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INSURANCE REVIEWER
The Contract of Insurance
A. Concept
1. Definition
a. Black Law’s Definition of Insurance
A contract whereby, for a stipulated consideration, one party
undertakes to compensate the other for loss on a specified subject
by specified perils. The party agreeing to make the compensation is
usually called the “insurer” or “underwriter,” the other, the “insured”
or “assured,” the agreed consideration, the “premium,” the written
contract, a “policy,” the events insured against, “risks” or “perils,” and
the subject, right or interest to be protected, the “insurable interest.”
b. Elements of Contract
Art. 1318. There is no contract unless the following requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract;
3. Cause of the obligation which is established.
Subject Matter: refers to the thing insured. In fire and marine insurance, the
thing insured is property; in life, health or accident insurance, it is the life or
health of the person subject of the contract; in casualty insurance, it is the
insured’s risk of loss or liability.
Consideration: Premium paid by the insured. It is the amount based on the
probability of loss and extent of liability for which the insurer may become liable
under the contract.
Object and Purpose: Insurance contract is a risk-bearing contract. Principal
object and purpose is the transfer and distribution of risk loss, damage or
liability arising from an unknown or contingent event through payment of a
consideration by the insured to the insurer under a legally binding contract to
reimburse the insured for losses suffered on happening of stipulated event.
c. Contract of Insurance
Section 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;
(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.
Legal Concept of Insurance:
1. Sec. 2 contains statutory definition of insurance and the acts
any of which will constitute “doing an insurance business” or
“transacting an insurance business.” Assurance is also used
instead of insurance. Assurance refers to an events like
death, which must happen, while insurance refers to a
contingent event which may or may not occur.
2. A contract of insurance is an agreement by which one party
(insurer) for a consideration (premium) paid by the other
party (insured), promises to pay money or its equivalent or to
do some act valuable to the latter (or his nominee), upon
happening of loss, damage, liability or disability arising from
unknown or contingent event. A written insurance contract is
called a policy.

Determination of the existence of the contract:
Character of insurance is to be determined by the exact nature
of the contract actually entered into whatever the form it takes or
by whatever name it may be called.
An agreement entered into by a corporation, even though it was
called a surety company, to indemnify for a valuable
consideration against loss by reason of uncollectable debts, was
an insurance contract and not a contract of guaranty.
Under the Code, contract of suretyship shall be deemed as
insurance contract “if made by a surety who or which as such, is
doing an insurance business.”
Elements of Contract of Insurance:
1. The insured possesses an interest of some kind susceptible
of pecuniary estimation known as insurable interest;
2. Insured is subject to risk of loss through the destruction or
impairment of that interest by the happening of designated
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 a similar risk; and
5. As consideration for insurer’s promise, the insured make a
ratable contribution called premium to a general insurance
fund.
Functions of Insurance:
1. Principal function is risk-bearing. Financial losses of the few
are equally distributed over the many out of a fund
contributed by all.
2. Subsidiary functions are: (a) to stimulate business
enterprises; (b) encourages business efficiency and
enterprise; © promotes loss-prevention; (d) encourages
savings; and (e) solves social problems.
3. Indirect functions are: (a) investment of funds; (b) use of
reserve funds; © effect on prices; and (d) as basis of credit.
2. Origin
Aboitiz Shipping v New India Assurance: Doctrine of limited liability is not
applicable in this case. When damage is due to fault of shipowner or to
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the concurrent negligence of shipowner and captain, such doctrine cannot
be invoked.
Doctrine of the “Real and Hypothecary Nature of Maritime Law”: This
doctrine contributed to the growth of insurance. HOW? Mutual
agreements among merchants engaged in common shipping ventures for
distributing among the mutual contractors, the loss falling upon any one
by reason of the perils of navigation. Law of insurance was actually
derived from the maritime law and was part of the general law merchant
and international in its character.
3. Laws Governing Insurance
a. RA No. 10607 (2013) of the new Insurance Code
An Act Strengthening the Insurance Industry
b. Civil Code provisions (life annuities, donations, damages,
subrogation, guarantees and sureties, insurance provisions
repeal
• Art 739 and 2012- void donations
• Art 2011- applicability of Civil Code
• Art 2021-27- life annuity contracts
• Art 2186- compulsory motor vehicle liability insurance
• Art 2207- insurer’s right of subrogation
c. Special Laws (eg GSIS, SSS, PDIC, Pre-Need Code)
Gercio v Sunlife Assurance: Deficiencies in the law will have to be
supplemented by general principles on the subject. PH law of insurance
should be supplemented by the general principles prevailing on the
subject. The purpose should be to have PH Law of Insurance conform as
nearly as possible to modern law of Insurance in US.
NOTE: Present rule, changing the name of beneficiary is allowed as long
as there is stipulation for such
• PD No.1146 with respect to insurance of government
employees;
• RA No. 1161 with respect to insurance employees in private
employment;
• RA No. 3591 which established the Philippine Deposit Insurance
Company insuring benefits are extended by the GSIS
4. Nature of Insurance Contracts
a. Aleatory,

Art 2010. By an aleatory contract, one of the parties or both reciprocally
bind themselves to give or to do something in consideration of what the
other shall give or do upon the happening of an event which is uncertain,
or which is to occur at an indeterminate time.
It depends upon contingent event. It is not a contract of chance. Art.
2010 provides that “By an aleatory contract, one of the parties or both
reciprocally bind themselves to give or to do something in
consideration of what the other shall give or do upon the happening
of an event which is uncertain, or which is to occur at an indeterminate
time.
Each party must take a risk; the insurer, that of being compelled upon
the happening of the contingency, to pay the entire sum agreed upon
and the insured, that of parting with the amount required as premium
without receiving anything.
b. Consensual and Voluntary
Art. 1305. A contract is a meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something or to render
some service.
Art. 1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public
policy.
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was
made.
Consensual means that it is perfected by the meeting of the minds
of the parties (Art.1319). Meanwhile it is voluntary in the sense that
it is not compulsory and the parties may incorporate such terms and
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conditions as they may deem convenient (Art.1306) which will be
binding (Art,1308) provided that they do not contravene any provision
of law and are not opposed to public policy.
c. Unilateral
Imposing legal duties only on the insurer who promises to indemnify
in case of loss.
d. Conditional
It is subject to conditions the principal one of which is the happening
of the event insured against. Aside from this main condition, the
contract usually includes other conditions (such as payment of
premium or performance of some other act) which must be complied
with as precedent to the right of the insured to claim benefit.
e. Contract of Adhesion
One of the parties imposes a ready-made form of contract, which the
other party may accept or reject, but which the latter cannot modify.
One party prepares the stipulation in the contract, while the other
party merely affixes his signature or his "adhesion" thereto, giving no
room for negotiation and depriving the latter of the opportunity to
bargain on equal footing. It must be borne in mind, however, that
contracts of adhesion are not invalid per se. Contracts of adhesion,
where one party imposes a ready-made form of contract on the other,
are not entirely prohibited. The one who adheres to the contract is, in
reality, free to reject it entirely; if he adheres, he gives his consent.
f. Contract of Indemnity
Because the promise of the insurer is to make good only the loss of
the insured. Note that no person may secure insurance upon property
in which he has no interest. If insured has no insurable interest, the
contract is void and unenforceable as being contrary to public policy
because it affords a temptation to the insured to wish or bring about
the happening of the loss.
g. Personal
It is between the insurer and the insured each party having in view
the character, credit and conduct of the other. The insured cannot
assign, before happening of the loss, his rights under a property
policy to others without the consent of the insurer.
Republic v Del Monte Motors: Del Monte cannot levy the security deposit
of the insurance commissioner in favor of only one insured. Securities are

held as contingency fund to answer for the claims against the insurance
company by all its policy holders and beneficiaries. This step is taken in
the event that the company becomes insolvent or otherwise unable to
satisfy the claims against it. Thus, a single claimant may not have their
own claims against the insurance company under other insurance
contracts it has entered into.
Philamcare Health Systems v CA: The health care agreement was in the
nature of non-life insurance, which is primarily a contract of indemnity.
Once the member incurs hospital, medical or any other expenses arising
from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the
contract.
Blue Cross Health Care v Olivares: A health care agreement is in the
nature of non-life insurance. It is established rule in insurance contracts
that when their terms contain limitations on liability, they should be
construed strictly against the insurer. These are contracts of adhesion the
terms of which must be interpreted and enforced stringently against the
insurer which prepared the contract. Thus, the insurer has the burden to
prove its presumption against the insured.
Philippine Health Care Products v CIR: HMO undertakes a business risk
when it offers to provide health services: the risk that might fail to earn a
reasonable return on its investment. However, such risk is not the type of
risk peculiar to insurance companies. Insurance risk or actuarial risk, is
the risk that the cost of insurance claims might be higher than the
premiums paid. The amount of premium is calculated on the basis of
assumptions made relative to the insured. Thus, HMO is not considered
as an insurance company.
5. Construction/Interpretation
Art. 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations
shall control.
If the words appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former.
Art. 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
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Art. 1372. However general the terms of a contract may be, they shall not
be understood to comprehend things that are distinct and cases that are
different from those upon which the parties intended to agree.
Art. 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
Art. 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from
all of them taken jointly.
Art. 1375. Words which may have different significations shall be
understood in that which is most in keeping with the nature and object of
the contract.
Art. 1376. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established.
Art. 1377. The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.
Art. 1378. When it is absolutely impossible to settle doubts by the rules
established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled
in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a
way that it cannot be known what may have been the intention or will of the
parties, the contract shall be null and void.
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules
of Court shall likewise be observed in the construction of contracts.
Gercio v Sunlife Assurance: If the husband wishes to retain to himself the
control and ownership of the policy he may so provide in the policy. But if
the policy contains no provision authorizing a change of beneficiary
without the beneficiary’s consent, the insured cannot make such change.
Accordingly, it is held that a life insurance policy of a husband made
payable to the wife as beneficiary, is the separate property of the
beneficiary and beyond the control of the husband.

Cebu Shipyard v William Lines: The intention of the parties to make each
other a co-assured under an insurance policy is to be gleaned principally
from the insurance contract or policy itself and not from any other contract
or agreement because the insurance policy denominates the assured and
the beneficiaries of the insurance. Thus, when the insurance policy names
only one party as the assured, the claim of another that it is a co-assured
is unfounded. Here, Prudential must be subrogated to the claim upon
paying the insured.
New Life Enterprises v CA: While it is a cardinal principle of insurance law
that a policy or contract of insurance is to be construed liberally in favor of
the insured and strictly against the insurer, yet contracts of insurance, are
to be construed according to the sense and meaning of the terms which
the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary
and popular sense. Moreover, obligations arising from contracts have the
force of law between the contracting parties and should be complied with
in good faith. Thus, here, it is clear that the conditions agreed by the
parties were violated by the insured.
Gaisano Cagayan v Insurance Co. Of North America: It is well-settled that
when the words of a contract are plain and readily understood, there is no
room for construction. In this case, the questioned insurance policies
provide coverage for book debts in connection with ready-made clothing
materials which have been sold or delivered to various customers and
dealers of the insured anywhere in the Philippines; and defined book
debts as “the unpaid account still appearing in the Book of Account of the
Insured 45 days after the time of the loss covered under this Policy.” Thus,
it is wrong to say that the policy covers the goods sold and delivered to
the customers and dealed of the insured because such was not stipulated
in the policy.
Rizal Surety v CA: Terms in an insurance policy, which are ambiguous,
equivocal or uncertain are to be construed strictly and most strongly
against the insurer. Indeed, the stipulation as to the coverage of the fire
insurance policy under controversy has created a doubt regarding the
portions of the building insured thereby. Art 1377 of the NCC provides:
The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity. Conformably, it stands to reason
that the doubt should be resolved against the petitioner, Rizal Surety
Insurance Company, whose lawyer or managers drafted the fire insurance
policy contract under scrutiny. Thus, Rizal Surety is liable for loss of the
two-storey annex building considering that the fire insurance policy sued
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upon covered only the contents of the four-span building. The two-storey
annex was actually an integral part of the four-span building.
Lalican v Insular: While it is a cardinal principle of insurance law that a
policy or contract of insurance is to be construed liberally in favor of the
insured and strictly as against the insurer company, yet, contracts of
insurance, like other contracts, are to be construed according to the sense
and meaning of the terms, which the parties themselves have used. If
such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense. In this case, the
conditions for reinstatement under the Policy Contract and Application for
Reinstatement were written in clear and simple language, which could not
admit of any meaning or interpretation other than those that they so
obviously embody. A construction in favor of the insured is not called for,
as there is no ambiguity in the said provisions in the first place. Thus,
Violeta cannot claim for payment of the proceeds because Eulogios death
rendered impossible full compliance with the conditions for reinstatement
of Policy.
Eulogio managed to file his Application for Reinstatement and deposit the
amount for payment of his overdue premiums and interests with Malaluan
before he died. However, the policy could only be considered reinstated
after the Application for Reinstatement had been processed and approved
by Insular Life during Eulogios lifetime and good health.
B. Insurance Contract
1. Parties
i.Insurer
Section 6. Every corporation, partnership, or association, duly authorized
to transact insurance business as elsewhere provided in this Code, may
be an insurer.
Parties to the contract of insurance:
1. INSURER or party who assumes or accepts the risk of loss and
undertakes for a consideration to indemnify the insured or to pay
him a certain sum on the happening of a specified contingency or
event. It is synonymous with assurer or underwriter.
2. INSURED or the second party to the contract, the party in whose
favor the contract is operative and who is indemnified against, or is to receive
a certain sum upon the happening of a specified contingency or event. He is
the person whose loss is the occasion for the payment of the insurance
proceeds by the insurer.

Note that insured is not always the person to whom the proceeds are
paid. This person may by the beneficiary designated in the policy. It is
also possible that the insured may assign the proceeds of the insurance
to someone else.
Insured and assured are interchangeably used but strictly, insured
refers to the owner of the property insured or person whose life is
subject of the contract of insurance, while assured refers to the person
for whose benefit the insurance is granted. Assured is also used
sometimes as synonym of beneficiary or the person designated by the
terms of the policy as the one to receive the proceeds of the insurance.
He is the third party in a contract of life insurance for whose benefit the
policy is issued and to whom the loss is payable.
Who may be an Insurer:
1. Foreign or domestic insurance company or corporation.
It must first obtain certificate of authority for that purpose from the
Insurance Commissioner who may refuse to issue such certificate
is, in his judgment, such refusal will best promote the interests of
the people.
2. Individual, partnership or association.
Any person, partnership or association of persons may be given a
certificate of authority if such person, partnership or association is
possessed of the capital assets required of a corporation doing the
same kind of business in Philippines.
Business of insurance affected with public interest.
Business of insurance is one that affected with public interest and
therefore, it is subject to regulation and control by the state by virtue of
the exercise of its police power or in the interest of public convenience
and general good of the people.
Insurance company is an instrumentality which gathers funds upon the
basis of equality of risk from a greater number of persons, sufficiently
large in number to arouse the element of chance to step out and the law
of averages to step in as the controlling factor
Section 190. For purposes of this Code, the term insurer or insurance
company shall include all partnerships, associations, cooperatives or
corporations, including government-owned or -controlled corporations or
entities, engaged as principals in the insurance business, excepting
mutual benefit associations. Unless the context otherwise requires, the
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term shall also include professional reinsurers defined in Section 288.
Domestic company shall include companies formed, organized or
existing under the laws of the Philippines. Foreign company when used
without limitation shall include companies formed, organized, or existing
under any laws other than those of the Philippines.
Section 191. The provisions of the Corporation Code, as amended,
shall apply to all insurance corporations now or hereafter engaged in
business in the Philippines insofar as they do not conflict with the
provisions of this chapter.
White Gold Marine Services v Pioneer Insurance: A Protection &
Indemnity Club (P&I Club) is “a form of insurance against third
party liability, where the third party is anyone other than the P &
I Club and the members.” Also a P& I club is mutual insurance
association that provides risk pooling, information and
representation for its members. By definition then, Steamship
Mutual as a P & I Club is a mutual insurance association engaged
in the marine insurance business.
Pandiman v Marine Manning Management Corp: Under the
principle of “relativity of contracts,” petitioner PPI cannot be held
liable for the same death benefits claims. The insurance contract
between the insurer and the insured, under Art. 1311 of the CC,
is binding only upon the parties (and their assigns and heirs) who
execute the same. With the reality, as borne by the records, that
petitioner PPI is not a party to the insurance contract in question,
no liability or obligation arising therefrom, may be imposed upon
it. Here, the P&I Club (OMMIAL) is the insurer, the shipowner
(Sun Richie Five Bulkers S.A.) is the insured, and respondent
Rosita Singhid as widow and heir of a crew on board the insured
vessel like Benito, is a beneficiary.
ii. Insured
Section 7. Anyone except a public enemy may be insured.
Capacity of Party insured:
1. Natural person- two essential requisites are necessary:
a. He must be competent to make a contract (Art 1327-29); and
b. He must possess an insurable interest in the subject of the
insurance.
2. Juridical person- third requisite may be added that is, the
insured must not be a public enemy. Juridical person like a

partnership or a corporation may take out insurance on property
owned by it.
Meaning of Public Enemy:
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.”
During wartime, a private corporation is deemed an enemy although
organized under 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.
Effect of war on existing insurance contracts:
1. Where parties rendered enemy aliens-- By law of nations, all
interactions between citizen of belligerent powers which is
inconsistent with a state of war is prohibited. 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.
The effect of war between countries of the insured and their insurer
upon insurance contracts validly entered into during peacetime is a
question upon which there is a decided conflict of authority.
a. With respect to property insurance: An insurance policy
ceases to be valid and enforceable as soon as an insured
becomes public enemy (Filipinas Cia de Seguros v Christern
Huenefeld & Co).
b. With respect to life insurance: The contract is not merely
suspended but is abrogated by reason of nonpayment of
premiums, since the time of the payments is peculiarly of the
essence of the contract. However, the insured is entitled to the
cash of reserve value of the policy, which is the excess of the
premiums paid over the actual risk carried during the years
when the policy had been in force.
2. Where loss occurs after end of war- Effect of war is not
merely to suspend but to abrogate the contract of insurance
between citizens of belligerent states, the termination of war does
not revive the contract. Consequently, the insurer is not liable even
if loss is suffered by the insured after the end of the war.
Section 8. Unless the policy otherwise provides, where a mortgagor of
property effects insurance in his own name providing that the loss shall
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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.
Insurable interest of mortgagee and mortgagor:
1. Separate insurable interest -- Mortgagor and mortgagee have each
an insurable interest in the property mortgaged 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. 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 the
objection that there is double insurance.
2. Extent of insurable interest of mortgagor-- The mortgagor
of property, as owner, has insurable interest to the extent of its
value, even though the mortgage debt equals such value. The loss
or destruction of the property insured will not extinguish his
mortgage debt.
3. Extent of insurable interest of mortgagee-- Mortgagee has
an insurable interest in the mortgaged property to the extent of the
debt secured, since property is relied upon as security, and in
insuring, he is not insuring the property itself but his interest or lien.
His insurable interest 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 the
mortgagee.
4. Extent of amount of recovery-- Mortgagor cannot recover
upon the insurance beyond the full amount of his loss and the
mortgagee, in excess of the credit at the time of the loss nor the
value of the property mortgaged.
Insurance by mortgagee of his own interest:
1. Right of Mortgagee in case of loss-- He is entitled to the proceeds of
the policy in case of loss before payment of the mortgagee.

2. Subrogation of insurer to right of mortgagee-- 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.
3. Change of creditor-- The payment of the insurance to the mortgagee
by reason of the loss does not relieve the mortgagor from his
principal obligation but only changes the creditor.
Insurance by mortgagor of his own interest:
1. For his own benefit-- Mortgagor may insure his own interest as
owner for his own benefit. In case of loss, insurance proceeds do
not inure to the benefit of the mortgagee who has no greater right
than unsecured creditors in the same.
2. For the benefit of mortgagee-- It is competent 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.
Mortgagee may be made the beneficial payee in several ways:
a. He may become the assignee of the policy with the consent
of the insurer;
b. He may be the mere pledgee without such consent;
c. A rider making the policy payable to the mortgagee “as his
interest may appear” may be attached;
d. A “standard mortgage clause” containing a collateral
independent contract between mortgagee and insurer may be
attached;
e. The policy, though, by its terms payable absolutely to the
mortgagor; may have been procured by a mortgagor under a
contract duty to insure for mortgagee’s benefit, in which case
mortgagee acquires an equitable lien upon the proceeds.
Insurance by mortgagor for benefit of mortgagee, or policy assigned to
mortgagee:
Legal effects where mortgagor effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a
policy insurance to the mortgagee:
1. The contract is deemed to be upon the interest of the
mortgagor; hence, he does not cease to be 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 mortgagee;
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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, 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.
Right of Mortgagee under mortgagor’s policy:
1. Before loss-- Mortgagee is a conditional appointee of the mortgagor
entitled to receive so much of any sum that may become due under
the policy as does not exceed his interest as mortgagee. Such right
becomes absolute upon the occurrence of the loss.
2. After loss-- If loss happens when the credit is not due, mortgagee is
entitled to receive money to apply to the extinguishment of the debt
as fast as it becomes due. On the other hand, if loss happens after
the credit has matured, mortgagee may apply the proceeds to the
extent of his credit.
Effect of insurance by mortgagee on behalf of mortgagor:
1. Discharge of debt.-- Same rules obtain when mortgagee himself
procures policy by which mortgagor is to pay the premiums upon
such insurance. Upon destruction of the property, mortgagee is
entitled to receive payment from the insured but such payment
discharges the debt if equal to it, and if greater than the debt, the
mortgagee holds the excess as trustee of the mortgagor.
2. Right to subrogation.-- If there is a stipulation that insurer
shall be subrogated to the rights of the mortgagee, the payment of
the policy will not discharge debt even though mortgagee may have
procured the policy by arrangement with the mortgagor. If there is
no such stipulation, the rule on subrogation does not apply except
where mortgagee insures only his interest.
Section 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
obligations on the assignee, making a new contract with him, the acts of
the mortgagor cannot affect the rights of said assignee.
Assignment or transfer of insurance policy:
The effect is to substitute the assignee or transferee in place of the
original insured in respect to the right to claim indemnity or payment for
a loss as well as the obligation to perform the conditions, if any, of the
policy. The assignee, unless he makes new contract with the insurer,

acquires no greater right under the insurance than the assignor had,
subject to insurer’s defenses.
1. As to fire policy. －In the absence of provision in the contract or
subsequent consent of the insurer, it is not subject to assignment
before it becomes a fixed liability, being strictly a personal contract.
Insurer is naturally concerned about moral character of the insured
and should not be compelled to become an insurer to an assignee
to whom he would have declined to issue a policy and who could
materially alter the risks assumed by the insurer without his
consent.
2. As to marine policy. －It is assignable even without the
consent of the insurer unless required by the terms of the policy.
Nevertheless, just like a fire policy, it is not assignable without the
consent of the insurer.
3. As to casualty policy. －Insurer’s consent also required.
4. As to life policy. －The policy may freely be assigned before
or after the loss occurs, to any person whether he has an insurable
interest or not. However, an assignment of life policy to person
without insurable interest, which the insured makes in bad faith and
under such circumstances as where there was a preconceived
agreement that the policy was to be assigned for the purpose of
accomplishing an illegal purpose.
Distinction between the assignment or transfer must be made between (a)
the policy itself which transfers rights to the contract to another insured; (b)
the proceeds of the policy after a loss has happened; and © the subject
matter of the insurance.
Right of mortgagor to assign insurance policy to mortgagee:
Right of the mortgagor to assign or transfer an insurance policy is
recognized in Sec.8. Sec.9 only gives the effect if insurer agrees to the
transfer of the policy and, at the time of his assent, imposes new
obligations on the assignee.
Effect of new contract between insurer and mortgagee-assignee:
Assignment by the mortgagor to the mortgagee with the consent of
insurer does not convert the contract into one of indemnity to the
mortgagee. The contract remains with the mortgagor as it is his interest
alone that is covered. The assignment operates merely as an equitable
K M C |9
transfer of the policy so as to enable the mortgagee to recover the
amount due in case of loss subject to subject to the conditions of the
policy.
However, where a new and distinct consideration passes from the
mortgagee to the insurer, a new contract is created between them.
Novation of the original contract takes place, Thus, acts of the
mortgagor cannot affect the rights of the mortgagee.
Section 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.
Persons entitled to recover on policy:
1. As against the insured. －Third persons have no right either in court
of equity or in court of law to the proceeds of policy unless there be
some contract of trust, express or implied, between the insured and
the third person.
2. As against the insurer. －Third person, in the absence of any
provision in the policy, has also no right to the proceeds. A policy of
insurance is a distinct and independent contract between the
insured and insurer. Only the insured, if still alive, or beneficiary, if
insured is already deceased, is entitled to claim insurance proceeds
upon maturation of policy.
Section 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.
Where insurance made by an agent or trustee:
An insurance may be taken by a person personally or through his agent
or trustee since by the provision of Sec.53, insurance is to be applied
exclusively to the interest of the person in whose name or for whose
benefit it is made, the agent or trustee when making an insurance
contract for or on behalf of his principal should indicate that he is merely
acting on in a representative capacity by signing as such as agent or
trustee, or by other general terms.
Section 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.

Where insurance effected by partner or part owner:
Insurable interest in property of partnership exists in both partnership
and the partners. A partner has an insurable interest in the firm property
which will support a policy taken out thereon for his own benefit. But a
partner who insures partnership property in his own name limits the
contract to his individual share unless the terms of policy clearly show
that insurance was meant to cover also the shares of the other partners.
Section 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 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.
Where description of insured general:
The policy must specify the parties between whom the contract is made.
Although it is usual to insert in a policy the name of the person insured,
it is not essential as he may be described in other ways. In order that
the insurance may be applied to the interest of the person claiming the
benefit of the policy, he must show that he is the person named or
described or that he belongs to the class of persons comprehended in
the policy.
Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know
how to write. (1263a)
Beneficiary defined:
1. Beneficiary is ordinarily used in referring to the person who is
Art. 1328. Contracts entered into during a lucid interval are valid.
Contracts agreed to in a state of drunkenness or during a hypnotic spell
are voidable.
Art. 1390. The following contracts are voidable or annullable, even
though there may have been no damage to the contracting parties:
2. It is also used in insurance law to indicate only those persons,
(1) Those where one of the parties is incapable of giving consent
to a contract;
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
Kinds of Beneficiary:
These contracts are binding, unless they are annulled by a proper action
in court. They are susceptible of ratification.
K M C | 10
Filipinas Cia de Seguros v Christern Huenefeld: The insurance policy
ceased to be valid and enforceable when the respondent having become
an enemy corporation on December 10, 1941, the insurance policy issued
in its favor on October 1, 1941, by the petitioner (a Philippine corporation)
had ceased to be valid and enforceable, and since the insured goods were
burned after December 10, 1941, and during the war, the respondent was
not entitled to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of specific provision
in the Insurance Law) require that the premium paid by the respondent for
the period covered by its policy from December 11, 1941, should be
returned by the petitioner.
Great Pacific Life v CA: The rationale of a group insurance policy of
mortgagors, otherwise known as the “mortgage redemption insurance,” is
a device for the protection of both the mortgagee and the mortgagor. On
the part of the mortgagee, it has to enter into such form of contract so that
in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance
will be applied to the payment of the mortgage debt, thereby relieving the
heirs of the mortgagor from paying the obligation.
iii. Beneficiaries
Section 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. Notwithstanding the foregoing, in the event the insured does
not change the beneficiary during his lifetime, the designation shall be
deemed irrevocable.
named or designated in a contract of life, health, or accident
insurance as the one who is to receive the benefits which become
payable, according to the terms of contract, upon death of the
insured.
whether natural or juridical, who, though not parties to the contract,
are mentioned in it as intended recipients of the proceeds or
benefits of the insurance if the insured risk occurs.
1. Insured himself. －Immediate party to the contract and is ordinarily
called the assured.

2. Third person who paid a consideration. －Insured may have taken
the policy for the benefit of a creditor or to secure some other
obligation;
3. Third person through mere bounty of insured. －Beneficiary may be
the one who gives no consideration whatsoever for any right that
may be acquired in the policy but is designated as recipient of the
proceeds of the policy through mere bounty of the insured.
Limitations in the appointment of beneficiary:
1. Art 2012→ any person forbidden from receiving donation under Art
739 cannot be named beneficiary of life insurance policy
2. Art 739 → Void donations: (a) Made between persons who are guilty
of adultery or concubinage; (b) between persons found guilty of the
same criminal offense; and © made to a public officer or his wife,
descendants and ascendants, by reason of his office.
3. Under Sec.10 → Life insurance is no different from civil donation
insofar as the beneficiary is concerned. Both are founded on the
same consideration: liberality.
Section 12. The interest of a beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other beneficiaries, unless
otherwise disqualified. In the absence of other beneficiaries, the
proceeds shall be paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid to the estate of the
insured.
Forfeiture of the interest of the beneficiary in a life insurance
policy:
Art. 2011. The contract of insurance is governed by special laws. Matters
not expressly provided for in such special laws shall be regulated by this
Code.
Art. 2012. Any person who is forbidden from receiving any donation
under Article 739 cannot be named beneficiary of a life insurance policy
by the person who cannot make any donation to him, according to said
article.
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;
K M C | 11
(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.
In the case referred to in No. 1, the action for declaration of nullity may
be brought by the spouse of the donor or donee; and the guilt of the
donor and donee may be proved by preponderance of evidence in the
same action.
Heirs of Loreto Maramag v de Guzman: Pursuant to Sec.53 of the
Insurance Code, it is obvious that the only persons entitled to claim the
insurance proceeds are either the insured, if still alive; or the beneficiary,
if the insured is already deceased, upon the maturation of the policy.
The exception to this rule is a situation where the insurance contract
was intended to benefit third persons who are not parties to the same in
the form of favorable stipulations or indemnity. In such a case, third
parties may directly sue and claim from the insurer.
Although petitioners are the legitimate heirs of Loreto, they were not
named as beneficiaries in the insurance policies issued by Insular and
Grepalife. Petitioners are third parties to the insurance contracts with
Insular and Grepalife and, thus, are not entitled to the proceeds.
Accordingly, respondents Insular and Grepalife have no legal obligation
to turn over the insurance proceeds to petitioners. The revocation of Eva
as a beneficiary in one policy and her disqualification as such in another
are of no moment considering that the designation of the illegitimate
children as beneficiaries in Loreto’s insurance policies remains valid.
Because no legal proscription exists in naming as beneficiaries the
children of illicit relationships by the insured, the shares of Eva in the
insurance proceeds, whether forfeited by the court in view of the
prohibition on donations under Art 739 of the CC or by the insurers
themselves for reasons based on the insurance contracts, must be
awarded to the said illegitimate children, the designated beneficiaries,
to the exclusion of petitioners. It is only in cases where the insured has
not designated any beneficiary, or when the designated beneficiary is
disqualified by law to receive the proceeds, that the insurance policy
proceeds shall redound to the benefit of the estate of the insured.
Insular v Ebrado: Life Insurance policy is no different from civil donation
as far as beneficiary is concerned because both are founded on
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.

Common-law spouses designated as beneficiary are barred from
receiving life insurance proceeds from a legally married person.
Conviction for adultery or concubinage is not a condition precedent to
be barred from receiving donations or life insurances. Only
preponderance of evidence is necessary. Thus, donation made in favor
of the common law wife is void.
Consuegra v GSIS: The beneficiary named in the life insurance does
not automatically become the beneficiary in the retirement insurance.
When Consuegra, designated his beneficiaries in his life insurance, he
could not have intended those beneficiaries of his life insurance as also
the beneficiaries of his retirement insurance because the provisions on
retirement insurance under the GSIS came about only when CA 186
was amended by RA 660 on June 18, 1951. Therefore, in case of failure
to name a beneficiary in an insurance policy, the proceeds will accrue
to the estate of the insured, and when there exist two marriages, each
family will be entitled to one-half of the estate.
SSS v DAVAC: If there is a named beneficiary and the designation is
not invalid (as it is not so in this case), it is not the heirs of the employee
who are entitled to receive the benefits (unless they are the designated
beneficiaries themselves). It is only when there is no designated
beneficiaries or when the designation is void, that the laws of
succession are applicable. And we have already held that the Social
Security Act is not a law of succession. Thus, it was proper to declare
Davac as beneficiary of the death benefits.
iv. Others
Section 184. A policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has an insurable
interest or not, and such person may recover upon it whatever the
insured might have recovered.
See secs 8&9 above
1. Assignee see discussion under Sec.9 (page
2. Mortgagor see discussion
3. Insurance Agent see discussion under Sec. 54
4. Broker
K M C | 12
Harding v Commercial Union: The insurer not in a position to challenge
the validity of the transfer, if it may be called such, They bore absolutely
no relation to the parties to the transfer at the time it occurred and had no
rights or interests inchoate, present, remote, or otherwise, in the property
in question at the time the transfer occurred. Thus, here, Mrs Harding has
insurable interest in the property given to her by her husband.
2. Premium
It is the agreed price for assuming and carrying the risk; or the
consideration paid an insurer for undertaking the insured against specified
peril.
Valenzuela v CA: Since admittedly the premiums have not been paid, the
policies issued have lapsed. The insurance coverage did not go into effect
or did not continue and the obligation of Philamgen as insurer ceased.
Thus, petitioners are not liable for the unpaid and uncollected premiums.
i.Payment
General Rule:
Once full payment is made, there was already a perfected contract as well
as partially performed contract.
As soon as the subject insured is exposed to peril, premium is due.
Velasco v Apostol: An insurer is entitled to the payment of premium as
soon as the thing insured is exposed to the peril insured against, unless
there is clear agreement to grant the insured credit extension of the
premium due. The insurance policy in question would be valid and binding
notwithstanding the non-payment of the premium if there was a clear
agreement to grant to the insured credit extension. Such agreement may
be express or implied. However, the Court sees no cogent proof of such
implied agreement. Thus, insurer here is not liable under the insurance
policy given that the premium was paid only after the accident.
Marquez and Maxilite v FEBTC: In estoppel, a party creating an
appearance of fact, which is false, is bound by that appearance as against
another person who acted in good faith on it. Estoppel is based on public
policy, fair dealing, good faith and justice. Its purpose is to forbid one to
speak against his own act, representations, or commitments to the injury
of one who reasonably relied thereon. It springs from equity, and is
designed to aid the law in the administration of justice where without its
aid injustice might result.

Here, FEBTC is estopped in claiming that the insurance premium has
been unpaid. FEBTC induced Maxilite and Marques to believe that the
insurance premium has in fact been debited from Maxilite’s account as
grounded on the the following facts:
1. FEBTC represented and committed to handle Maxilite’s
financing and capital requirements, including the related
transactions such as the insurance of the trust receipted
merchandise;
2. prior to the subject Insurance Policy, the premiums for the three
separate fire insurance policies had been paid through automatic
debit arrangement;
3. FEBIBI sent FEBTC, not Maxilite nor Marques, written reminders
dated 19 October 1994, 24 January 1995, and 6 March 1995 to
debit Maxilite’s account, establishing FEBTC’s obligation to
automatically debit Maxilite’s account for the premium amount;
4. there was no written demand from FEBTC or Makati Insurance
Company for Maxilite or Marques to pay the insurance
premium;
5. the subject insurance policy was released to Maxilite on 19
August 1994; and
6. the subject insurance policy remained uncancelled despite the
alleged non-payment of the premium, making it appear that the
insurance policy remained in force and binding.
Moreover, prior to the full settlement of the trust receipt account on 24 and
26 October 1994, FEBTC had insurable interest over the merchandise,
and thus had greater reason to debit Maxilite’s account. Also, Maxilite had
sufficient funds at the time the first reminder, dated 19 October 1994, was
sent by FEBIBI to FEBTC to debit Maxilite’s account for the payment of
the insurance premium. However, FEBTC failed to debit and instead
disregarded the written reminder from FEBIBI to debit Maxilite’s account.
FEBTC’s conduct clearly constitutes negligence in handling Maxilite’s and
Marques’ accounts.
Section 77. An insurer is entitled to payment of the premium as soon as
the thing insured is exposed to the peril insured against. Notwithstanding
any agreement to the contrary, no policy or contract of insurance issued
by an insurance company is valid and binding unless and until the
premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies, or
whenever under the broker and agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extension is given. No credit
extension to a duly licensed intermediary should exceed ninety (90) days
from date of issuance of the policy.
K M C | 13
Section 78. Employees of the Republic of the Philippines, including its
political subdivisions and instrumentalities, and government-owned or -
controlled corporations, may pay their insurance premiums and loan
obligations through salary deduction: Provided, That the treasurer,
cashier, paymaster or official of the entity employing the government
employee is authorized, notwithstanding the provisions of any existing
law, rules and regulations to the contrary, to make deductions from the
salary, wage or income of the latter pursuant to the agreement between
the insurer and the government employee and to remit such deductions
to the insurer concerned, and collect such reasonable fee for its services.
Section 79. An acknowledgment in a policy or contract of insurance or
the receipt of premium is conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid.
Section 81. If a peril insured against has existed, and the insurer has
been liable for any period, however short, the insured is not entitled to
return of premiums, so far as that particular risk is concerned.
Section 82. A person insured is entitled to a return of the premium when
the contract is voidable, and subsequently annulled under the provisions
of the Civil Code; or on account of the fraud or misrepresentation of the
insurer, or of his agent, or on account of facts, or the existence of which
the insured was ignorant of without his fault; or when by any default of
the insured other than actual fraud, the insurer never incurred any liability
under the policy.
A person insured is not entitled to a return of premium if the policy is
annulled, rescinded or if a claim is denied by reason of fraud.
Section 83. In case of an over insurance by several insurers other than
life, the insured is entitled to a ratable return of the premium,
proportioned to the amount by which the aggregate sum insured in all
the policies exceeds the insurable value of the thing at risk.
Section 84. An insurer may contract and accept payments, in addition
to regular premium, for the purpose of paying future premiums on the
policy or to increase the benefits thereof.
Section 64. No policy of insurance other than life shall be cancelled by
the insurer except upon prior notice thereof to the insured, and no notice
of cancellation shall be effective unless it is based on the occurrence,
after the effective date of the policy, of one or more of the following:
(a) Nonpayment of premium;

(b) Conviction of a crime arising out of acts increasing the hazard
insured against;
(c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the
hazard insured against;
(e) Physical changes in the property insured which result in the
property becoming uninsurable;
(f) Discovery of other insurance coverage that makes the total
insurance in excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of
the policy would violate or would place the insurer in violation of this
Code.
Section 66. In case of insurance other than life, unless the insurer at
least forty-five (45) days in advance of the end of the policy period mails
or delivers to the named insured at the address shown in the policy
notice of its intention not to renew the policy or to condition its renewal
upon reduction of limits or elimination of coverages, the named insured
shall be entitled to renew the policy upon payment of the premium due
on the effective date of the renewal. Any policy written for a term of less
than one (1) year shall be considered as if written for a term of one (1)
year. Any policy written for a term longer than one (1) year or any policy
with no fixed expiration date shall be considered as if written for
successive policy periods or terms of one (1) year.
Section 315. The premium, or any portion thereof, which an insurance
agent or insurance broker collects from an insured and which is to be
paid to an insurance company because of the assumption of liability
through the issuance of policies or contracts of insurance, shall be held
by the agent or broker in a fiduciary capacity and shall not be
misappropriated or converted to his own use or illegally withheld by the
agent or broker.
Any insurance company which delivers to an insurance agent or
insurance broker a policy or contract of insurance shall be deemed to
have authorized such agent or broker to receive on its behalf payment
of any premium which is due on such policy or contract of insurance at
the time of its issuance or delivery or which becomes due thereon.
In order to ensure faithful performance by the insurance agent or
insurance broker of these fiduciary responsibilities, the Insurance
Commissioner shall prescribe the minimum terms and conditions on
such matters in the standard agency or brokers agreement between the
agents and/or the broker with the insurance companies.
Section 233. In the case of individual life or endowment insurance, the
policy shall contain in substance the following conditions:
K M C | 14
(a) A provision that the policyholder is entitled to a grace period either of
thirty (30) days or of one (1) month within which the payment of any
premium after the first may be made, subject at the option of the insurer
to an interest charge not in excess of six percent (6%) per annum for the
number of days of grace elapsing before the payment of the premium,
during which period of grace the policy shall continue in full force, but in
case the policy becomes a claim during the said period of grace before
the overdue premium is paid, the amount of such premium with interest
may be deducted from the amount payable under the policy in
settlement;
(b) A provision that the policy shall be incontestable after it shall have
been in force during the lifetime of the insured for a period of two (2)
years from its date of issue as shown in the policy, or date of approval of
last reinstatement, except for nonpayment of premium and except for
violation of the conditions of the policy relating to military or naval service
in time of war;
(c) A provision that the policy shall constitute the entire contract between
the parties, but if the company desires to make the application a part of
the contract it may do so provided a copy of such application shall be
indorsed upon or attached to the policy when issued, and in such case
the policy shall contain a provision that the policy and the application
therefor shall constitute the entire contract between the parties;
(d) A provision that if the age of the insured is considered in determining
the premium and the benefits accruing under the policy, and the age of
the insured has been misstated, the amount payable under the policy
shall be such as the premium would have purchased at the correct age;
(e) If the policy is participating, a provision that the company shall
periodically ascertain and apportion any divisible surplus accruing on the
policy under conditions specified therein;
(f) A provision specifying the options to which the policyholder is entitled
to in the event of default in a premium payment after three (3) full annual
premiums shall have been paid. Such option shall consist of:
(1) A cash surrender value payable upon surrender of the policy
which shall not be less than the reserve on the policy, the basis of
which shall be indicated, for the then current policy year and any
dividend additions thereto, reduced by a surrender charge which
shall not be more than one-fifth (1/5) of the entire reserve or two
and one-half percent (2½%) of the amount insured and any
dividend additions thereto; and

(2) One or more paid-up benefits on a plan or plans specified in the
policy of such value as may be purchased by the cash surrender
value.
(g) A provision that at any time after a cash surrender value is available
under the policy and while the policy is in force, the company will
advance, on proper assignment or pledge of the policy and on sole
security thereof, a sum equal to, or at the option of the owner of the
policy, less than the cash surrender value on the policy, at a specified
rate of interest, not more than the maximum allowed by law, to be
determined by the company from time to time, but not more often than
once a year, subject to the approval of the Commissioner; and that the
company will deduct from such loan value any existing indebtedness on
the policy and any unpaid balance of the premium for the current policy
year, and may collect interest in advance on the loan to the end of the
current policy year, which provision may further provide that such loan
may be deferred for not exceeding six (6) months after the application
therefor is made;
(h) A table showing in figures cash surrender values and paid-up options
available under the policy each year upon default in premium payments,
during at least twenty (20) years of the policy beginning with the year in
which the values and options first become available, together with a
provision that in the event of the failure of the policyholder to elect one
of the said options within the time specified in the policy, one of said
options shall automatically take effect and no policyholder shall ever
forfeit his right to same by reason of his failure to so elect;
(i) In case the proceeds of a policy are payable in installments or as an
annuity, a table showing the minimum amounts of the installments or
annuity payments;
(j) A provision that the policyholder shall be entitled to have the policy
reinstated at any time within three (3) years from the date of default of
premium payment unless the cash surrender value has been duly paid,
or the extension period has expired, upon production of evidence of
insurability satisfactory to the company and upon payment of all overdue
premiums and any indebtedness to the company upon said policy, with
interest rate not exceeding that which would have been applicable to
said premiums and indebtedness in the policy years prior to
reinstatement.
Any of the foregoing provisions or portions thereof not applicable to
single premium or term policies shall to that extent not be incorporated
therein; and any such policy may be issued and delivered in the
Philippines which in the opinion of the Commissioner contains provisions
on any one or more of the foregoing requirements more favorable to the
policyholder than hereinbefore required.
K M C | 15
This section shall not apply to policies of group life or industrial life
insurance.
Section 234. No policy of group life insurance shall be issued and
delivered in the Philippines unless it contains in substance the following
provisions, or provisions which in the opinion of the Commissioner are
more favorable to the persons insured, or at least as favorable to the
persons insured and more favorable to the policyholders:
(a) A provision that the policyholder is entitled to a grace period of either
thirty (30) days or of one (1) month for the payment of any premium due
after the first, during which grace period the death benefit coverage shall
continue in force, unless the policyholder shall have given the insurer
written notice of discontinuance in advance of the date of discontinuance
and in accordance with the terms of the policy. The policy may provide
that the policyholder shall be liable for the payment of a pro rata premium
for the time the policy is in force during such grace period;
(b) A provision that the validity of the policy shall not be contested,
except for nonpayment of premiums after it has been in force for two (2)
years from its date of issue; and that no statement made by any insured
under the policy relating to his insurability shall be used in contesting the
validity of the insurance with respect to which such statement was made
after such insurance has been in force prior to the contest for a period of
two (2) years during such person’s lifetime nor unless contained in a
written instrument signed by him;
(c) A provision that a copy of the application, if any, of the policyholder
shall be attached to the policy when issued, that all statements made by
the policyholder or by persons insured shall be deemed representations
and not warranties, and that no statement made by any insured shall be
used in any contest unless a copy of the instrument containing the
statement is or has been furnished to such person or to his beneficiary;
(d) A provision setting forth the conditions, if any, under which the insurer
reserves the right to require a person eligible for insurance to furnish
evidence of individual insurability satisfactory to the insurer as a
condition to part or all of his coverage;
(e) A provision specifying an equitable adjustment of premiums or of
benefits or of both to be made in the event that the age of a person
insured has been misstated, such provision to contain a clear statement
of the method of adjustment to be used;
(f) A provision that any sum becoming due by reason of death of the
person insured shall be payable to the beneficiary designated by the

insured, subject to the provisions of the policy in the event that there is
no designated beneficiary, as to all or any part of such sum, living at the
death of the insured, and subject to any right reserved by the insurer in
the policy and set forth in the certificate to pay at its option a part of such
sum not exceeding Five hundred pesos (P500.00) to any person
appearing to the insurer to be equitably entitled thereto by reason of
having incurred funeral or other expenses incident to the last illness or,
death of the person insured;
(g) A provision that the insurer will issue to the policyholder for delivery
to each person insured a statement as to the insurance protection to
which he is entitled, to whom the insurance benefits are payable, and
the rights set forth in paragraphs (h), (i) and (j) following;
(h) A provision that if the insurance, or any portion of it, on a person
covered under the policy ceases because of termination of employment
or of membership in the class or classes eligible for coverage under the
policy, such person shall be entitled to have issued to him by the insurer,
without evidence of insurability, an individual policy of life insurance
without disability or other supplementary benefits, provided application
for the individual policy and payment of the first premium to the insurer
shall be made within thirty (30) days after such termination, and provided
further that:
(1) The individual policy shall be on any one of the forms, except
term insurance, then customarily issued by the insurer at the age
and for an amount not in excess of the coverage under the group
policy; and
(2) The premium on the individual policy shall be at the insurer’s
then customary rate applicable to the form and amount of the
individual policy, to the class of risk to which such person then
belongs, and to his age attained on the effective date of the
individual policy.
(i) A provision that if the group policy terminates or is amended so as to
terminate the insurance of any class of insured persons, every person
insured thereunder at the date of such termination whose insurance
terminates and who has been so insured for five (5) years prior to such
termination date shall be entitled to have issued to him by the insurer an
individual policy of life insurance subject to the same limitations as set
forth in paragraph (h), except that the group policy may provide that the
amount of such individual policy shall not exceed the amount of the
person’s life insurance protection ceasing;
(j) A provision that if a person insured under the group policy dies during
the thirty (30)-day period within which he would have been entitled to an
individual policy issued to him in accordance with paragraphs (h) and (i)
K M C | 16
above and before such individual policy shall have become effective, the
amount of life insurance which he would have been entitled to have
issued to him as an individual policy shall be payable as a claim under
the group policy whether or not application for the individual policy or the
payment of the first premium has been made;
(k) In the case of a policy issued to a creditor to insure debtors of such
creditor, a provision that the insurer will furnish to the policyholder for
delivery to each debtor insured under the policy a form which will contain
a statement that the life of the debtor is insured under the policy and that
any death benefit paid thereunder by reason of his death shall be applied
to reduce or extinguish indebtedness.
The provisions of paragraphs (f) to (j) shall not apply to policies issued
to a creditor to insure his debtors. If a group life policy is on a plan of
insurance other than term, it shall contain a non-forfeiture provision or
provisions which in the opinion of the Commissioner is or are equitable
to the insured or the policyholder: Provided, That nothing herein
contained shall be so construed as to require group life policies to
contain the same non-forfeiture provisions as are required of individual
life policies.
Section 236. In the case of industrial life insurance, the policy shall
contain in substance the following provisions:
(a) A provision that the insured is entitled to a grace period of four (4)
weeks within which the payment of any premium after the first may be
made, except that where premiums are payable monthly, the period of
grace shall be either one (1) month or thirty (30) days; and that during
the period of grace, the policy shall continue in full force, but if during
such grace period the policy becomes a claim, then any overdue and
unpaid premiums may be deducted from any amount payable under the
policy in settlement;
(b) A provision that the policy shall be incontestable after it has been in
force during the lifetime of the insured for a specified period, not more
than two (2) years from its date of issue, except for nonpayment of
premiums and except for violation of the conditions of the policy relating
to naval or military service, or services auxiliary thereto, and except as
to provisions relating to benefits in the event of disability as defined in
the policy, and those granting additional insurance specifically against
death by accident or by accidental means, or to additional insurance
against loss of, or loss of use of, specific members of the body;
(c) A provision that the policy shall constitute the entire contract between
the parties, or if a copy of the application is endorsed upon and attached
to the policy when issued, a provision that the policy and the application
therefor shall constitute the entire contract between the parties, and in

the latter case, a provision that all statements made by the insured shall,
in the absence of fraud, be deemed representations and not warranties;
(d) A provision that if the age of the person insured, or the age of any
person, considered in determining the premium, or the benefits accruing
under the policy, has been misstated, any amount payable or benefit
accruing under the policy shall be such as the premium paid would have
purchased at the correct age;
(e) A provision that if the policy is a participating policy, the company
shall periodically ascertain and apportion any divisible surplus accruing
on the policy under the conditions specified therein;
(f) A provision that in the event of default in premium payments after
three (3) full years’ premiums have been paid, the policy shall be
converted into a stipulated form of insurance, and that in the event of
default in premium payments after five (5) full years’ premiums have
been paid, a specified cash surrender value shall be available, in lieu of
the stipulated form of insurance, at the option of the policyholder. The
net value of such stipulated form of insurance and the amount of such
cash value shall not be less than the reserve on the policy and dividend
additions thereto, if any, at the end of the last completed policy year for
which premiums shall have been paid (the policy to specify the mortality
table, rate of interest and method of valuation adopted to compute such
reserve), exclusive of any reserve on disability benefits and accidental
death benefits, less an amount not to exceed two and one-half percent
(2½%) of the maximum amount insured by the policy and dividend
additions thereto, if any, when the issue age is under ten (10) years, and
less an amount not to exceed two and one-half percent (2½%) of the
current amount insured by the policy and dividend additions thereto, if
any, if the issue age is ten (10) years or older, and less any existing
indebtedness to the company on or secured by the policy;
(g) A provision that the policy may be surrendered to the company at its
home office within a period of not less than sixty (60) days after the due
date of a premium in default for the specified cash value: Provided, That
the insurer may defer payment for not more than six (6) months after the
application therefor is made;
(h) A table that shows in figures the nonforfeiture benefits available
under the policy every year upon default in payment of premiums during
at least the first twenty (20) years of the policy, such table to begin with
the year in which such values become available, and a provision that the
company will furnish upon request an extension of such table beyond
the year shown in the policy;
(i) A provision that specifies which one of the stipulated forms of
insurance provided for under the provision of paragraph (f) of this section
K M C | 17
shall take effect in the event of the insured’s failure, within sixty (60) days
from the due date of the premium in default, to notify the insurer in writing
as to which one of such forms he has selected;
(j) A provision that the policy may be reinstated at any time within two
(2) years from the due date of the premium in default unless the cash
surrender value has been paid or the period of extended term insurance
expired, upon production of evidence of insurability satisfactory to the
company and payment of arrears of premiums with interest at a rate not
exceeding six percent (6%) per annum payable annually;
(k) A provision that when a policy shall become a claim by death of the
insured, settlement shall be made upon receipt of due proof of death, or
not later than two (2) months after receipt of such proof;
(l) A title on the face and on the back of the policy correctly describing
its form;
(m) A space on the front or the back of the policy for the name of the
beneficiary designated by the insured with a reservation of the insured’s
right to designate or change the beneficiary after the issuance of the
policy. The policy may also provide that no designation or change of
beneficiary shall be binding on the insurer until endorsed on the policy
by the insurer, and that the insurer may refuse to endorse the name of
any proposed beneficiary who does not appear to the insurer to have an
insurable interest in the life of the insured. Such policy may also contain
a provision that if the beneficiary designated in the policy does not
surrender the policy with due proof of death within the period stated in
the policy, which shall not be less than thirty (30) days after the death of
the insured, or if the beneficiary is the estate of the insured, or is a minor,
or dies before the insured, or is not legally competent to give valid
release, then the insurer may make any payment thereunder to the
executor or administrator of the insured, or to any of the insured’s
relatives by blood or legal adoption or connections by marriage or to any
person appearing to the insurer to be equitably entitled thereto by reason
of having incurred expense for the maintenance, medical attention or
burial of the insured; and
(n) A provision that when an industrial life insurance policy is issued
providing for accidental or health benefits, or both, in addition to life
insurance, the foregoing provisions shall apply only to the life insurance
portion of the policy.
Any of the foregoing provisions or portions thereof not applicable to
nonparticipating or term policies shall to that extent not be incorporated
therein. The foregoing provisions shall not apply to policies issued or
granted pursuant to the nonforfeiture provisions prescribed in provisions
of paragraphs (f) and (i) of this section, nor shall provisions of paragraphs

(f), (g), (h), and (i) hereof be required in term insurance of twenty (20)
years or less but such term policies shall specify the mortality table, rate
of interest, and method of computing reserves.
ii. Effect
1. Non-payment
Phil Phoenix Surety v Woodworks: Nonpayment of the premium due does
not produce the cancellation of the contract of insurance. Such theory
would place exclusively in the hands of one of the contracting parties the
right to decide whether the contract should stand or not. Rather the correct
view would seem to be this: as the contract had become perfected, the
parties could demand from each other the performance of whatever
obligations they had assumed. Here, Woodworks alleged that
nonpayment terminated the contract so no need for Phoenix to
collect/demand payment. Such contention was invalid.
2. Partial Payment
Tibay et al v CA: Sec 77 of the Insurance Code states that where the
parties expressly stipulated that the policy is not in force until the premium
has been fully paid, the payment of partial premium by the assured should
not be considered the payment required by the law and the stipulation of
the parties. Rather, it must be taken in the concept of a deposit to be held
in trust by the insurer until such time that the full amount has been
tendered and duly receipted for. Thus, the fire insurance policy in this case
is not valid and unenforceable upon mere partial payment of premium.
UCPB General Insurance v Masagana Telemart: An insurance policy,
other than life, issued originally or on renewal, is not valid and binding until
actual payment of the premium. Any agreement to the contrary is void.
The parties may not agree expressly or impliedly on the extension of credit
or time to pay the premium and consider the policy binding before actual
payment. No renewal here.
Malayan Insurance Co., Inc. vs. Cruz-Arnaldo is not applicable. In that
case, payment of the premium was actually made before the fire occurred.
Here, the payment of the premium for renewal of the policies was
tendered a month after the fire occurred. The assured did not even give
the insurer a notice of loss within a reasonable time after occurrence of
the fire. Thus, insurance policy has expired already.
3. Payment through an Agent
Malayan Insurance v Arnaldo et al: Premium was paid by the insured. The
premium invoice issued to Pinca at the time of the delivery of the policy
was stamped “Payment Received” by Adora (agent). This is important
K M C | 18
because it suggests an understanding between Malayan and the insured
that such payment could be made later, as Adora had assured Pinca. In
any event, it is not denied that this payment was actually made by Pinca
to Adora, who remitted the same to Malayan.
South Sea Surety v CA: Valid payment was made. The subject Insurance
Policy was issued by insurance company on 20 January 1984. At the time
the vessel sank on 25 January 1984 resulting in the loss of the insured
logs, the insured had already delivered to Victorio Chua the check in
payment of premium. But, as Victorio Chua testified, it was only in the
morning of 30 January 1984 or 5 days after the vessel sank when his
messenger tendered the check to defendant South Sea Surety and
Insurance Co., Inc. Moreover, Chua also testified that the marine cargo
insurance policy was actually delivered to him on 21 January 1984 at his
office to be delivered to the plaintiff.
4. Return of Premium
Great Pacific Life v CA et al: When the petitioner advised private
respondent four months after he had paid the first premium, that his policy
had never been in force, and that he must pay another premium and
undergo another medical examination to make the policy effective, the
petitioner committed a serious breach of the contract of
insurance. Record shows that the premium was paid fully within the grace
period. This being so, the policy was already enforceable. The company
had sufficient time to examine the result of their medical examination on
the person of the appellee. They would not have delivered the policy on
January 24, 1973 if the appellee was unacceptable. Thus, since the policy
was in fact inoperative or ineffectual from the beginning, the company was
never at risk, hence, it is not entitled to keep the premium.
iii. No right to return of premium
Section 80. A person insured is entitled to a return of premium, as follows:
(a) To the whole premium if no part of his interest in the thing insured be
exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time and the
insured surrenders his policy, to such portion of the premium as
corresponds with the unexpired time, at a pro rata rate, unless a short
period rate has been agreed upon and appears on the face of the policy,
after deducting from the whole premium any claim for loss or damage
under the policy which has previously accrued: Provided, That no holder
of a life insurance policy may avail himself of the privileges of this
paragraph without sufficient cause as otherwise provided by law.

3. Insurable Interest
i.Definition and Purpose
Section 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.
Requisites of Contract of Insurance:
1. Subject matter in which the insured has an insurable interest;
2. Event or peril insured against which may be any contingent or
unknown event (past or future), and a duration for the risk
thereof;
3. A promise to pay or indemnify in fixed or ascertainable amount;
4. Consideration for the promise (or premium);
5. Meeting of the minds of the parties (agreement)
Insurance by a Married Woman:
Married woman may take out an insurance on her life or that of her
children without consent of husband, or that of her husband for having
insurable interest in the latter. She may also take out insurance on her
separate property or property given to her by her husband.
Insurance by a minor:
It is not entirely void but voidable or valid until annulled in a proper action
in court. If contract not disaffirmed by the minor, insurer is liable and
cannot invoke minority as a defense because “persons who are capable
cannot allege the incapacity of those with whom they contracted.”
However, if contract is fair and no fraud or undue influence on the part of
the insurer, minor cannot recover the premiums paid, if he cannot return
benefits received.
Ownership of Life Insurance Policy:
1. Ownership between the insured and beneficiaries
2. Interest of insured and beneficiary
K M C | 19
3. Transfer of rights to minor insured upon death of original owner of
policy
Section 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.
Lottery:
It extends to all schemes for the distribution of prizes by chance, such as
policy playing, gift exhibition, prize concerts, raffles at fairs, etc, and
various forms of gambling. Three essential elements are: (1)
consideration; (2) prizes; and (3) chance.
Application: A sweepstake holder cannot insure himself against failure of
his ticket to win a prize because it cannot be said that he suffered a “loss”
of the prize.
Contract of Insurance not a Wagering Contract:
Contract of Insurance is not a contract of chance and is not used for profit.
The purpose of insurance is reimbursement of the holder of insurance for
actual loss suffered from specified risks.
DISTINCTIONS:
1. Gambling Contract: parties contemplate gain through mere chance;
Insurance: parties seek to distribute possible loss by reason of
mischance.
2. Gambler courts fortune; Insured seeks to avoid misfortune.
3. Contract of Gambling: tends to increase the inequality of fortune;
Insurance: tends to equalize fortune.
4. Essence of gambling: whatever one person wins from a wager is lost
by the other wagering party; Insurance: what one insured gains is not
at the expense of another insured.
5. A party making a wager creates a risk of loss to himself where no such
risk existed previously; the purchase of insurance does not create
new or non-existing risk of loss to the purchaser.
SIMILARITY:
One party promises to pay given sum to the other upon occurrence of a
given future event, the promise being conditioned upon payment of, or
agreement to pay, a stipulated amount.
Section 21. A change of interest in a thing insured, after the occurrence of
an injury which results in a loss, does not affect the right of the insured to
indemnity for the loss.

Change of interest in a thing insured after loss:
After loss, liability of insurer becomes fixed and the insured has right to
assign his claim against the former. Insured has also an absolute right to
transfer the thing insured after occurence of the loss which shall not affect
his right to indemnity for the loss.
Section 25. Every stipulation in a policy of insurance for the payment of
loss whether the person insured has or has not any interest in the
property insured, or that the policy shall be received as proof of such
interest, and every policy executed by way of gaming or wagering, is
void.
Necessity of Insurable Interest:
Stipulations prohibited in an Insurance Policy:
1. Stipulation for the payment of loss whether the person insured has or
has any interest in the subject matter of the insurance.--> Refers to
wager policy or contract where the insured has no interest in the
thing insured and can sustain no loss by the happening of
misfortunes. Exception of this case found in Sec.181.
Two General Classes of Life Policies:
2. Stipulation that the policy shall be received as proof of
insurable interest.--> Existence of insurable interest does not depend
upon the contract of insurance or stipulations therein.
Wagering of gaming policies VOID:
A contract of insurance is void for illegality unless the insured has
insurable interest in the subject matter. A mere bet upon a future event is
void on the ground of public policy. In this case, no loss exists from the
occurrence of event.
ii. Insurable interest in life/health
Section 10. Every person has an insurable interest in the life and health:
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in part for education
or support, or in whom he has a pecuniary interest;
(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; and
(d) Of any person upon whose life any estate or interest vested in him
depends.
Insurable Interest in General:
K M C | 20
Insurable Interest is the interest which the law requires the owner of an
insurance policy to have in the person or thing insured. A person is
deemed to have insurable interest in subject matter insured where he has
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 loss or damage from its destruction, termination or injury by the
happening of the event insured against.
However, insurable interest in life of a person, the expectation of benefit
need not necessarily be of pecuniary in nature.
Its existence determines the liability of the insurer under the policy of
insurance. It also gives the person the legal right to insure the subject of
policy of insurance. It is also necessary to the validity of the insurance
contract whatever be the subject matter. If no insurable interest, such is
deemed as wagering policy which is void for illegality. However, insurable
interest requirement is not applicable in industrial life insurance.
1. Upon one’s Life -- This is for the benefit of himself, or of his estate, in
case it matures only at his death, or for benefit of 3 person who may
rd
be designated as beneficiary.
a.
2. Upon Life of Another -- The person who applied for insurance
for life of another must have insurable interest in the life of that
person.
iii. Insurable interest in property
Section 13. 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.
Section 14. An insurable interest in property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in that out of which
the expectancy arises.

iv. Double insurance and over insurance
• Defined
Section 95. A double insurance exists where the same person is insured
by several insurers separately in respect to the same subject and
interest.
Double Insurance:
Here, there is co-insurance by two or more insurers; hence, also known
as “co-insurance.”
Requisites:
1. Person insured is the same;
2. Two or more insurers insuring separately;
3. There is identity of subject matter;
4. There is identity of interest insured; and
5. There is identity of risk or peril insured against.
Double Insurance v Over-insurance:
1. There is over-insurance when amount of insurance is beyond the
value of the insured’s insurable interest while in double insurance,
there may be no over-insurance as when the sum total of the amounts
of the policies issued does not exceed the insurable interest of the
insured.
2. In double insurance, there are always several insurers while in over-
insurance, there may be only one insurer involved.
With these, double insurance and over-insurance my exist at the same time or
neither may exist at all.
Binding Effect of stipulation against Double Insurance:
A policy not containing a stipulation against additional insurance is not
invalidated by procuring such insurance. However, if there is a stipulation
for such prohibition, such is binding between the parties.
1. Additional insurance obtained by the insured. This provision is known
as additional or “other insurance” clause and is intended to
prevent an increase in moral hazard. It is valid and reasonable, and
in the absence of consent, waiver or estoppel on the part of insurer,
a breach of contract will prevent a recovery on the policy.
2. Additional insurance obtained by a third person. Insurance
obtained by a third person without knowledge or consent of the
K M C | 21
insured will not affect his rights under the policy in the absence of
ratification.
Purpose of Prohibition:
To prevent over-insurance and thus avert the perpetration of fraud. The
public as well as the insurer are interested in preventing situation in which
a loss would benefit the insured (Pioneer Insurance v Yap).
Section 96. Where the insured in a policy other than life is over insured
by double insurance:
(a) The insured, unless the policy otherwise provides, may claim
payment from the insurers in such order as he may select, up to the
amount for which the insurers are severally liable under their respective
contracts;
(b) Where the policy under which the insured claims is a valued policy,
any sum received by him under any other policy shall be deducted from
the value of the policy without regard to the actual value of the subject
matter insured;
(c) Where the policy under which the insured claims is an unvalued
policy, any sum received by him under any policy shall be deducted
against the full insurable value, for any sum received by him under any
policy;
(d) Where the insured receives any sum in excess of the valuation in the
case of valued policies, or of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the insurers, according to
their right of contribution among themselves;
(e) Each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which he is
liable under his contract.
Rules for Payment of Claims where there is over-insurance by double
insurance:
Insured can recover no more than the amount of his insurable interest
whether insurance is contained in one policy or in several policies. This
provision refers to the PRINCIPLE OF CONTRIBUTION which requires
each insurer to contribute ratably to the loss or damage considering that
the several insurances cover the same subject matter and interest against
the same peril. This is applicable where there is over-insurance by double
insurance or where the insurance contained in several policies have a
total sum that is excess of the insurable interest of the insured.

• If loss is greater than the sum total of all policies issued, each
insurer is liable for the amount of his policy.
Par. a.-- Several or solidary liability of insurers under their respective
contracts. Insured may claim payment from each company in such order
as he may select, up to the amount for which each is liable under its
contract. However, insured cannot claim more than the value of his
insurable interest. This is allowed where policy contains a contribution
clause which stipulates that insurance company shall not be liable to pay
or contribute more that its ratableproportion of the loss or damage.
Par b. -- Where insured claims under a valued policy. Insured may only
claim the value of the policy.
Par c. -- Where insured claims under an unvalued policy. In this case, the
value of loss must be ascertained which the insured may claim from any
of the insurers.
Par d. -- Where sum received by insured exceeds total insurance taken. Reinsurance:
Insured not allowed to recover more than the full indemnity.
Par e. - Liability of each insurer to contribute ratably to the loss. Each
insurer is bound to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract.
Amount of policy
Liability of Insurer=Total insurance taken
Reinsurance v Double Insurance:
Pioneer Insurance & Surety Corp v Yap: Clause providing that policy shall
be void if the insured procures additional insurance without the consent of
the insurer; Purpose of.—The obvious purpose of the aforesaid
requirement in the policy is to prevent over-insurance and thus avert the
perpetration of fraud. The public, as well as the insurer, is interested in
preventing the situation in which a fire would be profitable to the insured.
Thus, insurer here is absolved from liability because of the violation of the
insured in co-insurance clause.
Malayan Insurance v Phil. First Insurance: There is no double insurance
in this case. Double insurance exists where the same person is insured
by several insurers separately in respect to the same subject and interest.
The requisites in order for double insurance to arise are as follows:
1. The person insured is the same; Value of Reinsurance:
2. Two or more insurers insuring separately;
K M C | 22
3. There is identity of subject matter;
4. There is identity of interest insured; and
5. There is identity of the risk or peril insured against.
In the present case, while it is true that the Marine Policy and the SR Policy
were both issued over the same subject matter, i.e. goods belonging to
Wyeth, and both covered the same peril insured against, it is, however,
beyond cavil that the said policies were issued to two different persons or
entities. The interest of Wyeth over the property subject matter of both
insurance contracts is also different and distinct from that of Reputable’s.
v. Reinsurance
• Defined
Section 97. A contract of reinsurance is one by which an insurer
procures a third person to insure him against loss or liability by reason
of such original insurance.
Artex v Wellington:
A contract whereby one party, the insurer, agrees to indemnify another,
the reinsured (original insurer), either in whole or in part, against the loss
or liability which the latter may sustain or incur under a separate and
original contract of insurance with a third party, the original insured. It is
also referred as “an insurance of an insurance.” Sometimes, it is called
as “treaties.”
Double Insurance Reinsurance
insurer remains as the insurer becomes the insured, insofar as the
insurer of original reinsurer is concerned
insured
subject of the insurance the original insurer’s risk
is property
Insurance of the same Insurance of different interest
interest
The insured is the party The original insured has no interest in the
in interest in all the contract of reinsurance which is independent of
contracts the original contract of insurance
The insured has to give Consent of the original insured is not necessary
his consent
1. For the insurer (or reinsuring company)
2. For the insured

3. For the insuring public
• Duty to Disclose
Section 98. Where an insurer obtains reinsurance, except under automatic
reinsurance treaties, he must communicate all the representations of the
original insured, and also all the knowledge and information he possesses,
whether previously or subsequently acquired, which are material to the
risk.
Duty of Reinsured to Disclose Facts:
All material facts must be disclosed since the risks insured against in a
contract of reinsurance is the probability that the original insurer may be
compelled to indemnify for the loss under the policy issued by him. Thus,
if reinsured conceals the fact that a loss has taken place or that the
property is over-insured where he has knowledge, a policy may be
avoided.
Automatic and Facultative methods of Ceding Insurance:
1. Share or participation in risk insured- In case of automatic
reinsurance treaties where the ceding company (reinsured) is
bound to cede (give off by way of reinsurance) and the reinsurer is
obligated to accept a fixed share of the risk which has to be reinsured
under the contract, this provision is not applicable.
In case of facultative insurance, which covers liability on individual risk, there
is no obligation either to cede or accept participation in the risk insured, each
party is free to choose. But once share is accepted, obligation is absolute and
liability assumed can be discharged by payment of the share of the loss.
2. Advantage to insurer- Delay can be avoided in automatic method while
insurer receives the reinsurer’s underwriting opinion before policy is issued in
facultative method.
3. Protection to insurer- In automatic method, reinsurer is relying on the
underwriting judgment of the insurer and bound to accept a case even though
it may not agree with the underwriting decision. Reinsurer is protected by the
requirement that the original insurer retains its full retention limit, which
assures a measure of self-interest.
Reinsurance Treaty v Reinsurance Policy:
Reinsurance Policy: a contract of indemnity one insurer makes with
another to protect the first insurer from a risk it has already assumed.
K M C | 23
Reinsurance Treaty: merely an agreement between two insurance
companies whereby one agrees to cede and the other to accept
reinsurance business pursuant to provisions specified in the treaty.
Practice of issuing policies by insurance companies includes the issuance
of reinsurance policies on standard risks and also on substantiated risks
under special agreements. The lumping of different agreements under a
contract resulted to treaties. Such treaty is an agreement between
insurance companies to cover different situations described.
Treaties are contracts for insurance; while Reinsurance policies or
cessions are contracts of insurance.
Section 99. A reinsurance is presumed to be a contract of indemnity
against liability, and not merely against damage.
Section 100. The original insured has no interest in a contract of
reinsurance.
PHILAM v Auditor General:
Fieldmen’s v Asian Surety:
Equitable Insurance v Rural Insurance:
vi. Multiple or several interests on the same property; special
provisions on mortgagors and mortgagee
*See discussion on page
Section 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 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

obligations on the assignee, making a new contract with him, the acts of
the mortgagor cannot affect the rights of said assignee.
Geogonia v CA: The insurable interests of a mortgagor and a mortgagee
on the mortgaged property are distinct and separate. Since the two
policies of the PFIC do not cover the same interest as that covered by the
policy of the private respondent, no double insurance exists. The non-
disclosure then of the former policies was not fatal to the petitioner's right
to recover on the private respondent's policy. Thus, petitioner can recover
from Country bankers.
Tai Tong Chuache v Insurance Commssion: Petitioner has insurable
interest over the property. The burden of proof was on Travellers to show
that petitioner had no insurable interest. It failed to discharge of this
burden. In fact, Travellers did not assail the validity of the policy taken out
by petitioner over the mortgaged property. It also did not deny that the
property was razed by fire within the period covered by the insurance.
vii. Other Insurance Clause
New Life Enterprises v CA: Other insurance clause was violated. Sy never
disclosed co-insurance in the contracts he entered into with the three
corporations. The insured is specifically required to disclose the insurance
that he had contracted with other companies.
Geagonia v CA: Other insurance clause was not violated thus, there is no
double insurance. Condition 3 of the private respondent's Policy is a
condition which is not prescribed by law. Its incorporation in the policy is
allowed by Sec 75 of the Insurance Code which provides that "[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."
Such a condition is a provision which invariably appears in fire insurance
policies and is intended to prevent an increase in the moral hazard. It is
commonly known as the additional or "other insurance" clause and has
been upheld as valid and as a warranty that no other insurance exists. Its
violation would thus avoid the policy.
4. Policy
i.Defined
Section 49. The written instrument in which a contract of insurance is set
forth, is called a policy of insurance.
K M C | 24
Section 232. No policy, certificate or contract of insurance shall be issued
or delivered within the Philippines unless in the form previously approved
by the Commissioner, and no application form shall be used with, and no
rider, clause, warranty or endorsement shall be attached to, printed or
stamped upon such policy, certificate or contract unless the form of such
application, rider, clause, warranty or endorsement has been approved by
the Commissioner.
See Sec.233 above
ii. Form
Section 50. The policy shall be in printed form which may contain blank
spaces; and any word, phrase, clause, mark, sign, symbol, signature,
number, or word necessary to complete the contract of insurance shall be
written on the blank spaces provided therein.
Any rider, clause, warranty or endorsement purporting to be part of the
contract of insurance and which is pasted or attached to said policy is not
binding on the insured, unless the descriptive title or name of the rider,
clause, warranty or endorsement is also mentioned and written on the
blank spaces provided in the policy.
Unless applied for by the insured or owner, any rider, clause, warranty or
endorsement issued after the original policy shall be countersigned by the
insured or owner, which countersignature shall be taken as his agreement
to the contents of such rider, clause, warranty or endorsement.
Notwithstanding the foregoing, the policy may be in electronic form subject
to the pertinent provisions of Republic Act No. 8792, otherwise known as
the ‘Electronic Commerce Act’ and to such rules and regulations as may
be prescribed by the Commissioner.
Section 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or running
policies;
(c) The premium, or if the insurance is of a character where the exact
premium is only determinable upon the termination of the contract, a
statement of the basis and rates upon which the final premium is to be
determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute
owner thereof;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.

Section 226. Every insurance company authorized to do business in the
Philippines shall report to the Commissioner on forms prescribed by him
the particulars of reinsurance treaties or any new treaties or changes in
existing treaties within three (3) months from their effectivity.
iii. Riders and Endorsements
Sec 50 par.2. 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.
iv. Contents
See Sec.51 above
Section 227. No credit shall be allowed as an admitted asset or as a
deduction from liability, to any ceding insurer for reinsurance made, ceded,
renewed, or otherwise becoming effective after January 1, 1975, unless
the reinsurance shall be payable by the assuming insurer on the basis of
the liability of the ceding insurer under the contract or contracts reinsured
without diminution because of the insolvency of the ceding insurer nor
unless under the contract or contracts of reinsurance the liability for such
reinsurance is assumed by the assuming insurer or insurers as of the same
effective date; nor unless the reinsurance agreement provides that
payments by the assuming insurer shall be made directly to the ceding
insurer or to its liquidator, receiver, or statutory successor except:
(a) Where the contract specifically provides another payee of such
reinsurance in the event of the insolvency of the ceding insurer; and
(b) Where the assuming insurer with the consent of the direct insured or
insureds has assumed such policy obligations of the ceding insurer as direct
obligations of the assuming insurer to the payees under such policies and in
substitution for the obligations of the ceding insurer to such payees.
• Void Stipulations
Section 25. Every stipulation in a policy of insurance for the payment of
loss whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering, is void.
Refers to wager policy or contract upon bet.
K M C | 25
Section 63. A condition, stipulation, or agreement in any policy of
insurance, limiting the time for commencing an action thereunder to a
period of less than one (1) year from the time when the cause of action
accrues, is void.
It limits the period for commencing an action.
Sun Insurance v CA: Cause of action had already prescribed and rejection
of the claim is final. The condition contained in an insurance policy that
claims must be presented within one year after rejection is not merely a
procedural requirement but an important matter essential to a prompt
settlement of claims against insurance companies as it demands that
insurance suits be brought by the insured while the evidence as to the
origin and cause of destruction have not yet disappeared.
v. Cover Notes
Section 52. Cover notes may be issued to bind insurance temporarily
pending the issuance of the policy. Within sixty (60) days after issue of a
cover note, a policy shall be issued in lieu thereof, including within its terms
the identical insurance bound under the cover note and the premium
therefor.
Cover notes may be extended or renewed beyond such sixty (60) days
with the written approval of the Commissioner if he determines that such
extension is not contrary to and is not for the purpose of violating any
provisions of this Code. The Commissioner may promulgate rules and
regulations governing such extensions for the purpose of preventing such
violations and may by such rules and regulations dispense with the
requirement of written approval by him in the case of extension in
compliance with such rules and regulations.
vi. Kinds of Policies
• Open
Section 60. An open policy is one in which the value of the thing insured
is not agreed upon, and the amount of the insurance merely represents the
insurer’s maximum liability. The value of such thing insured shall be
ascertained at the time of the loss.
Development Insurance v IAC: The insurer is liable for full indemnity due
to the insured. The subject policy provides that: “This is an open policy as
defined in Section 57 of the Insurance Act. In the event of loss, whether
total or partial, it is understood that the amount of the loss shall be subject
to appraisal and the liability of the company, if established, shall be limited
to the actual loss, subject to the applicable terms, conditions, warranties

and clauses of this Policy, and in no case shall exceed the amount of the
policy.”
• Valued
Section 61. A valued policy is one which expresses on its face an
agreement that the thing insured shall be valued at a specific sum.
Harding v Commercial Union: The valuation of the car is binding upon the
insurance company. The defendant, upon the information given by
plaintiff, and after an inspection of the automobile by its examiner, having
agreed that it was worth P3,000, is bound by this valuation in the absence
of fraud on the part of the insured.
• Running or Successive
Section 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.
vii. Unilateral Cancellation of non-life policies
• By the Insurer
Section 64. No policy of insurance other than life shall be cancelled by the
insurer except upon prior notice thereof to the insured, and no notice of
cancellation shall be effective unless it is based on the occurrence, after
the effective date of the policy, of one or more of the following:
(a) Nonpayment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard insured
against;
(c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the hazard
insured against;
(e) Physical changes in the property insured which result in the property
becoming uninsurable;
(f) Discovery of other insurance coverage that makes the total insurance in
excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the policy
would violate or would place the insurer in violation of this Code.
Section 65. All notices of cancellation mentioned in the preceding section
shall be in writing, mailed or delivered to the named insured at the address
shown in the policy, or to his broker provided the broker is authorized in
writing by the policy owner to receive the notice of cancellation on his
behalf, and shall state:
(a) Which of the grounds set forth in Section 64 is relied upon; and
K M C | 26
(b) That, upon written request of the named insured, the insurer will furnish
the facts on which the cancellation is based.
• By the Insured
Section 79. An acknowledgment in a policy or contract of insurance or the
receipt of premium is conclusive evidence of its payment, so far as to make
the policy binding, notwithstanding any stipulation therein that it shall not
be binding until the premium is actually paid.
Paulino v Capital Insurance: The contract can be terminated unilaterally.
Pursuant to this stipulation, the contract in question could be terminated,
"at any time", upon the unilateral act of either party. Whichever party
exercised the "option", did not need the approval, consent or concurrence
of the other party. That consent was given at the time of the making of the
contract.
• Non-Renewal by the Insurer
Section 66. In case of insurance other than life, unless the insurer at least
forty-five (45) days in advance of the end of the policy period mails or
delivers to the named insured at the address shown in the policy notice of
its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the named insured shall be
entitled to renew the policy upon payment of the premium due on the
effective date of the renewal. Any policy written for a term of less than one
(1) year shall be considered as if written for a term of one (1) year. Any
policy written for a term longer than one (1) year or any policy with no fixed
expiration date shall be considered as if written for successive policy
periods or terms of one (1) year.
-end of midterms coverage-
Gratias tibi deus, gratias tibi!
C.
C.Rescission of Insurance Contract
1. Concealment
i.Defined, Sec.26,28
Section 26. A neglect to communicate that which a party knows and
ought to communicate, is called a concealment.

Four Primary Concerns of the Parties to an IC:
1. Correct estimation of the risk which enables the insurer to
decide whether he is willing to assume it and at what rate of
premium;
2. 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
insurer to guard against increase of risk because of change
in conditions;
4. Determining whether loss occurred and so the amount.
Devices for Ascertaining and controlling risk and loss:
1. Concealment and representations were originally developed
for the purpose of enabling the insurer to secure the same
information with respect to the risk that was possessed by
applicant for insurance, so he might be capable of forming a
just estimate of its quality.
2. Warranties and conditions dealing with conditions existing at
the inception of contract, and exceptions are used to make
more definite and certain general words used to describe risk
the insurer undertook to bear.
3. Exceptions perform similar function in making more definite
the coverage indicated by the general description of the risk
by excluding certain specified risks that otherwise would
have been included under general language describing risks
assumed. May be of certain property or of certain peril within
the general coverage.
Concealment:
A neglect to communicate that which a party knows and ought to
communicate. It is the intentional withholding by the insured of
any fact material to the risk.
Requisites (Sec.28):
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.
K M C | 27
A warranty made of the fact concealed, the non-disclosure of such
fact is not concealment but constitutes a violation of warranty.
Section 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.
Matters that must be communicated even in absence of inquiry:
Duty to communicate in good faith all facts within the knowledge of each
party only when:
1. They are material to the contract;
2. The other has not the means of ascertaining said facts;
3. As to which the party with the duty to communicate makes no
warranty.
Thus, applicant for life insurance suffering from or had been treated or
hospitalized for some ailment must disclose such facts even if not inquired
into where such facts are material to the risk assumed by the insurer.
The test is: If 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.
Effect of failure of insurer to verify:
There is no obligation for the insurance company to verify statements
made by the insured in his application before issuing policy. This is
because the insurance company has right to rely on the statements of the
insured as to material facts.
ii. Effect
Section 27. A concealment whether intentional or unintentional entitles
the injured party to rescind a contract of insurance.
Effect of Concealment:
1. By the insured-- it makes the contract voidable at the option of insurer.
The reason for this is because insurance policies are traditionally
contracts uberrimae fidae or contracts of utmost good faith. This
doctrine is essential on account of the fact that full circumstances of
subject matter of insurance are, as a rule, known to the insured only,
and the insurer, in deciding whether or not to accept the risk, must
rely primarily upon information supplied to him by the applicant. It is
strictly interpreted by the courts and not limited to material facts which

the applicant knows, but extends to those which he ought to know
they being necessary for insurer to evaluate risk, either to charge
higher premium or refuse to issue policy altogether. Therefore, it is no
defense to plead mistake or forgetfulness.
2. By the insurer-- Disclosure is imposed with equal stringency upon
insurer. Duty of utmost good faith is breached by concealment or
misrepresentation. Sec. 27 entitles injured party to rescind a contract
of insurance by reason of concealment, implying that it is optional on
his part whether or not to exercise his right of rescission.
Proof of Fraud in Concealment:
Insurer need not to prove fraud in order to rescind a contract on the
ground of concealment.
1. Existence of fraud not required. The duty of communication is
independent of the intention and is violated by the fact of
concealment, even no design to deceive.
2. Reason for the rule. If it were necessary for the insurance company to
show actual fraud on the part of the insured, then it is plain that it
would be impossible for it to protect itself and its honest policyholders
against fraudulent and improper claims
3. Basis and criterion. Basis of the rule vitiating the contract in cases of
concealment is that it misleads or deceives insurer into accepting the
risk or accepting it at the rate of premium agreed upon. Insurer,
relying upon the belief that insured will disclose every material fact
within his actual or presumed knowledge, is misled into a belief that
circumstance withheld does not exist, and he is thereby induced to
estimate the risk upon a false basis that it does not exist.
Principal question: Was the insurer misled or deceived into entering a
contract obligation or in fixing the premium of insurance by withholding of
material information or facts within the assured’s knowledge or presumed
knowledge? (Argente v West Coast LIfe Insurance)
Section 29. An intentional and fraudulent omission, on the part of one
insured, to communicate information of matters proving or tending to
prove the falsity of a warranty, entitles the insurer to rescind.
When Fraudulent Intent Necessary:
Here, non-disclosure must be intentional and fraudulent in order to
rescind the contract. Omission is on the part of the insured and the party
entitled to rescind is the insurer. Thus, in marine insurance contract,
warranty is implied that the ship is seaworthy, intentional and fraudulent
omission on the part of the insured when applying for policy to
K M C | 28
communicate information that the ship is in distress or in special peril
would entitle the insurer to rescind because concealment refers to matters
proving or tending to prove falsity of warranty that the ship is seaworthy.
iii. Elements
iv. Matters which need not be disclosed
Section 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.
Matters made the subject of special inquiries material:
Generally, matters made the subject of inquiry must be deemed material,
even though otherwise they might not be so regarded and insured is
required to make full and true disclosure to questions asked.
The failure of an apparently complete answer to make full disclosure will
avoid the policy. But answer that is incomplete on its face will not defeat
the policy in absence of bad faith.
When no duty to make disclosure:
1. Matters known to, or right to be known by insurer, or of which he
waives disclosure. Insured cannot be penalized for failure to disclose
matters already known to insurer for insurer cannot say that there is
deception; or ought to be known to the insurer or his agent for to hold
otherwise would be to charge the insured with the default of insurer
or his agent or of which insurer waives communication for insurer is
in estoppel.
2. Risks excepted from the policy. Insurer cannot complain since risks
excepted from the policy. It is important to note that the undisclosed
fact must not be material for otherwise, this rule will not apply.
3. Nature or amount of insured’s interest.

Section 32. Each party to a contract of insurance is bound to know all
the general causes which are open to his inquiry, equally with that of the
other, and which may affect the political or material perils contemplated;
and all general usages of trade.
Matters each party bound to know:
No need for the insured to communicate public events as sources of his
information being equally open to the insurer who is presumed to know.
Insurer is also charged with knowledge of general trade usages and rules
of navigation, kind of seasons and all risks connected with navigation.
Section 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.
Right to information may be waived:
May be expressly by terms of insurance, or impliedly by neglect to make
inquiry as to the facts already communicated. If applicant answered the
questions asked, he is justified in assuming that no information is further
desired.
Section 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.
Disclosure of nature and extent of interest of insured:
Under Sec.51(e), policy of insurance must specify “the interest of the
insured in property insured, if he is not the absolute owner. Thus, a
mortgagee must disclose his particular interest even if no inquiry made by
the insurer in this case. This is needed for the insurer to determine extent
of insured’s insurable interest.
Section 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.
Disclosure of judgment upon the matters in question:
The duty to disclose is confined to facts. Hence, no duty to disclose mere
opinion, speculation, intention or expectattion. This is true even if insured
is asked.
v. Test of Materiality Sec. 31
K M C | 29
Section 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.
Determination of Materiality:
1. Test of Materiality. -- Test is in effect which knowledge of the fact in
question would have on the making of the contract. To be material, a
fact need not increase the risk or contribute to any loss or damage
suffered. It is sufficient if the knowledge of it would influence the
parties in making contracts. The matter must be determined ultimately
by the court.
2. POV of the Insurer. -- Fact is material if knowledge of it would have a
“probable and reasonable influence upon the insurer in assessing the
risk involved and in making or omitting further inquiries, and cause
him either to reject the risk or to accept it only at a higher premium
rate or on different terms though that fact may not even remotely
contribute to the contingency upon which insurer would become liable
or in any wise affect the risks.
3. When concealment is intentional. -- Man’s state of mind or subjective
belief not capable of proof in judicial process, except through proof of
external cts or failure to act from which inferences as to his subjective
belief may be reasonably drawn.
Nature of the facts not conveyed to the insurer may be such that the failure
of the insured to communicate must have been intentional rather than
inadvertent. (Canilang v CA)
4. Where fact concealed not material. -- Insured cannot be guilty of
concealment.
Time when Information acquired:
No information possessed by one party can be material, in the sense of
requiring disclosure, unless it is possible that it may influence the other in
making the contract:
1. After contract has become effective. -- There can be no duty resting
upon the insured to disclose information, even though policy is yet to
issue. Thus, concealment must take place at the time the contract is
entered into in order that the disclosure ends with the completion and
effectivity of the contract.
2. Before contract becomes effective. -- If contract is to be effective only
upon issuance of the policy, applicant for life insurance, for instance,
is under a duty to disclose the changes in his health occuring or
coming to his knowledge between the date of submitting his

application after satisfactory medical examination and the date the
policy is delivered.
vi. Consequences of Concealment, Sec.27
See discussion under Sec.27
. Theory and object of incontestable clause:
vii. Incontestability, Sec.48, 227
Section 48. Whenever a right to rescind a contract of insurance is given
to the insurer by any provision of this chapter, such right must be
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.
When an insurer must exercise his right to rescind:
1. General Rule-- Contract of insurance may be rescinded on the ground
of concealment, or false representation or breach of warranty, An
action to rescind contract is founded upon and presupposes
existence of the contract, which is rescinded. Hence, a defense to an
action to recover insurance that the policy was obtained through false
representations, fraud, and deceit is not in the nature of an action to
rescind thus, not barred by the provision. There is no limit in imposing
defense.
2. In Non-Life Policy-- To rescind contract, such right must be exercised
prior to the commencement of an action on the contract. Insurer is no
longer entitled to rescind the contract after the insured has filed an
action to collect amount of insurance. But in Argente v West Coast
Life Insurance, it was held that insurer’s tender of the premium paid
and notice that policy is cancelled before commencement of suit due
to material misrepresentation operates as rescission.
3. In Life Policy-- It should be qualified by second paragraph of Sec.48.
With this, defenses mentioned are available only during the first two
years of a life insurance policy.
Incontestability of Life Policies:
Incontestable clause stipulating that policy shall be incontestable after
stated period are in general use, and are now required by statutes in force
in many states. They create a kind of contractual statute of limitations on
certain defenses that may be raised by the insurer.
K M C | 30
Incontestability means that after requisites are shown to exist, insurer
shall be estopped from contesting the policy or setting up any defense,
except as is allowed, on the ground of public policy.
For the insurer, it should have a reasonable opportunity to investigate
statements which the applicant makes in procuring his policy and that after
definite period, insurer should not be permitted to question the validity of
the policy either by affirmative action or by defense to a suit brought on
life policy by the beneficiary.
For the insured, this clause has as its object to give greatest possible
assurance to the holder that his beneficiaries would receive payment
without question as to the validity of the policy or the existence of the
coverage once the period of contestability passes. Such is designed to
protect the holder or beneficiaries from a lawsuit contesting validity of
policy after a considerable time has passed and evidence of facts
surrounding the purchase may be unavailable.
Requisites for incontestability:
1. Policy is life insurance policy;
2. Payable on the death of the insured; and
3. Has been in force during the lifetime of the insured for at least 2 years
from its date of issue or of its last reinstatement.
The period of 2years for contesting life insurance may be shortened but it
cannot be extended by stipulation. “During the lifetime” means that the
policy is no longer considered in force after insured has died. The key
phrase is “for a period of 2 years” (Tan v CA).
Effect when policy becomes incontestable:
Insurer then may not refuse to pay the policy by claiming that:
1. Policy is void ab initio; or
2. It is rescissible by reason of fraudulent concealment of the insured or
his agent, no matter how patent or well-founded; or
3. It is rescissible by reason of fraudulent misrepresentations of the
insured or his agent.
Defenses not barred by incontestable clause:
Incontestability of a policy is not absolute, otherwise, a beneficiary of any
person who had procured a life policy more than 2 years before death
would automatically be entitled to the proceeds upon that person’s death.
 K M C | 31

Incontestability only deprives the insurer of those defenses which arise in

connection with the information and operation of the policy prior to loss.

Insurer may contest the policy by way of defense to suit brought upon the
policy or by action to rescind the same on the following grounds:
1. That the person taking insurance lacked insurable interest as
required by law;
2. The cause of death of the insured is an excepted risk;
3. The premiums have not been paid;
4. The conditions of policy relating to military or naval service have
been violated;
5. Fraud is of particularity vicious type, as where the policy was
taken out in furtherance of a scheme to murder the insured, or
where insured substitutes another person for medical
examination, or where beneficiary feleniously kills the insured;
6. The beneficiary failed to furnish proof of death or to comply with
any condition imposed by the policy after the loss has happened’
or
7. The action was not brought within the time specified.

Section 227. No credit shall be allowed as an admitted asset or as a

deduction from liability, to any ceding insurer