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INSURANCE LAW l Atty.

Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Privity of contract or assignment by insured of claim not


GENERAL PROVISIONS
essential
SECTION 1 The right to subrogation is not dependent upon any privity of contract
or upon written or assignment of claim. It accrues simply upon payment
Section 1. This Decree shall be known as 'The Insurance Code'. of the insurance claim by the insurer.

Origin of present day insurance The subrogation receipt, by itself, is sufficient to establish not only the
Its origin is found in the mutual agreements among merchants of the relationship between the insured and the insurer, but also the amount
Italian cities in the early middle ages engaged in common shipping paid to settle the insurance.
ventures for distributing among the mutual contractors, the loss falling
upon any one by reason of the perils of navigation. Loss or injury for risk must be covered by the policy
The loss or injury must be covered by the policy for the insurer to be
Development of insurance in England subrogated of the rights of the insured.
1. Italian merchants founded trading houses in London and brought
the custom of insuring against the hazards of trade. Right of insured to recover from both insurer and third party
2. Insurance questions were decided by merchant courts and The right exists after indemnity has been paid by the insurer to the
merchant customs. insured who can no longer go after the third party. He can only recover
3. During the middle of the 18th century, the First English Insurance once. However, if the insurance company has not paid the full amount
Act was passed, where England’s common law courts began taking of injury or loss, the aggrieved party, not the insurer, is entitled to
cognizance of insurance cases and established a special court for recover the deficiency from the person liable.
the trial of marine insurance cases.
4. Lord Mansfield was appointed as Chief Justice of the Court of King’s Right of insurer against third party limited to amount
Bench. He is likewise called as the Father of English Commercial recoverable from the latter by the insured.
Law. Insurer is subrogated merely to the rights of the insured. It cannot
recover full amount paid to the insured if it is greater than that to which
TN: The development of insurance has followed the same lines in the the insured could lawfully lay claim against the person causing the loss.
United States as in England.
Exercise of right of subrogation by insurer discretionary
Development of insurance in the Philippines The insurer has the discretion whether or not to exercise its right to
1. Pre-Spanish times when the political unit was then the family – if a subrogate.
member of the family died, it was borne by the family.
2. Communities like the barangays developed, and assistance was Loss of right of subrogation by act of insured or insurer
extended accordingly. Should the insured, after payment from the insurer, release the
3. Mutual benefit societies and fraternal associations were organized wrongdoer from liability, the insurer loses his right to subrogate. In this
for the purpose of rendering assistance to their members. case, the insured is in obligation to return to the insurer the payment
4. Lloyd’s of London appointed Stratcham, Murray & Co. Inc. as its made.
representative in the Philippines. Insurance then was limited to
non-life insurance. Similarly, when the insurer pays the insured the value of the loss without
5. 1898 when life insurance was introduced with the entry of Sun Life notifying the carrier who has, in good faith settle the claim for loss of
Assurance of Canada. the insured, the settlement is binding on both insured and the insurer,
and the latter cannot bring an action against the carrier on his right to
Social Insurance subrogate.
Government sponsored programs, i.e. GSIS and SSS.
CONSTRUCTION OF THE INSURANCE CODE
RIGHT OF SUBROGATION OF INSURER TO RIGHTS OF
It is a settled rule of statutory construction that when a state has been
INSURED AGAINST WRONGDOER
adopted from some other state or country and said statute has
previously been construed by the courts of such state or country, the
Basis of right
statute is usually deemed to have been adopted with the construction
Subrogation is the substitution of one person in place of another with
so given.
reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies and securities. SECTION 2.

Subrogation has its roots in equity. It is designed to promote and to


Section 2. Whenever used in this Code, the following terms shall have
the respective meanings hereinafter set forth or indicated, unless the
accomplish justice and is the mode which equity adopts to compel the
context otherwise requires:
ultimate payment of a debt by one who is in justice and good conscience
ought to pay.
(a) A contract of insurance is an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or
Purpose of subrogation condition in policy
liability arising from an unknown or contingent event.
1. To make the person who caused the loss, legally responsible for it
2. To prevent the insured from receiving a double recovery.
A contract of suretyship shall be deemed to be an insurance
contract, within the meaning of this Code, only if made by a surety
Right of subrogation applicable only to property insurance
who or which, as such, is doing an insurance business as
The value of human life is regarded as unlimited and therefore, no
hereinafter provided.
recovery from third party can be deemed adequate to compensate the
insured’s beneficiary.
(b) The term doing an insurance business or transacting an insurance
business, within the meaning of this Code, shall include:

1|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

(1) Making or proposing to make, as insurer, any insurance DETERMINATION OF THE EXISTENCE OF THE CONTRACT
contract
(2) Making or proposing to make, as surety, any contract of Nature of the contract
suretyship as a vocation and not as merely incidental to any The character of insurance is to be determined by the exact nature of
other legitimate business or activity of the surety the contract actually entered into whatever the form it takes or whatever
(3) Doing any kind of business, including a reinsurance name it may be called.
business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code Under the Code, a contract of suretyship shall be deemed as insurance
(4) Doing or proposing to do any business in substance contract “if made by a surety who or which as such, is doing an
equivalent to any of the foregoing in a manner designed to insurance business,” within the meaning of the Code. But strictly
evade the provisions of this Code. speaking, a contract of suretyship is entirely different from a contract of
insurance.
In the application of the provisions of this Code, the fact that no
profit is derived from the making of insurance contracts, ELEMENTS OF THE CONTRACT
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed conclusive 1. Subject matter – the thing insured. In marine and fire
to show that the making thereof does not constitute the doing or insurance, it is the property; in life, health or accident insurance,
transacting of an insurance business. " it is the life or the health of a person; in casualty insurance, it is
the insured’s risk of loss or liability.
(c) As used in this Code, the term Commissioner means the Insurance
Commissioner. 2. Consideration – it is the premium paid by the insured. Its
amount is principally based on the probability of loss and extent
LEGAL CONCEPT OF INSURANCE of liability for which the insurer may become liable under the
contract.
A contract of insurance is an agreement by which one party (insurer) for
a consideration (premium) paid by the other party (insured), promises 3. Object and purpose – it is the transfer and distribution of risk
to pay money or its equivalent or to do some act valuable to the latter of loss, damage or liability arising from unknown or contingent
(or his nominee), upon the happening of a loss, damage, liability, or event through the payment of a consideration by the insured to
disability arising from an unknown or contingent event. the insurer under legally binding contract to reimburse the insured
for losses suffered on the happening of the stipulated event.
In insurance, the insurer, for a stipulated consideration, undertakes to
compensate the insured for a future loss, damage or liability on a TN: In a contract of insurance, there must be an offer and acceptance
specified subject caused by a specified event or peril. and the parties must have the legal capacity enter into such contract.
To be enforceable, all the requisites of a binding contract must be
DEFINITION OF INSURANCE FROM OTHER VIEWPOINTS present.
1. Economic
2. Business NATURE & CHARACTERISTICS OF AN INSURANCE CONTRACT
3. Mathematical 1. Consensual
4. Social 2. Voluntary
3. Aleatory
Economic 4. Executed and executory
Insurance is a method which reduces risk by transfer and combination 5. Conditional
of uncertainty in regard financial loss. 6. Contract of indemnity
7. Personal contract
Business 8. Property in legal contemplation
A plan by which large number of people associate themselves and
transfer to the shoulders of all, risks that attach to individuals. Insurance Consensual
may also be looked upon as an important part of the financial world, It is perfected by the meeting of the minds of the parties.
where insurance serves as a basis for credit and a mechanism for
savings and investments. Voluntary
It is not compulsory and the parties may incorporate such terms and
Mathematical conditions as they may deem convenient which will be binding provided
Insurance is the application of certain actuarial principles to calculate that they do not contravene any provision of law and are not opposed
the chance of loss. by public policy.

Social There are insurances that may arise by operation of law such as the War
Social device whereby the uncertain risks of individuals may be Damage Corporation Act. There are also social insurances that are
combined in a group and thus made more certain, with small periodic compulsory such as SSS and GSIS.
contributions by the individuals providing a fund out of which those who
suffer losses may be reimbursed. Aleatory
It depends upon some contingent event. One of the parties or both
In other words, it is a plan by which the losses of the few are paid out reciprocally bind themselves to give or to do something in consideration
of the contributions of all members of a group. of what the other shall give or do upon the happening of an event which
is uncertain, or which is to occur at an indeterminate time.

Executed and Executory


It is executed as to the insured after the payment of the premium and
executory on the part of the insurer in the sense that it is not executed
until payment for a loss. In other words, it is a unilateral contract

2|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

imposing legal duties only on the insurer who promises to indemnify in Coping with risk
case of loss. In insurance, the uncertainty is normally described in terms of risk. Risks
cannot be totally prevented or avoided. People cope with risk in various
Conditional ways. Such as:
It is subject to conditions the principal one of which is the happening of
the event insured against. In addition to this main condition, the contract 1. Limiting the probability of loss – example, building a concrete
usually includes many other conditions (such as payment of premium or building to make it less likely to catch fire.
performance of some other act) which must be complied with as
precedent to the right of the insured to claim benefit under it. 2. Limiting the effects of loss – example is putting on a seatbelt
to lessen the effects of accident.
Contract of Indemnity
The promise of the insurer is to make good only the loss of the insured, Diversification is an important way of limiting the effects of loss.
except in life and accident insurance where the result is death. Like when you diversify your investment in stock to lessen the
effects of loss of sharp decline in stocks.
If there is a stipulation of a possible gain on the insured, then it is
contrary to the proper nature of insurance. Also, it is void if the insured 3. Self-insurance or self-financing – example, owner of the
has no insurable interest. restaurant setting aside a portion of yearly profits into a fund
designated to pay a loss that could occur from food poisoning of
Personal Contract customers.
The insured cannot assign, before the happening of a loss, his rights
under a property policy to others without the consent of the insured. 4. Ignoring risk – example, a tightrope walker, even if he already
did everything to assure safety, would still ultimately decide to
Life insurance policies, however, are generally assignable or transferable ignore the risk and bear the loss if it materializes when he starts
as they are in the nature of property and do not represent a personal walking on the tightrope.
agreement between insured and insurer.
5. Transferring risk to another – this is when there is transferring
Property in Legal Contemplation or sharing of risk with someone else by a contractual obligation.
Since insurance is a contract, it is property in legal contemplation. But
unlike property policies, life insurance policies are generally assignable The value of transferring risk
or transferable like any “chose in action.” They are in the nature of
property and do not represent a personal agreement between the 1. Risk preferring – these people would forego the certain loss in
insurer and the insured. the hope of incurring no loss, despite the equal probability of
suffering a large loss.
DISTINGUISHING ELEMENTS OF THE CONTRACT OF
INSURANCE 2. Risk neutral – indifferent to the alternative

1. Insurable interest or an interest of some kind susceptible of 3. Risk averse – people who would rather lose with certainty
pecuniary estimation instead of confronting a bigger loss. As the potential magnitude
2. The insured is subject to a risk of loss through the destruction or of loss increases, people become more risk averse.
impairment of that interest by the happening of designated perils
3. The insurer assumes that risk of loss Economic effect of transfer and distribution of risk
4. Assumption of risk is part of a general scheme to distribute actual
losses among a large group or substantial number of persons 1. Benefit for society as a whole – the people insured will
bearing a similar risk completely eliminate the risk by transferring it to the insurers.
5. As consideration, insured pays premium to the general insurance Also, insurers, by dealing in risk on a large scale, could earn a
fund. profit. Indeed, society would be better off if a large number of
similar, mutually beneficial transactions would occur.
INSURANCE, A RISK-DISTRIBUTING DEVICE
2. Undesirable side effects – the insured might have less
If it possesses the first three elements is a risk-shifting device, but not incentive to take measures to prevent the loss from occurring or
a contract of insurance which is fundamentally a risk-distributing device. minimize the effect of loss once it occurs. This phenomenon is
called moral hazard.
Equitably distributes losses out of a general fund contributed
by all 3. Problem regarding measurement of amount of risk
By paying a pre-determined amount (premium) into a general fund out transferred – because of moral hazard, the ideal response is to
of which payment will be made for an economic loss of a defined type, monitor the insured’s behavior and adjust the premium of the
each member (insured) contributes to a small degree toward insured. But monitoring the behavior of each insured is not
compensation for losses suffered by any member of the group. The feasible.
amount each member contributes is based on the value of the property
or other interest being protected and the likelihood of the occurrence of 4. Sharing by insured of some responsibility for the risk – to
the feared event. deal with the moral hazard, the insured shares the risk through
deductible or coinsurance.
Provides protection against absorbing one’s losses alone
The primary goal of the insured is to exchange the gamble into doing it A. Deductible- the insured bears the any loss up to the stated
alone amount with the insurer bearing the rest.

B. Coinsurance- the insured bears some stated percentage of


the loss regardless of its amount, with the insurer bearing
the rest.

3|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

5. Problem regarding the computation of premium to be CLASSIFICATION OF CONTRACT OF INSURANCE


charged – for the insurer to monitor the insured’s behavior and
The principal and older forms of insurance are marine, fire, life and
adjust the premium based on the extent to which the insured
accident. The different kinds of insurance contracts written at the
takes adequate steps to safeguard his property.
present time vary in name and form but for convenience they may be
grouped under three great heads as follows:
6. Classification of risks – because of the complete impracticality
of individual rating, insurers group similar risks together and
1. Insurance against loss or impairment of property interest
charge each member of the group the same premium.
2. Insurance against loss of earning power
3. Insurance against contingent liability to make payment to another
7. Sub-classification of risks – further subdivision becomes too
expensive relative to the benefits gained. Thus, it is inevitable that
Insurance against loss or impairment of property interest
within the same group, some insured will be better risks than
The loss or impairment may be due to:
others, even though all members of the group pay the same
premium. In fact, any group will have a higher proportion of less 1. Marine perils (marine insurance)
desirable risks, since more applications for the insurance will tend 2. Fire (fire insurance), earthquake, explosion, etc. or
to come from those who get a better bargain. This is called 3. Due to the non-performance of contracts of which the insured is a
adverse selection. party (guaranty insurance)
4. The insolvency of the debtors (credit insurance)
Insurer and regulators must take this into account when deciding 5. The defalcation of employees and agents (fidelity insurance)
upon the scope of coverage and premiums to be charged for the 6. Theft or burglary (theft insurance policies)
coverage. 7. Defective titles or interest in the property (title insurance)

THE FIELDS OF INSURANCE Insurance against loss of earning power


This may be due to death (life insurance), accident injury, ill-health,
The basic classification emphasizes the difference between social and sickness, old age or other disability, or even unemployment
voluntary insurance.
Insurance against contingent liability to make payment to
Social (government) insurance another
It is compulsory and is designed to provide a minimum of economic The insured is protected against his loss with regard to claims for
security for large groups of persons, particularly those in the lower damages.
income groups. The concept is limited to that insurance which is
required by the government and have for their object the provision of a Example: Reinsurance, workmen’s compensation insurance and motor
minimum standard of living. vehicle liability insurance, all of which are designed to reimburse the
insured for any liability he might incur to a third party.
The compulsion element is predicated upon protecting general welfare
and some people not voluntarily purchasing insurance. TN: A modernized classification scheme recognizes four categories:
marine, property, personal and liability. They are also divided into two
Voluntary (private) insurance larger classes: property and personal.
It is not based on government compulsion and sought by the insured to
meet a recognized need for protection. CLASSIFICATION BY INTEREST PROTECTED
Another way to classify insurance is to categorize the subject matter
1. Commercial Insurance – this is what persons usually have in according to the interests being protected by the arrangement. At least
mind when they say insurance business. It receives its motivating two such methods of categorization exist: the third-party/first-party
force from the profit idea. distinction and the all-risk/specified-risk distinction

A. Personal insurance – based on the nature of perils. They First-party vs. third-party insurance
are more directly concerned with losses due to loss of earning In first-party insurance, the contract between the insurer and the
power of a person. Life insurance, including annuities, and insured is designed to indemnify the insured for a loss suffered directly
health and accident insurance are included. by the insured.

B. Property insurance – the purpose is for the protection 1. Property insurance – is a first-party insurance; the damage to
against loss arising from the ownership or use of property. It the property is an immediate, direct diminution of the insured’s
can be indemnifying for the loss of the insured’s own property assets.
or indemnifying the damage to other persons by the insured.
2. Liability insurance – sometimes described as a third-party
2. Cooperative insurance – the term cooperative is applied to insurance because the interests protected by the contract are
associations usually operating under hospital, medical, fraternal, those of a third person. The insured’s loss is “indirect.”
employee, or trade-union auspices. These associations are
organized without regard for profit. The non-profit cooperative 3. Life insurance – although there is a beneficiary, it is the insured
objective of insurance is emphasized. who suffers the loss. It is the insured who loses his life. Unless
the insured designates a beneficiary, the proceeds will go to the
3. Voluntary government insurance – there is no element of estate of the insured.
compulsion. In the category are to be found such plans as the
insurance of mortgage loans and insurance of growing crops. 4. Health insurance – the loss and illness is suffered by the
insured.

TN: All Insurance except liability can be fairly thought of as first-party


insurance.

4|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Important: The distinction between first-party and third-party 5. Losses from the willful and fraudulent act of the insured
insurance assists in understanding the concept of “no-fault” insurance.
No-fault insurance is essentially the substitution of first-party insurance Important: Also, all-risk coverage does not alter basic insurance law
for tort liability. The victim of tort, instead of looking for the tortfeasor principles that can operate to limit coverage such as insurable interest
and his insurer for reimbursement, looks to his own insurer for first- requirement, causation rules, the requirement that the loss not be
party protection. intentionally caused by the insured and implied exceptions.

The term “no-fault” connotes that the victim recovers for his loss from CLASSIFICATIONS UNDER THE CODE
his own insurer, without regard to the fault of the third party or his own
contributory fault. 1. Life insurance contracts
a. Individual life
ALL-RISK VS SPECIFIED-RISK b. Group life
c. Industrial life
All-risk reimburses the insured for damage to subject matter of the
policy from all causes except those specifically excepted in the policy. 2. Non-life insurance contracts
Specified-risk insurances covers only if it results from specifically a. Marine
identified causes listed in the policy. b. Fire
c. Casualty
Language of the policy
It is helpful but not necessarily determinative on whether a policy is all- 3. Contracts of suretyship or bonding
risk or specified-risk.
Contracts written by guaranty or surety companies
Coverage of policy This comprises principally fidelity, title, bond, and security guaranty.
The distinction can make a considerable difference in whether a Contracts of this kind are now almost regarded as those of insurance
particular loss is covered by the policy. If there is no specific exclusion where the underwriter engages in the business for profit, especially
pertaining to a certain event, the insured’s loss is covered. since the terms of such contracts usually closely resemble the essential
elements of an insurance contract.
Burden of proof
They are construed strictly against the insurer.
A. Under specified-risk – the burden is ordinarily placed on the insured
to initially prove that the loss fall within the policy’s provisions on Important: Under the Code, a contract of suretyship shall be deemed
coverage. to be an insurance contract only if made by a surety who or which is
doing an insurance business within the meaning of the Code.
B. Under an all-risk policy – once the insured establishes that a loss
occurred through some event other than an inherent defect or CONSTRUCTION OF INSURANCE CONTRACTS
normal depreciation, the burden is ordinarily placed on the insurer
to prove that the loss falls within an explicit exception to coverage. They provisions should be interpreted in consonance with each other. It
In property insurance, the insured merely has to show the cannot be interpreted piece-meal.
condition of the property insured when the policy attaches and the
fact of damage or loss. Where there is ambiguity or doubt
As a general rule, it should be interpreted liberally in favor of the insured
Example: A plane was hijacked and destroyed. The insurer argues that and strictly against the insurer so as to effect its purpose to pay or
there are three exclusions that bars recovery: (1) capture or seizure of indemnify the insured. A policy of insurance is a contract of adhesion.
property by governmental authority or agent; (2) war, invasion or civil
war; (3) strikes, riots or civil commotion When restrictive provisions have two interpretations, the one most
favorable to the insured is adopted.
Treating the policy as all-risk coverage, court held that insurers had
failed to prove that the cause of the loss was within the scope of the Where terms are clear
policy’s exclusions. Consistent with well-established rules of The court is bound to adhere to the insurance contract as an authentic
interpretation, the exclusions were construed in a manner most expression of the intention of the parties and it must be construed and
beneficial to the insured. enforced according to the sense and meaning of the terms which the
parties themselves have used. They must be taken in their plain and
Other advantages of all-risk coverage ordinary sense.
1. The coverage is presumably easier to understand.
2. Duplication of coverages and premiums from separate, specified- Where contract is silent with respect to a particular matter
risk policies is avoided. Any doubt that may arise for the failure of the contract to provide with
3. Pressures toward adverse selection are minimized. respect to a particular matter must be resolved against the insurer.
4. Policies are easier and less expensive for the insurer to administer.
5. The most widely perceived advantage is the avoidance of gaps in WHAT CONSTITUTES DOING OR TRANSACTING AN
coverage. INSURANCE BUSINESS

All-risk coverage not absolute Name or designation by insurer not controlling


An all-risk coverage does not include: The name or designation of the company is not determinative. Basically,
1. Undisclosed event that existed prior to coverage insurance, whether fire, marine or any other form, is that which the law
2. Events caused by the consummation during the period of coverage defines it to be.
of an indwelling fault in the goods that had existed prior to
coverage Acts deemed included by law
3. Losses which are certain to occur, such as loss due to normal wear Sec 2(2) enumerates the acts deemed as “doing an insurance business”
and tear or “transacting an insurance business.” The fact that no profit is derived
4. Losses which are not fortuitous and, therefore, is not insurable. from the making of insurance contracts or that no separate or direct

5|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

consideration is received or the fact that the contract states that it is not
CHAPTER 1. CONTRACT OF INSURANCE
an insurance policy, is not conclusive to show that the making does not
constitute the doing or transacting of an insurance business.
TITLE 1. WHAT MAY BE INSURED
Principal object and purpose to determine nature of contract
SECTION 3.
Under the “principal object and purpose test,” if the principal object and
purpose is “indemnity,” the contract constitutes insurance, but if it is Section 3. Any contingent or unknown event, whether past or future,
“service,” risk transfer and distribution being merely incidental, then the which may damnify a person having an insurable interest, or create a
arrangement is not insurance, therefore, not subject to laws on liability against him, may be insured against, subject to the provisions
insurance. of this chapter.

Example: A health maintenance organization (HMO) whose main The consent of the spouse is not necessary for the validity of an
objective is to provide the members of a group with health care service, insurance policy taken out by a married person on his or her life or that
rather than assumption of risk, is not engaged in an insurance business. of his or her children.

FUNCTIONS OF INSURANCE All rights, title and interest in the policy of insurance taken out by an
original owner on the life or health of the person insured shall
Principal function automatically vest in the latter upon the death of the original owner,
The principal function is risk-bearing. The financial losses of the few are unless otherwise provided for in the policy.
equitably distributed over the many out of a fund (premium) contributed
by all. What it does is to spread the losses over a large number of REQUISITES OF A CONTRACT OF INSURANCE
persons.
1. A subject matter in which the insured has an insurable interest
Subsidiary functions 2. Event or peril insured against which may be any contingent or
unknown event, past or future and a duration of the risk
1. Stimulates business enterprise – No large-scale enterprise 3. A promise to pay or indemnify in a fixed or ascertainable amount
could function in the modern world without the transference of 4. A consideration for the promise, known as “premium”
many of its risks to insurers. It also allows them to use their capital 5. A meeting of the minds
instead of freezing it for contingencies.
Important: Of course, the parties must be competent to enter into the
2. Encourages business efficiency and enterprise – Elimination contract.
of risk is an increase in business efficiency. By reducing risk, it will
increase willingness to invest business capital in business and SUBJECT MATTER OF CONTRACT OF INSURANCE
lessen worry of risk.
In general
3. Promotes loss-prevention – Insurers encourage loss- Anything that has appreciable pecuniary value which is subject to loss
prevention through a system of rating which allows discounts for or deterioration or of which one may be deprived so that his pecuniary
good features and impose special conditions where the risk is interest is or may be prejudiced.
unsatisfactory.
Property insurance
4. Encourage savings – It provides a climate in which savings are The property covered by a policy is regarded the subject matter of the
encouraged. A more direct stimulus is provided through a life insurance, but it is apparent that in the last analysis, it is the risk of loss
insurance which include a savings or investment elements as well of such property that is primarily involved.
as a protection element
Life, health and accident insurance
5. Solves social problems – Compensation is available to victims While it is true that the person becomes the subject of insurance, the
of loss or injuries, while the financial difficulties arising from old matter is generally viewed as one in reference to the insured as a party
age, disability or death are mitigated. to the contract.

Indirect functions Casualty insurance


In insurance against perils giving rise to a liability on the part of the
1. Investment of funds – Insurers can accumulate large funds insured to pay damages to the others, the subject matter is the risk
which they hold as custodians. These funds are invested not only involved in its use, or the insured’s risk of loss or liability, that he may
to provide for the interest but also to invest in other industries suffer loss or be compelled to indemnify for the loss suffered by a third
that contribute to national development. person.

2. Use of reserve funds – Reduction of cost of insurance to the Event or peril insured against
insuring public. The contingency or unknown event must

3. Effect on prices – The existence of insurance benefits the 1. Damnify or cause loss to a person having an insurable interest
consumers in terms of reduced prices since the cost of insurance 2. Create a liability against him
is less than the cost of risk without the insurance.
Insurance by a married woman
4. As a basis of credit – Credit extension is the most important She may take out an insurance on her life or her children or husband
phase of modern business and is contributed to by virtually all without the consent of her husband. She may also do the same to her
forms of insurance. paraphernal or separate property or on property given to her by her
husband.

6|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Insurance by a minor Similarity between insurance and gambling


It is not entirely void. It is one which merely voidable, that is, it is valid In both cases, one party promises to pay a given sum to the other upon
until annulled in a proper action in court by the minor or his legal occurrence of a given future event, the promise being conditioned upon
representative. the payment of, or agreement to pay, a stipulated amount by the other
party to the contract.
If contract is not disaffirmed by the minor, the insurer cannot escape
liability by pleading minority as a defense. But if the contract is fair and SECTION 5.
no fraud or undue influence was practiced by the insurer, the minor
cannot recover the premiums paid, if he cannot return the benefits Section 5. All kinds of insurance are subject to the provisions of this
received. The result is that an insurance company contracting with a chapter so far as the provisions can apply.
minor is bound by the contract; the minor ordinarily is not.
TITLE 2. PARTIES TO THE CONTRACT
OWNERSHIP OF LIFE INSURANCE POLICY
SECTION 6
Ownership divided between insured and beneficiaries
The insured being the owner of its various marketing and sales features, Section 6. Every corporation, partnership, or association, duly
such as the loan and cash surrender values, and the beneficiary being authorized to transact insurance business as elsewhere provided in this
the owner of a promise to pay the proceeds at the death of the insured Code, may be an insurer.
subject to the insured’s right of revocation.
PARTIES TO A CONTRACT
Interest of insured and beneficiary
The nature of the interest of the beneficiary depends on the terms of There are two parties to the contract: the insurer and the insured.
the insurance contract, including the existing statutes by which the
insurer and its policyholders are bound. Insurer
The party who assumes or accepts the risk of loss and undertakes for a
Transfer of rights to minor insured upon death of original owner consideration to indemnify the insured or to pay him a certain sum on
of policy the happening of a specified contingency or event.
All the rights, title and interest in the policy shall be automatically vest
in the minor unless otherwise provided for in the policy. Insured
The person in whose favor the contract is operative and who is
SECTION 4. indemnified against, or is to receive a certain sum upon the happening
of a specified contingency or event. He is the person whose loss is the
Section 4. The preceding section does not authorize an insurance for or occasion for the payment of the insurance proceeds by the insurer.
against the drawing of any lottery, or for or against any chance or ticket
in a lottery drawing a prize. The insured is not always the person whom the proceeds are paid. It
may be the beneficiary or someone whom the proceeds are assigned by
CONCEPT OF LOTTERY the insured.

Extends to all schemes for the distribution of prizes by chance. There Terms used
are three essential elements: A. Insurer – synonymous with the term “assurer” or “underwriter.”
The insurance company is sometimes called “underwriter.”
1. Consideration
2. Prizes B. Insured – refers to the owner of the property insured or the person
3. Chance whose life is the subject of the policy

Important: If the prize does not come out of the fund or contributions C. Assured – person for whose benefit the insurance is granted.
by the participant, no consideration has been paid and consequently, Sometimes used as a synonym of “beneficiary.”
there is no lottery.
D. Beneficiary – person designated to receive the proceeds of the
Contract of insurance not a wagering contract insurance. He is the third party in a contract of life insurance for
The distinction are as follows: whose benefit the policy is issued and to whom loss is payable.
There are occasions when the proceeds are paid to the estate of
1. In gambling contract, the parties contemplate gain through mere the insured.
chance while in insurance, parties seek to distribute possible loss
by reason of mischance TN: the terms “insured” and “assured” are generally used
2. The gambler courts fortune, while the insured seeks to avoid interchangeably.
misfortune
Who may be an insurer?
3. Contract of gambling tends to increase the inequality of fortune,
while contract of insurance tends to equalize fortune 1. Foreign or domestic insurance company or corporation- it must first
obtain a certificate of authority for that purpose from the Insurance
4. In gambling, whatever one person wins is lost by the other. In Commissioner who may refuse to issue such.
insurance, what insured gains is not at the expense of another
insured 2. Partnership or corporation
5. When party makes a wager, he creates a risk when no such risk
Important: Individuals, under the new Insurance Code can no longer
existed. In insurance, there is no new risk created. It is already an
qualify as an insurer.
existing risk.

7|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Business of insurance affected with public interest INSURABLE INTEREST OF MORTGAGEE AND MORTGAGOR
It is subject to regulation and control by the state by virtue of the
exercise of its police power or in the interest of public convenience and Separate insurable interest
the general good of the people. Both have insurable interest in the mortgaged property and this interest
is separate and distinct from each other. Consequently, insurance taken
by one in his own name only and in his favor alone, does not inure to
SECTION 7
the benefit of the other. In case both of them take out separate
Section 7. Anyone except a public enemy may be insured. insurance policies, the same is not open to the objection that there is
double insurance.
CAPACITY OF THE PARTY INSURED
Extent of insurable interest of mortgagor
Natural person As owner, he has insurable interest to the extent of the value, even
There are two essential requisites. though the mortgage debt equals such value. the reason is that the loss
or destruction of the property insured will not extinguish his mortgage
1. He must be competent to make a contract debt.
2. He must possess an insurable interest in the subject of the
insurance. Extent of insurable interest of mortgagee
He has an insurable interest in the mortgaged property to the extent of
TN: A third requite, applicable also to juridical persons, may be added the debt secured. He is not insuring the property but his interest or lien
and that is that the insured must not be a public enemy. in such property. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt. Such interest
Juridical person continues until the mortgage debt is extinguished.
A juridical person, like a partnership or a corporation, may take out
insurance on property owned by it. Note that Section 3 specifically Extent of amount of recovery
authorizes minors, 18 years or more to take out insurance payable to a The mortgagor cannot recover upon the insurance beyond the full
limited class of beneficiaries. amount of his loss and the mortgagee, in excess of the credit at the time
of the loss nor the value of the property mortgaged.
Meaning of public enemy
A nation with whom the Philippines is at war and it includes every citizen INSURANCE BY MORTAGEE IN CASE OF LOSS
or subject of such nation. A mob or robbers or thieves whoever they
may be, are never considered as public enemies under Sec 7. Right of the mortgagee in case of loss
He is entitled to the proceeds of the policy in case of loss before payment
EFFECT OF WAR ON EXISTING INSURANCE CONTRACT of the mortgage.

Where parties rendered enemy aliens Subrogation of insurer to right of mortgage


By law of nations, all intercourse between citizens of belligerent powers The mortgagee does not retain his claim against the mortgagor but it
which is inconsistent with a state of war is prohibited. The purpose of passes by subrogation to the insurer to the extent of the insurance
war is to cripple the power and exhaust all the resources of the enemy. money paid.
It is inconsistent that the subjects of one country should lend their
assistance to protect by insurance. Of course, if the parties are not Change of creditor
rendered enemy aliens, the policy continues. The payment of insurance to the mortgagee by reason of loss does not
relieve the mortgagor from his principal obligation but only changes the
1. With respect to property insurance – the insurance policy ceases creditor.
to be valid and enforceable as soon as an insured becomes a public
enemy. INSURANCE BY MORTGAGOR OF HIS OWN INTEREST

2. With respect to life insurance – the insurance is abrogated but the For his own benefit
insured is entitled to the cash or reserve value of the policy (if any), In case of loss, the insurance proceeds do not inure to the benefit of the
which is the excess of the premiums paid over the actual risk mortgagee who has no greater right than unsecured creditors in the
carried during the years when the policy had been in force. same.

Where loss occurs after the end of war For the benefit of mortgagee
The termination of the war does not revive the contract. Consequently, This is where the mortgagor pays the insurance premium, making the
the insurer is not liable even of the loss is suffered by the insured after loss payable to the mortgagee. The mortgagee may be made the
the end of the war. beneficial payee in several instances:

efdsg 1. He may become the assignee of the policy with the consent of the
SECTION 8
insurer
Section 8. Unless the policy otherwise provides, where a mortgagor of 2. He may be mere pledgee without such consent
property effects insurance in his own name providing that the loss shall 3. A rider making the policy payable to the mortgagee “as his interest
be payable to the mortgagee, or assigns a policy of insurance to a may appear” may be attached
mortgagee, the insurance is deemed to be upon the interest of the 4. A “standard mortgage clause” continuing a collateral independent
mortgagor, who does not cease to be a party to the original contract, contract between the mortgagee and the insurer may be attached
and any act of his, prior to the loss, which would otherwise avoid the 5. The policy, though, by its terms payable absolutely to the
insurance, will have the same effect, although the property is in the mortgagor; may have been procured by a mortgagor under a
hands of the mortgagee, but any act which, under the contract of contract duty to insure for the mortgagee’s benefit, in which case
insurance, is to be performed by the mortgagor, may be performed by the mortgagee acquires an equitable lien upon the proceeds.
the mortgagee therein named, with the same effect as if it had been
performed by the mortgagor.

8|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

INSURANCE BY MORTGAGOR FOR BENEFIT OF MORTGAGEE, After loss


OR POLICY ASSIGNED TO MORTGAGEE If loss happens when the credit is not due, the mortgagee is entitled to
receive the money to apply to the extinguishment of the debt. If the loss
Where the mortgagor of the property effects insurance in his own name happens after the credit has matured, the mortgagee may apply the
providing that the loss shall be payable to the mortgagee, or assigns a proceeds to the extent of his credit.
policy of insurance to the mortgagee, the following are the legal effects:
EFFECT OF INSURANCE BY MORTGAGEE ON BEHALF OF THE
1. The contract is deemed to be upon the interest of the mortgagor; MORTGAGOR
he does not cease to be party to the contract
Discharge of debt
2. Any act of the mortgagor prior to the loss, which would otherwise Upon the destruction of the property, the mortgagee is entitled to
avoid the insurance affects the mortgagee even if the property is receive payment from the insured but such payment discharges the debt
in the hands of the mortgagee if equal to it, and if greater than the debt, the mortgagee holds the
excess as trustee for the mortgagor.
Example: Storing inflammable materials in the insured house
Right to subrogation
3. Any act which under the contract of insurance is to be performed If there is a stipulation that the insurer shall be subrogated to the rights
by the mortgagor may be performed by the mortgagee with the of the mortgagee, the payment of the policy will not discharge the debt
same effect. even though the mortgagee may have procured the policy by
arrangement with the mortgagor. If there is no such stipulation, the rule
Example: Payment of the premium by the mortgagee on subrogation does not apply except where the mortgagee insures only
his interest.
4. In case of loss, the mortgagee is entitled to the proceed to the
extent of his credit sdf SECTION 9
5. Upon recovery by the mortgagee to the extent of his credit, the Section 9. If an insurer assents to the transfer of an insurance from a
debt is extinguished mortgagor to a mortgagee, and, at the time of his assent, imposes
further obligations on the assignee, making a new contract with him,
Important: The rule on subrogation by the insurer to the right of the the acts of the mortgagor cannot affect the rights of said assignee.
mortgagee does not apply in this case.
ASSIGNMENT OR TRANSFER OF INSURANCE POLICY
Example: R insured his house worth P1,200,000 for P1,000,000 with the
policy providing that the loss shall be payable to E. the house was The effect of assignment or transfer is to substitute the assignee or
mortgaged to E as security for a loan of P600,000. The house was transferee in place of the original insured in his right to claim indemnity
destroyed by fire. Who may recover? or payment as well as the obligation to perform the conditions if any, of
the policy.
E, as the mortgagee, is entitled to the extent of his credit of P600,000.
He shall hold as trustee for R, mortgagor, the excess of P400,000. If As to fire policy
before the loss, the mortgage debt has already been paid, R can recover A fire policy before it becomes fixed liability is not subject to assignment,
the entire P1,000,000. R effected the insurance in his own name and he being strictly a personal contract, in the absence of provision in the
did not cease to be a party to the original contract. contract or subsequent consent of the insurer. The insurer is naturally
concerned about the moral character of the insured and should not be
EFFECT OF STANDARD AND OPEN CLAUSE IN FIRE INSURANCE compelled to become an insurer to an assignee to whom he would have
POLICY declined to issue a policy and who could materially alter the risks
assumed by the insurer without his consent.
If fire insurance contains a standard or union mortgage clause
The acts of the mortgagor do not affect the mortgagee. The purpose of As to marine policy
the clause is to make a separate and distinct contract of insurance on A policy of marine insurance is assignable even without the consent of
the interest of the mortgagee. the insurer unless required by the terms of the policy. Nevertheless, it
is believed that marine policy is not assignable without the consent of
Contains an open or loss-payable mortgage clause the insurer.
It merely provides for the payment of the loss, if any, to the mortgagee
as his interest may appear and under it, the acts of the mortgagor affect As to casualty policy
the mortgagee. The mortgagee is only beneficiary under the contract The insurer’s consent is required. This insurance commonly involves
and not made a party. Hence, any act of the mortgagor which defeats moral hazards at least as great as those of fire insurance.
his right will also defeat the right of the mortgagee.
As to life insurance
RIGHT OF MORTGAGEE UNDER MORTGAGOR’S POLICY The policy may be freely be assigned before or after the loss occurs, to
any person whether he has an insurable interest or not. However, if
The contract of indemnity under such policy is primarily with the without insurable interest and made in bad faith and preconceived for
mortgagor, but the mortgagee is a third party beneficiary. an illegal purpose will not be upheld.

Before loss Important: A distinction must be made between the assignment or


The mortgagee is a conditional appointee of the mortgagor entitled to transfer (a) of the policy itself which transfers the rights to the contract
receive so much of any sum that may become due under the policy as to another insured (b) of the proceeds of the policy after a loss has
does not exceed his interest as mortgagee. Such right becomes absolute happened which involves a money claim under, or a right of action on,
upon the occurrence of the loss. the policy and (c) of the subject matter of the insurance, such as a house
insured under a fire policy which has the effect of suspending the

9|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

insurance until the same person becomes the owner of both the policy Validity of the contract
and the thing insured. Without an insurable interest, the contract of insurance is void for
illegality. This requirement is held not to apply to industrial life
RIGHT OF MORTGAGOR TO ASSIGN INSURANCE POLICY TO insurance.
MORTGAGEE
REQUIREMENT, A MATTER OF PUBLIC POLICY
The right of the mortgagor to assign or transfer an insurance policy is
recognized in Section 8. Section 9 only gives the effect if the insurer As a deterrence to the insured
agrees to the transfer of the policy and at the time of his assent, imposes This is to prevent a wager policy which is contrary to public interest. To
new obligations on the assignee. allow insurable interest to not exist will allow the insured to have an
interest in the destruction of the subject matter or to bring pass an event
EFFECT OF NEW CONTRACT BETWEEN INSURER AND that will make the insurance payable.
MORTGAGEE-ASSIGNEE
As a measure of limit of recovery
GR: The contract remains with the mortgagor as it is his interest alone Insurance should not provide the insured a means to gain a net profit
that is covered. The assignment operates merely as an equitable from the happening of the event. The requirement is enforced and the
transfer of the policy so as to enable the mortgagee to recover the defense permitted not in the interest of the insurer but of a sound public
amount due in case of loss of subject to the conditions of the policy. policy.

XPN: Where a new and distinct consideration passes from the TWO GENERAL CLASSES OF LIFE POLICIES
mortgagee to the insurer, a new contract is created between them.
Novation takes place. Insurance upon one’s life
In can be for the benefit of himself or his estate, or for the benefit of a
TITLE 3. INSURABLE INTEREST third person who may be designated as a beneficiary. This does not
usually present an insurable interest question.
SECTION 10
Insurance upon the life of another
Section 10. Every person has an insurable interest in the life and health: In this case, he must have an insurable interest in the life of that person.
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in part for education INSURABLE INTEREST IN ONE’S OWN LIFE
or support, or in whom he has a pecuniary interest;
(c) Of any person under a legal obligation to him for the payment of Every person has an unlimited insurable interest in his own life. It is not
money, or respecting property or services, of which death or illness necessary that the beneficiary designated in the policy should have any
might delay or prevent the performance; and interest in the life of the insured.
(d) Of any person upon whose life any estate or interest vested in him
depends. Insurance taken out on his life for the benefit of another
The presence of insurable interest is required only as an evidence of
INSURABLE INTEREST IN GENERAL good faith. The mere fact that a man on his own motion insures his life
for the benefit either of himself or of another is sufficient evidence of
An insurable interest is that interest which the law requires the owner good faith to validate the contract.
of an insurance policy to have in the person or thing insured.
When the insurance regarded a wagering policy
Pecuniary in nature Evidence of wagering policy is usually found in such facts as:
A person has insurable interest over the thing insured where he has a
relation or connection with or concern in it that he will derive pecuniary 1. The original proposal to take out insurance was that of the
or financial benefit or advantage from its preservation and will suffer beneficiary
pecuniary loss or damage from its destruction. 2. That premiums are paid by the beneficiary
3. That the beneficiary has no interest, economic or emotions, in the
Interest does not necessarily imply a right to the whole or part of a continued life of the insured
thing. It is to be circumstanced with respect to it as to have benefit from
its existence and prejudice from its destruction. SIMILARITY BETWEEN A LIFE INSURANCE POLICY AND A
CIVIL DONATION
Exception
It has a broader meaning in life insurance. To have an insurable interest Both are founded upon the same consideration: liberality.
in the life of a person, the expectation of benefit from the continued life
of that person need not necessarily be of a pecuniary nature. INSURABLE INTEREST IN LIFE OF ANOTHER

NECESSITY OF INSURABLE INTEREST Insurance for the benefit of insured


A person cannot lawfully procure insurance for his own benefit on the
Existence of insurable interest is the primary concern in determining the life of another in whose life he has no insurable interest. The policy of
liability of an insurer under a policy of insurance. the law requires that the assured shall have an interest to preserve the
life insured in spite of insurance, rather than destroy it because of the
Legal right to insure insurance.
Existence of insurable interest gives a person the legal right to insure
the subject of insurance. In its absence, it would be gambling which is Insurance for benefit of a third party
prohibited by law. When the owner insures a life of another and assigns a third person as
a beneficiary, both the owner and beneficiary must have an insurable
interest in the life of the cestui que vie.

10 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

INSURABLE INTEREST IN LIFE OF PERSON UPON WHOM ONE INSURABLE INTEREST OF CREDITOR IN LIFE OF HIS DEBTOR
DEPENDS FOR EDUCATION OR SUPPORT OR IN WHOM HE HAS
A PECUNIARY INTEREST Extent of interest
A creditor may insure the life of a debtor for the purpose of protecting
When mere blood relationship sufficient his debt but only to the extent of the amount of the debt and cost of
The mere relationship of brother or sister, father or child is sufficiently carrying the insurance of the debtor’s life.
close to give either an insurable interest in the life of the other. The
reason is that the natural affection in case of this kind is considered Right of the debtor in insurance taken by creditor
sufficient, if not more powerful, to protect the life of the insured than The contract is purely between the insurer and the insuring creditor. The
any other consideration. The essential thing is this: that the policy shall insurance does not inure to the benefit of the debtor unless the contrary
be obtained in good faith, and not for the purpose of speculating upon is stipulated.
the hazard of a life in which the insured has no interest.
Extent of the amount that may be recovered by insuring
Persons obliged to support each other creditor
The principle of indemnity applies in this case because this is not purely
1. The spouse a life insurance. The insuring creditor could only recover such amounts
2. Legitimate ascendants and descendants as remain unpaid at the time of the death of the debtor. If the whole
3. Parents and their legitimate children and the legitimate or debt has been paid, the recovery on the policy is no longer permissible.
illegitimate children of the latter
4. Parents and their illegitimate children and the legitimate or Where insurance taken by debtor for the benefit of creditor
illegitimate children of the latter Where a debtor in good faith insures his life for the benefit of the
5. Legitimate brothers and sisters, whether of the full or half-blood creditor, full payment of the debt does not invalidate the policy. The
proceeds should go to the estate of the debtor.
Important: Brothers and sisters not legitimately related, whether the
full or half-blood, are likewise bound to support each other except only Where debt becomes legally unenforceable
when the need for support is due to a cause imputable to the claimant’s Under US cases, if debt becomes unenforceable because of statute of
fault or negligence. limitations or insolvency, it does not cut off the insurable interest of the
creditor although there is no reasonable expectation of the debtor
When pecuniary benefit essential becoming solvent so as to be able to pay his debt. The reason given is
In other cases, mere blood relationship does not create an insurable that the moral or equitable obligation of the debtor to pay his debt is
interest. Also, mere relationship by affinity ordinarily does not constitute not destroyed by the discharge which affects only the legal obligation to
insurable interest. There must be an expectation of pecuniary benefit. pay.
If the party who takes out the insurance is dependent on the insured for
support and care, it is strong evidence of insurable interest even in the Under Philippine laws, it is clear that a creditor may not insure the life
absence of close blood relationship. of his debtor unless the latter has a legal obligation to him for the
payment of money.
The expectation need not have a legal basis. It is sufficient that it be
actual. Thus: INSURABLE INTEREST IN LIFE OF PERSON UPON WHICH AN
ESTATE OR INTEREST DEPENDS
1. The assumption of parental relations when a man sends a girl to
school and pays her expenses is sufficient. One may insure the life of a person where the continuation of the estate
2. A woman who takes a girl from an orphan asylum and gives her or interest vested in him who takes the insurance depends upon the life
home under circumstances calculated to raise a reasonable insured.
expectation of help and care from the girl during the declining years
of the benefactress, has an insurable interest in the girl’s life. CONSENT OF PERSON WHOSE LIFE IS INSURED
3. A corporation has an insurable interest in the life of an officer on
whose services the corporation depends for its prosperity and Essential to validity of policy
whose death will be the cause of a substantial pecuniary loss to it. The consent is strong evidence of good faith of the person procuring the
4. A person may take out a policy on the life of his business partner. insurance, and thus affords a needed guaranty to society.
5. In case of employees, insurable interest is dependent upon the
value of the employee to the business. Not essential to validity of policy
It seems that under our law, the consent of the person insured is not
INSURABLE INTEREST OF A PERSON IN LIFE OF ANOTHER essential to the validity of the policy so long as it could be proved that
UNDER A LEGAL OBLIGATION TO FORMER there is insurable interest.

Related by contract or commercial relation detdas a detter SECTION 11


A right possessed by a person that will be extinguished or impaired by
the death or illness of another will give a right to lawfully procure Section 11. The insured shall have the right to change the beneficiary
insurance on the other’s life. he designated in the policy, unless he has expressly waived this right in
said policy. Notwithstanding the foregoing, in the event the insured does
Example: A surety on the life of the principal. not change the beneficiary during his lifetime, the designation shall be
deemed irrevocable.
Risk that performance of obligation might be delayed or
prevented. BENEFICIARY DEFINED
It must appear that illness or death of the insured person who is under
It refers to the person who is named or designated in a contract of life,
a legal obligation might delay or prevent its performance.
health or accident insurance as the one who is to receive the benefits
upon the death of the insured.

11 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

KINDS OF BENEFICIARY Effect of death of insured


The insured’s power to extinguish the beneficiary’s interest ceases at his
The beneficiary in a life insurance policy may be the insurer himself or death and cannot be exercised by his personal representative or
his personal representatives or someone other than the insured. Where assignee.
the beneficiary is other than the insured, such person may occupy one
of the three relations to the insured: Where right to change is waived
If it is expressly waived, then the insured has no power to make such
1. Insured himself change without the consent of the beneficiary.
2. Third person who paid a consideration
3. Third person through mere bounty of insured The beneficiary acquires an absolute and vested interest to all benefits
accruing to the policy. A new beneficiary cannot be added as it will
Insured himself reduce the latter’s vested rights. The insured cannot destroy the
He may himself be the person who procures the contract and pays the contract by refusing to pay the premiums for the beneficiary can protect
premiums necessary to maintain it. Such a person is thus an immediate his interest by paying the premiums.
party to the contract and is ordinarily called the assured, as where the
creditor insures the life of his debtor MEASUREMENT OF VESTED INTEREST OF BENEFICIARY ON
POLICY
Third person who paid a consideration
The third person named as the beneficiary may have paid a valuable It should be measured on its full face value and not on its cash surrender
consideration for his selection. value for in case of death of the insured, said beneficiary is paid on the
basis of its face value. In case the insured should discontinue to pay the
Example: The insured may have taken the policy for the benefit of a premiums, the beneficiary may continue paying it and is entitled to
creditor or to secure some other obligations automatic extended term, or paid-up insurance options, etc., and that
said vested right under the policy cannot be divisible at any given time.
Third person through mere bounty of insured
The beneficiary designated may be the estate of the insured or a third WHERE BENEFICIARY DIES BEFORE THE INSURED
party.
If the beneficiary is revocable
TN: In the second and third cases, the beneficiary is not a party to the The heirs of the insured will be entitled to the proceeds of the insurance.
contract. In all the three cases, the proceeds of the life insurance
becomes the exclusive property of the beneficiary upon the death of the If the beneficiary is irrevocable
insured. There are two views.

LIMITATIONS IN THE APPOINTMENT OF BENEFICIARY 1. Beneficiary’s representative is entitled to insurance proceeds – it


would necessarily follow as a consequence of the vested interest
A person may take out a policy on his own life payable to whoever rule, where the right to change the designated beneficiary is
provided that he acts in good faith and without intent to make the expressly waived, if the beneficiary dies before the insured, his
transaction merely a cover for a forbidden wagering contract. The rights so vested should pass to his representatives.
limitation of the Civil Code is found in Articles 2012 and 739.
2. Estate of the insured is entitled to insurance proceeds – because
1. Article 2012 the deceased scarcely have intended to make a provision for the
Any person who is forbidden from receiving any donation under heirs of the deceased beneficiary, who may be persons without
Article 739 cannot be named beneficiary of a life insurance policy claim to his bounty or interest in his life.
by the person who cannot make any donation to him, according
to the said article. Important: According to sir, the second view is better.

2. Article 739 DESIGNATION OF BENEFICIARY


The following donations shall be void:
Words used in designating the beneficiaries of a life policy will not be
A. Those made between persons who were guilty of adultery or given their technical significance but will be construed broadly in order
concubinage at the time of the donation that the benefit of the insurance shall be received by those intended by
B. Those made between persons found guilty of the same the insured as the object of his bounty.
criminal offense, in consideration thereof
C. Those made to public officer or his wife, descendants and Children
ascendants, by reason of his office It includes an adopted child, an adult child not forming part of the
household, after-born children even of a marriage subsequently
Important: In order that Article 739 may apply, it is not required that contracted. This never intended to include grandchildren.
there be a previous conviction for adultery or concubinage. This can be
inferred from the clause that “guilt of the donor and done may be proved Where the children are named individually, other children cannot share
by preponderance of evidence.” in the insurance proceeds unless the insured subsequently amended his
designation to include them.
RIGHT OF INSURED TO CHANGE BENEFICIARY IN LIFE
INSURANCE Husband; wife or widow
This is a descriptio personae and the fact that one who otherwise
General rule answers the description does not have a legal status of a wife/husband
Whether or not the policy reserves to the insured the right to change of the insured does not prevent her from taking as beneficiary, as when
the beneficiary, he has the power to change the beneficiary without the she is designated by name although the words “his wife” or “her
consent of the latter who acquires no vested right but only an husband” are added.
expectancy of receiving the proceeds under the insurance.

12 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

However, if the beneficiary is not name and only designated as “wife” 7. In default, the State
or “husband”, the legal person as ascertained at the death of the insured
is entitled to the benefits. LIABILITY OF THE INSURER ON DEATH OF INSURED

Husband and children; wife and children Death at the hands of the law
The policy which designates the wife of the insured and “their children” According to Prof. Vance, this is one of the risks assumed by the insurer
includes children by another wife, although the prevailing view state that under a life insurance policy in the absence of a valid policy exception
the beneficiaries are limited to children common to both. But if the
designation is made to the insured’s “wife and children” or “my wife and Death by self-destruction
children,” the insurance is deemed for the benefit of all children of the It is quite clear, under Section 87, that the insurer is not liable in case
insured, whether by the named wife or those of another. the insured commits suicide intentionally. To hold otherwise is to say
that the insured may have to option when the event should happen.
Family This is against the very essence of the contract.
The court will ascertain whether that person was so regarded by the
insured. Death by suicide while insane
The suicide of the insured while insane does not discharge the insurer
Heirs or legal heirs from his liability in the contract. Insanity is one of the diseases that the
It includes a class of persons who would take the property of the insured insurer must have known that the insured was subject and the unwitting
in case he died intestate. It is generally held that the widow of the act of self-destruction is as much as the consequence of that disease as
deceased in entitled to take under a policy payable to his “heirs” or “legal if some vital organs were totally affected.
heirs” as well as the children of the deceased.
Death caused by the beneficiary
Estate or legal representatives of deceased The beneficiary is not deprived of the proceeds in case where he killed
Must be construed in their strict technical sense and the courts will the insured if it does not amount to felony such as self-defense or
ordinarily assume that they are used to mean executors or accident or the beneficiary is insane.
administrators unless it appears that the deceased intended to use these
expressions in the sense of heir or next of kin. Death caused by violation of law
The mere fact that the insured died while he was committing a felony
TN: If no beneficiary is designated in the life insurance policy, the or violating a law would not warrant denial of liability. The insurer, to
proceeds will go to his legal heirs in accordance with law. avoid liability, must prove that the commission of the crime had a causal
connection with the accident resulting in the death of the insured.
SECTION 12
SECTION 13
Section 12. The interest of a beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal, accomplice, or Section 13. Every interest in property, whether real or personal, or any
accessory in willfully bringing about the death of the insured. In such a relation thereto, or liability in respect thereof, of such nature that a
case, the share forfeited shall pass on to the other beneficiaries, unless contemplated peril might directly damnify the insured, is an insurable
otherwise disqualified. In the absence of other beneficiaries, the interest.
proceeds shall be paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid to the estate of the INSURABLE INTEREST IN PROPERTY
insured.
The interest may be in property itself (eg. ownership), or any
FORFEITURE OF THE INTEREST OF THE BENEFICIARY IN A LIFE relationship thereto (eg. Interest of a trustee or a commission agent),
INSURANCE POLICY or liability in respect thereof (eg. Interest of a carrier or depository of
goods). Anyone has an insurable interest in property who derives a
“Interest”, how construed benefit from its existence or would suffer loss from its destruction.
The word “interest” in this section means the right of the beneficiary to
receive the proceeds of the life insurance policy. It does not mean Occurrence of loss may be uncertain
insurable interest since the beneficiary need not have an insurable It is not necessary that the interest is such that the event insured against
interest in the life of the insured. would necessarily subject the insured to loss. It is sufficient that it might
do so, and that pecuniary injury would be the natural consequence.
OTHER QUALIFIED BENEFICIARIES OF THE INSURED
Title or right to possession not essential
In case the interest of the beneficiary is forfeited, the nearest relatives, What is important is that the person has an insurable interest if he is so
not otherwise disqualified, of the insured shall, inherit the proceeds paid situated with respect to the property that he will suffer loss as the
to the estate of the insured. proximate result of its damage or destruction.

Nearest relatives of the insured Legal expectation of loss or benefit


In the order of the enumeration. Insurable interest in the property is not necessarily an interest in the
property in the sense of title, but a concern in the preservation of the
1. The legitimate children property and such a relation to or connection with it as will necessarily
2. The mother and father, if living entail a pecuniary loss in case of its injury or destruction.
3. The grandfather and the grandmother, or ascendants nearest in
degree, if living As a general rule, the expectation of benefit to be derived from the
4. The illegitimate children continued existence of property must have a basis of legal right,
5. The surviving spouse although the person insured has no title, either legal or equitable, to the
6. The collateral relatives property insured.
a. Brothers and sisters full blood
b. Brothers and sisters half-blood
c. Nephews and nieces

13 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Mere factual expectation of loss


SECTION 15
Expectation not arising from legal right or duty does not constitute an
insurable interest. Section 15. A carrier or depository of any kind has an insurable interest
in a thing held by him as such, to the extent of his liability but not to
Important: Factual expectation, though usually insufficient in strict exceed the value thereof.
indemnity insurance, will suffice in life insurance.
INSURABLE INTEREST OF CARRIER OR DEPOSITORY
SECTION 14
The reason for this provision is that the loss of the thing may cause
Section 14. An insurable interest in property may consist in: liability to the carrier or depository to the extent of its value.
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
SECTION 16
(c) An expectancy, coupled with an existing interest in that out of
which the expectancy arises. Section 16. A mere contingent or expectant interest in any thing, not
founded on an actual right to the thing, nor upon any valid contract for
An existing interest it, is not insurable.
This may be a legal title or equitable title. Undoubtedly, the absolute
owner of the property has an insurable interest. A mere hope or expectation of benefit which may be frustrated by the
happening of some event uncoupled with any present legal right will not
Examples of those persons with insurable interest arising from legal title: support a contract of insurance.
1. Trustee, as in case of seller of property not yet delivered
Property of father/son/spouse
2. Mortgagor of the property mortgaged
A father cannot insure his son’s property or vice versa because the
3. Lessor of the property leased
interest is merely an expectancy of inheriting. This is also similar to the
4. Lessee and sub-lessee may also insure property leased or
spouse’s situation.
subleased
5. Assignee of property for the benefit of creditors
Life of parents/children/spouses
By statutory provisions, parents and children, and spouses can insure
Examples of persons with insurable interest arising from equitable title:
each other’s life. Since under the law, there are under mutual obligation
1. Purchaser of property before delivery or before he has performed to support each other, a life policy is held to be a means of fulfilling that
the conditions of sale obligation or a means of saving the party entitled to support from being
2. Mortgagee of property mortgaged the subject of public charity.
3. Mortgagor, after foreclosure but before expiration of the period
within which redemption is allowed Property of debtor
4. Beneficiary under a deed of trust A general or unsecured creditor cannot insure specific property of his
5. Creditors under a deed of assignment debtor who is alive, even though the destruction of such would render
6. Judgment debtor whose property has been seized under execution worthless any judgment he might obtain.
until the right to redeem or the right to have the sale set aside
has been lost But an unsecured creditor may insure the property of a deceased debtor
7. Builders and constructors in the buildings pending payment of the since all personal liability ceases with the death of the debtor. The
construction price proceedings to subject the estate to the payment of the debt of the
deceased debtor are in rem.
Important: More than one insurable interest may exist over the same
property. Also, an unsecured creditor who obtains a judgment in his favor
becomes a judgment creditor and has been held to have insurable
An inchoate interest interest in the debtor’s property as he has right to levy on such property
It must be founded on an existing interest. as may be necessary to satisfy judgment. However, to recover
insurance, he must show that the debtor has no other property out of
Example: A stockholder has an inchoate interest in the property of the which the judgment may be satisfied.
corporation which he is a stockholder, which is founded on existing
interest arising from his ownership of shares in the corporation. His Property of testator still alive
insurable interest is limited to the extent of the value of his interest or One named as beneficiary in a will has no insurable interest in a property
share in the distribution of the corporation assets. designated before the testator’s death. His expectation has no legal
basis since the will has no legal effect before the death of the testator.
Likewise, a partner has an insurable interest in the firm property which The will can be revoked unless the testator has expressly waived.
will support a separate policy for his benefit.
SECTION 17
As expectancy
The expectancy must be coupled with an existing interest in that out of Section 17. The measure of an insurable interest in property is the extent
which such expectancy arises. to which the insured might be damnified by loss or injury thereof.

Example: A farmer may insure future crops if they are to be grown on MEASURE OF INSURABLE INTEREST IN PROPERTY
land owned by him at the time of the issuance of the policy, or although
the crops are to be raised by him on the land of another, provided the The purpose of property insurance is to indemnify a person against
crops will belong to him when produced. actual loss, and not to wager on the happening of the event.

Similarly, an owner of a business can insure against a contingency which


may cause loss of profits resulting from the cessation or interruption of
his business.

14 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

SECTION 18 In theory, this becomes a contract of indemnity but it is often impossible


exactly to assess the injury suffered.
Section 18. No contract or policy of insurance on property shall be
enforceable except for the benefit of some person having an insurable Health insurance contracts
interest in the property insured. Not a contract of indemnity. But those that cover medical expenses are
contracts of indemnity. In these contracts, only medical expenses
EFFECTS OF ABSENCE OF INSURABLE INTEREST IN PROPERTY incurred by the insured are paid.
INSURED
Health care agreement
1. Principle of indemnity applicable Agreement with a health maintenance organization (HMO) is in the
2. Doctrine of waiver or estoppel not applicable nature of a non-life insurance which is a contract of indemnity. Once a
member incurs medical or hospital bills from sickness, injury and the
Principle of indemnity applicable like, the health care provider must pay for the same to the extent agreed
An insurance taken out by a person on property which he has no upon under the contract.
insurable interest is void.
SECTION 19
Where the insurance is invalidated on the ground that no insurable
interest exists, the premium is ordinarily returned to the insured unless Section 19. An interest in property insured must exist when the
he is in pari delicto with the insurer. insurance takes effect, and when the loss occurs, but need not exist in
the meantime; and interest in the life or health of a person insured must
In life insurance taken by a person on his own life, it is not necessary exist when the insurance takes effect, but need not exist thereafter or
for the beneficiary to have an insurable interest in the life insured. when the loss occurs.

Doctrine of waiver or estoppel not applicable TIME WHEN INSURABLE INTEREST MUST EXIST
This doctrine cannot be invoked since the public has an interest in the
matter independent of the consent or concurrence of the parties. 1. When insurance takes effect and loss occurs
2. When insurance takes effect
Measures of indemnity in insurance contracts 3. When liability attaches
1. Contracts of marine or fire insurance 4. Need not exist during intervening period
2. Liability insurance contracts
3. Life insurance contracts When insurance takes effect and loss occurs
4. Personal accident insurance contracts Insurable interest in property must exist on the date of execution of the
5. Health insurance contracts contract of insurance and on the date of the occurrence of the risk,
6. Health care agreement otherwise, policy is void. If he has no insurable interest, he suffered no
loss because it is an insurance of indemnity.
Contracts of marine or fire insurance
The amount of insurance being limited by the value of the interest to be When insurance takes effect
protected. The real purpose of the contract is, in case of loss, to place This is applicable in life insurance, even if it has ceased to exist at the
the insured in the same situation on which he was before the loss time of the insured’s death. Since the event which payment to be made
subject to the terms and conditions of the policy. The amount of is certain to happen, it is logical to determine insurable interest at the
indemnity may be determined after the loss or is previously fixed in the time the contract was entered in to.
contract.
When liability attaches
Pursuant to the general rule of indemnity, the amount of insurance fixed In liability insurance, questions of insurable interest are not important.
in the policy is not the exact measure of indemnity to which the insured It necessarily exists when the liability of the insured to a third party
is entitled, but the maximum indemnity which he might obtain. attaches.

Liability insurance contracts Need not exist during intervening period


This is against liability and not loss. If the insured suffers no loss because The purpose of the provision is to prevent the issue of wagering policies.
his liability to the third person cannot be enforced, the insurer has no
obligation to pay the proceeds. Existence of insurable interest when risk attaches
Existence of insurable interest at the inception of the contract, unless
Life insurance contracts made so by a statute, is not at all necessary to its validity. It is sufficient
This is not a contract of indemnity. The amount fixed payable at the that insurable interest exists at the time the risk attaches.
death of the insured is not considered as the true value of the thing
insured because the life of the person is priceless. It is simply the INSURABLE INTEREST IN LIFE AND PROPERTY
measure of indemnity which the insurer has bound himself to pay the DISTINGUISHED
insured.
As to extent of insurable interest
The amount for which a person is insured is governed by the amount of In life insurance, it’s unlimited and in property, it is limited to the actual
premium that he contracted to pay. Life insurance is more of an value of the interest.
investment than indemnification protection against loss.
As to time when insurable interest must exist
Personal accident insurance contracts In life insurance, it is enough that the insurable interest exists at the
This is not a contract of indemnity. However, if a person effects a time the policy takes effect and need not exist at the time of the loss,
personal accident insurance on the life of another person, the amount while in property insurance, it must exist when the insurance takes
recoverable is the loss sustained by the person who effected the policy. effect and when the loss occurs, but need not exist at the meantime.

15 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

As to expectation of benefit to be derived thing insured after the occurrence of the loss. Such change of interest
In life insurance, the expectation of benefit to be derived from the does not after his right to indemnity for the loss.
continued existence of life need not have any legal basis. In property
insurance, an expectation of benefit, to be derived from the continued SECTION 22
existence of the property insured, however likely and morally certain of
realization it may be, will not afford a sufficient insurable interest unless Section 22. A change of interest in one or more of several distinct things,
that expectation has a basis of legal right. separately insured by one policy, does not avoid the insurance as to the
others.
SECTION 20
CHANGE OF INTEREST WHERE SEVERAL THINGS SEPARATELY
Section 20. Except in the cases specified in the next four sections, and INSURED BY ONE POLICY
in the cases of life, accident, and health insurance, a change of interest
in any part of a thing insured unaccompanied by a corresponding change It is important to make a distinction between a divisible contract and an
of interest in the insurance, suspends the insurance to an equivalent indivisible contract.
extent, until the interest in the thing and the interest in the insurance
are vested in the same person. Effect dependent on divisibility of contract
If the things are “separately insured in one policy” the contract is
Effect, in general, of change of interest divisible and the violation of a condition which avoids the policy with
Generally speaking, the mere transfer of a thing insured does not respect to one or more of the things does not affect the others.
transfer the policy but suspends it until the same person becomes the
owner of both the policy and the thing insured. This is in accordance to Conversely, if the things are insured under one policy for a gross sum
Sec. 19 that an insured must have an insurable interest in the property and for an entire premium, the contract is indivisible so that a change
insured at the time of the loss. in interest in one or more of the things will also avoid the insurance as
to the others.
Object of rule against alienation
This is to provide against changes which might supply a motive to Divisibility of a contract, a question of intention
destroy the property, or might lessen the interest of the insured in This is to be determined by the language employed by the parties.
protecting and guarding it.
Example: where only one premium was paid for the entire shipment of
Change of interest covered by law goods, the insurance contract is indivisible and the fact that the goods
The change of interest covered in Sections 20-24 means absolute are loaded on two different vessels does not make the contract several
transfer of property insured such as the conveyance of the property by and divisible as to the items insured.
means of an absolute deed of sale. Consequently, the interest in the
property insured does not pass by mere execution of a pledge or a
SECTION 23
mortgage.
Section 23. A change of interest, by will or succession, on the death of
Exceptions to the general rule the insured, does not avoid an insurance; and his interest in the
The rule that change of interest suspends the insurance is subject to insurance passes to the person taking his interest in the thing insured.
these exceptions:
CHANGE OF INTEREST BY DEATH OF THE INSURED
1. In life, health and accident insurance
2. A change of interest in the thing insured after the occurrence of an It passes to the person’s heir, legatee or devisee who acquired interest
injury which results in a loss in the thing insured. This passes from the moment of death of the
3. A change of interest in one or more several things, separately decedent.
insured in one policy
4. A change of interest by will or succession on the death of the
SECTION 24
insured
5. A transfer of interest by one of the several partners, joint owners Section 24. A transfer of interest by one of several partners, joint
or owners in common, who are jointly insured, to the others owners, or owners in common, who are jointly insured, to the others,
6. When a policy is so framed that it will inure to the benefit of does not avoid an insurance even though it has been agreed that the
whomsoever, during the continuance of a risk, may become the insurance shall cease upon an alienation of the thing insured.
owner of the interest insured
7. When there is an express prohibition against alienation in the TRANSFER OF INTEREST BY ONE OF THE SEVERAL PARTNERS,
policy, in case of alienation, the contract of insurance is not merely ETC. JOINTLY INSURED
suspended but is avoided.
Effect where transfer is to the others
SECTION 21 It will not avoid the insurance. The rule is the same even if there is a
stipulation that the insurance shall cease upon an alienation of the thing
Section 21. A change of interest in a thing insured, after the occurrence insured.
of an injury which results in a loss, does not affect the right of the
insured to indemnity for the loss. Reason for the rule
Each partner is interested in the whole property and the hazard is not
CHANGE OF INTEREST IN A THING INSURED AFTER LOSS increase because the purchasing partner has acquired a greater interest
in the property by a transfer of his co-partner’s share. The transfer does
After the loss happened, the liability of the insurer becomes fixed. The not affect the risk because no new party is brought into contractual
insured has a right to assign his claim against the insurer as freely as relationship with the insurer.
any other money claim. This right is absolute and cannot be delimited
by an agreement. The insured has also the absolute right to transfer the

16 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Exception to the rule 2. The precise delimitation of the risk which determines the extent
A policy will be avoided by a sale of an interest in partnership property of the contingent duty to pay by the insurer
by the partner to one of his co-partners, without the consent of the 3. Control of the risk after it is assumed as will enable to insurer to
insurer and before the loss occurs, where the policy contains the guard against the increase of risk due to change in conditions
condition “that in case of any sale, transfer, or change of title of any 4. Determining whether a loss occurred and if so, the amount of
property insured by this company, or of any undivided interest therein, such loss
such insurance will be void and cease.”
DEVICES FOR ASCERTAINING & CONTROLLING RISK & LOSS
Effect when transfer is to a stranger 1. Concealment
It is alienation or transfer to a stranger or third person that will avoid 2. Representations
the policy. A sale of a partner of his interest to a stranger ends the 3. Warranties
contract of insurance as to him but does not affect the insurance as to 4. Conditions
the others. 5. Exceptions

SECTION 25 Concealment and representation


To enable the insurer to secure the same information with respect to
Section 25. Every stipulation in a policy of insurance for the payment of the risk that was possessed by the applicant for insurance, so that he
loss whether the person insured has or has not any interest in the might be equally capable of forming a just estimate or its quality.
property insured, or that the policy shall be received as proof of such
interest, and every policy executed by way of gaming or wagering, is Warranties and conditions
void. Deals with conditions existing at the inception of the contract. They
involve facts the existence of which shows the risk to be greater than
STIPULATIONS PROHIBITED IN AN INSURANCE POLICY that intended to be assumed and operates to create in the insurer the
power to extinguish if he so desires, the legal relations already created.
Stipulation for the payment of loss whether the person insured
has or has not any interest in the subject matter of the Example: The insured is required the warrant that he had not been
insurance subject to a major operation or a stipulation in the policy may be inserted
This is a mere wager policy or contract and is void. A wager policy has that the policy shall be void should the insured be guilty of concealment
been defined as a pretended insurance where the insured has no or representations.
interest in the thing insured and can sustain no loss by the happening
of the misfortunes insured against him. The law, however, makes an Exceptions
exception in the cases mentioned in Section 181 regarding life Used for the purpose of making more definite the coverage indicated by
insurance. the general description of the risk by excluding certain specified risks
that otherwise would have been included under the general language
Stipulation that the policy shall be received as a proof of describing the risks assumed.
insurable interest
WON insurable interest exists does not depend upon the contract of The general description of the risk concerned has two parts:
insurance or the stipulations therein. The insurer can always show lack 1. Designation of the specific property interest to be covered
of insurable interest after the issuance of a policy of insurance. Such 2. Specification of such of the perils to which that property interest
defense of absence of insurable interest is available only to the insurer. would be exposed

WAGERING OR GAMING POLICIES VOID Example: “This policy shall not cover accounts, bills, currency, deeds,
evidences of debt, money or securities; nor bullion or manuscripts,
A contract of insurance is void for illegality unless the insured has an unless specifically named hereon in writing.”
insurable interest in the subject matter insured.
Q. How may an insurer protect himself against fraudulent
A mere bet upon a future event claims of loss?
Wager or gaming policies are disapproved and condemned not only By inserting in the policy various conditions which take the form of
under statutes declaring them void, but also on the ground of public conditions precedent, i.e. there are conditions requiring immediate
policy. They are regarded as detrimental to society. Such policies have notice of loss or injury and detailed proofs of loss within a limited period.
a tendency to create a desire for the event.
CONCEALMENT DEFINED
Non-existence of loss from the occurrence of event A neglect to communicate that which a party knows and ought to
Wagers suffer no loss from the occurrence of the contingent event. They communicate. It is the intentional withholding by the insured of any fact
actually profit from it. The insurable interest requirement intends to material to the risk.
deter the insured from the temptation to bring about by unnatural
means the results of the contingent event. Requisites of concealment:
1. A party knows the fact which he neglects to communicate or
disclose to the other
TITLE 4. CONCEALMENT 2. Such party concealing is duty bound to disclose such fact
3. Such party concealing makes no warranty of the fact concealed
SECTION 26 4. The other party has no means of ascertaining the fact concealed
Section 26. A neglect to communicate that which a party knows and
ought to communicate, is called a concealment. Important: Where a warranty is made of the fact concealed, the non-
disclosure of such fact is not concealment but constitutes a violation of
Primary concerns of the parties to an insurance contract warranty.
1. The correct estimation of the risk which enables the insurer to
decide whether he is willing to assume it, and if so, at what rate
of premium.

17 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Q. What is the effect if the insurer failed to verify the


SECTION 27
statements made by the insured in his application?
Section 27. A concealment whether intentional or unintentional entitles Nothing. The insurer has no such obligation to verify. It has the right to
the injured party to rescind a contract of insurance. rely on the statements of the insured as to the material facts stated in
his application.
EFFECT OF CONCEALMENT
SECTION 29
A. Concealment by the insured – Failure on the part of the insured
to disclose conditions affecting the risk, of which he is aware, Section 29. An intentional and fraudulent omission, on the part of one
makes the contract voidable at the insurer’s option. insured, to communicate information of matters proving or tending to
prove the falsity of a warranty, entitles the insurer to rescind.
Reason: Insurance policies are traditionally contracts uberrimae
fidae – that is contracts of the utmost good faith. When fraudulent intent necessary
Unlike in ordinary concealment (Sec 27), the non-disclosure under this
Important: It is not limited to material facts which the applicant Section must be intentional and fraudulent in order that the contract
knows. It extends to those which he ought to know, they being may be rescinded.
necessary for the insurer to evaluate the risk. Therefore, it is no
defense to plead mistake or forgetfulness. A. Insured – the one guilty of the omission
B. Insurer – the one entitled to rescission of the contract
B. Concealment by the insurer – Injured party is entitled to
rescind the contract. This section relates to “falsity of a warranty”
In every contract of marine insurance, there is an implied warranty that
Reason: The contractual duty of disclosure is not required of the the ship is seaworthy. Thus, the intentional and fraudulent omission on
insured alone, but is imposed with equal stringency upon the the part of the insured when applying for a policy to communicate
insurer, since his dominant bargaining position carries with it information that his ship is in distress or in peril – would entitle the
stricter responsibility. insurer to rescind because said concealment tends proves or tends to
prove the falsity of the warranty that the ship is seaworthy.
PROOF OF FRAUD IN CONCEALMENT NOT REQUIRED
SECTION 30
Existence of fraud not required
Fraud is not essential in order that the insured may be guilty of Section 30. Neither party to a contract of insurance is bound to
concealment. The duty to communicate is independent of the intention. communicate information of the matters following, except in answer to
Thus, the absence of an intent to deceive is immaterial. the inquiries of the other:
(a) Those which the other knows
Reason: It would be impossible for the insurer to protect itself and its (b) Those which, in the exercise of ordinary care, the other ought to
honest policyholders against fraudulent and improper claims. It would know, and of which the former has no reason to suppose him
be wholly at the mercy of any one who wished to apply for insurance, ignorant
as it would be impossible to show actual fraud except in the extremest (c) Those of which the other waives communication
cases. (d) Those which prove or tend to prove the existence of a risk excluded
by a warranty, and which are not otherwise material; and
Basis of this provision (e) Those which relate to a risk excepted from the policy and which
Because it misleads or deceives the insurer into accepting the risk, or are not otherwise material.
accepting it at the rate of premium agreed upon.
When there is no duty to make disclosure
Principal question therefore must be: 1. Matters known to, or right to be known by insurer, or of which he
“Was the insurer misled or deceived into entering a contact obligation waives disclosure
or in fixing the premium of insurance by a withholding of material 2. Risks excepted from the policy
information or facts within the assured’s knowledge or presumed 3. Nature or amount of insured’s interest
knowledge?”
XPN: In answer to the inquiries of the insurer.
Matters made the subject of special inquiries material
SECTION 28 Matters made the subject of inquiry must be deemed material even
Section 28. Each party to a contract of insurance must communicate to though otherwise they might not be so regarded and this insured is
the other, in good faith, all facts within his knowledge which are material required to make full and true disclosure to questions asked.
to the contract and as to which he makes no warranty, and which the
other has not the means of ascertaining. Important: The failure of an apparently complete answer to make full
disclosure will avoid the policy. However, an answer incomplete on its
fact will not defeat the policy in the absence of bad faith.
Matters that must be communicated even in the absence of
inquiry
Example: In an application for fire insurance, the one applying was
This section makes it the duty of each party to communicate in good
asked whether the property is encumbered and for what amount.
faith all facts within his knowledge only when:
A. If he answers one mortgage when in fact there are two – the policy
1. They are material to the contract
is void.
2. The other has no means of ascertaining the said facts
B. If he merely answered that the property is encumbered without
3. The party with the duty to communicate makes no warranty.
stating the amount of encumbrance – the issue of the policy
without further inquiry is a waiver of the omission to state the
Important: The test is, if the applicant is aware of the existence of
amount.
some circumstances which he knows would influence the insurer in
acting upon his application, good faith requires him to disclose that
circumstance, through unasked.

18 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

After contract has become effective


SECTION 31
If the contract is already complete and binding before the information is
Section 31. Materiality is to be determined not by the event, but solely acquired – there is no duty on the insured to disclose the same, even
by the probable and reasonable influence of the facts upon the party to though the policy is yet to issue.
whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries. Before contract becomes effective
If the contract is to be effective only upon the issuance of the policy –
DETERMINATION OF MATERIALITY an applicant is under the duty to disclose material facts occurring or
coming to his knowledge between the date of submitting his application
Test of materiality and the date the policy is delivered.
The effect which the knowledge of the fact in question would have on
the making of the contract. To be material, a fact need not increase the SECTION 32
risk or contribute to any loss or damage suffered. It is sufficient if the
knowledge of it would influence the parties in making the contract. Section 32. Each party to a contract of insurance is bound to know all
the general causes which are open to his inquiry, equally with that of
Important: No information possessed by one party can be material, in the other, and which may affect the political or material perils
the sense of requiring disclosure, unless it is possible that it may contemplated; and all general usages of trade.
influence the other in the making of the contract.
Matters each party bound to know
Example: 1. General causes open to inquiry equally with that of the other (i.e.
Feds insured his house against fire, but did not disclose the fact that he that a nation is at war, or the laws and political conditions in other
received 2 letters threatening to set his house on fire if he did not pay countries)
P50, 000 to the sender. Feds’ house was destroyed by an accidental fire. 2. Those which affect the political or material perils contemplated
Here, the insurer can deny liability for the loss. 3. All general usages of trade (i.e. rules of navigation, kinds of
seasons, and all risks connected with navigation)
From the standpoint of the insurer
A fact is material if the knowledge of it would have a probable and SECTION 33
reasonable influence upon the insurer in assessing the risk involved,
even though such fact may not even remotely contribute to the Section 33. The right to information of material facts may be waived,
contingency upon which the insurer would become liable. either by the terms of insurance or by neglect to make inquiry as to such
facts, where they are distinctly implied in other facts of which
Example: Feds concealed the fact that he had diabetes and pneumonia. information is communicated.
The policy is avoided although the cause of death (i.e. plane crash) be
totally unconnected with the material fact concealed. Right to information may be waived
A. Express – by the terms of the insurance contract
Important: It is sufficient that his non-disclosure misled the insurer in B. Implied – by neglect to make inquiry as to such facts
forming his estimates of the risks of the proposed insurance policy or in
making inquiries. Important: If the applicant has answered the questions asked in the
application, he is justified in assuming that no further information is
When concealment regarded as intentional desired. A waiver is a type of estoppel.
Intention being a state of mind, can be determined only by the external
acts or failure to act from which inferences as to subjective belief may Example: In an answer to a question, the insured communicated to the
be reasonably drawn. insurer that he had once stayed in a hospital. The insurer did not inquire
as to the cause of the confinement. Here, there is implied waiver on the
Important: The nature of the facts not conveyed must have been part of the insurer of its rights to be informed of the kind of sickness
intentional rather than inadvertent. which caused insured’s confinement in the hospital.

Examples: A.G. Factor v. Phil. American Life Insurance


1. Concealment of the fact that he was operated on for cancer Facts: Insured died of stage 3 cancer of the cervix. Insurer denied the
involving complete removal of the right breast claim of death benefits on the ground that insured concealed the fact
2. Withholding by the father of the fact that his daughter was typically that he had cancer in her application. However, it appeals that the
a mongoloid child insured faithfully answered the questions in the application, even
indicating the addresses and names of the persons, laboratories and
Where fact concealed not material hospitals when and where she had consultations.
The insured cannot be guilty of concealment where the fact concealed Issue: Was the insured guilty of concealment of fact material to the
is not material. insurance contract?

Example: Insured underwent an ECG test and the results showed a Held: No. The insurer had every means to ascertain the truth of the
normal condition but he gave a negative answer to the question of matter alleged in the application. Insurer’s failure to make inquiry
whether he had such test – did not amount to concealment because constituted a waiver of its right to information of the facts.
even if the test was related to the insurer, the same would not have
affected its decision to insure the deceased. Ng Zee v. Asian Crusader Life Assurance Corp

TIME WHEN INFORMATION ACQUIRED Facts: Insured stated that he was operated on for a tumor of the
stomach associated with ulcer. It turned out however that his aliment
Important: The concealment must take place at the time the contract was diagnosed as peptic ulcer where a portion of his stomach was
is entered into in order that the policy may be avoided. The duty of removed.
disclosure ends with the completion and effectivity of the contract.

19 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Issue: Was the insurer deceived into entering the contract or accepting information to the insurer and otherwise induce him to enter into the
the risk at the rate of premium agreed upon? insurance contract.

Held: No. In the absence of evidence that the insured had sufficient Misrepresentation
medical knowledge as to enable him to distinguish between peptic ulcer A statement
and a tumor, his statement that said tumor was associated with peptic 1. As a fact of something which is untrue
ulcer of the stomach should be construed as an expression in good faith 2. Which the insured stated with knowledge that it is untrue and with
of his belief as to the nature of his ailment and operation. an intent to deceive or which he states positively as true without
knowing it to be true and which he has tendency to mislead
While the information was imperfect, the same was nevertheless 3. Where such fact in either case is material to the risk
sufficient to have induced the insurer to make further inquiries about
the ailment and operation of the insured. Insurer’s failure to make TN: Misrepresentation may be viewed as the active form of concealment
further inquiry therefore waives the imperfection of the answer.
Important: The misrepresentation has the effect of rendering the
SECTION 34 contract voidable at the option of the insurer, even though innocently
made and without wrongful intent.
Section 34. Information of the nature or amount of the interest of one
insured need not be communicated unless in answer to an inquiry, FORMS AND NATURE OF REPRESENTATION
except as prescribed by Section 51.
Information given concerning risk
DISCLOSURE OF NATURE & EXTENT OF INTEREST OF INSURED The person applying for insurance must give the insurer all information
concerning the risk as will be of use to the latter in estimating the
General Rule: There is no need to disclose the interest in the property character and in determining whether or not to assume it.
insured.
The information may be given:
Exceptions: 1. Orally
1. In answer to an inquiry 2. Written in papers not connected with the contract (i.e. circulars,
2. If the person applying for the policy is not the absolute owner prospectuses, examiner’s report)
thereof (Section 51) 3. In the policy itself

Example: Forms the basis of contract


A fire insurance policy was issued to Feds. He was described as the The information, however given, forms the basis of the contract. It
owner of the property, but in fact, he was only given the privilege of describes, marks out and defines the risk assumed. Here arises the
occupying the property, rent-free for life by the terms of his father’s will. reasonable rule that the untruth of any material representation relied on
by the insurer will avoid the contract, wholly irrespective of the intent,
Is the policy valid? No. Feds is guilty of misrepresentation. He should whether innocent or fraudulent.
have disclosed the nature of his interest in the property inasmuch as he
is not the absolute owner thereof. Intended as collateral inducements
Representations are made to influence the insurer to accept the risk.
SECTION 35 Thus, it may be communicated in any manner whatsoever that is
intelligible.
Section 35. Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own judgment upon SECTION 37
the matters in question.
Section 37. A representation may be made at the time of, or before,
Disclosure of judgment upon the matters in questions issuance of the policy.
The duty to disclose is confined to facts. Hence, there is no duty to
disclose mere opinion, speculation, intention or expectation. Time when representation may be made
The very nature of representation requires that it precede the execution
Important: This is true even if the insured is asked. of the contract.

Example: If the insurer asks “how long do you think you will live?”, the XPN: A representation may be performed after the issuance of the
insured need not answer the question. The fact that he committed error policy.
in answering such a question calling for an expression of opinion does
not constitute fraud in law. Important: The insurer must be induced by the misrepresentation of
the application for insurance to issue the policy. Clearly, a representation
made after the policy is issued could not have influenced the insurer.
TITLE 5. REPRESENTATION

SECTION 36 SECTION 38

Section 36. A representation may be oral or written. Section 38. The language of a representation is to be interpreted by the
same rules as the language of contracts in general.
REPRESENTATION AND MISREPRESENTATION DEFINED
Construction of representations
Representation Representations are construed liberally in favor of the insured, and are
Statement made by the insured at the time of, or prior to the issuance required to be only substantially true.
of the policy relative to the risk to be insured, as to an existing or past
fact or state of facts, or concerning a future happening – to give TN: Warranties, in contrast, must be literally true, otherwise the contract
will fail.

20 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Examples: SECTION 40
1. Questions as to the use of liquor – will be construed as referring to
habitual use and not occasional use. Section 40. A representation cannot qualify an express provision in a
2. Questions as to illness or disease – refer to serious ailments and contract of insurance, but it may qualify an implied warranty.
not to minor indispositions
Effect of representation on express provisions of policy
SECTION 39 A representation cannot qualify an express provision or an express
warranty in a contract of insurance. This is because a representation is
Section 39. A representation as to the future is to be deemed a promise, not part of the contract but only a collateral inducement to it.
unless it appears that it was merely a statement of belief or expectation.
Important: A representation however, may qualify an implied
KINDS OF REPRESENTATION warranty.
A representation must be made at the time of issuing the policy or before
and may be: Examples:
1. Oral or written
2. Affirmative or promissory 1. If the policy expressly provides that the house insured is used as a
warehouse, any representation made by the insured prior to the
A. Affirmative representation – Any allegation as to the issuance of the policy that the house was used only as a resident
existence or non-existence of a fact when the contract begins. – is not a defense in the action for recovery of the amount of
insurance.
Example: A statement of the insured that the house to be
insured is used only for residential purposes. 2. If the insured makes a representation that the vessel insured was
deficient for the voyage because it was not duly manned, such
B. Promissory representation – Any promise to be fulfilled representation may qualify the implied warranty that the vessel is
after the contract has come into existence or any statement seaworthy.
concerning what is to happen during the existence of the
insurance. SECTION 41
NATURE OF PROMISSORY REPRESENTATION Section 41. A representation may be altered or withdrawn before the
The term “promissory representation” is used in two senses: insurance is effected, but not afterwards.
1. It is used to indicate a parol or oral promise made in connection
with the insurance but not incorporated in the policy. Time to which representation refers
2. An undertaking by the insured, indicated in the policy, but not Representations refer only to the time of making the contract.
specifically made a warranty. It is however in such a case, merely Representations found to be untrue may be withdrawn prior to the
an executory term of the contract and not properly a completion of the contract but not afterwards.
representation.
Rules:
Important: A promissory representation is substantially a condition or A. There is no false representation, if it is true at the time the contract
a warranty. takes effect although false at the time it was made and vice versa.

EFFECT ON POLICY OF EXPRESSIONS OF OPINION OR Example: If the insured represented that his vessel was in Tokyo
EXPECTATION when it fact it was in Hongkong, but at the taking into effect of the
contract, it was already in Tokyo – there is no misrepresentation.
Good faith or bad faith of the insured
A representation of the expectation, intention, belief, or opinion of the B. There is false representation if it is true at the time it was made
insured, although false, will not avoid a policy of insurance if there is no but false at the time the contract takes effect.
actual fraud in inducing the acceptance of the risk.
Example: Assuming the representation that the vessel was in Tokyo
Liability of the insurer to be true but on the date of the execution of the contract the
The good faith of the insured furnishes the criterion of truth. Thus, to vessel was no longer in Tokyo but in Hongkong and is shipwrecked
avoid liability, the insurer must prove both (1) materiality of the insured’s there, the insurer is not liable under the policy on the ground of
opinion and (3) the latter’s intent to deceive. false representation.

Important: If the representation is one of fact, all the insurer need to TN: In other words, a representation is a continuing representation until
prove is its falsity and materiality as defined in Sections 44, 45, 46. The the contract takes effect.
intent to deceive is presumed.
SECTION 43
When representation deemed a mere expression of opinion Section 43. When a person insured has no personal knowledge of a fact,
An oral representation as to a future event or condition, over which the he may nevertheless repeat information which he has upon the subject,
insured has no control, with reference to property or life insured, will be and which he believes to be true, with the explanation that he does so
deemed a mere expression of opinion which will avoid a contract only on the information of others; or he may submit the information, in its
when made in bad faith. whole extent, to the insurer; and in neither case is he responsible for its
truth, unless it proceeds from an agent of the insured, whose duty it is
Example: Insured made an oral promise that the building shall be to give the information.
occupied. The failure to fulfill the promise if made in good faith, will not
avoid the policy. Effect where information obtained from third persons
The insured is given discretion to communicate to the insurer what he
knows of a matter of which he has no personal knowledge. If the

21 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

representation turns out to be false, he is not responsible therefore, representation. To be deemed false, it is sufficient if the representation
provided he gives explanation that he does so on the information of fails to correspond with the facts in a material point
others.
Effect of collusion or fraud of agent of insurer
Example: If the insured has no personal knowledge of the cause of the
death of his parents because they died when the insured was still an A. Collusion with insured – collusion between the agent and the
infant, he may report information obtained from friends and relatives, insured in misrepresenting the facts will vitiate the policy even
expressly stating that he does not possess knowledge personally but though the agent is acting within the apparent scope of his
through others. In this case, the insured is not responsible for the truth authority.
of the information.
B. Principal of agent – where the insured merely signed the
Effect where information obtained from agent of insured or application form and made the agent of the insurer fill the same
insurer for him, it was held that by doing so, the insured made the agent
of the insurer his own agent. The insurer is liable when its agent
A. Agent of the insured – if it was possible for the agent under such writes a false answer into the application without the knowledge of
circumstances in the exercise of due diligence to have made such the insured.
communication before the making of the contract, the insured will
be liable for the truth. Important: But where the insurer required its medical examiner to put
the questions and fill out the answers in his own handwriting, the writer
B. Agent of the insurer – the same principle applies to the insurer of the application is not the agent of the insured.
though in the nature of things, the question does not occur so
frequently.
SECTION 46
SECTION 44 Section 46. The materiality of a representation is determined by the
same rules as the materiality of a concealment.
Section 44. A representation is to be deemed false when the facts fail to
correspond with its assertions or stipulations.
Test materiality of representation
The materiality of the representation is to be determined not by the
When representation deemed false
event, but solely by the probable and reasonable influence of the facts
In order that a policy shall be avoided, a representation relied upon must
upon the party to whom the representation is made.
be false in a substantial and material respect.
Important: Materiality is a judicial question. The matter
Important: Unlike warranties, representations are not required to be
misrepresented must be of that character which the court can say would
literally true. They need only be substantially true.
reasonably affect the insurer's judgment.
The rule does not apply in marine insurance
Concealment and misrepresentation compared
In marine insurance, substantial truth of a representation is not
sufficient. The insured is required to state the exact and whole truth in
1. As to definition:
relation to all matters that he represents, or upon inquiry discloses or
A. Concealment – the insured withholds information of material
assumes to disclose.
facts from the insurer
B. Misrepresentation – the insured makes erroneous statements
TN: A statement that the applicant is in good health is held not to mean
of facts with the intent of inducing the insurer to enter into
that he is in perfect health, but that he is not aware of any disease of
the insurance contract
such a serious nature as to impair his health permanently. That he is
temporarily ill because of some passing malady does not render his
2. The materiality of a concealment is determined by the same rules
representation substantially untrue
as applied in cases of misrepresentation.
Construction of representation as affirmative.
3. A concealment on the part of the insured has the same effect as a
A representation written in the policy even in such form as to admit of
misrepresentation and gives the insurer a right to rescind the
its being construed as an executory agreement or promissory
contract.
representation will rather be construed, when possible, as an affirmative
representation of a present fact in order to save the policy from
4. Whether intentional or not, the injured party is entitled to rescind
avoidance.
a contract of insurance on ground of concealment or false
representation.
Example: The insured states that no smoking is allowed on the premises.
The truth of the representation at the time the contract takes effect is
5. Since the contract of insurance is said to be one of utmost good
sufficient to validate the insurance which will not be affected by a
faith on the part of both parties to the agreement, the rules on
subsequent change in the practice as to smoking in the premises.
concealment and representation apply likewise to the insurer.

SECTION 45 SECTION 47
Section 45. If a representation is false in a material point, whether Section 47. The provisions of this chapter apply as well to a modification
affirmative or promissory, the injured party is entitled to rescind the of a contract of insurance as to its original formation.
contract from the time when the representation becomes false.
Applicability of Sections 26 to 48.
Effect of falsity of representation The provisions of Sections 26 to 35 governing concealment and Sections
Fraud or intent to misrepresent facts is not essential to entitle the injured 36 to 48 governing representations apply not only to the original
party to rescind a contract of insurance on the ground of false formation of the contract but also to a modification of the same during
the time it is in force.

22 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Important: Thus, where the insurer is induced to modify the insurance Theory and object of the incontestable clause
policy as to the rate of premium by a misrepresentation on the part of
the insured in a material point, the insurer is entitled to rescind such A. As to the insurer – An insurer should have a reasonable
modification. opportunity to investigate the statements which the applicant
makes in procuring his policy and that after a definite period, the
SECTION 48 insurer should not permitted to question the validity of the policy
either by affirmative action or by defense.
Section 48. Whenever a right to rescind a contract of insurance is given
to the insurer by any provision of this chapter, such right must be B. As to the insured – The clause has as its object to give the
exercised previous to the commencement of an action on the contract. greatest possible assurance to a policyholder that his beneficiaries
would receive payment without question as to the validity of the
After a policy of life insurance made payable on the death of the insured policy or the existence of the coverage once the period of
shall have been in force during the lifetime of the insured for a period contestability passes.
of two (2) years from the date of its issue or of its last reinstatement,
the insurer cannot prove that the policy is void ab initio or is rescindable Requisites for incontestability
by reason of the fraudulent concealment or misrepresentation of the In order that the insurance shall be incontestable, the following must be
insured or his agent. present:
1. The policy is a life insurance policy
WHEN AN INSURER MUST EXERCISE HIS RIGHT TO RESCIND 2. It is payable on the death of the insured
3. It has been in force during the lifetime of the insured for at least 2
In general years from its date of issue or of its last reinstatement
A contract of insurance may be rescinded on the ground of:
1. Concealment Important: The period of two (2) years for contesting a life insurance
2. False representation policy by the insurer may be shortened but it cannot be extended by
3. Breach of warranty stipulation. The phrase "during the lifetime" simply means that the policy
is no longer considered in force after the insured has died. The key
Important: A defense to an action to recover insurance that the policy phrase is "for a period of two years."
was obtained through false representations, fraud and deceit is not in
the nature of an action to rescind and is thus not barred by the provision. Effects when policy becomes incontestable
There is no time limit imposed for interposing this defense. The insurer may not refuse to pay the same by claiming that:

In non-life policy 1. The policy is void ab initio


In order that the insurer may rescind a contract of insurance, such right 2. It is rescissible by reason of the fraudulent concealment of the
must be exercised prior to the commencement of an action on the insured or his agent, no matter how patent or well-founded
contract. In other words, the insurer is no longer entitled to rescind a 3. It is rescissible by reason of the fraudulent misrepresentations of
contract of insurance after the insured has filed an action to collect the the insured or his agent.
amount of the insurance.
Rule in case of reinstatement
Life policy A policy of insurance, after it has lapsed or become forfeited as for non-
The foregoing rulings should be understood to be qualified by the payment of premiums or breach of a warranty or condition may be
second paragraph of Section 48. By virtue of the second paragraph, the revived or reinstated pursuant to a provision in the policy or the
defenses mentioned are available only during the first two years of a life agreement of the parties.
insurance policy.
Important: In which case, the period of contestability should be
INCONTESTABILITY OF LIFE POLICIES counted from the date of reinstatement and not from the date of the
issuance of the policy.
Incontestability means that after the requisites are shown to exist,
the insurer shall be estopped from contesting the policy or setting up Defenses not barred by incontestable clause
any defense, except as is allowed, on the ground of public policy The insurer may still contest the policy by way of defense to a suit
brought upon the policy or by action to rescind the same, on any of the
Incontestable clauses following grounds:
Clauses in life insurance policies known as incontestable clauses (1) That the person taking the insurance lacked insurable interest as
stipulating that the policy shall be incontestable after a stated period are required by law
in general use, and are now required by statutes in force in many states. (2) That the cause of the death of the insured is an excepted risk;
They create a kind of contractual statute of limitations on certain (3) That the premiums have not been paid
defenses that may be raised by the insurer. (4) That the conditions of the policy relating to military or naval
service have been violated
Incontestability is not absolute (5) That the fraud is of a particularly vicious type, as where the policy
The incontestability of a policy under the law is not absolute. Otherwise, was taken out in furtherance of a scheme to murder the insured,
a beneficiary of any person who had procured a life policy more than or where the insured substitutes another person for the medical
two years before his death would automatically be entitled to the examination, or where the beneficiary feloniously kills the insured
proceeds upon that person's death.

Incontestability only deprives the insurer of those defenses which arise


in connection with the formation and operation of the policy prior to
loss.

23 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Finman General Assurance v. CA


TITLE 6. THE POLICY
Where the personal accident insurance policy involved specifically
SECTIONS 49-50 enumerated only 10 circumstances wherein no liability attaches to the
insurer for any injury, the failure of the insurer to include death resulting
Section 49. The written instrument in which a contract of insurance is from murders or assault among the prohibited risks lead inevitably to
set forth, is called a policy of insurance. the conclusion that it did not intend to limit or exempt itself from liability
for such death. The principle of expressio unius est exclusion alterius
Section 50. The policy shall be in printed form which may contain blank applies.
spaces; and any word, phrase, clause, mark, sign, symbol, signature,
number, or word necessary to complete the contract of insurance shall When terms of contract clear
be written on the blank spaces provided therein. There is no room for construction and such terms cannot be enlarged
or diminished by judicial construction.
Any rider, clause, warranty or endorsement purporting to be part of the
contract of insurance and which is pasted or attached to said policy is POLICY DIFFERENT FROM CONTRACT ITSELF
not binding on the insured, unless the descriptive title or name of the A policy of insurance is different from the contract of insurance. The
rider, clause, warranty or endorsement is also mentioned and written on policy is the formal written instrument evidencing the contract of
the blank spaces provided in the policy. insurance.
Unless applied for by the insured or owner, any rider, clause, warranty Form thereof previously approved by Insurance Commissioner
or endorsement issued after the original policy shall be countersigned Insurance policies generally are required in standard forms. Section 226
by the insured or owner, which countersignature shall be taken as his would make it seem that every contract of insurance in the Philippines
agreement to the contents of such rider, clause, warranty or must be evidenced by a policy and that policy must be in the form
endorsement. previously approved by the Insurance Commissioner.
Notwithstanding the foregoing, the policy may be in electronic form FORM OF CONTRACT OF INSURANCE
subject to the pertinent provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to such rules and Modern-day insurance contracts are evidenced by writing, which may be
regulations as may be prescribed by the Commissioner. informal as a binding slip, or it may be formal, being the carefully drawn
written policy in customary use.
Policy of insurance defined
See definition under Section 49. It is the written document embodying Under the Insurance Code, the policy must be in printed form.
the terms and stipulations of the contract of insurance between the Any word, phrase, clause, mark, sign, symbol, signature, number or
insured and the insurer. word necessary to complete the contract of insurance shall be written
on the blank spaces provided in the policy.
POLICY CONTROLS TERMS OF INSURANCE CONTRACT
Important: In case of conflict between the written and printed portions
Measure of insurer’s liability of a policy, the written portion prevails.
The terms of the insurance contract constitute the measure of the
insurer’s liability, and in order to recover, the insured must show himself PERFECTION OF INSURANCE CONTRACT
within the terms. A contract of insurance, like other contracts, must be consented to by
the parties. Consent is manifested by the meeting of the offer and the
Presence of requisites for validity acceptance upon the thing and the cause which are to constitute the
To create an enforceable agreement, all the requisites necessary in contract.
order that there will be a valid contract of insurance must be present.
Acceptance of application
Compliance of insured with conditions of policy Acceptance must be unconditional but it need not be by formal act. Such
Insurance companies have the same rights as individuals to limit their acceptance must likewise be accepted to the other party.
liability and to impose whatever conditions they deem best upon their
obligations not inconsistent with public policy. Thus, the contract is not perfected where the applicant for life insurance
dies before its approval or it does not appear that the acceptance-of the
TN: The compliance by the insured with the terms of the policy is a application ever came to the knowledge of the applicant.
condition precedent to the right of recovery.
Compliance with conditions precedent
POLICY IS A CONTRACT OF ADHESION The usual conditions found in the application for insurance or in the
policy are that the contract shall not become binding until the policy is
Terms drafted and imposed by insurer delivered and the first premium paid. These conditions are valid and
Insurance contracts are drafted with the aid of skilful and highly paid enforceable. Until the conditions are fulfilled, the policy is of no binding
legal talent. The applicant on the other hand, is a shorn lamb driven to effect.
accept whatever contract may be offered on a take it or leave it basis if
he wishes insurance protection. Important: A binding deposit receipt is intended to be merely a
provisional or temporary insurance contract and to be binding only upon
Ambiguity resolved against insurer compliance with the said conditions. In life insurance, a binding slip or
These types of contracts are viewed as traps for the weaker party whom binding receipt does not insure by itself.
the courts of justice must protect. Consequently, where the language in
the insurance contract is ambiguous, the same should be resolved Cover notes
liberally in favor of the insured and strictly against the party responsible They may be issued to bind the Insurance temporarily pending the
therefor. issuance of the policy. (Sec. 52.) Coverage then can begin depending
upon their terms.

24 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

OFFER AND ACCEPTANCE IN INSURANCE CONTRACT Liberty National Life Insurance Co. v. Patterson
In insurance transaction, it is important to know who makes the offer Facts: Feds made a written application for a $10,000 policy. He paid the
and who accepts the offer. The applicant usually makes the offer to the premiums and was given a receipt. The application provided that “no
insurer through an application for insurance. insurance would take effect until the policy had been manually delivered
to and accepted by Feds and the first premium paid during his lifetime.
(1) In property and liability insurance. — It is the insured who Feds then died of a coronary disease before the policy was issued and
technically makes an offer to the insurer, who accepts the offer, delivered to him.
rejects it, or makes a counter-offer. The offer is usually accepted
by an insurance agent on behalf of the insurer. Issue: Was the policy enforceable although it was not manually delivered
to and accepted by Feds?
(2) In life and health insurance. — The situation depends upon
whether the insured pays the premium at the time he applies for Held: Yes. The requirement of delivery was modified by the reference
insurance. to the receipt, which receipt made the insurance effective upon the
payment for the premium by Feds. Here, the premium was paid when
A. If he does not pay the premium – his application is the application for insurance was made.
considered an invitation to the insurer to make an offer
which he must then accept. Delivery to insurer’s agent as to delivery to insured
Suppose, the applicant dies after a life policy has been delivered to the
B. If he pays the premium with his application – his application insurance agent by the Head Office but before it is delivered to the
will be considered an offer. applicant, can his beneficiary recover on the policy?

DELIVERY OF POLICY Two views:


Delivery is the act of putting the insurance policy (the physical
document) into the possession of the insured. 1. Beneficiary cannot recover for the simple reason that the insurance
agent is not his agent
Importance of delivery of the policy
The delivery of the policy is important in at least two ways: 2. Beneficiary can recover because the contract is to be deemed
1. As evidence of the making of a contract and of its terms complete when the policy has been delivered to the insurance
2. As communication of the insurer’s acceptance of the insured’s offer agent. The insured having complied with every condition required
3. Delivery is also important because it may affect the term of the of him, actual delivery to him is not essential to give the policy
coverage. binding effect.

Example: If a policy provides that the coverage terminates 1 year after Effect of delivery of policy
delivery, it therefore, becomes the important fact for determining when A. Where delivery is conditional – non-performance of the condition
the policy ends.
precedent prevents the contract from taking effect.
Effect of absence of delivery B. Where delivery is unconditional – ordinarily consummates the
The delivery of a policy is not a prerequisite to a valid contract of contract, and the policy as delivered becomes the final contract
insurance, unless the parties have so agreed in clear language. The between the parties.
contract may be completed prior to or even without the delivery of the
policy depending on the intention of the parties. C. Where premium still unpaid after conditional delivery – in the
absence of any clear agreement, the policy will lapse if the
Important: The widespread use of binding receipts has made delivery premium is not paid.
less important than it used to be in the process of forming a contract
between the insurer and the insured, but delivery still has significance RIDER IN A CONTRACT OF INSURANCE
as the "decisive act that ordinarily marks the end of the insurer's
opportunity to decline coverage. A rider is a small printed or typed stipulation contained on a slip of paper
attached to the policy and forming an integral part of the policy.
Mode of delivery of policy
A. Actual delivery – delivery to the insured in person or his duly Reason: Riders are usually attached to the policy because they
constituted agent constitute additional stipulations between the parties. Any rider properly
B. Constructive delivery – may be constructively delivered when it is attached to a policy is part of the contract as if embodied in the policy.
deposited in the mail duly directed to the insured or his agent.
Necessity for riders
TN: In the final analysis, whether or not the policy was delivered after Because in the conduct of insurance business, it often becomes
its issuance depends not upon its manual possession by the insured, but necessary to add a new provision to a policy, or to modify or waive an
rather upon the intention of the parties which may be shown by their existing provision, or to make any desired change in the policy. This
acts or words. saves the trouble and expense of making an entirely new contract.

Presumption of delivery Rule in case of conflict between a rider, etc. and printed
Possession by the insured raises the presumption that the policy was stipulations of a policy
delivered to him, while possession by the insurer is prima facie evidence The rider prevails, as being a more deliberate expression of the
that no delivery was made. agreement of the contracting parties.

Important: If the application contains a provision that the insurance Example: The fire insurance policy on a building excludes loss by
shall not be effective until the delivery of the policy, delivery is essential earthquake. For the payment of an additional premium, the insurer
to the consummation of the contract. attached a rider, in which it agrees to indemnify the insured against loss
by earthquake. The rider becomes a part of the policy and supersedes
any part of the policy in conflict with its provisions.

25 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

ATTACHED PAPERS ON INSURANCE POLICY Important: There is no sufficient reason in contracts of insurance why
a party should be relieved from the duty of exercising the ordinary care
General rule: A rider, slip, or other paper becomes a part of a contract and prudence that would be exacted in relation to other contracts. The
or policy of insurance if properly and sufficiently attached or referred to conformity of the insured to the terms of the policy is implied from his
therein in a manner as to leave no doubt as to the intention of the parties failure to express any disagreement with what is provided for.
in such respect.
Trend in modern cases
Exception: If the descriptive title or name of the rider, etc. is not In forming a contract, an insured relies not upon the text of the policies
mentioned and written on the blank spaces provided in the policy. but on the general descriptions of the coverage provided by the insurer
and its agents during the time he is considering whether to submit an
Important: The lack of description will not affect the other provisions application.
of the policy except where without such rider, etc., the contract would
be incomplete. Absent a special request, an insured will not see the text of the policy
until after the application has been submitted and the first premium
Warranties paid. Under these circumstances, it is not surprising that the so-called
Inserted or attached to a policy to eliminate specific potential increases "duty to read" has less significance in modern cases.
of hazard during the policy term owing to (1) actions of the insured or
(2) condition of the property. INSURER’S DUTY TO EXPLAIN THE POLICY

Example: Hazardous Trades warranty Where terms of policy are clear


The insurer has no affirmative duty to explain the policy or its exclusions
Clause to the insured. This principle, however, is subject to some important
Agreement between the insurer and the insured on certain matter caveats.
relating to the liability of the insurer in case of loss.
Important caveats:
Examples:
1. Three-fourths clause 1. Reasonable expectations of insured –If a court holds that an
2. Loss payable clause insured's reasonable expectations entitle him to coverage despite
3. Change of ownership clause policy language to the contrary, the insurer must pay for the loss
because the insurer failed to explain the limitations on coverage
Endorsement to the insured.
Provision added to an insurance contract altering its scope or
application. Examples of endorsements are those extending the 2. Options available to insured – in the area of motor vehicle
Perils covered. insurance where legislations have made certain kinds of coverage
optional, courts have sometimes imposed a duty on the insurer to
Effect of lack of signature explain the options to the insured.
GR: Where the rider, etc. is physically attached to a policy of insurance
3. Information expected by insured by insurer’s agent –In
contemporaneously with its execution, the fact that it is without the
the exercise of skill and care that a reasonable agent would
signature of the insurer or of the insured will not prevent its inclusion
exercise, he has the obligation to explain to the customer the
and construction as a part of the insurance contract.
kinds of coverage available and to help the insured in choosing
an appropriate coverage.
XPN: But the countersignature of the insured or owner is required to
any rider, etc. not applied for by him if issued after the delivery of the
4. Contractual rights of insured after denial of coverage –
policy, which countersignature shall be taken as his agreement to the
when the insured disputes a denial of coverage, the insurer has
contents of the matter so attached.
the obligation to alert the insured to his rights under the policy.
The insurer must take affirmative steps to make sure that the
EFFECT OF FAILURE OF INSURED TO REAL POLICY
insured is informed of his remedial rights.
Majority rule
In most jurisdictions, the fact that it is customary for insured persons to SECTION 51
accept policies without reading is judicially recognized. The basis for the
decisions is that insurance contracts are contracts of "adhesion" and not
Section 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
of bargaining, that is, the insured purchases the contract prepared solely
(b) The amount to be insured except in the cases of open or running
by the insurer.
policies;
Minority rule (c) The premium, or if the insurance is of a character where the exact
premium is only determinable upon the termination of the
The insured has the duty to read his policy and is bound by his contract
as written whether he reads it or not. contract, a statement of the basis and rates upon which the final
premium is to be determined;
(d) The property or life insured;
Exceptions:
(e) The interest of the insured in property insured, if he is not the
1. Where the insured could not have discovered the erroneous
absolute owner thereof;
statement by such reading.
(f) The risks insured against; and
2. Where the insured is induced by the fraud of the agent of the
(g) The period during which the insurance is to continue.
insurer not to read his policy
3. Where the insured is illiterate or unable to read English
4. Where contracts are long, complicated and difficult to understand
even if read

26 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

CONTENTS OF THE POLICY RISK, PERIL, AND HAZARDS DISTINGUISHED


Section 51 enumerates what the policy of insurance must contain.
A. Risk – chance or possibility of loss based on known and unknown
1. Names of parties factors. If loss is certain to happen, no risk is involved.

Take note: B. Peril – contingent or unknown event which may cause a loss. It is
A. Incorrect spelling of a name is not fatal, so long as the identity the contingency that one insures against. Its existence creates the
of the party can be sufficiently established. risk and its occurrence results in loss.
B. It is not essential to the effectiveness of the contract that the
name of the insured should appear therein, as he may be Examples: Fires, flood, theft, illness, death, etc.
described in other ways, such as “for the owner” of specified
property. C. Hazard – the condition or factor which may create or increase the
chance of loss from a given peril.
2. Amount of insurance – necessary to easily and exactly
determine the amount of indemnity to be paid to the insured. The Two major classifications:
sum insured is a basis for calculating the premium.
1. Physical hazards – everything relating to location, structure,
Exceptions: The sum need not be specified in cases of open or occupancy, exposure, i.e. gasoline stored in the premises,
running policies. unsafe brake in a car, weak construction, etc.

3. Premium – it represents the consideration of the contract, what 2. Moral hazards – factors that have their inception in mental
the insured pays the insurer to assume the risk of loss. attitudes, including hazards created by dishonesty, insanity,
carelessness, indifference and other causes psychological in
A. Life insurance – premiums are based on the average life span nature.
predicted from mortality tables.
B. Fire insurance – factors affecting the rate are its structure or TN: However, the terms are sometimes given more than one meaning,
construction, occupancy, use, location, etc. and is true even in the insurance business.

4. Property or life insured – constitutes the subject matter of the REQUIREMENT FOR RISKS TO BE INSURABLE
contract.
Not all risks are insurable. To be considered insurable, it must
5. Interest of insured in property – only required when the substantially meet certain requirements.
insured is not the absolute owner of the property insured.
Especially important in fire insurance to determine the actual 1. Important – the loss to be insured against should be important
damage suffered by the insured in case of loss, if he is not the enough to warrant the existence of an insurance contract.
absolute owner thereof. (i.e. mortagagee) Otherwise, to cover every small loss would increase greatly the cost
of protection. Thus, a person may not insure against losing his
6. Risks insured against – because the undertaking of the insurer ballpen or glasses.
is to indemnify the insured for loss, damage or liability caused only
by the risks insured against. 2. Calculability – the risk must permit a reasonable statistical
estimate of the chance of loss. If it cannot be calculated
7. Term or duration of insurance – The duration may be statistically, it is impossible to determine the amount of premiums.
expressed in terms of dates, or in terms of voyage. This is
important because the insurer will not be liable unless it occurred 3. Definiteness of loss – losses should be fairly definite as to cause,
during such duration of the insurance. time, place and amount, otherwise, estimates of possible loss are
difficult.
TN: The period of time during which the insurer assumes the risk
of loss is known as the life of the policy. 4. No catastrophic loss – When large people are subject to the
A. Annual policies – policies issued for a term of 12 months same kind of losses, i.e. war, it is an obvious deviation from the
B. Short period policies – policies issued for a less period principle that the losses of the few are borne by many. Thus, it is
usual to exclude political and war risks.
KINDS OF INSURABLE RISKS
Risks are ordinarily divided into three classifications:
5. Accidental in nature – insurable risks must normally be
1. Personal risks – those involving the person, i.e. death or accidental in nature. Intentional losses caused by the insured are
disability. Personal risks are often divided into life and health risks. not insurable because they cannot be predicted and payment for
them is against public policy.
2. Property risks – those involving loss or damage to property.
Requirement not absolute
A. Direct losses – fire, lightning, flood, and other forces of nature However, the requirements above for an insurable risk are not absolute.
B. Indirect losses – loss of profits, rents or favorable leases Insurability is best described as a relative matter. What is insurable
varies amount insurers and may change over time and with the use of
3. Liability risks – those involving liability for the injury to the person several limitations.
or property of others. These risks are occasioned by the operation
of the law of liability (tort) and may sometimes be called third party
risks.

TN: This involves both bodily injury and property damage risks.

27 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

SECTION 52 2. A cover note shall be deemed to be a contract of insurance within


the meaning of Section 1 (1) of the Code.
Section 52. Cover notes may be issued to bind insurance temporarily
pending the issuance of the policy. Within sixty (60) days after issue of 3. No cover note shall be issued or renewed unless in the form
a cover note, a policy shall be issued in lieu thereof, including within its previously approved by the Insurance Commission.
terms the identical insurance bound under the cover note and the
premium therefor. 4. A cover note shall be valid and binding for a period not exceeding
sixty (60) days from the date of its issuance, whether or not the
Cover notes may be extended or renewed beyond such sixty (60) days premium therefor has been paid, but such cover note may be
with the written approval of the Commissioner if he determines that cancelled by either party upon at least seven (7) days notice to the
such extension is not contrary to and is not for the purpose of violating other party.
any provisions of this Code. The Commissioner may promulgate rules
and regulations governing such extensions for the purpose of preventing 5. If a cover note is not so cancelled, a policy of insurance shall, within
such violations and may by such rules and regulations dispense with the sixty (60) days after the issuance of such cover note, be issued in
requirement of written approval by him in the case of extension in lieu thereof. Such policy shall include within its terms the identical
compliance with such rules and regulations. insurance bond under the cover note and the premium therefor.

PRELIMINARY CONTRACTS OF INSURANCE 6. A cover note may be extended or renewed beyond the
aforementioned period of sixty (60) days with the written approval
There are two kinds of preliminary contract of insurance: of the Insurance Commission, provided that such written approval
may be dispensed with upon the certification of the president, vice-
1. Preliminary contract of present insurance president, or general manager of the insurance company
The insurer subjects the subject matter usually by a “binding slip” concerned that the risks involved, the values of such risks and/or
or “binder” or “cover note” – the contract to be effective until the the premiums therefor have not as yet been determined or
formal policy is issued or the risk rejected. established and that such extension or renewal is not contrary to
and is not for the purpose of violating any provisions of the
TN: The binder is actually a temporary contract of insurance and is Insurance Code, or of any of the rulings, instructions, circulars,
usually issued after the applicant pays the first premium. orders or decisions of the Insurance Commissioner.

2. Preliminary contracts of executory insurance 7. Insurance companies may impose on cover notes a deposit
The insurer makes a contract to insure the subject matter at some premium equivalent to at least 25% of the estimated premium of
subsequent time which may be definite or indefinite. Here, the right the intended insurance coverage but in no case less than P500.00.
acquired by the insured is merely to demand the delivery of a policy
in accordance with the terms agreed upon and the obligation SECTION 53
assumed by the insurer is to deliver such policy.
Section 53. The insurance proceeds shall be applied exclusively to the
Examples: proper interest of the person in whose name or for whose benefit it is
made unless otherwise specified in the policy.
A. X signed an application for a fire insurance of his house. The insurer
accepted the application and issued a cover note for the insurance. Persons entitled to recover on policy
Before the policy could be issued, the house was burned. In this As discussed, insurance is a personal contract between the insured and
case, the insurer would have to reimburse X for his loss. the insurer.

B. Suppose, in the same example, the agreement of the insurer is to 1. As against the insured – Third persons have no right to the
issue the policy within a certain date and the house was destroyed proceeds of the policy unless there be some contract of trust,
by fire before such date. Here, the insurer would not be liable on a express or implied, between the insured and third persons. So that
claim for loss as there was merely an executory contract of where different persons have different interests in the same
insurance. property (like the mortgagor and mortgagee of the property), the
insurance taken by one in his own right and in his own interest
ISSUANCE AND RENEWAL OF COVER NOTES does not in any way inure to the benefit of the other.

Cover notes or binders 2. As against the insurer – A third person, in the absence of any
Short-term insurance policies that may be issued to afford immediate provision in the policy, has also no right to the proceeds thereof.
provisional protection to the insured until the insurer can inspect or Pursuant to Section 53, only the insured, if still alive, or the
evaluate the risk in question and issue the proper policy or until the risk beneficiary, if the insured is already deceased, is entitled to claim
is declined and notice thereof given. the insurance proceeds upon the maturation of the policy.

Take note:
1. Being temporary, it is sufficient that the cover note shows by SECTION 54
necessary implication an agreement to pay whatever rate may be Section 54. When an insurance contract is executed with an agent or
fixed. trustee as the insured, the fact that his principal or beneficiary is the
2. The fact that no separate premium was paid on the cover note real party in interest may be indicated by describing the insured as agent
before the loss insured against occurred, does not militate against or trustee, or by other general words in the policy.
its binding effect as an insurance contract.
An insurance may be taken personally or through an agent
Rules on cover notes:
An insurance may be taken by a person personally or through his agent
1. Insurance companies doing business in the Philippines may issue or trustee since by the provision of Section 53, the insurance is to be
cover notes to bind insurance temporarily, pending the issuance of applied exclusively to the interest of the person in whose name or for
the policy. whose benefit it is made,

28 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Rule in case insurance is made by an agent or trustee Important: A purchaser of property who does not take the precaution
The agent or trustee when making an insurance contract for or on behalf to obtain a transfer of the policy of insurance cannot, in case of loss,
of his principal should indicate that he is merely acting in a recover upon such contract, as the transfer of the property has the effect
representative capacity by signing as such agent or trustee, or by other of suspending the insurance until the purchaser becomes the owner of
general terms in the policy. the policy as well as of the property insured.

However, where the defendant acted as plaintiff's agent for the SECTION 59-62
insurance of goods stored with the defendant, the plaintiff cannot claim
the benefit of the agency without sharing in the expenses. Section 59. A policy is either open, valued or running.

Section 60. An open policy is one in which the value of the thing insured
SECTION 55
is not agreed upon, and the amount of the insurance merely represents
Section 55. To render an insurance effected by one partner or part- the insurer’s maximum liability. The value of such thing insured shall be
owner, applicable to the interest of his co-partners or other part-owners, ascertained at the time of the loss.
it is necessary that the terms of the policy should be such as are
applicable to the joint or common interest. Section 61. A valued policy is one which expresses on its face an
agreement that the thing insured shall be valued at a specific sum.
Where insurance effected by partner or part owner
Section 62. A running policy is one which contemplates successive
Rules: insurances, and which provides that the object of the policy may be from
1. Insurable interest in the property of a partnership exists in both time to time defined, especially as to the subjects of insurance, by
the partnership and the partners additional statements or indorsements.
2. A partner has an insurable interest in the firm property which will
support a policy taken out thereon for his own benefit KINDS OF POLICIES

Important: But a partner who insures partnership property in his own Open or unvalued policy
name limits the contract to his individual share unless the terms of the This is defined in Section 60. It does not predetermine the value of the
policy clearly show that the insurance was meant to cover also the insured property but establishes a maximum amount the insurer will pay
shares of the other partners, in case of total loss of the property. It is one in which a certain agreed
sum is written on the face of the policy not as the value of the property
SECTIONS 56-57 insured, but as the maximum limit of the insurer’s liability.

Section 56. When the description of the insured in a policy is so general The insured must establish the FMV of the insured property at the time
that it may comprehend any person or any class of persons, only he who of the loss. If the FMV exceeds the maximum, the latter will control; if
can show that it was intended to include him, can claim the benefit of below, the former will control.
the policy.
The insurer will only pay the actual cash value of the property as
Section 57. A policy may be so framed that it will inure to the benefit of determined at the time of the loss.
whomsoever, during the continuance of the risk, may become the owner
of the interest insured. Valued policy
This is defined in Section 61. The value of the insured property is
WHERE DESCRIPTION OF INSURED GENERAL predetermined and the value is the amount to be used in case of total
loss. Therefore, it is one in which the insured and the insurer expressly
The policy of insurance must specify the parties between whom the agree in advance on the value of the subject property.
contract is made. Although it is usual to insert in a policy the name of
the person insured, it is not essential as he may be described in other There are two values – the face value of the policy and the value of the
ways. thing insured. In the absence of fraud or mistake, the agreed value of
the thing insured will be paid in case of total loss of the property, unless
What must a person claiming benefit show so the insurance the insurance is for a lower amount.
may be applied to his interest?
Running policy
In order that the insurance may be applied to the interest of the person
This is intended to provide indemnity for property which cannot well be
claiming the benefit of the policy, he must show that he is the person
covered by a valued policy because of its frequent change of location
named or described or that he belongs to the class of persons
and quantity, or for property of such nature as not to admit of a gross
comprehended in the policy.
valuation. This means that insurance may be carried out for constantly
changing stock of goods, or on grain that is being carried to and from
Example: Where the policy is "for the owner" of specified property, it is
the harbor on lighters.
necessary for such person to prove that at least he was the owner of
the thing insured at the time of the loss.
Advantages of a running policy

SECTION 58 1. He is neither underinsured or overinsured at any time, the premium


being based on the monthly values reported
Section 58. The mere transfer of a thing insured does not transfer the
2. He avoids cancellations that would otherwise be necessary to keep
policy, but suspends it until the same person becomes the owner of both
insurance adjusted to value each location and for which
the policy and the thing insured.
cancellations he would be charged the expensive short rate
3. He is saved the trouble of watching his insurance and the danger
Effect of transfer of thing insured of being underinsured is spite of his care, through oversight or
Since a contract of insurance is a personal contract, it does not attach mistake
to or run with the property insured.

29 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

4. The rate is adjusted to 100% insurance, whereas valued policies


SECTION 64
requiring insurance only to, say 80% of the value, give either a
small or no reduction for amounts of insurance above this figure. Section 64. No policy of insurance other than life shall be cancelled by
the insurer except upon prior notice thereof to the insured, and no notice
of cancellation shall be effective unless it is based on the occurrence,
SECTION 63
after the effective date of the policy, of one or more of the following:
Section 63. A condition, stipulation, or agreement in any policy of (a) Non-payment of premium;
insurance, limiting the time for commencing an action thereunder to a (b) Conviction of a crime arising out of acts increasing the hazard
period of less than one (1) year from the time when the cause of action insured against;
accrues, is void. (c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the
Validity of agreement limiting time for commencing action hazard insured against;
A clause in the policy to the effect that an action upon a policy by the (e) Physical changes in the property insured which result in the
insured must be brought within a certain period is valid and will prevail property becoming uninsurable;
over the general law on limitations of actions as prescribed by the Civil (f) Discovery of other insurance coverage that makes the total
Code, if not contrary to Section 63. insurance in excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the
TN: if the period fixes less than one year from the time the cause of policy would violate or would place the insurer in violation of this
action accrues, the stipulation would be void. In the case, however, of Code.
a policy of industrial life insurance, the period cannot be less than six
years after the cause of action accrues. SECTION 65

Nature of condition limiting period for filing claim Section 65. All notices of cancellation mentioned in the preceding section
The condition that claims must be presented within a certain period after shall be in writing, mailed or delivered to the named insured at the
rejection is not merely a procedural requirement. address shown in the policy, or to his broker provided the broker is
authorized in writing by the policy owner to receive the notice of
It is in the nature of condition precedent to the liability of the insurer, cancellation on his behalf, and shall state:
or, in other terms, a resolutory cause, the purpose of which is to (a) Which of the grounds set forth in Section 64 is relied upon; and
terminate all liabilities in case the action is not filed by the insured within (b) That, upon written request of the named insured, the insurer will
the period stipulated. furnish the facts on which the cancellation is based.

Where action brought against insurer’s agent CANCELLATION OF NON-LIFE INSURANCE POLICY
Bringing the action against the agent of the insurer is not just a
procedural mistake where there is no condition that the action must be Cancellation
filed against the agent. The right to rescind, abandon or cancel a contract of insurance. It is the
termination by either the insurer or the insured of the policy of insurance
The court cannot extend the clear scope of the agreement beyond what before its expiration. A contract of insurance is permitted to lapse when
is agreed upon by the parties. The bringing of such action against the the insured fails to take some action to keep the insurance in force.
agent cannot have any legal effect except that of notifying the agent of
the claim. Beyond such notification, the filing of the action can serve no The right of the insurer to cancel is found in Sections 64 and 65 while
other purpose. the insured can cancel at his election by surrendering the policy. Such
surrender entitles him to the return of the premiums on the customary
WHERE CAUSE OF ACTION ACCRUES short-rate basis.
The cause of action in an insurance contract does not accrue until the
insured’s claim is finally rejected by the insurer. Forms and sufficiency of notice of cancellation by the Insurer
The conditions under which the right may be exercised are:
1. Stipulated prescriptive period begins from the happening
of the loss – it has been held that the stipulation is repugnant to 1. There must be prior notice of cancellation to the insured
Section 63 because it would reduce the period allowed the insured 2. The notice must be based on the occurrence, after the effective
for bringing his action to less than one year. date of the policy, of one or more of the grounds mentioned
(Section 64)
2. Stipulated prescriptive period begins from rejection of 3. It must be in writing, mailed or delivered to the named insured at
claim – The court interpreted the words “action or suit” in the the address shown in the policy, or to his authorized broker and
policy as referring to a claim or demand in a court of justice. But, 4. It must state which of the grounds set forth is relied upon.
a complaint or claim filed by the insured with the Office of the
Insurance Commissioner would now be considered an “action” or Important: It is the duty of the insurer upon written request of the
“suit” the filing of which would have the effect of tolling or named insured to furnish the facts on which the cancellation is based
suspending the running of the prescriptive period. (Section 65). The premium referred must be premium paid subsequent
to the first since it mentions of non-payment “after effective date.”
3. Stipulated prescriptive period begins from filing of claim Section 77 ordains that “no policy or contract of insurance is issued by
– Where a fidelity bond requires action to be filed within one year an insurance company is valid and binding unless and until the premium
from the filing of the claim of loss, such condition contradicts the thereof has been paid.”
public policy of discouraging unnecessary litigation expressed in
Section 63. The cause of action does not accrue until the party PRIOR NOTICE OF CANCELLATION TO INSURED
obligated refuses, expressly or impliedly, to comply with its duties.
The purpose of provisions for notice of the insured is to prevent the
cancellation of the policy without allowing the insured ample opportunity
to negotiate for other insurance in its stead for his own protection.

30 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Notice given to insured himself


The notice should be personal to the insured and not to/through any
unauthorized person by the policy.

Notice delivered personally or sent by mail


The notice need not be delivered personally. It may be mailed (Section
65). But there is no proof that the notice, assuming it complied with the
other requisites or conditions, was actually mailed to and received by
the insured, where all that the insurer offers to show that the
cancellation was communicated is its employee’s testimony that it was
mailed.

SECTION 66

Section 66. In case of insurance other than life, unless the insurer at
least forty-five (45) days in advance of the end of the policy period mails
or delivers to the named insured at the address shown in the policy
notice of its intention not to renew the policy or to condition its renewal
upon reduction of limits or elimination of coverages, the named insured
shall be entitled to renew the policy upon payment of the premium due
on the effective date of the renewal. Any policy written for a term of
less than one (1) year shall be considered as if written for a term of one
(1) year. Any policy written for a term longer than one (1) year or any
policy with no fixed expiration date shall be considered as if written for
successive policy periods or terms of one (1) year.

RENEWAL OF NON-LIFE INSURANCE POLICY

As a new contract or extension of old one

GR: A renewal of insurance by the payment of a new premium and the


issuance of a receipt where there is no provision in the policy for its
renewal, is a new contract on the same terms as the old one.

XPN: Where the renewal is in pursuance of a provision to that effect, it


is not a new contract but an extension of the old one.

TN: In the last analysis, however, the resolution of the question depends
primarily on the intention of the parties as ascertained from the
instrument itself.

Rights of the parties


The named insured is given the right to renew upon the same terms and
conditions the original policy upon payment of the premium due on the
effective date of the renewal unless the insurer at least 45 days in
advance of the end of the period mails or delivers the insured notice of
its intention not to renew the policy or to condition its renewal upon
reduction of its amount or elimination of some coverages.

The general rule is that the insurance company is bound by the greater
coverage in an earlier policy where the renewal policy is issued without
calling to insured’s attention a reduction in the policy coverage.

Period for giving notice of non-renewal by insurer


A policy written for a term of less than one year is considered as if
written for a term of one year while a policy written for a longer term or
with no fixed expiration date is considered as if written for successive
policy periods terms of one year (Section 66). Thus, where the term of
the policy is five years, the notice must be given at least 45 days before
the anniversary date of any given policy year. If the 45 days rule is not
complied with, the insurer may not refuse to renew a policy upon
payment of the premium due.

Unless the insurer complies with the requirements of Sections 65 and


66, he has to renew the policy whether he likes it or not.

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