SAN BEDA UNIVERSITY
COLLEGE OF LAW
S.Y. 2020 - 2021
BAR QUESTIONS AND
SUGGESTED ANSWERS IN
COMMERCIAL LAW
REVIEW
-Insurance LawSUBMITTED BY:
4F 2020 - 2021
SUBMITTED TO:
ATTY. TIMOTEO B. AQUINO
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
CONCEPT OF INSURANCE
Nature and Characteristics
2012
An insurance contract is an aleatory contract, which means that:
a. The insurer will pay the insured equivalent to the amount of the premium paid.
b. The obligation of the insurer is to pay depending upon the happening of an
uncertain future event.
c. The insured pays a fixed premium for the duration of the policy period and the
amount of the premiums paid to the insurer is not necessarily the same amount
as what the insured will get upon the happening of an uncertain future event.
d. The obligation of the insurer is to pay depending upon the happening of an
event that is certain to happen.
SUGGESTED ANSWER: B. The obligation of the insurer is to pay depending upon the
happening of an uncertain future event.
CONCEPT OF INSURANCE
Nature and Characteristics
2012
An Insurance Contract is a contract of adhesion, which means that in resolving
ambiguities in the provision of the insurance contract, a. The general rule is that, the insurance contract is to be interpreted strictly in
accordance with what is written in the contract.
b. Are to be construed liberally in favor of the insured and strictly against the
insurer who drafted the insurance policy.
c. Are to be construed strictly against the insured and liberally in favor of the
insurer.
d. If there is an ambiguity in the insurance contract, this will invalidate the
contract.
SUGGESTED ANSWER: B. Are to be construed liberally in favor of the insured and strictly
against the insurer who drafted the insurance policy.
1
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
CONCEPT OF INSURANCE
Liberal Construction of Insurance Contracts
1993
S Insurance Co. issued a personal accident policy to Bob Tan with a face value of
P500,000. In the evening of September 5, 2020, after his birthday party, Tan was in a
happy mood but not drunk. He was playing with his handgun, from which he
previously removed the magazine. As his secretary was watching television, he stood
in front of her and pointed the gun at her. She pushed it aside and said that it may be
loaded. He assured her that it was not and then pointed it at his temple. The next
moment, there was an explosion and Tan slumped to the floor lifeless.
The wife of the deceased sought payment on the policy, but her claim was rejected.
The insurance company agreed that there was no suicide. However, it was the
submission of the insurance company that there was no accident. In support thereof,
it contended a) that there was no accident when a deliberate act was performed unless
some additional, unexpected, independent and unforeseen happening occur which
produces or brings about the injury or death; and b) that the insured willfully exposed
himself to needless peril and thus removed himself from the coverage of the insurance
policy.
Are the two contentions of the insurance company tenable? Explain.
SUGGESTED ANSWER: No, the contentions of the insurance company are untenable.
The facts of the case bear striking similarities with that of Sun Insurance Office vs. Court of
Appeals where the Supreme Court held that the term accident, as used in the contract of
insurance, must be construed in its common usage. 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 known case, and therefore not expected. Moreover, insurance
contracts, in case of doubt, are interpreted liberally in favor of the assured.
In the case at bar, Tan was unquestionably negligent and that negligence cost him his own
life. However, it should not prevent his widow from recovering from the insurance policy he
obtained precisely against accidents. There is nothing in the policy that relieves the insurer
of the responsibility to pay the indemnity agreed upon if the insured is shown to have
contributed to his own accident. Indeed, most accidents are caused by negligence.
Therefore, the death of Tan was accidental, and the widow of the deceased may sought
payment on the policy.
2
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
ELEMENTS OF INSURANCE
Parties; Public Enemy
2000
May a Filipino member of the New People’s Army be insured with a company licensed
to do business under the Insurance Code of the Philippines?
SUGGESTED ANSWER: Yes, a member of the New People’s Army may be insured with a
company licensed to do business under the Insurance Code of the Philippines. Section 7 of
the Insurance Code provides that “anyone except a public enemy may be insured.” What is
prohibited from being insured is a public enemy. A public enemy is a citizen or national of a
country with which the Philippines is at war. Such member of the New People’s Army is not
a citizen nor a national of another country with which the Philippines is at war, hence he may
be insured.
ELEMENTS OF INSURANCE
Parties; Prohibited Beneficiaries
1998; 2005
Jacob obtained a life insurance policy for P1 million designating irrevocably Diwata, a
friend, as beneficiary. Jacob, however, changed his mind and wants Yob and Jojo, his
other friends, to be included as beneficiaries considering that the proceeds of the
policy are sufficient for the three friends.
1. Can Jacob still add Yob and Jojo as his beneficiaries?
2. What are the effects of an irrevocable designation of a beneficiary under the
Insurance Code? Explain.
SUGGESTED ANSWERS:
1. No, Yob and Jojo cannot be designated as beneficiaries.
Section 11 of the Insurance Code provides that the insured shall have the right to
change the beneficiary designated in the policy, unless he has expressly waived his
right in said policy. Moreso, the Supreme Court, in the case of Go v. Redfern held that
an irrevocable beneficiary has acquired a vested right over the insured’s policy. Any
additional beneficiary that the insured wants to include in the policy must be with the
irrevocable beneficiary’s consent as such additional beneficiaries inclusion will
reduce the amount vested in the former.
In the case at bar, it appears that Diwata is an irrevocable beneficiary. Therefore, she
has a vested right over Jacob’s policy. Her consent must be obtained first by Jacob
before adding Yob and Jojo as beneficiaries.
3
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
2. The irrevocable beneficiary has a vested interest in the policy, including its incident
such as the policy loan and cash surrender value.
ELEMENTS OF INSURANCE
Parties
1981
On July 1, 1979, Crispulo, married to Laura with whom he has two legitimate children,
was issued Policy No. 8008 of the Midland Life Insurance Co. on a whole-life plan for
P10,000. He designated Angie, his common-law wife as the recoverable beneficiary.
He referred to her, in his application and policy, as his wife. Two years later, Crispulo
died. Angie filed her claim for the proceeds of the policy as the designated beneficiary
therein. The widow, Laura, also filed her claim as legal wife. If you were the Legal
Counsel for the Insurance Company, to whom would you adjudicate the proceeds of
the insurance policy? Reason out your answer briefly.
SUGGESTED ANSWER: I would adjudicate the proceeds of the insurance policy to Laura, the
legal wife. In the appointment of beneficiary, the New Civil Code imposed certain limitations;
one of them being that the insured may not appoint, as his beneficiary, one with whom he is
guilty of concubinage, at the time of designation. Since Crispulo was married to Laura at the
time when he designate as his beneficiary his concubine Angie, with whom he was guilty of
concubinage at the time of designation, Laura may have the designation of Angie nullified, by
mere preponderance of evidence in the same action for nullification. There is even no need
of the criminal conviction for concubinage (Arts. 739 and 2012, N.C.C.; Insular Life assn. Co.,
Ltd. v. Ebrado, Oct. 28, 1977; 80 SCRA 181).
ELEMENTS OF INSURANCE
Right of the Insured to Change Beneficiary
1978
On December 20, 1974, A took out a life insurance policy and named his wife B, as
beneficiary. The policy was silent with regard to any change of beneficiary. Suspecting
that B was committing adultery, A immediately notified the insurance company in
writing that he is substituting his brother C as beneficiary in place of B. A died later on
June 30, 1975. B claims the proceeds of the insurance policy, contending that as
designated beneficiary, she cannot be changed without her consent, she having
acquired a vested right to the proceeds of the policy. Decide. Give reasons for your
answer.
SUGGESTED ANSWER: B cannot claim the proceeds of A’s life insurance policy.
The law provides that insured shall have the right to change the beneficiary he designated in
the policy, unless he has expressly waived this right in said policy. Notwithstanding the
4
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
foregoing, in the event the insured does not change the beneficiary during his lifetime, the
designation shall be deemed irrevocable
B did not acquire any vested rights in the proceeds because A, the insured, had the right to
change the beneficiary and he has the power to 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.
Therefore, B cannot claim the insurance proceeds of A.
ELEMENTS OF INSURANCE
Beneficiary
2012
X is the common law wife of Y. Y loves X so much that he took out a life insurance on
his own life and made her the sole beneficiary. Y did this to ensure that X will be
financially comfortable when he is gone. Upon the death of Y:
a. X as sole beneficiary under the life insurance policy on the life of Y will be
entitled to the proceeds of the life insurance.
b. Despite the designation of X as the sole beneficiary, the proceeds of the life
insurance will go to the estate of Y.
c. The proceeds of the life insurance will go to the compulsory heirs of Y.
d. The proceeds of the life insurance will be divided equally amongst X and the
compulsory heirs of Y.
SUGGESTED ANSWER: A. X as sole beneficiary under the life insurance policy on the life of
Y will be entitled to the proceeds of the life insurance.
ELEMENTS OF INSURANCE
Excepted Risk
2012
X, in January 30, 2020, or two (2) years before reaching the age of 65, insured his life
for Php20Million. For reason unknown to his family, he took his own life two (2)days
after his 65th birthday. The policy contains no excepted risk. Which statement is most
accurate?
a. The insurer will be liable.
b. The insurer will not be liable.
c. The state of sanity of the insured is relevant in cases of suicide in order to hold
the insurer liable.
5
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
d. The state of sanity of the insured is irrelevant in cases of suicide in order to hold
the insurer liable.
SUGGESTED ANSWER: A. The insurer will be liable.
ELEMENTS OF INSURANCE
Who May Be Insured
2013
In 2010, the Philippine National Police declared Kaddafy Benjelani "Public Enemy No.
1" because of his terrorist activities in the country that have resulted in the death of
thousands of Filipinos. A ransom of P15 million was placed on Kaddafy Benjelani's
head.
Worried about the future of their family, Kaddafy Benjelani's estranged wife, Aurelia,
secured in December 2010 a life insurance policy on his life and designated herself as
the beneficiary.
Is the policy valid and binding?
A. Yes, the policy is valid and binding because Aurelia has an insurable interest on
the life of Kaddafy Benjelani.
B. No, the policy is not valid and binding because Kaddafy Benjelani has been
officially declared a public enemy.
C. Yes, the policy is valid and binding because it has been in force for more than
two years.
D. No, the policy is not valid and binding since the spouses' estrangement removed
Aurelia's insurable interest in Benjelani's life.
E. None of the above.
SUGGESTED ANSWER: A. Yes, the policy is valid and binding because Aurelia has an
insurable interest on the life of Kaddafy Benjelani.
ELEMENTS OF INSURANCE
Who May Insure; Effect of Minority
2012
X, a minor, contracted an insurance on his own life. Which statement is most accurate?
a. The life insurance policy is void ab initio.
b. The life insurance is valid provided it is with the consent of the beneficiary.
6
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
c. The life insurance policy is valid provided the beneficiary is his estate or his
parents, or spouse or child.
d. The life insurance is valid provided the disposition of the proceeds will be
subject to the approval of the legal guardian of the minor.
SUGGESTED ANSWER: C. The life insurance policy is valid provided the beneficiary is his
estate or his parents, or spouse or child.
ELEMENTS OF INSURANCE
Parties
2012
A house and lot is covered by a real estate mortgage (REM) in favor of ZZZ Bank. The
bank required that the house be insured. The owner of the policy failed to endorse nor
assign the policy to the bank. However, the Deed of Real Estate Mortgage has an
express provision which says that the insurance policy is also endorsed with the
signing of the REM. Will this be sufficient?
a. No, insurance policy must be expressly endorsed to the bank so that the bank
will have a right in the proceeds of such insurance in the event of loss.
b. The express provision contained in the Deed of Real Estate Mortgage to the
effect that the policy is also endorsed is sufficient.
c. Endorsement of Insurance Policy in any form is not legally allowed.
d. Endorsement of the Insurance Policy must be in a formal document to be valid.
SUGGESTED ANSWER: B. The express provision contained in the Deed of Real Estate
Mortgage to the effect that the policy is also endorsed is sufficient.
CLASSES OF INSURANCE
Marine Insurance
2014
ELP Insurance, Inc. issued Marine Policy No. 888 in favor of FCL Corp. to insure the
shipment of 132 bundles of electric copper cathodes against all risks. Subsequently,
the cargoes were shipped on board the vessel "M/V Menchu" from Leyte to Pier 10,
North Harbor, Manila.
Upon arrival, FCL Corp. engaged the services of CGM, Inc. for the release and
withdrawal of the cargoes from the pier and the subsequent delivery to its
warehouses/plants in Valenzuela City. The goods were loaded on board twelve (12)
trucks owned by CGM, Inc., driven by its employed drivers and accompanied by its
employed truck helpers. Of the twelve (12) trucks en routeto Valenzuela City, only
7
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
eleven (11) reached the destination. One (1) truck, loaded with eleven (11) bundles of
copper cathodes, failed to deliver its cargo.
Because of this incident, FCL Corp. filed with ELP Insurance, Inc. a claim for insurance
indemnity in the amount of P1,500,000.00. After the requisite investigation and
adjustment, ELP Insurance, Inc. paid FCL Corp. the amount of P1,350,000.00 as
insurance indemnity.
ELP Insurance, Inc., thereafter, filed a complaint for damages against CGM, Inc. before
the Regional Trial Court (RTC), seeking reimbursement of the amount it had paid to
FCL Corp. for the loss of the subject cargo. CGM, Inc. denied the claim on the basis that
it is not privy to the contract entered into by and between FCL Corp. and ELP
Insurance, Inc., and hence, it is not liable therefor.
If you are the judge, how will you decide the case?
SUGGESTED ANSWER: I will decide in favor of ELP Insurance.
Art. 2207 of the Civil Code provides that if the plaintiff’s property has been insured and he
has received indemnity from the insurance company for injury or loss arising out of the
wrong or breach of the contract, the insurance company shall be subrogated to the rights of
the insured against the person who violated the contract.
Here, it is immaterial whether CGM has privity to the contract between FCL Corp. and ELP,
since ELP Insurance is subrogated to the rights of FCL Corp. to the extent of the amount it
paid to the latter under the marine insurance contract. ELP Insurance has the right to seek
reimbursement from CGM, Inc., which caused the breach of contract and/or Tort arising from
contract between CGM, Inc. and FLP Corp.
Thus, I will decide in favor of ELP Insurance because it was subrogated to the rights of FCL
Corp. against CGM, Inc.
CLASSES OF INSURANCE
Marine Insurance
2017
Absolute Timber Co. (ATC) has been engaged in the logging business in Isabela. To
secure one of its shipments of logs to be transported by Andok Shipping Co., ATC
purchased a marine policy with an all-risk provision, Because of a strong typhoon then
hitting Northern Luzon, the vessel sank and the shipment of logs was totally lost. ATC
filed its claim, but the insurer denied the claim on several grounds, namely: (1) the
vessel had not been seaworthy; (2) the vessel’s crew had lacked sufficient training; (3)
the improper loading of the logs on only one side of the vessel had led to the tilting of
the ship to that side during the stormy voyage; and (4) the extremely bad weather had
8
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
been a fortuitous event. ATC now seeks your legal advice to know if its claim was
sustainable. What is your advice? Explain your answer.
SUGGESTED ANSWER: I would advise ATC that its claim is sustainable because the policy
they have is a marine policy with an all-risk provision.
In the case of Filipino Merchants Insurance Company vs. Court of Appeals (G.R. No. 85141,
November 28, 1989), the Supreme Court held that a coverage under an "all risks" provision
of a marine insurance policy creates a special type of insurance which extends coverage to
risks not usually contemplated and avoids putting upon the insured the burden of
establishing that the loss was due to the peril falling within the policy's coverage. The insurer
can avoid coverage upon demonstrating that a specific provision expressly excludes the loss
from coverage. As such, absent any specific provisions excepting the insurer from a
particular loss, the insurer will be liable.
In this case, since ATC procured a marine policy with an all-risk provision, any loss they incur
is covered by the policy. It is up to the insurer to prove that a specific provision in the policy
exists that the loss ATC incurred was due to a peril exempted from the coverage.
In line with this, ATC’s claim is sustainable.
CLASSES OF INSURANCE
Marine Insurance
2000
What warranties are implied in marine insurance?
SUGGESTED ANSWER:
The following warranties are implied in marine insurance:
1. That the ship is seaworthy to make the voyage and/or to take in certain cargoes;
2. That the ship shall not deviate from the voyage insured;
3. That the ship shall carry the necessary documents to show nationality or neutrality
and that it will not carry any document which will cast reasonable suspicion
thereon; and
4. That the ship shall not carry contraband, especially if it is making a voyage through
belligerent waters.
9
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
CLASSES OF INSURANCE
Marine Insurance
1992
An insurance company issued a marine insurance policy covering a shipment by sea
from Mindoro to Batangas of 1,000 pieces of Mindoro garden stones against “total loss
only.” The stones were loaded in two lighters, the first with 600 pieces and the second
with 400 pieces. Because of rough seas, damage was caused the second lighter
resulting in the loss of 325 out of the 400 pieces. The owner of the shipment filed
claims against the insurance company on the ground of constructive total loss in as
much as more than 3⁄4 of the value of the stones had been lost in one of the lighters. Is
the insurance company liable under its policy? Why?
SUGGESTED ANSWER: No, the insurance company is not liable under the policy for absence
of constructive loss of the Mindoro garden stones within the contemplation of law.
Sec. 141 of the Insurance Code provides that “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 (¾)
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 (¾); xxx”.
In the case of Oriental Assurance Co. vs. Court of Appeals, the Supreme Court held that the
basis of determining the existence of constructive total loss is the totality of the subject
matter insured as one inseparable unit.
In the case at bar, the policy covered the entire 1,000 pieces of Mindoro garden stones and
the total loss amounted to 325 pieces, the cost of which does not exceed 75% of the total
value of the insured shipment. Since the same are not separately insured, no right to abandon
is given to the person insured.
Therefore, the owner may not exercise his right to abandon and proceed to recover from the
insurer for lack of constructive loss of the shipment.
CLASSES
Marine Insurance
1997
Explain these two doctrines in maritime accidents:
a. The Doctrine of Inscrutable Fault; and
b. The Doctrine of Limited Liability.
10
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWERS:
a. The Doctrine of Inscrutable Fault provides that in cases where the Court determines
that collision is caused by fault but cannot determine which of the two vessels had
caused the collision, each vessel shall suffer its own losses and both shall be solidarily
liable for losses or damages on the cargo.
b. The Doctrine of Limited Liability, which has been explained to be that of the real and
hypothecary doctrine in maritime law, is embodied in Articles 587, 590 and 837
under Book III of the Code of Commerce. 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. When 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. But, the doctrine of limited liability finds no
application in cases where the shipowner and the agent are guilty of negligence.
CLASSES
Marine Insurance
1981
An inter-island vessel, insured for P2 M against “total and constructive total loss,” sank
in 150 ft of water one mile off Paranaque during a typhoon. After the typhoon, the ship
owner gave written notice of abandonment of his interest in the entire sunken ship to
the insurance company. Refusing to accept the offer of abandonment, the insurer
hired salvors to refloat the vessel at a total cost of P40,000. Because the refloated
vessel needed repairs, the insurer issued invitations to bid for repairs. Several firms
submitted separate sealed bids ranging from P1.2 M to P1.3 M for the complete
refurbishing and/or restoration of the vessel to its original condition. On the basis of
the following facts, the insurance company rejected the claim of the shipowner for
payment of total loss on the ground that the ground that there was no constructive
total loss.
1. Was the notice of abandonment given by the owner properly made? Reason.
2. Is the position of the insurance company as to the absence of constructive total
loss well taken? Reason.
3. Assuming that the shipowner failed to give the proper notice of abandonment,
may he still recover from the insurer? Why?
11
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWERS:
1. First Suggested Answer: The notice of abandonment made in writing by the insured
to the insurer was sufficient, had the loss been a constructive total loss of the vessel,
meaning more than ¾ of the value of the vessel. (Sec. 139, Corporation Code)
Second Suggested Answer: The notice of abandonment made in writing was not
proper, since the existence of the constructive total loss of the vessel had not yet been
determined. (Sec. 141, Insurance Code)
2. Yes, the position of the insurance company as to the absence of constructive total loss
is well taken. The sum total of the damage to the vessel was only P1,340,000.00
(P40,000 for the salvors, and P1,300 for the restoration of the vessel to its original
condition) which amount is not more than ¾ of the value of the vessel (P2 M) (Sec.
139, Corporation Code).
3. Yes, the shipowner may still recover from the insurer, his actual loss, the amount of
P1,340,000.00 which is now only partial loss, being not total loss. But since the said
amount was already spent by the insurer on the vessel, the insurer is no longer liable
to the shipowner, except to deliver the vessel.
CLASSES
Marine Insurance
1982
A. Explain the limited liability rule or the so called real or hypothecary nature of
maritime law.
B. In an action grounded on the contract of carriage, is there need for the court to
make an express finding of fault or negligence on the part of the carrier in order
to hold it liable for claims filed in behalf of the injured or deceased passengers?
Explain. Is there any exception to any answer you may give on this question?
SUGGESTED ANSWER:
A. Under the real or hypothecary nature of maritime law, the liability of the shipowner
or agent, arising from the operation of a ship, is limited to the vessel, equipment and
freight during the voyage, so that if shipowner or agent would abandon the vessel,
equipment and freight, his liability would be extinguished. However, if the vessel
would sink and never be recovered, that would also extinguish the liability of the
shipowner or agent, unless those would be insured, and in this case it would suffice
to surrender the insurance to the creditors to extinguish his liability (Abueg v. San
Diego, 44 Off. Gaz. 80).
12
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
B. In case of death or injuries to passengers, common carriers are presumed to have
been at fault or to have acted negligently, unless they prove that they observed the
utmost diligence of very cautious persons, with a due regard for all circumstances
(Arts. 1755 & 1756 N.C.C.).
MARINE INSURANCE
Averages
1981
The vessel “General Mascardo” was loaded with 5,000 tons of gold and copper
concentrates by Syndicated Ores, Inc. (the charterer) for delivery to the U.S. The
master of the vessel issued the corresponding bill of lading which contained a
prohibition against the loading of dangerous cargo per se or cargo which may become
dangerous and make the voyage unsafe. The master has had 10 years of experience as
captain, but this was his first experience with cargo of gold and copper concentrates.
The cargo was loaded, stowed and trimmed at the sole risk and expense of Syndicated
Ore, Inc. While enroute to its destination, the vessel met a typhoon and because of the
heavy stress, the shifting boards or compartments constructed by Syndicated broke,
causing the cargo of ore concentrates to shift. Since the vessel was listing on its side to
almost 14° for several hours, the master, in the hope of saving the vessel, decided to
jettison some of the cargo belonging to other shippers. At this point, a powerful
tugboat offered to help in maneuvering the vessel, which the master accepted on nocure no pay basis. To save the vessel and the remaining cargo, the master, after
consulting with his officers, deviated to Japan, the nearest port, instead of proceeding
to the U.S. Thereafter, the cargo of gold and copper concentrates were examined by
international surveyors who declare that the moisture content of said concentrates
was beyond transportable limit and the same was much higher than as certified by
Syndicated. The master and the shipowner, after declaring that the cargo was of
dangerous nature and condition, unloaded the cargo in Japan, abandoned the voyage
and informed the cargo owners to transship their cargo at their own cost and expense.
The master and the shipowner also slapped a lien on said cargo for freight up to Japan
as well as other expenses.
a. Was there a general average situation? Did the vessel have the right to jettison
other cargo, hire salvors and deviate the vessel to Japan?
b. Assuming Syndicated Ores, Inc. refused general average, may the vessel declare
the cargo as dangerous, unload the same, store the cargo in Japan and abandon
the voyage, at the same time slapping a lien on cargo for freightage, expenses
for unloading, expenses for jettison, salvage and/or general average?
c. Does Syndictaed Ores, Inc. have the right to insist that the vessel carry the cargo
to the U.S. per bill of lading, or that the shipowner hire a substitute vessel to
complete the contracted voyage in accordance with the “extraordinary
diligence” required or common carriers in the carriage of goods?
13
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWERS:
a. As to general average— First suggested answer: No, there was no general average
situation, the requisites of a general average being absent.
Second suggested answer: Assuming that the missing facts for requirements (there
are four requisites) were present, then there was general average. (A. Magsaysay, Inc.
v. Agan, L-6393, Jan. 31, 1955)
As to Jettison— First suggested answer: Since the requisites of a general average were
not existing, the captain had no right to jettison other cargo.
Second suggested answer: If the requisites of general average were present (there are
four), then the captain had the right to jettison the other cargo.
As to hiring salvor— First suggested answer: Yes, because the cargo of the vessel was
beyond the control of the crew.
Second suggested answer: No, because the requisites of a valid salvage claim were not
present (there are three)
As to deviation— First suggested answer: The vessel/captain had no right to deviate
the vessel to Japan because the requisites of arrival under stress were not present.
Second suggested answer: Yes, the vessel/captain had the right to deviate the vessel
to Japan, because made in good faith, upon reasonable grounds of belief in its
necessity to avoid a peril.
b. It depends. If the requisites of law as to general average, salvage work and deviation
of the vessel to Japan, would not be present or satisfied, as discussed above, under
question letter (a), then the vessel/captain may not do these acts/things stated in
question letter (b) to the prejudice of the shipper. If otherwise, the vessel/captain
may.
c. It depends. If during the voyage the vessel should become unseaworthy, the captain
shall be obliged to charter at his expense another one in good condition to carry the
cargo to its destination, U.S.A. If the captain should not furnish thru indolence or
malice, a vessel to take the cargo to its destination, the shippers may charter one at
the expense of the captain/shipowner.
14
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
MARINE INSURANCE
Doctrine of Limited Liability
2011
A cargo ship of X Shipping, Co. ran aground off the coast of Cebu during a storm and
lost all its cargo amounting to Php50 Million. The ship itself suffered damages
estimated at Php80 Million. The cargo owners filed a suit against X Shipping but it
invoked the doctrine of limited liability since its vessel suffered an Php80 Million
damage, more than the collective value of all lost cargo. Is X Shipping correct?
A. Yes, since under that doctrine, the value of the lost cargo and the damage to the
ship can be set-off.
B. No, since each cargo owner has a separate and individual claim for damages.
C. Yes, since the extent of the ship’s damage was greater than that of the value of
the lost cargo.
D. No, since X Shipping neither incurred a total loss nor abandoned its ship.
SUGGESTED ANSWER: D. No, since X Shipping neither incurred a total loss nor abandoned
its ship.
In the case of Monarch Insurance v. CA (2000), the Court ruled that under the Doctrine of
Limited Liability, which expresses that "No vessel, no liability", it provides that shipowners
or agents liability is merely co-extensive with his interest in the vessel such that a total loss
thereof results in its extinction. The total destruction of the vessel extinguishes maritime
liens because there is no longer any res to which it can attach.
In this case, X Shipping cannot raise the defense of doctrine of limited liability because it does
not incur total loss nor abandoned the ship. Hence, 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.
MARINE INSURANCE
Deviation; When it is Proper
2011
T Shipping, Co. insured all of its vessels with R Insurance, Co. The insurance policies
stated that the insurer shall answer for all damages due to perils of the sea. One of the
insured's ship, the MV Dona Priscilla, ran aground in the Panama Canal when its
engine pipes leaked and the oil seeped into the cargo compartment. The leakage was
caused by the extensive mileage that the ship had accumulated.
15
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
May the insurer be made to answer for the damage to the cargo and the ship?
A. Yes, because the insurance policy covered any or all damage arising from perils
of the sea.
B. Yes, since there appears to have been no fault on the part of the shipowner and
ship captain.
C. No, since the proximate cause of the damage was the breach of warranty of
seaworthiness of the ship.
D. No, since the proximate cause of the damage was due to ordinary usage of the
ship, and thus not due to a peril of the sea.
SUGGESTED ANSWER: D. No, since the proximate cause of the damage was due to ordinary
usage of the ship, and thus not due to a peril of the sea.
Pursuant to Section 101 of the Insurance Code, the risk which may be insured against in
marine insurance are those only perils of the sea, unless perils of the ship are covered by an
all-risk policy. Such perils of the sea must be the proximate cause of the loss in order that the
insurer may be held liable.
In the case of La Razon Social v. Union Insurance Society of Canton (1919), the Court ruled
that “a loss which, in the ordinary course of events, results from the natural and inevitable
action of the sea, from the ordinary wear and tear of the ship, or 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 "peril of the ship." The insurer undertakes to insure against perils of the sea and
similar perils, not against perils of the ship.”
In this case, the proximate cause of the damage was due to the leakage caused by the
extensive mileage that the ship had accumulated. Such damage clearly falls to the perils of
the ship since it is from the ordinary usage, wear and tear of the ship.
Therefore, being a no all-risk-policy, the insurer cannot be held liable to answer for the
damages because the risk which may be insured against are those only perils of the sea.
MARINE INSURANCE
Deviation; When it is Proper
2011
T, the captain of MV Don Alan, while asleep in his cabin, dreamt of an Intensity 8
earthquake along the path of his ship. On waking up, he immediately ordered the ship
to return to port. True enough, the earthquake and tsunami struck three days later
and his ship was saved. Was the deviation proper?
16
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
A. Yes, because the deviation was made in good faith and on a reasonable ground
for believing that it was necessary to avoid a peril.
B. No, because no reasonable ground for avoiding a peril existed at the time of the
deviation.
C. No, because T relied merely on his supposed gift of prophecy.
D. Yes, because the deviation took place based on a reasonable belief of the
captain.
SUGGESTED ANSWER: B. No, because no reasonable ground for avoiding a peril existed at
the time of the deviation.
Pursuant to Section 125 of the Insurance Code of the Philippines (ICP), it provides that
“Deviation is a departure from the course of the voyage insured, or an unreasonable delay in
pursuing the voyage or the commencement of an entirely different voyage.” Further, under
Section 126 of the same code, it states that “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.”
Thus, it is clear under Section 126 of the ICP that there must be a reasonable ground of belief
that there is a necessity to avoid a peril at the time when deviation is made. However, in this
case, there was no existing peril yet at the time the ship captain ordered the ship to return
to port as the captain only dreamt of an earthquake.
Therefore, the deviation made by the ship captain was improper.
MARINE INSURANCE
Loss; Constructive Total Loss
2011
For a constructive total loss to exist in marine insurance, it is required that the person
insured relinquish his interest in the thing insured. This relinquishment must be:
A.
B.
C.
D.
Actual
Constructive first and if it fails, then actual.
Either actual or constructive.
Constructive
17
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWER: A. Actual.
Pursuant to Section 133 of the ICP, it provides that “a constructive total loss is one which
gives to a person insured a right to abandon, under Section 141.” An abandonment is an act
of the insured by which, after a constructive total loss, he declares the relinquishment to the
insurer of his interest in the thing insured. One of the requisites provided for a valid
abandonment is that there must be an actual relinquishment of his interest in the thing
insured. It means that the person must do positive acts showing his abandonment over such
thing insured.
MARINE INSURANCE
Representation; Test of Materiality
2011
Shipowner X, in applying for a marine insurance policy from ABC, Co., stated that his
vessel usually sails middle of August and with normally 100 tons of cargo. It turned
out later that the vessel departed on the first week of September and with only 10 tons
of cargo. Will this avoid the policy that was issued?
A.
B.
C.
D.
Yes, because there was breach of implied warranty.
No, because there was no intent to breach an implied warranty.
Yes, because it relates to a material representation.
No, because there was only representation of intention.
SUGGESTED ANSWER: D. No, because there was only representation of intention.
Pursuant to Section 113 of the ICP, it provides that “if a representation by any 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.” Thus, there must be a material representation for the insurance contract
to be rescinded.
Moreover, in applying the Test of Materiality enunciated under Section 31 of the same code,
it provides that “materiality is 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 advantages of the proposed contract, or in making his inquiries.”
In this case, the representation made by the ship owner were only representation of
intention and does not affect the validity of the insurance contract. More so, such
representation is not the moving factor or the does not add to the reasons and not material
whether such policy be accepted or not.
Therefore, the representations made will not avoid the policy for it being only a
representation of intention.
18
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
MARINE INSURANCE
Perils of the Ship
2011
Perils of the ship, under marine insurance law, refer to loss which in the ordinary
course of events results from:
A.
B.
C.
D.
Natural and inevitable actions of the sea.
Natural and ordinary actions of the sea.
Unnatural and inevitable actions of the sea.
Unnatural and ordinary actions of the sea.
SUGGESTED ANSWER: A. Natural and inevitable actions of the sea.
In the case of La Razon Social v. Union Insurance Society of Canton (1919), the Court ruled
that “a loss which, in the ordinary course of events, results from the natural and inevitable
action of the sea, from the ordinary wear and tear of the ship, or 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 "peril of the ship."
MARINE INSURANCE
Perils of the Ship
2011
X Shipping, Co., insured its vessel MV Don Teodoro for Php100 Million with ABC
Insurance, Co. through T, an agent of X Shipping. During a voyage, the vessel
accidentally caught fire and suffered damages estimated at Php80 Million. T
personally informed ABC Insurance that X Shipping was abandoning the ship. Later,
ABC insurance denied X Shipping’s claim for loss on the ground that a notice of
abandonment through its agent was improper. Is ABC Insurance right?
A. Yes, since X Shipping should have ratified its agent’s action.
B. No, since T, as agent of X Shipping who procured the insurance, can also give
notice of abandonment for his principal.
C. Yes, since only the agent of X Shipping relayed the fact of abandonment.
D. No, since in the first place, the damage was more than 3⁄4 of the ship's value.
SUGGESTED ANSWER: B. No, since T, as agent of X Shipping who procured the insurance,
can also give notice of abandonment for his principal.
Pursuant to Section 140 of the ICP, “Abandonment, in marine insurance, is the act of the
insured by which, after a constructive total loss, he declares the relinquishment to the
19
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
insurer of his interest in the thing insured.” Further, under Article 145 of the same code, it
states that “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 (7) days from such oral notice.”
In this case, it was T, the agent of X Shipping that give notice of abandonment to the insurance
company. The relationship established between the agent and principal can be established
since also it was the agent, who procured first the insurance and then later on was the one
who gave notice of abandonment. In addition, the acts made by agents if it acted within the
powers and name of his principal, binds the principal from such acts.
Therefore, the notice of abandonment given through the agent of X Shipping was proper.
MARINE INSURANCE
Implied Warranty of Seaworthiness
1986
Jacob, the owner of a barge, offered to transport the logs of Esau from Palawan to
Manila. Esau accepted the offer not knowing that the barge was manned by an
irresponsible crew with deep-seated resentments against Jacob, their employer.
Esau inured his cargo of logs against both perils of the sea and barratry.
The logs were improperly loaded on one side, thereby causing the barge to tilt and to
navigate on an uneven keel. When the strong winds and high waves, normal for that
season, started to pound the barge, the crew took advantage of the situation and
unbolted the sea valves of the barge, causing sea water to come in. the barge sank.
When Esau tried to collect from the insurance firm, the latter stated that it could not
be held responsible considering the unworthiness of both the barge and its crew. Esau
countered that he was not the owner of the barge and he could not be held responsible
for conditions about which he was innocent.
Is the insurance company liable? Decide with reasons.
SUGGESTED ANSWER: No, the insurance company is not liable.
In marine insurance, the implied warranty of seaworthiness of the vessel at the time of the
inception of the voyage also applies to whoever is insuring the cargo, whether he be the
shipowner or not. It becomes the obligation of the cargo owner to look for a reliable common
carrier, which keeps its vessels seaworthy. The shipper may have no control over the vessel
but he has full control in the choice of the common carrier which will transport his goods. In
an insurance against perils of the sea, it which refers only to fortuitous accidents or casualties
20
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
of the seas and it is the responsibility of the insured rather than the insurer to see to it that
the vessel is seaworthy. That responsibility, however, shifts to the insurer where the covered
risks include perils of the ship.
In this case, there was a breach of warranty because the logs were improperly loaded and
the crew was irresponsible. Further, the strong and high waves which is normal for the
season of voyage causing the barge to sink is a cause which is not a peril of the sea. Hence,
due to Esau’s failure in his obligation as the owner of the cargo to look for a reliable common
carrier which keeps its vessel in a seaworthy condition, the insurance company should not
be liable for the loss.
MARINE INSURANCE
Loss
2005
MV Pearly Shells, a passenger and cargo vessel, was insured for P40 M against
“constructive total loss”. Due to typhoon, it sank near Palawan. Luckily, there were no
casualties, only injured passengers. The shipowner sent a notice of abandonment of
his interest over the vessel to the insurance company which then hired professionals
to afloat the vessel for P900,000. When re-floated, the vessel needed repairs estimated
at P2 M. The insurance company refused to pay the claim of the shipowner, stating that
there was “no constructive total loss.”
1. Was there “constructive total loss” to entitle the shipowner to recover from
the insurance company? Explain.
2. Was it proper for the shipowner to send a notice of abandonment to the
insurance company? Explain.
SUGGESTED ANSWERS:
1. Yes, there was constructive total loss.
Section 133, in relation to Section 141 of the Insurance Code of the Philippines
provides of the circumstances where a person insured by a contract of Marine
Insurance may abandon the thing insured when the cause of the loss is a peril insured
against. When the vessel sank, it was likely that it would be totally lost because of the
improbability of recovery. Thus, there is constructive total loss.
In this case, when the vessel sank it was likely that it would be totally lost because of
the improbability of recovery.
2. Yes, it was proper for the ship owner to send a notice of abandonment to the
insurance company.
21
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Section 140 if the Insurance Code of the Philippines defined abandonment as the act
of the insured by which, after a constructive total loss, he declares the relinquishment
to the insurer of his interest in the things insured. Abandonment is made by giving
notice thereof to the insurer as provided in Section 145, ICP. Since there was reliable
information of the loss of the vessel, it is therefore proper to send notice to the
insurance company.
MARINE INSURANCE
Deviation
2005
On a clear weather, MV Sundo, carrying insured cargo, left the port of Manila bound
for Cebu. While at sea, the vessel encountered a strong typhoon forcing the captain to
steer the vessel to the nearest island where it stayed for 7 days. The vessel ran out of
provisions for its passengers. Consequently, the vessel proceeded to Leyte to
replenish its supplies.
1. Assuming that the cargo was damaged because of such deviation, who between
the insurance company and the owner of the cargo bears the loss? Explain.
2. Under what circumstances can a vessel properly proceed to a port other than
its port of destination? Explain.
SUGGESTED ANSWERS:
1. It is the insurance company who should bear the loss.
Under Section 125 of the Insurance Code of the Philippines, departure of vessel from
course of voyage or an unreasonable delay in pursuing voyage, or the commencement
of an entirely different voyage.
The deviation is proper if it is one of the enumeration in Section 126 of the Insurance
Code of the Philippines. Since the deviation was caused by a strong typhoon, it was
caused by a strong typhoon, it was caused by circumstances beyond the control of the
captain, and also to avoid a peril whether or not insured against.
Thus, such deviation was proper and the insurance company shall bear the loss.
2. Under Section 126 of the Insurance Code of the Philippines, a vessel can properly
proceed to a port of destination in the following cases:
a. When caused by circumstances over which neither the master or 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;
22
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
c. When made in good faith, and upon reasonable grounds of belief in the
necessity to avoid peril; or
d. When made in good faith for the purpose of saving human life or relieving
another vessel in distress.
MARINE INSURANCE
Perils of the Ship V. Perils of the Sea
1998
A marine insurance policy states that “the insurer shall be liable for losses incident to
perils of the sea.” During the voyage, seawater entered the compartment where the
cargo was stored due defective drainpipe of the ship. The insured filed an action on
the policy for recovery of the damages caused to the cargo. May the insured recover
damages?
SUGGESTED ANSWER. No, the insured cannot recover damages.
Section 86 of the Insurance Code provides that an insurer is liable for a loss of which a peril
insured against was the proximate cause, although a peril not contemplated may have been
a remote cause of the loss. The Supreme Court has held in a litany of cases that proximate
cause is that which in natural and continuous sequence, unbroken by any new cause,
produces the loss and without which, the loss would not have occurred.
In the case before us, perils of the sea, that which event is insured, do not appear to be the
cause of the loss but that of the defective drainpipes of the ship. This defect is defined as
perils of the ship which is not covered by the policy. Therefore, the insured may not recover.
FIRE INSURANCE
Proximate Cause
1989
Queens Insurance Company insured X, a resident of Baguio City, “against all direct loss
and damage by fire.” X lived in a house heated by a furnace. His servant built a fire in
the furnace using material that was highly flammable. The furnace fire caused intense
heat and great volumes of smoke and soot that damaged the furnishings in the rooms
of X. when X tried to collect on the policy, Queens Insurance refused to pay contending
that the damage is not covered by the policy, where the fire is confined within the
furnace. Decide.
SUGGESTED ANSWER:
The refusal of Queens to pay is not justified. Under Section 169 of the Insurance Code, a fire
insurance is a contract of indemnity which the insurer for a consideration agrees to
indemnify the insured against loss of, or damage to, property by fire. In the present case, the
23
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
insurance coverage was against all direct loss and damage by fire. Since, clearly, fire was the
proximate cause of the damage, recovery should be allowed as being the real intendment of
the parties. As a rule, recovery is due when the risk insured against is either the proximate
cause or the immediate cause. Notwithstanding any exception, the primordial rule in
determining recovery is whether or not the risk insured against is the proximate cause. If in
the affirmative, recovery is allowed. Hence, X may recover on the policy.
FIRE INSURANCE
Warranties
1986
Pabaya paid for a fire insurance policy on his multi storey building. At the time he
applied for the insurance, he told the representative of the insurance company that he
planned to assign a security guard on every floor of the building right away. Except for
the ground floor, no security guards were assigned. 11 months after the policy was
issued, the building was gutted by fire which started on the third floor. Unknown to
Pabaya, the insurance company had incorporated his planned undertaking in the
policy.
Can Pabaya recover on the fire insurance policy?
SUGGESTED ANSWER: Yes, Pabaya can recover under the insurance policy.
Warranty is either express or implied and may also be affirmative or promissory. Promissory
warranties are subject to Section 72 of the Insurance Code which provides that a statement
in a policy, which imparts that 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.
In this case, the statement of Pabaya that he planned to assign security guard on every floor
of the building, whether incorporated in the policy or not, does not amount to a promissory
warrant. As it was a mere plan, it cannot be taken as an obligatory or promissory
undertaking.
Hence, Pabaya can recover on the fire insurance policy as there was no violation or breach
on the part of the insured.
FIRE INSURANCE
Kinds of Property Insurance Policies
1975
In 2004, Jose constructed a house worth P50,000.00, which he insured against fire for
the same amount. The insurance for the same amount was renewed every year. In
2014, when the house was already worth P100,000.00 on account of inflationary
24
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
prices (in case of a rebuilding), one-fifth (1/5) of the house was destroyed by fire. As
nothing illegal about the contract, how much, if any, can Jose successfully recover from
the Insurance Company? Reason.
SUGGESTED ANSWER: The answer must be qualified. Property Insurance policies may be
classified into an open policy, valued policy or running policy.
Under Sec. 60 of the Insurance Code, an open policy is one in which the value of the thing
insured is not agreed upon, and the amount of the insurance merely represents the insurer’s
maximum liability. The value of such thing insured shall be ascertained at the time of the
loss. Whereas, according to Sec. 61 of the Insurance Code, a valued policy is one which
expresses on its face an agreement that the thing insured shall be valued at a specific sum.
Meanwhile, in Sec. 62 of the Insurance Code, 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.
In the case at bar, if the fire policy is a valued one, then Jose can recover 1/5 of P50,000.00.
i.e., P10,000.00. Under the Insurance Code, the valuation in a valued policy is conclusive
between the parties in the absence of fraud. Perforce, Jose cannot claim that since his house
was worth P100,000.00 at the time of the loss, he should be able to recover
P20,000.00 (actual value of loss—1/5 of P100,00.00)
On the other hand, if the policy is an open policy, then under the Iaw, appraisal of loss is made
after the fire. Since the house was worth P100,00.00 at such time, then the loss of Jose is
P20,000.00 and he can recover this amount under such an open policy.
CLASSES
Compulsory Motor Vehicle Liability Insurance
2012
X is a passenger of a jeepney for hire being driven by Y. The jeepney collided with
another passenger jeepney being driven by Z who was driving recklessly. As a result
of the collision, X suffered injuries. Both passenger jeepneys are covered by
Comprehensive Motor Vehicular Insurance Coverage. If X wants to claim under the "no
fault indemnity clause", his claim will lie:
a. Against the insurer of the jeepney being driven by Z who was the one at fault.
b. The claim shall lie against the insurer of the passenger jeepney driven by Y
because X was his passenger.
c. X has a choice against whom he wants to make his claim.
d. None of the above.
25
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWER: B. The claim shall lie against the insurer of the passenger jeepney
driven by Y because X was his passenger.
CLASSES
Compulsory Motor Vehicle Liability Insurance
1981
X was riding a suburban utility vehicle (SUV) covered by a comprehensive motor
vehicle liability insurance (CMVLI) underwritten by FastPay Insurance Company
when it collided with a speeding bus owned by RM Travel, Inc. the collision resulted
in serious injuries to X; Y, a passenger of the bus; and Z, a pedestrian waiting for a ride
at the scene of the collision. The police report established that the bus was the
offending vehicle. The bus had a CMVLI policy issued by Dragon Insurance
Corporation, X, Y and Z jointly sued RM Travel and Dragon Insurance for indemnity
under the Insurance Code of the Philippines. The lower court applied the “no-fault”
indemnity policy of the statute, dismissed the suit against RM Travel, and ordered
Dragon insurance to pay indemnity to all three plaintiffs. Do you agree with the court’s
judgment? Explain.
SUGGESTED ANSWER:
No. The cause of action of Y is based on the contract of carriage, while that of X and Z is based
on torts. The court should not have dismissed the suit against RM Travel. The court should
have ordered Dragon Insurance to pay each of X, Y, and Z to the extent of the insurance
coverage, but whatever amount is agreed upon in the policy should be answered first by RM
Travel and the succeeding amount should be paid by Dragon Insurance up to the amount of
the insurance coverage. The excess of the claims of X, Y and Z, over and above such insurance
coverage, if any, should be answered or paid by RM Travel.
CLASSES
Compulsory Motor Vehicle Liability Insurance
1981
“X” owns and operates several passenger jeepneys in Metro Manila. He entered into a
contract with Gold Mine Insurance & Surety Co., insuring the operation of his jeepneys
against accidents with thirdparty-liability. During the effectivity of the insurance, one
of his jeepneys bumped “B”, who had just alighted from another passenger jeepney
whose driver unloaded passengers in the middle of the street. “B” suffered bodily
injury as a consequence and filed a claim against the insurance company. The latter
refused to pay on the ground that the driver of the jeepney from which passenger “B”
alighted was guilty of negligence in unloading in the middle of the street, and that the
driver of the insured operator was not at fault.
26
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWER:
Yes, passenger “B” may recover from the insurance company. The insurance covers the
operation of “X’s” jeepneys against accidents with third parties; therefore, the insurance
covers the liability for death or body injuries of third persons, like what happened to “B”, and
the claim shall be against the insurer of the directly offending vehicle (X’s vehicle).
Furthermore, any claim of this nature shall be paid without necessity of proving fault or
negligence of any kind, provided that the total indemnity in respect of any person shall be in
accordance as provided under the law.
CLASSES
Compulsory Motor Vehicle Liability Insurance; Theft Clause
1981
“A” was the owner of a car insured with Fortune Insurance Company for “Own
Damage”, “Theft”, and “Third-Party-Liability” effective May 16, 1977, to May 16, 1978.
On May 9, 1978, the car was brought to a machine shop for repairs. On May 11, 1978,
while in the custody of the machine shop, the car was taken by one of the employees
to be driven out to a certain place. While travelling along the highway, the car smashed
into a parked truck and suffered extensive damage. “A” filed a claim for recovery
under the policy but was refused payment. The insurance company averred that the
car was not stolen and, therefore, was not covered by the “Theft Clause.” Decide the
merits of the insurer’s contention, with reasons.
SUGGESTED ANSWER:
The insurer is liable to “A” under the “Theft Clause”. The taking of a car even though
temporary and only for a joy-ride, without the car owner’s consent is theft; and, therefore,
the insurer is liable for total loss due to car accident of the insured’s car wrongfully taken,
without the insured’s consent, from the repair shop entrusted for repairs. (Villacorta v.
Insurance Commissioner, Oct. 28, 1980, 100 SCRA 467)
CLASSES
Compulsory Motor Vehicle Liability Insurance; Theft Clause
1988
Mr. Gonzales was the owner of a car insured with Masagana Insurance Company for
“Own Damage”, “Theft”, and “Third Party Liability” effective May 14, 2019 to May 14,
2020. On May 2, 2020, the car was brought to a machine ship for repairs. On May 11,
2020, while in the custody of the machine shop, the car was taken by one of the
employees (of the machine shop) to show off to his girlfriend. While on the way to his
girlfriend’s house, the car smashed into a parked truck and was extensively damaged.
Mr. Gonzales filed a claim for recovery under the policy but was refused payment. The
27
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
insurance company averred that the car was not stolen, and therefore was not covered
by the “Theft Clause”. Decide the merits of the insurer’s contention, with reasons.
SUGGESTED ANSWER: The contention of the insurance company is untenable.
The insured is entitled to recover under the policy. In the 1983 case of Association of Baptists
vs. Fieldmen’s Insurance, the Supreme Court held that when a person, either with the object
of going to a certain place, or learning how to drive, or enjoying a free ride, takes possession
of a vehicle belonging to another, without the consent of its owner, he is guilty of theft
because by taking possession of the personal property belonging to another and using it, his
intent to gain is evident since he derives therefrom utility, satisfaction, enjoyment and
pleasure.” In the present case, the act of the employee of the machine shop constitutes theft
within the contemplation of law and jurisprudence, hence, the insurance company’s
argument that the car was not stolen cannot be given merit. Therefore, the insured is entitled
to recover under the Theft Clause of the subject policy.
CLASSES
Compulsory Motor Vehicle Liability Insurance; No Fault Indemnity Clause
1989
What is your understanding of a “no fault indemnity” clause found in an insurance
policy?
SUGGESTED ANSWER: Under the “no fault indemnity” clause, any claim for the death or
injury of any passenger or third party shall be paid without the necessity of proving fault or
negligence of any kind under the following conditions:
1. The total indemnity in respect of any one person shall not exceed P15,000 (Section
391, Insurance Code; Insurance Memo. Circular 4-2006);
2. The following proofs of loss, when submitted under oath, shall be sufficient evidence
to substantiate the claim:
a. Police report of accident; and
b. Death certificate and evidence sufficient to establish the proper payee; or
c. Medical report and evidence of medical or hospital disbursement in respect
of which refund is claimed.
3. The claim may be made against one motor vehicle only.
28
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
CLASSES
Compulsory Motor Vehicle Liability Insurance
2014
As a rule, an insurance contract is consensual and voluntary. The exception is in the
case of:
A.
B.
C.
D.
Inland Marine Insurance
Industrial Life Insurance
Motor Vehicle Liability Insurance
Life Insurance
SUGGESTED ANSWER: C. Motor Vehicle Liability Insurance
Chapter VI of the Insurance Code deals with this kind of insurance properly referred to as
“Compulsory Motor Vehicle Liability Insurance.”
Here, the other choices are all consensual and voluntary and only C is consensual but
compulsory as the name given by the Insurance Code provides.
Hence, only C is the exception that insurance contracts are both consensual and voluntary.
CLASSES
Casualty Insurance; Authorized Driver Clause
1991
Sheryl insured her newly acquired car, a Nissan Maxima against any loss or damage
for P50,000 and against 3rd party liability for P20,000 with the XYZ Insurance
Company. Under the policy, the car must be driven only by an authorized driver who
is either: 1) the insured, or 2) any person driving on the insured‘s order or with his
permission: provided that the person driving is permitted in accordance with the
licensing or other laws or regulations to drive the motor vehicle and is not disqualified
from driving such motor vehicle by order of a court.
During the effectivity of the policy, the car, then driven by Sheryl herself, who had no
driver‘s license, met an accident and was extensively damaged. The estimated cost of
repair was P40,000. Sheryl immediately notified XYZ, but the latter refused to pay on
the policy alleging that Sheryl violated the terms thereof when she drove it without a
driver‘s license. Is the insurer correct?
SUGGESTED ANSWER: No, the insurer was not correct in denying Sheryl’s claim under the
policy.
29
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In the case of Palermo v. Pyramid Insurance Co., the Supreme Court ruled that although
Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway
without a license or with an expired license, an infraction of the Motor Vehicle Law on the
part of the insured, is not a bar to recovery under the insurance contract. The Court further
reiterated that the requirement that the driver be "permitted in accordance with the
licensing or other laws or regulations to drive the Motor Vehicle and is not disqualified from
driving such motor vehicle by order of a Court of Law or by reason of any enactment
or regulation in that behalf," applies only when the driver "is driving on the insured's order
or with his permission."It does not apply when the person driving is the insured himself.
Applying the ruling to the case, Sheryl did not violate the terms of her insurance policy
despite driving her vehicle without driver’s license. The authorized diver clause is only
applicable when the driver is driving on the insured's order or with his permission. It does
not apply when the person driving is the insured himself.
Therefore, Sheryl can still recover the cost of repair covered by the insurance policy from
XYZ Insurance Company.
CLASSES
Compulsory Motor Vehicle Liability Insurance; No Fault Clause
1994
What is your understanding of a “no fault indemnity” clause found in an insurance
policy?
SUGGESTED ANSWER: In my understanding of the “no fault indemnity” clause, the injured
third party or passenger is given the option to file a claim for death or injury without the
necessity of proving fault or negligence of any kind under the following conditions:
1. The total indemnity in respect of any person shall not exceed Php 15,000.00 (Section
391, Insurance Code, Insurance Memo. Circular 4-2006);
2. The following proofs of loss, when submitted under oath, shall be sufficient evidence
to substantiate the claim:
a. Police report of accident; and
b. Death certificate and evidence sufficient to establish the proper payee; or
c. Medical report and evidence of medical or hospital disbursement in respect of
which refund is claimed; and
3. The claim must be made against one motor vehicle only.
30
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
CLASSES
Compulsory Motor Vehicle Liability Insurance
2000
X was riding a van covered by comprehensive motor vehicle liability insurance
(CMVLI) underwritten by FX Insurance Company, when it collided with a speeding bus
owned by Victory Liner. The collision resulted in serious injuries to X; Y, a passenger
of the bus; and Z, a pedestrian. The police report established that the bus was the
offending vehicle. The bus had CMVLI policy issued by VL Insurance Co. X, Y, and Z,
jointly sued Victory Liner and VL Insurance for indemnity under the insurance code.
The lower court applied the “no fault” indemnity policy, dismissed the suit against
Victory Liner, and ordered VL Insurance to pay indemnity to all three plaintiffs. Do you
agree with the court’s decision? Explain
SUGGESTED ANSWER: No. The cause of action of Y is based on the contract of carriage, while
that of X and Z is based on torts. The court should not have dismissed the suit against Victory
Liner. The court should have ordered VL Insurance to pay each of X, Y, and Z to the extent of
the insurance coverage, but whatever amount is agreed upon in the policy should be
answered first by Victory Liner and the succeeding amount should be paid by VL Insurance
up to the extent of the insurance coverage. The excess of the claims of X, Y, and Z, over and
above such insurance coverage, if any, should be answered or paid by Victory Liner.
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
Authorized Driver Clause
1986
Mayari obtained a comprehensive insurance policy on his car. The policy carried the
standard “authorized driver” clause which states that the insurance company is not
liable for any loss, accident or damage sustained while the car is being driven by
someone other than a duly authorized driver. One day, Mayari allowed his friend,
Kaibigan, to drive the car. Kaibigan figured in a mishap and the car was a total loss.
Kaibigan had been driving for the past 5 years but it appears that his driver’s license
was irregularly issued because he cannot read or write; neither did he take any of the
prescribed driver’s tests. After the initial case was issued, he merely asked his wife to
go to the LTC office to get a renewal of his license. Mayari did not know about the
irregularity in the driver’s license of Kaibigan.
Can Mayari recover on the insurance policy? Explain.
SUGGESTED ANSWER: No, Mayari cannot recover from the insurance policy.
31
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
The standard “authorized driver” clause requires that the driver at the time of the accident
must be duly authorized and licensed to drive. An authorized driver includes any person
driving in the insured’s order or with his permission; provided that the person driving must
be a duly licensed driver and has no disqualification from driving such motor vehicle by
order of a Court of Law or by reason of any enactment or regulation in that behalf.
While Kaibigan was permitted by Mayari to drive the car, he however fails to satisfy the
requirement that he must posses a license. An irregular license is not a license at all. Hence,
even in the absence on knowledge on the irregularity in the driver’s license of Kaibigan,
recovery from the insurance policy cannot be made by Mayari.
CLASSES
Compulsory Motor Vehicle Liability Insurance
2003
Rick de la Cruz insured his passenger jeepney with Asiatic Insurers, Inc. The policy
provided that the authorized driver of the vehicle should have a valid and existing
driver’s license. The passenger jeepney of Rick de la Cruz which was at the time driven
by Jay Cruz, figured in an accident resulting in the death of a passenger. At the time of
the accident, Jay Cruz was licensed to drive but it was confiscated by an LTO agent who
issued him a Traffic Violation Report (TVR) just minutes before the accident. Could
Asiatic Insurers, Inc., be made liable under its policy? Why?
SUGGESTED ANSWER: Asiatic Insurers, Inc. should be made liable under the policy. The said
policy provided a stipulation called the Authorized Driver Clause, which provides that the
driver other than the insured owner, must be duly licensed to drive the motor vehicle,
otherwise the insurer is excused from liability. In the case at bar, the driver of the jeepney is
a licensed driver. Although the driver was merely holding a TVR at the time of the accident,
it does violate the stipulation, as it does not erase the fact that the driver possesses a valid
and existing driver’s license. Thus, Asiatic Insurers, Inc. is liable.
CLASSES
Compulsory Insurance Coverage for Agency-hired Workers
2000
X company procured a group accident insurance policy for its construction employees
variously assigned to its provincial infrastructure projects. Y Insurance Company
underwrote the coverage, the premiums of which were paid for entirely by X Company
without any employee contributions. While the policy was in effect, five of the covered
employees perished at sea on their way to their provincial assignments. Their wives
signed a power of attorney designating X Company Executive, AB, as their authorized
representative to enter into a settlement with the insurance company. When a
32
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
settlement was reached, AB instructed the insurance company to issue the settlement
check to the order of X Company, which will undertake the payment to the individual
claimants of their respective shares. AB misappropriated the settlement amount and
the wives pursued their case against Y Insurance Co. Will the suit prosper? Explain
SUGGESTED ANSWER: Yes, the suit will prosper. It is the usual practice in the group
nsurance business that the employer-policy holder is the agent of the insurer. Here, X
Company, through its executive AB, acted as agent of Y Insurance Co. The latter is thus bound
by the misconduct of its agent.
CLASSES
Life Insurance
1977
A, an agent of life insurance company X, induced B who has been suffering from
advance tuberculosis to apply for a Php 100,000.00 life insurance which B did and he
(B) requested A to fill the application form. Through the connivance of the physician,
it was made to appear in the application that B is in good health and the Php
100,000.00 life insurance policy was issued by X to B. If B dies of tuberculosis, may his
beneficiaries recover?
SUGGESTED ANSWER: The answer depends upon the factual circumstances present.
Under the Insurance Code and cases decided by the Court, the insurer is bound when its
agent writes a false answer into the application without the knowledge of the insured, in
which case his (insured) beneficiaries may recover, but a collusion between the agent and
the insured in misrepresenting the facts will vitiate the policy.
Thus, in the instant case, if A obtained from B a correct and truthful answer to interrogatories
contained in the application but without the knowledge of B filed in false answer and thru
the connivance with the company physician, it was made to appear that B is in good health,
the insurer cannot assert the falsity of such answers as a defense to liability on the policy.
CLASSES OF INSURANCE
Life Insurance; Casualty Insurance; Accident v. Suicide
1995
Sun-Moon Insurance issued a Personal Accident Policy to Henry Dy with a face value
of P500,000. A provision in the policy states that “the company shall not be liable in
respect of bodily injury consequent upon the insured person attempting to commit
suicide or willfully exposing himself to needless peril except in an attempt to save
human life.” 6 months later, Henry died of a bullet wound in his head. Investigation
showed that one evening Henry was in a happy mood although he was not drunk. He
was playing with his handgun from which he had previously removed its magazine.
33
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
He pointed the gun at his sister who got scared. He assured her it was not loaded. He
then pointed the gun at his temple and pulled the trigger. The gun fires and
Henry slumped dead on the floor.
Henry’s wife, Beverly, as the designated beneficiary, sought to collect under the policy.
Sun-Moon rejected her claim on the ground that the death of Henry was not
accidental. Beverly sued the insurer. Decide. Discuss fully.
SUGGESTED ANSWER: Beverly, Henry’s wife, can recover the proceeds of the policy.
It was previously explained by the Court in Sun Insurance Office, Ltd. v. CA that, “the words
"accident" and "accidental" have never acquired any technical signification in law, and when
used in an insurance contract are to be construed and considered according to the ordinary
understanding and common usage and speech of people generally. In-substance, the courts
are practically agreed that the words "accident" and "accidental" mean that which happens
by chance or fortuitously, without intention or design, and which is unexpected, unusual, and
unforeseen.” To add, the Court also noted at the outset that “suicide and willful exposure to
needless peril are in pari materia because they both signify a disregard for one's life. The
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.”
Contrary to Sun-Moon’s claim, Henry’s death is merely accidental because it happened
fortuitously, without intention or design and not due to suicide or willful exposure to
needless peril. This is shown by the fact that Henry removed the gun’s magazine before he
pointed the same to his temple, believing that it was safe for him to do so, and even
assured his sister that the gun was harmless as it was not loaded. Henry’s act was purely an
act of negligence which is covered by the policy and for which the insured got the insurance
for his protection. His negligence, however, shall not prevent Beverly from recovering the
proceeds of the policy since there is nothing in the policy which relieves the insurer of the
responsibility to pay the indemnity agreed upon if the insured is shown to have contributed
to his own accident.
Therefore, Sun-Moon’s rejection of Beverly’s claim shall fail and Beverly shall be entitled to
recover the proceeds of the policy from Sun-Moon.
CLASSES OF INSURANCE CONTRACTS
Life Insurance; Assignment of Policy
1991
The policy of insurance upon his life, with a face value of P100,000 was assigned by
Jose, a married man with two (2) legitimate children, to his nephew Y as security for a
loan of P50,000. He did not give the insurer any written notice of such assignment
despite the explicit provision to that effect in the policy. Jose died. Upon the claim on
the policy by the assignee, the insurer refused to pay on the ground that it was not
34
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
notified of the assignment. Upon the other hand, the heirs of Jose contended that Y is
not entitled to any amount under the policy because the assignment without due
notice to the insurer was void. Resolve the issues.
SUGGESTED ANSWER: I would resolve the case by granting the P100,000 to the heirs of
Jose.
Pursuant to Section 184 of the Insurance Code, a policy of insurance upon life or health may
pass by transfer, will or succession to any person. Therefore, Jose may assign his life
insurance policy to his nephew Y. However, the assignment of life insurance must be done
in accordance to Section 185 of the Insurance Code which states that notice to an insurer of
transfer or bequest thereof is not necessary to preserve the validity of the policy unless
thereby expressly required. Applying this provision, Jose’s failure to notify the insurer of the
assignment precluded his nephew Y from claiming rights under the policy by virtue of the
express provision provided in the policy regarding notice of assignment.
Therefore, the heirs of Jose are correct in stating that the assignment of the policy to Y is void
due to Jose’s failure to provide a written notice of assignment to the insurer.
CLASSES
Life Insurance; Incontestability Clause
1989
Manpower Company obtained a group life insurance policy for its employees from
Phoenix Insurance Company. The master policy issued by Phoenix on June 1, 2018
contained a provision that eligible employees for insurance coverage were all fulltime employees of Manpower regularly working at least 30 hours per week. The policy
had also an incontestable clause. Beforehand, Phoenix sent enrollment cards to
Manpower for distribution to its eligible employees. X filled out the card which
contained a printed clause: “I request the insurance for which I may become eligible
under said Group Policy.” The cards were then sent to Phoenix and X was among the
employees of Manpower who was issued a certificate of coverage by Phoenix.
On July 3, 2020, X was killed on the occasion of a robbery in their house. While
processing the claim of X’s beneficiary, Phoenix found out that X was not an eligible
employee as defined in the group policy since he has not been employed 30 hours a
week by Manpower. Phoenix refused to pay. May X’s beneficiary invoke the
incontestability clause against Phoenix? Reasons.
SUGGESTED ANSWER: Yes, X’s beneficiary may invoke the incontestability clause.
Section 48 of the Insurance Code provides that 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
35
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
period of 2 years from the date of its issue or of its reinstatement, the insurer cannot prove
that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
In the case at bar, the master policy was already in force for more than 2 years considering
that the said policy was issued on June 1, 2018 and X died on July 3, 2020. When X filled out
the card containing the printed clause “I request the insurance for which I may become
eligible under said Group Policy”, it becomes the duty of the insurer to look into the
qualifications of X whether he can be covered or not by the group life insurance policy. After
his death, the insurer can no longer prove that the policy is void ab initio or rescindable by
reason of fraudulent concealment or misrepresentation. If the incontestability clause can
apply even to cases of intentional concealment and misrepresentation, there would be no
cogent reason for denying such application where the insured had not been guilty thereof.
Thus, the beneficiary of X may validly invoke the incontestability clause.
CLASSES OF INSURANCE
Accident Insurance
1990
Luis was the holder of an accident insurance policy effective on November 1, 2019 to
October 31, 2020. At a boxing contest held on January 1, 2020 and sponsored by his
employer, he slipped and was hit on the face by his opponent. He fell and his head hit
one of the posts of the boxing ring. He was rendered unconscious and was dead on
arrival at the hospital due to “intra-cranial hemorrhage”.
Can his father, who is the beneficiary under subject insurance policy successfully
claim indemnity from the insurance company? Explain.
SUGGESTED ANSWER: Yes, Luis’ father who is the beneficiary under the accident insurance
policy can successfully claim indemnity from the insurance company.
In the case of Dela Cruz v. The Capital Insurance and Surety Co., Inc., the Supreme Court
defined an accident as that which happen by chance or fortuitously, without intention and
design, and which is unexpected, unusual, and unforeseen. It further ruled that 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 the protection of policies insuring against death or injury from accident.
Applying this ruling to the case, Luis’ death is deemed covered by the accident insurance
policy. Although it is true that Luis’ participation in the boxing contest is voluntary, the injury
which caused his death was sustained when he accidentally fell and hit his head on the post
of the boxing ring. This unintentional slipping led to his death and is considered to be
unforeseen. Thus it must fall within the coverage of the accident insurance policy.
36
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
As the death of Luis is caused by his unintentional slipping, his father may rightfully claim
indemnity from the insurance company.
CLASSES OF INSURANCE
Accident Insurance
1975
In a course of a voluntary boxing content, B who had an accident insurance policy, slid
and slipped, enabling his opponent boxer to hit him with a blow that threw him to the
ropes, hitting his head against the canvass, causing B’s eventual death. There is
nothing in the insurance contract appertaining to boxing. Is the Insurance Company
liable? Reasons.
SUGGESTED ANSWER: Yes, the Insurance Company is liable. The insurer is liable because
the death in this case was an accident within the meaning of the policy. The proximate cause
of the death was the boxing contest.
Pursuant to the case of Dela Cruz vs Capital Insurance and Surety Corp. (GR No. L- 21574),
an accident is defined as 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 known cause and,
therefore, not expected. The fact that boxing is attended with some risks of external injuries
does not make any injuries received in the course of the game not accidental. In boxing as in
other equally physically rigorous sports, such as basketball or baseball, death is not
ordinarily anticipated to result. And if it does, the injury or death can only be accidental or
produced by some unforeseen happening or event.
In conclusion, it was an accident because the insured did not expect to die by entering such
contest. His slipping was accidental and this caused him to hit his head against the canvass,
leading to his death.
CLASSES OF INSURANCE
Casualty Insurance
1975
CNI insure SAM under a homeowner’s policy against claims for accidental injuries by
neighbors. SAM’s minor son, BOY, injured 3 children of POS, a neighbor, who sued SAM
for damages. SAM’s lawyer was ATT, who was paid for his services by the insurer for
reporting periodically on the case to CNI. In one report, ATT disclosed to CNI that after
his investigations, he found the injuries to the 3 children not accidental but
intentional.
37
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SAM lost the case in court, and POS was awarded one million pesos in damages which
he sought to collect from the insurer. But CNI used ATT’s report to deny the claim on
the ground that the injuries to POS’s 3 children were intentional, hence excluded from
the policy’s coverage. POS countered that CNI was estopped from using ATT’s report
because it was unethical for ATT to provide prejudicial information against his client
to the insurer, CNI.
Who should prevail: the claimant, POS; or the insurer, CNI? Decide with reasons
briefly.
SUGGESTED ANSWER: The claim of CNI will not prevail. As a rule, it is the insurer who has
the burden of proof to show that the peril was excepted as it is the insurer that seeks
avoidance from the liability.
In the case of Finman General Assurance Corp. v Court of Appeals, it was explained that there
is no “accident” in the context of an accident policy, if it is the natural result of the insured’s
voluntary act, unaccompanied by anything unforeseen except the injury. There is no accident
when a deliberate act is performed, unless some additional and unforeseen happening
occurs that brings about the injury.
In the case at bar, the element of deliberateness is clearly shown, especially considering the
fact that BOY is a minor, and the injured parties are also children. Accordingly, it is possible
that CNI’s claim may not prosper. ATT’s report is not conclusive on POS or the court.
CLASSES OF INSURANCE
Liability Insurance, Reinsurance; Co-insurance
1994
Distinguish co-insurance from reinsurance.
SUGGESTED ANSWER:
Co-insurance is the percentage in the value of the insured property which the insured himself
assumes or undertakes to act as insurer to the extent of the deficiency in the insurance of the
insured property. In case of loss or damage, the insurer will be liable only for such proportion
of the loss or damage as the amount of insurance bears to the designated percentage of the
full value of the property insurance.
Reinsurance, on the other hand, is where the insurer procures a third party, called the
reinsurer, to insure him against loss or liability by reason of such original insurance. A
reinsurance is an insurance against liability which the original insurer may incur in favor of
the original insured.
38
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
INSURABLE INTEREST
2017
The newly restored Ford Mustang muscle car was just released from the car
restoration shop to its owner, Seth, an avid sportsman. Given his passion for sailing,
he needed to go to a round-the-world voyage with his crew on his brand-new 180meter yacht. Hearing about his coming voyage, Sean, his bosom friend, asked Seth if
he could borrow the car for his next roadshow. Sean, who had been in the business of
holding motor shows and promotions, proposed to display the restored car of Seth in
major cities of the country. Seth agreed and lent the Ford Mustang to Sean. Seth further
expressly allowed Sean to use the car even for his own purposes on special occasions
during his absence from the country. Seth and Sean then went together to Bayad Agad
Insurance Co. (BAIC) to get separate policies for the car in their respective names.
BAIC consults you as its lawyer on whether separate policies could be issued to Seth
and Sean in respect of the same car.
a. What is insurable interest?
b. Do Seth and Sean have separate insurable interests? Explain briefly your
answer.
SUGGESTED ANSWERS:
a. In the case of Lalican vs. Insular Life Insurance Co. (G.R. No. 183526, August 25, 2009),
the Supreme Court defined insurable interest as the interest which a person is
deemed to have in the subject matter insured. Such person has a relation or
connection with or concern with the subject matter, such that the person will derive
pecuniary benefit or advantage from the preservation of the subject matter insured
and will suffer pecuniary loss or damage from its destruction, termination, or injury
by the happening of the event insured against.
b. Yes, Seth and Sean have separate insurable interests.
Under Section 13 of the Insurance Code, insurable interest in property insurance is
any 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.
In this case, Seth and Sean have separate insurable interests over the car arising from
different sources. Seth has insurable interest over the vehicle arising from his legal
title over the car as its owner. On the other hand, Sean has insurable interest in the
subject matter arising from his obligation to avoid the car from being lost or damaged
as the borrower.
As such, Seth and Sean may procure separate policies in respect to the same car.
39
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
INSURABLE INTEREST
In Life
2018
Shortly after Yin and Yang were wed, they each took out separate life insurance
policies on their lives, and mutually designated one another as sole beneficiary. Both
life insurance policies provided for a double indemnity clause, the cost for which was
added to the premium rate. During the last 10 years of their marriage, the spouses had
faithfully paid for the annual premiums over the life policies from both their salaries.
Unfortunately, Yin fell in love with his officemate, Vessel, and they carried on an affair.
After two years, their relationship bore them a daughter named Vinsel. Without the
knowledge of Yang, Yin changed the designation of the beneficiary to an "irrevocable
designation" of Vinsel and Vessel jointly. When Yang learned of the affair, she was so
despondent that, having chanced upon Yin and Vessel on a date, she rammed them
down with the car she was driving, resulting in Vin's death and Vessel's complete loss
of mobilization. Yang was sued for parricide, and while the case was pending, she filed
a claim on the proceeds of the life insurance of Yin as irrevocable beneficiary, or at
least his legal heir, and opposed the claims on behalf of Vessel and her daughter Vinsel.
Yang claimed that her designation as beneficiary in Vin's life insurance policy was
irrevocable, in the nature of one "coupled with interest," since it was made in
accordance with their mutual agreement to designate one another as sole beneficiary
in their respective life policies. She also claimed that the beneficiary designation of
Vessel and the illegitimate minor child Vinsel was void being the product of an illicit
relationship, and therefore without "insurable interest."
a. Is Yang correct in saying that her designation as beneficiary was irrevocable?
b. Do Vessel and Vinsel have "insurable interest" on the life of Yin?
SUGGESTED ANSWERS:
a. No, Yang is not correct. Under Section 11 of the Insurance Code, the insured shall
have the right to change the beneficiary he designated in the policy unless he
expressly waived this right in the policy. There is nothing in the life insurance policy
taken by Yang which indicated that the designation of Ying is irrevocable. As such, it
is deemed revocable.
B. No. Vessel has no insurable interest on the life of Yin. She cannot be lawfully
designated as a beneficiary. Persons who are proscribed to become donees under the
rules on donation cannot be designated as beneficiary in life insurance. These include
persons who are guilty of concubinage and adultery as in the case of Vin and Vessel.
ALTERNATIVE ANSWER: Yes, Vinsel has insurable interest on the life of Vin. As held
in the case of Heirs of Loreta Maramag v. Maramag, there is no legal proscription in
naming as beneficiaries the children of illicit relationships by the insured.
40
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
INSURABLE INTEREST
In Life; In Property
1984
On January 4, 1983, Mr. P joined Alpha Corporation (ALPHA) as President of the
company. ALPHA took out a life insurance policy on the life of Mr. P with Mutual
Insurance Company, designating ALPHA as the beneficiary. ALPHA also carried a fire
insurance with Beta Insurance Co. on a house owned by it, but temporarily occupied
by Mr. P again with ALPHA as beneficiary.
On September 1, 1983, Mr. P resigned from ALPHA and purchased the company house
he had been occupying. A few days later, a fire occurred resulting in the death of Mr. P
and the destruction of the house.
What are the rights of ALPHA (a) against Mutual Life Insurance Company on the life
Insurance policy? (b) against Beta Insurance Company on the fire insurance?
SUGGESTED ANSWERS:
a. ALPHA can recover against Mutual Life Insurance Co. in the life insurance policy.
Section 19 of the Insurance Code provides that an interest in the 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.
In the case at bar, ALPHA had an existing insurable interest on the life of its president
when it took out a life insurance on Mr. P. Although ALPHA no longer holds insurable
interest when the loss occurs because Mr. P had already resigned from the company
at the time of his death, ALPHA can still recover from Mutual Life Insurance.
b. ALPHA can no longer recover from Beta Insurance Co. in the fire insurance policy.
Section 19 of the Insurance Code provides that an interest in the 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.
In the case at bar, ALPHA holds an insurable interest on the property when it took out
the fire insurance. However, such insurable interest was extinguished when the
company house was purchased by Mr. P. Applying Section 19 of the Insurance Code,
the insurable interest must be existing at the time of loss, or when the fire occurred.
But since ALPHA no longer had an existing interest over the said property when it
41
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
was destroyed by fire, ALPHA can no longer recover from Beta Insurance Co. in the
fire insurance policy.
INSURABLE INTEREST
In Life; In Property
2000
ABC, an elderly bachelor with no known relatives, obtained life insurance coverage
for P250,000 from Alphabet Insurance Corporation, an entity licensed to engage in the
insurable business under the Insurance Code of the Philippines. He also insured his
residential house for twice that amount within the same corporation. He immediately
assigned all his rights to the insurance proceeds to XYZ, his friend-companion living
with him. Three year later, ABC died in a fire that gutted his insured house two days
after he had sold it. There is no evidence of suicide or arson or involvement of XYZ in
these events. XYZ demanded payment of the insurance proceeds from the two policies,
the premiums for which ABC had been faithfully paying during all the time he was
alive. Alphabet refused payment, contending that XYZ had no insurable interest and
therefore was not entitled to receive the proceeds from ABC’s insurance coverage on
his life and also on his property. Is Alphabet’s contention valid? Explain.
SUGGESTED ANSWER: Alphabet is correct with respect to the insurance coverage on the
property of ABC. The beneficiary in the property insurance policy or the assignee thereof
must have insurable interest in the property insured. XYZ, a mere friend-companion of ABC,
has no insurable interest in the residential house of ABC, Hence, XYZ is not entitled to receive
the proceeds from ABC’s insurance on his property.
However, as to the insurance coverage on the life of ABC, XYZ is entitled to receive the
proceeds thereof. The Insurance Code of the Philippines does not require that XYZ should
have insurable interest in the life of ABC since it was ABC himself who took the insurance on
his own life.
INSURABLE INTEREST
Beneficiary in Property and Life Insurance
1997
a. A obtains a fire insurance on his house and as a generous gesture names his
neighbor B as the beneficiary. If A’s house was destroyed by fire, can B
successfully claim against his policy.
b. A obtains an insurance over his life and names his neighbor B as the beneficiary
because of A’s secret love for B. If A dies, can B successfully claim against the
policy.
42
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWER:
1. No, B cannot successfully claim against the fire insurance policy. As a rule, the
beneficiary must have an insurable interest in the property that is the object of the
property insurance. The contract will be considered a wagering contract if the
beneficiary will be allowed to recover even if he has no insurable interest on the
subject property. Thus, B, having no insurable interest over the property of A which
is the subject of the fire insurance, cannot successfully claim against the said
insurance policy.
b. Yes, B can successfully claim against the policy. As provided under Section 10 of the
Insurance Code of the Philippines, every person has insurable interest in the life and
health of himself, thus the insured who takes out an insurance on his own life can
designate anybody whether or not the designated beneficiary has insurable interest
over the insured’s life. In the case at bar, B, the designated beneficiary, can
successfully claim against the life insurance policy over the life of A, even if the former
has no insurable interest over the life of the latter.
INSURABLE INTEREST
In Life
2011
X has been a long-time household helper of Z. X's husband, Y, has also been Z's longtime driver. May Z insure the lives of both X and Y with Z as beneficiary?
A. Yes, since X and Y render services to Z.
B. No, since X and Y have no pecuniary interest on the life of Z arising from their
employment with him.
C. No, since Z has no pecuniary interest in the lives of X and Y arising from their
employment with him.
D. Yes, since X and Y are Z’s employees.
SUGGESTED ANSWER: C. No, since Z has no pecuniary interest in the lives of X and Y arising
from their employment with him.
Pursuant to Section 10 of the ICP, it provides that “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.” Under this section, it can be ascertained that a person has insurable interest over
the life of another only if he has pecuniary interest over the life of such person, except if the
person insured is his spouse or child.
43
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In general, the test to determine if a person can insure the life of another is whether such
person is interested in the preservation of the insured life despite the insurance.
In this case, Z has no insurable interest over the life of X and Y since they do not fall among
any of the instances provided for under Section 10. Friendship and/or long-standing
relationship alone is not the insurable interest contemplated in life insurance.
Therefore, Z cannot insure the lives of both X and Y and designate himself as beneficiary.
INSURABLE INTEREST
In Life; In Property
2002
Distinguish insurable interest in property insurance from insurable interest in life
insurance.
SUGGESTED ANSWER: The difference are as follows:
1. As to the need for a legal basis, in property insurance, the expectation of benefit must
have a legal basis; Meanwhile, in life insurance, the expectation of benefit to be
derived from the continued existence of a life need not have any legal basis.
2. As to the extent, in property insurance, the actual value of the interest therein is the
limit of the insurance that can validly be placed thereon; while in life insurance, there
is no limit to the amount of insurance that may be taken upon life, except if the same
is secured by the creditor.
3. As to the time when it must exist, in property insurance, an interest insured must exist
when the insurance takes effect and when the loss occurs but need not exist in the
meantime; while in life insurance, it is enough that insurable interest exists at the
time when the contract is made but it need not exist at the time of loss.
4. As to the beneficiary’s interest, in property insurance, the beneficiary must have an
insurable interest in the thing insured; while in life insurance, insurable interest is
not necessary if the insured took out the policy on his own life and designated another
person.
INSURABLE INTEREST
Death of the Insured Due to the Beneficiary
2008
On January 1, 2015, Antonio Rivera secured a life insurance from SOS Insurance Corp.
for P1 Million with Gemma Rivera, his adopted daughter, as the beneficiary. Antonio
Rivera died on March 4, 2020 and in the police investigation, it was ascertained that
Gemma Rivera participated as an accessory in the killing of Antonio Rivera. Can SOS
44
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Insurance Corp. avoid liability by setting up as a defense the participation of Gemma
Rivera in the killing of Antonio Rivera? Discuss with reasons.
SUGGESTED ANSWER: Yes, SOS Insurance can avoid liability as to the claim of Gemma.
Under Section 12 of the Insurance Code, the interest of the beneficiary in a life insurance
policy shall be forfeited when the beneficiary is principal, accomplice, or accessory in
willfully bringing about the death of the insured. In such a case, the share forfeited shall pass
on to the other beneficiaries, unless otherwise is disqualified. In the absence of other
beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy
contract is silent, the proceeds shall be paid to the estate of the insured.
In this problem, participation of Gemma as an accessory in the killing of Antonio, the insured,
was duly ascertained in the police investigation. Applying Section 12, Gemma interest is
forfeited because she was an accessory in the killing of the insured. However, should there
be other qualified beneficiaries, SOS Insurance Corp shall pay them the proceeds of the
insurance. In the absence of other beneficiaries, the proceeds shall be paid in accordance
with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate
of the insured.
Therefore, SOS Insurance can avoid liability but only as to Gemma, but not as to those other
qualified beneficiaries, or depending on the stipulations in the policy, or the estate of the
deceased, as the case may be.
INSURABLE INSTEREST
In Life
1987
On July 14, 2018, X, a homosexual, took an insurance policy on the life of his boyfriend,
Y. In the insurance application, X misrepresented that Y was in perfect health although
he knew all the time that Y was afflicted with AIDS. On October 18, 2020, Y died in a
motor accident. Shortly thereafter, X filed his insurance claim.
Should the insurer pay? Reasons.
SUGGESTED ANSWER: The insurer is not obliged to pay.
Under Section 10, every person has an insurable interest in the life and health of another,
only if he has pecuniary interest over the life of such person, except if the person insured is
himself, of his spouse and of his children.
In this case, X is the boyfriend of Y and not his spouse. Friendship alone is not the insurable
interest contemplated in life insurance. No insurable interest over the life of another exists
as the relationship and pecuniary interest requirement was not complied with. Thus, the
45
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
insurer has no obligation to pay because X did not have an insurable interest over the life of
Y.
INSURABLE INSTEREST
In Life
2014
Carlo and Bianca met in the La Boracay festivities. Immediately, they fell in love with
each other and got married soon after. They have been cohabiting blissfully as
husband and wife, but they did not have any offspring. As the years passed by, Carlo
decided to take out an insurance on Bianca’s life for P1,000,000.00 with him (Carlo)
as sole beneficiary, given that he did not have a steady source of income and he always
depended on Bianca both emotionally and financially. During the term of the
insurance, Bianca died of what appeared to be a mysterious cause so that Carlo
immediately requested for an autopsy to be conducted. It was established that Bianca
died of a natural cause. More than that, it was also established that Bianca was a
transgender all along – a fact unknown to Carlo. Can Carlo claim the insurance benefit?
SUGGESTED ANSWER: Yes, Carlo may claim the insurance benefit.
Sec. 10(b) of the Insurance Code provides that a person has insurable interest over the life
and health of any person on whom he depends, wholly or in part, for education or support,
or in whom he has pecuniary interest.
Since Carlo always depended on Bianca both emotionally and financially, Carlo has insurable
interest over the life of Bianca. The void marriage and lack of kinship or legal obligation to
support are irrelevant in this case.
Thus, Carlo may claim the insurance benefit because he has insurable interest over Bianca’s
life.
INSURABLE INTEREST
In Property
2019
Define insurable interest in property.
SUGGESTED ANSWER:
Insurable interest in property is any interest therein, or any relation or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured. It may
consist of an existing interest, an inchoate interest founded on an existing interest, or an
expectancy, coupled with an existing interest in that out of which the expectancy arises.
46
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
INSURABLE INTEREST
In Property
2014
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 benefit or advantage
from its preservation. Which among the following subject matters is not considered
insurable?
A.
B.
C.
D.
A partner in a firm on its future profits
A general creditor on a debtor’s property
A judgment creditor on debtor’s property
A mortgage creditor on debtor’s mortgaged property
SUGGESTED ANSWER: B. A general creditor on a debtor’s property.
Sec. 13 of the Insurance Code provides the list of insurable interest in property, which
consists of: existing interest, inchoate interest founded on an existing interest, or expectancy
coupled with existing interest in that out of which the expectancy arises.
Here, a general creditor has none of those enumerated in Sec. 13 of the Insurance Code, since
a general creditor has no interest yet on the property of the debtor until the latter caused a
breach of their contract.
Thus, B is the correct answer.
INSURABLE INTEREST
In Property
2015
Novette entered into a contract for the purchase of certain office supplies. The goods
were shipped. While in transit, the goods were insured by Novette. Does she have an
insurable interest over the goods even before delivery of the same to her? Explain.
SUGGESTED ANSWER: Yes, Novette has an insurable interest over the goods.
Sec. 14 of the Insurance Code of the Philippines provides that 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.
47
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Here, Novette has an existing interest over the goods shipped. Her interest over the goods is
based on the perfected contract of sale. The perfected contract of sale between her and the
shipper of the goods operates to vest in her an equitable title even before delivery or before
she performed the conditions of the sale. The perfected contract of sale even without delivery
vests to the vendee an equitable title, an existing interest over the goods sufficient to be the
subject of insurance.
Hence, Novette has an insurable interest over the goods.
INSURABLE INTEREST
In Property
1978
The agent in Davao of the insured “A” was employed to ship “A”‘s copra to Manila and
to communicate the shipment to the buyer “A” in Manila. The said agent wrote the
owner of copra announcing the sailing of the ship, but failed to state that the ship had
run a ground, which fact he already knew before announcing the sailing. “A”, the buyer
of the copra, in all good faith, took out a marine insurance on the copra. The copra was
badly damaged and was a total loss. Can the insured recover on the policy? Reason.
SUGGESTED ANSWER: No, the insured cannot recover on the policy because there is a total
loss of the subject matter at the time the marine insurance was contracted.
Section 19 of the Insurance Code provides that an interest in property insured must exist
when the insurance takes effect and when the loss occurs, but need not exist in the meantime.
Here, A took out a marine insurance when the ship transporting the copra already run
aground which result to the total loss of the said copra. Accordingly, A’s interest in the
property does not exist when the insurance takes effect.
Therefore, A cannot recover on the policy.
INSURABLE INTEREST
In Property (Building Destroyed by Fire)
2010
To secure a loan of P10 million, Mario mortgaged his building to Armando. In
accordance with the loan arrangements, Mario had the building insured with First
Insurance Company for P10 million, designating Armando as the beneficiary.
Armando also took an insurance on the building upon his own interest with Second
Insurance Company for P5 million. The building was totally destroyed by fire, a peril
insured against under both insurance policies. It was subsequently determined that
the fire had been intentionally started by Mario and that in violation of the loan
agreement, he had been storing inflammable materials in the building.
48
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
2. Can Armando recover from either or both insurance companies?
3. What happens to the P10 million debt of Mario to Armando? Explain.
SUGGESTED ANSWERS:
1. As to the First Insurance Company, no, Armando cannot recover anything, while as to
the Second Insurance Company, yes, he can recover P5 million.
Pursuant to Sec. 87 of the Insurance Code, “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”.
In this case, the loss was due to a willful act of Mario, who committed arson and who
stored inflammable materials in the building. Thus, First Insurance Company is not
liable for the loss of the building.
However, as to the Second Insurance Company, Armando can collect from the former.
In the case of Palileo v. Cosio (1955), the Court ruled that "the mortgagee may insure
his interest in the property independently of the mortgagor. In that event, upon the
destruction of the property the insurance money paid to the mortgagee will not inure
to the benefit of the mortgagor, and the amount due under the mortgage debt remains
unchanged. The mortgagee, however, is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance
money paid."
In this case, since Armando took an insurance on the building upon his own interest
with the Second Insurance Company for P5 million, he can therefore recover the P5
million as a mortgagee.
2. Armando can collect the balance of P5 million from Mario.
As held in the same case mentioned above, the Court ruled that “the mortgagee, in
case of loss, may only recover upon the policy to the extent of his credit at the time of
the loss. It was declared that the mortgaged had no right of action against the
mortgagee on the policy.” Further, it ruled that “The general rule and the weight of
authority is, that the insurer is thereupon subrogated to the rights of the mortgagee
under the mortgage. This is put upon the analogy of the situation of the insurer to that
of a surety."
49
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In this case, since Armando will be able to collect P5 million from the Second
Insurance Company, this amount should be considered as partial payment of the loan.
Second Insurance Company can recover from Mario P5 million which it paid since it
became subrogated to the rights of Armando.
INSURABLE INTEREST
In Property
2001
AZ, owner of a condominium unit, insured the same against fire with the TYN
Insurance Co., and made the loss payable to his brother, BY. In case of loss by fire of
the said condominium unit, who may recover on the fire insurance policy? Why?
SUGGESTED ANSWER:
Only AZ can recover on the fire insurance policy for the loss of said condominium unit. A
person to recover in a property insurance policy must have insurable interest on the insured
property. Since AZ has an insurable interest on his own property, he could recover. BY could
not recover even if he is a beneficiary since he do not have any insurable interest over AZ’
property.
INSURABLE INTEREST
In Property
1980
“N” owns a condominium unit presently insured with Holy Insurance Co. for P1
Million. “N” later sells the condominium unit to “O”. Somehow “O” fails to obtain the
transfer of the insurance policy to his name from “N”. Subsequently, fire of unknown
origin destroys completely the condominium unit.
Who may collect the insurance proceeds?
SUGGESTED ANSWER: Neither “N” nor “O” may collect the insurance proceeds.
Under Section 19 of The Insurance Code an interest in the property insured must exist at
when the insurance takes effect, and when the loss occurs. Also, Section 58 provides 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.
In the given case, “N’s” insurable interest existed at the time when the insurance took effect
but the same was extinguished when N sold the condominium to “O” prior to the occurrence
of fire. Hence, “N” lacked insurable interest at the time when the loss occurred. On the other
hand, “O” cannot recover the proceeds because he lacked insurable interest at the time when
50
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
the insurance took effect. Also, he had no insurance contract over the condominium unit that
he bought from “O” because the latter failed to transfer the insurance policy in the name of
“N”.
Therefore, neither “N” nor “O” may collect the insurance proceeds.
INSURABLE INTEREST
In Property
1987
On February 3, 2020, while Jose Palacio was in the hospital preparatory to a heart
surgery, he called his only son, Boy Palacio, and showed the latter a will naming the
son as sole heir to all the father’s estate including the family mansion in Forbes Park.
The following day, Boy Palacio took out a fire insurance policy on the Forbes Park
mansion. One week later, the father died. After his father’s death, Boy Palacio moved
his wife and children to the family mansion which he inherited. On March 30, 2020, a
fire occurred razing the mansion to the ground. Boy Palacio then proceeded to collect
on the fire insurance he took earlier on the house.
Should the insurance company pay? Reasons.
SUGGESTED ANSWER:
No. In property insurance, insurable interest is any interest therein or liability in respect
thereof, and it 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 (Secs. 13 and 14, ICP). Section 19 of the Insurance Code provides that
it is necessary that the insurable interest exists when the insurance takes effect, and when
the loss occurs, but need not exist in the meantime. In this case, Boy Palacio did not have
any insurable interest over the subject property both at the time he took out the fire
insurance and the time the policy took effect. The insurable interest must be an existing
interest. Boy Palacio as an expected sole heir of his father’s estate does not give him any
existing interest prior to the death of the decedent. Hence, the insurance company should
not pay.
INSURABLE INTEREST
In Property Insurance
1994
In a civil suit, the Court ordered Benjie to pay Nat P500,000.00. To execute the
judgment, the sheriff levied upon Benjie’s registered property (a parcel of land and
building thereon) and sold the same at public auction to Nat, the highest bidder. The
latter, on March 18, 1992, registered with the Register of Deeds the certificate of sale
51
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
issued to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured with
Garapal Insurance for P1,000,000.00 the same building that was sold at public auction
to Nat. Benjie failed to redeem the property by March 18, 1993.
On March 19, 1993, a fire razed the building to the ground. Garapal Insurance refused
to make good its obligation to Benjie under the insurance contract.
1. Is Garapal Insurance legally justified in refusing payment to Benjie?
2. Is Nat entitled to collect the insurance policy?
SUGGESTED ANSWER:
1. Yes, Garapal Insurance’s refusal to pay Benjie was justified.
The Court has laid down that in property insurance, it is necessary that the insurable
interest exist when the insurance takes effect and when the loss occurs but need not
exist in the meantime in order that one may take out the proceeds of the policy.
Sections 13 and 14 of the Insurance Code provides that insurable interest in property
is any interest therein, or liability in respect thereof, and it may consist in (i) an
existing interest, (ii) an inchoate interest founded on an existing interest, or (iii) any
expectancy coupled with an existing interest.
In this case, Benjie was no longer the owner of the property insured at the time of the
loss as he failed to redeem the property. At the time of the fire, Benjie no longer had
insurable interest in the property insured.
With that, Benjie can no longer take out the proceeds of the insurance policy.
2. No, Nat is not entitled to collect the proceeds of insurance policy.
While at the time of the loss he had insurable interest in the building, as he was the
owner thereof, Nat however, did not have any interest in the policy since there was
no automatic transfer clause in the policy that would give him such interest to the
same.
Therefore, Nat cannot claim against the insurer.
INSURABLE INTEREST
Mortgagor and Mortgagee
1984
To secure a loan of P10M, O mortgaged his building to C. In accordance with the loan
arrangements, O had the property insured with Acme Insurance Company for P10M
52
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
with C as the beneficiary. C also took an insurance on the building upon his own
interest with Beta Insurance Co. for P5M.
The building was totally destroyed by fire, a peril insured against in both insurance
policies. It was subsequently determined that the fire had been intentionally started
by O and that, in violation of the loan agreement, O had been storing inflammable
materials in the building.
a. How much can C recover from either or both insurance companies?
b. What happens to the P10M debt of O to C?
SUGGESTED ANSWERS:
a. C cannot recover from Acme Insurance Co. but can recover the full amount of P5M
from Beta Insurance Co.
Section 8 of the Insurance Code provides that 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.
In the case at bar, it was the act of storing inflammable materials by the owner –
mortgagor O which caused the peril insured against. Thus, the avoidance of the
insurance by the said act is binding on the mortgagee C. On the other hand, C can
recover the full amount of P5M from Beta Insurance since the act of O in intentionally
starting the fire that caused the loss cannot be attributable to C, the mortgagee. The
act of O in storing inflammable materials in the building contrary to the loan
agreement does not affect the insurance policy effected by C.
Hence, C cannot recover any amount from Acme Insurance Co but can recover the full
amount of P5M from Beta Insurance Co.
b. The P10M debt of O to C will be affected by the amount which C will be able to collect
from Beta Insurance Co.
As held by the Supreme Court in the case of Palileo v. Cosio, where a mortgagee
independently of the mortgagor, insures the mortgaged property in his own name
and for his own interest, he is entitled to the insurance proceeds in case of loss. In
such case, however, he is not allowed to retain his claim against the mortgagor but is
passed by the subrogation to the insurer to the extent of the money paid.
Applying in this case, if C is able to recover P5M from Beta Insurance Co., the latter
will become entitled to collect P5M from O and O will remain liable to C for the balance
53
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
amounting to P5M. But in case C cannot recover any amount, the full amount of the
debt remains.
Hence, the debt of O to C will be affected by the amount which C will be able to collect
from Beta Insurance Co.
INSURABLE INTEREST
Separate Insurable Interest
1999
A businessman in the grocery business obtained from First Insurance an insurance
policy for P5M to fully cover his stocks-in-trade from the risk of fire. Three months
thereafter, a fire of accidental origin broke out and completely destroyed the grocery
including his stocks-in-trade. This prompted the businessman to file with First
Insurance a claim for five million pesos representing the full value of his goods. First
Insurance denied the claim because it discovered that at the time of the loss, the
stocks-in-trade were mortgaged to a creditor who likewise obtained from Second
Insurance Company fire insurance coverage for the stocks at their full value of P5 M.
a. May the businessman and the creditor obtain separate insurance coverages
over the same stocks-in-trade? Explain.
b. First Insurance refused to pay claiming that double insurance is contrary to
law. Is this contention tenable?
c. Suppose you are the Judge, how much would you allow the businessman and
the creditor to recover from their respective insurers. Explain.
SUGGESTED ANSWERS:
a. Yes. The businessman, as owner, and the creditor, as mortgagee, have separate
insurable interests in the same stocks-in-trade. Each may insure such interest to
protect his own separate interest.
b. The contention of First Insurance that double insurance is contrary to law is
untenable. There is no law providing that double insurance is illegal per se.
Moreover, in the problem at hand, there is no double insurance because the insured
with the First Insurance is different from the insured with the Second Insurance
Company. The same is true with respect to the interests insured in the two policies.
c. As Judge, I would allow the businessman to recover his total loss of P5M representing
the full value of his goods which were lost through fire. As to the creditor,
I would allow him to recover the amount to the extent of or equivalent to the value
of the credit he extended to the businessman for the stocks-in-trade which were
mortgaged by the businessman
54
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
INSURABLE INTEREST
Double Insurance
2005
1. When does double insurance exist?
2. What is the nature of the liability of the several insurers in double insurance?
Explain.
SUGGESTED ANSWERS:
1. Under Section 95 of the Insurance Code, double insurance exists where the same
person is insured by two or more insurers separately with respect to the same
subject matter and interest.
2. In double insurance, the insurers are considered as co-insurers. Each one is bound
to contribute ratably to the loss in proportion to the amount for which he is liable
under his contract. (Section 96 (e), Insurance Code of the Philippines)
INSURABLE INTEREST
Double Insurance
2012
X insured the building she owns with two (2) insurance companies for the same
amount. In case of damage, a. X cannot claim from any of the two (2) insurers because with the double
insurance, the insurance coverage becomes automatically void.
b. The two (2) insurers will be solidarily liable to the extent of the loss.
c. The two (2) insurers will be proportionately liable.
d. X can choose who he wants to claim against.
SUGGESTED ANSWER: D. X can choose who he wants to claim against.
INSURABLE INTEREST
Double Insurance and Over Insurance
1990
A. Suppose that Fortune owns a house valued at P600,000 and insured the same
against fire with three (3) insurance companies as follows:
55
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
X - P400,000
Y - P200,000
Z - P 600,000
In the absence of any stipulation in the policies, from which insurance company or
companies may Fortune recover in case fire should destroy his house completely?
B. If each of the fire insurance policies obtained by Fortune in problem (a) is a valued
policy and the value of his house was fixed in each of the policies at P1 million, how
much would Fortune recover from X if he has already obtained full payment on the
insurance policies issued by Y and Z?
C. If each of the policies obtained by Fortune in problem (a) above is an open policy
and it was immediately determined after the fire that the value of Fortune’s house
was P2.4 million, how much may he collect from X, Y, Z?
D. In problem (a), what is the extent of the liability of the insurance companies
among themselves?
E. Supposing in problem (a) above, Fortune was able to collect from both Y and Z, may
he keep the entire amount he was able to collect from the said two insurance
companies?
Explain your answers.
SUGGESTED ANSWERS:
A. Fortune can recover from any of the insurers in such order as he may select.
Pursuant to Section 96 paragraph a of the Insurance Code which states that where the
insured in a policy other than life is over insured by double insurance, 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. Applying this provision of law, absence any
stipulation regarding the order of claim in the insurance policies, Fortune may claim
against X, Y and Z in the order that he may select up to the amount for which the
insurers are severally liable under their respective contracts.
Therefore, Luis may select any among X, Y, and Z insurance companies to recover the
loss he suffered for the fire.
B. Under a valued policy, Fortune can still recover from X insurance company the
balance of the P1Million value of his house, which is P200,000.
56
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
A valued policy is defined under Section 61 of the Insurance code as a policy which
expresses on its face an agreement that the thing insured shall be valued at a specific
sum. As the insurance polices entered into by Fortune is a valued policy, the amount
of indemnity to be paid by each insurance company shall be the agreed valuation
provided specifically for each policy.
In computing for the amount to be claimed from X insurance company, Section 96
paragraph b of the Insurance code shall be applied. The provision of law states that
where the policy under which the insured claims is a valued policy, any sum received
by him under any other policy shall be deducted from the value of the policy without
regard to the actual value of the subject matter insured.
Applying this provision to the case, Fortune was able to obtain a total amount of
P800,000 from insurance companies Y (P200,000) and Z (P600,000). As the value of
the policy P1 Million, he can still recover the balance of P200,00 from X company since
he is entitled to recover up to extent of his loss.
Consequently, Fortune may rightfully recover ₽200,000 from X insurance company.
C. Under an open policy, Fortune may may recover the full amount of the coverage from
each insurer.
An open policy is defined under Section 60 of the Insurance Code as a policy in in
which the value of the thing insured is not agreed upon, and the amount of the
insurance merely represents the insurer’s maximum liability. The value of such thing
shall be ascertained in case of loss. Thus, Fortune may may recover the full amount of
the coverage from each insurer upon determination that the actual loss he suffered
amounted to P2.4 million.
Furthermore, Section 96 paragraph c of the Insurance Code provides that where the
policy under which the insured claims is an unvalued policy, any sum received by
him under any policy shall be deducted against the full insurable value, for any sum
received by him under any policy. In this case, Fortune’s house was valued at P 2.4
million but the total proceeds of Fortune’s insurance from X, Y and Z insurance
companies only amounts to P 1.2 million. As the value of the property loss due to fire
is less than the total proceeds of the insurance policies, Fortune can rightfully collect
the entire amount insured specified under each policy from each company.
Therefore, Fortune may collect from X P400,000, from Y P200,000 and from Z
P600,000.
D. Among themselves, each insurance company shall be liable for the following amounts:
X ─ P 200,000; Y ─ P100,000; and Z ─ P300,000.
57
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In computing for the proportionate amount to which each insurance company shall
be liable for under the policies, Section 96 paragraph e of the Insurance Code will be
applied. This provision states that that each insurer is bound, as between himself and
other insurers, to contribute ratably to the loss in proportion to the amount for which
he is liable under his contract.
In this case, the value of Fortune’s house amounting to P 600,000 will be distributed
proportionately to each company based on the value specified in each policy. The
amounts are computed as:
X─ 1/12 of P 600,000 = P 200,000
Y─ 2/12 of P 600,000 = P 100,000
Z─ 6/12 of P 600,000 = P 300,000
Therefore, X, Y and Z shall be liable pro-rata to the amounts of P200,000 from X company,
P100,000 from Y company and P300,000 from Z company.
E. No, Fortune cannot keep the entire amount he was able to collect from Y and Z
company which amounts to P 800,000.
The Principle of Indemnity states that the insured should not collect more than the
actual cash value of the loss. The principle aims to prevent the insured from profiting
from insurance contracts. It must be noted that the principle of indemnity is not
applicable to Life Insurance and Valued Policies. As problem (a) fails to indicate that
Fortune entered into a Valued Policy, it is only right to treat is an an ordinary
insurance policy. Thus, the principle of indemnity shall be applicable to this case.
Applying the principle of indemnity, Fortune cannot keep the entire amount he
collected from Y and Z company amounting to P800,000 as he only suffered a loss
amounting to P 600,000. He must therefore return the excess amount of P200,000.
INSURABLE INTEREST
Double Insurance
2008
Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The
owner insured the building against fire with three (3) insurance companies for the
following amounts: Northern Insurance Corp. – P20 Million Southern Insurance Corp.
– P30 Million Eastern Insurance Corp. – P50 Million.
A. Is the owner’s taking of insurance for the building with three (3) insurers valid?
Discuss.
B. The Building was totally razed by fire. If the owner decides to claim from
Eastern Insurance Corp. only P50 Million, will the claim prosper? Explain.
58
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWERS:
a. Yes, the taking of insurance with 3 insurers is valid.
Under Section 95 of the Insurance Code, where the same person is insured by several
insurers separately in respect to the same subject and interest, there is double
insurance.
In the problem, there is double insurance because there are several insurers over the
same condominium building, Terrazas de Patio, involving the same risk or peril,
which is fire, and involving the same interest, as an owner of the condominium.
The law does not expressly prohibit double insurance. However, when the policy
provides for “other insurance clause” or a clause in the policy providing that the
policy shall be void if the insured procures additional insurance without the consent
of the insurer, double insurance shall render the policy void. There is no showing in
the problem that such clause is stipulated in the policy.
Therefore, in the absence of “other insurance clause” in the policy, double insurance
does not avoid the policy.
b. Yes, the claim will prosper.
Under Section 96 of the Insurance Code, where the insured in a policy other that life
is over-insured by double insurance, 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.
In the problem, the claim was made against Eastern Insurance Corp for P50M. The
insured is allowed to choose the insurer against whom he will enforce his claim
provided that the claim shall not exceed his insurable interest over the property
insured. Since the claim is equal to the amount of the insurable interest over the
property, the claim shall prosper.
INSURABLE INTEREST
In Life
1987
Blanco took out a P1 M life insurance policy naming his friend and creditor,
Montenegro, as his beneficiary. When Blanco died, his outstanding loan obligation to
Montenegro was only P50,000. Blanco’s executor contended that only P50,000 out of
the insurance proceeds should be paid to Montenegro and the balance of P950,000
should be paid to Blanco’s estate.
59
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Is the executor’s contention correct? Reason out your answer.
SUGGESTED ANSWER: The contention of the executor is incorrect.
Under Section 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. The proceeds of a life insurance in which a third person is named beneficiary
belong exclusively to such beneficiary as an individual, they are not the property of the heirs
of the insured, are not subject to administration, and cannot properly be claimed or received
by the administrator or other legal representative of the insured as assets of his estate.
In this case, it was Blanco who took out the life insurance policy on his own life, naming only
Montenegro as the beneficiary. Hence, the proceeds of the insurance policy amounting to P
1M should be applied exclusively to the proper interest of Montenegro, the person whose
benefit it is made.
INSURABLE INTEREST
Equitable Interest
1991
A piece of machinery was shipped to Mr Pablo on the basis of C&F Manila. Pablo
insured said machinery with the Talaga Merchants Insurance Company (Tamic) for
loss or damage during the voyage. The vessel sank en route to Manila. Pablo then filed
a claim with Tamic which was denied for the reason that prior to deliver, Pablo had no
insurable interest. Decide the case.
SUGGESTED ANSWER: I would decide in favor of Mr. Pablo.
In the case of Filipino Merchants Insurance v. Court of Appeals, the Supreme Court ruled that
anyone has an insurable interest in property who derives a benefit from its existence or
would suffer loss from its destruction whether he has or has not any title in, or lien upon or
possession of the property. Furthermore, the Court also held that the 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.
Applying jurisprudence to this case, Mr. Pablo has equitable title over the piece of machinery
even before delivery by virtue of the perfected contract of sale. His interest over the
machinery is based on this. Hence, he has insurable interest over the piece of machinery
prior to its delivery.
Therefore, Mr. Pablo’s claim for loss or damage with Tamic must prosper as he has insurable
interest over the machinery prior to its delivery.
60
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
PERFECTION OF THE CONTRACT OF INSURANCE
Consent of the Parties
2003
Josie Gatbonton obtained from Warranty Insurance Corporation a comprehensive
motor vehicle insurance to cover her brand new automobile. She paid, and the insurer
accepted payment in check. Before the check could be encashed, Josie was involved in
a motor vehicle accident where her car became a total wreck. She sought payment
from the insurer. Could the insurer be made liable under the insurance coverage?
SUGGESTED ANSWER: Yes, Warranty Insurance Corporation can be made liable under the
insurance coverage.
An insurance contract, being consensual, is deemed perfected by the meeting of minds with
respect to the object and consideration of the contract. Further, Section 77 of the Insurance
Code also provides that no policy or contract of insurance is binding until and unless the
premium thereof has been paid. In the case at bar, Josie Gatbonton had “obtained” an
insurance for his motor vehicle, which would imply that an insurance contract has already
been perfected. The said policy also became valid and binding upon her payment to the
insurer, to which the insurer has accepted. Thus, the insurer is liable.
PERFECTION OF THE CONTRACT OF INSURANCE
Cognition Theory
2011
On June 1, 2020, X mailed to Y Insurance, Co. his application for life insurance, with
payment for 5 years of premium enclosed in it. On July 21, 2020, the insurance
company accepted the application and mailed, on the same day, its acceptance plus
the cover note. It reached X's residence on August 11, 2020. But, as it happened, on
August 4, 2020, X figured in a car accident. He died a day later. May X's heirs recover
on the insurance policy?
A. Yes, since under the Cognition Theory, the insurance contract was perfected
upon acceptance by the insurer of X's application.
B. No, since there is no privity of contract between the insurer and X’s heirs.
C. No, since X had no knowledge of the insurer's acceptance of his application
before he died.
D. Yes, since under the Manifestation Theory, the insurance contract was
perfected upon acceptance of the insurer of X's application.
SUGGESTED ANSWER: C. No, since X had no knowledge of the insurer's acceptance of his
application before he died.
61
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In the case of Steamship Mutual Underwriting Association v. Sulpicio Lines (2017), the Court
stated that “A contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application for insurance has not been either
accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be
binding from the date of 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.”
Further, pursuant to Art. 1319 of the New Civil Code, it states that “Consent is manifested by
the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind
the offerer except from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was made.”
In this case, X had no knowledge of the insurer’s acceptance of his application because he
died on August 4 and the application reached his residence on August 11. Hence, the contract
was never perfected and the obligation of the insurer which was supposed to be covered by
the premium did not materialize.
Therefore, mere submission of the application form without the offerors’ knowledge of the
acceptance or approval of the policy does not result in the perfection of the contract of
insurance.
PERFECTION OF THE CONTRACT OF INSURANCE
Cognition Theory
2016
Jason is the proud owner of a newly-built house worth PS million. As a protection
against any possible loss or damage to his house, Jason applied for a fire insurance
policy thereon with Shure Insurance Corporation (Shure) on October 11, 2016 and
paid the premium in cash. It took the company a week to approve Jason's application.
On October 18, 2016, Shure mailed the approved policy to Jason which the latter
received five (5) days later. However, Jason's house had been razed by fire which
transpired a day before his receipt of the approved policy. Jason filed a written claim
with Shure under the insurance policy. Shure prays for the denial of the claim on the
ground that the theory of cognition applies to contracts of insurance. Decide Jason's
claim with reasons.
SUGGESTED ANSWER: Jason’s claim shall not prosper as the cognition theory applies in
contracts of insurance.
Under such theory, the contract is perfected only upon the knowledge of the insured that the
insurer has already accepted the offer.
62
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In this case, at the time the house of Jason was burned down, he was still not aware that
Shure had already accepted his application for fire insurance policy as the receipt of the
approval only came the day after the incident. The contract of insurance was not yet
perfected at this point and, hence, Jason is not entitled to any claims.
As such, Jason’s claim should be denied.
PERFECTION OF THE CONTRACT OF INSURANCE
Cover Notes
2009
Antarctica Life Assurance Corporation (ALAC) publicly offered a specially designed
insurance policy covering persons between the ages of 50 to 75 who may be afflicted
with serious and debilitating illnesses. Quirico applied for insurance coverage, stating
that he was already 80 years old. Nonetheless, ALAC approved his application.
Quirico then requested ALAC for the issuance of a cover note while he was trying to
raise funds to pay the insurance premium. ALAC granted the request. Ten days after
he received the cover note, Quirico had a heart seizure and had to be hospitalized. He
then filed a claim on the policy.
A. Can ALAC validly deny the claim on the ground that the insurance coverage, as
publicly offered, was available only to persons 50 to 75 years of age? Why or
why not?
B. Did ALAC’s issuance of a cover note result in the perfection of an insurance
contract between Quirico and ALAC? Explain.
SUGGESTED ANSWERS:
A. No, ALAC cannot deny the claim.
Under Sec 33 of the Insurance Code, the right to information of material facts may be
waived, either by the terms of insurance or by neglect to make inquiry as to such facts,
where they are distinctly implied in other facts of which information is
communicated.
In the problem given, ALAC approved Quirico’s application despite the knowledge on
its part that the age is beyond the requirement set. It even issued a cover note in
Quirico’s favor. The insurer cannot belatedly claim that the insured is excluded from
the coverage of the insurance policy because it already waived its right to question
such fact clearly and unambiguously communicated to it.
63
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
B. No, the mere issuance of the cover note did not result in the perfection of an insurance
contract.
Insurance contracts, being consensual contracts, are perfected upon meeting of the
parties’ minds. Under the cognition theory, a contract is perfected the moment the
offeror learns of the acceptance of the offer by the offeree.
In this problem, Quirico was already aware of the approval of his insurance
application prior to the happening of the risk. Since an insurance contract is a
consensual contract, it was perfected upon the insured’s knowledge of the acceptance
by the insurer. This triggered the perfection of the contract, and not the issuance of
the cover note.
PERFECTION OF CONTRACT OF INSURANCE
Offer and Acceptance
1980
P” filed an application with an insurance company for a 20-year endowment policy in
the amount of P50,000.00 on the life of his one-year-old daughter, supplying all the
essential data in the application form, but without disclosing that his daughter was a
mongoloid child. Upon “P’s” payment of the annual premium, a binding deposit receipt
was issued to “P” by the insurance agent, subject to processing by the company. The
insurance company disapproved the insurance application stating that the plan
applied for was not available for minors below seven years old and offered another
plan. The insurance agent did not inform “P” of the disapproval nor of the alternative
plan offered, and instead, strongly recommended that the company reconsider and
approve the insurance application.
As fate would have it, “P’s” daughter died. “P” sought payment of the proceeds of the
insurance, but the company refused on the grounds that there was concealment of a
material fact in the insurance application form and that it had rejected the application.
“P” contended, on the other hand, that the binding deposit receipt constituted a
temporary contract of life insurance.
How would you resolve the issue?
SUGGESTED ANSWER: I would resolve the issue in favor of the insurance company.
The Supreme Court, in the case of Great Pacific Life Assurance Company v. Court of Appeals,
explained that the binding deposit receipt is merely conditional and does not insure outright.
Where an agreement is made between the applicant and the agent, no liability shall attach
until the principal approves the risk and a receipt is given by the agent. The acceptance is
merely conditional and is subordinated to the act of the company in approving or rejecting
64
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
the application Thus, in life insurance, a "binding slip" or "binding receipt" does not insure
by itself.
In the present case, there was no perfected contract of insurance on the ground that the
insurance company disapproved the application form. Also, as stated in the case above, the
binding deposit receipt issued to P does not insure outright. Thus, the insurance company is
not liable to pay the insurance proceeds.
PERFECTION OF THE CONTRACT OF INSURANCE
Cash and Carry Rule; Exceptions
2013
Stable Insurance Co. (SIC) and St. Peter Manufacturing Co. (SPMC) have had a longstanding insurance relationship with each other; SPMC secures the comprehensive
fire insurance on its plant and facilities from SIC. The standing business practice
between them has been to allow SPMC a credit period of 90 days from the renewal of
the policy within which to pay the premium.
Soon after the new policy was issued and before premium payments could be made, a
fire gutted the covered plant and facilities to the ground. The day after the fire, SPMC
issued a manager's check to SIC for the fire insurance premium, for which it was issued
a receipt; a week later SPMC issued its notice of loss.
SIC responded by issuing its own manager's check for the amount of the premiums
SPMC had paid, and denied SPMC's claim on the ground that under the "cash and carry"
principle governing fire insurance, no coverage existed at the time the fire occurred
because the insurance premium had not been paid.
Is SPMC entitled to recover for the loss from SIC?
SUGGESTED ANSWER: Yes, SPMC is entitled to recover for the loss from SIC.
As a general rule, an insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against (Sec. 78, Insurance Code). By way of exception,
if the insurer has granted the insured a credit term for the payment of the premium, then the
general rule may not apply (Makati Tuscany Condominium Corporation v. Court of Appeals).
In the case at bar, SIC and SPMC have standing business practice to grant the latter a 90-day
credit term days from the renewal of the policy within which to pay the premium. Hence, the
insurer is estopped from invoking the cash and carry principle. Consequently, the SPMC is
entitled to recover for the loss.
65
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
PERFECTION OF THE CONTRACT OF INSURANCE
Cash and Carry Rule; Exceptions
2015
Will an insurance policy be binding even if the premium is unpaid? What if it were
partially paid?
SUGGESTED ANSWER: Yes, an insurance policy may be binding even if the premium is
unpaid. As a general rule, the insurance policy is not valid and binding, unless the premium
thereof has been paid.
Sec. 77 of the Insurance Code provides that 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. This
is the cash-and-carry rule. Premium is the consideration for the undertaking of the insurer
to indemnify the insured against a specified peril.
There are exceptions however to the cash-and-carry rule, one of them is, when there is an
agreement allowing the insured to pay the premium in installments and partial payment has
been made at the time of the loss (Makati Tuscany Condominium Corporation v. CA).
Thus, an insurance policy may be binding even if the premium is unpaid or partially paid
pursuant to the exceptions to the cash-and-carry rule.
PERFECTION OF THE CONTRACT OF INSURANCE
Premium Payment
1978
On December 17, 1975, a fire policy, insuring a building and its contents, was
delivered to the insured company. By agreement, it was allowed to pay the premium
within 30 days. On January 8, 1976, it paid the premium by means of a check postdated
January 16, 1976. The check was deposited by the insurance company only on
February 20, but the check bounced, although January 19, the insured has a sufficient
bank balance. On January 18, two days after the premium became due; the insured
property was burned and became a total loss. Can the insurance company cancel the
policy for non-payment of premium? Give reasons for your answers.
SUGGESTED ANSWER: No, the insurance company cannot cancel the policy for nonpayment
of the premium.
66
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Section 77 of the Insurance Code provides that notwithstanding any agreement to contrary,
no policy or contract of insurance is valid and binding unless and until the premium thereof
has been paid. Moreover, Art. 1249 of the NCC states that the delivery of promissory notes
payable to order, or bills of exchange or mercantile documents shall produce the effect of
payment only when they have been cashed or when through the fault of the creditor, they
have been impaired.
However, in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., the Court
ruled that 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.
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.
Here, the fire policy is also silent as to the mode of payment and the insurer accepted the
promissory note in the payment of premium. The insurer cannot now raise nonpayment of
premium because at the time of loss, there is a sufficient bank balance to cover the check.
The fact that the check was subsequently dishonored on a later date 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.
Therefore, the insurance company cannot cancel the policy for nonpayment of the premium.
PERFECTION OF THE CONTRACT OF INSURANCE
Premium Payment
2010
Enrique obtained from Seguro Insurance Company a comprehensive motor vehicle
insurance to cover his top of the line Aston Martin. The policy was issued on March 31,
2020 and, on even date, Enrique paid the premium with a personal check postdated
April 6, 2020. On April 5, 2020, the car was involved in an accident that resulted in its
total loss. On April 10, 2020, the drawee bank returned Enrique’s check with the
notation "Insufficient Funds." Upon notification, Enrique immediately deposited
additional funds with the bank and asked the insurer to redeposit the check. Enrique
thereupon claimed indemnity from the insurer. Is the insurer liable under the
insurance coverage?
SUGGESTED ANSWER: No, the insurer is not liable under the insurance coverage.
Pursuant to Art. 1249 of the New Civil Code, “xxx The delivery of promissory notes payable
to order, or bills of exchange or other mercantile documents shall produce the effect of
67
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
payment only when they have been cashed, or when through the fault of the creditor they
have been impaired. xxx”
In this case, the total loss of the car happened on April 5, 2020, and when the check was
deposited, it was returned on April 10, 2020, for insufficiency of funds. The check was
honored only after Enrique deposited additional funds with the bank.
Therefore, as the payment did not produce any effect, the insurer is not liable.
PERFECTION OF THE CONTRACT OF INSURANCE
Premium Payment
2006
The BTS Insurance Company offered to insure Jin’s brand-new car against all risks in
the sum of P1 Million for 1 year. The policy was issued with the premium fixed at
P60,000.00 payable in 6 months. Jin only paid the first two months installments.
Despite demands, he failed to pay the subsequent installments. Five months after the
issuance of the policy, the vehicle was carnapped. Jin filed with the insurance company
a claim for its value. However, the company denied his claim on the ground that he
failed to pay the premium resulting in the cancellation of the policy.
Can Jin recover from the BTS Insurance Company?
SUGGESTED ANSWER: Yes, Jin can recover from BTS Insurance Company.
In the case of UCBP General Insurance v. Masagana Terminal, the Court ruled that when the
parties to a contract have agreed to the payment of premium by installments, and partial
payment has been made at the time of the loss, the insurer is still liable.
Here, when the car of Jin was lost, the six months agreed period of payment had not yet
elapsed. Jin can still recover from BTS Insurance Company, but as the insurer, it has the right
to deduct the amount of unpaid premiums from the insurance proceeds.
PERFECTION OF THE CONTRACT OF INSURANCE
Premium Payment
2007
Miguel took out a policy to insure his commercial building against fire. The broker for
the insurance company agreed to give a 15-day credit within which to pay the
insurance premium. Upon delivery of the policy on May 15, 2006, Miguel issued a
postdated check payable on May 30, 2006. On May 28, 2006, a fire broke out and
destroyed the building owned by Alfredo.
68
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
a. May Miguel recover on the insurance policy?
b. Would your answer in (a) be the same if it was found out that the proximate
cause of the fire was an explosion, and that fire was but the immediate cause of
loss and there is no excepted peril under the policy?
c. If the fire was found to have been caused by Miguel’s own negligence, can he
still recover on the policy?
SUGGESTED ANSWERS:
a. Yes, Miguel can recover on the insurance policy.
In the case of UCPB General Insurance v. Masagana Telemart, it was ruled by the Court
that the insured should be allowed to recover on losses sustained even when
premium was paid after the fact of loss, provided payment was received by the
insurer during the credit period given to the insured. This has modified the rule
provided under Section 77 of the Insurance Code which states that in fire insurance,
payment of premium is necessary for the validity of the policy, otherwise known as
the “cash and carry” provision.
In this case, Miguel can recover on the insurance policy. The check payment which he
made as premium payment was received by the insurer prior to the loss or within the
credit period.
Thus, he can recover from the insurance company.
b. Yes, my answer will be the same in the given situation.
Section 86 of the Insurance Code provides that an insured is allowed to recover under
an insurance contract if the cause of the loss was either the proximate cause or
immediate cause, as long as an expected peril was not the proximate cause of the loss.
Here, the fire, being the immediate cause for the loss of Miguel’s commercial building,
would warrant recovery under the policy.
c. Yes, Miguel can still recover from the policy.
Section 87 of the Insurance Code provides that 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 insurance agent or others.
In this case, the negligence of Miguel will not prevent or bar him from recovering from
the policy. The law only proscribes recovery when the insured caused the loss by his
willful acts, or with connivance with others.
Thus, Miguel can still recover from the insurance policy.
69
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
PERFECTION OF THE CONTRACT OF INSURANCE
Premium Payment
2014
On September 25, 2020, Danny Marcial (Danny) procured an insurance on his life with
a face value of P5,000,000.00 from RN Insurance Company (RN), with his wife Tina
Marcial(Tina) as sole beneficiary. On the same day, Danny issued an undated check to
RN for the full amount of the premium. On October 1, 2020, RN issued the policy
covering Danny’s life insurance. On October 5, 2020, Danny met a tragic accident and
died. Tina claimed the insurance benefit, but RN was quick to deny the claim because
at the time of Danny’s death, the check was not yet encashed and therefore the
premium remained unpaid.
1. Is RN correct?
2. Will your answer be the same if the check is dated October 15, 2020?
SUGGESTED ANSWERS:
1. No, RN is not correct.
Under Sec. 77 of the Insurance Code, no policy or contract of insurance is valid and
binding unless and until the premium thereof has been paid, except in cases of life or
industrial life policy whenever the grace period provision applies. In addition, Sec.
17(c) of the Negotiable Instruments Law provides that when the instrument is not
dated, it is considered as dated at the time it was issued. Also, the subsequent effect
of encashment or impairment due to the creditor’s fault would retroact to the date of
the mercantile instrument and its acceptance by the creditor.
Here, it is true that the premiums remained unpaid until the death of Danny Marcial
but it is the fault of RN Insurance why the check was not encashed even if it has the
check as early as 15 September 2020, from which time RN could have easily encashed
the check before Marcial’s death. This is based on the ruling of the Supreme Court in
the similar case of Malayan Insurance v. Amaldo.
Thus, RN is not correct in denying the claim because the non-encashment is due to
the fault of RN Insurance.
2. No, the answer will not be the same.
Under Sec. 77 of the Insurance Code, no policy or contract of insurance is valid and
binding unless and until the premium thereof has been paid, except in cases of life or
industrial life policy whenever the grace period provision applies.
70
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Here, the postdating of the check by Danny Marcial of 15 October 2020 does not
sufficiently put the insurance into effect because the giving of a check does not have
the effect of payment until it was encashed. At the time of Marcial’s death on 5 October
2020, the contract of insurance was not yet valid and binding due to non-payment of
premium.
Thus, the answer will not be the same because RN Insurance can validly refuse due to
non-payment of premiums.
PERFECTION OF THE CONTRACT OF INSURANCE
Refund of Premiums
2000
Name at least three instances when an insured is entitled to a return of the premium
paid.
SUGGESTED ANSWER: Three instances when an insured is entitled to a return of premium
paid are:
3. To the whole premium, if no part of his interest in the thing insured be exposed to any
of the perils insured against;
4. 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; and
5. 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.
RESCISSION OF INSURANCE CONTRACT
Concealment; Test of Materiality
2011
An insured, who gains knowledge of a material fact already after the effectivity of the
insurance policy, is not obliged to divulge it. The reason for this is that the test of
concealment of material fact is determined:
A.
B.
C.
D.
At the time of the issuance of the policy.
At any time before the payment of premium.
At the time of the payment of the premium.
At any time before the policy becomes effective.
71
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWER: D. At any time before the policy becomes effective.
Pursuant to Section 31 of the ICP, it provides that “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.”
RESCISSION OF INSURANCE CONTRACT
Concealment
1979
A fire insurance policy in favor of the insured contained a stipulation that the insured
shall give notice to the company of any insurances already effected or which may
subsequently be effected, covering the property insured and that unless such notice
be given before the occurrence of any loss, all benefits shall be forfeited. The face of
the policy bore the annotation “Co-insurance declared.” The things insured were
burned. It turned out that several insurances were obtained on the same goods for the
same term. The insurer refused to pay on the ground of concealment. May the insured
recover? Reason.
SUGGESTED ANSWER: Yes, the insured may recover because there is no concealment.
In the case of General Ins. And Surety Corp. v. Ng Hua, the court defined the “other insurance
clause” as a clause in the policy that provides that the policy shall be void if the insured
procures additional insurance without the consent of the insurer. The purpose of such is to
prevent over-insurance and thus avert the possibility of perpetration of fraud. Here, the face
of the policy already contains a notation “Co-insurance declared” which is a notice to the
insurer as to the existence of other insurance contracts on the property insured, and hence,
there is no concealment.
Therefore, the insurer may recover on the policy.
RESCISSION OF INSURANCE CONTRACT
Concealment
1979
Marine Insurance was secured upon goods on board a ship which departed from
Madagascar to Manila, without any disclosure to the insurer of the fact that the ship
has been reported at Lloyd’s of London as seen at sea, deep in water and leaky. This
report turned out later to be wrong because the ship was at no time during the voyage
leaky or in trouble, but was lost thru another insured risk. The insurer refuses to pay
the insured, claiming concealment. The insured counters that the fact not disclosed
72
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
was erroneous and did not increase the risk and therefore immaterial. Decide the
dispute with reasons.
SUGGESTED ANSWER: The insured cannot recover from the insurer.
The law provides that a neglect to communicate that which a party knows and ought to
communicate, is called a concealment. Concealment, whether intentional or unintentional
entitles the injured party to rescind a contract of insurance. The matter concealed by the
insured is considered material if it relates to physical hazard or moral hazard. It 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.
Here, the information that the ship in question was seen at sea, deep in water and leaky,
although erroneous, was material, and its concealment entitled the insurer to rescind the
contract of insurance. The matter concealed need not be the cause of the loss.
Therefore, the contention of insurer is valid and the insured cannot recover from him.
RESCISSION OF INSURANCE CONTRACT
Concealment
2012
When X insured his building, X indicated in the application that it is a residential
building, but actually the building was being used as a warehouse for some hazardous
materials. What is the effect on the insurance policy, if any?
a.
b.
c.
d.
The insurance policy can be cancelled because of the change in the use.
The insurance policy will automatically be changed.
The insurance policy need not be changed.
The insurance policy is fixed regardless of the change in the use.
SUGGESTED ANSWER: A. The insurance policy can be cancelled because of the change in the
use.
RESCISSION OF INSURANCE CONTRACT
Concealment
2016
X insured his life for P20 million. X, plays golf and regularly exercises everyday, hence
is considered in good health. He did not know, however, that his frequent headache is
really caused by his being hypertensive. In his application form for a life insurance for
himself, he did not put a check to the question if he is suffering from hypertension,
believing that because of his active lifestyle, being hypertensive is a remote
73
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
possibility. While playing golf one day, X collapsed at the fairway and was declared
dead on arrival at the hospital. His death certificate stated that X suffered a massive
heart attack.
a. Will the beneficiary of X be entitled to the proceeds of the life insurance under
the circumstances, despite the non-disclosure that he is hypertensive at the
time of application?
b. If X died in an accident instead of a heart attack, would the fact of X's failure to
disclose that he is hypertensive be considered as material information?
SUGGESTED ANSWERS:
a. No, the beneficiary of X would not be entitled to the proceeds of the life insurance.
Under Section 27 of the Insurance Code, a concealment whether intentional or
unintentional entitles the injured party to rescind a contract of insurance. While
Section 31 of the same code provides that 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.
In this case, the fact that X was hypertensive is a material fact that should have been
disclosed when he was applying for the life insurance policy as it was even asked in
the application form. Having concealed this fact, even though unintentional as he has
no knowledge of such condition, entitles the insurer to rescind the life insurance.
As such, the beneficiary of X would not be entitled to the proceeds.
b. Yes, the failure to disclose that he was hypertensive is still a material information.
Section 31 of the Insurance Code provides that 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. In the case of
Sunlife Assurance Co. vs Court of Appeals (G.R. No. 105135, June 22, 1995), the
Supreme Court also held that the insured need not die of the disease he had failed to
disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed insurance policy or in making
inquiries.
In this case, it is irrelevant that X died because of an accident. The fact that he failed
to disclose to the insurer that he was hypertensive despite being asked in the
application form entitles the insurer to rescind the contract regardless of what
actually caused his death.
74
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In line with this, there was still a material information that was concealed on the part
of X.
RESCISSION OF INSURANCE CONTRACTS
Concealment
2001
ABC applied for a non-medical life insurance with XYZ Insurance Corp. He did not
inform the insurer that one week prior to his application for insurance, he was
diagnosed as COVID-19 positive. The insured soon thereafter died in a plane crash. Is
the insurer liable considering that the fact concealed had no bearing with the cause of
death of the insured?
SUGGESTED ANSWER: No, the insurer is not liable to the insured.
It is well-settled that the insured need not die of the disease he failed to disclose to the
insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimate of
the risks of the proposed insurance policy or in making inquiries. Having concealed such a
material fact, XYZ cannot now be held liable as ABC’s insurer.
RESCISSION OF INSURANCE CONTRACTS
Concealment
1975
In a non-medical insurance contract (one where the company waives medical
examination) the insured failed to disclose that she had once been operated on,
although the information on this matter was supposed to have been supplied the
company. Within the proper period, may the Insurance Company have the contract
rescinded? Reasons.
SUGGESTED ANSWER: Yes, the Insurance Company can rescind the contract on the ground
of concealment of material fact.
According to Sec. 31 of the Insurance Code, materiality is determined 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. The waiver of a medical examination in a non-medical insurance contract renders
even more material the information required of the applicant concerning previous
conditions of health and diseases suffered (Sunlife Assurance Company of Canada vs. CA and
Bacani). Correlatively, under Sec. 26, concealment is a neglect to communicate that which a
party knows and ought to communicate. A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance (Sec. 27, Insurance Code).
75
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Here, the fact of the insured’s operation is material to the insurer, who may have refused to
issue the life policy had it known of such fact. This is even more true in a non-medical
insurance where no medical exam is made and the information given by the insured
concerning his past health and diseases is a very important factor which the insurer takes
into consideration in deciding to issue the policy. Ergo, the Insurance Company may have the
contract rescinded.
RESCISSION OF INSURANCE CONTRACTS
Concealment
1976
X applied for fire insurance on his house. In his application, he was asked the following
questions: “Is the house insured with another Insurance Company? If so, for how
much?” His answer was “No.” The fact, however, is that the house had been insured
with FGU for Php 100,000.00. The application was approved and made a part of the
policy. Subsequently, a fire occurred in a neighboring house, and spread to the house
of X which was completely burned. Demand for payment having been refused by the
insurer, X filed a complaint. May he recover? Reason.
SUGGESTED ANSWER: No, X may not recover.
Under the relevant provisions of the Insurance Code, concealment of a material fact is a
ground for rescission and is a valid defense of an insurer in an action based on the policy.
In this case, X was guilty of concealment of a material fact. The fact of the existence of the
other insurance is material because had X answered truthfully, the insurer would probably
have charged him higher premium, or would have made further inquiries, or would have
imposed some other conditions in the policy to protect its interest. Also, the existence of a
large amount of insurance increases the moral hazard or the temptation to commit arson.
Thus, based on the foregoing, X may not recover.
RESCISSION OF INSURANCE CONTRACT
Concealment
1996
Juan procured a “non-medical” life insurance from Good Life Insurance. He designated
his wife, Petra, as the beneficiary. Earlier, in his application in response to the
question as to whether or not he had ever been hospitalized, he answered in the
negative. He forgot to mention his confinement at the Kidney Hospital.
After Juan died in a plane crash, Petra filed a claim with Good Life. Discovering Juan’s
previous hospitalization, Good Life rejected Petra’s claim on the ground of
76
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
concealment and misrepresentation. Petra sued Good Life, invoking good faith on the
part of Juan. Will Petra’s suit prosper? Explain.
SUGGESTED ANSWER: No, Petra’s suit will not prosper.
Section 26 of the Insurance Code of the Philippines provides that “a neglect to communicate
that which a party knows and ought to communicate, is called a concealment”. In the case of
Stipcith vs. Metropolitan Life Insurance, it was stated that failure on the part of the insured
to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at
the insurer’s option. This is due to the fact that insurance policies are traditionally contracts
uberrimae fidae, that is, contracts of utmost good faith.
The Supreme Court also stated in the case of Sunlife Assurance Co. of Canada vs. Court of
Appeals that materiality of the concealment is to be determined not by the event, but solely
by the probable and reasonable influence of the facts upon the party to whom
communication is due, in forming his estimate of the disadvantages of the proposed contract
or in making his inquiries. The failure to disclose prior hospitalizations in the Sunlife Case
was deemed by the Supreme Court as material concealment, that raised grave doubts as to
the insured’s bonafides.
Thus in the case at bar, Juan’s failure to disclose his confinement at the Kidney Hospital
which is deemed as material information which would affect the decision of Good Life as to
reasonably assess the risk involved in accepting the insurance application is a ground for the
rescission of the said insurance contract.
Thus, Petra’s suit will not prosper.
RESCISSION OF INSURANCE CONTRACTS
Concealment; Misrepresentation
1994
On September 25, 1990, Tan took a life insurance policy from Philam. The policy was
issued on November 6, 1990. He died on April 26, 1992 of hepatoma. The insurance
company denied the beneficiaries’ claim and rescinded the policy by reason of alleged
misrepresentation and concealment of material facts made by Tan in his application.
It returned the premiums paid.
The beneficiaries contend that the company had no right to rescind the contract as
rescission must be done “during the lifetime” of the insured within two years and prior
to the commencement of the action.
Is the contention of the beneficiaries tenable?
77
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWER: No, the beneficiaries’ contention is not tenable.
Section 48 of the Insurance Code provides that, 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. Further, the same
section provides that, 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 (2) 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 rescindable by reason of the fraudulent concealment or misrepresentation
of the insured or his agent.
The right of the insurer to rescind is only lost if the beneficiary has commenced an action on
the policy, however, there is no such action in this case. Also, the insured died within less
than two (2) years from the issuance of the policy. Tan died on April 26, 1992, or less than
two years from the date he took the insurance policy on September 23, 1990.
Therefore, their claims as to the insurer’s right of rescission being barred and the
applicability of the incontestability clause hold no water.
RESCISSION OF INSURANCE CONTRACTS
Concealment; Misrepresentation
1989
X applied for life insurance with Metropolitan Life Insurance Company. The
application contained this question: “Have you ever had any ailment or disease of x x
x (b) the stomach or intestines, liver, kidney, or genitourinary organ?” X, a
laundrywoman who has no medical knowledge answered “No”. The application was
approved, premium was paid and 6 months later, X died from cancer of the stomach.
The post medical examination of X shows that she had the cancer at the time she
applied for a policy. Can the beneficiary of X collect on the policy? Reasons.
SUGGESTED ANSWER: No, the beneficiary is cannot collect form the insurance policy.
Section 27 of the Insurance Code provides that concealment, whether intentional or
unintentional entitles the injured party to rescind a contract of insurance. In the case at bar,
X is guilty of concealment of a material fact because she did not disclose her illness. The fact
that X had no medical knowledge does not excuse her concealment. Lack of knowledge on
the part of the insured about her ailment will not preclude the insurer from raising the
defense because Section 27 provides that concealment may either be intentional or
unintentional. Therefore, the beneficiary of X cannot collect from the insurer on the policy.
78
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
RESCISSION OF INSURANCE CONTRACTS
Concealment; Incontestability Clause
1991
Atty. Roberto took out a life insurance policy from the Dana Insurance Company (DIC)
on 01 September 2019. On 31 August 2020, Roberto died. DIC refused to pay his
beneficiaries because it discovered that Robert had misrepresented certain material
facts in his application. The beneficiaries sued on the basis that DIC can contest the
validity of the insurance policy only within 2 years from the date of issue and during
the lifetime of the insured. Decide on the Case.
SUGGESTED ANSWER: I would decide the case in favor of the Dana Insurance Company
(DIC).
Section 48 of the Insurance Code provides the incontestability clause which precludes the
insurer from raising the defenses of false representations or concealment of material facts
insofar as health and previous diseases are concerned if the insurance has been in force for
at least two years during the insured's lifetime. The two-year period is counted from the time
the insurance becomes effective until the death of the insured and not thereafter (Tan v.
Court of Appeals). As Atty. Roberto’s life insurance policy was in force for a period of less
than a year only, the incontestability clause is not applicable to the case. It is only after a
period of at least two years from the issuance of the policy, the beneficiaries are given
the stability to recover under the policy when the insured dies.
Consequently, Atty. Roberto’s beneficiaries are incorrect in stating that DIC can contest the
validity of the insurance policy only within 2 years from the date of issue and during the
lifetime of the insured. Therefore, the case must be decided in favor of DIC.
RESCISSION OF THE INSURANCE CONTRACT
Incontestability Clause; Concealment
1997
The assured answered “No” to the question in the life policy: “Are you suffering from
any form of heart illness?”. In fact, the assured has been a heart patient for many years.
On September 7, 2019, the assured is killed in a plane crash. The insurance company
denies the claim for insurance proceeds and returns the premiums paid.
Is the decision of the insurance company justified?
SUGGESTED ANSWER: It depends.
Section 26 of the Insurance Code of the Philippines provides that a neglect to communicate
that which a party knows and ought to communicate, is called a concealment. Furthermore,
79
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Section 27 of the same code provides that concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance. However, Section 48 provides
for an incontestability clause, this provides that 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 (2) 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 rescindable by reason of the fraudulent
concealment or misrepresentation of the insured or his agent.
In the case at bar, the non-disclosure by the assured of his heart illness is deemed as a
material concealment which is a proper ground for the rescission of the insurance contract.
If the incontestability clause provided under Section 48 of the abovementioned code does
not apply in the present case, in which the policy has not been in force for two (2) years, then
the decision of the insurance company not to pay and to return the premiums paid is
justified. However, if the insurance policy has already been in force for two (2) years from
the date of its issue, then the insurer will no longer be justified in denying the claim against
the insurance contract, due to the fact that the incontestability clause has already taken
effect.
RESCISSION OF INSURANCE CONTRACT
Incontestability Clause
2012
The "incontestability clause" in a Life Insurance Policy means:
a. That life insurance proceeds cannot be claimed two (2) years after the death of
the insured.
b. That two (2) years after date of issuance or reinstatement of the life insurance
policy, the insurer cannot anymore prove that the policy is void ab initio or
rescindable by reason of fraudulent concealment or misrepresentation of the
insured.
c. That the insured can still claim from the insurance policy after two (2) years
even though premium is not paid.
d. That the insured can only claim proceeds in a life insurance· policy two (2)
years after death.
SUGGESTED ANSWER: B. That two (2) years after date of issuance or reinstatement of the
life insurance policy, the insurer cannot anymore prove that the policy is void ab initio or
rescindable by reason of fraudulent concealment or misrepresentation of the insured.
80
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
RESCISSION OF INSURANCE CONTRACT
Incontestability Clause
1984
On May 15, 1982, Juan applied for a life insurance policy with Acme Insurance Co. The
policy was issued to Juan on June 30, 1982 but the date of issue, as appearing on the
policy was May 15, 1992, the date of his application. Juan subsequently realized that
some of his answers in the insurance application were erroneous. Accordingly, he
supplied the insurance company with the correct replies. However, his letter to the
insurance company was lost in the mails. Juan died June 1, 1984.
The insurance company now refuses to pay Juan’s beneficiary contending that Juan
misrepresented the state of his health at the time of his application. Is the Insurance
company liable? State your reason.
SUGGESTED ANSWER: Yes, the insurance company is liable.
Section 48 paragraph 2 of the Insurance Code provides for the incontestability clause in cases
of life insurance. The said provision states that after a policy of life insurance made payable
on the death of the insured for a period of two (2) 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 rescindable
by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
In the case at bar, the date of issue provided for in the policy is May 15, 1982. It is also the
reckoning date for the effectivity of the insurance. From May 15, 1982 up to his time of death
on June 1, 1984, two years had lapsed which rendered the policy incontestable.
Therefore, the insurance company can no longer prove that the policy is void ab initio or
rescindable by reason of Juan’s concealment or misrepresentation.
RESCISSION OF INSURANCE CONTRACT
Incontestability Clause
2013
Benny applied for life insurance for Php 1.5 Million. The insurance company approved
his application and issued an insurance policy effective October 28, 2019. Benny
named his children as his beneficiaries. On January 12, 2021, Benny died of hepatoma,
a liver ailment.
The insurance company denied the children's claim for the proceeds of the insurance
policy on the ground that Benny failed to disclose in his application two previous
consultations with his doctors for diabetes and hypertension, and that he had been
81
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
diagnosed to be suffering from hepatoma. The insurance company also rescinded the
policy and refunded the premiums paid. Was the insurance company correct?
SUGGESTED ANSWER: No, the insurance company is incorrect in rescinding the policy and
refunding the premiums paid.
In settled jurisprudence, the Court ruled that if the insured dies within the two-year
contestability period, the insurer is bound to make good its obligation under the policy,
regardless of the presence or lack of concealment or misrepresentation. In this case, even if
the two-year incontestability period has not yet lapsed, the death of Benny will render the
right of the insurer to rescind the policy nugatory. Hence, the insurance company should
make good its obligation under the policy, even though the policy was obtained by fraud,
concealment, or misrepresentation.
RESCISSION OF INSURANCE CONTRACTS
Representation; Incontestability Clause
2014
On July 3, 2016, Delia Sotero (Sotero) took out a life insurance policy from Ilocos
Bankers Life Insurance Corporation (Ilocos Life) designating Creencia Aban (Aban),
her niece, as her beneficiary. Ilocos Life issued Policy No. 747, with a face value of
P100,000.00, in Sotero’s favor on August 30, 2016, after the requisite medical
examination and payment of the premium.
On April 10, 2019, Sotero died. Aban filed a claim for the insurance proceeds on July
9, 2019. Ilocos Life conducted an investigation into the claim and came out withthe
following findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate.
2. Sotero was sickly since 2000.
3. Sotero did not have the financial capability to pay the premium on the policy.
4. Sotero did not sign the application for insurance.
5. Aban was the one who filed the insurance application and designated herself as
the beneficiary.
For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April 16,
2020, but refunded the premium paid on the policy.
A. May Sotero validly designate her niece as beneficiary?
B. May the incontestability period set in even in cases of fraud as alleged in this
case?
C. Is Aban entitled to claim the proceeds under the policy?
82
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
SUGGESTED ANSWERS:
A. Yes, Sotero may validly designate her niece as beneficiary.
The Insurance Code allows the designation of any person as beneficiary in an
insurance contract. The Code merely prohibits a public enemy to be insured but
anyone may be insured.
In this case, since there is no prohibition to the designation of Sotero’s niece as
beneficiary, the same can be validly made beneficiary by Sotero.
Thus, Sotero may designate her niece as beneficiary because there is no law
prohibiting such act.
B. Yes, the incontestability period may set in even in cases of fraud.
Sec. 48 of the Insurance Code, a policy of life insurance which have been in force for a
period of 2 years from the time of its issue or last reinstatement cannot be proven to
be void ab initio or rescindible by reason of fraud, concealment, or misrepresentation.
In Manila Bankers Life Insurance Corp. v. Aban, Sec. 48 of the Insurance Code was
made to regulate both the action of insurers and prospective takers of life insurance.
It seeks to protect legitimate policyholders against insurers who delay payment of
claims due to allegations of fraud which it can investigate and discover at the first
instance instead of continued premium collections.
Here, since Ilocos Life nearly took 3 years before it made its investigation when it
could do so within the 2 year incontestability period, it can no longer prove that the
policy is void ab initio on the ground of fraud.
Thus, the incontestability period still set in even in cases of fraud because it is the
reason for the inclusion of Sec. 48 in the Insurance Code.
C. Yes, Aban – Sotero’s niece – may claim the proceeds under the insurance policy.
Under Sec. 48 of the Insurance Code, a policy of life insurance which have been in
force for a period of 2 years from the time of its issue or last reinstatement cannot be
proven to be void ab initio or rescindible by reason of fraud, concealment, or
misrepresentation.
Since the life insurance of Sotero was in force for nearly 3 years from its issuance,
Ilocos Life may no longer prove it to be void ab initio on the ground of fraud.
Aban, therefore, can claim the proceeds of the policy for the life insurance became
incontestable after 2 years from its issue or last reinstatement.
83
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
RESCISSION OF INSURANCE CONTRACTS
Breach of Warranties
2010
Paolo, the owner of an ocean-going vessel, offered to transport the logs of Constantino
from Manila to Nagoya. Constantino accepted the offer, not knowing that the vessel
was manned by an irresponsible crew with deep-seated resentments against Paolo,
their employer. Constantino insured the cargo of logs against both perils of the sea
and barratry. The logs were improperly loaded on one side, thereby causing the vessel
to tilt on one side. On the way to Nagoya, the crew unbolted the sea valves of the vessel
causing water to flood the ship hold. The vessel sank. Constantino tried to collect from
the insurance company which denied liability, given the unworthiness of both the
vessel and its crew. Constantino countered that he was not the owner of the vessel and
he could therefore not be responsible for conditions about which he was innocent.
6. Is the insurance company liable? Why or why not?
7. What is "barratry" in marine insurance?
SUGGESTED ANSWERS:
1. No, the insurance company is not liable.
Pursuant to Sec. 1135 of the Insurance Code, it states that “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.”
Further, in the case of Roque v. IAC (1985), the court ruled that “Since the law provides
for an implied warranty of seaworthiness in every contract of ordinary marine
insurance, it becomes the obligation of a cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy condition. The shipper of cargo may have
no control over the vessel, but he has full control in the choice of the common carrier
that will transport his goods. Or the cargo owner may enter into a contract of
insurance which specifically provides that the insurer answers not only for the perils
of the sea but also provides for coverage of perils of the ship.”
In this case, there was a breach of warranty as the vessel was manned with an
irresponsible crew and the logs were improperly loaded. It is then apparent that the
owner of the cargo did not comply with his obligation to look for a reliable common
carrier which keeps its vessel in seaworthy condition.
Therefore, the insurance company cannot be held liable.
2. Pursuant to the same case mentioned above, “barratry” is defined as “any willful
misconduct on the part of master or crew in pursuance of some unlawful or
84
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
fraudulent purpose without the consent of the owners, and to the prejudice of the
owner's interest”.
RESCISSION OF INSURANCE CONTRACTS
Warranty
2014
On May 13, 2016, PAM, Inc. obtained a P15,000,000.00 fire insurance policy from
Ilocano Insurance covering its machineries and equipment effective for one (1) yearor
until May 14, 2017. The policy expressly stated that the insured properties were
located at "Sanyo Precision Phils. Building, Phase III, Lots 4 and 6, Block 15, PEZA,
Rosario, Cavite." Before its expiration, the policy was renewed on "as is" basis for
another year or until May 13, 2018. The subject properties were later transferred to
Pace Factory also in PEZA. On October 12, 2017, during the effectivity of the renewed
policy, a fire broke out at the Pace Factory which totally burned the insured
properties.
The policy forbade the removal of the insured properties unless sanctioned by
Ilocano. Condition 9(c) of the policy provides that "the insurance ceases to attach as
regards the property affected unless the insured, before the occurrence of any loss or
damage, obtains the sanction of the company signified by endorsement upon the
policy x x x (c) if the property insured is removed to any building or place other than
in that which is herein stated to be insured." PAM claims that it has substantially
complied with notifying Ilocano through its sister company, the RBC, which, in fact,
referred PAM to Ilocano for the insurance coverage.
Is Ilocano liable under the policy?
SUGGESTED ANSWER: No, Ilocano is not liable under the policy.
Section 75 of the Insurance Code provides that a policy may declare that a violation of
specified provisions thereof shall avoid it.
Here, since the removal of the insured property to another factory was done in violation of
Condition 9(c) of the insurance policy, such act freed Ilocano Insurance from any liability
even if the breach is with respect to an immaterial provision.
Thus, Ilocano is not liable because of the violation of a specified provision in the insurance
policy.
85
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
RESCISSION OF INSURANCE CONTRACTS
Material Concealment; Incontestability Clause
1998
Renato was issued a life insurance policy on January 2, 2018. He concealed the fact
that 3 years prior to the issuance of his life insurance policy, he had been seeing a
doctor about his heart ailment. On March 1, 2020, Renato died of heart failure. May
the heirs claim on the proceeds of the life insurance policy of Renato?
SUGGESTED ANSWER: Yes, the heirs may claim on the proceeds of the life insurance of
Renato.
The Supreme Court, in the case of Manila Bankers Life Insurance Corporation v. Aban, held
that Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the
insured. Under the provision, an insurer is given two years from the effectivity of a life
insurance contract and while the insured is alive to discover or 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. After the two-year period lapses, or when the insured dies within
the period, the insurer must make good on the policy, even though the policy was obtained
by fraud, concealment, or misrepresentation.
In this case, Renato died more that two years after the insurance took effect. Therefore, the
incontestability clause applies. The heirs may claim regardless of the presence of
concealment.
CLAIMS SETTLEMENT AND SUBROGATION
Loss
2014
On February 21, 2019, Barrack entered into a contract of insurance with Matino
Insurance Company (Matino) involving a motor vehicle. The policy obligates Matino
to pay Barrack the amount of Six Hundred Thousand Pesos (P600,000.00) in case of
loss or damage to said vehicle during the period covered, which is from February 26,
2019 to February 26, 2020.
On April 16, 2019, at about 9:00 a.m., Barrack instructed his driver, JJ, to bring the
motor vehicle to a nearby auto shop for tune-up. However, JJno longer returned and
despite diligent efforts to locate the said vehicle, the efforts proved futile. Resultantly,
Barrack promptly notified Matino of the said loss and demanded payment of the
insurance proceeds of P600,000.00.
86
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In a letter dated July 5, 2019. Matino denied the claim, reasoning as stated in the
contract that "the company shall not be liable for any malicious damage caused by the
insured, any member of his family or by a person in the insured’s service. Is Matino
correct in denying the claim?
SUGGESTED ANSWER: No, Matino Insurance erred in denying the claim.
In the case of Alpha Insurance and Surety Co. vs. Castor, the Supreme Court ruled that the
loss of the property insured due to the act of the driver of the insures is not an exception to
the coverage from the insurance policy with a tenor that is clear and unambiguous to cover
only “malicious damage” only.
In this case, the loss of the car of Barrack was due to theft and not malicious damage. As such,
the theft clause of the insurance policy is applicable and not the malicious damage clause.
Hence, Matino Insurance is not correct when it denied the claim of Barrack because the loss
due to the driver’s act is theft and not malicious damage.
CLAIMS SETTLEMENT AND SUBROGATION
Loss; Notice of Loss
2014
On May 26, 2020, Jess insured with Jack Insurance (Jack) his 2020 Toyota Corolla
sedan under a comprehensive motor vehicle insurance policy for one year. On July 1,
2020, Jess’ car was unlawfully taken. Hence, he immediately reported the theft to the
Traffic Management Command (TMC) of the Philippine National Police (PNP), which
made Jess accomplish a complaint sheet as part of its procedure. In the complaint
sheet, Jess alleged that a certain Ric Silat (Silat) took possession of the subject vehicle
to add accessories and improvements thereon. However, Silat failed to return the
subject vehicle within the agreed 3-day period. As a result, Jess notified Jack of his
claim for reimbursement of the value of the lost vehicle under the insurance policy.
Jack refused to pay claiming that there is no theft as Jess gave Silat lawful possession
of the car. Is Jack correct?
SUGGESTED ANSWER: No, Jack Insurance is not correct.
In the case of Paramount Insurance vs. Sps. Remondeulaz, the Supreme Court ruled that
when what is given is merely physical possession and not juridical possession, the act of not
returning the insured property without consent or authority of the owner constitutes theft.
Such theft is compensable under the insurance policy.
Here, Ric Silat was merely given physical possession of the car and his apparent taking of the
car of Jess is without consent or authority of the latter. This act of deprivation of property
constitutes theft and is compensable under the insurance policy.
87
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Thus, Jack Insurance is not correct because Ric Silat was not given lawful possession but
merely physical possession.
CLAIMS SETTLEMENT AND SUBROGATION
Subrogation
1978
A helicopter of ABC Co. collided with XYZ’s tramway steel cables in its logging area in
Surigao resulting in the destruction of the helicopter and death of two pilots. ABC Co.
insured at its expense the helicopter and death of two pilots. ABC Co. insured at its
expense the helicopter for P80,000.00 and the two pilots (life insurance) for
P50,000.00 each, and as a result of the crash, the insurer paid ABC Co. a total
indemnity of P180,000.00. Nevertheless, ABC Co sustained additional damages of
about P100,000.00 which were not covered by insurance.
a. ABC Co. sued XYZ to recover not only the additional damages, but also the
P180,000 which was already compensated by the insurer. Decide. Give reasons.
b. What right/recourse, if any, has the insurer in order to be reimbursed for the
amount it paid to ABC Co? Give reasons.
SUGGESTED ANSWERS:
a. Yes, ABC Co. may bring the action against XYZ but only for its claim for the additional
damages not covered by insurance and not the amount of P180,000 which is already
paid by the insurer.
The law provides that if a property is insured and the owner received indemnity from
the insurer, the latter is deemed subrogated to the rights of the insured against the
wrongdoer, and if the amount paid by the insurer does not fully cover the loss, then
the aggrieved party is the one entitled to recover the deficiency.
Here, the insurer already paid ABC Co., the amount of P180,000 which operates as an
equitable assignment to the former of all remedies which the latter may have against
XYZ. However, the amount paid by the insurer does not fully cover the loss, then
accordingly, ABC Co., is entitled to recover such deficiency from XYZ.
Therefore, ABC Co. can only recover its claim for additional damages against XYZ.
b. Yes, the insurer is deemed subrogated to the rights of ABC Co against XYZ but only up
to the extent of the amount of P80,000 paid for the property insurance of the
helicopter, and not for the life insurance of the two dead pilots. Art. 2207 of the NCC
cannot apply to life insurance because no recovery from XYZ can be deemed adequate
to compensate life. Here, upon payment by the insurer to ABC Co, the former is
88
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
deemed subrogated to the right of the latter against XYZ for the destruction of the
helicopter. Therefore, the insurer is entitled to recover P80,000 only from XYZ.
CLAIMS SETTLEMENT AND SUBROGATION
Subrogation; Quitclaim
1994
Raul’s truck bumped the car owned by Luz. The car was insured by Cala Insurance. For
the damage caused, Cala paid Luz P5,000.00 in amicable settlement. Luz executed a
release of claim, subrogating Cala to all her rights against Raul. When Cala demanded
reimbursement from Raul, the latter refused saying that he had already paid Luz
P4,500 for the damage to the car as evidenced by a release of claim executed by Luz
discharging Raul.
So Cala demanded reimbursement from Luz, who refused to pay, saying that the total
damage to the car was P9,500.00. Since Cala paid P5,000.00 only, Luz contends that
she was entitled to go after Raul to claim the additional P4,500.00.
1. Is Cala, as subrogee of Luz, entitled to reimbursement from Raul?
2. May Cala recover what it has paid Luz?
SUGGESTED ANSWER:
1. No, Cala is not entitled to reimbursement from Raul.
The principle of subrogation, as the Court has held, time and time again, is a normal
incident of indemnity property insurance as a legal effect of payment; it inures to the
insurer without any formal assignment or any express stipulation to that effect in the
policy. Said right is not dependent upon nor does it grow out of any privity of contract.
Payment to the insured makes the insurer an assignee in equity. However, there are
instances when there is no such right can be invoked as in the case (i) where the
insured by his own act releases the wrongdoer or third person liable for the loss; (ii)
where the insurer pays the insured for a loss or risk not covered by the policy; (iii) in
life insurance; or (iv) for recovery of loss in excess of insurance coverage.
In this case, despite Cala’s payment of the claim to the Luz, the insured, the right of
subrogation does not apply. The insured by her own act released the wrongdoer or
third person liable for the loss when Luz executed a release in favor of Raul.
With that, Cala can no longer claim against Raul.
2. Yes, Cala may recover what it has paid from Luz.
89
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In the case of Manila Mahogany Manufacturing Corporation v. CA, the Court held
that “the insurer can be subrogated to only such rights as the insured may have,
should the insured, after receiving payment from the insurer, release the wrongdoer
who caused the loss, the insurer loses his rights against the latter. But in such a case,
the insurer will be entitled to recover from the insured whatever it has paid to the
latter, unless the release was made with the consent of the insurer.”
Here, Cala lost its right to recover what it has paid to the insured against Raul because
of the release of claim executed by Luz in favor of Raul. However, since the release
was made without its consent, Cala is still entitled to recover from the insured, who
in this case is Luz, whatever it has paid to the same.
Therefore, it may recover the amount of P5,000 from Luz.
CLAIMS SETTLEMENT AND SUBROGATION
Subrogation
1980
“L” borrows P50,000 from “M” payable 360 days after date, at 12% interest per
annum. To secure the loan, “L” mortgages his house and lot in favor of “M”. To protect
himself from certain contingencies, “M” insures the house for the full amount of the
loan with Rock Insurance Company. A fire breaks out and burns the house and “M”
collects from the insurance company the full value of the insurance.
Upon maturity of the loan, the insurance company demands payment from “L”. The
latter refuses to pay on the ground that the loan had been extinguished by the
insurance payment which “M” received from the insurance company. He argues that
he has not entered into any loan or contract of whatever nature with the insurance
company. He further contends that it is bad enough to lose a house, but it is worse if
one has to pay off a paid obligation to somebody who has not extended any loan to
him. Besides, he states, that the insurance payment should inure to his benefit because
he owns the house.
Pass upon the merits of “L’s” contentions.
SUGGESTED ANSWER: L’s contentions are unmeritorious.
Under Art. 2207 of the Civil Code, if the plaintiff 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 recovery the deficiency from the person causing the loss or injury.
90
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
In the given case, the payment of Rock Insurance company of the premiums to the insured,
“M”, created legal subrogation and made the insurance company an assignee to claims of “M”
against the mortgagor, “L”.
Therefore, the payment of insurance premium did not extinguish the obligation of L to pay
the loan.
CLAIMS SETTLEMENT AND SUBROGATION
Right of Subrogation
2011
Where the insurer was made to pay the insured for a loss covered by the insurance
contract, such insurer can run after the third person who caused the loss through
subrogation. What is the basis for conferring the right of subrogation to the insurer?
A. Their express stipulation in the contract of insurance.
B. The equitable assignment that results from the insurer’s payment of the
insured.
C. The insured’s formal assignment of his right to indemnification to the insurer.
D. The insured’s endorsement of its claim to the insurer.
SUGGESTED ANSWER: B. The equitable assignment that results from the insurer’s payment
of the insured.
In the case of Pan Malayan Insurance v. CA (1990), the Court ruled that under the Principle
of Subrogation, “If the insured property is destroyed or damaged through the fault or
negligence of a party other than the assured, then the insurer, upon payment to the assured,
will be subrogated to the rights of the assured to recover from the wrongdoer to the extent
that the insurer has been obligated to pay.” Further, the Court stated that “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.” Thus, payment to the insured makes the insurer an assignee in equity.
CLAIMS SETTLEMENT AND SUBROGATION
Change of Designated Beneficiary; Liability of the Insurer
1988
On October 18, 2020, P, took out a life insurance policy and named his only son Q as
beneficiary. The policy was silent with regard to any change of beneficiary. P later
learned that Q was hooked on drugs and immediately notified the insurance company
in writing that he is substituting his sister, R, as his beneficiary in place of Q. P later
died of advanced tuberculosis. In the application form filled up by the agent of the
insurance company prior to the issuance of the life insurance policy by the insurance
company, the agent, without the knowledge of P, filled in a false answer and made it
91
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
appear that P was in good health. Upon P’s death, Q claimed the proceeds of the
insurance policy contending that as designated beneficiary, he cannot be changed
without his consent, having acquired a vested right to the proceeds of the policy.
a. Is Q’s contention correct? Reasons.
b. Can the insurance company refuse liability on the policy? Reasons.
SUGGESTED ANSWERS:
a. No, the contention of Q is not correct.
Section 11 of the Insurance Code provides that 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. In present case, P did not waive his right to change the beneficiary he
designated in the policy. As a matter of fact, P substituted his sister, R, in place of Q, the
original beneficiary.
Therefore, Q’s contention is untenable having no vested right over the proceeds of the
policy as he was substituted by R.
b. No, the insurer cannot refuse liability.
The Supreme Court held in the case of Malayan Insurance Co. vs. Pinca, a 1987 case, that
the insurance agent is an agent not of the insured but of the insurer and the latter must,
thus, suffer for the misconduct of the agent. In the case at bar, the agent of the insurance
company filled in a false answer, without knowledge of P, and made it appear that P was
in good health.
Therefore, the insurance company cannot escape liability as it is bound by the acts of its
agent.
CLAIMS SETTLEMENT
Actual Total Loss
1996
RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to
stormy weather, the ship carrying the rice became submerged in sea water, and with
it the rice carpo. When the cargo arrived in Manila, RC filed a claim for total loss with
the insurer, because the rice was no longer fit for human consumption. Admittedly,
the rice could still be used as animal feed. Is RC’s claim for total loss justified? Explain.
SUGGESTED ANSWER: Yes, RC’s claim for total loss is justified.
As provided under Sec. 130 of the Insurance Code of the Philippines:
92
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
Section 132. 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.
In line with the abovementioned provision, the Supreme Court, in citing the case of Great
Western Insurance Co. vs. Fogarty when it rendered its decision in the case of Pan Malayan
Insurance Co. vs. Court of Appeals, stated that the complete physical destruction of the
subject matter is not essential to constitute an actual total loss. Such a loss may exist where
the subject matter becomes valueless for the purpose for which it was intended.
In the case at bar, when the rice became submerged in sea water and became no longer fit
for human consumption, the purpose for which it was intended, such caused actual total loss
of the rice which was the subject of the insurance.
Thus, RC’s claim for total loss is justified.
CLAIMS SETTLEMENT
Prescription of Claims
1996
Robin insured his building against fire with the EFG Assurance. The insurance policy
contained the usual stipulation that any action or suit must be filed within one year
after the rejection of the claim. After his building burned down, Robin filed his claim
for fire loss with EFG. On February 28, 2019, EFG denied Robin’s claim. On April 3,
2019, Robin sought reconsideration of the denial, but EFG reiterated its position. On
March 20, 1995, Robin commenced judicial action against EFG. Should Robin’s action
be given due course? Explain.
SUGGESTED ANSWER: No, Robin’s action should not be given due course.
As provided in the case of Eagle Star Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), 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. The Supreme Court further explained in the case of Sun Insurance Office
LTD vs. Court of Appeals, (G.R. No. 89741 (1991)), that the term “final rejection” mentioned
in the Eagle Star case, cannot be taken to mean the rejection of a petition for reconsideration.
The "final rejection" being referred to in said case is the rejection by the insurance company.
This is in line with the rule which ensures prompt settlement of claims against insurance
93
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
companies as it demands that insurance suits be brought by the insured while the evidence
as to the origin and cause of destruction have not yet disappeared.
In the case at bar, the one year prescriptive period for Robin’s claim began to run on February
28, 2019 when EFG denied his claim for the fire loss and not on the date of the denial of his
motion for reconsideration of the denial. Thus, Robin’s judicial action which was instituted
on March 20, 1995 is already barred by prescription and should not be given due course.
CLAIMS SETTLEMENT
Third Party Liability
1996
While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the
latter. Roberto sued Cesar and the third party liability insurer for damages and/or
insurance proceeds. The insurance company moved to dismiss the complaint,
contending that the liability of Cesar has not yet been determined with finality.
A. Is the contention of the insurer correct? Explain
B. May the insurer be held liable with Cesar?
SUGGESTED ANSWERS:
A. No, the contention of the insurer is not correct. The Supreme Court stated in the case
of Sherman Shafer vs. Hon. Judge, Regional Trial Court of Olongapo City (G.R. No. L178858, November 14, 1988), that where an insurance policy insures directly against
liability, the insurer's liability accrues immediately upon the occurrence of the injury
or event upon which the liability depends, and does not depend on the recovery of
judgment by the injured party against the insured.
In the case at bar, the contention of the insurance company, that the liability of Cesar
will only arise upon the finality of the Court’s decision as to the existence of Cesar’s
liability, is untenable. From the moment that Cesar sideswiped Roberto, causing
injuries to the latter, gave rise to the liability of the insurer under the insurance policy.
B. No, the insurer cannot be held liable with Cesar.
The Supreme Court stated in the case of Figuracion vda. de Maglana vs. Consolacion
(G.R. No. 60506, August 6, 1992), that while it is true that where the insurance
contract provides for indemnity against liability to third persons, such third persons
can directly sue the insurer, however, the direct liability of the insurer under
indemnity contracts against third party liability does not mean that the insurer can
be held solidarily liable with the insured and/or the other parties found at fault. The
liability of the insurer is based on contract; that of the insured is based on tort. For if
the insurer were solidarily liable with the insured by reason of the indemnity contract
94
COMMERCIAL LAW REVIEW
4F 2020 – 2021
BAR QUESTIONS AND SUGGESTED ANSWERS IN INSURANCE LAW
against third party liability, under which an insurer can be directly sued by a third
party, this will result in a violation of the principles underlying solidary obligation
and insurance contracts.
Thus in the case at bar, the liability of the insurer based on the insurance contract is
direct, but not solidary with that of Cesar which is based on Torts Law.
BUSINESS OF INSURANCE
Mutual Insurance Company
2006
What is a mutual insurance company or association?
SUGGESTED ANSWER: In the case of Republic v. Sunlife Insurance Company of Canada, the
Court defined a mutual insurance company as a company owned by policyholders which is
designed to promote the welfare of its members and the money collected from among them
is solely for their own protection. In a sense, the member is both the insurer and the insured.
It has no capital stocks and the premiums or contributions of the members are the only
sources of funds to meet losses and expenses.
95