150 NEGOTIABLE INSTRUMENTS LAW the payee for the value of the check. This liability of the bank attaches whether or not the bank was aware of the unauthorized indorsement. Bar Question: Distinguish. clearly (1) crossed checks from cancelled checks. (2004 Bar) Answer: A crossed: check has two parallel lines on the upper left ‘hand portion thereof. A cancelled check has the word “cancelled” on the face of the check. A crossed check may stil be negotiated, but only. once, to one who has an account with the bank, while a cancelled check cannot be negotiated. A crossed check may only be. deposited and not encashed, while a cancelled check cannot be ‘deposited nor encashed (See Bataan vs. CA, 230 SCRA 643), CHAPTER V 1st INSURANCE CODE |. Laws Governing Insurance A. Principal Law The principal law on: insurance is the Insurance Code, promulgated as P.D. 612 on December 18, 1974. Since that date, * the code has gone through five major amendments. Then, on June .11, 1978, P.D. 1460 was promulgated, consolidating P.D. 612 (Insurance Code of 1974) with the amendatory decrees, and executive orders into a single code now known as the Insurance Code of 1978, The latest amendment to the Insurance Code Is B.P. 874 approved on June 12, 1985 1 Before December 18, 1974, the Insurance Law of the Phillppin wasyAct 2427, which took effect on July 1, 1915. This law Itself was subjected to amendments, the last being P.D. 63, which took effect on November 29, 1972. Act 2427,, as amended, repealed the Insurance provisions of the Code of Commerce of 1888. ‘Act 2427 was taken verbatim from the Insurance Law of Califomia. * Most of the insurance concepts’ of that law are retained by P.D. Decree No. 1460, the new Insurance Code, hence, decisions of California courts on insurance have a persuasive effect on courts in the Philippines. : B, Supplementary Laws The supplementary laws are found in (1) the Civil Code (Arts. 789, 2011, and 2012), (2) Act 2573 on Mutual Insurance on Work Animals, (3) R.A. 8291 (Government Service Insurance Act of 1997), (4) R.A. 656 (Property Insurance Law), (5) R.A. 8282 (Social ‘Security Act of 1997), (6) R.A. 3124, on Industrial Life insurance, (7) P.D. 317 on Insurance Cooperatives, and (8) P.D. 1467, as amended by RA. 8175, on Crop Insurance. Article 2011 of the Civil Code expressly provides that insurance Contracts shall be governed by special laws, Le., the Insurance Code (Heirs vs, Maramag, 588 SCRA 774),182 INSURANCE CODE 1. Nature of Insurance ‘A. Concepts Defined “4. Contract of insurance ‘A contact of insurance is an agreement whereby one undertakes {for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. A contract of suretyship is an insurance contract i the suréty is doing an insurance business (Sec. 2 [1], Insurance Code; Philamcare vs. CA, 379 SCRA 366). ‘An insurance contract exists where the following elements concur: (1) The ineured hes an insurable Interest; (2) The insured Is subject to-a rlak of loss by the happening of the designated peri; (3) ‘The Ingurer asaumien the risk; (4) Such assumpiton of kis pat of @ daneral.poheme to dlatribute actual losses among a large group "bearing & ‘imiiat risk; end (5) In- consideration: of: the Inure’’s promise, the Ineured pays @ premium (Philamcare vs.CA, upra) ‘Where there was no perfected contract of insurance, the insurer cannot be'held liable on the contract that does not exist (DBP vs. CA, 231 SCRA 370). ° ‘There are certain contracts almost all the provisions of which have been drafted only:by one party, usually @ corporation. Such ‘contracts are called contacts of adhesion, because the only participation of the other party is the signing of his signature or his ‘adhesion’ thereto. Insurance contracts, bils of lading, contracts of sale of lots on installment plan fall into this category. It is sought to be accepted or adhered to by the other party, who cannot change the same and who are thus made to adhere thereto on the ‘take it or leave it’ basis (Ruiz vs. CA, 401 SCRA 410). ft is an established rule in insurance contracts that when their terms contain limitations on liability, they should be construed strictly ‘against the insurer. These are contracts of adhesion the terms of which must be interpreted and enforced stringently against the insurer which prepared the contract (Blue vs. Olivares, 544 SCRA 580). INSURANCE CODE 153 While it is @ cardinal principle of insurance law that a policy or ‘contract of insurance is to be: construed liberally in-favor of the insured and strictly as against the insurer company, 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 sud terms are clear and uriambiguous, they must be taken and understood in their plain, ordinary and- popular sense (Lalican Vs. Insular, 597 SCRA 159): In contracts of adhesion, the parties do not bargain on equal footing, the weaker party's participation being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the courts of justice must protect. Consequently, any ambiguity therein is resolved against the insurer, ‘or construed liberally in favor of the insured (Gulf vs, Phil. Charter, 458 SCRA 550). ‘An insurance contract should be 80 interpreted &8 to carry out the purpose for which the parties entered Into the contract which Is to ingure 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 Ineurer from oncompliance with its obligations (DBP vs. Radio, 480 SCRA 314), {n insurance cases, once an insured makes out @ prima facie case in its favor, the burden of evidence shifts to the insurer to controvert the insured's prima facie case. An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the burden of establishing that the loss comes within the purview of the exception oF limitation (Ibid). The test fo determine if a contract is an insurance contract or not depends on the nature of. the promise, the act required to be performed, and the exact nature of the agreement in the light of the currence, contingency, or circumstances under which the Performance begomes requisite. It is'not by what itis called (White vs. Pioneer, 464 SCRA 448). 2: Doing or Transacting ant Insurance Business ‘The term “doing an insurance ‘business” or “transacting an insurance business” includes: 1) Making or proposing to make, as insurer, any. insurance contract;184 INSURANCE CODE 2) Making or proposing to make, as surely, any contract of suretyship asa vocation, not: as a mere incident to any other legitimate business of the surety; '3) Doing any other insurance busiriess like reinsurance and similar acts; and 4) Doing or proposing to do any business equivalent to the above (Sec. 2 [2}, Insurance Code). The Insurance Code of 1978 is very clear on what constitutes an insurance. company. It provides that an insurer or insurance company “shall include all individuals, partnerships, associations or corporations xxx engaged as principals in. the insurance business, ‘excepting mutual benefit associations.” Insurance companies and lending investors are different enterprises in the eyes of the law. Lending investors cannot, for 2 ‘consideration, hold anyone harmless from loss, damage or lability, ‘nor provide compensation or indemnity for loss. The underwriting of riaks 8 the prerogative of insurers, the great majority. of which are Incorporated insurance companies. Unlike the practice of lending investors, the lending activities of Insurance companies are circumscribed and strictly regulated by the State. Insurance companies cannot freely lend to “themselves or thers” as lending investors can, nor can insurance companies grant simply any kind of loan. Even’priot to 1978, the Insurance Code Prescribed, strict rules for the granting of loans by insurance Companies. These provisions on mortgage, collateral and policy loans were reiterated in the Insurance Code of 1978 and are still in force today (Commissioner vs. Phil. American, 453 SCRA 668). Bar Question: What is a mutual insurance company or association? (2006 Bar) Answer: A mutual ite insurance corporation isa cooperative that promotes the welfare of its own members. It does not operate for profit, but for the mutual benefit of its member-policyholders. They receive their insurance at cost, while reasonably and properly {guarding and maintaining the stabilly and solvency of the company. The economic benefits fitter to the cooperative members. Either equally or proportionally, they are distributed among members in correlation with the resources of the association utilized (See Republic vs. Suniife, 473 SCRA 129). ; INSURANCE CODE 155 ‘A mutual ife insurance company is conducted for he benefit ofits member-policyholders, who pay into its capital by way of premiums. To that extent, they are responsible for the payment of alts losses. ‘The cash paid in for premiums and the. premium notes constitute their assets. In the event thaf the company itself fails before the terms of the policies expire, the member-policyholders do not acquire the status of creditors. Rather, they simply become debtors. for whatever premiums that they have originally agreed to pay the ‘company, f they have not yet paid those arhounts in ful, for mutual companies depend solely upon premiums. Only when the premiums will have accumulated to a sum larger than that required to pay for company losses will the member-policyholders be. entitled to a “pro rata division thereof as profits.” (Ibid.). Contributing to its capital, the member-policyholders are obviously also its owners. They not only contributs to the payment of its losses, but are also entitled to a proportionate share and participate alike in its profits and surplus (Ibld.) Where the insurance is taken at cost, itis important that the rates of premium charged by a mutual company be larger than: might reasonably be expected to catry the insurance, in order to constitute a margin of safety. This course of action’is taken because a mutual ‘company has no capital stock and relies solely upon its premiums to ‘meet unexpected losses, contingencies and expenses ({bid.). Sharing in the common fund, any member-policyholder may choose to withdraw dividends in ¢ash or to apply them in order to reduce @ subsequent: premium, purchase additional insurance, or accelerate the payment period (Ibid.). The so-called dividend that is received by member-policyholders is not a portion of profits set aside for distributions to -the stockholders in proportion to their subscription to the capital stock of the corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character. It remains an overpayment, a benefit to which the member-policyholder is equitably entitled (Ibid). ‘The main difference between a Health Maintenance Organization (HMO) and an insurance company is that HMOs undertake to ga Ee Ss =156 INSURANCE CODE provide or arrange for the provision of medical services through Participating physicians while insurarice companies simply undertake to indemnify the insured for medical expenses incurred up to a pre- ‘agreed limit (Phil. Health vs. Cornmissioner, 600 SCRA 413) ‘The mere presence of risk would be insufficient to override the primary purpose of the business to provide medical services. os needed, with payment made directly to the provider of these services._In short, even Ifthe HMO assumes the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged inthe insurance business. By the same token, any indemnification resulting from: the payment for services rendered in case of emergency by non- Prtcipating health providers would stil-be incidental to the HMO's purpose of providing and arranging for health care services and does Not transform It info an insurer. - To fulfil its obligations to its ‘members under the agreements, the HMO is required to set up. a system and the facities for the delivery of such medical services. This Indubltably shows that indemnification is not its sole object. Even ‘if a contract contains ali the elements of an insurance contract, under Section 2(1) of the Insurance Code, if its primary purpose Is the rendering of service, itis not a contract of insurance. It does not necessarily follow, however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties .in making the -contract may negate the existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in consideration Of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. lis contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a’stipulated amount, agrees at its own expense to defend a physician against all suts for damages for malpractice is ‘one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyer's retainer contract, the ‘essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice Ibid.) BEE EB 2 SS INSURANCE CODE 187 Bar Question: In a sale of land on the installment plan, the contract Protos thal ncase of tho deh Of te wanes ree completion of all the installment payments, the vendee's representatives or his heirs could either complete payment and Larges the bpd fo the land from the vendor or rescind the contract and recover back payments made. Is this an tract? Give reasons. (1968 Bar) an istrance cont Answer: There is no insurance contract in the problem for several reasons: Firstly, the vendor does not have any certificate to be an insurer. Secondly, the death ofthe vandee does not vest in his hers any right to indemnity. The only right given to them is to continue the Contract or to rescind with ight to reimibursement—assignment rights which they possess as heirs, with or without the contract with the B. Characteristics of insurance Contract |tis basic that all the provisions of the insurance gzamind andirrtsin conmonace vt cach oer a ene are reflective of the true intent of the parties. The policy cannet be construed piecemeal. Certain stipulations cannot be segregated and then ‘made to control; neither do particular words or phrases Sepessarly determine ts character (Gul v. Phi, Chater, 458 SCRA Bar Question: What are the characteristics of an contract? Explain each characteristic briefly. (1970 Bar) etrance ‘Answer: An insurance contract has the. ir is 7 ee Sr rk eee + the ‘insurer merely promises to. ‘pay when the est vas amare both parties have reciprocal obligations of a ae : ono ~ because generally actual loss or GC icr tometer te, woe158 INSURANCE CODE 4. Aleatory Insurance is an aleatory contract whereby oné undertakes for a consideration to indemnify another against loss, damage or liablity arising from an unknown or contingent event. Bar Question: Luis was the holder of an accident insurance policy effective Noveinber 1, 1988 to October 31, 1989. At a boxing Contest held in January 1, 1989 and sponsored by his employers, he slipped and was hit on the face by his opponent so he fell and his hhead hit one of the posts of the boxing ring. He was. rendered unconscious and was dead on arrival at the hospital due to “intracranial hemorrhage.” Can his father who is beneficiary under said insurance policy successfully claim indemnity from the insurance company? Explain your answer. (1980 , 1975 Bar) ‘Anawer: Yes, the father can claim indemnity as the designated beneficiary in the: policy. “A boxer entering a ring does not expect to die from his act. His alipping, with his ‘head hitting one of the posts, is accidental, and therefore covered by his accident insurance policy. 2. Voluntary, as a General Rule Under the new contract of "compulsory insurance” introduced by. RA. 4119 to the Workmen's Compensation System, the insurance ‘company is liable for compensation payments regardless of conditions incorporated in the policy limiting its coverage to certain ‘named locations, classes of employees, or specified operations, In vview of the fact that we follow the “full coverage" rule in compulsory Insurance (Manila vs. Workmen's, 34 SCRA 68). ‘This compulsory insurance concept exists also in the motor vehicle liability insurance under Sec. 373 of the Code. Where the insurance contract as a Motor Vehicle insurance provides for indemnity against liability to a third party, such third party can directly ‘sue the insurer. Such a provision (pour autrui) creates a contractual relation which inures to the benefit of any and every person who may be negligently injured by the named insured a if Such injured person were specifically named in the policy (First vs, Heando, 199 SCRA 796). INSURANCE CODE 159 ‘The general purpose of statutes enabling an injured person to proceed directly against the insurer is to protect injured persons against the insolvency of the insured who causes such injury, and to {give such injured person a certain beneficial interest in the proceeds of the policy, and statutes are to be liberally construe! so that their intended purpose may be accomplished (Shafer vs. RTC, 167 SCRA 386). Ina third party liablity vehicle insurance, the insurer assumed the obligation of paying the injured third party to whom the insured is liable. The insurer becomes liable as soon as the labilty of the insured to the injured third person attaches. Prior payment by the insured to the injured third person is not necessary in order that the obligation of the insurer may a‘ise. From the moment that the sured became liable to the third person, the insured acquired an interest in the insurance contract, which interest may be garnished like any other credit (Perla vs. Ramolete, 203 SCRA 487). Bar Question: Are the heirs of @ taxicab driver covered by an insurance policy issued by an insurance company entitled to an indemnity after having recovered compensation under the Workmen's Compensation Law, because the policy’ in question contained a stipulation that ‘the’ company will indemnify any authorized driver provided that such authorized driver is not entitled to indemnity under any other policy? (1970 Bar) Answer: Yes, the heirs Of the driver are entited to recover. The Condition imposed in the. policy is null and void, because prior recovery by the driver's. tiers on. the Workmen's Compensation Insurance is a recovery under a “compulsory insurance", a concept introduced by the Workmen's Compensation Law. The second insurance being compulsory, recovery under it cannot be a limitation to any other insurance which may have been procured by an insured. 3, Uberrima Fides (Perfect Good Faith) Contract ‘The contract of insurance is one of perfect good faith (uberima fides) not for the insured alone, but equally so for the insurer; in fact, it ig more so for the latter since its dominant bargaining position ‘carries with it a stricter responsibility (Fieldmen's vs. Vda. de ‘Songeo,25 SCRA 70).160 INSURANCE CODE 4. Personal Contracts take effect only between the parties thereto, except in some specific instances provided by law where the contract contains some stipulations pour autrul or a provision in favor of a third person not a party to the contract. Under this doctrine, a third person is ‘allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred, favor upon such person. Consequently, a third person, not @ party to the contract, has no cause of action against the. parties thereto, and cannot generally: demand the enforcement of the same (Bonifacio vs. Mota, 20 SCRA 261). tf there is no condtion in the policy that an action should be filed by the Insured against the agent for his claim, the fling of such action has no legal effect and serves no other purpose except that of ‘Notifying the agent of the claim. There is no law giving an effect to ‘such action upon the principal, and courts cannot by interpretation ‘extend the clear scope of the agreement beyond what is agreed upon by the perties (Ang vs. Fulton, 2 SCRA 945), ‘An insurance contract provision for prior arbitration before resort to court action applies only where the insurer disputes his liability, not where It totally disclaims liability (Bayview vs. Ker, 116 SCRA 327). Insurance is a contract of indemnity. An insurance is the law between the parties, its terms and conditions constitute the measure of tha insurer's tlability “and complianca therewith is a condition precedent to the insured’s ight to recovery from the insurer (Verendia vs. CA, 217 SCRA 417). . Classes of Insurance 4. Life insurance - dependent upon human life 2. Nomi insurance, which may be a. Fire insurance . Marine insurdnce . Casualty insurance 4. Suretyship . Compulsory motor vehicle liability insurance Retirement insurance is primarily intended for the benefit of the ‘employee—to provide for his old age, or incapacity, after rendering INSURANCE CODE 161 service in the’ government for a required number of years. If the employee reaches the age of retirement, he gets the retirement benefit even 10 the exclusion of the beneficiaries named in his application of insurance. The beneficiary of the retirement insurance can only claim the proceeds. of the retirement insurance if the ‘employee dies. before retirement. if the employee falled or ‘overlooked to state the beneficiary of his retirement insurance, the retirement benefits will accrue to his’ estate and will be given to his legal heirs in accordance with law: ‘The beneficiary in a ‘fe insurance of an employee does not automatically become the beneficiary in the retirement insurance unless the said person is so designated in the application for retirement insurance (Vda. de Consuegra vs. GSIS, 37 SCRA 315). ‘A health care agreement is in the nature of non-life insurance, which is primarily'@ contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract (Philamcare vs. CA, 379 SCRA 356) : D. What May be Insured Against 4. A Future Contingent Event Resulting In Loss or Damage This is illustrated by a fire insurance or life insurance where the liability of the insurer Is made to depend on the: happening of an ‘event (destruction by fire of the insured building or death of tha insured) in the future. ‘The word “loss” in the Insurance Law embraces injury or damage. ‘Aloss may be total or partial (Bonifacio vs. Mora, supra). 2. A Past Unknown Event Resulting in Loss or Damage What past event may be insured? Give example. Answer: A past event the happening or nor-happening of which is ‘unknown to the parties at the time of the perfection of the contract may be insured against. This is illustrated in marine insurance where at the time, the policy is executed, the vessel subject of the162 INSURANCE CODE insurance may have already sunk, but that fact was unknown to the parties at the time of the execution of the policy. Bar Question: The agent in Davao of the insured “A” was employed to ship "A's" copra.to Menila and to communicate the shipment to the buyer “A in Manila. The said agent wrote the owner of the copra announcing the sailing of the ship, but failed to state that the ship ‘had run aground, which fact he already knew before announcing the sailing. "A", the buyer of the copra, in all good faith, took out a ‘marine insurance on the copra.’ The copra was badly damaged and was a total loss. Can the insured recover on the policy? Reason. (1979 Ber) Answer: -No, the insured cannot recover under the policy. ‘A past event, unknown to both parties at the time the insurance was procured, may be insured against, and recovery thereon may be had if the terms of the policy cover loss of this nature. However, in the above, the past event (the grounding of the vessel and consequent damages fo the copra) was not entirely ‘unknown to the Ineured (the owner of the copra), his buying agent in Davao having had knowledge’ of the grounding of the vessel even before the owner | ‘insurance.on the copra, which information his agent failed to relay to him. His agent's knowledge is equivalent to knowledge by him of the grounding, the past event insured against. * Besides, nothing is mentioned in the problem that the insurance would cover a past event whether or not the subject matter existed. -3. Contingent Liability This is best illustrated in reinsurance where the lability of the insurer is in tur insured by him with a second insurer. This is also true in Workmen's Compensation Insurance and Employers Liability Insurance. Bar Question: 1s the insurer liable for fortuitous event? (Answer ‘yes or no, then give reasons). (1962 Bar) ‘Answer: Yes, the insurer is liable for fortuitous event. By its very nature, the liability of the insurer attaches. on the happening of a Contingent event insured against, and that event should have ‘happened without intervention in any manner by the insured. An insurance contract Is one involving an assumption of risk by the insurer, INSURANCE CODE 163 Parties to an insurance Contract 4. The Insurer The insurer is the person who undertakes to indemnify another by a contract of insurance, and may be a natural person, company, corporation, or association who holds a certificate of authority from the Insurance Commissioner. 2. The Insured Generally, any person with capacity to contract and having an insurable interest in the life or property insured may be the insured. @ Minors * A minor under certain circumstances may be an insured, and can exercise all the rights and pfivileges of an owner under the policy. If a policy is taken by a person on the Iife.or health of a minor, the policy vests in the minor on the death of that person who procured the policy (Sec. 3, insurance Code). * Bar Question: May a minor contract for life, health and accident insurance? Explain fully. (1953 Bar) Answer: A minor may contract for life, health and accident insurance under the following conditions: (a)he must be at least 18 years old; (b) the insurance is on his fe; (c) the beneficiary is his estate, his parents, his spouse, children, brothers or sisters. (Note:_A person 18 years or above now has contractual capacity under R.A. 6809, hence cannot be considered a minor). X Bar Question: Who may be appointed as beneficiaries in a iife insurance policy taken by a minor, 18 years old? (1946 Bar) Answer: The following may be designated as beneficiaries to a Ife insurance taken by a minor: “his estate, ‘nis wite, his children, tis mother, his father, his brothers and his sisters. (Note: "A person 18 years or above now has contractual capacity under R.A. 6809, hence cannot be considered a minor).164 INSURANCE CODE b. Married Woman ‘A married woman may take insurance on her lfe or on that of her children, without need of her husband's consent (Sec. 3, Insurance Code). Under Sec. 5 of R.A. 7192, women, single or married, now have the same contractual rights as men in entering into insurance contracts. . Public Enemy A public enemy cannot be insured. By public enemy is meant any citizen or juridical entity of the country with which the Philippines may be at war. Bar Question: Mey a member of the Moro Islamic Liberation Front (MILF) or tte: breakaway group,.the Abu Sayyaf, be insured with @ ‘company licensed to do business under the Insurance Code of the Philippines (P.D: 1460)? (2000 Bar) Answer: Yes, a member of the MILF or the Abu Sayyaf may be insured. The prohibition pertains fo a public enemy, who is meant to be any citizen or judicial entity of the county with which the Philippines may be at war with them. Such is not the case at bar, members of the MILF or the Abu ‘Sayyaf being citizens of the Philippines and not of another country, hance, may stil be insured. 3. The Beneficiary ‘The beneficiary is the person designated to receive the proceeds of the policy when the risk attaches. He may be the insured himself In property insurance, or the insured or a third person in life Insurance. Itis obvious that the only persons entitled to claim the insurance proceeds are either the insured, tf stil alive; or the beneficiary, if the insured is already ‘deceased, upon the maturation of the policy (Heirs vs. Maramag, 588 SCRA 774). INSURANCE CODE 165 a. Beneficiary of One Who insures His Own Life The insured who insures his own life, as @ general rule, may designate any person including.his estate as his beneficiary, whether ‘oF not the beneficiary has an insurable interest in the life of the insured. ‘The insured shall have the right to-change his designation Of beneficiary, unless he has expressly designated an irrevocable beneficiary in his policy. Bar Question:. Is it necessary for a beneficiary to have an insurable interest in the lite of the insured? (1949 Bar) ‘Answer: If the policy is taken by the insured:on his own life; the beneficiary designated by him need not have an insurable interest in the life of the insured. Where the policy is taken by a third person not the insured, on the life of the insured, and said third person designates himself abthe beneficiary, he (the third person) must have an insurable interest on the life of the insured, at the time the policy became effective, Bar Question: Bianco took out a P1 milion life insurance polloy ‘naming his friend and creditor, Montenegro, as his beneficiary. When Blanco died, his outstanding loan obligation to Montenegro was only P50,000. Blanco’s executor contended that only P50,000 ‘out of the insurance proceeds should be paid to Montenegro and the balance of P950,000 should be paid to Blanco's estate. Is the executor’s contention correct? Reason out your answer. (1987 Bar) Answer: The executor's contention is not correct. When a person, ‘ike Bianco, took out a P'1 million insurance on his life, he can, under the law, designate any person, provided not disqualified to become a donee to him, to be his beneficiary to his life insurance. ° ‘tis not necessary for the beneficiary thus designated to have an ‘insurable interest in the lite of the insured nor is it necessary that the beneficiary thus designated should be an heir or should be related to the insured. Hence, in the provision, Montenegro would be entitled {0 the whole P1 milion proceeds of the policy. Bar Question: Assuming a man has a wife, several children, some legitimate, others illegitimate (spurious as well as natural) and @ close friend who has helped him in his business very much and whom he would like to repay. Can he make all or any of them the beneficiary or beneficiaries in his insurance policy? (1969 Bar)166 INSURANCE CODE Answer: Yes, he can designate all of them as his beneficiaries. Beneficiaries designated by the insured are not required to have any insurable interest on his life. Bar Question: A obtains insurance over his life and names his neighbor B the beneficiary because of A’s secret love for B. If A dies, can B successfully claim against the policy? (1997 Bar) ‘Answer: Yes, B can successfully claim against the policy of A. As a ‘general rule, the insured who insures his own life may designate any person including his estate as his beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured provided the beneficiary is not disqualified under the rules on donation. As B is only a secret love and not @ concubine of A, B is not disqualified, The proceeds of a jife insurance policy belong to the designated beneficiary to the exclusion of the heirs of the insured (Picar vs. G8I8, 33 SCRA 324), - ‘The father or mother of a minor who is an insured or beneficiary in 4 life policy, may exercise, for said minor, all rights’ under the policy Up to P20,000 without need of a court authority or a bond (Sec. 180, Insurance Code). ° 1. Exceptions to the General Rule - Persons Disqualified as Beneficiaries The only exceptions are found in Article 730 of the Civil Code, ‘consisting of persons disqualified from_ giving donations to each other. These are: (1) between persons guilty of adultery or concubinage; (2) between persons: found guilty of adultery or ‘concubinage in consideration thereof, and (3) those made to a public officer, his wife, ascendants or descendants, by reason of is office. A beneficiary in life insurance is like a donee; hence, the provisions on the disqualifications of a donee under the Civil Code ‘applies to @ beneficiary to the life insurance of the common-law husband as she is disqualified under Article 739 of the Civil Code to be his donee (Insular vs. Ebrado, 80 SCRA 181) ‘Bar Question: Eduardo Fernandez applied for and was issued Policy No. 0777 by Atlas Life Insurance Corporation on a whole life plan for P200,000.00. Although he was married to Clara, with whom gBgEHEWBuBE Ww Sa S35 3 INSURANCE CODE 167 the had five (6) legitimate children, he designated his common-law- wife, Diana Cruz, as his revocable beneficiary in the policy, and referred to Diana, in his application and policy, as his wife. Five (5) years thereafter, he died. Diana immediately fled her claim for the Proceeds of the policy as the designated beneficiary. Clara also filed her claim as legal wife. The insurance company filed a Petition for Interpleader before the Regional Trial Court of Rizal to determine who should be entitled to the proceeds of the policy. ‘It you were the judge, how would you decide the said interpleader action? Explain, (1998;1985, 1981, 1962, 1955 Bar) ‘Answer: if | were the judge, | wil resolve the interpleader action in favor of the legitimate wife, Clara, and her five legitimate children with the insured. Diana Cruz, insured’s common-law-wite, is disqualifed as beneficiary to ‘the insured's life policy — the reason for the disqualification being her living in concubinage with the Insured during his lifetime. A beneficiary in lfe insurance is like a donee, and 2 donee disqualified by the Civil Code is also disqualified to be the beneficiary in fife insurance. There being no qualified beneficiary, the proceeds of the polley will go tothe legal heirs of the insured - his legitimate wie, Clara and his five children with Clara, 2.. Vested Right of Beneficiary Bar Question: “A” took an insurance on his own life, appointing his wife “B" as beneficiary. During the battle of Manila, “A" died a fow moments after “BY. Who are entitled fo the insurance proceeds? (1946 Bar) Answer: The heirs of “B", the beneficiary wife, will be entitled to the proceeds of the policy. The designation here, being irrevocable, there being no reservation to revoke by the insured of the designation, vested in “B" a right to the insurance from the time of issue of the policy. (Note: Under the new Insurance ‘Code, the designation of beneficiary in a lfe policy is revocable unless the insured expressly provides that itis revocable.) ‘Bar Question: On December 20, 1974, “A” took out a life insurance policy and named his wife “B", as beneficiary. The policy was silent with regard to any change of beneficiary. Suspecting thet "B" was ‘commiting adultery, “A” immediately notified the insurance company= m&- 168 INSURANCE CODE in writing that he is substituting his brother *C* as his beneficiary in place of “B". “A" died on June 30, 1975. “B" claims the proceeds of the insurance policy, contending that as designated beneficiary, she cannot be changed without her consent, she having acquired a vested right to the proceeds of the policy. Decide and give reasons for your answer. (1988, 1978 Bar) Answer: The policy was taken on December 20, 1974, when the ‘New Insurance Code was already in effect.’ Under this Code, the designation of a beneficiary to a life insurance policy taken by a person on his life is revocable, unless he (the insured) expressly waived his right to change beneficiaries. AAs there 1s no express reservation not to change beneficiaries in the policy, the change made by the insured A, constituting C as his ‘benefictary operated to.revoke the designation of B. Hence, B does not have any right to claim the proceeds of A's policy as she was no longer the beneficiary when A the insured died on June 30, 1976, ‘The-vested Interest or right of the beneficiaries in a life insurance olley should be measured on ils full face value and not on its cash ‘surrender value, for, in case of death, the beneficiaries may continue paying the same.and they are entitled to automatic extended term on paid up insurance options, etc.. Said vested right under the policy ‘cannot be divisible at any given time. (Nario vs. Philam, 20 SCRA 434). A beneficiary designated in a GSIS life‘policy is governed in his rights by the GSIS law. While generally, a designated beneficiary is entitled to the whole proceeds ‘of the insured’s policy, in a GSIS policy, the law makes the proceeds liable to attachment, garnishment and other legal processes, when obligations or indebtedness to the GSIS and the employer, that is, the government, is concerned (Picar vs. GSIS, supra). 3, Irrevocable Designation Bar Question: What are the effects of an irrevocable designation of «a beneficiary under the Insurarice Code? Explain. (2005 Bar) Answer: If the designation of beneficiary is imevocable, the insured cannot (1) assign the policy, (2) take the cash surrender value of the ppalicy, (3) allow his creditors to attach or execute on the policy, (4) add a new beneficiary, or (5) change the ievocable designation to BSB Be SB Se 2 | INSURANCE CODE: 169 pfevocable, even though the-change is just and reasonable. This is ‘80 because the irrevocably designated beneficiary and his heirs have acquired from the date of the policy vested rights over the policy (See Philam vs. Pineda, 175 SCRA 416) ‘A person who insures his own life may designate his beneficiary revocably or irrevocably. For the designation to be irrevocable, the insured should expressly state the irrevocable designation in the policy itself (Sec. 11, Insurance Code). ~ Bar Question: 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 ot {riends, to be included as beneficiaries considering that the proceeds of the policy are sufficient for the three friends, Can Jacob stil add Yob and Jojo as his beneficiaries? (2005 Bar) Answer: The addition of two other beneficiaries would diminish Diwata's interest, consequently, Jacob can only add Yob and Jojo as beneficiaries if Diwata consents to the same. This is due to the irrevocable designation of Diwata as Jacob's beneficiary. A creditor bank as attomey-infact of the insured and as lnrevocable beneficiary of the insured had the obligation to collect. from the insurer. fit failed to do so afer the lapse of a considerable Period of time, itis barred from enforcing the obligation of the insured (PNB vs. CA, 158 SCRA 201). 4. Distribution of Proceeds of Policy if Premiums Paid from Salaries a, Where a’ Specified Person is Beneficiary Bar Question: “A” took out a P30,000.00 life insurance policy and designated his wife, “B” as the sole beneficiary. Al the premiums in the policy were paid out from his salaries. .The spouses have three (3) children, *X, *Y" and "2". "A" died intestate, a. Divide the proceeds of the policy. '. In the same case, suppose ‘A’ instead of designating his wife as sole beneficiary, designated his child "x" only as sole beneficiary? ‘Reason out your answers. (1961 Bar)BB EBB EBB ea Ss BEE BEBE ee 170 INSURANCE CODE Answer: (a) All of the proceeds of the policy will go to the designated beneficiary, “8” The source of the premium here is immaterial (0) Al of the proceeds of the policy here will go to °X", the designated beneficiary. The source of the premium again is immaterial b. Where the Estate of the Insured is the Beneficiary Bar Question: When are the proceeds of a life insurance policy considered conjugal even though the policy was made payable to the decedent's estate? (1951 Bar) ‘Answer: Evén though the proceeds of a.life insurance policy were ‘made payable to. the decedent's estate, said proceeds are stil ‘conjugal if the premiums are paid (1) from salaries of the insured or (2) from other conjugal funds or properties. Bar Question: —°Z" during his marriage to Y, obtained a life Inaurance policy for P10,000.00. payable to his estate. Premiums therecn were pald from his salary as a teacher. While the policy was {n effect, Z dled survived by Y and two children, A and B. How would {you generally apportion the proceeds of the policy? (1948 Bar) ‘Answer: The proceeds of the policy are conjugal. So, it will be divided as follows: 'P5,000 or 1/2 of the proceeds to Y, as Y's conjugal share. The remaining P5,000 to be divided into three, as follows: 1,666.67 to Y, as her share as heir of X; P1,666.67 to A, as his share as heir of X; and P1,666.67 to B, as his share as heir of X. While it is true that under general principles in the law on Insurance, if a policy provides that the proceeds shall be payable to the insured, if he lives up to a certain date, and in case of his death before that date, then they shall be payable to the beneficiary designated, the benefit of said policy will inure to such beneficiary in case the assured dies before the end of the period designated in the policy, and, generally, that the proceeds of a life insurance while a third person Is named beneficiary belong exclusively to such beneficiary as an individual; they are rot the property of the heirs of the insured, are not subject to administration, and cannot properly be claimed by the administrator or other legal representative of the insured as assets of his estate. INSURANCE CODE im Where the deceased married for a second time without the second wife knowing of the existence of the first marriage of the deceased, the proceeds of his life insurance policy, where no beneficiary was designated, will be divided equally between his two families (Vda. de Consuegra vs. GSIS, 37 SCRA 315). . Beneficiary of Life Insurance on the Life of ‘Another Person ‘Where life insurance is procured by a person over the life of another, the former must have an insurable. interest in the life of the latter as specified by law, at the time the policy was taken. 4d. Beneficiary of Property Insurance ‘The benéficiary of a property insurance must have an insur interest over the subject matter of the insurance existing at the time the policy was taken, and at the time the loss took place. Bar Question: A obtains a fire insurance on his house and generous gesture names. his neighbor as the beneficiary. hhouse is destroyed by fire, can B-successfully claim against the policy? (1997 Bar) . ‘Answer: No, B cannot successfully claim against the policy because in property insurance, the beneficiary must have an insurable interest ‘over the subject of the insurance existing at the time the policy was taken, and at the time the loss took place. F, Insurable interest 41. Insurable Interest Defined Bar Question: Define insurable interest. (1965 Bar) ‘Answer: Insurablo interest is every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature. that a contemplated peril might directly damnify the insured (Sec. 13, Insurance Code; See Gaisano vs. insurance, 490 ‘SCRA 286) Bar Question: BD has a bank deposit of half @ million pesos. Since the limit of the insurance coverage of the Philippine Deposit Insurance Corporation Act.(R.A. 3591) is only one tenth of BD'snee m INSURANCE CODE deposit, he would like some protection for the excess by taking out ‘an insurance against all risks or contingencies of loss arising from any unsound or unsafe’ banking practices including. unforeseen adverse effects of the continuing crisis: involving the banking and financial sector in the Asian region. Doss BD have an insurable interest within the meaning of the Insurance Code of the Philigpines (P.D. 1460)? (2000 Bar) ‘Answer: Yes. Tho Philippine Deposit insurance Corporation Act as amended by RA. 7400 has a liability :only up to P100,000 per deposit, hence BD has insurable interest in his bank deposit more particularly to the excess of the PDIC coverage, or the amount of ‘P400,000, in case of any unforeseen crisis in the bank. (Note: Under RA. 9576, coverage under the PDIC has been Increased to P500,000.00 per deposit.) ‘An ingurable interest is one of the most basic and essential requirements in’ an Insurance contract. In general, an insurable Interest Is that Interest.which a person is deemed to, have in the ‘subject matter Insured, where he’has a relation or connection with or ‘concern in It, such that the person will derive pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, fr injury by the happening of the event insured against. The existence of an insurable interest gives a person the legal right to ingure the subject matter of the policy of insurance. Section 10 of the Insurance Code indeed provides that every person has an insurable interest in his own life. Saction 19 of the same code also states that ‘an interest in the life or health of a person ineured must exlet when the insurance takes effect, but need not exist thereafter or when the loss occurs (Lalican vs. Insular, 597 SCRA 157) Life 2. Insurable interest Defined Bar Question: What is insurable interest in life? (1966 Bar) ‘Answer: insurable interest in life is the interest which aperson has in his Ife, or the interest which he may have-in the lives of other persons (1) on whom he depends wholly or in part for education or ‘support, (2) under legal obligation to him to pay money, to deliver property, or to render service, (3) upon whose life any estate or interest vested in him depends. INSURANCE CODE 173 b, insurable Interest in One's Life Every person has an insurable interest in the life and health of himself (Philamoare vs. CA, 379 SCRA 356) ¢. Insurable Intérest in the Life of Others Bar Question: When may there be an insurable interest in the life of another? Discuss briefly. (1966 Bar) ‘Answer: A person may have an insurable interest in the life of another in the following cases: (a) Of any person on whom he depends wholly or in part for education or support. Example: Wife insuring the husband's Ife. (0) Of any person under a legal obligation to him for payment of ‘money, o respecting property or service, of which death or line: might delay or prevent performance. Example: A creditor Insuring the life ofits general manager. A buyer insuring the Ife of the seller ‘of palay promised to be delivered in the future. (c) Of any person upon whose life any estate or Interest vested inhim depends. Example: Legatee of a usufruct insuring the life of the usufructuary on whose death the usufruct wilrbe extinguished. ‘The Problem: Some businessmen with an available starting capital totaling only P100,000,00 ask you to help organize a business firm. Subject (0 legal limitations, they have future plans to invite allen investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is ‘solicited on the following various questions that may arise: Bar Question: An insurance agent contracts the manager of your firm to sell life and property insurance. Your advice is sought on the following matters: ‘May your firm at its expense insure tho life of its manager with @ provision that the insurance proceeds shall be paid to the company ‘and his heirs in equal proportions? Why? (1973, 1965 Bar) Answer: Yes, my fim may insure at its expense the life-of its ‘manager, it having an insurable interest on the services of the said ‘manager to the firm, whose death or illness would materially and injuriously affect the corporation. ‘The provision on the contract that the proceéds shail be equally divided between the company and the heirs of its manager is valid, the company having an insurable_ 174 INSURANCE CODE interest as before stated, being entitled to the insurance proceeds. The same insurable interest may be said to exist in favor of the heirs. ‘The grant by the frm to the heirs of the manager of one haf of the proceeds of the policy can. be justified by the implied powers of a corporation, ift is @ corporate ently. Bar Question: On July 14, 1985, X, a homosexual, took an insurance policy on the life of his boy friend, Y. In the insurance ‘pplication, X misrepresented thet Y was in perfect health although he knew all the time that Y was afficted with AIDS. On October 18, 1987, Y died in a motor accitent. - Shorty thereafter, X filed. his insurance claim. ‘Should the insurer pay? Reasons. (1987, 1946 Bar) ‘Answer: No, the insurer should not pay because it has .no lability under the policy taken. ‘A person may Insure the life of another provided the former (the ‘one taking the policy) has an insurable interest in the life of the ‘insured. That insurable interest exists only in the following cases: (a) Over the life of @ person upon whom he depends for ‘education or support; (b) Over the life of @ person under a legal obligation to pay him money, to deliver property, or to render service; (c) Over the life of a person upon whose Ife any estate: or Interest vested in him (the one procuring the policy) depends. ‘A person does not have an insurable interest inthe lite of another who is @ mere friend - friendship alone not falling under any one of the three categories above-stated. Hence, the insurer is not lable because of the absence of insurable interest by the one who took the life policy over the life of the person whose life was insured. °X is also guity of misrepresentation that Y was in perfect health, hence the insurer is not liable, Bar Question: A lender of money, not licensed as an insurance company, exacted from each borrower as part. of the loan agreement, an amount sifficent to pay, and with it did pay, the premium on a policy of the life insurance on a borrower's life issued by a licensed insurance company. The loan agreement provided that in case of death of the borrower, the debt would be paid out of the proceeds of the life insurance. Could the lender be prosecuted for doing insurable business without the corresponding certificate of ‘authority? Explain your answer. (1968 Bar) | INSURANCE CODE 18 ‘Answer: The lender in the problem Is not acting as an insurer hence does not need any certificate of authority from the Insurance Commission. He therefore cannot be prosecuted for doing insurance business. Batter stil, he money lender has an insurable interest in the lives of his borrowers, to the extent of the amount each of them owes him. Hence, his act of requiring each of the borrowers fo procure life insurance, for an amount equivalent to the debts, and making him the beneficiary up to the extent of these debts, is allowed by law. 4d. Purpose of Insurable Interest in the Life of Others Bar Question: What is the purpose of the law in requiring that.the insured must have an insurable interest in the life of the person insured? (1949 Bar) Answer: The purpose of the law in requiring that the person procuring the insurance must have an insurable interest in the life insured is to take off all temptation to destroy the life of the insured because of his life insurance, This also prevents the contract from ~ becoming @ wagering contrac. e. When Insurable Interest Should Exist In life insurance, it is sufficient that the insurable interest over the lite of ancther exist a the time the insurance is taken. Bar Question: When must insurable interest exist? (1967, 1965 Bar) Answer: In life insurance over another's life, it must exist at the tine the insurance is taken. {In property. insurance, the insurable interest must exist at the time the insurance is taken, and when the Joss occurs, but need not exist in the meantime. Bar Question: On January 4, 1983, Mr. P joined Alpha Corporation (Alpha) as President of the Company. Alpha took out @ fe insurance policy on the life of Mr. P with Mutual Life Insurance ‘Company, designating Alpha as-the beneficiary. Alpha also carried a fire insurance with Beta Insurance Company on a house owned by it, but temporarily occupied by Mr. P, again with Alpha as the beneficiary. ‘On September 1, 1983, Mr. P resigned from Alpha and purchased the company house he had been occupying. A few days later, a fire ey ee ee ee eeea ee ee 176. INSURANCE CODE ‘occurred resulting in the death of Mr. P and the destruction of the house. What are the rights of Alptia (a) against Mutual Life Insurance ‘Company on the life insurance policy? (b) against Beta Insurance Company on the fire insurance? (1984 Bar) ‘Answer: Alpha has a right to recover from Mutual Life the proceeds ofthe ife insurance policy taken by Alpha on the life of P. While it is true that the basis forthe taking by Alpha of insurance on the life P was the service P would render as President fo Alpha and while itis equally true that P died after he resigned from Alpha, the rule in life insurance taker on the life of others is that the insurable interest -on said life must exist: only at the time the insurance was taken. A subsoquent termination of the relationship {from which the insurable interest arises will not affect the policy. ‘Alpha cannot recover against Beta Insurance on the fire insurance ‘ince at the time of loss, Alpha was no longer the owner of the house because P already bought it when he resigned. Hence, Alpha had ‘no Inaurable Interest over the property at the time of loss. In property Insurance, insurable Interest must exist at the time the insurance is taken and when the loss occurs, but need not exist inthe meantime. f. Insurable Interest in Life Insurance and in Property Insurance Compared Bar Question: Distinguish insurable interest in life from insurable interest in property. (2002, 1961.Bar) Answer: The differences between insurable interest in life insurance and in property insurance are: ; (@) In Ife insurance, the insurable interest must exist only at the time the policy is taken; in property insurance, that interest must exist at the time the policy is taken and at the time the loss occurs. (0) In life insurance taken on the insured's life, his beneficiary need not have an insurable interest on his (insured’s) life; in property insurance, the beneficiary must have an insurable interest in the property insured. (c) In life insurance over one's life, there is no limit fo the amount Of insurable interest. In propeity insurance, insurable interest is limited to the actual vaiue of the interest in the property. Bar Question: 1S, an elderly bachelor with no known relatives, obtained life. insurance coverage for P250,000.00 from Starbrite Insurance Corporation, an entity licensed to engage in the insurable ee ee) ee ee ee eee INSURANCE CODE i” business under the Insurance Code of the Philippines (P.D 1460). He also insured his residential house for twice that amount with the ‘same corporation. He immediately assigned all his rights to the insurance proceeds to BX, a friend-companion living with him. Three ‘years later, 1S died in a fire that gutted his insured house two days after he had sold it. There is no evidence ‘of suicide or arson or involvement of ‘BX in these events. BX demanded payment of the insurance proceeds from the two polices, the premiums for which IS nad been faithfully paying during all the time he was alive. Starbrite refused payment, contending that BX had no insurable interest and therefore was not entitled to receive the proceeds from IS's insurance coverage on his if and also on his property. Is Starbrite's contention valid? Explain, (2000 Ber) Answer: Starbrite's contention is not valid as fo the life Insurance. BX need not have insurable interest: on the ‘life of IS to be @ beneficiary in an insurance taken by IS on his own Ife, Starbrite ‘must therefore pay BX the life insurance proceeds, Starbnite’s contention, however, is valid as to the property ‘insurance. BX, a mere friend-companion, does not have insurable interest on the property insured. Starbrite therefore can refuse to ay BX the property insurance proceeds. 3. Insurable Interest in Property a. What it Consists of ‘An insurable interest‘in property does not necessarily imply a Property interest in, or a lisn upon, of possession of, the subject matter of the insurance, and neither the ttle nor a beneficial interest is requisite to the existence of such an interest; itis sufficient that the insured is so situated with reference to the property that he would be liable to loss should it be injured or destroyed by the peril against which its insured. Anyone has an insurable interest in property who derives @ benefit from its existence or would suffer loss from its destruction (Gaisano vs. Insurance, 490 SCRA 286). ‘The stipulation in Section 14 of the lease contract that the equipment shall be insured at the cost and expense ‘of the lessee against loss, damage, or destruction from ‘fre, theft, accident, or other insurable risk for the full term of the lease, is a binding and valid stipulation. The lessee has an insurable interest in the equipment and motor vehicles leased. Section'17 of the Insurance Code provides that the measure of an insurable interest in property178 INSURANCE CODE Is the extent to which the insured might be damnified by loss or injury thereof. It cannot be denied that the lessee will be directly damnified in case of loss, damage, or destruction of any of the properties leased (Ong vs. FEB, 524 SCRA 333). Bar Question: insurance: What is considered as an insurable interest in property. (1951 Bar) ‘Answer: insurable interest in property is every interest in property Whether real or personal, or any relation thereto, or liability in respect thereof, of such & nature that the contemplated peril might directly cause damage to the insured, Bar Question: What does insurable interest in property consist of. Explain your answer. (1967, 1963 Bar) Answer: An insurable interest in property may consist of: (a) “An ‘existing Interest; (b) An inchoate interest founded on an existing Interest; and (0) An expectancy, coupled with an existing interest in that out of which the expectancy arises. b. Examples Bar Question: “A" owns a house valued at P50,000.00 which he hhad insured against fire for 100,000.00, and to secure payment thereof he executed a deed of mortgage on the house, but without assigning the insurance policy to the latter. For “A's” failure to pay the loan upon maturity, “B" initiated foreclosure proceedings and in the ensuing public sale, the house was sold by the sheriff to."B" as highest bidder. Immediately upon issuance ofthe sherif’s certificate of sale in his favor, “B” insured the house against fire for 120,000.00 with another insurance company. In order to redeem the house, “A” borrowed P100,000.00 from “C’-and, as a security device, he assigned the insurance policy of P100,000.00 to °C” However, before “A” could pay “B" his obligation of P100,000.00, the ‘house was accidentally and totally buried. Does “A’, “Bor °C have any insurable interest in the house? May “A’, “B® and °C" recover under the policies? If so, how much? (1982 Bar) ‘Answer: A, the owner of the house stil has an insurable right fo the property - his right of redemption, which however was not the subject of insurance at the time of the loss, A having assigned the policy to c. BEREEe@ BBE INSURANCE CODE 19. 'B, the lender - mortgagee's insurable interest in the ‘house cconsists of his conditional right to become owner if the house is not redeemed by A within the redemption period. , a8 lender of P100,000 to B, has an insurable interest in the house, because the policy of A over the house was assigned to him (C). AA cannot recover under his fire policy because at the time of the fire, he had already assigned the policy to C. can recover under his fire policy, but the recovery cannot be up to the face value of the policy. The admitted true value of the house is P50,000 only, which amount an insured can recover if he is the absolute owner. The insurable interest of B in the house is not his real right as mortgagee, but his being highest bidder at auction, to become owner of the house, if the mortgagor fails to'redeem. The value of this right certainly cannot be an amount more than what an absolute owner can recover (P50,000). C cannot recover under the policy assigned to him because there is no assent of the insurer to the assignment. Bar Question: Give an example of an insurable inchoate right in the property. (1955 Bar) ‘Answer: The following are the examples: Inchoate interest founded (on an existing interest: (a) Contractor’ interest to the completed building for ‘unpaid construction cost; (b) Lessor’s interest on improvements made by lessee; and (o) Naked owner's interest over property over which another person has beneficial tile. Bar Question: “A owns a house worth P'500,000.00. He insured it against fre for P250,000.00 for the period from January 1, 1977 to January 1, 1978. At the instance of B, who is.a judgment creditor of AA the said house was levied upon by the sheriff and sold at public auction on March 15, 1977. It was adjudicated to B for P150,000 at the auction sale. insured the house against fire for 150,000.00 for the period from March 16, 1977 to March 16, 1978, The was accidentally bumed on Apri 1, 1977. a. May A recover under his policy? Give reasons. b. May B recover under his policy? Give reasons. (1977, 1947 Bar) Answer: (8) Yes, A the owner may recover under his poiicy. The insurable interest of A on the house is his ownership over. it. This insurable interest existed inspite of the sale at auction of the houseae ee 180 INSURANCE CODE on March 15, 1977, because the property, being real property, A, the ‘owner, stil had a one year period of redemption. () Yes, B, the buyer at auction, may recover under his policy. He has an inchoate right founded on an existing right, hence, an insurable interest in A's: house, even while the period of B's redemption was running, up to the extent of P150,000, the amount B paid at the auction. : Bar Question: °X’, a general creditor to *Y", insured the latter's property because the destruction of such property would render Wworthls any judgment he might obtain agains! hs said debtor. Is such contract of insurance valid or not? Why? (1965 Bar) Answer: No, the contract is not valid. “X’, the general creditor of *Y*, has no insurable interest in any of the specific properties of “Y" because his expectant interest is not founded on any actual right to the thing nor upon any valid contract for it. Bar. Question: Cirlaco leased.@ cammercial apartment from ‘Supreme Building Corporation (SBC). One of the. provisions of the ‘one-year lease contract states: "48. x x x The LESSEE shall not insure: against fre the chattels, merchandise, textiles, goods and effects placed at any stall or store or space in the leased premises without first obtaining the written ‘consent of the LESSOR. If the LESSEE. obtains fire: insurance ‘coverage without the consent of the LESSOR, the insurance policy is deemed assigned and transferred to the LESSOR for the latter’s benefit.” Notwithstanding the stipulation in the contract, without the consént of ‘SBC, Ciriaco insured the merchandise inside the leased premises against loss by fire in the amount of P500,000.00 with First United Insurance Corporation (FUIC). ‘A dey before the lease contract expired, fire broke out inside the leased premises, damaging Ciriaco’s merchandise. Having leamed of the insurance earlier procured by’ Ciriaco, SBC demanded from UIC that the proceeds of thé insurance policy be paid directly to it, ‘as provided in the lease contract. Who Is legally entitled to receive the insurance proceeds? Explain. (2009 Bar) Answer: Ciriaco is legally enttied to the proceeds of the insurance. It is Cilaco, as lessee, who has insurable interest over the chattels, ‘merchandise, textiles, goods and effects, even if the premises wherein such merchandise is placed is leased. SBC has no insurable interest over the same, although he has a separate and distinct Bea & INSURANCE CODE 181 insurable interest over the premises. In case of loss, Said goods, is Caco who should receive the proceeds ofthe insurance notwithstanding the provision in the, leese contract. The insurer cannot be compelled to pay the proceeds 10 a person vwho has no insurable interest in the property The liablly of the insured for volating their lease contract in that he obtained @ fre insurance policy over their own merchandise, without the consent of tho owner of the leased promisas, is @ separate and distinc issue (See Cha vs. CA, 277 SCRA 690). SBC cannot be entiled to the insurance proceeds because it has no insurable intrest in the subject matter ofthe insurance, ° Bar Question: A, a widower sixty years old, owns various houses. He does not believe in insurance. B is his only son: Does B have an- insurable interest in those houses? (1960 Bar) Answer: No, B does not have an insurable interest in any of the ‘houses of A, his father. He does not have any actual property right in any of the properties of his father during the latter's ietime to constitute as an insurable interest over the same. | bei wei ges aay b Bar Question: Juan insures against fire the property of his frie precise setae Pel ina ol al le Answer: No, the policy is not valid. Juan does not have any Gusting intrest. not even any expectancy on ie ting founded on an existing right to the thing. Hence, he does not have any insurable interest over the thing. Bar Question: JQ, owner of a condominium unit, insured the same against fire with XYZ Insurance Co., and made the loss payable to his brother, MLQ._ In case of loss by fire of the said condominium unit, who ‘may recover on the fire insurance policy? Stele the reason(s) for your answer. (2004 Bar) ‘Answer: JQ can recover on the fire insurance policy because as ‘owner, he has insurable interest over the property. MLQ cannot recover on the fire insurarice policy because he does not have insurable interest on the property. Annomife insurance policy such as the fire insurance policy taken over merchandise is primarily a contract of indemnity. insurable interest in the property insured must exist at the time the insurance takes effect and at the time the loss occurs (Section 19). The basis aa =182 INSURANCE CODE of such requirement of insurable interest in property insured is based ‘on sound policy: to prevent a person from taking out an insurance Policy on property upon which ‘he has no insurable interest and ‘collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager which is void under Section 25 of the insurance Code (Cha vs. CA, supra). The vendee-consignee of goods in transit under a perfected ccontract of sale is vested with an equitable tile to the goods even before recaipt by him of the goods to constitute an insurable interest in property (Filipino vs. CA, 179 SCRA 638). Bar Question: A piece of machinery was shipped to Mr. Pablo on the basis of C & F, Manila. . Mr, Pablo insured said machinery with the Talaga Merchants Insurance Corp. (TAMIC) for loss or damage during the voyage. The vessel sank en route fo Manila. Mr. Pablo then flled a claim with TAMIC which was denied for the reason that to delivery, Mr. Pablo had no insurable interest. Decide the foe (1901 Bar) ‘Anawer: Even before the receipt by Mr. Pablo of the machinery he bought, he has an equitable tte to the said machinery, which constitutes his insurable interest. Mr. Pablo can therefore claim from TAMIC the proceeds of the insurance policy on said machinery. c. When It Must Exist Bar Question: in a civil suit, the Court ordered Benjie to pay Nat 500,000.00. To execute the judgment, the sheriff levied upon Bonji's registered property (a parcel of ‘land and. the building thereon), and sold the same at public auction to Nat, the highest bidder. The latter, on March 18, 1992, registered with the register of deeds the certlicate of sale issued to him by the sheriff, Meanwhile, ‘on January 27, 1993, Benjie insured with Garapal Insurance for P1,000,000.00 the same building that was sold at public auction to ‘Nat. Benjie failed to redeem the property by March 18, 1993. In March 19, 1993, a fre razed the building to the ground. Garapal Insurance refused to make good its obligation to Benjie under the insurance contract. a. Is Garapal Insurance legally jusifed in refusing payment to Benjie? ‘5. Is. Nat entitled to collect on the insurance policy? (1994 Bar) INSURANCE CODE 183 Answer: (a) Yes, Garapal Insurance is justified in refus ent to Bone because Bento had no nsrabe intrest a the of eee since he failed to redeem the same by March 18, 1993. Even if he ‘has insurable interest at.the time the policy was issued, he had no incurable interest atthe time of loss. (b) Nat is not entitled to collect on the insurance policy because he had no insurable interest at the’time the policy was issued. He was not the owner then. The transfer of the property to him did not ‘automatically transfer to him the insurance thereon, Bar Question: On February 3, 1987, while Jose Palacio was in the ‘hospital preparatory to a heart surgery, he called his only son, Boy Palacio, and showed the latter a will naming the son as sole heir to all the father's estate including the family mansion in Forbes Park. The following day, Boy Palacio took out @ fire insurance on the Forbes Park mansion. One wedk later, the father dled. After hie father’s death, Boy Palacio moved his wife and children to the familly mansion which he inherited. On March 30, 1987, a fe occurred razing the mansion to the ground. Boy Palacio then proceeded to Collect on the fire insurance he took earlier on the house, ‘Should the insurance company pay? Ressons. (1987 Ber) Answer: The insurance company should not pay because It /s not able under the fre policy taken by Boy Palacio. ‘In property insurance policies, lke fire insurance, itis necessary that the insured (who also is the beneficiary as a general rule) should ‘have an insurable interest on the property insured, both at the time the policy took effect and at the time the loss took place. While it is true that the insured Boy Palacio was awnar of the insured house when the fire occurred, he however, had no insurable interest yet at the time he took out a fre insurance policy, as on the said date, his father, Jose Palacio, owner of the house, was stil living. His having been designated in his father's will as sole heir did ‘not make him, Boy Palacio, owner of the house; neither did it create for him any insurable interest in the house. The policy is therefore ‘ull and void and cannot bind the insurer. Bar Question: A insured against fire his ten-storey’ building on Ayala Avenue, with X and Company for PS milion on September 1, 1970. He sold the building to B on’September 20, 1970 for P6 ‘milion without endorsing the:fre policy. On September 25, 1970, the building was gutted by an accidental fire. ‘a, Can A collect trom X and Company the proceeds of the fre policy? Reason. SB 8a 2184 INSURANCE CODE’ ». Can B, as new owner of the building, collect the proceeds? Reason. . Assuming that the building was mortgaged to Bank Y to secure the debt of A for P4 million and the’ sale was made without the ‘knowledge of Bank Y, would your answer be the same as in (a) and (b) above? Reason. 4. Can Bank Y collect from X and Company? Explain. (1972, 1971 Bar) Answer. (a) A cannot collect from X and Company the proceeds of the fire policy because he had no insurable interest in the building at the time the building was burned. : (b) 8, the new owner, cannot collect because he had no insurable interest at the time the policy was issued. The policy taken by A on the building was not assigned to him when he (B) bought the buiiding from A. (c) No, my answer wil not be the same. Bank Y which necessarily is the assignee of the fire policy taken by A over the building a8 required by banking laws, ‘has an insurable interest (ts ‘mortgage right) even if the building changes ownership without its knowledge. its mortgage right, being real, attaches to the property Inrespective of ownership changes. (Q) Bank Y can collect the true value of the building (if a total loss) which cannot.exceed P4 milion, the value of its insurable interest. d. Amount of Insurance Bar Question: Juan has a property worth P10,000.00. He insures it against fire for P8,000.00. In case of total loss, how much shall he collect from the insurance? In case of partial loss in the amount of 'P8,000.00, how much shall he collect? Explain. (1946 Bar) Answer: In case of total loss, he will collect the face value of the fire policy - P8,000.00.: Ifthe actual loss is partial at P8,000.00, then he will collect only the amount in proportion to his loss ifthe policy is a valued policy. In the problem, he is entitled to collect 8/10 of 'P8,000.00 or P6,400.00. This is so because an owner of property wha insures the same for less than its true’ value is co-insurer for the uninsured portion of the property if the policy is a valued one. If the policy is an open one, he can collect his actual partial loss not exceeding the face value of the policy. In the problem, he can collect his P8,000 partial loss, the amount being within the face value of his policy. INSURANCE CODE gs j Bar Question: A shipped 1,000 sacks of palay with an estimated value of P10,000. He insured it for the same amount. On the way, “however, the entire shisment was damaged. Suppose that tho ‘market price that it would have brought undamaged was P15,000 but its market value in its damaged state was P7,500. How much can the insured collect? (1970 Bar) ‘Answer: The insured can recover only P5,000 or 1/2 of the face value of the policy of P10,000, ifthe policy is a valued policy: Where an owner under-insures his property, he acts as co-insurer {or the uninsured portion, hence, when a partial loss takes place, the value of ‘said loss isnot fully recoverable from the insurer. His loss ‘is one-half of the true value of the property, hence, his recovery is ‘one half of the face value of his policy. If the policy is open, he can recover the full amount of his partial loss provided it is'within the face value. He can therefore recover 7,500, his partial loss, The Problem: Some businessmen with an available starting capital totaling only P100,000.00 ask you t0 help orgenize @ business firm, ‘Subject t0 legal limitations, they have future plans to jnvite alien investors who are agreeable to rendering financial assistence by way Of direct investment and/or loans. Your professional assistance is solicited on the following various questions that may arise. ‘Bat Question: An insurance agent contacts the manager of your firm to sell life and property insurance. Your advice is sought on the following matters: : Your firm's car worth P20,000,00 was insured against damage by ‘accidents for P30,000.00. If the car was completely wrecked in a collision, how much can your firm recover on the policy? Why? (1973 Bar) Answer: My firm can recover only the true value of the car of 20,000, not the P30,000 face value of the policy. Insurance Contracts, especially of the nonv life variety, are contracts of indemnity and the insured can only recover as maximum the true value of that which he has lost. e. Insurable interest in Mortgaged Properties ‘The mortgagor has an insurable interest on his property as owner Up to the full value of his property, imespective of any mortgage on186 INSURANCE CODE said property in general. The exception is in marine insurance (Servicowide vs. CA, 256 SCRA 649). The mortgagee’s insurable interest is up to the extent of his credit (Ibid). Each may take separate insurances over the same property up to the extent oftheir respective insurable interests. The mortgagor may fake insurance on the property, and: assign ‘the same to the mortgagee: or constitute thie mortgagee as beneficiary as his interest may appear (Ibid). Where the mortgagor takes insurance‘on the: property in his own right making the loss payable to the mortgagee, the insurance is on the mortgagor's Interest, and he (the mortgagor) continues to be a party to the contract, and any act of his which would avoid the policy, will thus avold the policy, Conversely, any act fo be done by him, but done by the mortgagee, produces the same effect as if performed by him (Ibi. It the mortgagor assigns the policy to the mortgagee with the Insurer's eesent, but the lettor imposes new conditions on the assignee, the acts of the mortgagor will not affect the assignee's rights (Ibid). Where the Chattel Mortgage does not authorize the mortgagee to apply previous payments for the car to the insurance, the mortgagee has fo send notice to the morigagor if it decides to convert any of tho inetallments made by the latter fér the ronewal of the insurance Abid.) Bar Question: To secure a loan of P10 milion, Mario mortgaged his bullding to Armando. In accordance: with the loan arrangements, Mario had the building insured with First Insurance Company for P10 ‘milion; designating Armando as the beneficiary: Armando also took an insurance on the, building upon his own interest with Second Insurance Company’ for P5 milion. . The building was totally destroyed by fire, @ peril insured against under both insurance policies. it was subsequently determined that the fire had been intentionally started by Mario and that in violation of the loan agreement, he had been storing inflammable materials in the building. How much, if any, can Armando recover from either or both insurance companies? (2010 Bar) INSURANCE CODE a 187 Answer: Being a mortgagee, Armando’s insurable interest is up to the extent of his credit or up to 10 milion pesos. However, in the i case, he can only recover 5 milion pesos from the insurance ‘he took from Second Insurance Company. He may not recover from the insurance taken by Mario. because the latter violated the contract of insurance when he intentionally started the fire. Where the ‘mortgagor takes insurance on the property in his own right making the loss payable {3 the ‘mortgagee, the insurance is on the ‘mortgagor’ interest, and he (the morigagor) continues to be a party fo the contract, and any act of his which would avoid the policy, will thus avoid the policy.(See Servicewide vs. CA, supra). 4. Right of a Mortgage as a Beneficiary of Insurance Policles with Subsequent Endorsements and Delivery Itis settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged property, such that each one of them may insure the same property for his own sole benefit. The intentions of the parties “as shown by thelr ‘contemporaneous acts must be given due consideration In order to better serve the interest of justice and equity (RCBC vs, CA, 280 SCRA 292). It is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching crecitors (Ibid.). Section 53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it was made (Ibid). Bar Question: A businessman in the grocery business obtained from First Insurance an insurance policy for five milion pesos to fully cover his stocks-in-trade from the risk of ire. Three months thereafter, a fire of accidental origin broke out and completely destroyed the grocery including his stocks-n-rade. This prompted the businessman to file with First Insurance a claim for five milion pesos representing the full value of his goods. First insurance denied the claim becuse it discovered that at the time of the loss, the stocks-in-rade were mortgaged to a creditor who likewise obtained from Socond insurance Company tro insurance coverage for the stocks at their full value of five milion pesos.BB mRe eS 188 INSURANCE CODE (@) May. the businessman and the. creditor obtain separate insurance coverages over the same stocks+in-trade? Explain. 2008 : (6) Suppose you are the Judge, how much would you allow the businessman and the creditor to recover from their respective insurers. Explain. (1999 Bar) Answer: (a) Yes. The businessman, as mortgagor, and the creditor, ‘as mortgagee, have separate and distinct insurable interests in the ‘same mortgaged property, the stocks-in-rade, such that each one of them may insure the same property for their respective interests. 2008 (c) As the Judge, | would allow the businessman to recover stocks ~inrtrade which were lost. On the other hand, | would allow the Creditor to recover only the amount he extended to the businessman, if less than five milion pesos, because that is his only insurable Interest, Bar Question: To secure @ loan of P10 million, O mortgaged his ‘building to C. In accordance with the loan arrangements, O had the ‘property Insured with Acme Insurance Company for P10 milion, with Cas the beneficiary. C also took an insurance on the building upon ‘hls own interest with Beta Insurance Company for PS milion. ‘The building was totally destroyed by fire, @ perl insured against in both insurance policies. It'was subsequently determined that the fire had been intentionally started by O and that in violation of the loan agreement, O had been storing inflammable materials in the building. How much can C recover from either or both insurance ‘companies? What happens to the P10 milion debt of O to G? (1984 Bar) Answer: C can recover under the insurance policy procured by him ‘but not under the policy taken by O, the mortgagor, wherein C was designated as beneficiary. : , the mortgagee, can recover on the policy procured by him, with his mortgage credit as his insurable interest, because the actuations (of O do not bind him (C), and produce no adverse effect at all on the enforceability and validity of the fie policy procured by him (C). ‘On the other hand, the policy taken by O on the building wherein C was designated as beneficiary, is nullified by the .acts of O in intentionally starting the -fire and in storing inflammables in the building in violation of the agreement. INSURANCE CODE 189 © does not cease to be a party tothe agreement: by his designating the mortgagee, C, as beneficiary, and any act of © like intentionally buming the building or storing inflammables in it, wil avoid the policy and prevent the beneficiary from collecting the ‘proceeds under the policy taken by O. The amount recoverable by C under the P5 milion policy procured ‘by him on his mortgage interest wil only be 2/3 of PS milion. This reduction is caused by the fact that the extent of his inferest being P10 millon only, the two insurances, one for P10 millon and second for P5 million, is a case of over-insurance. These insurances will be proportionally reduced such that the total will not exceed P10 milion. The P10 milion debt of © {6 C can stil be collected by C less what C collected from the insurer, without prejudice to the insurer ‘being subrogated to the right of C to collect from O what C got from the insurer. " Ng ge ta Ber Question: .“A’, the registered owner of @ house and lot located ‘in Baguio City, mortgaged the same to “B', to secure the payment of a debt in the sum of P20,000, the mortgage being duly registered. The house was totally destroyed by accidental fre, but itis insured in the sum of P30,000. Who would be entitled to the insurance proceeds: 2. ifthe policy had been taken by “B’, and '. fit had been taken by ’A"? Reason. (1969 Bar) ‘Answer: (a) If the policy is taken by B, the mortgagee, he will be entitled to the proceeds of the policy up to the extent of his insurable interest which is the amount of his credit against the mortgagor. (b) iftaken by A, the owner, he is entitled to the proceeds. B, the ‘mortgagee, can collect from A, his credit, but not from the insurance company, as there is no assignment of the policy to him. Bar Question: Pedro obtained a loan of PS0,000.00 from, and mortgaged his P75,000 house as security for the loan to, Juan. Thereafter, Pedro insured the house against fre with the insurer "X" for P70,000. Juan also insured the house with insurer *Y" against fire for P50,000. While the policies were in force, the house was totally burtied accidentally. State the respective rights of Pedro and Juan, and the rights and/or obligations of insurers “X" and *Y”, Explain your answer. (1972 Bar) ‘Answer: Pedro can recover P70,000 from his insurer X, the amouint being the face value of his fire policy. and within its true value of 75,000,BES Ss = 190 INSURANCE CODE recover P50,000 from Y, his insurer, the amount being equator fo his mortgage credit, over which he has an insurable interest. Y, the insurer of Juan, is however subrogated fo the right of Juan to collect the P50,000 loan from Pedro. Question: “JC* obtained a loan from “PR” in the sum of Pio,cn0 mortgaging a residential buiing as security. "PR" insured the building against fire for P12,000. The building was partly destroyed by fire and “PR” collected P9,000.00 on the policy. “JC demanded that the sum received by “PR” should be credited to him Sad his indebtedness correspondingly reduced. Was “JC's” demand justiiod? What rights are acquired, f any, by the insurer. (1980 Ber) + No, “IC's” demand Is not justified. The insurance by "PR". air Nee procured by nn on his insrabe intrest, 20 Ie @ stranger fo the policy, ‘and therefore cannot claim any benefit under it. spp ysurer who paid “PR" is subrogated to the right of to come aon from Pict “PR® can still collect P1,000 directly from “JC", the balance of the obligation not recovered by ‘the insurance policy procured by “PR”. fon; M's house has a market value ‘of P30,000. He rary 15,000. When the policy is in force, M succeeds in ‘mortgaging the house to a wealthy friend for P20,000. The next day, fire partially destroys the house, It is estimated that it would cost fe pay ey Who may recover onthe pate? How much (1950) inswer: M, the owner of the house, who Insured the house, can er sy Which fs an open pally. The mortgagee cannot recover on the policy as ther’ is no assignment to him of the oo is partial, is ‘The amount of recovery by M, although the loss is partial, 15,000 (which is within the face value of the policy), the policy here being an open one. £. Change of Interest in Property Insured i the thing insured Rule, A_change of interest in any part of unaccompanied by a corresponding change of interest in. the asurance suspends the insurance to an equivalent extent, until the interests In the thing and in the insurance vest in the same person. i i \ i | INSURANCE CODE 11 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 wil or succession; and (4) transfer of interest by a partner, joint owner, or common owner, to another partner, joint ‘owner or common owner. The Problem: Some businessmen with an available starting capital totalling only 100,000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise. Bar Question: An insurance agent contacts the. manager of your firm to sell fe and property insurance. Your advice is sought on the following matters: “ The office building of your fim is insured against damage by fre and earthquakes. Without the previous consent of the insurer, your firm assigns the fire policyyafies the building ig burned totaly, ‘Does ihe gssinae have & right against the insurer? Give legal reasons. 1973 Bar) Answer: The assignee may collect the proceeds from the insurer because the change of interest (assignment) occurred after the loss. Bar Question: “A” insures his house’ for P10,000 commencing January 1, 1952. On February 15, 1952, “A” sells the house to “8” for P15,000 without endorsing or transferring the fire policy to “B’. On April 20, 1952, the house is completely destroyed on account of an accidental fie.” Can “A” or “B® collect the proceeds of the policy trom the insurer? Explain and give reasons for your answer. (1960, 1959, 1952 Bar) Answer: Neither A, the seller, nor 8, 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 interests in the property and in the insurance vest in the same person..A has transferred his interest in the object of the insurance (the house) to B without a transfer 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 ofthe foss, none can recover under the policy. Il, Devices to Detimit Subject Matter of Insurance192 INSURANCE CODE ‘A. Concealment 1. Defined Bar Question: Define or explain and exemplify concealment in insurance contracts. (1948 Bar) ‘Answer: ‘Concealment is a neglect to. communicate that which a ‘party knows and ought to communicate to the other party. ‘Example: Failure by the insured to inform the insurer that he has been hospitalized for cancer or some other serious disease. 2, Requisites For concealment to vitiate a contract of insurance, several requisites must be present: (t) the matter concealed must be ‘material, and (2) there must be an obligation for the insured to reveal the concealed matter to the insurer : The fraudulent Intent on the part of the insured must be established to warrant. rescission of the insurance contract. Concealment as @ defense for the health care provider or insurer to avoid liabilty Is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. The labilty of the health care provider attaches ‘once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid (Philamcare vs. CA, 379 SCRA 356) 3. Test of Materiality ‘A fact is material if knowiedge of it would have -affected the decision of the insurer to enter. into the contract, in estimating the risk, or in fixing the premium (Great vs. CA, 89 SCRA 543). Where the person procuring the insurance concealed the fact that the insured was a Mongoloid, the concealment is material and gives to the insurer the right fo rescind. Material concealment can rescind the insurance contract, whether intentional or unintentional (Ibid). Where the person procuring life insurance on the life of an iliterate old woman concealed the advanced stage of lung cancer of the insured who died of said disease seven months later, the insurer may rescind the policy. Lack..of understanding by the iliterate el oe ee ee eee) eee eee eee INSURANCE CODE 193 insured of the statements and her application as to her state of good health does not negate the insurers right to rescind (Tang vs, CA, 90 SCRA 236). ‘The waiver of a medical examination in a non-medical insuraiice contract renders even more material the information required of the applicant conceming previous condition of health and diseases suffered (Sunlife vs. CA, 245 SCRA 268). Matters relating to thé health of the insured are material and relevant to the approval and issuance of the life insurance policy as they definitely affect the insurer's action on the application {bid It's weltsettied that the insured nead not die of the disease he had failed to disclose to the insurer, as itis sufficient that his non- disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making Inquiries (Ibld.). ‘The information was matetial to the ability of the ineurer to estimate the probable risk the insured presented as a eubject of Ife insurance when he did not disclose his visits to his doctor, the diagnosis made and the medicines prescribed by such doctor, in the insurance application. It may be reasonably assumed that the insurer would have made further inquiries and would have probably refused to issue a non-medical insurance policy or, at the very least, required a higher premium for the same coverage (Vda. De Canilang vs. CA, 223 SCRA 443). Concealment exists where the assured had knowiedge of a fact material othe risk, and honesty, good faith, and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds the same (Great vs. CA, 316 SCRA 677). Ber Question: “P” fled en application with an insurance company for a 20-year endowment policy in the amount of P50,000.00 on the life ‘of his one-year-old daughter, supplying all the essential data in the application form, but without disclosing that his daughter wes @ Mongoloid child. Upon “P's” payment of the annual premium, a binding deposit receipt was issued to “P" by the insurance agent subject to processing by the company. The insurance company disapproved the insurance application stating that the plan applied for was not available for minors below seven years old, and offered another plan. The insurance agent did not inform ‘P* of the disapproval nor of the alternative plan offered, and instead, stronglyi ee 194 INSURANCE CODE recommended that the company reconsider and approve the insurance application. ‘As fate would have tt, “P’s" daughter died. *P” sought payment of the proceeds of the insurance but the company refused on the grounds that there was concealment of a material fact in the Insurance ‘application form and that it had rejected the application. “P* contended, on the other hand, that the binding deposit receipt constituted a temporary contract of ife insurance. 5 ‘How would you resolve the issue? (1980 Bar) ‘Answer: There can be. no recovery under the. policy for two reasons: firstly, the binding deposit contains the condition that the application would be subject to processing by the company. At most, therefore, it was a conditional acceptance subordinated to the act of the company to approve or disapprove the application. It therefore could not have bound the company unless the company approved the application. The failure of the agent to inform the insured of the ee ee ee INSURANCE CODE vm language of the contract is selected with great care and deliberation by experts, and legal advisers employed by, and acting exclusively in thé interest of, the insurance company (Rizal vs. CA, 336 SCRA 12). {In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance (American vs. Tantuco, 366 SCRA 740) In determining what the parties intended, the courts will read and construe the policy as a whole and if possible, give effect to all the parts of the contract, keeping in mind always, however, the prime rule that in the event of doubt, this doubt is to be resolved against the Insurer ibid.) 4. Particular Stipulations interpreted The clause in an insGirance policy authorizing the owner of the damaged vehicle to-contract for its repair does not mean that the repairman is entitled to collact the cost of repair out of the proceeds of the insurance. Jt merely establishes the procedure that the insured has to follow. in order to be entitled to Indemnity for repalr (liao vs GA, 218 SCRA 433). Bar Question: in line with the loan clause contained in @ validly existing life insurance policy, X applied for 2 loan of P50,00.00. The insurance company denied the loan application notwithstanding the fact that the cash surrender value of the policy was more than sufficient to justify the loan epplied for. X sued the insurance company demanding rescission of the contract of insurance and the return of all premiums previously paid by him. The insurance company claimed that A had fully enjoyed the protection of the insurance on his life while the policy was in force and that the ‘company had assumed the. risk of death of X in the meantime, Decide the case. Explain. (1971 Bar) Answer: While it is true that the company had already assumed @ risk while the policy was in force, the premium collected included a loading rate (for extra benefits like the right to borrow) to which the ‘company would not be entitled if there were no such extra rights, as itis not at all related to its risk 1 submit therefore that X is entitled to a refund to him of that portion of the premium already paid by X corresponding to this loading rate and he may likewise recover damages because of the breach.m2 INSURANCE CODE The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any other contract or agreement because the insurance policy denominates the assured ‘and the beneficiaries of the insurance. Thus, when the insurance policy names only one party as the, assured thereunder, the claim of eae that it (S a co-assured is unfounded (Cebu vs. William, supra). The rule that ambiguity must be strictly interpreted against the Insurer and liberally in favor of the insured, especially to avoid forfeiture, is equally applicable to. Health Care Agreements (Philamcare vs. CA, 379 SCRA 356). Since @ health care agreement is in the nature of a contract of Indemnity, payment should be made to the party who incurred the ‘expenses ([bid,), Btfectivity of Policy 4, General Rule Notwithstanding any agreement to the contrary, no. policy or contract of insurance Issued by an Insurance company is valid and binding unti the premium thereof has been paid, except in the case of a life or industrial life’ policy whenever the grace period applies (Section 77, Insurance Code), Where a fire policy was issued without payment of premiums, but which premiums five months later were paid to an authorized agent of the insurer, the policy is valid and the insurer is liable for the loss taking place torso payment (Malayan vs. Arai, 104 SCRA ‘The phrase “unless there is a clear agreement to grant the insured credit extension of the premiums due” found in Act 2427 is deleted from the Insurance Code (Velasco vs. Apostol, 173 SCRA 228). The actual payment of premium is a condition precedent to the valksty of an insurance contract (Ayla vs. Ray Burton, 385 Phi 475), INSURANCE CODE 213 Under the GSIS Law, the retired employees earned a vested right under their contract of insurance after they religiously paid premium to GSIS (Betoy vs. The Board, 658 SCRA 420). Ina pension plan, where the employee participation is mandatory, the prevailing view is that employees have contractual or vested right in the pension where the pension is part ofthe terms of employment (GSIS vs. Monteciaros, 478 Phil. 573; GSIS vs. De Leon, 635 SCRA 321). b. Exceptions 4. Life and Industria! Life Policy ‘The general rule in insurance iaws is:that unless the premium Is paid, the insurance policy is not valid and binding. The only exceptions are life and industrial Ife insurance (UCPB va, Masagana, 356 SCRA 307) 2. Written Acknowledgment of the Receipt of Premium by insurer ‘The renewal certificate issued. to respondent contsined the acknowledgment that premium had been paid. [tis noblsputed that the check drawn by respondent in favor of petitioner and delivered to its agent was honored when presented. and petitioner forthwith issued its official receipt to respondent. Section 306 of the Insurance Code provides that any insurance company which delivers a policy or contract of ineuranca to an insurance agent or insurance broker shall be deemed to have authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time ofits issuance or delivery or which becomes due thereon [Malayan vs. Amaldo, supral. in the instant case, the best evidence of such authority is the fact that petitioner accepted the check and issued the official receipt for the payment. , It is bound by its agent's acknowledgment of receipt of payment (American vs. Chua, 309 SCRA 250), Section 78 of the, Insurance Code explicitly provides: An ‘acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence ofits payment, 60 far as to make the policy binding, notwithstariding any stipulation therein that it shall not be binding until the premium is actually paid. This Section gE ES SSBEB EUS ES = m4 INSURANCE CODE establishes a legal fiction of payment and should be interpreted as an exception to Section 77 (UGPB vs. Masagana, supra. Bar Question: Josie Gatbonton obtained from Warranty insurance Corporation a comprehensive motor vehicle insurance to cover her brand new automobile. She paid, and the insurer accepted payment, jin check. Before the check could be encashed, Josie was involved Jn a motor vehicle accident where her car became a total wreck: She ‘sought payment from the insurer. Could the insurer be made liable under the insurance. coverage? (2003 Bar) Answer: Yes, the insurer can be made liable under the insurance coverage. The fact that the insurer accepted the check payment is ‘an acknowledgement that the premium:has been paid, hence the policy is binding (See American vs. Chua, supra). . 3, Payment in Installments of the Premium and. Partial Payment Made at the Time of Loss A third exception where Section 77 may not apply’ is ifthe parties have agreed to the payment in Installments of the premium ‘and Partial payment has been made at the time of loss. The subject policles are valid even If the premiums were pald on installments. ‘The records clearly show that the petitioners and private respondent intended subject insurance policies 1o be binding and effective otwithstanding the staggered payment of the premiums. The intial insurance contract entered into in 1982 was renewed in 1983, then in 1984.. In those three years, the insurer accepted all the installment paymenis.. Such acceptance of payments speaks loudly of the Insurer's intention to honor the policies it: issued to petitioner. Certainly, basic principles of equity and fairness would not allow the Insurer to continue collecting and accepting the premiums, although ald on Installments, and later deny liability on the lame excuse that the premiums were not prepaid in ful. While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, the request to make installment payments duly approved by the insurer would not prevent the entire. contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as Conclusive evidence of payment so far as to make the policy binding INSURANCE CODE 215 despite the fact that premium is actually unpald. Section 77 merely precludes the parties from stipulating that the policy is valid even: if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, publié order or public policy. So is an understanding to allow insured to pay premiums in installments not so proscribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted (UCPB vs. Masagana, supra). Bar Question: The Peninsula Insurance Company offered ta insure Francis’ brand new car against all risks in the sum of P1 Millon for 1 year. The policy was.issued with the premium fixed at P60,000.00 payable in 6 months. Francis only paid the first two months installments. Despite demands, he failed to pay the subsequent installments. Five months after the issuance of the policy, the vehicle was camepped. Francis filed with the insurance company @ ‘claim for its value. However, the company denied his claim an the {ground that he failed to pay premium resulting in the cancellation of the policy. Can Francis recover fom the Peninsula Insurance Company? (2006 Bar) 7 Answer: Yes, the. insurarice company is liable. since the. Joss happened on the 5" month which is within the agreed six-month ‘period of payment. The partial payment made by Francis prior to the time of the loss makes the lability shift to the insurer.. The partial payments constitute payment by installment which was duly agreed ‘upon by the parties. The basic principles of equity and faimess would not allow the insurer to continue’ collecting and accepting ‘premiums, although paid on installments, and later deny lability on the lame excuse that the premiums were not paid in full 4.Credit Extension for the Payment ‘of the Premium’ ~ lo scaured win the aecit Aer pron oid wfn crt oom There is a fourth exception to Section 77, namely, that the Insurer may grant credit extension for the payment of the premium. This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration Of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term. There Is nothing in, Section 77 which prohibits the parties in.an insurance contract to provide a credit term within which to pay the premiums. BES SSS SS216 INSURANCE CODE ‘That agreement is not against the law, morals, good customs, public ‘order or public policy. The agreement binds the parties. It would be Unjust and inequitable if recovery on the policy would not be permitted against the insurer which had consistently granted a 60-to- ‘90-day’ credit term for the payment of premiums despite ts full ‘awareness of Section 77 (UCPB vs. Masagana, supra.). Bar Question: Alfredo took out a policy to insure his commercial building against fire. The broker for the insurance company agreed to give a 15-day credit within which to pay the insurance premium. Upon delivery of the policy’ on May 15, 2006, Alfredo issued a postdated check payable on May 30, 2008. On May 28, 2006, a fire broke out and destroyed the building owned by Alfredo. May Alfredo recover on the insurance polléy? (2007 Bar) ‘Answer: “Yes, Alfredo may recover on the insurance policy. The Inaurance company's act of granting 'a. 15-day credit term is a recognized exception to the provisions of Section 77 of the Insurance Code on the binding effect of policies upon payment of the premium. (See UCP va: Masagana, suprs). “Hence; the policy is valid aven if the premium If not peta. 5.Estoppel Estoppel bars insurer from taking refuge under Section 77 since respondent relied in good faith on such practice. Estoppel then is ‘the fifth exception to:Section 77 (Ibid.). Bar Question: On Dec. 17, 1975, a fre policy, insuring a building and its contents, was delivered to the insured’ company. By agrooment, it was allowed to pay the premium within 30 days. On Jan. 8, 1976, it paid the premium by means of a check postdated Jan, 16, 1976. The check was deposited by the insurance company ‘only on Feb. 20, but the check bounced, although on January 19, the Insured had a sufficient bank balance. On January 18, two (2) days after the premium became due, the insured property was burned and became a total oss. Can the insurance company cancel the policy for non-payment of premium? Give reasons for your answers. (1978 Bar) Answer: Yes, the insurance company can cancel the policy. Non- ‘payment of the initial premium prevents the polly from taking effect. In the problem, however, that the insured was extended credit for 30 days which it complied with the issue of a check postdated within the said period, will not operate to make the policy effective, because the i INSURANCE CODE u7 clause of “unless there is a clear agreement to grant the insured ‘oredit extension” found in Act 2427 has been deleted in the Insurance Code. This méans that the policy Is not valid and binding tuntil the premium (Initial) is paid. ‘Bar Question: “A” insured his house against loss by fire for 100,000.00. The policy provides that the insurer shall be liable “if the property insured shall be damaged or destroyed by fre after the payment of premium, at anytime, from June 15, 1976 to June 15, 4977.” The policy was deliveréd to “A” on June 14, 1976. Instead of paying the premium in cash,-"A” issued a promissory note dated june 15, 1976, for the amount of the premium payable within 30 days. The note was accepted. Qn June 29, 1976, the property insured was bumed. The insurer refused to pay on the ground that the premium had not been paid, and the note did not have the effect of payment as its value had not been realized at the time the house was bumed. Decide with reasons. (1976 Bar) ‘Answer. | submit that the insurer is not lable. The aoceptence by the insurer of the post-dated promissory note le not payment, Hence, the policy was not valid and binding at the time of loss. Bar Question Enrique obtained from Seguro Insurance Company @ ‘compreherisive motor vehicle insurance (6 cover his top of the line ‘Aston Martin. The policy was issued on March 31, 2010 and, on feven date, Enrique paid the premium with a personal check postdated April 6, 2010. On Apri 8, 2010, the car was involved in an [2ccident thet resuited in its total loss. On April 10, 2010, the drawae bank retumed Enrique’s check with the notation “Insufficient Funds.” Upon notification, Enrique immediately deposited additional funds with the bank and asked the insurer to redeposit the check. Enrique thereupon claimed indemnity from the insurer. Is the insurer liable under the insurance coverage? Why or why not? (2010 Bar) ‘Answer: The insurer is not liable. Section 77 of the Insurance Code provides that no policy or contract of insurance issued by an insurance company is valid and binding until the premium thereof hhas been paid. The acceptance by.the insurer of the post-dated check note is not the payment contemplated by law. ‘Hence, the policy was not valid and binding atthe time of loss.SaeuaeBauus & 218 INSURANCE CODE 6. Cancellation and Renewal of Non-Life Policies No insurance policy, except lfe, may:be cancelled except upon prior notice to.the insured and for any of the following grounds: (1) non-payment of premium, (2) conviction af a crime out of acts increasing the hazard insured against, (3) discovery of fraud or ‘material misrepresentation, (4) discovery of wilful or reckless acts or ‘omissions increasing the risk insured against, (5) physical changes in the propery making the property uninsurable, and (6) a determination by the Insurance Commissioner that the policy would violate the Code (Section 64, Insurance Code). Ina noreiife insurance, the named insured shall be entitled to renew the palicy upon payment of the premium due, unless 45 days In advance before the end-of the original period, the insurer notifies the.ineured of its intention not to renew (Section 66, Ibid). ‘The claim of the inaurer that the policy was cancelled is without merit, It not having been shown that written notice was received by the Ineured, nor the requirements of a valid cancellation complied with by the ineurer (Malayan vs. Amaldo, 154 SCRA 672). C. Kinds of Policies There are three classes of policies in nonvife insurance: (1) open, (2) valued, and (3) running. ‘When the policy states that the lability of the insurer is the amount of the loss, whether total or partial, provided the loss is within the face value of the policy, the policy is an open policy, and the insurer is liable for the loss if within the covered amount (Development vs. IAG, 143 SCRA 62). Bar Question: What is : 2) an open policy, “b) a valued policy, .o) a running policy? (1953 Bar) Answer: (2) An open policy is one in which the value:of the thing insured snot agreed upon, but is left to be ascertained at the time of loss. AA certain agreed sum may be writen on the face of an.open policy, not as the value of the property insured, but as the maximum limit of recovery in case of destruction due to the occurrence of the peril insured against INSURANCE CODE 29 (0) A valued policy is one in which a definite valuation is, by the agreement of both parties, put upon the subject matter of the insurance and written’ on the face of the policy. The valuation, in the absence of fraud or mistake, is conclusive on the parties. (c) A running policy is one which. contemplates successive insurances and which provides that the subject of,the policy may {from time to time be defined. Bar Question: a) Suppose that Fortune owns a house valued at 600,000.90 and insured the same against fire with three (3) insurance companies as follows: ieee 400,000.00 Y snne 200,000.00 Zz 600,000.00 In the ‘absence of any stipulation in the policies, from which insurance company or companies may Fortune recover In case fe ‘should destroy his house completely? 'b. If each of the fire insurance policies obtained by Fortune in problem (a) is a valued policy and the value of his house was fixed in ‘each of the policies at P1 milion, how much would Fortune recover trom X, if he has already obtained full payment on the Insurance policies insured by ¥ and 2? c. If each of the: policies obtained by Fortune in problem (s) above is an open policy, and it was immediately determined after the fire that the value of Fortune's house was P2.4 milion, how much may he collect from X, ¥ and Z? d. In problem (a), what is the extent ofthe liability ofthe insurance ‘companies among themselves? ‘2. In problem (), what is the extont of the lability of Fortune to collect from both Y and Z? May he keep the entire amount he was able to collect from the said two insurance companies? Explain your answers. (1990 Bar) Answer: (a) Fortune can collect from any one or some of the three insurers up fo P600,000.00 only, without prejudice to those who have ‘overpaid claiming from the other insurers the amount of thelr proportionate shares. . (b) If the policies are valued at P1 million each, recovery by Fortune from any one of the throe of P1 milion wil cut off Fortune's right to recover from the other two.. Fortune is entitled to recover the 1 milion agreed valuation, and nothing more, respective of which insurance company made the payment to Fortune. This is without prejudice to the paying insurer getting from the ‘others their proportionate shares.220 INSURANCE CODE (c) If each of the policies is an’ open policy, Fortune can recover from all three the face value of their respective policies, the total of the three policies (P1.2 milion) not exceeding the true value. of the house determined at P2.4 milion after the fre. (d) As the house was valued at P600,000.00 but insured with three insurers for a total of P,200.000.00, the share of each insurer Is 50% of the face value of their respective policies. Fortune, for example, if it collects ail of the P600,000.00 from Z, would entitle Z to collect P200,000 fram X (1/2 of P400,000) and 100,000 from ¥ (1/2 of P200,000), the proportionate shares of X and Y. (e} If Fortune collected from ¥ and Z a total of P800,000, the excess of P200,000 over the value-of P600,000 wil have to be retuned by him. He cannot claim from the three insurers more than the true value of P600,000. ‘Bar Question: A owns house valued at P50,000 and is insured in ‘two companies, X and Y, for P45,000 and P10,000 respectively. In the polcies, It tated thet the value of the house is P25,000. ‘In Insurance Law, how are these policies denominated? Why? 6. How much I, the owner of the house, if destroyed by fire, entitled to collect from each of the Insurance companies? ©. If the actual loss amounts to P30,000 only, how much is A entitled to recelve from each of the Insurance companies? (1957 Bar) Answer: (a) The policies are valued policies because on the face of the policies there are values stated. (b) As the policies fix the value of the house at P25,000, that amount is tho maximum the insured can collect from the companies. The first insurer pays 45/55 or 9/11 of P25,000 or P20,450,00. The ‘second insurer pays 10/55 or 2/11 of P25,000 or P4, 550.00. (c) If the actual loss amounts to P30,000 only, A, the owner will receive 3/5 of P25,000 only or P15,000 from both insurers. The insurers. wil divide the P15,000 in the proportion of 9/11 and 2/11, respectively, for which they are liable to the Insured, Bar Question: In 1965, Jose constructed a house worth 50,000, which he insured against fire for the same amount. The insurance for the same amount was renewed evéry year. In 1974, when the ‘house was already worth P100,000 on account of inflationary prices (incase of a rebuilding), one-fith (1/5) of the house was destroyed by fire. Assuming that Jose was . completely blameless and thet there was nothing illegal about the contract, how much, if any, can BEES SSS SS INSURANCE CODE ma Jose successfully recover from the Insurance Company? Reasons. (1975 Bar) ‘Answer: If the policy is a valued policy, and the face value is the ‘agreed valuation between the partes, then Jose is ented to recover ‘only P10,000, 1/5 of the face value of the poly, said valuation being conclusive on the partes. D. Premium 4. Premium Defined ‘An insurance premium. is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril (Gulf vs. Phil. Charter, 458 SCRA 650). The premium, also. called the gross premium, consiate of two parts: the net premium which is the sum pald peftodically to meet the cost of the insurance and carry it from period to period, and the loading rate which answers for ‘adrhinistrtion, management, ‘operating expenses and profits of the insurer. 2. Duty to Pay Premium Bar Question: What is meant by “cash to carry” in the business of insurance? (2003 Bar) ‘Answer: The principle of "cash to carry” requires payment of the ‘premium before the contract of insurance can be valid and binding. ‘The philosophy behind this principle is that the insurer, upon issuance of the policy, is immediately exposed fo labilty or the risks insured against, hence itis entitled to be paid premium for extending protection to the insured immediately upon such exposure. ‘The payment of the premium is a condition to the intial validity and binding effect ofthe policy. Payment ofthe premium is a condition precedent to, and essential for, the efficaciousness of the contract of insurance (South vs. CA, 244 SCRA 744). In surety bonds, like that of an administrator, their continued effectivity is not dependent on the payment of premiums (Luzon vs. Quebrar, 127 SCRA 296).