VI.

Policy
A. Significance of Policy; contents
SEC. 50. The policy shall be in printed form which may contain blank spaces; and any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the
contract of insurance shall be written on the blank spaces provided therein.
Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance
and which is pasted or attached to said policy is not binding on the insured, unless the
descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and
written on the blank spaces provided in the policy.
Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued
after the original policy shall be countersigned by the insured or owner, which countersignature
shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.
Notwithstanding the foregoing, the policy may be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, otherwise known as the Electronic Commerce Act and to
such rules and regulations as may be prescribed by the Commissioner.
SEC. 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or running policies;
(c) The premium, or if the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis and rates upon
which the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute owner thereof;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
B. Cover Notes
SEC. 52. Cover notes may be issued to bind insurance temporarily pending the issuance of the
policy. Within sixty (60) days after issue of a cover note, a policy shall be issued in lieu thereof,
including within its terms the identical insurance bound under the cover note and the premium
therefor.
Cover notes may be extended or renewed beyond such sixty (60) days with the written approval
of the Commissioner if he determines that such extension is not contrary to and is not for the
purpose of violating any provisions of this Code. The Commissioner may promulgate rules and
regulations governing such extensions for the purpose of preventing such violations and may by
such rules and regulations dispense with the requirement of written approval by him in the case
of extension in compliance with such rules and regulations.
Insurance; Perfection of Insurance Contracts (2009) No.IV. Antarctica Life Assurance
Corporation (ALAC) publicly offered a specially designed insurance policy covering persons
between the ages of 50 to 75 who may be afflicted with serious and debilitating illnesses.
Quirico applied for insurance coverage, stating that he was already 80 years old. Nonetheless,
ALAC approved his application. Quirico then requested ALAC for the issuance of a cover note
while he was trying to raise funds to pay the insurance premium. ALAC granted the request. Ten
days after he received the cover note, Quirico had a heart seizure and had to be hospitalized.
He then filed a claim on the policy. (A) Can ALAC validly deny the claim on the ground that the

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insurance coverage, as publicly offered, was available only to persons 50 to 75 years of age?
Why or why not? (2%)
SUGGESTED ANSWER: No. By approving the application of Quirino who disclosed that he was
already 80 years old, ALAC waived the age requirement. ALAC is now stopped from raising
such defense of age of the insured.
(B) Did ALACs issuance of a cover note result in the perfection of an insurance contract
between Quirico and ALAC? Explain. (3%)
SUGGESTED ANSWER: The issuance of a cover note by ALAC resulted in the perfection of the
contract of insurance. In that case, it is only because there is delay in the issuance of the policy
that the cover notes was issued.
The cover note is a receipt whereby the company agrees to insure the insured for 60 days
pending the issuance of a regular policy. No separate premium is to be paid on a cover note. It
is not a separate policy but is integrated in the regular policy to be subsequently issued.
C. Kinds of Insurance Policy
SEC. 59. A policy is either open, valued or running.

1. Open
SEC. 60. An open policy is one in which the value of the thing
insured is not agreed upon, and the amount of the insurance
merely represents the insurers maximum liability. The value of
such thing insured shall be ascertained at the time of the loss.
Open Policy (1990)
c) If each of the policies obtained by Fortune in the problem (a) above is an open policy and it
was immediately determined after the fire that the value of Fortunes house was P2.4m, how
much may he collect from X,Y and Z?
SUGGESTED ANSWER:
In an open policy, the insured may recover his total loss up to the amount of the insurance
cover. Thus, the extent of
recovery would be P400th from X, P200th from Y, and P600th from Z.
a. Valued
SEC. 61. A valued policy is one which expresses on its face an agreement that the thing insured
shall be valued at a specific sum.
Valued Policy (1990)
b) If each of the fire insurance policies obtained by Fortune in the problem (a) is a valued policy
and the value of his house was fixed in each of the policies at P1m, how much would Fortune
recover from X if he has already obtained full payment on the insurance policies issued by Y
and Z?
SUGGESTED ANSWER:
Fortune may still recover only the balance of P200,000 from X insurance company since the
insured may only recover up to the extent of his loss.
ALTERNATIVE: Having already obtained full payment on the insurance policies issued by Y
and Z, Fortune may no longer recover from X insurance policy.

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b. Running
SEC. 62. A running policy is one which contemplates successive insurances, and which
provides that the object of the policy may be from time to time defined, especially as to the
subjects of insurance, by additional statements or indorsements.
D. Agreement to limit the time to commence action
SEC. 63. A condition, stipulation, or agreement in any policy of insurance, limiting the time for
commencing an action thereunder to a period of less than one (1) year from the time when the
cause of action accrues, is void.
EAGLE STAR VS CHIA (PERIOD RECKONED FROM HAPPENING OF LOSS)
On January 15, 1946, Atkin, Kroll & Co., loaded on the S. S. Roeph Silverlight owned and
operated by Leigh Hoegh & Co., A/S, of San Francisco California, 14 bales of assorted
underwear valued at P8,085.23 consigned to Chia Yu in the City of Manila. The shipment was
insured against all risks by Eagle Star Ins. Co. of San Francisco, California, under a policy
issued to the shipper and by the latter assigned to the consignee. The vessel arrived in Manila
on February 10, 1946, and on March 4 started discharging its cargo into the custody of the
Manila Terminal Co., Inc., which was then operating the arrastre service for the Bureau of
Customs. But the 14 bales consigned to Chia Yu only 10 were delivered to him as the remaining
3 could not be found. Three of those delivered were also found damaged to the extent of 50 per
cent.
Chia Yu claimed indemnity for the missing and damaged bales. But the claim was declined, first,
by the carrier and afterward by the insurer, whereupon Chia Yu brought the present action
against both, including their respective agents in the Philippines. Commenced in the Court of
First Instance of Manila on November 16, 1948, or more than two years after delivery of the
damaged bales and the date when the missing bales should have been delivered, the action
was resisted by the defendants principally on the ground of prescription. But the trial court found
for plaintiff and rendered judgment in his favor for the sum claimed plus legal interest and costs.
The judgment was affirmed by the Court of Appeals, and the case is now before us on appeal
by certiorari.
Except for the controversy as to the amount for which the carrier could be held liable under the
terms of the bill of lading, the only question presented for determination is whether plaintiff's
action has prescribed.
On the part of the carrier the defense of prescription is made to rest on the following stipulation
of the bill of lading:
In any event the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought within one year after the delivery of the goods or
the date when the goods should have been delivered.
The stipulation is but a repetition of a provision contained in section 3 (6) of the United States
Carriage of Goods by Sea, Act of 1936, which was adopted and made applicable to the
Philippines by Commonwealth Act 65 and by express agreement incorporated by reference in
the bill of lading. Following our decision in Chua Kuy vs. Everett Steamship Corporation,1 G. R.
No L-5554 (May 27, 1953) and in E. R. Elser, Inc., et al., vs. Court of Appeals,. et al.,2 G. R. No.
L-6517 (November 29, 1954) giving force and effect to this kind of stipulation in bills of lading
covering shipments from the United States to the Philippines, we have to hold that plaintiff's
failure to bring his action "within one year after the delivery of the goods or the date when the
goods should have been delivered" discharged the carrier from all liability. This dispenses with

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the necessity of deciding how much could be recovered from the carrier under the terms of the
bill of lading.
The case for the insurer stands on a different footing, for its claim of prescription is founded
upon the terms of the policy and not upon the bill of lading. Under our law the time limit for
bringing a civil action upon a written contract is ten years after the right of action accrues. (Sec.
43, Act 190; Art. 1144, New Civil Code.) But counsel for the insurer claim that this statutory in
the policy:
No suit action on this Policy, for the recovery of any claim, shall be sustainable in any
Court of law or equity unless the insured shall have fully complied with all the terms and
conditions of this Policy nor unless commenced with twelve (12) months next after the
happening of the loss . . .
To this we cannot agree.
In the case of E. Macias & Co. vs. China Fire Insurance & Co., Ltd., et al., 46 Phil. 345, relied
upon by the insurer, this Court held that a clause in an insurance policy providing that an action
upon the policy by the insured must be brought within a certain time is, if reasonable, valid and
will prevail over statutory limitations of the action. That decision, however, was rendered before
the passage of Act 4101, which amended the Insurance Act by inserting the following section in
chapter one thereof:
SEC. 61-A. Any 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.
As "matters respecting a remedy, such as the bringing of suit, admissibility of evidence, and
statute of limitations, depend upon the law of the place where the suit is brought" (Insular
Government vs. Frank, 13 Phil. 236), any policy clause repugnant to this amendment to the
Insurance Act cannot be given effect in an action in our courts.
Examining the policy sued upon in the present case, we find that its prescriptive clause, if given
effect in accordance with the terms of the policy, would reduce the period allowed the insured for
bringing his action to less than one year. This is so because the said clause makes the
prescriptive period begin from the happening of the loss and at the same time provides that the
no suit on the policy shall be sustainable in any court unless the insured shall have first fully
complied with all the terms and conditions of the policy, among them that which requires that, as
so as the loss is determined, written claim therefor be filed with the carrier and that the letter to
the carrier and the latter's reply should be attached to the claim papers to be sent to the insurer.
It is obvious that compliance with this condition precedent will necessarily consume time and
thus shorten the period for bringing suit to less than one year if the period is to begin, as stated
in the policy, from "the happening of the loss." Being contrary to the law of the forum, such
stipulation cannot be given effect.
It may perhaps be suggested that the policy clause relied on by the insurer for defeating
plaintiff's action should be given the construction that would harmonize it with section 61-A of
the Insurance Act by taking it to mean that the time given the insured for bringing his suit is
twelve months after the cause of action accrues. But the question then would be: When did the
cause of action accrue? On that question we agree with the court below that plaintiff's
cause of action did not accrue until his claim was finally rejected by the insurance
company. This is because, before such final rejection, there was no real necessity for
bringing suit. As the policy provides that the insured should file his claim, first, with the

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carrier and then with the insurer, he had a right to wait for his claim to be finally decided
before going to court. The law does not encourage unnecessary litigation.
At this junction it should be explained that while the decision of the Court of Appeals states that
the claim against the insurance company "was finally rejected o April 22, 1947, as correctly
concluded by the court below," it is obvious from the context and we find it to be a fact that the
date meant was April 22, 1948, for this was the date when, according to the finding of the trial
court, the insurance company in London rejected the claim. The trial court's decision says:
On September 21, 1946, after Roosevelt Steamship Agency Inc., and Manila Terminal
Co., Inc., denied plaintiff's claim, a formal insurance claim was filed with Kerr & Co., Ltd.,
local agents of Eagle Star Insurance Co., Ltd., (Exh. L.)Kerr & Co., Ltd., referred the
insurance claim to Eagle Star Insurance Co., Ltd. in London but the latter, after insistent
request of plaintiffs for action, rejected the claim on April 22, 1948, giving as its reasons
the lapse of the expiry day of the risks covered by the policy and returned the claim
documents only in August of 1948. (pp. 87-88, Record on Appeal.)
Furthermore, there is nothing in the record to show that the claim was rejected in the year 1947,
either by the insurance company in London or its settling agents in the Philippines, while on the
other hand defendant's own Exhibit L-1 is indisputable proof that it was on 22nd April 1948" that
the settling agents informed the claimant "that after due and careful consideration, our
Principals confirm our declination of this claim." It not appearing that the settling agents'
decision on claims against their principals were not subject to reversal or modification by the
latter, while on the contrary the insurance policy expressly stipulates, under the heading
"Important Notice," that the said agents "have authority to certify only as to the nature, cause
and extent of the damage," and it furthermore appearing that a reiteration of plaintiffs claim was
made to the principals and the latter gave it due course since only "after due and careful
consideration" did they confirm the action taken by the agents, we conclude that, for the
purpose of the present action, we should consider plaintiff's claim to have been finally rejected
by the insurer on April 22, 1948. Having been filed within twelve months form that date, the
action cannot be deemed to have prescribed even on the supposition that the period given the
insured for bringing suit under the prescriptive clause of the policy is twelve months after the
accrual of the cause of action.
In concluding, we may state that contractual limitations contained in insurance policies are
regarded with extreme jealousy by courts and will be strictly construed against the insurer and
should not be permitted to prevent a recovery when their just and honest application would not
produce that result. (46 C. J. S. 273.)
Wherefore, the judgment appealed from is reversed with respect to the carrier and its agents but
affirmed with respect to the insurance company and its agents, with costs against the latter.
ACCFA VS ALPHA (PERIOD RECKONED FROM HAPPENING OF LOSS)
Appeal, on points of law, against a decision of the Court of First Instance of Manila, in its Case
No. 43372, upholding a motion to dismiss.
At issue is the question whether or not the provision of a fidelity bond that no action shall be had
or maintained thereon unless commenced within one year from the making of a claim for the
loss upon which the action is based, is valid or void, in view of Section 61-A of the Insurance Act
invalidating stipulations limiting the time for commencing an action thereon to less than one year
from the time the cause of action accrues.
Material to this decision are the following facts: 1wph1.t
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According to the allegations of the complaint, in order to guarantee the Asingan Farmers'
Cooperative Marketing Association, Inc. (FACOMA) against loss on account of "personal
dishonesty, amounting to larceny or estafa of its Secretary-Treasurer, Ricardo A. Ladines, the
appellee, Alpha Insurance & Surety Company had issued, on 14 February 1958, its bond, No.
P-FID-15-58, for the sum of Five Thousand Pesos (P5,000.00) with said Ricardo Ladines as
principal and the appellee as solidary surety. On the same date, the Asingan FACOMA assigned
its rights to the appellant, Agricultural Credit Cooperative and Financing Administration (ACCFA
for short), with approval of the principal and the surety.
During the effectivity of the bond, Ricardo Ladines converted and misappropriated, to his
personal benefit, some P11,513.22 of the FACOMA funds, of which P6,307.33 belonged to the
ACCFA. Upon discovery of the loss, ACCFA immediately notified in writing the survey company
on 10 October 1958, and presented the proof of loss within the period fixed in the bond; but
despite repeated demands the surety company refused and failed to pay. Whereupon, ACCFA
filed suit against appellee on 30 May 1960.
Defendant Alpha Insurance & Surety Co., Inc., (now appellee) moved to dismiss the complaint
for failure to state a cause of action, giving as reason that (1) the same was filed more than one
year after plaintiff made claim for loss, contrary to the eighth condition of the bond, providing as
follows: .
EIGHT LIMITATION OF ACTION
No action, suit or proceeding shall be had or maintained upon this Bond unless the same
be commenced within one year from the time of making claim for the loss upon which
such action, suit or proceeding, is based, in accordance with the fourth section hereof.
(2) the complaint failed to show that plaintiff had filed civil or criminal action against Ladines, as
required by conditions 4 and 11 of the bond; and (3) that Ladines was a necessary and
indispensable party but had not been joined as such.
At first, the Court of First Instance denied dismissal; but, upon reconsideration, the court
reversed its original stand, and dismissed the complaint on the ground that the action was filed
beyond the contractual limitation period (Record on Appeal, pages 56-59).
Hence, this appeal.
We find the appeal meritorious.
A fidelity bond is, in effect, in the nature of a contract of insurance against loss from misconduct,
and is governed by the same principles of interpretation: Mechanics Savings Bank & Trust Co.
vs. Guarantee Company, 68 Fed. 459; Pao Chan Wei vs. Nemorosa, 103 Phil. 57.
Consequently, the condition of the bond in question, limiting the period for bringing action
thereon, is subject to the provisions of Section 61-A of the Insurance Act (No. 2427), as
amended by Act 4101 of the pre-Commonwealth Philippine Legislature, prescribing that
SEC. 61-A 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.
Since a "cause of action" requires, as essential elements, not only a legal right of the plaintiff
and a correlative obligation of the defendant but also "an act or omission of the defendant in
violation of said legal right" (Maao Sugar Central vs. Barrios, 79 Phil. 666), the cause of action
does not accrue until the party obligated refuses, expressly or impliedly, to comply with

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its duty (in this case, to pay the amount of the bond). The year for instituting action in
court must be reckoned, therefore, from the time of appellee's refusal to comply with its
bond; it cannot be counted from the creditor's filing of the claim of loss, for that does not
import that the surety company will refuse to pay. In so far, therefore, as condition eight of
the bond requires action to be filed within one year from the filing of the claim for loss, such
stipulation contradicts the public policy expressed in Section 61-A of the Philippine Insurance
Act. Condition eight of the bond, therefore, is null and void, and the appellant is not bound to
comply with its provisions.
In Eagle Star Insurance Co. vs. Chia Yu, 96 Phil. 696, 701, this Court ruled: .1wph1.t
It may perhaps be suggested that the policy clause relied on by the insurer for defeating
plaintiff's action should be given the construction that would harmonize it with section 61A of the Insurance Act by taking it to mean that the time given the insured for bringing his
suit is twelve months after the cause of action accrues. But the question then would be:
When did the cause of action accrue? On that question we agree with the court below
that plaintiff's cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real
necessity for bringing suit. As the policy provides that the insured should file his claim,
first, with the carrier and then with the insurer, he had a right to wait for his claim to be
finally decided before going to court. The law does not encourage unnecessary litigation.
The discouraging of unnecessary litigation must be deemed a rule of public policy, considering
the unrelieved congestion in the courts.
As a consequence of the foregoing, condition eight of the Alpha bond is null and void, and
action may be brought within the statutory period of limitation for written contracts (New Civil
Code, Article 1144). The case of Ang vs. Fulton Fire Insurance Co., 2 S.C.R.A. 945 (31 July
1961), relied upon by the Court a quo, is no authority against the views herein expressed, since
the effect of Section 61-A of the Insurance Law on the terms of the Policy or contract was not
there considered.
The condition of previous conviction (paragraph b, clause 4, of the contract) having been
deleted by express agreement and the surety having assumed solidary liability, the other
grounds of the motion to dismiss are equally untenable. A creditor may proceed against any one
of the solidary debtors, or some or all of them simultaneously (Article 1216, New Civil Code).
WHEREFORE, the appealed order granting the motion to dismiss is reversed and set aside,
and the records are remanded to the Court of First Instance, with instructions to require
defendant to answer and thereafter proceed in conformity with the law and the Rules of Court.
Costs against appellee. So ordered.
SUNLIFE INSURANCE VS CA (PETITION FOR RECONSIDERATION DOES NOT TOLL
RUNNING OF THE PERIOD)
FACTS
- Private respondent Emilio Tan took from the petitioner a Peso 300,000 property insurance
policy to cover his interest in the electrical insurance store of his brother housed in a building in
Iloilo City on August 15, 1983. Four days after the issuance of the policy, the building including
the insured store burned.
- On August 20, 1983, Tan filed his claim for fire loss. Sun Insurance, on February 29, 1984,
wrote the private respondent denying the claim. On April 3, 1984, private respondent wrote

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another letter to the insurance company requesting reconsideration of the denial. Tans lawyer
wrote another letter to the insurance company inquiring about the April 3 letter which sought for
a reconsideration of the denial. In its reply to the lawyers letter, Sun Insurance reiterated its
denial of the claim and enclosed therein copies of the two previous denials dated February 29,
1984 and May 17, 1985.
- On November 20, 1985, Tan filed a civil case with the RTC. Petition filed a motion to dismiss
on the alleged ground that the action has already prescribed based on Condition 27 of the
Insurance Policy which stated that the window to file the appropriate action with either the
Insurance Commission or in any court of competent jurisdiction is twelve months from the
rejection of the claim. RTC denied the motion and the subsequent motion for reconsideration.
The CA likewise denied the petition of Sun Insurance.
ISSUE
1. WON the court the filing of a motion for reconsideration interrupts the 12 months prescription
period to contest the denial of the insurance claim
2. WON the rejection of the claim shall be deemed final only if it contains words to the effect that
the denial is final
HELD
1. NO
- The SC held that Condition 27 of the Insurance policy is very clear and free from any doubt or
ambiguity. It has to be taken in its plain, ordinary, and popular sense. The rejection letter of
February 29, 1984 was clear and plain. The Court noted that the one year period is likewise in
accord with Section 23 of the Insurance Code which states that any condition which limits the
time for commencing an action to a period of less than one year when the cause of action
accrues is void. The right of action, according to the SC, accrues at the time that the claim is
rejected at the first instance. A request for reconsideration of the denial cannot suspend the
running of the prescriptive period. The Court noted that the rationale for the one year period is to
ensure that the evidence as to the origin and cause of the destruction have not yet disappeared.
2. NO
- The Court clarified its ruling in Eagle Star Insurance Co. vs Chia Yu where it ruled that the
cause of action in an insurance contract does not accrue until the Insureds claim is finally
rejected by the Insurer by stating the use of the word finally cannot be construed to mean the
rejection of a petition for reconsideration. What the court referred to in effect is the rejection in
the first instance as claimed by Sun Insurance
Disposition The decision of the CA is reversed and set aside. The case is dismissed
E. Cancellation of Policy
SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except upon
prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is
based on the occurrence, after the effective date of the policy, of one or more of the following:
(a) Nonpayment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard insured against;
(c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the hazard insured against;

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(e) Physical changes in the property insured which result in the property becoming uninsurable;
(f) Discovery of other insurance coverage that makes the total insurance in excess of the value
of the property insured; or
(g) A determination by the Commissioner that the continuation of the policy would violate or
would place the insurer in violation of this Code.
SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing,
mailed or delivered to the named insured at the address shown in the policy, or to his broker
provided the broker is authorized in writing by the policy owner to receive the notice of
cancellation on his behalf, and shall state:
(a) Which of the grounds set forth in Section 64 is relied upon; and
(b) That, upon written request of the named insured, the insurer will furnish the facts on which
the cancellation is based.
F. Renewal of Policy
SEC. 66. In case of insurance other than life, unless the insurer at least forty-five (45) days in
advance of the end of the policy period mails or delivers to the named insured at the address
shown in the policy notice of its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the named insured shall be entitled to renew the
policy upon payment of the premium due on the effective date of the renewal. Any policy written
for a term of less than one (1) year shall be considered as if written for a term of one (1) year.
Any policy written for a term longer than one (1) year or any policy with no fixed expiration date
shall be considered as if written for successive policy periods or terms of one (1) year.

VII. Warranties
A. Warranty vs Representation
The following are the distinctions between warranty and representation:
(1) Warranties are considered parts of the contract, while representations are but
collateral inducements to it;
(2) Warranties are always written on the face of the policy, actually or by reference, while
representations may be written in a totally disconnected paper or may be oral;
(3) Warranties must be strictly complied with, while in representations, substantial truth
only is required (Vance, op. cit.,p. 412.);
(4) The falsity or nonfulfillment of a warranty operates as a breach of contract, while the
falsity of a representation renders the policy void on the ground of fraud (45 C.J.S. 157.);
and
(5) Warranties are presumed material, while the insurer must show the materiality of a
representation in order to defeat an action on the policy.
B. Violation of warranties entitles other party to rescind
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.
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SEC. 76. A breach of warranty without fraud merely exonerates an insurer from the time that it
occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.
Carriage of Goods; Implied Warranty; Liability (2010)
Paulo, the owner of an ocean-going vessel, offered to transport the logs of Constantino from
Manila to Nagoya. Constantino accepted the offer, not knowing that the vessel was manned by
an irresponsible crew with deep-seated resentments against Paolo, their employer.
Constantino insured the cargo of logs against both perils of the sea and barratry. The logs were
improperly loaded on one side, thereby causing the vessel to tilt on one side. On the way to
Nagoya, the crew unbolted the sea valves of the vessel causing water to flood the ship hold.
The vessel sank. Constantino tried to collect from the insurance company which denied liability,
given the unworthiness of both the vessel and its crew. Constantino countered that he was not
the owner of the vessel and he could therefore not be responsible for conditions about which he
was innocent.
(A) Is the insurance company liable? Why or why not? (3%)
SUGGESTED ANSWER:
The insurance company is not liable, because there is an implied warranty in every marine
insurance that the ship is seaworthy whoever is insuring the cargo, whether it be the ship-owner
or not. There was a breach of warranty, because the logs were improperly loaded and the crew
was irresponsible. It is the obligation of the owner of the cargo to look for a reliable common
carrier which keeps its vessel in seaworthy condition. (Roque v. Intermediate Appellate Court,
139 SCRA 596 [1985]).
Insurance; Double Insurance; effect (1993)
Julie and Alma formed a business partnership. Under the business name Pino Shop, the
partnership engaged in a sale of construction materials. Julie insured the stocks in trade of Pino
Shop with WGC Insurance Co for P350th. Subsequently, she again got an insurance contract
with RSI for P1m and then from EIC for P200th. A fire of unknown origin gutted the store of the
partnership. Julie filed her claims with the three insurance companies. However, her claims
were denied separately for breach of policy condition which required the insured to give notice
of any insurance effected covering the stocks in trade. Julie went to court and contended that
she should not be blamed for the omission, alleging that the insurance agents for WGC, RSI
and EIC knew of the existence of the additional insurance coverages and that she was not
informed about the requirement that such other or additional insurance should be stated in the
policy. Is the contention of Julie tenable? Explain. May she recover on her fire insurance
policies? Explain.
SUGGESTED ANSWER:
1) No. An insured is required to disclose the other insurances covering the subject matter of the
insurance being applied for. (New Life Ent v CA 207 s 669)
2) No, because she is guilty of violation of a warranty/condition.
UNION VS PHILIPPINE GUARANTY (DUTY TO DISCLOSE)
FACTS: On January 12, 1962, the Union Manufacturing Co., Inc. obtained certain loans from
the Republic Bank in the total sum of 415,000.00. To secure the payment thereof, UMC
executed real and chattel mortgage on certain properties.
The Republic Bank procured from the defendant Philippine Guaranty Co., Inc. an insurance
coverage on loss against fire for 500,000.00 over the properties of the UMC, as described in
defendants cover note dated September 25, 1962, with the annotation that loss or damage, if
any, under said cover note is payable to Republic Bank as its interest may appear, subject
however to the printed conditions of said defendants Fire Insurance Policy Form.

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On September 6, 1964, a fire occurred in the premises of UMC and on October 6, 1964, UMC
filed its fire claim with the PGC Inc., thru its adjuster, H.H. Bayne Adjustment Co., which was
denied by said defendant in its letter dated November 26, 1964 on the following ground: Policy
Condition No. 3 and/or the Other Insurance Clause of the policy was violated because you did
not give notice to us of the other insurance which you had taken from New India for
80,000.00. Sincere Insurance for 25,000.00 and Manila Insurance for 200,000.00 with the
result that these insurances of which we became aware of only after the fire, were not endorsed
on our policy.
ISSUE: Whether Republic Bank can recover.
HELD: Without deciding- whether notice of other insurance upon the same property must be
given in writing, or whether a verbal notice is sufficient to render an insurance valid which
requires such notice, whether oral or written, we hold that in the absolute absence of such
notice when it is one of the conditions specified in the fire insurance policy, the policy is null and
void. (Santa Ana vs. Commercial Union Ass. Co., 55 Phil. 128).
If the insured has violated or failed to perform the conditions of the contract, and such a violation
or want of performance has not been waived by the insurer, then the insured cannot recover.
Courts are not permitted to make contracts for the parties. The functions and duty of the courts
consist simply in enforcing and carrying out the contracts actually made.
While it is true, as a general rule, that contracts of insurance are construed most favorably to the
insured, yet contracts of insurance, like other contracts, are to be construed according to the
sense and meaning of the terms which the parties themselves have used. If such terms are
clear and unambiguous they must be taken and understood in their plain, ordinary and popular
sense.
The annotation then, must be deemed to be a warranty that the property was not insured by any
other policy. Violation thereof entitles the insurer to rescind. xxx The materiality of nondisclosure of other insurance policies is not open to doubt.
The insurance contract may be rather onerous, but that in itself does not justify the abrogation of
its express terms, terms which the insured accepted or adhered to and which is the law between
the contracting parties.

UNITED MERCHANTS VS COUNTRY BANKERS INSURANCE

Facts:
United Merchants was a manufacturer and retailer of Christmas lights. It insured (fire policy) its
Christmas lights stored in the warehouse with Country Bankers.
The warehouse was burned down hence United sought indemnity from Country. Country
rejected the claim on the ground of Condition 15 of the policy which states that
If the claim be in any respect fraudulent, or if any false declaration be made or used in support
thereof, or if any fraudulent means or devices are used by the Insured or anyone acting in his
behalf to obtain any benefit under this Policy; or if the loss or damage be occasioned by the
willful act, or with the connivance of the Insured, all the benefits under this Policy shall be
forfeited.
CBIC alleged that UMCs claim was fraudulent because UMCs Statement of Inventory showed
that it had no stocks in trade as of 31 December 1995, and that UMCs suspicious purchases
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for the year 1996 did not even amount to P25,000,000.00. UMCs GIS and Financial Reports
further revealed that it had insufficient capital, which meant UMC could not afford the
allegedP50,000,000.00 worth of stocks in trade.
United answered back saying that they have a certificate from the Bureau of Fire Protection
which states that : The Bureau further certifies that no evidence was gathered to prove that the
establishment was willfully, feloniously and intentionally set on fire.
Issue: Whether UMC is entitled to claim from CBIC the full coverage of its fire insurance policy.
Held: No
If loss is proved apparently within a contract of insurance, the burden is upon the insurer to
establish that the loss arose from a cause of loss which is excepted or for which it is not liable,
or from a cause which limits its liability. In the present case, CBIC failed to discharge its
primordial burden of establishing that the damage or loss was caused by arson, a limitation in
the policy.
Nevertheless just because the defense failed to prove arson does not mean that fraud does not
exist. In fact, fraud exists in this case. The Court ruled that the submission of false invoices to
the adjusters establishes a clear case of fraud and misrepresentation which voids the insurers
liability as per condition of the policy.
A fraudulent discrepancy between the actual loss and that claimed in the proof of loss voids the
insurance policy. Mere filing of such a claim will exonerate the insurer. Considering that all the
circumstances point to the inevitable conclusion that UMC padded its claim and was guilty of
fraud, UMC violated Condition No. 15 of the Insurance Policy. Thus, UMC forfeited whatever
benefits it may be entitled under the Insurance Policy, including its insurance claim.

MALAYAN INSURANCE VS PAP CO., LTD

The Facts:
The Malayan Insurance Company (Malayan, petitioner), issued Fire Insurance Policy No. F00227-000073 to PAP Co. Ltd (PAP, respondent) for the latters machineries and equipment
located at Sanyo Precision Phils. Bldg., Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite
(Sanyo Building); PAP procured the insurance for Rizal Commercial Banking Corporation, the
mortgagee of the insured machineries and equipment. Almost a year later and during the
subsistence of the insurance contract, PAP Co. Renewed the insurance policy on an As is
basis, and a renewal policy was thus issued by Malayan. During the subsistence of the renewal
policy, the insured machineries and equipment were totally lost by fire, hence PAP Co, filed a
claim for fire insurance in the amount insured, which Malayan denied, averring that at the the
time of the loss, the insured machineries and equipment were transferred by PAP Co to a
location different from that indicated in the insurance policy, from the Sanyo Building to the Pace
Pacific Bldg inside the PEZA complex. PAP Co. argued that it informed RCBC, the party dutybound to relay such information to Malayan, hence the latter cannot deny liability. With Malayan
refusing to honor its claim, PAP Co. filed a complaint against Malayan before the RTC. The trial
court ruled in favour of PAP Co and ordered Malayan to pay the respondent indemnity for the
loss under the fire insurance policy. Although there was a change in the condition of the thing
insured as a result of the transfer of the subject machineries and equipment, the insurance
company failed to show proof that the transfer increased the risk insured against. PAP Cos
notice to RCBC substantially complied with the notice requirement under the policy as it was
RCBC who procured the insurance, according to the RTC. On appeal to the CA, the latter
affirmed with modification the RTC ruling, deleting the award of attorneys fees. The CA held

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that Malayan failed to show proof that there was a prohibition on the transfer of the insured
properties during the effectivity of the insurance policy, or to show that its consent was needed
before carrying out a transfer of the insured properties. Even if there was a prohibition, Malayan
could not escape liability as the transfer was made during the subsistence of the original policy,
not the renewal contract; therefore, Malayan was aware of the transfer of the properties when it
renewed the contract. Since the contract was a contract of adhesion, any ambiguity must be
resolved against the party who prepared the contract, in this case, Malayan. Malayan elevated
the case to the Supreme Court. It argues that PAP concealed a material fact in violation of Sec.
27 of the Insurance Code when it did not inform Malayan of the actual and new location of the
insured properties. PAP was also guilty of breach of warranty under the renewal policy under
Sec. 74 of the same code when it represented that the insured properties were located at Sanyo
Bldg., when in fact they were already transferred to Pace Bldg.,; Granting that PAP informed
RCBC of the transfer, the same is irrelevant and not binding to Malayan since RCBC is a
corporation vested with distinct juridical personality.
The Issues:
Whether or not Malayan is liable under the renewal fire insurance policy.
The Ruling:
The Court agrees with the position of Malayan that it cannot be held liable for the loss of the
insured properties under the fire insurance policy.
As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP obtained a
P15,000,000.00 fire insurance policy from Malayan covering its machineries and equipment
effective for one (1) year or until May 13, 1997; that the policy expressly stated that the insured
properties were located at Sanyo Precision Phils. Building, Phase III, Lots 4 & 6, Block 15,
EPZA, Rosario, Cavite; that before its expiration, the policy was renewed 1 on an as is basis
for another year or until May 13, 1998; that the subject properties were later transferred to the
Pace Factory also in PEZA; and that on October 12, 1997, during the effectivity of the renewal
policy, a fire broke out at the Pace Factory which totally burned the insured properties.
The policy forbade the removal of the insured properties unless sanctioned by Malayan
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as regards the
property affected unless the insured, before the occurrence of any loss or damage, obtains the
sanction of the company signified by endorsement upon the policy, by or on behalf of the
Company:
xxxxxxxxxxxx

(c
)

If property insured be removed to any building or place other than in that which is herein
stated to be insured.2

Evidently, by the clear and express condition in the renewal policy, the removal of the insured
property to any building or place required the consent of Malayan. Any transfer effected by the
insured, without the insurers consent, would free the latter from any liability.
The respondent failed to notify, and to obtain the consent of, Malayan regarding the removal
The records are bereft of any convincing and concrete evidence that Malayan was notified of
the transfer of the insured properties from the Sanyo factory to the Pace factory. The Court has

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combed the records and found nothing that would show that Malayan was duly notified of the
transfer of the insured properties.
What PAP did to prove that Malayan was notified was to show that it relayed the fact of transfer
to RCBC, the entity which made the referral and the named beneficiary in the policy. Malayan
and RCBC might have been sister companies, but such fact did not make one an agent of the
other. The fact that RCBC referred PAP to Malayan did not clothe it with authority to represent
and bind the said insurance company. After the referral, PAP dealt directly with Malayan.
The respondent overlooked the fact that during the November 9, 2006 hearing, 3 its counsel
stipulated in open court that it was Malayans authorized insurance agent, Rodolfo Talusan, who
procured the original policy from Malayan, not RCBC. This was the reason why Talusans
testimony was dispensed with.
Moreover, in the previous hearing held on November 17, 2005,4 PAPs hostile witness,
Alexander Barrera, Administrative Assistant of Malayan, testified that he was the one who
procured Malayans renewal policy, not RCBC, and that RCBC merely referred fire insurance
clients to Malayan. He stressed, however, that no written referral agreement exists between
RCBC and Malayan. He also denied that PAP notified Malayan about the transfer before the
renewal policy was issued. He added that PAP, through Maricar Jardiniano (Jardiniano),
informed him that the fire insurance would be renewed on an as is basis.5
Granting that any notice to RCBC was binding on Malayan, PAPs claim that it notified RCBC
and Malayan was not indubitably established. This enfeebles PAPs position that the subject
properties were already transferred to the Pace factory before the policy was renewed.

The transfer from the Sanyo Factory to the PACE Factory increased the risk.
The courts below held that even if Malayan was not notified thereof, the transfer of the insured
properties to the Pace Factory was insignificant as it did not increase the risk.
Malayan argues that the change of location of the subject properties from the Sanyo Factory to
the Pace Factory increased the hazard to which the insured properties were exposed. Malayan
wrote:
With regards to the exposure of the risk under the old location, this was occupied as factory of
automotive/computer parts by the assured, and factory of zinc & aluminum die cast, plastic gear
for copy machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A. But under
Pace Pacific Mfg. Corporation this was occupied as factory that repacks silicone sealant to
plastic cylinders with a rate of 0.657% under 6.1.2 A. Hence, there was an increase in the
hazard as indicated by the increase in rate.8
The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to a
hazardous environment and negatively affected the fire rating stated in the renewal policy. The
increase in tariff rate from 0.449% to 0.657% put the subject properties at a greater risk of loss.
Such increase in risk would necessarily entail an increase in the premium payment on the fire
policy.
Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the
importance of the issue, PAP failed to refute Malayans argument on the increased risk.
Malayan is entitled to rescind the insurance contract
Considering that the original policy was renewed on an as is basis, it follows that the renewal
policy carried with it the same stipulations and limitations. The terms and conditions in the
renewal policy provided, among others, that the location of the risk insured against is at the
Sanyo factory in PEZA. The subject insured properties, however, were totally burned at the
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Pace Factory. Although it was also located in PEZA, Pace Factory was not the location
stipulated in the renewal policy. There being an unconsented removal, the transfer was at PAPs
own risk. Consequently, it must suffer the consequences of the fire. Thus, the Court agrees with
the report of Cunningham Toplis Philippines, Inc., an international loss adjuster which
investigated the fire incident at the Pace Factory, which opined that [g]iven that the location of
risk covered under the policy is not the location affected, the policy will, therefore, not respond
to this loss/claim.9
It can also be said that with the transfer of the location of the subject properties, without notice
and without Malayans consent, after the renewal of the policy, PAP clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides:
Section 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a
contract of insurance.
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or condition of the thing insured. Section
168 of the Insurance Code provides, as follows:
Section 68. An alteration in the use or condition of a thing insured from that to which it is limited
by the policy made without the consent of the insurer, by means within the control of the
insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance.
Accordingly, an insurer can exercise its right to rescind an insurance contract when the following
conditions are present, to wit:
1) the policy limits the use or condition of the thing insured;
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insureds control; and
5) the alteration increases the risk of loss.10
In the case at bench, all these circumstances are present. It was clearly established that the
renewal policy stipulated that the insured properties were located at the Sanyo factory; that PAP
removed the properties without the consent of Malayan; and that the alteration of the location
increased the risk of loss.
WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby REVERSED
and SET ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby declared NOT liable for
the loss of the insured machineries and equipment suffered by PAP Co., Ltd.

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