Insurance TSN 1
First Exam Coverage
November 17, 2014
GENERAL PROVISIONS
SOURCES OF INSURANCE LAW IN THE PHILIPPINES
1. RA 10607 or “An Act Strengthening the Insurance
Industry, Further Amending PD No. 612, otherwise known
as the ‘Insurance Code,’ as amended xxx.” – It is the
latest Insurance Law in the Philippines. It is basically a
reinstatement of the provisions of PD 1460 which is also a
restatement of the provisions of PD 612. The new features
deal mostly with increase capitalization for insurance
companies. Otherwise, the basic provisions of the
insurance law pertaining to the type of insurance now
prevailing are the same.
2. PD 612 sort of codified the different insurance laws then
prevailing in Philippine jurisdiction. It instituted the
insurance code of the Philippines and amendments were
made by PD 1460.
3. Sometime in 1978, PD 1460 consolidated all insurance
laws into a single code and last year president Aquino
signed RA 10607.
LAWS GOVERNING INSURANCE
AS we said, insurance is a special contract. The law that
applies to insurance contracts is now RA 10607.
Q: Now in the event that there are other matters that are not
addressed, what are the laws, if any, that apply to conflicts or
issues that arise from insurance?
A: Civil Code and other Special laws shall apply suppletorily.
From the book…
1. Insurance Code of 1978
2. Civil Code –
a. Articles 739 and 2012 on void donations
b. Article 2011
c. Articles 2021-2027 with respect to life annuity
contracts
d. Article 2207 on the insurer’s right of subrogation
3. Special Laws – among such special laws on insurance are:
a. Insurance Code (PD 612, as amended)
b. Revised Government Service Insurance Act of
1977 (PD No. 1146) – for government employees
c. The Social Security Act of 1954 – for private
employees
4. Others – in addition, there is
a. RA No. 656, known as the “Property Insurance
Law”
b. RA 4898 providing life, disability and accident
insurance
c. EO 250 increasing the insurance benefits of
barangay officials
So insurance contract is primarily governed by the insurance
code but if it does not provide for a particular matter, the
provisions of the civil code, the contract and other special laws
shall apply. So, when you are confronted by a BAR question
and there is a question where you feel that the provisions of
the insurance code do not directly apply you can apply your
stock knowledge on the law of contracts from the civil code
provisions.
RIGHT OF SUBROGATION OF INSURER TO RIGHTS OF
INSURED AGAINST WRONGDOER
1. Subrogation
It is a very important principle in insurance contracts. It is the
process of legal substitution. In insurance contracts, the
insurance company is placed in the shoes of the insured once
the insurance company has paid the damages to the insured.
That is the function of equity. Equity is applied in cases
where you have to weigh the different rights of the parties to a
contract. Why? The insurance contract is designed in such a
way that nobody gains from the loss or damage. It is not
something that you earn your income over, it is not a profit
venture seeking arrangement between parties but a
compensation for loss or damage. So, once the insured suffers
loss or damage, the insured merely get the equivalent or worth
of the said loss.
Doctrine of Subrogation – the insurer after paying the
amount covered by the insurance policy steps into the shoes of
the insured
2. Purposes of subrogation condition in policy
Its principal purpose is to make the person who caused the
loss, legally responsible for it and at the same time prevent the
insured from receiving a double recovery from the wrongdoer
and the insurer.
So the injured cannot run after the insured having received
compensation from the insurance company. The insured also
cannot run again the third party who caused the loss or
damage. So who should run against the third party? It should
now be the insurance company.
3. Right of subrogation applicable only to property
insurance
Subrogation is not applicable to life insurance contract because
the pecuniary value of human life can seldom be determined
with accuracy.
4. Privity of contract or assignment by insured of
claim not essential
The defendant cannot raise the defense of privity of contract.
For example, XYZ Company is the insurer of a building owned
by D Company. Now, here comes Pitt (?), Pitt suffers a slip and
fall. You remember your torts? Pitt now goes after D, the
insured. Now, XYZ will come to the rescue of D by paying for
the damages caused by the injury suffered by Pitt. Notice that
there is really no privity of contract between Pitt and XYZ but
XYZ it still liable to pay Pitt because of the insurance contract
between XYZ and D.

So the privity of contract, therefore, is not a proper defense in
an insurance contract. What is necessary is only the
subrogation receipt. If the insurance company intends to
recover, it must prove that it was the negligence, for example,
on the part of the maintenance operator that caused the slip
and fall or the injury. It can now go after the maintenance
operator.
5. Loss or injury for risk must be covered by the policy
Under Article 2207 of the Civil Code, the cause of the loss or
injury must be a risk covered by the policy to entitle the
insurer to subrogation.
It simply means that the loss must be one of those
enumerated in the policy. In insurance law, the insurer will try
to really minimize his loss. As much as possible, when
something happens, they will run thru a check list because
they really want to minimize its loss or to share the loss with
other insurance companies. Now, if the insured wants to
recover as much as possible, all the risks that the insured can
imagine must be indicated or included in the policy itself. If
there are risks not covered by the policy, you can have it
covered by paying additional premium. Otherwise, the insured
will not be paid at all.
6. Right of insured to recover from both insurer and
third party
Basis: Principle of Indemnity
No double recovery. However, if the amount paid by the
insurance company does not fully cover the injury or loss, the
aggrieved party, i.e. insured, can recover the deficiency from
the person responsible for the loss or injury.
NOTE: This is wholly applicable only to property insurance. In
life insurance you have as many insurance policies as you can
afford.
7. Right of insured to recover from insurer instead of
the third party
As long as the insured can show that he has an insurance
contract with the insurance company, the insured can right
away ask for indemnity. That is why it is always good to be
covered by insurance policies. If the insurer would ask the
insured to seek redress from the third party, you will later on
learn that it is an act of unfair claim settlement which can
suspend the license of the said insurance company.
8. Right of insurer against third party limited to
amount recoverable from latter by the insured
As the insurer is subrogated merely to the rights of the
insured, it can necessarily recover only the amounts
recoverable by the insured from the party responsible for the
loss.
Remember that when an insurance company exercises its right
of subrogation the insurance company can only recover from
the third party that amount which the insured can recover
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from the third party. It cannot ask for more or for less, this is
because of the principle of indemnity and subrogation.
9. Exercise of right of subrogation by insurer
discretionary
Is it mandatory that the insurance company exercise its right
of subrogation at all times?
NO. The insurance company is not under any pain of law to
exercise its right of subrogation. The right of subrogation can
be exercised only in accordance with the sound discretion of
the insurance company. Sometimes the insurance company
would just forego claiming refund for the damages that it has
paid to the insured for practical reasons. If it is not a big
amount, the insurance company would just forego refund.
10. Loss of right of subrogation by act of the insured or
insurer
If the insured enters into a settlement with the third party, can
the insurance company still run after the third party?
The settlement entered into by the insured with the third party
diminishes or releases the third party of any liability. If
payment has already been paid by the insurance company,
after payment but, let’s say, there is still a recoverable
amount, the release of the third party also affects the
insurance company’s right of subrogation. The insurance
company also cannot seek refund for the amount paid but
what can happen is the insured has the obligation to pay back
to the insurance company whatever amount it has paid to the
third party. For defeating the insurer’s right of subrogation, the
insured is under obligation to return to the insurer the amount
paid thereby entitling the latter to recover the same.
Now, I want you to look at the case of Manila Mahogany
Manufacturing Corp vs. CA, 154 S 650 and Pioneer
Insurance & Surety Corp. vs. CA, 175 S 668.
11. Effect of assignment by insured of its right against
third party to insurer
In a case where the insured (shipper) has assigned its rights
against defendant (carrier) for damages caused to the cargo
shipped to the insurer which paid the amount represented by
the loss, the case is not between the insured and the insurer
but one between the shipper and the carrier because the
insurance company merely stepped into the shoes of the
shipper.
APPLICABILITY OF THE CIVIL CODE
So again, the provisions of the Civil Code apply suppletorily.
The provisions of the Civil Code may be applied to matters of:
ü Perfection of the insurance contract – was the insurance
contract perfected considering that the acceptance by the
insurance company of the policy or the application for
insurance was not received by the other party?
ü Consent – it is also very essential. Was the policy vitiated
by error?

ü Nullity of the contract for false or fraudulent consideration
ü Rescission – what are the effects of rescission? Under the
civil code, it is mutual restitution
ü Common law wife – disqualified from becoming a
beneficiary because of article 2012 in relation to article
739.
There was actually a BAR question, 2 or 3 years ago,
where this was asked. Common law wife and their
children were made beneficiaries of a life insurance policy.
The legal family then questioned the inclusion of the
common law wife, was the designation of the beneficiaries
valid? What about the children of the common law wife
and the policy holder?
ü Award of moral and exemplary damages in case of
unreasonable delay in the payment of insurance claims.
CONSTRUCTION OF THE INSURANCE CODE
There is a body of jurisprudence that is established in more
sophisticated jurisdictions in North America, etc. If there are
questions on interpretation, you can apply established
interpretations given by the courts of the said jurisdiction when
it can be proven that the statutes in question were actually
lifted from those jurisdictions. You can bring in the
interpretation of the jurisdiction, other than the Philippine
jurisdiction, and apply it to your own case.
(Ma’am talking about the development of the insurance
industry and the Philippine economy)
SEC. 2. Whenever used in this Code, the following terms shall
have the respective meanings hereinafter set forth or
indicated, unless the context otherwise requires:
(a) A “contract of insurance” is an agreement whereby one
undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent
event.
A contract of suretyship shall be deemed to be an insurance
contract, within the meaning of this Code, only if made by a
surety who or which, as such, is doing an insurance business
as hereinafter provided.
(b) The term doing an insurance business or transacting an
insurance business, within the meaning of this Code, shall
include:
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) Making or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the
surety;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized as constituting
the doing of an insurance business within the meaning of this
Code;
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(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that
no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business.
(c) As used in this Code, the term Commissioner means the
Insurance Commissioner.
Concept of Insurance
Q: What is a contract of insurance?
A: A “contract of insurance” is an agreement whereby one
undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent
event. (Sec. 2(a))
Q: What is the consideration here?
A: The consideration is the premium paid by the insured to the
insurer.
So in insurance contract, the one factor that distinguishes it
from other contracts is that the consideration is specifically
called a “premium”. Failure to pay premium will terminate the
insurance contract.
Q: If you belatedly pay the premium, will it cure the defect in
the contract?
A: It depends on the policy. In life insurance policy, there is
such a thing as a “grace period”. The grace period may be for
a period of thirty days and within that period you can still pay
the premium and it’s as though your payment never lapsed. In
property insurance, however, it is very crucial that you pay the
premium on time; otherwise, the contract will simply lapse.
Contract of Suretyship
It is only an insurance contract if made by a surety who or
which, as such, is doing an insurance business.
Doing an Insurance Business
Q: How do you define “doing an insurance business”?
A: The term doing an insurance business or transacting an
insurance business, within the meaning of this Code, shall
include:
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) Making or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity
of the surety;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized as
constituting the doing of an insurance business within
the meaning of this Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing in a

manner designed to evade the provisions of this
Code. (Section 2(b))
Q: Sometimes you come across companies that put out
advertisements for insurance coverage, are these companies
considered engaged in insurance?
A: YES. They are engaged in the business of insurance
because they are proposing to make an insurance contract but,
of course, at that stage there no perfected contract of
insurance yet. In other words, you have to fill up the details (in
the application) and send it to the insurance company. Is there
a perfected insurance contract once the insurance company
receives the application? Not yet, the insurance company must
accept the application and such acceptance must be relayed to
the applicant. It is only when the insurance company has made
known to the applicant that they have accepted the application
that a perfected contract of insurance arises. If there is no
perfected contract, the contract is null and void.
In the application of the provisions of this Code, the fact that
no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business.
The subparagraph of section 2 tells us that just because no
profit was derived from contract does not mean that there is
no perfected insurance contract.
Now let’s go to the determination of the existence of the
contract…
DETERMINATION OF THE EXISTENCE OF THE
CONTRACT
Elements of the contract:
1. Subject matter – the subject matter is the thing insured in
the policy
2. Consideration – is the premium
3. Object or purpose – transfer and distribution of risk of loss
In a nutshell that is what an insurance contract is.
NATURE AND CHARACTERISTICS OF AN INSURANCE
CONTRACT
These are the characteristics that set the insurance contract
apart from other contracts.
1. Consensual – there must be a meeting of the minds
between the parties
2. Voluntary
3. Aleatory – something must happen before the other party
is bound to perform his obligation; dependent upon a
contingency
4. Executed as to the insured after the payment of the
premium and executory on the part of the insurer
5. Conditional – subject to the happening of an event insured
against
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6. A contract of indemnity – you are indemnified only in so
far as the loss you suffered
7. Personal contract
November 24, 2014
(Ma’am reviewing last meeting’s discussion)
DISTINGUISHING ELEMENTS OF THE CONTRACT OF
INSURANCE
The contract of insurance made between the parties is
distinguished by the presence of 5 elements, namely:
1. The insured possesses an interest of some kind
susceptible of pecuniary estimation, known as “insurable
interest”;
2. The insured is subject to a risk of loss through the
destruction of that interest by the happening of
designation perils;
3. The insurer assumes that risk of loss;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group or substantial
number of persons bearing similar risk; and
5. As consideration for the insurer’s promise, the insured
makes a ratable contribution called “premium,” to a
general insurance fund.
COPING WITH RISK
I did mention in our past meeting that in so far as insurance
companies, in their business of insurance, what they are most
concerned with is how they could come up with schemes to
cope with risk.
The inherent uncertainty of events can be described in terms
of chance or probability. A person usually makes some sort of
calculation, perhaps instinctively, before deciding to engage or
not to engage in an activity. So similarly, an insurance
company also makes calculations. An insurance company may
jack-up the premium if the applicant is considered “high risk”
or when a building is already old. There are people called
“insurance adjuster” who evaluates the pecuniary value of the
loss and the insurance company would consider highly their
recommendation.
1. Limiting the probability of loss
For example, many industries utilize complex, dangerous
machinery, which place the employees who use them at
some risk. However, the probability that an employee will
lose a finger or hand in a cutting machine is reduced if
guards or other safety devices are used around the cutting
device. Sometimes, insurance companies would advise the
management that there should be hazards installed to
minimize the probability of the occurrence of an accident
that would cause damage or loss.
2. Limiting effects of loss
For example, you are a passenger in a vehicle. In case
collision occurs, for sure, there will be damage, but how

would you limit the effects of loss? By encouraging the
wearing of seat belt, among others.
3. Self-insurance or self-financing
4. Ignoring risk
5. Transferring risk to another
These are the different devices of which insurance companies
may reduce the risk.
FIELDS OF INSURANCE
1. In general
2. Social (government) insurance – example is Obama’s
health care insurance (ma’am gives lengthy opinion on
Obama’s administration and other health programs)
3. Voluntary (private) insurance
CLASSIFICATION BY INTEREST PROTECTED
1. First-party vs. third-party insurance
Q: What is the difference between first-party and third-party
insurance?
In first-party insurance, the contract between the insurer and
the insured is designed to indemnify the insured for loss
suffered directly by the insured.
In third-party insurance, on the other hand, the insured’s loss
is “indirect” in the sense that the third party suffers the
“direct” loss. The liability insurer will reimburse the insured for
any liability the insured may have to the third party, but in the
event of payment, the insured merely serves as a conduit for
transmission of the proceeds from the insurer to the third
party. It is third-party because ultimately, the proceeds are
received by a third-party. Example of which is a motor vehicle
insurance.
Life Insurance
Q: Is life insurance a first-party or third-party insurance?
A: It is a first-party insurance. There are instances, however,
that the owner of the policy designates a beneficiary to receive
the proceeds of the policy, but this does not mean that the
insurance is third-party.
Health Insurance
Health insurance can be categorized as a third-party
insurance. The health care provider suffers a loss in a sense
when it provides medical care, but the insurance is designed,
first and foremost, not to help health care providers but to
help individuals who incur medical bills. The health insurer
pays the provider for health care services directly rather than
paying it the insured. This is same with the concept of
transportation insurance explained earlier, that the insurance
company directly pays the provider but it is to the benefit of
the insured. The example here (book) is the auto repair shop
that fixes the insured’s automobile – you have a car that
suffered damage because of collision, the insurance company
will pay the auto repair shop directly not because the auto
repair shop is privy to the insurance contract. Payment was not
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for the benefit of the repair shop but is for the benefit of the
insured.
No-fault Insurance
It is the term that you often hear in compulsory motor vehicle
insurance. When we say “no-fault insurance,” there is no need
to determine who is at fault at the first instance before the
insurance receipt is released. As long as damage is incurred
and is proven, then the insurance company has no recourse
but to pay the insured.
It is essentially the substitution of first-party insurance for tort
liability. The term “no-fault” connotes that the victim recovers
for his loss from his own insurer, without regard to the
fault of the third-party or his own contributory fault.
2. All-risk versus specified-risk
It is important to determine if your policy is an all-risk policy of
a specified-risk policy.
What is an all-risk policy? It means it covers all risks except
those excepted in the policy. So, in an all-risk, the insurance
company covers everything with a few exceptions.
Who bears the burden of proof?
All-risk Specified risk
Burden is with the insurer to Burden is ordinarily placed
prove that the loss falls within with the insured to initially
an explicit exception to prove that the loss falls within
coverage. the policy’s provisions on
coverage.
ü If the loss is due to normal wear and tear, the loss is not
fortuitous and, therefore, is not insurable.
ü You have to remember that when you have an all-risk
policy, it does not mean that the insurance company
cannot put up a defense. If the loss is by reason of fraud,
if there is wilful act or negligence on the part of the
insured, then that can be raised as a defense
CONSTRUCTION OF INSURANCE CONTRACTS
General Rule: Contracts of insurance are to be construed or
interpreted liberally in favor of the insured and strictly against
the insurer. Why? A policy of insurance is a contract of
adhesion, that is to say, most of the terms of the contract do
not result from mutual negotiation between the parties.
Exception: When the intention of the policy is clear or the
language is sufficiently clear to convey the meaning of the
parties.
CHAPTER 1
THE CONTRACT OF INSURANCE
TITLE 1
WHAT MAY BE INSURED
SEC. 3. Any contingent or unknown event, whether past or
future, which may damnify a person having an insurable

interest, or create a liability against him, may be insured
against, subject to the provisions of this chapter.
The consent of the spouse is not necessary for the validity of
an insurance policy taken out by a married person on his or
her life or that of his or her children.
All rights, title and interest in the policy of insurance taken out
by an original owner on the life or health of the person insured
shall automatically vest in the latter upon the death of the
original owner, unless otherwise provided for in the policy.
SEC. 4. The preceding section does not authorize an insurance
for or against the drawing of any lottery, or for or against any
chance or ticket in a lottery drawing a prize.
SEC. 5. All kinds of insurance are subject to the provisions of
this chapter so far as the provisions can apply.
Lottery
If you take out an insurance for lottery, that cannot be a legal
insurance. A contract of insurance is not a wagering contract
but a contract of indemnity. Class, you cannot have a valid
insurance contract over a lottery or a raffle.
TITLE 2
PARTIES TO THE CONTRACT
SEC. 6. Every corporation, partnership, or association, duly
authorized to transact insurance business as elsewhere
provided in this Code, may be an insurer.
Who are parties to the insurance contract? The insurer
and the insured
Who may be insured? Section 6
December 1, 2014
Let’s go to this very interesting area of law called Insurance.
We’re in Title 2, Parties to the Contract. We have to determine
who are the proper parties in an insurance contract.
Sec. 6. Every person, partnership, association, or corporation
duly authorized to transact insurance business as elsewhere
provided in this code, may be an insurer.
So it can be a person, a corporate entity, an association, a
corporation. What about a non-profit organization? Can it
conduct the business of insurance? A non-profit organization,
you have to determine first if that non-profit organization is an
association. If it is an association or a corporation, partnership
duly organized under the laws of the Philippines and complying
with the requirements under the Insurance Code then that
nonprofit-organization can also be in the Business of
insurance.
Now, Section 7:
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Sec. 7. Anyone except a public enemy may be insured.
So we know who can be an insurer. Now we have to know
who can be the insured. Section 7 says that, anybody except
a public enemy may be insured.
How do you define a public enemy?
A public enemy designates a nation with whom the Philippines
is at war and it includes every citizen or subject of such nation.
The term may be taken to mean “alien enemy.” A mob,
however numerous they may be, or robbers or thieves
whoever they may be, are never considered public enemies for
purposes of the above provision.
What about a private corporation? It’s not a nation. Can a
private corporation be treated as a public enemy? How can
you tell that a private corporation is a public enemy? Is there a
test that we used? What do you look at to determine
citizenship of a corporation? What do you mean by the control
test?
During wartime, a private corporation is deemed an enemy
corporation although organized under the Philippine laws if
they are controlled by enemy aliens. This is the so called
“control test” whereby a corporation is deemed to have the
same citizenship as the controlling stockholders in time of war.
(Filipinas Cia de Seguros vs Hunefeld & Co)
Atty. Angeles: Citizens of a nation which our country is at war.
So if the controlling stockholders are not citizens of a nation
against which we are at war then they are not considered
public enemy.
Now, what is the effect of war on an existing property
insurance? And what is the effect of war on existing life
insurance?
By the law of nations, all intercourse between citizens of
belligerent powers which is inconsistent with a state of war is
prohibited. The purpose of war is to cripple the power and
exhaust the resources of the enemy. It is inconsistent that the
subjects of one country should lend their assistance to protect
by insurance, the commerce or property of belligerent alien
subjects or to do anything detrimental to their country’s
interest.
Of course, if the parties are not rendered enemy aliens by the
intervention of war, the policy continues to be enforceable
according to its terms and the laws governing insurance and
the general rules regarding contracts.
1. With respect to property insurance
The rule adopted in the Philippines is that an insurance policy
ceases to be valid and enforceable as soon as an insured
becomes a public enemy
2. With respect to life insurance

Three rules of doctrine have arisen. One of these rules is the
United States Rule which declares that the contract is not
merely suspended but is abrogated by reason of nonpayment
of premiums, since the time of payments is peculiarly of the
essence of the contract. However the insured is entitled to the
cash or reserve values of the policy (if any), which is the
excess of the premiums paid over the actual risk carried during
the years when the policy had been in force.
At the end of the war is the property insurance reinstated? Can
a Life insurance policy be reinstated?
Since the effect of war is not merely to suspend but to
abrogate the contract of insurance between citizens of
belligerent states, the termination of the war does not revive
the contract. Consequently, the insurer is not liable even if the
loss is suffered by the insured after the end of the war.
Atty. Angeles: Allright, that’s very clear that a public enemy
cannot be insured. Theoretically speaking, let’s say the
MILF/MNLF for example, are these organizations considered
public enemy of the States? Can they be insured under
section 7? What about the CPP-NPA?
These associations/organizations for purposes of discussion are
not treated as enemies of the state. If you take a look at the
definition, being a public enemy there is a sentence there:
A public enemy designates a nation with whom the Philippines
is at war and it includes every citizen or subject of such nation.
The term may be taken to mean “alien enemy.” A mob,
however numerous they may be, or robbers or thieves
whoever they may be, are never considered public enemies for
purposes of the above provision. (De Leon)
Of course I’m not saying that the MILF/MNLF/CPP-NPA is a
mob or robbers, nothing of that sort. What I’m saying is, this
particular provision; Section 7, really refers to a nation we are
at war with. So if there is no war then this particular section
does not apply. The famous case under this Section would be
Filipinas Cia de Seguros vs. Christern Huenefeld & Co.
Remember class, anybody can be insured except a public
enemy.
Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or
assigns a policy of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the mortgagor, who does
not cease to be a party to the original contract, and any act of
his, prior to the loss, which would otherwise avoid the
insurance, will have the same effect, although the property is
in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein named, with the
same effect as if it had been performed by the mortgagor.
Section 8 gives a situation where there is a mortgagor and a
mortgagee.
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Can you give us the difference between the insurable
interest of the mortgagor and the insurable interest of
the mortgagee over the property?
Separate insurable interest
The mortgagor and the mortgagee have each an insurable
interest in the property mortgage (Sec.13), and this interest is
separate and distinct from the other.
Consequently, insurance taken by one in his own name only
and in his favor alone, does not inure to the benefit of the
other (Sec. 53). And in case both of them take out separate
insurance policies on the same property, or one policy covering
their respective interests, the same is not open to objection
that there is double insurance (Sec 93).
Extent of insurable interest of mortgagor and
mortgagee
The mortgagor of property, as owner, has an insurable interest
therein to the extent of its value, even though the mortgage
debt equals such value. The reason is that the loss or
destruction of the property insured will not extinguish his
mortgage debt.
The mortgagee (or his assignee) as such has an insurable
interest in the mortgaged property to the extent of the debt
secured, since the property is relied upon as security thereof,
and in insuring, he is not insuring the property itself but his
interest or lien thereon. His insurable interest (Sec 10) is prima
facie the value mortgaged and extends only to the amount of
the debt, not exceeding the value of the mortgaged property.
Such interest continues until the mortgage debt is
extinguished.
Thus, separate insurances covering different insurable interests
may be obtained by the mortgagor and mortgagee.
Atty. Angeles: So we have a situation where there is a
mortgagor and mortgagee. It is a credit relationship between
the two parties. It is important to know that different parties
can have different insurable interest over one property. They
would have different insurable interest in the sense that the
mortgagor as the owner would have a different interest over
the property. What sort of interest would that be? His/her
interest as owner over the property. The mortgagee on the
other hand, his/her interest over the property would actually
just be simply the credit that he or she extended to the
mortgagor. There is no double insurance in this respect. They
are separate insurable interest.
Let’s take a look at Section 8.
. . .“a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to
the mortgagee, or assigns a policy of insurance to a
mortgagee,”
So we have two situations. The mortgagor takes on an
insurance policy for the property in his own name but provides
that the loss shall be payable to the mortgagee or assigns the

policy itself to the mortgagee. Did the mortgagor loss his
interest over the property? The answer is NO. The mortgagor
continues to have insurable interest over the property and
such he does not ceased to be a party to the original contract.
What is the effect now of that arrangement? What is the effect
on the mortgagor’s actions? What happens now when he
performs certain actions during the period of the insurance
contract? What are the consequences of his actions? What is
the effect if the mortgagor performs an act prior to the loss
that will abort the insurance? What is the effect on the
insurance?
Insurance of the mortgagor for the benefit of the
mortgagee or policy assigned to the mortgagee.
Under Section 8, where the mortgagor of the property effects
insurance in his own name providing that the loss shall be
payable to the mortgagee, or assigns a policy of insurance to
the mortgagee, the following are the legal effects:
1. The contract is deemed to be upon the interest of the
mortgagor, hence, he does not cease to be a party to the
contract;
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the mortgagee
even if the property is in the hands of the mortgagee;
3. Any act which under the contract of insurance is to be
performed by the mortgagor may be performed by the
mortgagee with the same effect;
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit; and
5. Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished.
Let’s try to simplify Section 8.
Let’s take a look at section 8 because it is a basic provision
that will guide the relationship of the mortgagor and a
mortgagee. Earlier we said that when the mortgagor of a
property effects insurance in his own name - here comes the
owner of the building taking out an insurance in his own name.
But In that policy, by way of rider or clause probably, the
mortgagor provides that in case of loss the proceeds shall be
payable to the mortgagee or that the policy of the insurance is
assign to the mortgagee. So those are the two instances:
1. loss the proceeds shall be payable to the mortgagee
or;
2. that the policy of the insurance is assign to the
mortgagee.
In those 2 instances the insurance policy is still deemed to be
in the interest of the mortgagor. So he does not lose his
insurable interest over the property. However, (this is the
important part) any act of his, meaning the mortgagor prior to
the loss which would otherwise avoid the insurance. Actions
prior to the loss that would nullify the insurance will have the
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same effect although the property is in the hands of the
mortgagee. Let’s try to visualize that.
The mortgagor instead of strictly following the policy that
states no flammables in the building. He nonetheless puts
flammable materials inside the building. That fact alone would
have nullified or avoided the insurance because that would be
in violation of the policy. Even if the deed or the title to the
land together with the building has already been delivered to
the mortgagee. Even if the deed has already been delivered to
the mortgagee, what happens? It will still void the insurance
policy. Why? Because these actions were in violation of the
policy. In this arrangement the mortgagee actually suffers.
Now, vice versa, if the mortgagee wants to perform actions
that the mortgagor would have otherwise been allowed to
perform the mortgagees action would be, for example, the
mortgagor does not pay the premium and then the mortgagee
pays the premium, that would still benefit the insurance policy.
. . . “but any act which, under the contract of
insurance, is to be performed by the mortgagor, may
be performed by the mortgagee therein named, with
the same effect as if it had been performed by the
mortgagor”.
So actions done by the mortgagor prior to the loss which
would nullify the insurance contract, would affect the
mortgagee in the same manner that actions performed by the
mortgagee will redound to the benefit of the mortgagor. That’s
the simple restatement of Section 8.
What is the extent of the insurable interest of the mortgagor to
the value of the property? When we are talking of property
insurance, because it is a contract of indemnity when the
owner of the property suffers loss, he/she may only get the
value of the loss not the value of the property itself. So if the
building is partially damaged, the owner does not get the value
or the cost of the entire building. The owner will only get
whatever has been lost, that portion that is considered as lost.
As far as the mortgagee is concerned his insurable interest is
again limited to the credit. If there has been partial payment
and the loss occurs. How much is he entitled to recover? Only
the balance of the credit. That’s just what each of them is
entitled to recover.
I want you to go over, just read through the Insurance by the
mortgagor for his own interest and insurance of the mortgagor
for the benefit of the mortgagee or policy assigned to the
mortgagee.
Insurance by mortgagee of his own interest
Right of mortgagee in case of loss
Where the mortgagee, independently of the mortgagor,
insures his own interest in the mortgaged property, he is
entitled to the proceeds of the policy in case of loss before
payment of the mortgage.
Subrogation of insurer to the right of mortgagee

In such case, the mortgagee is not allowed to retain his claim
against the mortgagor but it passes by subrogation to the
insurer to the extent of the insurance money paid.
Change of Creditor
In other words, the payment of the insurance of the
mortgagee by reason of the loss does not relieve the
mortgag0r from his principal obligation but only changes the
creditor.
Insurance by the mortgagor of his own interest
For his own benefit
The mortgagor may insure his own interest as owner for his
benefit. In case of loss, the insurance proceeds do not inure to
the benefit of the mortgagee who has no greater right than
unsecured creditors in the same.
For the benefit of mortgagee
It is competent, however, for the mortgagor to take out
insurance for the benefit of the mortgagee, where he pays the
insurance premium, making the loss payable to the mortgagee.
There is a discussion under the topic insurance by the
mortgagor of his own interest. There is a discussion of what is
the standard mortgage clause.
A “Standard mortgage Clause” containing a collateral
independent contract between the mortgagee and the insurer
may be attached.
A standard mortgage clause is an agreement whereby the
mortgagee and the insurer enter into a separate contract. Now
do you ask is there a need for standard clause for all mortgage
contract. This is it actually. But there are also mortgage
contracts where the – in banks for example. The Banks would
require endorsements(?) of the fire insurance policy. An
endorsement(?) would be for the benefit of the bank for
example or of the mortgagee that entered into a mortgage
contract with the mortgagor.
Sec. 9. If an insurer assents to the transfer of an insurance
from a mortgagor to a mortgagee, and, at the time of his
assent, imposes further obligation on the assignee, making a
new contract with him, the act of the mortgagor cannot affect
the rights of said assignee.
Section 9 Discusses about transfer or assignment of insurance
policy. Can the insurance policy be transferred? Of course, but
under certain conditions.
What is the consequence or the effect when the insurance
company assents or gives consent to the transfer of the
insurance policy to the mortgagee? What is the exception?
Section 9 only gives the effect if the insurer agrees to the
transfer of the policy and, at the time of his assent, imposes
new obligations on the assignee.
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What about the actions of the mortgagor can it affect the
rights of the assignee? No, only when the insurance company
imposes further conditions/obligations thereby making a new
contract. Why? Why is it the actions of the mortgagor do not
affect the new contract? What is the legal operation that took
place there? Novation, because the original insurance contract
was novated.
Let’s take a look at the different policies and how does section
9 apply as to fire policy.
Fire policy is not transferrable without the consent of the
insurance company, because a fire policy is a personal policy.
The insurance company needs to give consent to the transfer
of the policy because he wants to know if the new party is
reliable, there is no fraud, or if he is a party that the insurance
company does not want to insure.
What about marine policy? It says generally it is assignable
even though without the consent of the insurer unless required
by the terms of the policy. However the author believes that it
is still not assignable without the consent of the insurer.
Casualty policy, it’s more like liability insurance, it is also not
assignable unless the insurance company gives consent.
As to Life policy, the policy may be freely assigned before or
after the loss occurs, to any person whether he has any
insurable interest or not. The assignee, whether that assignee
has insurable interest or not. But of course the person taking
life insurance must have insurable interest. And we will find
out later on what are those insurable interests.
Right of the mortgagor to assign insurance policy to
mortgagee is recognized in Section 9. Remember it is possible
to assign the proceeds of the policy to the mortgagee. It is
allowed under section 8. Section 9 only refers to situation
where the insurer assents to the transfer but further imposes
obligations. In that case, the actions of the mortgagor do not
affect the new contract between the insurance company and
the mortgagee. Why? Because the original contract of
insurance is considered novated.
What are the kinds of insurable interest?
Section 10 Every person has…
Student: Under Section 10 par.C, the insurance is taken out by
the insured upon the of the life of the other. The assured here
is the creditor while the insured here is the debtor because the
creditor takes out an insurance policy for his benefit upon the
life of the debtor so that in the event of the happening of the
risk insured against such as the death of the debtor, the
creditor may still claim the insurance proceeds proper.
What is the meaning of insurable interest being pecuniary in
interest?
In general, a person is deemed to have an insurable interest in
the subject matter insured where he has a relation or
connection with or concern in it that he will derive pecuniary or
financial benefit or advantage from its preservation and will

suffer pecuniary or financial benefit or advantage from its
destruction, termination, or injury by the happening of the
event insured against.
Two general classes of life policies:
1) Insurance upon one’s life- In one class are those
taken out by the insured upon his own life for the benefit of
himself, or of his estate, in case it matures only at his death,
or for the benefit of a third person who may be designated as
beneficiary.
2) Insurance upon life of another- In the other class
belong policies taken out by the insured upon the life of
another .
REMEMBER:
An application for insurance on one’s own life does not usually
present an insurable interest question. On the other hand,
when one applies for insurance on the life of another for the
former’s benefit, he must have an insurable interest in the life
of that person.
Section 10 par. A) indicates that the husband has an insurable
interest in the life and health of himself, of his wife and of his
children.
What about insurable interest over the life of their mother or
father? Where does it fall?
It falls under Section 10 par. B) Of any person on whom
depends wholly or in part for education or support, or in whom
he has a pecuniary interest.
Let’s say you are in graduate school and your father is paying
for your tuition fee, do you have insurable interest over the life
of your father? It seems so because your father is paying for
your matriculation.
Section 10 par. C) Of any person under a legal obligation to
him for the payment of money, or respecting property or
services, of which death or illness might delay or prevent the
performance.
If you are financial executive who runs the business of your
employer, the latter has an insurable interest over your life
because if anything happens to you your employer will suffer
greatly for your loss.
Sec. 10 par. D) Of any person upon whose life any estate or
interest vested in him depends
Example: A receives as legacy , the usufruct of a house. The
ownership of which is vested in B. It is provided in the legacy
that should B die first, both the usufruct and the ownership of
the property will pass to C.
In this case, A has an insurable interest in the life of B for A
will suffer pecuniary loss by B’s death.
To sum it up, the insurable interest in the life or health of a
person is one that is defined in section 10. All other
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relationships there can be no insurable interest. You may have
an interest but not insurable. In other words, if the nature of
the insurance cannot be found under sections 10 pars. A, B,C,
or D, then it is not an insurable interest at all.
You play golf. It seems that your cuddy brings you luck. You
always win whenever he is your cuddy. You tell to yourself that
you have an insurable interest over the life of your cuddy. You
may have interest over his life but it is not insured. It is not an
insurable interest that can allow to get insurance policy for
you. The law is very specific. It is not one of those allowed by
the law.
There are certain insurance policies that are tainted with fraud
such as when a wagering policy has been taken out by the
insured on his life at the behest of a third person who is
named as beneficiary. Evidence of a wagering policy is usually
found in such facts as:
a.) That the original proposal to take out insurance was
that of the beneficiary;
b.) That premiums are paid by the beneficiary;
c.) That the beneficiary has no interest, economic or
emotional, in the continued life of the insured;
d.) The insured designates himself as the beneficiary.
On finding that such policy is primarily a wager, the court will
generally void the policy entirely.
In any case, there is no question that under our law, a person
has an insurable interest in his own life. But if the policy is
applied for and owned by someone other than the insured, the
applicant-owner must have insurable interest in the life of the
insured.
Similarity between a life insurance policy and a civil donation
A life insurance policy is no different from a civil donation
insofar as the beneficiary is concerned. Both are founded upon
the same consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds
or profits of said insurance.
Insurable interest in the life of another
The mere fact that two persons are engaged to be married
does not give one an insurable interest in the life of the other.
The law talks of spouses and not fiancées. It is very specific.
However an insurance policy can be taken out over the ring
that is given to the fiancé.
Insurable interest in life of person upon whom one depends for
education or support or in whom he has a pecuniary interest.
Blood or material relationships fit the concept of insurable
interest. The following have an insurable interest in each
other’s life since under the provisions of Article 195 of the
Family Code, they are obliged to support each other:

a) The spouses;
b) Legitimate ascendants and descendants;
c) Parents and their legitimate children and the
legitimate or illegitimate children of the latter;
d) Parents and their illegitimate children and the
legitimate or illegitimate children of the latter;
e) Legitimate brothers and sisters, whether of the full or
half-blood.
The relationship that is covered by this category refers to a
relationship brought about by family or blood not by in laws or
affinity.
. So if you insure somebody because you depend on that
person for education or support, that means that education or
support is owed to you because of blood relationship. Even
illegitimate relationship, it is still insurable because there is a
blood relationship that can be established.
When pecuniary benefit essential.
In other cases, mere blood relationship does not create an
insurable interest in the life of another. There must be an
expectation of pecuniary benefit in the life of the insured to
sustain the insurance, that is, a risk of actual monetary loss
from his death.
Section 11. The insured shall have the right to change the
beneficiary in the policy, unless he has expressly waived this
right in said policy.
Q: Can the insured changed his beneficiary?
A: Yes, unless there is express waiver in the policy.
Q: Who can be the legal beneficiary?
A: The beneficiary in a life insurance policy may be either the
insured himself or his personal representatives or someone
other than the insured. Where the beneficiary designated is a
person other than the insured, such person may occupy one of
three relations to the insured: a.) insured himself, b.) third
person who paid a consideration, and c.) third person through
mere bounty of insured.
Q: Does a beneficiary need to have an insurable interest?
A: NO. beneficiary ka lang eh. You are merely the recipient of
the liberality of the insured.
Limitations in the appointment of beneficiary
We said in the early of the course that the provisions of the
Civil Code applies suppletorily to insurance contracts. Under
Article 2012, any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary. So
this provision puts the limitation on the designation of the
beneficiary. We know that insured can designate his own
beneficiaries in both that he can also change them unless he
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has expressly waived his right. But that right to designate his
own beneficiary is limited by Article 2012 of the Civil Code
which further refers to Article 739.
Article 739. The following donations shall be void:
1.) Those made between persons who were guilty of
adultery or concubinage at the time of donation;
2.) Those made between persons who were guilty of the
same criminal offense, in consideration thereof;
3.) Those made to a public officer or his wife,
descendants and ascendants, by reason of his office.
Applying the same to insurance contracts, if the beneficiary of
the insurance policy is guilty of adultery or concubinage even
without finding of guilt, that designation of such beneficiary is
null and void.(NB: we’re only talking of parties directly
engaging in concubinage and not their children.)
Situation:
Out of adulterous relationship of A and B, three children were
born. If the designation of the beneficiaries in the insurance
policy was B (mistress) and our three children. So B’s share in
the policy is null and void pursuant to Article 739 while the
illegitimate children’s shares are not because they are not ones
in the adulterous relationship.
Q:During the lifetime of the insurance policy, does the
designation of the beneficiary limit the insured’s control over
the benefits of the policy? Does the beneficiary have the
control over the policy itself?
A: NO because the beneficiary’s right over the proceeds is
realized only when the loss of life has already occurred. Upon
the death of the insured, that’s when the right of the
beneficiary accrues. The beneficiary has only an inchoate right.
So much so that the insured decides to surrender the policy,
the beneficiary can do nothing about it. The insured can do
anything on the policy even without the consent of the
beneficiary.
Q: When the designation of beneficiary is irrevocable, what is
the nature of his right?
A: The beneficiary acquires an absolute and vested interest to
all benefits accruing to the policy.
Q: When does it accrue?
A: from the date of its issuance and delivery, including that of
obtaining a policy loan to the extent stated in the schedules of
values attached to the policy.
Q: What happens now when the insured wants to surrender
the policy or pays out a loan, what he should do?
A: He must obtain the consent of the beneficiary. Without the
consent of the beneficiary, all actions of the insured in the
policy are rendered void.

Measurement of vested interest of beneficiary in policy
The vested right or interest of the beneficiary in a policy
should be measured on its full value and not on its cash
surrender value for in case of death of the insured, said
beneficiary is paid on the basis of its face value. Face Value is
the value of the policy as stated on the cover of the policy.
Cash surrender value is the accumulated value that the
schedule of the insurance company gives to a particular policy
at some point in the life of the insurance contract. So if you
have parents and say na isurrender na lang natin itong policy,
kailangan na natin ng pambayad sa bar exam because the
insurance policy has a cash surrender value. It may not be the
full value of the policy but if your policy has been in existence
for several years and it has big face value, in all probability
you’ll have big cash surrender value especially if you did not
pay out a loan. It is only when you take out a loan that your
policy is really affected.
An application of loan under the policy and the surrender of
the policy by the insured constitute acts of disposition or
alienation of property rights of the beneficiary and not merely
management or administration because they involve the
incurring or termination of contractual obligations. So when the
insured exercises such and if the designation of the beneficiary
is irrevocable, those acts are not permitted without the
consent of the beneficiary. When you exercise those acts, you
are already exercising acts of ownership.
December 15, 2014
Sec. 11. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has expressly
waived this right in said policy.
Section 11 deals with the beneficiaries. By the way, a
beneficiary can be both natural and juridical person. An
employer of a high ranking executive can be a beneficiary in
the life insurance policy they may have taken on the life of the
CEO/CFO.
Kinds of Beneficiary:
1. Insured himself
2. The third person who paid a consideration
Like the employer for example or the creditor. He is the third
person to the contract of insurance.
3. Third person through the mere bounty of insured
There is no reason for the beneficiary to become one when he
has no insurable interest over the life of the insured but the
insured nevertheless specifies that the third party is the
beneficiary to the proceeds of the insurance policy.
In the second and third kind of beneficiary, the proceeds of the
life insurance policy become the exclusive property of the
beneficiary upon the death of the insured. Once the death
occurs (life insurance policy) the rights of a revocable
beneficiary becomes vested in the beneficiary himself/herself.
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From that time on, it becomes his property right. It is
translated now into a property right in favor of the beneficiary
himself. So once it becomes a property right he can actually
assign the proceeds, that is one of the effects of ownership.
You can assign, transfer to the one whomever you want to
transfer or you can transfer to an assignee the proceeds which
you will be receiving from the insurance policy. But such right
only ripens when death of the insured occurs.
We also discuss the limitations in the appointment of
beneficiary. So anyone can be appointed as beneficiary. There
are limitations. And one of the major limitations set forth is
under Article 2012 of the Civil Code. Article 2012 refers to
Article 739 which enumerates the people who cannot donate
among themselves or who cannot receive donations or whose
act of donating is rendered null and void.
Art. 739. The following donations shall be void:
(1) Those made between persons who were guilty of adultery
or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same
criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
Going back to adultery and concubinage do we need a final
judgment? No. the guilt of the person may be proven by mere
preponderance of evidence. If you want to contest a
designation of a beneficiary on the ground that the beneficiary
was engaged in an adulterous relationship with the insured,
how do you prove that? It’s merely a civil action that you will
institute. A civil action to render null and void the designation
of the defendant as beneficiary on the grounds of violations
under Art 739 and you’re degree of proof is merely
preponderance of evidence.
Right of the insured to change the beneficiary in life
insurance policy
You must always remember that when it is a revocable
beneficiary the insured has the right to continuously enjoy the
rights of ownership in the policy. What are those? Surrendering
the policy for its cash surrender value, taking up a loan on the
policy, all these things. Probably even giving up or quitting on
the insurance policy. Those are parts and parcel of the
ownership of the insured of the policy.
In contrast to that if it is an irrevocable beneficiary; the
beneficiary acquires an absolute and vested interest to all the
benefits accruing from the policy. All the benefits accruing
from the policy from the date of its issuance and delivery.
What does that mean? What is the significance of that? The
insured losses control over the policy, over his own policy and
practically for all intents and purposes surrenders the policy to
the irrevocable beneficiary. Because the right of the beneficiary
becomes vested upon its issuance and delivery, the beneficiary
can take out a loan to the extent stated in the schedule of the
values(?) because now he has a property right in the policy.

Can the owner/ insured continue to exercise ownership during
the time that he is alive notwithstanding the irrevocable
designation of the beneficiary? Is there an instance where the
insured can avail the benefits of the insurance policy despite
the irrevocable designation?
The beneficiary has thus a property right in the policy of which
could not be deprived without his consent.
Okay, understand section 11 and understand also the
irrevocable designation concept. The rights once irrevocably
designated, the rights now transferred to the beneficiary and
the rights become vested in him and he has all the rights. But
the insured is still the insured.
What will the insured do to be able to still enjoy the benefits of
the policy? - If the beneficiary consents. That’s why the hard
thing about irrevocable designation is anything you want to do
with the policy you have to get the consent of the beneficiary.
That’s all. You can still continue enjoying the benefits. Actually
the insured still owns the insurance policy itself. The proceeds
are owned already by the irrevocable beneficiary but that does
not render the owner of the policy useless or inutile. You can
still avail of a loan, get the cash surrender value. Now if you do
not get the consent of the beneficiary you cannot do that. But
if you get the consent of the beneficiary then you can still do
those things. You have to get the consent.
The beneficiary has thus a property right in the policy of which
could not be deprived without his consent (De leon).
Can a new beneficiary be added to the policy? No, if again
without the consent of the beneficiary. No new beneficiary can
be added because it will diminish his property right, it would
reduce the irrevocable beneficiary’s vested interest. But again
if he consents there should be no problem. What is unique
about the irrevocable designation is that the owner itself
cannot destroy the policy in the sense that he will simply just
runaway from his obligations under the policy. If the
irrevocable beneficiary feels that there is an intent on the part
of the insured not to continue paying the premiums, the
irrevocable beneficiary if he has the means to do it can actually
continue paying the premiums on the insurance contract.
What will you advice your client if he goes to you for advice
before he signs a 10Million insurance policy on his life? To
designate a beneficiary only as revocable.
Measurement of vested interest of beneficiary in the
policy
What is the measurement of the vested interest of your
beneficiary in the policy?
The vested right or interest of the beneficiary in a policy
should be measured on its full face value and not on its cash
surrender value.
The cash surrender value is taken from the schedule provided
for by insurance companies depending on the life of your
insurance policy. They have a schedule. If your policy has been
in existence for so many number of years, they have
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equivalent cash value for that policy at that point in time of the
life of the policy. The measurement of the vested interest of
your beneficiary in the policy is the full face value. So if your
insurance policy says that you are insured for 5Million, the
beneficiary gets the full amount of 5Million. We must
remember in the Nario case that the application of a loan,
surrender of the policy, these are acts that constitute
disposition or alienation of property rights. They are not merely
acts of administration because they involve terminating or
incurring contractual obligations.
An application of loan under the policy and the surrender of
the policy by the insured constitute acts of disposition or
alienation of property rights of the beneficiary and not merely
of management or administration because they involve the
incurring or termination of contractual obligations (Nario vs.
Philippine American Life Insurance Co., 20 scra 436)
Where beneficiary dies before the insured
There are two views, what are these two views? What is the
criticism of the first view?
1. View that beneficiary’s representative is entitled to
insurance proceeds
It would necessarily follow as a consequence of the vested
interest rule, where the right to change the designated
beneficiary is expressly waived in the policy, that if the
beneficiary dies before the insured, his rights so vested should
pass to his representatives, and on the death of the insured,
the proceeds of the policy should belong, not to estate of the
insured, but to the representatives of the beneficiary. But this
result, however logical in form, does great violence to the
purpose of the insured, who must have intended, in the
ordinary case, to provide a fund for the support after his
death, of those whom he was accustomed to support during
his lifetime. He can scarcely have intended to make a provision
for the distributes and legatees if the deceased beneficiary,
who may well be persons without claim to his bounty or
interest in his life.
2. View that estate of the insured is entitled to insurance
proceeds
It is believed that where the beneficiary predeceases the
insured, the estate of the insured should be entitled to the
proceeds of the insurance especially where the designation is
subject to the express condition to pay the beneficiary if he
survives the insure or “if surviving”. However, most but not all,
courts hold that the mere fact that such policy is made payable
to the designated beneficiary, “his executors, administrators,
or assigns,” is sufficient to negative the implied condition that
death of the beneficiary before maturity of the policy
terminated all his rights to it.
It is simple if the beneficiary dies, if you invoke the first view,
you are actually asking the insured to give out money to
people he doesn’t even know. So that is the objection to the
first view, that the insured was only being liberal, or being
generous to the person or the beneficiary itself. But if the
representatives of the beneficiary will partake of the proceeds

after his death it would be too much of an imposition on the
insured for him to be compelled under the law to give out his
funds to people he doesn’t even know or care about.
The second view on the other hand, is that if the beneficiary
dies before the insured the proceeds will go to his estate. In
the example, the estate of the insured should be entitled to
the proceeds of the insurance especially where the designation
is subject to the express condition to pay the beneficiary if he
survives the insured or “if surviving”. However, most but not
all, courts hold that the mere fact that such policy is made
payable to the designated beneficiary, “his executors,
administrators, or assigns.” When you have a phrase worded
in that way there is no other choice but to interpret it in the
manner the insured wishes, that is to pay to the beneficiary, if
he dies, “his executors, administrators, or assigns,”. When the
policy is worded in such a way you cannot deny his heirs,
executors from getting hold of the policy because it was
intended by the insured.
Go over the discussion on designation of beneficiary.
Designation of Beneficiary
The beneficiary designated may be the insured or his estate, a
specifically designated person or persons, or a class or classes
of person
1. Children
The word “children” used to designate beneficiaries, is broad
enough to include the following:
a. Adopted child; or
b. An adult child not forming a part of the household of
the insured; or
c. After-born children even of a marriage subsequently
contracted.
The word “children” in an insurance policy ordinarily means a
descendant of the first degree and is never intended to include
grandchildren.
2. Husband; wife or widow
The word “wife: in the description of the beneficiary of life
insurance is generally regarded as descriptio personae, and the
fact that one who otherwise answer the description does not
have the legal status of the wife of the insured does not
prevent her from taking as beneficiary, when she is designated
by name, although the word “his wife” were added. However,
if the beneficiary is not named but is designated merely by a
status, such as “the husband”, “wife”, or “widow” of the
insured, the legal husband or wife as ascertained at the death
of the insured, is entitled to the benefits of such insurance.
If the designation is merely wife, it merely describes the
person. If there is a name of the person it will be given more
preference, more weight than the general designation of
“wife”. If there is no name appearing in the policy, it is only a
designation of the husband or wife, widow of the insured then
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it is taken to mean the legal wife or the legal husband. What if
they’ve never been married? If they’ve never been married,
that’s __ determined provided there is no other party
interested to share in the pie. The problem always arises when
there are other parties claiming their shares in the proceeds.
3. Husband and children; wife and children
A policy payable to the wife of the insured and “their children”
includes children by another wife, although the prevailing view
state that the beneficiaries are limited to children common to
both. But if the designation is made to the insured’s “wife and
children” or “my wife and children”, the insurance is deemed
for the benefit of all children of the insured, whether by the
named wife or those of another.
4. Family
The term “family” is sometimes used to indicate the recipient
of the proceeds of an insurance policy. In deciding whether a
particular person claiming a share of the fund is of the family
of the insured, the court will ascertain whether that person
was so regarded by the insured. If he was so regarded, he will
be allowed to participate although in no way related to the
insured.
5. Heirs or legal heirs
When a life policy is made payable to the insured’s “heirs” or
“legal heirs”, these terms will not ordinarily be construed as
indicating merely the heirs at law but rather that class of
persons who would take the property of the insured in case he
died intestate.
6. Estate or legal representatives of deceased
The words “estate”, “representative”, or “legal
representatives”, when used in designating beneficiaries, are
to be construed in their strict technical sense and the courts
will ordinarily assume that they are used to mean executors or
administrators, unless it appears that the insured intended to
use these expressions in the sense of heirs or next kin.
Words used in designating the beneficiaries of a life policy will
not be given their technical significance but will be construed
broadly in order that the benefit of the insurance shall be
received by those intended by the insured as the object of the
bounty. The beneficiary designated may be the insured or his
estate, a specifically designated person or persons, or a class
or classes of persons.
1. Children
2. Husband; wife or widow
3. Husband and children; wife and children
4. Family
5. Heirs or legal heirs
6. Estate or legal representatives of deceased

(Ma’am: Just read. Please see the explanation in the book)
Consuegra vs. GSIS
If no beneficiary is designated in the life insurance policy, the
proceeds thereof will go to the legal heirs in accordance with
law. It has been held, however, that where women, innocently
and in good faith, contracted marriage with the same man, the
insured, and the latter did not designate any beneficiary who
would receive the proceeds of his life insurance, each family
shall be entitled to one half of the insurance benefits.
Section 12. The interest of a beneficiary in alife insurance
policy shall be forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the death
of the insured; in which event, the nearest relative of the
insured shall receive the proceeds of said insurance if not
otherwise disqualified.
The word “interest” mentioned in Section 12 means the right
of the beneficiary to receive the proceeds of the life insurance
policy. It does not mean insurable interest since the
beneficiary need not have an insurable interest in the life of
the insured.
Ma’am: We talk of insurable interest only in property
insurance. Interest here as mentioned by the law is actually an
interest over the right of the beneficiary to receive the
proceeds of the life insurance policy.
In case the interest of a beneficiary in a life insurance policy is
forfeited as provided in Sec. 12, the nearest relatives, not
otherwise disqualified, of the insured shall receive the
proceeds of the insurance in accordance with the rules on
intestate succession provided in the Civil Code.
The nearest relatives of the insured in the order of
enumeration are the following:
1. The legitimate children;
2. The father and mother, if living;
3. The grandfather and grandmother, or ascendants
nearest in degree, if living;
4. The legitimate children;
5. The surviving spouse;
6. The collateral relatives, to wit;
a. Brothers and sisters of the full blood;
b. Brothers and sisters of the half-blood;
c. Nephews and nieces
7. In default of the above, the State shall be entitled to
receive the insurance proceeds.
Liability of the insurer on death of insured
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Death at the hands of the law- It does not affect the liability of
the insurer.
For example, you are convicted criminally and you have to
suffer death penalty. Is the insurance company freed from
paying your beneficiaries in the insurance policy? NO, the
insurance company continues to be liable unless it is one of
the exceptions in the policy.
Death by self destruction- The insurer is not liable in case the
insured commits suicide intentionally, with whatever motive,
when in sound mind.
Death by suicide while insane- The suicide of an insured while
insane does not discharge the insurer from his liability on his
contract.
Ma’am: But later on, we will see under section 180, there is a
period within which insurance policy can be contested on the
basis of insanity and beyond that period it could no longer be
contested. Meaning, the insurance company could no longer
raise the defense of insanity.
Death caused by the beneficiary- Where the beneficiary, as
principal, accomplice, or accessory, intentionally brings about
the death of the insured under such circumstances as to
amount to a felony, he cannot receive any benefit under the
contract of insurance. However, where the death of the
insured was caused under circumstances as do not amount to
a felony as when the killing was accidental or in self-defense,
or where the beneficiary was insane, the rights of the
beneficiary under the policy are not affected.
Death caused by the violation of law- There must be a causal
relationship established first, that the violation of the law led to
the accident resulting in to the death of the insured.
Sections 13 to 24 deal with property insurance.
Section 13 defines insurable interest in property. It provides
that every interest in property, whether real or personal, or
any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the
insured, is an insurable interest.
Principle: Anyone has an insurable interest in property who
derives a benefit from its existence or would suffer loss from
its destruction.
Note that under the law, it is not necessary that the interest is
such that the event insured against would necessarily subject
the insured to loss. It is sufficient that the risk of loss might
occur and pecuniary injury would be the natural consequence.
What is more, although a person has no title, legal or
equitable, in the property, and neither possession nor right to
possession, yet he has an insurable interest if he is so situated
with respect to the property that he will suffer loss as the
proximate result of its damage or destruction.
Unlike the civil law concept of jus perit domino, where
ownership is the basis for consideration of who bears the risk

of loss, in property insurance, one’s property insurance, one’s
interest is not determined by concept of title, but where the
insured has substantial economic interest in the property.
Ma’am: Substantial economic interest is the key in determining
your insurable interest. A mortgagee may take out an
insurance policy over the property mortgaged but he does not
have title over the property itself yet he takes out an insurance
because he have an insurable interest and that comes in under
the concept of substantial economic interest in the property.
Legal expectation of loss or benefit
The expectation of benefit to be derived from the continued
existence of property must have a basis of legal right, although
the person insured must have a basis of legal right, although
the person insured has no title, either legal or equitable, to the
property insured.
Mere factual expectation of loss does not constitute an
insurable interest.
Situation:
An owner of a gasoline filling station near a hotel has no
sufficient insurable interest in the hotel simply because its
burning or destruction, though it leaves the filling station
physically unharmed, will lessen his income from guests of the
hotel.
NB: This type of interest called “factual expectation, though
usually insufficient strict indemnity insurance, will suffice in life
insurance.
Section 14. An insurable interest in property may consist in:
a. An existing interest;
b. An inchoate interest founded on an existing interest;
• A stockholder has an inchoate interest in the property
of the corporation of which he is stockholder, which is founded
on an existing interest arising from his ownership of shares in
the corporation. His insurable interest is limited to the extent
of the value of his interest or to his share in the distribution of
the corporate assets upon dissolution.
c. An expectancy, coupled with an existing interest in
that out of which the expectancy arises.
• A farmer may insure future crops if they are to be
grown on land owned by him at the time of the insurance of
the policy, or although the crops are to be raised by him on
the land of another, provided the crops will belong to him
when produced.
Sec. 15. A carrier or depository of any kind has an insurable
interest in a thing held by him as such, to the extent of his
liability but not to exceed the value thereof.
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The reason for this provision is that the loss of the thing may
cause liability to the carrier or depository to the extent of its
value.
Under the General Bonded Warehouse Act, a warehouseman,
licensed to engage in the business of receiving commodities for
storage, is required to insure the same against fire.
Sec. 16. A mere contingent or expectant interest in anything,
not founded on an actual right to the thing, nor upon any valid
contract for it, is not insurable.
Ma’am: Do you have insurable interest over your legitime?
According to the author, the right to legitime may form the
legal basis of a compulsory heir’s insurable interest. However,
in a case decided by the Supreme Court which was decided in
the late 2000, there were twelve children. Now the parents
while still alive decided to sell some of their properties to some
of their children. There were several properties that were sold
to six of the children and so the six other children instituted an
action to nullify the deed of sale because they were saying it
would impair their legitime. The Court ruled that their right to
their legitime is an inchoate right. The parents while alive can
choose to dispose of their properties whatever they want. And
it was determined that there was consideration in the deed of
absolute sale. The Court allowed the sale to be valid.
It seems the author is saying that the heir can insure his
legitime. Well if it is find with the heir that he pays for the
insurance premium, why not? But he cannot come to court and
say I have already right to my legitime because I already pay
for my insurance premium.
Sec.17. The measure of an insurable interest in property is
the extent to which the insured might be damnified by loss or
injury thereof.
In case of a contract of mortgage, a mortgagor has an
insurable interest equal to the value of the mortgaged property
and a mortgagee, only to the extent of the credit secured by
the mortgage. In property insurance, the amount appearing on
the policy itself is the limit of the amount the insured may
claim. But if it can be proven that the loss or damage was far
less than the amount appearing in the insurance policy, then
what will be paid is the actual loss. Why so? Because the
insurance is a contract of indemnity.
Sec.18. No contract or policy of insurance on property shall be
enforceable except for the benefit of some person having an
insurable interest in the property insured.
Cha vs. Court of Appeals
The contract of lease provides that any fire insurance policy
obtained by the lessee over his merchandise inside the leased
premises without the consent of the lessor is deemed assigned
or transferred to the lessor. It held that such automatic
assignment is void for being contrary to law and public policy,
hence, the insurer cannot be compelled to pay the proceeds of
the policy to the lessor who has no interest in the property
insured.

No the lessor has no insurable interest. The owner of the
building is primarily interested in the payment of the rentals of
the lessee. So regardless if the merchandise of the lessee
stored in the building will be destroyed by fire or not still the
interest of the lessor with respect to the lessee is still existing
to the extent of the rentals so since the rentals are not based
on the merchandise therefore the lessor has no interest.
Where the insurance is invalidated on the ground that no
insurable interest exists, the premium is ordinarily returned to
the insured unless he is in pari de licto.
The doctrine of waiver or estoppels cannot be invoked since
the public has an interest in the matter independent of the
consent or concurrence of the parties.
How do we measure the indemnity in insurance contracts?
General Rule: The amount of insurance fixed in the policy of a
marine or fire insurance is not the exact measure of indemnity
to which the insured is entitled, but the maximum indemnity
which he might obtain. The insured cannot recover in excess
of his actual loss.
Exception:
a.) In valued policies (Sec.61), however, the valuation of
the thing insured is conclusive between the parties thereto in
the adjustment of loss, if the insured has some interest at risk,
and there is no fraud on his part, although it might be proved
that the actual value of the thing is less.
b.) Similarly, the principle of indemnity cannot be invoked
by the insurer who agreed to repair or replace the thing
insured with a new one even though the cost of the
undertaking may exceed the original amount of the insurance.
January 5, 2015 (Happy New Year)
(Ma’am reviewing past discussions)
TITLE 4
CONCEALMENT
As we’ve said class, insurance companies have certain
mechanisms, devices which their liabilities are diminished.
What are these? One of these is concealment.
What is concealment?
SEC. 26. A neglect to communicate that which a party knows
and ought to communicate, is called a concealment.
Two aspects
ü “which a party knows”
If a party doesn’t know, there is no concealment because
you will not be hiding anything.
ü “ought to communicate”
It is a duty imposed on the person applying for an
insurance policy
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If you fail in these two aspects then there is concealment.
Four primary concerns of the parties to an insurance
contract.
In making a contract, so highly aleatory as that of insurance,
the parties have 4 primary concerns, to wit:
1. The correct estimation of the risk which enables the
insurer to decide whether he is willing to assume it, and if
so, at what rate of premium;
2. The precise delimitation of the risk which determines the
extent of the contingent duty to pay undertaken by the
insurer;
3. Such control of the risk after it is assumed as will enable
the insurer to guard against the increase of the risk
because of change in conditions; and
4. Determining whether a loss occurred and if so, the
amount of such loss.
If the loss never occurred the insurance company can never be
liable. So you can, year-in and year-out, buy insurance for your
building or for your house but when the risk never occurred,
the insurance company can never be liable under the policy.
Same with life insurance, ordinarily a life insurance is an
insurance for life all the way to age 99 but when you don’t
want to pay that long, what will you do? Make sure your policy
is earning dividends. During your lifetime, when you are able
to work, you are able to pay the premiums over that policy and
for a certain period of time, let’s say 20 years, dividends will
accrue and no loan payments is set-off against the dividends,
in time it will accumulate to such degree as it can pay-off your
yearly premium. That’s how you manage your insurance policy,
especially life insurance policy.
So concealment and representation are very important in the
sense that these pertain to information that the insurance
company need to have to be able to assess the extent of the
insurer’s eventual liability when the risk happens. (ma’am
talking about how the US deals with insurance fraud)
Devices for ascertaining and controlling risks –just go
over it J
What are the requisites of concealment? The four
requisites are:
1. A party knows the fact which he neglects to communicate
or disclose to the other;
2. Such party concealing is duty bound to disclose such fact
to the other;
3. Such party concealing makes no warranty of the fact
concealed; and
4. The other party has not the means of ascertaining the fact
concealed.
What is the effect of concealment?
SEC. 27. A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance.

What is the effect of rescission? Mutual restitution, the
parties are restored to their original condition. The premium
will have to be returned to the insured.
Rescission, actually, may or may not be resorted to by the
party. It depends, that is only an option for him. Failure on the
part of the insured to disclose conditions affecting the risk, of
which he is aware, makes the contract voidable at the
insurer’s option. Now we have to relate that with Section 48,
class. Let’s look at section 48 –
SEC. 48. Whenever a right to rescind a contract of
insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to
the commencement of an action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force during
the lifetime of the 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
policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of
the insured or his agent.
The second paragraph, there is a period imposed by law
beyond which the insurance company can no longer contest
the policy on the ground of concealment or misrepresentation.
So, we know that concealment, whether intentional or
unintentional, will cause the injured party to rescind the
contract of insurance but we also know that if the policy of the
insurance has been enforced for a period of more than 2 years
already (we are talking here of life insurance), so on the third
year, the insurance company cannot rescind or prove that the
insurance is void ab initio because there is concealment or
misrepresentation. So you have to make sure that if
mandadaya ka, your policy must be more than 2 years old so
that the insurance company can no longer question the validity
of your policy.
Now, do you need to prove fraud? NO. There is no need to
prove fraud because, as we’ve learned, whether intentional or
unintentional, if there is concealment then the policy is
voidable.
What do you think is the reason why the insurance
company need not prove fraud? The reason why there is
no need to prove fraud is because if you impose such condition
on the insurance company, that means that you have to prove
clearly that an intention was there to defraud the insurance
company. It is really too much of an obligation to be imposing
on the insurance company. The insurance company will
actually be wasting resources just to investigate an applicant
thoroughly of whether he/she is guilty of fraud, or whether the
representations made by the insured can be relied upon. At
best, the insurance company can only rely on the good faith of
the applicants.
There is a presumption that if you file an application for a life
insurance policy that all the information stated in that
application are true and there are no other information that
may be useful to the insurance company to assess the risk
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properly. For example, if you apply for an insurance policy,
there is a section (in the policy) asking if you have been
hospitalized for a particular illness, so they provide for a list of
illnesses. Now you tend to forget that you have been confined
for that illness because it has been quite some time and the
illness is not that threatening that you easily forget about it,
e.g. diarrhea, and if in the future something happens to you
and the insurance company discovers that you failed to
indicate that you have been hospitalize, they may say that you
have concealed some information from them. So, it is really
important that if you believe that that information may change
the way that the insurance company would look at you as a
risk, then you have to come forward. I believe that the
insurance company would not really disallow your application,
they would just ask for a higher premium.
Let’s go to Section 28…
What are the matters that must be communicated even
in the absence of inquiry?
SEC. 28. Each party to a contract of insurance must
communicate to the other, in good faith, all facts within his
knowledge which are material to the contract and as to which
he makes no warranty, and which the other has not the means
of ascertaining.
This section makes it the duty of each party to a contract of
insurance to communicate in good faith all facts within his
knowledge only when:
1. They are material to the contract;
2. The other has not the means of ascertaining said facts;
and
3. As to which the party with the duty to communicate
makes no warranty.
So, it’s important that the fact which you ought to
communicate must be material to the contract. Under the
annotation of section 28, the author sights few examples of
instances where the health conditions were concealed.
Example, an applicant for life insurance concealed that he was
treated or hospitalize for pneumonia. You must disclose these
facts even when not inquired into where the facts are material
to the risk assumed by the insurer. So we can conclude that
when you are taking out a life insurance policy, any condition
suffered, pwera na lang siguro cold, must be indicated in your
application.
The test is: If the applicant is aware of the existence of some
circumstances which he knows would influence the insurer in
acting upon his application, good faith requires him to disclose
that circumstance, though unasked.
SEC. 30. Neither party to a contract of insurance is bound to
communicate information of the matters following, except in
answer to the inquiries of the other:
(a) Those which the other knows;
(b) Those which, in the exercise of ordinary care, the other
ought to know, and of which the former has no reason to
suppose him ignorant;

(c) Those of which the other waives communication;
(d) Those which prove or tend to prove the existence of a risk
excluded by a warranty, and which are not otherwise material;
and
(e) Those which relate to a risk excepted from the policy and
which are not otherwise material.
When there is a specific inquiry from the insurance company,
then you ought to reply accurately. Otherwise, there is no
need to communicate these matters.
What is materiality?
SEC. 31. Materiality is to be determined not by the event, but
solely by the probable and reasonable influence of the facts
upon the party to whom the communication is due, in forming
his estimate of the disadvantages of the proposed contract, or
in making his inquiries.
How do you measure materiality? So materiality is determined
not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the
communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his
inquiries.
So if the insurance company needed to know this information,
and it is not one of those under Section 30, then you have to
apply the test of materiality. In an example, under
subparagraph (a), the applicant concealed the fact that he had
pneumonia, diabetes and syphilis, the policy is avoided
although the cause of the death (e.g. plane crash) is totally
unconnected with the material fact concealed or
misrepresented. What was the material fact concealed here?
The fact of his illnesses. Decision held that the insurance
company can raise that as a defense, the insurance company
can argue that there was concealment. You know why class?
You are taking money from the insurance company. The
moment the insurance company sees a way out of its
obligation it will really try its best to get out of its contractual
obligation.
In other words, if the information concealed was not material,
then there is no concealment. That’s the bottomline. It would
seem that any disease could me material to a life insurance
policy.
So section 32, just read that…
SEC. 32. Each party to a contract of insurance is bound to
know all the general causes which are open to his inquiry,
equally with that of the other, and which may affect the
political or material perils contemplated; and all general usages
of trade.
It talks about matters which the parties ought to know.
General usages of trade are those that are open to inquiry, in
other words magtanong ka lang alam mo na. So the insurance
company is given the task or ought to know matters, e.g.
areas frequently hit by typhoon.
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SEC. 33. The right to information of material facts may be
waived, either by the terms of insurance or by neglect to make
inquiry as to such facts, where they are distinctly implied in
other facts of which information is communicated.
So, there is a duty for you to obtain information and that duty
is expected where the fact that ought to have been
communicated is material to the policy. But what if the other
party waives it? So this duty can actually be waived under
Section 33.
How does waiver happen? By expressly stipulating it in the
contract itself or by failure to make inquiry.
Just look at the cases mentioned there. Will the insured be
faulted for not being able to distinguish between “peptic ulcer”
and “tumor?” No, in the absence of evidence that the insured
had sufficient knowledge as to enable him to distinguish
between “peptic ulcer” and a “tumor,” his statement, that said
tumor was “associated with peptic ulcer of the stomach”
should be construed as an expression made in good faith of his
belief as to the nature of his ailment and operation.
SEC. 34. Information of the nature or amount of the interest
of one insured need not be communicated unless in answer to
an inquiry, except as prescribed by Section 51.
SEC. 35. Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own
judgment upon the matters in question.
What is your opinion? Your opinion does not matter. So you
need not communicate your opinion. If there is a question in
the policy, “How long do you think you will live?” So it is calling
for an opinion, so even if you answer, “may be 50 more
years,” but you did not live that long, the insurance company
cannot take it up against you for it is not considered
misrepresentation.
So let’s move to representation…
TITLE 5
REPRESENTATION
SEC. 36. A representation may be oral or written.
What is representation? It is a statement by the insured at
the time of, or prior to, the issuance of the policy, relative to
the risk to be insured, as to an existing or past fact or state of
facts, or concerning a future happening, to give information to
the insurer and otherwise induce him to enter into the
insurance contract.
The representation may pertain to a facts or a situation, past,
present, or future. So when you say representation, you
positively indicate or affirm a fact or situation which occurred
in the past or is on-going.
How do you distinguish representation from
concealment?

SEC. 37. A representation may be made at the time of, or
before, issuance of the policy.
SEC. 38. The language of a representation is to be interpreted
by the same rules as the language of contracts in general.
Insurance contract is just another form of contract.
SEC. 39. A representation as to the future is to be deemed a
promise, unless it appears that it was merely a statement of
belief or expectation.
What is an affirmative representation? What does it constitute?
How about promissory representation?
SEC. 40. A representation cannot qualify an express provision
in a contract of insurance, but it may qualify an implied
warranty.
Representation must be an active statement on the part of the
applicant.
SEC. 41. A representation may be altered or withdrawn before
the insurance is effected, but not afterwards.
So why is it important that there is no
misrepresentation? It is important because the
representation was made the basis for the insurance company
entering into an insurance contract. The insurance company is
relying on the representation and on the basis of your
representation it has made its assessment on your insurability.
In liability insurance, the same principle applies.
SEC. 42. A representation must be presumed to refer to the
date on which the contract goes into effect.
SEC. 43. When a person insured has no personal knowledge
of a fact, he may nevertheless repeat information which he has
upon the subject, and which he believes to be true, with the
explanation that he does so on the information of others; or he
may submit the information, in its whole extent, to the insurer;
and in neither case is he responsible for its truth, unless it
proceeds from an agent of the insured, whose duty it is to give
the information.
Section 43 talks about information obtained from third
persons.
SEC. 44. A representation is to be deemed false when the
facts fail to correspond with its assertions or stipulations.
When the facts failed to correspond to its assertions, of course
that is false representation.
Now, does it have to be strictly interpreted? Or can substantial
compliance enough? Substantial truth is enough.
SEC. 45. If a representation is false in a material point,
whether affirmative or promissory, the injured party is entitled
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to rescind the contract from the time when the representation
becomes false.
Take note that in this provision, the right to rescind by the
insurance company is waived by the acceptance of insurance
premiums despite knowledge of the ground for rescission.
SEC. 46. The materiality of a representation is determined by
the same rules as the materiality of a concealment.
What is the test of materiality of a representation? It is the
same as concealment. It is not determined by the event but by
the reasonable and probable influence it has on the person
who is making the assessment.
SEC. 47. The provisions of this chapter apply as well to a
modification of a contract of insurance as to its original
formation.
SEC. 48. Whenever a right to rescind a contract of insurance
is given to the insurer by any provision of this chapter, such
right must be exercised previous to the commencement of an
action on the contract.
After a policy of life insurance made payable on the death of
the insured shall have been in force during the lifetime of the
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
policy is void ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation of the insured or
his agent.
Section 48, we’ve taken that earlier. The 2nd paragraph
pertains to life insurance policies.
Incontestability
It happens when the insurance company fails to contest the
policy by reason of concealment or misrepresentation.
So section 48 speaks of commencing an action on the contract.
So you must exercise first, you simply have to write a letter to
the other party informing of your decision to rescind the
contract, before the commencement of a civil action could be
had over the insurance policy.
Requisites for incontestability
1. The policy is a life insurance policy;
2. It is payable on the death of the insured; and
3. It has been in force during the lifetime of the insured for
at least two years from its date of issue or of its last
reinstatement.
Why reinstatement? What is the significance of this word?
Sometimes the insured fails to pay the premium even within
the grace period given under the policy and so the policy
lapses. When the policy lapses, the insured has the option to
reinstate the policy. How? By just paying the premium due.
When the policy is reinstated 6 months down the road, the
reckoning point, of the 2-year period, will be the date of the
reinstatement.

Take note, the 2-year period for questioning the policy may be
shortened but it cannot be extended by stipulation.
Defenses not barred by inconstestable (see enumeration
in the book)
January 10, 2015
Review of Title 5:
Remember that rules on representation are more or less the
same with concealment; same requirement of materiality. In
representation, there has to be substantial compliance in
material aspect of the insurance policy. It does not need a
literal or strict compliance.
2nd par.of Section 48 provides that after a policy of life
insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of
two years from the date of its issue or of its last reinstatement,
the insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. This provision
applies to life insurance with its incontestable clauses.
Incontestability means that after the requisites are shown to
exist, the insurer shall be estopped from contesting the policy
or setting up any defense, except as is allowed, on the ground
of public policy. (MEMORIZE)
The remedy when there is misrepresentation is rescission. It is
the same when there is concealment.
Significance of the 1st par.of Sec. 48
If the insured has already filed an action in court to collect the
amount of the insurance, the insurer cannot anymore rescind
the policy. The rescission of the insurer of the policy must
come before an action is commenced before the court. The
right to rescind, however, is waived by acceptance of
premiums.
Requisites for incontestability
Under our law, in order that the insurance shall be
incontestable, the following requisites must be present:
(1) The policy is a life insurance policy;
(2) It is payable on the death of the insured; and
(3) It has been in force during the lifetime of the insured for at
least two (2) years from its date of issue or of its last
reinstatement.
Ma’am: Incontestable clause applies only to life insurance
policies. Do not apply it when is at issue is a property
insurance.
Effect when policy becomes incontestable
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When a policy of life insurance becomes incontestable, the
insurer may not refuse to pay the same by claiming that:
(1) the policy is void ab initio; or
(2) it is rescissible by reason of the fraudulent concealment of
the insured or his agent, no matter how patent or well-
founded; or
(3) it is rescissible by reason of the fraudulent
misrepresentations of the insured or his agent.
Since the law speaks of a policy in force for two years, the
expression "void ab initio" should be understood in the sense
of "voidable" and the fraud contemplated should refer to fraud
in the inducement.4 (see Art. 1338, Civil Code.)
The Policy
Sec. 49. The written instrument in which a contract of
insurance is set forth, is called a policy of insurance.
It is the written document embodying the terms and
stipulations of the contract of insurance between the insured
and the insurer.
Ma’am: There is no verbal policy of insurance. It must be in a
written instrument.
Sec. 50. The policy shall be in printed form which may contain
blank spaces; and any word, phrase, clause, mark, sign,
symbol, signature, number, or word necessary to complete the
contract of insurance shall be written on the blank spaces
provided therein.
Ma’am: All these must be contained in the insurance policy. If
they are not and conflict arises, it may render your insurance
policy rescissible.
Any rider, clause, warranty, or endorsement purporting to be
part of the contract of insurance and which is pasted or
attached to said policy is not binding on the insured, unless the
descriptive title or name of the rider, clause, warranty, or
endorsement is also mentioned and written on the blank
spaces provided in the policy.
Ma’am: The keyword is RCWE. So You have a main policy. You
have riders, clause, warranty, or endorsement which are
usually found in a separate document. All these RCWE must in
the descriptive title of your attachments, must be found in the
policy itself. Otherwise, it will not be binding.
Last year’s exam in Insurance: How will the insurance
company be liable? This was on the basis of Sec.50. So
whenever there’s a movement in the life of the insurance
policy, endorsements particularly, property was mortgaged to
the bank. The bank must ask the insured to have the
insurance policy transferred in the name of the bank or at least
indicated that it was already mortgaged to the bank then the
endorsement is a very vital act to make the insurance company
liable. Dapat talaga nakaendorse. And where does the
endorsement appear? That endorsement appears in the policy

itself. It is important in the sense that it is required by law. We
cannot assume that because of the movement in the deed of
mortgage, the insurance policy is automatically liable to the
main parties involved in the transaction. If there is
endorsement but not indicated in the policy itself, then the
insurance will not be liable.
Unless applied for by the insured or owner, any rider, clause,
warranty, or endorsement issued after the original policy shall
be countersigned by the insured or owner, which
countersignature shall be taken as his agreement to the
contents of such rider, clause, warranty, or endorsement.
Ma’am: This particular paragraph assumes that it is the
insurance company that initiated the RCWE.
Group insurance and group annuity policies, however, may be
typewritten and need not be in printed form.
Compliance of the insured with conditions of policy
Insurance companies have the same rights as individuals to
limit their liability and to impose whatever conditions they
deem best upon their obligations not inconsistent with public
policy. The compliance by the insured with the terms of the
policy is a condition precedent to the right of recovery. Read
Fortune Insurance & Surety Co., Inc. vs. Court of Appeals, 244
SCRA 308 [1995].)
A policy of insurance is a contract of adhesion. Consequently,
where the language used in an insurance contract or
application is such as to create ambiguity, the same should be
resolved liberally in favor of the insured and strictly against the
party responsible therefore. However, if there are
circumstances that will point out that the insured has the
capacity, knowledge and expertise, all of these to protect his
interest, then the court will decide in favor of the insurance
company and against the insured.
It is well-settled that "contractual limitations of liability found in
insurance contracts should be regarded by courts with a
jaundiced eye and extreme care and should be so construed as
to preclude the insurer from evading compliance with its just
obligations. This is on the part of the insurance company but is
equally applicable to the insured.
A policy of insurance is different from the contract of
insurance. The policy is the formal written instrument
evidencing the contract of insurance entered into between the
insured and the insurer. It is the law between them.
Ma’am: Do not use these terms interchangeably.
Perfection of insurance contract.
A contract of insurance, like other contracts, must be assented
to by the parties either in person or by their agents. Under the
law, assent or consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which
are to constitute the contract. (Art. 1319, Civil Code.)
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If an application for insurance has not been either accepted or
rejected, there is no contract yet as it is merely an offer or
proposal.
The mere signing of an application for life insurance and the
payment of the first premium do not bind the insurer to issue a
policy where there is no evidence of any contract between the
parties that such acts should constitute a contract of
insurance.
The contract, to be binding from the date of the application,
must have been a completed contract, one that leaves nothing
to be done, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be
no contract of insurance unless the minds of the parties have
met in agreement.
Similarly, the contract is not perfected where the applicant for
life insurance dies before its approval or it does not appear
that the acceptance-of the application ever came to the
knowledge of the applicant.
The acceptance of an insurance policy must be unconditional,
but it need not be by formal act.
Ma’am: Because it is a contract, the parties may add additional
terms and conditions, that’s why it is necessary for you to look
the policy itself. If there are terms and conditions that are
unique to your circumstances which the insurance company
feel are necessary to protect its interest in the insurance, the
insurance companies will add the terms and conditions already
in the printed form. Likewise for the insured, if the insured also
wants more of protection, because of his special circumstance,
the insured may so indicate in the policy itself.
The parties may impose additional conditions precedent to the
validity of the policy as a contract as they see fit. The usual
conditions found in the application for insurance or in the
policy are that the contract shall not become binding until the
policy is delivered and the first premium paid. These conditions
are valid and enforceable. Until the conditions are fulfilled, the
policy is of no binding effect.
There is no valid and binding insurance contract where no
premium is paid unless credit is given or there is a waiver or
some agreement obviating the necessity for prepayment of the
premium. But where the premium has been previously paid,
the contract is perfected upon approval of the application
although the policy has not yet been issued, unless there is a
stipulation to the contrary.
The binding deposit receipt is intended to be merely a
provisional or temporary insurance and to be binding only
upon compliance with the conditions precedent indicated in the
policy. In life insurance, a "binding slip" or "binding receipt"
does not insure by itself.
Cover notes. — They may be issued to bind the Insurance
temporarily pending the issuance of the policy. Coverage then
can begin depending upon their terms.

Ma’am: Cover notes are different from binding slip. The former
form part of your policy itself.
Offer and acceptance in insurance contract
The applicant usually makes the offer to the insurer through an
application for insurance which is usually attached to policy
and made a part of the insurance contract.
1. In property and liability insurance
It is the insured who technically makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter-offer. The
offer is usually accepted by an insurance agent on behalf of
the insurer.
2. In life and health insurance
The situation depends upon whether the insured pays the
premium at the time he applies for insurance.
(a) If he does not pay the premium, his application is
considered an invitation to the insurer to make an offer, which
he must then accept before the contract goes into effect. If he
pays the premium with his application, his application will be
considered an offer. Life and health insurance agents,
however, do not have the authority to bind immediately the
insurers they represent. Instead they customarily issue a
binding receipt that makes the coverage effective on (1) the
date of the application, or (2) the date of the medical
examination, if the insurer determines later that the applicant
was insurable on that date. The binding receipt is, therefore, a
conditional acceptance by the insurer.
(b) Where the application for insurance constitutes an
offer by the insured, a policy issued strictly in accordance with
the offer is an acceptance of the offer that perfects the
contract.
What about offer and acceptance, because this is also found in
basic contract law. Do they also apply to insurance contract?
Yes they do. The applicant usually makes the offer which is in
the form of an application. The applicant fills out an application
form; they do this sometimes with the assistance of an
insurance agent. You will check those boxes whether you are
smoking, you have serious illnesses before, medical procedures
performed, family history is also there. So these are all
information contained in an application for a life insurance
policy. You also apply for property insurance; there are also
forms that you have to fill out. Because those forms are the
basis for making a reasonable assessment of how much a risk
you are, how much a risk your business is and the proper
payments you ought to pay for the policies.
In property and liability insurance it is the insured who
technically makes an offer to the insurer, and the insurer either
accepts it or rejects it, or makes a counter-offer. So if the
insurance company does not 100% approve your application
you may make a counter-offer. In life and health insurance the
situation depends upon whether the insured pays the premium
at the time he applies for insurance. If you do not pay the
premiums, if you do not issue a check, you do not give the
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cash equivalent of the premium at the time the application is
submitted, the application is merely considered as an invitation
to the insurer to make an offer to you. Life and health
insurance agents, however, do not have the authority to bind
immediately the insurers they represent. So what do they do?
They customarily issue a binding receipt that makes the
coverage effective on the date of the application, or the date
of the medical examination, if the insurer requires the
applicant that - in a way it is a conditional acceptance.
Importance of delivery of policy
What is the importance of the delivery of the policy?
Delivery is the act of putting the insurance policy – the physical
document – into the possession of the insured. The delivery of
the policy is important in at least 2 ways:
a. As evidence of the making of a contract and of its
terms; and
b. As communication of the insurer’s acceptance of the
insured’s offer
Absence of delivery
The delivery of a policy is not however, a prerequisite to a
valid contract of insurance. The contract may be completed
prior to delivery of the policy or even without the delivery of
the policy depending on the intention of the parties.
Modes of delivery of policy
Actual/Constructive delivery
There can be no contract of insurance unless the minds of the
parties have met in agreement. However, actual manual
transfer of the policy is not a prerequisite to its validity unless
the parties have so agreed in clear language. Constructive
delivery may be sufficient.
It can be actual delivery or constructive delivery. So if your
insurance agents fail to deliver the contract, does that mean
that the contract is void ab inito, null and void, or rescissible?
No. not necessary. Actual manual transfer of the policy is not a
prerequisite for its validity unless the parties have agreed in a
language that is clear.
Delivery, primarily a matter of intention
In the final analysis, whether or not the policy was delivered
after its issuance, depends, not upon its manual possession by
the insured but rather upon the intention of the parties which
may be shown by their acts or words. It may depend on the
wording of the application for Insurance, But possession by the
insured raises the presumption that the policy was delivered to
the insured, while possession by the insurer is prima facie
evidence that no delivery was made.
Effect of delivery of policy
What is the effect of delivery of policy?

Delivery conditional
Where there is conditional delivery of an insurance policy, non-
performance of the condition precedent prevents the contract
from taking effect.
Delivery unconditional
The unconditional delivery of an insurance policy
corresponding to the terms of the application ordinarily
consummates the contract, and the policy as delivered
becomes the final contract between the parties.
Rider in a contract of insurance
A rider is a small printed or typed stipulation contained on a
slip of paper attached to the policy and forming an integral
part of the policy.
Riders are usually attached to the policy because they
constitute additional stipulations between the parties.
So it forms an integral part of the policy. By the way, what is a
rider? Sometimes you have accident riders. You take out a life
insurance policy, payable upon the death of the insured. Death
here is the loss that is being insured against. But let’s say you
did not die, there was an accident. The insured severed an
arm, finger, hand. You did not die, you are simply rendered
incapacitated. How can you pay(?) now your premiums
because the policy is not extinguished by your accident. What
happens is, the insurance companies or its agents usually
advice you take out a rider. Riders require you to pay
additional premiums but they are not as big as the premiums
on the life insurance policy itself. They add up for each rider
that you take. You are assessed a separate premium. Once
their descriptive title is included in the blank space of the
policy itself, it forms an integral part of the insurance. Don’t
forget the requirement that it must be indicated in the main
policy itself.
Necessity for riders, etc
The necessity for riders, etc. is found in the fact that in the
conduct of insurance business, it often becomes necessary to
add a new provision to a policy, or to modify or waive an
existing provision, or to make any desired change in the policy.
This saves the trouble and expense of making an entirely new
contract.
Now do you only add riders at the beginning of the issuance of
the policy? Riders may come in in the middle of the life
insurance policy itself.
Rule in case of conflict between a rider, etc. and
printed stipulations of a policy
When there is an inconsistency between a rider and the
printed stipulations in the policy, the rider prevails, as being
more deliberate expression of the agreement of the
contracting parties.
Examples:
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1. The fire insurance policy on a building excludes loss
by earthquake. For the payment of an additional premium, the
insurer attached a rider, in which it agrees to indemnify the
insured against loss by earthquake.
The rider becomes a part of the policy and supersedes any
part of the policy in conflict with its provisions.
So a fire insurance policy may sometimes not include
Earthquakes. Sometimes the policy will state that fire
originated by earthquake will not be covered. Where there is a
strong earthquake and fire results, the fire insurance policy will
not include that as one of the risks they are willing to cover.
Why? Because they say you do not have control when
earthquake happens. If the insured wants total coverage
against fire, recovery from fire whatever the cause is. Then the
insured must secure a rider stating exactly that. In the
example, the insurer attached a rider, in which the insurance
company agrees to indemnify the insured against loss by
earthquake. The rider becomes part of the policy. It will now
prevail against other stipulations in the contract.
2. A printed stipulation provides that any other
insurance upon all or part of the thing covered by the policy
should be notified in writing to the company, or the policy will
be avoided, but a clause was inserted by typewriter to the
following effect “Subject to clauses G and A and other
insurance with a special short period attached to the policy.”
There is here sufficient notification to the company that other
insurances existed.
So the rider indicated by a typewritten clause said that there
are other insurance procure with a special short period
attached to the policy. The insurance company is procured
with notice that there other policies of insurance.
Attached papers on insurance policy
As a general rule, a rider, slip or other paper becomes a part of
a contract or policy of insurance if properly and sufficiently
attached or referred to therein in a manner as to leave no
doubt as to the intention of the parties in such respect.
In other words, as long as they are in the policy itself they are
part of the insurance contract.
Section 50 (pars 2 and 3) states the requirements that must be
observed in order that a rider etc., may be binding on the
insured. Section 50 is very important, insurance companies
must take care that additional terms, additional enforcements
must be indicated in the insurance policy itself. Later when we
discuss forms of policies. The Insurance Commission also pre-
approved the wordings of riders, there are pre-approved forms
for riders. Just like the main policy of insurance. The pre-
approved rider form will be stapled in the main policy itself. Is
that enough? No, because it did not comply with the
requirement of Section 50 that descriptive title of the rider
must be indicated in the policy itself. Hindi yan pwede istaple
lang it must be indicated in the policy itself.
What is the effect of lack of description?

Any rider, clause, warranty or endorsement purporting to be
part of the contract of insurance and which is pasted or
attached to said policy is not binding on the insured unless the
descriptive title or name of the rider, etc. is also mentioned
and written on the blank spaces provided in the policy. The
lack of description will not affect the other provisions of the
policy except where without such rider, etc., the contract
would be incomplete.
Effect of Failure of insured to read policy
Majority rule
In most jurisdictions, the fact that it is customary for insured
persons to accept policies, without reading is judicially
recognized. It follows that such acceptance is not negligence
per se and in proceedings to reform insurance contracts, most
courts hold that the insured’s acceptance and retention of the
policy unread is not such laches as will defeat his right to
reformation.
The basis for the decisions is that insurance contracts are
“contracts of adhesion” and not of bargaining, that is, the
insured purchases the contract prepared solely by the insurer.
Minority rule
On the other hand, there are many courts which apply to
insurance contracts the rule general contract law that one who
accepts a contractual instrument is conclusively presumed, in
the absence of fraud or mutual mistake, to know and assent to
its contents. The insured has the duty to read his policy and is
bound by his contract as written whether he reads it or not.
Usually you don’t read the policy at all. You only read the
policy when your insurance company refuses your claim for
payment of the proceeds. But the courts also will require the
insured the basic requirement at least to know the major
stipulation of the contract.
Insurer’s duty to explain policy
In most jurisdictions, if the terms of an insurance policy are
clear, unambiguous, and explicit, the insurer has no affirmative
duty to explain the policy or its exclusions to the insured.
This principle, however, is subject to some important caveats.
1. Reasonable expectations of insured
The doctrine of “reasonable expectations” can operate to
impose de facto a duty on the insurer to explain the policy’s
coverage to the insured.
2. Options available to insured
In the area of motor vehicle insurance where legislations have
made certain kinds of coverage optional, usually uninsured or
underinsured motorist insurance, courts have sometimes
imposed a duty on the insurer to explain the options to the
insured.
3. Information expected by insured from insurer’s agent
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Agents owe their customers a duty to exercise the skill and
care that a reasonable agent would exercise in the
circumstances. This duty encompasses many situations i an
obligation to explain to the customer the kinds of coverage
available and to help the insured in choosing an appropriate
coverage.
4. Contractual rights of insured after denial of coverage
When the insured disputes a denial of coverage, the duty of
good faith and fair dealing may impose an obligation on the
insurer to alert the insured on his rights.
Reasonable expectation, what is that? The doctrine of
“reasonable expectations” can operate to impose de facto a
duty on the insurer to explain the policy’s coverage to the
insured. So they will not go at length to read to you each and
every paragraph contained in the policy. If they read to you,
explain to you, pointed out to you the coverage and the
exceptions that would already been a substantial compliance of
the doctrine of reasonable expectations.
Alright, let’s go to Section 51
Sec. 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open
or running policies;
(c) The premium, or if the insurance is of a character
where the exact premium is only determinable upon the
termination of the contract, a statement of he basis and rates
upon which the final premium is to be determined;
(d) The property or life insured
(e) The interest of the insured in property insured, if he is
not the absolute owner thereof; and
(f) The risks insured against; and the period during
which the insurance is to continue
Sec. 51 enumerates what the policy of insurance must contain.
Their inclusion in insurance policies is essential to enable the
parties to determine easily the nature and effect of the
contract entered by them thereby avoiding lawsuits.
5. The interest of the insured in property insured, if he is
not the absolute owner thereof; and
So if the property is owned by several co-owners, the different
co-owners or their names must be indicated or reflected in the
policy itself.
6. The risks insured against; and the period during
which the insurance is to continue
It is important that the period of the policy is likewise
indicated. Property insurance is usually annual. It is usually for
a year, 12 noon or 12 midnight something like that. Different
from life insurance policy. Sa life insurance policy it is usually

the premium that is falling due on a certain period of the year.
If you pay your premiums annually, they will send you a
statement to remind you of your __ payments. That’s how the
life insurance policy is. The period of the life insurance policy is
necessarily the whole life of the person.
Risk, peril, hazards distinguished
So what is a risk, peril and hazards? How do you distinguish
one from the other?
1. Risk is the chance of loss or the possibility of the
occurrence of a loss, based on known and unknown factors. If
a loss is absolutely certain to happen or not to happen, no risk
is involved.
2. Peril is the contingent or unknown event which may
cause a loss. It is the contingency that one insures against. Its
existence creates the risk, and its occurrence results in loss. It
may be covered or excluded by a policy of insurance.
3. Hazard is the condition or factor, tangible or
intangible, which may create or increase the chance of loss
from a given peril.
Sec. 52. Cover notes may be issued to bind insurance
temporarily pending the issuance of the policy. Within sixty
days after issue of cover note, a policy shall be issued in lieu
thereof, including within its terms the identical insurance
bound under the cover note and the premium therefor.
Cover notes may be extended or renewed beyond such sixty
days with the written approval of the Commissioner if he
determines that such extension is not contrary to and is not for
the purpose of violating any provisions of this Code. The
Commissioner may promulgate rules and regulations governing
such extensions for the purposes of preventing such violations
and may by such rules and regulations dispense with the
requirement of written approval by him in the case of
extension in compliance with such rules and regulations.
The cover note is merely a written memorandum of the most
important terms of a preliminary contract of insurance,
intended to give temporary protection pending the
investigation of the risk by the insurer, or until the issue of a
formal policy, provided it is later determined that the applicant
was insurable at the time it was given.
Cover notes (also called binder) may be issued to afford
immediate provisional protection to the insured until the
insurer can inspect or evaluate the risk in question and issue
the proper policy, or until the risk is declined and notice
thereof is given.
Atty. Angeles: So the binding slip is not a cover note. In life
insurance policy the binding slip does not have the same
contractual obligation as a cover note. Cover notes yes, they
bind the insurance company temporarily pending the issuance
of the policy. But under the condition that within sixty days a
policy shall be issued in lieu thereof, including within its terms
the identical insurance bound under the cover note and the
premium therefor.
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Second paragraph, cover notes may be extended or renewed
beyond such sixty days with the written approval of the
Commissioner. In life insurance where the agreement is made
between the applicant and the insurance agent no liability shall
attach until the insurer approves it.
Look at the rules on cover notes. Sometimes insurance
companies will require additional premiums for cover notes.
Rules on Cover Notes
1. Insurance companies doing business in the Philippines
may issue cover notes to bind insurance temporarily, pending
the issuance of the policy.
2. A cover note shall be deemed to be a contract of
insurance within the meaning of Section 1(1) of the Code.
3. No cover note shall be issued or renewed unless in
the form previously approved by the Insurance Commission.
4. A cover note shall be valid and binding for a period
not exceeding 60 days from date of its issuance, whether or
not the premium therefor has been paid, but such cover note
may be cancelled by either party upon at least 7 days notice to
the other party.
5. If a cover note is not so cancelled, a policy of
insurance shall, within 60 days after the issuance of such cover
note, be issued in lieu thereof. Such policy shall include within
its terms the identical insurance bond under the cover note
and premium therefor.
6. A cover note may be extended or renewed beyond
the aforementioned period of 60 days with the written
approval of the Insurance Commission, provided that such
written approval may be dispensed with upon the certification
of the president, vice-president, or general manager of the
insurance company concerned that the risks involved, the
value of such risks and/or the premiums therefor have not as
yet been determined or established and that such extension or
renewal is not contrary to and is not for the purpose of
violating any provisions of the Insurance Code, or of any of the
rulings, instructions, circulars, orders or decisions of the
Insurance Commissioner.
7. Insurance companies may impose on cover notes a
deposit premium equivalent to at least 25% of the estimated
premium of the intended insurance coverage but in no case
less htan P500.00.
Why is there a cover note? Because sometimes insurance
company will take time to assess the kind of risk that you are
insured against. Sometimes they cannot inspect the property
you want to be insured right away. Sometimes you have to call
the experts. So the cover note is just really to cover the
transition period that’s why it is still binding between the
insurer (and the insured), because the insured is already ___
in. You want the property covered already but the insurance
company still unable to make a definite offer of the amount of
premium that will be demanded from you. That’s why there is
such a thing as a cover page.

Sec. 53. The insurance proceeds shall be applied exclusively
to the proper interest of the person in whose name or for
whose benefit it is made unless otherwise specified in the
policy
Applied exclusively to the proper interest of the person - so the
benefits will not inure to other persons that are not included in
the insurance contract itself. Again the 3rd person has no right
either in a court of equity or in a court of law to the proceeds
of the policy unless there be some contract of trust, express or
implied, between the insured and third persons.
Read this paragraph class (RCBC vs. CA), this is very
important. This particular provision applies when there are
many parties to a contract or the insurance policy. For
example, the building has been mortgaged to another so the
bank has interest on the credit extended to you. As owner you
also have your own insurance interest.
Thus, where the insurance policies on the mortgaged
properties have been endorsed by the mortgagor to the
mortgagee-bank, the proceeds being exclusively payable to the
bank by reason of the endorsement, these policies cannot be
attached by the mortgagor’s other creditors up to the extent of
the mortgagor’s outstanding obligation in the bank’s favor.
Under Section 53, to the extent of the mortgagor’s obligation
with the bank, his interest in the subject policies had been
transferred to the bank effective as of the time of the
endorsement, It is basic that the first mortgagee has superior
rights over junior mortgagees or attaching creditors. (Rizal
Commercial Banking Corporation vs. CA 289 scra 292)
In other words, your other creditors will not have any hold on
the proceeds of the insurance policy. Because when the owner
endorses the contract of insurance in favor of the bank the
proceeds will redound only to the benefit of the bank. The
other creditors of the mortgagor will have no say, or will have
no interest in the proceeds of the policy. Going back to Section
53, it shall apply exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
Sometimes there are questions where, included in the facts is
a deliberate attempt for you to be misled. For example, “the
parties deemed agreed”, ok lang yan if the law says, “unless
the parties agreed.” When you say that the parties agreed that
means that agreement is also allowed under the law. But if it is
not in the first place allowed then even if the parties agreed
that agreement of the parties will not validate an otherwise
void contract. Remember that. Not all contracts are made by
the consent of two people on all aspect or features of the
contract. If it is not allowed under law, even if the parties
agreed to such terms it will not validate the contract at all. In
Section 53 while it says, “shall be applied exclusively to the
proper interest of the person in whose name or for whose
benefit it is made,” if the parties did so agree then that is an
exception to the rule in Section 53. If there is an agreement
between the bank (mortgagee) and the owner that other
creditors may partake certain percentage of the proceeds.
Then that will be allowed under Section 53. That is the only
excuse there. That is the only way out of this provision.
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Sec. 54. When an insurance contract is executed with an
agent or trustee as the insured, the fact that his principal or
beneficiary is the real party in interest may be indicated by
describing the insured as agent or trustee, or by other general
words in the policy.
This is where one who took up the insurance is not the owner
himself but merely an agent. Then there is a principal that an
insurance agent is working for. The interest of the principal
must be indicated also in the policy itself.
Sec. 55. To render an insurance effected by one partner or
part-owner, applicable to the interest of his co-partners or
other part-owners, it is necessary that the terms of the policy
should be such as are applicable to the joint or common
interest.
Sec. 56. When the description of the insured in a policy is so
general that it may comprehend any person or any class of
persons, only he who can show that it was intended to include
him can claim the benefit of the policy.
Section 56, pertains to the description of the insured
Sec. 57. A policy may be so framed that it will inure to the
benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured.
Sec. 58. The mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person
becomes the owner of both the policy and the thing insured.
Sec. 59. A policy is either open, valued or running.
Sec. 60. An open policy is one in which the value of the thing
insured is not agreed upon, but is left to be ascertained in case
of loss.
Sec. 61. A valued policy is one which expresses on its face an
agreement that the thing insured shall be valued at specified
sum.
Sec. 62. A running policy is one which contemplates
successive insurances, and which provides that the object of
the policy may be from time to time defined, especially as to
the subjects of insurance, by additional statements or
indorsements.
An open policy is one in which the value of the thing insured is
not agreed upon, but is left to be ascertained in case of loss.
So there is no definite figure that is stated in the face of the
policy itself. How do you determine the amount of the loss?
Only when the loss happens and the parties agreed on the
value of the thing insured.
Value policy is one which expresses on its face an agreement
that the thing insured shall be valued at specified sum.
Going back to open policy why do you think this kind of
policies exist? Sometimes there are transactions, example, you
are a bonded warehouse. So goods come in and out. When
you took up a policy, you cannot say that the value of the

property is 100Thou today, tomorrow, every week or every
month thereafter. Because you’re a warehouse, you cannot
limit yourself to the exact value of the property at the time the
policy is taken. So if necessarily, it has to be an open policy,
the parties will agree to the amount of the insured only when
the loss occurs. So when the loss occurs then you will have to
evaluate the extent of the loss, the value of the loss. Valued
policy eksakto, so you know how much it’s worth. When you
take out just a regular fire insurance or property insurance for
a residential building you take out a valued policy.
What is running policy? A running policy is one which
contemplates successive insurances, and which provides that
the object of the policy may be from time to time defined,
especially as to the subjects of insurance. How do you do that?
By additional statements or indorsements. Successive policies,
so it’s one policy after another. These policies are usually
common in commercial establishments.
Sec. 63. A condition, stipulation, or agreement in any policy of
insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time
when the cause of action accrues, is void.
Section 63, this is some sort of a Statute of Limitations,
“condition, stipulation, or agreement in any policy of insurance,
limiting the time for commencing an action thereunder to a
period of less than one year from the time when the cause of
action accrues, is void.” You cannot agreed that the insurance
policy to have this kind of limitation. It shortens the period
within which you can commence an action against the
insurance company, that stipulation is void.
“One year from the time when the cause of action accrues.”
When does a cause of action accrues in an insurance policy?
When cause of action accrues
The right of the insured to the payment of his loss accrues
from the happening of the loss. However, the cause of action
in an insurance contract does not accrue until the insured’s
claim is finally rejected by the insurer. This is because before
such final rejection, there is no real necessity for bringing suit.
Since a “cause of action” requires as essential elements not
only a legal right of the plaintiff and a correlated obligation of
the defendant, but also an act or omission in violation of the
said legal right, the cause of action does not accrue until the
party obligated (insurer) refuses, expressly or impliedly, to
comply with its duty to the insured to pay the amount of
insurance.
In other words, the period for commencing an action under a
policy of insurance under Section 63 is to be computed not
from the time when the loss actually occurs but from the time
when the insured has a right to bring an action against the
insurer.
Atty. Angles: The cause of action accrues when the risk
happens or arises, right? Not necessarily. Sometimes the law
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gives you a chance to bring an action where your claim was
finally denied by the insurance company. So when your claim
was finally denied that’s the time when your cause of action
accrues. In other words, the fire took place in January 2012;
you filed a claim against the insurance company. There is a
process you have to go through before the claim is finally
denied. You kept on reminding the insurance company to
process your policy as soon as possible. They replied saying,
“we will sent investigators to investigate the cause of fire.” The
investigators would have to render a report etc etc. So when
the time the back and forth of correspondence was finally done
it was already at the end of the 2nd year. When does the
cause of action accrue? What is the cause of action? The
denial of your application. Unjust naman masyado diba if the
fire took place in January 2012 and the final denial of your
claim took place only in December of 2014. Alangan naman
the 1 year period will accrue or commence at the time the fire
took place, it’s unfair. You have to argue that the cause of
action accrued upon the final denial of your claim.
Sec. 64. No policy of insurance other than life shall be
cancelled by the insurer except upon prior notice thereof to the
insured, and no notice of cancellation shall be effective unless
it is based on the occurrence, after the effective date of the
policy, of one or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the
hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions increasing
the hazard insured against;
(e) physical changes in the property insured which result in the
property becoming uninsurable; or
(f) a determination by the Commissioner that the continuation
of the policy would violate or would place the insurer in
violation of this Code.
Section 64, how to cancel a non-life insurance policy. “No
policy of insurance other than life shall be cancelled by the
insurer except upon prior notice thereof to the insured,” prior
notice is a condition sine qua non. They also have to make
sure that, “no notice of cancellation shall be effective unless it
is based on the occurrence, after the effective date of the
policy, of one or more of the following.” So take note of the
prerequisites for cancellation.
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the
hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions increasing
the hazard insured against;

Increasing the hazard, if it does not increase then it is not a
ground for cancellation.
(e) physical changes in the property insured which result in the
property becoming uninsurable; or
If there are physical changes which you have made in the
property uninsurable walang problema yan. Let’s say, if your
physical change is to put up a higher fence. Yes indeed there
is a physical change, but it will not result to the property
becoming uninsurable. What is imagine here actually is you
assured that your warehouse will contain non-combustible
goods and then midway on the life of the policy, you decided
to store goods, materials probably that are easily combustible
then that will fall under (d) reckless acts increasing the hazard
insured against.
(f) a determination by the Commissioner that the continuation
of the policy would violate or would place the insurer in
violation of this Code.
Sec. 65. All notices of cancellation mentioned in the preceding
section shall be in writing, mailed or delivered to the named
insured at the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is relied
upon and (b) that, upon written request of the named insured,
the insurer will furnish the facts on which the cancellation is
based.
Section 65 gives you the forms of the notice of cancellation.
How notice of cancellation should be sent? First of all it must
be in writing. They cannot call you, text you. So it must be in
writing that your insurance policy is being cancelled. Mail or
delivered, how will the notice of cancellation be served? Snail
mail or courier? Well it doesn’t mention, as long as you have
proof that it has been delivered, it’s been received by you. And
shall state:
(a) which of the grounds set forth in section sixty-four is relied
upon and
(b) that, upon written request of the named insured, the
insurer will furnish the facts on which the cancellation is based
So the two items must appear in the notice of cancellation. If
you so desire they will furnish you with the facts on which the
cancellation is based. Section 64 and 65 go hand in hand. It
talks about how the policy is cancelled, what are the grounds
for cancellation. We know that before a policy is cancelled
there must be a written notice of cancellation, prior notice. And
what are the grounds of notice of cancellation and how is the
notice of cancellation made and/ or delivered. Sufficiency, it’s
important. Is the notice of cancellation sufficient?
Sec. 66. In case of insurance other than life, unless the
insurer at least forty-five days in advance of the end of the
policy period mails or delivers to the named insured at the
address shown in the policy notice of its intention not to renew
the policy or to condition its renewal upon reduction of limits
or elimination of coverages, the named insured shall be
entitled to renew the policy upon payment of the premium due
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on the effective date of the renewal. Any policy written for a
term of less than one year shall be considered as if written for
a term of one year. Any policy written for a term longer than
one year or any policy with no fixed expiration date shall be
considered as if written for successive policy periods or terms
of one year.
Section 66 on the other hand deals with the renewal of a non-
life insurance policy. There’s also a requirement of 45 days.
“…the named insured shall be entitled to renew the policy
upon payment of the premium due on the effective date of the
renewal.” Here it focuses on the renewal of the non-life policy.
That’s why when you get the insurance policy of your car, your
house the insured shall be entitled to the renewal of the policy.
So it is assumed that you are going to renew your policy. What
is the requirement? “upon payment of the premium due on the
effective date of the renewal. Any policy written for a term of
less than one year shall be considered as if written for a term
of one year”. Look at Section 66, assumption is you are going
to renew your policy unless you sent out a notice of
cancellation or the insurance company decides that it will not
renew the policy. Non renewal is different from cancellation.
Non renewal, paabutin mo talaga yong katapusan ng insurance
period. Cancellation may happen during the life of the policy
itself. Section 66 deals with a different situation from Section
64 and 65 (grounds for cancellation). The policy can be on its
6th or 7th month and then the insurance company decides to
cancel. Here, in the renewal it means that the policy has lived
out its period. So that’s the two situations that are being
addressed by these three last provisions.
Review:
Section 58 should be correlated to Section 20. The latter
applies when there is a transfer of the object insured from the
insured to another person. The former says that the transfer of
the thing insured does not carry with it the transfer of the
insurance policy.
SECTION 58. The mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person
becomes the owner of both the policy & the thing insured.
The transfer of the thing insured does not result to the transfer
of the policy in the insurance contract. It has only the effect of
suspending the insurance until the purchaser becomes the
owner of the policy as well as of the property insured.
The delivery by the vendor of his insured motor vehicle to his
vendee without any written endorsement to transfer the policy,
any loss that the motor vehicle might suffer will not give the
vendee the standing to lay claim against the insurer of the
vendor. The liability of the insurer does not automatically
attach by the mere transfer of the thing insured. The buyer
must make an effort to secure the transfer or endorsement of
the policy in his favor.
For exceptions to this rule, see Sections 20-24 and 57.
SECTION 57. A policy may be so framed that it will inure
to the benefit of whomsoever, during the continuance of the
risk, may become the owner of the interest insured.

The insurance may be applied to the interest of the person
claiming the benefit of the policy, by showing that he is the
person named or described or that he belongs to the class of
persons comprehended in the policy. In this case the transfer
of the policy is automatic, that is no endorsement is necessary.
SECTION 59. A policy is either open, valued or running.
SECTION 60. An open policy is one in w/c the value of
the thing insured is not agreed upon, but is left to be
ascertained in case of loss.
It is one in which a certain agreed sum is written on the face
of the policy not as the value of the property insured, but as
the maximum limit of the insurer's liability (i.e., face value), in
case of destruction by the peril insured against. The insured
must establish the fair market value (FMV) of the insured
property at the time of the loss. If the FMV exceeds the
maximum, the latter will control; if below, the former will
control. The insurer, however, only pays the actual cash value
of the property as determined at the time of loss.
SECTION 61. A valued policy is one w/c expresses on its
face an agreement that the thing insured shall be valued at a
specific sum.
It is one in which the parties expressly agree on the value of
the subject matter of the insurance.— the face value of the
policy and the value of the thing insured. In the absence of
fraud or mistake, the agreed value of the thing insured will be
paid in case of total loss of the property, unless the insurance
is for a lower amount.
SECTION 62. A running policy is one w/c contemplates
successive insurances, & w/c provides that the object of the
policy may be from time to time defined, especially as to the
subjects of insurance, by additional statements or
indorsements.
This kind of policy is intended to provide indemnity for
property which cannot well be covered by a valued policy
because of its frequent change of location and quantity, or for
property of such a nature as not to admit of a gross valuation.
It also denotes insurance which contemplates that the risk is
shifting, fluctuating or varying, and which covers a class of
property rather than any particular thing.
Ma’am: You usually see this when you are dealing with
inventories.
Sec. 63. A condition, stipulation, or agreement, in any policy of
insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time
when the cause of action accrues, is void.
If the period fixed is less than one year from the time the
cause of action accrues, the stipulation would be void. The
period for commencing an action under a policy of insurance
under Section 63 is to be computed not from the time when
the loss actually occurs but from the time when the insured
has a right to bring an action against the insurer.
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Where the policy provided that if a claim be made and
rejected, an "action or suit" should be commenced
within twelve months after such rejection otherwise the claim
would prescribe, a complaint or claim filed by the insured with
the Office of the Insurance Commissioner would now be
considered an "action" or "suit" the filing of which would have
the effect of tolling or suspending the running of the
prescriptive period. The new Insurance Code empowers the
Insurance Commissioner to adjudicate disputes relating to an
insurance company's liability to an insured under a policy
issued by the former to the latter.
The purpose of provisions or stipulations in insurance policies
for notice of cancellation to the insured, is to prevent the
cancellation of the policy, without allowing the insured ample
opportunity to negotiate for other insurance in its stead for his
own protection. (Saura Import & Export Co., Inc. vs. Phil.
International Surety
Co., 8 SCRA 143 [1963].)
The notice need not be delivered personally to the insured. It
may be mailed. (Sec. 65.) But there is no proof that the notice,
assuming it complied with the other requisites or conditions
mentioned, was actually mailed to and received by the insured,
where all that the insurer offers to show that the cancellation
was communicated to the insured is its employee's testimony
that the said cancellation was sent "by mail through our
mailing section" without more. (Malayan Insurance Co., Inc.
vs. Cruz-Amaldo, 154 SCRA 672 [1987].)
Warranties
Warranty is a statement or promise by the insured set forth in
the policy itself or incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect and without
reference to whether the insurer was in fact prejudiced by
such untruth or nonfulfillment, renders the policy voidable by
the insurer.
Kinds of Warranties
(1) An express warranty is an agreement contained in the
policy or clearly incorporated therein as part thereof whereby
the insured stipulates that certain facts relating to the risk are
or shall be true or certain acts relating to the same subjects
have been or shall be done.
(2) An implied warrranty is a warranty which from the
very nature of the contract or from the general tenor of the
words, although no express warranty is mentioned, is
necessarily embodied in the policy as a part thereof and which
binds the insured as though expressed in the contract.
Warranties distinguished from representations.
There are well recognized distinctions between warranties and
representations in contracts of insurance, to wit:

(1) Warranties are considered parts of the contract, while
representations are but collateral inducements to it;
(2) Warranties are always written on the face of the
policy, actually or by reference, while representations may be
written in a totally disconnected paper or may be oral;
(3) Warranties must be strictly complied with, while in
representations, substantial truth only is required
(4) The falsity or nonfulfillment of a warranty operates
as a breach of contract, while the falsity of a representation
renders the policy void on the ground of fraud and
Ma’am: The remedy for both is rescission although the grounds
are different.
(5) Warranties are presumed material, while the insurer
must show the materiality of a representation in order to
defeat an action on the policy.
Before a representation will be considered a warranty, it must
be expressly included or incorporated by clear reference in the
policy and the contract must clearly show that the parties
intended that the rights of the insured would depend on the
truth or fulfillment of the warranty.( Please read the case
illustrated in the book)
Unless the contrary intention appears, the courts will presume
that the warranty is merely affirmative. An affirmative warranty
is one which asserts the existence of a fact or condition at the
time it is made.
Sec. 68. A warranty may relate to the past, the present, the
future, or to any or all of these.
Sec. 69. No particular form of words is necessary to create a
warranty.
Sec. 70. Without prejudice to section fifty-one, every express
warranty, made at or before the execution of a policy, must be
contained in the policy itself, or in another instrument signed
by the insured and referred to in the policy as making a part of
it.
Representation is found in the application form which does not
form part of the policy itself. Warranty, on the other hand,
must be contained in the policy itself and can never be found
in the application form for insurance policy. If contained in
another instrument, it must be signed by the insured and
referred to in the policy as making a part of it. Mere reference
alone is not sufficient to give this effect. Please correlate this
to the 2nd par.of Sec. 50 which provides that warranty is not
binding to the insured even if it is signed by the insurer where
the descriptive title of the warranty is not mentioned or written
in the blank spaces provided for in the policy.
Sec. 71. A statement in a policy, of a matter relating to the
person or thing insured, or to the risk, as a fact, is an express
warranty thereof.
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Opinions and beliefs are not considered as warranty.
Sec. 73. When, before the time arrives for the performance
of a warranty relating to the future, a loss insured against
happens, or performance becomes unlawful at the place of
the contract, or impossible, the omission to fulfill the
warranty does not avoid the policy.
The general rule is that a violation of a warranty avoids the
insurance, give me the exceptions.
Section 73, which refers to those warranties relating to the
future, provides 3 exceptions:
1. When loss occurs before time of performance
2. When performance becomes unlawful
3. When performance becomes impossible
Sec. 74. The violation of a material warranty, or other
material provision of a policy, on the part of either party
thereto, entitles the other to rescind.
What is the course of action of the injured party when there is
a violation of the warranty?
The violation of the terms of contract of insurance
entitles either party to terminate contractual relations.
Under Section 74, the insurer is entitled to rescind a
contract of insurance for violation of a warranty only
if said warranty is material; otherwise, the breach
thereof will not avoid the policy.
What happens to violations of immaterial provisions?
The breach of any provision which is not material will
not avoid the policy (Section 74). However, the
parties may expressly stipulate that the violation of a
particular provision (although immaterial) in the policy
shall avoid it. (Sec 75) By such stipulation, the parties
convert an immaterial warranty into a material one.
Sec. 75. A policy may declare that a violation of specified
provisions thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid the policy.
I’ve mentioned earlier that the omission to fulfill the warranty
does not avoid the policy. If the loss occurs prior to the time of
performance, or when the performance is unlawful or when
the performance has become impossible.
What happens if there is waiver or estoppel? Do those
doctrines of estoppels or waiver apply?
Breach of warranty operates to discharge the insurer from
liability unless the insurer is liable because of a waiver of
the warranty or an estoppels.
1. The omission to fulfill a warranty or condition will
likewise be excused where there is a waiver on the
part of the insurer. Failure on the part of the insurer

to assert a forfeiture upon breach of warranty or
condition, after knowledge thereof, amounts to a
waiver or estoppel.
2. Under estoppels, the insurer is precluded, because of
some action or inaction on its part, from relying on an
otherwise valid defense as against the insured who
has been induced to enter into the contract by the
insurer’s representation or conduct.
So the Doctrine of waiver or estoppel can be raised as a
defense or as a counter-argument in favor of the insured. If
the insurance company continued the relationship knowing the
violation of the warranty then the insurer cannot back out of
its contractual obligations under the policy because the insurer
is estopped from asserting the breach or the insurer is deemed
to have waived its right to avail of eviction(?).
Sec. 76. A breach of warranty without fraud merely
exonerates an insurer from the time that it occurs, or where
it is broken in its inception, prevents the policy from
attaching to the risk.
Can you give me the distinction between warranty and
condition?
The term “warranty” and “conditions precedent” are often
used interchangeably or synonymously. However, some
courts have recognized material differences.
1. As to effect
Warranty does not suspend or defeat the operation of
the contract, but a breach affords either the remedy
expressly provided in the contract or that furnished by
law, while condition precedent is one without the
performance of which the contract although in form
executed by the parties and delivered, does not
spring into life.
In other words, a condition precedent is a limitation
to the attachment of the risk, whereas a warranty
does not necessarily have that effect.
2. As to nature
If the insured person contracts and warrants that if
representations made by him in his application for
insurance are not true, the policy shall be null and
void, such statements are not conditions precedent
but rather of the nature of a defeasance. Also,
promissory warranties are usually regarded as
conditions subsequent to be performed after the
policy has become a valid contract, non-performance
of which will work a defeasance.
Conditions are actually more like - there is already a valid
contract. When there is already a valid contract, the contract is
to be executed and one of the parties merely needs to comply
with certain conditions. But a violation of a warranty goes to
the very core of the validity of the contract itself. That’s how
different they are. Sometimes they are used interchangeably.
But when you are confronted with facts where in such a way if
the terms, stipulation are not complied with it would render
the contract null and void then that would be more likely a
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violation of a warranty. But if it is merely a restriction of a
process(?), then it is more likely a condition.
What are exceptions in an Insurance Policy?
Exceptions are inserted in a contract of insurance for
the purpose of withdrawing from the coverage the
policy, as delimited by the general language
describing the risk assumed some specific risks which
the insurer declares himself unwilling to undertake.
In other words, these terms that you will find in an insurance
policy: warranties, conditions precedent, exception they have
certain significance when they appeared in an insurance policy.
What is tricky there is when one is very closely related to the
other. We must know what distinguishes one from the other.
In section 74, what is the remedy? Rescission, the remedy
when there is a violation of a material warranty or other
material provision of a policy. It talks about material. When
you test a materiality for warranty, where do you find that? In
representation - they have the same test of materiality that
applies to warranty.
Sec. 46. The materiality of a representation is
determined by the same rules as the
materiality of a concealment.
Test of materiality
The materiality of the representation is to be
determined not by the event, but solely by the
probable and reasonable influence of the facts upon
the party to whom the representation is made, in
forming his estimates of the disadvantages of the
proposed contract or in making his inquiries.
Both parties can be guilty of misrepresentation. The insurance
company can also misrepresent certain facts to the insured.
Likewise the insured is usually the one guilty of
misrepresentation if there is misrepresentation. So the same
test is applied to both representation and violation warranty. It
must be a violation of a material one. If it is not material
warranty, then there is no ground, it would be unreasonable
on your part to seek for rescission of the insurance contract.
The remedy is rescission.
What about violation of immaterial provisions? Does that void
the policy? No, unless such violation is a specified provision in
the contract. You have to determine if the violation is a
violation of a material warranty or just an immaterial warranty.
If it is violation of a material warranty either party may seek
for a rescission of the contract on the ground of breach of
contract, he did not comply with the warranty. If an
Immaterial warranty has been violated it doesn’t automatically
void the policy. However, if it is so stated in the policy itself
you can’t do anything about it; the violation of a particular
provision no matter how immaterial will avoid it.
Effects of breach of warranty by insured
The breach referred to in Section 76 is without fraud. In order
that the insurer may be entitled to rescind a contract of
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insurance on the ground of breach of warranty, fraud is not

essential. Falsity, not fraud is the basis of liability on warranty.

1. Without fraud
When there is no fraud, the policy is avoided only
form the time of breach (Sec 76).
2. With fraud
When there is fraud, the policy is avoided ab
initio, and the insured is not entitled to the return
of the premium paid.

I want you to go over the discussion on Conditions in

insurance policy. There is a condition precedent and condition
subsequent. This is just for the academic discussion on what
these two animals are.

Let’s take a look at

Effects of breach on legal relations of parties

Warranties, conditions, and exceptions affect the legal

relations of the parties quite differently.

On binding force of contract

The occurrence of a breach of warranty or condition

even though such breach be but temporary renders
the entire contract defeasible or voidable and even
though such breach may not have affected the risk or
contributed to the loss in any way. But the occurrence
of an excepted peril, does not in the least affect the
binding force of the contract.

On liability where there is waiver

Such a breach of warranty or of condition may be

waived without consideration; but the insurer does
not become liable for an excepted loss by waiver
unless such waiver amounts to a new contract on
valuable consideration. The insurer cannot, by a
naked waiver, assume a non-existent duty. Nor is the
defense that the loss is excepted barred by the
incontestable clause.

Remember that the doctrine of estoppels and waiver played a

big role in insurance contract just like in other forms of
contracts, which are generally entered into by parties. So when
you look at insurance contract you do not only look at the
violation of the insurance code but also the possibility of
applying these doctrines. You apply these doctrines as your
defenses or your cause of action. So now we finish warranty.
Next meeting we will go on premium J

END