INSURANCE (BASED ON 2014 DE LEON BOOK)
THE INSURANCE CODE OF THE PHILIPPINES
P.D. 612, AS AMENDED BY R.A. 10607
GENERAL PROVISIONS
SEC. 1.This Decree shall be known as “The Insurance Code.”
MUTUAL INSURANCE AS OLD AS SOCIETY ITSELF 1.
2.
3.
4.
5.
6.
7.
Based upon the principle of aiding another from a loss caused by an
unfortunate event.
Existed among the Egyptians, Chines, Hindus, Romans and are known
to have been established among the Greeks as early as the third century
before Christ.
Origin of present day insurance attributed to merchants of Italian cities
who sought to distribute the loss falling upon any one by reason of the
perils of navigation.
From Italy the practice of insuring commercial ventures against disaster
spread to other maritime States of Europe such as England.
Lombards founded trading houses in London in the 12th Century. All
questions of insurance were decided based on the customs of merchants
and merchant courts
Middle 18th Century – Common law courts of England began to take
adequate cognizance of insurance cases
Lord Mansfield was the “Father of English Commerical Law” and the
same law was used to determine questions in insurance.
DEVELOPMENT IN THE UNITED STATES
1. With the exception of maritime insurance, English practices and English
decisions have little influence in the United States.
DEVELOPMENT IN THE PHILIPPINES
1. Insurance in the Philippines is rather a nascent institution. It did not
exist prior to the 19th Century.
2. It started with the practice of giving abuloy to the relatives of the dead.
And rendering financial aid when family members suffered any sort of
misfortune
3. Eventually mutual benefit societies and fraternal organizations were
organized for the purpose of rendering assistance.
4. What worked against the early development of insurance in the
Philippines was the fatalistic attitude exemplified by the phrase “bahala na.”
BIRTH IN THE PHILIPPINES
1. 1829 Lloyd’s of London appointed Stracham, Murray & Co., Inc. as its
representative here.
2. 1939 The Union Insurance Society of Canton appointed Russel & Sturgis
as its agent in Manila
-Both were limited to non-life insurance
3. 1898 Life insurance was introduced by Sun Life Assurance of Canada
4. First domestic non-life insurance company was Yek Tong Lin Fire and
Marine Insurance Co. in June 8, 1906
5. First domestic life insurance company, the Insular Life Assurance Co.,
Ltd., in 1910.
6. In 1950 reinsurance was introduced with Reinsurance Company of The
Orient for both life and non-life.
7. First Workmen’s Compensation Pool was organized in 1951 as the
Royal Group Inc.
8. 1949, a government agency was formed to handle insurance affairs,
The Insular Treasurer was appointed Commissioner ex-officio.
9. Social insurance was established in 1936 through the GSIS.
10. SSS followed suit in 1954.
SOURCES OF INSURANCE LAW IN THE PHILIPPINES
1. Spanish Period – Old Civil Code of 1889 and the Code of Commerce
2. Insurance Code expressly repealed the provisions on insurance in the
Code of Commerce
3. Civil Code of The Philippines
4. P.D. 612 instituted “The Insurance Code” in 1974
5. P.D. 1460 consolidated all insurance laws into a single code known as
“The Insurance Code of 1978”
6. R.A. 10607 mad many substantial amendments to the Insurance Code
LAWS GOVERNING INSURANCE
1. Insurance Code of 1978
-Governs the different types of insurance contracts and those engaged
in insurance business in the Philippines.
2. Civil Code
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
1 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
a. Void Donations – Arts. 739 and 2012
b. Applicability of the Civil Code –Art. 2011
c. Life Annuity Contracts – Arts. 2021-2027
d. Compulsory M.V. Liability Insurance – Art. 2186
e. Insurer’s right of subrogation – Art. 2207
Note: Insurance contracts are governed primarily by the Insurance
Code but if it doesn’t specifically provide for a particular matter in
question, the provisions of the Civil Code on contract and other special
laws shall govern.
3.
Special Laws
a. The Insurance Code
b. The Revised Government Insurance Act of 1977
c. The Social Security act of 1954
4. Others – Insofar as the Civil Code is concerned, the Code of Commerce is a
special law
a. R.A. 656 known as the “Property Insurance Law” dealing with
government property
b. R.A. 4898 providing life, disability and accident insurance coverage
to barangay officials
c. E.O. 250 increases, integrates and rationalizes the insurance benefits
of barangay officials and members of the Sanggunians.
d. R.A. 3591 established the Philippine Deposit Insruance Corporation
INSURER’S RIGHT OF SUBROGATION
1. Basis – Substitution of one person in place of another with reference to a
lawful claim or right, so that he who is substituted succeeds to the rights of the
other in relation to a debt or claim, including its remedies and securities.
-Basically a process of legal substitution. The insurer, after paying the
amount covered by the policy, steps into the shoes of the insured,
availing of himself the latter’s rights that exist against the wrongdoer at
the time of the loss.
2. Purposes of subrogation condition in policy
1. To make the person who caused the loss legally responsible
2. Prevent the insured from having double recovery from the
wrongdoer and the insurer.
-The insurer has the right to recover
1. Directly in a suit against the wrongdoer or
2. As the real party in interest in a suit brought by the insured
Case Doctrine: Whenever the wrongdoer settles with the insured
without the consent of the insurer and with the knowledge of the
insurer’s payment and right of subrogation, such right is not defeated
by settlement.
3. Right of subrogation applicable only to property insurance
-Value of human life is unlimited thus no recovery from a third party
can be deemed adequate to compensate the insured’s beneficiary. Life insurance
contracts are not ordinarily contracts of indemnity.
4. Privity of contract or assignment by insured of claim not essential.
a. Payment by the insurer to the insured serves as an equitable
assignment to the former of all the remedies which the latter may have
against the third party.
b. Right of subrogation does not come from privity of contract but it
accrues upon payment of the claim by the insurer
c. The subrogation receipt is sufficient to establish not only the
relationship of the insurer and the insured, but also the amount paid to
settle the insurance.
5. Loss or injury for risk must be covered by the policy otherwise there could be
no subrogation.
6. Right of insured to recover from both insurer and third party – The right of
subrogation given to the insurer prevents the insured from obtaining more than
the amount of his loss (Remember that it is a contract of indemnity hence the
insured cannot profit).
-If the amount paid bu the insurance company does not fully cover the
injury or loss, the aggrieved party viz. the insured is entitled to recover the
deficiency NOT the insurer.
7. Right of insured to recover from insurer instead of the third party – The
insurer cannot defeat the claim on the ground that the insured has the right to be
indemnified by the third person who caused the loss.
8. The right of the insurer against the third party who caused the loss is limited
to the amount recoverable from the latter by the insured.
9. The exercise of the right of subrogation by the insurer is purely discretionary
10. The right of subrogation has its limitations
a. Both the insurer and the consignee are bound by the contractual
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
2 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
stipulations under the bill of lading
b. The insurer can be subrogated only to the rights as the insured may
have against the wrongdoer
the insured
6.
The award of moral and exemplary damages in case of unreasonable
delay in the payment of insurance claims shall be governed by the Civil Code
Note: If the insured, after receiving payment from the insurer, by his
own act, releases the wrongdoer from liability then the insurer loses his
rights to the wrongdoer. Consequently, the insured will be bound to
return to the insurer, the amount it paid as indemnity. Under Art. 2207,
the insurer is the REAL PARTY IN INTEREST as re: the portion of
the indemnity paid.
Case: Where the insurer pays the insured the value of the lost goods
without notifying the carrier who has, in good faith, settled the claim
for loss of the insured, the settlement is binding on both the insured and
the insurer, and the latter can’t bring an action against the carrier on his
right of subrogation
CONSTRUCTION OF THE INSURANCE CODE
11. Effect of assignment by insured of its rights against third party to insurer
-Where the insured (shipper) has assigned its rights against defendant
(carrier of goods) for damages caused to the cargo shipped, to the insurer which
paid the indemnity, the case isn’t between the insured and insurer but one
between the shipper and the carrier because the insurance company merely
stepped into the shoes of the shipper. And if the shipper has a direct cause of
action vs. the carrier on account of the damage to cargo such action can be
asserted or availed of by the insurer as a subrogee of the insured and the carrier
cannot set up as a defense any defect in the insurance policy because it is not
privy to it.
1.
The interpretation of the judicial authorities of the State from where the
Insurance Code was taken shall be instructive, at the very least, in terms of the
fundamental points.
2. The rules enunciated by the best considered American authroties involving
similar provisions of the Philippine law on insurance should be adopted for the
purpose of having our law on insurance conform as nearly as possible to the
modern law of insurance as found in the United States.
SEC. 2. Whenever used in this Code, the following terms shall have the
respective meanings hereinafter set forth or indicated, unless the context
otherwise requires:
(a) A “contract of insurance” is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event.
A contract of suretyship shall be deemed to be an insurance contract, within the
meaning of this Code, only if made by a surety who or which, as such, is doing
an insurance business as hereinafter provided.
(b) The term “doing an insurance business” or “transacting an insurance
business,” within the meaning of this code shall include:
APPLICABILITY OF THE CIVIL CODE
Doctrines:
1.
If the insurer’s company is vitiated by error then such fact may be
used to give rise to the nullity of the contract
2.
Contract for a life annuity was not perfected where the acceptance of
the home office of the insurer never came to the knowledge of the applicant
who perished
3.
An insurance contract is null and void where the consideration is
false or fraudulent
4.
When an insurance contract is rescinded then the obligation of mutual
restitution under the Civil Code shall apply
5.
A common-law wife is disqualified from becoming the beneficiary of
(1) Making or proposing to make, as insurer, any insurance contract;
(2) Making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or activity
of the surety;
(3) Doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning
of this Code;
(4) Doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code the fact that no profit is derived
from the making of insurance contracts, agreements or transactions of that no
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
3 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
separate or direct consideration is received
therefor, shall not be deemed conclusive to show that the making thereof does
not constitute the ding or transacting of an insurance business
(c) as used in this Code, the term “Commissioner” means the “Insurance
Commissioner.
LEGAL CONCEPT OF INSURANCE
1. “Assurance” is also used instead of “insurance.” But strictly,
Assurance – refers to an event like death, which is certain to happen
Insurance – refers to a contingent event which may or may not happen
-Under the Code, however, the term “insurance” covers “assurance”
2. Better definition – a contract of insurance is an agreement by which one party
for a consideration paid by the other party, promises to pay money or its
equivalent or to do some act valuable to the latter, upon the happening of a loss,
damage, liability, or disability arising from an unknown or contingent event.
3. In general, an insurance contract is a promise by one person to pay another
upon the happening of a fortuitous event beyond the effective control of either
party in which the promise has an interest apart from the contract.
-A written insurance contract is called a policy
DEFINITION OF INSURANCE FROM OTHER VIEWPOINTS
1. Economic – reduces risk by a transfer and combination of uncertainty in
regard to financial loss
2. Business – serves as basis for credit and a mechanism for savings and
investments
3. Mathematical – application of actuarial principles to calculate risk
4. Social – social device whereby uncertain risks of individuals may be
combined in a group and this made more certain, with small periodic
contributions by the individuals providing a fund out of which those who suffer
losses may be reimbursed
DETERMINATION OF THE EXISTENCE OF THE CONTRACT
1. Nature – to be determined by the exact nature of the contract actually entered
into whatever form it takes or whatever name it may be called.
Note- Under the code, a contract of suretyship shall be deemed an
insurance contract “if made by a surety who or which as such is doing
an insurance business.” But strictly, a contract of suretyship is different
from an insurance contract.
2. Elements of the contract
1. Subject matter – thing insured
2.Consideration – premium paid by insured
3. Object and purpose – risk-bearing contract; transfer and distribution
of risk of loss, damage, or liability arising from an unknown or
contingent event
Note – to be binding there must be an acceptance of the offer and legal
capacity. To be enforceable, all the requisites of a binding contract
must be present
NATURE AND CHARACTERISTICS OF AN INSURANCE CONTRACT
1. Consensual – perfected by a meeting of the minds of the parties
2. Voluntary – parties may incorporate such terms and conditions as they please.
EXCEPTIONS:
1. May be required by law such as in motor vehicles or as a condition to
granting a license to conduct a business affecting public safety or
welfare
2. May arise by operation of law e.g. War Damage Corporation Act
3. Social insurance for members of the government
service or for employees of the private sector
3. Aleatory – it depends on some contingent event thus it is not a contract of
chance and in an insurance contract each party must take a risk.
Insurer: Risk of having to pay the indemnity if the contingent event
happens
Insured: Risk of paying the premium without receiving anything
therefor if the contingent event does not happen except protection,
which in itself is a valuable consideration
4. Unilateral – imposing legal duties only on the insurer who promises to
indemnify in case of loss
-It is executed as to the insured after payment of the premium and
executory on the part of the insurer in the sense that it is not executed
until payment for a loss.
-Insured usually assumes no duty to pay subsequent premiums unless
the insurer has continued the insurance after maturity of the premium,
in consideration of the insured’s express or implied promise to pay.
BUT he has the right to pay the stipulated premium and the insurer has
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
4 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
the duty to accept the payment when tendered.
5. Conditional – Subject to conditions the principal one of which is the
happening of the contingent event insured against
6. A contract of INDEMNITY – except for life and accident insurance where the
result is death because the promise of the insurer is only to make good the loss
of the insured.
1. If you have no insurable interest then you cannot be insured and the
contract will be void and unenforceable
7. Personal – between insurer and insured
1. Insured generally cannot assign before the happening of the loss, his
rights under a property policy without the consent of the insurer. The
obligation to pay does not attach to the object insured. If a transfer is
allowed in the policy then such contracts by which insurance is made to
pass from one owner to another are in the nature of successive
novations.
2. Life insurance policies, however, are generally assignable or
transferable as they are in the nature of property.
8. Since insurance is a contract then such is considered property in legal
contemplation. But unlike property policies, life insurance policies are generally
assignable like any chose in action
3. Assumption of risk by insurer
is only a risk-shifting device not a contract of insurance e.g. contract of guaranty
1. Equitably distributes losses out of a general fund contributed by all
2. Provides protection against absorbing one’s losses alone
COPING WITH RISK
Different ways of coping with risk
1. Limiting probability of loss – e.g. use of safety measures and devices
2. Limiting effects of loss – e.g. sprinkler systems, fire extinguishers
3. Diversification in investment – basically this is the opposite of putting all
your eggs in one basket. You manage your portfolio so you could gain on your
investments in terms of a net profit while incurring some losses in some areas.
4. Self-insurance or self-financing – e.g. rainy day money
5. Ignoring risk – bahala na si batman
6. Transferring risk to another - by contractual arrangement such as a seller’s
warranty. If your T.V. breaks within a couple of years, the manufacturer’s
warranty handles the repairs and defrays the costs.
VALUE OF TRANSFERRING RISK
DISTINGUISHING ELEMENTS OF THE CONTRACT OF INSURANCE
Note- ALL the elements must be present, otherwise it is not an insurance
contract. And even if all the elements are present, it is not an insurance contract
if the same is entered into for the purpose of rendering service and not
indemnification for a loss.
1. Risk preferring – those who choose to forego the certain loss in the hope of
incurring no loss, despite the equal probability of suffering a large loss
2. Risk neutral – indifferent to the alternatives
3. Risk averse – people who do not want to play ball. They’d rather choose to
lose P500 with certainty than confront the 50% chance of losing twice as much
Notes – As the potential magnitude of loss increases, most people
become more risk averse. This is true even though the probability of
loss declines.
-The more wealth a person has the less likely it is that the person will
be risk averse
-When people are averse to the risk of a loss, they are usually willing to
pay someone else to assume the risk.
INSURANCE AS RISK-DISTRIBUTING DEVICE
ECONOMIC EFFECTS OF THE TRANSFER & DISTRIBUTION OF RISK
A contract which only possesses the following elements:
1. Insurable interest
2. Risk of loss
1. Benefit to society as a whole – society as a whole would be better off if a
large number of similar, mutually beneficial transactions would occur
2. Undesirable side effects – If X’s risk is completely eliminated through
1. Insurable interest
2. Insured is subject to a risk of loss
3. Insurer assumes risk of loss or a portion of it
4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group or substantial number of persons bearing a similar risk and
5. Payment of premium – ratable contribution to a general insurance fund
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
5 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
transfer to Y, X would have less incentive to take measures that prevent loss
3. Problem re: measuring of amount of risk transferred – because the insurer
cannot always monitor the behavior of the insured
4. Sharing by insured of some responsibility for the risk – commonly termed as
deductible or coinsurance to make the insured retain some responsibility for the
loss
a. Deductible – insured bears any loss up to some stated amount
b. Coinsurance – insured bears some stated percentage of the loss
regardless of the amount
5. Problem re: computation of premium to be charged – difficult to calculate but
generally the amount of the fee should equal the insured’s expected loss e.g. a 1
in 5 probability of losing P100 computes to an expected loss of P20
6. Classification of risks – Insurers group similar risks together and charge each
member of the same group, the same fee.
7. Sub-classification of risks – At a certain point, further subdivision of the
group becomes too expensive relative to the benefits gained. As a result, some
insureds will be better risks than others
-Multiple Line Insurance – combination of at least two kinds e.g. fire
and casualty
-All Lines Insurance – denotes the broadening nature of insurance
operations which combine at least most of the basic types of insurance.
THREE MAIN CLASSIFICATIONS
1. Insurance against loss or impairment of property interests
2. Insurance against loss of earning power due to death
3. Insurance against contingent liability to make payment to another e.g.
reinsurance, workmen’s compensation insurance and M.V. Liability Insurance
MODERNIZED CLASSIFICATION
1. Marine
2. Property
3. Personal
4. Liability
THE FIELDS OF INSURANCE
CLASSIFICATION BY INTERESTS PROTECTED
1. Social (Government)
-Compulsory and designed to provide a minimum of economic security
for large groups. It is compulsory because some person can’t or won’t
voluntarily purchase insurance
2. Voluntary (Private)
* subgroups based on nature of perils
1. Commercial insurance
1. Personal
- Losses due to loss of earning power
2. Property
a. Indemnifies the owner for destruction or damages
to property e.g. Fire and Marine
b. As a consequence of negligent acts that result in
injuries to other persons or damage to their property
e.g. Casualty and Surety
2. Cooperative insurance – “Cooperative” is applied to assoc’s usually
operating under hospital, medical, fraternal, employee, or trade-union
auspices. Usually non-profit
3. Voluntary Government Insurance – e.g. insurance of mortgage loans
and insurance of growing crops
1. 1st Party vs. 3rd Party insurance
-In the former the contract between the insurer and insured indemnifies the
insured in the event of a loss suffered by him directly. In the latter a third person
damaged or injured by the insured is paid the indemnity
- Property Insurance is first party insurance
- Liability Insurance is third-party insurance
Note – All insurance except liability can be fairly thought of as first-party
insurance
-In life insurance the insured designates a beneficiary to receive the proceeds of
the policy but this does not mean that such is third-party insurance
-Health insurance is also first party
-the distinction between 1st and 3rd party insurance is useful in understanding the
concept of no-fault insurance which is the substitution of 1st party insurance for
tort liability.
2. All risk vs. Specified Risk
Note – The burden of proof in a specified risk policy is placed on the insured to
prove that the loss falls within the policy’s provisions on coverage. In an all-risk
policy, the burden of proof is on the insurer to prove that the loss falls within an
explicit exception to coverage it wants to avoid paying.
-If the exact cause of the loss is difficult to determine then an all-risk policy can
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
6 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
be highly beneficial for the insured
-All risk coverage does not alter basic insurance law principles like the insurable
interest requirement, causation rules, the requirement that the loss not be
intentionally caused by the insured, and implied exceptions.
CLASSIFICATIONS UNDER THE CODE
1. Life insurance contracts which may be:
a. Individual Life
b. Group Life
c. Industrial Life
2. Non-life insurance contracts which may be:
a. Marine
b. Fire
c. Casualty
3. Contracts of suretyship or bonding
Note – In theory, it would be possible for an insurance company to insure
against any risk whatever associated with any lawful activity as long as there is
no prohibition by a statute or violation of public policy.
CONTRACTS WRITTEN BY GUARANTY OR SURETY COMPANIES
Designated as:
-Fidelity
-Title
-Bond
-Security Guaranty
Note: The underwriter engages in the business for profit, especially since the
terms of such contracts usually closely resemble the essential elements of an
insurance contract. They are construed strictly against the insurer.
-A contract of suretyship shall be an insurance contract only if
1. Made by a surety
2. Who is doing an insurance business within the meaning of the code
Rules:
1. Interpreted liberally in favor of the insured and strictly against the insurer
2. Interpreted as to carry out the purpose for which the parties entered into the
contract, which is to insure against risks of loss, damage or liability on the part
of the insured.
3. When it contains exceptions or conditions
1. Interpreted most favorably toward those against whom they are
intended to operate and most strictly against the insurance company or
the party for whose benefit they are inserted.
2. Where restrictive provisions are open to 2 interpretations, that which
is most favorable to the insured is adopted.
3. Limitations of liability must be construed in such a way as to
preclude the insurer from non-compliance with its obligations.
Cases:
1. Amount recoverable in case of death by drowning is not stated in the
policy.
Insured died of drowning. The insurer only bound itself to pay 1K-3K
in case of death or bodily injury. It didn’t say anything about
drowning although it gave specific amounts for specific causes of
death. In this case the Court held that the insured may recover 3K. It is
the interpretation that favors the insured because it allows greater
indemnity.
2. Deceased has already been paid under the Workmen’s Compensation
Act from another policy
Policy stipulated that any authorized driver of Taxi Co. should not be
entitled to any indemnity under any other policy. The deceased,
however, was paid his workmen’s compensation from a different
policy. The Court held that despite the prohibition, it is too wellsettled that what the law requires enters into and forms part of
every contract. If there is any doubt concerning the liability of the
insurer, nonetheless it should be resolved in favor of the insured.
CONSTRUCTION OF INSURANCE CONTRACTS
Insurance contracts are to be examined and interpreted holistically
-Generally insurance contracts are contracts of adhesion
3. Insured owner of a vehicle was not aware that his driver’s license
was irregularly issued.
The policy states that the Insurer shall not be liable if damages caused
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
7 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
to insured vehicle if driven by a person not permitted in accordance
with licensing laws or regulations to drive the MV covered in the
policy. The driver was illiterate but was able to obtain a license by
paying P25. The insurance company presented a certification from the
Motor Vehicle Office that his license was not issued by it. No proof
that the insured knew that the circumstances surrounding such issuance
was irregular. The Court held that the insurer is still liable because (1)
Driver’s license is as a public document is presumed genuine. (2) The
issuance of such is proof that the M.V.O. considered the person to be
qualified to operate a M.V. and considering the weight of authority is in
favor of a liberal interpretation of the insurance policy for the benefit of
the party insured.
4. Insured car in the custody of the repair shop was taken out for a
joyride by employees of the shop owner
The Insurance Commission initially ruled that the accident did not fall
neither within the “authorized driver” clause nor the theft clause. The
Court held that the ruling is too restrictive and contrary to the
established principle that insurance contracts, being contracts of
adhesion are to be construed liberally in favor of the insured. The fact
that the car was driven in violation of the trust relationship between the
owner of the car and the repair shop does not mean that the ‘authorized
driver’ clause cannot apply as long as the one who took it for a joyride
was duly licensed. HOWEVER, it is the theft clause that applies since
the car was unlawfully taken.
Quantum of evidence to prove theft: In the absence of any stipulation to
the contrary, a prior conviction isn’t required to establish the fact of
theft. It is only to be determined by mere preponderance of evidence.
5. Policy contains conflicting provisions on effect of non-payment of
premium
Policy states that “my policy shall be made effective on the first day of
the month next following the month the first premium is paid;x x x.”
Another condition provides: “That failure to deduct from my salary the
monthy premiums shall not make the policy lapse, however, the
premium account shall be considered as indebtedness which, I bind
myself to pay the System.” Applicant died in a plane crash. No
premium has yet been remitted. The Court held that the policy is still
effective considering the ambiguity created by the operation of the
conditions should be interpreted adversely against the GSIS which
prepared the application.
6. Insured spouses died when passenger truck they were driving was
ambushed by Muslim rebels
Insurer paid the face value of the life insurance policies of D and E. But
denied liability for accidental death benefits of double indemnity on the
ground that their cause of death was an excluded risk n the rider to wit,
“ the policy shall not cover loss or disability caused directly or
indirectly by war, declared or undeclared, strikes, riots, and civil war,
revolution, or any warlike operation.” D and E were killed in an
ambush by Muslim rebels. The Court held that the cause of death was
not contemplated by the phrase “warlike operation” and thus the insurer
must pay the indemnity. The ambush was an isolated one, not done
pursuant to a prosecution of hostilities between warring parties.
7. Insurer resisted the claim of the insured on the ground that the
burned oil mill is not covered by any insurance policy because the
description of the insured establishment referred to another building.
Insured owned two oil mills. One was destroyed by fire. Insurer resists
paying the indemnity because the description, which consists of
boundaries and descriptions of adjacent structures, of the property
insured allegedly pertains to the oil mill that was left standing. There
was even a stipulation in the policy that mistakes or errors in the
description must be corrected immediately but such was not done. The
Court held that the insured may still recover because descriptive words
are to be construed with the greatest liberality in giving effect to
the insurance. The courts are inclined to consider that the policy
covers any building, which the parties manifestly intended to
insure, however inaccurate the description may be.
Note that there was a categorical statement in the policy which
used the word NEW, pertaining to the NEW OIL MILL. If the
parties intended to insure the old oil mill, there would have been no
need to use the word NEW.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
8 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Cardinal Rule: VERBA LEGIS applies and the insurance contract is
the law between the parties except when there is doubt. When there is
doubt the application of the aforementioned rules of interpretation
applies.
Cases:
1. Liability is limited to P150 if repair of insured was undertaken
without notice to insurer – Even if the insured paid a greater amount
that P150, the indemnity he will get will be limited to P150 because the
repair was undertaken without notifying the insurer.
2. Insurer must be given notice of other fire policies – In the absolute
absence of notice by the insured to the insurer of the existence of other
policies of insurance against fire upon the property insured when it is
one of the conditions specified in the fire insurance policy for the
validity of the policy and entitlement to indemnity in case of loss, the
policy is null and void. But where the condition does not absolutely
declare void any violation of the additional or “other insurance” clause,
but on the contrary, it expressly provides that the condition “shall not
apply when the total insurance or insurances in force at the time of the
loss or damage is not more than P200,000,” the policy is not totally free
of ambiguity. The only reasonable conclusion is that (a) the prohibition
applies only to double insurance and (b) the nullity of the policy shall
only be to the extent exceeding P200,000 of the total policies issued i.e.
under the condition, the insurer is amenable to assume a co-insurer’s
liability up to the loss not exceeding P200,000. Forfeitures are not
favored.
3. Only amputation of hand is considered a loss thereof
The insured suffered injuries, which rendered his hand to be
temporarily but totally disabled, he cannot recover the insurance policy
provision, which covers the loss of a hand. Such has been defined as
only pertaining to amputation.
4. The prescriptive period on claims on insurance policies may be
stipulated in the contract. When it is stipulated such is the period that
shall govern, not the Civil Code provision.
5. The policy states that “Use of M.V. must be for social, domestic or
pleasure purpose. This does not cover use for hire, or reward, or for
racing, pacemaking, reliability trial and speed testing.”
Car rallying is excepted. Despite the fact that car rallying is not
technically a race, it is definitely a contest based on precision and
coordination of crew as well as on road worthiness. Since the contest
was timed, controlled and conducted under the conditions with a crew
to test the precision of the driver and road worthiness of the car, the
“auto rally” falls within the exception, particularly under pace-making.
6. Written permission of insurer is required before insured may effect
payment in settlement of claim
The policy specifically requires that the insurer’s written consent be
first secured before any payment in settlement of the claim against the
insured can be made. There is nothing unreasonable or objectionable in
this stipulation that would warrant its nullification. It is designed to
safeguard the insurer’s interest against collusion between the insured
and the claimant.
Note – Where a contract is silent on any particular matter, the doubt
arising from such silence shall be construed strictly against the insurer.
Ex. The insurer contended that the amount recoverable on the car
insurance policy is subject to a deductible franchise. It was ruled that
the deductions of P250 and P274 as deductible franchise and 20%
depreciation on parts, respectively, claimed by the insurer as agreed
upon in “the contract, has no basis” because “the policy does not
mention any deductible franchise.”
WHAT CONSTITUTES
BUSINESS
DOING
OR
TRANSACTING
AN
INSURANCE
1. Name or designation by insurer not controlling. The exact nature of
the contract is to be determined by the stipulations thereof.
2. Acts deemed included by law – The Code enumerates acts which are
deemed included in the term “doing an insurance business” or
“transacting an insurance business.”
Ex. A company may be found to be engaged in an insurance business
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
9 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
even though it expressly disclaims any intention to sell insurance. Thus,
a newspaper which, in order to increase its circulation, promises to pay
a certain amount to the heirs of one who meets death by accident while
pursuing his ordinary avocation, provided a copy of the paper or a
coupon taken from it is found in his possession at the time of the
accident, carries an accident insurance business which is unauthorized
under a charter empowering it to publish a newspaper.
Ex. A contract for the payment of burial or funeral expenses at the
death of the holder is a contract of life insurance subject t the insurance
laws.
Ex. An agreement, however, to service and repair, at a flat monthly fee,
any burned out and defective parts of fluorescent fixtures has been held
not to constitute an insurance contract since any element of warrant or
guaranty in the agreement is merely incidental to the servicing
business.
The principal object and purpose test – If the principal object and
purpose is indemnity then it is an insurance contract. If the principal
purpose and object is a service or risk transfer and distribution then it is
neither an insurance contract nor will it be subject to the laws
governing insurance.
Ex. Health Maintenance Organizations, whether or not organized for
profit, whose main object is to provide the members of a group with
health care services, rather than assumption of insurance risk is not
engaged in the insurance business.
FUNCTIONS OF INSURANCE
1. Principal Function – The main function of insurance is risk-bearing.
The financial losses of the few are equitably distributed over the many
out of a fund contributed by all.
Ex. In fire insurance, the policyholders pay premiums to a
common pool, out of which those who suffer loss are
compensated. Thus when a fire guts the property of an insured,
the indemnity is paid for by all the insureds proportionately.
Note – Even life insurance has the same principle of spreading
of risk as long as the same does not lapse.
2. Subsidiary Functions
1. Stimulates business enterprises – No large-scale commercial and
industrial organizations could function in the modern world without
insurance. It allows capitalists to use their capital without freezing a
huge portion to guard against potential losses.
2. Encourages business efficiency and enterprise – The natural result of
elimination of risk is an increase in business efficiency. The worry of
uncertainty of such risk could seriously diminish the personal
efficiency of business managers but for the way on which insurance
relieves them of these strains.
3. Promotes loss-prevention – The community would suffer much
greater economic impoverishment through material losses if it were not
for the loss-prevention measures of insurers. Insurers encourage lossprevention through a system of rating which allows discounts for good
features and impose special conditions where the risk is unsatisfactory.
4. Encourages savings – By protecting individuals against unforeseen
events.
5. Solves social problems – GSIS and SSS provide amelioration for the
suffering of the many from loss of life, injuries, old age, disability.
3. Indirect Functions
1. Investment of funds – Insurers accumulate large funds which they
hold as custodians out of which claims and losses are met. These funds
themselves are invested so that not only do they earn interest to be
added to the funds but they also make available huge resources for
underwriting industrial, agricultural, cultural, and other projects that
contribute to national development
2. Use of reserve funds – Because of the investment policy of insrurers,
their reserve funds are not static, but are used productively. This results
in the reduction of the cost of insurance to the insuring public. If the
reserve funds are not used, the income they earn now would have to be
obtained through higher premiums
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
10 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
12. Meeting of the minds of the parties upon all the foregoing essentials
3. Effect on prices – The cost of insurance to the businessman is passed
on to the consumers, along with other production costs, but
paradoxically, the existence of insurance benefits the consumer public
in terms of reduced prices. This is because the cost of insurance is less
than the cost of risk without insurance
4. As basis of credit – Credit extension is the most important phase of
modern business and is contributed to by virtually all forms of
insurance. No dealer cares to sell goods to a retailer on credit unless he
has some assurance that the goods and the business of the retailer are
protected from sudden disaster by fire.
TITLE 1
WHAT MAY BE INSURED
Note:
•
•
Subject Matter of the Contract of Insurance
•
•
•
SEC. 3. Any contingent or unknown event, whether past or future, which
may damnify a person having an insurable interest, or create a liability against
him, may be insured against, subject to the provisions of this chapter.
The consent of the spouse is not necessary for the validity of an insurance
policy taken out by a married person on his or her life or that of his or her
children.
All rights, title and interest in the policy of insurance taken out by an original
owner on the life or health of the person insured shall automatically vest in
the latter upon the death of the original owner, unless otherwise provided for
in the policy.
•
8.
9.
Subject matter in which the insured has an Insurable interest
Event or Peril insured Against which may be any (future contingent or
unknown event, past or future) and a duration for the risk thereof
10. A Promise to pay or indemnify in a fixed or ascertainable amount
11. A consideration for the promise, known as the “Premium”
Generally, anything appreciable pecuniary value, which is
subject to loss or deterioration or of which one may be
deprived so that his pecuniary interest is or may be prejudiced,
may properly constitute the subject matter of insurance.
Property Insurance – ordinarily property covered by a policy
is regarded the subject matter of the insurance.
Life, health, and accident insurance – the person becomes the
subject of insurance, the matter is generally viewed as one in
reference to the insured as a party to the contract
Casualty insurance – The subject matter is the risk involved in
its use, or the insured’s risk of loss or liability that he may
suffer loss or be compelled to indemnify for the loss suffered
by a third person.
Event or Peril insured against
•
•
REQUISITES OF A CONTRACT OF INSURANCE (SI-PA-Pro-Pre-M)
Parties must be competent to enter into the contract
Policy must be in the form previously approved by the
Insurance Commissioner
The contingency or unknown event must be such that its
happening will:
a. damnify or cause loss to a person having an
insurable interest
b. Create liability against him
The unknown event may be past or future.
Insurance by a married woman
• A married woman without the consent of her husband may take out
an insurance on
o her life
o that of her children
o that of her husband
o paraphernal or separate property
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
11 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
property given to her by her husband
Insurance by a minor
• Insurance contract entered into by a minor is not entirely void but
merely voidable
• Insurer may not annul the contract on the ground of incapacity
• If the contract is fair and no fraud, the minor cannot recover
premiums if he cannot return the benefits received.
• If the minor is the beneficiary under a contract of life, health or
accident insurance, the judicial or natural guardian may exercise in
behalf of the minor any right under the policy
Ownership of life insurance policy
• Ownership divided between insured and beneficiaries – the insured is
the owner of its various marketing and sales features, such as the loan
and cash surrender values, and the beneficiary being the owner of a
promise to pay the proceeds at the death of the insured subject to the
insured’s right of revocation
• Interest of insured and beneficiary - one who takes a policy of
insurance on his own life becomes a party to the contract even though
the benefits of the contract will accrue to another known as beneficiary.
He may still maintain a suit.
• Transfer of rights – Upon death of the original owner, all rights, title
and interest in the policy shall automatically vest in the beneficiary
unless otherwise provided for in the policy.
SEC. 4. The preceding section does not authorize an insurance for or
against the drawing of any lottery, or for or against any chance or ticket in
a lottery drawing a prize.
Concept of Lottery
• Lottery externs to all schemes for the distribution of prizes by chances,
such as policy playing, gift exhibition, prize concerts, raffles at fairs.
• Three essential elements of lottery: (C.P.C.)
1. Consideration
2. Prizes
3. Chance
• There is consideration of price paid if it appears that prizes offered by
whatever name they may be called came out of the fund raised by the
sale of chances among participants. No consideration has been paid and
consequently, there is no lottery.
• e.g. A sweepstakes holder cannot insure himself against the failure of
his ticket to win a prize
Contract of Insurance not a wagering contract
• A contract of insurance is a contract of indemnity and is not a wagering
or gambling contract.
• While it is based on contingency, it is not a contract of chance used for
profit.
• The very purpose of insurance is the reimbursement of the holder of
insurance for the actual loss suffered.
Gambling contract
Parties contemplate gain
through mere chance
Gambler courts fortune
Essence
of
gambling:
whatever one person wins
from a wager is lost by the
other wagering party
As soon as a party makes a
wager, he creates a risk of
loss to himself
Insurance Contract
Parties seek to distribute
possible loss by reason of
mischance
Insured
seeks
to
avoid
misfortune
What one insured gains is not at
the expense of another insured.
The purchase of insurance does
not create a non-existing risk of
loss to the purchaser
Similarity between insurance and gambling
•
Insurance and gambling are similar only in one respect: one party
promises to pay a given sum to the other upon the occurrence of a given
future event, the promise being conditioned upon the payment of, or
agreement to pay, a stipulated amount by the other party to the contract.
SEC. 5. All kinds of insurance are subject to the provisions of this chapter so far
as the provisions can apply.
•
Applicable to Marine Insurance, Fire Insurance, Casualty Insurance,
Suretyship and to any other kind of insurance insofar as said provisions
can apply.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
12 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
Matters not expressly provided for in the Insurance Code and special
laws on insurance are regulated by the Civil Code.
RA No. 1161 (Social Security Act) shall be governed primarily by the
said law and subsidiarily by Chapter 1 of the Insurance Code and in the
absence of applicable provisions in both laws, the Civil Code.
TITLE 2
PARTIES TO THE CONTRACT
SEC. 6. Every corporation, partnership, or association, duly authorized to
transact insurance business as elsewhere provided in this Code, may be an
insurer.
refers to the owner of the property insured or the person whose life
is the subject of the contract of insurance, while “assured”, to the
person whose benefit the insurance is granted
o Also synonymous to the word beneficiary
o Beneficiary is the person designated by the terms of the
policy as the one to receive the proceeds of the insurance.
! He is the third party to the contract of life
insurance.
! There are occasions where the proceeds are paid
to the estate of the insured.
•
It is said that the relation between the insurer and the insured is that of a
contingent debtor and creditor, subject to the conditions of the policy and
not that of trustee and cestui que trust.
Who may be an insurer
1.
Parties to the Contract of Insurance
1.
2.
Insurer
• The party who assumes or accepts the risk of loss and undertakes
for a consideration to indemnify the insured or to pay him a certain
sum of on the happening of a specified contingency or event.
• The business of insurance may be carried only by corporations,
partnerships and associations
• Synonymous to “assurer” or “underwriter”
Insured
• The person in whose favor the contract is operative and who is
indemnified against or is to receive a certain sum upon the
happening of a specified contingency or event.
• Person whose loss is the occasion for the payment of the insurance
proceeds by the insurer.
• Insured is not always the person to whom the proceeds are paid.
o This person may be the beneficiary designated in the
policy
o The insured may also assign the proceeds to someone else
• Synonymous to “assured”; but strictly speaking, the term insured
2.
Foreign or domestic insurance company – Before they may transact
business they must first obtain a certificate of authority from the
Insurance Commissioner who can also refuse if in his judgment such
refusal will best promote the interests of the people.
! An insurance corporation is defined as one “formed and
organized to save any person or persons or other
corporations harmless from loss, damage, or liability
arising from unknown or future or contingent event, or to
indemnify or to compensate any person or persons or
other corporations for any such loss, damage or liability.
Individual, partnership or association – the only requisite being that he
holds a certificate of authority from the Insurance Commissioner which
shall be given when such possesses capital assets required of an
insurance corporation doing the same kind of business in the
Philippines and invested in the same manner.
! Insurer and insurance company include all individuals,
partnerships, associations, or corporations, including
GOCCs and entities engaged as principals in the
insurance
business,
excepting
mutual
benefits
associations.
Business of Insurance affected with public interest
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
13 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
•
One affected with a public interest and is subject to the regulation and
control by the State
An insurance company is an instrumentality which gather funds upon the
basis of equality of risk from a greater number of persons, sufficiently large
in number to arouse the element of chance to step out and the law of
averages to step in as the controlling factor.
A law requiring to file schedule of rates and prohibiting discriminatory rate
was held to be valid.
SEC. 7. Anyone except a public enemy may be insured.
Capacity of party insured
• Natural persons – 3 essential requisites (C.P.P.)
o 1. He must be Competent to make a contract
o 2. He must Possess an insurable interest in the subject
insurance
o 3. Must not be a Public enemy
• Juridical persons – may take out insurance on property
•
to be valid and enforceable as soon as an insured becomes a
public enemy
o With respect to life insurance – US rule: the contract is not
merely suspended but is abrogated by reason of nonpayment
of premiums, since the time of the payments is peculiarly of
the essence of the contract.
Where the loss occurs after the end of war – Since the effect of war is
not merely to suspend but to abrogate, the insurer is not liable even if
the loss is suffered by the insured after the end of the war.
SEC. 8. Unless the policy otherwise provides, where a mortgagor of property
effects insurance in his own name providing that the loss shall be payable to
the mortgagee, or assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the mortgagor, who does not
cease to be a party to the original contract, and any act of his, prior to the loss,
which would otherwise avoid the insurance, will have the same effect,
although the property is in the hands of the mortgagee, but any act which,
under the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the same effect as if it had
been performed by the mortgagor.
Meaning of Public Enemny
•
Public enemy designates a nation with whom the Philippines is at war
and it includes every citizen or subject of such nation.
o Alien enemy
o A mob is not a public enemy
o During wartime, a private corporation is deemed an enemy
corporation although organized under Philippine laws if they
are controlled by enemy aliens.
! Control test – whereby a corporation is deemed to
have the same citizenship as the controlling
stockholders in time of war.
Effects of war on existing insurance contracts
•
Where parties rendered enemy aliens – by law of nations, all
intercourse between citizens of belligerent powers which is inconsistent
with the state of war is prohibited.
o With respect to property insurance – insurance policy ceases
Insurable interest of mortgagee and mortgagor
•
•
•
•
Separable insurable interests – mortgagor and mortgagee has insurable
interest in the property mortgaged and this interest is separate and
distinct from each other. In case, both of them take out separate
insurance policies, the same is not open to objection that there is double
insurance
Extent of insurable interest of mortgagor – the mortgagor has insurable
interest as owner to the extent of its value even though the mortgage
debt equals such value.
Extent of insurable interest of mortgagee – the mortgagee has insurable
interest in the property to the extent of the debt secured, since the
property relied upon as security thereof, and in insuring, he is not
insuring the property itself but his interest or lien thereon.
Extent of amount of recovery – The mortgagor cannot recover upon the
insurance beyond the full amount of his loss and the mortgagee, in
excess of the credit at the time of the loss nor the value of the property
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
14 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
mortgaged.
Insurable by mortgagee on his own interest
• He is entitled to the proceeds of the policy in case of loss before
payment of the mortgage.
• In subrogation of insurer to right of mortgagee, the mortgagee 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
• The payment of the insurance to the mortgagee by reason of the loss
does not relieve the mortgagor from his principal obligation but only
changes in the creditor.
Insurable by mortgagor of his own interest
• Mortgagor may insure for his own benefit. In case of loss, the proceeds
does not inure to the benefit of the mortgagee
• Mortgagor may take out an insurance for the benefit of the mortgagee.
• Mortgagee may be made the beneficial payee in several ways:
1. He may become an assignee of the policy with the
consent of the insurer
2. He may be a mere pledgee without such consent
3. A rider making the policy payable to the mortgagor as his
interest may appear
4. A standard mortgage clause containing a collateral
independent contract
5. Mortgagee acquired equitable lien when mortgagor
procured a policy to insure mortgagee’s benefit.
Insurance by mortgage for benefit of mortgage, or policy assigned to
mortgagee
• The following are the legal effects:
1.
Contract is deemed to be upon the interest of the mortgagor;
hence he does not cease to be a party to the contract
2.
Any act of the mortgagor prior to the loss, which would
otherwise avoid the insurance, affects the mortgagee even if
the property is in the hands of the mortgagee
3.
Any act under the contract which may be performed by the
mortgagor may also be performed by the mortgagee
4.
In case of loss, mortgagee is entitled to the proceeds to the
extent of the credit
5.
Upon recovery, mortgagee to the extent of the credit, the debt
is extinguished.
Note: The rule of subrogation by the insurer to the right of the
mortgagee is not applicable.
Effect of standard and open clauses in fire insurance policy
•
•
•
If a fire insurance policy contains a standard or union mortgage clause,
the acts of the mortgagor do not affect the mortgagee. The purpose of
the clause is to make a separate and distinct contract of insurance on the
interest of the mortgagee.
An open or loss-payable mortgage clause merely provides for the
payment of loss, if any, to the mortgagee as his interest may appear and
under it, the acts of the mortgagor affect the mortgagee.
If the policy is obtained by the mortgagor with a loss-payable clause in
favor of the mortgagee, the mortgagee is only a beneficiary under the
contract and recognized as such by the insurer but not made a party to
the contract itself. Hence, any act of the mortgagor which defeats his
right will also defeat the right of the mortgagee.
Right of mortgagee under mortgagor’s policy.
•
•
Before loss. — Before a loss occurs, the mortgagee is a conditional
appointee of the mortgagor entitled to receive so much of any sum that
may become due under the policy as does not exceed his interest as
mortgagee. Such right becomes absolute upon the occurrence of the
loss.
After loss. — If the loss happens when the credit is not due, the
mortgagee is entitled to receive the money to apply to the
extinguishment of the debt as fast as it becomes due.
o On the other hand, if the loss happens after the credit has
matured, the mortgagee may apply the proceeds to the extent
of his credit.
Effect of insurance by mortgagee on behalf of mortgagor.
o
Upon the destruction of the property, the mortgagee is entitled to
receive payment from the insured but such payment discharges the debt
if equal to it, and if greater than the debt, the mortgagee holds the
excess as trustee for the mortgagor.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
15 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
If there is a stipulation that the insurer shall be subrogated to the rights
of the mortgagee, the payment of the policy will not discharge the debt
even though the mortgagee may have procured the policy by
arrangement with the mortgagor.
SEC. 9. If an insurer assents to the transfer of an insurance from a mortgagor
to a mortgagee, and, at the time of his assent, imposes further obligations on
the assignee, making a new contract with him, the acts of the mortgagor cannot
affect the rights of said assignee.
Assignment or transfer of insurance policy
• The assignee, unless he makes a new contract with the insurer, acquires
no greater right under the insurance than the assignor had, subject to
insurer's defenses.
• As to fire policy. —a fire policy before it becomes a fixed liability is
not subject to assignment, being strictly a personal contract, in the
absence of provision in the contract or subsequent consent of the
insurer.
o The insurer is naturally concerned about the moral character of
the insured and should not be compelled to become an insurer
to an assignee to whom he would have declined to issue a
policy and who could materially alter the risks assumed by the
insurer without his consent.
• As to marine policy. — It is generally recognized, however, that a
policy of marine insurance is assignable even without the consent of the
insurer unless required by the terms of the policy. The policy is not
assignable without the consent of the insurer
• As to casualty policy. — The insurer's consent is also required. Thus,
theft and burglary insurance and motor vehicle insurance involve
obvious moral hazards; hence, such policies are not freely assignable
without the insurer's consent.
• As to life policy. — With respect to life insurance, the policy may freely
be assigned before or after the loss occurs, to any person whether he
has an insurable interest or not.
o However, an assignment of a life policy to a person without an
insurable interest, which the insured makes in bad faith and
under such circumstances as where there was a preconceived
agreement that the policy was to be assigned for the purpose
of accomplishing an illegal purpose, that is, permitting the
•
assignee of the policy to wager on the length of life of the
insured, will not be upheld.
Note: A distinction must be made between the assignment or transfer
(a) of the policy itself which transfers the rights to the contract to
another insured, (b) of the proceeds of the policy after a loss has
happened, which involves a money claim under, or a right of action on,
the policy (see Sec. 83.), and (c) of the subject matter of the insurance,
which has the effect of suspending the insurance until the same person
becomes the owner of both the policy and the thing insured.
Right of mortgagor to assign insurance policy to mortgagee
• Section 9 only gives the effect if the insurer agrees to the transfer of the
policy and, at the time of his assent, imposes new obligations on the
assignee.
Effect of new contract between insurer and mortgagee-assignee
• The assignment of a fire insurance policy by the mortgagor to the
mortgagee with the consent of the insurer does not convert the contract
into one of indemnity to the mortgagee.
o The assignment operates merely as an equitable transfer of the
policy so as to enable the mortgagee to recover the amount
due in case of loss subject to the conditions of the policy.
o However, where a new and distinct consideration passes from
the mortgagee to the insurer, a new contract is created between
them. A novation of the original contract takes place. Hence,
the acts of the mortgagor cannot affect the rights of the
mortgagee, the assignee.
TITLE 3
INSURABLE INTEREST
SEC. 10. Every person has an insurable interest in 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.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
16 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
(1) Legal right to insure – The existence of insurable interest gives a
person the legal right to insure the subject of the policy of insurance. In
the absence of such interest, the person insuring in effect would be
gambling, which is prohibited by law (RPC, Art.195). It is a
fundamental postulate of all insurance that it must not be a mere bet
upon a future event.
SEC. 10. (H-ESPI-LO-Ve)
- Every person has an insurable interest in life and health:
(e) Of Himself, of his spouse and of his children;
(f) Of any person on whom he depends wholly or in part for Education or
Support, or in whom he has a Pecuniary Interest;
(g) 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
(h) Of any person upon whose life any estate or interest Vested in him
depends.
Insurable interest in general
• In essence, it is that interest which the law requires the owner of an
insurance policy to have in the person or thing insured.
(1) Pecuniary in nature – In general, a person is deemed to have an
insurable interest in the subject matter insured where he has no relation
or connection with or concern in it that he will derive pecuniary or
financial benefit or advantage from its preservation and will suffer
pecuniary loss or damage from its destruction, termination, or injury by
the happening of the event insured against.
(2) Exception – To have an insurable interest in the life of a person, the
expectation of benefit from the continued life of that person need not
necessarily be of a pecuniary nature.
Necessity of insurable interest
• The existence of insurable interest is a primary concern in determining
the liability of an insurer under a policy of insurance. Insurable interest
may be in life and health (Sec.10), or in property (Secs.13,14).
(2) Validity of the contract – The rule is that an insurable interest is
necessary to the validity of an insurance contract whatever the subject
matter of the policy, whether upon property or life. A policy issued to a
person without interest in the subject matter insured is a mere wagering
policy or contract and is void for illegality (Secs.18,25).
Exception: The insurable interest requirement is held not to apply to
industrial life insurance (Secs. 235-237).
Requirement, a matter of public policy
(1) As a deterrence to the insured – the requirement of an insurable
interest to support a contract of insurance is based upon considerations
of public policy which render wager policies invalid. It is demoralizing
in that:
a. It allows the insured to have an interest in the destruction of
the subject matter rather than in its preservation.
b. It affords a temptation or an inducement to the insured, having
nothing to lose and everything to gain, to bring to pass the
event upon the happening of which the insurance becomes
payable.
(2) As a measure of limit of recovery – If and to the extent that any
particular insurance contract is a contract to pay indemnity, the
insurable interest of the insured will be the measure of the upper limit
of his provable loss under the contract. The insurance should not
provide the insured with the means of making a net profit from the
happening of the event insured against.
Two general classes of life policies
(1) Insurance upon one’s life – In one class are those taken out by the
insured upon his own life (Sec.10[a]) for the benefit of himself, or of
his estate, in case it matures only at his death, or for the benefit of a
third person who may be designated as beneficiary. An application for
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
17 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
insurance one one’s own life does not usually present an insurable
interest question.
(2) Insurance upon life of another – When one applies for insurance on
the life of another for the former’s benefit, he must have an insurable
interest in the life of that person.
Insurable interest in one’s own life
• Every person has an unlimited insurable interest in his own life whether
the insurance is for the benefit of himself or another; and it is not at all
necessary that the beneficiary designated in the policy should have any
interest in the life of the insured.
(1) Insurance taken out by insured on his life for the benefit of another –
The presence of insurable interest is really required only as evidence of
the good faith of the parties. Consequently, the mere fact that a man on
his own motion insures his life for the benefit either of himself or of
another is sufficient evidence of good faith to validate the contract.
(2) When the insurance regarded a wagering policy – An exception to the
general rule exists in cases in which the court finds that a wagering
policy has been taken out by the insured on his life at the behest of a
third person who is named as beneficiary.
Evidence of a wagering policy (Secs.18,25) is usually found in such
facts as:
(a) That the original proposal to take out insurance was that of the
beneficiary;
(b) That premiums are paid by the beneficiary; and
(c) That the beneficiary has no interest, economic or emotional, in
the continued life of the insured.
On finding that such a policy is primarily a wager, the court will
generally void the policy entirely. In any case, there is no question that
under our law, a person has an insurable interest in his own life. But if
the policy is applied for and owned by someone other than the insured,
the applicant-owner must have an insurable interest in the life of the
insured.
• A donation is an act of liberality whereby a person disposes
gratuitously a thing or right in favor of another who accepts it
(Art.725, Civil Code).
• In essence, a life insurance policy is no different from a civil donation
insofar as the beneficiary is concerned. Both are founded upon the same
consideration: liberality. A beneficiary is like a done, because from the
premiums of the policy which the insured pays out of liberality, the
beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the Civil Code should
equally operate in life insurance contracts.
• A life insurance policy taken by a spouse on his (her) life in favor of
the other takes effect after the death of the insured.
Insurable interest in life of another
(1) Insurance for benefit of insured – A person cannot lawfully procure
insurance for his own benefit on the life of another in whose life he has
no insurable interest.
The insurable interest in the life of another must be a pecuniary one
(related to money) and it exists whenever the relation between the
assured and the insured, whether by blood, marriage or commercial
intercourse, is such that the assured has a reasonable expectation of
deriving benefit from the continuation of the life insured or of suffering
detriment or incurring liability through its termination.
(2) Insurance for benefit of a third party – When the owner of the policy
insures the life of another – the cestui que vie – and designates a third
party as beneficiary, both the owner and beneficiary must have an
insurable interest in the life of the cestui qui vie. If the insurable interest
requirement is satisfied (Sec.19), a life policy is assignable regardless
of whether the assignee has an insurable interest in the life of the cestui
qui vie (Sec.184).
Under our law, in order that one may have an insurable interest in the
life of another, it must be one of those mentioned ([a], [b], [c], [d]) in
Sec.10, i.e. the interest is pecuniary or founded upon the close
relationship between the parties. Hence, the mere fact that two (2)
persons are engaged to be married does not give one an insurable
interest in the life of the other.
Similarity between a life insurance policy and a civil donation
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
18 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Ex. X takes an insurance on his own life and names his friend Y as
beneficiary, and another insurance on Y’s life with himself (X) as
beneficiary.
The first insurance is valid because the beneficiary (Y) need not have
an insurable interest in the life of the insured. The second insurance is
void because X has no insurable interest on the life of Y.
Insurable interest in life of person upon whom one depends for education or
support or in whom he has a pecuniary interest
(1) When mere blood relationship sufficient – Mere relationship of
brother or sister, father or child is sufficiently close to give either an
insurable interest in the life of the other.
(2) Persons obliged to support each other – Generally, blood or material
relationships fit the concept of insurable interest. In any event, the
following have an insurable interest in each other’s life since under
Article 195 of the Family Code, they are obliged to support each other:
(a) The spouses;
(b) Legitimate ascendants and descendants;
(c) Parents and their legitimate children and the legitimate or
illegitimate children of the latter;
(d) Parents and their illegitimate children and the legitimate or
illegitimate children of the latter;
(e) Legitimate brothers and sisters, whether of the full or halfblood.
Note: Brothers and sisters not legitimately related, whether of
the full or half-blood, are likewise bound to support each other
except only when the need for support of the brother or sister,
being of age, is due to a cause imputable to the claimant’s fault
or negligence.
(3) When pecuniary benefit essential – In other cases, mere blood
relationship (e.g. lesser degree of kinship, such as uncle or aunt, and
nephew or niece, and cousins) does not create an insurable interest in
the life of another. Also, mere relationship by affinity (e.g. son-in-law,
brother-in-law, step-children) ordinarily does not constitute an
insurable interest.
Under our law, there must be an expectation of pecuniary benefit in the
life of the insured to sustain the insurance, that is, a risk of actual
monetary loss from his death. If the party who takes out the insurance is
dependent on the insured for support and care, it is strong evidence of
insurable interest even in the absence of close blood relationship.
Hence, “love and affection,” “gratitude,” or “friendship,” by itself is not
efficient. The expectation, however, need not have legal basis
whatever; it is sufficient that it be actual. Thus:
(a) The assumption of parental relations when a man sends a girl
to school and pays her expenses is sufficient to give her an
insurable interest in his life.
(b) Upon like principle, a woman who takes a girl from an orphan
asylum and gives her a home under circumstances calculated
to raise a reasonable expectation of help and care from the girl
during the declining years of the benefactress, has an insurable
interest in the girl’s life, although she is not formally
appointed her guardian.
(c) It is generally held that a corporation has an insurable interest
in the life of an officer on whose services the corporation
depends for its prosperity, and whose death will be the cause
of a substantial pecuniary loss to it.
(d) A person may take out a policy on the life of his business
partner on the theory that the latter’s death may adversely
affect the business operations which can, in turn, cause
financial losses.
(e) In the case of employees, insurable interest is dependent upon
the value of the employee to the business. A business usually
has an interest in other employees occupying key positions,
such as the president, executive officers, and department heads
who are important to the organization which expects to receive
some necessary gain form the continuation of their lives or
some financial loss from their death. However, valid insurance
may be written when the employee himself applies for the
policy and designates the employer as beneficiary.
Insurable interest of a person in life of another under a legal obligation to
former
(1) Related by contract or commercial relation – Any person so related to
another, either by contract or commercial relation, that a right
possessed by him will be extinguished or impaired by the death or
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
19 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
illness of the other may lawfully procure insurance on the other’s life.
Thus, the employer may insure the life of the employee and vice versa:
(a) A corporation, the life of its manager;
(b) A partner, the life of his co-partner;
(c) A partnership, the life of each partner;
(d) A surety, the life of his principal although the
principal has no insurable interest in the life of
his surety.
(2) Risk that performance of obligation might be delayed or prevented –
In all the instances mentioned, it must appear that the death or illness of
the insured person who is under a legal obligation, might delay or
prevent its performance (Sec.10[c]).
While a partner has an insurable interest in the life of a co-partner who
is indebted to him for his proportion of the capital or against whose
skill the said partner has advanced money, a partner has no insurable
interest in the life of the other if both have no capital invested and
neither is indebted to the other.
Insurable interest of creditor in life of his debtor
(1) Extent of interest – The creditor has unquestionably an insurable
interest in the life of his debtor under Sec.10(c). Thus, a creditor may
insure his debtor’s life for the purpose of protecting his debt but only to
the extent of the amount of the debt and the cost of carrying the
insurance on the debtor’s life.
The amount of the policy must not be so disproportionate to the amount
of the debts and liens thereon plus the cost of the insurance as to justify
the conclusion that the policy is merely a wagering or speculative one.
For instance, a policy on the life of another for P300,000 to cover a
debt of P50,000 is a mere wagering policy, and is void.
(2) Right of debtor in insurance taken by creditor – A creditor who
insures the life of his debtor does not act as the agent of the latter
(Sec.53), cases to the contrary notwithstanding. The contract is one
purely between the insurer and the insuring creditor inasmuch as by
law, the creditor is given an insurable interest on the life of his debtor
(Sec.10[c];8). In other words, the insurance does not inure to the benefit
of the debtor unless the contrary is expressly stipulated.
(3) Extent of the amount that may be recovered by insuring creditor –
The insuring creditor could only recover such amounts as remain
unpaid at the time of the death of the debtor. If the whole debt has
already been paid, then recovery on the policy is no longer permissible.
(4) Where insurance taken by debtor for the benefit of creditor – Where
a debtor in good faith insures his life for the benefit of the creditor, full
payment of the debt does not invalidate the policy; in such case, the
proceeds should go to the estate of the debtor.
(5) Where debt becomes legally unenforceable – Under our law, it is clear
that a creditor may not insure the life of his debtor, unless the latter has
a legal obligation to him for the payment of money (Sec.10[c]).
Insurable interest in life of person upon which an estate or interest depends
• Section 10(d) simply means that one may insure the life of a person
where the continuation of the estate or interest vested in him who takes
the insurance depends upon the life insured.
Ex. Suppose A receives as legacy, the usufruct of a house. The
ownership of which is vested in B. It is provided in the legacy that
should B die first, both the usufruct and the ownership of the property
will pass to C.
In this case, A has an insurable interest in the life of B for A will suffer
pecuniary loss by B’s death.
Consent of person whose life is insured
(1) Essential to validity of policy – A leading authority has said that all
contracts (without the consent of the insured) are contrary to public
policy, and void. His very consent is strong evidence of the goo faith of
the person procuring the insurance, and thus affords a needed guaranty
to society.
(2) Not essential to validity of policy – It seems, however, that under our
law (Sec.10), the consent of the person insured is not essential to the
validity of the policy. So long as it could be proved that the assured has
a legal insurable interest at the inception of the policy, the insurance is
valid even without such consent.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
20 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
SEC. 11. The insured shall have the right to change the beneficiary he designated
in the policy, unless he has expressly waived this right in said policy.
Notwithstanding the foregoing, in the event the insured does not change the
beneficiary during his lifetime, the designation shall be deemed irrevocable.
Beneficiary defined
(1) In insurance cases, the term beneficiary is ordinarily used in referring to
the person who is named or designated in a contract of life, health, or
accident insurance as the one who is to receive the benefits which
become payable, according to the terms of the contract, upon the death
of the insured.
(2) Only those persons, whether natural or juridical, who, though not
parties to the contract, are mentioned in it as the intended recipients of
the proceeds or benefits of the insurance if the insured risk occurs.
(3) A broader use of the term would include also those who, upon a proper
basis of insurable interest, secure insurance for their own benefit upon
the lives of others.
Kinds of beneficiary
• The beneficiary in a life insurance policy may be either the insured
himself or his personal representatives or someone other than the
insured. Where the beneficiary designated is a person other than the
insured, such person may occupy one of three (3) relations to the
insured:
(1) Insured himself – Such a person is thus an immediate party to the
contract and is ordinarily called the assured, as where the creditor
insures the life of his debtor;
(2) Third person who paid a consideration – The insured may have taken
the policy for the benefit of a creditor or to secure some other
obligation; or
(3) Third person through mere bounty of insured – The beneficiary
designated may be the estate of the insured or a third party.
Note: In (2) and (3), the beneficiary is not a party to the contract. In all three
cases, the proceeds of the life insurance policy become the exclusive
property of the beneficiary upon the death of the insured. Therefore, where
the insured, before dying, was judicially declared insolvent, the proceeds
should be paid to the beneficiary and not to the assignee in insolvency.
Limitations in the appointment of beneficiary
(1) Article 2012 of the Civil Code
“Any person who is forbidden from receiving any donation under
Article 739 cannot be named beneficiary of a life insurance policy by
the person who cannot make any donation to him, according to said
article.”
(2) Article 739 of the Civil Code
“The following donations shall be void:
1. Those made between person who were guilty of adultery or
concubinage at the time of the donation;
2. Those made between persons found guilty of the same criminal
offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
In the case referred to in No.1, the action for declaration of nullity may
be brought by the spouse of the donor or done; and the guilt of the
donor and done may be proved by preponderance of evidence in the
same action.
Note: In order that Article 739 may apply, it is not required that there
be a previous conviction for adultery or concubinage.
(3) The proscription in Article 739 of the Civil Code should equally
operate in life insurance contracts.
Ex. M, a married man, takes out an insurance policy on his life and
designate B, with whom M is cohabiting at the time, as beneficiary.
The designation of B is void since M and B are guilty of concubinage at
the time it is made. Hence, in case M dies, his legal heirs and not B will
be entitled to the insurance proceeds. But the designation is valid if
both M and B are single.
The insured in a life insurance may designate any person as beneficiary
unless disqualified to be so under the provisions of the Civil Code. In
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
21 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
the absence of any beneficiary named in the life insurance policy or
where the designated beneficiary is disqualified, the proceeds of the
insurance will go to the estate of the deceased insured.
Right of insured to change beneficiary in life insurance
(1) General rule – Whether or not the policy reserves to the insured the
right to change beneficiary, he has the power to so change the
beneficiary without the consent of the latter who acquires no vested
right but only an expectancy of receiving the proceeds under the
insurance. It follows that the insured retains the right to receive the
cash value of the policy, to take out loans against the cash value, to
assign the policy, or to surrender it without the consent of the
beneficiary.
(2) Effect of death of insured – The right must be exercised specifically in
the manner provided in the policy or contract. But the insured’s power
to extinguish the beneficiary’s interest ceases at his death, and cannot
be exercised by his personal representatives or assignees. The
beneficiary’s designation shall be deemed irrevocable.
(3) Where right to change is waived – If the right to change the
beneficiary is expressly waived in the policy, then the insured has no
power to make such change without the consent of the beneficiary.
(a) The beneficiary has a property right in the policy of which
could not be deprived without his consent.
(b) Neither can a new beneficiary be added to the irrevocably
designated beneficiary for this would in effect reduce the
latter’s vested rights.
(c) The insured does not even retain the power to destroy the
contract by refusing to pay premiums for the beneficiary can
protect his interest by paying the premiums for the reason that
the fulfillment of an obligation may be made by a third person
even against the will of the debtor and if he has an interest in
the fulfillment of the obligation, even against the will of the
creditor (Art.1236, Civil Code)
Measurement of vested interest of beneficiary in policy
• The vested right or interest of the beneficiary in a policy should be
measured on its full face value and not on its cash surrender value for in
case of death of the insured, said beneficiary is paid on the basis of its
face value. In case the insured should discontinue paying premiums, the
beneficiary may continue paying it and is entitled to automatic
extended term or paid up insurance options, etc., and that said vested
right under the policy cannot be divisible at any given time.
Where beneficiary dies before insured
(1) View that beneficiary’s representative is entitled to insurance
proceeds – Where the right to change the designated beneficiary is
expressly waived in the policy, that if the beneficiary dies before the
insured, his rights so vested should pass to his representatives, and on
the death of the insured, the proceeds of the policy should belong, not
to estate of the insured, but to the representatives of the beneficiary.
This result, however logical in form, does great violence to the purpose
of the insured, who must have intended, in the ordinary case, to provide
a fund for the support after his death, of those whom he was
accustomed to support during his lifetime.
(2) View that estate of the insured is entitled to insurance proceeds –
Where the beneficiary predeceases the insured, the estate of the insured
should be entitled to the proceeds of the insurance especially where the
designation is subject to the express condition to pay the beneficiary if
he survives the insured or “if surviving.”
However, most but not all, court hold that the mere fact that such a
policy is made payable to the designated beneficiary, “his executors,
administrators, or assigns,” is sufficient to negative the implied
condition that death of the beneficiary before maturity of the policy
terminated all his rights to it.
Designation of beneficiary
• The beneficiary designated may be the insured or his estate, a
specifically designated person or person, or a class or classes of
persons.
(1) Children – The term is broad enough to include the following:
a. An adopted child; or
b. An adult child not forming part of the household of the
insured; or
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
22 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
c.
After-born children even of a marriage subsequently
contracted
In an insurance policy, the word ordinarily means a descendant of the
first degree and is never intended to include grandchildren.
Where the children are named individually, other children cannot share
in the insurance proceeds unless the insured subsequently amend his
designation to include them.
(2) Husband; wife or widow – The word “wife” is generally regarded as
descriptio personae, and the fact that one who otherwise answer the
description does not have the legal status of the wife of the insured does
not prevent her from taking as beneficiary, as when she is designated
by name, although the words “his wife” are added. However, if the
beneficiary is not named but is designated merely by a status, such as
the “husband,” “wife,” or “widow” of the insured, the legal husband or
wife as ascertained at the death of the insured, is entitled to the benefits
of such insurance.
Note: Under our law, any person who is forbidden from receiving any
donation, such as a common-law spouse, cannot be named beneficiary
of a life insurance policy by the person who cannot make any donation
to him.
(3) Husband and children; wife and children – A policy payable to the
wife of the insured and “their children” includes children by another
wife, although the prevailing view state that the beneficiaries are
limited to children common to both. But if the designation is made to
the insured’s “wife and children” or “my wife and children,” the
insurance is deemed for the benefit of all children of the insured,
whether by the named wife or those of another.
(4) Family – The term is sometimes used to indicate the recipient of the
proceeds of an insurance policy. In deciding whether a particular
person claiming a share of the fund is of the family of the insured, the
court will ascertain whether that person was so regarded by the insured.
(5) Heirs or legal heirs – These terms will be construed as indicating that
class of persons who would take the property of the insured in case he
died intestate. Therefore, it is generally held that the widow of the
deceased is entitled to take under a policy payable to his “heirs” or
“legal heirs” as well as the children of the deceased.
(6) Estate or legal representatives of deceased – The words when used in
designating beneficiaries, are to be construed in their strict technical
sense and the courts will ordinarily assume that they are used to mean
executors or administrators, unless it appears that the insured intended
to use these expressions in the sense of heirs or next of kin.
If no beneficiary is designated in the life insurance policy, the proceeds
thereof will go to his legal heirs in accordance with law. However, it
has been held that where two (2) women innocently and in good faith
contracted marriage with the same man, the insured, and the latter did
not designate any beneficiary who would receive the proceeds of his
life insurance, each family shall be entitled to one half the insurance
benefits.
SEC. 12. The interest of a beneficiary in a life insurance policy shall be forfeited
when the beneficiary is the principal, accomplice, or accessory willfully bringing
about the death of the insured. In such a case, the share forfeited shall pass on to
the other beneficiaries, unless otherwise 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.
Forfeiture of the interest of the beneficiary in a life insurance policy
• The word “interest” here means the right of the beneficiary to receive
the proceeds of the life insurance policy. It does not mean insurable
interest since the beneficiary need not have an insurable interest in the
life of the insured.
(1) Other qualified beneficiaries of the insured – In case the interest of a
beneficiary in a life insurance policy is forfeited, the nearest relatives,
not otherwise disqualified, of the insured, shall, inherit the proceeds paid
to the estate of the insured in accordance with the rules on intestate
succession provided in the Civil Code.
(2) Nearest relatives of the insured – In the order of enumeration, they are
the following:
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
23 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
a.
b.
c.
d.
e.
f.
g.
Legitimate children;
Father and mother, if living;
Grandfather and grandmother, or ascendants nearest in degree,
if living;
Illegitimate children;
Surviving spouse; and
Collateral relatives, to wit:
i. Brothers and sisters of the full blood;
ii. Brothers and sisters of the half-blood;
iii. Nephews and nieces
In default of the above, the State shall be entitled to receive the
insurance proceeds (Art.1011).
Liability of insurer on death of insured
• Insurer is not liable in case the insured commits suicide intentionally,
with whatever motive, when in sound mind.
• But death which is purely accidental, even though due to the insured’s
own carelessness or negligence is not excluded from the coverage by
the words “self-destruction,” “death by his own hand,” and the like
which are generally considered synonymous with suicide.
• Where the insured is insane, it is the settled rule that, in the absence of
express conditions to the contrary, the suicide of an insured while
insane does not discharge the insurer from his liability on his contract.
• The beneficiary is not deprived of the insurance proceeds in every case
where the beneficiary killed the insured. Thus, where the death of the
insured was caused under circumstances as do not amount to a felony
as when the killing was accidental or in self-defense, or where the
beneficiary was insane, the rights of the beneficiary under the policy
are not affected.
• It has also been held that even though the beneficiary was guilty of a
felony, the beneficiary’s interest in the insurance is not forfeited where
the insured’s death was not intentionally caused.
• The insurer may properly insert in the contract an express provision
excepting from coverage death caused by the beneficiary, whether
lawfully or unlawfully.
• The mere fact that the insured died while he was committing a felony
or violating a law would not warrant denial of liability. To avoid
liability, the insurer must further establish that the commission of the
felony or the violation of law was the cause or had a casual connection
with the accident resulting in the death of the insured.
SEC. 13. Every interest in property, whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured, is an insurable interest.
Insurable interest in property
(1) In general – The interest may be in the property itself (e.g. ownership),
or any relation thereto (e.g. interest of a trustee or a commission agent),
or liability in respect thereof (e.g. interest of a carrier or depository of
goods).
(2) Occurrence of loss may be uncertain – It is not necessary that the
interest is such that the event insured against would necessarily subject
the insured to loss. It is sufficient that it might do so, and that pecuniary
injury would be the natural consequence.
(3) Title or right to possession not essential – It has been held that where
the mortgagor had sold the mortgaged premises to a vendee who
assumed the payment of the mortgage debt, and had thus parted with
all his interest in the property, the mortgagor yet had an insurable
interest in the property because of his personal liability for the debt and
his right be subrogated to the mortgage security in case he should be
compelled to make payment. Similarly, a vendor or seller retains an
insurable interest so long as he has nay interest therein as when he has
a vendor’s lien i.e. he retains ownership merely to insure that the buyer
will pay the price (Art.1504[1], Civil Code).
(4) Legal expectation of loss or benefit – Insurable interest in property is
not necessarily an interest in property in the sense of title, but a concern
in the preservation of the property and such a relation to or connection
with it as will necessarily entail a pecuniary loss in case of its injury or
destruction. As a general rule, however, the expectation of benefit to be
derived from the continued existence of property must have a basis of
legal right, although the person insured has no title, either legal or
equitable, to the property insured. The rule is different in life insurance.
(5) Mere factual expectation of loss – Such expectation not arising from
any legal right or duty in connection with the property, does not
constitute an insurable interest.
Note: This type of interest called “factual expectation,” though usually
insufficient in strict indemnity insurance, will suffice in life insurance.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
24 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
SEC. 14. An insurable interest in property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Insurable interest in property in particular cases
(1) An existing interest – May be a legal title or equitable title
a. Insurable interest arising from legal title:
i. Trustee, as in the case of the seller of property not yet
delivered
ii. Mortgagor of the property mortgaged
iii. Lessor of the property leased
iv. Lessee and sublessee may also unsure the property
leased or subleased
v. Assignee of property for the benefit of creditors
Where legal title is held in a representative capacity, as by an
executor, administrator, trustee, or receiver, the representative
has sufficient insurable interest for the purpose of taking out
insurance on the property under his control, but any proceeds
from such insurance are to be held for the benefit of those for
whose benefit the representative is acting.
b.
Insurable interest arising from equitable title:
i. Purchaser of property before delivery, or before he
has performed the conditions of sale
ii. Mortgagee of property mortgaged;
iii. Mortgagor, after foreclosure but before expiration of
the period within which redemption is allowed
iv. Beneficiary under a deed of trust
v. Creditors under a deed of assignment
vi. A judgment debtor whose property has been seized
under execution until the right to redeem or the right
to have the sale set aside has been lost
vii. Builders and constructors in the buildings pending
the payment of the construction price
A purchaser of an option to buy real estate has an insurable
interest to the extent of the advance payment for the option.
Thus, more than one insurable interest may exist over the
same property.
(2) An inchoate interest – Must be founded on an existing interest
a. A stockholder has in inchoate interest in the property of the
corporation, which is founded on an existing interest arising
from his ownership of shares in the corporation. His insurable
interest is limited to the extent of the value of his interest or to
his share in the distribution of the corporate assets upon
dissolution.
Note: A stockholder has neither legal nor equitable title to
assets of the corporation.
b.
A partner has an insurable interest in the firm property which
will support a separate policy for his benefit.
(3) An expectancy – Must be coupled with an existing interest in that out
of which such expectancy arises.
a. A farmer may insure future crops if they are to be grown on
land owned by him at the time of the issuance of the policy, or
although the crops are to be raised by him on the land of
another, provided the crops will belong to him when produced.
b.
An owner of a business can insure against a contingency,
which may cause loss of profits resulting form the cessation or
interruption of his business.
SEC. 15. A carrier or depository of any kind has an insurable interest in a thing
held by him as such, to the extent of his liability but not to exceed the value
thereof.
Insurable interest of carrier or depository
• It has been held that a policy effected by a bailee and covering by its
terms his own property and property held in trust, inures, in the event of
loss, equally and proportionately to the benefit of all the owners of the
property insured.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
25 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Under the General Bonded Warehouse Act, a warehouseman,
licensed to engage in the business of receiving commodities for storage,
is required to insure the same against fire.
death, however reasonable his expectation of benefit to be derived from
the continued existence of the property. His expectation has no legal
basis since the will has no legal effect before the death of the testator.
SEC. 16. A mere contingent or expectant interest in any thing, not founded on an
actual right to the thing, nor upon any valid contract for it, is not insurable.
SEC. 17. The measure of an insurable interest in property is the extent to which
the insured might be damnified by loss or injury thereof.
Mere contingent or expectant interest not insurable
• A mere hope or expectation of benefit which may be frustrated by the
happening of some event uncoupled with any present legal right will
not support a contract of insurance. Thus:
(1) Property of father/son/spouse – A father cannot insure his son’s
property nor can a son insure the property that he expects to inherit
from his father as his interest is merely an expectancy of inheriting.
Similarly, a spouse has no insurable interest in the property of the other.
The measure of insurable interest in property
• A contract of insurance is one of indemnity. Any contract of property
insurance that gives to the insured more than indemnity against his
actual loss that may be suffered by the happening of the event insured
against in the nature of a wagering policy contrary to public policy and
void.
• Thus, a mortgagor has an insurable interest equal to the value of the
mortgaged property and a mortgagee, only to the extent of the credit
secured by the mortgage (Sec.8).
• The purpose of property insurance is to indemnify a person against
actual loss, and not to wager on the happening of the event.
•
(2) Life of parents/children/spouses – By statutory provisions, parents and
children, and spouses can insure the life of each other as they are under
mutual obligation to support each other under the law.
(3) Property of debtor – Nor can a general or unsecured creditor insure
specific property of his debtor who is alive, even though destruction of
such property would render worthless any judgment he might obtain.
a. But an unsecured creditor may insure the property of a
deceased debtor since all personal liability ceases with the
death of the debtor. The proceedings to subject the estate to
the payment of the debt of the deceased debtor are in rem.
b. An unsecured creditor who obtains judgment in his favor
becomes a judgment in his favor becomes a judgment creditor
and has been held to have insurable interest in the debtor’s
property as he has a right to levy on such property as may be
necessary to satisfy the judgment. However, to recover under
the insurance, he must show that the debtor has no other
property out which the judgment may be satisfied.
c. An unsecured creditor has an insurable interest in the life of
his debtor to the extent of the amount of the debt (Sec.10[c]).
(4) Property of testator still alive – One named as beneficiary in a will has
no insurable interest in a property designated before the testator’s
Ex. X insured his property valued at P100,000, for P120,000. X suffered a
total loss. The amount of the insurance (P120,000) is not the amount
payable in the event of a loss but rather represents the maximum limit of
recovery of the insured (Sec.60).
SEC. 18. No contract or policy of insurance on property shall be enforceable
except for the benefit of some person having an insurable interest in the property
insured.
Effect of absence of insurable interest in property insured
• An insurance taken out by a person on property in which he has no
insurable interest is void.
• It has been held that fire insurance taken on property belonging to
another is void, although the insurer had full knowledge of the fact of
ownership and even if the insured subsequently acquired insurable
interest (Sec.19).
• In a case, the contract of lease provides that any fire insurance policy
obtained by the lessee over his merchandise inside the leased premises
without the consent of the lessor is deemed assigned or transferred to
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
26 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
•
•
the lessor. It held that such automatic assignment is void for being
contrary to law and public policy, hence, the insurer cannot be
compelled to pay the proceeds of the policy to the lessor who has no
interest in the property insured.
Where the insurance is invalidated on the ground that no insurable
interest exists, the premium is ordinarily returned to the insured unless
he is in pari delicto with the insurer.
In life insurance taken by a person on his own life, it is not necessary
for the beneficiary to have an insurable interest in the life insured
(Secs.10,19,184).
Doctrine of waiver or estoppel cannot be invoked since the public has
an interest in the matter independent of the consent or concurrence of
the parties.
But where the real intention of the insured was to insure his goods for
P15,000 but through the error or mistake of the insurer, the policy
issued for P15,000 was for the building in which the goods were stored
which building the insured never owned or had any insurable interest, it
was held in case of loss of the goods, the insured can recover.
Note: The above is a case where the insured’s lack of insurable interest
in property insured is not sufficient to avoid an insurance.
Measure of indemnity in insurance contracts
(1) Contracts of marine or fire insurance – They are contracts of
indemnity, the amount of insurance being limited by the value of the
interest to be protected. The real purpose of the contract is, in case of
loss, to place the insured in the same situation in which he was before
the loss subject to the terms and conditions of the policy. The amount
of indemnity may be determined after the loss (Sec.60) or is previously
fixed in the contract (Sec.61).
Pursuant to the general rule regarding indemnity, the amount of
insurance fixed in the policy of a marine or fire insurance is not the
exact measure of indemnity to which the insured is entitled, but the
maximum indemnity which he might obtain. The insured cannot
recover in excess of his actual loss.
a. In valued policies (Sec.61), however, the valuation of the
thing insured is conclusive between the parties thereto in the
adjustment of loss, if the insured has some interest at risk, and
b.
there is no fraud on his part (Secs.158,173), although it might
be proved that the actual value of the thing is less.
Similarly, the principle of indemnity cannot be invoked by the
insurer who agreed to repair or replace the thing insured with a
new one even though the cost of the undertaking may exceed
the original amount of the insurance (Sec.174).
(2) Liability insurance contracts – They are considered contracts of
indemnity against liability and not against loss (Sec.176). The insurer’s
promise is to pay the proceeds of the policy on behalf of the insured to
a third person to whom the insured is liable. If the insured suffers no
loss because his liability to the third person, for some reason, cannot be
enforced, the insurer has no obligation to pay the proceeds (Sec.176).
(3) Life insurance contracts – They are not contracts of indemnity. The
amount fixed payable at the death of the insured is not considered as
the true value of the thing insured because the life of a person is
priceless, but is simply the measure of indemnity which the insurer is
bound himself to pay the insured.
The amount for which a person is insured is governed by the amount of
premium that he contracted to pay. Life insurance is more of an
investment than indemnification protection against loss.
(4) Personal accident insurance contracts – They are not contracts of
indemnity. Life and limb are not susceptible to exact or uniform
valuation.
(5) Health insurance contracts – Health insurance contracts that provide a
specific periodic income to disabled persons are not contracts of
indemnity. But those that cover medical expenses are contracts of
indemnity. In these contracts, only medical expenses incurred by the
insured are paid.
(6) Health care agreement – Such an agreement with a health maintenance
organization (HMO) is in the nature of a non-life insurance which is
primarily a contract of indemnity. Payment should be made to the party
who incurred the expenses.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
27 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
SEC. 19. An interest in property insured must exist when the insurance takes
effect, and when the loss occurs, but need not exist in the meantime; and interest
in the life or health of a person insured must exist when the insurance takes
effects, but need not exist thereafter or when the loss occurs.
Time when insurable interest must exist
• The general stated in this section is applicable only to insurance on
property and not to life insurance except that on the life of the debtor.
(1) When insurance takes effect and loss occurs – Insurable interest in
property must exist at two (2) distinct times:
a. On the date of execution of the contract of insurance
b. On the date of the of the occurrence of the risk insured against
Otherwise, the policy is void. Rationale: If the insured has no more
interest in the property at the time of the injury, loss, or
destruction, he has suffered no loss.
Thus, if a fire occurs after the sale or alienation of the property,
former owner cannot recover on the policy.
(2) When insurance takes effect – In life insurance (Secs.179-180), the
insurable interest requirement is satisfied if the interest exists at the
time the policy is procured or took effect, even if it has ceased to exist
at the time of the insured’s death.
Thus, if a debtor whose life was insured by a creditor (Sec.10[c])
subsequently pays the debt, the insurance remains in force, provided the
former creditor continues to pay the premiums.
Under the law, health, accident, and disability insurance is deemed
included in the terms “life” and “non-life” insurance (Sec.193, par.8).
(3) When liability attaches – In liability insurance, questions of insurable
interest are not particularly important. It necessarily exists when the
liability of the insured to a third party attaches (Sec.172).
(4) Need not exist during intervening period – The purpose is to prevent
the issue of wagering policies. It is well-settled that in the absence of
special provision in the policy to the contrary, the alienation of insured
property will not defeat a recovery if the insured has subsequently
reacquired the property and possesses an insurable interest at time of
loss.
Ex.1. D insured his house on May 15, 2014 for a period of one year. C is an
unsecured creditor of D for the amount of P100,000 and he insured D’s
house on Sept.12, 2014 for the same amount. The house burned accidentally
on Sept.15, 2014.
C has no right to collect the proceeds of the insurance because being a
general creditor without any lien on D’s house, C had no insurable interest
when he insured it (Sec.16). But suppose D sold the house to C before
Sept.15, 2014 when the loss occurred. Not even then. C did not have
insurable interest in the house when the insurance took effect (Sec.19).
Ex.2. D issued a promissory note in favor of C to secure a loan of P100,000
payable within one (1) year. To add further protection, C insured D’s life
for the amount of the note for the year it was to run. D died on the 10th
month after paying the note at the end of the 9th month.
C cannot recover on the insurance. The principle of indemnity applies in
this as in property insurance. Neither can the estate of D recover since the
contract was purely between C and the insurer, unless the contrary is
stipulated.
But if the insurance was taken by D on his life for the benefit of C, the
payment of the debt did not invalidate the policy which would remain in
force for the full year for which the premium was paid. In this case, the
proceeds of the insurance would be paid to the estate of D.
Ex.3. X corporation insures the life of Y, its President, for P100,000 with X
as beneficiary. Thereafter, Y sells his stockholdings and severs connections
with X which continues to pay the annual premiums. During the currency of
the policy, Y dies. X is entitled to recover the insurance proceeds (Sec.19).
Existence of insurable interest when risk attaches
• It is sufficient that insurable interest exists at the time the risk attaches.
Ex. D, contemplating of buying B’s house, may take out a policy of
insurance under which the risk is to attach upon D’s purchase and
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
28 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
acquisition of inters tint he house. In this case, the requirement of good faith
and a real interest at the time of the loss is sufficient to satisfy the demand
of public policy.
Insurable interest in life and property
LIFE
(Save in life insurance
effected by creditor on life
of debtor) is unlimited
PROPERTY
Limited to the actual value
of the interest thereon
(Sec.17)
As to time when
insurable interest
must exist
Save above exception, it is
enough
that
insurable
interest exists at the time
the policy takes effect and
need not exist at the time
of the loss (Sec.181)
It is necessary that the
insurable interest “must
exist when the insurance
takes effect and when the
loss occurs, but need not
exist in the meantime
(Sec.19)
As to expectation
of benefit to be
derived
The expectation of benefit
to be derived from the
continued existence of life
need not have any legal
basis;
a
reasonable
probability is sufficient i.e.
one who is dependent on
another for support has an
insurable interest in the
latter’s life, even though
there is no legal right to
support.
An expectation of benefit, to
be
derived
from
the
continued existence of the
property insured must have
a basis of legal right, which
even if remote, constitutes
an insurable interest e.g. an
expectant heir cannot insure
the property he expects to
inherit. But a stockholder
may insure corporation
property though he has no
legal interest in such.
As to extent of
insurable interest
SEC. 20. Except in cases specified in the next four sections, and in the cases of
life, accident, and health insurance, a change of interest in any part of a thing
insured unaccompanied by a corresponding change of interest in the insurance,
suspends the insurance to an equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same person.
Effect, in general, of change of interest
• The mere transfer of a thing insured does not transfer the policy but
suspends it until the same person becomes the owner of both the policy
and the thing insured (Sec.58).
• Thus, a purchaser of insured property who does not take the precaution
to obtain a transfer of the policy of insurance, cannot, in case of loss,
recover upon such contract. The purchaser cannot recover because he
has no contract with the insurer. The seller (insured) cannot also
recover because having sold the property, he has no more insurable
interest in the same.
Note: The contract is not rendered void but is merely suspended by a
change of interest.
Change of interest covered by law
• The change of interest in Secs.21-24 means absolute transfer of the
property insured such as the conveyance of the property by means of an
absolute deed of sale.
• The interest in the property insured does not pass by mere execution of
a pledge or mortgage. Thus, it has been held that in a chattel mortgage,
there is no alienation within the meaning of the insurance law until the
mortgagee acquires a right to take possession of the property by default
of the mortgagor under the terms of the mortgage.
Exceptions to general rule
• The rule that change of interest suspends the insurance is subject to
exceptions:
(1) In life, health, and accident insurance (Sec.20);
(2) A change of interest in the thing insured after the occurrence
of an injury which results in a loss (Sec.21);
(3) A change of interest in one or more of several things,
separately insured by one policy (Sec.22);
(4) A change of interest by will or succession on the death of the
insured (Sec.23);
(5) A transfer of interest by one of several partners, joint owners,
or owners in common, who are jointly insured, to the others
(Sec.24);
(6) When a policy is so framed that it will inure to the benefit of
whomsoever, during the continuance of the risk, may become
the owner of the interest insured (Sec.57); and
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
29 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
(7) When there is an express prohibition against alienation in the
policy, in case of alienation, the contract of insurance is not
merely suspended but is avoided (Art.1306, Civil Code;
Sec.24).
Effect dependent
on divisibility of
contract
SEC. 21. A change of interest in a thing insured, after the occurrence of an injury
which results in a loss, does not affect the right of the insured to indemnity for the
loss.
Change of interest in a thing insured after loss
• After a loss has happened, the liability of the insurer becomes fixed.
The insured has a right to assign his claim against the insurer as freely
as any other money claim. This right is absolute and cannot be
delimited by agreement (See.83,173).The insured has also the absolute
right to transfer the thing insured after the occurrence of the loss. Such
change of interest does not affect his right to indemnity for the loss
(Sec.21).
Note: Sec.20 refers to change of interest in the thing insured before loss
has occurred.
SEC. 22. A change of interest in one or more several distinct things, separately
insured by one policy, does not avoid the insurance as to the others.
Change of interest in one or more of several distinct things, separately
insured by one policy
• It is important to make a distinction between a divisible contract and an
indivisible contract (Art. 1420, Civil Code).
Divisible
Indivisible
•
•
•
• The cause or
consideration is made up of
several parts;
• Things are “separately
insured in one policy” and
the violation of a condition
which avoids the policy
with respect to one or more
of the things does not affect
the others.
• The cause or consideration
is entire and single;
• Things are insured under
“one policy” for a gross
sum and for an entire
premium so that a change
of interest in one or more
of the things will also avoid
the insurance as to the
others.
Whether a contract is entire or severable is a question of intention to be
determined by the language employed by the parties.
Where only one premium was paid for the entire shipment of goods
(which are not separately valued) are loaded on two (2) different
vessels does not make the contract several and divisible as to the items
insured.
It has been held that where the amount of the insurance agreed upon
was merely apportioned among the various items insured to limit the
extent of the risk of the insurer as regards each item, the contract of
insurance is still indivisible.
SEC. 23. A change of interest, by will or succession, on the death of the insured,
does not avoid an insurance; and his interest in the insurance passes to the person
taking his interest in the thing insured.
Change of interest by death of insured
• Here, the insurance on property passes automatically, on the death of
the insured, to the heir, legatee or devisee who acquired interest in the
thing insured. The rights to the succession are transmitted from the
moment of the death of the decedent (Art.777, Civil Code).
SEC. 24. A transfer of interest by one of several partners, joint owners, or owners
in common, who are jointly insured, to the others, does not avoid an insurance
even though it has been agreed that the insurance shall cease upon an alienation
of the thing insured.
Transfer of interest by one of the several partners, etc. jointly insured
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
30 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
(1) Effect where transfer is to the others – Will not avoid the insurance.
The rule is the same even if there is a stipulation that the insurance shall
cease upon an alienation of the thing insured.
(2) Reason for the rule – Each partner, etc. is interested in the whole
property and the hazard is not increased because the purchasing partner
has acquired a greater interest in the property by a transfer of his copartners’ share. The transfer does not affect the risk because no new
party is brought into contractual relationship with the insurer.
(3) Exception to the rule – But a policy will be avoided by a sale of an
interest in partnership property by the partner to one of his co-partners,
without the consent of the insurer and before the loss occurs, where the
policy contains the condition “that in case of any sale, transfer, or
change of title of any property insured by this company, or of any
undivided interest therein, such insurance will be void and cease.”
(4) Effect where transfer is to strangers – It is alienation or transfer to a
stranger or third person that will avoid the policy. A sale by a partner of
his interest to a stranger ends the contract of insurance as to him but
does not affect the insurance as to the others.
Ex. A policy of fire insurance was issued to partnership X under its
firm name. The policy makes no provision for changes in the personnel
of the firm.
The subsequent withdrawal of a partner or admission of a new partner
will not affect the validity of the policy. Under Sec.26, the insurance
continues despite the changes in the firm’s membership. The policy
was taken in the name of the partnership X which has a juridical
personality separate and distinct form that of each of its members
(Art.1768,CC)
SEC. 25. Every stipulation in a policy of insurance for the payment of loss
whether the person insured has or has not any interest in the property insured, or
that the policy shall be received as proof of such interest, and every policy
executed by way of gaming or wagering, is void.
Stipulations prohibited in an insurance policy
(1) Stipulation for the payment of loss whether the person insured has or
has not any interest in the subject matter of the insurance – A policy
issued to a person without interest in the subject matter of the contract
is a mere wager policy or contract and is void.
A wager policy is a pretended insurance where the insured has no
interest in the thing insured and can sustain no loss by the happening of
the misfortunes insured against.
Note: The law, however, makes an exception in the cases mentioned in
Sec.181 regarding life insurance.
(2) Stipulation that the policy shall be received as proof of insurable
interest – Whether or not insurable interest exists does not depend upon
the contract of insurance or the stipulations therein. The insurer can
always show lack of insurable interest after the issuance of a policy of
insurance (Sec.83).
The defense of absence of insurable interest is available only to the
insurer being the only party to the insurance contract who has a
legitimate interest in raising the defense. It may be raised by and for the
benefit of the insurer alone.
Wagering or gaming policies void
• A contract of insurance is void for illegality unless the insured has an
insurable interest in the subject matter insured.
• All insurance must not be a mere bet upon a future event.
• Wagers suffer no loss from the occurrence of the contingent event; on
the contrary, they actually profit from it. The insurable interest
requirement intends to deter the insured from the temptation to bring
about by unnatural means the results of the contingent event.
TITLE 4
CONCEALMENT
SEC 26.
A neglect to communicate that which a party knows and ought to
communicate, is called a CONCEALMENT.
Notes:
Requisites (KB/NW-FC/NM-AF)
1. Party knows the fact
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
31 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
2. Bound to disclose such fact
3. There is no warranty of the fact concealed
4. The other party has no means of ascertaining such fact
• Presence of bad faith – not necessary
Reason for rule
Four primary concerns of parties in the contract:
1. Correct estimation of the risk
2. Precise limitation of the risk
3. Control of the risk after assumed
4. Determining whether loss occurred and amount of loss
•
•
Nature of an insurance contract is that it is done in good faith
(Rodriguez)
Fact concealed – MUST be MATERIAL to the risk
Devices for ascertaining and controlling risk and loss
1. Concealment and representations – enabling the insurer to secure the
same information with respect to the risk that was possessed by the
applicant for insurance, so that he might be equally capable of forming
a just estimate of its quality
2. Warranties and conditions – involve facts the existence of which shows
the risk to be greater than that intended to be assumed and operates to
create in the insurer the power to extinguish the legal relations already
created
3. Exceptions – making more definite the coverage indicated by the
general description of the risk by excluding certain specified tasks that
would otherwise have been included under the general language
describing the risk assumed
4. Executory warranties and conditions – undertaking that certain
conditions should or should not exist in the future; enable the insurer to
rescind the contract in case subsequent events increased the risk to such
an extent that he is no longer willing to bear
5. Conditions precedent – ex. Conditions requiring immediate notice;
action be brought within a limited amount of time
SEC 27.
A concealment whether intentional or unintentional:
- entitles the injured party to rescind a contract of insurance
Notes:
• Insurance Contracts are uberrimae fidae (of utmost good faith)
• Duty is on both insured and insurer
o Insured: Alone knows the full circumstances of the subject
matter
o Insurer: Dominant bargaining position carries with it stricter
responsibility
• Existence of fraud not required. Bad faith is not required.
• Rescission is OPTIONAL on the part of the injured party
• Reason for the provision: the party is misled or deceived into accepting
the risk
• Argente v. West Coast Life
Principal question to determine whether there is concealment
o “Was the insurer misled or deceived into entering a contract
obligation or in fixing the premium of insurance by a
withholding of material information or facts within the
assured’s knowledge or presumed knowledge?”
o Must be material to the contract
• In the Philippines: Applies to all kinds of insurance
•
• In the US: Applies only to marine insurance
SEC 28.
Each party to a contract of insurance:
- must communicated to the other – in good faith
- all facts within his knowledge which
• are material to the contract and
• as to which he makes no warranty, and
• which the other has not the means of ascertaining
Notes:
Matters must be communicated even in the absence of inquiry:
All facts within the party’s knowledge only when
• Material to the contract
• Other has not the means of ascertaining facts
• Party with the duty to communicate makes no warranty
Knowledge:
• Must be proven by the party claiming
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
32 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
Must be at the time the insurance takes effect
Test of Materiality
• If the applicant is aware of the existence of some circumstances which
he knows would influence the insurer in acting upon his application,
good faith requires him to disclose that circumstance, though asked
• It must be a fact of such nature that had the insurer known of it, it
would not have accepted the risk or would have demanded a higher
premium or different terms
Insurance company does not have an obligation to verify the statements made by
the insured in his application before issuing the policy.
It has a right to rely on the statements of the insured as to material facts.
“No means of Ascertaining”
• If the other party merely neglects to make inquiries – the right to
information is waived
When there is a warranty such fact is covered by such warranty – it is
superfluous to require disclosure
SEC. 29
An intentional and fraudulent omission:
- on the part of one insured,
- to communicate information of matters
o proving or tending to prove the falsity
entitles the insurer to rescind.
Notes:
• Facts of matters covered by the warranty does not have to be disclosed
BUT matters proving or tending to prove the FALSITY of the
warranty must be communicated
o There is a difference between falsity of warranty and violation
of warranty
o
• Must be INTENTIONAL and FRAUDULENT for the contract to be
rescinded
Ex. Failure to communicate that the ship’s equipment is out of
order entitles the insurer to rescind since it tends to prove the
falsity of the warranty that the ship is seaworthy.
o In marine insurance, the warranty implied is that the ship is
seaworthy
NOTE: Omission is on the part of the insured
o
•
SEC 30.
Neither party to a contract of insurance is bound to communicate
information of the matters following,
EXCEPT in answer to the inquiries of the other
1. Those which the other knows
2. Those which, in the exercise of ordinary care, the other ought to
know, and of which the former has no reason to suppose him ignorant
3. Those of which the other waives communication
4. Those which prove or tend to prove the existence of a risk excluded by
a warranty, and which are not otherwise material
5. Those which relate to a risk excepted from the policy and which are
not otherwise material
Notes:
• Direct questions are considered material therefore the insured is
required to make full and true disclosure of questions asked.
• Failure of an apparently complete answer to make full disclosure
will avoid the policy
• However, an answer incomplete on its face will NOT avoid the policy
in the absence of bad faith
Ex. When asked whether the property is encumbered and for
what amount, answer discloses one mortgage when in fact
there are two – avoids the policy
o To the same question, merely states that it is encumbered
without stating amount – issue of policy without further
inquiry is a waiver of the omission to state amount
• No duty to make disclosure:
o Matters known to or right to be known by insurer, of which he
waives disclosure
o Risks excepted from policy
o Nature or amount of insured’s interest need not be disclosed
unless in answer to an inquiry
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
33 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
SEC 31.
Materiality is to be determined
- NOT by the event,
- but solely by the probable and reasonable influence of the facts
- upon the party to whom the communication is due,
in forming his estimate of the disadvantages of the proposed contract,
OR in making his inquiries.
Notes:
• Test of materiality
o Effect which the knowledge of the fact in question would have
on the making of the contract. It is sufficient that it would
influence the parties in making the contract
o Matter must be determined ultimately by the court
• Effect on insurer: a probable and reasonable influence upon the
insurer in assessing the risk involved and in making or omitting further
inquiries, and cause him to either reject the risk or to accept it only at a
higher premium or on different terms
• It is sufficient that the non-disclosure misled the insurer in forming his
estimates of the risk or in making inquiries
• In case of avoided insurance, return premiums
• The nature of facts not conveyed to the insurer may be such that failure
of the insured to communicate must have been intentional rather than
inadvertent
• Insured cannot be guilty of concealment where the fact concealed is not
material
• If information acquired AFTER contract becomes binding and effective
o No duty to disclose information even if the policy is yet to
issue
o Concealment must take place at the time the contract is
entered
• If information acquired BEFORE contract becomes effective
o There is a duty to disclose
SEC 32.
Each party to a contract of insurance is bound to know:
- all the general causes
- which are open to his inquiry, equally with that of the other, and
- which may affect the political or material perils contemplated; and
- all general usages of trade
Notes:
• Insured need not disclosed public events such as that a nation is at war
o Sources of information equally open to insurer who is
presumed to know
• Insurer is also charged with the knowledge of general usages of trade
o Rules of navigation, kind of seasons, risks connected with
navigation
• Such information are equally presumed to be known by both parties.
SEC 33.
The right to information of material facts may be waived, either:
- By terms of insurance or
- By neglect to make inquiries as to such facts
o Where they are distinctly implied in other facts of which
information is communicated
Notes:
• Right to info may be waived:
o Expressly
o Impliedly
• If the applicant has answered the questions in the application, he is
justified in assuming that no further information is desired.
• No waiver where the failure to make further inquiries was due to
concealment of the insured
• Ng Zee v. Asian Crusader Life Assurance Corp.
o Wrong ruling; not applicable as fraud need not be proven
o Whether upon the face of the application, a question appears
to be not answered at all or to be imperfectly answered and the
insurer issues a policy without any further inquiry, it waives
the imperfection of the answer and rendered the omission to
answer more fully immaterial
SEC 34.
Information of the nature or amount of the interest of one insured
- Need not be communicated
UNLESS in answer to an inquiry,
EXCEPT as prescribed by Section 51
- 51(e) – must specify the interest in the property insured if not absolute
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
34 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
owner
•
Notes:
GR: Nature or amount of interest need not be communicated
EX:
1. Sec 51: Policy must specify the interest of the insured in the property
only when he is not the absolute owner
o Example: Trustee, mortgagee or building contractor must
communicate EVEN IF no inquiry is made by the insurer
2. When the insurer makes inquiry from the insured
SEC 35.
Neither party to a contract of insurance
- is bound to communicate, EVEN upon inquiry,
- information of his own judgment upon the matters in question
Notes:
• Duty to disclose is confined to facts, opinions not covered
TITLE 5
REPRESENTATION
SEC 36. A representation may be oral or written
Notes:
• Representations
o Factual statements made by the insured at the time of, or prior
to, the issuance of the policy to induce the insurer to enter into
the insurance contract
• Misrepresentation (all 3 elements must concur)
o A fact which is untrue
o Stated:
! With knowledge that it is untrue with intent to
deceive OR
! Stated positively as true without knowing it to be true
and which has a tendency to mislead
o Where such fact in either case is material to the risk
•
•
•
•
•
•
Renders the contract VOIDABLE:
o At the option of insurer
o Regardless of intent
Misrepresentation may be viewed as an active form of concealment
It is the duty of the person applying for insurance to give all the
information necessary regarding the risk
Information given (which can be communicated in any manner) forms
the basis of the contract
Representations are collateral inducements
o Made to influence the insurer to accept the risk
o Not part of the contact unless expressly made so
Insurer cannot decline to pay for the loss of a white painted house or
ship because it was described as painted green, although identical in
description with subject of loss
Once its written in a contract, it becomes a warranty or condition
SEC 37.
A representation may be made:
- At the time of, OR
- Before, issuance of policy
Notes:
Very nature of representation is that it precedes the execution of the contract.
Argente vs. West Coast life Ins., Co.
• Concealment is equivalent to a false representation that such fact does
not exist
• Terms have been used interchangeably
Misrepresentation
Concealment
Active form of deceit
Because there is an oral or written
false statement to induce
Passive form of deceit
Because there is neglect or failure
to disclose a material fact
No need to distinguish since the rules applicable to both are similar:
• Both requires the fact to concealed or misrepresented to be material
• Both entitles the injured party to rescind the contract at his option
• Both may be committed intentionally or unintentionally
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
35 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Representation may be performed after the issuance of the policy (Sec. 39)
SEC 38.
The language of a representation is to be interpreted by the same rules as the
language of contracts
Undertaking by insured inserted in policy but not specifically
made in a warranty is also a promissory representation
o A promissory representation is substantially a condition
or warranty
IF Representation is one of
o
•
Fact
Notes:
• Constructed liberally in favor of insured
• Representation need ONLY to be substantially true and need not be
literally true and accurate in every aspect
• Warranties must be literally true, otherwise, the contract will fail
• Examples:
o Use of liquor = habitual drinking
o Free from illness = true despite inflammation of eyes
o Illness = serious ailments
• Nature of information asked – such that no human being could, with
safety, undertake to answer correctly and warrant the correctness of his
answers
SEC 39.
A representation as to the future is to be deemed a promise:
UNLESS it appears that it was merely a statement of belief or expectation.
Notes:
• Kinds of Representation
o Oral OR Written
o Made before OR during the issuance of the policy
o Affirmative OR Promissory
• Affirmative representation
o Allegation as to the existence or non-existence of a fact when
the contract begins
o Ex. He is in good health
• Promissory representation: Any promise to be fulfilled after the
contract has come into existence or any statement concerning what is to
happen during the existence of the insurance
o Promise made in connection but not incorporated in the policy
! Promise made with fraudulent intent will serve to
defeat the insurance
Must prove to be false and
material
Need not be in bad faith
(intent to deceive presumed)
•
•
•
Mere Expression of Opinion
Must prove to be false and
material
Must be made in bad faith
(intention to deceive)
Deemed to be a mere expression of opinion: Representation as to a
future event or condition over which the insured has no control
If the promise is oral, the insurer may not be allowed to prove it by the
operation of the rule of evidence forbidding the admission of parol
testimony to add prior or contemporaneous terms to a written
instrument.
The promise, however, may be proved for a different purpose, that is to
prove that the insured made the promise in bad faith.
SEC 40.
A representation
- Cannot qualify an express provision in a contract of insurance
- BUT it may qualify an implied warranty
Notes:
• Representation is a mere collateral inducement to a contract – it is not
part of the contract that is why it cannot qualify its express provisions
•
SEC 41.
A representation may be altered or withdrawn:
before the insurance is effected,
but NOT afterwards
Notes:
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
36 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
•
May be done ONLY before the insurance is effected:
Since the insurer has not yet been induced
If done during such time – policy is NOT rescissible anymore
SEC 42.
A representation must be presumed to refer to the date on which the contract
goes in effect.
- Which he has upon the subject, and which he believes to be true,
- With the explanation that he does so on the information of others;
OR he may submit the information, in its whole extent, to the insurer
In NEITHER case is he responsible for its truth,
UNLESS it proceeds from an agent of the insured, whose duty it is to give the
information.
Notes:
• There is no false representation if it is true at the time the contract goes
into effect but false at the time it was made
• The contract can be rescinded ONLY when it is false at the time when
the contract is effected
SEC 43.
When a person insured has no personal knowledge of a fact
He may nevertheless repeat information
- Which he has upon the subject, and which he believes to be true,
- With the explanation that he does so on the information of others;
OR he may submit the information, in its whole extent, to the insurer
In NEITHER case is he responsible for its truth,
UNLESS it proceeds from an agent of the insured, whose duty it is to give the
information.
Notes:
• The insured is given discretion to communicate what he knows of a
matter which he as no personal knowledge
o GR: If it turns out to be FALSE – he is not responsible
o EX: He is responsible IF the information proceeds from an
agent of the insured, whose duty is to give information to his
principal
Rule on agency:
o Knowledge of the agent is knowledge of the principal
o Applies to insured and insurer
o Failure to communicate: contract will be avoided
NOTE: If the insured receives information material to the risk, or has
knowledge of a loss, he ought to communicate
•
SEC 44.
A representation is deemed to be false when the facts fail to correspond with
its assertions or stipulations
Notes:
• Unlike warranties, representation are not required to be literally true,
only be substantially true
• Substantial AND material misrepresentation, avoids the contract
o EX: marine insurance – insurer is required to state the exact
and whole truth
• The representation is substantially true and valid - EVEN if there are
some discrepancies which are minor or not material to the risk
• A representation written in the policy which could be interpreted as a
promise will be construed as affirmative representation when possible
to save the policy
SEC 45.
If a representation is false in a material point, whether affirmative or
promissory:
the injured party is entitled to rescind the contract
from the time when the representation becomes false.
The right to rescind granted by this Code to the insurer is waived:
by the acceptance of premium payments
DESPITE knowledge of the ground for rescission
Notes:
• Fraud not essential for right to rescind
• Representation may be intentional or unintentional
• Collusion between agent and insured will vitiate the policy
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
37 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
SEC 46.
The materiality of a representation is determined by the same rules as the
materiality of concealment
Notes:
•
•
•
•
Materiality is a judicial question
Concealment and misrepresentation give right to rescind
Rules apply both to the insurer and insured
See discussion in SEC 31
SEC 47.
The provisions of this chapter apply as well to a modification of a contract
of insurance as to its original formation
Notes:
• The rules on concealment and misrepresentation applies to both the:
o Original execution of the insurance policy
o Any alteration or modification of the contract
SEC 48.
Whenever a right to rescind a contract of insurance is given to the insurer:
such right must be exercised previous to the commencement of an action on the
contract.
After a policy of LIFE insurance made payable on the death of the insured:
shall have been in force during the lifetime of the insured
for a period of 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.
Notes:
In NON-Life Policy
• Insurer may rescind even after the loss and filing of claim provided it is
done BEFORE the insured files an action against the insurer
• However, a defense to an action that it was secured through
concealment or misrepresentation
o is not in a nature of an action to rescind
o Hence, not barred by the provision
IN life insurance,
• The defenses are available ONLY during the first two years of a life
insurance policy
• Incontestable clause requisites:
o It is a life insurance policy
o Payable on death of insured
o In force during the lifetime of the insured for at least 2 years
from its date of issue or of its last reinstatement
(Note: Period may be shortened but cannot be extended)
• When it becomes incontestable insurer cannot claim that policy is:
o Void ab initio (means voidable) due to fraud in inducement;
o Rescissible due to concealment or misrepresentation
• Defenses not barred by incontestability clause:
o Lack of insurable interest
o Cause of death is an excepted risk
o Non-payment of premium
o Conditions relating to military or naval service violated
o Fraud is of a particularly vicious type (scheme to murder,
insured substitutes a person for exam, beneficiary kills
insured)
o Beneficiary failed to furnish proof of death or to comply with
any condition imposed by policy after loss happened
o Action not brought within time specified
TITLE 6
THE POLICY
SEC. 49. The written instrument in which a contract of insurance is set forth, is
called a policy of insurance.
SEC. 50. The policy shall be in printed form which may contain blank spaces;
and any work, phrase, clause, mark, sign, symbol, signature, number, or word
necessary to complete the contract of insurance shall be written on the blank
spaces provided therein.
Any rider, clause, warranty, or endorsement purporting to be part of the contract
of insurance and which is pasted or attached to said policy is not binding on the
insured, unless the descriptive title or name of the rider, clause, warranty or
endorsement is also mentioned and written on the blank spaces provided in the
policy.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
38 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Unless applied for by the insured or owner, any rider, clause, warranty, or
endorsement issued after the original policy shall be countersigned by the insured
or owner, which countersignature shall be taken as his agreement to the contents
of such rider, clause, warranty, or endorsement.
Notwithstanding the foregoing, the policy may be in electronic form subject to
the pertinent provisions of Republic Act No. 8792, otherwise known as the
“Electronic Commerce Act” and to such rules and regulations as may be
prescribed by the Commissioner.
POLICY OF INSURANCE DEFINED.
•
•
It is the written document embodying the terms and stipulations of
the contract of insurance between the insured and the insurer.
Signature of the parties
•
•
General Rule: The policy of insurance is signed only by the
insurer or his duly authorized agent.
Exception: Where express warranties are contained in a separate
instrument forming part of the policy, the law requires that the
instrument must be signed by the insured.
Policy controls terms of insurance contract
•
•
•
The terms of the insurance policy constitute the measure of the
insurer’s liability. In order to recover, the insured must show
himself within the terms.
In the absence of fraud or mistake, a policy of insurance, upon
acceptance, constitutes a valid and binding contract, superseding
all preliminary agreements and negotiations.
The compliance with the insured with the terms of the policy is a
condition precedent to the right of recovery.
Policy a contract of “adhesion”
•
The terms are drafted and imposed by the insurer. Ordinarily,
contracts are freely negotiated by parties with roughly equivalent
•
bargaining power. However, this classical model is far removed
from the reality of the insurance business.
o Insurance contracts are drafted with the aid of skillful and
highly paid legal talent, from which no deviation desired
by an applicant will be permitted.
o Except for riders which may later be inserted, the insured
sees the contract in its final form and has had no voice in
the selection or arrangement of the words employed
therein.
o The insured cannot negotiate the substance of the
contract with the insurer. The provisions are normally
drafted by industry experts.
Since the parties do not bargain on equal footing, the weaker
party’s participation is reduced to the alternative “to take it or leave
it.” Consequently, where the language use in an insurance contract
or application is such as to create ambiguity, the same should be
resolved liberally in favor of the insured and strictly against the
party responsible therefor. The reason being, to afford the greatest
protection to the insured.
o Construe contracts as to preclude the insurer from evading
compliance with its just obligations.
o Forfeitures are not favored and that any construction
which would result in the forfeiture of the policy benefits
for the person claiming thereunder will be avoided if it is
possible to construe the policy in a manner which would
permit recovery.
o This rule that insurance contracts are to be construed
liberally in favor of the insured and strictly against the
insurer applies to suretyship agreements.
If the terms of the contract are clear and unambiguous, there is no
room for construction and such terms cannot be enlarged or
diminished by judicial construction.
o The courts will only rule out blind adherence to terms
where facts and circumstances will show that they are
basically one-sided.
Policy different from contract of insurance itself
•
The policy if the formal written instrument evidencing the contract
of insurance. It is the law between them.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
39 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
Insurance policies are generally required in standard forms as
approved by the Insurance Commissioner under Sec. 226.
Every contract of insurance in the Philippines must be evidenced
by a policy and that policy must be in the form previously
approved by the Insurance Commissioner.
Form of contract of insurance
•
•
•
•
The contract may be informal, e.g. as a binding slip, or a written
application informally accepted.
The contract may be formal, being the carefully drawn written
policy in customary use.
The policy must be in written form. Any word, sign, symbol, etc.
necessary to complete the contract of insurance shall be written on
the blank spaces provided in the policy.
In case of conflict between the written and printed portions of a
policy, the written portion prevails.
•
•
•
Perfection of insurance contract
•
•
•
It must, like other contracts, be assented to by the parties either in
person or by their agents.
Assent is manifested by the meeting of the offer and the acceptance
upon the thing and cause which are to constitute the contract.
If an application has not been either accepted or rejected, there is
not contract of insurance yet as it is merely an offer or proposal.
o Mere signing of an application and payment of the first
premium do not bind the insurer to issue a policy where
there is no evidence of any contract between the parties
that such acts should constitute a contract of insurance.
o The contract is not perfected where the applicant for life
insurance dies before its approval or it does not appear
that the acceptance of the application ever came to the
knowledge of the applicant.
o Acceptance of the contract unconditional. But it need not
be by formal act. Reception and retention of the policy
without objection beyond a reasonable time may be
deemed to be an acceptance. Retention by the insurer of
the premium for an unreasonable length of time may
constitute an acceptance.
The application may be so drafted that the insurance
became effective on its signing by the prospective insured
until the insurance is terminated by rejection of the
application. The insurer may expressly limit the duration
of the temporary insurance.
o The contract, to be binding from the date of the
application, must have been a completed contract, one
that leaves nothing to be done, nothing to be completed,
nothing to be passed upon, or determined, before it shall
take effect.
The parties may impose additional conditions precedent to the
validity of the policy as a contract as they see fit.
Usual conditions found in the application for insurance contract.
o That the contract shall not become binding until the policy
is delivered and;
o The first premium paid.
Until the conditions are fulfilled, the policy is of no binding effect.
o Where the premium has been previously paid, the contract
is perfected upon approval fo the application although the
policy has not yet been issued, unless there is a stipulation
to the contrary.
Binding receipt is sometimes issued and is intended to be merely a
provisional or temporary insurance contract and to be binding only
upon compliance with the said conditions. In life insurance a
binding slip does not insure by itself.
o Cover notes may be issued to bind the Insurance
temporarily pending the issuance of the policy.
o
•
Offer and acceptance in insurance contract
•
•
•
Applicant usually makes the offer to the insurer through an
application for insurance
In property and liability insurance. – It is the insured who
technically makes and offer to the insurer. The offer is usually
accepted by an insurance agent.
In life and health insurance. – The situation depends upon whether
the insured pays the premium at the time he applies for the
insurance.
o If he does not pay the premium, his application is
considered an invitation to the insurer to make an offer.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
40 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
If he pays the premium with his application, his
application will be considered an offer.
Life and health insurance agents do not have the authority to bind
immediately the insurers they represent. Instead, they customarily
issue a binding receipt that makes the coverage effective on
o Date of the application, or
o Date of the medical examination.
The binding receipt is a conditional acceptance by the insurer.
If the application constitutes and offer. A policy issued strictly in
accordance with the offer is an acceptance of the offer that perfects
the contract.
If the policy does not conform to the application, it is an offer to
the insured which he may accept or reject.
o
•
•
•
•
•
Importance of delivery of policy
•
•
•
•
•
Delivery – act of putting the insurance policy (the physical
document) into the possession of the insured.
The delivery is important as
o Evidence of the making of a contract and its terms
o Communication of the insurer’s acceptance of the
insured’s offer.
Delivery may also affect the term of the coverage.
o e.g. if a contract of insurance provides that the policy is to
expire after 1 year, the delivery becomes the important
fact for determining when the policy period ends.
However, the delivery of a policy is no a prerequisite to a valid
contract of insurance. The contract may be completed prior to the
delivery or without delivery depending on the intention of the
parties.
o The policy may also contain a provision that states that
the insurance is not effective until the delivery of the
policy.
Delivery has significance as the “decisive act that ordinarily marks
the end of the insurer’s opportunity to decline coverage.”
Modes of delivery of policy
•
Actual manual transfer of the policy is not a prerequisite to its
validity unless the parties have so agreed in clear language.
•
Constructive delivery may be sufficient.
o Where no further conditions are to be fulfilled, a policy of
insurance may be constructively delivered when it is
deposited in the mail duly directed to the insured or his
agent.
W/N the policy was delivered depends, not upon its manual
possession by the insured but rather upon the intention of the
parties which may be shown by their acts or words.
o But possession by the insured raises the presumption that
the policy was delivered to the insured, while possession
by the insurer is prima facie evidence that no delivery was
made.
o If the application contains a provision that the insurance
shall not be effective until the delivery of the policy,
delivery is essential to the consummation of the contract.
(Illustrative Case): While the application for insurance states that,
the policy must be delivered manually to the insured before the
insurance becomes effective, the receipt for the premium paid
makes the insurance effective upon the issuance of the policy.
o In this case the insured paid the premiums before the
policy was manually delivered to him. He was given a
receipt for the payment.
o The statement in the application that the policy must be
delivered manually before the insurance became effective
was modified by the reference to the receipt, which
receipt made the insurance effective upon the issuance of
the policy by the home office, subject to the condition that
the insured was in good health when the policy was
issued.
Delivery to insurer’s agent as delivery to insured
•
•
•
Is the delivery to the agent of the insurance company delivery to
the insured? There has been much conflict of view on the question.
(NO) Beneficiary cannot recover. – The insurance agent is not his
agent.
(YES) Beneficiary can recover. – The contract is deemed complete
when the policy has been delivered to the insurance agent.
o The insured having complied with every condition
required of him, actual delivery to him is no essential to
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
41 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
give the policy binding effect.
A contrary rule would be financially unfair to the
beneficiary where the amount of the premium is
computed from the date of the application. Because, in
effect, the insured paid a premium for a period during
which he did not actually receive any protection.
Effect of delivery of policy
•
•
•
If there is conditional delivery of an insurance policy, nonperformance of the condition precedent prevents the contract from
taking effect.
The unconditional delivery of an insurance policy corresponding to
the terms of the application ordinarily consummates the contract,
and the policy as delivered becomes the final contract between the
parties.
But the insurer cannot be presumed to have extended credit from
the mere fact of unconditional delivery of the insurance policy
without the prepayment of premium.
o In the absence of any clear agreement granting credit
extension, the policy will lapse if the premium is not paid,
at the time and in the manner specified in the policy.
Attached papers on insurance policy
•
•
•
Rider in a contract of insurance
•
•
•
•
A rider is a small printed or typed stipulation contained on a slip of
paper attached to the policy and forming an integral part of the
policy.
Riders constitute additional stipulations between the parties. It is a
part of the contract to the same extent and with like effect as if
actually embodied in the policy.
The necessity for riders is found in the fact that in the conduct of
insurance business, it often becomes necessary to add a new
provision to a policy, or to modify or waive an existing provision,
or to make any desired change in the policy.
When there is an inconsistency between a rider and the printed
stipulations in the policy, the rider prevails, as being a more
deliberate expression of the agreement of the contracting parties.
(This principle applies to the interpretation of clauses, warranties,
or indorsements which are attached to policies to vary their terms)
•
Generally, the rider, slip or other paper becomes a part of a
contract or policy of insurance if properly and sufficiently attached
or referred to therein in a manner as to leave no doubt as to the
intention of the parties in such respect.
Section 226: no rider shall be attached to, printed, or stamped upon
a policy of insurance unless the form of such rider has been
approved by the Insurance Commissioner.
A rider, clause, warranty or endorsement is not binding on the
insured unless the descriptive title or name of the rider, etc. is also
mentioned and written on the blank spaces provided in the
policy.
o Warranties are inserted or attached to a policy to
eliminate specific potential increases of hazard owing to
(1) actions of the insured or (2) condition of the property.
o A clause is an agreement between the insurer and the
insured on certain matter relating to the liability of the
insurer in case of loss.
o An endorsement is any provision added to an insurance
contract altering its scope or application. (Like extending
the perils covered)
! An endorsement may be in the nature of a permit
such as one authorizing the removal of the
insured property and providing for coverage in
another location.
As to the lack of signature
o General Rule: If the rider is physically attached to a
policy of insurance contemporaneously with its execution
and delivered to the insured so attached, and sufficient
reference is made in the policy, the fact that it is without
the signature of the insurer or of the insured will not
prevent its inclusion and construction as a part of the
insurance contract.
! Same rule as above if the rider, although issued
after the original policy, was applied for by the
insured or owner.
o Exception: The countersignature of the insured or owner
is required to any rider, etc. not applied for by him if
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
42 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
issued after the delivery of the policy. The
countersignature shall be taken as his agreement to the
contents of the matter so attached.
Effect of failure of insured to read policy
•
•
•
•
Majority Rule: The fact that it is customary for insured persons to
accept policies without reading is judicially recognized. Such
acceptance is not negligence per se. Most courts would hold that
the insured’s acceptance and retention of the policy unread is not
such laches as will defeat his right to reformation.
o Basis: the insurance contracts are contracts of adhesion.
Minority Rule: Courts apply to insurance contracts the rule of
general contract law that one who accepts a contractual instrument
is conclusively presumed to know and assent to its contents. The
insured has the duty to read the policy and is bound by his
contract as written whether he reads it or not.
Exceptions to the Minority Rule:
o Where the insured could not have discovered the
erroneous statement by such reading.
o Insured’s failure to read the policy is excused where he is
induced by the fraud of the agent of the insurer no to read
his policy.
o Insured’s failure to read the policy should be overlooked
if the insured is illiterate or unable to read English.
o Where the contract is long, complicated and difficult to
understand even if read.
Trends in modern cases. – There is an increased willingness to
protect insureds and other consumers who would suffer forfeiture.
o An insured relies not upon the text of the policies but on
the general descriptions of the coverage provided by the
insurer and its agents during the time he is considering
whether to submit an application.
o Absent a special request, an insured will not see the text
of the policy until after the application has been submitted
and the first premium paid.
Insurer’s duty to explain the policy
•
•
•
If the terms of an insurance policy are clear, unambiguous, and
explicit, the insurer has no affirmative duty to explain the policy or
its exclusions to the insured.
Caveats to the abovementioned rule
o The doctrine of “reasonable expectations” can operate to
impose de facto a duty on the insurer to explain the
policy’s coverage to the insured.
! If the insurer had provided an explanation of the
coverage, the insured’s expectations of different
coverage
would
have
been
rendered
unreasonable.
o In the area of Motor Vehicle Insurance courts have
sometimes imposed a duty on the insurer to explain the
options to the insured.
o Agents owe their customers a duty to exercise the skill
and care that a reasonable agent would exercise in the
circumstances.
! This duty encompasses and obligation to explain
to the customer the kinds of coverage available
and to help the insured in choosing an
appropriate coverage.
Contractual rights of insured after denial of coverage.
o When the insured disputes a denial of coverage, the duty
of good faith and fair dealing may impose an obligation
on the insurer to alert the insured to his rights.
! For example, if an insurer denies the claim of
insured under a health policy the insurer must
inform the insured of his contractual right to
impartial review and arbitration (if the right
exists).
o If the insurer had reason to know that the insured was
unaware of his rights, the insurer must explain such
available rights.
SEC. 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or running policies;
(c) The premium, or if the insurance is of a character where the exact premium
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
43 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
is only determinable upon the termination of the contract, a statement of the
basis and rates upon which the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute owner
thereof; and
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
•
•
Contents of the policy
•
•
•
•
Names of the parties are essential. But the mere fact that the name
of the insured was incorrectly spelled is of no importance whatever,
provided that the identity of the party can be sufficiently
established.
Amount of insurance is necessary in order to easily and exactly
determine the amount of indemnity to be paid the insured in case of
loss or damage especially if it is only partial and not total. The sum
insured is the basis for calculating the premium. However, it need
not be stated in the case of open or running policies.
o The amount of insurance is the maximum limit on the
insurer’s liability for loss or damage.
o Such amount is not necessarily the value of the property
insured nor the extent of liability of the insurer in the event
of loss unless it is otherwise stipulated.
o In life, health, accidental, and injury insurance, a fixed sum
is payable.
o In workmen’s compensation insurance, the amount is not
specified in the policy but by the law imposing liability
upon the employer, which is, by reference, made part of the
contract.
o The amount insured is the amount fixed in the policy
o The deductible is the stated amount to be deducted from
any loss, which is shouldered by the insured making the
insurer liable only for the excess of said amount.
The premium is also essential because it represents the
consideration of the contract. This is what the insured pays the
insurer to assume the risk of or the value of the loss.
o The rates of premium are developed on the basis of the
nature and character of the risk assumed and also on the
value of the property or other interest insured.
•
The property or life insured constitutes the subject matter of the
contract.
o It has been suggested that the proper phrase to use is “thing
insured” because insurable interest may be in liability and
not in life or property.
The requirement of interest insured in property is especially
important in fire insurance policies to determine the actual damage
suffered by the insured in case of loss of the property covered by the
policy if he is not the absolute owner thereof.
The risks insured against must be stated because the insurer’s
undertaking is to indemnify the insured for loss, damage or liability
caused or created only by the risks insured against.
o Almost any contingent or unknown event, whether past or
future, may be insured against except those repugnant to
public policy, positively prohibited, or those occasioned by
the insured’s own fraud or misconduct.
The period during which the insurance is to continue must also be
stated because although the loss suffered by the insured was caused
by the risk insured against, the insurer would not be liable unless it
occurred during such duration of the insurance.
o It may be expressed in terms of time, distance or voyage.
o The period of time during which the insurer assumes the
risk of loss is known as the life of the policy. (12 mos. –
annual policy; <12 mos. – short period policies)
Kinds of insurable risks (3 classifications)
•
•
•
Personal Risks. – Those involving the person. This is chiefly
concerned with the time of death or disability. This is often divided
into life and health risks.
Property Risks. – Those involving loss or damage to property. This
arises from the destruction of property.
o Direct losses by fire, lightning, flood, and other forces of
nature.
o Indirect losses may occur like loss of profits, rents, or
favorable lease.
Liability Risks. – Those involving the liability for the injury to the
person or property of others. This is occasioned by the operation of
the law of liability (torts) and may sometimes be called third-party
risks.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
44 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
The liability risk includes both bodily injury and property
damage risks.
Risk, peril, and hazards distinguished
•
•
•
•
Risk. – The chance of loss. The possibility of the occurrence of a
loss, based on known and unknown factors.
Peril. – The contingent or unknown event which may cause a loss.
Its existence creates the risk, and its occurrence results in loss. (e.g.
fires, flood, theft, illness, death)
Hazard. – The condition or factor which may create or increase the
chance of loss from a given peril. Ordinarily there are many
separate hazards and the sum total of the hazards constitute the
perils which cause the risk.
o Physical hazards. – The term includes everything relating
to location, structure, occupancy, exposure, and the like.
(e.g. unsafe brake in a car, weak construction, waste paper
piled under a staircase)
o Moral hazards. – The term is applied to those factors that
have their inception in mental attitudes. Appraisal of moral
hazards requires the study of the character of the person
under consideration in the light of his reputation. (e.g.
dishonesty, insanity, carelessness, indifference, other
psychological causes in nature).
However, in practice these terms are sometimes given more than
one meaning. The word “risk” is also loosely used to refer to the
subject matter insured and also as a synonym of the words “peril”
and “hazard”
Requirements for risks to be insurable
•
•
•
•
Importance. – The loss to be insured against should be important
enough to warrant the existence of an insurance contract.
Calculability. – The risk must permit a reasonable statistical
estimate of the chance of loss and possible variations from the
estimate.
Definiteness of loss. – The losses should be fairly definite as to
cause, time, place, and amount.
No catastrophic loss. – When large numbers of people are subject to
the same kind of losses at the same time, it is an obvious deviation
•
from the principle that the losses of the few are borne by the
contributions of the many who do not suffer loss. (e.g. it is usual to
exclude political and war risks)
Accidental nature. – Insurable risks must also normally be
accidental in nature. Insurance is intended to cover fortuitous or
unexpected losses.
o Intentional losses caused by the insured are usually
uninsurable because they cannot be reasonably predicted,
and payment for them would be against public policy.
Requirements not absolute
•
•
The requirements abovementioned are NOT absolute. Insurability is
best described as a relative matter.
What is “insurable” varies among insurers, and may change over
time and with the use of certain limitations such as the amount of
coverage, specific contract definitions, deductibles, reinsurance, etc.
SEC. 52. Cover notes may be issued to bind insurance temporarily pending the
issuance of the policy. Within sixty (60) days after issue of a cover note, a policy
shall be issued in lieu thereof, including within its terms the identical insurance
bound under the cover note and the premium therefor.
Cover notes may be extended or renewed beyond such sixty (60) days with the
written approval of the Commissioner if he determines that such extension is not
contrary to and is not for the purpose of violating any provisions of this Code.
The Commissioner may promulgate rules and regulations governing such
extensions for the purpose of preventing such violations and may by such rules
and regulations dispense with the requirement of written approval by him in the
case of extension in compliance with such rules and regulations.
Preliminary contracts of insurance (2 kinds)
•
Preliminary contract of present insurance. – The insurer insures the
subject matter through a “binding slip” or “cover note” which is to
be effective until the formal policy is issued or the risk rejected.
o The “binder” is a temporary contract of insurance and is
usually issued after the applicant pays the first premium.
o The cover note contains the most important terms of a
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
45 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
preliminary contract of insurance and is intended to give
temporary protection pending investigation or issue of the
formal policy. By its nature, it is subject to all the
conditions in the policy expected even though that policy
may never issue.
o In life insurance no liability shall attach until the insurer
approves the risk. Thus a binding slip or binding receipt
does not insure by itself.
o Binders or cover notes serve the needs of commercial
convenience and yet are more definite and reliable than
oral agreement.
Preliminary executory contract of insurance. – Here, the insurer
makes a contract to insure the subject matter at some subsequent
time which may be definite or indefinite. In this contract, the right
acquired by the insured is merely to demand the delivery of a policy
in accordance with the terms agreed upon and the obligation
assumed by the insurer is to deliver such policy.
•
•
•
•
•
Issuance and renewal of cover notes
•
Cover notes are short-term insurance policies that may be issued to
afford immediate provisional protection to the insured until the
insurer can inspect or evaluate the risk in question and issue the
proper policy or until the risk is declined and notice thereof given.
o It is sufficient that the cover note shows, by necessary
implication, an agreement to pay whatever rate may be
fixed.
o Cover notes do not contain particulars that would serve as
basis for the computation of the premiums and
consequently, no separate premiums are intended or
required to be paid therefor.
o A cover note is integrated with the regular policy to be
subsequently issued.
Rules on cover notes
•
Insurance companies doing business in the Philippines may issue
cover notes to bind insurance temporarily, pending the issuance of
the policy.
•
A cover note shall be deemed to be a contract of insurance within
the meaning of Section 1(1) of the Code.
No cover note shall be issued or renewed unless in the form
previously approved by the Insurance Commission.
A cover note shall be valid and binding for a period not exceeding
60 days from the date of its issuance, whether or not the premium
therefor has been paid. The cover not may be cancelled by either
party upon at least 7 days notice to the other party.
If the cover note is NOT cancelled, within 60 days after its issuance,
a policy of insurance shall be issued in lieu thereof.
o This policy will include an identical insurance bond and
premium provided under the cover note.
A cover note may be extended or renewed beyond the period of 60
days with the written approval of the Insurance Commission. The
written approval may be dispensed with upon the certification of the
president, vice-president, or general manager of the insurance
company concerned that the risks involved, the values of such risks,
and the premiums therefor have not as yet been determined or
established and that such extension is not for the purpose of
violating any provisions of the Insurance Code or any rulings,
instructions, circulars, orders or decisions of the Insurance
Commissioner.
Insurance companies may impose on cover notes a deposit premium
equivalent to at least 25% of the estimated premium coverage but in
no case less than P500.
SEC. 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
Persons entitled to recover on policy
•
As against the insured. – Third persons have no right to the
proceeds of the policy unless there be some contract of trust,
express or implied, between the insured and third person.
o GR: So if persons have different interests in the same
property (like a mortgagor and mortgagee), an insurance
taken by one in his own right and in his own interest does
not in any way inure to the benefit of the other.
o E: If the bailee secures insurance covering his own goods
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
46 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
and goods stored with him, and even if the owner of the
stored goods did not request or know of the insurance and
did not ratify it before payment of the loss, it has been held
that the warehouseman is liable to the owner of such stored
goods for his share in the insurance money.
As against the insurer. – A third person, in the absence of any
provision in the policy, has also no right to the proceeds thereof.
Only the insured, if still alive, or the beneficiary, if the insured is
already deceased, is entitled to claim the insurance proceeds upon
the maturation of the policy.
SEC. 56. When the description of the insured in a policy is so general that it may
comprehend any person or any class of persons, only he who can show that it
was intended to include him, can claim the benefit of the policy.
SEC. 57. A policy may be so framed that it will inure to the benefit of
whomsoever, during the continuance of the risk, may become the owner of the
interest insured.
Where description of insured general
SEC. 54. When an insurance contract is executed with an agent or trustee as the
insured, the fact that his principal or beneficiary is the real party in interest may
be indicated by describing the insured as agent or trustee, or by other general
words in the policy.
•
Where insurance made by an agent or trustee
•
•
•
The agent or trustee when making an insurance contract for or on
behalf of his principal should indicate that he is merely acting in a
representative capacity by signing as such agent or trustee, or by
other general terms in the policy.
However, it has been held that where the defendant acted as
plaintiff’s agent for the insurance of goods stored with the
defendant, the plaintiff cannot claim the benefit of the agency
without sharing in the expenses.
SEC. 55. To render an insurance effected by one partner or part-owner,
applicable to the interest of his co-partners or other part-owners, it is necessary
that the terms of the policy should be such as are applicable to the joint or
common interest.
•
The policy of insurance must specify the parties between whom the
contract is made.
o Although it is usual to insert in a policy the name of the
person, it is NOT essential. He may be described in other
ways.
In order to claim the benefit of the policy, the person claiming must
show that he is the person named or described or that he belongs to the
class of persons comprehended in the policy.
Example: a policy states: “payable to X (insured), mortgagee, as his
interest may appear, remainder to whomsoever, during the continuance
of the risk, may become the owner of the interest insured”
o This insures the entire interest in the property NOT just that of
the mortgagee.
o It also shows to whom the money, in case of loss, should be
paid.
SEC. 58. The mere transfer of a thing insured does not transfer the policy, but
suspends it until the same person becomes the owner of both the policy and the
thing insured.
Effect of transfer of thing insured
Where insurance effected by partner or part owner
•
•
GR: Insurable interest in the property of a partnership exists in both
the partnership and the partners. A partner has an insurable interest
in the firm property which will support a policy taken out thereon
for his own benefit.
E: If a partner who insures partnership property in his own name
limits the contract to his individual share.
•
•
A contract of insurance is personal. Hence, it does not attach to or run
with the property insured.
A purchaser of property who does not obtain a transfer of the policy
cannot, in case of loss, recover upon such contract, as the transfer of
the property has the effect of suspending the insurance until the
purchaser becomes the owner of the policy as well as of the property
insured.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
47 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
Exceptions: Sections 20-24 and 57.
SEC. 59. A policy is either open, valued, or running.
•
SEC. 60. An open policy is one in which the value of the thing insured is not
agreed upon and the amount of insurance merely represents the insurer’s
maximum liability. The value of such thing insured shall be ascertained at the
time of the loss.
SEC. 61. A valued policy is one which expresses on its face an agreement that
the thing insured shall be valued at a specified sum.
SEC. 62. A running policy is one which contemplates successive insurances, and
which provides that the object of the policy may be from time to time defined,
especially as to the subjects of insurance, by additional statements or
indorsements.
Kinds of policies
•
•
An open or unvalued policy does not predetermine the value of the
insured property but establishes a maximum amount the insurer will
pay in case of a total loss of the property insured.
o It is one in which a certain agreed sum is written on the face of
the policy NOT as the value of the property insured, but as the
maximum limit of the insurer’s liability.
o The insured must establish the FMV of the property at the
time of the loss.
! If the FMV exceeds the maximum, the insurer will
pay the maximum.
! If the FMV is less than the maximum, the insurer will
pay the FMV.
A valued policy is one where the value of the property is predetermined
and the value is the amount to be used in case of a total loss.
o There are 2 values, the face value and the value of the thing
insured. In the absence of fraud or mistake, the agreed value
of the thing insured will be paid in case of total loss of the
property.
o In life insurance, the liability of the insurer is measured by the
face value of the policy.
Example: A policy insuring a ship “valued at P50 million” is a
valued policy.
A running policy is intended to provide indemnity for property which
cannot well be covered by a valued policy because of its frequent
change of location and quantity, or for property of such a nature as not
to admit of a gross valuation.
o Here the risk is shifting, fluctuating, or varying, and which
covers a class of property rather than any particular thing.
o In some cases, the nature of the property insured or the
circumstances are such as to make it impossible to designate
the subject matter of insurance with certainty or particularity.
These policies are usually known as “floating,” “running,” or
“blanket.”
o A blanket policy (in the US) is one covering by a single
amount of insurance the same kind of property at different
locations or different kinds of property at a single location.
o Running policies are in reality open policies.
o When the goods change location frequently so as to make it
difficult to insure its whole value, the remedy is a contract that
has no fixed face value, the face value adjusting itself to the
changing value at one specified location or at each of several
locations.
o
Advantages of a running policy
•
•
•
•
Neither underinsured or overinsured at any time, the premium being
based on the monthly values reported
He avoids cancellations that would otherwise be necessary to keep
insurance adjusted to the value at each locations. (These cancellations
would also be charged an expensive short rate)
To save the trouble of watching his insurance and the danger of being
underinsured in spite of his care.
The rate is adjusted to 100% insurance, whereas valued policies
requiring insurance only to, say 80%, of the value, give either a small
or no reduction for amounts of insurance above this figure.
SEC. 63. A condition, stipulation, or agreement, in any policy of insurance,
limiting the time for commencing an action thereunder to a period of less than
one (1) year from the time when the cause of action accrues, is void.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
48 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Validity of agreement limiting time for commencing action
•
•
General rule. – A clause in the policy providing that an action must be
brought within a certain period is valid if not contrary to Section 63.
Period limitation. – If the period fixed is less than 1 year, it is void.
o EXCEPT: In a policy of industrial life insurance, the period
cannot be less than six (6) years after the cause of action
accrues.
Nature of condition limiting period for filing claim
•
•
•
The condition is an important matter, not merely a procedural
requirement, essential to prompt settlement of claims against insurance
companies.
It demands that insurance suits be brought by the insured while the
evidence as to the origin and cause of the loss or destruction has not yet
disappeared.
It is a resolutory cause, the purpose of which is to terminate all
liabilities in case the action is not filed by the insured within the period
stipulated.
Where action brought against insurer’s agent
•
The bringing of such action against the agent cannot have any legal
effect except that of notifying the agent of the claim.
When cause of action accrues
•
•
•
•
The right of the insured to the payment of his loss accrues from the
happening of the loss.
However, the cause of action in an insurance contract does not accrue
until the insured’s claim is finally rejected by the insurer.
o Before such final rejection, there is no real necessity for
bringing suit.
The period for commencing an action under a policy of insurance under
Section 63 is to be computed not from the time when the loss actually
occurs but from the time when the insured has a right to bring an action
against the insurer.
Examples:
o Where the policy provided that no such suit or action thereon
•
•
“for the recovery of any claim shall be sustainable in any court
of law or equity unless the insured shall have fully complied
with all the terms and conditions of the policy nor unless
commenced within 12 months next after the happening of the
loss,” it has been held that such stipulation is repugnant to
Section 63.
! In effect, it reduces the period allowed the insured for
bringing his action to less than 1 year.
! Obviously, compliance with the terms and conditions
would require some time and that will shorten the
period for bringing the suit.
! As the stipulation is upon a written contract, the time
limit is 10 years from the time the cause of action
accrues.
o Where the policy provided that if a claim be made and
rejected, an “action or suit” should be commenced within 12
months after such rejection otherwise the claim would
prescribe, it has been held that such a stipulation is valid.
o Where a fidelity bond requires action to be filed within 1 year
from the filing of the claim of loss, such condition contradicts
Section 63.
! A fidelity bond is in the nature of a contract of
insurance against loss from misconduct.
Contractual limitations contained in insurance policies are regarded
with extreme jealousy by courts and will be strictly construed against
the insurer.
The new Insurance Code empowers the Insurance Commissioner to
adjudicate disputes relating to an insurance company’s liability to an
insured. Hence, a complaint or claim filed by the insured with the
Office of the Insurance Commissioner would now be considered an
“action” or “suit” the filing of which would have the effect of tolling or
suspending the running of the prescriptive period.
SEC. 64. No policy of insurance other than life shall be cancelled by the insurer
except upon prior notice thereof to the insured, and no notice of cancellation
shall be effective unless it is based on the occurrence, after the effective date of
the policy, of one or more of the following:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard insured
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
49 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
against;
(c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the hazard
insured against;
(e) Physical changes in the property insured which result in the property
becoming uninsurable; or
(f) Discovery of other insurance coverage that makes the total insurance in
excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the policy
would violate or would place the insurer in violation of this Code.
SEC. 65. All notice of cancellation mentioned in the preceding section shall be
in writing, mailed or delivered to the named insured at the address shown in the
policy or to his broker provided the broker is authorized in writing by the policy
owner to receive the notice of cancellation on his behalf, and shall state (a)
Which of the grounds set forth in Section 64 is relied upon and (b) That, upon
written request of the named insured, the insurer will furnish the facts on which
the cancellation is based.
Cancellation of non-life insurance policy
•
•
•
Cancellation is broadly regarded as the right to rescind, abandon or
cancel a contract of insurance.
It is the termination by either the insurer or the insured of a policy of
insurance before its expiration.
The insured can cancel an insurance contract at his election by
surrendering the policy. Such surrender, however, entitles him to the
return of the premiums on the customary short-rate basis.
•
Prior notice of cancellation to insured
•
•
•
•
There must be prior notice of cancellation to the insured;
The notice must be based on the occurrence, after the effective date of
the policy, of one or more of the grounds mentioned (Sec 64);
o The premium referred to in Sec 64(a) must be a premium
subsequent to the first, because it speaks of non-payment
“after the effective date of the policy.”
It must be in writing, mailed or delivered to the named insured at the
address shown in the policy, or to his authorized broker; and
The purpose for notice to the insured is to prevent the cancellation of
the policy without allowing the insured ample opportunity to negotiate
for other insurance in its stead for his own protection.
Notice given to insured himself. – The notice should be personal to the
insured and not to and/or through any unauthorized person by the
policy.
Notice delivered personally or sent by mail. – There must be proof that
it was actually sent by mail.
SEC. 66. In case of insurance other than life, unless the insurer at least forty-five
(45) days in advance of the end of the policy period mails or delivers to the
named insured at the address shown in the policy notice of its intention not to
renew the policy or to condition its renewal upon reduction of limits or
elimination of coverages, the named insured shall be entitled to renew the policy
upon payment of the premium due on the effective date of the renewal. Any
policy written for a term of less than one (1) year shall be considered as if
written for a term of one year. Any policy written for a term longer than one (1)
year or any policy with no fixed expiration date shall be considered as if written
for successive policy period or terms of one (1) year.
Renewal of non-life insurance policy
•
Form and sufficiency of notice of cancellation by the Insurer
•
•
It must state which of the grounds set forth is relied upon.
o It is the duty of the insurer upon written request of the named
insured to furnish the facts on which the cancellation is based.
•
As a new contract or extension of old one. – As a general rule, a
renewal of insurance by the payment of a new premium and the
issuance of a receipt therefor where there is no provision in the policy
for its renewal, is a new contract on the same terms as the old one.
o But where the renewal is in pursuance of a provision to that
effect, it is not a new contract but an extension of the old one.
o In the last analysis, the resolution of the question depends
primarily on the intention of the parties as ascertained from the
instrument itself.
Rights of parties. – In the case of insurance other than life, the name
insured is given the right to renew upon the same terms and conditions
the original policy upon payment of the premium due on the effective
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
50 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
date of the renewal
o Unless the insurer, at least 45 days in advance of the end of the
period, mails or delivers to the insured notice of its intention
not to renew the policy or to condition its renewal upon
reduction of its amount or elimination of some coverages.
o If the insured’s attention was not called as regards a reduction
in the policy coverage, the insurance company is bound by the
greater coverage in an earlier policy.
Period for giving notice of non-renewal by insurer. – For the purpose
of determining whether or not the insurer has given such notice, a
policy written for a term of less than one (1) year is considered as if
written for a term of one (1) year while a policy written for a longer
term or with no fixed expiration date is considered as if written for
successive policy period terms of one (1) year.
Thus, where the term of the policy is 5 years. Notice must be given at least 45
days before the anniversary date of any given policy year. If the 45-day rule is
not complied with, the insurer may not refuse to renew a policy upon payment
of the premium due
•
1.
2.
3.
4.
TITLE 7
WARRANTIES
Sec. 67. A warranty is either express or implied.
Warranty defined
• Warranty is a statement or promise by the insured set forth in the policy
itself or incorporated in it by proper reference, the untruth or
nonfulfillment of which in any respect and without reference to whether
the insurer was in fact prejudiced by such untruth or nonfulfillment,
renders the policy voidable by the insurer
• Contract of insurance is rendered voidable by the insurer without
reference to the materiality of the statement or promise and whether the
insurer was prejudiced.
• A warranty may also be made by the insurer.
Kinds of warranties
Warranties are either affirmative or promissory and either express or
implied.
An express warranty is an agreement contained in the policy or clearly
incorporated therein as part thereof whereby the insured stipulates that
certain facts relating to the risk are or shall be true or certain acts
relating to the same subjects have been or shall be done.
An implied warrranty is a warranty which from the very nature of the
contract or from the general tenor of the words, although no express
warranty is mentioned, is necessarily embodied in the policy as a part
thereof and which binds the insured as though expressed in the contract.
o Implied warranties are generally warranties in marine
insurance although it is infrequently applied in other than
marine insurance. It is only in marine insurance that the law
provides for implied warranties.
An affirmative warranty is one which asserts the existence of a fact or
condition at the time it is made.
o The warranty is continuing if it is one that must be satisfied
during the entire coverage period of the insurance.
A promissory warranty, not infrequently called "executory" warranty, is
one where the insured stipulates that certain facts or conditions
pertaining to the risk shall exist or that certain things with reference
thereto shall be done or omitted. It is in the nature of a condition
subsequent.
Warranty presumed affirmative
• Unless the contrary intention appears, the courts will presume that the
warranty is merely affirmative.
• But the answer "Yes" to the question: "Will you keep your book of
accounts in an iron safe or secure in another building?" was held a
promissory warranty breach of which precluded recovery.
Sec. 68. A warranty may relate to the past, the present, the future, or to any or all
of these.
Time to which warranty refers
• Although the provision employs the term "warranty" in general, in the
case of a promissory warranty, the same may refer only to future
events. E.g. A stipulation in the policy that the insured never suffered
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
51 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
any heart ailment is a warranty that relates to the past, while a
stipulation that a building is occupied as a dwelling is a warranty that
relates to the present.
representation in order to
defeat an action on the policy
•
Sec. 69. No particular form of words is necessary to create a warranty.
Intention of parties governs
• Whether a statement made by the insured in the policy is a warranty
depends upon the intention of the parties in regard thereto.
• In case of doubt, a statement will be construed as a representation
rather than a warranty especially if such statement is contained in any
instrument other than the policy like an application which is, in itself,
collateral merely to the contract of insurance.
• The parties must intend a statement to be a warranty and it must be
included as a part of the contract.
• It has been held that gratuitous answers written in the application, that
is, answers not responsive to any questions asked, are not warranties
even though the policy makes the statements in the application
warranties.
•
Sec. 70. Without prejudice to section fifty-one, every express warranty, made at
or before the execution of a policy, must be contained in the policy itself, or in
another instrument signed by the insured and referred to in the policy as making a
part of it.
Express warranty, where contained
Warranties distinguished from representations
•
Warranties
Warranties are considered parts
of the contract
Warranties are always written
on the face of the policy,
actually or by reference,
Warranties must be strictly
complied with
The falsity or nonfulfillment of
a warranty operates as a breach
of contract.
Warranties
material,
are
presumed
Representations
While representations are but
collateral inducements to it
While representations may be
written
in
a
totally
disconnected paper or may be
oral
While in representations,
substantial truth only is
required
While the falsity of a
representation renders the
policy void on the ground of
fraud
While the insurer must show
the
materiality
of
a
Before a representaion will be considered a warranty, it must be
expressly included or incorporated by clear reference in the policy and
the contract must clearly show that the parties intended that the rights
of the insured would depend on the truth or fulfillment of the warranty.
Obviously, where a statement is true, it is ordinarily immaterial whether
it is a warranty or a representation.
Warranties are strictly construed. — It ought to be remembered that
not only are warranties strictly construed against the insurer, but they
should, likewise, by themselves be reasonably interpreted. That
reasonableness is to be ascertained in light of the factual conditions
prevailing in each case.
•
In a policy itself, or another instrument. — In order that a stipulation
may be considered a warranty, it must not only be clearly shown that
the parties intended it as such but it must also form part of the contract
itself or if contained in another instrument, it must be signed by the
insured and referred to in the policy as making a part of it. Mere
reference alone is not sufficient to give this effect.
"Another instrument" construed as excluding a rider. — It was held
that a rider attached to a policy is a part of the contract, to the same
extent and with like effect as if actually embodied therein.
Consequently, it need not be signed by the insured nor referred to in the
policy as making a part of it. "Another instrument," as used in Section
70, according to the Supreme Court, could not mean a mere slip of
paper like a rider, but something akin to the policy itself, which in
Section 49 is defined as a written instrument in which a contract of
insurance is set forth.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
52 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
Sec. 71. A statement in a policy, of a matter relating to the person or thing
insured, or to the risk, as a fact, is an express warranty thereof.
•
Express warranty regarding person, thing or risk
• Under Section 71, the statement in the policy relating to the person or
thing insured, or to the risk, must be as a fact and not as an opinion, or
belief, to constitute an express warranty thereof.
• A statement in the policy which, from the very nature of the subject
matter of the inquiry, can only be an expression of an opinion is not,
strictly speaking, a warranty of its truthfulness. Such a statement, if
deemed a warranty at all, is merely a limited warranty as to the honesty
and good faith of the insured — a warranty that the statement is his
honest opinion or judgment.
EXAMPLES:
o Where the answers in an application are qualified by the
words, appended at its foot, "the above is as near correct as I
remember," "to the best of my knowledge and belief," or
similar words, the right to recover on the policy will not be
defeated unless some answers are consciously incorrect.
o There is authority to the effect that a breach of warranty as to
the value of the property insured, which involves a matter of
mere opinion, where the property does not have a fixed market
value, must be substantial in order to constitute a ground for
avoiding the policy.
Sec. 73. When, before the time arrives for the performance of a warranty
relating to the future, a loss insured against happens, or performance becomes
unlawful at the place of the contract, or impossible, the omission to fulfill the
warranty does not avoid the policy.
When breach of warranty does not avoid policy
•
•
•
•
Warranty of facts or omissions which materially affect the risk.
•
Section 72 refers to a promissory warranty.
Breach of promises or agreements as to future acts will not avoid a
policy unless the promises are material to the risk.
The act or omission is material to the risk if it increases the risk, and
under the law, only substantial increase of risk works forfeiture of the
policy, which is avoided for increase in hazard.
The general rule is that a violation of a warranty avoids a contract of
insurance which refers to those warranties relating to the future.
Three (3) exceptions:
1. When loss occurs before time for performance
2. When performance becomes unlawful.
3. When performance becomes impossible
Where insurer barred by waiver or estoppel
Sec. 72. A statement in a policy, which imparts that it is intended to do or not
to do a thing which materially affects the risk, is a warranty that such act or
omission shall take place.
•
•
If it is stipulated in a policy requiring owner occupancy that the house
shall not be occupied by a tenant, there is a warranty that such
condition shall not take place.
A violation of the warrant in this case avoids the policy.
•
Breach of warranty operates to discharge the insurer from liability
unless the insurer is liable because of a waiver of the warranty or an
estoppel.
The omission to fulfill a warranty or condition will likewise be
excused where there is a waiver on the part of the insurer.
o Waiver may be defined as "an intentional relinquishment of a
known right."
o It may be express or implied.
o Failure on the part of the insurer to assert a forfeiture upon
breach of warranty or condition, after knowledge thereof,
amounts to a waiver or estoppel.
o If waiver is to be implied from conduct mainly, said conduct
must be clearly indicative of a clear intent of the insurer to
waive its right under the policy
Under estoppel, the insurer is precluded, because of some action or
inaction on its part, from relying on an otherwise valid defense as
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
53 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
•
against the insured who has been induced to enter into the contract by
the insurer's representation or conduct.
o The ground of estoppel is that it would be against equity and
good conscience for the insurer to assert such defense.
The insurer, knowing that the insured has violated a clause of the policy
prohibiting the making of other insurances on the same property
without giving notice to the insurer, preferred to continue the policy by
demanding and collecting the premium. This act constitutes a waiver of
the right to rescind the insurance contract.
Premium not paid. — Similarly, an extension of time for the payment
of a premium amounts to a waiver of the insurer's right to require
payment of the premium on the due date or within the grace period.
Warranty clause violated. — The insurance company was aware, even
before the policy was issued, that in the premises insured, the number
of fire hydrants was less than that demanded in the warranty.
Nevertheless, it issued the policy and accepted and retained the
corresponding premiums.The insurer is barred by waiver or estoppel to
claim violation of the said (fire hydrant) warranty.
Sec. 74. The violation of a material warranty, or other material provision of a
policy, on the part of either party thereto, entitles the other to rescind.
Right to rescind for violation of a material warranty
•
•
•
•
The violation of the terms of a contract of insurance entitles either party to
terminate the contractual relations.
Thus, the insured can sue for rescission for breach of contract due to the
refusal of the insurer to grant a loan applied for although this was expressly
agreed upon in the policy and he can recover the full amount of the
premiums paid by him up to the filing of the action.
Under Section 74, the insurer is entitled to rescind a contract of insurance
for violation of a warranty only if said warranty is material; otherwise, the
breach thereof will not avoid the policy.
The right of the insurer to rescind under Section 74 exists even though the
violation was not the direct cause of the loss.
Sec. 75. A policy may declare that a violation of specified provisions thereof
shall avoid it, otherwise the breach of an immaterial provision does not avoid the
policy.
When violation of immaterial provisions shall avoid policy.
• Every warranty is conclusively presumed material.
• Hence, a warranty as to any fact will preclude any inquiry as to the
materiality of that fact.
• It need only be false. The law makes a distinction between provisions
that are material and provisions that are immaterial. The breach of any
provision which is not material will not avoid the policy.
• However, the parties may expressly stipulate that the violation of a
particular provision (although immaterial) in the policy shall avoid it.
• By such stipulation, the parties convert an immaterial warranty into a
material one
Sec. 76. A breach of warranty without fraud, merely exonerates an insurer from
the time that it occurs, or where it is broken in its inception, prevents the policy
from attaching to the risk.
Effect of breach of warranty by insured.
• The breach referred to under Section 76 is one without fraud.
•
In order that the insurer may be entitled to rescind a contract of
insurance on the ground of a breach of warranty, fraud is not essential,
(see Sec. 74.)
•
Falsity, not fraud, is the basis of liability on a warranty.
o Without fraud. — Where there is no fraud, the policy is
avoided only from the time of breach and the insured is
entitled (a) to the return of premium paid at a pro rata rate
from the time of breach if it occurs after the inception of the
contract; or (b) to all the premiums if it is broken during the
inception of the contract. In the latter case, the contract is void
ab initio and never becomes binding.
o With fraud. — Where there is fraud, the policy is avoided ab
initio, and the insured is not entitled to the return of the
premium paid.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
54 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Conditions in insurance policy.
• In law, a condition is an event signifying in its broadest sense either an
occurrence or a non-occurrence that alters the previously existing legal
relations of the parties to the contract.
• Insurers may impose whatever conditions they please upon their
obligations, as long as they are not contrary to law, morals, good
customs, public order, or public policy.
•
Conditions in an insurance policy are of two kinds:
1. A condition precedent calls for the happening of some event
or the performance of some act after the terms of the contract
have been agreed upon, before the contract shall be binding on
the parties, such as that the policy shall not take effect until
delivery and payment of the first premium during the good
health of the applicant.
2. A condition subsequent is that which pertains not to the
attachment of the risk and the inception of the policy, but to
the contract of insurance after the risk has attached and during
the existence thereof such as the condition requiring notice
and proof of loss in case of loss upon an insurance against fire.
conditions subsequent to be performed after the
policy has become a valid contract, non-performance
of which will work a defeasance.
Exceptions distinguished from warranties and conditions
• In most cases, exceptions are easily distinguished from warranties and
conditions.
• If the policy contains warranted statement that the insured building is
occupied, we have an undoubted warranty. If the policy declares that
"this entire policy shall be void if the insured building be or becomes
vacant or unoccupied and so remained for more than ten days," we have
just as clearly a condition. If the provision is that "this company shall
not be liable for any loss while the insured building is vacant or
unoccupied" we have an unmistakable exception.
.
Effects of breach on legal relations of parties
•
Warranties and conditions distinguished
As to effect
WARRANTY
Warranty does not suspend or
defeat the operation of the
contract, but a breach affords
either the remedy expressly
provided in the contract or
that furnished by law
CONDITION
Condition precedent is one
without the performance of
which the contract, although
in form executed by the
parties and delivered, does
not spring into life
In other words, a condition precedent is a limitation to the
attachment of the risk, whereas a warranty does not
necessarily have that effect.
As to Nature
•
•
If the insured person contracts and warrants that if
the representations made by him in his application
for insurance are not true, the policy shall be null and
void, such statements are not conditions precedent
but rather of the nature of a defeasance.
Also, promissory warranties are usually regarded as
•
On binding force of contract. — The occurrence of a breach or
warranty or condition even though such breach be but temporary
renders the entire contract defeasible or voidable and even though such
breach may not have affected the risk or contributed to the loss in any
way.
On liability where there is waiver. — Such a breach of warranty or of
condition may be waived without consideration; but the insurer does
not become liable for an excepted loss by waiver unless such waiver
amounts to a new contract on valuable consideration.
o The insurer cannot, by a naked waiver, assume a non-existent
duty. Nor is the defense that the loss is excepted barred by the
incontestable clause.
TITLE 8
PREMIUM
Sec. 77.
An insurer is entitled to payment of the premium
as soon as the thing insured is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, NO policy or contract of
insurance issued by an insurance company is VALID and BINDING
UNLESS and UNTIL the premium thereof has been PAID,
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
55 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
EXCEPT in the case of a LIFE or INDUSTRIAL LIFE POLICY
- whenever the grace period provision applies or
- whenever under the broker and agency agreements with duly licensed
intermediaries, a 90-day credit extension is given.
No credit extension to a duly licensed intermediary should exceed 90 days
from date of issuance of the policy.
Sec. 78
• Employees of the Republic of the Philippines including its political
subdivisions and instrumentalities, and GOCCs may pay their
insurance premiums and loan obligations through SALARY
DEDUCTIONS
• Provided; that the treasurer, cashier, paymaster or official of the entity
employing the government employees is authorized notwithstanding
the provisions of any existing law, rules and regulations to the contrary,
to MAKE DEDUCTIONS from salary, wage or income of the latter
pursuant to an agreement between the insurer and the government
employee and to remit such deductions to the insurer concerned, and
collect such reasonable fees for its services.
Notes:
• Insurance Premium
o Agreed price for assuming or carrying the risk
o Consideration paid an insurer for undertaking to indemnify the
former against a specified peril
• Where only one premium is paid for several things, not separately
valued or separately insured, making only one cause or consideration,
the insurance contract is entire or indivisible as to the items insured
• Assessment – a sum specifically levied by mutual insurance companies
or associations, upon a fixed and definite plan, to pay losses and
expenses
• Payment of premium – one of the essential elements of an insurance
contract
• Non-payment puts an end to the insurance contract and the insurer has
no right to collect the premium
• Distinction between Premium and Assessment
o Premium – levied and paid to meet anticipated losses
! Not a debt
Assessments – collected to meet actual losses
! If properly levied, is a debt (unless expressly agreed)
When premium becomes a debt
o Fire, casualty and marine insurance –as soon as the risk
attaches
o Suretyship – as soon as the contract or bond is perfected and
delivered to the obligor
o
•
GR: If no premium is paid – contract is NOT effective
Exceptions: UCPB General Insurance Inc v. Masagana
• Sec 77: “in case of a life or industrial life policy whenever the grace
period provision applies”
• Sec 78: “Any acknowledgment in a policy or contract of insurance of
the receipt of premium is conclusive evidence of its payment”
o Makati Tuscany vs. CA, “when the parties agree to the
payment in installments and partial payment has been made at
the time of loss.”
o Makati Tuscany vs. CA, insurer may grant credit extension
o Estoppel
Life Insurance
• No duty for the insured to pay any premiums subsequent to the first
• It is purely UNILATERAL
• Cannot compel the insured to pay a premium because insured is not a
debtor of the insurer
• It is a contractual obligation
No excuse for non-payment or premiums
• GR: Non-payment cannot be excused even for a fortuitous event since
the payment of a premium is of essence of a contract
• EXCEPTIONS
1. Insurer has become insolvent and suspended business
2. Insurer has refused without justification a valid tender of payments
3. When the failure to pay was due to the wrongful act of the insurer
or his agent (he is estopped)
4. Insurer waived his right to demand payment
• Nonpayment does not merely suspend, it actually puts an end to the
insurance contract since time of payment is the essence of the contract
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
56 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
There is a valid payment even if check is encashed after the occurrence
of the risk insured against
On Partial Payments
•
Non-payment of
1st premium
Prevents the
contract from
becoming binding
UNLESS waived
BUT nonpayment
of balance of
premium DOES
NOT cancel the
contract
•
•
•
•
Non-payment of subsequent premiums
Does not affect the validity of the contract
UNLESS by express stipulation the policy
provides that it shall be suspended
Note:
Individual life insurance, endowment insurance
and group life insurance – policyholder is entitled
to a grace period of 30 days to pay the premium
after the first
Industrial life insurance – 4 weeks grace period
where premiums are payable monthly (30 days/1
month)
GR: Partial payment makes the policy effective during the whole
period of the policy
EX: When the parties expressly stipulate that the policy will not be in
force UNTIL the full payment of premium
Partial payment – considered as a deposit held in trust by the insurer
If there is a partially performed contract (as far as payment of
premium) = insurer and insured’s obligations arise; nonpayment of the
balance of the premium does not produce the cancellation of the
contract of insurance in the sense that it can no longer be enforced
Validity of policy where credit extension granted to insured
• Intention: Put a contract of insurance on a cash-and-carry basis
• Premium must be paid in cash as a condition precedent for non-life
insurance policy to be valid and binding (except Sec. 79)
• Makati Tuscany
o Sec. 77 merely precludes the parties from stipulating that the
policy is valid even if premiums are not paid, but does not
expressly prohibit an agreement granting credit extension, and
must not be contrary to morals, public policy, etc.
• Credit extension agreement is valid
Exceptions to Section 77
When policy is valid and binding notwithstanding nonpayment of premium
1. Life or industrial policy when the grace period provision applies
2. Under the broker or agency agreements, a 90-day extension is given
3. Acknowledgement in a policy or contract of receipt of premium
(conclusive evidence of payment) despite fact that it is actually unpaid
(Sec. 79)
4. Agreement allowing the insured to pay the premium in installments and
partial payment made at time of loss (Makati Tuscany)
5. Agreement to grant insured credit extension for payment of premium
and loss occurs before expiration of credit term
6. Estoppel
-
Credit extension = 90 DAYS MAXIMUM
Receipt of the insurer of the premium even after expiration of credit
term but before loss, renders the insurance valid and binding
Once a policy has been issued, the presumption lies that premium has
been duly paid and where nonpayment is attributable to the fault or
misrepresentation of insurer, insured is entitled to recover in case of
loss
Payment of the premium to the insurance agent or broker is payment to the
insurance company
• Misappropriation of the premiums paid by the agent is imputable to the
insurance company
Sec. 79.
An acknowledgment in a policy or contract of insurance of the receipt of
premium
- Is conclusive evidence of its payment, so far as to make the policy
binding,
- Notwithstanding any stipulation therein that it shall not be binding until
the premium is actually paid.
Notes:
• Establishes legal fiction of payment
• There is a waiver of the condition of prepayment – since it is declared
by law to be conclusive evidence of payment
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
57 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
•
•
•
•
Conclusive Presumption extends ONLY to the question of the binding
effect of the policy
Insurer may still dispute it but ONLY for the purpose of recovering the
premium due and unpaid
Acknowledgement is only prima facie evidence of payment of premium
Section 79 should be treated as an exception to Section 77
Capital Insurance v. Plastic Era
o 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 premium instead of cash.
This rendered the policy immediately operative on the date it
was delivered.
o The payment of the premium is an independent obligation, the
nonfulfillment of which would entitle the insurer to recover
Acceptance of premium (assures continued effectivity) does not
preclude insurer from interposing any valid defense under the terms of
the contract.
Sec. 80.
A person insured is entitled to a return of premium, as follows:
(a) To the whole premium if no part of his interest in the thing insured be
exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time AND the
insured surrenders his policy
- to such portion of the premium as corresponds with the unexpired
time, at a pro rata rate,
- UNLESS a short period rate has been agreed upon and appears on the
face of the policy,
- after deducting from the whole premium any claim for loss or
damage under the policy which has previously accrued
Provided, that no holder of a life insurance policy may avail himself of the
privileges of this paragraph without sufficient cause as otherwise provided by
law.
(1) A person insured is entitled to RETURN of the premium when the contract
is VOIDABLE, and subsequently ANNULLED under the provisions of the
Civil Code
- or on account of 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
(2) A person insured is not entitled to a return of premium if the policy is
annulled, rescinded or if a claim is denied by reason of fraud.
Sec. 83.
In case of an over-insurance by several insurers other than life, the insured:
- is entitled to a ratable return of the premium,
- proportioned to the amount by which the aggregate sum insured in all
the policies exceeds the insurable value of the thing at risk.
Notes:
• If insurance is illegal – premiums cannot be recovered
• But if they are not in pari delicto – innocent party may recover
7 Instances when the insured is entitled to recover premiums already made:
1.
2.
3.
4.
Sec. 81.
If a peril insured against has existed, and the insurer has been liable for any
period, however short, the insured is not entitled to return of premiums, so
far as that particular risk is concerned.
5.
6.
7.
When no part of the interest in the thing insured has been exposed to
any of the perils insured against
Insurance is for a definite period and the insured surrenders his policy
before termination
Contract is voidable and subsequently annulled because of fraud or
misrepresentation of the insurer or agent
Contract is voidable because of existence of facts of which insured was
ignorant without his fault
Insurer never incurred any liability under the policy because of the
default of the insured other than actual fraud
There is over-insurance
When rescission is granted due to the insurer’s breach of contract
Sec. 82.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
58 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
In 1, 3, 4 and 5 – the insured is entitled to a return of the ENTIRE premium
paid
• They have to be actually paid
• Payment to insurer’s agent is sufficient
The assumption of risk is one of the essential elements in the insurance contract
– if there is no risk – premium may be recovered
When the risk never attached
1. Application for a policy was not approved, no premium can be
recovered
2. Loss occurs before effective date
3. Insured and insurer become public enemies because of state of war
o War abrogates insurance contracts between citizens of
belligerent states
When the risk attaches:
• If risk is entire + contract is indivisible: insured is not entitled to
return of premium if insurer is exposed to the peril however short
• If contract is divisible (involves several distinct risks) – the premium
for the risk which does not attach can be claimed
Where the insurance is made for a definite period of time and the insured
surrenders his policy before the expiration of that period
Section 80(b) does NOT apply:
1. When the insurance is not for a definite period
2. A short period has been agreed upon
3. The policy is for life insurance policy
Example
• X insures house for 1 year and pays 16k for a 1-year premium. After
lapse of 3 months, X surrenders his policy. He is entitled to collect ¾ of
premium paid or 12k, representing the portion of the premium for
unexpired period of policy.
In short period rates:
• Return of the premium in the proportion stipulated
• Usually found in a table of figures stipulating the amount for the
premium
• The amount recoverable will not be the unexpired period BUT ONLY
the balance after deducting the percentage to be retained by the insurer
as stated in the table
PERIOD
1 or less
2 mos
3 mos
4 mos
5 mos
6 mos
% of Annual
Rate
20%
30%
40%
50%
60%
70%
PERIOD
7 mos
8 mos
9 mos
10 mos
11 mos
% of Annual
Rate
75%
80%
85%
90%
95%
In Life Insurance
• It is an indivisible contract so insured cannot recover
• HOWEVER, he is entitled to receive to the “cash surrender value”
AFTER 3 full annual premiums have been paid
When contract is voidable
Where the contract is voidable on account of fraud or misrepresentation of the
insurer or his agent
• If the insured is in fraud – he is NOT entitled to return of the premium
When the contract is voidable on account of facts, the existence of which the
insured was ignorant of without his fault
When by any default of the insured other than actual fraud, the insurer never
incurred any liability under the policy
Example: insured a vessel but it was destroyed before the actual voyage
When there is over-insurance
In case of an over-insurance by several insurers
• Insurer is not entitled to the portion of the premium corresponding to
the excess of the insurance over the insurable interest of the insured
• Return is only for the proportion which exceeds the insurable interest
• Proportioned to the amount by which the aggregate sum insured in all
the policies exceeds the insurable value of the thing at risk
• Example (see page 282, De Leon 2014)
o House has insurable value of 1.5 M
o Insurer A – 1.2 M – paid 24k
o Insurer B – 600k – paid 12k
o Total amount of insurance 1.8 M, premiums paid 36k
o Proportion of 300k to 1.8 or 1/6
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
59 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
1/6 of 24k = 4k; 1/6 of 12k =2k " amounts to be returned
•
It involves no moral hazard – does not increase the insurer’s risk;
transfer does not do harm to its duty
•
Sec 173. Which prohibits the transfer of a fire insurance policy to any
person who acts as an agent of the issuing company and declares such
transfer void insofar as it affects the creditors of the insured.
Sec. 84.
An insurer may contract and accept payments, in addition to regular premium,
for the purpose of paying future premiums on the policy or to increase the
benefits thereof
EX:
Notes:
• Insured is duty bound only to make prompt payment of only the
insurance premiums due under the policy
Sec. 86.
Unless otherwise provided by the policy, an insurer is liable for a loss:
of which a peril insured against was the proximate cause,
although a peril not contemplated by the contract may have been a remote
cause of the loss;
but he is not liable for a loss:
which the peril insured against was only a remote cause.
TITLE 9
LOSS
Sec. 85.
An agreement not to transfer the claim of the insured against the insurer after
the loss has happened
is VOID IF made BEFORE the loss
EXCEPT as otherwise provided in the case of life insurance.
Notes:
• Claim – demand for the satisfaction of a loss suffered within the
purview of an insured’s policy
• Before a loss has occurs, an insurance policy except life, is not
assignable without the consent of the insurer as it is a personal contract
• But after a loss has occurred, insured has the absolute right to transfer
or assign his claim against insurer.
GR: A prohibition against the transfer of the claim after the loss is against
public policy – therefore VOID
• The rights of the parties are already fixed after the loss
• Agreement hinders free transmission of property
• Transfer involves money claim; it is not the personal contract being
assigned but the money claim under or right of action on the policy
Notes:
• Loss: Injury, damage, or liability sustained by the insured in
consequence of the happening of one or more of the perils against
which the insurer has undertaken to indemnify the insured
• Scope of Loss
o Reinsurance – reinsurer’s share of the loss on risks ceded
either automatically or facutatively
o Insurance – bodily, etc.
• Extent of Loss
o Total, partial, constructive total
o May be satisfied by
! Payment of loss
! Reinstatement (repair or restoration)
! Replacement
o Cannot recover greater than loss
• Cause of Loss
o Liable if peril is the proximate cause and immediate cause
• Scope of the Peril
o Loss of income
o Bodily Injury
o Legal liability to 3rd party
• Insurer is Liable: when the peril insured is the proximate cause
• Insurer is NOT liable: when the peril insured is ONLY a remote cause
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
60 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
•
•
•
Burden of proof: Insurer has the burden of proof to show that he is not
liable
Proximate Cause: is that which in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces an injury without
which the injury would not have occurred.
o Not equivalent to immediate cause
Hostile Fire – occurs outside the usual confines or begins as a friendly
fire and becomes hostile by escaping from the place where it ought to
be to some place where it ought not to be
Friendly Fire – fire burns in a place where it was intended to burn and
ought to be
Sec. 87.
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.
Notes:
• For as long as the loss occurred in the course of rescuing or by efforts
to rescue from a peril INSURED against and also PROVIDED that the
property would have been lost by the peril insured against – the
insurer is liable, example – goods getting stolen while taken out coz
there was fire
• Loss is caused by the efforts to rescue the thing insured from the peril
insured against – example, pouring water to save from fire
• Insured is bound to exercise reasonable degree of care in removing the
goods
• The necessity of removal is to be determined by the circumstances as
they appear at that time, and not to the result.
• However, if it did not take place in the “course of the rescue” nor
“caused by efforts to recue” – insurer is not liable
Sec. 88.
Where a peril is especially excepted in a contract of insurance:
a loss, which would not have occurred but for such peril, is thereby excepted
although the immediate cause of the loss was a peril which was not excepted.
Notes:
• The insurer is NOT liable if the proximate cause is an excepted peril
even if the immediate peril is a peril not excepted
• Immediate Cause: cause or condition nearest to the time and place of
injury
• Insurer has the burden of proof that the risk causing the loss is excepted
Sec. 89.
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 agents or others
Notes:
•
•
•
•
It must be caused by a willful act
GR: Negligence of the insured or his agents – insurer is LIABLE
EX: If the negligence is so gross – insurer is NOT liable
The doctrine of contributory negligence does not in any way apply
to rights under a contract of insurance.
TITLE 10
NOTICE OF LOSS
Sec. 90.
In case of loss upon an insurance against fire, an insurer is exonerated
IF notice thereof be NOT given to him by
• An insured, or
• Some person entitled to the benefit of the insurance
without unnecessary delay
For other non-life insurance, the Commissioner may specify the period for
the submission of the notice of loss.
Sec. 91.
When a preliminary proof of loss is required by a policy, the insured is NOT
BOUND to give such proof as would be necessary in a court of justice
BUT it is sufficient for him to give the best evidence which he has in his
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
61 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
power at the time.
Notes:
• Sections 90 and 91 establish conditions concerning matters after the
loss that must be fulfilled before the insured becomes entitled to the
benefit of a fire insurance policy
o Written notice of loss given to the insurer
o When required by the policy, preliminary proof of loss
• No justification for submitting false proofs
• Breach affects a right that has already accrued
• Until a loss occurs, through a peril covered by the policy, the insurer’s
liability under his contract is altogether contingent, but with the
happening of the capital fact of loss, his liability arises and becomes
properly fixed.
• All conditions/requirements after the loss are merely for EVIDENTIAL
PURPOSES and DO NOT form part of the conditions of liability.
o Substantial compliance with the requirements is sufficient
(with regard to submission of documents to prove loss
Notice of loss – formal notice given the insurer by the insured or the claimant
under a policy of the occurrence of the loss insured against; necessary for the
insurer to be liable to pay the claim.
• Purpose: is to enable the insurer to gather information and make the
proper investigation while evidence is still fresh and take such action as
may be necessary to protect his interest from fraud or imposition
• No particular form is needed
• Formal notice of loss is not necessary if the insurer has actual notice
o It is immaterial that if the notice was not given, the company
would not be prejudiced; and if given, the company would not
be benefitted.
Time for giving notice of loss
• “Without unnecessary delay” – within reasonable time
• Depends on the circumstances of the case
• Construed liberally in favor of the insured
• Non-life insurance other than fire – the Commissioner may specify
the period for the submission of the notice of loss
• Parties may stipulate the period but must not be unreasonably short
• Lindus v. Northern Insurance Co. of New York
o Duty of insurer to show it has been prejudiced because of
delay in the giving of notice
o
o
Burden of proving actual prejudice is on the insurer
Duty of insurer to show that an additional insured knew of the
policy and it conditions
! Or that they made a reasonable effort to apprise the
insured of the extent and conditions of the policy
Proof of Loss
• Proof of loss: more or less formal evidence given the company by the
insured or claimant under a policy of the occurrence of the loss, the
particulars and the data necessary to enable the company to determine
its liability and amount
• Best evidence which he has in his power at the time is sufficient
o Need not be of such persuasiveness of that required in judicial
proceedings
• In loss upon an insurance against fire – written notice needed
• But GR: NO FORM REQUIRED
o Orally
o In writing
! Though more advisable if in writing for the
protection of the insured or his beneficiary
• Notice of loss may be in the form of:
o Informal/Provisional claim
! Containing minimum information
o Formal claim
! Contains the full details of the loss, computations of
the amounts claimed, and supporting evidence
together with request or demand for payment
Purpose of Proof of Loss
• Notice – give information upon which he may act promptly in
protecting the property from further loss for which he may be liable or
enable him to take any other steps that his interests may require
• Notice of loss is different from proof of loss.
• Statement of loss is a more formal requirement.
o Give the insurer information by which he may determine the
extent of his liability
o Afford him a means of detecting any fraud that may have been
practiced upon him
o Operate as a check upon extravagant claims
• May avail the services of ADJUSTERS in effecting the settlement of
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
62 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
an insurance claim
Burden of Proof of Loss in Court Action
1. INSURED has the burden of proving that he suffered loss.
a. In life insurance – death of insured must be proven
2. Once insured makes a prima facie case in his favor, burden SHIFTS to
the INSURER to controvert insured’s prima facie case
a. Insurer who seeks to defeat a claim because of an exception or
limitation in the policy has the burden of establishing that the
loss comes within the purview of the exception or limitation
•
Fire insurance
• Plaintiff has to prove the amount of loss by preponderance of
evidence
• Cost price is competent evidence to show value of articles
destroyed by fire
• BUT INVENTORY OF GOODS destroyed by fire is a mere claim
for loss and does not constitute evidence of loss. Testimony or
evidence must be given to sustain the correctness of claim.
Excuses for non-compliance with conditions
• Timely compliance with conditions is a condition precedent to right to
recover under the policy
• Failure to serve notice or proof may be excused when the
circumstances are such as to make strict compliance with the
requirement impossible
• Example: Insured died before the fire and the heirs did not
know about the policy
• Effect of fraudulent claim of loss
• Mere filing of such claim will exonerate the insurer if such clause is
part of the contract
• Good faith however will not exonerate the insurer
3. There must be positive proof of fraud – burden is on the insurer
Sec. 92.
All defects in a notice of loss, or in preliminary proof thereof,:
which the insured might remedy, and
which the insurer omits to specify to him, without unnecessary delay, as
grounds of objection, are WAIVED.
When defects in notice or proof deemed waived
• Proofs of loss satisfactory to the insurer are required to be given
• But the insurer must be satisfied when the insured has done all in his
power to furnish the information stipulated for in the policy
• It is the DUTY of the dissatisfied insurer to indicate the defects in the
proofs of loss as given, so that the deficiencies may be supplied
o Retention of defective proofs constitute as a waiver of his
objections
• Waiver of the insurer is present in the following instances
a. Writes to the insured that he considers the policy null and void
(as the notice of proof or loss would be useless)
b. Recognizes his liability to pay the claim
c. Denies all liability under the policy
d. Joins in the proceedings for determining the amount of loss by
arbitration, making no objections on account of notice and
preliminary proof
e. Makes objection on any ground other than a formal defect in
the preliminary proof
•
A general statement that proofs are defective is not sufficient to impose
on the insured the duty to supply the defects not pointed out.
o Example: If the policy required an affidavit of loss and a
defective one is accepted – there is a waiver on such defect.
Sec. 93.
Delay in the presentation to an insurer of notice or proof of loss is WAIVED
• If caused by any act of his, or
• If he omits to take objection promptly and specifically upon that
ground.
When Delay in Presentation of Notice or Proof Deemed Waived
• Waiver of delay may be made:
o By an act of the insurer
o Failure to take objection promptly and specifically upon that
ground
• Other instances mentioned in the book
o By accepting payment of premium with full knowledge that
the premises had been injured or destroyed by fire = estopped
from claiming that notice of fire was not given
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
63 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
o
If insured has attempted to comply with stipulations of the
policy and the company makes objections which necessitate
amended or supplemental prods, the insured will be allowed a
reasonable time after he is appraised within which to remedy
the defects
Sec. 94.
If the policy requires, by way of preliminary proof of loss,
the certificate or testimony of a person other than the insured,
it is sufficient for the insured to use reasonable diligence to procure it, and
in case of the refusal of such person to give it, then to furnish reasonable
evidence to the insurer that such refusal was not induced by any just grounds of
disbelief in the facts necessary to be certified or testified.
Effect of Failure to secure certificate or testimony of third person
• Insured only required to exercise reasonable diligence to procure it
• Liberally construed in favor of the insured
• Identity of risk or peril insured against
Examples
• X insures his house against fire with Y company and Z company
• X mortgages house to B, insurance taken by X and another by B on the
same house = not double insurance; not same insurable interest
• X insures his car against fire with Y and theft with Z = not double
insurance; not same risk or peril
•
•
•
•
•
TITLE 11
DOUBLE INSURANCE
Sec. 95.
A double insurance exists where:
- the SAME person is insured
- by SEVERAL insurers separately
- in respect to the same subject and interest.
Notes:
• Additional insurance, other insurance and double insurance are used
interchangeably although there is a technical difference in their
meanings
• In double insurance, there is co-insurance by two or more insurers,
hence it is also known as CO-INSURANCE.
Requisites: (All 4 must concur)
• Same person is insured
• Two or more insurers insuring separately
• Identity of subject matter
• Identity of interest insured
Double insurance is NOT prohibited IF the policy does not contain any
stipulation against such
Prohibition for double insurance is valid in order to prevent over
insurance and thus avert the perpetration of fraud
IF the insurer knows the existence of other insurances AND continued
the policy – it amounts to a waiver of the annulment for such cause
“Additional/Other insurance clause”
o Valid in the absence of consent, waiver or estoppel
o In order to be violation, the other insurance must be upon the
same subject matter, same interest and same risk
Additional insurance obtained by a third person without the knowledge
or consent of the insured = prohibition will NOT affect his rights under
the policy in the absence of ratification
Double insurance is different from over-insurance
• DI and OI may exist at the same time or neither may exist at all
• Double insurance is the term used instead of “co-insurance” when the
sums insured exceed the insurable interest. In such case, there is overinsurance by double-insurance
Double Insurance
There may be no over-insurance as
when the sum total of the amounts of
the policies issued does not exceed the
insurable interest of the insured
There are always several insurers
Over Insurance
Amount of the insurance is beyond
the value of the insured’s insurable
interest
There may only be one insurer
involved
Sec. 96.
Where the insured in a policy other than life over-insured by double
insurance:
(a) The insured, unless the policy otherwise provides, may claim payment
from the insurers in such order as he may select, up to the amount for
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
64 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
which the insurers are severally liable under their respective contracts
(b) 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
(c) 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
(d) Where the insured receives any sum in excess of the valuation in the
case of valued policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust for the insurers,
according to their right of contribution among themselves
(e) Each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which he
is liable under his contract
Notes:
• Principle of Contribution – requires each insurer to contribute ratably
to the loss or damage considering that the several insurances cover the
same subject matter and interest against the same peril
• Contribution clause – stipulation that the insurance company shall not
be liable to pay or contribute more than its ratable proportion of the loss
or damage
• They apply only where there is OVER-INSURANCE by DOUBLEINSURANCE
o Insurance is contained in several policies the total amount of
which is in excess of the insurable interest of the insured
• Paragraph (e) governs the liability of the insurers among themselves
where the total insurance taken exceeds the loss. If the loss is greater
than the sum total of the policies issued, each insurer is liable for the
amount of his policy.
• The insured can only recover the amount of his insurable interest
whether in one policy or several policies
• Since a contract of insurance is one of indemnity – the amount of
recovery is limited to the value of the insured’s insurable interest
Double Insurance
There must be several insurers
The total of the sum of the policies
need not exceed the insurable
interest
One insurer is sufficient
Amount of the insurance is
always beyond the value of the
insurable interest
TITLE 12
REINSURANCE
Sec. 97. A contract of reinsurance is one by which an insurer procures a third
person to insure him against loss or liability by reason of such original insurance.
Reinsurance defined
• It is a contract whereby one party, the reinsurer, agrees to indemnify
another, the reinsured (original insurer), either in whole or in part,
against loss or liability which the latter may sustain or incur under a
separate and original contract of insurance with a third party, the
original insured.
• It has been referred to simply as "an insurance of an insurance".
• Such contracts are sometimes referred to as "treaties".
• The reinsurance of a reinsurance is called retrocession.
Reinsurance distinguished from double insurance.
DOUBLE INSURANCE
In double insurance, the insurer
remains as the insurer of the
original insured
In double insurance, the subject
of the insurance is property
Double insurance is an insurance
of the same interest
REINSURANCE
While in reinsurance, the insurer
becomes the insured, insofar as the
reinsurer is concerned
While in reinsurance, it is the
original insurer's risk
Reinsurance is an insurance of a
different interest
In double insurance, the insured
is the party in interest in all the
contracts
While in reinsurance, the original
insured has no interest in the
contract of reinsurance which is
independent of the original
contract of insurance
Over Insurance
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
65 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
In double insurance, the insured
has to give his consent
While in reinsurance, the consent
of the original insured (who is
hardly even aware of the
reinsurance transaction) is not
necessary.
Value of reinsurance
From the standpoint of the insurer:
1. Every insurance company, in accordance with its financial strength,
establishes a limit on the maximum claim it wishes to pay out of its
own resources. This limit is called a "retention." At the same time, a
company wants its salesmen to be able to take an application for any
amount the applicant is willing to seek. When such applications are for
a sum over the company's retention, it handles the excess by means of
reinsurance.
2. Through the use of reinsurance, then, an insurer is able to issue policies
for amounts in excess of its retention limit or beyond the capacity of its
financial resources in case of a loss, rather than inconvenience a client
by referring him to other insurance companies. This is in the best
interest of the insuring public, the insurer, and the reinsurer.
3. Also, insurance protection will be distributed to a greater proportion of
those needing protection if the underwriters of many companies are in
position to supply insurance protection to applicants requiring large
amounts and to applicants who are not eligible for insurance at standard
rates.
4. Underwriters benefit through the placing of additional insurance in an
expanded market. The insurance industry benefits by reducing the
waste arising out of policies which are applied for but not issued.
5. The knowledge of the industry regarding classification of impaired
risks is increased in the most economical manner. Reinsuring
companies serve as focal point for the collection of such risks where
statistically significant volumes of consistently underwritten
substandard business are accumulated and subjected to extensive
analyses by an experienced staff.
6. Finally, the reinsurer benefits through the acquisition of business which
is expected to prove profitable in the long run.
From the standpoint of the insured:
1.
2.
3.
4.
5.
It gives insurance companies that practice in greater financial stability
and thus makes the insured's individual policy more reliable;
If a large amount of insurance is needed, the insured may obtain it
without negotiating with numerous companies;
It enables the insured to obtain protection promptly, without the delay
that would be required to divide and distribute the amount among many
companies;
All the insurance can be written under identical contract provisions,
whereas otherwise these might vary with the different companies
among whom the insurance is divided; and
Small companies are encouraged to divide large exposures for safety
and enabled to accept a wide variety of applicants.
From the standpoint of the insuring public
• Contracts or "treaties" of reinsurance are plainly beneficial to the public
inasmuch as they promote both efficiency and stability in the conduct
of the reinsurance business.
Sec. 98. Where an insurer obtains reinsurance, except under reinsurance
treaties, he must communicate all the representations of the original insured,
and also all the knowledge and information he possesses, whether previously or
subsequently acquired, which are material to the risk.
Duty of reinsured to disclose facts
•
•
•
Where an underwriter is seeking to insure his risks, his duty to disclose
all material facts is no less than the similar duty imposed on a person
seeking an original insurance; the duty in both cases is one of the
strictest good faith since the risk insured against in a contract of
reinsurance is the probability that the original insurer may be compelled
to indemnify for the loss under the policy issued by him.
Thus, a policy may be avoided where the reinsured conceals the fact
that a loss has taken place or that the property is over-insured where he
has knowledge thereof.
Section 98, however, covers knowledge or information possessed by
the insurer "whether previously or subsequently acquired, which are
material to the risk."
Automatic and facultative methods of ceding reinsurance
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
66 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
Reinsurance may be placed in effect either automatically or
facultatively
• Share or participation in risk insured. — The rule in Section 98 does
not apply in case of automatic reinsurance treaties under which the
ceding company (reinsured) is bound to cede (give off by way of
reinsurance) and the reinsurer is obligated to accept a fixed share of the
risk which has to be reinsured under the contract.
• In a facultative insurance, which covers liability on individual risk,
there is no obligation either to cede or to accept participation in the risk
insured, each party having a free choice. But once the share is accepted,
the obligation is absolute and the liability assumed thereunder can be
discharged by one and only way — payment of the share of the losses.
There is no alternative or substitute prestation.
• Advantage to insurer. — The main advantage to the insurer of the
automatic method is avoidance of any delay in issuing its policy.
o The advantage to the insurer of the facultative method is that it
receives the reinsurer's underwriting opinion before the policy
is issued.
• Protection to reinsurer. — By agreeing to accept business
automatically, the reinsurer is relying on the underwriting judgment of
the insurer and is bound to accept a case even though it may not agree
with the underwriting decision.
o The reinsurer is protected by the requirement that the original
insurer retains its full retention limit, which assures a measure
of self-interest. In actual practice, when any question of proper
underwriting classification exists, the insurer usually does not
use its automatic facility but instead secures the reinsurer's
underwriting opinion by submitting the case facultatively.
Reinsurance treaty distinguished from reinsurance policy
•
REINSURANCE POLICY
REINSURANCE TREATY
A reinsurance policy is a contract of
indemnity one insurer makes with
another to protect the first insurer from
a risk it has already assumed
In contradistinction, a reinsurance
treaty is merely an agreement
between two insurance companies
whereby one agrees to cede and the
other to accept reinsurance business
pursuant to provisions specified in
the treaty.
The practice of issuing policies by
insurance companies includes, among
other things, the issuance of
reinsurance policies on standard risks
and also on substandard risks under
special arrangements.
The lumping of the different
agreements under a contract has
resulted in the term known to the
insurance world as 'treaties.' Such a
treaty is, in fact, an agreement
between insurance companies to
cover the different situations
described.
Reinsurance treaties and reinsurance
policies are not synonymous.
Treaties are contracts for insurance
It is only after a reinsurance cession is
made that the obligation of the insurer
to pay the reinsurance premium arises.
Sec. 99. A reinsurance is presumed to be a contract of indemnity against
liability, and not merely against damage.
Nature of contract of reinsurance
• Contract, one of indemnity against liability. — In reinsurance, the
reinsurer agrees to indemnify the insurer, not against actual payment
made but against liabilities incurred. Therefore, it is by no means
necessary that the insurer shall first have paid a loss accruing, as a
condition precedent to his demanding payment of the reinsurer.
• Contract, separate from original insurance policy. — The contract of
insurance is independent of and separate from the contract of
reinsurance. The practice is for the reinsurer to pay the insurer even
before the latter has indemnified the original insured.
• Contract based on original policy. — The policy of reinsurance,
however, is necessarily based upon the original policy, and the rights of
the parties while, of course, fixed by the terms and conditions of the
policy of reinsurance are yet greatly affected by the terms and
conditions of the original policy upon which the reinsurance contract is
based.
• Insurable interest requirement applicable. — The doctrine of insurable
interest applies to reinsurance just as it does to any insurance contract.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
67 of 68
INSURANCE (BASED ON 2014 DE LEON BOOK)
•
Therefore, the primary insurer is not entitled to contract for reinsurance
exceeding the limits of the policy ceded to the reinsurer.
Rule on subrogation applicable. — In general, a reinsurer, on payment
of a loss, acquires the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss.
Sec. 100. The original insured has no interest in a contract of reinsurance.
Rights of original insured in contract of reinsurance
• The insured, unless the contract so provides, has no concern with the
contract of reinsurance, and the reinsurer is not liable to the insured
either as surety or otherwise.
• There is no privity of contract between the original reinsured and the
reinsurer.
• A contract of reinsurance rarely explicitly permits direct action by the
original insured against the reinsurer.
Liability of reinsurer to reinsured.
• In an action on a contract of reinsurance, as a general rule, the reinsurer
is entitled to avail itself of every defense which the reinsured might
urge in an action by the person originally insured.
o Thus, the reinsurer is not liable to the reinsured for a loss
under an original policy if the latter is not liable to the original
insured or for an amount more than the sum actually paid to
the insured.
o It has been held that the clause "to pay as may be paid
thereon" does not preclude the reinsurer from insisting upon
proper proof that a loss within the terms of the original policy
has taken place; it does not enable the reinsured to recover
from his reinsurer to an extent beyond the subscription of the
latter under the contract of reinsurance.
Unless the reinsurance contract contains a stipulation
assigning the right of the insurer in favor of the insured, the
latter, not being a privy to the contract, has no cause of action
against the reinsurer, but only against the insurer.
• Contract of reinsurance with stipulation in favor of original insured. —
The contract of reinsurance may contain a provision whereby the
reinsurer binds himself to pay to the policyholder any loss for which the
insurer may become liable.
o Therefore, the reinsurer who has promised to pay the losses
accruing under the original policy will be liable to a suit by the
original insured under the contract of reinsurance. The
remedy of the insured is both against the insurer and the
reinsurer.
• Contract of reinsurance amounting to novation of original contract. —
The original insured may also maintain an action directly against the
reinsurer in those cases in which the circumstances attending the
making of the contract of reinsurance amount to a novation of the
original contract and hence, operate to discharge that contract and the
original insurer from all obligations thereunder.
o The original insurer, however, will be released only when the
insured agrees with the insurer and reinsurer to the novation.
o Such an agreement is ordinarily carried into effect by a
surrender of the original policy and issuance of a new one
including the same terms and conditions, by the so-called
"reinsurer."
However, such a transaction is not one of technical reinsurance, for here, the socalled "reinsurer" is but substituted for the original insurer and hence, becomes
the immediate insurer of the subject of the original policy.
o
Liability of reinsurer to original insured.
•
Contract of reinsurance solely between insurer and reinsurer.
— In case the contract is solely between the insurer and the reinsurer,
contemplating only an indemnity to the insurer against losses suffered
by reason of the policies carried by him, the original insured has
absolutely no interest in the contract and is a total stranger to it.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BLOCK B 2016)
68 of 68