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INSURANCE (BASED ON 2014 DE LEON BOOK)

THE INSURANCE CODE OF THE PHILIPPINES 4. What worked against the early development of insurance in the
P.D. 612, AS AMENDED BY R.A. 10607 Philippines was the fatalistic attitude exemplified by the phrase “bahala na.”

GENERAL PROVISIONS BIRTH IN THE PHILIPPINES


1. 1829 Lloyd’s of London appointed Stracham, Murray & Co., Inc. as its
representative here.
SEC. 1.This Decree shall be known as “The Insurance Code.” 2. 1939 The Union Insurance Society of Canton appointed Russel & Sturgis
as its agent in Manila
MUTUAL INSURANCE AS OLD AS SOCIETY ITSELF - -Both were limited to non-life insurance
3. 1898 Life insurance was introduced by Sun Life Assurance of Canada
1. Based upon the principle of aiding another from a loss caused by an 4. First domestic non-life insurance company was Yek Tong Lin Fire and
unfortunate event. Marine Insurance Co. in June 8, 1906
2. Existed among the Egyptians, Chines, Hindus, Romans and are known 5. First domestic life insurance company, the Insular Life Assurance Co.,
to have been established among the Greeks as early as the third century Ltd., in 1910.
before Christ. 6. In 1950 reinsurance was introduced with Reinsurance Company of The
3. Origin of present day insurance attributed to merchants of Italian cities Orient for both life and non-life.
who sought to distribute the loss falling upon any one by reason of the 7. First Workmen’s Compensation Pool was organized in 1951 as the
perils of navigation. Royal Group Inc.
4. From Italy the practice of insuring commercial ventures against disaster 8. 1949, a government agency was formed to handle insurance affairs,
spread to other maritime States of Europe such as England. The Insular Treasurer was appointed Commissioner ex-officio.
5. Lombards founded trading houses in London in the 12th Century. All 9. Social insurance was established in 1936 through the GSIS.
questions of insurance were decided based on the customs of merchants 10. SSS followed suit in 1954.
and merchant courts
6. Middle 18th Century – Common law courts of England began to take SOURCES OF INSURANCE LAW IN THE PHILIPPINES
adequate cognizance of insurance cases
7. Lord Mansfield was the “Father of English Commerical Law” and the 1. Spanish Period – Old Civil Code of 1889 and the Code of Commerce
same law was used to determine questions in insurance. 2. Insurance Code expressly repealed the provisions on insurance in the
Code of Commerce
DEVELOPMENT IN THE UNITED STATES 3. Civil Code of The Philippines
4. P.D. 612 instituted “The Insurance Code” in 1974
1. With the exception of maritime insurance, English practices and English 5. P.D. 1460 consolidated all insurance laws into a single code known as
decisions have little influence in the United States. “The Insurance Code of 1978”
DEVELOPMENT IN THE PHILIPPINES 6. R.A. 10607 mad many substantial amendments to the Insurance Code
1. Insurance in the Philippines is rather a nascent institution. It did not
exist prior to the 19th Century. LAWS GOVERNING INSURANCE
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 1. Insurance Code of 1978
misfortune -Governs the different types of insurance contracts and those engaged
3. Eventually mutual benefit societies and fraternal organizations were in insurance business in the Philippines.
organized for the purpose of rendering assistance. 2. Civil Code

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a. Void Donations – Arts. 739 and 2012 -The insurer has the right to recover
b. Applicability of the Civil Code –Art. 2011 1. Directly in a suit against the wrongdoer or
c. Life Annuity Contracts – Arts. 2021-2027 2. As the real party in interest in a suit brought by the insured
d. Compulsory M.V. Liability Insurance – Art. 2186
e. Insurer’s right of subrogation – Art. 2207 Case Doctrine: Whenever the wrongdoer settles with the insured
without the consent of the insurer and with the knowledge of the
Note: Insurance contracts are governed primarily by the Insurance insurer’s payment and right of subrogation, such right is not defeated
Code but if it doesn’t specifically provide for a particular matter in by settlement.
question, the provisions of the Civil Code on contract and other special
laws shall govern. 3. Right of subrogation applicable only to property insurance
-Value of human life is unlimited thus no recovery from a third party
3. Special Laws can be deemed adequate to compensate the insured’s beneficiary. Life insurance
a. The Insurance Code contracts are not ordinarily contracts of indemnity.

b. The Revised Government Insurance Act of 1977 4. Privity of contract or assignment by insured of claim not essential.
c. The Social Security act of 1954 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
4. Others – Insofar as the Civil Code is concerned, the Code of Commerce is a against the third party.
special law b. Right of subrogation does not come from privity of contract but it
a. R.A. 656 known as the “Property Insurance Law” dealing with accrues upon payment of the claim by the insurer
government property c. The subrogation receipt is sufficient to establish not only the
b. R.A. 4898 providing life, disability and accident insurance coverage relationship of the insurer and the insured, but also the amount paid to
to barangay officials settle the insurance.
c. E.O. 250 increases, integrates and rationalizes the insurance benefits 5. Loss or injury for risk must be covered by the policy otherwise there could be
of barangay officials and members of the Sanggunians. no subrogation.
d. R.A. 3591 established the Philippine Deposit Insruance Corporation 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
INSURER’S RIGHT OF SUBROGATION the amount of his loss (Remember that it is a contract of indemnity hence the
insured cannot profit).
1. Basis – Substitution of one person in place of another with reference to a -If the amount paid bu the insurance company does not fully cover the
lawful claim or right, so that he who is substituted succeeds to the rights of the injury or loss, the aggrieved party viz. the insured is entitled to recover the
other in relation to a debt or claim, including its remedies and securities. deficiency NOT the insurer.
-Basically a process of legal substitution. The insurer, after paying the 7. Right of insured to recover from insurer instead of the third party – The
amount covered by the policy, steps into the shoes of the insured, insurer cannot defeat the claim on the ground that the insured has the right to be
availing of himself the latter’s rights that exist against the wrongdoer at indemnified by the third person who caused the loss.
the time of the loss. 8. The right of the insurer against the third party who caused the loss is limited
2. Purposes of subrogation condition in policy to the amount recoverable from the latter by the insured.
1. To make the person who caused the loss legally responsible 9. The exercise of the right of subrogation by the insurer is purely discretionary
2. Prevent the insured from having double recovery from the 10. The right of subrogation has its limitations
wrongdoer and the insurer. a. Both the insurer and the consignee are bound by the contractual

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stipulations under the bill of lading insured


b. The insurer can be subrogated only to the rights as the insured may 6. The award of moral and exemplary damages in case of unreasonable delay
have against the wrongdoer 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 CONSTRUCTION OF THE INSURANCE CODE
own act, releases the wrongdoer from liability then the insurer loses his 1.The interpretation of the judicial authorities of the State from where the
rights to the wrongdoer. Consequently, the insured will be bound to Insurance Code was taken shall be instructive, at the very least, in terms of the
return to the insurer, the amount it paid as indemnity. Under Art. 2207, fundamental points.
the insurer is the REAL PARTY IN INTEREST as re: the portion of 2. The rules enunciated by the best considered American authroties involving
the indemnity paid. similar provisions of the Philippine law on insurance should be adopted for the
Case: Where the insurer pays the insured the value of the lost goods purpose of having our law on insurance conform as nearly as possible to the
without notifying the carrier who has, in good faith, settled the claim modern law of insurance as found in the United States.
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 SEC. 2. Whenever used in this Code, the following terms shall have the
right of subrogation respective meanings hereinafter set forth or indicated, unless the context
otherwise requires:
11. Effect of assignment by insured of its rights against third party to insurer
-Where the insured (shipper) has assigned its rights against defendant (a) A “contract of insurance” is an agreement whereby one undertakes for a
(carrier of goods) for damages caused to the cargo shipped, to the insurer which consideration to indemnify another against loss, damage or liability arising from
paid the indemnity, the case isn’t between the insured and insurer but one an unknown or contingent event.
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 A contract of suretyship shall be deemed to be an insurance contract, within the
action vs. the carrier on account of the damage to cargo such action can be meaning of this Code, only if made by a surety who or which, as such, is doing
asserted or availed of by the insurer as a subrogee of the insured and the carrier an insurance business as hereinafter provided.
cannot set up as a defense any defect in the insurance policy because it is not
privy to it. (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
(1) Making or proposing to make, as insurer, any insurance contract;
Doctrines: (2) Making or proposing to make, as surety, any contract of suretyship as a
1.If the insurer’s company is vitiated by error then such fact may be used to vocation and not as merely incidental to any other legitimate business or activity
give rise to the nullity of the contract of the surety;
2.Contract for a life annuity was not perfected where the acceptance of the (3) Doing any kind of business, including a reinsurance business, specifically
home office of the insurer never came to the knowledge of the applicant who recognized as constituting the doing of an insurance business within the meaning
perished of this Code;
3. An insurance contract is null and void where the consideration is false or (4) Doing or proposing to do any business in substance equivalent to any of the
fraudulent foregoing in a manner designed to evade the provisions of this Code.
4.When an insurance contract is rescinded then the obligation of mutual
restitution under the Civil Code shall apply In the application of the provisions of this Code the fact that no profit is derived
5.A common-law wife is disqualified from becoming the beneficiary of the from the making of insurance contracts, agreements or transactions of that no

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separate or direct consideration is received insurance contract “if made by a surety who or which as such is doing
therefor, shall not be deemed conclusive to show that the making thereof does an insurance business.” But strictly, a contract of suretyship is different
not constitute the ding or transacting of an insurance business from an insurance contract.
(c) as used in this Code, the term “Commissioner” means the “Insurance 2. Elements of the contract
Commissioner.   1. Subject matter – thing insured
2.Consideration – premium paid by insured
LEGAL CONCEPT OF INSURANCE 3. Object and purpose – risk-bearing contract; transfer and distribution
of risk of loss, damage, or liability arising from an unknown or
1. “Assurance” is also used instead of “insurance.” But strictly, contingent event
Assurance – refers to an event like death, which is certain to happen Note – to be binding there must be an acceptance of the offer and legal
Insurance – refers to a contingent event which may or may not happen capacity. To be enforceable, all the requisites of a binding contract
-Under the Code, however, the term “insurance” covers “assurance” must be present

2. Better definition – a contract of insurance is an agreement by which one party NATURE AND CHARACTERISTICS OF AN INSURANCE CONTRACT
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, 1. Consensual – perfected by a meeting of the minds of the parties
damage, liability, or disability arising from an unknown or contingent event. 2. Voluntary – parties may incorporate such terms and conditions as they please.
EXCEPTIONS:
3. In general, an insurance contract is a promise by one person to pay another 1. May be required by law such as in motor vehicles or as a condition to
upon the happening of a fortuitous event beyond the effective control of either granting a license to conduct a business affecting public safety or
party in which the promise has an interest apart from the contract. welfare
-A written insurance contract is called a policy 2. May arise by operation of law e.g. War Damage Corporation Act
3. Social insurance for members of the government
DEFINITION OF INSURANCE FROM OTHER VIEWPOINTS service or for employees of the private sector
3. Aleatory – it depends on some contingent event thus it is not a contract of
1. Economic – reduces risk by a transfer and combination of uncertainty in chance and in an insurance contract each party must take a risk.
regard to financial loss Insurer: Risk of having to pay the indemnity if the contingent event
2. Business – serves as basis for credit and a mechanism for savings and happens
investments Insured: Risk of paying the premium without receiving anything
3. Mathematical – application of actuarial principles to calculate risk therefor if the contingent event does not happen except protection,
4. Social – social device whereby uncertain risks of individuals may be which in itself is a valuable consideration
combined in a group and this made more certain, with small periodic 4. Unilateral – imposing legal duties only on the insurer who promises to
contributions by the individuals providing a fund out of which those who suffer indemnify in case of loss
losses may be reimbursed -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
DETERMINATION OF THE EXISTENCE OF THE CONTRACT until payment for a loss.
-Insured usually assumes no duty to pay subsequent premiums unless
1. Nature – to be determined by the exact nature of the contract actually entered the insurer has continued the insurance after maturity of the premium,
into whatever form it takes or whatever name it may be called. in consideration of the insured’s express or implied promise to pay.
Note- Under the code, a contract of suretyship shall be deemed an BUT he has the right to pay the stipulated premium and the insurer has

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the duty to accept the payment when tendered. 3. Assumption of risk by insurer
5. Conditional – Subject to conditions the principal one of which is the is only a risk-shifting device not a contract of insurance e.g. contract of guaranty
happening of the contingent event insured against
6. A contract of INDEMNITY – except for life and accident insurance where the 1. Equitably distributes losses out of a general fund contributed by all
result is death because the promise of the insurer is only to make good the loss 2. Provides protection against absorbing one’s losses alone
of the insured.
1. If you have no insurable interest then you cannot be insured and the COPING WITH RISK
contract will be void and unenforceable
7. Personal – between insurer and insured Different ways of coping with risk
1. Insured generally cannot assign before the happening of the loss, his 1. Limiting probability of loss – e.g. use of safety measures and devices
rights under a property policy without the consent of the insurer. The 2. Limiting effects of loss – e.g. sprinkler systems, fire extinguishers
obligation to pay does not attach to the object insured. If a transfer is 3. Diversification in investment – basically this is the opposite of putting all
allowed in the policy then such contracts by which insurance is made to your eggs in one basket. You manage your portfolio so you could gain on your
pass from one owner to another are in the nature of successive investments in terms of a net profit while incurring some losses in some areas.
novations. 4. Self-insurance or self-financing – e.g. rainy day money
2. Life insurance policies, however, are generally assignable or 5. Ignoring risk – bahala na si batman
transferable as they are in the nature of property. 6. Transferring risk to another - by contractual arrangement such as a seller’s
8. Since insurance is a contract then such is considered property in legal warranty. If your T.V. breaks within a couple of years, the manufacturer’s
contemplation. But unlike property policies, life insurance policies are generally warranty handles the repairs and defrays the costs.
assignable like any chose in action
VALUE OF TRANSFERRING RISK
DISTINGUISHING ELEMENTS OF THE CONTRACT OF INSURANCE
1. Risk preferring – those who choose to forego the certain loss in the hope of
1. Insurable interest incurring no loss, despite the equal probability of suffering a large loss
2. Insured is subject to a risk of loss 2. Risk neutral – indifferent to the alternatives
3. Insurer assumes risk of loss or a portion of it 3. Risk averse – people who do not want to play ball. They’d rather choose to
4. Such assumption of risk is part of a general scheme to distribute actual losses lose P500 with certainty than confront the 50% chance of losing twice as much
among a large group or substantial number of persons bearing a similar risk and Notes – As the potential magnitude of loss increases, most people
5. Payment of premium – ratable contribution to a general insurance fund become more risk averse. This is true even though the probability of
loss declines.
Note- ALL the elements must be present, otherwise it is not an insurance -The more wealth a person has the less likely it is that the person will
contract. And even if all the elements are present, it is not an insurance contract be risk averse
if the same is entered into for the purpose of rendering service and not -When people are averse to the risk of a loss, they are usually willing to
indemnification for a loss. 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. Benefit to society as a whole – society as a whole would be better off if a
1. Insurable interest large number of similar, mutually beneficial transactions would occur
2. Risk of loss 2. Undesirable side effects – If X’s risk is completely eliminated through

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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 -Multiple Line Insurance – combination of at least two kinds e.g. fire
cannot always monitor the behavior of the insured and casualty
4. Sharing by insured of some responsibility for the risk – commonly termed as -All Lines Insurance – denotes the broadening nature of insurance
deductible or coinsurance to make the insured retain some responsibility for the operations which combine at least most of the basic types of insurance.
loss THREE MAIN CLASSIFICATIONS
a. Deductible – insured bears any loss up to some stated amount
b. Coinsurance – insured bears some stated percentage of the loss 1. Insurance against loss or impairment of property interests
regardless of the amount 2. Insurance against loss of earning power due to death
5. Problem re: computation of premium to be charged – difficult to calculate but 3. Insurance against contingent liability to make payment to another e.g.
generally the amount of the fee should equal the insured’s expected loss e.g. a 1 reinsurance, workmen’s compensation insurance and M.V. Liability Insurance
in 5 probability of losing P100 computes to an expected loss of P20 MODERNIZED CLASSIFICATION
6. Classification of risks – Insurers group similar risks together and charge each
member of the same group, the same fee. 1. Marine
7. Sub-classification of risks – At a certain point, further subdivision of the 2. Property
group becomes too expensive relative to the benefits gained. As a result, some 3. Personal
insureds will be better risks than others 4. Liability

THE FIELDS OF INSURANCE CLASSIFICATION BY INTERESTS PROTECTED

1. Social (Government) 1. 1st Party vs. 3rd Party insurance


-Compulsory and designed to provide a minimum of economic security -In the former the contract between the insurer and insured indemnifies the
for large groups. It is compulsory because some person can’t or won’t insured in the event of a loss suffered by him directly. In the latter a third person
voluntarily purchase insurance damaged or injured by the insured is paid the indemnity
2. Voluntary (Private) - Property Insurance is first party insurance
* subgroups based on nature of perils - Liability Insurance is third-party insurance
1. Commercial insurance Note – All insurance except liability can be fairly thought of as first-party
1. Personal insurance
- Losses due to loss of earning power -In life insurance the insured designates a beneficiary to receive the proceeds of
2. Property the policy but this does not mean that such is third-party insurance
a. Indemnifies the owner for destruction or damages -Health insurance is also first party
to property e.g. Fire and Marine -the distinction between 1st and 3rd party insurance is useful in understanding the
b. As a consequence of negligent acts that result in concept of no-fault insurance which is the substitution of 1st party insurance for
injuries to other persons or damage to their property tort liability.
e.g. Casualty and Surety 2. All risk vs. Specified Risk
2. Cooperative insurance – “Cooperative” is applied to assoc’s usually Note – The burden of proof in a specified risk policy is placed on the insured to
operating under hospital, medical, fraternal, employee, or trade-union prove that the loss falls within the policy’s provisions on coverage. In an all-risk
auspices. Usually non-profit policy, the burden of proof is on the insurer to prove that the loss falls within an
3. Voluntary Government Insurance – e.g. insurance of mortgage loans explicit exception to coverage it wants to avoid paying.
and insurance of growing crops -If the exact cause of the loss is difficult to determine then an all-risk policy can

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be highly beneficial for the insured Rules:


-All risk coverage does not alter basic insurance law principles like the insurable 1. Interpreted liberally in favor of the insured and strictly against the insurer
interest requirement, causation rules, the requirement that the loss not be 2. Interpreted as to carry out the purpose for which the parties entered into the
intentionally caused by the insured, and implied exceptions. contract, which is to insure against risks of loss, damage or liability on the part
of the insured.
CLASSIFICATIONS UNDER THE CODE 3. When it contains exceptions or conditions
1. Interpreted most favorably toward those against whom they are
1. Life insurance contracts which may be: intended to operate and most strictly against the insurance company or
a. Individual Life the party for whose benefit they are inserted.
b. Group Life 2. Where restrictive provisions are open to 2 interpretations, that which
c. Industrial Life is most favorable to the insured is adopted.
2. Non-life insurance contracts which may be: 3. Limitations of liability must be construed in such a way as to
a. Marine preclude the insurer from non-compliance with its obligations.
b. Fire
c. Casualty Cases:
3. Contracts of suretyship or bonding 1. Amount recoverable in case of death by drowning is not stated in the
policy.
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 Insured died of drowning. The insurer only bound itself to pay 1K-3K
no prohibition by a statute or violation of public policy. in case of death or bodily injury. It didn’t say anything about
drowning although it gave specific amounts for specific causes of
CONTRACTS WRITTEN BY GUARANTY OR SURETY COMPANIES 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
Designated as: indemnity.
-Fidelity
-Title 2. Deceased has already been paid under the Workmen’s Compensation
-Bond Act from another policy
-Security Guaranty
Note: The underwriter engages in the business for profit, especially since the Policy stipulated that any authorized driver of Taxi Co. should not be
terms of such contracts usually closely resemble the essential elements of an entitled to any indemnity under any other policy. The deceased,
insurance contract. They are construed strictly against the insurer. however, was paid his workmen’s compensation from a different
-A contract of suretyship shall be an insurance contract only if policy. The Court held that despite the prohibition, it is too well-
1. Made by a surety settled that what the law requires enters into and forms part of
2. Who is doing an insurance business within the meaning of the code 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
3. Insured owner of a vehicle was not aware that his driver’s license
Insurance contracts are to be examined and interpreted holistically was irregularly issued.
-Generally insurance contracts are contracts of adhesion
The policy states that the Insurer shall not be liable if damages caused

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to insured vehicle if driven by a person not permitted in accordance premium has yet been remitted. The Court held that the policy is still
with licensing laws or regulations to drive the MV covered in the effective considering the ambiguity created by the operation of the
policy. The driver was illiterate but was able to obtain a license by conditions should be interpreted adversely against the GSIS which
paying P25. The insurance company presented a certification from the prepared the application.
Motor Vehicle Office that his license was not issued by it. No proof
that the insured knew that the circumstances surrounding such issuance 6. Insured spouses died when passenger truck they were driving was
was irregular. The Court held that the insurer is still liable because (1) ambushed by Muslim rebels
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 Insurer paid the face value of the life insurance policies of D and E. But
qualified to operate a M.V. and considering the weight of authority is in denied liability for accidental death benefits of double indemnity on the
favor of a liberal interpretation of the insurance policy for the benefit of ground that their cause of death was an excluded risk n the rider to wit,
the party insured. “ the policy shall not cover loss or disability caused directly or
indirectly by war, declared or undeclared, strikes, riots, and civil war,
4. Insured car in the custody of the repair shop was taken out for a revolution, or any warlike operation.” D and E were killed in an
joyride by employees of the shop owner ambush by Muslim rebels. The Court held that the cause of death was
not contemplated by the phrase “warlike operation” and thus the insurer
The Insurance Commission initially ruled that the accident did not fall must pay the indemnity. The ambush was an isolated one, not done
neither within the “authorized driver” clause nor the theft clause. The pursuant to a prosecution of hostilities between warring parties.
Court held that the ruling is too restrictive and contrary to the
established principle that insurance contracts, being contracts of 7. Insurer resisted the claim of the insured on the ground that the
adhesion are to be construed liberally in favor of the insured. The fact burned oil mill is not covered by any insurance policy because the
that the car was driven in violation of the trust relationship between the description of the insured establishment referred to another building.
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 Insured owned two oil mills. One was destroyed by fire. Insurer resists
was duly licensed. HOWEVER, it is the theft clause that applies since paying the indemnity because the description, which consists of
the car was unlawfully taken. boundaries and descriptions of adjacent structures, of the property
insured allegedly pertains to the oil mill that was left standing. There
Quantum of evidence to prove theft: In the absence of any stipulation to was even a stipulation in the policy that mistakes or errors in the
the contrary, a prior conviction isn’t required to establish the fact of description must be corrected immediately but such was not done. The
theft. It is only to be determined by mere preponderance of evidence. Court held that the insured may still recover because descriptive words
are to be construed with the greatest liberality in giving effect to
5. Policy contains conflicting provisions on effect of non-payment of the insurance. The courts are inclined to consider that the policy
premium covers any building, which the parties manifestly intended to
insure, however inaccurate the description may be.
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.” Note that there was a categorical statement in the policy which
Another condition provides: “That failure to deduct from my salary the used the word NEW, pertaining to the NEW OIL MILL. If the
monthy premiums shall not make the policy lapse, however, the parties intended to insure the old oil mill, there would have been no
premium account shall be considered as indebtedness which, I bind need to use the word NEW.
myself to pay the System.” Applicant died in a plane crash. No

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Cardinal Rule: VERBA LEGIS applies and the insurance contract is racing, pacemaking, reliability trial and speed testing.”
the law between the parties except when there is doubt. When there is
doubt the application of the aforementioned rules of interpretation Car rallying is excepted. Despite the fact that car rallying is not
applies. technically a race, it is definitely a contest based on precision and
coordination of crew as well as on road worthiness. Since the contest
Cases: was timed, controlled and conducted under the conditions with a crew
1. Liability is limited to P150 if repair of insured was undertaken to test the precision of the driver and road worthiness of the car, the
without notice to insurer – Even if the insured paid a greater amount “auto rally” falls within the exception, particularly under pace-making.
that P150, the indemnity he will get will be limited to P150 because the
repair was undertaken without notifying the insurer. 6. Written permission of insurer is required before insured may effect
payment in settlement of claim
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 The policy specifically requires that the insurer’s written consent be
policies of insurance against fire upon the property insured when it is first secured before any payment in settlement of the claim against the
one of the conditions specified in the fire insurance policy for the insured can be made. There is nothing unreasonable or objectionable in
validity of the policy and entitlement to indemnity in case of loss, the this stipulation that would warrant its nullification. It is designed to
policy is null and void. But where the condition does not absolutely safeguard the insurer’s interest against collusion between the insured
declare void any violation of the additional or “other insurance” clause, and the claimant.
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 Note – Where a contract is silent on any particular matter, the doubt
loss or damage is not more than P200,000,” the policy is not totally free arising from such silence shall be construed strictly against the insurer.
of ambiguity. The only reasonable conclusion is that (a) the prohibition
applies only to double insurance and (b) the nullity of the policy shall Ex. The insurer contended that the amount recoverable on the car
only be to the extent exceeding P200,000 of the total policies issued i.e. insurance policy is subject to a deductible franchise. It was ruled that
under the condition, the insurer is amenable to assume a co-insurer’s the deductions of P250 and P274 as deductible franchise and 20%
liability up to the loss not exceeding P200,000. Forfeitures are not depreciation on parts, respectively, claimed by the insurer as agreed
favored. upon in “the contract, has no basis” because “the policy does not
mention any deductible franchise.”
3. Only amputation of hand is considered a loss thereof
The insured suffered injuries, which rendered his hand to be WHAT CONSTITUTES DOING OR TRANSACTING AN INSURANCE
temporarily but totally disabled, he cannot recover the insurance policy BUSINESS
provision, which covers the loss of a hand. Such has been defined as
only pertaining to amputation. 1. Name or designation by insurer not controlling. The exact nature of
the contract is to be determined by the stipulations thereof.
4. The prescriptive period on claims on insurance policies may be
stipulated in the contract. When it is stipulated such is the period that 2. Acts deemed included by law – The Code enumerates acts which are
shall govern, not the Civil Code provision. deemed included in the term “doing an insurance business” or
“transacting an insurance business.”
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 Ex. A company may be found to be engaged in an insurance business

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even though it expressly disclaims any intention to sell insurance. Thus, Note – Even life insurance has the same principle of spreading
a newspaper which, in order to increase its circulation, promises to pay of risk as long as the same does not lapse.
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 2. Subsidiary Functions
coupon taken from it is found in his possession at the time of the 1. Stimulates business enterprises – No large-scale commercial and
accident, carries an accident insurance business which is unauthorized industrial organizations could function in the modern world without
under a charter empowering it to publish a newspaper. insurance. It allows capitalists to use their capital without freezing a
huge portion to guard against potential losses.
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 2. Encourages business efficiency and enterprise – The natural result of
laws. elimination of risk is an increase in business efficiency. The worry of
uncertainty of such risk could seriously diminish the personal
Ex. An agreement, however, to service and repair, at a flat monthly fee, efficiency of business managers but for the way on which insurance
any burned out and defective parts of fluorescent fixtures has been held relieves them of these strains.
not to constitute an insurance contract since any element of warrant or
guaranty in the agreement is merely incidental to the servicing 3. Promotes loss-prevention – The community would suffer much
business. greater economic impoverishment through material losses if it were not
for the loss-prevention measures of insurers. Insurers encourage loss-
The principal object and purpose test – If the principal object and prevention through a system of rating which allows discounts for good
purpose is indemnity then it is an insurance contract. If the principal features and impose special conditions where the risk is unsatisfactory.
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 4. Encourages savings – By protecting individuals against unforeseen
governing insurance. events.

Ex. Health Maintenance Organizations, whether or not organized for 5. Solves social problems – GSIS and SSS provide amelioration for the
profit, whose main object is to provide the members of a group with suffering of the many from loss of life, injuries, old age, disability.
health care services, rather than assumption of insurance risk is not
engaged in the insurance business. 3. Indirect Functions
1. Investment of funds – Insurers accumulate large funds which they
FUNCTIONS OF INSURANCE 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
1. Principal Function – The main function of insurance is risk-bearing. added to the funds but they also make available huge resources for
The financial losses of the few are equitably distributed over the many underwriting industrial, agricultural, cultural, and other projects that
out of a fund contributed by all. contribute to national development

Ex. In fire insurance, the policyholders pay premiums to a 2. Use of reserve funds – Because of the investment policy of insrurers,
common pool, out of which those who suffer loss are their reserve funds are not static, but are used productively. This results
compensated. Thus when a fire guts the property of an insured, in the reduction of the cost of insurance to the insuring public. If the
the indemnity is paid for by all the insureds proportionately. reserve funds are not used, the income they earn now would have to be
obtained through higher premiums

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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 Note:
in terms of reduced prices. This is because the cost of insurance is less • Parties must be competent to enter into the contract
than the cost of risk without insurance • Policy must be in the form previously approved by the
Insurance Commissioner
4. As basis of credit – Credit extension is the most important phase of
modern business and is contributed to by virtually all forms of Subject Matter of the Contract of Insurance
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 • Generally, anything appreciable pecuniary value, which is
protected from sudden disaster by fire. subject to loss or deterioration or of which one may be
deprived so that his pecuniary interest is or may be prejudiced,
TITLE 1 may properly constitute the subject matter of insurance.
WHAT MAY BE INSURED • 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
SEC. 3. Any contingent or unknown event, whether past or future, which reference to the insured as a party to the contract
may damnify a person having an insurable interest, or create a liability against • Casualty insurance – The subject matter is the risk involved in
him, may be insured against, subject to the provisions of this chapter. 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
The consent of the spouse is not necessary for the validity of an insurance by a third person.
policy taken out by a married person on his or her life or that of his or her
children. Event or Peril insured against

All rights, title and interest in the policy of insurance taken out by an original • The contingency or unknown event must be such that its
owner on the life or health of the person insured shall automatically vest in happening will:
the latter upon the death of the original owner, unless otherwise provided for a. damnify or cause loss to a person having an
in the policy. insurable interest
b. Create liability against him
• The unknown event may be past or future.
REQUISITES OF A CONTRACT OF INSURANCE (SI-PA-Pro-Pre-M) Insurance by a married woman
• A married woman without the consent of her husband may take out
8. Subject matter in which the insured has an Insurable interest an insurance on
9. Event or Peril insured Against which may be any (future contingent or o her life
unknown event, past or future) and a duration for the risk thereof o that of her children
10. A Promise to pay or indemnify in a fixed or ascertainable amount o that of her husband
11. A consideration for the promise, known as the “Premium” o paraphernal or separate property

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o property given to her by her husband 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
Insurance by a minor consequently, there is no lottery.
• Insurance contract entered into by a minor is not entirely void but • e.g. A sweepstakes holder cannot insure himself against the failure of
merely voidable his ticket to win a prize
• Insurer may not annul the contract on the ground of incapacity Contract of Insurance not a wagering contract
• If the contract is fair and no fraud, the minor cannot recover • A contract of insurance is a contract of indemnity and is not a wagering
premiums if he cannot return the benefits received. or gambling contract.
• If the minor is the beneficiary under a contract of life, health or • While it is based on contingency, it is not a contract of chance used for
accident insurance, the judicial or natural guardian may exercise in profit.
behalf of the minor any right under the policy • The very purpose of insurance is the reimbursement of the holder of
Ownership of life insurance policy insurance for the actual loss suffered.
• Ownership divided between insured and beneficiaries – the insured is
the owner of its various marketing and sales features, such as the loan Gambling contract Insurance Contract
and cash surrender values, and the beneficiary being the owner of a Parties contemplate gain Parties seek to distribute
promise to pay the proceeds at the death of the insured subject to the through mere chance possible loss by reason of
insured’s right of revocation mischance
• Interest of insured and beneficiary - one who takes a policy of Gambler courts fortune Insured seeks to avoid
insurance on his own life becomes a party to the contract even though misfortune
the benefits of the contract will accrue to another known as beneficiary. Essence of gambling: What one insured gains is not at
He may still maintain a suit. whatever one person wins the expense of another insured.
• Transfer of rights – Upon death of the original owner, all rights, title from a wager is lost by the
and interest in the policy shall automatically vest in the beneficiary other wagering party
unless otherwise provided for in the policy. As soon as a party makes a The purchase of insurance does
wager, he creates a risk of not create a non-existing risk of
loss to himself loss to the purchaser

SEC. 4. The preceding section does not authorize an insurance for or Similarity between insurance and gambling
against the drawing of any lottery, or for or against any chance or ticket in
a lottery drawing a prize. • 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
Concept of Lottery
agreement to pay, a stipulated amount by the other party to the contract.
• 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.) SEC. 5. All kinds of insurance are subject to the provisions of this chapter so far
1. Consideration as the provisions can apply.
2. Prizes
3. Chance
• There is consideration of price paid if it appears that prizes offered by • Applicable to Marine Insurance, Fire Insurance, Casualty Insurance,

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Suretyship and to any other kind of insurance insofar as said provisions o The insured may also assign the proceeds to someone else
can apply. • Synonymous to “assured”; but strictly speaking, the term insured
• Matters not expressly provided for in the Insurance Code and special refers to the owner of the property insured or the person whose life
laws on insurance are regulated by the Civil Code. is the subject of the contract of insurance, while “assured”, to the
• RA No. 1161 (Social Security Act) shall be governed primarily by the person whose benefit the insurance is granted
said law and subsidiarily by Chapter 1 of the Insurance Code and in the o Also synonymous to the word beneficiary
absence of applicable provisions in both laws, the Civil Code. 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.

TITLE 2 • It is said that the relation between the insurer and the insured is that of a
PARTIES TO THE CONTRACT contingent debtor and creditor, subject to the conditions of the policy and
not that of trustee and cestui que trust.

SEC. 6. Every corporation, partnership, or association, duly authorized to Who may be an insurer
transact insurance business as elsewhere provided in this Code, may be an
insurer. 1. 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
Parties to the Contract of Insurance refusal will best promote the interests of the people.
§ An insurance corporation is defined as one “formed and
1. Insurer organized to save any person or persons or other
• The party who assumes or accepts the risk of loss and undertakes corporations harmless from loss, damage, or liability
for a consideration to indemnify the insured or to pay him a certain arising from unknown or future or contingent event, or to
sum of on the happening of a specified contingency or event. indemnify or to compensate any person or persons or
• The business of insurance may be carried only by corporations, other corporations for any such loss, damage or liability.
partnerships and associations 2. Individual, partnership or association – the only requisite being that he
• Synonymous to “assurer” or “underwriter” holds a certificate of authority from the Insurance Commissioner which
2. Insured shall be given when such possesses capital assets required of an
• The person in whose favor the contract is operative and who is insurance corporation doing the same kind of business in the
indemnified against or is to receive a certain sum upon the Philippines and invested in the same manner.
happening of a specified contingency or event. § Insurer and insurance company include all individuals,
• Person whose loss is the occasion for the payment of the insurance partnerships, associations, or corporations, including
proceeds by the insurer. GOCCs and entities engaged as principals in the
• Insured is not always the person to whom the proceeds are paid. insurance business, excepting mutual benefits
o This person may be the beneficiary designated in the associations.
policy

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Business of Insurance affected with public interest with the state of war is prohibited.
o With respect to property insurance – insurance policy ceases
• One affected with a public interest and is subject to the regulation and to be valid and enforceable as soon as an insured becomes a
control by the State public enemy
• An insurance company is an instrumentality which gather funds upon the o With respect to life insurance – US rule: the contract is not
basis of equality of risk from a greater number of persons, sufficiently large merely suspended but is abrogated by reason of nonpayment
in number to arouse the element of chance to step out and the law of of premiums, since the time of the payments is peculiarly of
averages to step in as the controlling factor. the essence of the contract.
• A law requiring to file schedule of rates and prohibiting discriminatory rate • Where the loss occurs after the end of war – Since the effect of war is
was held to be valid. 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. 7. Anyone except a public enemy may be insured.


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
Capacity of party insured the mortgagee, or assigns a policy of insurance to a mortgagee, the
• Natural persons – 3 essential requisites (C.P.P.) insurance is deemed to be upon the interest of the mortgagor, who does not
o 1. He must be Competent to make a contract cease to be a party to the original contract, and any act of his, prior to the loss,
o 2. He must Possess an insurable interest in the subject which would otherwise avoid the insurance, will have the same effect,
insurance although the property is in the hands of the mortgagee, but any act which,
o 3. Must not be a Public enemy under the contract of insurance, is to be performed by the mortgagor, may be
• Juridical persons – may take out insurance on property 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 Insurable interest of mortgagee and mortgagor
and it includes every citizen or subject of such nation.
o Alien enemy • Separable insurable interests – mortgagor and mortgagee has insurable
o A mob is not a public enemy interest in the property mortgaged and this interest is separate and
o During wartime, a private corporation is deemed an enemy distinct from each other. In case, both of them take out separate
corporation although organized under Philippine laws if they insurance policies, the same is not open to objection that there is double
are controlled by enemy aliens. insurance
§ Control test – whereby a corporation is deemed to • Extent of insurable interest of mortgagor – the mortgagor has insurable
have the same citizenship as the controlling interest as owner to the extent of its value even though the mortgage
stockholders in time of war. debt equals such value.
• Extent of insurable interest of mortgagee – the mortgagee has insurable
Effects of war on existing insurance contracts 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
• Where parties rendered enemy aliens – by law of nations, all insuring the property itself but his interest or lien thereon.
intercourse between citizens of belligerent powers which is inconsistent • Extent of amount of recovery – The mortgagor cannot recover upon the

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insurance beyond the full amount of his loss and the mortgagee, in extent of the credit
excess of the credit at the time of the loss nor the value of the property 5. Upon recovery, mortgagee to the extent of the credit, the debt
mortgaged. is extinguished.

Insurable by mortgagee on his own interest Note: The rule of subrogation by the insurer to the right of the
• He is entitled to the proceeds of the policy in case of loss before mortgagee is not applicable.
payment of the mortgage.
• In subrogation of insurer to right of mortgagee, the mortgagee is not Effect of standard and open clauses in fire insurance policy
allowed to retain his claim against the mortgagor but it passes by
subrogation to the insurer to the extent of the insurance money paid • If a fire insurance policy contains a standard or union mortgage clause,
• The payment of the insurance to the mortgagee by reason of the loss the acts of the mortgagor do not affect the mortgagee. The purpose of
does not relieve the mortgagor from his principal obligation but only the clause is to make a separate and distinct contract of insurance on the
changes in the creditor. interest of the mortgagee.
• An open or loss-payable mortgage clause merely provides for the
Insurable by mortgagor of his own interest payment of loss, if any, to the mortgagee as his interest may appear and
• Mortgagor may insure for his own benefit. In case of loss, the proceeds under it, the acts of the mortgagor affect the mortgagee.
does not inure to the benefit of the mortgagee • If the policy is obtained by the mortgagor with a loss-payable clause in
• Mortgagor may take out an insurance for the benefit of the mortgagee. favor of the mortgagee, the mortgagee is only a beneficiary under the
• Mortgagee may be made the beneficial payee in several ways: contract and recognized as such by the insurer but not made a party to
1. He may become an assignee of the policy with the the contract itself. Hence, any act of the mortgagor which defeats his
consent of the insurer right will also defeat the right of the mortgagee.
2. He may be a mere pledgee without such consent
3. A rider making the policy payable to the mortgagor as his Right of mortgagee under mortgagor’s policy.
interest may appear
4. A standard mortgage clause containing a collateral • Before loss. — Before a loss occurs, the mortgagee is a conditional
independent contract appointee of the mortgagor entitled to receive so much of any sum that
5. Mortgagee acquired equitable lien when mortgagor may become due under the policy as does not exceed his interest as
procured a policy to insure mortgagee’s benefit. mortgagee. Such right becomes absolute upon the occurrence of the
loss.
Insurance by mortgage for benefit of mortgage, or policy assigned to • After loss. — If the loss happens when the credit is not due, the
mortgagee mortgagee is entitled to receive the money to apply to the
• The following are the legal effects: extinguishment of the debt as fast as it becomes due.
1. Contract is deemed to be upon the interest of the mortgagor; o On the other hand, if the loss happens after the credit has
hence he does not cease to be a party to the contract matured, the mortgagee may apply the proceeds to the extent
2. Any act of the mortgagor prior to the loss, which would of his credit.
otherwise avoid the insurance, affects the mortgagee even if
the property is in the hands of the mortgagee Effect of insurance by mortgagee on behalf of mortgagor.
3. Any act under the contract which may be performed by the
mortgagor may also be performed by the mortgagee o Upon the destruction of the property, the mortgagee is entitled to
4. In case of loss, mortgagee is entitled to the proceeds to the receive payment from the insured but such payment discharges the debt

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if equal to it, and if greater than the debt, the mortgagee holds the of accomplishing an illegal purpose, that is, permitting the
excess as trustee for the mortgagor. assignee of the policy to wager on the length of life of the
o If there is a stipulation that the insurer shall be subrogated to the rights insured, will not be upheld.
of the mortgagee, the payment of the policy will not discharge the debt • Note: A distinction must be made between the assignment or transfer
even though the mortgagee may have procured the policy by (a) of the policy itself which transfers the rights to the contract to
arrangement with the mortgagor. 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,
SEC. 9. If an insurer assents to the transfer of an insurance from a mortgagor the policy (see Sec. 83.), and (c) of the subject matter of the insurance,
to a mortgagee, and, at the time of his assent, imposes further obligations on which has the effect of suspending the insurance until the same person
the assignee, making a new contract with him, the acts of the mortgagor cannot becomes the owner of both the policy and the thing insured.
affect the rights of said assignee.
Right of mortgagor to assign insurance policy to mortgagee
Assignment or transfer of insurance policy • Section 9 only gives the effect if the insurer agrees to the transfer of the
• The assignee, unless he makes a new contract with the insurer, acquires policy and, at the time of his assent, imposes new obligations on the
no greater right under the insurance than the assignor had, subject to assignee.
insurer's defenses.
• As to fire policy. —a fire policy before it becomes a fixed liability is Effect of new contract between insurer and mortgagee-assignee
not subject to assignment, being strictly a personal contract, in the • The assignment of a fire insurance policy by the mortgagor to the
absence of provision in the contract or subsequent consent of the mortgagee with the consent of the insurer does not convert the contract
insurer. into one of indemnity to the mortgagee.
o The insurer is naturally concerned about the moral character of o The assignment operates merely as an equitable transfer of the
the insured and should not be compelled to become an insurer policy so as to enable the mortgagee to recover the amount
to an assignee to whom he would have declined to issue a due in case of loss subject to the conditions of the policy.
policy and who could materially alter the risks assumed by the o However, where a new and distinct consideration passes from
insurer without his consent. the mortgagee to the insurer, a new contract is created between
• As to marine policy. — It is generally recognized, however, that a them. A novation of the original contract takes place. Hence,
policy of marine insurance is assignable even without the consent of the the acts of the mortgagor cannot affect the rights of the
insurer unless required by the terms of the policy. The policy is not mortgagee, the assignee.
assignable without the consent of the insurer
• As to casualty policy. — The insurer's consent is also required. Thus, TITLE 3
theft and burglary insurance and motor vehicle insurance involve INSURABLE INTEREST
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

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SEC. 10. Every person has an insurable interest in life and health:
(a) Of himself, of his spouse and of his children; (1) Legal right to insure – The existence of insurable interest gives a
(b) Of any person on whom he depends wholly or in part for education or person the legal right to insure the subject of the policy of insurance. In
support, or in whom he has a pecuniary interest; the absence of such interest, the person insuring in effect would be
(c) Of any person under a legal obligation to him for the payment of money, gambling, which is prohibited by law (RPC, Art.195). It is a
or respecting property or services, of which death or illness might delay fundamental postulate of all insurance that it must not be a mere bet
or prevent the performance; and upon a future event.
(d) Of any person upon whose life any estate or interest vested in him
depends. (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
SEC. 10. (H-ESPI-LO-Ve) person without interest in the subject matter insured is a mere wagering
-­‐ Every person has an insurable interest in life and health: policy or contract and is void for illegality (Secs.18,25).
(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 Exception: The insurable interest requirement is held not to apply to
Support, or in whom he has a Pecuniary Interest; industrial life insurance (Secs. 235-237).
(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 Requirement, a matter of public policy
might delay or prevent the performance; and (1) As a deterrence to the insured – the requirement of an insurable
(h) Of any person upon whose life any estate or interest Vested in him interest to support a contract of insurance is based upon considerations
depends. of public policy which render wager policies invalid. It is demoralizing
in that:
Insurable interest in general a. It allows the insured to have an interest in the destruction of
• In essence, it is that interest which the law requires the owner of an the subject matter rather than in its preservation.
insurance policy to have in the person or thing insured. b. It affords a temptation or an inducement to the insured, having
nothing to lose and everything to gain, to bring to pass the
(1) Pecuniary in nature – In general, a person is deemed to have an event upon the happening of which the insurance becomes
insurable interest in the subject matter insured where he has no relation payable.
or connection with or concern in it that he will derive pecuniary or
financial benefit or advantage from its preservation and will suffer (2) As a measure of limit of recovery – If and to the extent that any
pecuniary loss or damage from its destruction, termination, or injury by particular insurance contract is a contract to pay indemnity, the
the happening of the event insured against. insurable interest of the insured will be the measure of the upper limit
of his provable loss under the contract. The insurance should not
(2) Exception – To have an insurable interest in the life of a person, the provide the insured with the means of making a net profit from the
expectation of benefit from the continued life of that person need not happening of the event insured against.
necessarily be of a pecuniary nature.
Necessity of insurable interest Two general classes of life policies
• The existence of insurable interest is a primary concern in determining (1) Insurance upon one’s life – In one class are those taken out by the
the liability of an insurer under a policy of insurance. Insurable interest insured upon his own life (Sec.10[a]) for the benefit of himself, or of
may be in life and health (Sec.10), or in property (Secs.13,14). his estate, in case it matures only at his death, or for the benefit of a

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third person who may be designated as beneficiary. An application for Similarity between a life insurance policy and a civil donation
insurance one one’s own life does not usually present an insurable • A donation is an act of liberality whereby a person disposes
interest question. gratuitously a thing or right in favor of another who accepts it
(Art.725, Civil Code).
(2) Insurance upon life of another – When one applies for insurance on • In essence, a life insurance policy is no different from a civil donation
the life of another for the former’s benefit, he must have an insurable insofar as the beneficiary is concerned. Both are founded upon the same
interest in the life of that person. consideration: liberality. A beneficiary is like a done, because from the
premiums of the policy which the insured pays out of liberality, the
Insurable interest in one’s own life beneficiary will receive the proceeds or profits of said insurance. As a
• Every person has an unlimited insurable interest in his own life whether consequence, the proscription in Article 739 of the Civil Code should
the insurance is for the benefit of himself or another; and it is not at all equally operate in life insurance contracts.
necessary that the beneficiary designated in the policy should have any • A life insurance policy taken by a spouse on his (her) life in favor of
interest in the life of the insured. the other takes effect after the death of the insured.

(1) Insurance taken out by insured on his life for the benefit of another – Insurable interest in life of another
The presence of insurable interest is really required only as evidence of (1) Insurance for benefit of insured – A person cannot lawfully procure
the good faith of the parties. Consequently, the mere fact that a man on insurance for his own benefit on the life of another in whose life he has
his own motion insures his life for the benefit either of himself or of no insurable interest.
another is sufficient evidence of good faith to validate the contract.
The insurable interest in the life of another must be a pecuniary one
(2) When the insurance regarded a wagering policy – An exception to the (related to money) and it exists whenever the relation between the
general rule exists in cases in which the court finds that a wagering assured and the insured, whether by blood, marriage or commercial
policy has been taken out by the insured on his life at the behest of a intercourse, is such that the assured has a reasonable expectation of
third person who is named as beneficiary. deriving benefit from the continuation of the life insured or of suffering
detriment or incurring liability through its termination.
Evidence of a wagering policy (Secs.18,25) is usually found in such
facts as: (2) Insurance for benefit of a third party – When the owner of the policy
(a) That the original proposal to take out insurance was that of the insures the life of another – the cestui que vie – and designates a third
beneficiary; party as beneficiary, both the owner and beneficiary must have an
(b) That premiums are paid by the beneficiary; and insurable interest in the life of the cestui qui vie. If the insurable interest
(c) That the beneficiary has no interest, economic or emotional, in requirement is satisfied (Sec.19), a life policy is assignable regardless
the continued life of the insured. of whether the assignee has an insurable interest in the life of the cestui
qui vie (Sec.184).
On finding that such a policy is primarily a wager, the court will Under our law, in order that one may have an insurable interest in the
generally void the policy entirely. In any case, there is no question that life of another, it must be one of those mentioned ([a], [b], [c], [d]) in
under our law, a person has an insurable interest in his own life. But if Sec.10, i.e. the interest is pecuniary or founded upon the close
the policy is applied for and owned by someone other than the insured, relationship between the parties. Hence, the mere fact that two (2)
the applicant-owner must have an insurable interest in the life of the persons are engaged to be married does not give one an insurable
insured. interest in the life of the other.

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Ex. X takes an insurance on his own life and names his friend Y as Under our law, there must be an expectation of pecuniary benefit in the
beneficiary, and another insurance on Y’s life with himself (X) as life of the insured to sustain the insurance, that is, a risk of actual
beneficiary. 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
The first insurance is valid because the beneficiary (Y) need not have insurable interest even in the absence of close blood relationship.
an insurable interest in the life of the insured. The second insurance is Hence, “love and affection,” “gratitude,” or “friendship,” by itself is not
void because X has no insurable interest on the life of Y. efficient. The expectation, however, need not have legal basis
whatever; it is sufficient that it be actual. Thus:
Insurable interest in life of person upon whom one depends for education or (a) The assumption of parental relations when a man sends a girl
support or in whom he has a pecuniary interest to school and pays her expenses is sufficient to give her an
(1) When mere blood relationship sufficient – Mere relationship of insurable interest in his life.
brother or sister, father or child is sufficiently close to give either an (b) Upon like principle, a woman who takes a girl from an orphan
insurable interest in the life of the other. asylum and gives her a home under circumstances calculated
to raise a reasonable expectation of help and care from the girl
(2) Persons obliged to support each other – Generally, blood or material during the declining years of the benefactress, has an insurable
relationships fit the concept of insurable interest. In any event, the interest in the girl’s life, although she is not formally
following have an insurable interest in each other’s life since under appointed her guardian.
Article 195 of the Family Code, they are obliged to support each other: (c) It is generally held that a corporation has an insurable interest
(a) The spouses; in the life of an officer on whose services the corporation
(b) Legitimate ascendants and descendants; depends for its prosperity, and whose death will be the cause
(c) Parents and their legitimate children and the legitimate or of a substantial pecuniary loss to it.
illegitimate children of the latter; (d) A person may take out a policy on the life of his business
(d) Parents and their illegitimate children and the legitimate or partner on the theory that the latter’s death may adversely
illegitimate children of the latter; affect the business operations which can, in turn, cause
(e) Legitimate brothers and sisters, whether of the full or half- financial losses.
blood. (e) In the case of employees, insurable interest is dependent upon
the value of the employee to the business. A business usually
Note: Brothers and sisters not legitimately related, whether of has an interest in other employees occupying key positions,
the full or half-blood, are likewise bound to support each other such as the president, executive officers, and department heads
except only when the need for support of the brother or sister, who are important to the organization which expects to receive
being of age, is due to a cause imputable to the claimant’s fault some necessary gain form the continuation of their lives or
or negligence. some financial loss from their death. However, valid insurance
may be written when the employee himself applies for the
(3) When pecuniary benefit essential – In other cases, mere blood policy and designates the employer as beneficiary.
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 Insurable interest of a person in life of another under a legal obligation to
the life of another. Also, mere relationship by affinity (e.g. son-in-law, former
brother-in-law, step-children) ordinarily does not constitute an (1) Related by contract or commercial relation – Any person so related to
insurable interest. another, either by contract or commercial relation, that a right
possessed by him will be extinguished or impaired by the death or

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illness of the other may lawfully procure insurance on the other’s life. (3) Extent of the amount that may be recovered by insuring creditor –
Thus, the employer may insure the life of the employee and vice versa: The insuring creditor could only recover such amounts as remain
(a) A corporation, the life of its manager; unpaid at the time of the death of the debtor. If the whole debt has
(b) A partner, the life of his co-partner; already been paid, then recovery on the policy is no longer permissible.
(c) A partnership, the life of each partner;
(d) A surety, the life of his principal although the (4) Where insurance taken by debtor for the benefit of creditor – Where
principal has no insurable interest in the life of a debtor in good faith insures his life for the benefit of the creditor, full
his surety. payment of the debt does not invalidate the policy; in such case, the
(2) Risk that performance of obligation might be delayed or prevented – proceeds should go to the estate of the debtor.
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 (5) Where debt becomes legally unenforceable – Under our law, it is clear
prevent its performance (Sec.10[c]). 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]).
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 Insurable interest in life of person upon which an estate or interest depends
skill the said partner has advanced money, a partner has no insurable • Section 10(d) simply means that one may insure the life of a person
interest in the life of the other if both have no capital invested and where the continuation of the estate or interest vested in him who takes
neither is indebted to the other. the insurance depends upon the life insured.

Insurable interest of creditor in life of his debtor Ex. Suppose A receives as legacy, the usufruct of a house. The
(1) Extent of interest – The creditor has unquestionably an insurable ownership of which is vested in B. It is provided in the legacy that
interest in the life of his debtor under Sec.10(c). Thus, a creditor may should B die first, both the usufruct and the ownership of the property
insure his debtor’s life for the purpose of protecting his debt but only to will pass to C.
the extent of the amount of the debt and the cost of carrying the
insurance on the debtor’s life. In this case, A has an insurable interest in the life of B for A will suffer
pecuniary loss by B’s death.
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 Consent of person whose life is insured
the conclusion that the policy is merely a wagering or speculative one. (1) Essential to validity of policy – A leading authority has said that all
For instance, a policy on the life of another for P300,000 to cover a contracts (without the consent of the insured) are contrary to public
debt of P50,000 is a mere wagering policy, and is void. 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
(2) Right of debtor in insurance taken by creditor – A creditor who to society.
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 (2) Not essential to validity of policy – It seems, however, that under our
purely between the insurer and the insuring creditor inasmuch as by law (Sec.10), the consent of the person insured is not essential to the
law, the creditor is given an insurable interest on the life of his debtor validity of the policy. So long as it could be proved that the assured has
(Sec.10[c];8). In other words, the insurance does not inure to the benefit a legal insurable interest at the inception of the policy, the insurance is
of the debtor unless the contrary is expressly stipulated. valid even without such consent.

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the insured, before dying, was judicially declared insolvent, the proceeds
SEC. 11. The insured shall have the right to change the beneficiary he designated should be paid to the beneficiary and not to the assignee in insolvency.
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 Limitations in the appointment of beneficiary
beneficiary during his lifetime, the designation shall be deemed irrevocable. (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
Beneficiary defined the person who cannot make any donation to him, according to said
(1) In insurance cases, the term beneficiary is ordinarily used in referring to article.”
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 (2) Article 739 of the Civil Code
become payable, according to the terms of the contract, upon the death “The following donations shall be void:
of the insured. 1. Those made between person who were guilty of adultery or
(2) Only those persons, whether natural or juridical, who, though not concubinage at the time of the donation;
parties to the contract, are mentioned in it as the intended recipients of 2. Those made between persons found guilty of the same criminal
the proceeds or benefits of the insurance if the insured risk occurs. offense, in consideration thereof;
(3) A broader use of the term would include also those who, upon a proper 3. Those made to a public officer or his wife, descendants and
basis of insurable interest, secure insurance for their own benefit upon ascendants, by reason of his office.
the lives of others.
In the case referred to in No.1, the action for declaration of nullity may
Kinds of beneficiary be brought by the spouse of the donor or done; and the guilt of the
• The beneficiary in a life insurance policy may be either the insured donor and done may be proved by preponderance of evidence in the
himself or his personal representatives or someone other than the same action.
insured. Where the beneficiary designated is a person other than the
insured, such person may occupy one of three (3) relations to the Note: In order that Article 739 may apply, it is not required that there
insured: be a previous conviction for adultery or concubinage.

(1) Insured himself – Such a person is thus an immediate party to the (3) The proscription in Article 739 of the Civil Code should equally
contract and is ordinarily called the assured, as where the creditor operate in life insurance contracts.
insures the life of his debtor;
(2) Third person who paid a consideration – The insured may have taken Ex. M, a married man, takes out an insurance policy on his life and
the policy for the benefit of a creditor or to secure some other designate B, with whom M is cohabiting at the time, as beneficiary.
obligation; or
(3) Third person through mere bounty of insured – The beneficiary The designation of B is void since M and B are guilty of concubinage at
designated may be the estate of the insured or a third party. 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
Note: In (2) and (3), the beneficiary is not a party to the contract. In all three both M and B are single.
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 in a life insurance may designate any person as beneficiary
unless disqualified to be so under the provisions of the Civil Code. In

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the absence of any beneficiary named in the life insurance policy or face value. In case the insured should discontinue paying premiums, the
where the designated beneficiary is disqualified, the proceeds of the beneficiary may continue paying it and is entitled to automatic
insurance will go to the estate of the deceased insured. extended term or paid up insurance options, etc., and that said vested
right under the policy cannot be divisible at any given time.
Right of insured to change beneficiary in life insurance
(1) General rule – Whether or not the policy reserves to the insured the Where beneficiary dies before insured
right to change beneficiary, he has the power to so change the (1) View that beneficiary’s representative is entitled to insurance
beneficiary without the consent of the latter who acquires no vested proceeds – Where the right to change the designated beneficiary is
right but only an expectancy of receiving the proceeds under the expressly waived in the policy, that if the beneficiary dies before the
insurance. It follows that the insured retains the right to receive the insured, his rights so vested should pass to his representatives, and on
cash value of the policy, to take out loans against the cash value, to the death of the insured, the proceeds of the policy should belong, not
assign the policy, or to surrender it without the consent of the to estate of the insured, but to the representatives of the beneficiary.
beneficiary.
This result, however logical in form, does great violence to the purpose
(2) Effect of death of insured – The right must be exercised specifically in of the insured, who must have intended, in the ordinary case, to provide
the manner provided in the policy or contract. But the insured’s power a fund for the support after his death, of those whom he was
to extinguish the beneficiary’s interest ceases at his death, and cannot accustomed to support during his lifetime.
be exercised by his personal representatives or assignees. The
beneficiary’s designation shall be deemed irrevocable. (2) View that estate of the insured is entitled to insurance proceeds –
Where the beneficiary predeceases the insured, the estate of the insured
(3) Where right to change is waived – If the right to change the should be entitled to the proceeds of the insurance especially where the
beneficiary is expressly waived in the policy, then the insured has no designation is subject to the express condition to pay the beneficiary if
power to make such change without the consent of the beneficiary. he survives the insured or “if surviving.”
(a) The beneficiary has a property right in the policy of which
could not be deprived without his consent. However, most but not all, court hold that the mere fact that such a
(b) Neither can a new beneficiary be added to the irrevocably policy is made payable to the designated beneficiary, “his executors,
designated beneficiary for this would in effect reduce the administrators, or assigns,” is sufficient to negative the implied
latter’s vested rights. condition that death of the beneficiary before maturity of the policy
(c) The insured does not even retain the power to destroy the terminated all his rights to it.
contract by refusing to pay premiums for the beneficiary can
protect his interest by paying the premiums for the reason that Designation of beneficiary
the fulfillment of an obligation may be made by a third person • The beneficiary designated may be the insured or his estate, a
even against the will of the debtor and if he has an interest in specifically designated person or person, or a class or classes of
the fulfillment of the obligation, even against the will of the persons.
creditor (Art.1236, Civil Code)
(1) Children – The term is broad enough to include the following:
Measurement of vested interest of beneficiary in policy a. An adopted child; or
• The vested right or interest of the beneficiary in a policy should be b. An adult child not forming part of the household of the
measured on its full face value and not on its cash surrender value for in insured; or
case of death of the insured, said beneficiary is paid on the basis of its

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c. After-born children even of a marriage subsequently deceased is entitled to take under a policy payable to his “heirs” or
contracted “legal heirs” as well as the children of the deceased.
In an insurance policy, the word ordinarily means a descendant of the
first degree and is never intended to include grandchildren. (6) Estate or legal representatives of deceased – The words when used in
designating beneficiaries, are to be construed in their strict technical
Where the children are named individually, other children cannot share sense and the courts will ordinarily assume that they are used to mean
in the insurance proceeds unless the insured subsequently amend his executors or administrators, unless it appears that the insured intended
designation to include them. to use these expressions in the sense of heirs or next of kin.

(2) Husband; wife or widow – The word “wife” is generally regarded as If no beneficiary is designated in the life insurance policy, the proceeds
descriptio personae, and the fact that one who otherwise answer the thereof will go to his legal heirs in accordance with law. However, it
description does not have the legal status of the wife of the insured does has been held that where two (2) women innocently and in good faith
not prevent her from taking as beneficiary, as when she is designated contracted marriage with the same man, the insured, and the latter did
by name, although the words “his wife” are added. However, if the not designate any beneficiary who would receive the proceeds of his
beneficiary is not named but is designated merely by a status, such as life insurance, each family shall be entitled to one half the insurance
the “husband,” “wife,” or “widow” of the insured, the legal husband or benefits.
wife as ascertained at the death of the insured, is entitled to the benefits
of such insurance.
SEC. 12. The interest of a beneficiary in a life insurance policy shall be forfeited
Note: Under our law, any person who is forbidden from receiving any when the beneficiary is the principal, accomplice, or accessory willfully bringing
donation, such as a common-law spouse, cannot be named beneficiary about the death of the insured. In such a case, the share forfeited shall pass on to
of a life insurance policy by the person who cannot make any donation the other beneficiaries, unless otherwise disqualified. In the absence of other
to him. 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.
(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 Forfeiture of the interest of the beneficiary in a life insurance policy
limited to children common to both. But if the designation is made to • The word “interest” here means the right of the beneficiary to receive
the insured’s “wife and children” or “my wife and children,” the the proceeds of the life insurance policy. It does not mean insurable
insurance is deemed for the benefit of all children of the insured, interest since the beneficiary need not have an insurable interest in the
whether by the named wife or those of another. life of the insured.

(4) Family – The term is sometimes used to indicate the recipient of the (1) Other qualified beneficiaries of the insured – In case the interest of a
proceeds of an insurance policy. In deciding whether a particular beneficiary in a life insurance policy is forfeited, the nearest relatives,
person claiming a share of the fund is of the family of the insured, the not otherwise disqualified, of the insured, shall, inherit the proceeds paid
court will ascertain whether that person was so regarded by the insured. to the estate of the insured in accordance with the rules on intestate
succession provided in the Civil Code.
(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 (2) Nearest relatives of the insured – In the order of enumeration, they are
died intestate. Therefore, it is generally held that the widow of the the following:

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a. Legitimate children;
b. Father and mother, if living;
c. Grandfather and grandmother, or ascendants nearest in degree, SEC. 13. Every interest in property, whether real or personal, or any relation
if living; thereto, or liability in respect thereof, of such nature that a contemplated peril
d. Illegitimate children; might directly damnify the insured, is an insurable interest.
e. Surviving spouse; and
f. Collateral relatives, to wit:
i. Brothers and sisters of the full blood; Insurable interest in property
ii. Brothers and sisters of the half-blood; (1) In general – The interest may be in the property itself (e.g. ownership),
iii. Nephews and nieces or any relation thereto (e.g. interest of a trustee or a commission agent),
g. In default of the above, the State shall be entitled to receive the or liability in respect thereof (e.g. interest of a carrier or depository of
insurance proceeds (Art.1011). goods).
(2) Occurrence of loss may be uncertain – It is not necessary that the
Liability of insurer on death of insured interest is such that the event insured against would necessarily subject
• Insurer is not liable in case the insured commits suicide intentionally, the insured to loss. It is sufficient that it might do so, and that pecuniary
with whatever motive, when in sound mind. injury would be the natural consequence.
• But death which is purely accidental, even though due to the insured’s (3) Title or right to possession not essential – It has been held that where
own carelessness or negligence is not excluded from the coverage by the mortgagor had sold the mortgaged premises to a vendee who
the words “self-destruction,” “death by his own hand,” and the like assumed the payment of the mortgage debt, and had thus parted with
which are generally considered synonymous with suicide. 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
• Where the insured is insane, it is the settled rule that, in the absence of
his right be subrogated to the mortgage security in case he should be
express conditions to the contrary, the suicide of an insured while
compelled to make payment. Similarly, a vendor or seller retains an
insane does not discharge the insurer from his liability on his contract.
insurable interest so long as he has nay interest therein as when he has
• The beneficiary is not deprived of the insurance proceeds in every case
a vendor’s lien i.e. he retains ownership merely to insure that the buyer
where the beneficiary killed the insured. Thus, where the death of the
will pay the price (Art.1504[1], Civil Code).
insured was caused under circumstances as do not amount to a felony
(4) Legal expectation of loss or benefit – Insurable interest in property is
as when the killing was accidental or in self-defense, or where the
not necessarily an interest in property in the sense of title, but a concern
beneficiary was insane, the rights of the beneficiary under the policy
in the preservation of the property and such a relation to or connection
are not affected.
with it as will necessarily entail a pecuniary loss in case of its injury or
• It has also been held that even though the beneficiary was guilty of a
destruction. As a general rule, however, the expectation of benefit to be
felony, the beneficiary’s interest in the insurance is not forfeited where
derived from the continued existence of property must have a basis of
the insured’s death was not intentionally caused.
legal right, although the person insured has no title, either legal or
• The insurer may properly insert in the contract an express provision equitable, to the property insured. The rule is different in life insurance.
excepting from coverage death caused by the beneficiary, whether (5) Mere factual expectation of loss – Such expectation not arising from
lawfully or unlawfully. any legal right or duty in connection with the property, does not
• The mere fact that the insured died while he was committing a felony constitute an insurable interest.
or violating a law would not warrant denial of liability. To avoid
liability, the insurer must further establish that the commission of the Note: This type of interest called “factual expectation,” though usually
felony or the violation of law was the cause or had a casual connection insufficient in strict indemnity insurance, will suffice in life insurance.
with the accident resulting in the death of the insured.

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A purchaser of an option to buy real estate has an insurable


SEC. 14. An insurable interest in property may consist in: interest to the extent of the advance payment for the option.
(a) An existing interest; Thus, more than one insurable interest may exist over the
(b) An inchoate interest founded on an existing interest; or same property.
(c) An expectancy, coupled with an existing interest in that out of which the
expectancy arises. (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
Insurable interest in property in particular cases
from his ownership of shares in the corporation. His insurable
(1) An existing interest – May be a legal title or equitable title
interest is limited to the extent of the value of his interest or to
a. Insurable interest arising from legal title:
his share in the distribution of the corporate assets upon
i. Trustee, as in the case of the seller of property not yet
dissolution.
delivered
ii. Mortgagor of the property mortgaged
Note: A stockholder has neither legal nor equitable title to
iii. Lessor of the property leased
assets of the corporation.
iv. Lessee and sublessee may also unsure the property
leased or subleased
b. A partner has an insurable interest in the firm property which
v. Assignee of property for the benefit of creditors
will support a separate policy for his benefit.
Where legal title is held in a representative capacity, as by an
(3) An expectancy – Must be coupled with an existing interest in that out
executor, administrator, trustee, or receiver, the representative
of which such expectancy arises.
has sufficient insurable interest for the purpose of taking out
a. A farmer may insure future crops if they are to be grown on
insurance on the property under his control, but any proceeds
land owned by him at the time of the issuance of the policy, or
from such insurance are to be held for the benefit of those for
although the crops are to be raised by him on the land of
whose benefit the representative is acting.
another, provided the crops will belong to him when produced.
b. Insurable interest arising from equitable title:
b. An owner of a business can insure against a contingency,
i. Purchaser of property before delivery, or before he
which may cause loss of profits resulting form the cessation or
has performed the conditions of sale
interruption of his business.
ii. Mortgagee of property mortgaged;
iii. Mortgagor, after foreclosure but before expiration of
the period within which redemption is allowed SEC. 15. A carrier or depository of any kind has an insurable interest in a thing
iv. Beneficiary under a deed of trust held by him as such, to the extent of his liability but not to exceed the value
v. Creditors under a deed of assignment thereof.
vi. A judgment debtor whose property has been seized
under execution until the right to redeem or the right Insurable interest of carrier or depository
to have the sale set aside has been lost • It has been held that a policy effected by a bailee and covering by its
vii. Builders and constructors in the buildings pending terms his own property and property held in trust, inures, in the event of
the payment of the construction price loss, equally and proportionately to the benefit of all the owners of the
property insured.

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• Under the General Bonded Warehouse Act, a warehouseman, death, however reasonable his expectation of benefit to be derived from
licensed to engage in the business of receiving commodities for storage, the continued existence of the property. His expectation has no legal
is required to insure the same against fire. basis since the will has no legal effect before the death of the testator.

SEC. 17. The measure of an insurable interest in property is the extent to which
SEC. 16. A mere contingent or expectant interest in any thing, not founded on an
the insured might be damnified by loss or injury thereof.
actual right to the thing, nor upon any valid contract for it, is not insurable.

Mere contingent or expectant interest not insurable The measure of insurable interest in property
• A mere hope or expectation of benefit which may be frustrated by the • A contract of insurance is one of indemnity. Any contract of property
happening of some event uncoupled with any present legal right will insurance that gives to the insured more than indemnity against his
not support a contract of insurance. Thus: actual loss that may be suffered by the happening of the event insured
(1) Property of father/son/spouse – A father cannot insure his son’s against in the nature of a wagering policy contrary to public policy and
property nor can a son insure the property that he expects to inherit void.
from his father as his interest is merely an expectancy of inheriting. • Thus, a mortgagor has an insurable interest equal to the value of the
Similarly, a spouse has no insurable interest in the property of the other. mortgaged property and a mortgagee, only to the extent of the credit
secured by the mortgage (Sec.8).
(2) Life of parents/children/spouses – By statutory provisions, parents and • The purpose of property insurance is to indemnify a person against
children, and spouses can insure the life of each other as they are under actual loss, and not to wager on the happening of the event.
mutual obligation to support each other under the law.
Ex. X insured his property valued at P100,000, for P120,000. X suffered a
(3) Property of debtor – Nor can a general or unsecured creditor insure total loss. The amount of the insurance (P120,000) is not the amount
specific property of his debtor who is alive, even though destruction of payable in the event of a loss but rather represents the maximum limit of
such property would render worthless any judgment he might obtain. recovery of the insured (Sec.60).
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 SEC. 18. No contract or policy of insurance on property shall be enforceable
the payment of the debt of the deceased debtor are in rem. except for the benefit of some person having an insurable interest in the property
b. An unsecured creditor who obtains judgment in his favor insured.
becomes a judgment in his favor becomes a judgment creditor
and has been held to have insurable interest in the debtor’s Effect of absence of insurable interest in property insured
property as he has a right to levy on such property as may be
• An insurance taken out by a person on property in which he has no
necessary to satisfy the judgment. However, to recover under
insurable interest is void.
the insurance, he must show that the debtor has no other
• It has been held that fire insurance taken on property belonging to
property out which the judgment may be satisfied.
another is void, although the insurer had full knowledge of the fact of
c. An unsecured creditor has an insurable interest in the life of
ownership and even if the insured subsequently acquired insurable
his debtor to the extent of the amount of the debt (Sec.10[c]).
interest (Sec.19).
(4) Property of testator still alive – One named as beneficiary in a will has • In a case, the contract of lease provides that any fire insurance policy
no insurable interest in a property designated before the testator’s obtained by the lessee over his merchandise inside the leased premises
without the consent of the lessor is deemed assigned or transferred to

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the lessor. It held that such automatic assignment is void for being there is no fraud on his part (Secs.158,173), although it might
contrary to law and public policy, hence, the insurer cannot be be proved that the actual value of the thing is less.
compelled to pay the proceeds of the policy to the lessor who has no b. Similarly, the principle of indemnity cannot be invoked by the
interest in the property insured. insurer who agreed to repair or replace the thing insured with a
• Where the insurance is invalidated on the ground that no insurable new one even though the cost of the undertaking may exceed
interest exists, the premium is ordinarily returned to the insured unless the original amount of the insurance (Sec.174).
he is in pari delicto with the insurer.
• In life insurance taken by a person on his own life, it is not necessary (2) Liability insurance contracts – They are considered contracts of
for the beneficiary to have an insurable interest in the life insured indemnity against liability and not against loss (Sec.176). The insurer’s
(Secs.10,19,184). promise is to pay the proceeds of the policy on behalf of the insured to
• Doctrine of waiver or estoppel cannot be invoked since the public has a third person to whom the insured is liable. If the insured suffers no
an interest in the matter independent of the consent or concurrence of loss because his liability to the third person, for some reason, cannot be
the parties. enforced, the insurer has no obligation to pay the proceeds (Sec.176).
• 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 (3) Life insurance contracts – They are not contracts of indemnity. The
issued for P15,000 was for the building in which the goods were stored amount fixed payable at the death of the insured is not considered as
which building the insured never owned or had any insurable interest, it the true value of the thing insured because the life of a person is
was held in case of loss of the goods, the insured can recover. priceless, but is simply the measure of indemnity which the insurer is
bound himself to pay the insured.
Note: The above is a case where the insured’s lack of insurable interest
in property insured is not sufficient to avoid an insurance. 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
Measure of indemnity in insurance contracts investment than indemnification protection against loss.
(1) Contracts of marine or fire insurance – They are contracts of
indemnity, the amount of insurance being limited by the value of the (4) Personal accident insurance contracts – They are not contracts of
interest to be protected. The real purpose of the contract is, in case of indemnity. Life and limb are not susceptible to exact or uniform
loss, to place the insured in the same situation in which he was before valuation.
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 (5) Health insurance contracts – Health insurance contracts that provide a
fixed in the contract (Sec.61). specific periodic income to disabled persons are not contracts of
indemnity. But those that cover medical expenses are contracts of
Pursuant to the general rule regarding indemnity, the amount of indemnity. In these contracts, only medical expenses incurred by the
insurance fixed in the policy of a marine or fire insurance is not the insured are paid.
exact measure of indemnity to which the insured is entitled, but the (6) Health care agreement – Such an agreement with a health maintenance
maximum indemnity which he might obtain. The insured cannot organization (HMO) is in the nature of a non-life insurance which is
recover in excess of his actual loss. primarily a contract of indemnity. Payment should be made to the party
a. In valued policies (Sec.61), however, the valuation of the who incurred the expenses.
thing insured is conclusive between the parties thereto in the
adjustment of loss, if the insured has some interest at risk, and

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property will not defeat a recovery if the insured has subsequently


SEC. 19. An interest in property insured must exist when the insurance takes reacquired the property and possesses an insurable interest at time of
effect, and when the loss occurs, but need not exist in the meantime; and interest loss.
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. 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
Time when insurable interest must exist house on Sept.12, 2014 for the same amount. The house burned accidentally
• The general stated in this section is applicable only to insurance on on Sept.15, 2014.
property and not to life insurance except that on the life of the debtor.
C has no right to collect the proceeds of the insurance because being a
(1) When insurance takes effect and loss occurs – Insurable interest in general creditor without any lien on D’s house, C had no insurable interest
property must exist at two (2) distinct times: when he insured it (Sec.16). But suppose D sold the house to C before
a. On the date of execution of the contract of insurance Sept.15, 2014 when the loss occurred. Not even then. C did not have
b. On the date of the of the occurrence of the risk insured against insurable interest in the house when the insurance took effect (Sec.19).
Otherwise, the policy is void. Rationale: If the insured has no more
interest in the property at the time of the injury, loss, or Ex.2. D issued a promissory note in favor of C to secure a loan of P100,000
destruction, he has suffered no loss. 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
Thus, if a fire occurs after the sale or alienation of the property, month after paying the note at the end of the 9th month.
former owner cannot recover on the policy.
C cannot recover on the insurance. The principle of indemnity applies in
(2) When insurance takes effect – In life insurance (Secs.179-180), the this as in property insurance. Neither can the estate of D recover since the
insurable interest requirement is satisfied if the interest exists at the contract was purely between C and the insurer, unless the contrary is
time the policy is procured or took effect, even if it has ceased to exist stipulated.
at the time of the insured’s death.
But if the insurance was taken by D on his life for the benefit of C, the
Thus, if a debtor whose life was insured by a creditor (Sec.10[c]) payment of the debt did not invalidate the policy which would remain in
subsequently pays the debt, the insurance remains in force, provided the force for the full year for which the premium was paid. In this case, the
former creditor continues to pay the premiums. proceeds of the insurance would be paid to the estate of D.

Under the law, health, accident, and disability insurance is deemed Ex.3. X corporation insures the life of Y, its President, for P100,000 with X
included in the terms “life” and “non-life” insurance (Sec.193, par.8). as beneficiary. Thereafter, Y sells his stockholdings and severs connections
with X which continues to pay the annual premiums. During the currency of
(3) When liability attaches – In liability insurance, questions of insurable the policy, Y dies. X is entitled to recover the insurance proceeds (Sec.19).
interest are not particularly important. It necessarily exists when the
liability of the insured to a third party attaches (Sec.172). Existence of insurable interest when risk attaches
• It is sufficient that insurable interest exists at the time the risk attaches.
(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 Ex. D, contemplating of buying B’s house, may take out a policy of
special provision in the policy to the contrary, the alienation of insured insurance under which the risk is to attach upon D’s purchase and

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acquisition of inters tint he house. In this case, the requirement of good faith Effect, in general, of change of interest
and a real interest at the time of the loss is sufficient to satisfy the demand • The mere transfer of a thing insured does not transfer the policy but
of public policy. suspends it until the same person becomes the owner of both the policy
and the thing insured (Sec.58).
Insurable interest in life and property • 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,
LIFE PROPERTY recover upon such contract. The purchaser cannot recover because he
As to extent of (Save in life insurance Limited to the actual value has no contract with the insurer. The seller (insured) cannot also
insurable interest effected by creditor on life of the interest thereon recover because having sold the property, he has no more insurable
of debtor) is unlimited (Sec.17) interest in the same.

As to time when Save above exception, it is It is necessary that the Note: The contract is not rendered void but is merely suspended by a
insurable interest enough that insurable insurable interest “must change of interest.
must exist interest exists at the time exist when the insurance
the policy takes effect and takes effect and when the Change of interest covered by law
need not exist at the time loss occurs, but need not • The change of interest in Secs.21-24 means absolute transfer of the
of the loss (Sec.181) exist in the meantime property insured such as the conveyance of the property by means of an
(Sec.19) absolute deed of sale.
• The interest in the property insured does not pass by mere execution of
As to expectation The expectation of benefit An expectation of benefit, to a pledge or mortgage. Thus, it has been held that in a chattel mortgage,
of benefit to be to be derived from the be derived from the there is no alienation within the meaning of the insurance law until the
derived continued existence of life continued existence of the mortgagee acquires a right to take possession of the property by default
need not have any legal property insured must have of the mortgagor under the terms of the mortgage.
basis; a reasonable a basis of legal right, which
probability is sufficient i.e. even if remote, constitutes Exceptions to general rule
one who is dependent on an insurable interest e.g. an • The rule that change of interest suspends the insurance is subject to
another for support has an expectant heir cannot insure exceptions:
insurable interest in the the property he expects to (1) In life, health, and accident insurance (Sec.20);
latter’s life, even though inherit. But a stockholder (2) A change of interest in the thing insured after the occurrence
there is no legal right to may insure corporation of an injury which results in a loss (Sec.21);
support. property though he has no (3) A change of interest in one or more of several things,
legal interest in such. separately insured by one policy (Sec.22);
(4) A change of interest by will or succession on the death of the
SEC. 20. Except in cases specified in the next four sections, and in the cases of insured (Sec.23);
life, accident, and health insurance, a change of interest in any part of a thing (5) A transfer of interest by one of several partners, joint owners,
insured unaccompanied by a corresponding change of interest in the insurance, or owners in common, who are jointly insured, to the others
suspends the insurance to an equivalent extent, until the interest in the thing and (Sec.24);
the interest in the insurance are vested in the same person. (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

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(7) When there is an express prohibition against alienation in the Effect dependent • The cause or • The cause or consideration
policy, in case of alienation, the contract of insurance is not on divisibility of consideration is made up of is entire and single;
merely suspended but is avoided (Art.1306, Civil Code; contract several parts; • Things are insured under
Sec.24). • Things are “separately “one policy” for a gross
insured in one policy” and sum and for an entire
SEC. 21. A change of interest in a thing insured, after the occurrence of an injury the violation of a condition premium so that a change
which results in a loss, does not affect the right of the insured to indemnity for the which avoids the policy of interest in one or more
loss. with respect to one or more of the things will also avoid
of the things does not affect the insurance as to the
the others. others.
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 • Whether a contract is entire or severable is a question of intention to be
as any other money claim. This right is absolute and cannot be determined by the language employed by the parties.
delimited by agreement (See.83,173).The insured has also the absolute • Where only one premium was paid for the entire shipment of goods
right to transfer the thing insured after the occurrence of the loss. Such (which are not separately valued) are loaded on two (2) different
change of interest does not affect his right to indemnity for the loss vessels does not make the contract several and divisible as to the items
(Sec.21). insured.
• It has been held that where the amount of the insurance agreed upon
Note: Sec.20 refers to change of interest in the thing insured before loss
was merely apportioned among the various items insured to limit the
has occurred.
extent of the risk of the insurer as regards each item, the contract of
insurance is still indivisible.
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. 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 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 Change of interest by death of insured
indivisible contract (Art. 1420, Civil Code). • Here, the insurance on property passes automatically, on the death of
the insured, to the heir, legatee or devisee who acquired interest in the
Divisible Indivisible 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

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(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 A wager policy is a pretended insurance where the insured has no
cease upon an alienation of the thing insured. interest in the thing insured and can sustain no loss by the happening of
(2) Reason for the rule – Each partner, etc. is interested in the whole the misfortunes insured against.
property and the hazard is not increased because the purchasing partner
has acquired a greater interest in the property by a transfer of his co- Note: The law, however, makes an exception in the cases mentioned in
partners’ share. The transfer does not affect the risk because no new Sec.181 regarding life insurance.
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 (2) Stipulation that the policy shall be received as proof of insurable
interest in partnership property by the partner to one of his co-partners, interest – Whether or not insurable interest exists does not depend upon
without the consent of the insurer and before the loss occurs, where the the contract of insurance or the stipulations therein. The insurer can
policy contains the condition “that in case of any sale, transfer, or always show lack of insurable interest after the issuance of a policy of
change of title of any property insured by this company, or of any insurance (Sec.83).
undivided interest therein, such insurance will be void and cease.”
(4) Effect where transfer is to strangers – It is alienation or transfer to a The defense of absence of insurable interest is available only to the
stranger or third person that will avoid the policy. A sale by a partner of insurer being the only party to the insurance contract who has a
his interest to a stranger ends the contract of insurance as to him but legitimate interest in raising the defense. It may be raised by and for the
does not affect the insurance as to the others. benefit of the insurer alone.

Ex. A policy of fire insurance was issued to partnership X under its Wagering or gaming policies void
firm name. The policy makes no provision for changes in the personnel • A contract of insurance is void for illegality unless the insured has an
of the firm. insurable interest in the subject matter insured.
The subsequent withdrawal of a partner or admission of a new partner • All insurance must not be a mere bet upon a future event.
will not affect the validity of the policy. Under Sec.26, the insurance • Wagers suffer no loss from the occurrence of the contingent event; on
continues despite the changes in the firm’s membership. The policy the contrary, they actually profit from it. The insurable interest
was taken in the name of the partnership X which has a juridical requirement intends to deter the insured from the temptation to bring
personality separate and distinct form that of each of its members about by unnatural means the results of the contingent event.
(Art.1768,CC)

SEC. 25. Every stipulation in a policy of insurance for the payment of loss TITLE 4
whether the person insured has or has not any interest in the property insured, or CONCEALMENT
that the policy shall be received as proof of such interest, and every policy
executed by way of gaming or wagering, is void. SEC 26.
A neglect to communicate that which a party knows and ought to
communicate, is called a CONCEALMENT.
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 Notes:
issued to a person without interest in the subject matter of the contract Requisites (KB/NW-FC/NM-AF)
is a mere wager policy or contract and is void. 1. Party knows the fact

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2. Bound to disclose such fact Notes:


3. There is no warranty of the fact concealed • Insurance Contracts are uberrimae fidae (of utmost good faith)
4. The other party has no means of ascertaining such fact • Duty is on both insured and insurer
• Presence of bad faith – not necessary o Insured: Alone knows the full circumstances of the subject
matter
Reason for rule o Insurer: Dominant bargaining position carries with it stricter
Four primary concerns of parties in the contract: responsibility
1. Correct estimation of the risk • Existence of fraud not required. Bad faith is not required.
2. Precise limitation of the risk • Rescission is OPTIONAL on the part of the injured party
3. Control of the risk after assumed • Reason for the provision: the party is misled or deceived into accepting
4. Determining whether loss occurred and amount of loss the risk
• Argente v. West Coast Life
• Nature of an insurance contract is that it is done in good faith Principal question to determine whether there is concealment
(Rodriguez) o “Was the insurer misled or deceived into entering a contract
• Fact concealed – MUST be MATERIAL to the risk obligation or in fixing the premium of insurance by a
withholding of material information or facts within the
Devices for ascertaining and controlling risk and loss assured’s knowledge or presumed knowledge?”
1. Concealment and representations – enabling the insurer to secure the o Must be material to the contract
same information with respect to the risk that was possessed by the • In the Philippines: Applies to all kinds of insurance
applicant for insurance, so that he might be equally capable of forming •
a just estimate of its quality • In the US: Applies only to marine insurance
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 SEC 28.
create in the insurer the power to extinguish the legal relations already Each party to a contract of insurance:
created
-­‐ must communicated to the other – in good faith
3. Exceptions – making more definite the coverage indicated by the
-­‐ all facts within his knowledge which
general description of the risk by excluding certain specified tasks that
• are material to the contract and
would otherwise have been included under the general language
• as to which he makes no warranty, and
describing the risk assumed
4. Executory warranties and conditions – undertaking that certain • which the other has not the means of ascertaining
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 Notes:
5. Conditions precedent – ex. Conditions requiring immediate notice; Matters must be communicated even in the absence of inquiry:
action be brought within a limited amount of time All facts within the party’s knowledge only when
• Material to the contract
SEC 27. • Other has not the means of ascertaining facts
A concealment whether intentional or unintentional: • Party with the duty to communicate makes no warranty
- entitles the injured party to rescind a contract of insurance
Knowledge:

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• Must be proven by the party claiming rescinded


• Must be at the time the insurance takes effect o Ex. Failure to communicate that the ship’s equipment is out of
order entitles the insurer to rescind since it tends to prove the
Test of Materiality falsity of the warranty that the ship is seaworthy.
• If the applicant is aware of the existence of some circumstances which o In marine insurance, the warranty implied is that the ship is
he knows would influence the insurer in acting upon his application, seaworthy
good faith requires him to disclose that circumstance, though asked • NOTE: Omission is on the part of the insured
• 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 SEC 30.
premium or different terms Neither party to a contract of insurance is bound to communicate
information of the matters following,
Insurance company does not have an obligation to verify the statements made by EXCEPT in answer to the inquiries of the other
the insured in his application before issuing the policy. 1. Those which the other knows
It has a right to rely on the statements of the insured as to material facts. 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
“No means of Ascertaining” 3. Those of which the other waives communication
• If the other party merely neglects to make inquiries – the right to 4. Those which prove or tend to prove the existence of a risk excluded by
information is waived a warranty, and which are not otherwise material
5. Those which relate to a risk excepted from the policy and which are
When there is a warranty such fact is covered by such warranty – it is not otherwise material
superfluous to require disclosure
Notes:
• Direct questions are considered material therefore the insured is
SEC. 29 required to make full and true disclosure of questions asked.
An intentional and fraudulent omission: • Failure of an apparently complete answer to make full disclosure
-­‐ on the part of one insured, will avoid the policy
-­‐ to communicate information of matters • However, an answer incomplete on its face will NOT avoid the policy
o proving or tending to prove the falsity in the absence of bad faith
entitles the insurer to rescind. 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
Notes: without stating amount – issue of policy without further
• Facts of matters covered by the warranty does not have to be disclosed inquiry is a waiver of the omission to state amount
BUT matters proving or tending to prove the FALSITY of the • No duty to make disclosure:
warranty must be communicated o Matters known to or right to be known by insurer, of which he
o There is a difference between falsity of warranty and violation waives disclosure
of warranty o Risks excepted from policy
o o Nature or amount of insured’s interest need not be disclosed
• Must be INTENTIONAL and FRAUDULENT for the contract to be unless in answer to an inquiry

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-­‐ which may affect the political or material perils contemplated; and
SEC 31. -­‐ all general usages of trade
Materiality is to be determined
-­‐ NOT by the event,
-­‐ but solely by the probable and reasonable influence of the facts Notes:
-­‐ upon the party to whom the communication is due, • Insured need not disclosed public events such as that a nation is at war
in forming his estimate of the disadvantages of the proposed contract, o Sources of information equally open to insurer who is
OR in making his inquiries. presumed to know
• Insurer is also charged with the knowledge of general usages of trade
Notes: o Rules of navigation, kind of seasons, risks connected with
• Test of materiality navigation
o Effect which the knowledge of the fact in question would have • Such information are equally presumed to be known by both parties.
on the making of the contract. It is sufficient that it would
influence the parties in making the contract SEC 33.
o Matter must be determined ultimately by the court The right to information of material facts may be waived, either:
• Effect on insurer: a probable and reasonable influence upon the -­‐ By terms of insurance or
insurer in assessing the risk involved and in making or omitting further -­‐ By neglect to make inquiries as to such facts
inquiries, and cause him to either reject the risk or to accept it only at a o Where they are distinctly implied in other facts of which
higher premium or on different terms information is communicated
• It is sufficient that the non-disclosure misled the insurer in forming his
estimates of the risk or in making inquiries Notes:
• In case of avoided insurance, return premiums • Right to info may be waived:
• The nature of facts not conveyed to the insurer may be such that failure o Expressly
of the insured to communicate must have been intentional rather than o Impliedly
inadvertent • If the applicant has answered the questions in the application, he is
• Insured cannot be guilty of concealment where the fact concealed is not justified in assuming that no further information is desired.
material • No waiver where the failure to make further inquiries was due to
• If information acquired AFTER contract becomes binding and effective concealment of the insured
o No duty to disclose information even if the policy is yet to • Ng Zee v. Asian Crusader Life Assurance Corp.
issue o Wrong ruling; not applicable as fraud need not be proven
o Concealment must take place at the time the contract is o Whether upon the face of the application, a question appears
entered to be not answered at all or to be imperfectly answered and the
• If information acquired BEFORE contract becomes effective insurer issues a policy without any further inquiry, it waives
o There is a duty to disclose the imperfection of the answer and rendered the omission to
answer more fully immaterial
SEC 32.
Each party to a contract of insurance is bound to know: SEC 34.
-­‐ all the general causes Information of the nature or amount of the interest of one insured
-­‐ which are open to his inquiry, equally with that of the other, and -­‐ Need not be communicated

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UNLESS in answer to an inquiry, deceive OR


EXCEPT as prescribed by Section 51 § Stated positively as true without knowing it to be true
-­‐ 51(e) – must specify the interest in the property insured if not absolute and which has a tendency to mislead
owner o Where such fact in either case is material to the risk
• Renders the contract VOIDABLE:
Notes: o At the option of insurer
GR: Nature or amount of interest need not be communicated o Regardless of intent
EX: • Misrepresentation may be viewed as an active form of concealment
1. Sec 51: Policy must specify the interest of the insured in the property • It is the duty of the person applying for insurance to give all the
only when he is not the absolute owner information necessary regarding the risk
o Example: Trustee, mortgagee or building contractor must • Information given (which can be communicated in any manner) forms
communicate EVEN IF no inquiry is made by the insurer the basis of the contract
2. When the insurer makes inquiry from the insured • Representations are collateral inducements
o Made to influence the insurer to accept the risk
SEC 35. o Not part of the contact unless expressly made so
Neither party to a contract of insurance • Insurer cannot decline to pay for the loss of a white painted house or
-­‐ is bound to communicate, EVEN upon inquiry, ship because it was described as painted green, although identical in
-­‐ information of his own judgment upon the matters in question description with subject of loss
• Once its written in a contract, it becomes a warranty or condition

Notes: SEC 37.


• Duty to disclose is confined to facts, opinions not covered A representation may be made:
-­‐ At the time of, OR
-­‐ Before, issuance of policy

TITLE 5
REPRESENTATION Notes:
Very nature of representation is that it precedes the execution of the contract.
SEC 36. A representation may be oral or written
Argente vs. West Coast life Ins., Co.
Notes: • Concealment is equivalent to a false representation that such fact does
• Representations not exist
o Factual statements made by the insured at the time of, or prior • Terms have been used interchangeably
to, the issuance of the policy to induce the insurer to enter into
the insurance contract Misrepresentation Concealment
• Misrepresentation (all 3 elements must concur) Active form of deceit Passive form of deceit
o A fact which is untrue Because there is an oral or written Because there is neglect or failure
o Stated: false statement to induce to disclose a material fact
§ With knowledge that it is untrue with intent to

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• Promissory representation: Any promise to be fulfilled after the


No need to distinguish since the rules applicable to both are similar: contract has come into existence or any statement concerning what is to
• Both requires the fact to concealed or misrepresented to be material happen during the existence of the insurance
• Both entitles the injured party to rescind the contract at his option o Promise made in connection but not incorporated in the policy
• Both may be committed intentionally or unintentionally § Promise made with fraudulent intent will serve to
Representation may be performed after the issuance of the policy (Sec. 39) defeat the insurance
o Undertaking by insured inserted in policy but not specifically
made in a warranty is also a promissory representation
SEC 38. o A promissory representation is substantially a condition
The language of a representation is to be interpreted by the same rules as the or warranty
language of contracts • IF Representation is one of

Notes: Fact Mere Expression of Opinion


• Constructed liberally in favor of insured
• Representation need ONLY to be substantially true and need not be Must prove to be false and Must prove to be false and
literally true and accurate in every aspect material material
• Warranties must be literally true, otherwise, the contract will fail Need not be in bad faith Must be made in bad faith
• Examples: (intent to deceive presumed) (intention to deceive)
o Use of liquor = habitual drinking
o Free from illness = true despite inflammation of eyes
o Illness = serious ailments
• Deemed to be a mere expression of opinion: Representation as to a
• Nature of information asked – such that no human being could, with
future event or condition over which the insured has no control
safety, undertake to answer correctly and warrant the correctness of his
• If the promise is oral, the insurer may not be allowed to prove it by the
answers
operation of the rule of evidence forbidding the admission of parol
testimony to add prior or contemporaneous terms to a written
instrument.
SEC 39.
• The promise, however, may be proved for a different purpose, that is to
A representation as to the future is to be deemed a promise:
prove that the insured made the promise in bad faith.
UNLESS it appears that it was merely a statement of belief or expectation.
SEC 40.
Notes:
A representation
• Kinds of Representation
-­‐ Cannot qualify an express provision in a contract of insurance
o Oral OR Written
-­‐ BUT it may qualify an implied warranty
o Made before OR during the issuance of the policy
o Affirmative OR Promissory
Notes:
• Affirmative representation
• Representation is a mere collateral inducement to a contract – it is not
o Allegation as to the existence or non-existence of a fact when
part of the contract that is why it cannot qualify its express provisions
the contract begins
o Ex. He is in good health •
SEC 41.

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A representation may be altered or withdrawn: • The insured is given discretion to communicate what he knows of a
before the insurance is effected, matter which he as no personal knowledge
but NOT afterwards 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
Notes: principal
• May be done ONLY before the insurance is effected: • Rule on agency:
• Since the insurer has not yet been induced o Knowledge of the agent is knowledge of the principal
• If done during such time – policy is NOT rescissible anymore o Applies to insured and insurer
o Failure to communicate: contract will be avoided
SEC 42. NOTE: If the insured receives information material to the risk, or has
A representation must be presumed to refer to the date on which the contract knowledge of a loss, he ought to communicate
goes in effect.
-­‐ Which he has upon the subject, and which he believes to be true, SEC 44.
-­‐ With the explanation that he does so on the information of others; A representation is deemed to be false when the facts fail to correspond with
OR he may submit the information, in its whole extent, to the insurer its assertions or stipulations
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:
• Unlike warranties, representation are not required to be literally true,
only be substantially true
Notes: • Substantial AND material misrepresentation, avoids the contract
• There is no false representation if it is true at the time the contract goes o EX: marine insurance – insurer is required to state the exact
into effect but false at the time it was made and whole truth
• The contract can be rescinded ONLY when it is false at the time when • The representation is substantially true and valid - EVEN if there are
the contract is effected 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
SEC 43. to save the policy
When a person insured has no personal knowledge of a fact
He may nevertheless repeat information SEC 45.
-­‐ Which he has upon the subject, and which he believes to be true, If a representation is false in a material point, whether affirmative or
-­‐ With the explanation that he does so on the information of others; promissory:
OR he may submit the information, in its whole extent, to the insurer the injured party is entitled to rescind the contract
In NEITHER case is he responsible for its truth, from the time when the representation becomes false.
UNLESS it proceeds from an agent of the insured, whose duty it is to give the The right to rescind granted by this Code to the insurer is waived:
information. by the acceptance of premium payments
DESPITE knowledge of the ground for rescission

Notes:

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In NON-Life Policy
Notes: • Insurer may rescind even after the loss and filing of claim provided it is
• Fraud not essential for right to rescind done BEFORE the insured files an action against the insurer
• Representation may be intentional or unintentional • However, a defense to an action that it was secured through
• Collusion between agent and insured will vitiate the policy concealment or misrepresentation
o is not in a nature of an action to rescind
SEC 46. o Hence, not barred by the provision
The materiality of a representation is determined by the same rules as the IN life insurance,
materiality of concealment • The defenses are available ONLY during the first two years of a life
insurance policy
• Incontestable clause requisites:
Notes: o It is a life insurance policy
• Materiality is a judicial question o Payable on death of insured
• Concealment and misrepresentation give right to rescind o In force during the lifetime of the insured for at least 2 years
• Rules apply both to the insurer and insured from its date of issue or of its last reinstatement
• See discussion in SEC 31 (Note: Period may be shortened but cannot be extended)
• When it becomes incontestable insurer cannot claim that policy is:
SEC 47. o Void ab initio (means voidable) due to fraud in inducement;
The provisions of this chapter apply as well to a modification of a contract o Rescissible due to concealment or misrepresentation
of insurance as to its original formation • Defenses not barred by incontestability clause:
o Lack of insurable interest
Notes: o Cause of death is an excepted risk
• The rules on concealment and misrepresentation applies to both the: o Non-payment of premium
o Original execution of the insurance policy o Conditions relating to military or naval service violated
o Any alteration or modification of the contract o Fraud is of a particularly vicious type (scheme to murder,
insured substitutes a person for exam, beneficiary kills
insured)
SEC 48. o Beneficiary failed to furnish proof of death or to comply with
Whenever a right to rescind a contract of insurance is given to the insurer: any condition imposed by policy after loss happened
such right must be exercised previous to the commencement of an action on the o Action not brought within time specified
contract.
After a policy of LIFE insurance made payable on the death of the insured: TITLE 6
shall have been in force during the lifetime of the insured THE POLICY
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 SEC. 49. The written instrument in which a contract of insurance is set forth, is
by reason of the fraudulent concealment or misrepresentation of the insured or called a policy of insurance.
his agent.
SEC. 50. The policy shall be in printed form which may contain blank spaces;
Notes: 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

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spaces provided therein. • The compliance with the insured with the terms of the policy is a
condition precedent to the right of recovery.
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 Policy a contract of “adhesion”
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 • The terms are drafted and imposed by the insurer. Ordinarily,
policy. contracts are freely negotiated by parties with roughly equivalent
bargaining power. However, this classical model is far removed
Unless applied for by the insured or owner, any rider, clause, warranty, or from the reality of the insurance business.
endorsement issued after the original policy shall be countersigned by the insured o Insurance contracts are drafted with the aid of skillful and
or owner, which countersignature shall be taken as his agreement to the contents highly paid legal talent, from which no deviation desired
of such rider, clause, warranty, or endorsement. by an applicant will be permitted.
o Except for riders which may later be inserted, the insured
Notwithstanding the foregoing, the policy may be in electronic form subject to sees the contract in its final form and has had no voice in
the pertinent provisions of Republic Act No. 8792, otherwise known as the the selection or arrangement of the words employed
“Electronic Commerce Act” and to such rules and regulations as may be therein.
prescribed by the Commissioner. o The insured cannot negotiate the substance of the
contract with the insurer. The provisions are normally
drafted by industry experts.
POLICY OF INSURANCE DEFINED. • 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 is the written document embodying the terms and stipulations of it.” Consequently, where the language use in an insurance contract
the contract of insurance between the insured and the insurer. or application is such as to create ambiguity, the same should be
resolved liberally in favor of the insured and strictly against the
Signature of the parties party responsible therefor. The reason being, to afford the greatest
protection to the insured.
• General Rule: The policy of insurance is signed only by the o Construe contracts as to preclude the insurer from evading
insurer or his duly authorized agent. compliance with its just obligations.
• Exception: Where express warranties are contained in a separate o Forfeitures are not favored and that any construction
instrument forming part of the policy, the law requires that the which would result in the forfeiture of the policy benefits
instrument must be signed by the insured. for the person claiming thereunder will be avoided if it is
possible to construe the policy in a manner which would
Policy controls terms of insurance contract permit recovery.
o This rule that insurance contracts are to be construed
• The terms of the insurance policy constitute the measure of the liberally in favor of the insured and strictly against the
insurer’s liability. In order to recover, the insured must show insurer applies to suretyship agreements.
himself within the terms. • If the terms of the contract are clear and unambiguous, there is no
• In the absence of fraud or mistake, a policy of insurance, upon room for construction and such terms cannot be enlarged or
acceptance, constitutes a valid and binding contract, superseding diminished by judicial construction.
all preliminary agreements and negotiations. o The courts will only rule out blind adherence to terms

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where facts and circumstances will show that they are knowledge of the applicant.
basically one-sided. o Acceptance of the contract unconditional. But it need not
be by formal act. Reception and retention of the policy
Policy different from contract of insurance itself without objection beyond a reasonable time may be
deemed to be an acceptance. Retention by the insurer of
• The policy if the formal written instrument evidencing the contract the premium for an unreasonable length of time may
of insurance. It is the law between them. constitute an acceptance.
• Insurance policies are generally required in standard forms as o The application may be so drafted that the insurance
approved by the Insurance Commissioner under Sec. 226. became effective on its signing by the prospective insured
• Every contract of insurance in the Philippines must be evidenced until the insurance is terminated by rejection of the
by a policy and that policy must be in the form previously application. The insurer may expressly limit the duration
approved by the Insurance Commissioner. of the temporary insurance.
o The contract, to be binding from the date of the
Form of contract of insurance application, must have been a completed contract, one
that leaves nothing to be done, nothing to be completed,
• The contract may be informal, e.g. as a binding slip, or a written nothing to be passed upon, or determined, before it shall
application informally accepted. take effect.
• The contract may be formal, being the carefully drawn written • The parties may impose additional conditions precedent to the
policy in customary use. validity of the policy as a contract as they see fit.
• The policy must be in written form. Any word, sign, symbol, etc. • Usual conditions found in the application for insurance contract.
necessary to complete the contract of insurance shall be written on o That the contract shall not become binding until the policy
the blank spaces provided in the policy. is delivered and;
• In case of conflict between the written and printed portions of a o The first premium paid.
policy, the written portion prevails. • Until the conditions are fulfilled, the policy is of no binding effect.
o Where the premium has been previously paid, the contract
Perfection of insurance contract is perfected upon approval fo the application although the
policy has not yet been issued, unless there is a stipulation
• It must, like other contracts, be assented to by the parties either in to the contrary.
person or by their agents. • Binding receipt is sometimes issued and is intended to be merely a
• Assent is manifested by the meeting of the offer and the acceptance provisional or temporary insurance contract and to be binding only
upon the thing and cause which are to constitute the contract. upon compliance with the said conditions. In life insurance a
• If an application has not been either accepted or rejected, there is binding slip does not insure by itself.
not contract of insurance yet as it is merely an offer or proposal. o Cover notes may be issued to bind the Insurance
o Mere signing of an application and payment of the first temporarily pending the issuance of the policy.
premium do not bind the insurer to issue a policy where
there is no evidence of any contract between the parties Offer and acceptance in insurance contract
that such acts should constitute a contract of insurance.
o The contract is not perfected where the applicant for life • Applicant usually makes the offer to the insurer through an
insurance dies before its approval or it does not appear application for insurance
that the acceptance of the application ever came to the • In property and liability insurance. – It is the insured who

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technically makes and offer to the insurer. The offer is usually • Delivery has significance as the “decisive act that ordinarily marks
accepted by an insurance agent. the end of the insurer’s opportunity to decline coverage.”
• In life and health insurance. – The situation depends upon whether
the insured pays the premium at the time he applies for the Modes of delivery of policy
insurance.
o If he does not pay the premium, his application is • Actual manual transfer of the policy is not a prerequisite to its
considered an invitation to the insurer to make an offer. validity unless the parties have so agreed in clear language.
o If he pays the premium with his application, his Constructive delivery may be sufficient.
application will be considered an offer. o Where no further conditions are to be fulfilled, a policy of
• Life and health insurance agents do not have the authority to bind insurance may be constructively delivered when it is
immediately the insurers they represent. Instead, they customarily deposited in the mail duly directed to the insured or his
issue a binding receipt that makes the coverage effective on agent.
o Date of the application, or • W/N the policy was delivered depends, not upon its manual
o Date of the medical examination. possession by the insured but rather upon the intention of the
• The binding receipt is a conditional acceptance by the insurer. parties which may be shown by their acts or words.
• If the application constitutes and offer. A policy issued strictly in o But possession by the insured raises the presumption that
accordance with the offer is an acceptance of the offer that perfects the policy was delivered to the insured, while possession
the contract. by the insurer is prima facie evidence that no delivery was
• If the policy does not conform to the application, it is an offer to made.
the insured which he may accept or reject. o If the application contains a provision that the insurance
shall not be effective until the delivery of the policy,
Importance of delivery of policy delivery is essential to the consummation of the contract.
• (Illustrative Case): While the application for insurance states that,
• Delivery – act of putting the insurance policy (the physical the policy must be delivered manually to the insured before the
document) into the possession of the insured. insurance becomes effective, the receipt for the premium paid
• The delivery is important as makes the insurance effective upon the issuance of the policy.
o Evidence of the making of a contract and its terms o In this case the insured paid the premiums before the
o Communication of the insurer’s acceptance of the policy was manually delivered to him. He was given a
insured’s offer. receipt for the payment.
• Delivery may also affect the term of the coverage. o The statement in the application that the policy must be
o e.g. if a contract of insurance provides that the policy is to delivered manually before the insurance became effective
expire after 1 year, the delivery becomes the important was modified by the reference to the receipt, which
fact for determining when the policy period ends. receipt made the insurance effective upon the issuance of
• However, the delivery of a policy is no a prerequisite to a valid the policy by the home office, subject to the condition that
contract of insurance. The contract may be completed prior to the the insured was in good health when the policy was
delivery or without delivery depending on the intention of the issued.
parties.
o The policy may also contain a provision that states that Delivery to insurer’s agent as delivery to insured
the insurance is not effective until the delivery of the
policy. • Is the delivery to the agent of the insurance company delivery to

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the insured? There has been much conflict of view on the question. provision to a policy, or to modify or waive an existing provision,
• (NO) Beneficiary cannot recover. – The insurance agent is not his or to make any desired change in the policy.
agent. • When there is an inconsistency between a rider and the printed
• (YES) Beneficiary can recover. – The contract is deemed complete stipulations in the policy, the rider prevails, as being a more
when the policy has been delivered to the insurance agent. deliberate expression of the agreement of the contracting parties.
o The insured having complied with every condition (This principle applies to the interpretation of clauses, warranties,
required of him, actual delivery to him is no essential to or indorsements which are attached to policies to vary their terms)
give the policy binding effect.
o A contrary rule would be financially unfair to the Attached papers on insurance policy
beneficiary where the amount of the premium is
computed from the date of the application. Because, in • Generally, the rider, slip or other paper becomes a part of a
effect, the insured paid a premium for a period during contract or policy of insurance if properly and sufficiently attached
which he did not actually receive any protection. or referred to therein in a manner as to leave no doubt as to the
intention of the parties in such respect.
Effect of delivery of policy • Section 226: no rider shall be attached to, printed, or stamped upon
a policy of insurance unless the form of such rider has been
• If there is conditional delivery of an insurance policy, non- approved by the Insurance Commissioner.
performance of the condition precedent prevents the contract from • A rider, clause, warranty or endorsement is not binding on the
taking effect. insured unless the descriptive title or name of the rider, etc. is also
• The unconditional delivery of an insurance policy corresponding to mentioned and written on the blank spaces provided in the
the terms of the application ordinarily consummates the contract, policy.
and the policy as delivered becomes the final contract between the o Warranties are inserted or attached to a policy to
parties. eliminate specific potential increases of hazard owing to
• But the insurer cannot be presumed to have extended credit from (1) actions of the insured or (2) condition of the property.
the mere fact of unconditional delivery of the insurance policy o A clause is an agreement between the insurer and the
without the prepayment of premium. insured on certain matter relating to the liability of the
o In the absence of any clear agreement granting credit insurer in case of loss.
extension, the policy will lapse if the premium is not paid, o An endorsement is any provision added to an insurance
at the time and in the manner specified in the policy. contract altering its scope or application. (Like extending
the perils covered)
Rider in a contract of insurance § An endorsement may be in the nature of a permit
such as one authorizing the removal of the
• A rider is a small printed or typed stipulation contained on a slip of insured property and providing for coverage in
paper attached to the policy and forming an integral part of the another location.
policy. • As to the lack of signature
• Riders constitute additional stipulations between the parties. It is a o General Rule: If the rider is physically attached to a
part of the contract to the same extent and with like effect as if policy of insurance contemporaneously with its execution
actually embodied in the policy. and delivered to the insured so attached, and sufficient
• The necessity for riders is found in the fact that in the conduct of reference is made in the policy, the fact that it is without
insurance business, it often becomes necessary to add a new the signature of the insurer or of the insured will not

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prevent its inclusion and construction as a part of the o Absent a special request, an insured will not see the text
insurance contract. of the policy until after the application has been submitted
§ Same rule as above if the rider, although issued and the first premium paid.
after the original policy, was applied for by the
insured or owner.
o Exception: The countersignature of the insured or owner Insurer’s duty to explain the policy
is required to any rider, etc. not applied for by him if
issued after the delivery of the policy. The • If the terms of an insurance policy are clear, unambiguous, and
countersignature shall be taken as his agreement to the explicit, the insurer has no affirmative duty to explain the policy or
contents of the matter so attached. its exclusions to the insured.
• Caveats to the abovementioned rule
Effect of failure of insured to read policy o The doctrine of “reasonable expectations” can operate to
impose de facto a duty on the insurer to explain the
• Majority Rule: The fact that it is customary for insured persons to policy’s coverage to the insured.
accept policies without reading is judicially recognized. Such § If the insurer had provided an explanation of the
acceptance is not negligence per se. Most courts would hold that coverage, the insured’s expectations of different
the insured’s acceptance and retention of the policy unread is not coverage would have been rendered
such laches as will defeat his right to reformation. unreasonable.
o Basis: the insurance contracts are contracts of adhesion. o In the area of Motor Vehicle Insurance courts have
• Minority Rule: Courts apply to insurance contracts the rule of sometimes imposed a duty on the insurer to explain the
general contract law that one who accepts a contractual instrument options to the insured.
is conclusively presumed to know and assent to its contents. The o Agents owe their customers a duty to exercise the skill
insured has the duty to read the policy and is bound by his and care that a reasonable agent would exercise in the
contract as written whether he reads it or not. circumstances.
• Exceptions to the Minority Rule: § This duty encompasses and obligation to explain
o Where the insured could not have discovered the to the customer the kinds of coverage available
erroneous statement by such reading. and to help the insured in choosing an
o Insured’s failure to read the policy is excused where he is appropriate coverage.
induced by the fraud of the agent of the insurer no to read • Contractual rights of insured after denial of coverage.
his policy. o When the insured disputes a denial of coverage, the duty
o Insured’s failure to read the policy should be overlooked of good faith and fair dealing may impose an obligation
if the insured is illiterate or unable to read English. on the insurer to alert the insured to his rights.
o Where the contract is long, complicated and difficult to § For example, if an insurer denies the claim of
understand even if read. insured under a health policy the insurer must
• Trends in modern cases. – There is an increased willingness to inform the insured of his contractual right to
protect insureds and other consumers who would suffer forfeiture. impartial review and arbitration (if the right
o An insured relies not upon the text of the policies but on exists).
the general descriptions of the coverage provided by the o If the insurer had reason to know that the insured was
insurer and its agents during the time he is considering unaware of his rights, the insurer must explain such
whether to submit an application. available rights.

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insurer liable only for the excess of said amount.


• The premium is also essential because it represents the
SEC. 51. A policy of insurance must specify: consideration of the contract. This is what the insured pays the
insurer to assume the risk of or the value of the loss.
(a) The parties between whom the contract is made; o The rates of premium are developed on the basis of the
(b) The amount to be insured except in the cases of open or running policies; nature and character of the risk assumed and also on the
(c) The premium, or if the insurance is of a character where the exact premium value of the property or other interest insured.
is only determinable upon the termination of the contract, a statement of the • The property or life insured constitutes the subject matter of the
basis and rates upon which the final premium is to be determined; contract.
(d) The property or life insured; o It has been suggested that the proper phrase to use is “thing
(e) The interest of the insured in property insured, if he is not the absolute owner insured” because insurable interest may be in liability and
thereof; and not in life or property.
(f) The risks insured against; and • The requirement of interest insured in property is especially
(g) The period during which the insurance is to continue. important in fire insurance policies to determine the actual damage
suffered by the insured in case of loss of the property covered by the
Contents of the policy policy if he is not the absolute owner thereof.
• The risks insured against must be stated because the insurer’s
• Names of the parties are essential. But the mere fact that the name undertaking is to indemnify the insured for loss, damage or liability
of the insured was incorrectly spelled is of no importance whatever, caused or created only by the risks insured against.
provided that the identity of the party can be sufficiently o Almost any contingent or unknown event, whether past or
established. future, may be insured against except those repugnant to
• Amount of insurance is necessary in order to easily and exactly public policy, positively prohibited, or those occasioned by
determine the amount of indemnity to be paid the insured in case of the insured’s own fraud or misconduct.
loss or damage especially if it is only partial and not total. The sum • The period during which the insurance is to continue must also be
insured is the basis for calculating the premium. However, it need stated because although the loss suffered by the insured was caused
not be stated in the case of open or running policies. by the risk insured against, the insurer would not be liable unless it
o The amount of insurance is the maximum limit on the occurred during such duration of the insurance.
insurer’s liability for loss or damage. o It may be expressed in terms of time, distance or voyage.
o Such amount is not necessarily the value of the property o The period of time during which the insurer assumes the
insured nor the extent of liability of the insurer in the event risk of loss is known as the life of the policy. (12 mos. –
of loss unless it is otherwise stipulated. annual policy; <12 mos. – short period policies)
o In life, health, accidental, and injury insurance, a fixed sum
is payable. Kinds of insurable risks (3 classifications)
o In workmen’s compensation insurance, the amount is not
specified in the policy but by the law imposing liability • Personal Risks. – Those involving the person. This is chiefly
upon the employer, which is, by reference, made part of the concerned with the time of death or disability. This is often divided
contract. into life and health risks.
o The amount insured is the amount fixed in the policy • Property Risks. – Those involving loss or damage to property. This
o The deductible is the stated amount to be deducted from arises from the destruction of property.
any loss, which is shouldered by the insured making the o Direct losses by fire, lightning, flood, and other forces of

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nature. • Calculability. – The risk must permit a reasonable statistical


o Indirect losses may occur like loss of profits, rents, or estimate of the chance of loss and possible variations from the
favorable lease. estimate.
• Liability Risks. – Those involving the liability for the injury to the • Definiteness of loss. – The losses should be fairly definite as to
person or property of others. This is occasioned by the operation of cause, time, place, and amount.
the law of liability (torts) and may sometimes be called third-party • No catastrophic loss. – When large numbers of people are subject to
risks. the same kind of losses at the same time, it is an obvious deviation
o The liability risk includes both bodily injury and property from the principle that the losses of the few are borne by the
damage risks. contributions of the many who do not suffer loss. (e.g. it is usual to
exclude political and war risks)
Risk, peril, and hazards distinguished • Accidental nature. – Insurable risks must also normally be
accidental in nature. Insurance is intended to cover fortuitous or
• Risk. – The chance of loss. The possibility of the occurrence of a unexpected losses.
loss, based on known and unknown factors. o Intentional losses caused by the insured are usually
• Peril. – The contingent or unknown event which may cause a loss. uninsurable because they cannot be reasonably predicted,
Its existence creates the risk, and its occurrence results in loss. (e.g. and payment for them would be against public policy.
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 Requirements not absolute
separate hazards and the sum total of the hazards constitute the
perils which cause the risk. • The requirements abovementioned are NOT absolute. Insurability is
o Physical hazards. – The term includes everything relating best described as a relative matter.
to location, structure, occupancy, exposure, and the like. • What is “insurable” varies among insurers, and may change over
(e.g. unsafe brake in a car, weak construction, waste paper time and with the use of certain limitations such as the amount of
piled under a staircase) coverage, specific contract definitions, deductibles, reinsurance, etc.
o Moral hazards. – The term is applied to those factors that
have their inception in mental attitudes. Appraisal of moral SEC. 52. Cover notes may be issued to bind insurance temporarily pending the
hazards requires the study of the character of the person issuance of the policy. Within sixty (60) days after issue of a cover note, a policy
under consideration in the light of his reputation. (e.g. shall be issued in lieu thereof, including within its terms the identical insurance
dishonesty, insanity, carelessness, indifference, other bound under the cover note and the premium therefor.
psychological causes in nature).
• However, in practice these terms are sometimes given more than Cover notes may be extended or renewed beyond such sixty (60) days with the
one meaning. The word “risk” is also loosely used to refer to the written approval of the Commissioner if he determines that such extension is not
subject matter insured and also as a synonym of the words “peril” contrary to and is not for the purpose of violating any provisions of this Code.
and “hazard” The Commissioner may promulgate rules and regulations governing such
extensions for the purpose of preventing such violations and may by such rules
Requirements for risks to be insurable and regulations dispense with the requirement of written approval by him in the
case of extension in compliance with such rules and regulations.
• Importance. – The loss to be insured against should be important
enough to warrant the existence of an insurance contract. Preliminary contracts of insurance (2 kinds)

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• Preliminary contract of present insurance. – The insurer insures the


subject matter through a “binding slip” or “cover note” which is to Rules on cover notes
be effective until the formal policy is issued or the risk rejected.
o The “binder” is a temporary contract of insurance and is • Insurance companies doing business in the Philippines may issue
usually issued after the applicant pays the first premium. cover notes to bind insurance temporarily, pending the issuance of
o The cover note contains the most important terms of a the policy.
preliminary contract of insurance and is intended to give • A cover note shall be deemed to be a contract of insurance within
temporary protection pending investigation or issue of the the meaning of Section 1(1) of the Code.
formal policy. By its nature, it is subject to all the • No cover note shall be issued or renewed unless in the form
conditions in the policy expected even though that policy previously approved by the Insurance Commission.
may never issue. • A cover note shall be valid and binding for a period not exceeding
o In life insurance no liability shall attach until the insurer 60 days from the date of its issuance, whether or not the premium
approves the risk. Thus a binding slip or binding receipt therefor has been paid. The cover not may be cancelled by either
does not insure by itself. party upon at least 7 days notice to the other party.
o Binders or cover notes serve the needs of commercial • If the cover note is NOT cancelled, within 60 days after its issuance,
convenience and yet are more definite and reliable than a policy of insurance shall be issued in lieu thereof.
oral agreement. o This policy will include an identical insurance bond and
• Preliminary executory contract of insurance. – Here, the insurer premium provided under the cover note.
makes a contract to insure the subject matter at some subsequent • A cover note may be extended or renewed beyond the period of 60
time which may be definite or indefinite. In this contract, the right days with the written approval of the Insurance Commission. The
acquired by the insured is merely to demand the delivery of a policy written approval may be dispensed with upon the certification of the
in accordance with the terms agreed upon and the obligation president, vice-president, or general manager of the insurance
assumed by the insurer is to deliver such policy. company concerned that the risks involved, the values of such risks,
and the premiums therefor have not as yet been determined or
Issuance and renewal of cover notes established and that such extension is not for the purpose of
violating any provisions of the Insurance Code or any rulings,
• Cover notes are short-term insurance policies that may be issued to instructions, circulars, orders or decisions of the Insurance
afford immediate provisional protection to the insured until the Commissioner.
insurer can inspect or evaluate the risk in question and issue the • Insurance companies may impose on cover notes a deposit premium
proper policy or until the risk is declined and notice thereof given. equivalent to at least 25% of the estimated premium coverage but in
o It is sufficient that the cover note shows, by necessary no case less than P500.
implication, an agreement to pay whatever rate may be
fixed. SEC. 53. The insurance proceeds shall be applied exclusively to the proper
o Cover notes do not contain particulars that would serve as interest of the person in whose name or for whose benefit it is made unless
basis for the computation of the premiums and otherwise specified in the policy.
consequently, no separate premiums are intended or
required to be paid therefor. Persons entitled to recover on policy
o A cover note is integrated with the regular policy to be
subsequently issued. • As against the insured. – Third persons have no right to the

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proceeds of the policy unless there be some contract of trust,


express or implied, between the insured and third person. • GR: Insurable interest in the property of a partnership exists in both
o GR: So if persons have different interests in the same the partnership and the partners. A partner has an insurable interest
property (like a mortgagor and mortgagee), an insurance in the firm property which will support a policy taken out thereon
taken by one in his own right and in his own interest does for his own benefit.
not in any way inure to the benefit of the other. • E: If a partner who insures partnership property in his own name
o E: If the bailee secures insurance covering his own goods limits the contract to his individual share.
and goods stored with him, and even if the owner of the
stored goods did not request or know of the insurance and SEC. 56. When the description of the insured in a policy is so general that it may
did not ratify it before payment of the loss, it has been held comprehend any person or any class of persons, only he who can show that it
that the warehouseman is liable to the owner of such stored was intended to include him, can claim the benefit of the policy.
goods for his share in the insurance money.
• As against the insurer. – A third person, in the absence of any SEC. 57. A policy may be so framed that it will inure to the benefit of
provision in the policy, has also no right to the proceeds thereof. whomsoever, during the continuance of the risk, may become the owner of the
Only the insured, if still alive, or the beneficiary, if the insured is interest insured.
already deceased, is entitled to claim the insurance proceeds upon
the maturation of the policy. Where description of insured general

SEC. 54. When an insurance contract is executed with an agent or trustee as the • The policy of insurance must specify the parties between whom the
insured, the fact that his principal or beneficiary is the real party in interest may contract is made.
be indicated by describing the insured as agent or trustee, or by other general o Although it is usual to insert in a policy the name of the
words in the policy. person, it is NOT essential. He may be described in other
ways.
Where insurance made by an agent or trustee • 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
• The agent or trustee when making an insurance contract for or on class of persons comprehended in the policy.
behalf of his principal should indicate that he is merely acting in a • Example: a policy states: “payable to X (insured), mortgagee, as his
representative capacity by signing as such agent or trustee, or by interest may appear, remainder to whomsoever, during the continuance
other general terms in the policy. of the risk, may become the owner of the interest insured”
• However, it has been held that where the defendant acted as o This insures the entire interest in the property NOT just that of
plaintiff’s agent for the insurance of goods stored with the the mortgagee.
defendant, the plaintiff cannot claim the benefit of the agency o It also shows to whom the money, in case of loss, should be
without sharing in the expenses. paid.

SEC. 55. To render an insurance effected by one partner or part-owner, SEC. 58. The mere transfer of a thing insured does not transfer the policy, but
applicable to the interest of his co-partners or other part-owners, it is necessary suspends it until the same person becomes the owner of both the policy and the
that the terms of the policy should be such as are applicable to the joint or thing insured.
common interest.
Effect of transfer of thing insured
Where insurance effected by partner or part owner

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• A contract of insurance is personal. Hence, it does not attach to or run and the value is the amount to be used in case of a total loss.
with the property insured. o There are 2 values, the face value and the value of the thing
• A purchaser of property who does not obtain a transfer of the policy insured. In the absence of fraud or mistake, the agreed value
cannot, in case of loss, recover upon such contract, as the transfer of of the thing insured will be paid in case of total loss of the
the property has the effect of suspending the insurance until the property.
purchaser becomes the owner of the policy as well as of the property o In life insurance, the liability of the insurer is measured by the
insured. face value of the policy.
o Exceptions: Sections 20-24 and 57. o Example: A policy insuring a ship “valued at P50 million” is a
valued policy.
SEC. 59. A policy is either open, valued, or running. • A running policy is intended to provide indemnity for property which
cannot well be covered by a valued policy because of its frequent
SEC. 60. An open policy is one in which the value of the thing insured is not change of location and quantity, or for property of such a nature as not
agreed upon and the amount of insurance merely represents the insurer’s to admit of a gross valuation.
maximum liability. The value of such thing insured shall be ascertained at the o Here the risk is shifting, fluctuating, or varying, and which
time of the loss. covers a class of property rather than any particular thing.
o In some cases, the nature of the property insured or the
SEC. 61. A valued policy is one which expresses on its face an agreement that circumstances are such as to make it impossible to designate
the thing insured shall be valued at a specified sum. the subject matter of insurance with certainty or particularity.
These policies are usually known as “floating,” “running,” or
SEC. 62. A running policy is one which contemplates successive insurances, and “blanket.”
which provides that the object of the policy may be from time to time defined, o A blanket policy (in the US) is one covering by a single
especially as to the subjects of insurance, by additional statements or amount of insurance the same kind of property at different
indorsements. 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
Kinds of policies difficult to insure its whole value, the remedy is a contract that
has no fixed face value, the face value adjusting itself to the
• An open or unvalued policy does not predetermine the value of the changing value at one specified location or at each of several
insured property but establishes a maximum amount the insurer will locations.
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 Advantages of a running policy
the policy NOT as the value of the property insured, but as the
maximum limit of the insurer’s liability. • Neither underinsured or overinsured at any time, the premium being
o The insured must establish the FMV of the property at the based on the monthly values reported
time of the loss. • He avoids cancellations that would otherwise be necessary to keep
§ If the FMV exceeds the maximum, the insurer will insurance adjusted to the value at each locations. (These cancellations
pay the maximum. would also be charged an expensive short rate)
§ If the FMV is less than the maximum, the insurer will • To save the trouble of watching his insurance and the danger of being
pay the FMV. underinsured in spite of his care.
• A valued policy is one where the value of the property is predetermined • The rate is adjusted to 100% insurance, whereas valued policies

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requiring insurance only to, say 80%, of the value, give either a small bringing suit.
or no reduction for amounts of insurance above this figure. • 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
SEC. 63. A condition, stipulation, or agreement, in any policy of insurance, occurs but from the time when the insured has a right to bring an action
limiting the time for commencing an action thereunder to a period of less than against the insurer.
one (1) year from the time when the cause of action accrues, is void. • Examples:
o Where the policy provided that no such suit or action thereon
Validity of agreement limiting time for commencing action “for the recovery of any claim shall be sustainable in any court
of law or equity unless the insured shall have fully complied
• General rule. – A clause in the policy providing that an action must be with all the terms and conditions of the policy nor unless
brought within a certain period is valid if not contrary to Section 63. commenced within 12 months next after the happening of the
• Period limitation. – If the period fixed is less than 1 year, it is void. loss,” it has been held that such stipulation is repugnant to
o EXCEPT: In a policy of industrial life insurance, the period Section 63.
cannot be less than six (6) years after the cause of action § In effect, it reduces the period allowed the insured for
accrues. bringing his action to less than 1 year.
§ Obviously, compliance with the terms and conditions
Nature of condition limiting period for filing claim would require some time and that will shorten the
period for bringing the suit.
• The condition is an important matter, not merely a procedural § As the stipulation is upon a written contract, the time
requirement, essential to prompt settlement of claims against insurance limit is 10 years from the time the cause of action
companies. accrues.
• It demands that insurance suits be brought by the insured while the o Where the policy provided that if a claim be made and
evidence as to the origin and cause of the loss or destruction has not yet rejected, an “action or suit” should be commenced within 12
disappeared. months after such rejection otherwise the claim would
• It is a resolutory cause, the purpose of which is to terminate all prescribe, it has been held that such a stipulation is valid.
liabilities in case the action is not filed by the insured within the period o Where a fidelity bond requires action to be filed within 1 year
stipulated. from the filing of the claim of loss, such condition contradicts
Section 63.
Where action brought against insurer’s agent § A fidelity bond is in the nature of a contract of
insurance against loss from misconduct.
• The bringing of such action against the agent cannot have any legal • Contractual limitations contained in insurance policies are regarded
effect except that of notifying the agent of the claim. with extreme jealousy by courts and will be strictly construed against
the insurer.
When cause of action accrues • The new Insurance Code empowers the Insurance Commissioner to
adjudicate disputes relating to an insurance company’s liability to an
• The right of the insured to the payment of his loss accrues from the insured. Hence, a complaint or claim filed by the insured with the
happening of the loss. Office of the Insurance Commissioner would now be considered an
• However, the cause of action in an insurance contract does not accrue “action” or “suit” the filing of which would have the effect of tolling or
until the insured’s claim is finally rejected by the insurer. suspending the running of the prescriptive period.
o Before such final rejection, there is no real necessity for

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SEC. 64. No policy of insurance other than life shall be cancelled by the insurer • The notice must be based on the occurrence, after the effective date of
except upon prior notice thereof to the insured, and no notice of cancellation the policy, of one or more of the grounds mentioned (Sec 64);
shall be effective unless it is based on the occurrence, after the effective date of o The premium referred to in Sec 64(a) must be a premium
the policy, of one or more of the following: subsequent to the first, because it speaks of non-payment
“after the effective date of the policy.”
(a) Non-payment of premium; • It must be in writing, mailed or delivered to the named insured at the
(b) Conviction of a crime arising out of acts increasing the hazard insured address shown in the policy, or to his authorized broker; and
against; • It must state which of the grounds set forth is relied upon.
(c) Discovery of fraud or material misrepresentation; o It is the duty of the insurer upon written request of the named
(d) Discovery of willful or reckless acts or omissions increasing the hazard insured to furnish the facts on which the cancellation is based.
insured against;
(e) Physical changes in the property insured which result in the property Prior notice of cancellation to insured
becoming uninsurable; or
(f) Discovery of other insurance coverage that makes the total insurance in • The purpose for notice to the insured is to prevent the cancellation of
excess of the value of the property insured; or the policy without allowing the insured ample opportunity to negotiate
(g) A determination by the Commissioner that the continuation of the policy for other insurance in its stead for his own protection.
would violate or would place the insurer in violation of this Code. • Notice given to insured himself. – The notice should be personal to the
insured and not to and/or through any unauthorized person by the
SEC. 65. All notice of cancellation mentioned in the preceding section shall be policy.
in writing, mailed or delivered to the named insured at the address shown in the • Notice delivered personally or sent by mail. – There must be proof that
policy or to his broker provided the broker is authorized in writing by the policy it was actually sent by mail.
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 SEC. 66. In case of insurance other than life, unless the insurer at least forty-five
written request of the named insured, the insurer will furnish the facts on which (45) days in advance of the end of the policy period mails or delivers to the
the cancellation is based. 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
Cancellation of non-life insurance 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
• Cancellation is broadly regarded as the right to rescind, abandon or written for a term of one year. Any policy written for a term longer than one (1)
cancel a contract of insurance. year or any policy with no fixed expiration date shall be considered as if written
• It is the termination by either the insurer or the insured of a policy of for successive policy period or terms of one (1) year.
insurance before its expiration.
• The insured can cancel an insurance contract at his election by Renewal of non-life insurance policy
surrendering the policy. Such surrender, however, entitles him to the
return of the premiums on the customary short-rate basis. • 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
Form and sufficiency of notice of cancellation by the Insurer 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.
• There must be prior notice of cancellation to the insured; o But where the renewal is in pursuance of a provision to that

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effect, it is not a new contract but an extension of the old one. • Contract of insurance is rendered voidable by the insurer without
o In the last analysis, the resolution of the question depends reference to the materiality of the statement or promise and whether the
primarily on the intention of the parties as ascertained from the insurer was prejudiced.
instrument itself. • A warranty may also be made by the insurer.
• 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 Kinds of warranties
the original policy upon payment of the premium due on the effective
date of the renewal • Warranties are either affirmative or promissory and either express or
o Unless the insurer, at least 45 days in advance of the end of the implied.
period, mails or delivers to the insured notice of its intention 1. An express warranty is an agreement contained in the policy or clearly
not to renew the policy or to condition its renewal upon incorporated therein as part thereof whereby the insured stipulates that
reduction of its amount or elimination of some coverages. certain facts relating to the risk are or shall be true or certain acts
o If the insured’s attention was not called as regards a reduction relating to the same subjects have been or shall be done.
in the policy coverage, the insurance company is bound by the 2. An implied warrranty is a warranty which from the very nature of the
greater coverage in an earlier policy. contract or from the general tenor of the words, although no express
• Period for giving notice of non-renewal by insurer. – For the purpose warranty is mentioned, is necessarily embodied in the policy as a part
of determining whether or not the insurer has given such notice, a thereof and which binds the insured as though expressed in the contract.
policy written for a term of less than one (1) year is considered as if o Implied warranties are generally warranties in marine
written for a term of one (1) year while a policy written for a longer insurance although it is infrequently applied in other than
term or with no fixed expiration date is considered as if written for marine insurance. It is only in marine insurance that the law
successive policy period terms of one (1) year. provides for implied warranties.

Thus, where the term of the policy is 5 years. Notice must be given at least 45 3. An affirmative warranty is one which asserts the existence of a fact or
days before the anniversary date of any given policy year. If the 45-day rule is condition at the time it is made.
not complied with, the insurer may not refuse to renew a policy upon payment o The warranty is continuing if it is one that must be satisfied
of the premium due during the entire coverage period of the insurance.
4. A promissory warranty, not infrequently called "executory" warranty, is
one where the insured stipulates that certain facts or conditions
TITLE 7 pertaining to the risk shall exist or that certain things with reference
WARRANTIES thereto shall be done or omitted. It is in the nature of a condition
subsequent.
Sec. 67. A warranty is either express or implied.
Warranty presumed affirmative
• Unless the contrary intention appears, the courts will presume that the
Warranty defined warranty is merely affirmative.
• Warranty is a statement or promise by the insured set forth in the policy • But the answer "Yes" to the question: "Will you keep your book of
itself or incorporated in it by proper reference, the untruth or accounts in an iron safe or secure in another building?" was held a
nonfulfillment of which in any respect and without reference to whether promissory warranty breach of which precluded recovery.
the insurer was in fact prejudiced by such untruth or nonfulfillment,
renders the policy voidable by the insurer

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Sec. 68. A warranty may relate to the past, the present, the future, or to any or all complied with substantial truth only is
of these. required
The falsity or nonfulfillment of While the falsity of a
a warranty operates as a breach representation renders the
Time to which warranty refers of contract. policy void on the ground of
• Although the provision employs the term "warranty" in general, in the fraud
case of a promissory warranty, the same may refer only to future Warranties are presumed While the insurer must show
events. E.g. A stipulation in the policy that the insured never suffered material, the materiality of a
any heart ailment is a warranty that relates to the past, while a representation in order to
stipulation that a building is occupied as a dwelling is a warranty that defeat an action on the policy
relates to the present.
• Before a representaion will be considered a warranty, it must be
expressly included or incorporated by clear reference in the policy and
Sec. 69. No particular form of words is necessary to create a warranty. 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
Intention of parties governs it is a warranty or a representation.
• Whether a statement made by the insured in the policy is a warranty • Warranties are strictly construed. — It ought to be remembered that
depends upon the intention of the parties in regard thereto. not only are warranties strictly construed against the insurer, but they
• In case of doubt, a statement will be construed as a representation should, likewise, by themselves be reasonably interpreted. That
rather than a warranty especially if such statement is contained in any reasonableness is to be ascertained in light of the factual conditions
instrument other than the policy like an application which is, in itself, prevailing in each case.
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. Sec. 70. Without prejudice to section fifty-one, every express warranty, made at
• It has been held that gratuitous answers written in the application, that or before the execution of a policy, must be contained in the policy itself, or in
is, answers not responsive to any questions asked, are not warranties another instrument signed by the insured and referred to in the policy as making a
even though the policy makes the statements in the application part of it.
warranties.
Express warranty, where contained
Warranties distinguished from representations
• In a policy itself, or another instrument. — In order that a stipulation
Warranties Representations may be considered a warranty, it must not only be clearly shown that
Warranties are considered parts While representations are but the parties intended it as such but it must also form part of the contract
of the contract collateral inducements to it itself or if contained in another instrument, it must be signed by the
Warranties are always written While representations may be insured and referred to in the policy as making a part of it. Mere
on the face of the policy, written in a totally reference alone is not sufficient to give this effect.
actually or by reference, disconnected paper or may be • "Another instrument" construed as excluding a rider. — It was held
oral that a rider attached to a policy is a part of the contract, to the same
Warranties must be strictly While in representations, extent and with like effect as if actually embodied therein.

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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 • Section 72 refers to a promissory warranty.
70, according to the Supreme Court, could not mean a mere slip of • Breach of promises or agreements as to future acts will not avoid a
paper like a rider, but something akin to the policy itself, which in policy unless the promises are material to the risk.
Section 49 is defined as a written instrument in which a contract of • The act or omission is material to the risk if it increases the risk, and
insurance is set forth. under the law, only substantial increase of risk works forfeiture of the
policy, which is avoided for increase in hazard.
• If it is stipulated in a policy requiring owner occupancy that the house
Sec. 71. A statement in a policy, of a matter relating to the person or thing shall not be occupied by a tenant, there is a warranty that such
insured, or to the risk, as a fact, is an express warranty thereof. condition shall not take place.
• A violation of the warrant in this case avoids the policy.

Express warranty regarding person, thing or risk


• Under Section 71, the statement in the policy relating to the person or Sec. 73. When, before the time arrives for the performance of a warranty
thing insured, or to the risk, must be as a fact and not as an opinion, or relating to the future, a loss insured against happens, or performance becomes
belief, to constitute an express warranty thereof. unlawful at the place of the contract, or impossible, the omission to fulfill the
• A statement in the policy which, from the very nature of the subject warranty does not avoid the policy.
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 When breach of warranty does not avoid policy
honest opinion or judgment.
EXAMPLES: • The general rule is that a violation of a warranty avoids a contract of
o Where the answers in an application are qualified by the insurance which refers to those warranties relating to the future.
words, appended at its foot, "the above is as near correct as I • Three (3) exceptions:
remember," "to the best of my knowledge and belief," or 1. When loss occurs before time for performance
similar words, the right to recover on the policy will not be 2. When performance becomes unlawful.
defeated unless some answers are consciously incorrect. 3. When performance becomes impossible
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 Where insurer barred by waiver or estoppel
mere opinion, where the property does not have a fixed market
value, must be substantial in order to constitute a ground for • Breach of warranty operates to discharge the insurer from liability
avoiding the policy. 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
Sec. 72. A statement in a policy, which imparts that it is intended to do or not excused where there is a waiver on the part of the insurer.
to do a thing which materially affects the risk, is a warranty that such act or o Waiver may be defined as "an intentional relinquishment of a
omission shall take place. known right."
o It may be express or implied.
Warranty of facts or omissions which materially affect the risk.

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o Failure on the part of the insurer to assert a forfeiture upon agreed upon in the policy and he can recover the full amount of the
breach of warranty or condition, after knowledge thereof, premiums paid by him up to the filing of the action.
amounts to a waiver or estoppel. • Under Section 74, the insurer is entitled to rescind a contract of insurance
o If waiver is to be implied from conduct mainly, said conduct for violation of a warranty only if said warranty is material; otherwise, the
must be clearly indicative of a clear intent of the insurer to breach thereof will not avoid the policy.
waive its right under the policy • The right of the insurer to rescind under Section 74 exists even though the
• Under estoppel, the insurer is precluded, because of some action or violation was not the direct cause of the loss.
inaction on its part, from relying on an otherwise valid defense as
against the insured who has been induced to enter into the contract by
Sec. 75. A policy may declare that a violation of specified provisions thereof
the insurer's representation or conduct.
shall avoid it, otherwise the breach of an immaterial provision does not avoid the
o The ground of estoppel is that it would be against equity and
policy.
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 When violation of immaterial provisions shall avoid policy.
without giving notice to the insurer, preferred to continue the policy by • Every warranty is conclusively presumed material.
demanding and collecting the premium. This act constitutes a waiver of • Hence, a warranty as to any fact will preclude any inquiry as to the
the right to rescind the insurance contract. materiality of that fact.
• Premium not paid. — Similarly, an extension of time for the payment • It need only be false. The law makes a distinction between provisions
of a premium amounts to a waiver of the insurer's right to require that are material and provisions that are immaterial. The breach of any
payment of the premium on the due date or within the grace period. provision which is not material will not avoid the policy.
• Warranty clause violated. — The insurance company was aware, even • However, the parties may expressly stipulate that the violation of a
before the policy was issued, that in the premises insured, the number particular provision (although immaterial) in the policy shall avoid it.
of fire hydrants was less than that demanded in the warranty. • By such stipulation, the parties convert an immaterial warranty into a
Nevertheless, it issued the policy and accepted and retained the material one
corresponding premiums.The insurer is barred by waiver or estoppel to
claim violation of the said (fire hydrant) warranty.
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.
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.

Effect of breach of warranty by insured.


• The breach referred to under Section 76 is one without fraud.
Right to rescind for violation of a material warranty
• 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,
• The violation of the terms of a contract of insurance entitles either party to
(see Sec. 74.)
terminate the contractual relations.
• Thus, the insured can sue for rescission for breach of contract due to the • Falsity, not fraud, is the basis of liability on a warranty.
o Without fraud. — Where there is no fraud, the policy is
refusal of the insurer to grant a loan applied for although this was expressly
avoided only from the time of breach and the insured is

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entitled (a) to the return of premium paid at a pro rata rate In other words, a condition precedent is a limitation to the
from the time of breach if it occurs after the inception of the attachment of the risk, whereas a warranty does not
contract; or (b) to all the premiums if it is broken during the necessarily have that effect.
inception of the contract. In the latter case, the contract is void
As to Nature • If the insured person contracts and warrants that if
ab initio and never becomes binding.
o With fraud. — Where there is fraud, the policy is avoided ab the representations made by him in his application
initio, and the insured is not entitled to the return of the for insurance are not true, the policy shall be null and
premium paid. void, such statements are not conditions precedent
but rather of the nature of a defeasance.
Conditions in insurance policy. • Also, promissory warranties are usually regarded as
• In law, a condition is an event signifying in its broadest sense either an conditions subsequent to be performed after the
occurrence or a non-occurrence that alters the previously existing legal policy has become a valid contract, non-performance
relations of the parties to the contract. of which will work a defeasance.
• Insurers may impose whatever conditions they please upon their
obligations, as long as they are not contrary to law, morals, good Exceptions distinguished from warranties and conditions
customs, public order, or public policy. • In most cases, exceptions are easily distinguished from warranties and
• Conditions in an insurance policy are of two kinds: conditions.
1. A condition precedent calls for the happening of some event • If the policy contains warranted statement that the insured building is
or the performance of some act after the terms of the contract occupied, we have an undoubted warranty. If the policy declares that
have been agreed upon, before the contract shall be binding on "this entire policy shall be void if the insured building be or becomes
the parties, such as that the policy shall not take effect until vacant or unoccupied and so remained for more than ten days," we have
delivery and payment of the first premium during the good just as clearly a condition. If the provision is that "this company shall
health of the applicant. not be liable for any loss while the insured building is vacant or
2. A condition subsequent is that which pertains not to the unoccupied" we have an unmistakable exception.
attachment of the risk and the inception of the policy, but to .
the contract of insurance after the risk has attached and during Effects of breach on legal relations of parties
the existence thereof such as the condition requiring notice
and proof of loss in case of loss upon an insurance against fire. • On binding force of contract. — The occurrence of a breach or
warranty or condition even though such breach be but temporary
Warranties and conditions distinguished 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
WARRANTY CONDITION way.
As to effect Warranty does not suspend or Condition precedent is one • On liability where there is waiver. — Such a breach of warranty or of
defeat the operation of the without the performance of condition may be waived without consideration; but the insurer does
contract, but a breach affords which the contract, although not become liable for an excepted loss by waiver unless such waiver
either the remedy expressly in form executed by the amounts to a new contract on valuable consideration.
provided in the contract or parties and delivered, does o The insurer cannot, by a naked waiver, assume a non-existent
that furnished by law not spring into life duty. Nor is the defense that the loss is excepted barred by the
incontestable clause.

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TITLE 8 • Where only one premium is paid for several things, not separately
PREMIUM valued or separately insured, making only one cause or consideration,
the insurance contract is entire or indivisible as to the items insured
Sec. 77. • Assessment – a sum specifically levied by mutual insurance companies
An insurer is entitled to payment of the premium or associations, upon a fixed and definite plan, to pay losses and
as soon as the thing insured is exposed to the peril insured against. expenses
• Payment of premium – one of the essential elements of an insurance
Notwithstanding any agreement to the contrary, NO policy or contract of contract
insurance issued by an insurance company is VALID and BINDING • Non-payment puts an end to the insurance contract and the insurer has
UNLESS and UNTIL the premium thereof has been PAID, no right to collect the premium
EXCEPT in the case of a LIFE or INDUSTRIAL LIFE POLICY • Distinction between Premium and Assessment
- whenever the grace period provision applies or o Premium – levied and paid to meet anticipated losses
- whenever under the broker and agency agreements with duly licensed § Not a debt
intermediaries, a 90-day credit extension is given. o Assessments – collected to meet actual losses
No credit extension to a duly licensed intermediary should exceed 90 days § If properly levied, is a debt (unless expressly agreed)
from date of issuance of the policy. • When premium becomes a debt
o Fire, casualty and marine insurance –as soon as the risk
attaches
Sec. 78 o Suretyship – as soon as the contract or bond is perfected and
• Employees of the Republic of the Philippines including its political delivered to the obligor
subdivisions and instrumentalities, and GOCCs may pay their
insurance premiums and loan obligations through SALARY GR: If no premium is paid – contract is NOT effective
DEDUCTIONS Exceptions: UCPB General Insurance Inc v. Masagana
• Provided; that the treasurer, cashier, paymaster or official of the entity • Sec 77: “in case of a life or industrial life policy whenever the grace
employing the government employees is authorized notwithstanding period provision applies”
the provisions of any existing law, rules and regulations to the contrary, • Sec 78: “Any acknowledgment in a policy or contract of insurance of
to MAKE DEDUCTIONS from salary, wage or income of the latter the receipt of premium is conclusive evidence of its payment”
pursuant to an agreement between the insurer and the government o Makati Tuscany vs. CA, “when the parties agree to the
employee and to remit such deductions to the insurer concerned, and payment in installments and partial payment has been made at
collect such reasonable fees for its services. the time of loss.”
o Makati Tuscany vs. CA, insurer may grant credit extension
o Estoppel

Notes: Life Insurance


• Insurance Premium • No duty for the insured to pay any premiums subsequent to the first
o Agreed price for assuming or carrying the risk • It is purely UNILATERAL
o Consideration paid an insurer for undertaking to indemnify the • Cannot compel the insured to pay a premium because insured is not a
former against a specified peril debtor of the insurer
• It is a contractual obligation

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balance of the premium does not produce the cancellation of the


No excuse for non-payment or premiums contract of insurance in the sense that it can no longer be enforced
• GR: Non-payment cannot be excused even for a fortuitous event since
the payment of a premium is of essence of a contract Validity of policy where credit extension granted to insured
• EXCEPTIONS • Intention: Put a contract of insurance on a cash-and-carry basis
1. Insurer has become insolvent and suspended business • Premium must be paid in cash as a condition precedent for non-life
2. Insurer has refused without justification a valid tender of payments insurance policy to be valid and binding (except Sec. 79)
3. When the failure to pay was due to the wrongful act of the insurer • Makati Tuscany
or his agent (he is estopped) o Sec. 77 merely precludes the parties from stipulating that the
4. Insurer waived his right to demand payment policy is valid even if premiums are not paid, but does not
• Nonpayment does not merely suspend, it actually puts an end to the expressly prohibit an agreement granting credit extension, and
insurance contract since time of payment is the essence of the contract must not be contrary to morals, public policy, etc.
• There is a valid payment even if check is encashed after the occurrence • Credit extension agreement is valid
of the risk insured against
On Partial Payments Exceptions to Section 77
When policy is valid and binding notwithstanding nonpayment of premium
Non-payment of Non-payment of subsequent premiums 1. Life or industrial policy when the grace period provision applies
1st premium 2. Under the broker or agency agreements, a 90-day extension is given
Prevents the Does not affect the validity of the contract 3. Acknowledgement in a policy or contract of receipt of premium
contract from UNLESS by express stipulation the policy (conclusive evidence of payment) despite fact that it is actually unpaid
becoming binding provides that it shall be suspended (Sec. 79)
UNLESS waived 4. Agreement allowing the insured to pay the premium in installments and
Note: partial payment made at time of loss (Makati Tuscany)
BUT nonpayment Individual life insurance, endowment insurance 5. Agreement to grant insured credit extension for payment of premium
of balance of and group life insurance – policyholder is entitled and loss occurs before expiration of credit term
premium DOES to a grace period of 30 days to pay the premium 6. Estoppel
NOT cancel the after the first
contract Industrial life insurance – 4 weeks grace period -­‐ Credit extension = 90 DAYS MAXIMUM
where premiums are payable monthly (30 days/1 -­‐ Receipt of the insurer of the premium even after expiration of credit
month) term but before loss, renders the insurance valid and binding
-­‐ Once a policy has been issued, the presumption lies that premium has
• GR: Partial payment makes the policy effective during the whole been duly paid and where nonpayment is attributable to the fault or
period of the policy misrepresentation of insurer, insured is entitled to recover in case of
loss
• EX: When the parties expressly stipulate that the policy will not be in
force UNTIL the full payment of premium
Payment of the premium to the insurance agent or broker is payment to the
• Partial payment – considered as a deposit held in trust by the insurer
insurance company
• If there is a partially performed contract (as far as payment of
• Misappropriation of the premiums paid by the agent is imputable to the
premium) = insurer and insured’s obligations arise; nonpayment of the
insurance company

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-­‐ UNLESS a short period rate has been agreed upon and appears on the
Sec. 79. face of the policy,
An acknowledgment in a policy or contract of insurance of the receipt of -­‐ after deducting from the whole premium any claim for loss or
premium damage under the policy which has previously accrued
-­‐ Is conclusive evidence of its payment, so far as to make the policy Provided, that no holder of a life insurance policy may avail himself of the
binding, privileges of this paragraph without sufficient cause as otherwise provided by
-­‐ Notwithstanding any stipulation therein that it shall not be binding until law.
the premium is actually paid.

Sec. 81.
Notes: If a peril insured against has existed, and the insurer has been liable for any
• Establishes legal fiction of payment period, however short, the insured is not entitled to return of premiums, so
• There is a waiver of the condition of prepayment – since it is declared far as that particular risk is concerned.
by law to be conclusive evidence of payment
• Conclusive Presumption extends ONLY to the question of the binding Sec. 82.
effect of the policy (1) A person insured is entitled to RETURN of the premium when the contract
• Insurer may still dispute it but ONLY for the purpose of recovering the is VOIDABLE, and subsequently ANNULLED under the provisions of the
premium due and unpaid Civil Code
• Acknowledgement is only prima facie evidence of payment of premium -­‐ or on account of fraud or misrepresentation of the insurer, or of his
• Section 79 should be treated as an exception to Section 77 agent
• Capital Insurance v. Plastic Era -­‐ or on account of facts, the existence of which the insured was ignorant
o Considering that the policy is silent as to the mode of without his fault
payment, the insurer is deemed to have accepted the -­‐ or when by any default of the insured other than actual fraud, the
promissory note in the payment of premium instead of cash. insurer never incurred any liability under the policy
This rendered the policy immediately operative on the date it
was delivered. (2) A person insured is not entitled to a return of premium if the policy is
o The payment of the premium is an independent obligation, the annulled, rescinded or if a claim is denied by reason of fraud.
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 Sec. 83.
the contract. In case of an over-insurance by several insurers other than life, the insured:
Sec. 80. -­‐ is entitled to a ratable return of the premium,
A person insured is entitled to a return of premium, as follows: -­‐ proportioned to the amount by which the aggregate sum insured in all
(a) To the whole premium if no part of his interest in the thing insured be the policies exceeds the insurable value of the thing at risk.
exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time AND the Notes:
insured surrenders his policy • If insurance is illegal – premiums cannot be recovered
-­‐ to such portion of the premium as corresponds with the unexpired • But if they are not in pari delicto – innocent party may recover
time, at a pro rata rate,
7 Instances when the insured is entitled to recover premiums already made:

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3. The policy is for life insurance policy


1. When no part of the interest in the thing insured has been exposed to Example
any of the perils insured against • X insures house for 1 year and pays 16k for a 1-year premium. After
2. Insurance is for a definite period and the insured surrenders his policy lapse of 3 months, X surrenders his policy. He is entitled to collect ¾ of
before termination premium paid or 12k, representing the portion of the premium for
3. Contract is voidable and subsequently annulled because of fraud or unexpired period of policy.
misrepresentation of the insurer or agent In short period rates:
4. Contract is voidable because of existence of facts of which insured was • Return of the premium in the proportion stipulated
ignorant without his fault • Usually found in a table of figures stipulating the amount for the
5. Insurer never incurred any liability under the policy because of the premium
default of the insured other than actual fraud • The amount recoverable will not be the unexpired period BUT ONLY
6. There is over-insurance the balance after deducting the percentage to be retained by the insurer
7. When rescission is granted due to the insurer’s breach of contract as stated in the table

In 1, 3, 4 and 5 – the insured is entitled to a return of the ENTIRE premium PERIOD % of Annual PERIOD % of Annual
paid Rate Rate
• They have to be actually paid 1 or less 20% 7 mos 75%
• Payment to insurer’s agent is sufficient
2 mos 30% 8 mos 80%
The assumption of risk is one of the essential elements in the insurance contract 3 mos 40% 9 mos 85%
– if there is no risk – premium may be recovered 4 mos 50% 10 mos 90%
When the risk never attached 5 mos 60% 11 mos 95%
1. Application for a policy was not approved, no premium can be 6 mos 70%
recovered
2. Loss occurs before effective date In Life Insurance
3. Insured and insurer become public enemies because of state of war • It is an indivisible contract so insured cannot recover
o War abrogates insurance contracts between citizens of
• HOWEVER, he is entitled to receive to the “cash surrender value”
belligerent states
AFTER 3 full annual premiums have been paid
When the risk attaches:
When contract is voidable
• If risk is entire + contract is indivisible: insured is not entitled to
Where the contract is voidable on account of fraud or misrepresentation of the
return of premium if insurer is exposed to the peril however short
insurer or his agent
• If contract is divisible (involves several distinct risks) – the premium
• If the insured is in fraud – he is NOT entitled to return of the premium
for the risk which does not attach can be claimed
When the contract is voidable on account of facts, the existence of which the
Where the insurance is made for a definite period of time and the insured
insured was ignorant of without his fault
surrenders his policy before the expiration of that period
Section 80(b) does NOT apply: When by any default of the insured other than actual fraud, the insurer never
1. When the insurance is not for a definite period incurred any liability under the policy
2. A short period has been agreed upon Example: insured a vessel but it was destroyed before the actual voyage

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• Claim – demand for the satisfaction of a loss suffered within the


When there is over-insurance purview of an insured’s policy
In case of an over-insurance by several insurers • Before a loss has occurs, an insurance policy except life, is not
• Insurer is not entitled to the portion of the premium corresponding to assignable without the consent of the insurer as it is a personal contract
the excess of the insurance over the insurable interest of the insured • But after a loss has occurred, insured has the absolute right to transfer
• Return is only for the proportion which exceeds the insurable interest or assign his claim against insurer.
• Proportioned to the amount by which the aggregate sum insured in all
the policies exceeds the insurable value of the thing at risk GR: A prohibition against the transfer of the claim after the loss is against
• Example (see page 282, De Leon 2014) public policy – therefore VOID
o House has insurable value of 1.5 M • The rights of the parties are already fixed after the loss
o Insurer A – 1.2 M – paid 24k • Agreement hinders free transmission of property
o Insurer B – 600k – paid 12k • Transfer involves money claim; it is not the personal contract being
o Total amount of insurance 1.8 M, premiums paid 36k assigned but the money claim under or right of action on the policy
o Proportion of 300k to 1.8 or 1/6 • It involves no moral hazard – does not increase the insurer’s risk;
o 1/6 of 24k = 4k; 1/6 of 12k =2k à amounts to be returned transfer does not do harm to its duty
EX:
Sec. 84. • Sec 173. Which prohibits the transfer of a fire insurance policy to any
An insurer may contract and accept payments, in addition to regular premium, person who acts as an agent of the issuing company and declares such
for the purpose of paying future premiums on the policy or to increase the transfer void insofar as it affects the creditors of the insured.
benefits thereof
Sec. 86.
Notes: Unless otherwise provided by the policy, an insurer is liable for a loss:
• Insured is duty bound only to make prompt payment of only the of which a peril insured against was the proximate cause,
insurance premiums due under the policy 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 Notes:
LOSS • Loss: Injury, damage, or liability sustained by the insured in
consequence of the happening of one or more of the perils against
Sec. 85. which the insurer has undertaken to indemnify the insured
An agreement not to transfer the claim of the insured against the insurer after • Scope of Loss
the loss has happened o Reinsurance – reinsurer’s share of the loss on risks ceded
is VOID IF made BEFORE the loss either automatically or facutatively
EXCEPT as otherwise provided in the case of life insurance. o Insurance – bodily, etc.
• Extent of Loss
o Total, partial, constructive total
Notes:

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o May be satisfied by • Loss is caused by the efforts to rescue the thing insured from the peril
§ Payment of loss insured against – example, pouring water to save from fire
§ Reinstatement (repair or restoration) • Insured is bound to exercise reasonable degree of care in removing the
§ Replacement goods
o Cannot recover greater than loss • The necessity of removal is to be determined by the circumstances as
• Cause of Loss they appear at that time, and not to the result.
o Liable if peril is the proximate cause and immediate cause • However, if it did not take place in the “course of the rescue” nor
• Scope of the Peril “caused by efforts to recue” – insurer is not liable
o Loss of income
o Bodily Injury Sec. 88.
o Legal liability to 3rd party Where a peril is especially excepted in a contract of insurance:
• Insurer is Liable: when the peril insured is the proximate cause a loss, which would not have occurred but for such peril, is thereby excepted
• Insurer is NOT liable: when the peril insured is ONLY a remote cause although the immediate cause of the loss was a peril which was not excepted.
• 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 Notes:
which the injury would not have occurred. • The insurer is NOT liable if the proximate cause is an excepted peril
o Not equivalent to immediate cause even if the immediate peril is a peril not excepted
• Hostile Fire – occurs outside the usual confines or begins as a friendly • Immediate Cause: cause or condition nearest to the time and place of
fire and becomes hostile by escaping from the place where it ought to injury
be to some place where it ought not to be • Insurer has the burden of proof that the risk causing the loss is excepted
• Friendly Fire – fire burns in a place where it was intended to burn and
ought to be Sec. 89.
An insurer is not liable:
Sec. 87. -­‐ for a loss caused by the willful act or through the connivance of the
An insurer is liable where the thing insured is rescued from a peril insured insured;
against that would otherwise have caused a loss, IF, BUT he is NOT exonerated:
in the course of such rescue, the thing is exposed to a peril not insured by the negligence of the insured, or of the insurance agents or others
against,
which permanently deprives the insured of its possession, in whole or in part; or Notes:
where a loss is caused by efforts to rescue the thing insured from a peril • It must be caused by a willful act
insured against. • GR: Negligence of the insured or his agents – insurer is LIABLE
• EX: If the negligence is so gross – insurer is NOT liable
Notes: • The doctrine of contributory negligence does not in any way apply
• For as long as the loss occurred in the course of rescuing or by efforts to rights under a contract of insurance.
to rescue from a peril INSURED against and also PROVIDED that the
property would have been lost by the peril insured against – the TITLE 10
insurer is liable, example – goods getting stolen while taken out coz NOTICE OF LOSS
there was fire

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• Formal notice of loss is not necessary if the insurer has actual notice
Sec. 90. o It is immaterial that if the notice was not given, the company
In case of loss upon an insurance against fire, an insurer is exonerated would not be prejudiced; and if given, the company would not
IF notice thereof be NOT given to him by be benefitted.
• An insured, or
• Some person entitled to the benefit of the insurance Time for giving notice of loss
without unnecessary delay • “Without unnecessary delay” – within reasonable time
For other non-life insurance, the Commissioner may specify the period for • Depends on the circumstances of the case
the submission of the notice of loss. • Construed liberally in favor of the insured
• Non-life insurance other than fire – the Commissioner may specify
Sec. 91. the period for the submission of the notice of loss
When a preliminary proof of loss is required by a policy, the insured is NOT • Parties may stipulate the period but must not be unreasonably short
BOUND to give such proof as would be necessary in a court of justice • Lindus v. Northern Insurance Co. of New York
BUT it is sufficient for him to give the best evidence which he has in his o Duty of insurer to show it has been prejudiced because of
power at the time. delay in the giving of notice
o Burden of proving actual prejudice is on the insurer
Notes: o Duty of insurer to show that an additional insured knew of the
• Sections 90 and 91 establish conditions concerning matters after the policy and it conditions
loss that must be fulfilled before the insured becomes entitled to the § Or that they made a reasonable effort to apprise the
benefit of a fire insurance policy insured of the extent and conditions of the policy
o Written notice of loss given to the insurer
o When required by the policy, preliminary proof of loss Proof of Loss
• No justification for submitting false proofs • Proof of loss: more or less formal evidence given the company by the
• Breach affects a right that has already accrued insured or claimant under a policy of the occurrence of the loss, the
• Until a loss occurs, through a peril covered by the policy, the insurer’s particulars and the data necessary to enable the company to determine
liability under his contract is altogether contingent, but with the its liability and amount
happening of the capital fact of loss, his liability arises and becomes • Best evidence which he has in his power at the time is sufficient
properly fixed. o Need not be of such persuasiveness of that required in judicial
• All conditions/requirements after the loss are merely for EVIDENTIAL proceedings
PURPOSES and DO NOT form part of the conditions of liability. • In loss upon an insurance against fire – written notice needed
o Substantial compliance with the requirements is sufficient • But GR: NO FORM REQUIRED
(with regard to submission of documents to prove loss o Orally
Notice of loss – formal notice given the insurer by the insured or the claimant o In writing
under a policy of the occurrence of the loss insured against; necessary for the § Though more advisable if in writing for the
insurer to be liable to pay the claim. protection of the insured or his beneficiary
• Purpose: is to enable the insurer to gather information and make the • Notice of loss may be in the form of:
proper investigation while evidence is still fresh and take such action as o Informal/Provisional claim
may be necessary to protect his interest from fraud or imposition § Containing minimum information
• No particular form is needed o Formal claim

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§ Contains the full details of the loss, computations of circumstances are such as to make strict compliance with the
the amounts claimed, and supporting evidence requirement impossible
together with request or demand for payment • Example: Insured died before the fire and the heirs did not
know about the policy
Purpose of Proof of Loss • Effect of fraudulent claim of loss
• Notice – give information upon which he may act promptly in • Mere filing of such claim will exonerate the insurer if such clause is
protecting the property from further loss for which he may be liable or part of the contract
enable him to take any other steps that his interests may require • Good faith however will not exonerate the insurer
• Notice of loss is different from proof of loss. 3. There must be positive proof of fraud – burden is on the insurer
• Statement of loss is a more formal requirement.
o Give the insurer information by which he may determine the Sec. 92.
extent of his liability All defects in a notice of loss, or in preliminary proof thereof,:
o Afford him a means of detecting any fraud that may have been which the insured might remedy, and
practiced upon him which the insurer omits to specify to him, without unnecessary delay, as
o Operate as a check upon extravagant claims grounds of objection, are WAIVED.
• May avail the services of ADJUSTERS in effecting the settlement of
an insurance claim
When defects in notice or proof deemed waived
Burden of Proof of Loss in Court Action • Proofs of loss satisfactory to the insurer are required to be given
1. INSURED has the burden of proving that he suffered loss. • But the insurer must be satisfied when the insured has done all in his
a. In life insurance – death of insured must be proven power to furnish the information stipulated for in the policy
2. Once insured makes a prima facie case in his favor, burden SHIFTS to • It is the DUTY of the dissatisfied insurer to indicate the defects in the
the INSURER to controvert insured’s prima facie case proofs of loss as given, so that the deficiencies may be supplied
a. Insurer who seeks to defeat a claim because of an exception or o Retention of defective proofs constitute as a waiver of his
limitation in the policy has the burden of establishing that the objections
loss comes within the purview of the exception or limitation • Waiver of the insurer is present in the following instances
a. Writes to the insured that he considers the policy null and void
• Fire insurance (as the notice of proof or loss would be useless)
• Plaintiff has to prove the amount of loss by preponderance of b. Recognizes his liability to pay the claim
evidence c. Denies all liability under the policy
• Cost price is competent evidence to show value of articles d. Joins in the proceedings for determining the amount of loss by
destroyed by fire arbitration, making no objections on account of notice and
• BUT INVENTORY OF GOODS destroyed by fire is a mere claim preliminary proof
for loss and does not constitute evidence of loss. Testimony or e. Makes objection on any ground other than a formal defect in
evidence must be given to sustain the correctness of claim. the preliminary proof

Excuses for non-compliance with conditions • A general statement that proofs are defective is not sufficient to impose
• Timely compliance with conditions is a condition precedent to right to on the insured the duty to supply the defects not pointed out.
recover under the policy o Example: If the policy required an affidavit of loss and a
• Failure to serve notice or proof may be excused when the defective one is accepted – there is a waiver on such defect.

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-­‐ the SAME person is insured


Sec. 93. -­‐ by SEVERAL insurers separately
Delay in the presentation to an insurer of notice or proof of loss is WAIVED -­‐ in respect to the same subject and interest.
• If caused by any act of his, or
• If he omits to take objection promptly and specifically upon that
ground. Notes:
• Additional insurance, other insurance and double insurance are used
When Delay in Presentation of Notice or Proof Deemed Waived interchangeably although there is a technical difference in their
• Waiver of delay may be made: meanings
o By an act of the insurer • In double insurance, there is co-insurance by two or more insurers,
o Failure to take objection promptly and specifically upon that hence it is also known as CO-INSURANCE.
ground Requisites: (All 4 must concur)
• Other instances mentioned in the book • Same person is insured
o By accepting payment of premium with full knowledge that • Two or more insurers insuring separately
the premises had been injured or destroyed by fire = estopped • Identity of subject matter
from claiming that notice of fire was not given • Identity of interest insured
o If insured has attempted to comply with stipulations of the • Identity of risk or peril insured against
policy and the company makes objections which necessitate Examples
amended or supplemental prods, the insured will be allowed a • X insures his house against fire with Y company and Z company
reasonable time after he is appraised within which to remedy • X mortgages house to B, insurance taken by X and another by B on the
the defects same house = not double insurance; not same insurable interest
• X insures his car against fire with Y and theft with Z = not double
Sec. 94. insurance; not same risk or peril
If the policy requires, by way of preliminary proof of loss,
the certificate or testimony of a person other than the insured,
• Double insurance is NOT prohibited IF the policy does not contain any
it is sufficient for the insured to use reasonable diligence to procure it, and
stipulation against such
in case of the refusal of such person to give it, then to furnish reasonable
• Prohibition for double insurance is valid in order to prevent over
evidence to the insurer that such refusal was not induced by any just grounds of
insurance and thus avert the perpetration of fraud
disbelief in the facts necessary to be certified or testified.
• IF the insurer knows the existence of other insurances AND continued
the policy – it amounts to a waiver of the annulment for such cause
Effect of Failure to secure certificate or testimony of third person
• “Additional/Other insurance clause”
• Insured only required to exercise reasonable diligence to procure it
o Valid in the absence of consent, waiver or estoppel
• Liberally construed in favor of the insured
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
TITLE 11
or consent of the insured = prohibition will NOT affect his rights under
DOUBLE INSURANCE
the policy in the absence of ratification
Sec. 95.
Double insurance is different from over-insurance
A double insurance exists where:

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• DI and OI may exist at the same time or neither may exist at all or damage
• Double insurance is the term used instead of “co-insurance” when the • They apply only where there is OVER-INSURANCE by DOUBLE-
sums insured exceed the insurable interest. In such case, there is over- INSURANCE
insurance by double-insurance o Insurance is contained in several policies the total amount of
which is in excess of the insurable interest of the insured
Double Insurance Over Insurance • Paragraph (e) governs the liability of the insurers among themselves
There may be no over-insurance as Amount of the insurance is beyond where the total insurance taken exceeds the loss. If the loss is greater
when the sum total of the amounts of the value of the insured’s insurable than the sum total of the policies issued, each insurer is liable for the
the policies issued does not exceed the interest amount of his policy.
insurable interest of the insured There may only be one insurer • The insured can only recover the amount of his insurable interest
There are always several insurers involved whether in one policy or several policies
• Since a contract of insurance is one of indemnity – the amount of
Sec. 96. recovery is limited to the value of the insured’s insurable interest
Where the insured in a policy other than life over-insured by double
insurance: Double Insurance Over Insurance
(a) The insured, unless the policy otherwise provides, may claim payment There must be several insurers One insurer is sufficient
from the insurers in such order as he may select, up to the amount for The total of the sum of the policies Amount of the insurance is
which the insurers are severally liable under their respective contracts need not exceed the insurable always beyond the value of the
(b) Where the policy under which the insured claims is a valued policy, interest insurable interest
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 TITLE 12
subject-matter insured REINSURANCE
(c) Where the policy under which the insured claims is an unvalued
policy, any sum received by him under any policy shall be deducted Sec. 97. A contract of reinsurance is one by which an insurer procures a third
against the full insurable value, for any sum received by him under any person to insure him against loss or liability by reason of such original insurance.
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 Reinsurance defined
unvalued policies, he must hold such sum in trust for the insurers, • It is a contract whereby one party, the reinsurer, agrees to indemnify
according to their right of contribution among themselves another, the reinsured (original insurer), either in whole or in part,
(e) Each insurer is bound, as between himself and the other insurers, to against loss or liability which the latter may sustain or incur under a
contribute ratably to the loss in proportion to the amount for which he separate and original contract of insurance with a third party, the
is liable under his contract original insured.
• It has been referred to simply as "an insurance of an insurance".
Notes: • Such contracts are sometimes referred to as "treaties".
• Principle of Contribution – requires each insurer to contribute ratably • The reinsurance of a reinsurance is called retrocession.
to the loss or damage considering that the several insurances cover the
same subject matter and interest against the same peril Reinsurance distinguished from double insurance.
• Contribution clause – stipulation that the insurance company shall not
be liable to pay or contribute more than its ratable proportion of the loss

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DOUBLE INSURANCE REINSURANCE amounts and to applicants who are not eligible for insurance at standard
In double insurance, the insurer While in reinsurance, the insurer rates.
remains as the insurer of the becomes the insured, insofar as the 4. Underwriters benefit through the placing of additional insurance in an
original insured reinsurer is concerned expanded market. The insurance industry benefits by reducing the
In double insurance, the subject While in reinsurance, it is the waste arising out of policies which are applied for but not issued.
of the insurance is property original insurer's risk 5. The knowledge of the industry regarding classification of impaired
Double insurance is an insurance Reinsurance is an insurance of a risks is increased in the most economical manner. Reinsuring
of the same interest different interest 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
In double insurance, the insured While in reinsurance, the original
analyses by an experienced staff.
is the party in interest in all the insured has no interest in the
6. Finally, the reinsurer benefits through the acquisition of business which
contracts contract of reinsurance which is
is expected to prove profitable in the long run.
independent of the original
contract of insurance
From the standpoint of the insured:
In double insurance, the insured While in reinsurance, the consent 1. It gives insurance companies that practice in greater financial stability
has to give his consent of the original insured (who is
and thus makes the insured's individual policy more reliable;
hardly even aware of the
2. If a large amount of insurance is needed, the insured may obtain it
reinsurance transaction) is not
without negotiating with numerous companies;
necessary.
3. It enables the insured to obtain protection promptly, without the delay
that would be required to divide and distribute the amount among many
companies;
Value of reinsurance 4. All the insurance can be written under identical contract provisions,
whereas otherwise these might vary with the different companies
From the standpoint of the insurer: among whom the insurance is divided; and
1. Every insurance company, in accordance with its financial strength, 5. Small companies are encouraged to divide large exposures for safety
establishes a limit on the maximum claim it wishes to pay out of its and enabled to accept a wide variety of applicants.
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 From the standpoint of the insuring public
amount the applicant is willing to seek. When such applications are for • Contracts or "treaties" of reinsurance are plainly beneficial to the public
a sum over the company's retention, it handles the excess by means of inasmuch as they promote both efficiency and stability in the conduct
reinsurance. of the reinsurance business.
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 Sec. 98. Where an insurer obtains reinsurance, except under reinsurance
financial resources in case of a loss, rather than inconvenience a client treaties, he must communicate all the representations of the original insured,
by referring him to other insurance companies. This is in the best and also all the knowledge and information he possesses, whether previously or
interest of the insuring public, the insurer, and the reinsurer. subsequently acquired, which are material to the risk.
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 Duty of reinsured to disclose facts

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underwriting classification exists, the insurer usually does not


• Where an underwriter is seeking to insure his risks, his duty to disclose use its automatic facility but instead secures the reinsurer's
all material facts is no less than the similar duty imposed on a person underwriting opinion by submitting the case facultatively.
seeking an original insurance; the duty in both cases is one of the Reinsurance treaty distinguished from reinsurance policy
strictest good faith since the risk insured against in a contract of
reinsurance is the probability that the original insurer may be compelled REINSURANCE POLICY REINSURANCE TREATY
to indemnify for the loss under the policy issued by him.
A reinsurance policy is a contract of In contradistinction, a reinsurance
• Thus, a policy may be avoided where the reinsured conceals the fact
indemnity one insurer makes with treaty is merely an agreement
that a loss has taken place or that the property is over-insured where he
another to protect the first insurer from between two insurance companies
has knowledge thereof.
a risk it has already assumed whereby one agrees to cede and the
• Section 98, however, covers knowledge or information possessed by other to accept reinsurance business
the insurer "whether previously or subsequently acquired, which are pursuant to provisions specified in
material to the risk." the treaty.
Automatic and facultative methods of ceding reinsurance
• Reinsurance may be placed in effect either automatically or The practice of issuing policies by The lumping of the different
facultatively insurance companies includes, among agreements under a contract has
• Share or participation in risk insured. — The rule in Section 98 does other things, the issuance of resulted in the term known to the
not apply in case of automatic reinsurance treaties under which the reinsurance policies on standard risks insurance world as 'treaties.' Such a
ceding company (reinsured) is bound to cede (give off by way of and also on substandard risks under treaty is, in fact, an agreement
reinsurance) and the reinsurer is obligated to accept a fixed share of the special arrangements. between insurance companies to
risk which has to be reinsured under the contract. cover the different situations
• In a facultative insurance, which covers liability on individual risk, described.
there is no obligation either to cede or to accept participation in the risk
Reinsurance treaties and reinsurance Treaties are contracts for insurance
insured, each party having a free choice. But once the share is accepted,
policies are not synonymous.
the obligation is absolute and the liability assumed thereunder can be
discharged by one and only way — payment of the share of the losses.
It is only after a reinsurance cession is
There is no alternative or substitute prestation.
made that the obligation of the insurer
• Advantage to insurer. — The main advantage to the insurer of the
to pay the reinsurance premium arises.
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
Sec. 99. A reinsurance is presumed to be a contract of indemnity against
automatically, the reinsurer is relying on the underwriting judgment of
liability, and not merely against damage.
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 Nature of contract of reinsurance
insurer retains its full retention limit, which assures a measure
of self-interest. In actual practice, when any question of proper

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• Contract, one of indemnity against liability. — In reinsurance, the o Thus, the reinsurer is not liable to the reinsured for a loss
reinsurer agrees to indemnify the insurer, not against actual payment under an original policy if the latter is not liable to the original
made but against liabilities incurred. Therefore, it is by no means insured or for an amount more than the sum actually paid to
necessary that the insurer shall first have paid a loss accruing, as a the insured.
condition precedent to his demanding payment of the reinsurer. o It has been held that the clause "to pay as may be paid
• Contract, separate from original insurance policy. — The contract of thereon" does not preclude the reinsurer from insisting upon
insurance is independent of and separate from the contract of proper proof that a loss within the terms of the original policy
reinsurance. The practice is for the reinsurer to pay the insurer even has taken place; it does not enable the reinsured to recover
before the latter has indemnified the original insured. from his reinsurer to an extent beyond the subscription of the
• Contract based on original policy. — The policy of reinsurance, latter under the contract 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 Liability of reinsurer to original insured.
policy of reinsurance are yet greatly affected by the terms and
conditions of the original policy upon which the reinsurance contract is • Contract of reinsurance solely between insurer and reinsurer.
based. — In case the contract is solely between the insurer and the reinsurer,
• Insurable interest requirement applicable. — The doctrine of insurable contemplating only an indemnity to the insurer against losses suffered
interest applies to reinsurance just as it does to any insurance contract. by reason of the policies carried by him, the original insured has
Therefore, the primary insurer is not entitled to contract for reinsurance absolutely no interest in the contract and is a total stranger to it.
exceeding the limits of the policy ceded to the reinsurer. o Unless the reinsurance contract contains a stipulation
• Rule on subrogation applicable. — In general, a reinsurer, on payment assigning the right of the insurer in favor of the insured, the
of a loss, acquires the same rights by subrogation as are acquired in latter, not being a privy to the contract, has no cause of action
similar cases where the original insurer pays a loss. against the reinsurer, but only against the insurer.
• Contract of reinsurance with stipulation in favor of original insured. —
Sec. 100. The original insured has no interest in a contract of reinsurance. The contract of reinsurance may contain a provision whereby the
reinsurer binds himself to pay to the policyholder any loss for which the
Rights of original insured in contract of reinsurance insurer may become liable.
• The insured, unless the contract so provides, has no concern with the o Therefore, the reinsurer who has promised to pay the losses
contract of reinsurance, and the reinsurer is not liable to the insured accruing under the original policy will be liable to a suit by the
either as surety or otherwise. original insured under the contract of reinsurance. The
remedy of the insured is both against the insurer and the
• There is no privity of contract between the original reinsured and the
reinsurer. reinsurer.
• Contract of reinsurance amounting to novation of original contract. —
• A contract of reinsurance rarely explicitly permits direct action by the
The original insured may also maintain an action directly against the
original insured against the reinsurer.
reinsurer in those cases in which the circumstances attending the
making of the contract of reinsurance amount to a novation of the
Liability of reinsurer to reinsured.
original contract and hence, operate to discharge that contract and the
• In an action on a contract of reinsurance, as a general rule, the reinsurer
original insurer from all obligations thereunder.
is entitled to avail itself of every defense which the reinsured might
o The original insurer, however, will be released only when the
urge in an action by the person originally insured.
insured agrees with the insurer and reinsurer to the novation.

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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   so-­‐called   "reinsurer"   is   but   substituted   for   the   original   insurer   and  
hence,  becomes  the  immediate  insurer  of  the  subject  of  the  original  policy.    

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