Quiz No.

8 – Insurance Code (Premiums to Claims)

I
Lee See Guat, a 61-year old illiterate who spoke only Chinese, applied for life insurance. The
application which became a part of the contract was in English and since her answers indicated
that she was healthy, the insurer issued the policy. Lee See Guat died for lung cancer about seven
months after the policy was issued. It turned out that the insured deliberately concealed material
facts about her physical condition and history. The beneficiary claimed that since Lee See Guat
was illiterate and spoke only Chinese, she could not be held guilty of concealment of her health
history because the application for insurance was in English and the insurer failed to prove that
the terms thereof has been fully explained to her. Was the insurer bound to explain the terms of
the contract to an illiterate insured? (10%)

Answer: Perez, p. 172-173

No. The insurer was under no obligation to prove that the terms of the contract were fully
explained to the other party. The obligation to show that the terms of the contract had been fully
explained to the party who is unable to read and understand the language of the contract, when
fraud or mistake is alleged, devolves on the party seeking to enforce it. Here, the insurer was not
seeking to enforce the contract, on the contrary, it was seeking to avoid performance. Since the
insured was guilty of concealment, the insurer was not liable. (Tang v CA, 90 SCRA 236).

II
On March 19, 1963, Pacific Timber obtained a cover note insuring logs to be exported. On April
2, 1963, the regular marine policies were issued and the premiums thereon were paid. No
separate premium was paid on the cover note. After the issuance of the cover note but before the
issuance of the regular policies, a number of logs were lost. The insurer refused to pay the loss
on the ground that no premium was paid on the cover note. Was premium needed to make the
cover note binding? (10%)

Answer: Perez, p. 180-181

No. The cover note was binding even if premium was not paid thereon because no premium
could be fixed on the cover note until all the particulars of the shipment was known. As a logical
consequence, no separate premium is required to be paid on the cover note. Furthermore, if the
cover note is to be treated as a separate policy which would require separate premium instead of
integrating it to the regular policies subsequently issued, the purpose and function of the cover
note would be set at naught or rendered meaningless. Liability on the cover note should arise
even before payment of premium. This is how the cover note as a “binder” should legally
operate; otherwise, it will serve no practical purpose in the realm of commerce. (Pacific Timber
Export Corporation vs CA, 112 SCRA 199).

III
Juan procured a “non-medical” life insurance from Good Life Insurance. He designated his wife,
Petra, as the beneficiary. Earlier in his application in response to the question as to whether or
not he had ever been hospitalized, he answered in the negative. He forgot to mention his
confinement at the Kidney Hospital. After Juan died in a plane crash, Petra filed a claim with
Good Life. Discovering Juan’s previous hospitalization, Good Life rejected Petra’s claim on the
ground of concealment and misrepresentation. Petra sued Good Life, invoking faith on the part
of Juan. Will Petra’s suit prosper? Explain. (10%)

Answer: Aquino, p. 198

No. Petra’s suit will not prosper. There was material concealment in the present case because the
illness of Juan could certainly affect the decision of the insurer to enter into the insurance
contract. The fact that the insured died of a cause that is alien to the illness that was concealed
will prevent the insurer from invoking the concealment as a defense. In addition, the fact, that the
insured merely forgot to disclose his confinement at the Kidney Hospital does not excuse him
from the non-disclosure because Section 27 of the Insurance Code makes concealment available
as a defense whether the same is intentional or unintentional.

IV
On October 18, 1980, P took out a life insurance policy and named his only son as beneficiary. P
thereafter learned that Q was hooked on drugs and immediately notified the insurance company
in writing that he is substituting his sister R as the beneficiary in place of Q. P later died of
advanced tuberculosis. In the application filled up by the agent of the insurance company, the
agent, without the knowledge of P, filled in a false answer and made it appear that P was in good
health. Upon P’s death, Q claimed the proceeds of the insurance policy contending that as
designated beneficiary, he having acquired a vested right to the policy. Can the insurance
company refuse liability on the policy? (10%)

Answer: Aquino, p. 199

No. The false statement was made by the insurer’s agent hence it should be the insurer who
should bear the effects of its agents misconduct. However, there is no such collusion in the
present case because the problem states that the false answer was made without the knowledge of
the insured. (See Malayan Insurance Corporation vs. Pinca, G.R. No. 67835, October 12, 1987
and Great Pacific Life vs. CA, 89 SCRA 543).

V
In June 1981, Juan applied for a life insurance with a double indemnity provision in case of death
by accident. Describe an express injury in the application form of insurance, he did not mention
the fact that he had suffered from viral hepatitis the previous year. As Juan had fully recovered
from the disease, the medical examination performed by the insurance company’s physician did
not reveal such previous illness, and showed that Juan was healthy and was an insurable risk.
The policy was issued forthwith. In March 1983, Juan died in an automobile accident.
Subsequent investigation revealed that Juan is negligent in not having his breaks checked. The
insurance company refused to pay Juan’s wife, the designated beneficiary on two grounds: that
Juan is guilty of fraudulent concealment of his ailment, and that Juan’s death was caused by his
owned negligence. The policy was silence as to the effect of the insured’s negligence on the right
to recover therein. Juan’s wife insists that she has the right to recover because Juan’s death was
caused by an accident, which has nothing to do whatsoever with his liver ailment. She therefore
insists on double indemnity.

a. Is she entitled to any indemnity? Explain. (5%)

b. If Juan’s accident occurred in July 1983, would your answer be the same? Explain. (5%)

Answer: Aquino, pp. 230-231

a. No. Juan’s wife is not entitled to any indemnity. Juan concealed a material fact; and the
fact that the cause of his death is not the liver ailment does not relieve him and his heirs
of the effect of such concealment.
b. No, my answer would not be the same if Juan’s accident occurred in July 1983. The
incontestable or incontestability clause is already applicable. The policy has become
incontestable considering that the policy was issued in June 1981 and two years had
lapsed from the date of the issuance of the policy. Section 48 of the Insurance Code
provides that “after a policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a period of two years from
the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is
void ab initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.”
 VI
L borrows P50,000 from M payable 360 days after date at 12% per annum. To secure the loan, L
mortgages his house and lot in favor of M. To protect himself from certain contingencies, M
insures the house for the full amount of the loan with Rock Insurance Co. A fire breaks out and
burns the house and M collects from the insurance company the full value of the insurance. Upon
maturity of the loan, the insurance company demands payment from L. The latter refuses on the
ground that the loan had been extinguished by the insurance payment which M received from the
insurance company. He further contends that it is bad enough to lose a house but it is worse if
one has to pay off a paid obligation to somebody who has not extended any loan to him. Besides,
he states, that the insurance payment should inure to his benefit because he owns the house. Pass
upon the merit of L’s contention. (10%)

Answer: Aquino, p. 273

L’s contention is not correct. The loan of L was not extinguished by the insurance payment
which M received form the insurance company. In addition, the insurance payment did not inure
to the benefit of L. The interest that was insured was the interest of M. Hence, the proceeds
should apply to the interest of M.

The refusal on the part of L to pay the insurer on the ground that he cannot pay his obligation to
the person or entity who did not extend the loan is also untenable. The right of the insurance
company is not based on contract but on the right of subrogation under Article 2207 of the New
Civil Code. The insurance company is subrogated to the rights of M the moment it paid M the
proceeds of the insurance policy.

VII
From March 6, 1970 to March 6, 1971, petitioner insured its Mercedes Benz four-door sedan
with respondent insurance company. On May 4, 1970, the insured vehicle was bumped and
damaged by a truck owned by SMC. For the damaged caused, respondent insurance company
paid petitioner P5,000 in amicable settlement. Petitioner’s general manager executed a Release
of Claim, subrogating respondent’s company to all its right to action against SMC, the person
responsible. On December 11, 1972, respondent company demanded reimbursement from SMC
of the amount it had paid to petitioner. SMC refused on the ground that it had already paid
petitioner P4,500.00 for the damages to petitioner’s motor vehicle, as evidenced by a cash
voucher and a Release of Claim discharging SMC all actions, claims, demands as a consequence
of the accident. Can insurer exercise its right of subrogation against SMC? (10%)

Answer: Aquino, p. 275

No. The insurer can no longer recover from SMC. Since the insurer can be subrogated to only
such rights as the insured may have, should the insured, after receiving payment from the insurer,
release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in
such a case, the insurer will be entitled to recover from the insured whatever it has paid to the
latter, unless the release was made with the consent of the insurer. (Manila Mahogany
Manufacturing Corporation vs Court of Appeals and Zenith Insurance Corporation, G.R. No.
52756, October 12, 1987).

VIII
Alfredo took out a policy to insure his commercial building against fire. The broker for the
insurance company agreed to give a 15-day credit within which to pay the insurance premium.
Upon delivery of the policy on May 15, 2006, Alfredo issued a postdated check payable on May
30, 2006. On May 28, 2006, a fire broke out and destroyed the building owned by Alfredo.

a. May Alfredo recover on the insurance policy? (3%)

b. Would your answer in a) be the same if it as found that the proximate cause of the fire
was an explosion and that fire was but the immediate cause of the loss and there is no
excepted peril under the policy? (3%)
 c. If the fire was found to have been caused by Alfredo’s own negligence, can he still
recover on the policy? (4%)

Answer: 2007 Bar

a. Yes, Alfredo may recover on the policy. It is valid to stipulate that the insured will be
granted credit term for the payment of premium. Payment by means of a check which
was accepted by the insurer, bearing a date prior to the loss, would be sufficient. The
subsequent effects of encashment retroact to the date of the check.
b. Yes, recovery under the insurance contract is allowed if the cause of the loss was either
the proximate or the immediate cause as long as an excepted peril, if any, was not the
proximate cause of the loss.
c. Yes, mere negligence on the part of the insured will not prevent recovery under the
insurance policy. The law merely prevents recovery when the cause of loss is the willful
act of the insured, alone or in connivance with others.

IX
X insured his life for P20 million. X plays golf and regularly exercises everyday, hence is
considered in good health. He did not know, however, that his frequent headaches is really
caused by his being hypertensive. In his application for a life insurance for himself, he did not
put a check to the question if he is suffering from hypertension, believing that because of his
active lifestyle, being hypertensive is remote possibility. While playing golf one day, X collapsed
at the fairway and was declared dead on arrival at the hospital. His death certificate stated that X
suffered a massive heart attack.

a. Will the beneficiary of X be entitled to the proceeds of the life insurance under the
circumstances, despite the non-disclosure that he is hypertensive at the time of
application? (5%)
b. b. If X died in an accident instead of a heart attack, would the fact of X’s failure to
disclose that he is hypertensive be considered as material information? (5%)

Answer: 2016 Bar Exam

a. No, the beneficiary of X is not entitled to the proceeds of the life insurance. The
hypertension of X is a material fact that should have been disclosed to the insurer. The
concealment of such material fact entitles the insurer to rescind the insurance policy.
b. b. It is still a material information. It is settled that the insured cannot recover even
though the material fact not disclosed is not the cause of the loss.

X
a) Suppose that Fortune owns a house valued at P600,000 and insured the same against fire with
3 insurance companies as follows:

X ------------------- P400,000.00
Y ------------------- P200,000.00
Z ------------------- P600,000.00

In the absence of any stipulation in the policies from which insurance company or companies,
may Fortune recover in case of fire should destroy his house completely? (2%)

b) If each of the fire insurance policies obtained by Fortune in problem (a) is a valued policy and
the value of his house was fixed in each of the policies at P1M, how much would Fortune
recover from X if he has already obtained full payment on the insurance policies issued by Y and
Z? (2%)
c) If each of the policies obtained by Fortune in problem (a) above is an open policy and it was
immediately determined after the fire that the value of Fortune’s house was P2.4 M, how much
may he collect from X, Y and Z? (2%)

d) In problem (a), what is the extent of the liability of the insurance companies among
themselves? (2%)

e) Supposing in problem (a) above, Fortune was able to collect from both Y and Z, may he keep
the entire amount he was able to collect from the said 2 insurance companies?
Explain your answer. (2%)

Answer: 1990 Bar Exam:

a) Fortune may recover from the insurers in such order as he may select up to their concurrent
liability.

b) One Answer (assuming that the real value is P1 M): Fortune may still recover only the balance
of P200,000 from X Insurance Company since the insured may only recover up to the extent of
his loss.

Another Answer (assuming that the real value is P600,000): Having obtained full payment on the
insurance policies issued by Y and Z, Fortune may no longer recover from X Insurance
Company.

c) In an open policy, the insured may recover his total loss up to the amount of the insurance
coverage. Thus, the extent of recovery would be P400, 000 from X; P200, 000 from Y; and
P600, 000 from Z.

d) In the problem (a), the insurance companies among themselves would be liable, viz:

X— 4/12 of P600,000 = P200,000

Y— 2/12 of P600,000 = P100,000
Z— 6/12 of P600,000 = P300,000

e) No, he can only be indemnified for his loss, not profit thereby; hence, he must return P200,
000 of the P800, 000 he was able to collect.