Insurance Midterm Notes

Insurance Midterm Notes 2014. USC College of Law AY 2014-2015. Room 404 Transcript.
Definitions: During the pre-Spanish times, when the political unit was then
the family, if a member of the family died or suffered any other
Variable contracts - a policy that provides a guaranteed misfortune, it was borne by the family. Even now, this practice
minimum death benefit with the potential for increased of furnishing some form of assistance to bereaved members of
benefits, without the necessity of paying additional premium. the family of someone who dies still exists. Eventually, mutual
Law of large numbers – a theorem used by insurance benefit societies and fraternal associations were organized for
companies to determine the chance of an event occurring. the purpose of rendering assistance in money or kind, to their
Authorized Driver Clause – an insurance clause which provides members.
that if the person driving is other than the insured, he must
have been duly authorized by the insured, to drive the vehicle Insurance, in its present concept was first introduced in the
to make the insurance company liable for the driver's Philippines in 1892 when Lloyd’s of London appointed their
negligence representative here. In 1898, life insurance was introduced in
Mortgage Redemption Insurance - is a form of life insurance this country with the entry of Sun Life Assurance of Canada. In
which pays for the mortgage of the insured in case of untimely 1906, the first domestic non-life insurance company, the Yek
death. Tong Lin Fire and Marine Insurance Company, was organized,
Wager Policy - A pretended insurance where the insured has no while the first domestic life insurance company, the Insular Life
interest in the thing insured and can sustain no loss by the Assurance Co., Ltd., was organized in 1910.
happening of the misfortunes insured against.
Cover notes – short term insurance policies that may be issued Concept of social insurance
to afford immediate provisional protection to the insured until
the policy is issued or rejected. Social insurance is any government-sponsored program
No-fault insurance - any type of insurance contract under which wherein the benefits, eligibility requirements and other aspects
insured are indemnified for losses by their own insurance of the program are defined by statute. It is funded by taxes or
company, regardless of fault in the incident generating losses. premiums paid by (or on behalf of) participants (although
Alien enemy - an alien who is designated as an enemy during additional sources of funding may be provided as well) and the
wartime due to permanent or temporary allegiance to a hostile program serves a defined population, and participation is either
power compulsory or the program is subsidized heavily enough that
Factual Expectation - expectation not arising from any legal most eligible individuals choose to participate.
right or duty in connection with the property, and which do not
constitute an insurable interest. Examples of social insurance
Doctrine of Reasonable Expectation - a principle that relies on
the reasonable expectations of the insured as a guide for Government Service Insurance System (GSIS) and Social Security
insurance contract interpretation. Insurance (SSS)
Preliminary contract of present insurance – the insurer insures
the subject matter usually by cover note, the contract to be Is the President of the Philippines covered by GSIS?
effective until the formal policy is issued or the risk rejected.
Assured - the person designated to receive the proceeds of the Yes
insurance.
Risk – is the chance of loss. Sources of insurance law in the Philippines
Peril – is the contingent event which may cause a loss.
Hazard – the condition or situation that creates or increases 1) The Code of Commerce and the old Civil Code of 1889;.
chance of loss in an insured risk from a given peril. 2) Act No. 2427 (Insurance Act), which expressly repealed the
Loss – refers to the happening of the event insured. provisions of the Code of Commerce.
3) R.A. No. 386 (NCC), which expressly repealed those
First meeting of the semester: Maybe we can now start with provisions of the old Civil Code on insurance.
the preliminaries class… [insert here the sound of crickets 4) P.D. No. 612 (The Insurance Code), which repealed Act No.
chirping] 2427, as amended.
5) P.D. No. 1460 (The Insurance Code of 1978), which reenacted
Origin of the modern insurance P.D. No 612, as amended. It has been amended by P.D. No.
1814 and No. 1981 and Batas Pambansa Blg. 874.
Its origin is to be found in the mutual agreement among 6) R.A. No 10607.
merchants of the Italian cities in the early middle ages engaged
in common shipping ventures for distributing among the mutual Laws governing insurance
contractors, the loss falling upon any one by reason of the perils
of navigation. These Italian merchants founded trade houses in 1) The Insurance Code of 1978 (PD NO 612, as amended by
London in the 12th century and brought the custom of insuring Presidential Decree Nos. 1141, 1280, 1455, 1460, 1814 and
against hazards of trade. The development of the several kinds 1981, and Batas Pambansa Blg. 874, and R.A. No. 10607)
of insurance has followed the same lines in the US as in 2) Civil Code (Article 739 and 2012, on void donations; Article
England. The insurance industry of the US has grown to such 2011, on the applicability of the Civil Code; Articles 2021-2027,
extent that the English practices and decisions have little with respect to life annuity contracts; Article 2186, on
influence on insurance in the US. compulsory motor vehicle liability insurance; Article 2207, on
the insurer’s right of subrogation)
Development of insurance in the Philippines Insurance contracts are governed primarily by the Insurance
Code but if it does specifically provide for a particular matter in
“Everything not saved will be lost.” -Nintendo "Quit Screen" message TRWE PAGE 1
question, the provision of the Civil Code on contracts and other

special laws shall govern. A insured his life in the amount of P10 million, making B, his
wife as his beneficiary. There was a time that B quarreled with
ARTICLE 2207.If the plaintiff's property has been insured, and A. B murdered A. B went to the insurance company and asks
he has received indemnity from the insurance company for the for the proceeds of the insurance, to which the latter obliged.
injury or loss arising out of the wrong or breach of contract The prosecution file a case of murder against B. B was
complained of, the insurance company shall be subrogated to convicted and sent to jail. Upon learning that B was convicted
the rights of the insured against the wrongdoer or the person for murder with finality, the insurer went to B and told B, “I
who has violated the contract. If the amount paid by the have to get the P10 million from you because I am now
insurance company does not fully cover the injury or loss, the subrogated when I paid the amount of the proceeds”. Is the
aggrieved party shall be entitled to recover the deficiency from insurer correct?
the person causing the loss or injury.
No. The value of human life is regarded as unlimited and
3) Special laws - therefore, no recovery from a third party can be deemed
a) P.D. No. 612 (The Insurance Code) adequate to compensate the insured’s beneficiary.
b) P.D. No. 1146, as amended (The Revised Government
Insurance Act of 1977), with respect to insurance of Why is subrogation limited only to property insurance?
government employees.
c) R.A. No. 1161, as amended (The Social Security Act of The pecuniary value of a human life to the beneficiary of a life
1954) insurance policy can seldom be determined with accuracy,
4) Others – except where the insurance is taken by a creditor on the life of
a) R.A. No. 656, as amended (Property Insurance Law, a debtor to secure a debt.
dealing with government property)
b) R.A. No. 4898, as amended, providing life, disability and SIR: The creditor has an insurable interest over the life of his
accident insurance coverage to barangay officials. debtor. But not to any extent. The creditor can only insure the
c) Exec. Order No. 250, which increased, integrated and life of the debtor up to the amount of his debt. Such that if the
rationalized the insurance benefits of barangay officials debt is only P5 million, the creditor cannot get as proceeds the
under R.A. No. 4898 and members of the LGU councils. entire amount of P10 million. Even if the creditor insured the
d) R.A. No. 3591, as amended, which established the life of his debtor in the amount of P10 million, later on if the
Philippines Deposit Insurance Corporation which insures insurer learns that the credit is only P5 million, then only P5
the deposits of all banks which are entitled to the benefits million will be released to the creditor because his insurable
of insurance under the Act. interest is only up to P5 million.
Concept of subrogation Supposing A insured his BMW car in the amount of P3 million.
While he was driving, it was hit by B, who was driving
Subrogation is the substitution of one person in place of negligently. A went to the insurer and asks for the proceeds of
another with reference to a lawful claim or right, so that he who the insurance. He was able to prove that the damage to his car
is substituted succeeds to the rights of the other in relation to a amounted to P2 million so he was able to receive the proceeds
debt or claim, including its remedies and securities. of the insurance up to P2 million. Since the insurer once took
up Insurance Law in the USC-College of Law (later on na one-
Purpose of subrogation time-big-time ni Torregosa), he knew of the concept of
subrogation so he went directly to B. But B said, “I will not pay
(1) To make the person who caused the loss, legally responsible you because there was no assignment. In fact, you cannot
for it and (2) prevent the insured from receiving a double produce any single document which shows that there was
recovery from the wrongdoer and the insurer. payment or the rights of A was assigned to you. Is that
correct?
SIR: The concept of subrogation is very important in your
insurance law. No because the right of subrogation is not dependent upon any
privity of contract or upon written assignment of claim. It
Must there be a lawsuit in order to have a subrogation? accrues simply upon payment of the insurance claim by the
insurer. The presentation in evidence of the insurance policy is
No. Subrogation accrues simply upon payment of the insurance not indispensable before the insurer may recover. The
claim by the insurer. subrogation receipt, by itself, is sufficient to establish not only
the relationship of the insurer and the insured, but also the
Concept of subgrogation in terms of insurance law amount paid to settle the insurance. (Privity of contract or
assignment by insured of claim not essential.)
Subrogation refers to the process an insurance company uses to
seek reimbursement from the responsible party for a claim it What if there is no receipt?
has already paid. Your insurance company may pay your claim,
and then seek reimbursement from the other party. Then the wrongdoer should not pay.
SIR: At the time when the insurer paid the insured the proceeds SIR: If you are the wrongdoer class, even if that is the concept
of the insurance, he steps into the shoes of the insured. He can of subrogation, you should, at the very least, ask for some
now the recover whatever the damage caused from the documents before releasing the amount. Otherwise, if he has
wrongdoer or tortfeasor.
no documents to prove that payment was made, why will you (a) both the insurer and the consignee are bound by the
be compelled to pay. Let him file a case against you. contractual stipulations under the bill or lading.
(b) the insurer can be subrogated only to the rights as the
Supposing in the same example, the damage caused by insured may have against the wrongdoer.
negligence of a person is an excluded risk. Despite the
presence of such excluded risk in the insurance, still the A, insure his car for P1 million against all risk. The car was hit
insurer paid A. After that, the insurer went to B and ask for by B and the car was damaged to the tune of P1 million. So A
reimbursement. Will that prosper? went to the insurer and the insurer paid the insured. After
receiving payment from the insurer, A released B from any
No because the cause of the loss or injury must be a risk liability for the loss or damage to his car. What is the effect of
covered by the policy to entitle the insurer to subrogation and the part of the action of A on the rights of the insurer?
since the insurer paid the insured for a loss which is not a risk
covered by the policy, the insurer has no right of subrogation The insurer loses his rights against the wrongdoer since the
against the third party liable for the loss. (Loss or injury for risk insurer can be subrogated to only such rights as the insured
must be covered by the policy.) may have. For defeating the insurer’s right of subrogation, A is
under obligation to return to the insurer the amount paid
Is there no instance where the insurer can go after B? thereby entitling A to recover the same. (Loss of right of
subrogation by act of insured or insurer.)
Yes there is. The insurer may recover from the third party
responsible for the damage to the insured property under A, a merchant shipped his goods amounting to P1 million using
Article 1236(2) of the Civil Code. the motor vessel owned by B. A, the insured, also insured
them. Unfortunately, the vessel was devoured by a kraken. B,
Article 1236(2) Whoever[insurer] pays for another[insured] in good faith, settled his obligations with A. The insurer,
may demand from the debtor[wrongdoer] what he has paid, without informing B, also settled the amount with A. May the
except that if he paid without the knowledge or against the will insurer go after B?
of the debtor, he can recover only insofar as the payment has
been beneficial to the debtor. SIR: No because there is not subrogation in this case. A contract
of insurance is a contract of indemnity. At the time when the
What if that time B knew that the insurer will pay but before insurer paid the A, there was no longer damage on the part of
the insurer could deliver the amount of the proceeds of the A, the insured. Whatever damaged A incurred was already paid
insurance to A, B told the insurer, ”Do not to pay A because its by the carrier. There is no subrogation here. (Effect of
outside the coverage of the insurance. It’s an issue between assignment by insured of its rights against third party to
me and A”? insurer.)
Article 1236 still applies even if payment was made by the Applicability of the Civil Code in your insurance contract
insurer against the will of the debtor.
It is applied subsidiarily as insurance contracts are governed
Can A recover from both the insurer and B? primarily by the Insurance Code.
A may recover from either the insurer or B but he may only Provisions in the Civil Code which can apply in contracts of
recover once. The right of subrogation given to the insurer insurance
prevents the insured from obtaining more than the amount of
his loss. (Right of insured to recover from both insurer and third 1) Contract is voidable when consent is vitiated. (Articles 1330,
party.) 1331).
2) When a contract is perfected. (Article 1319[2])
In our example, the amount of the insurance taken by A from 3) Contract is void where the consideration is false or
the insurer is P3 million, supposing the BMW owned by A is fraudulent. (Article 1353)
damaged to the tune of P4 million. Can he recover the entire 4) Obligation of mutual restitution in case of rescission. (Article
amount from the insurer? 1385)
5) Prohibition on a common-law wife from becoming the
No because their contract of insurance only covered an amount beneficiary of the insured. (Article 2012 in relation to Article
up to P3 million. 739)
6) The award of moral and exemplary damages in case of
Where can A recover the deficiency? unreasonably delay in the payment of insurance claims.
A can recover the deficiency from B under Article 1236. What is meant by the construction of Insurance Code?
Can you compel the insurer to exercise the right of It means the interpretation of the insurance law.
subrogation?
When do you construe the provisions of the Insurance Code?
No because such right lies solely within the insurer’s discretion.
(Exercise of right of subrogation by insurer discretionary) Only in case of ambuigity.
Limitations to the right of subrogation SECTION 2.
Contract of insurance Social – it is a social device whereby uncertain risks of

individuals may be combined in a group and thus made more
A contract of insurance is an agreement whereby one certain, with small periodic contributions by the individuals
undertakes for a consideration to indemnify another against providing a fund out of which those who suffer losses may be
loss, damage or liability arising from an unknown or contingent reimbursed.
event.
Nature and characteristics of an insurance contract
Concept of an unknown event
1) It is consensual because it is perfected by the meeting of the
An event which may or may not happen. minds of the parties.
2) It is voluntary in the sense that it is not compulsory and the
Contract of suretyship parties may incorporate such terms and conditions as they may
deem convenient which will be binding.
SIR: It is an agreement whereby a party called the surety 3) It is aleatory in the sense that it depends upon some
guarantees the performance of another, called the principal or contingent event.
obligor, of an obligation or undertaking in favor of a third 4) It is executed as to the insured after the payment of the
person, called the obligee. premium, and executory on the part of the insurer in the sense
that it is not executed until payment for a loss.
When contract of suretyship is deemed an insurance contract 5) It is conditional because it is subject to the conditions the
principal one of which is the happening of the event insured
A contract of suretyship shall be deemed to be an insurance against.
contract, only if made by a surety who or which, as such, is 6) It is a contract of indemnity because the promise of the
doing an insurance business under the Insurance Code. insurer is to make good only the loss of the insured.
7) It is a personal contract between the insurer and the insured.
What do you mean by doing an insurance business or 8)As a contract, it is a property in legal contemplation. They are
transacting an insurance business? in the nature of property and do not represent a personal
agreement between the insurer and the insured.
1) Making or proposing to make, as insurer, any insurance
contract; Does the concept of contract of indemnity apply to life
2) Making or proposing to make, as surety, any contract of insurance?
suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety; No because the pecuniary value of a human life to the
3) Doing any kind of business, including a reinsurance business, beneficiary of a life insurance policy can seldom be determined
specifically recognized as constituting the doing of an insurance with accuracy.
business within the meaning of this Code;
4) Doing or proposing to do any business in substance Insurance, a risk-distributing device
equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code. The device of insurance equitably distributes losses out of a
general fund contributed by all. It serves to spread the risk of
What is the concept of assurance and how do you financial or economic loss faced by the insured among as many
differentiate it from assurance? possible of those who are subject to the same kind of risk. By
paying a pre-determined amount into a general fund out of
Assurance is used to describe the life insurance business, which payment will be made for an economic loss of a defined
referring to an event like death, which must happen while type, each member contributes to a small degree toward
insurance refers to a contingent event which may or may not compensation for losses suffered by any member of the group.
happen. As used in the Insurance Code, the term insurance
covers assurance. Contract of adhesion
Elements of a contract A contract in which most of the terms do not result from
mutual negotiation between the parties as they are prescribed
1) Subject matter – refers to the thing insured. by the insurer in final printed forms which the insured may
2) Consideration – premium paid by the insured reject or to which he may “adhere” if he chooses but which he
3) Object and purpose – transfer and distribution of risk or loss. cannot change.
Definition of insurance from the viewpoint of: In case of doubt in an insurance policy, who should be in
favored, the insurer or the insured?
Economic –it is a method which reduces risk by a transfer and
combination (pooling) of uncertainty in regards to a financial The insured because it is not really his fault. It should be
loss. construed against the party who caused such ambiguity, the
Business – it is a plan by which large numbers of people insurer.
associate themselves and transfers to the shoulder of all, risks
that attach to individuals. VIRGINIA CALANOC vs PHILIPPINE AMERICAN LIFE INSURANCE
Mathematical – it is the application of certain actuarial CO
(insurance mathematics) application.
FACTS: Melencio Basilio was a watchman of the Manila Auto instruments, causing wounds on the body of said Juan S.
Supply. He secured a life insurance policy from the Philippine Biagtan resulting in his death. Plaintiffs, as beneficiaries of the
American Life Insurance Company in the amount of P2,000 to insured, filed a claim under the policy. The insurance company
which was attached a supplementary contract covering death paid the basic amount of P5,000.00 but refused to pay the
by accident. On January 25, 1951, he died of a gunshot wound additional sum of P5,000.00 under the accidental death benefit
on the occasion of a robbery committed in the house of Atty. clause, on the ground that the insured's death resulted from
Ojeda. Virginia Calanoc, the widow, was paid the sum of P2,000, injuries intentionally inflicted by third parties and therefore was
face value of the policy, but when she demanded the payment not covered.
of the additional sum of P2,000 representing the value of the
supplemental policy, the company refused alleging, as main ISSUE: Whether the wounds received by the insured at the
defense, that the deceased died because he was murdered by a hands of the robbers — nine in all, five of them mortal and four
person who took part in the commission of the robbery and non-mortal — were inflicted intentionally.
while making an arrest as an officer of the law which
contingencies were expressly excluded in the contract and have HELD: Yes. It cannot be denied that the act itself of inflicting the
the effect of exempting the company from liability. injuries was intentional. Where a gang of robbers enter a house
and coming face to face with the owner, even if unexpectedly,
ISSUE: Whether Basilio’s death was accidental or caused by one stab him repeatedly, it is contrary to all reason and logic to say
of the risks excluded by the supplementary contract which that his injuries are not intentionally inflicted, regardless of
exempts the company from liability. whether they prove fatal or not. Nine wounds inflicted with
bladed weapons at close range cannot conceivably be
HELD: Accidental. There is no proof that the death of Basilio is considered as innocent insofar as such intent is concerned.
the result of assault or murder for the record is barren of any Thus, it has been held that "intentional" as used in an accident
circumstance showing how the fatal shot was fired. Nor can it policy excepting intentional injuries inflicted by the insured or
be said that the killing was intentional for there is the possibility any other person, etc., implies the exercise of the reasoning
that the malefactor had fired the shot merely to scare away the faculties, consciousness and volition. Where a provision of the
people around for his own protection and not necessarily to kill policy excludes intentional injury, it is the intention of the
or hit the victim. The victim could have been either the person inflicting the injury that is controlling.
policeman or Atty. Ojeda for it cannot be pretended that the
malefactor aimed at the deceased precisely because he wanted What is the difference between this case and the case of
to take his life. Basilio cannot be considered as making an arrest Calanoc?
as an officer of the law, as contended, simply because he went
with the traffic policeman, for certainly he did not go there for In the case of Calanoc, the malefactor had fired the shot merely
that purpose nor was he asked to do so by the policeman. to scare away the people around for his own protection and not
necessarily to kill or hit the victim whereas in this case, nine
While as a general rule the parties may limit the coverage of the wounds inflicted with bladed weapons at close range cannot
policy to certain particular accidents and risks or causes of loss, conceivably be considered as innocent insofar as such intent is
and may expressly except other risks or causes of loss concerned.
therefrom, it is to be desired that the terms and phraseology of
the exception clause be clearly expressed so as to be within the The contract of insurance is considered as uberrimae fidei, a
easy grasp and understanding of the insured. For if the terms contract in utmost good faith
are doubtful or obscure the same must of necessity be
interpreted or resolved against the one who has caused the This means that all parties to an insurance contract must deal in
obscurity so as to effect the dominant purpose of indemnity or good faith, making a full declaration of all material facts in the
payment to the insured, especially where a forfeiture is insurance proposal (questionnaire). Otherwise, if you will die,
involved. the problem will lie to the beneficiaries because the insurer
might not release the amount of the insurance as you did not
EMILIA T. BIAGTAN vs THE INSULAR LIFE ASSURANCE with your insurer in good faith. The same goes with the insurer,
COMPANY he is also required to deal with you in good faith. Such that
whatever is provided for in the policy, it can be made binding to
FACTS: Juan S. Biagtan was insured with defendant InsularLife the insurer.
Assurance Company for the sum of P5,000.00 and, under a
supplementary contract denominated "Accidental Death Elements of a contract of insurance
Benefit Clause, for an additional sum of P5,000.00 if "the death
of the Insured resulted directly from bodily injury effected 1) The insured possesses an interest of some kind susceptible of
solely through external and violent means sustained in an pecuniary estimation known as “insurable interest”.
accident ... and independently of all other causes. The clause, 2) The insured is subject to a risk of loss through the destruction
however, expressly provided that it would not apply where or impairment of that interest by the happening of designated
death resulted from an injury "intentionally inflicted by another perils.
party. On the night of May 20, 1964 a band of robbers entered 3) The insurer assumes that risk of loss.
the house of the insured Juan S. Biagtan. That in committing the 4) Such assumption of risk is part of a general scheme to
robbery, the robbers, on reaching the staircase landing on the distribute actual losses among a large group or substantial
second floor, rushed towards the door of the second floor number of persons bearing a similar risk.
room, where they suddenly met a person near the door of 5) As consideration for the insurer’s promise, the insured make
oneof the rooms who turned out to be the insured Juan S. a ratable contribution called “premium”, to a general insurance
Biagtan who received thrusts from their sharp-pointed fund.
Concept of insurable interest You engage in the activity without doing anything further with
regard to the risk. (self-explanatory)
Every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature Transferring risk to another
that a contemplated peril might directly damnify the insured.
By entering into a contract of insurance.
Risk shifting-device vs Risk-distributing device:
Distinction between a risk preferring, risk neutral and risk
In a risk-shifting device, the contract possesses only the first averse individual:
three (3) elements of a contract of insurance whereas a risk-
distributing device equitably distributes losses out of a general Risk preferring people would choose to forego the certain loss
fund contributed by all. in the hope incurring no loss despite the equal probability of
suffering a large loss. Risk neutral people are indifferent to the
Example of a risk-shifting device alternatives. Risk averse people would choose to lose P500 with
certainty instead of confronting the 50% change of losing twice
A contract of guaranty, where the creditor is exposed to as much.
impairment by the happening of contingent events such as the
insolvency of the principal debtor and the risk of the creditor is FIGURACION VDA. DE MAGLANA vs CONSOLACION
merely assumed by the guarantor.
FACTS: Lope Maglana was on his way to his work station,
Example of a risk-distributing device driving a motorcycle, he met an accident that resulted in his
death. He died on the spot. The PUJ jeep that bumped the
A contract of insurance. deceased was driven by Pepito Into, operated and owned by
defendant Destrajo. The heirs of Lope Maglana, Sr., here
Concept of risk petitioners, filed an action for damages and attorney's fees
against operator Patricio Destrajo and AFISCO. An information
A situation where the probability of a loss is known but when a for homicide thru reckless imprudence was also filed against
mode of occurrence or the actual value of the occurrence is not. Pepito Into. The lower court rendered a decision finding that
Destrajo had not exercised sufficient diligence as the operator
Ways people cope with risk of the jeepney. Destrajo was ordered to pay the plaintiffs the
sum of P12,000.00 and P5,000.00 as moral damages, which
By: amount shall be deducted in the event judgment in the criminal
1) limiting the probability of loss. case against Into shall have been enforced. AFISCO is also
2) limiting the effects of loss. ordered to reimburse defendant Destrajo whatever amounts
3) self-insurance. the latter shall have paid only up to the extent of its insurance
4) ignoring the risk. coverage. Petitioners filed a motion for the reconsideration of
4) transferring the risk to another. the second paragraph of the dispositive portion of the decision
contending that AFISCO should not merely be held secondarily
Ways you can limit the risk or probability of loss liable because the Insurance Code provides that the insurer's
liability is "direct and primary and/or jointly and severally with
1) Installing guards or safety devices in a cutting machine. the operator of the vehicle, although only up to the extent of
2) Using concrete materials instead of wood in constructing the insurance coverage." Petitioners argued their position that
buildings. AFISCO is directly and solidarily liable with Destrajo up to the
3) Installing loss prevention devices such as firewalls, sprinkler extent of its insurance coverage.
systems.
ISSUE: Whether AFISCO is directly and/or solidarily liable with
Way you can limit the effects of loss Destrajo.
1) By using seat belts while riding in automobiles. HELD: The provision in the insurance contract between AFISCO
2) Installing sprinkler systems inside the building. and Destrajo leads to no other conclusion but that AFISCO can
be held directly liable by petitioners. AFISCO will pay all sums of
How self-insurance work money to discharge the liability of the insured in cases of death
or injury to third parties. Where an insurance policy insures
An owner chooses to bear the risk himself thru special funds set directly against liability, the insurer's liability accrues
aside to cover the loss. immediately upon the occurrence of the injury or event upon
which the liability depends, and does not depend on the
Disadvantages of self-insurance recovery of judgment by the injured party against the insured.
Since petitioners had received from AFISCO the sum of
1) It’s expensive. P5,000.00 under the no-fault clause, AFISCO's liability is now
2) The funds set aside may not be sufficient to cover the loss. limited to P15,000.00.
3) You do not know when the loss may occur.
4) Loss may occur before the owner is fully prepared for it. However, we cannot agree that AFISCO is likewise solidarily
liable with Destrajo. While it is true that where the insurance
Ignoring risk contract provides for indemnity against liability to third
persons, such third persons can directly sue the insurer, motor vehicle by order of a Court of law or by reason of any
however, THE DIRECT LIABILITY OF THE INSURER UNDER enactment or regulation in that behalf.”
INDEMNITY CONTRACTS AGAINST THIRD PARTY LIABILITY
DOES NOT MEAN THAT THE INSURER CAN BE HELD ISSUE: Whether or not Palermo is an authorized driver" under
SOLIDARILY LIABLE WITH THE INSURED AND/OR THE OTHER the insurance policy considering that his driver's license had
PARTIES FOUND AT FAULT. THE LIABILITY OF THE INSURER IS expired at the time of the accident.
BASED ON CONTRACT; THAT OF THE INSURED IS BASED ON
TORT. Thus, petitioner therein, which, under the insurance HELD: Duh. The driver of the insured motor vehicle at the time
contract is liable only up to P20,000.00, cannot be made of the accident was the insured himself, hence an "authorized
solidarily liable with the insured for the entire obligation of driver" under the policy. While the Motor Vehicle Law prohibits
P29,013.00 otherwise there would result "an evident breach of a person from operating a motor vehicle on the highway
the concept of solidary obligation." The liability of AFISCO based without a license or with an expired license, an infraction of the
on the insurance contract is direct, but not solidary with that of Motor Vehicle Law on the part of the insured, is not a bar to
Destrajo which is based on Article 2180 of the Civil Code. 12 As recovery under the insurance contract. It however renders him
such, petitioners have the option either to claim the P15,000 subject to the penal sanctions of the Motor Vehicle Law. The
from AFISCO and the balance from Destrajo or enforce the requirement that the driver be "permitted in accordance with
entire judgment from Destrajo subject to reimbursement from the licensing or other laws or regulations to drive the Motor
AFISCO to the extent of the insurance coverage. Vehicle and is not disqualified from driving such motor vehicle
by order of a Court of Law or by reason of any enactment or
Purpose of a Third Party Liability (TPL) insurance regulation in that behalf," applies only when the driver "is
driving on the insured's order or with his permission." It does
To protect injured persons against the insolvency of the insured not apply when the person driving is the insured himself.
who causes such injury, and to give such injured person a
certain beneficial interest in the proceeds of the policy. Concept of 'authorized driver' clause
Concept of a solidary obligation A clause which provides that a person other than the insured
owner, who drives the car on the insured's order, such as his
In solidary obligations, the creditor may enforce the entire regular driver, or with his permission, such as a friend or
obligation against one of the solidary debtors, in an insurance member of the family or the employees of a car service or
contract, the insurer undertakes for a consideration to repair shop, must be duly licensed drivers and have no
indemnify the insured against loss, damage or liability arising disqualification to drive a motor vehicle.
from an unknown or contingent event.
ZENITH INSURANCE vs CA
ANDREW PALERMO vs PYRAMID INSURANCE CO
FACTS: Lawrence Fernandez insured his car for "own damage"
FACTS: After having purchased a brand car, Andrew Palermo with Zenith Insurance. The car figured in an accident and
insured the same with Pyramid Insurance against any loss or suffered actual damages in the amount of P3,640.00. After
damage for P20,000.00 and against third party liability for allegedly being given a run around by Zenith for two (2)
P10,000.00. Palermo paid Pyramid Insurance P361.34 premium months, Fernandez filed a complaint for sum of money and
for one year, for which defendant issued Private Car damages resulting from the refusal of Zenith to pay the amount
Comprehensive Policy. The automobile was, however, claimed. Aside from actual damages and interests, Fernandez
mortgaged by Palermo with the vendor, Ng Sam Bok Motors also prayed for more damages in the amount of P10,000.00,
Co., to secure the payment of the balance of the purchase price. exemplary damages of P5,000.00, attorney's fees of P3,000.00
While driving the automobile in question, Palermo met a violent and litigation expenses of P3,000.00. A decision was rendered
accident. The La Carlota City fire engine crashed head on, and by the trial court in favor of private respondent Fernandez. The
as a consequence, the plaintiff sustained physical injuries, his Court of Appeals rendered its decision affirming in toto the
father, Cesar Palermo, who was with him in the car at the time decision of the trial court. Zenith Insurance appeals the case
was likewise seriously injured and died shortly thereafter, and and contends that while the complaint of Fernandez prayed for
the car in question was totally wrecked. The insurance policy P10,000.00 moral damages, the lower court awarded twice the
grants an option unto the defendant, in case of accident either amount, or P20,000.00 without factual or legal basis; while
to indemnify the plaintiff for loss or damage to the car in cash Fernandez prayed for P5,000.00 exemplary damages, the trial
or to replace the damaged car. Pyramid Insurance, however, court awarded P20,000.00; and while Fernandez prayed for
refused to take either of the above-mentioned alternatives for P3,000.00 attorney's fees, the trial court awarded P5,000.00.
the reason as alleged, that the insured himself had violated the
terms of the policy when he drove the car in question with an ISSUE: Whether or not the award of moral damages, exemplary
expired driver's license. The court ordered the defendant to pay damages and attorney's fees is proper.
the plaintiff the sum of P20,000.00, value of the insurance of
the motor vehicle. Pyramid Insurance alleges that the court HELD: No. Under the Insurance Code, in case of unreasonable
erred in interpreting the provision of the policy regarding delay in the payment of the proceeds of an insurance policy,
AUTHORIZED DRIVER: “Any of the following:(a)The Insured; the damages that may be awarded are: 1) attorney's fees; 2)
(b)Any person driving on the Insured's order or with his other expenses incurred by the insured person by reason of
permission. Provided that the person driving is permitted in such unreasonable denial or withholding of payment; 3)
accordance with the licensing or other laws or regulations to interest at twice the ceiling prescribed by the Monetary Board
drive the Motor Vehicle and is not disqualified from driving such of the amount of the claim due the injured; and 4) the amount
of the claim. That in awarding moral damages in case of breach
of contract, there must be a showing that the breach was of the Villacorta, thus, a violation of the 'Authorized Driver'
wanton and deliberately injurious or the one responsible acted clause of the policy. Commission likewise upheld Empire
fraudulently or in bad faith. The act of Zenith Insurance in Insurance’s assertion that the car was not stolen and therefore
delaying payment for two months cannot be considered as so not covered by the Theft clause, ruling that the fact that the car
wanton or malevolent to justify an award of P20,000.00 as was taken by one of the residents of the Sunday Machine
moral damages, taking into consideration also the fact that the Works, and the withholding of the same, for a joy ride should
actual damage on the car was only P3,460. In the pre-trial of the not be construed to mean 'taking' under the Revised Penal
case, it was shown that there was no total disclaimer by Code. If at all there was a 'taking', the same was merely
Fernandez. The reason for Zenith Insurance’s failure to temporary in nature. A temporary taking is held not a taking
indemnify Fernandez within the two-month period was that the insured against.
parties could not come to an agreement as regards the amount
of the actual damage on the car. The amount of P10,000.00 ISSUE: (1) Whether or not Mabana is an “authorized driver”
prayed for by private respondent as moral damages is under the policy; (2) Whether or not Empire Insurance is liable
equitable. Exemplary damages will not be awarded as the under the theft clause of the policy.
insurance company had not acted in wanton, oppressive or
malevolent manner. The awards due to private respondent HELD: (1) Yes. A car owner who entrusts his car to an
Fernandez are as follows: 1)P3,640.00 as actual claim plus established car service and repair shop necessarily entrusts his
interest of twice the ceiling prescribed by the Monetary Board car key to the shop owner and employees who are presumed to
computed from the time of submission of proof of loss; have the insured's permission to drive the car for legitimate
2)P10,000.00 as moral damages; 3)P5,000.00 as attorney's fees; purposes of checking or road-testing the car. The mere
4)P3,000.00 as litigation expenses and 5)Costs happenstance that the employee(s) of the shop owner diverts
the use of the car to his own illicit or unauthorized purpose in
Effect if there is an unreasonable delay in releasing the violation of the trust reposed in the shop by the insured car
proceeds of the insurance policy under the Insurance Code owner does not mean that the "authorized driver" clause has
been violated such as to bar recovery, provided that such
The damages that may be awarded are: employee is duly qualified to drive under a valid driver's license.
1) attorney's fees; The situation is no different from the regular or family driver,
2) other expenses incurred by the insured person by reason of who instead of carrying out the owner's order to fetch the
such unreasonable denial or withholding of payment; children from school takes out his girlfriend instead for a joy
3) interest at twice the ceiling prescribed by the Monetary ride and instead wrecks his girlfriend, este the car.
Board of the amount of the claim due the injured; and (2) Yes. When a person, either with the object of going to a
4) the amount of the claim. certain place, or learning how to drive, or enjoying a free ride,
takes possession of a vehicle belonging to another, without the
Why was the amount the moral damages and other damages consent of its owner, he is guilty of theft because by taking
reduced by the Supreme Court? possession of the personal property belonging to another and
using it, his intent to gain is evident since he derives therefrom
Because there was no showing that the breach was wanton and utility, satisfaction, enjoyment and pleasure. It is equally
deliberately injurious or that Zenith Insurance acted evident that the taking proved to be quite permanent rather
fraudulently or in bad faith. The reason for Zenith Insurance’s than temporary, for the car was totally smashed in the fatal
failure to indemnify Fernandez within the two-month period accident and was never returned in serviceable and useful
was that the parties could not come to an agreement as regards condition to Villacorta.
the amount of the actual damage on the car.
What is the basis of the lower court in saying that the driver
VILLACORTA vs INSURANCE COMMISSION was not authorize?
FACTS: Petitioner Jewel Villacorta vehicle was brought to the Villacorta and her husband’s admission that they did not know
Sunday Machine Works, Inc., for general check-up and repairs. the person who drove her vehicle at the time of the accident,
While it was in the custody of the shop, the car was allegedly much less consented to the use of the same.
taken by six persons and driven out. While travelling, the car
figured in an accident. The driver, Benito Mabasa, and one of What about the fact that the driver was not authorize by the
the passengers died and the other four sustained physical owner? [answer on the above case]
injuries. The car, as well, suffered extensive damage. Villacorta,
thereafter, filed a claim for total loss with Empire Insurance but Why did the Supreme Court set aside the application of the
claim was denied. Hence, Villacorta was compelled to institute authorized driver clause and instead used the theft clause?
an action. Empire Insurance contended that the accident did
not fall within the provisions of the policy either for the Own Because there was no violation of the 'Authorized Driver' clause
Damage or Theft coverage, invoking the policy provision on of the policy. The SC considered Mabana as an authorized driver
"Authorized Driver" clause. The Insurance Commission decided under the policy; That the mere happenstance that the
in favor of Empire Insurance holding under "Authorized Driver" employee(s) of the shop owner diverts the use of the car to his
clause, if the person driving is other than the insured, he must own illicit or unauthorized purpose in violation of the trust
have been duly authorized by the insured, to drive the vehicle reposed in the shop by the insured car owner does not mean
to make the Insurance company liable for the driver's that the "authorized driver" clause has been violated such as to
negligence. With the declarations of Villacorta and her husband bar recovery, provided that such employee is duly qualified to
that they did not Mabasa nor consented to the use of the car, drive under a valid driver's license. On the other hand, there
the Commission hold that Mabasa, is not an authorized driver
was an unlawful taking of the car, hence the theft clause was have less incentive to take measures that prevent the loss from
applied. occurring or minimize the effect of loss once it occurs.
(Phenomenon of moral hazard)
SUN INSURANCE OFFICE vs CA; NERISSA LIM
Phenomenon of moral hazard
FACTS: Nerissa Lim's husband, Felix Lim, Jr., was issued a
personal accident policy. Two months later, he was dead with a Such a case is encountered when, being covered by the
bullet wound in his head. Pilar Nalagon, Lim's secretary, was the insurance contract, the insured reduce the caution they would
only eyewitness to his death. It happened after his mother's have applied had they not been insured, thus making the
birthday party. According to Nalagon, Lim was in a happy mood insured event more likely and its reimbursement higher.
(but not drunk) and was playing with his handgun, from which
he had previously removed the magazine. As she watched the Ways to solve the phenomenon of moral hazard
television, he stood in front of her and pointed the gun at her.
She pushed it aside and said it might be loaded. He assured her By:
it was not and then pointed it to his temple. The next moment 1) involving insured agents in sharing the risk,
there was an explosion and Lim slumped to the floor. He was 2) tying the premium to the history of the person to be insured,
dead before he fell. As beneficiary, Nerissa Lim sought payment 3) reducing the premium if the insured implements special
on the policy but her claim was rejected. Sun Insurance agreed precautions to reduce the probability of the risk occurring.
that there was no suicide. It argued, however, that there was no
accident either. It further argued that there is no accident when Deductible insurance
a deliberate act is performed unless some additional,
unexpected, independent and unforeseen happening occurs The insured bears any loss up to some stated amount with the
which produces or brings about their injury or death. That Felix insurer bearing the rest.
Li, Jr. willfully exposed himself to needless peril and thus
removed himself from the coverage of the insurance policy. Coinsurance
ISSUE: Whether or not Felix Lim willfully exposed himself to The insured bears some stated percentage of the loss
needless peril, thereby removing himself from the coverage of regardless of its amount, with the insurer bearing the rest.
the insurance policy.
Phenomenon of adverse selection
HELD: No. Lim did not willfully expose himself to needless peril
when he pointed the gun to his temple because the fact is that It describes a situation wherein an individual's demand for
he thought it was not unsafe to do so. The act was precisely insurance (the propensity to buy insurance and the quantity
intended to assure Nalagon that the gun was indeed harmless. purchased) is positively correlated with the individual's risk of
Lim was unquestionably negligent and that negligence cost him loss (higher risks buy more insurance), and the insurer is unable
his own life. But it should not prevent his widow from to allow for this correlation in the price of insurance. From the
recovering from the insurance policy he obtained precisely insurer's viewpoint, the higher mortality of the group which
against accident. There is nothing in the policy that relieves the selects to buy insurance is adverse. The insurer raises the price
insurer of the responsibility to pay the indemnity agreed upon if of insurance accordingly, and, as a consequence, low-risk
the insured is shown to have contributed to his own accident. individuals may be less likely to buy insurance (or may buy
Indeed, most accidents are caused by negligence. There are smaller amounts) than they would buy at a lower price
only four exceptions expressly made in the contract to relieve reflective of their lower risk. The reduction in insurance
the insurer from liability, and none of these exceptions is purchases by low-risk individuals is also adverse from the
applicable in the case at bar. It bears noting that insurance insurer's viewpoint, and perhaps also from a public policy
contracts are as a rule supposed to be interpreted liberally in viewpoint. In such cases, the premium would result too high for
favor of the assured. low-risk individuals and too cheap for those expected as the
riskiest, thus generating an accumulation of bad risks and the
Isn't it a fact that when he place the gun he willfully exposed consequent default of the insurance company.
himself to a needless peril?
PERLA COMPANIA DE SEGUROS vs. CA, HERMINIO LIM and
Lim did not know that the gun he put to his head was loaded. As EVELYN LIM
the secretary testified, Lim had removed the magazine from the
gun and believed it was no longer dangerous. He expressly FACTS: Herminio and Evelyn Lim purchased a Ford Hatchback
assured her that the gun was not loaded. 1981 model car and insured with Perla Compania de Seguros,
Inc. (PERLA) for comprehensive coverage including theft. On
Economic effects of the transfer and distribution of risk November 9, 1982, said vehicle was carnapped. Evelyn Lim,
who was driving said car before it was carnapped, immediately
1) Benefit to the society as a whole - since an insured person called up the Anti-Carnapping Unit of the Philippine
completely eliminates his risk by transferring it to the insurer Constabulary to report said incident and thereafter, went to the
for a price. The insurer, on the other hand, by dealing in risk on nearest police substation to make a police report regarding said
a large scale, could earn a profit. Society as a whole would be incident. Lim then filed a claim for loss with the Perla Insurance
better off if a large number of similar, mutually beneficial but said claim was denied on the ground that Evelyn Lim, who
transaction would occur. was using the vehicle before it was carnapped, was in
2) Undesirable side effect – If an insured’s risk is completely possession of an expired driver's license at the time of the loss
eliminiated through transfer to the insurer, the former might
of said vehicle which is in violation of the authorized driver to accomplish the ends of social insurance by private
clause of the insurance policy. enterpises.
3) Voluntary government insurance – Involves no element of
ISSUE: Whether or not Evelyn Lim violated the insurance compulsion.
contract because the authorized driver clause.
Three main classifications of insurance
HELD: No. The comprehensive motor car insurance policy
issued by Perla Insurance undertook to indemnify the private 1) Insurance against loss or impairment of property interests
respondents against loss or damages to the car (a) by accidental which may either be in existence of merely expected.
collision or overturning, or collision or overturning consequent a. Guaranty insurance - insures the non-performance
upon mechanical breakdown or consequent upon wear and of the contract.
tear; (b) by fire, external explosion, self-ignition or lightning or b. Credit insurance - insures the insolvency of the
burglary, housebreaking or theft; and (c) by malicious act. debtor.
Where a car is admittedly, as in this case, unlawfully and c. Fidelity insurance - insures against defalcations of
wrongfully taken without the owner's consent or knowledge, employees and agents.
such taking constitutes theft, and, therefore, it is the "THEFT" d. Theft insurance - insures the property against theft.
clause, and not the "AUTHORIZED DRIVER" clause, that should e. Title insurance - insures against defective title or
apply. There is no causal connection between the possession of interest in property.
a valid driver's license and the loss of a vehicle. To rule 2) Insurance against loss of earning power (life insurance) due
otherwise would render car insurance practically a sham since to death, accidental injury, ill-health, sickness, old age or other
an insurance company can easily escape liability by citing disability, or even unemployment.
restrictions which are not applicable or germane to the claim, 3) Insurance against contingent liability to make payment to
thereby reducing indemnity to a shadow. another, i.e., the insured is reimburse for any liability he might
incur to a third party.
Fields of insurance
Four types of insurance under the modernized classification
1) Voluntary insurance - it is sought by the insured to meet a
recognized need for protection and is not based upon 1) marine
government compulsion. 2) property
2) multiple-line insurance - a combination of at least two (2) 3) personal
kinds of insurance, specifically the traditional fire and casualty 4) liability
lines.
3) all lines insurance - describes the broadening nature of Classifications of insurance by interests protected
insurance operations which combine at least most of the basic
types of insurance including the traditional fire, casualty, life 1) First-party versus third-party insurance – In first-party
and health lines. insurance, the contract between the insurer and the insured is
4) social insurance - it is compulsory and is designed to provide designed to indemnify the insured for a loss suffered directly by
a minimum of economic security for large groups of persons, the insured (Ex: property insurance). In third-party insurance,
particularly thosein the lower income groups. the insurer indemnifies a third party injured by the insured’s
conduct.
Can the government compel the individual to get a social 2) All-risk versus specified-risk – An all-risk insurance reimburses
insurance? the insured for damages to the subject matter of the policy
from all causes except those specifically excepted in the policy.
Yes because the government has the obligation to protect the In other words, all those not excluded are automatically
general welfare of its citizens. included. An specified-risk insurance which covers damage to
the subject matter of the policy if it results from specifically
Three groups of voluntary insurance identified causes listed in the policy.
1) Commercial insurance – This is what persons usually have in Type of loss is suffered by the insured in a third-party
mind when they refer to the insurance business. insurance
Two major classification of commercial insurance:
a) Personal insurance – based on the nature of the The insured suffers an indirect loss, in the sense that the third
perils and is more directly concerned with losses due party suffers the direct loss.
to loss of earning power of a person.
b) Property insurance – Insures against loss arising Is a life insurance considered a first-party insurance or third-
from the ownership or use of property. There are 2 party insurance?
general classifications of property insurance:
i. The first indemnifies the insured in the It is a first-party insurance because the loss is suffered by the
event of loss growing out of damages of his own insured; it is the insured who loses his life.
property.
ii. The second pays damages for which the Is a health insurance a first-party insurance or third-party
insured is legally liable. insurance?
2) Cooperative insurance – Usually involves associations usually
operating under medical, fraternal employees auspices It is a first-party insurance because the loss – the illness and
organized without regard to the profit and represent an effort expenses – is suffered directly by the insured.
X insured his house against all risk for P50 million. One day he
No-fault insurance purchase flammable materials place it inside his house. After a
few days the house was gutted by fire. He went to the insurer
It is essentially the substitution of first-party insurance for tort and ask the insurer to release the proceeds. He was able to
liability. The victim of a tort, instead of looking for the prove that the house was indeed was gutted by fire. Should
tortfeasor and his insurer for reimbursement, looks to his own the insurer release the proceeds?
insurer for the first-party protection. The term “no-fault”
connotes that the victim recovers for his loss from his own No because an all-risk coverage does not include loss which is
insurer, without regard to the fault of the third party or his own certain to occur. An all-risk coverage does not alter the basic
contributory fault. insurance law principles that can operate to limit the coverage
such as the causation rule.
Can his insurer ask reimbursement from the tortfeasor?
Classifications of insurance under the Insurance Code
Yes under the concept of subrogation.
Insurance contracts are classified according to the nature of the
What if there is a contributory negligence? risk involves as follows:
1) Life insurance contracts which may be:
The amount the insured can claim from the tortfeasor is a) individual life
equitably reduced. Under the concept of subrogation, the b) group life
insurer can only claim such amount that the insured could have c) industrial life
received from the tortfeasor. 2) Non-life insurance contracts which may be:
a) marine
Burden of proof in an all-risk policy b) fire
c) casualty
Both the insured and the insurer. Once the insured establishes 3) Contracts of suretyship or bonding.
that a loss occurred through some event other than an inherent
defect or normal depreciation, the burden is placed in the Treatment of contracts of suretyship
insurer to prove that the loss falls within an explicit exception to
the coverage. Under the Insurance Code, a contract of suretyship shall be
deemed to be an insurance contract only if made by a surety
Burden of proof in a specified-risk policy who or which, is doing an insurance business within the
meaning of the Code.
The burden is placed on the insured to initially prove that the
loss falls within the policy’s provision on coverage. The principle object and purpose test
Advantages of an all-risk coverage Under this test, if the principle object and purpose is indemnity,
the contract constitute insurance, but if it is “service” risk
1) The burden is placed in the insurer to prove that the loss falls transfer and distribution being merely incidental, then the
within an explicit exception to the coverage. arrangement is not insurance and therefore not subject to laws
2) The all-risk policy diminishes the burden placed on the regulating insurance. (This test is used in evaluating whether an
insured and thus makes pro-insured outcomes more likely. agreement that includes an indemnification or other risk shifting
3) The coverage is presumably simpler to understand. constitutes insurance. The fact that an agreement contains an
4) Duplication of coverages and premiums from separate, element of risk shifting will not cause the agreement to be
specified-risk is avoided. deemed a contract of insurance so long as the principal object
5) Pressures toward adverse selection are minimized. and purpose of the agreement is something other than shifting
6) Policies are easier to and less expensive for the insurer to risk.)
administer.
7) Avoidance of gaps in coverage. Functions of insurance
X is a merchant who owns a warehouse which stores several 1) Principal function – risk bearing. The financial losses of the
stocks worth P50 million. He insured his warehouse in an all- few are equitably distributed over the many out of a fund
risk policy. Before the all-risk insurance was issued in his favor, contributed by all.
the stocks inside his warehouse were already rotting. Upon 2) Subsidiary functions:
discovering, he paid the all-risk policy of the insurance. If you a) Stimulates business enterprises – It enables
are the insurer will you release the proceeds of the insurance? industrialists and other to use their capital in the
development of their business by paying a fixed
No, because an all-risk coverage is not absolute. The all-risk contribution by way of premium and obtain financial
event would not include undisclosed event that existed prior to security against the insured risk, instead of freezing
coverage or an event cause by the consummation during the capital to guard against various contingencies.
period of coverage of an indwelling fault in the goods that had b) Encourages business efficiency and enterprise – By
existed prior to that coverage. Furthermore, an all-risk policy reducing risk, insurance also increases the willingness
does not cover losses due to willful and fraudulent act of the to invest new capital in business enterprise.
insured. c) Promotes loss-prevention – Insurance encourage
loss-prevention through a system of rating which
allows discounts for good features and impose special

conditions where the risk is unsatisfactory. ISSUE: Whether or not Herrer received notice of acceptance of
d) Encourage savings – By protecting the individual his application.
against unforeseen events, insurance provides a
climate in which savings are encouraged. HELD: No. Our deduction from the evidence on this issue must
e) Solves social problems – The effect of the concurrent be that the letter of November 26, 1917, notifying Mr. Herrer
operation of both social insurance and free enterprise that his application had been accepted, was never actually
insurance is that compensation is available to victims mailed and thus was never received by the applicant. The law
of loss or injuries, while the financial difficulties arising applicable to the case is found to be the second paragraph of
from old age, disability, or death are mitigated. article 1262 of the Civil Code providing that an acceptance
3) Indirect functions – made by letter shall not bind the person making the offer
a) Investment of funds – By reason of their principal except from the time it came to his knowledge. A letter will not
function, insurers accumulate large funds which are be presumed to have been received by the addressee unless it
invested so that not only do they earn interest to be is shown that it was deposited in the post-office, properly
added to the funds but they also make available huge addressed and stamped. We hold that the contract for a life
resources for projects that contribute to national annuity in the case at bar was not perfected because it has not
development. been proved satisfactorily that the acceptance of the
b) Use of reserve funds – Because of the investment application ever came to the knowledge of the applicant.
policy of insurers, their funds are not static, but are
used productively. Event or peril that can be insured against
c) Effect on prices – The existence of insurance benefits
the consumer public in terms of reduced prices Any contingent or unknown event, past or future, whose
because the cost of insurance is less than the cost of happening will (1) damnify or cause loss to a person having an
risk without insurance. insurable interest or (2) create a liability against him. (For
d)As a basis of credit – Because of insurance, a example: Death of a person, fire against your property)
mortgagee is willing to lend money because he knows
the value of the property is protected, or a dealer now Can the husband insure himself without the consent of his
sell goods to a retailer on credit because he has some wife?
assurance that the goods and the business of the
retailer are protected from sudden disaster by fire. Yes because the provides that the consent of the spouse is not
necessary for the validity of an insurance policy taken out by a
SECTION 3. married person on his/her life or that of his/her children.
Requisites of contract of insurance Subject matter in a life insurance
1) A subject matter in which the insured has an insurable The life of the insured.
interest.
2) Peril insured against which may be any future contingent or Subject matter in a casualty insurance
unknown event, past or future., and a duration for the risk
thereof. The risks involved in the use of the property, or the insured’s
3) A promise to indemnify in a fixed amount. risk of loss or liability, that he may suffer loss or be compelled
4) A consideration for the promise, known as premium. to indemnify of the loss suffered by a third person.
5) A meeting of the minds of the parties upon all the foregoing
essentials. Can a minor enter into a contract of insurance?
ENRIQUEZ vs SUN LIFE INSURANCE Yes, although the contract is voidable, i.e., valid until annulled.
FACTS: On September 24, 1917, Joaquin Herrer made Effect if an insurance company issues an insurance policy on a
application to the Sun Life Assurance Company of Canada seven year old kid
through its office in Manila for a life annuity. The application
was immediately forwarded to the head office of the company The insurance company is bound by the contract.
at Montreal, Canada. On November 26, 1917, the head office
gave notice of acceptance by cable to Manila. On December 4, In such case, can the insurer deny liability by reason of
1917, the policy was issued at Montreal. On December 18, minority of the insured?
1917, attorney Aurelio A. Torres wrote to the Manila office of
the company stating that Herrer desired to withdraw his No because persons who are capable of entering into contracts
application. The following day the local office replied to Mr. cannot allege the incapacity of those with whom they
Torres, stating that the policy had been issued, and called contracted.
attention to the notification of November 26, 1917. This letter
was received by Mr. Torres on the morning of December 21, Ownership of life insurance policy
1917. Mr. Herrer died on December 20, 1917. An action
brought by the plaintiff ad administrator of the estate of the Ownership is divided between insured and beneficiaries.
late Joaquin Ma. Herrer to recover from the defendant life
insurance company the sum of pesos 6,000 paid by the How about the beneficiary?
deceased for a life annuity.
SEC. 5.
A insured the life of B, making himself the beneficiary. SEC 6.

However, A died ahead of B. What happens to the policy?
Parties to a contact insurance
All rights, title and interest in the policy of insurance taken out
by A on the life or health of B shall automatically vest in the B 1) The insurer who assumes the risk of loss for a consideration
upon the death of the A, unless otherwise provided for in the to indemnify insured on the happening of a specified
policy. [Sec 3(3)] contingency or event.
2) The insured who is to receive a certain sum upon the
SECTION 4. happening of a specified contingency.
Concept of lottery Does the insured always receive the proceeds of the
insurance?
The term lottery extends to all schemes for the distribution of
prizes by chance, such as policy playing, gift exhibition, prize No. The recipient may be the beneficiary designated in the
concerts, raffles at fairs, etc., and various forms of gambling. policy. It is also possible that the insured may assign the
proceeds to someone else.
Elements of lottery
Is the beneficiary a party to the insurance contract?
1) consideration
2) prize No. He is a third party in a contract of life insurance.
3) chance
Difference between insurer and assurer
In order for it to be considered a lottery or a game of chance,
should there be a direct connection between the element of Insurer is synonymous with the term assurer.
consideration and the element of prize?
Difference between insured and assured
Yes. It is considered a lottery if the prizes offered came out of
the fund raised by the sale of chances among the participants in The term insured refers to the owner of the property insured
order to win the prizes. while assured is the person whose benefit the insurance is
granted.
Supposing X purchased a lotto ticket because the prize is
already P500 million. X wants to insure his winning so he went Difference between the assured and beneficiary
to an insurance company. Is that allowed?
Assured is synonymous with beneficiary, the person designated
No, because the law expressly prohibits an insurance for or to receive the proceeds of the insurance.
against the drawing of any lottery, or for or against any chance
or ticket in a lottery drawing a prize. (Sec. 4) Who may be an insurer
Distinctions between an insurance and a wagering contract 1) Foreign or domestic insurance company or corporation – it
must first obtain a certificate of authority from the Insurance
1) In a gambling contract, the parties contemplate gain through Commssioner before they may transact insurance business in
mere chance while in a contract of insurance, the parties seek the Philippines.
to distribute possible loss by reason of mischance. 2) Individual, partnership or association – must hold a certificate
2) The gambler courts fortune, while the insured seeks to avoid of authority from the Insurance Commissioner and possessed of
misfortune. the capital assets required of an insurance corporation doing
3) The contract of gambling tends to increase the inequality of the same kind of business in the Philippines and invested in the
fortune, while the contract of insurance tends to equalize the same manner.
fortune.
4) In gambling, whatever one person wins from a wager is lost SECTION 7.
by the other wagering party. In a contract of insurance, what
one insured gains is not at the expense of another insured. Capacity of a party insured
5) As soon as a party makes a wager, he creates a risk of loss to
himself where no such risk existed previously. On the other 1) Natural person – Two essential requisites:
hand, the purchase of insurance does not create a new risk of a) He must be competent to make contract.
loss to the purchaser. The following cannot give consent to a contract:
i. unemancipated minors
Similarity between insurance and gambling ii. insane or demented persons
iii. deaf-mutes who do not know how to write
In both cases, one party promises to pay a given sum to the iv. persons who are suffering from civil
other upon the occurrence of a given future event, the promise interdiction
being conditioned upon the payment, or agreement to pay, a v. incompetents who are under guardianship
stipulated amount by the other party to the contract. b) He must possess an insurable interest in the subject
of the insurance.
2) Juridical person – may takeout insurance on property owned

by it. FACTS: Armando Geagonia is the owner of Norman’s Mart and
obtained from Country Bankers a fire insurance policy which
Meaning of a public enemy covered Stock-in-trade consisting of RTW dry goods. The policy
contained a provision where the insured must give notice to the
A nation with whom the Philippines is at war and includes insurer of any insurance or insurances already affected or which
every citizen of such nation. The term may be taken to mean may be subsequently be effected covering any of the property
alien enemy. Mob, robbers, or thieves are never considered or properties consisting of stocks in trade, goods in process
public enemies for purposes of the Insurance Code. and/or inventories already insured by such policy otherwise it
shall be deemed forfeited, provided that such condition does
Enemy corporation not apply when the total insurance or insurances in force at the
time of the loss is not more than 200k. Subsequently, a fire
A private corporation is deemed an enemy corporation broke out and destroyed Geagonia’s stocks-in-trade. Country
although organized under Philippine laws if they are controlled bankers denied the claim because it was found that at the time
by enemy aliens. of the loss, the stocks were likewise covered by two other fire
insurances for 100k each by PFIC. It had a mortgage clause
Control test which stated that loss, if any, shall be payable to Cebu Tesing
Textiles.
Test whereby a corporation is deemed to have the same
citizenship as the controlling stockholders in time of war. ISSUE: Whether or not there was double insurance to justify
denial of the claim
Effect of war on existing insurance contracts
HELD: NO (Country Bankers is liable. The condition in the policy
1) With respect to property insurance – An insurance policy is commonly known as the additional or “other insurance”
ceases to be valid as soon as an insured becomes a public clause and has been upheld as valid and as a warranty that no
enemy. other insurance exists. Its violation would thus avoid the policy.
2) With respect to life insurance – The contract is not merely However, in order to constitute a violation, the other insurance
suspended but is abrogated by reason of nonpayment of must be upon the same subject matter, the same insurable
premiums, since the time of the payments is peculiarly of the interest, and the same risk. As to a mortgaged property, the
essence of the contract. However, the insured is entitled to the mortgagor and the mortgagee have each an independent
cash value of the policy, which is the excess of the premiums insurable interest therein and both interests may be one policy,
paid over the actual risk carried during the years when the or each may take out a separate policy covering his interest,
policy had been enforced. either at the same or separate times. The mortgagor’s insurable
interest covers the full value of the mortgaged property, even
Contract of insurance between citizens of belligerent states though the mortgage debt is equivalent to the full value of the
are abrogated property. The mortgagee’s insurable interest is to the extent of
the debt, since the property is relied upon as security thereof,
The purpose of war is to cripple the power and exhaust the and in insuring he is not insuring the property but his interest or
resources of the enemy. It would be inconsistent that the lien thereon. A double insurance exists where the same person
subjects of one country should do anything detrimental to their is insured by several insurers separately in respect of the same
country’s interest by lending their assistance to protect by subject and cover the same interest. Since the two policies of
insurance, the commerce or property of belligerent alien the PFIC do not cover the same interest as that covered by the
subjects. policy in issue, no double insurance exists. The non-disclosure is
not fatal.
SECTION 8
What is the reason why the insurer denied the claim?
Insurable interest of mortgagee and mortgagor
That there was a violation of the “other insurance” clause.
1) Separate insurable interest – They each have a separate and
distinct insurable interest in the property mortgaged. What is this clause?
2) Extent of insurable interest of mortgagor – has an insurable
interest to the extent of its value. Loss or destruction of the SIR: When you take an insurance policy, particularly property
property insured will not extinguish his mortgage debt. insurance, there is this usual clause in the policy wherein you
3) Extent of insurable interest of mortgagee – has an insurable have to obtain a written approval from the insurer of your act in
interest in the mortgaged property to the extent of the debt taking insurance policy. This is called the “other insurance”
secured (or to the extent of his credit). He is not insuring the clause. If you have other insurances, you have to divulge it to
property itself but his interest or lien on the property. Such your insurer. Otherwise, if at the time of loss, the insurer will
interest continues until the mortgage debt is extinguished. discover that there are other insurances covering the same
4) Extent of amount of recovery – the mortgagor cannot recover property, on the same interest, and the same risk, then your
upon the insurance beyond the full amount of his loss and the claim will be denied.
mortgagee cannot recover in excess of the credit at the time of
the loss nor the value of the property mortgaged. Purpose of “other insurance” clause
GEAGONIA vs CA and COUNTRY BANKERS INSURANCE It prevents over insurance and therefore, fraud will be averted.
CORPORATION
FORTUNE INSURANCE vs CA in a vehicular accident. Regina Edillon, who was named a

beneficiary in the insurance policy sought to collect the
FACTS: On June 29, 1987, Producer’s Bank of the Philippines’ insurance claim but Manila Banker denied the claim.
armored vehicle was robbed, in transit, of seven hundred Apparently, it is a rule of the insurance company that they were
twenty-five thousand pesos (Php 725,000.00) that it was not to issue insurance policies to “persons who are under the
transferring from its branch in Pasay to its main branch in age of sixteen (16) years of age or over the age of sixty (60)
Makati. To mitigate their loss, they claim the amount from their years …” Note, that Lapuz was already 65 years old when she
insurer, namely Fortune Insurance and Surety Co. was applying for the insurance policy.
Fortune Insurance, however, assails that the general exemption
clause in the Casualty Insurance coverage had a general ISSUE: Whether or not Edillon is entitled to the insurance claim
exemption clause, to wit: as a beneficiary.
"GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of HELD: Yes. The age of the insured Carmen 0. Lapuz was not
xxx xxx xxx concealed to the insurance company. Her application for
(b)any loss caused by any dishonest, fraudulent or criminal act insurance coverage which was on a printed form furnished by
of the insured or any officer, employee, partner, director, private respondent and which contained very few items of
trustee or authorized representative of the Insured whether information clearly indicated her age at the time of filing the
acting alone or in conjunction with others. . . . " same to be almost 65 years of age. There was sufficient time for
the private respondent ro process the application and to notice
And, since the driver (Magalong) and security guard (Atiga) of that the applicant was over 60 years of age and thereby cancel
the armored vehicle were charged with three others as liable the policy on that ground if it was minded to do so. If the
for the robbery, Fortune denies Producer’s Bank of its insurance private respondent failed to act, it is either because it was
claim. According to Fortune, when Producers commissioned a willing to waive such disqualification; or, through the
guard and a driver to transfer its funds from one branch to negligence or incompetence of its employees for which it has
another, they effectively and necessarily became its authorized only itself to blame, it simply overlooked such fact. Under the
representatives in the care and custody of the money. circumstances, the insurance corporation is already deemed in
Assuming that they could not be considered authorized estoppel. Its inaction to revoke the policy despite a departure
representatives, they were, nevertheless, employees of from the exclusionary condition contained in the said policy
Producers. Fortune insists that PRC Management System and constituted a waiver of such condition.
Unicorn Security Services are but "labor-only" contractors
under the Labor Code, and a finding that a contractor is a PERLA COMPANIA DE SEGUROS vs CA, MILAGROS CAYAS
"labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the FACTS: Milagros Cayas was the registered owner of a Mazda
project and the employee of the "labor-only" contractor. bus. Said passenger vehicle was insured with Perla Compania de
Seguros. On December 17, 1978, the bus figured in an accident
ISSUE: Whether or not recovery is precluded under the general injuring several of its passengers. Perea sued Milagros Cayas for
exemption clause. damages; while three others agreed to a settlement of
P4,000.00 each with Milagros Cayas.
HELD: Yes, recovery is precluded under the general exemption After trial, the court rendered a decision in favor of Perea,
clause. Even granting for the sake of argument that these Cayas ordered to compensate the latter with damages. Cayas
contracts were not "labor-only" contracts, and PRC filed a complaint with the CFI, seeking reimbursement from
Management Systems and Unicorn Security Services were truly PCSI for the amounts she paid to ALL victims, alleging that the
independent contractors, we are satisfied that Magalong and latter refused to make such reimbursement notwithstanding
Atiga were, in respect of the transfer of Producer's money from the fact that her claim was within its contractual liability under
its Pasay City branch to its head office in Makati, its "authorized the insurance policy. The decision of the CA affirmed in toto the
representatives" who served as such with its teller Maribeth decision of the RTC of Cavite, the dispositive portion of which
Alampay. Howsoever viewed, Producers entrusted the three states: IN VIEW OF THE FOREGOING, judgment is hereby
with the specific duty to safely transfer the money to its head rendered ordering Perla Compania to pay plaintiff Cayas the
office, with Alampay to be responsible for its custody in transit; sum of P50,000.00 under its maximum liability as provided for
Magalong to drive the armored vehicle which would carry the in the insurance policy;
money; and Atiga to provide the needed security for the In this petition for review on certiorari, Perla Compania seeks to
money, the vehicle, and his two other companions. In short, for limit its liability only to the payment made by Cayas to Perea
these particular tasks, the three acted as agents of Producers. A and only up to the amount of P12,000.00. It altogether denies
"representative" is defined as one who represents or stands in liability for the payments made by Cayas to the other 3 injured
the place of another; one who represents others or another in a passengers totaling P12,000.00.
special capacity, as an agent, and is interchangeable with
"agent." ISSUE: How much should Perla Compania pay?
EDILLON vs MANILA BANKERS LIFE HELD: The insurance policy clearly and categorically placed
Perla Compania’s liability for all damages arising out of death or
FACTS: In April 1969, Carmen Lapuz filled out an application bodily injury sustained by one person as a result of any one
form for insurance under Manila Banker Life Assurance accident at P12,000.00. The insurance policy also provides:
Corporation. She stated that her date of birth was July 11, 1904. 5. No admission, offer, promise or payment shall be
Upon payment of the Php 20.00 premium, she was issued the made by or on behalf of the insured without the
insurance policy in April 1969. In May 1969, Carmen Lapuz died written consent of the Company …
It being specifically required that Perla Compania’s written FACTS: For the loss it sustained fire as a result of the fire, Lianga
consent be first secured before any payment in settlement of Bay Cooperative filed an insurance claim with Country Bankers
any claim could be made, Cayas is precluded from seeking Insurance. The latter, however, denied the claim on the ground
reimbursement of the payments made to the other 3 victims in that based on the submitted documents, the building of Lianga
view of her failure to comply with the condition contained in Bay was set on fire by two NPA rebels who wanted to obtain
the insurance policy. provisions. This was an excepted risk under the policy contract.
Also, the insurance policy involved explicitly limits petitioner’s ISSUE:

liability to P12,000.00 per person and to P50,000.00 per
accident. Clearly, the fundamental principle that contracts are HELD: Where a risk is excepted by the terms of a policy which
respected as the law between the contracting parties finds insures against other perils or hazards, loss from such a risk
application in the present case. Thus, it was error on the part of constitutes a defense which the insurer may urge, since it has
the trial and appellate courts to have disregarded the not assumed that risk, and from this it follows that an insurer
stipulations of the parties and to have substituted their own seeking to defeat a claim because of an exception or limitation
interpretation of the insurance policy. Although Cayas was able in the policy has the burden of proving that the loss comes
to prove a total loss of only P44,000.00, petitioner was made within the purview of the exception or limitation set up. If a
liable for the amount of P50,000.00, the maximum liability per proof is made of a loss apparently within a contract of
accident stipulated in the policy. This is patent error. An insurance, the burden is upon the insurer to prove that the loss
insurance indemnity, being merely an assistance or restitution arose from a cause of loss which is expected or for which it is
insofar as can be fairly ascertained, cannot be availed of by any not liable, or from a cause which limits its liability. Stated
accident victim or claimant as an instrument of enrichment by elsewise, since the petitioner in this case is defending on the
reason of an accident. ground of non-coverage and relying upon an exemption or
exception clause in the fire insurance policy, it has the burden
AISPORNA vs CA of proving the facts upon which such excepted risk is based, by
a preponderance of evidence. But petitioner failed to do so.
FACTS: Mapalad Aisporna, wife of a duly licensed insurance
agent, was charged for violation of the first paragraph of AMERICAN HOME ASSURANCE COMPANY vs TANTUCO
Section 189 of the Insurance Act having acted as agent in the ENTERPRISES, INC
solicitation for insurance in favor of Eugenio Isidro for and in
behalf of Perla Compania de Seguros, Inc. without having first FACTS: Tantuco Enterpries insured against fire its two oil mills
secured a certificate of authority to act as such agent from the with American Home Assurance. The first oil mill was covered
office of the Insurance Commission. The evidence disclosed at by Fire Insurance Policy No. 306-7432324-3 for the period
the trial was that petitioner merely left a note on top of her March 1, 1991 to 1992 while the second oil mill, which
husband's desk informing the latter of Isidro's intention to commonly referred to as the new oil mill was covered by Policy
renew his policy. The trial court found appellant guilty as No. 306-7432321-9 also for the same term. Unfortunately, on
charged. On appeal, the Court of Appeals construing the first September 30, 1991, the new oil mill was destroyed by fire.
paragraph of Section 189 independent from the two succeeding Respondent claimed for the insurance proceeds from the
paragraphs, affirmed the judgment of conviction and held that petitioner but it was rejected by the latter for the reason that
the receipt of compensation for the issuance of an insurance the burned oil mill was not covered by any insurance policy.
policy is not an essential element for a violation of the first According to petitioner, the oil mill gutted by the fire was not
paragraph of Section 189 of the Insurance Act. the one described by the specific boundaries in the contested
policy. In further attempt to avoid liability, petitioner claimed
ISSUE: Whether or not a person can be convicted of having that respondent forfeited the renewal policy for its failure to
violated the first paragraph of Section 189 of the Insurance Act pay the full amount of the premium and breached the Fire
without reference to the second paragraph of the same section. Extinguishing Appliances Warranty. Hence, respondent filed a
complaint for specific performance and damages with the
HELD: No. The first paragraph of Section 189 prohibits a person Regional Trial Court of Lucena City. After trial, the court
from acting as agent, subagent or broker in the solicitation or rendered judgment in favor of respondent. On appeal, the
procurement of applications for insurance without first Court of Appeals upheld the decision of the RTC.
procuring a certificate of authority so to act from the Insurance
Commissioner, while its second paragraph defines who is an ISSUE: Whether or not Tantuco Enterprises can claim the
insurance agent within the intent of this section and, finally, the proceeds of its policy from the American Home Assurance.
third paragraph thereof prescribes the penalty to be imposed
for its violation. Considering that the definition of an insurance HELD: Yes. In construing the words used descriptive of a
agent as found in the second paragraph is also applicable to the building insured, the greatest liberality is shown by the courts in
agent mentioned in the first paragraph, to receive giving effect to the insurance. In view of the custom of
compensation by the agent is an essential element for a insurance agents to examine buildings before writing policies
violation of the first paragraph of Section 189; The appellate upon them, and since a mistake as to the identity and character
court has established ultimately that Mapala did not receive of the building is extremely unlikely, the courts are inclined to
any compensation for the issuance of the insurance policy of consider that the policy of insurance covers any building which
Eugenio Isidro. the parties manifestly intended to insure, however inaccurate
the description may be. Notwithstanding, therefore, the
COUNTRY BANKERS INSURANCE vs LIANGA BAY AND misdescription in the policy in this case, it is beyond dispute,
COMMUNITY MULTI-PURPOSE COOPERATIVE that what the parties manifestly intended to insure was the
new oil mill. If the parties really intended to protect the first oil acceptance age limit of 60 years at the time of application. DBP
mill, then there is no need to specify it as new. Indeed, it would apprised Candida Dans of the disapproval of her late husband’s
be absurd to assume that Tantuco Enterprises would protect its MRI application. DBP offered to refund the premium which the
first oil mill for different amounts and leave uncovered its deceased had paid, but Candida Dans refused to accept the
second one. The first oil mill is already covered under the policy same demanding payment of the face value of the MRI or an
issued by the petitioner. It is unthinkable for Tantuco amount equivalent of the loan. She, likewise, refused to accept
Enterprises to obtain the other policy from the very same an ex gratia settlement which DBP later offered. Hence, the
company. American Home Assurance ought to know that a case at bar.
second agreement over that same realty results in its
overinsurance. On the supposed Tantuco Enterprises' ISSUE: Whether or not the DBP MRI application was perfected.
insufficient premium payment, the Court found that the said
issue was never raised at the pre-trial proceedings. Nor did HELD: No. Under the provisions of the MRI, the coverage shall
American Home Assurance present during the trial any witness take effect: (1) when the application shall be approved by the
to testify that Tantuco Enterprises indeed failed to pay the full insurance pool; and (2) when the full premium is paid during
amount of the premium. As to the alleged breach of the the continued good health of the applicant. These two
warranty, the Court found that Tantuco Enterprises was able to conditions, being joined conjunctively, must concur.
comply with the warranty. Undisputably, the power to approve MRI applications is lodged
with the DBP MRI Pool. The pool, however, did not approve the
PERFECTION OF CONTRACTS CASES application of Dans. There is also no showing that it accepted
the sum of P1,476.00, which DBP credited to its account with
GREAT PACIFIC LIFE ASSURANCE vs CA full knowledge that it was payment for Dan's premium. There
was, as a result, no perfected contract of insurance; hence, the
FACTS: Ngo Hing, a duly authorized agent of Pacific Life, applied DBP MRI Pool cannot be held liable on a contract that does not
for a 20-year endowment policy on the life of his one-year old exist. The liability of DBP is another matter.
daughter, a mongoloid. He did not divulge each physical defect
of his daughter. He paid the premium and was issued a binding Mortgage redemption insurance
deposit receipt. However, despite the branch manager's
favorable recommendation, the Company disapproved the Mortgage Redemption Insurance (MRI) is a form of life
application, because a 20-year endowment plan is not available insurance which pays for the mortgage of the insured in case of
for minors. Instead, it offered the Juvenile Triple Action Plan. untimely death. In the Philippines, this is a requirement of
The manager wrote back and again strongly recommended the banks when applying for a housing loan. However, if you
approval of the application. At this point, the child died of already have an existing life insurance policy, you can assign
influenza with complication of broncho-pneumonia. that policy as your MRI so in case of death, the mortgage gets
paid off from your life insurance proceeds.
ISSUE: whether the binding deposit receipt constituted a
temporary contract of the life insurance in question. PEREZ vs CA
HELD: Where the binding deposit receipt is intended to be FACTS: Primitivo B. Perez had been insured with BF Lifeman
merely a provisional or temporary insurance contract, and that Insurance Corporation since 1980 for P20,000.00. He was
the receipt merely acknowledged, on behalf of the insurance convinced to increase the coverage to P50,000.00 and avail of
company, that the latter's branch office had received from the its promotional discount. However, delay took place in
applicant the insurance premium and had accepted the processing the application form. Perez died in an accident. At
application subject for processing by the insurance company, the time of his death, the applications for the increased
such binding deposit receipt does not become in force until the coverage were still in the provincial office. Without knowing
application is approved. A binding deposit receipt which is that Perez had died, BF Lifeman approved the application form
merely conditional does not insure outright. Thus, where an and issued the corresponding policy a few days after his death.
agreement is made between the applicant and the agent, no His widow, Virginia Perez, claimed the benefits under the
liability will attack until the principal approves the risk and a insurance policies of the deceased. She was paid under the first
receipt is given by the agent. The acceptance is merely insurance policy but was refused of the claim under the
conditional, and is subordinated to the act of the company in increased coverage. The insurance company maintained that
approving or rejecting the application. the insurance had not been perfected at the time of death of
the insured. BF Lifeman filed a complaint for rescission of
DBP vs CA contract. Meanwhile Virginia filed a counterclaim for collection
of the amount under the increased policy. The trial court ruled
FACTS: Juan B. Dans, together with his family applied for a loan in favor of Virginia. The Court of Appeals, however, reversed
of P500,000 with DBP. As principal mortgagor, Dans, then 76 the decision saying that the insurance contract for the
years of age was advised by DBP to obtain a mortgage increased indemnity could not have been perfected since at the
redemption insurance (MRI) with DBP MRI pool. A loan in the time the policy was issued, Primitivo was already dead. The
reduced amount was approved and released by DBP. From the instant petition was filed on the ground that there was a
proceeds of the loan, DBP deducted the payment for the MRI consummated contract because the condition of the policy was
premium. The MRI premium of Dans, less the DBP service fee of potestative, being dependent upon the will of the insurance
10%, was credited by DBP to the savings account of DBP MRI- company only and was therefore null and void.
Pool. Accordingly, the DBP MRI Pool was advised of the credit.
Dans died of cardiac arrest. DBP MRI Pool notified DBP that ISSUE: Whether or not Virginia Perez is entitled to the proceeds
Dans was not eligible for MRI coverage, being over the of the insurance policy under the increased indemnity.
whatever amount the former has been adjudged to pay Vallejos

HELD: No. A contract of insurance, like other contracts, must be on its insurance policy.
assented to by both parties either in person or by their agents.
So long as an application for insurance has not been either HELD: (1) No. Only respondents Sio Choy and San Leon Rice
accepted or rejected, it is merely an offer or proposal to make a Mill, Inc, (to the exclusion of the petitioner) that are solidarily
contract. The contract, to be binding from the date of liable to respondent Vallejos for the damages awarded to
application, must have been a completed contract, one that Vallejos. Sio Choy and San Leon Rice Mill, Inc. are the principal
leaves nothing to be done, nothing to be completed, nothing to tortfeasors who are primarily liable to respondent Vallejos. The
be passed upon, or determined, before it shall take effect. law states that the responsibility of two or more persons who
There can be no contract of insurance unless the minds of the are liable for a quasi-delict is solidarily. On the other hand, the
parties have met in agreement. When Primitivo filed an basis of petitioner's liability is its insurance contract with
application for insurance, paid P2,075.00 and submitted the respondent Sio Choy. While it is true that where the insurance
results of his medical examination, his application was subject contract provides for indemnity against liability to third
to the acceptance of private respondent BF Lifeman Insurance persons, such third persons can directly sue the insurer, 6
Corporation. The assent of private respondent BF Lifeman however, the direct liability of the insurer under indemnity
Insurance Corporation therefore was not given when it merely contracts against third party liability does not mean that the
received the application form and all the requisite supporting insurer can be held solidarily liable with the insured and/or the
papers of the applicant. Its assent was given when it issues a other parties found at fault. The liability of the insurer is based
corresponding policy to the applicant. Under the on contract; that of the insured is based on tort. In the case at
abovementioned provision, it is only when the applicant pays bar, petitioner as insurer of Sio Choy, is liable to respondent
the premium and receives and accepts the policy while he is in Vallejos, but it cannot, as incorrectly held by the trial court, be
good health that the contract of insurance is deemed to have made "solidarily" liable with the two principal tortfeasors
been perfected. It is not disputed, however, that when namely respondents Sio Choy and San Leon Rice Mill, Inc. For if
Primitivo died on November 25, 1987, his application papers for petitioner-insurer were solidarily liable with said two
additional insurance coverage were still with the branch office respondents by reason of the indemnity contract against third
of respondent corporation in Gumaca and it was only two days party liability-under which an insurer can be directly sued by a
later, or on November 27, 1987, when Lalog personally third party — this will result in a violation of the principles
delivered the application papers to the head office in Manila. underlying solidary obligation and insurance contracts.
Consequently, there was absolutely no way the acceptance of (2) Yes. Upon payment of the loss, the insurer is entitled to be
the application could have been communicated to the applicant subrogated pro tanto to any right of action which the insured
for the latter to accept inasmuch as the applicant at the time may have against the third person whose negligence or
was already dead. wrongful act caused the loss. When the insurance company
pays for the loss, such payment operates as an equitable
SUBROGATION CASES assignment to the insurer of the property and all remedies
which the insured may have for the recovery thereof. That right
MALAYAN INSURANCE vs CA is not dependent upon, nor does it grow out of, any privity of
contract, (italics supplied) or upon written assignment of claim,
FACTS: Malayan Insurance Co., Inc., issued in favor of private and payment to the insured makes the insurer an assignee in
respondent Sio Choy Private Car Comprehensive Policy covering equity. It follows, therefore, that petitioner, upon paying
a Willys jeep. The insurance coverage was for "own damage" respondent Vallejos the amount of not exceeding P20,000.00,
not to exceed P600.00 and "third-party liability" in the amount shall become the subrogee of the insured, the respondent Sio
of P20,000.00. The insured jeep, while being driven by one Juan Choy; as such, it is subrogated to whatever rights the latter has
P. Campollo, an employee of the respondent San Leon Rice Mill, against respondent San Leon Rice Mill, Inc. Article 1217 of the
Inc., collided with a passenger bus belonging to causing damage Civil Code gives to a solidary debtor who has paid the entire
to the insured vehicle and injuries to the driver, Juan P. obligation the right to be reimbursed by his co-debtors for the
Campollo, and the respondent Martin C. Vallejos, who was share which corresponds to each. The rule holds true as to an
riding in the ill-fated jeep. As a result, Martin C. Vallejos filed an insurer subrogated to the right of a solidary debtor.
action for damages against Sio Choy, Malayan Insurance Co.,
Inc. and PANTRANCO. MANILA MAHOGANY MANUFACTURING CORPORATION vs. CA
After trial, judgment was rendered in favor of the plaintiff and AND ZENITH INSURANCE CORPORATION
against Sio Choy and Malayan Insurance Co., Inc., and third-
party defendant San Leon Rice Mill, Inc. "The above-named FACTS: Manila Mahogany insured its Mercedes Benz with
parties against whom this judgment is rendered are hereby held Zenith Insurance Company. One day, the vehicle was bumped
jointly and severally liable. With respect, however, to Malayan and damaged by a truck owned by San Miguel Corp (SMC).
Insurance Co., Inc., its liability will be up to only P20,000.00. On Zenith paid P5K to petitioner in amicable settlement.
appeal, CA, ruled, however, that the San Leon Rice Mill, Inc. has Petitioner’s general manager executed a Release Claim,
no obligation to indemnify or reimburse the petitioner subrogating respondent company to all its right to action
insurance company for whatever amount it has been ordered to against SMC. Later respondent wrote Insurance Adjusters Inc.
pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to demand reimbursement from SMC. Insurance Adjusters
to the contract of insurance between Sio Choy and the refused saying that SMC had already paid petitioner P4,500 for
insurance company. the damages to petitioner’s vehicle, as evidenced by a cash
voucher and Release of Claim executed by the GM of petitioner
ISSUE: (1) Whether or not Malayan Insurance is solidarily liable discharging SMC from “all actions, claims, demands the rights of
with Sio Choy and San Leon Rice Mill; (2) whether Malayan action that now exist or hereafter develop arising out of or as a
Insurance is entitled to be reimbursed by San Leon Rice Mill for consequence of the accident.
Respondent demanded the P4.5K amount from petitioner. action and denied its motion for reconsideration. The CA
Petitioner refused. Suit filed for recovery. City Court ordered affirmed the trial courts decision. Hence, this petition.
petitioner to pay respondent. CFI affirmed. CA affirmed with
modification that petitioner was to pay respondent the total ISSUE: Whether or not payment under the “own damage”
amount of 5K it had received from respondent. Petitioner’s under the insurance policy precludes insurer from the right of
argument: Since the total damages were valued at P9,486.43 subrogation.
and only 5K was received by petitioner from respondent,
petitioner argues that it was entitled to go after SMC to claim HELD: No. When PANMALAY utilized the phrase "own damage"
the additional which was eventually paid to it. Respondent’s – a phrase which, incidentally, is not found in the insurance
argument: No qualification to its right of subrogation. policy – to define the basis for its settlement of CANLUBANG's
claim under the policy, it simply meant that it had assumed to
ISSUE: Whether or not Manila Mahogany should pay Zenith reimburse the costs for repairing the damage to the insured
Insurance despite the subrogation in the Release of Claim was vehicle. It is in this sense that the so-called "own damage"
conditioned on recovery of the total amount of damages coverage is differentiated from Third Party Liability" coverage
petitioner has sustained. which refer to "Property Damage" coverage (liabilities arising
from damage caused by the insured vehicle to the properties of
HELD: Yes. Although petitioner's right to file a deficiency claim third parties). Moreover, a perusal of the provisions of the
against San Miguel Corporation is with legal basis, without insurance policy reveals that damage to, or loss of, the insured
prejudice to the insurer's right of subrogation, nevertheless vehicle due to negligent or careless acts of third parties is not
when Manila Mahogany executed another release claim listed under the general and specific exceptions to the coverage
discharging San Miguel Corporation from all actions, claims, of insured risks which are enumerated in detail in the insurance
demands and rights of action that now exist or hereafter arising policy itself. For even if under the above circumstances
out of or as a consequence of the accident" after the insurer PANMALAY could not be deemed subrogated to the rights of its
had paid the proceeds of the policy – the compromise assured under Article 2207 of the Civil Code, PANMALAY would
agreement of P5,000.00 being based on the insurance policy – still have a cause of action against private respondents. The
the insurer is entitled to recover from the insured the amount insurer who may have no rights of subrogation due to
of insurance money paid. Since petitioner by its own acts "voluntary" payment may nevertheless recover from the third
released San Miguel Corporation, thereby defeating private party responsible for the damage to the insured property under
respondent's right of subrogation, the right of action of Article 1236 of the Civil Code.
petitioner against the insurer was also nullified. Otherwise
stated: private respondent may recover the sum of P5,000.00 it CEBU SHIPPING AND ENGINEERING WORKS, INC. VS. WILLIAM
had earlier paid to petitioner. LINES INC. AND PRUDENTIAL GUARANTEE AND ASSURANCE
COMPANY, INC.
The decision of the respondent court ordering petitioner to pay
respondent company, not the P4,500 as originally asked for, but FACTS: William Lines, Inc. brought its vessel M/V Manila City
P5,000, the amount respondent company paid petitioner as to the Cebu Shipyard in Lapulapu City for annual dry-docking
insurance, is also in accord with law and jurisprudence. Since and repair. Subject vessel was insured with Prudential
the insurer can be subrogated to only such rights as the insured Guarantee for P45,000,000.00 for hull and machinery. The Hull
may have, should the insured, after receiving payment from the Policy included an “Additional Perils” clause covering loss of or
insurer, release the wrongdoer who caused the loss, the insurer damage to the vessel through the negligence of, amonf others,
loses his rights against the latter. But in such a case, the insurer ship repairmen. CSEW was also insured by Prudential
will be entitled to recover from the insured whatever it has paid Guarantee for third party liability under s Shiprepairs Legal
to the latter, unless the release was made with the consent of Liability Insurance Policy for P10,000,000.00 only. After subject
the insurer. vessel was transferred to the docking quay, it caught fire and
sank, resulting to its eventual total loss. William Lines, Inc. filed
PAN MALAYAN INSURANCE vs CA a complaint for damages against CSEW, alleging that the fire
which broke out in M/V Manila City was caused by CSEW’s
FACTS: Pan Malayan filed a complaint for damages with the RTC negligence and lack of care. An amended complaint,
of Makati against private respondents Erlinda Fabie and her impleading Prudential Guarantee as co-plaintiff, was filed after
driver. Pan Malayan insured a Mitsubishi Colt Lancer car the latter had paid William Lines, Inc. the value of the hull and
registered in the name of Canlubang. Dut to the carelessness, machinery insurance of M/V Manila City. RTC ruled that the
recklessness and imprudence of the unknown driver of a pick- cause of the fire was through the negligence of CSEW. CA
up, the insured car was hit and suffered damages in the amount affirmed the appealed decision. Hence this petition.
of P42,052.00. Pan Malayan defrayed the cost of repair of the
insured car, and therefore was subrogated to the rights of ISSUE: Whether or not Prudential has the right of subrogation
Canlubang against the driver of the pick-up and his employer, against its own insured and whether or not the parties intended
Erlinda Fabie. Despite repeated demands, defendants failed for them to be a co-assured in the insurance policy.
and refused to pay the claim of Pan Malay. Defendants/Private
Respondents alleged that Pan Malay had no cause of action RULING: The petition is unmeritorious. Upon proof of payment
against them because payment under the “own damage” clause by Prudential Guarantee to William Lines, the former was
of the insurance policy precluded subrogation under Article subrogated to the right of the latter to indemnification from
2207 of the Civil Code, since indemnification thereunder was CSEW. Thus, when Prudential, after due verification of the
made on the assumption that there was no wrongdoer or no merit and validity of the insurance claim of William Lines, paid
third party at fault. RTC dismissed the case for no cause of the latter the total amount covered by its insurance policy, it
was subrogated to the right of the latter to recover the insured 5) Upon recovery by the mortgagee to the extent of his credit,
loss from CSEW, the liable party. the debt is extinguished.
A stipulation in the work order that requires William Lines to 6) The rule on subrogation by the insurer to the right of the
maintain insurance on the vessel during the period of dry- mortgagee does not apply in this case.
docking or repair, works to the benefit of CSEW. However, the
fact that CSEW benefits from the said stipulation does not Standard or union mortgage clause
automatically make it as a co-assured of William Lines. The hull
and machinery insurance procured by William Lines, Inc. from Clause which makes a separate and distinct contract of
Prudential named only "William Lines, Inc." as the assured. insurance on the interest of the mortgagee. Under this clause,
Thus, when the insurance policy involved named only William the acts of the mortgagor do not affect the mortgagee.
Lines, Inc. as the assured thereunder, the claim of CSEW that it
is a co-assured is unfounded. Open or loss-payable clause
Legal effects of an insurance by mortgagee of his own interest Clause that may be included in a policy obtained by the
and the loss is payable to the mortgagee mortgagor in favor of the mortgagee where the latter is only a
beneficiary and not a party to the contract itself. Under this
1) Mortgagee is entitled to the proceeds of the policy in case of clause, any acts of the mortgagor which defeats his right wil
loss before the payment of the mortgage. also defeat the right of the mortgagee.
2) The claim passes by subrogation to the insurer to the extent
of the insurance money paid and the mortgagee is not allowed Effect of standard and open clauses in fire insurance policy
to retain his claim against the mortgagor. clause.
3) The payment of the insurance to the mortgagee by reason of
the loss does not relieve the mortgagor from his principal Rights of the mortgagee under the mortgagor’s policy
obligation but only changes the creditor.
1) Before loss – the mortgagee is a conditional appointee of the
C has a credit of P8 million against D which is secured by D’s mortgagor entitled to receive so much of any sum that may
house. C, mortgagee, insured the house of D, mortgagor, up to become due under the policy as does not exceed his interest as
P8 million. Supposing D already paid C P4 million, how much mortgagee.
will C be entitled to recover from the insurer? 2) Loss happens when credit is not yet due - the mortgagee is
entitled to receive money to apply to the extinguishment of the
P4 million, the remaining debt of D. debt as fast as it becomes due
3) Loss happens after credit has matured – the mortgagee may
May C, after receiving the P4 million from the insurer, still go apply the proceeds to the extent of his credit. [interest]
after D and collect the remaining P4 million debt?
Effect of insurance by mortgagee on behalf of mortgagor
No because his insurable interest was already satisfied with the
payment of the P4 million by the insurer. 1) Discharge of debt – The same rules obtain when the
mortgagee procures the policy as a contracting party by which
Supposing the insurer paid the D the amount of P8 million, is the mortgagor is to pay the premiums upon such insurance.
he subrogated to the rights of the mortgagee and go after the Upon the destruction of the property, the mortgagee is entitled
mortgagor? to receive payment from the insured but such payment
discharges the debt it equal to it, and if greater than the debt,
Yes. When the insurance is procured by the mortgagee for his the mortgagee holds the excess as trustee for the mortgagor.
own benefit and the insurer pays the proceeds to the 2) Right to subrogation – If there is a stipulation that the insurer
mortgagee, the insurer is subrogated to the latter’s right and he shall be subrogated to the rights of the mortgagee, the
may go after the mortgagor. payment of the policy will not discharge the debt even though
the mortgagee may have procured the policy by arrangement
Supposing it was the mortgagor who procured and paid for the with the mortgagor.
insurance contract, making the loss payable to the mortgagee,
SEC. 9. If an insurer assents to the transfer of an insurance
Legal effects of an insurance by mortgagor for the benefit of from a mortgagor to a mortgagee, and, at the time of his
the mortgagee assent, imposes further obligations on the assignee, making a
new contract with him, the acts of the mortgagor cannot
1) The contract is deemed to be upon the interest of the affect the rights of said assignee.
mortgagor; hence, he does not cease to be party to the
contract. Does the act of the mortgagor affect the rights of the
2) Any act of the mortgagor prior to the loss, which would assignee?
otherwise avoid the insurance affects the mortgagee even if the
property is in the hands of the mortgagee. Yes, unless the insurer assents to the transfer of an insurance
3) Any act under the contract which is to be performed by the from a mortgagor to a mortgagee, and, at the time of his
mortgagor may be performed by the mortgagee with the same assent, imposes further obligations on the assignee, making a
effect. new contract with him.
4) In case of loss, the mortgagee is entitled to the extent of his
credit. Legal effect of assignment or transfer of insurance policy
To substitute the assignee or transferee in place of the original

insured in respect to the: A person is deemed to have an insurable interest in the subject
(1) right to claim indemnity for a loss; matter where he has a relation with it in that he will derive
(2) obligation to perform the conditions, if any, of the policy. pecuniary benefit from its preservation and will suffer
pecuniary loss from its destruction, by the happening of the
Assignment or transfer of insurance policy event insured against.
1) As to fire policy – not assignable (you might assign it to an Necessity of insurable interest
arsonist) without the consent of the insurer;
2) As to marine policy – not assignable (you might assign it to In the absence of such interest, the person insuring in effect
jack sparrow) without the consent of the insurer. would be gambling which is prohibited by law. A policy issued
3) As to casualty policy - not assignable (you might assign it to to a person without interest in the subject matter insured is a
lupin) as it involves obvious moral hazards, unless the insurer mere wagering policy and is void for illegality.
consents;
4) As to life policy – may freely be assigned before or after the Requirement, a matter of public policy
loss occurs, to any person whether he has an insurable interest
or not; except when it is assigned to a person without an A wager policy is obviously contrary to public interest in that:
insurable interest and under circumstances where the insured 1) It allows the insured to have an interest in the destruction of
makes such an assignment in bad faith. the subject matter rather that its preservation.
2) It affords a temptation or inducement to the insured, having
Moral hazard nothing to lose and everything to gain, to bring pass the event
upon the happening of which the insurance becomes payable.
The lack of incentive to guard against risk where one is
protected from its consequences, e.g., by insurance. Two general classes of life policies
Kinds of assignment or transfer 1) Insurance upon one’s life – Those taken out by the insured
upon his own life for the benefit of himself, or of his estate, or
1) of the policy itself- transfers the rights to the contract to of a third person who may be designated as beneficiary.
another insured. 2) Insurance upon the life of another – Policies taken out by the
2) of the proceeds of the policy after loss has happened – insured upon the life of another.
involves a money claim under the policy.
3) of the subject matter of the insurance – such as a house Insurable interest in one own’s life
insured under a fire policy which has the effect of suspending
the insurance until the same person becomes the owner of Every person has an unlimited insurable interest in the his own
both the policy and the thing insured. life whether the insurance is for the benefit of himself or
another; and it is not necessary that the beneficiary designated
Legal basis of the mortgagor to assign the insurance policy to in the policy should have any interest in the life of the insured.
the mortgagee
Instances of a wagering policy
Section 8 of the Code.
1) that the original proposal to take out insurance was that of
SEC. 10. Every person has an insurable interest in the life and the beneficiary.
health: 2) that premiums are paid by the beneficiary.
(a) [1]Of himself, [2] of his spouse and [3]of his children; 3) that the beneficiary has no interest, economic or emotional
(b) [4]Of any person on whom he depends wholly or in part for in the continued life of the insured.
education or support, or in whom he has a pecuniary interest;
(c) [5]Of any person under a legal obligation to him for the SIR: These are just indicia; There’s really not hard and fast rule
payment of money, or respecting property or services, of in determining whether the life insurance is a wagering policy.
which death or illness might delay or prevent the
performance; and Similarity between a life insurance policy and a civil donation
(d) [6]Of any person upon whose life any estate or interest
vested in him depends. A donation is an act of liberality whereby a person disposes
gratuitously a thing or right in favor of another who accepts it.
Insurable interest Both are founded upon the same consideration: liberality.
That interest which the law requires the owner of an insurance Insurable interest in life of another
policy to have in the person or thing insured.
A person cannot lawfully procure an insurance for his own
Insurable interest in life insurance benefit on the life of another in whose life he has no insurable
interest. The policy of the law requires that the insured shall
To have an insurable interest in the life of a person, the have an interest to preserve the life insured in spite of the
expectation of benefit from the continued life of that person insurance rather than destroy it because of the insurance.
need not necessarily be of a pecuniary nature.
Insurance for benefit of a third party
Test in insurable interest in general
When the owner of a policy insures the life of another(cestui SIR: If the reason why you made this person as your beneficiary
que vie) and designates a third party as a beneficiary, both the was because of the commission of the offense of adultery or
owner and the beneficiary must have an insurable interst in the concubinage, then the insurance policy is void even if it is the
life of the cestui que vie. consideration only.
X insures the life of Y and makes Z as the beneficiary. Should X Corporation insuring the life of its officer
have an insurable interest in the life of Y?
Generally, a corporation has an insurable interest in the life of
Both X and Z should have an insurable interest in the life of Y. an officer on whose services the corporation depends for its
prosperity and whose death will be the cause of a substantial
Persons obliged to support each other pecuniary loss to it.
Generally, blood or material relationships fit the concept of Partnership insuring the life of one of its partner
insurable interest. The following have an insurable interest in
each other’s life since under the Family Code, they are obliged A person may take out a policy on the life of his business
to support each other: partner on the theory that the latter’s death may adversely
affect the business operations which can, in turn, cause
(1) The spouses; financial losses.
(2) Legitimate ascendants and descendants;
(3) Parents and their legitimate children and the legitimate and Insuring the life of the President of the Republic or the Dean of
illegitimate children of the latter; the College of Law
(4) Parents and their illegitimate children and the legitimate and
illegitimate children of the latter; and Under our law, there must be an expectation of benefit in the
(5) Legitimate brothers and sisters, whether of full or half- life of the insured to sustain the insurance, i.e., a risk of actual
blood. and substantial monetary loss from his death. Hence, love,
affection, gratitude or friendship by itself is not sufficient.
Insuring your collateral relatives
Insuring the life of an employer
Mere blood relationship such as uncle or aunt, and nephew and
niece and cousins (lesser degree of kinship), does not create an For as long as the employee derives pecuniary benefit from the
insurable interest in the life of another. Also, mere relationship continued existence of his employer and suffer pecuniary loss
by affinity (in-laws; stepchildren) ordinarily does not constitute from his death, he may insure the life of the latter.
an insurable interest.
Insuring the life of a janitor/clerk/house helper
Insuring your girlfriend/mamasan
In the case of employees, insurable interest is dependent upon
You may for as long as you can prove that you have an insurable the value of the employee to the business. One who could be
interest in her because you wholly depend on your paramour easily replaced would hardly be one in whom the employer
for education or support. could reasonably claim an insurable interest.
Insuring your paramour Insurable interest of creditor in the life of his debtor
No because any person forbidden from receiving any donation Only to the extent of the amount of the debt.
cannot be named beneficiary of a life insurance policy by the
person who cannot make any donation to him. The debtor got an insurance to be paid to the creditor.
Meanwhile, he was able to pay his creditor. Later on, the
Should there be a previous conviction for adultery of debtor died and became a zombie. Is the insurer liable to pay
concubinage? the proceeds to the creditor?
No it is not required. An action for declaration of nullity may be No, the debt was already extinguished upon payment by the
brought by the spouse of the donor or done and the guilt of the debtor. The proceeds should instead go to the estate of the
donor and done may be proved by preponderance of evidence. debtor.
Supposing in the same scenario, you were able to procure an Consent of person whose life insured
insurance policy and later on you died. To whom should the
proceeds of the insurance policy go? Not essential to the validity of the policy so long as it could be
proved that the assured has a legal insurable interest at the
To the estate of the insured. inception of the policy.
X agreed to have sex with Y, a married man, because of Y’s SEC. 11. The insured shall have the right to change the
promise to make her a beneficiary. Is that a valid transaction? beneficiary he designated in the policy, unless he has
expressly waived this right in said policy. Notwithstanding the
No because an insurance made between persons found guilty of foregoing, in the event the insured does not change the
the same criminal offense, in consideration thereof is void. beneficiary during his lifetime, the designation shall be
deemed irrevocable.
Then the insured has no power to make such change without

Beneficiary the consent of the beneficiary.
The person names in the contract of life, health, or accidental What if X refuses to continue paying the premiums. What is
insurance as the one who is to receive the benefits. the remedy of Y?
Kinds of beneficiary Y may opt pay the premium because the fulfillment of an
obligation may be made by a third person even against the will
1) The insured himself – the person who procures the contract of the debtor and if has has an interest in the fulfillment of the
and pays the premium necessary to maintain it. obligation, even against the will of the creditor. (Art 1236)
 Where the creditor insures the life of the debtor
o The creditor is the insured and the beneficiary Measurement of vested interest of beneficiary in policy
o The life of the debtor is the subject of the life
insurance policy Measured on its full face value and not on its cash surrender
2) Third person who paid a consideration – The insured may value for in case of death of the insured, said beneficiary is paid
have taken the policy for the benefit of the creditor or to secure on the basis of its face value.
some other obligation.
 Where the debtor procures an insurance for the Effect where beneficiary dies before insured
benefit of his creditor.
3) Third person through mere bounty of insured – The 1) view that beneficiary’s representative/heir is entitled to
beneficiary may be one who gives no consideration but is insurance proceeds – where the right to change the designated
designated as recipient of the proceeds of the policy. beneficiary is expressly waived in the policy, his vested right
 Third party liability insurance procured by car owners. should pass to his representatives.
In the 2nd and 3rd cases, (generally) the beneficiary is not a party 2) view that estate of the insured is entitled to the insurance
to the contract of insurance. policy – the insured could not have intended to make a
provision for the heirs of the deceased beneficiary, who may be
Limitations in the appointment of beneficiary persons without an interest in his life. This is true also where
the designation is subject to the express condition to pay the
1) ART 739. The following donations shall be void: beneficiary if the survives the insured or “if surviving”. [better
i. Those made between persons who were guilty of view]
adultery or concubinage at the time of the donation;
ii. Those made between persons found guilty of the same X designates his insurer as his beneficiary. Is that allowed?
criminal offense, in consideration thereof;
iii. Those made to a public officer or his wife, descendants Yes you can designate anyone as your beneficiary except as
and ascendants, by reason of his office. otherwise prohibited by the law.
2) ART 2012. Any person who is forbidden from receiving any
donation under article 739 cannot be named beneficiary of a Designation of beneficiary
life insurance policy by the person who cannot make any
donation to him, according to said article. 1) Children – means a descendant of the first degree and is
never intended to include grandchildren. “the beneficiaries are
Right of the insured in life insurance where beneficiary is a my children” includes children by another wife.
third person 2) Wife – the word “wife” in the description of the beneficiary
of life insurance is generally regarded as merely descriptive and
General rule: does not necessarily need to have the legal status of a wife. “my
1) right to change the wife and children” is deemed for benefit of al children of the
2) retains the right receive the cash value of the policy insured, whether by the named wife or those of another.
3) take out loans against the cash value
4) to assign the policy If no beneficiary is designated, the proceeds will go to his legal
5) to surrender the policy heirs in accordance with law.
Rationale: beneficiary acquires no vested right but only an
expectancy of receiving the proceeds under the insurance. SEC. 12. The interest of a beneficiary in a life insurance policy
Exception: when the insured expressly waives such right under shall be forfeited when the beneficiary is the principal,
the policy. accomplice, or accessory in willfully bringing about the death
of the insured. In such a case, the share forfeited shall pass on
X made Y as his beneficiary. When X died, the heirs of X would to the other beneficiaries, unless otherwise disqualified. In the
like to assign the proceeds of the insurance to Z. Can the heirs absence of other beneficiaries, the proceeds shall be paid in
do that? accordance with the policy contract. If the policy contract is
silent, the proceeds shall be paid to the estate of the insured.
No because the insured’s power to assigned the beneficiary’s
interest ceases at his death and cannot be exercised by his Nearest relatives of the insured
heirs, representatives or assignees. (Effect of death of insured)
In the order of enumeration, they are the following:
Where right to change is waived (a) The legitimate children;
(b) The father and mother, if living;
(c) The grandfather and grandmother, or ascendant subrogated to the mortgage security in case he should
nearest in degree, if living be compelled to make payment.
(d) The illegitimate children; 3) Legal expectation of loss or benefit. – the expectation of
(e) The surviving spouse; and benefit to be derived from the continued existence of property
(f) The collateral relatives, to wit: must have a basis of legal right although the person insured has
1) Brothers and sisters of the full blood no title, either legal or equitable, to the property insured.
2) Brothers and sisters of the half-blood; and
3) Nephews and nieces. Factual expectation
(g) In default of the above, the State shall be entitled to
receive the insurance proceeds. Such expectation not arising from any legal right or duty in
connection with the property, does not constitute an insurable
Liability of insurer on death of insured interest. Thus, an owner of a gasoline filling station near a hotel
has no sufficient insurable interest in the hotel simply because
1) Death in the hands of the law – Many courts hold that the its burning or destruction, though it leaves the filling station
insurer is not liable for the death of the insured at the handsof physically unharmed, will lessen his income from guests of the
the law. hotel. This type of interest though usually insufficient in strict
2) Death by self-destruction. – the insurer is not liable in case indemnity insurance, will suffice in life insurance.
the insured commits suicide intentionally, with whatever
motive, when in sound mind. To hold otherwise is to say that SEC. 14. An insurable interest in property may consist in:
the occurrence of the event, upon the happening of which the (a) An existing interest;
insurer undertook to pay, was intended to be left to insured’s (b) An inchoate interest founded on an existing interest; or
option. That view is against the very essence of the contract. (c) An expectancy, coupled with an existing interest in that out
3) Death by suicide while insane. –The suicide of an insured of which the expectancy arises.
while insane does not discharge the insurer from his liability on
his contract. Such insanity is one of the diseases to which the Existing interest
insurer must have known that the insured was subject.
4) Death caused by the beneficiary – where the beneficiary, as The existing interest in a property may be a legal title or
principal, accomplice or accessory intentionally brings about the equitable title.
death of the insured under such circumstances as to amount to  Persons who have insurable interest arising from legal
felony, he cannot recover any benefit under the contract of title: trustee, mortgagor, lessor, lessee, sublessee
insurance. His interest shall be forfeited and the nearest
relative of the insured shall receive the proceeds of said Equitable interest
insurance if not otherwise disqualified. However, when the
killing was accidental, unintentional or in self-defense or where A real right, but not a legal right, in a property. You do not own
the beneficiary was insane, the rights of the beneficiary under the property but you have the right to possess, use, to the fruits
the policy are not affected. of the property. Examples are the lessees of a building, tenant
5) Death caused by violation of law – Does not warrant denial of of a land.
liability. To avoid liability, the insurer must further establish that  Persons who have insurable interest arising from
the commission of the felony or the violation of the law was the equitable title: Purchaser of property before delivery;
cause or had a causal connection with the accident resulting in mortgagor after foreclosure but before the expiration
the death of the insured. of the redemption period; judgment debtor whose
property has been seized under execution until the
SEC. 13. Every interest in property, whether real or personal, right to redeem.
or any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the Inchoate interest
insured, is an insurable interest.
Generally property interests, that are likely to vest but have not
Insurable interest in property yet actually done so. The inchoate interest usually is dependent
on an event occurring that triggers the interest, such as a
1) In general –anyone has an insurable interest in property who relative's death triggering an inheritance. You have an insurable
derives a benefit from its existence or would suffer loss from its interest over an inchoate interest for as long as it is founded on
destruction. an existing interest.
2) Title or right to possession not essential – Although a person  A stockholder has an inchoate interest in the property
has no title, legal or equitable, in the property, and neither of a corporation of which he is stockholder, which is
possession nor right to possession, yet he has an insurable founded on an existing interest arising from his
interest if he is so situated with respect to the property that he ownership of shares in the corporation. His insurable
will suffer loss as the proximate result of its damage or interest is limited to the extent of the value of his
destruction. interest in the distribution of the corporate assets
 where a mortgagor had sold the mortgaged premises upon dissolution.
to a vendee who assumed the payment of the
mortgage debt, and had thus parted with all his An expectancy
interest in the property, the mortgagor yet had an
insurable interest in the property because of his Must be coupled with an existing interest in that out of which
personal liability for the debt and his right to be such expectancy arises.
 A farmer may insure future crops if they are to be

grown on land owned by him, or although the crops SEC. 17. The measure of an insurable interest in property is the
are to be raised by him on the land of another extent to which the insured might be damnified by loss or
provided the crops will belong to him when produced. injury thereof.
SEC. 15. A carrier or depository of any kind has an insurable Measure of insurable interest in property
interest in a thing held by him as such, to the extent of his
liability but not to exceed the value thereof. To the extent to which the insured might be damnified by loss
or injury thereof. Otherwise, the insurance contract would be in
Insurable interest of carrier or depository a nature of a wagering policy. The purpose of property
insurance is to indemnify a person against his ACTUAL loss and
The loss of the thing may cause liability to the carrier or not to wager on the happening of the event.
depositary to the extent of its value.  A person who insures his property valued at P100,000
for P120,000 and suffers a total loss, is only limited to
SEC. 16. A mere contingent or expectant interest in any thing, recover his actual loss P100,000, the value of his house
not founded on an actual right to the thing, nor upon any valid and not the whole amount of P120,000 which
contract for it, is not insurable. represents the maximum limit of recovery of the
insurer.
Mere contingent or expectant interest
SEC. 18. No contract or policy of insurance on property shall be
A mere expectation of benefit which may be frustrated by the enforceable except for the benefit of some person having an
happening of some event uncoupled with any present legal insurable interest in the property insured.
right will not support a contract of insurance
Can a property insurance be taken for the benefit of any other
1) Property of father/son/spouse – A father cannot insured his person, even if that person has no insurable interest?
son’s property nor can the son insure the property that he
expects to inherit from his father as his interest is merely an No because no contract or policy of insurance on property shall
expectancy of inheriting. be enforceable except for the benefit of some person having an
2) Property of debtor – Nor can a general or unsecured creditor insurable interest in the property insured.
insure specific property of his debtor who is alive, even though
destruction of such property would render worthless any
judgment he might obtain. Effect of absence of insurable interest in the property insured
 But an unsecured creditor may insure the property of
a deceased debtor since all personal liability ceases 1) Principle of indemnity applicable – An insurance taken out of
with the death of the debtor. The proceedings to a person on property in which he has no insurable interest is
subject the estate to the payment of the debt of the void.
deceased debtor are in rem.  Where the insurance is invalidated on the ground that
 An unsecured creditor who obtains a judgment in his no insurable interest exists, the premium is ordinarily
favor becomes a judgment creditor and has an returned to the insured unless he is in pari delicto with
insurable interest in the debtor’s property has he has a the insurer.
right to levy on such property.
 An unsecured creditor has an insurable interest in the Measure of indemnity in insurance contracts
life of the debtor to the extent of the amount of the
debt. 1) Contracts of marine or fire insurance – The amount of
3) Property of testator still alive – One named as beneficiary in a insurance fixed in the policy is not the exact measure of
will has no insurable interest in a property designated before indemnity to which the insured is entitled, but the maximum
the testator’s death. His expectation has no legal basis since the indemnity which he might obtain. The insured cannot recover in
will has no legal effect before the death of the testator. The will excess of his actual loss.
can be revoked at any time before the death of the testator  In valued policies – the valuation of the thing insured is
unless he has expressly waived this right in the policy in which conclusive between the parties in the adjustment of
case the beneficiary will have insurable interest. loss.
2) Liability insurance contracts – They are considered contracts
X purchased a house under a contract to sell. The contract of indemnity against liability and not against loss. The insured’s
provides that no transfer shall be made until and unless the promise is to pay the proceeds of the policy on behalf on the
buyer pays the entire amount. X was able to sell 80% of the insured to a third person to whom the insured is liable. If the
contract price. Can X insure the property? insured suffers no loss because his liability to the third person,
for some reason, cannot be enforced the insurer has no
Yes, because every interest in property, whether real or obligation to pay the proceeds.
personal, or any relation thereto, or liability in respect thereof, 3) Life insurance contracts – They are not contracts of
of such nature that a contemplated peril might directly damnify indemnity. It is simply the measure of indemnity which the
the insured, is an insurable interest. In property insurance, insurer has bound himself to pay the insured. Life insurance is
although a person has no title, legal or equitable to such more of an investment than indemnification protection against
property, he may still insure said property for as long as he is loss.
situated with respect to the property that he will suffer loss as  Except when the creditor insures the life of his debtor.
the proximate result of its damage or destruction.
4) Personal accident insurance contracts – They are not

contracts of indemnity. Life and limb are not susceptible to X insured life of debtor for P 1million, the debtor paid him
exact or uniform valuation. 1million pesos. Thereafter, the debtor died. Can X claim
5) Health insurance – those that cover medical expenses are proceeds of insurance?
contracts of indemnity.
Yes because in life insurance the insurable interest requirement
SEC. 19. An interest in property insured must exist when the is satisfied if the interest exists at the time the policy took effect
insurance takes effect, and when the loss occurs, but need not even if it ceased to exist at the time of the insured’s death.
exist in the meantime; and interest in the life or health of a
person insured must exist when the insurance takes effect, X Partnership insured life of one of the partners, thereafter
but need not exist thereafter or when the loss occurs. one of the partners resigned. Thereafter died, can partnership
claim proceeds?
You are the owner of the said property, you lease the property
to X, and then you took an insurance and you assign the Yes because he had a insurable interest at the time the
proceeds, if ever the building will be gutted by fire, to the insurance took effect.
lessee because the lessee also has insurable interest, is that
allowed? X unsecured creditor, insured life of his debtor, thereafter
debtor died. Can he claim?
No because an interest in property insured must exist when the
insurance takes effect, and when the loss occurs, but need not Yes
exist in the meantime.
Distinction Between Insurable Interest In Life And Property
The person having insurable interest, should that person be
the same as the insured and the beneficiary? 1) As to extend of insurable interest – Insurable interest in life is
unlimited whereas in property it is limited to the actual value of
Yes the interest.
2) As to time when insurable interest must exist – In life
And can the insured designate a beneficiary in property and insurance it is enough that it exists at the time the policy took
life insurance? effect whereas in property insurance that insurable interest
must exist when the insurance takes effect and when the loss
In property insurance the beneficiary must have an insurable occurs but need not exist in the meantime.
interest at the time of the loss whereas in life insurance the 3) As to expectation of benefit to be derived – In life insurance,
beneficiary may or may not have an insurable interest when the the expectation of benefit to be derived need not have a legal
loss occurs. basis whereas in property insurance, the expectation of benefit
has have a legal basis.
X planned to purchase a house, before buying the same house
he insured the same and thereafter was able to purchase the SEC. 20. Except in the cases specified in the next four sections,
house. The house was totally destroyed, can he claim the and in the cases of life, accident, and health insurance, a
proceeds? change of interest in any part of a thing insured
unaccompanied by a corresponding change of interest in the
No because X didn’t have an interest in property insured when insurance, suspends the insurance to an equivalent extent,
the insurance took effect. until the interest in the thing and the interest in the insurance
are vested in the same person.
If he cannot get the proceeds, what about the premium that
he paid? Effect of change of interest
It will be returned to him The mere transfer of a thing insured does not transfer the
policy but suspends it until the same person becomes the
X owns stocks, and the stocks were inside the building. The owner of both the policy and the thing insured.
contract with the insurer was to insure the stocks against any
harm, danger or peril. Unfortunately the contract says it’s the Object of rule against alienation
building that was insured and not the stocks. X tried to claim
the insurer said no, I cannot release the proceeds because To provide against changes which might supply a motive to
according to the contract it was the building that was insured destroy the property or might lessen the interest of the insured
and not the stocks. Can X claim? in protecting and guarding it.
He can claim because of the error committed. Change of interest covered by law
X insured life of his wife, thereafter he had a quarrel, to spite It must be an absolute transfer of the property insured such as
his wife, they annulled. Can the wife if husband dies claim the the conveyance of the property by means of an absolute deed
proceeds even if annulled? of sale.
Yes because insurable interest in life insurance need only exist Exceptions to the general rule
when the insurance takes effect, but need not exist thereafter
or when the loss occurs. 1) In life, health and accident insurance
2) A change of interest in the thing insured after the occurrence

of an injury which results in a loss. The rights to succession are transmitted from the moment of
3) A change of interest in one or more of several things, the death of the decedent.
separately insured by one policy
4) A change of interest by will or succession on the death of the X insured his house. X died and became an extra in the
insured walking dead. Thereafter the house was gutted by fire. May
5) A transfer of interest by one of several partners, joint owners the heir claim the proceeds?
who are jointly insured, to the others
6) When a policy is so framed that it will inured to the benefit of Yes because the change of interest in the house by the death of
whomsoever. X does not affect the insurance because it is likewise
7) When there is an express prohibition against alienation, the transferred to his heirs who may collect on the policy should
contract is avoided. the house be burned later on even before he could transfer the
insurance policy under his name.
SEC. 21. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss, does not affect SEC. 24. A transfer of interest by one of several partners, joint
the right of the insured to indemnity for the loss. owners, or owners in common, who are jointly insured, to the
others, does not avoid an insurance even though it has been
Change of interest in a thing insured after loss agreed that the insurance shall cease upon an alienation of
the thing insured.
After a loss has happened, the liability of the insurer becomes
fixed. The insured has a right to assign his claim against the Each partner is interested in the whole property and the hazard
insurer. This right is absolute and cannot be delimited by is not increased because the purchasing partner has acquired a
agreement. The insured also has the right to transfer the thing greater interest in the property. No new party is brought into
insured after the occurrence of the loss. Such change of interest contractual relationship with the insurer.
does not affect his right to indemnity for the loss.
Effect where transfer to strangers
SEC. 22. A change of interest in one or more of several distinct
things, separately insured by one policy, does not avoid the It will avoid the policy. A sale by a partner of his insurable
insurance as to the others. interest to a stranger ends the contract of insurance as to him
but does not affect the insurance as to the others.
Change of interest where several things separately insured by
one policy SEC. 25. Every stipulation in a policy of insurance for the
payment of loss whether the person insured has or has not
1) Effect dependent on divisibility of contract – If the things are any interest in the property insured, or that the policy shall be
separately insured in one policy the contract is divisible and the received as proof of such interest, and every policy executed
violation of a condition which avoids the policy with respect to by way of gaming or wagering, is void.
one or more of the things does not affect the others. On the
other hand, if the things are insured under one policy for a Stipulations that are prohibited in an insurance policy
gross sum and for an entire premium, the contract is indivisible
so that a change of interest in one or more of the things will 1) Stipulation of the payment of loss whether the person insured
also avoid the insurance as to the others. has or has not interest in the subject matter of the insurance – is
a mere wager policy and is void.
X insured his house for P200,000 and his vehicle insured for 2) Stipulation that the policy shall be received as proof of
P300,000 under a divisible insurance. X sold his vehicle to Y. insurable interest – it is void because whether or not insurable
The house thereafter was gutted by fire. Can X claim the interest exists does not depend upon the contract of insurance.
proceeds?  The defense of absence of insurable interest is
available only to the insurer being the only party to the
Yes, the sale of the car will not affect the insurance of the car. insurance contract who has a legitimate interest in
raising the defense. It may be raised by and for the
The car was lost after X sold it to Y. Can X still claim the benefit of the insurer alone.
proceeds?
Wager policy
No because at the time of the loss X no longer has insurable
interest over the car. A pretended insurance where the insured has no interest in the
thing insured and can sustain no loss by the happening of the
How about Y, can she claim the proceeds? misfortunes insured against.
No because at the time the insurance policy took effect, she did Wagering policy or gaming policies void
not have an insurable interest over the car, unless there was
also a transfer of the policy at the time X sold the car to Y. 1) A mere bet upon the future – such policies have a tendency
to create a desire for the event and furnish strong temptation
SEC. 23. A change of interest, by will or succession, on the to the party interested to bring about if possible the event
death of the insured, does not avoid an insurance; and his insured against.
interest in the insurance passes to the person taking his 2) Non-existence of loss from occurrence of event – Wagers
interest in the thing insured. suffer no loss from the occurrence. On the contrary, they
actually profit from it. The insurable interest requirement Whether the insurer was misled or deceived into entering a
intends to deter the insured from the temptation to bring about contract obligation by a withholding of material facts within the
by unnatural means the results of the contingent event. assured’s knowledge or presumed knowledge.
CONCEALMENT X was not aware of his illness. X, in his application, he wrote

that he was fully fit. The insurer did not bother to verify the
SEC. 26. A neglect to communicate that which a party knows data supplied by X. However, in reality, X suffers from a
and ought to communicate, is called a concealment. medical condition. His application was eventually approved. Is
there concealment?
Different devices for ascertaining and controlling risk and loss
No because there was no knowledge on the part of X that he is
1) Concealment suffering from a certain illness. In concealment, it’s the failure
2) Representations to communicate a material fact which such party knows and
3) Warranties ought to communicate.
4) Conditions
5) Exceptions SEC. 28. Each party to a contract of insurance must
communicate to the other, in good faith, all facts within his
Requisites for concealment knowledge which are material to the contract and as to which
he makes no warranty, and which the other has not the means
1) A party knows the fact which he neglects to communicate to of ascertaining.
the other.
2) Such party concealing is duty bound to disclose such fact to Matters that must be communicated even in the absence of
the other. an inquiry
3) Such party concealing makes no warranty of the fact
concealed All facts :
4) The other party has no means of ascertaining the fact 1) which are material to the contract.
concealed. 2) the other party has no means of ascertaining
2) which the other party with the duty to communicate makes
Where a warranty made of the concealed, the non-disclosure of no warranty.
such fact is not concealment but constitutes a violation of
warranty. Test used
SEC. 27. A concealment whether intentional or unintentional If the applicant is aware of the existence of some circumstances
entitles the injured party to rescind a contract of insurance. which he knows would influence the insurer in acting upon his
application, good faith requires him to disclose that
Effect of concealment circumstance though unasked.
1) By the insured – makes the contract voidable at the insurer’s Effect of failure of insurer to verify
option. It is not limited to material facts which the applicant
knows, but extends to those which he ought to know, they The effect of material concealment cannot be avoided by the
being necessary for the insurer to evaluate the risk, either to allegation that the insurer could have known and discovered
charge a higher premium or to refuse to issue a policy. the illness or disease which the insured had concealed. The
2) By the insurer – imposed with equal stringency upon the insurance company has the right to rely on the statements of
insurer since his dominant bargaining position carries with it the insured as to material facts such as his previous sickness, for
stricter responsibility. he knows the facts, and the matter is not one of which
disclosure is excused by the law.
Give an example where the insurer is guilty of concealment
whereby the insured is entitled to rescind the contract X insured his building and he said that it is a sari-sari when it
truth and in fact it was a warehouse for LPG. The insurer did
The insured wanted to insure himself for P500,000. The insurer not verify. Can it be rescinded?
assessed him of certain premiums. It turned out such insurer
has no asset and cannot pay the amount. This entitles the Yes because X knows for a fact that his warehouse is not a sari-
insurer to rescind the contract and recover the premium he sari store. Thus, he is liable for concealment.
paid to the insurer.
SEC. 29. An intentional and fraudulent omission, on the part of
Proof of fraud in concealment one insured, to communicate information of matters proving
or tending to prove the falsity of a warranty, entitles the
The insurer need not prove fraud because it would be insurer to rescind.
impossible for an insurer to show actual fraud except. The duty
of communication is violated by the fact of concealment, even When fraudulent intent necessary in concealment
when there is no design to deceive.
When the concealment relates to the falsity of a warranty. The
Test for concealment non-disclosure under Sec. 29 must be intentional and
fraudulent in order that the contract may be rescinded.
Give an example accidental fire. The insurer can deny liability for the
loss.
In every marine insurance, there is implied warranty that the
ship is seaworthy. The fraudulent omission on the part of the From the standpoint of the insurer
insured when applying for a policy to communicate information
that his ship is in distress or in special peril would entitle the A fact is material if the knowledge of it would have a probable
insurer to rescind because the concealment refers to matters and reasonable influence upon the insurer in assessing the risk
proving or tending to prove the falsity of the warranty that the involved and in making or omitting further inquiries, and cause
ship is seaworthy. him to either reject the risk or to accept it only at a higher
premium rate or on different terms.
SIR: You enter into a fire insurance contract. You make a
warranty in the contract that during the coverage of the policy Effect if insurer does not require medical examination
you will only use the building as your residential house. If you
violate that policy, the insurer can rescind the contract. In this The waiver of the insurance company of medical examination
case, you also concealed a material information because you renders more material the information required of the
knew for a fact that when the policy took effect the house was applicant concerning the previous condition of health and
also used for business. Had you told the insurer that you also disease suffered .
use the house for business, they would have charge you for a
higher premium because the house will be subject to more When concealment regarded as intentional
risks. In this case, there is a material concealment because he
did not divulge to the insurer that the house is not exclusively When the nature of the facts not conveyed to the insurer may
used for residential purposes. Worse, you made a warranty that be such that the failure of the insured to communicate must
such house will be used only residential purposes. The facts he been intentional rather than inadvertent.
concealed has a connection with his warranty. Therefore, the  The withholding of the applicant of the fact that his
insurer may rescind the contract either because of the daughter is suffering from down syndrome. Such fact
concealment or fraudulent concealment. which is material to the contract could never be
disguised in supplying essential data for the insurance
SEC. 30. Neither party to a contract of insurance is bound to application form.
communicate information of the matters following, except in
answer to the inquiries of the other: Where fact concealed not material
(a) Those which the other knows;
(b) Those which, in the exercise of ordinary care, the other When such fact would not have affected the decision of the
ought to know, and of which the former has no reason to insurer.
suppose him ignorant;
(c) Those of which the other waives communication; Time when information acquired
(d) Those which prove or tend to prove the existence of a risk
excluded by a warranty, and which are not otherwise 1) After contract has become effective – Concealment must take
material; and place at the time the contract is entered into in order that the
(e) Those which relate to a risk excepted from the policy and policy will be avoided and not afterwards. The duty of
which are not otherwise material. disclosure ends with the completion and effectivity of the
contract.
Matters made the subject of special inquiries 2) Before contract becomes effective – In life insurance, the
applicant is under a duty to disclose to the insurer changes in
As a general rule, matters made the subject of inquiry must be his health coming to his knowledge between the date of
deemed material, even though otherwise they might not be so submitting his application and the date the policy is delivered.
regarded.
SEC. 32. Each party to a contract of insurance is bound to
When there is no need to make a disclosure know all the general causes which are open to his inquiry,
equally with that of the other, and which may affect the
See Section 30 above. political or material perils contemplated; and all general
SEC. 31. Materiality is to be determined not by the event, but usages of trade.
solely by the probable and reasonable influence of the facts
upon the party to whom the communication is due, in forming Matters each party bound to know
his estimate of the disadvantages of the proposed contract, or
in making his inquiries The insured need not communicate public events such as that a
nation is at wars or the laws and political conditions in other
Test of materiality countries. Likewise, the insurer is charged with the knowledge
of the general trade usages and rules of navigation, kinds of
Whether the knowledge of the fact would influence the parties seasons and all the risks connected with navigation.
in making the contract.
Example: X insured his house against fire but he did SEC. 33. The right to information of material facts may be
not disclose the fact that he received 2 letter waived, either by the terms of insurance or by neglect to make
threatening to set his house on fire if he did not pay P1 inquiry as to such facts, where they are distinctly implied in
billion to the sender. X’s house was destroyed by an other facts of which information is communicated.
Right to information may be waived When representation becomes a misrepresentation
Either expressly, by the terms of insurance, or implied, by the When factually untrue and the insured knew at the time when
neglect to make inquiry as the facts already communicated. he made such representations that it is untrue and he has
 In an answer to a question, the insured communicated intent to deceive.
to the insurer that he had once stayed in a hospital.
The insurer did not inquire as to the cause of the Intended as collateral inducements
confinement. In this case, there is an implied waiver on
the part of the insurer. Representations are made to influence the insurer to accept the
 But there is no waiver where the failure of the insurer risk. They are not a part of the contract unless expressly made
to make further inquiries was due precisely to so.
concealment on the part of the insured.
SEC. 37. A representation may be made at the time of, or
SEC. 34. Information of the nature or amount of the interest of before, issuance of the policy.
one insured need not be communicated unless in answer to an
inquiry, except as prescribed by Section 51. Time when representation may be made
Disclosure of nature and extent of the interest of the insured It precedes the execution of the contract. The insurer must be
induced by the misrepresentation of the applicant for the
Under Section 51, it is required that a policy of insurance must insurance to issue the policy at a specified premium.
specify the interest of the insured if he not the absolute owner
of the property in order that the insurer may determine the SEC. 38. The language of a representation is to be interpreted
extent of the insured’s insurable interest. by the same rules as the language of contracts in general.
 There is no need to disclose the interest in the
property if the insured the owner thereof. Construction or representations
SEC. 35. Neither party to a contract of insurance is bound to Representations are construed liberally in favor of the insured
communicate, even upon inquiry, information of his own and are required to be only substantially true. Warranties by
judgment upon the matters in question. contrast must be literally true or the contract will fail.
 In a question are you afflicted with a disease, the
Disclosure of judgment upon the matters in question insured stated no even if he suffered a 1 day fever. Is
there a misrepresentation? No because there is no
The duty to disclose is confined to facts. Hence, there is not material representation.
duty to disclose mere opinion, speculation, intention or
expectation. SEC. 39. A representation as to the future is to be deemed a
 Suppose the insurer asks the insured, “How long do promise, unless it appears that it was merely a statement of
you think you will live?” The insured need not answer belief or expectation.
the question.
Kinds of representation
REPRESENTATION
A representation may be:
SEC. 36. A representation may be oral or written. 1) oral or written
2) made at the time of issuing the policy or before
Representation 3) affirmative or promissory
A statement made by the insured at the time of, or prior to, the Affirmative representation
issuance of the policy relative to the risk to be insured, as to a
past or existing fact or state of facts, or concerning a future Any allegation as to the existence or non-existence of a fact
happening, to give information to the insurer and otherwise when the contract begins.
induce him to enter into the insurance.
Promissory representation
Misrepresentation
Any promise to be fulfilled after the contract has come into
A statement existence.
1) as a fact of something which is untrue,
2) which the insured stated with knowledge that it is untrue and Nature of promissory representations
with an intent to deceive, or which he states positively as true
without knowing it to be true and which has a tendency to 1) It is used to indicate an oral promise made in connection with
mislead, and the insurance but not incorporated in the policy.
3) where such fact in either case is material to the risk. 2) An undertaking by the insured, inserted in the policy, but not
specifically made a warranty.
Such misrepresentation by the insured renders the insurance
contract voidable at the option of the insurer, even though Effect on policy of expression of opinion or expectation
innocently made and without wrongful intent.
1) Good faith/bad faith of the insured – a representation of the

expectation, intention, belief or opinion of the insured although Only to the time of making the contract. There is no false
false, will not avoid a policy if there is no actual fraud in representation, if it is true at the time the contract takes effect
inducing the acceptance of the risk or its acceptance at a lower although false at the time it was made and vice versa, there is
premium. false representation if it is true at the time it was made but
2) Liability of the insurer – To avoid liability, the insurer must false at the time the contract takes effect.
prove both the materiality of the insured’s opinion and the
latter’s intent to deceive. If the representation is one of fact, all X applied for an insurance policy. He claimed that he is not
the insurer need to prove is its falsity and materiality. The afflicted with any disease. The day after he suffered a heart-
intent to deceive is presumed. attack. On the next day, the policy was delivered to him. Still
 In response, to a question an applicant for a motor he did not inform the insurer. Is he guilty of
vehicle insurance replied: “I am a good driver”. The misrepresentation?
statement is not fraudulent as it is merely made an
expression of opinion. But if in fact the applicant does Yes.
not know how to drive, he is guilty of fraudulent
misrepresentation of material fact. SEC. 43. When a person insured has no personal knowledge of
a fact, he may nevertheless repeat information which he has
When representation deemed a mere expression of opinion upon the subject, and which he believes to be true, with the
explanation that he does so on the information of others; or
An oral representation as to a future event over which the he may submit the information, in its whole extent, to the
insured has no control with reference to property or life insurer; and in neither case is he responsible for its truth,
insured, will be deemed a mere expression of opinion. unless it proceeds from an agent of the insured, whose duty it
is to give the information.
SEC. 40. A representation cannot qualify an express provision
in a contract of insurance, but it may qualify an implied Effect where information obtained from third persons
warranty.
If the representation turns out to be false, he is not responsible
Effect of representation on express provisions of policy provide he gives explanation that he does so on the information
of others. The insured is not responsible for the truth of the
A representation cannot qualify an express provision or an information.
express warranty in a contract of insurance. This is because a  If Superman has no personal knowledge of the cause
representation is not part of the contract but only a collateral of the death of his parents because they died when he
inducement to it. However, a representation may qualify an was still infant, he may report such information
implied warranty. obtained from Lex Luthor and Batman, expressly
stating that he does not possess knowledge personally
The policy says that the vessel is a passenger vessel. During but though others.
the execution the insured represents that the vessel is used as
a cargo vessel. Thereafter, the vessel sank while traversing the Effect where information obtained from agent of
high seas. Can the insurance company deny? insured/insurer
No because such representation cannot qualify an express 1) Agent of the insured - the insured will be liable for the truth if
provision written in the insurance policy. the agent has the duty to communicate such information to the
principal and it was possible for the agent under such
X claims during the execution of the contract that his vessel is circumstances in the exercise of due diligence to have made
a fire hazard. Take note that in marine insurance, there is an such communication before making the contract.
implied warranty that the vessel is seaworthy. Thereafter, the 2) Agent of the insurer – same principle applies.
vessel caught fire in the middle of the voyage and sank. Can
the insurer deny the proceeds? SEC. 44. A representation is to be deemed false when the facts
fail to correspond with its assertions or stipulations.
No because such representation has already qualified the
implied warranty that the vessel is seaworthy. When representation deemed false
SEC. 41. A representation may be altered or withdrawn before When the representation relied upon is false in substantial and
the insurance is effected, but not afterwards. material respect.
When representation may be altered or withdrawn When representation considered substantially true
May be altered or withdrawn before the contract actually takes A representation is substantially true when it is true in every
effect but not afterwards since the insurer has already been led material particular to the risk, or is so far that the conduct of
by the representation in assuming the risk. the insurer would not have been different if the exact truth had
been alleged.
SEC. 42. A representation must be presumed to refer to the  In marine insurance, substantial truth of a
date on which the contract goes into effect. representation is not sufficient. The insured is required
to state the exact and whole truth because the insurer
Time to which representation refers
generally relies to a large degree on the statements of 3) As to the effect, concealment and misrepresentation on the
the applicant regarding the risk. part of the insured gives the insurer a right to rescind the
contract.
Construction of representation as affirmative 4) Whether intentional or not, the injured party is entitled to
rescind a contract of insurance on the ground of concealment
A representation written in the policy even when such form as or false representation.
to admit of its being construed as an executory agreement or
promissory representation will rather be construed when SEC. 48. Whenever a right to rescind a contract of insurance is
possible, as an affirmative representation of a present fact in given to the insurer by any provision of this chapter, such right
order to save the policy from avoidance. must be exercised previous to the commencement of an
action on the contract.
SEC. 45. If a representation is false in a material point,
whether affirmative or promissory, the injured party is After a policy of life insurance made payable on the death of
entitled to rescind the contract from the time when the the insured shall have been in force during the lifetime of the
representation becomes false. insured for a period of two (2) years from the date of its issue
or of its last reinstatement, the insurer cannot prove that the
Effect of falsity of representation policy is void ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation of the insured
Entitles the injured party to rescind a contract of insurance on or his agent.
the ground of false representation. To be deemed false, it is
sufficient if the representation fails to correspond with the facts When an insurance must exercise his right to rescind
in a material point. Representations of fact are the foundation
of the contract. 1) In general - In a property insurance, you have to plead to the
court of your intention to rescind the insurance contract before
Effect of collusion of fraud of agent of insurer the insured files an action to collect the proceeds of such
insurance. Once the insured has filed an action to collect the
1) Collusion with insured – collusion between the agent and the amount, you are no longer allowed to rescind such contract.
insured in misrepresenting the facts will vitiate the policy even However, in that same action file by the filed by the insured,
though the agent is acting within the apparent scope of his you may raise it as a matter of defense that the insured has
authority. The agent thereby ceases to represent his principal, violated the rules on concealment, representation or warranty,
and represents himself, so the insurer is not estopped from etc.
avoiding the policy. 2) In life policy – The defenses are available only during the first
2) Principal agent – likewise, where the insured merely signed two (2) years of a life insurance policy.
the application form and made the agent of the insurer fill the
same for him, the insured made the agent of the insurer his Incontestability of life policies
own agent, thereby vitiating the policy.
The policy shall be incontestable after a stated period.
SEC. 46. The materiality of a representation is determined by Incontestability means that after the two years from the date of
the same rules as the materiality of a concealment. its issue, the insurer shall be estopped from contesting the
policy or setting up any defense, except as is allowed, on the
Test of materiality ground of public policy.
The materiality of the representation is to be determined not by Theory and object of the incontestable clause
the event, but solely by the probable and reasonable influence
of the facts upon the party to whom the representation is 1) As to the insurer – an insurer should have a reasonable
made, in forming his estimates of the disadvantages of the opportunity to investigate the statements which the applicant
proposed contract or in making his inquiries. makes in procuring his policy and that after a definite period,
the insurer should not be permitted to question the validity of
Materiality, a judicial question the policy, either by affirmative action or by defense to a suit
brought on the life policy by the beneficiary.
It is not left to the insurance company to determine the 2) As to the insured – the clause gives the greatest possible
materiality of the representation. The matter represented must assurance to a policyholder that his beneficiary would receive
of that character which the court can say would affect the payment without question as to the validity of the policy once
insurer’s judgment. the period of contestability passes.
Concealment and misrepresentation compared Requisites for incontestability
1) As to the facts, in concealment the insured withholds the 1) the policy is a life insurance policy
information of material facts from the insurer whereas in 2) it is payable on the death of the insured
misrepresentation, the insured makes the erroneous 3) it has been in force during the lifetime of the insured for at
statements of facts with the intent of inducing the insurer to least two (2) years from its date of issue or of its last
enter into the insurance contract. reinstatement.
2) As to the determination of the materiality, both are governed
by the same rules. The period of 2 years may be shortened but it cannot be
extended by stipulation. The phrase “during the lifetime” simply
means that the policy is no longer considered in force after the

insured has died.
Defenses not barred by incontestable clause
1) that the person taking the insurance lacked insurance

interest as required by law.
2) the cause of the death of the insured is an excepted risk.
3) the premiums have not been paid.
4) the conditions of the policy relating to military or naval
service have been violated
5) the fraud is of a particularly vicious type, as where the policy
was taken out in furtherance of a scheme to murder the
insured.
6) the beneficiary failed to furnish proof of death or to comply
with any condition imposed by the policy after the loss has
happened.
7) the action was not brought within the time specified.

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Insurance Midterm Notes 2014. USC College of Law AY 2014-2015. Room 404 Transcript.

question, the provision of the Civil Code on contracts and other

Limitations to the right of subrogation SECTION 2.

Contract of insurance Social – it is a social device whereby uncertain risks of

allows discounts for good features and impose special

Requisites of contract of insurance Subject matter in a life insurance

A insured the life of B, making himself the beneficiary. SEC 6.

2) Juridical person – may takeout insurance on property owned

FORTUNE INSURANCE vs CA in a vehicular accident. Regina Edillon, who was named a

Also, the insurance policy involved explicitly limits petitioner’s ISSUE:

whatever amount the former has been adjudged to pay Vallejos

To substitute the assignee or transferee in place of the original

Then the insured has no power to make such change without

 A farmer may insure future crops if they are to be

4) Personal accident insurance contracts – They are not

2) A change of interest in the thing insured after the occurrence

CONCEALMENT X was not aware of his illness. X, in his application, he wrote

Right to information may be waived When representation becomes a misrepresentation

1) Good faith/bad faith of the insured – a representation of the

Concealment and misrepresentation compared Requisites for incontestability

means that the policy is no longer considered in force after the

Defenses not barred by incontestable clause

1) that the person taking the insurance lacked insurance

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