THE
INSURANCE CODE
OF THE PHILIPPINES
(PRES. DECREE NO. 1460, AS AMENDED.)
GENERAL PROVISIONS
Section 1. This Decree shall be known as "The Insurance Code of 1978.*"
Historical origin of insurance.
(1) Mutual insurance as old as society itself. — Insurance is
based upon the principle of aiding another from a loss caused by
an unfortunate event. Some writers have maintained that mutual
insurance is as old as society itself. It seems that benevolent
societies organized for the purpose of extending aid to their
unfortunate members from a fund contributed by all, have been
in existence from the earliest times. They existed among the
Egyptians, the Chinese, the Hindus, and the Romans and are
known to have been established among the Greeks as early as
the third century before Christ.
1
*"The Insurance C o d e / ' in Presidential Decree No. 612.
The g e r m of the m o d e r n mercantile insurance contract appears to have been the
transaction evidenced by the bottomry or respondentia bond, together with the practice
of "general average" contribution, (see Sees. 101, 136.) The late Dr. Trenerry, author of a
learned work on the early history of insurance, finds a primitive form of bottomry loans
in the Babylonian C o d e of H a m m u r a b i (B.C. 2250.), and a m o r e highly developed form
in the Hindu L a w s of Manu, so called. He conjectures that this important business practice w a s taken over by the Phoenicians, who greatly improved it and carried it on to the
Greeks, w h o m a y have known and used it as early as the Trojan War.
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
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(2) Origin of present day insurance attributed to merchants of
Italian cities. — The practice of insurance as we know it today,
as an important agency in promoting commercial and industrial
transactions, is relatively of modern invention. Its origin is to be
found in the mutual agreements among merchants of the Italian
cities in the early middle ages engaged in common shipping
ventures for distributing among the mutual contractors, the loss
falling upon any one by reason of the perils of navigation. It is
thus apparent that in its early forms, the law of insurance was
derived from the maritime law and, as such, was part of the
general law merchant, and international in its character.
2
(3) Development of insurance in England. — F r o m Italy, the
practice of insuring commercial ventures against disaster
rapidly extended to other maritime States of Europe. The Italian
merchants coming from the flourishing commercial centers in
Northern Italy, and generally known as Lombards, founded
trading houses in London in the twelfth century and brought
with them the custom of insuring against hazards of trade. All
questions of insurance, however, were determined in accordance
with the customs of merchants, and by merchant courts, or rather,
A m o n g the R o m a n s , several different forms of such societies, k n o w n as Collegia,
were developed, and b e c a m e of sufficient i m p o r t a n c e u n d e r the E m p i r e to attract strict
regulatory legislation. They performed m a n y of the functions of the m o d e r n m u t u a l benefit society, providing primarily funeral rites for the dead, but also aid for sick and a g e d
members. A still extant copy of the by-laws of one of these R o m a n societies contains
such familiar provisions as that the m e m b e r forfeits all rights to benefits by failure to
pay dues or by committing suicide, a n d an earnest injunction to the m e m b e r s to read
the by-laws and thus avoid lawsuits. F r o m the R o m a n Collegia probably developed the
medieval guilds, which flourished throughout E u r o p e a n d undoubtedly a s s u m e d to their
m e m b e r s m a n y obligations which we should n o w class as life, accident, or health insurance contracts. Some of them even w e n t so far as to provide indemnity for losses by fire
and shipwreck, from the death of cattle, a n d from theft. (Vance, op. cit., pp. 8-10.)
2
F r o m the twelfth to the sixteenth centuries, the Italian republics of Venice, Florence,
and Genoa flourished greatly by reason of their extensive maritime c o m m e r c e , and it w a s
a m o n g these Italian merchants that the contract of insurance first received that attention
which the manifest benefits to be derived from its use would justify. Insurances w e r e
certainly effected as early as the beginning of the thirteenth century, a n d possibly in the
tenth century. The earliest policy form k n o w n to be extant w a s written in Genoa in 1347,
and a statutory form was prescribed in Florence in 1523. F r o m Italy, the c u s t o m of making
mutual contracts of insurance spread rapidly o v e r the whole of c o m m e r c i a l E u r o p e , a n d
early c a m e to be practiced extensively by the merchants in the towns forming the Hanseatic League. The word "policy" is a m o n u m e n t to the Italian origin of insurance, being
derived from the Italian word "poliza." (ibid., pp. 10-11.)
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G E N E R A L PROVISIONS
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the custom of submitting all contracts involving mercantile rights
to courts of merchants established among themselves.
It was not until the middle of the eighteenth century that the
c o m m o n law courts of England began to take adequate cognizance of insurance cases with the passage in 1601 of the first
English Insurance Act by which a special court was established
for the trial of marine insurance controversies. In 1756, with the
appointment of Lord Mansfield as Chief Justice of the Court of
King's Bench, there came a new era in the c o m m o n law with
reference to questions involving the law merchant. In the skillful hands of this great judge who is properly called the "Father
of English Commercial Law," the essential principles of the law
merchant were incorporated into the common-law system of
England and the common-law courts thereby rendered competent to determine all questions involving insurance.
3
(4) Development of insurance in the United States. — In general,
the development of the several kinds of insurance has followed
the same lines in the United States as in England. However, the
insurance industry of the United States has grown to such an
extent that with the exception of ocean marine insurance, the
English practices and the English decisions have little influence
on insurance in the United States, (see Vance, The L a w of
Insurance [3rd Ed.], pp. 7-22.)
(5) Development of insurance in the Philippines. — Insurance
in the Philippines is rather a young institution. Prior to the
3
K n o w n to h a v e triggered the early development of insurance is Lloyd's of London
(referred to as the international insurance market). It began as a 17th century coffeehouse
catering to merchants, vessel owners, bankers and the first underwriters. It is known that
Lloyd's Coffeehouse, an inn kept by one E d w a r d Lloyd on Tower Street in London, was,
as early as 1688, a popular resort for seafaring m e n and merchants engaged in foreign
trade.
It b e c a m e the custom a m o n g those w h o gathered at Lloyd's to m a k e their gathering an occasion for arranging their mutual contracts of insurance against the sea perils
to which their ventures were exposed. The method employed in making such insurance
contracts was for the person desiring the insurance to pass around a m o n g the company
assembled a slip upon which was written a description of the vessel and its cargo, with
the n a m e of the master and the character of his crew, and the v o y a g e contemplated. Those
desiring to become insurers of the ventures so described would write beneath the description on this slip their names or initials, and opposite thereto the amount which each
w a s willing to shoulder. The term "underwriter" was believed to have originated from
such a practice, (ibid., pp. 17-18.)
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec.l
19th century, insurance, in its modern sense, did not even exist.
During the pre-Spanish times, when the political unit was then
the family, if a member of the family died or suffered any other
misfortune, it was borne by the family. When communities,
such as the barangays developed, the assistance was extended
accordingly. Even now, this practice of furnishing some form of
assistance to bereaved members of the family of someone w h o
dies still exists. Eventually, mutual benefit societies and fraternal
associations were organized for the purpose of rendering
assistance, in money or in kind, to their members. It m a y be that
what worked much against the early development of insurance
in the Philippines, aside from economic reasons (low per capita
income of the people), was the fatalistic philosophy behind our
oft-quoted expression 'bahala na.'
Insurance, in its present concept, was first introduced in the
Philippines sometime in 1829 when Lloyd's of London appointed
Stracham, Murray & Co., Inc. as its representative here. Sometime
in 1939, the Union Insurance Society of Canton appointed Russel
& Sturgis as its agent in Manila. The business transacted in the
Philippines then was limited to non-life insurance. It w a s only
in 1898 that life insurance was introduced in this country with
the entry of Sun Life Assurance of Canada in the local insurance
market.
The first domestic non-life insurance company, the Yek Tong
Lin Fire and Marine Insurance Company, w a s organized on June 8,
1906, while the first domestic life insurance company, the Insular
Life Assurance Co., Ltd., was organized in 1910. ("Supervision
and Regulation of the Insurance Business in the Philippines,"
Journal of the IBP, First Quarter, 1976, p. 21, by Comm. G. CruzArnaldo) In 1950, reinsurance w a s introduced with Reinsurance
Company of the Orient writing treaties for both life and non-life.
The first workmen's compensation Pool was organized in 1951
as the Royal Group Incorporated. In 1949, a government agency
was formed to handle insurance affairs. The Insular Treasurer
was appointed Commissioner ex-officio.
Social insurance was established in 1936 with the enactment
of C.A. No. 186 which created the Government Service Insurance
System (GSIS) which started operations in 1937. The Act covers
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G E N E R A L PROVISIONS
5
government employees. It was followed m u c h later in 1954 by
R.A. No. 1161 which provides for the organization of the Social
Security System (SSS) covering employees of the private sector.
Sources of insurance law in the Philippines.
(1) During the Spanish period, all of the provisions
concerning insurance in the Philippines were found in Title VII
of Book Two and Section III of Title III of Book Three of the Code
of Commerce, and in Chapters II and IV of Title XII of Book Four
of the old Civil Code of 1889.
(2) W h e n Act No. 2427 (enacted on December 11, 1914.),
otherwise known as the Insurance Act, took effect on July 1,
1915 during the American regime, the provisions of the Code of
C o m m e r c e on insurance were expressly repealed.
(3) Thereafter when R.A. No. 386, otherwise known as the
Civil Code of the Philippines, took effect on August 30, 1950
(Lara vs. del Rosario, 94 Phil. 778 [1954].), those provisions of
the old Civil Code on insurance (Arts. 1791-1797 and 1802-1808.)
were also expressly repealed.
(4) Presidential Decree No. 612, as amended, which ordained
and instituted the Insurance Code of the Philippines, was
promulgated and became effective on December 1 8 , 1 9 7 4 during
the period of martial law. It repealed Act No. 2427, as amended.
Before Presidential Decree No. 612, amendments to the Act were
m a d e by Presidential Decrees No. 6 3 , 1 2 3 , and 317.
(5) Presidential Decree No. 1460 consolidated all insurance
laws into a single code known as the Insurance Code of 1978
which was issued and took effect on June 11, 1978. Basically, it
reenacted Presidential Decree No. 612, as amended. It has been
amended by Presidential Decree No. 1814 and Batas Pambansa
Big. 874.
Laws governing insurance.
(1) Insurance Code of 1978. — The law on insurance is
contained now in the Insurance Code of 1978 (Pres. Decree No.
1460, as amended.) and special laws (infra.) and partly, in the
pertinent provisions of the Civil Code.
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec.l
The Insurance Code primarily governs the different types
of insurance contracts and those engaged in insurance business
in the Philippines. It took effect on June 11, 1978, the date of its
promulgation "without prejudice, however, to the effectivity
dates of the various laws, decrees and executive orders which
have so far amended the provisions of the Insurance Code of the
Philippines. (Presidential Decree No. 612.)"
(2) Civil Code. — The provisions of the Civil Code dealing on
insurance are found in Articles 739 and 2012 (on void donations),
Article 2011 (on the applicability of the Civil Code), Articles
2021-2027 (with respect to life annuity contracts), Article 2186 (on
compulsory motor vehicle liability insurance), and Article 2207
(on the insurer's right of subrogation).
The Civil Code, in the Title on Damages, provides for the
insurer's right of subrogation as follows:
"Art. 2207. If the plaintiff's property has been insured and
he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to
the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss or injury."
In other words, insurance contracts are governed primarily
by the Insurance Code but if it does not specifically provide for a
particular matter in question, the provisions of the Civil C o d e on
contracts and other special laws shall govern.
(3) Special laws. — Article 2011 of the Civil Code provides:
"The contract of insurance is governed by special laws.
Matters not expressly provided for in such special laws shall
be regulated by this Code."
Among such special laws on insurance are:
(a) The Insurance Code of 1978 (Pres. Decree No. 1460.);
(b) The Revised Government Service Insurance Act of
1977 (Pres. Decree No. 1146, as amended.), with respect to
insurance of government employees; and
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G E N E R A L PROVISIONS
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(c) The Social Security Act of 1954 (R.A. No. 1161, as
amended.), with respect to insurance of employees in private
employment.
(4) Others. — Insofar as the Civil Code is concerned, the
Code of C o m m e r c e is considered a special law.
(a) In addition, there is R.A. No. 656 (as amended by
Pres. Decree No. 245.), known as the "Property Insurance
Law," dealing with government property.
(b) There is also R.A. No. 4898 (as amended by R.A.
No. 5756.) providing life, disability and accident insurance
coverage to barangay officials.
(c) Executive Order No. 250 (July 25, 1987) increases,
integrates and rationalizes the insurance benefits of barangay
officials under R.A. No. 4898 and members of Sangguniang
Panlalawigan,
Sangguniang Panlungsod,
and
Sangguniang
Bayan under Presidential Decree No. 1147. The insurance
benefits are extended by the Government Service Insurance
System.
4
(d) R.A. No. 3591 (as amended.) establishes the Philippine
Deposit Insurance Corporation which insures the deposits
of all banks which are entitled to the benefits of insurance
under the Act.
Right of subrogation of insurer to rights
of insured against wrongdoer.
(1) Basis of right. — The doctrine of subrogation is basically a
process of legal substitution; the insurer, after paying the amount
covered by the insurance policy, stepping into the shoes of the
4
"Sec. 522. Insurance Coverage. — The Government Service Insurance System (GSIS)
shall establish and administer an appropriate system under which the punong barangay,
the m e m b e r s of the sangguniang barangay, the barangay secretary, the barangay treasurer,
and the m e m b e r s of the barangay tanod shall enjoy insurance coverage as provided in this
C o d e and other pertinent laws. F o r this purpose, the GSIS is hereby directed to undertake
an actuarial study, issue rules and regulations, determine the premiums payable and reco m m e n d to Congress the a m o u n t of appropriations needed to support the system. The
amount needed for the implementation of the said insurance system shall be included
in the annual "General Appropriations Act." (Local Government Code [R.A. No. 7160],
effective Jan. 1,1992.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
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Sec.l
insured, as it were, and availing himself of the latter's rights that
exist against the wrongdoer at the time of the loss. It has its roots
in equity. It is designed to promote and to accomplish justice and
is the mode which equity adopts to compel the ultimate payment
of a debt by one who in justice and good conscience ought to pay.
(Phil. American General Insurance Co., Inc. vs. Court of Appeals,
273 SCRA 262 [1997]; Delsan Transport Lines, Inc. vs. Court of
Appeals, 369 SCRA 24 [2001].)
5
(2) Purposes of subrogation condition in policy. — Its principal
purpose is to make the person who caused the loss, legally
responsible for it and at the same time prevent the insured from
receiving a double recovery from the wrongdoer and the insurer.
The insurer is entitled to recover either directly in a suit against
the wrongdoer (third party) or as the real party in interest in a
suit brought by the insured and thereby fully recover or at least
lessen the amount of loss it m a y have paid the insured. The rule
likewise prevents tortfeasors from being free from liabilities and
is thus founded on considerations of public policy.
There exists a wealth of U.S. jurisprudence that whenever
the wrongdoer settles with the insured without the consent of
the insurer and with knowledge of the insurer's payment and
right of subrogation, such right is not defeated by the settlement.
(Danza's Corporation vs. Abrogar, 4 7 8 SCRA 80 [2006].)
(3) Right of subrogation applicable only to property insurance.
— The right of subrogation under Article 2 2 0 7 applies only to
property, and not to life insurance. The value of h u m a n life is
regarded as unlimited and, therefore, no recovery from a third
party can be deemed adequate to compensate the insured's
beneficiary. The pecuniary value of a h u m a n life to the
beneficiary of a life insurance policy can seldom be determined
with accuracy (except where the insurance is taken by a creditor
on the life of a debtor to secure a debt). Life insurance contracts
are not ordinarily contracts of indemnity, (see Chap. II, Title 2.)
(4) Privity of contract or assignment by insured of claim not
essential. — Payment by the insurer to the insured operates as
5
F o r additional discussion, see annotations u n d e r Section 2 4 3 .
Sec. 1
G E N E R A L PROVISIONS
9
an equitable assignment to the former of all the remedies which
the latter m a y have against the third party whose negligence
or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract
or upon written assignment of claim. It accrues simply upon
payment of the insurance claim by the insurer, (see Pan Malayan
Insurance Corp. vs. Court of Appeals, 184 SCRA 54 [1990]; Phil.
American General Insurance Co., Inc. vs. Court of Appeals,
supra; Aboitiz Shipping Corp. vs. Insurance Company of South
America, 561 SCRA 262 [2008].)
The presentation in evidence of the insurance policy is not
indispensable before the insurer m a y recover. The subrogation
receipt, by itself, is sufficient to establish not only the relationship
of the insurer and the insured, but also the amount paid to
settle the insurance. (Delsan Transport Lines, Inc. vs. Court of
Appeals, supra; Federal Express Corporation vs. American H o m e
Assurance Company, 437 SCRA 50 [2004].)
(5) Loss or injury for risk must be covered by the policy. — Under
Article 2207, the cause of the loss or injury must be a risk covered
by the policy to entitle the insurer to subrogation. Thus, where
the insurer pays the insured for a loss which is not a risk covered
by the policy, thereby effecting 'Voluntary p a y m e n t / ' the insurer
has no right of subrogation against the third party liable for the
loss. Nevertheless, the insurer may recover from the third party
responsible for the d a m a g e to the insured property under Article
1236 of the Civil Code. (Sveriges Anfartygs Assurance Forening
vs. Qua Chee Gan, 21 SCRA 12 [1967]; see also St. Paul Fire &
Marine Insurance Co. vs. Macondray & Co., Inc., 70 SCRA 122
[1976]; Fireman's Fund Ins. Co. & Firestone Tire & Rubber Co. vs.
Jamila, Inc., 70 SCRA 23 [1976].)
(6) Right of insured to recover from both insurer and third party. —
The right of subrogation given to the insurer prevents the insured
from obtaining more than the amount of his loss. It is a method
of implementing the principle of indemnity that is at the heart of
all insurance, (see Sec. 18.) The right exists after indemnity has
been paid by the insurer to the insured who can no longer go
after the third party. He can only recover once. Note, however,
that if the amount paid by the insurance company does not fully
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Sec.l
cover the injury or loss, it is the aggrieved party, i.e., the insured,
not the insurer, who is entitled to recover the deficiency from the
person responsible for the loss or injury, (see F.F. Cruz & Co., Inc.
vs. Court of Appeals, 164 SCRA 731 [1988].) This is true in case of
under-insurance.
(7) Right of insured to recover from insurer instead of the third
party. — The insurer cannot defeat the insured's claim for indemnity on the ground that the insured has a right to be indemnified
by a third person. Having been paid a premium to make good
the insured's loss, the insurer cannot compel him to seek indemnity elsewhere.
(8) Right of insurer against third party limited to amount recoverable from latter by the insured. — The literal language of Article
2207 makes it clear that the insurance company that has paid
indemnity "shall be subrogated to the rights of the insured
against the wrongdoer or the person w h o has violated the
contract." As the insurer is subrogated merely to the rights of the
insured, it can necessarily recover only the amount recoverable
by the insured from the party responsible for the loss. It cannot
recover in full the amount it paid to the insured if it is greater
than that to which the insured could lawfully lay claim against
the person causing the loss. (Rizal Surety & Insurance Co. vs.
Manila Railroad Co., 23 SCRA 205 [1968].)
6
By w a y of illustration, if what the insured can recover under
the law from the party w h o is guilty of breach of contract is
P5,000.00, then it is only said amount that is recoverable by the
insurer from said party, notwithstanding that it paid the insured
more than P5,000.00. Neither can the insurer recover m o r e than
it paid the insured although the latter is able to recover the
deficiency from the wrongdoer because of under-insurance. (see
No. 5.)
(9) Exercise of right of subrogation by insurer discretionary. —
Whether or not the insurer should exercise the rights of the
insured to which it had been subrogated lies solely within the
S e e , however, the case of C e b u Shipyard and Engineering Works, Inc. vs. William
Lines, Inc., (306 SCRA 762 [1999]) given u n d e r Section 2 4 3 .
Sec.l
G E N E R A L PROVISIONS
11
former's sound discretion. Since its identity is not of record, it
has to claim its right to reimbursement of the amount paid to the
insured. (F.F. Cruz & Co., Inc. vs. Court of Appeals, supra.)
(10) Loss of right of subrogation by act of insured or insurer.
— The right of subrogation has its limitations to wit: (a) both
the insurer (of goods covered by a a bill of lading), and the
consignee are bound by the contractual stipulations under the
bill of lading; and (b) the insurer can be subrogated only to the
rights as the insured m a y have against the wrongdoer. Should
the insured, after receiving payment from the insurer, release
by his own act the wrongdoer or third party responsible for the
loss or d a m a g e from liability, the insurer loses his rights against
the wrongdoer since the insurer can be subrogated to only such
rights as the insured m a y have. For defeating the insurer's right
of subrogation, the insured is under obligation to return to the
insurer the amount paid thereby entitling the latter to recover the
same. Under Article 2207, the insurer is the real party-in-interest
with regard to the portion of the indemnity paid for he is deemed
subrogated to the rights of the insured with respect thereto.
(Manila Mahogany Manufacturing Corp. vs. Court of Appeals,
154 SCRA 650 [1987]; Pioneer Insurance & Surety Corp. vs. Court
of Appeals, 175 SCRA 668 [1989]; Aboitiz Shipping Corp. vs.
Insurance C o m p a n y of South America, supra.)
Similarly, where the insurer pays the insured the value of the
lost goods without notifying the carrier who has in good faith
settled the claim for loss of the insured, the settlement is binding
on both the insured and the insurer, and the latter cannot bring
an action against the carrier on his right of subrogation, (see Pan
Malayan Insurance Corp. vs. Court of Appeals, supra.)
(11) Effect of assignment by insured of its rights against third
party to insurer. — Where the insured (shipper/consignee of
goods) has assigned its rights against defendant (carrier of
goods) for damages caused to the cargo shipped to the insurer
which paid the amount represented by the loss, the case is not
between the insured and the insurer but one between the shipper
and the carrier because the insurance company merely stepped
into the shoes of the shipper. And if the shipper has a direct
cause of action against the carrier on account of the damage to
12
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
cargo, such action can be asserted or availed of by the insurer as a
subrogee of the insured and the carrier cannot set up as a defense
any defect in the insurance policy because it is not a privy to
it. (Compania Maritima vs. Insurance Co. of North America, 12
SCRA 213 [1964].)
Applicability of the Civil Code.
Article 2011 (supra.) of the Civil Code means that if the
Insurance Code does not specifically provide for a particular
matter in question, the provisions of the Civil Code regarding
contracts shall govern. (Musngi vs. West Coast Life Insurance
Co., 61 Phil. 864 [1935].) In other words, insurance contracts are
governed primarily by the Insurance Code and subsidiarily, by
the Civil Code, (see Art. 18, Civil Code; see also Sec. 422. )
7
Accordingly, our Supreme Court has held that:
(1) Where the insurance company's consent to the policy was
vitiated by error (see Arts. 1 3 3 0 , 1 3 3 1 , Civil Code.), such fact m a y
give rise to the nullity of the contract (Lucero Vda. de Sindayen
vs. Insular Life Assurance Co., 62 Phil. 9 [1935].);
(2) The contract for a life annuity was not perfected where
the acceptance of the application by the h o m e office of the insurer
(see Art. 1319, par. 2, Civil Code.) never c a m e to the knowledge
of the applicant who died (Enriquez vs. Sun Life Assur. Co. of
Canada, 41 Phil. 209 [1920].);
(3) An insurance contract is null and void where the
consideration is false or fraudulent (see Art. 1353, Civil Code;
Musngi vs. West Coast Life Insurance Co., supra.);
(4) Since the Insurance Act (now The Insurance Code) has no
provision regarding the amount of recovery in case of rescission
(see Sec. 74.), the rule found in the Civil Code which imposes
the obligation of mutual restitution (see Art. 1385, Civil Code.)
should apply (Filipinas Compania de Seguros vs. Nava, 17 SCRA
210 [1966].);
(5) A common-law wife is disqualified from becoming the
beneficiary of the insured in view of the prohibition in Article
2012 in relation to Article 739 of the Civil Code and the absence
U n l e s s otherwise indicated, refers to Section in Insurance C o d e .
Sec. 2
G E N E R A L PROVISIONS
13
of any specific provision in the Insurance Code on the matter
(The Insular Life Assur. Co. vs. Ebrado, 80 SCRA 181 [1977]; see
Sees. 10, 53.); and
(6) The award of moral and exemplary damages in case of
unreasonable delay in the payment of insurance claims (see Sec.
244.), shall be governed by the rules under the Civil Code. (Zenith Insurance Corporation vs. Court of Appeals, 185 SCRA 398
[1990].)
Construction of the Insurance Code.
The construction of the Insurance Code means its interpretation and this is allowed only if its provisions are not clear.
(1) It is a settled rule of statutory construction that when a
statute has been adopted from some other state or country and
said statute has previously been construed by the courts of such
state or country, the statute is usually deemed to have been
adopted with the construction so given. (Cerezo vs. Atlantic Gulf
& Pacific Co., 33 Phil. 425 [1916].) Thus, it has been held that
since Act No. 2727, the former Insurance Act (with the exception
of Chapter V [which deals with insurance companies and agents]
thereof which was allegedly taken largely from the law of New
York), was taken verbatim from the law of California, the courts
should follow in fundamental points, at least, the construction
placed by California courts on California law. (Ang Giok Chip
vs. Springfield Fire & Marine Ins. Co., 58 Phil. 378 [1933].) The
present Insurance Code is based principally upon Act No. 2427,
as amended.
(2) The rules enunciated by the best considered American
authorities involving similar provisions of the Philippine law on
insurance should be adopted for the purpose of having our law
on insurance conform as nearly as possible to the modern law of
insurance as found in the United States proper. (Gercio vs. Sun
Life Assur. Co., 48 Phil. 53 [1925]; Constantino vs. Asia Life Ins.
Co., 87 Phil. 248 [1950].)
Sec. 2. Wherever used in this Code, the following terms
shall have the respective meanings hereinafter set forth or
indicated, unless the context otherwise requires:
14
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
(1) A "contract of insurance" is an agreement whereby
one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown
or contingent event.
A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if
made by a surety who or which, as such, is doing an insurance business as hereinafter provided.
(2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of this
Code, shall include: (a) making or proposing to make, as
insurer, any insurance contract; (b) making or proposing
to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate
business or activity of the surety; (c) doing any kind of
business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code the
fact that no profit is derived from the making of insurance
contracts, agreements or transactions or that no separate
or direct consideration is received therefor, shall not be
deemed conclusive to show that the making thereof does
not constitute the doing or transacting of an insurance
business.
(3) As used in this Code, the term "Commissioner"
means the "Insurance Commissioner." (a)*
Legal concept of insurance.
(1) Insurance is a type of contract. Section 2 contains the
statutory definition of the contract of insurance and the acts
any of which will constitute "doing an insurance business" or
"transacting an insurance business."
The term "assurance" is also used instead of "insurance"
although the former is seldom employed. Many modern writers
*Signifies that former provision in Insurance Act (Act N o . 2 4 2 7 . ) has been a m e n d e d .
Sec. 2
G E N E R A L PROVISIONS
15
use "assurance" instead of "insurance" to describe the life
insurance business, the former referring to an event like death,
which must happen, and the latter, to a contingent event which
m a y or m a y not occur. As used in the Code, the term "insurance"
covers "assurance."
The definition of the law is subject to criticism. For instance,
it does not include life insurance which is a contract upon
condition rather than to indemnify for no recovery can fully
repay a beneficiary for loss of life which is beyond pecuniary
value, (see Chap. II, Title 5.)
(2) A better definition would be that, a contract of insurance
is an agreement by which one party (insurer) for a consideration
(premium) paid by the other party (insured), promises to pay
money or its equivalent or to do some act valuable to the latter
(or his nominee), upon the happening of a loss, damage, liability,
or disability arising from an unknown or contingent event, (see
Vance, op. cit., p. 83.)
In general, an insurance contract is a promise by one person
to pay another, money or any other thing of value upon the
happening of a fortuitous event beyond the effective control of
either party in which the promisee has an interest apart from
the contract. (Edwin W. Patterson, Essentials of Insurance Law,
p. 10, 1957 Ed., published by McGraw-Hill Book Co., Inc.) In
insurance, the insurer, for a stipulated consideration, undertakes
to compensate the insured for a future loss, damage or liability
on a specified subject caused by a specified event or peril. (Sec.
3[g].) A written insurance contract is called a policy, (see Sec. 49.)
Definition of insurance from other
viewpoints.
A definition of insurance may be made from several viewpoints:
(1) Economic. — In this sense, insurance is a method which
reduces risk by a transfer and combination (or "pooling") of uncertainty in regard to financial loss;
(2) Business. — As a business institution, it has been defined
as a plan by which large numbers of people associate themselves
16
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
and transfer to the shoulders of all, risks that attach to individuals.
Insurance may also be looked upon as an important part of the
financial world, where insurance serves as a basis for credit and
a mechanism for savings and investments;
(3) Mathematical. — In this sense, insurance is the application
of certain actuarial (insurance mathematics) principles (see
David L. Bickelhaupt, General Insurance, 1974 Ed., pp. 2931, published by Richard D. Irwin, Inc., Homewood, Illinois,
60430.) to calculate the chance of loss, (see Note 10.) Thus, in life
insurance, the principles of probability are applied to statistical
results of past experience represented by a mortality table. By
way of illustration, suppose the mortality table shows that out
of 10,000 lives, on the average, 10 die per year, the probability of
death is, therefore, 1 / 1 0 0 0 or 0.001; and
(4) Social. — In this sense, insurance has been defined as a
social device whereby the uncertain risks of individuals m a y be
combined in a group and thus m a d e more certain, with small
periodic contributions by the individuals providing a fund out of
which those who suffer losses m a y be reimbursed. (Robert Riegel,
Jerome S. Miller, and C. Arthur Williams, Jr., Insurance Principles
and Practices, p. 15, 1976 ed., published by Prentice-Hall, Inc.,
Englewood Cliffs, N e w Jersey.) In other words, it is a plan by
which the losses of the few are paid out of the contributions of all
members of a group.
Determination of the existence
of the contract.
(1) Nature of the contract. — The character of insurance is
to be determined by the exact nature of the contract actually
entered into whatever the form it takes or by whatever n a m e it
may be called. Thus, it was held that an agreement entered into
by a corporation, even though it was called a surety company, to
indemnify for a valuable consideration another against loss by
reason of uncollectible debts, was a contract of insurance and not
a contract of guaranty. (Tebbets vs. Guarantee Co., 73 F. 95.)
Under the Code, a contract of suretyship shall be deemed an
insurance contract "if made by a surety who or which as such, is
doing an insurance business," within the meaning of the Code.
Sec 2
G E N E R A L PROVISIONS
17
But strictly speaking, a contract of suretyship is entirely different
from a contract of insurance, (see Chap. 11, Title 4; also Sees. 185,
200[2, b, d].)
(2) Elements of the contract. — In determining the existence of
a contract of insurance, it is important to consider the following:
(a) Subject matter. — This refers to the thing insured. In
fire insurance and in marine insurance, the thing insured is
property; in life, health or accident insurance, it is the life
or health of the person that is the subject of the contract; in
casualty insurance, it is the insured's risk of loss or liability;
and
(b) Consideration. — The consideration for an insurance
contract is the premium paid by the insured, (see Sec. 77.) Its
amount is principally based on the probability of loss and
extent of liability for which the insurer m a y become liable
under the contract.
(c) Object and purpose. — Basically, a contract of insurance
is a risk-bearing contract. The principal object and purpose of
insurance is the transfer and distribution of risk of loss, damage,
or liability arising from an unknown or contingent event
through the payment of a consideration by the insured to
the insurer under a legally binding contract to reimburse the
insured for losses suffered on the happening of the stipulated
event.
Nature and characteristics of an insurance
contract.
Broadly speaking, a contract of insurance has the following
characteristics:
(1) It is consensual because it is perfected by the meeting of
the minds of the parties, (see Art. 1319, Civil Code.) So, if an
application for insurance has not been either accepted or rejected,
there is no contract as yet. (see Sees. 49-50.)
(2) It is voluntary in the sense that it is not compulsory and the
parties may incorporate such terms and conditions as they may
deem convenient (see Art. 1306, ibid.) which will be binding (see
Art. 1308, ibid.) provided they do not contravene any provision
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
18
Sec. 2
of law and are not opposed to public policy, (see Art. 1306, ibid.)
It is governed by the rules which govern other contracts.
(a) Although the contract of insurance is generally a
voluntary contact, the carrying of insurance, particularly
liability insurance, may be required by law in certain instances
such as for motor vehicles (Sees. 373-389.), or employees
(Arts. 168-184, Labor Code.), or as a condition to granting a
license to conduct a business or calling affecting the public
safety or welfare. (43 Am. Jur. 2d. 64.)
(b) An insurance may arise by operation of law. By w a y of
example, the War Damage Corporation Act (Sec. 5[g], Public
Law 506, 77th Congress of the U.S.) m a y be given. It provides
for the payment of compensation "by the War D a m a g e
Corporation without requiring a contract of insurance or the
payment of premium or other charge x x x as if a policy x x x
was in fact in force at the time of the loss or damage." Section
5(g), according to the Supreme Court, "leaves no room for
doubt about the intent of the Congress of the United States
to establish, between the War D a m a g e Corporation and the
owner of the property, lost or damaged, a relation identical
to that existing between the insurer and the insured under
a contract of insurance/' (Comm. of Internal Revenue vs.
Asturias Sugar Central, Inc., 2 SCRA 1140 [1961].)
8
Social insurance (infra.) for members of the Government
Service Insurance System and for employees of the private
sector covered by the Social Security System (supra.) is also
established by law.
(3) It is aleatory in the sense that it depends upon some
contingent event. But it is not a contract of chance (see Sec. 4.)
although the event against the occurrence of which it is intended
to provide may never occur. "By an aleatory contract, one of the
9
8
In the Philippines, the p a y m e n t of loss or d a m a g e to p r o p e r t y during the war, resulting from enemy attack or in the furtherance of the resistance m o v e m e n t , w a s m a d e
through the Philippine W a r D a m a g e Commission.
This basic feature distinguishes an insurance contract from other contracts (called
commutative) that are presumed to represent even exchanges. The b u y e r of groceries or
clothing or a television set pays about what the g o o d s are worth, and he gets immediate
delivery of them, so that he is ordinarily able to tell right a w a y w h e t h e r he is getting his
9
Sec. 2
G E N E R A L PROVISIONS
19
parties or both reciprocally bind themselves to give or to do
something in consideration of what the other shall give or do
upon the happening of an event which is uncertain, or which is
to occur at an indeterminate time/' (Art. 2010, Civil Code.)
In insurance, each party must take a risk; the insurer, that of
being compelled upon the happening of the contingency, to pay
the entire sum agreed upon and the insured, that of parting with
the amount required as premium without receiving anything
therefor in case the contingency does not happen except what
is ordinarily termed "protection" which is itself is a valuable
consideration. (Vance, op. ext., p. 93.)
(4) It is executed as to the insured after the payment of the
premium, and executory on the part of the insurer in the sense
that it is not executed until payment for a loss. In other words, it
is a unilateral contract imposing legal duties only on the insurer
w h o promises to indemnify in case of loss.
The contract contemplates the payment of the premium
as condition precedent to the inception of the contract but the
insured usually assumes no duty to pay subsequent premiums
enforceable at the suit of the insurer unless the latter has continued
the insurance after maturity of the premium, in consideration of
the insured's express or implied promise to pay. But he has a right
to pay the stipulated premium and the insurer is under a duty to
accept the payment when tendered. Of course, the insurer may
not be liable if the insured fails to pay the premiums. In such a
case, the insurance usually lapses, (see ibid., pp. 94, 300.)
(5) It is conditional because it is subject to conditions the
principal one of which is the happening of the event insured
against. In addition to this main condition, the contract usually
includes many other conditions (such as payment of premium or
performance of some other act) which must be complied with as
precedent to the right of the insured to claim benefit under it.
money's worth, (see E.W. Patterson, op. cit., pp. 2-3.) Insurance contracts, however, are
aleatory in nature which m e a n s that they m a y involve the exchange of widely varying
values for it is of the essence of insurance that no one knows how the risk insured against
will happen. Thus, an insurer m a y be liable to pay the full amount insured under life
policies of which only very few premiums have been paid.
20
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
(6) It is a contract of indemnity (except life and accident
insurance where the result is death) because the promise of the
insurer is to make good only the loss of the insured, (see Sec. 18.)
Any contract that contemplates a possible gain to the insured by
the happening of the event upon which the liability of the insurer
becomes fixed is contrary to the proper nature of insurance.
Hence, no person m a y secure insurance upon property in which
he has no interest. (Vance, op. cit., p. 101.)
If the insured has no insurable interest, the contract is void
and unenforceable (see Sees. 18-19.) as being contrary to public
policy because it affords a temptation to the insured to wish or
bring about the happening of the loss.
(7) It is a personal contract, each party having in view the
character, credit and conduct of the other. (Vance, op. cit., p. 96.)
(a) As a rule, the insured cannot assign, before the
happening of the loss, his rights under a property policy
to others without the consent of the insurer, (see Sec. 83.)
Consequently, the obligation of the insurer to pay does not
attach to or run with the property whether it be real property
or personal.
It follows that if a person whose property is insured
sells it to another, the buyer cannot be his successor in the
contract of insurance unless, of course, the sale is with the
consent of the insurer or unless by express stipulation of the
parties, the contract is m a d e to run with the property to the
transferee, (see Sees. 20, 57, 58.) Thus, where the insurance is
"on account of the owner," or "for w h o m it m a y concern,"
or where "the loss is payable to bearer," the subsequent
transferees or owners become by the terms of the contract,
the real parties to the contract of insurance. Such contracts,
by which the insurance is m a d e to pass from owner to owner,
are of the nature of successive novations, (see Art. 1292, Civil
Code.)
(b) Regardless of how they are categorized {infra.), all
insurance contracts share a c o m m o n trait of "personalness."
1) The category of personal insurance, which includes life, health, accident, and disability insurance, is
Sec. 2
G E N E R A L PROVISIONS
21
plainly "personal": the insurance applies only to a particular individual, and it is not possible, for example, for the
insured unilaterally declaring that his health insurance
policy shall now be deemed to cover the health of someone else.
2) Liability insurance is also personal in the same
sense: each person purchases coverage for his own (or
a group of related persons) potential liability to others.
The insurer prices the coverage depending on the
characteristics and traits of the particular insured.
3) Property insurance is also "personal' in this
limited sense. The insurance is on the insured's interest in
the property, not on the property itself. It is the damage
to the personal interest not the property that is being
reimbursed under a policy of property insurance (R.H.
Jerry, II, Understanding Insurance Law, pp. 2 6 5 - 2 6 6 , 1 9 8 7
ed., published by Mathew Bender & Co., Inc., N e w York.)
(c) Life insurance policies, however, are generally
assignable or transferable (see Sec. 181.) as they are in the
nature of property and do not represent a personal agreement
between insured and insurer.
(8) Since an insurance is a contract, as such, it is property in
legal contemplation. But unlike property policies, life insurance
policies are generally assignable or transferable like any "chose
in action." (see Sec. 181.) They are in the nature of property and
do not represent a personal agreement between the insurer and
the insured.
Distinguishing elements of the contract
of insurance.
The contract of insurance made between the parties usually
called the insured and the insurer, is distinguished by the
presence of five elements, namely:
(1) The insured possesses an interest of some kind susceptible
of pecuniary estimation, known as "insurable interest";
(2) The insured is subject to a risk of loss through the
destruction or impairment of that interest by the happening of
designated perils;
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
22
(3) The insurer assumes that risk of loss;
Sec. 2
10
(4) Such assumption of risk is part of a general scheme to
distribute actual losses among a large group or substantial number
of persons bearing a similar risk; and
(5) As consideration for the insurer's promise, the insured
makes a ratable contribution called "premium," to a general
insurance fund, (see Vance, op. cit. pp. 1-2.)
t
All the elements must be present, otherwise there can be no
contract of insurance, and even if the contract contains all the
elements, it is not an insurance contract within the context of
the Insurance Code if the primary purpose of the parties is the
rendering of service and not the indemnification of a party for
loss, damage, or liability incurred by the latter.
Insurance, a risk-distributing device.
A contract possessing only the first three elements n a m e d
above is a risk-shifting device, but not a contract of insurance which
is fundamentally a risk-distributing {risk-sharing or risk-policy)
device. Thus, in a contract of guaranty, an interest possessed by
the creditor (which is the payment of the debt) is exposed to
impairment by the happening of contingent events such as the
insolvency of the principal debtor, and the risk of the creditor is
merely assumed by the guarantor.
(1) Equitably distributes losses out of a general fund contributed
by all. — The device of insurance serves to distribute the risk of
10
T h e insurance company, however, by using the science of probability a n d the law
of large numbers (sometimes referred to as the law of averages or the law of probabilities c a n
predict with considerable a c c u r a c y the n u m b e r of insureds to similar risks w h o will incur
losses during a specified period and the extent of such losses. As a result, the a m o u n t s
of p r e m i u m can be calculated such that the i n c o m e therefrom should be just e n o u g h to
meet expected losses incurred by that group, together with expenses, taxes a n d a reasonable profit but low enough to m a k e the insurance saleable. Thus, the risk a s s u m e d by the
insurance c o m p a n y is reduced to a m i n i m u m .
The probability that the prediction of total losses will not be t h r o w n off by an unexpected n u m b e r of losses, increases as the n u m b e r of similar insurance policies issued
increases. In other words, w h e n the n u m b e r of similar independent risks is increased,
the relative a c c u r a c y of predictions about future losses is also increased. It is impossible
to predict individual losses but the insurer c a n predict certain "averages" w h e n a large
number of similar policies are considered. If the n u m b e r of policies sold does not reach
the safe point, the insurance c o m p a n y can reinsure its risks with another.
Sec. 2
G E N E R A L PROVISIONS
23
economic loss among as m a n y as possible of those w h o are subject
to the same kind of risk. By paying a pre-determined amount
(premium) into a general fund out of which payment will be
m a d e for an economic loss of a defined type, each member
contributes to a small degree toward compensation for losses
suffered by any m e m b e r of the group.
(2) Provides protection against absorbing one's losses alone. —
The member has no w a y of knowing in advance whether he will
receive compensation more than he contributes or whether he
will merely be paying for the losses of others in the group; but
his primary goal is to exchange the gamble of doing it alone,
whereby he could either escape all losses whatsoever or, suffer a
loss that might be devastating, for the opportunity to pay a fixed
and certain amount into the fund, knowing that the amount is
the m a x i m u m he will lose on account of the particular type of
risk insured against. This broad sharing of economic risk is the
principle of risk-distribution. (J.F. Dobbyn, Insurance L a w in a
Nutshell, 1989 ed., published by West Publishing Co., St. Paul,
Minn.)
11
All contracts, either expressly or implicitly, transfer risk in
one w a y or another. If a contract possesses the five elements
mentioned, principally, the allocation or pooling of risks, it
is a contract of insurance, whatever be its name or form, as
distinguished from contracts that transfer risk but do not
constitute insurance.
EXAMPLE:
If the parties agree that A will purchase B's house on a
condition that A is able to obtain financing, B bears the risk
that financing will be available to A. If financing is unavailable
to A, A has no duty to buy the house. In the absence of such a
condition, A bears the risk that financing will not be available,
because A would still be obligated to buy the house even if he
does not obtain financing.
"To ensure p a y m e n t for whatever losses that may occur due to the exposure to
the peril insured against, the law mandates all insurance companies to maintain a legal
reserve fund in favor of those claiming under their policies, (see Sees. 210-214.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
24
Sec. 2
Although conditioning As duty to purchase the house
upon the availability of suitable financing transfers risk from
A to B, this does not mean that the contract between A and B
is a contract of insurance. Insurance contracts have additional
characteristics.
In the illustration under No. (3), in discussing "the value
of transferring risk" (infra.) concerning the contract between X
and Y, the contract not only transferred but also distributed risk.
When Y assumed X's risk of loss as well as the risk of 99 other
persons, Y was able to distribute the risk across a large group
of persons possessing similar risks. The characteristic of risk
distribution sets insurance contracts apart from other kinds of
contracts.
It can be said, then, that a contract of insurance is an
agreement in which one party (the insurer), in exchange for
a consideration provided by the other party (the insured),
assumes the other party's risk and distributes it across a group
of similarly situated persons, each of whose risk has been
assumed in a similar transaction. (R.H. Jerry, II, op. cit., p. 15.)
By way of insurance, existing risks are distributed so that the
losses resulting from them do not fall on one person or a small
group of persons.
Coping with risk.
2
The inherent uncertainty of events can be described in terms
of chance or probability. In insurance, the uncertainty is normally
described in terms of risk. People make judgments about risk
everyday. A person usually makes some sort of calculation,
perhaps instinctively, before deciding to engage or not to engage
in an activity.
People cope with risk in various ways.
(1) Limiting the probability of loss. — One w a y to attempt to
manage risk is to limit the probability of loss. For example, m a n y
industries utilize complex, dangerous machinery, which place the
employees who use them at some risk. However, the probability
that an employee will lose a finger or hand in a cutting machine
is reduced if guards or other safety devices are used around the
cutting device. Similarly, concrete buildings are less likely to
12
F o r additional discussion, see annotation u n d e r Section 5 1 .
Sec. 2
G E N E R A L PROVISIONS
25
catch fire than w o o d buildings. Thus, a builder might choose
to use masonry rather than wood in a given structure or install
loss prevention devices (e.g., firewalls, sprinkler systems) so as to
limit the probability of loss.
(2) Limiting effects of loss. — Another w a y to cope with risk is
to limit the effects of loss. For example, passengers in automobiles
are at risk of injury through accidents. If an accident occurs and
the passenger is wearing a seat belt, the passenger is less likely to
suffer injury; if an injury is suffered, it is likely to be less severe.
Thus, to limit the effects of an accident should it occur, many
people choose to "buckle up," thereby limiting the effects of
loss. Similarly, buildings are subject to a risk of fire, regardless
of the construction materials used. To limit the effects of a fire
should it occur, m a n y building owners install sprinkler systems.
A sprinkler system will not prevent a fire, but it will limit the
effect of a fire should one occur.
Diversification is a particularly important w a y of limiting the
effects of loss. For example, individuals who invest in the stock
market expect to make money, but they are also at risk of losing
money. To minimize the risk that a sharp decline in the value
of one stock will decimate the investor's assets, most investors
own a wide variety of the stocks. Through this strategy, losses
in one stock are m u c h more likely to be offset by profits in other
stocks; if fortunate, the investor will show a net profit from the
total portfolio. Of course, diversification also limits the chance,
or r i s k / that the investor will benefit from a sharp increase in
the value of one stock.
//
,
13
(3) Self-insurance. — Sometimes people cope with risk through
self-insurance. For example, a restaurant owner, cognizant of the
possibility that a patron may contract food poisoning, is likely
to take substantial preventive measures to limit the risk of such
an occurrence. After taking such steps, a remote risk nonetheless
exists that a customer might be poisoned. The owner may
calculate that such an event will rarely occur and may conclude
13
T h e t w o above methods of minimizing risks through preventive measures to
protect the personal and financial interests of individuals and business or at least to
reduce loss involve the practice of "risk management."Transferring certain risks from the
insured to the insurance c o m p a n y is the most c o m m o n method of risk management.
26
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
that if it does occur, the damages associated with the event could
easily be paid from the owner's assets. Alternatively, the owner
may choose to set aside a portion of each year's profits into a
special or reserve fund designated to pay the loss should it occur.
In either case, the owner chooses to bear or assumes the risk
himself thru special funds set aside to cover the loss. This is, in
effect, self-insurance or self-financing.
(4) Ignoring risk. — Sometimes, after weighing potential benefits and costs of a particular activity, and after taking appropriate steps, if any, to minimize the probability or extent of loss,
the individual m a y choose to engage in the activity without doing anything further with regard to the risk. Thus, some people
choose to ignore risk.
For example, the tightrope walker m a y purchase special
shoes to reduce the risk of falling and m a y install a safety net
to minimize the amount of loss should a fall occur, but if the
performer proceeds with the walk, the performer has decided
both to assume the risk that remains and to bear the costs of loss
should the injury materialize. The performer is not self-insuring,
because the performer has no assets to compensate for his loss of
life, which is one of the risks. Rather, the performer is choosing
to ignore the risk.
(5) Transferring risk to another. — In situations where risk
cannot be managed sufficiently through preventive measures
or through steps that reduce the effects of loss, and where
assumption of the risk is not feasible, people usually cope with
risk by transferring it to someone else (see H. Jenny, III, op. cit.,
pp. 10-11.) by a contractual arrangement. An example of such an
arrangement is a seller's warranty of goods sold. Also, a person
may, by entering into a contract of insurance, relieve himself, at
least in part, from the risk of loss which under the law must be
borne by him, i.e., by buying insurance. This approach to coping
with risk is discussed in the next topic.
The value of transferring risk.
An individual's attitude toward risk is influenced by several
factors, including the probability of loss, the potential magnitude
of the loss, and the person's ability to absorb the loss.
Sec. 2
G E N E R A L PROVISIONS
27
With respect to loss, people are either risk preferring, risk
neutral, or risk averse. Imagine forcing several individuals to
choose between a 50% chance of losing P1,000 (which computes
to an "expected loss" of P500) or a certainty of losing P500.
14
(1) Some people are risk preferring. These people would
choose to forego the certain loss in the hope of incurring no loss,
despite the equal probability of suffering a large loss.
(2) In the same situation, many people are risk neutral, that is,
indifferent to the alternatives.
(3) A substantial group of people are risk averse. This group
would choose to lose P500 with certainty instead of confronting
the 50% chance of losing twice as much.
(a) As the potential magnitude of loss increases, most
people become more risk averse. This is true even though
the probability of loss declines.
15
EXAMPLE:
When confronted with a one in 10,000 chance of losing
P10,000 (an expected loss of PI) and the prospect of losing
PI with certainty, many people previously indifferent would
prefer to lose PI with certainty to avoid the possibility, albeit a
remote one, of suffering a substantial loss.
The more wealth a person has, the less likely it is that the
person will be averse to risk: a multimillionaire is more likely
to be indifferent toward the choice of losing PI with certainty
and confronting the one-in-10,000 chance of losing P10,000.
16
1 4
A n "expected loss" is the m a g n i t u d e of the loss, should it materialize, times the
probability that it will occur. Thus, if someone has a one in t w o chances of losing P500,
the expected loss is P 2 5 0 . If the chance of losing P 5 0 0 is one in ten, the expected loss is
P50. (ibid., p. 11.)
This discussion assumes rational behavior. Sometimes people behave irrationally
and ignore risk, e.g., Ray vs. Federated Guaranty Life Ins. Co., 381 So. 2d 847 (La. App.
1980), where the insured, insane and under delusion that he possessed supernatural
powers, held his head u n d e r water in bathtub and drowned, (ibid., p. 11.)
With respect to m o d e r a t e beneficial risks, m a n y people are risk preferring. For example, lotteries operated by state governments have been successful because large numbers of people prefer m o d e r a t e amounts of risk: when faced with the choice of retaining
one dollar in the pocket and exchanging that dollar for a one-in-a-million chance of winning several thousand dollars, m a n y people are willing to trade the dollar for the small
chance of winning the large prize. However, when faced with the prospect of receiving
15
16
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
28
Sec. 2
(b) When people are averse to the risk of a loss, they are
usually willing to pay someone else to assume the risk.
EXAMPLE:
Assume that X has a one-in-100 chance of suffering a loss
of P1,000 (an expected loss of P10). Since X is risk averse, X
is willing to pay P15 to someone else, Y, in exchange for Y's
promise to reimburse X for X's loss, should X incur it.
In other words, the value to X of having the risk assumed
by someone else is P15. If 99 people similarly situated to X
reach the same agreement with Y, Y will receive Pl,500 (100
times P15), and Y will have to pay one person the sum of P1,000
(since if 100 people each have a one-in-100 chance of suffering
the loss, the probabilities indicate that one person probably
will suffer the loss).
Y earns a profit of P500, which increases Y's satisfaction.
Also, the satisfaction of X and each of the 99 similarly situated
people is enhanced, because each of them transfers to someone
else, the risk to which they were averse.
In this illustration, X and the others entered into agreements
with Y to transfer risk for a price. X and the others are the
insured and Y is the insurer; each of the 100 insured entered into
an insurance contract with Y. A market existed in which X and Y
could meet, and in which X could transfer and Y could assume
risk for a price. X placed a value on having the risk transferred,
and X received this value when Y assumed the risk.
Also, Y benefited by assuming the risk of many people
similarly situated to X and by pooling these risks together, so
that each individual's risk could be distributed across the pool.
The P15 which Y charged X is the insurance premium. Based on
the loss experience of the pool and statistical probabilities, Y
knew that collecting P15 from each insured very likely would
be adequate to cover the losses of all the insureds, plus provide
Y a reasonable return for putting itself at risk.
An insurance contract has a variety of economic implications, a few of which are discussed subsequently, (ibid.,
pp. 11-12.)
P 5 0 0 with certainty and a 50% c h a n c e of receiving P 1 , 0 0 0 , m a n y people w o u l d be indifferent, a n d m a n y others would be risk averse, in that they would prefer P 5 0 0 with certainty
rather than face a 50% chance of getting nothing, (ibid., p. 12.)
Sec. 2
G E N E R A L PROVISIONS
29
Economic effects of the transfer
and distribution of risk.
(1) Benefit to society as a whole. — The illustration above
demonstrates several aspects of the economic impact of a contract
of insurance. Most obviously, X completely eliminated his risk by
transferring it to Y for a price. This transfer has value for X, since
X desired to be free of the risk and this objective was achieved.
Moreover, the transaction had value to Y, since Y, by dealing in
risk on a large scale, could earn a profit.
If the costs and benefits of the transaction are viewed in this
way, it can be said that since the satisfaction of both parties was
improved, the transaction was a desirable one; indeed, society as
a whole would be better off if a large number of similar, mutually
beneficial transactions would occur.
(2) Undesirable side effects. — However, total elimination of
risk can have undesirable side effects. If X's risk is completely
eliminated through transfer to Y, X might have less incentive to
take measures that prevent the loss from occurring or minimize
the effect of loss once it occurs. Thus, if Y agrees to reimburse X
for d a m a g e to or loss of X's personal property, X is likely to have
a reduced incentive to take steps to protect his property.
Consequently, the existence of insurance could have the perverse effect of increasing the probability of loss. For example, if a
mechanic knows that in the event his tools are stolen the insurer
will reimburse his loss in full, the mechanic m a y be less likely to
suffer the inconvenience of putting his tools in a locked storage
area at the end of each working day. This phenomenon is called
moral hazard.
(3) Problem regarding measurement of amount of risk transferred.
— T h e theoretically ideal response to the problem of moral hazard
would be for the insurer to monitor the insured's behavior and
adjust the premium based on the extent to which the insured takes
adequate steps to safeguard his property. If such measurements
were possible, the insurance would be priced in exact conformity
with the amount of risk being transferred to the insurer.
For obvious reasons, however, monitoring the behavior of
each insured is not feasible. Even if the prospect of having a third
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
30
Sec. 2
party constantly inquiring into one's behavior were acceptable,
the administrative costs of such a system would be prohibitive.
(4) Sharing by insured of some responsibility for the risk. — To
deal with the moral hazard phenomenon in most insurance
transactions, the insured retains some responsibility for the risk
through either a deductible or coinsurance. With a deductible, the
insured bears any loss up to some stated amount with the insurer
bearing the rest. With coinsurance, the insured bears some stated
percentage of the loss regardless of its amount, with the insurer
bearing the rest. Thus, in the foregoing example, the insured has
an incentive to preserve his property, since the insured will bear
some portion of any loss to himself.
Requiring the insured to bear a portion of the loss is not
a totally satisfactory solution for the risk averse person. On
balance, however, that solution is the best one. To compensate
for the moral hazard phenomenon, premiums would have to
be much higher if all of the insured's risks were transferred; the
insured benefits in the long run by paying lower premiums while
simultaneously taking some measures that prevent loss or limit
its effects.
(5) Problem regarding computation of premium to be charged.
— Another economic effect of an insurance contract devolves
from practical limitations inherent in the process by which the
fee charged the insured is computed. The amount of the fee, or
premium, should equal the insured's expected loss (e.g., a onein-five probability of losing P100 computes to an expected loss of
P20) plus a pro rata share of the insurer's administrative costs.
17
However, because life is uncertain, calculating each person's
expected loss with absolute precision is impossible. Indeed,
the expenses involved in calculating each person's expected
loss would be enormous; to cover these administrative costs,
premiums would be exorbitant. Moreover, if such predictions
were possible on an individual basis, insurance would not be
necessary, since each person would know when loss would occur
17
In the case of stock c o m p a n y (ibid., pp. 12-14.), the insurer's administrative costs
should include an allowance for a reasonable profit.
Sec. 2
G E N E R A L PROVISIONS
31
and then would take all necessary preventive measures, thereby
eliminating the value of transferring risk.
(6) Classification of risks. — Because of the complete impracticality of individual rating, insurers group similar risks together
and charge each member of the group the same premium. Insurers will subdivide the insureds into distinct groups as long as
the cost of measuring the differentiating factor is less than the
premium reduction the insurer can offer members of a differentiated, better-risk group.
EXAMPLE:
Assume that smokers on the average have a shorter life
span than non-smokers. This distinction could be the basis for
an insurer offering non-smokers lower cost life insurance than
smokers.
However, making the distinction will involve some administrative and investigative costs. Some of these costs will
result from attempting to control factors that will tend to
make the smoker/non-smoker distinction inaccurate, such as
problems with the trustworthiness of the data (applicants who
know they can secure a lower premium will have a tendency to
understate their smoking habits), the uncertainty over whether
a person who has quit smoking has a different life expectancy
than either a non-smoker or a presently-active smoker, and
the possible differential impact of different amounts of daily
smoking.
If the cost of accurately distinguishing smokers from
nonsmokers exceeds the premium reduction that could be
offered to non-smokers, insurers will not make the distinction,
since the insurer is likely to lose more smoking customers to
insurers who do not make the distinction than the insurer who
will gain in new non-smoking customers.
(7) Sub-classification of risks. — At a certain point in any risk
classification scheme, further subdivision of the group becomes
too expensive relative to the benefits gained. Thus, it is inevitable
that within the same group, some insureds will be better risks
than others, even though all members of the group pay the same
premium. In fact, any group will have a higher proportion of
less desirable risks, since more applications for the insurance
32
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
will tend to come from those who get a better bargain. This
phenomenon is called adverse selection.
Insurers and regulators must take into account the existence
of adverse selection when deciding upon the scope of coverage
and the premiums to be charged for the coverage, (ibid., pp. 1214.)
The fields of insurance.
(1) In general. — The basic classification emphasizes the
difference between social (government) and voluntary (private)
insurance. Voluntary insurance includes the major category
of commercial insurance, which is divided into personal (life
and health) and property types of protection, and traditionally
in property insurance, the major groupings of fire-marine and
casualty-surety insurance are important.
With recent trends toward broader insurance operations
and contracts, the terms "multiple line insurance" and "all lines
insurance" have become important. The first term has been
accepted to denote not just several kinds of insurance but the
combination of at least two kinds of insurance, specifically the
traditional fire and casualty lines. The second is not used in a
technical sense, for few insurers or contracts do include every
possible kind of insurance. The term is used rather to describe
the broadening nature of insurance operations which combine at
least most of the basic types of insurance including the traditional
fire, casualty, life, and health lines, (see note 14.)
(2) Social (government) insurance. — It is compulsory and
is designed to provide a minimum of economic security for
large groups of persons, particularly those in the lower income
groups. It concerns itself primarily with the unfavorable losses
(income and costs) resulting from the perils of accidental injury,
sickness, old age, unemployment, and the premature death of
the family earner. The concept here is limited to that insurance
which are required by the government and have for their object
the provision of a minimum standard of living.
The compulsion element is predicated upon the experience
that some persons cannot or will not voluntarily purchase
Sec. 2
G E N E R A L PROVISIONS
33
insurance, and the obligation of the government to protect the
general welfare of its citizens.
(3) Voluntary (private) insurance." — It is not based upon
government compulsion and is sought by the insured to meet
a recognized need for protection. It divides itself into three (3)
groups:
(a) Commercial insurance. — This is what persons usually
have in mind when they refer to the insurance business. In
contrast to cooperative plans, it receives its motivating force
from the profit idea. Two major classifications are parts of
commercial insurance:
19
1) Personal insurance. — This division is based on
the nature of the perils; that is, whether they are more
directly concerned with losses due to loss of earning
power of a person. Life insurance, including annuities,
and health and accident insurance are important parts of
the personal category of commercial insurance; and
2) Property insurance. — In this category is included
every form that has for its purpose the protection against
loss arising from the ownership or use of property. There
are two general classifications of property insurance. The
first indemnifies the insured in the event of loss growing
out of damages to, or destruction of his own property.
The second form pays damages for which the insured
is legally liable, the consequence of negligent acts that
result in injuries to other persons or damage to their
property. Included in the first classification are fire and
marine insurance, and in the second are casualty and
surety insurance.
(b) Cooperative insurance. — The term "cooperative" is
applied to associations usually operating under hospital,
medical, fraternal, employee, or trade-union auspices. The
associations are organized without regard to the profit
18
F o r differences between social insurance and private insurance, see annotation under Section 228.
A n o t h e r classification of all kinds of insurance might contrast "individual or family" versus "business" insurance depending on the nature of the purchases (family as
opposed to business firm purchases). (D.L. Bickelhaupt, op. ext., p. 69.)
19
34
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
motive and represent, in fact, an effort to accomplish the ends
of social insurance by private enterprise. Here, the non-profit
cooperative objective of the insurance is emphasized; and
(c) Voluntary government insurance. — This category is
principally distinguished from social insurance in that there
is no element of compulsion. The various plans offered are
designed to benefit the entire community but are used only
by those persons who wish to use the available benefits. In
the category are to be found such plans as the insurance of
mortgage loans and insurance of growing crops, (see D.L.
Bickelhaupt, op. cit. pp. 66-74.)
f
Classifications of contracts of insurance.
The principal and older forms of insurance are marine (see
Sec. 99.), fire (see Sec. 167.), life (see Sec. 179.) and accident, (see
Sec. 180.) Their rapid growth and successful conduct have in
recent years stimulated the attempts to apply the principles of
insurance to contracts of indemnity for numerous other kinds
of loss. These attempts have resulted in a wide extension of
insurance to almost all the innumerable varying risks to which
the interests of the members of a society are subject under m o d e m
economic and industrial conditions.
20
The different kinds of insurance contracts written at the
present time vary infinitely in n a m e and form but for convenience
they may be grouped under three great heads as follows:
(1) Insurance against loss or impairment of property interests,
which may be either in existence or merely expected; that is,
present rights or profits yet to accrue. The loss or impairment
may be due to marine perils (called marine insurance), fire (called
^Historically, insurers u n d e r t o o k to issue insurance only in one of the distinct categories of risk. This w a s not entirely a voluntary choice, as statutes in m o s t states confined
insurers to writing insurance in only one line. O v e r time, however, those restrictions w e r e
removed, a n d m a n y insurers c o m m e n c e d w h a t w a s called multiple line underwriting,
meaning the writing of insurance in all lines except life. Eventually, these insurers w e r e
allowed to a d d the insurance to their lines, resulting in w h a t w a s k n o w n as all line underwriting. Today, with the practice of the multiple-line and all-line underwriting, the
prospective insured can often deal with one c o m p a n y and one agent to meet all his insurance needs. (R.H. Jerry, II, op. cit., p. 33.)
Sec. 2
G E N E R A L PROVISIONS
35
fire insurance), earthquake, explosion, etc. or due to the nonperformance of contracts of which the insured is a party (known
as guaranty insurance); or the insolvency of debtors (called credit
insurance); or defalcations of employees and agents (termed
fidelity insurance); or theft and burglary (so there are written theft
insurance policies); or defective titles or interest in property (called
title insurance);
(2) Insurance against loss of earning power due to death {life
insurance), accidental injury, ill-health, sickness, old age or other
disability, or even unemployment; and
(3) Insurance against contingent liability to make payment to
another, that is to say, the insured is protected against his loss with
regard to claims for damages. Thus, we have reinsurance (see Sec.
95.), workmen's compensation insurance and motor vehicle liability
insurance, all of which are designed to reimburse the insured for
any liability he might incur to a third party, (see Sec. 174; also Sec.
99[2]; see Vance, op. cit., pp. 51-55.)
A modernized classification scheme recognizes four (4)
categories of insurance, namely: marine, property, personal, and
liability. Property insurance is designed to indemnify the insured
for loss to his property interests while personal insurance is
intended to protect his personal interests. Insurance contracts are
also divided into two large classes: property insurance (Nos. 1
and 3) and personal insurance (No. 2).
Classification by interests protected.
Another w a y to classify insurance is to categorize the
subject matter according to the interests being protected by the
arrangement. At least two such methods of categorization exist:
the third-party/first-party distinction, and the all-risk/specifiedrisk distinction.
(1) First-party versus third-party insurance. — In first-party
insurance, the contract between the insurer and the insured is
designed to indemnify the insured (or other insureds such as
family members) for a loss suffered directly by the insured.
(a) Property insurance, is first-party insurance; the damage to the property is an immediate, direct diminution of the
36
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 2
insured's assets. The proceeds are paid to the insured to redress the insured's loss.
(b) Liability insurance, on the other hand, is sometimes
described as third-party insurance because the interests protected by the contract are ultimately those of third parties
injured by the insured's conduct. Thus, if the insured negligently causes injury to a third party, the third party will possess a claim against the insured. If this claim is reduced to a
judgment, the insured will suffer a loss.
The insured's loss, however, is "indirect" in the sense that
the third party suffers the "direct" loss. The liability insurer
will reimburse the insured for any liability the insured
m a y have to the third party, but in the event of payment,
the insured merely serves as a conduit for transmission of
the proceeds from the insurer to the third party. Thus, it is
sometimes said that liability insurance is actually designed
to protect unknown third parties.
(c) All insurance except liability can be fairly thought of as
first-party insurance.
(d) In life insurance, the insured ordinarily designates
a beneficiary to receive the proceeds of the policy, but this
does not mean that the insurance is third-party. The loss is
suffered by the insured; it is the insured w h o loses his life.
Unless the owner of the policy chooses to create third-party
rights in a beneficiary, it is the insured's estate that receives
the proceeds.
(e) Health insurance is also uneasily categorized under this
framework. Frequently, the health insurer pays the provider
of health care services {e.g., the hospital or doctor) directly,
rather than paying the proceeds to the insured. But the loss
— the illness and its expenses — is suffered directly by the
insured. The health care provider suffers a "loss" in a sense
when it provides medical care, but the insurance is designed,
first and foremost, not to help health care providers but to
help individuals w h o incur medical bills.
The health care provider is similarly situated to the auto
repair shop that fixes the insured's automobile damaged by a
Sec. 2
G E N E R A L PROVISIONS
37
falling tree: the insurer m a y pay the auto repair shop directly,
but this does not mean the insurance is for the benefit of the
auto repair shop.
(f) The first-party versus third-party insurance distinction
assists in understanding the concept of "no-fault" insurance.
No-fault insurance is essentially the substitution of first-party
insurance for tort liability. The victim of a tort, instead of
looking to the tortfeasor and his insurer for reimbursement,
looks to his own insurer for first-party protection. First-party
insurance is compulsory under the typical no-fault scheme.
The term "no-fault" connotes that the victim recovers for
his loss from his own insurer, without regard to the fault of
the third party or his own contributory fault. (R.H. Jerry, II,
op. cit., pp. 43-44.)
(2) All-risk versus specified-risk. — Another w a y to categorize
insurance according to the interests protected is the all-risk/
specified-risk distinction. All-risk insurance reimburses the
insured for d a m a g e to the subject matter of the policy from
all causes except those specifically excepted in the policy. In
other words, all those not excluded are automatically included.
Specified-risk insurance covers damage to the subject matter of the
policy only if it results from specifically identified causes listed
in the policy.
(a) Language of the policy. — It is helpful but not necessarily
determinative on whether a policy is all-risk or specifiedrisk. Language such as "this vessel is insured for physical
loss or damage from any external cause" except for certain
explicit exclusions is all-risk coverage. In contrast, the typical
homeowner's policy which lists several insured events is
ordinarily treated as a specified-risk policy.
The historical development of the policy can be important
in determining whether the policy covers all risks. Marine
insurance, for example, has traditionally been treated as allrisk insurance. The so-called "jeweler's block insurance"
was developed to provide jewelers with coverage regardless
of the cause, and thus traditionally has been treated as allrisk insurance. On the other hand, homeowner's insurance,
38
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
normally treated as specified-risk insurance, evolved by
joining several distinct coverages — fire, liability, theft, etc.
— in one policy.
(b) Coverage of the policy. — The distinction can make
a considerable difference in whether a particular loss is
covered by a policy. For example, in Northwest Airlines,
Inc. vs. Globe Indemnity Co. (303 Minn. 16, 225 N.W. 2d 831
[1975].), a hijacker extorted a large sum of money from the
airline and then parachuted from the jet over the northwest.
The airline's policy had five categories of coverage, two of
which were 'Toss inside the premises" and 'Toss outside
the premises." The insurer argued that the loss did not fall
within the technical limits of any of these coverages, but
the court reasoned that the policy read as a whole would be
interpreted as all-risk coverage, meaning that the loss was
covered unless the insurer could show that the specific risk
was excluded. Since no explicit exclusion pertained to the
hijacking risk, the insured's loss was covered.
(c) Burden of proof — An important reason that the
distinction between all-risk and specified-risk insurance can
alter outcomes involves the effect of the distinction on the
burden of proof. Under a specified-risk policy, the burden is
ordinarily placed on the insured to initially prove that the loss
falls within the policy's provisions on coverage. However,
under an ill-risk policy, once the insured establishes that a
loss occurred through some event other than an inherent
defect or normal depreciation, the burden is ordinarily placed
on the insurer to prove that the loss falls within an explicit
exception to coverage.
In property insurance, the insured has merely to show
the condition of the property insured when the policy
attaches and the fact of loss or d a m a g e during the period of
the policy. If the causation leading to the loss is difficult to
identify and prove, an all-risk policy can be highly beneficial
to the insured, (ibid., pp. 44-45; see Vda. de Gabriel vs. Court
of Appeals, 264 SCRA 137 [1996].)
(d) Illustration. — The potential advantage to the insured
of all-risk coverage is illustrated by the case of Pan American
Sec. 2
G E N E R A L PROVISIONS
39
World Airways, Inc. vs. Aetna Casualty & Surety Co. (505 F. 2d
989 [2d Cir. 1974].) A Pan American Boeing 747 was hijacked
and ultimately destroyed by members of the Popular Front
for the Liberation of Palestine. The insurers argued that three
specific exclusions barred Pan Asia's recovery for the loss of
the aircraft: capture or seizure of property by governmental
authority or agent; war, invasion, or civil war; and strikes,
riots, or civil commotion.
Treating the policy as all-risk coverage, the U.S. Court of
Appeals held that the insurers had failed to prove that the
cause of the loss w a s within the scope of the policy's exclusions which were ambiguous as applied to a "political hijacking" or an "act for political or terrorist purposes." Consistent
with well established rules of interpretation, the exclusions
were construed in a manner most beneficial to the insured.
If the policy in Pan American World Airways had been a
specified-risk policy, the insurers might have prevailed. The
insurers' difficulty in showing that the cause of the loss fell
within an exclusion would have instead been the insured's
problem of showing that a covered peril caused the loss. If
the coverage granting provisions in a specified-risk policy
did not identify "hijacking" or "act for political or terrorist
purposes" as covered perils, it is improbable that the insured
would have succeeded in carrying its burden of bringing the
loss within the terms of the policy's coverage.
As in m a n y other settings, the allocation of the burden of
proof can be determinative of the outcome of a case. The allrisk policy diminishes the burden placed on the insured, and
thus makes pro-insured outcomes more likely, (ibid., p. 265.)
(e) Other advantages of all-risk coverage. — All-risk insurance is thought to be advantageous in several respects: the
coverage is presumably simpler to understand; duplication
of coverages and premiums from separate, specified-risk
policies is avoided; pressures toward adverse selection are
minimized; and the policies are easier and less expensive
for the insurer to administer. However, the most widely
perceived advantage is the avoidance of gaps in coverage.
Losses that would otherwise fall within the gaps of specified-
Sec. 2
T H E INSURANCE C O D E O F T H E PHILIPPINES
40
risk coverage will be indemnified if a policy is deemed to be
all-risk, (ibid., p. 264.)
(f) All-risk coverage not absolute. — The observation that
"all-risk insurance fills in all the gaps" needs to be, however
substantially qualified. Coverage under all-risk policies is
hardly absolute. For example, it is a fundamental prerequisite
to any policy's coverage that the loss be "fortuitous." As
explained by one court; "[t]he 'all-risk' event so covered
would not include an undisclosed event that existed prior to
coverage, or an event caused by the consummation during
the period of coverage of an indwelling fault in the goods
that had existed prior to that coverage." (see Northwest
Airlines, Inc. vs. Globe Indemnity Co., supra)
If a loss is certain to occur, such as loss due to normal
wear and tear, the loss is not fortuitous and, therefore, is not
insurable. Furthermore, exclusions can take away m u c h of
what the all-risk policy gives. Also, all-risk coverage does
not alter basic insurance law principles that can operate to
limit coverage, such as the insurable interest requirement,
causation rules, the requirement that the loss not be
intentionally caused by the insured, and implied exceptions
(such as the friendly fire rule). (R.H. Jerry, II, op. cit. p. 264.)
An "all-risk" insurance policy covers all kinds of loss but not
those due to willful and fraudulent act of the insured. (Mayer
Steel Corp. vs. Court of Appeals, 274 SCRA 432 [1997].)
21
f
Classifications under the Code.
Under the Insurance Code, insurance contracts are classified
according to the nature of the risk involved as follows:
(1) Life insurance contracts which m a y be:
(a) individual life (see Sees. 179-183, 227.);
(b) group life (see Sees. 50, last par., 228.); and
(c) industrial life (see Sees. 229-231.);
21
O n e might say that death is certain to o c c u r and, therefore, death is not fortuitous.
However, the time at which death will o c c u r is not certain. It is on this basis that death is
a fortuitous event, (ibid., p. 264.)
Sec. 2
G E N E R A L PROVISIONS
41
(2) Non-life insurance contracts which m a y be:
(a) marine (see Sees. 99-166.);
(b) fire (see Sees. 167-173.); and
(c) casualty (see Sec. 174.); and
22
(3) Contracts of suretyship or bonding. (See Sees. 175-178.)
The general definition of insurance in Section 2 can cover
any kind of loss, damage, or liability arising from an unknown
or contingent event. Theoretically, it would be possible for an
insurance c o m p a n y to insure against any risk whatever associated
with any lawful activity as long as there is no prohibition by a
statute or violation of public policy.
23
Contracts written by guaranty
or surety companies.
A class of contracts written by guaranty or surety companies,
and generally designated as guaranty insurance, comprises
principally fidelity, title, bond, and security guaranty. Contracts
of this kind are n o w almost regarded as those of insurance where
the underwriter engages in the business for profit, especially
since the terms of such contracts usually closely resemble the
essential elements of an insurance contract. (Couch, Cyclopedia
of Insurance Law, 1st ed., p. 45.)
Like other insurance contracts, they are construed strictly
against the insurer. (Couch, op. cit., p. 41.) The general rule that
the bonds of guaranty and surety companies who engage in
the business for profit are essentially insurance contracts and
are governed by the rules of construction applicable thereto,
rather than by the rules applicable to strict or pure contracts of
^These different kinds of Insurance contract apply to different types of risk with
different kinds of coverage. The policies (Sec. 49.) differ in the persons and interests they
protect.
^ F o r example, it has generally been held that any insurance contract that might act
to discourage m a r r i a g e is unenforceable as against public policy. This rule has been applied primarily to so-called "marriage benefit insurance," whereby the insurer is bound
to pay the beneficiary or his wife at the time of the beneficiary's marriage on condition
that he remains single for a specified period of time. Another variation obligates the insurer to pay, at the time of marriage, a sum which increases, the longer the insured remains single. (J.F. Dobbyns, op. cit., p. 73.)
42
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
suretyship, applies to bonds guaranteeing the carrying out or
performance of contracts to do a particular act or carry out a
particular project, (ibid., p. 24, cited in Luzon Surety Co., Inc. vs.
City of Bacolod, 34 SCRA 509 [1970].)
Under the Code, a contract of suretyship shall be deemed to
be an insurance contract only if made by a surety who or which,
as such, is doing an insurance business within the meaning of the
Code. (Sec. 2[1, 2].)
Construction of insurance contracts.
It is basic that all provisions of the insurance policy (Sees.
49-51.) should be examined and interpreted in consonance with
each other. The policy cannot be construed price-meal. Certain
stipulations cannot be segregated and then m a d e to control;
neither do particular words or phrases necessarily determine
its character. (Gulf Resort, Inc. vs. Philippine Charter Insurance
Corporation, 458 SCRA 550 [2005].) The various stipulations in
the policy shall be interpreted together, attributing to doubtful
ones that sense which m a y result from all of them taken jointly.
(Art. 1374, Civil Code.)
(1) Where there is ambiguity or doubt. — Insurance is, in its
nature, complex and difficult for the layman to understand.
(Algoe vs. Pacific Meet. L. Ins., Co., 91 Wash. 324, L R A 1917A,
1237.) As a general rule, contracts of insurance are to be construed
or interpreted liberally in favor of the insured and strictly against
the insurer resolving all ambiguities against the latter (Young vs.
Midland Textile Insurance Co., 30 Phil. 617 [1915]; Sun Insurance
Office, Ltd. vs. Court of Appeals, 195 SCRA 193 [1991].), so as
to effect its dominant purpose of indemnity or payment to the
insured, especially where a forfeiture is involved. (43 A m . Jur.
2d. 357; Calanoc vs. Court of Appeals, 98 Phil. 79 [1955].) An
insurance contract should be so interpreted as to carry out the
purpose for which the parties entered into the contract which is
to insure against risks of loss, d a m a g e or liability on the part of
the insured. Limitations of liability must be construed in such
a way as to preclude the Insurer from non-compliance with its
obligations. (DBP Pool Accredited Insurance Companies vs.
Radio Mindanao Network, Inc., 480 SCRA 314 [2006].) They
Sec. 2
G E N E R A L PROVISIONS
43
should be construed strictly against the Insurer. (Blue Cross
Health Care vs. Olivares, 544 SCRA 580 [2008].)
The above principle of interpreting insurance contracts can
better be understood when it is remembered that a policy of
insurance is a contract of "adhesion/' that is to say, most of the
terms of the contracts do not result from mutual negotiation
between the parties as they are prescribed by the insurer in final
printed forms which the insured m a y reject or to which he m a y
"adhere" if he chooses but which he cannot change. The insurer
is under the duty to make its meaning clear if it desires to limit
or restrict the operation of the general provisions of its contract
by special proviso, exception or exemption. In a "bargaining
contract/' in contrast to a contract of "adhesion/' both parties
participate in drawing up its terms and conditions or determining
its wording. A n y ambiguity in the insurance contract should,
therefore, be resolved in favor of the beneficiary. (Serrano vs.
Court of Appeals, 130 SCRA 327 [1984]; National Power Corp. vs.
Court of Appeals, 145 SCRA 533 [1986]; Rizal Surety & Insurance
C o m p a n y vs. Court of Appeals, 336 SCRA 12 [2000].)
24
Accordingly, a policy of insurance which contains exceptions
or conditions tending to work a forfeiture of the policy shall be
interpreted most favorably toward those against w h o m they
are intended to operate and most strictly against the insurance
company or the party for whose benefit they are inserted. Where
restrictive provisions are open to two interpretations, that
which is most favorable to the insured is adopted. Limitations
of liability must be construed in such a way as to preclude the
insurer from non-compliance with its obligations. (Heirs of
Coscolluela vs. Rico General Insurance Corp., 179 SCRA 511
[1989]; Geagonia vs. Court of Appeals, 241 SCRA 152 [1995];
Malayan Insurance Corp. vs. Court of Appeals, 270 SCRA 242
[1997]; Philamcare Health System, Inc. vs. Court of Appeals, 379
SCRA 356 [2002].) Where an insurance covering the insured (a lot
purchaser) contains a provision that the same is effective, valid,
24
T h e interpretation of obscure words or stipulations in a contract shall not favor the
party w h o caused the obscurity. (Art. 1377, Civil Code.)
F o r additional discussion, see annotations under Sections 49-50.
44
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
and binding until terminated by the insurer by disapproving
the insurance application which provision is in the nature of
a resolutory condition which would lead to the cessation of
the insurance contract, the mere inaction of the insurer on the
insurance application must not work to prejudice the insured. It
cannot be interpreted as a termination of the insurance contract.
The termination of the insurance contract by the insurer must
be explicit and unambigiuous. (Eternal Gardens Memorial Park
Corp. vs. Phil. American Life Insurance Co., 551 SCRA 1 [2008].)
ILLUSTRATIVE CASES:
1. Amount recoverable in case of death by drowning is not
stated in policy.
Facts: The insurer has bound itself under its policy to pay
P1,000.00 to P3,000.00 as indemnity for the death of the insured
for bodily injury, the policy mentioning specific amounts that
may be recovered. The policy, however, does not positively
state any definite amount that may be recovered in case of
death by drowning, although it is a ground for recovery apart
from death for bodily injury.
Issue: How much can the insured recover?
Held: There is an ambiguity in this respect in the policy,
which ambiguity must be interpreted in favor of the insured
and strictly against the insurer as to allow a greater indemnity,
i.e., P3,000.00. (Del Rosario vs. Equitable Ins. & Casualty Co., 8
SCRA 343 [1963]; see also Fieldmen's Ins. Co., Inc. vs. Vda. de
Songco, 25 SCRA 70 [1968].)
2. Deceased has already been paid under the Workmen's
Compensation Act from another policy.
Facts: The insurance policy contained a prohibition to the
effect that any "authorized driver of T (Taxi Co.) should not
be entitled to any indemnity under any other policy." The
deceased, however, was paid his workmen's compensation
from another policy.
Issue: Should such fact defeat the right to recover under
such insurance policy?
Held: No, despite the prohibition mentioned, it is too
well settled to need the citation of authorities that what the
Sec. 2
G E N E R A L PROVISIONS
45
law requires (as the Workmen's Compensation Act [R.A. No.
4119], now embodied in Arts. 166-208, Labor Code; see Arts.
1711, 1712, Civil Code.) enters into and forms part of every
contract. Assuming, however, that there is doubt concerning
the liability of the insurer, nonetheless it should be resolved
in favor of the insured. Courts are to regard "with extreme
jealousy" limitations of liability found in insurance policies
and to construe them in such a way as to preclude the insurer
from non-compliance with his obligation. (Taurus Taxi Co., Inc.
vs. The Capital Insurance & Surety Co., Inc., 24 SCRA 454 [1968].)
25
3. Insured owner of a vehicle was not aware that his driver's
license was irregularly issued.
Facts: The "authorized driver clause" of the insurance
policy states that the insurance company shall not be liable for
damages caused to insured vehicle if driven by a person not
"permitted in accordance with licensing laws or regulations
to drive the motor vehicle covered by this policy." The vehicle
was damaged during the effectivity of the policy.
26
The driver who was at the wheel of the insured car at the
time of the accident, does not know how to read and write
and was able to secure a driver's license without passing any
examination therefor, by paying P25.00 to the Cavite Agency of
the Motor Vehicles Office (now Land Transportation Office). To
disprove that the license was genuine, the insurance company
presented a certification of said agency that the license in
question was not issued by it.
There is no proof that the insured (owner of vehicle)
knew that the circumstances surrounding such issuance was
irregular.
Issue: Is the insurer liable?
25
W h i c h provide a tax-exempt employees' compensation p r o g r a m administered by
the Employees' Compensation Commission.
A foreigner whose 9 0 - d a y tourist visa had expired, cannot recover on his car insurance policy, not being authorized under the law to drive a motor vehicle without a Philippine driver's license. (Strokes vs. Malayan Insurance Co., Inc., 127 SCRA 706 [1984].) A
traffic violation receipt (TVR) does not suspend the erring driver's license. It is, however,
co-terminous with the confiscated license, i.e., it serves as a temporary license and that it
m a y be renewed but in no case should extend beyond the expiration date of the original
license. (Gutierrez vs. Capital Insurance & Surety Co., 130 SCRA 100 [1984].)
2 6
46
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
Held: Yes. (1) A driver's license, a public document. — A
driver's license that bears all the earmarks of a duly issued
license is a public document which is presumed genuine. The
presumption of genuineness in its issuance is not disproved
by a mere certification by an agency of the MVO that it did
not issue the license in question because it does not remove
the possibility that said office may have been mistaken or that
said license was issued by another agency, particularly in view
of the fact that the person who issued the certification was not
placed on the witness stand. As the law stood (in 1961) when
the claim arose, the examination could be dispensed with in the
discretion of MVO officials. (Sec. 26, Act No. 3992, as amended.)
(2) A driver's license, a representation by the government of
holder's qualification to operate motor vehicles. — The issuance of
the license is a proof that MVO officials considered the driver of
the insured qualified to operate motor vehicles and the insured
was entitled to rely upon such license. And considering that
the weight of authority is in favor of a liberal interpretation of
the insurance policy for the benefit of the party insured and
strictly against the insurer, no breach was committed of the
above-quoted provision of the policy. (CCC Insurance Corp. vs.
Court of Appeals, 31 SCRA 264 [1970].)
4. Insured car in the custody of a repair shop was taken out for
a joyride by employees of the shop owner.
Facts: While the insured car was in the custody of a repair
shop, it was taken out for a joyride by a "resident" of the shop
and several other persons. The car met an accident and was
extensively damaged. The Insurance Commission ruled that
the accident did not fall within the "authorized driver" clause
or under the theft coverage.
Issue: Is the ruling correct?
Held: No. (1) Purpose of authorized driver clause. — "The
ruling is too restrictive and contrary to the established principle
that insurance contracts, being contracts of adhesion where
the only participation of the other party is the signing of his
signature or his 'adhesion' thereto, 'obviously call for greater
strictness and vigilance on the part of courts of justice with a
view of protecting the weaker party from abuse and imposition
and prevent their becoming traps for the unwary.' The main
purpose of the 'authorized driver' clause is that a person other
Sec 2
G E N E R A L PROVISIONS
than the insured owner, who drives the car on the insured's
order, such as his regular driver, or with his permission, such
as a friend or member of the family or the employees of a car
service or repair shop must be duly-licensed drivers and have
no disqualification to drive a motor vehicle.
A car owner who entrusts his car to an established car
service and repair shop necessarily entrusts his car key to the
shop owner and employees who are presumed to have the
insured's permission to drive the car for legitimate purposes
of checking or road testing the car. The mere happenstance that
the employee(s) of the shop owner diverts the use of the car to
his own illicit or unauthorized purpose in violation of the trust
reposed in the shop by the insured car owner does not mean
that the 'authorized driver' clause has been violated such as to
bar recovery, provided that such employee is duly qualified to
drive under a valid driver's license."
(2) Theft clause applies. — "Secondly, and independently of
the foregoing (since when a car is unlawfully taken, it is the theft
clause, not the 'authorized driver' clause, that applies), where a
car is admitted as in this case unlawfully and wrongfully taken
by some people, be they are employees of the car shop or not
to whom it had been entrusted, and taken on a long trip to
Montalban without the owner's consent or knowledge, such
taking constitutes or partakes of the nature of theft for purposes
of recovering the loss under the policy in question. The insurer
must, therefore, indemnify the car owner for the total loss of
the insured car under the theft clause of the policy, subject to
the filing of such claim for reimbursement or payment as it
may have as subrogee against the repair shop." (Villacorta vs.
Insurance Commission & Empire Insurance Company, 100 SCRA
467 [1980]; see Annotation under Sec. 243.)
(3) Quantum of evidence to prove theft. — "In the absence of
any provision in the policy, prior conviction for the crime of
theft is not required to make the insurer liable under the theft
clause policy. In a civil action for recovery on an automobile
insurance, the question of whether a person using a certain
automobile at the time of the accident stole it or not is to be
determined by a fair preponderance of evidence and not by the
rule of criminal law requiring proof of guilt beyond reasonable
doubt." (Association of Baptists for World Evangelism, Inc. vs.
Fieldmen's Insurance Co., Inc., 124 SCRA 618 [1983]; see Malayan
Insurance Co., Inc. vs. Court of Appeals, 146 SCRA 45 [1986].)
47
48
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
5. Policy contains conflicting provisions on effect of nonpayment of premium.
Facts: A provision in the application for insurance with
the GSIS states this condition: "That my policy shall be made
effective on the first day of the month next following the month
the first premium is paid; x x x." Another condition provides:
"That failure to deduct from my salary the monthly premiums
shall not make the policy lapse, however, the premium account
shall be considered as indebtedness which, I bind myself to pay the
System."
The applicant, an employee of the Bureau of Public
Works, died in an airplane crash. It appears that the Bureau
had not remitted to the GSIS even a single premium because
the Bureau's collecting officer was not advised by the GSIS to
make the required deduction pursuant to the provision in the
application.
Issue: Should the policy be considered in force notwithstanding that not a single premium had been paid thereon?
Held: Yes. The ambiguity created by the operation of the
conditions should be interpreted adversely against the GSIS
which prepared the insurance contract or application. This
rule is especially true in insurance policies where forfeiture is
involved. (Landicho vs. Government Service Insurance System, 46
SCRA 7 [1972].)
6. Insured spouses died when passenger truck they were
driving was ambushed by Muslim rebels.
Facts: R (insurer) paid the face value of the life insurance
policies of spouses D and E (insured) but denied liability for
accidental death benefits of double indemnity on the ground
that the cause of their death was an excluded risk provided for
in the comprehensive accident indemnity rider which provides
that "the policy shall not cover loss or disability caused directly
or indirectly by war, declared or undeclared, strikes, riots, and
civil war, revolution, or any warlike operation."
It appears that D and E died when the passenger truck they
were driving was ambushed by Muslim rebels in Zamboanga
del Sur.
Issue: Was the death of D and E caused by "warlike
operation"?
Sec. 2
G E N E R A L PROVISIONS
Held: No. The ambush was an isolated one, and was not
in the prosecution of hostilities between two combatants or
warring parties. The vehicle was travelling for the purpose
of transporting their paying passengers and not for the
prosecution of any warlike operation. Even if such was the
case, the passengers were not aware of such fact. The use of the
term "warlike operations" right after the terms "civil war" and
"revolution" must be interpreted to mean "operation in time of
war." (Gonzales vs. The Phil American Life Insurance Co., I.C. Case
No. 56, June 21,1976.)
7. Insurer resisted the claim of the insured on the ground that
the burned oil mill is not covered by any insurance policy because the
description of the insured establishment referred to another building.
Facts: Respondent TE, Inc., engaged in the coconut oil
milling and refining industry, owns two oil mills separately
covered by fire insurance policies issued by petitioner AHA
Co. The second oil mill came to be commonly referred to as the
new oil mill which was gutted and consumed by fire.
Respondent AHA rejected petitioner TE's claim for the
insurance proceeds on the ground that no policy was issued
covering the burned oil mill. According to AHA, the oil mill
insured is specifically described in the policy by its boundaries
in the following manner:
"Front: by a driveway thence at 18 meters distance by
Bldg. No. 2.
Right: by an open space thence by Bldg. No. 4.
Left: Adjoining thence an imperfect wall by Bldg. No. 4.
Rear: by an open space thence at 8 meters distance."
However, it argues that this specific boundary description
clearly pertains, not to the burned oil mill, but to the other
mill. In other words, the oil mill gutted by fire was not the one
described by the specific boundaries in the contested policy.
What exacerbates respondent's predicament, petitioner
posits, is that it did not have the supposed wrong description
or mistake corrected. Despite the fact that the policy in question
was issued way back in 1988, or about three years before the fire,
and despite the "Important Notice" in the policy that "Please
read and examine the policy and if incorrect, return it immediately
49
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
50
Sec. 2
for alteration," respondent apparently did not call petitioner's
attention with respect to the misdescription.
By way of conclusion, petitioner argues that respondent is
"barred by the parole evidence rule from presenting evidence
(other than the policy in question) of its self-serving intention
(sic) that it intended really to insure the burned oil mill," just as
it is "barred by estoppel from claiming that the description of
the insured oil mill in the policy was wrong, because it retained
the policy without having the same corrected before the fire by
an endorsement in accordance with its Condition No. 28."
Issue: May the insured recover under the policy
notwithstanding the misdescription in the fire policy?
Held: Yes. (1) Descriptive words are to be construed with the
greatest liberality. — "In construing the words used descriptive
of a building insured, the greatest liberality is shown by the
courts in giving effect to the insurance. In view of the custom
of insurance agents to examine buildings before writing policies
upon them, and since a mistake as to the identity and character
of the building is extremely unlikely, the courts are inclined to
consider that the policy of insurance covers any building which
the parties manifestly intended to insure, however inaccurate
the description may be."
27
(2) Parties manifestly intended to insure new oil mill. —
"Notwithstanding, therefore, the misdescription in the policy, it
is beyond dispute, to our mind, that what the parties manifestly
intended to insure was the new oil mill. This is obvious from
the categorical statement embodied in the policy, extending its
protection:
'On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra,
copra cake and copra mills whilst contained in the new oil
mill building, situate (sic) at UNNO. ALONG NATIONAL
HIGHWAY, BO. IYAM, LUCENA CITY UNBLOCKED.'
(emphasis supplied.)
If the parties really intended to protect the first oil mill, then
there is no need to specify it as new.
27
See Martinez, Philippine Insurance C o d e Annotated, p. 324, citing Richard vs. Ins.
Co., 27 N.W. 5 8 6 (1886), which gives the following illustration: A policy u p o n a "school
house" w a s held sufficient to identify the building insured in which a school w a s kept,
although it w a s not an ordinary school house; the term "store" w a s held to be a sufficient
description of a building used as a restaurant and bakery.
Sec. 2
G E N E R A L PROVISIONS
Indeed, it would be absurd to assume that respondent
would protect its first oil mill for different amounts and leave
uncovered its second one. As mentioned earlier, the first oil
mill is already covered under Policy No. 306-7432324-4 issued
by the petitioner. It is unthinkable for respondent to obtain the
other policy from the very same company. The latter ought to
know that a second agreement over that same realty results in
its overinsurance.
The imperfection in the description of the insured oil mill's,
boundaries can be attributed to a misunderstanding between
the petitioner's general agent, Mr. Alfredo Borja, and its policy
issuing clerk, who made the error of copying the boundaries
of the first oil mill when typing the policy to be issued for the
new one. x x x It is thus clear that the source of the discrepancy
happened during the preparation of the written contract."
(3) Case falls within one of the recognized exceptions of the parol
evidence rule. — "These facts lead us to hold that the present
case falls within one of the recognized exceptions to the parole
evidence rule. Under the Rules of Court, a party may present
evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading, among others, its
failure to express the true intent and agreement of the parties
thereto. Here, the contractual intention of the parties cannot be
understood from a mere reading of the instrument. Thus, while
the contract explicitly stipulated that it was for the insurance of
the new oil mill, the boundary description written on the policy
concededly pertains to the first oil mill. This irreconcilable
difference can only be clarified by admitting evidence aliunde,
which will explain the imperfection and clarify the intent of the
parties."
(4) Respondent is not barred by estoppel — "Anent petitioner's argument that the respondent is barred by estoppel
from claiming that the description of the insured oil mill
in the policy was wrong, we find that the same proceeds
from a wrong assumption. Evidence on record reveals that
respondent's operating manager, Mr. Edison Tantuco, notified
Mr. Borja (the petitioner's agent with whom respondent
negotiated for the contract) about the inaccurate description in
the policy. However, Mr. Borja assured Mr. Tantuco that the use
of the adjective new will distinguish the insured property. The
assurance convinced respondent that, despite the impreciseness
51
52
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
in the specification of the boundaries, the insurance will cover
the new oil mill."
(5) Doubt is to be resolved against the insurer. — "The object
of the court in construing a contract is to ascertain the intent
of the parties to the contract and to enforce the agreement
which the parties have entered into. In determining what the
parties intended, the courts will read and construe the policy
as a whole and if possible, give effect to all the parts of the
contract, keeping in mind always, however, the prime rule that
in the event of doubt, this doubt is to be resolved against the
insurer. In determining the intent of the parties to the contract,
the courts will consider the purpose and object of the contract."
(American Home Assurance Company vs. Tantuco Enterprises, Inc.,
366 SCRA 740 [2001].)
(2) Where terms are clear. — The cardinal principle of insurance
law of interpreting insurance contracts favorably to the insured
is applicable only in cases of doubt, not when the intention of
the policy is clear or the language is sufficiently clear to convey
the meaning of the parties (Young vs. Midland Textile Ins. Co.,
supra.) although the contract m a y be rather onerous.
The court is bound to adhere to the insurance contract as the
authentic expression of the intention of the parties, and it must be
construed and enforced according to the sense and meaning of the
terms which the parties themselves have used. If such terms are
clear and certain, they must be taken in their plain and ordinary
sense. (Art. 1370, Civil Code; see Pacific Banking Corp. vs. Court
of Appeals, 168 SCRA 1 [1988]; Sun Insurance Office, Ltd. vs.
Court of Appeals, 195 SCRA 193 [1991]; N e w Life Enterprises
vs. Court of Appeals, 207 SCRA 669 [1992]; Tagle vs. Court of
Appeals, 466 SCRA 464 [2005].) The terms of an unambiguous
insurance policy cannot be enlarged or diminished by judicial
construction since the court cannot make a new contract for
the parties where they themselves have employed express and
unambiguous words. (American Casualty Co. vs. Myrick, 96
ALR 2d. 1352.)
Moreover, obligations arising from contracts have the force
of law between the contracting parties and should be complied
with in good faith. (Art. 1159, Civil Code.)
Sec. 2
G E N E R A L PROVISIONS
53
ILLUSTRATIVE CASES:
1. Liability is limited to P150 if repair of insured was undertaken without notice to insurer. — Where the automobile liability
policy provided that the insurer would not be liable for more
than P150.00 if the insured undertook repairs of the car subject
of the insurance without the knowledge of the insurer, the latter is not liable to pay a greater amount to the insured who had
actually spent P307.27 for repairs due to an accident covered
by the policy but which were authorized without first notifying the insurer. (Misamis Lumber Corporation vs. Capital Dev. &
Surety Co., 17 SCRA 228 [1966].)
2. Insurer must be given notice of the existence of other fire
policies. — In the absolute absence of notice by the insured to
the insurer of the existence of other policies of insurance against
fire upon the property insured when it is one of the conditions
specified in the fire insurance policy, for the validity of the
policy and entitlement to indemnity in case of loss, the policy
is null and void and the insured cannot recover. Courts are
not permitted to make contracts for the parties. Their function
and duty consist simply in enforcing and carrying out the
contracts actually made. The parties must abide by the terms
of the contract because such terms constitute the measure of
the insurer's liability and compliance therewith is a condition
precedent to the insured's right of recovery from the insurer.
(Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., 47 SCRA
271 [1972]; see Pacific Banking Corp. vs. Court of Appeals,
supra-, New Life Enterprises vs. Court of Appeals, supra; Sta.
Ana vs. Commercial Union Assurance Co., 55 Phil. 324 [1930].)
28
But where the condition does not absolutely declare void
any violation of the additional or "other insurance" clause, but
on the contrary, it expressly provides that the condition "shall
not apply when the total insurance or insurances in force at the
time of the loss or damage is not more than P200,000.00," the
policy is not totally free from ambiguity. The only reasonable
M
T h e purpose of the requirement in the policy that the insured declare other insurances is to prevent over insurance and thus avert the perpetration of fraud. The public
as well as the insurer is interested in preventing the situation in which a "fire" would be
profitable to the insured. (Pioneer Insurance & Surety C o r p . vs. Yap, 61 SCRA 4 2 6 [1974];
General Insurance & Surety C o r p . vs. Ng Hua, 106 Phil. 1117 [I960].) Such a condition
has been upheld as valid and as a warranty that no other insurance exists. (Geagonia vs.
C o u r t of Appeals, 241 SCRA 152 [1995]; see Sees. 75, 93.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec.
conclusion is that (a) the prohibition applies only to double
insurance (Sec. 93.), and (b) the nullity of the policy shall only be
to the extent exceeding P200,000.00 of the total policies issued.
In other words, under the condition, the insurer is amenable
to assume a co-insurer's liability up to the loss not exceeding
P200,000.00. Forfeitures are not favored. (Geagonia vs. Court of
Appeals, 241 SCRA 152 [1995].)
3. Only the amputation of hand is considered as a loss thereof.
— Where the insured, an operator mechanic of a factory,
suffered injuries which caused the temporary total disability
of his left hand, due to the fractures of the index, middle and
fourth fingers thereof, he cannot recover on the insurance
policy which provides that partial disability of either hand
means amputation through the bones of the wrist. As the
terms of the policy are clear, express and specific that only
amputation of the left hand should be considered as a loss
thereof, an interpretation that would include the mere fracture
or other temporary disability, not covered by the policy, would
be unwarranted. The insurance contract is the law between
the parties. [Ty vs. First National Surety & Assurance Co., Inc., 1
SCRA 1324 [1961 ]; see Ty vs. Filipinas Compana de Seguros, 17
SCRA 364 [1966].)
4. Action on a claim must be brought within one year from
denial thereof. — Where under the terms of the policy, an action
on a claim denied by the insurer must be brought within one
(1) year from the denial, the contract which is the law between
the parties, governs, not the rules on the prescription of actions.
(Ang vs. Fulton, 2 SCRA 945 [1961].)
5. Use of motor vehicle must be "for social, domestic or pleasure
purpose." — The provision of the policy on the limitation as to
use reads: "Use only for social, domestic and pleasure purpose.
This does not cover use for hire, or reward, or for racing,
pacemaking, reliability-trial, and speed testing x x x."
Is car rallying embraced within the exception? Yes. While
an "auto rally is not racing as the contest is not based on
speed or acceleration where the vehicle which is travelling
at a higher rate of speed throughout the duration of test will
be the winner" (see 36 Words and Phrases 3.), it is definitely
a contest based on "precision" and "coordination of crew" as
well as on "road worthiness." Since the contest was timed,
controlled and conducted under the conditions with a crew
Sec. 2
G E N E R A L PROVISIONS
55
to test the precision of the driver and the road worthiness of
the car, the "auto rally" falls within the exception, particularly
under "pace-making, reliability-trial, and speed testing" and
thus, not within the coverage of the policy. (Dumoy Sawmill Inc.
vs. Times Surety & Insurance Co., Inc., I.C. Case No. 132 [1976].)
6. Written permission of insurer is required before insured may
effect payment in settlement of claim. — The policy specifically
requires that insurer's written consent be first secured before
any payment in settlement of the claim against the insured can
be made. There is nothing unreasonable or objectionable in
this stipulation as would warrant its nullification. The same is
obviously designed to safeguard the insurer's interest against
collusion between the insured and the claimant. The failure
of the insured to comply with this condition contained in the
insurance policy will preclude him from seeking reimbursement
of the payments made. (Perla Compania de Seguros, Inc. vs. Court
of Appeals, 185 SCRA 741 [1990].)
(3) Where contract is silent with respect to a particular matter. —
Any doubt that m a y arise for failure of the contract to provide
with respect to a particular matter should be resolved against
the insurer. In a case, the insurer contended that the amount
recoverable on a car insurance policy is subject to a deductible
franchise. It w a s ruled that the deductions of P250.00 and
P274.00 as deductible franchise and 20% depreciation on parts,
respectively, claimed by the insurer as agreed upon in "the
contract, has no basis," because "the policy does not mention any
deductible franchise." (Zenith Insurance Corporation vs. Court
of Appeals, 185 SCRA 398 [1990].)
What constitutes doing or transacting
an insurance business.
(1) Name or designation by insurer not controlling. — The name
by which a company or association or its certificates or policies
are designated, are not determinative of the question of whether
the organization is an insurance company or association, or
is engaged in an insurance business, or its contracts are in the
nature of insurance policies. Basically, insurance, whether fire,
marine, or any other form, is that which the law defines it to be.
(43 Am. Jur. 2d. 68.)
56
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2
(2) Acts deemed included by law. — The Code enumerates the
acts which are deemed included in the term "doing an insurance
business" or "transacting an insurance business." (Sec. 2[2].)
The fact that no profit is derived from the making of insurance
contracts or that no separate or direct consideration is received
therefor (ibid.), indeed, the fact that the contract states that it
is not an insurance policy, is not conclusive to show that the
making thereof does not constitute the doing or transacting of an
insurance business.
(a) A company m a y be found to be engaged in an
insurance business even though it expressly disclaims any
intention to sell insurance. (43 A m . Jur. 2d. 69.) Thus, it has
been held that a newspaper which in order to increase its
circulation, promises to pay a certain amount to the heirs of
one who meets death by accident while pursuing his ordinary
avocation, provided a copy of the paper or a coupon taken
from it is found in his possession at the time of the accident,
carries an accident insurance business which is unauthorized
under a charter empowering it to publish a newspaper.
(Commonwealth vs. Philadelphia Inquirer, 3 Pa Dist. 7 4 2 , 1 5
Pa Co 463.)
(b) While there are few cases in which a different
conclusion has been reached, the majority of cases have
adopted the view that a contract for the payment of burial or
funeral expenses at the death of the holder is a contract of life
insurance subject to the insurance laws. (43 A m . Jur. 2d. 72.) It
has, for example, been ruled that a contract by an individual
engaged in the undertaking business, to furnish burial in
consideration of payment of varying amounts during life
according to the holder's age and the service to be rendered, is
within the operation of the statute governing the transaction
of insurance business. (Comm. vs. Luquire Burial Asso., 104
F2 d 89; State vs. Willet, 86 NE 68; Heaton vs. Goodposter, 200
SW 2d. 120.)
(c) An agreement, however, to service and repair, at a flat
monthly fee, any burned out and defective parts of fluorescent
fixtures has been held not to constitute an insurance contract
since any element of warranty or guaranty in the agreement
is merely incidental to the servicing business. (Higger vs.
Sec. 2
G E N E R A L PROVISIONS
57
Rodziminsky, Inc., 19 NYS 2d 69.) Any such warranty is not
generally considered insurance if it excludes losses by external
accidental causes. On the other hand, a tire manufacturer
was held to be engaged in the insurance business when it
promised to repair or replace the tire if any defects were discovered
or accidental losses incurred within a stated period. (D.L.
Bickelhaupt, op. cit., p. 38.)
(3) Principal object and purpose test to determine nature of
contract. — M a n y of the cases are extremely difficult to reconcile.
Obviously, it is not the purpose of insurance law to regulate
all contracts involving assumption or distribution of risk. It is,
therefore, important to distinguish insurance contracts from
other contracts of contingent obligations, such as contracts
of guarantee or contracts for services to be rendered on the
happening of some future, uncertain event.
Under the so-called "principal object and purpose test," if
the principal object and purpose is "indemnity/ the contract
constitutes insurance, but if it is "service," risk transfer and
distribution being merely incidental, then the arrangement
is not insurance and, therefore, not subject to laws regulating
insurance, (see Jordan vs. Group Health Association, 107 F. 2d
239; California Physician's Service vs. Garrison, 172 P. 2d 4.)
Applying this test, a corporation such as a health maintenance
organization (HMO), whether or not organized for profit, whose
main object is to provide the members of a group with health
care services, rather than the assumption of insurance risk is
not engaged in insurance business. The basic distinction between
medical service corporations and ordinary health and accident
insurers is that the former, undertake to provide prepaid medical
services (at reduced cost, not to distribute risk like an insurer)
through participating physicians, thus relieving subscribers
of any further financial burden, while the latter undertake
to indemnify an insured for medical expenses up to, but not
beyond, the schedule of rates contrained in the policy. Even if
the former assumes the risk of paying the cost of these services
that may be more than a member has prepaid, it nevertheless
7
29
29
T h e risk that the a m o u n t of insurance claims might be higher than the premiums
paid. It is also known as acturial risk.
cannot be considered as being engaged in the insurance business
because any indemnification resulting from the payment for
services even if rendered in case of emergency would still be
incidental to main purpose of providing and arranging for health
care services. (Philippine Health Care Provider, Inc. vs. Comm.
of Internal Revenue, 600 SCRA 413 [2009].)
Functions of insurance.
In appraising the value of any social institution, like insurance,
one must consider not only its readily apparent benefits, but also
its more remote consequences. The functions of insurance (which
has been often referred to as "the first modern industry") are set
out below.
(1) Principal function. — The main function of insurance
is risk-bearing. The financial losses of the few are equitably
distributed over the m a n y out of a fund (premium) contributed
by all. What it does is to spread the losses over a large number of
persons.
(a) In fire insurance, for example, the policyholders pay
premiums into a c o m m o n pool, out of which those w h o suffer loss are compensated. The amount of the premium or
contribution is fixed according to individual circumstances.
Where fire destroys the insured property, the insurance company pays the loss from the fund created from the premiums
paid by all those similarly insured. Thus, the loss is borne not
by the insurer but proportionally by all those w h o contributed premiums.
(b) In life insurance, every policy which does not lapse,
eventually becomes a claim, but there is the same principle of
spreading of risk.
(2) Subsidiary functions. — The following functions, although
subsidiary, are not insignificant:
(a) Stimulates business enterprises. — Insurance has m a d e
possible, and helps to maintain, the present-day large-scale
commercial and industrial organizations. No large-scale
enterprise could function in the modern world without
the transference of many of its risks to insurers. It also
enables industrialists and others to use their capital in the
Sec. 2
G E N E R A L PROVISIONS
59
development of their business by paying a fixed contribution
by w a y of premium and obtain financial security against the
insured risks, instead of freezing capital to guard against
various contingencies.
(b) Encourages business efficiency and enterprise. — The
natural result of the elimination of risk is an increase in
business efficiency. The worry and uncertainty of such risks
could seriously diminish the personal efficiency of business
managers but for the w a y on which insurance relieves them
of these strains. By reducing risk, insurance also increases the
willingness to invest new capital in business enterprise;
(c) Promotes loss-prevention. — The community would
suffer m u c h greater economic impoverishment through
material losses if it were not for the loss-prevention
measures of insurers. In property insurance, for instance,
regular inspections of steam boilers, engines, and other
equipment carried out by the insurer with the making of
recommendations for the efficient and economic working of
the plant reduce explosions and breakdown to the minimum.
Insurers encourage loss-prevention through a system of
rating which allows discounts for good features and impose
special conditions where the risk is unsatisfactory;
(d) Encourages savings. — By protecting the individual
against unforeseen events, insurance provides a climate
in which savings are encouraged. A more direct stimulus,
however, is provided through most life insurance policies,
which include a savings or investment elements as well as a
protection element; and
(e) Solves social problems. — Some of the social problems
which beset a modern civilized community are taken care
through insurance. Many of the measures are provided
through the system of social (government) insurance (such
as that administered by the GSIS and the SSS) while others
are provided through free enterprise insurance. The effect of
the concurrent operation of both types of insurance is that
compensation is available to victims of loss or injuries, while
the financial difficulties arising from old age, disability, or
death are mitigated.
(3) Indirect functions. — There are also various indirect
functions some of which may be regarded as benefits rather than
functions proper. They are as follows:
(a) Investment of funds. — By reason of their principal
function, insurers accumulate large funds which they hold
as custodians out of which claims and losses are met. These
funds themselves are invested so that not only do they earn
interest to be added to the funds but they also make available
huge resources for underwriting industrial, agricultural,
cultural, and other projects that contribute to national
development;
(b) Use of reserve funds. — Because of the investment
policy of insurers, their reserve funds are not static, but are
used productively. This results in the reduction of the cost of
insurance to the insuring public. If the reserve funds were
not so used, the income they now earn would have to be
obtained through higher premiums;
(c) Effect on prices. — The cost of insurance to the
businessman is passed on to the consumers, along with
other production costs, but paradoxically, the existence of
insurance benefits the consumer public in terms of reduced
prices. This is because the cost of insurance is less than the
cost of risk without insurance; and
(d) As a basis of credit. — Credit extension is the most
important phase of modern business and is contributed to
by virtually all forms of insurance. Thus, in the case of a
mortgage upon real estate, no mortgagee is willing to lend
money unless he knows that the value of the property is
protected from destruction by fire. No dealer cares to sell
goods to a retailer on credit unless he has some assurance
that the goods and the business of the retailer are protected
from sudden disaster by fire, (see Elements of Insurance, by
W.A. Dinsdale & D.C. McMurdie, 1977 ed., 7-10, published
by Pittman Publishing Limited, London; Riegel, Miller &
Williams, Jr., op. cit, pp. 23, 25, 26.)
— oOo —
Chapter I
CONTRACT OF INSURANCE
Title 1
WHAT MAY BE INSURED
Sec. 3. Any contingent or unknown event, whether past
or future, which may damnify a person having an insurable
interest, or create a liability against him, may be insured
against, subject to the provisions of this chapter.
The consent of the husband is not necessary for the
validity of an insurance policy taken out by a married woman on her life or that of her children.
Any minor of the age of eighteen years or more, may,
notwithstanding such minority, contract for life, health and
accident insurance, with any insurance company duly authorized to do business in the Philippines, provided the
insurance is taken on his own life and the beneficiary appointed is the minor's estate or the minor's father, mother,
husband, wife, child, brother or sister.
The married woman or the minor herein allowed to take
out an insurance policy may exercise all the rights and
privileges of an owner under a policy.
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health of a
minor shall automatically vest in the minor upon the death
of the original owner, unless otherwise provided for in the
policy, (a)
Requisites of a contract of insurance.
Since policies are contracts, many of the rules and general
principles of contracts apply also to insurance. In order that
61
62
Sec. 3
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
there will be a valid and enforceable contract of insurance, it is
necessary that the following be present:
(1) A subject matter in which the insured has an insurable
interest (see Sees. 12-14.);
(2) Event or peril insured against which may be any (future)
contingent or unknown event, past or future (Sec. 3.), and a
duration for the risk thereof (see Sec. 51 [g].);
(3) A promise to pay or indemnify in a fixed or ascertainable
amount (see Sec. 2.);
//
(4) A consideration for the promise, known as the p r e m i u m
(see Sec. 77.); and
,,
(5) A meeting of minds of the parties upon all the foregoing
essentials, (see Arts. 1 3 1 8 , 1 3 1 9 , Civil Code.)
Of course, the parties must be competent to enter into the
contract, (see Arts. 1327-1329, Civil Code; Sees. 6-7.)
Under Section 226, it is provided that "no policy of insurance
shall be issued or delivered within the Philippines unless in the
form previously approved by the Insurance Commissioner/ Of
course, the contract must not be for a purpose contrary to law or
public policy.
7
Subject matter of contract of insurance.
(1) In general — Anything that has an appreciable pecuniary
value, which is subject to loss or deterioration or of which
one may be deprived so that his pecuniary interest is or m a y
be prejudiced, m a y properly constitute the subject matter of
insurance.
(2) Property insurance. — Both persons and property m a y
be the subjects of insurance, but the term "subject matter" is
ordinarily used in reference to the insurance of property. The
property covered by a policy is regarded the subject matter of
the insurance, but it is apparent that in the last analysis, it is the
risk of loss of such property that is primarily involved, (see Sees.
13-14.)
(3) Life, health, and accident insurance. — While it is true that in
life, health, or accident insurance the person becomes the subject
Sec. 3
CONTRACT OF INSURANCE
Title 1. — W h a t M a y Be Insured
63
Of insurance, the matter is generally viewed as one in reference to
the insured as a party to the contract. (29 Am. Jur. 216; see Sees.
10,179-183.)
(4) Casualty insurance. — In insurance (not falling within the
scope of the other types of insurance) against perils which may
affect the person a n d / o r property of the insured and give rise to
liability on his part to pay damages to others, the subject matter
is the risks involved in its use, or the insured's risk of loss or
liability, that he m a y suffer loss or be compelled to indemnify for
the loss suffered by a third person.
1
Casualty insurance includes personal accident and health
insurance as written by non-life insurance companies and all
insurance against loss or liability which is not within the scope
of the other types of insurance, namely, fire, marine, suretyship
and life, (see Sec. 174.)
Event or peril insured against.
Under Section 3 (par. 1.), the contingency or unknown event
must be such that its happening will (1) damnify or cause loss
to a person having an insurable interest or (2) create a liability
against him. The unknown event m a y be past or future, (see
Sec. 51 [f].) In a contract of insurance, the insurer is liable for a
fortuitous event if it is the event or peril insured against and is
the proximate cause of the loss, (see Sec. 84; also Art. 1174, Civil
Code.)
2
1
A n o t h e r point of view considers as the subject matter of liability insurance the activity or process in the course of which legal liability is incurred by the insurer. Thus, the
m o t o r vehicle form c o m m o n l y in use obligates the insurer to pay on behalf of the insured
all s u m s which he shall b e c o m e obligated to pay for death or bodily injuries "arising out
of the use of the insured vehicle." (see E.W. Patterson, op. cit, pp. 2 3 2 - 2 3 3 .
Strictly speaking, an insurer does not insure against an event, i.e., insure that the
event will not h a p p e n (or will happen). Thus, the fire insurer does not promise the insured that he will not have a destructive fire; the life insurance contract, even though
euphemistically w o r d e d ("X c o m p a n y insures the life of Y " ) does not deceive the most
ingenuous person into believing that the company guarantees eternal life. The insurer
merely promises to pay a s u m of money (exceptionally, to make a restitution in kind as
an alternative) if a defined event occurs. To insure an event, then, means to make such a
conditional promise, {ibid., pp. 237-238.)
2
64
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 3
EXAMPLES:
(1) Y's vessels left for a voyage on June 15 from Manila to
San Francisco, U.SA. Y insured said vessel against the perils
of the sea (see Sec. 99.) "lost or not lost" on June 19 with X
Insurance Co. Without the knowledge of both parties, the
vessel had already sunk on June 18. Here, the sinking of the
vessel is a past event at the time the policy took effect.
The contract is valid and X Insurance Co. is liable because
it agreed to pay even though the vessel be already lost. An
insurance against an unknown past event is peculiar only to
marine insurance. In case of fire insurance, the fire must be a
future, not a past event.
(2) Y owns a car which he drives himself. If he injures
pedestrians or causes damage to property by the use of his car,
he thereby incurs liability. Now he may insure himself against
liability to third persons that may be created by this contingent
event, (see Sec. 174.) A clear example of this kind of insurance
is also seen in reinsurance, (see Sec. 95.)
But if the contract is to indemnify Y against actual loss or
payment to third persons, the insurance is one of indemnity
merely and not against liability. (Guingon vs. Del Monte, 20
SCRA 1043 [1967].)
Insurance by a married woman.
A married w o m a n m a y take out an insurance on her life or
that of her children without the consent of her husband (Sec. 3,
par. 2.), or that of her husband, she having an insurable interest
in the latter, (see Sec. 10.) She m a y also take out insurance on her
paraphernal or separate property, or on property given to her by
her husband. (Harding vs. C o m m . Union Assurance Co., 38 Phil.
464 [1918]; see Art. 39, Civil Code; Arts. 110, 111, Family Code
[Exec. Order No. 209].)
Insurance by a minor.
(1) Life, health, or accident insurance. — Under Section 3 (par.
3.), a minor may enter into a valid contract of insurance provided
that:
(a) He is 18 years of age or over;
(b) The contract is for life, health, or accident insurance;
Sec. 3
CONTRACT OF INSURANCE
Title 1. — W h a t M a y Be Insured
65
(c) The insurance is taken on his life; and
(d) The beneficiary (the person designated to receive the
proceeds of the insurance upon the happening of the event
insured against) is any of those enumerated by law.
(2) Other insurance. — A contract of insurance other than life,
health, or accident insurance, such as fire or marine insurance,
entered into by a minor is not entirely void. It is one which is
merely voidable, that is, it is valid until annulled in a proper
action in court by the minor or his legal representative. (Art.
1390, Civil Code.)
If the contract is not disaffirmed by the minor, the insurer
cannot escape liability by pleading minority as a defense because
"persons w h o are capable cannot allege the incapacity of those
with w h o m they contracted." (Art. 1397, ibid.) But if the contract
is fair and no fraud or undue influence was practiced by the
insurer, the minor cannot recover the premiums paid, if he
cannot return the benefits received, (see Arts. 1385, 1241, par. 1,
1427, ibid.; Johnson vs. Northwestern Mut. L. Ins. Co., 59 N.W.
992.)
The result is that an insurance company contracting with a
minor is bound by the contract; the minor ordinarily is not.
Ownership of life insurance policy.
(1) Interest of person who insured his own life. — Ownership of a
m o d e m life insurance policy is divided between the insured and
the beneficiary (infra.), the insured being the owner of its various
marketing and sales features, such as the loan and cash surrender
values, and the beneficiary being the owner of a promise to pay
the proceeds at the death of the insured subject to the insured's
right of revocation. (Gordon vs. Portland Trust Bank, 53 ALR 2d
1106; 43 Am. Jur. 2d. 310-311.)
One who takes a policy of insurance on his own life becomes,
in so doing, a party to the contract, even though the benefits of
the insurance are to accrue to someone else known as beneficiary.
Such contract remains his, at least, in part, and may be maintained
by suit, if necessary, for the protection of those in whose favor
it is made. (Heffelfinger vs. Comm., 302 US 690; 43 Am. Jur. 2d
310.)
66
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 4
(2) Interest of beneficiary. — In general, the nature of the
interest of the beneficiary depends on the terms of the insurance
contract, including the existing statutes by which the insurer
and its policyholders are bound. Under our Code, the married
woman or the minor allowed to take out an insurance policy
may exercise all the rights and privileges of an owner, as insured
a n d / o r beneficiary. (Sec. 3, par. 4; see Sec. 180, par. 3.)
(3) Transfer of rights to minor insured upon death of original owner
of policy. — Upon the death of the original owner of a policy of
insurance taken out by him on the life or health of a minor, all
rights, title and interest in the policy shall automatically vest in
the minor unless otherwise provided for in the policy. (Sec. 3,
par. 5.) This contemplates a case where X took a life insurance on
the life or health of his son Y, a minor, appointing himself (X) as
beneficiary, and later X died.
Sec. 4. The preceding section does not authorize an
insurance for or against the drawing of any lottery, or for
or against any chance or ticket in a lottery drawing a prize.
Concept of lottery.
The term "lottery" extends to all schemes for the distribution
of prizes by chance, such as policy playing, gift exhibition, prize
concerts, raffles at fairs, etc., and various forms of gambling.
The three essential elements of lottery are: (1) consideration; (2)
prizes; and (3) chance. (Uy vs. Palomar, 27 SCRA 287 [1969].)
There is consideration of price paid if it appears that the
prizes offered by whatever name they m a y be called came out of
the fund raised by the sale of chances among the participants in
order to win the prizes. Conversely, if the prizes do not c o m e out
of the fund or contributions by the participants, no consideration
has been paid and consequently, there is no lottery, (ibid.) Thus,
there is no lottery where a company, to promote the sale of certain
products, resorts to a scheme which envisions the giving away
for free of certain prizes for the purchase of said products, for the
participants are not required to pay more than the usual price of
the products. Under the scheme, prizes can be obtained without
any additional consideration. (Phil. Refining Co. vs. Palomar,
Sec. 4
CONTRACT OF INSURANCE
Title 1. — W h a t M a y Be Insured
67
148 SCRA 313 [1987]; Palomar vs. CFI of Manila, 165 SCRA 162
[1988].)
It can be clearly seen from the language of Section 4 that a
sweepstake holder cannot insure himself against the failure of
his ticket to win a prize because even if he were not to win, it
cannot be said that he suffered a "loss" of the prize. In other
words, the failure to win a prize would not damnify or create a
liability against him.
Contract of insurance not a wagering
contract.
A contract of insurance is a contract of indemnity and is not
a wagering or gambling contract, (see Sec. 25.) While it is based
on a contingency, it is not a contract of chance and is not used for
profit. The very purpose of insurance is the reimbursement of the
holder of insurance for actual loss suffered from specified risks.
The distinctions are the following:
(1) In a gambling contract, the parties contemplate gain
through mere chance {i.e., occurrence of the contingent event),
while in a contract of insurance, the parties seek to distribute
possible loss by reason of mischance;
(2) The gambler courts fortune, while the insured seeks to
avoid misfortune;
(3) The contract of gambling tends to increase the inequality
of fortune, while the contract of insurance tends to equalize
fortune (see Vance, op. ext., p. 93.);
(4) The essence of gambling is this: whatever one person wins
from a wager is lost by the other wagering party. In a contract
of insurance, what one insured gains is not at the expense of
another insured. Basically, it can be said that the entire group of
insureds provides through the premiums paid, the funds which
make possible the payment of all claims; and
(5) As soon as a party makes a wager, he creates a risk of
loss to himself where no such risk existed previously. On the
other hand, the purchase of insurance does not create a new
and, therefore, non-existing risk of loss to the purchaser. Instead,
the only intelligent reason for purchasing insurance is that
68
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 5
the purchaser faces an already existing risk of economic loss.
(Protection Functions of Life and Health Insurance, by William
T. Beadles, in Life and Health Insurance Handbook, edited by
Gregg & Lucas [3rd ed.], p. 29, hereinafter cited as LHIH.) One
can insure only if he has an insurable interest in the subject of
insurance, (see Sees. 3[par. 1], 1 0 , 1 3 . )
Similarity between insurance
and gambling.
Insurance and gambling are similar in only one respect.
In both cases, one party promises to pay a given sum to the
other upon the occurrence of a given future event, the promise
being conditioned upon the payment of, or agreement to pay, a
stipulated amount by the other party to the contract.
This means that in either case, one party m a y receive more,
much more, than he paid or agreed to pay. At this point, similarity
ceases between gambling and insurance. (W.T. Beadles, in L H I H ,
op. ext., p. 30.)
EXAMPLES:
(1) Ten members of a cycling team contributed P2,000.00
each to a fund available for the use of any member injured while
participating in the Tour of Luzon contest. This is insurance.
Each member contributes to a common fund, out of which he
is reimbursed for losses he may suffer.
(2) Suppose, in the same example, the agreement was
that the entire sum of P20,000.00 would be given to any team
member who would win the most laps. This is a wager. Here,
the parties contemplate gain based upon uncertain events.
Sec. 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply.
Applicability of provisions of Chapter 1.
By virtue of Section 5, the provisions of Chapter 1 on "The
Contract of Insurance" (Sees. 1-98.) are also applicable to Marine
Insurance (Sees. 99-166.), Fire Insurance (Sees. 167-173.), Casualty
Insurance (Sec. 174.), Suretyship (Sees. 175-178.), Life Insurance
Sec. 5
CONTRACT OF INSURANCE
Title 1. — W h a t M a y Be Insured
69
(Sees. 179-183.), and to any other kind of insurance (see Sec. 2.) so
far as said provisions can apply. Matters not expressly provided
for in the Insurance Code and special laws on insurance are
regulated by the Civil Code. (Art. 2011, Civil Code.)
So, an insurance contract under Republic Act No. 1161 (Social
Security Act of 1954.), as amended, shall be governed primarily
by the said law and subsidiarily, by Chapter 1 of the Insurance
Code, and in the absence of applicable provisions in both laws,
the pertinent provisions of the Civil Code shall be applied.
— oOo —
Title 2
PARTIES TO THE CONTRACT
Sec. 6. Every person, partnership, association, or
corporation duly authorized to transact insurance business
as elsewhere provided in this Code, may be an insurer, (a)
Parties to a contract of insurance.
The two parties to a contract of insurance are:
(1) The insurer or the party w h o assumes or accepts the
risk of loss and undertakes for a consideration to indemnify
the insured or to pay him a certain sum on the happening of a
specified contingency or event.
Under the Code, the business of insurance m a y be carried on
by individuals just as much as by corporations and associations.
As a matter of fact, in the early days, a large proportion of the risks
was underwritten by private individuals. Gradually, this form
of doing business has fallen into disuse and today, the business
of insurance is conducted almost exclusively by corporations or
associations. It has been stated that the State itself m a y go into
insurance business (Vance, op. cit., pp. 309-310.); and
(2) The insured or the second party to the contract, the person
in whose favor the contract is operative and w h o is indemnified
against, or is to receive a certain sum upon the happening of a
specified contingency or event. He is the person whose loss is
the occasion for the payment of the insurance proceeds by the
insurer.
The insured is not, however, always the person to w h o m the
proceeds are paid. This person m a y be the beneficiary designated
in the policy, (infra.) It is also possible that the insured m a y assign
the proceeds of the insurance to someone else.
70
Sec. 6
CONTRACT OF INSURANCE
Title 2. — Parties to the Contract
71
It is said that the relation between the insurer and the insured
is that of a contingent debtor and creditor, subject to the conditions of the policy and not that of trustee and cestui que trust.
(Ibid., p. 116.)
Terms used.
(1) "Insurer" is synonymous with the term "assurer" or
"underwriter." (Black's L a w Dictionary, 2nd ed.) The insurance
company is sometimes called "underwriter."
(2) The terms "insured" and "assured" are generally used
interchangeably; but strictly speaking, the term "insured" refers
to the owner of the property insured or the person whose life is
the subject of the contract of insurance, while "assured," to the
person for whose benefit the insurance is granted.
1
Thus, where a wife insures the life of her husband for her own
benefit, the wife is the assured and the husband, the insured. The
wife, the individual w h o contracts with the insurer is the owner
of the policy but she is not the insured. Also, the owner of a life
policy is not necessarily the one who contracted with the insurer
nor the insured in the case of a purchaser of a policy on the life of
another (assuming the insurable interest requirement is met).
In property insurance, like fire insurance, the insured is also
the assured where the proceeds are payable to him.
(3) "Assured" is also used sometimes as a synonym of
"beneficiary." The beneficiary is the person designated by the
terms of the policy as the one to receive the proceeds of the
insurance. He is the third party in a contract of life insurance
(see Sees. 179-180.) for whose benefit the policy is issued and
to w h o m the loss is payable. (44 C.J.S. 497.) There are occasions
when the proceeds are paid to the estate of the insured.
Who may be an insurer.
(1) Foreign or domestic insurance company or corporation. —
Before a foreign or domestic insurance company or corporation
i n s u r a n c e contracts are usually obtained through an "agent" who is ordinarily employed by the Insurance C o m p a n y or a "broker" who is ordinarily an independent contractor, (see Sees. 299-302.) In effect, the former is an agent of the applicant for Insurance.
T H E INSURANCE CODE OF T H E PHILIPPINES
72
Sec. 6
may transact insurance business in the Philippines, it must
first obtain a certificate of authority for that purpose from the
Insurance Commissioner who may refuse to issue such certificate
of authority if, in his judgment "such refusal will best promote
the interests of the people of this country" (Sec. 187.)
(2) Individual partnership, or association. — Although insurance business is ordinarily carried on by partnerships and
corporations, yet any individual may be an insurer, the only
requisite being that "he holds a certificate of authority from the
Insurance Commissioner." (Sec. 6.) Any person, partnership, or
association of persons may be given a certificate of authority
if such person, partnership, or association is "possessed of the
capital assets required of an insurance corporation doing the
same kind of business in the Philippines and invested in the
same manner." (see Sees. 184-186.)
(a) An "insurance corporation" is defined by the Code as
one "formed or organized to save any person or persons or
other corporations harmless from loss, damage, or liability
arising from any unknown or future or contingent event,
or to indemnify or to compensate any person or persons or
other corporations for any such loss, damage, or liability, or to
guarantee the performance of or compliance with contractual
obligations or the payment of debts of others." (Sec. 185.) The
last part of the statement of purpose refers to suretyship, (see
Sec. 175.)
(b) For purposes of the Code, the terms, "insurer" and
"insurance company" "include all individuals, partnerships,
associations, or corporations, including government-owned
or controlled corporations or entities, engaged as principals
in the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the terms
shall also include professional reinsurers defined in Section
280." (Sec. 184.)
2
2
U n d e r the General Banking L a w of 2 0 0 0 (R.A. No. 8791.), "a b a n k shall not directly e n g a g e in insurance business as the insurer." (Sec. 54.) T h r o u g h the marketing tool
known as "bancassurance," insurance c o m p a n i e s are able to i m p r o v e the distribution of
their insurance products through branch network. Bancassurance combines the business
of banking and insurance where an insurer utilizes bank branches to distribute insur-
Sec. 7
CONTRACT OF INSURANCE
Title 2. — Parties to the Contract
73
Business of insurance affected
with public interest.
It is recognized that the business of insurance is one that
is affected with a public interest and, therefore, it is subject to
regulation and control by the state by virtue of the exercise of
its police power or in the interest of public convenience and the
general good of the people. (29 Am. Jur. 60-61.)
An insurance company, in effect, is an instrumentality which
gathers funds u p o n the basis of equality of risk from a greater
number of persons, sufficiently large in number to arouse the
element of chance to step out and the law of averages to step in
as the controlling factor — and holds the numerous amounts so
collected as general fund to be paid out to those w h o shall suffer
losses. In this fund, which thus constitutes a guaranty against
individual loss, all are interested not in some vague w a y but in a
very real sense. (Tyson vs. Banton, 273 U.S. 418.)
Thus, a law requiring insurance companies to file schedule of
rates and prohibiting discriminatory rates, was held valid on the
ground that the business of insurance affects the public welfare
as to invoke and require governmental regulation. "Accidental
fires are inevitable and extent of the loss is very great. The object
of the regulation is to distribute the loss over as wide an area
as possible. In other words, the loss is spread over the country,
the disaster to an individual is shared by many, the disaster to
a community shared by other communities; great catastrophies
are, therefore, lessened." (German Alliance Ins. Co. vs. Lewis,
223 U.S. 889.)
Sec. 7. Anyone except a public enemy may be insured.
ance policies. Presently, the BSP allows banks to sell insurance products at their branches.
U n d e r the law, banks are allowed to engage in non-allied undertakings but only through
subsidiaries or affiliates. To comply with the ownership rule, a major insurance company
can set up a subsidiary and sell 5% of equity to a bank. The policies or products that
would be sold through that bank would have to be the products of the acquired insurance
unit. U n d e r present rules, only commercial and universal banks are authorized to enter
into a bancassurance tie-up with insurers, while thrift bank subsidiaries are disallowed.
BSP Circular No. 683 (Feb. 23, 2 0 1 0 ) prescribes the guidelines on the marketing, sale and
servicing (e.g., collecting p r e m i u m s and paying claims) of micro-insurance products (as
defined Ins. Memo. Cir. No. 1-2010) by a rural, cooperative, or thrift-bank provided the
micro-insurance product is duly approved by the Insurance Commission.
74
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 7
Capacity of party insured.
(1) Natural person. — In order that a person m a y be the party
insured in a contract of insurance, two essential requisites are
necessary, to wit:
(a) He must be competent to make a contract (see Arts.
1327-1329, Civil Code.); and
(b) He must possess an insurable interest in the subject of
the insurance. (Vance, op. cit. p. 143.)
f
A third requisite, applicable also to juridical persons, m a y
be added, i.e., that the insured must not be a public enemy.
(Sec. 7.)
(2) Juridical person. — A juridical person, like a partnership
or a corporation, m a y take out insurance on property owned by
it. (see Arts. 44, 45, Civil Code.) Note that Section 3 specifically
authorizes minors, 18 years or more to take out insurance payable
to a limited class of beneficiaries.
Meaning of public enemy.
Apublic enemy designates a nation with w h o m the Philippines
is at w a r and it includes every citizen or subject of such nation.
The term m a y be taken to m e a n "alien enemy." A mob, however
numerous they m a y be, or robbers or thieves whoever they m a y
be, are never considered public enemies for purposes of the above
provision, (see Bouvier's L a w Dictionary; Russel vs. Fagan, 4 Atl.
258.)
During wartime, a private corporation is deemed an enemy
corporation although organized under Philippine laws if they
are controlled by enemy aliens. This is the so-called "control test"
whereby a corporation is deemed to have the same citizenship
as the controlling stockholders in time of war. (Filipinas Cia de
Seguros vs. Christern Huenefeld & Co., 89 Phil. 54 [1951]; S.
Winshop vs. Phil. Trust Co., 90 P h i l 744 [1952].)
Effect of war on existing insurance
contracts.
(1) Where parties rendered enemy aliens. — By the law of nations,
all intercourse between citizens of belligerent powers which is
Sec. 7
CONTRACT OF INSURANCE
Title 2. — Parties to the Contract
75
inconsistent with a state of w a r is prohibited. The purpose of war
is to cripple the power and exhaust the resources of the enemy. It
is inconsistent that the subjects of one country should lend their
assistance to protect by insurance, the commerce or property of
belligerent alien subjects or to do anything detrimental to their
country's interests, (see 6 Couch, Cyclopedia of Insurance Law,
pp. 5352-5353.)
Of course, if the parties are not rendered enemy aliens by
the intervention of war, the policy continues to be enforceable
according to its terms and the laws governing insurance and
the general rules regarding contracts. The effect of w a r between
countries of the insured and the insurer upon insurance contracts
validly entered into during peacetime is a question upon which
there is a decided conflict of authority.
(a) With respect to property insurance. — The rule adopted
in the Philippines is that an insurance policy ceases to be
valid and enforceable as soon as an insured becomes a public
enemy. (Filipinas Cia de Seguros vs. Christern Huenefeld &
Co., Inc., supra.)
(b) With respect to life insurance. — Three rules or doctrines
have arisen. One of these rules is the United States Rule which
declares that the contract is not merely suspended but is
abrogated by reason of nonpayment of premiums, since
the time of the payments is peculiarly of the essence of the
contract. However, the insured is entitled to the cash or
reserve value of the policy (if any), which is the excess of the
premiums paid over the actual risk carried during the years
when the policy had been in force. (New York Life Ins. vs.
Statham, 93 U.S. 24.)
This rule has been specifically followed by our Supreme
Court, (see Constantino vs. Asia Life Ins. Co., 87 Phil. 248 [1950];
also McGuire vs. The Manufacturer's Life Ins. Co., 87 Phil. 370
[1950]; Nat. Leather Co., Ins. vs. U.S. Life Ins. Co., 87 Phil. 410
[1950]; Vda. de Carrero vs. Manufacturer's Life Ins. Co., 87 Phil.
460 [1950]; Gonzaga vs. Crown Life Ins. Co., 91 Phil. 10 [1952].)
(2) Where loss occurs after end of war. — Since the effect of war
is not merely to suspend but to abrogate the contract of insurance
between citizens of belligerent states, the termination of the war
76
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 8
does not revive the contract. Consequently, the insurer is not
liable even if the loss is suffered by the insured after the end of
the war.
Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee,
or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor,
who does not cease to be a party to the original contract,
and any act of his, prior to the loss which would otherwise
avoid the insurance, will have the same effect, although
the property is in the hands of the mortgagee, but any act
which, under the contract of insurance, is to be performed
by the mortgagor, may be performed by the mortgagee
therein named, with the same effect as if it had been performed by the mortgagor.
Insurable interest of mortgagee
and mortgagor.
(1) Separate insurable interests. — The m o r t g a g o r and the
mortgagee have each an insurable interest in the property
mortgaged (Sec. 13.), and this interest is separate and distinct
from the other. Consequently, insurance taken by one in his o w n
name only and in his favor alone, does not inure to the benefit
of the other. (Sec. 53.) A n d in case both of them take out separate
insurance policies on the same property, or one policy covering
their respective interests, the same is not open to the objection
that there is double insurance, (see Sec. 93.)
(2) Extent of insurable interest of mortgagor. — The m o r t g a g o r
of property, as owner, has an insurable interest therein to the
extent of its value, even though the mortgage debt equals such
value. (Higginson vs. Dall, 13 Mass. 96.) The reason is that the
loss or destruction of the property insured will not extinguish his
mortgage debt.
(3) Extent of insurable interest of mortgagee. — The mortgagee
(or his assignee) as such has an insurable interest in the mortgaged
property to the extent of the debt secured, since the property is
relied upon as security thereof, and in insuring, he is not insuring
Sec. 8
CONTRACT OF INSURANCE
Title 2. — Parties to the Contract
77
the property itself but his interest or lien thereon. His insurable
interest (Sec. 10.) is prima facie the value mortgaged and extends
only to the amount of the debt, not exceeding the value of the
mortgaged property. Such interest continues until the mortgage
debt is extinguished. Thus, separate insurances (see Sec. 93.)
covering different insurable interests m a y be obtained by the
mortgagor and the mortgagee. (44 C.J.S. 883-884; see Palileo vs.
Cosio, 97 Phil. 919 [1966] and 17 SCRA 196 [1966]; Geagonia vs.
Court of Appeals, 241 SCRA 152 [1995].)
(4) Extent of amount of recovery. — The mortgagor cannot
recover upon the insurance beyond the full amount of his loss
and the mortgagee, in excess of the credit at the time of the loss
nor the value of the property mortgaged.
EXAMPLE:
R is the owner of a house worth P1,000,000.00 which he
mortgaged to E to secure a loan of P500,000.00. The insurable
interest of R, mortgagor, is P1,000,000.00, while that of E,
mortgagee, is P500,000.00.
The insurance taken by R upon his own interest only does
not inure to the benefit of E. R may claim in case of loss, the
entire proceeds or amount of his loss and may sue thereon
in his own name. E has no right to claim the proceeds of the
policy.
Conversely, R has no interest in the insurance taken out
by E on his own interest (San Miguel Brewery vs. Law Union,
Inc., 40 Phil. 674 [1920].) but if the loss occurs after the debt has
been discharged by payment or otherwise, E may not recover
because insurance is merely a contract of indemnity. (Sec. 17.)
Insurance by mortgagee of his own
interest.
(1) Right of mortgagee in case of loss. — Where the mortgagee,
independently of the mortgagor, insures his own interest in the
mortgaged property, he is entitled to the proceeds of the policy
in case of loss before payment of the mortgage.
(2) Subrogation of insurer to right of mortgagee. — In such
case, the mortgagee is not allowed to retain his claim against
the mortgagor but it passes by subrogation to the insurer to the
78
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 8
extent of the insurance money paid. (Palileo vs. Cosio, 97 Phil.
919 [1955]; Lyden vs. Lawrence, 81 A. 121.)
(3) Change of creditor. — In other words, the payment of the
insurance to the mortgagee by reason of the loss does not relieve
the mortgagor from his principal obligation but only changes the
creditor, (see Arts. 1291[3], 1300, Civil Code.)
So, in the preceding example, the insurer can collect from
R, mortgagor, to the extent of the amount paid to E, creditormortgagee. E cannot collect both the insurance and the mortgage
debt.
Insurance by mortgagor of his own
interest.
(1) For his own benefit. — The mortgagor m a y insure his own
interest as owner for his benefit. In case of loss, the insurance
proceeds do not inure to the benefit of the mortgagee w h o has no
greater right than unsecured creditors in the same.
(2) For the benefit of mortgagee. — It is competent, however,
for the mortgagor to take out insurance for the benefit of the
mortgagee, where he pays the insurance premium, making the
loss payable to the mortgagee. Indeed, this is the usual practice.
The mortgagee m a y be m a d e the beneficial payee in several
ways:
(a) He m a y become the assignee of the policy with the
consent of the insurer;
(b) He m a y be the mere pledgee without such consent;
(c) A rider (see Sec. 50.) making the policy payable to the
mortgagee "as his interest m a y appear" m a y be attached;
(d) A "standard mortgage clause" containing a collateral
independent contract between the mortgagee and the insurer
m a y be attached; or
(e) The policy, though, by its terms payable absolutely
to the mortgagor; m a y have been procured by a mortgagor
under a contract duty to insure for the mortgagee's benefit,
in which case the mortgagee acquires an equitable lien upon
the proceeds.
Sec. 8
CONTRACT OF INSURANCE
Title 2. — Parties to the Contract
79
Insurance by mortgagor for benefit of mortgagee,
or policy assigned to mortgagee.
Under Section 8, where the mortgagor of property effects
insurance in his own name providing that the loss shall be
payable to the mortgagee, or assigns a policy of insurance to the
mortgagee, the following are the legal effects:
3
(1) The contract is deemed to be upon the interest of the
mortgagor; hence, he does not cease to be party to the contract;
(2) A n y act of the mortgagor prior to the loss, which would
otherwise avoid the insurance (like storing inflammable materials
in the insured house) affects the mortgagee even if the property
is in the hands of the mortgagee;
(3) A n y act which under the contract of insurance is to be
performed by the m o r t g a g o r (like payment of the premium) m a y
be performed by the mortgagee with the same effect;
(4) In case of loss, the mortgagee is entitled to the proceeds to
the extent of his credit; and
(5) U p o n recovery by the mortgagee to the extent of his
credit, the debt is extinguished.
The rule on subrogation by the insurer to the right of the
mortgagee does not apply in this case.
EXAMPLE:
R insured his house worth Pl,200,000.00 for P1,000,000.00,
with the policy providing that the loss shall be payable to E
(or R subsequently, assigns the policy to E). The house was
mortgaged to E as security for a loan of P600 000.00. It was
totally destroyed by accidental fire. Who may recover on the
policy?
/
E, mortgagee, is entitled to the insurance proceeds to the
extent of his credit of P600,000.00. He shall hold as trustee for
R, mortgagor, the excess of P400,000.00.
If before the loss, the mortgage debt had already been
paid, R would be entitled to recover the P1,000,000.00 from
3
In the case of fire or marine insurance which m a y be assigned before it becomes
a fixed liability (see Sec. 83.), the assignment must be with the consent of the insurer
because it is a personal contract.
80
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 8
the insurer. R effected the insurance in his own name and he
did not cease to be a party to the original contract although
the policy provided that the loss shall be payable to E (or he
assigned the policy to E).
Effect of standard and open clauses
in fire insurance policy.
(1) If a fire insurance policy contains a standard or union
mortgage clause, the acts of the mortgagor do not affect the
mortgagee. The purpose of the clause is to make a separate and
distinct contract of insurance on the interest of the mortgagee.
Thus, a mortgagee m a y procure a policy, as a contracting
party in accordance with the terms of an agreement by which the
mortgagor is to pay upon such insurance. (Geagonia vs. Court of
Appeals, supra.)
(2) An open or loss-payable mortgage clause merely provides
for the payment of loss, if any, to the mortgagee as his interest
may appear (see Sec. 57.) and under it, the acts of the mortgagor
affect the mortgagee.
If the policy is obtained by the mortgagor with a loss-payable
clause in favor of the mortgagee as his interest m a y appear,
the mortgagee is only a beneficiary under the contract and
recognized as such by the insurer but not m a d e a party to the
contract itself. Hence, any act of the mortgagor which defeats
his right will also defeat the right of the mortgagee. This kind
of policy covers only such interest as the mortgagee has at the
issuing of the policy. Thus, where the insurance policies issued
by the insurer name the mortgagor as the assured and contain a
mortgage clause which reads: "Loss, if any, shall be payable to
X (mortgagee) as its interest m a y appear subject to the terms of
this policy/' it was held that this is clearly a simple loss payable
clause, not a standard mortgagee clause. (Geagonia vs. Court of
Appeals, supra.)
Right of mortgagee under mortgagor's
policy.
The contract of indemnity under such policy is primarily with
the mortgagor, but the mortgagee is a third party beneficiary.
Sec. 8
CONTRACT OF INSURANCE
Title 2. — Parties to the Contract
81
(1) Before loss. — Before a loss occurs, the mortgagee is a conditional appointee of the mortgagor entitled to receive so much
of any sum that m a y become due under the policy as does not
exceed his interest as mortgagee. Such right becomes absolute
upon the occurrence of the loss.
(2) After loss. — If the loss happens when the credit is not
due, the mortgagee is entitled to receive the money to apply to
the extinguishment of the debt as fast as it becomes due. (Sisk vs.
Repuane, 108 Atl. 858.) On the other hand, if the loss happens after
the credit has matured, the mortgagee m a y apply the proceeds to
the extent of his credit. (RD. C a r m a n & Co. vs. Zaborsky, [C.A.]
36 O.G. 1979.)
Effect of insurance by mortgagee
on behalf of mortgagor.
(1) Discharge of debt. — Practically the same rules obtain
when the mortgagee himself procures the policy as a contracting
party in accordance with the terms of an agreement by which
the mortgagor is to p a y the premiums upon such insurance.
U p o n the destruction of the property, the mortgagee is entitled to
receive payment from the insured but such payment discharges
the debt if equal to it, and if greater than the debt, the mortgagee
holds the excess as trustee for the mortgagor.
(2) Right to subrogation. — If there is a stipulation that the
insurer shall be subrogated to the rights of the mortgagee, the
payment of the policy will not discharge the debt even though
the mortgagee m a y have procured the policy by arrangement
with the mortgagor. (Vance, op. cit, p. 775.) If there is no such
stipulation, the rule on subrogation does not apply except where
the mortgagee insures only his interest, (supra.)
EXAMPLE:
Suppose, in the preceding example, the house was insured
by E for P150,000.00.
If the loss by fire occurred before the payment of the loan
of P100,000.00, E would be entitled to collect from the insurer
P100,000.00 only, the amount of his credit.
If the loss occurred after the payment of the loan, E cannot
recover because he had no insurable interest in the property
mortgaged at the time of the loss.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
82
Sec. 9
In either case, R cannot recover because he is not the
insured.
Sec. 9. If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of
his assent, imposes further obligations on the assignee,
making a new contract with him, the acts of the mortgagor
cannot affect the rights of said assignee.
Assignment or transfer of insurance policy.
The effect of an assignment or transfer is to substitute the
assignee or transferee in place of the original insured in respect
to the right to claim indemnity or payment for a loss as well as
the obligation to perform the conditions, if any, of the policy.
The assignee, unless he makes a new contract with the insurer,
acquires no greater right under the insurance than the assignor
had, subject to insurer's defenses.
(1) As to fire policy. — By the great weight of authorities, a
fire policy before it becomes a fixed liability is not subject to
assignment, being strictly a personal contract, in the absence of
provision in the contract or subsequent consent of the insurer. (6
Couch 5138.) The insurer is naturally concerned about the moral
character of the insured and should not be compelled to become
an insurer to an assignee to w h o m he would have declined to
issue a policy and w h o could materially alter the risks assumed
by the insurer without his consent.
(2) As to marine policy. — It is generally recognized, however,
that a policy of marine insurance is assignable even without the
consent of the insurer unless required by the terms of the policy.
(Spring vs. South Carolina Ins. Co., 8 Wheat 268, 5 L. Ed. 614.)
Nevertheless, it is believed that a marine policy just like a fire
4
4
T h e rule that marine policies are assignable without the consent of the insurer, in
the absence of an express provision to the contract in the policy, b e c a m e established at a
time w h e n m e a n s of c o m m u n i c a t i o n b e t w e e n distant places w e r e slow and difficult a n d
great inconvenience would h a v e resulted if the o w n e r of an insured ship or c a r g o h a d to
wait until he could get the consent of the insurer before he could assign it along with the
insurance covering it. The inconvenience to the insured of having substituted an o w n e r
w h o might, by his w a y of dealing with the ship, increase the risks a s s u m e d by the insurer.
(E.W. Patterson, op. ext., 210.)
Sec. 9
CONTRACT OF INSURANCE
Title 2. — Parties to the C o n t r a c t
83
policy, is not assignable without the consent of the insurer, (see
Sees. 5 , 1 9 , 20, 58.)
(3) As to casualty policy. - The insurer's consent is also
required. This type of insurance (see Sec. 174.) commonly
involves moral hazards at least as great as those of fire insurance.
Thus, theft and burglary insurance and motor vehicle insurance
involve obvious moral hazards; hence, such policies are not
freely assignable without the insurer's consent. (E.W. Patterson,
op. cif,p.2[3].)
(4) As to life policy. — With respect to life insurance, the
policy m a y freely be assigned before or after the loss occurs, to
any person whether he has an insurable interest or not. (see Sec.
181.) However, an assignment of a life policy to a person without
an insurable interest, which the insured makes in bad faith and
under such circumstances as where there was a preconceived
agreement that the policy was to be assigned for the purpose of
accomplishing an illegal purpose, that is, permitting the assignee
of the policy to w a g e r on the length of life of the insured, will not
be upheld.
Note: A distinction must be made between the assignment or
transfer (a) of the policy itself which transfers the rights to the
contract to another insured, (b) of the proceeds of the policy after
a loss has happened, which involves a money claim under, or a
right of action on, the policy (see S e c 83.), and (c) of the subject
matter of the insurance, such as a house insured under a fire policy
which has the effect of suspending the insurance until the same
person becomes the owner of both the policy and the thing
insured, (see Sees. 19, 20, 21.)
Right of mortgagor to assign insurance
policy to mortgagee.
The right of the mortgagor to assign or transfer an insurance
policy is recognized in Section 8 of the Code. Section 9 only gives
With the establishment of telegraph, cable, radio and other modern means of communication, the justification for the rule disappears. Furthermore, marine insurance now
includes insurance against perils of property on land, (see Sec. 99.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
84
Sec. 9
the effect if the insurer agrees to the transfer of the policy and, at
the time of his assent, imposes new obligations on the assignee.
However, neither section makes a distinction as to the kind of
insurance policy that is assignable.
Effect of new contract between insurer
and mortgagee-assignee.
The assignment of a fire insurance policy by the mortgagor
to the mortgagee with the consent of the insurer does not
convert the contract into one of indemnity to the mortgagee. The
contract remains with the mortgagor as it is his interest alone
that is covered. The assignment operates merely as an equitable
transfer of the policy so as to enable the mortgagee to recover the
amount due in case of loss subject to the conditions of the policy.
(45 C.J.S. 438.)
However, where a new and distinct consideration passes
from the mortgagee to the insurer, a new contract is created
between them, (ibid.) A novation of the original contract takes
place. Hence, the acts of the mortgagor cannot affect the rights
of the mortgagee, the assignee. (Sec. 8.)
5
— oOo —
5
Article 1291. Obligations m a y be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (Civil C o d e )
Title 3
INSURABLE INTEREST
Sec. 10. Every person has an insurable interest in the
life and health:
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in
part for education or support, or in whom he has a pecuniary interest;
(c) Of any person under a legal obligation to him for
the payment of money, or respecting property or services,
of which death or illness might delay or prevent the performance; and
(d) Of any person upon whose life any estate or interest vested in him depends, (a)
Insurable interest in general.
An insurable interest is one of the most basic of all requirements in insurance. In essence, it is that interest which the law
requires the owner of an insurance policy to have in the person
or thing insured.
(1) Pecuniary in nature. — In general, a person is deemed to
have an insurable interest in the subject matter insured where
he has a relation or connection with or concern in it that he
will derive pecuniary or financial benefit or advantage from
its preservation and will suffer pecuniary loss or damage from
its destruction, termination, or injury by the happening of the
event insured against. (Lalican vs. Insular Life Insurance Co.,
Limited, 597 SCRA 159 [2009], citing De Leon, Insurance Code of
the Philippines Annotated [2002 ed.], p. 85; 44 C.J.S. 870.)
(a) Interest does not necessarily imply a right to the whole
or a part of a thing. To have an interest in the preservation of
a thing is to be circumstanced with respect to it as to have
benefit from its existence and prejudice from its destruction.
85
86
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 10
(b) The property of a thing and the interest devisable from
it may be very different; of the first, the price is generally the
measure, but by interest in a thing, every benefit or advantage
arising out of or depending on such thing may be considered
as being comprehended. (Dindsdale & McMundie, supra., p.
78, citing Lucena vs. Crawfurd [1806], 2 Bos. & P.N.R. 269.)
(2) Exception. — The term has a somewhat broader meaning
in connection with life insurance. To have an insurable interest in
the life of a person, the expectation of benefit from the continued
life of that person need not necessarily be of a pecuniary nature.
(infra.)
Necessity of insurable interest
to validity of contract.
The existence of insurable interest is a primary concern
in determining the liability of an insurer under a policy of
insurance. Insurable interest m a y be in life and health (Sec. 10.),
or in property. (Sees. 1 3 , 1 4 . )
(1) The existence of insurable interest gives a person the
legal right to insure the subject of the policy of insurance. In the
absence of such interest, the person insuring in effect would be
gambling (see Sees. 3[par. 1], 4, 18, 25.), which is prohibited by
law. (Revised Penal Code, Art. 195.) It is a fundamental postulate
of all insurance that it must not be a mere bet upon a future event.
(44 C.J.S. 869.)
(2) The rule is that an insurable interest is necessary to the
validity of an insurance contract whatever the subject matter of
the policy, whether upon property or life. A policy issued to a
person without interest in the subject matter insured is a mere
wager policy or contract and is void for illegality. (Sees. 18, 25.)
The insurable interest requirement is held not to apply to
industrial life insurance, (see Sees. 229-231.)
Requirement, a matter of public
policy.
(1) As a deterrence to the insured. — The requirement of an
insurable interest to support a contract of insurance is based
Sec. 10
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
87
upon considerations of public policy which render wager policies
invalid. A wager policy is obviously contrary to public interest. It
is demoralizing in that:
(a) It allows the insured to have an interest in the
destruction of the subject matter rather than in its preservation
(Myer vs. Grand Lodge, A.O.N.W., 36 N.E. 429.); or
(b) It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain, to bring
to pass the event upon the happening of which the insurance becomes payable. (White vs. Equitable Nuptial Benefit
Union, 76 Ala. 251.)
(2) As a measure of limit of recovery. — The legal requirement
has been devised with another object in view. If and to the
extent that any particular insurance contract is a contract to pay
indemnity, the insurable interest of the insured will be the measure
of the upper limit of his provable loss under the contract. (E.W.
Patterson, op. cit., p. 109.) The insurance should not provide the
insured with the means of making a net profit from the happening
of the event insured against. The requirement is enforced and the
defense permitted not in the interest of the insurer but of a sound
public policy.
Two general classes of life policies.
Life insurance policies may be divided into two general
classes.
(1) Insurance upon one's life. — In one class are those taken
out by the insured upon his own life (Sec. 10[a].) for the benefit
of himself, or of his estate, in case it matures only at his death,
or for the benefit of a third person who may be designated as
beneficiary. An application for insurance on one's own life does
not usually present an insurable interest question.
(2) Insurance upon life of another. — In the other class belong
policies taken out by the insured upon the life of another, (ibid.,
[a], [b], [c], and [d]; Vance, op. cit., p. 188.) When one applies for
insurance on the life of another for the former's benefit, he must
have an insurable interest in the life of that person.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
88
Sec. 10
Insurable interest in one's own life.
Every person has an unlimited insurable interest in his
own life (40 C.J.S. 909.) whether the insurance is for the benefit
of himself or another; and it is not at all necessary that the
beneficiary designated in the policy should have any interest in
the life of the insured.
1
(1) Insurance taken out by insured on his life for the benefit of
another. — The presence of insurable interest is really required
only as evidence of the good faith of the parties. It is contrary to
human experience that a person will insure his own life for the
benefit of another for the purpose of speculation, to be tempted
to take his own life in order to secure the payment of money to
another, or designate as the beneficiary, a person interested in the
destruction and not in the continuance of his life. Consequently,
the mere fact that a m a n on his o w n motion insures his life for
the benefit either of himself or of another is sufficient evidence
of good faith to validate the contract. (29 A m . Jur. 312; Vance, op.
cit., p. 188.)
Although there are cases on record where the beneficiary
without interest has yielded to the temptation to terminate
unlawfully the life insured as if he himself had taken out the
policy, the law considers this danger too slight for notice, since
the selection of the beneficiary by the insured is in ordinary
cases sufficient guaranty of the existence of such good faith and
confidence between them as will sufficiently protect the insured.
(Ibid., op. cit, p. 189.)
(2) When the insurance regarded a wager policy. — An exception
to the general rule exists in cases in which the court finds that
a wagering policy has been taken out by the insured on his life
at the behest of a third person who is n a m e d as beneficiary.
Evidence of a wagering policy (see Sees. 18, 25.) is usually found
in such facts as:
(a) that the original proposal to take out insurance was
that of the beneficiary;
]
To say that every m a n has an insurable interest in his o w n life is inaccurate, since a
m a n does not suffer loss by his o w n death or at least does not survive to claim indemnity
for that loss. Hence, it is better to say that the question of insurable interest is immaterial
where the policy is procured by the person whose life is insured. (E.W. Patterson, op. cit.,
pp. 166-169.)
Sec. 10
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
89
(b) that premiums are paid by the beneficiary; and
(c) that the beneficiary has no interest, economic or
emotional, in the continued life of the insured.
On finding that such a policy is primarily a wager, the court
will generally void the policy entirely. (J.F. Dobbyns, op. cit, pp.
60-61.)
In any case, there is no question that under our law (Sec.
ll[a].), a person has an insurable interest in his own life. But if
the policy is applied for and owned by someone other than the
insured, the applicant-owner must have an insurable interest in
the life of the insured.
Similarity between a life insurance
policy and a civil donation.
A donation is an act of liberality whereby a person disposes
gratuitously a thing or right in favor of another who accepts it.
(Art. 725, Civil Code.)
In essence, a life insurance policy is no different from a
civil donation insofar as the beneficiary is concerned. Both are
founded upon the same consideration: liberality. A beneficiary
is like a donee, because from the premiums of die policy which
the insured pays out of liberality, the beneficiary will receive
the proceeds or profits of said insurance. As a consequence,
the proscription in Article 739 (infra.) of the Civil Code should
equally operate in life insurance contracts. (The Insular Life
Assur. Co. vs. Ebrado, 80 SCRA 181 [1977].)
Under Article 87 of the Family Code (Exec. Order No. 209.),
"Every donation or grant of gratuitous advantage, direct or
indirect, between the spouses during the marriage shall be void,
except moderate gifts which the spouses may give each other on
the occasion of any family rejoicing. The prohibition shall apply
also to persons living together as husband and wife without a
valid marriage/' A life insurance policy taken by a spouse on his
(her) life in favor of the other takes effect after the death of the
insured.
2
2
T h e sentence "The prohibition does not apply when the donation takes effect after
the death of the donor" in Article 133 of the Civil Code is deleted in Article 87 of the
Family Code.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
90
Sec. 10
Insurable interest in life of another.
(1) Insurance for benefit of insured. — A person cannot lawfully
procure insurance for his own benefit on the life of another in
whose life he has no insurable interest. (44 C.J.S. 896.)
The insurable interest in the life of another must be a
pecuniary one (related to money) and it exists whenever the
relation between the assured and the insured, whether by blood,
marriage or commercial intercourse, is such that the assured has a
reasonable expectation of deriving benefit from the continuation
of the life insured or of suffering detriment or incurring liability
through its termination. Or to put it more briefly, the policy of the
law requires that the assured shall have an interest to preserve
the life insured in spite of the insurance, rather than destroy it
because of the insurance. (Vance, op. cit., p. 190.)
(2) Insurance for benefit of a third party. — W h e n the owner
of the policy insures the life of another — the cestui que vie —
and designates a third party as beneficiary, both the owner and
beneficiary must have an insurable interest in the life of the cestui
que vie. If the insurable interest requirement is satisfied (see Sec.
19.), a life policy is assignable regardless of whether the assignee
has an insurable interest in the life of the cestui que vie. (see Sec.
181.)
Under our law, in order that one m a y have an insurable
interest in the life of another, it must be one of those mentioned
([a], [b], [c], and [d].) in Section 10 of the Insurance Code, i.e.,
the interest is pecuniary or founded upon the close relationship
between the parties. Hence, the mere fact that two persons are
engaged to be married does not give one an insurable interest in
the life of the other.
EXAMPLE:
X takes an insurance on his own life and names his friend
Y as beneficiary and another insurance on Y's life with himself
(X) as beneficiary.
The first insurance is valid because the beneficiary (Y) need
not have an insurable interest in the life of the insured. The
second insurance is void because X has no insurable interest on
the life of Y.
Sec. 10
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
91
Insurable interest in life of person upon whom
one depends for education or support or
in whom he has a pecuniary interest.
(1) When mere blood relationship sufficient. — In the United
States, numerous decisions hold that pecuniary benefit is not the
only test. Thus, the mere relationship of brother or sister, father
or child is sufficiently close to give either an insurable interest in
the life of the other. The reasoning upon which the rule is based
is that the natural affection in cases of this kind is considered
sufficient, if not m o r e powerful, to protect the life of the insured
than any other consideration. The essential thing is this: that the
policy shall be obtained in good faith, and not for the purpose of
speculating upon the hazard of a life in which the insured has no
interest. (Connecticut Mut. L. Ins. Co. vs. Schefer, 94 U.S. 457.)
Generally, blood or material relationships fit the concept of
insurable interest. In any event, the following have an insurable
interest in each other's life since under the provisions of Article
195 of our Family Code (Exec. Order No. 209.), they are obliged
to support each other:
(a) The spouses;
(b) Legitimate ascendants and descendants;
(c) Parents and their legitimate children and the legitimate or illegitimate children of the latter;
(d) Parents and their illegitimate children and the legitimate or illegitimate children of the latter;
(e) Legitimate brothers and sisters, whether of the full or
half-blood.
Brothers and sisters not legitimately related, whether of
the full or half-blood, are likewise bound to support each
other except only when the need for support of the brother or
sister, being of age, is due to a cause imputable to the claimant's fault or negligence. (Sec. 196, ibid.)
(2) When pecuniary benefit essential. — In other cases, mere
blood relationship {e.g., lesser degree of kinship, such as uncle
or aunt, and nephew or niece, and cousins) does not create an
insurable interest in the life of another. Also, mere relationship by
92
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 10
affinity (e.g., son-in-law, brother-in-law, step-children) ordinarily
does not constitute an insurable interest.
Under our law, there must be an expectation of pecuniary
benefit in the life of the insured to sustain the insurance, that is,
a risk of actual monetary loss from his death. Hence, "love and
affection/' "gratitude," or "friendship," by itself is not sufficient.
The expectation, however, need not have legal basis whatever; it
is sufficient that it be actual. Thus:
(a) The assumption of parental relations when a m a n
sends a girl to school and pays her expenses is sufficient to
give her an insurable interest in his life. (Carpenter vs. United
States L. Ins. Co., 161 P. 9.)
(b) Upon like principle, a w o m a n w h o takes a girl from
an orphan asylum and gives her a h o m e under circumstances
calculated to raise a reasonable expectation of help and care
from the girl during the declining years of the benefactress,
has an insurable interest in the girl's life, although she is not
formally appointed her guardian. (Thomas vs. National Ben.
Assn., 86 A. 375.)
(c) It is generally held that a corporation has an insurable
interest in the life of an officer on whose services the
corporation depends for its prosperity, and whose death will
be the cause of a substantial pecuniary loss to it. (Murray vs.
G.E. Higgins Co., 300 Pa. 341; see El Oriente vs. Posadas, 56
Phil. 147; see also Sec. 10[c].)
(d) Similarly, a person m a y take out a policy on the life of
his business partner on the theory that the latter's death m a y
adversely affect the business operations which can, in turn,
cause financial losses, (see Connecticut Mutual Life Ins. Co.
vs. Lucha, 108 U.S. 498 [1883].)
(e) In the case of employees, insurable interest is
dependent upon the value of the employee to the business.
One who could be easily replaced would hardly be one in
w h o m the employer could reasonably claim an insurable
interest. However, a chemist working on research problems
might reasonably be insured, particularly if his experiments
had a reasonable expectation of substantial future benefits. A
Sec. 10
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
93
business usually has an interest in other employees occupying
key positions, such as the president, executive officers, and
department heads who are important to the organization
which expects to receive some necessary gain from the
continuation of their lives or some financial loss from their
death. However, valid insurance m a y be written when the
employee himself applies for the policy and designates the
employer as beneficiary, (see D.L. Bickelhaupt, op. cit., p. 226.)
3
Insurable interest of a person in life of another
under a legal obligation to former.
(1) Related by contract or commercial relation. — Any person so
related to another, either by contract or commercial relation, that
a right possessed by him will be extinguished or impaired by
the death or illness of the other m a y lawfully procure insurance
on the other's life. Thus, the employer m a y insure the life of the
employee and vice versa: a corporation, the life of its manager; a
partner, the life of his co-partner; a partnership, the life of each
partner (Vance, op. cit., pp. 197-198.); and a surety, the life of his
principal (Scott vs. Dickson, 108, p. 6.) although the principal has
no insurable interest in the life of his surety. (Tate vs. Commercial
Bldg. Assn., 33 S.E. 382.)
(2) Risk that performance of obligation might be delayed or
prevented. — In all the instances mentioned, it must appear
that the death or illness of the insured person who is under a
legal obligation, might delay or prevent its performance. (Sec.
10[c].) Accordingly, it has been held that while a partner has an
insurable interest in the life of a co-partner who is indebted to
him for his proportion of the capital (Connecticut Mut. L. Ins. Co.
vs. Lucks, 108 U.S. 498.) or against whose skill the said partner
has advanced money (Ann. Cas. 24 L. ed. 288.), a partner has no
insurable interest in the life of the other if both have no capital
invested and neither is indebted to the other. (Powell vs. Dewey,
31 S.E. 381.)
3
This is sometimes referred to as "key person insurance.'
94
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 10
Insurable interest of creditor in life
of his debtor.
(1) Extent of interest. — The creditor has unquestionably an
insurable interest in the life of his debtor under Section 10(c).
Thus, a creditor may insure his debtor's life for the purpose of
protecting his debt but only to the extent of the amount of the
debt and the cost of carrying the insurance on the debtor's life.
It is clear that the creditor will not be fully damnified if the
insurance is limited only to the exact amount of the debt. However,
the amount of the policy must not be so disproportionate to
the amount of the debts and liens thereon plus the cost of the
insurance as to justify the conclusion that the policy is merely a
wagering or speculative one. ( C a m m a c k vs. Lewis, 15 Wall. [U.S.]
643.) For instance, a policy on the life of another for P300,000.00
to cover a debt of P50,000.00 is a mere wagering policy, and is
void, (ibid.; Sees. 1 7 , 1 8 , 1 9 , 25.)
(2) Right of debtor in insurance taken by creditor. — A creditor
who insures the life of his debtor does not act as the agent of
the latter (see Sec. 53.), cases to the contrary notwithstanding.
The contract is one purely between the insurer and the insuring
creditor inasmuch as by law, the creditor is given an insurable
interest on the life of his debtor. (Sec. 10[c]; see Sec. 8.) In other
words, the insurance does not inure to the benefit of the debtor
unless, of course, the contrary is expressly stipulated.
(3) Extent of the amount that may be recovered by insuring
creditor. — Strictly speaking, an insurance taken by the creditor
on the life of his debtor is not purely a contract of life insurance.
The principle of indemnity applies in this particular kind of
insurance as in the case of property insurance. ( C a m m a c k vs.
Lewis, 82 Wall. [U.S.] 643.) It follows that the insuring creditor
could only recover such amounts as remain unpaid at the time of
the death of the debtor. If the whole debt has already been paid,
then recovery on the policy is no longer permissible. (God-sall
vs. Boldero, 9 East 72.)
(4) Where insurance taken by debtor for the benefit of creditor. —
A distinction should be m a d e between a policy taken by a debtor
on his life and made payable to his creditor and one taken by a
creditor on the life of his debtor. Where a debtor in good faith
insures his life for the benefit of the creditor, full payment of the
Sec. 10
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
95
debt does not invalidate the policy; in such case, the proceeds
should go to the estate of the debtor. (Crotty vs. Union Mut. L.
Ins. Co., 144 U.S. 64; S. Guevarra, The Phil. Insurance Law, 1961
ed., p. 35.)
(5) Where debt becomes legally unenforceable. — According to
American cases, the fact that a valid debt becomes subsequently
unenforceable, by reason of being barred by the statute of
limitations or of the debtor's discharge in insolvency, does not
cut off the insurable interest of the creditor although there is no
reasonable expectation of the debtor becoming solvent so as to
be able to pay his debt. The reason given is that the moral or
equitable obligation of the debtor to pay his debt is not destroyed
by the discharge which affects only the legal obligation to pay.
(43 Am. Jur. 2d 1004.)
Under our law, however, it is clear that a creditor m a y not
insure the life of his debtor unless the latter has a legal obligation
to him for the payment of money. (Sec. 10[c].)
Insurable interest in life of person upon which
an estate or interest depends.
Section 10(d) provides that every person has an insurable
interest in the life and health of "any person upon whose life
any estate or interest vested in him depends." This simply means
that one m a y insure the life of a person where the continuation
of the estate or interest vested in him who takes the insurance
depends upon the life insured.
EXAMPLE:
Suppose A receives as legacy, the usufruct of a house. The
ownership of which is vested in B. It is provided in the legacy
that should B die first, both the usufruct and the ownership of
the property will pass to C.
In this case, A has an insurable interest in the life of B for A
will suffer pecuniary loss by B's death.
Consent of person whose life is insured.
Is the consent of the person whose life is insured essential to
the validity of the insurance taken by another?
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
96
Sec. 11
(1) Essential to validity of policy. — A leading authority has
said:
"On clear principle and by the weight of authority, it is
believed that all such contracts (without the consent of the
insured) are contrary to public policy, and void, x x x The
amount of insurance that may be validly procured is not
limited strictly to the amount of the pecuniary interest to
be protected. A margin must be allowed to cover premiums
and other charges. But this excess of insurance offers a strong
temptation to hasten the death of the insured by criminal
means. The danger to the public of such insurances is largely
obviated when the insured, with knowledge of all the circumstances, has given consent to the contract. His very consent is
strong evidence of the good faith of the person procuring the
insurance, and thus affords a needed guaranty to society."
(Vance, op. cit., p. 208.)
(2) Not essential to validity of policy. — It seems, however, that
under our law (Sec. 10.), the consent of the person insured is not
essential to the validity of the policy. So long as it could be proved
that the assured has a legal insurable interest at the inception of
the policy, the insurance is valid even without such consent. The
presence of insurable interest takes the contract out of the class of
forbidden wagers.
Sec. 11. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has expressly waived this right in said policy, (n)
Beneficiary defined.
(1) In insurance cases, the term beneficiary is ordinarily
used in referring to the person who is named or designated in
a contract of life, health, or accident insurance as the one w h o is
to receive the benefits which become payable, according to the
terms of the contract, upon the death of the insured, (see 44 Am.
Jur. 2d. 639.)
(2) It is also used in insurance law to indicate only those
persons, whether natural or juridical, who, though not parties to
Sec. 11
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
97
the contract, are mentioned in it as the intended recipients of the
proceeds or benefits of the insurance if the insured risk occurs,
(see Vance, op. cit., p. 656.)
(3) A broader use of the term would include also those who,
upon a proper basis of insurable interest, secure insurance for
their own benefit upon the lives of others, (ibid.)
Kinds of beneficiary.
The beneficiary in a life insurance policy m a y be either the
insured himself or his personal representatives or someone other
than the insured. W h e r e the beneficiary designated is a person
other than the insured, such person m a y occupy one of three
relations to the insured:
(1) Insured himself. — He m a y himself be the person who
procures the contract and pays the premiums necessary to
maintain it. Such a person is thus an immediate party to the
contract and is ordinarily called the assured (Vance, op. cit., pp.
658-659.), as where the creditor insures the life of his debtor;
(2) Third person who paid a consideration. — The third person
named as beneficiary m a y have paid a valuable consideration
for his selection as such; that is, the insured m a y have taken
the policy for the benefit of a creditor or to secure some other
obligation; or
(3) Third person through mere bounty of insured. — The
beneficiary m a y be one who gives no consideration whatsoever
for any right that m a y be acquired in the policy but is designated
as recipient of the proceeds of the policy through mere bounty of
the insured, (ibid., p. 659.) The beneficiary designated may be the
estate of the insured or a third party.
In the second and third cases, the beneficiary is not a party to
the contract. In all the three cases, the proceeds of the life insurance
policy become the exclusive property of the beneficiary upon the
death of the insured. Therefore, where the insured, before dying,
was judicially declared insolvent, the proceeds should be paid to
the beneficiary and not to the assignee in insolvency.
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
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Limitations in the appointment
of beneficiary.
A person may take out a policy of insurance on his own life
and make it payable to whomsoever he pleases, irrespective of
the beneficiary's lack of insurable interest, provided he acts in
good faith and without intent to make the transaction merely a
cover for a forbidden wagering contract. (44 C.J.S. 899.) Our Civil
Code, however, imposes certain limitations in the appointment
of a beneficiary.
Article 2012 of the Civil Code provides as follows:
"Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of
a life insurance policy by the person w h o cannot make any
donation to him, according to said article, (n)"
Article 739 above referred to provides as follows:
"The following donations shall be void:
(1) Those m a d e between persons w h o were guilty of
adultery or concubinage at the time of the donation;
(2) Those m a d e between persons found guilty of the
same criminal offense, in consideration thereof;
(3) Those m a d e to a public officer or his wife, descendants
and ascendants, by reason of his office.
In the case referred to in No. 1, the action for declaration
of nullity m a y be brought by the spouse of the donor or
donee; and the guilt of the donor and donee m a y be proved
by preponderance of evidence in the same action, (n)"
In order that Article 739 m a y apply, it is not required that
there be a previous conviction for adultery or concubinage. This
can be inferred from the clause that "the guilt of the donor and
donee m a y be proved by preponderance of evidence." (The
Insular Life Assur. Co., Ltd. vs. Ebrado, 80 SCRA 181 [1977].)
As already pointed out (under Sec. 10), a life insurance
policy, in essence, is no different from a civil donation insofar
as the beneficiary is concerned. Both are founded on the same
consideration: liberality. A beneficiary is like a donee because
Sec. 11
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
99
from the premiums of the policy which the insured pays out
of liberality, the beneficiary will receive the proceeds or profits
of said insurance. As a consequence, the proscription in Article
739 of the Civil Code should equally operate in life insurance
contracts.
EXAMPLE:
M, a married man, takes out an insurance policy on his life
and designates B, with whom M is cohabiting at the time, as
beneficiary.
The designation of B is void since M and B are guilty of
concubinage at the time it is made. Hence, in case M dies, his
legal heirs and not B will be entitled to the insurance proceeds.
But the designation is valid if both M and B are single.
The insured in a life insurance may designate any person
as beneficiary unless disqualified to be so under the provisions
of the Civil Code. In the absence of any beneficiary named in
the life insurance policy or where the designated beneficiary is
disqualified, the proceeds of the insurance will go to the estate
of the deceased insured. (Vda. de Consuegra vs. GSIS, 37 SCRA
315 [1971].)
Right of insured to change beneficiary
in life insurance.
(1) General rule. — Section 11 abandons the former rule that
unless the policy reserves to the insured the right to change the
beneficiary, no such right exists and the named beneficiary has
vested right in the policy of which he cannot be divested without
his consent, (see 44 Am. Jur. 2d. 646, 688-689; see Gercio vs. Sun
Life Assurance of Canada, 48 Phil. 53 [1925].)
Now, whether or not the policy reserves to the insured the
right to change the beneficiary, he has the power to so change
the beneficiary without the consent of the latter who acquires
no vested right but only an expectancy of receiving the proceeds
under the insurance. It follows that the insured retains the right
to receive the cash value of the policy, to take out loans against
the cash value, to assign the policy, or to surrender it without the
consent of the beneficiary.
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(2) Effect of death of insured. — The right must be exercised
specifically in the manner provided in the policy or contract.
But the insured's power to extinguish the beneficiary's interest
ceases at his death, and cannot be exercised by his personal
representatives or assignees. The beneficiary's right then becomes
completely fixed.
(3) Where right to change is waived. — If the right to change the
beneficiary is expressly waived in the policy, then the insured
has no power to make such change without the consent of the
beneficiary.
(a) The beneficiary acquires an absolute and vested
interest to all benefits accruing to the policy from the date of
its issuance and delivery, including that of obtaining a policy
loan to the extent stated in the schedules of values attached
to the policy. (Gercio vs. Sun Life Assurance of Canada,
supra.) The beneficiary has thus a property right in the policy
of which could not be deprived without his consent.
(b) Neither can a new beneficiary be added to the
irrevocably designated beneficiary for this would in effect
reduce the latter's vested rights. (Go vs. Redfem, 72 Phil. 71
[1941].)
(c) The insured does not even retain the p o w e r to destroy
the contract by refusing to pay premiums for the beneficiary
can protect his interest by paying the premiums (Vance, op.
cit., p. 665.) for the reason that the fulfillment of an obligation
may be m a d e by a third person even against the will of
the debtor and if he has an interest in the fulfillment of the
obligation, even against the will of the creditor, (see Art. 1236,
Civil Code.)
Measurement of vested interest
of beneficiary in policy.
The vested right or interest of the beneficiary in a policy
should be measured on its full face value and not on its cash
surrender value for in case of death of the insured, said beneficiary
is paid on the basis of its face value. In case the insured should
discontinue paying premiums, the beneficiary m a y continue
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Title 3. — Insurable Interest
101
paying it and is entitled to automatic extended term or paidup insurance options, etc. and that said vested right under the
policy cannot be divisible at any given time.
An application of loan under the policy and the surrender
of the policy by the insured constitute acts of disposition or
alienation of property rights of the beneficiary and not merely
of management or administration because they involve the
incurring or termination of contractual obligations. (Nario vs.
Philippine American Life Insurance Co., 20 SCRA 436 [1967].)
ILLUSTRATIVE CASE:
Insurer required authority from court for surrender of policy
designating an unemancipated son as beneficiary.
Facts: W was issued by X Co. (insurer) a 20-year endowment
plan, with a face value of P5,000.00. She designated her husband
H, and their unemancipated minor son S, as her irrevocable
beneficiaries. After the denial by X Co. of her policy loan
application, W signified her decision to surrender her policy
to X Co., which she was also entitled to avail of under one of
the provisions of the same policy, and demanded its cash value
which then amounted to P520.00.
X Co. denied the loan application and the surrender of
the policy on the same ground — that the written consent
for the minor son must not only be given by his father H, as
legal guardian, but it must also be authorized by the court in
competent guardianship proceeding.
Issue: Is X Co. justified in disapproving the proposed
transactions in question?
4
Held: Yes. Under Article 320 of the Civil Code, "when the
property of the child is with more than two thousand pesos, the
father or mother shall be considered a guardian of the child's
property subject to the duties and obligations of guardians
under the Rules of Court." In this case, the full face value of the
policy is P5,000.00 and the minor's vested interest therein, as
one of the two (2) irrevocable beneficiaries, consists of one-half
(1/2) of said amount of P2,500.00. (ibid.)
4//
A r t . 225. The father and the mother shall jointly exercise legal guardianship over
the property of their unemancipated common child without the necessity of a court appointment x x x." (Family C o d e )
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
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Sec. 11
Note: The ruling in this case has been modified by Section
180.
Where beneficiary dies before insured.
(1) View that beneficiary's representative is entitled to insurance
proceeds. — It would necessarily follow as a consequence of the
vested interest rule, where the right to change the designated
beneficiary is expressly waived in the policy, that if the beneficiary
dies before the insured, his rights so vested should pass to his
representatives, and on the death of the insured, the proceeds of
the policy should belong, not to estate of the insured, but to the
representatives of the beneficiary. But this result, however logical
in form, does great violence to the purpose of the insured, who
must have intended, in the ordinary case, to provide a fund for
the support after his death, of those w h o m he w a s accustomed
to support during his lifetime. He can scarcely have intended
to make a provision for the distributees and legatees of the
deceased beneficiary, who m a y well be persons without claim to
his bounty or interest in his life. (Vance, op. cit., p. 710.)
(2) View that estate of the insured is entitled to insurance proceeds.
— In view of the above considerations, it is believed that where
the beneficiary predeceases the insured, the estate of the insured
should be entitled to the proceeds of the insurance especially
where the designation is subject to the express condition to pay
the beneficiary if he survives the insured or "if surviving." (see
Indiana Ins. Co. vs. McGinnis, 101 N.E. 289.) However, most,
but not all, courts hold that the mere fact that such a policy is
made payable to the designated beneficiary, "his executors,
5
5
T h e requirement of an insurable interest goes back to the early 18th c e n t u r y in E n g land. At that time, life insurance policies w e r e not applied for and issued to the persons
whose lives were to be insured. Often the insured did not k n o w the person w h o obtained
the insurance or even that insurance h a d been effected on his life. At one time, it w a s almost a sport to w a g e r that public figures w o u l d or w o u l d not live for even such a period
of time as a few days. Obviously, this w a s wagering of a peculiarly vicious nature, so vicious indeed that it shocked the conscience of an 18th century public not too highly noted
for its squeamishness. In 1974, the English Parliament finally took action and enacted a
law to put an end to such "a mischievous kind of gaming." ( L a w a n d the Life Insurance
Contract, by J . E . Greider & VV.T. Beadles, 1974 ed., pp. 126-127 published by Richard D.
Erwin, Inc., H o m e w o o d , Illinois.)
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administrators, or assigns," is sufficient to negative the implied
condition that death of the beneficiary before maturity of the
policy terminated all his rights to it. (Vance, op. cit., p. 712.)
Designation of beneficiary.
Words used in designating the beneficiaries of a life policy
will not be given their technical significance but will be construed
broadly in order that the benefit of the insurance shall be received
by those intended by the insured as the object of his bounty.
(ibid., p. 551; see Sec. 56.) The beneficiary designated m a y be the
insured or his estate, a specifically designated person or persons,
or a class or classes of persons.
(1) Children. — The word "children" used to designate
beneficiaries, is broad enough to include the following: (a) an
adopted child; or (b) an adult child not forming a part of the
household of the insured; or (c) after-born children even of
a marriage subsequently contracted. The word "children" in
an insurance policy ordinarily means a descendant of the first
degree and is never intended to include grandchildren. (29 Am.
Jur. 960-961.)
Where the children are named individually, other children
cannot share in the insurance proceeds unless the insured
subsequently amend his designation to include them.
(2) Husband; wife or widow. — The word "wife" in the description of the beneficiary of life insurance is generally regarded
as descriptio personae, and the fact that one who otherwise
answers the description does not have the legal status of the wife
of the insured does not prevent her from taking as beneficiary, as
when she is designated by name, although the words "his wife"
are added, (see Social Security System vs. Davac, 17 SCRA 863
[1966].) However, if the beneficiary is not named but is designated
merely by a status, such as the "husband," "wife," or "widow" of
the insured, the legal husband or wife as ascertained at the death
of the insured, is entitled to the benefits of such insurance. (29
Am. Jur. 965-966.)
Note that under our law (Arts. 2012 and 739, Civil Code,
supra.), any person who is forbidden from receiving any donation,
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such as a common-law spouse, cannot be named beneficiary
of a life insurance policy by the person who cannot make any
donation to him.
(3) Husband and children; wife and children. — A policy payable to the wife of the insured and "their children" includes
children by another wife, although the prevailing view state that
the beneficiaries are limited to children c o m m o n to both, (ibid.,
961.) But if the designation is m a d e to the insured's "wife and
children" or "my wife and children," the insurance is deemed for
the benefit of all children of the insured, whether by the named
wife or those of another. (Recker vs. Ins. Co., N.W. 771.)
Under a policy payable to the insured's "husband and
children," he and they do not take the insurance by inheritance
but upon her death, the insurance money must be divided per
capita among the husband and children. The same rule applies to
a policy payable to "wife and children." (29 A m . Jur. 966.)
(4) Family. — The term "family" is sometimes used to indicate
the recipient of the proceeds of an insurance policy. In deciding
whether a particular person claiming a share of the fund is of
the family of the insured, the court will ascertain whether that
person was so regarded by the insured. If he w a s so regarded, he
will be allowed to participate although in no w a y related to the
insured. (Vance, op. cit., p. 554.)
(5) Heirs or legal heirs. — W h e n a life policy is m a d e payable
to the insured's "heirs" or "legal heirs," these terms will not
ordinarily be construed as indicating merely the heirs at law but
rather that class of persons w h o would take the property of the
insured in case he died intestate. Therefore, it is generally held
that the widow of the deceased is entitled to take under a policy
payable to his "heirs" or "legal heirs" as well as the children of
the deceased, (ibid., p. 552.)
(6) Estate or legal representatives of deceased. — The words
"estate," "representatives," or "legal representatives," when
used in designating beneficiaries, are to be construed in their
strict technical sense and the courts will ordinarily assume that
they are used to mean executors or administrators, unless it
appears that the insured intended to use these expressions in the
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Title 3. — Insurable Interest
105
sense of heirs or next of kin. Policies payable to the insured's
"executors, administrators or assigns" are clearly assets of the
deceased insured's estate while those payable to his "heirs" or
"next of kin" are not. (ibid., p. 657.)
If no beneficiary is designated in the life insurance policy, the
proceeds thereof will go to his legal heirs in accordance with law.
It has been held, however, that where two women, innocently
and in good faith, contracted marriage with the same man, the
insured, and the latter did not designate any beneficiary who
would receive the proceeds of his life insurance, each family
shall be entitled to one half of the insurance benefits. (Consuegra
vs. GSIS, 37 SCRA 315 [1971].)
Sec. 12. The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about
the death of the insured; in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified, (n)
Forfeiture of the interest of the beneficiary
in a life insurance policy.
The w o r d "interest" mentioned in Section 12 means the right
of the beneficiary to receive the proceeds of the life insurance
policy. It does not m e a n insurable interest since the beneficiary
need not have an insurable interest in the life of the insured.
In case the interest of a beneficiary in a life insurance policy
is forfeited as provided in Section 12, the nearest relatives, not
otherwise disqualified, of the insured shall receive the proceeds
of the insurance in accordance with the rules on intestate
succession provided in the Civil Code.
The nearest relatives of the insured in the order of enumeration
are the following:
(1) The legitimate children;
(2) The father and mother, if living;
(3) The grandfather and grandmother, or ascendants nearest
in degree, if living;
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(4) The illegitimate children;
(5) The surviving spouse; and
(6) The collateral relatives, to wit:
(a) brothers and sisters of the full blood;
(b) brothers and sisters of the half-blood; and
(c) nephews and nieces, (see Arts. 978, 979, 985-987, 988,
995,1003-1006, Civil Code.)
(7) In default of the above, the State shall be entitled to
receive the insurance proceeds, (see Art. 1011, ibid.)
Liability of insurer on death of insured.
(1) Death at the hands of the law. — While m a n y courts hold
that the insurer is not liable for the death of the insured at the
hands of the law, even though such risk is not expressly excepted
in the policy, Professor Vance, in his treatise on insurance, is of
the opinion that the better view is that the death of the insured
at the hands of the law — as by legal execution — is one of the
risks assumed by the insurer under a life insurance policy in the
absence of a valid policy exception. (Vance, op. cit., p. 572.)
(2) Death by self-destruction. — Professor Vance is also of the
opinion that, by the weight of authority, death by suicide is not
by implication exempted from the risks assumed by the insurer
under a life insurance policy especially where the insurance is
for the benefit of another rather than the insured. But procuring a
policy with intent to commit suicide is obviously fraudulent and
avoids the insurance, (ibid., p. 560.)
In view, however, of the provision of Section 87 (infra.) see
Sec. 5.), it is quite clear that the insurer is not liable in case the
insured commits suicide intentionally, with whatever motive,
when in sound mind. To hold otherwise is to say that the
occurrence of the event, upon the happening of which the insurer
undertook to pay, was intended to be left to insured's option.
That view is against the very essence of the contract. (Hennessy
vs. Automobile Owners' Ins. Ass'n, 282 S.W. 791; see Sec. 3.)
The rule applies with equal force and there can be no recovery
if the insured, being in the possession of his ordinary reasoning
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Title 3. — Insurable Interest
107
facilities, from anger, pride, jealousy, or a desire to escape from
the ills of life, intentionally takes his own life. The reason for
this is that the death is still caused by the voluntary act of the
insured, he knowing and intending that his death shall be the
result of his act. (Life Ins. Co. vs. Terry, 15 Wall. 580.) But death
which is purely accidental, even though due to the insured's own
carelessness or negligence is not excluded from the coverage by
the words "self-destruction/' "death by his own hand," and the
like which are generally considered synonymous with suicide.
(Parker vs. N e w York Life Ins. Co., 125 S.E. 6 [1924].)
(3) Death by suicide while insane. — Where the insured is
insane, it is the settled rule in all jurisdictions that, in the absence
of express conditions to the contrary (as where the policy
excludes from among the risks assumed by the insurer death of
the insured by suicide [or by self-destruction or by his own hand
or act], "sane or insane"), the suicide of an insured while insane
does not discharge the insurer from his liability on his contract.
Such insanity is one of the diseases to which the insurer must
have known that the insured was subject and the unwitting act
of self-destruction is as m u c h the consequence of that disease as
if some vital organs were totally affected. (Vance, op. cit., pp. 563565; see Sec. 180-A.)
(4) Dea th caused by beneficiary.—On the broad ground of public
policy that prohibits anyone from profiting by his own wrong,
where the beneficiary, as principal, accomplice, or accessory (see
Arts. 1 7 , 1 8 , and 19, Rev. Penal Code.), intentionally brings about
the death of the insured under such circumstances as to amount
to a felony, he cannot receive any benefit under the contract of
insurance. His interest shall be forfeited, in which event, the
nearest relative of the insured shall receive the proceeds of said
insurance if not otherwise disqualified. (Sec. 12.)
However, the beneficiary is not deprived of the insurance
proceeds in every case where the beneficiary killed the insured.
Thus, where the death of the insured was caused under
circumstances as do not amount to a felony as when the killing
was accidental or in self-defense, or where the beneficiary was
insane, the rights of the beneficiary under the policy are not
affected. It has also been held that even though the beneficiary
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Sec. 12
was guilty of a felony, the beneficiary's interest in the insurance
is not forfeited where the insured's death was not intentionally
caused. (Vance, op. cit., pp. 717-718.)
Suppose, the beneficiary murdered the insured prompted by
a motive other than gain, are the beneficiary's rights forfeited?
It may be argued that the purpose is to deter murders for gain;
hence, if the beneficiary killed the insured because of jealousy for
instance, the denial of recovery on the insurance policy would
not have presented itself to his mind as a deterrent. However,
the moral sentiment of the community is not so discriminating;
punishment is still looked upon as retribution. Moreover, a
court can seldom be quite sure that pecuniary gain was not a
contributing motive of the crime. Hence, it is well-settled that
a deliberate killing (murder) of the insured by the beneficiary
suffices to work a forfeiture. The insurer m a y properly insert in
the contract an express provision excepting from coverage death
caused by the beneficiary, whether lawfully or unlawfully. (E.W.
Patterson, op. cit., pp. 159-160.)
(5) Death caused by violation of law. — The mere fact that the
insured died while he w a s committing a felony or violating a law
would not warrant denial of liability. To avoid liability, the insurer
must further establish that the commission of the felony or the
violation of law was the cause or had a casual connection with
the accident resulting in the death of the insured. (A. Tolentino
vs. Filipinas Life Assurance Co., Inc., I.C. Case No. 162, July 19,
1976, citing Couch on Insurance, 2d. 41:632.)
ILLUSTRATIVE CASE:
The insured, who died while driving his motorcycle, was not
allowed to drive a motorcycle in his driver's license.
Facts: While the life insurance policy with a face value of
P2,000 was in force, D (insured) died as a result of a vehicular
accident wherein he was bumped by a car while driving his
motorcycle. The policy carried with it a Special Accident Rider
providing for an additional benefit of P2,000.00 in case of death
by accident.
R (insurer) denied payment to D's widow of the Special
Accident Rider benefits on the ground that the death of D was
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Title 3. — Insurable Interest
109
an excepted risk as he was then "committing a felony" at the
time of the accident as he was not allowed to drive a motorcycle
in his driver's license.
Issue: Should R be exonerated from paying the Special
Accident Rider benefit?
Held: No. An act or omission punishable by a special law
is strictly not a felony but more of the general term — crime,
offense, transgression or infraction of law. Therefore, the act
of driving a motorcycle without the license to do so, while in
violation of a special law, particularly the Land Transportation
and Traffic Code, would not constitute a "felony"; and even if
such act is a "felony," the mere fact that the accident occurred
while D was committing such felony would not exonerate R
from paying the benefit under the Special Accident Rider to
avoid liability.
It must also be shown that the violation of law was the
cause or had causal connection with the accident, (ibid.)
Sec. 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might directly
damnify the insured, is an insurable interest.
Insurable interest in property in general.
Section 13 defines insurable interest in property. The interest
m a y be in the property itself (e.g., ownership), or any relation
thereto (e.g., interest of a trustee or a commission agent), or
liability in respect thereof (e.g., interest of a carrier or depository
of goods). The principle may be stated generally that anyone has
an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction. (Harrison vs.
Fortlege, 161 U.S. 57.)
(1) Occurrence of loss may be uncertain. — Note that under the
law, it is not necessary that the interest is such that the event
insured against would necessarily subject the insured to loss. It is
sufficient that it might do so, and that pecuniary injury would be
the natural consequence. (Rigg - Comm. Mut. Ins. Co., 25 N.E.
1058.) Thus, an insurer of property against fire has an insurable
interest therein co-extensive with his liability, (see Sec. 95.)
sv s
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Sec. 13
(2) Title or right to possession not essential — What is more,
although a person has no title, legal or equitable, in the property,
and neither possession nor right to possession, yet he has an
insurable interest if he is so situated with respect to the property
that he will suffer loss as the proximate result of its damage or
destruction.
(a) Accordingly, it has been held that where a mortgagor
had sold the mortgaged premises to a vendee who assumed
the payment of the mortgage debt, and had thus parted
with all his interest in the property, the mortgagor yet had
an insurable interest in the property because of his personal
liability for the debt and his right to be subrogated to the
mortgage security in case he should be compelled to make
payment. (Pike vs. American Alliance Ins. Co., 124 S.E. 161;
Vance, op. cit., p. 173.)
(b) Similarly, a vendor or seller retains an insurable
interest on the property sold so long as he has any interest
therein. In other words, so long as he has a vendor's lien,
i.e., he retains ownership merely to insure that the buyer will
pay the price, (see Art. 1504[1], Civil Code.) Unlike die civil
law concept of jus perit domino, where ownership is the basis
for consideration of w h o bears the risk of loss, in property
insurance, one's interest is not determined by concept of title,
but whether the insured has substantial economic interest in
the property.
(3) Legal expectation of loss or benefit. — Insurable interest in
property is not necessarily an interest in property in the sense
of title, but a concern in the preservation of the property and
such a relation to or connection with it as will necessarily entail a
pecuniary loss in case of its injury or destruction. (Crossman vs.
American Ins. Co. of Newark, 164 N.W. 428 [1917].) As a general
rule, however, the expectation of benefit to be derived from the
continued existence of property must have a basis of legal right,
although the person insured has no title, either legal or equitable,
to the property insured. (Baldwin vs. State Ins. Co., 15 N.W. 300;
see Sees. 1 6 , 1 9 . ) The rule is different in life insurance, (infra.)
(4) Mere factual expectation of loss. — Such expectation not
arising from any legal right or duty in connection with the
Sec. 14
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
111
property, does not constitute an insurable interest. Thus, an owner
of a gasoline filling station near a hotel has no sufficient insurable
interest in the hotel simply because its burning or destruction,
though it leaves the filling station physically unharmed, will
lessen his income from guests of the hotel. (E.W. Patterson, op.
cit, pp. 118-119.)
This type of interest called "factual expectation," though
usually insufficient in strict indemnity insurance, will suffice in
life insurance, (see Sec. 10[b].)
Sec. 14. An insurable interest in property may consist
in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in
that out of which the expectancy arises.
Insurable interest in property in particular
cases.
Insurable interest in property need not be an existing interest.
It m a y consist merely of an inchoate interest or an expectancy.
(1) An existing interest. — The existing interest in a property
m a y be a legal title or equitable title. Undoubtedly, the absolute
owner of property has an insurable interest thereon.
(a) The following are examples of persons who have
insurable interest arising from legal title: trustee, as in the case
of the seller of property not yet delivered; mortgagor of the
property mortgaged; lessor of the property leased; lessee and
sublessee may also insure the property leased or subleased;
and assignee of property for the benefit of creditors.
Where legal title is held in a representative capacity,
as by an executor, administrator, trustee, or receiver, the
representative has sufficient insurable interest for the purpose
of taking out insurance on the property under his control,
but any proceeds from such insurance are to be held for the
benefit of those for whose benefit the representative is acting.
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Sec. 14
(b) The following have insurable interest arising from
equitable title: purchaser of property before delivery, or
before he has performed the conditions of sale; mortgagee of
property mortgaged; mortgagor, after foreclosure but before
expiration of the period within which redemption is allowed;
the beneficiary under a deed of trust; the creditors under a
deed of assignment (Vance, op. cit., pp. 164-168.); a judgment
debtor whose property has been seized under execution
until the right to redeem or the right to have the sale set aside
has been lost (44 C.J.S. 881.); and builders and constructors
in the buildings pending the payment of the construction
price. (Lampano vs. Jose, 30 Phil. 357 [1915].) A purchaser of
an option to buy real estate has an insurable interest to the
extent of the advance payment for the option. (Riegel, Miller
& Williams, Jr., op. cit., p. 45.)
Thus, more than one insurable interest m a y exist over the
same property.
(2) An inchoate interest. — Such inchoate interest must be
founded on an existing interest.
(a) A stockholder has an inchoate interest in the property
of the corporation of which he is stockholder, which is founded
on an existing interest arising from his ownership of shares in
the corporation. His insurable interest is limited to the extent
of the value of his interest or to his share in the distribution
of the corporate assets upon dissolution, (see Vance, op. cit.,
p. 175.) The stockholder has an interest in the preservation of
the corporate property; in its destruction, he sustains a loss in
so far as the value of his stock is depreciated in consequence
of such destruction, or his dividends are reduced or cut off.
(Warren vs. Havenport Fire Ins. Co., 31 Iowa 464.)
Note that a stockholder has neither legal nor equitable
title to assets of the corporation.
(b) Likewise, a partner has an insurable interest in the
firm property which will support a separate policy for his
benefit. (44 C.J.S. 892.)
(3) An expectancy. — The expectancy must be coupled with
an existing interest in that out of which such expectancy arises.
Sec. 15
C O N T R A C T OF I N S U R A N C E
Title 3. — Insurable Interest
113
(a) Thus, a farmer m a y insure future crops if they are to
be grown on land owned by him at the time of the issuance
of the policy, or although the crops are to be raised by him
on the land of another, provided the crops will belong to him
when produced. (Vance, op. cit., p. 177.)
(b) Similarly, an owner of a business can insure against a
contingency which m a y cause loss of profits resulting from
the cessation or interruption of his business.
(c) A n y binding contract giving rights which will be
injuriously affected by the destruction of any designated
property will also afford an insurable interest in such
property even though the insured m a y have neither interest
in the property nor specific lien upon it. So, a workman has
an insurable interest in any building he m a y have contracted
to repair, or an artist might insure the structure for the interior
decoration of which he had been employed. (Vance, op. cit., p.
178; see Sees. 1 0 3 , 1 0 5 . )
Sec. 15. 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.
Insurable interest of carrier or depository.
The reason for this provision is that the loss of the thing may
cause liability to the carrier or depository to the extent of its
value. (Stilwall vs. Staples, 19 N.Y. 401.)
A person having a "qualified property" in chattels entitling
him to possession and the right of using or dealing with them in
accordance with the terms of the bailment, has such interest in
the chattels as m a y be the subject of a valid contract of insurance.
Such bailee m a y insure merely his interest in the chattels to
protect himself against loss of the benefits to which he is entitled,
or he may, and does more frequently, insure himself against the
liability which he may incur upon the destruction of the chattels.
(Vance, op. cit, pp. 168-169.)
It has been held by our Supreme Court that a policy effected
by a bailee and covering by its terms his own property and
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
114
Sec. 16
property held in trust, inures, in the event of loss, equally and
proportionately to the benefit of all the owners of the property
insured. (Lopez vs. del Rosario, 44 Phil. 98 [1922].)
Under the General Bonded Warehouse Act, a warehouseman,
licensed to engage in the business of receiving commodities for
storage, is required to insure the same against fire. (Act No. 3893,
as amended, Sec. 6.)
Sec. 16. A mere contingent or expectant interest in
anything, not founded on an actual right to the thing, nor
upon any valid contract for it, is not insurable.
Mere contingent or expectant interest
not insurable.
A mere hope or expectation of benefit which m a y be frustrated
by the happening of some event uncoupled with any present
legal right will not support a contract of insurance. Thus:
(1) Property offather Isonl spouse. — A father cannot insure his
son's property nor can a son insure the property that he expects
to inherit from his father as his interest is merely an expectancy
of inheriting, (see Baldwin vs. State Insurance Co., 15 N.W. 300.)
Similarly, a spouse has no insurable interest in the property of
the other.
6
(2) Life of parents/children/spouses. — By statutory provisions,
parents and children, and spouses can insure the life of each
other, (see Art. 195, Family Code, in relation to Section 10[b].)
Since under the law, they are under mutual obligation to support
each other, a life policy is held to be a means of fulfilling that
obligation or a means of saving the party entitled to support
from being the subject of public charity. (Ford vs. Doll, 12 Mass.
115.)
6
A possible basis for a claim to an insurable interest is Section 14(b) a n d (c). Since o n e
is entitled to claim from the property of the other, the satisfaction of the latter's obligation to support the former, the former m a y be said to h a v e "an existing interest" in the
property of the latter. Furthermore, the right to legitime m a y also form the legal basis of
a compulsory heir's insurable interest, (see Arts. 886, 887, 2011, Civil C o d e ; see also Arts.
225-227, Family Code.)
Sec. 17
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
115
(3) Property of debtor — Nor can a general or unsecured
creditor insure specific property of his debtor who is alive, even
though destruction of such property would render worthless
any judgment he might obtain.
(a) But an unsecured creditor m a y insure the property of
a deceased debtor since all personal liability ceases with the
death of the debtor. The proceedings to subject the estate to
the payment of the debt of the deceased debtor are in rem.
(b) Also, an unsecured creditor who obtains a judgment
in his favor becomes a judgment creditor and has been held
to have insurable interest in the debtor's property as he has a
right to levy on such property as m a y be necessary to satisfy
the judgment. However, to recover under the insurance, he
must show that the debtor has no other property out of which
the judgment m a y be satisfied. (Spare vs. H o m e Mutual Ins.
Co., 15 F. 707 [1883].)
(c) Of course, an unsecured creditor has an insurable
interest in the life of his debtor to the extent of the amount of
the debt. (Sec. 10[c].)
(4) Property of testator still alive. — One named as beneficiary
in a will has no insurable interest in a property designated
before the testator's death, however reasonable his expectation
of benefit to be derived from the continued existence of the
property. His expectation has no legal basis since the will has
no legal effect before the death of the testator. (Vance, op. cit.,
pp. 162-163,173.) The will can be revoked at any time before the
death of the testator unless he has expressly waived this right
in the policy (Sec. 11.) in which case the beneficiary will have
insurable interest.
Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified
by loss or injury thereof.
Measure of insurable interest in property.
As already shown, a contract of insurance is one of indemnity.
Any contract of property insurance that gives to the insured
more than indemnity against his actual loss that may be suffered
116
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 17
by the happening of the event insured against is in the nature
of a wagering policy contrary to public policy and void. Thus,
a mortgagor has an insurable interest equal to the value of the
mortgaged property and a mortgagee, only to the extent of the
credit secured by the mortgage, (see Sec. 8.) The purpose of
property insurance is to indemnify a person against actual loss,
and not to wager on the happening of the event.
EXAMPLES:
(1) X insured his property valued at P100,000.00, for
P120,000.00. X suffered a total loss. The amount of the insurance
(P120,000.00) is not the amount payable in the event of a loss
but rather represents the maximum limit of recovery of the
insured, (see Sec. 60.)
Under the indemnity rule, the insurer would be liable only
to pay P100,000.00. If X receives P80,000.00 from the party that
caused the loss, the liability of the insurer is reduced in the
same amount. Anything that reduces or diminishes the loss
reduces the amount which the insurer is bound to pay.
(2) Under a building contract, X constructed a house for
P400,000.00 for Y who made an advance payment of P80,000.00,
the balance to be paid upon delivery of the house on a certain
date when Y would return from abroad and occupy the house.
As X finished the construction at a much earlier date, he insured
the house against fire for P400,000.00. The house was burned
down before its delivery to Y.
What is the extent of the insurable interest of X? It is
P400,000.00 although he already received from Y P80,000.00
as advance payment because X has to replace the house
destroyed with another worth P400,000.00, as per contract, not
P320,000.00.
(3) The financing lease contract stipulates that the equipment
and motor vehicles leased shall be insured at the cost and
expense of the lessee against loss, damage or destruction from
fire, theft, accident, or other insurable risk for the full term of
the lease. The lessee has an insurable interest in the equipment
and motor vehicles leased under Section 17 as it will be directly
damnified in case of loss, damage, or destruction of any of the
properties leased. (Ong Lim Sing, Jr. vs. FGB Leasing Finance
Corp., 524 SCRA 333 [2007].)
Sec. 18
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
117
Sec. 18. No contract or policy of insurance on property
shall be enforceable except for the benefit of some person
having an insurable interest in the property insured, (a)
Effect of absence of insurable interest
in property insured.
(1) Principle of indemnity applicable. — This principle is at
the basis of all contracts of property insurance. Accordingly, an
insurance taken out by a person on property in which he has no
insurable interest is void. It has been held that fire insurance taken
on property belonging to another is void, although the insurer
had full knowledge of the fact of ownership (Firemen's Fund Ins.
Co. vs. Cos, 175 P. 493.) and even if the insured subsequently
acquired insurable interest. (Sec. 19.) In a case, the contract of
lease provides that any fire insurance policy obtained by the
lessee over his merchandise inside the leased premises without
the consent of the lessor is deemed assigned or transferred to the
lessor. It held that such automatic assignment is void for being
contrary to law and public policy, hence, the insurer cannot be
compelled to pay the proceeds of the policy to the lessor who has
no interest in the property insured. (Cha vs. Court of Appeals,
277 SCRA 690 [1997].)
Where the insurance is invalidated on the ground that no
insurable interest exists, the premium is ordinarily returned
to the insured unless he is in pari delicto with the insurer, (see
Arts. 1411, 1412, Civil Code.) It is consistent with the principle
of indemnity to pay the insured a benefit in an amount equal to
or less than the loss but the principle is violated if he is paid a
benefit more or greater than the loss.
In life insurance taken by a person on his own life, it is not
necessary for the beneficiary to have an insurable interest in the
life insured, (see Sees. 1 0 , 1 9 , 1 8 1 . )
(2) Doctrine of waiver or estoppel not applicable. — This doctrine
cannot be invoked since the public has an interest in the matter
independent of the consent or concurrence of the parties. (Colver
vs. Central States F. Ins. Co., 287 P. 266.) But where the real
intention of the insured was to insure his goods for P15,000.00
but through the error or mistake of the insurer, the policy
118
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 18
issued for P15,000.00 was for the building in which the goods
were stored which building the insured never owned or had
any insurable interest, it was held in case of loss of the goods,
the insured can recover. (Garcia vs. Hongkong F. & M. Ins. Co.,
45 Phil. 122 [1923].) This is a case where the insured's lack of
insurable interest in property insured is not sufficient to avoid an
insurance.
Measure of indemnity in insurance
contracts.
(1) Contracts of marine or fire insurance. — They are contracts
of indemnity. This means that the real purpose of the contract is,
in case of loss, to place the insured in the same situation in which
he was before the loss subject to the terms and conditions of the
policy. The amount of indemnity m a y be determined after the
loss (see Sec. 60.) or is previously fixed in the contract, (see Sec.
61.)
Pursuant to the general rule regarding indemnity, the amount
of insurance fixed in th? policy of a marine or fire insurance is not
the exact measure of indemnity to which the insured is entitled,
but the m a x i m u m indemnity which he might obtain. The insured
cannot recover in excess of his actual loss.
(a) In valued policies (Sec. 61.), however, the valuation of
the thing insured is conclusive between the parties thereto
in the adjustment of loss, if the insured has some interest at
risk, and there is no fraud on his part (see Sees. 156, 171.),
although it might be proved that the actual value of the thing
is less.
(b) Similarly, the principle of indemnity cannot be
invoked by the insurer w h o agreed to repair or replace the
thing insured with a new one even though the cost of the
undertaking may exceed the original amount of the insurance,
(see Sec. 172.)
(2) Liability insurance contracts. — They are considered
contracts of indemnity against liability and not against loss, (see
Sec. 174.) In this type of insurance, the insurer's promise is to
pay the proceeds of the policy on behalf of the insured to a third
Sec. 18
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
119
person to w h o m the insured is liable. If the insured suffers no loss
because his liability to the third person, for some reason, cannot
be enforced, the insurer has no obligation to pay the proceeds,
(see Sec. 174.)
(3) Life insurance contracts. - They are not contracts of indemnity. The amount fixed payable at the death of the insured
is not considered as the true value of the thing insured because
the life of a person is priceless, but is simply the measure of indemnity which the insurer has bound himself to pay the insured.
(Young vs. The Midland Textile Ins. Co., 30 Phil. 617 [1915].)
The contract of insurance m a y be to pay, on the happening
of the event insured against, a certain or ascertainable sum of
money, irrespective of whether or not the insured has suffered
loss or of the amount of such loss if he has suffered any. The
amount for which a person is insured is governed by the amount
of premium that he contracted to pay.
(4) Personal accident insurance contracts. — Like life policies,
they are not contracts of indemnity. Life and limb are not
susceptible to exact or uniform valuation. Hence, the principle
of indemnity is not applicable. However, if a person effects a
personal accident insurance on the life of another person, the
amount recoverable is the loss sustained by the person who
effected the policy. In theory, therefore, such a personal accident
insurance becomes a contract of indemnity, but it is often
impossible exactly to assess the injury suffered, and a policy with
fixed benefits m a y be issued. (Dinsdale & McMurdie, op. cit., p.
94.)
(5) Health insurance contracts. — Like life insurance contracts,
health insurance contracts that provide a specific periodic
income to disabled persons are not contracts of indemnity. But
those that cover medical expenses are contracts of indemnity. In
these contracts, only medical expenses incurred by the insured
are paid. (Riegel, Miller, & Williams, Jr., op. cit., p. 58.)
(6) Health care agreement. — Such an agreement with a health
maintenance organization (HMO) is in the nature of a non-life
insurance which is primarily a contract of indemnity. (Phil.
Health Care Providers, Inc. vs. Comm. of Internal Revenue, 554
SCRA 411 [2008].) Once a member incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated
contingent, the health care provider must pay for the same to the
extent agreed upon under the contract. Being in the nature of a
contract of indemnity, payment should be made to the party who
incurred the expenses. Hence, the fact that the one who paid all
the hospital and medical expenses was not the legal wife of the
deceased member considering that at the time of their marriage,
the deceased was previously married to another w o m a n who
was still alive, is of no moment. She is entitled to reimbursement.
(Philamcare of Health Systems, Inc. vs. Court of Appeals, 379
SCRA 356 [2002]; Blue Cross Health Care, Inc. vs. Olivares, 544
SCRA 580 [2008]; see Note 6 to Sec. 174.)
Sec. 19. An interest in property insured must exist when
the insurance takes effect, and when the loss occurs, but
need not exist in the meantime; and interest in the life or
health of a person insured must exist when the insurance
takes effect, but need not exist thereafter or when the loss
occurs, (a)
Time when insurable interest
must exist.
The general rule stated in this section is applicable only to
insurance on property and not to life insurance except that on the
life of the debtor.
(1) When insurance takes effect and loss occurs. — Insurable
interest in property must exist at two distinct times: on the date
of execution of the contract of insurance; and on the date of the
occurrence of the risk insured against, otherwise, the policy
is void. Thus, if a fire occurs after the sale or alienation of the
property, the former owner cannot recover on the policy.
(2) When insurance takes effect. — In life insurance, the
insurable interest requirement is satisfied if the interest exists
at the time the policy is procured, even if it has ceased to exist
at the time of the insured's death. Thus, if a debtor whose life
was insured by a creditor (see Sec. 10[c].) subsequently pays the
debt, remains in force provided, of course, the former creditor
continues to pay the premiums.
S e c 19
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
121
Most of the situations in which insurable interest m a y later
disappear involve business relationships. Under the law, health,
accident and disability insurance is deemed included in the
terms "life" and "non-life" insurance. (Sec. 187, par. 8.)
(3) When liability attaches. — In liability insurance, questions
of insurable interest are not particularly important. It necessarily
exists when the liability of the insured to a third party attaches,
(see Sec. 174.)
(4) Need not exist during intervening period. — The obvious
purpose of the provision is to prevent the issue of wagering
policies, (see Sec. 14[b], [c].) But the interest insured "need not
exist in the meantime." (Sec. 19.) It is well-settled that in the
absence of special provision in the policy to the contrary, the
alienation of insured property will not defeat a recovery if the
insured has subsequently reacquired the property and possesses
an insurable interest at the time of loss. (Womble vs. Dubuque
Fire & Marine Ins. Co., 37 N.F. 2d 263.)
EXAMPLES:
(1) D insured his house on May 15, 2002 for a period of
one year. Without assigning the policy, he sold the house to B
on July 10, 2002.
If the house was accidentally burned on September 15,2002,
D cannot recover because his insurable interest was no longer
existing when the loss occurred. However, if on September 11,
2002, D reacquired the house from B, D may recover on the
policy because insurable interest need not exist during the
intervening period from July 10, 2002 when he sold the house,
to September 10, 2002.
(2) Suppose in the same example, C is an unsecured
creditor of D for the amount of P100,000.00 and he insured D's
house on September 12, 2002 for the same amount. The house
burned accidentally on September 15, 2002.
Has C the right to collect the proceeds of the insurance?
No, because being a general creditor without any lien on D's
house, C had no insurable interest when he insured it. (see Sec.
16.) But, suppose D sold the house to C before September 15,
2002 when the loss occurred. Not even then. C did not have
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
122
Sec. 19
insurable interest in the house when the insurance took effect.
(Sec. 19.)
(3) D issued a promissory note in favor of C to secure a
loan of P100,000.00 payable within one (1) year.
To add further protection, C insured D's life for the amount
of the note for the year it was to run. D died on the 10th month
after paying the note at the end of the ninth month.
Can C recover on the insurance? No. The principle of
indemnity applies in this case as in property insurance. Neither
can the estate of D recover since the contract was purely
between C and the insurer, unless, of course, the contrary was
stipulated.
But if the insurance was taken by D on his life for the benefit
of C, the payment of the debt did not invalidate the policy
which would remain in force for the full year for which the
premium was paid. In this case, the proceeds of the insurance
would be paid to the estate of D.
(4) X corporation insures the life of Y, its President,
for P100,000.00 with X as beneficiary. Thereafter, Y sells his
stockholdings and severes connections with X which continues
to pay the annual premiums. During the currency of the policy,
Y dies. Is X entitled to recover the insurance proceeds? Yes,
under Section 19.
Existence of insurable interest
when risk attaches.
It must be noted, however, that notwithstanding the great
volume of authority to the contrary, it seems that the existence of
an insurable interest at the inception of the contract, unless m a d e
so by statute, is not at all necessary to its validity. It is sufficient
that insurable interest exists at the time the risk attaches. (Vance,
op. cit, pp. 180-181; Sec. 14[b], [c].)
EXAMPLE:
D, contemplating the purchase of B's house, may take out
a policy of insurance under which the risk is to attach upon D's
purchase and acquisition of interest in the house. In this case,
the requirement of good faith and a real interest at the time
of the loss is amply sufficient to satisfy the demand of public
policy. (Vance, op. cit., p. 181.)
Sec. 19
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
123
Insurable interest in life and property
distinguished.
(1) As to extent of insurable interest. — Insurable interest in life
(save in life insurance effected by creditor on life of debtor) is
unlimited; in property, insurable interest is limited to the actual
value of the interest thereon, (see Sec. 17.)
(2) As to time when insurable interest must exist. — In life
insurance (save that effected by creditor on life of debtor), it is
enough that insurable interest exists at the time the policy takes
effect and need not exist at the time of the loss (see Sec. 181.); in
property insurance, it is necessary that insurable interest "must
exist when the insurance takes effect and when the loss occurs,
but need not exist in the meantime." (Sec. 19.)
(3) As to expectation of benefit to be derived. — In life insurance,
the expectation of benefit to be derived from the continued
existence of life need not have any legal basis whatever. A
reasonable probability is sufficient without more. Thus, a person
is under no legal obligation to support a friend or a cousin. Yet
one w h o is dependent on another for support has an insurable
interest in the latter's life, even though there is no legal right
to support if there is reasonable ground for believing that the
support will be continued. (Carpenter vs. U.S.L. Ins. Co., 23 LRA
571.)
In property insurance, an expectation of benefit, to be derived
from the continued existence of the property insured, however
likely and morally certain of realization it m a y be, will not afford
a sufficient insurable interest unless that expectation has a basis of
legal right. If such legal basis exists, an expected benefit, however
remote, constitutes an insurable interest. (Vance, op. cit., p. 15; see
Sec. 13.) Thus, an expectant heir cannot insure the property he
expects to inherit. But a stockholder may insure the property of
the corporation although he has no legal interest whatsoever in
such property. His expectation of benefit to be derived from the
continued existence of such property, however, is based upon his
legal right as stockholder to demand participation in the profits
of the corporation, or in its assets upon dissolution, (see Sec.
14[b].)
124
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2 0
Sec. 20. Except in the cases specified in the next four
sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured
unaccompanied by a corresponding change of interest in
the insurance, suspends the insurance to an equivalent
extent, until the interests in the thing and the interest in
the insurance are vested in the same person.
Effect, in general, of change of interest.
Generally speaking, the mere transfer of a thing insured does
not transfer the policy but suspends it until the same person
becomes the owner of both the policy and the thing insured. (Sec.
58.) This rule is embodied in Section 20 and is in accordance with
Section 19 that an insured must have an insurable interest in the
property insured at the time of loss.
Thus, a purchaser of insured property w h o does not take the
precaution to obtain a transfer of the policy of insurance, cannot,
in case of loss, recover upon such contract, as the transfer has the
effect of suspending the insurance until the purchaser becomes
the owner of the policy as well as the property insured. In such
case, nobody can recover on the policy. The purchaser cannot
recover because he has no contract with the insurer. The seller
(insured) cannot also recover because having sold the property,
he has no more insurable interest in the same. (San Miguel
Brewery vs. L a w Union & Rock Ins. Co., 40 Phil. 674 [1920].)
Note that the contract is not rendered void but is merely
suspended by a change of interest.
Object of rule against alienation.
The object of the provision against alienation or change of
interest or title is ordinarily to provide against changes which
might supply a motive to destroy the property, or might lessen
the interest of the insured in protecting and guarding it. (29 A m .
Jur., 505.)
Change of interest covered by law.
The change of interest referred to in Sections 20, 21, 22, 23,
and 24 means absolute transfer of the property insured such as
Sec. 21
CONTRACT OF INSURANCE
Title 3. -— Insurable Interest
125
the conveyance of the property by means of an absolute deed of
sale.
Consequently, the interest in the property insured does not
pass by mere execution of a pledge or mortgage. Thus, it has
been held that in a chattel mortgage, there is no alienation
within the meaning of the insurance law until the mortgagee
acquires a right to take possession of the property by default of
the mortgagor under the terms of the mortgage. (Bachrach vs.
British American Ass'n. Co., 17 Phil. 562 [1910].)
Exceptions to general rule.
The rule that change of interest suspends the insurance is
subject to exceptions, to wit:
(1) In life, health, and accident insurance (Sec. 20.);
(2) A change of interest in the thing insured after the
occurrence of an injury which results in a loss (Sec. 21.);
(3) A change of interest in one or more of several things,
separately insured by one policy (Sec. 22.);
(4) A change of interest by will or succession on the death of
the insured (Sec. 23.);
(5) A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured, to the
others (Sec. 24.);
(6) W h e n a policy is so framed that it will inure to the benefit
of whomsoever, during the continuance of the risk, m a y become
the owner of the interest insured (Sec. 57.); and
(7) When there is an express prohibition against alienation
in the policy, in case of alienation, the contract of insurance is not
merely suspended but is avoided. (Art. 1306, Civil Code; see Sec.
24.)
Sec. 21. A change of interest in a thing insured, after
the occurrence of an injury which results in a loss, does
not affect the right of the insured to indemnity for the loss.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
126
Sec. 22
Change of interest in a thing insured
after loss.
After a loss has happened, the liability of the insurer becomes
fixed. The insured has a right to assign his claim against the
insurer as freely as any other money claim. This right is absolute
and cannot be delimited by agreement, (see Sees. 83, 173.) The
insured has also the absolute right to transfer the thing insured
after the occurrence of the loss. Such change of interest does not
affect his right to indemnity for the loss. (Sec. 21.)
Section 20 refers to change of interest in the thing insured
before loss has occurred.
Sec. 22. A change of interest in one or more of several
distinct things, separately insured by one policy, does not
avoid the insurance as to the others.
Change of interest where several things
separately insured by one policy.
In connection with the above section, it is important to make
a distinction between a divisible contract and an indivisible
contract, (see Art. 1420, Civil Code.)
(1) Effect dependent on divisibility of contract. — In the former,
the cause or consideration is m a d e up of several parts while
in the latter, it is entire and single. If the things are "separately
insured in one policy" the contract is divisible and the violation
of a condition which avoids the policy with respect to one or
more of the things does not affect the others.
On the other hand, if the things are insured under one
policy for a gross sum and for an entire premium, the contract
is indivisible so that a change of interest in one or m o r e of the
things will also avoid the insurance as to the others.
EXAMPLE:
Suppose D is the owner of a car and a jeep. He insured the
car for P500,000.00 and the jeep for P200,000.00 under a single
policy for which he paid a total premium of P15,000.00. Under
Section 22, the sale of the jeep will not affect the insurance of
the car.
Sec. 2 3
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
127
But if the car and the jeep were not separately valued in the
policy and D paid P15,000.00 as the premium for the insurance
of both the car and the jeep, the sale of the jeep without the
insurer's consent affects also the insurance on the car. Hence, if,
after the sale of the jeep, the car was lost or destroyed, C cannot
recover on the insurance of the car.
(2) Divisibility of contract, a question of intention. — Whether
a contract is entire or severable is a question of intention to be
determined by the language employed by the parties. Where
only one premium w a s paid for the entire shipment of goods,
the insurance contract is indivisible and the fact that the goods
(which are not separately valued) are loaded on two different
vessels does not make the contract several and divisible as to the
items insured. (Oriental Assurance Corp. vs. Court of Appeals,
200 SCRA 459 [1991].)
It has been held that where the amount of the insurance
agreed upon w a s merely apportioned among the various items
insured to limit the extent of the risk of the insurer as regards
each item, the contract of insurance is still indivisible. (Piatt vs.
Minnesota F. Ins. Co., 23 Minn. 479.)
Sec. 23. A change of interest, by will or succession, on
the death of the insured, does not avoid an insurance; and
his interest in the insurance passes to the person taking
his interest in the thing insured.
Change of interest by death of insured.
Under Section 23, the insurance on property passes
automatically, on the death of the insured, to the heir, legatee or
devisee who acquired interest in the thing insured. The rights to
the succession are transmitted from the moment of the death of
the decedent. (Art. 777, Civil Code.)
EXAMPLE:
D insures his house. Thereafter, he dies. H inherits the
property by will or by operation of law. The change of interest
in the house by the death of D does not affect the insurance
because it is likewise transferred to H who may collect on the
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2 4
policy should the house be burned later on even before he
could transfer the insurance policy under his name.
Sec. 24. A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly
insured, to the others, does not avoid an insurance, even
though it has been agreed that the insurance shall cease
upon an alienation of the thing insured.
Transfer of interest by one of the several
partners, etc. jointly insured.
(1) Effect where transfer is to the others. — A transfer of interest
in the insured property by a partner, joint owner, or owner in
common, to the others who are jointly insured, will not avoid the
insurance. The rule is the same even if there is a stipulation that
the insurance shall cease upon an alienation of the thing insured.
(2) Reason for the rule. — The underlying principle is that
each partner (or owner, or owner in common) is interested in
the whole property and the hazard is not increased because the
purchasing partner has acquired a greater interest in the property
by a transfer of his co-partners' share. (Hartford F. Ins. Co. vs.
Liddleli Co., 60 S.E. 104.) In other words, the transfer does not
affect the risk because no new party is brought into contractual
relationship with the insurer.
(3) Exception to the rule. — But a policy will be avoided by a
sale of an interest in partnership property by the partner to one
of his co-partners, without the consent of the insurer and before
the loss occurs, where the policy contains the condition "that
in case of any sale, transfer, or change of title of any property
insured by this company, or of any undivided interest therein,
such insurance will be void and cease." (Hartford F. Ins. Co. vs.
Ross, 85 Am. Dec. 452.)
(4) Effect where transfer is to strangers. — It is alienation or
transfer to a stranger or third person that will avoid the policy.
A sale by a partner of his interest to a stranger ends the contract
of insurance as to him but does not affect the insurance as to the
others.
Sec. 2 5
CONTRACT OF INSURANCE
Title 3. — Insurable Interest
129
EXAMPLE:
A policy of fire insurance was issued to partnership X under
its firm name. The policy makes no provision for changes in the
personnel of the firm.
Will the subsequent withdrawal of a partner or admission
of a new partner affect the validity of the policy? No. Under
Section 26, the insurance continues despite the changes in the
firm's membership. The policy was taken in the name of the
partnership X which has a juridical personality separate and
distinct from that of each of its members, (see Art. 1768, Civil
Code.)
Sec. 25. Every stipulation in a policy of insurance for
the payment of loss whether the person insured has or has
not any interest in the property insured, or that the policy
shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void, (a)
Stipulations prohibited in an insurance
policy.
There are two stipulations in an insurance policy which are
declared void under this section.
(1) Stipulation for the payment of loss whether the person insured
has or has not any interest in the subject matter of the insurance. — A
policy issued to a person without interest in the subject matter
of the contract is a mere wager policy or contract and is void.
(32 C.J. 1110.) A wager policy has been defined as a pretended
insurance where the insured has no interest in the thing insured
and can sustain no loss by the happening of the misfortunes
insured against. (43 A m . Jur. 2d 964; see Sec. 25.)
The policy of the law does not admit of such insurance,
however willing the parties may be to enter it. The doctrine of
waiver has obviously nothing to do with it. The company or its
agents cannot, by waiver, invest the insured with interest he does
not own. (Agricultural Ins. Co. vs. Montague, 38 Mich. 548.)
The law, however, makes an exception in the cases mentioned
in Section 181 regarding life insurance.
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2 5
(2) Stipulation that the policy shall be received as proof of insurable interest. — Whether or not insurable interest exists does not
depend upon the contract of insurance or the stipulations therein.
The insurer can always show lack of insurable interest after the
issuance of a policy of insurance, (see Sec. 83.)
The defense of absence of insurable interest is available only
to the insurer being the only party to the insurance contract who
has a legitimate interest in raising the defense. It m a y be raised
by and for the benefit of the insurer alone.
Wagering or gaming policies void.
A contract of insurance is void for illegality unless the insured
has an insurable interest in the subject matter insured.
(1) A mere bet upon a future event. — It is a fundamental
postulate of all insurance that it must not be a mere bet upon
a future event. Wager or gaming policies are disapproved and
condemned not only under statutes declaring them void, but
also independently of statute, on the ground of public policy.
They are regarded as detrimental to society. Such policies have
a tendency to create a desire for the event, and furnish strong
temptation to the party interested to bring about if possible the
event insured against, (see 32 C.J. 1109; see annotations under
Sees. 4 , 1 0 , 1 8 . )
(2) Non-existence of loss from occurrence of event. — Wagers
suffer no loss from the occurrence of the contingent event. On
the contrary, they actually profit from it. The insurable interest
requirement intends to deter the insured from the temptation
to bring about by unnatural means the results of the contingent
event.
— oOo —
Title 4
CONCEALMENT
Sec. 26. A neglect to communicate that which a party
knows and ought to communicate, is called a concealment.
Four primary concerns of the parties
to an insurance contract.
In making a contract, so highly aleatory as that of insurance,
the parties have four primary concerns, to wit:
(1) The correct estimation of the risk which enables the
insurer to decide whether he is willing to assume it, and if so, at
what rate of premium;
(2) The precise delimitation of the risk which determines the
extent of the contingent duty to pay undertaken by the insurer;
(3) Such control of the risk after it is assumed as will enable
the insurer to guard against the increase of the risk because of
change in conditions; and
(4) Determining whether a loss occurred and if so, the
amount of such loss. (Vance, op. ext., pp. 364-365.)
Devices for ascertaining and controlling
risk and loss.
In order to effect the above ends which at times may
prove to be very difficult, several devices, technically known
as concealment, representations, warranties, conditions, and
exceptions, have been developed by persons engaged in the
insurance business.
(1) The devices of concealment (see Sec. 26.) and representations
(see Sec. 36.) were originally developed for the purpose of
131
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 2 6
enabling the insurer to secure the same information with respect
to the risk that was possessed by the applicant for insurance, so
that he might be equally capable of forming a just estimate of its
quality.
(2) Warranties (see Sees. 67, 68.) and conditions so far as they
are affirmative, that is, dealing with conditions existing at the
inception of the contract, and exceptions are used for the purpose
of making more definite and certain the general words used to
describe the risk the insurer undertook to bear.
The general description of the risk concerned has two parts:
First, the designation of the specific property interest to
be covered; and
Secondly, the specification of such of the perils to which
that property interest would be exposed.
For example: The insured m a y be required to warrant that
he had not been subject to the peril of a major operation, or a
condition in the form of a stipulation m a y be inserted in the
policy that the policy shall be void should the insured be guilty
of concealment or misrepresentation. Warranties and conditions
involve facts the existence of which shows the risk to be greater
than that intended to be assumed and operates to create in
the insurer the power to extinguish, if he so desires, the legal
relations already created.
(3) Exceptions perform a similar function in making m o r e
definite the coverage indicated by the general description of the
risk by excluding certain specified risks that otherwise would
have been included under the general language describing the
risks assumed. The exception m a y be of certain property or of
certain peril within the general coverage. For example: 'This
policy shall not cover accounts, bills, currency, deeds, evidences
of debt, money or securities; nor unless specifically n a m e d
hereon in writing, bullion or manuscripts/'
In a fire insurance policy, burning caused by lightning m a y
be excepted from the risks assumed.
(4) Executory warranties (Sec. 68.) and conditions, that is,
undertakings that certain conditions should or should not exist
Sec. 2 6
CONTRACT OF INSURANCE
Title 4. —- Concealment
133
in the future, are used to enable the insurer to rescind the contract
in case subsequent events increased the risk to such an extent
that he is no longer willing to bear. For example: The insured may
warrant that a w a t c h m a n will be kept upon the premises during
the currency of the policy, or conditions m a y be inserted to the
effect that the policy shall become void if any repairs are made
upon the building, or the hazard otherwise increased without
the written consent of the insurer.
In a somewhat different way, exceptions are also used for
the purpose of controlling risks. For example: If in any particular
instance the insurer fears the consequences of the vacancy of
the property insured, he may, instead of inserting the condition
that the entire policy shall be void if the property becomes and
remains vacant or unoccupied for a period of 30 days without
the consent of the insurer, provide that he assumes no liability
for loss while such vacancy or unoccupancy remains. In this case,
the occurrence of the excepted vacancy does not give the insurer
any power to rescind the contract which remains in full force and
effect.
(5) The insurer must also protect himself against fraudulent
claims of loss; and this he attempts to do by inserting in the policy
various conditions which take the form of conditions precedent.
For instance, there are conditions requiring immediate notice of
loss or injury and detailed proofs of loss within a limited period
(see Sees. 88, 89.); and in a great many policies, there is found
a condition requiring that any action thereon shall be brought
within a limited time, (see Sec. 63.)
It is necessary for the insurer to ascertain not only the fact
of loss, but also the amount of any loss that m a y in fact have
occurred. To secure such protection, the insurer inserts the
various conditions providing for the appointment of appraisers,
and for arbitration in case no agreement can be reached as to the
amount of loss, (see Vance, op. cit., pp. 364-368.)
Concealment defined.
Concealment is defined by Section 26 as a neglect to communicate that which a party knows and ought to communicate.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
134
Sec. 27
Requisites of concealment.
Read together with Section 28, there can be no concealment
unless:
(1) a party knows the fact which he neglects to communicate
or disclose to the other;
(2) such party concealing is duty bound to disclose such fact
to the other;
(3) such party concealing makes no warranty of the fact
concealed; and
(4) the other party has not the means of ascertaining the fact
concealed.
Where a warranty is m a d e of the fact concealed, the non-disclosure of such fact is not concealment but constitutes a violation
of warranty. (Title 7.)
Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance, (as amended by B.P. Big. 874.)
Effect of concealment.
(1) By the insured. — As a rule, failure on the party of the
insured to disclose conditions affecting the risk, of which he is
aware, makes the contract voidable at the insurer's option. (45
C.J.S. 153.) The reason is that insurance policies are traditionally
contracts uberrimae fidae (Stipcith vs. Metropolitan Life Ins. Co.,
277 U.S. 311.), that is, contracts of the utmost good faith.
This doctrine is essential on account of the fact that the full
circumstances of the subject matter of insurance are, as a rule,
known to the insured only, and the insurer, in deciding whether
or not to accept a risk, must rely primarily upon the information
supplied to him by the applicant. It is strictly interpreted by the
courts and is not limited to material facts which the applicant
knows, but extends to those which he ought to know (Dindsdale
& McMurdie, op. cit., pp. 85-86.) they being necessary for the
insurer to evaluate the risk, either to charge a higher premium or
to refuse to issue a policy altogether. Therefore, it is no defense to
plead mistake or forgetfulness.
Sec. 2 7
CONTRACT OF INSURANCE
Title 4. — Concealment
135
(2) By the insurer. — The contractual duty of disclosure
imposed by utmost good faith is not required of the insured
alone, but is imposed with equal stringency upon the insurer;
in fact, it is more upon the latter, since his dominant bargaining
position carries with it stricter responsibility. (Qua Chee Gan
vs. L a w Union & Rock Ins. Co., 98 Phil. 85 [1955]; Fieldmen's
Insurance Co., Inc. vs. Vda. de Songco, 25 SCRA 70 [1968].)
The duty of utmost good faith is breached by concealment or
misrepresentation. (Sees. 44, 45.) Section 27 "entitles" the injured
party to rescind a contract of insurance by reason of concealment,
implying that it is optional on his part whether or not to exercise
his right of rescission.
Proof of fraud in concealment.
Under Section 27, the insurer need not prove fraud in order
to rescind a contract on the ground of concealment. (Saturnino
vs. Phil. American Life Insurance Co., 7 SCRA 316 [1963].)
(1) Existence of fraud not required. — The duty of communication is independent of the intention and is violated by the fact
of concealment, even when there is no design to deceive. (Sun
Mut. Ins. Co. vs. Ocean Ins. Co., 107 U.S. 485.) In this jurisdiction, the legal effect of a concealment, whether intentional or
unintentional, is the same, i.e., it entitles the insurer to rescind
the contract of insurance, concealment being defined as "negligence to communicate that which a party knows and ought to
communicate." (Saturnino vs. Phil.-American Life Insurance
Co., supra; Great Pacific Life Assurance Co. vs. Court of Appeals,
89 SCRA 543 [1979].)
1
^The phrase "whether intentional or unintentional" between "concealment" and "entitles" in Section 26 of the former Insurance Act was deleted in Section 27 of the former Insurance C o d e which took effect on December 18, 1974 and in the present Insurance Code
until it w a s restored by Batas Pambansa Big. 874. Section 27, according to the Supreme
C o u r t in the case of Ng Gan Z e e vs. Asian Crusader Life Assurance Corp. (122 SCRA 461
[1983]), "requires that fraudulent intent on the part of the insured must be established
to entitle the insurer to rescind." This ruling is no longer controlling. It was erroneously
reiterated in Philamcare Health Systems, Inc. vs. Court of Appeals (379 SCRA 350 [2002]). But
even with the deletion of the phrase, it is believed that proof that the concealment was
intentional was not required to entitle the injured party to rescind.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
136
Sec. 27
(2) Reason for the rule. — Moreover, if it were necessary for
the insurance company to show actual fraud on the part of the
insured, "then it is plain that it would be impossible for it to
protect itself and its honest policyholders against fraudulent and
improper claims. It would be wholly at the mercy of any one
who wished to apply for insurance, as it would be impossible
to show actual fraud except in the extremest cases. It could not
rely on an application as containing information on which it
could act. There would be no incentive to an applicant to tell the
truth." (Kasprzyk vs. Metropolitan Ins. Co., 140 N.Y. 211, cited in
Saturnino case, supra.) But Section 27 must be read in relation to
Section 29.
(3) Basis and criterion for provision. — The basis of the rule
vitiating the contract in cases of concealment is that it misleads
or deceives the insurer into accepting the risk, or accepting it at
the rate of premium agreed upon. The insurer, relying upon the
belief that the insured will disclose every material fact within his
actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced
to estimate the risk upon a false basis that it does not exist. (see
Sec. 31.)
2
The principal question, therefore, must be: "Was the insurer
misled or deceived into entering a contract obligation or in
fixing the premium of insurance by a withholding of material
information or facts within the assured's knowledge or presumed
knowledge?" (Argente vs. West Coast Life Ins. Co., 51 Phil. 725
[1928].)
EXAMPLE:
In his application for life insurance, D did not reveal the
fact that he was suffering from an ailment.
(1) Whether or not D was aware of the ailment, there is no
concealment (Sec. 26.) where the ailment was not material to
the contract. (Sec. 31.)
2
T h e rule is thus based u p o n the assumption that the circumstances affecting the risk
are more readily accessible to the insured than to the insurer and that the insurer actually
trusts the insured to disclose all the facts. (E.W. Patterson, op. cit., pp. 4 5 0 - 4 5 1 . )
Sec. 2 7
CONTRACT OF INSURANCE
Title 4. — Concealment
137
(2) Whether or not D was aware of the ailment, there is
concealment where the ailment was material to the contract:
(a) If D was aware of the ailment but honestly believed
that it was not material, the concealment is not fraudulent
or intentional.
(b) If D was aware of the ailment, there is fraudulent
concealment where the ailment was material to the contract
and D knew or believed that it was material.
Rules as to marine insurance.
(1) In the United States. — The rule as stated in Section 27
applies only to (ocean) marine insurance. The reason for the
contrary rule is that in marine insurance, "the subject of insurance
is generally beyond the reach, and not open to the inspection of
the underwriters, often in distant ports or upon the high seas x x x
and the underwriter from the very necessities of his undertaking
is obliged to rely upon the assured and has, therefore, the right
to exact a full disclosure of all the facts known to him which m a y
in any w a y affect the risk to be assumed."
On the other hand, in fire and other kinds of insurance,
the subject "is, or m a y be, seen and inspected before the risk is
assumed and its construction, situation and ordinary hazards
as well appreciated by the underwriter as by the other" and,
therefore "no such necessity for reliance exists, and if the
underwriter assumes the risk without taking the trouble to
either examine or inquire, he cannot very well in the absence of
fraud, complain that it turned out greater than he anticipated."
(Hartford Protection Ins. Co. vs. Hormer, 59 Am. Dec. 684.)
(2) In the Philippines. — The rule, however, that obtains in
our jurisdiction, applicable to every kind of insurance, is that
fraud is not essential in order that the insured may be guilty of
concealment. Section 26 (now Sec. 27.) of the former Insurance
Act was taken from Section 330 of the California Insurance Code
and it has been held that under this provision, the presence or
absence of an intent to deceive is immaterial. (Gates vs. General
Casualty Co. of America, 120 F. 2d. 925; N.Y. Life Ins. Co. vs.
Fleck, 12 N.W. 2d. 530; Telford vs. N.Y. Life Ins. Co., 69 P. 2d. 835;
Saturnino vs. Phil. Am. Life Ins. Co., supra.)
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THE INSURANCE CODE OF THE PHILIPPINES
Sec. 2 8
Sec. 28. Each party to a contract of insurance must
communicate to the other, in good faith, all facts within his
knowledge which are material to the contract, and which
the other has not the means of ascertaining, and as to
which he makes no warranty.
Matters that must be communicated
even in the absence of inquiry.
This section makes it the duty of each party to a contract
of insurance to communicate in good faith all facts within his
knowledge only when:
(1) they are material to the contract (Sees. 31, 34, 35.);
(2) the other has not the means of ascertaining the said facts
(see Sees. 30, 32, 33.); and
(3) as to which the party with the duty to communicate
makes no warranty, (see Sees. 67-76.)
So, an applicant for life insurance suffering from or w h o h a d
been treated or hospitalized for some ailment like pneumonia,
diabetes or syphilis (De Leon vs. Crown Life Ins. Co., [C.A.]
L-44842, June 20, 1939.); or incipient pulmonary tuberculosis
(Musngi vs. West Coast Life Ins. Co., 61 Phil. 864 [1939].); or
peptic ulcer (Yu Pang Cheng vs. Court of Appeals, 105 Phil. 930
[1959].); or cerebral congestion and Bells Palsy or that his case
had been diagnosed as alcoholism or psychoneurosis (Argente
vs. West Coast Life Ins. Co., 51 Phil. 725 [1928].); or cardiovascular
disease (St. Ferdinand Memorial Park, Inc. vs. Great Pacific
Life Assurance Corp., I.C. Case Nov. 20, Jan. 7, 1977.); or sinus
tachycardia (sinus initiated; heart rate faster than 100 beats per
minute, a common reaction to heart disease) and acute bronchitis
(Canilang vs. Court of Appeals, 223 SCRA 443 [1993].), or that
he w a s hospitalized for two weeks prior to his application for
insurance (Sunlife Assur. Co. of Canada vs. Court of Appeals, 2 4 5
SCRA 268 [1995].), must disclose such facts even if not inquired
into where such facts are material to the risk assumed by the
insurer.
The test is: If the applicant is aware of the existence of some
circumstances which he knows would influence the insurer in
Sec. 2 9
CONTRACT OF INSURANCE
Title 4. — Concealment
139
acting upon his application, good faith requires him to disclose
that circumstance, though unasked. (Vance, op. cit., p. 372.)
Effect of failure of insurer to verify.
The effect of material concealment cannot be avoided by the
allegation that the insurer could have known and discovered the
illness or disease which the insured had concealed.
This argument postulates an obligation of the insurance
company before issuing the policy to verify the statements made
by the insured in his application. But there is no such obligation.
The insurance c o m p a n y has the right to rely on the statements of
the insured as to material facts such as to his previous sickness, for
he knows the facts, and the matter is not one of which disclosure
is excused by the law. (De Leon vs. Crown Life Ins. Co., [C.A.]
L-44842, June 2 0 , 1 9 3 9 . )
3
Sec. 29. An intentional and fraudulent omission, on the
part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty,
entitles the insurer to rescind.
When fraudulent intent necessary.
Under this section, the concealment relates to the "falsity of a
warranty." (see Sees. 67-76.)
Unlike in ordinary concealment (Sec. 27.), the non-disclosure
under Section 29 must be intentional and fraudulent in order
that the contract m a y be rescinded. It is to be noted here that
3
In a case, w h e r e the insurer sought to avoid payment of a life insurance policy on the
g r o u n d that the insured (a Chinese widow, 61 years old, and an illiterate w h o spoke only
Chinese) concealed or misrepresented her state of health, the beneficiary contending that
she could not be held guilty of concealment because the application for insurance was in
English and the insurer has not proved that the terms thereof had been fully explained to
her (insured) as required by Article 1332 of the Civil C o d e which stipulated: "when one of
the parties is unable to read or if the contract is in a language not understood by him, and
mistake of fraud is alleged, the person enforcing the contract must show that the terms
thereof h a v e been fully explained to the former." Held: Article 1332 is not applicable, as
the duty to show that the terms of the contract "have been fully explained" devolves on
the party-beneficiary, seeking to enforce the contract, not on the one (insurer) seeking to
avoid its performance. (Tang vs. Court of Appeals, 90 SCRA 236 [1979].)
140
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 3 0
the omission is on the part of the insured and the party entitled
to rescind is the insurer. Thus, in every contract of marine
insurance, the warranty is implied that the ship is seaworthy
(Sees. 113, 114.), the intentional and fraudulent omission on the
part of the insured when applying for a policy to communicate
information that his ship is in distress or in special peril would
entitle the insurer to rescind because the concealment refers to
matters proving or tending to prove the falsity of the warranty
that the ship is seaworthy.
Sec. 30. Neither party to a contract of insurance is
bound to communicate information of the matters following, except in answer to the inquiries of the other:
(a) Those which the other knows;
(b) Those which, in the exercise of ordinary care, the
other ought to know, and of which the former has no reason to suppose him ignorant;
(c) Those of which the other waives communication;
(d) Those which prove or tend to prove the existence
of a risk excluded by a warranty, and which are not otherwise material; and
(e) Those which relate to a risk excepted from the policy, and which are not otherwise material.
Matters made the subject of special inquiries
material.
As a general proposition, matters m a d e the subject of inquiry
must be deemed material, even though otherwise they might
not be so regarded (North A m . Fire Ins. Co. vs. Throop, 22 Mich.
146.) and the insured is required to make full and true disclosure
to questions asked. (Smith vs. Ins. Co., 49 N.Y. 211.)
The failure of an apparently complete answer to make full
disclosure will avoid the policy. But an answer incomplete on its
face will not defeat the policy in the absence of bad faith. (Vance,
op. cit, p. 376.)
Sec. 30
C O N T R A C T OF I N S U R A N C E
Title 4. — Concealment
141
EXAMPLE:
If one applying for insurance upon a building against fire
is asked whether the property is encumbered and for what
amount and his answer discloses one mortgage when in fact
there are two, the policy issued thereon is avoided. (Rowne vs.
Fifthburg Mut. Fire Ins. Co., 7 Allen [Mass.] 57.)
But if to the same question he merely answers that the
property is encumbered, without stating the amount of
encumbrances, the issue of the policy without further inquiry,
is a waiver of the omission to state the amount. (Nichols vs.
Fayetee Mut. Fire Ins. Co., 1 Allen [Mass.] 63.)
When there is no duty to make disclosure.
The circumstances of the parties to an insurance contract,
or the conditions under which it is executed m a y be such as to
render it unnecessary, in the absence of questions requiring it, for
the insured to disclose to the insurer, facts that would otherwise
be material. (Vance, op. cit., p. 381.) Thus:
(1) Matters known to, or right to be known by insurer, or of which
he waives disclosure. — The insured cannot be penalized for failure
to disclose matters already known to the insurer (Sec. 30[a].) for
obviously, the insurer cannot say there is deception; or ought to
be known to the insurer or his agent (ibid., [b]; Sec. 32.) for to hold
otherwise would be to charge the insured with the default of the
insurer or his agent (Bates vs. Hewit, 1867 L.R. 2 Q.B. 595.); or of
which the insurer waives communication (Sec. 30[c]; Sec. 33.) for
the insurer is in estoppel.
(2) Risks excepted from the policy. — The insurer cannot complain of the insured's failure to disclose facts that concern only
risks excepted from the policy, either expressly or by warranty,
from the liability assumed under the policy. (Thomas & Mersey
Marin Ins. Co. vs. Guaford Ship Co., [1911] A.C. 529.) It is important to note, however, that in this case, the undisclosed fact must
not be material (Sec. 30[d], [e].) for otherwise, the rule will not
apply.
(3) Nature or amount of insured's interest. — Also, information
of the nature or amount of the interest of one insured need
not be communicated unless in answer to an inquiry except as
prescribed by Section 51. (Sec. 34.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
142
Sec. 31
Sec. 31. Materiality is to be determined not by the
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 disadvantages of the
proposed contract, or in making his inquiries.
Determination of materiality.
(1) Test of materiality. — The test is in the effect which the
knowledge of the fact in question would have on the making
of the contract. To be material, a fact need not increase the risk
or contribute to any loss or damage suffered. It is sufficient if
the knowledge of it would influence the parties in making the
contract. (Vance, op. cit., p. 375.) The matter must, of course, be
determined ultimately by the court.
EXAMPLE:
When D insured his house against fire, he did not disclose
the fact that he received two letters threatening to set his house
on fire if he did not pay P50,000.00 to the sender. D's house was
destroyed by an accidental fire. The insurer can deny liability
for the loss.
(2) From the standpoint of the insurer. — A fact is material if the
knowledge of it would have a "probable and reasonable influence
upon the insurer in assessing the risk involved and in making
or omitting further inquiries, and cause him either to reject the
risk or to accept it only at a higher premium rate or on different
terms though that fact m a y not even remotely contribute to the
contingency upon which the insurer would become liable, or in
any wise affect the risk, (ibid., p. 326; see Argente vs. West Coast
Life Ins. Co., 51 Phil. 725 [1928]; Canilang vs. Court of Appeals,
223 SCRA 443 [1993].)
(a) Thus, where the applicant concealed the fact that he
had pneumonia, diabetes or syphillis, the policy is avoided
although the cause of the death (e.g., plane crash) be totally
unconnected with the material fact concealed or misrepresented. (De Leon vs. Crown Life Ins. Co., [C.A.] No. 44842,
June 20, 1939.) It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the
Sec. 31
CONTRACT OF INSURANCE
Title 4. — Concealment
143
proposed insurance policy or in making inquiries. (Sunlife
Assur. Co. of Canada vs. Court of Appeals, 245 SCRA 268
[1995].)
(b) The materiality of the existence of other insurance
contracts against fire upon the same property insured, when
its disclosure is one of the conditions specified in the fire
insurance policy, is not open to doubt. (Union Manufacturing
Co., Inc. vs. Phil. Guaranty Co., Inc., 47 SCRA 271 [1973].)
(c) In non-medical insurance (which does away, with the
usual medical examination before the policy is issued), the
waiver by the insurance company of medical examination
renders more material, the information required of the
applicant concerning the previous condition of health and
disease suffered, for such information necessarily constitutes
an important factor which the insurer takes into consideration
in deciding whether to issue the policy or not. (Saturnino vs.
Phil. American Life Insurance Co., 7 SCRA 361 [1963]; Sunlife
Assur. Co. of Canada vs. Court of Appeals, 245 SCRA 268
[1995].)
(d) In a case where the insured, in his application for
insurance, m a d e a negative answer which is false, to the
question of whether he has consulted or been treated for
elevated blood pressure and on the basis of the answer, the
insurer accepted his application as a standard risk where only
the routine medical examination was taken, and subsequently
the insured died of hypertension, it was held that the insurer
m a y rescind the contract of insurance and delay payment on
the ground of concealment a n d / o r misrepresentation. The
insurer was ordered to refund the premiums paid by the
deceased insured with legal interest from the time payment
was made. (A.V. A m o r vs. Travellers Life Insurance of the
Philippines, I.C. Case No. 185, March 7,1977.)
(3) When concealment regarded as intentional — A man's
state of mind or subjective belief is not capable of proof in our
judicial process, except through proof of external acts or failure
to act from which inferences as to his subjective belief may be
reasonably drawn.
144
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 31
The nature of the facts not conveyed to the insurer may be
such that the failure of the insured to communicate must have
been intentional rather than inadvertent. (Canilang vs. Court of
Appeals, supra.)
(a) The concealment by the insured of the fact that he
"was operated on for cancer, involving complete removal
of the right breast and stayed in the hospital for a period of
eight (8) days" is in itself fraudulent, although the insured's
doctor never told her, that the disease for which she was
operated on was cancer, "as there could not have been any
mistake about it, no matter what the ailment." (Saturnino vs.
Phil. American Life Ins. Co., 7 SCRA 316 [1963].)
(b) The withholding by the applicant, father of oneyear-old insured, of the fact that his daughter was typically
a mongoloid child, of which he was fully aware, as such a
congenital physical defect could never be ensconced nor
disguised, in supplying essential data for the insurance
application form which fact is material to the contract,
constitutes fraudulent concealment. (Great Pacific Life Assn.
Co. vs. Court of Appeals, 89 SCRA 543 [1979].)
(c) The concealment was held intentional on the part of
the insured who "could not have been unaware that his heart
beat would at times rise to high and alarming levels and that
he had consulted a doctor twice in the two (2) months before
applying for non-medical insurance. Indeed, the last medical
consultation took place just the day before the insurance
application was filed. In all probability, [the insured] went
to visit his doctor precisely because of the discomfort and
concern brought about by his experiencing sinus tachycardia."
(Canilang vs. Court of Appeals, supra.)
But in the absence of evidence of the uninsurability of a
person afflicted with chronic cough, concealment thereof is no
ground for annulment of the policy. (Insular Life Assn. Co. vs.
Pineda, [C.A.] 40 O.G. 285.)
(4) Where fact concealed not material — The insured cannot be
guilty of concealment where the fact concealed is not material.
Thus, where the insured underwent an ECG (electrocardiogram)
test and the results showed a normal condition but he gave a
negative answer to the question whether he had such test, it
Sec. 3 2
CONTRACT CTC.K
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Title I? F R A N C E
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m question is acquired, there can be no duty resting upon the
insured to disclose it, even though the policy is yet to issue.
(Vance, op. cit., p. 378.) In other words, concealment must take
place at the time the contract is entered into in order that the
policy m a y be avoided and not afterwards. The duty of disclosure
ends with the completion and effectivity of the contract.
The rule is different in reinsurance, (see Sec. 96.)
(2) Before contract becomes effective. - If the contract is to be
effective only upon the issuance o f the policy, a n a p p ^ ^
insurance, for instance, is under a duty to disc o s < £ ^ m urer
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
146
Sec. 3 3
conditions in other countries (Beech vs. Ins. Co., 7 L. ed. 90
[1800].), or the allegiance of particular countries, the sources
of his information being equally open to the insurer who is,
therefore, presumed to know them.
Likewise, the insurer is charged with the knowledge of the
general trade usages and rules of navigation, kind of seasons,
and all the risks connected with navigation.
Sec. 33. The right to information of material facts may
be waived, either by the terms of insurance or by neglect
to make inquiries as to such facts where they are distinctly
implied in other facts of which information is communicated.
Right to information may be waived.
The right to information of material facts m a y be waived
either expressly, that is, by the terms of insurance, or impliedly,
that is, by neglect to make inquiry as to the facts already
communicated. If the applicant has answered the questions
asked in the application, he is justified in assuming that no
further information is desired. (Commonwealth Life Ins. Co. vs.
Reder, 154 S.W. 906.) A waiver is a type of estoppel.
EXAMPLE:
In an answer to a question, the insured communicated to
the insurer that he had once stayed in a hospital. The insurer
did not inquire as to the cause of the confinement.
In this case, the law presumes that there is implied waiver
on the part of the insurer of its right to be informed of the kind
of sickness which caused insured's confinement in the hospital.
(see Sec. 30[c].) The Insurer is estopped in the future from using
that former right to its advantage. But there is no waiver where
the failure of the insurer to make further inquiries was due
precisely to concealment on the part of the insured, (see Sec.
27.)
4
4
F o r one thing, life insurance c o m p a n i e s ordinarily require completion of a detailed
application form, and, frequently, a medical examination. Thus, the insured would be
justified in assuming that the insurer has asked all the information it d e e m s material to
the approval of the application.
Sec. 3 3
CONTRACT QF INSURANCE
Title 4. — Concealment
ILLUSTRATIVE CASES:
1. Insurer had every means to ascertain truth of matters alleged
in application.
Facts: The cause of death of the insured was certified as
"Cancer of the Cervix, Stage III." The insurer's ground for
denial of claim of death benefits is concealment of the fact that
the insured had knowledge of and been treated for cancer of
the cervix and hypertension, which fact the insured failed to
reveal in her application.
It appears, however, that the insured had faithfully
answered the questions in the application to the best of her
knowledge even indicating the addresses and names of
persons, laboratories and hospitals when and where she had
consultations.
Issue: Was the insured guilty of concealment of fact material
to the insurance contract?
Held: No. The insurer had every means to ascertain the
truth of the matter alleged in the application. The failure of
the insurer to make inquiry constituted a waiver of its right to
information of the facts. (AG. Factor vs. The Phil. American Life
Insurance Co., I.C. Case No. 310, Aug. 29,1977.)
2. Insured lacked sufficient medical knowledge as to enable him
to distinguish between "peptic ulcer" and "tumor."
Facts: The alleged false statements given by the insured
are as follows: "Operated on for a Tumor (mayoma) of the
stomach. Claims that tumor has been associated with ulcer of
the stomach. Tumor taken out was hard and of a hen's egg size.
Operation was two years ago. Now claims he is completely
recovered."
It appears that the insured's ailment was diagnosed as
"peptic ulcer" for which an operation known as "sub-total
gastric resection" was performed; and that the specimen
removed from his body was "a portion of stomach measuring
12 cm. and 19 cm. along the lesser curvature with a diameter of
15 cm. along the greatest dimension."
Issue: Was the insurer, because of insured's representation,
misled or deceived into entering the contract or in accepting
the risk at the rate of premium agreed upon?
147
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
148
Sec. 34
Held: No. In the absence of evidence that the insured had
sufficient medical knowledge as to enable him to distinguish
between "peptic ulcer" and a "tumor," his statement, that
said tumor was "associated with peptic ulcer of the stomach"
should be construed as an expression made in good faith of his
belief as to the nature of his ailment and operation.
Indeed, such statement must be presumed to have been
made by him without knowledge of its incorrectness and
without any deliberate intent on his part to mislead the insurer.
While from the viewpoint of a medical expert, the information
communicated was imperfect, the same was nevertheless
sufficient to have induced the insurer to make further inquiries
about the ailment and operation of the insured.
Where "upon the face of the application, a question appears
to be not answered at all or to be imperfectly answered and the
insurer issues a policy without any further inquiry, it waives
the imperfection of the answer and renders the omission to
answer more fully immaterial." (Ng Zee vs. Asian Crusader Life
Assurance Corp., 122 SCRA 461 [1983].)
Sec. 34. Information of the nature or amount of the
interest of one insured need not be communicated unless
in answer to an inquiry, except as prescribed by Section
fifty-one.
Disclosure of nature and extent
of interest of insured.
Under Section 51(e), it is required that a policy of insurance
must specify "the interest of the insured in property insured, if he
is not the absolute owner thereof/' So, a mortgagee must disclose
his particular interest even if no inquiry is m a d e by the insurer
in relation thereto. Such requirement is m a d e so that the insurer
m a y determine the extent of the insured's insurable interest, (see
Sees. 1 7 , 1 8 . )
But there is no need to disclose the interest in the property
insured if it is absolute.
EXAMPLE:
A fire insurance policy was issued to D (insured). He was
described as the owner of the insured residential property. D
Sec. 3 5
CONTRACT OF INSURANCE
Title 4. — Concealment
149
was only given the privilege of occupying the house, rent-free
for life, by the terms of his father's will. D represented himself
as the owner.
Is the policy valid? No. D is guilty of misrepresentation. He
should have disclosed the nature of his interest in the property
inasmuch as he is not the absolute owner thereof.
Sec. 35. Neither party to a contract of insurance is
bound to communicate, even upon inquiry, information of
his own judgment upon the matters in question.
Disclosure of judgment upon the matters
in question.
The duty to disclose is confined to facts. (Hart vs. British &
F. Marine Ins. Co., 22 P. 302.) Hence, there is no duty to disclose
mere opinion, speculation, intention or expectation. (Folsom vs.
Mercantile Mut. Ins. Co., 18 Wall. 237; 38 C.J. 1056; see Sec. 101.)
This is true even if the insured is asked.
EXAMPLE:
Suppose the insurer asks the insured the following
question: "How long do you think you will live? " The insured need
not answer the question; and the fact that he committed error
in answering a question calling for an expression of opinion
does not constitute fraud in law. (45 C.J.S. 105.)
— oOo —
Title 5
REPRESENTATION
Sec. 36. A representation may be oral or written.
Representation defined.
Representation is a statement made by the insured at the time
of, or prior to, the issuance of the policy (Sec. 37.), as to an existing
or past fact or state of facts, or concerning a future happening,
to give information to the insurer and otherwise induce him to
enter into the insurance contract.
It may also be made by the insurer but as the insured seldom
desires to avoid the contract, the cases nearly always involve to
representations made by the insured.
Misrepresentation defined.
1
Misrepresentation in insurance is a statement (1) as a fact of
something which is untrue, (2) which the insured stated with
knowledge that it is untrue and with an intent to deceive, or
which he states positively as true without knowing it to be true
and which has a tendency to mislead, and (3) where such fact in
either case is material to the risk. (43 Am. Jur. 2d 1019.)
Such a misrepresentation by the insured renders the
insurance contract voidable at the option of the insurer, even
though innocently made and without wrongful intent.
Misrepresentation m a y be viewed as the active form of concealment.
'Misrepresentation is an affirmative defense. To avoid liability, the insurer has the
duty to establish such a defense by satisfactory and convincing evidence. ( N g G a n Z e e vs.
Asian C r u s a d e r Life Assurance Corp., 122 S C R A 461 [1983]; Great Pacific Life Insurance
Corp. vs. C o u r t of Appeals, 3 1 6 S C R A 677 [1999].)
150
Sec 36
CONTRACT OF INSURANCE
Title 5. — Representation
151
Form and nature of representation.
(1) Information given concerning risk. — It is the duty of the
person applying for insurance to give to the insurer all such
information concerning the risk as will be of use to the latter in
estimating its character and in determining whether or not to
assume it. This information m a y be given orally, or written in
papers not connected with the contract, such as circulars and
prospectuses, or in the application or examiner's report, or it
m a y appear in the policy itself.
(2) Forms basis of contract. — However communicated,
the information thus given forms the basis of the contract as
made. It describes, marks out, and defines the risk assumed. If
the description as relied on by the insurer, proved to be untrue
in any material respect, the insurer m a y deny liability saying,
"I did not assume this risk, but that which was described to
me." Hence, arises the reasonable rule that the untruth of any
material representation relied on by the insurer, will avoid the
contract, wholly irrespective of the intent, whether innocent or
fraudulent, with which such misrepresentation was made, (ibid.;
see however, Sec. 45.)
(3) Intended as collateral inducements. — Representations are
m a d e to influence the insurer to accept the risk. Being merely
collateral inducements to the contract, representations may be
communicated in any manner whatsoever that is intelligible.
(Vance, op. cit., p. 393.) But they are not a part of the contract
unless expressly m a d e so.
EXAMPLES:
(1) An underwriter who has insured a vessel described as
a steamer cannot be required to pay the loss of a sailing vessel;
nor will he, under a policy written upon the vessel, represented
to be safe in port, be liable for the loss of a vessel which at the
time of the undertaking was at sea and storm tossed for the
simple reason that he had not insured a vessel in that situation.
(2) The insurer of a brick house is not liable for the loss
of a frame house; nor is he, who insures a man of thirty, liable
for the death of a man who was then fifty-five, even though
in every other respect he may answer to the description of the
person insured, (ibid.)
152
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 37-38
But the insurer could not decline to pay for the loss of a
white painted house or ship because the one insured was
described as being painted green though otherwise identical in
description with the subject of the loss, (ibid.)
Sec. 37. A representation may be made at the time of,
or before, issuance of the policy, (a)
Time when representation may be made.
The very nature of representation requires that it precede the
execution of the contract, (see Sec. 41.)
The insurer must be induced by the misrepresentation of
the insured to issue the policy at a specified premium. Clearly,
a representation made after the policy is issued could not have
influenced either party to enter into the contract. However, a
representation m a y be performed after the issuance of the policy,
(see Sec. 39.)
Sec. 38. The language of a representation is to be interpreted by the same rules as the language of contracts in
general.
Construction of representations.
Representations are construed liberally in favor of the insured,
and are required to be only substantially true. Warranties (Sec.
67.), by contrast, must be literally true, or the contract will fail.
The circumstances under which representations are usually
made to the insurer justify this rule. If the representation is written in the policy, the language in which it is expressed was chosen
by the insurer; if in answer to an inquiry, the agent of the insurer
usually phrases the answer to a question worded by the insurer.
The great number and particularity of the inquiries m a d e and the
nature of the information asked, are such that "no h u m a n being
could, with safety, undertake to answer correctly and warrant
the correctness of his answers." (Vance, op. cit., p. 399.)
Sec. 39
CONTRACT OF INSURANCE
Title 5. — Representation
153
ILLUSTRATIVE CASES:
1. Questions as to the use of liquor. — They will be construed,
if possible, as referring to habitual use and not to occasional
use or even occasional sprees. (Venn. Mutual Life Ins. Co. vs.
Nunnery, 176 Miss. 197.)
2. Questions as to having any illness. — In a case where
the insured had stated that he had never had "any illness,
local disease or injury in any organ," it was held that this
representation was substantially true despite the fact that
the insured had been discharged from the army because of
inflammation of the eyes, which, however, had been entirely
cured before the application for the policy.
If it is true that there are "about fifty parts of the human
body which come under the denomination of organs, including,
among others, the eyes, the nerves, bones, cartilages, veins,
glands of the skin, etc.," then if a finger had been broken, the
skin injured or a vein cut at any period of the applicant's life, the
answer given would necessarily constitute a misrepresentation
which is not so. (Fitch vs. Am. Popular Life Ins. Co., 59 N.Y. 557,
17 Am. Rep. 372.)
3. Questions as to illness or disease. — They will refer to
serious ailments and not to minor indispositions. (Ransom
vs. The Plan Montreal Life Insurance, 276 P 2d 633.) Gastric
discomfort suffered after a drinking spree cannot be considered
a serious ailment but merely a minor indisposition which
appeared to be of an inconsequential nature not only to an
ordinary layman but even to the medical practitioner. (E. Agos
vs. The Phil. American Life Insurance Co., I.C. Case No. 10, March
11,1976.)
The rules referred to in Section 38 are the provisions of the
Civil Code on "Interpretation of Contracts" from Article 1370
to Article 1379.
Sec. 39. A representation as to the future is to be
deemed a promise, unless it appears that it was merely a
statement of belief or expectation.
Kinds of representation.
A representation may be: (1) oral or written (Sec. 36.); (2)
made at the time of issuing the policy or before (Sec. 37.); and (3)
affirmative or promissory. (Sees. 39, 42.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
154
Sec. 39
(1) An affirmative representation is any allegation as to the
existence or non-existence of a fact when the contract begins, (see
Sec. 42.) Thus, the statement of the insured that the house to be
insured is used only for residential purposes is an affirmative
representation.
(2) A promissory representation is any promise to be fulfilled
after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance.
Nature of promissory representations.
The term "promissory representation" is used in two senses:
(1) First, it is used to indicate a parol or oral promise m a d e
in connection with the insurance, but not incorporated in the
policy. The non-performance of such a promise cannot be shown
by the insurer in defense to an action on the policy, but proof that
the promise was made with fraudulent intent will serve to defeat
the insurance; and
(2) Secondly, an undertaking by the insured, inserted in
the policy, but not specifically made a warranty, is called also
a "promissory representation." It is, however, in such a case,
merely an executory term of the contract, and not properly a
representation. (Vance, op. cit., p. 396.)
A promissory representation is, therefore, substantially a
condition or a warranty.
EXAMPLE:
An applicant for fire insurance on a building makes a
promise contained in the policy that it shall be occupied, which
promise induces the insurer to issue the policy at a lower rate.
It is clear that the promise is not representation at all but a
term of the contract, the performance of which may be made a
condition of the insurer's liability.
But if the promise is oral, the insurer may not be allowed to
prove it by the operation of the rule of evidence forbidding the
admission of parol testimony to add prior or contemporaneous
terms to a written instrument. (Rules of Court, Rule 130, Sec. 9.)
The promise, however, may be proved for a different purpose,
Sec. 39
CONTRACT OF INSURANCE
Title 5. — Representation
155
that is, to prove that the insured had made the promise in bad
faith.
Effect on policy of expressions
of opinion or expectation.
(1) Good faith/bad faith of the insured. — A representation of
the expectation, intention, belief, opinion or judgment of the
insured, although false, will not avoid a policy of insurance if
there is no actual fraud in inducing the acceptance of the risk,
or its acceptance at a lower rate of premium; and this is likewise
the rule although the statement is material to the risk, if such
statement is obviously of the foregoing character since in such
case the insurer is not justified in relying upon such a statement,
but is obligated to make further inquiry. (43 Am. Jur. 2d 1023; see
Philamcare Health Systems, Inc. vs. Court of Appeals, 379 SCRA
356 [2002].)
(2) Liability of the insurer. — As to such representations, the
good faith of the insured furnishes the criterion of truth, for they
can be false only when the intention, opinion or belief as stated is
not honestly entertained. (Vance, op. cit., p. 394.) To avoid liability,
the insurer must prove both materiality of the insured's opinion
and the latter's intent to deceive.
If the representation is one of fact, all the insurer need to
prove is its falsity and materiality as defined in Sections 44, 45,
and 46. The intent to deceive is presumed.
EXAMPLES:
(1) The insured may express an opinion that his house is
of a certain value, or that his body is wholly free from a certain
disease. Here, the insurer knows that the insured's opinion
may be mistaken but the fact that such opinion is honestly
entertained may be of great value to him in estimating the risk.
But the policy will not be avoided even if the opinion turns out
to be erroneous, (see Mouler vs. Ins. Co., Ill U.S. 335.)
(2) In response to a question, an applicant for a motor
vehicle insurance replied: "I am a very good driver." The
statement is not fraudulent as it is merely an expression of
opinion. But if in fact the applicant does not know how to
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
156
Sec. 4 0
drive, he is guilty of fraudulent misrepresentation of material
fact. (Sees. 44, 45.)
When representation deemed a mere
expression of opinion.
An oral representation as to a future event or condition, over
which the insured has no control, with reference to property or
life insured, will be deemed a mere expression of opinion which
will avoid a contract only when m a d e in bad faith. (Bryant vs.
Ocean Ins. Co., 22 Pick [Mass.] 200.)
EXAMPLE:
The insured made an oral promise that the building insured
shall be occupied. The subsequent failure to fulfill the promise
if made in good faith, will not avoid the policy even though the
risk be increased by the building's being unoccupied.
Sec. 40. A representation cannot qualify an express
provision in a contract of insurance; but it may qualify an
implied warranty, (a)
Effect of representation on express
provisions of policy.
A representation cannot qualify an express provision or an
express warranty in a contract of insurance. This is so because a
representation is not a part of the contract but only a collateral
inducement to it. A representation, however, m a y qualify an
implied warranty.
EXAMPLES:
(1) If the policy expressly provides that the house insured
is used as a warehouse, any representation made by the insured
prior to the issuance of the policy to the effect that the house
was used only as a residence is not a defense in the action for
recovery of the amount of insurance.
(2) If the insured makes a representation that the vessel
insured was deficient for the voyage because it was not duly
manned, such representation may qualify the implied warranty
that the vessel is seaworthy, (see Sees. 113,116.)
Sees. 41-42
CONTRACT OF INSURANCE
Title 5. — Representation
157
Sec. 41. A representation may be altered or withdrawn
before the insurance is effected, but not afterwards.
When representation may be altered
or withdrawn.
A representation, not being a part of the contract of insurance,
m a y be altered or withdrawn before the contract actually takes
effect but not afterwards since the insurer has already been led
by the representation in assuming the risk contemplated in the
contract.
Sec. 42. A representation must be presumed to refer to
the date on which the contract goes in effect.
Time to which representation refers.
Representations refer only to the time of making the contract.
As already shown, statements promissory of conditions to exist
subsequent to the completion of the contract m a y be conditions
or warranties. They cannot be representation. Hence, conditions
represented as existing must be so during the making of the
contract but not necessarily afterwards (Vance, op. cit., p. 405;
but see Sec. 96.), and representations found to be untrue m a y
be withdrawn prior to the completion of the contract but not
afterwards. (Sec. 41.)
It results that there is no false representation, if it is true at
the time the contract takes effect although false at the time it was
made and vice versa, there is false representation if it is true at the
time it was m a d e but false at the time the contract takes effect.
EXAMPLES:
(1) If the insured represented that his vessel was in
Tokyo, when in fact it was in Hongkong, but at the taking
into effect of the contract, it was already in Tokyo, there is no
misrepresentation. Conversely, the contract is avoided even if
the representation was true at the time it was made, but false at
the time the contract takes effect.
Assuming the representation that the vessel was in Tokyo to
be true but on the date of the execution of the contract the vessel
was no longer in Tokyo but in Hongkong and is shipwrecked
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
158
Sec. 4 3
there, the insurer is not liable under the policy on the ground
of false representation. In other words, a representation is a
"continuing representation" until the contract takes effect, (see
Stipcich vs. Metropolitan L. Ins. Co., 277 U.S. 311.)
(2) At the time X applied for a life insurance policy on June
10, 2002, he had never suffered from any of the enumerated
diseases including pneumonia. On July 12, 2002, he became ill
with pneumonia and completely recovered on July 25, 2002.
When the policy was delivered and the first premium paid
on July 30, 2002, X did not disclose his having been sick with
pneumonia. Is there false representation? Yes, and, therefore,
the insurer is entitled to rescind the contract, (see Sec. 45.)
(3) But the truth of the statement made by the insured at the
date of the application that, for example, his age at his nearest
birthday is thirty-five, is surely to be tested as of the date of the
application. It would be absurd to say that this representation
was fatally false because at the time of the acceptance of the
application and the completion of the contract it was no longer
true. (Vance, op. cit., p. 406.)
Sec. 43. When a person insured has no personal
knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes
to be true, with the explanation that he does so on the information of others; or he may submit the information, in
its whole extent, to the insurer; and in neither case is he
responsible for its truth, unless it proceeds from an agent
of the insured, whose duty it is to give the information.
Effect where information obtained
from third persons.
Under this section, the insured is given discretion to communicate to the insurer what he knows of a matter of which he
has no personal knowledge. If the representation turns out to be
false, he is not responsible therefor, provided he gives explanation
that he does so on the information of others.
EXAMPLE:
If the insured has no personal knowledge of the cause of
the death of his parents because they died when the insured
Sec. 4 3
C O N T R A C T OF INSURANCE
Title 5. — Representation
159
was still an infant, he may report information obtained from
friends and relatives, expressly stating that he does not possess
knowledge personally but through others. In this case, the
insured is not responsible for the truth of the information.
On the other hand, where a party orders insurance, and
afterwards receives information material to the risk, or has
knowledge of a loss, he ought to communicate it to his agent as
soon as, with due and reasonable diligence, it can be communicated for the purpose of countermanding the order, or laying the
circumstances before the insurer. If he omits to do so, the policy
is avoided. (M. Lanahen vs. Universal Ins. Co., 7 L. Ed. 9 8 , 1 0 5 . )
Effect where information obtained
from agent of insured/insurer.
(1) Agent of the insured. — If the information proceeds from
an agent of the insured, whose duty it is in the ordinary course
of business to communicate such information to his principal,
and it was possible for the agent under such circumstances in
the exercise of due diligence to have made such communication
before the making of the contract, the insured will be liable for
the truth.
EXAMPLE:
A captain of a ship is bound to communicate its loss to the
owner and if the latter effects an insurance on the ship "lost or
not lost" in ignorance of the antecedent loss due to the fraud
or negligence of the captain, the insured cannot recover on the
policy, (see Proudfoot vs. Montefine, L.R. 2 Q.B. 511.)
(2) Agent of the insurer. — It must be borne in mind that the
same principle applies to the insurer though in the nature of
things, the question does not occur so frequently.
EXAMPLE:
If an insurer would effect an insurance upon a vessel "lost
or not lost," when his agent under a duty of disclosing to the
insurer, knew that the vessel had, in fact, arrived safely, the
insurance would be void, and the insured would be entitled to
a return of premium. (Vance, op- cit., p. 383.)
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 4 4
Sec. 44. A representation is to be deemed false when
the facts fail to correspond with its assertions or stipulations.
When representation deemed false.
Section 44 defines misrepresentation, (see also the definition
under Sec. 36.)
Unlike in the case of warranties (see Sec. 67.), representations
are not required to be literally true; they need only be substantially
true. In order that a policy shall be avoided, a representation
relied upon must be false in a substantial and material respect.
(Sec. 45.) A representation is substantially true when it is true
in every particular material to the risk, or is so far true that the
conduct of the insurer would not have been different if the exact
truth had been alleged. Where a representation partly fails but is
true or is complied with so far as is essential to the risk insured
against, the policy remains in force. (32 C.J. 1290.)
In marine insurance, substantial truth of a representation
is not sufficient. The insured is required to state the exact and
whole truth in relation to all matters that he represents, or upon
inquiry discloses or assumes to disclose. (Sec. 107.)
EXAMPLES:
(1) Confinement in childbirth is not a "personal ailment"
within the representation made by a married woman that she
had not consulted a physician "in regard to a personal ailment"
during seven years prior to her application, (see Rasicot vs.
Royal Neighbors of America, 109 P. 1048.)
(2) Failure of insured to include an illness occasioned by a
fall from a tree from which he had completely recovered, was held
not to avoid the policy, although the application blank reads:
"Detail all illness, disease, operations, accidents or injuries you
have since childhood." (see Missouri State Life Ins. Co. vs. Witt,
256 S.W. 46.)
Query: But is it not the right of the insurer to determine
the nature of the injury or illness or its ultimate effect on
the insurable character of the life proposed before deciding
whether or not to enter into the contract? (see Sec. 46.)
Sec. 4 5
CONTRACT OF INSURANCE
Title 5. — Representation
161
(3) A statement that the applicant is in good health is held
not to mean that he is in perfect health, but that he is not aware
of any disease of such a serious nature as to impair his health
permanently. That he is temporarily ill because of some passing
malady does not render his representation substantially untrue,
(see Connecticut Mut. Life Ins. Co. vs. Union Trust Co., 122 U.S.
250.)
Construction of representation as affirmative.
A representation written in the policy even in such form as
to admit of its being construed as an executory agreement or
promissory representation (Sec. 39.) will rather be construed,
when possible, as an affirmative representation of a present fact
(see Sec. 42.) in order to save the policy from avoidance.
EXAMPLE:
The insured states that a building is used for a certain
purpose or that no smoking is allowed on the premises.
The truth of the representation at the time the contract
takes effect is sufficient to validate the insurance which will
not be affected by a subsequent change in the use to which the
building is put or in the practice as to smoking in the premises,
(see Home Ins. Co. vs. North Little Rock Ice & Elec. Co., I l l
S.W. 994; Hasford vs. Insurance Co., 127 U.S. 399.)
Sec. 45. If a representation is false in a material point,
whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. The right to rescind granted by
this Code to the insurer is waived by the acceptance of
premium payments despite knowledge of the ground for
rescission, (as amended by B.P. Big. 874.) (a)
Effect of falsity of representation.
Fraud or intent to misrepresent facts is not essential to entitle
the injured party to rescind a contract of insurance on the ground
of false representation.
2
2
Batas Pambansa Big. 874 deleted the word "intentionally" before "false."
162
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 4 5
To be deemed false, it is sufficient if the representation fails to
correspond with the facts (Sec. 44.) in a material point. (Sec. 45.)
Representations of fact are the foundation of the contract; and if
the foundation does not exist, the superstructure does not arise.
(Kimmball vs. Aetna Ins. Co., 9 Allen 540.) In other words, the
minds of the parties never meet.
EXAMPLES:
(1) An applicant for life insurance denied in his application
that any member of his family had been sick or that he himself
had the disease, although he knew that a brother and a sister
of his had died previously of pulmonary tuberculosis and
he himself was already spitting blood at the time he filed his
application. The misrepresentation is material and sufficient to
avoid the contract of insurance (Sison vs. Manufacturer's Life
Ins. Co., [C.A.] 37 O.G. 1563.) even if not intentional.
(2) But it is not misrepresentation for the insured to state
that he did not drink beer or other intoxicants if he drank but
very seldom. (Insular Life Assurance Co. vs. Pineda, [C.A.] 40
O.G. 285.) Here, the representation is false but not in a material
point.
Effect of collusion or fraud of agent
of insurer.
(1) Collusion with insured. — Collusion between the agent
and the insured in misrepresenting the facts will vitiate the
policy even though the agent is acting within the apparent scope
of his authority. (Mutual Aid Union vs. Blackwall, 196 S.W. 792.)
When there is collusion, the agent thereby ceases to represent his
principal, and represents himself; so the insurer is not estopped
from avoiding the policy. (Sison vs. Sun Life Assur. Co. of Canada,
[C.A.] 47 O.G. 1954.)
(2) Principal of agent. — Likewise, where the insured merely
signed the application form and made the agent of the insurer fill
the same for him, it was held that by doing so, the insured m a d e
the agent of the insurer his own agent. (Insular Life Assur. Co. vs.
Feliciano, 74 Phil. 469 [1943].) But where the insurer required its
medical examiner to put the questions and fill out the answers
in his own handwriting, the writer of the application is not the
Sec. 4 6
CONTRACT OF INSURANCE
Title 5. — Representation
163
agent of the insured. (Wilson vs. Conway Ins. Co., 4 R.I. 141.)
The insurer is liable when its agent writes a false answer into the
application without the knowledge of the insured. (45 C.J.S. 179.)
Sec. 46. The materiality of a representation is determined by the same rules as the materiality of a concealment.
Materiality of representation.
(1) Test of materiality. — The materiality of the representation
is to be determined not by the event, but solely by the probable
and reasonable influence of the facts upon the party to w h o m
the representation is made, in forming his estimates of the
disadvantages of the proposed contract or in making his inquiries.
(Sec. 31.)
(2) Materiality, a judicial question. — W h o determines the
materiality of the representation? It is not left to the insurance company to say after the loss has occurred that it would
or would not have issued the policy had an answer been truly
given. No sound principle of law would permit a determination
of this question solely upon the say so of the company. The matter misrepresented must be of that character which the court can
say would reasonably affect the insurer's judgment. No misrepresentation of a mere trifling matter in the applicant's health if he
might honestly be mistaken about it, will render the statement
false so as to avoid the policy, merely because an insurance company says that it would not have issued the policy otherwise.
(Volunteer State Life Ins. Co. vs. Richardson, 244, S.W. 44.)
Concealment and misrepresentation
compared.
(1) In concealment, the insured withholds information of
material facts from the insurer, whereas in misrepresentation, the
insured makes erroneous statements of facts with the intent of
inducing the insurer to enter into the insurance contract.
(2) The materiality of a concealment is determined by the
same rules as applied in cases of misrepresentation.
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 47-48
(3) A concealment on the part of the insured has the same
effect as a misrepresentation and gives the insurer a right to
rescind the contract.
(4) Whether intentional or not, the injured party is entitled to
rescind a contract of insurance on ground of concealment or false
representation.
(5) Since the contract of insurance is said to be one of utmost
good faith on the part of both parties to the agreement, the rules
on concealment and representation apply likewise to the insurer.
Sec. 47. The provisions of this chapter apply as well to
a modification of a contract of insurance as to its original
formation, (a)
Applicability of Sections 26 to 48.
The provisions of Sections 26 to 35 governing concealment
and Sections 36 to 48 governing representations apply not only to
the original formation of the contract but also to a modification of
the same during the time it is in force. Thus, where the insurer is
induced to modify the insurance policy as to the rate of premium
by a misrepresentation on the part of the insured in a material
point, the insurer is entitled to rescind such modification.
Sec. 48. Whenever a right to rescind a contract of
insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured for a period of two years from the
date of its issue or of its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent, (a)
When an insurer must exercise his right
to rescind.
(1) In general. — A contract of insurance m a y be rescinded
on the ground of concealment, or false representation, or breach
S e c 48
CONTRACT OF INSURANCE
Title 5. — Representation
165
of warranty. An action to rescind a contract, as contemplated by
the first paragraph of Section 48, is founded upon and presupposes the existence of the contract, which is rescinded. Hence,
a defense to an action to recover insurance that the policy was
obtained through false representations, fraud and deceit is not
in the nature of an action to rescind and is, therefore, not barred
by the provision. There is no time limit imposed for interposing
this defense. (Tan Chay vs. West Coast Life Ins. Co., 51 Phil. 80
[1927].)
(2) In non-life policy. — Under the first paragraph of Section
48, in order that the insurer m a y rescind a contract of insurance,
such right must be exercised prior to the commencement of an
action on the contract. In other words, the insurer is no longer
entitled to rescind a contract of insurance after the insured has
filed an action to collect the amount of the insurance. It has been
held, however, that where any of the material representations is
false, the insurer's tender of the premiums and notice that the
policy is cancelled before commencement of the suit thereon,
operates to rescind a contract of insurance. (Argente vs. West
Coast Life Ins. Co., 51 Phil. 275 [1927].)
(3) In life policy. — With reference to life insurance contracts,
the foregoing rulings should be understood to be qualified by
the second paragraph of Section 48. By virtue of the second
paragraph, the defenses mentioned are available only during the
first two years of a life insurance policy.
Incontestability of life policies.
Clauses in life insurance policies known as incontestable
clauses stipulating that the policy shall be incontestable after a
stated period are in general use, and are now required by statutes
in force in many states. (Vance, op. cit., p. 575.) They create a kind
of contractual statute of limitations on certain defenses that may
be raised by the insurer.
Incontestability means that after the requisites are shown to
exist, the insurer shall be estopped from contesting the policy or
setting up any defense, except as is allowed, on the ground of
public policy, (infra.)
Theory and object of the incontestable
clause.
(1) As to the insurer. — The theory is that an insurer should
have a reasonable opportunity to investigate the statements
which the applicant makes in procuring his policy and that after
a definite period, the insurer should not be permitted to question
the validity of the policy (ibid., p. 577.), either by affirmative
action or by defense to a suit brought on the life policy by the
beneficiary (Powell vs. Mut. Life Ins. Co., 144 N.E. 825.)
(2) As to the insured. — The clause has as its object to give the
greatest possible assurance to a policyholder that his beneficiaries
would receive payment without question as to the validity of
the policy (Newton vs. N e w York Life Ins., 325 F. 2d 498.) or the
existence of the coverage once the period of contestability passes.
It is designed to protect the policyholder or beneficiary from a
lawsuit contesting the validity of the policy after a considerable
time has passed and evidence of the facts surrounding the
purchase may be unavailable. (Note, 62 H a r v a r d L. Rev. 890
[1949].) It is a sufficient answer to the various tactics employed
by insurance companies to avoid liability.
Requisites for incontestability.
Under our law, in order that the insurance shall be
incontestable, the following requisites must be present:
(1) The policy is a life insurance policy;
(2) It is payable on the death of the insured; and
(3) It has been in force during the lifetime of the insured for at
least two (2) years from its date of issue or of its last reinstatement.
(see Sees. 227[b], 228[b], 230[b].)
3
3
W h e r e different dates are concerned, however, this m a y not a l w a y s be true. F o r
instance, the policy date m a y be different from the issue date, and the d a t e the first prem i u m w a s paid m a y be different yet. Since ambiguities are interpreted in favor of the
policyholder or beneficiary, if the insurance b e c a m e effective on a date prior to the date of
issue, the contestable period should be c o m p u t e d from the earlier date. Nevertheless, in a
case w h e r e the policy was dated back six months to obtain the benefit of a lower age and
lower p r e m i u m , it has been held that the contestable period c o m m e n c e d from the date of
issue and not the effective date of the coverage. (Forest vs. Mutual Benefit Life Ins. Co.,
89 NYS [2d] 4 8 8 [1949].)
Sec. 48
CONTRACT OF INSURANCE
Title 5. — Representation
167
The period of two (2) years for contesting a life insurance
policy by the insurer m a y be shortened but it cannot be extended
by stipulation. The phrase "during the lifetime" simply means
that the policy is no longer considered in force after the insured
has died. The key phrase is "for a period of two years." (Tan vs.
Court of Appeals, 174 SCRA 403 [1989].)
Effect when policy becomes incontestable.
W h e n a policy of life insurance becomes incontestable, the
insurer m a y not refuse to pay the same by claiming that:
(1) the policy is void ab initio; or
(2) it is rescissible by reason of the fraudulent concealment of
the insured or his agent, no matter how patent or well-founded;
or
(3) it is rescissible by reason of the fraudulent misrepresentations of the insured or his agent.
Since the law speaks of a policy in force for two years, the
expression "void ab initio" should be understood in the sense of
"voidable" and the fraud contemplated should refer to fraud in
the inducement. (see Art. 1338, Civil Code.) In case of reinstated
policy, the period of contestability should be counted from the
date of reinstatement and not from the date of the issuance of
the policy. A policy of insurance, after it has lapsed or become
forfeited, as for nonpayment of premiums or breach of a
4
4
T h e incontestable clause has sometimes been criticized on the basis that it permits
a fraudulent contract to be enforced after the expiration of the contestable period. In answer, the clause does not so m u c h condone fraud as limit the time within which the
insurer m a y discover the fraudulent conduct and take appropriate action to cancel the
contract. There are a few exceptions even after the period has run. (infra.)
The purpose of the incontestable clause is to assure that after the specified period,
the policy owner m a y rely upon the insurance company to carry out the terms of the
contract regardless of irregularities in connection with the application which may later
be discovered. The fact that having given this assurance the insurer m a y occasionally be
precluded from interposing a defense based on fraud generally is considered justified by
the sense of security given policy owners and beneficiaries by reason of the clause. ("Legal Concepts and Contract Provisions," by J E . Greider, in LHIH, p. 116.)
The distinction is, in effect, one between a contract that is "void" and one that is
"voidable." A void contract was never a contract at all; lack of insurable interest makes the
contract "void." The incontestable clause bars defenses that might be asserted to render
void an existing contract. (R.H. Jerry, II, op. cit, p. 202.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
168
Sec. 4 8
warranty or condition, may be revived or reinstated pursuant
to a provision contained in the policy or the agreement of the
parties. (Perm. F. Ins. Co. vs. Malone, 56 ALR 1075.)
EXAMPLE:
X procured insurance on his life through fraudulent
concealment or misrepresentations.
(1) If X dies within two years from the issuance of the
policy, the rule on incontestability does not apply because the
law says that the policy must have been in force during the lifetime
of the insured for a period of two years. Hence, his beneficiary
cannot recover on the policy.
(2) Whether or not X is dead or alive, the insurer cannot
exercise the right after two years from the time the policy is
issued. The fraud committed by X is cured by the lapse of the
said two-year period.
But if the policy is payable not upon the death of the
insured but upon maturity by lapse of a certain period of time,
the insurer can still ask for its annulment or rescission.
ILLUSTRATIVE CASE:
Insurer's approval of application for reinstatement was made after
insured's death but before her death, insured had already complied
with the conditions for reinstatement.
Facts: During the pendency of her application for the
reinstatement of her life policy which lapsed on January 14,
1971 for nonpayment of premium, D (insured) died for a
cause described as "acute renal failure." The approval of the
application was made by R (insurer) after her death.
It appears, however, that D, before her death, had already
complied with the conditions for reinstatement, namely;
payment of the back premiums and submission of proof of
insurability (a Health Statement).
Issue: Did D's death pending approval of her application
for reinstatement operate to avoid the policy?
Held: No. The approval of her application was merely
a mechanical act which should be granted upon compliance
with the conditions mentioned. Since, in fact, R approved her
application, the original policy is deemed reinstated as of the
Sec. 4 8
CONTRACT OF INSURANCE
Title 5. — Representation
169
effective premium due shown in the policy, that is, January 14,
1971.
The argument that the approval of the application is the
effective date of the policy would allow R to determine the
effective date and where loss has already occurred, will permit
R to avoid the terms and conditions of the original policy and
result in the undermining of the actual conditions which are
the fundamental basis of all insurance. (Enriquez vs. The Phil.
American Life Insurance Co., I.C. Case No. 13, July 21,1976.)
Defenses not barred by incontestable
clause.
The incontestability of a policy under the law is not absolute;
otherwise, a beneficiary of any person w h o had procured
a life policy m o r e than two years before his death would
automatically be entitled to the proceeds upon that person's
death. Incontestability only deprives the insurer of those defenses
which arise in connection with the formation and operation of
the policy prior to loss. (Business Law, Wyatt and Wyatt, 1963
Ed., p. 878.)
The insurer m a y still contest the policy by w a y of defense to
a suit brought upon the policy or by action to rescind the same,
on any of the following grounds:
(1) That the person taking the insurance lacked insurable
interest as required by law;
(2) That the cause of the death of the insured is an excepted
risk;
(3) That the premiums have not been paid (Sees. 77, 227[b],
228[b], 230[b].);
(4) That the conditions of the policy relating to military or
naval service have been violated (Sees. 227[b], 228[b].);
(5) That the fraud is of a particularly vicious type, as where
the policy was taken out in furtherance of a scheme to murder
the insured, or where the insured substitutes another person for
the medical examination, or where the beneficiary feloniously
kills the insured (Vance, op. cit., pp. 582-583.);
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 48
(6) That the beneficiary failed to furnish proof of death or to
comply with any condition imposed by the policy after the loss
has happened (see Sec. 242.); or
(7) That the action was not brought within the time specified,
(see Sec. 63.)
— oOo —
Title 6
THE POLICY
Sec. 49. The written instrument in which a contract of
insurance is set forth, is called a policy of insurance.
Sec. 50. The policy shall be in printed form which may
contain blank spaces; and any word, phrase, clause, mark,
sign, symbol, signature, number, or word necessary to
complete the contract of insurance shall be written on the
blank spaces provided therein.
Any rider, clause, warranty, or endorsement purporting
to be part of the contract of insurance and which is pasted
or attached to said policy is not binding on the insured,
unless the descriptive title or name of the rider, clause,
warranty, or endorsement is also mentioned and written on
the blank spaces provided in the policy.
Unless applied for by the insured or owner, any rider,
clause, warranty, or endorsement issued after the original
policy shall be countersigned by the insured or owner,
which countersignature shall be taken as his agreement
to the contents of such rider, clause, warranty, or endorsement.
Group insurance and group annuity policies, however,
may be typewritten and need not be in printed form, (a)
Policy of insurance defined.
Section 49 defines the policy of insurance. In other words, it is
the written document embodying the terms and stipulations of
the contract of insurance between the insured and the insurer.
Signature of the parties.
The "policy" or "insurance policy" or more fully "policy of
insurance," is signed only by the insurer or his duly authorized
171
172
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 4 9 - 5 0
agent. It need not be signed by the insured except where express
warranties are contained in a separate instrument forming part
of the policy in which case the law requires that the instrument
must be signed by the insured. (Sec. 70.)
The standard practice is to have the prospective insured fill
out and sign an application prepared by the insurer.
Policy controls terms of insurance
contract.
(1) Measure of insurer's liability. — An insurance policy is
essentially a contract between the insurer and the insured. Its
terms constitute the measure of the insurer's liability, and in
order to recover, the insured must show himself within the terms.
(2) Presence of requisites for validity. — To create an enforceable
agreement, all the requisites necessary in order that there will
be a valid contract of insurance must be present, (see Sec. 2.)
In the absence of fraud or mistake, a policy of insurance, upon
acceptance, constitutes a valid and binding contract, superseding
all preliminary agreements and negotiations. (44 C.J.S. 1070-1071.)
(3) Compliance of insured with conditions of policy. — In the
absence of statutory prohibition to the contrary, insurance
companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best
upon their obligations not inconsistent with public policy. The
compliance by the insured with the terms of the policy is a
condition precedent to the right of recovery. (Young vs. Midland
Textile Ins. Co., 30 Phil. 617 [1915]; Pacific Banking C o r p vs.
Court of Appeals, 168 SCRA 1 [1988]; Central Assurance Corp.
vs. Court of Appeals, 200 SCRA 459 [1991]; Fortune Insurance &
Surety Co., Inc. vs. Court of Appeals, 244 SCRA 308 [1995].)
Policy, a contract of "adhesion."
(1) Terms drafted and imposed by insurer. — A policy of
insurance is a contract of "adhesion," par excellence, (see Sec.
2.) The term "adhesion contract" is essentially a description of
the manner by which the contract is formed: one party having
superior bargaining power imposes its choice of terms on the
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
173
other party. Ordinarily, contracts are freely negotiated by parties
with roughly equivalent bargaining power. However, this
classical model is far removed from the reality of the insurance
business.
(a) Professor Williston described the process this way:
"[Insurance contracts are drafted] with the aid of skillful
and highly paid legal talent, from which no deviation
desired by an applicant will be permitted. The established
underwriter is magnificently qualified to understand and
protect its o w n selfish interests. In contrast, the applicant
is a shorn lamb driven to accept whatever contract m a y be
offerred on a 'take-it-or-leave-it' basis if he wishes insurance
protection." (A Treatise on the L a w of Contracts, pp. 19-20,
3rd Ed. [1973].) Except for riders (infra.) which m a y later be
inserted, the insured sees the contract in its final form and
has had no voice in the selection or arrangement of the words
employed therein. (Geagonia vs. Court of Appeals, 241 SCRA
152 [1995].)
(b) Although the insured can choose from a variety of
available coverages, he cannot negotiate the substance of
the contract with the insurer. The policy's provisions even if
mandated by statute or regulations, are drafted by industry
experts. In m a n y transactions, the insured will not even see
the policy he purchased until after the first premium is paid.
Naturally, in the adhesion setting, a higher probability exists
that the party with less bargaining power will be subjected to
oppressive and unjust provisions. (R.H. Jerry, II, op. cit., pp.
104-105.)
(2) Ambiguity resolved against insurer. — Since in this type of
contracts, the parties do not bargain on equal footing, the weaker
party's participation is reduced to the alternative "to take it or
leave it." Thus, those contracts are viewed as traps for the weaker
party whom the courts of justice must protect. (Gulf Resort, Inc. vs.
Philippine Charter Insurance Corporation, 458 SCRA 550 [2005].)
Consequently, where the language used in an insurance contract
or application is such as to create ambiguity, the same should
be resolved liberally in favor of the insured and strictly against
the party responsible therefor (see Art. 1377, Civil Code.), i.e., the
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Sees. 49-50
insurance company which prepared the contract. (Landicho vs.
GSIS, 44 SCRA 7 [1972]; Verendia vs. Court of Appeals, 217 SCRA
417 [1993]; Malayan Insurance Corp. vs. Court of Appeals, 270
SCRA 242 [1997].), the reason being, undoubtedly, to afford the
greatest protection to the insured.
(a) It is well-settled that "contractual limitations of
liability found in insurance contracts should be regarded by
courts with a jaundiced eye and extreme care and should
be so construed as to preclude the insurer from evading
compliance with its just obligations." (Western Guaranty
Corp. vs. Court of Appeals, 187 SCRA 652 [1990]; Heirs of
Coscuella, Sr. vs. Rico General Insurance Corp., 179 SCRA 511
[1989]; Taurus Taxi Co., Inc. vs. Capital Insurance & Surety
Co. Inc., 24 SCRA 454 [1968].)
Thus, where the personal accident insurance policy
involved specifically enumerated only ten (10) circumstances
wherein no liability attaches to the insurer for any injury,
disability or loss suffered by the insured as a result of any
of the stipulated causes, the failure of the insurer to include
death resulting from murders or assault among the prohibited
risks leads inevitably to the conclusion that it did not intend
to limit or exempt itself from liability for such death. The
principle of expressio unius est exclusio alterius — the mention
of one thing implies the exclusion of another thing — is
applicable. (Finman General Assurance Corp. vs. Court of
Appeals, 213 SCRA 493 [1992].)
(b) It is also a cardinal principle of law that forfeitures are
not favored and that any construction which would result in
the forfeiture of the policy benefits for the person claiming
thereunder will be avoided if it is possible to construe the
policy in a manner which would permit recovery, as for
example, by finding a waiver for such a forfeiture. (Geagonia
vs. Court of Appeals, supra.)
(c) The rule that insurance contracts are to be construed
liberally in favor of the insured and strictly against the insurer
applies to suretyship agreements. (Chapter 11, Title 4.)
(3) When general rule not applicable. — The courts will only
rule out blind adherence to terms where facts and circumstances
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
175
will show that they are basically one-sided. The "fine print" or
"contracts of adhesion" rule does not apply where the petitioner
is an acute businessman of experience who is presumed to
have assented to the assailed provisions of the policy with full
knowledge and, therefore, cannot claim he did not know its
terms.
It goes without saying that if the terms of the contract are clear
and unambiguous, there is no room for construction and such
terms cannot be enlarged or diminished by judicial construction.
Thus, if the parties clear intent is to limit earthquake shock
cover-age of the policy to two swimming pools only in a resort,
the coverage cannot be extended to all of the insured properties.
(Gulf Resorts, Inc., vs. Philippine Charter Insurance, Corp., 458
SCRA 550 [2005]; Fortune Insurance & Surety Co., Inc. vs. Court
of Appeals, 244 SCRA 308 [1995].)
7
Policy different from contract itself.
A policy of insurance is different from the contract of insurance.
(1) Written instrument evidencing the contract. — The policy
is the formal written instrument evidencing the contract of
insurance entered into between the insured and the insurer. It is
the law between them.
(2) Form thereof previously approved by Insurance Commissioner.
— Insurance policies generally are required in standard forms.
Under Section 226, no policy of insurance shall be issued or
delivered within the Philippines unless in the form previously
approved by the Insurance Commissioner. It would seem from
this provision that every contract of insurance in the Philippines
must be evidenced by a policy and that policy must be in the
form previously approved by the Insurance Commissioner.
Form of contract of insurance.
Modern-day insurance contracts are evidenced by writing.
This writing may be informal, as a binding slip (infra.), or a written
application informally accepted; or it may be formal, being the
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
176
Sees. 49-50
carefully drawn written policy in customary use. (Vance, op. ext.,
p. 234.)
1
Under the Code, the policy must be in printed form.
Group insurance and group annuity policies, however, may
be typewritten. (Sec. 50, par. 4.) In case of conflict between the
written and printed portions of a policy, the written portion
prevails. Qargue vs. Union Fire Insurance Co., 56 Phil. 758 [1932].)
The fourth paragraph of Section 50 shall be interpreted to
apply only to group life and annuity policies. (Ins. Com. Cir.
Letter, Aug. 3 , 1 9 7 6 . )
Perfection of insurance contract.
A contract of insurance, like other contracts, must be assented
to by the parties either in person or by their agents. Under the
law, assent or consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to
constitute the contract. (Art. 1319, Civil Code.)
(1) Acceptance of application. — If an application for insurance
has not been either accepted or rejected, there is no contract yet as
it is merely an offer or proposal. (De Lim vs. Sun Life Assurance
Co., 41 Phil. 263 [1920]; Development Bank of the Phils, vs. Court
of Appeals, 231 SCRA 370 [1994].)
(a) The mere signing of an application for life insurance
and the payment of the first premium do not bind the insurer
to issue a policy where there is no evidence of any contract
]
Despite a popular impression that all insurance contracts m u s t be in writing, no
rule of law imposes any such universal requirement. Oral contracts of insurance h a v e
been frequently enforced by courts. H o w e v e r , the enforcement of such contracts m a y be
precluded or m a d e m o r e difficult in certain situations than w o u l d be the enforcement
of written ones. The difficulties m a y be g r o u p e d into five heads: (1) statutes requiring a
written m e m o r a n d u m (e.g., Statute of F r a u d s ) ; (2) provision of the insurance c o m p a n y ' s
charter; (3) difficulty of proving an oral agreement, especially u n d e r the parol evidence
rule; (4) authority of the insurer's agent to m a k e an oral contract; a n d (5) indefiniteness of
the terms of the oral agreement. (E.W. Patterson, op. cit., pp. 8 1 - 8 2 . )
In any event, the issuance of a written policy is so m u c h the c u s t o m that one can
safely say that the applicant and the insurance c o m p a n y from the first "contemplate that
their negotiations shall be reduced to writing/' O n c e the policy h a s been issued and delivered, oral evidence will not be permitted to vary or contradict its terms. Q.E. Greider
& W.T. Beadles, op. cit., p. 184.)
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
177
between the parties that such acts should constitute a contract
of insurance. (Badger vs. N e w York Life Ins. Co., Inc., 7 Phil.
381 [1907].)
The contract, to be binding from the date of the application,
must have been a completed contract, one that leaves nothing
to be done, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be
no contract of insurance unless the minds of the parties have
met in agreement. (De Lim vs. Sun Life Assurance Co., supra;
Great Pacific Life Assurance Corp. vs. Court of Appeals, 89
SCRA 543 [1979].)
(b) Similarly, the contract is not perfected where the
applicant for life insurance dies before its approval or it does
not appear that the acceptance of the application ever came
to the knowledge of the applicant. (Enriquez vs. Sun Life
Assurance Co., 41 Phil. 269 [1920].)
(c) The acceptance of an insurance policy must be
unconditional, but it need not be by formal act. Reception and
retention of the policy without objection beyond a reasonable
time m a y be deemed to be an acceptance. (44 C.J.S. 1068; Ang
Giok Chip vs. Springfield Fire & Ins. Co., 56 Phil. 375 [1931].)
(2) Compliance with conditions precedent. — The parties m a y
impose additional conditions precedent to the validity of the
policy as a contract as they see fit. The usual conditions found in
the application for insurance or in the policy are that the contract
shall not become binding until the policy is delivered and the
first premium paid. These conditions are valid and enforceable.
(Vance, op. cit., p. 247.) Until the conditions are fulfilled, the
policy is of no binding effect, (see Sec. 77.)
(a) There is no valid and binding insurance contract
where no premium is paid unless credit is given or there
is a waiver or some agreement obviating the necessity for
prepayment of the premium. (Phil. Phoenix Surety & Ins.
Co. vs. Woodworks, Inc., 92 SCRA 419 [1979]; see, however,
Sec. 77.) But where the premium has been previously paid,
the contract is perfected upon approval of the application
although the policy has not yet been issued, unless there is a
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Sees. 4 9 - 5 0
stipulation to the contrary, (see Ocampo vs. GSIS, 78 Phil. 216
[1947].)
(b) The insurance applied for has never been in force
where the applicant dies after the disapproval of the insurance
application notwithstanding that the initial premium has
been paid and a binding deposit receipt issued, where the
receipt contains the following conditions: 1) that the insurer
shall be satisfied that the applicant was insurable; 2) that if
the insurer does not accept the application but offers another
plan, the insurance contract shall not take effect unless the
applicant accepts the same; and 3) that if the applicant is not
insurable and the insurer disapproves the application, the
insurance applied for shall not be in force and the premium
paid shall be returned to the applicant.
The above are in the nature of conditions precedent
and show that the binding deposit receipt is intended to be
merely a provisional or temporary insurance contract (see
Sec. 52.) and to be binding only upon compliance with the
said conditions. In life insurance, a "binding slip" or "binding
receipt" does not insure by itself. (Great Pacific Life Assurance
Corp. vs. Court of Appeals, supra; see Sec. 52.
(3) Cover notes. — They m a y be issued to bind the Insurance
temporarily pending the issuance of the policy. (Sec. 52.) Coverage
then can begin depending upon their terms.
Offer and acceptance in insurance contract.
In insurance transaction, it is important to know w h o makes
the offer and who accepts the offer. The applicant usually makes
the offer to the insurer through an application for insurance
which is usually attached to policy and m a d e a part of the insurance contract.
(1) In property and liability insurance. — It is the insured who
technically makes an offer to the insurer, who accepts the offer,
rejects it, or makes a counter-offer. The offer is usually accepted
by an insurance agent on behalf of the insurer.
(2) In life and health insurance. — The situation depends upon
whether the insured pays the premium at the time he applies for
insurance.
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CONTRACT OF INSURANCE
Title 6. — The Policy
179
(a) If he does not pay the premium, his application
is considered an invitation to the insurer to make an offer,
which he must then accept before the contract goes into effect.
If he pays the premium with his application, his application
will be considered an offer. Life and health insurance agents,
however, do not have the authority to bind immediately
the insurers they represent. Instead, they customarily issue
a binding receipt that makes the coverage effective on (1)
the date of the application, or (2) the date of the medical
examination, if the insurer determines later that the applicant
w a s insurable on that date. The binding receipt is, therefore,
a conditional acceptance by the insurer. (Riegel, Miller &
Williams, Jr., op. ext., pp. 36-37.)
(b) W h e r e the application for insurance constitutes an
offer by the insured, a policy issued strictly in accordance
with the offer is an acceptance of the offer that perfects the
contract. If the policy issued does not conform to the insured's
application, it is an offer to the insured which he m a y accept
or reject. (E.W. Patterson, op. ext., p. 107.)
Importance of delivery of policy.
Delivery is the act of putting the insurance policy — the
physical document — into the possession of the insured. (R.H.
Jerry, II, op. cit., p. 156.)
(1) Process of forming a contract. — The delivery of the policy
is important in at least two ways:
(a) as evidence of the making of a contract and of its
terms; and
(b) as communication of the insurer's acceptance of the
insured's offer. (E.W. Patterson, op. cit., p. 92.)
(2) Determination of policy period. — The fact of delivery is
also important for another reason. Delivery may affect the term
of the coverage. Where a policy, for example, provides that the
coverage terminates one (1) y
delivery, it, therefore,
becomes the important fact for determining when the policy
period ends. (R.H. Jerry, II, op. cit., p. 156.)
e a r
a f t e r
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 49-50
(3) Absence of delivery. — The delivery of a policy is not,
however, a prerequisite to a valid contract of insurance. The
contract may be completed prior to delivery of the policy or even
without the delivery of the policy depending on the intention of
the parties.
The widespread use of binding receipts has m a d e delivery
less important than it used to be in the process of forming a
contract between the insurer and the insured, but delivery still
has significance as the "decisive act that ordinarily marks the end
of the insurer's opportunity to decline coverage." (Ibid.)
Modes of delivery of policy.
(1) Actual!constructive delivery. — As has been shown, there
can be no contract of insurance unless the minds of the parties
have met in agreement. However, actual manual transfer of
the policy is not a prerequisite to its validity unless the parties
have so agreed in clear language. Constructive delivery m a y be
sufficient.
(a) Delivery m a y be m a d e to the insured in person or
to his duly constituted agent (Lucero Vda. de Sindayen vs.
Insular Life Assur. Co. Ltd., 62 Phil. 9 [1935].) or some person
for the benefit of the insured.
(b) Where no further conditions are to be fulfilled, a
policy of insurance m a y be constructively delivered when it
is deposited in the mail duly directed to the insured or his
agent. (44 C.J.S. 1060.)
(2) Delivery, primarily a matter of intention. — In the final
analysis, whether or not the policy was delivered after its
issuance, depends, not upon its manual possession by the insured
but rather upon the intention of the parties which m a y be shown
by their acts or words. It m a y depend on the wording of the
application for Insurance. But possession by the insured raises
the pre-sumption that the policy was delivered to the insured,
while possession by the insurer is prima facie evidence that no
delivery was made. If the application contains a provision that
the insurance shall not be effective until the delivery of the policy,
delivery is essential to the consummation of the contract.
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
181
Delivery to insurer's agent
as delivery to insured.
Is delivery to the agent of the insurance company delivery
to the insured? Suppose, the applicant dies after a life policy has
been delivered to the insurance agent by the Head Office but
before it is delivered to the applicant, can his beneficiary recover
on the policy?
There has been m u c h conflict of view on the question.
(1) Beneficiary cannot recover. — One view holds that the
beneficiary cannot recover for the simple reason that the
insurance agent is not his agent, (see Bradley vs. N e w York Life
Ins., 275 F. 657 [1921].)
(2) Beneficiary can recover. — The other view says the
beneficiary can recover on the theory that the contract is to be
deemed complete when the policy has been delivered to the
insurance agent.
(a) The insured having complied with every condition
required of him, actual delivery to him is not essential to
give the policy binding effect, (see New York Life Ins. Co. vs.
B a b c o c k , 3 0 S.E. 273 [1898].)
(b) Moreover, a contrary rule would be financially
unfair to the beneficiary where the amount of the premium
is computed from the date of the application. In effect, the
insured paid a premium for a period during which he did
not actually receive any protection. On the other hand, if the
insured has not died, the insurer can simply consider the
contract perfected upon actual delivery of the policy to the
agent.
Effect of delivery of policy.
(1) Where delivery conditional — Where there is conditional
delivery of an insurance policy, non-performance of the
condition precedent prevents the contract from taking effect.
Thus, a stipulation that the policy shall not become operative
unless the applicant is in good health at the time of the delivery
of the policy is valid, binding and enforceable. (44 C.J.S. 1031; see
182
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 4 9 - 5 0
Argente vs. West Coast Life Ins. Co., 51 Phil. 732 [1928].) Good
health, of course, does not mean perfect health.
(2) Where delivery unconditional. — The unconditional
delivery of an insurance policy corresponding to the terms of the
application ordinarily consummates the contract, and the policy
as delivered becomes the final contract between the parties.
Where the parties so intend, the insurance becomes effective at
the same time of the delivery of the policy. (44 C.J.S. 1069.)
(3) Where premium still unpaid after unconditional delivery. —
But the insurer cannot be presumed to have extended credit
from the mere fact of unconditional delivery of the insurance
policy without the prepayment of premium; and even if such
presumption m a y be inferred, there must be a clear and express
acceptance by the insured of the insurer's offer to extend credit.
In the absence of any clear agreement granting credit extension,
the policy will lapse if the premium is not paid, at the time and
in the manner specified in the policy. (Phil. Phoenix Surety & Ins.
Co., Inc. vs. Woodworks, Inc., 92 SCRA 419 [1979]; see however,
Sec. 77.)
Rider in a contract of insurance.
A rider is a small printed or typed stipulation contained on a
slip of paper attached to the policy and forming an integral part
of the policy.
(1) Additional binding stipulations between the parties. —
Riders are usually attached to the policy because they constitute
additional stipulations between the parties. A n y rider, etc.,
properly attached to a policy is a part of the contract to the same
extent and with like effect as if actually embodied in the policy.
(Ang Giok Chip vs. Springfield, 56 Phil. 275 [1931].)
(2) Necessity for riders, etc. — The necessity for riders, etc.,
is found in the fact that in the conduct of insurance business,
it often becomes necessary to add a new provision to a policy,
or to modify or waive an existing provision, or to make any
desired change in the policy. This saves the trouble and expense
of making an entirely new contract.
(3) Rule in case of conflict betweem a rider, etc. and printed
stipulations of a policy. — When there is an inconsistency between
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
183
a rider and the printed stipulations in the policy, the rider
prevails, as being a more deliberate expression of the agreement
of the contracting parties. (C. Alvendia, The L a w of Insurance
in the Philippines [1968 Ed.], p. 98.) This principle applies to the
interpretation of clauses, warranties, or indorsements which are
attached to policies to vary their terms.
EXAMPLES:
(1) The fire insurance policy on a building excludes loss
by earthquake. For the payment of an additional premium, the
insurer attached a rider, in which it agrees to indemnify the
insured against loss by earthquake.
The rider becomes a part of the policy and supersedes any
part of the policy in conflict with its provisions.
(2) A printed stipulation provides that any other insurance
upon all or part of the thing covered by the policy should be
notified in writing to the company, or the policy will be avoided,
but a clause was inserted by typewriter to the following effect:
"Subject to clauses G and A and other insurances with a special
short period attached to the policy."
There is here sufficient notification to the company that
other insurances existed, (see Gonzales La O vs. Yek Tong Lin,
55 Phil. 386 [1930].)
Attached papers on insurance policy.
(1) Binding effect. — As a general rule, a rider, slip, or other
paper becomes a part of a contract or policy of insurance if
properly and sufficiently attached or referred to therein in a
manner as to leave no doubt as to the intention of the parties in
such respect. (43 Am. Jur. 2d 345-346.)
Section 50 (pars. 2 and 3.) states the requirements that must
be observed in order that a rider, etc., may be binding on the
insured. Another provision of the Insurance Code which imposes
a restriction on the use of riders, etc., is Section 226 which states
that no rider, etc., shall be attached to, printed or stamped upon
a policy of insurance unless the form of such rider, etc., has been
approved by the Insurance Commissioner.
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184
Sees. 4 9 - 5 0
(2) Effect of lack of description. — Any rider, clause, warranty,
or endorsement purporting to be part of the contract of insurance
and which is pasted or attached to said policy is not binding on
the insured unless the descriptive title or name of the rider, etc. is
also mentioned and written on the blank spaces provided in the
policy. (Sec. 50, par. 2.) The lack of description will not affect the
other provisions of the policy except where without such rider,
etc., the contract would be incomplete.
2
(a) Warranties are inserted or attached to a policy to
eliminate specific potential increases of hazard during the
policy term owing to 1) actions of the insured or 2) condition
of the property. (Riegel, Miller and Williams, Jr., op. cit., p.
201.) An example of a warranty (Sees. 67-78.) is "Hazardous
Trades Warranty" which stipulates that none of the
enumerated trades considered as hazardous will be carried
on the building insured.
(b) A clause is an agreement between the insurer and the
insured on certain matter relating to the liability of the insurer
in case of loss. Thus, under the "Three-fourths Clause," the
liability of the insurer shall not exceed 3 / 4 of the loss of or
damage to the insured. The "Loss Payable Clause" states
that the loss, if any, is payable to a named party or parties, as
their interest m a y appear, (see Sec. 53.) Under the "Change
of Ownership Clause" providing that it will inure to the
benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured (see Sec. 57.),
the insurer gives its written consent to the assignment of the
thing insured.
(c) An endorsement is any provision added to an insurance contract altering its scope or application. Examples of
endorsements are those extending the perils covered. An
endorsement m a y be in the nature of a permit such as one
authorizing the removal of the insured property and providing for coverage in another location. Many endorsements are
merely typewritten additions to the contract, changing its
2
The policy must specifically state the rider, etc., as applicable to such policy to be
binding on the insured.
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
185
amount, rate, or term. Errors m a y be corrected in the same
manner. (D.L. Bickelhaupt, op. cit., p. 52.) An endorsement
varies the terms of an original insurance contract. If the endorsement is already attached to the policy at the time of its
issue, it is not an endorsement, strictly speaking.
(3) Effect of lack of signature. — As a general rule, where
the rider, etc. is physically attached to a policy of insurance
contemporaneously with its execution and delivered to the
insured so attached, and sufficient reference is m a d e in the
policy, the fact that it is without the signature of the insurer or of
the insured will not prevent its inclusion and construction as a
part of the insurance contract. (43 Am. Jur. 2d 346-347.)
The same rule applies where the rider, although issued after
the original policy, w a s applied for by the insured or owner. But
the countersignature of the insured or owner is required to any
rider, etc. not applied for by him if issued after the delivery of the
policy, which countersignature shall be taken as his agreement to
the contents of the matter so attached. (Sec. 50, pars. 2 and 3.)
Effect of failure of insured
to read policy.
(1) Majority rule. — In most jurisdictions, the fact that it
is customary for insured persons to accept policies without
reading is judicially recognized. It follows that such acceptance
is not negligence per se and in proceedings to reform insurance
contracts, most courts hold that the insured's acceptance and
retention of the policy unread is not such laches as will defeat his
right to reformation.
The basis for the decisions is that insurance contracts are
contracts of "adhesion" and not of bargaining, that is, the insured
purchases the contract prepared solely by the insurer. (Vance, op.
cit., p. 257; see Del Rosario vs. Equitable Ins. & Casualty Co., 8
SCRA 343 [1963]; Sec. 2.)
(2) Minority rule.
On the other hand, there are many courts
which apply to insurance contracts the rule of general contract
law that one who accepts a contractual instrument is conclusively presumed, in the absence of fraud or mutual mistake, to know
186
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Sees. 4 9 - 5 0
and assent to its contents. The insured has the duty to read his
policy and is bound by his contract as written whether he reads
it or not. (Vance, op. cit., pp. 257, 267.)
There is no sufficient reason in contracts of insurance why
a party should be relieved from the duty of exercising the
ordinary care and prudence that would be exacted in relation to
other contracts. (Gillen vs. Equitable Life Assur. S o c , 10 N.W. 2d
693.) The conformity of the insured to the terms of the policy is
implied from his failure to express any disagreement with what
is provided for. He m a y not thereafter be heard to say that he did
not read the policy or know its terms since it is his duty to read
his policy and it will be assumed that he did so (Ang Giok Chip
vs. Springfield Fire & Ins. Co., 56 Phil. 375 [1931].), especially
where the insured is a businessman and the contract concerns
indemnity in case of loss in his money-making trade. (New Life
Enterprises vs. Court of Appeals, 207 SCRA 669 [1992].)
(3) Exceptions to minority rule. — Exceptions m a y be applied
to the rule that the insured is bound to the contract if he fails to
read it.
(a) It is obvious that the insurer cannot complain of the
failure of the insured to read his policy where the insured
could not have discovered the erroneous statement by such
reading. Thus, where a copy of the application containing the
false statements was not attached to the policy or where the
copy attached was illegible, the insured cannot be charged
with any duty to read the application.
(b) Likewise, it has been held that the insured's failure to
read the policy is excused where he is induced by the fraud of
the agent of the insurer not to read his policy. (Vance, op. cit.,
pp. 257, 266-267; 45 C.J.S. 742.)
(c) The insured's failure to read the policy should be
overlooked if the insured is illiterate or unable to read
English. (Mutual of O m a h a Ins. Co. vs. Russel, 402 F.2d 339.)
(d) In settings where the contracts are long, complicated
and difficult to understand even if read, it m a y not be
reasonable to expect people to take the time to read the
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CONTRACT OF INSURANCE
Title 6. — T h e Policy
187
contracts before manifesting intent to be bound by them.
(R.H. Jerry, II, op. cit, p. 142.)
(4) Trend in modern cases. — The reduced adherence to the
rigid rule that the insured is bound to the contract if he fails to
read it is simply one manifestation of the increased willingness
to protect insureds and other consumers w h o would suffer
forfeiture but for the relaxation of traditional contract rules. In
forming a contract, an insured relies not upon the text of the
policies but on the general descriptions of the coverage provided
by the insurer and its agents during the time he is considering
whether to submit an application. Absent a special request, an
insured will not see the text of the policy until after the application
has been submitted and the first premium paid.
Under these circumstances, it is not surprising that the socalled "duty to read" has less significance in m o d e m cases. (Ibid.)
Insurer's duty to explain the policy.
(1) Where terms of policy are clear. — In most jurisdictions, if
the terms of an insurance policy are clear, unambiguous, and
explicit, the insurer has no affirmative duty to explain the policy
or its exclusions to the insured. As stated by one court, "[w]hen
a court is reviewing claims under an insurance policy, it must
hold the insured bound by clear and conspicuous provisions in
the policy even if evidence suggests that the insured did not read
or understand them." (Sarchett vs. Blue Shield of California, 233
Cal. Rptr. 76, 85, 729 P. 2d 267 [1987].)
(2) Important caveats. — This principle, however, is subject to
some important caveats.
(a) Reasonable expectations of insured. — The doctrine of
"reasonable expectations" can operate to impose de facto
a duty on the insurer to explain the policy's coverage to
the insured. If a court holds that an insured's reasonable
expectations entitle him to coverage despite policy language
to the contrary, the court has said, in effect, that the insurer
must pay for the loss because the insurer failed to explain
the limitations on coverage to the insured. In other words, if
the insurer had provided an explanation of the coverage, the
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THE INSURANCE CODE OF THE PHILIPPINES
Sees. 49-50
insured's expectations of different coverage would have been
rendered unreasonable.
(b) Options available to insured. — In the area of motor
vehicle insurance where legislations have m a d e certain kinds
of coverage optional, usually uninsured or underinsured
motorist insurance, courts have sometimes imposed a duty
on the insurer to explain the options to the insured. Where
insurers have failed to do so, they have been held liable for
loss despite the fact that the policy as issued did not provide
the coverage. Not all courts, however, agree with this result.
(c) Information expected by insured from insurer's agent. —
Agents owe their customers a duty to exercise the skill and care
that a reasonable agent would exercise in the circumstances.
This duty encompasses in m a n y situations an obligation to
explain to the customer the kinds of coverage available and
to help the insured in choosing an appropriate coverage.
To the extent agents and the insurers w h o retain them are
held liable for the negligence of agents in performing their
professional duties, a duty to explain coverage is effectively
imposed upon the insurer.
(d) Contractual rights of insured after denial of coverage. —
When the insured disputes a denial of coverage, the duty of
good faith and fair dealing m a y impose an obligation on the
insurer to alert the insured to his rights. In Sarchett vs. Blue
Shield of California (supra.), a 1987 California Supreme Court
decision, the insurer denied the insured's claim under a health
policy without informing the insured of his contractual right
to impartial review and arbitration. The Court stated: "Once
it becomes clear to the insurer that its insured disputes its
denial of c o v e r a g e , . . . the duty of good faith does not permit
the insurer passively to assume that its insured is aware of
his rights under the policy. The insurer must instead take
affirmative steps to make sure that the insured is informed of
his remedial rights."
In Sarchett, the arbitration clause was prominently
displayed with a bold-face heading. Nevertheless, the Court
reasoned that the insurer had reason to know that the insured
was unaware of his rights, because he repeatedly protested
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
189
the denial of coverage without requesting review by an
impartial panel of physicians. (R.H. Jerry, II, op. cit., pp. 142143.)
Group insurance.
(1) Advantage of contract. — Generally speaking, group
insurance (see Sec. 228.) is the coverage of a number of individuals
by means of a single or blanket policy, thereby effecting economies
which frequently enable the insurer to sell its services at lower
premium rates than are ordinarily obtainable for the same type
of insurance protection on life policies sold to individuals. (Land
vs. West Coast Life Ins. Co., 201 Or. 397, 270 P. 2d 154; 44 Am. Jur.
2d. 801.)
(2) Form and nature of contract. — It is essentially a single
insurance contract that provides coverage for m a n y individuals.
In its original and most c o m m o n form, group insurance provides
life or health insurance coverage for the employees of one
employer. (Pineda vs. Court of Appeals, 45 SCAD 30, 226 SCRA
754 [1993].)
(a) It ordinarily takes the form of insurance whereby the
employees' lives are insured by the employer in consideration
of a flat premium based upon the average age and such
premiums are generally paid by the employer.
(b) It is not indemnity insurance for the benefit of the
employer but insurance upon the life of the employee for
his personal benefit and the protection of those depending
upon him and is in addition to and distinct from workmen's
compensation insurance. (44 Am. Jur. 2d 801-802.)
(c) Such contracts are generally construed as creating a
contract between the employer and the insurer but for the
benefit of the insured employees. (Mogee vs. Equitable Life
Assur. S o c , 244 NW 518, 44 Am. Jur. 2d 801.) It affects four
parties — the insurer, the employer, the insured, and the
beneficiary. (Rivers vs. State Capital Life Ins. Co., 96 SE 2d
431.)
(3) Collection and payment of premiums. — A group insurance
plan is considered to be "contributory" if each member pays
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
190
Sees. 4 9 - 5 0
all or some part of the premiums and "non-contributory" if
the representative (i.e., employer) pays all of the premiums.
One reason for the attractiveness of group insurance as a fringe
benefit to employees is that the amounts of premiums paid by the
employer are tax deductible, within limits, while the premiums
paid by the employee are not considered taxable income to the
employee. (J.F. Dobbyn, op. cit., p. 15.)
Most policies require an employee to pay a portion of the
premium (contributory plan) which the employer deducts from
wages or salaries while the remainder is paid by the employer.
The employer, as representative of the group or administrator
of the insurance program, acts as a functionary in the collection
and payment of premiums and in performing related duties such
as the disbursement of insurance payments to the employees.
(Pineda vs. Court of Appeals, supra.)
(4) Constituent parts of contract. — When group insurance is
effected, a group or "master" policy is customarily issued by the
insurer to the employer or analogous policyholder and certificates
of participation are issued to the individual employees or
participants. It is generally held then that an employee's contract
of insurance under the group plan consists of the "parent" or
master policy, the individual certificate being no part of such
contract but only an instrument reciting the employee's right to
protection under the terms of the group policy.
3
For purposes of construction, however, both the master
policy and the certificate are to be considered together as parts of
the same contract. (44 A m . Jur. 2d 803-804.)
(5) Employer acts as agent of insurer. — In group insurance
policies, the employer is the agent of the insurer. As has been
said:
"We are convinced that the employer is the agent of the
insurer in performing the duties of administering group
insurance policies. It cannot be said that the employer
3
T h e m a s t e r policy sets forth all the t e r m s and conditions of the insurance, where the
certificates of participation serve merely to inform the individual m e m b e r s of the major
features of the insurance and are not, therefore, considered to be a part of the insurance
contract itself. (J.F. Dobbyn, op. cit., p. 13.)
Sees. 4 9 - 5 0
CONTRACT OF INSURANCE
Title 6. — The Policy
191
acts entirely for its own benefit or for the benefit of its
employees in undertaking administrative functions. While
a reduced premium m a y result if the employer relieves the
insurer of these tasks, and this, of course, is advantageous
to both the employer and the employees, the insurer also
enjoys significant advantages from the rearrangement. The
reduction in the premium which results from the employeradministration permits the insurer to realize a larger volume
of sales, and at the same time the insurer's own administrative
costs are markedly reduced.
xxx
The most persuasive rationale for adopting the view
that the employer acts as the agent of the insurer, however,
is that the employee has no knowledge of or control
over the employer's actions in handling the policy or its
administration. An agency relationship meets this agency
test with regard to the administration of the policy, whereas
that between the employer and its employees fails to reflect
true agency. The insurer directs the performance of the
employer's administrative acts, and if these duties are not
undertaken properly, the insurer is in a position to exercise
more constricted control over the employer's conduct."
(Pineda vs. Court of Appeals, supra, quoting Elfstrom vs.
New York Life Insurance Company, 432 P. 2d 73 [Cal. Sup.
Ct. 1967].)
(6) Employees are real parties in interest. — Although the
employer m a y be the titular or named insured, the insurance is
actually related to the life and health of the employee. Indeed, the
employee is in the position of a real party to the master policy, and
even in a non-contributory plan, the payment by the employer
of the entire premium is a part of the total compensation paid
for the services of the employee. Put differently, the labor of the
employees is the true source of the benefits, which are a form of
additional compensation to them.
It has been stated that every problem concerning group
insurance presented to a court should be approached with the
purpose of giving to it every legitimate opportunity of becoming
a social agency of real consequence considering that the
Sec. 51
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192
primary aim is protection for his employees and their families
at the lowest possible cost, and in so doing, the employer creates
goodwill with his employees, enable the employees to carry a
larger amount of insurance than they could otherwise, and helps
to attract and hold a permanent class of employees. (Pineda vs.
Court of Appeals, supra.)
Sec. 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of
open or running policies;
(c) The premium, or if the insurance is of a character
where the exact premium is only determinable upon the
termination of the contract, a statement of the basis and
rates upon which the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if
he is not the absolute owner thereof; and
(f) The risks insured against; and
(g) The period during which the insurance is to continue, (a)
Contents of the policy.
4
Section 51 enumerates what the policy of insurance must
contain. Their inclusion in insurance policies is deemed essential
to enable the parties to determine easily the nature and effect of
the contract entered by them thereby avoiding lawsuits.
5
(1) Names of parties. — The names of the parties are, of course,
essential in all contracts. But the mere fact that the n a m e of the
insured was incorrectly spelled is of no importance whatever,
provided that the identity of the party can be sufficiently
established. (Travis vs. Peabody Ins. Co., 28 W. Va. 582.) N o r is it
4
A n insurance policy is entirely different from a surety bond, (see Sees. 175-176.)
A s to additional matters to be stated in case of individual life or e n d o w m e n t g r o u p
life, and individual life policies, see Sections 227, 228, and 2 3 0 .
5
Sec. 51
CONTRACT OF INSURANCE
Title 6. — The Policy
193
essential to the effectiveness of the contract that the name of the
insured should appear therein, as he m a y be described in other
ways than by name, such as where the policy is "for the owner"
of specified property, for the benefit of "whom it m a y concern,"
or contains words of like import, (see Sec. 57.)
(2) Amount of insurance. — This requirement is necessary in
order to easily and exactly determine the amount of indemnity
to be paid the insured in case of loss or damage especially if
it is only partial and not total. The sum insured is a basis for
calculating the premium. It, however, need not be specified in
the cases of open (Sec. 60.) or running policies. (Sec. 62.)
(a) The amount of insurance is the m a x i m u m limit on the
insurer's liability for loss or damage suffered by the insured,
as in fire insurance and casualty insurance, (see Sec. 60.) Such
amount is not necessarily the value of the property insured
nor the extent of liability of the insurer in the event of loss
(see Sees. 6 1 , 1 5 6 , 1 7 2 . ) , unless it is otherwise stipulated.
(b) In other kinds of insurance such as life insurance and
health insurance and accidental death and injury insurance,
a fixed sum is payable, i.e., one not measured by the proved
amount of the insured's loss, (see Sec. 61.)
(c) In workmen's (employees') compensation insurance
(which is a kind of casualty insurance), the amount is not
specified in the policy but by the law imposing liability
upon the employer, which is, by reference, made part of the
contract. (E.W. Patterson, op. cit., p. 235.)
(d) The amount insured is the amount fixed in the policy.
Where the policy of life insurance contains an "automatic
increase clause" by which the increase of the insurance
coverage shall depend upon the happening of an event (see
Art. 1181, Civil Code.), the amount insured by the policy at
the time of its issuance necessarily includes the additional
sum covered by the said clause because it was already
determinable at the time the transaction was entered into and
formed part of the policy. (Comm. of Internal Revenue vs.
Lincoln Philippine Life Insurance Company, Inc., 379 SCRA
423 [2002].)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
194
Sec. 51
(e) The deductible is the stated amount to be deducted
from any loss, which is shouldered by the Insured making
the Insurer liable only for the excess of said amount.
(3) Premium. — The requirement is also essential considering
that the premium represents the consideration of the contract (see
Sees. 2, 60-62, 77.), what the insured pays the insurer to assume
the risk of or the value loss.
6
The rates of the premium are developed on the basis of the
nature and character of the risk assumed and also on the value
of the property or other interest insured. The rate or amount
increases as the risk of loss increases.
(a) In life insurance, the premiums are based on the
average life span at any given age, predicted from statistical
figures known as mortality tables. These tables enable the
insurer to estimate the probability of death at each age
among particular selected groups during a specified period.
Thus, the life insurance policy of the father would require the
payment of higher premiums than his son's.
(b) In fire insurance, the factors that affect the rate of a
building are its structure or construction, occupancy or use,
location, and loss-prevention or protection facilities (e.g.,
availability of fire-fighting equipment and water supply in
the vicinity), and the exposure or proximity to other risks,
(see Sec. 339.) A discount or reduction in the premium rate
is usually granted where such facilities are installed in the
insured premises.
(4) Property or life insured. — The property or life insured
constitutes the subject matter of the contract, (see comments
under Sec. 3.) It is clear that the insurer will not be liable if, for
instance, the property lost or damaged is not that insured. It has
been suggested that the proper phrase to use is "thing insured"
because insurable interest m a y be in liability (see Sees. 2, 13, 15,
174.) and not in life or property. (Sees. 1 0 , 1 3 . )
6
T h e t e r m "net premium" refers to the portion of the p r e m i u m that is chargeable
directly to the risk assumed by the insurer. "Gross premium" refers to the total a m o u n t
charged to the insured, which necessarily includes the net p r e m i u m plus charges for administrative expenses and profits.
Sec. 51
CONTRACT OF INSURANCE
Title 6. — The Policy
195
(5) Interest of insured in property. — This requirement is
especially important in fire insurance policies to determine the
actual d a m a g e suffered by the insured in case of loss of the
property covered by the policy if he is not the absolute owner
thereof, (see Sec. 34.) So, a mortgage must disclose his particular
interest in the property insured by him.
(6) Risks insured against. — The necessity for the requirement
becomes obvious when it is considered that the insurer's
undertaking is to indemnify the insured for loss, damage or
liability caused or created only by the risks insured against, (see
Sees. 2, 3.) Generally speaking, all forseeable losses or risks m a y
be insured against except those the insurance of which would
be repugnant to public policy or positively prohibited, or those
which are occasioned by the insured's own fraud or misconduct.
Almost any contingent or unknown event, whether past or
future, m a y be insured against. (2 Am. Jur. [Rev.] 525-526.)
(7) Term or duration of insurance. — The period during which
the insurance is to continue must also be stated because although
the loss suffered by the insured was caused by the risk insured
against, the insurer would not be liable unless it occurred during
such duration of the insurance. The duration m a y be expressed
in terms of dates, from one specified time to another as, for
example, in marine insurance, from March 26, 2010 to March
25, 2011, or in terms of distance or voyage, as for example, from
Manila to Hongkong regardless of the time it takes tot complete
the voyage.
The period of time during which the insurer assumes the risk
of loss is known as the life of the policy. Policies issued for a term
of 12 months are known as annual policies while those for a less
period are known as short period policies.
Kinds of insurable risks.
7
The risks confronting man are ordinarily divided into three
(3) classifications, namely:
(1) Personal risks. — They are those involving the person. This
classification of risk is chiefly concerned with the time of death
7
F o r additional discussion, see annotation under Section 2.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
196
Sec. 51
or disability. It is perfectly apparent that of death there is no
uncertainty but the time of its occurrence. And aside from death,
there is the risk of incapacity through accidental injury, illness or
old age. Personal risks are often divided into life and health risks;
(2) Property risks. — They are those involving loss or damage
to property. This second classification of risk is that which arises
from die destruction of property. The possible loss of a cargo
or ship at sea is considered a risk to those engaged in maritime
operations.
(a) Direct losses by fire, lightning, windstorm, flood, and
other forces of nature offer a constant threat of loss to real
estate, as well as all kinds of personal property and property
involved in any form of transportation;
(b) Indirect losses also m a y occur, including loss of profits,
rents, or favorable leases; and
(3) Liability risks. — They are those involving liability for the
injury to the person or property of others. This third classification
of risk is occasioned by the operation of the law of liability (tort)
and m a y sometimes be called third party risks.
Whenever an individual is legally liable for any injury to
another, as, for instance, through an accident when the driver
of an automobile is negligent and injures a pedestrian, or when
a person is injured on someone's property such risk is termed a
third party risk or liability. It is so-called because when insurance
is used to shift the burden of responsibility, the insurer and
insured person have agreed that a "third party" (the injured
person) will be paid for injuries for which the insured is legally
liable. The liability risk includes both bodily injury and property
damage risks. (D.L. Bickelhaupt, op. cit., p. 11.)
Risk, peril, and hazards distinguished.
8
(1) Risk is the chance of loss, or the possibility of the
occurrence of a loss, based on known and unknown factors. If a
8
T h e foregoing is known as negative, or undesirable risk. But risk c a n be positive in
the sense that the risk is a beneficial one. F o r example, if a person h a s a one-in-100 chance
of winning a contest, a chance of gain or benefit exists, rather than a c h a n c e of loss. The
chance of obtaining a benefit is a positive risk.
Sec. 51
CONTRACT OF INSURANCE
Title 6. — The Policy
197
loss is absolutely certain to happen or not to happen, no risk is
involved.
9
(2) In contrast to risk, peril is
event which m a y cause a loss. It
insures against, (see Sec. 3, par. 1.)
and its occurence results in loss. It
by a policy of insurance.
the contingent or unknown
is the contingency that one
Its existence creates the risk,
m a y be covered or excluded
Examples of perils are fires, flood, theft, automobile accidents,
illness, death, and hundreds of other causes of uncertainty.
(3) Hazard is the condition or factor, tangible or intangible,
which m a y create or increase the chance of loss from a given peril.
Ordinarily, there are m a n y separate hazards that attach to any
particular object or person. The sum total of the hazards constitute
the perils which cause the risk. A practice of the insurance
business divides hazards into two (2) major classifications, to
wit:
(a) Physical hazards. — The term includes everything
relating to location, structure, occupancy, exposure, and the
like such as waste paper piled under a staircase, gasoline
stored in the premises, unsafe brake in a car, weak construction
which m a y fail in a heavy wind, and many others; and
(b) Moral hazards. — The term is applied to those factors
that have their inception in mental attitudes. Included in this
second group are the hazards created by dishonesty, insanity,
carelessness, indifference, and other causes psychological
in nature. Appraisal of moral hazards requires the study of
the character of the person under consideration in the light
of his reputation. It involves a consideration of the personal
character of the insured that increases the possibility of loss.
10
(4) Use of term to mean another. — In practice, however, the
terms are sometimes given more than one meaning. This is true
even in the insurance business. Risk may be used when what is
9
I n life insurance, the risk is against premature death or that of economic loss result-
ing from premature death.
Included in this type is what is referred to as morale hazard arising out of indiference to loss, resulting in carelessness, for example, by a demoralized employee in the
safe-keeping or handling of property.
10
198
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 51
in mind is peril or degree of hazard (e.g., Sec. 51 [f].), while a risk
may refer to the subject matter of insurance. Thus, one is said
to be insured against fire risks, and a risk (meaning a building)
which is slated or tiled is a better risk than one which is thatched,
(see Dinsdale & McMurdie, op. cit., p. 5; D.L. Bickelhaupt, op. cit.,
pp. 6-8.) Section 99 (1, f) refers to "risks or perils of navigation"
while Section 64 (b, d) speaks of "the hazard insured against."
Thus, the word "risk" is also loosely used to refer to the subject
matter insured and also as a synonym of the words "peril" and
"hazard."
Requirements for risks to be insurable.
Not all risks are insurable. In the practice of insurance, a
risk to be considered insurable must substantially meet certain
requirements. It will be useful to outline these requirements.
They are as follows:
(1) Importance. — The loss to be insured against should
be important enough to warrant the existence of an insurance
contract. Obviously, to cover every small loss would increase
greatly the cost of protection. For example, a person m a y not
insure against losing his pen or breaking his eyeglasses. In motor
vehicle insurance against loss or damage, the insurer usually
restricts its payment to that portion of the loss exceeding a
specified deductible amount;
(2) Calculability. — The risk must permit a reasonable
statistical estimate of the chance of loss and possible variations
from the estimate. If the incidence of loss cannot be calculated
statistically, it is impossible to determine the amount of premiums
that would be required to accumulate a common fund or pool, to
meet the losses arising;
(3) Definiteness of loss. — The losses should be fairly definite
as to cause, time, place, and amount, for otherwise, estimates of
possible loss are difficult;
(4) No catastrophic loss. — When large numbers of people are
subject to the same kind of losses at the same time, it is an obvious
deviation from the principle that the losses of the few are borne
by the contributions of the many who do not suffer loss. Thus, it
Sec. 52
CONTRACT OF INSURANCE
Title 6. — The Policy
199
is usual to exclude political and w a r risks from most insurance
policies although these risks m a y sometimes be shouldered by
the State; and
(5) Accidental nature. — Insurable risks must also normally
be accidental in nature. Insurance is intended to cover fortuitous
or unexpected losses. Intentional losses caused by the insured
are usually uninsurable because they cannot be reasonably
predicted, and payment for them would be against public
policy. Other losses are c o m m o n as to be expected rather than
unexpected. Wear and tear and depreciation are examples, (see
Dinsdale & McMurdie, op. cit., pp. 4-5; D.L. Bickelhaupt, op. cit.,
pp. 11-13.)
Requirements not absolute.
The above requirements for an insurable risk are not absolute.
Insurability is best described as a relative matter. Many common
kinds of insurance do not perfectly meet each of the requirements.
Consider, for example, the following: Is theft insurance
"definite?" (that is, was the item really stolen, or just lost?) Are all
drivers similar in regard to the risk of automobile accidents?
(Obviously not, though they may be relatively similar within
age, type of car, and other classifications). Is fire caused by
"carelessness" always accidental? Aren't typhoons "catastrophic"
in nature?
//
,,
Insurers deal with the problem, trying to improve the
insurability of a peril by such methods as limitations on the
amount of coverage and locations, specific contract definitions,
prohibited types, deductibles, reinsurance, and many other
ways. Clearly, what is "insurable" varies among insurers, and
may change over time and with the use of these limitations.
(Ibid.)
Sec. 52. Cover notes may be issued to bind insurance
temporarily pending the issuance of the policy. Within sixty
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.
200
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 52
Cover notes may be extended or renewed beyond such
sixty days with the written approval of the Commissioner
if he determines that such extension is not contrary to and
is not for the purpose of violating any provisions of this
Code. The Commissioner may promulgate rules and regulations governing such extensions for the purpose of preventing such violations and may by such rules and regulations dispense with the requirement of written approval by
him in the case of extension in compliance with such rules
and regulations, (n)
Preliminary contracts of insurance.
There are two kinds of preliminary contracts of insurance,
namely: preliminary contracts of present insurance and preliminary
contracts of executory insurance.
(1) By a preliminary contract of present insurance, the
insurer insures the subject matter usually by what is known as
the "binding slip," or "binder" or "cover note," the contract to be
effective until the formal policy is issued or the risk rejected, (see
Vance, op. cit., p. 219.) The binder is actually a temporary contract
of insurance and is usually issued after the applicant pays the
first premium.
(a) The cover note is merely a written m e m o r a n d u m
of the most important terms of a preliminary contract of
insurance, intended to give temporary protection pending
the investigation of the risk by the insurer, or until the issue
of a formal policy, provided it is later determined that the
applicant was insurable at the time it was given. By its nature,
it is subject to all the conditions in the policy expected even
though that policy m a y never issue, (see ibid., p. 235.)
In life insurance, where an agreement is m a d e between
an applicant and the insurer's agent, no liability shall attach
until the insurer approves the risk. Thus, in life insurance, a
"binding slip" or "binding receipt" does not insure by itself.
(Great Pacific Life Assurance Corp. vs. Court of Appeals, 89
SCRA 543 [1979].)
(b) Binders or cover notes serve the needs of commercial
convenience and yet are more definite and reliable than
Sec. 5 2
CONTRACT OF INSURANCE
Title 6. — t h e Policy
201
oral agreement. While the issuance of a binder is ordinarily
conclusive evidence of the making of a contract, yet the
insurer m a y show the contrary by proving, for example, that
he delivered the binder with an oral understanding, that it
was not to take effect until other insurers had taken part of
the risk. (E.W. Patterson, op. cit., 99.)
(2) By a preliminary executory contract of insurance, the insurer makes a contract to insure the subject matter at some subsequent time which m a y be definite or indefinite. Under such an
executory contract, the right acquired by the insured is merely
to d e m a n d the delivery of a policy in accordance with the terms
agreed upon and the obligation assumed by the insurer is to
deliver such policy. (Vance, op. cit., pp. 219-220.)
EXAMPLES:
(1) X signed an application for a fire insurance of his house.
The insurer accepted the application and issued a cover note
for the insurance. Before the policy could be issued, the house
was burned. In this case, the insurer would have to reimburse
X for his loss.
(2) Suppose, in the same example, the agreement of the
insurer is to issue the policy within a certain date and the
house was destroyed by fire before such date. Here, the insurer
would not be liable on a claim for loss as there was merely an
executory contract of insurance.
Issuance and renewal of cover notes.
Cover notes (also called a binder) m a y be issued to afford
immediate provisional protection to the insured until the insurer
can inspect or evaluate the risk in question and issue the proper
policy (Sec. 52, par. 1.), or until the risk is declined and notice
thereof given.
(1) Being of temporary nature, it is sufficient, for example,
that the cover note shows by necessary implication an agreement
to pay whatever rate may be fixed. (43 Am. Jur. 2d 277.)
(2) The fact that no separate premium was paid on the cover
note before the loss insured against occurred, does not militate
202
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 52
against its binding effect as an insurance contract. By their
nature, cover notes do not contain particulars that would serve as
basis for the computation of the premiums and consequently, no
separate premiums are intended or required to be paid therefor.
(Pacific Timber Export Corp. vs. Court of Appeals, 112 SCRA 199
[1982].)
(3) If a cover note is to be treated as a separate policy instead
of integrating it to the regular policy to be subsequently issued,
its purpose and function would be set at naught or rendered
meaningless, for it is in a real sense a contract, not a mere
application for insurance which is a mere offer. (Ibid.)
The Code prescribes the requirements regarding the issuance
and extension or renewal of cover notes. (Sec. 52.)
Rules on cover notes.
(1) Insurance companies doing business in the Philippines
may issue cover notes to bind insurance temporarily, pending
the issuance of the policy.
(2) A cover note shall be deemed to be a contract of insurance
within the meaning of Section 1(1) of the Code.
(3) No cover note shall be issued or renewed unless in the
form previously approved by the Insurance Commission.
(4) A cover note shall be valid and binding for a period not
exceeding sixty (60) days from the date of its issuance, whether or
not the premium therefor has been paid, but such cover note m a y be
cancelled by either party upon at least seven (7) days notice to
the other party.
(5) If a cover note is not so cancelled, a policy of insurance
shall, within sixty (60) days after the issuance of such cover note,
be issued in lieu thereof. Such policy shall include within its
terms the identical insurance bond under the cover note and the
premium therefor.
(6) A cover note m a y be extended or renewed beyond the
aforementioned period of sixty (60) days with the written
approval of the Insurance Commission, provided that such
written approval may be dispensed with upon the certification
Sec. 53
CONTRACT OF INSURANCE
Title 6. — The Policy
203
of the president, vice-president, or general manager of the
insurance company concerned that the risks involved, the
values of such risks a n d / o r the premiums therefor have not as
yet been determined or established and that such extension or
renewal is not contrary to and is not for the purpose of violating
any provisions of the Insurance Code, or of any of the rulings,
instructions, circulars, orders or decisions of the Insurance
Commissioner. (Ins. M e m o . Cir. No. 3-75, Sept. 2 9 , 1 9 7 5 , effective
Oct. 2 1 , 1 9 7 6 . )
(7) Insurance companies m a y impose on cover notes a
deposit premium equivalent to at least 25% of the estimated
premium of the intended insurance coverage but in no case less
than P500.00. (Ins. Cir. Letter, Jan. 1 7 , 1 9 8 0 . )
Sec. 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name
or for whose benefit it is made unless otherwise specified
in the policy, (a)
Persons entitled to recover on policy.
As already discussed, insurance is a personal contract
between the insured and the insurer.
(1) As against the insured, third persons have no right either
in a court of equity or in a court of law to the proceeds of the
policy unless there be some contract of trust, express or implied,
between the insured and third persons. So that where different
persons have different interests in the same property (like the
mortgagor and mortgagee of the property), the insurance taken
by one in his own right and in his own interest does not in any
way inure to the benefit of the other. (Lampano vs. Jose, 30 Phil.
537 [1915]; see Sec. 8.)
But if the bailee secures insurance covering his own goods
and goods stored with him, and even if the owner of the stored
goods did not request or know of the insurance and did not
ratify it before payment of the loss, it has been held that the
warehouseman is liable to the owner of such stored goods for his
share in the insurance money. (Lopez vs. Del Rosario, 44 Phil. 98
[1922].)
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 5 3
(2) As against the insurer, a third person, in the absence of any
provision in the policy, has also no right to the proceeds thereof.
A policy of insurance is a distinct and independent contract
between the insured, and the insurer. Pursuant to Section 53,
only the insured, if still alive, or the beneficiary, if the insured
is already deceased, is entitled to claim the insurance proceeds
upon the maturation of the policy.
Again, a third person has no right in law or equity to the
proceeds of an insurance unless there is a contract or trust,
expressed or implied, between the insured and the third
person (Bonifacio Bros., Inc. vs. Mora, 20 SCRA 261 [1967].), or
the insurance contract was intended to benefit third persons
who are not parties to the contract in the form of reasonable
stipulations. In such case, the third party m a y directly sue and
claim from the insurer. (Heirs of L.G. M a r a m a g vs. Maramag,
588 SCRA 774 [2009].) Thus, where the insurance policies on the
mortgaged properties have been endorsed by the mortgagor to
the mortgagee-bank, the proceeds being exclusively payable to
the bank by reason of the endorsement, these policies cannot be
attached by the mortgagor's other creditors up to the extent of the
mortgagor's outstanding obligation in the bank's favor. Under
Section 53, to the extent of the mortgagor's obligation with the
bank, his interest in the subject policies had been transferred to
the bank effective as of the time of the endorsement. It is basic that
the first mortgagee has superior rights over junior mortgagees or
attaching creditors. (Rizal Commercial Banking Corporation vs.
Court of Appeals, 289 SCRA 292 [1998].)
ILLUSTRATIVE CASES:
1. Proceeds of car policy payable to mortgagee.
Facts: The insured had taken out a policy on his car "loss if
any, payable to X," the mortgagee of the car.
Issue: Is Y, the repairman, entitled to collect the cost of
repair out of the insurance proceeds?
Held: No. The proceeds of the policy covering the value of
the repairs made on the car by Y who was authorized by the
insured (owner of the damaged vehicle) to make the repairs
should be paid directly to X whom the parties intend to benefit
.53
CONTRACT OF INSURANCE
Title 6. — The Policy
and not to Y in the absence of any provision in the policy which
discloses an intent to benefit the repairman in case of repair of
the car.
The clause in an insurance policy authorizing the owner
of the damaged vehicle to contract for its repair does not mean
that the repairman is entitled to collect the cost of repair out
of the proceeds of the insurance. It merely establishes the
procedure that the insured has to follow in order to be entitled
to indemnity for repair. (Ibid.)
2.
Proceeds of car policy payable, in case of death of insured
driver, to his personal representatives, or to claimants or heirs of
claimants.
Facts: The insurance policy in favor of the insured (taxicab
company) provides, inter alia, that the insurance company
"will indemnify any authorized driver who is driving the
motor vehicle" of the insured and in the event of death of
said driver, the company shall, likewise, "indemnify his
personal representatives" and the company "may, at its option,
make indemnity payable directly to the claimants or heirs of
claimants."
Issue: Do the heirs of the deceased driver have a direct
cause of action against the insurance company?
Held: Yes, it being the true intention of this policy to protect
the liabilities of the insured towards the passengers of the
motor vehicle and the public (in other words, third parties).
Thus, the policy under consideration is typical of contracts pour
autrui (i.e., contracts containing a stipulation in favor of a third
person; see Art. 1311, Civil Code.), this character being made
more manifest by the fact that the deceased driver paid 50% of
the corresponding premiums, which were deducted from his
weekly commissions.
Under these conditions, the heirs of the deceased driver
have direct cause of action against the insurance company and
since they can maintain this action by themselves, without
assistance of the insured, it goes without saying that they can
properly join the latter in filing complaint against the insurance
company to collect the proceeds of the policy. (Coquia vs.
Fieldmen's Insurance Co., Inc., 26 SCRA 178 [1968].)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
206
3.
Sees. 5 4 - 5 5
Proceeds of car policy payable to wife.
Facts: W claimed for a total loss of her vehicle insured by R
which denied the claim on the ground that W cannot institute
the action alone without joining her husband as complainants.
Issue: Is the defense tenable?
Held: No. It is a technical defense which has nothing to do
with the merits of the case and which should receive, if ever,
only a scant consideration. W, being the person in whose name
and for whose benefit the insurance policy in question was
issued, has in the absence of proof to the contrary, the exclusive
right under Section 53 to the proceeds thereof. (A. Carlos vs.
Summit Guaranty and Insurance Co., Inc., I.C. Case No. 181, Jan.
23,1976.)
Sec. 54. When an insurance contract is executed with
an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by
other general words in the policy, (a)
Where insurance made by an agent
or trustee.
An insurance m a y be taken by a person personally or
through his agent or trustee since by the provision of Section
53, the insurance is to be applied exclusively to the interest of
the person in whose n a m e or for whose benefit it is made, the
agent or trustee when making an insurance contract for or on
behalf of his principal should indicate that he is merely acting in
a representative capacity by signing as such agent or trustee, or
by other general terms in the policy.
It has been held, however, that, where the defendant acted
as plaintiff's agent for the insurance of goods stored with the
defendant, the plaintiff cannot claim the benefit of the agency
without sharing in the expenses. (Lopez vs. Del Rosario &
Quiogue, 44 Phil. 98 [1922].)
Sec. 55. To render an insurance effected by one partner
or part-owner, applicable to the interest of his co-partners
Sees. 5 6 - 5 7
C O N T R A C T OF INSURANCE
Title 6. — The Policy
207
or other part-owners, it is necessary that the terms of the
policy should be such as are applicable to the joint or common interest.
Where insurance effected by partner
or part owner.
Insurable interest in the property of a partnership exists in
both the partnership and the partners. A partner has an insurable
interest in the firm property which will support a policy taken
out thereon for his o w n benefit. (Cowan vs. Iowa Stage Ins. Co.,
40 Iowa 551.) But a partner w h o insures partnership property in
his o w n n a m e limits the contract to his individual share unless
the terms of the policy clearly show that the insurance was meant
to cover also the shares of the other partners, (see 26 C.J.S. 86.)
Sec. 56. When the description of the insured in a policy
is so general that it may comprehend any person or any
class of persons, only he who can show that it was intended to include him can claim the benefit of the policy.
Sec. 57. A policy may be so framed that it will inure to
the benefit of whomsoever, during the continuance of the
risk, may become the owner of the interest insured.
Where description of insured general.
The policy of insurance must specify the parties between
w h o m the contract is made. (Sec. 51 [a].) Although it is usual to
insert in a policy the name of the person insured, it is not essential
as he m a y be described in other ways.
In any case, in order that the insurance may be applied to the
interest of the person claiming the benefit of the policy, he must
show that he is the person named or described or that he belongs
to the class of persons comprehended in the policy.
EXAMPLES:
(1) Where the policy is "for the owner" of specified
property, it is necessary for such person to prove that at least
he was the owner of the thing insured at the time of the loss.
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 58-62
(2) Upon like principle, a policy framed, thus: "payable to
X (insured), mortgagee, as his interest may appear, remainder
to whomsoever, during the continuance of the risk, may become
the owner of the interest insured" indicates an intention to
insure the entire interest in the property and not merely the
insurable interest of the mortgagee and would show exactly to
whom the money, in case of loss, should be paid (San Miguel
Brewery vs. Law Union & Rock Ins. Co., 40 Phil. 674 [1920].),
i.e., the mortgagee and the owner of the property insured.
Sec. 58. The mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person
becomes the owner of both the policy and the thing insured.
Effect of transfer of thing insured.
Since a contract of insurance is a personal contract, it does not
attach to or run with the property insured, (see Sees. 17, 20, and
30.) A purchaser of property w h o does not take the precaution to
obtain a transfer of the policy of insurance cannot, in case of loss,
recover upon such contract, as the transfer of the property has the
effect of suspending the insurance until the purchaser becomes
the owner of the policy as well as of the property insured. (San
Miguel Brewery vs. L a w Union & Rock Ins. Co., supra.)
For exceptions to this rule, see Sections 20-24 and 57.
Sec. 59. A policy is either open, valued, or running.
Sec. 60. An open policy is one in which the value of the
thing insured is not agreed upon, but is left to be ascertained in case of loss.
Sec. 61. A valued policy is one which expresses on its
face an agreement that the thing insured shall be valued at
a specified sum.
Sec. 62. A running policy is one which contemplates
successive insurances, and which provides that the object
of the policy may be from time to time defined, especially
as to the subjects of insurance, by additional statements
or indorsements.
Sees. 5 9 - 6 2
CONTRACT OF INSURANCE
Title 6. — The Policy
209
Kinds of policies.
Insurance policies m a y be open, valued, or running. They
m a y be also classified as life, fire, marine, and casualty policies.
(1) An open or unvalued policy is defined in Section 60. In
other words, it is one in which a certain agreed sum is written on
the face of the policy not as the value of the property insured, but
as the m a x i m u m limit of the insurer's liability (i.e., face value), in
case of destruction by the peril insured against. The insured must
establish the fair market value (FMV) of the insured property at
the time of the loss. If the F M V exceeds the maximum, the latter
will control; if below, the former will control.
The insurer, however, only pays the actual cash value of the
property as determined at the time of loss.
EXAMPLE:
Where a house insured for P1,000,000.00 is totally
destroyed by fire, the insurer may introduce evidence to show
that the property was not really worth P1,000,000.00 but some
rather less sum. Thus, in case the value of the property at the
time of the loss was only P800,000.00, then this is all that the
insured will receive although the face value of the policy is
P1,000,000.00.
Of course, however, the amount written in the policy is
always the limit of recovery, beyond which there is no liability
upon the insurer, even if it is shown that the damage actually
suffered is in excess of P1,000,000.00. (Vance, op. cit, p. 62.)
In other words, the amount recoverable is determined by
the amount of the loss but not exceeding the face amount of
the policy. But until shown otherwise by the insurer, the house
must be considered as having an actual value of P1,000,000.00,
the amount of the insurance.
(2) A valued policy is defined in Section 61. Therefore, it is one
in which the parties expressly agree on the value of the subject
matter of the insurance. (44 C.J.S. 496.) Thus, there are two values
— the face value of the policy and the value of the thing insured. In
the absence of fraud or mistake, the agreed value of the thing
insured will be paid in case of total loss of the property, unless
the insurance is for a lower amount.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
210
Sees. 59-62
The liability of the insurer under a life policy is measured by
the face value of the policy, (see Sec. 183.)
EXAMPLE:
A policy insuring a ship "valued at P50 million" is a valued
policy. Such a valuation, unless it is fraudulent or so grossly
excessive as to indicate fraud, is conclusive upon the parties
(see Sec. 156.) and in case of loss, it always furnishes the basis
of settlement even though it might be proved that the actual
value of the property lost is more or less, (see Harding vs.
Commercial Union Assur., 38 Phil. 464 [1918].)
In an open policy, the value of the property insured is not
agreed upon, although the parties m a y agree on the m a x i m u m
amount of recovery or limit to the liability of the insurer. In case
of loss, this amount must be considered, by agreement of the
insurer and the insured, the actual value of the property in the
absence of evidence of greater s or lesser value. (Development
Insurance Corp. vs. Intermediate Appellate Court, 143 SCRA 62
[1986].)
11
EXAMPLE:
If, in the same example, the ship is insured for only P5
million, the policy is still valued as there is an agreed valuation,
i.e., P10 million, but the maximum amount of recovery is P5
million. The insured value is P10 million. This is different from
the sum or amount insured which is P5 million.
(3) Arunning policy is defined in Section 62. This kind of policy
is intended to provide indemnity for property which cannot well
be covered by a valued policy because of its frequent change of
location and quantity, or for property of such a nature as not
to admit of a gross valuation. It also denotes insurance which
"In m a r i n e insurance, the insured is considered a co-insurer for the difference between the face a m o u n t of the policy and the value of the property, (see Sec. 157.) In fire
insurance, the insured is considered a co-insurer as to the uninsured portion only w h e n
there is a co-insurance clause in the policy, (see Sec. 172.)
Sees. 5 9 - 6 2
CONTRACT OF INSURANCE
Title 6. — The Policy
211
contemplates that the risk is shifting, fluctuating or varying, and
which covers a class of property rather than any particular thing.
(44 C.J.S. 494-496.)
In some cases, the nature of the property insured, or the
circumstances of the granting of the insurance, are such as to
make it impossible to designate the subject matter of insurance
with certainty or particularity. Thus, insurance m a y be carried
on a constantly changing stock of goods, or on grain that is
being carried to and from in the harbor on lighters. Under such
circumstances, these policies are usually known as "floating,"
"running," or "blanket." (Vance, op. cit., p. 63.)
In the United States, a blanket policy is one covering by a
single amount of insurance the same kind of property at different
locations or different kinds of property at a single location. Thus,
insurance of several buildings together at different locations,
or of a building and its content together at a single location, or
stocks of goods located at different warehouses, for P400,000.00,
would constitute a blanket form, (see Riegel, Miller & William,
Jr., op. cit, pp. 189-190.)
Running policies are in reality open policies.
EXAMPLE:
A retail store-corporation of the "chain-type" may have
half a dozen warehouses and 10 individual stores all located
at different places. The value of goods in any one of the
warehouses or stores may be as little as P50,000.00 in one
month and as much as PI million, in another month.
If those goods are to be covered by a valued policy, either
the insured must insure at least PI million in each location, in
order to be sure of collecting any loss in full, in which case he
pays premiums for insurance he can never collect or he must
attempt to estimate closely in advance the required insurance,
and he may find the amount insufficient to cover a loss
completely.
The remedy is a contract that has no fixed face value, the
face value adjusting itself to the changing value at one specified
location or at each of several locations. (Ibid.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
212
Sec. 6 3
Advantages of a running policy.
The advantages to the insured of this form of coverage are:
(1) He is neither underinsured nor overinsured at any time,
the premium being based on the monthly values reported;
(2) He avoids cancellations that would otherwise be
necessary to keep insurance adjusted to value at each location,
and for which cancellations he would be charged the expensive
short rate;
(3) He is saved the trouble of watching his insurance and
the danger of being underinsured in spite of his care, through
oversight or mistake; and
(4) The rate is adjusted to 100% insurance, whereas valued
policies requiring insurance only to, say 80% of the value, give
either a small or no reduction for amounts of insurance above
this figure. (Void., p. 190.)
Sec. 63. 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 year from
the time when the cause of action accrues, is void.
Validity of agreement limiting time
for commencing action.
(1) General rule. — A clause in an insurance policy to the
effect that an action upon the policy by the insured must be
brought within a certain period is valid and will prevail over the
general law on limitations of actions as prescribed by the Civil
Code if not contrary to Section 63. (see Teal Motor Co. vs. Orient
Ins. Co., 59 Phil. 809 [1934].) The rights of the parties flow from
the insurance contract; hence, they are not bound by the statute
of limitations nor by exemptions thereto. (Ang vs. Fulton Fire
Insurance Co., 2 SCRA 945 [1961]; E. Macias & Co. vs. China Fire
Insurance Co., 46 Phil. 345 [1924].)
12
12
A n insurance policy being a written contract, any action based thereon should be
brought within ten (10) years from the time the right of action a c c r u e s (Art. 1144.) which
period m a y be either lengthened or shortened by the parties subject to Section 63.
Sec. 6 3
CONTRACT OF INSURANCE
Title 6. — The Policy
213
(2) Period limitation. — If the period fixed is less than one year
from the time the cause of action accrues, the stipulation would
be void. (Sec. 63.) In the case, however, of a policy of industrial
life insurance, the period cannot be less than six (6) years after
the cause of action accrues. (Sec. 231 [d].)
Nature of condition limiting period
for filing claim.
The condition in an insurance policy that claims must be
presented within a certain period after rejection is not merely a
procedural requirement.
The condition is an important matter essential to prompt
settlement of claims against insurance companies, as it demands
that insurance suits be brought by the insured while the evidence
as to the origin and cause of the loss or destruction has not yet
disappeared. It is in the nature of a condition precedent to the
liability of the insurer, or, in other terms, a resolutory cause, the
purpose of which is to terminate all liabilities in case the action
is not filed by the insured within the period stipulated. (Ang vs.
Fulton Fire Insurance Co., supra; see Sun Insurance Office, Ltd.
vs. Court of Appeals, 195 SCRA 193 [1991].)
Where action brought against insurer's
agent.
The bringing of the action against the agent of the insurance
company is not "merely a procedural mistake of no significance
or consequence, which may be overlooked" where there is no
condition in the policy that the action must be filed against the
agent.
The court cannot, by interpretation, extend the clear scope
of the agreement beyond what is agreed upon the parties. The
bringing of such action against the agent cannot have any legal
effect except that of notifying the agent of the claim. Beyond such
notification, the filing of the action can serve no other purpose.
There is no law giving any effect to such action upon the principal.
(Ibid.)
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
214
Sec. 6 3
When cause of action accrues.
The right of the insured to the payment of his loss accrues
from the happening of the loss. However, the cause of action in
an insurance contract does not accrue until the insured's claim is
finally rejected by the insurer. This is because before such final
rejection, there is no real necessity for bringing suit. (Eagle Star
Ins. Co., Ltd. vs. Chia Yu, 96 Phil. 696 [1955].)
Since "cause of action" requires as essential elements not
only a legal right of the plaintiff and a correlated obligation of
the defendant, but also an act or omission in violation of the said
legal right, the cause of action does not accrue until the party
obligated (insurer) refuses, expressly or impliedly, to comply
with its duty to the insured to pay the amount of the insurance.
This is especially true where the policy provides that no action
shall be brought unless the claim is first presented extrajudicially
in the manner provided in the policy, (see Pacific Banking Corp.
vs. Court of Appeals, 168 SCRA 1 [1988]; Travellers Insurance &
Surety Corp. vs. Court of Appeals, 272 SCRA 536 [1997].)
In other words, the period for commencing an action under a
policy of insurance under Section 63 is to be computed not from
the time when the loss actually occurs but from the time when
the insured has a right to bring an action against the insurer.
Thus:
13
(1) Stipulated prescriptive period begins from happening of the
loss. — Where the policy provided that no suit or action thereon
"for the recovery of any claim shall be sustainable in any court of
law or equity unless the insured shall have fully complied with
all the terms and conditions of the policy nor unless c o m m e n c e d
13
U n d e r Section 3(b, 6) of the C a r r i a g e of Goods by Sea Act of 1 9 3 6 (C.A. N o . 65.),
the carrier and the ship shall be discharged from all liability in respect of loss or d a m a g e s
unless suit is brought within one (1) y e a r after delivery of the g o o d s or the d a t e w h e n the
g o o d s should have been delivered. It h a s been held that the one-year period applies not
only to the shipper but also to the insurer of the goods. Otherwise, w h a t the A c t intends
to prohibit after the lapse of the one-year prescriptive period can be d o n e indirectly by
the shipper or o w n e r of the g o o d s by simply filing a claim against the insurer even after
the lapse of one (1) year. If the shipper (insured) files an action against the insurer after
the one-year period, the insurer can successfully deny liability on the g r o u n d that the insured has prevented the insurer from being subrogated to the right of the insured against
the carrier by filing the suit after the one-year period. (Filipino M e r c h a n t s Insurance Co.,
Inc. vs. Alejandro, 145 SCRA 42 [1986].)
Sec. 6 3
C O N T R A C T Of I N S U R A N C E
Title 6. — T h e Policy
215
within twelve months next after the happening of the loss/' it
has been held that the above stipulation is repugnant to Section
63 because if given effect would reduce the period allowed the
insured for bringing his action to less than one year.
This is so because the said cause makes the prescriptive
period begin from the happening of the loss and at the same time
provides that no suit on the policy shall be sustainable in any
court unless the insured shall have first fully complied with all
the terms and conditions of the policy among them, that which
requires that, as soon as the loss is determined, written claim be
filed with the carrier and that the letter to the carrier and the
latter's reply should be attached to the claim papers to be sent
to the insurer. It is obvious that compliance with this condition
precedent will necessarily consume time and thus, shorten the
period for bringing suit to less than one year, if the period is to
begin from the happening of the loss and not from "the time the
cause of action accrues" as provided in Section 63. (ibid.)
As the stipulation is upon a written contract, the time limit
is ten years from the time the cause of action accrues. (Art. 1144,
Civil Code.)
(2) Stipulated prescriptive period begins from rejection of claim.
— On the other hand, where the policy provided that if a claim
be m a d e and rejected, an "action or suit" should be commenced
within twelve months after such rejection otherwise the claim
would prescribe, it was held that an action filed seventeen
months after the rejection had already prescribed although the
insured, one month after his claim was rejected, by the insurer,
had filed a complaint with the Insurance Commissioner, the
Court interpreting the words "action or suit" in the policy as
referring to a claim or demand in a court of justice. (Lopez vs.
Filipinas Compania de Seguros, 16 SCRA 855 [1966].)
The new Insurance Code, however, empowers the Insurance
Commissioner to adjudicate disputes relating to an insurance
company's liability to an insured under a policy issued by the
former to the latter, (see Sec. 416.) Hence, a complaint or claim
filed by the insured with the Office of the Insurance Commissioner
would now be considered an "action" or "suit" the filing of
which would have the effect of tolling or suspending the running
216
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 6 4
of the prescriptive period. Under Section 384, "an action or suit
for recovery of damage due to loss or injury must be brought in
proper cases, with the Commissioner or the Courts within one
year from denial of the claim, otherwise the claimant's right of
action shall prescribe."
(3) Stipulated prescriptive period begins from filing of claim. —
Where a fidelity bond requires action to be filed within one (1) year
from the filing of the claim of loss, such condition contradicts the
public policy of discouraging unnecessary litigation expressed in
Section 61-A. (now Sec. 63.)
Since "cause of action" requires as essential elements not
only a legal right of the plaintiff and a correlated obligation of
the defendant but also "an act or omission of the defendant in
violation of said legal right," the cause of action does not accrue
until the party obligated (surety) refuses, expressly or impliedly,
to comply with its duty (in this case to pay the amount of the
bond). A fidelity bond is, in effect, in the nature of a contract of
insurance against loss from misconduct and is governed by the
same principle of interpretation. Consequently, the condition of
the bond is subject to the provisions of Section 61-A (now Sec. 63.),
is null and void, and action m a y be brought within the statutory
period of limitation (10 years) for written contracts. ( A C C F A vs.
Alpha Insurance & Surety Co., Inc., 24 SCRA 151 [1968].)
Contractual limitations contained in insurance policies are
regarded with extreme jealousy by courts and will be strictly
construed against the insurer and should not be permitted to
prevent a recovery when their just and honest application would
not produce that result. (Eagle Star Ins. Co., Ltd. vs. Chia Yu,
supra, citing 46 C.J.S. 273.)
Sec. 64. No policy of insurance other than life shall be
cancelled by the insurer except upon prior notice thereof
to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective
date of the policy, of one or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing
the hazard insured against;
Sec. 6 5
CONTRACT OF INSURANCE
Title 6. — The Policy
217
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions
increasing the hazard insured against;
(e) physical changes in the property insured which result in the property becoming uninsurable; or
(f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code, (n)
Sec. 65. All notices of cancellation mentioned in the
preceding section shall be in writing, mailed or delivered
to the named insured at the address shown in the policy,
and shall state (a) which of the grounds set forth in section
sixty-four is relied upon and (b) that, upon written request
of the named insured, the insurer will furnish the facts on
which the cancellation is based, (n)
Cancellation of non-life insurance policy.
Cancellation, as the term is generaly used with regard to
insurance, is broadly regarded as the right to rescind, abandon,
or cancel a contract of insurance. (State Pacific Mut. L. Ins. Co. vs.
Larson, 152 Fla. 729.) It is the termination by either the insurer
or the insured of a policy of insurance before its expiration. A
contract of insurance is permitted to lapse when the insured
fails to take some action (e.g., payment of premiums) to keep the
contract in force.
The right of the insurer to cancellation of a policy of insurance
other than life is covered by Sections 64 and 65. The insured can
cancel an insurance contract at his election by surrendering the
policy. Such surrender, however, entitles him to the return of the
premiums on the customary short-rate basis, (see Sec. 79[b].)
Section 380 refers to the cancellation of a compulsory motor
vehicle liability insurance policy.
Form and sufficiency of notice
of cancellation by the Insurer.
The conditions under which the right may be exercised are:
(1) There must be prior notice of cancellation to the insured;
218
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 6 5
(2) The notice must be based on the occurrence, after the
effective date of the policy, of one or more of the grounds mentioned
(Sec. 64.);
(3) It must be in writing, mailed or delivered to the named
insured at the address shown in the policy; and
(4) It must state which of the grounds set forth is relied upon.
(Sec. 65; see Sees. 380, 381.)
It is the duty of the insurer upon written request of the
named insured to furnish the facts on which the cancellation is
based. (Sec. 65.) The premium referred to in Section 64(a) must
be a premium subsequent to the first, because it speaks of nonpayment "after the effective date of the policy." Section 77 ordains
that "no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium
thereof has been paid."
Prior notice of cancellation to insured.
The purpose of provisions or stipulations in insurance
policies for notice to the insured, is to prevent the cancellation
of the policy, without allowing the insured ample opportunity to
negotiate for other insurance in its stead for his o w n protection.
(Saura Import & Export Co., Inc. vs. Phil. International Surety
Co., 8 SCRA 143 [1963].)
(1) Notice given to insured himself — The notice should
be personal to the insured and not to a n d / o r through any
unauthorized person by the policy. Therefore, notice of
cancellation by the insurer, given to the mortgagee of the insured
but not to the insured with which the insurer had direct dealing
without the prior authority of the insured, is not effective notice
as to the insured owner. (Ibid.)
(2) Notice delivered personally or sent by mail — The notice
need not be delivered personally to the insured. It m a y be
mailed. (Sec. 65.) But there is no proof that the notice, assuming it
complied with the other requisites or conditions mentioned, was
actually mailed to and received by the insured, where all that the
insurer offers to show that the cancellation was communicated to
the insured is its employee's testimony that the said cancellation
Sec. 6 6
CONTRACT OF INSURANCE
Title 6. —- The Policy
219
was sent "by mail through our mailing section" without more.
(Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 154 SCRA 672
[1987].)
Sec. 66. In case of insurance other than life, unless the
insurer at least forty-five days in advance of the end of
the policy period mails or delivers to the named insured
at the address shown in the policy notice of its intention
not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the named
insured shall be entitled to renew the policy upon payment
of the premium due on the effective date of the renewal.
Any policy written for a term of less than one year shall be
considered as if written for a term of one year. Any policy
written for a term longer than one year or any policy with
no fixed expiration date shall be considered as if written
for successive policy periods or terms of one year, (n)
Renewal of non-life insurance policy.
(1) Asa new contract or extension of old one. — As a general rule,
a renewal of insurance by the payment of a new premium and
the issuance of a receipt therefor where there is no provision in
the policy for its renewal, is a new contract on the same terms as
the old one. But where the renewal is in pursuance of a provision
to that effect, it is not a new contract but an extension of the old
one.
In the last analysis, however, the resolution of the question
depends primarily on the intention of the parties as ascertained
from the instrument itself. (43 Am. Jur. 2d 427.)
14
(2) Rights of parties. — In case of insurance other than life, the
named insured is given the right to renew upon the same terms
and conditions the original policy upon payment of the premium
due on the effective date of the renewal unless the insurer at least
14
In the Malayan case above, the insured "meant to renew the [fire] policy if it had really been already cancelled but not if it was still effective. It w a s all conditional. As it has
not been shown that there w a s a valid cancellation of the policy, there was consequently
no need to renew it but to pay the premium thereon. Payment w a s thus legally m a d e on
the original transaction x x x."
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
220
Sec. 6 6
forty-five (45) days in advance of the end of the period mails or
delivers to the insured notice of its intention not to renew the
policy or to condition its renewal upon reduction of its amount
or elimination of some coverages. (Sec. 66.)
The general rule is that an insurance company is bound by
the greater coverage in an earlier policy where the renewal policy
is issued without calling to insured's attention a reduction in the
policy coverage. (Palmer vs. Hartford F. Ins. Co., 54 Conn. 488;
Bauman vs. Royal Indem. Co., 36 N.J. 12.)
(3) Period for giving notice of non-renewal by insurer. — For the
purpose of determining whether or not the insurer has given
such notice within the period prescribed, a policy written for a
term of less than one (1) year is considered as if written for a
term of one (1) year while a policy written for a longer term
or with no fixed expiration date is considered as if written for
successive policy periods terms of one (1) year. (Sec. 66.) Thus,
where the term of the policy is five (5) years, the notice must be
given at least 45 days before the anniversary date of any given
policy year. If the 45 days rule is not complied with, the insurer
may not refuse to renew a policy upon payment of the premium
due.
15
Unless the insurer complies with the requirements of Sections
65 and 66, he has to renew the policy whether he likes it or not.
— oOo —
15
If the policy is for a short period, say, 40 days, the insured m u s t be given notice,
upon issuance, that the policy w o u l d not be renewed u p o n its expiration.
Title 7
WARRANTIES
Sec. 67. A warranty is either express or implied.
Warranty defined.
Warranty is a statement or promise by the insured set forth
in the policy itself or incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect and without
reference to whether the insurer was in fact prejudiced by such
untruth or nonfulfillment, renders the policy voidable by the
insurer, (see Vance, op. cit., p. 408.)
A warranty m a y also be made by the insurer, (see Sec. 74.)
Kinds of warranties.
In the law of insurance, warranties are either affirmative
(see Sec. 68.) or promissory (see Sec. 72.) and either express or
implied, and there m a y be several warranties of different kinds
in one policy.
(1) An express warranty is an agreement contained in the
policy or clearly incorporated therein as part thereof whereby
the insured stipulates that certain facts relating to the risk are
or shall be true or certain acts relating to the same subjects have
been or shall be done.
(2) An implied warrranty is a warranty which from the very
nature of the contract or from the general tenor of the words,
although no express warranty is mentioned, is necessarily
embodied in the policy as a part thereof and which binds the
insured as though expressed in the contract, (see 29 Am. Jur. 428.)
221
222
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 67
Thus, in every policy of marine insurance, there is an implied
warranty that the ship is seaworthy when the policy attaches.
(Sec. 113; see Sec. 126.)
It would seem that implied warranties are generally
warranties in marine insurance although it is infrequently
applied in other than marine insurance. (43 Am. Jur. 2d 1027.)
It is only in marine insurance that the law provides for implied
warranties.
(3) An affirmative warranty is one which asserts the existence
of a fact or condition at the time it is made, (see ibid., p. 428; Vance,
op. cit., p. 410.) The warranty is continuing if it is one that must be
satisfied during the entire coverage period of the insurance.
(4) Apromissory warranty, not infrequently called "executory"
warranty, is one where the insured stipulates that certain facts or
conditions pertaining to the risk shall exist or that certain things
with reference thereto shall be done or omitted, (see ibid.) It is in
the nature of a condition subsequent. (45 C.J.S. 159.)
Warranty presumed affirmative.
Unless the contrary intention appears, the courts will
presume that the warranty is merely affirmative.
EXAMPLES:
(1) Where the policy describes the property as being "a
two-storey structure used as a residence" there is no warranty
that such structure would continue to be used.
(2) The statement "watchman on premises at night" made
in the policy was held to refer only to the time of making the
contract and not to be a warranty that a watchman would be
kept continuously on the premises thereafter. (Virginia Fire &
Marine Ins. Co. vs. Buck, 13 S.E. 973.)
But the answer "Yes" to the question: "Will you keep your book
of accounts in an iron safe or secure in another building?" w a s held a
promissory warranty breach of which precluded recovery. (Virginia Fire & Marine Ins. Co. vs. Morgan, 18 S.E. 191.)
Sees. 6 8 - 6 9
CONTRACT OF INSURANCE
Title 7. — Warranties
223
Sec. 68. A warranty may relate to the past, the present,
the future, or to any or all of these.
Time to which warranty refers.
Although the provision employs the term "warranty" in
general, in the case of a promissory warranty, the same m a y refer
only to future events.
EXAMPLES:
(1) A stipulation in the policy that the insured never
suffered any heart ailment is a warranty that relates to the past,
while a stipulation that a building is occupied as a dwelling is
a warranty that relates to the present.
(2) Where the insured makes a stipulation that he would
employ a watchman, or install appliances for extinguishing
fires, or that he would not store or keep for sale hazardous
goods in the building insured during the pendency of the
policy, the warranty is one that relates to the future.
Sec. 69. No particular form of words is necessary to
create a warranty.
Intention of parties governs.
The word "warranty" used in an insurance contract does
not necessarily constitute a warranty nor is the use of such word
necessary to constitute a warranty. Whether a statement made
by the insured in the policy is a warranty depends upon the
intention of the parties in regard thereto. (43 Am. Jur. 2d 1030.)
In case of doubt, a statement will be construed as a representation rather than a warranty especially if such statement
is contained in any instrument other than the policy like an
application which is, in itself, collateral merely to the contract of
insurance. The parties must intend a statement to be a warranty
and it must be included as a part of the contract.
EXAMPLE:
An applicant's statement that he is not afflicted with a
specified disease, or that he is in good health, is presumed
224
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 6 8 - 6 9
to be a representation and, if but a representation, is held to
be merely a statement of opinion. Its incorrectness does not
invalidate the contract unless the opinion was fraudulently
given.
But if such statement is warranted to be true in every
respect, its incorrectness in fact will wholly avoid the policy,
even though the insured acted in perfect faith. (Vance, op. ext.,
pp. 413-414.)
It has been held that gratuitous answers written in the
application, that is, answers not responsive to any questions
asked, are not warranties even though the policy makes the
statements in the application warranties. (Commercial Mut. Acc.
Co. vs. Bates, 52 N.E. 49.)
Warranties distinguished from representations.
There are well recognized distinctions between warranties
and representations in contracts of insurance, to wit:
(1) Warranties are considered parts of the contract, while
representations are but collateral inducements to it;
(2) Warranties are always written on the face of the policy,
actually or by reference, while representations m a y be written in
a totally disconnected paper or m a y be oral;
(3) Warranties must be strictly complied with, while in
representations, substantial truth only is required (Vance, op. cit.,
p. 412.);
(4) The falsity or nonfulfillment of a warranty operates as a
breach of contract, while the falsity of a representation renders
the policy void on the ground of fraud (45 C.J.S. 157.); and
(5) Warranties are presumed material, while the insurer
must show the materiality of a representation in order to defeat
an action on the policy.
Before a representaion will be considered a warranty, it
must be expressly included or incorporated by clear reference in
the policy and the contract must clearly show that the parties
intended that the rights of the insured would depend on the
truth or fulfillment of the warranty. Obviously, where a statement
Sees. 6 8 - 6 9
CONTRACT OF INSURANCE
Title 7. — Warranties
225
is true, it is ordinarily immaterial whether it is a warranty or a
representation. (Ibid.)
ILLUSTRATIVE CASE:
To avoid liability, insurer claims that insured violated the express
terms of the Fire Extinguishing Appliances Warranty.
Facts: Petitioner AHA Company contends that respondent
TE Enterprises violated the express terms of the Fire
Extinguishing Appliances Warranty. The said warranty
provides:
"WARRANTED that during the currency of this Policy,
Fire Extinguishing Appliances as mentioned below shall
be maintained in efficient working order on the premises
to which insurance applies:
-
PORTABLE EXTINGUISHERS
-
INTERNAL HYDRANTS
-
EXTERNAL HYDRANTS
-
FIRE PUMP
-
24-HOUR SECURITY SERVICES
BREACH of this warranty shall render this policy null
and void and the Company shall no longer be liable for any
loss which may occur."
Petitioner argues that the warranty clearly obligates the
insured to maintain all the appliances specified therein. The
breach occurred when the respondent failed to install internal
fire hydrants inside the burned building as warranted. This
fact was admitted by the oil mill's expeller operator.
Issue: Was respondent guilty of breach of the warranty?
Held: No. (1) Respondent was not required to provide for all the
extinguishing appliances enumerated in the policy. — "We agree
with the appellate court's conclusion that the aforementioned
warranty did not require respondent to provide for all the fire
extinguishing appliances enumerated therein. Additionally, we
find that neither did it require that the appliances are restricted
to those mentioned in the warranty. In other words, what the
warranty mandates is that respondent should maintain in
efficient working condition within the premises of the insured
property, fire fighting equipments such as, but not limited to,
226
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 7 0
those identified in the list, which will serve as the oil mill's first
line of defense in case any part of it bursts into flame."
(2) Respondent complied with the warranty. — "To be sure,
respondent was able to comply with the warranty. Within the
vicinity of the new oil mill can be found the following devices:
numerous portable fire extinguishers, two fire hoses, fire
hydrant, and an emergency fire engine. All of these equipments
were in efficient working order when the fire occurred."
(3) Warranties are strictly construed. — "It ought to be
remembered that not only are warranties strictly construed
against the insurer, but they should, likewise, by themselves
be reasonably interpreted. That reasonableness is to be
ascertained in light of the factual conditions prevailing in each
case. Here, we find that there is no more need for an internal
hydrant considering that inside the burned building were: (1)
numerous portable fire extinguishers, (2) an emergency fire
engine, and (3) a fire hose which has a connection to one of
the external hydrants." (American Home Assurance Company vs.
Tantuco Enterprises, Inc., 366 SCRA 740 [2001].)
Sec. 70. Without prejudice to section fifty-one, every
express warranty, made at or before the execution of a
policy, must be contained in the policy itself, or in another
instrument signed by the insured and referred to in the
policy as making a part of it. (a)
Express warranty, where contained.
(1) In a policy itself, or another instrument. — In order that a
stipulation m a y be considered a warranty, it must not only be
clearly shown that the parties intended it as such but it must
also form part of the contract itself or if contained in another
instrument, it must be signed by the insured and referred to
in the policy as making a part of it. Mere reference alone is not
sufficient to give this effect.
(2) Validity of construed in a rider. — In the case of A n g Giok
Chip vs. Springfield Fire & Mutual Insurance Co. (56 Phil. 375
[1931].), the question presented was whether a warranty contained
in a rider (Warranty "F" fixing the amount of hazardous goods
which might be stored in the insured building) to the policy is
Sec. 71
CONTRACT OF INSURANCE
Title 7. — Warranties
227
null and void on the ground that the rider was not signed by the
insured and not referred to in the policy as making a part of it.
(a) "Another instrument" construed as excluding a rider. —
It w a s held that a rider attached to a policy is a part of the
contract, to the same extent and with like effect as if actually
embodied therein. Consequently, it need not be signed by the
insured nor referred to in the policy as making a part of it.
"Another instrument," as used in Section 70, according to the
Supreme Court, could not mean a mere slip of paper like a
rider, but something akin to the policy itself, which in Section
49 is defined as a written instrument in which a contract of
insurance is set forth.
(b) Dissenting opinion. — In a dissenting opinion, Justice
Villa-Real stated:
"It would certainly be an absurdity if Section 65 [now
Sec. 70.] were construed as requiring that an express
warranty be contained only in the policy or in another
instrument signed by the insured and referred to therein
as making a part thereof for the protection of such
insured and at the same time permitting that such express
warranty be contained in a piece of paper not signed by
the insured but simply attached to the policy and referred
to therein as making a part thereof, thus opening the door
to fraud — it being easy to detach such rider or slip and
change it with another — which is precisely what the law
is trying to prevent."
Sec. 71. A statement in a policy, of a matter relating to
the person or thing insured, or to the risk, as a fact, is an
express warranty thereof.
Express warranty regarding person,
thing, or risk.
(1) Statement must refer to a fact. — Under Section 71, the
statement in the policy relating to the person or thing insured, or
to the risk, must be as a fact and not as an opinion, or belief, to
constitute an express warranty thereof.
228
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 72
EXAMPLE:
The statement of the insured as to his age, or the purpose
for which the property insured is used like for dwelling, or that
certain acts shall not be done, like storing hazardous goods,
is an express warranty, the falsity or breach of which would
avoid the policy.
(2) Where statement in the nature of an opinion. — A statement
in the policy which, from the very nature of the subject matter
of the inquiry, can only be an expression of an opinion is not,
strictly speaking, a warranty of its truthfulness. Such a statement,
if deemed a warranty at all, is merely a limited warranty as to
the honesty and good faith of the insured — a warranty that
the statement is his honest opinion or judgment. (First National
Bank vs. Hartford Fire Ins. Co., 95 U.S. 673.)
EXAMPLES:
(1) Where the answers in an application are qualified by
the words, appended at its foot, "the above is as near correct
as I remember," "to the best of my knowledge and belief,"
or similar words, the right to recover on the policy will not
be defeated unless some answers are consciously incorrect.
(Northwestern Mut. L. Ins. Co. vs. Gridley, 100 U.S. 614.)
(2) There is authority to the effect that a breach of warranty
as to the value of the property insured, which involves a
matter of mere opinion, where the property does not have a
fixed market value, must be substantial in order to constitute a
ground for avoiding the policy. (Phoenix Ins. Co. vs. Pickel, 21
N.E. 546.)
Sec. 72. A statement in a policy, which imparts that it is
intended to do or not to do a thing which materially affects
the risk, is a warranty that such act or omission shall take
place.
Warranty of facts or omissions which
materially affect the risk.
Section 72 refers to a promissory warranty. Breach of promises
or agreements as to future acts will not avoid a policy unless the
promises are material to the risk. (Karp vs. Fidelity-Phoenix Ins.
Co., 4k. A. 2d 529.) This is clear from Section 72.
Sec. 73
CONTRACT OF INSURANCE
Title 7. — Warranties
229
The act or omission is material to the risk if it increases the
risk, and under the law, only substantial increase of risk works
forfeiture of the policy which is avoided for increase in hazard.
(45 C.J.S. 287.)
EXAMPLES:
(1) If it is stipulated in a policy requiring owner occupancy
that the house shall not be occupied by a tenant, there is a
warranty that such condition shall not take place.
(2) If it is agreed that the insured shall not store inflammable
materials of any kind, there is a warranty that such act will not
be committed.
A violation of the warrant in either case avoids the policy.
Sec. 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured
against happens, or performance becomes unlawful at the
place of the contract, or impossible, the omission to fulfill
the warranty does not avoid the policy.
When breach of warranty does not
avoid policy.
The general rule is that a violation of a warranty avoids a
contract of insurance. Section 73, which refers to those warranties
relating to the future, provides three (3) exceptions:
(1) When loss occurs before time for performance. —
EXAMPLE:
If the insured warrants that within five days after the
execution of the contract he will install fire extinguishers in
the insured premises and the loss occurs on the second day
without the insured having complied with the warranty, the
policy is not avoided by the failure to perform said warranty.
(2) When performance becomes unlawful. —
EXAMPLE:
The policy contains an express warranty that the insured
house which at the time was rented to tenants shall cease to
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
230
Sec. 73
be rented and shall be used as private dwelling for the family
of the insured within three months from the date of the policy.
Subsequently, a law was passed prohibiting the ejectment of
tenants without fixed period of lease within a period of one
year in view of an emergency existing.
When the loss occurs after three months the insured has
not yet complied with the warranty. In this case, the omission
to fulfill said warranty does not avoid the policy.
(3) When performance becomes impossible. — Failure to comply
with a promissory warranty m a y be due not only to legal
impossibility but also to physical impossibility, (see Art. 1266,
Civil Code.)
EXAMPLE:
If the insured warrants to change the party wall of his
house to concrete within a certain period and before the date
arrives, no cement is available for private use without the fault
of the insured and subsequently the loss happens, the nonperformance of the warranty does not also avoid the policy.
Where insurer barred by waiver
or estoppel.
Breach of warranty operates to discharge the insurer from
liability unless the insurer is liable because of a waiver of the
warranty or an estoppel. The doctrines of waiver and warranty
are two devices which frequently have been used to modify the
harsh operation of the rules on concealment and warranty.
(1) The omission to fulfill a warranty or condition will
likewise be excused where there is a waiver on the part of the
insurer. Waiver may be defined as "an intentional relinquishment
of a known right." It m a y be express or implied. Failure on the
part of the insurer to assert a forfeiture upon breach of warranty
or condition, after knowledge thereof, amounts to a waiver or
estoppel. If waiver is to be implied from conduct mainly, said
conduct must be clearly indicative of a clear intent of the insurer
to waive its right under the policy. (Pioneer Insurance & Surety
Corp. vs. Yap, 61 SCRA 426 [1974]; see Prudential Guarantee and
Sec. 73
CONTRACT OF INSURANCE
Title 7. — Warranties
231
Assurance, Inc. vs. Trans-Asia Shipping Lines, Inc., 491 SCRA
411 [2006].)
(2) Under estoppel, the insurer is precluded, because of some
action or inaction on its part, from relying on an otherwise valid
defense as against the insured who has been induced to enter
into the contract by the insurer's representation or conduct. The
ground of estoppel is that it would be against equity and good
conscience for the insurer to assert such defense. Estoppel is
different from waiver, but the result is much the same.
EXAMPLES:
(1) Other insurance clause violated. — The insurer, knowing
that the insured has violated a clause of the policy prohibiting
the making of other insurances on the same property without
giving notice to the insurer, preferred to continue the policy by
demanding and collecting the premium. This act constitutes a
waiver of the right to rescind the insurance contract. (La O vs.
Yek long Lin Fire & Marine Ins. Co., 55 Phil. 386 [1930].)
(2) Premium not paid. — Similarly, an extension of time for
the payment of a premium amounts to a waiver of the insurer's
right to require payment of the premium on the due date or
within the grace period.
(3) Warranty clause violated. — The insurance company
was aware, even before the policy was issued, that in the
premises insured, the number of fire hydrants was less than
that demanded in the warranty. Nevertheless, it issued the
policy and accepted and retained the corresponding premiums.
The insurer is barred by waiver or estoppel to claim violation
of the said (fire hydrant) warranty. (Qua Chee Gan vs. Law Union
& Rock Ins. Co., 98 Phil. 85 [1955].)
(4) Insured vehicle not a common carrier. — The insurer knew
all along that the insured owned a private vehicle and not a
common carrier when it issued a common carrier's accident
insurance policy. Not once but twice, its agents, without any
objection on its part, discounted the fears of the insured, a man
of scant education, that his privately owned vehicle might
not fall within the terms of the policy. This is a case where
the doctrine of estoppel undeniably calls for application. The
insurer is estopped from alleging breach of warranty and
condition in the policy. (Fieldmen's Insurance Co., Inc. vs. Vda. de
Songco, 25 SCRA 70 [1968].)
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 74
ILLUSTRATIVE CASE:
Representation was made by the insured, not by the insurer.
Facts: Under the common carrier's accident insurance
policy issued by the insurer, the recovery of the insured
(taxicab company) is limited to "all sums including claimant's
(passengers in the taxicab in this case) cost and expense which
the insured shall become legally liable" in the "event of accident
caused by or arising out of the use of the motor vehicle." The
taxicab of the insured collided with a gravel and sand truck.
The lower court, while holding that the collision was due
to the fault of driver of the truck, nevertheless held the taxicab
operator (insured) liable to the passengers of its motor vehicle
on the strength of its representation that its passengers were
insured against accidents and adjudged the insurer answerable
to the insured in view of its third party liability contract.
Issue: Is the insurer liable to the insured under the policy?
Held: No. The indemnity awarded to the passengers was
not because of the accident but was exclusively predicated on
estoppel — on the representation made by the insured. Had it
not been for this representation, the insured would not have
been liable at all. It does not appear, however, that the insurer
authorized or consented to or even knew of, the representation
by the insured. It follows that the insurer may not be held
liable for such damages for recovery is limited by the terms
and conditions of the policy. (Far Eastern Surety & Insurance Co.
vs. Vda. de Misa, 25 SCRA 662 [1968].)
Sec. 74. The violation of a material warranty, or other
material provision of a policy, on the part of either party
thereto, entitles the other to rescind.
Right to rescind for violation
of a material warranty.
(1) Rescission by the insured. — The violation of the terms
of a contract of insurance entitles either party to terminate the
contractual relations. (Young vs. Midland Textile Ins. Co., 30 Phil.
614 [1915].) Thus, the insured can sue for rescission for breach of
contract due to the refusal of the insurer to grant a loan applied
for although this was expressly agreed upon in the policy and he
Sec. 7 5
CONTRACT OF INSURANCE
Title 7. — Warranties
233
can recover the full amount of the premiums paid by him up to
the filing of the action. (Filipinas Compania de Seguros vs. Nava,
17 SCRA 210 [1966].)
(2) Rescission by the insurer. — Under Section 74, the insurer
is entitled to rescind a contract of insurance for violation of a
warranty only if said warranty is material; otherwise, the breach
thereof will not avoid the policy. (Sec. 75.) The right of the insurer
to rescind under Section 74 exists even though the violation was
not the direct cause of the loss. (Young vs. Midland Textile Ins.
Co., supra.) Thus, where a fire policy requires the insured to give
notice of the existence of other insurance policies over the same
property insured, the non-disclosure thereof is a violation of a
material warranty which entitles the insurer to rescind. (Union
Manufacturing Co., Inc. vs. Phil. Guaranty Co., Inc., 4 7 SCRA 271
[1972].)
Sec. 75. A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach
of an immaterial provision does not avoid the policy.
When violation of immaterial provisions
shall avoid policy.
Under American jurisprudence, every warranty is conclusively presumed material, (see Vance, op. cit., p. 415.) Hence,
a warranty as to any fact will preclude any inquiry as to the
materiality of that fact. It need only be false. The law (Sees. 74
and 75.) makes a distinction between provisions that are material
and provisions that are immaterial. The breach of any provision
which is not material will not avoid the policy. (Sec. 74.)
However, the parties m a y expressly stipulate that the violation
of a particular provision (although immaterial) in the policy
shall avoid it. (Sec. 75.) By such stipulation, the parties convert
an immaterial warranty into a material one. Thus, a stipulation
against procuring additional insurance without the insurer's
consent although immaterial to the risk insured against, will
avoid a fire insurance policy which declares that such violation
shall avoid it. (45 C.J.S. 359.) Such a stipulation or condition has
been upheld as valid and as a warranty no other insurance exists.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
234
Sec. 7 6
However, to constitute a violation, the other insurance must be
upon the same subject-matter, the same interest therein and the
same risk. (Geagonia vs. Court of Appeals, 241 SCRA 152 [1995];
see Sec. 93.)
Sec. 76. A breach of warranty without fraud, merely exonerates an insurer from the time that it occurs, or where it
is broken in its inception, prevents the policy from attaching to the risk.
Effect of breach of warranty
by insured.
The breach referred to under Section 76 is one without fraud.
In order that the insurer m a y be entitled to rescind a contract of
insurance on the ground of a breach of warranty, fraud is not
essential, (see Sec. 74.) Falsity, not fraud, is the basis of liability
on a warranty. (Leonard vs. State Mut. L. Assur. Co., 24 R.I. 7, 51
A. 1049.)
(1) Without fraud. — Where there is no fraud, the policy is
avoided only from the time of breach (Sec. 76.) and the insured is
entitled (a) to the return of premium paid at a pro rata rate from
the time of breach (see Sec. 79[b].) if it occurs after the inception
of the contract; or (b) to all the premiums if it is broken during
the inception of the contract. In the latter case, the contract is
void ab initio and never becomes binding.
(2) With fraud. — W h e r e there is fraud, the policy is avoided
ab initio, and the insured is not entitled to the return of the
premium paid.
EXAMPLE:
Suppose the warranty stipulates that the insured will not
store inflammable materials in the building insured.
If the policy is issued on June 10, 2002 and the insured
violates the warranty on June 25,2002, the insurer is exonerated
only from June 25, 2002. Consequently, the insurer is liable
for any loss arising before June 25, 2002 but not as to a loss
occurring thereafter. In this case, the insurer is entitled to retain
the premium up to June 25, 2002, the time of the breach.
Sec. 76
CONTRACT OF INSURANCE
Title 7. — Warranties
235
If the insured, without fraud, makes a false warranty at
the time he signs the contract, he cannot recover for any loss
arising thereafter because the breach prevents the policy from
attaching to the risk. In other words, the contract is void ab
initio but all the premiums should be returned to the insured.
If the insured is guilty of fraud, he is not entitled to the
return of the premiums paid.
Conditions in insurance policy.
In law, a condition is an event signifying in its broadest
sense either an occurrence or a non-occurrence that alters the
previously existing legal relations of the parties to the contract.
(E.W. Patterson, op. cit, p. 238.)
Insurers m a y impose whatever conditions they please upon
their obligations, as long as they are not contrary to law, morals,
good customs, public order, or public policy. (Art. 1306, Civil
Code.) Conditions in an insurance policy are of two kinds —
precedent and subsequent.
(1) A condition precedent calls for the happening of some event
or the performance of some act after the terms of the contract have
been agreed upon, before the contract shall be binding on the
parties, such as that the policy shall not take effect until delivery
and payment of the first premium during the good health of the
applicant.
(2) A condition subsequent is that which pertains not to the
attachment of the risk and the inception of the policy, but to the
contract of insurance after the risk has attached and during the
existence thereof (43 A m . Jur. 2d 1035.), such as the condition
requiring notice and proof of loss in case of loss upon an insurance
against fire, (see Sees. 88-89.)
Warranties and conditions distinguished.
The terms "warranty" and "conditions precedent" are often
used interchangeably or synonymously. However, some courts
have recognized material differences.
(1) As to effect. — The best recognized distinction between
the two is that warranty does not suspend or defeat the operation
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236
Sec. 7 6
of the contract, but a breach affords either the remedy expressly
provided in the contract or that furnished by law, while condition
precedent is one without the performance of which the contract,
although in form executed by the parties and delivered, does
not spring into life. In other words, a condition precedent is a
limitation to the attachment of the risk, whereas a warranty does
not necessarily have that effect.
(2) As to nature. — If the insured person contracts and
warrants that if the representations made by him in his
application for insurance are not true, the policy shall be null
and void, such statements are not conditions precedent but
rather of the nature of a defeasance. Also, promissory warranties
are usually regarded as conditions subsequent to be performed
after the policy has become a valid contract, non-performance of
which will work a defeasance. (43 A m . Jur. 2d 1036.)
Exceptions in insurance policy.
Exceptions are inserted in a contract of insurance for the
purpose of withdrawing from the coverage of the policy, as
delimited by the general language describing the risk assumed,
some specific risks which the insurer declares himself unwilling
to undertake. Thus, the insurer w h o issues his policy covering a
certain store and its contents against loss or d a m a g e by fire m a y
cut down the meaning of "contents" by excepting m o n e y and
securities, and restrict the peril of "fire" by excepting fire caused
by lightning. (Vance, op. cit, p. 426.)
Exceptions distinguished from warranties
and conditions.
In most cases, exceptions are easily distinguished from
warranties and conditions.
EXAMPLE:
If the policy contains warranted statement that the insured
building is occupied, we have an undoubted warranty. If the
policy declares that "this entire policy shall be void if the
insured building be or becomes vacant or unoccupied and
so remained for more than ten days," we have just as clearly
Sec. 7 6
CONTRACT OF INSURANCE
Title 7. — Warranties
237
a condition. If the provision is that "this company shall not
be liable for any loss while the insured building is vacant or
unoccupied" we have an unmistakable exception.
But the policy might be worded so as to leave the matter
in doubt. Thus, if the provision above given as creating an
exception should declare that "the insurer shall not be liable if
the building becomes vacant," a court might well be doubtful
whether a condition or an exception was intended.
Ordinarily, the insurance is suspended as long as the
undesirable situation exists, that is, the building remains
unoccupied, but as soon as the undesirable situation is
eliminated, the insurance is revived or reinstated.
Effects of breach on legal relations
of parties.
Warranties, conditions, and exceptions affect the legal
relations of the parties quite differently.
(1) On binding force of contract. — The occurrence of a breach
or warranty or condition even though such breach be but
temporary renders the entire contract defeasible or voidable
and even though such breach may not have affected the risk
or contributed to the loss in any way. But the occurrence of an
excepted peril, such as the vacancy of the insured house, does
not in the least affect the binding force of the contract. If a loss
happens during such vacancy, it falls outside the coverage of the
policy and the insurer is not liable. But if no loss occurs, and the
house is reoccupied, the contract relations of the parties continue
unchanged.
(2) On liability where there is waiver. — Such a breach of
warranty or of condition may be waived without consideration;
but the insurer does not become liable for an excepted loss by
waiver unless such waiver amounts to a new contract on valuable
consideration. The insurer cannot, by a naked waiver, assume a
non-existent duty. Nor is the defense that the loss is excepted
barred by the incontestable clause, {ibid., pp. 426-427.)
— oOo —
The consideration
assuming the risk
involved
Title 8
PREMIUM
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period
provision applies, (a)
Premium defined.
An insurance premium m a y be defined as the agreed price for
assuming and carrying the risk — that is, the consideration paid
an insurer for undertaking to indemnify the insured against a
specified peril. (43 A m . Jur. 2d 326.)
Note: Where only one premium is paid for several things
not separately valued or separately insured, making for only
one cause or consideration, the insurance contract is entire or
indivisible, not severable, or divisible, as to the items insured.
It is immaterial that they are shipped or transported separately.
(Oriental Assurance Corp. vs. Court of Appeals, 200 SCRA 4 5 9
[1991]; see Sees. 2 2 1 , 1 3 9 . )
Assessment defined.
An assessment, in the law of insurance, is a sum specifically
levied by mutual insurance companies or associations, upon
a fixed and definite plan, to pay losses and expenses. A policy
issued on the assessment plan has been defined as one where
the payment of the benefit is in any manner or degree dependent
238
Sec. 7 7
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
239
upon the collection of an assessment upon persons holding
similar policies. (43 A m . Jur. 2d, p. 327.)
Premium distinguished from assessment.
In theory, all payments of premiums and assessments are but
contributions from all members of the insuring organization to
make good the losses of individual members.
The chief distinction, however, between premiums and
assessments lies in the fact that the former are levied and paid to
meet anticipated losses, while the latter are collected to meet actual
losses. The payment of premium, after the first, is not enforceable
against the insured; while assessments, unless otherwise agreed,
are legally enforceable once levied. Hence, while premium is
not a debt, an assessment, properly levied, unless otherwise
expressly agreed, is a debt. (Vance, op. cit., pp. 296-297, 300.)
Payment of premium ordinarily not a debt
or obligation.
(1) In fire, casualty, and marine insurance. — The premium
payable becomes a debt as soon as the risk attaches (Sec. 77;
see Sees. 79[a], 78.), and in suretyship, as soon as the contract or
bond is perfected and delivered to the obligor. (Sec. 177.) The
phrase "the thing insured is exposed to the peril insured against"
assumes that the contract is perfected which takes place when
the applicant's offer is accepted by the insurer.
1
Where, as between the insurer and the insured, there was not
only a perfected contract of insurance but a partially performed
one as far as the payment of the agreed premium was concerned,
the obligation of the insurer to pay the insured the amount for
which the policy was issued in case the conditions therefor had
been complied with, arose and became binding upon it, while
the obligation of the insured to pay the remainder of the total
amount of the premium due became demandable. Nonpayment
of the balance of the premium due does not produce the
'Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 550
(2005), citing De Leon, Hector S., the Insurance Code of the Philippines (1992), p. 194.
240
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
cancellation of the contract of insurance in the sense that it can
no longer be enforced. A contrary rule would place exclusively in
the hands of the insured the right to decide whether the contract
should stand or not. (Phil. Phoenix Surety & Insurance Co., Inc.
vs. Woodworks, Inc., 20 SCRA 1270 [1967].)
ILLUSTRATIVE CASES:
1. Balance of premium was not paid.
Facts: On April 1,1960, X Co. (insurer) issued and delivered
to Y Co. (insured) a fire policy for the amount of P300,000.00 for
a term of one year. The premium of said policy amounted to
P6,000.00. On September 22,1960, Y Co. paid P3,000.00.
Notwithstanding several demands, Y Co. refused to pay
the balance.
Issue: Did the nonpayment cancel the policy?
Held: No. In this case, the risk attached upon the issuance
and delivery to Y Co. on April 1,1960 of the fire policy. As the
policy was effective for one (1) year, from April 1,1960 to April
1,1961, the balance of the premium was still collectible. As the
contract had become perfected, the parties could demand from
each other the performance of whatever obligations they had
assumed.
In the case of the insurer (X Co.), it had the right to demand
from the insured (Y Co.) the completion of the payment of the
premium due or sue for rescission of the contract. As it chose to
demand specific performance of the insured's obligation to pay
the balance of the premium, the latter's duty to pay is indeed
indubitable, (ibid.)
2. No premium was paid.
Facts: Suppose, no partial payment of the premium was
made by Y Co. to X Co.
Issue: May X Co. recover the unpaid premium from Y Co.?
Held: No. The continuance of the insurer's obligation is
conditioned upon the payment of the premium, so that no
recovery can be had upon a lapsed policy, the contractual
relation between the parties having ceased. In fact, if the peril
insured against had occurred, X Co., as insurer, would have had
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
a valid defense against recovery under the policy. (Phil Phoenix
Surety & Ins., Co. vs. Woodworks, Inc., 92 SCRA 419 [1979].)
Note: In the preceding case, recovery of the balance of the
unpaid premium was allowed inasmuch as "there was not only
a perfected contract of insurance but a partially performed one
as far as the payment of the agreed premium was concerned."
3. The balance of the premium which was only partially paid,
was paid only after the loss has occurred.
Pacts: Private respondent X & Co. (insurer) issued a fire
insurance policy in favor of T (insured) on a residential building
for P600,000.00. T only paid P600.00 out of the total premium of
P2,900 thus leaving a considerable balance unpaid.
T paid the balance two (2) days after the insured building
was completely destroyed by fire. The policy provides for
payment of premium in full before the "policy shall be deemed
effective, valid and binding upon the company."
Issue: Is the fire insurance policy valid and enforceable
upon mere partial payment of premium.
Held: No. (1) Phoenix and Makati Tuscany cases not persuasive.
— "The 1969 Phoenix case (supra.) is not persuasive; neither is it
decisive of the instant dispute. For one, the factual scenario is
different. In Phoenix, it was the insurance company that sued for
the balance of the premium, i.e., it recognized and admitted the
existence of an insurance contract with the insured. In the case
before us, there is, quite unlike in Phoenix, a specific stipulation
that (t)his policy x x x is not in force until the premium has
been fully paid and duly receipted by the Company x x x x.
Resultantly, it is correct to say that in Phoenix, a contract was
perfected upon partial payment of the premium since the
parties had not otherwise stipulated that prepayment of the
premium in full was a condition precedent to the existence of a
contract.
In Phoenix, by accepting the initial payment of P3,000.00
and then later demanding the remainder of the premium
without any other precondition to its enforceability as in the
instant case, the insurer in effect had shown its intention to
continue with the existing contract of insurance, as in fact it
was enforcing its right to collect premium, or exact specific
performance from the insured. This is not so here. By express
241
242
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
agreement of the parties, no vinculum juris or bond of law was
to be established until full payment was effected prior to the
occurrence of the risk insured against.
In Makati Tuscany case (infra.), the parties mutually agreed
that the premium could be paid in installments, which in
fact they did for three (3) years, hence, this Court refused to
invalidate the insurance policy. These two cases, Phoenix and
Tuscany, adequately demonstrate the waiver, either express or
implied, of prepayment in full by the insurer: impliedly, by suing
for the balance of the premium as in Phoenix, and expressly,
by agreeing to make premium payable in installments as in
Tuscany. But contrary to the stance taken by petitioners, there is
no waiver express or implied in the case at bench. Precisely, the
insurer and the insured expressly stipulated that (t)his policy
including any renewal thereof and/or any indorsement thereon is not
in force until the premium has been fully paid to and duly receipted
by the Company x x x x and that this policy shall be deemed effective,
valid and binding upon the Company only when the premiums
therefor have actually been paid in full and duly acknowledged."
(2) Partial payment in the nature of a deposit. — "Conformably
with the aforesaid stipulations explicitly worded and taken in
conjunction with Section 77 of the Insurance Code the payment
of partial premium by the assured in this particular instance
should not be considered the payment required by the law and
the stipulation of the parties. Rather, it must be taken in the
concept of a deposit to be held in trust by the insurer until such
time that the full amount has been tendered and duly receipted
for. In other words, as expressly agreed upon in the contract,
full payment must be made before the risk occurs for the policy
to be considered effective and in force."
(3) Premium is the 'elixir vitae' of insurance business. —
"It cannot be disputed that premium is the elixir vitae of the
insurance business because by law the insurer must maintain
a legal reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt payment
and full satisfaction. It must be emphasized here that all
actuarial calculations and various tabulations of probabilities
of losses under the risks insured against are based on the
sound hypothesis of prompt payment of premiums. Upon this
bedrock, insurance firms are enabled to offer the assurance of
security to the public at favorable rates. But once payment of
premium is left to the whim and caprice of the insured, as when
Sec. 7 7
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
the courts tolerate the payment of a mere P600.00 as partial
undertaking out of the stipulated total premium of P2,983.50
and the balance to be paid even after the risk insured against
has occurred, as petitioners have done in this case, on the
principle that the strength of the vinculum juris is not measured
by any specific amount of premium payment, we will surely
wreak havoc on the business and set to naught what has taken
actuarians centuries to devise to arrive at a fair and equitable
distribution of risks and benefits between the insurer and the
insured." (Tibay vs. Court of Appeals, 257 SCRA 126 [1996].) Note:
See UCPB General Insurance Co., Inc. vs. Masagana Telemart,
Inc., 356 SCRA 307 [2001], which reconsidered previous
decision of June 15,1999, Illus. Case No. 2, infra.)
Dissenting Opinion:
(1) Enough that payment on premium, partly or in full, made.
— "The payment of premium, subject to the stated exceptions,
is deemed by the foregoing provisions (Sec. 77.) to be an
element essential to establish the juridical relation between
the insurer and the insured. Observe, however, that the law
neither requires, nor measures the strength of the vinculum
juris by, any specific amount of premium payment. It should
thus be enough that payment on the premium partly or in full,
is made by the insured which the insurer accepts. In fine, it is
either that a juridical tie exists (by such payment) or that it is not
extant at all (by an absence thereof). Once the juridical relation
comes into being, the full efficacy, not merely pro tanto, of the
insurance contract naturally follows. Verily, not only is there an
insurance perfected but also a partially performed contract.
In case of loss, recovery on the basis of the full contract
value, less the unpaid premium can accordingly be had;
conversely, if no loss occurs, the insurer can demand the
payment of the unpaid balance of the premium. The insured, on
the one hand, cannot avoid the obligation of paying the balance
of the premium while the insurer, upon the other hand, cannot
treat the contract as valid only for the purpose of collecting
premiums and as invalid for the purpose of indemnity."
(2) Insurer's liability reduced proportionately by balance of
premium still due. — "Nor would the non-payment of the balance
due result in an AUTOMATIC cancellation of the insurance
contract; otherwise, the effect would be to place exclusively in
the hands of one of the contracting parties the right to decide
243
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
whether the contract should stand or not in possible disregard of
the MUTUALITY OF CONTRACTS RULE. Instead, the parties
should be able to demand from each other the performance
of whatever obligations they had assumed or, if desired, sue
timely for the rescission of the contract, In the meanwhile, the
contract endures, and an occurrence of the risk insured against
triggers the insurer's liability. Forthwith, legal compensation
arises under the pertinent provisions of the Civil Code under
which the mutual debts are, to the extent of the concurrent
amount, extinguished by mere operation of the law.
The net result, such as in the case at bench, is that the
insurer's liability to the insured would simply be reduced by
the balance of the premium still due from the latter. Thus, it
becomes TOTALLY INCONSEQUENTIAL whether the insured
still remits or no longer remits payment of the balance of the
premium, the insurer's liability theretofore having already
attached."
(3) Partial payment accepted by insurer. — "The insured
HAD MADE, and the insurer HAD ACCEPTED, a partial
premium payment of the policy weeks before the risk insured
against took place.
An insurance is an aleatory contract which, unlike a
conditional agreement whose efficacy is dependent on stated
conditions, is at once effective upon its perfection although
the occurrence of a condition or event may later dictate the
demandability of certain obligations thereunder. Founded
on the autonomy of contracts, the parties, of course, are
generally not prevented from imposing conditions that alone
could trigger the contract's obligatory force. These conditions,
however must not be contrary to law, morals, good customs,
public order or public policy.
To say that the provisions in the policy issued by Fortune,
i.e., that the insurance shall not 'be x x x in force until the
premium has been fully paid,' and that it 'shall be deemed
effective, valid and binding upon the company only when
the premiums therefor have actually been paid in full and duly
acknowledged/ override the efficaciousness of the insurance
contract despite the payment and acceptance of a part of the
premium would be opposed not only to the precepts heretofore
adverted to on the correct application of Section 77, but also to
the intent and spirit of Section 78 which, like Section 77 is not
dependent on how much premium has been paid.
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
It seems quite clear to me that on the day premium
payment is made by the insured, albeit only a portion of it, so
long as it is accepted by the insurer, the insurance coverage
becomes effective and binding, any stipulation in the policy
to the contrary notwithstanding. The insurer is not without
recourse; all that it needs is not to accept, if it wants to, any
premium payment of less than full. But if it does accept
payment, reason dictates that it should not be allowed to deny
the insurance contract upon which very existence that payment
is predicated." (Vitug, J.)
4. To avoid liability, insurer claims that insured forfeited the
renewal policy for failure to pay the full amount of premium.
Facts: Petitioner AHA Company claims that respondent
TE Enterprises, Inc. forfeited the renewal policy for its failure
to pay the full amount of the premium and breach of the Fire
Extinguishing Appliances Warranty.
The amount of the premium stated on the face of the
policy was P89,770.20. From the admission of respondent's
own witness, Mr. Borja, which the petitioner cited, the former
only paid it P75,147.00, leaving a difference of P14,623.20. The
deficiency, petitioner argues, suffices to invalidate the policy, in
accordance with Section 77 of the Insurance Code.
The Court of Appeals refused to consider this contention of
the petitioner. It held that this issue was raised for the first time
on appeal, hence, beyond its jurisdiction to resolve, pursuant to
Rule 46, Section 18 (now Rule 44, Sec. 15) of the Rules of Court.
Petitioner, however, contests this finding of the appellate
court. It insists that the issue was raised in paragraph 24 of its
Answer, viz.:
"24.Plaintiff has not complied with the condition of the
policy and renewal certificate that the renewal premium
should be paid on or before renewal date."
Petitioner adds that the issue was the subject of the crossexamination of Mr. Borja, who acknowledged that the paid
amount was lacking by P14,623.20 by reason of a discount or
rebate, which rebate under Section 361 of the Insurance Code is
illegal.
Issue: Is petitioner's argument tenable?
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
Held: No. (1) Petitioner's answer contains no specific and definite
allegation of non-payment. — "It is true that the asseverations
petitioner made in paragraph 24 of its Answer ostensibly spoke
of the policy's condition for payment of the renewal premium
on time and respondent's non-compliance with it. Yet, it did
not contain any specific and definite allegation that respondent
did not pay the premium, or that it did not pay the full amount,
or that it did not pay the amount on time."
(2) Question of supposed inadequate payment was never raised
in the trial court. — "Likewise, when the issues to be resolved
in the trial court were formulated at the pre-trial proceedings,
the question of the supposed inadequate payment was never
raised. Most significant to point, petitioner fatally neglected
to present, during the whole course of the trial, any witness
to testify that respondent indeed failed to pay the full amount
of the premium. The thrust of the cross-examination of Mr.
Borja, on the other hand, was not for the purpose of proving
this fact. Though it briefly touched on the alleged deficiency,
such was made in the course of discussing a discount or rebate,
which the agent apparently gave the respondent. Certainly, the
whole tenor of Mr. Borja's testimony, both during direct and
cross examinations, implicitly assumed a valid and subsisting
insurance policy. It must be remembered that he was called
to the stand basically to demonstrate that an existing policy
issued by the petitioner covers the burned building." (American
Home Assurance Company, Inc. vs. Tantoco Enterprises, Inc., 366
SCRA 740 [2001].)
(2) In life insurance. — The premium becomes a debt only
when in the case of the first premium, the contract has become
binding, and in the case of subsequent premiums, when the
insurer has continued the insurance after maturity of the
premium, in consideration of the insured's express or implied
promise to pay. (Vance, op. cit., p. 300.)
(a) A life insurance policy involves a contractual
obligation wherein the insured becomes duty bound to pay
the premium agreed upon lest he runs the risk of having his
insurance policy lapse if he fails to pay such premiums. The
fact that the insurance policy contains an automatic premium
payment clause cannot divest such policy of its contractual
Sec. 7 7
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
247
nature for the result of such failure would only be for him to
pay the premium plus the corresponding interest depending
upon the condition of the policy.
(b) There is usually no duty assumed by the insured to
pay any premiums subsequent to the first. Insofar as the
contract is executory, the ordinary life insurance is purely
unilateral, (ibid., p. 296.) The insurer, therefore, cannot compel
the insured to pay the premium because the insured is by no
means a debtor of the insurer, nor is the insurer the creditor
of the insured.
Effect of nonpayment of premium.
The general rules of law applicable to the payment of
money obligations are, of course, applicable to the payment of
insurance premiums. As a general principle, the time specified
for the payment of premiums is of the essence of the contract.
The ability of the insurer to meet its contingent obligations to the
public depends upon the prompt payment of all premiums due
it.
(1) First premium. — Nonpayment of the first premium
unless waived (see Sec. 78.), prevents the contract from becoming
binding notwithstanding the acceptance of the application nor
the issuance of the policy. But nonpayment of the balance of the
premium due does not produce the cancellation of the contract,
(see Phil. Phoenix Surety & Insurance, Co., Inc. vs. Woodworks,
Inc., 20 SCRA 1270 [1967], supra.)
(2) Subsequent premiums. — Nonpayment of subsequent
premiums does not affect the validity of the contracts unless,
by express stipulation, it is provided that the policy shall in that
event be suspended or shall lapse. In case of individual life or
endowment insurance and group life insurance, the policyholder
is entitled to a grace period of either thirty (30) days or one (1)
month within which the payment of any premium after the first
may be made. (Sees. 227[a], 228[a].) In the case of industrial
life insurance, the grace period is four (4) weeks, and where
premiums are payable monthly, either thirty (30) days or one (1)
month. (Sec. 230[a].)
248
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
Excuses for nonpayment of premiums.
(1) Fortuitous events. — Even the act of God, rendering the
payment of the premium by the insured wholly impossible (see
Art. 1174, Civil Code.), will not prevent the forfeiture of the
policy when the premium remains unpaid. If the insured can
neglect payment at maturity and yet suffer no loss or forfeiture,
premiums will not be punctually paid. The insurer must have
some efficient means of enforcing punctuality; hence, insurance
contracts usually provide for the forfeiture of the policy
upon default of prompt payment of premiums. (Wheeler vs.
Connecticut Mutual Life Ins. Co., 82 N.Y. 543.)
The rule is not affected by the fact that the nonpayment is
due to w a r or that the insured has not been negligent. In this
jurisdiction, nonpayment of premiums does not merely suspend
but puts an end to an insurance contract, "since the time of the
payment is peculiarly of the essence of the contract." Insurance
companies "not only calculate on the receipt of the premiums
when due but on the compounding interest upon them. It is on
this basis that they are enabled to offer assurance at the favorable
rates they do." (National Leather Co., Inc. vs. U.S. Life Ins. Co.,
87 Phil 410 [1950]; Constantino vs. Asia Life Ins., Co., 87 P h i l 248
[1950]; Phil. Phoenix Surety & Ins. Co. vs. Woodworks, Inc., 92
SCRA 419 [1979], supra.)
(2) Condition, conduct or default of insurer. — Indeed, no excuse
whatever will avail to prevent a forfeiture except only when the
nonpayment has in some w a y been induced by the condition,
conduct or default of the insurer.
Thus, nonpayment is excused:
(a) Where the insurer has become insolvent and has
suspended business, or has refused without justification a
valid tender of premiums (see Gonzales vs. Asia Life Ins. Co.,
92 Phil. 197 [1952].); or
(b) Where the failure to pay was due to the wrongful
conduct of the insurer as when the insurer induced the
beneficiary under a policy to surrender it for cancellation by
falsely representing that the insurance was illegal and void,
and returning the premiums paid; or
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
249
(c) Where the insurer has in any wise waived his right to
demand payment. (Vance, op. cit, pp. 326-331.)
But the insurer will not be deemed to have waived his
privilege of forfeiture by mere inaction or silence if the ground be
default in the payment of premiums, going as it does to the whole
consideration inducing the insurer to enter into the contract.
Furthermore, while the insured has the privilege of continuing
the policy in force by making premium payments, the insurer
cannot ordinarily force the insured to make these payments.
(ibid., p. 493.)
Validity of policy where credit extension
granted to insured.
The first sentence of Section 72 (now Section 77) of the
former Insurance Act includes the following provisions after
the w o r d "against": "unless there is a clear agreement to grant
the insured credit extension of the premium due." This phrase
expressly permitting an agreement to extend the period to pay
the premium has been omitted in Section 77 and the phrase
"Notwithstanding any agreement to the contrary," added at
the beginning of the second sentence. Apparently, the intention
is to put a contract of insurance "except in the case of a life or
an industrial life policy whenever the grace provision period
applies," on a "cash-and-carry basis," and except as provided in
Section 78, so that under Section 77, the premium must be paid in
cash as a condition precedent for a non-life insurance policy to be
valid and binding, and an agreement to grant the insured credit
2
3
4
2
T h e phrase is not found in Section 72.
U n d e r Section 196(1), p r e m i u m receivables are not allowed as admitted assets in
the determination of the financial condition of any insurance company. Pursuant to Section 196(10) and in implementation of the cash-and-carry provision of Section 77, the
Insurance Commissioner has issued a circular letter (dated N o v e m b e r 20, 1981, superseding previous circulars, rulings or instructions on the matter inconsistent therewith)
prescribing the rules on p r e m i u m receivables to be considered as admitted assets, (see
annotations under Sees. 196, 197.) In other words, only premium receivables allowed as
admitted assets under the circular are considered paid for purposes of Section 77.
3
4
A s to cover notes, see Section 52.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
250
Sec. 77
5
extension of the premium due is void. (see Velasco vs. Apostol,
173 SCRA 228 [1989].)
In Makati Tuscany Condominium Corp. vs. Court of Appeals
(infra.), the Supreme Court sustained the Court of Appeals in
the latter s ruling that "Section 77 merely precludes the parties
from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement granting
credit extension, and such an agreement is not contrary to
morals, good customs, public order or public policy. (De Leon,
The Insurance Code, at p. 235.) So is an understanding to allow
insured to pay premiums in installments not so proscribed.
At the very least, both parties should be deemed in estoppel
to question the arrangement they have voluntarily accepted/'
In UCPB General Insurance Co., Inc. vs. Masagana Telemart, Inc.
(308 SCRA 259 [1999].), the Supreme Court m a d e the following
ruling: "An insurance policy other than life issued originally or
on renewal is not valid and binding until actual payment of the
premium. The parties m a y not agree expressly or impliedly on
the extension of credit or time to pay the premium and consider
the policy binding before actual payment." (see Note 7.)
,
It is submitted that a credit extension agreement is valid.
(1) If, under Section 78, the mere acknowledgment in the
policy of receipt of premium makes the policy binding although
in fact it has not been paid, there is a stronger reason to accord validity
to a policy where there is a clear agreement to grant the insured credit
extension of the premium due. In both cases, the insurer waives
the condition of prepayment in full and has a right to recover the
premium due and unpaid.
6
(2) The familiar principle is that what the law prohibits to be done
directly cannot be done indirectly. To adopt the official interpretation
5
This is the interpretation of the Insurance C o m m i s s i o n and the insurance industry.
A c c o r d i n g to the Commission, the "cash-and-carry" rule does not apply w h e n it will
w o r k against public interest or innocent third parties. Thus, in the case of c o m p u l s o r y
m o t o r vehicle insurance (Chap. VI.), w h e r e accident victims b e c o m e third p a r t y claimants, an insurance c o m p a n y cannot deny recovery on the g r o u n d that the p r e m i u m on
the policy h a s not been paid. Such policy is considered already paid for, o n c e it is in the
hands of the insured for the protection of innocent third persons w h o are not privy to the
insurance contract.
6
In the absence of clear waiver, express or implied by the insurer, the insured cannot
collect on the proceeds of the policy.
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
251
would, in effect, establish the following rule: "Credit extension of
the premium due m a y be granted: if done by express agreement,
the policy is void; if done merely by an acknowledgment of
receipt of premium which is actually unpaid, the policy is valid."
In other words, what the parties cannot do directly, they can do
indirectly.
(3) The new rule is susceptible to the constitutional objection that
it unduly restricts the freedom of contract particularly of the insured
who m a y be the innocent victim of an unscrupulous insurer
desiring to collect the whole premium for a reduced period of
coverage. The deletion of the quoted phrase notwithstanding,
the fact remains that there is no express prohibition by Section
77 against an agreement granting credit extension and such
agreement cannot be said to be contrary to "morals, good
customs, public order or public policy." (see Art. 1306, Civil
Code.) "Because the freedom to contract is both a constitutional
and statutory right, to uphold the right, courts are enjoined to
m o v e with necessary caution and prudence in holding contracts
void." (Gabriel vs. Mateo, 71 Phil. 497 [1941].)
7
(4) The ruling of the Supreme Court in U C P B General
Insurance Co. (supra.) is unduly favorable to the insurer who
m a y grant an extension to the insured and easily lull the latter
into a false sense of security and then deny liability should the
event insured against takes place. But the insurer m a y choose to
demand the payment of the premium before a loss has occurred
if he desires to maintain or continue the contract of insurance.
8
When policy valid and binding notwithstanding
nonpayment of premium.
The following are the exceptions to Section 77:
(1) In the case of a life or an industrial policy whenever the
grace period provision applies (Sec. 77.);
^ t w a s held that u n d e r Section 72, an insurance policy w a s automatically cancelled
u p o n failure of the insured to pay the premium within the 90-day credit extension granted by the express terms of the promissory note signed by the insured. ( A C M E Shoe Rubber & Plastic Corp. vs. Court of Appeals, 134 SCRA 155 [1985].)
Reconsidered and set aside on motion for reconsideration of respondent. (356 SCRA
8
307 [2001], Ulus. case No. 2, infra.)
252
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
(2) When there is an acknowledgment in a policy or contract
of insurance of receipt of premium even if there is a stipulation
therein that it shall not be binding until the premium is actually
paid (Sec. 78.);
(3) When there is an agreement allowing the insured to pay
the premium in installments and partial payment has been m a d e
at the time of loss (see Makati Tuscany Condominium Corp. vs.
Court of Appeals, 215 SCRA 463 [1992], infra.);
(4) When there is an agreement to grant the insured credit
extension for the payment of the premium (Art. 1306, Civil
Code.), and loss occurs before the expiration of the credit term;
and
(5) When estoppel bars the insurer from invoking Section
77 to avoid recovery on a policy providing a credit term for the
payment of the premiums, as against the insured w h o relied in
good faith on such extension.
Be that as it may, once a policy has been issued, the presumption lies that the premium has been duly paid, and where
the nonpayment of the premium is attributable to the fault or
misrepresentation of the insurer, the insured is entitled to recover in case of loss.
ILLUSTRATIVE CASES:
1. The premium due was paid on installments.
Facts: Private respondent, X Co. (insurer), issued in favor of
Y Co. (insured), petitioner, an insurance policy on the latter's
building for a period beginning March 1, 1982 and ending
March 1, 1983. The premium was paid in four (4) installments
in 1982, all of which were accepted by X Co. A renewal policy
was issued for a term covering March 1,1993 to March 1,1994.
The premium was paid in five (5) installments in 1993. Again,
all payments were accepted by X Co.
On January 20, 1984, the policy was again renewed and
private respondent issued to petitioner Insurance Policy No.
AH-CPP-9210651 for the period March 1, 1984 to March 1,
1985. On this renewed policy, petitioner made two installment
payments, both accepted by private respondent, the first on
February 6, 1984 for P52,000.00 and the second, on June 6,
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
1984 for P100,000.00. Thereafter, petitioner refused to pay the
balance of the premium. Consequently, private respondent
filed an action to recover the unpaid balance of P314,103.05 for
Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the
issuance of Insurance Policy No. AH-CPP-9210651. It explained
that it discontinued the payment of premiums because the
policy did not contain a credit clause in its favor and the receipts
for the installment payments covering the policy for 1984-85
as well as the two (2) previous policies, stated the following
reservations:
"2. Acceptance of this payment shall not waive any of
the company rights to deny liability on any claim under the
policy arising before such payments or after the expiration
of the credit clause of the policy; and
"3. Subject to no loss prior to premium payment. If
there be any loss, such is not covered."
Petitioner further claimed that the policy was never binding
and valid, and no risk attached to the policy. It then pleaded a
counterclaim for P152,000.00 for the premiums already paid for
1984-85, and in its answer with amended counterclaim, sought
the refund of P924,206.10 representing the premium payments
for 1982-85.
On October 8,1987, the trial court dismissed the complaint
and the counterclaim.
Both parties appealed from the judgment of the trial court.
Thereafter, the Court of Appeals rendered a decision modifying
that of the trial court by ordering herein petitioner to pay the
balance of the premiums due on Policy No. AH-CPP-921-651,
or P314,103.05 plus legal interest until fully paid, and affirming
the denial of the counterclaim. The appellate court thus
explained —
"The obligation to pay premiums when due is ordinarily
an indivisible obligation to pay the entire premium. Here,
the parties herein agreed to make the premiums payable in
installments, and there is no pretense that the parties never
envisioned to make the insurance contract binding between
them. It was renewed for two succeeding years, the second and
third policies being a renewal /replacement for the previous
one. And the insured never informed the insurer that it was
terminating the policy because the terms were unacceptable.
253
254
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
While it may be true that under Section 77 of the Insurance
Code, the parties may not agree to make the insurance contract
valid and binding without payment of premiums, there is
nothing in said section which suggests that the parties may not
agree to allow payment of the premiums in installments, or to
consider the contract as valid and binding upon payment of
the first premium. Otherwise, we would allow the insurer to
renege on its liability under the contract, had a loss incurred
(sic) before completion of payment of the entire premium,
despite its voluntary acceptance of partial payments, a result
eschewed by basic considerations of fairness and equity.
To our mind, the insurance contract became valid and
binding upon payment of the first premium, and the plaintiff
could not have denied liability on the ground that payment
was not made in full, for the reason that it agreed to accept
installment payments, x x x"
Petitioner now asserts that its payment by installment of
the premiums for the insurance policies for 1982, 1983 and
1984 invalidated said policies because of the provisions of
Section 77 and by the conditions stipulated by the insurer
in its receipts, disclaiming liability for loss occurring before
payment of premiums. Petitioner concludes that there cannot
be a perfected contract of insurance upon mere partial payment
of the premiums because under Section 77 of the Insurance
Code, no contract of insurance is valid and binding unless
the premium thereof has been paid, notwithstanding any
agreement to the contrary. As a consequence, petitioner seeks
a refund of all premium payments made on the alleged invalid
insurance policies.
Issue: Are the subject policies valid even if the premiums
were paid on installments?
Held: Yes.
(1) Insurer's intention is to honor policies payable in installments. — "The records clearly show that petitioner and private
respondent intended subject insurance policies to be binding
and effective notwithstanding the staggered payment of the
premiums. The initial insurance contract entered into in 1982
was renewed in 1983, then in 1984. In those three (3) years, the
insurer accepted all the installment payments. Such acceptance
of payments speaks loudly of the insurer's intention to honor
the policies it issued to petitioner. Certainly, basic principles
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
of equity and fairness would not allow the insurer to continue
collecting and accepting the premiums, although paid on
installments, and later deny liability on the lame excuse that
the premiums were not prepaid in full."
(2) Agreement granting credit extension is not expressly
prohibited. — "We therefore sustain the Court of Appeals.
We quote with approval the well-reasoned findings and
conclusions of the appellate court contained in its Resolution
denying the motion to reconsider its Decision —
While the import of Section 77 is that prepayment of
premiums is strictly required as a condition to the validity
of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer,
would prevent the entire contract of insurance from going into
effect despite payment and acceptance of the initial premium
or first installment. Section 78 of the Insurance Code in effect
allows waiver by the insurer of the condition of prepayment
by making an acknowledgment in the insurance policy of
receipt of premium as conclusive evidence of payment so far
as to make the policy binding despite the fact that premium is
actually unpaid.
The reliance by petitioner on Arce vs. Capital Surety and
Insurance Co. (117 SCRA 63 [1982]) is unavailing because the
facts therein are substantially different from those in the case at
bar. In Arce, no payment was made by the insured at all despite
the grace period given. In the case before Us, petitioner paid
the initial installment and thereafter made staggered payments
resulting in full payment of the 1982 and 1983 insurance
policies. For the 1984 policy, petitioner paid two (2) installments
although it refused to pay the balance.
(3) Insured is not entitled to a refund of premiums. — "It
appearing from the peculiar circumstances that the parties
actually intended to make the three (3) insurance contracts
valid, effective and binding, petitioner may not be allowed to
renege on its obligation to pay the balance of the premium after
the expiration of the whole term of the third policy (No. AHCPP-9210651) in March 1985. Moreover, as correctly observed
by the appellate court, where the risk is entire and the contract
is indivisible, the insured is not entitled to a refund of the
premiums paid if the insurer was exposed to the risk insured
255
256
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
for any period, however brief or momentary." (Makati Tuscany
Condominium Corp. vs. Court of Appeals, 215 SCRA 462 [19921.)
2. Premiums for the policies in question were paid by the
insured and accepted and received by insurer's cashier within the
credit terms but after the occurrence of the loss.
Facts: In a decision made by the Supreme Court on June
15,1999 (308 SCRA 259), it defined the issue to be: Whether the
fire insurance policies issued by petitioner to the respondent
covering the period from May 22, 1991 to May 22, 1992 ... had
been extended or renewed by an implied credit arrangement
though actual payment of premium was tendered on a later
date and after the occurrence of the (fire) risk insured against.
It resolved this issue in the negative in view of Section 77 of
the Insurance Code and our decisions in Valenzuela vs. Court
of Appeals (191 SCRA 1 [19902]); South Sea Surety and Insurance
Co., Inc. vs. Court of Appeals (244 SCRA 744 [1995]); and Tibay vs.
Court of Appeals (257 SCRA 196 [1996]). Accordingly, it reversed
and set aside the decision of the Court of Appeals.
Respondent (insured) seasonably filed a motion for the
reconsideration of the adverse verdict.
The following facts, as found by the trial court and the
Court of Appeals, are indeed duly established.
(1) For years, petitioner (insurer) had been issuing fire
policies to the respondent, and these policies were annually
renewed.
(2) Petitioner had been granting respondent a 60- to
90-day credit term within which to pay the premiums on the
renewed policies.
(3) There was no valid notice of non-renewal of the
policies in question, as there is no proof at all that the notice
sent by ordinary mail was received by respondent, and the
copy thereof allegedly sent to respondent's broker was ever
transmitted to respondent.
(4) The premiums for the policies in question in the
aggregate amount of P225,753.95 were paid by respondent
within the 60 to 90-day credit term and were duly accepted and
received by Petitioner's cashier.
Issue: The core issue of whether Section 77 of the Insurance
Code of 1978 (P.D. No. 1460) must be strictly applied to
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
petitioner's advantage despite its practice of granting a 60- to
90-day credit term for the payment of premiums.
Held: (1) Exceptions to Section 77. — "Section 77 of the
Insurance Code of 1978 is a reproduction of Section 77 of P.D.
No. 612 (The Insurance Code) promulgated on 18 December
1974. In turn, this Section has its source in Section 72 of Act
No. 2427 otherwise known as the Insurance Act as amended by
R.A. No. 3540, approved on 21 June 1963, which read:
'SEC. 72. An insurer is entitled to payment of premium
as soon as the thing insured is exposed to the peril insured
against, unless there is clear agreement to grant the insured
credit extension of the premium due. No policy issued by
an insurance company is valid and binding unless and
until the premium thereof has been paid.' (Underscoring
supplied)
It can be seen at once that Section 77 does not restate the
portion of Section 72 expressly permitting an agreement to
extend the period to pay the premium. But are there exceptions
to Section 77?
The answer is in the affirmative.
(2) First and second exceptions. — The first exception is
provided by Section 77 itself, and that is, in case of a life or
industrial life policy whenever the grace period provision
applies.
The second is that covered by Section 78 of the Insurance
Code x x x."
(3) Third exception. — "A third exception was laid down in
Makati Tuscany Condominium Corporation vs. Court of Appeals (215
SCRA 463 [1992]), wherein we ruled that Section 77 may not
apply if the parties have agreed to the payment in installments
of the premium and partial payment has been made at the time
of loss. We said therein, thus:
'We hold that the subject policies are valid even if the
premiums were paid on installments. The records clearly
show that the petitioners and private respondent intended
subject insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums.
The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three years, the
257
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
insurer accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurer's
intention to honor the policies it issued to petitioner.
Certainly basic principles of equity and fairness would not
allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny
liability on the lame excuse that the premiums were not
prepaid in full.'"
(4) Fourth exception. — "Not only that. In Tuscany, We
also quoted with approval the following pronouncement of
the Court of Appeals in its Resolution denying the motion for
reconsideration of its decision:
'While the import of Section 77 is that prepayment of
premiums is strictly required as a condition to the validity
of the contract, we are not prepared to rule that the request
to make installment payments duly approved by the
insurer would prevent the entire contract of insurance
from going into effect despite payment and acceptance of
the initial premium or first installment. Section 78 of the
Insurance Code in effect allows waiver by the insurer of the
condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive
evidence of payment so far as to make the policy binding
despite the fact that premium is actually unpaid. Section
77 merely precludes the parties from stipulating that the
policy is valid even if premiums are not paid, but does not
expressly prohibit an agreement granting credit extension,
and such an agreement is not contrary to morals, good
customs, public order or public policy (DE LEON, The
Insurance Code, p. 175). So is an understanding to allow
insured to pay premiums in installments not so prescribed.
At the very least, both parties should be deemed in
estoppel to question the arrangement they have voluntarily
accepted.'
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth
exception to Section 77, namely, that the insurer may grant
credit extension for the payment of the premium. This simply
means that if the insurer has granted the insured a credit
term for the payment of the premium and loss occurs before
the expiration of the term, recovery on the policy should be
S e c 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
allowed even though the premium is paid after the loss but
within the credit term.
Moreover, there is nothing in Section 77 which prohibits the
parties in an insurance contract to provide a credit term within
which to pay the premiums. That agreement is not against the
law, morals, good customs, public order or public policy. The
agreement binds the parties [under] Article 1306 of the Civil
Code."
(5) Fifth exception. — "Finally in the instant case, it would
be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a
60 to 90-day credit term for the payment of premiums despite
its full awareness of Section 77. Estoppel bars it from taking
refuge under said Section, since Respondent relied in good
faith on such practice. Estoppel then is the fifth exception to
Section 77." (UCPB General Insurance Co., Inc. vs. Masagana
Telemart, Inc., 356 SCRA 307 [2001 ].)
Dissenting Opinion:
(1) Adverse effect of credit arrangement on integrity of legal
reserve requirement. — "A requirement imposed by way of State
regulation upon insurers is the maintenance of an adequate legal
reserve in favor of those claiming under their policies. The law
generally mandates that insurance companies should retain an
amount sufficient to guarantee the security of its policyholders
in the remote future, as well as the present, and to cover any
contingencies that may arise or may be fairly anticipated. The
integrity of this legal reserve is threatened and undermined if
a credit arrangement on the payment of premium were to be
sanctioned. Calculations and estimations of liabilities under the
risk insured against are predicated on the basis of the payment
of premiums, the vital element that establishes the juridical
relation between the insured and the insurer. By legislative fiat,
any agreement to the contrary notwithstanding, the payment
of premium is a condition precedent to, and essential for, the
efficaciousness of the insurance contract, except (a) in case of
life or industrial life insurance where a grace period applies, or
(b) in case of a written acknowledgment by the insurer of the
receipt of premium, such as by a deposit receipt, the written
acknowledgment being conclusive evidence of the premium
payment so far as to make the policy binding."
259
260
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
(2) Acknowledgment of payment of premium in lieu of mere credit
arrangement. — "Section 77 of the Insurance Code amended
Section 72 of the then Insurance Act by deleting the phrase,
'unless there is a clear agreement to grant the insured credit
extension of the premium due,' and adding at the beginning
of the second sentence the phrase, '[notwithstanding any
agreement to the contrary.' Commenting on the new provision,
Dean Hernando B. Perez states:
x x x Tf the insurer wants to favor the insured by making
the policy binding notwithstanding the non-payment of
premium, a mere credit agreement would not be sufficient.
The remedy would be for the insurer to acknowledge in the
policy that premiums were paid although they were not,
in which case the policy becomes binding because such
acknowledgment is a conclusive evidence of payment of
premium (Section 78). Thus, the Supreme Court took note
that under the present law, Section 77 of the Insurance
Code of 1978 has deleted the clause 'unless there is a clear
agreement to grant the insured credit extension of the
premium due' (Velasco vs. Apostol, 173 SCRA 228)."
(3) Non-applicability of the estoppel doctrine. — "By weight
of authority, estoppel cannot create a contract of insurance,
neither can it be successfully invoked to create a primary
liability, nor can it give validity to what the law so proscribes as
a matter of public policy. So essential is the premium payment
to the creation of the vinculum juris between the insured and
the insurer that it would be doubtful to have that payment
validly excused even for a fortuitous event."
(4) Amount of premium payment. — "The law, however,
neither requires for the establishment of the juridical tie, nor
measures the strength of such tie by, any specific amount
of premium payment. A part payment of the premium, if
accepted by the insurer, can thus perfect the contract and
bring the parties into an obligatory relation. Such a payment
puts the contract into full binding force, not merely pro tanto,
thereby entitling and obligating the parties by their agreement.
Hence, in case of loss, full recovery less the unpaid portion of
the premium (by the operative act of legal compensation), can
be had by the insured and, correlatively, if no loss occurs the
insurer can demand the payment of the unpaid balance of the
premium." (Vitug, J.)
Sec 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
Dissenting Opinion:
(1) Insurance claim fraudulent in character. — "Respondent
Masagana surreptitiously tried to pay the overdue premiums
before giving written notice to petitioner of the occurrence of the
fire that razed the subject property. This failure to give notice
of the fire immediately upon its occurrence blatantly showed
the fraudulent character of its claim. The fire totally destroyed
the property on June 13, 1992; the written notice of loss was
given only more than a month later, on July 14, 1992, the day
after respondent surreptitiously paid the overdue premiums.
Respondent very well knew that the policy was not renewed
on time. Hence, the surreptitious attempt to pay overdue
premiums. Such act revealed a reprehensible disregard of the
principle that insurance is a contract uberrima fides, the most
abundant good faith. Respondent is required by law and by
express terms of the policy to give immediate written notice of
loss. This must be complied with in the utmost good faith."
(2) Respondent guilty of material representation. — "The
claim for insurance benefits must fall as well because the
failure to give timely written notice of the fire was a material
misrepresentation affecting the risk insured against.
Section 1 of the policy provides:
'AH benefits under the policy shall be forfeited if the
claim be in any respect fraudulent, or if any false declaration
be made or used in support thereof, or if any fraudulent
means or devices are used by the insured or any one acting
on his behalf to obtain any benefit under the policy.'
In the factual milieu, the purported practice of giving 60
to 90-day credit extension for payment of premiums was a
disputed fact. But it is a given fact that the written notice of
loss was not immediately given. It was given only the day after the
attempt to pay the delayed premiums."
(3) Purported credit, a mere verbal understanding. — "At any
rate, the purported credit was a mere verbal understanding
of the respondent Masagana of an agreement between the
insurance company (petitioner) and the insurance brokers of
respondent Masagana. The president of respondent Masagana
admitted that the insurance policy did not contain any proviso
pertaining to the grant of credit within which to pay the
premiums. Respondent Masagana merely deduced that a
credit agreement existed based on previous years' practice
261
262
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
that they had of delayed payments accepted by the insurer as
reflected on the face of the receipts issued by UCPB evidencing
the payment of premiums.
xxx
xxx
It must be stressed that a verbal understanding of
respondent Masagana cannot amend an insurance policy. In
insurance practice, amendments or even corrections to a policy
are done by written endorsements or tickets appended to the
policy."
(4) Credit granted to insurance brokers, not to insured
(respondent). — "However, the date on the face of the receipts
does not refer to the date of actual remittance by respondent
Masagana to UCPB of the premium payments, but merely to
the date of remittance to UCPB of the premium payments by
the insurance brokers of respondent Masagana.
Hence, what has been established was the grant of credit
to the issurance brokers not to assured. The insurance company
recognized the payment to the issurance broker as payment to
itself, through the actual remittance of the premium payments
to the principal might be later. Once payment of the premium is
made to the insurance broker, the assured would be covered by
a valid and binding insurance policy, provided the loss occurred
after payment to the broker has been made."
(5) Estoppel not available in this case. — "Assuming arguendo
that the 60 to 90-day-credit-term has been agreed between the
parties, respondent could not still invoke estoppel to back up
its claim. 'Estoppel is unavailing in this case,' thus spoke the
Supreme Court through the pen of Justice Hilario G. Da vide, Jr.,
now Chief Justice. Mutatis mutandis, he may well be speaking
of this case. He added that '[E]stoppel can not give validity
to an act that is prohibited by law or against public policy.'
The actual payment of premiums is a condition precedent to
the validity of an insurance contract other than life insurance
policy. Any agreement to the contrary is void as against the law
and public policy."
(6) When estoppel a valid exception to premium pre-payment
requirement. — An incisive reading of (Section 77) would
show that the emphasis was on the conclusiveness of the
acknowledgment in the policy of the receipt of premium,
notwithstanding the absence of actual payment of premium,
because of estoppel. Under the doctrine of estoppel, an
Sec. 77
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against
the person relying thereon, 'A party may not go back on his
own acts and representations to the prejudice of the other party
who relied upon them/
This is the only case of estoppel which the law considers a
valid exception to the mandatory requirement of pre-payment
of premium. The law recognized that the contracting parties,
in entering a contract of insurance, are free to enter into
stipulations and make personal undertakings so long as they
are not contrary to law or public policy. However, the law is
clear in providing that the acknowledgment must be contained
in the policy or contract of insurance. Anything short of it
would not fall under the exception so provided in Section 78."
(7) No valid and binding insurance policy created. — "Hence,
because of respondent's failure to pay the premiums prior to
the occurrence of the fire insured against, no valid and binding
insurance policy was created to cover the loss and destruction
of the property. The fire took place on June 13,1992, twenty-two
(22) days after the expiration of the policy of fire insurance. The
tender of payment of premiums was made only thirty (30) days
after the occurrence of the fire, or on July 13,1992. Respondent
Masagana did not give immediate notice to petitioner of the fire
as it occurred as required in the insurance policy. Respondent
Masagana tried to tender payment of the premiums overdue
surreptitiously before giving notice of the occurrence of the
fire."
(8) Pre-payment of premium expressly stipulated. — "More
importantly, the parties themselves expressly stipulated that
the insurance policy would not be binding on the insurer
unless the premiums thereon had been paid in full. Section 2 of
the policy provides:
'2. This policy including any renewal and/or endorsement
thereon is not in force until the premium has been fully paid and
duly receipted by the Company in the manner provided therein.
x x x it is hereby declared, agreed and warranted that this policy
shall be deemed effective valid and binding upon the Company
when the premiums thereof have actually been paid in full and
duly acknowledged in a receipt signed by any authorized official
or representative!agent of the Company in such manner as
provided herein.'
263
264
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 77
Thus, the insurance policy, including any renewal thereof
or any endorsements thereon shall not come in force until
the premiums have been fully paid and duly received by the
Insurance Company No payment in respect of any premiums
shall be deemed to be payment to the Insurance Company
unless a printed form of receipt for the same signed by an
Official or duly appointed Agent of the Company shall be
given to the insured."
(9) Tibay case in point. — "The case of Tibay vs. Court of
Appeals (326 Phil. 931; 257 SCRA 126 [1996].) is in point. The
issue raised therein was: 'May a fire insurance policy be
valid, binding and enforceable upon mere partial payment of
premium?' In the said case, Fortune Life and General Insurance
Co., Inc. issued Fire Insurance Policy No. 136171 in favor of
Violeta R. Tibay and/or Nicolas Roraldo, on a two-storey
residential building located at 5855 Zobel Street, Makati City,
together with all the personal effects therein. The insurance
was for P600,000.00, covering the period from 23 January 1987
to 23 January 1988. On 23 January 1987, of the total premium
of P2,983.50, Violeta Tibay only paid P600.00, thus leaving a
substantial balance unpaid. On March 8, 1987, the insured
building was completely destroyed by fire. Two days later,
or on 10 March 1987, Violeta Tibay paid the balance of the
premium. On the same day, she filed with Fortune a claim for
the proceeds of the fire insurance policy.
In denying the claim of insurance, the Court ruled that 'by
express agreement of the parties, no vinculum juris or bond of
law was to be established until full payment was effected prior
to the occurrence of the risk insured against.' As expressly
stipulated in the contract, full payment must be made before
the risk occurs for the policy to be considered effective and in
force. "No vinculum juris whereby the insurer bound itself to
indemnify the assured according to law ever resulted from the
fractional payment of premium.'"
(10) Factual situation in Makati Tuscany case different. — "The
majority cited the case of Makati Tuscany Condominium Corp. vs.
Court of Appeals to support the contention that the insurance
policies subject of the instant case were valid and effective.
However, the factual situation in that case was different from
the case at bar.
In Tuscany, the Court held that the insurance policies
were valid and binding because there was partial payment of
Sec. 78
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
the premiums and a clear understanding between the parties
that they had intended the insurance policies to be binding
and effective notwithstanding the staggered payment of the
premiums. On the basis of equity and fairness, the Court ruled
that there was a perfected contract of insurance upon the partial
payment of the premiums, notwithstanding the provisions
of Section 77 to the contrary. The Court would not allow the
insurer to continue collecting and accepting the premiums,
although paid on installments, and later deny liability on the
lame excuse that the premiums were not prepaid in full/'
(11) No clear and definite agreement on the grant of a credit
extension. — "In the case at bar, there was no clear and definite
agreement between petitioner and respondent on the grant
of a credit extension; neither was there partial payment of
premiums for petitioner to invoke the exceptional doctrine in
Tuscany.
Hence, the circumstances in the above cited case are totally
different from the case at bar, and consequently, not applicable
herein."
(12) Payment of premium a mandatory requisite. — "With
regard to the contention that the absence of notice of nonrenewal of the policy resulted to the automatic renewal of the
insurance policy we find the contention untenable. As above
discussed, the law provides that only upon payment of the
insurance premium will the insurance policy bind the insurer
to the peril insured against and hold it liable under the policy
in case of loss.
Even in the absence of notice of non-renewal the assured
would be bound by the law that a non life insurance policy
takes effect only on the date payment of the premium was
made.
Verily, it is elemental law that the payment of premium is a
mandatory requisite to make the policy of insurance effective. If
the premium is not paid in the manner prescribed in the policy
as intended by the parties, the policy is void and ineffective.
{Pardo, ].)
Sec. 78. An acknowledgment in a policy or contract of
insurance of receipt of premium is conclusive evidence of
its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding
until the premium is actually pa» - (a)
d
265
266
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 78
Effect of acknowledgment of receipt
of premium in policy.
(1) Waiver of condition of prepayment. — Where the policy or
contract of insurance contains an acknowledgment of receipt of
premium, the insurer cannot deny the truth of the receipt of the
premium in an action against him on the policy even if it is actually
unpaid and notwithstanding any stipulation making prepayment
of the premium a condition precedent to the binding effect of the
policy. The law establishes a legal fiction of payment. The reason
for the rule is founded on the fact that when the policy contains
such written acknowledgment, it is presumed that the insurer
has waived the condition of prepayment, the acknowledgment
being declared by law to be conclusive evidence of premium
payment.
(2) Recovery of premium if unpaid. — It must be noted,
however, that the conclusive presumption extends only to the
question of the binding effect of the policy. As far as the payment
of the premium itself is concerned, the acknowledgment is only
a prima facie evidence of the fact of such payment. In other words,
the insurer m a y still dispute its acknowledgment but only for the
purpose of recovering the premium due and unpaid. Whether
payment was indeed m a d e is a question of fact.
According to the Supreme Court, Section 78 should be
interpreted as an exception to Section 77. (American H o m e
Assurance C o m p a n y vs. Chua, 309 SCRA 250 [1999].)
ILLUSTRATIVE CASE:
Insurer accepted the promise of the insured who delivered a
postdated check, to pay the insurance policy within 30 days.
Facts: The insurer accepted the promise of the insured in the
acknowledgment receipt to pay the insurance premium within
30 days from the effectivity date of a fire policy insurance
on December 17, 1960, when the policy was delivered to the
insured. On January 6,1961, in partial payment of the insurance
premium, the insured delivered to the insurer a check for the
amount of P1,000.00 postdated January 16, 1961. On January
18,1961, or two days after the insurance premium became due,
the property insured was destroyed by fire.
Sec. 78
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
267
It appeared that the insurer tried to deposit the check only
on February 20, 1961 and the same was dishonored by the
bank for lack of funds although the records showed that as of
January 19, 1961, the insured had a balance of Pl,193.00 with
the bank.
Issue: Is the insurer liable for the loss?
Held: Yes. By accepting the promise of the insured to pay
the insurance policy, the insurer implicitly agreed to modify
the tenor of the insurance policy and, in effect, waived the
provision therein that it would only pay for the loss or damage
in case the same occurs after the payment of the premium.
Considering that the policy is silent as to the mode of payment,
the insurer is deemed to have accepted the promissory note in
the payment of the premium instead of cash. This rendered the
policy immediately operative on the date it was delivered.
The fact that the check was later on dishonored did not in
any way operate as a forfeiture of the insured's right under
the policy, in the absence of express stipulation thereon to
that effect. The payment of the premium is an independent
obligation the non-fulfillment of which would entitle the insurer
to recover. Where credit is given by an insurance company for
the payment of the premium it has no right to cancel the policy
for nonpayment except by putting the insured in default and
giving him personal notice. (Capital Insurance & Surety Co., Inc.
vs. Plastic Era Co., Inc., 65 SCRA 134 [1975].)
Note: See, however, Section 77.
Effect of acceptance of premium.
Acceptance of premium within the stipulated period for
payment thereof, including the agreed period of grace, merely
assures continued effectivity of the insurance policy in accordance
with its terms. Such acceptance does not stop the insurer from
interposing any valid defense under the terms of the insurance
policy, where such insurer is not guilty of any inequitable act or
representation.
There is nothing inconsistent between acceptance of premium
due under an insurance policy and the enforcement of these
terms. (Stokes vs. Malayan Insurance Co., Inc., 127 SCRA 766
[1984].)
268
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 79-82
Sec. 79. A person insured is entitled to a return of premium, as follows:
(a) To the whole premium if no part of his interest in
the thing insured be exposed to any of the perils insured
against.
(b) Where the insurance is made for a definite period of
time and the insured surrenders his policy, to such portion
of the premium as corresponds with the unexpired time, at
a pro rata rate, unless a short period rate has been agreed
upon and appears on the face of the policy, after deducting from the whole premium any claim for loss or damage
under the policy which has previously accrued; Provided,
That no holder of a life insurance policy may avail himself
of the privileges of this paragraph without sufficient cause
as otherwise provided by law.
Sec. 80. If a peril insured against has existed, and the
insurer has been liable for any period, however short, the
insured is not entitled to return of premiums, so far as that
particular risk concerned.
Sec. 81. A person insured is entitled to a return of the
premium when the contract is voidable, on account of the
fraud or misrepresentation of the insurer, or of his agent,
or on account of facts, the existence of which the insured
was ignorant without his fault; or when by any default of
the insured other than actual fraud, the insurer never incurred any liability under the policy.
Sec. 82. In case of an over insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate
sum insured in all the policies exceeds the insurable value
of the thing at risk.
When insured entitled to recover
premiums.
The insured has the right to recover premiums already paid
or a portion thereof in the following cases:
(1) When no part of the thing insured has been exposed to
any of the perils insured against (Sec. 79[a].);
Sees. 79-82
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
269
(2) W h e n the insurance is for a definite period and the insured
surrenders his policy before the termination thereof (ibid., [b].);
(3) W h e n the contract is voidable because of the fraud or
misrepresentations of the insurer or his agent (Sec. 81.);
(4) W h e n the contract is voidable because of the existence of
facts of which the insured was ignorant without his fault (ibid.);
(5) W h e n the insurer never incurred any liability under the
policy because of the default of the insured other than actual
fraud (ibid.);
(6) W h e n there is over-insurance (Sec. 82.); and
(7) W h e n rescission is granted due to the insurer's breach of
contract. (Filipinas Compania de Seguros vs. Nava, 17 SCRA 216
[1966]; see Sec. 74; also Art. 1385, Civil Code.)
In the cases mentioned in Nos. 1, 3, 4, and 5, the insured is
entitled to a return of the entire premium paid. Of course, the
insured cannot recover premiums unless they have actually
been paid. Payment to insurer's agent is sufficient. The Code
speaks of the return or refund of premium payments. Fees like
documentary stamps tax and other taxes are not covered.
Where risk has never attached.
Since premiums are paid in consideration of the assumption
of specified risks by insurers, and since no premium is due unless
the risk attaches, if the risk insured against does not or cannot
attach, or if no part of the interest is subject to any of the specified
perils, the insurer cannot claim or retain the premium thus paid,
in the absence of any fraud or fault on the part of the insured. (43
Am. Jur. 2d. 951.) It would be contrary to the dictates of honesty
and fair dealing to allow the insurer to treat the policy as valid
long enough to get the premium on it and leave it at liberty to
repudiate it the next moment, (see Edillon vs. Manila Bankers
Life Ins. Corp., 117 SCRA 187 [1982].)
(1) Approval of application or acceptance of policy absent—Where
the application for a policy was not approved, no premium can
be recovered, and with respect to a policy requiring acceptance
to be effective, the insured cannot be held liable for accruing
270
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 79-82
premiums if the policy is not accepted. (44 C.J.S. 1329.) And if
the premium has previously been paid, it must be returned as no
risk whatsoever has ever attached. If no risk attaches or contract
results, there is no meeting of the minds of the parties on the
subject matter of the insurance.
(2) Loss occurs before effective date. — Where the insured pays
in advance the annual premium on a certain property insured
by him, the insurance to take effect on a certain date and the loss
occurs before said date, the insured is entitled to a return of the
whole premium.
(3) Insured and insurer become public enemies. — Where the
parties in a contract of insurance have become public enemies
(see Sec. 7.) because of the existence of a state of war, justice
requires that premiums paid after the declaration of w a r between
the belligerent states be returned to the insured. War abrogates
insurance contracts between citizens of belligerent states,
and therefore, the insured is not entitled, notwithstanding the
payment of premiums, to indemnity for loss occurring after such
declaration of war. (see Filipinas Cia de Seguros vs. Christern
Huenefeld & Co., Inc., 89 Phil. 54 [1951].)
Where insured surrenders policy
before termination.
Section 79(b) does not apply (1) where the insurance is not
for a definite period (Sec. 80.); or (2) where a short period rate
has been agreed upon; or (3) where the policy is a life insurance
policy.
If the insurance is for a definite period of time and the insured
cancels his policy by surrendering his policy (provided this is
allowed under the policy), the insured is entitled to recover the
premiums already paid equivalent to the unexpired term at a pro
rata rate. In other words, the insurer shall refund the unearned
premium in proportion to the unexpired period, retaining only
the earned portion corresponding to the portion expired. But
there shall be deducted from the whole premiums any claim for
loss or damage under the policy which has previously accrued.
Sees. 79-82
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
271
EXAMPLE:
X insures his house for one year and pays the amount of
PI6,000.00 corresponding to the premium for one year. If after
the lapse of three months, X surrenders his policy, he shall
be entitled to collect 3 / 4 of the premium paid or P12,000.00
representing the portion of the premium for the unexpired
period of the policy.
Now, suppose that the insurance of the house also covers
furniture, some of which were burned prior to the cancellation
of the policy and the insured paid the amount of P4,000.00 for
the damage. In this case, the sum of P4,000.00 shall be deducted
from P16,000.00 thereby leaving a balance of P12,000.00. X
will thus be entitled to a return of P9,000.00 which is 3 / 4 of
P12,000.00.
Where short period rate has been
stipulated.
An insurance policy is often cancelled either by the insurer
or by the insured before its expiration. If a policy on which
premiums have been paid for a year is cancelled by the insurer
before the expiration of the year, it retains only a proportion of
the annual premium that the expired time bears to the entire
time. If the policy is cancelled by the insured, the pro rata return
of premium will not be followed if the policy stipulates a short
period rate, in which case, the insured is entitled to return of the
premium in the proportion stipulated. A short period rate clause
appears in most fire policies.
The following is an example:
"It is hereby agreed that, in the event of this policy being
surrendered by the insured for cancellation, the company
shall retain a premium in accordance with the following scale
for the time the policy has been in force."
Then follows the scale, e.g.:
For 1 month or less
For 2 months
For 3 months
For 4 months
For 5 months
2
0
3
0
4
0
5
0
6
0
percent
percent
percent
percent
percent
of the Annual Rate
of the Annual Rate
of the Annual Rate
of the Annual Rate
of the Annual Rate
272
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
For 6 months
For 7 months
For 8 months
For 9 months
For 10 months
For 11 months
70
75
80
85
90
95
percent
percent
percent
percent
percent
percent
Sees. 79-82
of the Annual Rate
of the Annual Rate
of the Annual Rate
of the Annual Rate
of the Annual Rate
of the Annual Rate
Right to recover premiums as to life
insurance.
Recovery of premiums paid is not allowed in life insurance if
the insured surrenders his policy.
The reason is that life insurance is not a divisible contract. It
is not an insurance for a single year, with a privilege of renewal
from year to year by paying the annual premium but that it is an
entire contract of insurance for life subject to discontinuance and
forfeiture for nonpayment of any of the stipulated premiums.
There is no proper relation between the annual premium and the
risk of assurance for the year in which it is paid. Each installment
is, in fact, part consideration of the entire insurance for life. It is
the same thing where the annual premiums are spread over the
whole life. The value of assurance for one year of a man's life
when he is young, strong and healthy is manifestly not the same
when he is old and decrepit. (Vance, op. cit., pp. 298-299.)
However, the insured will be entitled to receive the "cash
surrender value" of his policy "after three full annual premiums
shall have been paid." (Sees. 227[f], 230[f].)
Where risk has attached.
(1) Whole premium considered as earned. — The general rule
is that the insurance granted is the entire consideration for the
premium received; hence, if the risk has attached by reason of
the contract's becoming binding upon the insurer, the whole
premium must be considered as earned and, therefore, cannot
be apportioned in case the risk terminates before the end of the
term for which the insurance was granted. (Vance, op. cit., p. 347.)
Thus, in the absence of any agreement to the contrary, "if a peril
insured against has existed, and the insurer has been liable for
Sees. 79-82
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
273
any period, however short, the insured is not entitled to return
of premiums so far as that particular risk is concerned." (Sec. 80;
see Sec. 77.)
EXAMPLE:
X procures insurance upon a certain vessel against the
perils of the sea (see Sec. 99.) for a voyage from Manila to
London. The voyage is to last for 5 days. If X cancels the policy
two days after the voyage has commenced, no portion of the
premium is returnable because the thing insured has already
been exposed to the perils insured against.
(2) Where insurance divisible. — Of course, if the contract
of insurance is divisible, consisting of several distinct risks for
which different amounts of premiums have been paid (see Sec.
22; Art. 1420, Civil Code.), the premium paid for any particular
risk is not earned until that risk has attached.
EXAMPLE:
Suppose the insurance procured by X upon his vessel
contemplates a voyage in three (3) different stages (Sec. 117.)
— from Port A to Port B, then to Port C, and finally, to Port D
— and X paid a different amount of premium as regards each
portion.
In this case, the contract of insurance is divisible. If X
cancels the policy after the vessel reaches Port A, he can recover
the premiums corresponding to the two (2) other stages of the
voyage as to which no risk has been assumed by the insurer,
(see Sec. 79[b].)
Where the contract is voidable.
(1) Fraud of the insurer or his agent. — If the policy is induced
by the fraud or misrepresentation of the insurer, or his agent, the
insured may, by timely action, rescind the contract and demand
the return of the premiums paid by him. (Sec. 78.)
EXAMPLES:
(1) Where the insured is induced to take out an insurance
upon the representation of the insurer's agent that the policy
will be issued to him within one month, the insured may refuse
274
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 79-82
the contract and recover back the premiums paid by him if the
policy is not issued within said period.
(2) Where the insurer's agent represents that in case the
applicant for life insurance becomes incapacitated due to an
accident, the company will pay him a monthly pension of
P1,000.00 during the period of his incapacity, the insured is
entitled to a return of the premium if the policy issued states
nothing about this point because the policy is different from
that applied for.
(2) Other grounds. — The insured is also entitled to a return
of the premiums when the contract is voidable "on account of
facts, the existence of which the insured was ignorant without
his fault; or when, by any default of the insured other than actual
fraud, the insurer never incurred liability under the policy." (Sec.
81.)
EXAMPLES:
(1) Where the insured pays insurance premiums on his
vessel not knowing that it has already been lost, he can recover
back the premiums so paid in the absence of stipulation in the
policy that the insurer will remain liable even if the vessel is
already lost.
(2) Where the insured takes a policy on a vessel under
repair and pays the premium in advance but for reasons not
due to actual fraud on his part, the repair of the vessel is not
completed on the date when the voyage is to start, the insured,
in the absence of any contrary stipulation, may recover the
premium already paid.
(3) Fraud of the insured. — The insured is not entitled to a
return of the premium paid if the policy is annulled by reason of
fraud or misrepresentation of the insured. Section 81 impliedly
prohibits the return of the premium where the policy is annulled
by reason of the fraud of the insured. (De Leon vs. The Crown
Life Ins. Co., [C.A.] No. 41482, June 2 0 , 1 9 3 9 . )
Where there is over-insurance.
In case of over-insurance by double insurance (see Sec. 93.),
the insurer is not liable for the total amount of insurance taken,
Sees. 79-82
CONTRACT OF INSURANCE
Title 8. — P r e m i u m
275
his liability being limited to the amount of the insurable interest
on the property insured. Hence, he is not entitled to that portion
of the premium corresponding to the excess of the insurance
over the insurable interest of the insured.
The premiums to be returned where there is over-insurance
by several insurers shall be proportioned to the amount by
which the aggregate sum insured in all the policies exceeds the
insurable value of the thing at risk. (Sec. 82.)
EXAMPLE:
Suppose X insures his house which has an insurable value
of Pl,500,000.00 as follows:
Insurer
Amount of insurance
Premiums paid
A Co.
Pl,200,000.00
P24,000.00
B Co.
600,000.00
12,000.00
Pl,800,000.00
P36,000.00
In this case, there is an over-insurance of P300,000.00, the
amount by which the aggregate sum insured in the two policies
exceeds the insurable value of the house. The proportion is
P300,000.00 to Pl,800,000.00 or 1 / 6 . Hence, 1 / 6 of P24,000.00 or
P4,000.00 is what A Co. must return; and 1 / 6 of P12,000.00 or
P2,000.00 is what B Co. must return. Since the insurable interest
of X is only Pl,500,000.00; he cannot recover the whole of the
amount insured in case of loss.
Where insurance is illegal.
When the insurance is void because it is illegal, the general
rule is that the premiums cannot be recovered.
But if, in fact, the parties are not in pari delicto, the law will
allow an innocent insured to take again his premiums as when the
insured was ignorant of the facts which rendered the insurance
illegal. It is also held that where one, having no insurable interest
in the life insured, paid premiums in the bona fide belief induced
by the fraudulent statement of the insurer, that such insurance
276
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 79-82
was valid, he may recover the premiums paid despite the fact
that the contract was illegal. But it is otherwise when the insured
was a conscious party to the wrong. (Foster vs. Metropolitan Life
Ins. Co., 35 N.E. 849; Vance, op. cit, pp. 351-352; Arts. 1411-1412,
Civil Code.)
Basis of right to recover premiums.
With regard to return of premium for short interest, overinsurance, and double insurance, the basis is this:
(1) Insurer could have been called to pay the whole sum insured.
— If the insurer could at any time, and under any conceivable
circumstances, have been called on to pay the whole sum on
which he has received premium, in such case the whole premium
is earned and there shall be no return;
(2) Insurer could have been called to pay only part of the whole
sum insured. — If, on the other hand, he could never in any event
have thus been called on to pay the whole, but only a part of the
amount of his subscription — say a half or a fourth — he ought
not retain a larger proportion than one-half or one-fourth of
the premium and must return the residue. (Arnould on Marine
Insurance, cited by Vance, p. 351.)
— oOo —
Title 9
LOSS
Sec. 83. An agreement not to transfer the claim of the
insured against the insurer after the loss has happened, is
void if made before the loss except as otherwise provided
in the case of life insurance, (a)
Claim in insurance defined.
Claim m a y be defined as a demand for the satisfaction of a
loss suffered within the purview of an insured's policy. It m a y be
m a d e by the party insured, the insurer with right of subrogation,
or a non-party but with a right against the insured.
Effect of agreement not to transfer
claim of insured after a loss.
Before a loss has occurred, an insurance policy, except a life
insurance policy (see Sec. 181.), is not assignable without the
consent of the insurer on the theory that the policy is a personal
contract between the insured and insurer. After a loss has
occurred, the insured has an absolute right to transfer or assign
his claim against the insurer. A stipulation which attempts to
prohibit such transfer of a policy is void.
(1) Agreement hinders free transmission of property. — Such
a stipulation is void as against public policy for it hinders the
free transmission of property from one person to another. (West
Branch Ins. Co. vs. Holfenstain, 40 Pa. St. 289; see Sec. 21.)
(2) Transfer involves but money claim or right of action. — After
the loss has been suffered, the policy or right thereunder may
be assigned without the consent of or notice to the insurer for in
277
278
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 84
such case, it is not the personal contract which is being assigned,
but a money claim under or a right of action on the policy. (Ocean
Acci. & G. Corp. vs. Southwestern Bell Teleph. Co., 122 A.L.R.
133.)
(3) Transfer involves no question of moral hazard. — Such assignment of the right to collect from the insurer involves no question
of moral hazard (i.e., risk of loss being deliberately or carelessly
caused by the insured) because it cannot increase the insurer's
risk for a loss that has already occurred. Once a loss has occurred,
the duty of the insurer to pay the insurance proceeds is fixed and
the transfer does no h a r m to its duty.
Section 173, however, prohibits the transfer of a policy of
fire insurance to any person or company w h o acts as an agent
for or otherwise represents the issuing company and declares
such transfer void insofar as it m a y affect other creditors of the
insured.
Sec. 84. Unless otherwise provided by the policy, an
insurer is liable for a loss of which a peril insured against
was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of
the loss; but he is not liable for a loss of which the peril
insured against was only a remote cause, (a)
Loss in insurance defined.
Loss may be defined as the injury, damage, or liability
sustained by the insured in consequence of the happening of one
or more of the perils against which the insurer, in consideration
of the premium, has undertaken to indemnify the insured.
Scope of loss.
The word "loss" in insurance law embraces bodily injury,
including death, or property damage or destruction, (see
Bonifacio Bros. vs. Mora, 20 SCRA 261 [1969].) It also includes
loss of income or profits and legal liability to a third party.
In reinsurance, loss refers to the reinsurer's share of the loss
on risks ceded either automatically or facultatively (see Sec. 96.)
Sec. 8 4
CONTRACT OF INSURANCE
Title 9. — Loss
279
Liability of insurer for loss.
(1) Extent of loss. — H o w much the insurer will pay depends
upon whether the insured suffers a loss and the extent of that
loss. (Riegel, Miller & Williams, op. ext., p. 37.) As to extent, loss
m a y be total, partial, or constructive total, (see Sees. 127-131.)
It is satisfied by payment of the loss, reinstatement (repair or
restoration) of the property lost or damaged, or its replacement
(substitution) with another similar property, (see Sec. 172)
1
(2) Cause of loss. — The insurer assumes liability only for a
loss proximately caused by the perils insured against although
a peril not insured against m a y have been a remote cause of the
loss. (Sec. 84.) But the insurer is still liable even if the proximate
cause is not the peril insured against if the immediate cause is the
peril insured against, (see Sec. 86.)
(3) Burden of proof where loss has occurred. — The insurer has
the burden of proof to show that he is not liable. Where the insurer
denies liability for a loss alleged to be due to a risk not insured
against, but fails to establish the truth of such fact by concrete
proofs, the insurer is liable under the terms and conditions of the
policy by which it has bound itself. (Heirs of I. Coscolluela vs.
Rico General Insurance Corp., 179 SCRA 511 [1989].)
Stated elsewise, if a proof is made of a loss apparently within a contract of insurance, the burden is upon the insurer to
prove by a preponderance of evidence, that the loss arose from a
cause with is excepted or for which it is not liable, or from a cause
lr
rhe a m o u n t of loss payable is affected by stipulations in the policy such as "franchise clause" in a marine c a r g o policy under which no loss is payable if it does not reach
a certain amount, otherwise the entire loss is payable; "co-insurance clause" in fire insurance (see Sec. 172.)"; "deductible clause" in motor vehicle insurance against loss or damage which provides for the deduction of a stipulated amount from the d a m a g e payable;
and "contribution clause" in case of double insurance, (see Sec. 94[1].)
The deductible clause is a standard feature in the l o s s / d a m a g e s cover in motor
vehicle insurance and m a y vary depending on the m a k e / t y p e and classification of the
vehicle. By making the insured shoulder the amount of the deductible stipulated in the
policy, small "nuisance claims" are eliminated and this in the long run helps provide for
lower insurance premium. The insurer is liable only in excess of the deductible or the
stated amount to be deducted from the loss. Furthermore, the insure shoulders a portion
of the cost of brand new parts to replace damaged parts of his depreciated parts. He is
charged with what is called "depreciation" or "betterment" for the improvement on his
vehicle. Insurance is for indemnity and not for profit.
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
280
Sec. 84
which limits its liability. (Country Bankers Insurance Corporation vs. Lianga Bay and Multi-Purpose Cooperative, Inc., 374
SCRA 653 [2002]; DBP Pool of Accredited Insurance Companies
vs. Radio Mindanao Network, Inc., 480 SCRA 314 [2006].)
Meaning of proximate cause.
Proximate cause is that which, in a natural and continuous
sequence, unbroken by any new independent cause, produces
an event and without which the event would not have occurred.
(Milwaukee vs. Kellog, 94 U.S. 469.) It is to be observed that the
proximate cause is the efficient cause — the one that sets others
in motion — to which the loss is to be attributed, although other
and incidental causes m a y be nearer in time to the result and
operate more immediately in producing the loss. (Lanasa Fruit
S.S. & Importing Co. vs. Universal Ins. Co., 302 U.S. 556.)
Proximate cause is not, therefore, equivalent to "immediate
cause."
2
The doctrine of proximate cause has been defined as follows:
"Was there an unbroken connection between the wrongful act
and the injury, a continuous operation? Did the facts constitute
a continuous succession of events, so linked together as to make
a natural whole, or was there some new and independent cause
intervening between the wrong and the injury?" (Milwaukee vs.
Kellog, supra.) The question that needs to be asked is: If the event
did not happen, could the injury have resulted? If the answer
is NO, then tthe event is the proximate cause. (Allied Banking
Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008].)
2
Proximate cause has a different m e a n i n g in insurance case than it h a s in tort cases.
In the latter, the rules of p r o x i m a t e cause are applied for the single p u r p o s e of fixing
culpability and for that reason, the rules consider both the injury and the principal cause
to fix the blame on those w h o created the situation in which the physical laws of nature
operated; in the former, the concern is not with the question of culpability or w h y the
injury occurred, but only with the nature of the injury and h o w it h a p p e n e d . If the nearest
efficient cause of the loss is one of the perils insured against, the courts look no further; if
it is not a peril insured against, recovery m a y nevertheless be had if the dominant cause
is a risk or peril insured against. (43 A m . Jur. 2d. [Rev.] 526.)
Sec. 8 4
CONTRACT OF INSURANCE
Title 9. — Loss
281
EXAMPLES:
(1) If fire causes an explosion which results in a loss, fire
is the proximate cause of the loss (Scripture vs. Lowell Mut.
Fire Ins. Co., 57 Am. Dec. 11.) while explosion is the immediate
cause. The insurer is liable where either peril is covered by the
policy, (see Sec. 86.)
(2) If a house is insured against fire and it is damaged
by the falling of a wall of a neighboring building (a peril not
contemplated by the contract) which is on fire, the fire is the
proximate cause although no part of the insured house is
actually on fire.
(3) Even if the fire results only after the fall of the building
and as a consequence of such, nevertheless, the damage, so far
as it is attributable to the fire and not merely to the falling of the
building, is a loss by fire. Here, the fire is the immediate cause
of the loss.
(4) If, however, the fall of the building, although it occurs
after a fire, is not the result of the fire, the loss is not covered
by the policy. (45 C.J.S. 865.) In this case, fire is just the remote
cause of the loss for which an insurer is not liable.
(5) An accidental injury resulting in hernia which forced
the insured, as a last resort, to submit to a surgical operation
which turns out to be unsuccessful, is the proximate cause of
the death and not the surgical operation. (Travelers' Ins. Co.
vs. Murray, 16 Colo. 296.) Here, there is an unbroken chain
of causation between the accident and the death without the
intervention of any new and independent cause so that the
death is the direct and natural consequence of the accident.
Hostile and friendly fires explained.
In determining the liability of the insurer against damage by
fire, it is necessary to make a rather subtle distinction between
fires that are "hostile" and those that are "friendly." The dividing
line is somewhat indistinct in detail under the cases, but the
traditional definition is as follows.
3
(1) When fire a friendly fire. — So long as a fire burns in a
place where it was intended to burn, and ought to be, it is to be
3For definition of fire, see annotation under Section 167.
282
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 84
regarded as merely an agency for the accomplishment of some
purpose and not as a hostile peril. It is a friendly fire.
(a) Thus, a fire burning in a furnace, or a stove, or a lamp,
is considered a friendly fire; and damage that may be caused
by such fires, due to their negligent management, is not
considered to be within the terms of the policy. (Vance, op.
cit., p. 869.)
(b) So it has been held that damage caused by smoke
issuing from a lamp that is turned up too high (Fitzgerald
vs. Ferman Ins. Co., 62 N.Y.S. 824.) or from a stove pipe that
is defective (Cannon vs. Phoenix Ins. Co., 35 S.E. 775.), or by
soot or smoke issuing from a defective furnace (Levitt vs.
Hartford Country Mut. Fire Ins. Co., 136 A. 572.) is not to be
considered as directly caused by fire.
The principle underlying these cases is simply that the
policy shall not be construed to protect the insured from injury
consequent upon his negligent use or management of fire, so
long as it is confined to the place where it ought to be. (American
Towing Co. vs. German Fire Ins. Co., 21 A. 553.)
(2) When fire a hostile fire. — It is hostile when it occurs outside
of the usual confines or begins as a friendly fire and becomes
hostile by escaping from the place where it ought to be to some
place where it ought not to be.
(a) Therefore, where a fire in a chimney, due to the
ignition of soot there, caused soot and smoke to issue from
the stove so as to d a m a g e the property insured, the court
very properly held the d a m a g e due to a hostile fire. (Way vs.
Insurance Co., 43 N.E. 1032.) The fire was intended to burn in
the stove and not in the chimney.
(b) Likewise, where flames escaped through a crack in a
stove releasing a sprinkle head above, the insurer was held
liable for the issuing loss. (Pappadakis vs. Netherlands Fire
Ins. Co., 242, P. 641.)
(c) It has also been held, and with good reason, that even
though a fire may remain entirely within its proper place, it
m a y become hostile if it, by accident, becomes so excessive
as to be beyond control (In O'Connor vs. Queen Ins. Co.,
Sec. 8 5
CONTRACT OF INSURANCE
Title 9. — L o s s
283
122 N.W. 1038.); and when oil leaked from the furnace, the
court properly held that the fire was hostile. (Giambaloo vs.
Phoenix Ins. Co., 36 N.Y.S. 2d 598.)
(d) A fire caused by a lighted cigarette on a rug is, of
course, a hostile fire. (Swerling vs. Connecticut Fire Ins. Co.,
180 A. 343.) But recovery would not be allowed for damage
to a rug accidentally dropped on a burning stove. In this case,
the d a m a g e is caused by a friendly fire.
Sec. 85. An insurer is liable where the thing insured is
rescued from a peril insured against that would otherwise
have caused a loss, if, in the course of such rescue, the
thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole
or in part; or where a loss is caused by efforts to rescue
the thing insured from a peril insured against.
Extension of principle of proximate
cause.
Under Section 85, the insurer is liable in two cases:
(1) Where the loss took place while being rescued from the peril
insured against. — The insurer is liable where the insured is
permanently deprived of the possession, in whole or in part,
of the thing insured by a peril not insured against provided it
is shown that said property would have been lost by the peril
insured against had there been no attempt to rescue it. Thus, the
loss of goods by theft during the removal of the goods to save
them from loss by fire is covered by a policy against fire (Queen
Ins. Co. vs. Paterson Drug Co., 74 So. 807.) unless, of course the
policy itself contains a stipulation exempting the insurer from
liability for such loss. (Caceres vs. New India Assur. Co., [C.A.]
36 O.G. 3114.)
(2) Where the loss is caused by efforts to rescue the thing insured
from a peril insured against. - Here, it is the efforts to rescue the
thing that caused the loss.
(a) Thus, damages to goods by being trampled on or
thrown about in the efforts to put out the fire are covered by
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
284
Sec. 8 6
the policy of fire insurance. (Cohn vs. National Ins. Co., 70
S.W. 259.)
(b) The insurer is also liable for loss caused by preparing
the goods for removal from the premises although they are
not actually carried out if at the time the work of removal is
begun, the property is in such danger of fire that a reasonably
prudent man would attempt to protect it. (Ins. Co. of North
America vs. Leader, 48 S.E. 972.)
(c) So also, damage to the insured property caused by
water during attempt to save it from fire is generally regarded
as resulting directly from the fire itself and as making the
insurer liable therefor. (Cohn vs. National Ins. Co., 70, supra.)
But the insured is bound to exercise a reasonable degree of
care in removing the goods. The necessity for removal is to be
determined not by the result alone but by the circumstances
as they appear to the interested persons at the time of the fire.
(White vs. Republic Fire Ins. Co., 57 Me. 91.)
EXAMPLE:
X was issued a fire insurance policy covering his house
and its contents. At about 10 o'clock in the evening, the house
caught fire and was partially destroyed. Much of the furniture
was carried out of the house and left in the yard. During the
night, some of the furniture was stolen.
Is X entitled to recover for this later loss? No. The loss is
not covered by Section 85 since the loss did not take place "in
the course of such rescue" nor "caused by efforts to rescue [the
furniture] from a peril insured against."
Sec. 86. Where a peril is especially excepted in a contract of insurance, a loss, which would not have occurred
but for such peril, is thereby excepted although the immediate cause of the loss was a peril which was not excepted.
Where proximate cause is an excepted
peril.
The insurer is not liable if the proximate cause of the loss is
a peril excepted from the policy although the immediate cause
Sec. 8 7
CONTRACT OF INSURANCE
Title 9. — Loss
285
is a peril not excepted. Thus, in a fire insurance policy which
excludes loss through explosion, if an explosion occurs first and
causes a fire which results in a loss, the insurer is not liable. In
this case, the proximate cause of the loss is "explosion" which
is an excepted peril; "fire" is the immediate cause but not the
"proximate cause." However, if a hostile fire occurs and causes
an explosion, then, "fire" is the proximate cause and the insurer
is liable for the loss caused by the "explosion" notwithstanding
the exception.
It has been held that the insurance company has the burden of
proving that the loss is caused by the risks excepted and for want
of such proof, the company is liable. (Paris-Manila Perfumery
Co. vs. Phoenix Assur. Co., 49 Phil. 753 [1926].)
Sec. 87. An insurer is not liable for a loss caused by the
willful act or through the connivance of the insured; but he
is not exonerated by the negligence of the insured, or of
the insured's agents or others.
Loss by willful act or through connivance
of insured.
The insurer is not liable for a loss caused by the intentional
act (e.g., suicide) of the insured or through his connivance. Such
loss is not within the contemplation of a contract of insurance one
of the requisites of which is that the risk should not be subject in
any wise to the control of the parties, (see Sec. 3.) Thus, when
the insured intentionally burns the insured goods and submits
fraudulent proof of loss, the policy is avoided.^ (Prats & Co. vs.
Phoenix Ins. Co., 52 Phil. 807 [1929]; East Furniture Co. vs. Globe
& Rutgers Fire Ins. Co., 57 Phil. 576 [1932].)
EXAMPLE:
The insured conspired or designed to destroy the property
insured. The property was burned before such conspiracy or
design could be carried out.
Presidential Decree No. 1613 enumerates the circumstances any of which shall constitute prima facie evidence of arson, (see note to Sec. 172.)
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Is the insurer liable? Yes, because the loss was not "caused
by the willful .act or through the connivance of the insured."
ILLUSTRATIVE CASE:
Wife started a fire that damaged the house and some of its
contents.
Facts: H had an argument with his wife, W, and left his
home. After he left, W started a fire that damaged the house
and some of its contents. H filed a claim on the insurance policy
that covered the house. The policy was in the names of H and
W.
Issue: Can H, an innocent co-insured, collect the policy
when the jointly insured party started the fire.
Held: Yes. H was not guilty of wrongdoing. When an
insurance policy is ambigiuous or unclear, it must be construed
against the insurer. The intentional destruction of the property
by one of the co-insured should not be interpreted to deny
recovery by the other co-insured unless the policy specifically
so states. Since the policy does not so state, H is entitled to
recovery for the damages to his property interest as covered by
the policy. (Ryan vs. MFA Mutual Insurance Company, 610 SW2d
428 [lean. App. 1980.)
Note: This was a case of first impression in Tennessee. The
former majority among states was that the innocent insured
was barred from recovery because of tthe wrongdoing of the
other co-insured.
Allowing the innocent party to recover would not benefit
the wrongdoer in this case. Furthermore, when an insurance
policy is unclear, it must be construed against the insurer.
The policy here did not specifically state that the intentional
destruction of the insured property by one of the co-insured
would bar recovery by the other innocent co-insured.
Loss caused by negligence of insured.
(1) Where there is ordinary negligence. — One of the purposes
for taking out insurance is to protect the insured against the
consequences of his own negligence and that of his agents. Thus,
it is a basic rule in insurance that the carelessness and negligence
of the insured or his agents constitute no defense on the part of
the insurer. (FGU Insurance Corporation vs. Court of Appeals,
Sec. 8 7
CONTRACT OF INSURANCE
Title 9. — Loss
287
454 SCRA 337 [2005].) The doctrine of contributory negligence
does not in any w a y apply to rights under a contract of insurance.
(Richards v. Standard Acc. Ins. Co., 200 R 1017.)
(a) Mere negligence or carelessness on the part of the
insured or of his servants, although directly causing or
contributing to the loss, usually is one of the risks covered
by the insurance and does not relieve the company from
liability. (Ibid.) In a case where the insured lighted some
straw under the barn in order to smoke out bees, and the fire
rapidly spread and destroyed the property, it was held that
the insured could recover for loss by fire of his b a m and its
contents. (Johnson vs. Bershire Mut. Ins. Co., 4 Allen 328.)
(b) An insurance policy would be of little value if
it is permissible to set up a defense in every case where
negligence could be shown. (Pool vs. Ins. Co., 65 N.W. 54.)
"An overwhelming percentage of all insurable loss sustained
because of fire can be directly traced to some act or acts of
negligence. Were it not for the errant human element, the
hazards insured against would be greatly diminished. It is in
full appreciation of these conditions that the property owner
seeks insurance and it is after painstaking analysis of them
that the insurer fixes his premiums and issues the policies.
It is in recognition of this practice that the law requires the
insurer to assume the risk of negligence of the insured and
permit recovery by an insured whose negligence proximately
caused the loss." (Federal Ins. Co. vs. Terminal Trail Tours,
Inc., 117 F. 2d 794 [1941].)
(2) Where there is gross negligence. — But gross negligence or
recklessness on the part of the insured, the consequence of which
must have been palpably obvious to him at the time, will relieve
the insurer from liability. This would be true, for example:
(a) where the insured, in his own house, sees the burning
coals in the fireplace roll down on his wooden floor and does
not brush them up; or
(b) where the insured sees a small fire start and makes no
attempt to put it out (Gove vs. Farmer's Mut. F. Ins. Co., 97
Am. Dec. 572.); or
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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 87
(c) where a building is voluntarily set on fire to save
other buildings from the effect of a conflagration and no
efforts are taken to save personal property in the building
although there is ample time. (First Nat. Bank vs. German
Am. Ins. Co., 134 N.W. 873.)
To what extent the insured's negligence must go in order
to constitute gross carelessness or recklessness and thereby
exonerate the insurer from liability must be evaluated in light
of the circumstances surrounding each case. (FGU Insurance
Corporation vs. Court of Appeals, supra.)
— oOo —
Title 10
NOTICE AND PROOF OF LOSS
Sec. 88. In case of loss upon an insurance against fire,
an insurer is exonerated, if notice thereof be not given to
him by an insured, or some person entitled to the benefit
of the insurance, without unnecessary delay, (a)
Sec. 89. When a preliminary proof of loss is required
by a policy, the insured is not bound to give such proof as
would be necessary in a court of justice; but it is sufficient
for him to give the best evidence which he has in his power
at the time.
Conditions before loss.
As a condition precedent to the right of recovery, there must
be compliance on the part of the insured with the terms of the
policy. If he has violated or failed to perform the conditions of
the contract, and such a violation or want of performance has
not been waived by the insurer, then the insured can not recover.
The terms of the contract constitute the measure of the insurer's
liability, and noncompliance therewith by the insured bars his
right of recovery. (Young vs. Midland Textile Insurance Co., 30
Phil. 617 [1915]; Stokes vs. Malayan Insurance, Co., Inc., 127
SCRA 766 [1984].)
Thus, where a fire insurance policy required, as one of
its conditions, the insured to give notice of other insurance,
if any, upon the same property, in the absence of such notice,
notwithstanding that there are other insurance policies on the
property, the policy is null and void, and the insured cannot
289
290
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sees. 88-89
recover. (Union Manufacturing Co., Inc. vs. Phil. Guaranty Co.,
Inc., 47 SCRA 271 [1972].) Similarly, where the policy provides
that it shall be void if the insured shall procure any other
insurance on the property without the consent of the insurer,
the violation of the condition renders ipso facto the policy void.
(Pioneer Insurance & Surety Co. vs. Yap, 6 SCRA 246 [1974].)
As has been stated: "The insurance contract m a y be rather
onerous but that in itself does not justify the abrogation of its
express terms, which the insured accepted or adhered to and
which is the law between the contracting parties." (Misamis
Lumber Corp. vs. Capitol Insurance & Surety Co., Inc., 17 SCRA
228 [1966].)
Conditions after loss.
(1) Notice and proof of loss. — Sections 88 and 89 establish
conditions concerning matters after the loss that must be fulfilled
before the insured becomes entitled to the benefit of the policy,
namely: notice of loss must be given to the insurer (Sec. 88.) and
when required by the policy, a preliminary proof of loss must
likewise be given. (Sec. 89.) While an insured, in submitting
his proof of loss is "not bound to give such proof as would be
necessary in a court of justice" under Section 88, the same section
does not give him any justification for submitting false proofs.
(Yu Ban Chuan vs. Fieldmen's Insurance Co., Inc., 4 SCRA 491
[1965].)
In some life and accident policies, a provision is included
requiring that a certificate of the attending physician of the
insured be furnished as a part of the proof of death, (see Sec. 92.)
(2) Nature. — While in the form of conditions precedent, they
are in nature conditions subsequent the breach of which affects a
right that has already accrued. Until a loss occurs, through a peril
covered by the policy, the insurer's liability under his contract is
altogether contingent, but with the happening of the capital fact
of loss, his liability arises and becomes properly fixed.
(3) Construction. — All those conditions in the policy-making
requirements of the insured after the loss are intended merely
for evidential purposes and do not properly form any part of the
conditions of liability. Such being the nature of these conditions,
Sees. 8 8 - 8 9
CONTRACT OF INSURANCE
Title 10. — Notice and Proof of Loss
291
it is manifested that the general rules of construction require
that they shall be construed with much less strictness than those
conditions that operate prior to the loss. (Vance, op. cit, p. 894.)
Indeed, with regard the submission of documents to prove
loss, substantial, not strict compliance with the requirements
will always be deemed sufficient. (Finman General Assurance
Corporation vs. Court of Appeals, 361 SCRA 214 [2001].)
Meaning and purpose of notice of loss.
(1) Notice of loss is the more or less formal notice given
the insurer by the insured or claimant under a policy of the
occurrence of the loss insured against.
(2) The purpose of a notice of loss is to apprise the insurance
company with the occurrence of the loss, so that it m a y gather
information and make proper investigation while the evidence is
still fresh, and take such action as may be necessary to protect its
interest (see 45 C.J.S. 1182.) from fraud or imposition; in the case
of property insurance, to prevent further loss to the property.
Necessity of notice of loss.
It is obvious that the insurer cannot be held liable to pay a
claim unless he receives notice of that claim.
Under the law, if notice of loss is not given to the insurer by
the person insured or by the person entitled to the benefit of the
insurance without unnecessary delay, or in a timely manner, the
insurer is exonerated (Sec. 88.) or discharged from liability even
though the loss is one the policy was designed to protect against.
It is immaterial that if the notice is not given, the company
would not be prejudiced; and if given, the company would not
be benefited.
It has been held that formal notice of loss is not necessary if
the insurer already has actual notice (Fidelity-Phoenix F. Ins. Co.
vs. Friedman, 174 S. W. 215.), but there is authority to the contrary.
(Col. Sav. Bank vs. American Surety Co., 87 P. 118.)
Time for giving notice of loss.
The notice must be given "without unnecessary delay." (Sec.
88.) It has been held that a requirement of the policy that notice
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
292
Sees. 88-89
of loss be given immediately or forthwith requires the giving of
notice within a reasonable time. (Bachrach vs. Britain Am. Assur.
Co., 17 Phil. 555 [1910].)
What constitutes a reasonable time for giving notice depends
on the circumstances of the particular case although the courts
construe the requirement of immediate notice liberally in favor
of the insured. Thus, notice will be considered as given immediately, forthwith, as soon as possible or "without unnecessary
delay," if it has been given "as soon as circumstances permitted
the insured, in the exercise of reasonable diligence, to communicate." (Vance, op. cit., p. 895.)
The insurance contract m a y provide that the notice of loss
shall be given within a stated time after the loss occurs and
that failure to give the notice within such time shall preclude
recovery. Such provision is valid provided the time so fixed is
not unreasonably short.
Meaning and nature of proof of loss.
(1) Proof of loss is the m o r e or less formal evidence given
the company by the insured or claimant under a policy of the
occurrence of the loss, the particulars thereof and the data
necessary to enable the company to determine its liability and
the amount thereof.
1
(2) It is not what is known in the law of evidence as "proof"
or "evidence" for the consideration of the trial court, and it does
not stand for proof in court. (45 C.J.S. 1182.) Loss and its amount
m a y be determined on the basis of such proof as m a y be offered
by the insured which need not be of such persuasiveness as is
required injudicial proceedings. (Malayan Insurance Co., Inc. vs.
Cruz-Arnaldo, 154 SCRA 672 [1987].)
Form of notice or proof of loss.
The law does not make any requirement as to the form in
which notice or proof of loss must be given. Accordingly, in the
l
\n the case of the "no fault" indemnity in C o m p u l s o r y M o t o r Vehicle Liability Insurance, see Section 378 (ii).
Sees. 8 8 - 8 9
CONTRACT OF INSURANCE
Title 10. — Notice and Proof of Loss
293
absence of any stipulation in the policy, notice or proof m a y be
given orally or in writing. However, it is advisable to give the
notice or proof in writing for the protection of the insured or his
beneficiary.
The notice of loss m a y be in the form of an informal or
provisional claim containing a minimum of information as
distinguished from a formal claim which contains the full details
of the loss, computations of the amounts claimed, and supporting
evidence, together with a demand or request for payment.
Purpose of proof of loss.
The notice of loss is distinct from the proof of loss. The
requirement of notice is intended merely to give the insurer
information upon which he m a y act promptly in protecting the
property from further loss for which he m a y be liable or to enable
him to take any other immediate steps that his interests m a y
require. (Vance, op. cit., 895.)
The statement of loss is, however, a very much more formal
requirement, and intended not only: (1) to give the insurer
information by which he m a y determine the extent of his liability
but also; (2) to afford him a means of detecting any fraud that
m a y have been practiced upon him; and (3) to operate as a check
upon extravagant claims. (Ibid.)
The insurer or the insured may avail of the services of
adjusters in effecting the settlement of an insurance claim, (see
Sec. 324.)
Burden of proof of loss in court action.
If the insured has the burden of proving that he has sufficed
a loss and in life insurance, death of the insured must be proven.
In an action on a fire insurance policy to recover the value of
goods alleged to have been destroyed by fire, it devolves upon
the plaintiff to prove the amount of his loss by a preponderance
of evidence. (Go Ly vs. Yorkshire Ins. Co., 43 Phil. 633 [1922].) In
this connection, the cost price is competent evidence to show the
value of articles destroyed by fire. (LaO vs. Yek Tong Lin Fire &
Marine Ins. Co., 55 Phil. 386 [1930].)
294
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 9 0
But an inventory of goods destroyed by fire is a mere claim
for loss and, where the insurer denies liability, does not certainly
constitute evidence of loss. Testimony or evidence must be given to
sustain the correctness of the claim. This is particularly true where
the insurer's inventory was prepared with the intervention of the
insured. Its falsity is evidence of the fraudulent character and
the unmeritoriousness of the insured's claim. (Yu Ban Chuan vs.
Fieldmen's Insurance Co., Inc., 14 SCRA 491 [1965].)
Excuses for non-compliance with
conditions.
Timely compliance with the conditions is required as a
condition precedent to the right to recover under the policy.
However, failure on the part of the insured to comply strictly
with their terms will be excused when the circumstances were
such as to make strict compliance impossible.
Thus, failure to give notice and proof of loss will be excused
when it is due to the death or incapacity of the insured or the
fact that the beneficiary had no knowledge of the existence of
the policy of the insured w h o died before the fire. (Vance, op. cit.,
p. 901.) Where, for example, the heirs did not know about the
fire policy, their delay in giving notice of loss to the insurer and
furnishing proof of loss should not defeat their right to recover
on the policy.
Sec. 90. All defects in a notice of loss, or in preliminary
proof thereof, which the insured might remedy, and which
the insurer omits to specify to him, without unnecessary
delay, as grounds of objection, are waived.
When defects in notice or proof
deemed waived.
Proofs of loss satisfactory to the insurer are required to be
given. But the insurer must be satisfied when the insured has
done all in his power to furnish the information stipulated for in
the policy. It is the duty of the dissatisfied insurer to indicate the
defects in the proofs of loss as given, so that the deficiencies m a y
be supplied. His retention of the defective proofs constitutes a
Sec. 91
CONTRACT OF INSURANCE
Title 10. — Notice a n d Proof of Loss
295
waiver of his objections, (ibid., pp. 893-894.) Thus, there is waiver
where the insurer:
(1) Writes to the insured that he considers the policy null and
void as the furnishing of the notice or proof of loss would be
vain and useless (Bachrach vs. British A m . Ins. Co., 17 Phil. 555
[1910].); or
(2) Recognizes his liability to pay the claim (45 C.J.S. 1209.);
or
(3) Denies all liability under the policy (Vance, op. cit., p.
894.); or
(4) Joins in the proceedings for determining the amount of
the loss by arbitration, making no objections on account of notice
and preliminary proof (Carol vs. Gerard Fire Ins. Co., 13 Pac.
863.); or
(5) Makes objection on any ground other than a formal defect
in the preliminary proof. (McMasters & Bruce vs. Westchester
County Mut. Ins. Co., 25 Wend. 397.)
It has been held that a general statement that proofs are
defective is not sufficient to impose on the insured the duty to
supply defects not pointed out. (Ins. Co. of N. A m . vs. Hope, 58
111. 75.)
Sec. 91. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his,
or if he omits to take objection promptly and specifically
upon that ground.
When delay in presentation of notice
or proof deemed waived.
By the provisions of Section 91, waiver of delay in the
presentation of notice or proof of loss may be made: (1) by an act
of the insurer; and (2) by failure to take objection promptly and
specifically upon that ground.
An insurance company, by accepting payment of premium
with full knowledge that the premises had been injured or
destroyed by fire, is estopped from claiming that notice of the fire
296
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 91
was not given forthwith to the insurer by the insured as required
by the terms of the policy. (Emery vs. Svea Fire Ins. Co., 20 Pac.
88.) If the insured has attempted to comply with the stipulations
of the policy and the company makes objections which necessitate
amended or supplemental proofs, the insured will be allowed
a reasonable time after he is appraised thereof within which
to remedy the defects regardless of the time prescribed by the
policy for furnishing proofs. (McCarvel vs. Phoenix Ins. Co., 66
N.W. 367.)
ILLUSTRATIVE CASE:
Instead of invoking delay, insurer took steps to determine cause
and extent of loss.
Tacts: The loss occurred on March 29, 1963. The notice of
loss sent by the insured, although dated April 4, 1963, was
received by the insurer only on April 15, 1963. It requested
its adjuster to investigate and assess the loss on July 17, 1963.
The adjuster submitted his report on August 23, 1963 and his
computation of insurer's liability on September 14,1963.
Issue: Was there delay in the giving of notice of loss? On
this assumption, was there waiver of the delay on the part of
the insurer?
Held: The defense of delay cannot be sustained. The
insurer's reaction upon receipt of the notice of loss was to set
in motion what would be necessary to determine the cause and
extent of the loss, with a view to payment thereof under the
insurance agreement.
Instead of invoking the ground of delay, it took steps clearly
indicative that this particular ground for objection to the claim
was never in its mind. The nature of this specific ground for
resisting a claim places the insurer on duty to inquire when
the loss took place, so that it could determine whether delay
would be a valid ground upon which to object to a claim
against it. From April 1963 to July 1963, enough time was
available for the insurer to determine if the insured was guilty
of delay in communicating the loss to insurer. Furthermore, in
the proceedings that took place in the Office of the Insurance
Commissioner, the insurer did not raise the defense of delay to
avoid liability when it should have done so, indicating that it
did not find any delay.
Sec. 9 2
CONTRACT OF INSURANCE
Title 10. — Notice and Proof of Loss
297
But even on the assumption that there was delay, waiver
can be successfully raised against the insurer. (Pacific Timber
Export Corp. vs. Court of Appeals, 112 SCRA 199 [1982].)
Sec. 92. If the policy required, by way of preliminary
proof of loss, the certificate or testimony of a person other
than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal
of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by
any just grounds of disbelief in the facts necessary to be
certified or testified.
Effect of failure to secure certificate
or testimony of third person.
If the policy requires, by w a y of preliminary proof of loss, the
certificate or testimony of a person (like a notary public) other
than the insured, such requirement must be complied with by
the insured as part of the contract. However, the insured is only
required to exercise due diligence to procure it. In the event of
the refusal of such person to give the certificate or testimony, the
insured must furnish reasonable evidence to the insurer that the
person's refusal w a s not induced by any just grounds of disbelief
of said person in the truth of the facts necessary to be certified or
testified but, because of other grounds.
It has been held that such requirement in the policy must be
liberally construed in favor of the insured, (ibid.)
— oOo —
Title 11
DOUBLE INSURANCE
Sec. 93. A double insurance exists where the same person is insured by several insurers separately in respect to
the same subject and interest.
Double insurance defined.
Section 93 defines double insurance. In insurance contracts, the
terms "additional insurance," "other insurance," and "double
insurance" are used interchangeably, although there is a technical
difference in their meanings. (29 A m . Jur. 567.)
In double insurance, there is co-insurance (see Sec. 157.) by
two or more insurers; hence, it is also known as "co-insurance."
Requisites of double insurance.
There is no double insurance unless the following requisites
exist:
(1) The person insured is the same;
(2) Two or more insurers insuring separately;
(3) The subject matter is the same;
(4) The interest insured is also the same; and
(5) The risk or peril insured against is likewise the same.
EXAMPLES:
(1) X insures his house against fire with Y company and Z
company. Double insurance exists in this case because all the
requisites are present. The subject matter insured is the house.
The interest insured is X's interest in the house.
298
S e c 93
CONTRACT OF INSURANCE
Title 11. — Double Insurance
299
(2) X mortgages his house to B. Insurance taken by X and
another taken by B on the same house is not double insurance
because it is not on the same interest, (see Sec. 8.)
(3) X insures his automobile against fire with Y company
and against theft with Z company. There is no double insurance
because the automobile is not insured against the same risk or
peril.
Double insurance distinguished
from over-insurance.
Double insurance is different from over-insurance.
(1) There is over-insurance when the amount of the insurance
is beyond the value of the insured's insurable interest. In double
insurance, there m a y be no over-insurance as when the sum
total of the amounts of the policies issued does not exceed the
insurable interest of the insured.
(2) While in double insurance there are always several
insurers, in over-insurance there m a y be only one insurer
involved.
F r o m the above explanation, double insurance and overinsurance m a y exist at the same time or neither m a y exist at all.
Double insurance is the term used instead of "co-insurance"
when the sums insured exceed the insurable interest. In such
case, there is "over-insurance" by "double insurance."
EXAMPLE:
If X's insurable interest in a house is P1,000,000.00 and
he insured it with Y company for Pl,100,000.00, there is overinsurance but there is no double insurance.
On the other hand, if he insures the same house with Y
company for P600,000 and Z company for P400,000.00, there is
double insurance but there is no over-insurance.
If the amount of insurance with Y company is P450,000.00,
there is not only double insurance but also over-insurance.
Now if X procures only one policy for the amount of
P1,000,000.00 or a lesser amount, there is neither double
insurance nor over-insurance.
300
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 9 3
Binding effect of stipulation against
double insurance.
A policy which contains no stipulation against additional
insurance is not invalidated by the procuring of such insurance.
Invariably, policies of fire insurance contain a stipulation or
condition that they shall be avoided if additional insurance is
procured on the property without the insurer's consent, (see Sec.
75.)
(1) Additional insurance obtained by the insured. — Such provision is commonly known as the additional or "other insurance"
clause and is intended to prevent an increase in the moral hazard. It is valid and reasonable, and in the absence of consent,
waiver or estoppel on the part of the insurer, a breach thereof will
prevent a recovery on the policy. (45 C.J.S. 359-360; Santa A n a vs.
Commercial Union Assur. Co., 55 Phil. 329 [1930]; Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., 47 SCRA 271 [1972];
Pioneer Insurance and Surety Corp. vs. Yap, 61 SCRA 4 2 6 [1974.)
However, in order to constitute a violation, the other insurance
must be upon the same subject matter, the same interest therein,
and the same risk. (Geagonia vs. Court of Appeals, 241 SCRA 152
[1995].)
(2) Additional insurance obtained by a third person. — The
good or bad faith of the insured usually is immaterial. However,
insurance obtained by a third person without the knowledge or
consent of the insured will not affect his rights under the policy
in the absence of ratification. (45 C.J.S. 363.)
Purpose of prohibition against double
insurance.
The purpose of the prohibition against double insurance is to
prevent over-insurance and thus avert the perpetration of fraud.
The public, as well as the insurer, is interested in preventing
the situation in which a loss would be profitable to the insured.
(Pioneer Insurance & Surety Corp. vs. Yap, supra.)
There is a great temptation upon dishonest persons, whose
property is insured up to its full value or above it, to bring about
its destruction; and the same considerations undoubtedly tend to
Sec. 9 4
CONTRACT OF INSURANCE
Title 11. — Double Insurance
301
lessen the care that m a y be exercised by the honest in preventing
loss. In view of these facts, as amply demonstrated by experience
as they are apparent to reason, the underwriters take every
precaution to avoid over-insurance. (Vance, op. cit., p. 841.)
Sec. 94. Where the insured is over-insured by double
insurance:
(a) The insured, unless the policy otherwise provides,
may claim payment from the insurers in such order as he
may select, up to the amount for which the insurers are
severally liable under their respective contracts;
(b) Where the policy under which the insured claims is
a valued policy, the insured must give credit as against the
valuation for any sum received by him under any other policy without regard to the actual value of the subject matter
insured;
(c) Where the policy under which the insured claims is
an unvalued policy he must give credit, as against the full
insurable value, for any sum received by him under any
other policy;
(d) Where the insured receives any sum in excess of
the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold
such sum in trust for the insurers, according to their right
of contribution among themselves;
(e) Each insurer is bound, as between himself and the
other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract.
Rules for payment of claims where there is
over-insurance by double insurance.
As the contract of insurance is a contract of indemnity (Sec.
18.), the insured can recover no more than the amount of his
insurable interest whether the insurance is contained in one
policy or in several policies. The rules provided in Section 94
enunciate the principle of contribution which requires each insurer
to contribute ratably to the loss or damage considering that the
several insurances cover the same subject matter and interest
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
302
Sec. 9 4
against the same peril. They apply only where there is overinsurance by double insurance, that is, the insurance is contained
in several policies the total amount of which is in excess of the
insurable interest of the insured.
Paragraph (e) governs the liability of the insurers among
themselves where the total insurance taken exceeds the loss. If
the loss is greater than the sum total of all the policies issued,
each insurer is liable for the amount of his policy.
EXAMPLE:
(1) Several or solidary liability of insurers under their respective
contracts (par. a). — A owns a house valued at P180,000.00 and
he insures the same with three insurance companies as follows:
X Company
P60,000.00
Y Company
180,000.00
Z Company
240,000.00
If the house is totally burned, A, unless the policies
otherwise provide, may claim payment from each of them in
such order as he may select, up to the amount for which each is
liable under its contract. Thus, A may demand indemnity first
from X company but the latter is liable only to the extent of
P60,000.00, the amount specified in its policy. But if A elects to
claim payment first from Z company, A cannot recover more
than P180,000 which is the value of his insurable interest. A,
may collect P60,000.00 from each of the insurers, or P180,000.00
only from Y company and nothing from X company and Z
company.
The exception allowed by law (i.e., "unless the policy
otherwise provides") applies where the policy contains
what is generally referred to as the contribution clause which
stipulates that the insurance company shall not be liable to pay
or contribute more than its ratable proportion of the loss or
damage, (see No. 4.)
(2) Where insured claims under a valued policy (par. b). — In the
same example, in case A recovers P60,000.00 from X company,
he must give credit as against the valuation of P180,000.00 for
the sum of P60,000.00 thus received by him without regard
to his actual loss. In other words, A may recover only the
Sec. 9 4
CONTRACT OF INSURANCE
Title 11. — Double Insurance
303
difference of P120,000.00 from either Y company or Z company
or from both of them so long as the amount recovered does not
exceed P120,000.00.
If A has been fully indemnified for his loss by one insurer,
he cannot file subsequent claims against the others.
(3) Where insured claims under an unvalued policy (par. c).
— In case the policies are unvalued or open, the value of the
loss must be ascertained. If the actual loss is estimated to be
P150,000.00, A may recover said amount from the insurers in
such order as he may select up to the amount for which they
are severally liable under their respective contracts, (par. [a].)
If A collects from X company P30,000.00 and from Y company
P90,000.00, he can still collect from Z company the difference of
P30,000.00 to make up the loss of P150,000.00
(4) Liability of each insurer to contribute ratably to the loss (par.
e). — Under paragraph (e), each insurer is bound to contribute
ratably to the loss in proportion to the amount for which he is
liable under his contract. The formula may be stated as follows:
Amount o f policy
x
L o s s = L i a b i l i t y o f
Total insurance taken
Thus, in the first example, the pro rata contribution of each
of the insurers is as follows:
X Company —
P 60,000.00
or 1 / 8 of P180,000.00 or P22,500.00
P480,000.00
Y Company —
P180,000.00
or 3 / 8 of P180,000.00 or P67,500.00
P480,000.00
Z Company —
P240,000.00 or 4 / 8 of PI80,000.00 or P90,000.00
P480,000.00
Total amount recoverable = P180,000.00
So, if A is able to receive the amount of P180,000.00 from
Y company under paragraph (a) of Section 94, X company
and Z company are liable to reimburse Y company for their
304
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 94
respective shares as indicated above. However, where there is a
pro rata clause in the policy, whereby each one of the insurers is
made liable only for his ratable proportion of the loss, A cannot
exercise his right under paragraph (a) for he may claim from
each insurer only such amount corresponding to his ratable
proportion of the loss.
(5) Where sum received by insured exceeds total insurance taken
(par. d). — Let us now suppose that A, after receiving P60,000.00
from X company, succeeds in collecting the sum of P120,000.00
and P144,000.00 from Y company and Z company, respectively.
Under paragraph (d), A must hold the amount of P144,000.00,
said amount being in excess of his insurable interest in the
house, in trust for the insurers X, Y, and Z. He cannot recover
more than the full indemnity. Thus, 1/8 of P144,000.00 or
P18,000.00 must be returned to X; 3 / 8 of P144,000.000 or
P54,000.00 to Y; and 4 / 8 of P144,000.00 or P72,000.00 to Z.
Pursuant to paragraph (e), X Company can recover from Y
Company, Pl,500.00 and from Z Company, P18,000.00. Thus:
X Company —
P 60,000.00
—
amount paid to A
- 18,000.00
—
amount to be returned by A
—
amount due from Y Company
- 18,000.00
—
amount due from Z Company
P 22,500.00
— pro rata contribution
P 42,000.00
- 1,500.00
P 40,500.00
Y Company —
P 120,000.00
—
amount paid to A
- 54,000.00
—
amount to be returned by A
+ 1,500.00
—
amount due to X company
P 67,500.00
—
pro rata contribution
P 144,000.00
—
amount paid to A
- 72,000.00
—
amount to be returned by A
P 66,000.00
Z Company —
Sec. 9 4
CONTRACT OF INSURANCE
Title 11. — Double Insurance
P 72,000.00
+ 18,000.00
—
amount due to X Company
P 90,000.00
— pro rata contribution
— oOo —
305
Title 12
REINSURANCE
Sec. 95. A contract of reinsurance is one by which an
insurer procures a third person to insure him against loss
or liability by reason of such* original insurance.
Reinsurance defined.
Section 95 defines a contract of reinsurance. It is a contract
whereby one party, the reinsurer, agrees to indemnify another,
the reinsured (original insurer), either in whole or in part, against
loss or liability which the latter m a y sustain or incur under a
separate and original contract of insurance with a third party, the
original insured. It has been referred to simply as "an insurance of
an insurance" (44 A m . Jur. 2d. 283; see Sees. 2 1 6 - 2 2 2 , 2 8 0 - 2 8 1 , 3 1 0 312.), i.e., insurance business is transferred from one insurance
company to another.
Such contracts are sometimes referred to as "treaties."
Reinsurance is required by law in certain cases, (see Sec. 215,
par. 1.) The reinsurance of a reinsurance is called retrocession.
EXAMPLE:
X insures his house against fire for P1,000,000.00 with Y
company. Here, the contract is only between X and Y company.
If Y Company, to relieve itself of any liability or to reduce
its potential liability under the contract, reinsures the risk or
part of it with Z company, another contract of insurance is
entered into, with Y company and Z company as the parties.
'Such" should be "an.
306
Sec. 9 5
CONTRACT OF INSURANCE
Title 12. — Reinsurance
307
By giving off the whole or some portion of the risk insured,
the insurer reduces the amount of its possible loss. Y company
becomes the reinsured, while Z company is the reinsurer.
It is obvious that in order that there may be a contract of
reinsurance, it is necessary that there is an original contract of
insurance; and since a contract of reinsurance like any other
contract of insurance must be supported by an insurable
interest, it is likewise clear that reinsurance may not be for a
greater amount than the original insurance, although it may be
easily for a less amount.
In case the house is destroyed by fire, Z company is not
bound to pay Y company more than the amount actually paid
by the latter to X.
Reinsurance distinguished from double
insurance.
The following are the distinctions:
(1) In double insurance, the insurer remains as the insurer of
the original insured, while in reinsurance, the insurer becomes
the insured, insofar as the reinsurer is concerned;
(2) In double insurance, the subject of the insurance is
property, while in reinsurance, it is the original insurer's risk
(Sec. 97.);
(3) Double insurance is an insurance of the same interest
while reinsurance is an insurance of a different interest;
(4) In double insurance, the insured is the party in interest
in all the contracts, while in reinsurance, the original insured has
no interest in the contract of reinsurance which is independent of
the original contract of insurance (Sec. 98.); and
(5) In double insurance, the insured has to give his consent,
while in reinsurance, the consent of the original insured (who
is hardly even aware of the reinsurance transaction) is not
necessary.
Value of reinsurance.
(1) From the standpoint of the insurer. — Reinsuring companies
benefit from contracts of reinsurance.
308
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 9 5
(a) Every insurance company, in accordance with its
financial strength, establishes a limit on the m a x i m u m claim
it wishes to pay out of its own resources. This limit is called a
"retention." At the same time, a company wants its salesmen
to be able to take an application for any amount the applicant
is willing to seek. When such applications are for a sum over
the company's retention, it handles the excess by means of
reinsurance.
1) Through the use of reinsurance, then, an insurer is
able to issue policies for amounts in excess of its retention
limit or beyond the capacity of its financial resources
in case of a loss, rather than inconvenience a client by
referring him to other insurance companies. This is in the
best interest of the insuring public, the insurer, and the
reinsurer.
2) Also, aside from spreading risks among several
insurance companies, insurance protection will be distributed to a greater proportion of those needing protection
if the underwriters of m a n y companies are in position to
supply insurance protection to applicants requiring large
amounts and to applicants w h o are not eligible for insurance at standard rates.
3) Underwriters benefit through the placing of
additional insurance in an expanded market. The
insurance industry benefits by reducing the waste arising
out of policies which are applied for but not issued.
(b) Further, the knowledge of the industry regarding
classification of impaired risks is increased in the most
economical manner. Reinsuring companies serve as focal point
for the collection of such risks where statistically significant
volumes of consistently underwritten substandard business
are accumulated and subjected to extensive analyses by an
experienced staff. Improved underwriting standards are
promulgated as a result of such analyses. This process is more
efficient than if each insuring company found it necessary to
attempt to perform its o w n underwriting research.
Sec. 9 6
CONTRACT OF INSURANCE
Title 12. — Reinsurance
309
Finally, the reinsurer benefits through the acquisition of
business which is expected to prove profitable in the long run.
( Reinsurance by Walter W. Steffen, in LHIH, p. 992.)
//
,,
(2) From the standpoint of the insured. — The practice of
reinsurance is also beneficial to the insured for the following
reasons:
(a) It gives insurance companies that practice in greater
financial stability and thus makes the insured's individual
policy more reliable;
(b) If a large amount of insurance is needed, the insured
m a y obtain it without negotiating with numerous companies;
(c) It enables the insured to obtain protection promptly,
without the delay that would be required to divide and
distribute the amount among many companies;
(d) All the insurance can be written under identical
contract provisions, whereas otherwise these might vary
with the different companies among w h o m the insurance is
divided; and
(e) Small companies are encouraged to divide large
exposures for safety and enabled to accept a wide variety of
applicants. (Riegel, Miller & Williams, Jr., op. cit, p. 125.)
(3) From the standpoint of the insuring public. — Contracts
or "treaties" of reinsurance are plainly beneficial to the public
inasmuch as they promote both efficiency and stability in the
conduct of the reinsurance business. (Vance, op. cit, p. 1066, see
Sees. 216-222.)
Sec. 96. Where an insurer obtains reinsurance, except
under reinsurance treaties, he must communicate all the
representations of the original insured, and also all the
knowledge and information he possesses, whether previously or subsequently acquired, which are material to the
risk, (a)
Duty of reinsured to disclose facts.
Where an underwriter is seeking to insure his risks, his
duty to disclose all material facts is no less than the similar duty
imposed on a person seeking an original insurance; the duty in
both cases is one of the strictest good faith (Sun Mut. Ins. Co. vs.
Ocean Ins. Co., 107 U.S. 485.) since the risk insured against in a
contract of reinsurance is the probability that the original insurer
may be compelled to indemnify for the loss under the policy
issued by him. (New York Brewery Ins. Co. vs. New York Co., 17
Wend. 359.) Thus, a policy may be avoided where the reinsured
conceals the fact that a loss has taken place or that the property is
over-insured where he has knowledge thereof.
EXAMPLE:
X insurance company issued a fire policy covering
a building owned by Y. Z insurance company accepted
reinsurance coverage under the policy. Thereafter, Y married
H, an ex-convict for arson. All the members of the board
of directors of X were invited as guests at the wedding and
knew who H was. Subsequently, the building was completely
destroyed by fire.
May X recover from Z notwithstanding that X did not
disclose H's previous conviction for arson?
No. Generally, when a contract of insurance has been
entered into, the insured cannot be charged with fraudulent
concealment by reason of the fact that he fails to disclose matters
material to the risk arising thereafter. (45 C.J.S. 115; Sees. 31,
46.) Section 96, however, covers knowledge or information
possessed by the insurer "whether previously or subsequently
acquired, which are material to the risk."
Automatic and facultative methods
of ceding reinsurance.
Reinsurance m a y be placed in effect either automatically or
facultatively.
1
^ o r glossary of important reinsurance terms, see annotations u n d e r Sections 2 1 6 222.
The insurance c o m p a n y originally writing the insurance is called the "primary insurer," or "direct insurer," or "ceding insurer." It is sometimes referred to as the "direct
writer." The portion of the risk retained by the primary insurer is called "net retention"
or "net line," while the portion transferred to the reinsurer is called the "cession." The act
of transferring the risk is called "ceding." The ceding insurer (reinsured) is known as a
Sec. 9 6
CONTRACT OF INSURANCE
Title 12. — Reinsurance
311
(1) Share or participation in risk insured. — The rule in Section
96 does not apply in case of automatic reinsurance treaties under
which the ceding company (reinsured) is bound to cede (give off
by w a y of reinsurance) and the reinsurer is obligated to accept
a fixed share of the risk which has to be reinsured under the
contract.
In a facultative insurance, which covers liability on individual
risk, there is no obligation either to cede or to accept participation
in the risk insured, each party having a free choice. But once
the share is accepted, the obligation is absolute and the liability
assumed thereunder can be discharged by one and only way
— payment of the share of the losses. There is no alternative or
substitute prestation, (see Equitable Ins. & Casualty Co., Inc. vs.
Rural Ins. & Surety Co., Inc., 4 SCRA 343 [1962].)
(2) Advantage to insurer. — The main advantage to the insurer
of the automatic method is avoidance of any delay in issuing its
policy. The advantage to the insurer of the facultative method
is that it receives the reinsurer's underwriting opinion before
the policy is issued. On occasion, the reinsurer m a y have had
previous applications or m a y receive concurrent applications for
reinsurance on the same risk from different companies; for this
reason, it m a y have more complete underwriting information
than any single insurer. ("Reinsurance," by Walter W. Steffen, in
LHIH, p. 1000.)
(3) Protection to reinsurer. — By agreeing to accept business
automatically, the reinsurer is relying on the underwriting
judgment of the insurer and is bound to accept a case even though
it may not agree with the underwriting decision. The reinsurer
is protected by the requirement that the original insurer retains
its full retention limit, which assures a measure of self-interest.
In actual practice, when any question of proper underwriting
"cedant." If the reinsurer, in turn, passes to another insurer a portion of the risk reinsured,
the transaction is called "retrocession." It is really the reinsurance of a reinsurance. The
ceding reinsurer is called a "retrocedent" and the second assuming reinsurer is known as
a "retrocessionaire."
A professional reinsurer transacts solely and exclusively reinsurance business in the
Philippines, (see Sec. 280.) It does not write direct insurance, its transactions being limited
to insurers.
classification exists, the insurer usually does not use its automatic
facility but instead secures the reinsurer's underwriting opinion
by submitting the case facultatively. (Ibid.)
Reinsurance treaty distinguished
from reinsurance policy.
The concept of one and the other is well expressed thus:
"A reinsurance policy is a contract of indemnity one insurer
makes with another to protect the first insurer from a risk it
has already assumed x x x. In contradistinction, a reinsurance
treaty is merely an agreement between two insurance companies
whereby one agrees to cede and the other to accept reinsurance
business pursuant to provisions specified in the treaty.
The practice of issuing policies by insurance companies
includes, among other things, the issuance of reinsurance
policies on standard risks and also on substandard risks under
special arrangements. The lumping of the different agreements
under a contract has resulted in the term known to the insurance
world as 'treaties/ Such a treaty is, in fact, an agreement between
insurance companies to cover the different situations described.
Reinsurance treaties and reinsurance policies are not synonymous. Treaties are contracts for insurance; reinsurance policies or
cessions x x x are contracts of insurance." (Pioneer Life Ins. Co.
vs. Alliance Life Insurance Co., 30 N.E. 2d 60, 72, cited in Phil.
American Life Ins. Co. vs. Auditor General, 22 SCRA 135 [1968].)
It is only after a reinsurance cession is made that the obligation
of the insurer to pay the reinsurance premium arises. (Ibid.)
Sec. 97. A reinsurance is presumed to be a contract of
indemnity against liability, and not merely against damage.
Nature of contract of reinsurance.
The subject of the contract of reinsurance is the primary
insurer's risk and not the property insured under the original
policy.
(1) Contract, one of indemnity against liability. — In reinsurance,
the reinsurer agrees to indemnify the insurer, not against actual
Sec. 9 8
CONTRACT OF INSURANCE
Title 12. — R e i n s u r a n c e
313
payment m a d e but against liabilities incurred. Therefore, it is by
no means necessary that the insurer shall first have paid a loss
accruing, as a condition precedent to his demanding payment
of the reinsurer. In fact, the insolvency of the insurer, which
precludes him from fulfilling in full the obligation incurred to
the insured under the original policy, does not in any wise affect
the right of the insurer to demand payment in full under the
policy of reinsurance (Vance, op. cit, pp. 1068-1069.), and this is
true even if the original insured should decide not to enforce his
claim against the insurer.
(2) Contract, separate
contract of insurance is
contract of reinsurance.
the insurer even before
insured.
from original insurance policy. — The
independent of and separate from the
The practice is for the reinsurer to pay
the latter has indemnified the original
(3) Contract based on original policy. — The policy of reinsurance, however, is necessarily based upon the original policy, and
the rights of the parties while, of course, fixed by the terms and
conditions of the policy of reinsurance are yet greatly affected
by the terms and conditions of the original policy upon which
the reinsurance contract is based. (Vance, op. cit., p. 1068.) The
reinsured risk must be the same as that covered by the original
insurance policy.
(4) Insurable interest requirement applicable. — The doctrine
of insurable interest applies to reinsurance just as it does to any
insurance contract. Therefore, the primary insurer is not entitled
to contract for reinsurance exceeding the limits of the policy
ceded to the reinsurer. Similarly, the reinsurer cannot provide
coverage for risks beyond the scope of the coverage provided by
the primary insurer. (R.H. Jerry, II, op. cit, p. 686.)
(5) Rule on subrogation applicable. — In general, a reinsurer,
on payment of a loss, acquires the same rights by subrogation
as are acquired in similar cases where the original insurer pays a
loss. (Pioneer Insurance & Surety Corp. vs. Court of Appeals, 175
SCRA 668 [1989]; see Art. 2207, Civil Code, discussed under Sec.
1.)
Sec. 98. The original insured has no interest in a contract of reinsurance.
314
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 98
Rights of original insured in contract
of reinsurance.
Reinsurance is a contract between the reinsured and the
reinsurer by which the latter agrees to protect the former from
risks already assumed.
(1) The insured, unless the contract so provides, has no
concern with the contract of reinsurance, and the reinsurer is not
liable to the insured either as surety or otherwise. (Baltica Ins.
Co. vs. Carr, 162 N.E. 178.)
(2) There is no privity of contract between the original
reinsured and the reinsurer. A contract of reinsurance rarely
explicitly permits direct action by the original insured against
the reinsurer.
Liability of reinsurer to reinsured.
In an action on a contract of reinsurance, as a general rule,
the reinsurer is entitled to avail itself of every defense which
the reinsured might urge in an action by the person originally
insured. (Gibson vs. Revilla, 92 SCRA 219 [1979].)
Thus, the reinsurer is not liable to the reinsured for a loss
under an original policy if the latter is not liable to the original
insured or for an amount more than the sum actually paid to the
insured. It has been held that the clause "to pay as m a y be paid
thereon" does not preclude the reinsurer from insisting upon
proper proof that a loss within the terms of the original policy
has taken place; it does not enable the reinsured to recover from
his reinsurer to an extent beyond the subscription of the latter
under the contract of reinsurance. (Ibid.)
Liability of reinsurer to original insured.
The original insured m a y stand in any of three (3) relations
towards the reinsurer in accordance with the terms of the
particular contract of reinsurance.
(1) Contract of reinsurance solely between insurer and reinsurer.
— In case the contract is solely between the insurer and the
reinsurer, contemplating only an indemnity to the insurer
against losses suffered by reason of the policies carried by him,
Sec. 9 8
CONTRACT OF INSURANCE
Title 12. — Reinsurance
315
the original insured has absolutely no interest in the contract and
is a total stranger to it. Unless the reinsurance contract contains
a stipulation assigning the right of the insurer in favor of the
insured, the latter, not being a privy to the contract, has no cause
of action against the reinsurer, but only against the insurer. (Artex
Dev. Co., Inc. vs. Wellington Ins. Co., Inc., 51 SCRA 352 [1973].)
(2) Contract of reinsurance with stipulation in favor of original
insured. — The contract of reinsurance m a y contain a provision
whereby the reinsurer binds himself to pay to the policyholder
any loss for which the insurer m a y become liable, (see Sec. 2;
also Art. 1311, par. 2, Civil Code. ) Therefore, the reinsurer who
has promised to pay the losses accruing under the original policy
will be liable to a suit by the original insured under the contract
of reinsurance. The remedy of the insured is both against the
insurer and the reinsurer, (see Coquia vs. Fieldmen's Insurance
Co., Inc., 26 SCRA 178 [1968]; Guingon vs. Del Monte, 20 SCRA
1043 [1967].)
2
(3) Contract of reinsurance amounting to novation of original
contract. — The original insured m a y also maintain an action
directly against the reinsurer in those cases in which the
circumstances attending the making of the contract of reinsurance
amount to a novation of the original contract (see Art. 1291 [2],
Civil Code. ) and hence, operate to discharge that contract and
the original insurer from all obligations thereunder. The original
insurer, however, will be released only when the insured agrees
with the insurer and reinsurer to the novation, (see Art. 1293,
ibid.*)
3
2
A r t . 1311 x x x If a contract should contain s o m e stipulation in favor of a third
person, he m a y d e m a n d its fulfillment provided he c o m m u n i c a t e d his acceptance to the
obligor before its revocation. A m e r e incidental benefit or interest of a person is not sufficient. The contracting parties m u s t have clearly and deliberately conferred a favor upon
a third person.
A r t . 1291. Obligations m a y be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
A r t . 1293. Novation which consists in substituting a new debtor in the place of the
original one, m a y be m a d e even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)
3
4
316
T H E I N S U R A N C E C O D E O F T H E PHILIPPINES
Sec. 9 8
Such an agreement is ordinarily carried into effect by a
surrender of the original policy and issuance of a new one
including the same terms and conditions, by the so-called
"reinsurer/' However, such a transaction is not one of technical
reinsurance, for here, the so-called "reinsurer" is but substituted
for the original insurer and hence, becomes the immediate
insurer of the subject of the original policy. (Vance, op. cit., pp.
1070-1073.)
— oOo —
Chapter II
CLASSES OF INSURANCE
Title 1
MARINE INSURANCE
Sub-title 1-A
Definition
Sec. 99. Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, evidences
of debt, valuable papers, bottomry, and respondentia
interests and all other kinds of property and interests
therein, in respect to, appertaining to or in connection
with any and all risks or perils of navigation, transit
or transportation, or while being assembled, packed,
crated, baled, compressed or similarly prepared for
shipment or while awaiting shipment, or during any
delays, storage transshipment, or reshipment incident
thereto, including war risks, marine builder's risks,
and all personal property floater risks.
(b) Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or
damage arising out of or in connection with the construction, repair, operation, maintenance or use of the
subject matter of such insurance (but not including life
317
318
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 99
insurance or surety bonds nor insurance against loss
by reason of bodily injury to any person arising out of
the ownership, maintenance, or use of automobiles).
(c) Precious stones, jewels, jewelry, precious
metals, whether in course of transportation or otherwise.
(d) Bridges, tunnels and other instrumentalities of
transportation and communication (excluding buildings, their furniture and furnishings, fixed contents
and supplies held in storage); piers, wharves, docks
and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams
and appurtenant facilities for the control of waterways.
(2) "Marine protection and indemnity insurance,"
meaning insurance against, or against legal liability of the
insured for, loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or
construction of any vessel, craft or instrumentality in use
in ocean or inland waterways including liability of the insured for personal injury, illness or death or for loss of, or
damage to, the property of another person, (a)
Transportation insurance defined.
Another important part of property insurance is the very
broad field of transportation insurance w h i c h is concerned with
the perils of property in (or incidental to) transit as o p p o s e d to
property perils at a generally fixed location. (D.L. Bickelhaupt,
op. cit, p. 837.)
The term does not include n o r m a l m o t o r vehicle insurance
which is treated separately by law. (see Chap. VI.)
Major divisions of transportation insurance.
Transportation insurance, usually k n o w n in the insurance
business as marine insurance, has two major divisions, namely:
(1) Ocean marine insurance. — It is one of the oldest written
forms of insurance and has to do primarily with the insurance
of sea perils. (D.L. Bickelhaupt, op. cit., pp. 537-538.) T h e old law
Sec. 99
CLASSES OF INSURANCE
Title 1. — Marine Insurance
319
(Act No. 2427, Sec. 92.) defines marine insurance (term used for
ocean marine insurance) as "an insurance against risk connected
with navigation, to which a ship, cargo, freightage, profits or
other insurable interest in m o v a b l e property, m a y be exposed
during a certain v o y a g e or a fixed period of time; and
1
(2) Inland marine insurance. — It is of comparatively
recent origin and covers primarily the land or over the land
transportation perils of property shipped by railroads, m o t o r
trucks, airplanes, and other m e a n s of transportation. It also covers
risks of lake, river, or other inland w a t e r w a y transportation and
other waterborne perils outside of those risks that fall definitely
within the ocean marine category, (see D.L. Bickelhaupt, op. cit.,
p. 538.)
Section 99 enumerates the coverage of m a r i n e insurance.
Note that the insurance m a y be in the form of property insurance,
indemnifying the insured for loss or d a m a g e to property (Sec.
99[1].) or in the form of liability insurance protecting the insured
against liability for loss or d a m a g e to property or for personal
injury, illness or death of another person. (Sec. 99[2].)
Scope of ocean marine insurance.
O c e a n marine insurance provides protection for: (1) ships or
hulls; (2) goods or cargoes; (3) earnings such as freight, passage
money, commissions, or profits; and (4) liability (known as
"protection and indemnity insurance") incurred by the owner or
any party interested in or responsible for the insured property
'Before the promulgation of the Insurance Code of the Philippines (Presidential Decree No. 612, as amended.), which repealed the Insurance Act (Act No. 2427, as amended.), Sections 93 to 159 of the Act, which became Sections 100 to 166 of the Insurance
Code of the Philippines, now the Insurance Code of 1978 (Presidential Decree No. 1460.),
applied only to (ocean) marine insurance as defined in Section 92 of the old law, that is,
insurance covering only movable property exposed to risks connected with navigation.
It is not clear whether Sections 100 to 166 of the present Code should likewise apply only to ocean marine insurance or to both ocean and inland marine insurance. Since
Title I, Chapter II of the Code makes no distinction in regard to the application of its
provisions, then said Title should apply to both kinds of marine insurance as defined in
Section 99 except those provisions which by their very nature contemplate "risks or perils
of navigation" that fall definitely within the ocean/marine category. For example, the
provisions which refer to insurance upon ship should not apply to inland marine insurance involving perils of land or air transportation only.
THE INSURANCE CODE OF THE PHILIPPINES
320
Sec. 99
2
by reason of maritime perils. (D.L. Bickelhaupt, op. cit., pp. 5 3 8 539.)
Risks or losses covered in ocean marine
insurance.
Under a marine insurance policy, all risks or losses m a y be
insured against, except such as are repugnant to public policy
or positively prohibited. (Bell vs. Western M & F Inc. Co., [La]
5 Rob. 423.) A general marine insurance policy w h i c h does not
state the risks assured is valid and covers the usual marine risks
(Parkhurst vs. Gloucester Mut. Fishing Ins. Co., 100 Mass. 301.);
and in a marine policy, the general enumeration of "all other
perils" etc., extends only to marine d a m a g e of like kind to those
enumerated. (Thamas & Mersey M. Ins. Co. vs. Hamilton [Eng.],
LR 12 AC 484 [HL].)
3
Of course, to sustain a recovery on a marine policy, the loss
must have b e e n occasioned by a risk or peril insured against.
Thus:
4
(1) T h e contract of insurance on freight is that the perils insured against shall not prevent the ship from earning full freight
2
The origin of the practice of insurance is to be found in the mutual agreements made
among merchants engaged in common shipping adventures, for distributing among the
mutual contractors the loss falling upon any one by reason of the perils of navigation. It is
thus apparent that in its early forms, the law of insurance was derived from the maritime
law, and as such was a part of the general law merchant, and international in its character.
(Vance, op. cit., p. 7.) For several centuries after its introduction into England, insurance
was largely confined to marine risks, and consequently, the law of marine insurance was
first developed in the English courts, (ibid., p. 17.)
By way of a historical background, marine insurance developed as an "all-risk"
coverage (infra.), using the phrase "perils of the sea" (infra.) to encompass the wide and
varied range of risks that were covered. The subject policies contain die "Perils" clause
which is a standard form in any marine insurance policy. (Malayan Insurance Corp. vs.
Court of Appeals, 270 SCRA 242 [1997].)
A marine risk note is not an insurance policy; it is only an acknowledgment or declaration of the insurer confirming the specific shipment covered by its marine open policy,
the evaluation of the cargo, and the chargeable premium. It is the marine open policy
which is the main insurance contract. It is incumbent upon the insurance company to
present in evidence the policy to support its claim of subrogation (International Container Terminal Services, Inc. vs. FGU Insurance Corp., 556 SCRA 194 [2008]; Eastern
Shipping Lines, Inc. vs. Prudential Guarantee and Assurance, Inc., 599 SCRA 565 [2009].)
It has been held, however, that the non-presentation of the marine insurance policy in
court is not fatal where its existence was already admitted by petitioner in open court, it
has been properly identified by testimony duly recorded and incorporated in the records
of the case, and there was no dispute as regards the loss of the cargo on the insured's vessel and the provisions of the policy. (Ibid.)
3
4
Sec. 99
CLASSES OF INSURANCE
Title 1. — Marine Insurance
321
for the insured in that voyage; such a contract does not undertake that the goods shall be delivered in a sound or merchantable
state or that the vessel shall be safe from the dangers of the sea.
(Hugg vs. Augusta Ins. & B k g . Co., 12 L. E d . 235.)
(2) T h e underwriter of a vessel does not undertake for the
cargo but engages only for the ability of the vessel to perform
her voyage and to b e a r d a m a g e w h i c h the vessel m a y sustain in
making the voyage. (Alexander vs. Baltimore Ins. Co., 9 L. Ed.
650.) Similarly, an insurance on cargo merely does not insure the
ship.
(3) An insurance on time by no m e a n s contains an e n g a g e m e n t
that any particular v o y a g e undertaken by the insured within the
prescribed period shall be performed before the expiration of the
policy but only that the ship shall be capable of performing the
voyage undertaken notwithstanding any loss or injury which
m a y occur to h e r during the time for w h i c h she is insured. (Bradie
vs. Maryland Ins. Co., 9 L. E d . 1123.)
(4) In marine policies, as in other kinds of insurance, the
insurer m a y except liability from certain causes. Thus, under a
marine policy excluding coverage for breakage unless caused
by an accident to the vessel, it has b e e n held that b a d weather
causing the d a m a g e is not an accident within the policy. (Traders
vs. Poland, [La App.] 181 So 2d. 879; see 44 A m . Jur. 2d 214-215.)
(5) It is a well-understood and well-established rule of marine
insurance that goods are presumed to be shipped under deck, that is,
below the weather deck of the vessel. If the goods are shipped
on deck, they are not covered by the policy unless special notice
of the stowage is given to the underwriter and he accepts the
enhanced risk. T h e reason for this presumption is that the deck
of a vessel is not designed to carry goods. Its primary function is
to make the holds watertight and to protect the cargo laden in the
holds. Goods carried on deck are subject to weather damage, sea
damage, and the hazard of being w a s h e d overboard. Shipowners
have no legal right to load goods on deck, and if they do, such
goods are at the shipowner's risk unless he had obtained the
consent of the cargo owner to such stowage.
322
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 99
Accordingly, underwriters cannot be expected, without
special notice, to assume the risk of goods laden on deck and
will be released from their contract if the insured subject is so
loaded. There are certain cases, however, which m a y furnish
an exception to this rule. Certain kinds of goods, dangerous
in themselves, are, by custom and sometimes by law, required
to be shipped on deck so that they will not endanger the other
cargo and can, if necessity arises, be quickly thrown overboard.
Underwriters are presumed to k n o w of these customs and legal
requirements. (Marine Insurance, Its Principles and Practice, by
William D. Winter, 3rd Ed., pp. 1-2 [1952], published by M c G r a w
Hill Book & Co., Inc., N.Y.)
"Perils of the sea," as used in ocean marine
insurance, explained.
(1) Perils covered. — O c e a n marine insurance protects ships
at sea and the cargo or freight on such ships from standard
"perils of the sea." T h e phrase "perils of the s e a " or "perils of
navigation" includes only those casualties d u e to the unusual
violence or extraordinary action of w i n d and wave, or to other
extraordinary causes connected with navigation. (Vance, p. 296.)
(a) The phrase thus embraces all kinds of marine casualty
such as shipwreck, foundering, stranding, collision, and
every specie of d a m a g e d o n e to the ship or goods at sea by
the violent action of the w i n d and w a v e s (45 C.J.S., 934.) or
losses occasioned by the jettisoning of cargo if it is m a d e for
the purpose of saving a vessel rendered u n w o r t h y during
the voyage, not through the fault of the captain. (Dabney vs.
N e w England Mut. Marine Ins. Co., 14 Allen 300.)
(b) T h e phrase extends to barratry w h i c h in A m e r i c a n
insurance law is "any willful misconduct on the part of the
master or crew in pursuance of s o m e unlawful or fraudulent
purpose without the consent of the owners, and to the
prejudice of the o w n e r ' s interest." Barratry requires a willful
and intentional act in its commission. No honest error of
judgment or mere negligence, unless criminally gross, can
CLASSES OF INSURANCE
Title 1. — Marine Insurance
Sec. 99
323
5
be barratry. (Roque vs. Intermediate Appellate Court, 139
S C R A 596 [1985].)
(2) Perils not covered. — It does not include losses resulting
from ordinary w e a r and tear or other d a m a g e usually incident
to the voyage. T h e mere fact that an injury is d u e to the violence
of s o m e marine force does not necessarily bring it within the
protection of the policy if such violence w a s not unusual or
unexpected. Thus, the insurer is not liable for a sail carried away
by the violence of a tempest, for tempests are not unusual nor is
the loss of a sail. But the carrying a w a y of a mast, or the loss of an
anchor by a storm, will entail liability u p o n the insurer, for such
damage is due only to unusual violence in the elements, and is
not ordinarily to be expected as incident to navigation. (Vance,
op. cit., p. 927.)
(3) A relative term. — "Perils of the s e a " is a relative term and
the meaning m a y vary with the circumstances. Thus, where a
vessel designed for inland waters w a s insured while b e i n g towed
in the Gulf of M e x i c o a n d the insurer w a s fully aware of the
hazardous nature of the j o u r n e y a n d charged an extra premium,
the loss w a s held to be due to perils of the sea although a sea-going
vessel w o u l d not h a v e b e e n d a m a g e d by the m o d e r a t e w a v e s
encountered. (Ibid.; C o m p a n i a de N a v e g a c i o n vs. Fireman's
Fund Ins. Co., 277 U.S. 66.)
Perils of the sea distinguished from perils
of the ship.
(1) A loss which, in the ordinary course of events, results (a)
from the natural and inevitable action of the sea, (b) from the
ordinary wear and tear of the ship, or (c) from the negligent
failure of the ship's owner to provide the vessel with proper
equipment to convey the cargo under ordinary conditions, is not
a peril of the sea. Such a loss is rather due to what has been aptly
called the perils of the ship.
The insurer does not undertake to insure against perils of
the ship. T h e purpose of an ocean marine policy is to secure
'Barratry is not a peril of the sea and is not covered by a policy of insurance which
does not specify barratry as a risk. (43 Am. Jr. 2d [Rev.] 752.)
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THE INSURANCE CODE OF THE PHILIPPINES
Sec. 99
an indemnity against accidents which may happen not against
event which must happen.
(2) "Perils of the sea" has been said to include only such losses
as are of extraordinary nature or arise from some overwhelming
power which cannot be guarded against by the ordinary exertion
of human skill or prudence, as distinguished from the ordinary
wear and tear of the voyage and from injuries suffered by the
vessel in consequence of her not being seaworthy.
It is also the general rule that everything w h i c h happens
through the inherent vice of the thing, or by the act of the owner,
master or shipper shall not be reputed a peril if not otherwise
borne in the policy. (Roque vs. Intermediate Appellate Court,
supra.) Thus, it has been held that loss caused to cargo of rice
by the entrance of sea water through the ship's defective pipe,
of which the shipowner w a s apprised b u t failed properly to
repair, was one more analogous to that which directly resulted
from simple seaworthiness than to that w h i c h resulted from
perils of the sea. T h e o w n e r of the d a m a g e d rice m u s t look to the
shipowner for redress and not to the insurer. ( G o Tiaco vs. U n i o n
Ins. Society of Canton, 40 Phil. 4 0 1 [1919]; see Cathay Insurance
Co. vs. Court of Appeals, 151 S C R A 710 [1987].)
Perils of the sea must be the proximate
cause of loss.
As with other kinds of insurance, in ocean marine insurance,
the insurer is liable only for such losses or d a m a g e s proximately
caused by the perils insured against.
EXAMPLES:
(1) Suppose a perishable cargo is greatly damaged by
the perils of the sea, and it should, in consequence thereof
long afterwards, and before arrival at the port of destination,
become gradually so putrescent as to be required to be thrown
overboard for the safety of the crew; the immediate cause of
the loss would be the act of the master and crew; but there is no
doubt that the insurer would be liable for a total loss upon the
ground that the operative cause was the perils of the sea.
(2) Suppose a vessel which is insured against fire only
is struck by lightning, and takes fire; and in order to save her
Sec. 99
CLASSES OF INSURANCE
Title 1. — Marine Insurance
325
from utter destruction, she is scuttled and sunk in shoal water
and she cannot afterwards be raised; it might be said that the
immediate cause of the loss was the scuttling; but in a juridical
sense, it would be the fire, and the insurer would be liable
therefor.
(3) Suppose a vessel insured against all perils but fire is
shipwrecked by a storm on a barbarous coast and burnt by the
natives; it might be said that the proximate cause of the loss
was the fire; and yet there is no doubt that the insurer would be
held liable on the policy upon the ground that the vessel had
never been delivered from the original peril of the shipwreck.
(Peters & Brothers vs. Warren Ins. Co., 14 Pet. 99.)
"All risks" marine insurance policy.
An all risks marine insurance policy insures against all causes
of conceivable loss or d a m a g e , except as otherwise excluded in
the policy or due to fraud or intentional m i s c o n d u c t on the part
of the insured.
(1) Scope of protection. — This type of policy has b e e n evolved
to grant greater protection than that afforded by the "perils
clause." It covers all losses during the v o y a g e whether arising
from a marine peril or not, including pilferage losses during the
war. An example of an "all risks" clause is as follows:
"This insurance is against all risks of loss or d a m a g e
to the subject matter insured but shall in no case d e e m e d
to extend to cover loss, damage, or expense proximately
caused by delay or inherent vice or nature of the subject
matter insured. Claims recoverable hereunder shall be
payable irrespective of percentage."
(2) Burden of proof on part of insurer to establish damage or
loss that has occurred, excluded from coverage. — T h e insurance
policy above covers all loss or damage to the cargo except those
caused by delay or inherent vice or nature of the cargo insured.
It is the duty of the insurance company to establish that said
loss or damage falls within the exceptions provided for by law;
otherwise, it is liable therefor.
An "all risks" provision of a marine policy creates a special
type of insurance which extends coverage to risks not usually
326
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 99
contemplated and avoids putting upon the insured the burden
of establishing that the loss was due to peril falling within
the policy's coverage. The insurer can avoid coverage upon
demonstrating that a specific provision expressly excludes the
loss from coverage. (Choa Tiek Seng vs. Court of Appeals, 183
SCRA 223 [1990].)
(3) Initial burden on part of insured to establish damage or loss
occurred. — Generally, the burden of proof is upon the insured
to show that a loss arose from a covered peril, but under an
"all risks" policy, the burden is not on the insured to prove the
precise cause of loss or damage for which it seeks compensation.
The insured under an "all risks insurance policy" h a s the initial
burden of proving that the cargo was in good condition w h e n the
policy attached and that the cargo was d a m a g e d w h e n unloaded
from the vessel; thereafter, the burden then shifts to the insurer
to show the exception to the coverage. T h e basic rule, to state
again, is that the insurance c o m p a n y has the b u r d e n of proving
that the loss is caused by the risks excepted and for w a n t of such
proof, the c o m p a n y is liable. (Filipino Merchants Insurance C o .
vs. Court of Appeals, 179 S C R A 638 [1989].)
Development of inland marine insurance
in the United States.
(1) Need for inland transportation insurance. — T h e original
marine policy primarily furnished insurance against perils
while property was on board the vessel, and its development
increased the scope of insurance to cover cargo from the time the
property left the premises of the shipper until it w a s delivered
to the premises of the consignee. This, of course, also involved
coverage while the property w a s on land during transit. At the
same time, the development of the land forms of transportation—
the railroads, motor trucks, and airplanes — called for insurance
against the perils of land transportation only. T h u s , inland marine
insurance, as separate from ocean marine insurance, originated.
(Riegel, Miller and Williams, Jr., op. cit., p. 302.)
(2) Extension of inland marine use. — Still another surge in
the use of inland marine insurance hinged upon the factor of
the continuing diffusion of wealth throughout the economy.
Sec. 99
CLASSES OF INSURANCE
Title 1. — Marine Insurance
327
The ownership of fur coats, of jewelry, of h o b b y equipment and
sporting equipment spread and p r o m o t e d the widespread use of
insurance forms designed for these possessors.
As business and c o m m e r c e grew, m a n y activities s e e m e d to
be served best by extension of land m a r i n e insurance to cover
property while awaiting shipment, while b e i n g prepared for
shipment, while being processed, and while in storage after
shipment. N e w inland marine insurance protection next c a m e
to apply w h e n the act of transportation itself b e c a m e incidental
to the true use of the property involved. T h e personal use of
jewelry or furs, for instance, ordinarily involves no use of the
transportation agencies; yet, an inland m a r i n e insurance form
insures articles of j e w e l r y or furs, w h e r e v e r they m a y be, even if
they are kept within the h o m e of the o w n e r for twelve m o n t h s of
the year, (ibid., p. 303.)
(3) Flexibility of inland marine rates and coverages. — As the
d e m a n d for inland marine insurance coverages developed into
a veritable b o o m , fire and casualty insurers w e r e attracted to the
business. S o m e of the old marine policy w e r e retained b u t there
were also incorporated in the policy, features to be found in both
fire and casualty policies.
Because of the flexibility of the transportation policy, m u c h
broader coverage were available under inland marine contracts
than could be obtained under the old fire or casualty contracts.
T h e inland marine contract were particularly desirable w h e n
there were concentrated values. In the case of furs, jewelry,
art treasures, and the like, instead of insuring the risks against
burglary, fire, and other innumerable specific perils, a single
policy covering all risks had tremendous appeal. When, as was
usually the case, the "all risks" policy could be obtained for a
cost much less than was required for an accumulation of separate
policies, the appeal of the marine policy to the buyer of insurance
was natural. (D.L. Bickelhaupt, pp. 554-555.)
(4) Broadening of inland marine coverage. — T h e original
coverage under inland marine insurance gave protection to the
policyholder in case of loss or damage resulting from the "perils
of transportation." The scope was broadened until finally "all
328
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 99
risks" policies were reached, an almost unlimited insurance that
appears in very many of the inland marine forms. With "all risks"
coverage, and with a very free description of "transportation,"
either actual or technical (the transportation element c a m e to
involve not only actual transporting but the technical "state
of transportation"), marine insurance companies received
complaints from the casualty and the fire insurance companies.
These complaints were resolved in 1933 in the acceptance of the
insurance companies' definition of the insuring powers of marine
and transportation underwriters by the National Convention of
Insurance Commissioners. (Riegel, Miller, & Williams, Jur., op.
cit., pp. 303-304.)
(5) Present status of inland marine business. — T h e Nationwide
Definition merely defines w h a t can be classified as marine
insurance, as distinguished from fire and casualty insurance. It
does not distinguish b e t w e e n ocean marine and inland marine
insurance. T h e definition is less important today b e c a u s e
multiple-line laws n o w permit a single insurer to write all types
of property and liability insurance. It is still important, however,
to define marine insurance, because this insurance does h a v e
some distinctive characteristics, and under s o m e state laws, is
still treated differently.
According to the Nationwide Definition, inland marine
insurance includes at least the following classes:
(a) Property insurance on goods in transit by railroad,
express, mail, motor truck, aircraft and (partly b y ) water. T h e
majority of entirely waterborne shipments are covered by
ocean marine policies, but protection against the water-transit
peril is sometimes included under inland marine policies
along with protection against the other contingencies. This
protection is logically afforded in inland marine insurance;
(b) Property insurance on goods of certain specified types,
wherever they m a y be, against any peril, even though not in
the course of transportation. An e x a m p l e is a jewelry floater
covering "all risks." Another is the insurance on goods in
the hands of a dry cleaner. Such contracts are m u c h broader
policies than could be issued by either fire or casualty insurers
Sec. 99
CLASSES OF INSURANCE
Title 1. — Marine Insurance
329
at the time the definition w a s adopted, b u t for w h i c h there
w a s a strong d e m a n d ;
(c) Property insurance on fixed property such as bridges,
tunnels and the like; on aids to navigation, such as piers, dry
docks and marine railways; and on aids to communication,
such as radio and television c o m m e r c i a l equipment;
(d) Property insurance on a few of the means of transportation,
such as small boats, railroad cars, and the like. T h e m o r e
important exposures of this character are insured by other
agencies, such as vessels by the o c e a n m a r i n e departments,
airplanes by aviation insurers, and m o t o r vehicles by
automobile insurers; a n d
(e) Liability insurance, to protect transportation carriers,
warehousemen, processors, a n d other bailees from the
consequences of legal responsibility for property of customers
while in their custody. (Riegel, Miller & Williams, Jr., op. cit.,
pp. 303-305.)
Classes (scope) of inland marine
insurance.
Basically, to be eligible for inland marine contract, the risk
must involve an element of transportation. Either the property
is actually in transit held by persons (bailees) w h o are not its
owners, or at a fixed location but an important instrument of
transportation, or is a m o v a b l e type of goods which is often
at different locations. There are four (4) divisions or classes of
inland marine insurance and they are the following:
(1) Property in transit. — T h e insurance provides protection for
property frequently exposed to loss while it is in transportation
from one location to another;
(2) Bailee liability. — T h e insurance provides protection to
persons w h o have temporary custody of the goods or personal
property of others, such as carriers, laundrymen, warehousemen,
and garagekeepers;
(3) Fixed transportation property. — T h e insurance covers
bridges, tunnels, and other instrumentalities of transportation
and communication, although as a matter of fact they are fixed
330
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 100
property. They are so insured because they are held to be an
essential part of the transportation system. Marine policies must
exclude buildings, their furniture, fixtures, fixed contents, and
supplies held in storage. They invariably extend to cover more
perils than those included in the usual fire policy. In order for
a risk to qualify for a marine contract, there must definitely be
included some additional marine peril such as collapse, collision,
or flood; and
(4) Floater. — In inland marine insurance, the term is used in
the sense that it provides insurance to follow the insured property
wherever it m a y be located, subject always to the territorial limits
of the contract. Floater policies m a y be issued for such items as
jewelry, furs, works of art, contractor's equipment, theoretical
property, salesmen samples, and others, (see D . L . Bickelhaupt,
op. cit., pp. 556-562.)
Although the basis for eligibility is the fact that transportation
or movement of property is often present, the condition n e e d not
necessarily occur. Floaters h a v e b e e n issued covering property
that is seldom moved, (see Riegel, Miller & Williams, Jr., op. cit.,
p. 312.)
Sub-Title 1-B
Insurable Interest
Sec. 100. The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one
who covenants to pay him its value in case of loss; Provided, That in this case the insurer shall be liable for only
that part of the loss which the insured cannot recover from
the charterer.
Insurable interest of insured in marine
insurance.
As with other insurances, marine insurance is invalid unless
supported by an insurable interest in the thing insured. There
can be no valid insurance unless there is something to insure.
But it is held that if an insurance is taken u p o n a ship or cargo
"lost or not lost," that is, the insurer expressly agrees that he will
Sec. 100
CLASSES OF INSURANCE
Title 1. — Marine Insurance
331
bound in any event, even though the vessel be already lost, the
contract is binding and the insurer m u s t pay, e v e n though it be
proved that the insured h a d nothing to insure w h e n the contract
was made. (Pendergast vs. Glove & Rutgers Fire Ins. Co., 159
N.E. 183; Vance, op. cit., p. 911.)
Insurable interest of owner of a ship.
T h e owner of a vessel undoubtedly has an insurable interest
on the vessel to the extent of its value and this is true, even if he
has mortgaged the s a m e (Higginson vs. Dall, 13 M a s s . 96.); or
has chartered it to a third person w h o agrees to pay h i m its value
in case of loss. (Sec. 100.) However, in the latter case, the insurer
is liable only for that part of the loss w h i c h the insured cannot
recover from the charterer.
6
The charterer of a ship h a s an insurable interest in it to the
extent that he is liable to be damnified by its loss. (Sec. 106.)
EXAMPLE:
X is the owner of a ship valued at P10,000,000.00. He
charters it to Y who agrees to pay its value in case of loss.
X can still insure the vessel up to its value. If he does insure
it, he can recover P10,000,000.00 from Y, the charterer. However,
if X recovers P4,000,000.00, from Y, he can recover only the
balance of P6,000,000.00 from the insurer. The liability of the
insurer is subsidiary to that of the charterer. If the amount paid
by the insurer is only P5,000,000.00, X is entitled to recover the
deficiency from Y. (see Art. 2207, Civil Code.)
After payment of indemnity, the right of subrogation
is given to the insurer against Y in case the loss arose out of
"wrong or breach of contract" on Y's part, (ibid.)
T h e shipowner's liability arising from the operation of a ship is merely co-extensive
with his interest in the vessel such that a total loss thereof results in its extinction. This
limited liability rule is subject to exceptions, namely: (1) whether the injury or death to
a passenger is due either to the fault of the shipowner, or to the concurring negligence
of the shipowner and the captain; (2) where the vessel is insured; and (3) in workmen's
compensation claims. (Monarch Insurance Co., Inc. vs. Court of Appeals, 333 SCRA 71
[2000].)
332
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 100
Insurable interest and sale contracts.
A person has an insurable interest if he will suffer in the event
of loss of, or damage to, the subject matter insured.
(1) In the case of a vessel. — T h e insurable interest is c o m m o n l y
possessed by the owner, and also if money has been borrowed,
by one who holds mortgage on the vessel. O n e w h o leases a
vessel may agree to assume responsibility for its insurance, in
which case he has an insurable interest.
(2) In the case of cargo. — T h e insurable interest is in the
shipper or the consignee depending upon the terms of sale. T h e
following are s o m e of the c o m m o n terms of sale:
(a) F.O.B. (free on board):
1) F.O.B. factory.—The b u y e r assumes responsibility
w h e n the goods leave the factory; or
2) F.O.B. point of destination. — T h e b u y e r does not
assume responsibility until the goods are received from
the carrier.
(b) C.I.F. (cost, insurance, and freight) — T h e seller
assumes complete responsibility for securing all necessary
insurance; and
(c) C. & F. (cost and freight) — T h e b u y e r procures his
own insurance. (Riegel, Miller, & Williams, Jr., op. cit., pp.
274-275.)
(3) In the case of a vendee/consignee of goods in transit. — T h e
v e n d e e / c o n s i g n e e has such existing interest therein as m a y be
the subject of a valid contract of insurance. His interest over the
goods is based on the perfected contract of sale b e t w e e n h i m
and the shipper of the goods which operates to vest in h i m an
equitable title even before delivery or before he performed the
conditions of the sale. T h e contract of shipment, w h e t h e r under
F.O.B., C.I.F., or C. & F., is immaterial in the determination of
whether the vendee has an insurable interest or not in the g o o d s
in transit. T h e perfected contract of sale even without delivery
vests in the vendee an equitable title, an existing interest over
the goods sufficient to be the subject of insurance. (Filipino
Merchants Insurance Co. vs. Court of Appeals, 179 S C R A 6 3 8
[1989].)
Sees. 101-102
CLASSES OF INSURANCE
Title 1. — Marine Insurance
333
Sec. 101. The insurable interest of the owner of a ship
hypothecated by bottomry is only the excess of its value
over the amount secured by bottomry.
Shipowner's and lender's insurable interest where
vessel hypothecated by bottomry.
A loan on bottomry is o n e w h i c h is payable only if the vessel, given as a security for the loan, c o m p l e t e s in safety the contemplated voyage. T h e lender in b o t t o m r y is entitled to receive a
high rate of interest to c o m p e n s a t e h i m for the risk of losing his
loan. T h e o w n e r of the vessel receives in case of loss no indemnity for his loss, but he does secure i m m u n i t y from p a y m e n t of
the loan.
Obviously, m a n y of the e l e m e n t s of an insurance contract are
present in the b o t t o m r y loan as well as in the respondentia loan,
w h i c h is secured in similar m a n n e r on the cargo or s o m e part
thereof. (Vance, op. cit., p. 9.)
W h e r e a vessel is b o t t o m e d , the o w n e r has an insurable
interest only in the excess of its value over the a m o u n t of the
bottomry loan. (Sec. 101.) T h e insurable interest of the lender on
bottomry in the vessel given as security is to the extent of the
loan.
EXAMPLE:
If the value of the vessel of X is P2,000,000.00, and he
borrows from Y by way of loan on bottomry, P800,000.00, then
he may effect insurance on it for only Pl,200,000.00, as this
difference or excess of its value is the extent of his insurable
interest.
On the other hand, Y has an insurable interest in the
ship given as security for the loan up to the amount thereof
of P800,000.00, as the happening of the loss by a marine peril
exposes him to the danger of not being able to recover the said
amount.
The contract of loan is similar to a marine insurance except
that the money is given in advance.
Sec. 102. Freightage, in the sense of a policy of marine
insurance, signifies all the benefits derived by the owner,
either from the chartering of the ship or its employment for
the carriage of his own goods or those of others.
334
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 103
Meaning of freightage.
Section 122 gives the meaning of freightage (also called
"freight") in marine insurance. In other words, it is the benefit
which is to accrue to the owner of the vessel from its use in the
voyage contemplated or the benefit derived from the e m p l o y m e n t
of the ship.
Sources of freightage.
Freightage m a y be derived from: (1) the chartering of the
ship; (2) its employment for the carriage of his o w n goods; and
(3) its employment for the carriage of the goods of others. (Sec.
102.)
Sec. 103. The owner of a ship has an insurable interest in expected freightage which according to the ordinary
and probable course of things he would have earned but
for the intervention of a peril insured against or other peril
incident to the voyage.
Insurable interest in expected
or anticipated freightage.
Under Section 103, the o w n e r of a ship includes not only the
legal owner but also the charterer w h o expects to earn in the
transportation of goods of others.
(1) The freight (or freightage) covered by an ordinary m a r i n e
policy is something m o r e than the interest indicated ordinarily
by the use of the word "freight." (see Sec. 102.) T h e freight m o n e y
assured to the shipowner m a y be: (a) freight, in its ordinary
acceptation, to be earned and payable u p o n the completion of
the voyage; (b) the hire of the vessel, payable by the charterer; or
(c) the benefit accruing to the o w n e r from the use of his vessel in
the way of profits u p o n carriage of his o w n goods. (Vance, op cit.,
p. 913.)
(2) T h e owner of a ship has an insurable interest in expected
freightage which he m a y not earn in case of the intervention of a
peril insured against or other peril incident to the voyage. (Sec.
103.) The rule is the s a m e although the freight has b e e n paid in
advance. (Vance, op. cit., p. 913.) However, where the agreement
Sec. 104
CLASSES OF INSURANCE
Title 1. — Marine Insurance
335
is that the freight is payable in any event, w h e t h e r the vessel
is lost or is not lost, the s h i p o w n e r has no insurable interest in
such freight. (44 C.J.S. 923.) B u t the shipper w h o has prepaid the
freightage under such condition, has an insurable interest on the
same.
Insurable interest in passage money.
Passage money, unlike freight, is customarily payable in
advance; it cannot be recovered if the vessel is lost before the
completion of the passage. U n d e r such circumstances, the
passenger can clearly insure his a d v a n c e s of p a s s a g e m o n e y but
the shipowner m a y not insure it unless it is payable only u p o n
the completion of the v o y a g e . (Vance, op. cit., p. 914.)
Sec. 104. The interest mentioned in the last section exists, in case of a charter party, when the ship has broken
ground on the chartered voyage. If a price is to be paid for
the carriage of goods, it exists when they are actually on
board, or there is some contract for putting them on board,
and both ship and goods are ready for the specified voyage, (a)
Insurable interest in expected freightage
in a charter party.
(1) When it exists. — To give an insurable interest in expected
freightage, the insured m u s t h a v e an inchoate right to freight,
that is, he must be in such position with regard to freight that
nothing could prevent h i m from ultimately having a perfect
right to it but the intervention of the perils insured against.
(a) Where freight is the price to be paid for the hire of
the ship under a charter party (infra.), the shipowner has an
inchoate right to freight as soon as there is an inception of
performance by the ship under the charter party.
(b) Where the inchoate right to freight accrues as soon
as the goods are actually put on board and where part of the
goods has been loaded and the balance is ready, there is an
insurable interest in the whole freight.
3 3 6
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 105
(c) Where the shipowner has m a d e a binding contract for
freight and the ship is in readiness to receive the goods, he
has an insurable interest.
(2) When none exists. — There is no insurable interest in
freight:
(a) Where there is no contract and no part of the goods
expected to be carried are on board, there is no insurable
interest in freight although there are goods ready for shipment
or the master is provided with funds for the purpose of
purchasing a cargo.
(b) Where the vessel is a mere "seeking ship" or a vessel
looking for cargo to be transported, the owner h a s no insurable interest in freight to be earned on goods not loaded, (see
44 C.J.S. 932.)
Sec. 105. One who has an interest in the thing from
which profits are expected to proceed, has an insurable
interest in the profits.
Insurable interest in expected profits.
(1) Interest in thing involved based on some legal right. —
One having a reasonable expectation of profits from a marine
adventure may take out insurance to protect such profits.
(Patapsco Ins. Co. vs. Coulter, 3 Pet. [U.S.] 222.) However, the
interest in the goods or adventure out of which the profits are
expected to be realized should be a legal interest although such
interest m a y be contingent (see Sec. 14[c].) like c o m m i s s i o n to an
agent or consignee. (French vs. H o p e Ins. Co., 16 Pick 397.) Thus,
the owner of a cargo to be carried on a trading voyage has an
insurable interest not only on the value of the cargo but also on
the expected profit from the sale of the cargo which is liable to be
affected by the perils of the sea. (Barclay vs. Cousins, 2 East. 544.)
(2) Interest in thing involved based on a valuable consideration.
— The insured has sufficient interest if it is based on a valuable
consideration paid. For instance, one w h o has m a d e a contract
for purchase of property which has been m a d e ready for shipment, although not loaded and w h o has contracted to sell it at a
Sec. 106
CLASSES OF INSURANCE
Title 1. — Marine Insurance
337
profit, has an insurable interest in the profits. (Royal Exch. Assur.
C o . vs. M'Swiney, 14 Q . B . 646.)
Sec. 106. The charterer of a ship has an insurable interest in it, to the extent that he is liable to be damnified by its
loss.
Insurable interest of the charterer.
By the provision of Section 106, the insurable interest of
a charterer of a ship is up to the extent that he is liable to be
damnified by its loss.
(1) O n e w h o charters a vessel, with a stipulation to pay its
value in case of loss, h a s an insurable interest to the extent of its
value.
(2) T h e charterer has also an insurable interest in the profits
he expects to earn by carrying the g o o d s in excess of the a m o u n t
he agreed to pay for the charter of the vessel.
EXAMPLE:
Y charters a vessel with a value of P2,000,000.00 belonging
to X. It is stipulated that in case of loss, Y would pay its value.
In this case, Y may insure the vessel for P2,000,000.00 as this is
the extent of his insurable interest.
If the agreement with A is that Y would pay P200,000.00 for
the charter of the vessel, whether the vessel is lost or not lost,
Y's insurable interest is P2,200,000.00.
Suppose the agreement with X is that Y would pay the
price of the charter only upon the safe arrival of the vessel at
the port of destination. Then Y engages to carry the goods of Z
for the price of P300,000.00. The expected profits of P30U000.00
exceed the chartered hire P200,000.00 by P100,000.00. In this
case, Y can insure the vessel to the extent of P2,100,000.00
(P2,000,00.00 + P100,000.00) as that is the extent that he is liable
to be damnified by its loss.
Types of charter parties.
A charter party is a contract by which an entire ship or some
principal part thereof is lent by the owner to another person for a
338
Sec. 106
THE INSURANCE CODE OF THE PHILIPPINES
specified time or use. (Puromines, Inc. vs. Court of Appeals, 220
SCRA 281 [1993].) In modern maritime law and usage, there are
two (2) distinguishable types of charter parties.
(1) A bareboat or demise charter is a demise of a vessel, m u c h
as a lease of an unfurnished house is a demise of real property.
The shipowner turns over full possession and control of his
vessel to the charterer, w h o then undertakes to provide a crew
and victuals and supplies and fuel for her during the term of the
charter. The shipowner is not normally required by the terms of
a demise charter to provide a crew, and so the charterer gets the
"bareboat," i.e., without a crew. T h e charterer b e c o m e s , in effect,
the owner for the voyage or service stipulated, subject to liability
for damages caused by negligence.
Sometimes, of course, the demise charter might provide
that the shipowner is to furnish a master and crew to m a n the
vessel under the charterer's direction, such that the master and crew
provided by the shipowner b e c o m e the agents and servants or
employees of the charterer, and the charterer (and not the o w n e r )
through the agency of the master, has possession and control of
the vessel during the charter period.
(2) Under a contract of affreightment, the o w n e r of the vessel
leases part or all of its space to haul goods for others. It is a contract
of special service to be rendered by the o w n e r of the vessel w h o
retains the possession, c o m m a n d and navigation of the ship,
the charterer or freighter merely having use of the space in the
vessel in return for the payment of the charter hire or freight.
The contract m a y be either v o y a g e charter or time charter. T h e
charterer is free from liability to third persons in respect to the
ship.
7
(a) A voyage charter or trip charter is a contract for the
carriage of goods, from one or more ports of loading to one
or more ports of unloading, on one or on a series of voyages.
In a voyage charter, master and crew remain in the e m p l o y
The cargo not loaded is considered as deadfreight. It is the amount paid by or recoverable from a charterer of a ship for the portion of the ship's capacity the latter contracted
for but failed to occupy. Under Section 680 of the Code of Commerce, the liability for
deadfreight is on the charterer. (National Food Authority vs. Court of Appeals, 311 SCRA
700 [1999].)
V
CLASSES OF INSURANCE
Title 1. — Marine Insurance
Sec. 106
339
of the o w n e r of the vessel. T h e ship o w n e r supplies the
ship's store, pays for the w a g e s of the master and the crew
and defrays the expenses for the maintenance of the ship. A
voyage charter being a private carriage, the parties m a y fully
contract respecting liability for d a m a g e to the g o o d s and
other matters. T h e basic principle is that the "responsibility
for cargo loss falls on the o n e w h o agreed to perform the
duty involved" in accordance with the terms of m o s t voyage
charters.
8
(b) A time charter is a contract for the use of a vessel for
a specified period of time or for the duration of o n e or more
specified voyages. In this case, the o w n e r of the time-chartered
vessel also retains possession a n d control through the master
and crew w h o remain his e m p l o y e e s . W h a t time charterer
acquires is the right to utilize the carrying capacity and
facilities of the vessel a n d to designate her destinations
during the term of the charter.
In a demise or bareboat charter, the charterer is treated as
owner pro hac vice of the vessel, the charterer assuming in large
measure the customary rights a n d liabilities of the shipowner in
relation to third persons w h o h a v e dealt with h i m or with the
vessel. In such case, the master of the vessel is the agent of the
charterer and not of the shipowner. T h e charterer or o w n e r pro
hac vice, and not the general o w n e r of the vessel, is held liable for
the expenses of the voyage including the w a g e s of the seamen."
T h e distinction between a "common or public carrier" (see Arts. 1732, 1733, Civil
Code.) and a "private or special carrier" lies in the character of the business, such that if
the undertaking is a single transaction, not a part of the genera! business or occupation,
although involving the carriage of goods for a fee, the person or corporation offering such
service is a private carrier.
A public carrier remains as such, notwithstanding the charter of the whole or portion of a vessel by one or more persons, provided the charter is limited to the ship only,
as in the case of a time charter or voyage charter. It is only when the charter includes
both the vessel and its crew as in a bareboat or demise that a common carrier becomes
private at least insofar as the particular voyage covering the charter party is concerned.
Indubitably, a shipowner in a time or voyage charter retains possession and control of the
ship, although her holds may, for the moment, be the property of the charterer. (Planters
Products, Inc. vs. Court of Appeals, 226 SCRA 478 [1993].)
I n a contract of affreightment, the shipper or charterer merely contracts a vessel
to carry his cargo with the corresponding duty to provide for the berthing space for the
loading or unloading. The charterer is merely required to exercise ordinary diligence in
insuring that a berthing space be made available for the vessel. He does not make himself
340
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 107
(Litonjua Shipping Company, Inc. vs. National Seaman Board,
176 SCRA 189 [1989]; see Maritime Agencies & Services, Inc.
vs. Court of Appeals, 187 S C R A 346 [1990]; Puromines, Inc. vs.
Court of Appeals, supra; see Planters Products, Inc. vs. Court of
Appeals, 226 S C R A 4 7 6 [1993]; Tabacalera Insurance C o m p a n y
vs. North Front Shipping Services, Inc., 272 S C R A 527 [1997];
National Food Authority vs. Court of Appeals, 311 S C R A 700
[1999]; Caltex [Phils.], Inc. vs. Sulpicio Lines, Inc., 315 S C R A 709
[1999]; San Miguel Corporation vs. Heirs of S. Inguito, 3 8 4 S C R A
87 [2002].)
Sub-Title 1-C
Concealment
Sec. 107. In marine insurance, each party is bound
to communicate, in addition to what is required by section twenty-eight, all the information which he possesses,
material to the risk, except such is mentioned in section
thirty, and to state the exact and whole truth in relation to
all matters that he represents, or upon inquiry discloses
assumes to disclose.
Meaning of concealment in marine insurance.
Concealment in marine insurance is the failure to disclose a n y
material fact or circumstance w h i c h in fact or l a w is within, or
which ought to be within the k n o w l e d g e of o n e party and of
which the other has no actual or presumptive k n o w l e d g e .
This rule applies to both the assured and the underwriter, and
the rests upon the doctrine of g o o d faith as well as the prevention
of fraud. (3 Joyce on Insurance, 2 n d Ed., 2943.)
Rules as to misrepresentations and concealments
stricter in marine insurance.
T h e rules as to misrepresentations and the concealments, or
omissions to state facts material to the risk are m o r e strict in cases
an absolute insurer against all events which cannot be foreseen or are inevitable. The law
only requires the exercise of due diligence on the part of the charterer to scout or look for
a berthing space. (National Food Authority vs. Court of Appeals, supra.)
CLASSES OF INSURANCE
Title 1. — Marine Insurance
Sec. 108
341
of marine than of fire insurance. T h i s is due to the difference in
the character of the property, and the greater facility the insurer
possesses in obtaining information as to its conditions and
surrounding circumstances in cases of insurance on buildings,
etc., than on vessels, w h i c h are often insured w h e n absent or
afloat. (Armena vs. T h e Transatlantic Fire Ins. Co., 90 N.Y. 450.)
10
U n d e r Section 107, to constitute concealment, it is sufficient
that the insured is in possession of the material fact concealed
although he m a y not be aware of it. Thus, if the agent failed
to notify his principal of the loss of a cargo and the latter, after
the loss but ignorant thereof, secured insurance "lost or not"
on the venture, such insurance will be void on the ground of
concealment. (Proudfoot vs. Montefiore, L.R. 2 Q . B . 511.)
Sec. 108. In marine insurance, information of the belief
or expectation of a third person, in reference to a material
fact, is material.
Opinions or expectations of third persons.
A party to a contract of insurance need not communicate
information of his o w n j u d g m e n t to the insurer m u c h less what
he learns from a third person, (see Sees. 3 5 , 43.)
In marine insurance, however, the rule is quite strict because
the insured is b o u n d to c o m m u n i c a t e to the insurer not only
facts but also (1) beliefs or opinions of third persons or (2)
expectations of third persons. T h e only requirement is that the
information be in reference to a material fact. (Sec. 108.) Thus,
there is concealment where the insured at the time of application
for insurance did not disclose the opinion of marine experts w h o
inspected the vessel insured that it w a s unseaworthy.
10
When the early contracts of marine insurance were formed, in the days when underwriters frequented the coffee shops of 18th century England, the risk to be assumed
was evaluated almost entirely in reliance on information furnished by the applicant. Often the ship was far away and could not be inspected. In any case, it was the owner who
was best acquainted with the condition of the ship, the circumstances of the voyage and
other matters which vitally affected the degree of the risk involved. As a result, the insurance was early declared to be a contract of the highest good faith and the insurer was
held to be entitled to rely upon the information submitted to him. (Legal Concepts and
Contract Provisions, by J.E. Greider, in LHIH, p. 110.)
342
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 109-110
Sec. 109. A person insured by a contract of marine
insurance is presumed to have knowledge, at the time of
insuring, of a prior loss, if the information might possibly
have reached him in the usual mode of transmission and
at the usual rate of communication.
Presumptive knowledge by insured
of prior loss.
(1) When rule applicable. — Section 109 establishes a rebuttable presumption of knowledge of a prior loss on the part of the
insured " i f the information might possibly h a v e reached h i m in
the usual m o d e of transmission and at the usual rate of c o m m u nication."
(2) Reason for presumption. — T h e reason for the presumption
is the quickness in the transmission of n e w s by m e a n s of
modern communications. I n a s m u c h as at present, the m e a n s of
transportation have rapidly a d v a n c e d due to the urgent needs
of commerce, the presumption that the loss of a vessel due to
the disaster of the seas w a s duly c o m m u n i c a t e d to the insured,
becomes stronger. (Snow vs. Mercantile Mut. Ins. Co., 61 N.Y.
160.)
(3) When rule not applicable. — T h e insured is not b o u n d ,
however, to use all accessible m e a n s of information at the very
last instant of time to ascertain the condition of the property
insured. Thus, w h e n having no cause to expect information the
insured omits to call at the post office w h e r e a letter w a s received
on the morning of the day the insurance w a s effected, containing
the material information, he is not guilty of negligence w h i c h
will vitiate the policy. (Neptune Ins. C o . vs. Robinson, 11 Gill &
[Md.] 250.)
Sec. 110. A concealment in a marine insurance, in respect to any of the following matters, does not vitiate the
entire contract, but merely exonerates the insurer from a
loss resulting from the risk concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to capture and detention;
Sec.
in
CLASSES OF INSURANCE
Title 1. — Marine Insurance
343
(c) The liability to seizure from breach of foreign laws
of trade;
(d) The want of necessary documents;
(e) The use of false and simulated papers.
When concealment does not vitiate
entire contract.
As a rule, the c o n c e a l m e n t of a material fact entitles the
injured party to rescind the entire contract of insurance. However,
concealment of any of the matters indicated from paragraphs
(a) to (e) of Section 110 does not avoid the policy ab initio. If the
vessel be lost due to any of the causes m e n t i o n e d in Section 110,
which w a s concealed, the insurer is not liable; b u t if the vessel be
lost due to other perils of the sea, like a storm, the insurer is not
exonerated from liability.
Generally, the national character of the vessel is not a
material fact; but facts lying peculiarly within the k n o w l e d g e
of the insured, w h i c h will e x p o s e the property to belligerent
risks or seizure and c o n d e m n a t i o n for violation of the trade or
navigation laws of another country, m u s t be disclosed. (45 C.J.S.
551.)
Sub-Title 1-D
Representations
Sec. 111. If a representation, by a person insured by a
contract of marine insurance, is intentionally false in any
material respect, or in respect of any fact on which the
character and nature of the risk depends, the insurer may
rescind the entire contract.
Applicability of rules on representation
to marine insurance.
The rules governing representations with respect to insurance
policies generally have b e e n held to apply to marine insurance
policies. Thus, the general rules have been applied to marine
insurance with respect to the distinctions between representations
and warranties and to the construction of representations, and a
344
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 112
substantial misrepresentation of any material fact or circumstance
relating to marine insurance avoids the policy. (45 C.J.S. 552.)
The general rule that a representation is material where it
would influence the judgment of a prudent insurer in fixing the
premium or in determining whether he would take the risk, is
applicable to marine insurance. (38 C.J.S. 1062.)
Effect of false representation
by insured.
(1) Intentional. — A n y misrepresentation of a material fact
made with fraudulent intent avoids the policy.
(2) Not intentional. — If the misrepresentation is not
intentional or fraudulent b u t the fact misrepresented is material
to the risk, the insurer m a y also rescind the contract from the
time the representation b e c o m e s false. Section 111 qualifies the
general provision in Section 45 under w h i c h the injured party m a y
rescind the contract only "from the time w h e n the representation
b e c o m e s false" although the representation is intentionally false.
(3) Materiality of representations. — Representations as to the
age, equipment, earnings, and particular condition or rating
of a vessel; that she is to be repaired at a certain place; that she
has arrived at her port of destination, or w a s at a certain place
at a certain time; that other underwriters h a d insured her at a
certain rate; or as to anything w h i c h concerns the state of the
vessel at any particular period of her voyage, h a v e b e e n held
to be material. B u t statements of the nature and a m o u n t of the
cargo, where she w a s not overloaded or w h e r e the underwriter
did not rely thereon, h a v e b e e n held to be immaterial. (38 C.J.S.
554.)
Sec. 112. The eventual falsity of a representation as to
expectation does not, in the absence of fraud, avoid a contract of marine insurance.
Effect of falsity of representation
as to expectation.
Representations of expectation or intention are to be carefully
distinguished from promissory representations. T h e former are
Sec. 113
CLASSES OF INSURANCE
Title 1. — Marine Insurance
345
statements of future facts or events w h i c h are in their nature
contingent and which the insurer is b o u n d to k n o w that the
insured could not h a v e intended to state as k n o w n facts, but
as intentions or expectations merely. H e n c e , unless m a d e with
fraudulent intent, their failure of fulfillment is not a ground for
rescission.
This rule applies to statements of the time a vessel will sail
or is expected to sail, the nature of the cargo to be shipped, the
a m o u n t of profits expected, the destination of the vessel, or that
the insured has no doubt that he can get insurance effected for a
certain premium. (45 C.J.S. 553.)
Sub-Title 1-E
Implied Warranties
Sec. 113. In every marine insurance upon a ship or
freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the
ship is seaworthy.
Warranty in marine insurance defined.
In marine insurance, a warranty has b e e n defined as a
stipulation, either expressed or implied, forming part of the
policy as to s o m e fact, condition or circumstance relating to the
risk. (Hearn vs. Equitable Safety Ins. Co., 30 Wall. 494, 22 L. Ed.
398.)
Implied warranties in marine insurance.
In every insurance u p o n any marine venture whether
of vessel, cargo, or freight, there are conditions upon the
underwriter's liability for the risks assumed, usually termed as
implied warranties. That is, the insurer will not be liable for any
loss under his policy in case the vessel: (1) is unseaworthy at
the inception of the insurance (Sec. 113.); or (2) deviates from
the agreed voyage (see Sees. 123, 124, 125.); or (3) engages in an
illegal venture. (Vance, op. cit., p. 920.)
Another implied warranty is that (4) the ship will carry the
requisite documents of nationality or neutrality of the ship or
346
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 113
cargo where such nationality or neutrality is expressly warranted.
(Sec. 120.)
Of course, it is also impliedly warranted that the insured has
an insurable interest in the subject matter insured.
Implied warranty of seaworthiness.
In every voyage policy of marine insurance, there is an
implied warranty that the vessel is in all respects seaworthy, and
such warranty can be excluded only by clear provisions of the
policy. (38 C.J. 1071-1072; Phil. A m e r i c a n General Insurance Co.
vs. Court of Appeals, 273 S C R A 262 [1997].)
(1) Where seaworthiness admitted by insurer. — If the policy
provides that the seaworthiness of the vessel as b e t w e e n
insured and insurer is admitted, the issue of seaworthiness
cannot be raised by the insurer without showing concealment or
misrepresentation by the insured. T h e admission of seaworthiness
by the insurer m a y m e a n one or two things: (a) that the warranty
of seaworthiness is to be taken as fulfilled; or (b) that the risk of
unseaworthiness is assumed by the insurer. T h e insertion of such
waiver clauses in cargo policies is in recognition of the realistic
fact that cargo owners cannot control the state of the vessel. (Ibid.)
(2) Where unseaworthiness unknown to owner of cargo insured. —
Where cargo (see Sec. 9 9 [ 1 , a].) is the subject of marine insurance,
the implied warranty of seaworthiness attaches to w h o e v e r is
insuring the cargo, whether he be the shipowner or not. T h e fact
that the unseaworthiness of the ship w a s u n k n o w n to insured is
immaterial in ordinary marine insurance and m a y not be used
by him as a defense in order to recover on the marine insurance
policy.
Since the law provides for an implied warranty of seaworthiness in every contract of ordinary m a r i n e insurance, it
becomes the obligation of a cargo o w n e r to look for a reliable
c o m m o n carrier which keeps its vessels in seaworthy condition.
The shipper may have no control over the vessel but he has full
control in the choice of the c o m m o n carrier that will transport
his goods. Or, the cargo o w n e r m a y enter into a contract of
insurance which specifically provides that the insurer answers
Sec. 114
CLASSES OF INSURANCE
Title 1. — Marine Insurance
347
not only for the perils of the sea but also provides for coverage
of perils of the ship. (Roque vs. Intermediate Appellate Court,
139 S C R A 5 9 6 [1985]; Phil. A m e r i c a n General Insurance Co., Inc.
vs. Court of Appeals, supra.) It has b e e n held, however, that a
charterer of a vessel h a s no obligation before transporting its
cargo to ensure that the vessel it chartered complied with all
the legal requirements. T h e duty rests u p o n the c o m m o n carrier
simply for being e n g a g e d in "public services." Because of the
implied warranty of seaworthiness, shippers of g o o d s are not
expected w h e n transacting with c o m m o n carriers, to inquire
into the vessel's seaworthiness, genuineness of its licenses and
compliance with all maritime laws. (Caltex [Phils.], Inc. vs.
Sulpicio Lines, Inc., 315 S C R A 709 [1999].)
(3) Where vessel found unseaworthy. — As a general rule,
c o m m o n carriers are p r e s u m e d to h a v e b e e n at fault or to have
acted negligently for the loss, destruction, or determination of
goods, unless they prove that they observed diligence. (Arts. 1733,
1 7 3 4 , 1 7 3 5 , Civil Code.) W h e r e a vessel is found unseaworthy, a
shipowner is also p r e s u m e d to be negligent since it is tasked with
the maintenance of its vessel. T h o u g h its duty can be delegated,
still, the shipowner m u s t exercise close supervision over its men.
An exception to the limited liability doctrine which limits the
insurer's liability to it pro rata share in the insurance proceeds,
is w h e n the d a m a g e is due to the fault of the shipowner and
the captain. In such case, the shipowner, unless it overcomes
the presumption of negligence, is liable to the total value of the
damage or loss.
Sec. 114. A ship is seaworthy, when reasonably fit to
perform the service, and to encounter the ordinary perils
of the voyage, contemplated by the parties to the policy.
What constitutes seaworthiness.
Seaworthiness is a relative term depending upon the nature of
the ship, the voyage, and the service in which she is at the time
engaged. (American Merchant Marine Ins. Co. vs. Margaret M.
Ford Corp., 269 F. 768.) Generally, for a vessel to be seaworthy, it
must be adequately equipped for the voyage and manned with a
348
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 114
sufficient number of competent officers and crew. T h e failure of
a common carrier to maintain in seaworthy condition the vessel
involved in the contract of carriage is a clear breach of its duty
prescribed in Article 1755 of the Civil Code. (Caltex [Phils.], Inc.
vs. Sulpicio Lines, Inc., 315 S C R A 709 [1999].)
(1) Nature of ship. — To comply with the implied warranty
of seaworthiness, the vessel must be in a fit state as to repair,
equipment, crew and in all other respects to perform the voyage
insured and to encounter the ordinary perils of navigation. She
must also be in a suitable condition to carry the cargo put on
board or intended to be put on board, (see 45 C.J.S. 563.) It is not
necessary that the cargo itself shall be seaworthy, (see Sec. 119.)
(2) Nature of voyage. — W h a t is reasonable fitness to encounter
the perils expected to arise in the course of the v o y a g e vary,
naturally, with the character of the particular voyage. A vessel
well fitted for the navigation of the Mississippi m i g h t be wholly
unfit for a voyage on the Great Lakes, while a lake streamer
would scarcely be seaworthy in the Atlantic. A crew that could be
quite adequate for a vessel while passing through a canal might
be insufficient for the proper handling of the s a m e vessel on the
high seas. (Vance, op. tit., pp. 922-923.)
(3) Nature of service. — T h e seaworthiness of a vessel is also
to be determined with regard to the nature of the cargo w h i c h
she undertakes to transport, the requirement b e i n g that she shall
be reasonably capable of safely carrying the cargo to its port of
destination. (Schults vs. Pacific Ins. Co., 14 Fla. 7 3 ; see Sec. 119.)
ILLUSTRATIVE CASE:
Evidence established that insured motor launch was unseaworthy.
Facts: A motor launch owned by X was chartered by Y.
Delivery of the motor launch was made after the date agreed
upon. While manned by a complement engaged by Y, the motor
launch sank. X brought an action to recover from Y the value of
the motor launch or from the insurer the amount for which it
was insured.
It appears that at the time it sank, there was no typhoon;
the waves were those caused by monsoon winds of the season;
the motor launch did not touch bottom or hit anything during
Sec. 115
CLASSES OF INSURANCE
Title 1. — Marine Insurance
349
her cruise in the bay; and the water was bubbling in the engine
room, from which it could be inferred that the underneath
planking gave away.
Issue: Will the action prosper?
Held: No. Whether or not there was delivery of the motor
launch on the date agreed upon becomes unimportant if the
same was unseaworthy; and the preponderance of evidence
established that it was unseaworthy and that it sank due to her
unseaworthiness and not to the incompetence or negligence of
the complement engaged by Y to man her. (Madrigal, Tiangco &
Co. vs. Hanson, Orth & Stevenson, Inc., 103 Phil. 345 [1958].)
Criterion of seaworthiness.
T h e warranty of seaworthiness is not an absolute guaranty
that the vessel will safely m e e t all possible perils. (Vance, op. cit.,
p. 923.)
A perfect vessel or one impervious to the assaults of the
elements is not required; nor is the best and m o s t skillful form of
construction required, but only such as is sufficient for the kind
of vessels insured with reference to their physical and mechanical
condition, the extent of its fuel and provisions supply, the quality
of its officers and crew, and its adaptability for the service in
which they are employed. (45 C.J.S. 5 6 3 ; S a n M i g u e l Corporation
vs. Heirs of S. Inguito, 384 S C R A 87 [2002].)
Sec. 115. An implied warranty of seaworthiness is
complied with if the ship be seaworthy at the time of the
commencement of the risk, except in the following cases:
(a) When the insurance is made for a specified length
of time, the implied warranty is not complied with unless
the ship be seaworthy at the commencement of every voyage it undertakes during that time;
(b) When the insurance is upon the cargo which, by
the terms of the policy, description of the voyage, or established custom of the trade, is to be transhipped at an intermediate port, the implied warranty is not complied with
unless each vessel upon which the cargo is shipped, or
transhipped, be seaworthy at the commencement of each
particular voyage.
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Sec. 115
When seaworthiness is complied with.
(1) Commencement of risk. — The general rule is that the
warranty of seaworthiness is complied with if the ship be
seaworthy at the time of the c o m m e n c e m e n t of the risk. Prior
or subsequent unseaworthiness is not a breach of the warranty;
nor is it material that the vessel arrives in safety at the end of her
voyage. There is no implied warranty that the vessel will remain
in seaworthy condition throughout the life of the policy, (see Sec.
118.)
(2) Exceptions. — There are three exceptions to the rule,
namely:
(a) In the case of time policy, the ship m u s t be seaworthy
at the c o m m e n c e m e n t of every voyage she m a y undertake
(Sec. 115[a].);
(b) In the case of cargo policy, each vessel u p o n w h i c h the
cargo is shipped or transhipped, j n u s t be seaworthy at the
c o m m e n c e m e n t of each particular voyage (ibid., [b].); and
11
(c) In the case of a voyage policy contemplating a v o y a g e
in different stages, the ship m u s t be seaworthy at the
c o m m e n c e m e n t of each portion. (Sec. 117.)
(3) Ship's actual condition at commencement of voyage. — T h e
unexplained sinking of a vessel creates the presumption of
unseaworthiness. T h e shipowner cannot escape liability by
presenting in evidence a certificate that tends to s h o w that at
the time of dry-docking and inspection (by the Philippine Coast
Guard), the vessel w a s fit for voyage.
"In maritime law, transshipment is defined as "the act of taking cargo out of one ship
and loading it in another," or "the transfer of goods from the vessel stipulated in the
contract of affreightment to another vessel before the place of destination named in the
contract has been reached," or "the transfer for further transportation from one ship or
conveyance to another."
In its ordinary or strictly legal acceptation, there is transshipment whether or not the
same person, firm or entity owns the vessels. In other words, the fact of transshipment is
not dependent upon the ownership of the transporting conveyances but rather on the fact
of actual physical transfer or cargoes from one vessel to another. It is a well-known commercial usage that transshipment of freight without legal excuse, however competent
and safe the vessel into which the transfer is made, is an infringement on the right of the
shipper and subjects the carrier to liability if the freight is lost even by a cause otherwise
excepted. (Magellan Mfg. Marketing Corp. vs. Court of Appeals, 201 SCRA 102 [1991].)
Sec. 115
CLASSES OF INSURANCE
Title 1. — Marine Insurance
351
Seaworthiness relates to the vessel's actual condition at the
time of the c o m m e n c e m e n t of the v o y a g e . T h e issuance of the
certificate neither negates the presumption of unseaworthiness
triggered by an unexplained sinking or establishes seaworthiness.
Securing a certificate of seaworthiness, or the approval of
the shipper of the cargo, or his surveyor, of the condition of
the vessel or her s t o w a g e does not satisfy the vessel o w n e r ' s
obligation nor does it establish due diligence if the vessel was,
in fact, unseaworthy, for the cargo o w n e r has no obligation in
relation to seaworthiness. (Delsan Transport Lines, Inc. vs. Court
of Appeals, 369 S C R A 24 [2001].)
EXAMPLES:
(1) X insures his ship for a voyage between Manila and
Tokyo. The implied warranty of seaworthiness is complied
with if the vessel leaves Manila in seaworthy condition.
(2) Suppose X insures the ship for one year, a specific
length of time. If the vessel undertakes ten voyages during the
period specified, the implied warranty is not complied unless
the ship be seaworthy at the commencement of each voyage.
(3) Suppose the insurance is upon cargo which by the
terms of the policy is to be carried by two vessels: by vessel
A, from Manila to Tokyo; and by vessel B, from Tokyo to San
Francisco.
In this case, the implied warranty applies to the commencement of each particular voyage. So the insurer is not
liable in case of loss of or damage to the cargo while in vessel
B, if vessel B is unseaworthy when it leaves Tokyo although
vessel A leaves Manila in a seaworthy condition.
Time and voyage policies.
A time policy provides coverage for a fixed period of time, at
the expiration of which the insurance will lapse, while a voyage
policy covers the subject matter for the voyage n a m e d in the
policy until the specified voyage ends, regardless of the time it
takes to complete the voyage.
(1) The time policy gives protection for a stipulated period
and, therefore, avoids the annoyance of constant attention to
352
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 116
the termination of voyages and the renewal of policies. On hulls
(vessels), they are, therefore, the c o m m o n type. By m e a n s of
the time policy, the insured avoids the necessity of continually
describing separate voyages m a n y of which are over similar
routes.
(2) The voyage policy is particularly adapted to tramp
steamers and sailing vessels, inasmuch as these do not m o v e over
fixed routes and their travel m a y be more easily described by
separate voyage policies. Because cargoes are subject to sea risk
for comparatively short periods, the voyage policy is frequently
used. (Riegel, Miller & Williams, Jr., op. cit, pp. 275-276.)
Sec. 116. A warranty of seaworthiness extends not
only to the condition of the structure of the ship itself,
but requires that it be properly laden, and provided with
a competent master, a sufficient number of competent officers and seamen, and the requisite appurtenances and
equipment, such as ballasts, cables and anchors, cordage
and sails, food, water, fuel and lights, and other necessary
or proper stores and implements for the voyage.
Scope of seaworthiness of vessel.
Seaworthiness requires that the vessel m u s t h a v e e q u i p m e n t
and appliances appropriate to the v o y a g e in w h i c h it is e n g a g e d
and the cargo it carries; it must h a v e sufficient fuel, stores and
provisions to last for the entire v o y a g e ; it m u s t h a v e sufficient
number of competent officers and men; and if the insurance is
on cargo, the same must be properly loaded, stowed, d u n n a g e d
and secured so as not to imperil the navigation of the vessel or to
cause injury to the vessel or cargo.
A ship, however, is not unseaworthy b e c a u s e of s o m e defect
in loading or stowage w h i c h is easily curable by those on board,
and w a s cured before the loss. B u t carrying a deck cargo raises
a presumption of unseaworthiness w h i c h can be o v e r c o m e only
by showing affirmatively that the deck cargo w a s not likely to
interfere with the due m a n a g e m e n t of the vessel; and when, by
a jettison or otherwise, the vessel can be m a d e seaworthy, the
warranty is satisfied, (see 45 C.J.S. 564-566.)
Sec. 117
CLASSES OF INSURANCE
Title 1. — Marine Insurance
353
It is settled that the carrying of cargo on deck raises the
presumption of unseaworthiness unless it can be s h o w n that the
deck cargo will not interfere with the proper m a n a g e m e n t of the
ship. A ship m a y not be designed to carry substantial a m o u n t
of cargo on d e c k and the inordinate loading of cargo on deck
m a y result in the decrease of the vessel's metacentric height thus
m a k i n g it unstable. (Phil. A m e r i c a n G e n e r a l Insurance C o . vs.
Court o f Appeals, 273 S C R A 2 6 2 [1997].)
Sec. 117. Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefor, a warranty of
seaworthiness is complied with if, at the commencement
of each portion, the ship is seaworthy with reference to
that portion.
Seaworthiness during voyage in stages.
This section provides the third exception to the general rule
stated under Section 115. W h e r e the policy contemplates a voyage
in different stages during w h i c h the subject matter insured will
be exposed to different degrees or kinds of perils, or the ship
will require different kinds of equipment, she m u s t be seaworthy
at the c o m m e n c e m e n t of each stage, b u t it is sufficient if at the
c o m m e n c e m e n t of each stage she is seaworthy for the purpose of
that stage. (Northwestern S S . C o . vs. M a r i t i m e Ins. Co., 161 F. Ed.
166.)
T h e stages must be separate and distinct in order to have a
different degree of seaworthiness for particular parts. (Quebec
Mar. Ins. Co. vs. Commercial Bank, L.R. 3 P C . 234.)
EXAMPLE:
A vessel is insured for a long voyage, part of which will be
in rivers and the rest across high seas and this fact appears in
the policy.
In this case, the warranty of seaworthiness on the vessel
is applied separately to the different portions of the voyage.
If the vessel is seaworthy at the beginning of the first portion
of the voyage, such warranty is not complied with if at the
354
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 118-119
commencement of the second portion of the voyage, the vessel
is not in a position to encounter the ordinary perils of the sea.
(Bullion vs. Lupton, 15 Com. B. 109 R.C.L)
Sec. 118. When a ship becomes unseaworthy during
the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer
on ship or shipowner's interest from liability from any loss
arising therefrom, (a)
Where ship becomes unseaworthy
during voyage.
As a general rule, the implied warranty of seaworthiness
is complied with if the ship be seaworthy at the time of the
commencement of the risk. (Sec. 115.) T h e r e is no implied
warranty that the vessel will remain in a seaworthy condition
throughout the life of the policy.
However, w h e n the vessel b e c o m e s u n s e a w o r t h y during
the voyage, it is the duty of the master, as the s h i p o w n e r ' s
representative, to exercise due diligence to m a k e it seaworthy
again, and if loss should occur b e c a u s e of his negligence in
repairing the defect, the insurer is relieved of liability ( P a d d o c k
vs. Franklin Ins. Co., 11 Pick 234; see S e c . 133.) b u t the contract of
insurance is not affected as to any other risk or loss covered by
the policy and not caused or increased by such particular defect.
(Union Ins. C o . of Philadelphia vs. Smith, 124 U.S. 405.)
Note that the benefit of exoneration is given only to an
"insurer on ship or s h i p o w n e r ' s interest."
Sec. 119. A ship which is seaworthy for the purpose of
an insurance upon the ship may, nevertheless, by reason
of being unfitted to receive the cargo, be unseaworthy for
the purpose of insurance upon the cargo.
Seaworthiness as to cargo.
The seaworthiness of a vessel is also to be determined
with regard to the nature of the cargo w h i c h she undertakes to
transport, the requirement being that she shall be reasonably
Sec. 120
CLASSES OF INSURANCE
Title 1. — Marine Insurance
355
capable of safely conveying the cargo to its port of destination.
(Schultz vs. Pacific Ins. Co., 14 Fla. 73.)
A ship which is seaworthy for the purpose of insurance u p o n
the ship m a y yet be u n s e a w o r t h y for the p u r p o s e of insurance
u p o n the cargo. Thus, a ship w a s held u n s e a w o r t h y for cargo
because of a defective pipe w h i c h the s h i p o w n e r failed to repair,
with the result that water entered the vessel and the cargo w a s
d a m a g e d . (G. Tiaco y H e r m a n o s vs. U n i o n Ins. Society of Canton,
40 Phil. 40 [1919].)
Sec. 120. Where the nationality or neutrality of a ship
or cargo is expressly warranted, it is implied that the ship
will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents
which cast reasonable suspicion thereon.
Express warranty as to nationality
or neutrality.
(1) A warranty of national character m a y be gathered from the
language of the policy describing the vessel as the "Philippine,"
"American," "British," or " S p a n i s h " ship, etc., although an
exception has b e e n m a d e w h e r e the fact recited could h a v e no
relation to the risk. A warranty of nationality does not m e a n
that the vessel w a s built in such country, but that the property
belongs to a subject thereof. It refers to the beneficial ownership
rather than to the legal title. (45 C.J.S. 557.)
(2) A warranty of neutrality imports that the property insured
is neutral in fact, and shall be so in appearance and conduct, that
the property shall belong to neutrals, and that no act of insured
or his agent shall be done which can legally compromise its
neutrality. T h e warranty extends to insured's interest in all the
property intended to be covered by the policy, but not to the
interest of a third person not covered by the policy. (Ibid.)
Implied warranty to carry requisite
documents.
(1) The warranty of nationality also requires that the vessel
be conducted and documented as of such nation, and a breach of
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THE INSURANCE CODE OF THE PHILIPPINES
Sees. 121-123
warranty in either particular will avoid the policy. The warranty
is a continuing one and a change of nationality is a breach of the
warranty, but the warranty is not broken by a contract for sale
and transfer to an alien at a future date. (Ibid.)
. (2) A warranty of neutrality requires tha t the insured property
shall be accompanied by documentary evidence of its neutral
character, and not by any other papers which compromise such
character. The proper papers must be produced w h e n necessary
to prove ownership, and such production is not excused because
the papers were lost by the fault of the master. (Ibid.)
Sub-Title 1-F
Voyage a n d Deviation
Sec. 121. When the voyage contemplated by a marine
insurance policy is described by the places of beginning
and ending, the voyage insured is one which conforms to
the course of sailing fixed by mercantile usage between
those places.
Sec. 122. If the course of sailing is not fixed by mercantile usage, the voyage insured by a marine insurance
policy is that way between the places specified, which to
a master of ordinary skill and discretion, would mean the
most natural, direct and advantageous.
Sec. 123. Deviation is a departure from the course of
the voyage insured, mentioned in the last two sections, or
an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage.
Meaning of deviation.
Section 123 defines deviation. In other words, any u n e x c u s e d
departure from the regular course or route of the insured v o y a g e
or any other act which substantially alters the risk constitutes
deviation. (45 C.J.S. 564.)
Cases of deviation in marine insurance.
There are four (4) cases of deviation in m a r i n e insurance,
namely:
Sees. 124-125
CLASSES OF INSURANCE
Title 1. — Marine Insurance
357
(1) Departure from the course of sailing fixed by mercantile
usage b e t w e e n the places of b e g i n n i n g and ending specified in
the policy (Sec. 121.);
(2) Departure from the m o s t natural, direct, and advantageous
route b e t w e e n the places specified if the course of sailing is not
fixed by mercantile u s a g e (Sec. 122.);
(3) Unreasonable delay in pursuing the v o y a g e (Sec. 123.);
and
(4) T h e c o m m e n c e m e n t of an entirely different voyage, (ibid.)
Sec. 124. A deviation is proper:
(a) When caused by circumstances over which neither
the master nor the owner of the ship has any control;
(b) When necessary to comply with a warranty, or to
avoid a peril, whether or not the peril is insured against;
(c) When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
(d) When made in good faith, for the purpose of saving
human life or relieving another vessel in distress.
Sec. 125. Every deviation not specified in the last section is improper.
Kinds of deviation.
Deviation m a y be proper or improper. Deviation is proper
in the cases enumerated in Section 124. Every deviation not
specified in Section 124 is improper. (Sec. 125.)
T h e insurer is not exonerated from liability for loss happening
after proper deviation. T h e effect is as if there were no deviation.
W h e n deviation is proper.
(1) Deviation from the course of the voyage will not vitiate
a policy of marine insurance if the deviation is justified or
caused by actual necessity which is equal in importance to such
deviation. (Maryland Ins. Co. vs. Le Roy, 3 L. Ed., 257.) Thus, the
insurance is not affected:
358
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 126
(a) Where the ship is compelled to head for another port
by stress of weather (Graham vs. Commercial Ins. Co., 11
Johns [N.Y.] 352.); or
(b) Where a departure from the course is m a d e to take
on a pilot when necessary to the safety of the adventure
(Pouverin vs. Louisiana State M. & F. Ins. Co., 4 B o b [La.]
234.); or in order to proceed to a place where the ship will
meet a convoy if the policy warrants that the ship will not
proceed from one port to another without convoy (Gordon
vs. Morley, 2 Strange 1265.); or to escape capture (Whitney
vs. Haven, 13 Mass. 172.); or
(c) Where the master seeks another port of discharge
when the water of the river to the port in w h i c h he is supposed
to discharge is too shallow for his vessel to enter. (Byrne vs.
Louisiana State Ins. Co., 7 Mart. [La.] 126.)
(2) Such compulsory deviations are risks impliedly a s s u m e d
by the underwriter. B u t while deviation to save property is
not justified, unless it is to save another vessel in distress (see
Burgeos vs. Equitable M a r i n e Ins. Co., 126 M a s s . 70 [1878].), a
deviation for the purpose of saving life does not constitute a
breach of warranty. (Sec. 124[d].) In this case, the justification
rests on ground of humanity.
Sec. 126. An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation.
Effect of improper deviation.
Where there has b e e n any deviation or c h a n g e of the risk
without just cause, the insurer b e c o m e s immediately absolved
from further liability under the policy for losses occurring
subsequent (not before) to the deviation. (45 C.J.S. 567.)
Just as a surety is discharged if the creditor materially
changes the contract with the principal debtor, irrespective of
actual injury to the surety, so the marine underwriter is entitled
to be discharged if the risk assumed is c h a n g e d by a deviation
from the voyage insured. A n d the fact that the deviation did not
increase the risk, or in any wise contribute to the loss suffered, is
Sees. 127-130
CLASSES OF INSURANCE
Title 1. — Marine Insurance
359
wholly immaterial. (Vance, op. cit., p. 924.) T h e underwriter can
always defend himself by saying: "I n e v e r u n d e r t o o k this risk."
(African Merchants C o . vs. British, Etc., Mar. Ins. Co., L.R. 8 Esch.
154.)
Sub-Title 1-G
Loss
Sec. 127. A loss may be either total or partial.
Sec. 128. Every loss which is not total is partial.
Sec. 129. A total loss may be either actual or constructive.
Kinds of losses.
T h e law classifies loss into either total or partial. T h e r e are t w o
kinds of total loss: actual or absolute; (Sec. 130.) a n d constructive or
technical. (Sec. 131.)
W h e n the loss is total, the underwriter is liable for the w h o l e
of the a m o u n t insured.
Sec. 130. An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by
being broken up;
(c) Any damage to the thing which renders it valueless
to the owner for the purpose for which he held it; or
(d) Any other event which effectively deprives the
owner of the possession, at the port of destination, of the
thing insured, (a)
Meaning of actual total loss.
An actual total loss exists when the subject matter of the
insurance is wholly destroyed or lost or when it is so damaged
as no longer to exist in its original character. (Vance, op. cit., p.
935.)
360
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 130
Complete physical destruction not essential
to constitute actual total loss.
Under Section 130, the complete physical destruction of the
subject matter as in the case of fire is not essential to constitute an
actual total loss. (pars, [b], [c], [d].) Such a loss m a y exist where the
form and specie of the thing is destroyed although the materials
of which it consisted still exist. (Pan M a l a y a n Insurance Corp. vs.
Court of Appeals, 201 S C R A 382 [1991].)
EXAMPLES:
(1) Where a vessel sinks in deep water or runs on the reef
and is broken wholly to pieces, the loss is actually total. The
same is true where a vessel is so badly injured that she no longer
exists as a ship but is a mere confused mass of material. (Vance,
op. cit., p. 935.) Likewise, where the insured is irretrievably
deprived of possession or ownership of the cargo in question
(e.g., sunk gold bars which could not be retrieved), an actual
total loss has been suffered.
(2) The fact that insured vessel which sank and was finally
raised was in such condition that much further time would be
required to make the necessary repairs and install the new
machinery before it could be placed in commission, and the
further fact that the cost of salvage, repair, and reconstruction
was more than the original cost of the vessel or its value at the
time the policy was issued, constitute an actual total loss of
the vessel. (Philippine Mfg. Co. vs. Union Insurance, 42 Phil. 378
[1921]; but see Sec. 139.)
(3) An actual total loss is suffered where the cargo, by
the process of decomposition or other chemical agency, no
longer remains the same kind of thing as before. Thus, in a
case, the insured rice seeds found wetted were determined
to be lost and rendered valueless to the insured for planting
or seeding purposes since the wetting or contact with water
had definitely activated their tendency to germinate. The rice
seeds were treated and would germinate upon mere contact
with water. (Pan Malayan Insurance Corp. vs. Court of Appeals,
supra.) Another example is where cement submerged in water
becomes concrete. Here, there is a loss of species which means
that the damage sustained causes the cargo to be different from
the original.
Sec. 130
CLASSES OF INSURANCE
Title 1. — Marine Insurance
361
(4) There is also an actual total loss if the insured is
effectively deprived of the use and possession of the property
as where the property insured passes into the possession of
captors or salvors, and the owners are thus in fact dispossessed,
provided the owners cannot in either case recover the
possession except by disproportionate exertions, expenses, or
hazard. (Monroe vs. British, etc., Mar. Ins. Co., 52 Fed. 777.)
Limited liability rule.
T h e s h i p o w n e r ' s or ship agent's liability is usually coextensive with his interest in the vessel such that a total loss
thereof results in its extinction. In our jurisdiction, the limited
liability rule is e m b o d i e d in Articles 5 8 7 , 5 9 0 a n d 8 3 7 u n d e r B o o k
III of the C o d e of C o m m e r c e , thus:
Art. 587. T h e ship agent shall also be civilly liable for the
indemnities in favor of third persons w h i c h m a y arise from
the conduct of the captain in the care of the goods which he
loaded on the vessel; b u t he m a y e x e m p t h i m s e l f therefrom
by abandoning the vessel with all her e q u i p m e n t and the
freight it m a y h a v e e a r n e d during the voyage.
Art. 5 9 0 . T h e co-owners of the vessel shall be civilly liable
in the proportion of their interests in the c o m m o n fund for
the results of the acts of the captain referred to in Article 587.
Each co-owner m a y e x e m p t h i m s e l f from this liability by
the abandonment, before a notary, of the part of the vessel
belonging to him.
Art. 837. T h e civil liability incurred by shipowners in the
case prescribed in this section, shall be understood as limited
to the value of the vessel with all its appurtenances and
freightage served during the voyage.
These articles precisely intend to limit the liability of the
shipowner or agent to the value of the vessel, its appurtenances
and freightage earned in the voyage, provided that the owner
or agent abandons the vessel. W h e n the vessel is totally lost in
which case there is no vessel to abandon, abandonment is not
required. Because of such total loss, the liability of the shipowner
or agent for damages is extinguished.
362
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 131-132
As an exception to the limited liability doctrine, a shipowner
or ship agent may be held liable for damages when the sinking
of the vessel is attributable to the actual fault or negligence of the
shipowner or its failure to ensure the seaworthiness of the vessel.
(Aboitiz Shipping Corporation vs. CA, 569 S C R A 294 [2008].)
Sec. 131. A constructive total loss is one which gives
to a person insured a right to abandon, under section one
hundred thirty-nine.
Meaning of constructive total loss.
^constructive total loss, or, as it is sometimes called, a "technical
total loss," is one in which the loss, although not actually total, is
of such a character that the insured is entitled, if he thinks fit, to
treat it as total by abandonment. (45 C.J.S. 1150.)
Importance of distinction b e t w e e n actual
and constructive total loss.
It is highly important that the t w o kinds of total loss be
carefully differentiated, for u p o n t h e m d e p e n d s the w h o l e
doctrine of a b a n d o n m e n t (see Sees. 138, 139.), so important in
the law of marine insurance.
In cases of actual total loss, no a b a n d o n m e n t is necessary;
but if the loss is merely constructively total, an a b a n d o n m e n t
becomes necessary in order to recover as for a total loss. (38 C.J.
1136.)
Sec. 132. An actual loss may be presumed from the
continued absence of a ship without being heard of. The
length of time which is sufficient to raise this presumption
depends on the circumstances of the case.
Presumption of actual total loss.
Where a vessel is not heard of at all within a reasonable time
after sailing, or for a reasonable time after she w a s last seen, she
will be presumed to have b e e n lost from a peril insured against.
To lay a foundation for the presumption, it is e n o u g h to prove
that the vessel w a s not heard of at her port of departure after
Sec. 133
CLASSES OF INSURANCE
Title 1. — Marine Insurance
363
she sailed without calling witnesses from her port of destination
to s h o w that she never arrived there. B u t plaintiff must prove
that w h e n the vessel left h e r port of outfit, she w a s b o u n d on
the voyage insured. There is no fixed rule with regard to the
time after which a missing vessel will be p r e s u m e d to be lost. It
depends u p o n the circumstances of each case. (38 C.J. 1178.)
Sec. 133. When a ship is prevented, at an intermediate port, from completing the voyage, by the perils insured
against, the liability of a marine insurer on the cargo continues after they are thus reshipped.
12
Nothing in this section shall prevent an insurer from
requiring an additional premium if the hazard be increased
by this extension of liability, (a)
Liability of insurer in case of reshipment.
T h e above section contemplates an insurance u p o n cargo.
(1) If the original ship be disabled, a n d the master, acting
with a wise discretion, as the agent of the merchant and the
shipowners, forwards the cargo in another ship, such necessary
and justifiable change of ship will not discharge the underwriter
on the goods from liability for any loss w h i c h m a y take place on
goods subsequently to such reshipment. (Salisbury vs. St. Louis
Mar. Ins. Co., 6 6 A m . D e c . 687.)
(2) This rule will not be obligatory where resort must be
had to distant places to procure a vessel, and there are serious
impediments in the w a y of putting the cargo on board. (Bryant
vs. C o m m o n w e a l t h Ins. Co., 6 Pick. [Mass.] 13.)
In any case, the insurer m a y require an additional premium
if the hazard be increased by the extension of liability. (Sec. 133.)
'The former provision, Section 126 of the Insurance Act, contains the following
phrase between "against" and "the liability": "the master must make every exertion to
procure, in the same or contiguous port, another ship for the purpose of conveying the
cargo to its destination and." In view of the word "thus" before "reshipped," it would
seem there was an unintentional omission of the master's duty to look for another vessel,
(see Sec. 139[d].)
364
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 134-136
Sec. 134. In addition to the liability mentioned in the last
section, a marine insurer is bound for damages, expenses
of discharging, storage, reshipment, extra freightage, and
all other expenses incurred in saving cargo reshipped pursuant to the last section, up to the amount insured.
Nothing in this or in the preceding section shall render
a marine insurer liable for any amount in excess of the insured value or, if there be none, of the insurable value, (a)
Additional liability of insurer of goods.
The expenses specified in Section 134 refer to those necessary
to complete the transportation of cargo reshipped u n d e r Section
133. The insurer is liable for t h e m in addition to paying for any
loss or damage which m a y take place on the goods, due to the
perils insured against.
The liability, however, of the insurer under Section 134 cannot
exceed the a m o u n t of the insurance.
Sec. 135. Upon an actual total loss, a person insured is
entitled to payment without notice of abandonment.
Right of insured to payment upon
an actual total loss.
(1) In constructive total loss, an a b a n d o n m e n t by the insured
is necessary in order to recover for a total loss (Sec. 138.) in the
absence of any provision to the contrary in the policy.
(2) In case of actual total loss, the right of the insured to claim
the whole insurance is absolute. H e n c e , he need not give notice of
abandonment nor formally abandon to the insurer anything that
may remain of the insured property. (Gordon vs. Massachusetts
Fire & Marine Ins. Co., 2 Pick. [Mass.] 249.)
Sec. 136. Where it has been agreed that an insurance
upon a particular thing, or a class of things, shall be free
from particular average, a marine insurer is not liable for
any particular average loss not depriving the insured of
the possession, at the port of destination, of the whole of
such thing, or class of things, even though it becomes en-
Sec. 136
CLASSES OF INSURANCE
Title 1. — Marine Insurance
365
tirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing
insured.
Meaning of average.
Average is d e n n e d by the C o d e of C o m m e r c e as any
extraordinary or accidental e x p e n s e incurred during the v o y a g e
for the preservation of the vessel, cargo, or b o t h and all d a m a g e s
to the vessel and cargo from the t i m e it is loaded and the v o y a g e
c o m m e n c e d until it ends and the cargo unloaded. (Art. 8 0 6
thereof.)
Kinds of average.
Averages are of t w o kinds. T h e y are:
(1) Gross or general averages w h i c h include d a m a g e s and
expenses w h i c h are deliberately caused by the master of the
vessel or u p o n his authority, in order to save the vessel, her
cargo, or both at the s a m e t i m e from a real and k n o w n risk. (Art.
811, ibid.)
A general average loss m u s t be b o r n e equally by all of the
interests concerned in the venture; and
(2) Simple or particular averages w h i c h include all d a m a g e s
and expenses caused to the vessel or to her cargo which h a v e
not inured to the c o m m o n benefit and profit of all the persons
interested in the vessel and her cargo. (Art. 809, ibid.) T h e y refer
to those losses which occur under such circumstances as do not
entitle the unfortunate owners to receive contribution from other
owners concerned in the venture as where a vessel accidentally
runs aground and goes to pieces after the cargo is saved. (Vance,
op. cit., p. 934.)
A particular average loss is suffered by and borne alone by
the owner of the cargo or of the vessel, as the case m a y be.
The terms "partial loss," "particular average," and "average,
unless general" are generally regarded as synonymous when
used in marine insurance. (44 A m . Jur. 2d 548.)
366
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 136
Principle of general average
contribution.
General average is a principle of customary law, independent
of contract, whereby, when it is decided by the master of a vessel,
acting for all the interests concerned, to sacrifice any part of a
venture exposed to a c o m m o n and imminent peril in order to
save the rest, the interests so saved are compelled to contribute
ratably or proportionately to the owner of the interest sacrificed,
so that the cost of the sacrifice shall fall equally u p o n all.
This practice of "general average" contribution is a device
for a limited distribution of loss. T h e loss is pro tanto m a d e up
by proportionate or "general average" contributions from the
owners of the other interests benefited by the sacrifice. (Vance,
op. cit., p. 9.)
Right of a party to claim general average
contribution.
The requisites to the right to claim general average contribution are:
(1) There must be a c o m m o n danger to the vessel or cargo;
(2) Part of the vessel or cargo w a s sacrificed deliberately;
(3) T h e sacrifice m u s t be for the c o m m o n safety or for the
benefit of all;
(4) It must be m a d e by the master or u p o n his authority;
(5) It must not be caused by any fault of the party asking the
contribution;
(6) It must be successful, i.e., resulted in the saving of the
vessel and / o r cargo; and
(7) It must be necessary. (Vance, op. cit., p. 934; M a g s a y s a y
vs. Agan, 51 O.G. 1358 [March 1955]; International Harvester vs.
Hamburg-American Line, 42 Phil. 845 [1922].)
Examples of general average: T h e effects jettisoned to lighten
the vessel, whether they belong to the cargo, to the vessel, or
to the crew; the damage caused to the vessel which h a d to be
opened, scuttled or broken in order to save the cargo. (Art. 811,
Code of Commerce.) Jettison is the intentional casting overboard
Sec. 136
CLASSES OF INSURANCE
Title 1. — Marine Insurance
367
of any part of a venture exposed to a peril in the h o p e of saving
the rest of the venture. (Vance, op. cit., p. 933.)
The formalities prescribed under Articles 813 and 814 of the
C o d e of C o m m e r c e m u s t be complied with in order to incur the
expenses and cause the d a m a g e s corresponding to gross average.
(Phil. H o m e Assurance Corp. vs. Court of Appeals, 71 S C A D 199,
257 S C R A 468 [1996].)
Liability of insurer for general average.
T h e liability of the insurer for general average is clearly
provided in the clause of Section 136 w h i c h states "but he is
liable for his proportion of all general average loss assessed upon
the thing insured." (see Sees. 164-165.) It has been held by our
S u p r e m e Court that Article 8 5 9 of the C o d e of C o m m e r c e which
reads:
" T h e underwriters of the vessels, of the freightage
and of the cargo shall be obliged to p a y for the indemnity
of the gross average in so far as is required of each one of
these objects respectively."
is still in force. (Jargue vs. Smith Bell & Co., 56 Phil. 758 [1932].)
Article 8 5 9 is mandatory in terms, and insurers, whether for
the vessel or for the freightage or for the cargo, are b o u n d to
contribute to the indemnity of the general average. A n d there
is nothing unfair in the provision; it simply places the insurer
on the same footing as other persons w h o h a v e an interest in
the vessel, or the cargo therein, at the time of the occurrence of
the general average and w h o are compelled to contribute. (Ibid.,
Art. 812, Code of C o m m e r c e ; see Sec. 164 on limit of insurer's
liability.)
The formula for computing the liability of the insurer may be
stated as follows:
Amount of insurance
Total amount or value
involved
General Average
Loss (GAL)
Proportion of GAL
for which insurer
is liable
368
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 136
EXAMPLE:
A is the owner of a vessel worth P8,000,000.00 insured
against "absolute total loss only" with Y Co. The vessel ran
into very heavy sea and it became necessary to jettison the
cargo belonging to B valued at P1,000,000.00. As a result of the
jettison, the vessel was saved together with the cargo belonging
to C valued at P600,000.00 and to D valued at P400,000.00.
Here, Y Co. is liable to contribute to the indemnity of
the general average although the policy makes it liable only
upon actual total loss of the vessel. The total value involved is
P10,000,000.00, consisting of the value of the cargo sacrificed
and that of the vessel and/or cargo saved.
The ratable contribution of the parties will be as follows: Y
Co., 4 / 5 of P1,000,000.00 or P800,000.00; B, 1 / 1 0 of P1,000,000.00
or P100,000.00; C, 3 / 5 0 of P1,000,000.00 or P60,000.00; and D,
2 / 5 0 of P1,000,000.00 or P40,000.00.
Note that B contributes P100,000 as his part of the indemnity
for the general average brought about by the jettison of his
cargo. The liability of Y Co. cannot exceed the contributing
value of the vessel, (see Sec. 164.)
Liability of insurer for particular average.
Policies of marine insurance frequently contain stipulations
with respect to certain class of goods which are perishable or
peculiarly subject to d a m a g e under w h i c h the insurer will not be
liable for loss, partial or total, arising from perils of the sea. T h e
purpose of such stipulation is to protect the insurer.
In addition, it m a y be agreed by the parties that the insurance
shall be free from particular average. In such case, the marine
insurer is liable only for general average and not for particular
average unless such particular average loss h a s the effect of
"depriving the insured of the possession at the port of destination
of the whole" of the thing insured. (Sec. 136.) In the absence
of any contrary stipulation, the insurer is liable for particular
average loss.
Examples of particular average: T h e d a m a g e suffered by the
cargo from the time of its embarkation until it is unloaded; the
damage and expenses suffered by the vessel from the time it is
Sees. 137-138
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Sec. 137. An insurance confined in terms to an actual
total loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the
entire thing insured.
Scope of insurance against actual
total loss.
An insurance against "total loss o n l y " will cover any total loss,
whether it is actual or constructive, although there is authority to
the contrary. W h e r e the insurance is against "absolute" total loss
or "actual" total loss, the insurer will not be liable for constructive
or technical total loss. (45 C.J.S. 1148.)
If the insured is deprived of the possession of the entire thing
insured at the port of destination, the insurer is liable because the
permanent non-arrival thereof is really an actual total loss.
Sub-Title 1-H
Abandonment
Sec. 138. Abandonment, in marine insurance, is the act
of the insured by which, after a constructive total loss, he
declared the relinquishment to the insurer of his interest in
the thing insured, (a)
Meaning of abandonment.
Section 138 gives the definition of abandonment in marine
insurance. It has also been defined as the act of an insured in
notifying the insurer that owing to damage done to the subject
of the insurance, he elects to take the amount of the insurance in
the place of the subject thereof, the remnant of which he cedes to
the insurer. (Camberling vs. M'Call, 1 A m . Dec. 314.)
THE INSURANCE CODE OF THE PHILIPPINES
370
Sec. 138
Requisites for valid abandonment.
The requisites for a valid abandonment in marine insurance
are:
(1) There must be an actual relinquishment by the person
insured of his interest in the thing insured (Sec. 138.);
(2) There must be a constructive total loss (Sec. 139.);
(3) The abandonment be neither partial nor conditional (Sec.
140.);
(4) It must be m a d e within a reasonable time after receipt of
reliable information of the loss (Sec. 141.);
(5) It must be factual (Sec. 142.);
(6) It must be m a d e by giving notice thereof to the insurer
which m a y be done orally or in writing (Sec. 143.); and
(7) T h e notice of abandonment must be explicit and m u s t
specify the particular cause of the abandonment. (Sec. 144.)
The international rule is to the effect that the right of
abandonment of vessels, as a legal limitation of a s h i p o w n e r ' s
liability, does not apply to cases where the injury or average w a s
occasioned by the s h i p o w n e r ' s o w n fault. Article 587 (supra.)
of the Code of C o m m e r c e speaks only of situations where the
fault or negligence is committed solely by the captain. W h e r e the
shipowner is likewise to be blamed, Article 5 8 7 will not apply
and such situation will be covered by the provisions of the Civil
Code on C o m m o n Carriers. (Phil. A m e r i c a n General Insurance
Co., Inc. vs. Court of Appeals, 273 S C R A 262 [1997].)
Necessity for abandonment.
(1) W h e n the loss is only technically total, the insured cannot claim the whole insurance without showing d u e regard to
the interest which the underwriter m a y take in the abandoned
property. Therefore, whenever the underwriter by prompt action
might be able to save s o m e portion of the insured property, he is
entitled to timely notice of abandonment by the insured and he
cannot be m a d e liable for a total loss without it. (Vance, op. cit.,
p. 938.)
Sec. 139
CLASSES OF INSURANCE
Title 1. — Marine Insurance
371
But there is no obligation u p o n the insured to abandon. It
is a matter of his o w n election. If he omits to abandon, he m a y
nevertheless recover his actual loss. (Sec. 155.)
(2) W h e n the vessel is totally lost, a b a n d o n m e n t is not
required as there is no vessel to abandon. By reason of such
total loss, the liability of the ship's o w n e r or agent for d a m a g e s
extinguished in the absence of any finding of fault on other
part. However, the insurer a n s w e r s for the d a m a g e s from w h i c h
the shipowner or agent m a y be held liable. (Aboitiz Shipping
Corporation vs. Court o f Appeals, 5 6 9 S C R A 2 9 4 [2008].)
Sec. 139. A person insured by a contract of marine
insurance may abandon the thing insured, or any
particular portion thereof separately valued by the policy,
or otherwise separately insured, and recover for a total
loss thereof, when the cause of the loss is a peril insured
against:
(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from
the peril;
(b) If it is injured to such an extent as to reduce its
value more than three-fourths;
(c) If the thing insured is a ship, and the contemplated
voyage cannot be lawfully performed without incurring either an expense to the insured of more than three-fourths
the value of the thing abandoned or a risk which a prudent
man would not take under the circumstances; or
(d) If the thing insured is cargo or freightage, and the
voyage cannot be performed, nor another ship procured
by the master, within a reasonable time and with reasonable diligence to forward the cargo, without incurring the
like expense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case be abandoned,
unless the ship is also abandoned, (a)
W h e n constructive total loss exists.
As to when a constructive total loss exists, three (3) rules m a y
be mentioned.
(1) According to the English rule, when the subject matter of
372
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 139
the insurance, while still existent in specie, is so damaged as not
to be worth, when repaired, the cost of the repairs.
(2) According to the American rule, w h e n it is so damaged
that the cost of repairs would exceed one-half of the value of the
thing as required. The American rule is ordinarily spoken of as
the "fifty percent rule." (Vance, op. cit., pp. 935, 937.)
(3) In the Philippines, the insured m a y not abandon the thing
insured unless the loss or d a m a g e is more than three-fourths of
its value as indicated in Section 139.
Abandonment where insurance divisible
and where indivisible.
Under the first paragraph of Section 139, any particular
portion of the thing insured separately valued by the policy m a y
be separately abandoned as it is d e e m e d separately insured.
Whether a contract is entire or severable is a question of intention
to be determined by the language e m p l o y e d by the parties.
In a case, the policy in question s h o w e d that the subject
matter insured was the entire shipment of 2,000 cubic meters of
logs. It was held that the fact that the logs were loaded in two
different barges did not m a k e the contract of insurance several
and divisible as to the items insured b e c a u s e the logs on the
two barges were not separately valued or separately insured,
for only one premium w a s paid for the entire shipment m a k i n g
only one cause or consideration. T h e logs having b e e n insured as
one inseparable unit, the totality of the shipment of logs should
be the basis for the existence of constructive total loss. (Oriental
Assurance Corp. vs. Court of Appeals, 2 0 0 S C R A 4 5 9 [1991].)
Criterion as to extent of loss.
T h e extent of the injury to the vessel is to be considered with
reference to its general market value immediately before the
disaster. This has been held to be the proper rule, even though
the policy is valued. It has also b e e n held, however, that the
valuation of the policy is the proper criterion; and this will, of
course, apply where the policy expressly provides that the value
stated therein shall be taken as the basis of estimate. (45 C.J.S.
1151.)
Sees. 140-141
CLASSES OF INSURANCE
Title 1. — Marine Insurance
373
In determining the extent of the loss, the expenses incurred
or to be incurred by the insured recovering the thing insured
(e.g., expenses of refloating a vessel) are taken into account.
Sec. 140. An abandonment must be neither partial nor
conditional.
Abandonment must be absolute.
T h e a b a n d o n m e n t m u s t be entire and cover the w h o l e interest
insured (Bidwell vs. N o r t h w e s t e r n Ins. Co., 19 N.Y. 179.); it m u s t
be unconditional, unfettered by contingencies and limitations.
(Patapsco Ins. C o . vs. Southgate, 8 L. E d . 243.) However, if only a
part of a thing is covered by the insurance, the insured n e e d only
abandon that part.
Sec. 141. An abandonment must be made within a reasonable time after receipt of reliable information of the
loss, but where the information is of a doubtful character
the insured is entitled to a reasonable time to make inquiry.
Abandonment must be made within
a reasonable time.
(1) Reliable information of loss. — W h e n the insured has received
notice of a loss, he must elect within a reasonable time whether
he will abandon to the insurer, and if he elects to abandon, he
must give notice thereof. This is in order that the insurer m a y not
be prejudiced by the delay, and m a y take immediate steps for the
preservation of such of the property insured as m a y remain in
existence.
(2) Double character of information of loss.—What is a reasonable
time is a question depending on the facts and circumstances in
each case. (44 A m . Jur. 2d 541.) Thus, if from information first
received, the character of the loss is not m a d e clearly to appear,
the insured is entitled to a sufficient interval to ascertain its real
nature, but he cannot wait an undue length of time to see whether
it will be more profitable to abandon or to claim for a partial loss.
After the property passes b e y o n d the control of the insured, as
from an unjustifiable sale, an abandonment is too late. (45 C.J.S.
1157.)
374
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 142
Sec. 142. Where the information upon which an abandonment has been made proved incorrect, or the thing
insured was so far restored when the abandonment was
made that there was then in fact no total loss, the abandonment becomes ineffectual.
Abandonment must be factual.
(1) Existence of loss at time of abandonment. — T h e right of the
insured to abandon and recover for a total loss depends u p o n
the state of facts at the time of the offer to abandon, and not u p o n
the state disclosed by the information received, or u p o n the state
of loss at a prior or subsequent time. (Orient Mut. Ins. Co. vs.
Adams, 123 U.S. 67.)
(2) Effect of subsequent events. — If the a b a n d o n m e n t w h e n
m a d e is good, the rights of the parties are definitely fixed, and do
not b e c o m e changed by any subsequent events. If, on the other
hand, the abandonment, w h e n made, is not good, subsequent
circumstances will not affect it so as retroactively, to impart to it
a validity which it has not at its origin. (Bradlie vs. M a r y l a n d Ins.
Co., 12 Pet. 378.)
Accordingly, the insured cannot a b a n d o n w h e n the thing
insured is safe; or w h e n he knew, at the time of his offer to abandon,
that the vessel has b e e n repaired and is successfully pursuing her
voyage (Depau vs. O c e a n Ins. Co., 15 A m . D e c . 431.); and the
invalidity of the a b a n d o n m e n t is not cured by the subsequent
loss of the thing insured. B u t if, after a valid a b a n d o n m e n t has
been made, the insured property w a s recovered, the insured
cannot withdraw the abandonment.
(3) Instances justifying abandonment. — It h a s b e e n held
that the insured m a y a b a n d o n for a total loss u n d e r a marine
insurance policy in case of capture, seizure, or detention of the
ship or cargo; restraint by blockade or e m b a r g o ; w h e r e through
no fault of the owner, funds for repair cannot be raised; w h e r e
the voyage is absolutely lost; or where under urgent necessity,
the master of a vessel at an intermediate port, m a k e s a sale of the
insured property. (45 C.J.S. 1152.)
Sec. 143
CLASSES OF INSURANCE
Title 1. — Marine Insurance
375
Information need not be direct
or positive.
T h e intelligence w h i c h authorized the insured to abandon
need not be direct or positive information.
T h e protest of the master, a n e w s p a p e r report, the report of
a pilot, or a letter from an official or an agent, is sufficient. T h e
information m u s t be of such facts a n d circumstances as to render
it highly probable that a constructive total loss h a s occurred, and
facts sufficient to constitute a total loss m u s t exist. B u t the facts
and the information n e e d not be the s a m e . (38 C.J.S. 1155.)
Sec. 143. Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing;
Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within seven
days from such oral notice, (a)
Form of notice of abandonment.
T h e law requires no particular form for giving notice of
abandonment.
(1) T h e notice m a y be m a d e orally unless the policy requires
it to be in writing, and even then a notice by telegraph is sufficient
if it otherwise complies with the requirements. (45 C.J.S. 1155.)
(2) If the notice be done orally, the insured must submit to
the insurer within seven days from such oral notice, a written
notice of the abandonment. (Sec. 143.)
By whom and to whom notice made.
(1) T h e abandonment need not necessarily be m a d e by the
insured but m a y be m a d e by an authorized agent, and an agent
having an authority to insure has prima facie an authority to
abandon.
(2) The abandonment m a y be m a d e to an agent of the
underwriter and abandonment to a broker w h o is agent for both
parties is sufficient. (45 C.J.S. 1156.)
376
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 144-145
Sec. 144. A notice of abandonment must be explicit,
and must specify the particular cause of the abandonment,
but need state only enough to show that there is probable
cause therefor, and need not be accompanied with proof of
interest or of loss.
Notice of abandonment must be
explicit.
The notice of abandonment m u s t be explicit, and not left ppen
as a matter of inference from s o m e equivocal acts. There must be
an intention to abandon, apparent from the c o m m u n i c a t i o n to
the insurer, and a relinquishment of all rights to the insurer. (26
Patapsco Ins. Co. vs. Southgate, 8 L. Ed. 243.)
The use of the w o r d " a b a n d o n " is not necessary; it is sufficient
if expressions are u s e d which inform the insurer that it is the
intention of the insured to give up the property insured. (Canada
Sugar Ref. Co. vs. Ins. Co. of N.A., 175 U.S. 609.) B u t there is
no abandonment although the insured m a y h a v e given notice
of an intention to abandon, if he continues to claim a n d use the
property as his own. (Louisville Underwriters vs. P o n c e , 19 S.W.
10.)
Notice of abandonment must specify
particular cause thereof.
The grounds for the a b a n d o n m e n t m u s t be stated with such
particularity as to enable the underwriter to determine w h e t h e r
or not he is b o u n d to accept the offer. (Pierce vs. O c e a n Ins. Co.,
29 A m . Dec. 567.) However, it is sufficient if the notice s h o w s
probable cause for the abandonment; nor is it required that it be
accompanied with proof of interest or of loss. (Sec. 144.)
Sec. 145. An abandonment can be sustained only upon
the cause specified in the notice thereof.
Proof of other causes not admissible.
The insured must state sufficient grounds for the a b a n d o n m e n t
to m a k e it valid and he cannot avail himself of any ground of
abandonment other than that stated at the time thereof. (Pierce
Sees. 146-147
CLASSES OF INSURANCE
Title 1. — Marine Insurance
377
vs. O c e a n Ins. Co., 29 A m . Dec. 567.) If he assigns an insufficient
cause or causes w h i c h do not in fact exist, proof of other causes
will not be admitted in suing for a total loss.
Sec. 146. An abandonment is equivalent to a transfer
by the insured of his interest, to the insurer, with all the
chances of recovery and indemnity.
Effect of valid a b a n d o n m e n t .
A valid a b a n d o n m e n t transfers to the insurer the interests in
the subject matter covered by the policy subject to the rights and
interests, if any, of third persons. T h e insurer acquires thereby the
entire interest insured, together w i t h all its incidents, including
rights of action w h i c h the insured has against third persons
for the injury. (45 C.J.S. 1159-1160.) In other words, the insurer
b e c o m e s entitled to all the rights w h i c h the insured possessed in
the thing insured.
The execution of a formal instrument is not necessary to effect
an abandonment for, by Section 146, the act of abandonment,
when accepted (Sees. 1 5 0 , 1 6 9 . ) , has all the effects w h i c h the most
carefully drawn assignment w o u l d accomplish. (44 A m . Jur. 2d
542.) T h e effect of the a b a n d o n m e n t retroacts to the time of the
loss. (Sec. 148.)
Sec. 147. If a marine insurer pays for a loss as if it were
an actual total loss, he is entitled to whatever may remain
of the thing insured, or its proceeds or salvage, as if there
had been a formal abandonment.
Rights of insurer w h o pays partial loss
as actual total loss.
An election and notice of abandonment is a condition
precedent to a claim for a constructive total loss. (38 C.J.S. 1147.)
Under Section 147, the interest of the insured over the
thing covered by the policy will be transferred to the insurer,
notwithstanding the lack of abandonment, as if there had been
a formal abandonment, in case the insurer pays for a loss as if it
were an actual total loss. The acceptance by the insured of the
378
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 148-149
payment is deemed an offer of abandonment on his part. Hence,
the insurer is entitled to whatever m a y remain of the thing
insured, or its proceeds or salvage.
Sec. 148. Upon an abandonment, acts done in good
faith by those who were agents of the insured in respect to
the thing insured, subsequent to the loss, are at the risk of
the insurer, and for his benefit.
Transfer of agency to insurer.
The captain or master continues to be the agent of the insured
until abandonment, but from the m o m e n t of a valid abandonment,
the master of the vessel and agents of the insured b e c o m e the
agents of the insurer, and the latter b e c o m e s responsible for all
their acts in connection with the insured property and for all the
expenses and liabilities in respect thereof. (45 C.J.S. 1160.)
Liability of insurer for expenses
and wages.
The abandonment w h e n m a d e relates b a c k to the time of the
loss and if effectual, the title of the insurer b e c o m e s vested as
of that date and he is responsible for the reasonable expenses
incurred by the master after that date in an attempt to save the
vessel. Insurers are also liable for the w a g e s of s e a m e n earned
subsequent to the loss, b u t take free from any lien or liability for
wages earned prior thereto. (Ibid.)
Sec. 149. Where notice of abandonment is properly
given, the rights of the insured are not prejudiced by the
fact that the insurer refuses to accept the abandonment.
Effect of insurer's refusal to accept abandonment on insured's rights.
Acceptance is in no case necessary if the a b a n d o n m e n t is
properly made. (King vs. Middletown Ins. Co., Conn. 184.) T h e
insured's right to abandon, in a policy of marine insurance, is
absolute when justified by the circumstances.
Sees. 150-152
CLASSES OF INSURANCE
Title 1. — Marine Insurance
379
Sec. 150. The acceptance of an abandonment may either express or implied from the conduct of the insurer.
The mere silence of the insurer for an unreasonable length
of time after notice shall be construed as an acceptance,
(a)
Form of acceptance of abandonment.
(1) An insurer's acceptance of an offered a b a n d o n m e n t need
not be express.
(2) It m a y be implied by conduct, as by an act of the insurer
in consequence of an a b a n d o n m e n t w h i c h can be justified only
under a right derived from the a b a n d o n m e n t . (Richelieu vs.
Boston Marine Ins. Co., 130 U . S . 408.) Thus, w h e r e the insurer
refused the a b a n d o n m e n t of a ship but took possession of the
s a m e for the purpose of m a k i n g repairs and retained it for an
unreasonable time, he will be d e e m e d to h a v e accepted the
abandonment. (Reynolds vs. O c e a n Ins. Co., 33 A m . Dec. 727.)
(3) M e r e silence after notice w o u l d not operate as an
acceptance, if it is not "for an unreasonable length of time."
(Sec. 150.) N o r w o u l d steps taken by the insurer to preserve the
property from further loss for the benefit of all the parties a m o u n t
to an acceptance. (45 C.J.S. 1158.)
Sec. 151. The acceptance of an abandonment, whether
expressed or implied, is conclusive upon the parties, and
admits the loss and the sufficiency of the abandonment.
Sec. 152. An abandonment once made and accepted
is irrevocable, unless the ground upon which it was made
proves to be unfounded.
Effect of acceptance of abandonment.
(1) U p o n receiving notice of abandonment, the insurer m a y
accept or reject the abandonment. If he accepts, he becomes
at once liable for the whole amount of the insurance, and also
becomes entitled to all rights which insured possessed in the
thing insured, (see Sec. 146.)
(2) The acceptance of an abandonment fixed the rights of
the parties (Vance, op. cit., pp. 938-939.); whether expressed or
THE INSURANCE CODE OF THE PHILIPPINES
380
Sec. 153
implied, is conclusive upon them (Sec. 151.), and irrevocable.
(Sec. 152.)
(3) Therefore, the acceptance of an abandonment stops the
insurer to rely on any insufficiency in the form (see Sec. 143.),
time (see Sec. 141.), or right (see Sec. 139.), of abandonment. (45
C.J.S. 1158.) Whether or not the insured has a right to abandon is
immaterial where the abandonment is accepted and there is no
fraud. (New Orleans Ins. Co. vs. Piaggio, 16 Wall. [U.S.] 378.)
The only exception provided by law is the case where the
ground upon which it w a s m a d e proves to be unfounded. (Sec.
152.) Under Section 145, an a b a n d o n m e n t can be sustained only
upon the ground specified in the notice thereof.
Sec. 153. On an accepted abandonment of a ship,
freightage earned previous to the loss belongs to the insurer of said freightage; but freightage subsequently
earned belong to the insurer of the ship.
Right of insurer to freightage.
W h e n abandonment is validly made, the interest of the
insured in the thing covered passes to the insurer.
T h e insurer of the ship b e c o m e s the o w n e r thereof after an
abandonment, and his title b e c o m e s vested as of the time of loss.
Hence, freightage earned subsequent to the loss belongs to the
insurer of said ship. B u t freightage earned previously belongs to
the insurer of said freightage w h o is subrogated to the rights of
the insured up to the time of loss.
EXAMPLE:
Suppose a ship is chartered to carry cargo from Port A
to Port C. Upon reaching Port B, the ship was damaged and
abandoned to insurer X company. The ship was repaired by X
company and it continued its voyage to Port C.
In this case, the freightage on the cargo from Port B to Port
C belongs to X company but the freightage on the cargo from
Port A to Port B belongs to the insurer of said freightage.
Sees. 154-156
CLASSES OF INSURANCE
Title 1. — Marine Insurance
381
Sec. 154. If an insurer refuses to accept a valid abandonment, he is liable as upon an actual total loss, deducting from the amount any proceeds of the thing insured
which may have come to the hands of the insured.
Effect of refusal to accept a valid abandonment on insurer's liability.
T h e insured's right to abandon, in a policy of marine
insurance, is absolute w h e n justified by the circumstances a n d
no acceptance is necessary to validate the a b a n d o n m e n t , (see Sec.
149.)
(1) If the insurer declines to accept a proper abandonment, he
is liable as upon an actual total loss less a n y proceeds the insured
m a y h a v e received on a c c o u n t of the d a m a g e d property as w h e n
the insured succeeds in selling the property as d a m a g e d .
(2) If the a b a n d o n m e n t w a s improper, the insured m a y
nevertheless recover to the extent of the d a m a g e proved.
Sec. 155. If a person insured omits to abandon, he may
nevertheless recover his actual loss.
Effect of insured's failure to make
abandonment.
T h e insured has an election to a b a n d o n or not, and cannot
be compelled to a b a n d o n although a b a n d o n m e n t is proper. He
m a y await the final event, and recover accordingly for a total or
a partial loss, as the case m a y be.
Note that under Section 155, the insured fails to m a k e an
abandonment. On the other hand, Section 154 applies where a
valid abandonment has been m a d e but the insurer refuses to
accept the same without any valid reason.
Sub-Title 1-1
Measure of Indemnity
Sec. 156. A valuation in a policy of marine insurance is
conclusive between the parties thereto in the adjustment
of either a partial or total loss, if the insured has some interest at risk, and there is no fraud on his part; except that
382
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 157
when a thing has been hypothecated by bottomry or respondentia, before its insurance, and without the knowledge of the person actually procuring the Insurance, he
may show the real value. But a valuation fraudulent In fact,
entitles the Insurer to rescind the contract.
Valuation in a marine policy.
(1) Object of valuation. — A policy of marine insurance may
be valued or open, (see Sec. 61.) Section 156 refers to a valued
marine policy. T h e object of a valuation in a policy is to fix in
advance the value of the property and thus avoid the necessity
of proving its actual value in case of loss.
(2) Effect of valuation. — It m a y h a p p e n w h e n a vessel, for
example, is insured for a long time or for a long voyage, h e r value
at the end of the voyage, m a y not be the s a m e as at the beginning.
But, in general, the insured value m u s t be taken to be that which
is stated in the policy. It is conclusive u p o n the parties provided
that (a) the insured has s o m e interest at risk a n d (b) there is no
fraud on his part. If the valuation is fraudulent in fact, the insurer
is entitled to rescind the contract.
(3) Right to give evidence of value. — In a valued marine policy,
neither party can thus give evidence of the real value of the
thing insured. However, w h e n the thing h a s b e e n hypothecated
by bottomry or respondentia (see Sec. 101.) before its insurance
and without the k n o w l e d g e of the person w h o actually procured
the insurance, the insurer m a y s h o w the real value b u t he is
not entitled to rescind the contract unless he can prove that the
valuation w a s in fact fraudulent.
Sec. 157. A marine insurer is liable upon a partial loss,
only for such proportion of the amount Insured by him as
the loss bears to the value of the whole interest of the insured in the property Insured.
When insured a co-insurer in marine
insurance.
In every marine insurance, the insured is expected to cover
by insurance the full value of the property insured. If the value of
CLASSES OF INSURANCE
Title 1. — Marine Insurance
Sec. 158
383
his interest exceeds the a m o u n t of insurance, he is considered the
co-insurer for an a m o u n t determined by the difference b e t w e e n
the insurance taken out and the value of the property. T h e rule is
different in fire insurance, (see S e c . 172.)
T h e law determines the a m o u n t recoverable according to the
following formula:
(Partial) Loss
Value of thing insured
^
Amount of
insurance
=
Amount of
recovery
EXAMPLE:
If a vessel valued at P500,000.00 is insured for only
P400,000.00 and is damaged to the extent of P250,000.00, the
insurer will be required to pay only 80% of the loss suffered,
or P200,000.00; the other 20% or P50,000.00 being borne by the
insured himself. (Vance, op. cit., pp. 103-104.)
In the example given, we have the following computation:
P250,000.00
P500,000.00
The insured is considered a co-insurer as to the uninsured
portion of P100,000.00.
Note that Section 157 applies only if (1) the loss is partial
and (2) the amount of insurance is less than the insured's entire
insurable interest in the property insured. So, in the same
example, if the loss is total, the insurer is liable for the full
amount of P400,000.00. On the other hand, if the property is
insured to its full value, the insured is entitled to recover the
full amount of the partial loss of P250,000.00.
Sec. 158. Where profits are separately insured in a contract of marine insurance, the insured is entitled to recover, in case of loss, a proportion of such profits equivalent
to the proportion which the value of the property lost bears
to the value of the whole.
Loss of profits separately insured.
If the profits to be realized are separately insured from the
vessel or cargo, the insured is entitled to recover, in case of loss,
THE INSURANCE CODE OF THE PHILIPPINES
384
Sec. 159
such proportion of the profits as the value of the property lost
bears to the value of the whole property.
The formula m a y be stated thus:
Value of property lost
Value of whole property
^
Amount of
insurance
_
Amount of
recovery
insured
EXAMPLE:
Assuming that the amount of the profits insured is
P20,000.00, the value of the whole cargo from which such
profits are expected to be realized is P80,000.00, and the value
of the goods lost is P48,000.00, then the insured is entitled to
recover P12,000.00 computed as follows:
P48,000.00
o r
3 / p 2 0 0 , 0 0 0 . 0 0 = P12,000.00
5 x
P80,000.00
Sec. 159. In case of a valued policy of marine insurance
on freightage or cargo, if a part of the subject is exposed to
risk, the valuation applies only in proportion to such part.
Where only part of a cargo or freightage
insured exposed to risk.
Where cargo is insured under a valued policy b u t only a
portion of the cargo is actually carried by the vessel at the time of
loss, the valuation will be reduced proportionately. T h e insurer
is b o u n d to return such portion of the p r e m i u m as corresponds
with the portion of the cargo w h i c h h a d b e e n e x p o s e d to the risk.
EXAMPLE:
If 200 cavans of rice valued at P160,000.00 are insured for
the same amount for a voyage in a certain vessel and only 50
cavans were actually loaded and shipped in said vessel, in
case of total loss, the insured can collect only 1/4 of the entire
valuation or P40,000.00 but the insurer is bound to return 3 / 4
of the premiums paid by the insured since 3 / 4 of the cargo or
150 cavans were not exposed to the risk.
Sees. 160-161
CLASSES OF INSURANCE
Title 1. — Marine Insurance
385
Sec. 160. When profits are valued and insured by a
contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which
they were expected to arise, and the valuation fixes their
amount.
Presumption of loss of profits.
W h e r e profits are separately insured from the property out
of which they are expected to arise, the insured, in case of partial
loss of the property, is entitled merely to partial mdernnity for
the profits lost. (Sec. 158.) If the property is totally lost, pro tanto
the total profits are also lost. Thus, u n d e r Section 160, such loss of
the profits is conclusively p r e s u m e d from the loss of the property
and the valuation agreed u p o n in the policy fixes the a m o u n t of
recovery.
EXAMPLE:
Where the value of the profits insured is fixed at P100,000.00
and the cargo out of which said profits are expected to arise is
completely lost by the peril insured against, the insured can
recover the total amount of P100,000.00.
The loss of the profit of P100,000.00 is conclusively presumed from the total loss of the cargo and the insurer is bound
by the valuation.
Sec. 161. In estimating a loss under an open policy of
marine insurance, the following rules are to be observed:
(a) The value of a ship is its value at the beginning of
the risk, including all articles or charges which add to its
permanent value or which are necessary to prepare it for
the voyage insured;
(b) The value of cargo is its actual cost to the insured,
when laden on board, or where that cost cannot be ascertained, its market value at the time and place of lading,
adding the charges incurred in purchasing and placing
it on board, but without reference to any loss incurred in
raising money for its purchase, or to any drawback on its
exportation, or to the fluctuation of the market at the port
of destination, or to expenses incurred on the way or on
arrival;
THE INSURANCE CODE OF THE PHILIPPINES
386
Sees. 160-161
(c) The value of freightage is the gross freightage, exclusive of primage, without reference to the cost of earning it; and
(d) The cost of insurance is in each case to be added
to the value thus estimated.
Rules for estimating loss under an o p e n policy
of marine insurance.
Section 161 refers to an open policy while Section 156 refers
to valued policies.
In determining the loss under an open policy of marine
insurance, the real value of the thing insured m u s t be proved by
the insured in each case. Section 161 lays d o w n the value to be
used for indemnity purposes.
13
(1) Value of vessel. — U n d e r paragraph (a), in ascertaining the
value of a vessel, the value is to be taken as of the c o m m e n c e m e n t
of the risk and not its value at the time she w a s built.
13
The insured may be made liable for demurrage. "In its strict sense, the term means
the compensation provided for in the contract of affreightment for the detention of the
vessel beyond the time agreed on for loading or unloading or for sailing. Essentially,
demurrage is the claim for damages for failure to accept delivery. In a broad sense, every
improper detention of a vessel may be considered a demurrage. Liability for demurrage,
using the word in its strictly technical sense, exists only when expressly stipulated in
the contract. Using the term in its broader sense, damages in the nature of demurrage
are recoverable for a breach of the implied obligation to load or overload the cargo with
reasonable dispatch, but only by the party to whom the duty is owed and only against
one who is a party to the shipping contract. Notice of arrival of vessels or conveyances or
of their placement for purposes of unloading is often a condition precedent to the right to
collect demurrage charges." (Magellan Mfg. Marketing Corp. vs. Court of Appeals, 201
SCRA 102 [1991].)
The shipper or charterer is liable for the payment of demurrage claims when he
exceeds the period for loading or unloading as agreed upon or the agreed "laydays"
which period may or may not be stipulated in the contract. A charter party may either
provide for a fixed laydays or certain general or indefinite words such as "customary
quick dispatch" or "as fast as the steamer can load." The circumstances obtaining at the
time of loading or unloading are to be taken, into account in the determination of "customary quick dispatch." What is a reasonable time depends on the existing as opposed to
normal circumstances, at the port of loading and the custom of the port. Delay in loading
or unloading the vessel runs against the charterer as soon as the vessel is detained for an
unreasonable length of time from the arrival of the vessel because no available berthing
space was provided for the vessel due to the negligence of the charterer or by reason of
circumstances caused by the fault of the charterer. (National Food Authority vs. Court of
Appeals, 311 SCRA 700 [1999].)
Sec. 162
CLASSES OF INSURANCE
Title 1. — Marine Insurance
387
(2) Value of cargo. — U n d e r paragraph (b), the value of the
cargo is its actual cost to the insured, w h e n laden on board,
or where that cost cannot be ascertained, its m a r k e t value at
the time and place of shipment. T h e expected profits from the
cargo are not considered since they can be covered by a separate
insurance, (see Sees. 9 9 , 1 5 8 , 1 6 0 . ) In customs law, drawback is an
allowance (to the w h o l e or part only) m a d e by the g o v e r n m e n t
upon the duties on imported merchandise, w h e n the importer,
instead of selling it here, re-exports it, or the refunding of such
duties if already paid. (Black's L a w Dictionary [1968 ed.], p. 583.)
(3) Value of freightage. — U n d e r p a r a g r a p h (c), the gross
freightage and not the net freightage is the basis for determining
the value of the freightage. T h e reason is that the gross a m o u n t
of the freightage, as the m e a s u r e of indemnity, can be easily and
exactly determined. On the other hand, to take the net a m o u n t
of the freightage as the basis, w o u l d lead to lawsuits over the
deductions w h i c h should b e m a d e .
Primage is excluded from gross freightage. It is a small
compensation paid by a shipper to the m a s t e r of the vessel for
his care and trouble b e s t o w e d on the s h i p p e r ' s g o o d s and which
the master is entitled to retain in the absence of an agreement to
the contrary with the o w n e r s of the vessels. (Ballantine's L a w
Dictionary [1948 ed.], p. 64.)
(4) Cost of insurance. — U n d e r paragraph (d), the cost of the
insurance is always a d d e d in calculating the value of the ship,
cargo, or freightage or other subject matter in an o p e n policy.
Sec. 162. If cargo insured against partial loss arrives
at the port of destination in a damaged condition, the loss
of the insured is deemed to be the same proportion of the
value which the market price at that port, of the thing so
damaged, bears to the market price it would have brought
if sound.
Where cargo insured against partial loss
is d a m a g e d .
The foregoing provision applies if the cargo is insured against
partial loss and it suffers damage as a result of which its market
value at the port of destination is reduced, (see Sec. 157.)
THE INSURANCE CODE OF THE PHILIPPINES
388
Sec. 163
The formula may be stated as follows:
Market price in sound state
Less: Market price in damaged state
=
Reduction in value (depreciation)
Reduction in value
Amount of
Market price in sound state
insurance
_
Amount of
recovery
EXAMPLE:
Suppose that goods valued at P500,000.00 and insured for
P300,000.00 were damaged on the way so that their market
price at the port of destination was only P400,000.00. Assuming
that the market price of the goods would have brought if
sound is also P500,000.00, the amount recoverable is P60,000.00
determined as follows:
P500,000.00 - P400,000.00 = P100,000.00
P100,000.00
P500,000.00
Q r
l
J
5 x
P300Q00
0 0
=
P60,000.00
Sec. 163. A marine insurer is liable for all the expenses
attendant upon a loss which forces the ship into port to
be repaired; and where it is stipulated in the policy that
the insured shall labor for the recovery of the property, the
insurer is liable for the expense incurred thereby, such expense, in either case, being in addition to a total loss, if
that afterwards occurs.
Liability of insurer for expenses incurred
for repair and recovery.
As a general rule, a marine insurer is not liable for m o r e than
the amount of the policy.
Under Section 163, however, expenses incurred in repairing
the damages suffered by a vessel b e c a u s e of the perils insured
against as well as those incurred for saving the vessel from such
perils, such as the expenses of launching or raising the vessel or
of towing or navigating it into port for her safety, are items to be
borne by the insurer in addition to a total loss if that afterwards
Sees. 164-165
CLASSES OF INSURANCE
Title 1. — Marine Insurance
389
takes place, (see Sees. 1 3 6 , 1 6 3 ; also Sees. 133-134 as to insurance
on cargo.) Such e x p e n s e s are k n o w n as "Port of refuge" expenses.
Sec. 164. A marine insurer is liable for a loss falling
upon the insured, through a contribution in respect to the
thing insured, required to be made by him towards a general average loss called for by a peril insured against: Provided, That the liability of the insurer shall be limited to
the proportion of contribution attaching to his policy value
where this is less than the contributing value of the thing
insured, (a)
Sec. 165. When a person insured by a contract of marine insurance has a demand against others for contribution, he may claim the whole loss from the insurer, subrogating him to his own right to contribution. But no such
claim can be made upon the insurer after the separation of
the interests liable to contribution, nor when the insured,
having the right and opportunity to enforce contribution
from others, has neglected or waived the exercise of that
right.
Rights of insured in case of general
average.
(1) General rule. — T h e insurer is liable for any general
average loss (see Sec. 136.) w h e r e it is payable or has been paid
by the insured in consequence of a peril insured against. T h e
insured m a y either hold t i e insurer directly liable for the w h o l e
of the insured value of the property sacrificed for the general
benefit, subrogating h i m to his o w n right of contribution or
demand contribution from the other interested parties as soon as
the vessel arrives at her destination. In other words, the insured
need not wait for an adjustment of the average.
(2) Exceptions. — However, there can be no recovery for
general average loss against the insurer:
(a) after the separation of the interests liable to contribution, that is to say, after the cargo liable for contribution
has been removed from the vessel; or
(b) when the insured has neglected or waived his right to
contribution.
THE INSURANCE CODE OF THE PHILIPPINES
390
Sec. 166
Limit as to liability of insurer.
The liability of the marine insurer for any general average
loss is limited to the proportion of contribution attaching to his
policy value where this is less than the contributing value of
the thing insured. (Sec. 164.) In other words, the liability of the
insurer shall be less than the proportion of the general average
loss assessed upon the thing insured (see S e c . 136.) where its
contributing value is more than the amount of the insurance.
In such case, the insured is liable to contribute ratably with the
insurer to the indemnity of the general average.
The formula m a y be stated as follows:
Amount of
insurance
x
Proportion of general
insurance
Value of thing
insured
=
Limit of
liability of
insurer
EXAMPLE:
Thus, in the example under Section 136, if the vessel
worth P8,000,000.00 was insured by A for only P4,000,000.00
with Y Co., then Y Co. is liable for only 1/2 of P800,000.00,
the proportion of the general average loss assessed upon the
vessel, while A is liable to contribute the other P400,000.00.
Sec. 166. In the case of a partial loss of a ship or its
equipment, the old materials are to be applied towards
payment for the new. Unless otherwise stipulated in the
policy, a marine insurer is liable for only two-thirds of the
remaining cost of repairs after such deduction, except that
anchors must be paid in full, (a)
Liability of insurer in case of partial loss
of ship or its equipment.
In case of a partial loss of a vessel, by c o m m o n u s a g e w h i c h
has the sanction of law, there is deducted from the cost of repairs
"one-third n e w for old," on the theory that the n e w materials
render the vessel m u c h more valuable than it w a s before the loss.
W h e n repairs are thus made, one-third of the cost of the repair is
Sec. 166
CLASSES OF INSURANCE
Title 1. — Marine Insurance
391
laid upon the insured as his burden, and the implied agreement
under the policy is that in case of d a m a g e to the ship by a peril
within the policy, the loss shall be estimated at two-thirds of
the cost of repairs fairly executed or one-third new for old, as is
commonly expressed. (44 A m . Jur. 2d 527.)
Section 166 prescribes the deductions to be m a d e from such
cost subject to other conditions stipulated in the policy.
— oOo —
Title 2
FIRE
INSURANCE
Sec. 167. As used in this Code, the term "fire insurance" shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied
risks, when such risks are covered by extension to fire insurance policies or under separate policies, (a)
Fire insurance defined.
Afire insurance is a contract of indemnity by w h i c h the insurer,
for a stipulated premium, agrees to indemnify the insured against
loss of, or d a m a g e to, a property caused by hostile fire, (see Sec.
84.)
Fire-and-extended c o v e r a g e .
As used in the Code, it includes not only insurance against
loss by fire, but also insurance in the so-called "allied l i n e s " that
protect against loss by lightning, windstorm, etc. but only w h e n
such risks are covered by extension to fire insurance policies
or under separate policies (Sec. 167.) subject to the p a y m e n t
of additional premiums. T h e c o v e r a g e m a y be attached by
endorsements, (see Sec. 50.)
Thus, a distinction is d r a w n b e t w e e n fire insurance alone and
fire-and-extended coverage.
Nature of fire insurance.
Fire insurance is essentially a contract of indemnity. I n d e m n i t y
is its sole purpose and any contract that contemplates a possible
gain to the insured by the happening of the event u p o n which
the liability b e c o m e s fixed is contrary to its proper nature and is
not allowed. (Vance, op. cit., p. 101.)
392
Sec. 167
CLASSES OF INSURANCE
Title 2. — Fire Insurance
393
Concept of fire.
1
In a case, the court defining fire, said:
"Spontaneous combustion is usually a rapid oxidation.
Fire is oxidation which is so rapid as to produce either
a flame or a glow. Fire is always caused by combustion,
but combustion does not always cause fire. T h e w o r d
'spontaneous' refers to the origin of the combustion. It m e a n s
the internal development without the action of an external
agent. C o m b u s t i o n or spontaneous c o m b u s t i o n m a y be so
rapid as to produce fire, b u t until it does so, combustion
cannot be said to be fire." (Western Woolen Mills C o . vs.
Northern Assur. Co., 1 3 9 F e d . 637, cited in D.L. Bickelhaupt,
p. 478.)
T h e presence of heat, steam, or e v e n s m o k e is evidence of
fire, but taken by itself will not prove the existence of fire. Unless
accompanied by ignition, heat sufficient to cause charring or
scorching does not constitute fire. To constitute fire, combustion
must proceed at a rate sufficiently fast to produce a flame, a glow,
or incandescence. Regardless of the a m o u n t of heat, there can be
no fire until ignition takes place. T h e loss resulting from a sizable
hole burned in a couch e v e n though no o n e w a s there to see the
fire probably w o u l d be covered. A small scorch on a table by a
cigarette w o u l d not meet the definition of fire. (D.L. Bickelhaupt,
op. cit., p. 478.)
In our jurisprudence, fire m a y not be considered a natural
disaster or calamity since it almost always arises from s o m e
act of m a n or by h u m a n means. It cannot be an act of G o d
unless caused by lightning or a natural disaster or casualty not
attributable to h u m a n agency. (Phil. H o m e Assurance Corp. vs.
Court of Appeals, 257 S C R A 4 6 8 [1996].)
Risks or losses covered.
In determining whether a risk or cause of loss is written, the
scope and coverage of a fire insurance policy and the intention of
the parties, as indicated by their contract controls.
'For distinction between hostile and friendly fires, see annotation under Section 84.
394
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 167
(1) Fire insurance policies now frequently contain "extended
coverage" provisions bringing certain additional risks, or all
other risks not excluded within the coverage of the policy. In some
policies, damage or loss by explosion, lightning, earthquake,
typhoon, flood, riot and other special perils may be expressly
insured against in addition to that caused by fire. As thus used,
these terms are given practically the same meaning as w h e n used
in exceptions in such respect from the risk insured against, (see
44 Am. Jur. 2d 546.)
(2) They may also extend the coverage to indirect or consequential losses.
Indirect loss coverage.
The standard fire contract is an agreement to repay the insured
for direct loss. Nearly all other property insurance contracts are
similarly restricted. It is apparent, however, that the consequences
of a direct loss m a y be greater than the d a m a g e itself.
If, for example, a manufacturing plant cannot operate
because a fire cripples its machinery, or if an explosion destroys
the refrigeration facilities of a meat-packing plant, the plant loses,
during the period of inactivity, profits that it w o u l d ordinarily
have earned. If a fire m a k e s half a building untenantable for
six (6) months during the period of repair, the o w n e r m a y lose
rents during that period. T h e attachment of a consequential loss
form to the standard fire policy extends the coverage to such
consequential losses. (Riegel, Miller & Williams, Jr., op. cit., p.
216.) This special coverage is k n o w n as loss of profits insurance or
business interruption insurance.
Kinds of indirect losses.
Indirect or consequential losses m a y consist of:
(1) Physical damage caused to other property (which is not
usually covered by the basic insurance policy). Thus, a fire m a y
interfere with heating, cooling, air conditioning, or furnishing
power, and as a result goods are spoiled, or result in the loss of
valuable records or papers that cannot be recopied, or decrease
in value the undamaged m e m b e r of a pair (ibid., p. 217.);
Sec. 167
CLASSES OF INSURANCE
Title 2. — Fire Insurance
395
(2) Loss of earnings due to the interruption of business by
damage to insured's property; and
(3) Extra expense or additional expenditure or charges
incurred by the insured following d a m a g e or destruction of
buildings or contents by an insured peril. E x a m p l e s are the cost
of doing business at a location other than the usual premises of
the insured, the e x p e n s e of maintaining a h o m e on a temporary
basis elsewhere, and the e x p e n s e of demolition w h e n required by
ordinance or law regulating construction or repair of buildings.
{ibid., p. 238.)
Ocean marine and fire policies
distinguished.
A policy of insurance on a vessel e n g a g e d in navigation is a
contract of ocean marine insurance although it insures against
fire risks only.
However, where the hazard is fire alone and the subject is
an unfinished vessel, never afloat for a voyage, the contract
to insure is a fire risk, especially in the absence of an express
agreement that it shall h a v e the incidents of marine policy, or
where it insures materials in a shipyard for use in constructing
vessels. T h e same is true w h e r e a policy insures against fire, a
vessel while moored and in use as a hospital. (44 C.J.S. 478.)
Importance of the distinction.
It is highly important to determine w h e t h e r an insurance
against risk of fire u p o n a vessel is a marine insurance or just an
ordinary fire insurance for two reasons:
(1) In marine insurance, the rules on constructive total loss
(Sees. 131,139.) and abandonment (Sec. 138.) apply but not in fire
insurance; and
(2) In case of partial loss of a thing insured for less than its
actual value, the insured in a marine policy is a co-insurer of
the uninsured portion (Sec. 157.), while the insured m a y only
become a co-insurer in fire insurance if expressly agreed upon by
the parties, (see Sec. 172.)
396
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 168-169
Sec. 168. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the
control of the insured, and increasing the risks, entitles an
insurer to rescind a contract of fire insurance.
Sec. 169. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy, which
does not increase the risk, does not affect a contract of fire
insurance.
W h e n alteration in thing insured
entitles insurer to rescind.
In order that the insurer m a y rescind a contract of fire
insurance under Section 168 for any alteration m a d e in the use or
condition of the thing insured, the following requisites m u s t be
present:
(1) T h e use or condition of the thing is specifically limited or
stipulated in the policy;
(2) Such use or condition as limited by the policy is altered;
(3) T h e alteration is m a d e without the consent of the insurer;
(4) T h e alteration is m a d e by m e a n s within the control of the
insured; and
(5) T h e alteration increases the risk.
But a contract of fire insurance is not affected by any act of
the insured subsequent to the execution of the policy, w h i c h does
not violate its provisions even though it increases the risk and is
the cause of the loss. (Sec. 170.)
Increase of risk or hazard in g e n e r a l .
(1) Implied undertaking of insured. — Every contract of
insurance is m a d e with reference to the conditions surrounding
the subject matter of the risk and the p r e m i u m is fixed with
reference thereto. (25 C.J.S. 199.) There is thus an implied promise
or undertaking on the part of the insured that he will not change
the premises or the character of the business carried there, or
to be carried on there, so as to increase the risk of loss by fire
Sees. 168-169
CLASSES OF INSURANCE
Title 2. — Fire Insurance
397
although most fire insurance policies contain a specific provision
against an increase of risk or hazard. (44 A m . Jur. 2d 138.)
(2) Character of the increase in risk. — An increase of hazard
takes place w h e n e v e r the insured property is put to s o m e n e w
use, and the n e w use increases the chance of loss. (Graley vs.
American Eagle Tire Co., 257 N.Y.S. 5668.)
M e r e negligent acts temporarily endangering the property
will not violate the policy (Vance, op. cit., p. 846.) nor the
temporary acts or conditions w h i c h h a v e ceased prior to the
occurrence of the loss (e.g., s m o k i n g in bed, using kerosene to
start a fire, storing a small a m o u n t of gasoline). There m u s t be
an actual increase of risk a n d while it is not necessary that the
increased risk should h a v e caused or contributed to the loss, still
it is necessary that the increase be of substantial character. (45
C.J.S. 313-314.)
Alterations avoiding policy.
(1) Where risk of loss increased. — T h e policy is avoided by
any alteration in the use or condition of the property insured
increasing the risk as where firecrackers are placed in the
insured building (Young vs. M i d l a n d Textile, Inc., Co., 50 Phil.
617 [1927].); or where a building insured as a dwelling is used
as a disreputable roadside tavern and b a w d y - h o u s e (Allen vs.
H o m e Int. Co., 65 Pac. 158.); or as a retail liquor store. (Western
Assur. Co. vs. M c D i k e , 62 Miss. 740.) U n d e r such circumstances,
the basis upon which the contract of insurance rests is changed
and, therefore, there can be no recovery.
(2) Where the increase no longer existing at time of loss. — T h e
insurer w o u l d still be liable if the increase in hazard was no
longer existing at the time of the loss as w h e n the firecrackers in
the insured dwelling house had already b e e n removed and in no
way contributed to the loss unless there is a breach of warranty
that no hazardous goods should be stored or kept in the property
insured, (see Sec. 76.)
Alterations not avoiding policy.
(1) Where risk of loss not increased. — There is not an increase
of risk and the policy is not avoided where a different use is
398
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 168-169
made of the insured premises, which use is not of a dangerous
character and does not differ materially from the use specified in
the policy, even though an additional or increased premium m a y
be demanded therefor. (Monteleone vs. Royal Ins. Co., 50 L R A
784.)
(2) Where questioned articles required by insured's business.—
Even though the policy contains certain provisions prohibiting
specified articles from being kept in the insured premises, the
policy will not be avoided by a violation of these provisions if the
articles are necessary or ordinarily used in the business conducted
in the insured premises, like benzine kept in a furniture factory
for purposes of operating or for cleaning machinery. (Bachrach
vs. British American Assur. Co., 17 Phil. 55 [1910].)
(3) Where insured property would be useless if questioned acts were
prohibited. — The making of repairs, painting or doing other acts
of similar character on the thing insured are not to be regarded
as increasing the risk since the property w o u l d be useless to the
insured if such acts were prohibited (Vance, op. cit., p. 848.) e v e n
though by reason thereof, the property m a y be e x p o s e d to s o m e
additional risk. ( T h o m p s o n vs. U.S. Products a n d Shippers Ins.
Co., 160 N.E. 668.) Thus, keeping in the h o u s e a small quantity
of gasoline, needed for removing old paint during the course of
making repairs, does not increase the risk. (Smith vs. Insurance
Co., 65 N.W. 256.)
Where insured has no control
or knowledge of alteration.
(1) Insurer's liability unaffected. — T h e insurer is not relieved
from liability if the acts or circumstances by w h i c h the risk is
increased are occasioned by accident, or a cause over w h i c h
the insured has no control. Thus, increase in risk resulting from
adjacent premises over which the insured has no control will not
avoid a policy (State Ins. Co. vs. Taylor, 24 P. 333.) unless actually
known to the insured (Hartford Fire Ins. Co. vs. Borroh, 133 S.W.
465.); or from act of the insured's tenant provided the act is not
known to the insured.
(2) Insured's knowledge presumed. — It would seem, however,
that every act of the insured's tenant substantially and perma-
Sec. 170
CLASSES OF INSURANCE
Title 2. — Fire Insurance
399
nently affecting the conditions of the property so as to constitute
an increase in risk, w o u l d be presumptively k n o w n to the
insured. (Liverpool, etc., Inc. C o . vs. Grunther, 116 U . S . 113.)
Application of Section 75 and Section 169.
An alteration in the risk or condition of the thing insured
w h i c h does not increase the risk will n o t affect a contract of fire
insurance. This is the rule e m b o d i e d in Section 169, and it is
logical as the basis u p o n w h i c h the contract rests is n o t changed.
Furthermore, it is consistent with the provision of Section 75 that
the breach of an immaterial provision does not avoid the policy.
However, under Section 75, the insurer is given the right to
insert terms and conditions in the policy w h i c h if violated w o u l d
avoid it. An alteration m a d e in the use of condition of the thing
insured will thus avoid a policy u n d e r the s a m e section if such
alteration is expressly prohibited although it does n o t increase
the risk. Therefore, Section 169 applies to policies w h i c h are
silent u p o n the subject.
Sec. 170. A contract of fire insurance is not affected by
any act of the insured subsequent to the execution of the
policy, which does not violate its provisions, even though
it increases the risk and is the cause of a loss.
Where act of insured not in violation
of policy.
If the policy does not contain any prohibition limiting the
use or condition of the thing insured (Sec. 168.), an alteration in
said use or condition does not constitute a violation of the policy.
Hence, the contract is not affected by such alteration even though
it increases the risk and is the cause of the loss. Section 170 m a y
be considered as an exception to the rule laid d o w n in Section
168.
However, Section 170 is n o w practically of no importance
since at present, most insurance companies, to protect themselves
expressly provide in every policy of fire insurance that it shall be
avoided by any act of the insured which increases the risk.
THE INSURANCE CODE OF THE PHILIPPINES
400
Sees. 171-172
Sec. 171. If there is no valuation in the policy, the measure of indemnity in an insurance against fire is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in
the condition in which it was at the time of the injury; but if
there is a valuation in a policy of fire insurance, the effect
shall be the same as in a policy of marine insurance.
Sec. 172. Whenever the insured desires to have a valuation named in his policy, insuring any building or structure against fire, he may require such building or structure
to be examined by an independent appraiser and the value
of the insured's interest therein may then be fixed as between the insurer and the insured. The cost of such examination shall be paid for by the insured. A clause shall be
inserted in such policy stating substantially that the value
of the insured's interest in such building or structure has
been thus fixed. In the absence of any change increasing
the risk without the consent of the insurer or of fraud on
the part of the insured, then in case of a total loss under
such policy, the whole amount so insured upon the insured's interest in such building or structure, as stated in
the policy upon which the insurers have received a premium, shall be paid, and in case of a partial loss, the full
amount of the partial loss shall be so paid, and in case
there are two or more policies covering the insured's interest therein, each policy shall contribute pro rata to the
payment of such whole or partial loss but in no case shall
the insurer be required to pay more than the amount thus
stated in such policy. This section shall not prevent the
parties from stipulating in such policies concerning the repairing, rebuilding or replacing of buildings or structures
wholly or partially damaged or destroyed. (a)
2
2
Section 164-A of the Insurance Act (Act No. 2427.) which was inserted by Republic
Act No. 1481, providing for prima facie evidence of arson, was repealed by the former
Insurance Code of Philippines (Pres. Decree No. 612.) by omission. Said section makes
it obligatory on the part of the insurer to insert in the policy, the clause embodying the
circumstances and the presumption mentioned therein, except in cases of insurance of
residential building or buildings used purely for residential purposes.
An insurer is not liable for a loss caused by the willful act or through the connivance of the insured (Sec. 87.), as when arson is committed by the insured or in conspiracy
with another. Under Presidential Decree No. 1613 which amends the law on arson as
contained in Articles 320 to 3260-B of the Revised Penal Code, arson is committed by any
person who bums or sets fire on the property of another. (Sec. 1, Pres. Decree No. 1613.)
Sees. 171-172
CLASSES OF INSURANCE
Title 2. — Fire Insurance
401
Measure of indemnity under an open
policy.
(1) Amount of actual loss sustained. — In the absence of express
valuation in a fire insurance policy (see Sec. 60.), the insured is
only entitled to recover the a m o u n t of actual loss sustained and
the burden is u p o n h i m to establish the a m o u n t of such loss by
a preponderance of evidence. (Tan C h u c o vs. Yorkshire Fire &
Life Ins. Co., 14 Phil. 3 4 6 [1909].) A contract of fire insurance is
a contract of indemnity. Hence, the insured is entitled to receive
the amount necessary to indemnify him, or to h a v e the thing
insured in the s a m e condition in w h i c h it w a s at the time of the
loss.
(2) Limit to amount. — T h e liability of the insurer shall in
no event exceed w h a t it w o u l d cost the insured to repair, or
replace the thing insured with materials of like kind and quality
with proper deduction for depreciation considering the age or
condition of the thing before the loss.
(3) Market value in case of personal property. — In the case of
goods or personal property h a v i n g a m a r k e t value w h i c h can
readily be determined, such market value m a y be applied in
determining the actual loss sustained.
Any of the following circumstances shall constitute prima facie evidence of arson:
(1) If the fire started simultaneously in more than one part of the building or establishment; (2) If substantial amount of flammable substances or materials are stored within
the building not necessary in the business of the offender nor for household use; (3) If
gasoline, kerosene, petroleum or other flammable or combustible substances or materials
soaked therewith or containers thereof, or any mechanical, electrical, chemical, or electronic contrivance designed to start a fire, or ashes or traces of any of the foregoing are
found in the ruins or premises of the burned building or property; (4) If the building or
property is insured for substantially more than its actual value at the time of the issuance
of the policy; (5) If during the lifetime of the corresponding fire insurance policy more
than two fires have occurred in the same or other premises owned or under the control of
the offender and/or insured; (6) If shortly before the fire, a substantial portion of the effects insured and stored in a building or property had been withdrawn from the premises
except in the ordinary course of business; or (7) If a demand for money or other valuable
consideration was made before the fire in exchange for the desistance of the offender or
for the safety of the person or property of the victim. (Sec. 6, ibid.)
The building which is the object of arson including the land on which it is situated
shall be confiscated and escheated to the State, unless the owner thereof can prove that he
has no participation in nor knowledge of such arson despite the exercise of due diligence
on his part. (Sec. 8, ibid.)
THE INSURANCE CODE OF THE PHILIPPINES
402
Sees. 171-172
Measure of indemnity under a valued
policy.
The effect of a valuation in a policy of fire insurance is the
same as in a policy of marine insurance, (see Sections 6 1 , 1 5 6 . )
(1) Valuation conclusive between the parties. — In other words,
the valuation in a policy of fire insurance is conclusive between
the parties in the adjustment of either partial or total loss if the
insured had an insurable interest and w a s not guilty of fraud.
(Harding vs. Commercial U n i o n Ins. Co., 38 Phil. 4 8 4 [1918];
Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 154 S C R A 672
[1987].)
(2) Amount stated in policy/amount of partial loss. — T h e valuation of a building or structure insured under a policy against fire
may be fixed as provided in Section 172. In case of a total loss,
the insured can recover the w h o l e a m o u n t so insured as stated in
the policy and in case of partial loss, the full a m o u n t of the partial loss. A total loss of the insured building exists w h e n the result of
the fire is such as to render the property wholly unfit for use as
a building h o w e v e r valuable it m a y be as m e r e material. (Vance,
op. cit., p. 886.)
(3) Pro rata contribution to payment of loss. — If the thing is
insured under two or more policies, each policy shall contribute
pro rata to the payment of such whole or partial loss.
In life insurance, the measure of indemnity is the s u m fixed
in the policy. T h e principle of indemnity does not apply, (see Sec.
183.)
EXAMPLE:
About ten (10) years ago, X constructed a house for which
he spent P300,000.00 which he insured against fire for the same
amount. He renewed the insurance for the same amount every
year. This year, when the house was already worth P600,000.00
(if it is rebuilt) on account of inflationary prices, 1/5 of the
house was destroyed by accidental fire.
How much can X recover from the insurer? It depends.
If the policy is an open policy, X can recover his actual loss
of P120,000.00, which is 1/5 of P600,000.00, the value of the
property at the time of the loss. (Sec. 171.)
Sees. 171-172
CLASSES OF INSURANCE
Title 2. — Fire Insurance
403
If the policy is a valued policy, and the house was valued
at P300,000.00, X can recover only 1/5 of P300,000.00, or
P60,000.00.
Insured not a co-insurer under fire policies
in the absence of stipulation.
U n d e r the usual contract of fire insurance, the insurer, in
case of a partial loss of the subject of the contract, is required to
give full indemnity for such loss up to the a m o u n t written in the
policy even though the property be very inadequately insured.
Thus, if property w h i c h is valued at P 1 0 0 , 0 0 0 . 0 0 is insured for
P50,000.00 and is d a m a g e d by fire to the extent of one-half of its
value, the insurer will be c o m p e l l e d to pay the entire P50,000.00
necessary to repair the loss. This, however, as already pointed
out earlier, is not the rule in marine insurance. (Sec. 157.) But a
similar result is n o w obtained in fire insurance by the insertion
of a standard provision k n o w n as "co-insurance c l a u s e " in the
fire insurance policy (see Sec. 93.) to e n c o u r a g e property owners
to insure their property for an a m o u n t as close to full value as
possible.
Reason for co-insurance clause
in fire policies.
T h e co-insurance clause is a clause requiring the insured to
maintain insurance to an a m o u n t equal to the value or specified
percentage of the value of the insured property under penalty of
becoming co-insurer to the extent of such deficiency (see Vance,
op. cit., p. 887.), i.e., the difference b e t w e e n the value or percentage
insured and the amount of the insurance. It divides the potential
risk between the insured and the insurer in case of partial loss or
destruction of the insured property.
Only a small percentage of fires result in the total destruction
of the property insured. This is especially true where the goods
or buildings insured are widely separate and where the fire
protection is adequate. M a n y property owners, realizing that the
possibility of total destruction is slight, desire to insure merely for
a small percentage of the value of the building or goods. If they
can, by insuring the property for only 2 5 % of its value, receive
THE INSURANCE CODE OF THE PHILIPPINES
404
Sees. 171-172
full indemnity for any loss in 9 5 % of the cases, they are tempted
to accept this partial coverage at a cost only of one-fourth of that
required for complete coverage.
To prevent the property owners from taking out such
small amount of insurance, and thereby reducing the premium
payments and thereby increasing the rates of premium for all,
the insurers often insert as a rider to the standard fire policy a
so-called "co-insurance" clause. This results in reducing the
recovery in case of partial loss to but a portion of the s u m n a m e d
in the policy though in case of total loss, the insurer is liable for
the amount n a m e d in the policy. (Ibid.)
EXAMPLE:
If a house valued at P500,000.00 is insured only for
P300,000.00 and is damaged to the extent of P300,000.00, the
insurer is liable, where there is a co-insurance clause in the
policy, for 3 / 5 of the loss or only P180,000.00, 2 / 5 of the loss or
P120,000.00 being borne by the insured himself.
Thus, the insured is considered the co-insurer for the
amount determined by the difference between the insurance
taken out and the value of the property insured. This difference
is assumed to be the personal risk of the insured. In case of total
loss, the insurer is liable for the full amount of P300,000.00.
If the insurance carried is more than P500,000.00, the value
of the property, only P500,000.00, the actual fire loss, will be
paid.
Option to rebuild clause.
Under Section 172, the mere fact that the parties h a v e fixed
a valuation in the policy does not prevent them from stipulating
in the policy concerning the repairing, rebuilding or replacing of
buildings or structures wholly or partially d a m a g e d or destroyed.
Thus, the insurer m a y be given the option to reinstate or replace
the property damaged or destroyed or any part thereof, instead
of paying the amount of the loss or damage.
This option given to the insurer is called the option to rebuild
clause. It is reserved by the insurer in order to protect h i m against
unfairness in the appraisal and award rendered by a packed
Sec. 173
CLASSES OF INSURANCE
Title 2. — Fire Insurance
405
board of arbitrators, or in the proof of loss. T h e insurer must
exercise his option to rebuild within the time stipulated in the
policy, or in the absence of stipulation, within a reasonable time.
T h e choice by the insurer shall produce no effect except from the
time it has b e e n c o m m u n i c a t e d to the insured. (Art. 1 2 0 1 , Civil
Code.)
Unless the policy has limited the cost of rebuilding to the
a m o u n t of the insurance, the insurer, after electing to rebuild,
can be compelled to perform his undertaking, e v e n though the
cost m a y exceed the original a m o u n t of insurance. (Vance, op. cit.,
p. 883.)
Sec. 173. No policy of fire insurance shall be pledged,
hypothecated, or transferred to any person, firm or company who acts as agent for or otherwise represents the
issuing company, and any such pledge, hypothecation, or
transfer hereafter made shall be void and of no effect insofar as it may affect other creditors of the insured, (n)
Pledge, etc. of fire insurance policy
after a loss.
(1) Consent of, or notice to, insurer not required. — After a loss
has occurred, the insured m a y pledge, hypothecate, or transfer a
fire insurance policy or rights thereunder. This he m a y do even
without the consent of, or notice to, the insurer, (see Sees. 2 1 ,
83.) In such case, it is not the personal contract which is being
assigned, but a claim under or a right of action on the policy
against the insurer. As a general rule, the assignee acquires no
greater rights against the insurer than h a d the one to w h o m the
policy was issued.
(2) Limitation. — T h e right of the insured to assign his
claim against the insurer after a loss has occurred, is subject to
the prohibition in Section 173 against the transfer of a policy of
fire insurance to any person or c o m p a n y w h o acts as agent or
otherwise represents the insurer. A n y such pledge, etc. shall be
void and of no effect insofar as it m a y affect other creditors of the
insured.
— oOo —
Title 3
CASUALTY INSURANCE
Sec. 174. Casualty insurance is insurance covering
loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other
types of insurance such as fire or marine. It includes, but
is not limited to, employer's liability insurance, workmen's
compensation insurance, public liability insurance, motor
vehicle liability insurance, plate glass insurance, burglary
and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance.
Casualty insurance defined.
Casualty insurance includes all forms of insurance against loss
or liability arising from accident or m i s h a p excluding certain
types of loss or liability w h i c h are not within the scope of other
types of insurance, namely: marine; fire; suretyship; and life.
Risks or losses covered.
Section 174 defines casualty insurance by a process of
elimination. Without the exclusion of the other types of insurance,
casualty insurance would apply to almost any kind of insurance.
(1) Accepting "casualty" to m e a n "accident" — that is, a
violent mishap proceeding from an u n k n o w n or u n e x p e c t e d
cause — casualty insurance m i g h t be p r e s u m e d to include any
loss or d a m a g e w h e n an accident is the cause of the loss. (D.L.
Bickelhaupt, op. cit., p. 71.) Thus, a casualty insurance policy
excludes losses arising from accident w h i c h are within the
coverage of the other types of insurance mentioned.
406
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
407
(2) In burglary, robbery and theft insurance, the opportunity
to defraud the insurer — the moral hazard — is so great that
insurer h a v e found it necessary to fill up their policies with m a n y
restrictions designed to reduce the hazard. Persons frequently
excluded under such provisions are those in the insured's service
and employment. T h e p u r p o s e of the exception is to guard
against liability should the theft be c o m m i t t e d by o n e having
unrestricted access to the property. (Fortune Insurance & Surety
Co., Inc. vs. Court of Appeals, 2 4 4 S C R A 3 0 8 [1995].)
Except with respect to c o m p u l s o r y m o t o r vehicle liability
insurance (Chap. VI.), the Insurance C o d e contains no other
provisions applicable to casualty insurance or to robbery
insurance in particular. T h e s e contracts are, therefore, governed
by the general provisions applicable to all types of insurance.
Outside of these, the rights a n d obligations of the parties
must be determined by the t e r m s of their contract, taking into
consideration its purpose and always in accordance with the
general purpose of insurance. (Ibid., citing M a . Clara M. C a m p o s ,
Insurance, 1983 Ed., p. 199.)
Two general divisions of casualty i n s u r a n c e .
They are as follows:
(1) Insurance against specified perils w h i c h m a y affect the
person and / o r property of the insured such as personal accident,
robbery or theft, d a m a g e to or loss of m o t o r vehicle, insolvency
of debtors, defalcation of employees, etc.; and
(2) Insurance against specified perils w h i c h m a y give rise
to liability on the part of the insured for claims for injuries to
others or for d a m a g e to their property, such as w o r k m e n ' s
compensation, motor vehicle liability, professional liability,
products liability, etc.
Liability insurance defined.
Liability insurance has been said to be a contract of indemnity
for the benefit of the insured and those in privity with him, or those
to w h o m the law upon the grounds of public policy extends the
indemnity against liability. (Foehrenback vs. German-American
Title & Tt. Co., 217 Pa. 3 3 1 ; 43 Am. Jur. 2d 76.)
408
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 174
Under policies of this type, an indemnity is provided to the
insured in respect of his legal liability to pay damages, usually
arising out of negligence or nuisance and occasionally, under
contract. (Dinsdale & McMurdie, op. cit., p. 83.)
Liability insurable.
(1) Liability for quasi-delict or non-fulfillment of contract. —
Liability, as we deal in this work, is financial responsibility that
one party has to another party as a consequence of doing or
failing to do something. T h e doing or failing to do m a y involve
negligence, or the terms of an existing contractual agreement
between two or more parties. (Riegel, Miller & Williams, Jr., op.
cit., pp. 425-426.)
Liability involving the c o m m i s s i o n of a quasi-delict or tort
(see Arts. 2176,2177, Civil Code.) is a civil injury, and not a felony
or crime which is a public injury. T h e first is remedied by civil
action instituted by the injured party, while the State takes action
with respect to the second to punish the offender.
(2) Liability for criminal negligence. — Liabilities arising out of
acts of negligence w h i c h are also criminal are also insurable on
the ground that such acts are accidental. Thus, a m o t o r insurance
policy covering the insured's liability for accidental injury caused
by his negligence, even though gross and attended by criminal
consequences such as h o m i c i d e through reckless imprudence,
wil not be void as against public policy.
Liability consequences of deliberate criminal acts are not
insurable. Thus, it was held (in Hardy vs. M o t o r Insurers' Bureau,
2 All E.R. 742 [1964].) that a motorist guilty of a deliberate crime
resulting in payment of d a m a g e s to an injured third party is not
entitled to recover on the policy. However, if he does not pay the
damages, the injured third party can recover against the insurer.
(Dindsdale & McMurdie, op. cit., 83.)
1
'At first, all liability insurance was considered of doubtful legality because it encourages the insured to be careless and because it requires the insurer to interfere in litigation
to which he is not a party. (Art. 2207, Civil Code.) It was also argued that the insurer could
not lawfully promise to indemnify the insured against the consequence — civil liability
to injured persons — of his violation of law, e.g., traffic law. But to hold all such claims excepted would reduce indemnity to a mere shadow, and that the benefits of motor vehicle
liability insurance outweighs its possible slight encouragement of carelessness.
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
409
Insurable interest in liability insurance.
In liability insurance, questions of insurable interest are not
particularly important. As a general rule, liability insurance, like
other forms of insurance, m u s t be supported by an insurable
interest in the insured, although there is s o m e authority to the
contrary.
(1) T h e insurable interest is to be found in the interest the
insured has in the safety of persons w h o m a y maintain, or in
the freedom from d a m a g e of property w h i c h m a y b e c o m e the
basis of suits against h i m in case of their injury or destruction.
T h e interest does not d e p e n d u p o n w h e t h e r the insured has a
legal or equitable interest in property, b u t u p o n w h e t h e r he m a y
be charged by law with the liability against w h i c h insurance is
taken out. (ibid., 554-555.)
(2) Therefore, liability insurance — assuming one qualifies
as an insured — is always supported by an insurable interest.
Thus, even if one w e r e to conclude that an insurable interest is
not required for liability insurance, such a rule w o u l d h a v e no
significant adverse implications. (R.H. Jerry, II, op. cit., p. 193.)
When liability insurance in policy
payable.
T h e general distinction b e t w e e n an insurance against
liability and one against actual loss (or o n e of strict indemnity
only) is that the coverage or liability of the insurer under the first
attaches w h e n the liability of the insured to the injured third party
attaches, regardless of actual loss at that time, while under the
second, an action against the insurer does not lie until an actual
loss is sustained by the insured, (see E.W. Patterson, op. cit., 263.)
In a third party liability insurance contract, the insurer assumes
the obligation of paying the injured third parties to w h o m the
insured is liable. From the m o m e n t that the insured becomes
liable to the third person, the insured acquires an interest in the
insurance contract which may be garnished like any other credit.
(Perla Compania de Seguros, Inc. vs. Ramolete, 203 S C R A 487
[1991].)
In general, the class into which a particular policy falls
depends on the intention of the parties as evidenced by the
410
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 174
phraseology of the agreement in such respect in the policy. (43
Am. J u r . 2 d 770-771.)
Right of injured person to sue insurer
of party at fault.
The right of the person injured to sue the insurer of the party
at fault (insured) depends on whether the contract of insurance
is intended to benefit third persons also or only the insured.
The test applied is this:
(1) Indemnity against third party liability. — W h e r e the contract
provides for indemnity against liability to third persons, then
third persons to w h o m the insured is liable, can sue directly the
insurer upon the occurrence of the injury or event u p o n which
the liability depends. T h e purpose is to protect the injured person
against the insolvency of the insured w h o causes such injury and
to give h i m a certain beneficial interest in the proceeds of the
policy. It is as if such injured person were especially n a m e d in
the policy. (Shafer vs. Judge, RTC, 167 S C R A 386 [1986].) W h e r e
the contract is one of indemnity against liability, it b e c o m e s
operative as soon as the liability of the person indemnified
arises irrespective of whether or not he h a s suffered actual loss.
(Republic Glass Corporation vs. Qua, 435 S C R A 4 8 0 [2004];
Associated Insurance & Surety Co., Inc. vs. Chua, 7 S C R A 52
[1963].)
(2) Indemnity against actual loss or payment. — W h e r e the contract is for indemnity against actual loss or payment, then third
persons cannot proceed against the insurer, the contract being
solely to reimburse the insured for liability actually discharged
by him through payment to third persons, said third person's
recourse being thus limited to the insured alone. (Guingon vs.
Del Monte, 20 S C R A 1043 [1967].) Prior p a y m e n t by the insured
is necessary in order that the obligation of the insurer m a y arise.
Basis and extent of insurer's liability.
(1) Contract of insurance. — T h e direct liability of the insurer
under indemnity contract against third party liability does not
mean that the insurer can be held solidarily liable with the
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
411
insured and / o r the other parties found at fault. T h e liability of
the insurer to the third party is b a s e d on contract; that of the
insured is based on tort. (Malayan Insurance Co., Inc. vs. Court
of Appeals, 165 S C R A 136 [1988]; First Integrated B o n d i n g &
Insurance Co., Inc. vs. Hernando, 199 S C R A 796 [1991]; Heirs of
G.U. Poe vs. M a l a y a n Insurance Co., Inc., 584 S C R A 152 [2009].)
(2) Sum limited in the contract.—While in a solidary obligation
the creditor m a y enforce the entire obligation against one of the
solidary debtors, in an insurance contract, the insurer undertakes
to indemnify the insured against loss, d a m a g e or liability
arising from u n k n o w n or contingent event. To m a k e the insurer
solidarily liable with the latter's entire obligation b e y o n d the
sum limited in the insurance contract w o u l d result in "evident
breach of the concept of solidary obligations." (Vda. de M a g l a n a
vs. Consolacion, 2 1 2 S C R A 2 6 8 [1992].) T h e third-party liability
of the insurer is only up to the extent of the insurance policy and
that required by law. A n y a w a r d b e y o n d the insurance coverage
would already be the sole liability of the insured and / or the other
parties, if any, at fault. (GSIS vs. Court of Appeals, 3 0 8 S C R A 559
[1999].)
EXAMPLE:
The policy is one whereby the insurer agreed to indemnify
the insured "against all sums x x x which the insured shall
become legally liable to pay in respect of a death of or bodily
injury to any person x x x."
Is the policy for indemnity against liability? Yes. From
the fact that the insured is liable to third persons, such third
persons are entitled to sue the insurer. (Ibid.)
ILLUSTRATIVE CASE:
Right of insurer to be subrogated to the rights of the insured
against the third party responsible for the insurer's liability under the
policy.
Facts: M Co., insurer, issued in favor of S, insured, a
private car comprehensive policy for "own damage" not to
exceed P6,000.00 and a "third party liability" in the amount
of P20,000.00. The insured jeep, while being driven by C, an
THE INSURANCE CODE OF THE PHILIPPINES
412
Sec. 174
employee of D Co., collided with a passenger bus belonging to
P Co. causing damage to the insured vehicle and injuries to C,
and T, who was riding in the ill-fated jeep.
The Court of Appeals affirmed the decision of the trial
court that S, D Co. and M Co. are solidarily liable for damages
to T but ruled that D Co. has no obligation to reimburse M Co.
for whatever amount the latter has been ordered to pay on its
policy.
Issue: Is the ruling correct?
Held: No. Only S and D Co. are solidarily liable to T. S is
made liable to T pursuant to Article 2184 of the Civil Code,
while the basis of liability of D Co. is Article 2180. It thus
appears that S and D Co. are the principal tortfeasors who are
primarily liable to T. The law states that the responsibility of
two or more persons who are liable for a quasi-delict is solidary.
2
3
4
On the other hand, the basis of M Co.'s liability is its
insurance contract "existing between it and S at the time of
the complained vehicular accident. M Co., upon paying T the
amount of P20,000.00, shall be subrogated to whatever rights S
has against D Co. in accordance with Article 1217 of the Civil
Code which gives to a solidary debtor who has paid the entire
obligation the right to be reimbursed by his co-debtors for the
share which corresponds to each. (Malayan Insurance Co. vs.
Court of Appeals, supra.)
5
2
Art. 2184. In motor vehicle mishap, the owner is solidarily liable with his driver, if
the former, who was in the vehicle, could have, by the use of due diligence, prevented the
misfortune. It is disputably presumed that a driver was negligent, if he had been found
guilty of reckless driving or violating traffic regulations at least twice within the next
preceding two months.
If the owner was not in the motor vehicle, the provisions of Article 2180 are
applicable.
Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's
own acts or omissions, but also for those of persons for whom one is responsible,
xxx
xxx
Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks even though the former are not
engaged in any business industry.
xxx
xxx
The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent
damage. (1903a)
Art. 2194.
See annotations under Sections 1 and 243.
3
4
5
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
413
Accident a n d health insurance.
(1) Closely related purposes of coverages. — Accident and health
coverages h a v e closely related purposes. Accident insurance
reimburses the insured for pecuniary loss suffered as a result of
injuries sustained in an accident. Health insurance, on the other
hand, reimburses the insured for pecuniary loss arising out of
disease-related illness. In b o t h kinds of insurance, the insured is
reimbursed for medical and hospital expenses and, in the case of
accident insurance and s o m e t i m e s health insurance, earnings as
a result of the incapacity.
6
(2) Combination of coverages.—Accident and health coverages
are often c o m b i n e d in the s a m e policy thereby protecting the
insured from loss from either kind of disability. Also, accident
insurance is frequently offered as a s u p p l e m e n t to life insurance.
If death is caused by accident, m a n y life policies pay "double
indemnity," m e a n i n g proceeds twice the a m o u n t of the policy's
face value. T h e cost of the additional coverage is relatively low.
Accident insurance is also provided with other coverages,
most prominently with m o t o r vehicle insurance. Various kinds of
specialized health insurance exist. "Major m e d i c a l " is e x p a n d e d
coverage for catastrophic medical expenses. Hospitalization
insurance is also widely marketed, as are other various kinds of
supplementary coverages. (R.H. Jerry, II, op. cit., pp. 31-32.)
(3) Burden of proof. — In accident insurance, the insured's
beneficiary has the burden of proof in demonstrating that the
cause of death is due to the covered peril. O n c e that fact is
established, the burden then shifts to the insurer to show any
excepted peril that m a y h a v e been stipulated by the parties. An
'A health care agreement which grants "living benefits," such as medical check-ups
and hospitalization which a member may immediately enjoy so long as he is alive upon
the effectivity of the agreement until its expiration is in the nature of non-life insurance,
which is primarily a contract of indemnity. (Philamcare Health Systems, Inc. vs. Court of
Appeals, 379 SCRA 356 [2002]; Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580
[2008]; see Sec. 18.) In the case of Philippine Health Care Providers Inc. vs. Comm. of Internal
Revenue (600 SCRA 413 [2009].), the Supreme Court reversed itself. It held that a corporation, such as a Health Maintenance Organization (HMO), whether or not organized for
profit, whose main object is to provide the members of a group with health care services
should not be considered as engaged in insurance activities.
t
THE INSURANCE CODE OF THE PHILIPPINES
414
Sec. 174
"accident insurance" is not thus to be likened to an ordinary
life insurance where the insured's death, regardless of the cause
thereof, would normally be compensable. (Vda. de Gabriel vs.
Court of Appeals, 264 S C R A 137 [1996].)
Meaning of "accident" a n d "accidental"
as used in accident policy.
The terms "accident" and "accidental," as used in insurance
contracts, have not acquired any technical meaning. T h e y are
construed by the courts in their ordinary and c o m m o n acceptation. Thus, the terms have been taken to m e a n that which
happens by chance or fortuitously, without intention or design,
and which is unexpected, unusual and unforeseen.
(1) Happening from known or unknown cause unusual and
unexpected. — An accident is an event that takes place without
one's foresight or expectation - an event that proceeds from an
unknown cause, or is an unusual effect of a k n o w n cause and,
therefore, not expected. It is an event which h a p p e n s without
any h u m a n agency or, if happening through h u m a n agency, an
event which, under the circumstances, is u n u s u a l to and not
expected by the person to w h o m it happens. (De La Cruz vs.
Capital Insurance & Surety Co., Inc., 17 S C R A 559 [1966]; Filipino
Merchants Insurance Co., Inc. vs. Court of Appeals, 179 S C R A
638 [1989]; 43 A m . Jur. 2d 627-628.) It need not be an event that is
"sudden."
(2) Cause may be attributable to fault or negligence. — T h e terms
do not, without qualification, exclude events resulting in d a m a g e
or loss due to the fault, recklessness or negligence of third parties.
T h e concept "accident" is not necessarily s y n o n y m o u s with the
concept of "no fault." It m a y be utilized simply to distinguish
intentional or malicious acts from negligent or careless acts of
man. (Pan Malayan Insurance Corp. vs. Court of Appeals, 184
S C R A 54 [1990].)
7
7
Foreseeability is an element of establishing negligence; so, "accident" may embrace
events that could have been foreseen.
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
415
Rule as to death or injury resulting f r o m
"accidental" o r "accidental m e a n s . "
T h e tendency of court decisions in the U n i t e d States in recent
years is to eliminate the fine distinction b e t w e e n the terms
"accidental" and "accidental m e a n s " and to consider t h e m as
legally synonymous. (Travellers' Protective Association vs.
Stephens, 185 Ark. 6 6 0 , 4 9 S.W. [3d] 3 6 4 ; Equitable Life A s s u r a n c e
C o . vs. H e m e n over, 100 Colo. 2 3 1 , 67 P. [2d] 80, 110 A L R 1270,
cited in De La C r u z vs. Capitol Insurance & Surety Co., Inc.,
supra.) A n u m b e r of courts h a v e reached the conclusion that
the two concepts are so difficult to distinguish that they will be
treated as essentially the s a m e in their jurisdictions. (I.E. Greider
& W.T. Beadless, op. cit., p. 218.)
8
A distinction b e t w e e n the t w o is certainly not understood by
the average m a n and he is the one for w h o m the policy is written.
(Burr vs. C o m m e r c i a l Travellers M u t . Ecc. Ass'n., 7 N . E . [2d] 124
[1946].)
(1) General rule. — T h e generally accepted rule is that death
or injury does not result from accident or accidental m e a n s within
the terms of an accident policy if it is the natural result of the
insured's voluntary act, u n a c c o m p a n i e d by anything unforeseen
except the death or injury.
(2) Exception. — There is no accident w h e n a deliberate act is
performed unless s o m e additional, unexpected, independent and
unforeseen happening occurs w h i c h produces or brings about
the result of injury or death. In other words, where the death
or injury is not the natural or probable result of the insured's
voluntary act, or if something unforeseen occurs in the doing of
the act which produces the injury, the resulting death is within
"Hence, it is no longer safe to rely upon the distinction between an injury which was
an "accidental" result of an act which the insured intended to do and one which resulted
from "accidental means" where the insured acted voluntarily to produce one result and
produced another result unexpectedly. An example of the latter is the intentional pulling of a hair from the nose resulting in an abrasion through which bacteria entered and
caused infection, resulting in death. (E.W. Patterson, op. cit., pp. 243-244.) Here, both the
cause and the result are accidental. In the former, the result (injury) is unintended or
unexpected.
Death or injury could be a result of accident, but the latter does not necessarily result
to the former.
416
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 174
the protection of policies insuring against death or injury from
accident.
Thus, in a case where the participation of the insured in a
boxing contest was voluntary, but the injury was sustained
when he slid, giving occasion to the infliction by his opponent
of the blow that threw h i m to the ropes of the ring and without
this unfortunate incident, that is, the intentional slipping of the
deceased, perhaps he could not h a v e died, the court held that his
death may be regarded as accidental although boxing is attended
with some risk of external injuries. In boxing, or in other equally
physically vigorous sports such as basketball or baseball, death
is not ordinarily anticipated to result. If, therefore, it ever does,
the injury or death can only be accidental. Of course, if the policy
specifically excludes death resulting from a boxing match, the
insurer is not liable for such death. (De La Cruz vs. Capitol
Insurance & Surety Co., Inc., supra.)
Suicide and willful exposure
to needless peril.
Both are in pari matere because they b o t h signify a disregard
for one's life. T h e only difference is in degree, as suicide imports
a positive act of ending such life whereas the second act indicates
a reckless risking of it that is almost suicidal in intent. (Sun
Insurance Office, Ltd. vs. Court of Appeals, 211 S C R A 5 5 4 [1992].)
"Voluntary exposure to a k n o w n danger" is generally held
to negate the accidental character of whatever followed from the
known danger.
To illustrate: A person w h o walks a tightrope 1,000 meters
above the ground and without any safety device m a y not actually
be intending to commit suicide, but his act is nonetheless suicidal.
He would thus be considered as "willfully exposing himself to
needless peril." (Ibid.) Similarly, an insured's death as a result
of playing "Russian roulette" (pulling the trigger of a revolver
after spinning the cylinder with one cartridge in it) was held not
within the coverage of an accident insurance. (E.W. Patterson,
pp. 245-246, citing T h o m p s o n vs. Prudential Ins. Co. of America,
66 S.E. 2d, 19 [6a. App. 1951].)
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
417
But the mere act of the insured of pointing the gun to his
temple, believing that the g u n w a s not loaded and the gun fired,
w h e n he pulled the trigger resulting in his death, w a s held an
accident. T h e insured w a s unquestionably negligent but it should
not prevent his beneficiary from recovering from the insurance
policy he obtained precisely against accident where "there is
nothing in the policy that relieves the insurer of the responsibility
to pay the indernnity agreed u p o n if the insured is s h o w n to
have contributed to his o w n accident. Indeed, m o s t accidents are
caused by negligence," the firing of the g u n w a s the "additional,
unexpected, independent a n d unforeseen h a p p e n i n g " that led
to the insured's death. (Sun Insurance Office, Ltd. vs. Court of
Appeals, supra.)
Meaning of "intentional" as used
in accident policy.
"Intentional," as u s e d in an accident policy excepting
intentional injuries inflicted by the insured or any other person,
etc., implies the exercise of the reasoning faculties, consciousness,
and volition. W h e r e a provision of the policy excludes intentional
injury, it is the intention of the person inflicting the injury that
is controlling. If the injuries suffered by the insured clearly
resulted from the intentional act of a third person, the insurer is
relieved from liability as stipulated. (Biagtan vs. T h e Insular Life
Assurance Co., Ltd., 44 S C R A 58 [1972].)
EXAMPLE:
D (insured) lifted heavy objects all day as a result of which
he suffered injury to his back. For a claim to be payable under
an accident policy, both the cause and the result of the death or
injury must be accidental. Here, the cause was the heavy work
— which was intentional. The injury, therefore, is not covered
by the policy.
On the other hand, if D slips and falls while lifting the
heavy objects, the cause (loss of balance) and the result (injured
back) are both accidental. His injury is covered by the policy.
ILLUSTRATIVE CASES:
1. Insured stabbed by escaping robbers. — The house of the
insured was robbed by a band of robbers; in committing the
418
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 174
robbery, the robbers rushed towards the door of the second floor,
and coming face to face with the owner, even if unexpectedly,
stabbed him repeatedly, causing wounds on the body resulting
in his death.
Under the circumstances, it is contrary to all reason and
logic to say that his injuries were not intentionally inflicted.
(ibid.)
2. Insured was killed for the purpose of robbery. — The
insured was waylaid and assassinated for the purpose of
robbery. While the assassination of the insured was to him an
unforeseen event and, therefore, accidental, "the clause of the
proviso that excludes the (insurer's) liability, in case death or
injury is intentionally inflicted by any other person, applies in
this case." (Hutchcrafts's Ex'r. vs. Travelers' Ins. Co., 87 Ky. 300,
8 S.W. 570, cited in the Biagtan case; see, however, Finman case,
infra.)
3. Insured was shot while approaching place of robbery. — The
insured was a watchman in a certain company, who happened
to be invited by a policeman to come along as the latter was on
his way to investigate a reported robbery going on in a private
house. As the two of them approached and stood in front of
the main gate of the house, a shot was fired and it turned out
afterwards that the insured was hit in the abdomen, the wound
causing his death.
Under the circumstances, the court held that it could
not be said that the killing was intentional for there was the
possibility that the malefactor had fired the shot to scare the
people around for his own protection and not necessarily to kill
or hit the victim. (Calanoc vs. Court of Appeals, 98 Phil. 79 [1955],
cited in the Biagtan case.)
9
4. Insured died in the course of an assault or murder. — The
insured and his companion were on their way home from
attending a festival when they were confronted by unidentified
persons. The insured died from a stab wound. The insurer
denied the insurance claim on the ground that the insured's
'Comparing the Calanoc and the Biagtan cases, the Supreme Court said: "A similar
possibility is clearly ruled out by the facts in the (Biagtan) case now before us. For while a
single shot fired from a distance, could indeed have been fired with intent to kill or injure,
nine wounds inflicted with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned. The manner of execution of the crime
permits no other conclusion." (see, however, dissenting opinion of Justice Teehankee.)
Sec. 174
CLASSES OF INSURANCE
Title 3. — Casualty Insurance
419
death was committed with deliberate intent which, by the
very nature of a personal accident insurance policy cannot be
mdernnified.
According to the Supreme Court: "x x x the happening was
a pure accident on the part of the victim. The insured died from
an event that took place without his foresight or expectation,
an event that proceeded from an unusual effect of a known
cause and, therefore, not expected. Neither can it be said that
there was a capricious desire on the part of the insured to
expose his life to danger considering that he was just going
home after attending a festival. Furthermore, the principle of
expresso unius est exclusio alterius is applicable in the instant case
since murder and assault not having been expressly included
in the enumeration of only ten (10) circumstances that would
negate liability in said insurance policy cannot be considered
by implication to discharge the petitioner insurance company
from liability for any injury, disability or loss suffered by
the insured." This ambiguity in the insurance contract was
interpreted in favor of the insured. (Finman General Assurance
Corp. vs. Court of Appeals, 213 SCRA 493 [1992].)
Effect of "no action" clause in policy
of liability insurance.
In Guingon vs. Del Monte (20 S C R A 1043 [1967].), the policy
requires that suit and final j u d g m e n t be first obtained against
the insured; that only "thereafter" can the person injured recover
on the policy; it expressly disallows suing the insurer as a codefendant of the insured in a suit to determine the latter's liability
to the third person.
The query is which procedure to follow — that of the
insurance policy or the Rules of Court. It w a s held that "no
action" clause in the policy cannot prevail over the Rules of
Court provisions aimed at avoiding multiplicity of suits. Section
5 of Rule 2 on "joinder of causes of action" and Section 6 of
10
10
SEC. 5. Joinder of causes of action. — A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he may have against an opposing party,
subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of
parties;
420
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 174
Rule 3 on "permissive joinder of causes of parties"" cannot be
superseded, at least with respect to third persons not a party to
the contract by a "no action" clause on the contract of insurance.
(ibid.; Shaffer vs. Judge, RTC, supra.)
— oOo —
(b) The joinder shall not include special civil actions or actions governed by special
rules;
(c) Where the causes of action are between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided
one of the causes of action falls within the jurisdiction of said court and the venue lies
therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the test of jurisdiction. (5a)
"SEC. 6. Permissive joinder of parties. — All persons in whom or against whom any
right to relief in respect to or arising out of the same transaction or series of transactions
is alleged to exist, whether jointly, severally, or in the alternative, may except as otherwise provided in these rules, join as plaintiffs or be joined as defendant in one complaint,
where any question of law or fact common to all such plaintiffs or to all such defendants
may arise in the action; but the court may make such orders as may be just to prevent any
plaintiff or defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest.
Title 4
SURETYSHIP
Sec. 175. A contract of suretyship is an agreement
whereby a party called the surety guarantees the performance by another party called the principal or obligor of
an obligation or undertaking in favor of a third party called
the obligee. It includes official recognizances, stipulations
bonds or undertakings issued by any company by virtue
and under the provisions of Act No. 536, as amended by
Act No. 2206. (n)
Suretyship defined.
Section 175 defines the contract of suretyship. It is an agreement
whereby one (usually an insurance c o m p a n y ) undertakes to
answer, under specified terms and conditions, for the debt,
default or miscarriage of another (principal or obligor), such as
failure to perform a contract or certain duties, or for breach of
trust, negligence and the like, in favor of a third party (obligee),
(see Sec. 2[1, 2].)
1
Undertakings within the scope of suretyship.
A contract of suretyhip includes official recognizances,
stipulations, bonds, or undertakings issued by any c o m p a n y by
virtue of and under the provisions of Act N o . 536, as amended
by Act No. 2206, entitled " A n Act relative to recognizances,
•There may be a co-suretyship whereby two or more parties become co-sureties in
a single bond. It is unlimited when each co-surety assumes solidary liability and limited,
when their obligation is joint, (see Arts. 1207, 1208, Civil Code.) Under Section 176, the
liability of the surety or co-sureties is solidary.
421
THE INSURANCE CODE OF THE PHILIPPINES
422
Sec. 175
stipulations, bonds, and undertakings, and to allow certain
corporations to be accepted as surety thereon."
Under Act No. 536, whenever any recognizance, stipulation,
bond, or undertaking conditioned for the faithful performance
of any duty or of any contract m a d e with public authority (i.e.,
government), or for doing or refraining from doing anything in
such recognizance, etc. specified is required or permitted by law
to be given with one surety or with two or more sureties, the
execution of the same or the guaranteeing of the performance
of the condition thereof shall be sufficient w h e n executed or
guaranteed by any corporation organized under the laws of
the Philippines and authorized to b e c o m e a surety upon official
recognizances, etc.
The Act requires that such recognizance, etc. be approved
by the head of Department, court, judge, officer, b o a r d or body,
executive, legislative, or judicial, required to approve or accept
the same. (Sec. 1 thereof.)
2
Corporate suretyship.
(1) Background. — In very ancient times, it w a s the practice
to take hostages, by treaty or force, from tribes w h o w e r e under
obligation, as a guarantee of good conduct or fulfillment of
promises. Biblical references s h o w that suretyship w a s c o m m o n
in those days, and in England, it reached such proportion by the
time of Cromwell's administration as to give rise to a b u r d e n s o m e
number of court cases. Personal sureties were u s e d exclusively
Memorandum Circular No. 622 of the Office of the President of the Philippines,
dated February 12,1973, provides:
"For the protection of the interest of the Government, all insurance companies
shall be required to present a certification of the Insurance Commissioner regarding
their financial conditions, outstanding obligations with the Government and such
other matters as may, from time to time, be required by said official, before they can
issue any bond or policy in favor of any government agency or office.
All courts, government agencies, bureaus, and government-owned or -controlled corporations dealing with insurance companies are hereby required to
furnish the Office of the Insurance Commissioner information or report of their
transactions within three (3) days from the consummation thereof, stating the: (a)
name of insurance company that issued the policy or bond; (b) name and address
of insured or principal; (c) number of policy or bond; (d) date of issue of policy or
bond; (e) amount of policy or bond; (f) outstanding obligations of or claims against
the insurance company issuing the policy or bond." (Ins. Circular dated Feb. 21,
1973.)
Sec. 176
CLASSES OF INSURANCE
Title 4. — Suretyship
423
until a society w a s formed in 1720 to insure masters against loss
through the dishonesty of their servants.
In 1853, N e w York authorized the formation of c o m p a n i e s to
accept fidelity and surety risks, b u t no c o m p a n y took advantages
of this privilege until 1876. Corporate sureties w e r e found superior
to individuals in m a n y respects and thus corporate b o n d i n g
(fidelity) and surety grew to a b i g business. (Riegel, Miller &
Williams, Jr., op. cit., pp. 385-396.)
In the early days w h e n personal sureties w e r e utilized, cosuretyship w a s c o m m o n . With the rise of corporate sureties,
reinsurance (Sec. 95.) is considered a simpler and m o r e convenient
device for spreading risks, (see S e c . 2 1 5 , par. 2.) Personal sureties
in property b o n d are currently allowed for bail b o n d s u n d e r the
Rules of Court, (see Rule 114, Sees. 1 2 , 1 3 . )
(2) Treated like insurance. — With the c h a n g e to surety b o n d s
being issued by corporations, the court b e g a n to change the
rule of strictissimi juris, w h i c h favored the surety in interpreting
the contract. Gradually, the insurance rule w h i c h applied to
"contracts of adhesion" w a s adopted. W h e n the contract is
primarily d r a w n up by one party, the benefit of the doubt goes
to the other party (the insured, or obligee) in the case of an
ambiguity. Suretyship, especially fidelity bonding, is thus treated
like (non-life) insurance in s o m e respects'. T h e b o n d s l o o k like
insurance contract, too, and they are often issued by agents w h o
write both insurance contracts and b o n d s . Regulation of b o n d s
likewise falls under the Office of the Insurance Commissioner.
(D.L. Bickelhaupt, op. cit., p. 743.)
Sec. 176. The liability of the surety or 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 terms
of the contract of suretyship in relation to the principal
contract between the obligor and the obligee, (as amended
by Pres. Decree No. 1855.) (n)
Nature of liability of surety.
The contract of a surety is evidenced by a writing called
"surety b o n d " which is essentially a promise to guarantee the
debt or obligation of the obligor.
424
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 176
(1) Solidary. — The liability of the surety or sureties under
a bond is joint and several, or solidary. This means that upon
default by the obligor in complying with his obligation as
secured by the bond, the surety b e c o m e s primarily liable to the
obligee w h o has right to demand payment under the terms and
conditions of the bond, (see Arts. 1207-1208, 2407, Civil Code.)
(2) Limited or fixed. — It is limited to the amount of the bond,
(see Republic vs. Court of Appeals, 354 S C R A 285 [2001].)
(3) Contractual. — It is determined strictly by the terms of the
(a) contract of suretyship in relation to the (b) principal contract
between the obligor and the obligee. (Sec. 176; see Zenith Insurance
Corp. vs. Court of Appeals, 119 S C R A 4 8 5 [1982].) A surety is
merely a collateral contract. Its basis is the principal contract or
undertaking which it secures. T h e obligee does not participate in
the processing and approval of the b o n d application the merits
of which it is the duty of the surety to investigate and ascertain
before it is approved. A n y misrepresentation m a d e by the b o n d
applicant cannot, therefore, defeat the rights of the obligee.
To indemnify the surety against loss, the obligor executes a
(c) third contract in favor of the surety. This contract is called an
"Indemnity Agreement." T h e (original) surety issuing the prime
bond may cede a portion or portions of the b o n d to one or m o r e
insurers or sureties under a b o n d reinsurance contract.
ILLUSTRATIVE CASE:
Bond makes surety liable to obligee for failure of obligor to collect
from a third paty.
Facts: S (surety company) issued in favor of C (obligee) a
surety bond to secure the faithful compliance by P (obligor)
of his obligations to C as C's distributor. The bond provides
that it shall be liable in case of nonpayment of any De Luxe
Products Marketing (DLPM) account in favor of C and the nonremittance of any collections due from any account booked by
DLPM.
C failed to collect from P for purchases made by DLPM
which the latter failed to pay. S alleged as a defense that the
bond of DLPM was issued in favor of P and not in favor of
DLPM.
Sec. 176
CLASSES OF INSURANCE
Title 4. — Suretyship
425
Issue: Is the surety bond liable?
Held: Yes. The condition of the bond explicitly provides
for S's liability in case of non-payment of any DLPM account.
(Edward Keller, Ltd. vs. Workmen's Insurance Co., Inc., I.C. Case
No. 378, Aug. 9,1977.)
Distinctions between suretyship
and property insurance.
They are the following:
(1) Suretyship is an accessory contract b e c a u s e it is dependent
for its existence on a principal contract, while a contract of
insurance is a principal contract in itself;
(2) In the first, there are always three parties: the surety; the
principal debtor or obligor; and the creditor or obligee, while
in the second, there are only t w o parties, the insurer and the
insured;
(3) T h e first is m o r e of a credit a c c o m o d a t i o n with the surety
assuming primary liability, while the second is generally a
contract of indemnity;
(4) In the first, the surety is entitled to reimbursement from
the principal and his guarantors for the loss it m a y suffer under
the contract, while in the second, there is no right of recovery
for the loss the insurer m a y sustain except w h e n the insurer is
entitled to subrogation. In case of subrogation, however, the
third party against w h o m the insurer m a y proceed is not a party
to a contract;
(5) Generally, a b o n d can only be cancelled by or with the
consent of the obligee or by the Commissioner or by a court of
competent jurisdiction, while a contract of insurance m a y be
cancelled unilaterally either by the insured or by the insurer on
grounds provided by law (Sec. 64.);
(6) The first requires the acceptance of the obligee before it
becomes valid and enforceable, while the second does not need
the acceptance of any third party; and
(7) The first is a risk-shifting device, the premium paid being
in the nature of a service fee, while the second is a risk-distributing
426
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 177
device, the premium paid being considered a ratable contribution
to a common fund, (see Sec. 2.)
Distinctions between suretyship
and guaranty.
By guaranty, a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so. (par. 1, Art. 2047, Civil Code.) T h e
distinctions between a surety and a guarantor are as follows:
(1) The surety assumes liability as a regular party to the
undertaking, while the liability of the guarantor depends u p o n
an independent agreement to pay if the primary debtor fails to
do so;
(2) The surety is primarily liable, w h i l e the guarantor is
secondarily liable; and
(3) The surety is not entitled to the benefit of exhaustion of
the debtor's assets, while the guarantor has this right to h a v e all
the property of the debtor and legal remedies against the debtor
first exhausted before he can be c o m p e l l e d to p a y the creditor.
(Art. 2058, ibid.)
It would then follow that "while a surety undertakes to p a y
if the principal does not pay, the guarantor b i n d s h i m s e l f to p a y if
the principal cannot pay." (Machette vs. Hospicio de S a n J o s e &
Fidelity & Surety Co., 43 Phil. 2 9 7 [1922].) In short, the surety is
considered in law as being the s a m e party as the principal debtor
in relation to the latter's obligation.
Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and
until the premium therefor has been paid, except where
the obligee has accepted the bond, in which case the bond
becomes valid and enforceable irrespective of whether or
not the premium has been paid by the obligor to the surety; Provided, That if the contract of suretyship or bond is
not accepted by, or filed with the obligee, the surety shall
collect only a reasonable amount, not exceeding fifty per
Sec. 177
CLASSES OF INSURANCE
Title 4. — Suretyship
427
centum of the premium due thereon as service fee plus the
cost of stamps or other taxes imposed for the issuance of
the contract or bond; Provided, however, That if the nonacceptance of the bond be due to the fault of the surety, no
such service fee, stamps or taxes shall be collected.
In the case of a continuing bond, the obligor shall pay
the subsequent annual premium as it falls due until the
contract of suretyship is cancelled by the obligee or by the
Commissioner or by a court of competent jurisdiction, as
the case may be. (n)
P a y m e n t of p r e m i u m s .
T h e rules are as follows:
(1) T h e p r e m i u m b e c o m e s a debt as s o o n as the contract of
suretyship or b o n d is perfected and delivered to the obligor (see
Sec. 77.);
(2) T h e contract of suretyship or b o n d i n g shall not be valid
and binding unless and until the p r e m i u m therefor has b e e n
paid;
(3) W h e r e the obligee h a s accepted the b o n d , it shall be valid
and enforceable notwithstanding that the p r e m i u m has not b e e n
paid (see Philippine Pryce A s s u r a n c e Corp. vs. Court of Appeals,
230 S C R A 164 [1994].);
3
(4) If the contract of suretyship or b o n d is not accepted by, or
filed with the obligee, the surety shall collect only a reasonable
amount;
(5) If the non-acceptance of the b o n d be due to the fault or
negligence of the surety, no service fee, stamps, or taxes imposed
shall be collected by the surety; and
(6) In the case of a continuing b o n d (for a term longer than
one year or with no fixed expiration date), the obligor shall pay
the subsequent annual premium as it falls due until the contract
is cancelled. (Sec. 177.)
The premium is the consideration for furnishing the bond
or the guaranty and the obligation to pay the same subsists for
'Sections 64 and 77 refer to insurance in general Section 177 specifically governs
suretyships. (AFP General Insurance Corp. vs. Molina, 556 SCRA 630 [2008].)
428
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 177
as long as the liability of the surety shall exist. (Reparations
Commission vs. Universal Deep-Sea Fishing Corp., 83 S C R A
764 [1978]; Arranz vs. Manila Fidelity & Surety Co., 101 Phil. 272
[1957].)
ILLUSTRATIVE CASES:
1. Right of principal not to pay premium where surety fails or
refuses to pay loan and interest.
Facts: Under the terms of the contract of suretyship, the
obligation of S (surety) is that D (principal) pay C (creditor) the
loan and the interest thereon, and that S shall be relieved of its
obligation when the loan secured is paid. In the contract, C was
given the right to sue D, or the latter and S at the same time.
Issue: Can D excuse himself from the payment of the
premium on the bond upon the failure or refusal of S to pay the
loan and interest?
Held: No. S did not promise D that it will pay the loan
contracted by D for the latter's benefit. Such a promise is not
implied by law either. D, therefore, cannot claim that there has
been a breach on the part of S of any obligation it has made or
undertaking under the suretyship contract.
The failure or refusal of S to pay the debt for D's account
did not have the effect of relieving D of his obligation to pay
the premiums on the bond furnished. As long as the loan and
interest remain unpaid, S continues to be bound to C, and as
a corollary, its right to collect the premiums on the bond also
continues. (Arranz vs. Manila Fidelity & Surety Co., supra.)
2. Liability of principal for renewal premiums after termination
of contract of suretyship.
Facts: S issued a surety bond in behalf of D and in favor of
C, in consideration of which D and E executed an indemnity
agreement whereby, among other things, they severally
promised to pay S in advance the premium for each period of
12 months while the surety bond or any renewal thereof was in
effect. About five (5) days before the expiration of the liability
on the bond, C filed a civil case against S and D for the loss C
allegedly suffered as a direct consequence of the failure of D to
comply with its contract.
Sec. 177
CLASSES OF INSURANCE
Title 4. — Suretyship
429
Upon the expiration of the 12-month life of the bond, S
made a demand for the payment of the renewal premiums.
According to S, as long as the bond is in full force and effect, the
principal (D) should pay the corresponding renewal premium,
for if the case is decided against S, it must pay the face value of
its bond, and yet it is barred from collecting any consideration
for the use of its bond during the pendency of the case.
Issue: Is D liable to pay the renewal premiums?
Held: No, since D opted not to renew the contract. More
specifically, where a contract of surety is terminated under its
terms, the liability of the principal for premiums after such
termination ceases notwithstanding the pendency of a lawsuit
to enforce a liability that accrued during its stipulated lifetime.
(Capital Ins. & Surety Co., Inc. vs. Ronquillo Trading, 123 SCRA
526 [1983].)
Types of surety b o n d s .
4
S o m e of the major types of surety b o n d s are:
(1) Contract bonds. — T h e s e b o n d s are connected with
construction and supply contracts. T h e y are for the protection of
the owner against a possible default by the contractor to comply
with his contract or his possible failure to pay material men,
laborers, and sub-contractors. T h e position of surety, therefore, is
to answer for a failure of the principal to'perform in accordance
with the terms and specifications of the contract.
There m a y be two bonds:
(a) Performance bond. — O n e
performance of the contract; and
covering
the
faithful
(b) Payment bond. — O n e covering the payment of
laborers and material m e n (Wyatt & Wyatt, Business Law:
Principles and Cases, 2nd Ed. [1903], pp. 895-896.);
(2) Fidelity bonds. — They pay an employer for loss growing
out of a dishonest act of his employee. For the purposes of
underwriting, they are classified as:
(a) Industrial bond. — O n e required by private employers
to cover loss through dishonesty of employees; and
4
For rules and regulations governing the issuance of bonds, see Appendix "G.
THE INSURANCE CODE OF THE PHILIPPINES
430
Sec. 177
(b) Public official bond. — O n e required of public officers
for the faithful performances of their duties (see D.L.
Bickelhaupt, op. cit., pp. 748-749.) and as a condition of
entering upon the duties of their offices. It ordinarily includes
all officers w h o have custody of public funds. T h e officials, to
be sure, would be individually liable for any loss. T h e official,
however, is not always in a position to m a k e good the loss.
The requirement of an official bond, therefore, is to protect
public funds. (Wyatt & Wyatt, op. cit., p. 896.)
Note that in the case of a fidelity bond, the obligation of the
employee to be honest with his employer is implied rather than
contractual. T h e ordinary surety bond, on the other hand, obligates
the surety to hold himself responsible for the performance of an
express obligation of the principal (D.L. Bickelhaupt, op. cit., p.
744.); and
(3) Judicial bonds. — T h e y are those w h i c h are required in
connection with judicial proceedings. S o m e of the m o s t c o m m o n
kinds are injunction bonds, attachment bonds, replevin bonds,
bail bonds, and appeal bonds. T h e purpose of requiring a
litigant to furnish a judicial b o n d is to indemnify the adverse
party against damages resulting from the proceeding, (see Wyatt
and Wyatt, op. cit., p. 896.)
5
It is a settled doctrine that the conditions of a b o n d specified
and required in the provisions of the statute or regulation
providing for the submission of the b o n d are incorporated or
built into all bonds tendered under that statute or regulation,
5
In a Memorandum to all Clerks of Court and Branch Clerks of Court, dated September 10,1993, the Court Administrator of the Supreme Court prescribed the guidelines
before approval by the Judge concerned of all applications for bail/judicial bonds.
As a parallel move with that of the Supreme Court to stop the proliferation of spurious bail bonds and other judicial bonds, the following rules were issued by the Insurance
Commission to govern the issuance of judicial bonds: (1) Judicial bonds can only be issued by the head office or the duly registered (with the Insurance Commission) branches
and district offices of insurance companies to the exclusion of others; (2) The insurance
company issuing judicial bonds shall confirm every first ten (10) days of the following
month, the bonds it had issued to a particular court and shall request said court for a return confirmation of the same, both copy furnished the Supreme Court and the Insurance
Commission; and (3) Requests for verification coming from the courts shall be acted upon
by the concerned insurance company within two (2) days from receipt of the request. (Ins.
Cir. Letter No. 24-93, dated Sept. 24,1993.)
Sec. 178
CLASSES OF INSURANCE
Title 4. — Suretyship
431
even though not there set out in printer's ink. (Finman General
Assurance Corp. vs. Inocencio, 179 S C R A 4 8 0 [1989].)
Sec. 178. Pertinent provisions of the Civil Code of
the Philippines shall be applied in a suppletory character
whenever necessary in interpreting the provisions of a
contract of suretyship, (n)
Pertinent Civil Code provisions applicable
in a suppletory character.
Article 2047 of the Civil C o d e provides:
" B y g u a r a n t y a person called the guarantor b i n d s h i m s e l f
to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person b i n d s h i m s e l f solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title 1 of this
B o o k shall be observed. In such case, the contract is called a
suretyship."
T h e second paragraph states the l a w applicable to the
contract of suretyship. It e m b r a c e s Articles 1207 to 1222 of Section
4 (Joint and Solidary Obligations), Chapter 3 (Different Kinds of
Obligations), Title 1 (Obligations) of the Civil C o d e . In a solidary
obligation, the solidary debtor himself is the principal debtor.
W h e n e v e r applicable, the provisions on guaranty from Articles
2047 to 2084 of the Civil C o d e also apply to suretyship.
T h e above provisions of the Civil C o d e shall be applied in
a suppletory character w h e n e v e r necessary in interpreting the
provisions of a contract of suretyship. (Sec. 178.)
— oOo —
Title 5
LIFE INSURANCE*
Sec. 179. Life insurance is insurance on human lives
and insurance appertaining thereto or connected therewith, (n)
Sec. 180. An insurance upon life may be made payable
on the death of the person, or on his surviving a specified
period, or otherwise contingently on the continuance or
cessation of life.
Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance
contract for purposes of this Code.
In the absence of a judicial guardian, the father, or in
the latter's absence or incapacity, the mother, of any minor,
who is an insured or a beneficiary under a contract of life,
health, or accident insurance, may exercise, in behalf of
said minor, any right under the policy, without necessity of
court authority or the giving of a bond, where the interest
of the minor in the particular act involved does not exceed
twenty thousand pesos. Such right may include, but shall
not be limited to obtaining a policy loan, surrendering the
policy, receiving the proceeds of the policy, and giving the
minor's consent to any transaction on the policy, (a)
Life insurance defined.
(1) Based on Section 180, life insurance m a y be d e n n e d as
insurance payable on the death' of a person, or on his surviving
*"Life and Health Insurance" under the Insurance Act. (Act No. 2427.)
'"Sec. 3. Disputable presumptions. — The following presumptions are satisfactory if
uncontradicted, but may be contradicted and overcome by other evidence: x x x x after
432
Sees. 179-180
CLASSES OF INSURANCE
Title 5. — Life Insurance
433
a specified period, or otherwise contingently on the continuance
or cessation of life.
(2) It has also b e e n defined as a mutual agreement by which a
party agrees to p a y a given s u m on the h a p p e n i n g of a particular
event contingent on the duration of h u m a n life, in consideration
of the payment of a smaller s u m immediately, or in periodical
payments by the other party. (44 C.J.S. 484.)
(3) Essentially, life insurance is a contract to m a k e specific
payments to pay to a certain person, the beneficiary, u p o n the
death of a person w h o s e life h a s b e e n insured.
Parties involved in a policy of life
insurance.
T h e cast of characters involved in a policy of life insurance
other than the insurer includes:
(1) T h e owner of the polio/, w h o h a s the p o w e r to n a m e or
change the beneficiary, to assign the policy (under certain
conditions), cash it in for its surrender value, or use it as collateral
in obtaining a loan; and the obligation to pay the premiums;
(2) T h e person w h o s e life is the subject of the policy, also
k n o w n as the cestui que vie; a n d
(3) T h e beneficiary to w h o m the proceeds are paid.
O n e person might occupy all three positions by n a m i n g his
estate as beneficiary; or each of the three positions m a y be held
by a separate party. (J.F. Dobbyns, op. cit., p. 71.)
an absence of seven years, it being unknown whether or not the absentee still lives, he
is considered dead for all purposes, except for those of succession. The absentee shall
not be considered dead for the purpose of opening his succession till after an absence of
ten years. If he disappeared after the age of seventy-five years, an absence of five years
shall be sufficient in order that his succession may be opened. The following shall be
considered dead for all purposes, including the division of the estate among the heirs: (1)
A person on board a vessel lost during a sea voyage, or an aircraft which is missing, who
has not been heard of for four years since the loss of the vessel or aircraft; (2) A member
of the armed forces who has taken part in armed hostilities, and has been missing for four
years; (3) A person who has been in danger of death under other circumstances and his
existence has not been known for four years x x x." (Rule 131, Rules of Court.)
434
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 179-180
Nature of life insurance.
The nature of an insurance contract as one of indemnity is
not, or is not altogether, true as to life insurance.
(1) Liability absolutely certain. — T h e ordinary life insurance
contemplates the certain payment of a specified s u m at an
uncertain time; and the premiums are so calculated that in
accordance with the insured's expectancy of life under a specified
mortality table, there will be paid to the insurer in premiums and
interest thereon, a s u m equal to an amount to b e c o m e due on the
death of the insured plus the expense of administration.
(a) In case of fire and marine insurance, the insurer takes
merely a risk that a loss m a y take place within a given term,
it being k n o w n by experience that such losses do not occur in
a great majority of cases.
(b) In ordinary life insurance, the event u p o n which the
payment is to be m a d e is absolutely certain to h a p p e n at s o m e
future time. In the average case, the insurer only pays b a c k
the m o n e y that has been given to h i m to h o l d in quasi trust for
the insured plus interest and less expenses. O n l y in the case
of premature death does the insurance p a y m e n t e m b r a c e the
element of indemnity. (Vance, op. cit., pp. 105-106.)
(2) Amount of insurance generally without limit. — A n o t h e r
reason w h y life insurance m a y not be regarded as a contract of
indemnity exists in the difficulty to be encountered in fixing any
sort of pecuniary value u p o n life. It is a well-recognized principle
that, granting the existence of an actual interest, except w h e n the
interest grows out of an obligation to pay a fixed s u m of money,
there is no limit as to the a m o u n t of insurance w h i c h m a y legally
be placed upon the life of any person even though that person
might be one whose life w a s rather a burden u p o n the party in
interest than a benefit possessing a pecuniary value, (ibid.) W h e n
the insured dies, the insurer m u s t pay face the a m o u n t of the
policy (or more) to the n a m e d beneficiary.
(3) Life policy is a valued policy. — A policy of life insurance
is treated substantially as a valued policy (see Sec. 183.) it being
regarded a misnomer to speak of death as a "loss" in the sense
in which the burning of a building is spoken of as a " l o s s "
Sees. 179-180
CLASSES OF INSURANCE
Title 5. — Life Insurance
435
(Wahl vs. Interstate B u s i n e s s m e n ' s Acci. Assn., 297 N.W. 395.)
because there is no w a y to measure the value of a h u m a n life.
Life insurance policies are "valued" by the purchaser w h e n
the policy is purchased and the value placed on the insured is
basically decided by the a m o u n t the purchaser is willing to p a y
in premiums. The a m o u n t is determined by the factors affecting
the life of the insured such as his age, health, a n d occupation.
(4) Direct pecuniary loss not required. — W h e n settlement is
made, the beneficiaries are under no obligation to demonstrate,
as a condition precedent to recovery, a direct pecuniary loss as a
result of the death of the insured.
(a) A life policy is not a m e r e contract of indemnity, but
is more accurately characterized as a form of investment. It
is a contract to p a y the beneficiary a certain s u m of m o n e y
to meet the financial crisis w h i c h m a y be caused in the event
of death of the insured or any disability resulting in loss of
earning p o w e r provided certain conditions are performed
by the insured. (Victor vs. Louise Cotton Mills, 61 S.E. 648.)
T h e measure of recovery is, therefore, the face a m o u n t of the
policy and not the value of the insured's life.
2
(b) Here, it is the difficulty of deterrnining precise
values that prevents life insurance- contracts from being,
strictly speaking, based upon indemnity. O n e cannot say,
for example, that the life of a person is worth (or not worth)
precisely P50,000.00, or P100,000.00, or P1,000,000.00. Thus,
the life insurance contract agrees to pay a certain stated
amount rather than an a m o u n t determined after the loss to
be a repayment for the loss. There can be no question raised
by the insurer paying the loss as to whether or not the loss
2
Life insurance (except term insurance) is primarily thought of as an investment
by the insured. In the usual case, life insurance is purchased to provide security to the
insured's beneficiaries in the event the insured suffers an early death. In a real sense,
the insurance is designed to "indemnify" the beneficiaries for the loss they suffered as a
result of being deprived of the earning power of the insured. However, it is unrealistic to
place a precise value on human life. Indeed, the most important qualities of life are incapable of being measured in economic terms. Thus, life insurance is not pure indemnity
insurance, and property insurance has more indemnity characteristics than life insurance. (R.H. Jerry, II, op. cit., p. 181.)
THE INSURANCE CODE OF THE PHILIPPINES
436
Sees. 179-180
of life actually resulted in an equivalent economic loss to the
insured or his family. (D.L. Bickelhaupt, op. cit., pp. 89-90.)
3
(c) It is frequently the case that at the time the policy
becomes payable because of the death of the insured his value
as a producer has ceased. This circumstance has no bearing
whatever upon the right of the beneficiary to participate fully
in the policy in accordance with its terms. T h e contract of
life insurance pays a certain s u m of m o n e y on the loss. (Ibid.,
224.) There is no attempt to put a monetary value on life.
Life insurance distinguished f r o m fire
and marine insurance.
(1) T h e former is not a contract of indemnity (save that effected
by a creditor on life of debtor) b u t a contract of investment, while
the latter are contracts of indemnity (supra.);
(2) T h e former is always regarded as a v a l u e d policy (Sec.
183.), while the latter m a y be o p e n or valued;
(3) A life policy m a y be transferred or assigned to any person
even if he has no insurable interest (Sec. 181.), w h i l e in the case
of a fire or marine policy, the transferee or assignee m u s t h a v e an
insurable interest in the thing insured;
(4) Unless expressly required, the consent of the insurer is
not essential to the validity of the assignment of a life policy (Sec.
182.), while such consent, in the absence of waiver by the insurer,
is essential in the assignment of a fire or m a r i n e policy;
(5) In the former (save that effected by a creditor on life
of debtor), insurable interest in the life or health of the person
insured need not exist after the insurance takes effect or w h e n
the loss occurs, while in the latter, the insurable interest in the
3
Wrule one individual may procure insurance on another's life for the purpose of
indemnifying himself against actual loss or damage anticipated from the latter's death,
the promise of the insurer is not a promise to pay loss or damage but a promise to pay
a fixed sum if and when a certain event happens. The amount named in a life insurance
policy is not treated as the upper limit of recovery; it is the amount payable, no more and
no less. Not being a contract of indemnity, the insurer is not entitled to subrogation, i.e.,
to be reimbursed by a wrongdoer who caused the death of the person insured. (E.W. Patterson, op. cit., pp. 154-155.)
Sees. 179-180
CLASSES OF INSURANCE
Title 5. — Life Insurance
437
property insured m u s t exist not only w h e n the insurance takes
effect but also w h e n the loss occurs (Sees. 1 9 , 1 8 1 . ) ;
(6) In the former, insurable interest n e e d not h a v e any legal
basis, while in the latter, insurable interest m u s t h a v e a legal
basis (see Sec. 19.);
(7) In the former, the contingency that is contemplated (i.e.,
death) is a certain event, the only uncertainty being the time
w h e n it will take place, while in the latter, the contingency
insured against m a y or m a y not occur;
(8) In the former (unless written only for a term), the liability
of the insurer to m a k e p a y m e n t is certain, the only uncertain
element being w h e n such p a y m e n t m u s t be m a d e , while in the
latter, liability is uncertain b e c a u s e the h a p p e n i n g of the peril
insured against is uncertain; in other words, in the former, the
amount insured will h a v e to be paid sooner or later, while in the
latter, the amount insured m a y not h a v e to be paid;
(9) T h e former, although it m a y be terminated by the insured,
cannot be cancelled by the insurer, and, therefore, is usually a
long-term contract, while the latter m a y be cancelled by either
party and is usually for a term of o n e (1) year (see Sees. 65, 66.);
(10) In the former, the " l o s s " to the beneficiary caused by
the death of the insured can s e l d o m be measured accurately in
terms of cash value, while the reverse is generally true of the loss
of property; and
(11) In the former, the beneficiary is under no obligation to
prove actual financial loss as a result of the death of the insured
in order to collect the insurance, while in the latter, the insured
is required to submit proof of his actual pecuniary loss as a
condition precedent to collecting the insurance, (see Title 10.)
Under Article 2012 of the Civil Code, "any person w h o is
forbidden from receiving any donation under Article 739 cannot
be named beneficiary of a life insurance policy by the person w h o
cannot make any donation to him, according to said article." (see
Sec. 11.)
THE INSURANCE CODE OF THE PHILIPPINES
438
Sees. 179-180
Exemption of life insurance policies
from execution.
In an action against the insured under a life insurance policy,
may the policy be attached and sold at public auction?
Under the Rules of Court, all moneys, benefits, privileges
or annuities accruing or in any m a n n e r growing out of any
life insurance are exempt from execution (Rule 3 9 , Sec. 12[k]
thereof.) regardless of the amount of the annual p r e m i u m s paid.
Before the amendment of the provision, if they exceed P500.00 "a
like exemption shall exist which shall bear the s a m e proportion
to the moneys, benefits, privileges, or annuities so accruing or
growing out of such insurance that said P500.00 bears to the
whole premiums paid." By w a y of illustration, if the p r e m i u m s
paid annually amount to P l , 5 0 0 . 0 0 , only 1 / 3 of the life insurance
benefits are exempt from execution.
Incidentally, it has b e e n held that statutes e x e m p t i n g
proceeds of life insurance from claims of creditors are regarded
as exemption laws, and not as part of the insurance laws of the
State, nor as designed simply to protect the insurer from harassing
litigation, and should be construed liberally and in the light of,
and to give effect to, their purpose of enabling an individual to
provide a fund after his death for his family w h i c h will be free
from the claims of creditors. (Gallardo vs. M o r a l e s , 107 Phil. 9 0 3
[1960], citing 35 C.J.S. 53-54.)
Application of e x e m p t i o n to accident
insurance.
(1) When accident insurance regarded as
life insurance. —
Generally speaking, a life insurance is distinct and different
from an accident insurance, (see S e c . 174.) However, w h e n one
of the risks insured in the latter is the death of the insured by
accident, then such accident insurance m a y also be regarded as a
life insurance.
1
4
No insurance company may be authorized to transact in the Philippines the business of life and non-life insurance concurrently, unless specifically authorized to do
so; Provided, That the terms "life" and "non-life" insurance shall be deemed to include
health, accident and disability insurance. (Sec. 187, par. 8.)
Sees. 179-180
CLASSES OF INSURANCE
Title 5. — Life Insurance
439
For this reason, and b e c a u s e the above-quoted provision of
the Rules of Court m a k e s reference to "any life insurance," the
exemption there established applies to ordinary life insurance
contracts, as well as to those w h i c h although intended primarily
to indemnify for risks arising from accident, likewise, insure
against loss of life due either to accidental causes, or to the
willful and criminal act of another, which, as such, is not strictly
accidental in nature. (Gallardo vs. Morales, supra.)
(2) Burden of proof. — In an accident insurance, the insured's
beneficiary has the b u r d e n of proving that the cause of death is
due to the covered peril. O n c e that fact is established, the b u r d e n
then shifts to the insurer to s h o w a n y e x c e p t e d peril that m a y
have b e e n stipulated by the parties. An "accident i n s u r a n c e " is
not thus to be likened to an ordinary life insurance w h e r e the
insured's death, regardless of the cause thereof, w o u l d n o r m a l l y
be compensable.
T h e ordinary life insurance is akin to an "all-risks" coverage
in property insurance, w h e r e the insurer, on the aspect of burden
of proof, has merely to s h o w the condition of the property
insured w h e n the policy attaches a n d the fact of loss or d a m a g e
during the period of the policy and w h e r e thereafter, the burden
would be on the insurer to s h o w any " e x c l u d e d peril." W h e n the
insured risk is specified as in an accident insurance policy (e.g.,
for bodily injury caused solely by violent accidental external
and visible m e a n s resulting in death or disability), it lies with
the claimant of the insurance proceeds to initially prove that the
loss is caused by the covered peril. (Vda. de Gabriel vs. Court of
Appeals, 264 S C R A 137 [1996].)
Kinds of life insurance policies.
The kinds of individual life policies are limited in n u m b e r
only by the ingenuity of the actuaries and other officials of the
numerous competing companies insuring against loss of life, and
only the more important and usual kinds need be mentioned.
5
Trie policies may be: (1) medical cases or those which have been issued after consideration of a medical report upon the life to be insured, in addition to the personal
statement in the proposal for insurance; or (2) non-medical cases or those which have been
issued after consideration of the personal statement in the proposal for insurance, without obtaining a medical report on the life of the insured, (see Cir. Letter, Oct. 29,1985.)
440
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 179-180
(1) Ordinary life policy is one under the terms of which the
insured is required to pay a certain fixed premium annually
or at more frequent intervals throughout his entire life and
the beneficiary is entitled to receive payment under the policy
only after the death of the insured. M a n y insurance companies
consider this policy paid-up w h e n the insured reaches the age
of 100. Thus, the ultimate payment of the insurance proceeds
(either at that age or at death) is as certain as death itself.
An alternative form of payment, however, can c o m e about
by the inclusion of an investment feature through the p a y m e n t
of the "cash surrender value" of the policy in case it is cancelled
by the owner or it lapses through n o n p a y m e n t of premiums.
Sometimes, it permits the insured to b o r r o w against the value
without surrender of the policy. This policy is for the w h o l e
duration of life. It carries the lowest rate of p r e m i u m .
6
This kind of policy is also k n o w n as whole life or regular life, or
straight life, or cash-value insurance.
(2) Limited payment life policy is one under the terms of w h i c h
the premiums are payable only during a limited period of years,
usually ten, fifteen, or twenty. W h e n the specified n u m b e r of
premium payments h a v e b e e n m a d e , the insurance is fully paid
for. It is like ordinary life policies in that it is p a y a b l e only at
the death of the insured. T h e insured can take advantage of the
investment aspect of the policy. If the insured should die within
the specified period, his beneficiary is entitled to all the proceeds
of the policy without any liability for the unpaid p r e m i u m s .
Because of the limited n u m b e r of p a y m e n t s to be m a d e by the
insured, the premiums are proportionately higher. This insurance
does have a cash surrender value.
This kind of policy is also called limited premium insurance
policy.
'The policy is really a combination of a term insurance and a savings plan. A part of
every premium paid covers the cost of insurance and the remainder is applied to the savings component of the policy. Thus, it is more expensive than term insurance. However,
die premium does not increase over time. The amount of savings is called the policy's
"cash value" or "surrender value" which increases in later years because a bigger proportion of the premium goes into savings, (see Sec. 227.)
Sees. 179-180
CLASSES OF INSURANCE
Title 5. — Life Insurance
441
(3) Term insurance policy is o n e w h i c h provides coverage only
if the insured dies during a limited period. (Vance, op. cit., p. 63.)
It is an insurance for a fixed or a specific term, such as two, five,
or ten years. If the insured dies within the period specified, the
policy is paid to the beneficiary. If he survives the period, the
contract terminates or expires at the e n d of the time period. T h e
premium paid is levied during the specified terms and increases
with each renewal term (43 A m . Jur. 2 d . 67.) or the a m o u n t of
coverage declines, and this is b e c a u s e as a person ages, the risk
of death increases.
T h e p r e m i u m is lower than in the case of straight life insurance
because of the possibility that the insurer m a y not be obliged to
pay anything in proceeds w h a t s o e v e r if the insured survives the
term. Consequently, this form of life insurance is not considered
to carry with it the e l e m e n t of investment. It has no loan value.
There is generally no provision for p a y m e n t of a cash surrender
value or investment value u p o n surrender or lapse of the policy.
T h e insured m a y be given the option to convert the policy to one
of whole life or e n d o w m e n t life.
This kind of insurance is also k n o w n as temporary insurance.
It is essentially pure insurance, i.e., it provides life insurance
alone.
7
(4) Endowment policy is o n e under the terms of which
the insurer binds himself to pay a fixed s u m to the insured if
he survives for a specified period (maturity date stated in the
policy), or, if he dies within such period, to s o m e other person
indicated. T h e p r e m i u m is higher b e c a u s e the cash values of
the policy grow more rapidly. This kind of policy differs from
the limited payment life policy in that in the case of the latter,
the policy is paid only u p o n the death of the insured. Here, the
insured stands a chance of being paid the proceeds of the policy
while still alive. After receiving the face amount of the policy,
all coverage will terminate. It has an increasing cash surrender
value but premiums are high, as payment is required even after
the end of the term if the insured is still living. The proceeds on
7
Another type of Insurance is universal life that combines some aspects of term Insurance and some aspects of whole life Insurance.
THE INSURANCE CODE OF THE PHILIPPINES
442
Sees. 179-180
maturity can be paid either in a lump sum or as an annuity. This
type represents both term insurance and a form of annuity (right
is to receive, for a definite term, fixed, periodical payments).
This type of policy is thus useful in retirement planning.
For the purpose of the Insurance Code, endowment contracts
shall be considered life insurance contracts. (Sec. 180, par. 2.)
The Insurance Code contains special provisions governing
group life insurance (see Sees. 50, last par., 228.) and industrial
life insurance. (Sees. 229, 330, 231.)
Scope of life insurance.
The loss of earning p o w e r by persons results from their
death, injury, illness, old age, or loss of e m p l o y m e n t . T h e
branches of insurance covering s o m e of these contingencies h a v e
not, it seems, acquired n a m e s in keeping with their purposes, so
that death is a contingency covered by life insurance; injury or
sickness is a contingency covered by health insurance; old age is
insured by annuities or pensions; and u n e m p l o y m e n t insurance
indemnifies for the loss of part of i n c o m e and is a type of social
insurance.
(1) Life insurance, in its simplest form, undertakes to protect
the insured's family, creditors, or others against pecuniary loss
which may be the outgrowth of the death of the insured. T h e
loss occasioned by death against which life insurance attempts to
provide protection is the cessation of the current earning p o w e r of
the insured. Applying an e c o n o m i c interpretation to the concept
of death, the permanent loss of current earning capacity a m o u n t s
to an "economic death." F r o m the e c o n o m i c standpoint, death
may be:
(a) Actual death. — This classification represents the socalled "casket death";
(b) Living death. — This involves permanent disability;
and
(c) Retirement death. — Living b e y o n d the period of
earning capacity represents this classification of death.
(2) Health, accident and disability insurance provides benefits
for hospital or medical expenses, or for loss of time or earning
Sees. 179-180
CLASSES OF INSURANCE
Title 5. — Life Insurance
443
power because of injury or illness. W h i l e health insurance is
written by life insurers, injury and illness are also viewed as
casualties (see D.L. Bickelhaupt, op. cit., p. 70.), that is, both as
life and non-life insurance; hence, such policies m a y be issued by
either life or non-life insurance companies.
Like life insurance contracts, health insurance contracts that
provide a specific periodic i n c o m e to disabled persons are not
contracts of indemnity. But those that cover medical expenses are
contracts of indemnity, (see Sees. 1 7 4 , 1 8 1 , 1 8 3 . ) In these contracts,
only medical expenses incurred by the insured are paid. (Riegel,
Miller and Williams, Jr., op. cit., p. 58.) Health, accident and
disability insurance is d e e m e d by law as both life and non-life,
(see Art. 187, par. 8.)
Contract of life annuity defined.
" B y the aleatory contract of life annuity, the debtor binds himself
to pay an annual pension or i n c o m e during the life of one or more
determinate persons in consideration of a capital consisting of
m o n e y or other property, w h o s e ownership is transferred to h i m
at once with the burden of the i n c o m e . " (Art. 2 0 2 1 , Civil Code. )
8
8
The following are the other provisions of the Civil Code on life annuity:
Art. 2022. The annuity may be constituted upon the life of the person who gives the
capital, upon that of a third person, or upon the lives of various persons, all of whom
must be living the time the annuity is established.
It may also be constituted in favor of the person or persons upon whose life or lives
the contract is entered into, or in favor of another or other persons. (1803a)
Art. 2023. Life annuity shall be void if constituted upon the life of a person who was
already dead at the time the contract was entered into, or who was at that time suffering
from an illness which caused his death within twenty days following said date. (1804)
Art. 2024. The lack of payment of the income due does not authorize the recipient of
the life annuity to demand the reimbursement of the capital or to retake possession of the
property alienated, unless there is a stipulation to the contrary; he shall have only a right
judicially to claim the payment of the income in arrears and to acquire a security for the
future income, unless there is a stipulation to the contrary. (1805a)
Art. 2025. The income corresponding to the year in which the person enjoying it dies
shall be paid in proportion to the days during which he lived; if the income should be
paid by installments in advance, the whole amount of the installment which began to run
during his life shall be paid. (1806)
Art. 2026. He who constitutes an annuity by gratuitous title upon his property, may
provide at the time the annuity is established that the same shall not be subject to execution or attachment on account of the obligations of the recipient of the annuity. If the
annuity was constituted in fraud of creditors, the latter may ask for the execution or attachment of the property. (1807a)
444
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 179-180
The annuity concept.
The annuity has been called the "upside-down application
of the life insurance principle." This concept is based on the
notion that the purpose of life insurance is the scientific creation
of an estate, whereas the purpose of the annuity is the scientific
liquidation of an estate.
Under a life insurance contract, the estate is created at death.
Under the annuity contract, the estate is fully liquidated by death.
Reduced to its ultimate simplicity, the idea can be expressed by
comparing the nature of the t w o types of agreements. In exchange
for his premium, the purchaser of life insurance expects his
insurer to pay his beneficiary a specified s u m u p o n his death. For
his premium, the purchaser of an annuity expects his insurer to
pay him a periodic i n c o m e as long as he lives. Thus, under a life
insurance contract, the insurer starts paying u p o n the death of
the insured, whereas under an annuity contract, the insurer stops
paying upon the death of the insured. ("Contracts-Annuities,"
by Robert I. Mehr, in L H I H , p. 78.)
Annuity contracts distinguished f r o m
ordinary life policies.
Contracts of annuities differ materially from ordinary life
policies and are not generally regarded as such. B u t u n d e r
the law, they are considered, like e n d o w m e n t contracts, as life
insurance contracts. (Sec. 180, par. 2.) T h e fact remains, however,
that annuity and insurance are opposites; in this combination,
one neutralizes the risk customarily inherent in the other.
(1) An annuity contract, unlike the life insurance contract,
insures against e c o n o m i c problems resulting from a long life,
rather than an early death.
(2) F r o m the insurer's viewpoint, insurance looks to longevity, while annuity, to transiency.
(3) Under the ordinary life insurance policy, the insured
pays to the insurer an annuity and his beneficiary receives at the
Art. 2027. No annuity shall be claimed without first proving the existence of the
person upon whose life the annuity is constituted. (1808)
Sec. 180-A
CLASSES OF INSURANCE
Title 5. — Life Insurance
445
insured's death the l u m p s u m payment. U n d e r the usual form
of annuity, the l u m p s u m is paid to the insurer immediately and
the annuitant receives the annuity p a y m e n t s as long as he lives.
(Vance, op. cit., p. 1020.)
(4) An annuity appears m o r e like an " i n v e s t m e n t " instead
of an insurance, w h i c h m a y or m a y not turn out to be profitable,
while life insurance has a characteristic akin to "indemnity," i.e.,
the insurer will reimburse the insured's beneficiaries a large s u m
u p o n the insured's death.
Both provide protection from a substantial risk. A person
m a y take life insurance a n d at the s a m e time enter into a contract
of annuity to provide security b o t h against the risk of premature
death and against the risk of long life.
T h e special provisions of the Civil C o d e govern primarily
such contracts.
Sec. 180-A. The insurer in a life insurance contract
shall be liable in case of suicide only when it is committed
after the policy has been in force for a period of two years
from the date of its issue or of its last reinstatement, unless the policy provides a shorter period; Provided, however, That suicide committed in the state of insanity shall
be compensable regardless of the date of commission, (as
inserted by B.P. Big. 874.)
Liability of insurer in case of suicide.
(1) When liable. — In a life insurance contract, the insurer is
liable in case of suicide in the following cases:
(a) T h e suicide is committed after the policy has been in
force for a period of two (2) years from the date of its issue or
of its last reinstatement;
(b) The suicide is committed after a shorter period (e.g.,
one year) provided in the policy although within the twoyear period; and
(c) The suicide is committed in the state of insanity
regardless of the date of commission, unless suicide is an
excepted risk.
THE INSURANCE CODE OF THE PHILIPPINES
446
Sec. 181
Note that the policy cannot provide a period longer than
two (2) years. Thus, if the policy provides for a three-year period
and the suicide is committed within said period but after two (2)
years, the insurer is liable.
(2) When not liable. — In fine, the insurer shall not be liable in
three cases:
(a) The suicide is not by reason of insanity and is
committed within the two-year period;
(b) T h e suicide is by reason of insanity b u t is not a m o n g
the risks assumed by the insurer regardless of the date of
commission; and
(c) The insurer can show that the policy w a s obtained
with the intention to c o m m i t suicide even in the absence of
any suicide exclusion in the policy.
Sec. 161. A policy of insurance upon life or health may
pass by transfer, will or succession to any person, whether
he has an insurable interest or not, and such person may
recover upon it whatever the insured might have recovered.
Right of insured to assign life
insurance policy.
(1) Insurable interest of assignee in life insurance not required. —
All life insurance policies are declared by law to be assignable
regardless of whether the assignee has an insurable interest in
the life of the insured or not. (Sun Life Assur. C o . of C a n a d a vs.
Ingersoll, 41 Phil. 331 [1921].) A provision in a contract of life
insurance denying the insured his right to assign without the
consent of the insurer will be void.
(a) T h e contract, not being one of indemnity, does not
require the insurable interest to continue as in the case of
fire insurance, (see Sec. 19.) "Life insurance has b e c o m e in
our days one of the best recognized forms of investment and
self-compelled savings. So far as reasonable safety permits,
it is desirable to give life policies the ordinary characteristics
of property." (Grigsby vs. Russel, 2 2 2 U.S.A. 49.) To deny
Sec. 181
CLASSES OF INSURANCE
Title 5. — Life Insurance
447
the right to assign a life insurance policy except to a person
having an insurable interest, is to diminish appreciably the
investment value of the contract to the owner, (see D.L.
Bickelhaupt, op. cit., p. 294.)
(b) By requiring an incipient insurable interest, the l a w
restricts the class of persons w h o m a y profit from the death of
the insured thereby reducing to a reasonably safe m i n i m u m
the dangers of wagering and of murder. (E.W. Patterson,
op. cit., p. 164.) T h e o w n e r of the policy having an insurable
interest will ordinarily protect the life of the person insured
by the discreet selection of an assignee.
(c) No insurable interest is necessary where the policy
is procured by the person w h o s e life is insured on his o w n
initiative, (see Sec. 10[a].) Since he m a y n a m e any beneficiary
he pleases in policy taken out by him, an assignment of
the policy by h i m w o u l d not be invalidated by the lack of
insurable interest of the assignee.
(2) Where assignment used as a cloak to hide an illegal scheme. —
T h e courts will not, however, permit the process of assignment
to be used as a cloak to hide an illegal intent to m a k e contracts
on h u m a n life. (Mutual Aid U n i o n vs. White, 204 S.W. 137.) T h e
usual evidence of this s c h e m e is the fact that the assignment
occurred almost immediately after the policy w a s issued.
An assignment is to be distinguished from a change in the
designated beneficiary, (see Sec. 11.)
Necessity of consent of beneficiary
to assignment.
(1) With waiver of right to change beneficiary. — In accordance
with the rule that a beneficiary of an ordinary life insurance
policy which contains an express waiver of the right to change the
beneficiary acquires a vested and absolute interest which cannot
be divested without his consent (see Sec. 11.), it is consequently
true that the insured cannot assign such a policy without the
consent of the beneficiary.
(2) Without such waiver. — On the other hand, where the
policy contains no such waiver, the insured may assign the
448
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 182
policy without the consent of the beneficiary. The beneficiary, in
the latter case, has a mere expectancy and he cannot m a k e an
assignment of the policy until his interest in the proceeds thereof
becomes absolutely fixed by the death of the insured, (see Mutual
Ben. Life Ins. Co. vs. Sweet, 222 F. 200.)
Sec. 182. Notice to an insurer of a transfer or bequest
thereof is not necessary to preserve the validity of a policy
of insurance upon life or health, unless thereby expressly
required.
Notice to insurer of transfer.
(1) Notice not required by policy. — If the policy does not
expressly require the insured to give notice of an assignment or
transfer of the policy to the insurer, such notice is not essential to
the validity of the assignment.
(2) Notice required by policy. — Of course, w h e r e notice to the
insurer is required by the provisions of the policy, an assignment
(not the policy itself) without such notice, in the absence of
waiver, shall h a v e no effect so far as the insurer is concerned.'
This means that the insurer without notice is relieved of any
responsibility in case payment is m a d e to the beneficiary before
receipt by the insurer of the notice. E v e n without notice to the
insurer, the assignment is binding u p o n the assignor (insured)
and the assignee.
(3) Assignment with consent of insurer. — W h e t h e r or not the
policy expressly requires that notice of an assignment or transfer
must be given to the insurer, the assignment with the consent
of the insurer creates, in effect, a novation, (see Art. 1 2 9 1 , Civil
Code.) T h e assignee takes the n e w l y formed contract free of
defenses available to the insurer against the insured (assignor)
under the old contract.
'A literal interpretation of Section 182 makes the notice, when expressly required,
"necessary to preserve validity of the policy." A policy of insurance upon life or health
is declared by Section 181 as assignable. Since the consent of the insurer is not necessary
to the validity of the assignment, the absence of notice to the insurer of the assignment
cannot affect the validity of the policy itself. A contract of property insurance is not assignable without the consent of the insurer.
Sec. 183
CLASSES OF INSURANCE
Title 5. — Life Insurance
449
EXAMPLE:
X insured his life, naming his estate as the beneficiary.
Later, he assigned the policy to Y who has no insurable interest
in his life. X died without notifying the insurer of the transfer. A
clause in the policy expressly provides that no assignment shall
be effective until the insurer has been notified in writing.
May Y collect from the insurer the value of the policy?
In view of Section 182, the insurer may legally pay the
beneficiary which shall become the trustee of the amount
received in favor of Y. However, the insurer may waive the
requirement as to notice and pay Y. Where such notice is not
required by the policy, the insurer is under obligation to pay Y
after acquiring knowledge of the assignment.
Sec. 183. Unless the interest of a person insured is
susceptible of exact pecuniary measurement, the measure
of the indemnity under a policy of insurance upon life or
health is the sum fixed in the policy.
Measure of indemnity under life policy.
T h e extent or a m o u n t of i n d e m n i t y payable on the death of
the insured under a policy of insurance u p o n life or health is
the amount fixed in the policy. In effect, Hfe policies are valued
ones, (see Sec. 61.) In property insurance w h i c h is fundamentally
a contract of indemnity, the m e a s u r e of indemnity depends on
whether the policy is an o p e n or a valued policy, (see Sec. 171.)
Strictly speaking, there could be no exact pecuniary
measurement of a person's interest in his life or the life of another.
Hence, a person can purchase life insurance for any a m o u n t as
long as he can pay the premium. T h e exception is w h e n a person
insures the life of another, as where a creditor insures the life of
his debtor, (see Sec. 10[c].) In this case, the interest of the creditor
in the "life of the d e b t o r " is susceptible of exact pecuniary
measurement or estimation.
— oOo —
Chapter III
THE BUSINESS OF INSURANCE
Title 1
INSURANCE COMPANIES: ORGANIZATION,
CAPITALIZATION, A N D AUTHORIZATION
Sec. 184. For purposes of this Code, the term "insurer"
or "insurance company" shall include all individuals,
partnerships, associations, or corporations including
government-owned or controlled corporations or entities,
engaged as principals in the insurance business,
excepting mutual benefit associations. Unless the context
otherwise requires, the term shall also include professional
reinsurers defined in section two hundred eighty.
"Domestic company" shall include companies formed,
organized or existing under the laws of the Philippines.
"Foreign company," when used without limitation, shall
include companies formed, organized, or existing under
any laws other than those of the Philippines.
Sec. 185. Corporations formed or organized to save
any person or persons or other corporations harmless
from loss, damage, or liability arising from any unknown
or future or contingent event, or to indemnify or to compensate any person or persons or other corporations for
any such loss, damage, or liability, or to guarantee the performance of or compliance with contractual obligations or
the payment of debts of others shall be known as "insurance corporations."
The provisions of the Corporation Law* shall apply to
all insurance corporations now or hereafter engaged in
"Now, the Corporation Code of the Philippines (Batas Pambansa Big. 68.) which superseded the former Corporation Law. (Act No. 1459, as amended.)
450
Sees. 186-187
THE BUSINESS OF INSURANCE
451
Title 1. — Insurance Companies: Organization, Capitalization, and Authorization
business in the Philippines in so far as they do not conflict
with the provisions of this chapter.
Sec. 186. No person, partnership, or association of
persons shall transact any insurance business in the Philippines except as agent of a person or corporation authorized to do the business of insurance in the Philippines,
unless possessed of the capital and assets required of an
insurance corporation doing the same kind of business in
the Philippines and invested in the same manner; nor unless the Commissioner shall have granted to him or them a
certificate to the effect that he or they have complied with
all the provisions of law which an insurance corporation
doing business in the Philippines is required to observe.
Every person, partnership, or association receiving
any such certificate of authority shall be subject to the insurance laws of the Philippines and to the jurisdiction and
supervision of the Commissioner in the same manner as
if an insurance corporation authorized by the laws of the
Philippines to engage in the business of insurance specified in the certificate.
Sec. 187. No insurance company shall transact any insurance business in the Philippines until after it shall have
obtained a certificate of authority for that purpose from the
Commissioner upon application therefor and payment by
the company concerned of the fees hereinafter prescribed.
The Commissioner may refuse to issue a certificate of
authority to any insurance company if, in his judgment,
such refusal will best promote the interests of the people
of this country. No such certificate of authority shall be
granted to any such company until the Commissioner shall
have satisfied himself by such examination as he may
make and such evidence as he may require that such company is qualified by the laws of the Philippines to transact
business therein, that the grant of such authority appears
to be justified in the light of local economic requirements,
and that the direction and administration, as well as the
integrity and responsibility of the organizers and administrators, the financial organization and the amount of capital, notwithstanding the provisions of section one hundred
452
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 186-187
eighty-eight, reasonably assure the safety of the interests
of the policyholders and the public*
In order to maintain the quality of the management of
insurance companies and afford better protection of policyholders and the public in general, any person of good
moral character, unquestioned integrity and recognized
competence may be elected or appointed director or officer of insurance companies. The Commissioner shall prescribe the qualifications of the executive officers and other
key officials of insurance companies for purposes of this
section.
No person shall concurrently be a director and/or officer of an insurance company and an adjustment company.
Incumbent directors and/or officers affected by the
above provisions are hereby allowed to hold on to their
positions until the end of their terms or two years from the
effectivity of the Decree, whichever is shorter.
Before issuing such certificate of authority, the Commissioner must be satisfied that the name of the company
is not that of any other known company transacting a similar business in the Philippines, or a name so similar as to
be calculated to mislead the public.
*In accordance with the "Fit & Proper" requirements of Section 187 aimed at ensuring that the company direction and administration as well as the integrity and responsibility of its organizers and administrators shall afford the safety of the interest of the
policyholder and the general public, only persons of good moral character, unquestioned
integrity and recognized competence shall be qualified to become stockholders/directors/trustees/officer of insurance entities and mutual benefit associations or become
holders of special licenses such as soliciting officials/adjusters/underwriters/actuaries,
etc. In view thereof and as basis for the Insurance Commission in assessing fitness and
property, it is required that new functionaries including applicants for special licenses,
submit the following: (1) Duly notarized personal history statement or resume with three
(3) references not related by reason of consanguinity or affinity; (2) NBI clearance; (3)
Income Tax Returns (ITR) for the last three (3) years; and (4) Clearance from immediate
past employer.
In addition, they may also be required to appear before an officer of the Insurance
Commission, it is understood that the key functionaries fully adhere to the principles of
good corporate governance and mandated responsibilities in their respective companies
as specified in Ins. Circular No. 13-2002-A, September 15, 2003. (Ins. Ore. Letter No. 1304, June 7, 2004.)
A Corporate Governance Scorecard (CGS) has been developed by the Insurance
Commission for submission by Insurance Companies and intermediaries on an annual
basis starting on April 15, 2009.
Sec. 188
Title i.
THE BUSINESS OF INSURANCE
453
Insurance Companies: Organization, Capitalization, and Authorization
Such certificate of authority shall expire on the last day
of June of each year and shall be renewed annually if the
company is continuing to comply with the provisions of
this Code or the circulars, instructions, rulings, or decisions of the Commissioner. Every company receiving any
such certificate of authority shall be subject to the provisions of this Code and other related laws and to the jurisdiction and supervision of the Commissioner.
No insurance company may be authorized to transact
in the Philippines the business of life and non-life insurance concurrently, unless specifically authorized to do so;
Provided, That the terms, "life" and "non-life" insurance
shall be deemed to include health, accident and disability
insurance.
No insurance company shall have any equity in an adjustment company and neither shall an adjustment company have an equity in an insurance company.
Insurance companies and adjustment companies presently affected by the above provision shall have two years
from the effectivity of the Decree within which to divest
of their stockholdings, (as amended by Pres. Decree No.
1455.)
Sec. 188. Except as provided in section two hundred
eighty-one, no domestic insurance company shall, if a
stock corporation, engage in business in the Philippines
unless possessed of a paid-up capital stock equal to at
least five million pesos; Provided, That a domestic insurance company already doing business in the Philippines
with a paid-up capital stock which is less than five million
pesos shall have a paid-up capital stock of at least three
million pesos by December thirty-one, nineteen hundred
seventy-eight, four million pesos by December thirty-one,
nineteen hundred seventy-nine, and five million pesos by
December thirty-one, nineteen hundred eighty; Provided,
further, That the Secretary of Finance may, upon recommendation of the Insurance Commissioner, increase such
minimum paid-up capital stock requirement, under such
terms and conditions as he may impose, to an amount
which, in his opinion, would reasonably assure the safety
of the interests of the policyholders and the public.
The Commissioner may, as a pre-licensing requirement of a new insurance company, in addition to the paid-
454
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 189
up capital stock, require the stockholders to pay in cash to
the company in proportion to their subscription interests
a contributed surplus fund of not less than one million pesos, in the case of a life insurance company, or not less
than five hundred thousand pesos, in the case of an insurance company other than life. He may also require such
company to submit to him a business plan showing the
company's estimated receipts and disbursements, as well
as the basis therefor, for the next succeeding three years.
If organized as a mutual company, in lieu of such capital stock, it must have available cash assets of at least
five million pesos above all liabilities for losses reported,
expenses, taxes, legal reserve, and reinsurance of all outstanding risks, and the contributed surplus fund equal to
the amounts required of stock corporations. A stock insurance company doing business in the Philippines may, subject to the pertinent law and regulations which now are or
hereafter may be in force, alter its organization and transform itself into a mutual insurance company, (as amended
by Pres. Decree No. 1455.)
Sec. 189. Every company must, before engaging in the
business of insurance in the Philippines, file with the Commissioner the following:
(a) A certified copy of the last annual statement or a
verified financial statement exhibiting the condition and
affairs of such company."
(b) If incorporated under the laws of the Philippines,
a copy of the articles of incorporation and by-laws, and
any amendments to either, certified by the Securities and
Exchange Commission to be a copy of that which is filed
in its office.
(c) If incorporated under any laws other than those of
the Philippines, a certificate from the Securities and Exchange Commission showing that it is duly registered in
the mercantile registry of that Commission in accordance
with the Corporation Law. A copy of the articles of incorpo*The Insurance Commission has adopted the General Information Sheet (GIS) of the
Securities and Exchange Commission (SEC) as among the reports for periodic submission. (Ins. Circ. Letter No. 26-05, Sept. 6, 2005.)
Sec. 190
THE BUSINESS OF INSURANCE
455
Title 1. — Insurance Companies: Organization, Capitalization, and Authorization
ration and by-laws and any amendments to either, if organized or formed under any law requiring such to be filed,
duly certified by the officer having the custody of same, or
if not so organized, a copy of the law, charter or deed of
settlement under which the deed of organization is made,
duly certified by the proper custodian thereof, or proved
by affidavit to be a copy; also a certificate under the hand
and seal of the proper officer of such state or country having supervision of insurance business therein, if any there
be, that such corporation or company is organized under
the laws of such state or country, with the amount of capital stock or assets and legal reserve required by this Code.
(d) If not incorporated and of foreign domicile, aside
from the certificate mentioned in paragraph (c) of this section, a certificate setting forth the nature and character of
the business, the location of the principal office, the name
of the individual or names of the persons composing the
partnership or association, the amount of actual capital
employed or to be employed therein, and the names of all
officers and persons by whom the business is or may be
managed.
The certificate must be verified by the affidavit of the
chief officer, secretary, agent, or manager of the company;
and if there are any written articles of agreement of the
company, a copy thereof must accompany such certificate.
Sec. 190. The Commissioner must require as a condition precedent to the transaction of insurance business
in the Philippines by any foreign insurance company, that
such company file in his office a written power of attorney designating some person who shall be a resident of
the Philippines as its general agent, on whom any notice
provided by law or by any insurance policy, proof of loss,
summons and other legal processes may be served in all
actions or other legal proceedings against such company,
and consenting that service upon such general agent shall
be admitted and held as valid as if served upon the foreign
company at its home office. Any such foreign company
shall, as further condition precedent to the transaction of
insurance business in the Philippines, make and file with
the Commissioner an agreement or stipulation, executed
456
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 191
by the proper authorities of said company in form and substance as follows:
"The (name of company) does hereby stipulate and
agree in consideration of the permission granted by the
Insurance Commissioner to transact business in the Philippines, that if at any time said company shall leave the
Philippines, or cease to transact business therein, or shall
be without any agent in the Philippines on whom any notice, proof of loss, summons, or legal process may be
served, then in any action or proceeding arising out of
any business or transaction which occurred in the Philippines, service of any notice provided by law, or insurance
policy, proof of loss, summons, or other legal process may
be made upon the Insurance Commissioner, and that such
service upon the Insurance Commissioner shall have the
same force and effect as if made upon the company."
Whenever such service of notice, proof of loss, summons, or other legal process shall be made upon the Commissioner, he must, within ten (10) days thereafter, transmit by mail, postage paid, a copy of such notice, proof of
loss, summons, or other legal process to the company at
its home or principal office. The sending of such copy by
the Commissioner shall be a necessary part of the service
of the notice, proof of loss, or other legal process.
Sec. 191. No insurance company organized or existing
under the government or laws other than those of the Philippines shall engage in business in the Philippines unless
possessed of paid-up unimpaired capital or assets and reserve not less than that herein required of domestic insurance companies, nor until it shall have deposited with the
Commissioner for the benefit and security of the policyholders and creditors of such company in the Philippines,
securities satisfactory to the Commissioner consisting of
good securities of the Philippines, including new issues of
stock of "registered enterprises," as this term is defined in
Republic Act No. 5186, otherwise known as the Investment
Incentives Act,* as amended, to the actual market value of
*It has been repealed by Presidential Decree No. 1789, the Omnibus Investments
Code which codified all investment incentive laws including R.A. No. 5186. They are now
incorporated in the new Omnibus Investments Code, Executive Order No 226 dated
July 1987.
Sees. 192-193
THE BUSINESS OF INSURANCE
457
Title 1. — Insurance Companies: Organization, Capitalization, and Authorization
not less than the minimum paid-up capital required of domestic insurance companies; Provided, That at least fifty
per centum of such securities shall consist of bonds or
other evidences of debt of the Government of the Philippines, its political subdivisions and instrumentalities, or
of government-owned or controlled corporations and entities, including the Central Bank. The total investment of
a foreign insurance company in any registered enterprise
shall not exceed twenty per centum of the net worth of said
foreign insurance company nor twenty per centum of the
capital of the registered enterprise, unless previously authorized in writing by the Commissioner.
For purposes of this Code, the net worth of a foreign
insurance company shall refer only to its net worth in the
Philippines, (as amended by Pres. Decree No. 1455.)
Sec. 192. The Commissioner shall hold the securities,
deposited as aforesaid, for the benefit and security of all
the policyholders of the company depositing the same,
but shall as long as the company is solvent, permit the
company to collect the interest or dividends on the securities so deposited, and, from time to time, with his assent,
to withdraw any of such securities, upon depositing with
said Commissioner other like securities, the market value
of which shall be equal to the market value of such as may
be withdrawn. In the event of any company ceasing to do
business in the Philippines, the securities deposited as
aforesaid shall be returned upon the company's making
application therefor and proving to the satisfaction of the
Commissioner that it has no further liability under any of
its policies in the Philippines.
Sec. 193. Every foreign company doing business in the
Philippines shall set aside an amount corresponding to
the legal reserves of the policies written in the Philippines
and invest and keep the same therein in accordance with
the provisions of this section. The legal reserve therein required to be set aside shall be invested only in the classes
of Philippine securities described in section two hundred;
Provided, however, That no investment in stocks or bonds
of any single entity shall, in the aggregate exceed twenty
per centum of the net worth of the investing company or
twenty per centum of the capital, of the issuing company,
458
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 184-193
whichever is the lesser, unless otherwise approved in writing by the Commissioner. The securities purchased and
kept in the Philippines under this section, shall not be sent
out of the territorial jurisdiction of the Philippines without
the written consent of the Commissioner.
Power of state to regulate insurance
business.
(1) Basic reasons for governmental regulation. — T h e insurance
business is heavily regulated by law because of public policy
considerations to insure that every insurance c o m p a n y c o m p l y
with the applicable laws in conducting its business and in its
dealing with the Insured.
The insurance business possesses peculiar characteristics
justifying governmental control and provision.
(a) The chief characteristic is that an insurance contract is an
aleatory contract, that is, a contract under w h i c h the obligation
of one party, the insurer, will mature ( b e c o m e immediately
payable) only u p o n the h a p p e n i n g of a fortuitous event
which is, generally speaking, m u c h m o r e likely not to occur
during the coverage bargained for.
1
(b) Inequality of values to be exchanged characterizes insurance since the p r e m i u m paid by the insured unconditionally
is ordinarily for less than the a m o u n t w h i c h the insurer m a y
b e c o m e obligated to pay on a contingency w h i c h will probably not occur. T h e insured gets only a promise by the insurer and m a y never have occasion to find out, by his o w n
experience, whether that promise w o u l d be performed. He is,
therefore, m o r e gullible with respect to insurance and m o r e
susceptible to the wiles of the salesmen.
(c) The insured's inability to look out for his o w n interest
is increased by the technical character of the insurance contract.
1) While s o m e insurance contracts can be written
mostly in ordinary l a y m e n ' s language, virtually all of
'If the probability of the occurrence of an insured event (e.g., fire during a period of
3 years) is greater than even chance, it will be insured.
Sees. 184-193
THE BUSINESS OF INSURANCE
459
Title ]. — Insurance Companies: Organization, Capitalization, and Authorization
them require either s o m e trade terms or, w h a t is likely to
mislead, s o m e special m e a n i n g s given to simple terms.
2) Furthermore, the various conditions of the insure r ' s promise and of settlement, and the promises of services or benefits are likely to add up to a pretty involved
contract that very few insureds can understand without
the explanations given by a competent a n d honest insurance agent or broker. Hence, the latter are included within the scope of governmental regulation.
3) Moreover, an insurance cannot succeed unless it
m a k e s a large n u m b e r of contracts a n d m a s s production
of contracts m e a n s that the insured must ordinarily take
the insurer's printed form, or do without. B e c a u s e of this,
the contract of insurance is s o m e t i m e s called a "contract
of adhesion."
(d) All of these result in inequality of bargaining of power
as between insured and insurer. T h e g o v e r n m e n t intervenes
primarily to protect the interest of the insured, secondarily,
to protect honest and competent insurers from unfair
competition by the dishonest and incompetent. (E.W.
Patterson, op. cit., pp. 2-3.)
(2) Involves an exercise of police power. — It is generally
recognized that the business of insurance is one that is affected
with a public interest, and that it is a proper subject of regulation
and control by the state by virtue of the exercise of its police
power, in the interest of public convenience and the general
good of the people. Indeed, it is not only the right but also the
sovereign duty of a state to regulate the business of insurance.
(3) Scope. — T h e power is very broad.
(a) It extends to all persons seeking to engage in the
transaction of insurance business, whether carried on by a
domestic or foreign company, an individual, or an association,
and whether applied to newly formed corporations or already
engaged in the business.
(b) T h e state may regulate the relations between insurer
and insured in various respects as well as the affairs of an
insurance company without violating due process.
460
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 184-193
(c) It has the right to prescribe reasonable conditions
prerequisite to the carrying of insurance business, provided
there is no discrimination between citizens of equal merit
within or without the State, (see 43 Am. Jur. 2d. 108-110.)
As it is unlawful to do such business except on specified
conditions, the carrying on of such business is the exercise of a
franchise. (State ex rel. Rachards vs. Ackerman, 37 N . E . 828.)
(4) State regulating agencies. — T h e State controls the insurance
business through all departments of the government, (see Chap.
VIII.)
(a) T h e judicial department exercises control by deciding
controversies b e t w e e n litigants.
(b) T h e legislative department has broad p o w e r s to enact
all legislations, necessary or expedient for the public good
limited only by the provisions of the Constitution.
(c) T h e executive department through a particular official
or office, i.e., the Insurance Commission, is charged with the
duty of seeing that the insurance laws and regulations are
enforced, (see E.W. Patterson, op. cit., pp. 6-9.)
(5) Stages of regulation. — T h e State m a y regulate insurance
enterprises at three stages: w h e n they are launched; while they
are successfully doing business; and w h e n they h a v e gotten into
financial difficulties.
(a) T h e first stage is controlled by the granting of charters
under general laws and by the granting of licenses to n e w
enterprises (see Sees. 186-187.);
(b) T h e second, by the p o w e r to revoke (or refuse renewal
of) licenses, by the p o w e r to e x a m i n e a c o m p a n y (see Sees.
245-246, 415.), and by the criminal penalties for various
infractions of its laws (see Sees. 419-420.); and
(c) T h e third, through the p o w e r of the Insurance
Commissioner to appoint a conservator or receiver to take
charge of the m a n a g e m e n t of the c o m p a n y or administer its
assets, or a liquidator to w i n d the c o m p a n y ' s business and
distribute its assets, (see Sees. 248-251.)
Sees. 184-193
THE BUSINESS OF INSURANCE
461
Title i. — Insurance Companies: Organization, Capitalization, and Authorization
Thus, from the cradle to the grave, an insurer is u n d e r official
surveillance. (E.W. Patterson, op. cit., pp. 1, 9-10.)
Business of insurance conducted almost
exclusively by corporations.
Insurance, no doubt, m a y be carried on by individuals or
partnerships, but today the business of insurance is conducted
almost exclusively by corporations (exceptions are mutual benefits associations), (see Sec. 390.) Statutes h a v e b e e n enacted in
almost all jurisdictions which, while varying widely in their
terms and provisions, provide elaborate systems for the formation and regulation of insurance corporations. (43 A m . Jur. 2d.
141-142.)
T h e various corporations, in w h o s e h a n d s m o s t of the
insurance business n o w lies, differ very greatly in their nature
and organization and in their charter powers. A c o m p a n y m a y
be e m p o w e r e d by its charter and the laws to grant only certain
types of insurance coverages.
(1) A life insurance c o m p a n y is usually e m p o w e r e d to write
personal accident and health insurance and annuities as well as
life insurance.
(2) A fire insurance c o m p a n y customarily is e m p o w e r e d to
write, in addition to fire insurance, m a r i n e insurance, both ocean
and inland, and certain m i n o r lines.
(3) A casualty c o m p a n y m a y usually also write w o r k m e n ' s
compensation insurance and accident and health insurance as
well as relatively m i n o r lines such as fidelity, surety and plate
glass coverage.
(4) There is n o w a growing tendency to break d o w n the sharp
barriers in the fire and casualty field so as to permit one c o m p a n y
to write most types of fire and casualty coverages — referred to
as "multiple line" underwriters. (Vance, op. cit., p. 123.)
The provisions of the Corporation C o d e of the Philippines,
(B.P. Big. 68.) are expressly m a d e applicable by the Insurance
Code to all corporations n o w or hereafter engaged in business in
the Philippines insofar as they do not conflict with the provisions
of Chapter III. (Sec. 185, last par.) In other words, in case of
conflict, the Insurance C o d e shall prevail.
462
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 184-193
General requirements before an insurance company
may transact insurance business.
(1) Domestic insurance companies. — Before a domestic insurance company, as defined in Sections 184 and 185, m a y transact
any insurance business in the Philippines except as agent of a
person or corporation authorized to do the business of insurance
in the Philippines, it must comply with the following requirements:
(a) It is possessed of the required paid-up capital and
assets (Sec. 186, par. 1.);
(b) It shall have obtained a certificate of authority for that
purpose from the Insurance Commissioner u p o n application
therefor and payment of the fees prescribed (Sec. 187.); and
(c) It shall have filed with the Insurance C o m m i s s i o n e r
the documents required under Section 189;
The Commissioner may, as a pre-licensing requirement
of a new insurance company, require the p a y m e n t in cash by
the stockholders, in addition to the paid-up capital stock, of a
contributed surplus fund of not less than P I million in the case
of a life insurance company, or not less than P500,000.00 in the
case of a non-life insurance company, a n d the submission by
such c o m p a n y of a business plan showing its estimated receipts
and disbursements, as well as the basis therefor, for the next
succeeding three (3) years. (Sec. 188, par. 2.)
The contributed surplus is intended to prevent the diminution
of the required paid-up capital by organizational expenses. As
soon as the c o m p a n y recovers these expenses, the stockholders
will be allowed to withdraw their contributions.
(2) Foreign insurance companies. — In addition, if the insurer is
a foreign c o m p a n y (Sec. 184.), it shall h a v e filed with the Insurance
Commissioner a written power of attorney designating s o m e
person w h o shall be resident of the Philippines as its agent (Sec.
190.) and deposited with the Insurance C o m m i s s i o n e r for the
benefit of its policyholders and creditors satisfactory securities
required under Section 191.
An insurance c o m p a n y m a y not transact the business of life
and non-life insurance concurrently unless specifically authorized
Sees. 184-193
THE BUSINESS OF INSURANCE
463
Title i.
Insurance Companies: Organization, Capitalization, and Authorization
to do so. No insurance c o m p a n y shall h a v e any equity in an
adjustment c o m p a n y and neither shall an adjustment c o m p a n y
have any equity in an insurance company. (Sec. 188, pars. 8 and
9; see Chap. IV, Title V.)
Minimum capitalization requirements for new
insurance and reinsurance companies
and those to be rehabilitated.
Only sufficiently capitalized insurance and re-insurance
companies can be competitive regionally and globally and
sustain public and investor confidence in the insurance industry.
Non-compliant and failed insurance c o m p a n i e s cause an
alarming n u m b e r of unpaid insurance claims, causing inestimable d a m a g e and prejudice to the victims of u n p a i d insurance
policies. T h e result is a frustrated insurance policy-holding public and unfavorable public perception of the industry as a whole.
M o s t insurance c o m p a n i e s previously put u n d e r conservatorship or receivership, or r e c o m m e n d e d for liquidation b e c a u s e of
violations of statutory and regulatory requirements, primarily
capital impairment and margin of solvency deficiency, and subsequently allowed to be rehabilitated, h a d failed.
T h e n e w capitalization requirements are as follows:
(1) Effective July 1, 2 0 0 6 , no n e w life or non-life insurance
company shall be allowed to do business in the Philippines
unless it has a capitalization of P I Billion, paid in cash, of which
at least 5 0 % consists of paid-up capital and the remaining portion
thereof as contributed surplus, which in no case shall be less than
P200 Million.
(2) Effective July 1, 2006, no n e w reinsurance c o m p a n y shall
be allowed to do business in the Philippines unless it has a
capitalization of P2 Billion, paid in cash, of which at least 5 0 %
consists of paid-up capital and the remaining portion thereof
as contributed surplus, which in no case shall be less than P400
Million.
(3) Effective July 1, 2006, no life or non-life insurance
companies under conservation or receivership or for liquidation
may be rehabilitated unless it has a net worth of P I Billion Pesos,
464
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 184-193
computed in accordance with the Insurance Code, and of which
at least 5 0 % consists of paid-up capital and the remaining portion
thereof as contributed surplus, which in no case shall be less than
P200 Million.
(4) Effective July 1, 2006, no reinsurance companies
under conservation or receivership or for liquidation m a y be
rehabilitated unless it has a net worth of P2 Billion, c o m p u t e d in
accordance with the Insurance Code, and of which at least 5 0 %
consists of paid-up capital and the remaining portion thereof
as contributed surplus, which in no case shall be less than P 4 0 0
Million.
(5) The above requirements are without prejudice to other
requirements that are to be imposed under any risk-based capital
method that m a y be adopted by the Insurance Commission.
(Dept. of Finance Order No. 19-06, M a y 15, 2006.)
2
Deposits and withdrawal of securities
by foreign insurance companies.
(1) It is within the p o w e r of a State to require c o m p a n i e s
doing an insurance business within its boundaries to file or
deposit security for the performance of their obligations before
they can issue policies within the State.
(a) Such deposit constitutes a trust fund for the benefit of
policyholders. A n y surplus after the satisfaction of the claims
of policyholders constitutes a trust fund for the benefit of
creditors of the depositing company. (43 A m . Jur. 2d. 123.)
(b) T h e actual market value of the securities required to
be deposited with the Insurance C o m m i s s i o n e r m u s t not be
less than the m i n i m u m paid-up capital required of domestic
insurance companies.
(c) At least 5 0 % of the total security deposit shall consist
of bonds or other evidences of debt of the g o v e r n m e n t of the
To secure the solvency position of insurers and thus adequately protect the insuring public, Department of Finance Order No. 20-06 estalished fixed annual capitalization
increases through the years 2006 to 2010/2011. Ins. Memo. Cir. No. 6-2006 and No. 7-2006
prescribe the Risk-Based Capital (RBC) framework for insurers. Ins. Memo. Cir. No. 10-06
integrates the compliance standard under the DOF Order No. 27-2006, and Ins. Memo.
Cir. No. 6-2006 and No. 7-2006.
Sees. 184-193
THE BUSINESS OF INSURANCE
465
Title i.
Insurance Companies: Organization, Capitalization, and Authorization
Philippines, its political subdivisions and instrumentalities,
or of government-owned or controlled corporations and
entities, including the Central Bank, (see Sec. 191.)
(2) On withdrawing from a State, a foreign insurance c o m pany is entitled, after having paid all liabilities, to w i t h d r a w its
deposits with the State and they m a y not be attached by a foreign
creditor, (see 43 A m . Jur. 2d 123; see Sees. 1 9 1 , 1 9 2 . )
Section 192 specifically confers custody over the securities
upon the Insurance C o m m i s s i o n e r with w h o m these investments
are required to be deposited. An implied trust is created by law
(see Arts. 1 4 4 0 , 1 4 4 1 , Civil Code.) for the benefit of all claimants
under subsisting insurance contracts issued by the insurance
company. As the officer vested with the custody of the security
deposit, the C o m m i s s i o n e r is in the best position to determine if
and w h e n it m a y be released without prejudicing the rights of
policy holders. (Republic vs. D e l M o n t e Motors, Inc., 504 S C R A
53 [2006].)
Entry of foreign insurance or reinsurance
companies or intermediaries.
In relation to Sections 184, 188, 203, 280, 2 8 1 , and 299, the
following rules or guidelines h a v e b e e n promulgated:
(1) Modes of entry. — A foreign insurance or reinsurance
company or intermediary is allowed entry to do business in the
Philippines under any of the following modes:
3
(a) Ownership of the voting stock of an existing domestic
insurance or reinsurance c o m p a n y or intermediary;
(b) Investment in a n e w insurance or reinsurance
company or intermediary incorporated in the Philippines; or
(c) Establishment of a branch.
Entry under item (c) is not available to an intermediary. An
applicant may avail itself of only one (1) m o d e of entry.
3
A reinsurance company is not doing business in a certain State merely because the
property or lives which are insured by the original insurer company are located in that
State. (State Avon Insurance PLC vs. Court of Appeals, 278 SCRA 312 [1997].)
THE INSURANCE CODE OF THE PHILIPPINES
466
Sees. 184-193
(2) Basis of selection. — In the approval of entry of foreign
insurance or reinsurance company or intermediary, the following
factors shall be taken into consideration by the Insurance C o m mission:
(a) Geographic representation and complementation;
(b) Strategic trade and investment relationships between
the Philippines and the country of incorporation of the
foreign insurance or reinsurance c o m p a n y or intermediary;
(c) Demonstrated capacity, global reputation in underwriting innovations, and stability in a competitive environment of the applicant;
(d) Reciprocity rights are enjoyed by Philippine insurance
or reinsurance companies or intermediaries in the applicant's
country; and
(e) Willingness to fully share its technology.
(3) Qualification of applicant. — O n l y those a m o n g the top 2 0 0
foreign insurance or reinsurance companies or intermediaries in
the world or the top 10 in their country of origin and h a v e b e e n
doing business for the last 10 years as of the date of application
shall be allowed entry.
To qualify as a branch or as a n e w c o m p a n y incorporated
in the Philippines, the applicant m u s t be widely-owned and
publicly listed in its country of origin, unless it is majority-owned
by the government, (as a m e n d e d by Dept. of Finance Order N o .
100-94-A, Nov. 1 8 , 1 9 9 4 . )
The term "widely-owned" m e a n s that not a single stockholder
of the applicant o w n s m o r e than twenty percent ( 2 0 % ) of its
voting stock; while "publicly listed" m e a n s that its shares of
stock are listed in the stock exchanges.
(4) Capital requirements. —
(a) For an insurance company, m i n i m u m paid-up capital
of:
1) P250 million and a contributed surplus fund of
P50 million, where foreign equity is sixty percent ( 6 0 % )
or more;
Sees. 184-193
THE BUSINESS OF INSURANCE
467
7iti i.
Insurance Companies: Organization, Capitalization, and Authorization
e
2) P 1 5 0 million and a contributed surplus of P 5 0
million, w h e r e foreign equity is m o r e than forty percent
(40%) but less than sixty percent (60%);
3) P 7 5 million a n d a contributed surplus fund of P25
million, w h e r e foreign equity is forty percent ( 4 0 % ) or
less.
(b) For a reinsurance company, a m i n i m u m paid-up
capital of:
1) P 5 0 0 million, w h e r e foreign equity is sixty percent
(60%) or more;
2) P 3 0 0 million, w h e r e foreign equity is m o r e than
forty percent ( 4 0 % ) b u t b e l o w sixty percent ( 6 0 % ) ;
3) P 1 5 0 million, w h e r e foreign equity in a n e w
c o m p a n y incorporated in the Philippines is forty percent
(40%) or less.
However, any foreign insurance or reinsurance c o m p a n y
seeking entry under Section 1(c) above shall deposit with
the Insurance C o m m i s s i o n , securities satisfactory to the
C o m m i s s i o n to the actual m a r k e t value of not less than P 3 0 0
million for an insurance c o m p a n y and P 5 0 0 million for a
reinsurance company.
(c) For an intermediary, a m i n i m u m paid-up capital of
US$1,000,000.00 or its equivalent in Philippine pesos, 5 0 %
of which to be invested in Philippine G o v e r n m e n t Securities
and deposited with the Insurance C o m m i s s i o n .
(5) Scope of operation. — No composite license shall be issued
to an insurance c o m p a n y applicant under these guidelines.
(6) Head office guaranty. — T h e h e a d office of a foreign
insurance or reinsurance c o m p a n y shall guaranty prompt
payment of all liabilities of its Philippine branch.
(7) Entrants under Section 1 (a and b). — Foreign insurance or
reinsurance company to operate as a branch or where foreign
equity in said company or intermediary is more than 4 0 % shall
be allowed entry within two (2) years from the effectivity of
these guidelines. During this period, the number of foreign
insurance or reinsurance companies or intermediaries that shall
468
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 184-193
be allowed entry is five (5) each but may be increased to ten (10)
each by approval of the President of the Philippines upon the
recommendation of the Secretary of Finance.
(8) Board of directors. — Subject to existing laws, non-Filipino
nationals may become m e m b e r s of the board of directors of an
insurance or reinsurance c o m p a n y to the extent of the foreign
participation in the equity of such company.
(9) Staff. — Expatriates will be allowed to occupy managerial
positions in a company formed or entering under these guidelines,
subject to existing laws, rules and regulations.
(10) Procedural rules. — T h e existing rules of the Insurance
Commission on pre-licensing requirements for n e w domestic
insurance or reinsurance companies or intermediaries are also
applicable to applicants under these guidelines. (Dept. of Finance
Order No. 100-94, Oct. 2 4 , 1 9 9 4 . )
— oOo —
Title 2
MARGIN OF INSOLVENCY
Sec. 194. An insurance company doing business
in the Philippines shall at all times maintain a margin
of solvency which shall be an excess of the value of its
admitted assets exclusive of its paid-up capital, in the
case of a domestic company, or an excess of the value
of its admitted assets in the Philippines, exclusive of its
security deposits, in the case of a foreign company, over
the amount of its liabilities, unearned premiums and
reinsurance reserves in the Philippines of at least two per
mille of the total amount of its insurance in force as of
the preceding calendar year on all policies, except term
insurance, in the case of a life insurance company, or of at
least ten per centum of the total amount of its net premium
written during the preceding calendar year, in the case of
a company other than life insurance company; Provided,
That, in either case, such margin shall in no event be
less than five hundred thousand pesos; and Provided,
further, That the term "paid-up capital" shall not include
contributed surplus and capital paid in excess of par value.
Such assets, liabilities and reserves shall exclude assets,
liabilities and reserves included in separate accounts
established in accordance with section two hundred thirtyseven. Whenever the aforementioned margin be found to
be less than that herein required to be maintained, the
Commissioner shall forthwith direct the company to make
good any such deficiency by cash, to be contributed by
all stockholders of record in proportion to their respective
interest, and paid to the treasurer of the company, within
fifteen days from receipt of the order; Provided, That the
company in the interim shall not be permitted to take
any new risk of any kind or character unless and until it
469
470
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 194
make good such deficiency; and Provided, further, That
a stockholder who aside from paying the contribution
due from him, pays the contribution due from another
stockholder by reason of the failure or refusal of the latter
to do so, shall have a lien on the certificates of stock of
the insurance company concerned appearing in its books
in the name of the defaulting stockholder on the date of
default, as well as on any interest or dividends that have
accrued or will accrue to the said certificates of stock, until
the corresponding payment or reimbursement is made by
the defaulting stockholder, (as amended by Pres. Decree
No. 1455.)
Maintenance of margin of solvency
at all times.
Every insurance c o m p a n y doing business in the Philippines
must maintain at all times the margin of solvency required under
Section 194 of the Code. By the provisions of Section 194, the
total admitted assets of an insurance c o m p a n y (see Title 3.) must
exceed its total liabilities other than its paid-up capital or security
deposits, as the case m a y be, by a relevant a m o u n t k n o w n as the
"margin of solvency."
(1) Excess of admitted assets. — T h e c o m p a n y ' s financial
condition must, therefore, s h o w at all times that the value of
its admitted assets exclusive of its appraisal and reevaluation
surplus, and of its paid-up capital, if a domestic company, or
the value of its admitted assets in the Philippines exclusive of its
appraisal and revaluation surplus, and of its security deposits, if
a foreign company, exceeds the a m o u n t of its liabilities, unearned
premium and reinsurance reserves in the Philippines —
(a) by at least two per mille (i.e., P2 for every P1,000) of
the total a m o u n t of its insurance in force as of the preceding
calendar year on all policies, except term insurance, in the
case of a life company, or
(b) by at least ten per centum (i.e., P 1 0 for every P100)
of the total amount of its net p r e m i u m written during the
preceding calendar year, in the case of a non-life company.
In either case, however, such margin shall in no event be less
than P500,000.00.
Sec. 194
THE BUSINESS OF INSURANCE
Title 2. — Margin of Insolvency
471
(2) Definitions. — As used in the C o d e —
(a) T h e term paid-up capital shall not include contributed
surplus and capital paid in excess of par value;
(b) T h e terms assets, liabilities a n d reserves shall not
include the assets, liabilities and reserve included in separate
accounts established in accordance with Section 237 of the
Code;
(c) T h e phrase total amount of its insurance in force as of
the preceding calendar year shall m e a n the total a m o u n t of a
life c o m p a n y ' s insurance in force at the beginning of the
preceding year, plus the total a m o u n t of insurance issued,
revived or increased during that year, less the total a m o u n t of
insurance terminated by death, lapsation, maturity, disability,
surrender or other causes during that year, on all policies
except term insurance; and
(d) T h e phrase net premium written during the preceding
calendar year shall m e a n a non-life c o m p a n y ' s gross p r e m i u m s
on risks written and renewed during the preceding year in the
Philippines, less returns and cancellations, plus reinsurance
premiums received during that y e a r from authorized and
unauthorized insurers, less reinsurance p r e m i u m s ceded
during that year to authorized and unauthorized insurers.
(3) Satisfaction of deficiency. — W h e n e v e r the aforementioned
margin of solvency is found to be less than that required of an
insurance c o m p a n y to be maintained, the deficiency shall be
made good by cash to be contributed by all stockholders of
record in proportion to their respective interests and paid to the
treasurer of the c o m p a n y within fifteen (15) days from receipt
by such company of the order of the Insurance Commissioner
directing such company to m a k e good such deficiency.
For purposes of the above, a professional reinsurer shall be
deemed to be a non-life company. (Ins. M e m o . Cir. No. 4-75, Oct.
1,1975, effective Dec. 18,1975.)
(4) Importance. — "It m a y be stressed that this margin of
solvency is most important as it would improve security for
the insured risks by establishing a safeguard against adverse
fluctuations of the company's results, increase the company's
472
THE INSURANCE CODE OF THE PHILIPPINES
Sec 195
retention capacity, and strengthen both the company and the
national market. Accordingly, part of the company's annual
profits would be used for building up this solvency margin."
("Supervision and Regulation of the Insurance Business in the
Philippines," Journal of the IBP, First Quarter, 1976, pp. 24-25, by
Commissioner G. Cruz-Arnaldo.)
Sec. 195. No domestic insurance corporation shall declare or distribute any dividend on its outstanding stocks
except from profits attested in a sworn statement to the
Commissioner by the president or treasurer of the corporation to be remaining on hand after retaining unimpaired:
(a) The entire paid-up capital stock;
(b) The margin of solvency required by section one
hundred ninety-four;
(c) In the case of life insurance corporations, the legal
reserve fund required by section two hundred eleven;
(d) In the case of corporations other than life, the legal
reserve fund required by section two hundred thirteen;
(e) A sum sufficient to pay all net losses reported, or
in the course of settlement, and all liabilities for expenses
and taxes.
Any dividend declared or distributed under the preceding paragraph shall be reported to the Commissioner
within thirty days after such declaration or distribution.
If the Commissioner finds that any such corporation
has declared or distributed any such dividends in violation
of this section, he may order such corporation to cease
and desist from doing business until the amount of such
dividend or the portion thereof in excess of the amount
allowed under this section has been restored to said corporation.
Distribution of dividends to stockholders
of domestic corporations.
(1) General rules applicable to corporations generally govern. —
The payment of dividends to stockholders of insurance c o m p a n i e s
is governed by the same general rules applicable to p a y m e n t of
Sec. 195
THE BUSINESS OF INSURANCE
Title 2. — Margin of Insolvency
473
dividends to stockholders of corporations generally, (see Sec.
185, par. 2.) T h e losses must be deducted before the profits can be
ascertained. Consequently, the p r e m i u m s on unexpired risks are
not distributable as dividends to stockholders until a deduction
has been made of an a m o u n t sufficient to cover losses w h i c h the
previous business of the c o m p a n y indicates m a y reasonably be
expected to occur. (Lexington Life, F & M Ins. C o . vs. Page, 56 Ky.
[M B M o n ] 412; see 4 3 A m . Jur. 2 d 161.)
(2) Specific requirements. — Section 195 i m p o s e s three
requirements for a domestic insurance corporation declaring or
distributing any dividend on its outstanding stocks:
(a) T h e dividends m u s t be declared out of profits from its
business;
(b) T h e profits m u s t be attested in a sworn statement
by its president or treasurer to be remaining on h a n d after
retaining unimpaired the entire paid-up capital stock, the
required margin insolvency and legal reserve fund, and the
aggregate a m o u n t of its debts a n d liabilities; and
(c) T h e dividend m u s t be reported to the C o m m i s s i o n e r
within thirty (30) days after such declaration or distribution.
— oOo —
Title 3
ASSETS
Sec. 196. In any determination of the financial condition of any insurance company doing business in the Philippines, there shall be allowed and admitted as assets only
such assets owned by the insurance company concerned
and which consist of:
1. Cash in the possession of the insurance company
or in transit under its control, and the true and duly verified
balance of any deposit of such company in a financially
sound commercial bank or trust company.
2. Investments in securities, including money market
instruments, and in real property acquired or held in accordance with and subject to the applicable provisions of
this Code and the income realized therefrom or accrued
thereon.
3. Loans granted by the insurance company concerned to the extent of that portion thereof adequately
secured by non-speculative assets with readily realizable
values in accordance with and subject to the limitations
imposed by applicable provisions of this Code.
4. Policy loans and other policy assets and liens on
policies, contracts or certificates of a life insurance company, in an amount not exceeding legal reserves and other
policy liabilities carried on each individual life insurance
policy, contract or certificate.
5. The net amount of uncollected and deferred premiums and annuity considerations in the case of a life insurance company which carries the full mean tabular reserve
liability.
6. Reinsurance recoverable by the ceding insurer:
(a) from an insurer authorized to transact business in this
474
Sec. 197
THE BUSINESS OF INSURANCE
Title 3 . — Assets
country, the full amount thereof; or (b) from an insurer not
authorized in this country, in an amount not exceeding the
liabilities carried by the ceding insurer for amounts withheld under a reinsurance treaty with such unauthorized
insurer as security for the payment of obligations thereunder if such funds are held subject to withdrawal by, and under the control of, the ceding insurer. The Commissioner
may prescribe the conditions under which a ceding insurer
may be allowed credit, as an asset or as a deduction from
loss and unearned premium reserves, for reinsurance recoverable from an insurer not authorized in this country
but which presents satisfactory evidence that it meets the
applicable standards of solvency required in this country.
7. Funds withheld by a ceding insurer under a reinsurance treaty, provided reserves for unpaid losses and
unearned premiums are adequately provided.
8. Deposits or amounts recoverable from underwriting associations, syndicates and reinsurance funds, or
from any suspended banking institution, to the extent
deemed by the Commissioner to be available for the payment of losses and claims and values to be determined by
him.
9. Electronic data processing machines, as may be
authorized by the Commissioner to be acquired by the
insurance company concerned, the acquisition cost of
which to be amortized in equal annual amounts within a
period of five years from the date of acquisition thereof.
10. Other assets, not inconsistent with the provisions
of paragraphs 1 to 9 hereof, which are deemed by the Commissioner to be readily realizable and available for the payment of losses and claims at values to be determined by
him.
Sec. 197. In addition to such assets as the Commissioner may from time to time determine to be non-admitted
assets of insurance companies doing business in the Philippines, the following assets shall in no case be allowed as
admitted assets of an insurance company doing business
in the Philippines, in any determination of its financial condition:
1. Goodwill, trade names, and other like intangible
assets.
475
476
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 196-197
2. Prepaid or deferred charges for expenses and
commissions paid by such insurance company.
3. Advances to officers (other than policy loans);
which are not adequately secured and which are not previously authorized by the Commissioner, as well as advances to employees, agents, and other persons on mere
personal security.
4. Shares of stock of such insurance company,
owned by it, or any equity therein as well as loans secured
thereby, or any proportionate interest in such shares of
stock through the ownership by such insurance company
of an interest in another corporation or business unit.
5. Furniture, furnishings, fixtures, safes, equipment,
library, stationery, literature, and supplies.
6. Items of bank credits representing checks, drafts
or notes returned unpaid after the date of statement.
7. The amount, if any, by which the aggregate value
of investments as carried in the ledger assets of such insurance company exceeds the aggregate value thereof as
determined in accordance with the provisions of this Code
and/or the rules of the Commissioner.
All non-admitted assets and all other assets of doubtful
value or character included as ledger or non-ledger assets
in any statement submitted by an insurance company to
the Commissioner, or in any insurance examiner's report
to him, shall also be reported, to the extent of the value
disallowed as deductions from the gross assets of such
insurance company, except where the Commissioner permits a reserve to be carried among the liabilities of such
insurance company in lieu of any such deduction.
Classification of assets of an insurance
company.
In the determination of the financial condition of any
insurance company doing business in the Philippines, its assets
m a y be:
(1) Admitted assets or those assets enumerated in Section
196 owned by an insurance c o m p a n y which are allowed and
Sees. 196-197
THE BUSINESS OF INSURANCE
Title 3. — Assets
477
admitted by law as assets of such c o m p a n y in the determination
of its financial condition (Sec. 196.); or
1
(2) Non-admitted assets or those assets e n u m e r a t e d in
Section 197 o w n e d by an insurance c o m p a n y w h i c h are not
allowed by law to be admitted as assets of such c o m p a n y in the
determination of its financial condition, including such assets as
the Commissioner m a y from time to time determine to be nonadmitted assets. (Sec. 197.)
A n y investment m a d e in violation of the applicable provisions
of Title 4 of the C o d e shall be considered non-admitted assets.
(Sec. 207.)
Treatment of premium as admitted assets.
For the purpose of determining compliance with the margin of
solvency (Sec. 194.) requirement of non-life insurance companies
in addition to the assets e n u m e r a t e d in Section 196, the Insurance
C o m m i s s i o n considers as admitted assets, p r e m i u m s due from
the following:
(1) T h e Government of the Philippines, its political sub-divisions or instrumentalities, including government-owned or
controlled corporations, whether as insured, general agent,
insurance broker, mortgagee or trustee, provided that in case
any of said entities assume the role of a trustee, the insurance
company concerned shall present proof that such premiums are
held by such entity as trustee of the said company;
1
"Insured deposits" by the Philippine Deposit Insurance Corporation (PDIC) are assets deemed by the Insurance Commission to be readily available for payment of losses
and claims under Section 196(10). The term maeans the amount due to any depositior for
depositss in an Insured bank not of any oblifation of the depositor to the Insured bank
as of the date of closure but not to exceed P250,000 as provided under R.A. No. 3591. Deposists made in all banks, other than commercial bank or trust company, which are duly
authorized by the Bangko Sentral ng Pilipinas (BSP), shall be admitted as Cash in Bank
to the extent of P250,000.00, the maximum amount other assets subject to the lowest of
the following limitations: (1) The excess deposit in the said bank should not exceed 10%
of the total admitted assets of the insurance company as of December 31 of the year next
preceding the date of such investment; (2) The above amount should not exceed 25% of
the total equity of the said bank during the preceding year as duly certified by the BSP;
and (3) In no case should the total deposit, loan, equity, and other form of investments
in the said bank exceed 25% of the total admitted assets of the insurance company as of
December 31 of the year next preceding the date of such investment.
478
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 196-197
(2) Marine Hull Premiums covered by Deferred Premiums
Clause " E " attached to the policy and payable in four (4) quarterly
installments provided that the installments to be considered as
admitted assets are only the installments due within 90 days as
of cut-off date. Premium installments over 90 days due that were
paid after the cutt-off date, on the other hand, can be considered
as after date transaction provided that these installments are
paid and supported by a schedule showing details per policy
and copies of policies, validated deposit slip, with Certificate
of Authority to Confirm the said deposits with the b a n k s and
other pertinent documents which shall be m a d e available to the
examiners for verification.
(3) Premiums Receivable Account (direct agents, general agents
and insurance brokers) covering policies within 90 days from
inception as of the cut-off date provided the following requirements are complied with:
(a) T h e receivables are properly supported by an aging
schedule showing details per policy and copies of policies;
(b) The m a x i m u m a m o u n t of p r e m i u m s receivables to be
considered shall not exceed 2 5 % of the p r e m i u m v o l u m e net
of commissions;
(c) Premiums due from direct agents, general agents, or
insurance brokers, not exceeding 90 days, shall be b a c k e d
up by a surety b o n d issued by an insurance c o m p a n y duly
authorized to do business in the Philippines. T h e direct
agent or general agents or insurance brokers shall file with
the Commission and maintain in force a surety b o n d in favor
of the people of the Republic of the Philippines executed
by a c o m p a n y authorized to b e c o m e surety u p o n official
recognizance, stipulations, bonds, and undertakings, in an
amount equivalent to at least 2 5 % of the direct agent's, general
agent's or broker's p r e m i u m v o l u m e net of c o m m i s s i o n s for
the proceeding calendar year or P l , 5 0 0 , 0 0 0 , w h i c h e v e r is
higher, conditioned upon full accounting;
(d) Said surety b o n d shall be submitted to the C o m m i s s i o n
together with a sworn certification executed by the direct
agent or general agent or insurance broker, or their president,
Sees. 196-197
THE BUSINESS OF INSURANCE
Title 3. — Assets
479
or executive vice-president in the case of corporations, stating
the amount of h i s / i t s total annual p r e m i u m v o l u m e from all
sources for the previous calendar year, and that the a m o u n t
of the b o n d is equal to at least 2 5 % of the p r e m i u m v o l u m e
net of c o m m i s s i o n s or P l , 5 0 0 , 0 0 0 , w h i c h e v e r is higher.
(e) Agents, general agents and insurance brokers are
enjoined to submit their remittances simultaneous with
the submission of their production reports to the insurance
c o m p a n y concerned in its h e a d office in the Philippines
within the terms and conditions set forth in their agreement;
and
(f) Other pertinent d o c u m e n t s are m a d e available to the
examiners for verification, otherwise, unverified accounts
will be disallowed.
As for P r e m i u m s Receivable A c c o u n t s covering policies
b e y o n d 90 days from inception w h i c h are outstanding at the end
of the given calendar year and collected the following y e a r / s the
s a m e shall be considered as after-date transactions, subject to the
following conditions:
(a) Schedule of P r e m i u m s Receivable, with the full
details of the insurance policies over 90 days due m u s t be
submitted simultaneously with, and during the submission
period for, the Annual Statement;
(b) Collections should be duly supported by official
receipts and validated deposit slips together with the
Certificate of Authority to Confirm the said deposits with the
banks; and
(c) Additional pertinent d o c u m e n t s d e e m e d necessary
or required by this C o m m i s s i o n must likewise be submitted.
(Ins. Cir. Letter 27-06, June 6, 2006; supersedes Ins. Cir. Letter
No. 12-05.)
— oOo —
Title 4
INVESTMENTS
Sec. 198. No insurance company shall loan any of its
money or deposits to any person, corporation or association, except upon first mortgage or deeds of trust of unencumbered, improved or unimproved real estate, including condominiums, in cities and centers of population of
municipalities in the Philippines when the amount of such
loan is not in excess of seventy per centum of the market
value of such real estate; or upon the security of first mortgages or deeds of trust of actually cultivated, improved
and unencumbered agricultural lands in the Philippines
when the amount of such loan is not in excess of forty per
centum of the market value of such land; or upon the purchase money mortgages or like securities received by it
upon the sale or exchange of real property acquired pursuant to sections two hundred and two hundred two; or upon
bonds or other evidences of debt of the Government of
the Philippines or its political subdivisions authorized by
law to issue bonds, or upon bonds or other evidences of
debt of government-owned or controlled corporations and
instrumentalities including the Central Bank, or upon obligations issued or guaranteed by the International Bank for
Reconstruction and Development; or upon stocks, bonds
or other evidences of debt as are specified in Section two
hundred.*
*No insurance company shall loan any of its money or deposits to any person, corporation or association, when the amount of such loan is in excess of: (1) 100% of the
market value of bonds or other evidences of debt of the Government of the Philippines
or its political subdivisions authorized by law to issue bonds or upon bonds or other
evidences of debt of government-owned or controlled corporations and instrumentalities
including the Central Bank; (2) 90% of the market value of bonds or other evidences of
debt of private entities as are specified under Section 200; and (3) 75% of the market value
of stocks as are specified in Section 200 of the Insurance Code. (Ins. Memo. Cir. No. 1-87,
dated June 11, 1987.)
480
Sees. 199-200
THE BUSINESS OF INSURANCE
Title 4. — Investments
481
A life insurance company, however, may lend to any
of its policyholders upon the security of the value of its
policy such sum as may be determined pursuant to the
provisions of the policy.
Loans granted upon the security of real estate for a
period longer than five years shall be amortized in monthly, quarterly, semi-annual or annual installment: Provided,
That no such loans shall have a maturity in excess of twenty years.
The phrase "improved real estate" used above is
hereby defined to mean land with permanent building or
buildings erected or being erected thereon. Except as otherwise approved by the Commissioner, in case the building or buildings on land do not belong to the owner of the
latter, no loan shall be granted on the security of the real
estate in question unless both the owner of the building or
buildings and the owner of the land sign the deed of mortgage, and unless the owner of the land is the Government
of the Philippines or one of its political subdivisions, in
which event the owner is not required to sign the deed of
mortgage.
Sec. 199. No loan by any insurance company on the security of real estate shall be made unless the title to such
real estate shall have first been registered in accordance
with the existing Land Registration Act,* or shall be a titulo
real duly registered, or have been previously registered
under the provisions of the existing Mortgage Law.**
Sec. 200. (1) An insurance company may purchase,
hold, own and convey such property, real and personal,
as may have been mortgaged, pledged, or conveyed to it
in good faith in trust for its benefit by reason of money
loaned by it in pursuance of the regular business of the
company, and such real or personal property as may have
been purchased by it at sales under pledges, mortgages or
deeds or trust for its benefit on account of money loaned
by it; and such real and personal property as may have
been conveyed to it by borrowers in satisfaction and dis-
*Now the Property Registration Decree. (Pres. Decree No. 1529, dated June 11,1987.)
** Discontinued by Pres. Decree No. 1529.
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 199-200
charge of loans made by the company to them; Provided,
however, That any real estate purchased by an insurance
company in payment or by reason of any loan made by it
shall be sold by the company within twenty years after the
title thereto has been vested in it.
(2) An insurance company may purchase, hold, own
and convey real and personal property as follows:
(a) The lot with building thereon in which the company conducts and carries on its business.
(b) Bonds or other evidences of debt of the Government of the Philippines or its political subdivisions
authorized by law to issue bonds at the reasonable
market value thereof.
(c) Bonds or other evidences of debt of government owned or controlled corporations and entities,
including the Central Bank.
(d) Bonds, debentures or other evidences of indebtedness of any solvent corporation or institution
created or existing under the laws of the Philippines;
Provided, however, That the issuing, assuming or
guaranteeing entity of its predecessors shall not have
defaulted in the payment of interest on any of its securities and that during each of any three including
the last two of the five fiscal years next preceding the
date of acquisition by such insurance company of
such bonds, debentures, or other evidences of indebtedness, the net earnings of the issuing, assuming or
guaranteeing institution available for its fixed charges,
as hereinafter defined, shall have been not less than
one and one-quarter times the total of its fixed charges
for such year; And Provided, further, That no life insurance company shall invest in or upon the obligations
of any one institution in the kinds permitted under this
sub-section and amount in excess of twenty-five per
centum of the total admitted assets of such insurer
as of December thirty-first next preceding the date of
such investment.
As used in this sub-section the term "net earnings
available for fixed charges" shall mean net income after deducting operating and maintenance expenses,
Sees. 199-200
THE BUSINESS OF INSURANCE
Title 4. — Investments
taxes other than income taxes, depreciation and depletion; but excluding extraordinary non-recurring items
of income or expense appearing in the regular financial statement of the issuing, assuming or guaranteeing institution. The term "fixed charges" shall include
interest on funded and unfunded debt, amortization of
debt discount, and rentals for leased properties.
(e) Preferred or guaranteed stocks of any solvent
corporation or institution created or existing under the
laws of the Philippines; Provided, however, That the
issuing, assuming or guaranteeing entity or its predecessors has paid regular dividends upon its preferred
or guaranteed stocks for a period of at least three
years next preceding the date of investment in such
preferred or guaranteed stocks; Provided, further, That
if the stocks are guaranteed, the amount of stocks so
guaranteed is not in excess of fifty per centum of the
amount of the preferred or common stocks, as the
case may be, of the guaranteeing corporation; And
Provided, finally, That no life insurance company shall
invest in or loan upon obligations of any one institution in the kinds permitted under this sub-section an
amount in excess of ten per centum of the total admitted assets of such insurer as of December thirty-first
next preceding the date of such investment.
(f) Common stocks of any solvent corporation or
institution created or existing under the laws of the
Philippines upon which regular dividends shall have
been paid for the three years next preceding the purchase of such stock; Provided, however, That no life
insurance company shall invest in or loan upon the
obligations of any one corporation or institution in the
kinds permitted under this sub-section an amount in
excess of ten per centum of the total admitted assets
of such insurer as of December thirty-first next preceding the date of such investment.
(g) Certificates, notes and other obligations issued by trustees or receivers of any institution created
or existing under the laws of the Philippines which, or
the assets of which, are being administered under the
direction of any court having jurisdiction; Provided,
483
484
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 201-202
however, That such certificates, notes or other obligations are adequately secured as to principal and interest.
(h) Equipment trust obligations or certificates
which are adequately secured or other adequately secured instruments evidencing an interest in equipment
wholly or in part within the Philippines; Provided, however, That there is a right to receive determined portions of rental, purchase or other fixed obligatory payments for the use or purchase of such equipment.
(i) Any obligation of any corporation or institution
created or existing under the laws of the Philippines
which is, on the date of acquisition by the insurer, adequately secured and has qualities and characteristics
wherein the speculative elements are not predominant.
(j) Such other securities as may be approved by
the Commissioner.
(3) Any domestic insurer which has outstanding insurance, annuity or reinsurance contracts in currencies
other than the national currency of the Philippines may invest in, or otherwise acquire or loan upon securities and
investments in such currency which are substantially of
the same kinds, classes and investment grades as those
eligible for investment under the foregoing subdivisions
of this section; but the aggregate amount of such investments and of such cash in such currency which is at anytime held by such insurer shall not exceed one and onehalf times the amount of its reserves and other obligations
under such contracts or the amount which such insurer is
required by the law of any country or possession outside
the Republic of the Philippines to invest in such country or
possession, whichever shall be greater.
Sec. 201. An insurance company may (1) invest in equities of other financial institutions, and (2) engage in the
buying and selling of short-term debt instruments: Provided, That any or all of such investments shall be with the
prior approval of the Commissioner.
Sec. 202. Any life insurance company may:
(a) Acquire or construct housing projects and, in connection with any such project, may acquire land or any in-
Sec. 203
THE BUSINESS OF INSURANCE
Title 4. — Investments
terest therein by purchase, lease or otherwise, or use land
acquired pursuant to any other provision of this Code.
Such company may thereafter own, maintain, manage,
collect or receive income from, or sell and convey, any
land or interest therein so acquired and any improvements
thereon. The aggregate book value of the investments of
any such company in all such projects shall not exceed at
the time of such investments twenty-five per centum of the
total admitted assets of such company on the thirty-first
day of December next preceding;
(b) Acquire real property, other than property to be
used primarily for providing housing and property for accommodation of its own business, as an investment for
the production of income, or may acquire real property to
be improved or developed for such investment purpose
pursuant to a program therefor, subject to the condition
that the cost of each parcel or real property so acquired
under the authority of this paragraph (a), including the estimated cost to the company of the improvement or development thereof, when added to the book value of all
other real property held by it pursuant to this paragraph
(b), shall not exceed twenty-five per centum of its admitted
assets as of the thirty-first day of December next preceding.
Sec. 203. Every domestic insurance company shall,
to the extent of an amount equal in value to twenty-five
per centum of the minimum paid-up capital required under
section one hundred eighty-eight, invest its fund only in
securities, satisfactory to the Commissioner, consisting of
bonds or other evidences of debt of the Government of the
Philippines or its political subdivisions or instrumentalities
or of government-owned or controlled corporations and
entities, including the Central Bank of the Philippines;
Provided, That such investments shall at all times be maintained free from any lien or encumbrance; And Provided,
further, That such securities shall be deposited with and
held by the Commissioner for the faithful performance
by the depositing insurer of all its obligations under
its insurance contracts. The provisions of section one
hundred ninety-two shall, so far as practicable, apply to
the securities deposited under this section.
485
486
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 204-205
Except as otherwise provided in this Code, no judgment creditor or other claimant shall have the right to levy
upon any of the securities of the insurer held on deposit
under this section or held on deposit pursuant to the requirement of the Commissioner, (as amended by Pres. Decree No. 1455.)
Sec. 204. After satisfying the requirements contained
in the preceding section, any domestic non-life insurance
company, may invest, to an amount prescribed below,
its funds in, or otherwise, acquire or loan upon, only the
classes of investments described in section two hundred,
including securities issued by any "registered enterprise,"
as this term is defined in Republic Act No. 5186, otherwise
known as the Investment Incentives Act,* and such other
classes of investments as may be authorized by the Commission for purposes of this section; Provided, That (a)
no more than twenty per centum of the net worth of such
company as shown by its latest financial statement approved by the Commissioner shall be invested in the lot
and building in which the insurance company conducts its
business; and (b) the total investment of an insurance company in any registered enterprise shall not exceed twenty
per centum of the net worth of said insurance company as
shown by its aforesaid financial statement nor twenty per
centum of the paid-up capital of the registered enterprise
excluding the intended investment, unless previously authorized by the Commissioner; and Provided, further, That
such investments, free from any lien or encumbrance,
shall be at least equal in amount to the aggregate amount
of (a) its legal reserve, as provided in section two hundred
thirteen, and (b) its reserve fund held for reinsurance as
provided for in the pertinent treaty provision in the case of
reinsurance ceded to authorized insurers, (as amended by
Pres. Decree No. 1455.)
Sec. 205. After satisfying the requirements contained
in sections one hundred ninety-one, one hundred ninetythree, two hundred three and two hundred four, any nonlife insurance company may invest any portion of its funds
representing earned surplus in any of the investments
'See note to Section 191.
Sees. 206-208
THE BUSINESS OF INSURANCE
Title 4. — I n v e s t m e n t s
described in sections one hundred ninety-eight, two
hundred and two hundred one, or in any securities issued
by a "registered enterprise" mentioned in the preceding
section: Provided, That no investment in stocks or bonds
of any single entity shall in the aggregate, exceed twenty
per centum of the net worth of the insurance company
as shown in its latest financial statement approved by
the Commissioner or twenty per centum of the paid-up
capital of the issuing company, whichever is lesser, unless
otherwise approved by the Commissioner.
Sec. 206. After satisfying the minimum capital investment required in section two hundred three, any life insurance company may invest its legal policy reserve, as
provided in section two hundred eleven or in section two
hundred twelve, in any of the classes of securities or types
of investments described in sections one hundred ninety-eight, two hundred, two hundred one and two hundred
two, subject to the limitations therein contained, and in
any securities issued by any "registered enterprise" mentioned in section two hundred four, free from any lien or
encumbrance, in such amounts as may be approved by
the Commissioner. Such company may likewise invest any
portion of its earned surplus in the aforesaid securities or
investments subject to the aforesaid limitations.
Sec. 207. Any investment made in violation of the applicable provisions of this title shall be considered nonadmitted assets.
Sec. 208. (1) All bonds or other evidences of indebtedness having a fixed term and rate of interest and held
by any life insurance company authorized to do business
in this country, if amply secured and if not in default as
to principal or interest, shall be valued as follows: if purchased at par, at the par value; if purchased above or below par, on the basis of the purchase price adjusted so as
to bring the value to par at maturity and so as to yield in
the meantime the effective rate of interest at which the purchase was made, or in the discretion of the Commissioner,
on the basis of the method of calculation commonly known
as the pro rata method. In applying the foregoing rule the
purchase price shall in no case be taken at a higher figure
than the actual market value at the time of acquisition. The
487
488
THE INSURANCE CODE OF THE PHILIPPINES
Sec. 208
Commissioner shall have the power to determine the eligibility of any such investments for valuation on the basis of
amortization, and may by regulation prescribe or limit the
classes of securities so eligible for amortization. All bonds
or other evidences of indebtedness which in the judgment
of the Commissioner are not amply secured shall not be
eligible for amortization and shall be valued in accordance
with paragraph two. The Commissioner may, if he finds
that the interest of policyholders so permit or require, by
official regulation permit or require any class or classes
of insurers, other than life insurance companies, authorized to do business in this country, to value their bonds
or other evidences of indebtedness in accordance with the
foregoing rule.
(2) The investments of all insurers authorized to do
business in this country, except securities subject to amortization and except as otherwise provided in this chapter,
shall be valued, in the discretion of the Commissioner, at
their market value, or at their appraised value, or at prices
determined by him as representing their fair market value.
If the Commissioner finds that in view of the character of
investments of any insurer authorized to do business in
this country; it would be prudent for such insurer to establish a special reserve for possible losses or fluctuations in
the values of its investments, he may require such insurer
to establish such reserve, reasonable in amount, and may
require that such reserve be maintained and reported in
any statement or report of the financial condition of such
insurer. The Commissioner may, in connection with any
examination or required financial statement of an authorized insurer, require such insurer to furnish him complete
financial statements and audited report of the financial
condition of any corporation of which the securities are
owned wholly or partly by such insurer and may cause an
examination to be made of any subsidiary or affiliate of
such insurer.
(3) The stock of an insurance company shall be valued
at the lesser of its market value or its book value as shown
by its last approved annual statement or the last report on
examination whichever is more recent. The book value of
a share of common stock of an insurance company shall
be ascertained by dividing (a) the amount of its capital and
Sec. 208
THE BUSINESS OF INSURANCE
Title 4. — Investments
surplus less the value of all of its preferred stock, if any,
outstanding, by (b) the number of shares of its common
stock issued and outstanding. Notwithstanding the foregoing provisions, an insurer may, at its option value its
holdings of stock in a subsidiary insurance company in
an amount not less than acquisition cost if such acquisition cost is less than the value determined as hereinbefore
provided.
(4) Real estate acquired by foreclosure or by deed in
lieu thereof, in the absence of a recent appraisal deemed
by the Commissioner to be reliable, shall not be valued
at an amount greater than the unpaid principal of the defaulted loan at the date of such foreclosure or deed, together with any taxes and expenses paid or incurred by
such insurer at such time in connection with such acquisition, and the cost of additions or improvements thereafter
paid by such insurer and any amount or amounts thereafter paid by such insurer on any assessments levied for
improvements in connection with the property.
(5) Purchase money mortgages received on dispositions of real property held pursuant to section one hundred ninety-eight shall be valued in an amount equivalent
to ninety per centum of the value of such real property.
Purchase money mortgages received on dispositions of
real property otherwise held shall be valued in an amount
not exceeding ninety per centum of the value of such real
property as determined by an appraisal made by an appraiser at or about the time of disposition of such real
property.
(6) The stock of a subsidiary of an insurer shall be valued on the basis of the greater of (i) the value of only such
of the assets of such subsidiary as would constitute lawful
investments for the insurer if acquired or held directly by
the insurer or (ii) such other value determined pursuant to
standards and cumulative limitations, contained in a regulation to be promulgated by the Commissioner.
(7) Notwithstanding any provision contained in this
section or elsewhere in this chapter, if the Commissioner
finds that the interests of policyholders so permit or require, he may permit or require any class or classes of insurers authorized to do business in this country to value
489
490
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 198-209
their investments or any class or classes thereof as of any
date heretofore or hereafter in accordance with any applicable valuation or method.
Sec. 209. It shall be the duty of the officers of the insurance company to report within the first fifteen days of every month all such investments as may be made by them
during the preceding month, and the Commissioner may, if
such investments or any of them seem injudicious to him,
require the sale or disposal of the same. The report shall
also include a list of investments sold or disposed of by
the company during the same period.
Investments by insurance c o m p a n i e s .
The importance of a sound investment policy cannot be
overemphasized because of the considerable funds w h i c h are
necessarily in the hands of insurance c o m p a n i e s and w h i c h
are essential to their business. Profit from investment is a vital
source of income, and as a guiding rule, it will be recognized
that insurers so control their investment policy as to secure the
highest rate of interest consistent with maintaining the value of
the capital invested and the requisite convertibility, as and w h e n
required.
(1) Life insurance policies are in the nature of p e r m a n e n t
contracts and long-term securities are, therefore, suitable for the
greater part of the life insurance fund. Different considerations,
however, are present in connection with marine, fire, a n d accident
insurances because it is impossible to foresee the occurrence
of heavy catastrophes, resulting in an unexpected drain u p o n
the funds. For the latter purpose, therefore, it is essential that
securities should be readily convertible.
(2) In any event, investments should be well spread in order
to smooth out market fluctuations, and insurance companies,
therefore, need to watch the market closely.
(3) Investments, of course, are not limited to stock exchange
securities, as will be evident from a glance at any c o m p a n y ' s
balance sheet. Insurers grant mortgages, purchase freehold
and leasehold ground rents, and, indeed, are always prepared
to find n e w avenues for the investment of their funds as long
THE BUSINESS OF INSURANCE
Title 4. — Investments
Sees. 198-209
491
as the capital is secure and the general conditions satisfactory.
(Dindsdale & M c M u r d i e , op. cit., pp. 212-213.)
Investment of the amount of increase
of paid-up capital or assets.
(1) A domestic insurance c o m p a n y shall invest to the extent
of an amount equal in value to 2 5 % of the required increase of
the paid-up capital in accordance with and as specified u n d e r the
provisions of Section 2 0 3 and h a v e the securities deposited with
the Insurance Commissioner.
(2) A domestic professional reinsurer shall invest to the extent
of an amount equal in value to 2 5 % of the required increase of the
paid-up capital in accordance with and as specified u n d e r the
provisions of Section 2 8 1 and h a v e the securities deposited with
the Insurance Commissioner.
(3) A foreign insurance c o m p a n y or foreign professional
insurer shall invest to the extent of an a m o u n t equal in value to
the full extent of the m i n i m u m paid-up unimpaired capital or
assets above required in accordance with and as specified under
the provisions of Section 191.
(4) A n e w insurance c o m p a n y or professional reinsurer
must invest, before it starts to transact business as such, to the
extent of the amount required and as specified under Sections
191 and 203 and h a v e the securities deposited with the Insurance
Commissioner. (Ministry Order N o . 2-84, dated Jan. 1 7 , 1 9 8 4 . )
1
Under Section 203, the securities are held as a contingency
fund, to answer for all the claims against the insurance company
by all its policy holders and their beneficiaries in the event the
company becomes insolvent or otherwise unable to satisfy the
claims against it. (see Sec. 192.) Thus, a single claimant m a y
not lay stake on the securities to the exclusion of all others. The
right to lay claim to the fund is dependent on the solvency of
the insurer and is subject to all other obligations of the company
•Only foreign currencies acceptable to the Bangko Sentral ng Pilipinas (BSP) as part of
its international reserves are allowed for foreign currency denominated investments and
insurance policies. (Ins. Cir. Letter No. 9-97, Sept. 24, 1997.)
THE INSURANCE CODE OF THE PHILIPPINES
492
Sees. 198-209
arising from its insurance contracts. Being a mere expectancy an
inchoate interest, it has no attribute of property. (Republic vs. Del
Monte Motors, Inc., 504 S C R A 53 [2006].)
Investment of legal reserve.
Every non-life insurance company, domestic or foreign, must
set aside and maintain an amount corresponding to the legal
reserves required under Section 213 (infra.) of the C o d e .
(1) The amount corresponding to the aforementioned legal
reserve shall, together with the amount corresponding to the
reserve fund held for reinsurance ceded to authorized insurers
as provided for in pertinent treaty provisions, be invested as
follows:
(a) In the case of a domestic company. — In the classes
of investments described in Section 2 0 0 of the Insurance
Code, including securities issued by any "registered
enterprise," as this term is defined in Republic Act N o . 5186,
otherwise k n o w n as the Investment Incentives Act, and
such other classes of investments as m a y be authorized by
the Commissioner, provided that (i) in case of a c o m p a n y ' s
investment in the lot and building in w h i c h it will conduct
its business, not more than twenty per centum ( 2 0 % ) of the
net worth of such c o m p a n y as s h o w n by its latest financial
statement approved by the Insurance C o m m i s s i o n e r shall be
considered for purposes of this investment requirement and
(ii) the total investment of such c o m p a n y in any "registered
enterprise" shall not exceed twenty per centum ( 2 0 % ) of the
paid-up capital of the registered enterprise excluding the
intended investment, unless previously authorized in writing
by the Insurance Commissioner, (see Sec. 204.)
2
(b) In the case of a foreign company. — In the classes of
Philippine securities described in sub-paragraphs (b), (c), (d),
(e), (f), (g), (h), and (i) of Section 200(2) of the Insurance Code,
provided that no investment in stocks or b o n d s of any single
entity shall, in the aggregate, exceed twenty per centum ( 2 0 % )
of the net worth in the Philippines of the investing c o m p a n y
2
See note to Section 191.
Sees. 198-209
THE BUSINESS OF INSURANCE
Title 4. — Investments
493
as s h o w n by its latest financial statement approved by the
Insurance C o m m i s s i o n e r or t w e n t y per centum ( 2 0 % ) of the
paid-up capital of the issuing company, w h i c h e v e r is the
lesser, unless otherwise approved in writing by the Insurance
Commissioner, provided, further, that the securities so
purchased shall be kept in the Philippines and shall not be
sent out of the Philippines without the written consent of the
Insurance Commissioner, (see Sec. 193.)
(2) T h e full a m o u n t of the legal reserve required to be set up
in the b o o k s of and held by an insurance c o m p a n y doing business
in the Philippines for reinsurance ceded to unauthorized foreign
insurance companies, if any there b e , shall be invested only
in b o n d s or other evidences of debt of the G o v e r n m e n t of the
Philippines or its political subdivisions or instrumentalities, or
of government-owned or controlled corporations and entities,
including the Central B a n k of the Philippines, a n d / o r other
securities acceptable under Section 2 0 0 of the Insurance Code,
(see Sec. 219.)
T h e investments mentioned a b o v e m u s t at all times be free
from any lien or e n c u m b r a n c e . (Ins. M e m o . Cir. N o . 5-75, Oct. 15,
1975, effective Jan. 1,1976.)
Foreign currency denominated investments
and insurance policies.
T h e following guidelines shall govern foreign currency
denominated investments and insurance policies:
(1) Foreign currencies allowed. — O n l y foreign currencies
acceptable to the Bangko Sentral ng Pilipinas (BSP) as part of its
international reserves shall be allowed.
(2) Investments. — T h e following foreign currency denominated investments may be allowed:
(a) Issues of the Philippine government or Philippine
government-owned or controlled corporations;
(b) Issues of Philippine private corporations provided
these shall have a credit rating equivalent to or better than
that of the Philippine government;
494
THE INSURANCE CODE OF THE PHILIPPINES
Sees. 198-209
(c) Issues of foreign governments provided these shall
have a a m i n i m u m credit rating of: BB+ as rated by S & P,
or Bal as rated by Moody's, or its equivalent as rated by
other international credit rating agencies acceptable to the
Insurance Commission; or one notch above the credit rating
of the Philippine government, whichever is higher;
(d) Issues of foreign corporations provided these shall
have a m i n i m u m credit rating of: B B B as rated by S & P,
or Baa as rated by M o o d y ' s , or its equivalent as rated by
other international credit rating agencies acceptable to the
Insurance Commission; or t w o notches above the credit
rating of the Philippine government, whichever is higher;
(e) Loans against mortgages on real properties outside the
Philippines which shall be considered surplus investments
and which shall be m a d e only if the laws of the country
where the property is located allow the lender to o w n real
estate property in the event of foreclosure;
(f) Loans guaranteed by b a n k s of foreign countries
provided the guarantor b a n k has a m i n i m u m credit rating
of B B B as rated by S & P, or B a a 2 as rated by M o o d y ' s , or
its equivalent as rated by other international credit rating
agencies acceptable to the Insurance C o m m i s s i o n ; or t w o
notches above the credit rating of the Philippine government,
whichever is higher; and
(g) Investments in venture capital w h i c h shall be considered as surplus investments if m a d e in accordance w i t h rules
and regulations, and u p o n prior approval of the Insurance
Commission.
Aggregate investments for each type of issues m e n t i o n e d
from items (b) to (g) shall not exceed 2 5 % of the c o m p a n y ' s latest
verified total admitted assets for life c o m p a n y and 2 0 % of the
networth for non-life company.
Reserves and other liabilities in a foreign currency m u s t
be matched with assets in the s a m e currency to at least 5 0 % .
Exceptions m a y be granted where the aggregate liabilities in a
foreign currency are less than 1 0 % of the total foreign currency
liabilities of the company. T h e pertinent provisions of the
Sees. 198-209
THE BUSINESS OF INSURANCE
Title 4. — Investments
495
Insurance C o d e on investments shall likewise be applicable
to foreign investments. All foreign currency denominated
investments must be coordinated w i t h the International
Department of the Bangko Sentral ng Pilipinas (BSP).
(3)
Insurance policies. —
(a) All liabilities resulting from the issuance of a foreign
currency denominated policy shall be v a l u e d in the same
currency used in the insurance policy.
(b) All foreign currency assets shall be b o o k e d in the
currency stated in the underlying i n s t r u m e n t / d o c u m e n t . In
the absence of any i n s t r u m e n t / d o c u m e n t , it shall be b o o k e d
in the currency of the country w h e r e the asset is physically
located.
(c) Only cash holdings in acceptable foreign currencies
as defined in N o . (1), shall be allowed.
(d) P r e m i u m related taxes and d o c u m e n t a r y s t a m p taxes
shall be based on the peso equivalent of the p r e m i u m or s u m
assured, as the case m a y b e , at the time the taxes are due in
accordance with BIR regulations.
(e) C o m m i s s i o n s shall be paid in accordance with the
currency agreed u p o n in the agency contract.
(f) Policy benefits and claims shall be payable in the
currency of the insurance policy issued. However, p a y m e n t
m a y be m a d e in another currency subject to the agreement
between the claimant and the insurance company.
(g) Premiums shall be billed in the s a m e currency as the
policy issued. However, p a y m e n t m a y be m a d e in another
currency subject to the agreement between the policyholder
and the insurance company.
(h) Income arising from foreign currency investments
shall be recognized in the currency of the instrument, unless
such instrument specifies another currency, in which case the
investment income shall be valued in that currency.
(i) For purposes of booking the original transaction,
all foreign currency assets and liabilities shall be recorded
in their original currency as mentioned in items (a) and (b)
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THE INSURANCE CODE OF THE PHILIPPINES
Sees. 198-209
above, converted to Philippine peso based on the exchange
rate being used by individual insurance company at the time
they were acquired or incurred, provided however that these
are revalued periodically as explained in item (j), below.
(j) For purposes of periodic and annual reporting, the
value of the foreign currency assets and liabilities shall be
converted to Philippine peso based on the B S P guiding rate
at the end of the reporting period.
(k) Unrealized foreign exchange gain or loss shall be
recognized as Fluctuation Reserve Foreign Exchange.
(1) Realized foreign exchange gain or loss shall be
recognized as income or loss in the Income Statement.
(m) Schedules showing balance sheet items in foreign
currency values and their peso equivalent, shall be submitted
with the Annual Statement. In case an account consists of
multiple currencies, a sub-schedule showing the currency
breakdown shall likewise be submitted.
(4) Rationale for offshore investments. — Offshore investments
described in No. (2) above m a y be