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N O T E S I N I N S U R A N C E L A W DRAGON

B Y : M E L A N I E B U M A C A S Page 1

I N S U R A N C E

PD 1460

PRELIMINARIES

A. Definition of Contract of Insurance

B. Requisites of Insurance Contract

C. Concealment and Representation

D. Kinds of PolicyE. Warranties in Insurance Contract

F. Double InsuranceG. Reinsurance Contract

H. Marine Insurance

I .LossesJ .Abandonment

K. Kinds of Insurance

L. Motor Vehicle Insurane- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

WHAT LAWS GOVERN INSURANCE

(a) Insurance Code (PD 1460 whose affectivity date is 11 June1978)

(b) In absence of applicable provisions, the Civil Code;(c) In absence of applicable provisions in the Insurance Code and

Civil Code, the general principles on the subject in the United

States (Constantino vs. Asia Life Insurance, 87 Phil 248)

WHAT IS A CONTRACT OF INSURANCE

- It is an agreement whereby one undertakes for aconsideration to indemnify another against loss, damage,

or liability arising from an unknown or contingent event;- A contract of suretyship shall also be deemed aninsurance contract if made by a surety who or which is

doing an insurance business;

Doing an insurance business or transacting an insurance business is:

(a) making or proposing to make as insurer any insurancecontract;

(b) making or proposing to make as surety contract of suretyshipas a vocation and not merely incidental to any other legitimate

business or activity of the surety;

(c) doing any business including a reinsurance business,specifically as doing an insurance business within the hearingof the Code;

(d) doing or proposing to do any business in substance equivalentto any of the foregoing in a manner designed to evade theprovisions of the Code (section 2);

NATURE AND CHARACTERISTICS OF A

CONTRACT OF INSURANCE

1. It is an ALEATORY contract2. It is a contract of INDEMNITY for Non-Life recovery is

commensurate to the loss. It is an investment in life insurance

secured by the insured as a measure of economic security for him

during his lifetime and for his beneficiary upon his death except one

secured by the creditor on the life of the debtor;

3. It is a PERSONAL contract4. It is EXECUTORY and CONDITIONAL on part of the insurer5. It is one of PERFECT GOOD FAITH6. It is a contract of ADHESION insurance companies manage to

impose upon the insured prepared contracts, which the insured cannot

change. Consequently, they are to construed as follows:(a) In case there is no doubt as to the terms of the insurance

contract, it is to be construed in its plain, ordinary, and

popular sense;

(b) If doubtful, ambiguous, certain, it is to be construed strictlyagainst the insurer and liberally in favor of the insured because

the latter has no voice in the selection of the words used, and the

language used is selected by the lawyers of the Insurer (QuaChee Gan vs. Law Union Rock Ins. Co. Ltd. 52 OG 1982)

Illustrations:a. P Bank obtained insurance against robbery, which excluded loss by

any criminal act of the insured or any authorized representative.

While transferring funds from one branch to another, the insuredsarmored truck was robbed. The driver was assigned by a labor

contractor with the insured, while the security guard was assigned

by an agency contracted by the insured. Both driver and guard

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were found to be involved. Can the loss be excluded? HELD: The

loss is excluded , the driver/guard although assigned by labor

contractors are authorized representatives. The terms are

clear and unambiguous. (Fortune Insurance vs. CA, 244 SCRA 308).

b. Personal Accident policies providing payment for loss of hand.The insurance policy defines it as amputation. The insured has an

accident resulting in a temporary total disability but hand is notamputated. HELD: Insurer is not liable. (Ty vs. First NationalSurety and Assurance Company 17 SCRA 364) But In case

where the policy provided loss of both, legs by amputation, a claim

against the policy was allowed for a total paralysis to exclude totalparalysis is contrary to public policy, public good and sound

morality, as it would force the insured to have his legs amputated to

be able to claim on the policy. (Panaton vs. Malayan 2 Court of

Appeals 783)

c. Warranty in a fire insurance policy prohibited storage of oilshaving a flash point of below 300 Fahrenheit. Gasoline is stored. Is

there a policy violation? HELD: The clause is ambiguous. Inordinary parlance oils means lubricants not gasoline. There is

no reason why gasoline could not be expressed clearly in thelanguage public can readily understand. (Qua Chee Gan)

d. An action to recover the amount of PHP 2,000.00 due to death bydrowning where the policy provided for indemnity in the amount

of PHP 1,000.00 to PHP 3,000.00 HELD: The interpretation of the

obscure stipulation in contract must not favor the one who

caused the obscurity. Hence, judgment for additional PHP

2,000.00 was affirmed. (Del Rosario vs. Equitable Insurance and

Casualty Company, 8 SCRA 343)

e. Denial of a claim on the ground that the insured vehicle was aprivate type vehicle on the ground that the policy issued to the

insured was a common carriers liability, Insurance policy whichcovers a public vehicle for hire. HELD: Insurer is liable as it was

aware all along that the vehicle of the insured was a private

vehicle. (Fieldman Insurance vs. Mercedes Vargas vda De Songco,25 SCRA 70)

f. Denial of a claim for benefit due to the death of Flaviano Landichoin a plane crash under the GSIS policy on the ground of non

payment of the premium. HELD: The policy contained a provision

that the application for insurance is authority for GSIS to cause thededuction of premium from the insureds salary. (Landicho vs.

GSIS, 44 SCRA 7)

Other case reference: New Life Enterprises vs. CA, 207 SCRA 669

MARINE RISK NOTE IS NOT AN INSURANCE POLICY Certainly it would be

obtuse for us to even to entertain the idea that the insurance contract

between Malayan and ABB Koppel was actually constituted by the MarineRisk Note alone. (Malayan Insurance Co. vs. Regis Brokerage Corporation

Nov. 23 2007 G.R. No. 172156)

WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT

1. The insured should possess an interest of some kind, susceptible ofpecuniary estimation known as insurable interest. Generally a person has insurable interest in the subject matter insured

when:- He has such a relation or connection with or concern in,

such subject matter that he will derive pecuniary benefitor advantage from its preservation or will suffer

pecuniary loss or damage from its destruction,

termination or injury by the happening of the event insuredagainst.

- It is necessary because its absence renders the contractvoid. This is based on the principle that insurance is a

contract of indemnity. If the insured has no interest, he

will not stand to suffer loss or injury by the happening

of the event insured against.

INSURANCE CONTRACT [Loss covered by the insurance policy; Burden of

proof to prove that same] Any loss or damage happening during the

existence of abnormal conditions (whether physical or otherwise) whichare occasioned by or through in consequence directly or indirectly, of any of

the said occurrences shall be deemed to be loss or damage which is not

covered by the insurance, except to the extent that the insured shall provethe loss or damage, happened independently of the existence of such

abnormal conditions.

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An Insurance contract, being a contract of adhesion, should be so

interpreted as to carry out the purpose for which the parties entered into

the contract which is to insure against risks of loss or damage to the goods.

Limitations of liability should be regarded with extreme jealousy and must

be construed in such a way as to preclude the insurer from noncompliancewith its obligations. (DBP Pool of Accredited Insurance Companies v. Radio

Mindanao Network, Inc. Jan. 27, 2006, G.R. No. 147039)

ETERNAL GARDENS MEMORIAL PARK CORPORATION vs. THE

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY (G.R. No. 166245,

April 9, 2008)

Philamlifes assumption of risk of loss without approving the

application. - The question arises as to whether Philamlife assumed therisk of loss without approving the application.

This question must be answered in the affirmative.

It must be remembered that an insurance contract is a contract of adhesion

which must be construed liberally in favor of the insured and strictly

against the insurer in order to safeguard the latters interest. Thus,in Malayan Insurance Corporation v. Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed inaccordance with the general rule of resolving any ambiguity

therein in favor of the insured, where the contract or policy is

prepared by the insurer.A contract of insurance, being acontract of adhesion, par excellence, any ambiguity therein

should be resolved against the insurer; in other words, it should

be construed liberally in favor of the insured and strictly againstthe insurer. Limitations of liability should be regarded with

extreme jealousy and must be construed in such a way as to

preclude the insurer from noncompliance with its obligations.

In the more recent case ofPhilamcare Health Systems, Inc. v. Court of

Appeals, we reiterated the above ruling, stating that:

When the terms of insurance contract contain limitations on

liability, courts should construe them in such a way as to precludethe insurer from non-compliance with his obligation. Being a

contract of adhesion, the terms of an insurance contract are to be

construed strictly against the party which prepared the contract,

the insurer. By reason of the exclusive control of the insurancecompany over the terms and phraseology of the insurance contract,

ambiguity must be strictly interpreted against the insurer andliberally in favor of the insured, especially to avoid forfeiture.20

GULF RESORTS, INC., vs. PHILIPPINE CHARTER INSURANCE

CORPORATION (G.R. No. 156167 May 16, 2005)

Provisions of insurance policy; no piecemeal construction or

segregation of certain stipulations allowed; all parts should bereflective of clear intent of parties.- The policy cannot be construedpiecemeal. Certain stipulations cannot be segregated and then made to

control; neither do particular words or phrases necessarily determine its

character. Petitioner cannot focus on the earthquake shock endorsement tothe exclusion of the other provisions. All the provisions and riders, taken

and interpreted together, indubitably show the intention of the parties to

extend earthquake shock coverage to the two swimming pools only.

Contract of insurance; payment of premium by the insured, an

important element of the contract; Courts finding that no premium

payments with regard to earthquake shock coverage, except on the twoswimming pools.- A careful examination of the premium recapitulation will

show that it is the clear intent of the parties to extend earthquake shock

coverage only to the two swimming pools. Section 2(1) of the InsuranceCode defines a contract of insurance as an agreement whereby one

undertakes for a consideration to indemnify another against loss, damage

or liability arising from an unknown or contingent event. Thus, aninsurance contract exists where the elements concur.

IN WHAT DOES A PERSON HAVE INSURABLE INTEREST IN (LIFE)

Every person has an insurable interest in the Life and Health of:

1.himself, his spouse and of his children;

2.any person on whom he depends wholly or in fact for educationor support or in whom he has pecuniary interest (Note article 195 of the

Family Code specifying the persons obligated to support each other.

Example pecuniary interest-partners, employees);

3.any person under legal obligation to him for the payment ofmoney, respecting property or services of which death or illness might

delay or prevent performance. Example Mortgagors, Debtors.

4.Any person upon whose life, any estate or interest vested in himdepends (Example Usufructuary X allows Y to receive fruits of the land of

the former as long as he is alive. Y has insurable interest in life of X, because

the death of X will terminate his right and cause him damage. (Section 10)
http://www.lawphil.net/judjuris/juri2008/apr2008/gr_166245_2008.html#fnt20http://www.lawphil.net/judjuris/juri2008/apr2008/gr_166245_2008.html#fnt20http://www.lawphil.net/judjuris/juri2008/apr2008/gr_166245_2008.html#fnt20http://www.lawphil.net/judjuris/juri2008/apr2008/gr_166245_2008.html#fnt20

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WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE

- It exist when there is reasonable ground founded on the relation ofthe parties, either pecuniary or contractual or by blood or by

affinity to expect some benefit from the continuance of life of theinsured;

WHEN MUST INSURABLE INTEREST IN LIFE EXIST

- Insurable interest in life must exist at the time of the effectivityof the policy and need not exist at the time of the death of the

insured as life insurance is not a contract of indemnity. It is meant

to give financial security to the insured or his beneficiaries(Section 19). However, insurable interest of a creditor on the life of

the debtor must exist only at the time of effectivity but also at the

time of the death of the debtor as in this instance it is a contractof indemnity. His interest is capable of exact pecuniary

measurement.

WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONES LIFE

- He has unlimited interest in his own life or that of another personregardless of whether or not the latter has insurable interest.

Provided, that if the beneficiary has no insurable interest, there isno fore or bad faith. But if he takes out a policy on the life of

another and names himself as the beneficiary, he must have an

insurable interest in the life of the insured;

INSURABLE INTEREST The insurable interest of every member of

petitioners health care program in obtaining the health care agreement ishis own health. Under the agreement, petitioner is bound to indemnify anymember who incurs hospital, medical or any other expense asising from

sickness, injury or other stipulated contingency to the extent agreed upon

under the contract. (Philippine Health Care Providers Inc. V. Commissionerof Internal Revenue, Jun. 12 2008 G.R. 167330)

IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS

TAKEN

- The law does not require the consent of the person insured andsuch has been considered as not essential to the validity of the

contract as long as there is insurable interest at the beginning;

IN WHAT DOES A PERSON HAVE INSURABLE INTEREST IN PROPERTY

- A person has insurable interest in property as every interest inproperty, whether real or personal, or any relation thereto, or

liability in respect thereof, of such nature that a contemplatedperil might directly damnify the insured is an insurable

interest(section 13). It may consist of:

(a) An existing interest(b) An inchoate interest founded on an existing interest

(Defined: Interest in real estate which is not a present interest

but which may ripen into a vested interest if not barred,

extinguished, or divested.)

(c)

An expectancy coupled with an existing interest in that out ofwhich the expectancy arises;

Note:

- Expectancy must be founded on an actual right to the thing or a validcontract for it;

- A carrier or depository of any kind has insurable interest in the thingheld by him such to the extent of his liability but not to exceed the

value thereof(Sections 13, 14, and 15);

- But, a mere contingent or expectant interest in anything, notfounded on contract or actual right to the thing is not insurable

as there is no insurable interest(Section 16);

WHO IS BOUND BY A CONTRACT OF INSURANCE The insurance

contract between the insurer and the insured, under Article 1311 of theCivil Code is binding only upon the parties (and their assigns and heirs)

who execute the same.

INCHOATE RIGHT The right to lay claim on the fun is dependent

on the solvency of the insurer and is subject to all other obligations of thecompany arising from its insurance contracts. Thus, the respondents

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interest is merely inchoate. Being a mere expectancy, it has no attribute of

property. At this time, it is nonexistent and may never exist. Hence, it wouldbe premature to make the security deposit answerable for CISCOs present

obligation to Del Monte Motors. (Republic of the Philippines v. Del Monte

Motors, Inc., Oct.9, 2006 G.R. No. 156956)

WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY

- Whether one will derivepecuniary benefit or advantage from itspreservation or will suffer pecuniary loss or damage from its

destruction; (Section 17)

INSURABLE INTEREST IN BANK DEPOSITS

2000 BAR EXAM (VIII - b)Q: BD has bank deposit of half a million pesos.Since the limit of trhe

insurance coverage of the Philippine Deposit Insurance Corp Act ( 3591) isonly one tenth of BDs deposit, he would like some protection for the excess

by taking out an insurance against all risks or contingencies of loss arisingfrom any unsound or unsafe banking practices including unforeseen

adverse effects of the continuing crisis involving the banking and financial

sector in Asia. Does BD have insurable interest within the meaning of theInsurance Code?

A: Yes, BD has insurable interest in his bank deposit. In case of loss

of said deposit, more particularly to the extent of the amount in excess of

the limit covered by the Philippine Deposit Insurance Corporation Act, BD

will be damnified. He will suffer pecuniary loss of P400,000.00, that is, hisbank deposit of half a million pesos minus P100,000.00 which is the

maximum amount recoverable from the PDIC.

MUST THE BENEFICIARY IN PROPERTY HAVE INSURABLE INTERESTON THE PROPERTY INSURED?- YES, as no contract or policy of insurance on property shall be

enforceable. Except for the benefit of some person having

insurable interest in the property insured;

WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST- must exist at the time the insurance takes effect and when the loss

occurs but need not exits in the meantime (Section 19);

COMPARE WITH INSURABLE INTEREST IN LIFE: 2002 BAR EXAM

(N0.XVII)

LIFEPROPERTY

- not necessary can be based on

consanguinity oraffinity

- based on pecuniaryinterest

- only at effectivityexcept that taken by

a creditor in the lifeof the debtor

- exist at the time ofeffectivity and loss

- no limit exist ifbased on debtor

- limited to actualvolume insured

IN RELATION TO THE NEED FOR THE EXISTENCE OF INSURABLE

INTEREST, PLEASE NOTE:

- That a change in interest in any part of a thing insuredaccompanied by a corresponding change in the insurance

suspends the insurance to an equivalent extent until interest in the

thing and interest in the insurance is vested in the same person;

- No claim in insurance contract while it is suspended because it canhappen that the insurable interest will be returned;

CHANGE OF INTEREST IN PROPERTY INSURED (Transfer or Sale ofinsured property) (1994 & 200 Bar Exams)

A change of interest in any part of a thing insuredunaccompanied by a corresponding change of interest in the

insurance suspends the insurance to an equivalent extent, until the

interests in the thing and the interest in the insurance are vested inthe same person. (Sec. 20)

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Exceptions: 1) change of interest after the loss; 2) change of

interest in one or more of several things separately insured; 3)

change of interest by will or succession; and 4) transfer of interest by

a partner, joint owner, or common owner, to another partner, joint

owner or common owner.

1980 Bar Exam:

A insures his house for P 10, 000 commencing January 1, 1952. OnFebruary 15, 1952, A sells the house to B for P15,000 without

endorsing or transferring the fire policy to B. On April 20, 1952, the

house is completely destroyed on account of the accidental fire. CanA or B collect the proceeds of the policy from the insurer? Explain

and give reasons for your answer. (1952, 1959, 1980 Bar)

ANSWER:

Neither A, the seller, nor B, the buyer, can collect under the policy. A

transfer of interest in property without any transfer of interest in the

insurance suspends the latter until the interest in the property and inthe insurance is vested in the same person. A has transferred his

interest in the object of the insurance (the house) to B without atransfer of his interest in the insurance to B. As the interests in the

object and in the insurance are in different persons at the time of the

loss, none can recover under the policy.

WHAT CHANGE IS CONTEMPLATEDAn absolute transfer of the property not life, a lease/mortgage;

EXCEPTIONS TO THE REQUIREMENTS OF INSURABLE INTEREST:

(1) Life, health or accident insurance because they are notcontracts of indemnity and insurable interest is not

required at the time of loss;

(2) A change of interest after occurrence of an injury andresults in loss does not affect the right of the insured to

indemnity;

- After a loss, the liability of the insurer is fixed

(3) A change of interest in one or more several distinct things,separately insured by one policy, does not avoid as to the

others (Section 22);

(4) A change of interest in one or more several distinct things,separately insured by one policy, does not avoid theinsurance as to the insured; (Section 23)

(5) A transfer of interest by one or several partners, jointowners, or owners in common, who are jointly insured tothe others, does not avoid insurance even though it hasbeen agreed that the insurance shall lease upon an

allocation of the thing insured;

Note:

- There must be no stipulation against it otherwise it isavoided;

- Transfer to strangers avoid the policy(6) When notwithstanding a prohibition, the consent of the

insurer is obtained;

(7) When the policy is so framed that it will insure to the benefit of

whomsoever may become the owner during thecontinuance of the risk;

CONTINUATION OF ELEMENTS1. Insurable interest;2. The insured is subject to risk of loss through the destruction or

impairment of that interest by the happening of the designatedrisk;

3. The insurer assumes the risk of loss;4. Such assertion is part of a general scheme to distribute actual loss

among a large group of persons bearing somewhat similar risk;

5. As a consideration for the insurers promise, the insured makes aratable contribution called a premium to the general insurance

fund;

WHAT MAY BE INSURED AGAINST

- Any unknown or contingent event, whether past or future, whichmay damnify a person having insurable interest or create a

liability against him, may be insured against (Section 3);

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Example: Insurance against damage, liability, unknown past event (in

marine insurance insurance is over the vessel against perils of the

sea, lost or not lost), or future event like loss or theft of the object;

- In relation to the insurance so secured, note:1. The consent of the husband is not necessary for the validity of an

insurance policy taken by a Married woman on her life and that

of her children. Under art. 145 of the family code, she can alsoinsure her separate property without the consent of the husband;

2. A minor may take out a contract for life, health and accidentinsurance with any company authorized to do business in thePhilippines, provided it be taken out on his own life and the

beneficiary named is his estate, father, mother, husband, wife,

child, brother or sister. In so doing, the married woman/minor

may exercise all the rights or privileges under the policy;

ButWhat is the effect of the death of the original owner of a policy, which

covers the life of a minor, ahead of the minor all rights, title and interest in

the policy shall automatically vest in the minor unless otherwise providedin the policy;

WHAT CANNOT BE INSURED

- An insurance for or against the drawing of any lottery or for oragainst any chance or ticket in a lottery drawing or prize. Becausegambling results in profit and insurance only seeks to

indemnify the insured against loss (Section 4)

WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE

1. INSURER every person, partnership, association or corporationduly authorized to transact insurance business as provided in the

code may be an insurer. It is the party who agrees to indemnifyanother upon the happening of specified contingency;

2. INSURED party to be indemnified in case of loss (section 6).Anyone except a public enemy (a nation at war with Philippines

and every citizen subject of such nation. Reason: the purpose of

war is to cripple the power and exhaust the resources of the

enemy, and it is inconsistent to destroy its resources then pay it

the value of what has been destroyed) may be insured;

2000 BAR EXAM (VIII - a)

Q: May a member of the MORo Islamic Liberation Front ( MILF ) or

its breakawy group, the Abu Sayaff, be insured with a company licensed to

do business under the Insurance Code of the Philippines? Explain?A: A member of the MILF or the Abu Sayyaf may be insured with a

company licensed to do business under the Insurance Code of the

Philippines. What is prohibited to be insured is a public enemy. A public

enemy is a citizen or national of a country with which the Philippines is atwar. Such member if the MILF or the Abu Sayyaf is not a citizen or national

of another country, but of the Philippines.

WHO MAY INSURE A MOrTGAGED PROPERTY

- Both the mortgagor and the mortgagee may take out separatepolicies with the same or different companies. The mortgagor tothe extent of his property, the mortgagee to the extent of his

credit; (section 8)

INSURANCE INTEREST ON MORTGAGED PROPERTY (2005 BAR EXAM(N0. X - 2- a)

Armando Geagonia v. CA 241 SCRA 154

SC RULING

Condition 3 is what is known as other insurance clause which is a validprovision allowed by the insurance code in order to prevent in an increase

in the moral hazard and to serve as a warranty that no other insurance

exists. Its incorporation in fire policies prevents over insurance and adverts

the perpetration of fraud. Its violation will thus avoid the policy. However,

in order to constitute a violation, the other insurance must be upon the

same subject matter, the same interest therein, and the same risk.Double insurance exists where the same person is insured by

several insurers separately in respect of the same subject and interest.

The court ruled that since the stocks in trade insured with PFICwere mortgaged property, separate insurances covering different insurable

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interests maybe obtained by the mortgagor and mortgagee. The insurable

interests of a mortgagor and mortgagee are separate and distinct, thus no

double insurance exists since the policies of PFIC do not cover the sameinterest as that covered under the policy of Country Bankers Insurance

Corp. The non-disclosure of the policies with PFIC was not fatal toArmandos right to recover on his policy with Country Bankers Insurance

Corp.

WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES

THE PROPERTY MORTGAGED IN HIS OWN NAME BUT MAY THE LOSS

PAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM.

UNLESS THE POLICY PROVIDES OTHERWISE

a. The insurance is still deemed to be upon the interest of themortgagor who does not cease to be a party to the original contract.Hence, if the policy is cancelled, notice must be given to the

mortgagor;

b. Any act of the mortgagor, prior to loss, which would otherwise avoidthe policy or insurance, will have the same effect although theproperty is in the hands of the mortgagee. Hence, if there is a

violation of the policy by the mortgagor, the mortgagee cannot

recover;

c. Any act required to be done by the mortgagor may be performed bythe mortgagee with the same effect if it has been performed by the

mortgagor. Example: If notice of loss is required, the mortgagee maygive it;

d. Upon the occurrence of the loss, the mortgagee is entitled to recoverto the extent of his credit and the balance if any to be paid to the

mortgagor, since such is for both their benefits;e. Upon recovery by the mortgagee, his credit is extinguished;

If on the other hand, (section 9), the insurer assents to the transfer of theinsurance from the mortgagor to the mortgagee, and at the time of his

assent, imposes further qualifications on the assignee, making a new

contract with him, the acts of the mortgagor cannot affect the rights of the

assignee Note the Union Mortgage Clause creates the relation of

insured and insurer between mortgagee and the insurer independent of the

contract of the mortgagor. In such case, any act of the mortgagor can no

longer affect the rights of the mortgagee the insurance contract is now

independent of that with the mortgagor;

WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEEWITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR

a. The mortgagee may collect from the insurer upon the occurrenceof the loss to the extent of his credit;b. Unless otherwise stated, the mortgagor cannot collect the

balance of the proceeds after the mortgagee is paid;

c. The insurer, after payment to the mortgagee, becomessubrogated to the rights of the mortgagee against the mortgagor

and may collect the debt to the extent paid to the mortgagee;

d. The mortgagee after payment cannot collect anymore from themortgagor BUT if he is unable to collect in full from insurer, he

can recover from the mortgagor;

e. The mortgagor is not released from the debt because the insureris subrogated in place of the mortgagee;

3. BENEFICIARY the person who receives the benefits of an insurancepolicy upon maturity;

property insurance yes the insured himself but cant assign theproceeds;

life insurance not required to have insurable interest;

WHO MAY BE BENEFICIARIES IN LIFE INSURANCE

- Anyone, except who are prohibited by law to receive donationsfrom the insured. Note art. 739 of the Civil Code, hence thefollowing cannot be designated as beneficiaries;

1. Those made between persons guilty of adultery orconcubinage at the time of the designation;

2. Those guilty of the same criminal offense in considerationthereof;

2008 BAR EXAM

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On January 1, 2000, Antonio Rivera secured a life insurance from SOS

Insurance Corp. for P1 Million with Gemma Rivera, his adopted daughter, as

the beneficiary. Antonio Rivera died on March 4, 2005 and in the police

investigation, it was ascertained that Gemma Rivera participated as an

accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoidliability by setting up as a defense the participation of Gemma Rivera in the

killing of Antonio Rivera? Discuss with reasons. (4%)

Answer: Section 12. The interest of a beneficiary in a life insurance policyshall be forfeited when the beneficiary is the principal, accomplice, or

accessory in willfully bringing about the death of the insured; in which

event, the nearest relative of the insured shall receive the proceeds of saidinsurance if not otherwise disqualified.Thus, the insurance company must

still pay out the proceeds of the life insurance policy to the nearest qualified

relative of the insured.

3. Those made to a public officer or his wife,descendants/ascendants by reasons of his office;

- A prior conviction for adultery/concubinage is not required, itcan be proven by proponderance of evidence in the same actionnullifying the designation. Note the cases of Insular Life vs. Ebrado,80 SCRA 181, where a common law wife of the insured who is

married could not be named as a beneficiary and SSS vs. Davac, 17SCRA 863, where the insured designated his second wife as a

beneficiary was upheld as the latter was not aware of the first

marriage;- The disqualification does not extend to the children of the adultery

or concubinage in view of the express recognition of the

successional rights of illegitimate children (Art. 287, NCC and Art.

176, Family Code);

MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF

THE INSURED

- It is recognized that the insured may name anyone he choosesexcept those disqualified to receive donations as a beneficiary in

his life insurance, even if he is a stranger and has no insurableinterest in the life of the insured. The designation, however, must

be in GOOD FAITH AND WITHOUT FRAUD OR INTENT TO ENTER

INTO A WAGERING CONTRACT.

Beneficiary in life and property insurance (2005 bar exams)

Philippine American Life Insurance Company v. Pineda (175 SCRA

416)

SC Ruling:Under the law, the beneficiary designated in a life insurance contract cannot

be changed without his or her consent because of the beneficiarys vested

interest in the policy. In this regard, it is worth nothing that the beneficiarydesignation indorsement which forms part of the policy in the name ofRodolfo Dimayuga states that the designation of the beneficiaries is

irrevocable and no right or privilege under the policy may be exercised, or

agreement made with the insurance company to any change in oramendment to the policy without the consent of the said beneficiary.

Accordingly, based on the provisions of the contract and the law applicable,

it is only with the consent of all the beneficiaries that any change or

amendment to the policy concerning the irrevocability of beneficiaries may

be legally and validly effected.

Insurable interest on property

Spouses Nilo Cha v. CA Aug. 18, 1997 2009 bar examsSC RULING:

1. The lessor cannot validly be a beneficiary of the fire insurancepolicy taken by the spouses Cha. It has no insurable interest on the

merchandize insured because it remains with the spouses.

2. The automatic assignment of the policy to the lessor is void forbeing contrary to law and public policy. The proceeds of the fire

insurance policy rightfully belong to the spouses cha.

3. The insurer cannot be compelled to pay the proceeds of the policy tothe lessor who has no insurable interest on the property insured.

CAN THE BENEFICIARY BE CHANGED- The insured shall have the right to change the beneficiary he

designated unless he has expressly waived the right in the policy

(Section 11);

- If he has waived the right, the effect is to make the designation asirrevocable. Note that the designation of the guilty spouse as

irrevocable beneficiary is revocable as the instance of the innocent

spouse in cases of termination of:(1) a subsequent marriage;(2) nullification of marriage;

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(3) annulment of marriage; and(4) legal separation (Art. 34, (4) Family Code

WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE

BENEFICIARY IN A LIFE INSURANCE CONTRACT

The beneficiary has a vested right that cannot be taken awaywithout his consent. In fact should the insured discontinue payment of the

premium, the beneficiary may continue paying. Neither can the insured get

a loan or obtain the cash surrender value of the policy without his consent

(Nario vs. Philamlife, 20 SCRA 434).

Note: where the wife and minor children were named irrevocable

beneficiaries, wife dies, the husband seeks to change the beneficiaries with

the consent of the children. The consent is not valid due to minority.

(Philamlife vs. Pineda, 170 SCRA 416).

2005 BAR EXAM (NO. IX -1)

Q: What are the effects of an irrevocable designation of a beneficiary under

the Insurance Code? Explain. (2%)

A: The irrevocable beneficiary has a vested interest in the policy, including

its incident such as the policy loan and cash surrender value. (Grogorio v.

Sun Life Assurance Company of Canada, 48 Phil. 53 [1925])

2005 BAR EXAM (NO. IX- 2)

Q: Jacob obtained a life insurance policy for P1 Million designating

irrevocably Diwata, a friend, as his beneficiary. Jacob, however, changed his

mind and wants Yob and Jojo, his other friends, to be included asbeneficiaries considering that the proceeds of the policy are sufficient for

the three friends.Can Jacob still add Yob and Jojo as his beneficiaries?

Explain. (2%)

A: The insured cannot add other beneficiaries as this would diminish the

interest of Diwata who is the irrevocably designated beneficiary. The

insured can only do so with the consent of Diwata.WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN

ENDOWMENT POLICY

- His interest is contingent as benefits are to be paid only if theassured dies before the specified period. If the insured outlivesthe period, the benefits are paid to the insured;

WHAT IS THE EFFECT OF FAILURE TO DESIGNATE OR BENEFICIARY ISDISQUALIFIED

- The benefits of the policy shall accrue to the estate of theinsured;

WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED

- If the designation is irrevocable, the legal representatives ofthe beneficiary may recover unless it was stipulated that the

benefits are payable only if living. If designation is

revocable, and no change is made, the benefits passes to the

estate of the insured. The rule holds also if benefits werepayable only if living or if surviving and the beneficiary

dies before the insured;

WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE

INSURANCE WHERE HE WILLFULLY KILLS THE INSURED

- If the killing is willful, the interest is forfeited, if he is theprincipal, an accomplice, or an accessory. The nearest relativeof insured gets the proceeds if not otherwise disqualified

(Section 12). If not willful or felonious, the provision does not

apply;

C O N C E A L M E N T

WHAT IS CONCEALMENT?

- Concealment is a neglect to communicate that which a partyknows and ought to communicate (Section 26);

WHAT IS THE EFFECT OF CONCEALMENT?

- Whether intentional or not, it entitles the injured party to rescind thecontract of insurance (Section 27).Examples:

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(1) The insured does not disclose sickness but dies of another cause.There is concealment because it is material to a determination

of the assumption of risk by the insurer;

(2) The father of the insured obtained an insurance policy over hisdaughter, but did not disclose that she was a mongoloid child,the child dies of influenza, the concealment relieves the insurer

of liability (Grepalife vs. CA 89 SCRA 543)

BASIS OF PROVISIONS ON CONCEALMENT/REPRESENTATION

- Fundamental characteristic of a contract of insurance that it is oneof perfect/utmost good faith;

2001 BAR EXAM (N0.XVI): A applied for a non-medical life insurance. The

insured did not inform the insurer that one week prior to his application forinsurance, he was examined and confined at St. Lukes hospital where he

was diagnosed for lung cancer. The insured soon thereafter died in a plane

crash. Is the insurer liable considering that the fact concealed had no

bearing with the cause of death of the insured? Why?A: No. The concealed fact is material to the approval and issuance

of the insurance policy. It is well settled that the insured need not die of the

disease he failed to disclose to the insurer. It is sufficient that his non-

disclosure misled the insurer in forming his estimate of the risks of theproposed insurance policy or in making inquiries.

WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED?

- The party claiming existence of concealment must prove that therewas knowledge on the part of the party charged with concealment;

AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT

HAVE KNOWLEDGE OF THE FACT CONCEALED?

- Generally, a party must have knowledge of the fact concealed atthe time of the effectivity of the policy. Note that even if a party did

not know of the existence at the rime of application but before its

effectivity, there is concealment;

- Information acquired after effectivity is not concealment and doesnot constitute ground to rescind the policy, as after the policy is

issued, information subsequently acquired is no longer material as

it will not affect or influence the party to enter into contract.

However, in case of the reinstatement of a lapsed policy, facts

known after effectivity but before reinstatement must be

disclosed;

HOW IS THE MATERIALITY OF THE CONCEALMENT ORREPRESENTATION DETERMINED?

Materiality is determined not by the event, but solely by the

probable and reasonable influence of the facts upon the party to whom the

communication is due, in forming his estimate of the disadvantages of the

proposed contract or in making his inquiries (Section 31);

WHAT IS THE TEST OF MATERIALITY?

The test of materiality is whether knowledge of the true facts could

have influence a prudent insurer in determining whether to accept the risk

or in fixing the premiums;

MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT

CONCERNED AND THE CAUSE OF THE LOSS? Not necessary

Concealment need not be material, be of facts which about orcontribute to or are connected of the insureds loss. It is immaterial that

there is no causal relationship between the fact concealed and the loss

sustained. It is sufficient that the non-revelation has misled the insurer informing its estimate of disadvantage of fixing the premium.

Examples: Insured concealed kidney disease and enlarged liver later he

died of thrombosis, is the insurer liable? No, since the fact concealed was

material though the insured did not die therefrom (Henson vs. Philam 50

OG 73428). Insured had concealed that he had kidney disease. He dies in

plane crash. The insurer is not liable (Sunlife vs. CA, 245 SCRA 269);

WHAT FACTS MUST BE COMMUNICATED?

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Each party to an insurance contract is bound to communicate to the other

all facts that meet the following requisites:

(a) Such fact that must be within his knowledge asconcealment requires knowledge of the fact concealed by the

party charged with concealment;(b) Fact/s must be material to the contract it must be of such

nature that had the insurer known of it, it would not have

accepted the risk or demanded a higher premium;(c) That the other party had no means of ascertaining such

fact/s;

(d) That the party with a duty to communicate makes nowarranty (Section 28) as the existence of a warranty make

the requirement to disclose superfluous but an intentional

fraudulent omission on the part of the one insured to

communicate information on a matter proving or tending toprove falsity of a warranty entitles the insurer to rescind

(Section 29).

WHAT MATTER NEED NOT BE COMMUNICATED?

Except in answer to the inquiries of the other:

(1) Those which the other knows as the insurer cannot say that ithas been deceived or misled;

Example: Insured discloses that he has tuberculosis to he agent of

the insurer, who in turn omits to state the same in the application of

the insured was deemed knowledge of the insurer (Insular LifeAssurance Co. vs. Feliciano, 74 Phil 468). Insurer had surveyed the

location and surrounding area of a building that it is to be insured

against fire, an omission to state that there are neighboring buildings

will not avoid policy;

(2) Those which in the exercise of ordinary care, the other ought toknow, and of which, the former has no reason to suppose him to be

ignorant. The facts that the other ought to know as per section 32

are:

(3) Those of which the other waives communication. A waiver takesplace either, by the terms of the insurance or by he neglect to make

inquiries as to such facts where they are distinctly implied in other

facts of which information is communicated (section 33).

(4) Those which prove or tend to prove the existence of a risk excludedby a warranty, and which are not otherwise material.(5) Those which relate to the risk exempted from the policy, and which

are not otherwise material (section 30).

SUNLIFE ASSURANCE CO. OF CANADA VS. CA, JUNE 22, 1995

(1996, 1997, and 2001 Bar Exams)

Robert Bacani was issued life insurance non-medical policy for

P100,000.00 with his mother as beneficiary. In his application, he

concealed his confinement at the Lung Center of the Philippines for certainillness. He died of a plane crash. The insurance company refused to pay for

breach of the insurance contract.RTC and CA granted the claim of thebeneficiary because the concealed facts were not material or irrelevant to

the cause of death.

SC RULING:

The SC reversed the ruling and held that the information which theinsured failed to disclose was material and relevant to the approval and

issuance of the policy. The facts concealed would have affected the

insurers action on the application either by charging a higher rate of

premium or rejecting the same. The insured need not die of the disease he

concealed. It is sufficient that his non-disclosure misled the insurer informing his estimate of the risk involved or in making inquiries. The

contract of insurance can be rescinded by reason of concealment and this

has to be exercised within the two year contestability period.

R E P R E S E N T A T I O N

WHAT IS REPRESENTATION?

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Oral or written statement of a fact or a condition affecting the risk

made by the insured to the insurance company, tending to induce the

insurer to take the risk (Section 36);

WHEN MAY REPRESENTATION BE MADE

Since it is an inducement to entering a contract it must ordinarily

be made at the same time as or before the insurance of the policy (section37). Note that it can also be made after the issuance of the policy when the

purpose thereof is to induce the insurer to modify an existing insurance

contract as the provisions also apply to a modification (Same with

concealment)

HOW SHOULD REPRESENTATION BE CONSTRUED

The language of a representation is to be interpreted by the same

rules as the language of the contracts in general (section 38). Hence, it need

not be literally true and correct/accurate in every respect, rather, it is

sufficient if it is substantially or materially true. In case of a promissoryrepresentation, it is sufficient if it is substantially complied with;

WHAT ARE THE FORMS AND KINDS OF REPRESENTATION

Representations may be Oral or Written and can either be:

(a) Affirmative which is an affirmation of a fact existing whenthe contract begins;

(b) Promissory which is a statement by the insured concerningwhat is to happen during the term of the insurance;

IS A REPRESENTATION PART OF THE CONTRACT

No, it cannot qualify as an express provision in a contract (it is a

collateral inducement to the contract but it may qualify an implied

warranty (section 40);

CAN A REPRESENTATION BE WITHDRAWN OR ALTERED

Yes, as long as the insurance has not yet been effected and the

insurer has not yet been induced to issue the policy. If withdrawn or alteredafterwards, the contract can be rescinded as the insurer has already been

led to issue the policy (section 41);

TO WHAT DATE DOES A REPRESENTATION REFER

It must be presumed to refer to the date on which the contract goesinto effect (section 42);

Note: There is no false representation if it is true at the t ime the

contract takes effect although false at the time it is made;

WHEN IS A REPRESENTATION SAID TO BE FALSE

When the facts fail to correspond with its assertions or stipulations

(Section 44);

MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HE HAS

NO PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROMOTHERS?

When a person has no personal knowledge of facts he may or

may not communicate such information to the insurer. If he doescommunicate, he is not responsible for its truth (section 43). Hence, there

can be no misrepresentation;

WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROMA 3RD PERSON

When the information material to the transaction was acquired by

an agent of the insured, as knowledge of the agent is also knowledge of the

principal;

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WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL

POINT?

If it is false on material point, whether affirmative or promissory the injured party is entitled to rescind the contract from the time the

representation becomes false. However, the right to rescind is consideredwaived by the acceptance of premium payments despite knowledge of the

ground to rescind (section 45);

Examples:

(a) Insurer was aware of the lack of the extinguishersrequired by the policy. But there is no waiver if the

insurer had no knowledge of the ground at the time of the

acceptance of the premium;

(b) Unauthorized driver (Strokes vs. Malayan, 127 SCRA 766)HOW IS MATERIALITY DETERMINED?

The same as concealment (Section 46) probable and reasonableinfluence of the facts upon the party to whom the representation is made in

forming his estimate of the advantage/disadvantages of the contract or I

making inquiries;

WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED (SEC

48)

The right to rescind must be exercised previous to thecommencement of an action on the contract (section 48). Note the case of

Tan Chay Hing vs. West Coast Life Insurance Co., 51 Phil 80, where an insurer

interposed the defense in an action to claim the proceeds that the contract

is null and void. Section 48 was held to apply only when there is a contract

to rescind.

It is also qualified by 2nd paragraph of section 48 whichprovides that after a policy of life insurance payable on the death of the

insured shall have been in force during the lifetime of the insured for a

period of 2 years from the date of issue or its last reinstatement, the insurer

cannot prove that the policy is void ab initio or is subject to rescission by

reason of a fraudulent concealment or misrepresentation of the insured or

his agent(known as the incontestability clause);

WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITYCLAUSE

(a) On the part of the insurer an insurer has/should have areasonable opportunity to investigate the statements which

are made by the applicant an that after a definite period, it

should no longer be permitted to question its validity;

(b) On part of the insured its object is to give the greatestpossible assurance that the beneficiaries would receivepayment of the proceeds without question as to validity or the

policy;

REQUISITES OF INCONTESTABILITY CLAUSE

The requisites are:

(1) It is a life insurance policy;(2) It is payable on the death of the insured;(3) It has been in force during the lifetime of the insured for at

least two years from date of issue/or last reinstatement;

Tan vs. CA, 174 SCRA 403 during the lifetime of the insured meansthat the policy is no longer in force if the insured dies. Facts: Philam issued

policy on November 6, 1973. On April 26, 1975 the insured died. The

beneficiaries claimed but the insurer denied the claim on September 11,1975 and rescinded the policy on the ground of misrepresentation and

concealment. Held: Insurer has two years from date of issue/reinstatement

within which to contest the policy whether or not the insured still lives

within the period;

WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN

AFTER THE LAPSE OF 2 YEARS?

(1) non-payment of premiums;(2) lack of insurable interest;(3) that the cause of death was excepted or not covered by the

terms of the policy;

(4) that the fraud was of a particular vicious type such as:

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a. policy was taken in furtherance of a scheme to murder theinsured;

b. where the insured substituted another for the medicalexamination;

c. where the beneficiary feloniously killed the insured;(5) violation of a condition in the policy relating to military or

naval service in time of war;

(6) the necessary notice or proof of death was not given;(7) action is not brought within time specified in the policy, whichin no case should be less than 1 year as per section 63;

WHAT ARE THE EFFECTS OF INCONTESTABILITY?

The insurer can no longer escape liability, tender the policy or be

allowed to prove that the policy is void ab initio or may be rescinded by

reason of concealment or misrepresentation by the agent of the insured orthe insured;

DISTINGUISH CONCEALMENT FROM REPRESENTATION

Concealment is the neglect of one party to communicate to the

other material facts. The information he gives in compliance with his duty

to reveal information is representation. Representation therefore is thecommunication required to comply with the prohibition against

concealment;

Concealment is the passive and misrepresentation is the active

form of the same bad faith;

CONCEALMENT AND REPRESENTATION COMPARED

1. In concealment the insured withholds information of materialfacts, while in representation the insured makes erroneous

statements;2. In concealment and misrepresentation both give the insurer the

right to rescind the contract of insurance;

3. The materiality of concealment and representation aredetermined by the same rules;

4. Whether the concealment or representation is intentional or not,the injured party can rescind;

5. Since insurance contracts are of utmost good faith the insurer isalso covered by the rules;

P O L I C Y

DEFINE POLICY

It is the written instrument in which a contract of insurance is set

forth (Section 49.);

HOW IS IT CONSTRUED, WHAT IF THE INSURED DOES NOTUNDERSTAND THE CONTENTS OF THE POLICY?

Generally in favor of the insured and against the insurer. The

burden of proving that the terms of the policy have been explained is uponthe party seeking to enforce it. The claim of the beneficiary that since the

insured was illiterate and spoke Chinese only, she could not be held guilty

of concealment because the application and policy was in English (Tang vs.

CA, 90 SCRA 236);

FORM OF THE POLICY

It shall be printed and may contain blank spaces and any word,phrase, clause or mark, sign, symbol, signature, or number necessary to

complete it shall be written in the blank spaces (Section 50). If there are

riders, clauses, warranties or endorsements purporting to be part of thecontract of insurance and which are pasted or attached to the policy is not

binding on the insured unless the descriptive title of the same is alsomentioned and written on the blank spaces provided in the policy. Note: if

pasted or attached to the original policy at the time it was issued thesignature of the insured is not necessary to make it binding. If after the

original policy is issued, it must be counter-signed by the insured unless

applied for by the insured;

No rider, clauses, or warranties, or endorsements shall be attached,

printed or stamped on the policy unless the form of such application has

been approved by the insurance commissioner;

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Riders are forms attached to the policy when the company finds itnecessary to alter or amend the applicants answer to any question in the

application;

Clauses are forms containing additional stipulations;

Warranties are written statement/stipulations inserted on the face of the

contract or incorporated by proper words or reference where the insuredcontracts as to the existence of facts, circumstances or conditions the

truth of which are essential to the validity of the contract;

Endorsements are agreements not contained but may be written or

attached to policy to change or modify a part thereof;

WHAT MUST A POLICY SPECIFY?

A policy must specify:

(1) The parties whom the contract is made;(2) The amount to be insured except in open or running policies;(3) The premium, or if the premium is to be determined at the

termination of the contract, a statement of the basis and ratesupon which the final premium is to be determined;

(4) The property or life insured;(5) The interest of the insured in the property insured, if not the

absolute owner;(6) The risks insured against;(7) The period during which the insurance is to continue (Section

51);

FGU INSURANCE CORPORATION vs.

CA ( G.R. No. 137775. March 31, 2005)

Fortuitous event; Definition. Caso fortuito orforce majeure (which in law

are identical insofar as they exempt an obligor from liability) by definition,

are extraordinary events not foreseeable or avoidable, events that could not

be foreseen, or which though foreseen, were inevitable. It is therefore not

enough that the event should not have been foreseen or anticipated, as is

commonly believed but it must be one impossible to foresee or to avoid.

The fortuitous event should be the proximate and only cause of the loss;

While the loss of the cargoes was admittedly caused by the

typhoon Sisang, a natural disaster, ANCO could not escape liability torespondent SMC. The records clearly show the failure of petitioners

representatives to exercise the extraordinary degree of diligence mandated

by law. To be exempted from responsibility, the natural disaster should

have been the proximate and only cause of the loss. There must have beenno contributory negligence on the part of the common carrier. As held in

the case ofLimpangco Sons v. Yangco Steamship Co.:

. Carelessness and negligence of the insured or his agents

constitute no defense on the part of the insurer.

One of the purposes for taking out insurance is to protect the insured

against the consequences of his own negligence and that of his agents. Thus,

it is a basic rule in insurance that the carelessness and negligence of the

insured or his agents constitute no defense on the part of the insurer.When the insureds negligence is gross as to constitute a willful

act, the insurer must be exonerated.- The question now is whether thereis a certain degree of negligence on the part of the insured or his agents that

will deprive him the right to recover under the insurance contract. We say

there is. However, to what extent such negligence must go in order toexonerate the insurer from liability must be evaluated in light of the

circumstances surrounding each case. When evidence show that the

insureds negligence or recklessness is so gross as to be sufficient to

constitute a willful act, the insurer must be exonerated.

The United States Supreme Court has made a distinction between ordinary

negligence and gross negligence or negligence amounting to misconductand its effect on the insureds right to recover under the insurance contract.

According to the Court, while mistake and negligence of the master or crew

are incident to navigation and constitute a part of the perils that the insureris obliged to incur, such negligence or recklessness must not be of such

gross character as to amount to misconduct or wrongful acts; otherwise,

such negligence shall release the insurer from liability under the insurancecontract.

WHAT ARE COVER NOTES?

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It is a written memorandum of the most important terms of a

preliminary contract of insurance intended to give protection pending

investigation by the insurer of the risk or until the insurance of the formal

policy (Section 52). It is also known as binding slip or receipt or binder;

EFFECTIVITY OF A COVER NOTE

The effectivity of a cover note is 60 days as within such period, a

policy shall be issued including in its terms the identical assurance found

under the cover rate and the premium therefore. It may however, beextended beyond 60 days and with the written approval of the Insurance

Commissioner if he determines that it does not violate the Insurance Code;

NOTE THE FOLLOWING RULES HAVE BEEN PROMULGATED BY THE

INSURANCE COMMISSIONER:

(1) A cover note is valid for 60 days whether or not a premium ispaid but may be cancelled by either party upon at least 7 day

notice to the other party;

(2) If the other note is not cancelled, a regular policy must beissued within 60 days from the date of issue of the cover note

including within its terms the identical insurance;

(3) It may be extended with the written approval of thecommissioner but may be dispensed with by a certification of

the President, Vice-President or General Manager of theinsurer that the risks involved and the extension do not violate

the code;

(4) Insurance companies may impose a deposit premiumequivalent to at least 25% of the estimated premium but in no

case less than Php500.00;

WHEN WILL A COVER NOTE GIVE ADEQUATE INSURANCE

PROTECTION?

It gives adequate insurance protection when it is a preliminary

contract ofpresent insurance and not a mere agreement to insure a future

time, as on acceptance of the application or issuance/delivery of the policy.

(44 CJS 958)

Example:

(1) Agent issued a provisional policy acknowledging receipt ofpremiums and stating that the insurance shall be effectiveupon approval and issuance of the policy by the head office.

There is no protection as it is a mere acknowledgement of thepayment of premiums as the effectivity of the insurance is

expressly provided (Lim vs. Sunlife, 41 Phil 265);(2) In life insurance, a binding slip does not insure by itself as it

was stated that it was subject to the approval of the insurer

and the same was subsequently disapproved (Grepalife vs. CA,

89 SCRA 546);

IS PAYMENT OF A PREMIUM PAYMENT FOR THE COVER NOTENECESSARY TO BE PROTECTED AGAINST RISK INSURED AGAINST?

Cover note held to be binding despite the absence of a premium

payment for its issuance. No separate premiums are intended or required tobe paid on a cover note because they do not contain particulars of the

property insured that would serve as the basis for the computation ofpremiums such being the case no premium can be fixed. The cover notes

should not be treated as a separate policy but should be integrated in theregular policy subsequently issued so that premiums on the regular policy

should include that for the cover note (Pacific Timber vs. CA, 112 SCRA

199);

2009 BAR EXAM (IV)

Antarctica Life Assurance Corporation (ALAC) publicly offered aspecially designed insurance policy covering persons between the ages of

50 to 75 who may be afflicted with serious and debilitating illnesses.Quirico applied for insurance coverage, stating that he was already 80 years

old. Nonetheless, ALAC approved his application.Quirico then requested

ALAC for the issuance of a cover note while he was trying to raise funds to

pay the insurance premium. ALAC granted the request. Ten days after hereceived the cover note, Quirico had a heart seizure and had to be

hospitalized. He then filed a claim on the policy.

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a. Can ALAC validly deny the claim on the ground that theinsurance coverage, as publicly offered, was available only to

persons 50 to 75 years of age? Why or why not? (2%)

b. Did ALACs issuance of a cover note result in the perfectionof an insurance contract between Quirico and ALAC? Explain. (3%)

Answer:

a. no. there was no concealment on the part of quirico as to hisage.

b. yes, one of the exception of the cash and carry rule is in life

insurance when the grace period applies. in the case at bar, the

issuance of the cover note shows that the insurer granted a grace

period.

WHOSE INTEREST IS INSURED

(1) The insurance proceeds shall be applied exclusively to the properinterest of the person in whose name or for whose benefit it is

made unless otherwise specified in the policy (Section 53).

Example:

(a) In the case of Del Val vs. Del Val, 29 Phil 534, thedesignation of a sister as a sole beneficiary in life insurance

cannot be defeated by the contention of the plaintiff that theproceeds belong to the estate of the insured was disregarded

as insurance is to be governed by special law, not by the law

covering donations or succession;

(b) In the case ofBonifacio Bros. vs. Mara, G.R. No. 20853, 29May 1967, action to recover cost of repairs and labor to a

motor vehicle where the policy states loss is payable to H.S.

Reyes, the mortgagee of the vehicle who had no knowledge of

the fact that Mara had it repaired with Bonifacio Bros., where

the court ruled that H.S. Reyes is the one entitled to theproceeds because a policy of insurance is a separate and

independent contract between the insured and the insurer,

and that third persons have no right to the proceeds of theinsurance.

MAY A 3RD PERSON SUE THE INSURER No, in general rule unless there is

stipulation. Unless otherwise specified in the policy, a 3RD person may sue

if:

(a) The insurance contract contain stipulation in favor of a 3 RDperson, the latter though not a party may sue to enforce before thecontract is revoked by the parties;

Example: In case ofCoquia vs. Fieldmens Insurance Co. 26 SCRA 179 ,

the insurance company undertook to indemnify any authorizeddriver who was driving the motor vehicle insured. Coquia, while

driving the insured motor vehicle met an accident and died. His

heirs were allowed to sue the insurer, the policy being considered in

the nature of a contractpour autruiand therefore the enforcement

thereof may be demanded by a 3rd party whose benefit it was made;

(b) The insurance contract provides for indemnity against liabilityto 3RD persons.

Example: In the case ofGuingon vs. Del Monte, 20 SCRA 1043, the

insured procured insurance that would indemnify him against any

and all sums, which he may be legally liable to pay in respect to the

death or bodily injury to any person. A jeepney covered by theinsurance had bumped Guingon and had caused his death. The

insurance was held to be one for indemnity for liability to third

persons (Third Party Liability), and therefore, such third person isentitled to sue the insurer. The test to determine whether a 3rd

person may directly sue the insurer of the wrongdoer is:if the

contract provides indemnity against liability to 3RD persons, then the

latter to whom the insured is liable may directly sue the insurer, onthe other hand, if the insurance if for the indemnity against actual

loss or payment then the 3rd person cannot sue the insurer

recourse is against the insured alone.

(2) If the contract is executed with an agent or trustee as theinsured, the fact that his principal or beneficiary is the realparty in interest may be indicated by describing the insured as

the agent/trustee or by general words in the policy (Section

54). If not indicated, it is as if the insurance is the taken out by

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the agent/trustee alone, consequently the principal has no

right against the insurer;

(3) If a partner or part owner effects insurance, it is necessary thatthe terms of the policy should be such as are applicable to thejoint or common interest so that it may be applicable to the

interest of his co-partners/owners (Section 55). Consequently,

the policy must state that the interest of all is insured, if not, itis only the interest of the one getting the policy that is insured;

(4) When the description of the insured in the policy is so generalthat it may comprehend any person or any class of persons,

only he who can show that it was intended to include him can

claim the benefit of the policy (Section 56).

(5) When a policy is so framed that it will inure to the benefit ofwhomsoever, during the continuance of the risk may become

the owner of the interest insured (Section 57). The proceeds

become payable to who may be the owner at the time the lossor injury occurs. This is an exception to section 20.

(6) The mere transfer of a thing insured does not transfer thepolicy but suspends it until the same person becomes the

owner of both the policy and the thing insured (Section 58).

Note the exceptions to this rule as found in sections 20-24 and57;

WHAT ARE KINDS OF INSURANCE POLICIES

The kinds of policies are (1) Open, (2) Valued, or (3) Running(Section 59);

An Open Policy is one in which the value of the thing insured isnot agreed upon, but is left to be ascertained in case of loss

(Section 60). What is mentioned, as the amount is not the valueof the property but merely the maximum limit of the insurers

liability. In case of loss, the insurer only pays the actual cash

value at the time of loss;

A Valued Policy is one, which expresses on its face that thething insured shall be valued at a specified sum (Section 61).

The valuation of the property insured is conclusive between theparties. In the absence of fraud or mistake, such value will be

paid in case of a total loss;

A Running Policy (Floating Policy) is one which contemplatessuccessive insurances and which provides that the object of the

policy may be from time to time defined especially as to the

subjects of insurance, by additional statements or indorsements

(Section 62). This is also known as a Floating Policy usually

issued to provide indemnity for property, which cannot becovered by specific insurance because of a frequent change in

location and quantity.

Example: Insurance procured by a retail establishment to cover its

inventory that fluctuates in quantity, or is located in several

areas;

VALUED POLICY DISTINGUISHED FROM AN OPEN POLICY

(1) In a valued policy, proof of value of the thing after the loss isnot necessary. In an open policy, the insured must prove the

value of the thing insured;

(2) In a valued policy, the parties have conclusively stipulatedthat the property insured is valued at a specified sum. In an

open policy, the value is not agreed but left to be ascertainedupon loss;Note: this does not violate the principle that a contract of

insurance is a contract of indemnity as long as the valuation is

reasonable and is bonafide).

OPEN AND VALUED POLICIES

PROBLEM

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Suppose A constructed a house in 1990 at a cost of P

200,000.00 which he insured against fire to the said amount. The

policy for P 200,000.00 was renewed every year. In 1995, when the

said house was already P 400,000.00, of the house was burned or

destroyed by fire. How much can he recover from the insurer?ANSWER:

It depends. If the policy is a valued policy, A can recover only

P 50,000.00. If a policy is an open policy, A can recover his actual lossof P 100,000.00.

CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR

LIMITATIONS ON THE PERIOD OF TIME TO BRING AN ACTION

Yes, provided the period agreed upon should not be less than one

year (Section 63). If less than one year, the agreement is void. The periodso agreed shall be considered as having commenced from the time the

cause of action accrues. Usually, the cause of action accrues from the date

of the insurers rejection of the claim of the beneficiary or of the insured

since before rejection there is no necessity to bring suit. When no periodis stipulated or if the stipulation is void, the period is within 10 years

under article 1144, New Civil Code, it being a written contract (Eagle Star

vs. Chia Yu 96 Phil 696, ACCFA vs. Alpha Insurance, 24 SCRA 151). If the

insured asks for a reconsideration of the denial, the period is still

counted from the time the claim is denied at the first instance not

reconsideration - as it gives the insured a scheme or devise to waste timeuntil evidence that may be considered against him can be destroyed (Sun

Life Office Ltd. Vs. CAR, 195 SCRA 193). The period does not run if action is

brought against an agent of the insurer;

WHAT IS THE PRESCRIPTIVE PERIOD OF MOTOR VEHICLE INSURANCE

One year from denial of the claim not date of accident(Summit

Guaranty vs. De Guzman, 15 SCRA 389);

WHERE IS THE ACTION FILED

The action may be filed in the following:

(1) Courts;

(2) Insurance Commissioner, who has concurrent jurisdictionwith courts for claims not exceeding Php100,000.00;

(3) POEA/DOLE have the power to compel a surety to make goodon a solidary undertaking in the same proceeding where the

liability of the principal obligor is determined.Note that the claim becomes action upon filing with the court;

CANCELLATION OF THE POLICY

If policy other than life shall be cancelled by the insurer except

upon prior notice thereof to the insured. No notice of cancellation

shall be effective if not based on the occurrence, after effective date ofone or more grounds: (Section 64)

(1) Non payment of premium;(2) Conviction of a crime arising out of acts increasing the hazard

insured against

(3) Discovery of material representation;(4) Discovery of willful or reckless acts or omissions increasing

the hazard insured against;

(5) Physical changes in the property insured which the result inthe property being uninsurable;

(6) Determination by the insurance commissioner thatcontinuation of the policy would place the insurer in violation

of the code:

FORM OF NOTICE OF CANCELLATION

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It must be in writing, mailed or delivered to the name insured at

the address shown in the policy which shall state:

(1) The grounds relied upon as per section 64, and;(2) That upon written request of the named insured, the insurer

will furnish the facts on which cancellation is based (Section65).

Notes:

(1) A fire insurance policy is cancelled on October 15, 1981. Theinsurers clerk allegedly got notice of cancellation by mail but

there was no proof that it was actually mailed and received.

Insurer relies on the presumption of regularity. Held:Considering the strict language of the law that no policy can be

cancelled without prior notice it behooved on the insurer to

make sure that cancellation was actually sent and received bythe insured (Malayan vs. Arnaldo, 156 SCRA 762);

(2) A insured his building against fire and made the loss payableto mortgagee. Upon cancellation notice was sent to the

mortgagee. Held: There was no valid notice of cancellation.The notice is personal to the insured and not to any

unauthorized person (Saura Import Export vs. Philippine

International Surety Co., Inc., 8 SCRA 143);

IS THE INSURED HAVE THE RIGHT TO RENEW HIS POLCY

Yes, in insurance other than life, the named insured, may renew

the policy upon payment of the premium due on the effective date of the

renewal, if, he has not been given notice by the insurer of the intention

not to renew or to condition renewal upon reduction of limits orelimination of coverages by mail or delivery at leastforty five days in

advance of the end of the policy;

W A R R A N T I E S

Defined

- It is a statement or promise stated in the policy or incorporatedtherein by reference, whereby the insured expressly or impliedly

(Section 67) contracts as to the past, present or future (Section 68)

existence of certain facts, conditions or circumstances the literal

truth of which is essential to the validity of the contract;

FORM

No particular form of words is necessary to create a warranty

(Section 69). What is essential is what the parties intend a statement to beand if so intended as a warranty it must be included as part of the contract;

Note:

(1) Whether a warranty is constituted or not depends uponthe intention of the parties, the nature of the contract, or

the words used thereto;

(2) In case of doubt, the statement is presumed to be arepresentation not a warranty;

WHAT ARE THE KINDS OF WARRANTIES

(1) Affirmative those that relate to matters that exist at orbefore the issuance of the policy;

(2) Promissory those where the insured promises orundertakes that certain matters shall exist or will be done orwill be omitted after the policy takes effect. It is a statement in

the policy, which imparts that it is intended to do or not to do a

thing which materially affects the risk, is a warranty that suchact or omission shall take place (Section 72);

Note that unless the contrary intention appears, the courts will

presume that the warranty is merely an affirmative warranty.

(3) Express a statement in a policy of a matter relating to theperson or thing insured or to the risk as a fact (Section 71) and

where the assertion or promise is clearly set forth in the policyor incorporated therein by reference. They can be affirmative

or promissory warranties;

An express warranty made at or before the execution of

the policy should be contained (a) in the policy itself(b) in

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another instrument signed by the insured and referred to in

the policy as making a part of it (Section 70). This includes a

rider it is a part of the policy, it need not be signed unless the

rider was issued after the original policy took effect;

(4) Implied where the assertion or promise is not expressly setforth in the policy but because of the general tenor of theterms of the policy or from the very nature of the insurance

contract, a warranty is necessarily inferred or understood.Note that the law only provides for implied warranties in

contracts of marine insurance. See section 113

(seaworthiness) and 126 (deviation);

EFFECT OF VIOLATION OF A WARRANTY

The violation of a material warranty, or other material provision of

the policy, on the part of either party thereto, entitles the other to rescind

(Section 74) Note that the insured can exercise the right also when the

insurer violates a warranty, like when it refuses to grant a loan on the

policy. Butas far as the insured, Note also that:

(1) While a policy may declare that a violation of a specifiedprovisions thereof shall avoid it, otherwise the breach of animmaterial provision does not avoid the policy (Section 75).

Meaning ordinarily a breach of an immaterial provision

does not avoid a policy, however, if stipulated that anybreach avoids the policy, the policy is avoided;

(2) A breach of a warranty without fraud, merely exonerates aninsurer from the time it occurs, or where it is broken at its

inception, prevents the policy from attaching to the risk(Section 76). Meaning that if the breach is without fraud

the policy is avoided only from the time of the breach it is still

effective. Consequently, the insured is entitled to a pro-ratereturn of the premium paid under section 79 (b) or all

premiums, if the breach occurs at the inception of the contract,

as such is void ab initio and had never become binding;

Note that a causal connection between the violation of the warranty is not

necessary So, even if the violation did act contribute in the loss the other

party may still rescind.

Example: A insured building against fire. A warranty stated that nohazardous goods should be stored. A stored fireworks. The building was

burned and the fireworks were discovered stored in the area not affectedby the fire. The insurer was not held liable as the storage had increased the

risk(Young vs. Midland Textiles Ins. 30 Phil 617);

THE NON PERFORMANCE OF A PROMISSORY WARRANTY DOES NOT

AVOID THE POLICY WHEN BEFORE THE ARRIVAL OF THE TIME FORPERFORMANCE (Section 73)

(1) The loss insured against happens;(2) The performance becomes unlawful at the place of the

contract;

(3) The performance becomes impossible;DISTINGUISHING IT FROM REPRESENTATIONS

WARRANTY REPRESENTATION

- A warranty is part ofthe contract;

-

A warranty isexpressly set forth in

the policy or

incorporated therein

by reference;

- A warranty muststrictly and literally

performed;

-Representation ismerely a collateral

inducement thereto;-A Representation mybe oral or written in

another statement;

- Representation mustbe substantially true;

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- A warranty ispresumed material;

- A breach of warrantyis a breach of the

contract itself

- A representationmust be shown to be

so;

- (mis)representationis a ground to rescind

the contract;

P R E M I U M

DEFINED

The agreed price for assuming and carrying the risk;

WHEN IS THE INSURER ENTITLED TO A PREMIUM?

The insurer is entitled to the payment of a 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 is

paid except in:

(1) In case of life or industrial life (life insurance policy where thepremium is payable monthly or oftener) whenever the grace

period applies (Section 77);(2) When the insurer makes a written acknowledgement of the

receipt of premium, such is conclusive evidence of the

payment of the premium to make it binding notwithstandingany stipulation therein that it shall not be binding until the

premium is paid (Section 78) HENCE, the effect of an

acknowledgementin a policy or contract of insurance of the

receipt of the premium is that it is conclusive evidence ofpayment so far as to make the policy binding. However, it is

conclusive only to make the policy binding and not for the

purpose of collecting premium, and;(3) Where the obligee has accepted the bond or suretyship

contract in which case such bond or suretyship contract

becomes valid and enforceable irrespective of whether or not

the premium has been paid by the obligor to the surety

(Section 177);

EXCEPTIONS TO SECTION 77:

UCPB GENERAL INSURANCE CO., INC. vs.MASAGANA TELAMART, INC.(G.R. No. 137172 April 4, 2001)

1. In case of life or industrial life insurance, when the grace periodsapplies; (Sec. 77)

2. When the insurer makes a written acknowledgment of the receiptpremium; (Sec. 78)

3. Section 77 may not apply if the parties have agreed to the payment of

the premium in installments and partial payment has been made at

the time of the loss. (Makati Tuscany Condominium Corp. v. CA, 215SCRA 462)

4. If the insurer granted the insured a credit term for the payment of the

premium and loss occurs before the expiration of the term, recovery

should be allowed even the premium is paid after the loss but withinthe credit term.

5. Where the parties are barred by estoppel.

UCPB GENERAL INSURANCE CO. VS. MASAGANA TELEMART, APRIL

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