Insurance Contract Essentials

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REVI EW ER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
MATTERS TO STUDY:
For purposes of the bar, study very well the following:
1. Insurable interest (most important)
2. The principle of indemnity, specially in property insurance
3. The principle of subrogation (Art. 2207, NCC)
4. The principle of utmost good faith
5. The principle of insurance as a contract of adhesion
CASE: ENRIQUEZ VS. SUN LIFE ASSURANCE CO.
FACTS: An application for life insurance was mailed. An acceptance was also mailed by
the insurer. Before the receipt of the acceptance letter, the insured died.
HELD:
Follow the Theory of Cognition. A contract is perfected upon knowledge
of the acceptance. There was no perfected contract since it was not shown that the
acceptance of the application ever came to the knowledge of the applicant.
HISTORY:
1. Insurance Act (2427)
2. PD 612
3. PD 1460 - merely codified all the insurance laws of the Philippines; date of
effectivity - 11 June 1978
4. PD 1814 - amending certain provisions of the Insurance Code
5. BP 874
CONTRACT OF INSURANCE
A "contract of insurance" is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event.
It is an agreement, a contract. Hence, it must have all the essential elements
of a contract: consent, object, and cause or consideration.
What are the essential elements of a contract of insurance? There must be
a subject matter in which case there must be an insurable interest,
especially in property insurance. There must be the risk or the peril insured
against. Under the Code, the risk is any contingent and unknown event, whether
past or future, which may damnify a person having an insurable interest can be
insured against.
Insurable interest is a very important concept in insurance. There must be
a risk or peril insured against. There must also be the consent of the contracting
parties. As a rule, it is a voluntary contract. The only exception is found in
Chapter VI, the Compulsory Motor Vehicle Liability Insurance. Those who have cars
know this. You cannot register your vehicle unless it is covered by this type of
insurance.
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But as a rule, insurance is a voluntary contract. So the parties must give

their consent freely; no vice of consent, like force, intimidation, undue
influence, mistake, violence, etc. Then, like any other contract, there must
be a meeting of the minds. It is a consensual contract; it is perfected by mere consent.
There is also an offer and an acceptance between the insurer and the insured. These
elements must concur before you have a contract of insurance.
Who are the parties? The insured and the insurer. Who is the insurer? He is
the party who undertakes to indemnify the insured against loss, damage or
liability arising from an unknown or contingent event. The insured on the other hand,
is the party to be indemnified upon the occurrence of the loss. Aside from being
capacitated to enter into a contract, what other qualifications must the insured
posses? The law says under Sec. 7, he must not be a public enemy. The law says anyone
except a public enemy can be insured against.
What does public enemy mean? To what does it refer? It refers to a country
with which the Philippines is at war and the citizens thereof. What is the reason why,
under the law, a public enemy cannot be insured against? The reason is obvious. The
purpose of war is to cripple the power & exhaust the
resources of the enemy. If the Code did not contain the aforementioned prohibition,
it could be insured to compensate by way of insurance after having destroyed or
crippled the resources of the enemy.
May a minor validly enter into a contract of insurance? Under the present
Code, the law by way of exception provides that a minor may enter into a contract of
life, health and accident insurance, provided the beneficiary is
among those mentioned under the law: the minor's estate, the parents,
spouse, children, siblings (Sec. 3[3]).
Consider, however, RA 6809, which reduced the minority age to eighteen. So
when the law speaks of a minor at least eighteen years of age, considering RA
6809, I believe that said provision of the Insurance Code has been correspondingly
modified by said piece of legislation.
In other words, one who is eighteen (18) years of age is no longer a minor
under RA 6809. Therefore, a person who is eighteen years of age may enter not
only into a contract of life and accident insurance, but even property
insurance.
Suppose the insured is minor, below eighteen years of age, say seventeen
and he enters into a contract of property insurance. The insurance company issues a
policy. There is a loss by fire. Can the insurance deny the claim on
the ground that the insured is a minor? May the insurer raise as a defense the minority
of the insured, and therefore consider the contract void? NO. Recall the law on
contracts under the Civil Code. Under the law, a contract
entered into by a minor is not void, it is only voidable, therefore valid until
annulled (Art. 1390 [1], NCC)
Furthermore, we have that law on contracts, that when one of the parties
is incapacitated, the capacitated party cannot invoke as a defense the incapacity of
the other party. In other words, in the absence of misrepresentation on the part of
the minor, the insurer will be liable despite the fact that the insured is a minor.
We can even apply the principle
of estoppel. The insurer is estopped from denying the claim.
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How about a married woman? Can she enter into a contract of insurance
without the consent of her husband? YES provided that the insurance is on her
life or that of her children (Sec. 3, par. 2, ICP)
The law does not mention property insurance. Under the Civil Code and under the
present Family Code, with respect to the question of whether a wife
may engage in any trade, occupation or profession without the consent of the
husband, the rule is YES, the wife can do so. All that the wife can do is to
object on serious moral grounds and provided that his income is sufficient
to support the family in accordance with its social standing.
There are many important concepts referring to a contract of insurance. The most
important ones are:
1. it is a personal contract
2. it is a contract of adhesion
CHARACTERISTICS OF A CONTRACT OF INSURANCE
1.
It is an aleatory contract
Art. 2010, NCC - by an aleatory contract, one of the parties or both reciprocally
bind themselves to give or to do something in
consideration of what the other shall give or do upon the happening of
an event which is uncertain or which is to occur at an indeterminate time.
Event which may or may not happen - fire
Even that will happen although we do not know when
- death (in so far
as the insurer is concerned, the even is conditional, it may or may not

happen)
2.
It is a personal contract
See Sec. 20
The law presumes that the insurer considered the personal qualifications of
the insured.
3.
It is a contract of indemnity (except life & accident insurance where the result
is death)
In so far as property insurance is concerned. The purpose of the insurance
contract is to indemnify. Therefore, the amount to be recovered should never
be more than the loss. Otherwise, the contract becomes an instrument for
unjust enrichment (solutio indebiti).
4.
It is a contract of adhesion
A contract which does not result from the negotiation of the parties.
In insurance, there is a policy, normally in printed form. Normally, the
applicant of the insured has no participation in the preparation of
the contract. He may either accept or reject the contract.
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In transportation law, there is a case involving a plane ticket which the

Supreme Court held as a contract of adhesion. Will it bind the passenger
although he has not read it? Yes, because while it is a contract of adhesion, it
is not a void contract. It follows that he is
bound by the provisions thereof. That is also the case of a contract of
insurance.
The situation is different in a contract of sale where the parties normally
would have a say on the terms thereof, the manner of payment,
the manner of delivery, who should shoulder the expenses, etc. This does not
apply in a contract of insurance.
In a contract of insurance, the policy is in written form presented to the
applicant. He either adheres (that is why it is called a contract
of adhesion) or rejects the contract. Therefore, as a result, being a contract

of adhesion, the rule is: should there be any doubt, ambiguity
or obscurity, in any of the terms and stipulations of the contract, the
same shall be interpreted strictly against the insurer and liberally in
favor of the insured.
There is a similar provision of the Civil Code, under Art. 1377.
Art. 1377. The interpretation of obscure words or stipulations in
a contract shall not favor the party who caused the obscurity.
Applying the aforesaid provision to a contract of insurance, who is that
party? The insurer. The party who prepared the contract. Therefore,
should there be any doubt, any ambiguity or obscurity, in any of
terms and conditions of the contract, the
rule shall be interpreted strictly against
the favor of the insured.
the
to follow is: the same

insurer and liberally in
To illustrate: regarding the so-called authorized driver clause of the

policy, who is deemed to be an authorized driver under the policy? In a
contract of insurance, should there be an accident, and the driver at the time
of the accident is not an authorized driver within the meaning
of the policy, there can e no recovery.
Under the policy, who is an authorized driver?
1. the insured
2. any person driving upon the insured's order with his permission
provided the person driving is authorized to drive the motor vehicle
in accordance with the licensing laws, rules, or regulations and is
not disqualified from driving the same by order of a court law, or
any rule or regulation on that behalf.
Simply that means: if the one driving is other than the insured:
1. he must be authorized or permitted by the insured.
2. he must be qualified to drive in accordance with, say, the Land
Transportation Code, and other rules and regulations, must not have
been disqualified by any court of law, rule or regulation in that behalf.
According to the Code, however, the requirement that the person driving,
must be duly authorized to drive in accordance with the licensing law,
rules and regulations, and is not disqualified from driving the
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motor vehicles by any order of a court of law, etc., applies only if the person
driving is other than the insured.
So, in the case of Palermo, and some other cases, at the time of the accident, the
one driving his car was the insured himself. He had an expired driver's license.
The insurance company denied the claim
involving the authorized driver clause. According to the insurance
company, the under the policy, the insured as driver was not authorized,
hence, the insurer was not liable.
The Supreme Court said NO. Because at the time of the accident, the one
driving the car was the insured himself. The foregoing requirement does
not apply.
In the case of Perla Compania de Segurus vs. CA, 208 scra 478, the insured car
was parked somewhere in Makati. It was car napped. It was
being driven by someone who had an expired license before it was stolen.
The insurance company denied the claim invoking the authorized driver clause.
The Supreme Court disagreed. In the first place, what should apply is the theft
clause, not the authorized driver clause. The fact that the person driving the
car before it was stolen did not have a license or
had an expired driver's license is of no moment. The clause that should
apply is the theft clause.
In the case of Villacorta vs. Insurance Commission, 100 SCRA 467, the insured
car was involved in an accident and was brought to the repair
shop. Necessarily the owner would have to entrust the keys of the car
to the owner of the shop or the authorized representative, so the car
after the repair had been completed could be road-tested. But some of the
employees of the motor shop used the car in a joy-ride around
Manila. Unfortunately, it was involved in an accident, again the
insurance company denied the claim invoking the authorized driver clause.
The Supreme Court disagreed. When the insured entrusted the keys to the
owner of the repair shop, there was an implied authority given by the
insured either to the owner of the shop or the latter's employees to drive the
car. Secondly, in that case, what should apply is not the authorized driver
clause but the theft clause of the policy.
EXCEPTION TO THE RULE: tourists, however, who have an expired xxx of 90
days is not under the law, an authorized driver unless he secures a Philippine
Driver's License.
REMEMBER You apply the rule that should there be any doubt, ambiguity or obscurity, in
any of the terms and stipulations of the contract, the same shall be
interpreted strictly against the insurer and liberally in
favor of the insured, only when there is doubt, ambiguity or obscurity,
in any of the terms and stipulations of the contract.
But if the terms, conditions, and stipulations are clear, there is no room for
interpretation.
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When the law or contract is clear, no matter how harsh it may be, then
the courts will have to enforce the law or contract. Courts are not supposed
to make contracts for the parties. That is also true with the
contract of insurance.
Why don't we refer or apply to the provisions of the Civil Code when we
talk about the contract of insurance? What laws govern the contract of
insurance?
Art. 2011, CC: The contract of insurance is governed by special laws.
Matters not expressly provided for in such special laws shall
be regulated by this Code.
Primarily, a contract of insurance is governed by special laws (PD 1460,
as amended). In the absence of any applicable provision of the special
law, the provisions of the Civil Code, particularly the provisions on
Obligations and Contracts shall be applied.
In the absence of any applicable provisions in both, then decisions and
doctrines prevailing in the United States may be applied. Why? Because
primarily, our law on insurance is of American origin, patterned from the
insurance laws of California and New York.
REMEMBER, in resolving insurance problems, apply the following in the order
they are mentioned:
1. Special Laws
2. Civil Code (Art. 2011)
3. American decisions and doctrines
5.
It is based on the principle of subrogation (applicable only to property

insurance)
Art. 2027, CC: If the plaintiff's property has been insured, and
he has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract
complained of,
the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or
loss, the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss
or injury.
Subrogation is
essentially a process of substitution, where the subrogee,

in this case, the insurer, steps into the shoes of the insured. Actions or
rights pertaining to the insured will be transferred to the insurer.
For example, you have a car insured under a comprehensive policy. It was
involved in an accident. It was the fault of the other party. Damage:
P30,000.00. What are your remedies? Either you recover from the insurer or
from the party at fault. You cannot recover from both. Why
not? Because a contract of insurance is a contract of indemnity. It is
not to be used as an instrument for profit or gain.
Suppose you decide to recover from the insurer, but the insurer pays you only
P25,000.00. With respect to that amount, there will be subrogation. It is now
the insurer who can recover this amount from the
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party at fault. In the case of Malayan Insurance Company, the court held that
subrogation is a normal incident of indemnity insurance. It inures to the
insurer without the need of formal assignment or an express stipulation in the
policy to that effect. The moment the insurer pays the insured, the insurer
becomes a subrogee in equity.
May the insured recover from the party at fault? Art. 2207 of the Civil
Code says YES, because the law says, "if the amount paid by the insurance
company does not fully recover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury."
Can the insurer's right of subrogation be destroyed? Yes. The insurer's right
of subrogation can be destroyed when the insured releases the other party at
fault from liability. Why? Because by releasing the other party, the insured
destroys or defeats the insurer's right of subrogation. Hence, the insurer
will deny the claim of the insured.
In other words, it is the obligation of the insured to preserve at all
times that right of recovery which belongs to him, but which will eventually
be transferred to the insurer by way of subrogation. That is
a condition in the insurance policy.
How else can the right of subrogation be destroyed or defeated? When the
insurer pays the insured even if the cause of the loss was not the
risk or peril insured against.
What factors must concur before there can be recover in property
insurance?
1. the insured must have an insurable interest in the subject matter;
2. that the interest must be properly covered by the policy;
3. there must be a loss; and
4. as a rule, the loss must be proximately caused by the peril insured
against.
ILLUSTRATIONS:
1.
A owns a house worth P1M. He has an insurable interest in the house.

But B insured the house in his name. Should there be a loss, can B
recover? No. Because he has no insurable interest in the house. Can
A recover? No. Because while A has an insurable interest in that house,
such interest was not covered by the policy, as it was B who
insured the house.
2.
In the same example, A insured the house against fire for one year.
During the year, there was no fire, there was no loss. Can there be
a refund of the premiums paid? No. there can be no recovery. What does the
insured get? What is the consideration?
The consideration on the part of the insurer is the premium paid by
the insured. How about the insured, what is its consideration? The
protection, the promise, the undertaking on the part of the insurer
to indemnify the insured in case of loss. That is the consideration
on the part of the insured.
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So it is not correct to say that should there be no loss within the

term of the policy, there is no cause or consideration. There was a
consideration. If there is no cause or consideration, even under
the law on contracts, the contract is void. Or where the cause or
consideration is illicit or unlawful, the contract is also void.
Art. 1411, CC: When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no action
against each other, and both shall be prosecuted. xxx
INSURABLE INTEREST
When is a person said to have an insurable interest in a subject
matter? Why does the law require the insured to have an insurable interest?
If the insured has no insurable interest in the subject matter, the contract
becomes a wagering contract, on the theory that he has nothing to lose and everything
to gain.
While it is true that the insurance is a conditional contract based on chance, it
is not the same as a wagering contract. The law does not authorize
it under Sec. 4, 16 and 25.
When is the insured deemed to have an insurable interest? A person has an
insurable interest in the subject matter if he is so connected, so situated,
so circumstanced, so related, that by the preservation of the property he shall

suffer pecuniary loss, damage or prejudice.
How do we determine whether a person has an insurable interest in the life
of another person, without considering the enumeration under Sec. 10? There is
insurable interest when that person has an interest in the preservation of
life of another despite the insurance, rather than in its destruction
because of the insurance.
In other words, could the
beneficiary be more interested in terminating
that life so that he could
recover from the insurer, or could he be more life,
interested in preserving that
despite the insurance, then he has
insurable interest in that life.
In whose life or health does a person has an insurable interest?

Sec. 10. Every person has an insurable interest in the life and health:
a) of himself, of his spouse and of his children;
b) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
c) of any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or
prevent the performance; and
d) of any person upon whose life any estate or interest vested in
him depends.
The explanations for (a) and (b) above are self-explanatory.

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For (c) above, this refers to a case where the person in question is under
obligation either for payment of money or to render services. The movie companies
for instance, have insurable interest in the life/lives and health
of the actors and actresses who are under contract with them. Why? Because these
actors and actresses are under obligation to render services to said movie companies.
Without these actors and actresses, these movie companies are liable to close down.
With respect to the obligation for the payment of money, there is the creditordebtor relationship. A creditor has insurable interest in the life of the debtor, but
only to the event of the obligation. For instance, the debtor owes the creditor of
P1M in the form of a loan. Can the creditor insure the life of the debtor? Yes.
Because the debtor is under obligation to
pay money to the creditor. The death of the debtor will either delay or prevent the
payment of the loan. But although the creditor can insure the life of the debtor,
the insurance is limited to the amount of the loan which
is P1M.
QUERY:
In the example above, suppose C (creditor) insures the life of D (debtor)
for P1M. Before the death of D, the loan had been fully paid by him. Can D recover? No,
because he was not a party to the contract (Art. 1311, CC). An
insurance procured by the creditor over the life of the debtor for the benefit of the
creditor will not inure to the benefit of the debtors. The creditor is not acting as
an agent. Can C recover? No, because he no longer
had insurable interest on the life of D at the time of D's death. Who can recover?
Nobody.
Suppose it was D who insured his own life and made C as the beneficiary,
but before D's death, the loan had been paid in full, this time who can recover? The
heirs or legal representative of D.
Try to consider the difference between those two different situations. An
insurance procured by the creditor on the life of the debtor in the name or for
the benefit of the creditor will not inure to the benefit of the debtor.
The nature of the life insurance partakes of the nature of a contract of indemnity
because, unlike in property insurance, in life insurance, as a rule,
there is no limit. That is one of the distinctions between life insurance and
property insurance. You can insure your own life for as much as you wish, with as
many insurance companies as you like, provided you pay the premiums.
In property insurance, on the other hand, there is a limit. And that is the
extent of the insurable interest. Under Sec. 14, for a person to have insurable
interest in property, he need not be the owner thereof.
Sec. 14. An insurable interest in property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in
which the expectancy arises.
that
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Aside from an owner of a property, who else can have an insurable interest
in such property? A lessee, among others. In order to ascertain whether or not a
person has an insurable interest in property subject matter, the test to be applied is
Sec. 17.
Sec. 17. The measure of an insurable interest in property is the extent
to which the insured might be damnified by loss or injury thereof.
In the event of loss or injury to the property, will he be damnified? Will

he suffer any loss, damage or prejudice? If the answer is YES, then he has insurable
interest.
In the sale of property, the vendor, prior to actual delivery, has an insurable
interest in the property. In sale with a right to repurchase (pacto
de retro), within the period of redemption, the vendor a retro has an insurable
interest in the property because he still has the right of redemption.
Although you should recall how is ownership of the thing sold transfers to
the vendee or buyer. That is important for determining for instance, the issue of who
should bear the loss, because of the principle or res perit domino.
In transfer by delivery, tradition, actually or constructively, it is not

the perfection of the contract, nor the payment of the price, but the delivery, which
will transfer ownership to the buyer. So pending delivery, despite perfection or even
payment of the price, as a rule, then vendor is still the owner. The vendee, of
course, under Arts. 1163 -1165, CC, can demand
delivery. He has a right. So in effect, both the vendor and the vendee
have insurable interest in property subject matter.
With respect to a stockholder of a corporation, does he have insurable interest
in the corporate assets and property? The rule in corporation law is
that a corporation has a personality distinct and separate from those of its
stockholders. Hence, any property of the corporation is not property of its
stockholders. Such property belongs to the corporation as a distinct and separate
entity. But a stockholder has an inchoate interest to the extent of
his shares or subscription in corporate assets. To that extent, a
stockholder has insurable interest in the property of a corporation.
Going back to life insurance, do you have an insurable interest in the life of
your girlfriend? No. Mere relationship is not enough to grant insurable interest in a
person party to such relationship. Unless she depends
on you for support.
What about a corporation, does it have an insurable interest in the life
of its janitor? No. Even if the janitor is under obligation to render services
to the corporation, death of the janitor cannot bring loss or prejudice to the
corporation. But does a corporation have an insurable interest in the life of
its president? Yes. Death of the president will mean
loss or prejudice to the corporation itself.
Do you have an insurable interest in the life of your lecturer? Is he not
under obligation to render service to you (deliver lectures)? Or is it the school
which has an insurable interest in the life of the lecturer? No.
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Sec. 8.
Unless
the
policy
otherwise
provides,
where
mortgagor
of
property
effects insurance in his own name providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the mortgagor, who does not cease to be
a party to the original contract, and any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same effect, although the property is in
the hands of the mortgagee, but any act which, under the contract of insurance, is to
be performed by the mortgagor, may be performed by the mortgagee therein named, with
the same effect as if it had been performed by the mortgagor.
These are the possible situations You have a debtor who owes the creditor P2M. There is a principal
contract of loan, which is secured by a real estate mortgage of a house and
lot, and the house is worth P3M.
Who has an insurable interest in the house and how much? Both the mortgagor
and the mortgagee have separate and distinct interest in that house. Why the
mortgagor? Because he is the owner.
Will the fact that it is mortgaged to the creditor secure a loan of P2M not diminish
or reduce the insurable interest of the mortgagor in the house?
Should not the loan of P2M be deducted from the value of the house which is
P3M, making the mortgagor's insurable interest in the house only up to the extent of
P1M?
No. Despite the mortgage, the mortgagor's interest will be up to the
value of the house. Why? Because 1.
2.
Under the law on Credit Transactions, ownership is not transferred to the

mortgagee, and
Loss of the house will not mean the extinguishment of the loan.
Under the law on Contracts, while

contract will extinguish the accessory
accessory contract will not extinguish
accessory follows the principal.
the extinguishment of the principal

contract, the extinguishment of the the
principal contract. The rule is:
Should the house be lost, such loss will not necessarily mean the
extinguishment of the loan.
The loan will only become an unsecured obligation. Therefore, the
mortgagor's interest in the house remains.
How about the creditor, who is not the owner, will he have an insurable interest in
the house? Yes, because by the loss or destruction thereof shall
prejudice the obligation will become unsecured to the extent of the loan of P2M. Both
mortgagor-debtor and mortgagee-creditor have separate and distinct interest in the
said property.
SITUATION NO. 1:
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D insures the house for P5M against fire in his own name, for his own interest
only. Nothing is mentioned about the interest of C. The house was destroyed by
fire. Who can recover and how much?
Can C recover? No, because he is not a party to the contract of insurance.
Can D recover? Yes. How much? Only P3M although he insured it for P5M.
Why only P3M? Because insurance is a contract of indemnity.
If he were allowed to recover P5M but the property is worth only P3M, D would be
making a profit. That would encourage arson.
While C cannot recover directly from the insurance company, he shall, however,
hold a lien over the proceeds of the policy under Art. 2127, CC.
SITUATION NO. 2:
C insures the house for P2M against fire in his own name, for his own interest.
Nothing is mentioned about D's interest. The house is completely destroyed by fire.
Who can recover?
Only C, because D is not a party to the contract of insurance. If the insurance
company indemnifies C, the amount of P2M, will such payment extinguish the loan?
No. There will be subrogation. The insurer, after indemnifying C can recover
from D. There will be a change of creditors.
SITUATION NO. 3:
What is contemplated under Sec. 8 is where D insures the property in his
name, for his interest, but with a stipulation in favor of C.
The following are the consequences:
1.
2.
D is still the real party in interest, he does not cease to be a

party to the contract.
Any act of D which will otherwise avoid the policy will have the same
effect.
Suppose the policy contains a stipulation that there should be no storage of

flammable materials like gasoline. In violation thereof, D, the insured,
stores gasoline. This is an act of the insured, which under the policy, could avoid
it. Despite the "loss payable clause" in favor of the creditor,
that will avoid the policy.
Suppose, the insurance was for P3M and there was a total loss, who can recover and
how much?
C cannot recover from the insurer because at the time of the loss, he
no longer had any insurable interest in the property.
Suppose, there was no payment, who can recover and how much?
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C can recover P2M and D, 1M. This time the loan is extinguished. There will be no
subrogation. This is what we call "loss payable clause."
PROBLEM:
In life insurance, is it necessary for the beneficiary to have an insurable
interest in the life of the insured?
It depends. Where a person insures his own life, he can, as a rule, designate
anybody, even a complete stranger, as the beneficiary. That beneficiary need
not have an insurable interest in the life of the insured.
He can designate anybody subject only to the exceptions under Art. 739,
CC, in relation to Art. 2012, CC.
"Art. 739. The following donations shall be void:
1. Those made b/n persons who were guilty of adultery or concubinage at
the time of the donation;
2. Those made b/n persons found guilty of the same criminal
offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
In the case referred to in No.1, the action for declaration of nullity may
be brought by the spouse of the donor or donee; and the guilt of the donor and
donee may be proved by preponderance of evidence in the same action."
"Art. 2012. Any person who is forbidden from receiving any donation under
Art. 739 cannot be named beneficiary of a life insurance policy
by the person who cannot make any donation to him, according to this article."
Simply, one who cannot receive any donation under Art. 739, cannot be named
beneficiary in the life insurance policy by the person who cannot give any
donation.
Reason behind the law: to prevent an indirect violation or circumvention of the
law.
Proceeds of a life insurance policy partakes of the nature of a
donation to the beneficiary. Act of liberality.
CASE: INSULAR LIFE VS. EBRADO
FACTS: A married man insured his life and designated his mistress as
beneficiary. When he died, both the wife and the mistress filed their
respective claim with the insurance company.
The insurance company went to the court by way of interpleader.
ISSUE: Who should recover, the wife or the mistress?
HELD:
The mistress could not recover because of Art. 739 and Art. 2012. The
wife could not recover either because she was not a party to the contract; neither was
there a stipulation in her favor. The proceeds would go to the estate of the deceased.
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14
As a rule, when a person insures his own life, he can designate anybody as his
beneficiary. However, when a person insures the life of another, he must
have an insurable interest in that life. Apply Sec. 10. One cannot just insure the
life of anybody and make himself the beneficiary. He must have an insurable
interest in that life.
In property insurance, however, the insured MUST always have an insurable
interest in the subject matter.
In the case of a mortgage property, the interest of the mortgagor is up to
the extent of the value of the property. The only exception is the bottomry
loan.
The nature of a bottomry loan is that the payment of the loan is conditional,
subject to the safe arrival of the vessel at the port of destination.
PROBLEMS Q: The father insured his life and made his son the beneficiary. Later, the
father discovered that his son was a drug addict. So he wrote to the insurance
company asking for a change of beneficiary, from his son to his wife. The father
died and the son filed a claim with the insurance company, claiming that he, having
been named by his father as the beneficiary in the policy, he acquired a vested
right or interest in the proceeds of the insurance policy. Is the contention of the
son tenable?
A:
is
Under Sec. 11, which reversed the provisions of the old law, the rule now
that the designation is presumed to be revocable. The rule is that
the
insured can always change the beneficiary named in the policy, unless he expressly
waives that right in the policy.
Q:
Can the beneficiary apply the vested interest rule in the policy?
If the designationis irrevocable, like for instance, when there is an

express waiver by the insured in the policy. The beneficiary, in this case, acquires a
vested interest in the policy of which he cannot be deprived without his consent.
Otherwise, in the absence of an express waiver by the insured, the beneficiary can be
changed anytime.
A:
Q: What is the effect under Sec. 12 where the beneficiary in life insurance
policy willfully brings about the death of the insured, either accomplice
or accessory?
A: The beneficiary automatically forfeits his interest in the insurance policy.
This does not mean, however, that the insurer will no longer be liable. The insurer
remains liable, the only effect is that the beneficiary's interest is forfeited.
Who then will be entitled to the proceeds? The nearest relative of the insured, not
otherwise disqualified (so, where the beneficiary brings about the death of the
insured not in a willful manner, as
for instance, through reckless imprudence under Art. 365, RPC, Sec. 12 does not
apply).
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15
Q: Is a mere hope or expectancy insurable? Suppose a person buys sweepstakes

tickets and insures his chance of winning, so much so that if he does not win
the first price, the insurer will indemnify? Or can you insure your chance of
passing the bar exams?
A: No. A mere hope or expectancy is not insurable. This is a wagering contract.
In order that a mere hope may be insurable, it must be coupled with
an existing interest in the thing from which the expectancy shall arise under
Sec. 14, par. c. or under Sec. 16, which provides that there must be a valid
contract.
The shattering of expectation, however bright, or the disappointing of hope,
however strong, does not constitute such a loss to be indemnified by insurance. It
will be in the nature of a wagering contract which the law does
not allow - gambling.
Q: The mother was confined in a hospital, scheduled to be operated on the following

day of a very serious illness. The night before the operation, she
called for her only son, and told him that she had prepared a will naming the son
as the only heir. Among the property that the son expected to inherit was a house
located at Dasmarias Village. On the same evening, the son together
with his family moved into the house which he expected to inherit. At the same time
he insured the house in his name against fire. The operation took
place, and unfortunately, the mother died. After which, the house was
completely destroyed by fire, the risk or peril insured against. May the son
recover?
A: No. When he insured the house, he had no insurable interest. His interest
was a mere hope or expectancy. You do not inherit from a person who is still
alive. Inheritance takes place upon the death of the decedent. Under the
law, insurable interest in property must exist both at the time of the
effectivity of the policy AND at the time of the loss, although it need not
exist in the meantime.
Insurable interest in life, on the other hand, need to exist only at
the time of the effectivity of the policy, it need not exist thereafter.
Q: Under Sec. 20, where there is a change of interest in any part of the thing insured
unaccompanied by a corresponding change of interest in the insurance, what will
happen?
A:
The policy shall be suspended to an equivalent extent until the interest
in the thing and the interest in the insurance are vested in the same perso n.
Under Sec. 58, the mere transfer of the thing insured will not mean automatic
transfer of the policy. It shall be suspended until the same person becomes the owner
of both the policy and the thing insured. It will merely be suspended, it will not be
avoided, because of the rule that insurable interest in property must exist both at
the time of the effectivity of the loss although it need not exist in the meantime.
EXAMPLE:
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REVIEW ER IN INSURANCE LAW
You own a car, and insured it in your name. At the time of the effectivity of
the policy there is no question that you have an insurable interest in the car
being the owner. The policy is for a term of one year. Six months
thereafter, you sold the car. There is a change of interest in the car, from the
original owner to the buyer. But the policy was not transferred
to the buyer. Thereafter, the car was lost. Who can recover? Nobody. Neither
the original owner nor the buyer. The original owner cannot recover because
while he had an insurable interest in the car at the time
of the effectivity of the policy, he no longer had insurable interest in
the car at the time of the loss. He had sold it. The buyer could not recover
either. While he had insurable interest at the time of the loss,
he had no insurable interest in the car at the time of effectivity of the
policy.
Q: How can insurable interest in both the insured and the policy be vested again in
the same person?
A: (1) In the example given, before the occurrence of the loss, the policy was
transferred to the buyer. In that case, may the buyer recover? Yes, because when the
policy was transferred to him, interest in both the policy and in the car were present
in the buyer.
(2) Where the seller repurchases the car before the occurrence of the
loss. In which case, the seller may recover.
So, if you sell an insured property and neither you nor the buyer takes the
precaution of having the policy transferred in the name of the buyer, in
case of loss, neither you and the buyer can recover. This is because of the
rule in property insurance that, insurable interest must exist at the time of the
effectivity of the policy and at the time of the occurrence of the loss.
In life insurance, however, all that the law requires is that insurable interest
must exist at the time of the effectivity of the policy but it need
not exists thereafter.
EXAMPLE:
A corporation has insurable interest in the life of its president. So here is
a corporation which insures the life of its president. The corporation is the
beneficiary. As president of the corporation, he is allowed to use
a house belonging to the corporation. After the effectivity of the life insurance
policy, the president resigns from the corporation and relinquishes all his
interest in the corporation. after which, he insured
the house in his own name against fire. After resigning and insuring the
house, the corporation agrees to sell the house to its former president.
Then the former president dies, and the house burns.
Q: Who can recover on the life insurance policy?
A: The corporation can, because at the time of the effectivity of the
policy, the corporation still has an insurable interst in the life of
the president, because he was still president then. Although at the time of
the loss (death), the corporation no longer had insurable interest in the
life because he had already resigned.
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17
Q: Who can recover on the fire insurance?

A: Neither the corporation nor the former president (estate) can recover,
because when the president insured the house in his name, he
did not yet have an insurable interest in the house for the simple reason that
he was not yet its owner. It was after the effectivity of
the policy that he was able to buy it.
INSURABLE INTEREST IN LIFE vs. INSURABLE INTEREST IN PROPERTY:
Insurable interest in life need exist only at the time of the

effectivity of the policy. It need not exist thereafter.
Insurable interest in property must exist both at the time of the
effectivity of the policy AND at the time of the loss. It need not exist in
the meantime.
SUSPENSION OF POLICY
GENERAL RULE:
Sec. 20.
xxx
change
of
interest
in
any
part
of
thing
insured
unaccompanied by a corresponding change in interest in the insurance,

suspends the insurance to an equivalent extent, until the interest in the
thing and the interest in the insurance are vested in the same person.
EXCEPTIONS:
Under the following circumstances, the policy will not be suspended despite
a change in any part of the thing insured:
1.
Sec. 21. A change in interest in a thing insured, after the

occurrence of an injury which results in a loss, does not affect
the right of the insured to indemnity for the loss.
In motor vehicle insurance, the owner insured his car in his name.
It was involved in an accident. Damage: P20,000.00. After which, he
sold the car. May the seller recover? Yes, because at the time of the
occurrence of the loss (accident) he was still the owner, hence,
he still had an insurable interest in the car. But suppose after the transfer
or sale of the car, a second accident happened, however, there was no
transfer of the policy to the buyer. With respect to the second accident, who
can recover? Nobody, because neither the seller nor the buyer had insurable
interest both at the time of the effectivity of the policy and at the time of
the loss.
2.
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.
This refers to a divisible contract. You own four houses in a compound: A,
B, C, and D. You insured them under one policy, but separately valued. You
pay a single premium. Later, you sold house A,
but the policy was not transferred to the buyer. Afterwards, house B
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18
was burned down. Can the insured recover? Yes, the sale of house A
will not affect the insured's right to be indemnified because of the
loss or destruction of house B. Although they are covered under the
policy and a single premium is paid, the contract is divisible.
3.
Sec. 23. A change on 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.
Whoever takes the property of the decedent will automatically become the
owner of the policy. Here is a father, who, during his lifetime,
insured his house in his name against fire. The policy was in the name of the
father. The house was later inherited by the son. So actually, there was a
change of interest in the house, from the father to the son. Later, the house
was burned. Can the son recover?
Yes. Whoever takes the house will automatically be the owner of the
policy.
What is the reason for this exception?
Art. 1311, NCC. Contracts take effect only between the parties, their
assigns and heirs, except in cases where the rights and obligations
arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.
4.
Sec. 24. A transfer of interest by one of several partners,

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.
joint
This refers to a case where the change of interest is made in favor

of a partner, joint owner, or co-owner. Let's say A, B, and C are owners in
common of a house worth P3M. They insured the house jointly in their names.
Later, A sold his undivided share of to D, after which the house was
completely destroyed by fire. Insofar as the share of A is concerned, there
had been a change of interest in favor of D. Since D is a stranger, not a
partner, the rule in suspension is applied. When is the exception applied? The
exception is applied where A, instead of transferring his share to
D, transfers the same to B or C, thereby increasing the participation of
either to . There will be no suspension of the policy because no
new party was introduced to the co-ownership.
5.
Sec. 57. 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.
This contemplates a situation where there is an agreement or
stipulation in the policy that should there be a transfer or change
of interest in the property, there should likewise be an automatic transfer
or policy. This is a valid stipulation.
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19
Art. 1306, NCC. The contracting parties may establish such

stipulations, clauses, terms, and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
Sec. 25. Every stipulation in
policy
of insurance
for the payment of
loss
whether the person insured has or has not any interest in the property insured,
or that the policy shall be received as proof of such interest, and every policy
executed by way of gaming or wagering, is void.
So even if there is a stipulation, that it is void, or that the policy shall be
received as evidence of proof of interest. This is also void.
As to whether a person has or has no insurable interest in property, cannot be
vested by mere agreement or stipulation or the parties. It is contrary to law (Sec.
25) and public policy because it becomes a wagering contract.
PROBLEM:
Q: B is not the owner of the house. He is neither a lessee nor a mortgagee. He
has nothing to do with the house. He tells the insured that despite the fact
that he has no insurable interest in the house, he would
like to insure the house in his name against fire. He is willing to pay any amount
of premium that may be required from him. And the insurer knowing that B has no
insurable interest in the house, agrees to issue a
policy to B. they further stipulated that should the house be destroyed by
fire, the insurer will indemnify him regardless of whether or not he has
insurable interest in the house. Afterwards, the house is completely
destroyed by fire. Can B recover?
A: No. Their agreement is contrary to law and public policy, because it was a
wagering contract.
UTMOST GOOD FAITH (UBERIMEI FIDEI)
The contract is the law between the contracting parties, and they are enjoined
to comply with it in good faith. In a contract of insurance, the law
does not require only ordinary good faith but utmost good faith.
What is utmost good faith? It means absolute and perfect candor, openness and
honesty. It is the absence of any deception or concealment however slight.
The parties to a contract of insurance must act in utmost good faith. There
should be no concealment. There should be no misrepresentation. What is
the reason for utmost good faith? A contract of insuranc
e is an aleatory
contract.
By an aleatory contract, one or both of the contracting parties reciprocally bind

themselves to give or to do something in consideration of what the other party shall
give or do.
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20
Being an aleatory contract, the insurer's liability is conditional. The

parties, especially the insurer, relies on the representation and statements
made by the other party. In life insurance, the insurer will not just issue a
policy. The insured may be asked to give statements or to answer questions. The
insured, next to his doctor, is in a better position to know the state of
his health. So he should not in any way misrepresent the state of his health.
WHAT ARE THE DEVICES USED BY THE INSURER TO ASCERTAIN, DETERMINE AND CONTROL
THE RISKS TO BE ASSUME?
1.
2.
3.
4.
5.
Concealment
Representation
Warranties
Conditions
Exceptions
WHAT ARE THE FOUR PRIMARY CONCERNS OF THE INSURER?

1. The correct estimation of the risk, which enables the insurer to decide
whether he is willing to assume it and if so, at what rate of premium.
2. The precise delimitation of the risk which determines the extent of the
contingent duty to pay undertaken by the insurer.
3. Such control of the risk after it is assumed as will enable the insurer to
guard against the increase of the risk because of change in
conditions.
4. Determining whether a loss occurred and if so, the amount of such loss.
HOW MAY AN INSURER BE ABLE TO CONTROL THE RISK THROUGH THE USE OF EXCEPTION?
Exempt certain properties

Except certain perils or risks
IN PROPERTY INSURANCE, THE FOLLOWING MUST CONCUR BEFORE ONE MAY RECOVER:
1.
2.
3.
4.
Insurable interest;
Interest must be properly covered by the policy;
There was a loss; and
Loss must be proximately caused by the peril insured against.
The principle of utmost good faith applies to both parties. If information is

withheld, then it follows that there was no meeting of the minds.
CONCEALMENT
Sec. 26. A neglect to communicate that which a party knows and ought to communicate
is called concealment.
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21
I would call it a "sin of omission," neglect, failure. Where you are dutybound to communicate to the insurer, an information or a fact which is within
your knowledge, which is material in the contract, but which you did not communicate,
you are guilty of concealment under Sec. 27. The remedy of the insurer is to rescind
the contract.
Sec. 27. A concealment whether intentional or unintentional entitles the injured

party to rescind a contract of insurance. (As amended by Batasang Pambansa Blg.874)
What are the grounds for rescission?

1. Concealment
2. Misrepresentation, and
3. Breach of warranty.
When we speak of rescission, the party asking for rescission of the contract
impliedly admits the existence of a valid and binding contract. Because the purpose
of rescission is to terminate, to rescind. You do not terminate or rescind a nonexisting contract. Rescission would not be the remedy. So rescission presupposes the
existence of a valid ad binding contract.
Going back to concealment, does it mean that the parties are also required
to communicate everything, including "tsismis," especially where the applicant is
a woman? No. What one is required to communicate is that which is within his
knowledge. It must be material. One is not under obligation to communicate
something immaterial.
How is materiality determined?
Sec. 31. Materiality is to be determined not by the event, but solely by
the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries.
For an information to be material, is it necessary that it be the cause of
the loss? No. In determining whether or not an information is material, you simply ask:
"Had this been concealed to the insurer, had it not been concealed, do you think the
insurer would have been influenced (1) in deciding or not whether to issue the policy
and (2) in determining the rate
of premium?" If the answer is yes, then it is material.
For example, here is a person suffering from a terminal disease, confined in
a hospital. The doctors told him about it and he had, at most six months to live.
Wanting to provide something for the members of his family upon his
death, he went to an insurance company and applied for a life insurance policy. The
insurance company agreed to issue a non-medical life insurance policy. This means
the insurer waives the right to have the applicant physically or medically
examined.
Where the insurer agrees to issue a non-medical insurance policy, would that
constitute a waiver of the right to communication? No. What is waived is
only the right to have the applicant examined. And according to the Supreme Court,
where the insurer issues a non-medical life insurance policy, with more reason should
there be no concealment, no misrepresentation, on the part
of the applicant. Why? Because you can assume that the insurer, in agreeing
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22
to issue the non-medical life insurance policy, he must have relied

entirely, completely, on the statements of the insured.
So, a non-medical insurance policy was issued because from his appearance, he
did not appear to be suffering from a serious ailment. He did not tell the
insurer that he was ill, he concealed that fact. Later, he died in a vehicular
accident.
Can the insurer rescind the contract on the ground of concealment? Yes. The fact
of illness was immaterial. Had he told the insurer that he was seriously ill, the
insurer would not have agreed to issue the policy. Such fact, if disclosed, would have
influenced the insurer in deciding whether or
not to issue the policy.
Assuming that the insurer would have, just the same, agreed to issue
the policy, the rate of premium would have been very high.
Of course, there are matters, which need not be communicated. Matters, which,
through the ordinary exercise of diligence could have been ascertained
by the insurer. This is similar to what we call in civil procedure as "judicial
notice," where the law presumes that a certain matter is known to both parties. Like
mercantile usages, practice, etc., these need not be communicated.
Or, where there is waiver, which may either be express or implied - waiver
of the right to communication. There is an express waiver when it is so stated in
the policy. There is an implied waiver when there is a neglect or
failure to inquire from facts which are communicated where they are distinctly
impaired. (Sec. 33)
ILLUSTRATION:
We must distinguish between an answer to a question which is manifestly
incomplete, yet accepted by the insurer, and an answer to a question which is
apparently complete but in fact incomplete and therefore, untrue. In the latter case,
there would be no waiver.
EXAMPLES:
i.
One of the questions asked of the applicant in an applicant for life

insurance is, "Have you ever been to a hospital?" Yes. The insurer
did not ask further questions, did not pursue the question. But the
applicant had been operated on twenty times.
Failure of the insurer to make further inquiries after the answer yes was
given is deemed to be a waiver of the right to communication.
The answer yes, means that there was something wrong with the health
of the applicant. A prudent insurer would have asked further, when?
Why? How many times? Etc.
Failure to do that on the part of the insurer would constitute a waiver of
the right to communication.
ii.
In the same example, the applicant is asked the following questions,

(1) Have you ever been confined in a hospital? Yes. (2) How many times? Two
times. (3) Why? I suffered from minor ailments like flu.
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REVI EWER IN INSURANCE LAW
It turned out, however, that the applicant had been confined in a hospital
many times, and had gone major operations for some serious ailments.
Does this constitute a waiver? No, because in the second example, there are
answers which are apparently complete but which are in fact incomplete.
Therefore, the insurer may still rescind the contract by reason of
concealment.
MISREPRESENTATION
Like concealment, misrepresentation is a sin of commission. What is the purpose of
misrepresentation? Why would a party to a contract make misrepresentations to the
insurer? To induce the insurer to enter into a contract. That being the purpose,
misrepresentation is made either before or
at the time of the effectivity of the issuance of policy.
Normally, misrepresentations are not made after the issuance of the
policy, because they will not serve any purpose anymore.
After having convinced the insurer to enter into a contract, to issue the
policy, there is no point in making further misrepresentation. These are
made before.
However, there is an EXCEPTION where a representation is made even
after the effectivity of the insurance policy.
Sec. 47. The provisions of this chapter apply as well to a modification
of a contract of insurance as to its original formation.
EXAMPLE:
You insured your house. At the time of insuring it, you represented to the
insurer that it was being used for industrial purposes. And it was true.
Necessarily, between a building used exclusively for residential purposes
and one used for commercial or industrial purposes, the latter would command a
higher rate or premium, because the risk is greater.
Six months after the effectivity of the policy, a change in the nature of
the occupancy took place. You went bankrupt so you closed the business. There was
a change in the nature of the occupancy from commercia l or industrial to
residential. So you returned to the insurer and represented
to him that from this day on, the property would be used exclusively
for residential purposes and not as previously stated.
So here is a representation made after the effectivity of the insurance policy.
The purpose of which is to ask for the modification of the policy, in
order that the insurer may agree to a reduction of the premium. This is the
exception.
PROBLEM:
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24
An applicant for a life insurance is asked the question, "Have you ever suffered
from any of the following diseases?" One of them is pneumonia. Answer: No. It was
untrue because at that time, he had suffered pneumonia.
There was no misrepresentation. However, while the policy was being
processed, he did suffer form pneumonia. But because of modern drugs, he
got cured before the issuance of the policy. So at that time of the issuance of
the policy, he was no longer suffering form pneumonia. But he
did suffer from pneumonia between the time of filing of the application and the
date of the effectivity of the policy. So he did not tell the insurer anymore that
he did suffer from pneumonia.
Then he died of cancer. Could the insurer deny the claim on the ground that there
was either concealment or misrepresentation? Yes.
RULE:
Statement in the case of representation must be true when the contract goes into
effect, although it may not be true when made.
On the other hand, even if true when made, but no longer true when the contract
goes into effect, that will give the insurer the right to rescind the contract.
Rescission is the remedy when there is concealment, misrepresentation,

and breach of warranty.
What are the limitations of the right of the insurer to rescind the contract
of insurance?
(1) Sec. 45. If a representation is false in a material point, whether
affirmative or promissory, the injured party is entitled to rescind the
contract from the time when the representation becomes false. The right to rescind
granted by this Code to the insurer is waived by the acceptance of premium payments
despite knowledge of the ground for rescission. (As amended
by Batasang Pambansa Blg. 874).
Simply, the second part of the foregoing provisions means: If the insurer
accepts premium payments despite knowledge of the ground for rescission, such
acceptance will constitute a waiver of the right to rescind.
EXAMPLE:
The insurer knew that there was misrepresentation. So, he could have asked for
the rescission of the policy. But instead of asking for the rescission of the
policy, he accepted the premium payments from the insured. Such acceptance
constitutes a waiver of the right to rescind.
What could be the purpose or reason of the insurer in accepting premium
payments instead of rescinding the policy, knowing that it could be
rescinded?
He expected that there would be no loss, there would be no claim, during the
term of the policy.
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25
Sec. 48. Whenever a right to rescind a contract of insurance is given to

the insurer by any provision of this chapter, such right must be
exercised previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a
period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio
or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
(2) In a non-life policy, such right must be exercised prior to the
commencement of an action on the contract.
"Commencement of an action on the contract" - either in court or
with the Insurance Commissioner.
(3) In a life policy, defenses are available only during the first two years of
the insurance policy.
The period of two years for contesting a life policy by the insurer may be
shortened but it cannot be extended by stipulation.
If an insurer believes that the contract may be rescinded, he must do. He

must act before the insured files an action against the insurer for the recovery of
a claim. The second part is what is known as the incontestability clause.
WHAT IS THE INCONTESTABILITY CLAUSE?

A Clause stipulating that the policy shall be incontestable after a started period
; after the requisites are shown to exists, the insured shall be estopped from
contesting the policy or setting any defense, except as allowed, on the ground of
public policy.
REQUISITES OF INCONTESTABILITY CLAUSE?
1. Life insurance policy payable upon the death of the insured; and
2. Policy must have been in force for a period of at least two years during the
lifetime of the insured either from date of issue or date of
last reinstatement.
If the foregoing requisites concur, the insurer can no longer ask for the
rescission
of
the
contract
on
the
ground
of
concealment
or
misrepresentation. The policy has become incontestable.
But even if the policy of life insurance has become incontestable under Sec. 48
(2), the insurer can still raise certain defenses to defeat recovery,
like non-payment of the premiums. It does not mean that simply because a policy has
become incontestable, the insured need not pay the premiums anymore. Of course not.
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26
Going back
to the insurer
In the case of
that he is the
interest)?
to concealment, is it necessary for the insurer to communicate

the nature and amount of his interest in the property insured?
a house, is the insured required to communicate to the insurer
owner (nature of interest) and that his house is worth P1M (amount of
As a rule, NO. If he is the absolute owner, he does not have to inform

the insurer of the nature and amount of his interest.
If, however, he is not the absolute owner, like in the case of a mortgagee,
under Sec. 8, then YES, he has to inform the insurer not only the nature of
his interest, the fact that he is a mortgagee, but he must also inform the insurer the
extent of his interest in the property, say P2M.
If the insured is the absolute owner, it is easy to ascertain the
extent of his interest, it is the value of the property.
If the insured is not the absolute owner, like a mortgagee, then his interest may
be less than the value of the property. It could only be the amount of the obligation
secured by the mortgage.
WHAT IS THE EFFECT WHEN THE POLICY BECOMES INCONTESTABLE?
The insurer cannot set up the defenses that:
a. The policy is void ab intitio;
b. It is rescissible by reason of fraudulent concealment of the insured
or his agent, no matter how patent or well-founded;
c. It is rescissible by reason of fraudulent misrepresentation of the
insured or his agent.
IS THE INCONTESTABLE CLAUSE ABSOLUTE?
No. It only deprives the insurer of those defenses which arise in
connection with the formation and operation of the policy prior to the loss.
The following defenses are still available:
1.
2.
3.
4.
5.
6.
7.
That the person taking the insurance lacked insurable interest

required by law.
That the cause of death of the insured is an excepted risk.
That the premiums have not been paid.
That the conditions of the policy relating to military or naval science
have been violated.
That the fraud is of a particular vicious type.
That the beneficiary failed to furnish proof of death or to comply with
any condition imposed by the policy after the loss had happened.
That the action was not brought within the time specified.
PURPOSE OF THE LAW:

The assure that after the specified period, the policy owner may rely
upon the insurance company to carry out the terms of the contract, regardless
of irregularities in connection with the application which may later be

discovered.
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27
WHAT IS A POLICY?
It is the written instrument in which a contract of insurance is set
forth. (Sec. 49)
IS IT THE SAME AS THE INSURANCE CONTRACT ITSELF?
No.
CAN THERE BE A CONTRACT OF INSURANCE WITHOUT A POLICY?
As a rule, YES, because a policy is only an evidence of the contract.
HOW IS CONTRACT OF INSURANCE PERFECTED?
Being a consensual contract, as distinguished from a real contract, it is
perfected by mere consent. Concurrence between an offer and acceptance (in a
real contract, delivery is necessary for the perfection of the contract, like
the contract of pledge, loan, commodatum).
In a contract of insurance, the moment the parties agree or their minds meet, when
there is concurrence between the offer and acceptance, there is a
contract of insurance. A meeting of the minds on the object of the contract.
What may be the object? In life insurance, it is the life or health of a
person; in property insurance, like fire or marine, it is the property; in liability
insurance, it is the possible liability of a person by reason of the use of the
property. An example of liability insurance is what we call under Chapter VI as the
Compulsory Motor Vehicle Liability Insurance. The insurer under a liability type of
insurance is liable only with respect to the civil aspect. Criminal liability cannot
be insured because it is
something personal.
In Criminal Law, every person who is criminally liable is also civilly liable
(Art. 100, RPC). For example, one is involved in a vehicular accident
and he is at fault. He can be charged under Art. 365 of the RPC. But he can
also he held civilly liable for the damage to property that he have caused,
or the injury that another person may have sustained by reason of the accident. The
insurer will answer only for the civil liability, not for the criminal liability.
Sometimes after the issuance of the policy, the parties to the contract may find it
necessary to make certain alterations, modifications or changes or erasures. This can be
done without canceling the policy, which may prove to be not only expensive but also
tenious. How? It can be done through the use of riders, endorsements, warranties, and
clauses.
For example, going back to Sec. 20, what is the effect of a change of interest in
any part of the thing insured if there is no corresponding change
of interest in the insurance? What will happen? The policy shall be suspended.
If the property insured is transferred, but the insurance is not transferred to
the buyer, in case of loss, neither the original owner nor the
buyer can recover. Because under Sec. 20, the law requires that in property insurance,
insurable interest must exist both at the time of the effectivity
of the policy and at the time of the loss, although it need not exist in
the meantime.
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28
So let's say the owner of a car insures the car in his own name under a
comprehensive policy for one year. Three months thereafter, he sold the car without
transferring the policy to the buyer. In case of loss of the car, neither the original
owner nor the buyer can recover. There can be recovery only if the policy is
transferred to the buyer.
In property insurance, the transfer of the insurance must be with the consent of
the insurer, unlike in the case of life insurance under Sec. 181.
In life insurance, the policy may be assigned even without the consent of
the insurer, unless there is a stipulation to the contrary,
In property insurance, the consent of the insurer is necessary for the transfer
of the policy. Why? Because it is a personal contract.
Even under Sec. 58, the law says "The mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person becomes the owner of both
the policy and the thing insured. "
In the above example, where the owner sells the car, how can the
insurance policy be transferred to the buyer (now owner) without canceling
the existing policy which is in the name of the original owner or seller? It
can be done through the use of an endorsement. The insurer will simply issue
an endorsement.
In the foregoing example, you cannot affect a transfer of the registration
certificate of the car unless the buyer gets a new policy, or gets an endorsement from
the insurer, which is to be submitted to the LTO. This is because of the rule that
failure to do so will result in the suspension of the policy.
Is the counter-signature of the insured necessary where a rider, or an

endorsement, or a clause, or a warranty is issued? The answer is qualified.
If the same was issued simultaneously with the policy (normally it is attached to
the policy), there is no need for the counter-signature of the insured.
But if the same is issued after the issuance of the policy, the answer is
qualified again:
1.
If it was the insured who requested for the issuance of the rider,
endorsement, or clause or warranty, his counter-signature is
not necessary; but
2. If it was issued after the effectivity of the policy and it was
not asked for by the insured, his counter-signature is necessary
as evidence of his assent to the rider, endorsement, clause or warranty.
WHAT IS A RIDER?
It is a printed or typed stipulation contained on a slip of paper attached to
the policy and forming an integral part of the policy. Riders are usually
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- 29 -

attached to the policy because they

between the parties.
constitute
additional
stipulations
29
When there is inconsistency between a rider and the printed stipulation in

the policy, the rider prevails as being more deliberate expression of the agreement
of the contracting parties.
WHY IS
It
modify
making
THERE A NECESSITY FOR RIDERS?

is often becomes necessary to add a new term to the policy or to
or waive an existing term. Riders save the parties from the trouble of
an entirely new contract.
WHAT MUST A POLICY OF INSURANCE CONTAIN?

1.
2.
3.
4.
5.
6.
7.
8.
The name of the parties.

Amount of the insurance.
Rate of premium.
Property or life insured.
Interest of the insured on the property if he is not the owner thereof;
Risks insured against.
Duration of the insurance.
Terms of the policy.
May a third person, one who is not a party to the contract sue the insurer
directly. The rule is found under Art. 1311, NCC, on the relativity of contracts.
The exception to the rule is where a contract contains a stipulation in favor of a
third person, known as stipulation pour atrui.
One who is not a party to a contract shall not be bound by a contract, neither can
he demand performance thereof. The same rule applies to a contract of insurance.
WHAT IS A COVER NOTE?

It is a written memorandum of the most important terms of a preliminary contract
intended to give temporary protection pending the investigation of
the risk by the insurer or until the issue of a formal policy provided that
it is later determined that the applicant was insurable at the time it was given.
PURPOSE: to give temporary protection.

For how long it will be valid? 60 days
May it be extended? How? It may be extended or renewed with the written approval of
the Insurance Commissioner if he determines that such extension is not contrary to and
is not for the purpose of violating any provision of
the Code or the approval of the Insurance Commissioner may be dispensed with
upon the certification of the president, vice -president, or general manager of the
insurance company concerned that the risk involved, the values of such
risks and or the premiums therefore has not yet been determined or established or such
extension or renewal is not contrary to and is not for the purpose of violating any
provisions of the Insurance Code, or of any
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- 30 -
30
rulings, instructions, or circulars of the Insurance Commissioner. (Ins.

Memo. Cir. No. 3-75, dated September 29, 1975, effective Oct. 21, 1976)
Is it necessary that it be supported by a separate premium? No. See Pacific
Timber case. It is only a collateral agreement.
Sec. 53. The insurance proceeds shall be applied exclusively to the proper interest
of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
As a rule, a third party cannot sue the insurer directly. When can a third
person sue the insurer directly? Where the policy provides for indemnity against
liability. An insurance against liability is considered a contract
with a stipulation in favor of a third party. An example of this type of policy is
what we have under Chapter VI, the Compulsory Motor Vehicle Liability Insurance. Under
this type of coverage, a third party may sue the insurer directly.
The very purpose of the law is to provide immediate financial assistance

to victims of vehicular accidents, regardless of the financial capability of
the insured (Malayan Insurance; Pan Malayan Insurance).
When the insurance policy insures against liability, then a third party may sue the
insurer directly. There is no need to wait for the court to convict the insured or
render a judgment against the insured. The victim or claimant third party can proceed
directly against the insurer.
But while a third party may sue the insurer directly under a liability coverage,
the liability of the insurer and the insured is NOT solidary.
A third party claimant covered by a liability type of policy sues on the
insurance policy; judgment is rendered against both the insured and the insurer. Can
the plaintiff recover the entire amount adjudged by the court against the insurer
without proceeding against the insured? No, said the case
of Malayan Insurance and Pan Malayan Insurance. Because the obligations of the
insurer and the insured are not solidary.
Q: Why are they not solidary?
A: Because
1.
2.
The liability of the insurer is based on contract. The contract of

insurance, whereas the liability of the insured is based on torts.
The liability of the insurer is limited to the face value of the policy.
Hence, to hold the insurer as solidary liable with the
insured is to admit a possibility where the insurer may be held liable on
an amount that is more than the amount of the coverage.
HOW IS LOSS UNDERSTOOD IN INSURANCE?

It includes any partial loss, injury or damage which may be suffered by the
insured, it does not follow the definition of loss in the Civil Code.
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- 31 -
31
MAY A CONTRACT OF INSURANCE BE ENTERED INTO BY AN AGENT?

Yes. See Sec. 54 - it will inure to the benefit of the principal.
REQUISITES before the contract shall be deemed a contract for the principal:
1.
2.
3.
4.
Agent must be duly authorized;

Must act within the scope of his authority;
Must disclose his principal; and
Indicate by appropriate words that he is acting in a representative capacity.
Correlate Sec. 20 with Sec. 57 and 58.
WHAT ARE THE DIFFERENT TYPES OF POLICIES?

OPEN POLICY
As to how much the insured can recover under an open policy depends upon:
1.
2.
The value of the property after the concurrence of the loss; and
The face value of the policy.
In no case can the insurer be held liable for more - but his liability may
be less than the face value of the property insured.
VALUED POLICY
In a valued policy, the parties agree prior to the issuance of the policy
on a definite valuation of the property insured. The policy on its face expresses
the value thereof.
So if the parties agree at the time that the policy is insured that the contract is
worth P3M. This amount now represents the value of the property.
RUNNING POLICY
A running policy contemplates successive insurance. Normally, this is issued
where there is a constant change either in the:
1. Location of the property insured, or
2. Valuation thereof.
Like in the case of stocks in trade. You own a department store, and you
insured your stocks. Considering the nature of the business - you sell and
replenish constantly - there is a constant change thereof. So you cannot fix
the amount even just for a day. Can you imagine the inconvenience if every
time there is a change in the valuation of the stocks, you cancel the policy and
ask for a new one? You probably cancel your policy every thirty minutes.
So to avoid the inconvenience, a running policy may be issued. The subject

of the insurance may be determined from time to time through the use of additional
statements or endorsements without canceling your policy.
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32
PRESCRIPTION OF ACTION
What is the period of prescription of an action based on a contract of insurance?
Within what time should an action based on a contract of insurance
be brought?
In the absence of any stipulation in the policy, you apply the provisions
of the Civil Code. This being an action based on a written contract, it prescribes
in ten years.
So, the contract of insurance being a contract, an action arising therefrom
prescribes in ten (10) years, in the absence of a stipulation in the policy.
May the parties agree on a period less than ten years? YES. Under Sec.
63, provided it is not less than one (1) year from the time the cause of
action accrues.
Sec. 63. A condition, stipulation, or agreement in any policy of insurance,
limiting the time for commencing an action thereunder to a period of less
than one year from the time when the cause of action accrues, is void.
One year
Less than one year
- valid
- invalid
If there is a stipulation in the contract providing for the period within

which an action based on the contract may be brought, the same is valid, provided it
is not less than one (1) year from the time the cause of action
accrues. It is reckoned or computed not from the date of the accident, but from the
time the cause of action accrues.
When does the cause of action accrue? From the receipt by the insured
of the notice of denial of the claim.
So if the insurer does not act on the claim, he neither approves or
denies it, the cause of action will never accrue. And the one year period
will not begin to run.
There was an actual case that we handled. There was a vehicular accident.
The insured filed a claim with the insurer. The insurer did not act on the claim for a
period of five years. There was no approval nor denial. So the insured filed a case in
court against the insurer. The lawyer of the insurance company filed a motion to dismiss
on the ground of prescription. He
was very confident because in that particular case, there was a stipulation in the
policy providing for a period of one year. The stipulation provided that the one year
period would run from the time the cause of action accrues.
The one-year period in the foregoing example starts to run, not from the
date of the accident, but from the time the cause of action accrues. And the
cause of action does not accrue if the insurer does not act on the claim. The
cause of action accrues only from the receipt by the insured of the denial of
his claim by the insurer. From the time of such receipt, the prescription starts to
run.
If the stipulation states that the insured can bring an action against the
insurer within a period of one year from the date of the accident, this
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- 33 -
33
amounts to saying that the period of prescription as agreed upon is less than
one year. Because under the law, the cause of action accrues from the receipt
of the denial of the claim, not from the date of the accident. Hence, under
Sec. 63, this stipulation on prescription is void. And since it is void, it
is as if there is no stipulation at all.
If there is no stipulation, the provision of the Civil Code on prescription should
be adopted. Said provision states that an action based on
a written contract prescribes in ten years. (Art. 1144, NCC)
Under the Compulsory Motor Vehicle Liability Insurance, as amended by BP 384, a
notice must be sent to the insurer, within six months from the date of
the accident; otherwise, it would constitute a waiver on the part of the claimant. The
action must be brought within one-year from the denial of the claim.
Let's say you are the claimant victim under this type of coverage. You have to
give a notice to the insurer within six months from the date of the
accident. If the insurance company does not pay, you have one year from the denial of
the claim within which to file your claim either with the regular courts or with the
Insurance Commission. Otherwise, the action shall prescribe (correlate Sec. 63 of the
Code and BP 384, on prescription of action).
CASE: SUN INSURANCE OFFICE LIMITED VS. COURT OF APPEALS, 195 SCRA 193
FACTS: The policy provides for a period of one year prescription. One year from the
time the cause of action accrues. The insured, after the occurrence
of the loss, filed a notice of his claim to the insurer. The insurance company
denied the claim. Upon denial of the claims, the insured filed a request for
reconsideration with the insurer, this too was denied.
There was a loss, notice of loss, claim, denial of claim, request
for reconsideration, denial of request for reconsideration.
When the case was filed, it was already beyond the one year period from the
denial of the claim, because it took sometime before the insurer could act on the
request for reconsideration.
ISSUE: Has the action prescribed?
When did the prescriptive period start to run, from the first denial of
the claim or from the denial of the request for reconsideration?
HELD: Prescription started to run from the first denial of the claim, not from the
denial of the request for reconsideration. The action, therefore, has prescribed.
Otherwise, the claimant can delay the filing of an action which may be prejudicial to
the insurer. Why prejudicial? Because if the filing of the action is delayed,
witnesses may no longer be available, documentary evidence may no longer be
available.
While it is true that insurance is a contract of adhesion, hence should be

interpreted strictly against the insurer and liberally in favor of the insured, this
principle is applicable only where there is ambiguity in the terms or stipulations
thereof.
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34
When the terms or stipulations are clear, there is no room for interpretation.
The only recourse is to enforce the contract. Courts are not
meant to make contracts for the parties.
Q:
May a policy of insurance be cancelled after the issuance?
A: YES. But the insurance company cannot just arbitrarily cancel an insurance
policy. The insurance company must follow the procedure laid down under the law.
The law requires the following: (Proceedings for cancellation)
1.
There must be a written notice of cancellation to the insured in accordance

with Sec. 65; and
2. The notice must state any of the grounds for cancellation mentioned
under Sec. 64:
i.
ii.
iii.
iv.
v.
vi.
non-payment of premiums;
conviction of a crime arising out of acts increasing the hazards
insured against;
discovery of fraud or material misrepresentation;
discovery of willful or reckless acts or omissions increasing the
hazards insured against;
physical changes in the property insured which result in the property
becoming uninsurable;
determination by the Insurance Commissioner that the continuation of
the policy would violate or would place the insurer in violation of
the Code.
PURPOSE OF SEC. 65: to afford the insured continued protection.

WHAT IF THERE IS NO NOTICE, THE INSURED WENT TO THE INSURER, THE INSURED WAS
WILLING TO PAY THE PREMIUMS, THE INSURER REFUSES TO RENEW. ON THE THIRD DAY,
A LOSS OCCURRED, IS THE INSURER LIABLE?
Yes. Cancellation must conform with the requirements of the law.
WHAT IS THE REMEDY OF THE INSURED IN THIS CASE?
Consignation. Go to the Insurance Commissioner and deposit the premium based
on the old contract.
WARRANTY
What is a warranty? What is the purpose of warranty? An example in an insurance
against fire is that the insured shall not store flammable materials within the
premises of the insured property, otherwise the policy shall be avoided.
Why does the insurer require the insured to make such a warranty? In order
to eliminate potentially increasing hazards, which may either be due to the acts of
the insured or to the change in the condition of the property. Definitely, the
storage of such material will increase the risk, the hazards,
because there are fire hazards.
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35
Let's say in anticipation of Christmas and New Year, you store explosives in
your house. Your house is insured against fire, and there is a warranty in
the policy to the effect that you will not store flammable materials within the
premises of the insured property.
Christmas passed, New Year passed, you consumed all the explosives in your
house but nothing happened to your house. Three days after, when there were no longer
any explosives therein, your house burns. Cause: faulty electrical
wiring.
Can the insurer deny the claim? Yes.
When there is a breach of warranty, there
between the breach and the cause of the loss.
breach was the cause of the loss or not. With
breach and the cause of the loss, the insurer
the ground of breach of warranty.
need not be a causal connection

It is of no moment whether the
or without connection between the
can rescind the contract on
But if there is no warranty to that effect, the insurer will remain liable.
PURPOSE: To control the risk assumed by the insurer.
WHERE SHOULD AN EXPRESS POLICY BE STATED? WHAT IF IT WAS WRITTEN
SEPARATE PIECE OF PAPER?
It must be contained in the policy or clearly incorporated therein as
part thereof.
ON
SUPPOSE THAT THERE IS A BREACH OF WARRANTY BUT IT DID NOT CONTRIBUTE TO THE
LOSS, IS THE INSURER LIABLE?
No. The insurer will be exonerated?
WHAT ARE THE DIFFERENT KINDS OF WARRANTY?
1.
EXPRESS WARRANTY - it is an agreement contained in the policy or clearly

incorporated therein as part thereof whereby the insured
stipulates that certain facts relating to the risk are or shall be true
or certain facts relating to the same subjects have been or shall be done.
2.
IMPLIED WARRANTY - is a warranty which from the very nature of the contract or
from the general tenor of the words, although no express warranty is
mentioned, is necessarily embodied in the policy as part thereof and which
binds the insured as though expressed in warranty.
AFFIRMATIVE WARRANTY - one which asserts the existence of a fact or condition
at the time it is made.
PROMISSORY WARRANTY - one where the insured stipulates that certain facts or
conditions pertaining to the risk shall exist or that certain things with
reference thereto shall be done or omitted.
3.
4.
WHAT ARE THE INSTANCES WHEN THERE IS BREACH OF WARRANTY BUT THE POLICY IS NOT
AVOIDED?
1.
When the loss occurs before the time for the performance of the warranty.
2.
3.
When the performance becomes unlawful.

When the performance becomes impossible.
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36
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.
Sec. 75. A policy may declare that a violation of specified provisions thereof
shall avoid it, otherwise the breach of an immaterial provision does
not avoid the policy.
Under Sec. 74, breach of material warranty or of a material provision of
a policy will entitle the other party to rescind the contract.
Q: How about a violation of an immaterial provision of the policy? Will it avoid the
policy?
A:
RULE: violation of an immaterial provision will not avoid the policy.
EXCEPTION: when the policy as provided for under Sec. 75 expressly provides
or declares that a violation thereof will avoid it.
For example, on co-insurance. The policy provides that other insurance allowed, to
be declared when required or on the occurrence of a loss. The stipulation provides
further, otherwise, this policy shall be avoided.
You have here a provision which actually is not material, but a violation
thereof will avoid the policy because the policy expressly declares that a violation
thereof will avoid it. In the absence of such express stipulation, however,
violation thereof will not avoid the policy (Sec. 75).
IS FRAUD NECESSARY IN THE BREACH OF WARRANTY?
No. See Sec. 76.
1.
Without any fraud, the policy is avoided only from the time of the breach and
the insured is entitled to:
i.
to return of premium paid at a pro rata rate from the time of
breach (see Sec. 79[b]) if it occurs after the inception of the
contract; or
ii.
to all the premiums if it is broken during the inception of the
contract.
2.
With fraud, the policy is avoided ab initio.
PREMIUM PAYMENTS
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies.
Sec. 78. An acknowledgment in a policy or contract of insurance or the

receipt of premium is conclusive evidence of its payment, so far as to make the
policy binding, notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid.
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37
Under Sec. 77, the RULE is on a cash and carry basis. No premium payment, no
policy. The law says he can demand for a return of the entire premium if
the thing insured was never exposed to the peril insured against. Why? Because
there is no assumption of risk.
Let's say you insured certain cargoes for transport to Japan. They are to be
loaded on a vessel. You buy marine insurance thereon and pay the premium.
But for one reason or another, you failed to load the cargo on the designated
vessel. The vessel left without your cargo. In this case you can ask for the
return of the entire premium because the thing insured (cargoes) was never exposed
to any navigational peril insured against; there was no assumption of
risk on the part of the insurer.
REASONS:
When the parties enter into a credit agreement, such an agreement is valid
because it is not contrary to law, morals, good customs, public order and public
policy (Art. 1306, NCC).
Besides what Sec. 77 prohibits is not the payment of the premium on installment
but the stipulation that will make the policy valid and binding despite the nonpayment of the premium. It does not prohibit the parties from
entering into a credit agreement.
So if the parties agree on the payment of the premium on installment,
that agreement is valid and binding.
On the other hand, under Sec. 78, when there is an acknowledgment of the
receipt of the premium by the insurer, such acknowledgment is considered
conclusive evidence of the payment of the premium, notwithstanding any
stipulation that it shall not be binding until the premium is actually paid.
In other words, if the insurer acknowledges in the policy the receipt of
the premium although in fact such premium has not been paid, such acknowledgement made
by the insurer will serves as conclusive evidence of its
payment. The insurer will not even be allowed to introduce evidence to the contrary
because the law says conclusive evidence.
For example, a person insures his house against fire for one year. Premium
for that year was paid but nothing happened. With the intention to renew the
policy for another year, a renewal certificate was issued to him worded thus:
"in consideration of the premium of P3,000.00 having been paid, this policy is
renewed for another year subject to the same terms and conditions." It was
signed by the insurer and delivered to the insured. But the insured never paid the
premium for the second year. This time the house was burned. The insured filed a
claim but the insurer denied such claim invoking Sec. 77: No
premium payment, No policy.
The Court held that the applicable provision is Sec. 78, the acknowledgment of
the receipt of the premium payment is conclusive evidence of its payment.
Where, however, the question is with respect to the actual payment of the
premium, not the validity or the binding effect of the contract, the
conclusive presumption does not apply.
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38
In the same example, if the insurer admits the liability but demands for
payment of the premium, the insured cannot invoke Sec. 78 to evade payment and say
that the acknowledgement receipt is conclusive evidence he need not pay the premium,
Sec. 78 is no longer applicable because this is now an action which involves the
payment of the premium, not the validity or the binding effect of the contract. This
is now an action brought by the insurer
against the insured for the collection of the premium. In which case, the conclusive
presumption will not apply.
RETURN OF PREMIUM
What is the basis of the right of the insurer to collect premiums? Or if
the premiums have been paid, what is the basis of the right of the insurer
to retain the premiums paid? The assumption of risk.
If the insurer does not assume any risk, he is not entitled to collect premiums.
If the premiums have been paid, he has no right to retain the same.
The premiums must be returned to the insured.
For example, there is 100% certainty that there will be no loss, no damage,
hence there is no risk. Why pay the premium? The assumption of the risk by the insurer
is the basis of the right to collect premiums.
Q: Is the insurer liable if the cause of the loss or damage is a fortuitous

event?
A: Yes, provided that the cause of the loss or damage is not an excepted peril.
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which, could
not be foreseen, or which, though foreseen, were inevitable.
Is the foregoing provision general rule

insurance? Can the insurer escape liability
fortuitous event?
applicable to the contract

by invoking said provision
of
on
No. A contract of insurance falls under exception no. 3 because the

very nature of the insurer's obligation requires the assumption of risk.
Therefore, even if the cause of the loss or damage was fortuitous event,
as long as it is not an excepted peril, the insurer shall be liable. It cannot
invoke as a defense, caso fortuito. Necessarily, the insurer in a contract of
insurance assumes the risk.
When is the insured entitled to return of premiums? When can he ask for a
refund, totally or partially? He can demand for the return of the entire premium if
the thing insured was never exposed to the peril insured against.
Why? Because there is no assumption of risk.
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- 39 -
39

When can the insured ask for a partial return of premium?

Here, we have to
indivisible contract.
distinguish
between
divisible
contract
and
an
Let's say you insured your car for 12 months. You paid your premiums of P1,200 per
month. After six months of effectivity, no loss. You decide to surrender the policy,
have it cancelled, probably because you already sold
the car. In this case, you can ask for a return of premium for the
unexpired period of six months.
In the absence of any short-period rate, the basis of the computation is
pro rata.
Likewise, partial return of premium is applicable to cases of over
insurance resulting from double insurance.
In over insurance, the total amount of the coverage exceeds the value of
the property. There can be double insurance without over insurance, and
over insurance without double insurance.
OVER INSURANCE WITHOUT DOUBLE INSURANCE

You have a building worth P10M and you insured it with one company for P15M.
DOUBLE INSURANCE WITHOUT OVER INSURANCE

You have a building worth P10M and you insured it with five companies for
P2M each for a total of P10M.
Where, however, there is double insurance resulting in over insurance, the

premiums paid corresponding to the excess will be refunded. Insofar as the excess is
concerned, there is no assumption of risk on the part of the insurer. In case of
total loss, the insured cannot recover more than the value of the property, because
insurance is a contract of indemnity, not for
profit. It is not intended to enrich the insured. Otherwise, it becomes a wagering
contract.
What's wrong with a wagering contract? If this is allowed, the insured would be
tempted to bring about the loss or destruction of the thing insured.
In property insurance, the result is arson.
EXAMPLE:
You have a building worth P10M and you insured it with five companies for
P3M each, for a total of P15M. In case of loss, even a total loss, the insured
cannot recover more than P10M, which is the value of the property.
The premium corresponding to the excess of P5M must be refunded to the insured,
because insofar as such excess is concerned, the insurer never assumed any risk.
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- 40 -
40
MAY PREMIUMS BE PAID IN INSTALLEMNTS? WILL THE PARTIAL PAYMENT OF THE

PREMIUMS MAKE THE POLICY VALID AND BINDING?
Yes. A stipulation, which provides for the payment of the premium in
installments is valid, the same not being contrary to law, morals, good customs,
public order or public policy. Sec. 77 merely precludes the parties
from stipulating that the policy is valid and even if the premiums are not paid. It
does not prohibit the parties from entering into a credit agreement.
(Makati Tuscany Condominiums vs. Court of Appeals)
There are only two statutory exceptions to the requirement of the pre - payment
of the premiums, namely:
1.
2.
In case of life or industrial life insurance, when a grace period applies;

or
When an insurer makes a written acknowledgment of the receipt of the premiums,
such acknowledgement being declared by law to be conclusive evidence of the
premium payment (South Sea Surety vs. Court of Appeals).
In Spouses Tibay vs. Court of Appeals, the Supreme Court held that a fire
insurance policy shall not be valid and binding upon mere partial payment of
the premium. Sec. 77 contemplates full payment.
Justice Vitug made a dissenting opinion in this case, the following are the
arguments:
1.
The payment of the premiums, subject to the stated exceptions (Sec. 77

regarding life insurance and Sec. 78) is deemed, by the foregoing
provision, to be an element essential to establish juridical relation between
the insurer and the insured. Observe, however, that the law never requires,
nor measures the strength of the vindiculum juris by
any specific amount of premium payment. It should be enough that payment on
the premium, partly or in full, is made by the insured, which the insurer
accepts. In fine, it is either that a juridical tie
exists (by such payment) or that it is not existent at all (by such payment).
Once the juridical relation comes into being, the full efficacy, not mere pro
tanto, of the insurance naturally follows. Verily, not only is there an
insurance contract, but also a partially
performed contract. In case of loss, recovery on the basis of the full
contract value, less the unpaid premium accordingly be had. Conversely,
if no loss occurs, the insurer can demand the unpaid balance of the premium.
The insured, on the one hand, cannot avoid the obligation of
paying the premium while the insurer cannot treat the contract as valid
only for the purpose of collecting premiums and as invalid for the purpose of
indemnity.
2.
Non-payment
of
the
balance
due
cannot
result
in
an
automatic
cancellation of the insurance contract, otherwise, the effect would be to

place exclusively in the hands of one of the contracting parties to
decide whether the contract should stand or not in possible disregard of
the mutuality of contracts rule. Instead the parties should be able to
demand from each other the performance of whatever obligations they
had assumed or, if desired, sue timely for the rescission of the contract.
In the meanwhile, the contract endures and an occurrence of
the risk insured against triggers the insurer's liability. Forthwith, legal
compensation under the Civil Code can be applied. The net result
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- 41 -
41
would be that the insurer's liability to the insured would simply be reduced
by the balance of the premium, the insurer's liability therefore having
already attached.
3.
To say that the provisions in the policy issued by Fortune, "That the
insurance shall not be in force until the premium had been fully paid
and that it shall be deemed effective, valid and binding upon the company
only when the premiums therefore have been actually paid in full and duly
acknowledge" override the efficaciousness of the insurance contract despite
the payment and acceptance of a part of the
premium would be opposed not only to the precepts heretofore adverted
to on the correct application of Sec. 77 but also the intent and
spirit of Sec. 78.
4.
On the day premium payment is made but the insured, albeit only a portion of
it, so long as accepted by the insurer, the insurance
coverage becomes effective and binding, notwithstanding any
stipulation to the contrary. The insurer is not without any recourse;
all that it needs is not to accept if it wants to, any premium payment
of less than full.
NOTE: In this case, the insured had made and the insurer had accepted a partial
payment of the premium payment on the policy weeks before the risk insured against
took place.
It has also been held that when an insurer authorizes an insurance broker to
deliver a policy to the insured, it is deemed to have authorized said agent
to receive the premium in its behalf.
An acknowledgement in a policy or a contract of insurance of receipt of

premium is conclusive evidence of its payment, so far as to make the policy
binding notwithstanding any stipulation therein that it shall not be binding
until the premium is actually paid.
REASON:It is presumed that the insurer has waived the condition of pre-payment.
The conclusive presumption applies only to the question of the binding effect of
the policy.
WHAT IS THE BASIS OF THE INSURER'S RIGHT TO COLLECT PREMIUMS?
The assumption of risk.
WHEN IS THE INSURED ENTITLED TO A RETURN OF THE PREMIUM?
1.
2.
3.
4.
5.
6.
7.
When no part of the thing insured has been exposed to any peril
insured against.
When the insurance is for a definite period and the insured surrenders
his policy before the termination thereof.
Where the contract is voidable because of fraud or misrepresentation
on the part of the insured or his agent.
When the contract is voidable because of the existence of facts of which the
insured was ignorant without his fault.
When the insurer never incurred any liability under the policy because
of the default of the insured other than actual fraud.
When there is over insurance.
When rescission is granted because of the insurer's breach of contract.
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- 42 -
42
SEC. 79 DOES NOT APPLY WHEN:

1.
2.
3.
The insurance is not for a definite period.

A short period rate has been agreed upon.
The policy is a life policy.
IN INSURANCE, WHAT MAY BE TRANSFERRED OR ASSIGNED?

1.
2.
The thing insured - see effects on Sec. 20

The policy itself.
3.
be
Property insurance, being a personal contract, may not transferred without
the consent of the insurer.
A life insurance, unless otherwise provided in the policy, always be
transferred.
may
The claim itself - see Sec. 83
Even if there is a stipulation in the policy against the transfer of

claim, such stipulation is void. The insured may still transfer his claim
after the claim has been fixed by agreement.
REASON: Just like any other money claim, it can be assigned. It would unduly
restrict the right of an owner to transfer his property.
WHEN IS THERE A LOSS? IS A PARTIAL LOSS POSSIBLE?

Art. 1189 (2)
Since the car was only partially damaged, the situation does not fall under any
of the foregoing enumerations. Therefore, there is no loss. The loss payable clause
does not apply.
In a case, the Supreme Court rejected the foregoing argument. In insurance,
"loss" is not to be interpreted in the context of the foregoing Civil Code provision.
When we speak of "loss" in insurance, we refer not only to total
losses but also to partial losses.
What is the effect of a stipulation in a contract of insurance, which prohibits
the insured form transferring his claim against the insurer after the occurrence of
a loss, and the agreement is made before the loss under Sec.
83?
Sec. 83. An agreement not to transfer the claim of the insured against the
insurer after the loss has happened, is void if made before the loss except as
otherwise provided in the case of life insurance.
Let's say a motor car insurance policy, the car was damaged, and the loss
was fixed at P30,000 by agreement of the parties - the insured and the insurer.
Before the payment of the loss, the insured A assigned his claim to
B. There is an agreement in the policy, which prohibits A from transferring his claim.
What should be the effect of such an agreement? It is void. Despite the agreement,
A can assign his claim to B even without the consent of the insurer.
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- 43 -
43
REASON: A money claim is property. To prohibit A from transferring or assigning

his claim would result in undue restriction of one of the rights
of an owner, an attribute of ownership under the Law on Property. Jus disponendi,
the right to dispose. The transmission of rights over property.
A common cause of misunderstanding between policy holders and the insurance
companies is that when there is a loss the insurance company denies the claim
invoking that it is not caused by the peril insured against.
Recall July 16, 1990 killer quake. The question raised by the owners of building
which were damaged by the earthquake was whether or not they could recover on their
policies.
As a rule, in order that the insurer can be held liable, the peril
insured against must be the proximate cause of the loss (if the peril insured
against is only a remote cause, the insurer is not liable.
PROXIMATE CAUSE is an event which sets all other events in motion without
any intervening or independent cause without which the injury or loss would not have
occurred. It need not be the nearest in point of time and place of
the loss.
For example, you have an insurance against fire. First, there was an explosion
causing fire, then the fire causing the loss.
Proximate cause
Immediate cause
- explosion
- fire
Is the insurer liable? Depends on whether or not the explosion is an excepted

or excluded peril under Sec. 86, the insurer shall not be liable.
Sec. 86. Where a peril is especially excepted in a contract of insurance, a

loss, which would not have occurred but for such peril, is thereby excepted although
the immediate cause of the loss was a peril which was not excepted.
You have an insurance against fire. First there was a volcanic eruption causing
an earthquake; earthquake causing an explosion; explosion causing fire; fire causing
the loss.
Proximate cause
Immediate cause
- volcanic eruption
- fire
Is the insurer liable? Depends on whether the proximate cause is an excepted peril
or not. The rule is, the peril insured against must be the proximate cause. It if it
only the remote cause of the loss, the insurer shall not be liable.
EXAMPLE:
You own building A and B and you insured them against fire. Between them
is a firewall. Fire started in building A and because of the intense heat,
it weakened the firewall, which subsequently fell and destroyed building
B. Can you recover on building B?
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- 44 -
44
Yes. The proximate cause is fire, the immediate cause is the falling of the wall.
Although building B was not damaged by fire, the proximate cause
of such damage was fire, the very peril insured against.
EXAMPLE:
Fire started in building A, the wall did not fall. Several months later, a
strong typhoon came because of which the wall fell. Is the insurer liable?
No. Fire in this situation is only a remote cause of the loss. Neither is
it the proximate cause nor the immediate cause.
In no case the insured covered by a personal accident policy, participated in

a boxing competition. He was hit by his opponent, he fell his head hit the floor
and died. The insurer denied the claim because according to the insurer
the cause of death was not the accident and besides the cause of death was not covered
by the policy.
The Supreme Court said that the cause of the death was an accident. Accident
means something which is unforeseen. It happens without any design or intervention by
the human will, unexpected.
There was this executive in a company. He had a gun. He unloaded it. To impress his
secretary he pointed a gun to his temple and pulled the trigger.
An explosion followed and he fell dead.
The insurance company, denied the claim saying the cause of death was not
accidental. The insured deliberately pointed the gun to his temple and
deliberately pulled the trigger.
The Supreme Court said it was accidental, not intentional. The explosion was
unforeseen, unexpected. The cause of death being an accident, the insurer
was held liable.
In Torts and Damages, the accused can be held liable only if his negligence
was the proximate cause of the loss, death or injury. Of course if there was
contributory negligence on the part of the plaintiff, the same will mitigate
the liability of the accused.
Here is a boy playing with a ball. The ball rolled out into the street. The boy ran
after the ball. Unfortunately, there was a speeding vehicle which
hit the boy and the boy died.
What was the proximate cause of death? Was it the manufacturer of the ball
without which there would not have been any ball? Was it the store which sold
the ball? Was it the father who bought the ball? Was is the boy who was playing with
the ball? Or was it the negligence of the driver?
The Supreme Court held that the cause of the death of the boy was the negligence
of the driver of the car that hit the boy. The negligence of the
driver was the proximate cause of the loss.
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- 45 -
45
Sec. 85. An insurer is liable where the thing insured is rescued from a
peril insured against that would otherwise have caused a loss, if, in the
course of
such rescue, the thing is exposed to a peril not insured against, which permanently
deprives the insured of its possession, in whole or in part; or where a loss is caused
by efforts to rescue the thing insured from a peril insured against.
Building A and B are adjacent to each other separated only by a wire fence.
Under the Law on Property, a distance of 2 meters must be maintained from the
boundary line (Easement of light and view). Building A with all the personal
effects therein (appliances, furniture, clothes) is insured against fire. Fire
started on building B.
Residents of building A brought out their belongings in order to say them
from the impending fire. But as soon as the belongings are brought out into
the street, they are taken away by looters.
The personal effects were being rescued from a peril insured against (fire) but
in the process they were exposed to a peril not insured against (theft).
Fortunately the firemen arrived on time and put the fire under control. No
part of the insured building was damaged by fire but the personal belonging that were
taken out into the street were stolen. They were being rescued from
the peril insured against, but along the way it was exposed to a peril not insured against
(theft). Is the insurer liable in so far as the personal effects are concerned?
If you would interpret Sec. 85, the answer is NO because the law says "xx
that would otherwise have caused a loss xxx." The insured in order to recover
would have to prove that he had not removed his things from the house they would have
been burnt. But could he prove it when he removed his personal effects therefrom before
they would get burned? The insurer would say "kung hindi ninyo inalis yan, hindi sana
nasunog" But do we have to wait until the
house is on fire?
If the policy contains a condition which requires the insured to take the
necessary steps to prevent or minimize further losses (normally it does), said
condition would be in conflict with Sec. 85 above. There would be a situation where
the insured would be placed in a no -win situation.
In such a case, the insurer will be liable for damage or loss of the personal
effects which while being rescued from peril insured against (fire)
got exposed to a peril not insured against (theft).
To illustrate this condition. For example, one has a car insured under the
Comprehensive Insurance Policy. You were involved in an accident in an uninhabited
place. Under the foregoing condition you were not supposed to
leave the car there. There is a provision in the policy, that you must see to
it that the car is towed to a safe place. That's why the insurance company pays a
certain amount as towing fee. Because if you leave the car there and
just came back later you will find only the shell of the car because everything
else would have been stolen by them.
Because of the foregoing conflict some people especially when they are fully
covered just lock their houses when exposed to fire, instead of trying
to rescue their personal effects therein so that they can recover. Otherwise,
- 45 -
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46
their claims might be rejected because the insurer might say "kung hindi ninyo
inalis yan, hindi sana nasunog."
Likewise, the insurer is liable if the loss is caused by efforts to
save the things from the peril insured against.
In the foregoing example, when someone tries to lift the refrigerator in
order to save it from fire (peril insured against) but it turns out to be too
heavy for him and drops it and the refrigerator gets damaged the insurer shall be
liable.
Q: Suppose the peril insured against was only the immediate cause under Sec.
86, is the insurer liable?
First, there was an explosion then there was fire and the fire caused the
loss.
Proximate cause
Immediate cause
- Explosion
- Fire
A: If the proximate cause was the explosion is an exempted peril, the insurer
shall not be liable under Sec. 86 otherwise insurer is liable.
Q: Suppose the loss was caused by the negligence of the insured. Is the insurer
liable?
A:
Mere negligence on the part of the insured will not exonerate the insurer.
Some people have the impression that if the insurer can prove that the cause of
the loss was the negligence of the insurer, then the insurer shall
not be liable. This is not correct.
If mere negligence on the part of the insured will exonerate the insurer,
the in no case will an insurer be liable under a liability type of coverage
under Chapter 6.
Under this type of coverage, the insurer is liable only when the
insurer is negligent (culpa aquiliana - Art. 365, RPC)
Suppose you are driving recklessly and you got involved in an accident. It
was your fault. Can the insurer deny your claim on the ground that you had been
negligent?
No. Unless it was a willful act on the part of the insured or with the connivance of
the insured (Sec. 87)
In an insurance against fire, you set your house on fire (arson). The insurer
will not be liable under Sec. 87.
Or you ask someone else to do it for you and you connive with him. Again
the insurer will not be liable. But if the cause of the loss was simple negligence,
such negligence will not exonerate the insurer.
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47
Friendly Fire/Hostile Fire

A fire is friendly when it is found in a place where it is intended to
be. Ex. Stove, for domestic or industrial purpose.
Should there be any loss or damage occasioned by the smoke coming out
of the stove, the insurer will not be liable therefore.
The fire becomes hostile when it spreads from where it is intended to
burn or to be. In which case, the insurer shall be liable.
CONDITIONS
Conditions are the devices used by the parties in controlling risk or loss. It
may be classified into conditions precedent and conditions subsequent.
Conditions precedent - must be fulfilled before the effectivity of the policy.
Conditions subsequent - must be fulfilled after the effectivity of the policy.
EXAMPLE:
1. Giving notice of loss without unreasonable delay (Sec. 88) so that a. the
insured
can
take
steps
or
actions
to
minimize
further
losses;
and
b. to be able to determine the extent of the liability to prevent the
filing of fraudulent claims.
Failure to do so especially in fire insurance will exonerate the insurer.
2. Submission of proof of loss that will enable the insurer to determine:
a. WON there was really a loss
b. WON the property insured was the one involved in the accident
c. Amount of damages
In a vehicular accident, proof of loss are:

a. Police report;
b. Affidavit of witnesses;
c. Pictures of the damaged car;
d. Estimate of invoice;
In case of death:
a. Death certificate.
In case of injuries:
a. Medical certificate;
b. Receipts, etc.
Such proof would enable the insurer to estimate the extent of the loss
so it could determine how much it would be liable.
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48
The law does not require a particular form unless the policy provide for
a particular form to be submitted.
There are other conditions which the policy may require the insured to comply
with before there can be recovery.
Q: What is the difference between the effects of the non-performance of conditions
precedent and of conditions subsequent?
A: Non-performance of conditions subsequent will NOT avoid the policy but will
result in the forfeiture of the rights of the insured against the insurer while
non-performance of conditions precedent will AVOID the policy.
DOUBLE INSURANCE
You have a building worth P10M. You insured it with 5 companies worth
P20M. Hence, you have double insurance resulting in over insurance.
Q:
Should there be a loss, from whom and how much can the insured recover?
A:
Sec. 94. Where the insured is over insured by double insurance:

(a) The insured, unless the policy otherwise provides, may claim payment from
the insurers in such order as he may select, up to the amount for which the
insurers are severally liable under their respective contracts;
(b) Where the policy under which the insured claims is a valued policy,
the insured must give credit as against the valuation for any sum received by
him under any other policy without regard to the actual
value of the subject matter insured;
(c) Where the policy under which the insured claims is an unvalued
policy he must give credit, as against the full insurable value, for any sum
received by him under any policy;
(d) Where the insured receives any sum in excess of the valuation in the case
of valued policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust for the insurers, according
to their right of contribution among themselves;
(e) Each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which
he is liable under his contract.
EXAMPLES:
SITUATION (a)
This means that the insured can recover from the insurers in any order
he wants provided that the insurers liability shall not exceed the face value of
the policy in the case of a valued policy.
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- 49 -
49
Suppose there are 5 insurers, the insurer can recover the whole P10M from
insurer 1 or from insurer 1, P3M, from insurer 2, P2M and from insurer 3,
P5M.
While it
liable, this
can hold any
liable under
is true that under Sec. 94 (e) the insurers are proportionately

is only true as among them. Insofar as the insured is concerned, he
of the insurers liable up to the amount for which they are severally
their respective contracts.
SITUATION (b) and (c)

There are 4 insurers and the total loss is P10M. Let's say he recovers from insurer
1, P2M. He has to deduct that from the amount of the total loss. Then recover from
insurer 2, P3M and insurer 3, P3M. Again, he has
to deduct the amount from the total loss. How much can he recover from insurer 4?
Only P2M.
Why? Insurance is a contract of indemnity. The insured should not be allowed
to recover more than the value of the property otherwise it will
result in unjust enrichment on the part of the insured and thus becomes a
wagering contract.
SITUATION (d)
Suppose for one reason or another, he was able to recover more than P10M say,
P15M. Under the law, the excess of P5M does not belong to him and he
shall hold it in trust for the insurer according to their right of

contributions among themselves. He becomes a trustee similar to the principle
of solutio indebiti.
When there is something delivered and there is no right or obligation to
demand it, the obligation to return the thing delivered arises.
SITUATION (e)
The insurers among themselves are only proportionately liable. So how
much is each of them liable?
(Amount of policy) x (Loss) Total
Insurance taken
Ultimately, each insurer will only shoulder a proportionate amount of the
loss, although an insurer may be made to pay more than his actual contribution. But
eventually those who paid less than what they are supposed
to pay will have to reimburse the insurer, which may have paid more than their
proportionate contribution.
REINSURANCE
This is what we call, in property insurance, limit of single risk. This means an
insurance company is allowed to retain only 20% of its net worth. This is retention
capacity. That applies only to a single risk.
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- 50 -
50
Sec. 215. No insurance company other than life, whether foreign or domestic,
shall retain any risk on any one subject of insurance in an amount exceeding
twenty per centum of its net worth. For purposes of this section, the term "subject of
insurance" shall include all properties or risks insured by the same insurer that
customarily are considered by non -life company underwriters
to be subject to loss or damage from the same occurrence of any hazard insured
against.
Reinsurance ceded as authorized under the succeeding title shall be deducted
in determining the risk retained. As to surety risk, deduction shall also be
made of the amount assumed by any other company authorized to transact
surety business and the value of any security mortgage, pledged, or held
subject to the surety's control and for the surety's protection.
This means that the occurrence of the peril insured against might result
in a total loss. Insurance companies operate on the basis of the law of the
averages. They have a way of limiting their exposure in a given area.
For instance in fire insurance, no insurance company will insure all the
houses located along the same block. Why? Should fire break out in that area,
there is a probability that all the causes will get burned. And it will result in
what they call xxx
So if you apply with an insurance company, the insurer will ask: "How
much is my exposure in that area?" If the insurer has reached the maximum
exposure, it will no longer issue any policy.
In life insurance, the insurer considers the assumption that not all policy
holders will die at the same time.
Let's say X is the insured. He owns a building worth P100M. He insures it
with one insurer Y against fire. 20% of the net worth is its retention capacity.
Let's assume that the retention capacity of Y is P20M. While it can

insure the property for P100M, Y will have to reinsure the excess of P20M.
So the original contracts between X and Y is the contract of insurance. Y
will have to reinsure with A say, P10M, with B, P30M, with C, P30M and D, P10M for a
total of P80M.
These contracts between Y and A, B, C and D are contracts of reinsurance.
In the original contract (contract of insurance), the subject matter of the
contract is the building in the subsequent contract (contract of reinsurance), the
subject matter is the liability that Y may suffer by reason
of the original contract.
So what happens? Let's say there was a total loss. The entire building worth
P100M was damaged. Can the insured recover directly from the reinsurer?
No. Because the insured is not a party to the contract of insurance.
- 50 -
- 51 -
51
From whom can the insured recover the amount of P100M? Only from Y, the insurer. But
later on, Y can recover from the reinsurers a total of P80M. The
original insurer for P100M can recover from the reinsurers a total of P80M. Net loss,
P20M.
Without the device of reinsurance, Y will have to shoulder the entire amount of
P100M. This is one way of preventing insurance companies from becoming bankrupt or
insolvent. It is to the interest of the insuring public
that insurance companies remain solvent. That is a purpose of reinsurance. Insurance
is a risk distributing device. Loss of one is shouldered by many.
In reinsurance, the rules on concealment and representation, how may this be
done? There may be either a reinsurance treaty or a proper payment basis.
If there is a reinsurance treaty between Y and A, that in itself is a contract

signed before hand. There is an agreement under that treaty that for
every risk assumed by Y, a certain percentage shall be ceded to Y automatically. No need
of making an offer. Of course, in the treaty, there is
a provision on the type of risk that shall be covered.
So let's say there is a treaty between Y and A and this is one of the risks covered
by the treaty. And under the treaty, 10% of the risk assumed by
Y is automatically ceded to A, then the moment Y assumes this risk, 10% Of P100M is
automatically ceded to A by way of reinsurance.
The advantage in a treaty is that there is no need to make an offer,
there is no need to make an acceptance. The cession is automatic.
In
that
case,
the
reinsurer
under
the
treaty
follows
the
fortune
or
misfortune of the insurer. The reinsurer relies on the underwriting

judgment of the insurer.
But if there is no treaty, the
there is a treaty between Y and A,
just like any other contract. So Y
not accept the offer because there
contract of reinsurance.
transaction is on a case by case basis. Let's say

then Y has to make an offer to A
will send a letter to A, and A may or may
is no treaty arrangement. If A says no, there is no
MARINE INSURANCE
Under the present Code, marine insurance is defined in Sec. 99. It consists of two
parts. Part one refers to any loss or damage to any of the properties enumerated
thereunder. Part two, which is an example of liability
insurance, refers to marine protection and indemnity insurance.
Under the second part, the insurer will be liable for any liability that
the insured may incur arising from marine operations. i.e., Marine protection
and indemnity insurance.
You should be able to distinguish between perils of the sea and perils of the
ship. If the cause of the loss is only peril of the ship, the insurer is not
liable. Examples of this would be the usual or ordinary movements of the sea like
waves, ordinary wear and tear of the vessel or negligent failure of
the owner of the master to provide the vessel with the necessary equipment. If the
cause of the loss is any of those enumerated above, the insurer shall
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52
not be liable. It must be a peril of the sea and not perils of the ship. It
must be something which may or may not happen and not something which must happen.
Just like any other type of property insurance. In marine insurance, the
law requires also that the insured must have an insurable interest in the subject
matter.
The owner of a vessel under Sec. 100 has an insurable interest although the vessel
may have been chartered by one who covenants to pay him its value
in case of loss.
Let us say you have a vessel worth P100M and somebody charters it as agreed,
among others, that should the vessel be lost, he (charterer) would pay the value
thereof.
(A charterer party is actually a contract of lease whereby the owner or the agent
leases the whole of the vessel or part thereof, for the transportation of tools or
passengers or both, for a fixed price).
Q:
Up to what extent would be the insurable interest of the owner?
A: Still P100M. But he can recover from the insurer only what he can not recover from
the charterer.
If the charterer pays the owner P80M upon the loss of the vessel, then the
owner can recover from the insurer only P20M. Why? Because insurance is a contract of
indemnity. He cannot be allowed to recover an amount more than
the value of the property. Otherwise, it will result in undue enrichment on the part
of the insured. Solutio indebiti.
How about the charterer, does he have insurable interest in the vessel? Yes,
under Sec. 106, the charterer has an insurable interest in the vessel to
the extent that he shall be imdennified.
So, considering that he agreed to pay the value of the vessel upon its loss, then
the charterer's interest would be the value of the vessel (100M).
LOANS ON BOTTOMRY, RESPONDENTIA

What is a loan on bottomry or respondentia? How does a bottomry loan differ
from an ordinary loan?
In the case of bottomry loan, the repayment is conditional. It is subject
to the condition that the vessel, which is given as a security, shall arrive
safely at the port of destination.
So let's say, A is a lender in bottomry loan. The vessel, worth P100M
is the collateral for the payment of the loan. The bottomry is P20M.
Q:
What is the extent of the insurable interest of the owner?
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53
A:
The difference between the value of the vessel and the amount of the loan.
In the foregoing example, the insurable interest of the owner would only be P80M.
Why? Because should the vessel be lost during the voyage, the borrower does not
have to pay the lender.
How about the lender, does he have an insurable interest in the vessel? Yes, to the
extent of the amount of the loan. Why? Because should the vessel
be lost he will not be able to recover the loan from the owner.
So, both the owner and the lender may insure the vessel. The owner, to the
extent of the difference between the value of the vessel and the amount of the loan,
the lender, the amount of the loan, because that is the extent that
he shall be damnified by the loss of the vessel.
Loans on bottomry are not subject to the Usury Law. Meaning, the lender
on bottomry could charge interest higher than the rates allowed by the Usury
Law (when this law was still in effect).
One of the most essential requirements of Usury is, the loan must be absolutely
payable. That is not true in the case of a bottomry loan, because
in the bottomry loan, the repayment is subject to the condition that the vessel
shall arrive safely at the port of destination.
The same principle applies in the case of respondentia loan. The only difference
is, in the case of respondentia loan, the collateral is not the vessel but the goods
loaded thereon. But the payment of the loan is also subject to the condition that the
cargoes will arrive safely at the port of
destination. Otherwise, the borrower need not pay the loan.
Recall that mere hope or expectancy is not insurable (Sec. 14 and 16). If
you buy a sweepstakes ticket, you cannot insure the chance of winning. That is mere
hope or expectancy,
In order that hope or expectancy may be insurable, under Sec 14, it must
be coupled with an interest in the thing from which the expectancy shall arise or
there must be a valid contract for it.
Thus, in the case of expected freightage, an expected profit in marine
insurance, they are insurable although they are in the nature of a mere hope
or expectancy.
Let's say A is the owner of certain goods worth P300T, should the goods arrive
safely at the port of destination, he expects to sell them for P350T,
or expects to realize a profit of P50T. There is no question that he can insure the
goods, because he has an insurable interest in the goods. That is
an existing interest under Sec. 14.
But he also has an insurable interest in the expected profit. He can insure the
profit separately although this is in the nature of a mere hope or expectancy.
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54
Why? Because he has an interest in the goods from the sale of which the profits
shall be realized. Loss of the goods would also mean loss of the profits.
This is also true in connection with expected freightage. In marine

insurance, when we speak of freightage. This would include all benefits
derivable for the enjoyment of or use of the vessel, or the transportation of
goods, or passengers, or both or from the chartering of vessel. Again, this in the
nature of a mere hope or expectancy. But under the law, this is insurable because under
Sec. 16 it is founded on an interest upon the thing
from which the expectancy shall arise.
So if you are given a problem, and the problem speaks of an expectancy. The
question provides that so and so insures the expectancy. You must analyze
the nature of the expectancy. If it is a mere hope or expectancy, it is not
insurable. To be insurable, the hope or expectancy must be coupled with an interest
in the thing from which the expectancy shall arise.
The rules on concealment and representation are also applicable in a contract of
marine insurance. In other words, the parties to a contract of marine insurance must
also act in utmost good faith.
As a matter of fact, the application of the rule on concealment and
representation in marine insurance is more strict than in other types of
insurance. Why? Because of the nature of the property as well as the location
thereof.
Oftentimes,
the
subject
matter
of
marine
policy,
like
vessel
is
out
there on the high sea, or in a port of, and the insurer has not have that vessel examined
or inspected. Therefore, the insurer has to rely, almost entirely, on the representation
of the insured.
Unlike for instance, in fire insurance, normally before the insurer decides to
issue a policy, he would have the property examined by his own employees. Such
procedure may not be possible in the case of marine insurance.
Take note, however, of Sec. 110. With respect to the matters mentioned under
Sec. 119, would the concealment thereof entitle the insurer to rescind
the contract?
Normally, you will recall, because of the principle of materiality under Sec. 31,
should there be concealment or representation, this is the RULE: what was the
concealed or misrepresented need not have been the cause of the
loss. There need not be any causal connection between what was concealed or
misrepresented and the cause of the loss.
A person suffering from a terminal diseases which he concealed from the insurer.
He died in a vehicular accident. Under the law, the insurer can rescind the contract
due to concealment on the part of the insured. Note that
there was not even a causal connection between what was concealed and the cause of
death. But such absence of causal connection is of no moment. The fact of concealment
on the part of the insured gives the insurer the right to
rescind the contract of insurance.
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55
Under Sec. 110, however, in marine insurance, should there be any concealment of
any matters mentioned thereunder, as to whether the insurer will be liable or not
will depend on the cause of the loss.
If the cause is something else other than what was concealed the
insurer will still be liable.
In order that the insurer will be exonerated, should there be concealment of
any matters mentioned under Sec. 110, that must be the cause of the loss.
Under No. 1, for example, the national character or nationality of the thing
insured; let us say you have a vessel of Iranian registry. The insured concealed
from the insurer the fact that the vessel was of Iranian registry.
During the voyage, the vessel encountered a strong typhoon and it was damaged. Can
the insurer ask for the rescission of the contract due to concealment?
No, because the cause of the loss was not the fact that it was of Iranian
registry. The cause of the loss was typhoon.
But in the same example, before it could reach its port of destination, it
was captured and detained by the Iraqia (because there was war going on between
Iran and Iraq), can the insurer rescind the contract?
Yes, because its capture and detention was due to the fact it was of Iranian
registry. What was concealed turned out to the cause of the loss (capture and
detention).
The foregoing is an exception to the rule on materiality under Sec. 31
WARRANTIES
Warranties in marine insurance may be: (1) expressed, or (2) implied.
Implied warranties are those which are deemed to be part of the
contract even if the parties did not expressly agree on such warranties.
In marine insurance, the following are the implied warranties:
1.
2.
3.
4.
the vessel is sea worthy;

the vessel will not make an improper deviation;
the vessel will not engage in any illegal venture;
if there is an express warranty, as to the nationality or neutrality
of the vessel, there is an implied warranty that it will carry the
requisite documents to prove its nationality or neutrality (note that
this implied warranty appears only if there is an express warranty as to
the nationality or neutrality of the vessel).
SEAWORTHINESS
This is a relative term. In ascertaining whether a vessel is seaworthy, there are
several factors to be considered. To be considered are: (1) the structural condition
of the vessel; (2) the nature of the service to be
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56
performed; and (3) the nature of the voyage; and (4) the cargoes to be
loaded on the vessel.
In general, a vessel is seaworthy if it is fit to perform the service and
to encounter the ordinary perils of the sea with respect to the voyage
contemplated by the parties.
But it does not apply only to the structural condition of the vessel. It
must also be properly equipped; it must be provided with sufficient numbers of crew
members; and it must be provided with the necessary provisions, etc.
A vessel may be seaworthy for navigating rivers or inter -island voyages but not
for the purpose of navigating the high seas.
Let's say a vessel may be seaworthy for navigating between Manila and Cebu. But
the vessel may not be seaworthy for navigating between Manila and U.S.
A vessel may be seaworthy for carrying cargoes for a particular service

or voyage but not on intentional voyages.
So you have the best structurally constructed vessel in the world. You have a
voyage from Manila and San Francisco, USA. You provide the captain and
the members of the crew with only one sandwich and a glass of water each. The
vessel is not seaworthy.
The law requires that it be properly laden or provided with the necessary
equipment.
RULE: the vessel must be seaworthy only at the commencement to the voyage.
EXCEPTIONS:
1. In case of time policy;
2. In case of insurance on cargoes which by the nature of the voyage, of
the nature of the cargoes, or by agreement of the parties, they
are to be transit from one vessel to another.
Exceptions to (1)
1. Let us say in a policy for one year, during the term of the policy, the
vessel undertakes three voyages. Then the law requires that it must be
seaworthy at the commencement of each voyage.
2. In an insurance on cargoes, the cargoes are to be shipped from Manila
to San Francisco. From Manila, the cargoes are loaded on vessel A. Upon
reaching Guam, they are transferred to vessel B and upon reaching Alaska,
they are transferred to vessel C. In that case, when vessel A
leaves Manila, it must be seaworthy; when vessel B leaves Guam, it must be
seaworthy and; when vessel C leaves Alaska, it must be seaworthy.
3. The vessel would have to navigate rivers then it goes out into
China Sea and passes through the Suez Canal. This is a voyage by stages.
It must be seaworthy in navigating any of the stages: rivers, China Sea
and Suez Canal.
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the
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57
Q: Suppose at the time of the commencement of the voyage it was seaworth y.

But upon reaching a certain point, it became unseaworthy. The master believed
it could still move by its own power and so it proceeded. Upon
reaching
another point, there was a loss or damage. Is the insurer liable?
A: (Qualified) It depends. If the cause of the loss was not the unseworthiness of the
vessel, the insurer will still be liable. But if the cause of the loss is the
unseaworthiness of the vessel, the insurer shall not
be liable.
When it becomes unseaworthy, the law requires the master without unnecessary
delay to have the vessel repaired; failing in which and thereafter a loss occurs,
the insurer shall not be liable.
INSURANCE OF CARGOES
Q: Does the requirement of seaworthiness also apply to an insurance of cargoes?
A:
Yes.
Q: Suppose A is the owner of certain cargoes loaded in a vessel for a voyage

from Manila to Japan. Unknown to A, the vessel was unseaworthy. And during the
voyage, the cargoes were damaged or lost due to the unseaworthiness of the vessel.
Can A in an action brought against the insurer claim that he had
no notice or knowledge of the fact that the vessel was unseaworthy?
A:
No.
The court held that while it may be true that he was not the owner of the
vessel and it is possible that he had not knowledge of the fact the vessel was
unseaworthy, it was his obligation as owner of the cargoes to look for a
vessel that was seaworthy. Otherwise, the insurer shall not be liable by reason of
the unseaworthy of the vessel.
DEVIATION
Deviation in marine insurance may either be proper or improper.
Where the voyage was described by the points of beginning and ending (ex.
Beginning Manila and ending New York), which is the course of the sail?
1. It will depend upon the agreement or stipulation of the parties.
2. If there is no such stipulation, it will depend upon marine usages
or practices.
3. In the absence of both, it shall be that way between the places specified
which to a master of ordinary skill and discretion would
mean the most natural, direct and advantageous.
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58
Q: Let's assume that either by agreement of the parties or as fixed by usages

or which to a master of ordinary skill and discretion is the most natural, direct and
advantageous, where can there be a deviation?
A:
1. When there is a departure from the course of the voyage.

2. When there is unnecessary delay in commencing the voyage.
3. When it pursues an entirely different voyage.
A deviation is improper when it is not proper. When is it proper? See

Sec. 124.
Q: Let's say during the voyage the master received the information from PAGASA that there was an approaching typhoon along the course of sail being pursued by
the vessel. Believing in good faith that the information from PAGASA was true, the master deviated. It turned out though that the PAG-ASA was
wrong, that there was after all no typhoon coming. Could this be a proper or
improper deviation?
A: This is a proper deviation, provided the master acted in good faith in relying on
the information, although it turned out to be untrue.
We have to distinguish between a proper and improper deviation because under Sec.
126, if the deviation is improper, and a loss or damage occurs subsequently to the
improper deviation, the insurer shall not be liable.
Under the law, the insurer can always claim when you departed from the course of
sail in effect, there was no meeting of the minds, and therefore,
can rescind the contract.
LOSS
In maritime insurance, losses may be total or partial. Every loss which
is not total is partial.
WHEN IS THERE TOTAL LOSS?
Total loss may be actual or constructive/technical.
Constructive/technical total loss is important in relation to the principle of
abandonment.
Average may either be particular or general. In transportation law, average
includes all expenses incurred for preservation of the vessel or cargo, or both,
during the voyage up to the point of destination. That would include losses,
damages and expenses.
In particular average loss, it does not inure to the common benefit, to the
parties, to the marine venture and therefore it is to be borne only by the party whose
interest was lost or damaged.
In general average loss, the requisites are:
1.
2.
It must be done deliberately by the master or upon his authority;

It must inure to the common benefit of all parties;
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59
3.
4.
5.
There must be no negligence on the part of the party whose interest

was sacrificed;
It must be successful;
There must be a marine peril.
Q: You have a voyage from Manila to Hong Kong. Loaded thereon are cargoes belonging
to A, B, and C. Who are the parties?
A:
The owner of the vessel and the owners of the cargoes (A, B, C).
During the voyage, the vessel encountered a strong typhoon. In order to lighten
the load of the vessel, the master decided to jettison the cargo belonging to A and
as a result, the vessel and the remaining cargoes arrived
safely in Hong Kong. This is a general average situation.
The parties whose interests were saved, the owner of the vessel and the owners of
the cargoes (B and C), will contribute to the loss. It is but fair,
had it not been lost.
If the parties are insured, the insurers will pay the contributions assessed
upon the insured.
What is the formula used to determine the share contribution of each of the
parties?
Interest of party x
Total Interest
Loss
Contribution
Sec. 136. Where it has been agreed that an insurance upon a particular thing,
or class of things, shall be free from particular average, a marine insurer is not
liable for any particular average loss not depriving the insured of the possession, at
the port of destination, of the whole of such thing, or class of things, even though
it becomes entirely worthless; but such insurer
is liable for his proportion of all general average loss assessed upon the thing
insured.
Q: Should there be such a clause in a marine policy and a loss occurs during
the voyage, would the insurer be liable?
A: Qualify. If it is a particular average loss and it is only partial, the insurer shall
not be liable. But even if it is only a particular average loss
if it is total, then the insurer shall be liable. However, if it is in the nature of a
general average loss, despite the presence of the above clause, the insurer will be
liable and will have to pay the contribution.
In the example above, where the cargoes of A were jettisoned, and supposing the
jettisoned goods were worth P1M, A, the owner may either demand contributions from
the parties whose interests were saved (owner of vessel and owner of the other
cargoes) or if the goods were insured, he may recover
from his insurer. (Note that he cannot recover from both, because of the principle
of indemnity).
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60
If the goods were insured, and he decides to recover from the insurer, then there
will be subrogation. He can no longer demand contribution from the
parties whose interests were saved. The insurer becomes a subrogee who can demand
contributions from the parties whose interests were saved.
Q: When will the right of the insured to demand indemnification from his insurer be
lost (or when can he not recover from his insurer)?
A: 1. If he waives the right to demand contributions from the parties whose
interest were saved; and
2. If he allows separation of interests.
Like in a motor car insurance, for instance, you were involved in an accident,
the other party was at fault. Your car was insured under a comprehensive policy.
What are your remedies?
1.
2.
recover from your insurer, or

recover from the party at fault.
If you recover from your insurer up to the extent of the amount paid by the insurer,
there will be subrogation (Art. 2207, NCC). But you can still recover the deficiency.
Similarly, in marine insurance, if the party whose interest was

sacrificed decides to recover from his insurer, it will now be the insurer
who has the right to recover from the parties whose interests were saved.
The insured should not do any act that will destroy that right, because
it will eventually be transferred to the insurer by way of subrogation.
So if he waives the right by signing a waiver, for instance, then the insurer
will deny his claim because the right of subrogation is destroyed. By executing the
waiver, you deny your insurer the right as subrogee to go after
the party at fault (Read Pan Malayan Insurance).
CO-INSURANCE
Sec. 157. A marine insurer is liable upon a partial loss, only for such proportion
of the amount insured by him as the loss bears to the value of the
whole interest of the insured in the property insured.
In marine insurance, by express provisions of the law, provided the requisites

are present, there is what we call co -insurance whether or not there is a
stipulation in the policy. In other types of insurance, like fire,
there has to be an express stipulation.
The requisites are:
1.
2.
The property is under-insured (insured for an amount less than

its value);
There is only a partial loss.
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61
What is the effect? You cannot recover the whole amount of your loss from
your insurer. You will shoulder a portion thereof. You become a co-insurer with your
insurer.
Let's say a vessel worth P50M is insured for only P25M. With respect to the
uninsured portion of P25M, you become your own insurer, that's why it is
called co-insurance.
Let's say there was partial loss of P20M. You cannot recover the entire P20M. You
can recover only , which is P10M. You shoulder the difference of P10M.
So while it is not advisable to over-insure your property because insurance

contract is a contract of indemnity, neither it is advisable to under-insure it
because of the principle of co-insurance.
REPEAT: In marine insurance with or without a stipulation in the policy,
by virtue of Sec. 157, provided that the requisites are there, the principle
of co-insurance are there. In other types of insurance, like fire, there
must be an express stipulation in the policy (normally, there is in standard
form) for the principle of co-insurance to apply.
With respect to package, the same principle applies. As a matter of fact
with respect to the general average loss, we also have the same principle.
EXAMPLE:
A is the owner of the goods worth P1M but he insured them for
only P.5M. Under Sec. 157, should there be a partial loss, the foregoing formula on
co-insurance is applied,
B's property worth P1M was saved, insured for only P.5M. Let's say the contribution
assessed upon B as one of the parties whose interest was saved was P100T. It's the
insurer who will have to pay the contribution.
Why? Considering that the goods belonging to B was under insured, under the
principle of co-insurance, the amount that will be paid by the insurer will only be
of the amount of contribution assessed upon B, as the law says
this is the contributing value.
In determining the amount of contribution to be paid by a party whose interest
was saved, the basis thereof is the value, not the amount of insurance.
Where the policy value is less than the contributing value, then the liability
of the insurer will only be proportionate under Sec. 157.
The same thing applies in the case of goods and package. Let's say you have goods
worth P2M and you expect to make a profit of P300T. You may insure
not only the goods but also the expected profits. The loss of the goods
means total loss of the profits obviously.
If the goods are lost during the voyage, the owner can recover from the insurer of
the profits the entire amount of P300T, aside from the value of the goods.
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62

Partial loss of the goods will mean partial loss of the profits, obviously.
Let's say during the voyage 50% of the goods were lost. So the owner
recover only P150T by way of lost profits from the insurer of the profits.
can
ABANDONMENT
The following are the requisites of a valid abandonment:
1.
2.
3.
4.
There must be constructive total loss under Sec. 139;

It must be neither partial or conditional (must be total and
unconditional)
There must be a notice or an order to abandon to the insurer
(orally or in writing; if oral, it must be confirmed in writing
within 7 days);
It must be explicit, based on the facts existing at the time the
order was made.
In the Philippines, under Sec. 139 we follow the rule. There

constructive total loss, when more then of the value has been lost to the
peril insured against.
When there is constructive total loss, the insured has the option
abandon (meaning to relinquish his interest in the thing insured in favor of
the insurer, so he can recover on the basis of actual total loss).
is
to
EXAMPLE:
The property insured is worth P20M. 80% thereof was lost. Under
Sec. 139 there is a constructive total loss. The insured can relinquish the
equivalent of 20% or what remains of the thing insured in favor of the
insurer, then he can recover on the basis of an actual loss, 100%. He cannot
retain what remains then recover because of the principle of indemnity.
But the foregoing is not mandatory. It is merely optional on the part of

the insured. If he decides to retain the equivalent of 20% he can recover
his actual loss. In either case he will still be getting 100%.
If he decides to abandon by surrendering what remains of the thing insured,
he can recover only his
actual loss, 100% but if he decides not to abandon
and retains it, he recovers the equivalent of 80%.
Basically what is the meaning of abandonment in marine insurance?
Q:
Is acceptance of an order to abandon necessary on the part of the insurer?
A:
No. Acceptance on the part of the insurer is not necessary.
Q: Suppose the insurer refuses to accept a valid abandonment, what is the effect?
A:
It will not prejudice the rights of the insured.
Q: Suppose the insurer say, "I will not accept. You can keep that. I will just pay
80%." Can this be done?
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63
A: No. The insured can recover on the basis of an actual loss, deducting therefrom
whatever comes into his hand.
Q:
what are the effects of a valid abandonment?
A: 1. There is a relinquishment of the interest of the insured in favor of the insurer.

2. There is what we call a transfer of agency (the agents of the insured
becomes the agents of the insurer).
Ownership of the ship being abandoned is transferred to the insurer at the

time of the loss. It retroacts to the date of the loss, not upon acceptance.
FIRE INSURANCE
Sec. 167. As used in this Code, the term "fire insurance" shall include insurance
against loss by fire, lightning, windstorm, tornado or earthquake and other allied
risks, when such risks are covered by extension to fire insurance policies or under
separate policies.
It would seem that fire insurance covers not only losses caused by fire but also
losses caused by lightning, earthquake, tornado, windstorm, and other allied risks.
Recall that during the Killer Quake many building collapsed. The property
owners asked if they could recover their losses under their fire policies.
In an insurance against fire and the cause of loss is earthquake, can the
insured recover?
As a rule, for the insured to recover, the peril insured against must be
the proximate cause of the loss.
If the proximate cause of the loss is not the peril insured against, under
Sec. 86, recovery would depend on whether the cause of the loss is excepted or
not.
Despite this provision on fire insurance, which would seem to include such
things as earthquake, windstorm, etc., the law does not mean that those risks
are indeed included because the same provision sates "when such risks are covered:
(1) by an extension to fire insurance policies; or (2) under separate policies."
So the rule is still the same. If the loss is caused by these things called
allied risks, like tornado, lightning, etc., as to whether the insured
will recover depends on whether such perils are: (1) covered by the policy itself; or
(2) under a separate policy.
What are the effects of the alteration in any part of the thing insured?
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64

For instance, a building is insured. The policy expressly provides that it

shall be used exclusively for residential purposes. During the terms of
policy, the owner converted it into a commercial or industrial building,
thereafter, it was burned. Can the insured recover?
the
There was an alteration from residential to commercial or industrial?

If made without the consent of the insurer by means within the
the insured, it increases the risk. Necessarily, when the house is
from
residential to commercial or industrial, there is an
There was a violation
of the policy provision. Therefore,
deny the claim.
control of
converted
increase in
the insurer
But if the provision is immaterial in order to avoid the policy,

policy must expressly state that a violation thereof shall avoid it.
Otherwise, it shall not avoid the policy.
risk.
can
the
Losses by fire may either be:

1.
2.
direct or actual; or
indirect or consequential
Normally, under a fire policy, the insurer

actual losses. Unless the policy provides otherwise.
is
liable
only
for
direct
Sometimes, indirect or consequential losses are more than the

actual
direct losses. Examples of consequential losses: loss of use; loss of income;
loss of profits.
or
or
In the absence of any specific provision in the policy, the insurer's

liability is confined to the direct or actual losses. And fire
must
be the
proximate cause.
Suppose you have a building and you insured it with two or more companies.
Should there be a loss, can the insurer invoke
a defense that
the property
was insured with two or more companies,
and therefore
the insurer cannot
be
liable?
In the absence of a provision in the policy,
insurance, the insurer cannot raise such defense.
which
Normally, double insurance is allowed, provided

insurers when required or upon the happening of a loss.
notice
prohibits
is
double
given
to
The Supreme Court in may cases held that such clause valid, which requires
the insured to give notice of the existence of other insurance/s. Failure on
the part of the insured to do so could be a ground
for the denial
claim.
SURETYSHIP/GUARANTY
In a contract of guaranty, the guarantor is only secondarily liable to
the principal debtor that is why he is entitled to the benefit of exclusion.
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all
of the
- 65 -
65
In the case of a surety, the liability is solidary with that of the principal
debtor.
While a surety undertakes to pay the principal obligation if the debtor does not
pay, regardless of whether the latter is solvent or insolvent, a guarantor undertakes
to pay only when the principal debtor cannot pay by reason of insolvency. That is why
he (guarantor) is entitled to the benefit of exclusion.
A surety is an insurer of the debt; while a guarantor is an insurer of

the solvency of the debtor.
Just like any other accessory contract or obligation, a contract of
suretyship or of guaranty cannot exist independently. There has to be a valid
and binding principal obligation. For instance, in a contract of mortgage or
pledge, there has to be a valid and binding principal obligation.
You have a first contract, the debtor 'D' and the creditor 'C' Let' say it is
a contract of loan. But before the creditor would grant the loan in favor of the
debtor, he would have to be protected so he gets someone else, 'S' to
act as surety. If 'S' agrees, then there will be a second contract between 'C' and 'S'.
The second is the contract of suretyship.
But before 'S' would enter into such a contract, he would also like to be
protected. So there will be a third contract between the debtor 'D' and the
surety 'S'. This contract is sometimes called an indemnity agreement.
Actually, these are three separate and independent contracts, but they are
so interrelated that the moment. Let's say, D fails to pay C, then C will
go after S under the contract of suretyship.
The law defines a contract of suretyship as an agreement whereby a party
called a surety undertakes to perform the obligation of another party called
the debtor in favor of another party called the creditor.
If S pays C, then S in turn can ask for reimbursement from the
principal debtor, D.
A contract of suretyship is essentially a credit accommodation. A surety is not
supposed to suffer a loss, unlike the insurer. Because if the surety
pays the creditor, he can ask for reimbursement from the principal debtor. And the
extent of liability of the surety depends on the contract of the surety in relation
to the principal contract. Just like a guaranty. And thereafter, the surety can ask
for reimbursement of indemnification from the principal debtor.
Just like a contract of insurance, the surety is also entitled to the payment of
premiums.
LIFE INSURANCE
Sec. 179. Life insurance is insurance on human lives and insurance appertaining
thereto or connected therewith.
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- 66 -
66
Take note of Sec. 180-A, an amendatory section inserted by BP 874.

Sec. 180-A. The insurer in a life insurance contract shall be liable in case of
suicides only when it is committed after the policy has been in force for a period
of two years from the date of its issue or of its last reinstatement, unless the
policy provides a shorter period: Provided, however, That suicide
committed in the state of insanity shall be compensable regardless of the date of

commission. (As amended by Batasang Pambansa Blg. 874).
The rule is simple. If the insured commits suicide, is the insurer liable?
The answer depends on whether the insured was sane or insane at the
time of the commission of the act (suicide):
1.
If he was sane, the answer would further depend on the time the act (suicide)
was committed:
a. If he was sane and the act was committed WITHIN a period of two years from
the date of the issuance of the policy, or of its last
reinstatement, the insurer shall not be liable.
The parties can agree on a period shorter than two years, but they
cannot agree on a period longer than two years.
b. If the insured was sane and the act (suicide) was committed AFTER a
period of two years from the date of issue, or date of last
reinstatement, the insurer shall be liable.
2.
If the insured was insane at the time of the commission of the act, then it
shall always be compensable regardless of the date of the commission.
So if he was insane, you do not ask the date of commission anymore.

Whether it was committed during or after the two-year period is not
relevant. The law says that the insurer shall always be liable.
But would a sane person commit suicide?

Note that the period above is similar to the incontestability clause.
Sec. 181. A policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not,
and such person may recover upon it whatever the insured might have recovered.
May the insured in a life insurance policy assign or transfer a policy?
As a rule, YES.
Is the consent of the insurer necessary for the assignment of the policy?
In the absence of an express provision in the policy, the consent of the insurer is
NOT necessary.
Is the consent of the beneficiary necessary for assignment of a life insurance
policy? It would depend. Sec. 11 says that if the beneficiary had acquired a vested
right because the designation is irrevocable, it cannot be
assigned without his consent. However, if the designation is revocable,
then the consent of the beneficiary is not necessary.
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- 67 -
67
Suppose that at the time of the death of the insured, he was committing a
felony, will such fact be a ground for the insurer to deny the claim? The Supreme Court
held that the mere fact that at time of death of the insured he
was committing a felony, that in itself is not a ground for the denial of the
claim. There must be a connection between the cause of death and the commission
of the felony.
Suppose premiums on a life insurance policy are paid from:

1.
2.
3.
separate property of insane;

conjugal assets;
partly from separate property and partly from conjugal assets.
To whom shall the proceeds go?

Depends on the beneficiary: (a) juridical person; (b) natural person.
Let us say someone while still single insured his life. He paid the premiums out of
his own salary. Three years later he got married and he continued to pay the premiums
out of his salary, which was not conjugal property. Then he dies. The beneficiary was
someone else, not the wife. How would the proceeds of the property be distributed?
In case of BPI
were paid from the
separate property.
shall be conjugal.
vs. Posadas, the Supreme Court held that where the premiums
separate property of the insured, the proceeds shall be considered
If the premiums were paid out of the conjugal assets, the proceeds
If the premiums were paid partly from
separate property and partly form conjugal assets, the proceeds shall be divided
proportionately.
However, the foregoing rule shall apply only if the main beneficiary is the
estate or the legal representative of the insured.
If the beneficiary is a natural person, regardless of the source/s of the
premiums, the proceeds shall belong to the beneficiary, to the exclusion of all
others. The foregoing rule does not apply where the beneficiary is a juridical
person.
CLAIMS SETTLEMENT
Where there is an action, or in case of litigation, the law requires the
Insurance Commissioner, or the Court, as the case may be, to make a finding on
whether the insurer unjustifiable withheld the payment of claims.
If in the affirmative, then the Commissioner or the Court is required to
award damages, attorney's fees, expenses, interest twice the ceiling set by the
Monetary Board. Before there can be an award of such damages, like interest, there
has to be an express finding by the lower court, or the Commissioner that there was
undue denial or withholding of the payment of the
claim.
- 67 -
- 68 -
68
The law says twice the ceiling set by the Monetary Board. What is the legal rate?
In Reformina vs. Tomol. The Supreme Court held that 12% applied if the
transaction is in the form of a loan, forebearance of money, goods, or credit.
But if it is an action for damages, it is still 6%.
Art. 2209, NCC. If the obligation consists in the payment of a sum of money and
the debtor incurs in delay, the indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest
which is 6% per annum.
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI)

As a general rule, insurance is a voluntary contract. But this is an exception
because in the case of motor vehicle insurance, it is compulsory.
'NO FAULT FEATURE' (See Sec. 378)
The purpose of these articles on compulsory insurance is to provide immediate
financial assistance to victims of vehicular accidents regardless of the financial
capability of the motor vehicle owner or operator.
As amended by PD 1455, it now covers only physical injuries. No more damages to
property.
The law says a passenger is one who is being transported or conveyed in

or by another vehicle for transportation for compensation.
A third party is one who is not a passenger.
The following are not considered third parties:
1.
2.
3.
4.
the
son
The
the
the
passenger
members of the household of the insured
members of the family within the second degree of consanguinity or
affinity of a motor vehicle owner or land transportation operator
employees of the insured, i.e., driver, in respect to death or bodily
injured, arising out of and in the course of employment.
In the case of Phil. Summit Guaranty, the insured car was registered in the name of
corporation, assigned to its president. One day, while the president was with his
in the car, the car was involved in an accident.
son died. A claim was filed, but the insurer denied the claim, invoking
exclusionary clause. According to the insurer, the son of the president to whom
car was assigned was not a third party.
The Supreme Court disagreed. The insured was a corporation, and under the
law, a corporation has a personality separate and distinct from that of its officers
and stockholders. Hence, the exclusionary rule does not apply in this case.
- 68 -
- 69 -
69
Besides, this being a contract of adhesion, in case of doubt, the same shall be
interpreted in favor of the insured and strictly against the insurer.
The most significant feature of this coverage is the 'NO FAULT' Clause under
Sec. 378.
Sec. 378. Any claim for death or injury to any passenger or third party pursuant to
the provisions of this chapter shall be paid without the necessity of proving fault
or negligence of any kind; Provided, That for purposes of this section:
(i) The total indemnity in respect of any person shall not exceed five
thousand pesos;
(ii) The following proofs of loss, when submitted under oath, shall be
sufficient evidence to substantiate the claim:
(a) Police report of accident; and
(b) Death certificate and evidence sufficient to establish the proper
payee; or
(c)
Medical report and evidence of medical or hospital disbursement
in respect of which refund is claimed;
(iii) Claim may be made against one motor vehicle only. In the case of
an occupant of a vehicle, claim shall lie against the insurer of the vehicle in
which the occupant is riding, mounting or dismounting from.
In any other case, claim shall lie against the insurer of the directly
offending vehicle. In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible for the
accident shall be maintained.
Considering that this is a compulsory type of insurance coverage, in case
of an accident between two vehicles, you can almost be sure that they are covered.
Against whom may the heirs of the victims file their claim? Can they choose
between the insurers of the two vehicles?
The Supreme Court in the case of Perla Compania de Seguros, said No. The
law is clear. It says the claim shall be filed against the insurer of the vehicle where
the claimant or the victim was an occupant, where he was riding,
mounting or dismounting from.
Let's say P was a passenger of vehicle A. The vehicle was involved in a road
accident with vehicle B. Is P correct in filing a claim against the insurer of vehicle
B?
No. The claim must be filed against the insurer of the vehicle where he was an
occupant, mounting or dismounting from at the time of the accident.
Suppose a pedestrian was injured in the accident. Against whom shall the
pedestrian file his claim? The law says, against the insurer of the
directly offending vehicles.
- 69 -
- 70 -
70
Sec. 384. Any person having any claim upon the policy issued pursuant to this
Chapter shall, without any unnecessary delay, present to the insurance company
concerned a written notice of claim setting forth the nature, extent
and duration of the injuries sustained as certified by a duly licensed physician.
Notice of claim must be filed within six months from date of accident, otherwise, the
claim shall be deemed waived. Action or suit for recovery of damage due to loss or
injury must be brought, in proper cases, with the Commissioner or the Courts within
one year from denial of the claim, otherwise, the claimant's right of action shall
prescribe. (As amended by Presidential Decree 1814 and Batas Pambansa Blg. 874).
Notice - within 6 months from date of the accident
Action - within 1 year from denial of the claim
JURISDICTION
With respect to the compulsory type of coverage, the Insurance Commissioner has
the original and exclusive jurisdiction, subject to limitations under Sec. 414.
INSURANCE COMMISSIONER
Prior to the declaration of Martial Law this was purely an administrative
body. It was then known as the Office of the Insurance Commissioner.
A presidential decree issued after Martial Law granted it adjudicatory powers.

So it is now a quasi-judicial body. It exercises quasi-judicial functions.
In Phil. American Life vs. Ansaldo, it was held that the quasi-judicial power of
the Insurance Commissioner is limited by law to claims and complaints involving any
loss, damage, or liability for which an insurer may
be answerable under any kind of policy or contract of insurance. This power does not
cover the relation affecting the insurance company and its agents but is limited to
adjudicating claims and complaints filed by the insured against the insurance company.
With respect to the administrative powers, it has the power to issue licenses
to insurance companies, the power to investigate insurance companies,
the power to examine the books and records of insurance companies.
What is the extent of its jurisdiction? It can adjudicate claims arising
from any contract of insurance, suretypship, reinsurance, etc., provided the
claim does not exceed P100,000.00, exclusive of interest, attorney's fees, and costs
(beyond this amount, it has no jurisdiction). Jurisdiction is concurrent with the
regular courts. But the moment an action is filed and the Commissioner takes
cognizance of the action, although it has concurrent jurisdiction with the regular
courts, then it shall acquire jurisdiction to the exclusion of the regular courts in
any case involving the same subject matter.
- 70 -

Insurance Contract Essentials

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- 1-

But as a rule, insurance is a voluntary contract. So the parties must give

- death (in so far

as the insurer is concerned, the even is conditional, it may or may not

In transportation law, there is a case involving a plane ticket which the

of adhesion) or rejects the contract. Therefore, as a result, being a contract

to follow is: the same

To illustrate: regarding the so-called authorized driver clause of the

It is based on the principle of subrogation (applicable only to property

essentially a process of substitution, where the subrogee,

A owns a house worth P1M. He has an insurable interest in the house.

So it is not correct to say that should there be no loss within the

so circumstanced, so related, that by the preservation of the property he shall

In whose life or health does a person has an insurable interest?

The explanations for (a) and (b) above are self-explanatory.

As lectured by Dean Jose R. Sundiang

In the event of loss or injury to the property, will he be damnified? Will

In transfer by delivery, tradition, actually or constructively, it is not

As lectured by Dean Jose R. Sundiang

Under the law on Credit Transactions, ownership is not transferred to the

Under the law on Contracts, while

the extinguishment of the principal

As lectured by Dean Jose R. Sundiang

D is still the real party in interest, he does not cease to be a

Suppose the policy contains a stipulation that there should be no storage of

As lectured by Dean Jose R. Sundiang

As lectured by Dean Jose R. Sundiang

If the designationis irrevocable, like for instance, when there is an

As lectured by Dean Jose R. Sundiang

Q: Is a mere hope or expectancy insurable? Suppose a person buys sweepstakes

Q: The mother was confined in a hospital, scheduled to be operated on the following

The policy shall be suspended to an equivalent extent until the interest

As lectured by Dean Jose R. Sundiang

As lectured by Dean Jose R. Sundiang

Q: Who can recover on the fire insurance?

INSURABLE INTEREST IN LIFE vs. INSURABLE INTEREST IN PROPERTY:

Insurable interest in life need exist only at the time of the

unaccompanied by a corresponding change in interest in the insurance,

Sec. 21. A change in interest in a thing insured, after the

Sec. 22. A change of interest in one or more several distinct things,

As lectured by Dean Jose R. Sundiang

Sec. 23. A change on interest, by will or succession, on the death of

Sec. 24. A transfer of interest by one of several partners,

This refers to a case where the change of interest is made in favor

As lectured by Dean Jose R. Sundiang

Art. 1306, NCC. The contracting parties may establish such

Sec. 25. Every stipulation in

for the payment of

By an aleatory contract, one or both of the contracting parties reciprocally bind

As lectured by Dean Jose R. Sundiang

Being an aleatory contract, the insurer's liability is conditional. The

WHAT ARE THE FOUR PRIMARY CONCERNS OF THE INSURER?

Exempt certain properties

The principle of utmost good faith applies to both parties. If information is

As lectured by Dean Jose R. Sundiang

Sec. 27. A concealment whether intentional or unintentional entitles the injured

What are the grounds for rescission?

As lectured by Dean Jose R. Sundiang

to issue the non-medical life insurance policy, he must have relied

One of the questions asked of the applicant in an applicant for life

In the same example, the applicant is asked the following questions,

As lectured by Dean Jose R. Sundiang