Insurance Law: (Republic Act No. 10607 With Notes On Pre-Need Act)

ESSENTIALS OF
INSURANCE LAW
(Republic Act No. 10607
with Notes on Pre-Need Act)
TIMOTEO B. AQUINO
Professor of Law, Pre-Bar Review and MCLE Lecturer
A u t h o r , Torts and Damages
Reviewer on Civil Law
Philippine Corporate Law Compendium
Essentials of Credit Transactions and Banking Law
Notes and Cases on Negotiable Instruments Law and Banking Law
Notes and Cases on Banking Law and Negotiable
Instruments Law (Vol. II, General Banking Law
and Related Laws)
C o - A u t h o r , Reviewer on Commercial Law
Essentials of Transportation and Public Utilities Law
Handbook on Summary and Smalls Claims Procedure
and Bouncing Checks Law
(With Notes on Ejectment and Katarungang Pambarangay Law)
Revised Rules on Summary Procedure: Revisited
Fundamentals of Negotiable Instruments Law
Fundamentals of Obligations and Contracts
Third Edition
2018
856 Nicanor Reyes, Sr. St.

Tel. Nos. 736-05-67 • 735-13-64
1977 C.M. Recto Avenue
Tel. Nos. 735-55-27 • 735-55-34
Manila, Philippines
www.rexpublishing.com.ph
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UNIVERSITY OF THE CORDILLERAS'

LIBRARIES_______________
PREFACE TO THE THIRD EDITION
This latest edition includes a discussion of new cases promulgated by the

Supreme Court, rules and regulations issued by the Insurance Commission as
well as additional discussion of important subjects that comprise what the author
believes to be the essentials of Insurance Law. The plan is for this work to
provide entry-level information and discussion on Insurance Law. It is hoped that
the students and practitioners will continue to give this edition the same reception
that was given to the previous edition. The author is grateful to all of them.
TIMOTEO B. AQUINO
Teresa,, Rizal
in
r:
A
PREFACE
We are still in what is fittingly called by Mr. Allan Greenspan as the

“ A g e o f T u r b u l e n c e . ” Mr. Greenspan observed that
the financial crisis disrupted much of the world’s financial system and had cast “a
pall over many nations’ prospects for economic growth.” The insurance industry is
one of those hit by the upheaval. Even insurance companies that appeared to be
monolithic a couple of years ago are now stuck in financial quagmire.
Significantly, Mr. Greenspan is also of the view that “the best strategy is to ensure
that our markets at all times have enough flexibility and resilience, unencumbered
by protectionism or rigid regulation, to absorb and mitigate the shock of crises.”
Nevertheless, he also believes that there is a greater need for enforcement of
regulations that stops activities that hinder voluntary exchange markets. For him,
there is a greater need for law-enforcement professionals.
Lawyers are part of the pillars of law-enforcement. But pillars cannot endure
in the t e r r a f i r m a of law without solid basic foundation. This
includes knowledge of the fundamental statutory rules and legal principles that
govern financial intermediation conduits like insurers. The present work is the
author’s modest contribution to such indispensable underpinnings. As the title of
this book suggests, what is woven are the essentials of insurance laws, rules, and
jurisprudence. The materials prepare law students and legal practitioners for a more
intensive training on the intricacies of the insurance industry.
The book departs from the mode of presentation that can be found in
available law books on insurance because of its topical presentation. The statutory
provisions and administrative rules are integrated in the discussion. The
arrangement of the topics reflects and puts into writing how the author collates,
arranges, and correlates the voluminous materials when teaching the subject in law
school. Sample bar examination questions and their suggested answers are
included. To further illustrate the operation of legal norms, cases decided by the
Supreme Court and other tribunals are presented in a “problem-answer” form.
The previous edition of this work was based on the Insurance Code of
1978. With the enactment of Republic Act No. 10607, the author was
constrained to update the work to make it consistent with the new law. In
addition, the author also included two chapters, particularly Chapter 17 on the
Insurance Commissioner, and Chapter 18 on Pre-Need Plans. The author
included a chapter on Pre-Need Plans because the regulation thereof was
already transferred to the Insurance Commissioner under Republic Act No.
9829.
As usual, this work would not have been finished without the inspiration
of the author’s wife, Bernadette, and their children Leona Isabelle, Lean Carlo,
and Lauren Margaret. The author likewise owes gratitude to his family and
friends who are also always there to lend support. He also owes special thanks
to the law professors who generously support the author by using his other
works. Finally, the author is grateful to his students during his almost twenty
years of teaching law not only for their encouraging comments, but also for
giving him the privilege of being part of their legal training. Truly, the author’s
students are the reasons why his works came to be.
TIMOTEO B. AQUINO
February 2014 Teresa,
Rizal
CONTENTS
CHAPTER 1. GENERAL CONCEPTS

1. Definition........................................................................
1
1.1. Test..........................................................................
3
1.2. Suretyship.......................................................... 5
1.3. Pre-Need Plans........................................................ 5
1.4. Variable Contracts.................................................. 6
2. Doing an Insurance Business......................................... 10
2.1. Mutual Insurance Companies..................................... 11
2.2. HMO: Principal Object and Purpose Test 11
3. Applicable Laws............................................................. 13
3.1. New Civil Code.......................................................... 14
3.2. Corporation Code....................................................... 15
4. Elements................................................................................... 15
4.1. Requisites of a Valid Contract.................................... 16
4.2. Distribution of Losses................................................. 16
4.3. Risk............................................................................
4.4. Assumption of Risk.................................................... 17
20
5. Nature and Purpose.................................•................................
5.1. How People Deal with Risks........................................
20
5.2. How Insurance Deals with Risk.................................. 21
6. Characteristics...........................................................................
21
6.1. Not a Wagering Contract............................................ 22
23
7. Social Value..............................................................................
8. Perfection................................................................................ 26
8.1. Delivery of the Policy................................................. 27
9. Kinds of Insurance.................................................................... 33
10. Principle of Indemnity ................................................................
36
39
vii
CHAPTER 2. THE PARTIES
1. Insured................................................................................................. 40
1.1. Assured and Owner............................................................. 41
1.2. Capacity.............................................................................. 41
1.3. Effect of Death of Owner ........................................................... 43
1.4. Public Enemy............................................................................... 43
1.5. Rights of Policyholders................................................................ 45
2. Insurer.......................................................................................................... 46
2.1. Definition..................................................................................... 46
2.2. Certificate of Authority................................................................ 50
2.3. Grounds for Disapproval of Application..................................... 51
2.4. Prohibited Acts............................................................................ 51
3. Beneficiary................................................................................................... 53
3.1. Generally Revocable.................................................................... 61
3.2. Forfeiture of Rights of Beneficiary.............................................. 62
3.3. Disqualification of Beneficiary ................................................... 63
4. Trustee or Agent.......................................................................................... 66
5. Partner.......................................................................................................... 66
6. Assignee of Life Insurance.......................................................................... 67
6.1. Assignee of Property Insurance................................................... 68
7. Insurance Agent and Insurance Broker........................................................ 68
7.1. Insurance Agent........................................................................... 69
7.2. Insurance Broker.......................................................................... 75
7.3. Effect of Receipt of Premium...................................................... 75
7.4. No Jurisdiction Over Insurer-Agent
Relationship................................................................................. 75
CHAPTER 3. INSURABLE INTEREST

1. Concept......................................................................................................... 77
2. Insurable Interest in Life Insurance............................................................. 79
2.1. Insurable Interest Under the Code............................................... 79
2.2. Classes of Insurable Interest in Life
Insurance ..................................................................................... 80
2.3. Consent of the Insured................................................................. 85
3. Insurable Interest in Property Insurance...................................................... 89
3.1. Test.............................................................................................. 90
3.2. Kinds of Insurable Interest........................................................... 90
3.3. Distinctions Between Insurable Interest in
Property Insurance and Life Insurance........................................ 93
3.4. Insurable Interest of Bailee.......................................................... 97
viii
3.5. Insurable Interest of the Mortgagor
and Mortgagee.......................................................................... 98
3.6. Insurable Interest of Mortgagee.............................................. 101
3.7. Subrogation ............................................................................ 102
3.8. Financial Lease ...................................................................... 102
4. Time When Insurable Interest Must Exist........................................ 105
4.1. Property Insurance.................................................................. 105
4.2. Life Insurance......................................................................... 108
5. Insurable Interest of Beneficiary in Property
Insurance ........................................................................................ 109
5.1. Insurable Interest of Beneficiary in Life
Insurance................................................................................. 110
6................................................................................................................ Assigne
e in Life Insurance.................................................................................... 110
6.1. Assignee in Property Insurance................................................. Ill
CHAPTER 4. PREMIUM
1. Premium Required for Policy to be Binding.............................. 112
1.1. Effect of Non-Payment........................................................... 113
1.2. When Binding Even if Premium is Unpaid...................... 115
2. How to Prevent Lapse of Life Insurance Policy..................................... 123
2.1. Automatic Policy Loan and Cash
Surrender Value...................................................................... 123
2.2. Dividends................................................................................ 126
2.3. Reinstatement Clause.............................................................. 126
3. Return of Premium................................................................................. 127
3.1. Grounds................................................................................... 128
4. Advance Payment ........................................................................... 132
5. Rebate of Premium.......................................................................... 132
CHAPTER 5. THE POLICY
1. Consensual............................................................................................ 134
2. Statute of Frauds Inapplicable................................................................ 135
3. Policy...................................................................................................... 135
3.1. Other Documents ................................................................. 137
3.2. Policy Form............................................................................ 137
4. Basic Provisions ..................................................................................... 138
4.1. Parties .................................................................................... 140
4.2. Designation of Beneficiary .....................................-...... 141
4.3. Amount Insured ................................................................. 142
ix
4.4. Premium ................................................................................... 143
4.5. Identification of the Insured....................................................... 144
4.6. Identification of Property Insured ............................................. 145
4.7. Risk Insured Against ................................................................ 159
5. Riders...................................................................................................... 152
6. Contract of Adhesion............................................................................... 154
6.1. Reading of Policy...................................................................... 154
7. Interpretation and Proof........................................................................... 155
7.1. Interpretation in Case of Doubt.................................................. 156
7.2. Forfeiture Clauses...................................................................... 159
7.3. Other Rules of Interpretation..................................................... 159
7.4. Indivisibility.............................................................................. 162
7.5. Proof.......................................................................................... 163
7.6. Signatory................................................................................... 164
8. Cover Notes............................................................................................ 165
9. Kinds of Property Insurance Policy.......................................................... 166
10. Cancellation............................................................................................. 169
10.1. Rescission................................................................................ 172
11. Renewal of Policy.................................................................................... 173
12. Reformation of the Policy........................................................................ 174
12.1. Mistake.................................................................................... 175
CHAPTER 6. ASCERTAINING AND

CONTROLLING RISKS 1 2
1. Concealment............................................................................................
1.1. Materiality.................................................................................
1.2. Examples of Material Facts.......................................................
1.3. Causation Not Necessary ..........................................................
1.4. Requisites..................................................................................
1.5. Knowledge of Agent of Insured................................................
1.6. When There Is No Concealment................................................
1.7. Judgment or Opinion.................................................................
1.8. Knowledge of the Insurer..........................................................
1.9. Intentional and Unintentional
Concealment.............................................................................
1.10. Knowledge of the Fact Concealed.............................................
1.11. Waiver of Insurer......................................................................
1.12. Remedy.......................................................................................
2. Representation....................................................................................
2.1. Time of Representation...............................................................
x
2.2. Distinctions and Similarities............................................ 207
2.3. Kinds................................................................................ 208
2.4. Interpretation.................................................................... 208
2.5. Test of Materiality............................................................ 209
2.6. Remedy............................................................................ 212
3. Warranties......................................................................................... 214
3.1. Kinds................................................................................ 214
3.2. Rules on Promissory Warranties...................................... 215
3.3. Formalities of Express Warranty..................................... 215
3.4. Examples of Express Warranty........................................ 216
3.5. Breach of Warranty by the Insured.................................. 217
3.6. Remedy............................................................................ 218
3.7. Breach Without Fraud...................................................... 219
3.8. Distinctions...................................................................... 219
4. Other Devices................................................................................... 219
4.1. Conditions........................................................................ 219
4.2. Exception, Exclusion, or Exemption................................ 221
5. Incontestable Clause......................................................................... 222
5.1. Mandatory Incontestable Clauses.................................... 223
5.2. Rationale.......................................................................... 224
5.3. Allegation of Connivance with Agent ............................. 226
5.4. Effect of Death Within Two Years.................................. 226
5.5. When Inapplicable .......................................................... 228
6. War Limitation Rider or War Clause.................................... 231
7. Defenses of Insured Against Revocation.......................................... 231
7.1. Guaranteed Insurability Clause........................................ 232
7.2. Timeliness of Rescission.................................................. 233
7.3. Waiver.............................................................................. 234
7.4. Estoppel............................................................................ 236
CHAPTER 7. LOSS AND NOTICE OF LOSS
1. Loss .................................................................................................. 23^
1.1. Proximate Cause Defined................................................. 238
1.2. Rules under the Insurance Code....................................... 239
1.3. Concurrent Causes........................................................... 241
1.4. Negligent and Intentional Acts
or Omissions..................................................................... 243
244
2. Notice of Loss ..................................................................................
3. Proof of Loss.....................................................................................
4. Defects in Notice and Proof..............................................................
5. Effect of Delay..................................................................................
xi
CHAPTER 8. CLAIMS SETTLEMENT AND
SUBROGATION
Claims Settlement............................................................................ 252
1.1. Unfair Claims Settlement Practices.................................. 253
1.2. Life Insurance Policy........................................................ 254
1.3. Non-Life Insurance Policy................................................ 254
1.4. Unreasonable Denial or Withholding of Claim.. 255
Fraudulent Claim ............................................................................ 258
Prescriptive Period........................................................................... 261
3.1. Stipulation......................................................................... 261
3.2. Accrual.............................................*............................... 262
3.3. Rule If There Is No Stipulation......................................... 263
Subrogation...................................................................................... 264
4.1. Requisites of Subrogation................................................. 266
4.2. When There Is No Subrogation........................................ 266
4.3. Limitations........................................................................ 267
4.4. Limitations as to the Amount Recoverable....................... 267
4.5. Effect of Prescription........................................................ 269
4.6. Discretion of Insurer to Exercise Right............................ 271
4.7. Presentation of the Policy................................................. 271
CHAPTER 9. DOUBLE INSURANCE
Definition.........................................................................................
Requisites ....................................................................................... 276
2.1. Double Insurance in Life Insurance.................................. 276
No General Prohibition Against Double Insurance......................... 277
Other Insurance Clause.................................................................... 278
4.1. Alternative Forms............................................................. 278
4.2. Rationale........................................................................... 278
4.3. Validity............................................................................. 279
4.4. Additional Insurance......................................................... 279
Over-Insurance by Double Insurance.............................................. 281
5.1. Rules in Case of Over-Insurance By 283
Double Insurance..............................................................
Collateral Source Rule..................................................................... 283
285
CHAPTER 10. REINSURANCE
287
288
288
Definition.....................
1.1. Nature............
1.2. Distinctions
xu
2. Parties......................................................................... 288
3. Distinguished from Double-Insurance and
Co-Insurance............................................................................................ 291
4. Functions................................................................................................... 292
5. Kinds......................................................................................................... 292
5.1. Facultative Reinsurance........................................................... 292
5.2. Treaty....................................................................................... 293
6. Insurable Interest....................................................................................... 293
7. Premium.................................................................................................... 294
8. Obligation.................................................................................................. 294
8.1. Measure of Liability................................................................. 294
8.2. Good Faith.............................................................................. 294
9. Cancellation............................................................................................... 296
CHAPTER 11. MARINE INSURANCE

1. Definition................................................................................................... 298
2. Kinds of Marine Insurance....................................................................... 299
2.1. Ocean Marine Insurance........................................................... 300
2.2. Inland Marine Insurance........................................................... 304
2.3. Aviation Insurance................................................................... 305
3. Period Covered.......................................................................................... 306
4. Risks Insured Against............................................................................... 306
4.1. All Risk Policy......................................................................... 306
4.2. Named Perils Policy................................................................. 308
4.3. Inland Marine Insurance Perils............................:............. 315
5. Insurable Interest....................................................................................... 316
5.1. Insurable Interest Over the Ship.............................................. 317
5.2. Insurance Over Cargo............................................................... 318
5.3. Insurance Over Freightage and Income................................... 320
6. Concealment............................................................................................. 322
7. Representation......................................................................................... 324
8. Implied Warranties................................................................................... 326
8.1. Seaworthiness....................................................................... 326
8.2. Documents of Nationality or Neutrality............................. 331
8.3. Legality..................................................................................... 331
9. The Voyage and Deviation........................................................................ 331
9.1. Route...................................................................................... 331
9.2. Deviation.................................................................................. 332
xiii
10. Loss ........................................................................................................... 334
10.1. Kinds of Loss.......................................................................... 334
11. Abandonment............................................................................................. 342
11.1. Requisites.................................................................................. 343
11.2. Effects of Abandonment........................................................... 345
11.3. Acceptance of Abandonment.................................................... 346
11.4. Revocation................................................................................ 346
11.5. Effect of Failure to Abandon.................................................... 347
12. Measure of Indemnity................................................................................ 348
12.1. Co-Insurance Clause................................................................. 349
12.2. Freightage or Cargo.................................................................. 350
12.3. Profits........................................................................................ 350
12.4. Partial Loss of Cargo................................................................ 351
12.5. Sue and Labor Clause............................................................... 351
12.6. Application of Old Materials.................................................... 351
13. Averages.................................................................................................... 352
13.1. FPA Clause............................................................................... 352
13.2. Simple or Particular Average.................................................... 353
13.3. General Average....................................................................... 354
13.4. Who Will Pay General Average............................................... 356
13.5. Subrogation............................................................................... 359
CHAPTER 12. FIRE INSURANCE

1. Concept........................................................................................................ 360
2. Property Insured........................................................................................... 362
3. Alteration..................................................................................................... 362
4. Subsequent Acts of the Insured................................................................... 364
5. Measure of Indemnity.................................................................................. 364
5.1. Valued Policy............................................................................. 364
5.2. Open Policy................................................................................ 365
5.3. Indirect Losses........................................................................... 365
6. Prohibitions.................................................................................................. 366
7. Co-Insurance................................................................................................ 367
8. Sound Value Distinguished from
Replacement Cost Value........................................................................... 367
9. Exceptions.................................................................................................... 368
10. Warranty.................................................................................................... 369
CHAPTER 13. LIFE INSURANCE

1. General Concepts......................................................................................... 370
2. Kinds............................................................................................................ 373
xiv
3. Annuity.............................................................................................. 377
4. Life Annuity Under the Civil Code .................................................. 378
5. Minor as Insured................................................................................ 379
6. Suicide Clause................................................................................... 381
7. Accidental Death Benefit Clause............................................................... 382
8. Transfer of Policy....................................................................................... 385
9. Exempt from Execution.............................................................................. 385
10. Insolvency................................................................................................ 386
11. Contents of Policy.................................................................................... 387
12. Life Insurance Equation........................................................................... 401
CHAPTER 14. CASUALTY INSURANCE

AND COMPULSORY THIRD PARTY LIABILITY
INSURANCE
1. Definition.................................................................................................... 402
1.1. Distinguished from Accident Insurance................................... 403
2. Governing Rules......................................................................................... 403
3. Theft and Robbery Insurance..................................................................... 403
4. Personal Accident and Health Insurance.................................................... 406
4.1. Accident.................................................................................. 406
4.2. Willful Exposure to Needless Perils....................................... 407
4.3. Voluntary Acts........................................................................ 407
5. Glass Insurance.......................................................................................... 411
6. Employer’s Liability Insurance.................................................................. 411
7. Motor Vehicle Liability Insurance............................................................. 411
7.1. Direct Liability........................................................................ 411
7.2. Authorized Driver Clause..................................................... 414
7.3. Theft Clause ........................................................................... 416
7.4. Authorized Driver Clause and
Theft Clause Distinguished..................................................... 417
8. Compulsory Motor Vehicle Liability
Insurance (CMVLI)................................................................................ 418
8.1. Definitions.............................................................................. 420
8.2. Alternative Compliance........................................................ 421
8.3. Coverage................................................................................. 422
8.4. No Fault Indemnity Clause..................................................... 425
8.5. Cancellation of CMVLI.......................................................... 427
8.6. Change of Ownership............................................................. 428
8.7. Claims Settlement................................................................... 428
8.8. Penalty Clauses....................................................................... 430
XV
CHAPTER 15. SURETYSHIP
1. General Concepts................................................................ 436
1.1. Distinguished from Insurance Contracts ... 437
1.2. Three “Cs”............................................................. 437
1.3. Distinguished from Guaranty................................ 438
1.4. Civil Code Applicable........................................... 439
1.5. Nature of Liability ................................................ 439
1.6. Extent of Liability.................................................. 441
2. The Parties........................................................................... 441
3. Premium.............................................................................. 442
4. Interpretation....................................................................... 442
5. Kinds of Bonds................................................................... 444
445
6. Continuing Surety...............................................................
446
7. Reimbursement...................................................................
446
8. Extinguishment...................................................................
CHAPTER 16. REGULATION
OF INSURANCE BUSINESS
1. Sources of Regulation......................................................... 449
1.1. Authority of LGU Restricted................................. 450
2. Reasons and Bases of Regulation....................................... 450
3. Areas of Regulation............................................................ 450
4. Formation and Licensing of Insurers..................................
4.1. Applicable Law..................................................... 451
4.2. Basic Requirements............................................... 451
4.3. Certificate of Authority......................................... 451
4.4. When Issuance of Certificate Can 451
Be Refused............................................................. 452
4.5. Suspension and Cancellation of Authority. 452
4.6. Other Aspects of Corporate Organization., 453
5. Directors and Officers......................................................... 454
5.1. Corporate Governance........................................... 454
6. Financial Regulations.......................................................... 455
6.1. Paid-up Capital and Net Worth............................. 455
6.2. Margin of Solvency............................................... 459
6.3. Admitted Assets.................................................... 459
6.4. Dividend Policy..................................................... 459
6.5. Investments............................................................ 460
6.6. Reserves................................................................. 460
6.7. Examinations and Reports..................................... 461
6.8. Limit of Single Risk.............................................. 461
xvi
7. Security Deposit........................................................................................ 462
8. Regulation of Persons Involved in the Business............................... 465
8.1. Reinsurance Business............................................................. 465
8.2. Foreign Companies................................................................. 466
8.3. Holding Companies............................................................... 466
8.4. Self-Regulatory Organizations............................................... 467
8.5. Other Persons Subject to Regulation...................................... 468
9. Corporations in Distress............................................................................ 470
9.1. Conservatorship...................................................................... 470
9.2. Receivership............................................................................ 472
9.3. Capitalization While Under Conservatorship.... 475
10. Rate Regulation ...................................................................................... 475
10.1. Purposes of Rate Regulation.................................................. 476
10.2. Power of the Commissioner Over Rates................................ 477
11. Policy Forms........................................................................................... 477
12. Sales Practices and Consumer Protection............................................... 477
12.1. Prohibitions............................................................................ 478
13. Anti-Money Laundering......................................................................... 480
13.1. Layering................................................................................. 480
CHAPTER 17. THE INSURANCE COMMISSIONER

1. Insurance Commissioner........................................................................... 481
2. Term of the Commissioner........................................................................ 481
3. Authority of the Commissioner................................................................. 482
4. Security for the Commissioner and Other Officers.......................... 484
5. Administrative Sanctions.......................................................................... 485
6. Quasi-Judicial Functions........................................................................... 486
7. Procedure................................................................................................... 488
8. Pre-Need.................................................................................................... 489
CHAPTER 18. PRE-NEED PLANS

1. Governing Law and State Policy............................................................... 491
2. Pre-Need Plan Defined.............................................................................. 492
3. Parties........................................................................................................ 492
3.1. Other Persons Regulated by the
Commissioner ........................................................................ 493
3.2. Suspension or Revocation of Authority ................................ 494
4. Kinds of Pre-Need Plans........................................................................... 494
xvii
5. Pre-Need Contract .................................................................................... 495
5.1. Interpretation ............................................................................ 495
6. Registration and Disclosure of Information.............................................. 499
7. Consideration ........................................................................................... 502
8. Termination of the Plan............................................................................. 503
8.1. Termination by Planholder ...................................................... 503
8.2. Termination by Pre-Need Company.................................. 503
9. Claims Settlement.............................................................................. 503
10. Unfair Claims Settlement.................................................................. 504
11. Trust Fund............................................................................................... 505
12. Regulation of Pre-Need Companies........................................................ 507
13. Pre-Need Companies in Distress............................................................. 508
APPENDICES
Appendix “A” — The Insurance Code (RA 10607).......................................... 513
Appendix “B” — Pre-Need Code (RA 9829).................................................... 638
Appendix “C” — The Insurance Act (Act 2427).............................................. 666
Appendix “D” — Insurance Memorandum
Circular No. 4-2006........................................................ 699
xviii
CHAPTER 1
GENERAL CONCEPTS
Modern insurance contracts originated from the practice of merchants in the 14th
century. Nevertheless, it has been acknowledged that different strains of security
arrangements have already been used for centuries and they are akin to insurance contract
in embryonic form.
Justice Laurel commented on the growth of insurance business in this wise:
‘The phenomenal growth of insurance from almost nothing a hundred years ago to
its present gigantic proportion is not of the outstanding marvels of present-day business
life. The demand for economic security, the growing need for social stability, and the
clamor for protection against the hazards of cruel-crippling calamities and sudden
economic shocks, have made insurance one of the felt necessities of modern life.
Insurance is no longer a rich man’s monopoly. Upon it are heaped the assured hopes of
many families of modest means. It is woven, as it were, into the very warp and woof of
national economy. It touches the holiest and most sacred ties in the life of man—love of
parents, love of wives and love of children.”1
§1. DEFINITION. The statutory definition of the “ c o n t r a c t o f
i n s u r a n c e ” appears in the first paragraph of Section 2 of the Insurance
Code that states:2
SEC. 2. Whenever used in this Code, the following

terms shall have the respective meanings hereinafter
set forth or indicated, unless the context otherwise
requires:
(a) A contract of insurance is an agreement
whereby one undertakes for a consideration to
indemnify
The Insular Life Assurance Co., Ltd. v. Serafin D. Feliciano, et al., G.R. No. 47593,
September 13, 1941, 73 Phil. 201.
2
Section 2, Insurance Code, Republic Act (RA) No. 10607 dated August 15, 2013,
hereinafter referred to as I.C.
1
2 ESSENTIALS OF INSURANCE LAW
(Republic Act No. 10607 with Notes on Pre-Need Act)
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.
a. Insurance may also be defined as a contract whereby one party called
the insurer undertakes for a consideration to pay another party called the insured, or
his beneficiary, upon the happening of the peril insured against, whereby the party
insured or his beneficiary suffers loss or damage or is exposed to liability.
CHAPTER 1 3
GENERAL CONCEPTS
§1.01. TEST. Whether or not a contract is one of insurance is to be

determined by its purpose, effect, contents, and import and not necessarily by the
terminology used.3 The test to determine if a contract is an insurance contract or not,
depends on the nature of the promise, the act required to be performed, and the exact
nature of the agreement in the light of the occurrence, contingency or circumstances
under which the performance becomes requisite.4 The test is whenever the assumption
of risk and the indemnification of loss is the principal object and purpose of the
contract.5 6 7 8
a. For instance, a contract may be considered an insurance contract even if
it is referred to as a health plan. In P h i l a m c a r e H e a l t h
S y s t e m s v . C o u r t o f A p p e a l s , * the
Supreme Court ruled that the contract involved was an insurance contract rather than
a preneed plan. In the said case, the insurable interest of respondent’s husband in
obtaining the health care agreement was his own health. Once the member incurs
hospital, medical, or any other expense 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. This ruling was reiterated in F o r t u n e
M e d i c a r e , I n c . v . A m o r i n 1 where the Supreme
Court emphasized “that for purposes of determining the liability of a health care
provider to its members, jurisprudence holds that a health care agreement is in the
nature of non-life insurance, which is primarily a contract of indemnity.” The
arrangement is “the same when the member incurs hospital, medical or any other
expense 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.”
b. The Supreme Court reached a different conclusion in
P h i l i p p i n e H e a l t h C a r e P r o v i d e r ,
I n c . v . C I R 8 where it concluded that the elements of insurance
contract are absent. The Court ruled that there was no indemnity precisely because
the member merely
3
National Auto Service Corporation v. State, Texas Civ. App., 55 S.W. (2d) 209.
4
White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, et al.,
G.R. No. 154514, July 28, 2005.
Philippine Health Care Providers v. CIR, G.R. No. 167330, September 18,
2009.
6
G.R. No. 125678, March 18, 2002. See also Blue Cross Health Care, Inc. v.
Noemi and Danilo Olivares, G.R. No. 169737, February 12, 2008.
7
G.R. No. 195872, March 12, 2014 citing Philamcare Health Systems, Inc. v. CA,
429 Phil. 82, 90 (2002); see also Philippine Health Care Providers, Inc. v. Commissioner of
Internal Revenue, supra.
8
Supra (The Supreme Court reversed its previous ruling in 2008 as reported in 554
SCRA 511 [2008]).
avails of medical services to be paid or already paid in advance at a pre-agreed price

under the agreements. Indemnity of the member was not the focal point of the
agreement but the extension of medical services to the member at an affordable
cost; it did not partake of the nature of a contract of insurance. Although risk is a
primary element of an insurance contract, it is not necessarily true that risk alone is
sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to
distinguish prepaid service contracts (like those of petitioner) from the usual
insurance contracts. Indeed, an entity undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar only to insurance companies.
c. It should be noted in this connection that a Health Plan is not one of
the Pre-Need Plans expressly recognized under the Pre- Need Code and its
Implementing Rules and Regulations.9 Under the Implementing Rules and
Regulations, a pre-need company may be authorized to issue plans if it is any or all
of the following types of plans: (1) educational plan, (2) pension plan, and (3) life or
memorial plan.
d. Even a provision in a Collective Bargaining Agreement can be
considered an insurance contract under certain circumstances. In
M i t s u b i s h i M o t o r s P h i l i p p i n e s
S a l a r i e d E m p l o y e e s U n i o n
( M M P S E U ) v . M i t s u b i s h i M o t o r s
P h i l i p p i n e s C o r p .,10 the Collective Bargaining Agreement
entered into between the petitioner union and respondent corporation, MMPC,
contained a provision that states that the company “shall obtain group
hospitalization insurance coverage or assume under a self-insurance basis
hospitalization for the dependents of regular employees up to a maximum amount of
forty thousand pesos (P40,000.00) per confinement subject to” certain limitations
and conditions specified therein. The Court ruled that “MMPC is a no-fault insurer.
Hence, it cannot be obliged to pay the hospitalization expenses of the dependents of
its employees which had already been paid by separate health insurance providers of
said dependents.” Moreover, since the subject CBA provision is an insurance
contract, the rights and obligations of the parties must be determined in accordance
with the general principles of insurance law. Being in the nature of a non-life
insurance contract and essen
9
Section 4(b), R.A. No. 9829. Section 10, IRR of the Pre-Need Code.
10
G.R. No. 175773, June 17, 2013.
CHAPTER 1 5
GENERAL CONCEPTS
tially a contract of indemnity, the CBA provision obligates MMPC to indemnify

the covered employees’ medical expenses incurred by their dependents but only
up to the extent of the expenses actually incurred. This is consistent with the
principle of indemnity which proscribes the insured from recovering greater than
the loss.”
e. In P a n d i m a n P h i l i p p i n e s , I n c .
v . M a r i n e M a n n i n g M a n a g e m e n t
C o r p . , n the Supreme Court considered the Protection and Indemnity
Agreement issued by a P&I Club as an insurance contract. In the Protection and
Indemnity Agreement, the P&I Club is the insurer, the shipowner is the insured,
and the heir of a crew on board the insured vessel is a beneficiary.
f. A promise of manufacturers, contractors or distributors to replace a
product or redo a work if the product or work is defective is not considered an
insurance but a warranty.* 12 However, the promise by a third person — not the
manufacturer, contractor or distributor - to compensate the expenses that will be
incurred by the owner of the product or building to replace, repair or rework the
property may also be in the form of insurance.13
g. Contracts of law firm with clients whereby in consideration of
periodical payments, the law firm promises to represent such clients in all suits for
or against them are not insurance contracts.14
§1.02. SURETYSHIP. For regulatory purposes, a contract of suretyship
shall be deemed to be an insurance contract within the meaning of the Insurance
Code when made by a surety who or which, as such, is doing an insurance
business.15
a. The contract of suretyship under the New Civil Code is simply defined as
an agreement whereby one binds himself solidarily with the principal debtor.16
§1.03. PRE-NEED PLANS. Insurance contracts should likewise be
distinguished from pre-need plans that are now under the regulatory powers of the
Insurance Commission (I.C.) under
n
G.R. No. 143313, June 21, 2005.
12
Williams, Jr. and Heins, Risk Management and Insurance, 1989 Ed., p. 322.
™Ibid.
14
Philippine Health Care Providers, Inc. v. CIR, supra.
15
Section 2,1.C.; See §2 of this Chapter.
16
Section 2047, New Civil Code.
the Pre-Need Code ( R . A . N o . 9 8 2 9 ) . Pre-need plans are

contracts, agreements, deeds or plans for the benefit of the planholders which provide
for the performance of future service/s, payment of monetary considerations or
delivery of other benefits at the time of actual need or agreed maturity date, as
specified therein, in exchange for cash or installment amounts with or without
interest or insurance coverage and includes life, pension, education, interment and
other plans, instruments, contracts or deeds as may be determined by I.C. 17 The basic
laws and rules on Pre-Need Plans are discussed in Chapter 18 of this work.18
§1.04. VARIABLE CONTRACTS. The Insurance Code likewise governs
“variable contracts.” “ V a r i a b l e c o n t r a c t ”means any
policy or contract on either a group or on an individual basis issued by an insurance
company providing for benefits or other contractual payments or values thereunder to
vary so as to reflect investment results of any segregated portfolio of investments or
of a designated separate account in which amounts received in connection with such
contracts shall have been placed and accounted for separately and apart from other
investments and accounts. This contract may also provide benefits or values
incidental thereto payable in fixed or variable amounts, or both.19
PROBLEMS:
1. In return for the 20 years of faithful service of X as a househelper to Y, the
latter promised to pay P100,000.00 to X’s heirs if he (X) dies in an accident
by fire. X agreed. Is this an insurance contract? ( 2 0 1 1 B a r )
A: No, the agreement is not insurance but a conditional donation.
There is no insurance because there is no contract to indemnify the
heirs or X for any loss, damage or Lability. Y actually promised to
transfer P100,000.00 to the heirs of X gratuitously on the condition that
X dies in an accident by fire. The promise to transfer is subject to a
suspensive condition.
2. ET, deceased husband of respondent JT, applied for a health care coverage
with petitioner Philamcare Health Systems, Inc. The application was
approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the
agreement, respondent’s husband was entitled to avail of hospitalization
benefits, whether ordinary or
17
Section 4(b), R.A. No. 9829.
18
See Chapter 18, of this book, p.
19
Section 238, I.C. as amended.
CHAPTER 1 7
GENERAL CONCEPTS
emergency, listed therein. He was also entitled to avail of

“o u t p a t i e n t b e n e f i t s ” such as annual physical
examinations, preventive health care and other outpatient services. Was the
agreement an insurance contract?
A: Yes. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity. In this, the insurable
interest of respondent’s husband in obtaining the health care agreement
was on his own health. Once the member incurs hospital, medical or any
other expense 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. ( P h i l a m c a r e H e a l t h
S y s t e m s , I n c . v . C o u r t o f
A p p e a l s a n d J u l i t a T r i n o s ,
G . R . N o . 1 2 5 6 7 8 , M a r c h 1 8 ,
2 0 0 2 . But see c o n t r a r y v i e w i n
P h i l . H e a l t h C a r e P r o v i d e r s ,
I n c . v . C I R , S e p t e m b e r 1 8 ,
2 0 0 9 b e l o w )
Under the agreement with the PHCP, Inc., the member pays the PHCP a
predetermined consideration in exchange for the hospital, medical and
professional services rendered by the petitioner’s physician or affiliated physician
to him. In case of availment by a member of the benefits under the agreement,
PHCP does not reimburse or indemnify the member as the latter does not pay any
third party. Instead, it is the petitioner who pays the participating physicians and
other health care providers for the services rendered at pre-agreed rates. The
member does not make any such payment. According to the agreement, a member
can take advantage of the bulk of the benefits anytime, e . g . , laboratory
services, x-ray, routine annual physical examination and consultations, vaccine
administration as well as family planning counseling, even in the absence of any
peril, loss or damage on his or her part. In case of emergency, petitioner is obliged
to reimburse the member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of services available.
The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury. Can the
contract between the member and the PHCP be considered an insurance contract?
A: No. The contract is not an insurance contract. Not all the
necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part
of the member that should be indemnified by PHCP. In other words, there
is nothing in the agreement that gives rise to a monetary liability on the
part of the member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The terms
“indemnify* or “indemnity* presupposes that a liability or claim has
already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be
paid or already paid in advance at a pre-agreed price under the agreements.

Indemnity of the member was not the focal point of the agreement but the
extension of medical services to the member at an affordable cost, it did not
partake of the nature of a contract of insurance.
While PHCP undertakes a business risk when it offers to provide
health services: the risk that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as 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.
However, assuming that the PHCP’s commitment to provide medical
services to its members can be construed as an acceptance of the risk that it
will shell out more than the prepaid fees, it still will not qualify as an
insurance contract because petitioner’s objective is to provide medical
services at reduced cost, not to distribute risk like an insurer.
( P h i l i p p i n e H e a l t h C a r e
P r o v i d e r s , I n c . v . C I R , G . R .
N o . 1 6 7 3 3 0 , S e p t e m b e r 1 8 ,
4
2 0 0 9 )
4. Respondent Rosita Singhid’s deceased husband Benito Singhid (Benito) was hired by
Fullwin Maritime Limited (Fullwin), through its local agent, respondent Marine
Manning and Management Corporation (MMMC), as chief cook on board the
vessel MV Sun Richie Five for a term of 12 months. MV Shn Richie Five Bulkers
S.A., owner of the vessel Sun Richie Five, was a member of a P&I Club, which is
“an association composed of shipowners in general who band together for the
specific purpose of providing insurance cover on a mutual basis against liabilities
incidental to shipowning that the members incur in favor of third parties. The
vessel and its crew were covered by a “Class 1-Protection and
Indemnity”agreement beginning noon of February 20, 1997 up to February 20,
1998 as embodied in the Certificate of Entry issued by OMMIAL. OMMIAL
transacted business in the Philippines through its local correspondent, herein
petitioner Pandiman Philippines, Inc. (PPI). While the vessel was on its way to
Shanghai, China from Ho Chih Minh City, Vietnam, Benito suffered a heart
attack, and subsequently died on June 24, 1997. His remains were flown back to
the Philippines. After Benito’s remains were interred, his widow Rosita filed a
claim for death benefits with MMMC, which, however, referred her to herein
petitioner PPI. Upon Rosita’s submission of all the required documents, PPI
approved the claim and recommended payment thereof in the amount of
US$79,000. But, despite said recommendation, Rosita’s death claims remained
unpaid. PPI is being made liable as an insurance agent. However, PPI claims that
it is not an insurance agent but a mere local correspondent
CHAPTER 1 9
GENERAL CONCEPTS
of the P&I Club. Thus, petitioner maintains that even if OMMIAL (the P&I Club), as
insurer of S u n R i c h i e F i v e , is held principally liable to Rosita
for her husband’s death benefits, petitioner cannot be held solidarity liable together
with said insurer. Should petitioner PPI be held liable as insurance agent for Rosita’s
claim for death benefits under the “ C l a s s 1 -
P r o t e c t i o n a n d I n d e m n i t y ”
a g r e e m e n t ?
A: No, PPI is not liable under the "C l a s s 1 - P r o t e c t i o n
a n d I n
d e m n i t y ” agreement. The protection and indemnity agreement is
actually an insurance contract, the provisions of the Insurance Code (P.D. No.
1460, as amended) is the governing law. In the subject insurance contract, the
P&I Club (OMMIAL) is the insurer, the shipowner (Sun Richie Five Bulkers
S.A.) is the insured, and herein respondent Rosita Singhid as widow and heir
of a crew on board the insured vessel like Benito, is a beneficiary.
Initially, the Court observed that there is nothing therein to show that
an insurance contract in this case was in fact negotiated between the insured
S u n R i c h i e F i v e and the insurer OMMIAL, through
petitioner as insurance agent which will make petitioner an insurance agent
under Section 300 of the Insurance Code. The fact that petitioner referred to
OMMIAL as its “principal” instead of its “client” is of no moment. Such
“reference,” however, will not and cannot vary the definition of what an
insurance agent actually is under the aforecited law, nor can it automatically
turn petitioner into one, thereby becoming correspondingly liable to all the
duties, requirements, liabilities and penalties to which an insurance agent is
subject to. Hence, petitioner PPI is not an insurance agent under the obtaining
circumstances.
In any event, payment for claims arising from the peril insured against,
to which the insurer is liable, is definitely not one of the liabilities of an
insurance agent. Thus, there is no legal basis whatsoever for holding petitioner
solidarily liable with insurer OMMIAL for Rosita’s claim for death benefits
on account of her husband’s demise while under the employ of MMMC’s
principal, Fullwin.
Besides, even 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 Article 1311 of the Civil
Code, 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. ( P a d i m a n
P h i l i p p i n e s , I n c . v . M a r i n e
M a n n i n g M a n a g e m e n t C o r p . ,
G . R . N o . 1 4 3 3 1 3 , J u n e 2 1 ,
2 0 0 5 )
§2. DOING AN INSURANCE BUSINESS. The term "doing an insurance

business” or “transacting an insurance business,” within the meaning of the Insurance
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; and
(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.20
a. Profit Not Material. In the application of the provisions of the Insurance
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.21
b. In some cases, a single transaction is sufficient to consider that the party
who extends the protection under the contract is engaged in insurance business
because the law considers making “any” insurance contract as engaging in the
business of insurance.
c. Bancassurance. The recent amendments to the Insurance Code introduce
the concept of the business of b a n c a s s u r a n c e . The term
b a n c a s s u r a n c e means “the presentation and sale to bank
customers by an insurance company of its insurance products within the premises of
the head office of such bank duly licensed by the B a n g k o S e n t r a l
n g P i l i p i n a s or any of its branches under such rules and regulations
which the Commissioner and the B a n g k o S e n t r a l n g
P i l i p i n a s may promulgate.”22 The Insurance Commissioner and the
B a n g k o S e n t r a l n g P i l i p i n a s shall
promulgate rules and regulations to effectively supervise the business of
b a n c a s s u r a n c e . 2 3
“Section 2,1.C.
n
Ibid.
^Section 375,1.C., as amended by R.A. No. 10607.
23
IbidSee Circular Letter No. 2015-20 dated April 27, 2015 entitled “Rules Implementing
Title 9, Chapter IV of the Amended Insurance Code on Bancassurance.”
CHAPTER 1 11
GENERAL CONCEPTS
§2.01. MUTUAL INSURANCE COMPANIES. Mutual Insurance Companies are

entities that are “doing an insurance business” within the contemplation of the Insurance
Code. A Mutual Insurance Company is a company owned by policyholders. It is designed
to promote the welfare of its members and the money collected from among them is
solely for their own protection. In a sense, the member is both the insurer and insured. It
has no capital stock and the premiums or contributions of the members are the only
sources of funds to meet losses and expenses.24
a. Mutual Insurance Companies may take the form of the P&I Club which is
“an association composed of shipowners in general who band together for the specific
purpose of providing insurance cover on a mutual basis against liabilities incidental to
shipowning that the members incur in favor of third parties.”25
§2.02. HMO: PRINCIPAL OBJECT AND PURPOSE TEST. It was explained
earlier that there are conflicting decisions on the issue that health plans entered into with
a Health Maintenance Organization (HMO) partake the nature of insurance contracts. It
should be recalled that HMO refers to a juridical entity legally organized to provide or
arrange for the provision of pre-agreed or designated health care services to its enrolled
members for a fixed pre-paid fee for a specified period of time. 26 27
a. I n Philippine Health Care Providers, Inc. v. Commissioner
o f I n t e r n a l R e v e n u e , 2 1 the Supreme Court ruled that the
HMO involved in the case was not engaged in insurance business. The Court cited the
following:
“Various courts in the United States, whose jurisprudence has a persuasive effect
on our decisions, have determined that HMOs are not in the insurance business. One test
that they have applied is whether the assumption of risk and indemnification of loss
(which are elements of an insurance business) are the principal object and purpose of the
organization
24
Republic v. Sunlife Insurance Company of Canada, G.R. No. 158085, October 14, 2005;
White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, et al, G.R. No. 154514,
July 28, 2005. See 2006 Bar.
25
Pandiman Philippines, Inc. v. Marine Manning Management Corporation, G.R. No. 143313,
June 21, 2005; See also Steamship Mutual Underwriting Association (Bermuda) Ltd. v. Sulpicio
Lines, Inc., G.R. No. 196072, September 20, 2017.
26
DOH Administrative Order No. 34 Series of 1994; E.O. No. 192 dated November 12, 2015.
27
G.R. No. 167330, September 18, 2009; see also Medicard Philippines, Inc. v.
Commissioner of Internal Revenue, G.R. No. 222743, April 5, 2017.
or whether they are merely incidental to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely incidental and service is the principal
purpose, then the business is not insurance.
Applying the principal object and purpose test, there is significant American case
law supporting the argument that a corporation (such as an HMO, whether or not organized
for profit), whose main object is to provide the members of a group with health services, is
not engaged in the insurance business.
XXX
That an incidental element of risk distribution or assumption may be present should
not outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function
becomes faint, if not extinct. This is especially true when the contract is for the sale of goods
or services on contingency. But obviously it was not the purpose of the insurance statutes to
regulate all arrangements for assumption or distribution of risk. That view would cause them
to engulf practically all contracts, particularly conditional sales and contingent service
agreements. The fallacy is in looking only at the risk element, to the exclusion of all others
present or their subordination to it. The question turns, not on whether risk is involved or
assumed, but on whether that or something else to which it is related in the particular plan is
its principal object purpose.”
PROBLEMS:
1. In order to save on premium payments, a number of ship-owners organized a company
(Company “A”) which will answer for all the damages or losses to each of their
vessels. Each of the vessels shall be covered by individual policies issued by the
Company “A” but the source of indemnity shall be exclusively from the annual
contributions of the member shipowners. No profit is derived from the operation of
the company. No other person or entity other than a member can obtain a policy
from the Company “A.” No separate premiums are paid by the members in securing
policies from Company. Is the Company “A” doing an insurance business?
A: Yes, Company “A” is engaged in insurance business in the
Philippines under Section 2 [2] of the Insurance Code and the policies that it
issues are insurance policies. Company “A” is in the nature of a Mutual
Insurance Company. It is immaterial that no profit is derived from making
insurance contracts and that no separate or direct consideration is received
therefor. These facts do not preclude the existence of an insurance business.
( W h i t e G o l d M a r i n e S e r v i c e s ,
I n c . v . P i o n e e r I n s u r a n c e
S u r e t y C o r p o r a t i o n , e t a l . ,
G . R . N o . 1 5 4 5 1 4 , J u l y 2 8 ,
2 0 0 5 )
CHAPTER 1 13
GENERAL CONCEPTS
2. Mr. A borrowed money from Mr. B. As a security for the loan, Mr. C, a
doctor, agreed to act as a surety in favor of Mr. B. Is Mr. C “doing an insurance
business”?
A: No. Mr. C is not doing an insurance business. It appears that the
contract of suretyship entered into by Mr. C is just an isolated transaction.
Mr. C did not enter into the contract as part of his vocation.
§3. APPLICABLE LAWS. The primary law that governs insurance contracts is
the Insurance Code of the Philippines that was originally enacted as P.D. No. 602. 28 A
series of amendments followed the enactment of the law until the most recent
amendment, R.A. No. 10607 dated August 15, 2013.29
a. R.A. No. 10607 was published in a newspaper of general circulation on
September 5,2013. This law re-enacted P.D. No. 602 as amended and introduced new
concepts and provisions. For example, the law now includes a provision on
microinsurance, bancassurance, trust operations of insurance companies, 30 and self-
regulatory organizations.31 The new law strengthened the regulatory provisions of the
Code. These include but are not limited to: (1) increase of the paid-up capital and net
worth requirements for insurers;32 (2) new requirements for unimpaired capital or assets
and reserved;33
(3) new provisions on financial reporting framework; 34 (4) adoption of corporate
governance rules;35 (5) changes in the provisions on margin of solvency;36 (6) changes in
the provisions on investments;37
(7) fixing the term of the Insurance Commissioner to six years;38 and (8) changes in the
jurisdiction of the Insurance Commission over insurance claims. 39 Other changes merely
expressly adopted
28
The previous edition of this work was based on P.D. No. 1460 as amended, otherwise
known as Insurance Code of 1978.
^See Appendix 1 of this work.
^Section 429,1.C., as added by R.A. No. 10607.
31
Sections 430 to 436,1.C., as added by R.A. No. 10607.
32
Section 194 I.C., as amended by R.A. No. 10607; One Billion Pesos is now required for
new domestic life or non-life stock corporation.
33
Section 197,1.C., as amended by, R.A. No. 10607.
^Chapter II-A, Section 189,1.C., as added by R.A. No. 10607.
35
Section 193,1.C., as added by R.A. No. 10607.
36
87
38
First paragraph, Section 437,1.C., as added by R.A. No. 10607.
39
Section 439,1.C., as modified by R.A. No. 10607.
prevailing jurisprudence. For instance, the law now expressly allows in Section 77 a
credit extension for the payment of premium. , Another example is the deletion in Section
3 of the provision- regarding minors.
b. Previously, the Code of Commerce, which took effect in 1888, governed

insurance contracts. The Code of Commerce contained provisions on fire insurance,
life insurance and transportation insurance. Justice Malcolm traced the history of
insurance laws in Enriquez v. Sun Life Assurance Company of Canada:40
“Until quite recently, all of the provisions concerning life insurance in the
Philippines were found in the Code of Commerce and the Civil Code. In the Code of
the Commerce, there formerly existed Title VIII of Book III and Section III of Title III
of Book III, which dealt with insurance contracts. In the Civil Code there formerly
existed and presumably still exist, Chapters II and IV, entitled insurance contracts and
life annuities, respectively, of Title XII of Book IV. On and after July 1, 1915, there
was, however, in force the Insurance Act No. 2427. Chapter IV of this Act concerns
life and health insurance. The Act expressly repealed Title VIII of Book II and Section
III of Title III of Book III of the code of Commerce. The law of insurance is
consequently now found in the Insurance Act and the Civil Code.”
c. The Insurance Act was later repealed by P.D. No. 612 which took effect
on December 18, 1974. As noted earlier, P.D. No. 602 was amended by subsequent
laws including P.D. Nos. 1141, 1280, 1455, 1460, 1814, and 1981, and B.P. Big. 874.
d. Interpretation. There are provisions of The Insurance Act (Act No. 2427)
which were taken verbatim from the law of California. In turn, provisions of the
Insurance Act are retained even under present laws. 41 Hence, “in accordance with
well[-] settled canons of statutory construction, the court should follow in fundamental
points, at least, the construction placed by California courts on a California law.” 42
§3.01. NEW CIVIL CODE. In addition, the New Civil Code provisions govern
suppletorily. Article 2011 of the New Civil Code provides that the contract of
insurance is governed by special laws.
40
G.R. No. L-15895, November 29, 1920.
41
The new provisions that were not part of or adopted from the Insurance Act
include the provisions on Surety, Compulsory Motor Vehicle Liability Insurance, and
Mutual Benefit Associations (See Appendix of this work).
42
Ang Giok Chip v. Springfield Fire & Marine Insurance Company, G.R. No. L-33637,
December 31, 1931.
CHAPTER 1 15
GENERAL CONCEPTS
Article 2011 of the New Civil Code further provides that matters not expressly provided
for in the special laws on insurance shall be regulated by the New Civil Code. For
instance, the rules on perfection of contracts under the Title IV of the New Civil Code
on obligations and contracts can be applied in the absence of provisions of the Insurance
Code.43 More specifically, the New Civil Code likewise provides for grounds for
disqualification of beneficiaries under Article 2012 thereof.
a. Right of Subrogation.44 The New Civil Code specifically deals with the right
of the insurer to subrogation. Article 2207 of the New Civil Code provides that “if the
plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.” The right
of subrogation is discussed in Chapter 8 of this book.
§3.02. CORPORATION CODE. By express provisions of Section 191 of the

Insurance Code, the provisions of the Corporation Code of the Philippines 45 shall
apply to all insurance corporations engaged in business in the Philippines insofar as
they do not conflict with the provisions of the Insurance Code. Thus, if there is a
specific provision of the Insurance Code, the same Code prevails over the
Corporation Code. This also means that insurance corporations are still subject to the
regulatory powers of the Securities and Exchange Commission as corporations.
§4. ELEMENTS. Insurance contracts have the following features or elements:
(1) The insured has an insurable interest;
(2) The insured is subject to a risk of loss by the happening of the
designated peril;
(3) The insurer assumes the risk;
43
See for instance Musngi v. West Coast Life Insurance, G.R. No. L-41794, August
30, 1935 (citing the elements of contracts and rules on void contracts under the old Civil
Code).
44
See Chapter 8, Claims Settlement and Subrogation.
45
B.P. Big. 68.
(4) Such assumption of risk is part of a general scheme to distribute actual

losses among a large group of persons bearing a similar risk: and
(5) In consideration of the insurer’s promise, the insured pays a premium. 46
§4.01. REQUISITES OF A VALID CONTRACT. It should be noted
however that insurance must have all the essential elements of a valid contract
enumerated in the New Civil Code. Article 1318 of the New Civil Code provides that
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; and
(3) Cause of the obligation which is established. For the insurer, “(t)he consideration
in insurance contracts is the premium, the rate of which is measured by the character
of the risk assumed.”47 On the other hand, the object of insurance is the obligation to
indemnify another against loss, damage, or liability arising from an unknown or
contingent even.48 It is the not proceeds of the insurance or the amount to be paid by
the insurer that is the object of the contract. Although the property insured or the life
insured are the subject matters that are insured, the property and life of a person are
not objects of the contract as the term is understood in civil law.
§4.02. DISTRIBUTION OF LOSSES. It is required that the assumption of
risk by the insurer is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk. This is an affirmation of the fact that
insurance is a “risk-spreading?’ device. However, for purposes of applying the
provisions of the Insurance Code, a single transaction may be deemed an insurance
contract. In fact, as noted earlier, a provision in a Collective Bargaining Agreement
may be considered an insurance contract in proper cases.49
a. Consequently, those who may enter into insurance contracts without
authority from the Insurance Commission may be sanctioned precisely for offering
and entering into insurance
46
Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No. 156167,
May 16, 2005.
47
Sulpicio Guevara, The Insurance Law Annotated, 1939 Ed., p. 3, hereinafter cited
as “Guevara, p. 3; Gaisano v. Development Insurance and Surety Corp., G.R- No. 190702,
February 27, 2017.”
^Guevara, ibid.
49
Mitsubishi Motors Philippines Salaried Employees Union (MMPSEU) v. Mitsubishi
Motors Philippines Corp., G.R. No. 175773, June 17, 2013.
CHAPTER 1 17
GENERAL CONCEPTS
contracts without a general scheme to distribute actual losses but only to victimize
the unknowing public. Nevertheless, the “insurer” must also be compelled to
comply with its obligation under the insurance contract. The “insurer” is still
considered engaged in insurance business because it is doing or proposing to do
business which in substance is equivalent to those expressly enumerated in Section
2 of the Insurance Code in a manner designed to evade the provisions of the
Insurance Code.50
§4.03. RISK. It is an element of an insurance contract that the insured is
subject to a risk of loss by the happening of the designated peril. The first paragraph
of Section 3 of the Insurance Code provides:
Sec. 3. Any contingent or unknown event,

whether past or future, which may damnify a person
having an insurable interest, or create a liability
against him, may be insured against.
a. Under Section 3, the risk must be (1) a contingent or unknown event,

whether past or future; and (2) it must damnify the insured or create liability against
him. The risk “must be real and such that neither the insured nor the insurance
company may hasten or prevent it.”51
b. Uncertainty is a feature of insurance because it requires the presence of
an unknown and contingent event. The loss may or may not happen. In the case of
life insurance, the uncertainty is with respect to the time death will occur. “Fortuity
is to be determined at the time of the making of the contract or possibly, the
inception of the risk.”52 Thus, “losses occasioned to the subject matter in the
ordinary course of affairs, such as ordinary depreciation and wear- and-tear, do not
therefore entitle the assured to recover unless an express stipulation enables him to
do so, and simply insure against ‘all risks’ is not enough.” 53 These types of losses
are not fortuitous. However, the uncertainty may refer to the time of occurrence as
in the case of life insurance. In the latter case, the occurrence of the event - death - is
a period rather than a condition.
“Section 2,1.C.
51
Vicente Francisco, Commentaries on the Insurance Act, 1933 Ed., p. 4, hereinafter
cited as “Francisco, p. 4” citing 1 Joyce Ins., Sec. 6.
52
Chitty on Contracts, Vol. II, 29th Ed., 2004, p. 1162, hereinafter called “Chitty on
Contracts.”
“Chitty on Contracts, p. 1162.
c. Willful Acts. Similarly, as will be discussed in Chapter 7, Section 89 of

the Insurance Code provides that “an insurer is not liable for a loss caused by the
willful act or through the connivance of the insured.” The element of uncertainty or
contingency is absent in these cases. However, it is possible for another assured,
with his own insurable interest, to recover if he did not participate or contribute to
the willful act.
d. Requirements of Insurable Risk. From the viewpoint of the insurer, it is
ideal that six requirements of insurable risk are present: (1) There must be a large
number of homogenous exposure units; (2) The loss must be accidental and
unintentional; (3) The loss must be determinable and measurable; (4) The loss
should not be catastrophic; (5) The chance of loss must be calculable; and (6) The
premium must be economically feasible.54
(1) Nevertheless, while catastrophic losses are not insurable, the
losses should also be not too miniscule. Trivial losses are not insurable in
accordance with the principle of D e m i n i m i s n o n
c u r a t l e x . 5 5
(2) There are risks of loss that cannot be insured by reason of
public policy. For example, liability for exemplary damages regardless of the
nature of the proceedings where the same is awarded are not insurable.56
e. Pure Risk distinguished from Speculative Risk. Broadly speaking, risk
is the uncertainty of loss. The risk that may be assumed is the “pure” type of risk
which is defined as a situation where the possibility is either the person involved will
suffer a loss or he will not suffer a loss. This involves the possibility that one’s
property may be destroyed or the possibility that one may suffer economic loss
because of premature death or injury. This should be distinguished from
“speculative” risk which may either result in gain or loss. For example, gambling
involves speculative risk because the player may lose or he may win. Pure risk
results in either loss or “no loss” while speculative risk results in either loss or gain.
(1) Incidentally, in addition to being a pure risk, the Supreme Court
explained that what is involved in insurance contracts is called an “Insurance
Risk,” also known as “Actuarial
o4
Robert I. Mehr and Emerson Cammack, Principles of Insurance, 7th Ed., p. 32,
herein after referred to as “Mehr and Cammack.”
55
The law does not concern itself with trifles.
56
I.C. Circular Letter No. 2017-49, October 30, 2017.
CHAPTER 1 19
GENERAL CONCEPTS
Risk.” It 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.67
f. Distinguished from Peril. The designated peril in insurance is the
specific cause of loss that is insured against while risk is the uncertainty that the
property or person insured will be lost or damaged by reason of the designated or
some other peril. However, these terms (risk and peril) are oftentimes used
interchangeably in legal literature.
g. Past Event. A past event that may be insured against is peculiar to
Marine Insurance. For example, a marine insurance policy for a ship ‘lost or not
lost” insures the ship even for the event that may have already transpired. At the
time the policy was taken, the parties are not aware if the ship is already lost. The
insurer will pay even if the ship turns out to be already lost at the time the policy
was taken.
h. Distinguished from Fortuitous Event and Condition. Risk is not
synonymous to fortuitous event in Civil Law. The term risk is likewise not the
equivalent of “condition” under the New Civil Code. While a condition is
generally a future and uncertain event, a risk insured against may even be
considered a period in civil. In life insurance, the only uncertainty is the time
when the risk insured against (death) will happen.
i. Distinguished from Hazard. Risks should be distinguished from
hazards which are circumstances or conditions that create or increase the risk of
loss. Hazards may either be (1) physical hazard, (2) moral hazard, or (3) morale
hazard.57 58 Physical hazard refers to the physical condition of the thing or the
person that increases the chance of loss. Moral hazard involves dishonesty or
character defects in the individual that increase the chance of loss. Moral hazard
likewise includes carelessness or indifference to a loss because of the existence of
the insurance although this type of moral hazard is also sometimes called “morale
hazard.”59
57
Philippine Health Care Provider, Inc. v. CIR, G.R. No. 167330, September 18,
2009.
58
George E. Redja, Principles of Insurance, 3rd Ed., p. 13, hereinafter cited as
“Redja, p. 13.”
™Ibid.
j. Distinguished from Loss. Loss is the end result of the risk insured
against. Loss involves diminution of value or disappearance of value resulting from
a risk.60
k. Inherent Vice. Losses that arise from the very nature and condition
of the property are not generally covered by the insurance unless expressly provided
for in the policy. Generally, insurance cover losses that arises from events that
“impinge upon the subject matter.” 61 It generally arises from external causes. 62 By
way of exception, life insurance may cover death from disease or old age.63
§4.04. ASSUMPTION OF RISK. The insurer assumes the risk of loss,
meaning, the insurer promises to pay the insured if the risk insured against occurs.
While the promise of the insurer is generally to pay the money value of the loss, the
assumption of risk may include the promise to deliver the equivalent of the property 7
that was lost. There is even a view to the effect that insurance contracts include
contracts to indemnify by the performance of services. 64 One example of this is a fire
insurance policy where the beneficiary is not automatically entitled to cash but there
is an “option to rebuild clause” under which the parties stipulate “the repairing,
rebuilding or replacing of buildings or structures wholly or partially damaged or
destroyed.”65 An option to rebuild clause is allowed under Section 174 of the
Insurance Code.66 The Supreme Court ruled in one case that the insurer must notify
the insured of his election stating which of the two prestations he is disposed to
fulfill in accordance with the provisions of the Civil Code on alternative
obligations.67
§5. NATURE AND PURPOSE. Insurance is a plan for dealing with the risk
of economic loss resulting from the happening of a future or contingent event or a
past event unknown to the parties. The insured sacrifices a present monetary loss in
the form of premium payment in order to avoid a greater loss in the future.
60
See Chapter 7.
61
Chitty on Contracts, p. 1162.
62
Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R.
No. 85141, November 28, 1989.
63
Ibid.
64
Physicians’ Defense Co. v. Cooper, (C.C.A. 9th) 199 F. 576, 47 L.R.A. (N.S.)
290.
65
See Section 174,1.C., as amended by R.A. No. 10607.
^Previously Section 172 before R.A. No. 10607; Ong v. The Century Insurance Co.,
Ltd., G.R. No. L-22738, December 2, 1924.
67
0ng v. The Century Insurance Co., Ltd., ibid.
CHAPTER 1 21
GENERAL CONCEPTS
§5.01. HOW PEOPLE DEAL WITH RISKS. In general, the ways people
deal with risk include: (a) risk avoidance, (b) risk retention, (c) risk transfer, (d)
loss control, and (e) insurance.68
a. Examples. An example of risk avoidance is when people avoid a
particular activity to escape the risk of loss. Risk retention means that the person
involved will shoulder all the damages that may be incurred. Risk transfer may be
accomplished for example when the one who is normally responsible will make the
other party shoulder the loss through contract. Control of loss may either be loss
avoidance or loss retention.69
b. While it is true that more and more individuals have taken notice of
the importance of risk management in their everyday lives, there are others who
are indifferent to risks. Adam Smith wrote: “The overweening conceit which the
greater part of men have of their own abilities, is an ancient evil remarked by the
philosophers and moralist of all ages. Their absurd presumption in their own good
fortune, has been less taken notice of. It is, however, if possible still more
universal. There is no man living who, when in tolerable health and spirits, has not
some share of it. The chance of gain is by every man more or less over-valued, and
the chance of loss is by most men under-valued, by scarce any man, who is in
tolerable health and spirits, valued more than it is worth.”70
§5.02. HOW INSURANCE DEALS WITH RISK. From the viewpoint of
most insured individuals, they are transferring their risk of loss to the insurance
company. As stated earlier, they trade present loss by way of premium payments
with future recompense for greater loss.
a. Risk-Distributing Device. However, in reality, insurance is a risk-
distributing device because the risk of loss is not actually transferred to the insurer
but a number of people constituting the clients of the insurer contribute to a
common fund by paying premiums. In theory, the insurer will get the amount to be
paid to each insured in case of loss from this pool or common fund. That is why it
is one of the features of insurance that the assumption of risk of the insurer is part
of a general scheme to distribute actual losses among a large group of persons
bearing a similar risk. Adam Smith observed in The Wealth of Nations that “the
trade of insurance gives
^Redja,” p. 13.
69
Redja, p. 14.
70
Adam Smith, The Wealth of Nations, Bantam Classic Edition, 2003, p. 149.
security to the fortunes of private people, and by dividing among that great many
that loss which would ruin an individual, makes it fall light and easy upon the whole
society.”71
b. Law of Large Numbers. Pooling of loss experience of large number of
homogenous exposure units will also allow the insurer to predict future losses with
some accuracy. This is consistent with what is known as the “Law of Large
Numbers” according to which the greater the number of exposures, the more closely
will the actual results approach the probable results that are expected from an
infinite number of exposures.72
§6. CHARACTERISTICS. Insurance contracts are: (1) Aleatory, (2)
Unilateral, (3) Personal, (4) Consensual, (5) U b e r r i m a e
F i d a e .
a. Aleatory. Article 2010 of the New Civil Code provides that a contract
is aleatory when 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.
Insurance is one of the contracts enumerated in the New Civil Code as falling under
this classification of special contracts. It is not a contract of chance but a contract
where some of the rights of the parties of the contract are contingent upon chance
events.73 It is also aleatory in the sense that what the insured will pay in pesos is not
equal to what he will receive in case of loss. The money values exchanged in that
sense are not equivalents. In another sense, however, the contract is commutative
because what the insured paid for is the equivalent of what he got, that is, the
promise of the insurer to indemnify the insured in case of loss.
b. Unilateral. This is a characteristic of insurance contract because the
payment of the premium is not traditionally imposed as an obligation but an event
that gives the contract obligatory force. However, upon payment of the premium
there is only one party who has the obligation, that is, the insurer’s obligation to pay
the proceeds of the insurance in case of loss.
71
Ibid., p. 961.
72
Robert I. Mehr and Sandra C. Gustavson, Life Insurance: Theory and Practice, 4th
Ed., p. 31, hereinafter referred to as “Mehr and Gustavson.”
73
William R. Vance, Handbook of the Law of Insurance, 2nd Ed. (1930), p. 66,
hereinafter referred to as “Vance.”
CHAPTER 1 23
GENERAL CONCEPTS
c. Personal. The contract is personal because the contract is entered into

with due consideration to the circumstances of the parties. Thus, the insurer may
have accepted the risk because of the insurability of the insured. Each party enters
into the contract in view of the character, credit and conduct of the other. 74 Even
property insurance contract is personal in nature. In reality, it is a person rather than
the property that is protected. Hence, the character, credit and conduct of the person
who insures a property are still important considerations. Property insurance still
aims to indemnify a person who incurred the loss; the measure of insurance
payment is loss to the insured and not the loss of specified property. 75
d. Consensual. The contract of insurance is perfected by mere consent
without the need of delivery or any formality.
e. U b e r r i m a e F i d a e . The contract of insurance is
one of perfect good faith. Thus, both parties must not only perform their obligations
in good faith but they must also avoid material concealment or misrepresentations.
The c a v e a t e m p t o r rule is therefore generally inapplicable.
(1) The obligation to maintain perfect good faith is imposed not
only on the insured but on the insurer as well. This “accounts for the
readiness which the courts apply the doctrine of estoppel as against the
insurer when he seeks to take advantage of some condition of forfeiture in
order to escape payment under the policy.”76
f. Executory and Conditional. The contract is executory to the insurer and
subject to conditions, the principal one of which is the happening of the event
insured against. In addition to the main condition, it usually includes many other
conditions which must be complied with as precedent to the right of the insured to
claim the proceeds.77
§6.01. NOT A WAGERING CONTRACT. In a wagering contract, one
person is interested in the loss of another; he benefits if the other party losses. If one
is wagering on the life of another, he may profit from the loss of the life of the
other. It was explained that
74
Vance, p. 69.
75
Burton T. Beam, Jr., Davil L. Bickelhaupt, Robert Mr. Crowe, Barbara S. Poole,
Fundamentals of Insurance for Financial Planning, 3rd (2002) Ed., p. 150, hereinafter
referred to as “Beam, Jr., et al., p. 150.”
7e
Vance, p. 75.
77
Vance, p. 67.
“the chief objection is that it leads to an unearned gain — ‘unearned’ in the sense
that wagering is not socially productive.”78 It was further explained:
“Vaguely, a sense of antagonism is aroused in a community of workers

against persons who obtain a means of livelihood without participating in the
machinery of social or economic production and distribution — in short, against
‘social slackers.’ More specifically, unearned gains lead to idleness, and the wagerer
becomes a social parasite. Useful business and industry are thereby discouraged. On
the moral side, idleness leads to vice; and the impoverishment of the loser entails
misery, and, in consequence, crime.”79
a. Under the same principle, Section 4 prevents insurance on a lottery or

any game of chance:
SEC. 4. The preceding section does not authorize

an insurance for or against the drawing of any lottery,
or for or against any chance or ticket in a lottery
drawing a prize.
b. It should be noted that as early as the case of E l D e b a t e ,
I n c . v . T o p a c i o ,®° the Supreme Court ruled that for lottery to
exist, three elements must concur, namely: consideration, prize, and chance. The
term “lottery” extends to all schemes for the distribution of prizes by chance, such as
policy playing, gift exhibitions, prize concerts, raffles at fairs, and various forms of
gambling. However, this definition involves the definition of “lottery” under the
Postal Law under the old Administrative Code. The law does not condemn the
gratuitous distribution of property by chance, if no consideration is derived directly
or indirectly from the party receiving the chance, but does condemn as criminal,
schemes in which a valuable consideration of some kind is paid directly or indirectly
for the chance to draw a prize.
c. However, Section 4 of the Insurance Code is more expansive. The
prohibition is not limited to the insurance on lottery. It prohibits insurance “for or
against any chance.” Hence, an insurance * 19
78
Edwin W. Patterson, Insurable Interest In Life, Columbia Law Review, Vol. 18,
No. 5 (May, 1918), p. 386, hereinafter referred to as “Patterson, p. 386.”
19
Ibid.
®°44 Phil. 278, citing Sotto v. Ruiz, 21 Phil. 468. Note, however, that this involves
the definition of “lottery” under the Postal Law and the old Administrative Code.
CHAPTER 1 25
GENERAL CONCEPTS
against a “chance” to win a prize is still prohibited even if there is no consideration for
the “lottery.”
d. In addition, it does not follow that an insurance contract is authorized even
if the transaction does not involve an illegal wagering contract. For instance, in
P a l o m a r v . C o u r t o f F i r s t
I n s t a n c e 81 and P h i l i p p i n e R e f i n i n g
C o m p a n y v . P a l o m a r * 2 Philippine Refining Company
resorted to two schemes to promote the sale of its products both of which envisioned
the giving away for free of certain prizes (without additional consideration) for the
purchase of its soap and cooking oil products. In other words, the participants would get
the exact value of the prize for the goods plus the chance of winning in the scheme. No
one would be required to pay more than the usual price of the products. The Court
concluded that no lottery was involved in the two cases because of the settled rule that
“a plan whereby prizes can be obtained without any additional consideration (when a
product is purchased) is not a lottery.” However, it is believed that even if there was no
lottery, no insurance can be taken on the chance to win the prize. It is believed that the
scheme — although not a prohibited lottery — involves a “chance” that is contemplated
in Section 4 of the Insurance Code. Moreover, there can be no insurable interest in the
chance to win a prize, whether or not there is consideration, because the “insured” will
not be damnified by the loss.
e. It has been said that “the gambler courts fortune, the insured seeks to avoid
misfortune.”83 Article 2013 of the New Civil Code provides that “a game of chance is
that which depends more on chance or hazard than or skill or ability.” An insurance
contract will be a wager whenever both these conditions exist: (a) The beneficiary may
freely take the initiative in procuring the contract; and (b) the beneficiary has no interest
in the life insured.*1 In this connection, the explanation of Professor Patterson on the
nature of wagering contracts is helpful:
“At the outset it is necessary to determine the sense in which the term “wager” is used.
It may have an equivocal or a sinister meaning, depending upon whether regard is had to the
form of the agreement, or to its object. The essentials of a wager, as set forth by Hawkins, J.,
in Carlill v. Carbolic Smoke Ball Co.l are: (1) A mutual agreement of two that according to the
81
G.R No. L-29881, August 31, 1988.
82
G.R. No. L-29062, 148 SCRA 313 (1987).
83
Francisco,
p. 7 citing
Vance on
issue of a future uncertain event, one shall receive from the other a stake;
(2) the necessity that each party shall either win or lose; (3) that neither party shall have
any interest other than the stake he is to win or lose; (4) mutuality of intent as to hazard. On
the other hand, Anson defines a wager as “a promise to give money or money’s worth upon
the determination or ascertainment of an uncertain event.” The latter definition ignores the
third essential of the former, namely, the absence of any interest in the event other than the
stake to be won. Anson was looking solely to the form of the agreement, while Hawkins,
J . , was attempting to frame a definition which would cover the object of the agreement
as well as its form. Thus, a marine insurance policy and a bet upon a horse race are alike in
the sense that each is a promise to pay money upon the happening of an event which may or
may not occur. A consideration of the objects or purposes of the two agreements, however,
shows that the resemblance is only superficial. The purpose of the promisee in making the
bet is to gain by the transaction; the purpose of the promisee in procuring the marine policy
is to lessen the hardship from his misfortune in losing his ship. Since the promise is to pay
the amount of loss sustained, this is the only purpose (barring fraud) which the insured can
have in taking out such a policy. Such a purpose - to lessen hardship from pecuniary
misfortune - may be called an “indemnity purpose.” Here the “insurable interest” of the
insured is his maximum possible pecuniary loss from the happening of the event.”86
f. It should also be noted that Article 2014 of the New Civil

Code provides that “no action can be maintained by the winner for the
collection of what he has won in a game of chance. But any loser in a
game of chance may recover his loss from the winner, with legal interest
from the time he paid the amount lost, and subsidiarily from the operator
or manager of the gambling house.” Hence, a loser is not damnified by
the loss because he can recover his loss from the winner.
§7. SOCIAL VALUE. It has been said that insurance contributes
to society by favorably affecting the allocation of resources, engaging in
loss-prevention, indemnifying losses, serving as a basis of the credit
structure, eliminating worry, facilitating trade and commerce, and
providing channel for investible funds. There are costs because of the
large amount of money needed as premium and the insurance business
employs substantial amounts of labor and capital. Fraudulent losses
likewise occur and in some cases result in carelessness. However, the
social value of insurance far outweighs its social costs. 86
i
^Patterson, p. 385. 1
^Mehr and Cammack, pp. 10-14. t
CHAPTER 1 27
GENERAL CONCEPTS
a. General Benefits of Insurance. It has been observed that the benefits of

insurance for the general public include the following: (1) It gives peace of mind; (2)
It keeps families and businesses together; (3) It increases marginal utility of assets
because it serves as intermediary between those who have small need for a minor
amount of capital and those who have great needs for immediate use of large sums to
meet losses they have suffered;
(4) It facilitates credit transactions; (5) It stimulates savings; (6) It provides
investment capital; (7) It provides incentive to business or individuals because they
are relieved of fortuitous losses; and (8) It helps in loss prevention.87
§8. PERFECTION. An insurance contract is consensual. 88 Hence, it is
perfected by the meeting of minds with respect to the object and consideration of the
contract. Article 1319 of the New Civil Code provides:
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. (1262a)
a. Cognition Theory. Particularly, consistent with the C o g n i t i o n

T h e o r y 89 that is being applied under the New Civil Code, an insurance
contract is perfected the moment the offeror learns of the acceptance of his offer by
the other party.
87
David L. Bickelhaupt, General Insurance, 1974 Ed., pp. 75-77, hereinafter referred to
as “Bickelhaupt.”
88
As distinguished from real contracts which are perfected by delivery and formal
contracts which require certain formalities like a public instrument to be perfected.
89
This should be distinguished from the Manifestation Theory contemplated under
Article 54 of the Code of Commerce under which the contract is perfected from the time the
acceptance of the offer is manifested. For example, the sending of the letter accepting the offer
perfects the contract even if the offeror has not yet received the notice.
b. Insured Usually Makes the Offer. In insurance contract, the insured

makes the offer by submitting the application to the insurer or its authorized agent.
The insurer accepts the offer by approving the application and the contract is
perfected upon receipt of notice by the insured of such approval.90
(1) On the other hand, the insurer will then go through the process
of underwriting. “Underwriting is the selection and pricing of insurance
applications that are offered to the insurer.”91
(2) In this connection, it is well to note that the usual procedure for
the perfection of an insurance contract (insured makes the offer by filing an
application form) may be departed from. “It may be that the insurer offers a
contract which is accepted by the insured with or without writing; or the
agent to whom the application for insurance is made may have authority to
accept the offer without reference, and this acceptance may be written or
oral.”92
c. Unaccepted Application. In a case decided by the Supreme Court, the
insurance contract was considered binding upon proof that the insurance application
was duly received by the insurer.93 The Court ruled that insurer assumed the risk of
loss without approving the application. However, it is believed that the ruling in the
said case cannot be considered an exception to the rule on perfection of insurance
contracts. Courts cannot impose a contract in the absence of a perfected contract.
Closer examination of the facts shows that what was involved was Creditor Group
Life Insurance Policy. Under the policy, the clients of petitioner Eternal Gardens
who purchased burial lots from it on installment basis would be insured by
Philamlife. The amount of insurance coverage depended upon the existing balance
of the purchased burial lots. The policy was to be effective for a period of one year,
renewable on a yearly basis. The policy provides that: “The insurance of any eligible
Lot Purchaser shall be effective on the date he contracts a loan with
^Development Bank of the Phils, v. Court of Appeals, G.R. No. 109937, March 21,
1994; Rafael Enriquez v. Sun Life Assurance Co. of Canada, G.R. No. 15895, November 29,
1920.
91
Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 2009 Ed., Section 4.2,
hereinafter referred to as “Beam, Jr. and Wiening.”
92
Vance, p. 175.
93
Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance
Corporation, G.R. No. 166245, April 9, 2008.
CHAPTER 1 29
GENERAL CONCEPTS
the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.” The Supreme Court applied the rule
that there must be strict interpretation of the provision of the insurance policy
against the insurer in arriving at the conclusion that the insurance shall be
deemed effective the moment the lot buyer contracts a loan with Eternal Gardens.
In other words, there was already a prior agreement regarding the effectivity of
the contract of insurance. The Supreme Court observed:
“On the other hand, the seemingly conflicting provisions must be harmonized to
mean that upon a party’s purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser >
is created and the same is effective, valid, and binding until terminated by Philamlife by
disapproving the insurance application. The second sentence of Creditor Group Life Policy
No. P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which
would lead to the cessation of the insurance contract. Moreover, the mere inaction of the
insurer on the insurance application must not work to prejudice the insured; it cannot be
interpreted as a termination of the insurance contract. The termination of the insurance
contract by the insurer must be explicit and unambiguous.”94
(1) The decision in Eternal Gardens Memorial Park v.

Philippine American Life Insurance Corporation 95 may also be
cr harmonized with the general rule that an insurance contract
is perfected from the time the applicant learns about the
acceptance or approval of his application by considering that the
petitioner Eternal Gardens should be deemed the agent of the 1
insurer with respect to the subject group life insurance. 96 The
petitioner should have been considered an agent of the insurer
by virtue of the master agreement or policy and the perfection
of the contract for the purchase of a lot on installment likewise
perfects the insurance contract with respect to the specific lot
buyer. In other words, the petitioner can be deemed the agent
of the insurer for purposes of making the offer of insurance and
Êternal Gardens Memorial Park Corporation v. Philippine American Life Insurance

Corporation, supra. It is believed however that the observation of the Supreme Court that inaction of the
insurer cannot be interpreted as the termination of the contract is not in point. The question is whether or
not an insurance contract was entered into or whether the insurer assumed the risk of loss through its
inaction. j.
There is nothing to terminate if not risk is assumed.
95
Ibid. jj
96
See Luz Pineda, et al. v. Hon. Court of Appeals, et al., G.R. No. 105562, 1
September 27, 1993. See also §9[a] of Chapter 13 of this work. f
! UNIVERSITY OF THE CORDILLERAS

LIBRARIES ______
its acceptance happens at the same time as the acceptance of the offer to sell
the lot is made.
(2) In E t e r n a l G a r d e n s
M e m o r i a l P a r k v . P h i l i p p i n e
A m e r i c a n L i f e I n s u r a n c e
C o r p o r a t i o n 9 7 the petitioner can be deemed to be the
agent of insurer who offers an insurance contract at the same time as it offers
to sell its lots. When the buyer accepts the offer, the buyer is also deemed to
have accepted the insurance thereby perfecting the same.
(3) The situation in E t e r n a l G a r d e n s
M e m o r i a l P a r k v . P h i l i p p i n e
C o r p o r a t i o n 9 8 is similar to the practice of business
entities in tying up with insurance companies in the sale of their goods. For
example, some business entities sell goods like luggage or offer tour package;
if a person will buy the goods or avail of the service, the buyer will be
entitled to automatic insurance coverage. In some cases, insurance companies
sell greeting cards like Christmas cards which entitle the buyer to insurance
coverage. It is believed that in those cases, the sellers are constituted as the
agents of the insurance companies. These agents make the offer of insurance
which the buyers accept.
d. Effect of Non-acceptance. In any event, an insurance contract cannot
be deemed perfected if there is only an offer to enter into an insurance contract in
the form of an insurance application. As observed by Prof. Vance, “mere delay by
the insurer, although unreasonable, in acting upon the application raises no
implication of acceptance nor does it estop the insurer to deny the existence of the
contract.”99 Consent is an indispensable element of the contract and there can be no
contract if there is no meeting of minds between the parties as to the object and
consideration. Courts cannot make a contract if nothing was agreed upon. It is true
that acceptance of an offer can be implied. However, implied acceptance of an offer
can be established only if there are other circumstances that will indicate such
acceptance other than inaction or delay. In other case, estoppel can be relied upon
only if there are other circumstances that led the applicant to believe and rely on the
belief that his application is already approved (other mere than inaction or delay).
The Supreme
91
Supra.
9 8
Ibid.
"Vance, p. 188.
CHAPTER 1 31
GENERAL CONCEPTS
Court explained in De Lira u. Sun Life Assurance Company of Canada:100 *
“It is of course a primary rule that a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents. So long as an application
for insurance has not been accepted or rejected, it is merely an offer or proposal to make
contract. The contract, to be binding from the application, must have been a completed
contract, one that leaves nothing to be done, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in agreement.”
e. Rules on Acceptance by an Agent. The Supreme Court likewise relied

on Prof. Joyce in De him v. Sun Life Assurance Company of Canada 101 in
explaining the three general rules concerning the agent’s receipt pending approval or
issuance of policy in this wise: (1) If the act of acceptance of the risk by the agent and
the giving by him of a receipt is within the scope of the agent’s authority, and nothing
remains but to issue a policy, then the receipt will bind the company; (2) Where an
agreement is made between the applicant and the agent whether by signing an
application containing such condition, or otherwise, that no liability shall attach until
the principal approves the risk and a receipt is given buy the agent, such acceptance is
merely conditional, and it subordinated to the act of the company in approving or
rejecting; so in life insurance a “binding slip” or “binding receipt” does not insure of
itself; and
(3) Where the acceptance by the agent is within the scope of his authority a receipt
containing a contract for insurance for a specific time which is not absolute but
conditional, upon acceptance or rejection by the principal, covers the specified period
unless the risk is declined within that period. The Court likewise cited two cases
stating that:
“In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489) the facts
were that the amount of the first premium had been paid to an insurance agent and a receipt
given therefor. The receipt, however, expressly declared that if the application was accepted
by the company, the insurance shall take effect from the date of the application but that if
the application was not accepted, the money shall be returned. The trite decision of the
circuit court of appeal was, “On the conceded facts of this
100
G.R. No. L-15774, November 29,
1920,
Ibid.,41citing
lQ1 Phil. Joyce,
263. Volume I, p. 253.
case, there was no contract to life insurance perfected and the judgment of the circuit
court must be affirmed.”
In the case of Cooksey v. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the
person applying for the life insurance paid and amount equal to the first premium, but
the application and the receipt for the money paid, stipulated that the insurance was to
become effective only when the application was approved and the policy issued. The
court held that the transaction did not amount to an agreement for preliminary or
temporary insurance. It was said:
It is not an unfamiliar custom among life insurance companies in the operation of
the business, upon receipt of an application for insurance, to enter into a contract with
the applicant in the shape of a so-called “binding receipt” for temporary insurance
pending the consideration of the application, to last until the policy be issued or the
application rejected, and such contracts are upheld and enforced when the applicant dies
before the issuance of a policy or final rejection of the application. It is held, too, that
such contracts may rest in parole. Counsel for appellant insists that such a preliminary
contract for temporary insurance was entered into in this instance, but we do not think
so. On the contrary, the clause in the application and the receipt given by the solicitor,
which are to be read together, stipulate expressly that the insurance shall become
effective only when the “application shall be approved and the policy duly signed by the
secretary at the head office of the company and issued.” It constituted no agreement at
all for preliminary or temporary insurance . .
f. Where an agreement is made between the applicant and the agent,

no liability shall attach until the principal approves the risk. The acceptance
and issuance of a binding receipt is merely conditional and is subordinated to
the act of the company in approving or rejecting the application. 102
g. It is also believed that situation where an agent is authorized to
enter into an insurance contract obtains in Bank of Philippine Islands v. Laingo103
involving an offer to bank customers to open a two-in-one deposit account in
partnership with its affiliate insurer. Any customer interested to open a deposit
account under this two-in-one product, after submitting all the required
documents to the bank and obtaining the bank’s approval, will automatically
be given insurance coverage. Thus, the bank acted as agent of the insurer with
respect to the insurance feature of its own marketed product. The acceptance
by the agent binds the insurer.
102
Great Pacific Life Assurance Co. v. Hon. Court of
Appeals, G.R. No. L-31845, April 30, 1979.
103
G.R. No. 205206, March 16, 2016.
CHAPTER 1 33
GENERAL CONCEPTS
h. Tort Liability. Even if there is no perfected contract, the insurer may

be subject to tort liability under Articles 2176, 19, 20, and 21 of the New Civil
Code for abuse of right or acting in a manner that is contrary to morals and good
customs based on the peculiar circumstances of each case.
(1) Mere delay in acceptance of the insurance application will not
result in a binding contract. Court cannot impose upon the parties a contract
if they did not consent. However, in proper cases, the insurer may be liable
for tort. Liability may also be based on Articles 2176, 19, 20, and 21 of the
New Civil Code. For instance, Professor Vance cited one case where the
Court observed that: “Having solicited applications for insurance, and
having so obtained them and having received payment of fees or premiums
exacted, they are bound to furnish the indemnity the state has authorized
them to furnish, or decline to do so within such reasonable time as will
enable them to act intelligently and advisedly thereon, or suffer the
consequences from their neglect to do so.”104
§8.01. DELIVERY OF THE POLICY. Since the contract of insurance is
consensual, the delivery of the policy is not necessary for the perfection of the
contract. Prof. Agbayani opined that delivery of the policy is necessary to make
the policy binding.105 However, he also said that this requirement of delivery is
satisfied if the parties’ intention is to be bound by the insurance. In effect, even
under this view, mere consent is enough to bind the parties. The view does not
diverge from the rule established by jurisprudence that insurance is consensual.
a. While delivery of the policy is not indispensable for the perfection of
the contract of insurance, it is still important that the policy is delivered to the
insured so that the insured can read and understand all the terms and conditions
thereof. The policy is proof of the terms and conditions of the contract and the fact
that the insured accepted the same. As explained in one case, it is and was
incumbent upon the insured to read the insurance contracts. For instance, this can
be reasonably expected of an insured who has been a businessman for a long
period of time and the contract concerns
104
Vance, p. 192.
105
Aguedo Agbayani, Commercial Law, Volume
2, 1986 Ed., p. Ill, hereinafter cited as “2 Agbayani.”
indemnity in case of loss in his money-making trade which may be precisely the
reason for his procuring the same.106
b. The parties may also expressly agree that the delivery and
acceptance of the policy is a condition for the effectivity thereof. It can be
provided that the insurance policy is not valid and binding until the policy is
accepted by the insured upon its delivery. Necessarily, however, there is already
vinculum juris that binds the parties in these cases. The condition is imposed as
part of a binding agreement.
c. The delivery of the policy may also be the reckoning point for
compliance with certain conditions. For instance, it may be expressly agreed
upon that the insured property should not be used for business purposes at the
time of the delivery of the policy. It may also be provided that the insured is of
good health at the time of delivery of the policy.
PROBLEMS:
1. “P” filed an application with an insurance company for a 20-year
endowment policy in the amount of P50,000.00 on the life of his one- year old
daughter, supplying all the essential data in the application form, but without
disclosing that his daughter was a Mongoloid child. Upon “P’s” payment of the
annual premium, a binding deposit receipt was issued to “P” by the insurance agent
subject to the processing by the company. The insurance company disapproved the
insurance application stating that the plan applied for was not available for minors
below seven years old and offered another plan. The insurance agent did not inform
“P” of the disapproval nor of the alternative plan offered and instead, strongly
recommended that the company reconsider and approve the insurance application.
As faith would have it, “P’s” daughter died. “P” sought payment of the
proceeds of the insurance but the company refused on the grounds that there was
concealment of material fact in the insurance application and that it has rejected the
application. “P” contended, on the other hand, that the binding deposit receipt
constituted a temporary contract of life insurance. How would you resolve this
issue?
A: The denial by the insurance company of the claim is valid. There
is no perfected insurance contract until the insured learns about the approval
of the application by the insurer. Hence,
106
New Life Enterprises and Julian Sy v. Hon. Court of
Appeals, et al., G.R. No. 94071, March 31, 1992.
CHAPTER 1 35
GENERAL CONCEPTS
not insurance contract can be perfected if the approval came after the
death of the insured. The binding deposit receipt is merely conditional
and does not insure outright. The binding deposit receipt is
subordinated to the approval or rejection of application by the
insurance company. ( G r e a t P a c i f i c L i f e
A s s n C o . v . C o u r t o f
A p p e a l s , G . R . N o . L - 3 1 8 4 5 ,
A p r i l 3 0 , 1 9 7 9 )
Mr. A filed an application for a fire insurance policy to cover his house. He
signed the application on January 15, 2007 and delivered it to his insurance
broker, Mr. B, on January 16, 2007 together with the required premium. Mr. B
submitted the application to the office of XYZ Insurance Corporation on
January 20, 2007 and the application was processed and approved on January
25, 2007. On January 26, 2007, XYZ sent a notice to Mr. A by mail. Mr. A
received the notice on January 28, 2007. In the meantime, on January 26,
2007, the house of Mr. A was totally destroyed by fire. Can Mr. A recover
from XYZ?
A: No, Mr. A cannot recover from XYZ. There is no perfected
insurance contract between A and XYZ at the time of the loss. An
insurance contract is perfected only from the time the insured had
notice of the acceptance of his offer. The application of Mr. A
constitutes the offer to enter into an insurance contract. While the offer
had already been accepted on January 25, 2007 or before the loss, the
insured learned about the acceptance of the offer only after the loss or
on January 28, 2007.
An application for a life insurance policy with JH Insurance Company was
made by Mr. DHD and listed therein for inclusion as insured lives are Mr.
DHD, his wife AD and his children KD and BD. The application discloses that
“KD’s heart is impaired.” Mr. DHD was informed by the soliciting agent that
he could not assure him that the company would include KD as an insured
family member. JH Insurance Company approved the application but with the
notation “Delete KD as insured.” Thereafter, a life insurance policy was sent
to DHD insuring the lives of all the persons named in the application but
attached thereto are the application and a document entitled “Amendment to
Application” which required the signature of the insured and provides that KD
be deleted from the list of the proposed insured and that no coverage should be
provided to her. Not being able to contact the insured who was not at home
when he called, the soliciting agent left the policy and attached documents
with AD. The amendment had not been signed by the insured when KD died.
The insurance company denied the claim for KD’s death. Is the denial proper?
A: Yes, the denial of the claim was proper because there was no
perfected contract of insurance. The application of the insured was in
the nature of an offer that must be accepted by the insurance company.
The insurance company did not accept the offer and instead attached the
amendment to the contract of
insurance which deletes the policy of one of the lives included in the
application. The amendment constituted a counter-offer which must be
accepted by the insured-applicant. In this case, the counter-offer was
not accepted because the signature was not obtained. ( J o h n
H a n c o c k M u t u a l L i f e
I n s u r a n c e C o m p a n y v .
D o n a l d H . D i e t l i n , e t a l . ,
1 9 9 A 2 d 3 1 1 , A p r i l 6 ,
1 9 6 4 )
§9. KINDS OF INSURANCE. Insurance may be: (1) private insurance or

(2) government insurance. Government insurance includes the insurance coverage
provided by the Social Security System to employees of the private sector 107 and
the insurance coverage under the Government Service Insurance System which
extends to the employees in the government service. 108 This coverage was even
extended to the p u n o n g h a r a n g a y , the members of the
s a n g g u n i a n g b a r a n g a y , the h a r a n g a y
secretary, the h a r a n g a y treasurer, and the members of the
h a r a n g a y t a n o d . 1 0 9 These insurance contracts are called
“social insurance” contracts. They are compulsory in nature and are designed to
provide a minimum of economic security for large groups of persons, particularly
in the lower income classes.110 They are designed to protect the large group of
persons against the perils of accidental injury, sickness, old age, unemployment
and the premature death of the family wage earner. 111 There is also mandatory
coverage under the National Health Insurance Act of 2013 which provides for
mandatory coverage.112
a. Compulsory Insurance. There are also other compulsory
insurance like the Compulsory Third Party Liability Insurance for Motor
Vehicles113 and the compulsory coverage of passengers and cargoes of vessels. 114
The insurance coverage is secured from private insurers and not from a particular
government agency. There is also a special law that provides for compulsory
insurance for each migrant worker deployed by a recruitment/manning agency at
no cost to the said worker.115
107
R.A. No. 8282.
108
R.A. No. 8291.
109
Section 522, Local Government Code.
110
Bikelhaupt, p. 66.
m
Bikelhaupt, ibid.
U2
R.A. No. 10606.
113
Sections 386 to 402,1.C.; See Chapter 14 of this work.
114
Section 14, R.A. No. 9295; See Chapter 11 of this
115
Section 37-A, R.A. No. 8042 or Migrant
Workers and Overseas Filipinos Act of 1995, as added
by R.A. No. 10022.
CHAPTER 1 37
GENERAL CONCEPTS
b. General Classification. Professor Vance declared that there are

attempts to extend the principles of insurance to numerous kinds of losses.116 This
attempt resulted in extension to insurance to many kinds of risk and different
kinds of insurance. However, Professor Vance said that different kinds of
insurance may be grouped into three great heads namely:
(1) “Insurance against loss or impairment of property interests,
which may either be in existence or merely expected; that is present rights
or profits yet to accrue;” 117 (2) “Insurance against loss of earning power, by
accidental injury, sickness, old age, or disability, by death, or even by
unemployment;”118 and
(3) “Insurance against contingent liability to make payment to another for
any cause.”119
c. Classification According to Object. Based on the object that is
sought to be protected, private insurance can either be:
(1) Life or Health Insurance, (2) Property Insurance, or (3) Liability Insurance.
d. Special Types. Special types of insurance contracts with specific
provisions in the Insurance Code are: (1) Marine Insurance,
(2) Casualty Insurance, (3) Fire Insurance, (4) Life Insurance, (5) Compulsory
Third Party Liability Insurance, and (6) Microinsurance.
e. As to the Persons Covered. Insurance be (1) Individual Insurance or
(2) Group Insurance. Individual insurance is usually owned by the person or
entity who is insured or who owns the property. Group insurance provides
coverage to more than one person under a single contract issued to someone other
than the persons insured.120 An example of the latter is a group mortgage
redemption insurance and policies issued to employers.121
f. Insurance may also be either Personal Insurance or Business
Insurance. Personal insurance are those used by natural persons and their families
like life insurance, disability and motor
116
William R. Vance, Handbook of the Law of
Insurance, 2nd Ed., p. 34, hereinafter referred to as
“Vance,117p.Ibid.
34.”
ll8
Ibid.
n9
Ibid.
120
Beam, Jr. and Wiening, Fundamentals of
Insurance Planning, 3rd Ed., (2009), Section 1.32,
hereinafterSee
121 referred to as “Beam,
for example SerranoJr.v.and Wiening.”
Court of Appeals, G.R. No. L-35529, July 16,
1984.
vehicle insurance. Business insurance are those that are used by business
organizations like employee life insurance or property insurance for the factory
and the inventories therein.
g. Life Insurance. The classification of life insurance may be made: (1)
according to the period when it is in force, or (2) according to its object, or (3)
according to its special characteristics. Life Insurance may be classified into:
(1) Term Insurance — The life of a person is insured on a
temporary basis or for a limited period.
(2) Whole Life Insurance — A person is insured during his entire
lifetime.
(3) Endowment Policy — In this type of insurance, the insured is
paid a certain amount or the face value of the policy if the insured survives
a certain period and the beneficiary will get the proceeds if the insured
does not survive.
(4) Industrial Life — It is that form of life insurance under which
the premiums are payable either monthly or oftener, if the face amount of
insurance provided in any policy is not more than five hundred times that
of the current statutory minimum daily wage in the City of Manila, and if
the words “industrial policy” are printed upon the policy as part of the
descriptive matter.122
(5) Ordinary Life — the insured is required to pay a certain fixed
premium annually throughout life and the beneficiary is entitled to receive
payment under the policy only upon the death of the insured. 123 When the
payment is paid for a limited period of years, the insurance is called
“Limited Payment Life.”124
h. Property Insurance. The Insurance Code recognizes insurance
policies that are wholly or partly considered property insurance. These include:
(1) fire insurance and allied insurance, (2) marine insurance, and (3) casualty
insurance.
i. Microinsurance. R.A. No. 10607 now includes a provision on
Microinsurance.125 Section 187 of the Insurance Code provide
122
Section 235,1.C., as amended
byVance,
123 RA. No. 10607.
p. 46.
l2i
Ibid.
125
Sections 187 and 188,1.C., as amended by R.A. No. 10607.
CHAPTER 1 39
GENERAL CONCEPTS
that Microinsurance is a financial product or service that meets the risk

protection needs of the poor where: (a) The amount of contributions, premiums,
fees or charges, computed on a daily basis, does not exceed 7.5% of the current
daily minimum wage rate for non- agricultural workers in Metro Manila; and
(b) The maximum sum of guaranteed benefits is not more than 1,000 times of
the current daily minimum wage rate for non-agricultural workers in Metro
Manila.
§10. PRINCIPLE OF INDEMNITY. One of the fundamental principles
of insurance is what is known as the principle of indemnity. This means that the
insured should not collect more than the actual cash value of the loss. The
principle is meant to prevent the insured from profiting from insurance and to
reduce moral hazard.126 The “real purpose of the contract is, in case of loss, to
place the insured in the same situation in which he was before the loss, subject
to the terms and conditions of the policy.”127
a. Exceptions. Accepted exceptions to the principle of indemnity
include: (1) Life insurance because the amount to be paid by the insurer can
never be equal to the value of the life that is being insured; and (2) Valued
policies under which the insurer will pay the value fixed in the policy regardless
of the actual cash value in case of total loss.128
b. Manifestations. The fact that insurance contract is a contract of
indemnity is manifested in the following: (1) Insurable interest is indispensable,
(2) The value of the interest destroyed or damage is generally the measure of
indemnity (except in the cases cited above), (3) Co-insurance clause in marine
insurance, and (4) Subrogation in property insurance.129
12
2
CHAPTER 2
THE PARTIES
The insurer and the insured are the parties to an insurance contract. The
insurer is the party who promises to pay in case loss results because the peril
insured against occurred. The insured is the owner of the policy whose
property or life is insured or who took out the insurance over the life of
persons in whom he has insurable interest. There is a third person involved in
an insurance contract known as the beneficiary. The beneficiary is the person
in whose favor the insurance was taken by the insured and who will receive
the proceeds of the insurance in case of loss. However, in strict legal sense,
the beneficiary is not a party to the contract unless he is the insured himself.
The importance of studying the parties involved in insurance contracts was
explained in this wise:
“Insurance ideas and practices define central privileges and responsibilities

within a society. In that sense, our insurance arrangements form a material constitution,
one that operates through routine, mundane transactions that nevertheless define the
contours of individual and social responsibility. For that reason, studying who is
eligible to receive what insurance benefits, and who pays for them, is as good a guide to
the social compact as any combination of Supreme Court opinions.”1
§1. INSURED. Under the Insurance Code, the insured is the person
who applied for and to whom an insurance policy is issued to cover his life,
property or the life of or property of other person/s in whose life or property
he has insurable interest or liability to other persons. The insured is the one
who enters into a contract with the insurer; he is the owner of the policy. The
insured is also defined as “the person, group, or organization whose property,
health, life is covered by an insurance policy.”2
lr
Tom Baker, On the Genealogy of Moral Hazard, 75 Texas Law Review 237 (1996).
2
Par. 5.1 (i), I.C. Circular Letter 2015-58-A dated December 21, 2015.
40
OHAFTRK? ■11
fHF FART1F8
$1.0 U ASSURED AND OWNER. In life insuwiw, if a person tusurtNS

th<' Life of awthw, The person whoso life is insured is called th«' YusuêsT*
whik the person who took out an insurance on the former's life is called the
'‘‘assured.’* There are those who refer t o t he person who obtained the policy as
the Ywvnor” and the person whose Lite w as insured as the ’‘'insured.'*
$1.02. CAPACITY. Under the New Civil Code, a contract is voidable if
one of the parties is incapacitated.* Accordingly, an insurance contract is
voidable if the insured is a minor, an insane person or is otherwise incapacitated
to enter into an insurance contracts Howowr. a capacitated person can validly
enter into an insurance contract insuring the life of an incapacit ated person like
a minor.
a. Spouses. Married women can enter into insurance contracts without

the consent of their husbands in the same manner that the latter can enter into
an insurance contract without the consent of his wife tor a policy taken out of his
or her life or that of his or her children. Section 3 of the Insurance Code provides
that:
•"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.”
(1) The above-quoted provision is consistent with E.O. No. 209

otherwise known as the Family Code of the Philippines 8 and RA. No. 7192.
R.A. No. 7192 expressly provides that married women can enter into
insurance contracts without the consent of their husbands. Women’s
capacity to act is not impaired by marriage because the mandate of the
law is on equality.* These statutory provisions are consistent with Section
14 of the Article II of the 1987 Constitution which provides for “equality
before the law of women and men.”
(2) The wording of the law - "his or her children” - does not
limit the provision to an insurance taken on the common children of the
spouses. This means that the insurance taken 3 4 * 6
3
Ardcle 1390, New Civil Code.
4
Article 38, New Civil Code.
hereinafter referred to as the “Family Code."
6
See Article 73, Family Code.
on the life of a child who is not also the child of the other spouse may be
covered by the provision.
(3) The implication of Section 3 is that the consent of the spouse is
necessary for the validity of an insurance policy taken out by a married
person on the life of other persons other than life of the spouses themselves
or his or her children. It is believed, however, that we have to apply the
provisions of the Family Code with respect to this situation. Thus, if the
property regime of the spouses is absolute community property, the
insurance is taken on the life of a third person (who is a debtor of the
spouses), the taking of insurance can be considered an act of administration.
Hence, the taking of the insurance policy should be jointly made by the
spouses because Section 96 of the Family Code provides that the
administration of the community property shall belong to both spouses
jointly. In case of disagreement, it is the husband that will prevail. However,
if a spouse takes an insurance policy on his own life and a third person who
is totally unrelated to them, financially or otherwise, is made a beneficiary,
then it is believed that the taking of the insurance and payment of the
premium is in the nature of a donation that should be approved by both
spouses under an absolute community property regime. Section 98 of the
Family Code provides that “neither spouse may donate any community
property without the consent of the other.”
b. Minors. Minors cannot enter into insurance contracts. The rule under the
New Civil Code is that a contract entered into between a minor and capacitated
person is considered voidable. Hence, an insurance contract entered into between
the minor and an insurance company is voidable.
(1) R.A. No. 10607 removed the provision on minors in Section 3
making it consistent with other laws. It should be noted in this connection
that previously Section 3 of the Insurance Code provides that “any minor of
the age of 18 years or more, may, notwithstanding such minority, contract
for life, health and accident insurance, with any insurance company duly
authorized to do business in the Philippines, provided the insurance is taken
on his own life and the beneficiary appointed is the minor’s estate or the
minor’s father, mother, husband, wife, child, brother or sister.” However,
this provision was likewise deemed superseded by the Family Code which
fixed the
CHAPTER 2 43
THE PARTIES
age of majority at 18 years. 7 At 18, a person is capacitated to act for all

purposes. Hence, a person who is 18 years old can enter into an insurance
contract without any limitation except the limitations imposed on other
persons who are of legal age.
§1.03. EFFECT OF DEATH OF OWNER. The last paragraph of Section 3

as amended by R.A. No. 10607 now provides:
“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.”
(1) For example, the life of a minor can be insured. The parents
can insure the life of their minor child. If the parents, who are the original
owners of the policy, will die, all the rights, title and interest in the policy
shall be automatically vested in the minor.
(2) Before R.A. No. 10607, the last paragraph of Section 3
applies only to insurance taken on the life of minors. Section 3 previously
provides that “all rights, title and interest in the policy of insurance taken
out by an original owner on the life or health of a minor shall automatically
vest in the minor upon the death of the original owner, unless otherwise
provided for in the policy.” With the replacement of the word minor with
the generic “person insured,” the last paragraph of Section 3 is no longer
limited to insurance taken on the life or health of minors.
§1.04. PUBLIC ENEMY. Section 7 of the Insurance Code provides that
“Anyone except a public enemy may be insured.” A public enemy is a State (and
the citizens thereof) which is at war with the Philippines.
a. Effect of War. If there is no war yet at the time of the taking of the
policy but war ensued between the Philippines and the country of the insured, the
insurance policy is deemed abrogated. The Supreme Court has adopted the so
called “United States Rule” which declares that the contract is not merely
suspended, but is
’Article 234, Family Code, as amended by R.A. No. 6809.

abrogated by reason of nonpayment of premiums, since the time of the payments is

peculiarly of the essence of the contract. 3
(1) The Supreme Court rejected the New York rule which holds that
war between states in which the parties reside suspends the contract of life
insurance and that, upon tender of all premiums due by the insured or his
representative after the war was terminated, the contract is revived and
becomes fully operative.8 9
b. In another case, the Supreme Court ruled that based on Section 7 of the
Insurance Code, it stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.10 The High Court cited these authorities:
“Effect of war, generally. — All intercourse between citizens of belligerent

powers which is inconsistent with a state of war is prohibited by the law of nations.
Such prohibition includes all negotiations, commerce, or trading with the enemy; all
acts which will increase, or tend to increase, its income or resources; all acts of
voluntary submission to it; or receiving its protection; also all acts concerning the
transmission of money or goods; and all contracts relating thereto are thereby nullified.
It further prohibits insurance upon trade with or by the enemy, upon the life or lives of
aliens engaged in service with the enemy; this for the reason that the subjects of one
country cannot be permitted to 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 purpose of war is to cripple the power and exhaust the
resources of the enemy, and it is inconsistent that one country should destroy its
enemy’s property and repay in insurance the value of what has been so destroyed, or
that it should in such manner increase the resources of the enemy, or render it aid, and
the commencement of war determines, for like reasons, all trading intercourse with the
enemy, which prior thereto may have been lawful. All individuals therefore, who
compose the belligerent powers, exist, as to each other, in a state of utter exclusion, and
are public enemies.11
In the case of an ordinary fire policy, which grants insurance only from year, or for
some other specified term it is plain that when the parties
8
James McGuire v. Manufacturers Life Insurance Company, G.R. No. L-3581,
September 21,1950; Lopez de Constantino Asia Life Insurance Company, and Peralta Asia Life
Insurance Company, G.R. Nos. L-1669 and L-1670, August 31, 1950.
9
Ibid.
10
Filipinas Compania de Seguros v. Christern, Huenenfeld & Co., G.R. No. L-2294, May
25, 1951.
n
Ibid., citing 6 Couch, Cyc. of Ins. Law, pp. 5352-5353.
CHAPTER 2 45
THE PARTIES
become alien enemies, the contractual tie is broken and the contractual rights of the parties,
s o f a r a s n o t v e s t e d , lost/’12
§1.05. RIGHTS OF POLICYHOLDERS. An insured may be considered a

policyholder under the Insurance Code. The Insurance Commission defines a
“policyholder as the named owner of the insurance policy who may be the
insured or assured in life or nonlife insurance policy or a beneficiary as may be
applicable/’13 As part of its effort to protect the public, the Insurance
Commission promulgated the Bill of Rights of Policyholders under which the
following right are recognized:
“1) Right to a financially sound and viable insurance company.

Policyholders shall have the right to an insurance company that is financially stable
and solvent to ensure its ability to honor its contractual obligations to its
policyholders.
2) Right to access insurance companies’ official financial information.
Policyholders shall have the right to access insurance companies’ audited financial
statements and annual reports.
3) Right to be informed of the license status of insurance companies,
intermediaries and soliciting agents. Policyholders shall have the right to be
informed if a particular insurance company, intermediary or soliciting agent is duly
licensed to engage in doing insurance business in the Philippines.
4) Right to be offered a duly approved insurance product. Only duly
approved insurance products in accordance with the Insurance Code and pertinent
regulations shall be offered.
5) Right to be informed of the benefits, exclusions and other provisions
under the policy. Policyholders shall have the right to be informed of the benefits,
exclusions and all other provisions of the policy.
6) Right to receive the policy. Policyholders shall have the right to
receive the policy within a reasonable period of time after payment of premium.
7) Right to confidentiality of information. Policyholders shall be
protected from unauthorized disclosure of personal, financial and other confidential
information by insurance companies,
12
Filipinas Compania de Seguros v. Christern, Huenefeld & Co., supra, citing Vance, the
Law on Insurance, Section 44, p. 112.
Însurance Commission Circular Letter No. 2016-30, dated May 26, 2016.
46 ESSENTIALS OF INSURANCE IAW
intermediaries and soliciting agents, except as otherwise allowed by law, regulations

or valid court or government order.
8) Right to efficient service from insurance companies, intermediaries
and soliciting agents. Policyholders shall have the right to timely and prompt
delivery of service from insurance companies, intermediaries and soliciting agents.
9) Right to prompt and fair settlement of claims. Insurance companies
shall process and settle policyholders’ claims with utmost good faith and within a
reasonable period. Policyholders shall have the right to: (i) receive a written
acknowledgement of the claim; (ii) prompt payment of valid claims within the
period prescribed under the Insurance Code or pertinent regulations; or, (iii) receive
a written denial of claim with the stated ground and/or basis thereof.
10) Right to seek assistance from the Insurance Commission.
Policyholders shall have the right to seek assistance in settling any controversy
between an insurance company, intermediary or soliciting agent and policyholder.
Policyholders shall have the right to: (i) report any wrongful act or omission of an
insurance company, intermediary or soliciting agent; (ii) file a complaint against any
insurance company for unreasonable denial of a valid insurance claim; and (iii)
institute action against any erring insurance company, intermediary and soliciting
agent for any of the grounds provided under the Insurance Code and other pertinent
regulations.”14
§2. INSURER. Section 6 of the Insurance Code provides that every person,
partnership, association, or corporation duly authorized to transact insurance
business may be an insurer. An insurer is “every person or corporation engaged in
the business of making insurance contracts of insurance.”15
§2.01. DEFINITION. “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. 16 The old governing
provision of Insurance Code
u
Supra.
15
Par. 5.1 (j), I.C. Circular Letter 2015-58-A dated December 21, 2015.
16
Section 190, I.C., as amended by R.A. No. 10607. Note that R.A. No. 10607 deleted the
following definition of insurance corporations in the previous Section 185 of the I.C., which is now
Section 191, as corporations formed or organized to save any person or persons or other
corporations harmless from loss, damage, or liability arising from any unknown or future or
contingent event, or to indemnify or to compensate any person or persons or other corporations
for any such loss, damage, or liability, or to guarantee the performance of or compliance with
contractual obligations or the payment of debt of others corporations.
CHAPTER 2 47
THE PARTIES
included individuals in the term “insurer” or ‘insurance company.” However,

individuals are no longer identified as persons who can be an insurer under the present
law.17
a. Professional Reinsurer. The terms “insurer” or “insurance company”
likewise include professional reinsurers.18 Section 288 defines the term “professional
reinsurer” as any person, partnership, association or corporation that transacts solely
and exclusively reinsurance business in the Philippines.
b. Domestic and Foreign Company. An insurer may be a domestic company
or a foreign company. “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.19
c. Mutual Benefit Association. Although excluded from the term “insurer”
under Section 190 of the Insurance Code, likewise within the regulatory powers of the
Insurance Commission are “mutual benefit associations.” They must first secure a
license from the Insurance Commission before they can transact business.20
(1) Mutual benefit associations include “any society, association or
corporation, without capital stock, formed or organized not for profit but
mainly for the purpose of paying sick benefits to members, or of furnishing
financial support to members while out of employment, or of paying to
relatives of deceased members of fixed or any sum of money, irrespective of
whether such aim or purpose is carried out by means of fixed dues or
assessments collected regularly from the members, or of providing, by the
issuance of certificates of insurance, payment of its members of accident or
life insurance benefits out of such fixed and regular dues or assessments, but
in no case shall include any society, association, or corporation with such
mutual benefit features and which shall be carried out purely from voluntary
contributions collected not regularly and/or no fixed amount from
whomsoever may contribute.”21
17
The provision was Section 184 of the I.C. before R.A. No.
10607.
™Ibid.
19
Section 190,1.C., as amended by R.A. No. 10607.
“Section 404,1.C., as amended by R.A, No. 10607.
21
d. Mutual ImKiramce C'tttpajzzas. Murru&l Immram** Compames
mm z^czziz&i fibe kmmnzim Code. Serru- 2A5
provides zcjtt <my icmesmc izr.rlr fife ttstrttitsE m mpazy bring business in tbe
Philipgmes zusy r^h’ m:.: =r. in?rrpc-rs:ed
mutual life insurer. To oksu eu.fi. r: ZLEJ rrruoe and cany on: a plan for the
ecrmisfiinu ot the omruau fi:ur enure? of its capital stock for the benefit of :os
pcikyioiiera. or any t_ass or classes of its policyholders, by complying wfifi one
rertzreztrttts of Chapter HL Title 17 of the Iran ranee Otoe.-
Oj Procedure for MumaHzanon. The plan for mutualization shah
zrehrie appropriate proceedings for amending the insurer's arnitlas tf
incnrpcraticn i-o give effect to the aecuisition. by said insurer, for the benefit
of its policyholders or any class or classes thereof, of the outstanding shares of
its capital stock and the conversion of the insurer from a stock corporation into
a non-stock corporation for the benefit of its members. The members of such
non-srock corporation shall be the poEcyholders from time to rime of the class
or classes for whose benefit the stock of the insurer was acquired, and the
policyholders of such other class or classes as may be specified in such
corporations Articles of Incorporation as they may be amended from time to
time.23
(2) The terms "policyholder" or “policyholders" for purposes of
mutualization under Chapter in. Title 17 shall be deemed to mean the person
or persons insured under an individual policy of life insurance, or of health
and accident insurance, or of any combination of life, health, and accident
insurance. They shall also include the person or persons to whom any annuity
or pure endowment is presently or prospectively payable by the terms of an
individual annuity or pure endowment contract, except where the policy or
contract declares some other person to be the owner or holder thereof, in
which case such other person shall be deemed policyholder. The terms
“policyholder” and “policyholders” include the employer to whom, or a
president, secretary or other executive officer of any corporation or
association to which a master group policy has been issued, but exclude the
holders of certificates or policies issued under or in connection with a master
group
“Sections 268 to 280, I.C., as amended by R.A. No. 10607.

“Section 269,1.C., aB amended by R.A. No. 10607.
CHAPTER 2 49
THE PARTIES
policy. Beneficiaries under unmatured contracts shall not as such be deemed

to be policyholders.24
(3) Demutualization. In some countries, the trend is towards
“demutualization.” More and more mutual insurance companies are
converting to stock corporations. One of the primary reasons for this
development is the need of companies for more funds. It is easier to raise
funds if the corporate vehicle is a stock corporation. Another reason for
demutualization is to enable the insurance company to diversify its activities
and to facilitate payment of certain types of non-cash compensation to its
directors and officers.25 Demutualization is now expressly recognized under
Section 280 of the Insurance Code which provides that “a domestic mutual
life insurance company doing business in the Philippines may convert itself
into an incorporated stock life insurance company by de-mutualization.” 26 The
same provision states that “the conversion of a domestic mutual life insurance
company shall be carried out pursuant to a conversion plan duly approved by
the Commissioner.”27 The Corporation Code applies suppletory to this
demutualization process.28
e. Cooperatives. The new Section 190 expressly includes cooperatives in
the entities included in the terms “insurer” or “insurance company.” In this
connection, Articles 105 to 108 of R.A. No. 9520 otherwise known as the Philippine
Cooperative Code of 2008 provides that:
ART. 105. Cooperative Insurance Societies. —
Existing cooperatives may organize themselves into a
cooperative insurance entity'for the purpose of
engaging in the business of insuring life and property
of cooperatives and their members.
ART. 106. Types of Insurance Provided. — Under
the cooperative insurance program established and
24
Section 269, ibid.
^Burton T. Beam, Jr., David L. Bickelhaupt, Robert M. Crowe, and Barbara
S. Poole, Fundamentals of Insurance for Financial Planning, 3rd Ed., 2002, p. 74,
“Beam, et al”
26
See I.C. Circular Letter No. 2017-06, dated January 23, 2017 providing for
rules on demutualization.
27
Îbid.
formed by the virtue of the provisions of this Code, the

cooperative insurance societies shall provide its
constituting members different types of insurance
coverage consisting of, but not limited to, life
insurance with special group coverage, loan
protection, retirement plans, endowment, motor vehicle
coverage, bonding, crop and livestock protection and
equipment insurance.
ART. 107. Applicability of Insurance Laws. —
The provisions of the Insurance Code and all other
laws and regulations relative to the organization and
operation of an insurance company shall apply to
cooperative insurance entities organized under this
Code. The requirements on capitalization, investments
and reserves of insurance firms may be liberally
modified upon consultation with the Authority and the
cooperative sector, but in no case may be requirement
to be reduced to less than half of those provided for
under the Insurance Code and other related laws.
ART. 108. Implementing Rules. — The Insurance
Commission and the Authority, in consultation with the
concerned cooperative sector, shall issue the appropri-
ate rules and regulations implementing the provisions
of this Chapter.
§2.02. CERTIFICATE OF AUTHORITY. Section 193 of the Insurance
Code provides that, “no insurance company shall transact any insurance business
in the Philippines until after it shall have obtained a certificate of authority for that
purpose from the (Insurance) Commissioner upon application therefor and
payment by the company concerned of the fees.” A certificate of authority is
required because contracts of insurance involve public interest and regulation
thereof by the State is necessary.29
a. Basic Qualifications. Similarly, Section 192 provides that no person,
partnership, or association of persons shall transact any insurance business in the
Philippines except as agent of a person or corporation authorized to do the
business of insurance in the Philippines, unless: (1) possessed of the capital and
assets required of an insurance corporation doing the same kind of business in the
Philippines and invested in the same manner; (2) nor unless the
29
White Gold Marine Services, Inc. v. Pioneer Insurance and Surety
Corporation, et al., G.R. No. 154514, July 28, 2005.
CHAPTER 2 51
THE PARTIES
Commissioner shall have granted to him or them a certificate to the effect that he
or they have complied with all the provisions of law which an insurance corporation
doing business in the Philippines is required to observe.
b. Term of the Certificate. Section 193 provides that ‘The certificate of
authority issued by the Commissioner shall expire on the last day of December,
three (3) years following its date of issuance, and shall be renewable every three
(3) years thereafter, subject to the company’s continuing compliance with the
provisions of this Code, circulars, instructions, rulings or decisions of the
Commission.”
§2.03. GROUNDS FOR DISAPPROVAL OF APPLICATION. Section
193 provides for some of the grounds for rejection of the application for certificate
of authority by the Insurance Com mis - sioner:
a. If such refusal will best promote the interest of the people of this
country;
b. If there is evidence that the applicant company is not qualified by the
laws of the Philippines to transact business therein;
c. If the grant of such authority appears to be unjustified in the light of:
(1) economic requirements; ( 2 ) the direction, administration,
integrity and responsibility of the organizers and administrators; (3)
SO the financial organization and the amount of capital; and (4)
c
reasonable assurance of the safety of the interests of the
policyholders and the public; and
d. The name of the applicant belongs to any other known company
transacting a similar business in the Philippines or its name is so
similar as to be calculated to mislead the public.
§2.04. PROHIBITED ACTS. An insurer is prohibited from doing, among
other acts, the following:30
a. To transact in the Philippines both the business of life and non-life
insurance concurrently unless specifically authorized to do so;31
^Section 193, I.C., us amended by R.A. No. 10607.

91
Ibid. Note that the terms “life” and “non-life” insurance shall be deemed to include
health, accident, and disability insurance.
UNIVERSITY OF THE
CORDILLERAS ____________________ LIBRARIES
b. To have equity in an adjustment company (neither shall an adjustment

company have an equity in an insurance company);
c. To negotiate any contract of insurance other than is plainly expressed
in the policy or other written contract issued to or to be issued as
evidence thereof;32
d. To directly or indirectly, by giving or sharing a commission or in any
manner whatsoever, pay or allow or offer to pay or allow to the insured
or to any employee of such insured, either as an inducement to the
making of such insurance or after such insurance has been effected,
any rebate from the premium which is specified in the policy, or any
special favor or advantage in the dividends or other benefits to accrue
thereon;33
e. To give or offer to give any valuable consideration or inducement of
any kind, directly or indirectly, which is not specified in such policy or
contract of insurance;34
f. To make any discrimination against any Filipino in the sense that he is
given less advantageous rates, dividends or other policy conditions or
privileges than are accorded to other nationals because of his race;35
g. To issue or circulate or cause or permit to be issued or circulated any
literature, illustration, circular or statement of any sort misrepresenting
the terms of any policy issued by any insurance company of the
benefits or advantages promised thereby, or any misleading estimate of
the dividends or share of surplus to be received thereon;36
h. To use any name or title of any policy or class of policies
misrepresenting the true nature thereof;37 and
i. To make any misleading representation or incomplete comparison of
policies to any person insured in such company for the purpose of
inducing or tending to
32
Section 370,1.C., as amended by R.A. No.
10607.
™Ibid.
34
Ibid.
™Ibid.
^Section 371,1.C., as amended by R.A. No.
10607.
31
Ibid.
CIlArJ’KK 2 U
Tin-; PARTIES
induct; Much person to lapse, forfeit, or Htjrrender h m ftaid

insurance.
j. To commit unsafe business practices or acts/*'-' PROBLEM:

1. Sometime in January 1975, MH, NL was able to convince Mr, ET to take out a life insurance
policy with MBL Insurance Corporation. A x a result of a medical examination conducted
on ET showing that he was a diabetic, the insurance company fixed the annual insurance
premium at P93,180.00 for a life insurance policy with a face value of Pi,000,000.00. In order
to persuade ET to take out the policy at the computed premium, NL offered to return to him
the amount corresponding to her commission out of the first premium payment, which is
equivalent to 50% thereof. Upon such inducement, ET agreed to take the policy thus, on April
30, 1975, he issued two checks in favor of the MBL for P46,590.00 each or a total of
P93,180.00. Both checks were postdated May 30, 1975 so as to enable NL to make
arrangements for the return to ET of one check corresponding to the amount of her
commission. On June 4, 1975, NL received the sum of P51,249.00 as her commission out of
the first annual premium paid by ET. Yet, NL failed to comply with her commitment to pay
ET P46,590.00. Soon after, ET’s attorney sent a demand letter dated July 7, 1975. Can Mr. ET
recover from MBL?
A: No, ET cannot recover from MBL. Under Section 361 of the In
surance Code insurance companies, brokers and agents are prohibited to induce
another to take out an insurance policy with the promise to return part of the premium
out of the commissions of the agent or broker. The law disallows practices involving
rebates or preferential treatment with respect to the cost of the policy or the benefits
allowed for the premium. Accordingly, to enforce contracts or agreements directly
prohibited under the law would be against the very public policy which the law was
designed and intended to uphold. ( N o r a L u m i b a o v . T h e
H o n . I n t e r m e d i a t e A p p e l l a t e C o u r t
a n d E u g e n i o T r i n i d a d , G . R . N o . L -
6 4 6 7 7 , S e p t e m b e r 1 3 , 1 9 9 0 )
§3. BENEFICIARY. The beneficiary may be a party to the contract of

insurance or a third person (a person who is not a party to the contract). For
instance, person having insurable interest over the life of another may obtain an
insurance policy and designate 38 *
38
Section 371, l.C.
"See l.C. Circular Letter No. 2017-59, December 29, 2017.
himself as the beneficiary. On the other hand, a person may insure his own life or
property and designate somebody else or a third person as the beneficiary. The
designation of the third party as a beneficiary may be required by a separate
agreement as in the case of a mortgagee who is designated by virtue of a stipulation
in a mortgage contract. However, the designation of the beneficiary may be based on
the sole will of the insured.
a. Beneficiary Not A Party. Unless he is the insured himself, the
beneficiary is not one of the contracting parties. However, a third party beneficiary
named in the policy has the right to file an action against the insurer in case of loss.
No other party can recover the proceeds other than the beneficiary. Section 53
provides:
SEC. 53. The insurance proceeds shall be applied

exclusively to the proper interest of the person in
whose name or for whose benefit it is made unless
otherwise specified in the policy.
b. When a Beneficiary is Designated. In life insurance, if there is a named

beneficiary and the designation is not invalid, it is the designated beneficiary who is
entitled to receive the proceeds and not the heirs of the insured. If another person is
named the beneficiary, the proceeds of an insurance policy belong exclusively to the
beneficiary and not to the estate of the person whose life was insured. In other
words, the proceeds are the separate and individual property of the beneficiary, and
not of the heirs of the person whose life was insured. 40 At any rate, the heir may also
be the beneficiary and the proceeds of the life-insurance policy payable to said heir
belongs to him exclusively and does not form part of the deceased’s estate. 41 The
view has been expressed that it is immaterial if it is the beneficiary or it is the
insured that will pay the premium:
“If the law required that every contract should have, manifestly, a useful object, it
is doubtful if the insurance contract of the sort here discussed could justify itself. However,
the law enforces all agreements except those which are clearly harmful; and the harmful
tendencies of such an agreement are reduced to a negligible minimum by the requirement
that
40
Luz Picar, et al. v. Government Service Insurance System, G.R. No. L-25803, May
29, 1970; Del Val v. Del Val, 29 Phil. 534, 540 (1915); Sergio Alabat, et al. v. Toribia De
Alabat, G.R. No. L-22169, December 29, 1967.
41
The Bank of Philippine Islands v. Juan Posadas, Sr., G.R. No. 34583, October 22,
1931, citing 37 Corpus Juris 565-566.
CHAPTER 2 55
THE PARTIES
the cestui, and not the beneficiary, shall take the initiative in procuring the policy. It may be noted,
too, that the beneficiary’s gain is less in this case than where the cestui pays the premiums. It is
submitted, therefore, that the mere fact that the beneficiary pays the premiums should not make the
transaction void.
If all of the proceeds of the policy are to go to some third person, neither the cestui nor the
person who pays the premiums, the transaction is a gift by the person paying the premiums, and is
unobjectionable. Where by the terms of the policy or by a separate agreement, the person who pays
the premium is to receive a substantial part of the proceeds, the balance going to some third person
who pays nothing, the transaction may be a gift by the beneficiary paying the premiums or possibly
a pledge to secure the repayment of the premiums. The situation is practically the same as if two
policies were issued, e . g . , one payable to Y, who pays nothing, the other payable to B, who
agrees to pay the premiums on both. Since the latter is open to the same objections as the policies
discussed in the last paragraph, this case does not rest upon a very different basis from that one. Yet
one circumstance should be noted: the fact that B is to divide the proceeds with the c e s t u i
s widow or other dependent furnishes a possible motive for the c e s t u i to procure the
policy upon his own initiative; and yet it gives B a greater incentive to desire the c e s t u i s
premature death than is the case where B is to receive the entire proceeds.
It is believed that the weight of authority supports the view that the mere payment of
premiums by the beneficiary who has no interest, upon a policy procured by the c e s t u i ,
does not ipso facto render the policy void. In a number of cases where A procured a policy upon his
life and at once made it payable in whole or in part to B, who had no interest in A’s life and who
agreed to pay all the premiums, the courts have held the transaction to be a pure wager and have
denied B the right to the proceeds of the policy. In most of the cases cited in the last note it is not
clear whether the payment of premiums by the beneficiary was regarded per se wager and have
denied B the right to the proceeds of the policy. In most of the cases cited in the last note it is not
clear whether the payment of premiums by the beneficiary was regarded per se as making the
contract void, or whether it was regarded as strong evidence that the beneficiary was the active and
moving party in the transaction. The distinction is substantial. The real issue is whether or not the
beneficiary took the initiative in procuring the policy. The fact that the policy was procured by the
c e s t u i under an agreement whereby the intended beneficiary was to pay the premiums, is
an evidential fact upon that issue. It is not conclusive, but taken with the surrounding circumstances
it may produce an irresistible inference that the c e s t u i was but a tool in the hands of the
beneficiary.”42
42
Edwin W. Patterson, Columbia Law Review, Vol. 18, No. 5 (May 1918), pp. 400-
401.
56 ESSENTIALS OF ZXSUEAN’CZ L-.-*
(Republic Act No. 1C6C7 Noces :u. Prs-Ssec. Art
c. The principle is the same in prozeTtj mtrme. 15. the insured-

beneficiary, having insurable in:eretTL is entitled t.: :h= proceeds of the
premium although he is net the owner there*:! The Supreme Court
explained in Larr.pcsr.rj 1. Jose*1 that h: is êh settled that a policy of
insurance is a distinct independent contrast her*-een the insured and
insurers, and third person have no right either in a court of equity, or in a
court of law. to the proceeds of ru unless there be some contract or trust,
expressed or implied, between the insured and third persons.” The Court
further explained:
“The policy was in the name of Barrette alone- It was. ihereftre. = personal contract
between him and the company and not a con trait which ran with the property. According to
this personal contract the insurance policy was payable to the insured without regard to the
nature and extent of his interest in the property, provided that he had as we have sain, an
insurable interest at the time of the making of the contract, and also at the time of the fire.
Where different persons have different interests in the same property, the insurance taken by
one in his own right and in his own interest does not in any way insure to the benefit of
another. This is the general rule prevailing in the United States and we find nothing different
in this jurisdiction. ( 1 9 C y c 8 8 3 . )
In the case of S h a d g e t t v . P h i l l i p s a n d
C r e w C o .. reported in 56 L. R.A., 461, Mrs. Shadgett received a piano as a gift
from her husband and insured it. She knew that it was the obligation of her husband to insure
the piano for the benefit of the vendor. The court held, however, that the vendor (mortgagee)
was not entitled to the proceeds of the insurance as “there was no undertaking on the part of
Mrs. Shadgett to either insure for complainant’s benefit, or to assume her husband’s
obligation to so insure, and mere knowledge of that obligation did not impose it upon her."
The court further said: “The contract of insurance was wholly between the defendant
and the insurance company, and was personal in the sense that the money agreed to be paid
in case of loss was not to stand in the place of the piano itself, but was a mere indemnity
against the loss of defendant s interest therein. I f h e r i n t e r e s t w a s
s m a l l , o n a c c o u n t o f [ e j n c u m b r a n c e s
e x i s t i n g i n f a v o r o f t h e c o m p l a i n a n t ,
that fact was for the consideration only of the insurer and defendant, for complaint has no
concern with the adjustment of the loss between them. We know of no principle, either of
law or equity, which would bind defendant to carry out her donor’s contract to insure, in the
absence of any agreement on her part to do so, even though the property in her hands was
subject to complainant’s rights therein as a conditional vendor.”
The court further says: “A contract of insurance made for the insurer’s (insured)
indemnity only, a s w h e r e t h e r e i s n o
a g r e e m e n t , express or implied, 43
43
G.R. No. L-9401, March 30, 1915.
CHAPTER 2
THE PARTIES
that it shall be for the benefit of a third person, DOES HOC ASIACH OR RM WMI
the title to the insured property on a transfer thereof personal as the insurer and the insured-
In such case strangers to the contract require in their own right any interest in the insurance
mcc*~y. SKsepi through an assignment or some contract with which they are connected-"
d. Third Parties, The insurer has no obligation to Kim over the proceeds of
the insurance to third persons even if the third persons are immediate relatives if there is
a designated beneficiary. The Supreme Court cited Section 53 and explained in
H e i r s o f L o r e t o C . M a r a m a g v . E v a
V e r n a D e G u z m a n M a r a m a g , e i
“Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if sriH alrê: 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.”
e. When There is No Beneficiary. It is only when there is no designated

beneficiary or when the designation Is void, that the laws of succession are applicable. 44
45
In other words, if there is no designated beneficiary, the proceeds shall form part of
the estate of the deceased insured.46
f. Effect of Death of Owner-Beneficiary. Section 3 of the Insurance Code
provides that “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.”
The problem, however, arises if a person insured his own life and designated another
person as beneficiary but both the insured and the beneficiary died in the same incident.
It has been opined that in these cases, the rules on survivorship applies. 47 It should be
recalled that Rule 131, Section 3(jj) of the Rules of Court
44
G.R. No. 181132, June 5, 2009.
46
Social Security System v. Candelaria D. Davac, ei al, G.R. No. L-21642, July
30, 1966.
46
Heirs of Loreto C. Maramag v. Eva Verna De Guzman Maramag, et al~,
G.R. No. 181132, June 5, 2009; Re: Claims for the Benefits of the Late Mario v.
Chanliongco, A.M. No. 190, October 18, 1977.
47
Sulpicio Guevara, The Insurance Law, 1939 Ed., p. 6, hereinafter referred to
as “Guevara, p. 6.”
applies if the persons involved are not heirs of each other. The rules on survivorship
of heirs, on the other hand, are provided for in Article 43 of the New Civil Code.
g. Effect of Use of Conjugal Funds. If the funds of the conjugal
partnership of gains are used to pay for the premium, the proceeds of the policy
constitute community property if the policy was made payable to the deceased’s
estate. One-half of said proceeds belongs to the estate and the other half to the
surviving spouse.48
(1) In a case decided when the New Civil Code provisions on the
property regime of the spouses was still in force, the Supreme Court adopted
the following comments of Manresa in his Commentaries on the Civil Code: 49
“The amount of the policy represents the premium to be paid, and the right to it
arises the moment the contract is perfected, for at that moment the power of disposing of it
may be exercised, and if death occurs payment may be demanded. It is therefore
something acquired for a valuable consideration during the marriage, though the period of
its fulfillment, depend upon the death of one of the spouses, which terminates the
partnership. So considered, the question may be said to be decided by Articles 1396 and
1401: if the premiums are paid with the exclusive property of husband or wife, the policy
belongs to the owner, if with conjugal property, or if the money cannot be proved as
coming from one or the other of the spouses, the policy is community property.”
(2) However, if there is a designated beneficiary, the beneficiary is

entitled to the proceeds of the policy. The source of the premium is
immaterial.
h. Vested Interest of Beneficiary. The vested interest or right of the
beneficiaries in a life insurance policy should be measured on its full face-value and
not on its cash surrender value,
48
The Bank of Philippine Islands v. Juan Posadas, Sr., G.R. No. L-
25803, May 29, 1970, citing Martin Moran, 11 Tex. Civ. A., 509; In re Stan’s
Estate, Myr. Prob. (Cal) 5 (where the Supreme Court of California found that
the premiums were paid using the salary of the deceased, which salary was
considered community property); In re: Webb’s Estate, Myr. Prob (Cal), 93
(where the Supreme Court of California found that the decedent paid the first
third of the amount of the premiums on his life-insurance policy out of his
earning before the marriage and the remainder from his earnings received
after the marriage and where the court held that one-third of the policy
belonged to his separate estate, and the remainder to the community property).
49
Vol. 9, page 589 cited in The Bank of Philippine Islands v. Juan
Posadas, Jr., ibid.
CHAPTER 2 5&
THE PARTIES
for in case of death of the insured, said beneficiaries are paid on the basis of its face-
value and in case the insured should discontinue paying premiums, the beneficiaries
may continue paying it and are entitled to automatic extended term or paid-up
insurance options and that said vested right under the policy cannot be divisible at any
given time.50
PROBLEM:
1. Enrique Mora, owner of an Oldsmobile sedan model 1956, bearing plate no. QC-8088,
mortgaged the same to the H.S. Reyes, Inc., with the condition that the former would
insure the automobile, with the latter as beneficiary. The automobile was thereafter
insured on June 23, 1959 with the State Bonding & Insurance Co. Inc., and motor
car insurance policy A-0615 was issued to Enrique Mora, the pertinent provisions of
which read:
“1- The Company (referring to the State Bonding & Insurance Co., Inc.) will,
subject to the Limits of Liability, indemnify the Insured against loss of
or damages to the Motor Vehicle and its accessories and spare parts
whilst thereon; (a) by accidental collision or overturning or collision or
overturning consequently upon mechanical breakdown or consequent
upon wear and tear.
XXX XXX XXX
2. At its own option the Company may pay in cash the amount of the loss
or damage or may repair, reinstate, or replace the Motor Vehicle or
any part thereof or its accessories or spare parts. The liability of the
Company shall not exceed to value of the parts whichever is the less.
The Insured's estimate of value stated in the schedule will be the
maximum amount payable by the Company in respect of any claim for
loss or damage.
XXX XXX XXX
4. The Insured may authorize the repair of the Motor Vehicle necessitated by
damage for which the Company may be liable under this Policy
provided that: — (a) The estimated cost of such repair does not
exceed the Authorized Repair Limit, (b)A detailed estimate of the cost is
forwarded to the Company without delay, subject to the condition that
Loss, if any, is payable to H.S. Reyes, Inc., ’ by virtue of the fact that
said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes,
Inc. and that under a clause in said insurance policy, any loss was
made payable to the H.S. Reyes, Inc. as Mortgagee;
50
Delfin Nario, et al. v. The Philippine American Life Insurance
Company, G.R. No. L-22796, June 26, 1967, 20 SCRA 434.
XXX XXX XXX

During the effectivity of an insurance contract, the car met an accident. Enrique
Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized the
Bonifacio Bros. Inc. to furnish the labor and materials, some of which were supplied by
the Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at
P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company, after
claiming a franchise in the amount of P100.00, drew a check in the amount of
P2,002.73, as proceeds of the insurance policy, payable to the order of Enrique Mora or
H.S. Reyes, Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for
disposition and delivery to the proper party. In the meantime, the car was delivered to
Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the
Bonifacio Bros., Inc. and Ayala Auto Parts Co. of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the
Bonifacio Bros., Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint
with the Municipal Court of Manila against Enrique Mora and the State Bonding &
Insurance Co., Inc. for the collection of the sum of P2,002.73. Will the action prosper?
A: The action will not prosper because Bonifacio Bros., Inc. and
Ayala Auto Parts Co. have no cause action against the insurer. The facts show
that the appellants’ alleged cause of action rests exclusively upon the terms of
the insurance contract. They seek to recover the insurance proceeds, and for
this purpose, they rely upon paragraph 4 of the insurance contract document
executed by and between the State Bonding & Insurance Company, Inc. and
Enrique Mora. Bonifacio Bros, and Ayala Auto Parts are not mentioned in the
contract as parties thereto; nor is there any clause or provision thereof from
which we can infer that there is an obligation on the part of the insurance
company to pay the cost of repairs directly to them. It is fundamental that
contracts take effect only between the parties thereto, except in some specific
instances provided by law where the contract contains some stipulation in favor
of a third person. Such stipulation is known as stipulation p o u r
a u t r u i or a provision in favor of a third person not a party to the
contract. However, there is no such stipulation in the subject insurance contract
in favor of Bonifacio Bros, and Ayala Auto Parts. The parties to the insurance
contract omitted such stipulation. What was stipulated upon was a “loss
payable” clause of the insurance policy that provides that the “Loss, if any, is
payable to H.S. Reyes, Inc.” indicating that it was only the H.S. Reyes, Inc.
which they intended to benefit. ( B o n i f a c i o B r o t h e r s
v . M o r a , G . R . N o . 2 0 8 5 3 , M a y
2 9 , 1 9 6 7 )
CHAPTER 2 61
THE PARTIES
§3.01. GENERALLY REVOCABLE. As a rule, the designation of the beneficiary

is revocable. If the insured wants the designation to be irrevocable, the irrevocable
nature should be expressly provided for in the policy:
SEC. 11. The insured shall have the right to change

the beneficiary he designated in the policy, unless he has
expressly waived this right in said policy. Notwithstanding
the foregoing, in the event the insured does not change the
beneficiary during his lifetime, the designation shall be
deemed irrevocable.
a. Effect if Irrevocable. As the term implies, an irrevocable beneficiary

cannot be replaced. The irrevocable beneficiary has vested rights over the policy. 51 For
example, the rights of the irrevocable beneficiary cannot be affected by the subsequent
assignment of the insurance policy. In case there is cash surrender value, it is the
irrevocable beneficiary who can take a policy loan thereon.52
(1) Surrender of the policy and policy loan is not merely an act of
administration, hence, the irrevocable beneficiary has interest therein. Surrender
of the policy constitutes an act of disposition or alienation of property rights and
not merely of management or administration because it involves the incurring or
termination of contractual obligations.53
b. Exception. By way of exception, the Family Code provides for revocation
of an irrevocable designation of beneficiary. Article 64 of the Family Code provides that
after the finality of the decree of legal separation, the innocent spouse may revoke the
designation as a beneficiary in any insurance policy, even if such designation is
stipulated to be irrevocable. The revocation of or change in the designation of the
insurance beneficiary shall take effect upon written notification thereof to the insured.
The same rule can be found in Article 43 of the Family Code and is likewise adopted in
Article 50 of the same Code. In other words, revocation of the designation as a
beneficiary of the spouse who is in bad faith applies in cases covered by Articles 40, 42,
43, 45, 50, and 64 of the Family Code.
51
See exception in Article 64, Family Code.
52
Delfin Nario, et al. v. The Philippine American Life Insurance Company,
supra.
™Ibid.
c. Revocation during the Lifetime. The additional provision that was

inserted by R.A. No. 10607 in Section 11 states that notwithstanding the revocable
nature of the designation of the beneficiary, “in the event the insured does not
change the beneficiary during his lifetime, the designation shall be deemed
irrevocable.” However, the provision is a surplusage with respect to life insurance
because the insured who is the owner of the policy can no longer change the
beneficiary beyond his lifetime. The insurance proceeds should already be paid after
the death of the insured because the risk insured against already transpired. This is
true even if the one who took the insurance is not the person whose life is insured.
The additional provision in Section 11 may find application only in property
insurance.
PROBLEM:
1. On October 18, 1980, P took out a life insurance policy and named his only son Q as
beneficiary. P 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. Upon P’s death, Q claimed the
proceeds of the insurance policy contending that as designated beneficiary he
acquired a vested right to the policy. Is Q’s contention correct?
A: No, the contention of Q is not correct. The designation of the
beneficiary is revocable unless the right to revoke is waived. In the present
case, the designation of Q as beneficiary was revoked with his replacement
with R.
§3.02. FORFEITURE OF RIGHTS OF BENEFICIARY. Section 12 of the

Insurance Code provides:
SEC. 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 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 is silent, the proceeds shall be paid to the estate
of the insured.
a. Section 12 of the Insurance Code talks about a disqualification that

arises after the perfection of the contract of insurance. The beneficiary does not
suffer any disqualification at
CHAPTER 2 (i:i
THE PARTIES
the inception of the contract but he becomes disqualified after the contract’s
perfection. The underlying principle is that the beneficiary should not profit
from his misdeed. This is consistent with the maxim U n n e d o l t
p r i s e a d v a n t a g e d e s o n t o r t
d e s m e n e 54 and N e m o e x s u o d e l i c t o
m e l l o r a m s u a m c o n d i t i o n e m
f a c e r e p o t e s t Note that the disqualification under Section 12
of the Insurance Code arises due to a willful act of the beneficiary.
b. R.A. No. 10607 changed the default rules on beneficiary under
Section 12.66 In Life Insurance, if a beneficiary is disqualified under Section 12,
the proceeds of the insurance shall be paid in accordance with the following
rules:
(1) The forfeited share of the disqualified beneficiary shall pass
on to the other beneficiaries;
(2) If there are no other beneficiaries, the proceeds shall be paid
in accordance with the policy contract;
(3) If there are no other beneficiaries and there is no provision
in the policy contract, the proceeds shall be paid to the estate of the
insured.
§3.03. DISQUALIFICATION OF BENEFICIARY. The grounds for
disqualification of a beneficiary in insurance contracts can be found in the New
Civil Code. Article 2012 of the New Civil Code provides:
ART. 2012. Any person who is forbidden from
receiving any donation under Article 739 cannot be
named beneficiary of a life insurance policy and by
the person who cannot make any donation to him,
according to said article.
a. Rationale. The Supreme Court explained in
The Insular Life Assurance Co., Ltd. v. Carponia T. Ehrado:57
“In essence, a life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned. Both are founded upon 54 55 56 * * *
54
0ne ought not to take advantage of his own wrong.
55
No one can improve his condition through his own misdeed.
56
Before the amendatory provisions of R.A. No. 10607, if there are no other
beneficiaries, the nearest relative of the insured shall receive the proceeds of said
insurance if not otherwise disqualified.
b7
Supra.
(Republic Act No. 10607 with Notes on Pro-Need Act)
the same consideration: liberality. A beneficiary is like a donee, because from the premiums of
the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or
profits of said insurance. As « consequence, the proscription in Article 739 of the new Civil
Code should equally operate in life insurance contracts. The mandate of Article 2012 cannot be
laid aside: any person who cannot receive a donation cannot be named as beneficiary in the life
insurance policy of the person who cannot make the donation. Under American law, a policy of
life insurance is considered as a testament and in construing it, the courts will, so far as
possible treat it as a will and determine the effect of a clause designating the beneficiary by
rules under which wills are interpreted.”
b. Grounds for Disqualification. Thus in the following cases, although the

insurance contract itself is valid, the designation of beneficiary is void because they are
disqualified as beneficiaries:50
(1) Those made between persons who were guilty of adultery or
concubinage at the time of the donation;
(2) Those made between persons found guilty of the same criminal
offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
c. Hence, in one case, the Supreme Court ruled that a husband cannot name
as beneficiary a woman with whom he had illicit relations. The common law wife who
is aware that the man with whom she has relations is already married may not be validly
designated as a beneficiary.59 However, this argument would certainly not apply to the
children borne out of wedlock. The illegitimate children are not covered by the
prohibition. As a matter of fact, the New Civil Code (and now the Family Code)
recognizes certain successional rights of illegitimate children.60 *
d. Conviction is not necessary in order for one to be disqualified due to
adultery or concubinage. This is the rule in donation which should equally apply to
insurance contracts. The Supreme Court explained:01
“Article 739, New Civil Code.

“Insular Life Assurance v. Ebrado, G.R. No. L-44059, October 28, 1977, 80 SCRA 181.
“Southern Luzon Employees’ Association v. Juunita Golpeo, G.R. No. L-6114, October
30, 1954. ailbid.
CHAI'I'EH
2
THE PARTIES
"4. Wo do not think that a con victior) for adultery or concubinage in exacted before the
disabilities mentioned in Article 730 tony effectuate. More specifically, with regard to the
diaahility on “persons who were guilty of adultery or concubinage at the time of the donation,”
Article 730 itself provides:
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 donee may be proved by preponderance of
evidence in the same action,"
The underscored clause neatly conveys that no criminal conviction for the disqualifying
offense is a condition precedent. In fact, it cannot even be gleaned from the afore-quoted provision
that a criminal prosecution is needed. On the contrary, the law plainly states that the guilt of the
party may be proved “in the same action” for declaration of nullity of donation. And, it would be
sufficient if evidence preponderates upon the guilt of the consort for the offense indicated. The
quantum of proof in criminal cases is not demanded.
e. The spouse can designate the other as a beneficiary. While a spouse is

prohibited from making a donation to the other spouse under the New Civil Code and
the Family Code, this prohibition does not apply to insurance contracts. The proceeds of
the insurance policy cannot be considered a donation or gift. ‘The contract of life
insurance is a special contract and the destination of the proceeds thereof is determined
by special laws which deal exclusively with that subject. The Civil Code (and the
Family Code) has no provision which relate directly and specifically to life-insurance
contracts or to the destination of life insurance proceeds.”62
f. While a concubine is disqualified, the illegitimate children of the insured
are not disqualified. No legal proscription exists in naming as beneficiaries the children
of illicit relationships by the insured. If the concubine was disqualified, her shares in the
insurance proceeds must be awarded to the illegitimate children who are also designated
as beneficiaries.63
PROBLEM:
1. Eduardo Fernandez applied for and was issued policy no. 0777 by
Atlas Life Insurance Corporation on a whole life plan for P200,000.00.
Although he was married to Clara, with whom he had five (5)
62
Del Val v. Del Val, 29 Phil. 534 (1915); Hilario Gercio v. Sun Life Assurance of Canada,
et al., G.R. No. 23703, September 28, 1925.
“Heirs of Loreto C. Maramag v. Eva Do Guzman Maramag, G.R. No. 181132, June 5, 2009.
66 ESSENTIALS OF INSURANCE ’LAW
(Republic Act No. 10607 with Notes on Pre-Need Act.)
legitimate children, he designated his common-law wife, Diana Cruz, as his revocable
beneficiary on the policy, and referred to Diana, in his application and policy as his wife.
Five (5) years thereafter, he died. Diana immediately filed her claim for the proceeds of
the policy as designated beneficiary. Clara also filed her claim as a legal wife. The
insurance company filed a petition for interpleader before the Regional Trial Court of
Rizal to determine who should be entitled to the proceeds of the policy. If you were the
judge, how would you decide the said interpleader action?
A: If I were the judge, I would rule in favor of Clara. As the legal
wife, Clara (together with the children) is entitled to the proceeds of insurance
taken by Eduardo Fernandez. The designation of his common-law wife, Diana as
his revocable beneficiary is void because the designation was made at the time
they were guilty of concubinage. Hence, the proceeds shall be part of the estate.
Note: The guilt of Diana and Eduardo for concubinage may be established
by mere preponderance of evidence in the same action and there is no need for a
criminal conviction for concubinage. (Insular Life Assurance Co., Ltd. v. Ebrado,
October 28, 1997, 80 SCRA 181)
§4. TRUSTEE OR AGENT. The insurance policy may be obtained by a person

through his agent or trustee. 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.64
§5. PARTNER. 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. 65
a. If the policy is secured for the benefit of a partnership, a change in the
name of the partnership does not avoid the policy. For example, the Supreme Court ruled
in one case that when the partners of a general partnership doing business under the firm
name of “Sharruf & Co.” obtained insurance policies and the latter afterwards changed its
name to “Sharruf & Eskenazi” (which are the names of the same and only partners of said
firm “Sharruf &
“Section
54,1.C.
“Section
55,1.C.
CHAPTER 2 67
THE PARTIES
Co.”), but continuing the same business, the new firm acquires the rights of the former
under the same policies.66
§6. ASSIGNEE OF LIFE INSURANCE. Justice Holmes said that “life insurance
has become in our day one of the best recognized form of investment and self-compelled
saving. So far as reasonable safety permits, it is desirable to give to life policies the
ordinary characteristics of property.”67 Consistently, in this jurisdiction, a life or health
insurance policy can be transferred even without the consent of the insurer. Section 184
of the Insurance Code provides:
SEC. 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.
a. How to Transfer. No formalities are required for the assignment of life or
health insurance policies. Hence, the provisions of the New Civil Code on assignment of
rights should be applied. For example, the New Civil Code provides as one of the modes
of transferring ownership the delivery of the proof or evidence of the right. Accordingly,
delivery of the policy may transfer ownership of the policy of insurance.
b. Notice Not Necessary. Since the right to transfer is conferred by law,

notice to the insurer is not even necessary to validate the transfer. The assignee acquires
right thereon even without the knowledge of the insurer. Nevertheless, while notice to
the insurer is not required, it is more advantageous to the assignee to give notice to the
insurer of such transfer.
c. Double Assignment. There are two views in determining who has a better
right in case the insured assigns the life or health insurance policy to two or more
persons. One is the “English Rule” according to which the assignee who first gives notice
is the one entitled to the proceeds if he has no notice of any prior assign-
oe
Sharuff & Co. v. Baloise Insurance Company, et al., G.R. No. 44119,
March 30. 1937.
67
Janine R. Greiber and William T. Beadles, Law and the Insurance Life
Insurance Contract, 1968 Ed., p. 372 hereinafter cited as “Greiber and Beadles, p.
332.”
ESSENTIALS OF INSURANCE LAW
menu* The other view is known as the “ A m e r i c a n R u l e n

which provides that the assignee under the first assignment has the preferable
claim.® The “American Rule” applies in this jurisdiction because in the absence
of any specific provision on double sale or assignment of rights, the apphcable
principle is p r i u s t e m p o r e p o r t i o r j u r e —
first in time, stronger in right.
§6.01. ASSIGNEE OF PROPERTY INSURANCE. With respect to
property insurance, Section 58 provides that the mere transfer of a thing insured
does not transfer the policy, but suspends it until the same person becomes the
owner of both the policy and the thing insured. Implicit from this provision is the
rule that the policy can be transferred so long as the transferee has insurable
interest in the thing insured. Nevertheless, the insurer’s assent is necessary for the
transfer.70
a. Exceptions. There are exceptional cases when the insurer’s consent is not
necessary even if successors-in-interest of the insured substitute the latter. These
include cases involving transfer through will or succession and other instances of
transfer by operation of law and in cases where there is transfer among partners.71
§7. INSURANCE AGENT AND INSURANCE BROKER. Section 307 of
the Insurance Code provides that “no insurance company doing business in the
Philippines, nor any agent thereof, shall pay any commission or other
compensation to any person for services in obtaining insurance, unless such
person shall have first procured from the Commissioner a license to act as an
insurance agent of such company or as an insurance broker as hereinafter
provided.” The law likewise provides that “no person shall act as an insurance
agent or as an insurance broker in the solicitation or procurement of applications
for insurance, or receive for services in obtaining insurance, any commission or
other compensation from any insurance company doing business in the
Philippines, or any agent thereof, without first procuring a license so to act from
the Commissioner, which must be renewed every three years thereafter.”
“Greiber and Beadles, p. 332.

"Ibid.
70
San Miguel Brewery v. Law Union & Rock Insurance Co., G.R. No. L-14300, January
19, 1920, 40 Phil. 674.
71
Sections 23 and 24,1.C.
CHAPTER 2 69
THE PARTIES
a. Section 318 of the Insurance Code provides that “except as otherwise

provided by law or treaty, it shall be unlawful for any person, partnership, association or
corporation in the Philippines, for himself or itself, or for some other person, partnership,
association or corporation, either to procure, receive or forward applications of insurance
in, or to issue or to deliver or accept policies or contracts of insurance of or for, any
insurance company or companies not authorized to transact business in the Philippines,
covering risks, life or non-life, situated in the Philippines and any such person,
partnership, association or corporation violating the provisions of this section shall be
deemed guilty of a penal offense, and upon conviction thereof, shall for each such offense
be punished by a fine of two hundred fifty thousand pesos (P250,000), or imprisonment of
six (6) months, or both at the discretion of the court.”72
§7.01. INSURANCE AGENT. An insurance agent is any person who for
compensation solicits or obtains insurance on behalf of any insurance company or
transmits for a person other than himself an application for a policy or contract of
insurance to or from such company or offers or assumes to act in the negotiating of such
insurance.73 Insurance agent includes an agency leader, agency, manager or their
equivalent.
a. One who claims that a person is an insurance agent must prove that the
latter falls under Article 309 of the Insurance Code. The mere fact that there reference
by the alleged agent to the insurer as a “principal” instead of its “client” is not
conclusive evidence that the former is in fact an insurance agent. Such “reference”
however, will not and cannot vary the definition of what an insurance agent actually is
under the Insurance Code, “nor can it automatically turn petitioner into one, thereby
becoming correspondingly liable to all the duties, requirements, liabilities and
penalties to which an insurance agent is subject to.”74
b. Independent Contractor. R.A. No. 10607 clarified the relationship
between the insurer and the insurance agent by expressly providing in Section 309 that
“an insurance agent is
72
Section 318, as amended by R.A. No. 10607 which increased the penalty of a fine
of P10,000.00.
73
Section 317,1.C.
74
Pandiman Philippines, Inc. v. Marine Manning Management Corporation, G.R. No.
143313, June 21, 2005.
Zsctibcc An Ncv 10607 «nt.h Note's on Pro-Nood Act)
an mderenden: contractor and not an employee of the company represented/

Nevertheless. Section 309 likewise provides that “since the Lnsnrance
industry is imbued with public interest, the insurance companies up*an
approval of the Commissioner may exercise wide latitude in supervising the
activities of their insurance agents to ensure the protection of the insuring
public.”75
(1> I; should be noted in this connection that the new provisions
of Section 309 of the Insurance Code was enacted after the legal
controversy brought about by the conflicting decisions in Tongko v.
The Manufacturers Life Insurance Company.™ In its original decision in
the said case, the Supreme Court ruled that the insurer had control
over the insurance agent that would make the latter the former’s
employee.77 Later, the Supreme Court reversed its own ruling in the
same case and ruled that that its previous decision “was not supported
by the evidence adduced and was not in accordance with prevailing
jurisprudence.”78 The Supreme Court further ruled in its Resolution
on the Motion for Reconsideration that the absence of any showing the
insurer’s control over the insurance agent’s contractual duties points
to the absence of employer-employee relationship.79
c. General Agent. It shall be unlawful for any person, company or
corporation in the Philippines to act as general agent of any insurance
company unless he is empowered by a written power of attorney duly
executed by such insurance company, and registered with the Insurance
Commissioner to receive notices, summons and legal processes for and in
behalf of the insurance company concerned in connection with actions or
other legal proceedings against said insurance company.*
(1) Court Processes. Notices, summons, or processes of any
kind sent by registered mail to the last registered
75
This provision was inserted in Section 309 of the I.C., as amended by R.A. No.
10607.
76
G.R. No. 167622, November 7, 2008 (original decision penned by Justice Velasco) and
June 29, 2010 (Resolution of the Motion for Reconsideration penned by Justice Brion).
77
Tongko v. The Manufacturers Life Insurance Company, G.R. No. 167622, November
7, 2008.
78
Tongko v. The Manufacturers Life Insurance Company, i b i d . , June 29, 2010.
79
/bid.
“Section 308,1.C.
CHAPTER 2 71
THE PARTIES
address of such general agent of the company concerned or to the

Commissioner shall be sufficient service and deemed as if served on the
insurance company itself.81
d. Classes of Agents. It is believed that despite the reversal of its original
Decision in T o n g k o v . T h e M a n u f a c t u r e r s
L i f e I n s u r a n c e C o m p a n y , an insurance
company may still have two classes of agents: (1) salaried employees who keep
definite hours and work under the control and supervision of the company; and (2)
an independent contractor who work on commission basis. Under the first category,
the relationship between the insurance company and its agents is governed by the
Contract of Employment and the provisions of the Labor Code, while under the
second category, the same is governed by the Contract of Agency and the
provisions of the New Civil Code on Agency. Disputes involving the agent are
cognizable by the regular courts.82 If a person is an insurance agent within the
contemplation of the Insurance Code, then by express provisions of Section 309,
the insurance agent is as independent contractor. However, the name used to
designate a person is not controlling, if all the elements of employer-employee
relationship are present - especially the element of control - then the “insurance
agent” should be considered an employee. This is a factual issue that requires
presentation of evidence on the different i n d i c i a of employer-employee
relationship.
e. Governing Law. Insurance agents are governed by the New Civil Code
provisions on Agency. Their acts within the limits of their authority are considered
binding on their principal. They also bind their principal if apparent authority is
given to them. The Supreme Court observed in one case:83
“By the contract of agency, a person binds himself to render some service or
to do something in representation or on behalf of another, with the consent or
authority of the latter. The general rule is that the principal is responsible for the
acts of its agent done within the scope of
81
Section 308,1.C.
82
Philippine American Life Insurance Company and Rodrigo De Los Reyes v.
Hon. Armando Ansaldo, et al., G.R. No. 76452, July 26, 1994; Great Pacific Life
Assurance Corporation v. Judico, 180 SCRA 445 (1989); Investment Planning
Corporation of the Philippines v. Social Security Commission, 21 SCRA 904 (1962).
^Filipinas Life Assurance Company v. Clemente N. Pedroso, et al., G.R. No.
159489, February 4, 2008. Note: The Supreme Court rejected the argument of the
petitioner that the act of its agent is not binding because it is an insurance company and is
not involved in investment.
(Republic Ac; No. 10607 with Notes on Pro-Need Act)
its authority, and should bear the damage caused to third persons. When the agent
exceeds his authority, the agent becomes personally liable for the damage. But even when
the agent exceeds his authority, the principal is still solidarily liable together with the
agent if the principal allowed the agent to act as though the agent had full powers. In other
words, the acts of an agent beyond the scope of his authority do not bind the principal,
unless the principal ratifies them, expressly or impliedly. Ratification in agency is the
adoption or confirmation by one person of an act performed on his behalf by another
without authority.''
(1) In this connection, it is well to quote the comments of Justice

Laurel on the role of insurance agents: “It is of common knowledge that the
selling of insurance today is subjected to the whirlwind p r e s s u r e
of modern salesmanship. Insurance companies send detailed instructions to
their agents to solicit and procure applications. These agents are to be found
all over the length and breadth of the land. They are stimulated to more
active efforts by contests and by the keen competition offered by the other
rival insurance companies. T h e y s u p p l y a l l t h e
i n f o r m a t i o n , p r e p a r e a n d
a n s w e r t h e a p p l i c a t i o n s ,
s u b m i t t h e a p p l i c a t i o n s t o
t h e i r c o m p a n i e s , c o n c l u d e t h e
t r a n s a c t i o n s , a n d o t h e r w i s e
s m o o t h o u t a l l d i f f i c u l t i e s . The
agents in short do what the company set them out to do.” 84 Consequently,
the insurer is ordinarily bound by the negligent or willful acts or omissions
of insurance agents.
f. Collusion Between the Insured and the Agent. However, the insurer is
entitled to deny a claim if a material fact regarding the health of the insured was
concealed by the agent with the participation of the insured. 85 Although the
insurance agent represents the insurer, the insured cannot escape the effect of the
falsity that the agent committed with his complicity.
g. Limit of Authority of Agent. The provisions in the policy that specifies
and limits the powers and duties of an agent is binding on the insured.86 If the
authority of the agent is limited in the policy itself, the insured cannot claim
otherwise by saying that he did not read the policy. By accepting the policy, the
insured becomes
“Insular Life v. Feliciano, et al, G.R. No. 47593, September 13, 1941, 73 Phil. 201,
205.
“Insular Life v. Feliciano, et al, G.R. No. 47593, December 29, 1943.
“Susana Glaraga v. Sun Life Assurance Co., G.R. No. L-25963, December 14,
1926.
CHAPTER 2 73
THE PARTIES
charged with knowledge of its contents, whether he actually read it or not. He could not
ostrich-like hide his head from it in order to avoid his part of the bargain and at the
same time claim the benefit thereof. He is deemed chargeable with knowledge, from
the very terms of the policy he seeks to enforce.87
(1) It should also be noted in this connection that whenever limitations on
the authority of agents are conspicuously noted in the insurance application, the
insured is precluded from establishing that the agent had apparent authority. 88
h. Not Solidarily Liable with Insurer for the Claim. “In any event, payment
for claims arising from the peril insured against, to which the insurer is liable, is
definitely not one of the liabilities of an insurance agent.” 89 Thus, the insurance agent
cannot be made solidarily liable with the insurer for the insurance claim. There is no
legal basis whatsoever for holding petitioner solidarily liable with insurer.
CASE:
On July 20, 1999, Rheozel Laingo (Rheozel), the son of respondent Yolanda Laingo
(Laingo), opened a “Platinum 2-in-l Savings and Insurance” account with petitioner Bank of
the Philippine Islands (BPI) in its Claveria, Davao City branch. The Platinum 2-in-l Savings
and Insurance account is a savings account where depositors are automatically covered by an
insurance policy against disability or death issued by petitioner FGU Insurance Corporation
(FGU Insurance). BPI issued a passbook and an Insurance Coverage Certificate to Rheozel
with Laingo as his named beneficiary. On September 25, 2000, Rheozel died due to a
vehicular accident as evidenced by a Certificate of Death issued by the Office of the Civil
Registrar General of Tagum City, Davao del Norte. Since Rheozel came from a reputable and
affluent family, the Daily Mirror headlined the story in its newspaper on September 26, 2000.
BPI was informed of the death of Rheozel on September 27, 2000 and the family of the
deceased was allowed to withdraw P995,000.00 from the account of Rheozel to be used for the
funeral and burial expenses. An employee of BPI even went to the wake to verify some
information. More than two (2) years later or on January
87
Supra.
88
John, K. DiMugno and Paul E.B. Glad, California Insurance Law Handbook, 2010
Ed., p. 28 hereinafter cited as “DiMugno and Glad, p. 28”, citing Linnastruth v. Mutual Ben.
Health & Acc. Ass’s, 22 Cal. 2d 216, 137 P.2d 833 (1943).
89
Pandiman Philippines, Inc. v. Marine Manning Management Corporation, G.R. No.
143313, June 21, 2005.
/•I KSNKNTIAI.N OK INMI H<AN< K I,AW
A* l No I I H K ) / w i l h N n l n n o n l ' n ' Ni<•111 Ai I)
21, 2008, Klmo/ds HiHlor, Ivlmiilvn l.imigo < tonri'pcion, winJ** iimingmg Kluw.tTs personal
things in IHM room al llmir roMiilonri* m Kroland, i)/ivno (''ity. found the Personal Arralenl
liiminino' ('nvi'iitgo 1 !erl lliriilo ihsna d by FGU Insurance. Ivhealvn immodinloly conveyed I lie
mformiil ioM to Laingo Laingo sent two f2) lot-tors dnlod Septemlier II, 2008 nod November 7,
2008 to HIM and FGU lusunmoo roqiioHl.ing lliem to proceMii her claim a a beneticiary of
Kbeo/td's insurance policy. The claim wan denied. In a cane tiled by Hainan against the insurer,
(be trial court ruled that the prescriptive period ot 00 days shall commence from flu* time of death
of the insured and not from the knowledge of the beneficiary. Since the insurance claim wan tiled
more than 90 days from the death of the insured, the case must he dismissed. Is Laingo, as named
beneficiary who had no knowledge of the existence of the insurance contract, barred on the ground
of failure to file a written notice of claim within 90 days upon the death of the insured?
A: No, Laingo is not barred. Notice was in fact given to the agent of the
insurer which notice is binding on the latter. In this case, BPI acted as agent of FGU
Insurance with respect to the insurance feature of its own marketed product. BPI not
only facilitated the processing of the deposit account and the collection of necessary
documents but also the necessary endorsement for the prompt approval of the insurance
coverage without any other action on Rheozel’s part. Rheozel did not interact with FGU
Insurance directly and every transaction was coursed through BPI. BPI, as agent of FGU
Insurance, had the primary responsibility to ensure that the 2-in-l account be reasonably
carried out with full disclosure to the parties concerned, particularly the beneficiaries.
Thus, it was incumbent upon BPI to give proper notice of the existence of the insurance
coverage and the stipulation in the insurance contract for filing a claim to Laingo, as
Rheozel’s beneficiary, upon the latter’s death. In this case, BPI had the obligation to
carry out the agency by informing the beneficiary, who appeared before BPI to withdraw
funds of the insured who was BPI’s depositor, not only of the existence of the insurance
contract but also the accompanying terms and conditions of the insurance policy in order
for the beneficiary to be able to properly and timely claim the benefit.
Upon Rheozel’s death, which was properly communicated to BPI by his mother
Laingo, BPI, in turn, should have fulfilled its duty, as agent of FGU Insurance, of
advising Laingo that there was an added benefit of insurance coverage in Rheozel’s
savings account. An insurance company has the duty to communicate with the
beneficiary upon receipt of notice of the death of the insured. This notification is how a
good father of a family should have acted within the scope of its business dealings with
its clients. BPI is expected not only to provide utmost customer satisfaction in terms of
its own products and services but also to give assurance that its business concerns with
its partner entities are implemented accordingly.
CHAPTER 2 75
THE PARTIES
BPI had been informed of Rheozel's death by the latter’s family. Since
BPI is the agent of FGU Insurance, then such notice of death to BPI is
considered as notice to FGU Insurance as well. FGU Insurance cannot now
justify* the denial of a beneficiary's insurance claim for being filed out of
time when notice of death had been communicated to its agent within a few
days after the death of the depositor-insured. In short, there was timely notice
of Rheozel’s death given to FGU Insurance within three (3) months from
Rheozel’s death as required by the insurance company.
Consequently*. BPI and FGU Insurance shall bear the loss and must
pay* the insurance proceeds of Rheozel’s personal accident insurance
coverage to Laingo. as Rheozel’s named beneficiary. ( B a n k o f
P h i l i p p i n e I s l a n d s v . L a i n g o ,
G . R . N o . 2 0 5 2 0 6 , M a r c h 1 6 ,
2 0 1 6 )
§7.02. INSURANCE BROKER. An insurance broker is any person who for

any* compensation, commission or other thing of value acts or aids in any* manner
in soliciting, negotiating or procuring the making of any* insurance contract or in
placing risk or taking out insurance, on behalf of an insured other than himself. 90
Thus, while the insurer agent normally represents the insurer, the insurance broker
acts for and in behalf of the insured.
§7.03. EFFECT OF RECEIPT OF PREMIUM. 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.91
a. Authority to Receive Premium, 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.92
§7.04. NO JURISDICTION OVER INSURER-AGENT RELATIONSHIP.
Section 439 of the Insurance Code expressly
^Section 310,1.C. as amended by R.A. No.

10607.
91
Section 315,1.C. as amended by RJL No.
952
Ibid.
10607.
(Republic Act. No. 10607 with Noto« on Pro-Neod Act)
provides that “the power of the of the Commissioner does not cover the relationship
between the insurance company and its agents/ brokers.” 93 The Supreme Court
explained in P h i l i p p i n e A m e r i c a n L i f e
I n s u r a n c e C o m p a n y a n d R o d r i g o D e
L o s R e y e s v . H o n . A r m a n d o
A n s a l d o , e t a l . , 9 * * that while the subject of Insurance
Agents and Brokers is discussed under Chapter IV, Title I of the Insurance Code, the
provisions of said Chapter speak only of the licensing requirements and limitations
imposed on insurance agents and brokers. The Insurance Code does not have
provisions governing the relations between insurance companies and their agents. It
follows that the Insurance Commissioner cannot, in the exercise of its quasijudicial
powers, assume jurisdiction over controversies between the insurance companies and
their agents.95
a. It should be clarified, however, that insurance agents and brokers are
under the regulatory powers of the Insurance Commissioner. Hence, the Insurance
Commissioner can revoke their license in proper cases. In addition, administrative
sanctions can be imposed by the Insurance Commissioner on erring insurance agents
and brokers.96
93As amended by R.A. No. 10607.

9*G.R. No. 76452, July 26,1994.
*Ibid.
^Section 437(i), I.C., as amended by R.A. No.
10607.
CHAPTER 3
INSURABLE INTEREST
In early 18th century England, life insurance policies can be issued to persons
who were unrelated and even unknown to the insured. 1 The insured himself often did
not know who took the policy on his own life. At one time it was almost a sport to
wager that public figures would or would not live for even such a short period of time as
a few days. Persons in public life were thus made the subjects of life insurance contracts
by people who were not even acquainted with them. It so shocked the public that in
1774, the English Parliament took action and enacted a law that provided that “no
insurance shall be made by any person or persons, or any other event or events
whatsoever, wherein the person or persons for whose use, benefit, or on whose account
such policy or policies shall be made, shall have no interest, or by way of gaming or
wagering.”2 3
§1. CONCEPT. One of the earliest definitions of insurable interest in life
insurance in the United States can be found in the case of W a r n o c k v .
D a v i s : ' 4
“It is not easy to define with precision what will in all cases constitute an insurable
interest, so as to take the contract out of the class of a wager policies. It may be stated
generally, however, to be such an interest, arising from the relation of the party obtaining the
insurance, either as creditor of or surety for the assured, or from ties of blood or marriage to
him, as will justify a reasonable expectation of advantage or benefit from the continuance of
his life. It is not necessary that the expectation of advantage or benefit should always be
capable of pecuniary estimation; for a parent has an insurable interest in the life of his child,
and a child in the life of his parent, a husband in the life of his wife, and a wife in the life of her
husband. The natural affection in cases of this kind is considered as powerful — as operating
’Janice E. Greiber and William T. Bead lea, Law and the Life Insurance
Contract, 1968 Ed., p. 121, hereinafter referred to as “Greiber and Beadles.”
2
Greiber and Beadles, p. 121.
3
104 U.S. 775 (1882).
77
7H KSSKNTIAI-H OF INSURANCE LAW
(Republic Act. No. 10607 with Notes on Pre-Need Act)
more efficaciously to protect, the life of the insured than any other consideration. Hut in all
cases there must be a reasonable ground, founded upon the relations of the parties to each
other, either pecuniary or of blood or affinity, to expect some benefit or advantage from the
continuance of the life of the assured. Otherwise, the contract is a mere wager, by which the
party taking the policy directly interested in the early death of the assured. Such policies
have the tendency to create a desire for the event. They are, therefore, independently of any
statute on the subject, condemned, as being against public policy.”
a. Verily, in all cases where the law provides for insurable interest in life,
there is reasonable ground to expect that one who takes out insurance over the life of
another stands to benefit from its continuation and is not interested in his early death.
However, it is important to point out that the Insurance Code now provides for an
exclusive list in Section 10 of persons who may have insurable interest in the life of
another.
b. With respect to property insurance, the basic concept of insurable
interest is provided for in Section 13 of the Insurance Code which states that “Every
interest in property, whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify the
insured, is an insurable interest.” Otherwise stated, an insurable interest in property is
a pecuniary reason for desiring the continued existence of property, arising out of
right or a liability, connected with property, which the law can perceive.4
c. Public policy requires an insurable interest to prevent wagering under the
guise of insurance, and to reduce to a safe level the temptation to destroy the insured
property. Lack of insurable interest is a defense created for the benefit of society, not
for the benefit of any insurance company.5
d. The Supreme Court explained in L a l i c a n v . T h e
I n s u l a r L i f e A s s u r a n c e C o m p a n y
L t d . 6 that “an insurable interest is one of the most basic and essential
requirements in an insurance contract. In general, an insurable interest is that interest
which a person is deemed to have in the subject matter insured, where he has a
relation or connection with or concern in it, such that the person will derive pecuniary
benefit or advantage from the preservation of
4
Hugh J. Fegan, Insurance from Ballantine's Problems
inIbid.,
6 Law,p.p.569.
569.
6
G.R. No. 183526, August 25, 2009.
OHAPTKK 3 n
IN8U K A B L K I N T B K K 8 T
the subject matter insured and will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening of the event insured
against. The existence of an insurable interest gives a person the legal right to
insure the subject matter of the policy of insurance.”
e. Independent of the foregoing, the presence of insurable interest

likewise has the following purposes: (1) The presence of insurable interest
reduces moral hazard — dishonesty or character defects in the individual that
increase the chance of loss; and (2) Insurable interest likewise helps in
measuring the loss of the insured.
f. If the insured has no insurable interest over the life or property he
insures, the insurance contract is considered unenforceable. 7 If it can be
established that the contract is really a wager, the same can be considered
void for being against public policy. Thus, Section 25 of the Insurance Code
provides:
SEC. 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.
§2. INSURABLE INTEREST IN LIFE INSURANCE. It was explained

that “[i]t was first thought that human life was so sacred that it could not be
the object of a contract, but this belief soon disappeared to give place to the
rule that human life may be insured under conditions sufficient to neutralize
the temptation of the beneficiary to destroy the life of the insured. This
safeguard can be found in the rule which requires that a person who insures
the life of another must be interested in the continuance of the life of the
insured, at least at the time the insurance is effected for the purpose of
frustrating any evil intent of hastening the fatal event by which he would
derive an economic benefit.”8
§2.01. INSURABLE INTEREST UNDER THE CODE. The persons in
whose life one may have insurable interest are enumerated in Section 10 of
the Insurance Code which provides:
1
See Section 18,1.C.
8
Francisco, p. 14.
80 ESSENTIALS OE INSI EtANv '.v ,A\^
(Republic Act No. LOtfOT wtth N>««“/*? or* Act)
SEC. 10. Every person tias an msurable 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.
§2.02. CLASSES OF INSURABLE INTEREST IN LIFE INSURANCE.

Insurable interest may be (1) insurable interest in the insured’s own life, or (2)
insurable interest in the life of another person. Where the insurance is on the life of
another, the owner of the insurance policy is different from the "subject” of the
insurance — meaning the person whose life is insured. The owner may, in turn, be
the beneficiary or the beneficiary may he another person. With respect to insurable
interest in the life of another person, the same may be based on (1) relationship by
blood; (2) business relationship; or (3) other pecuniary interest.
a. Blood Relationship. Blood relationship is limited to insurable interest over
the life of a spouse or of one’s children. In these cases, mere blood relationship is
sufficient; as explained in one case, “close ties of blood or affinity,... with the
natural affection and moral forces which generally prompt one such to serve and
protect the other, rendering it highly improbable that one for money would take the
life of the other, afford a surer guaranty to society against the dangers of betting on
the duration of human life, than any mere pecuniary interest in the life insured,
often more imaginary than real.”9
b. When Mere Blood Relationship is Not Sufficient. Blood relationship

alone would not suffice in other cases. Thus, one has no insurable interest over the
life of his parents or his brothers and sisters by the mere fact that they are related to
him by blood
9
Croswell v. Connecticut Indemnity, Ass’n. (1897)1 S. C. 103, 114,2 8 S. E. 200.
CHAPTER 3 81
INSURABLE INTEREST
alone. If the person whose life is sought to be insured is not a spouse or a

child, one can have insurable interest only on the life of a relative if he or she
falls under any other paragraph of Section 10 of the Insurance Code. For
example, a person has insurable interest over the life of his parents because
his parents are legally obligated under the Family Code to give support to
their children. The basis of insurable interest is not blood relationship but
pecuniary interest.
c. Education or Support. One has insurable interest on the life of
any person on whom he depends wholly or in part for education or support.
The law does not require that the person on whom one depends wholly or in
part for education or support is legally obligated to do so. For example, if Mr.
A, a mere family friend, without being obligated to do so, pays for the
education or is supporting Mr. B, the latter may take out a life insurance on
the life of Mr. A. It should be recalled that Article 195 of the Family Code
(E.O. No. 209):
ART. 105. Subject to the provisions of the
succeeding articles, the following are obliged to
support each other to the whole extent set forth in
the preceding article:
(1) The spouses;
(2) Legitimate ascendants and descendants;
(3) Parents and their legitimate children and
the legitimate and illegitimate children of the latter;
(4) Parents and their illegitimate children and
the legitimate and illegitimate children of the latter;
and
(5) Legitimate brothers and sisters, whether
of full or half-blood. (291a)
(1) The above-enumerated persons are entitled to support can
insure the life of the persons who are legally obligated to support
them. As noted earlier, although the persons enumerated are blood
relatives, blood relationship is not the basis of the insurable interest
but the fact that the persons are legally obligated to support the other.
Insurable interest is therefore present if support is received as a mere
fact or as a matter of right. There is insurable interest in the life of one
who, in fact, gives support even without any legal obligation or in
cases when one is legally obligated to support
'2 ISSENTIALS OF INSURANCE UVW
Ja^: N,\ '. AfO~ wni Xo;<^ on Pro-Neod Act)
another although ore âme is not being given in the meantime. In me miter
case, even ii there is no present reliance for support on me person whose life is
being insured, there is at least pecuniary interest in the life of the persons
identified in Article iOo o: me Family Code.
d. Pecuniary Interest, Even* person has insurable interest in the life or
health of any person in whom he has a pecuniary interest. It is enough if there is a
reasonable certainty that the continuation of the life will be of direct, material
advantage to the insured, but if such benefit would only be indirect or uncertain the
requirement as to insurable interest is not satisfied. 10 It was further observed that “the
modern tendency of the courts is to broaden the conception of an insurable interest,
and it is now generally accepted that a reasonable expectancy" of pecuniary" benefit
arising from the continuance of life of an individual with whom one has business
dealings, or a reasonable expectancy of pecuniary harm because of the death of such
an individual, furnishes an insurable interest.” 11 In other words, the insurable interest
is based “on a reasonable expectation of financial benefit from the continuation of the
life of the insured or a reasonable expectation of expenses upon the death of the
insured.”12
(1) Accordingly, a company has an insurable interest in the life of its
officers.13 One has insurable interest over the life of his partner or his
employee. In both cases, pecuniary benefit is derived by the person who
will take out an insurance policy with the continued preservation of the life
of the partner or employee. In the case of a partner, it is reasonable to
conclude that the continuance of partnership and the life of a partner
furnished a reasonable expectation of advantage to the other partners.
Similarly, the loss of the life of the employee, officer or director will result
in economic loss on the part of the employer or the corporation because he
will be deprived of the service of the employee. There reasonable
expectancy of financial loss from the death of an officer or director or
employee or partner.
,0
Harvard Law Review, Vol. 23, No. 1 (1909), pp. 57-59.
"Columbia Law Review, Vol. 22, No. 2 (Feb. 1922), p. 170.
,2
Robert I. Mehr and Emerson Cammack, Principle of Insurance, 1980 Ed., p. 97,
hereinafter cited as “Mehr and Cammack, p. 97.”
13
U.S. v. Supplee-Biddle Hardware Co., 265 U.S. 189, 44 S.Ct. 546 (1924).
CHAPTER 3 83
INSURABLE INTEREST
(2) Under the same principle, a surety has insurable in the life of
the principal and a close corporation has insurable interest in the lives of its
stockholders (who may directly manage the close corporation).14
e. Debtor’s Life. One can insure the life 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. In other words, a
creditor shall have insurable interest over the life of the debtor who may be
obligated to deliver money or property or to provide some service. However, the
debtor cannot insure the life of the creditor because he will not be damnified by the
loss of the creditor’s life.
(1) The view has been previously expressed that if the creditor
insures the life of the debtor and the creditor pays the premium, it is only the
creditor who is allowed to recover under the policy. The debtor has no right
to recover from the insurer as there is no privity between them. “To allow
the representatives of the debtor to claim from the creditor the fund minus
the expenses (and the debt, if that is yet unpaid) is to put all the chances of
loss upon the creditor. If his debtor dies soon, the creditor reaps no benefit if
the premiums and their accumulated interest consume the fund, as they must
more often than not, his security for the debt is gone.”15
(2) It was opined however that a distinction is drawn in cases of
creditors’ policies between those effected by the creditor absolutely for his
own protection and benefit, and those under an agreement of the parties for
collateral security, the debtor paying the premiums. Where the relation of
debtor and creditor subsists, and the true construction of the instruments and
the evidence of the real nature of the transaction shows that the policy of
insurance was effected by the creditor as a security or indemnity, if the
debtor directly or indirectly provides money to defray the expenses of that
security, he is on a principle of natural equity, entitled to have the security
delivered up to him when he pays his debt, which it was directly or
indirectly
14
Mehr and Cammack, p. 97.
15
Erskine Hazard Dickson, Insurable Interest in Life, The
American Law and Register Review, Vol. 44, No. 3, (March 1896) p.
163, herein after cited as ‘'Dickson, p. 163 ”
at his expense effected to secure.16 This is especially true it* the creditor is
constituted as an agent of the debtor for the purpose of securing the policy.
(3) It should be noted, however, that Section 3 of the Insurance
Code now provides that “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.” This contemplates a
situation where the person who took out the policy predeceased the insured.
(4) If the creditor insures the life of a debtor and the debt has been
paid when the debtor died, the creditor can no longer recover. It was opined
that this type of insurance is not like an ordinary life insurance but one that is
a contract of indemnity. Hence, the rule that applies to property insurance
applies, that is, the insurable interest must exist at the time of the loss. The
creditor cannot recover because his interest does not exist at the time of the
loss.17
f. One Whose Life Any Estate Depends. There is insurable interest on
the life of any person upon whose life any estate or interest vested in him depends.
Dean Francisco gave the following examples: (1) “A person who will become the
owner of a property as soon as another attains a certain age, may, (by) means of
insurance, assure an indemnity for loss to be suffered by him in case that person
dies before attaining such age; (2) A may insure the life of B in order to compensate
himself for the loss which he will suffer through the latter’s death if A receives as a
legacy the usufruct of a property that ownership of which is vested in B, on the
condition that at the death of the latter, the legacy is extinguished, the ownership
and usufruct of the property passing to C.”18
g. Mortgage Redemption Insurance. Debtors may be insured into a group
life insurance known as “mortgage redemption insurance.” A “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
Hi
Dickson, p. 162.
17
Guevarra, p. 12.
18
Francisco, p. 16.
CHAPTER 3 85
INSURABLE INTEREST
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. In a similar vein,
ample protection is given to the mortgagor under such a concept so that in the event of death,
the mortgage obligation will be extinguished by the application of the insurance proceeds to
the mortgage indebtedness. Consequently, where the mortgagor pays the insurance premium
under the group insurance policy, making the loss payable to the mortgagee, the insurance is
on the mortgagor’s interest, and the mortgagor continues to be a party to the contract. In this
type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such
loss-payable clause does not make the mortgagee a party to the contract.19
h. If the insurer that issued the mortgage redemption insurance files a case
against the beneficiaries to declare null and void on the ground of fraud or material
concealment, a third party complaint can be filed by the beneficiaries (defendants) against
the mortgagee.20
§2.03. CONSENT OF THE INSURED. One of the issues raised regarding
insurable interest in life insurance is with respect to the consent of the insured. The
question is whether or not the consent of the person whose life is insured is necessary for
the purpose of securing a life insurance.
a. The first view is supported by American legal writers to the effect that
consent must be secured, otherwise, the insurance is void for being against public policy.
Under this view, “even though one person has insurable interest in the life of another, as a
precautionary measure against foul play, the prospective buyer (of the policy) is not
allowed to insure that person’s life without the subject’s consent.” 21 Thus, Dean Perez,
citing Couch, is of the view that consent of the insured is indispensable. 22 He explained that
the person who will apply for an insurance policy must not only have
19
Great Pacific Life Assurance Corp. v. Court of Appeals, G.R. No. 113899, October 13,
1999; Paramount Life & General Insurance Corporation v. Castro, G.R. No. 195728, April 19,
2016.
20
Paramount Life & General Insurance Corporation v. Castro, ibid.
21
“Mehr and Cammack, p. 97.”
22
Perez, Insurance Code and Insolvency Law, 1999 Ed., p. 36.
insurable interest in the life of the subject but he must also get the consent
of the subject - the person whose life is insured “otherwise the contract is
not valid unless subsequently ratified by the insured.” 23 Prof. Vance is of
the same view stating that the consent of the subject is a strong evidence of
good faith on the part of the person who is procuring the insurance policy
that affords a needed guaranty to society; 24 * the view of Prof. Vance is
cited and supported by Professor Agbayani. 26 On the other hand, the view
that consent is not indispensable is supported by Prof. De Leon who
explained that the insurance contract is valid so long as it could be
established that the assured has a legal insurable interest. He observed that
“the presence of insurable interest takes the contract out of the class of
forbidden wagers.”26
b. This author agrees with the view that consent is not necessary.
In the first place, Prof. Vance observed that “it seems not to be yet clearly
settled whether the consent of the insured is necessary to the validity of the
policy procured by another, especially in view of the undoubtedly
extensive practice of insurer now to grant insurance in large amounts on
the lives of persons who have no knowledge of the contract and have given
no consent to it.”27 Secondly, the concern of Prof. Vance relates to large
amounts of insurance taken by tradesmen even on the King and Queen and
prominent financiers. These are the types of insurance policies that
according to him are contrary to public policy and void on clear principle
and by weight of authority;28 these are the insurance that are not limited to
the amount of pecuniary interest or there is excess insurance. 29 Third, there
is a set of persons identified in Section 10 who may not be capable of
giving consent. Thus, under Section 10(a), a parent has insurable interest
in the life of a child even if the child is a minor. The minor child cannot
give his or her consent except through the parents who are his or her
parents, as guardian. In fact, it has been acknowledged that policies on
infants are an exception. 30 Fourth, the insurance secured by one spouse on
the life
23
Perez, ibid.
24
Vance, pp. 172-173.
26
2 Agbayani 34.
26
Hector S. De Leon, The Insurance Code of the Philippines, Annotated,
1998 Ed., p. 97.
27
Vance, p. 171.
28
Ibid.
29
Vance, p. 172.
30
Perez, p. 36; Vance, p. 171.
CHAPTER 3 87
INSURABLE INTEREST
of another is also a known exception. 31 Thus, outside of these last two cases -
children and spouses - the insurable interest is already pecuniary and excess
insurance can already be determined. In other words, the invitation to mischief
is minimal if the insurable interest is limited to the pecuniary interest. Lastly, as
it was observed by one legal writer, “the law is seeking merely to restrict the
eligible beneficiaries to a roughly selected class of persons who, by their
general relations to the insured (cestui que vie), will render the harmful
tendencies of such contracts negligible. ,,32 The presence of real insurable interest
in the persons named in Section 10 is an assurance that these persons are
interested in the preservation of the life of the person whose life is insured. It
was further observed that consent is not the only way to prevent the danger that
is sought to be avoided:
“It cannot be doubted that the law would be tolerating a very substantial evil if
“the whole world of the unscrupulous” (to use Mr. Justice Holmes’ phrase)” were free to
bet upon what life they choose. Some safeguard is necessary in order to reduce this evil to
a negligible minimum. The transactions above-mentioned (sale of an expectancy, and
promise to devise property in consideration of support during the promisor’s life) afford
one instance of a sufficient safeguard, the consent of the c e s t u i q u e
v i e . So also, A’s consent that B may become the beneficiary in a policy upon A’s
life reduces to a negligible minimum the tendency of such a contract to bring about
murder. The instinct of self-preservation is one of the most powerful of psychological
forces. If, then, the c e s t u i q u e v i e is s u i j u r i s and is
intelligently cognizant of the nature of the transaction and of the possibility that the
beneficiary may profit by his death, the consent of the c e s t u i q u e v i e
affords sufficient assurance that the beneficiary will be a person who may safely be
entrusted to resist the temptation to murder.
The law cannot make a better choice of beneficiary than can the c e s t u i
q u e v i e . Moreover, such a d e l e c t u s p e r s o n a e
makes “a roughly selected class of persons who by their general relations with the person
whose life is insured, are less likely than criminals at large to attempt to compass his
death.” It is obvious, however, that this reasoning (from the instinct of self-preservation)
will be inapplicable where through infancy, insanity, duress, deception or pure ignorance,
the consent of the c e s t u i q u e v i e is not an intelligent consent or is
not a real consent; and hence these abnormal cases must be dealt with on a different
footing.
The consent of the c e s t u i q u e v i e is not the only means by which
the temptation to murder may be counteracted. Where the beneficiary’s gain
M
from the policy is substantially equalled by a corresponding loss produced by the death
of the c e s t u i q u e v i e , the actual tendency to produce homicide
is reduced to a negligible minimum. So, too, where from any other cause the
beneficiary has an unusually strong motive for desiring the preservation of the life
insured. Thus, the second objection to life insurance contracts is met when either (a)
the c e s t u i q u e v i e gives his intelligent juristic consent to the
naming of the beneficiary; or (b) the beneficiary has a sufficiently powerful motive,
pecuniary or otherwise, for desiring that the death of the c e s t u i should not
occur.”33
c. In the case of insurable interest on any person under a legal obligation

for the payment of money, or respecting property or services, of which death or illness
might delay or prevent the performance, the insurable interest is limited up to the
extent of the liability. It is in effect a security for the payment of obligation and the
obligee who took the policy cannot recover more that what is owed to him. With such
limitations, it is believed that it is unreasonable to require the creditor to secure the
consent of the debtor before securing the policy for his own protection, with the
creditor paying the premium. Of course, in practice, consent is usually present because
the creditor who intends to secure a policy will make it a condition in the loan or any
pertinent agreement that the debtor gives his or her consent. In the alternative, the
creditor will require the debtor to secure an insurance policy and either assign the same
to the creditor or to make the creditor the beneficiary thereof.
PROBLEM:
1. On January 4, 1983, Mr. P joined Alpha Corporation (AT .PHA) as president of the
company. ALPHA took out a life insurance policy on the life of Mr. P with
Mutual Insurance Company, designating ALPHA as the beneficiary. ALPHA
also carried a fire insurance with Beta Insurance Company on a house owned
by it but temporarily occupied by Mr. P, again with ALPHA as the beneficiary.
On September 1, 1983, Mr. P resigned from ALPHA and purchased the
company house he had been occupying. A few days later, fire occurred
resulting in the death of Mr. P and the destruction of the house.
a. What are the rights of ALPHA against Mutual Life Insurance Company
on the life insurance policy?
b. What are the rights of ALPHA against Beta Insurance Company on the
fire insurance?
^Patterson, p. 409.
CHAPTER 3 89
INSURABLE INTEREST
A: (a) ALPHA can recover from Mutual Life Insurance Company

in the life insurance policy. ALPHA had insurable interest of
ALPHA in the life of the person insured, Mr. P, at the time the
insurance took effect. Mr. P was an employee of ALPHA at the time
the insurance policy was taken. The fact that he was no longer an
employee at the time of his death will not defeat the claim because
in life insurance, insurable interest need not exist thereafter or when
the loss occurred. ( S e c t i o n 1 9 , 1 . C . )
(b) ALPHA cannot recover from Beta Insurance Company. In property
insurance, insurable interest in the property insured must exist not
only when the insurance takes effect but also when the loss occurs.
In the given problem, the fire that destroyed the insured house took
place after ALPHA had sold the house to Mr. P. Hence, the
insurable interest of ALPHA in the property insured no longer
existed when the loss occurred. ( S e c t i o n
1 9 , 1 . C . )
2. On July 14, 2005, X, took an insurance policy on the life of his friend, Y.
In the insurance application, X misrepresented that Y was in perfect health
although he knew all the time that Y was afflicted with AIDS. On October 18,
2007, Y died in a motor accident. Shortly thereafter, X filed his insurance claim.
Should the insurer pay? Reasons.
A: No. The insurer need not pay the claim of X. The insurer does
not have any legal obligation to make such payment because X does not
have insurable interest over the life of Y. The friendship of X alone is not
the insurable interest contemplated in the life insurance. Insurable interest
in the life of others (other than one’s spouses or children) is merely to the
extent of the pecuniary interest in that life which interest is not shown in
the facts presented.
§3. INSURABLE INTEREST IN PROPERTY INSURANCE. The basic rule in

property insurance is provided for in Section 18 of the Insurance Code which provides
that “no contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.” Related
provisions are Sections 13, 14, 16, and 17 of the Insurance Code which provides:
SEC. 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.
SEC. 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.
SEC. 16. A mere contingent or expectant interest
in anything, not founded on an actual right to the
thing, nor upon any valid contract for it, is not
insurable.
SEC. 17. The measure of an insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof.
§3.01. TEST. Based on Section 13 of the Insurance Code, the presence of

insurable interest in property can be determined by asking if the insured has 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 said
insured.
a. Any title to, or interest in property, legal or equitable, will support a
contract of property insurance. Even where the insured has no title, the contract will
be upheld if his interest in or his relation to, the property is such that he will, or may
be benefited by its continued existence or suffer a direct pecuniary loss from its
destruction or injury.34
b. The test in determining insurable interest in property is whether one will
derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary
loss or damage from its destruction, termination, injury by the happening of the event
insured against.35
§3.02. KINDS OF INSURABLE INTEREST. Insurable interest in property
may be an (1) existing interest; (2) inchoate interest founded on an existing interest;
or (3) expectancy, coupled
34
Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers
Insurance Corporation, CA GR CV No. 03771, January 6, 1986, 1 CARA 1, 5.
35
Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers
Insurance Corporation, ibid., citing Harrison v. Fortlege, 161 U.S. 57.
CHAPTER 3 91
INSURABLE INTEREST
with an existing interest out of which the expectancy arises. All of these interests must
directly damnify the insured.36
a. Existing Interest. Existing interest includes the interest of an owner.
However, title or ownership is not essential. Thus, the following persons have insurable
interest over the property even if they are not the owners thereof: (1) lessee, (2)
depositary, (3) usufructuary, and (4) borrower i n c o m m o d a t u m .
b. Consistently, a possessor who is holding the property without
consideration with the consent of the owner has insurable interest in the property that he
is occupying. One has insurable interest if he is so situated with respect to the property
that he will suffer loss as the proximate result of its damage or destruction.37
c. In sale of goods, an unpaid seller retains insurable interest over the goods
even if ownership had already been transferred to the vendee upon delivery. An unpaid
seller has a vendor’s lien and therefore he will be damnified by the loss of the goods
even after delivery.38
d. On the other hand, the vendee or buyer has insurable interest over the
goods even while the goods are still in transit. In one case, the Supreme Court ruled that
the consignee of the goods in transit under an invoice containing the terms under “C & F
Manila,” has insurable interest in said goods. As vendee/consignee of the goods, he has
such existing interest therein as may be the subject of a valid insurance contract. His
interest over the goods is based on the perfected contract of sale. The perfected contract
of sale between him and the seller/shipper of the goods operates to vest in him an
equitable title even before delivery or before he performed the conditions of the sale.
The contract of shipment, whether under “F.O.B.,” “C.I.F,” or “C & F” is immaterial in
the determination of whether the vendee has insurable interest or not in the goods in
transit. The perfected contract of sale even without delivery vests the vendee an
equitable title, an existing interest over the goods sufficient to be the subject of
insurance.39
36
Section 13,1.C.
37
Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers Insurance
Corporation, supra.
38
Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839,
June 8, 2006; Carlos De Lizardi v. F.M. Yaptico, G.R. No. L-9954, March 22, 1915.
39
Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November
28, 1989.
e. Insurable interest in property exists in any of the following cases

because the person is so situated that he will suffer because of the loss due to a
peril insured against:40
(1) When the insured possesses a legal title to the property
insured, whether vested or contingent, defeasible or indefeasible;
(2) When he has equitable title of whatever character and in
whatever manner acquired;
(3) When he possesses a qualified property or possessory right
in the subject of the insurance;
(4) When he has mere possession or right of possession;
and
(5) When he has neither possession of the property nor any
other legal interest in it but stands in such relation with respect to it that
he may suffer from its destruction, loss of a legal right dependent upon
its continued existence.
f. An example of the last situation of a person who stands in such
relation with respect to it that he may suffer from its destruction is a building
contractor who insured the building that he constructed. 41 The Supreme Court
explained in Lampano v. Jose:42
“If Barretto (the building contractor) had an insurable interest in the house, he
could insure this interest for his sole protection. The policy was in the name of Barretto
alone. It was, therefore, a personal contract between him and the company and not a
contract which ran with the property. According to this personal contract the insurance
policy was payable to the insured without regard to the nature and extent of his interest
in the property, provided that he had, as we have said, an insurable interest at the time
of the making of the contract, and also at the time of the fire. Where different persons
have different interests in the same property, the insurance taken by one in his own right
and in his own interest does not in any way insure to the benefit of another. This is the
general rule prevailing in the United States and we find nothing different in this
jurisdiction. (19 Cyc., 883.)”
40
Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers Insurance
Corporation, supra.
41
Lampano v. Jose, G.R. No. L-9401, March 30, 1915.
42
Ibid.
INSURABLE INTEREST IN
PROPERTY INSURABLE INTEREST IN LIFE
1. As to extent: Limited up to the value of 1. Unlimited except if secured by the
the property. creditor.
43
Guevara, p. 13 citing Aetna Ins. Co. v. Miers, 5 Sneed (Tenn.) 139. 44Vance,
p. 19.
45
2 Agbayani 42-43.
2. At the time of the perfection of the
insurance contract.
. Time when it must exist: At the time of
perfection of the contract and at the
time of the loss.
. Need for legal basis: Expectation of benefit
must have legal basis.
3. Expectation of benefit need not have
legal basis or need not be based on
legally enforceable obligation.
. Beneficiary’s interest: Beneficiary must
have insurable interest. 4. Insurable interest is not necessary if the
insured took out the policy on his own
life and designated another.
Beneficiary must have insurable
interest if one took out an insurance
on the life of another.
PROBLEMS:
1. A piece of machinery was shipped to Mr. Pablo and on the basis of C & F, Manila.
Mr. Pablo insured said machinery with the Talaga Merchandise Insurance Corp.
(TAMIC) for loss or damage during the voyage. The vessel tank en route to
Manila. Mr. Pablo then filed a claim with TAMIC which was denied for the
reason that prior to delivery, Mr. Pablo had no insurable interest. Decide the
case.
A: TAMIC invalidly denied the claim. Mr. Pablo already had an
insurable interest on the piece of the machinery he bought even before
delivery. As a purchaser, he already had equitable interest on the property
delivery. ( F i l i p i n o M e r c h a n t s
I n s u r a n c e C o . v . C A ,
1 7 9 S C R A 6 3 8 )
2. A owns a house valued at P50,000.00 which he had insured against fire for
P100,000.00. He obtained a loan from B in the amount of P100,000.00 and to
secure payment thereof, he executed a deed of mortgage to the house but without
assigning the insurance policy to the latter. For A’s failure to pay the loan upon
maturity, B initiated foreclosure proceedings and in the ensuing public sale, the
house was sold to B as the highest bidder. Immediately, upon issuance of the
highest bidder’s certificate of sale in his favor, B insured the house against fire
for P120,000.00 with another insurance company. In order to redeem the house,
A borrowed P100,000.00 from C, and as a security device, he assigned the
insurance policy of P100,000.00 to C. However, before A could pay B his
obligation of P100,000.00 the
CHAPTER 3 }>5
INSURABLE INTEREST
house was accidentally and totally burned. Who can recover from the insurer?
A: Only B can recover under the policy. As the mortgagor and
highest bidder in the foreclosure sale, B has insurable interest on A’s house. However,
his interest is limited to P50,000.00, the value of A’s house. An insurance contract is a
contract of indemnity, hence, B cannot recover more that the value of the house.
A cannot recover. Although A has insurable interest over the house, he lost his interest
over the insurance policy when he assigned it to C. A had no more interest in his
insurance policy at the time of the loss.
C cannot recover because he has no insurable interest over A’s house. As an unsecured
creditor, C has no interest over the house. Besides, the assignment to him of A’s
insurance policy was not approved by the insurer.
3. A owns a house worth P500,000.00. He insured it against fire for P250,000.00 for the period
from January 1, 1977 to January 1, 1978. At the instance of B who is a judgment creditor of
A, the said house was levied upon by the sheriff and sold at public auction on March 15, 1977.
It was adjudicated to B for P150,000.00 at the auction sale. B insured the house against fire for
P150,000.00 for the period from March 16, 1977 to March 16, 1978. The house was
accidentally burned on April 1, 1977. May A recover under his policy? Give reasons.
A; A can recover under his policy. A had insurable interest over the house at the time the
policy was taken and at the time of the loss. A did not lose his insurable interest when
the house was sold at public auction. A, as judgment debtor, had 12 months time after
the sale to redeem the property. A’s insurable interest in the house remained during
such redemption period. Hence, A had insurable interest at the time of loss.
4. The defendant, Mariano R. Barretto, constructed a house for the other defendant, Placida A.
Jose, on land described as No. 72, plot F. Estate of Nagtahan, district of Sampaloc, city of
Manila, for the agreed price of P6,000.00. Subsequent thereto and on November 12, 1912,
Placida A. Jose sold the house to the plaintiff, Antonina Lampano, for the sum of P6,000.00.
On March 22, 1913, the house was destroyed by fire. At the time of the fire, Antonina
Lampano still owed Placida A. Jose the sum of P2,000.00, evidenced by a promissory note,
and Placida A. Jose still owed Mariano R. Barretto on the cost of the construction the sum of
P2,000.00. After the completion of the house and sometime before it was destroyed, Mariano
R. Barretto took out an insurance policy upon it in his own name, with the consent of Placida
A. Jose, for the sum of P4,000.00. After its destruction, he collected P3,600.00
from the insurance company, having paid in premiums the sum of P301.50. Has
Antonina Lampano any right to recover from Barretto any portion of the insurance
money?
A: No. That Barretto had an insurable interest in the house, we
think there can be no question. He constructed the building, furnishing all the
materials and supplies, and insured it after it had been completed. Having
insurable, he could insure this interest for his sole protection. The policy was
in the name of Barretto alone. It was, therefore, a personal contract between
him and the company and not a contract which ran with the property.
According to this personal contract the insurance policy was payable to the
insured without regard to the nature and extent of his interest in the property,
provided that he had, as we have said, an insurable interest at the time of the
making of the contract, and also at the time of the fire. Where different
persons have different interests in the same property, the insurance taken by
one in his own right and in his own interest does not in any way insure to the
benefit of another. In the case at bar, Barretto assumed the responsibility for
the insurance. The premiums, as we have indicated, were paid by him without
any agreement or right to recoup the amount paid therefor should no loss
result to the property. It would not, therefore, be in accordance with the law
and his contractual obligations to compel him to account for the insurance
money, or any par thereof, to the plaintiff, who assumed no risk whatever.
(Antonina Lampano v. PlacidaA. Jose, et al., No. L-9401, March 30,
1915; pars. 3 and 5, Art. 1923, Civil Code; Manresa, Vol. 12, pp. 692-
695; citing decision of the Supreme Court of Spain of December 30,
1896; 19 Cyc., 883)
5. Mr. AKY is an owner of a business establishment engaged in dyeing and bleaching
clothing materials. Mr. AKY insured his building which serves as his place of
business including the machineries and all its contents with X Insurance Corporation
such as textiles found therein. While the insurance policy was in force, fire destroyed
the building and all its contents. Included in the properties that were destroyed are
textiles which were delivered by the customers of Mr. AKY that were meant for
dyeing. X Insurance Corporation argues that Mr. AKY cannot recover with respect to
the textiles because he allegedly does not have insurable interest thereon. Is the
position of X Insurance Corporation tenable?
A: No, the position of X Insurance Corporation is not tenable.
AKY has insurable interest over the textiles. The destruction of the textiles
meant pecuniary loss to AKY because he was deprived of the
compensation he would certainly be entitled to for dyeing the same not to
mention their pecuniary liability for the labor and other expenses. They are
also liable to the owners
CHAPTER 3 97
INSURABLE INTEREST
of the textiles for their loss. Whenever there is a real interest to protect
and a person is so situated with respect to the subject of insurance that
its destruction would or might reasonably be expected to impair the
value of that interest, an insurance on such interest would not be a wager
within the statute, whether the interest was an ownership in or a right to
the possession of the property or simply an advantage of a pecuniary
character having a legal basis. ( A n g K a Y u , e t
a l . v . P h o e n i x A s s u r a n c e
C o . , L t d . , e t a l . , C A , G . R .
N o . 2 7 8 8 1 - R , S e p t e m b e r 2 8 ,
1 9 6 1 , 1 C A R 7 0 4 , 7 0 9 )
§3.04. INSURABLE INTEREST OF BAILEE. In a contract of

carriage, the carrier may be damnified by the loss of the goods because he
may be obligated to pay the shipper any damage to the property. Similarly, a
depositary is obligated to take care of the thing deposited and he can be made
liable if the thing deposited is damaged. Thus, both the carrier and the
depositary have insurable interest over the property subject to the provisions
of Section 15 of the Insurance Code which provides:
SEC. 15. A carrier or depository of any kind has an

insurable interest in a thing held by him as such, to the
extent of his liability but not to exceed the value thereof.
a. Included in insurance policies taken by depositaries are the so-

called bailee policies that are involved in transportation of goods. It was
observed that “any bailee or person in custody of property and responsible
for it may take insurance in his own name, and may recover not only a sum
equal to his own interest in the property by reason of any lien for advances or
charges, but the full amount named in the policy up to the value of the
property.”46 However, under Section 15, the amount that can be recovered is
limited to amount that is equivalent to the extent of liability of the carrier or
depositary; the value of the property is fixed as the upper limit of the amount
that can be recovered by the bailee or carrier and not necessarily the amount
that can be recovered.
b. In Lopez v. Del Rosario,47 the Supreme Court observed that “a
policy effected by bailee and covering by its terms his own
46
Guevara, p. 14 citing 26 C.J. 26, 27.
47
G.R. No. L-19189, November 27,1922 citing Snow v. Carr (1878), 61 Ala., 363;
32 Am. Rep., 3; Broussard vs. South Texas Rice Co., (1910), 103 Tex., 535; Ann. Cas.,
1913-A, 142, and note; Home Insurance Co. of New York v. Baltimore Warehouse Co.
(1876), 93 U.S., 527.
98 ESSENTIALS OP INSURANCE LAW
property and property held in trust; inures, in the event of a loss, equally and
proportionately to the benefit of all the owners of the property insured. Even if one
secured insurance covering his own goods and goods stored with him, and even if
the owner of the stored goods did not request or know of the insurance, and did not
ratify it before the payment of the loss, yet it has been held by a reputable court that
the warehouseman is liable to the owner of such stored goods for his share.” It
should be noted however that the Supreme Court observed in this case that by giving
a natural expression to the terms of the warehouse receipts, it could be concluded
that the warehouseman acted as the agent of the owners-depositor. The agency can
be deduced from the warehouse receipts, the insurance policies, and the
circumstances surrounding the transaction. Thus, the situation in L o p e z v .
D e l R o s a r i o ™ is not one of those contemplated under Section 15
of the Insurance Code because insurance under this provision is an insured to be
taken by the carrier or the depositary in their own behalf.
§3.05. INSURABLE INTEREST OF THE MORTGAGOR AND
MORTGAGEE. Both the mortgagor and the mortgagee have insurable interest over
the mortgaged property. The mortgagor is the owner of the mortgaged property,
hence, he has an existing interest that may be the subject of an insurance. Section 8
governs situations when the mortgagor takes an insurance on the basis of his own
insurable interest:
SEC. 8. Unless the policy otherwise provides,

where a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to
the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the
interest of the mortgagor, who does not cease to be a
party to the original contract, and any act of his, prior
to the loss, which would otherwise avoid the insurance,
will have the same effect, although the property is in
the hands of the mortgagee, but any act which, under
the contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee therein
named, with the same effect as if it had been performed
by the mortgagor.
™Supra.
CHAPTER 3 99
INSURABLE INTEREST
a. As to a mortgaged property, the mortgagor and the mortgagee have

each an independent insurable interest therein and both interests may be covered
by one policy, or each may take out a separate policy covering his interest, either
at the same or at separate times. The mortgagor’s insurable interest covers the full
value of the mortgaged property, even though the mortgage debt is equivalent to
the full value of the property. The mortgagee’s insurable interest is to the extent
of the debt, since the property is relied upon as security thereof, and in insuring,
he is not insuring the property but his interest or lien thereon. His insurable
interest is p r i m a f a c i e the value mortgaged and extends only to
the amount of the debt, not exceeding the value of the mortgaged property. Thus,
separate insurances covering different insurable interests may be obtained by the
mortgagor and the mortgagee.49
b. The usual practice and contractual stipulation is for mortgagor to
take out insurance for the benefit of the mortgagee. The mortgagee may be made
the beneficial payee in several ways including the following: 50
(1) He may become the assignee of the policy with the consent of
the insurer; or
(2) A mere pledgee without such consent, or the original policy
may contain a mortgage clause; or
(3) A rider making the policy payable to the mortgagee “as his
interest may appear” may be attached; or
(4) A “standard mortgage clause,” containing a collateral
independent contract between the mortgagee and insurer, may be attached;
or
(5) 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 the mortgagee’s benefit, in which case the mortgagee acquires an
equitable lien upon the proceeds; or
(6) The policy may provide for a loss payable clause in favor of
the mortgagee.
49
Armando Geagonia v. Court of Appeals and Country Bankers Insurance
Corporation, No. 114427, February 6, 1995; Rizal Commercial Banking
Corporation, et al. v. Court of Appeals, et al., G.R. No. 128833, April 20, 1998.
Ârmando Geagonia v. Court of Appeals, ibid.
100 ESSENTIALS OF INSURANCE 1 AW
(Republic Act No. 10607 with Notes on Pro-Need Act)
c. In the policy obtained by the mortgagor with “loss payable

clause” in favor of the mortgagee as his interest may appear, the
mortgagee is only a beneficiary under the contract, and recognized as
such by the insurer but not made a party to the contract itself." 1 Hence,
any act of the mortgagor which defeats his right will also defeat the right
of the mortgagee. This kind of policy covers only such interest as the
mortgagee has at the issuance of the policy. 51 52 The typical “loss payable
clause” is also known as the “open mortgage clause.”
d. A “loss payable clause” should be distinguished from a “union
mortgage clause” where there is a transfer of an insurance from the
mortgagor to the mortgagee with the assent of insurer. The applicable
statute is Section 9 of the Insurance Code which provides:
SEC. 9. If an insurer assents to the transfer of an

insurance from a mortgagor to a mortgagee, and, at the
time of his assent, imposes further obligation on the
assignee, making a new contract with him, the act of the
mortgagor cannot affect the rights of said assignee.
e. The different variations of “loss payable clauses” were

explained by Prof. Vance in this wise:
“In the first class are those that merely designate the mortgagee as payee, to the
extent of his interest, of such sum as may become payable under the provisions and
conditions of the policy. Under such clause, the mortgagee is made merely a beneficiary
under the contract, recognized as such by the insurer, but not made a party to the contract
itself. Any default on the part of the mortgagor, which by the terms of the policy defeat his
rights, will also defeat all rights of the mortgagee under the contract, even though the latter
may not have been in any fault.
In the second class are those clauses, known in their more usual forms, as “standard”
or “union” mortgage clauses, which create collateral independent contracts between the
insurer and mortgagee, and provide that the rights of the mortgagee shall not be defeated by
the acts or defaults of the mortgagor. Under clauses of this class, we have the general rule
that the mortgagee’s rights remain unaffected by any default or breach of condition by the
mortgagor to which the mortgagee is not a party.”53
51
Great Pacific Life Assurance Corp. v. Court of Appeals and Medarda V.
Leuterio, G.R. No. 113899, October 13, 1999.
62
Ibid.
53
Vance, pp. 654-655.
CHAPTER 3 101
INSURABLE INTEREST
§3.06. INSURABLE INTEREST OF MORTGAGEE. The rule is that

a mortgagee may, independently of the mortgagor, insure the mortgaged
property in his own name and for his own interest. In such case, the
mortgagee is entitled to the insurance proceeds in case of loss, but he is not
allowed to retain his claim against the mortgagor. The claim is passed by
subrogation to the insurer to the extent of the money paid. Or stated in
another way, the mortgagee may insure his interest in the property
independently of the mortgagor and in that event, upon the destruction of the
property the insurance money paid to the mortgagee will not inure to the
benefit of the mortgagor, and the amount due under the mortgage debt
remains unchanged. The mortgagee, however, 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.54
a. It is true that there are authorities which hold that if a mortgagee
procures insurance on his separate interest at his own expense and for his
own benefit, without any agreement with the mortgagor with respect thereto,
the mortgagor has no interest in the policy, and is not entitled to have the
insurance proceeds applied in reduction of the mortgage debt, and that,
furthermore, the mortgagee “has still a right to recover his whole debt of the
mortgagor.” But these authorities merely represent the minority view. The
general rule and the weight of authority is, that the insurer is thereupon
subrogated to the rights of the mortgagee under the mortgage. In this respect,
the insurer is akin to a surety.55
b. Thus, in one case, an insurance contract was taken out by the
mortgagee upon his own interest and it was stipulated that the proceeds
would be paid to him only. The Supreme Court held that the mortgagee, in
case of loss, may only recover upon the policy to the extent of his credit at
the time of the loss. It was declared that the mortgagor had no right of action
against the mortgagee on the policy.56
^Cherie Palileo v. Beatriz Cosio, G.R. No. L-7667, November 28, 1955, citing
Vance, pp. 654, 772-773.
55
Cherie Palileo v. Beatriz Cosio, ibid., citing 19 R.C.L. p. 405; Jones on
Mortgages, Vol. I, pp. 671-672; King v. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins.
Co. v. Boyden 9 Allen, 123. See also Loomis v. Eagle Life & Health Ins. Co., 6 Gray,
396; Washington Mills Emery Mfg. Co. v. Weymouth & B. Mut. F. Ins. Co., 135 Mass.
506; Foster v. Equitable Mut. F. Ins. Co., 2 Gray 216. See case note, 3 Lawyers’ Report
Annotated, new series, p. 79.
^San Miguel Brewery v. Law Union and Rock Insurance Co., Ltd., G.R. No.
L-14300, January 19, 1920, 40 Phil. 674.
c. On the other hand, a mortgagee may also procure a policy as a

contracting party in accordance with the terms of an agreement by which
the mortgagor is to pay the premiums upon such insurance. 57
d. The mortgagee may likewise procure an insurance policy for
his own benefit and make himself the beneficiary. The mortgagee will not
be required to account for the proceeds or to share the same to the
mortgagor. The contract between the mortgagee as insured and the
mortgagor is an independent contract.58
e. It has been noted, however, that although the mortgagee is
himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains a policy on
the assurance that it insures him, the policy is in fact in the form used to
insure a mortgagor with loss payable clause.59
§3.07. SUBROGATION. “Where a mortgagee insures the mortgaged property
at his own expense and for his own benefit and a loss occurs, the insurer on paying
the loss to the mortgagee is subrogated, to the extent of the amount thus paid, to the
means of enforcing payment of the original obligation by the debtor, the claim not
being extinguished until payment to him.”60
a. However, where the mortgagor obtains an insurance on the mortgaged
property or the insurance was obtained at his request and expense, the insurer is not
entitle to subrogation to the rights of the mortgagee on a payment of the loss in the
absence of a specific provision therefor in the policy.61
§3.08. FINANCIAL LEASE. Both the financial lessor and the lessee in a
financial lease have insurable interest over the property that is the object of the
lease.62 The financial lessor likewise has insurable interest over the property that is
the object of the financial lease. A financial lease is a “a mode of extending credit
through a non-cancelable lease contract under which the lessor purchases or
57
San Miguel Brewery v. Law Union and Rock Insurance, supra.
Ântonina Lampano v. Placida A. Jose, et al., G.R. No. L-9401, March 30,
1915, citing Shadgett v. Phillips and Crew Co, 56 L. R. A., 461.
Ârmando Geagonia v. Court of Appeals and Country Bankers Insurance
Corporation, supra.
^Francisco, p. 11; See also Chapter 8 for extensive discussion of subrogation.
61
Francisco, p. 12, citing Carpenter v. Providence Washington Ins., Co., 16
Pet. 495 and F. Ins. Co. v. Royal Ins. Co., 55 N.Y. 343, 14 AM. Rep. 271.
62
Vicente Ong T.im Sing, Jr. v. FEB Leasing, G.R. No. 168115, June 8, 2007.
CHAPTER 3 103
INSURABLE INTEREST
acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances,
business and office machines, and other movable or immovable property in consideration
of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at
least 70% of the purchase price or acquisition cost, including any incidental expenses and a
margin of profit over an obligatory period of not less than two years during which the
lessee has the right to hold and use the leased property with the right to expense the lease
rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and
preservation thereof, but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract.” 63 The financial lessor has
insurable interest because the legal title to the leased equipment is lodged in the financial
lessor. The financial lessee likewise has insurable interest because is entitled to the
possession and use of the leased equipment.
PROBLEMS:
1. On December 18 [2006], plaintiff obtained from defendant a loan in the sum of
P12,000.00 subject to the following conditions: (a) that plaintiff shall pay to
defendant an interest in the amount of P250.00 a month; (b) that defendant shall
deduct from the loan certain obligations of plaintiff to third persons amounting to
P4,550.00, plus the sum of P250.00 as interest for the first month; and (c) that after
making the above deductions, defendant shall deliver to plaintiff only the balance of
the loan of P12,000.00. Pursuant to their agreement, plaintiff paid to defendant as
interest on the loan a total of P2,250.00 corresponding to nine (9) months from
December 18 [2006], on the basis of P250.00 a month, which is more than the
maximum interest authorized by law. To secure the payment of the aforesaid loan,
defendant required plaintiff to sign a document known as “Conditional Sale of
Residential Building,” purporting to convey to defendant, with right to repurchase, a
two (2)-storey building of strong materials belonging to plaintiff. This document did
not express the true intention of the parties which was merely to place said property
as security for the payment of the loan. After the execution of the aforesaid
document, defendant insured the building against fire with the Associated Insurance
& Surety Co., Inc. for the sum of P15,000.00, the insurance policy having been
issued in the name of defendant. The building was partly destroyed by fire and, after
proper demand, defendant collected from the insurance company an indemnity of
P13,107.00. Plaintiff demanded from defendant that she be credited with the
necessary amount to pay her obligation out
“R-A. No. 5980 as amended by R.A. No. 8556, Section 3(d).

of the insurance proceeds but defendant refused to do so. When a case was
filed with the trial court, the “Conditioned Sale of Residential Building” was
declared an equitable mortgage and the obligation of the plaintiff was
considered fully compensated by the insurance amount and in ordering
defendant to refund to plaintiff the sum of Pi, 107.00 representing the
difference of the loan of P12,000.00 and the sum of P13,107.00 collected by
said defendant from the insurance company. Did the court correctly rule that
there was compensation?
A: No. The court erred in declaring that the proceeds of the
insurance taken out by the defendant on the property mortgaged inured
to the benefit of the plaintiff and in ordering said defendant to deliver to
the plaintiff the difference between her indebtedness and the amount of
insurance received by the defendant, for the correct solution should be
that the proceeds of the insurance should be delivered to the defendant
but that her claim against the plaintiff should be considered assigned to
the insurance company who is deemed subrogated to the rights of the
defendant to the extent of the money paid as indemnity. Hence, the
proceeds of the insurance amounting to P13,107.00 was properly
collected by defendant who is not required to account for it to the
plaintiff. The collection of said insurance proceeds shall not be deemed
to have compensated the obligation of the plaintiff to the defendant, but
bars the latter from claiming its payment from the former. (Cherie
Palileo v. Beatriz Cosio, G.R. No. L-7667, November 28, 1955) 2
2. L borrows P50,000.00 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 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.
A: The contentions of L are untenable. The obligation to pay the
loan was not extinguished when M received the proceeds of the insurance
company. The insurable interest of M as mortgagee is separate and
distinct from the interest of L. Thus, recovery under an insurance policy
separately taken by the mortgagee, M, will not affect the obligation of L.
CHAPTER 3 105
INSURABLE INTEREST
L’s argument that he has not entered into any loan or contract of
whatever nature with the insurance company will not excuse him from
liability. Upon payment of the insurer, the latter is subrogated to the
rights of the mortgagee. The right of subrogation is imposed by law. It is
not dependent upon nor does it grow out of any privity of contract, or
upon the insurer an assignee in equity. L’s consent to said subrogation is
not necessary. ( A r t i c l e 2 2 0 7 N C C ;
F i r e m a n ’ s F u n d I n s u r a n c e
C o . v . J a m i l l a & C o . , 7 0
S C R A 3 2 3 )
§4. TIME WHEN INSURABLE INTEREST MUST EXIST. The time during
which insurable interest must exist is different if the insurance is property insurance
and if the insurance is life or health insurance. The governing rule is expressed in
Section 19 of the Insurance Code:
SEC. 19. An interest in property insured must exist

when the insurance takes effect, and when the loss
occurs, but need not exist in the meantime; and interest
in the life or health of a person insured must exist when
the insurance takes effect, but need not exist thereafter
or when the loss occurs.
§4.01. PROPERTY INSURANCE. In property insurance, insurable interest in

the subject property must exist when the insurance takes effect and when the loss
occurs. It need not exist continuously from the time the insurance takes effect until the
time of the loss; the law provides that it need not exist in the meantime. In other
words, the insured can recover even if he lost his insurable interest after the perfection
of the insurance contract so long as he recovers the same before the loss occurs. For
example, Mr. A is the owner of a car which he insured with X Company. After the
issuance of the policy, Mr. A sold and delivered the car to Mr. B. Later, Mr. A re-
acquired the car from Mr. B. It was after the re-acquisition that the car was destroyed.
In this case, Mr. A can recover even if there is a period between the time of the taking
of the insurance and the time of the loss that Mr. A had no insurable interest over the
car. The insurance is deemed suspended during the intervening period in accordance
with Section 20 of the Insurance Code which provides:
SEC. 20. Except in the cases specified in the next

four sections, and in the cases of life, accident, and
health insurance, a change of interest in any part of a
thing insured unaccompanied by a corresponding
change in interest in the insurance, suspends the

insurance to an equivalent extent, until the interest in
the thing and the interest in the insurance are vested in
the same person.
a. Thus, in the given example, the insurance is suspended when

Mr. B became the owner and possessor of the car. The insurance is
automatically reinstated when Mr. A re-acquires the property.
SEC. 58. The mere transfer of a thing insured does

not transfer the policy, but suspends it until the same
person becomes the owner of both the policy and the
thing insured.
b. The policy may contain a provision that renders the policy void upon
the transfer of the property without the consent of the insurer. “If the policy contains
no provision against alienation, the transfer of the entire interest in the property
covered will not render the contract void, but simply inoperative during the period
of suspension, and subject to a revival upon the interest again vested in the person
named in the policy as insured. The fact that a transfer or sale of the property
insured is merely voidable will not aid the insured where it has not been set aside
prior to the loss.”64
c. Transfer or change of interest in the property with the consent of the
insurer will not suspend the policy. In fact, the policy itself may be written in such a
way that consent is given in advance by the insurer and the policy will inure to the
benefit of anyone to whom the property is transferred. Section 57 of the Insurance
Code provides:
SEC. 57. A policy may be so framed that it will

inure to the benefit of whomsoever, during the
continuance of the risk, may become the owner of the
interest insured.
d. The change of interest will not suspend the insurance in the cases
contemplated in Sections 21 to 24 of the Insurance Code which provide:
64
Joyce, The Law of Insurance, 2nd Ed., Vol. 4, p. 3960.
CHAPTER 3 107
INSURABLE INTEREST
SEC. 21. A change in 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.
SEC. 22. A change of interest in one or more
several distinct things, separately insured by one policy,
does not avoid the insurance as to the others.
SEC. 23. A change on interest, by will or
succession, on the death of the insured, does not avoid
an insurance; and his interest in the insurance passes to
the person taking his interest in the thing insured.
SEC. 24. A transfer of interest by one of several
partners, joint owners, or owners in common, who are
jointly insured, to the others, does not avoid an
insurance even though it has been agreed that the
insurance shall cease upon an alienation of the thing
insured.
e. Under Section 22, two or more properties are insured but they are
insured separately. Thus, if two buildings are insured in one policy but they are
insured separately, the change of interest in one building does not suspend the
insurance as to the other building.
f. In summary, a change in the interest in property insurance will not
suspend the insurance in the following cases:
(1) If there is a change in interest in the thing insured after the
occurrence of the loss;65
(2) If there is a change in interest in one or more of several things
that are separately insured (as to the things not transferred);66
(3) Change of interest through succession;67
(4) Transfer of interest from one partner to another partner of

interest over a property jointly insured;68 and
65
Section
21,1.C.
66
Section
67
Section
^Section
24,1.C.
(5) Transfer of interest from one joint or co-owner to another

of the jointly or co-owned property insured.69
g. It should also be noted that the policy is avoided, and not merely
suspended, if there is an express prohibition to alienate but the insured
breached the contractual prohibition.70
§4.02. LIFE INSURANCE. In life insurance, all that is required is
that the insured has insurable interest over the life that is insured at the time
the insurance takes effect. This rule is rooted in the fact that life insurance
is not a contract of indemnity. For example, a spouse can insure the life of
the other spouse. The spouse who took out the insurance can still recover if
at the time of the death of the spouse whose life was insured, their marriage
was already annulled.
a. Moreover, the rule that incipient interest is sufficient takes into
consideration the hardship upon the insured that will result if the contrary
rule will be implemented. “The premiums are fixed, and are calculated
upon the face of the policy at the time it is taken. If the cessation or
diminution of the beneficiary’s insurable interest prevents or reduces the
recovery, the insured will have paid for something which he does not get.” 71
It was also observed that an incipient interest is a sufficient safeguard
against promiscuous wagering on lives. The rule is aimed at the making of
such contracts; the purpose of the contract is to be looked at as of the time
when it was entered into.72
PROBLEMS:
1. The agent in Davao of the insured “A” was employed to ship “A’s” copra to
Manila and to communicate the shipment to the buyer “A” in Manila. The
same agent wrote the owner of the copra announcing the sailing of the ship,
but failed to state that the ship had run a ground, which fact he already knew
before announcing the sailing. “A,” the buyer of the copra, in all good faith,
took a marine insurance on the copra. The copra was badly damaged and was
a total loss. Can the insured recover on the policy?
A: No, the insured cannot recover on the policy. The subject matter
of the Marine Insurance was already lost at the time of the
69
Section 24,1.C.
70
2 Agbayani 49.
71
Patterson, p. 414 citing Dalby v. India and London Life Assurance Co. (1854) 15 C.
B. 365
72
Patterson, p. 414.
CHAPTER 3 109
INSURABLE INTEREST
perfection of the insurance contract. It is basic that an interest in the

property insured must exist when the insurance takes effect and when the
loss occurs.
2. In a civil suit, the court ordered Benjie to pay Nat P500,000.00. To execute the
judgment, the sheriff levied upon Benjie’s registered property (a parcel of land
and the building thereon), and sold the same at a public auction to Nat, the highest
bidder. The latter, on March 18, 1992, registered with the register of deeds the
certificate of sale issued to him by the sheriff. Meanwhile, on January 27, 1993,
Benjie insured with Garapal Insurance for Pi Million the same building that was
sold at public auction to Nat. Benjie failed to redeem the property by March 18,
1993. On March 19, 1993, a fire razed the building to the ground. Garapal
insurance refused to make good its obligation to Benjie under the insurance
contract. Is Garapal Insurance legally justified in refusing payment to Benjie?
A: Yes, Garapal Insurance is legally justified in refusing payment
of the insurance proceeds to Benjie. The basic rule in insurance is that the
insured must have insurable interest in the property insured not only at the
time of the perfection of the contract but also at the time of the loss. In this
case, Benjie no longer had insurable interest on the property at the time of
the loss because Benjie was no longer the owner of the property insured as
he failed to redeem the property within the redemption period of one year.
3. On February 3,1987, while Jose Palacio was in the hospital preparatory to a heart
surgery, he called his only son, Boy Palacio, and showed the latter a will naming
his son as sole heir to all the father’s estate including the family mansion in
Forbes Park. The following day, Boy Palacio took out a fire insurance policy on
the Forbes Park mansion. One week later, the father died. After his father’s death,
Boy Palacio moved his wife and children to the family mansion which he
inherited. On March 30, 1987, a fire occurred razing the mansion to the ground.
Boy Palacio then proceeded to collect on the fire insurance he took earlier on the
house. Should the insurance company pay? Reasons.
A: No, the insurance company can legally refuse to pay. The rule in
property insurance is that insurable interest must exist both at the time of
the risk insured against occurs. In the present case, Boy did not have
insurable interest on the house at the time he took the insurance. The fact
that Boy Palacio was the expected sole heir of his father’s estate does not
give the prospective heir any existing interest prior to the decedent.
§5. INSURABLE INTEREST OF BENEFICIARY IN PROPERTY

INSURANCE. The beneficiary must have insurable interest in the property that is the
object of the insurance. The
contract will be considered a wagering contract if the beneficiary will be allowed

to recover even if he has no insurable interest on the subject property.
§5.01. INSURABLE INTEREST OF BENEFICIARY IN LIFE
INSURANCE. If the insured takes out an insurance on his own life, he can
designate anybody whether or not the beneficiary has insurable interest over his
(insured) life. However, if the insured takes out an insurance on the life of another
designating himself or herself as beneficiary, insurable interest of the part of the
insured is necessary. Insurable interest on the part of the beneficiary is likewise
necessary if one takes out an insurance on the life of another and designates a third
person as the beneficiary.
PROBLEM:
1. Blanco took out a Pi Million life insurance policy naming his friend and creditor,
Montenegro as his beneficiary. When Blanco died, his outstanding loan to
Montenegro was only P50,000.00. Blanco’s executor contended that only P50,000.00
out of the insurance proceeds should be paid to Montenegro and the balance of
P950,000.00 should be paid to Blanco’s estate. Is the executor’s contention correct?
Reason out your answer.
A: No, the contention of the executor is not correct. A person
can insure his own life and he does, he can designate any person as
beneficiary even if the same person does not have insurable interest in his life.
In other words, the beneficiary in a life insurance policy in the life of the
insured need not have insurable interest if he was designated by the insured
himself. The beneficiary who is so designated is therefore entitled to the entire
proceeds of the insurance.
§6. ASSIGNEE IN LIFE INSURANCE. A life insurance policy can be

transferred even without the consent of or notice to the insurer. By express
provision of Section 184 of the Insurance Code, it is not necessary that the
transferee has insurable interest.
a. Since a policy of insurance upon life or health may pass by
transfer, will or succession to any person whether he has insurance interest or
not, the transferee may recover whatever the insured may have recovered under
the policy.73
73
Great Pacific Life Assurance Corp. v. Court of Appeals and Medarda V. Leuterio, G.R.
No. 113899, October 17, 1999.
CHAPTER 3 111
INSURABLE INTEREST
§6.01. ASSIGNEE IN PROPERTY INSURANCE. With respect to

property insurance, it is necessary that the transferee has insurable interest over
the thing insured. This is consistent with Section 18 of the Insurance Code which
provides that “no contract or policy of insurance on property shall be enforceable
except for the benefit of some person having an insurable interest in the property
insured.” The requirement of insurable interest can likewise be inferred from
Section 58 which provides that the mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person becomes the owner of
both the policy and the thing insured.
a. Accordingly, a clause in an agreement, providing for an automatic

assignment of the policy is void, if the assignee does not have any insurable
interest over the insured property. For example, a provision in a contract of lease
that provides that any fire insurance policy obtained by the lessee over the
merchandise inside the leased premises is deemed assigned or transferred to the
lessor is void for being contrary to law and public policy.74
b. If the transfer of the property insurance policy is made after the loss,
insurable interest on the part of the beneficiary is no longer necessary. In fact, the
policy cannot prohibit the transfer of the policy after the loss has occurred. The
Insurance Code provides:
SEC. 85. An agreement not to transfer the claim

of the insured against the insurer after the loss has
happened, is void if made before the loss except as
otherwise provided in the case of life insurance.
PROBLEM:
1. “NT owns a condominium unit presently insured with Holy Insurance
Company for Pi Million. “N” later sells the condominium unit to “0.”
Somehow, “O” fails to obtain the transfer of the insurance policy to his
name from “N.” Subsequently, a fire of unknown origin destroys
completely the condominium unit. Who may collect the insurance?
A Nobody can collect the insurance proceeds. While N had insurable
interest at the time the insurance policy was taken, he no longer
had insurable interest at time of the loss. On the other hand, “O” is
not a party to the insurance contract and there was no valid
assignment of the policy to “O.” * 18
74
Spouses Nilo Cha, et al. v. Court of Appeals, et al., G.R. No. 124520, August
18, 1997.
CHAPTER 4
PREMIUM
Insurance is a risk-spreading device. The insurer pools the premiums paid

by all its client. In theory, the pool of premiums answers for the losses of each
insured. Indeed, it is no exaggeration to say that premium is the e l i x i r
v i t a e of insurance business.1
§1. PREMIUM REQUIRED FOR POLICY TO BE BINDING. At the heart
of the statutory rules on premium is Section 77 of the Insurance Code which
provides:
SEC. 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.
a. When Payment Accrues. The law states that the insurer is entitled to
payment of the premium as soon as the thing insured is exposed to the peril
insured against. It should be noted however, that the contract of insurance is
generally unilateral. This means that the insurer does not have a reciprocal
obligation to pay the premium although the same payment will give rise to the
unilateral obligation of the insurer. Usually, the insured cannot be sued for non-
payment of the premium, the only effect of non-payment being
lr
Tibay v. Court of Appeals, G.R. No. 119655, May 24, 1996, 257 SCRA 126.
112
CHAPTER 4 113
PREMIUM
that the policy will not go into force. After the insurance comes into force after their
payment of premium, it is only the insurer that makes a legally enforceable promise.
(1) Payment may be made to the insurer himself or its agent.
Section 315 of the Insurance Code provides “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.” Payment to an agent having authority to receive or collect payment
is equivalent to payment to the principal himself; such payment is complete
when the money delivered is in the agent’s hands and is a discharge of the
indebtedness owing to the principal.2
(2) Industrial Life Policy.3 In the case of industrial life policy,
Section 235 of the Insurance Code provides that the same “shall not lapse for
non-payment of premium if such non-payment was due to the failure of the
company to send its representative or agent to the insured at the residence of
the insured or at some other place indicated by him for the purpose of
collecting such premium.” This rule shall not apply however when the
premium on the policy remains unpaid for a period of three (3) months or
twelve (12) weeks after the grace period has expired.4
§1.01. EFFECT OF NON-PAYMENT. The obligation of the insurer will not
become valid and binding if the first premium has not been paid. If the subsequent
premiums have not been paid, the policies issued will be deemed to have lapsed. Mere
delivery of a promissory note or a post-dated check is not sufficient unless the case is
covered by any of the exceptions. The importance of payment of premium was
explained in this wise:
“An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal
contract where the rights and obligations of the parties
2
Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, et al., G.R. No. 67835,
October 12, 1987; Santos B. Areola, et al. v. Court of Appeals, et al., G.R. No. 95641,
September 22, 1994.
:1
Section 235, I.C.
4
2nd par.. Section 235, I.C.
correlate and mutually correspond. The insurer assumes the risk of loss which an insured
might suffer in consideration of premium payments under a risk-distributing device. Such
assumption of risk is a component of a general scheme to distribute actual losses among a
group of persons, bearing similar risks, who make ratable contributions to a fund from
which the losses incurred due to exposures to the peril insured against are assured and
compensated.
xxx
A requirement imposed by way of State regulation upon insurers is the
maintenance of an adequate legal reserve in favor of those claiming under their policies.
The law generally mandates that insurance companies should retain an amount sufficient
to guarantee the security of its policyholders in the remote future, as well as the present,
and to cover any contingencies that may arise or may be fairly anticipated. The integrity
of this legal reserve is threatened and undermined if a credit arrangement on the payment
of premium were to be sanctioned. Calculations and estimations of liabilities under the
risk insured against are predicated on the basis of the payment of premiums, the vital
element that establishes the juridical relation between the insured and the insurer. By
legislative fiat, any agreement to the contrary notwithstanding, the payment of premium
is a condition precedent to, and essential for, the efficaciousness of the insurance
contract, except
(a) in case of life or industrial life insurance where a grace period applies; or (b) in case
of a written acknowledgment by the insurer of the receipt of premium, such as by a
deposit receipt, the written acknowledgment being conclusive evidence of the premium
payment so far as to make the policy binding.”5
(b) It was observed that the payment of the premium creates the
v i n c u l u m j u r i s between the parties. It was observed that “so
essential is the premium payment to the creation of the v i n c u l u m
j u r i s between the insured and the insurer that it would be doubtful to have that
payment validly excused even for a fortuitous event.” 6 It is believed however, that there
is already a v i n c u l u m j u r i s between the parties even if the premium
has not yet been paid. Considering that insurance contract is consensual, a juridical bond
already exists between the parties the moment the contract is perfected by mere consent.
However, it is the obligation of the insurer that is subject to the condition that the
premium is paid.
(c) If the insurer has no liability under the lapsed and inexistent policies, the
insurer has no right to demand, much less
6
Separate Opinion of Justice Vitug in UCPB General Insurance Co., Inc. v. Masagana
Telamart, Inc., G.R. No. 137172, April 4, 2001.
6
Ibid., citing Constantino v. Asia Life Insurance Co., 87 Phil. 248.
CHAPTER 4 115
PREMIUM
sue the insured for the unpaid premiums. To give the insurer the right to sue the
insured would be the height of injustice and unfair dealing. With the lapsing of the
policies through the nonpayment of premiums by the insured there is no more
insurance contract to speak of. The nonpayment of the premiums does not merely
suspend but puts an end to an insurance contract since the time of the payment is
peculiarly of the essence of the contract.7
a. Payment by Check. Delivery of a check after the loss is not effective. 8
Similarly, delivery of a post-dated check before the loss will not result in making the
policy binding if there is no credit agreement. In G a i s a n o v .
D e v e l o p m e n t I n s u r a n c e a n d S u r e t y
C o r p ,,9 the Supreme Court observed that the policy states that the insured’s
application for the insurance is subject to the payment of the premium. Hence, there
is no waiver of pre-payment, in full or in installment, of the premiums under the
policy.
b. However, there is an opinion to the effect that if the check is not post-
dated and covered by sufficient funds, delivery thereof will make the insurance
policy valid and binding even if the same is encashed after the loss. 10 The effect of
the subsequent encashment retroacts to the date of delivery to and acceptance by the
insurer.11
§1.02. WHEN BINDING EVEN IF PREMIUM IS UNPAID. Based on the
ruling in U C P B G e n e r a l I n s u r a n c e C o . ,
I n c . v . M a s a g a n a T e l a m a r t ,
I n c . , 1 2 there are five exceptions to the rule that the policy is not valid and
binding unless the premiums have been paid. These exceptions are as follows:
(1) When the grace period applies in case of life and industrial life policy;
(2) When there is an acknowledgement in the policy or receipt that the
premium has been paid;
7
Arturo P. Valenzuela, et al. v. The Hon. Court of Appeals, et al.t G.R. No.
83122, October 19, 1990.
8
Gaisano v. Development Insurance and Surety Corp., G.R. No. 190702,
February 27, 2017.
9
Ibid.
10
Justice Jose C. Vitug, Pandect of Commercial Law and Jurisprudence, 1st
Ed., p. 68.
n
Ibid.
12
G.R. No. 137172, April 4, 2001. Note that the Supreme Court reversed its
earlier Decision in the same case which sustained the insurer’s position.
(3) When there is an agreement that the premium shall be payable on

installment;
(4) When there is a credit extension; and

(5) When the equitable doctrine of estoppel applies.
a. Grace Period. A grace period is the period after the date of the premium
is due during which the premium can be paid with no interest charged and the policy
remaining in force.13 This exception presupposes that the insurance policy had already
been in force for a certain period. It cannot apply when the insurance policy is first
taken. The applicable provisions are Sections 233, 234, and 236, the pertinent
provisions of which state:
SEC. 233. In the case of individual life or

endowment insurance, the policy shall contain in
substance the following conditions:
(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 de
deducted from the amount payable under the policy in
settlement;
xxx
SEC. 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 policy-holders:
13
Harvey W. Rubin, Dictionary of Insurance Terms, 4th Ed., p. 207, hereinafter referred
to as “Rubin.”
CHAPTER 4 117
PREMIUM
(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;
xxx
SEC. 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;
xxx
b. Acknowledgment. The second exception is provided for in Section
79 of the Insurance Code which states:
SEC. 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.
Even if, in fact, the insured has not yet paid the premium, the insurer’s
obligation will already be in force if there is agreement. However, this does not
mean that the insured is excused from paying the premium that is due. The
insurer can still demand payment of the premium.
c. Installment. In M a k a t i T u s c a n y
C o n d o m i n i u m C o r p o r a t i o n v . T h e
C o u r t o f A p p e a l s , e t a l . , u the Supreme Court
allowed the insured to pay the premiums on installment basis and adopted the following
ratiocination of the Court of Appeals in making such ruling:
“While the import of Section 77 is that prepayment of premiums is strictly

required as a condition to the validity of the contract, We are not prepared to rule that
the request to make installment payments duly approved by the insurer, would prevent
the entire contract of insurance from going into effect despite payment and acceptance
of the initial premium or first installment. Section 78 of the Insurance Code in effect
allows waiver by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium as conclusive evidence
of payment so far as to make the policy binding despite the fact that premium is actually
unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid
even if premiums are not paid, but does not expressly prohibit an agreement granting
credit extension, and such an agreement is not contrary to morals, good customs, public
order or public policy. ( D e L e o n , t h e I n s u r a n c e
C o d e , a t p . 1 7 5 ) So is an understanding to allow insured to pay
premiums in installments not so proscribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have voluntarily accepted.
The reliance by petitioner on A r c e v . C a p i t a l
S u r e t y a n d I n s u r a n c e Co.14 15 is unavailing because the
facts therein are substantially different from those in the case at bar. In A r c e , no
payment was made by the insured at all despite the grace period given. In the case
before Us, petitioner paid the initial installment and thereafter made staggered payments
resulting in full payment of the 1982 and 1983 insurance policies. For the 1984 policy,
petitioner paid two (2) installments although it refused to pay the balance.”
d. Credit Extension. Credit extension is allowed under our present law and
jurisprudence. However, the policy must expressly and clearly provide for a credit
extension.16 Under Section 77 as amended by R.A. No. 10607, a 90-day credit extension
may be given under the broker and agency agreements with duly licensed
intermediaries. The requisites are as follows: (1) The credit extension must be provided
for under the broker and agency agreements; and
14
G.R. No. 95546, November 6, 1992; Government Service Insurance System v.
Prudential Guarantee and Assurance, Inc., G.R. Nos. 165585 and 176982, November 20, 2013
(the rule was applied to reinsurance premiums in this case).
15
G.R. No. L-28501, September 30, 1982.
16
Gasiano v. Development Insurance and Surety Corporation, G.R. No. 190702, February
27, 2017.
CHAPTER 4 119
PREMIUM
(2) The credit extension to a duly licensed intermediary should exceed 90 days
from date of issuance of the policy. The agreement between the duly licensed
intermediary and the insurer will benefit the insured who can also pay through the
intermediary within the credit extension.
(1) It should be noted that the credit extension, under R.A. No.
10607, is extended to the duly licensed intermediary which in turn can
benefit the insured. However, the Supreme Court observed in U C P B
G e n e r a l I n s u r a n c e C o . , I n c . v .
M a s a g a n a T e l a m a r t , I n c . 1 7 that by
the approval of the afore- quoted findings and conclusion of the Court of
Appeals, M a k a t i T u s c a n y
C o n d o m i n i u m C o r p o r a t i o n v .
T h e C o u r t o f A p p e a l s , e t a l . 1 8
has provided a fourth exception to Section 77, namely, that the insurer may
grant credit extension for the payment of the premium. This simply means
that if the insurer has granted the insured a credit term for the payment of
the premium and loss occurs before the expiration of the term, recovery on
the policy should be allowed even though the premium is paid after the loss
but within the credit term. The Supreme Court observed 19 that there is
nothing in Section 77 which prohibits the parties in an insurance contract to
provide a credit term within which to pay the premiums. That agreement is
not against the law, morals, good customs, public order, or public policy.
The agreement binds the parties. Article 1306 of the Civil Code provides
that 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.
(2) Old Rule. The old insurance law, Act No. 2427, as amended
provided that: “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. No
policy issued by an insurance company is valid and binding unless and until
the premium thereof has been paid.” Thus, under the old law, the insurance
policy would be valid and binding
17
G.R. No. 137172, April 4, 2001. Note that the Supreme Court reversed its
earlier Decision in the same case which sustained the insurer’s position.
18
G.R. No. 95546, November 6, 1992.
19
UCPB General Insurance Company, Inc. v. Masagana Telamart, Inc., supra.
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.20 The present law, Section 77 of the Insurance Code of
1978 has deleted the clause “unless there is clear agreement to grant the insured
credit extension of the premium due.” The implication of the ruling in
V e l a s c o v . A p o s t o l 21 is that credit extensions are no
longer allowed because the law-making body deliberately made the deletion
precisely to remove the exception.
(3) It is also important to note the well-reasoned opinion of Justice
Vitug to the effect that credit terms are not allowed under the present law. He
believes that there should at least be partial payment of premium to establish
the v i n c u l u m j u r i s between the insurer and the insured.
He explained in his Separate Opinion in U C P B v .
M a s a g a n a T e l a m a r t : 2 2
“This provision23 amended Section 72 of the then Insurance Act by deleting the
phrase, “unless there is a clear agreement to grant the insured credit extension of the
premium due,” and adding at the beginning of the second sentence the phrase,
“[notwithstanding any agreement to the contrary.” Commenting on the new provision, Dean
Hernando B. Perez states:
“Under the former rule, whenever the insured was granted credit extension of
the premium due or given a period of time to pay the premium on the policy issued,
such policy was binding although premiums had not been paid (Section 72,
Insurance Act; 6 Couch 2d. 67). This rule was changed when the present
provision eliminated the portion concerning credit agreement, and added the phrase
‘notwithstanding any agreement to the contrary’ which precludes the parties from
stipulating that the policy is valid even if premiums are not paid. Hence, under the
present law, the policy is not valid and binding unless and until the premium is paid
(Arce v. Capital Insurance & Surety Co., Inc., 117 SCRA 63). If the insurer
wants to favor the insured by making the policy binding notwithstanding the non-
payment of premium, a mere credit agreement would not be sufficient. The remedy
would be for the insurer to acknowledge in the policy that premiums were paid
although they were not, in which case the policy becomes binding because such
acknowledgment is a
20
Laura Velasco, et al. v. Hon. Sergio A.F. Apostol, et al., G.R. No. L-44588, May 9,
1989.
21
Ibid.
22
G.R. No. 13712, April 4, 2001.
23
Section 77,1.C.
CHAPTER 4 121
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conclusive evidence of payment of premium ( S e c t i o n 7 8 ) .

Thus, the Supreme Court took note that under the present law, Section 77 of the
Insurance Code of 1978 has deleted the clause ‘unless there is a clear agreement
to grant the insured credit extension of the premium due” ( V e l a s c o
v . A p o s t o l , 1 7 3 S C R A 2 2 8 )
By weight of authority, estoppel cannot create a contract of insurance, neither
can it be successfully invoked to create a primary liability, nor can it give validity to
what the law so proscribes as a matter of public policy. So essential is the premium
payment to the creation of the v i n c u l u m j u r i s between the
insured and the insurer that it would be doubtful to have that payment validly excused
even for a fortuitous event.
The law, however, neither requires for the establishment of the juridical tie, nor
measures the strength of such tie by, any specific amount of premium payment. A part
payment of the premium, if accepted by the insurer, can thus perfect the contract and
bring the parties into an obligatory relation. Such a payment puts the contract into full
binding force, not merely p r o t a n t o , thereby entitling and obligating the
parties by their agreement. Hence, in case of loss, full recovery less the unpaid portion
of the premium (by the operative act of legal compensation), can be had by the insured
and, correlatively, if no loss occurs the insurer can demand the payment of the unpaid
balance of the premium.
In the instant case, no juridical tie appears to have been established under any of
the situations hereinabove discussed.”
(4) It should likewise be noted that in a case decided under the old
Insurance Law when credit extensions were expressly allowed, the policy is
deemed automatically cancelled if the insured signed a promissory note stating
that the insured will pay the premium on or before a fixed date and the insured
failed to pay on the stipulated date.24
PROBLEM:
Stable Insurance Co. (SIC) and St. Peter Manufacturing Co. (SPMC) have had a
long-standing insurance relationship with each other; SPMC secures the comprehensive
fire insurance on its plant and facilities from SIC. The standing business practice
between them has been to allow SPMC a credit period of 90 days from the renewal of
the policy within which to pay the premium. Soon after the new policy was issued and
before premium payments could be made, a fire gutted the covered plant and facilities to
the ground. The day after the fire, SPMC issued a manager’s check to SIC for
24
Acme Shoe Rubber & Plastic Corporation v. The Court of Appeals, et al., G.R. No. L-
56718, January 17, 1985.
the fire insurance premium, for which it was issued a receipt; a week later SPMC issued
its notice of loss. SIC responded by issuing its own manager’s check for the amount of
the premiums SPMC had paid, and denied SPMC’s claim on the ground that under the
“cash and carry” principle governing fire insurance, no coverage existed at the time the
fire occurred because the insurance premium had not been paid. Is SPMC entitled to
recover for the loss from SIC? ( 2 0 1 3 B a r )
A: SPMC is entitled to recover the loss. The granting of a credit term
to pay the premiums is not prohibited by the Insurance Code. The problem
likewise indicates that the standing business practice of the insurer is to allow
SPMC to pay the premiums after 60 or 90 days. Hence, SPMC relied in good
faith that the insurer, Stable Insurance Company, will continue with such credit
extension. Hence, based on the facts, Stable Insurance is likewise estopped from
raising the defense that premium had not been paid.
e. Estoppel. Estoppel may bar an insurer from taking refuge under Section
77 if the insured relied in good faith on a practice that they have been following with
the insurer. Hence, estoppel then is the fifth exception to Section 77. For example, the
Supreme Court ruled that it would be unjust and inequitable if recovery on the policy
would not be permitted against insurer, which had consistently granted a 60-day to 90-
day credit term for the payment of premiums despite its full awareness of Section
1 1 . 2 5
f. Salary Deductions for Government Employees. Section 7826 provides that:
SEC. 78. Employees of the Republic of the Philip-

pines, including its political subdivisions and instru-
mentalities, and government-owned or -controlled cor-
porations, 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, not-
withstanding 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
25
Ibid., Gasiano v. Development Insurance and Surety 190702, Corporation, G.R. No.
February 27, 2017.
26
This is a new provision inserted by R.A. No. 10607.
CHAPTER 4 123
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employee and to remit such deductions to the insurer

concerned, and collect such reasonable fee for its ser-
vices.
Thus, under the above-quoted provision, the insurance policy is already

binding although the premium is, in effect, paid through installment by the
government employee. It should be emphasized, however, that the provision
requires that there is an agreement between the insurer and the government
employee authorizing salary deduction of the premium. This is consistent with the
general rule that no deductions can be made from the salary without the consent of
the employee.
g. Surety. Another exception can be cited but only with respect to a
suretyship under Section 179 of the Insurance Code which provides that the surety is
already liable even if there is nonpayment of premium if the obligee has already
accepted the bond.27 Section 179 of the Insurance Code provides that the surety is
entitled to payment of the premium as soon as the contract of suretyship or bond is
perfected and delivered to the obligor and no contract of suretyship or bonding shall
be valid and binding unless and until the premium therefor has been paid. However,
the exception is when the obligee has accepted the bond, in which case the bond
becomes valid and enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety.
h. Valid Tender of Payment. The insurance contract will continue to be
binding if the non-payment was due to the fault of the insurer. The act of the insurer
or his agent in refusing the tender of payment of a premium properly made, will
necessarily stop the insurer from claiming a forfeiture from non-payment.28
§2. HOW TO PREVENT LAPSE OF LIFE INSURANCE POLICY. Several
devices have been used to prevent the lapse of life insurance policy. These include:
(1) grace period; (2) automatic policy loan; (3) application of dividend; and (4)
restatement clause.
§2.01. AUTOMATIC POLICY LOAN AND CASH SURRENDER VALUE.
Cash surrender value “as applied to a life insurance policy, is the amount of money
the company agrees to pay
27
AFP General Ins. Corp. v. Molina, G.R. No. 151133, June 30, 2008.
28
Alicia S. Gonzales v. Asia Life Insurance Company, G.R. No. L-5188, October 29,
1952, citing Vance on Insurance, 2nd Ed., p. 294.
to the holder of the policy if he surrenders it and releases his claims upon it. The more
premiums the insured has paid the greater will be the surrender value; but the
surrender value is always a lesser sum than the total amount of premiums paid.” 29 The
cash value or cash surrender value is therefore an amount which the insurance
company holds in trust for the insured to be delivered to him upon demand. It is
therefore a liability of the company to the insured. When the company’s credit for
advances is paid out of the cash value or cash surrender value, that value and the
company’s liability is thereby diminished p r o t a n t o . Consequently,
the net assets of the insurance company increased correspondingly; for it is plain
mathematics that the decrease of a person’s liabilities means a corresponding increase
in his net assets.30
a. Section 233(f) of the Insurance Code provides that life or health
insurance policy must state the options to which the policy holder is entitled in the
event of default in a premium payment after three full annual premiums have been
paid. Such options shall consist of:
b. A cash surrender value payable upon surren-

der 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 (21/2%)
of the amount insured and any dividend additions
thereto; and
c. 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.31
d. Under paragraph (g) of the same provision, Section 233, the life
insurance policy must likewise contain a “provision that at anytime 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
29
The Manufacturers Life Insurance Co. v. Bibiano L. Meer, G.R. No. L-2910, June
29, 1951, citing Cyclopedia Law Dictionary, 3rd Ed., 1077.
30
The Manufacturers Life Insurance Co. v. Bibiano L. Meer, ibid.
31
Par. (f), Section 233,1.C.
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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 months
after the application therefor is made.”
e. Under an Automatic Premium Loan Clause, “if at the end of the grace
period the premium due has not been paid, a policy loan will automatically be made
from the policy’s cash value to pay the premium. The primary purpose is to prevent
unintentional lapse of the policy.”32 If the policy loan and accrued interest is not paid
in cash, the life insurer recovers the outstanding balance of the loan and accrued
interest either from the death benefit if the insured dies or the cash surrender value.
The insurer cannot file a case for the payment of the loan because in reality, then the
policy loan is an advance. As explained by Justice Holmes: “The so-called liability of
the policyholder never exists as a personal liability, it never is a debt, but is merely a
deduction in account from the sum that the plaintiffs (insurer) ultimately must pay.”33
f. Sample stipulations referred to as non-forfeiture clauses contained in
life insurance policies was quoted by the Supreme Court34 as follows:
‘“8. Automatic Premium Loan. — This Policy shall not lapse for non-payment of
any premium after it has been three full years in force, if, at the due date of such premium,
the Cash Value of this Policy and of any bonus additions and dividends left on accumulation
(after deducting any indebtedness to the Company and the interest accrued thereon) shall
exceed the amount of said premium. In which event the company will, without further
request, treat the premium then due as paid, and the amount of such premium, with
interest from its actual due date at six per
32
Rubin, p. 44.
33
Board of Assessors v. New York Life Insurance Co., 216 U.S. 517, 30 S.Ct. 385
(1910).
34
The Manufacturers Life Insurance Co. v. Bibiano L. Meer, G.R. No. L-2910, June
29, 1951.
cent p e r a n n u m , compounded yearly, and one per cent, compounded

yearly, for expenses, shall be a first lien on this Policy in the Company’s favour in
priority to the claim of any assignee or any other person. The accumulated lien may at
any time, while the Policy is in force, be paid in whole or in part.
‘When the premium falls due and is not paid in cash within the month’s grace, if
the Cash Value of this policy and of any bonus additions and dividends left on
accumulation (after deducting any accumulated indebtedness) be less than the premium
then due, the Company will, without further requests, continue this insurance in force
for a period ...
‘10. Cash and Paid-Up Insurance Values. — At the end of the third policy year
or thereafter, upon the legal surrender of this Policy to the Company while there is no
default in premium payments or within two months after the due date of the premium in
default, the Company will (1) grant a cash value as specified in Column (A) increased
by the cash value of any bonus additions and dividends left on accumulation, which
have been allotted to this Policy, less all indebtedness to the Company on this Policy on
the date of such surrender, or (2) endorse this Policy as a Non-Participating Paid-up
Policy for the amount as specified in Column (B) of the Table of Guaranteed Values ...”
§2.02. DIVIDENDS. The life insurance policy may be participating or non-

participating. In the case of participating insurance policy, the insured is entitled to the
dividends that may be available. It is mandated in the Insurance Code that if the policy
is participating, it must contain a provision that the company shall periodically ascertain
and apportion any divisible surplus accruing on the policy under conditions specified
therein.35 It may be provided that the dividend shall be applied to the premiums that are
due or payable.
§2.03. REINSTATEMENT CLAUSE. Section 233(j) of the Insurance Code
states among others that a life insurance policy must contain a provision that the
policyholder shall be entitled to have the policy reinstated at any time within three years
from the date of default of premium payment unless the cash surrender value has been
duly paid, or the extension period has expired.
a. The reinstatement will be made 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
35
Section 233(e), I.C; see also Section 218,1.C.
CHAPTER 4 127
PREMIUM
years prior to reinstatement.36 It is a long standing rule that right of the insured to
reinstatement does not give him an absolute right to such reinstatement by the mere
filing of an application. The insurer may deny the application for reinstatement if it is
not satisfied as to the insurability of the insured and if the insured does not pay the
overdue premium.37 * *
§3. RETURN OF PREMIUM. Section 80 of the Insurance Code enumerates
the cases when return of premium is a matter of right:
SEC. 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
penis 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.
SEC. 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.
SEC. 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,
36
Section 2330), I.C.
37
Rufino D. Andres v. The Crown Life Insurance Company, G.R. No. L-10874,
January 28, 1958; Lalican v. Insular Life Assurance Co., G.R. No. 183526, August
25, 2009.
(Republic Act No, 10607 with Notes on Pre-Need Act)
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.
SEC. 83. In case of an over insurance by several
insurers, 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.
§3.01. GROUNDS. Based on the foregoing provisions, the return of premium

is warranted in the following cases:
(1) When the thing was not exposed to the peril insured against;38
(2) “Time policy” when the policy is surrendered before the expiration of
the stipulated time (the refund is p r o r a t a ) ; 3 9
(3) When the contract is voidable and subsequently annulled under the
provisions of the Civil Code;40
(4) When the contract is annulled 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;41
(5) When by any default of the insured other than actual fraud, the
insurer never incurred liability under the policy;42 and
(6) When there is over-insurance by several insurers.43
"Section 80, a, I.C.

"Section 80, b, I.C.
"Section
82,1.C., as
42
amended
Ibid.
"Section 83, I.C.
CHAPTER 4 129
PREMIUM
a. Not exposed to peril insured against. The insured can ask for the return of
the premium if the property was not exposed to the risk insured against. However, where
the risk is entire and the contract is indivisible, the insured is not entitled to a refund of
the premiums paid if the property insured was exposed to the risk insured for any period,
however brief or momentary.44
b. Time policy. With respect to time policy, the idea is that the amount paid
is actually for the entire period and is spread to the entire term. In other words, the
premium corresponds to a certain unit or units of time. That is why surrender of the
policy means that the insurer will not be liable for the remaining period and the premium
corresponding to the remaining period is no longer due. The refund shall be on a p r o
r a t a basis except if a short rate has been agreed upon and appears in the policy.
c. Voidable policy. Refund of the premium is also warranted if the contract is
voidable. However, the ground that the contract is voidable should not be due to the
insured or his agent. The law provides that the voidable nature of the contract should be
on account of fraud or misrepresentation of the insurer, or of his agent, or on account of
facts, the existence of which the insured was ignorant without his fault. Thus, under the
provisions of Section 82 as amended by R.A. No. 10607, the insured is not entitled to
return of the premium if the insured acted fraudulently, thus:
“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.”
(1) Similarly, the insurer cannot keep the premium that was paid by
the insured if the insurer was never at risk because the policy was inoperative
and ineffectual from the beginning.45
PROBLEMS:
1. MTI obtained from UG Insurance Co., Inc. five insurance policies on its properties in Pasay
City and Manila. For years, MTI had been issuing fire policies to UG, and these
policies were annually renewed.
44
Makati Tuscany Condominium Corporation v. The Court of Appeals, et al, G.R. No.
95546, November 6, 1992.
45
Great Pacific Life Insurance Corporation v. Hon. Court of Appeals and Teodoro
Cortez, G.R. No. L-57308, April 23, 1990.
(Republic Act No, 10607 with Notow on fVo Need Actj
UG had boon granting Respondent, a 60-to 90-day credit term within which to pay the
premiums on the renewed policies. There was no valid notice of non-renewal of the
policies in question, as there is no proof at all that the notice sent by ordinary mail
was received by MTI, and the copy thereof allegedly sent to the broker was ever
transmitted to MTI. The premiums for the policies in the aggregate amount of
P225,753.95 were paid by MTI within the 60- to 90-day credit term and were duly
accepted and received by UG’s cashier. However, the payment was made after the
loss. Can UG deny the claim on the ground that the policies were not renewed by the
payment of premium?
A: No, UG cannot deny the claim. The policies were already
deemed renewed because the premiums were paid within the credit extension
given by the insurer. In addition, it would be unjust and inequitable if recovery
on the policy would not be permitted against UG, which had consistently
granted a 60- to 90-day credit term for the payment of premiums despite its
full awareness of Section 77. Estoppel bars it from taking refuge under said
Section, since Respondent relied in good faith on such practice. Hence, the
present case falls under two exceptions to Section 77, namely, when a credit
extension was granted and when the equitable principle of estoppel applies.
( U C P B G e n e r a l I n s u r a n c e
C o m p a n y , I n c . v . M a s a g a n a
T e l a m a r t , I n c . , G . R . N o .
1 3 7 1 7 2 , A p r i l 4 , 2 0 0 1 )
2. A insured his house against loss by fire for P100,000.00. The policy provides that the
insurer shall be liable “if the property insured shall be damaged or destroyed by fire
after the payment of premium, at anytime, from June 15, 1976 to June 15, 1977.” The
policy was delivered to A on June 14, 1976. Instead of paying the premium in cash, A
issued a promissory note dated June 15, 1976, for the amount of the premium, payable
within 30 days. The note was accepted. On June 29, 1976, the property insured was
burned. The insurer refused to pay on the ground that the premium had not been paid,
and the note did not have the effect of payment, as its value had not been realized at
the time the house was burned. Decide with reasons.
A: A may recover. The acceptance of the insurer of the promissory
note has the effect of waiving the provision that it would be liable only after
payment of optimum premium. The insurer may likewise be deemed to have
been estopped in claiming that the insurance contract is not yet in force.
3. Sometime in early 1982, private respondent American Home Assurance Co. (AHAC),
represented by American International Underwriters (Phils.), Inc., issued in favor of
petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy
No. AH-CPP-9210452 on the latter’s building and premises, for a
CHAPTER 4 131
PREMIUM
period beginning March 1, 1982 and ending March 1, 1983, with a total premium
of P466,103.05. The premium was paid on installments on March 12, 1982, May
20, 1982, June 21, 1982 and November 16, 1982, all of which were accepted by
private respondent. The policy was renewed twice thereafter with the same
arrangement on payment of the premium on installment. The last renewal was on
January 20, 1984, and the insurer issued to petitioner Insurance Policy No. AH-
CPP-9210651 for the period March 1, 1984 to March 1, 1985. On this renewed
policy, petitioner made two installment payments, both accepted by private
respondent, the first on February 6, 1984 for P52,000.00 and the second, on June
6, 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the
premium. Consequently, private respondent filed an action to recover the unpaid
balance of P314,103.05 for Insurance Policy No. AH-CPP-9210651. In its answer
with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-
CPP-9210651. It explained that it discontinued the payment of premiums because
the policy did not contain a credit clause in its favor and the receipts for the
installment payments covering the policy for 1984-85, as well as the two previous
policies. Petitioner further claimed that the policy was never binding and valid,
and no risk attached to the policy. Decide with reason.
A: The claim of the insurer must be sustained. The subject policies
are valid even if the premiums were paid on installments. The records
clearly show that petitioner and private respondent intended subject
insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered
into in 1982 was renewed in 1983, then in 1984. In those three years, the
insurer accepted all the installment payments. Such acceptance of
payments speaks loudly of the insurer's intention to honor the policies it
issued to petitioner. Certainly, basic principles of equity and fairness
would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the
lame excuse that the premiums were not prepaid in full. It appearing from
the peculiar circumstances that the parties actually intended to make the
three insurance contracts valid, effective and binding, petitioner may not
be allowed to renege on its obligation to pay the balance of the premium
after the expiration of the whole term of the third policy (No. AH-CPP-
9210651) in March 1985. Moreover, where the risk is entire and the
contract is indivisible, the insured is not entitled to a refund of the
premiums paid if the insurer was exposed to the risk insured for any
period, however brief or momentary. ( M a k a t i
T u s c a n y C o n d o m i n i u m
C o r p o r a t i o n v . T h e C o u r t o f
A p p e a l s , e t a l . , G . R . N o .
9 5 5 4 6 , N o v e m b e r 6 , 1 9 9 2 )
§4. ADVANCE PAYMENT. Premium may be paid in advance by the

insured. Thus, an additional provision was added as Section 84 by R.A. No,
10607 which authorizes insurers to accept payments for the purpose of paying
future premiums:
SEC. 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.
§5. REBATE OF PREMIUM. Section 370 of P.D. No. 612 states:
SEC. 370. No insurance company doing

business in the Philippines or any agent thereof, no
insurance broker, and no employee or other
representative of any such insurance company,
agent, or broker, shall make, procure or negotiate
any contract of insurance or agreement as to policy
contract, other than is plainly expressed in the policy
or other written contract issued or to be issued as
evidence thereof, or shall directly or shall indirectly,
by giving or sharing a commission or in any manner
whatsoever, pay or allow or offer to pay or allow to
the insured or to any employee of such insured,
either as an inducement to the making of such
insurance or after such insurance has been effected,
any rebate from the premium which is specified in
the policy, or any special favor or advantage in the
dividends or other benefits to accrue thereon, or
shall give or offer to give any valuable consideration
or inducement of any kind, directly or indirectly,
which is not specified in such policy or contract of
insurance; nor shall any such company, or any agent
thereof, as to any policy or contract of insurance
issued, make any discrimination against any Filipino
in the sense that he is given less advantageous
rates, dividends or other policy conditions or
privileges than are accorded to other nationals
a. Furthermore, Section 372 of the Insurance Code provides that violation
of Section 370 constitutes a ground for the immediate revocation of the license
issued to the erring insurance company, agent or broker and the imposition of a
fine not exceeding P25,000.00
CHAPTER 4 133
PREMIUM
b. The purpose of these statutes is the prevention of unfair discriminatory

practices by insurance companies, agents and brokers in order to ensure that equal
terms are fixed for policyholders of the same insurable class and equal expectation of
life. In aid and furtherance of this desirable policy, the statutes prohibit such practices
involving rebates or preferential treatment with respect to the cost of the policy or the
benefits allowed for the premium. 46 It follows that to enforce contracts or agreements
directly forbidden under these statutes, thereby allowing recovery thereunder, would
be subversive of the very public policy which the law was designed and intended to
uphold. While the statutes are addressed to the insurance companies, agents and
brokers, and are enacted for the protection of policyholders, the provisions are for the
general body of policyholders who would suffer by the enforcement of the prohibited
agreements, and not for those who have entered into such agreements and are seeking
to profit by its terms.47
46
Nora Lumibao v. The Hon. Intermediate Appellate Court and Eugenio Trinidad,
G.R. No. L-64677, September 13, 1990, citing Laun v. Pacific Mutual Life Inn. Co. of
California, 111 NW 660 (1907); Bernblum v. Travelers Ins. Co. of Hartford, Connecticut,
105 SW 2d 941 (1937); Chatz v. Bloom, 54 NE 2d 889 (1944); Mahone v. Hartford Life
and Accident Insurance Company, 561 P 2d 142 (1976).
47
Nora Lumibao v. The Hon. Intermediate Appellate Court and Eugenio Trinidad,
ibid!., citing Smathers v. Bankers’ Life Ins. Co., 65 SE 746 (1909); Richmond v.
Conservative Life Ins. Co., 165 NW 286 (1917); Sovereign Camp v. Waggoner, 173 So.
424 (1937).
CHAPTER 5
THE POLICY
A clearly readable and understandable insurance policy is important for

the protection of the general public. In the early days of fire insurance business,
certain insurance companies were notorious for cluttering their policies with
restrictive provisions that resulted in voluminous contracts that were largely
unreadable. A decision in one case contains this Dickensian description of such
nefarious practice:
“Forms of applications and policies x x x of a most complicated and elaborate

structure were prepared, and filled with covenants, exceptions stipulations, provisions,
rules, regulations and conditions rendering the policy void in a great number of
contingencies. These provisions were of such bulk and character that they would not be
understood by men in general, even if subjected to a careful and laborious study; by men in
general, they were sure not to be studied at all. The study of them was rendered particularly
unattractive by a profuse intermixture of discourses on subjects in which a premium payer
would have no interest. This compound, if read by him, would, unless he were an
extraordinary man, be an inexplicable riddle, a mere flood of darkness and confusion, some
of the most material stipulations were concealed in a mass of rubbish on the back side of
the policy and the following page, where few would expect to find anything more than a
dull appendix and where scarcely any one would think of looking for information x x x. As
if it were feared that, notwithstanding these discouraging circumstances, some extremely
eccentric person might attempt to examine and understand the meaning of the involved and
intricate net in which he was to be entangled, it was printed in such small type and in lines
so long and so crowded that the perusal of it was made physically difficult, painful and
injurious.”1
§1. CONSENSUAL. An insurance contract is a consensual contract. It is

perfected by mere consent of the parties and no
Delaney v. Rockingham Farmers Mutual Insurance Company, 52 N.H. 581, 587 (1873),
cited in Huebner, Black & Webb, p. 17.
134
CHAPTER 5 135
THE POLICY
formality is required for its perfection. Hence, the absence of a policy does not bar
the contract from coming into existence.
§2. STATUTE OF FRAUDS INAPPLICABLE. A contract is
unenforceable if the same does not comply with the Statute of Frauds. Article 1403
of the New Civil Code requires a contract to be in a note or memorandum if it is
one of the cases covered by the Statute of Frauds. 2 These include contracts that
cannot be performed within one year after the contract is made. One argument is
that insurance contracts (with a term of more than one year) cannot be performed
within one year because the loss may occur after one year. However, insurance
contracts can be performed within one year although it is contingent upon the
happening of an event. For instance, while life insurance contracts may remain in
force for decades, the obligation of the insurance company to pay the proceeds may
likewise be performed within one year because the future event (death of the
insured) may occur within one year. Hence, insurance contracts are not covered by
the Statute of Frauds.
§3. POLICY. Although formalities are not required for the perfection of the
contract, it is still mandated by law that written policies should be issued by the
insurer. A policy of insurance is defined in Section 49 of the Insurance Code as
“the written instrument in which a contract of insurance is set forth.”
a. Printed Form. Section 50 of the Insurance Code provides that 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.
(1) Before R.A. No. 10607, Group Insurance and Group Annuity
Policies which may be typewritten and need not be in printed form.
However, R.A. No. 10607 removed this exception in Section 50.
b. Electronic Document. Section 50 now provides that “the policy may
be in electronic form subject to the pertinent provisions of R.A. No. 8792,
otherwise known as the ‘Electronic Commerce Act’ and to such rules and
regulations as may be prescribed by the Commissioner.” 3 The applicable rules and
regulations is the Insurance Commission Circular Letter No. 2014-47 dated
November
2
See Article 1403, New Civil Code.
3
Section 50,1.C., as amended by R.A. No.
10607.
21, 2014 entitled “Guidelines on Electronic Commerce of Insurance Products. In

the Guidelines, the Insurance Commissioner expressed the view that: (1) the words
“writing,” “certificate” or any reference documents found in the Insurance Code
permit electronic documents;
(2) the requirement that the document be “signed” permits electronic signature;
and (3) the provisions for “delivery,” “notice” or that the document be “mailed” or
is “issued” or similar acts, permit electronic communications. 4
(1) It is also provided that “considering that consumers themselves
complete the insurance application form on the Internet, the process may be
subject to error. To prevent the consequences of such errors, the
information from the application form shall be recapitulated in a summary
and presented to consumers before the contract is concluded, giving them
the opportunity to validate their answers once more. In lieu of an actual
specimen signature from the consumer to validate the information indicated
in the online application form, the consumer may signify his consent by
clicking the confirmation button to finalize the processing of the
application. The use of the confirmation button does not prevent the
insurance provider from using other modes of capturing consent (i . e .,
digital electronics signature pads, software application).5
c. Approval of Insurance Commission. All policies issued by insurance
companies are approved by the Insurance Commission in accordance with the first
paragraph of Section 232 which provides:
SEC. 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.
4
Section 13,1.C., Circular Letter No. 14-47.
Circular Letter No. 2014-47 dated November 21, 2014 as amended by
Circular Letter No. 2016-60 dated November 16, 2016 and Circular Letter No.
2016-15 dated March 15, 2016.
CHAPTER 5 137
THE POLICY
d. Amendments. The rule requiring submission to the Insurance

Commission and approval thereof by the latter includes amendments or revisions
to the standard policy wordings that would require approval as determined by
said body. The specimen copy of the submitted forms shall be stamped
“Approved” by the Commission. 6
§3.01. OTHER DOCUMENTS. It should also be noted that in addition
to the policy, the other important documents for the creation of insurance
contract or the creation or limitation of liability include the Application, cover
notes or binders, Riders and Endorsements.
a. Application. The Application is the offer of the person who seeks to
procure an insurance policy. The application contains information and
declaration that may constitute representations of the applicant. “Declarations are
statements providing information about the risk to be insured and usually for the
basis for a decision regarding the issuance and rating of the insurance.”7
b. Binding Receipts. Insurers may likewise issue binding receipts.
However, it was explained that in life insurance, a “binding slip” or “binding
receipt” does not insure by itself. 8 Thus, in one case, the binding deposit receipt
was clearly intended to be merely a “provisional or temporary insurance contract
and only upon compliance of the following conditions: (1) that the company shall
be satisfied that the applicant was insurable on standard rates; (2) that if the
company does not accept the application and offers to issue a policy for a
different plan, the insurance contract shall not be binding until the applicant
accepts the policy offered; otherwise, the deposit shall be refunded; and (3) that if
the applicant is not able according to the standard rates, and the company
disapproves the application, the insurance applied for shall not be in force at any
time, and the premium paid shall be returned to the applicant.” 9 The binding
deposit receipt is merely conditional and does not insure outright.
§3.02. POLICY FORM. The insurer is generally free to provide for the
terms and conditions of the policies that it will issue so long
Circular Letter No. 2015-15 dated March 26, 2015.

7
“Great Pacific Life Assurance Co. v. Hon. Court of Appeals, G.R. No. L-
31845 April 30,1979 citing De Lim v. Sun Life Assurance Company of
9
Ibid.
as the same provisions are not contrary to law, moral, customs, and public
policy. In addition, the forms are subject to the approval of the Insurance
Commission. Pursuant to Section 232 of the Insurance Code, the Insurance
Commission likewise imposed the minimum requirements for the approval of
insurance plans/forms for policy, certificate or contract of insurance,
application, rider, clause, warranty or indorsements for all life insurance
companies.10
a. In some cases, the Insurance Commission approved standard
policies that should be used by insurers. For example, the Insurance
Commission approved a Standard Fire Policy in September 1980 and the same
was made effective in January 1981. Similarly, the Insurance Commission
likewise approved a Standard Life Insurance Policy dated June 25, 1993.11
b. Mandatory Provisions under the Code. However, in certain cases,
the law itself provides for mandatory provisions. Thus, the law prescribes
minimum mandatory provisions for the following policies: (1) Individual life, 12
(2) Endowment Insurance,13 (3) Group Life,14 * and (4) Industrial Life.16
c. Insurance Guidelines. The Insurance Commission consolidated the
relevant rules on the approval of Non-Life Insurance Policy Forms. Hence, the
Commission promulgated the “Guidelines on the Approval of Non-Life
Insurance Policy Forms The administrative issuance recognizes the flexibility
of the insurers “to design insurance products to support the needs of the clients
in a manner that shall promote greater insurance protection.” 17 Moreover, the
guidelines provide that the “policy forms must not be inequitable, unfairly
discriminatory, misleading, deceptive, obscure or that encourage
misrepresentation.”18
§4. BASIC PROVISIONS. It is a basic rule that the terms of the contract
constitute the measure of the insurer’s liability and
10
Circular Letter No. 11-90, July 10, 1990.
u
Circular Letter No. 14-93; See also Circular Letter No. 2015-12-C
dated March 24, 2015 for the Changes in the Approved Non-Life Insurance
12
Section 233,1.C.
13
Ibid.
14
Section 234,1.C.
16
Section 235,1.C.
16
Circular Letter No. 2015-58-A dated December 21, 2015.
17
Ibid.
18
Par. 3.3, Circular Letter No. 2015-58-A dated December 21, 2015.
CIIAI’TKK 5
THF POLICY
compliance therewith is a condition precedent to the insured'n right of recovery from

the insurer.'0 Section 51 provides the contents of the policy. However, Section 51 does
not prohibit additional stipulations. 19 20 Stipulations that are not contrary to law,
morals, good customs, public order or public policy must be upheld as effective, valid
and binding as between the parties.21
a. The provisions of an insurance contract can be classified as
follows: (1) declarations, (2) insuring agreements, (3) exclusions, and
(4) conditions. The policy of insurance must contain the provisions enumerated in
Section 51 which provides:
SEC. 51. A policy of insurance must specify:

(a) The parties between whom the contract is
made;
(b) The amount to be insured except in the cases
of open or running policies;
(c) The premium, or if the insurance is of a char-
acter 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.
a. Declarations. Most of the provisions of Section 51 are part of the

declaration. “Declarations identify the insured; describe the property, activity or life
insured; state the types of coverage purchased, the applicable policy limits and the
term of the coverage;
19
Stokes v. Malayan Insurance Co., Inc., C.K. No. L-34768, February 28, 1984, 127
SCRA 766, 769; Young v. Midland Toxtilo liiHuruncu, Co., 30 Phil. 617.
20
Steamship Mutual Underwriting Association (Bermuda) Limited v. Sulpicio Lines,
Inc., G.R. Nos. 196072 and 208603, September 20, 2017.
21
Perla Compania De Seguros v. Court of Appeals, G.R. No. 78860, May 28,
1990.
and indicate the premium paid for each separate coverage purchases. The purpose of
the declarations made by the insured is to give the insurer sufficient information to
enable it, with information from other sources, to issue the desired contract at a proper
price.”22
b. Insuring Agreements. These provisions specify what the insurer
promises to do. “The insuring agreements describe the characteristics of the events
covered under the contract.”23
c. Exclusions. These provisions limit the coverage provided under the
insuring agreements. These provisions exclude specified perils, property, sources of
liability, persons, losses, locations and time periods.24
d. Conditions. These provisions define terms used in the other parts of the
contract, prescribe conditions that must be complied before the insurer can be made
liable and may describe the basis for computing the premium.25
e. Distinguished from Notes. In marine insurance, the policy should be
distinguished from “Marine Risk Notes.” A Marine Risk Note is an acknowledgment
or declaration confirming the specific shipment covered by its Marine Open Policy,
the evaluation of the cargo, and the chargeable premium. 26 Such note is not the policy
itself.
d. Non-Waiver Clause. The Insurance Commission allows an insurer to
insert in a non-life insurance policy a Non-Waiver Clause which is a provision that
“no change in the policy is valid unless approved by an executive officer of the
insurer, or unless the approval is endorsed on the policy or attached it, or both, and
that no agent has authority to change the policy or waive any of its provisions.” 27
§4.01. PARTIES. The policy must identify the insurer and the insured. Parties
are indispensable elements of insurance contracts.
22
C. Arthur Williams, Jr. and Richard M. Heins, Risk Management and Insurance, 1989 6th
Ed., p. 339 hereinafter referred to as “Williams, Jr. and Heins.”
23
Williams, Jr. and Heins, ibid.
^Williams, Jr. and Heins, p. 340.
“Williams, Jr. and Heins, p. 341.
26
Aboitiz Shipping Company v. Philippine American General Insurance Company,
G.R. No. 77530, October 5, 1989, 178 SCRA 357; Malayan Insurance Company, Inc. v.
Regis Brokerage Corporation, G.R. No. 172156, November 23, 2007.
27
Par. 7.21,1.C. Circular Letter 2015-58-A dated December 21, 2015.
CHAPTER 5 141
THE POLICY
The parties who consent to perfect the contract should necessarily be specified.
a. It should be noted however that the person whose life is insured need
not be a party to the insurance contract.
§4.02. DESIGNATION OF BENEFICIARY. The designation of the
beneficiary should be made in unequivocal terms. The Insurance Code provides
for rules on designation of beneficiaries as follows:
SEC. 53. The insurance proceeds shall be

applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made
unless otherwise specified in the policy.
a. Rules on Designation. Ideally, the name of the beneficiary is expressly
stated in the policy to avoid confusion. The designation is not however invalid
despite the absence of the specific name. For instance, it is enough that the
identity of the beneficiary is sufficiently determinable from the details provided
in the policy. Some of the rules on the designation of the beneficiary are as
follows:
(1) If the designated beneficiary is the “wife” without the
specific name, the second wife is the beneficiary in case the first wife
dies;28
(2) If the policy designates the “children” as beneficiary, these
include adopted children and children by the wife designated as
beneficiary and children of the previous marriage;29
(3) Adopted children are included in the policy that designates
the “children” as beneficiary.30
(4) Only the children by the wife designated as beneficiary is
included if the designation uses the terms “our children” or “children of
this marriage.”31
(5) There is a conflict of opinion regarding the issue regarding
the inclusion of illegitimate in the designation of “children” as
beneficiary. However, with the policy to protect children, it is submitted
that illegitimate children are included. * 1
B
i lbid.
S1
(6) The estate may be designated by expressly providing that the

estate is the beneficiary or as follows: “To the executors, administrators,
assigns of the insured.”32
(7) The words “wife of the insured” or the use of the term “Mrs
” is merely descriptive and the person whose specific name appears as
beneficiary (example Mrs. Juana De la Cruz) is considered the
beneficiary even if in fact, the person so named is not married to the
insured.33 34
(8) The person designated by specified name but with an
additional description “fiance” remains the beneficiary even if the person
so named is no longer the fiance of the insured.31
(9) The designation may be class designation which include the
members of the class who are living at the death of the insured (example,
“children”).35
(10) The designation may be P e r S t i r p e s which
means that proceeds shall be divided among the members of a class,
such as children of the insured, with the share of the member of the
class, like a child, who pre-deceased the insured going to that person’s
surviving children.36
§4.03. AMOUNT INSURED. The amount insured fixes the limit of the
liability of the insurer. In property insurance, the liability may be for total loss
or for less than total loss. The policy may also provide for different amounts of
compensation depending on the type or cause of loss. For example, in health
insurance, the liability may vary depending on the cause of the injury. 37 On the
other hand, a life insurance policy may provide for a bigger amount of
insurance coverage for certain causes of death as in the case where double
compensation is provided for accidental death.
a. In addition, the amount may vary depending on whether or not certain
conditions are complied with. Thus, in one case, the car insurance policy drew
out not only the limits of the insurer’s liability but also the mechanics that the
insured had to follow to be entitled
32
Greider and Beadles, p. 146.
33
Ibid.
34
IbidSimmons v. Simmons, 272 S.W. 2d 913.
35
™Ibid.
37
Del Rosario v. The Equitable Insurance and Casualty Co., Inc.,
G.R. No. L-16215, June 29, 1963.
CHAPTER 5 143
THE POLICY
to full indemnity of repairs. The option to undertake the repairs is accorded to the
insurance company in one of the paragraphs of the policy otherwise the insurer’s
liability is fixed as at smaller amount. Where the insurer is deprived of the option
because the insured took it upon itself to have the repairs made, and only notified the
insurer when the repairs were done, the insurer is liable for such a smaller amount.
Under this provision, it is not even necessary to require the insurer to prove that the
cost of repair that was made at the instance of the insured was unreasonable.38
b. In this connection, it was also explained that “limitations of liability on
the part of the insurer or health care provider must be construed in such a way as to
preclude it from evading its obligations. Accordingly, they should be scrutinized by
the courts with ‘extreme jealousy’ and ‘care’ and with a ‘jaundiced eye.”’39
c. The policy may also stipulate an automatic increase in coverage under
certain circumstances. For instance, in one variation of what is known as the
“Automatic Increase Clause” in life insurance, the coverage is automatically increased
to a higher amount if the insured reaches a certain age.40
§4.04. PREMIUM. It is a basic statutory rule that “no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid.” 41 While the presence of consideration is an
indispensable element of an insurance contract, the Insurance Code requires payment
of the premium in order to make the responsibility of the insurer to pay obtain
obligatory force.
a. Ordinarily, the exact amount of the payable premium should be
specified in the policy. However, there are cases when the insurance is of a character
where the exact premium is only determinable upon the termination of the contract. In
which case the law requires that a statement of the basis and rates upon which
38
Misamis Lumber Corporation v. Capital Insurance and Surety Company, G.R. No. L-
21380, May 20, 1966.
^hilamcare Health Systems, Inc. v. Court of Appeals, 429 Phil. 82 (2002); Blue
Cross Health Care, Inc. v. Spouses Olivares, 568 Phil. 526 (2008); Fortune Medicare, Inc.
v. Amorin, G.R. No. 195872, March 12, 2014 (involving the interpretation of the term
“approved standard charges” for which the insurer was liable up to 80%).
^Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Company,
G.R. No. 1190176, March 19, 2002.
41
Section 77,1.C.
the final premium is to be determined is specified in the policy. In other words, the
rate of the premium should either be determined or determinable. The amount of the
premium cannot be left to the sole will of one of the parties.
§4.05. IDENTIFICATION OF THE INSURED. Generally, the policy expressly
specifies the insured - the person whose life is insured. Specifying the insured leaves
no room to doubt the identity of the owner of the policy or the person whose life is
insured. In property insurance, the person insured is the person, having insurable
interest of the property insured, took out the insurance policy; the subject matter of the
insurance in this case is the property insured. As noted in Chapter 2, in life insurance,
if a person insures the life of another, the person whose life is insured is called the
“insured” while the person who took out an insurance on the former’s life is called the
“assured.”
a. Insured Identified in General Terms. Section 56 of the Insurance Code
applies when the insured is not specifically identified. 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. Hence, it is a question of proof if the person claims that he is one
of those described as insured in general terms.
SEC. 56. When the description of the insured in a

policy is so general that it may comprehend any person or
any class of persons, only he who can show that it was
intended to include him can claim the benefit of the
policy.
Thus, an insurance over a car may designate the “registered owner” as the
insured. In such case, there it can easily be established by presenting the Certificate of
Registration of the car.
b. Additional Insured. There are cases, however, when the insured are
necessarily identified in general terms. Thus, in the Compulsory Third Party Liability
Insurance, the Insurance Code mandates an insurance coverage in favor of the
“passengers” of the vehicle. Necessarily, not all future passengers can be identified in
the policy and their identities may also be determined as of the time of the accident.
Similarly, a Group Insurance Plan may provide that any person eligible for coverage
shall be automatically insured. A
CHAPTERS 145
THE POLICY
person is insured so long as he qualifies under the coverage clause provided for in the
policy.42
c. Agents, Trustees, Co-Owners and Partners. Sections 54 and 55 provides
for rules on the determination of the real owner of the policy in policies involving
agents, trustees, co-owners and partners.
SEC. 54. When an insurance contract is executed

with an agent or trustee as the insured, the fact that his
principal or beneficiary is the real party in interest may be
indicated by describing the insured as agent or trustee, or
by other general words in the policy.
SEC. 55. To render an insurance effected by one
partner or part-owner, applicable to the interest of his co-
partners or other part-owners, it is necessary that the
terms of the policy should be such as are applicable to
the joint or common interest.
(1) Agent or Trustee. The principal may be damnified by the loss of

the property that he owns that is under the care of a trustee or agent. On the
other hand, the agent or trustee that takes care of the property may also be
damnified by the property’s loss. Hence, both the principal and his agent or
trustee can insure the property under the latter’s care. There may be instances,
however, that the principal takes an insurance on the property through the
agent or trustee. The policy may not expressly provide that it was the principal
who really took the policy but the policy may contain words that will indicate
that the principal is the real party-in-interest. This is an example of the
situations that are covered by Section 54 of the Insurance Code.
(2) Partner or Co-owners. Partners and co-owners may have
insurable interest on the property owned by the partnership or owned in
common. The insurance can be taken by the managing partner or co-owner on
the property for the partnership or the co-ownership. In such case, the terms of
the policy should expressly provide that the insurance is applicable to the joint
or common interest. An express provision is
42
Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984.
necessary because a co-owner and partner also have insurable interest on

the property and they may take an insurance for their own benefit.
§4.06. IDENTIFICATION OF PROPERTY INSURED. Section 51
provides that the property insured and the interest of the party insured must be
specified. Ideally, the description of the property insured should so specific as to
leave no room to doubt its identity. This will avoid unnecessary dispute with the
insurer in case of loss. However, an erroneous description of the property insured
will not necessarily avoid the policy if the true intention of the parties can be
determined.
a. Thus, in G a r c i a v . H o n g k o n g F i r e
& M a r i n e I n s u r a n c e C o . , L t d .,43 the
insured wanted insurance upon a stock of goods, which he owned, and he
received and paid for a policy on a building, which he did not own, and while the
policy was in force and effect, both the building, which he did not own, and the
stock of merchandise, which he did own, were completely destroyed by fire.
Hence, there can be recovery in case of loss of the merchandise.
b. It is well to point out in this connection that insurance can also be on
the liability of a person. Hence, the subject matter of the insurance is not limited
to property; it can also insure the performance of the obligation of a person. For
instance, the potential liability of the carrier to its passengers in case the
passengers are injured may be insured against.
c. In one case involving insurance against the risk of loss through
earthquakes, the insured claimed that the policies covered not only two swimming
pools but also all the properties in the resort that it owns. The insured rejected the
claim for loss over the other properties claiming that the policies covered only the
swimming pools. The Supreme Court ruled in favor of the insurer stating that all
the provisions of the policies and riders, taken and interpreted together
indubitably show the intention of the parties to extend the earthquake shock
coverage to the two swimming pools only.44
PROBLEMS:
1. Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining
industry. It owns two oil mills. Both are located in a factory compound at Iyam,
Lucena City. It appears that respondent
43
G.R. No. 20341,
September 1, 1923.
“Ibid.
CHAPTER 5 147
THE POLICY
commenced its business operations with only one (1) oil mill. In 1988, it started operating
its second oil mill. The latter came to be commonly referred to as the new oil mill. The
two oil mills were separately covered by fire insurance policies issued by petitioner
American Home Assurance Co., Philippine Branch. The policy for the new oil mill states:
This is obvious from the categorical statement embodied in the policy, extending its
protection: “On machineries and equipment with complete accessories usual to a coconut
oil mill including stocks of copra, copra cake and copra mills whilst contained in the
n e w o i l m i l l building, situate (sic) at UNNO. ALONG NATIONAL
HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED.” A fire that broke out in the
early morning of September 30,1991 gutted and consumed the new oil mill. Respondent
immediately notified the petitioner of the incident. The latter then sent its appraisers who
inspected the burned premises and the properties destroyed. Thereafter, in a letter dated
October 15, 1991, petitioner rejected respondent’s claim for the insurance proceeds on the
ground that no policy was issued by it covering the burned oil mill. It stated that the
description of the insured establishment referred to another building. It was noted that
despite the fact that the policy in question was issued way back in 1988, or about three
years before the fire, and the insured did not call petitioner’s attention with respect to the
misdescription. Did the insurer validly reject the claim?
A: No. The rejection of the claim was invalid. In construing the
words used descriptive of a building insured, the greatest liberality is shown by
the courts in giving effect to the insurance.
In view of the custom of insurance agents to examine buildings before writing
policies upon them, and since a mistake as to the identity and character of the
building is extremely unlikely, the courts are inclined to consider that the policy
of insurance covers any building which the parties manifestly intended to
insure, however inaccurate the description may be.
Notwithstanding, therefore, the misdescription in the policy, it is beyond
dispute, to our mind, that what the parties manifestly intended to insure was the
new oil mill. This is obvious from the categorical statement embodied in the
policy referring to the “new oil mill.” If the parties really intended to protect the
first oil mill, t h e n t h e r e i s n o n e e d t o
s p e c i f y i t a s n e w .
Indeed, it would be absurd to assume that respondent would protect its first
oil mill for different amounts and leave uncovered its second one. As mentioned
earlier, the first oil mill is already covered under another policy issued by the
petitioner.
It is unthinkable for respondent to obtain the other policy from the very same
company. The latter ought to know that a second agreement over that same
realty results in its over insurance.
The imperfection in the description of the insured oil mill’s

boundaries can be attributed to a misunderstanding between the
petitioner’s general agent, and its policy issuing clerk, who made the error
of copying the boundaries of the first oil mill when typing the policy to be
issued for the new one. It is thus clear that the source of the discrepancy
happened during the preparation of the written contract.
These facts lead us to hold that the present case falls within one of
the recognized exceptions to the parole evidence rule. Under the Rules of
Court, a party may present evidence to modify, explain or add to the terms
of the written agreement if he puts in issue in his pleading, among others,
its failure to express the true intent and agreement of the parties thereto. 15
Here, the contractual intention of the parties cannot be understood from a
mere reading of the instrument. Thus, while the contract explicitly
stipulated that it was for the insurance of the new oil mill, the boundary
description written on the policy concededly pertains to the first oil mill.
This irreconcilable difference can only be clarified by admitting evidence
a l i u n d e , which will explain the imperfection and clarify the
intent of the parties.
Anent petitioner’s argument that the respondent is barred by
estoppel from claiming that the description of the insured oil mill in the
policy was wrong, we find that the same proceeds from a wrong
assumption. Evidence on record reveals that respondent’s operating
manager notified the petitioner’s agent with whom respondent negotiated
for the contract about the inaccurate description in the policy. However,
the agent assured the manager that the use of the adjective n e w will
distinguish the insured property. The assurance convinced respondent,
despite the impreciseness in the specification of the boundaries, the
insurance will cover the new oil mill. Hence, respondent is not barred by
estoppel. ( A m e r i c a n H o m e A s s u r a n c e
C o m p a n y v . T a n t u c o
E n t e r p r i s e s , I n c . , G . R . N o .
2
1 3 8 9 4 , O c t o b e r 8 , 2 0 0 1 )
2. On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insur ance) issued
Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc.
(Transworld), initially for PI,000,000.00 and eventually increased to
Pi,500,000.00, covering the period from August 14, 1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location
thereof, read:
‘“On stocks of finished and/or unfinished products, raw materials
and supplies of every kind and description, the properties of the
Insureds and/or held by them in trust, on commission or on joint account
with others and/or for which they (sic) responsible in case of loss whilst
contained and/or stored during the currency of this Policy in the
premises occupied by
CHAPTER 5 149
THE POLICY
them forming part of the buildings situate (sic) within own Compound at
MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA,
PHILIPPINES, BLOCK NO. 601.’
X X X X X X X X X
‘Said building of four-span lofty one storey in height with mezzanine portions
is constructed of reinforced concrete and hollow blocks and/or concrete under galvanized
iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo
assembly plant, offices, warehouse and caretaker’s quarters.
1
Bounds in front partly by one-storey concrete building under galvanized iron
roof occupied as canteen and guardhouse, partly by building of two and partly one
storey constructed of concrete below, timber above under-galvanized iron roof occupied
as garage and quarters and partly by open space and/or tracking/packing, beyond which
is the aforementioned Magdalo Street; on its right and left by driveway, thence open
spaces, and at the rear by open spaces. w
The same pieces of property insured with the petitioner were also insured with
New India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing
the middle portion of its four-span building and partly gutting the left and right
sections thereof. A two-storey building (behind said four-span building) where fun
and amusement machines and spare parts were stored, was also destroyed by the fire.
Petitioner Rizal Insurance denied the insurance claim stating that its fire insurance
policy sued upon covered only the contents of the four- span building, which was
partly burned, and not the damage caused by the fire on the two-storey annex
building. Is the denial of the claim justified?
A: No, the denial was not justified. Resolution of the issues posited
here hinges on the proper interpretation of the stipulation in subject fire insurance
policy regarding its coverage, which reads:
“x x x contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic) within
own Compound x x x.” Therefrom, it can be gleaned unerringly that the fire
insurance policy in question did not limit its coverage to what were stored in
the four-span building. As opined by the trial court of origin, two
requirements must concur in order that the said fun and amusement machines
and spare parts would be deemed protected by the fire insurance policy under
scrutiny, t o w i t :
“First, said properties must be contained and/or stored in the areas
occupied by Transworld and second, said areas must form part of the
building described in the policy x x x.”
‘Said building of four-span lofty one-storey in height with

mezzanine portions is constructed of reinforced concrete and hollow
blocks and/or concrete under galvanized iron roof and occupied as
hosiery mills, garment and lingerie factory, transistor-stereo assembly
plant, offices, warehouse and caretaker’s quarter
Verily, the two (2)-storey building involved, a permanent
structure which adjoins and intercommunicates with the “first right span
of the lofty storey building,” formed part thereof, and meets the
requisites for compensability under the fire insurance policy sued upon.
So also, considering that the two (2)-storey building aforementioned was
already existing when subject fire insurance policy contract was entered
into on January 12, 1981, having been constructed sometime in 1978,
petitioner should have specifically excluded the said two (2)-storey
building from the coverage of the fire insurance if minded to exclude the
same but if did not, and instead, went on to provide that such fire
insurance policy covers the products, raw materials and supplies stored
within the premises of respondent Transworld which was an integral
part of the four (4)-span building occupied by Transworld, knowing
fully well the existence of such building adjoining and
intercommunicating with the right section of the four (4)-span building.
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.
Hence, petitioner insurer is liable for the amount of P470,328.67, it
being the total loss and damage suffered by Transworld for which
petitioner Rizal Insurance is liable. ( R i z a l S u r e t y
& I n s u r a n c e C o m p a n y v .
C o u r t o f A p p e a l s , G . R . N o .
1 1 2 3 6 0 , J u l y 1 8 , 2 0 0 0 )
§4.07. RISK INSURED AGAINST. The concept of risk was discussed in

Chapter l.46 Section 3 of the Insurance Code provides that “(a)ny 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.” Hence, it
is indispensable that the following elements are present: (1) the event that constitutes
the risk must be contingent or unknown; and (2) the happening of the event will
damnify the insured or will create a liability against the insured. 45
45
See discussion in Note 4.03.
CHAPTER 5 151
THE POLICY
a. It was explained that the following must be within the scope of the
contractual definition: (1) nature of the event, (2) the time of its occurrence, (3) place of
its occurrence, and (4) the nature of the loss suffered (in indemnity insurance).” 46 Thus,
the policy may provide for a period of cover under which the insurer may be liable only
if the risk insured against occurs within the period agreed upon. The loss resulting from
the risk insured against must occur during the period agreed upon although the full extent
of the loss may be determined or is made manifest after the period of cover.47
b. Named Perils and All Risk Policies. If the policy specifies the risk or risks
insured against, the policy is called a “named-peril” policy. An all risk policy as the term
implies all risks of accidental nature.
c. All Risk Policies. An “all risk policy” should be read literally as meaning
all risks whatsoever and covering all losses by an accidental cause of any kind. The terms
“accident” and “accidental,” as used in insurance contracts, have not acquired any
technical meaning. The very nature of the term “all risks” must be given a broad and
comprehensive meaning as covering any loss other than a willful and fraudulent act of
the insured. This is pursuant to the very purpose of an “all risks” insurance to give
protection to the insured in those cases where difficulties of logical explanation or some
mystery surround the loss or damage to property. An “all risks” policy has been evolved
to grant greater protection than that afforded by the “perils clause,” in order to assure that
no loss can happen through the incidence of a cause neither insured against nor creating
liability in the insured; it is written against all losses, that is, attributable to external
causes. Generally, the burden of proof is upon the insured to show that a loss arose from
a covered peril, but under an “all risks” policy the burden is not on the insured to prove
the precise cause of loss or damage for which it seeks compensation. The insured under
an “all risks insurance policy” has the initial burden of proving that the cargo was in
good condition when the policy attached and that the cargo was damaged when unloaded
from the vessel; thereafter, the burden then shifts to the insurer to show the exception to
the coverage.48
“^Chitty on Contracts, Vol. II, 29th Ed., 2004, p. 1161.

47
Chitty on Contracts, ibid., p. 1166.
48
Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R.
No. 85141, November 28, 1989.
§5. RIDERS. The second and third paragraphs of Section 50 of the

Insurance Code provide for the rules regarding riders, clauses, warranties or
endorsements also known as “Ancilliary Forms” that are not part of the original
printed form but are merely attached to the policies, v i z . :
“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.”
a. Requisites. Based on Section 50 of the Insurance Code, a rider,
clause warranty or endorsement that are not part of the original printed form are
binding provided that:
(1) The rider, clause, warranty or endorsement is attached to the
policy;
(2) The descriptive title or name of the rider, clause, warranty
or endorsement is mentioned and written on the blank spaces provided in
the original printed policy form; and
(3) If not applied for by the insured or owner, the rider, clause,
warranty or endorsement shall be countersigned by the insured.
b. Riders and endorsements modify the provisions in the standard
policies by adding special provisions thereto. Strictly speaking, Riders are
modifications in life insurance while Endorsements are modifications in property
and liability insurance.49 However, they are used interchangeably in many cases.
A rider or endorsement that is attached to a policy is a part of the contract, to the
same extent and with like effect as it actually embodied therein.50
49
“Ang Giok Chip v. Springfield Fire and Marin Insurance Co., G.R. No.
L-33637, December 31, 1931 citing I Couch, Cyclopedia of Insurance Law, Sec.
CHAPTER 5 153
THE POLICY
c. An E n d o r s e m e n t is a written agreement attached to a

property insurance policy to add or subtract insurance coverages. 51 The Insurance
Commission defines an E n d o r s e m e n t as “a written document attached
to an insurance policy that modifies the policy by changing the coverage afforded
under the policy. An E n d o r s e m e n t can add or reduce coverage for
acts or things that are not covered as part of the original policy and can be added at the
inception of the policy or later during the term of the policy.”52
d. A rider is an endorsement to a life insurance policy that modifies clauses

and provisions of the policy, including or excluding coverage. 53 If the requirements of
Section 50 of the Insurance Code are complied with, they take precedence over the
original policy provisions. They are deemed integral parts of the original policy. 54 The
importance of riders and endorsements was further explained in this wise:
“Endorsements and riders are used to complete a contract, alter coverages to satisfy
particular needs, and to change policies in effect. The standard fire policy is not complete
until an endorsement describing the property covered is attached. To satisfy particular
needs, endorsements and riders may alter the coverage to include additional perils, property,
losses, places, hazards, and people, or may be used to eliminate coverages in the standard
form. Subsequent to the issuance of the policy, endorsements or riders may be added to
revise the amount of insurance, correct errors in the contract, adjust a rate, or include
coverage of newly acquired property. Endorsements and riders supersede the standard
policy provisions and may be altered by later endorsements or riders.”55
e. It is a well-settled rule that in case repugnance exists between written and

printed portions of a policy, the written portion prevails. There can be no question that
as far as any inconsistency exists, a “rider” prevails over the printed clause it covers.
When an
51
Rubin, p. 153.
52
Paragraph 5.1 (f), I.C., Circular Letter No. 2015-58-A dated December 21,
2015.
53
Rubin, p. 440.
^Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Co., Inc.,
G.R. No. 119176, March 19, 2002. This case involves an “Automatic Increase Clause” where the
date when the automatic increase of the value of the policy is provided for in the attachment. The
Supreme Court ruled that there was no need to enter into a separate agreement.
55
instrument consists partly of written words and partly of a printed form and the two
are inconsistent, the former controls the latter.56
§6. CONTRACT OF ADHESION. Insurance policies are contracts of
adhesion because only one (1) party (insurer) prepares the written contract while the
other party (insured) merely adheres to the contract. Usually, the insured cannot
change the written policy imposed by the insurer. It is likewise called contract by
adherence.
a. Nevertheless, it does not follow that the insured has not given his
consent to the terms and conditions of the insurance contract simply because it is a
contract of adhesion. A contract of adhesion is as equally binding as any other
contract. Every insured should be aware of the fact that a party is not relieved of the
duty to exercise the ordinary care and prudence that would be exacted just because
what is involved is a contract by adherence. The conformity of the insured to the
terms of the policy is implied from his failure to express any disagreement with what
is provided for therein.
§6.01. READING OF POLICY. The majority rule is that injured persons may
accept policies without reading them, and that this is not negligence p e r s e .
However, the rule is not without any exception. Thus, it is incumbent upon the
insured to read the insurance contract if this can be reasonably expected of him
considering that he has been a businessman for a long period of time and the contract
concerns indemnity in case of loss in his moneymaking trade of which important
consideration he could not have been unaware as it was precisely the reason for his
procuring the same.57 As Mr. Justice Regalado explained:
“Petitioners (insured) should be aware of the fact that a party is not relieved of the
duty to exercise the ordinary care and prudence that would be exacted in relation to other
contracts. The conformity of the insured to the terms of the policy is implied from his
failure to express any disagreement with what is provided for. It may be true that the
majority rule, as cited by petitioners, is that injured persons may accept policies without
reading them, and that this is not negligence per se. But, this is not without any
^Francisco Jarque v. Smith Bell & Co., Ltd., et al., G.R. No. L-32986, November 11,
1930, citing Joyce on Insurance, 2d Ed., Sec. 224, p. 600; Arnould on Marine Insurance, 9th
Ed., Sec. 73; Marine Equipment Corporation v. Automobile Insurance Co., 24 Fed. (2d), 600;
and Marine Insurance Company v. McLahanan, 290 Fed., 685, 688.
57
New Life Enterprises v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31,
1992.
CHAPTER 5 155
THE POLICY
exception. It is and was incumbent upon (the insured) to read the insurance contracts, and
this can be reasonably expected of him considering that he has been a businessman since 1965
and the contract concerns indemnity in case of loss in his money-making trade of which
important consideration he could not have been unaware as it was pre-in case of loss in his
moneymaking trade of which important consideration he could not have been unaware as it
was precisely the reason for his procuring the same.”58 59
a. In this connection, it was further explained that the receipt of this policy
by the insured without objection binds both the acceptor and the insured to the terms
thereof. The insured may not thereafter be heard to say that he did not read the policy
or know its terms, since it is his duty to read his policy and it will be assumed that he
did so.69 It was further ruled that “where the holder of a policy discovers a mistake
made by himself and the local agent in attaching the wrong rider to his application,
elects to retain the policy issued to him, and neither requests the issuance of a different
one nor offers to pay the premium requisite to insure against the risk which he believe
the rider to cover, he thereby accepts the policy.”60
§7. INTERPRETATION AND PROOF. One of the cardinal rules in the
interpretation of contracts is “when the words and language of documents are clear and
plain or readily understandable by an ordinary reader thereof, there is absolutely no
room for interpretation or construction anymore. Courts are not allowed to make
contracts for the parties; rather, they will intervene only when the terms of the policy
are ambiguous, equivocal, or uncertain. The parties must abide by the terms of the
contract because such terms constitute the measure of the insurer’s liability and
compliance therewith is a condition precedent to the insured’s right of recovery from
the insurer.”61
58
New Life Enterprises v. Hon. Court of Appeals, et al, G.R. No. 94071, March 31, 1992;
See also Ejercito v. Oriental Assurance Corporation, G.R. No. 192099, July 8, 2015.
59
Ang Giok Chip v. Springfield Fire & Marine Insurance Co., G.R. No. L-33637,
December 31, 1931.
Âng Giok Chip v. Springfield Fire & Marine Insurance Co., ibid., citing California
Jurisprudence, vol. 14, p. 427.
61
New Life Enterprises v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31, 1992
citing Marina Port Services, Inc. v. Iniego, et al., 181 SCRA 304 (1990); Pan Malayan Insurance
Corporation v. Court of Appeals, et al., 184 SCRA 54 (1990); and Perla Compania de Seguros,
Inc. v. Court of Appeals, et al., 185 SCRA 741 (1990).
a. In Phil. American General Insurance Co., Inc. v. Mutuc, 62 the

Supreme Court ruled that insurance contracts are the private laws of the contracting
parties and should therefore be fulfilled according to the literal sense of their
stipulations, if their terms are clear and leave no room for doubt as to the intention of
the contracting parties, for contracts are obligatory, no matter what form they may
be, whenever the essential requisites for their validity are present. In Pacific
Oxygen & Acetylene Co. v. Central Bank ,63 the Supreme Court ruled that the first
and fundamental duty of the courts is the application of the law according to its
express terms, interpretation being called for only when such literal application is
impossible.
b. “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 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. Moreover, obligations
arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.”64
§7.01. INTERPRETATION IN CASE OF DOUBT. If, however, there is
doubt, any doubt should be resolved against the insurer since an insurance contract is
a contract of adhesion. Conformably, it stands to reason that the doubt should be
resolved against the insurer whose lawyer or managers drafted the insurance policy
contract.65 This is consistent with Article 1377 of the New Civil Code which
provides:
Art. 1377. The interpretation of obscure words or

stipulations in a contract shall not favor the party who
caused the obscurity.
62
G.R. No L-19632, November 13, 1974. 61 SCRA 22; Castro v. Court of Appeals,
G.R. No. L-44727, September 11, 1980, 99 SCRA 197.
63
G.R. No. L-21881, March 1, 1969, 22 SCRA 917.
M
New Life Enterprises v. Hon. Court of Appeals, et al., supra citing Sun Insurance
Office, Ltd. v. Court of Appeals, et al., 195 SCRA 193 (1991) and Article 1157, New Civil
Code.
65
Rizal Surety and Insurance Company v. Court of Appeals and Transworld Knitting
Mills, Inc., G.R. No. 112360, July 18, 2000.
CHAPTER 5 157
THE POLICY
a. Reasonable Expectation Doctrine. One of the doctrines that is being

used regarding the interpretation of policies is the Reasonable Expectation Doctrine
under which the language of the insurance policy is interpreted to give effect to the
reasonable expectation of the insured. This is the result of the view the interpretation
should favor the insured because of the disparate bargaining status between the
parties; that the insurer is the more powerful bargainer to meet its own needs.66
b. It has been generally held that the terms in an insurance policy, which
are ambiguous, equivocal, or uncertain are to be construed strictly against, the
insurer, and liberally in favor of the insured so as to effect the dominant purpose of
indemnity or payment to the insured, especially where a forfeiture is involved, and
the reason for this rule is that the “insured usually has no voice in the selection or
arrangement of the words employed and that the language of the contract is selected
with great care and deliberation by expert and legal advisers employed by, and acting
exclusively in the interest of, the insurance company. 67 It was likewise explained the
“rigid application of the rule on ambiguities has become necessary in view of current
business practices. The Courts cannot ignore that nowadays monopolies, cartels, and
concentration of capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared ‘agreements’ that the
weaker party may not change one whit, his participation in the ‘agreement’ being
reduced to the alternative to ‘take it or leave it’ labeled since contracts by adherence
( c o n t r a t s d ’ a d h e s i o n ), in contrast to those entered into
by parties bargaining on an equal footing, such contracts (of which policies of
insurance and international bills of lading are prime examples) obviously call for
greater strictness and vigilance on the part of courts of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their becoming
traps for the unwary.68 Justice J.B.L. Reyes explained in Q u a C h e e
G a n u . L a w U n i o n a n d R o c k
I n s u r a n c e C o . , L t d . , 6 9 that
^Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 54 Cal. Rptr. 104, 419 P.2d 168
(1966).
67
Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215,
June 29, 1963 citing 29 Am. Jur. 181; 44 C.J.S. 1174; Calanoc v. Court of Appeals, et al., G.R.
No. L-8151, December 16, 1955.
^Fieldmen’s Insurance Company, Inc. v. Vda. de Songco, G.R. No. L-24833,
September 23, 1968, citing New Civil Code, Article 24; Sent, of Supreme Court of Spain,
December 13, 1934, February 27, 1942.
69
98 Phil. 85 (1955).
the contract of insurance is one of perfect good faith ( u b e r i m a

f i d e s ) not for the insured alone, but equally so for the insurer; in fact, it
is more so for the latter, since its dominant bargaining position carries with it
stricter responsibility. This is merely to stress that while the morality of the
business world is not the morality of institutions of rectitude like the pulpit and the
academe, it cannot descend so low as to be another name for guile or deception.
Moreover, should it happen thus, no court of justice should allow itself to lend its
approval and support.
c. The Supreme Court ruled in L a n d i c h o v .
G o v e r n m e n t S e r v i c e I n s u r a n c e
S y s t e m “This is particularly true as regards insurance policies, in respect of
which it is settled that the ‘terms in an insurance policy, which are ambiguous,
equivocal, or uncertain xxx are to be construed strictly and most strongly against
the insurer, and liberally in favor of the insured so as to effect the dominant
purpose of indemnity or payment to the insured, especially where forfeiture is
involved/ and the reason for this is that the ‘insured usually has no voice in the
selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by experts and legal advisers
employed by, and acting exclusively in the interest of, the insurance company/”
d. For example, if 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, the doubt should be resolved in favor of the insured and against
the insurance company.70 71 An insurance contract should be so interpreted as to
carry out the purpose for which the parties entered into the contract which is, to
insure against risks of loss or damage to the goods. Such interpretation should
result from the natural and reasonable meaning of the language in the policy. 72 The
rule is that the provisions defining the coverage of the policy shall be construed to
provide the widest possible coverage while exclusions are construed narrowly
against the insured.73
70
G.R. No. L-28866, March 17, 1972, citing 29 Am. Jur. 181 & 44 CJS 1174.
71
Rizal Surety and Insurance Company v. Court of Appeals and Transworld Knitting
Mills, Inc., G.R. No. 112360, July 18, 2000.
72
Malayan Insurance Corporation v. The Honorable Court of Appeals and TKC
Marketing Corporation, G.R. No. 119599, March 20, 1997.
73
DiMugno and Glad, p. 1706 citing Crane v. State Farm Fire & Cas. Co., 48 A.L.R.
3d 1089 (1971).
CHAPTER 5 159
THE POLICY
e. 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 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.74
§7.02. FORFEITURE CLAUSES. Provisions, conditions or exceptions tending
to work a forfeiture of insurance policies should be construed most strongly against
those for whose benefit they are inserted, and most favorably toward those against
whom they are intended to operate. 75 Hence, coverage provisions are construed broadly
to provide the broadest possible coverage while exclusions are construed narrowly. 76
Exclusions are strictly construed against the insurer and liberally interpreted in favor of
the insured.77
§7.03. OTHER RULES OF INTERPRETATION. Other rules of interpretation
of contracts that apply to insurance contracts include the rules discussed hereunder.
a. E x p r e s s o u n i u s e x c l u s i o
a l t e r i u s — the mention of one thing implies the exclusion of another thing.
An enumeration of exclusions or excluded perils wherein no liability attaches to
petitioner insurance company leads to the conclusion that the other causes are not
excluded. Thus, if murder and assault are not expressly included in the enumeration of
the circumstances that would negate liability in said insurance policy leads to
conclusion that the insurer is liable in those cases.78
b. When an instrument consists partly of written words and partly of a
printed form and the two are inconsistent, the written words control the latter.79
74
Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No. 89741, March 13,
1991; Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 (1988).
75
Trinidad v. Orient Protective Ass’n., 67 Phil. 181.
76
State Farm Mutual Auto Insurance Co. v. Partridge, 10 Cal. 3df 94, 109 Cal. Rptr. 811
(1973).
77
Delgado v. Heritage Life Insurance Co., 157 Cal. App. 3d 262, 271, 203 Cal. Rptr. 672,
677 (2nd Dist. 1984).
78
Finman General Assurance Corp. v. The Hon. Court of Appeals, G.R. No. 100970,
September 2, 1992.
79
Jarque v. Smith Bell & Co., Ltd., G.R. No. L-32986, November 11,1930 citing Joyce
on Insurance, 2d ed., sec. 224, page 600; Arnould on Marine Insurance, 9th Ed., Sec. 73;
Marine Equipment Corporation v. Automobile Insurance Co., 24 Fed. (2d), 600; and Marine
Insurance Company v. McLahanan, 290 Fed., 685, 688.
c. Another basic rule is that all provisions should be examined and a

particular provision should not be construed in isolation. “All its parts are reflective
of the true intent of the parties. The policy cannot be construed piecemeal. Certain
stipulations cannot be segregated and then made to control; neither do particular
words or phrases necessarily determine its character.” 80 All the provisions and riders
should be taken and interpreted together to show the intention of the parties.81
d. The words used in the policy do not have different meanings depending
on whether they appear in the coverage clause or an exclusion clause.82
e. Where categories are used in a policy to defined covered items, an
exception to the insurance coverage contained in one of the categories does not apply
to the other categories.83
f. The policy should be read as a layman would have read it and not as it
may be analyzed by an expert. However, the plain meaning rule does not apply if the
parties used particular words in a technical sense.84
CASE:
1. On February 7,1957, the defendant Equitable Insurance and Casualty Co., Inc.,
issued Personal Accident Policy No. 7136 on the life of Francisco del
Rosario, alias Paquito Bolero, son of herein plaintiff- appellee, binding itself
to pay the sum of Pi,000.00 to P3,000.00, as indemnity for the death of the
insured. Part I the Policy provides that if the insured sustains any bodily
injury which is effected solely through violent, external, visible and
accidental means, and which shall result, independently of all other causes
and within 60 days from the occurrence thereof, in the Death of the Insured,
the Company agreed to pay the following amounts: Section 1. Injury
sustained other than those specified below unless excepted hereinafter -
PI,000.00; Section 2. Injury sustained by the wrecking or disablement
^Gulf Resorts Inc. v. Philippine Charter Insurance Corp., G.R. No. 156167, May 16,
2005.
81
Ibid.
82
Mori v. Southern General Ins. Co., 196 Cal. Rptr. 627, 629 (3rd District, 1987) cited in
DiMugno and Glad, p. 1702.
Âmerican Star Insurance Co. v. Ins. Co. of the West, 232 Cal. App. 3d 1320 (4th
District 1991) cited in DiMugno and Glad, p. 1703.
^DiMugno and Glad, p. 1704 citing Crane v. State Farm Fire & Cas. Co., 48 A.L.R. 3d
1089 (1971) and Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. 4th 645.
CHAPTER 5 161
THE POLICY
of a railroad passenger car or street railway car in or on which the Insured is travelling as
a farepaying passenger - Pi,500.00; Section 3. Injury sustained by the burning of a church,
theatre, public library or municipal administration building while the Insured is therein at
the commencement of the fire - P2,000.00; Section 4. Injury sustained by the wrecking or
disablement of a regular passenger elevator car in which the Insured is being conveyed as
a passenger (Elevator in mines excluded) - P2,500.00; and Section 5. Injury sustained by a
stroke of lightning or by a cyclone - P3,000.00. Part VI that the policy shall not cover
disappearance of the Insured nor shall it cover Death, Disability, Hospital fees, or Loss of
Time, caused to the insured: (h) By drowning except as a consequence of the wrecking or
disablement in the Philippine waters of a passenger steam or motor vessel in which the
Insured is travelling as a farepaying passenger. However, a rider to the Policy contained
the following: IV. DROWNING It is hereby declared and agreed that exemption clause
Letter (h) embodied in PART VI of the policy is hereby waived by the company, and to
form a part of the provision covered by the policy. On February 24, 1957, the insured
Francisco del Rosario, alias Paquito Bolero, while on board the motor launch “ISLAMA”
together with 33 others, including his beneficiary in the Policy, Remedios Jayme, were
forced to jump off said launch on account of fire which broke out on said vessel, resulting
in the death of drowning, of the insured and beneficiary in the waters of Jolo. A claim is
made for P3,000.00. The insurer admits that it is liable under the insurance policy but the
defendant claims that the liability is not P3,000.00 but only PI,000.00. Is the insurer liable
for only PI,000.00?
A: No, the insurer is liable up to P3,000.00. Besides, on the face
of the policy itself, death by drowning is a ground for recovery apart from the
bodily injury because death by bodily injury is covered by Part I of the policy
while death by drowning is covered by Part VT thereof. But while the policy
mentions specific amounts that may be recovered for death for bodily injury, yet,
there is not specific amount mentioned in the policy for death through drowning
although the latter is, under Part VI of the policy, a ground for recovery
thereunder. Since the defendant has bound itself to pay Pi,000.00 to P3,000.00 as
indemnity for the death of the insured but the policy does not positively state any
definite amount that may be recovered in case of death by drowning, there is an
ambiguity in this respect in the policy, which ambiguity must be interpreted in
favor of the insured and strictly against the insurer so as to allow greater
indemnity. We believe that under the proven facts and circumstances, the findings
and conclusions of the trial court, are well taken, for they are supported by the
generally accepted principles or rulings on insurance, which enunciate
that where there is an ambiguity with respect to the terms and conditions of
the policy, the same will be resolved against the one responsible thereof. It
should be recalled in this connection, that generally, the insured, has little, if
any, participation in the preparation of the policy, together with the drafting
of its terms and Conditions. The interpretation of obscure stipulations in a
contract should not favor the party who cause the obscurity (Art. 1377,
N.C.C.), which, in the case at bar, is the insurance company. Where two
interpretations, equally fair, of languages used in an insurance policy may be
made, that which allows the greater indemnity will prevail. At any event, the
policy under consideration, covers death or disability by accidental means,
and the appellant insurance company agreed to pay PI,000.00 to P3,000.00.
is indemnity for death of the insured. ( D e l R o s a r i o
o . The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215,
June 29, 1963)
§7.04. INDIVISIBILITY. An insurance policy may be considered indivisible even

if it covers two or more properties. The general rule is that “the peculiar character of the
insurance contract raises a strong presumption in all the cases that its terms are to be
construed as parts of an indivisible whole.” 85 It would depend on the intent of the parties.
The Court ruled:
“The terms of the contract constitute the measure of the insurer liability and
compliance therewith is a condition precedent to the insured’s right to recovery from the
insurer. ( P e r l a C o m p a n i a d e S e g u r o s , I n c .
v . C o u r t o f A p p e a l s , G . R . N o .
7 8 8 6 0 , M a y 2 8 , 1 9 9 0 , 1 8 5 S C R A 7 4 1 )
Whether a contract is entire or severable is a question of intention to be determined by the
language employed by the parties. The policy in question shows that the subject matter
insured was the entire shipment of 2,000 cubic meters of apitong logs. The fact that the
logs were loaded on two different barges did not make the contract several and divisible as
to the items insured. The logs on the two barges were not separately valued or separately
insured. Only one premium was paid for the entire shipment, making for only one cause or
consideration. The insurance contract must, therefore, be considered indivisible.” 86
a. When the insurance contract covers several separate subjects in

consideration of separate premiums, the contract is divisible and invalidity of one does not
affect the other. In addition, the con-
85
Vance, p. 86.
Ôriental Assurance Corp. v. Court of Appeals, G.R. No. 94052, August 9,
1991.
CHAPTER 5 163
THE POLICY
tract is indivisible when breach or misrepresentation regarding one

(1) subject affects the other subjects.87
§7.05. PROOF. If the terms and conditions of the policy are in question in a
case, the party who seeks to prove such terms and conditions must present the policy
during trial and formally offer it as evidence. Any person who relies on the policy as the
basis of his cause of action must also attach the same to the complaint as an actionable
document.88 The Court observed:
“... If a legal claim is irrefragably sourced from an actionable document, the defendants
cannot be deprived of the right to examine or utilize such document in order to intelligently
raise a defense. The inability or refusal of the plaintiff to submit such document into evidence
constitutes an effective denial of that right of the defendant which is ultimately rooted in due
process of law, to say nothing on how such failure fatally diminishes the plaintiffs substantiation
of its own cause of action.”
a. The obligation to attach the policy to the Complaint as an actionable

document and to present and offer the same applies even if the plaintiff is an insurance
company that is trying to recover based on its right of subrogation.89
b. Note that the Insurance Commission issued I.C. Circular No. 11-2000
which prevents insurers and insurance agents from divulging information in insurance
policies. However, the Supreme Court ruled that the Circular is not intended to prevent
compliance with lawful orders of the Court. Hence, there is no legal impediment to the
production of the insurance application and the insurance policy pursuant to subpoena
issued by the trial court.90
c. It should be noted, however, that if the policy is attached to the
complaint, the insurer cannot escape liability by claiming that the policy (or bond of a
surety) was unaccounted for or missing from its custody. 91 The insurer cannot let the
beneficiary suffer through its own fault.
87
Vance, p. 86.
^Malayan Insurance Company, Inc. v. Regis Brokerage Corporation, G.R. No.
172156, November 23, 2007.
"Ibid.
^Philip S. Yu v. Court of Appeals, G.R. No. 154115, November 29, 2005, 476 SCRA 443.
91
Capital Insurance and Surety Co. v. Del Monte Motors, Inc., G.R. No. 159979,
December 15, 2015.
§7.06. SIGNATORY. The officer who should sign the policy for the insurer
must be duly authorized to sign the policy. However, violation of the internal rules of
the insurer regarding contract signatories cannot be used against an innocent insured.
For example, if the Vice President signed the insurance policy, the insurer cannot
escape liability by citing the internal rules that states that the corporate signatory is the
President. As between the insured and the insurer, the insurer who employed and gave
character to the Vice President as its agent should be the one to bear the loss.92
PROBLEMS:
1. GRI is the owner of a resort and had its properties in said resort insured
originally with the AHAC. In the first four insurance policies issued by AHAC
the risk of loss from earthquake shock was extended only to plaintiffs two
swimming pools. Subsequently, petitioner agreed to insure with respondent the
properties covered by the policy issued by AHAC-AIU, provided that the policy
wording and rates in said policy be copied in the policy to be issued by
respondent. An earthquake struck central Luzon and northern Luzon and
petitioner’s properties, including the two swimming pools, were damaged. GRI
then filed a claim with the respondent for the said damage including other
properties destroyed by the earthquake. Respondent denied claim and said that
they are only liable to the two swimming pools covered by the policy and not the
other properties. Whether or not AHAC is also liable for the damages caused by
the earthquake on the other properties of petitioner?
A: No. AHAC is only liable for the two swimming pools. It is
basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other. All its parts are reflective of the
true intent of the parties. The policy cannot be construed piecemeal. GRI
cannot focus on the earthquake shock endorsement to the exclusion of the
other provisions. All the provisions and riders, taken and interpreted
together, indubitably show the intention of the parties to extend the
earthquake shock coverage to the swimming pools only. An insurance
premium is the consideration paid by the insured to the insurer for
undertaking to indemnify the former against a specified peril. In the subject
policy, no premium payments were paid with regard to earthquake shock
coverage except on the two pools. There is no mention of any premium
payable for the other resort properties. ( G u l f R e s o r t s ,
I n c . v . P h i l i p p i n e C h a r t e r
I n s u r a n c e C o r p o r a t i o n , G . R .
N o . 1 5 6 1 6 7 , M a y 1 6 , 2 0 0 5 )
92
Capital Insurance and Surety Co. v. Del Monte Motors, Inc., supra.
CHAPTER 5 165
THE POLICY
§8. COVER NOTES. Cover notes are interim or preparatory contracts of

insurance. An interim coverage may be necessary because the insurer may need
more time to process the insurance application. The applicable provision states:
SEC. 52. Cover notes may be issued to bind

insurance temporarily pending the issuance of the policy.
Within sixty (60) days after the issue of the 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.
a. Requisites. The issuance of Cover Notes under Section 52 is subject to

the following rules:
(1) The Cover Note shall be issued or renewed only upon prior approval
of the Insurance Commission;
(2) The Cover Note shall be valid and binding not more than 60 days
from the date of its issuance;
(3) The cover note may be cancelled by either party upon prior notice to
the other of at least seven days;
(4) The policy should be issued within 60 days after the issuance of the
cover note; and
(5) The 60-day period may be extended upon written approval of the
Insurance Commission.
b. When approval is dispensed with. The written approval of the Insurance
Commission is dispensed with upon the certification of the president, vice president
or general manager of the insurer that the risk involved, the values of such risks and
premium therefor have not as yet been determined or established
and the extension or renewal is not contrary to or is not for the purpose of
violating the Insurance Code or any rule.93
c. Premium. No separate premium (separate from the policy or main
contract) is required for the cover note.94
§9. KINDS OF PROPERTY INSURANCE POLICY. A property insurance
policy is either open, valued, or running.95 These types of policies are defined in
Sections 60 to 62, v i z . :
SEC. 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
shall be ascertained in case of loss.96
SEC. 61. A valued policy is one which expresses
on its face an agreement that the thing insured shall
be valued at a specific sum.
SEC. 62. A running policy is one which contem-
plates 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.
a. Valued Policy. A valued policy expresses the agreed valuation of the

thing insured on the face of the policy. This valuation is binding on the parties; no
party can establish a different valuation in case of loss. The amount to be paid by
the insurer as indemnity may not necessarily be related to the actual loss. The
measure of indemnity is the agreed valuation and not the actual loss. That is
precisely the reason why a valued policy is considered an exception to the
principle of indemnity.
(1) The rule that the valuation in a valued policy is binding on the
insurer may be justified if the situation of the insurer is considered v i s -
a - v i s that of the insured. Unlike its most prospective customers, the
insurer has the necessary resources to determine the correct valuation of the
property.
93
Ins. Memo. Circ. No. 3-75.
94
Pacific Timber Export Corp. v. Court of Appeals, 112 SCRA 199.
95
Section 59,1.C.
Âs amended by R.A. No. 10607.
CHAPTER 5 167
THE POLICY
After profiting from premium payment at the rate that was computed on the
basis of the agreed valuation (and which rate will then be high if there is
over-insurance), the insurer should not be allowed to question the valuation
on which it profited.
(2) A life insurance policy is always a valued policy because the
amount fixed in the policy is always not related to the actual loss. The
parties will always agree on a valuation which is always not equivalent to
the value of the life that will be lost.
b. Open Policy. No valuation of the property is stipulated in an open
policy. Consistent with the rule that contract of insurance is a contract of
indemnity, the insurer is only entitled to recover the amount of the actual loss
sustained by him as he may be able to establish (there being no express valuation
in the policy). Judgment may be properly entered against the insurer for lack of
satisfactory proof of the amount of his loss. 97 An open policy is sometimes called
an “unvalued policy” because it is “one in which the value is not fixed, but is left
to be definitely determined in case of loss.” 98 The actual loss as determined will
represent the total indemnity due the insured from the insurer except only that the
total indemnity shall not exceed the face value of the policy.99
(1) There is still a face value appearing in an Open Policy. However,
the amount fixed merely represents the insurers liability.100
c. Running Policy. A fire insurance policy may be entered into that
covers “stock of rice and p a l a y (loose and/or in sacks), the property of the
assured or held by him in trust, on commission or on joint account with others
and/or for which he is responsible in case of loss, while contained during the
currency of the policies in the building of the assured in Binalonan, Pangasinan
”101 This policy is a
97
Tan Chuco v. Yorkshire Fire and Life Insurance Company, G.R. No. L-
5069, October 15,1909, citing Franklin F. Ins. Co. v. Hamil, 6 Gill (Md.) 87;
Marchesseau v. Merchants Ins., Co., 1 Rob. (La.), 438; Eagle Ins. Co. v. Lafayette
Ins. Co., 9 Ind.,on
"Couch 443.
Insurance, 2nd Ed., Vol. 1, pp. 90-91, hereinafter called “1 Couch
90, 91.”
"Development Insurance Corporation v. Intermediate Appellate Court, et al.,
G.R. No. L-71360, July 16, 1986.
100
101
Lee Bog & Company v. Hanover Fire Insurance Company of the City of
New York, et al., G.R. No. L-10305, February 28, 1961.
typical running policy where the extent of the property insured shall be defined
from time to time because of the nature of the business that is being insured.
PROBLEMS:
1. Suppose that Fortune owns a house valued at P600,000.00 and insured the same
against fire with three 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?
A: Fortune may recover from any, any two (2) or all of the insurers
provided that the total amount that he will recover does not exceed his loss.
( S e c . 9 4 , I C P ) Fortune may demand indemnity from Z
alone for P600,000.00. In the alternative, Fortune may recover from all
insurers P200,000.00 each. Fortune may also opt to recover P400,000.00
from X and recover the balance from any or both Y or Z.
2. If each of the policies obtained by Fortune in problem (1) is an open policy and it was
immediately determined after the fire that the value of the house was P2.4 Million,
how much may he collect from X, Y, and Z?
A: Fortune may recover the full amount of the coverage from each
insurer if all policies are open policies. The value of the property to be
considered is the actual value of P2.4 Million. Since the total amount of the
insurance coverage is less than the actual loss, Fortune may recover
P400,000.00 from X, P200,000.00 from
Y and P600,000.00 from Z or a total amount of Pl.2 Million. 3
3. If each of the fire insurance policies obtained by Fortune in problem

(2) is a valued policy and the value of his house was fixed in each policies at Pi
Million, how much would Fortune recover from X if he has already obtained full
payment from the insurance policies issued by Y and Z?
A: Fortune can only recover P200,000.00 from X. The valuation of
the property (in this case PI Million) is binding on the parties and it is no
longer necessary to determine the actual value thereof. The valuation in the
policy is deemed the actual value of the property. (Par. [b], Section 94, ICP)
CHAPTER 5 169
THE POLICY
4. Supposing in problem (1), Fortune was able to collect from both Y and Z, may he
keep the entire amount he was able to collect from the said two (2) insurance
companies? Explain your answers.
A: No. Fortune may not keep the amount that he collected from
Y and Z. In problem (1), the total value of the property was P600,000.00,
hence, if he collected P200,000.00 from Y and P600,000.00 from Z, there is
an excess of P200,000.00. Fortune can only be indemnified for his loss.
Fortune must hold the excess amount of his insurable interest in the house,
P200,000.00, in trust for the insurers Y and Z. (Par. [d], Section 94, ICP)
5. In problem (1) what is the extent of the liability of the insurance companies among
themselves?
A: Each insurer is bound to contribute ratably to the loss in
proportion to the amount for which he is liable under his contract. (Par. fej,
Section 94, ICP) The ratable contribution of each insurer will be
determined based on the following formula:
Amount of policy
Total insurance taken
Using the foregoing formula, the extent of liability of each insurer
out of the total loss of P600,000.00 are as follows: X = P200,000
(400,000/1,200,000 x 600,000), Y = P100,000 (200,000/1,200,000 x 600,000)
and Z = P300,000 (600,000/1,200,000 x 600,000).
§10. CANCELLATION. Cancellation of property insurance policies should
be made in accordance with Sections 64 and 65 of the Insurance Code which
provide:
SEC. 64. No policy of insurance other than life
shall be cancelled by the insurer except upon prior
notice thereof to the insured, and no notice of
cancellation shall be effective unless it is based on the
occurrence, after the effective date of the policy, of one
or more of the following:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts
increasing the hazard insured against;
(c) Discovery of fraud or material
misrepresentation;
(d) Discovery of willful or reckless acts or omis-
sions increasing the hazard insured against;
(e) Physical changes in the property insured

which result in the property becoming uninsurable; or
(f) Discovery of other insurance coverage that
makes the total insurance in excess of the value of the
property insured; or102
(g) A determination by the Commissioner that the
continuation of the policy would violate or would place
the insurer in violation of this Code.
SEC. 65. All notices of cancellation mentioned in
the preceding section shall be in writing, mailed or
delivered to the named insured at the address shown in
the policy, 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
(b) That, upon written request of the named
insured, the insurer will furnish the facts on which the
cancellation is based.
a. Requisites of Cancellation. Cancellation of insurance policies requires the

concurrence of the following conditions:
(1) Prior notice of cancellation to insured;
(2) The notice of cancellation must be based on the occurrence
after effective date of the policy of one or more of the grounds mentioned in
Section 64;
(3) The notice must be in writing, mailed or delivered to the
named insured at the address shown in the policy or to his broker is
authorized in writing in the policy owner to receive the notice of
cancellation on his behalf;
(4) The notice must state the grounds relied upon provided in
Section 64 of the Insurance Code and upon request of insured, to furnish
facts on which cancellation is based.103
102
Section 64(f) was added by R.A. No. 10607.
103
Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos,
G.R. No. 125678, March 18, 2002; Malayan Insurance Co., Inc. v. Gregoria Cruz
Arnaldo, G.R. No. L-67835, October 12, 1987; Section 65 as amended by R.A. No.
10607.
CHAPTER 5 171
THE POLICY
b. Property Insurance. The law provides that Section 64 applies to

insurance “other than life insurance.” In other words, Section 64 applies only to
property insurance.
(1) Nevertheless, it is believed that some of the grounds in Section
64 may apply to life insurance. For example, a life insurance policy may also
be cancelled for non-payment of premium, fraud or material
misrepresentation.
c. Reason for Notice Requirement. The purpose of provisions or
stipulations for notice to the insured is to prevent the cancellation of the policy
without allowing the insured ample opportunity to negotiate for other insurance in its
stead. The form and sufficiency of a notice of cancellation is determined by policy
provisions and Sections 64 and 65 of the Insurance Code.104
d. Contents of Notice. Section 65 requires a statement of the grounds
relied upon. Nevertheless, so long as the ground is stated, written notice to the
insured need not be in any particular form in order to form the basis for the
cancellation of a policy. In the absence of a statute or policy provision prescribing
such form, the notice is sufficient so long as it positively and unequivocally indicates
to the insured, that it is the intention of the company that the policy shall cease to be
binding. Where the policy contains no provision that a certain number of days notice
shall be given, a reasonable notice and opportunity to obtain other insurance must be
given.105
e. Actual Receipt Necessary. Actual personal notice to the insured is
essential to a cancellation under a provision for cancellation by notice. The actual
receipt by the insured of a notice of cancellation is universally recognized as a
condition precedent to a cancellation of the policy by the insurer. Consequently, a
letter containing notice of cancellation which is mailed by the insurer but not
received by the insured, is ineffective as cancellation.106
f. Receipt of Notice by Broker. Generally, the receipt of notice of
cancellation by the broker is not binding on the insured. Ordinarily, “the authority
of the broker to represent the insured
104
Saura Import and Export, Co., Inc. v. Philippine International Surety
Co., Inc. and Philippine National Bank, G.R. No. 15184, May 31, 1963, citing
29 Am. Jur. pp. 732-741.
™Ibid.
™Ibid.
ends with the completion of the contract, and any notice thereafter given to the
broker will not affect the rights of the insured.” 107 By way of exception, Section 65
as amended by R.A. No. 10607 now provides that notice of cancellation can be
given to the broker provided that the broker is authorized in writing by the policy
owner to receive the notice of cancellation on his behalf.
g. Cancellation by the Insured. While Section 64 deals only with the right
of the insurer to cancel the policy, it does not follow that the insured cannot cancel
the policy. This right to surrender the policy is implicit in Section 80 of the
Insurance Code which provides that the insured is entitled to the return of the
premium “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 p r o r a t a 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.” Section 80 is subject to the caveat 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.”
(1) It should likewise be noted in this connection that in a case
decided under the old Insurance Law, the Supreme Court ruled that “neither
the return of the policy, nor a demand for the return of a proportion of the
premium corresponding to the unexpired term, nor the actual return of said
portion of the premium is essential to the effectivity of the request of the
insured for the cancellation of the insurance policy. Upon receipt thereof by
the insurer, the contract becomes i p s o f a c t o terminated,
without any further act of any party.”108
§10.01. RESCISSION. Cancellation like rescission is one of the ways to
terminate the policy. Termination means any practice or act by an insurer which has
the effect of discontinuing an insurance policy. 109 The said term also includes non-
renewal. If the termination based on grounds other than those provided for in
Section 64 of the Insurance Code, “the violation of the provision of
107
Vance, pp. 444-445.
108
Leona Paulino v. The Capital Insurance & Surety Co., Inc., G.R. No. L-
11728, May 15, 1959.
109
CHAPTER 5 173
THE POLICY
the policy or any breach must be consistent with grounds allowed by law on
concealment, representation and warranty.” 110 Thus, the grounds for rescission by
the insurer of a non-life insurance policy are enumerated as follows: 111
1) When representation is false on material point whether affirmative or
promissory;112
2) Violation of material warranty on the part of either party or other
material provisions of the policy;113
3) Intentional or unintentional concealment;114
4) Violation of a special provision of the policy where the policy declares
that violation thereof shall avoid the policy;115 and
5) Intentional or fraudulent omission, on the part of one insured, to
communicate information of matters proving or tending to prove the
falsity of a warranty;116 and
6) With respect to fire insurance, alteration in the use or condition of a
thing insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the control of the
insured, and increasing the risks.117
§11. RENEWAL OF POLICY. The insured has the right to renew a non-life
insurance policy. In some cases, he can do so by simply paying the premium due on
the effective date of the renewal.
a. Renewal of the policy means that “the issuance and delivery by an
insurer of a policy for the same or similar coverage superseding at the end of the
policy period a policy previously issued and delivered by the same insurer or the
issuance and delivery of a certificate or notice extending the terms of a policy
beyond its period
U0
Par. 7.5,1.C. Circular Letter 2015-58-A dated December 21,
2015.
nl
Ibid.
112
Section 45,1.C.
113
Section 74,1.C.
114
Section 27,1.C.
115
Section 75,1.C.
u6
Section 29,1.C.
“’Section 171,1.C.
or term.118 Non-renewal is simply the termination of the policy by the insurer at the
expiration of the date of the policy.119
b. However, the insured will not have any right to renew if notice of the
intention not to renew is given by the insurer at least 45 days prior expiration of the
policy.
SEC. 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.
§12. REFORMATION OF THE POLICY. It may happen that what was agreed
upon is different from what is written in the policy. For example, during the
negotiations which resulted in the writing of an insurance policy, the parties agreed to
certain terms and conditions but the resulting policy does not reflect their true
agreement because of inadvertence, ignorance, or mistake. In such case, the Court
would have the power to reform the contracts and give effect to them in the sense in
which the parties intended to be bound. But in order to justify this, it must be made
clearly to appear that the minds of the contracting parties did actually meet in
agreement and that they labored under some mutual error or mistake in respect to the
expression of their purpose.120
n8
Par. 5.1 (q), I.C. Circular Letter 2015-58-A dated December 21, 2015.
U9
Par. 5.1 (m), I.C. Circular Letter 2015-58-A dated December 21, 2015.
120
San Miguel Brewery, et al. v. Law Union and Rock Insurance Company (Ltd.),
et al., G.R. No. L-14300, January 19, 1920. See also Fink v. Queens Insurance Co., 24
Fed., 318; Esch v. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury
Savings etc., Co. v. Charter Oak Insurance Co., 31 Conn., 517; Balen v. Hanover Fire
Insurance Co., 67 Mich., 179.
CHAPTER 5 175
THE POLICY
a. Thus, in one case,121 it appeared that a mortgagee desiring to insure his own
insurable interest only, correctly stated his interest, and asked that the same be insured.
The insurance company agreed to accept the risk, but the policy was issued in the name of
the mortgagor-owner, because of the mistaken belief of the company’s agent that the law
required it to be so drawn. It was held that a court of equity had the power, at the suit of
the mortgagee, to reform the instrument and give judgment in his favor for the loss
thereunder, although it had been exactly as it was. Said the court: “If the applicant
correctly states his interest and distinctly asks for an insurance thereon, and the agent of
the insurer agrees to comply with his request, and assumes to decide upon the form of the
policy to be written for that purpose, and by mistake of law adopts the wrong form, a court
of equity will reform the instrument so as to make it insurance upon the interest named.” 122
b. In another case the Court said: “[The Court] ha[s] before us a contract from
which by mistake, material stipulations have been omitted, whereby the true intent and
meaning of the parties are not fully or accurately expressed. There was a definite
concluded agreement as to insurance, which, in point of time, preceded the preparation and
delivery of the policy, and this is demonstrated by legal and exact evidence, which
removes all doubt as to the sense and undertaking of the parties. In the agreement, there
has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit
the insurance to an interest in the property less than that agreed to be insured. The written
agreement did not effect that which the parties intended. That a court of equity can afford
relief in such a case, is, We think, well[-]settled by the authorities.”123
c. But to justify the reformation of a contract, the proof must be of the most
satisfactory character, and it must clearly appear that the contract failed to express the real
agreement between the parties.
§12.01. MISTAKE. It should be noted that it is also possible for the insured to
recover even if there was a mistake. It is not necessary that there be reformation of the
policy. In an early case,
121
San Miguel Brewery, et al. v. Law Union and Rock Insurance Company (Ltd.), et al., ibid.,
citing in Bailey v. American Central Insurance Co. (13 Fed., 250).
122
San Miguel Brewery, et al. v. Law Union and Rock Insurance Company (Ltd.), ibid.
123
Ibid., citing Smell v. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.
it was apparent that a mistake was made in the issuance of the policy. The insured
wanted insurance upon a stock of goods, which he owned, and he received and
paid for a policy on a building, which he did not own, and while the policy was in
force and effect, both the building, which he did not own, and the stock of
merchandise, which he did own, were completely destroyed by fire. The insured
was a well-known merchant, and his merchandise was in the building described in
the policy. The insured was allowed to recover for the loss of his merchandise
under the circumstances.124
l24
Domingo Garcia and Philippine National Bank v. The Hong Kong Fire and
Insurance Co., Ltd., G.R. No. 20341, September 1, 1923.
CHAPTER 6
ASCERTAINING AND CONTROLLING RISKS
Professor Vance said that “in making a contract so highly aleatory as that of
insurance the parties have four primary concerns:
(1) the correct estimation of the risk which enables the insurer to decide whether
he is willing to assume it, and if so at what rate of premium; (2) the precise
delimitation of the risk which determines the extent of the contingent duty to pay
undertaken by the insurer;
(3) such control of the risk after it is assumed as will enable the underwriter to
guard against the increase of the risk because of change in conditions; and (4)
determining whether the loss has occurred, and if so, the amount of the loss.” 1
It is precisely because of such concerns that different devices were
developed to ascertain and control risks. These devices include concealment,
representation, warranty, condition and exceptions. Thus, the correct estimation of
the risk may be made if all material information are disclosed and if the parties are
certain that disclosed information can be relied upon. On the other hand,
delimitation of the risk may be made by specific description of the risk consisting of
the designation of the specific person or property interest to be covered and the
specification of the perils. Delimitation is further accomplished by using exceptions
that are inserted in the policy or stated in the rider. Control of the risk can be done
by resorting to promissory warranties and conditions that will prevent the
occurrence of risks or hazards that may happen after the policy has been issued.
§1. CONCEALMENT. Concealment is defined in Sections 26 and 28 of the
Insurance Code as follows:
1
William R. Vance, Handbook of the Law of Insurance, 2nd Ed., pp. 334-335,
hereinafter referred to as “Vance.”
177
SEC. 26. A neglect to communicate that which a

party knows and ought to communicate, is called a
concealment.
SEC. 28. Each party to a contract of insurance must
communicate to the other, in good faith, all facts within
his knowledge which are material to the contract and as
to which he makes no warranty, and which the other has
not the means of ascertaining.
a. The obligation of each party not to conceal material facts is expressed

in Section 28 of the Insurance Code which states that 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. The obligation to
communicate is the obligation of each party, both the insurer and the insured. Even
the insurer is bound to observe utmost good faith in dealing with the insured.
b. The duty to disclose is required because insurance contracts are
described as contracts u b e r r i m a e f i d a e , that is, of utmost
good faith. Lord Mansfield explained in a leading case2 in England:
“Insurance is a contract upon speculation. The special facts, upon which the
contingent chance is to be computed, lie most commonly in the knowledge of the
insured only: the underwriters trust his representation, and proceeds upon the
confidence that he does not keep back circumstances in his knowledge, to mislead
the under-writer into a belief that the circumstance does not exist, and to induce him
to estimate the risque as if it did not exist.”
c. In A r g e n t e v . W e s t C o a s t L i f e
I n s u r a n c e C o m p a n y ,3 the Supreme Court explained that
the rule on concealment is a requirement of honesty, good faith, and fair dealing.
“The assured undertakes to state all the circumstances affecting the risk, a full and
fair statement of all is required.”
§1.01. MATERIALITY. Only material facts are required to be disclosed. It
would be too much to put on an insured the duty to disclose
2
Carter v. Boehm, 3 Burr. 1905 (1766).
3
G.R. No. L-24899, March 19, 1928 citing Joyce, The Law of Insurance, 2nd edition,
volume 3, Chapter LV.
CHAPTER 6 179
everything that might influence the mind of the insurer. “Business could hardly be
carried on if this were required.” 4 In relation to the insured, the matters he concealed
are considered material if such matters will affect the insurer’s action on his
application, either by approving it with the corresponding adjustment for a higher
premium or rejecting the same or in fixing the terms and conditions of the policy. In
relation to the insurer, the matters concealed are considered material if they will affect
the decision of the insured to enter into the insurance contract. Section 31 provides:
SEC. 31. Materiality is to be determined not by the

event, but solely by the probable and reasonable
influence of the facts upon the party to whom the
communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making
his inquiries.
a. Generally, the matter concealed by the insured is considered material if

it relates to physical hazard or moral hazard. Hazards affect the estimate of the
disadvantages of the proposed contract. If the insurer knows about the circumstances
relating to physical or moral hazard, it will give a chance to the insurer to make
further inquiries and to decide on the basis of such inquiry.
b. Thus, according to Professor Vance, “the test of materiality is the effect
which the knowledge of the fact in question would have on the making of the
contract. To be material, a fact need not increase the risk or contribute to any loss or
damage suffered. It is sufficient if the knowledge of it would influence the parties in
making the contract.”5
c. If there is nothing in the policy that makes it an obligation of the party to
make disclosure during the life of the contract, then there is no duty to make such
disclosure for facts occurring after the insurance takes effect. Such information could
not affect the making of the contract.
d. The Supreme Court explained in one case:6 “The basis of the rule
vitiating the contract in case of concealment is that it
4
Victor Dover, A Handbook to Marine Insurance, 1975 Ed., p. 346, citing
Ionides v. Pender, 1874, hereinafter referred to as “Dover.”
6
Vance, p. 347.
6
Argente v. West Coast Life Insurance, Inc., G.R. No. L-24899, March 19,1928.
misleads or deceives the insurer into accepting the risk, or accepting it at the rate of
premium agreed upon. The insurer, relying upon the belief that the assured will
disclose every material within his actual or presumed knowledge, is misled into a
belief that the circumstance withheld does not exist, and he is thereby induced to
estimate the risk upon a false basis that it does not exist. The principal question,
therefore, must be: Was the assurer misled or deceived into entering a contract
obligation or in fixing the premium of insurance by a withholding of material
information of facts within the assured’s knowledge or presumed knowledge?”
e. However, material information obtained after the filing of the
application but before the insurance takes effect should also be disclosed. Hence, the
applicant for a life insurance policy is under a duty to disclose to the insurer changes
in his health occurring or coming to his knowledge between the date of submission
of the policy and the time it takes effect.7
§1.02. EXAMPLES OF MATERIAL FACTS. Using the test of materiality
set forth above, the facts that are material — and should therefore be disclosed -
relate to the physical hazard or to the moral hazard. 8 Material facts in property
insurance includes, for example, “the nature, construction or use of an insured
building, or whether it is particularly exposed to risk; in life insurance, they would
include health or a high risk occupation or hobby or the results of any health tests
known to the insured; in liability insurance, they would include a bad accident
record.”9
a. In M a l a y a n I n s u r a n c e v . P A P
C o . L t d . , 1 0 the transfer of the location of the insured machineries
was considered material fact that should have been disclosed when the fire insurance
policy was renewed. The unconsented removal of the machineries to another
location made the said machineries at the insured company’s own risk. The Court
ruled that there was concealment that entitled the insurer to rescind under Sections
26 and 27 of the Insurance Code.
7
Vance, p. 351; Miller v. Republic Nat. Life Ins. Co., 789 F.2d 1336 (9th Cir.
1986).
8
Birds, p. 111.
9
Birds, pp. Ill to 112.
10
G.R. No. 200784, August 7, 2013: Note that the Supreme Court considered the
non-disclosure as concealment, misrepresentation and a breach of material warranty.
CHAPTER 6 181
b. In F l o r e n d o u . P h i l a m P l a n s , I n c . , n
the insured signed the insurance application without filling in the details regarding his
continuing treatments for heart condition and diabetes. The Supreme Court ruled that there
was concealment of a material fact. In this same case, the beneficiary also argued that the
application required the disclosure of treatment for heart condition in the last five years. The
beneficiary pointed out that the pacemaker implant was made about 20 years before he
signed the application. The Supreme Court rejected the argument explaining that:
“Lourdes next points out that it made no difference if Manuel failed to reveal the fact
that he had a pacemaker implant in the early 70s since this did not fall within the five-year
timeframe that the disclosure contemplated. But a pacemaker is an electronic device
implanted into the body and connected to the wall of the heart, designed to provide regular,
mild, electric shock that stimulates the contraction of the heart muscles and restores
normalcy to the heartbeat. That Manuel still had his pacemaker when he applied for a
pension plan in October 1997 is an admission that he remained under treatment for irregular
heartbeat within five years preceding that application.
Besides, as already stated, Manuel had been taking medicine for his heart condition
and diabetes when he submitted his pension plan application. These clearly fell within the
five-year period. More, even if Perla’s knowledge of Manuel’s pacemaker may be applied to
Philam Plans under the theory of imputed knowledge, it is not claimed that Perla was aware
of his two other afflictions that needed medical treatments. Pursuant to Section 27 of the
Insurance Code, Manuel’s concealment entitles Philam Plans to rescind its contract of
insurance with him.”
c. The following are other examples of material concealment:
(1) Concealment of the insured in life insurance of fainting spells and/or

drug overdose illness is a material concealment;* 12
(2) The insured’s failure to disclose in an application for an automobile
insurance that he does not have a driver’s license or that his license was revoked
or suspended;13
n
G.R. No. 186983, February 22, 2012.
12
Wilson v. Western National Life Ins. Co., 235 Cal. App. 3d 981, 1 Cal. Rpt. 2d 157 (5th
Dis. 1991) cited in DiMugno and Glad, p. 1634.
,a
Civil Service Emp. Ins. Co. v. Blake, 245 Cal. App. 2d 196, 53 Cal. Rptr. 701 (2d Diet.
1966) cited in DiMugno and Glad, p. 1946.
§1.03. CAUSATION NOT NECESSARY. The matter concealed need not

be the cause of the loss. For example, in life insurance, the facts concealed need
not have a bearing on the cause of death of the insured. It is well-settled that the
insured need not die of the disease if he had failed to disclose to the insurer the
existence of such disease. It is sufficient that his non-disclosure misled the insurer
in forming his estimates of the risks of the proposed insurance policy or in
making inquiries.14
a. In F l o r e n d o v . P h i l a m P l a n s ,
I n c . , 1 5 the matter concealed was the continuing treatment of the insured
for heart condition and diabetes. The claim was denied on the ground of material
concealment although the insured died of blood poisoning.
§1.04. REQUISITES. The requisites that can be derived from the
provisions of the Insurance Code that justify one party to rescind the policy on the
ground of concealment are as follows:
(1) The party involved must know the fact concealed or at least he ought to
know the same;16
(2) The fact concealed must be material;17
(3) No warranty is extended by the party regarding the fact concealed;18 and
(4) The other party does not have the means of ascertaining.19
§1.05. KNOWLEDGE OF AGENT OF INSURED. Professor Vance
believes that knowledge on the part of the agent of the insured can be imputed to
the insured himself only if the following circumstances are present: (1) It was the
duty of the agent to acquire and communicate information of the facts in question,
and (2) It was possible for the agent, in the exercise of reasonable diligence, to
have made such communication before the making of the insurance contract. 20 It
is believed that the requirements suggested by Prof.
14
Sun Assurance Company of Canada v. The Hon. Court of Appeals and
Spouses Rolando and Bernarda Bacani, G.R. No. 105135, June 22, 1995; Henson v.
The Philippine American Life Insurance Co., 56 O.G. No. 48 (1960).
16
Supra.
16
17
Section 28,1.C.
18
Ibid.
19
Section 28,1.C.; Florendo v. Philam Plans, Inc., supra.
20
Vance, p. 354.
CHAPTER 6 183
ASCERTAINING AND CONTROLLING
RISKS
Vance are consistent with Section 43 of the Insurance Code which provides that the
principal-insured is bound with the knowledge of his agent “whose duty it is to give
information.”
a. In F l o r e n d o v . P h i l a m P l a n s ,
I n c . , 2 1 the beneficiary insisted that there was no concealment because the
soliciting agent knew that the insured had a pacemaker implanted 20 years before he
signed the application. In addition, the beneficiary contended that the mere fact that
the insured signed the application in blank and let the soliciting agent fill in the
required details did not make her his agent and bind him for her concealment. The
Supreme Court rejected the arguments stating that the responsibility of preparing the
application belonged to the insured and the insured cannot sign the application and
disown the responsibility for having it filled up. If the insured furnished the soliciting
agent the needed information and delegated to her the filling up of the application,
then she acted on his instruction, not on the insurer’s instructions. The Supreme Court
likewise observed that even assuming that it was the soliciting agent who filled up the
application, the insured is still bound by what it contains because he expressly
certified that he authorized the actions of the agent. The Supreme Court also noted
that the insured was a civil engineer and manager of a construction company and he
could be expected to know that one must read every document, especially if it creates
rights and obligations affecting him before signing the same. “It could reasonably be
expected that he would not trifle with something that would provide additional
financial security to him and his wife in his twilight years.”22
b. However, it should be noted that the insurer cannot rely on the alleged
connivance between the agent and the insured all the time. This is especially true
where the incontestability clause applies.23 24
c. In addition, it is also well to note the authorities cited in the dissenting
opinion in T h e I n s u l a r L i f e A s s u r a n c e
C o . L t d . v . F e l i c i a n o l A that are also persuasive:
21
Supra.
22
Florendo v. Philam Plans, Inc., supra; Insular Life Assurance Co. Ltd. v. See
also Feliciano, G.R. No. L-47593 December 29, 1943; Soliman v. U.S. Life Insurance
Co, G.R. L-11975, June 27, 1958.
23
Manila Bankers Life Insurance Corp. v. Aban, G.R. No. 175666, July 29,
2013.
24
G.R. No. L-47593, December 29, 1943.
“Besides, the principles that the insured is not bound to know the contents of the
application, and may rely on the agent’s assurances that his answers have been correctly
written will, of course, apply with special force where the insured is illiterate and unable to
read, or is ignorant of the language. (Vol. 5, Cooley’s Briefs on Insurance, 2nd Ed., p. 4188,
cases cited.)
And also where the photostatic copies of the application embodied in the policy are
practically illegible, the insured is not bound to know the contents of the application. (New
York Ins. Co. v s . Holpem D.C. 57 Fed. 2nd, 200).
According to the great weight of authority, if an agent of the insurer, after obtaining
from an applicant for insurance a correct and truthful answer to interrogations contained in
the application for insurance, without knowledge of the applicant fills in false answers,
either fraudulently or otherwise, the insurer cannot assert the falsity of such answers as a
defense to the liability on the policy and this is generally without regard to the subject
matter of the answers or the nature of the agent’s duties or limitations on his authority, at
least if not brought to the attention of the applicant. It is equally well-settled that if a correct
representation is made in a written application, or the insurance agent issuing the policy is
appraised of the true facts concerning the matter in question, as for instance the title to the
insured premises, but the agent inserts an incorrect statement in the policy, the insurer
cannot rely upon the error in avoidance of its liability.” H o m e I n s . C o .
v s . M e n d e n h a l l , 154 111., 452, 45 NE., 1078, 36 LRA., 374;
P h o e n i x I n s . C o . v s . T u c k e r , 92 111., 64, 34 Am
Rep., 106; C o m m e r c i a l I n s . C o . v s .
S p a n k n o b l e , 52 111., 53, 4 Am. Report, 582; Y o u n g v s .
H a r t f o r d F . I n s . C o . 45 Iowa, 377, 24 Am. Rep., 754;
W e l s h v s . L o n d o n A s s u r . 151 Pa., 607, 25 A, 142, 21
Am St. Rep., 726 — (Taken from Am Juris, on Insurance Vol. 29, par. 843).
An insured may be justified in signing an application in blank at the request of
the insurer’s agent, who agrees to fill it in from data furnished by the insured or from an
old application. In fact, an insurer cannot urge the falsity of representations contained in
the policy issued, or in the application, where such representations were inserted therein,
either by the company or its agent, after the application was signed, without the
knowledge or consent of the insured, who has made no such representations. (Couch on
Insurance, Vol. 4, par. 842 b.)”
§1.06. WHEN THERE IS NO CONCEALMENT.
SEC. 30. Neither party to a contract of insurance is

bound to communicate information of the matters
following, except in answer to the inquiries of the other:
(a) Those which the other knows;
CHAPTER 6 185
(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.
SEC. 32. Each party to a contract of insurance is
bound to know all the general causes which are open to
his inquiry, equally with that of the other, and which may
affect the political or material perils contemplated; and all
general usages of trade.
SEC. 33. The right to information of material facts
may be waived, either by the terms of the insurance or by
neglect to make inquiry as to such facts, where they are
distinctly implied in other facts of which information is
communicated.
SEC. 34. Information of the nature or amount of the
interest of one insured need not be communicated unless
in answer to an inquiry, except as prescribed by section
fifty-one.
SEC. 35. Neither party to a contract of insurance is
bound to communicate, even upon inquiry, information of
his own judgment upon the matters in question.
a. When there is no material concealment. From the above-quoted provisions,

there is no material concealment that justifies the insurer to rescind the policy in the
following cases:
(1) When matters are known to the other party;
(2) When, in the exercise of ordinary care, one party ought to know,
and of which the other party has no reason to suppose him ignorant; 3
(3) When there is waiver of communication;

(4) When matters are those which prove or tend to prove the
existence of a risk excluded by a warranty, and which are not otherwise
material;
(5) When matters are those which relate to a risk excepted from the
policy and which are not otherwise material;
(6) When the matter involves general causes that are open to inquiry
of each party and which may affect the political or material perils
contemplated;
(7) When the matter is included in general usages of trade;
(8) Information of the nature or amount of the insured property, is not
disclosed unless in answer to an inquiry; and
(9) When what is involved is information of the party’s own
judgment upon the matters in question.
b. Facts that need not be disclosed. Indeed, not all facts are to be disclosed
to the other party. As explained by Lord Mansfield:25
“The underwriter need not be told what lessens the risk agreed and understood
to be run by the express terms of the policy. He need not be told general topics of
speculation; as for instance: The underwriter is bound to know every cause which
may occasion natural perils; as the difficulty of the voyage, the kind of seasons, the
probability of lightning, hurricanes, earthquakes, e t c . He is bound to know
every cause which may occasion political perils; from the rupture of States from war,
and the various operations of it. He is bound to know the probability of safety from
the continuance or return of peace; from the imbecility of the enemy, through the
weakness of their counsels or their want of strength, e t c .
The reason of the rule which obliges parties to disclose is to prevent fraud and
to encourage good faith. It is adapted to such facts as vary the nature of the contract
which one privately knows and the other is ignorant and has reason to suspect.
The question, therefore, must always be whether there was under all the
circumstances at the time the policy was underwritten, a fair representation; or a
concealment x x x varying materially the object of the policy and changing the risks
understood to be run.”
25
Carter v. Boehm, supra.
CHAPTER 6 187
§1.07. JUDGMENT OR OPINION. Neither party to a contract of insurance is

bound to communicate, even upon inquiry, information of his own judgment upon the
matters in question. Thus, opinions of the insured need not be disclosed. In other words,
the duty of disclosure — and the duty not to misrepresent - requires that the statement to
be made by one party relates to facts and not to opinion. 26 However, there must be good
faith and there must be no intent to deceive. 27 Thus, the Supreme Court relied on the
following disquisition in one case:28
“Although false, a representation of the expectation, intention, belief, opinion, or

judgment of the insured will not avoid the policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise
the rule although the statement is material to the risk, if the statement is obviously of the
foregoing character, since in such case the insurer is not justified in relying upon such
statement, but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally states to be true,
as a matter of expectation or belief, that which he then knows, to be actually untrue, or the
impossibility of which is shown by the facts within his knowledge, since in such case the
intent to deceive the insurer is obvious and amounts to actual fraud.”
a. In the above-cited P h i l a m c a r e H e a l t h
S y s t e m s , I n c . u . C o u r t o f A p p e a l s , 2 9
the Supreme Court explained that the answers of an applicant (who is not a doctor)
regarding the medical history of his wife largely depends on opinion rather than fact. The
Supreme Court ruled that there would be no concealment so long as the answers are made
in good faith and without intent to deceive even if the answers which are in the nature of
opinions are untrue. In the said case, Ernani Trinos, deceased husband of respondent
Julita Trinos, applied for a health care coverage with petitioner Philamcare Health
Systems, Inc. It appears that in the application for health coverage, petitioner required
respondent’s husband to sign an express authorization for any person, organization or
entity that has any record or knowledge of his health to furnish any and all
26
John Birds, Modern Insurance Law, 4th Ed. (1997), p. 102, hereinafter referred to as
“Birds.”
27
Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos, G.R.
No. 125678, March 18, 2002.
2&
Ibid., citing Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern
Woodmen of America.
2
*Ibid.
information relative to any hospitalization, consultation, treatment or any other

medical advice or examination. In the standard application form, he gave the
answer “NO” to the following question: “Have you or any of your family
members ever consulted or been treated for high blood pressure, heart trouble,
diabetes, cancer, liver disease, asthma or peptic ulcer?” The petitioner insurer
denied the claim saying that there was a concealment regarding Ernani’s medical
history. Doctors at the MMC allegedly discovered at the time of Ernani’s
confinement that he was hypertensive, diabetic and asthmatic, contrary to his
answer in the application form. The petitioner was not sustained by the Supreme
Court explaining that the statement was a matter of opinion.
b. The same conclusion was reached when the insured answered that
there was “no recurrence” of his kidney ailment. The Supreme Court accepted
the explanation that the answer may be construed as an honest opinion of the
insured who was not a medical doctor. The Court also sustained the view that
answers to question that are matters of opinion made in good faith without intent
to deceive will not avoid the policy even though they are untrue.30
c. The conclusion would be different, however, if the insured knows
relevant facts that indicate the nature or gravity of his illness. Thus, if the insured
had consulted a doctor for something other than common colds and he had full
knowledge of the nature of the illness, the non-disclosure thereof cannot be
considered just a matter of opinion. It is one involving non-disclosure of material
fact. For example, in S u n L i f e I n s u r a n c e
C o m p a n y o f C a n a d a v . C o u r t o f
A p p e a l s a n d R o l a n d a a n d
B e r n a r d a B a c a n i ,31 the deceased insured was asked
whether he consulted a doctor or submitted to ECG, X-rays, blood test, and other
test, or have been attended or admitted to a hospital or have sought advice for
urine, kidney or bladder disorder. The deceased answered questions in the
affirmative with respect to the first (whether he consulted a doctor) but limited
his answer to a consultation with a certain doctor of the Chinese General
Hospital on February 1986, for cough and flu complications. The other questions
were answered in the negative. However, the insurer later discovered that two
weeks prior to his application for insurance, the insured was examined and
confined
30
Sun Life of Canada (Philippines), Inc. v. Sibya, G.R. No. 211212, June 8,
2016.
31
G.R. No. 105135, June 22, 1995. See case digest below.
CHAPTER 6 189
ASCERTAINING AND CONTROLLING
RISKS
at the Lung Center of the Philippines, where he was diagnosed for renal failure. During
his confinement, the deceased was subjected to urinalysis, ultra-sonography and
hematology tests. The Supreme Court ruled that the information which the insured
failed to disclose were material and relevant to the approval and the issuance of the
insurance policy. The matters concealed would have definitely affected petitioner’s
action on his application, either by approving it with the corresponding adjustment for
a higher premium or rejecting the same. Moreover, a disclosure may have warranted a
medical examination of the insured by petitioner in order for it to reasonably assess the
risk involved in accepting the application. The Supreme Court ruled that there could
not have been good faith on the part of the insured because he was surely aware of the
previous confinement.
§1.08. KNOWLEDGE OF THE INSURER. It is usually held that where the
insurer, at the time of the issuance of a policy of insurance, has knowledge of existing
facts which, if insisted on, would invalidate the contract from its very inception, such
knowledge constitutes a waiver of conditions in the contract inconsistent with the facts,
and the insurer is estopped thereafter from asserting the breach of such conditions. The
law is charitable enough to assume, in the absence of any showing to the contrary, that
an insurance company intends to execute a valid contract in return for the premium
received; and when the policy contains a condition which renders it voidable at its
inception, and this result is known to the insurer, it will be presumed to have intended
to waive the conditions and to execute a binding contract, rather than to have deceived
the insured into thinking he is insured when in fact he is not, and to have taken his
money without consideration.32
a. Reason for the Rule. The plain, human justice of this doctrine is perfectly
apparent. To allow a company to accept one’s money for a policy of insurance
which it then knows to be void and of no effect, though it knows as it must, that the
assured believes it to be valid and binding, is so contrary to the dictates of honesty
and fair dealing, and so closely related to positive fraud, as to the abhorent to fair-
minded men. It would be to allow the company to treat the policy as valid long
enough to get the premium on it, and leave it at
32
Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., G.R. No. L-4611,
December 17, 1955, 98 Phil. 85, 90-91, citing 29 Am. Jur., Insurance, Section 807, at pp.
611-612.
liberty to repudiate it the next moment. This cannot be deemed to be the

real intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for
fraudulent purposes and designs which [the Court] cannot believe it to be
guilty of.33
b. The Supreme Court explained in one case the effect of
knowledge on the part of the insurer of facts that are enough to invalidate
the policy:34
“It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract
from its very inception, such knowledge constitutes a waiver of conditions in the contract
inconsistent with the known facts, and the insurer is stopped thereafter from asserting the
breach of such conditions. The law is charitable enough to assume, in the absence of any
showing to the contrary, that an insurance company intends to execute a valid contract in return
for the premium received; and when the policy contains a condition which renders it voidable
at its inception, and this result is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than to have deceived the insured
into thinking he is insured when in fact he is not, and to have taken his money without
consideration.” ( 2 9 A m . J u r . , I n s u r a n c e ,
S e c t i o n 8 0 7 , a t p p . 6 1 1 - 6 1 2 )
The reason for the rule is not difficult to find.
“The plain, human justice of this doctrine is perfectly apparent. To allow a company to
accept one’s money for a policy of insurance which it then knows to be void and of no effect,
though it knows as it must, that the assured believes it to valid and binding, is so contrary to the
dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorrent
to fair-minded men. It would be to allow the company to treat the policy as valid long enough
to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot be
deemed to be the real intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for fraudulent poses and
designs which we cannot believe it to be guilty of.” ( W i l s o n v .
C o m m e r c i a l U n i o n A s s u r a n c e C o . , 9 6
A t l . 5 4 0 , 5 4 3 - 5 4 4 )
A s i m i l a r v i e w w a s u p h e l d i n t h e c a s e o f Capital Insurance
& Surety Co., Inc. v. Plastic Era Co., Inc., 65 SCRA 134, w h i c h i n v o l v e d a
violation
33
Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., ibid., citing Wilson v.
Commercial Union Assurance Co., 96 Atl. 540, 543-544.
34
Edillon v. Manila Bankers Life Insurance Corp., G.R. No. L-34200, September
30, 1982.
CHAPTER 6 191
of the provision of the policy requiring the payment of premiums before the insurance shall
become effective. The company issued the policy upon the execution of a promissory note
for the payment of the premium. A check given subsequent by the insured as partial
payment of the premium was dishonored for lack of funds. Despite such deviation from the
terms of the policy, the insurer was held liable.
§1.09. INTENTIONAL AND UNINTENTIONAL CONCEALMENT. Section 27 of

the Insurance Code is unequivocal that intent of the party is irrelevant in concealment:
SEC. 27. A concealment whether intentional or

unintentional entitles the injured party to rescind a contract
of insurance.
a. In this jurisdiction, concealment, whether intentional or unintentional, entitles

the insurer to rescind the contract of insurance. This rule is consistent with the definition of
concealment as “negligence to communicate that which a party knows and ought to
communicate.”35 36 In the case of A r g e n t e v . W e s t C o a s t
L i f e I n s u r a n c e Co.,36 the Supreme Court quoted Joyce as follows: 37
“The basis of the rule vitiating the contract in cases of concealment is that it misleads or
deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed
upon. The insurer, relying upon the belief that the assured will disclose every material fact
within his actual or presumed knowledge, is misled into a belief that the circumstance
withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that
it does not exist.” Prof. Dover38 explained that concealment, or s u p p r e s s i o
v e r i , is nearly allied to a l l e g a t i o f a l s i , and avoids a contract
upon principles of natural justice. Every concealment, whether arising from accident,
negligence, inadvertence, or mistake, if material, will be equally fatal to the contract as if it
were intentional or fraudulent.
b. The Supreme Court held that materiality of the information withheld does not
depend on the state of mind of the insured. Neither does it depend on the actual or physical
events which ensue. Thus, “ g o o d f a i t h ” i s no defense in
concealment.
35
Ignacio Saturnino v. The Philippine American Life Insurance Company, G.R. No. L-
16163, February 28, 1963.
^G.R. No. L-24899, March 19, 1928, 51 Phil. 725.
37
Joyce, Law of Insurance, 2nd Ed., Vol. 3.
38
Dover, p. 344.
c. In one case, the insured’s failure to disclose the fact that he was
hospitalized for two weeks prior to filing his application for insurance, raises
grave doubts about his b o n a f i d e s . It can be inferred that such
concealment was deliberate on his part.39
d. Section 27 of the Insurance Code adopts the rule under the old
Insurance Law. However, the original Section 27 does not contain the phrase
“intentional or unintentional.” This phrase was however returned by B.P. Big.
874. Nevertheless, the absence of the phrase “intentional or unintentional” in the
original Insurance Code of 1978 (prior to its amendment by B.P. Big. 874) did not
change the rule. As a simple matter of grammar, it may be noted that
“intentional” and “unintentional” cancel each other out. The net result therefore
of the phrase “whether intentional or unintentional” is precisely to leave
unqualified the term “concealment.” Thus, Section 27 of the Insurance Code of
1978 is properly read as referring to “any concealment” without regard to whether
such concealment is intentional or unintentional. The phrase “whether intentional
or unintentional” was in fact superfluous. The deletion of the phrase “whether
intentional or unintentional” could not have had the effect of imposing an
affirmative requirement that a concealment must be intentional if it is to entitle
the injured party to rescind a contract of insurance. The restoration in 1985 by
B.P. Big. 874 of the phrase “whether intentional or unintentional” merely
underscored the fact that all throughout (from 1914 to 1985), the statute did not
require proof that concealment must be “intentional” in order to authorize
rescission by the injured party.40
e. An exception to the rule that concealment may be intentional or
unintentional is provided for in Section 29 of the Insurance Code because the
requirement therein is that the omission is intentional or fraudulent. Section 29
states:
SEC. 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.
™Vda. de Canilang v. Court of Appeals, G.R. No. 92492, June 17, 1993, 223
SCRA 443.
40
Ng Gan Zee v. Asian Cruzader Life Assurance Corporation, G.R. No. L-
30685, May 30, 1983.
CHAPTER 6 193
f. There would still be material concealment even if the insured has no

knowledge of the existence of a duty to disclose. Similarly, concealment is present if the
insured has no knowledge of the materiality of the fact which he already knows. A man
may act in perfect good faith within the meaning of the ordinary term of the phrase, yet
still be held not to have acted in the utmost good faith in the legal sense.41
§1.10. KNOWLEDGE OF THE FACT CONCEALED. With respect to
knowledge of the material fact concealed, the Supreme Court observed in
S a t u r n i n o v . T h e P h i l i p p i n e
A m e r i c a n L i f e I n s u r a n c e C o m p a n y 42 that
actual knowledge of the insured is not necessary to give the insurance company the right
to avoid the policy on the ground of concealment. If it were the law that an insurance
company could not depend a policy on the ground of concealment or misrepresentation,
“unless it could show actual knowledge on the part of the applicant that the statements
were false, then it would be impossible for it to protect itself and its honest policyholders
against fraudulent and improper claims.” 43 It would be wholly at the mercy of anyone who
wishes to apply for insurance, as it would be impossible to show actual fraud except in
extreme cases. It could not rely on an application as containing information on which it
could act. There would be no incentive to an applicant to tell the truth. 44 In other words,
under the majority view, absence of knowledge of the fact concealed will not deprive the
insurer of the right to invoke concealment because unintentional concealment is still
concealment that is contemplated under Section 26 of the Insurance Code.
a. The majority view is to the effect that the insured need not
know the fact concealed is consistent with what Prof. Vance referred to as the English
Doctrine.45 Prof. Vance cited the celebrated case of C a r t e r v .
B o e h m 46 where Justice Mansfield observed that although the suppression
should happen through mistake, without any fraudulent intention, yet the underwriter is
deceived because the risk run is really different from the risk understood and intended
to be run at the time of the agreement.
41
Birds, p. 103.
42
Supra, citing Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211, 214.
43
Saturnino v. The Philippine American Life Insurance Co., supra.
44
Ibid.
45
Vance, p. 339. This is in contrast to the American Doctrine where the presence of fraud is
necessary before the concealment can be invoked.
46
3 Borrows, 1905, 1909.
(1) One example that is often cited is a situation where the insured
was already sick at the time he took the policy but he was not aware of such
fact. It is often suggested that there is concealment of material fact because
concealment need not be intentional.47
(2) Similarly, there is still concealment even if the party does not
know but he ought to know the matter concealed. The law makes this an
exception. Although objectively speaking, the party is not actually aware of
the matter concealed, the law ascribes to him presumed knowledge of the
matter or fact concealed because he ought to know the same matter or fact
in view of the surrounding circumstances. Thus, if a party was not aware of
the nature of his illness by reason of negligence or indifference, then this
may amount to bad faith in some cases and therefore material concealment
results. For example, if the insured was hospitalized for several months, he
cannot claim that there was no material concealment because he ought to
know the nature of his illness.
b. Minority View. The minority view is to the effect that the contract
cannot be rescinded on the ground of concealment if the non-disclosing party
does not know the fact involved. This view is supported by the definition in
Section 26 of the Insurance Code which states that concealment is neglect to
communicate that which a party “knows and ought to communicate.” Thus, it is
required under Section 26 that the fact allegedly concealed is known to the party
or at the very least, the fact is something that the party who allegedly concealed
ought to know. According to this view, when the law states that the concealment
is intentional or unintentional, the intent refers to the intent to deceive or “corrupt
intent.”48 The view is that Section 26 of the Insurance Code which refers to
matters that “a party knows” can be reconciled with Section 27 which refers to
intentional and unintentional concealment. The view is that one can conceal only
if he knows what to conceal. It is true that concealment can still avoid the policy
even if the concealment is unintentional. But this only means that there is still
concealment whether or not there was fraudulent intent. Thus, mistake, good faith
and
47
Suggested answers to the Bar Examinations in Commercial Law of the UP
Law Center.
48
This was in fact the issue that was resolved by the alternative rules cited in
the treatise of Prof. Vance when he referred to the English Rule and the American
Rule. The English doctrine is to the effect that the presence or absence of corrupt
intent is immaterial (Vance, p. 339).
CHAPTER 6 195
negligence will not excuse the insured from material concealment because unintentional
non-disclosure still avoids the policy.
c. Exceptions. Nevertheless, even under the majority view where knowledge on
the part of the insured/applicant is immaterial, there were cases when the Supreme Court
did not sustain the insurer’s position that the insurance policies in question can be avoided
on the ground of concealment or misrepresentation. These include cases when (1) the
matter allegedly concealed is a matter of opinion, and
(2) when the insurer waived his right to the information as in the case where the insured
gave an imperfect answer.49 * For example, the insurer cannot avoid the policy on the
ground of concealment if the matter concealed involves an opinion on the medical
condition of the insured. In the above-cited P h i l a m c a r e H e a l t h
S y s t e m , I n c . v . C o u r t o f A p p e a l s , 50 the
insurer was not informed of the medical condition of the insured. However, the Court
ruled that the medical condition of the insured is a matter of opinion which cannot be
invoked so long as there was no intent to deceive. Hence, if the insured stated that he is in
good health, such statement is a matter of opinion and should not be construed as material
concealment.
§1.11. WAIVER OF INSURER. It has been held that where, upon the face of the
application, a question appears to be not answered at all or to be imperfectly answered, and
the insurers issue a policy without any further inquiry, they waive the imperfection of the
answer and render the omission to answer more fully immaterial. 51 For example, in life
insurance, even if from the viewpoint of a medical expert, the information communicated
about the ailment of the insured was imperfect, there would be no ground to avoid the
policy on the ground of concealment if the imperfect answer or information is nevertheless
sufficient to have induced insurer to make further inquiries about the ailment and operation
of the insured.
a. I n Ng Gan Zee v. Asian Crusader Life Assurance Corporation ,52 t h e
alleged false statements given by Kwong Nam
49
See §1.10 below.
“G.R. No. 125678, March 18, 2002.
51
Ng Gan Zee v. Asian Crusader Life Assurance Corporation, G.R. No. L-30685, May 30,
1983.
b2
Ibid. It should be noted that the Supreme Court observed in Ng Gan Zee v. Asian
Crusader Life Assurance Corporation that the concealment must be intentionally made. This
observation is apparently inconsistent with the provisions of the old Insurance Law (the law then
in force) which expressly provides that the
are as follows: “Operated on for a Tumor [mayoma] of the stomach. Claims that
Tumor has been associated with ulcer of stomach. Tumor taken out was hard and
of a hen’s egg size. Operation was two
[2] years ago in Chinese General Hospital by Dr. Yap. Now, claims he is
completely recovered.”
(1) The insurer claims that there was material misrepresentation
because the doctor who treated the insured reported that about two (2) years
before he (the insured) applied for a life insurance policy, the insured was
diagnosed as having “peptic ulcer” for which, an operation, known as a sub-
total gastric resection was performed on the insured and that the Surgical
Pathology Report of Dr. Elias Pantangco showing that the specimen
removed from the patient’s body was a portion of the stomach measuring 12
cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along
the greatest dimension. The Supreme Court considered this as an imperfect
answer that does not avoid the policy. The Supreme Court adopted the
observation of the trial court that “if the ailment and operation of [the
insured] had such an important bearing on the question of whether the
[insurer] would undertake the insurance or not, the court cannot understand
why the [insured] or its medical examiner did not make any further inquiries
on such matters from the x x x [h]ospital or require copies of the hospital
records from the appellant before acting on the application for insurance.
The fact of the matter is that the [insurer] was too eager to accept the
application and receive the insured’s premium. It would be inequitable now
to allow the [insurer] to avoid liability under the circumstances.53
b. It was explained however that “where an answer of the applicant to a
direct question of the insurers purports to be a complete answer to the question, any
substantial misstatement or omission avoids a policy issued on the faith of the
application.”54
c. In S u n L i f e o f C a n a d a
( P h i l i p p i n e s ) , I n c . v . S i b y a ,55 the Court
ruled that there was no concealment because the insured
concealment may be intentional or unintentional. Hence, such observation must be considered

as a mere obiter.
53
Supra.
^Vance, p. 348, citing Phoenix Mut. Life Ins. Co. v. Raddin, 120 U.S. 183, 7 S.Ct 500,
30 L. Ed. 644 (1887).
“G.R. No. 211212, June 8, 2016.
CHAPTER 6 197
disclosed the fact that he had sought advice for kidney problems and had undergone a
procedure due to kidney stone at the National Kidney Institute in 1987. The insurer
claimed that there was concealment because the insured allegedly did not disclose his
previous medical treatment in May and August of 1994 which undisclosed fact allegedly
suggested that the insured was in “renal failure” and at a high risk medical condition. The
Court ruled against the insurer and allowed recovery by the beneficiaries. The Court ruled
that concealment as a defense for the insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon
the insurer. The insurer failed to clearly and satisfactorily established its allegations. The
Court pointed out the admission of the insured of his medical treatment for kidney ailment
and that he authorized the insurer to inquire further into his medical history for
verification purposes.
§1.12. REMEDY. Section 27 provides that the presence of concealment entitles the
insurer to rescind the insurance contract. However, it is important to note that the right to
rescind should be exercised previous to the commencement of an action on the contract. 66
It is also subject to the incontestable clause discussed hereunder.
PROBLEMS:
1. In a non-medical insurance contract (one where the company waives medical
examination) the insured failed to disclose that she had once been operated on,
although the information on this matter was supposed to have been supplied the
company. Within the proper period, may the insurance company have the
contract rescinded?
A: Yes, the insurance company can have the contract rescinded.
The fact that the insured was operated on is a material fact that should
have been disclosed to the insurer. The fact concealed may have affected
the decision of the insurer to approve the application or to fix the
premium rate. Section 27 of the Insurance Code provides that “a
concealment whether intentional or unintentional entitles the injured
party to rescind a contract of insurance.”
2. X applied for Life Insurance with Metropolitan Life Insurance Company. The
application contained this question: “Have you ever had any ailment or disease
of x x x (b) the stomach or intestines, liver, kidney or genitourinary organ?” X,
a laundry woman, who has
“Section 48,1.C.
no medical knowledge answered “No.” The application was approved, premium was
paid and six (6) months later, X died from cancer of the stomach. The post medical
examination of X shows that she had the cancer at the time she applied for a policy.
Can the beneficiary of X collect on the policy?
A: No, the beneficiary of X cannot collect on the policy. The matter
concealed was material hence the insurer has a valid defense against the
beneficiary. The defense is available even if X was not aware of her fatal
illness because Section 27 of the Insurance Code gives the right to the insurer
to avoid the policy whether the concealment is intentional or unintentional.
3. 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.
A: 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.
4. A, an agent of life insurance company X, induced B who has been suffering from
advanced tuberculosis to apply for P10,000.00 life insurance which B did and he (B)
requested to fill the application form. Through the connivance of the physician, it was
made to appear in the application that B is in good health and the P10,000.00 life
insurance policy was issued by X to B. If B dies of tuberculosis, may his
beneficiaries recover? Why?
A: No, the beneficiaries may not recover. There was collusion on
the part of the insured, the insurance agent and the physician which vitiates
the policy. This is not a simple case of concealment but a deliberate
attempt to defraud the insurer. There was a deliberate attempt to hide the
fact that the insured was suffering from tuberculosis.
CHAPTER 6 199
On October 18, 1980, P took out a life insurance policy and named his only son Q 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?
A: 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. It
would have been different if there was collusion between the agent and the
insured. 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. ( S e e M a l a y a n I n s u r a n c e
C o r p . v . P i n c a , G . R . N o .
6 7 8 3 5 , O c t o b e r 1 2 , 1 9 8 7 a n d
G r e a t P a c i f i c L i f e u . C A , 8 9
S C R A 5 4 3 )
The policy sued upon is one for 20-year endowment non-medical insurance. This kind
of policy dispenses with the medical examination of the applicant usually required in
ordinary life policies. However, detailed information is called for in the application
concerning the applicant’s health and medical history. The written application in this
case was submitted by Saturnino to appellee on November 16, 1957, witnessed by
appellee’s agent Edward A. Santos. The policy was issued on the same day, upon
payment of the first year’s premium of P339.25. On September 19, 1958 Saturnino
died of pneumonia, secondary to influenza. Appellants here, who are her surviving
husband and minor child, respectively, demanded payment of the face value of the
policy. The claim was rejected and this suit was subsequently instituted. It appears that
two (2) months prior to the issuance of the policy or on September 9, 1957, Saturnino
was operated on for cancer, involving complete removal of the right breast, including
the pectoral muscles and the glands found in the right armpit. She stayed in the hospital
for a period of eight (8) days, after which she was discharged, although according to
the surgeon who operated on her she could not be considered definitely cured, her
ailment being of the malignant type. Notwithstanding the fact of her operation,
Estefania A. Saturnino did not make a disclosure thereof in her application for
insurance. On the contrary, she stated therein that she did not have, nor had she ever
had, among other ailments listed in the application, cancer or other tumors; that she
had not consulted any physician, undergone any operation or suffered any injury within
the preceding five (5) years; and that she had never been treated for nor did she ever
have any illness or disease peculiar to her sex, particularly of the breast, ovaries,
uterus, and menstrual disorders. The application also recites that the foregoing
declarations constituted “a further basis for the issuance of the policy.” Did the
insured make such false representations of material facts as to avoid the policy?
What is the effect of waiver of the medical examination?
A: There can be no dispute that the information given by her in her
application for insurance was false, namely, that she had never had cancer or
tumors, or consulted any physician or undergone any operation within the
preceding period of five (5) years. Are the facts then falsely represented
material? The Insurance Law ( S e c t i o n 3 0 ) provides that
“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 proposed contract, or
in making his inquiries.” It seems to be the contention of appellants that the
facts subject of the representation were not material in view of the “non-
medical” nature of the insurance applied for, which does away with the
usual requirement of medical examination before the policy is issued. The
contention is without merit. If anything, the waiver of medical examination
renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer
takes into consideration in deciding whether to issue the policy or not. It is
logical to assume that if appellee had been properly apprised of the insured’s
medical history she would at least have been made to undergo medical
examination in order to determine her insurability.
Appellants argue that due information concerning the insured’s
previous illness and operation had been given to appellees agent Edward A.
Santos, who filled the application form after it was signed in blank by
Estefania A. Saturnino. This was denied by Santos in his testimony, and the
trial court found such testimony to be true. This is a finding of fact which is
binding upon [the Court], this appeal having been taken upon questions of
law alone. [The Court] do[es] not deem it necessary, therefore, to consider
appellee’s additional argument, which was upheld by the trial court, that in
signing the application form in blank and leaving it to Edward A. Santos to
fill (assuming that to be the truth) the insured in effect made Santos her
agent for that purpose and consequently was responsible for the errors in the
entries made by him in that capacity.
In the application for insurance signed by the insured in this case,
she agreed to submit to a medical examination by a duly appointed examiner
of appellee if in the latter’s opinion such examination was necessary as
further evidence of insur-
CHAPTER 6 201
ability. In not asking her to submit to a medical examination, appellants

maintain, appellee was guilty of negligence, which precluded it from finding
about her actual state of health. No such negligence can be imputed to appellee.
It was precisely because the insured had given herself a clean bill of health that
appellee no longer considered an actual medical check-up necessary.
Appellants also contend there was no fraudulent concealment of the

truth inasmuch as the insured herself did not know, since her doctor never told
her, that the disease for which she had been operated on was cancer. In the first
place the concealment of the fact of the operation itself was fraudulent, as there
could not have been any mistake about it, no matter what the ailment.
Secondly, in order to avoid a policy it is not necessary to show actual fraud on
the part of the insured. ( I g n a c i o S a t u r n i n o v .
T h e P h i l i p p i n e A m e r i c a n L i f e
I n s u r a n c e C o m p a n y , G . R . N o . L -
1 6 1 6 3 , F e b r u a r y 2 8 , 1 9 6 3 )
On April 15, 1986, Robert John B. Bacani procured a life insurance contract for
himself from petitioner. He was issued Policy No. 3-903- 766-X valued P100,000.00,
with double indemnity in case of accidental death. The designated beneficiary was his
mother, respondent Bernarda Bacani. On June 26, 1987, the insured died in a plane
crash. Respondent Bernarda Bacani filed a claim with petitioner, seeking the benefits
of the insurance policy taken by her son. Petitioner conducted an investigation and its
findings prompted it to reject the claim. In its letter, petitioner informed respondent
Bernarda Bacani, that the insured did not disclosed material facts relevant to the
issuance of the policy, thus rendering the contract of insurance voidable. A check
representing the total premiums paid in the amount of P10,172.00 was attached to
said letter. Petitioner claimed that the insured gave false statements in his application
when he answered the following questions:
“5. Within the past 5 years have you:
a) consulted any doctor or other health practitioner?
b) submitted to:
ECG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility? 6
6. Have you ever had or sought advice for:

202 ESSENTIALS OK INSURANCE LAW
(Republic Act No. 1 (><>07 with Notes on Pro-Need Act)
XXX XXX XXX
b) urine, kidney or bladder disorder?”
(Rollo, p. 53)
The deceased answered questions No. 5(a) in the affirmative
but limited his answer to a consultation with a certain Dr. Reinaldo
D. Raymundo of the Chinese General Hospital on February 1986, for
cough and flu complications. The other questions were answered in
the negative. { R o l l o , p. 53) Petitioner discovered that two
(2) weeks prior to his application for insurance, the insured was
examined and confined at the Lung Center of the Philippines, where
he was diagnosed for renal failure. During his confinement, the
deceased was subjected to urinalysis, ultra-sonography and
hematology tests, (a) Was rescission of the contract justified on the
ground of concealment? (b) Will the waiver of medical examination
be deemed a waiver of concealment as a ground for rescission? (c)
Assuming that there was concealment, can the same be invoked even
if it was not the cause of the loss?
A: a. Yes. The terms of the contract are clear. The insured is
specifically required to disclose to the insurer matters relating to his
health. The information which the insured failed to disclose were
material and relevant to the approval and the issuance of the
insurance policy. The matters concealed would have definitely
affected petitioner’s action on his application, either by approving it
with the corresponding adjustment for a higher premium or rejecting
the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably
assess the risk involved in accepting the application. It should be
noted that materiality of the information withheld does not depend on
the state of mind of the insured. Neither does it depend on the actual
or physical events which ensue. Thus, “good faith” is no defense in
concealment. The insured’s failure to disclose the fact that he was
hospitalized for two (2) weeks prior to filing his application for
insurance, raises grave doubts about his b o n a f i d e s .
It appears that such concealment was deliberate on his part.
b. No. The argument that the insurer’s waiver of the medical
examination of the insured debunks the materiality of the facts
concealed is untenable. The waiver of a medical examination [in a
non-medical insurance contract] renders even more material the
information required
CHAPTER 6 203
of the applicant concerning previous condition of health and diseases

suffered, for such information necessarily constitutes an important
factor which the insurer takes into consideration in deciding whether to
issue the policy or not. Such argument of private respondents would
make Section 27 of the Insurance Code, which allows the injured party
to rescind a contract of insurance where there is concealment,
ineffective.
c. Yes, concealment can still be invoked. The fact that the facts concealed
had no bearing to the cause of death of the insured, it is well-settled
that the insured need not die of the disease he had failed to disclose to
the insurer. It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed insurance policy or
in making inquiries. ( S u n A s s u r a n c e
C o m p a n y o f C a n a d a v . T h e
H o n . C o u r t o f A p p e a l s and
S p o u s e s R o l a n d o a n d
B e r n a r d a B a c a n i , G . R . N o .
1 0 5 1 3 5 , J u n e 2 2 , 1 9 9 5 ;
H e n s o n v . T h e P h i l i p p i n e
C o . , 5 6 O . G . N o . 4 8 [ I 9 6 0 ] )
NOTE: The rescission in this case was exercised within the two
(2)-year contestability period as recognized in Section 48 of The
Insurance Code.
On June 18, 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was
diagnosed as suffering from “sinus tachycardia.” The doctor prescribed the following
for him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang
consulted the same doctor again on August 3, 1982 and this time was found to have
“acute bronchitis.”
On the next day, August 4, 1982, Jaime Canilang applied for a “non-medical”
insurance policy with respondent Great Pacific Life Assurance Company (“Great
Pacific”) naming his wife, petitioner Thelma Canilang, as his beneficiary. Jaime
Canilang was issued ordinary life insurance Policy No. 345163, with the face value of
P19,700.00, effective as of August 9, 1982. On August 5, 1983, Jaime Canilang died
of “congestive heart failure,” “anemia,” and “chronic anemia.” Petitioner, widow and
beneficiary of the insured, filed a claim with Great Pacific which the insurer denied
on December 5, 1983 upon the ground that the insured had concealed material
information from it. The medical declaration which was set out in the application for
insurance executed by Jaime Canilang read as follows:
'‘MEDICAL DECLARATION
'I hereby declare that:
(1) I have not been confined in any hospital, sanitarium or infirmary, nor received
any medical or surgical advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a physician for a heart condition,
high blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or
any other physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
GENERAL DECLARATION
I hereby declare that all the foregoing answers and statements are
complete, true and correct. I hereby agree that if there be any fraud or
misrepresentation in the above statements material to the risk, the
INSURANCE COMPANY upon discovery within two (2) years from the
effective date of insurance shall have the right to declare such insurance
null and void. That the liabilities of the Company under the said Policy
/TA/Certificate shall accrue and begin only from the date of
commencement of risk stated in the Policy/TA/Certificate, provided that the
first premium is paid and the Policy/TA/Certificate is delivered to, and
accepted by me in person, when I am in actual good health.
Signed at Manila this 4th day of August, 1992.
Elegible
Signature of Applicant”
[The Court] note[s] that in addition to the negative statements made by Mr.
Canilang in paragraphs 1 and 2 of the medical declaration, he failed to
disclose in the appropriate space, under the caption “Exceptions,” that he
had twice consulted Dr. Wilfredo B. Claudio who had found him to be
suffering from “sinus tachycardia” and “acute bronchitis.” Was there
material concealment?
A: Yes, there was material concealment. The information which

Jaime Canilang failed to discloses was material to the ability of Great
Pacific to estimate the probable risk he presented as a subject of life
insurance. Had Canilang disclosed his visits to his doctor, the diagnosis
made and the medicines prescribed by such doctor, in the insurance
application, it may be reasonably assumed that Great Pacific would have
made further inquiries and would have probably refused to issue a non-
medical insurance policy or, at the very least, required a higher premium
for the same coverage. The materiality of the information withheld by
Great Pacific did not depend upon
CHAPTER 6 205
the state of mind of Jaime Canilang. A man’s state of mind or subjective belief
is not capable of proof in our judicial process, except through proof of external
acts or failure to act from which inferences as to his subjective belief may be
reasonably drawn. Neither does materiality depend upon the actual or physical
events which ensue. Materiality relates rather to the “probable and reasonable
influence of the facts” upon the party to whom the communication should have
been made, in assessing the risk involved in making or omitting to make further
inquiries and in accepting the application for insurance; that “probable and
reasonable influence of the facts” concealed must, of course, be determined
objectively, by the judge ultimately.
In any case, in the case at bar, the nature of the facts not conveyed to the
insurer was such that the failure to communicate must have been intentional
rather than merely inadvertent. For Jaime Canilang could not have been
unaware that this heart beat would at times rise to high and alarming levels and
that he had consulted a doctor twice in the two (2) months before applying for
non-medical insurance. Indeed, the last medical consultation took place just the
day before the insurance application was filed. In all probability, Jaime
Canilang went to visit his doctor precisely because of the discomfort and
concern brought about by his experiencing “sinus tachycardia.”
( T h e l m a V d a . d e C a n i l a n g v .
H o n . C o u r t o f A p p e a l s , e t a l . ,
G . R . N o . 9 2 4 9 2 , J u n e 1 7 , 1 9 9 3 )
The insured, in his application for insurance, particularly in his declarations to the
examining physician, stated the following in answering the questions propounded to
him:
14. Have you ever had any of the following diseases or symptoms?
Each question must be read and answered “Yes” or “No.”
XXX XXX XXX

Gastritis, Ulcer of the Stomach or any disease of that organ? No.
Vertigo, Dizziness, Fainting-spells or Unconscious? No.
Cancer, Tumors or Ulcers of any kind? No.
15. Have you ever consulted any physician not included in any of the
above answers? Give names and address or physicians list ailments or accidents
and date. No.
It appears that the insured entered the Chinese General Hospital for
medical treatment on January 29, 1950 having stayed there up to February
11, 1950. Upon entering the
hospital, he complained of dizziness, anemia, abdominal pains and tarry

stools, and in the evening of his admission he had / several abdominal
pains and his discharges were with black' tarry stools and felt dizzy and
weak. The history of his illness shows that the same “started a year ago as
frequent dizziness.” An X-ray picture of his stomach was taken and the
diagnosis made of him by his doctors showed that his illness was “peptic
ulcer, bleeding.” Was there material concealment?
A: Yes, there was material concealment. It should be noted that
the insured’s confinement in the Chinese General Hospital took place from
January 29, 1950 to February 11, 1950, whereas his 57 application for
insurance wherein he stated his answer to the questions propounded to him
by the examining physician of defendant was submitted to defendant on
September 5, 1950. It is apparent that when the insured gave his answers
regarding his previous ailment, particularly with regard to “Gastritis, Ulcer
of the Stomach or any disease of that organ” and “Vertigo, Dizziness,
Fainting-spells or Unconsciousness,” he concealed the ailment of which he
was treated in the Chinese General, Hospital which precisely has direct
connection with the subject of the questions propounded. The negative
answers given by the insured regarding his previous ailment, or his
concealment of the fact that he was hospitalized and treated for sometime
of peptic ulcer and had suffered from “dizziness, anemia, abdominal pains
and tarry stools,” deprived defendant of the opportunity to make the
necessary inquiry as to the nature of his past illness so that as it may form
its estimate relative to the approval of his application. Had defendant been
given such opportunity, considering the previous illness of the insured as
disclosed by the record of the Chinese General Hospital, defendant would
probably had never consented to the issuance of the policy in question. In
fact, according to the death certificate, the insured died of “infiltrating
medullary carcinoma, Grade 4, advanced cardiac and of lesser curvature,
stomach metastases spleen,” which may have direct connection with his
previous illness. ( Y u P a n g C h e n g u . T h e
C o u r t o f A p p e a l s , e t a l , G . R .
N o . L - 1 2 4 6 5 , M a y 2 9 , 1 9 5 9 )
§2. REPRESENTATION. Representations are statements made to give

information to the insurer to induce him to enter into the insurance contract. 58 A
representation is a collateral communication made to the other party in writing or by
word of mouth.59
57
Va
nce,
58
Va
59
Do
nce,
ver,
CONCEALMENT REPRESENTATION
1. It involves an omission - n o n - 1. It involves a positive assertion or
d i s c l o s u r e . affirmation.
60
168 SCRA 1 (1988) citing Tolentino, Commercial Laws of the Philippines, p. 991,
Vol. II, 8th Ed.; New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No.
94071, March 31, 1992.
2. Concealment cannot refer to future
acts.
2. Representation can pertain to the future
because it can be promissory.
3. Same test applies.
3. Same test of materiality applies.
4. A party can rescind. 4. A party can rescind. |
§2.03. KINDS. As to form, a representation may be oral or written. 61 As to

the nature of the statements, representation may be either affirmative or
promissory.
a. Affirmative representations involve statements dealing with facts
existing at the time the contract is made while promissory representations pertain
to statements made by the insured concerning what is to happen at the time the
insurance is already effective. Section 39 provides that:
SEC. 39. A representation as to the future is to be

deemed a promise, unless it appears that it was merely
a statement of belief or expectation.
§2.04. INTERPRETATION. The basic rule is that representations are

construed liberally in favor of the insured and are required to be only substantially
true.62
a. Rules. Section 38 of the Insurance Code provides that the language
of a representation is to be interpreted by the same rules as the language of
contracts in general. In this connection, Articles 1370 to 1379 of the New Civil
Code may be applied. For instance, the rule in the New Civil Code is that if the
terms are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulation shall control.63
b. Time to Which it Refers. Section 42 of the Insurance Code provides
that a representation must be presumed to refer to the date on which the contract
goes into effect. For example, the representation that the house is not occupied
relates to the time the
61
Section
36,1.C.
62
Vance, p. 373.
Ârticle 1370,
New Civil
CHAPTER 6 209
contract takes effect. It may be possible that the house had been occupied before but
there is no misrepresentation so long as the same is not occupied when the contract
takes effect. Obviously, this applies only to affirmative representations and not to
promissory representations.
c. Can Qualify an Implied Warrant. Section 40 provides that a
representation cannot qualify an express provision in a contract of insurance but it
may qualify an implied warranty. For instance, the implied warrant of seaworthiness
may be qualified by a representation which was made earlier by the insured that the
ship does not have a particular equipment on board.
§2.05. TEST OF MATERIALITY. Section 46 of the Insurance Code provides
that the materiality of a representation is determined by the same rules as the
materiality of a concealment. Thus, there is deemed to be material misrepresentation if
the knowledge of one party thereof will affect the insurer’s action on his application,
either by approving it with the corresponding adjustment for a higher premium or
rejecting the same or in fixing the terms and conditions of the policy.
a. Examples. Thus, the representation is material if it relates to health,
freedom from disease, habits and medical attendance. There are instances when
family relationship and family history may also be important.64
(1) There is material representation for instance when the insured
in a life insurance policy falsely represented that she had not smoked for one
year;65
(2) There is also material misrepresentation if the applicant in a life
insurance policy stated that she weighed 180 pounds when she in fact
weighed 300 pounds;66
b. Representation as to Age in Life Insurance. Section 233(d) provides
that the following provision must be stated in an Individual Life or Endowment
Policy:
^S.S. Huebner and Kenneth Black, Jr., Life Insurance, 10th Ed., pp. 173-174, hereinafter
called “Huebner and Black.”
Ôld Line Life Ins. Co. v. Superior Court, 229 Cal. App. 3d 1600, 281 Cal. Rptr. 15 (1st
Dist. 1991) cited in DiMugno and Glad, p. 1634.
66
Taylor v. Sentry Life Ins. Co., 729 F.2d 652, (9th Cir. 1984) cited in DiMugno and Glad,
p. 1634.
(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;
(1) With the above-quoted provision, a misstatement of the age of

the insured does not avoid the policy. The only result is that any amount
payable or benefit accruing under the policy shall be such as the premium paid
would have purchased at the correct age. In other words, the benefits that will
be paid will be equal to what the premium paid by the insured would have
purchased if the age had been correctly stated. This rule takes into
consideration the view that no person can testify on his own age except from
hearsay.
(2) In this connection, the Standard Life Insurance Policy Provisions
issued by the Insurance Commission under Circular Letter No. 14-93, dated
June 25, 1993 include the following:
“If the age of the Insured has been misstated, the amount of insurance will be
adjusted to the amount which the premium would have purchased at the correct
age, applicable risk class and applicable premium rates as of the policy date.
If at the correct age, the Insured is not eligible for any coverage under this
Policy or its riders, the Company will refund the corresponding premiums actually
received by the Company less any indebtedness under this Policy.” 3
(3) No doubt, persons do not have accurate

information as to their correct ages. Yet the correct age of the
insured is the chief corner-stone of the life insurance structure. 67
The prudent thing for the insurer to do then is to require the
submission of the Certificate of Live Birth of the insured. If the
Certificate of Live Birth will not be required and the insurer
merely relied on the representation of the insured, then the
insurer’s only recourse is to make the adjustment regarding
premium if there was misstatement.
67
Langan v. United States Life Insurance Co., 344 Mo. 989, 130 So. W. (2d)
479 (1939).
CHAPTER 6 211
(4) Nevertheless, it is believed that the misstatement as to the age of

the insured must be done in good faith. There is a ground to rescind for
misrepresentation if there is fraud or intent to deceive consistent with the
feature of insurance as contracts u b b e r i m a e f i d a e .
(5) In E d i l l o n v . M a n i l a
B a n k e r ’ s L i f e I n s u r a n c e
C o r p . , 6 8 the life insurance policy provides that the insurer shall
not be liable to pay claims when the insured is under 16 or over 60 years.
However, although the insured was already above 60 years when she applied
for an insurance policy, she actually disclosed such fact in the application.
Hence, the Court ruled that the insurer is estopped from using the age of the
insured. The insurer should be construed as having waived the
disqualification willfully or through the negligence of its employees. Despite
the information given by the insured as to her age, “which could hardly be
overlooked in the application form, considering its prominence thereon and
its materiality to the coverage applied for, the respondent insurance
corporation received her payment of premium and issued the corresponding
certificate of insurance without question.”
c. Erroneous Description of Building in Fire Insurance. Misdescription
of the building without the fault of the insured cannot be considered material
representation.69 The mistake of the employees or agents of the insurance company
cannot prejudice the insured.70
(1) With respect to statements regarding the value of the property,
it has been observed that all statements of value are, of necessity, to a large
extent matters of opinion and it would be outrageous to hold the that the
validity of all valued policies must depend upon the absolute correctness of
the estimated amount. The ordinary test of value of property is the price it
will commend in the market if offered for sale. However, men may honestly
differ about the value of the market or as to what it will bring in the
market.71
68
G.R. No. L-34200 September 30, 1982.
69
Domingo Garcia v. Hong Kong Fire & Marine Insurance, Co., Ltd.,
G.R. No. 20341, September 1, 1923, 45 Phil. 122.
70
1 Couch 215.
71
Mrs. Henry E. Harding v. Commercial Union Assurance Co., G.R. No.
L-12707, August 10, 1918.
§2.06. REMEDY. There is misrepresentation or false representation under

Section 44 of the Insurance Code if the facts fail to correspond with assertions or
stipulations. Misrepresentation entitles the aggrieved party to the right to rescind
the contract. Section 45 provides:
SEC. 45. If a representation is false in a material

point, whether affirmative or promissory, the injured
party is entitled to rescind the contract from the time
when the representation becomes false.
a. When Rescission is Unavailable. Based on Section 48 and the second
sentence of Section 45, the injured party cannot rescind the policy on the ground of
false representation in the following cases:
(1) When there is waiver;
(2) When an action has already been commenced on the contract; 72
and
(3) When the incontestable clause applies.73
b. Estoppel No Longer Applicable. Before R.A. No. 10607, the insurer
can no longer rescind the policy “when there is estoppel as in the case where the
insurer accepted premium payments despite knowledge of the ground for
rescission.”74 However, R.A. No. 10607 deleted this provision thereby indicating
that acceptance of the premium will not estop the insurer from rescinding the
policy on the ground of misrepresentation. In other words, the insurer can still
rescind the policy even if it accepted the premium despite knowledge of the ground
for rescission provided that other defenses are not available like the incontestability
clause discussed hereunder.
PROBLEM:
1. On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life
for the sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On
the same date, appellant, upon receipt
72
Section 48,1.C.
73
Ibid.
74
Before R.A. No. 10607, there is a second sentence in Section 45, I.C. that
states that “the right to rescind granted by this Code to the insurer is waived by
the acceptance of premium payments despite knowledge of the ground for
rescission. (As amended by Batas Pambansa Big. 874J'
CHAPTER 6 213
of the required premium from the insured, approved the application and issued the
corresponding policy. On December 6, 1963, Kwong Nam died of cancer of the liver with
metastasis. All premiums had been religiously paid at the time of his death. On January 10,
1964, his widow Ng Gan Zee presented a claim in due form to appellant for payment of the
face value of the policy. On the same date, she submitted the required proof of death of the
insured. Appellant denied the claim on the ground that the answers given by the insured to
the questions appealing in his application for life insurance were untrue. The insured
allegedly made the following misrepresentation: “Operated on for a Tumor [mayoma] of
the stomach. Claims that Tumor has been associated with ulcer of stomach. Tumor taken
out was hard and of a hen’s egg size. Operation was two (2) years ago in Chinese General
Hospital by Dr. Yap. Now, claims he is completely recovered.” The insurer relied on the
following to prove the alleged misrepresentation: [1] The report of Dr. Fu Sun Yuan the
physician who treated Kwong Nam at the Chinese General Hospital on May 22, 1960,
i . e . , about two (2) years before he applied for an insurance policy on May 12, 1962.
According to said report, Dr. Fu Sun Yuan had diagnosed the patient’s ailment as ‘peptic
ulcer’ for which, an operation, known as a sub-total gastric resection was performed on the
patient by Dr. Pacifico Yap; and [2] The Surgical Pathology Report of Dr. Elias Pantangco
showing that the specimen removed from the patient’s body was a portion of the stomach
measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along
the greatest dimension. On the bases of the above undisputed medical data showing that
the insured was operated on for “peptic ulcer,” involving the excision of a portion of the
stomach, appellant argues that the insured’s statement in his application that a tumor, “hard
and of a hen’s egg size,” was removed during said operation, constituted material
concealment. Was there material representation that avoids the policy?
A: No. It bears emphasis that Kwong Nam had informed the
appellant’s medical examiner that the tumor for which he was operated on was
“associated with ulcer of the stomach.” In the absence of evidence that the
insured had sufficient medical knowledge as to enable him to distinguish
between “peptic ulcer” and “a tumor,” his statement that said tumor was
“associated with ulcer of the stomach,” should be construed as an expression
made in good faith of his belief as to the nature of his ailment and operation.
Indeed, such statement must be presumed to have been made by him without
knowledge of its incorrectness and without any deliberate intent on his part to
mislead the appellant. While it may be conceded that, from the viewpoint of a
medical expert, the information communicated was imperfect, the same was
nevertheless sufficient to have induced appellant to make further inquiries about
the ailment and operation of
the insured. It has been held that where, upon the face of the application, a
question appears to be not answered at all or to be imperfectly answered,
and the insurers issue a policy without any further inquiry, they waive the
imperfection of the answer and render the omission to answer more fully
immaterial. As aptly noted by the lower court, “if the ailment and operation
of Kwong Nam had such an important bearing on the question of whether
the defendant would undertake the insurance or not, the court cannot
understand why the defendant or its medical examiner did not make any
further inquiries on such matters from the Chinese General Hospital or
require copies of the hospital records from the appellant before acting on
the application for insurance.” The fact of the matter is that the defendant
was too eager to accept the application and receive the insured’s premium.
It would be inequitable now to allow the defendant to avoid liability under
the circumstances. ( N g G a n Z e e v . A s i a n
C r u z a d e r L i f e A s s u r a n c e
C o r p o r a t i o n , G . R . N o . L -
3 0 6 8 5 , M a y 3 0 , 1 9 8 3 )
§3. WARRANTIES. A warranty is an affirmation of fact or a promise

that forms part of the terms and conditions of the policy. Otherwise stated, a
warranty is a statement or promise set forth in the policy, or by reference
incorporated therein, the untruth or nonfulfillment, renders the policy voidable
by the insurer.75
SEC. 68. A warranty may relate to the past, the present, the
future, or to any or all of these.
a. A warranty provides a safety valve by which underwriters can

ensure that an insurance is actually of the character attributed to it. 76
§3.01. KINDS. A warranty is either express or implied. 77 A warranty may
also be an affirmative warranty or promissory warranty.
a. An express warranty is one that is stated in the policy or any of its
attachments. An implied warranty is a natural element of the contract imposed
by law and is a part of the policy without
75
Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, G.R. No.
151890, June 20, 2006, 491 SCRA 411, 435.
76
Dover, p. 369.
77
Section 67,1.C.
CHAPTER 6 215
the need that it be stated in the policy. For example, there may be implied warranty of
seaworthiness in marine insurance.
b. An affirmative warranty is an affirmation of fact that exists at the time
they are made. It is an undertaking that some positive allegation of fact is true. For
example, the insured may warrant that the insured building is not being for commercial
purposes. Promissory warranty stipulates that certain things shall be done or a specified
condition shall exist during the currency of life of the insurance contract. In promissory
warranty, one party is bound by an executory stipulation.
§3.02. RULES ON PROMISSORY WARRANTIES. Promissory warranties are
subject to Sections 72 and 73 of the Insurance Code which provide:
SEC. 72. A statement in a policy which imparts that

it is intended to do or not to do a thing which materially
affects the risk, is a warranty that such act or omission
shall take place.
SEC. 73. When, before the time arrives for the
performance of a warranty relating to the future, a loss
insured against happens, or performance becomes
unlawful at the place of the contract, or impossible, the
omission to fulfill the warranty does not avoid the
policy.
a. Promissory warranty may either be a positive act or an omission. Thus, the

insured in a fire insurance may warrant that the firewall of the building will be
modified to the height and specifications stated in the policy. On the other hand,
there may also be a promissory warranty that is in the form of omission as in the
case where the insured warrants that he will not store gasoline or kerosene in the
insured building.
§3.03. FORMALITIES OF EXPRESS WARRANTY. Section 69 of the
Insurance Code provides that no particular form of words is necessary to create a
warranty. However, Section 70 imposes the following requirements:
SEC. 70. Without prejudice to Section 51, every

express warranty, made at or before the execution of a
policy, must be contained in the policy itself, or in
another instrument signed by the insured and referred
to in the policy as making a part of it.
a. Thus, there are only two ways of making an express warranty part of
the insurance contract:
(1) It must be contained in the policy itself; or
(2) It may be expressed in another instrument provided that the
separate instrument is signed by the insured and referred to in the policy.
b. The Supreme Court explained that “any express warranty or
condition is always a part of the policy, but, like any other part of an express
contract, may be written in the margin, or contained in proposals or documents
expressly referred to in the policy, and so made a part of it” 7* The Supreme Court
further explained:
“The law says that every express warranty must be “contained in the policy itself.”
The word “contained,” according to the dictionaries, means “included,” “inclosed,”
“embraced,” “comprehended,” etc. When, therefore, the courts speak of a rider attached to
the policy, and thus “embodied” therein, or of a warranty “incorporated” in the policy, it is
believed that the phrase “contained in the policy itself” must necessarily include such rider
and warranty. As to the alternative relating to “another instrument,” “instrument” as here
used could not mean a mere slip of paper like a rider, but something akin to the policy itself,
which in section 48 of the Insurance Act is defined as “The written instrument, in which a
contract of insurance is set forth.” In California, every paper writing is not necessarily an
“instrument” within the statutory meaning of the term. The word “instrument has a well-
defined definition in California, and as used in the Codes invariably means some written
paper or instrument signed and delivered by one person to another, transferring the title to,
or giving a lien, on property, or giving a right to debt or duty. (Hoag v s . Howard [1880],
55 Cal., 564; People v s . Fraser [1913], 137 Pac., 276.) In other words, the rider,
warranty F, is contained in the policy itself, because by the contract of insurance agreed to
by the parties it is made to form a part of the same, but is not another instrument signed by
the insured and referred to in the policy as forming a part of it ”7&
§3.04. EXAMPLES OF EXPRESS WARRANTY. Section 71 of the Insurance

Code provides that a statement in a policy of a matter relating to the person or thing
insured, or to the risk, as a 78 *
78
Ang Giok Chip v. Springfield Fire & Marine Insurance Co., G.R. No. L-33637,
December 31, 1931 citing Parsons on Maritime Law, 106, and Phillips on Insurance, Section
756 and 4 Couch, Cyclopedia of Insurance Law, Section 862.
™Ibid.
CHAPTER 6 217
fact, is an express warranty thereof. For example, a statement in the life insurance
policy that the insured has not been involved in any vehicular accident for the past
10 years or has never been charged with any crime involving moral turpitude is an
express warranty. Similarly, a statement that there is no gasoline in the insured
building is a warranty because it relates to the risk insured against.
a. A warranty may likewise be in the form of an “other insurance”
clause whereby the insured warrants that there is no existing insurance over the
same property when the insurance policy takes effect. 80
§3.05. BREACH OF WARRANTY BY THE INSURED. Breach of

warranty by the insured renders the contract defeasible. However, in order to
avoid the policy, the insurer must prove such breach consistent with the rule that
any violation must be established by the person who is making such allegation. 81
a. The insurer may elect to waive his right to avoid the policy in case of
breach by the insured. This waiver by the insurer may be express or implied. For
example, there is implied waiver when the insurer renewed the policy knowing
that there was breach of warranty.82
PROBLEM:
1. Julie and Alma formed a business partnership. Under the business name Pino Shop, the
partnership is engaged in the sale of construction materials. Julie insured the stocks
in trade of Pino shop with WGC Insurance Company for P350,000.00. Subsequently,
she again got an insurance contract with RSI for Pi million and then from EIC for
P200,000.00. A fire of unknown origin gutted the store of the partnership. Julie filed
her claim with the three insurance companies. However, her claim was denied
separately for breach of policy condition which required the insured to give notice of
any insurance effected covering the stocks in trade. Julie went to court and contended
that she should not be blamed for the omission, alleging that the insurance agents for
WGC, RSI and EIC knew of the existence of the additional insurance coverages and
that she was not informed about
m
See Chapter 9, Section 3 discussing the “Other Insurance Clause.”
81
Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines, Inc., G.R. No.
151890, June 20, 2006.
82
Ibid.
the requirement that such other or additional insurance should be stated in

the policy. May she recover on her fire insurance policy?
A: No, she can no longer recover from said insurance policy because
she is guilty of violation of a warranty condition.
§3.06. REMEDY. A party may rescind the policy if there is breach of

warranty on the part of the other party.
SEC. 74. The violation of a material warranty, or

other material provision of a policy, on the part of
either party thereto, entitles the other to rescind.
SEC. 75. A policy may declare that a violation of
specified provisions thereof shall avoid it, otherwise
the breach of an immaterial provision does not avoid
the policy.
a. It should be noted that Sections 74 and 75 allow the party to rescind

or to avoid the policy only in case of a material breach. Breach of an immaterial
provision does not avoid the policy. Sections 74 to 75 of the Insurance Code
indicate that it is no longer the rule that all warranties are considered material the
moment that they are expressed to be so in the policy. It should be recalled that
the rule in the United States is that materiality of warranties are already removed
from the consideration of the court or jury. This is not the rule under the
Insurance Code.
b. However, if the policy itself provides that breach of a warranty or a
provision avoids the policy, the warranty is deemed to be material. The policy
may make what would normally be considered an immaterial warranty into one
that is material. This may be done if the parties agree that the statements are
absolutely true and if untrue in any respect, the policy is avoided.
c. There is authority for the view, however, that noncompliance with
a warranty is excused when by reason of a change of circumstances, the warranty
ceases to be applicable to the circumstances of the contract, or when compliance
with the warranty is rendered unlawful by any subsequent law. Breach may
likewise be waived by the other party.83
“Dover, p. 370.
WARRANTY RKI’RESKNTATION 1
1. It is part of the contract.
1. It is not part of the contract hut a
collateral inducement.
2. It can he oral or in writing.
2. It is written on a policy or its rider. .J
3. It is presumed to be material. 3. It must be established to be material.
4. There must be strict compliance. | 4. It must be substantially true. j
§4. OTHER DEVICES. Risks can also be limited or controlled using

“exceptions/’ “exclusions,” and “conditions.”
§4.01. CONDITIONS. Conditions are in the nature of collateral terms. They do
not relate to the risk covered or statement of facts but are in the nature of collateral
promises or stipulations.84 These include the following:
(1) Promises or obligations regarding claims procedure that are not
fundamental to the validity of the contract; and
(2) Conditions conferring more rights to the insurer enlarging or
repeating the minimum rights provided by law.85
a. An insurance contract with stipulated conditions is the law between the
parties. Its terms and conditions constitute the measure of the insurer’s liability and
compliance therewith is a condition precedent to the insured’s right to recovery from
the insurer.86
“Birds, p. 150.
“Birds, p. 151.
“Rafael (Rex) Verandia v. Court of Appeals, et al., G.R. No. 75605, January 22,
1993; Pacific Banking Corporation v. Court of Appeals 168 SCRA 1 (1988); Oriental
Assurance Corporation v. Court of Appeals, 200 SCRA 459 (1991), citing Perla Compania
de Seguros, Inc. v. Court of Appeals, 185 SCRA 741 (1991).
b. Conditions may also be either conditions precedent like payment of

premium or conditions subsequent like giving of notice of loss.
c. For example, a policy may provide that all benefits under the policy
shall be forfeited “if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or
devises are used by the Insured or anyone acting in his behalf to obtain any
benefit under the policy.”87 Thus, if for example an insured presented a false
declaration to support his claim for benefits in the form of a fraudulent lease
contract, he forfeited all benefits therein by virtue of the same stipulation of the
policy in the absence of proof that the insurer waived such provision. Worse yet,
by presenting a false lease contract, the insured, reprehensibly disregarded the
principle that insurance contracts are u b e r r i m a e f i d a e and
demand the most abundant good faith.88 89
d. The burden is on the insurer to prove that the insured breached the
condition that is imposed. Since breach of condition is a defense that will relieve
him of his liability under the policy the onus of proof is on the insurer who will
invoke such defense.
e. In P e r l a C o m p a n i a D e
S e g u r o s , I n c . v . C o u r t o f
A p p e a l s , ™ the Supreme Court considered as valid the provision in
an insurance against liability to third persons, a provision that imposes the
condition that any settlement of claim by third persons shall be subject to the
approval of the insurer. No compliance with the condition will bar the insured
from claim from the insurer. The stipulation states: “No admission, offer, promise
or payment shall be made by or on behalf of the insured without the written
consent of the Company which shall be entitled, if it so desires, to take over and
conduct in his (sic) name the defense or settlement of any claim, or to prosecute
in his (sic) name for its own benefit any claim for indemnity or damages or
otherwise, and shall have full discretion in the conduct of any proceedings in the
settlement of any claim, and the insured shall give all such information and
assistance as the Company may require. If the Company shall make any payment
in settlement of any claim, and such payment includes any amount
87
Rafael (Rex) Verandia v. Court of Appeals, et al., G.R. No. 75605,
January 22, 1993.
™Ibid.
89
G.R. No. 78860, May 28, 1990, 185 SCRA 741.
CHAPTER 6 221
not covered by this Policy, the Insured shall repay the Company the amount not so
covered.”
f. In another variation of what is known as the “Other Insurance Clause,” it
may be expressly provided for as a condition that the insured must give notice of the
existence of another insurance coverage on the same property. Otherwise, the policy is
null and void.90 An extended discussion of the “Other Insurance Clause” is in Chapter
9 of this work.
§4.02. EXCEPTION, EXCLUSION, OR EXEMPTION. The insurer may
provide for exemptions or exceptions in the policy. However, the rule is that if the
insurer desires to limit or restrict the operation of the general provisions of its contract
by special proviso, exception, or exemption, the policy should express such limitation
in clear and unmistakable language. For example, if the insurer wants to include the
risk of arrest occasioned by ordinary judicial process as an exception in the marine
insurance policy, it must expressly so provide in the policy without ambiguity.91
a. It is to be desired that the terms and phraseology of the exception
clause be clearly expressed so as to be within the easy grasp and understanding of
the insured, for if the terms are doubtful or obscure the same must be of necessity
be interpreted or resolved against the insured who caused the ambiguity. 92
b. Exceptions to the general coverage are construed most strongly
against the company. Even an express exception in a policy is to be construed
against the underwriters by whom the policy is framed, and for whose benefit the
exception is introduced. Where restrictive provisions are open to two
interpretations, that which is most favorable to the insured is adopted.93
c. The obligation to prove that the loss is covered by the exception rests
with the insurer.94 For example, a fire insurance policy in one case excludes from
the coverage of the policy damages
M
New Life Enterprises v. Court of Appeals, G.R. No. 94071, March 31, 1992; see
Note 3 of Chapter 9 of this book.
91
92
Virginia Calanoc v. Court of Appeals, G.R. No. L-8151, December 16, 1955.
93
Ibid.
94
See New World International Development (Phils.), Inc. v. NYK-FilJapan
Shipping Corp., G.R. No. 171468, August 24, 2011.
resulting from explosion. The Supreme Court still sustained the claim because the
insurer failed to prove that the cause of the loss was explosion. 95
d. In another case,96 97 the personal accident insurance policy involved
specifically enumerated only 10 circumstances wherein no liability attaches to the
insurance company for any injury, disability* or loss suffered by the insured as a
result of any of the stipulated causes. The High Court observed that the principle
of “ e x p r e s s i o u n i u s e s t e x c l u s i o
a l t e r i u s ”— the mention of one thing implies the exclusion of another
thing — is applicable. Since murder and assault was not expressly included in the
enumeration of the circumstances that would negate liability in said insurance
policy, murder and assault cannot be considered by implication to discharge the
insurance company from liability for any injury, disability or loss suffered by the
insured. Thus, the failure of the insurance company to include death resulting from
murder or assault among the prohibited risks leads inevitably to the conclusion
that it did not intend to limit or exempt itself from liability for such death. The
Court likewise cited Article 1377 of the Civil Code of the Philippines which
provides that the interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity. Moreover, it is well-settled that
contracts of insurance are to be construed liberally in favor of the insured and
strictly against the insurer. Ambiguity in the words of an insurance contract should
be interpreted in favor of its beneficiary.
e. Another example of an exclusion is the stipulation in a Theft and
Robbery Insurance involved in F o r t u n e I n s u r a n c e &
S u r e t y C o . u . C o u r t o f
A p p e a l s . 9 1 The policy in the said case states that the excluded risks
include “any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with others.”
§5. INCONTESTABLE CLAUSE. Section 48 of the Insurance Code
provides that:
95
Paris-Manila Perfume Co. v. Phoenix Assurance Company, Ltd., G.R. No.
L-25845, December 17, 1926.
“Finman General Assurance Corporation v. Hon. Court of Appeals and
Julia Surposa, G.R. No. 100970, September 2, 1992. See Chapter 14 for the digest
of this case.
97
G.R. No. 115278, May 23, 1995; See the digest of this case in Chapter 14.
CHAPTER 6 223
SEC. 48. Whenever a right to rescind a contract of

insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the
commencement of an action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from the
date of its issue or of its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
§5.01. MANDATORY INCONTESTABLE CLAUSES. Section 233 requires the

following incontestable clause in an Individual Life or Endowment Policy:
(b) A provision that the policy shall be incontest-

able 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 non-payment of premium and
except for violation of the conditions of the policy relating
to military or naval service in time of war;
a. For group life insurance policies, the mandatory incontestable clause required
under Section 234 is as follows:
(b) A provision that the validity of the policy shall

not be contested, except for non-payment 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 written instrument signed by him;
b. The mandated incontestable clause for industrial life insurance policies

under Section 236 of the Insurance Code states:

able 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 non-payment 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. The incontestability period is one year only for a Term Insurance

coverage under a Group Life Insurance Policy that is required to cover planholders of
Pre-Need Plans. The one-year contestability period is part of the Standard Contract
Provisions for Health, Pension and Memorial pre-need plans that are required by the
Insurance Commission.98
§5.02. RATIONALE. The incontestable clause is upheld in law not for the
purpose of upholding fraud but for the purpose of shutting off harassing defenses. 99
The clause is designed to induce the insurer to investigate and act with reasonable
promptness if it wishes to avoid the policy. The facts can be best ascertained and
established if investigated within the soonest possible time. Investigation becomes
harder through the passage of time. It is unfair for the insurer to wait for the death of
the insured who obviously can no longer defend his claim. 100 The rationale was
explained as follows:
“ E a r l y U s e o f t h e C l a u s e . The incontestable
clause was first introduced by life insurance companies on a voluntary basis in the
latter half of the 1800’s in an effort to counteract a growing attitude toward the life
insurance business. This feeling was due largely to the practices of some insurers of
taking full advantage of their right to disaffirm a contract if any statement, even a
relatively unimportant one, in the application were not literally true.
Often premiums had been paid for a long period of time, and the misstatements
concerned were relatively trivial, yet the company would disaffirm the contract at the
death of the insured, leaving the beneficiary in the difficult position of either having
no insurance or explaining and
"Insurance Commission Circular Letter No. 2016-11 dated March 8, 2016. "Mutual Life
Insurance Company v. Whitehead, 123 Ky. 21, 26 (1906). 100Amex Life Assurance Co. v. Slome
Capital Corp., 60 Cal. Rptr. 2nd 898 (1977).
CHAPTER 6 225
alleged misstatement made many years earlier in the application and about which she
knew little or nothing. As a matter of fact, the early life insurers had a considerable amount
of success in disaffirming their policies in circumstances of this kind, but this success, as
one commentator has put it, rapidly gained for them a reputation as the ‘great repudiators.’
In an effort to counteract this growing reputation and to assure the insureds and
beneficiaries that such purely technical grounds would not be used to disaffirm their
contracts, the incontestable clause was introduced in the latter half of the 19th century by
the companies themselves.”101
a. In Manila Bankers Life Insurance Corp. v. Aban ,102 the Supreme Court
explained that “the ultimate aim of Section 48 of the Insurance Code is to compel insurers
to solicit business from or provide insurance coverage only to legitimate and bona fide
clients, by requiring them to thoroughly investigate those they insure within two years
from effectivity of the policy and while the insured is still alive. If they do not, they will be
obligated to honor claims on the policies they issue, regardless of fraud, concealment or
misrepresentation. The law assumes that they will do just that and not sit on their laurels,
indiscriminately soliciting and accepting insurance business from any Tom, Dick and
Harry.”
b. The insurer has two years from the date of issuance of the insurance contract
or of its last reinstatement within which to contest the policy, whether or not, the insured
still lives within such period. After two years, the defenses of concealment or
misrepresentation, no matter how patent or well founded, no longer he. Congress felt this
was a sufficient answer to the various tactics employed by insurance companies to avoid
liability.103 04
c. The incontestable clause was not applied in Florendo v. Philam Plans104
because the two-year period has not yet lapsed. In the above-cited Manila Bankers
Life Insurance Corp. v. Aban ,105 the policy was issued on August 30, 1993, the insured
died on April 10,
101
102
G.R. No. 175666, July 29, 2013 citing Tongko v. The Manufacturers Life Insurance
Company (Phils.), Inc., G.R. No. 167622, June 29, 2010, 622 SCRA 58, 75; Republic v. Del
Monte Motors, Inc., 535 Phil. 53, 60 (2006); White Gold Marine Services, Inc. v. Pioneer
Insurance & Surety Corporation, 502 Phil. 692, 700 (2005); and Eternal Gardens Memorial Park
Corporation v. Philippine American Life Insurance Company, G.R. No. 166245, April 9, 2008,
551 SCRA 1, 13.
103
Emilio Tan, et al. v. The Court of Appeals and Philippine American Life Insurance
Company, G.R. No. 48049, June 29, 1989.
i04
Supra.
105
G.R. No. 175666, July 29, 2013.
226 ESSENTIALS OF INSURANCE U-WV
1996. and the claim was denied on April 16, 1997. The insurance policy was thus in
force for a period of three years, seven months, and 24 days. Considering that the
insured died after the two-year period, the plaintiff-appellant is, therefore, barred
from proving that the policy is void ab initio by reason of the insured’s fraudulent
concealment or misrepresentation or want of insurable interest on the part of the
beneficiary, herein defendant-appellee.
§5.03. ALLEGATION OF CONNIVANCE WITH AGENT The insurer
cannot likewise escape the operation of the incontestability clause by claiming that
the insured connived with the insurance agent. Even if the same allegation is true,
the insurer should have discovered this alleged fraud if proper investigation was
made during the two-year period. It was further observed Manila Bankers Life
Insurance Corp. v. Aban,10e that:
“Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease doing business. If
they could not properly screen their agents or salesmen before taking them in to market their
products, or if they do not thoroughly investigate the insurance contracts they enter into with
their clients, then they have only themselves to blame. Otherwise said, insurers cannot be
allowed to collect premiums on insurance policies, use these amounts collected and invest the
same through the years, generating profits and returns therefrom for their own benefit, and
thereafter conveniently deny insurance claims by questioning the authority or integrity of their
own agents or the insurance policies they issued to their premium-paying clients. This is
exactly one of the schemes which Section 48 aims to prevent. Insurers may not be allowed to
delay the payment of claims by filing frivolous cases in court, hoping that the inevitable may
be put off for years - or even decades - by the pendency of these unnecessary court cases. In the
meantime, they benefit from collecting the interest and/or returns on both the premiums
previously paid by the insured and the insurance proceeds which should otherwise go to their
beneficiaries. The business of insurance is a highly regulated commercial activity in the
country, and is imbued with public interest. “An insurance contract is a contract of adhesion
which must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the former’s interest.”
§5.04. EFFECT OF DEATH WITHIN TWO YEARS. The rule that was promulgated
in E m i l i o T a n , e t a l . v . T h e C o u r t o f
A p p e a l s 106 107 is to the effect that the policy can still be rescinded or
106
G.R. No. 175666, July 29,
2013.
107
G.R. No. 48049, June 29,
1989.
CHAPTER 6 227
the claim can still be denied if the insured dies within the two-year period provided for under
Section 48 of the Insurance Code. In the same case, the insured died before the expiration of
the two-year period and the beneficiaries contended that the insurance company no longer had
the right to rescind the contract of insurance as rescission must allegedly be done during the
lifetime of the insured within two years and prior to the commencement of action. The
Supreme Court rejected this contention because the petitioners’ interpretation would give rise
to the incongruous situation where the beneficiaries of an insured who dies right after taking
out and paying for a life insurance policy, would be allowed to collect on the policy even if
the insured fraudulently concealed material facts.108
a. Unfortunately, a contrary rule was expressed in Sun Life of Canada
(Philippines), Inc. v. Sibya,109 * where the Supreme Court ruled that “the death of the insured
within the two-year period will render the right of the insurer to rescind the policy nugatory.
In the said case, the insurer issued the policy on February 5, 2001 and the insured died on
May 11, 2001 or a mere three months from the issuance of the policy. However, the Court
ruled that the incontestability period will now set in. The Court cited the observation in
Manila Bankers Life Insurance Corporation v. Aban 110 where it was stated that “after the
two-year period lapses, or when the insured dies within the period, the insurer must make
good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation.”
b. It is believed that the ruling in Emilio Tan, et al. v. The Court of
Appeals111 is the correct rule. It is believed that the insurer can deny the claim on the
ground of concealment if the insured dies before the expiration of the two-year
period. It should be noted that the portion of the observation in Manila Bankers Life
Insurance Corporation v. Aban112 * that was quoted by the Supreme Court in the Sun
Life of Canada (Philippines), Inc. v. Sibya113 is a mere obiter because the policy
involved in Manila Bankers Life Insurance Corporation v. Aban 114 had already been in
force for more than three
108
Emilio Tan, et al. v. The Court of Appeals and Philippine American Life Insurance
Company, ibid.
109
G.R. No. 211212, June 8, 2016.
u0
Supra, 715 Phil. 404 (2013).
in
G.R. No. 48049, June 29, 1989.
ll2
Supra.
11S
Supra.
114
Supra.
(3) years. In addition, it is believed that the policy under Section 48 will not be served
if the insurer’s right to rescind or deny the claim will be denied if the insured dies
within the two-year period. The Court explained in Manila Bankers Life Insurance
Corporation v . Aban:115
“The insurer is deemed to have the necessary facilities to discover such

fraudulent concealment or misrepresentation within a period of two years. It is not fair
for the insurer to collect the premiums as long as the insured is still alive, only to raise
the issue of fraudulent concealment or misrepresentation when the insured dies in order
to defeat the right of the beneficiary to recover under the policy.
At least two years from the issuance of the policy or its last reinstatement, the
beneficiary is given the stability to recover under the policy when the insured dies. The
provision also makes clear when the two-year period should commence in case the policy
should lapse and is reinstated, that is, from the date of the last reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how
patent or well-founded, will no longer he.
Congress felt this was a sufficient answer to the various tactics employed by
insurance companies to avoid liability.
The so-called ‘incontestability clause’ precludes the insurer from raising the defenses
of false representations or concealment of material facts insofar as health and previous
diseases are concerned if the insurance has been in force for at least two years during the
insured’s lifetime. The phrase ‘during the lifetime’ found in Section 48 simply means that the
policy is no longer considered in force after the insured has died. The key phrase in the second
paragraph of Section 48 is ‘for a period of two years.”’
It is submitted that if the policy is in force for less than two years, especially for
a very short period like a few days of even a month or two after the issuance or last
reinstatement of the policy, then the period would not be sufficient to conduct sufficient
investigation to discover the fraudulent concealment or misrepresentation.
§5.05. WHEN INAPPLICABLE. The incontestable clause cannot be invoked in
the following cases:
(1) Non-payment of premium;116
115
Supra
116
Sect
ion
CHAPTER 6 229
.ASCERTAINING AND CONTROLLING RISKS
(2) Violation of the conditions of the policy relating to military or

naval service in times of war;1,7
(3) Property Insurance;us

(4) Absence of Insurable Interest;
(5) When vicious fraud was employed in obtaining the policy as in the
case of fraudulent impersonation and the case where the policy was taken as part
of the scheme to murder the insured;117 118 119
(6) Where the cause of the loss is an excepted risk;120

(7) Where the beneficiary feloniously kills the insured;121
(8) The beneficiary failed to comply with conditions subsequent like
failure to submit notice of loss; and
(9) If the claim is barred by extinctive prescription.

(10) The incontestability clause does not apply if the insured applied
vicious fraud.122 Thus, it was also explained that the incontestable clause does not
apply if there was fraudulent impersonation. For instance, it is contrary to public
policy for any person to obtain life insurance by substituting an individual other
than the named insured for medical examination. The contract is void in this
situation, hence, the incontestable clause does not apply. 123 Thus, the incontestable
clause was not applied when if the beneficiary of an insured who is an HIV-positive
caused an impostor to take the medical examination.124
(11) The clause does not apply if the assured does not have insurable
interest on the life of the insured. There cannot be any insurance contract in the
absence of insurable interest. The incon-
117
Section 227,1.C.
118
Section 48,1.C.
119
2 Agbayani 100.
120
Ibid.
l2l
Ibid.
l2z
See for example Eguaras v. Great Eastern Assurance Co., Ltd., G.R. No.
L-10436, January 24, 1916, 33 Phil. 263 .
123
Obartuch v. Security Mutual Life Insurance Company, 114 F. (2d) 873
(C.CA. 111. 1940) cited in Greider and Beadles, p. 250.
124
Amex Life Assurance Co. v. Superior Court, 14 Cal. 4th 1231, 60 Cal.
Rptr. 2d 898, 930 P. 2d 1264 (1997) cited in DiMugno v. Glad, p. 1640.
testable clause does not apply because the clause by itself does not create a
contract.125 Hence, incontestable clause does not apply if any of the other essential
elements of the contract is absent.
PROBLEMS:
1. In June 1981, Juan applied for a life insurance policy 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 own negligence. The policy is silent
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.
b. If Juan’s accident occurred in July 1983, would your answer be the
same? Explain.
A: 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,
125
CHAPTER 6 231
the insurer cannot prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the
insured or his agent/’
2. On September 23, 1990, Tan took a life insurance policy from Philam. The policy was issued on
November 6, 1990. He died on April 26, 1992 of Hepatoma. The insurance company denied
the beneficiaries’ claim and rescinded the policy by reason of alleged misrepresentation
and concealment of material facts made by Tan in his application. It returned the
premiums paid. The beneficiaries contended that the company had no right to rescind the
contract as rescission must be done “during the lifetime” of the insured within two years
and prior to the commencement of the action. Is the contention of the beneficiaries
tenable?
A: No, the contention of the beneficiaries is untenable. Mr. Tan
died on April 26, 1992 or less than two years from the insurance of the policy on
September 23, 1990. There is no requirement under Section 227 that the rescission
is done during the lifetime of the insured.
§6. WAR LIMITATION RIDER OR WAR CLAUSE. Section 227 requires a

provision in the policy that the incontestable clause does not apply if there is a violation
of the conditions of the policy relating to military or naval service in times of war. The
war clause itself is not required by the Insurance Code. However, the moment the parties
include a war clause in the policy, the beneficiaries can no longer invoke the
incontestable clause if the war clause is violated. The war limitation clause or rider limits
the liability of the insurer in the event the insured looses his life as a result of war. It was
explained that the purpose of this clause is not so negative as it might seem. Insurers
might not be willing to issue life insurance policies in times of war. Hence, a war clause
does not represent so much a limitation on the coverage in the broad sense as a practical
way of issuing coverage that would not otherwise be made available to a large number of
young men in times of war or when war is imminent. It permits the issuance of life
insurance policies that would not otherwise be issued.126
§7. DEFENSES OF INSURED AGAINST REVOCATION. Aside from the
incontestable clause, other grounds may be invoked by the insured or his beneficiaries to
prevent the insurer from invoking the devices for limiting or controlling the risk. These
126
include: (1) Guaranteed Insurability Clause, (2) Failure to invoke before

commencement of the action, (3) Waiver, and (4) Estoppel.
§7.01. GUARANTEED INSURABILITY CLAUSE. For group life
insurance policies, Section 234(b) provides 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 years during
such person’s lifetime nor unless contained in written instrument signed by him.
Thus, under this provision, statements that tend to show that the insured is
uninsurable cannot be used against him in the following cases:
(1) If the insurance has been in force prior to the contest for a
period of two years during the person’s lifetime; or
(2) If the statement is not in writing and/or not signed by the
insured.
a. The term “insurability” includes all matters which would have been
considered by the company on the application except the age of the insured. It
includes such elements as habits, occupation, finances and good health.127 It is often
confused with good health but it has long been settled that good health is not the
same as insurability. The classic example of the distinction between the two is the
statement in one case that a criminal that is condemned to death may be in perfect
health but hardly insurable.128
b. For instance, insurance company may consider a person uninsurable
because of the insured’s pecuniary circumstances coupled with heavy over-
insurance that is entirely out of line with his financial condition. 129 In another case,
the insurability was determined by considering that the insured is known to be
financially insolvent and the circumstances show probability of suicide.130
c. The insurability clause may likewise be stipulated upon by the parties
for individual life and endowment policies. This clause becomes more important
when the insured is entitled
127
Ibid., p. 401; Kallman v. Equitable Life Assurance Society, 248 A.D.
146,288 N.Y.S. 1032 (1936).
128
Kallman v. Equitable Life Assurance Society, ibid.
™Ibid.
130
Ibid., citing Ginsberg v. Eastern Life Insurance Co. of New York, 118 N.J.
Esq. 223, 178 A. 378.
CHAPTER 6 233
to reinstatement or renewal of the policy. Proof of insurability at the time of the application
for reinstatement is a proper risk for insurance upon the basis of the original contract.131
§7.02. TIMELINESS OF RESCISSION. The first paragraph of Section 48 of the
Insurance Code provides that “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.” The chapter referred to is Chapter I which
includes provisions on concealment, representations, and warranties. Thus, in one case where
the insurer alleged that there was concealment, the Supreme Court explained that while
under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a
contract of insurance,” the right to rescind should be exercised previous to the
commencement of an action on the contract.132
a. The provision requiring the right to rescind to be exercised previous to the
commencement of an action is a copy of Section 47 of the old law. In a decision of the
Supreme Court under the old law, it was explained that: “As stated, an action to rescind a
contract is founded upon and presupposes the existence of the contract which is sought to be
rescinded. If all of the material matters set forth and alleged in the defendant’s special plea
are true, there was no valid contract of insurance, for the simple reason that the minds of the
parties never met and never agreed upon the terms and conditions of the contract. [The
Court] [is] clearly of the opinion that, if such matters are known to exist by a preponderance
of the evidence, they would constitute a valid defense to plaintiff s cause of action.” 133
b. If an insurer cannot rescind the contract because of the commencement of
an action, the insurer can still set up the ground for rescission as a defense. In another
case,134 the Supreme Court explained the origin and the interpretation of the rule in the
first paragraph of Section 48 in the State where the same rule originated:
131
Banas v. Oriental Life Insurance Co., (CA) 52 O.G. 5898 (No. 13).
132
Philamcare Health Systems, Inc. v. Court of Appeals, G.R. No. 125678, March 18, 2002. .
133
Tan Chay Heng v. The West Coast Life Insurance Company, G.R. No. L-27541, November
21, 1927.
134
Bemardo Argente v. West Coast Life Insurance Company, G.R. No. 24899, March 19,
1928.
234 ESSENTIALS OF INSURANCE lJ\W
“Lastly, appellant contends that even if the insurance company had a right to
rescind the contract, such right cannot now be enforced in view of the provisions of
Section 47 of the Insurance Act providing “Whenever a right to rescind a contract of
insurance is given to their insurer by provision of this chapter, such right must be
exercised previous to the commencement of an action on the contract” This section was
derived from Section 2583 of the California Civil Code, but in contrast thereto, makes
use of the imperative “must” instead of the permissive “may.” Nevertheless, there are
two answers to the problem as propounded. The first is that the California law as
construed by the code examiners, at whose recommendation it was adopted, conceded
that “A failure to exercise the right (of rescission), cannot, of course, prejudice any
defense to the action which the concealment may furnish.” ( C o d e s o f
C a l i f o r n i a a n n o t a t e d ; T a n C h a y
H e n g v . W e s t C o a s t L i f e I n s u r a n c e
C o m p a n y [ 1 9 2 7 ] , p . 8 0 , a n t e . ) The second
answer is that the insurance company more than one month previous to the
commencement of the present action wrote the plaintiff and informed him that the
insurance contract was void because it had been procured through fraudulent
representations, and offered to refund to the plaintiff the premium which the latter had
paid upon the return of the policy for cancellation. As held in California as to a fire
insurance policy, where any of the material representations are false, the insurer’s tender
of the premium and notice that the policy is canceled, before the commencement of suit
thereon, operate to rescind the contract of insurance. ( R a n k i n v .
A m a z o n I n s u r a n c e C o . [ 1 8 9 1 ] , 8 9
C a l , 2 0 3 . ) "
c. The abovequoted Decision states that the interpretation under the

California Civil Code as to a fire insurance policy is that where any of the material
representations is false, the insurer’s tender of the premium and notice that the policy is
cancelled, before the commencement of suit thereon, operate to rescind the contract of
insurance.135 Thus, the exercise of the right to rescind does not require the filing of a
case in court.
§7.03. WAIVER. Waiver is the intentional relinquishment of a known right. It
may also be narrowly defined as the intended giving up of a known privilege or
power. It always involves consent but it does not rise to the level of contract. 136
Waiver may be express or implied.
a. The right to information of material facts may be waived,
either by the terms of the insurance or by neglect to make inquiry as to such facts,
where they are distinctly implied in other facts of which information is
communicated. For example, if the insured
135
Bemardo Argente v. West Coast Life Insurance Company, supra.
13e
Vance, p. 451.
CHAPTER 6 235
already disclosed that he had undergone surgery without stating all the details, the insurer can
no longer rescind the contract on the ground that the specific illness involved in the surgery was
not disclosed. The insurer is deemed to have made a waiver for its failure to make further
inquiries.
b. Similarly, even if there is an exclusionary condition of overage (where there is
exclusion if insured is above a certain age), the insurer can no longer deny the claim on such
ground if the insured disclosed his or her age in the application. 137
c. It has been held that where, upon the face of the applica tion, a question appears to
be not answered at all or to be imperfectly answered, and the insurers issue a policy without any
further inquiry, the insurers thereby waive the imperfection of the answer and render the
omission to answer more fully immaterial. 138
d. Waiver is also illustrated in Section 33 of the Insurance Code which
provides that the right to information of material facts may be waived, either by the
terms of the insurance or by neglect to make inquiry as to such facts, where they are
distinctly implied in other facts of which information is communicated.
e. Q u e C h e e G a n v . L a w U n i o n
I n s u r a n c e C o . , L t d . 1 3 9 involved a claim on an
insurance policy which contained a provision as to the installation of fire hydrants the
number of which depended on the height of the external wan perimeter of the bodega
that was insured. When it was determined that the bodega should have 11 fire hydrants
in the compound as required by the terms of the policy, instead of only two that it had,
the claim under the policy was resisted on that ground. The Court ruled that the said
deviation from the terms of the policy did not prevent the claim because the insurance
company was aware, even before the policies were issued, that in the premises insured
there were only two fire hydrants installed, contrary to the requirements of the
warranty in question.
f. It should be noted that in non-life insurance policies, an insurer may
insert in any insurance policy a provision that no change in the policy is valid unless
approved by an executive officer
137
Edillon v. Manila Banker’s Life Insurance Corporation, G.R. No. L-34200,
September 30, 1982; see also Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd.,
G.R. No. L-4611, December 17, 1955.
138
Ng Gan Zee v. Asian Cruzader Life Assurance Corporation, supra.
139
Supra.
of the insurer, or unless the approval is endorsed on the policy or attached to it, or
both, and that no agent has authority to change the policy or waive any of its
provisions.140
§7.04. ESTOPPEL. Article 1431 of the New Civil Code provides that
through estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying
thereon. Estoppel may be i n p a i s or by deed. Unlike a waiver, there is no
element of consent in estoppel. As already discussed earlier, Section 45 of the
Insurance Code (before it was amended by R.A. No. 10607) used to provide for an
example of estoppel. However, R.A. No. 10607 already removed this previous
exception in Section 45 of the Insurance Code.
a. For example, an insurance firm was not allowed to escape liability
under a common carrier insurance policy on the pretext that what was insured, not
once but twice, was a private vehicle and not a common carrier. The policy was
issued upon the insistence of the insurer’s agent who discounted fears of the insured
that his privately owned vehicle might not fall within the terms of the policy.
Moreover, the insured was “a man of scant education,” finishing only the first
grade. The Supreme Court observed that it is now beyond question that where
inequitable conduct is shown by an insurance firm, it is “estopped from enforcing
forfeitures in its favor, in order to forestall fraud or imposition on the insured.” 141
The doctrine of estoppel undeniably calls for application. Since the insurer had led
the insured to believe that he could qualify under the common carrier liability
insurance policy, and to enter into contract of insurance paying the premiums due, it
could not, thereafter, in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs of the insured. As estoppel
is primarily based on the doctrine of good faith and the avoidance of harm that will
befall the innocent party due to its injurious reliance, the failure to apply it in this
case would result in a gross travesty of justice.142
140
Par. 7.21, Guidelines on the Approval of Non-Life Policy Forms, I.C.
Circular Letter dated 2015-58-A dated December 21, 2015.
141
Fieldmen’s Insurance Company v. Mercedes Vargas Vda. de Songco, G.R.
No. L-24833, September 23, 1968; Qua Chee Gan v. Law Union and Rock Insurance
Co., Ltd., supra.
142
Fieldmen’s Insurance Company v. Mercedes Vargas Vda. de Songco, ibid.
CHAPTER 7
LOSS AND NOTICE OF LOSS
The question of causation is a focal question in insurance cases because the

liabilities of insurers rest on proof of causation. The determination of whether or not the
risk insured against or an excepted peril or a risk not insured against is the proximate
cause of the loss is crucial in fixing the insurer’s liability. In many cases, insurance
claims involve simple cause and effect analysis. In some cases, the task is complicated
because of the number of candidate causes that may have preceded the loss. As John
Stuart Mill explained in his A S y s t e m o f L o g i c :
“It is not true that one effect must be connected with only one cause or assemblage of
conditions; that each phenomenon can be produced only in one way. There are often several
independent modes in which the same phenomenon could have originated. One fact may be the
consequent in several invariable sequences; it may follow, with equal uniformity, any one of
several antecedents, or collection of antecedents. Many causes may produce mechanical
motion: many causes may produce some kinds of sensation: many causes may produce death.
A given effect may really be produced by a certain cause, and yet be perfectly capable of being
produced without it.”1
§1. LOSS. Loss in insurance means the injury or damage sustained by the
insured in consequence of the happening of one or more of the accidents or misfortune
against which the insurer, in consideration of the premium, has undertaken to indemnify
the insured.2
a. In property insurance, loss means the pecuniary detriment consisting of

the total cash value of the property in case of total loss or the reduction of the value
thereof in case of partial loss.
1
Book III, Chapter 10, Section 1.
2
Bonifacio Bros., Inc., et al v. Enrique Mora, et al, G.R. No. L-20853, May 29,
1967.
237
With respect to life insurance, loss occurs when the person insured dies while in
health insurance, loss occurs in case of injury to or disability of the insured. In both
cases, the loss must have been caused by the peril insured against or is otherwise
covered by the insurance policy.
§1.01. PROXIMATE CAUSE DEFINED. Proximate cause is that cause
which, in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have occurred.3
a. Distinguished from Remote Cause. Proximate cause should be
distinguished from remote cause which is defined as that cause which some
independent force merely took advantage of to accomplish something which is not
the natural effect thereof.4 The insurer will not be liable if the peril insured against is
a mere remote cause — c a u s a p r o x i m a n o n
r e m o t a s p e c t a t o r .5 Francis Bacon explained this by saying
that: “It were infinite for the law to judge the causes of causes, and their impulsion
one of another; therefore it contenteth itself with the immediate cause.”6
b. Efficient Cause. In Insurance Law, “the proximate cause of the loss is
that cause proximate to the loss, not necessarily in time, but in efficiency. Remote
causes may be disregarded in determining the cause of the loss, but the doctrine
may be interpreted with good sense, so as to uphold and not defeat the intention of
the parties to the contract. There must be a direct and uninterrupted sequence
between the proximate cause and ultimate loss; if any new intervening cause arises
between primary cause and ultimate loss, such new intervening cause will rule out
consideration of preceding causes, subject to its possessing the qualities of reality,
predominance, efficiency.”7
c. Peril Insured Against. The intention of the parties comes into play
because of the element of designation of the perils insured against. Thus, unlike tort
cases, there is a threshold question in insurance if the peril is covered by the
insurance. Initially, the policy should be examined to determine what are the perils
insured
3
Bataclan v. Medina, 102 Phil. 181 (1957).
'U’imoteo B. Aquino, Torts and Damages, 2016 Ed., p. 302, citing 57 Am. Jur.
2d 484.
5
Regard the proximate cause and not the remote cause.
6
Cited in Victor Dover, A Handbook to Marine Insurance, 1975 Ed. (Revised by
Robert H. Brown), p. 398, hereinafter cited as “Dover.”
7
Dover, pp. 401-402.
CHAPTER 7 239
against and the perils that are excluded. After establishing that the peril is included in
the perils insured against and/or not an excluded peril, another question is whether
or not the event that transpired falls within the contemplation of what is expressly
provided for. For instance, if the insurance is against fire, an underlying question is
whether or not fire occurred. It may start with a conceptual problem on the meaning
of fire. This issue is separate from the issue that resolves whether the particular
“fire” involved is the proximate cause of the loss.
d. Immediate Cause. There is likewise the concept of immediate cause
that is injected in the Insurance Code.8 The term “immediate cause” suggests
proximity in time to the loss. What is usually contemplated is a situation where at
least two causes are involved; one cause occurs after the other. For example, an
explosion occurred in a building which was followed by fire which destroyed the
building. In this case, the immediate cause is fire.
§1.02. RULES UNDER THE INSURANCE CODE. Although the concept
of proximate cause in torts is adopted for purposes of insurance, the rules are not
exactly the same as the rules in torts. The rule in q u a s i - d e l i c t is
that the tortfeasor is liable only if his negligent act or omission is the proximate
cause of the loss. In other words, the defendant is not liable if his negligent act is
not the proximate cause of the loss even if it such negligence immediately
preceded the loss.
In insurance cases, it would be possible for the insured to recover even if the peril
insured against is not the proximate cause of the loss. The insurer may be liable
even if the peril insured against is just an immediate cause and another cause is
the proximate cause.
a. The rules are embodied in Sections 86 to 88 of the Insurance Code
which state:
SEC. 86. Unless otherwise provided by the
policy, an insurer is liable for a loss of which a peril
insured against was the proximate cause, although a
peril not contemplated by the contract may have been
a remote cause of the loss; but he is not liable for a
loss which the peril insured against was only a remote
cause.
SEC. 87. An insurer is liable where the thing
insured is rescued from a peril insured against that
8
See Section 88,1.C.
240
would otherwise have caused a loss, if, in the course of

such rescue, the thing is exposed to a peril not insured
against, which permanently deprives the insured of its
possession, in whole or in part; or where a loss is
caused by efforts to rescue the thing insured from a
peril insured against.
SEC. 88. Where a peril is especially excepted in a
contract of insurance, a loss, which would not have
occurred but for such peril, is thereby excepted
although the immediate cause of the loss was a peril
which was not excepted.
b. Based on the above-quoted provisions, the rules may be summarized

thus:
(1) The insurer is liable if the peril insured against is the proximate
cause of the loss;9 the liability is present even if it is accompanied by a
remote cause or an immediate cause and whether or not such causes (remote
or immediate) are excepted perils;
(2) The insurer is not liable if the peril insured against is the
remote cause;10
(3) The insurer is liable if the thing insured is damaged because it
was being rescued from the peril insured against;11
(4) The insurer is liable for damages caused by a peril not insured
against to which the thing was exposed while the same was being rescued
from a peril insured against;12
(5) The insurer is liable if the peril insured against is the immediate
cause of the loss if the proximate cause is not an excepted peril;13
(6) The insurer is not liable if the peril insured against is the
immediate cause but the proximate cause is an excepted peril.14
9
Section
86,1.C.
10
Ibid.
“Section
12
Ibid.
13
Section
14
Ibid.
CHAFTSE ~ 241
LOSS AND NOTICE G? LOSS
c. For example, the proximate cause is ire an d the immediate

cause is explosion. The insurer will be liable if ire is a peril insured against even if explosion
is an excepted peril. If fire is an excepted peril and explosion is the one insured against- the
insurer will not be liable.
§1.03, CONCURRENT CAUSES. In tort law, where the negligent acts of two or
more persons concur in bringing about an injury to another, the joint tortfeasors shall be
solidarity liable.15 16 Joint tortfeasors are solidarity liable if their concurrent or successive
negligent acts or omissions are. in combination, the direct and proximate causes of a single
injury to a third ter son.15 Solidary liability is likewise present if the causes are
evernfetermined. that is, the acts or omissions concur but can separately cause the same
injury even if only one occurs. Although two or more causal sets concur, one causal set is
enough to bring about the result.17 18
a. In insurance cases, the issue is whether the insurer is liable if the peril insured
against is only one o: the concurrent causes. “The problem of determining the effect of
insurance provisions relating to causation has repeatedly arisen in instances in which the loss
can reasonably be viewed attributable to more than one cause. In such instances, courts
typically consider whether at least one of the contributing factors that cause the loss is a risk
covered by the insurance policy.’713 When an insurance policy provides coverage for losses
produced by some causes, and excludes coverage for losses from other causes, courts
frequently hold that coverage extends to the loss even though an excluded element is a
contributory cause.19
b. An incidental peril outside the policy, contributing to the risk insured against,
will not defeat recovery nor may the insurer defend by showing that an earlier cause brought
the loss not within a peril insured against, where the insured peril was the last step prior to
loss. It has been held that recovery may be allowed where the insured risk was the last step in
the chain of causation set in motion by an uninsured peril, or where the insured risk itself set
15
16
See Aquino, Torts and Damages, 2016 Ed., p. 599.
11
Ibid., p. 272,
18
Robert E. Keeton and Allan Widiss, Insurance Lcuc, A Guide to Fundamental Principles, Legal
Doctrines and Commercial Practices, p. 553.
19
Keeton and Widiss, ibid.
242
into operation a chain of causation in which the last step may have been excepted
risk.20
c. Where only one concurring cause of loss is insured against and
damage by each cause cannot be distinguished, the party responsible for the
dominating efficient cause has been held liable for the loss. But where there are
several concurring causes of loss, and the damages by the respective perils can be
distinguished, each party must bear his proportion.21
d. It has also been observed that California courts have applied a rule
that where two proximate causes join in causing an injury one of which is insured
against, the insurer is liable under the policy irrespective of the eventuality that
there is another concurrent proximate cause which constitutes an uncovered risk.22
(1) For example, the insured while driving a car was injured by
his negligent discharge of a pistol. He was allowed recovery under a policy
which excluded injuries arising out of use of a vehicle.23
(2) Another example is a case where a homeowner’s policy
excluded flood but the insured was allowed to recover although the damage
incurred was due to the flooding of the insured’s property where the
concurrent proximate cause was the negligence of third parties in
maintaining flood control facilities.24
(3) In the same vein is a case where an owner of a home which
slid down the hill along with the hillside itself recovered under an all risk
policy expressly excluding earth movement because a concurrent cause
could be found in a sub-drain that had been negligently damaged so that the
ground become saturated and moved.25
20
See Sections 86-88, I.C. See also: In Re: Insurance Claims of Guaranteed
Hotels, Inc., Zambales Doctors Hospital, Inc., Rocio P. Baltao & E.S. Baltao &
Co. v. Philippine Pryce Assurance Corporation, Arbitration Proceedings No. 1,
January 10, 1992, citing Appleman, 2083, pp. 309-312.
2x
Ibid.
22
Kenneth York and John Whelan, Insurance Law General Practices, p. 228.
23
Ibid., citing State Farm Mutual Auto Ins. Co. v. Partridge, 10 Cal. 3d 94 Cal.
Rprt. 811 (1973).
24
Ibid., citing Safeco Ins. Co v. Guyton, 692 F. 2d 551 (9th Cir. 1982).
2S
Ibid., citing Premier Ins. Co. v. Welch, 140 Cal. App. 3r 720, 189 Cl.
Rprt. 657 (1983).
CHAPTER 7 243
(4) In the given examples, however, it appears that the cases can be
decided on the basis of Sections 84 to 86 of the Insurance Code because the
perils insured against were the proximate causes of the respective loss
although the immediate causes were excluded in the policy.
§1.04. NEGLIGENT AND INTENTIONAL ACTS OR OMISSIONS. The
rule expressed in Section 89 of the Insurance Code is to the effect that (1) the
insurer is not liable for losses caused by intentional acts of the insured, and (2) the
insurer is liable if the loss was caused through negligence. The provision states:
SEC. 89. An insurer is not liable for a loss caused

by the willful act or through the connivance of the
insured; but he is not exonerated by the negligence of
the insured, or of the insurance agents or others.
a. Rationale. The reason for the rule that the insurer is liable for
negligence is because one of the purposes for taking out insurance is to protect the
insured against the consequences of his own negligence and that of his agents. Thus,
it is a basic rule in insurance that the carelessness and negligence of the insured or
his agents constitute no defense on the part of the insurer.26
b. Effect of Gross Negligence. Distinction should, however, be made
between ordinary negligence and gross negligence or negligence amounting to
misconduct and its effect on the insured’s right to recover under the insurance
contract. While mistake and negligence of the insured or his agent constitute part of
the perils that the insurer is obliged to incur, such negligence or recklessness must
not be of such gross character as to amount to misconduct or wrongful acts;
otherwise, such negligence shall release the insurer from liability under the
insurance contract.27
c. For example, the insured was not allowed to recover in a marine
insurance policy covering a barge which ran aground because of the strong waves
brought about by bad weather. The court found that there was b l a t a n t
n e g l i g e n c e on the part of the employees of the insured when the
patron (operator) of the tugboat immediately left the barge at the wharf despite the
looming bad weather. Negligence
26
FGU Insurance Corporation v. The Court of Appeals, et al., G.R. No.
137775, March 31, 2005.
27
Jbid.
was likewise exhibited by the representative of the insured who did not heed the
request that the barge be moved to a more secure place. The court found that the
prudent thing to do, as was done by the other sea vessels at the wharf during the time
in question, was to transfer the vessel to a safer wharf. Only the subject vessel was
left at the wharf.28
§2. NOTICE OF LOSS. The parties may agree on a stipulation in the policy
that notice should be given within a certain period from the time of the loss. The
parties may agree that the absence of notice of loss within the period agreed upon will
extinguish the loss. This notice is separate from the claim itself although a claim
within the period of giving notice is already deemed compliance with the
requirement.
a. However, with respect to fire insurance, notice of loss is mandatory
under Section 90. Notice may be given either by (1) the insured, or (2) the person
entitled to the benefit of the insurance. For example, the mortgagee who is the
beneficiary may also give notice of loss under this provision. Section 90 provides:
SEC. 90. In case of loss upon an insurance against

fire, an insurer is exonerated, if notice thereof be not
given to him by an insured, or some person entitled to
the benefit of the insurance, without unnecessary delay.
For other non-life insurance, the Commissioner may
specify the period for the submission of the notice of
loss.
b. The notice under Section 90 should be given without unnecessary delay.

It would depend on the circumstances if there was unnecessary delay in giving the
notice of loss. For example, there could be no undue delay if the absence of
immediate notice was because the insured was injured and hospitalized for a long
period of time.
c. Even if the policy requires “immediate” notice, the use of the term
“immediate” does not mean that the parties intended to impose upon the insured any
impossible requirements. Therefore, notice will be considered immediate if it has
been given as soon as circumstances permitted the insured, in the exercise of
reasonable
28
FGU Insurance Corporation v. The Court of Appeals, supra.
CHAPTER 7 245
diligence, to communicate it.29 In another case, the Supreme Court ruled that the words
“immediate notice” can be construed to mean only within a reasonable time. 30
d. Whether or not there is undue delay, which is proscribed under Section 90 or
a stipulation in the policy, should be decided liberally in favor of the insured. Prof. Vance 31
explained that these conditions, while in the form of conditions precedent, are in reality in
the nature of conditions subsequent, the breach of which affects a right that has already
accrued. Until a loss occurs through a peril covered by the policy, the insurer’s liability
under this contract is altogether contingent, but with the happening of the capital fact of
loss his liability arises and becomes properly fixed. Hence, “when they contain provisions
of forfeiture they must be regarded as penalties defeating a right that has already accrued.
Such being the nature of these conditions, it is manifest that the general rules of
construction require that they shall be construed with much less strictness than those
conditions that operate prior to the loss.”32
e. It is sufficient that there is substantial compliance with the provision in the
policy requiring notice of loss. 33 The policy may also contain a provision stipulating the
period within which notice should be given.
f. There is waiver of the requirement of notice of loss if the claim is denied on
the ground that the policy is null and void. It is well-settled by a preponderance of
authorities that such a denial is a waiver of notice of loss because if the policy is null and
void, the furnishing of such notice would be useless.34
g. Notice to the agent of the insurer binds the insurer. Under the doctrine of
representation, notice to the agent is notice to the principal.35
29
Vance, p. 781.
Ê.M. Bachrach v. British American Assurance Company, G.R. No. L-5715, December 20,
1910.
31
Vance, pp. 780-781.
32
Ibid.
^Finman General Assurance Corporation v. Court of Appeals and USIPHIL Incorporated,
G.R. No. 138737, July 12, 2001.
Ê.M. Bachrach v. British American Assurance Co., supra.
^Bank of Philippine Islands v. Laingo, G.R. No. 205206, March 16, 2016.
2Ae KSSKNTIALS OP INSURANCE LAW
(Republic Act No. 1()(>07 with Notes on Pro-Need Act)
§3. PROOF OF LOSS. It is not required for the insured to submit a

preliminary proof of loss unless there is a stipulation in the policy requiring
submission of proof of loss. If there is a contractual stipulation, requiring the
submission of a preliminary proof of loss, compliance should be in accordance
with Sections 89 and 92 of the Insurance Code:
SEC. 91. When a preliminary proof of loss is

required by a policy, the insured is not bound to give
such proof as would be necessary in a court of
justice; but it is sufficient for him to give the best
evidence which he has in his power at the time.
SEC. 94. If the policy requires, by way of
preliminary proof of loss, the certificate or testimony
of a person other than the insured, it is sufficient for
the insured to use reasonable diligence to procure it,
and in case of the refusal of such person to give it,
then to furnish reasonable evidence to the insurer that
such refusal was not induced by any just grounds of
disbelief in the facts necessary to be certified or
testified.
a. The law does not require preponderance of evidence because the

insured is not bound to submit preliminary proof that is required by regular
courts. Substantial evidence is also not required because such evidence is
required only in quasi-judicial cases including cases before the Insurance
Commission. All that the law requires is for the insured to give the best evidence
which he has in his power to submit at that time.
b. If the policy is valued, the valuation fixed in fire insurance policy is
conclusive in case of total loss. If the policy is an open policy, the valuation is not
conclusive, and the loss and its amount may be determined on the basis of such
proof as may be offered by the insured, which need not be of such persuasiveness
as is required in judicial proceedings.36
c. However, if the claim is denied and the insured is constrained to file
a case in court, the burden of proof is on the insured to prove his loss because the
same is part of his cause of
36
Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-
67835, October 12, 1987.
CHAPTER 7 247
action- If a case is filed in court, the insured must prove his cause of action by
preponderance of evidence.
(1) In an accident insurance, the insured's beneficiary has the burden of
proof in demonstrating that the cause of death is due to the covered peril. Once the
fact is established, the burden then shifts to the insurer to show any excepted peril
that may have been stipulated by the parties. An "accident insurance" is not thus to
be likened to an ordinary life insurance where the insured’s death, regardless of
the cause thereof, would normally be compensable. The latter is akin to property
insurance with an "all risk” coverage where the insured, on the aspect of burden of
proof, has merely to show the condition of the property insured when the policy
attaches and the fact of loss or damage during the period of the policy and where,
thereafter, the burden would be on the insurer to show any "excluded peril.”
When, however, the insured risk is specified, it lies with the claimant of the
insurance proceeds to initially prove that the loss is caused by the covered peril.37
§4. DEFECTS IN NOTICE AND PROOF. Section 92 of the Insurance Code
provides that "all defects in a notice of loss, or in preliminary proof thereof, which the
insured might remedy, and which the insurer omits to specify to him, without
unnecessary delay, as grounds of objection, are waived.”
a. In one case, it was ruled that the certification issued by the Integrated
National Police of Lao-ang, Samar, as to the extent of the insured’s loss should be
considered sufficient. The insurer submitted no evidence to the contrary nor did it
even question the extent of the loss. Even if the same certification is not what was
provided for, there is deemed to be compliance because of the rule that if the insured
files notice and preliminary proof of loss and the insurer fails to specify to the former
all the defects thereof and without unnecessary delay, all objections to notice and
proof of loss are deemed waived under Section 92 of the Insurance Code.38
b. For example, the Supreme Court sustained the validity of this provision in
one case:39
37
Jacqueline Jimenez Vda. de Gabriel v. Hon. Court of Appeals, et al., G.R. No.
103883, November 14, 1996.
^Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-67835,
October 12, 1987.
39
Finman General Assurance Corporation v. Court of Appeals and USIPHIL
Incorporated, G.R. No. 138737, July 12, 2001.
(Republic Act No, 10607 with Notes on Pre-Need Act)
“13. The insured shall give immediate written notice to the Company of any
loss, protect the property from further damage, forthwith separate the damaged and
undamaged personal property, put it in the best possible order, furnish a complete
inventory of the destroyed, damaged, and undamaged property, showing in detail
quantities, costs, actual cash value and the amount of loss claimed; AND WITHIN
SIXTY DAYS AFTER THE LOSS, UNLESS SUCH TIME IS EXTENDED IN
WRITING BY THE COMPANY, THE INSURED SHALL RENDER TO THE
COMPANY A PROOF OF LOSS, signed and sworn to by the insured, stating the
knowledge and belief of the insured as to the following: the time and origin of the
loss, the interest of the insured and of all others in the property, the actual cash value
of each item thereof and the amount of loss thereto, all encumbrances thereon, all
other contracts of insurance, whether valid or not, covering any of said property, any
changes in the title, use, occupation, location, possession or exposures of said
property since the issuing of this policy by whom and for what purpose any buildings
herein described and the several parts thereof were occupied at the time of loss and
whether or not it then stood on leased ground, and shall furnish a copy of all the
descriptions and schedules in all policies, and if required verified plans and
specifications of any building, fixtures, or machinery destroyed or damaged. The
insured, as often as may be reasonably required, shall exhibit to any person
designated by the company all that remains of any property herein described, and
submit to examination under oath by any person named by the Company, and
subscribe the same; and, as often as may be reasonably required, shall produce for
examination all books of account, bills, invoices, and other vouchers or certified
copies thereof if originals be lost, at such reasonable time and place as may be
designated by the Company or its representative and shall permit extracts and copies
thereof to be made.
No claim under this policy shall be payable unless the terms of this condition
have been complied with.”
c. The Supreme Court noted that immediately after the occurrence of the
fire, the insured notified the insurer thereof. Thereafter, the insured submitted the
following documents: (1) Sworn Statement of Loss and Formal Claim; and (2) Proof
of Loss. The submission of these documents, to the Court’s mind, constitutes
substantial compliance with the provision in the policy. Indeed, as regards the
submission of documents to prove loss, substantial, not strict, compliance with the
requirements will always be deemed sufficient.40
d. There is no defect of proof however even if an adjuster’s report is not
submitted. There is nothing in the Insurance Code that makes the participation of an
adjuster in the assessment of the
40
Incorporated, supra.
CHAPTER 7 249
loss imperative or indispensable. Section 334 of the Insurance Code cannot be relied
upon because it simply speaks of the licensing and duties of adjusters. 41
§5. EFFECT OF DELAY. Section 93 of the Insurance Code provides that delay
in the presentation to an insurer of notice or proof of loss is waived if caused by any
act of the insurer or if he omits to take objection promptly and specifically upon that
ground. Thus, there are three cases when delay is excused:
(1) When delay is attributable to the insurer;
(2) When there was no prompt objection; and
(3) There was an objection but not specifically on the ground that there was
delay of notice or proof of loss.
PROBLEMS:
1. In 1977, petitioner Norman R. Noda obtained from respondent Zenith Insurance
Corporation, two fire insurance policies: [1] No. F-03724 with a face value of
P30,000.00 covering the goods and stocks in trade in his business establishment at
the market site in Mangagoy, Bislig, Surigao del Sur for the period from March 3,
1977 to March 3, 1978 and [2] No. F-03734 with a face value in the aggregate
amount of P100,000.00 for the period from May 10, 1977 to May 10, 1978 and
consisting of Item 1 for P40,000.00 on household furniture, fixtures, fittings and
other personal effects, and Item 2 for P60,000.00 on stocks in trade usual to
petitioner’s retail business situated in a two (2)-storey building at 039 Barreda St.,
also in Mangagoy, Bislig, Surigao del Sur, the ground floor of which the petitioner
used as store and the second floor as family quarters. While both policies were in
force, fire destroyed petitioner’s insured properties at the market site on September 5,
1977 and at Barreda St. on November 9, 1977. Petitioner failed to obtain indemnity
on his claims from respondent Zenith. When a case was filed with the Insurance
Commission, the Commissioner ordered the insurer to pay only on one (1) policy and
denied the claim on Policy No. F-03734 with respect to stocks in trade.
A: To prove the existence of the stocks in trade covered by Policy
No. F-03734, petitioner offered his testimony and that of his wife as well as
documentary exhibits. The foregoing evidence for petitioner preponderantly
showed the presence of some P590,000.00 worth of goods in his retail store
during the fire of November 9, 1977. While the insurer, and the Insurance

Incorporated, supra.
Commissioner for that matter, have the right to reject proofs of loss if they are
unsatisfactory, they may not set up for themselves an arbitrary standard of
satisfaction. Substantial compliance with the requirements will always be
deemed sufficient. A scrutiny of the above-mentioned adjuster’s report reveals
that together with the formal demand for full indemnity, petitioner submitted
his income tax return for 1978, purchase invoices, certification from his
suppliers as to his purchases, and other supporting papers. The report even
took into account the appraisals of the other adjusters and concluded that the
total loss sustained by petitioner in his household effects a n d stocks in
trade reached P379,302.12. But after apportioning said amount among
petitioner’s six different insurers (the co- insurance being known to Zenith),
the liability of Zenith was placed at P60,592.10. It therefore recommended that
Zenith pay the petitioner the amount of P60,592.10. Indeed, petitioner had
every reason to expect that respondent Commissioner would give equal weight
and credence to the adjuster’s report (on Policy No. F-03734) as she had done
with the other. After all, said document was offered as evidence by Zenith
itself and could very well be considered as an admission of its liability up to
the amount recommended. It would have been pointless for Zenith to have
introduced said report as its evidence if it did not agree with its findings and
ultimate proposals. Being in the nature of an admission against interest, it is
the best evidence which affords the greatest certainty of the facts in dispute.
Respondent Commissioner should not have perfunctorily dismissed that
particular evidence as a worthless piece of paper. ( N o r m a n
N o d a v . H o n . G r e g o r i a C r u z -
A r n a l d o a n d Z e n i t h I n s u r a n c e
C o r p o r a t i o n , G . R . N o . 5 7 3 2 2 ,
J u n e 2 2 , 1 9 8 7 )
2. Clause 13 of the contract of insurance between the parties provides that
“If the claim be in any respect fraudulent, or if any false declaration be made or used
in support thereof, ... all benefit under this Policy shall be forfeited.” Plaintiff
insured’s verified claim totaled P31,860.85, of which, in accordance with the terms of
the policy, three-fourths was asked, or P23,895.64. The insurer’s inventory of the
goods found after the fire came to P13,113.00. The difference between insured’s
claim and insurer’s estimate of the loss, which was confirmed in the trial court, was
P18,747.85. Can the insurer deny the claim under Clause 13 of the policy?
A: Yes, the claim can be denied. A false and material statement
made with an intent to decide or defraud
a v o i d s a n i n s u r a n c e p o l i c y . (Yu Cua v. South British
Insurance Co. [1920], 41 Phil. 134; Go Lu v. Yorkshire Insurance Co.
[1922], 43 Phil. 633; Tuason v. North China Insurance Co. and Liverpool
& London & Globe Insurance Co. [1924], 47 Phil. 14; Insurance Act No.
2427, Sec. 44.) T h a t h a s b e c o m e t h e s e t t l e d d o c t r i n e
in the
CHAPTER 7
Philippines. It should not now be departed from out of a spirit of sympathy in one
particular case. It is well for those who are unfortunate enough to have losses by fire
to know that they can only hope to recoup themselves by fair dealing. No court
could, for a moment, subscribe to a confirmation of a fire insurance claim
dishonestly made.
While the contrast between the claim and the loss in the three (3) cited cases
may be more startling than in the case at bar, the same principle governs. In the Y u
C u a case, the claim was 14 times bigger than the real loss; in the Go L u case,
eight (8) times; and in the T u a s o n case, six (6) times. In the T a n I t
case before us, the difference under one (1) hypothesis is about 50%, and under
another hypothesis, about 25%. Still that constitutes a serious discrepancy between
the true value of the property and that sworn to in the proofs of loss, and is an
outstanding fact to be considered as bearing upon the presence of fraud. It is more
than an honest misstatement, more than inadvertence or mistake, more than a mere
error in opinion, more than a slight exaggeration, and in connection with all the
surrounding circumstances, discloses a material overvaluation made intentionally
and willfully. [The Court] might condone one who overvalues his loss to offset
counter-undervaluation by an insurance company, but [the Court] cannot forgive one
who asks for reimbursement for good alleged to have been consumed by fire when
no such good were in the place to be consumed. ( T a n I t v . S u n
I n s u r a n c e O f f i c e , G . R . N o . L -
2 7 8 4 7 , D e c e m b e r 1 2 , 1 9 4 7 )
CHAPTER 8
CLAIMS SETTLEMENT AND SUBROGATION
The expectation of payment for his loss is the primary reason why the
insured entered into the insurance contract. For the insured, it is imperative
that the insurer effect a fair and prompt payment for his loss. A writer keenly
observed:
“The repayment for the values which have been lost is often the point at which
the policyholder has the strongest possible realization of why he purchased the
insurance contract. Up to that time he may have had a feeling that there were a number
of vague reasons why he purchased the protection. When he actually receives a loss
check which makes it possible for him to rebuild his home or replace his automobile, he
has specific and tangible knowledge as to why he needed the insurance. He often may
wonder what he possibly would have done if he had not had the proper insurance
coverage.
The insured who has honestly suffered loss or damage need not approach the
insurance company in no apologetic frame of mind. The claim settlement which he asks
for is his by right of purchase. It should be the objective of both to arrive at a fair and
equitable measure of the loss.”1
§1. CLAIMS SETTLEMENT. The liability of the insurer attaches the

moment the risk insured against causes loss to the insured. Section 247 of the
Insurance Code provides that “no insurance company doing business in the
Philippines shall refuse, without just cause, to pay or settle claims arising
under coverages provided by its policies, nor shall any such company engage
in unfair claim settlement practices.”
a. Insurance adjusting is the term that is being used to denote
the function of loss payment. An adjuster is the person employed by the
insurer in property and casualty insurance to settle in behalf of the insurer the
claim of the insured. The adjuster evaluates
îckelhaupt, p. 176.
252
CHAPTER 8 253
the insurance claim and makes the proper recommendation to the insurer. Under the
Insurance Code, the adjuster may be an Independent Adjuster or a Public Adjuster:2
(1) An “independent adjuster” is any person, partnership, association or
corporation which, for money, commission or any other thing of value, acts for or
on behalf of an insurer in the adjusting of claims arising under insurance contracts
or policies issued by such insurer.3
(2) A “public adjuster” is any person, partnership, association or
corporation which, for money, commission or any other thing of value, acts on
behalf of an insured in negotiating for, or effecting, the settlement of a claim or
claims of the said insured arising under insurance contracts or policies, or which
advertises for or solicits employment as an adjuster of such claims. 4
b. Note however, that the functions of an adjuster is merely to settle and adjust
claims in behalf of his principal. The adjuster does not assume personal liability. 5
§1.01. UNFAIR CLAIMS SETTLEMENT PRACTICES. Any of the following
acts by an insurance company, if committed without just cause and performed with such
frequency as to indicate a general business practice, shall constitute unfair claim
settlement practices which may result in the suspension or revocation of the certificate of
authority of the insurer by the Insurance Commission: 6
(1) Knowingly misrepresenting to claimants pertinent facts or policy
provisions relating to coverage at issue;
(2) Failing to acknowledge with reasonable promptness pertinent
communications with respect to claims arising under its policies;
(3) Failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under its policies;
2
Section 333,1.C; See Chapter 16 for further discussion on the law on adjusters.
3
Ibid.
A
Ibid.
5
Smith Bell & Co., Inc. v. Court of Appeals and Joseph Bengson Chua, G.R. No. 110668,
February 6, 1997.
Section 247,1.C.
254 ESSENTIALS OP INSURANCE LAW
(Republic Act No. 10607 with Notes to Pre-Neec Act,
(4) Not attempting in good faith to effectuate prompt, fair and

equitable settlement of claims submitted in which liability has become
reasonably clear; or
(5) Compelling policyholders to institute suits to recover amounts
due under its policies by offering without justifiable reason substantially less
than the amounts ultimately recovered in suits brought by them.
§1.02. LIFE INSURANCE POLICY. The proceeds of a life insurance policy
shall be paid immediately upon maturity of the policy. 7 * However, the policy may
provide that the proceeds are made payable in installments or as an annuity, in
which case the installments, or annuities shall be paid as they become due.*
a. In the case of a policy maturing by the death of the insured, the
proceeds thereof shall be paid within 60 days after presentation of the claim and
filing of the proof of the death of the insured. The proceeds of the policy maturing
by the death of the insured payable to the beneficiary shall include the discounted
value of all premiums paid in advance of their due dates, but are not due and
payable at maturity.9
b. Refusal or failure to pay the claim within the time prescribed herein
will entitle the beneficiary to collect interest on the proceeds of the policy for the
duration of the delay at the rate of twice the ceiling prescribed by the Monetary
Board, unless such failure or refusal to pay is based on the ground that the claim is
fraudulent.10
§1.03. NON-LIFE INSURANCE POLICY. The amount of any loss or
damage for which an insurer may be liable under any policy other than life
insurance policy, shall be paid within 30 days after proof of loss is received by the
insurer and ascertainment of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration.11 The period may be shorter if
an agreement is reached.12
7
Se
ctio
6
Ibi
9
Ibi
10
I
“Section 249,1.C.
bid
12
Par. 7.12,1.C. Circular Letter 2015-58-A dated December
21, 2015.
CHAPTER 8 255
a. However, if ascertainment of loss is not had or made within 60 days after

such receipt by the insurer of the proof of loss, then the loss or damage shall be paid
within 90 days after receipt of the proof of loss.11
b. Unreasonable refusal or failure to pay the loss or damage within the time
prescribed under Section 249 of the Insurance Code will entitle the assured to collect
interest on the proceeds of the policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based
on the ground that the claim is fraudulent.13 14 The “double interest” referred to in Section
249 can only be interpreted to mean double the legal rate of interest of 6 % prescribed
by the Monetary Board or 12%.15 When the law in Section 249 speaks of the ceiling
prescribed by the Monetary Board, it can only refer to the rate applicable to obligations
that are in the nature of loans or forbearance of money.16 Under BSP Circular No. 799,
Series of 2013 dated July 1, 2013, the legal rate of interest was reduced from 12% to 6%
for every loan or forbearance of money, goods, or credits and the rate allowed for
judgments in the absence of contractual stipulation as to the rate of interest.
c. The insurer must settle the claim even without the participation of an
adjuster. There is nothing in the Insurance Code that makes the participation of an
adjuster in the assessment of the loss imperative or indispensable. Section 334 of the
Insurance Code speaks of the licensing and duties of adjusters but it does not require as a
pre-requisite the assessment of adjusters in the settlement of the insurance claim. 17
§1.04. UNREASONABLE DENIAL OR WITHHOLDING OF CLAIM. In case
of any litigation for the enforcement of any policy or contract of insurance, it shall be the
duty of the Commissioner or the Court, as the case may be, to make a finding as to
whether the payment of the claim of the insured has been unreasonably denied or
withheld.18 It should be noted that failure to pay any such claim
13
Section 249, I.C. (previously Section 243).
14
Ibid.
15
Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines, Inc., G.R. No.
151890, June 20, 2006.
16
Stronghold Insurance Co., Inc. v. Pamana Island Resort Hotel and Marina Club, Inc.,
G.R. No. 174838, June 1, 2016.
17
Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-67835,
October 12, 1987.
18
Section 250, I.C.
within the time prescribed in Sections 248 and 249 of the Insurance Code shall be
considered p r i m a f a c i e evidence of unreasonable delay in payment.19
a. Interest and Damages. If the claim of the insured has been unreasonably
denied or withheld, the insurance company shall be adjudged to pay the following: 1)
attorneys fees; 2) other expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment; 3) interest of 12% at twice the ceiling
prescribed by the Monetary Board of the amount of the claim due the injured; 20 and 4)
the amount of the claim.21 The interest that is payable for unlawful withholding of the
insurance proceeds or unlawful denial of the claim is what is known as “compensatory
interest” which is in the nature of penalty.22
b. For an insurance company to be held liable for unreasonably delaying
and withholding payment of insurance proceeds, the delay must be wanton,
oppressive, or malevolent. It is generally agreed, however, that an insurer may in good
faith and honesty entertain a difference of opinion as to its liability. Accordingly, the
statutory penalty for vexatious refusal of an insurer to pay a claim should not be
inflicted unless the evidence and circumstances show that such refusal was willful and
without reasonable cause as the facts appear to a reasonable and prudent man. For
instance, the insurer cannot be deemed to be guilty of acting wantonly and in bad faith
in delaying the release of the proceeds if there is a problem in the determination of
who is the actual beneficiary of the insurance policies, aggravated by the claim of
various creditors who wanted to partake of the insurance proceeds. 23
c. If there is no unreasonable or unjustified delay or refusal in settling the
claim of the insured, the interest is 6% p e r a n n u m from the time of
demand. As already stated earlier, under BSP
19
See discussion in Section 1.02 and 1.03 above, Notes 6 and 10.
20
Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., et al.,
supra.
21
Ibid., see also Zenith Insurance Corporation v. Court of Appeals and Lawrence
Fernandez, G.R. No. 85296, May 14, 1990.
22
Sun Life of Canada (Philippines), Inc. v. Sandra Tan Kit, G.R. No. 183272, October
15, 2014.
23
The rule in Rizal Commercial Banking Corporation, et al. v. Court of Appeals and Go
Yu & Sons, Inc., G.R. No. 128833, April 20, 1988 and Zenith Insurance Corporation v. Court of
Appeals, 185 SCRA 403 (1990) was already overtaken by BSP Circular 799, Series of 2013.
CHAPTER 8 257
Circular No. 799, Series of 2013, the legal rate of interest is now 6% whether or not
the claim is based on loan or forbearance of money.
(1) Based on the ruling in Stronghold Insurance Co., Inc. v. Pamana
Island Resort Inc.,24 if the Bangko Sentral ng Pilipinas (BSP) will eventually
increase the rate of interest to a rate that is higher than the present rate of 6% for
loan or forbearance of money, then the higher rate would still be inapplicable if
there is an unreasonable denial of an insurance claim under Article 249 of the
Insurance Code.
(2) However, the ruling in other cases is to the effect that if the case is
a simple insurance claim, the interest rate that applies is the one that applies for
claims that are not in the nature of loan or forbearance of money. The High
Court ruled that if there is no unreasonable delay, the insurance claims for
damage or loss incurred by the insured is not in the nature of loan or forbearance
of money.25 However, if the rate for loans and forbearance of money is increased
back to 12%, such 12% should already be applied from the time the judgment of
court becomes final and executory even if the claim is originally not for loan or
forbearance of money.26
d. No compensatory or penalty interest was due in case the insurer is
refunding the premium as a consequence of the rescission of the policy because of
material concealment committed by the insured. Compensatory interest is due only if
the obligor is proven to have failed to comply with his obligation. In the said case, the
insurer did not incur delay or unjustifiably deny the claim.27
e. Mere denial of the claim does not warrant of the award of moral and
exemplary damages and attorney’s fees. For instance, the imposition of damages is not
justified if it is evident that the insurer is acting in good faith in resisting the
beneficiary’s claim on the ground that the death of the insured is covered by the
exception.
24
G.R. No. 174838, June 1, 2016; New World International Development (Phils.), Inc.
v. NYK-PhilJapan Shipping Corp., et al., G.R. No. 171468, August 24, 2011; Prudential
Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., G.R. No. 174838, June 1,
2016.
25
Tio Kho Cho v. Hon. Court of Appeals, G.R. Nos. 76101-02, September 30,
1991.
26
Ibid.; Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, July 12,
1994.
27
Sun Life of Canada (Philippines), Inc. v. Sandra Tan Kit, G.R. No. 183272, October
15, 2014.
This is true where the issue is debatable and is clearly not raised only for the
purpose of evading a legitimate obligation. In order that a person may be made
liable to the payment of moral damages, the law requires that his act be wrongful.
The adverse result of an action does not p e r s e make the act wrongful and
subject the act to the payment of moral damages. The law could not have meant to
impose a penalty on the right to litigate; such right is so precious that moral
damages may not be charged on those who may exercise it erroneously. For these,
the law taxes costs.28
§2. FRAUDULENT CLAIM. The insurer may justifiably reject a claim that
is fraudulent.29 For instance, the insured can deny the claim if the insurer presented
a false claim based on a fictitious document. 30 Similarly, the denial of the claim
may also be justified if the loss is grossly overvalued.31 R.A. No. 10607 now
expressly provides for criminal liability for fraudulent claims. Section 251 of the
Insurance Code as amended by R.A. No. 10607 provides that:
SEC. 251. It is unlawful to:

(a) Present or cause to be presented any
fraudulent claim for the payment of a loss under a
contract of insurance; and
(b) Fraudulently prepare, make or subscribe any
writing with intent to present or use the same, or to
allow it to be presented in support of any such claim.
Any person who violates this section shall be
punished by a fine not exceeding twice the amount
claimed or imprisonment of two (2) years, or both, at
the discretion of the court.
a. Since presentation of a fraudulent claim is considered illegal, the

insurer is not obligated to pay the insured or beneficiary who submitted such
fraudulent claim.
(1) However, there is a need to interpret paragraph
(b) of Section 251 of the Insurance Code. The first paragraph
28
Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim,
G.R. No. 92383, July 17, 1992.
29
Tan It v. Sun Insurance Office, G.R. No. L-27847, December 12, 1927.
30
Moises Ariche, et al. v. The Law Union and Rock Insurance Co., Ltd., et al.,
G.R. Nos. L-24454-24456, January 12, 1996.
31
The East Furniture, Inc. v. The Globe & Rutgers Fire Insurance Co. of New
York, G.R. No. L-35848, November 22, 1932.
CHAPTER 8 259
is clear enough - the person who presented or caused to be presented any

fraudulent claims is criminally liable. However, with respect to the second
paragraph, it is believed that the same cannot be interpreted to mean that mere
preparation of a claim form is enough to make one liable. If the form was
prepared with the intent to present or use the same but the form was not
submitted because the person who prepared it changed his mind and kept it in his
drawer, then there should be no liability. Even if violation of Section 251 is
m a l a p r o h i b i t a , it is absurd to make one liable just by
preparing the claim.
(2) The word “fraudulently'’ in paragraph 5 indicates that the insurer
was already aware of the claim; fraud presupposes the presence of another person
against whom the fraud is committed or is being misled. Hence, it is believed that
paragraph (b) of Section 251 presupposes that a claim was already presented.
(3) Thus, if a fraudulent claim was filed, the persons who may be
made criminally liable under Section 251 are as follows:
(4) The person who presented the fraudulent claim;

(5) The person who caused the filing of the fraudulent claim;
(6) The person who prepared or made the fraudulent claims
with intent to present or use the same, or to allow it to be presented in
support of any such claim; and
(7) The person who subscribed any writing with intent to
present or use the same, or to allow it to be presented in support of any
such claim.
(8) The insured is not even entitled to a return of premium in accordance
with Section 82 of the Insurance Code as amended by R.A. No. 10607 which
provides, in part: “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.” It follows,
that the insurer is also not liable to pay interest for its refusal to pay the claim based
on the ground that the claim is fraudulent.32
32
Section 250,1.C.
b. In United Merchants Corporation v. Country Bankers Insurance

Corp.,M the Supreme Court ruled that the insured in a fire insurance was guilty of
fraud when it padded its claim. Hence, it forfeited its right to the proceeds
pursuant to an express stipulation in the Policy. The “claim is twenty five times the
actual claim proved.” The Supreme Court summarized its previous rulings on
fraudulent claim in support of its Decision:
“In U y H u & C o . v . T h e P r u d e n t i a l
A s s u r a n c e C o . , L t d . , the Court held that where a fire
insurance policy provides that ‘if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or devices are
used by the Insured or anyone acting on his behalf to obtain any benefit under this Policy,’
and the evidence is conclusive that the proof of claim which the insured submitted was false
and fraudulent both as to the kind, quality and amount of the goods and their value
destroyed by the fire, such a proof of claim is a bar against the insured from recovering on
the policy even for the amount of his actual loss.
XXX
In Y u B a n C h u a n v . F i e l d m e n ’ s
I n s u r a n c e , C o . , I n c . , the Court ruled that the submission of
false invoices to the adjusters establishes a clear case of fraud and misrepresentation which
voids the insurer’s liability as per condition of the policy. Their falsity is the best evidence
of the fraudulent character of plaintiffs claim. In V e r e n d i a v . C o u r t
o f A p p e a l s , where the insured presented a fraudulent lease contract to
support his claim for insurance benefits, the Court held that by its false declaration, the
insured forfeited all benefits under the policy provision similar to Condition No. 15 of the
Insurance Policy in this case.
XXX
It has long been settled that a false and material statement made with an intent to
deceive or defraud voids an insurance policy. In Y u C u a v . S o u t h
B r i t i s h I n s u r a n c e C o . , the claim was fourteen times
bigger than the real loss; in G o L u v . Y o r k s h i r e
I n s u r a n c e C o . , eight times; and in T u a s o n v .
N o r t h C h i n a I n s u r a n c e C o . , six times. In the
present case, the claim is t w e n t y - f i v e t i m e s the actual claim
proved.
The most liberal human judgment cannot attribute such difference to mere
innocent error in estimating or counting but to a deliberate intent to demand from insurance
companies payment for indemnity of goods not existing at the time of the fire. This
constitutes the so-called “fraudulent
^G.R. No. 198588, July 11, 2012.

CHAPTER 8 261
claim'’ which, by express agreement between the insurers and the insured, is a ground for
the exemption of insurers from civil liability.”34
§3. PRESCRIPTIVE PERIOD. The Insurance Code does not provide for a
prescriptive period for the filing of a complaint for the recovery of the proceeds of the
insurance. One exception is the one year period provided for in the case of Compulsory
Third Party Liability Insurance under Section 397 of the Insurance Code.
§3.01. STIPULATION. However, the parties may stipulate a prescriptive period
in the policy subject to the limitation under Section 63 of the Insurance Code, which
states that:
SEC. 63. A condition, stipulation or agreement in any

policy of insurance, limiting the time for commencing an
action thereunder to a period of less than one (1) year
from the time when the cause of action accrues, is void.
a. The stipulated period prevails. For example, the policy involved in one
case35 includes Condition 27 which reads: “27. Action or suit clause — If a claim be
made and rejected and an action or suit be not commenced either in the Insurance
Commission or in any court of competent jurisdiction within twelve (12) months from
receipt of notice of such rejection, or in case of arbitration taking place as provided
herein, within twelve (12) months after due notice of the award made by the arbitrator or
arbitrators or umpire, then the claim shall for all purposes be deemed to have been
abandoned and shall not thereafter be recoverable hereunder.” The Supreme Court ruled
that Condition 27 in the policy is consistent with Section 63 of the Insurance Code.
b. 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.
It demands that insurance suits be brought by the insured while * 41
34
United Merchants Corporation v. Country Bankers Insurance Corp., Note 33, citing Uy
Hu & Co. v. The Prudential Assurance Co., Ltd., 51 Phil. 231 (1927); Yu Ban Chuan v.
Fieldmen’s Insurance Co., 121 Phil. 1275 (1965); Tan It v. Sun Insurance Office, 51 Phil. 212
(1927), citing Yu Cua v. South British Insurance Co.,
41 Phil. 134 (1920); Go Lu v. Yorkshire Insurance Co., 43 Phil. 633 (1922); Tuason v. North
China Insurance Co., 47 Phil. 14 (1924).
35
Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No.
89741, March 13, 1991.
the evidence as to the origin and cause of destruction have not yet disappeared.36
§3.02. ACCRUAL. The right of the insured to the payment of his loss accrues
from the happening of the loss. However, the cause of action in an insurance contract
does not accrue until the insured’s claim is finally rejected by the insurer. 37 There is no
real necessity for bringing suit before such final rejection.38 Since “cause of action”
requires as essential elements not only a legal right of the plaintiff and a correlative
obligation of the defendant in violation of the said legal right, the cause of action does
not accrue until the party obligated (surety or insurer) refuses, expressly or impliedly,
to comply with its duty to pay the amount of the bond or insurance proceeds. 39
Indisputably, the insured’s cause of action or his right to file a claim either in the
Insurance Commission or in a court of competent jurisdiction commences from the
time of the denial of his claim by the Insurer, either expressly or impliedly. 40
a. The rejection referred to should be construed as the rejection in the first
instance, for if what is being referred to is a reiterated rejection conveyed in a
resolution of a petition for reconsideration, such should have been expressly
stipulated. The prescriptive period starts to run from final rejection of the claim and
not from the resolution by the insurer of the request or petition for reconsideration by
the insured. The Court explained that the contention runs counter to the declared
purpose for requiring that an action or suit be filed in the Insurance Commission or in
a court of competent jurisdiction from the denial of the claim. To uphold such
contention would contradict and defeat the very principle which the High Court had
laid down. Moreover, it can easily be used by insured persons as a scheme or device to
waste time until
Âng v. Fulton Fire Insurance Co., 2 SCRA 945 (1961); E. Macia & Co. v. The China
Fire Insurance & Co., Ltd., et al., G.R. No. L-21881, October 3, 1924.
37
Travellers Insurance & Surety Corporation v. Hon. Court of Appeals and Vicente
Mendoza, G.R. No. 82036, May 22, 1997; Agricultural Credit & Cooperative Financing
Administration v. Alpha Insurance & Surety Co., Inc., G.R. No. L-24566, July 29, 1968.
38
Star Insurance Co. v. Chia Yu, 96 Phil. 696 (1955).
39
ACCFA v. Alpha Insurance & Surety Co., Inc., 24 SCRA 151 (1968); See also H.H. Hollero
Construction, Inc. v. Government Service Insurance System, G.R. No.
152334, September 24, 2014.
40
Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No.
89741, March 13, 1991.
CHAPTER 8 263
any evidence which may be considered against them is destroyed. 41 While the Supreme
Court used the phrase “final rejection” in one case, 42 the same cannot be taken to mean the
rejection of a petition for reconsideration. Such was clearly not the meaning contemplated
by the Court. The insurance policy in the case provides that the insured should file his
claim, first, with the carrier and then with the insurer. The “final rejection” being referred
to in said case is the initial rejection by the insurance company.
b. The prescriptive period stipulated in the contract is not tolled if the insured
sends a letter to the insurer asking for clarification of the grounds for cancellation of the
policy.43 In one case, the Supreme Court explained that there was no peculiar circumstance
that justifies the view of the insured that the rule should be relaxed because it turned out
that the insured filed the case eight months after the receipt of a clarificatory letter from the
insurer.44
c. A stipulation in a policy of insurance that no action shall be sustainable
unless commenced within 12 months after the loss, is binding, and bars a suit
commenced after that time, even though a prior suit was commenced within 12 months,
and failed without fault on the part of the plaintiff.45
§3.03. RULE IF THERE IS NO STIPULATION. If no prescriptive period is
provided for in the policy, the prescriptive period is 10 years from the rejection of the
claim by the insurer. This is consistent with the provisions of Article 1144 of the New
Civil Code which provides that prescriptive period for written contracts is 10 years. 46
PROBLEM:
Q. Robin secured his building against fire with EFG Insurance. The insurance policy
contained the usual stipulation that any action or suit must be filed within one
year after the rejection of the claim. After
41
Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, supra.
42
Eagle Star Ins., Co., Ltd., et al. v. Chia Yu, 96 Phil. 701 (1955); Summit Guaranty and
Insurance Co., Inc. v. Judge de Guzman, 235 Phil. 389, 399 (1987).
43
New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No. 94071,
March 31, 1992.
44
Ibid.
45
E. Macias & Co. v. The China Fire & Insurance Co., Ltd., et al., G.R. No. L-21881,
October 3, 1924.
46
Mayer Steel Pipe Corporation, et al. v. Court of Appeals, et al., G.R. No. 124050,
June 19, 1997.
his building burned down, Robin filed his claim for fire loss with EFG. On
February 28, 1994, EFG denied Robin’s claim. On April 3, 1994, Robin
sought reconsideration of the denial, but EFG reiterated its position. On
March 20,1995, Robin commenced judicial action against EFG. Should
Robin’s action be given due course? Explain.
A. No, Robin’s action should not be given due course. The filing of a request for
reconsideration by Robin did suspend the running prescriptive period of one
(1) year stipulated in the insurance policy. The one (1) year prescriptive
period commenced to run from the denial of the claim on February 28, 1994.
Hence, the filing of the case on March 20, 1995 was already time-barred.
§4. SUBROGATION. Legal subrogation is an equitable doctrine and arises

by operation of the law, without any agreement to that effect executed between the
parties.47 Subrogation is an arm of equity that may guide or even force one to pay a
debt for which an obligation was incurred but which was in whole or in part paid by
another.48 “Subrogation is founded on principles of justice and equity, and its
operation is governed by principles of equity. It rests on the principle that
substantial justice should be attained regardless of form, that is, its basis is the
doing of complete, essential, and perfect justice between all the parties without
regard to form”49 The legal principle is that “once the insurer pays the insured,
equity demands reimbursement as no one should benefit at the expense of
another.”50
a. The right of subrogation of insurers is governed by Article 2207 of the
New Civil Code which provides:
Art. 2207. If the plaintiff’s property has been in-

sured, and he has received indemnity from the insur-
ance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insur-
ance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has
47
Republic Flour Mills Corp. v. Forbes Factors, Inc., G.R. No. 152313, October
19, 2011.
48
Ibid., citing Fireman’s Fund Insurance Company v. Jamila & Company, Inc.,
G.R. No. L-27427, April 7, 1976, 70 SCRA 323, 327-328; 83 C.J.S. 576, 678, note 16,
citing Fireman’s Fund Indemnity Co. v. State Compensation Insurance Fund, 209 Pac.
2d 55.
49
Fireman’s Fund Insurance Company v. Jamila & Company, Inc., ibid., citing
83 C.J.S. 579-80.
“Asian Terminals, Inc. v. Malayan Insurance Co., Inc., G.R. No. 171406,
April 4, 2011.
CHAPTER 8 265
violated the contract. If the amount paid by the insurance

company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency
from the person causing the loss or injury.
b. Under Article 2207 of the New Civil Code, payment by the assurer to the
assured operates as an equitable assignment to the assurer of all the remedies which the
assured may have against the third party whose negligence or wrongful act caused the loss.
The right of subrogation is not dependent upon, nor does it grow out of any privity of
contract or upon payment by the insurance company of the insurance claim. It accrues
simply upon payment by the insurance company of the insurance claim. 51
c. The doctrine of subrogation has its roots in equity. It is designed to promote
and to accomplish justice and is the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice, equity and good conscience ought to pay.52
d. Article 2207 of the Civil Code is founded on the well- settled principle of
subrogation. If the insured property is destroyed or damaged through the fault or negligence
of a party other than the assured, then the insurer, upon payment to the assured, will be
subrogated to the rights of the assured to recover from the wrongdoer to the extent that the
insurer has been obligated to pay. Payment by the insurer to the assured operates as an
equitable assignment to the former of all remedies which the latter may have against the
third party whose negligence or wrongful act caused the loss.53
51
Loadstar Shipping Company, Incorporated v. Malayan Insurance Company, Incorporated,
G.R. No. 185565, November 26, 2014; Asian Terminals, Inc. v. Philam Insurance Company, Inc.,
G.R. Nos. 181163, 181262, and 181319, July 24, 2013; RCJ Bus Lines Incorporated v. Standard
Insurance Company, G.R. No. 193629, August 17, 2011; Aboitiz Shipping Corp. v. Insurance Co. of
North America, No. 168402, August 6, 2008; The Philippine American General Insurance Company v.
The Hon. Court of Appeals and Felman Shipping Lines, G.R. No. 116940, June 11, 1997; Coastwise
Lighterage Corporation v. Court of Appeals, et al.y G.R. No. 114167, July 12, 1995; Pan Malayan
Insurance Corporation v. Court of Appeals, G.R. No. 81026, April 3, 1990, 184 SCRA 54; Compania
Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA
213; Fireman’s Fund Insurance Company v. Jamila and Company, Inc., G.R. No. L-27427, April 7,
1976, 70 SCRA 323.
o2
The Philippine American General Insurance Company v. The Hon. Court of Appeals and
Felman Shipping Lines, G.R. No. 116940, June 11, 1997.
53
Pan Malayan Insurance Corporation v. Court of Appeals, Erlinda Fabie, et al., G.R. No. 81026,
April 3, 1990; Compania Maritima v. Insurance Company of
§4.01. REQUISITES OF SUBROGATION. The following requisites

must concur for subrogation to take place:
(1) The insurance involved is property insurance;
(2) There is a loss arising from the risk insured against;
(3) The insured received indemnity from the insurer for the loss;
(4) The indemnity is covered by the face value of the policy.
§4.02. WHEN THERE IS NO SUBROGATION. There are a few
recognized exceptions to the rule on subrogation. Thus, there is no subrogation
in the following instances:
(1) If the assured by his own act releases the wrongdoer or third party
liable for the loss or damage, from liability, the insurer’s right of
subrogation is defeated;54
(2) Where the insurer pays the assured the value of the lost goods
without notifying the carrier who has in good faith settled the
assured’s claim for loss, the settlement is binding on both the
assured and the insurer, and the latter cannot bring an action
against the carrier on his right of subrogation;55
(3) Where the insurer pays the assured for a loss which is not a risk
covered by the policy, thereby effecting “voluntary payment,” the
former has no right of subrogation against the third party liable for
the loss;56
(4) Where the insurer paid in excess of the amount of the loss; and
(5) When life insurance is involved.57
North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman’s Fund Insurance
Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323.
54
Danzas Corporation, et al v. Court of Appeals, G.R. No. 141462, December 15, 2005,
478 SCRA 80; Pan Malayan Insurance Corporation v. Court of Appeals, Erlinda Fabie, et al, G.R.
No. 81026, April 3, 1990, citing Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co.,
117 US 312, 29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet &
Eastern Railway Co., 229 F 2d 705 (1956).
55
Pan Malayan Insurance Corporation v. Court of Appeals, Erlinda Fabie, et al, G.R. No.
81026, April 3, 1990; McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923).
56
Jbid., citing Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G.R. No. L-
22146, September 5, 1967, 21 SCRA 12.
57
See Article 2207, New Civil Code.
CHAPTER 8 267
§4.03. LIMITATIONS. If the claim of the insured against a third party is

limited, the right of subrogation of the insurer is likewise limited. “As subrogee,
the insurer steps into the shoes of the assured and may exercise only those rights
that the assured may have against the wrongdoer who caused the damage.” 58
a. Consistently, if the insured is bound by contractual stipulations, the
insurer-subrogee is also bound by the same contractual stipulation. 59 “Second, the
insurer can be subrogated only to the rights as the insured may have against the
wrongdoer.”60 Thus, if a notice of claim is imposed on the insured as a condition
precedent, the right of the insured-subrogee to recover is subject to the condition
precedent as well.61
§4.04. LIMITATIONS AS TO THE AMOUNT RECOVERABLE. For
example, in one case the person responsible for the damage is a common carrier
and there was a valid limitation in the bill of lading as to the amount recoverable
from the carrier. The Supreme Court ruled that the insurer, after paying the claim
of the insured for damages under the insurance, is subrogated merely to the rights
of the assured. As subrogee, it can recover only the amount that is recoverable by
the latter. Since the right of the assured in case of loss or damage to the goods, is
limited or restricted by the provisions in the bill of lading, a suit by the insurer as
subrogee necessarily is subject to like limitations and restrictions. 62 63
a. In Atlantic Mutual Insurance Company v. Manila Port Service,™ the
Supreme Court explained that having been subrogated merely to the rights of the
insure, the insurer’s recovery necessarily should be limited to what was
recoverable by the insured. The insurer cannot recover from the offending party
an amount greater than that to which the insured could lawfully lay claim. 64
58
Aboitiz Shipping Corp. v. Insurance Company of North America, G.R. No. 168402,
August 6, 2008.
59
Federal Express Corporation v. American Home Assurance Company, G.R. No.
150094, August 18, 2004, 437 SCRA 50, 56.
"Ibid.
61
Aboitiz Shipping Corp. v. Insurance Company of North America, supra.
62
St. Paul’s Fire & Marine Insurance Co. v. Macondary Co., Inc., et al.y G.R. No. L-
27796, March 25, 1976.
63
G.R. No. L-16271, October 31, 1961; see also Insurance Service Co. of North
America v. Manila Port Service, L-17331, November 29, 1961; Insurance Company of North
America v. U.S. Lines, Co., G.R. No. L-17032, March 31, 1964.
64
Rizal Surety and Insurance Company v. Manila Railroad Company, G.R. No. L-
24043, April 25, 1968.
b. Similarly, in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and

Surety Corporationthe Supreme Court sustained the contractual stipulation
limiting the liability of the ship repairer to P50,000,000.00. The Supreme
Court ruled that the insurer, as subrogee of the ship owner who has the
right to claim from the ship repairer, may only claim P50,000,000.00 even if
it paid more than such amount to the ship owner. The Supreme Court
reiterated the well-settled rule that the insurer can be subrogated only to
the rights as the insured may have against the wrongdoer.
c. However, the stipulation limiting the liability to a certain amount is not
binding on the insurer and the insured if the stipulation is contrary to public policy,
morals and public customs. Thus, Cebu Shipyard and Engineering Works, Inc. v.
William Lines, Inc.,66 the vessel was insured with the insurer for P45,000,000.00.
The vessel was totally lost because of the negligence of the defendant that was
engaged in the business of dry-docking and repairing of marine vessels. The said
claim of shipowner was then found to be valid and compensable such that
Prudential paid the latter the total value of its insurance claim. Furthermore, it was
ascertained that the replacement cost of the vessel (the price of a vessel similar to
M/V Manila City), amounts to P50,000,000.00. When the insurer exercised its right
of subrogation, the party responsible invoked the stipulation with the insured
limiting its liability to the insured to Pi,000,000.00. It was explained that the
aforestated circumstances, let alone the fact that negligence on the part of party
responsible has been sufficiently proven, it would indeed be unfair and inequitable
to limit the liability of petitioner to Pi,000,000.00; the limit was found to be
“unconscionable if not overstrained.” To allow the defendant to limit its liability to
PI,000,000.00 notwithstanding the fact that the total loss suffered by the assured and
paid for by insurer amounted to P45,000,000.00 would sanction the exercise of a
degree of diligence short of what is ordinarily required because, then, it would not
be difficult for the defendant to escape Lability by the simple expedient of paying an
amount very much lower than the actual damage or loss suffered by the shipowner.
d. On the other hand, if the amount recoverable by the insured from the
person who caused the loss is more than the face 65 * *
65
G.R. Nos. 180880-81 and 180896-97, September 18, 2012. In this case, the
respondent insurer paid its insured, the ship owner, the amount of US$8,472,581.78.
^G.R. No. 132607, May 5, 1999.
CHAPTER S 269
value of the policy, the insurer can only recover from the person who caused the loss
the amount that it actually paid to the insured. If the total face value is paid, the
insurer can recover the same amount subject to the right of the insured to recover the
balance or that part of the loss that is not covered by the insurance.
§4.05. EFFECT OF PRESCRIPTION. As noted earlier, uas subrogee, the
insurer steps into the shoes of the assured and may exercise only those rights that the
assured may have against the wrongdoer who caused the damage.” 67 Consistently, if
the claim of the insured is subject to a prescriptive period, the claim of the insurer by
virtue of its right of subrogation is also subject to the same prescriptive period. 66 For
example, if the insured is the shipper of goods in a common carrier, to all intents and
purposes, the insurer (after payment to the insured) stands in the place and in
substitution of the consignee. * 69 A fortiori, both the insurer and the consignee are
bound by the contractual stipulations in the bill of lading and statutory regulations. 70
(1) For example, in international carriage by sea, Section 3(6) of the
Carriage of Goods by Sea Act would also apply to the insurer. This means that the
insurer, like the shipper, may no longer file a claim against the carrier beyond the
one
(l) -year period provided in the law. But it does not mean that the
shipper may no longer file a claim against the insurer because the basis of the
insurer’s liability is the insurance contract. Such obligation prescribes in 10 years,
in accordance with Article 1144 of the New Civil Code.71
(2) Similarly, the insurer is bound by a stipulation in the airway bill
requiring the filing of a claim with the carrier must be within a certain period from
the time the goods are placed at the disposal of the consignee. The filing of a claim
is a condition precedent that must be complied with even by the insurer. The
shipper or consignee must allege and prove the fulfillment of this condition.
Consequently, in the exercise of
Âboitiz Shipping Corp. v. Insurance Company of North America, G.R. No. 168402, August
6, 2008.
Ôriental Assurance Corporation v. Ong, G.R. No. 189524, October 11, 2017.
69
Federal Express Corporation v. American Home Assurance Company, et al., G.R. No.
150094, August 18, 2004, 437 SCRA 50, 56-57.
70
Ibid.
71
Mayer Steel Pipe Corporation, et al. v. Court of Appeals, et al., G.R. No. 124050,
June 19, 1997; Filipino Merchants Co., Inc. v. Alejandro, 145 SCRA 42.
270 ESSENTIALS OF INSURANCI LAW
(Republic AT: NO. 10537 wrb No:a? oa Pre-Need Art
its subrogatory rights. the insurer is likewise required to aLere and prove the
fulfillment of the condition requiring the filing cf a claim within the period
fixed in the airway bill'1
a. Rightfully, the insurer who is exercising its right cf subrogation is also
bound by the prescriptive period that applies to the insured. 7- This is understandable
because the insurer, in the exercise of the right of subrogation, is pursuing the cause
of action belonging to the shipper/insured. Hence, any defense available against the
shipper is available against the insurer. It should be noted however that the Supreme
Court ruled in V e c t o r S h i p p i n g C o r p o r a t i o n
v . A m e r i c a n H o m e A s s u r a n c e C o . / *
that the action cf the insurer is not upon a written contract, but upon an obligation
created by law. Hence, it comes under Article 1144(2) of the Civil Code. For
purposes of the law on the prescription of actions, the period of limitation is 10
years. This is because the subrogation of insurer to the rights of the insured was by
virtue of the express provision of law embodied in Article 2207 of the Civil Code,
right of subrogation pursuant to Article 2207, s u p r a , was “not dependent
upon, nor did it grow out of, any privity of contract or upon written assignment of
claim but accrued simply upon payment of the insurance claim by the insurer."
According to the Supreme Court, the insurer’s cause of action accrued as of the time
respondent actually indemnified.
b. It is submitted that the ruling in V e c t o r S h i p p i n g
C o r p o r a t i o n v . A m e r i c a n H o m e
A s s u r a n c e C o . 7 2 7 3 7 4 7 5
is not correct and the
rulings in D o m i n g o A n g u . C o m p a n i a
M a r i t i m a , e t a l and A n g v . A m e r i c a n
S t e a m s h i p A g e n c i e s , I n c . express the correct
rule. There seems to be confusion regarding the right of subrogation and the cause of
action. The cause of action is not the right of subrogation: it is not an act or omission
in violation of the right of another. What accrues at the time of payment of the
insurer is the right of subrogation and not the cause of action being pursued against
the defendant. The wrongful act or omission that constitutes the cause of action is the
breach of the contract between the carrier and not shipper which resulted in the
damage to the shipper (loss of cargo). What the Insurance company enforced was the
same cause of action
72
Federal Express Corporation v. American Home Assurance Company, et al.,
supra.
73
Fil Merchants v. Alejandro, 145 SCRA 42 (1986).
74
G.R. No. 159213, July 3, 2013.
™Ibid.
CHAPTER 8 271
that pertained to the shipper-insured who was paid by the insurance company. After all,
subrogation gives the insurer the right to exercise the right of the insurer. Hence, the case is for
the enforcement of the right of the insured that was violated and the insurer merely stepped
into the shoes of the insured. Hence, prescriptive period should not be based on the day the
right of subrogation accrued but on the time the cause of action accrued.
§4.06. DISCRETION OF INSURER TO EXERCISE RIGHT. Under Article 2207, the
real party-in-interest with regard to the indemnity received by the insured is the insurer. The
insured can no longer recover his damages against the offending party or the party who is
liable. Whether or not the insurer should exercise the rights of the insured to which it had been
subrogated lies solely within the former’s sound discretion. The insurer may opt not to
exercise its right of subrogation.76
§4.07. PRESENTATION OF THE POLICY. It was noted in Chapter 5 that any person
who relies on the policy as the basis of his cause of action must also attach the same to the
complaint as an actionable document. 77 The obligation to attach the policy to the Complaint as
an actionable document and to present and offer the same applies even if the plaintiff is an
insurance company that is trying to recover based on its right of subrogation.78 * * *
a. In Home Insurance Corporation v. Court of Appeals, 19 the insurance
contract, which was not presented in evidence in that case would have indicated the scope of
the insurer’s liability, if any. Hence, the non-presentation of the policy was declared fatal to
the claim. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp., m the Supreme Court
ruled that the presentation of the marine insurance policy was necessary because the issues
raised therein arose from the very existence of an insurance contract. In Wallem Philippines
Shipping, Inc. v. Prudential Guarantee and Assurance, Inc., sl the Court ruled that the
insurance contract must be presented in
76
FF Cruz & Co., Inc. v. The Court of Appeals, et al., G.R. No. L-52732, August 29, 1988; Phil. Air
Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031 (1957).
77
Malayan Insurance Company, Inc. v. Regis Brokerage Corporation, G.R. No. 172156, November
23, 2007.
1H
Ibid.
7tt
G.R. No. 109293, August 18, 1993, 225 SCRA 411.
"°G.R. No. 172156, November 23, 2007.
H,
G.R. No. 152158, February 7, 2003.
evidence in order to determine the extent of the coverage. Thus, if the insurer paid
more than what is provided for in the policy, the insurer cannot recover that it
paid beyond such amount.
b. However, there are cases that hold that “non-presentation of the
insurance contract or policy is not necessarily fatal.82 * * The admitted exceptions
are cases when there is no dispute regarding the existence and validity of the
policy and the terms and conditions thereof. In D e l s a n
T r a n s p o r t L i n e s , I n c . v . C o u r t
o f A p p e a l s the Court ruled that the presentation in evidence of
the marine insurance policy is not indispensable in the case before the insurer may
recover from the common carrier the insured value of the lost cargo in the
exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of herein private respondent as insurer and the
assured shipper of the lost property but also the amount paid to settle the
insurance claim. There was no issue as regards the provisions of Marine Open
Policy and its existence was already admitted by petitioner in open court. The
Supreme Court explained that even though it was not offered in evidence, it can
still be considered by the court as long as they have been properly identified by
testimony duly recorded and they have themselves been incorporated in the
records of the case.
c. In I n t e r n a t i o n a l C o n t a i n e r
T e r m i n a l S e r v i c e s , I n c . v . F G U
I n s u r a n c e C o r p o r a t i o n , 84 the Supreme Court
used the same line of reasoning in sustaining the finding the arrastre contractor
liable for the lost shipment despite the failure of the insurance company to offer in
evidence the insurance contract or policy.
d. Similarly, the presentation of the insurance contract or policy was not
necessary in A s i a n T e r m i n a l s , I n c . v .
M a l a y a n I n s u r a n c e C o . , I n c . 8 5
Although petitioner objected to the admission of the Subrogation Receipt in its
Comment to respondent’s formal offer of evidence on the ground that respondent
failed to present the insurance contract or policy, the Answer and Pre-Trial Brief
showed that “petitioner never questioned respondent’s right to subrogation, nor
did it dispute the coverage of the insurance contract or policy. Since there was no
issue regarding the validity of the insurance
82
Eastem Shipping Lines, Inc. v. Prudential Guarantee and Assurance, Inc., G.R. No.
174116, September 11, 2009, 599 SCRA 565, 581.
“G.R. No. 127897, November 15, 2001, 420 Phil. 824.
^G.R. No. 161539, June 27, 2008.
“G.R. No. 171406, April 4, 2011.
CLA3L? SUIT^ZMZNT AND SUBROGATION' 273
ccutrsn or policy, or any provision thereof, respondent had no reason

:c present the insurance contract or policy as evidence during the
PROBLEMS:
U L borrows P50.000 from M payable 360 days after date at 12% p e r i o secure the loam L
mortgages big, house and lot in favor G: M. io protect himself from certain contingencies, M
insures the nouse tor me rull amount of the loan with Rock Insurance Co. A fire creaks out and
bums the house and M collects from the insurance company the full value of the insurance. Upon
maturity of loan, the insurance company demands payment from L. The latter refuses on me 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.
A: The loan of L was not extinguished by the insurance payment
which M received from 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 only 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 the
insurance policy.
2. SB Corporation delivered to BAE Corporation, a shipment of 109 cartons of veterinary
biologicals for delivery to consignee. The shipment was covered by an airway bill with the
words, ‘REFRIGERATE WHEN NOT IN TRANSIT and ‘PERISHABLE’ stamp marked
on its face. That same day, BAE insured the cargoes with American Home Assurance
Company (AHAC). The following day, BAE turned over the custody of said cargoes to
Federal Express (FE), which transported that, same to Manila and were stored at
Cargohaus’ warehouse. However, the goods were stored only in a room with two
(2) air conditioners running, to cool the place instead of a refrigerator. Later, a
government agency duly examined the goods and declared the “ELISA reading” of
vaccines are below the positive reference serum. As a consequence SB abandoned the
shipment and declared
‘total loss’ for the unusable shipment. The consignee filed with AHAC through its
representative in the Philippines, the Philam Insurance Co., Inc. (‘PHILAM’) that
recompensed SB. Thereafter, PHILAM filed an action for damages against the
petitioner imputing negligence on either or both of them in the handling of cargo.
Does PHILAM have a cause of action or personality to sue?
A: Yes, PHILAM and AHAC have personality to sue by virtue of
the right of subrogation. Upon payment to the consignee of an indemnity
for the loss of or damage to the insured goods, the insurer’s entitlement to
subrogation p r o t a n t o equips it with a cause of action in case
of a contractual breach or negligence. In the exercise of its subrogatory
right, an insurer may proceed against an erring carrier. To all intents and
purposes, it stands in the place and in substitution of the consignee.
( F e d e r a l E x p r e s s C o r p o r a t i o n
v . A m e r i c a n H o m e A s s u r a n c e
C o m p a n y a n d P h i l a m I n s u r a n c e
C o m p a n y , I n c . , G . R . N o .
1 5 0 0 9 4 , A u g u s t 1 8 , 2 0 0 4 )
3. During the effectivity of an insurance policy (with a face value of P20,000.00)
issued by MICO, and more particularly on December 19, 1967, at about 3:30 in
the afternoon, the insured jeep, while being driven by one Mr. JC, an employee of
SLRM, Inc. collided with a passenger bus belonging to Mr. SC the respondent
Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national
highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured
vehicle and injuries to the driver, JC, and the MCV, who was riding in the ill-fated
jeep. The trial court held Mr. SC and SLRM, Inc., solidarily liable to MCV for the
amount of P29,103.00. It was ruled that Mr. MCV may enforce the entire
obligation on only one of said solidary debtors. If Mr. SC as solidary debtor is
made to pay for the entire obligation (P29,103.00) and MICO as insurer of Mr. SC
is compelled to pay P20,000.00, can MICO claim reimbursement from SLRM,
Inc.?
A: Yes, MICO can claim reimbursement from SLRM. MICO, upon
paying the injured party Mr. MCV the amount of not exceeding
P20,000.00, shall become the subrogee of the insured, Mr. SC; as such, it is
subrogated to whatever rights the Mr. SC has against SLRM Inc. SLRM is
liable under Article 2180 of the New Civil Code for the negligent acts of its
employee who was a joint tortfeasor. SLRM is solidarily liable and is
therefore obligated to reimburse Mr. SC. Article 1217 of the Civil Code
gives to a solidary debtor who has paid the entire obligation the right to be
reimbursed by his co-debtors for the share which corresponds to each. In
accordance with Article 1217, MICO, upon payment to Mr. MCV and
thereby becoming the subrogee of solidary debtor Mr. SC, is entitled to
reimbursement from respondent SLRM,
CHAPTER 8 275
Inc. MICO has the right to be reimbursed by the latter in the amount of P14,551.50
(which is 1/2 of P29,103.00). ( M a l a y a n I n s u r a n c e
C o m p a n y , I n c . v . T h e H o n . C o u r t
o f A p p e a l s , e t a l . , G . R . N o . L -
3 6 4 1 3 , S e p t e m b e r 2 6 , 1 9 8 8 )
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 damage caused, respondent
insurance company paid petitioner P5,000.00 in amicable settlement. Petitioner’s general
manager executed a Release of Claim, subrogating respondent 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 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?
A: 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.
( M a n i l a M a h o g a n y M a n u f a c t u r i n g
C o r p o r a t i o n v . C o u r t o f A p p e a l s
a n d Z e n i t h I n s u r a n c e
C o r p o r a t i o n , G . R . N o . 5 2 7 5 6 ,
O c t o b e r 1 2 , 1 9 8 7 )
CHAPTER 9
DOUBLE INSURANCE
When two or more insurers issue separate insurance policies over the same
subject, the inevitable conflict results and the danger that fraud may permeate the
transactions becomes greater. Moral hazard is increased. “Although the insured
may retain an interest in the preservation of the property, the motive for its
preserration would not be as strong if several policies existed upon the property
aggregating the sum in excess of its actual value. Certainly, the insured may not be
as watchful and careful of the acts of others as he would if the property were not so
fully protected.”1 With the danger brought about by two or more insurance over the
same subject matter, law-making body deemed it proper to clarify the rules on
double insurance and the possible concurrent situation of over- insurance.
§1. DEFINITION. The concept of double insurance is provided for in
Section 93 of the Insurance Code which provides:
SEC. 95. A double insurance exists where the

same person is insured by several insurers separately
in respect to the same subject and interest.
§2. REQUISITES. Based on Section 95, it is clear that double insurance is

present if the following requisites will concur:
(1) The same person is insured;
(2) There are two or more insurers that insured the person
separately;
(3) The insurance is over the same subject;
(4) The same interest is involved; and
‘9 Couch 12-13.
276
CHAPTER 9 o <i
DOUBLE INSURANCE
5) m e same peril is insured against.2

a. Thus, there is double insurance if the owner of a house will insure it with two
insurers. For example. Mr. X owns a house and he insures it wdth ABC Insurance Corporation
against fire for P500.000.00 and XYZ Insurance Corporation also against fire for P6GQ,000.00.
The same person is insured, Mr. X, and there are two insurers, ABC and XYZ. The two policies
cover the same subject .natter, the house of Mr. X and the same interest of Mr. X as owner is
involved. In addition, the same peril is insured against fire.
b. There is no double insurance if the owner and the lessee of the same house insures
the same with two insurers. For instance, if Mr. A owns a house which he leased to Mr. B, there
will be no double insurance if Mr. A will insure the house with ABC Insurance Corporation and
Mr. B will insure it with XYZ Insurance Corporation. Two separate interests are insured by
different persons.
c. There is no double insurance if the mortgagor and the mortgagee separately insures
the mortgaged property. The two insurance policies do not involve the same interest. 3
d. Mr. X owns a house and he insures it with ABC Insurance Corporation against fire
for P500,000.00 and with XYZ Insurance Corporation against flood for P600,000.00. There is no
double insurance because although the same person and subject are involved in both insurance
policies, the peril insured against are different.
e. T h e r e is also no double insurance if the owner and the carrier separately
insured the same goods. The Carrier’s insurance interest is recognized under Section 15 of the
Insurance Code.4
§2.01. DOUBLE INSURANCE IN LIFE INSURANCE. It should be noted
that there can be double insurance in life insurance but there can never be over-insurance. The life
of a person can be insured for any amount and it would still be inadequate because of the: intrinsic
value of life.
y
.SVr Malayan Insurance Co., Inc. v. Philippine First Insurance Co., Inc., et til., (\,H. No.
184'iOO, .July 11, 2012 for a substantially the same enumeration of the rwju mites.
‘Armando (loagonia v. Court of Appeals, G.R. No. 114427, February 6, 1995.

^Malayan Insurance Co., Inc. v. Philippine First Insurance Co., Inc., et al.,
Hu/tra,
§3. NO GENERAL PROHIBITION AGAINST DOUBLE INSURANCE.

The implication of the rules on double-insurance 5 under the Insurance Code is that
double-insurance is not prohibited.
a. By way of exception R.A. No. 10607 modified Section 64(f) of the
Insurance Code by providing that the insurance policy can be rescinded upon:
(f) Discovery of other insurance coverage that

makes the total insurance in excess of the value of the
property insured;
b. The language of Section 64(f) shows that the policy can be rescinded
if two conditions are present: (1) another insurance coverage is discovered; and (2)
the total insurance is in excess of the value of the property insured. Strict
interpretation of the provision indicates that the general rule is that taking other
insurance coverage is not prohibited provided that the total insurance is not in
excess of the value of the property insured.
§4. OTHER INSURANCE CLAUSE. Taking of another insurance policy
over the same property may also be prohibited by stipulation in what is known as
the “Other Insurance Clause.”
§4.01. ALTERNATIVE FORMS. The other insurance clause may appear in
different forms. These include the following:
(1) A condition that states that procurement of additional
insurance without the consent of the insurer renders void the policy
i p s o f a c t o . 6
(2) A provision that requires the insured to disclose the existence
of any other insurance on the property. Otherwise, the contract may be
avoided for material concealment.
(3) A warranty that there is no other existing insurance over the
same property.
a. The standard fire policy used by insurance companies usually contains
a condition that the insured shall give notice to the insurer of any insurance or
insurances already effected, or which may subsequently be effected covering any
property or properties
B
6
Ulpiano Sta. Ana v. Commercial Union Assurance Company, G.R. No. L-32889,
November 20, 1930.
CHAPTER 9 279
DOUBLE INSURANCE
and unless such notice is given and the particulars of such insurance or insurances is stated, all
benefits under the policy shall be forfeited.
§4.02. RATIONALE. 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 peril like fire would be profitable to
the insured.7 The “Other Insurance Clause” prevents the increase of the moral hazard
explained in the introduction to this Chapter.
§4.03. VALIDITY. The validity of a clause in a fire insurance policy to the effect that
the procurement of additional insurance without the consent of the insurer renders i p s o
f a c t o the policy void is well-settled. 8 The law also authorizes insurance companies to
terminate the contract at any time, at its option, by giving notice and refunding a ratable
proportion of the premium. It was held that an additional insurance, unless consented to, or
unless a waiver was shown, i p s o f a c t o avoided the contract, and the fact that
the company had not, after notice of such insurance, cancelled the policy, did not justify the
legal conclusion that it had elected to allow it to continue in force. The terms of the policy
which required the insured to declare other insurances, the statement in question must be
deemed to be a statement (warranty) binding on both insurer and insured, that there was no
other insurance on the property. The annotation must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof entitled the insurer to rescind.
Such misrepresentation is fatal. The materiality of non-disclosure of other insurance policies
is not open to doubt.9
a. The rule upholding the validity of the “other insurance clause” is long-
standing. Thus, the Supreme Court reviewed the prevailing jurisprudence in one case:10
7
Pioneer Insurance and Surety Corporation v. Olivia Yap, G.R. No. L-36232, December 19,
1974.
8
Ulpiano Sta. Ana v. Commercial Union Assurance Company, G.R. No. L-32889, November
20, 1930.
ôneer Insurance and Surety Corporation v. Oliva Yap, ibid..; General Insurance & Surety
Corporation v. Ng Hua, G.R. No. L-14373, January 30, 1960.
10
Union Manufacturing Company, Inc. and Republic Bank v. Philippine Guaranty Co.,
Inc., G.R. No. L-27932, October 30, 1972; see also Sta. Ana v. Commercial Union Assurance
Company, Ltd., 55 Phil. 329; General Insurance & Surety Corporation v. Ng Hua, G.R. No. L-
14373, January 30, 1960; Union Manufacturing Company, Inc. v. Philippine Guaranty Co., Inc.,
G.R. No. L-27932, October 30, 1972.
“It is to S a n t a A n a v . C o m m e r c i a l U n i o n
A s s u r a n c e Co., a 1930 decision, that one turns to for the first explicit
formulation as to the controlling principle. As was made clear in the opinion of this Court,
penned by Justice Villa-Real: “Without deciding whether notice of other insurance upon the
same property must be given in writing, or whether a verbal notice is sufficient to render an
insurance valid which requires such notice, whether oral or written, We hold that in the
absolute absence of such notice when it is one of the conditions specified in the fire insurance
policy, the policy is null and void.” The next year, in A n g G i o k C h i p
v . S p r i n g f i e l d F i r e & M a r i n e I n s .
C o . , the conformity of the insured to the terms of the policy, implied from the failure to
express any disagreement with what is provided for, was stressed in these words of the
p o n e n t e , Justice Malcolm: “It is admitted that the policy before Us was accepted
by the plaintiff. The receipt of this policy by the insured without objection binds both the
acceptor and the insured to the terms thereof. The insured may not thereafter be heard to say
that he did not read the policy or know its terms, since it is his duty to read his policy and it
will be assumed that he did so.” As far back as 1915, in Y o u n g v .
M i d l a n d T e x t i l e I n s u r a n c e C o m p a n y , it
was categorically set forth that as a condition precedent to the right of recovery, there must be
compliance on the part of the insured with the terms of the policy. As stated in the opinion of
the Court through Justice Johnson: “If the insured has violated or failed to perform the
conditions of the contract, and such a violation or want of performance has not been waived
by the insurer, then the insured cannot recover. Courts are not permitted to make contracts for
the parties. The function and duty of the courts consist simply in enforcing and carrying out
the contracts actually made. While it is true, as a general rule, that contracts of insurance are
construed most favorably to the insured, 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.” More specifically, there was a reiteration of this
S a n t a A n a ruling in a decision by the then Justice, later Chief Justice, Bengzon,
in G e n e r a l I n s u r a n c e & S u r e t y C o r p . v .
N g H u a . Thus: “The annotation then, must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof entitles the insurer to rescind.
( S e c . 6 9 , I n s u r a n c e A c t ) Such misrepresentation is fatal
in the light of our views in S a n t a A n a v . C o m m e r c i a l
U n i o n A s s u r a n c e C o m p a n y , L t d . . . . The
materiality of non-disclosure of other insurance policies is not open to doubt.” As a matter of
fact, in a 1966 decision, M i s a m i s L u m b e r C o r p . v .
C a p i t a l I n s . & S u r e t y C o . , I n c . , Justice
J.B.L. Reyes, for this Court, made manifest anew its adherence to such a principle in the face
of an assertion that thereby a highly unfavorable provision for the insured would be accorded
recognition. This is the language used: “The insurance contract may be rather ponerous (‘one
sided,’ as the lower court put it), but that in itself does not justify the abrogation of its express
terms, terms which the insured accepted or adhered to and which is the law between the
contracting parties.” (Citations omitted.)
CHAPTER 9 281
DOUBLE INSURANCE
§4.04. ADDITIONAL INSURANCE. An interesting case involving the

application of the “Other Insurance Clause” is E m i l i o
G o n z a l e z L a ’ O v . Y e k T o n g L i n
F i r e & M a r i n e I n s u r a n c e C o . ,
L t d . 1 1 where the defendant insurer Yek Tong Lin Fire & Marine
Insurance Co., Ltd. (hereinafter referred to as YTL) denied the claim for the
amount of two (2) insurance policies totaling P100,000.00 upon leaf tobacco
belonging to the plaintiff, which was damaged by the fire that destroyed the
building on Soler Street No. 188, where said tobacco was stored, on January 11,
1928. The claim was denied on the ground that the insured-plaintiff obtained
additional insurance coverage totaling P190,000.00 for the tobacco. At the time of
the fire, the plaintiff had in the warehouse, more than 6,200 bales of leaf tobacco
worth over P300,000.00 or more than the sum total of all the insurances taken out
with all the insurance companies. YTL argued that the claim was validly denied
because the plaintiff failed to notify the defendant corporation in writing, of other
insurance policies obtained by him, he has violated Article 3 of the conditions of
the policies in question, thereby rendering these policies null and void. Article 3 of
the conditions of the policies in question prescribes: “ART. 3. Any insurance in
force upon all or part of the things insured must be declared in writing by the
insured and he should cause the company to insert or mention it in the policy, and
without such requisite said policy will be regarded as null and void, and the
assured deprived of all rights of indemnity in case of loss.”
(1) The Supreme Court rejected the argument stating that “it may
be said that the tobacco insured in the other companies was different from
that insured with the defendant, since the number of bales of tobacco in the
warehouse greatly exceeded that insured with the defendant and the other
companies put together. And according to the doctrine enunciated in 2 6
C o r p u s J u r i s 1 8 8 , to be insurance of the sort
prohibited the prior policy must have been insurance upon the same subject
matter, and upon the same interest therein.” In other words, the Supreme
Court believed that the “Other Insurance Clause” cannot be invoked if the
other insurance is only an additional insurance to cover the remaining value
of the goods.
a. No recent case involves the very same issue involved in the
G o n z a l e z L a ’ O case cited above. The doctrine in the same
case has not yet been abandoned. However, it is believed that if a similar case will
be resolved by the Supreme Court, the ruling in the G o n z a l e z
L a ’ O case should already be abandoned because even
n
G.R. No. 33131, December 30, 1930.
if the insurance coverage is less than the total value of the goods, the insurance
should still be considered an insurance over the same subject matter. There was
no physical segregation of the portion of the goods that were insured, hence, the
insurance is over the undivided or ideal portion of the goods.
PROBLEMS:
1. Pedro Reyes applied for a fire insurance on his house. In his application, it was asked
the following question: “Is the house insured with another insurance company? If
so, how much?” His answer was “No.” The fact, however, was that the house had
been insured with the FGU for P100,000.00. The application was approved and
made a part of the policy. Subsequently, a fire occurred in the neighboring house,
and spread to the house of Pedro Reyes which was completely burned. Demand for
payment having been refused by the insurer, Pedro Reyes filed a complaint. May he
recover? Reason.
A: No. Pedro Reyes may not recover because he was guilty of con
cealment. The existence of another insurance is a material fact that should
have been disclosed to the insurer. Section 26 of the Insurance Code defines
concealment as “a neglect to communicate that which a party knows and
ought to communicate.” Section 27 also of the Insurance Code, provides
further that “a concealment whether intentional or unintentional entitled an
injured party to rescind a contract of insurance.” In the case at bar, there was
concealment of the fact that his house was already insured with FGU.
Therefore, the Insurance Company may rescind the contract, and Pedro
Reyes may no longer recover.
2. A fire insurance policy in favor of the insured contained a stipulation that the insured
shall give notice to the company of any insurance already effected or which may
subsequently be effected, covering the property insured and unless such notice be
given before the occurrence of any loss, all benefits shall be forfeited. The face of
the policy bore the annotation “Co-insurance declared.” The things insured were
burned, it turned out that several insurance were obtained on the same goods for the
same term. The insurer refused to pay on the ground of concealment. May the
insured recover? Reason.
A: Yes, the insured may recover from the insurer. The insurer
cannot claim that there was material concealment. The problem states that
the face of the policy bore an annotation, “Co- insurance declared.” This
annotation is notice to the insurer as to the existence of other insurance
contracts on the property insured. The insurer should have inquired about
the details of such other insurance if it was really concern about them.
( G e n e r a l I n s u r a n c e a n d S u r e t y
C o r p o r a t i o n v . N g H u a , G . R .
N o . L - 1 4 3 7 3 , J a n u a r y 3 0 ,
1 9 6 0 )
CHAPTER 9 283
DOUBLE INSURANCE
§5. OVER-INSURANCE BY DOUBLE INSURANCE. There is over-insurance if

the insured takes out an insurance over the property insured in an amount which is in excess
of the value of his insurable interest.
a. Over-insurance may exist even if there is only one insurer and one policy. For
example, if Mr. A owns a house valued at P500,000.00, there is over-insurance if he insures
it with ABC Corporation for P700,000.00.
b. Over-insurance may likewise exist if there is double insurance. For example,
Mr. X owns a house valued at P400,000.00 and he insures it with ABC Insurance
Corporation against fire for P300,000.00 and XYZ Insurance Corporation against fire for
P300,000.00. There is over-insurance by double insurance.
c. It does not follow, however, that there will be overinsurance if there is double
insurance. In fact, there can be underinsurance even if there is double-insurance. For
example, Mr. X owns a house valued at P400,000.00 and he insures it with ABC Insurance
Corporation against fire for P100,000.00 and XYZ Insurance Corporation against fire for
P100,000.00. There is double insurance in this case but there is no over-insurance. The
taking of another insurance without over-insurance is not a ground to rescind the policy
under Section 64(f).
§5.01. RULES IN CASE OF OVER-INSURANCE BY DOUBLE INSURANCE. If
there is over-insurance by doubleinsurance, it is necessary to determine from whom and how
much can the insured recover. It is also necessary to determine the rights of the insurers
i n t e r s e .
a. In determining the rights of the insured, one indispensable consideration is that
an insurance contract is a contract of indemnity. Hence, the insured cannot recover more
than what he lost. The insured is not supposed to profit from his loss even if he has two or
more insurers. Thus, if there is over-insurance, he cannot recover beyond his loss. It is well
to emphasize, however, that is true only with respect to property insurance because
insurance over the life of a person is not a contract of indemnity and there cannot be over-
insurance over the life of any person.
b. Section 96 of the Insurance Code provides the rules, v i z . :
SEC. 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.
a. As explained earlier, under Section 64 as amended by R.A. No. 10607,

the policy can be rescinded if the insurer discovers that the insured took another
insurance policy where the total coverage will exceed the value of the property
insured. Thus, the rules under above-quoted Section 96 will apply if the there was
prior consent of the insurers in taking the insurance or double insurance is not
prohibited in the policy even if the total coverage is in excess of the value of the
property.
b. The wording of Section 96(b) was modified by R.A. No. 10607.
Originally, Section 9412 provides that “where the policy under
12
Section 94 is the provision of Insurance Code of 1978 that was later
renumbered to Section 96 by R.A. No. 10607.
CHAPTER 9 286
DOUBLE INSURANCE
which the insured claims is a valued policy, the insured must give credit as against the
valuation for any sum received by him under any other policy without regard to the actual
value of the subject matter insured ” Now' the provision simply states that “where the
policy under w'hich 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 policyr Thus, the insurer will already deduct the amount that was
previously received by the insurer.
c. Similarly, Section 96(c) was modified because under the old provision,
Section 94(c),13 provides that “where the policy under which the insured claims is an
unvalued policy he must give credit, as against the full insurable value, for any sum
received by him under any policy.” Now, Section 96(c) simply states that “in an unvalued
policy, any sum received by the insurer under any policy shall be deducted against the full
insurable value, for any sum received by him under any policy ”
§6. COLLATERAL SOURCE RULE. Under the collateral source mile, the
defendant is prevented from benefiting from the plaintiffs receipt of money from other
sources. Thus, the question is whether or not a person who recovered from an insurer the
proceeds of a life insurance policy, can still recover from other sources. The Supreme
Court explained the rule in Mitsubishi Motors Philippines Salaried Employees Union
(MMPSEU) v. Mitsubishi Motors Philippines Corp.:14
“Under this rule, if an injured person receives compensation for his injuries from a
source wholly independent of the tortfeasor, the payment should not be deducted from the
damages which he would otherwise collect from the tortfeasor. In a recent Decision 40 by
the Illinois Supreme Court, the rule has been described as “an established exception to the
general rule that damages in negligence actions must be compensatory.” The Court went
on to explain that although the rule appears to allow a double recovery, the collateral
source will have a lien or subrogation right to prevent such a double recovery. In Mitchell
v. Haidar, the collateral source rule was rationalized by the Supreme Court of Delaware:
The collateral source rule is ‘predicated on the theory that a tortfeasor has no
interest in, and therefore no right to benefit from monies received by the injured person
from sources unconnected with the defendant’. According
13
Insurance Code of 1978.
M
G.R. No. 175773, June 17,
2013.
to the collateral source rule, ‘a tortfeasor has no right to any mitigation of damages
because of payments or compensation received by the injured person from an
independent source.’ The rationale for the collateral source rule is based upon the quasi-
punitive nature of tort law liability. It has been explained as follows:
The collateral source rule is designed to strike a balance between two
competing principles of tort law: (1) a plaintiff is entitled to compensation sufficient to
make him whole, but no more; and (2) a defendant is liable for all damages that
proximately result from his wrong. A plaintiff who receives a double recovery for a
single tort enjoys a windfall; a defendant who escapes, in whole or in part, liability for
his wrong enjoys a windfall. Because the law must sanction one windfall and deny the
other, it favors the victim of the wrong rather than the wrongdoer.
Thus, the tortfeasor is required to bear the cost for the full value of his or her
negligent conduct even if it results in a windfall for the innocent plaintiff.”
a. Thus, “the collateral source rule applies in order to place the responsibility
for losses on the party causing them. Its application is justified so that ‘the wrongdoer
should not benefit from the expenditures made by the injured party or take advantage of
contracts or other relations that may exist between the injured party and third persons.’
Thus, it finds no application to cases involving no-fault insurances under which the
insured is indemnified for losses by insurance companies, regardless of who was at fault
in the incident generating the losses.”
b. It was earlier opined that it is believed that the Collateral Source Rule
applies in cases involving life insurance. It is submitted that the amount of life
insurance received by the insurance beneficiary of the deceased victim of t o r t
should be ignored even if the beneficiary is the same plaintiff in the t o r t case. The
value of the life of the deceased can never be quantified and any amount received as
proceeds of life insurance can never be equal to the value of the life of the victim. 15 On
the other hand, the Collateral Source Rule does not apply if damage consists in damage
to property that is covered by an insurance policy. The insurer shall indemnify the
insured for the loss and shall be subrogated to the rights of the insured.16
15
Timoteo B. Aquino, Torts and Damages, 2016 Ed., p.
817.
16
Ibid.
CHAPTER 10
REINSURANCE
Prof. C.H. Golding observed that it is a reasonably safe assumption that

reinsurance began to be practiced immediately after the beginning of the practice of
insurance. The earlier recorded example of reinsurance was in the year 1370 where the
insurer of a voyage from Genoa to Sluys reinsured part of the voyage, that is, from
Cadiz to Sluys and retained the part of the voyage through the Mediterranean. 1 On the
other hand, the first known reinsurance treaty was entered into in France in 1821. 2 Since
then, the number of reinsurance transactions grew exponentially in direct proportion to
the growth of direct insurance business. In the meantime, the rules that apply to
reinsurance had undergone a virtual metamorphosis.
§1. DEFINITION. The Insurance Code defines reinsurance as follows:
SEC. 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.
a. A reinsurance transaction is defined as “an agreement between two
parties, called the reinsured (ceding company, a term also often used — especially in
relation to reinsurances on a proportional basis) and reinsurer, respectively, whereby
the reinsurer agrees to accept a certain fixed share of the reinsured’s risk upon terms
set out in the agreement.”3 The original insurer, who, having issued a policy to an
insured to cover a certain risk, desires to relieve itself of part thereof. 4 It cannot exist
without an original insurance coverage.
*C.H. Golding, Golding: The Law and Practice of Reinsurance, 5th Ed., 1987, p. 2, edited
by K.V. Louw, hereinafter referred to as “Golding.”
2
Golding, ibid.
3
Golding, p. 7.
4
Golding, ibid.
287
§1.01. NATURE. Reinsurance is presumed to be a contract of indemnity

against liability, and not merely against damage/' The peril insured against is the risk
that the insurer will suffer a loss when it will be required to pay the original insured.
The risk of damage to the property insured by the insurer (reinsured) is not assumed
by the reinsurer although the same damage triggers the liability of the reinsurer. The
importance of reinsurance was explained in this wise:
“Reinsurance plays an essential role in the strategic decisions of insurers to

enter or leave the marketplace for insurance products. Reinsurance is frequently
used to increase an insurer’s capacity to write new business in a marketplace. By
‘laying-off a portion if a risk on another insurer, a ceding insurer is able to reduce
the reserves it is required to maintain and increase the assets on is balance sheet,
thus freeing the ceding insurer to issue additional policies.”* 6
§1.02. DISTINCTIONS. Reinsurance should be distinguished from double-

insurance which involves the same insured and the same risk and subject matter. It
should also be distinguished from the co-insurance clause under which the risk of
loss of a percentage in the value of the insured property is assumed by the insured
himself. The insured absorbs the loss to the extent of the deficiency in the insurance
of the insured property. The insurer will be liable only for such proportion of the
loss or damage as the amount of the insurance bears to the percentage of the full
value of the property insured.
§2. PARTIES. The parties to the contract are the original insurer (now called
the reinsured) and the reinsurer. The reinsured is also called the “ceding company”
or the “direct-writing company.” A reinsurer of the reinsurer is called
“retrocessionaire.”
a. No privity between original insured and reinsurer. Section 100 of the
Insurance Code makes it clear that “the original insured has no interest in a contract
of reinsurance.” Thus, the original insured cannot file an action to recover from the
reinsurer even if he has difficulty in recovering from the original insurer.
6
Section 99, I.C.; See Circular Letter No. 2014-42 dated September 30, 2014 as well
as Circular Letter Nos. 12-2008, 14-2008 and 12-2009 for the Rules and Regulations on
Reinsurance Transactions.
6
John K. DiMugno and Paul E.B. Glad, California Insurance Law Handbook, 2010
Ed., p. 1911 citing Travelers Indemnity Co. v. Gillespie, 50 Cal. 3d 82 (1990).
CHArrRK 1 0 vm
REINSURANCE
There is no privity between the original insured and the reinsurer. Reinsurance is therefore
the insurance of an insurance.7
b. Direct recourse against reinsurer. The original insured may be allowed to
directly sue the reinsurer if the reinsurance policy contains a stipulation p o u r
a u t r u i in favor of the original insured which is allowed under the second
paragraph of Article 1311 of the New Civil Code. 8 The stipulation must be clear and
unmistakable that such right is given to the original insured. However, it is important to
note that notwithstanding such provision allowing direct recourse by the original insured
against the reinsurer, the original insured’s right to sue the original insurer (re-insured)
directly and solely would not be affected or curtailed in any way. without prejudice to the
insurer in turn filing a third party complaint against the reinsurer.9
(1) It is to the advantage of the insured that a stipulation p o u r
a u t r u i is inserted in the reinsurance policy. The original insured is, from
a purely economic standpoint, vitally interested in the practice of reinsurance.
“Since the reinsured depends on the reinsurer for the payment of its share of loss,
it follows that property owners can be vitally affected, depending on the financial
strength of the reinsurer. As a matter of fact, reinsurers have insured the
insurance placed by the property owner with the original (direct-writing)
company, and failure on the reinsurer’s part to meet a loss may, in turn, cause the
direct-writing insurer to fail in meeting its liability to the insured/’10
c. Reinsurer not a party in an action against the insurer. Since the
reinsurer is not a party to the original insurance contract, the reinsurer cannot intervene
as matter of right in an action filed by the original insured against the insurer. In one
case, the reinsurer filed a motion for intervention arguing that intervention was proper
because it was obliged to pay any amount that may be paid under the original policies.
The Supreme Court declared that the reinsurer need not intervene because the said
reinsurer can
’Communication and Information Systems Corporation v. Mark Sensing Australia Pty.

Ltd., G.R. No. 192159, January 25, 2017.
8
Artex Development Co., Inc. v. Ellington Insurance, Co., Inc., G.R. No. L-29508, June
27, 1973,
9
Ibid.
10
S.S.Huebner, Kenneth Black, Jr. & Bernard L. Webb, Property and Liability Insurance, 4th
(1996) Ed., p. 610, hereinafter referred to as “Huebner, Black & Webb.’
avail itself of any defense that the reinsured may have under the original policy. In other
words, the reinsurer is not precluded from insisting upon proper proof that a loss, strictly
within the terms of the original policy, has taken place.11
d. Assignment. The original insured may likewise directly sue the reinsurer if
the insurer-reinsured assigns the proceeds of the reinsurance policies to the original
insured.12 This presupposes that the right to recover already accrued and the original
insured is the assignee of such right against the reinsurer.
PROBLEM:
1. X Insurance Company, a domestic corporation, entered into a reinsurance treaty with Y
Reinsurance Company, foreign corporation. Y does not have any office in the
Philippines and it does not likewise have agents. The reinsurance treaty was
entered into through an international broker. Among the policies that X ceded
under the treaty is the liability under a fire insurance policy obtained by YCM.
Thereafter, the property insured by YCM was razed by fire and X partially paid
YCM under the original policy. In addition, X assigned all the proceeds of the
reinsurance policies. X thereafter filed a case against Y. Service of summons was
made through the Insurance Commission. Y argues summons were invalidly
served and that the court has no jurisdiction over its person because it is a foreign
corporation not doing business in the Philippines. X rebutted the argument of Y
stating that Y was doing business in the Philippines because all the original
insurance contracts that were reinsured were executed in the country and all
original insured are residents of the Philippines. Whose argument is correct?
A: The argument of Y is correct. It is not doing business in the
Philippines. It does not appear at all that Y had performed any act which
would give the general public the impression that it had been engaging, or
intends to engage in its ordinary and usual business undertakings in the
country. The reinsurance treaties between X and Y was made through an
international insurance broker, and not through any entity or means
remotely connected with the Philippines. Moreover, there is authority to
the effect that a reinsurance company is not doing business in a certain
state merely because the property or fives which
n
Ivor Robert Dayton Gibson v. Hon. Pedro A. Revilla, et al., G.R. No. L-41432, July
30, 1979; See Communication and Information Systems Corp. v. Mark Sensing Australia Pty.
Ltd., G.R. No. 192159, January 25, 2017.
12
See Avon Insurance, et al. v. Court of Appeals, et al., G.R. No. 97642, August 29,
1997.
DOUBLE-INSURANCE REINSURANCE
1. The insurer remains in such capacity
only. 1. The insurer becomes an insured (reinsured) in
the reinsurance policy.
2. There is only one insured.
2. There are two separate insured.
3. The subject matter is the property
insured. 3. The subject matter is the liability of the insured.
4. Involves separate interests.
4. The same interest is insured.
5. Same peril is insured against in separate
5. Different perils are insured against in separate
policies. policies.
REINSURANCE CO-INSURANCE
1. Two separate contracts are involved. 1. There is only one contract.
2. The liability is fixed in a separate contract

between different parties.
2. The obligation on the part of the insured is fixed
by law or in a clause stipulated upon.
3. The insured will not shoulder part of the3. loss
The insured will share in the loss contemplated
contemplated by the reinsurance contract. by the original contract.
4. Not mandated by law in marine insurance. 4. Co-insurance is provided by law in

marine insurance.
§4. FUNCTIONS. From the perspective of the original insurer (reinsured),

the primary function of reinsurance is to absorb those surplus amounts on each risk
accepted by the reinsured which go beyond what it can safely retain for its own
account.13 Reinsurance is a method whereby an original insurer distributes its risks
by giving off the whole or some portion thereof to another insurer, with the object
of reducing the amount of its possible loss.14
a. The significant functions include the following: (1) It gives insurers
the benefit of greater stability resulting from a widespread business. “By accepting
many risks and scaling down by reinsurance, all those that are larger than the
normal carrying capacity of the ceding company justifies, uncertainty is reduced
through the application of the law of large numbers.” 15 In catastrophic losses, the
reinsured is likewise protected. (2) “Reinsurance enables insurers to have a single
risk capacity to accommodate policies of large amounts, with the knowledge that
they can protect themselves against staggering losses by adjusting risks in such a
manner as to reduce the probability of serious inroad into their capital and
surplus.”16
§5. KINDS. There are two basic types of reinsurance transactions, namely:
(1) Facultative Reinsurance; and (2) Automatic Treaty.
§5.01. FACULTATIVE REINSURANCE. Facultative reinsurance is an
optional, case-by-case method used when the ceding company receives an
application for insurance. The reinsurer is under no obligation to accept the
insurance. Its advantage is flexibility since the reinsurance contract can be made to
fit a particular case.17 Each risk to be reinsured is individually offered to and
accepted by or declined by the reinsurer.18
a. The term “facultative” is used in insurance contracts merely to define
the right of the reinsurer to accept or not to accept participation in the risk insured.
But once the share is accepted, the obligation is absolute and the liability assumed
thereunder can
13
Golding, p. 18.
14
Golding, p. 17.
16
Huebner, Black & Webb, pp. 610-611.
16
Huebner, Black & Webb, p. 611.
17
Redja, p. 546.
18
Golding, p. 36.
CHAPTER 10 293
REINSURANCE
be discharged by one and only way — payment of the share of the losses.19
b. A facultative reinsurance contract is not the equivalent or a type of
facultative obligation contemplated under the New Civil Code. There is a
facultative obligation under the New Civil Code when only one prestation has
been agreed upon but the obligor may render another in substitution. 20 There is
no alternative nor substitute prestation in reinsurance.
§5.02. TREATY. Automatic treaty involves a prior agreement between
the insurer and the reinsurer that the reinsurer is compelled to accept what is
being ceded by the insurer. It may also be provided that the insurer is compelled
to cede a particular type of insurance to the reinsurer. Automatic treaty may be
“Quota-share Treaty,” “Surplus-share Treaty,” “Excess-of-loss Treaty,” and
“Reinsurance Pool.”21
(1) Q u o t a - s h a r e T r e a t y — The insurer and
the reinsurer agree to share losses and premiums based on some
proportion.
(2) S u r p l u s - s h a r e T r e a t y — The
reinsurer accepts in excess of the ceding company’s retention limit
up to a maximum amount.
(3) E x c e s s - o f - L o s s T r e a t y — Losses in
excess of the retention limit are paid by the reinsurer up to some
maximum limit. This is often used for catastrophic loss.
(4) R e i n s u r a n c e P o o l — It is an organization
of insurers that underwrites reinsurance on a joint basis.
§6. INSURABLE INTEREST. Like all types of insurance contracts, the
presence of insurable interest is indispensable in reinsurance. In reinsurance, the
reinsured has no interest in the property or life that is originally insured.
However, the requirement of insurable interest is complied with by the fact that
the reinsured has issued the original policy and accepted liability to its original
insured.22
19
Equitable Insurance and Casualty Company, Inc. v. Rural Insurance and Surety Co., Inc.,
G.R. No. L-17436, January 31, 1962.
20
21
Redja, pp. 546-547.
22
Golding, p. 8.
^Republic Act No. 10607 with Notes on Pre-Need Act)
§7. PREMIUM. The re-insured is required to pay the premium to the

reinsurer. The same rules that apply ordinary insurance policies apply to reinsurance
contracts. Even with respect to reinsurance contracts, the re-insurer is entitled to
payment of t he 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 re-
insurance issued by the re-insurance company is valid and binding unless and until
the premium thereof has been paid. However, the exceptions are applicable as well.
Hence, the re-insured is also allowed to pay the reinsurance premiums on installment
basis.23
§8. OBLIGATION. The reinsurer is obligated to pay the insurer or ceding
company the moment the latter is exposed to liability. For example, if the building
that was insured was destroyed and the original insured demanded payment from the
insurer, the insurer can in turn already demand payment from the reinsurer. At that
time, the reinsured is already exposed to the peril insured against in the reinsurance
contract.
§8.01. MEASURE OF LIABILITY. Following the basic principle in
insurance, a reinsurance contract is a contract of indemnity. The extent of the liability
of the reinsurer is measured by the extent of the liability of the reinsured under the
original policy and the amount of the reinsurance. The reinsurance cannot exceed the
amount of the liability of the insurer under the original policy. If the insurer entered
into an amicable settlement with the original insured with the latter accepting an
amount lesser than the face value of the original policy, the reinsurer should likewise
be liable for such lesser amount even if the reinsurance covers the entire face value of
the policy. This is consistent with the characteristic of reinsurance as an insurance
against liability. The limit is the extent of the liability of the reinsured.
§8.02. GOOD FAITH. Reinsurance is also a contract u b e r r i m a e
f i d a e . The doctrine of good faith that applies to direct insurance is equally
applicable to reinsurance. It has been stated that the foundation of reinsurance are the
following:24 *
(1) Full information, so far as possessed by the reinsured, as to the risk on
which the reinsurance is requested.
23
Government Service Insurance System v. Prudential Guarantee and
Assurance, Inc., G.R. Nos. 165585 and 176982, November 20, 2013.
^Golding, p. 9.
CHAPTER 10 296
REINSURANCE
(2) Full information as to the amount retained by the reinsured on the identical
property which the reinsurance is requested.
a. Duty to communicate. Consistently, the reinsured has a specific obligation
to disclose all representations and all the knowledge and information he possesses under
Section 98 which states:
SEC. 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.
b. Therefore, the insurer or ceding company in facultative reinsurance must

communicate (1) representations of the original insured, and (2) knowledge and
information he possesses whether previously or subsequently acquired. These facts
may affect the decision of the reinsurer to accept the ceded insurance.
c. “The duty of disclosure in reinsurance business is qualified by one
important fact, that is, it is transacted between parties who are equally experts in their
business. This will sometimes relax to a minor degree the duty imposed upon the
reinsured.”25
d. Duty to communicate in a treaty. In the case of an automatic treaty, the
reinsurer will no longer decide whether or not to accept the insurance. Hence,
representations or other information need not be disclosed by the insurer because the
reinsurer is compelled to accept what is being ceded. “Under this method, it may not
be possible for the reinsured to give full information as to the nature of the risk to be
reinsured or its own retention, in respect to every cession to be made under a treaty. To
have to do this would go a long way to defeat the objects for which this method of
reinsurance was devised.”26
(1) However, the duty of good faith remains in automatic treaty. “It
is incumbent upon the reinsured to make a full disclosure of all the material
facts in the negotiations
G
leading up to the completion of the contract.” 27 In addition, in the general

operation of the treaty, the reinsured is bound to exercise the utmost good
faith towards its reinsurer.28
(2) Thus, before entering into a treaty, the reinsurer is necessarily
interested in acquiring general knowledge of the reinsured and the latter
must give information that relates to the following: ( i ) The standing and
reputation of the reinsured; ( i i ) The experience and quality of its
management;
(iii) The general underwriting policy of the reinsured; ( i v ) The
company’s limit of retention and their relationship with the total premium
income; and ( v ) The different areas from which the business is
derived.29
e. Bordereau. In this connection, it is well to note that in a form called
Bordereau, the policy form shows loss history and premium history with respect to
specific risks.30 The reinsurer uses this information to establish the reinsurance
premium.
§9. CANCELLATION. Reinsurance policies may be cancelled on the same
grounds as ordinary insurance policies. For example, there can be cancellation of
policies on the ground of nonpayment of premium or material misrepresentation or
fraud.
a. Cancellation of the reinsurance treaty does not automatically result in
the cancellation of the reinsurance contracts entered into pursuant thereto.
Reinsurance Contracts may continue despite the cancellation of the treaty.31
PROBLEM:
1. Six (6) reinsurance contracts were entered into between insurer X and reinsurer
Y. Of the six (6) reinsurance contracts two (2) contain provisions “that in
the event of termination of this Agreement..., the liability of Y under current
cessions shall c o n t i n u e i n f u l l f o r c e
a n d e f f e c t u n t i l t h e i r n a t u r a l
e x p i r y ...;” and the 4th paragraph of Article VI of the Personal
Accident Reinsurance Treaty states: “4. On the termination of this
Agreement from any cause whatever, the liability of the REINSURER (Y)
under any current cession including any
27
Golding, p. 11.
™Ibid.
^Golding, p. 22.
^Rubin, p. 58.
31
Fieldmen’s Insurance Company, Inc. v. Asia Surety and Insurance Company,
Inc., G.R. No. L-23447, July 31, 1970.
CHAPTER 10 297
REINSURANCE
amounts due to be ceded under the terms of this Agreement and which are not
cancelled in the ordinary course of business s h a l l c o n t i n u e
i n f u l l f o r c e u n t i l t h e i r e x p i r y
unless the COMPANY (X) shall, prior to the thirty-first December next following
such notice, elect to withdraw the existing cessions ...” The two reinsurance
contracts have a term of one year which expires on June, 2007. The Reinsurance
Treaty was terminated on March 6, 2007. Will the two reinsurance contracts
remain effective despite the termination of the treaty?
A: Yes, the two (2) contracts shall remain in force until June,
2007. The provisions in the contracts quoted in the problem clearly and
expressly recognize the continuing effectivity of policies ceded under
them for reinsurance notwithstanding the cancellation of the contracts
themselves. Insofar as the two (2) reinsurance agreements with the express
stipulations afore-quoted are concerned, Y cannot validly claim that the
cancellation or the termination of the treaty carried with it i p s o
f a c t o the termination of all reinsurance cessions thereunder. Such
cessions continued to be in force until their respective dates of expiration.
Thus, Y cannot avoid liability which arose by reason of a loss covered by
the original policies which occurs before June, 2007.
( F i e l d m e n ’ s I n s u r a n c e
C o m p a n y , I n c . u . A s i a S u r e t y
a n d I n s u r a n c e C o m p a n y , I n c . ,
G . R . N o . L - 2 3 4 4 7 , J u l y 3 1 ,
1 9 7 0 )
CHAPTER 11
MARINE INSURANCE
Marine insurance is said to be the oldest form of insurance. As trade and

commerce developed necessitating shipment of goods from one place to another,
primitive types of securities were developed to secure the vessels and cargoes. These
eventually developed into what is known as marine insurance. It is an important tool
in commerce and is often indispensably part of commercial credit transactions as one
of the documents included in what is known as the commercial set.1
§1. DEFINITION. The term marine insurance cannot be given a simple

definition; it has no unified conception. One might suppose that this type of
insurance is limited to insurance that secures vessels and its cargoes against the
perils of navigation. However, the present law does not limit marine insurance to the
risks of navigation. It is well to quote Section 101 of the Insurance Code which
defines Marine Insurance by enumeration:
SEC. 101. Marine Insurance includes;

(a) Insurance against loss of or damage to:
(1) Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects, disburse-
ments, profits, moneys, securities, choses in ac-
tion, instruments of debts, valuable papers, bot-
tomry, and respondentia interests and all other
kinds of property and interests therein, in respect
to, appertaining to or in connection with any and
all risks or perils of navigation, transit or transpor-
tation, or while being assembled, packed, crated,
baled, compressed or similarly prepared for ship-
lf
The commercial set usually includes the bill of lading, sight draft, and evidence of
insurance. They are tender documents that are being used in letters of credit transactions.
298
CHAPTER 11 299
MARINE INSURANCE
ment or while awaiting shipment, or during any de-

lays, storage, transshipment, or reshipment incident
thereto, including war risks, marine builder’s risks,
and all personal property floater risks;
(2) Person or property in connection with or
appertaining to a marine, inland marine, transit or
transportation insurance, including liability for loss
of or damage arising out of or in connection with the
construction, repair, operation, maintenance or use
of the subject matter of such insurance (but not
including life insurance or surety bonds nor
insurance against loss by reason of bodily injury to
any person arising out of ownership, maintenance,
or use of automobiles);
(3) Precious stones, jewels, jewelry, precious
metals, whether in course of transportation or
otherwise; and
(4) Bridges, tunnels and other instrumen-
talities of transportation and communication (ex-
cluding buildings, their furniture and furnishings,
fixed contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to navi-
gation and transportation, including dry docks and
marine railways, dams and appurtenant facilities for
the control of waterways.
(b) Marine protection and indemnity insurance,
meaning insurance against, or against legal liability of the
insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland waterways,
including liability of the insured for personal injury, illness
or death or for loss of or damage to the property of
another person.
§2. KINDS OF MARINE INSURANCE. There are two basic types of marine
insurance, namely: (1) Ocean Marine Insurance; and
(2) Inland Marine Insurance. However, Section 101 of the Insurance Code is so
broad that it even includes another type that is neither Ocean Marine Insurance nor
Inland Marine Insurance, that is, Aircraft Hull Policy, which is a type of Aviation
Insurance.
§2.01. OCEAN MARINE INSURANCE. Ocean Marine Insurance is what

was contemplated under the old Insurance Law 2 which defines marine insurance as
“an insurance against risks connected with navigation, to which a ship, cargo,
freightage, profits, or other insurable interest in movable property, may be exposed
during a certain voyage or a fixed period of time.” Broadly speaking, the different
kinds of Ocean Marine Insurance may be grouped into four, v i z . :
(1) Insurance over the vessel, craft and other conveyances;
(2) Insurance for the protection of the carrier against liability
to others for loss or damage to the property of another;
(3) Insurance over cargoes that are being transported; and
(4) Insurance over freight and income.
a. Insurance over the vessel. The different insurance policies over the
vessel include:3
(1) Hull Policies — Insurance for the loss or damage to the vessel
and which are further classified according to the type of vessel and/or the
nature of water that is being navigated.
(2) Builder’s Risk Policy — This relates to the construction,
conversion and repair of the hull.
(3) Port Risk Only Policy — This covers perils to which the
vessel might be exposed while in port including fire, collision, or damage
while being transferred from one dock to another.
(4) Fleet Policies — As the term implies, this is an insurance that
covers a fleet of ships.
(5) Full Form Policy — This covers both total and partial loss.
(6) Total Loss Only Policy — As the term implies this insures
total loss only and is resorted to for the purpose of obtaining favorable
premium rate.
b. Insurance against liability. The second group of Ocean Marine
Insurance Policies protects the owner of the carrier or vessel against liability to
other persons. These include:
Section 92, Act 2427.

3
See Huebner, Black & Webb, pp. 165 to 167.
CHAPTER 11 301
MARINE INSURANCE
(1) Running Down Clause — It is the clause in an insurance

policy that insures liability for collision.
(2) Marine Protection and Indemnity Insurance
— It is an insurance against, or against legal liability of the insured for
loss, damage, or expense incident to ownership, operation, chartering,
maintenance, use, repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland waterways, including liability of
the insured for personal injury, illness or death or for loss of or damage to
the property of another person.4
(3) Excess Protection and Indemnity Insurance
— This insurance covers damage or liability in excess of the value of the
ship which is the limit of liability under the real and hypothecary nature of
maritime law and its consequent limited liability rule. Excess liability is an
exception to the limited liability rule under Maritime law. This includes
cases when the shipowner itself was negligent.
(4) Water Pollution Liability — Insurance that covers the
liability of the carrier in water pollution cases.
c. Insurance over the cargo. Cargo Policies insure the goods that are
being shipped against loss or damages. They may be classified depending on
whether they are shipped in a river, lake, or whether it is coastwise shipping or
international shipping. They may likewise be classified into:
(1) Trip or Single Risk Cargo Policy — It covers a particular
shipment of goods.
(2) Open Cargo Policy — The shipper insures all its shipments
as described in the policy irrespective of route, time of shipment, or
class of approved vessel. There is automatic coverage. Thus, in one
case, the Court said that a marine open policy is the blanket insurance to
be undertaken by the insurer on all goods to be shipped by the consignee
during the existence of the contract.5
(i) It was noted that a Marine Risk Note is not the
Open Cargo policy. It merely constitutes an acknowledg-
4
Par. 2, Section 101, I.C.
5
Malayan Insurance Co., Inc. v. Jardine Davies Transport Services, Inc., G.R. No. 181300,
September 18, 2009.
ment or declaration of the shipper about the specific shipment

covered by the marine insurance policy, the evaluation of the cargo
and the chargeable premium.6
d. Insurance over freightage and income. A Marine Insurance Policy
may cover loss of freightage for failure to complete the voyage or delivery of the
goods. Section 102 of the Insurance Code defines freightage as “all the benefits
derived by the owner, either from the chartering of the ship or its employment for
the carriage of his own goods or those of others.” This also covers insurance
policies for the loss of income contemplated in Section 105 of the Insurance
Code.
e. Compulsory Passenger and Cargo Liability Insurance — R.A. No.

9295 otherwise known as the “ D o m e s t i c S h i p p i n g
D e v e l o p m e n t A c t o f 2 0 0 4 ” requires
compulsory coverage for passengers and cargoes. Sections 14 and 15 thereof
provide:
SEC. 14. Compulsory Insurance Coverage for

Passenger and Cargo. — To meet its financial res-
ponsibility for any liability which a domestic ship
operator may incur for any breach of the contract of
carriage, every domestic ship operator shall be
required to submit annually the following:
(1) Adequate insurance coverage for each
passenger in an amount to be computer in
accordance with existing laws, rules and regulations,
and the total amount of such coverage shall be
equivalent to the total number of passenger
accommodations being offered by the vessel;
(2) Adequate insurance coverage for cargo in
an amount to be computed in accordance with
existing laws, rules and regulations, and the total
amount of such coverage shall be equivalent to the
total cargo capacity being offered by the vessel; and
(3) If a domestic ship operator should offer
both passenger and cargo service, then the total
insurance coverage shall be in the total sum
equivalent to that stipulated in paragraphs (1) and (2)
of this section.
6
Malayan Insurance Co., Inc. v. Jardine Davies Transport Services, Inc., G-R
No. 181300, September 18, 2009.
CHAPTER 11 303
MARINE INSURANCE
Provided, That if a domestic ship operator should operate

more than one (1) vessels, the amount of insurance
coverage required under this section, for purposes of
providing financial capacity, shall be the amount
equivalent to the total number of passenger
accommodations, or total cargo capacity, or both, of the
largest operating vessel which the domestic ship
operator may have: Provided, further, That the total
insurance coverage which may be required of any
domestic ship operator shall not exceed the value of
such vessel: Provided, finally, That adequate insurance
coverage shall be obtained from any duly licensed
insurance company or international protection and
indemnity association.
SEC. 15. Other Insurance Coverage. — The MARINA
shall have the power to require every ship operator to
obtain such other compulsory insurance coverage
necessary to adequately cover claims for damages.
(1) MARINA Rules. A compulsory insurance in the amount of

P200,000.00 for each passenger is imposed on shipowners/operators. It is the
shipowner/operator who is liable to pay the amount of P200,000.00 if no
insurance is obtained or if the passenger is unmanifested. In addition, an
insurance coverage for each survivor of a maritime accident in the amount of
P50,000.00 is likewise required.7
(2) Period Covered. Memorandum Circular No. 40 provides the
following rules on the period during which there is insurance coverage:
The insurance should attach from the time the passenger sets foot on the boarding
gangway or ladder leading to the deck, continues during the entire course of the voyage
covered by the passenger ticket or coupon until the passenger shall have left the
disembarking gangway or ladder at the port of destination.
It is understood that the insurance shall continue during the time the vessel calls on
designated or intermediate ports provided the passenger stays on board. Should any
passenger in transit disembark at such
7
See Section 14.1, Rule V, IRR of R.A. No. 9295; MARINA Circular No. 40 and
MARINA Circular 2009-18, Series of 2009.
3f>4 ESSENTIALS OF INSURANCE LAW
Republic Act No. 10607 with Notes on Pre-Need Act)
designated or intermediate port not his destination, the insurance shall be deemed
suspended as at the moment the passenger leaves the ladder or disembarking
gangway and shall remain suspended whilst on land. The cover for such passenger is
restored as at the moment he sets foot on the gangway or ladder to board the vessel.
If the passenger continues to stay on board the vessel beyond the port of
destination designated in his passenger ticket or coupon without leave from the
vessel authorities, then the insurance shall cease, insofar as such passenger is
concerned, as at the moment the vessel’s anchor is raised to commence the voyage
beyond the passenger’s destination.
In a ddition, if the vessel, whilst at sea, sinks or has to be abandoned because
of fire, stranding, agrounding, or capsizing or other perils at sea, the insurance shall
remain in full force until the passengers reach or are safely brought to the nearest
port of refuge or safety.
(3) Claims Settlement. The MARINA rules provide that the

insurance company shall pay any claim for death or bodily injury sustained
by a manifested passenger without the necessity of proving fault or
negligence on the part of the car carrier. Immediate payment shall be upon
presentation of the following proofs
(a) In case of death — death certificate and evidence
sufficient to establish the proper payee. For purposes of this coverage,
a passenger is presumed dead if he is missing and cannot be located
after six (6) months from date of casualty. For claims settlement
purposes, therefore, a certification from the Philippine Coast Guard to
the effect that the passenger is missing and cannot be located despite
diligent search would suffice.* 9
(b) In case of bodily injury resulting in permanent disability
— certification from a licensed physician.10
In case of dispute, the same shall be settled by the Insurance Commission in
accordance with existing law.11
§2.02. INLAND MARINE INSURANCE. Marine insurance may likewise
cover risks that do not relate to navigation itself
^Memorandum Circular
No.
»Ibld.40.
x0
Ibid.
"Ibid.
CHAPTER 11 305
MARINE INSURANCE
or transit of goods and passengers. The growth of transportation facilities and the
expansion of inland business and commerce saw the need for a new type of
insurance that cannot be covered by ocean marine insurance and ordinary property
or life insurance. Inland marine insurance include insurance over cargoes,
infrastructure and floaters.
a. Insurance policies over goods that are being imported or exported.
These include: (a) Insurance over goods that are “being assembled, packed, crated,
baled, compressed or similarly prepared for shipment or while awaiting shipment,” 12
and
(b) Bailee policies for goods in storage.
b. Insurance over means of and infrastructure for transportation and
communications. These are policies that cover “bridges, tunnels and other
instrumentalities of transportation and communication (excluding buildings, their
furniture and furnishings, fixed contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to navigation and transportation, including
dry docks and marine railways, dams and appurtenant facilities for the control of
waterways.”13
c. Personal Property Floaters.14 These policies are called floaters because
the protection follows the insured properties wherever they may be found or
located. The properties are covered whether they are in transit or in a fixed location.
These floaters include insurance over “precious stones, jewels, jewelry, precious
metals, whether in course of transportation or otherwise.” 15 They also include
“personal effects floaters” like those covering the personal effects of tourists and
travelers. Likewise included are “wedding gift floaters,” “cold storage floaters,”
“bicycle floaters,” and “mobile machinery and equipment floaters.”
§2.03. AVIATION INSURANCE. Section 101 includes insurance over an
aircraft as part of Marine Insurance. This includes different Aircraft Hull Policies
which may take different forms defending on the type of aircraft.
a. An Aircraft Hull Policy may cover all risks “ground and flight” which
means that all damages both on the ground and in
12
Paragraph 1(a), Section
101,1.C.
13
Paragraph 1(d), Section
14
Paragraph 1(c), Section
15
Ibid.
flight are included. It may also cover insurance over the aircraft while the same is
not in motion.
§3. PERIOD COVERED. Marine insurance policies must state the period
covered by the insurance.16 The period covered may likewise depend on the type of
insurance involved. For instance, Ocean Marine Insurance may be further classified
into "voyage policies” or “time policies.” “Voyage policies” cover the voyage to
and from a particular place while “time policies” cover a stated period of time.
Other terms or clauses used in policies that indicate the period covered by the
insurance include the “Warehouse to Warehouse Clause,” the “Loss or Not Lost
Clause,” and “At and From Clause ”
a. Warehouse to Warehouse Clause. This simply means that the shipper
is insured from the time his goods leave the warehouse until their delivery to the
warehouse of the consignee.
b. Lost or Not Lost Clause. The vessel or the shipment is covered even if
they may have been destroyed already at the time of the issuance of the policy. This
is an example of the situation contemplated under Section 2 of the Insurance Code
that a past event may be insured against. The fact of loss should be unknown to the
parties.
c. “At and From Clause.” The coverage is effective while the vessel is at
and from a designated port. If the policy covers only the vessel, “ f r o m ”
the port, the period when the vessel is still at the port is not covered.
§4. RISKS INSURED AGAINST. The peril insured against would depend
on whether the policy is an “All Risk Policy” or a “Named Peril Policy.”
§4.01. All RISK POLICY. An all risk policy insures against all conceivable
causes loss or damage except as otherwise excluded in the policy or one due to
fraud or intentional misconduct on the part of the insured. It covers all losses during
the voyage whether arising from a marine peril or not. 17 The nature of an “all risk
policy” was explained in one case18 in this wise:
16
Section 51,1.C.
17
Choa Tiek Seng v. Hon. Court of Appeals, et al., G.R. No. 84507, March 15,
1990.
18
Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng,
G.R. No. 85141, November 28, 1989.
CHAPTER 11 307
MARINE INSURANCE
An “all risks policy” should be read literally as meaning all risks whatsoever and covering
all losses by an accidental cause of any kind. The terms “accident” and “accidental,” as used in
insurance contracts, have not acquired any technical meaning. They are construed by the courts in
their ordinary and common acceptance. Thus, the terms have been taken to mean that which
happens by chance or fortuitously, without intention and design, and which is unexpected, unusual
and unforeseen. An accident is an event that takes place without one’s foresight or expectation; an
event that proceeds from an unknown cause, or is an unusual effect of a known cause and,
therefore, not expected.
The very nature of the term “all risks” must be given a broad and comprehensive meaning
as covering any loss other than a willful and fraudulent act of the insured. This is pursuant to the
very purpose of an “all risks” insurance to give protection to the insured in those cases where
difficulties of logical explanation or some mystery surround the loss or damage to property. An “all
risks” policy has been evolved to grant greater protection than that afforded by the “perils clause,”
in order to assure that no loss can happen through the incidence of a cause neither insured against
nor creating liability in the ship; it is written against all losses, that is, attributable to external
causes.
The term “all risks” cannot be given a strained technical meaning, the language of the
clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it extends to
all damages/losses suffered by the insured cargo except (a) loss or damage or expense proximately
caused by delay, and (b) loss or damage or expense proximately caused by the inherent vice or
nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a covered
peril, but under an “all risks” policy the burden is not on the insured to prove the precise cause of
loss or damage for which it seeks compensation. The insured under an “all risks insurance policy”
has the initial burden of proving that the cargo was in good condition when the policy attached and
that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the
insurer to show the exception to the coverage. As [the Court] held in P a r i s - M a n i l a
P e r f u m e r y C o . v . P h o e n i x A s s u r a n c e
C o . , L t d . , the basic rule is that the insurance company has the burden of proving that
the loss is caused by the risks excepted and for want of such proof, the company is liable.
Coverage under an “all risks” provision of a marine insurance policy creates a special type
of insurance which extends coverage to risks not usually contemplated and avoids putting upon the
insured the burden of establishing that the loss was due to the peril falling within the policy’s
coverage; the insurer can avoid coverage upon demonstrating that a specific provision expressly
excludes the loss from coverage. A marine insurance policy providing that the insurance was to be
“against all risks” must be construed as creating a special insurance and extending to other risks
than are usually contemplated, and covers all losses except such as arise from the
fraud of the insured. The burden of the insured, therefore, is to prove merely that the
goods he transported have been lost, destroyed or deteriorated. Thereafter, the burden is
shifted to the insurer to prove that the loss was due to excepted perils. To impose on the
insured the burden of proving the precise cause of the loss or damage would be
inconsistent with the broad protective purpose of ‘all risks’ insurance.
a. An example of an all-risk clause that was

c i t e d i n o n e c a s e i s a s f o l l o w s : 1 9 “5. This insurance is against
all risks of loss or damage to the subject-matter insured but shall in no case be
deemed to extend to cover loss, damage, or expense proximately caused by delay
or inherent vice or nature of the subject-matter insured. Claims recoverable
hereunder shall be payable irrespective of percentage.’'
b. The insurer may provide for exclusions from the “all-risk” clause. For
example, the Marine Open Policy involved in one case provided certain exceptions
like unsuitable packaging, inherent vice, delay in voyage and vessels
unseaworthiness. In this case, however, the insurer had the burden of proving that
the case falls under the exception. 20 The usual exclusions are the FC&S clause and
the SR&CC clause.
(1) Free of capture and seizure (FC&S) clause — This clause
eliminates coverage for losses caused by war, piracy, or virtually any lawful
or unlawful taking or seizure of the vessel or cargo.21
(2) Strikes, riots and civil commotion (SR&CC) clause — The
policy excludes strikes, labor disturbances, riots, vandalism, sabotage or
malicious acts.
§4.02. NAMED PERILS POLICY. Alternatively, the insurance policy may
specify the perils insured against in what is known as the “ P e r i l s
C l a u s e . ”
a. Examples. An example of a typical “Perils Clause,” which
is a standard form in marine insurance policy, was involved in one case22 and reads:
19
Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng,
supra.
20
New World International Development (Phils.), Inc. v. NYK-FilJapan Shipping
Corp., G.R. No. 171468, August 24, 2011.
21
Malayan Insurance Corporation v. The Hon. Court of Appeals & TKC Marketing
Corporation, G.R. No. 119599, March 20, 1997.
22
Ibid.
CHAPTER 11 309
MARINE INSURANCE
“Touching the adventures which the said INSURER, are content to hear, and to take
upon them in this voyage; they are of the Seas; Men- of*War, Fire, Enemies, Pirates, Rovers,
Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests,
Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, Condition, or
quality so ever, Barratry of the Master and Mariners, and of all other Perils, Losses, and
Misfortunes, that have come to hurt, detriment, or damage of the said goods and
merchandise or any part thereof. AND in case of any loss or misfortune it shall be lawful to
the ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and
about the defense, safeguards, and recovery of the said goods and merchandises, and ship, &
c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the
said INSURER, will contribute according to the rate and quantity of the sum herein
INSURED. AND it is expressly declared and agreed that no acts of the Insurer or Insured in
recovering, saving, or preserving the Property insured shall be considered as a Waiver, or
Acceptance of Abandonment. And it is agreed by the said INSURER, that this writing or
Policy of INSURANCE shall be of as much Force and Effect as the surest Writing or policy
of INSURANCE made in LONDON. And so the said INSURER, are contented, and do
hereby promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the
ASSURED, his or their Executors, Administrators, or Assigns, for the true Performance of
the Premises; confessing themselves paid the Consideration due unto them for this
INSURANCE at and after the rate arranged.”
b. Another example of a “Perils Clause” reads:

“Touching the adventures which the said INSURER is content to bear and takes
upon itself in this voyage, they are all of the seas, fires, assailing thieves, jettisons, barratry of
the master and crew and all other like perils, losses and misfortunes that have or shall come
to the hurt, detriment or damage of said goods or any part thereof.”
c. Perils of the Sea. By way of a historical background, it is well to note

that marine insurance developed as an all-risk coverage, using the phrase
“ p e r i l s o f t h e s e a ” to encompass the wide and varied
range of risks.23
(1) The meaning of the expression “perils ... of the seas . . . and all
other perils, losses, and misfortunes,” used in describing the risks covered by
policies of marine insurance, has been the subject of frequent discussion.
However, certain propositions relative thereto are now so generally accepted
as
23
Marketing Corporation, supra.
to be considered definitely settled. 24 “ P e r i l s o f t h e

s e a ” refers only to fortuitous accidents or casualties of the seas. 25
They do not include the natural and ordinary action of the sea or wave
which may result in what may be described as wear and tear. 26
“ P e r i l s o f t h e s e a ” are restricted to such
accidents and misfortunes only as proceed from mere sea-damage, that is,
such as arise, e x v i d i v i n a from stress of weather, winds
and waves, from lightning and tempests, rocks and sands. 27 The purpose of
the policy is to secure an indemnity against accidents which may happen,
not against events which must happen.28
(2) The Supreme Court explained in T r a n s i m e x ,
C o . v . M a f r e A s i a n I n s u r a n c e
C o r p . 2 9 that the phrase “perils of the sea” carries the same
connotation. Although the term has not been definitively defined in
Philippine jurisprudence, courts in the United States of America generally
limit the application of the phrase to weather that is “so unusual, unexpected
and catastrophic as to be beyond reasonable expectation.” Accordingly,
strong winds and waves are not automatically deemed perils of the sea, if
these conditions are not unusual for that particular sea area at that specific
time, or if they could have been reasonably anticipated and foreseen.” There
was no peril of the sea in the case because the vessel faced winds of only up
to 40 knots. Hence, the winds were below the PAGASA mandated threshold
of 45 to 50 knots to be considered a “storm” under Article 1734(1). The
Court likewise explained:
“As a side note, we observe that there are no definite statutory standards for
determining the existence of a “storm” or “peril of the sea” that would exempt a common
carrier from liability. Hence, in marine insurance cases, courts are constrained to rely
upon their own understanding of these terms of art, or upon imprecise accounts of the
speed of the winds encountered and the strength of the waves experienced by a vessel. To
obviate uncertainty, it may be time for Congress to lay down specific rules to distinguish
‘storms’ and other ‘perils of the sea’ from the ordinary action of the wind and waves.
While uniform measures of severity may prove difficult to establish, the
24
La Razon Social “Go Tiacoy Hermanos” v. Union Insurance Society of Canton, Ltd.,
G.R. No. 13983, September 1, 1919.
25
Dover, p. 262.
26
Ibid. citing Cargo ex Xantho v. Owners of Xantho, 1887.
21
Ibid.
28
La Razon Social v. Union Insurance Society of Canton, supra.
29
G.R. No. 190271, September 14, 2016.
CHAPTER 11 311
MARINE INSURANCE
legislature may consider providing more detailed standards to be used by the judiciary in
resolving maritime cases. These may include wind velocity, violence of the seas, the height of
the waves, or even the expected weather conditions in the area involved at the time of the
incident.”
d. Distinguished from Perils of the Ship. It is also well- settled that a loss
which, in the ordinary course of events, results from the natural and inevitable action
of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of
the ship’s owner to provide the vessel with proper equipment to convey the cargo
under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what
has been aptly called the “ p e r i l o f t h e s h i p . "The insurer
undertakes to insure against perils of the sea and similar perils, not against perils of
the ship.30
(1) For example, the entrance of the sea water into the ship’s hold
through the defective pipe was not due to any accident which happened during
the voyage, but to the failure of the ship’s owner properly to repair a defect,
the existence of which he was apprised. The loss was therefore more
analogous to that which directly results from simple unseaworthiness than to
that which results from perils of the sea.31
(2) Perils of the sea likewise include the rusting of steel pipes that
are being transported, caused by the toll on the cargo of the wind, water and
salt conditions.32 Other cases and examples were summarized as follows:
“The second of the decision from the House of Lords from which We have quoted
(Wilson, Son & Co. v. owners of Cargo per the Xantho [1887], 12 A. C., 503)
arose upon the following facts: The owners of certain cargo embarked the same upon the
steamship Xantho. A collision took place in a fog between this vessel and another ship,
Valuta. An action was thereupon instituted by the owners of the cargo against the owners
of the Xantho. It was held that if the collision occurred without fault on the part of the
carrying ship, the owners were not liable for the value of the cargo lost by such collision.
Still another case was decided in the House of Lords upon the same date as the
preceding two, which is equally instructive as the others upon
30
La Razon Social v. Union Insurance Society of Canton, supra.
31
Ibid.
32
Cathay Insurance Co. v. Hon. Court of Appeals and Remington Industrial Sales
Corporation, G.R. No. 76145, June 30, 1987.
$12 ESSENTIALS OK INSURANCE LAW
(Republic Art No. 10607 with Notes on Pro-Need Act)
the question now under consideration. We refer to H a m i l t o n ,

F r a s e r & C o . v . l \ m c i o r f i$ C o . .
( f l 8 8 7 J . 1 2 A . C . , 5 I S ) , where it appeared that rice
was shipped under a charter party and bills of lading which expected “dangers and
accident of the sea." During the voyage rats gnawed a hole in a pipe on board the ship,
whereby sea water effected an entrance into the ship’s hold and damaged the rice. It
appeared that there was no neglect or default on the part of the shipowners or their
servants in the matter of attending to the cargo. It was held that this loss resulted from
an accident or peril of the sea and that the shipowners were not responsible. Said
Bramwell: “No question of negligence exists in this case. The damage was caused by
the sea in the course of navigation with no default in any one. I am, therefore, of
opinion that the damage was caused by peril of the sea within the meaning of the bill of
lading." The point which discriminates this decision from that now before Us is that in
the present case the negligence of the shipowners must be accepted as established.
Undoubtedly, if in H a m i l t o n , F r a s e r & C o . v .
P a n d o r f & C o . , ( [ 1 8 8 7 ] , 1 2 A . C . ,
5 1 8 ) , it had appeared that this hold had been gnawed by the rats prior to this
voyage and the owners, after having their attention directed to it, had failed to make
adequate repairs, the ship would have been liable.
The three decisions in the House of Lords above referred to contain elaborate
discussions concerning the liability of shipowners and insurers, respectively, for
damage happening to cargo in the course of a sea voyage; and it would be
presumptuous for Us to undertake to add to what has been there said by the learned
judges of that high court. Suffice it to say that upon the authority of those cases there is
no room to doubt the liability of the shipowner for such a loss as occurred in this case.
By parity of reasoning the insurer is not liable; for, generally speaking, the shipowner
excepts the perils of the sea from his engagement under the bill of lading, while this is
the very peril against which the insurer intends to give protection. As applied to the
present case it results that the owners of the damages rice must look to the shipowner
for redress and not to the insurer.”33
e. Perils. Other perils included in the ( ( P e r i l s C l a u s e ”

include fires, assailing thieves, jettisons, barratry of the master and crew and all other
like perils, losses and misfortunes:
(1) Fire and Related Perils. The policy may likewise provide that the
insurer is liable if the goods and/or the vessel are destroyed or damaged by fire
and other losses due to heat, smoke, vessel, or odor or from water, steam or
chemicals.
(2) Jettison. This is usually involved in “General Average” where the
goods are thrown overboard to save other cargoes and/or the ship.
33
La Razon Social v. Union Insurance Society, supra.
ciiArriOK 1 1 313
MARINE INSURANCE
(B) Barratry. It is an act committed by the master or crew of the ship for
some unlawful or fraudulent purpose contrary to their duty to the ship owner.84
(4) Assailing Thieves. This refers to the theft of cargo committed by
force and does not include clandestine theft, pilferage, or theft by passengers or
crew.
(5) All Other like Perils. The words “all other perils, losses, and
misfortunes” or “all other like perils” in a standard “Perils Clause” are to be
interpreted as covering risks which are of like kind ( e j u s d e m
g e n e r i s ) with the particular risks which are enumerated in the
preceding part of the same clause of the contract. They have always been held or
assumed to be restricted to cases ‘akin to’ or resembling’ or ‘of the same kind as’
those specially mentioned. Thus, there must be some casualty, something which
could not be foreseen as one of the necessary incidents of the adventure.34 35
f. Clauses that Modify Coverage. Certain perils are not usually covered by the
typical “Perils Clause” because they are not perils of the sea or like perils. Hence, it is
necessary to include certain clauses to modify the insurance coverage with respect to the
perils that are covered, the property covered and the losses that are covered. Other
clauses remove certain perils from the coverage. These include the “Inchmaree Clause,”
the “SR&CC,” “FC&S”36 and other clauses discussed below.
(1) Inchmaree Clause. This is a clause that is included in a hull policy to
cover loss or damage through the bursting of the boiler, breaking of shafts or
through latent defects of the machinery and equipment, hull or its appurtenances
and faults or errors in the navigation or management of the vessel. 37 The
Inchmaree Clause should be expressly provided for because damage of this sort
are not included in the term “perils of the sea.” The case where the clause
originated was narrated by our Supreme Court in one of the above-cited cases:38
34
Timoteo B. Aquino and Ramon Paul L. Hernando, Essentials of Transportation and
Public Utilities Law, 2016 Ed., p. 200 citing 70 Am. Jur 2d 968, hereinafter referred to as
“Aquino and Hernando.”
35
La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd., G.R.
No. 13983, September 1, 1919.
36
See 4.01 of this Chapter.
37
Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc., et al., G.R. No.
132607, May 5, 1999.
38
La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd.,
supra.
M
x x x Thames and Mersey Marine Insurance Co. v. Hamilton, Fraser &
Co., [1887], 12 A. C., 484 arose upon the following state of facts: In March, 1884, the
Inchmaree was lying at anchor off Diamond Island and was about to start upon her
voyage. To this end it became necessary to fill up her boilers. There was a donkey-engine
with a donkey-pump on board, and the donkey-engine was set to pump up water from
the sea into the boilers. Those in charge of the operation did not take the precaution of
making sure that the valve of the aperture leading into one of the boilers was open. This
valve happened to be closed. The result was that the water being unable to make its way
into the boiler was forced back and split the air-chamber and so disabled the pump. It
was held that whether the injury occurred through negligence or accidentally without
negligence, it was not covered by the policy, since the loss did not fall either under the
words “perils of the seas” or under the more general words “all other perils, losses, and
misfortunes.” Lord Bramwell, in the course of his opinion quoted with approbation as
definition given by Lopes L.J. in Pandorf v. Hamilton (16 Q. B. D., 629), which is
as follows: In a seaworthy ship damage to goods caused by the action of the sea during
transit not attributable to the fault of anybody, is a damage from a peril of the sea.”
(2) Running Down Clause is a clause that makes the insurer liable
in collision cases.
(3) Delay Clause exempts the insurer from liability if there was
delay in the voyage.
(4) Sue and Labor (S&L) Clause requires the insured and his
representative to take all reasonable steps that are necessary to limit or
reduce an imminent loss. Indemnity will be given by the insurer for such
effort.
(5) Protection and Indemnity (P&I) Clause insures the shipowner
from liability for damages caused by the ship to wharves, piers and other
harbor installations.
(6) Institute War Clause (IWC) may be expressly provided to be
deemed to form part of the policy if the FC&S clause will be deleted. The
clause provides that the insurance covers risks covered by the FC&S
including capture, seizure, arrest, restraint or detainment. When the IWC is
deemed part of the policy, it also includes arrest by ordinary judicial process
and not necessarily only by means of political acts. Consistent with the
general purpose of the clause, the IWC includes seizure or detention by civil
authorities.39
39
Malayan Insurance Corporation v. The Hon. Court of Appeals & TKC
CHAPTER 11 315
MARINE INSURANCE
(7) Memorandum Clause provides for the list of goods for which the
insurer will be liable unless damage exceeds a stated percentage of total
value.
§4.03. INLAND MARINE INSURANCE PERILS. The nature of inland
marine insurance prevents the application of some of the rules that are applicable to
ocean marine insurance. Nevertheless, there may likewise be all-risk policies in
inland marine insurance. With respect to named perils policies, the perils that can be
named in the policies depend upon the nature of the property insured against.
a. For example, the named perils in insurance coverage over
instrumentalities of transportation are obviously different from personal property
floaters. Similarly, a builder’s policy will cover perils that are different from bailee
policies.
PROBLEMS:
1. A shipped 100 pieces of plywood from Davao City to Manila. He took a marine
insurance policy to insure the shipment against loss or damage due to perils of the
sea, barratry, fire, jettison, pirates, and other such perils. When the ship left the port
of Davao, the shipman in charge forgot to secure one porthole, through which the
seawater seeped during the voyage, damaging the plywood. A filed a claim against
the insurance company which refused to pay on the ground that the loss or damage
was not due to a peril of the sea or any of the risks covered by the policy. It was
admitted that the sea was reasonably calm during the voyage and that no strong wind
or waves were encountered by the vessel. How would you decide the case? Explain.
A: I will rule in favor of the insurer. The insurer can deny the claim
of A because the loss was not caused by perils of the sea or other similar
perils. Perils of the sea includes only those casualties due to the unusual
violence or extraordinary action of the wind or waves or to other
extraordinary causes connected with navigation. No such peril occurred in
this case.
2. The policy of marine insurance issued by the Union Insurance Society of Canton,
Ltd., upon a cargo of rice belonging to the plaintiffs, Go Tiaoco Brothers purports to
insure the cargo from the following among other risks: “Perils ... of the seas, men of
war, fire, enemies, pirates, rovers, thieves, jettisons, . . . barratry of the master and
mariners, and of all other perils, losses, and misfortunes that have or shall come to
the hurt, detriment, or damage of the said goods and merchandise or any part
thereof.” The cargo was transported in the early days of May, 1915, on the
steamship H o n d a g u a from the port of Saigon to
:no ESSENTIALS OF INSURANCE LAW
Cebu. On discharging the rice from one of the compartments in the after hold,
upon arrival at Cebu, it was discovered that one thousand four hundred seventy-
three sacks and been damages by seawater. The loss so resulting to the owners of
rice, after proper deduction had been made for the portion saved, was three
thousand eight hundred seventy five pesos and twenty-five centavos (P3,875.25).
It appears that the drainpipe which served as a discharge from the water closet
passed down through the compartment where the rice in question was stowed
and thence out to sea through the wall of the compartment, which was a part of
the wall of the ship. The joint or elbow where the pipe changed its direction was
of cast iron; and in course of time it had become corroded and abraded until a
longitudinal opening had appeared in the pipe about one inch in length. This hole
had been in existence before the voyage was begun, and an attempt had been
made to repair it by filling with cement and bolting over it a strip of iron. The
effect of loading the boat was to submerge the vent, or orifice, of the pipe until it
was about 18 inches or 2 feet below the level of the sea. As a consequence the
sea water rose in the pipe. Navigation under these conditions resulted in the
washing out of the cementfilling from the action of the seawater, thus permitting
the continued flow of the salt water into the compartment of rice. Is the insurer
liable on this policy for the loss caused in the manner above stated?
A: No. The insurer is not liable. In the present case, the entrance
of the sea water into the ship’s hold through the defective pipe already
described was not due to any accident which happened during the
voyage, but to the failure of the ship’s owner properly to repair a defect
of the existence of which he was apprised. The loss was therefore more
analogous to that which directly results from simple unseaworthiness
than to that which results from perils of the sea. ( L a R a z o n
S o c i a l " G o T i a c o y H e r m a n o s
v . U n i o n I n s u r a n c e S o c i e t y o f
C a n t o n , L t d . , G . R . N o .
1 3 9 8 3 , S e p t e m b e r 1 , 1 9 1 9 )
§5. INSURABLE INTEREST. In general, a person has insurable interest in

property if he will benefit from its continued existence and he will be damnified by its
loss. Section 13 of the Insurance Code provides that the presence of insurable interest
in property can be determined by asking if the insured has 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 said insured. The specific
rules on insurable interest in Marine Insurance are consistent with the general rule.
Thus, Sections 102 to 108 provides:
CHAPTER 11 317
MARINE INSURANCE
SEC. 102. The owner of a ship has in all cases an

insurable interest in it, even when it has been chartered by
one who covenants to pay him its value in case of loss:
Provided, That in this case the insurer shall be liable for
only that part of the loss which the insured cannot recover
from the charterer.
SEC. 103. The insurable interest of the owner of the
ship hypothecated by bottomry is only the excess of its
value over the amount secured by bottomry.
SEC. 104. Freightage, in the sense of a policy of
marine insurance, signifies all the benefits derived by the
owner, either from the chartering of the ship or its
employment for the carriage of his own goods or those of
others.
SEC. 105. The owner of a ship has an insurable
interest in expected freightage which according to the
ordinary and probable course of things he would have
earned but for the intervention of a peril insured against
or other peril incident to the voyage.
SEC. 106. The interest mentioned in the last section
exists, in case of a charter party, when the ship has
broken ground on the chartered voyage. If a price is to be
paid for the carriage of goods it exists when they are
actually on board, or there is some contract for putting
them on board, and both ship and goods are ready for the
specified voyage.
SEC. 107. One who has an interest in the thing from
which profits are expected to proceed has an insurable
interest in the profits.
SEC. 108. The charterer of a ship has an insurable
interest in it, to the extent that he is liable to be damnified
by its loss.
§5.01. INSURABLE INTEREST OVER THE SHIP. Based on the foregoing

provisions, it is clear that the following persons have insurable interest over the
vessel:
a. Shipowner. Ownership is the most basic type of existing
interest which can be insured. Thus, the owner of the ship can normally insure the vessel up
to its full value.
(1) If the ship is being chartered, the shipowner’s insurable interest

over the full value of the ship is maintained. This is true even if the charterer
agreed to pay the value of the ship in case of loss thereof. 40 Nevertheless, if
the charterer contractually bound himself to pay the value of the ship in case
of loss, the shipowner may recover from the insurer only the portion that he
cannot recover from the charterer.
(2) If the ship is hypothecated by a loan on bottomry, the insurable
interest of the shipowner is limited to the amount not covered by the loan. 41
In a loan on bottomry, the borrower (shipowner) will not be required to pay
the loan if the vessel will not safely reach its destination.
b. Charterer. The charterer has insurable over the ship to the extent that
he is liable to be damnified by its loss.42
c. Lender on Bottomry. The lender in a loan on bottomry has insurable
interest over the ship up to the extent of the loan.43
d. Mortgagee. The vessel may be mortgaged by the shipowner. Hence,
consistent with the general rules on insurable interest, the mortgagee of the vessel
may likewise insure the same vessel because he will be damnified by its loss.
§5.02. INSURANCE OVER CARGO. Both the shipowner and the shipper
have insurable interest over the goods. The shipowner may be damnified by the loss
of the goods under the contract of carriage while the shipper as owner of the goods
or seller obviously has a present interest to protect.
a. Goods in Transit. It should be noted in this connection that the consignee
(buyer) has insurable interest over the goods even if there are still no transfer of
ownership while the goods are in transit. The rule was discussed by the Supreme
Court in this wise:
“Herein private respondent, as vendee/consignee of the goods in transit has such
existing interest therein as may be the subject of a valid contract of insurance. His
interest over the goods is based on the perfected contract of sale. The perfected contract
of sale between him and the shipper of the goods operates to vest in him an equitable
title even before delivery
40
Section
102,1.C.
41
Section
42
Section
43
Section
103,1.C.
CHAPTER 11 319
MARINE INSURANCE
or before he performed the conditions of the sale. The contract of shipment, whether under
F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of whether the
vendee has an insurable interest or not in the goods in transit. The perfected contract of sale
even without delivery vests in the vendee an equitable title, an existing interest over the goods
sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract
of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods
to a carrier, whether named by the buyer or not, for, the purpose of transmission to the buyer is
deemed to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in
the present case. The Court has heretofore ruled that the delivery of the goods on board the
carrying vessels partake of the nature of actual delivery since, from that time, the foreign
buyers assumed the risks of loss of the goods and paid the insurance premium covering them.
C & F contracts are shipment contracts. The term means that the price fixed includes in
a lump sum the cost of the goods and freight to the named destination. It simply means that the
seller must pay the costs and freight necessary to bring the goods to the named destination but
the risk of loss or damage to the goods is transferred from the seller to the buyer when the
goods pass the ship’s rail in the port of shipment.”44 45
a. In M a l a y a n I n s u r a n c e C o . , I n c . v .
P h i l i p p i n e F i r s t I n s u r a n c e C o . 4 b Wyeth
Philippines, Inc. and respondent Reputable Forwarder Services entered into a contract of
carriage whereby the latter undertook to transport and deliver the former’s products to its
customer. Wyeth insured the products with the respondent insurer while Reputable secured a
separate insurance policy from the petitioner over the same products. Unfortunately, the
products were hijacked by armed men. The Supreme Court observed that both Wyeth and
Reputable had insurable interest over the goods. The policy issued by the respondent insurer
“was in consideration of the legal and/or equitable interest of Wyeth over its own goods.” On
the other hand, what was issued by the petitioner insurer to Reputable was “over the latter’s
insurable interest over the safety of the goods, which may become the basis of the latter’s
liability in case of loss or damage to the property and falls within the contemplation of Section
15 of the Insurance Code.”
44
Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R. No.
85141, November 28, 1989.
45
G.R. No. 119599, March 20, 1997.
§5.03. INSURANCE OVER FREIGHTAGE AND INCOME, The

shipowner has an insurable interest over the expected freightage. As already noted
earlier, freightage, in the sense of a policy of marine insurance, signifies all the
benefits derived by the owner, either from the chartering of the ship or its
employment for the carriage of his own goods or those of others. 46 Thus, freightage
may arise either (1) as consideration for a charter party, or (2) as consideration for
the carriage of goods. Under Section 105, the owner of a ship has an insurable
interest in expected freightage which according to the ordinary and probable course
of things he would have earned but for the intervention of a peril insured against or
other peril incident to the voyage.
a. The charterer may likewise have insurable interest over his expected
freightage. For example, if a person is using the vessel of another under a bareboat
charter to transport his own goods and that of others, the charterer has insurable
interest in the expected freightage.
b. When interest exists. Section 106 of the Insurance Code provides that
“the interest mentioned in the last section exists, in case of a charter party, when
the ship has broken ground on the chartered voyage. If a price is to be paid for the
carriage of goods it exists when they are actually on board, or there is some
contract for putting them on board, and both ship and goods are ready for the
specified voyage.” In summary, the insurable interest over expected freightage
arises:
(1) If there is charter party — when the ship has broken ground
on the chartered voyage.
(2) In carriage of goods — when the goods are actually on board
or there is some contract for putting them on board, and both ship and
goods are ready for the specified voyage.
c. Advance Freightage. The shipowner has no insurable interest over the
freightage if the shipper or chatterer had already paid the freightage in advance and
without obligation to refund the same in case of loss. In this case, the shipowner
will not be damnified by the loss.
d. Profits. Section 107 of the Insurance Code provides that one who has
an interest in the thing from which profits are expected
46
Section 104,1.C.
CHAPTER 11 321
MARINE INSURANCE
to proceed has an insurable interest in the profits. For example, Mr. X shipped his
goods through a certain vessel. The value of the goods is P500,000.00 and Mr. X
already agreed with Mr. Y (seller) that he (X) will acquire for P600,000.00 the same
the moment it reaches the port of destination. In this case, there is an expected profit
in the amount of P100,000.00 and Mr. X has insurable interest over that profit.
PROBLEMS:
1. This is an action brought by the consignee of the shipment of fishmeal loaded on board the
vessel SS Bougainville and unloaded at the Port of Manila on or about December 11,
1976 and seeks to recover from the defendant insurance company the amount of
P51,568.62 representing damages to said shipment which has been insured by the
defendant insurance company under Policy No. M-2678. The defendant brought a third
party complaint against third party defendants C o m p a g n i e
M a r i t i m e D e s C h a r g e u r s R e u n i s and/or E.
Razon, Inc. seeking judgment against the third (sic) defendants in case judgment is
rendered against the third party plaintiff. It appears from the evidence presented that in
December 1976, plaintiff insured said shipment with defendant insurance company
under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods
described as 600 metric tons of fishmeal in new gunny bags of 90 kilos each from
Bangkok, Thailand to Manila against all risks under warehouse to warehouse terms.
Actually, what was imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF
Manila. The fishmeal in 666 new gunny bags were unloaded from the ship on
December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and
defendant’s surveyor ascertained and certified that in such discharge 105 bags were in
bad order condition as jointly surveyed by the ship’s agent and the arrastre contractor.
The condition of the bad order was reflected in the turn over survey report of Bad Order
cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three (3) pages which are
also Exhibits 4, 5 and 6-Razon. The cargo was also surveyed by the arrastre contractor
before delivery of the cargo to the consignee and the condition of the cargo on such
delivery was reflected in E. Razon’s Bad Order Certificate No. 14859, 14863 and
14869 covering a total of 227 bags in bad order condition. Defendant’s surveyor has
conducted a final and detailed survey of the cargo in the warehouse for which he
prepared a survey report Exhibit F with the findings on the extent of shortage or loss on
the bad order bags totaling 227 bags amounting to 12,148 kilos, Exhibit F-l. Based on
said computation the plaintiff made a formal claim against the defendant Filipino
Merchants Insurance Company for P51,568.62 (Exhibit C) the computation of which
claim is contained therein. A formal claim statement was also presented by the plaintiff
against the vessel dated December 21, 1976,
Exhibit B, but the defendant Filipino Merchants Insurance Company refused to pay the
claim. Consequently, the plaintiff brought an action against said defendant as adverted
to above and defendant presented a third party complaint against the vessel and the
arrastre contractor.
a. Does the consignee have insurable interest over the goods?
b. Is the insurer liable?

A: a. Yes, the consignee has insurable interest. The private
respondent, as consignee of the goods in transit under an invoice
containing the terms under “C & F Manila,” has insurable interest in
said goods. He will already be damnified by the loss of the goods even
before delivery.
b. Yes, the insurer is liable. In the present case, there being no showing
that the loss was caused by any of the excepted perils, the insurer is
liable under the policy. As aptly stated by the respondent Court of
Appeals, upon due consideration of the authorities and jurisprudence it
discussed —
“ . . . it is believed that in the absence of any showing that the

losses/damages were caused by an excepted peril,
i . e . , delay or the inherent vice or nature of the subject
matter insured, and there is no such showing, the lower court did not
err in holding that the loss was covered by the policy.
“There is no evidence presented to show that the condition of

the gunny bags in which the fishmeal was packed was such that they
could not hold their contents in the course of the necessary transit,
much less any evidence that the bags of cargo had burst as the result of
the weakness of the bags themselves. Had there been such a showing
that spillage would have been a certainty, there may have been good
reason to plead that there was no risk covered by the policy. ( S e e
B e r k v . S t y l e [ 1 9 5 6 J c i t e d
i n M a r i n e I n s u r a n c e C l a i m s ,
i b i d . , p . 1 2 5 ) . Under an ‘all risks’ policy, it was
sufficient to show that there was damage occasioned by some
accidental cause of any kind, and there is no necessity to point to any
particular cause.” ( F i l i p i n o M e r c h a n t s
I n s u r a n c e C o . , I n c . v . C o u r t
o f A p p e a l s a n d C h o a T i e k
S e n g , G . R . N o . 8 5 1 4 1 ,
N o v e m b e r 2 8 , 1 9 8 9 )
§6. CONCEALMENT. In marine insurance, each party is bound to communicate

all the information which he possesses material to the risk. A party must state the exact
and whole truth in
CHAPTER 11 323
MARINE INSURANCE
relation to all matters that he represents or upon inquiry discloses or assumes to

disclose.47 Just like the other types of insurance, the necessity for disclosure to the
insurer by the insured “of all material facts is of vital importance to the former, as
it is on the facts placed before him during the negotiations which precede the
conclusion of the contract that he reaches his decision as to the acceptance or
declinature, as the case may be, of the risk.”48 Thus, Section 109 provides:
SEC. 109. In marine insurance each party is

bound to communicate, in addition to what is required
by Section 28, all the information which he
possesses, material to the risk, except such as is
mentioned in Section 30, and to state the exact and
whole truth in relation to all matters that he
represents, or upon inquiry discloses or assumes to
disclose.
a. Belief or Expectation. However, the rules in insurance
are stricter than in ordinary insurance. For instance, Section 110 provides:
SEC. 110. In marine insurance, information of

the belief or expectation of a third person, in
reference to a material fact, is material.
(1) Ordinarily, belief or expectation of third persons are not material
and need not be disclosed. In marine insurance, even information on the
belief or expectation of a third person in reference to a material fact is
material.49 For example, if a third person believes that there is something
wrong with engine of the vessel, the insured is bound to disclose the same
belief because it has reference to a material fact. Similarly, if the insured
has expectation that the repair to the vessel was not correctly made, then
the insured must make such disclosure.
b. Presumption. Section 111 of the Insurance Code provides that “a
person insured by a contract of marine insurance is presumed to have
knowledge, at the time of insuring, of a prior loss, if the information might
possibly have reached him in the usual mode of transmission and at the usual
rate of communication.” The
47
Section
109,1.C.
48
Dover, p.
49
Section
110,1.C.
presumption in this case is rebuttable. However, in the present age of advanced

technology, it would seem that the presumption would always arise. There is hardly
any situation when the usual means of communication will not reach the person
insured. In fact, insurers may insist that the presence of up to date and adequate
means of communications should be warranted by the insured.
c. Cases when causation necessary. As a general rule, the insurer may
rescind the insurance contract even if the risk concealed is not the cause of the loss.
However, the Insurance Code provisions on marine insurance provide for certain
exceptions. Thus, Section 112 enumerates certain cases where the insurer will be
exonerated only if the risk concealed is the cause of the loss.
SEC. 112. A concealment in a marine insurance,

in respect to any of the following matters, does not
vitiate the entire contract, but merely exonerates the
insurer from a loss resulting from the risk concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to capture
and detention;
(c) The liability to seizure from breach of
foreign laws of trade;
(d) The want of necessary documents;
(e) The use of false and simulated papers.
d. Distinctions. Concealment in ordinary insurance may be
distinguished from concealment in marine insurance as follows: (1) In ordinary
insurance, belief and expectations of third persons need be disclosed while in
marine insurance the beliefs and expectations of third persons as to material facts
should be disclosed; and (2) In the cases enumerated in Section 112, the insurer
is exonerated only if the same are the causes of the loss while in ordinary
insurance, the general rule is that the insurer is always exonerated even if the
matter concealed is not the cause of the loss.
§7. REPRESENTATION. Representations are statements made to give
information to the insurer, and otherwise induce him to enter into the insurance
contract.50 A representation is a collateral
ânce, p. 359.
CHAPTER 11 325
MARINE INSURANCE
communication made to the other party in writing or by word of mouth which

induces the other to enter into a contract of insurance. Representation is not part of
the contract but is merely a collateral inducement. Consequently, they are made at
the time or before the issuance thereof. The statutory rules on representation are
dictated by the demands of good faith. “Were it not for the observance of good
faith, the conduct of marine insurance would be impossible; at least, without a
complete reorganization of its structure and great increase in cost to enable
insurers to investigate the circumstances surrounding every proposition of
insurance.”51
a. Materiality. The general rule in insurance is that the materiality of
the facts represented is determined using the same rules that apply to concealment.
Representation in marine insurance is material if it will affect the decision of the
insurer to take the risk or to fix the premium and other terms and conditions of the
policy. In the case of marine insurance, the specific obligation of the insured is
expressed in Section 113.
SEC. 113. If a representation by a person
insured by a contract of marine insurance, is
intentionally false in any material respect, or in
respect of any fact on which the character and nature
of the risk depends, the insurer may rescind the
entire contract.
b. Expectation. Only factual representations are covered by the rules on
representation. Expectations of the insured are not material unless it will amount to
a promissory representation. A representation as to a matter of expectation or
belief is true if it be made in good faith. 52 The contract will be avoided only if
there is fraud, as expressly provided for in Section 114:
SEC. 114. The eventual falsity of a
representation as to expectation does not, in the
absence of fraud, avoid a contract of marine
insurance.
(1) For example, if it is represented that the vessel is to set sail by a
date specified, this is a representation on a matter of fact and the insurer
may avoid the contract if the vessel
51
Dover,
p.Dover,
52 344.
p. 352.
will sail on another date. However, if the representation were merely in the
form that it was intended that the vessel should sail on or by a date stated, the
contract would not be affected as long as it was clear that the representation was
a mere hope or expectation and not a binding undertaking.53
§8. IMPLIED WARRANTIES. One peculiarity of marine insurance is the
presence of implied warranties which are by law considered natural elements of the
contract of marine insurance. These warranties are implied in the sense that they are
deemed part of the contract even in the absence of contractual stipulations. The implied
warranties in marine insurance under the Insurance Code are as follows: (1) Warranty
of Seaworthiness, (2) Warranty that the ship has the documents of neutrality or
nationality, (3) Warranty against improper deviation, and (4) Warranty of legality of the
voyage.
§8.01. SEAWORTHINESS. It is universally accepted that in every contract of
marine insurance, a warranty is implied that the ship shall be seaworthy at the time of
the inception of the voyage. A finding that the vessel is unseaworthy precludes
recovery from the insurer.54 The fact that the unseaworthiness of the vessel is unknown
to the insured is immaterial and may still be used as a defense of the insurer. 55 This rule
is accepted under the old Insurance Law56 as well as the Insurance Code.
SEC. 115. In every marine insurance upon a ship or

freight, or freightage, or upon any thing which is the
subject of marine insurance, a warranty is implied that the
ship is seaworthy.
a. A ship is seaworthy if it is able to withstand the rigors of the voyage and that
it has been properly laden, provided with competent crew and equipped with the
appropriate appurtenances and equipment. Sections 116 and 118 of the Insurance Code
clearly provide:
53
Dover, supra.
54
Madrigal, Tiangco and Co. v. Hanson, Ort and Stevenson, Inc., G.R. No. L-6106-07,
April 18, 1958.
55
Isabel Roque, et al. v. Hon. Intermediate Appellate Court and Pioneer Insurance &
Surety Corp., G.R. No. L-66935, November 11, 1985.
56
Section 106, Act No. 2427.
(’IIAI’TKK 1 I 327
MARI NR INSIJRANCK
SEC. 116. A ship is seaworthy when reasonably fit to

perform the service and to encounter the ordinary perils
of the voyage contemplated by the parties to the policy.
SEC. 118. A warranty of seaworthiness extends not
only to the condition of the structure of the ship itself, but
requires that it be properly laden, and provided with a
competent master, a sufficient number of competent
officers and seamen, and the requisite appurtenances
and equipment, such as ballasts, cables and anchors,
cordage and sails, food, water, fuel and lights, and other
necessary or proper stores and implements for the
voyage.
b. It is also well-settled that a ship which is seaworthy for the purpose of

insurance upon the ship may yet be unseaworthy for the purpose of insurance upon
the cargo. This is also referred as “car go worthiness.” This warranty applies even if
the shipper availed of the services of a common carrier. “It becomes the obligation of
the cargo owner to look for a reliable common carrier which keeps its vessels
seaworthy. He may have no control over the vessel but he has full control in the
selection of the common carrier that will transport his goods. He also has full
discretion in the choice of assurer that will underwrite a particular venture.” 57
SEC. 121. A ship which is seaworthy for the

purpose of an insurance upon the ship may,
nevertheless, by reason of being unfitted to receive the
cargo, be unseaworthy for the purpose of the insurance
upon the cargo.
(1) In one case,58 a cargo of wheat was laden upon a ship which had a
porthole insecurely fastened at the time of the lading. This porthole was about
one foot above the water line; and in the course of the voyage seawater entered
57
The Philippine American General Insurance Co., Inc. v. Court of Appeals &
Felman Shipping Lines, G.R. No. 116940, June 11, 1997; Isabel Roque, et al. v. Hon.
Intermediate Appellate Court and Pioneer Insurance & Surety Corp., supra.
^La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton,
Ltd., G.R. No. 13983, September 1, 1919, citing Steel v. State Line Steamship Co. ([1877],
L. R. 3 A. C., 72).
the compartment where the sacks of wheat were stored and damaging the
same. It was held that the ship was unseaworthy with reference to the cargo in
question.
(2) Another case59 involved a cargo of jute. During the voyage, the
vessel encountered stormy weather, as a consequence of which the cargo
shifted its position and broke a pipe leading down through the hold from the
water closet, with the result that water entered the vessel and the jute was
damaged. It was found that the cargo was improperly stowed and that the
owners of the ship were chargeable with negligence for failure to protect the
pipe by putting a case over it. It was accordingly held that the ship was
unseaworthy.60
c. Waiver. The warranty of seaworthiness is waived if the insurer paid the
insured the value of the lost cargoes. However, the waiver of the warranty of
seaworthiness for insurance purposes does not likewise mean that the insurer can no
longer raise the fact the vessel is not seaworthy when said insurer will exercise its
right of subrogation against the party who is at fault.61
d. When must the ship be seaworthy.
SEC. 117. An implied warranty of seaworthiness is

complied with if the ship be seaworthy at the time of the
commencement of the risk, except in the following
cases:
(a) When the insurance is made for a specified
length of time, the implied warranty is not complied with
unless the ship be seaworthy at the commencement of
every voyage it undertakes during that time;
(b) When the insurance is upon the cargo which,
by the terms of the policy, description of the voyage, or
established custom of the trade, is to be transshipped at
an intermediate port, the implied warranty is not
59
La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton,
Ltd., No. 13983, September 1, 1919, citing Gilroy, Sons & Co. v. Price & Co. ([1893], 18 A.
C., 56).
^La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd.,
ibid.
61
Delsan Transport Lines, Inc. v. The Hon. Court of Appeals and American Home
Assurance Corporation, G.R. No. 127897, November 15, 2001.
CHAPTER 11 329
MARINE INSURANCE
complied with unless each vessel upon which the

cargo is shipped, or transshipped, be seaworthy at
the commencement of each particular voyage.
SEC. 119. Where different portions of the
voyage contemplated by a policy differ in respect to
the things requisite to make the ship seaworthy
therefor, a warranty of seaworthiness is complied with
if, at the commencement of each portion, the ship is
seaworthy with reference to that portion.
(1) Based on the above-quoted provisions and prevailing
jurisprudence, the seaworthiness of the vessel must exist as follows:
(i) Voyage policy — at the commencement of the

voyage.
(ii) Time policy — at the commencement of every
voyage commenced during the stipulated time.
(iii) Voyage in stages — at the commencement of each
portion or stage.
(iv) Port policy — at the time the vessel is exposed to
any risk at the port.
(v) Cargo policy and the goods are to be transshipped —
at the commencement of each particular voyage.
(2) Generally, it is only the commencement of the voyage that is
the reckoning point to determine if the implied warranty of seaworthiness
was complied with. If the vessel becomes unseaworthy after the
commencement of the voyage, then there is no breach of warranty. The
exception is provided for in Section 120 which provides:
SEC. 120. When the ship becomes
unseaworthy during the voyage to which an
insurance relates, an unreasonable delay in repairing
the defect exonerates the insurer on ship or
shipowner’s interest from liability from any loss
arising therefrom.
(3) For example, a typhoon damaged the vessel on its way to
destination forcing it to seek refuge in another port. If
the shipowner did not repair or delays in repairing the vessel even if it was in a
position to do so without unnecessary delay, the insurer will be exonerated from
any loss arising therefrom. If, for instance, the shipowner would have still
earned the profits that he was originally expecting had he expeditiously repaired
the vessel, then the insurer is not liable if the shipowner did not make such
repairs without justifiable reason.
PROBLEMS:
1. Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with
the petitioner, Delsan Transport Lines, Inc., for a period of one year whereby the
said common carrier agreed to transport Caltex’s industrial fuel oil from the
Batangas-Bataan Refinery to different parts of the country. Under the contract,
petitioner took on board its vessel, MT Maysun 2,277.314 kiloliters of industrial
fuel oil of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City.
The shipment was insured with the private respondent, American Home
Assurance Corporation. On August 14, 1986, MT Maysum set sail from
Batangas for Zamboanga City. Unfortunately, the vessel sank in the early
morning of August 16, 1986 near Panay Gulf in the Visayas taking with it the
entire cargo of fuel oil. Subsequently, private respondent paid Caltex the sum of
Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and Fifty-
Seven Centavos (P5,096,635.67) representing the insured value of the lost cargo.
Exercising its right of subrogation under Article 2207 of the New Civil Code,
the private respondent demanded of the petitioner the same amount it paid to
Caltex. The private respondent denied the claim arguing that it cannot be said
that it was at fault because the seaworthiness of the vessel was deemed admitted.
Is the denial of the claim proper?
A: No, the denial of the claim is improper. It is true that the
payment made by the private respondent for the insured value of the lost
cargo operates as waiver of its (private respondent) right to enforce the
term of the implied warranty against Caltex under the admission of the
vessel’s seaworthiness by the private respondent as to foreclose recourse
against the petitioner for any liability under its contractual obligation as a
common carrier. The fact of payment grants the private respondent
subrogatory right which enables it to exercise legal remedies that would
otherwise be available to Caltex as owner of the lost cargo against the
petitioner common carrier. ( D e l s a n T r a n s p o r t
L i n e s , I n c . v . C o u r t o f
A p p e a l s , G . R . N o . 1 2 7 8 9 7 ,
N o v e m b e r 1 5 , 2001)
CHAPTER 11 331
MARINE INSURANCE
§8.02. DOCUMENTS OF NATIONALITY OR NEUTRALITY.
SEC. 122. Where the nationality or neutrality of a

ship or cargo is expressly warranted, it is implied that the
ship will carry the requisite documents to show such
nationality or neutrality and that it will not carry any
documents which cast reasonable suspicion thereon.
a. The following are the implied warranties contemplated under Section 122
of the Insurance Code: (1) the vessel has the requisite documents of nationality or
neutrality if nationality or neutrality is expressly warranted; and (2) the vessel will not
carry documents that will cast reasonable suspicion on its nationality or neutrality if
nationality or neutrality is expressly warranted.
b. The nationality or neutrality is not impliedly warranted. It is the presence
of documents and the absence of documents that will cast suspicion that are impliedly
warranted. However, the implied warranties flow from the express warranty of
neutrality or nationality.
§8.03. LEGALITY. The long standing custom in marine insurance is that there
is an implied warranty that the adventure is a lawful one and that so far as the insured
can control the matter, the adventure shall be carried out in a lawful manner.62
a. If an integral voyage is illegal in any respect at its commencement, no
insurance can legally be effected on any part of it, though such part, taken by itself,
would be legal.63
b. Even in the absence of a provision in the Insurance Code, the warranty is
still implicit from the provisions of the New Civil Code because a contract with an
illegal object is void. Insurance upon any venture contemplating the violation of law
is, like any other contract to the same effect, void.64
§9. THE VOYAGE AND DEVIATION.
§9.01. ROUTE. The route that a vessel should take is governed by Sections 123
and 124 of the Insurance Code which provide:
62
Dover,
p.Dover,
63 379.
^Vance,
p. 844.
SEC. 123. When the voyage contemplated by a

marine insurance policy is described by the places of
beginning and ending, the voyage insured in one which
conforms to the course of sailing fixed by mercantile
usage between those places.
SEC. 124. If the course of sailing is not fixed by
mercantile usage, the voyage insured by a marine insur-
ance policy is that way between the places specified,
which to a master of ordinary skill and discretion, would
mean the most natural, direct and advantageous.
a. The course of the voyage shall be determined in the following order:

(1) The course agreed upon by the parties;
(2) If nothing was agreed upon, one which conforms to the course
of sailing fixed by mercantile usage;
(3) If there is no mercantile usage, one which a master of ordinary
skill and discretion would find to be the most natural, direct and
advantageous.
§9.02. DEVIATION. Deviation is (1) a departure from the course of the
voyage insured, mentioned in Sections 123 and 124 of the Insurance Code, or (2) an
unreasonable delay in pursuing the voyage or the commencement of an entirely
different voyage.65 Deviation may be proper deviation and improper deviation. It is
only in case there is improper deviation that the insurer will not be liable for the
loss.
a. Deviation is proper in the situations enumerated in Section 126. Every
deviation that is not excused under Section 126 is considered improper deviation.
Section 126 provides an exclusive list of cases when deviation is proper.
SEC. 126. A deviation is proper:

(a) When caused by circumstances over which
neither the master nor the owner of the ship has any
control;
65
Section 127,1.C.
CHAPTER 11 333
MARINE INSURANCE
(b) When necessary to comply with a warranty, or

to avoid a peril, whether or not the peril is insured
against;
(c) When made in good faith, and upon
reasonable grounds of belief in its necessity to avoid a
peril; or
(d) When made in good faith, for the purpose of
saving human life or relieving another vessel in distress.
SEC. 127. Every deviation not specified in the last
section is improper.
SEC. 128. An insurer is not liable for any loss hap-
pening to the thing insured subsequent to an improper
deviation.
b. Consequently, there is no improper deviation if an earthquake that

triggered huge waves caused the master of the vessel to deviate from the agreed
course of navigation. There is likewise no improper deviation if the usual route was
not followed in order to avoid pirates.
c. The cases contemplated by paragraphs (c) and (d) of Section 126 of the
Insurance Code expressly require that good faith. This means that even if the peril to
be avoided turned out to be nonexistent, there would still be no improper deviation so
long as the deviation was done in good faith.
PROBLEMS:
1. Vessel A and its cargoes were insured by its owner with X Insurance Co. against perils of
the sea and those cause by typhoon, earthquake, theft and acts of pirates and other
similar perils. While the vessel was on its way to Singapore to deliver the goods that
were shipped from Manila, the captain of the vessel changed its route because of the
information that it received from the Coast Guard that an earthquake occurred
along the agreed route making it dangerous to travel in the area. The vessel and its
cargoes were later destroyed because the vessel was attached by pirates. X Insurance
Co. later denied the claim of the shipowner on the insurance policy on the ground
that although the loss was directly caused by a peril insured against there was
improper deviation because there was really no earthquake along the agreed route.
Is the insurer correct?
A: No, the insurer was not correct. There was no unlawful deviation
because there was reasonable ground for the captain of the vessel in good
faith to conclude that there was valid ground to change
the course of the voyage. The captain relied on the information given
to him by the Coast Guard, hence, it was reasonable for him to believe
that it was necessary to avoid a peril.
§10. LOSS. Loss in insurance means the injury or damage sustained by the
insured in consequence of the happening of one or more of the accidents or
misfortune insured against by the marine insurer.
§10.01. KINDS OF LOSS. A loss may be either (1) total, or (2) partial. 66
Every loss which is not total is partial.67
a. A total loss may likewise be either (1) actual, or (2) constructive. As
the term implies, there is really no total loss in constructive total loss. The law
however will allow recovery that is equivalent to the amount that may be recovered
in actual total loss provided that there is abandonment. The law provides that a
constructive total loss is one which gives to a person insured a right to abandon. 68
On the other hand, upon an actual total loss, a person insured is entitled to payment
without notice of abandonment.69
(1) The marine insurance policy may limit the liability to actual loss.
However, under Section 139 of the Insurance Code, an insurance confined
in terms to an actual loss does not cover a constructive total loss, but covers
any loss, which necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing insured.
b. Actual Total Loss. Generally speaking, there is actual total loss if the
subject-matter is destroyed or so damaged as to cease to be a thing of the kind
insured or where the insured is irretrievably deprived thereof. 70 Section 132 provides
that an actual total loss is caused by:
(i) A total destruction of the thing insured;
(ii) The irretrievable loss of the thing by sinking, or by
being broken up;
^Section
129,1.C.
67
Section
68
Section
69
Section
70
Dover, p.
411.
CHAPTER 11 335
MARINE INSURANCE
(iii) Any damage to the thing which renders it valueless to the

owner for the purpose for which he held it; or
(iv) Any other event which effectively deprives the owner of the
possession, at the port of destination, of the thing insured.
(1) There is actual total loss of the vessel if it is rendered valueless to
the owner. To render it valueless to the owner, it is not necessary that there
should be an actual or total loss or destruction of all the different parts of the
entire vessel. The question here is whether, under the conditions then and there
existing, the vessel is of any value to the owner. If it is not of any value to the
owner, then there is an actual loss or a “total destruction of the thing insured”
within the meaning of the law. Thus, there is total loss of the ship when she has
sustained such extensive damage that it would not be reasonably practical to
repair her. The ordinary measure of prudence which the courts have adopted is
this: If the ship, when repaired, will not be worth the sum which it would be
necessary to expend upon her, the repairs are, practically speaking, impossible,
and it is a case of total loss.71
(2) Indeed, the complete physical destruction of the subject matter is not
essential to constitute an actual total loss. Such a loss may exist where the form
and specie of the thing is destroyed, although the materials of which it consisted
still exist as where the cargo by the process of decomposition or other chemical
agency no longer remains the same kind of thing as before.72
c. Constructive Total Loss. In broad terms, there is constructive total loss
where “the thing insured has been reduced to such a state or placed in such a position
by the perils insured against as to make its total destruction or annihilation though not
inevitable, yet highly imminent or its ultimate arrival under the terms of the policy,
though not utterly hopeless, yet exceedingly doubtful.” 73 Constructive total loss is
sometimes called “commercial
71
Philippine Manufacturing Co. v. Union Insurance Society of Canton, Ltd., G.R. No. L-
16473, November 22, 1921.
72
Pan Malayan Insurance Corporation v. Court of Appeals, et al., G.R. No. 95070,
September 5, 1991.
73
Dover, p. 417.
total loss” or a “conventional total loss” based on arithmetical computation. In this

jurisdiction, the computation is fixed in the law itself, thus:
SEC. 141. A person insured by a contract of

marine insurance may abandon the thing insured, or
any particular portion thereof separately valued by the
policy, or otherwise separately insured, and recover for
a total loss thereof, when the cause of the loss is a
peril insured against:
(a) If more than three-fourths (3/4) thereof in
value is actually lost, or would have to be expended to
recover it from the peril;
(b) If it is injured to such an extent as to reduce
its value more than three-fourths (3/4);
(c) If the thing insured is a ship, and the con-
templated voyage cannot be lawfully performed
without incurring either an expense to the insured of
more than three-fourths (3/4) the value of the thing
abandoned or a risk which a prudent man would not
take under the circumstances; or
(d) If the thing insured, being cargo or
freightage, and the voyage cannot be performed, nor
another ship procured by the master, within a
reasonable time and with reasonable diligence, to
forward the cargo, without incurring the like expense
or risk mentioned in the preceding sub-paragraph. But
freightage cannot in any case be abandoned unless the
ship is also abandoned.
(1) If the goods are shipped, as one separate unit, the total number
or quantity of goods serve as the basis of determining the existence of
constructive total loss even if the goods are shipped separately.74
(2) There was constructive total loss in another case where the
value of the loss was established to be 3/4 of the total loss. “The estimates
given by the three disinterested and qualified shipyards show that the
damage to the ship would
74
0riental Assurance Corporation v. Court of Appeals and Panama Saw Mill Co.,
Inc., G.R. No. 94052, August 9, 1991.
CHAI*TER 11 337
MARINE INSURANCE
exceed P270,000,000.00, or 3/4 of the total value of the policies -

P360,000,000.00. These estimates constituted credible and acceptable proof
of the extent of the damage sustained by the vessel.” The adjustment report
likewise confirmed such fact.75
d. Presumed Actual Total Loss. Generally, the fact of actual total loss
should be established by sufficient evidence. However, Section 134 provides for an
exception under which two
(2) requisites must concur: (1) Continued absence of the ship for a considerable
length of time; and (2) The vessel has not been heard of.
SEC. 134. An actual loss may be presumed from

the continued absence of a ship without being heard of.
The length of time which is sufficient to raise this
presumption depends on the circumstances of the
case.
e. Reshipment. Sections 135 and 136 deal with reshipment

of the cargo whenever the vessel can no longer continue its voyage because of the
peril insured against:
SEC. 135. When a ship is prevented, at an

intermediate port, from completing the voyage, by the
perils insured against, the liability of a marine insurer
on the cargo continues after they are thus reshipped.
Nothing in this section shall prevent an insurer
from requiring an additional premium if the hazard be
increased by this extension of liability.
SEC. 136. In addition to the liability mentioned in
the last section, a marine insurer is bound for damages,
expenses of discharging, storage, reshipment, extra
freightage, and all other expenses incurred in saving
cargo reshipped pursuant to the last section, up to the
amount insured.
Nothing in this or in the preceding section shall
render a marine insurer liable for any amount in excess
of the insured value or, if there be none, of the
insurable value.
75
Keppel Cebu Shipyard v. Pioneer Insurance and Surety Corp., G.R. Nos. 180880-
81, September 25, 2009.
(1) The rules that can be derived from Sections 135 and 136
whenever the ship is prevented from completing its voyage because of a
peril insured against, are as follows:
(i) If the goods are reshipped, the insurance over the goods
continue when they are thus reshipped;
(ii) The insurer may require the additional premium if
the hazard is increased by this extension of liability;
(iii) The marine insurer is bound to pay for damages,
expenses of discharging, storage, reshipment, extra freightage, and all
other expenses incurred in saving cargo reshipped pursuant to the last
section, up to the amount insured; and
(iv) The marine insurer shall not be liable for any amount in
excess of the insured value or, if there be none, of the insurable value.
(2) A controversy involving Section 135 concerns its variance with
the provisions of the old law. Section 126 of Act No. 2427 provided that
when a ship is prevented, at an intermediate port, from completing the
voyage, by the perils insured against, the master must make every exertion
to procure, in the same or a contiguous port, another ship, for the purpose of
conveying the cargo to its destination; and the liability of a marine insurer
thereon continues after they are thus reshipped. Thus, Section 135 of the
Insurance Code does not contain the following clause: “the master must
make every exertion to procure, in the same or a contiguous port, another
ship, for the purpose of conveying the cargo to its destination.” It is opined
by some commentators that the deletion of the clause is unintentional as
indicated by the words “thus reshipped” in Section 135.
(3) However, it is submitted that there is no basis to assume that
the deletion was unintentional. It is respectfully submitted that the obligation
which is no longer in the statute cannot be read into the provision. It should
be noted that the deleted portion pertains to an obligation of the master who
is not a party to the insurance contract. In the absence of an express
statement in the statute, no liability should be imposed on the carrier or its
master; they did not voluntarily assume such obligation and no additional
compensation is
CHAPTER 11 339
MARINE INSURANCE
given to them. At any rate, Section 135 as it is now worded favors the insured
even in the absence of a statutory obligation on the part of the master to reship
the goods. In the absence of statutory obligation, the parties to the contract must
stipulate an obligation to reship. If the goods were thus reshipped based on the
contractual obligation, the goods would still be covered by the policy. In
addition, if the ship was not able to continue with the voyage because the carrier
failed to exercise extraordinary diligence, the carrier may not escape or lessen its
liability if it will reship the goods in another vessel so that it will also reach its
destination on time. In such case, the reshipment would still be covered by the
original insurance.
(4) Another problem regarding Section 135 is with respect to the right
of the insurer to ask for additional premium. The statute provides that the
additional premium may be demanded if the hazard be increased by the extension
of liability. Obviously, the hazard is always being increased because the vessel is
prevented from leaving an intermediate port and the goods will be transferred to
another vessel. Necessarily, there will also be delay in the departure in the
intermediate port. If those things will be considered, then the insurer will always
be given the right to ask for additional premium. Hence, if the intention is really
to give additional benefit to the insured or to make the provision favorable to the
insured, Section 133 should be construed in such a way that the increase in the
hazard that is referred to should be a hazard other than those that usually
accompany the reshipment.
PROBLEMS:
1. RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to
stormy weather, the ship carrying the rice became submerged in sea water and with it,
the cargo. When the cargo arrived in Manila, RC filed a claim for total loss with the
insurer because the rice was no longer fit for human consumption. Admittedly, the rice
could still be used for animal feed. Is RC’s claim for total loss justified?
A: Yes, RC’s claim for total loss was justified. Although the rice
can still be used for animal feed, they can no longer for the use that they are
originally intended or for the use that they are intended according to their
nature. Actual total loss may exist even if there is no complete physical
destruction of the thing insured. (Pan Malayan Insurance Corporation v.
CA, et al., G.R. No. 95070, September 5, 1991; 201 SCRA 382)
2. An insurance company issued a marine insurance policy covering a shipment by

sea from Mindoro to Batangas of 1,000 pcs. of Mindoro garden stones against
Total Loss Only. The stones were loaded in two lighters, the first, with 600 pcs.
and the second with 400 pieces. Because of rough seas, damage was caused to the
second lighter resulting in the loss of 325 out of the 400 pcs. The owner of the
shipment filed claims against the insurance company on the ground of constructive
total loss in as much as more than three-fourths of the value of the stones had been
lost in one of the lighters. Is the insurance company liable under its policy? Why?
A: No. The insurance company is not liable because there was no
total loss. The liability of the insurer under the policy is for ‘Total Loss
Only.’ The insurance was over the 1,000 pieces of garden stones and only
325 were lost. In fact, there was even no constructive total loss even if the
loss constitutes 2/3 of the stones shipped in the second lighter. Although
they were shipped on separate lighters, the two shipment totaling 1,000
pieces of garden stones were under a single and indivisible coverage.
3. Sometime in January 1986, private respondent Panama Sawmill Co., Inc. (Panama)
bought, in Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000
cubic meters. It hired Transpacific Towage, Inc., to transport the logs by sea to
Manila and insured it against loss for PIM with petitioner Oriental Assurance
Corporation (Oriental Assurance). The logs were loaded on two (2) barges: (1) on
barge PCT7000, 610 pieces of logs with a volume of 1,000 cubic meters; and
(2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic
meters. On 28 January 1986, the two barges were towed by one tugboat, the MT
“Seminole.” But, as fate would have it, during the voyage, rough seas and strong
winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of
logs out of the 598 pieces loaded thereon. Panama demanded payment for the loss
but Oriental Assurance refuse on the ground that its contracted liability was for
“TOTAL LOSS ONLY.” Was the refusal to pay valid?
A: Yes, the insurer validly refused to pay. There was neither actual
total loss nor constructive total loss. Hence, the insurer is not liable because
the insurance is for TOTAL LOSS ONLY. The policy in question shows
that the subject matter insured was the entire shipment of 2,000 cubic
meters of apitong logs. The fact that the logs were loaded on two different
barges did not make the contract several and divisible as to the items
insured. The logs on the two barges were not separately valued or
separately insured. Only one premium was paid for the entire shipment,
making for only one cause or consideration. The insurance contract must,
therefore, be considered indivisible. Thus, for purposes of determining if
there was constructive total loss,
CHAPTER 11 341
MARINE INSURANCE
the total number of logs should be considered and no the logs shipped on each
barge. The logs having been insured as one inseparable unit, the correct basis
for determining the existence of constructive total loss is the totality of the
shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces
thereof were lost or 41.45% of the entire shipment. Since the cost of those 497
pieces does not exceed 75% of the value of all 1,208 pieces of logs, the
shipment cannot be said to have sustained a constructive total loss under Section
139(a) of the Insurance Code. ( O r i e n t a l A s s u r a n c e
C o r p o r a t i o n v . C o u r t o f A p p e a l s
a n d P a n a m a S a w M i l l C o . , I n c . ,
G . R . N o . 9 4 0 5 2 , A u g u s t 9 , 1 9 9 1 )
In July, 1917, the defendant insured the plaintiffs lighter for the sum of Pi6,000, and
issued its policy for such insurance, which recites that the steel tank lighter
P h i l m a c o is insured “for and during the space of twelve calendar-months
from July 6, 1917 to July 5, 1918, both dates inclusive, upon the hull, machinery, tackle,
apparel, boats or other furniture of the good ship or vessel,” and that “the assured is and
shall be rated and valued on hull, engine and pumping machinery, whereof this policy
insures pesos sixteen thousand, P. I. C. Warranted against the absolute total loss of the
lighter only. Warranted trading between Bitas, Tondo, or Pasig River and steamers in
the Bay of Manila or harbor.” In consideration thereof, the plaintiff paid the defendant
P960 as a premium for such insurance. About July 1, 1918, and during the life of the
policy and as a result of a typhoon, the lighter was sunk in the Manila Bay, of which the
plaintiff notified the defendant and demanded payment of the full amount of its policy,
which the defendant refused, and denied its liability. The cost of salvage and the
necessary repairs were substantially equal to the original cost of the lighter and its value
as stipulated in the policy. Was there total loss of the vessel?
A: Yes, there was total loss. At the time the lighter was sunk and
in the bottom of the bay under the conditions then [and] there existing, it was of
no value to the owner, and, if it was of no value to the owner, it would be a
actual total loss. To render it valueless to the owner, it is not necessary that
there should be an actual or total loss or destruction of all the different parts of
the entire vessel. The question here is whether, under the conditions then and
there existing, and as the lighter laid in the bottom of the bay, was it of any
value to the owner. If it was not of any value to the owner, then there was an
actual loss or a “total destruction of the thing insured” within the meaning of the
insurance law at that time. The lighter was sunk about July 1, 1918. After
several futile attempts, it was finally raised September 20, 1918. It is fair to
assume that in its then condition much further time would be required to make
the necessary repairs and install the new machinery before it
KSSKNT1AUS OF INSURANCE LAW
^Republic Act No. 10(>07 with Notes on Pre-Need Act)
could again bo placed in commission. During all that time the owner would
be deprived of the use of its vessel or the interest on its investment. When
those questions are considered the testimony is conclusive that the cost of
salvage, repair, and reconstruction was more than the original cost of the
vessel of its value at the time the policy was issued. As found by the trial
court "it is difficult to see how there could have been a more complete loss
of the vessel than that which actually occurred ” Upon the facts that shown
here, any other construction would nullify the statute, and, as applied to the
conditions existing in the Manila Bay, this kind of a policy would be
worthless, and there would not be any consideration for the premium. A
ship is a total loss when she has sustain [ed] such extensive damage that it
would not be reasonably practical to repair her. The ordinary measure of
prudence which the courts have adopted is this: If the ship, when repaired,
will not be worth the sum which it would be necessary to expend upon her,
the repairs are, practically speaking, impossible, and it is a case of total
loss. (Philippine Manufacturing Co. v. Union Insurance Company
of Canton, Ltd., G.R. No. L-16473, November 22, 1921)
§11. ABANDONMENT. Abandonment is defined in Section 140 as the act

of the insured by which, after a constructive total loss, he declares the
relinquishment to the insurer of his interest in the thing insured.
a. Distinguished from Abandonment in Maritime Law. Abandonment of
the vessel in marine insurance is different from abandonment of the vessel made by
the ship owner in maritime law. It should be recalled that the real and hypothecary
nature of maritime law limits the liability of the carrier to the value of the vessel.
Abandonment of the vessel, its appurtenances and the freightage is an indispensable
requirement before the ship owner or ship agent can enjoy the benefits of the limited
liability principle. If the carrier does not want to abandon the vessel, then he is still
liable even beyond the value of the vessel.
b. For example, in the case of P h i l i p p i n e
S h i p p i n g C o m p a n y v . G a r c i a ,76 which is an
action for damages instituted by the Philippine Shipping Company for the loss of
Steamship u N t r a . S r a . d e L o u r d e s *'as a result of
the collision with the Steamship “N a v a r r a ” of Garcia, it was found that
the “ ' N a v a r r a ” was responsible for the collision. The claim of the
Philippine Shipping is that the defendant
70
6 Phil. 281.
CHAI'I'hJi l l MVl
MAKINK ISfitJi 1ANCK
should pay PI8,000.00, the value of the “ N a v a r r a ” a t t h e time of

its loss, in accordance with the provision of Article 837 of the Code of Commerce, and that
it was i m m a t e r i a l that the “ N a v a r r a ” h a d been
entirely lost provided the value could he ascertained since the extent of liability of the
owner of the colliding vessel resulting from the collision is to be determined by its value.
T h e Supreme Court speaking through the then Chief Justice Arellano held that the rule
is that in the case of collision, abandonment of the vessel is necessary in order to limit the
liability of the shipowner or the agent to the value of the vessel, its appurtenances and
freightage earned in the voyage in accordance with Article 837 of the Code of Commerce.
The only instance where such abandonment is dispensed with is when the vessel was
entirely lost. In such case, the obligation is thereby extinguished.
c. Under the limited liability rule in maritime law, there is no need for
constructive total loss of the vessel and the abandonment is made in favor of the persons
to whom the carrier is liable. In marine insurance, there is a need for
c o n s t r u c t i v e total loss and the abandonment is made in favor of the
insurer. It would only be possible for the insurer to benefit from the abandonment of the
vessel in maritime law if it is exercising its right of subrogation.
In other words, after paying the insured who is entitled to claim damages from the
carrier, the insurer is subrogated to the rights of the insured and is therefore subject to
the defenses and is entitled to the benefits that the insured may have.
d. It should be noted in this connection that the limited liability rule in
maritime law does not apply to the insurer. Thus, in V a s q u e z v .
C o u r t o f A p p e a l s , 7 1 the Supreme Court explained that the
total loss of the vessel did not extinguish the liability of the carrier’s insurer. “Despite
the loss of the vessel, therefore, its insurance answers for the damages that a shipowner
or agent, may be held liable for by reason of the death of its passengers.”
§11.01. REQUISITES. The requisites for a valid abandonment are reflected in the
following provisions of the Insurance Code:
SEC. 140. Abandonment, in marine insurance, is the

act of the insured by which, after a constructive total
loss, he declares the relinquishment to the insurer of his
interest in the thing insured.
^G.R. No. L-42926, September 13, 1985.

SEC. 142. An abandonment must be neither partial

nor conditional.
SEC. 143. An abandonment must be made within a
reasonable time after receipt of reliable information of
the loss, but where the information is of a doubtful
character, the insured is entitled to a reasonable time
to make inquiry.
SEC. 145. Abandonment is made by giving notice
thereof to the insurer, which may be done orally, or in
writing; Provided, That if the notice be done orally, a
written notice of such abandonment shall be submitted
within seven days from such oral notice.
SEC. 144. A notice of abandonment must be
explicit, and must specify the particular cause of the
abandonment, but need state only enough to show that
there is probable cause therefor, and need not be
accompanied with proof of interest or of loss.
SEC. 147. An abandonment can be sustained only
upon the cause specified in the notice thereof.
a. Based on the foregoing provisions, an abandonment shall be considered effective

only if the following requisites are present:78
(1) There must be an actual relinquishment by the person insured
of his interest in the thing insured ( S e c . 1 4 0 , I C P ) ;
(2) There must be a constructive total loss ( S e c . 1 4 1 ,
ICP);
(3) The abandonment be neither partial nor conditional
( S e c . 1 4 2 , I C P ) ;
(4) It must be made within a reasonable time after receipt of
reliable information of the loss ( S e c . 1 4 3 , I C P ) ;
(5) It must be factual ( S e c . 1 4 4 , I C P ) ;
(6) It must be made by giving notice thereof to the insurer which
may be done orally or in writing ( S e c . 1 4 5 , I C P ) ]
and
78
Sundiang and Aquino, p. 66.
CHAPTER 11 345
MARINE INSURANCE
(7) The notice of abandonment must be explicit and must specify

the particular cause of the abandonment ( S e c . 1 4 6 ,
I C P ) .
b. Abandonment can neither be partial nor conditional. The insurer is
supposed to get whatever remains of the vessel, cargo or freightage, hence, the
insured cannot abandon only part of the subject property. For instance, the
insured cannot abandon only half of the cargo in favor of the insurer. Similarly,
the insured cannot impose the condition that the abandonment is valid only if the
ship cannot be salvaged.
c. Abandonment must be made within a reasonable time. What is
considered reasonable time depends upon the circumstances of each case.
d. Section 141 uses the word “ m a y ” indicating that there is
discretion to abandon and to claim for total loss. “Properly considered, the word
“may” in the provision is intended to grant the insured . . . the option or
discretion to choose the abandonment of the thing insured ... or any particular
portion thereof separately valued by the policy, or otherwise separately insured,
and recover for a total loss when the cause of the loss is a peril insured against.79
§11.02. EFFECTS OF ABANDONMENT. Abandonment transfers all the
rights of the insured over the thing insured to the insurer. In other words, the
insurer becomes the owner of what remains of the property that is the subject of
the insurance.
SEC. 148. An abandonment is equivalent to a
transfer by the insured of his interest to the insurer,
with all the chances of recovery and indemnity.
SEC. 149. If a marine insurer pays for a loss as if
it were an actual total loss, he is entitled to whatever
may remain of the thing insured, or its proceeds or
salvage, as if there had been a formal abandonment.
SEC. 150. Upon an abandonment, acts done in
good faith by those who were agents of the insured in
respect to the thing insured, subsequent to the loss,
are at the risk of the insurer and for his benefit.
79
Keppel Cebu Shipyard v. Pioneer Insurance and Surety Corp., G.R.
Nos. 180880-81, September 25, 2009.
SEC. 155. On an accepted abandonment of a

ship, freightage earned previous to the loss belongs
to the insurer of said freightage; but freightage
subsequently earned belongs to the insurer of the
ship.
§11.03. ACCEPTANCE OF ABANDONMENT. If all the requisites are
complied with for a valid abandonment, the insurer may not reject the
abandonment. Thus, the rights of the insured are not prejudiced by the fact that
the insurer refuses to accept the abandonment. 80 In other words, the insured
would still be entitled to compensation for total loss despite the refusal of the
insurer to accept. However, there is still an advantage if the insurer express or
impliedly accepted the abandonment because the abandonment whether
express or implied is conclusive upon the parties and is deemed an admission
of the loss and the sufficiency of the abandonment.81
SEC. 151. Where notice of abandonment is
properly given, the rights of the insured are not
prejudiced by the fact that the insurer refuses to
accept the abandonment.
SEC. 152. The acceptance of an abandonment
may be either express or implied from the conduct of
the insurer. The mere silence of the insurer for an
unreasonable length of time after notice shall be
construed as an acceptance.
SEC. 153. The acceptance of an abandonment,
whether express or implied, is conclusive upon the
parties, and admits the loss and the sufficiency of
the abandonment.
SEC. 156. If an insurer refuses to accept a valid
abandonment, he is liable as upon actual total loss,
deducting from the amount any proceeds of the
thing insured which may have come to the hands of
the insured.
§11.04. REVOCATION. Abandonment is generally irrevocable. The
abandonment can be revoked only when the ground proves to be unfounded
as in the case where there was in fact no constructive total loss.
^Section 151,1.C.
81
Section 153,1.C.
CHAPTER 11 347
MARINE INSURANCE
SEC. 154. An abandonment once made and accepted

is irrevocable, unless the ground upon which it was made
proves to be unfounded.
SEC. 144. Where the information upon which an
abandonment has been made proves incorrect, or the
thing insured was so far restored when the abandonment
was made that there was then in fact no total loss, the
abandonment becomes ineffectual.
§11.05. EFFECT OF FAILURE TO ABANDON. No abandonment can be
made if there is partial loss which is not considered constructive total loss. In
which case, the insurer is still liable for such partial loss. The same will result if
there is constructive total loss but the insurer failed or refused to abandon. Thus, if
a vessel is insured for its full value of P10 Million and there is loss valued at P9
Million, the insurer will be liable for P9 Million if the insured did not abandon.
This is in accordance with Section 157 of the Insurance Code which provides:
SEC. 157. If a person insured omits to abandon, he
may nevertheless recover his actual loss.
PROBLEMS:
1. An inter-island vessel, Insured for 2 million against total or constructive loss, sank in 150
feet of water, one mile of Paranaque during a typhoon. After the typhoon, the ship
owner gave a written notice of abandonment of his interest in the entire sunken ship
to the insurance company. Refusing to accept the offer of abandonment, the insurer
hired salvors to refloat the vessel at a total cost of P40,000. Because the refloated
vessel needed repairs, the insurer issued invitation to bid for repairs. Several firms
submitted separate sealed bids ranging from PI.2 million to Pi.3 million for the
complete refurbishing and/or restoration of the vessel to its original condition. On the
basis of the following facts, the insurance company rejected the claim of the ship
owner of total loss on the ground that there was no constructive loss. Is the position
of the insurance company as to the absence of constructive total loss well-taken?
Reasons.
A Yes, the position of the insurance company that there was no constructive total loss
is well-taken. However, the denial of the claim was invalid because there was
actual total loss. While the ship was at the bottom of the sea, the ship is
rendered valueless to the owner of the vessel for the purpose for which it was
held. The law does not require that all parts of the vessel is destroyed.
(See Section 130, Insurance Code; Philippine Manufacturing Co. v.

Insurance Society of Canton, Ltd., 42 Phil. 378 [1921])
It should be noted, however, that there is an alternative view to
the effect that there is no actual total loss because the vessel is not
irretrievably lost by sinking within the contemplation of Section
130[b] of the Insurance Code.
Moreover, there is also a view that there is no constructive total
loss in the present case. The sum that is necessary for the restoration of
the vessel was only PI.34 million. Only P40,000 was necessary for
salvors to refloat the vessel and PI.3 million was necessary for the
restoration of the vessel to its original condition. Hence, the amount is
not more than 3/4 of the value of the vessel (P2 Million).
§12. MEASURE OF INDEMNITY. The amount of indemnity in

marine insurance is affected by the type of policy involved. A policy may
be a valued policy where the value of the property is fixed therein. It may
also be an open policy where no value of property is fixed in the policy.
a. Valued Policy. In a valued policy, the valuation is conclusive
upon the parties except when there is fraud when the valuation was fixed.
SEC. 158. A valuation in a policy of marine

insurance is conclusive between the parties thereto in
the adjustment of either a partial or total loss, if the
insured has some interest at risk, and there is no fraud
on his part; except that when a thing has been
hypothecated by bottomry or respondentia, before its
insurance, and without the knowledge of the person
actually procuring the insurance, he may show the real
value. But a valuation fraudulent in fact, entitles the
insurer to rescind the contract.
b. Open Policy. In a valued policy, there is no conclusive value

that is fixed therein. The determination of the value of the thing insured is
governed by the following provisions:
SEC. 163. In estimating a loss under an open policy

of marine insurance the following rules are to be
observed:
(a) The value of a ship is its value at the beginning
of the risk, including all articles or charges which add to
CHAPTER 11 349
MARINE INSURANCE
its permanent value or which are necessary to prepare

it for the voyage insured;
(b) The value of the cargo is its actual cost to the
insured, when laden on board, or where the cost cannot
be ascertained, its market value at the time and place
of lading, adding the charges incurred in purchasing
and placing it on board, but without reference to any
loss incurred in raising money for its purchase, or to
any drawback on its exportation, or to the fluctuation
of the market at the port of destination, or to expenses
incurred on the way or on arrival;
(c) The value of freightage is the gross freightage,
exclusive of primage, without reference to the cost of
earning it; and
(d) The cost of insurance is in each case to be
added to the value thus estimated.
§12.01. CO-INSURANCE CLAUSE. There is always co-

insurance in marine insurance in accordance with Section 159
which provides:
SEC. 159. A marine insurer is liable upon a partial

loss, only for such proportion of the amount insured by
him as the loss bears to the value of the whole interest
of the insured in the property insured.
(1) The requisites for the application of co-insurance

in marine insurance are as follows: (a) There must be partial
loss, and (b) There is under-insurance meaning the insurance
coverage is less than the value of the property insured.
(2) Based on Section 159, the amount that the insurer is
required to pay in case of partial loss is the proportion between
the amount insured and the value of the whole interest in the
property. Thus, the share of the insurer is determined on the
basis of the following:
Amount of Partial Loss/Value of the Interest in
Property x Amount of Insurance = Share of the Insurer8 2
82
This formula can likewise be expressed as follows: Amount of Insurance/
Value of Property x Value of Damage = Share of Insurer. In the given example,
8,000,000/10,000,000 X 400,000 = 320,000.
(3) For example, the vessel valued at P10 Million is insured by its
owner A with X Insurer for P8 Million. Later, the vessel was damaged and
the damage is valued at P400,000. Under the circumstances, the insurer is
liable in the amount of P320,000 (400,000/10,000,000 X 8,000,000 =
320,000). This means that the owner of the vessel shouldered the loss up the
extent of P80,000.
(4) The co-insurance clause is not applicable if there is total loss.
Thus, in the preceding example, if the vessel worth P10 Million was totally
lost, the insurer is liable up to P8 Million which is the face value of the
insurance policy.
(5) Section 159 applies only to marine insurance. A co- insurance
clause may be part of an ordinary property insurance only if there is as
stipulation to that effect. Hence, if the insurance is fire insurance, there will
be co-insurance only if a co-insurance clause is expressly stipulated in the
policy.
§12.02. FREIGHTAGE OR CARGO. In case of a valued policy of marine
insurance on freightage or cargo, if a part only of the subject is exposed to the risk,
the valuation applies only in proportion to such part.83
§12.03. PROFITS. Marine insurance over profits may be a valued policy.
Thus, Section 162 of the Insurance Code provides that:
SEC. 162. When profits are valued and insured by

a contract of marine insurance, a loss of them is
conclusively presumed from a loss of the property out
of which they are expected to arise, and the valuation
fixes their amount.
(1) For example, the shipowner insured the profits that he expects
from the sale of the goods that he is transporting in his ship for a particular
voyage. If the profits are fixed at PI Million in the policy, the insurer is
liable for such amount upon the total loss of the goods in transit. The amount
fixed in the policy as profits is conclusively presumed to be the amount of
the profits which were lost.
(2) However, where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover,
83
Section 161,1.C.
CHAPTER 11 351
MARINE INSURANCE
in case of loss, a proportion of such profits equivalent to the proportion which

the value of the property lost bears to the value of the whole. 84 Thus, the amount
payable shall be determined on the basis of the following formula:
Value of Lost Property/Total Value of Property x
Expected Profits = Liability
(3) For example, the shipowner insured his expected profit in the
amount of P50,000.00 which was supposed to be derived from the goods that
are being shipped worth PI00,000.00. If good worth P60,000.00 are lost, the
insurer shall be liable in the amount of P30,000.00 (60,000/100,000 X 50,000 =
30,000).
§12.04. PARTIAL LOSS OF CARGO. Section 164 of the Insurance Code
provides that if cargo insured against partial loss arrives at the port of destination in a
damaged condition, the loss of the insured is deemed to be the same proportion of the
value which the market price at that port, of the thing so damaged, bears to the market
price it would have brought if sound.
§12.05. SUE AND LABOR CLAUSE. Sue and Labor Clause requires the
insured and his representative to take all reasonable steps that are necessary to limit or
reduce an imminent loss. Indemnity will be given by the insurer for such effort. On the
other hand, it may likewise be provided that the insured may exert effort in recovering
the property and the consequences thereof are provided for as follows:
SEC. 165. A marine insurer is liable for all the

expenses attendant upon a loss which forces the ship
into port to be repaired; and where it is stipulated in the
policy that the insured shall labor for the recovery of the
property, the insurer is liable for the expense incurred
thereby, such expense, in either case, being in addition
to a total loss, if that afterwards occurs.
§12.06. APPLICATION OF OLD MATERIALS. In the case of a partial loss of
the ship or its equipment, the old materials are to be applied towards payment for the
new. Unless otherwise stipulated in the policy, a marine insurer is liable for only two-
thirds
84
Section 160, l.C.
(Republic Act No. 10007 with Notea on Pro-Need Act)
(2/3) of the remaining cost of repairs after such deduction, except that anchors
must be paid in full.85
§13. AVERAGES. Article 806 of the Code of Commerce provides that
averages are all extraordinary or accidental expenses which may be incurred
during the voyage in order to preserve the vessel, the cargo or both and any
damage or deterioration which the vessel may suffer from the time it puts to sea
from port of departure until it casts anchor in the port of destination as well as
those suffered by the merchandise from the time they are loaded in the port of
shipment until they are loaded of consignment.
§13.01. FPA CLAUSE. Open cargo policies may contain what is known
as FPA (Free from Particular Average) clause which limits liability in case of
partial loss. Particular average is also known as simple average under the Code of
Commerce. The rule in this jurisdiction is provided for in Section 138 of the
Insurance Code which provides:
SEC. 138. Where it has been agreed that an

insurance upon a particular thing, or class of things,
shall be free from particular average, a marine insurer
is not liable for any particular average loss not
depriving the insured of the possession, at the port of
destination, of the whole of such thing, or class of
things, even though it becomes entirely worthless;
but such insurer is liable for his proportion of all
general average loss assessed upon the thing
insured.
a. It should be noted, however, that two basic types of FPA clauses may be
inserted in the policy namely: (a) FPA-American Conditions (FPAAC); and (b)
FPA-English Conditions (FPA-EC).
(1) When FPAAC is provided for, a particular average is not
payable unless the loss is caused by the vessel’s being stranded, sunk,
burnt, on fire or in collision.86
(2) Under the FPAEC, the particular average is not payable
unless the carrying vessel has been stranded, sunk, burnt, or in collision. If
any of those perils occurs, the FPAEC
“Section 168,1.C.
“Jerome Trupin and Arthur Flitner, Commercial Property Insurance and Risk
Management, Vol. 2, 1999 5th Ed., p. 26, hereinafter called “Trupin & Flitner.”
CHAPTER 11 353
MARINE INSURANCE
is breached and the particular average caused by a peril of the sea or any other
insured peril during the voyage will be covered even if there is no causal
connection between the stranding, sinking, burning or collision and the particular
average loss.87
§13.02. SIMPLE OR PARTICULAR AVERAGE. Implicit from Section 138 is
the rule that simple or particular average may be covered by the insurance policy. The
Code of Commerce defines simple or particular averages as all the expenses and
damages caused to the vessel or to her cargo which have not inured to the common
benefit and profit of all the persons interested in the vessel and her cargo. 88 If a damage
is not a general average, the same can be considered particular average. 89 Article 810 of
the Code of Commerce provides that “the owner of the goods which gave rise to the
expense or suffered the damage shall bear the simple or particular averages.”
a. Examples of simple or particular averages provided for under Article 809 of
the Code of Commerce are as follows:
(1) The losses suffered by the cargo from the time of its embarkation
until it is unloaded, either on account of inherent defect of the goods or by
reason of an accident of the sea or f o r c e m a j e u r e , and the
expenses incurred to avoid and repair the same.
(2) The losses and expenses suffered by the vessel in its hull, rigging,
arms, and equipment, for the same causes and reasons, from the time it puts to
sea from the port of departure until it anchors and lands in the port of
destination.
(3) The losses suffered by the merchandise loaded on deck, except in
coastwise navigation, if the marine ordinances allow it.
(4) The wages and victuals of the crew when the vessel is detained or
embargoed by legitimate order or f o r c e m a j e u r e , if the
charter has been contracted for a fixed sum for the voyage.
(5) The necessary expenses on arrival at a port, in order to make
repairs or secure provisions.
87
Jerome Trupin and Arthur Flitner,
supra. 809, Code of Commerce.
Ârticle
m
Ibid.
(6) The lowest value of the goods sold by the captain in arrivals
under stress for the payment of provisions and in order to save the crew, or
to meet any other need of the vessel, against which the proper amount shall
be charged.
(7) The victuals and wages of the crew while the vessel is in
quarantine.
(8) The loss inflicted upon the vessel or cargo by reason of an
impact or collision with another, if it is accidental and unavoidable. If the
accident should occur through the fault or negligence of the captain, the
latter shall be liable for all the losses caused.
(9) Any loss suffered by the cargo through the fault, negligence,
or barratry of the captain or of the crew, without prejudice to the right of
the owner to recover the corresponding indemnity from the captain, the
vessel, and the freightage.
§13.03. GENERAL AVERAGE. A general or gross average shall include
all the damages and expenses which are deliberately caused in order to save the
vessel, its cargo or both at the same time, from real and known risk.90
a. Requisites. The Supreme Court adopted the requisites of general
averages stated by Senator Tolentino in his commentaries on the Code of
Commerce:91
(1) There must be a common danger;
(2) For the common safety part of the vessel or of the cargo or
both is sacrificed deliberately;
(3) From the expenses or damages caused follows the successful
saving of the vessel and cargo; and
(4) The expenses or damages should have been incurred or
inflicted after taking proper legal steps and authority.
b. Rationale. Such claims have their foundation in equity, and rest
upon the doctrine that whatever is sacrificed for the common benefit of the
associated interests shall be made good by all the interests which are exposed to
the common peril and which were saved from the common danger by the
sacrifice.
90
Article 811, Code of Commerce.
91
A. Magsaysay, Inc. v. Agan, 96 Phil. 504. See also Compagme de
Commerce, et al. v. Hamburg America, et al., 36 Phil. 590.
CHAPTER 11 355
MARINE INSURANCE
c. Common Danger. The requirement that there must be common danger

“means, that both the ship and the cargo, after has been loaded, are subject to the same
danger, whether during the voyage, or in the port of loading or unloading; that the
danger arises from the accidents of the sea, dispositions of the authority, or faults of
men, provided that the circumstances producing the peril should be ascertained and
imminent or may rationally be said to be certain and imminent.”92
d. Voluntary Sacrifice. There must be voluntary sacrifice of a part for the
benefit of the whole in order to justify general average contribution. For example, it
may involve a voluntary jettison or casting away of some portion of the associated
interests for the purpose of avoiding the common peril from the whole to a particular
portion of those interests. It cannot involve a damage which resulted beyond the
control of the captain and crew or without any intention on their part. As a matter of
fact, the Code of Commerce prescribes a procedure in deciding whether a sacrifice
should be made.93
e. Successful Saving. The general average contribution cannot be demanded
if the vessel and other cargo that are sought to be saved were in fact not saved. Article
860 of the Code of Commerce provides “if, notwithstanding the jettison of
merchandise, breakage of masts, ropes, and equipment, the vessel shall be lost running
the same risk, no contribution whatsoever by jettison of gross average shall be proper.
The owners of the goods saved shall not be liable for the indemnification of those
jettisoned, lost, or damaged.”
f. Mandatory Legal Steps. It is also indispensable that the expenses or
damages should have been incurred or inflicted after taking proper legal steps and
authority. In this connection, the proper steps and authority for making the sacrifice
are prescribed in Articles 813 to 815 of the Code of Commerce.94
g. Examples. Examples of general averages under the Code of Commerce
are enumerated in Article 811 thereof as follows:
(1) The goods or cash invested in the redemption of the vessel or of
the cargo captured by enemies, privateers, or pirates, and the provisions,
wages, and expenses of the vessel
92
Aquino and Hernando, Essentials of Transportation and Public Utilities Law, 2011
Ed., p. 458.
93
Ibid.
9
*Ibid.
detained during the time the settlement or redemption is being made.

(2) The goods jettisoned to lighten the vessel, whether they
belong to the cargo, to the vessel, or to the crew, and the damage suffered
through said act by the goods which are kept on board.
(3) The cables and masts which are cut or rendered useless, the
anchors and the chains which are abandoned, in order to save the cargo,
the vessel, or both.
(4) The expenses of removing or transferring a portion of the
cargo in order to lighten the vessel and place it in condition to enter a port
or roadstead, and the damage resulting therefrom to the goods removed or
transferred.
(5) The damage suffered by the goods of the cargo by the
opening made in the vessel in order to drain it and prevent its sinking.
(6) The expenses caused in order to float a vessel intentionally
stranded for the purpose of saying it.
(7) The damage caused to the vessel which had to be opened,
scuttled or broken in order to save the cargo.
(8) The expenses for the treatment and subsistence of the
members of the crew who may have been wounded or crippled in
defending or saying the vessel.
(9) The wages of any member of the crew held as hostage by
enemies, privateers, or pirates, and the necessary expenses which he may
incur in his imprisonment, until he is returned to the vessel or to his
domicile, should he prefer it. 10 11 12
(10) The wages and victuals of the crew of a vessel

chartered by the month, during the time that it is embargoed or
detained by force majeure or by order of the government, or in order
to repair the damage caused for the common benefit.
(11) The depreciation resulting in the value of the goods
sold at arrival under stress in order to repair the vessel by reason of
gross average.
(12) The expenses of the liquidation of the average.
§13.04. WHO WILL PAY GENERAL AVERAGE. Code of Commerce
expressly provides that gross or general average shall
CHAPTER 11 357
MARINE INSURANCE
be borne by those who benefited from the sacrifice. Article 812 of the Code of
Commerce provides that “in order to satisfy the amount of the gross or general
averages, all the persons having an interest in the vessel and cargo therein at the time
of the occurrence of the average shall contribute.” On the other hand, Article 859 of
the Code of Commerce provides that the insurers of the vessel, of the freightage and
of the cargo shall be obliged to pay for the indemnification of the gross average,
insofar as is required of each one of the objects respectively.
a. Therefore, Article 859 of the Code of Commerce imposes a statutory
obligation on the part of the marine insurer to shoulder the share pertaining to the
property that it insured. Thus, the insurer of the vessel is obliged to pay the general
average contribution pertaining to the vessel. The obligation of the insurer under
Article 859 subsists even if the marine insurance policy provides that the liability of
the insurer is for “ t o t a l l o s s o n l y .,%5 The Supreme Court
explained:
‘The article is mandatory in its terms, and the insurers, whether for the vessel or
for the freight or for the cargo, are bound to contribute to the indemnity of the general
average. And there is nothing unfair in that provisions; it simply places the insurer on the
same footing as other persons who have an interest in the vessel, or the cargo therein at the
time of the occurrence of the general average and who are compelled to contribute (Art.
812, Code of Commerce).
In the present case, it is not disputed that the ship was in grave peril and that the
jettison of part of the cargo was necessary. If the cargo was in peril to the extent of call for
general average, the ship must also have been in great danger, possibly sufficient to cause its
absolute loss. The jettison was therefore as much to the benefit of the underwriter as to the
owner of the cargo. The latter was compelled to contribute to the indemnity; why should not
the insurer be required to do likewise? If no jettison had take place and if the ship by reason
thereof had foundered, the underwriter’s loss would have been many times as large as the
contribution now demanded.”
b. The computation of the general average contribution of the insurer is

governed by Sections 166. The pertinent provisions provide:
SEC. 166. A marine insurer is liable for a loss falling

upon the insured, through a contribution in respect to
^Francisco Jarque v. Smith Bell & Co., Ltd., et al., G.R. No. L-32986, November
11,1930, 56 Phil. 758.
the thing insured, required to be made by him towards

a general average loss called for by a peril insured
against; provided, that the liability of the insurer shall
be limited to the proportion of contribution attaching
to his policy value where this is less than the
contributing value of the thing insured.
SEC. 167. When a person insured by a contract of
marine insurance has a demand against others for
contribution, he may claim the whole loss from the
insurer, subrogating him to his own right to
contribution.
But no such claim can be made upon the insurer after
the separation of the interests liable to contribution,
nor when the insured, having the right and opportunity
to enforce contribution from others, has neglected or
waived the exercise of that right.
SEC. 168. In the case of a partial loss of ship or
its equipment, the old materials are to be applied
towards payment for the new. Unless otherwise
stipulated in the policy, a marine insurer is liable for
only two-thirds of the remaining cost of repairs after
such deduction, except that anchors must be paid in
full.
(1) Formula. Section 166 provides that the liability of the insurer
shall be limited to the proportion of contribution attaching to his policy
value where this is less than the contributing value of the thing insured.
Based on this rule, the formula for the determination of the general
average contribution of the insurer is as follows:
Amount of Insurance /Value of Property Insured X
GA Contribution of Insured = Amount to be paid.
(2) For example, the insurer insured the goods of Mr. X that is
being carried in the vessel. The value of the goods is P20,000 while the
insurance thereon is only Pi5,000. If the general average contribution
pertaining to Mr. X is P4,000, the liability of the insurer for the general
average is P3,000 (15,000/20,000 X 4,000).
(3) The liability of the insurer may however be reduced if there
are materials that are left because Section 168 provides that the old
material shall be applied for the acquisition of new materials.
CHAPTER 11 359
MARINE INSURANCE
§13.05. SUBROGATION. The person whose property was sacrificed is

entitled to general average payments. For example, the goods of Mr. X amounting
P30,000, were jettisoned to save the ship. The goods are insured with Y Insurer for
its full value. In this case, Mr. X can claim the total loss in the amount of P30,000
from Y Insurer but the latter is subrogated to the rights of Mr. X to claim from the
person benefitted their general average contribution. This is in accordance with
Section 165 of the Insurance Code quoted above.
a. The insured cannot claim from the insurer the amount of his loss if the
said insurer cannot be subrogated to the rights of the insured. Thus, the insured
cannot claim in the following instances:
(1) If there is already separation of interest liable to the
contribution;
(2) If the insured neglects to claim contribution although he has
opportunity to enforce the same; and
(3) If the insured waives the right to claim contribution.
CHAPTER 12
FIRE INSURANCE
The discovery of fire is one of the most important milestones in the

progress of mankind. But while discovery of fire is a leap for man, fire is also a
bane for countless individuals. The lyrical pen of Mr. Justice Cruz provides a
striking description of the role of insurance when one’s property is destroyed
by fire:
“When a person’s house is razed, the fire usually burns down the efforts of a
lifetime and forecloses hope for the suddenly somber future. The vanished abode
becomes a charred and painful memory. Where once stood a home, there is now, in the
sighing wisps of smoke, only a gray desolation. The dying embers leave ashes in the
heart.
For peace of mind and as a hedge against possible loss, many people now secure
fire insurance. This is an aleatory contract. By such insurance, the insured in effect
wagers that his house will be burned, with the insurer assuring him against the loss, for a
fee. If the house does burn, the insured, while losing his house, wins the wagers. The
prize is the recompense to be given by the insurer to make good the loss the insured has
sustained.
It would be a pity then if, having lost his house, the insured were also to lose the
payment he expects to recover for such loss. Sometimes it is his fault that he cannot
collect, as where there is a defect imputable to him in the insurance contract. Conversely,
the reason may be an unjust refusal of the insurer to acknowledge a just obligation, as
has happened many times.”1
§1. CONCEPT. As used in the Insurance Code, the term “fire

insurance” shall include insurance against loss by: (1) fire, (2) lightning, (3)
windstorm, (4) tornado, (5) earthquake, and (6) other allied risks, when such
risks are covered by extension to fire insurance policies or under separate
policies.2 Thus, fire insurance
Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, et al., G.R. No. L-67835,
October 12, 1987.
2
Section 169,1.C.
360
CHAJTKK VJ. 301
KIRK INHIJKANCK
rovers not only damage or IOHH by fir«* but also allied risks if they are covered
by extensions and separate policies.
a. Fire. The term “fire” baa been defined an oxidation of a degree that is
sufficient to produce a visible flame. As observed in one case: “No definition of fire can
be found that does not include the idea of visible heat or light, and this is also the popular
meaning given to the word. The slow decomposition of animal and vegetable matter in
the air is caused hy combustion. Combustion keeps up the animal heat of the body. It
causes the wheat to heat in the bin and in the stack. It causes hay in the stack and in the
mow of the barn to heat and decompose. It causes the sound tree of the forest, when
thrown to the ground, in the course of years to decay and molder away, until it becomes
again a part of the earth. Still we never speak of these processes as ‘fire.’ And why?
Because the process of oxidation is so slow that it does not, in the language of the witness
at the trial, produce a ‘flame or glow.’ ”r*
b. Hostile Fire Only. Liability on the part of the insurer will ensue only if there
is a “hostile fire” and not a “friendly fire.” “A hostile fire is one that is uncontrolled,
whereas a friendly fire is one contained in its proper receptacle. Once a fire has passed
outside the limits assigned to it, it becomes a hostile fire. So long as the fire remains
friendly, it is generally held that no right of recovery arises under the policy. Thus, if the
fire remains controlled and no ignition results, damage to the receptacle itself or to other
property by scorching, blistering, cracking, overheating, or soot are damages that are not
insured. The same rule applies to property that falls accidentally or is thrown
unintentionally into a friendly fire.” 3 4 However, “if fire escapes its confines, it becomes
an insured peril. Thus, in a case where fire escapes through a crack in the oven and sets
fire to the kitchen floor covering, the fire is hostile and the resulting loss is covered by the
contract.”5
c. Lightning. The policy may provide that the insurer is liable for losses
caused by the discharge of atmospheric electricity. The said loss may be covered even if
no fire results. If fire results, the loss is compensable because fire is the immediate cause
so long as lightning is not an excepted peril.
3
Westem Woolen Mill Co. v. Northern Assurance Co. of London, 139 Fed. 637, 639
(1905).
4
Hueber, Black and Webb, p. 113.
Hbid.
302 ESSENTIALS OK INSURANCE LAW
(Republic Arl. NO. 10007 with Notes on Pro Need Act.)
d. Windstorm. In some insurance policies, the coverage for windstorm

stipulates that velocity of the wind. For example, it is provided in some policies that
the* wind must h(; of at least, a minimum velocity of 75 miles per hour. “I lowever,
evidence of velocity is often absent, so currently the peril is considered in terms of
effect rather than establishing a condition. If the wind is of such a force as to cause
damage, it is deemed a windstorm and the resulting losses are covered.”*'
e. Earthquake. The coverage for earthquake is usually covered by a

separate policy or extension rather than part of an existing coverage because it w i l l
increase the cost of policy to the point that it would not be equitable. Moreover,
insurance against earthquake normally requires special terms and conditions.
Hence, earthquake peril is always an exclusion from an ordinary fire insurance
policy.
§2. PROPERTY INSURED. The insured property must be adequately
described in the policy. It was observed that in construing the words used to
describe the property, the greatest liberality is shown by the courts in giving effect
to the insurance.6 7
a. In one case, the Supreme Court took cognizance of the custom of
insurance agents of inspecting or examining the insured property before writing the
policy and mistake as to the identity and character of the property insured — a
building in the cited case - is extremely unlikely. 8 Hence, it was pointed out that
courts are inclined to consider that the policy covers any building which the parties
manifestly intended to insure however inaccurate the description may be.9
§3. ALTERATION. The effect of alteration on the thing insured would
depend on the nature of alteration and its effect on the risk. The governing statutes
are Sections 168 and 169 which provide:
SEC. 170. An alteration in the use or condition of a

thing insured from that to which it is limited by the
6
Huebner, Black and Webb, p. 126, citing Fidelity Phoenix Fire Insurance Co.
of New of York v. Board of Education of the Town of Rosedale, 6 CCH 739.
7
American Home Assurance Company v. Tantuco Enterprises, Inc., G.R. No.
138941, October 8, 2001.
Hbid.
»Ibid.
CHAPTER 12 n«»
FIRE INSURANCE
policy made without the consent of the insurer, by means

within the control of the insured, and increasing the risks,
entitles an insurer to rescind a contract of fire insurance.
SEC. 171. An alteration in the use or condition of a
thing insured from that to which it is limited by the policy,
which does not increase the risk, does not affect a
contract of fire insurance.
a. Based on the foregoing provisions, it is clear that alteration will prevent

recovery on the policy only if the following requisites are present:
(1) The alteration is on the use or condition of the thing insured;
(2) The use or condition of the thing insured is limited in the policy;
(3) The alteration is without the consent of the insurer;
(4) The alteration is within the control of the insured;
and
(5) The alteration increases the risk.10
b. There is an increase in the hazard or risk if there is a substantial change of
conditions affecting the risk as materially to increase it. However, mere negligence
temporarily endangering the property does not violate the law.11 12
c. For example, a house was insured against fire and the policy provides that
the house shall be used only as the residence of the insured. If the house was converted into
a bakery without the consent of the insurer, there will be material alteration that will entitle
the insurer to rescind the policy. The change in the use of the thing by the insured increases
the risk.
d. In M a l a y a n I n s u r a n c e C o m p a n y ,
I n c . u . P A P C o . L t d . , ( P h i l .
B r a n c h ) ™ the Supreme Court considered as an alternative ground for denying
the claim or rescinding the policy on the ground
w
See Malayan Insurance Company, Inc. v. PAP Co., Ltd., (Phil. Branch),
G.R. No. 200784, August 7, 2013.
11
Vance, p. 731.
12
Supra.
of material alteration. The insured machineries and equipment were transferred

from one building to another that was not stipulated in the policy without the
consent of the insurer. The Supreme Court declared that the alteration of the
location increased the risk of loss. Although the building where the machineries and
equipment were stored was not insured, the change in the location of the
machineries and equipment changes the condition of the thing insured.
§4. SUBSEQUENT ACTS OF THE INSURED. A contract of fire insurance
is not affected by any act of the insured subsequent to the execution of the policy,
which does not violate its provisions, even though it increases the risk and is the
cause of the loss.13
§5. MEASURE OF INDEMNITY. The measure of indemnity would depend
on the type of policy that will be issued by the insurer. The rule in a valued policy
is different from the rule in an open policy.
§5.01. VALUED POLICY. In a valued policy, the valuation fixed in the
policy shall be binding on the parties. The rule is the same in marine insurance.
Hence, a valuation in a policy of fire insurance is conclusive between the parties
thereto in the adjustment of either partial or total loss, if the insured has some
interest at risk, and there is no fraud on his part; but a valuation fraudulent in fact,
entitles the insurer to rescind the contract.14
a. An independent appraiser may be required to fix the value of the thing
insured. Section 174 applies:
SEC. 174. Whenever the insured desires to have a

valuation named in his policy, insuring any building or
structure against fire, he may require such building or
structure to be examined by an independent appraiser
and the value of the insured’s interest therein may then
be fixed as between the insurer and the insured.
The cost of such examination shall be paid for by the
insured. A clause shall be inserted in such policy
stating substantially that the value of the insured’s
interest in such building or structure has been thus
fixed. In the absence of any change increasing the risk
without the consent of the insurer or of fraud on the
part of the
13
Section
172,1.C.
14
Sections 173
and 158,1.C.
CHAPTER 12 365
FIRE INSURANCE
insured, then in case of a total loss under such policy, the

whole amount so insured upon the insured’s interest in
such building or structure, as stated in the policy upon
which the insurers have received a premium, shall be paid,
and in case of a partial loss the full amount of the partial
loss shall be so paid, and in case there are two (2) or more
policies covering the insured’s interest therein, each policy
shall contribute pro rata to the payment of such whole or
partial loss. But in no case shall the insurer be required to
pay more than the amount thus stated in such policy. This
section shall not prevent the parties from stipulating in
such policies concerning the repairing, rebuilding or
replacing of buildings or structures wholly or partially
damaged or destroyed.
b. Option to Rebuild Clause. The last sentence of Section 174 refers to what is
known as the Option to Rebuild Clause. The parties may stipulate that the insurer may
cause the repair, rebuilding, or replacement of the buildings or structures wholly or
partially destroyed or damaged.
(1) Professor Vance states that the insurer is also apt at times to suffer from
the perverted valuation made by appraisers friendly to the insured. While the
insurer would have the same right to avoid the award or appraisement, if unfairly
made, as would the insured, he would hardly be so successful in proving fraud.
Therefore, the insurer may escape the prejudice by providing for an option to
rebuild, repair or replace the loss or damage. The “option to rebuild” clause
operates as a wholesale check upon the insured in estimating the value of the
damaged goods.15
§5.02. OPEN POLICY. In an open policy where there is no valuation in the policy,
the measure of indemnity in an insurance against fire is the expense it would be to the
insured at the time of the commencement of the fire to replace the thing lost or injured in
the condition in which at the time of the injury.16
§5.03. INDIRECT LOSSES. What was discussed earlier are in the nature of direct
damage to the insured property. However, the occurrence of fire and other allied perils may
produce two types
16
Vance, pp.
766-767.
16
Section
173,1.C.
3^5 ESSENTIALS OF INSURANCE LAW
{Republic Act No. 10607 with Notes on Pre-Need Act)
of losses namely: (1) financial loss due to the direct physical damage of physical
property: and (2) the indirect or consequential losses arising out of the loss of use
of the property.17
a. Consequential losses may be covered by insurance that may involve
time element. Included are:
(1) Business Interruption Insurance - This insurance may provide
that the insurer is liable for the loss suffered consisting of loss of earnings
comprising of the net profits that could have been realized had the business
continued and expenses that continue despite the interruption of the
business.18
(2) Extra Expense Insurance - This insurance covers
extraordinary7 expenses that may be incurred in an effort to avoid any
interruption of service. It covers additional expenses over and above the
normal cost of doing business if necessitated by a fire or other insured peril
at the described premises.19
(3) Rent Insurance — This protects the insured from loss of
rental income. In other words, the rent insurance protects the insured
against either loss of income from property or loss of used of the
property.20
§6. PROHIBITIONS. Section 175 of the Insurance Code provides that no
policy of fire insurance shall be pledged, hypothecated, or transferred to any
person, firm or company who acts as agent for or otherwise represents the issuing
company, and any such pledge, hypothecation, or transfer hereafter made shall be
void and of no effect insofar as it may affect other creditors of the insured.
a. Non-Alienation Clause. The fire insurance policy cannot be transferred
without the consent of the insurer. Even if the alienation is allowed in the
insurance policy, it is also required that the transferee has insurable interest over
the insured property.
(1) It was explained however that the “non-alienation clause” is
not violated by the execution of a chattel mortgage. There is no alienation
within the meaning of the clause by the mortgage of the property until
foreclosure.21
17
Huebner, Black and
Webb, p.260.
Ibid., p.
lg 259.
19
Ibid., p. 273.
“ibid., p. 282.
21
E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715,
December 20, 1919.
CHAPTER 12 367
FIRE INSURANCE
§7. CO-INSURANCE. A co-insurance clause is always part of marine insurance. In

marine insurance, there is co-insurance by operation of law; there is no need for stipulation.
However, a co- insurance clause may likewise be inserted in a fire insurance policy. There
will be no co-insurance without such express stipulation.
a. Co-insurance means the insured shall be paid only in the proportion that the
amount of insurance purchased bears to the minimum amount of insurance that the contract
requires the insured to carry.22 Co-insurance is apportionment of losses between an insurer
and its insured such that the insurer will pay a fraction of each loss equal to the so-called co-
insurance apportionment ratio.23
b. A simple formulation of the procedure for determination of the amount to be
paid by the insurer is as follows:
Amount of Insurance/Value of Property x
Amount of Loss = Amount Payable.
c. In G a l i a n v . S t a t e A s s u r a n c e
C o m p a n y , 2 4 the co-insurance clause provides as one of the conditions of the
policy: “If the property hereby insured shall, at the breaking out of any fire, be collectively
of greater value than the sum insured thereon, then the insured shall be considered as being
his own insurer for the difference, and shall bear a ratable proportion of the loss accordingly.
Every item, if more than one, of the policy shall be separately subject to this condition.” The
property insured was worth P4,512.00. The salvage amounted to P120.40. This left a partial
loss amounting to P4,391.60. As the property was insured for only P3,000.00, the insurer
must bear a portion of the loss represented by a fraction the numerator of which is the
amount of the insurance and the denominator of which is the value of the property at the
time of the fire. This entitled the insured to a judgment against the insurer for P2,919.92.
§8. SOUND VALUE DISTINGUISHED FROM REPLACEMENT COST VALUE.
There are many cases when the insured will be surprised to receive much less than the
amount that it will spend to repair or to rebuild the insured property because of the terms and
conditions provided for in the policy. Thus, if the policy provides that the method of valuing
the insured property is at its
22
Huebner, Black and Webb, p. 96.
^George L. Head, Insurance to Value, 1971 Ed., p.
^G.R. No. Lr-8405, February 10, 1915.
39.
“Sound Value,” also known as “Actual Cash Value” (ACV), the value of the
property (and therefore the amount payable by the insurer) is computed by
deducting the depreciation from the replacement cost. The depreciation is
determined on the basis of the useful life of the property to establish the remaining
life thereof. This is not the same of book value of the property.
a. Thus, the amount payable by the insurer would be higher if the method
of valuing the property is the “Replacement Cost Value” (RCV) under which the
depreciation shall not be deducted. The valuation may also on the basis of Fixed
Value which is a fixed pre-determined valuation. Necessarily, the premium for
such policies may be higher than policies where the valuation is on the basis of the
ACV.
§9. EXCEPTIONS. The insurance may exclude different perils from the
coverage of the policy. Thus, the parties may provide that losses caused by war,
insurrection, rebellion, invasion, and other similar causes are excepted perils. The
policy may likewise provide for a theft clause that excludes loss through theft.
a. War and Related Risks. A policy may expressly exclude war,
invasion, civil commotion, or to the abnormal conditions arising therefrom from
the perils insured against. However, the mere fact that fire destroyed the thing
insured when there is war does not automatically prevent recovery. There can still
be recovery if the loss was occasioned by a cause independent of, and unrelated to
war, invasion, civil commotion, or to the abnormal conditions arising therefrom.
Recovery is permitted if the fire “was purely an ordinary and accidental one.” 25
b. Intentional Act. Even in the absence of stipulation, the insurer may
refuse to pay if the loss was the result of intentional act of the insured. 26 However,
the fact that the loss was the result of the intentional act of the insured must be
established by sufficient evidence.27 The Supreme Court observed in one case,
“Neither the interest of justice nor public policy would be promoted by an
omission of the courts to expose and condemn incendiarism once the same
25
FiIipinas Compania de Seguros v. Tan Chuaco, G.R. No. L-1559, January 31,
1950.
26
Section 89, I.C. See also Moises Ariche, et al. v. The Law Union and Rock
Insurance Co., Ltd., et al., G.R. Nos. L-24454-24456, January 12, 1996.
27
E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715,
December 20, 1919.
CHAPTER 12 369
FIRE INSURANCE
is established by competent evidence. It would tend to encourage rather than

suppress that great public menace if the courts do not expose the crime to public
condemnation when the evidence in a case xxx has really been committed.”28
§10. WARRANTY. In addition to the statutory provisions regarding
alterations, the insurance policy may likewise include express warranties regarding
the use and condition of the insured premises.
a. Thus, the policy may expressly warrant that the insured property cannot
be used for storage of inflammable substances. The policy must clearly state the
warranty. There is no breach if there is no provision in the policy prohibiting the
keeping of paints and varnishes upon the premises where the insured property was
stored. No violation of the policy can be invoked by the insurer if paints and
varnishes are stored.29
b. Even if there is prohibition regarding storage of paints and varnishes, there
is no violation thereof if it is understood that the keeping thereof is incidental to the
business. For example, if the property insured consisted mainly of household furniture
kept for the purpose of sale. The preservation of the furniture in a salable condition by
retouching or otherwise is incidental to the business. It is well-settled that the keeping of
inflammable oils on the premises, though prohibited by the policy, d o e s n o t
v o i d i t i f s u c h k e e p i n g i s
i n c i d e n t a l t o t h e b u s i n e s s :30 Thus, where a
furniture factory keeps benzene for the purposes of operation, or where it is used for the
cleaning machinery, the insurer cannot on that ground avoid payment of loss, though the
keeping of the benzene on the premises is expressly prohibited.31
28
The East Furniture, Inc. v. The Globe & Rutgers Fire Insurance Co. of New York,
G.R. No. L-35848, November 22,1932.
Ê.M. Bachrach v. British American Assurance Company, supra.
30
Ibid., citing Davis v. Pioneer Furniture Company, 78 N. W. Rep., 596; Faust v.
American Fire Insurance Company, 91 Wis., 158.
31
Ibid., citing Mears v. Humboldt Insurance Company, 92 Pa. St., 15; 37 Am. Rep.,
647.
CHAPTER 13
LIFE INSURANCE
“The Court certainly agrees that a drowned man cannot go to the insurance
company to ask for compensation. That might frighten the insurance people to death.ffL
§1. GENERAL CONCEPTS. Section 181 of the Insurance Code defines life
insurance as an insurance on human lives and insurance appertaining thereto or
connected therewith. Section 181 provides:
SEC. 181. Life insurance is insurance on human

lives and insurance appertaining thereto or connected
therewith.
Every contract or undertaking for the payment of
annuities including contracts for the payment of lump
sums under a retirement program where a life insurance
company manages or acts as a trustee for such
retirement program shall be considered a life insurance
contract for purposes of this Code.
a. Various definitions are stated in a case:2

“Life insurance is a contract whereby one party insures a person against loss by the
death of another. (Petition of Robbins, 140 A. 366, 367, 126 Me. 555.)
An insurance on life is a contract by which the insurer, for a stipulated sum, engages
to pay a certain amount of money if another dies within the time limited by the policy. (Cason
v. Owens, 26 S. E. 75, 76, 100 Ga. 142.)
'Sun Insurance Office (Ltd.) v. The Court of Appeals and Nerissa Lim, G.R. No. 92383,
July 17, 1992.
2
Gallardo v. Morales, G.R. No. L-12189, April 29, 1960.
370
CHAPTER 13 371
LIFE INSURANCE
Life insurance includes in which the payment of the insurance money is contingent upon
the loss of life. ( B o w l e s s v . M u t u a l B e n . H e a l t h &
A c c i d e n t A s s n . , C . C . A . V a . 9 9 F . 2 d 4 4 .
4 8 , 4 9 . )
A contract for life insurance is really a contract for insurance for one year in consideration
of an advanced premium, with the right of assured to continue it from year to year upon payment of
a premium as stipulated. ( M u t u a l L i f e I n s . C o . 1 0 0 P a
1 7 2 , 1 8 0 . )
In its broader sense, ‘life insurance' includes accident insurance, since life is insured under
either contract. ( A m e r i c a n T r u s t & B a n k i n g C o . v .
L e s s l y , 1 0 6 S . W . 2 d . 5 5 1 , 5 5 2 , 1 7 1
T e n n . 5 6 1 , 1 1 1 A . L . R . 5 9 . )
Under statute providing that ‘any life insurance’ on life of husband shall insure to benefit of
widow and children exempt from husband’s debt, proceeds of policy insuring against death by
accident insured to widow’s benefit free from husband’s debts. ( C o d e 1 9 3 2 , B
8 4 5 6 . A m e r i c a n T r u s t & B a n k i n g C o . v .
L e s s l y , 1 0 6 S . W . 2 d 5 5 1 , 1 7 1 T e n n . 5 1 1
I I I A . L . R . 5 9 . )
Insurance policy, providing for payment in case of accidental death, is ‘life insurance
policy’ to such extent within state statue (sic.) prescribing incontestable period for policies.
( C o d e S . C . 1 9 3 2 s s 7 9 8 6 , 7 9 8 7 ; P a c i f i c
M u t . L i f e I n s . C o . o f C a l i f o r n i a v .
P a r k e r , C . C A . S . C . , 7 1 F . 2 d 8 7 2 , 8 7 5 . )
‘Life insurance’ includes all policies of insurance in which payment of insurance money is
contingent upon loss of life. . . . ( S m i t h v . E q u i t a b l e L i f e
A s s u r . S o c . o f U . S . , 8 9 S . W . 2 d 1 6 5 ,
1 6 7 , 1 6 9 T e n n . 4 7 7 . )
Insurance policy including a death benefit and a health or accident disability benefit
constituted a ‘life insurance policy’ within meaning of Law 1926, c. 118, S. 134, imposing privilege
tax on insurance companies with different rates as between life insurance companies and other
companies, in view of provisions of Code 1906, ss 2576, 2598 ( H e m i n g w a y ’ s
C o d e 1 9 2 7 , s s 5 8 3 0 , 5 8 5 6 ) , and Law 1924, c. 191, s I
( H e m i n g w a y ’ s C o d e 1 9 2 7 , s 5 9 9 5 ) ; it being
immaterial that in some policy forms the health and disability feature was more valuable assent a
showing that death provision was inserted to avoid the higher tax. ( U n i v e r s a l
L i f e I n s . C o . v . S t a t e , 1 2 1 S o . 8 4 9 ,
8 5 0 , 1 5 5 M i s s . 3 5 8 . ) ( 2 5 W o r d s &
P h r a s e s 2 6 0 , 2 6 1 , 2 6 2 . )
When the application was made, Harris W. Rimmer carried life insurance with the
Equitable Life Assurance Society, for $10,000, payable upon proof of death, with a provision that
upon death by accident the amount of insurance payable would be increased to $20,000. The
plaintiff insisted that this was life insurance, a disclosure of which was not called for in question 10,
while the defendant insisted it was accident insurance that should have been disclosed and further
insisted that, it being a fact material to the risk the failure to disclose the policy in the Equitable Life
Assurance Society rendered the policy issued to the applicant void. . . .
The court might have gone further and held that the failure of the applicant to characterize the
Society as accident insurance did not constitute a false

answer to the inquiry of what accident or health
insurance he was carrying. The policy in the Equitable
Life Assurance Society covered loss of life from natural
as well as external and accidental causes, and was life
insurance. The mere addition of the double indemnity
clause providing for increased insurance upon proof of
death by accident did not divest the policy of its
character of insurance on life, or make the contract
o t h e r t h a n l i f e i n s u r a n c e , for insurance on life includes all policies of
insurance in which the payment of the insurance money is contingent upon the loss of life.
(Logan u. Fidelity & Casualty Co., 146Mo. 114, 47 S.W. 948. See also Johnson v.
Fidelity & Guaranty Co., 148 Mich. 406, 151 N.W. 593, L.R.A. 1916A, 475; Zimmer v.
Central Accidental Co., 207 Pa. 472, 56 A. 1003; Wright v. Fraternities Health &
Accident Ass’n. 107 Me. 418, 78A. 475, 32 L.R.A. [N.S.J 461; Metropolitan Life Ins. Co.
v. Ins. Com’r 208 Mass. 386, 94 N.E. 477; Standard Life & Accident Ins. Co. v. Caroll,
86 F. 567, 41 L.R.A. 194; Wahl v. Interstate Business Men’s Accident Ass’n 201 Iowa;
1355, 207 N.W. 395, 50 A.L.R. 1377.) (Provident Life & Accident Ins. Co. v. Rimmer, 12
S. W. 2d Series, 365, 367.)”
b. Valued Policy. Life insurance is not a contract of indemnity.

Consistently, the interest of the person insured in his or another person’s life is
generally not susceptible of exact pecuniary measurement. Hence, the measure
of indemnity is whatever is fixed in the policy.
SEC. 186. Unless the interest of a person insured is

susceptible of exact pecuniary measurement, the measure
of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy.
c. An example of a situation where the interest of a person insured is

susceptible of exact pecuniary measurement is the case of a creditor who
insures the life of the debtor. The interest of the insured creditor is measurable
because it is based on the value of the indebtedness.
d. At any rate, it is also not correct to say that insurer will accept the
application for life insurance coverage for any amount without regard to economic value.
The foundation of life insurance is not an abstract philosophical framework but the
economic value of human life. One concept that is widely accepted is known as “human
life value” which was proposed by Prof. Huebner in the 1920s in the United States. 3
Under this framework of analysis, “human life value
3
Huebner & Black, p. 15.
CHAPTER 13 373
LIFE INSURANCE
is a measure of the actual future earnings or service of an individual, that is, the
capitalized value of an individual’s net future earnings after subtracting self-
maintenance costs.”4 An insurer that accepts and approves all life insurance
applications is courting disaster because individuals have different human life values
and should not therefore be insured under the same terms and conditions. A prudent
insurer must do all of the following: (1) set the various classes of risks and applicants
to determine who among them belong to the so- called “sub-standard” group, (2)
establish the limits for the various classes of risks, (3) adopt selection and
classification procedures that will permit the placing of applicants for life insurance
into the proper categories.5
§2. KINDS. Under the Insurance Code, an insurance upon life may be made
payable on the death of the person, or on his surviving a specified period, or
otherwise contingently on the continuance or cessation of life. 6 Accordingly, life
insurance may be classified into
(1) Whole Life Insurance, (2) Term Insurance, and (3) Endowment Policy.
a. Whole Life Insurance. Whole life insurance offers permanent protection.
The life of the person is covered for life. It may further be classified according to
the modes of payment of premium, that is, it may be (1) Single Premium - there
single or onetime payment of substantial amount of premium; (2) Continuous
Premium or Ordinary Life Insurance - premiums are paid until the death of the
insured; or (3) Limited Payment Period - premium are paid for a limited number
of year.
(1) Cash Value Life Insurance is a form of life insurance where the
premiums paid are sufficient to pay not only the insurance claims and
expenses but it also a cash value or a savings fund within the policy. Unlike a
term insurance which does not have cash values, cash value for whole life
insurance is guaranteed.7 Under a whole life insurance policy, a reserve is
accumulated that eventually equals the face value of the policy. The
accumulated cash values may eventually provide the basis for a policy loan.
It can also support the non-forfeiture
4
Huebner & Black, p. 15.
5
Huebner & Black, Chapters 32 and 33, pp. 442-463.
6
Section 182, 1st paragraph, I.C.
7
Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed., 2009,
Sec. 8.4.
options - meaning the policy will not necessarily be forfeited for non-
payment of premium because the savings fund can be used for such purpose.
b. Term Insurance. In term insurance, the insurer promises to pay the fact
amount of the policy to the beneficiary if the insured dies within a specified period.
The contract expires without value if the insured survives the period. The
distinguishing features of a term insurance are: (1) It has a fixed period, and (2)
Little or no cash values are accumulated.8
(1) In life insurance, the policy matures either upon the expiration
of the term set forth therein in which case its proceeds are immediately
payable to the insured himself, or upon his death occurring at any time prior
to the expiration of such stipulated term, in which case, the proceeds are
payable to his beneficiaries. Thus, in one case, the policy matured upon the
death of the insured on November 2, 1944, and the obligation of the insurer
to pay arose as of that date. The period provided by law within which to pay
the proceeds after presentation of proof of death is merely procedural in
nature, evidently to determine the exact amount to be paid and the interest
thereon to which the beneficiaries may be entitled to collect in case of
unwarranted refusal of the company to pay, and also to enable the insurer to
verify or check on the fact of death which it may even validly waive. It is the
happening of the suspensive condition of death that renders a life policy
matured and not the filing of proof of death which is merely procedural, for
even if such proof were presented but if turns out later that the insured is
alive, such filing does not give maturity to the policy. The insured having
died on November 2, 1944, during the Japanese occupation, the proceeds of
his policy should be adjusted accordingly.9
(2) Term Insurance may be further classified into “shortterm
insurance,” “long-term insurance,” “renewable insurance,” or “convertible
insurance.” Convertible term insurance can be converted into a whole life
policy or endowment policy within a certain period without proof of
insurability.
®Mehr and Cammack, p. 365.

Teresa Vda. de Fernandez, et al. v. The National Life Insurance Company of the
Philippines, G.R. No. L-9146, January 27, 1959.
CHAPTER 13 375
LIFE INSURANCE
(3) A “term insurance” is used for short term need. For example, a loan
may provide as a condition that the borrower is insured for the entire term of the
loan. In addition, in the case of convertible or renewable policy, the same may be
resorted to by someone who cannot afford long term protection but at the same
time gain benefit of dispensing with proof of insurability.
c. Endowment Policy. The parties may also enter into what is known as an
endowment policy. If a policy of insurance provides that the proceeds shall be payable to
the assured, if he lives to a certain date, and, in case of his death before that date, then they
shall be payable to the beneficiary designated. 10 The interest of the beneficiary is a
contingent one, and the benefit of the policy will only inure to such beneficiary in case the
assured dies before the end of the period designated in the policy. 11 Under an endowment
of policies payable to the insured at the expiration of a certain period, if alive, but
providing for the payment of a stated sum to a designated beneficiary in case of the
insured death during the period mentioned, the insured and the beneficiary take contingent
interests. The interest of the insured in the proceeds of the insurance depends upon his
survival at the expiration of endowment period. Upon the insured’s death, within the
period, the beneficiary will take, as against the personal representative or the assignee of
the insured. Upon the other hand, if the insured survives the endowment period, the
benefits are payable to him or to his assignee, notwithstanding a beneficiary is designated
in the policy.12
(1) An endowment life insurance policy is a variation of cash value life
insurance. The policy provides level death benefits and cash values that
increase with duration so that a policy’s cash value equals its death benefit at
maturity, but the policy also allows the purchaser to specify the policy’s
maturity date.13
d. Industrial Life Insurance. The term * i n d u s t r i a l
l i f e i n s u r a n c e ” as used in this Code shall mean that form of
life insurance under which the premiums are payable either monthly or oftener,
10
Mariano J. Villanueva v. Pablo Oro, G.R. No. L-2227, August 31, 1948, citing
Couch, Cyclopedia of Insurance Law, Vol. 2, Sec. 343, p. 1023.
“Mariano J. Villanueva v. Pablo Oro, ibid.
12
Ibid., citing 29 Am. Jur., Section 1277, pp. 952, 953.
13
Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed., 2009, Sec. 8.17.
if the face amount of insurance provided in any policy is not more than five
hundred times that of the current statutory minimum daily wage in the City of
Manila, and if the words “ i n d u s t r i a l p o l i c y ” are
printed upon the policy as part of the descriptive matter.14
e. Variable Life or Variable Unit-Linked (VUL) Insurance
Contractor Policy. This is “any insurance policy or contract on either a group
or on an individual basis issued by an insurance company providing for benefits
or other contractual payments or values there under to vary so as to reflect
investment results of any segregated portfolio of investments or of a designated
separate account in which amounts received in connection with such contracts
shall have been placed and accounted for separately and apart from other
investments and accounts.”15
f. Participating Policy is one which gives the holder a right to
participate in such dividends as may be declared in his class from saving due to
favorable mortality and investment experience. 16 Non-participating carries no
dividends requiring uniform premium payments, ordinarily at a lower rate than
participating policies.17 The dividends are generated because of “favorable
experience, such as higher-than-expected investment returns or lower-than-
expected mortality and/or expenses for operations.”18
g. While accident insurance is different from life insurance, there is
authority for the view that when one of the risks insured in the accident insurance
is death of the insured by accidents, then such accident insurance may also be
regarded as life insurance.19
h. A provision in a policy that provides for funeral/cash benefit in case
of death by natural causes or illness is considered life insurance and are not
supposed to be included in an Accident and Health Policy.20
14
Section 235,1.C. See also Articles 2021 to 2027, New Civil Code.
15
Section 238(b), I.C.; See Circular Letter No. 2017-34, June 15, 2017,
Revised Guidelines on Variable Life Insurance Contracts.
16
Vance, p. 46.
17
Ibid.
18
Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed.,
2009, Sec. 8.24.
19
Gallarado v. Morales, G.R. No. 12189, April 29, 1960.
20
CHAPTER 13 377
LIFE INSURANCE
§3. ANNUITY. The Insurance Code provides that every contract or pledge for the
payment of endowments or annuities shall be considered a life insurance contract for
purpose of the Code.21 The second paragraph of Section 181 of the Code provides:
Every contract or undertaking for the payment of

annuities including contracts for the payment of lump
sums under a retirement program where a life insurance
company manages or acts as a trustee for such retirement
program shall be considered a life insurance contract for
purposes of this Code.
a. Strictly speaking a contract of insurance may be distinguished from

“annuities” which can be considered an investment rather than a specie of insurance. A
contract of life insurance involves “payments of amounts known as premium by the
insured over a period of years in return for which the insurer creates an immediate
estate in a fixed amount in the event of his death while in good standing.” 22 In
insurance, “there is an immediate hazard of loss thrown upon the insurer, with the
required performance by the insured of certain obligations at designated intervals of
time.”23 “An annuity contract is diametrically opposed to this. The person designated
as the recipient is the person paying the money. He pays in a fixed sum at one time, in
return for which the company must then perform a series of obligations over a period
of years, at designated times. The hazard of loss is no longer upon the company but
upon the recipient who may die before any benefits are received. Instead of creating an
immediate estate for the benefit of others, he has reduced his immediate estate in favor
of future contingent income.”24
b. Thus, while life insurance gives protection for premature death, an
annuity gives protection for excessive longevity. 25 There is also a pooling of money in
annuity but the same spreads the risk that some of those who contribute to the pool will
live beyond their life expectancy and outlive their income. “While life insurance can
21
Section 181, 2nd Paragraph, I.C.
22
1 Appleman, Insurance Law and Practice, Section 83, p. 76 (1941) cited in Prudential
Insurance Company v. Howell, 148 A (2d) 145 (1959).
Îbid.
24
Ibid.
25
Beam, Jr., et al., p. 335.
provide a financial hedge against dying too soon, annuity can provide a hedge
against living too long.”26
c. An annuity may be classified into annuity certain, or life annuity.
Life annuity may be (1) whole life annuity, or (2) temporary life annuity. In an
Annuity Certain, the annuity payments are made for a definite period without
being linked to the duration of a specified human life. Life annuity is linked to
the life of a specified person. Whole life annuity is the type where payment of
annuity is made so long as the person is alive. In a temporary life annuity,
payments are terminated either at the death of the specified person or at a fixed
period.27
§4. LIFE ANNUITY UNDER THE CIVIL CODE. It should be noted that
Life Annuity is one of the aleatory contracts under the New Civil Code. Article
2010 of the New Civil Code 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.” The
provisions of the New Civil Code on the aleatory contract of life annuity read as
follows:
Art. 2021. The aleatory contract of life annuity

binds the debtor to pay an annual pension or income
during the life of one or more determinate persons in
consideration of a capital consisting of money or
other property, whose ownership is transferred to him
at once with the burden of the income. (1802a)
Art. 2022. The annuity may be constituted upon
the life of the person who gives the capital, upon that
of a third person, or upon the lives of various persons,
all of whom must be living at the time the annuity is
established.
It may also be constituted in favor of the person
or persons upon whose life or lives the contract is
entered into, or in favor of another or other persons.
(1803)
Art. 2023. Life annuity shall be void if constituted
upon the life of a person who was already dead at the
26
Beam, Jr., et al., p. 335.
27
Beam, Jr., and Wiening, supra,
Section 11.2.
CHAPTER 13 379
LIFE INSURANCE
time the contract was entered into, or who was at that

time suffering from an illness which caused his death
within twenty days following said date. (1804)
Art. 2024. The lack of payment of the income due
does not authorize the recipient of the life annuity to
demand the reimbursement of the capital or to retake
possession of the property alienated, unless there is a
stipulation to the contrary; he shall have only a right
judicially to claim the payment of the income in arrears
and to require a security for the future income, unless
there is a stipulation to the contrary. (1805a)
Art. 2025. The income corresponding to the year in
which the person enjoying it dies shall be paid in
proportion to the days during which he lived; if the
income should be paid by installments in advance, the
whole amount of the installment which began to run
during his life shall be paid. (1806)
Art. 2026. He who constitutes an annuity by
gratuitous title upon his property, may provide at the
time the annuity is established that the same shall not
be subject to execution or attachment on account of the
obligations of the recipient of the annuity. If the annuity
was constituted in fraud of creditors, the latter may ask
for the execution or attachment of the property. (1807a)
Art. 2027. No annuity shall be claimed without first
proving the existence of the person upon whose life the
annuity is constituted. (1808)
§5. MINOR AS INSURED. The third and fourth paragraphs of Section 182 of
the Insurance Code as amended by R.A. No. 10607 provide:
“In the absence of a judicial guardian, the father, or

in the latter’s absence or incapacity, the mother, of any
minor, who is an insured or a beneficiary under a
contract of life, health, or accident insurance, may
exercise, in behalf of said minor, any right under the
policy, without necessity of court authority or the giving
of a bond, where the interest of the minor in the
particular act involved does not exceed Five hundred
thousand pesos (P500,000.00) or in such reasonable
amount as
may be determined by the Commissioner. Such right

may include, but shall not be limited to, obtaining a
policy loan, surrendering the policy, receiving the
proceeds of the Policy, and giving the minor’s consent
to any transaction on the policy.
“In the absence or in case of the incapacity of the
father or mother, the grandparent, the eldest brother or
sister at least eighteen (18) years of age, or any relative
who has actual custody of the minor insured or
beneficiary, shall act as a guardian without need of a
court order or judicial appointment as such guardian,
as long as such person is not otherwise disqualified or
incapacitated. Payment made by the insurer pursuant
to this section shall relieve such insurer of any liability
under the contract.”
a. The present rule is the exception to the provisions of the Family

Code.28 Under Section 182 of the Insurance Code, the parents may exercise any
right under the policy without court authority or the giving of a bond where the
interest of the minor in the particular act does not exceed P500,000.00. Article 225
of the Family Code provides that if the market value of the property or the annual
income of the child exceeds P50,000.00, the parent concerned shall be required to
furnish a bond in such amount as the court may determine but not less than 10% of
the value of the property or annual income, to guarantee the performance of the
obligations prescribed for general guardians. A petition for approval of the bond is
required.29 Under Section 182 of the Insurance Code, a court order and a bond are
both unnecessary for the exercise of the right of the minor under the policy
provided that the interest of the minor does not exceed P500,000.00. The latter
amount of P500,000.00 is more realistic under present circumstances because the
expenses to be incurred in filing a petition for approval of a bond may be more
than what the amount of the property itself if the minimum amount is just
P50,000.00.
b. Article 225 of the Family Code likewise provides for joint exercise
of legal guardianship over the properties of an
28
Article 225, Executive Order No. 209, Family Code. See also Luz Pineda, et al.
v. Court of Appeals, G.R. No. 105562, September 27, 1993.
29
Article 225, Executive Order No. 209, Family Code.
HIAITKR l.'i UH 1
LIPK
INSl/RANOK
unomnnripnted common child without the necessity of a court appointment. It is the?
father’s decision that will prevail in case of disagreement unless there is a judicial order to
the contrary. When the above-quoted paragraphs of Section 182 of the Insurance Code was
modified by R.A. No. 10607, the legislators did not reconcile (he same with Article 225
with respect to joint administration of the minor’s properties. Section 182 still provides that
the father, or in the latter’s absence or incapacity, the mother, of any minor, may exercise,
in behalf of said minor, any right under the policy. In the previous edition of this work, it
was opined that the provisions of Article 225 of the Family Code on joint exercise of legal
guardianship should be deemed to have impliedly modified Section 182 (previously
numbered Sec. 180) and the rule on joint administration would be deemed to be
incorporated in the Insurance Code. However, with the re-enactment of the old rules under
Section 182, it is clear that the evident intent is to give the father the primary authority to
exercise the rights under the minor’s policy. It is only when he is incapacitated that the
mother can exercise such right.
c. Hence, under the new provisions of Section 182, the following can
exercise the rights of the minor under a life insurance policy where he is an insured or
beneficiary:
(1) Father;
(2) Mother but only in the absence or incapacity of the father;
(3) In the absence of the father or the mother, the following may
exercise the right without need of court appointment:
(i) the grandparent,
(ii) the eldest brother or sister at least eighteen (18) years of age, or
(iii) any relative who has actual custody of the minor insured or
beneficiary.
§6. SUICIDE CLAUSE. The policy may provide for suicide as an excepted
peril. Contrarily, the policy may also include suicide as a peril insured against.
However, a stipulation in the policy is not necessary for the insurer to be liable even in
the case of suicide provided that the policy has been in force for period of two years
from the date of issue or last reinstatement. Section 183 of the Insurance Code provides:
SEC. 183. The insurer in a life insurance contract

shall be liable in case of suicide only when it is com-
mitted after the policy has been in force for a period of
two (2) years from the date of its issue or of its last rein-
statement, unless the policy provides a shorter period:
Provided, however, That suicide committed in the state of
insanity shall be compensable regardless of the date of
commission.
a. The insurer is liable in case of suicide even before the two year period in
any of the following cases:
(1) When a shorter period is provided for in the policy. For example,
the policy may provide that the insurer is liable in case of suicide if it has been
in force for at least one year.
(2) When the suicide was committed in the state of insanity. For
example, the insured became insane one month after the issuance of the policy.
A week thereafter, the insured committed suicide while he was still insane.
The insurer is liable in this case.
§7. ACCIDENTAL DEATH BENEFIT CLAUSE. The life insurance policy
may provide for an accidental death benefit clause which gives the beneficiaries
additional benefits if the death of the insured is through accidental means. Thus, the
policy may provide for an additional amount if the death of the insured resulted
directly from bodily injury effected solely through external and violent means
sustained in an accident and independently of all other causes. This rule was
explained in one case:30
“A gun which discharges while being cleaned and kills a bystander; a hunter who
shoots at his prey and hits a person instead; an athlete in a competitive game involving
physical effort who collides with an opponent and fatally injures him as a result: these
are instances where the infliction of the injury is unintentional and therefore would be
within the coverage of an accidental death benefit clause such as that in question in this
case. But where a gang of robbers enter a house and coming face to face with the owner,
even if unexpectedly, stab him repeatedly, it is contrary to all reason and logic to say that
his injuries are not intentionally inflicted, regardless of whether they prove fatal or not. As
it was, in the present case they did
^’Emilia T. Biagtan, et al. v. The Insular Life Assurance Company, Ltd., G.R- No. L-
25579, March 29, 1972.
CHAPTER 13 383
LIFE INSURANCE
prove fatal, and the roEbers have been accused and convicted of the crime of robbery with homicide.
The c a s e of O j . l a r . o c tr. Col. r i o f A p p e a l s , 9 8
P h i l . 7 9 , is relied upon by the trial court in support of its decision. The facts in that case,
however, are different from those obtaining here. The insured there was a watchman in a certain
company, who happened to be invited by a policeman to come along as the latter was on his way to
investigate a reported robbery going on in a private house. As the two of them, together with the owner
of the house, approached and stood in front of the main gate, a shot was fired and it turned out
afterwards that the watchman was hit in the abdomen, the wound causing his death. Under those
circumstances, this Court held that it could not be said that the killing was intentional for there was the
possibility that the malefactor had fired the shot to scare the people around for his own protection and
not necessarily to kill of hit the victim. A similar possibility is clearly ruled out by the facts in the case
now before Us. For while a single shot fired from a distance, and by a person who was not even seen
aiming at the victim, could indeed have been fired without intent to kill or injure, nine wounds indicted
with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent
is concerned. The manner of execution of the crime permits no other conclusion.
Court decisions in the American jurisdiction, where similar provisions in accidental death
benefit clauses in insurance policies have been construed, may shed light on the issue before Us. Thus, it
has been held that '‘intentional” as used in an accident policy excepting intentional injuries inflicted by
the insured or any other person, e t c . , implies the exercise of the reasoning faculties,
consciousness, and volition. Where a provision of the policy excludes intentional injury, it is the
intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured
clearly resulted from the intentional act of a third person the insurer is relieved from liability as
stipulated.
In the case of H u t c h c r a f t ’ s E x ’ r . v .
T r a v e l e r s ’ I n s . C o . , 8 7 K y . 3 0 0 , 8 S . W .
5 7 0 , 1 2 A m . S t . R e p . 4 8 4 , the insured was waylaid and
assassinated for the purpose of robbery. Two ( 2 ) defenses were interposed to the action to
recover indemnity, namely: (1) that the insured having been killed by intentional means, his death
was not accidental, and (2) that the proviso in the policy expressly exempted the insurer from liability
in case the insured died from injuries intentionally inflicted by another person. In rendering judgment
for the insurance company, the Court held that while the assassination of the insured was as to him an
unforeseen event and therefore accidental, the clause of the proviso “that excludes the (insurer’s)
liability, in case death or injury is intentionally inflicted by any other person, applies to this case.”
I n Butero v. Travelers’ Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61,
7 1 S . W . 8 1 1 , the insured was shot three times by a person unknown late on a dark
and stormy night, while working in the coal shed of a railroad company. The policy did not cover
death resulting from “intentional
3S4 ESSENTIALS OF INSURANCE LAW
injuries inflicted by the insured or any other person.” The inquiry was as to the question
whether the shooting that caused the insureds death was accidental or intentional; and the
Court found that under the facts, showing that the murderer knew his victim and that he
fired with intent to kill, there could be no recovery under the policy which excepted death
from intentional injuries inflicted by any person.”
a. The death of the insured is still compensable under the Accidental Death
Clause if the insured died because a malefactor had fired the shot that killed the
insured merely to scare away the people around the malefactor for the latter’s
protection and not necessary to kill the insured.31
b. The death of the insured was accidental when he ruptured his intestine
after he jumped a few feet to the floor. The death was accidental “because although his
act of jumping was intentional, the result (rupturing his intestine) was not. 32 The death
was also accidental where the death was caused by contaminated dental equipment. 33
However, routine jogging that resulted in ocular pressure in the insured’s eye was not
considered accidental.34
PROBLEM:
1. The facts are stipulated. Juan S. Biagtan was insured with defendant Insular Life
Assurance Company under Policy No. 398075 for the sum of P5,000 and, under a
supplementary contract denominated “Accidental Death Benefit Clause, for an
additional sum of P5,000 if “the death of the Insured resulted directly from bodily
injury effected solely through external and violent means sustained in an accident...
and independently of all other causes.” The clause, however, expressly provided that
it would not apply where death resulted from an injury “intentionally inflicted by a
third party.” On the night of May 20, 1964 or during the first hours of the following
day a band of robbers entered the house of the insured Juan S. Biagtan. In
committing the robbery, the robbers, on reaching the staircase landing of the second
floor, rushed towards the doors of the second floor room, where they suddenly met a
person near the door of one of the rooms who turned out to be the insured Juan S.
Biagtan who received thrusts from their sharp-pointed instruments, causing wounds
on the body of said Juan
^'Virginia Calanoc v. Court of Appeals, G.R. No. L-8151, December 16, 1955.
32
Di Mugno and Glad, p. 1620, citing Harloe v. California State Life Ins. Co., 206 Cal.
141, 273 P. 560 (1928).
M
Ibid., citing Horton v. Travelers’ Ins. Co., 45 Cal. App. 462, 187 P. 1070 (2d Dist.
1920).
M
Ibid., citing Williams v. Hartford Accident & Indemnity Co., 158 Cal. App. 3d 229,
204 Cal. Rptr. 453 (2d Dist. 1984).
CHAPTER 13 385
LIFE INSURANCE
S. Biagtan resulting in his death at about 7 a.m. on the same day, May 21, 1964”;
Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The
insurance company paid the basic amount of P5,000 but refused to pay the additional
sum of P5,000 under the accidental death benefit clause, on the ground that the
insured’s death resulted from injuries intentionally inflicted by third parties and
therefore was not covered. Plaintiffs filed suit to recover. The only issue to be
resolved is whether under the facts, the wounds received by the insured at the hands
of the robbers — nine in all, five of them mortal and four non-mortal — were
inflicted intentionally. The trial court ruled in the negative finding that the wounds
were not inflicted intentionally. Is the trial court correct in its finding?
A: No. The trial court committed a plain error in concluding that
the wounds were inflicted unintentionally. The wounds were inflicted upon
the deceased, all by means of thrusts with sharp- pointed instruments
wielded by the robbers. This is a physical fact as to which there is no
dispute. So is the fact that five of those wounds caused the death of the
insured. Whether the robbers had the intent to kill or merely to scare the
victim or to ward off any defense he might offer, it cannot be denied that the
act itself of inflicting the injuries was intentional. (Emilia T, Biagtan, et al. v.
The Insular Life Assurance Company, Ltd., G.R. No. L-25579, March 29, 1972)
§8. TRANSFER OF POLICY. The policy of life insurance may be the

object of voluntary and involuntary transfer. Insurable interest on the part of the
transferee is not necessary. Notice to the insurer is not even necessary.
SEC. 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.
SEC. 185. Notice to an insurer of a transfer or
bequest thereof is not necessary to preserve the validity
of a policy of insurance upon life or health, unless
thereby expressly required.
§9. EXEMPT FROM EXECUTION. Proceeds of life insurance policies are

exempt from execution under Section 13(k) of Rule 39 of the Rules of Civil
Procedure which declares as exempt from execution “monies, benefits, privileges,
or annuities accruing or in any manner growing out of any life insurance.” The
exemption is
not limited to life insurance defined in Section 179 of the Insurance Code. When the Rules
of Court make reference to “any life insurance,” the exemption there established applies
to ordinary life insurance contracts, as well as to those which, although intended primar-
ily to indemnify for risks arising from accident. It includes policies that insure against loss
of life due, either to accidental causes, or to the willful and criminal act of another, which,
as such, is not strictly accidental in nature. Indeed, it has been held that statutes of this
nature seek to enable the head of the family to secure his widow and children from
becoming a burden upon the community and, accordingly, should merit a liberal
interpretation.35
§10. INSOLVENCY. There is resolute attitude of Courts upon the
proposition that the assignee acquires no beneficial interest in insurance effected on the
life of the insolvent, except to the extent that such insurance contains assets which can be
realized upon as of the date when the petition of insolvency is filed. This attitude is
manifest if the question has arisen under provisions like Section 32 of the Insolvency Law
which provides the properties that are exempt from execution do not pass to the
assignee.36 Similarly, under Section 113 of R.A. No. 10142, legal title of properties exempt
from execution does not pass to the liquidator.
a. The explanation is to be found in the consideration that the destruction of a
contract of life insurance is not only highly prejudicial to the insured and those dependent
upon him, but is inimical to the interests of society. Insurance is a species of property that
should be conserved and not dissipated. As is well known, life insurance is increasingly
difficult to obtain with advancing years, and even when procurable after the age of 50, the
cost is then so great as to be practically prohibitive to many. Insolvency is a disaster likely
to overtake men in mature life; and one who has gone through the process of bankruptcy
usually finds himself in his declining years with the accumulated savings of years swept
away and earning power diminished. The courts are therefore practically unanimous in
refusing to permit the assignee in insolvency to wrest from the insolvent a policy of
insurance which contains in it no present realizable assets. 37
35
Gallardo v. Morales, G.R. No. L-12189, April 29, 1960.
36
This corresponds to Section 14 of the American Bankruptcy Act of 1867, or under
Section 70(a) of the American Bankruptcy Act of 1898.
37
Sun Life Assurance Company of Canada v. Frank B. Ingersoll, G.R. No. 16475,
November 8, 1921.
CHAPTER 13 387
LIFE INSURANCE
§11. CONTENTS OF POLICY. The forms of insurance policies are subject

to the approval of the Insurance Commission. The insurer can insert stipulation that
is not contrary to law, moral, good customs and public policy so long as the approval
is secure. However, in the case of Individual Life Insurance, Endowment Policy,
Group Life Insurance Policy and Industrial Life Policy, 3* the Insurance Code
requires certain mandatory provision. The mandatory provision for Individual Life
Insurance and Endowment Policy are as follows:
SEC. 233. In the case of individual life or

endowment insurance, the policy shall contain in
substance the following conditions:
(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 38
38
See Sections 229, 230 and 231,1.C.
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 (2 1/2%) of
the amount insured and any dividend additions
thereto; and 2
(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
CHAPTER 13
LIFE INSURANCE
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.
This section shall not apply to policies of group life

or industrial life insurance.
a. Group Life Insurance. In a group life insurance, a group of individuals are

covered by one master contract. Thus, policyholder may be an employer who obtains a
group insurance coverage over the lives of his employees. The nature of this contract
was explained in one case:39
“This practice is usual in the group insurance business and is consistent with the
jurisprudence thereon in the State of California — from whose laws our Insurance Code has
been mainly patterned — which holds that the employer-policyholder is the agent of the
insurer.
Group insurance is a comparatively new form of insurance. In the United States, the
first modern group insurance policies appear to have been issued in 1911 by the Equitable
Life Assurance Society. Group insurance is essentially a single insurance contract that
provides coverage for many individuals. In its original and most common form, group
insurance provides life or health insurance coverage for the employees of one employer.
The coverage terms for group insurance are usually stated in a master agreement or
policy that is issued by the insurer to a representative of the group or to an administrator of
the insurance program, such as an employer. The employer acts as a functionary in the
collection and payment of premiums and in performing related duties. Likewise falling within
the ambit of administration of a group policy is the disbursement of insurance payments by
the employer to the employees. Most policies, such as the one in this case, require an
employee to pay a portion of the premium, which the employer deducts from wages while the
remainder is paid by the employer. This is known as a contributory plan as compared to a
non-contributory plan where the premiums are solely paid by the employer.
Although the employer may be the titular or named insured, the insurance is actually
related to the life and health of the employee. Indeed, the employee is in the position of a real
party to the master policy, and even in a non-contributory plan, the payment by the employer
of the entire premium is a part of the total compensation paid for the services of the
employee. Put differently, the labor of the employees is the true source of the benefits, which
are a form of additional compensation to them.
It has been stated that every problem concerning group insurance presented to a
court should be approached with the purpose of giving to it every legitimate opportunity of
becoming a social agency of real consequence * 27
39
Luz Pineda, et al. v. Hon. Court of Appeals, et al., G.R. No. 105562, September
27, 1993.
CHAKffcR y/f
UFK J.'.BL'RAN'CF
considering that the ftnmbry mm is to provide the employer with e means of procuring insurance
\tr<ttection for his employees end their familiars at the lowest possible cx/rtt, and in HO doing, the
employer creates goodwill vdth hi« employees, enables the employees to carry a larger amount of
insurance than they could otherwise, and helps to attract and hold a permanent, class of employees.
In E l f f i L r o r n v . N e w Y o r k L i f e
I n s u r a n c e ( ' C o m p a n y , the California Supreme Court, explicitly
ruled that in group insurance policies, the employer is the agent of the insurer. Thus:
We are convinced that the employer is the agent of the insurer in performing
the duties of administering group insurance policies. It cannot be said that, the
employer acts entirely for its own benefit or for the benefit of its employees in
undertaking administrative functions. While a reduced premium may result if the
employer relieves the insurer of these tasks, and this, of course, is advantageous to
both the employer and the employees, the insurer also enjoys significant advantages
from the arrangement. The reduction in the premium which results from employer-
administration permits the insurer to realize a larger volume of sales, and at the same
time the insurer’s own administrative costs are markedly reduced.
xxx
The most persuasive rationale for adopting the view that the employer acts as the
agent of the insurer, however, is that the employee has no knowledge of or control over the
employer’s actions in handling the policy or its administration. An agency relationship is
based upon consent by one person that another shall act in his behalf and be subject to his
control. It is clear from the evidence regarding procedural techniques here that the insurer-
employer relationship meets this agency test with regard to the administration of the policy,
whereas that between the employer and its employees fails to reflect true agency. The insurer
directs the performance of the employer’s administrative acts, and if these duties are not
undertaken properly the insurer is in a position to exercise more constricted control over the
employer’s conduct.
I n Neider v. Continental Assurance Company, w h i c h was cited in

Elfstrom, i t w a s h e l d t h a t :
[tjhe employer owes to the employee t h e d u t y o f

g o o d f a i t h a n d d u e c a r e in attending to the
policy, and that the employer should make clear to the employee anything
required of him to keep the policy in effect, and the time that the obligations are
due. In its position as administrator of the policy, We feel also that the employer
should be considered as the agent of the insurer, and a n y
o m i s s i o n o f d u t y to the employee in its administration
should be a t t r i b u t a b l e t o t h e i n s u r e r .”
(1) The mandatory provisions for a group life insurance are provided
for under Section 234 of the Insurance Code as follows:
SEC. 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 policy-
holder or by persons insured shall be deemed represen-
tations 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
CHAPTER 13 39
LIFE INSURANCE
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 custom-
arily 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)
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.
CHAPTER 13 395
LIFE INSURANCE
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.
b. Industrial Life Insurance. Section 235 of the Insurance Code provides that the
term i n d u s t r i a l l i f e i n s u r a n c e as used in this
Code shall mean that form of life insurance under which the premiums are payable
either monthly or oftener, if the face amount of insurance provided in any policy is not
more than five hundred times that of the current statutory minimum daily wage in the
City of Manila, and if the words i n d u s t r i a l p o l i c y are printed
upon the policy as part of the descriptive matter.
(1) An industrial life policy shall not lapse for non-payment of
premium if such nonpayment was due to the failure of the company to send its
representative or agent to the insured at the residence of the insured or at some
other place indicated by him for the purpose of collecting such premium.
However, this rule shall not apply when the premium on the policy remains
unpaid for a period of three (3) months or twelve (12) weeks after the grace
period has expired.40
(2) The mandatory provisions for industrial life insurance are provided
for under Section 236 of the Insurance Code which provides:
SEC. 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
40
Section 235, Insurance Code.
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;
able 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 servic-
es 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 in-
sured, 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
CHAPTER 13 397
LIFE INSURANCE
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 (2 1/2%) 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 (2 1/2%) 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 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
CHAPTER 13
LIFE INSURANCE
maintenance, medical attention or burial of the insured;

and
(n) A provision that when an industrial life insur-
ance policy is issued providing for accidental or health
benefits, or both, in addition to life insurance, the fore-
going 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.
(3) Prohibited stipulations in an industrial life policies enumerated in

Section 237 of the Insurance Code:
SEC. 237. No policy of industrial life insurance shall

be issued or delivered in the Philippines if it contains any
of the following provisions:
(a) A provision that gives the insurer the right to
declare the policy void because the insured has had any
disease or ailment, whether specified or not, or because
the insured has received institutional, hospital, medical or
surgical treatment or attention, except a provision which
gives the insurer the right to declare the policy void if the
insured has, within two (2) years prior to the issuance of
the policy, received institutional, hospital, medical or
surgical treatment or attention and if the insured or the
claimant under the policy fails to show that the condition
occasioning such treatment or attention was not of a
serious nature or was not material to the risk;
(b) A provision that gives the insurer the right to
declare the policy void because the insured has been
rejected for insurance, unless such right be conditioned
upon a showing by the insurer that knowledge of such
rejection would have led to a refusal by the insurer to

make such contract;
(c) A provision that allows the company to pay the
proceeds of the policy at the death of the insured to any
person other than the named beneficiary, except in
accordance with a standard provision as specified under
the provisions of paragraph (m) of the preceding section;
(d) A provision that limits the time within which any
action at law or in equity may be commenced to less than
six (6) years after the cause of action shall accrue; and
(e) A provision that specifies any mode of

settlement at maturity of less value than the amount
insured by the policy plus dividend additions, if any, less
any indebtedness to the company on the policy and less
any premium that may by the terms of the policy be
deducted, payments to be made in accordance with the
terms of the policy.
Nothing contained in this section nor in the provi-
sion of paragraph (b) of the preceding section, relating to
incontestability, shall be construed as prohibiting the life
insurance company from placing in its industrial life
policies provisions limiting its liability with respect to:
(1) Death resulting from aviation other than
as a fare-paying passenger on a regularly sched-
uled route between definitely established airports;
and
(2) Military or naval service: Provided, That if

the liability of the company is limited as herein
provided, such liability shall in no event be fixed at
an amount less than the reserve on the policy
(excluding the reserve for any additional benefits in
the event of death by accident or accidental means
or for benefits in the event of any type of disability),
less any indebtedness on or secured by such
policy; nor shall any provision of this section apply
to any provision in an industrial life insurance
policy for additional benefits in the event of death
by accident or accidental means.
CHAPTER 13 401
LIFE INSURANCE
§12. LIFE INSURANCE EQUATION. In business of life insurance, in the long

run, the incoming premiums and investment earnings must be equal to the outgoing
payment of losses, expenses and profits. 41 The way the business works was summarized
in this wise:
“Since there is no assurance that the death rate will exactly follow the expectation
in the given year, insurers collect somewhat more than they need to pay the expected
claims. In addition to this, they must add a “loading” to the mortality cost in order to have
enough to pay the operating expenses of the company. Finally, funds held for reserves or
surplus are invested and the investment income is used to reduce the cost of insurance. If
the insurer is able to operate at an expense less than it calculated, or the death claims do
not equal the expectations, savings are accumulated and at the end of the business year
they may be apportioned back to policyholders as a dividend or to stockholders as
profits”42
a. Mortality Table. It is therefore important to make proper calculations to attain

the equality of values mentioned above. This is done with the help of mortality tables
prepared by actuaries. The mortality table is the instrument that measures the probability
or living or dying. The table shows the probable death rate at each age.43
41
Bickelhaupt, p.
227.
42
Ibid.
43
Bickelhaupt, p.
239.
CHAPTER 14
CASUALTY INSURANCE AND COMPULSORY
THIRD PARTY LIABILITY INSURANCE
Casualty insurance and accident insurance is of later origin as it was derived

mainly from the practice of life insurance. However, it has been said that it more
clearly accords with the original purposes (of insurance) than life insurance. “Under
life insurance, the insurer undertakes to pay a certain sum upon the happening of an
event which will certainly take place, the only contingency being with reference to
the time at which death will occur. On the other hand, the accident insurer merely
assumes the risk of misfortune which may or may not happen, and which in fact in
the majority of cases never does happen. Therefore, in pure accident insurance, there
is little of the investment feature that requires the reservation of reserve fund which
plays an important part in the conduct of life insurance business.”1
§1. DEFINITION. Section 176 of the Insurance Code provides that:
SEC. 176. Casualty insurance is insurance

covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law or
custom are considered as falling exclusively within the
scope of other types of insurance such as fire or
marine. It includes, but is not limited to, employer’s
liability insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft insurance,
personal accident and health insurance as written by
non-life insurance companies, and other substantially
similar kinds of insurance.
ânce, p. 867.
402
CHAPTER 14 403
a. Thus, casualty insurance includes the following:
(1) Burglary and theft insurance.
(2) Personal accident and health insurance as written
by non-life insurance companies.
(3) Plate glass insurance.
(4) Employer’s liability insurance.
(5) Motor vehicle liability insurance.
(6) Other substantially similar kinds of insurance.

b. Examples of insurance policies that are substantially similar to those
expressly enumerated under Section 176 include: (1) Pollution Liability Insurance, (2)
Pharmacist Liability Insurance,
( 3 ) Medical Malpractice Insurance, (4) Garage Insurance, and (5) Directors and Officers
Liability Insurance.
§1.01. DISTINGUISHED FROM ACCIDENT INSURANCE. Casualty insurance
is strictly speaking different from Accident Insurance. Accident Insurance is defined as
“an insurance policy which provides coverage, singly or in combination, for death,
dismemberment, disability or hospital and medical care caused by accident or special
kinds of accidents.”2
§2. GOVERNING RULES. Except with respect to compulsory motor vehicle
liability insurance, the Insurance Code contains no other provisions applicable to casualty
insurance contracts. These contracts are governed by the general provisions applicable to
all types of insurance. Outside of these, the rights and obligations of the parties must be
determined by the terms of their contract, taking into consideration its purpose and always
in accordance with the general principles of insurance law.3
§3. THEFT AND ROBBERY INSURANCE. It has been aptly observed that in
burglary, theft and robbery insurance, “the opportunity to defraud the insurer — the moral
hazard — is so great that insurers have found it necessary to fill up their policies with
countless restrictions, many designed to reduce this hazard. Seldom
'^Paragraph 5.1, I.C. Circular Letter No. 2015-58-A dated December 21, 2015.
^Fortune Insurance and Surety Company, Inc. v. Court of Appeals and Producer’s Bank
of the Philippines, G.R. No. 115278, May 23, 1995.
404 ESSENTIALS OF INSURANCE I,AW
does the insurer assume the risk of all losses due to the hazards insured against.” 4
a. For example, persons frequently excluded under such provisions are
those in the insured’s service and employment. The purpose of the exception is to
guard against liability should the theft be committed by one having unrestricted
access to the property. In such cases, the terms specifying the excluded classes are
to be given their meaning as understood in common speech. The terms “service”
and “employment” are generally associated with the idea of selection, control, and
compensation.5
b. When the theft and robbery insurance uses the term “employee,” it
contemplates any person who qualifies as such as generally and universally
understood, or jurisprudentially established in the light of the four standards in the
determination of the employer-employee relationship, or as statutorily declared
even in a limited sense as in the case of Article 106 of the Labor Code which
considers the employees under a “labor-only” contract as employees of the party
employing them and not of the party who supplied them to the employer.6
PROBLEM:
1. The plaintiff bank was insured by the defendant insurer against theft and robbery.
An armored car of the plaintiff, while in the process of transferring cash in the
sum of P725,000 under the custody of its teller, Maribeth Alampay, from its
Pasay Branch to its Head Office at 8737 Paseo de Roxas, Makati, Metro Manila
on June 29, 1987, was robbed of the said cash. The robbery took place while the
armored car was traveling along Taft Avenue in Pasay City; the said armored
car was driven by Benjamin Magalong y de Vera, escorted by Security Guard
Saturnino Atiga y Rosete. Driver Magalong was assigned by PRC Management
Systems with the plaintiff by virtue of an Agreement executed on August 7,
1983; the Security Guard Atiga was assigned by Unicorn Security Services, Inc.
with the plaintiff by virtue of a contract of Security Service executed on
October 25, 1982. After an investigation conducted by the Pasay police
authorities, the driver Magalong and guard Atiga were charged, together with
Edelmer Bantigue y Eulalio, Reynaldo Aquino and John Doe, with violation of
4
Fortune Insurance and Surety Company, Inc. v. Court of Appeals and
Producer’s Bank of the Philippines, supra.
b
Ibid.
6
Ibid.
CHAPTER 14 4or>
P.D. No. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City. The Fiscal
of Pasay City then filed an information charging the aforesaid persons with the said
crime before Branch 112 of the Regional Trial Court of Pasay City. Demands were
made by the plaintiff upon the defendant to pay the amount of the loss of P725,000, but
the latter refused to pay as the loss is excluded from the coverage of the insurance
policy specifically under the “General Exceptions'’ thereof which reads:
“GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
XXX XXX XXX
(b) any loss caused by any dishonest, fraudulent or criminal act of the insured
or any officer, employee, partner, director, trustee or authorized representative of the
Insured whether acting alone or in conjunction with others. . . . ”
The plaintiff opposes the contention of the defendant and contends that Atiga
and Magalong are not its “officer, employee, trustee or authorized representative” at
the time of the robbery. Did the defendant validly deny the claim?
A: Yes, the defendant insurer validly denied the claim. But even
granting for the sake of argument that these contracts were not “labor-only”
contracts, and PRC Management Systems and Unicorn Security Services were
truly independent contractors, Magalong and Atiga were, in respect of the
transfer of Producer’s money from its Pasay City branch to its head office in
Makati, its “authorized representatives” who served as such with its teller
Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the
specific duty to safely transfer the money to its head office, with Alampay to
be responsible for its custody in transit; Magalong to drive the armored vehicle
which would carry the money; and Atiga to provide the needed security for the
money, the vehicle, and his two other companions. In short, for these
particular tasks, the three acted as agents of Producers. A “representative” is
defined as one who represents or stands in the place of another; one who
represents others or another in a special capacity, as an agent, and is
interchangeable with “agent.” In view of the foregoing, Fortune is exempt
from liability under the general exceptions clause of the insurance policy.
( F o r t u n e I n s u r a n c e a n d S u r e t y
C o m p a n y , I n c . v . C o u r t o f
A p p e a l s a n d P r o d u c e r ’ s B a n k o f
t h e P h i l i p p i n e s , G . R . N o .
1 1 5 2 7 8 , M a y 2 3 , 1 9 9 5 )
§4. PERSONAL ACCIDENT AND HEALTH INSUR- ANCE. This type of

insurance normally includes: (1) Income Coverage. (2) Coverage for Loss of Life,
Sight or Limb, or (3) Medical Expenses Coverage.
§4.01. ACCIDENT. One of the issues pertaining to personal accident
insurance is the meaning of the term “accident.” It has been observed that the words
“accident” and “accidental” have never acquired any technical signification in law,
and when used in an insurance contract are to be construed and considered according
to the ordinary understanding and common usage and speech of people generally.
Courts are practically agreed that the words “accident” and “accidental” in substance
mean that which happens by chance or fortuitously, without intention or design, and
which is unexpected, unusual, and unforeseen. The definition that has usually been
adopted by the courts is that an accident is an event that takes place without one’s
foresight or expectation — an event that proceeds from an unknown cause, or is an
unusual effect of a known case, and therefore not expected.7
a. It has been held that death through “sunstroke” is considered death through
accidental means. The opinion of Justice Car- dozo is cited in support of this opinion:
“Sunstroke, though it may be a disease according to the classification of physicians,
is none the less an accident in the common speech of men ... The suddenness of its approach
and its catastrophic nature . . . have made that quality stand out when thought is
uninstructed in the mysteries of science. . . Violent it is for the same reason, and external
because the train of consequences is set in motion by the rays of the sun beating down upon
the body, a cause of operating from without.
In my view this man died from an accident. What killed him was a heat-stroke
-1 ■ coming suddenly and unexpectedly upon him while at work. Such a stroke is an unusual
ti effect of a known cause, often, no doubt, threatened, but generally averted by precautions
which experience, in this instance, had not taught. It was an unlooked for mishap in the
N
U-
course of his employment. In common language, it was a case of accidental death.”8
7
Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim, G.R.
No. 92383, July 17, 1992.
8
Dissenting Opinion in Landress v. Phoenix Mutual Life Insurance Company, 291
U.S. 491 (1934) cited in Raley v. Life & Casualty Ins. Co. of Tennessee, 117 A. (2d) 110
(D.C.C.A, 1955).
CHAPTER 14 407
§4.02. WILLFUL EXPOSURE TO NEEDLESS PERILS. Personal accident

policies often expressly exclude injuries caused by the willful exposure of the insured to
needless peril. It should be noted at the outset that suicide and willful exposure to
needless peril are i n p a r i m a t e r i a because they both signify a
disregard for one’s life. The only difference is in degree, as suicide imports a positive act
of ending such life whereas the second act indicates a reckless risking of it that is almost
suicidal in intent. To illustrate, a person who walks a tightrope one thousand meters
above the ground and without any safety device may not actually be intending to commit
suicide, but his act is nonetheless suicidal. He would thus be considered as “willfully
exposing himself to needless peril” within the meaning of the exception in question.9
a. Accident insurance policies were never intended to reward the insured for
his tendency to show off or for his miscalculations. They were intended to provide for
contingencies. Hence, when one miscalculates and jumps from the Quezon Bridge into
the Pasig River in the belief that he can overcome the current, he has willfully exposed
himself to peril and must accept the consequences of my act. If one drowns, his
beneficiary cannot go to the insurance company to ask them to compensate them for the
insured’s failure to swim as well as he thought he could. It is clear that when the insured
braved the currents of the river, he deliberately exposed himself to a known peril. 10
b. At any rate, even in the absence of the express exclusion of willful
exposure to needless perils, such willful exposure may likewise be deemed excluded
under the rule that insurers are exonerated by the gross negligence of the insured.11
§4.03. VOLUNTARY ACTS. The generally accepted rule is that death or
injury does not result from accident or accidental means within the terms of an
accident-policy if it is the natural result of the insured’s voluntary act, unaccompanied
by anything unforeseen except the death or injury. There is no accident when a
deliberate act is performed unless some additional, unexpected, independent, and
unforeseen happening occurs which produces or
9
Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim,
supra.
l0
Ibid.
n
FGU Insurance Corporation v. The Court of Appeals, et al., G.R. No. 137775, March 31,
2005.
brings about the result of injury or death. In other words, where the death or injury
is not the natural or probable result of the insured’s voluntary act, or if something
unforeseen occurs in the doing of the act which produces the injury, the resulting
death is within the protection of the policies insuring against death or injury from
accident. There is no accident when a deliberate act is performed unless some
additional, unexpected, independent and unforeseen happening occurs which
produces or brings about their injury or death.12
a. In one case, the insured died because of his participation in a boxing

contest. While the participation of the insured in the boxing contest is voluntary,
the injury was sustained when he slid, giving occasion to the infliction by his
opponent of the blow that threw him to the ropes of the ring. Without this
i> unfortunate incident, that is, the unintentional slipping of the deceased, perhaps he
-c could j
not have received that blow in the head and would not have died. f
The fact that boxing is attended with some risks of external injuries j
t does not make any injuries received in the course of the game not j
: 11 accidental. In boxing as in other equally physically rigorous sports, j
such as basketball or baseball, death is not ordinarily anticipated [
to result. If, therefore, it ever does, the injury or death can only be (
accidental or produced by some unforeseen happening or event as |
what occurred in this case.13 [
PROBLEMS:
. 1. The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face
M value of P200,000.00. Two months later, he was dead with a bullet wound in his
head. As beneficiary, his wife Nerissa Lim sought payment on the policy but her
iin
claim was rejected. The petitioner agreed that there was no suicide. It argued,
however, that there was no accident either. Pilar Nalagon, Lim’s secretary, was
the only eyewitness to his death. It happened on October 6, 1982, at about 10
o’clock in the evening, after his mother’s birthday party. According to Nalagon,
Lim was in a happy mood (but not drunk) and was playing with his handgun,
from which he had previously removed the magazine. As she watched the
television, he stood in front of her and pointed the gun at her. She pushed it
aside and said it might be
12
Sun Insurance Office, Ltd. v. The Hon. Court of Appeals, G.R. No.
92383, July 17, 1992; Simon De la Cruz v. The Capital Insurance, G.R. No. L-
21574, June 30, 1966.
13
Simon De la Cruz v. The Capital Insurance and Surety Co., Inc., G.R.
No. L-21547, June 30, 1966.
CHAPTER 14 400
loaded. He assured her it was not and then pointed it to his temple. The next moment there
was an explosion and Lim slumped to the door. He was dead before he fell. The petitioner
insurer denied the claim on the ground that the death of the insured was not caused by
accident and that the same is covered by this provision:
Exceptions —
The company shall not be liable in respect of.
1. Bodily injury\
xxx xxx xxx b.

consequent upon.
i) The insured persons attempting to commit suicide or wilfully exposing
himself to needless peril except in an attempt to save human life.
Is the death of the insured covered by the covered by the accident
insurance? Is it covered by the exceptions?
A: Yes, the death of the insured is covered by the policy and does not
fall under the exceptions. An accident is an event which happens without any human
agency or, if happening through human agency, an event which, under the
circumstances, is unusual to and not expected by the person to whom it happens. It
has also been defined as an injury which happens by reason of some violence or
casualty to the insured without his design, consent, or voluntary co-operation. Hence,
the incident that resulted in Lim’s death was indeed an accident. This was the firing
of the gun, which was the additional unexpected and independent and unforeseen
occurrence that led to the insured person’s death. It cannot be said that Lim had
willfully exposed himself to needless peril. Lim had removed the magazine from the
gun and believed it was no longer dangerous. He expressly assured the secretary that
the gun was not loaded. It is submitted that Lim did not willfully expose himself to
needless peril when he pointed the gun to his temple because the fact is that he
thought it was not unsafe to do so. The act was precisely intended to assure Nalagon
that the gun was indeed harmless.
Lim was unquestionably negligent and that negligence cost him his own life.
But it should not prevent his widow from recovering from the insurance policy he
obtained precisely against accident. There is nothing in the policy that relieves the
insurer of the responsibility to pay the indemnity agreed upon if the insured is shown
to have contributed to his own accident. Indeed, most accidents are caused by
negligence. There are only four exceptions expressly made in the contract to relieve
the insurer from liability, and none of these exceptions is applicable
i n t h e c a s e a t b a r . (Sun Insurance Office, Ltd. v. The Hon.

Court of Appeals and Nerissa him, G.R. No. 92383, July 17, 1992)
2. On October 22, 1986, deceased Carlie Surposa was insured with petitioner Finman
General Assurance Corporation under Finman General Teachers Protection Plan
Master Policy No. 2005 and Individual Policy No. 08924 with his parents, spouses
Julia and Carlos Surposa, and brothers Christopher, Charles, Chester and Clifton,
all surnamed Surposa, as beneficiaries. The perils insured against include
“accidents” and “accidental death.” While said insurance policy was in full force
and effect, the insured, Carlie Surposa, died on October 18, 1988 as a result of a
stab wound inflicted by one of the three unidentified men without provocation and
warning on the part of the former as he and his cousin, Winston Surposa, were
waiting for a ride on their way home along Rizal-Locsin Streets, Bacolod City
after attending the celebration of the “ M a s k a r r a Annual Festival.”
Thereafter, private respondent and the other beneficiaries of said insurance policy
filed a written notice of claim with the petitioner insurance company which denied
said claim contending that murder and assault are not within the scope of the
coverage of the insurance policy because the death was not accidental. Is the
denial of the claim valid?
A: No, the denial was not valid. The terms ‘accident’ and ‘accidental,’
as used in insurance contracts have not acquired any technical meaning,
and are construed by the courts in their ordinary and common acceptation.
Thus, the terms have been taken to mean that which happen by chance or
fortuitously, without intention and design, and which is unexpected,
unusual, and unforeseen. An accident is an event that takes place without
one’s foresight or expectation — an event that proceeds from an unknown
cause, or is an unusual effect of a known cause and, therefore, not
expected. In the case at bar, it cannot be pretended that Carlie Surposa
died in the course of an assault or murder as a result of his voluntary act
considering the very nature of these crimes. In the first place, the insured
and his companion were on their way home from attending a festival.
They were confronted by unidentified persons. The record is barren of any
circumstance showing how the stab wound was inflicted. Nor can it be
pretended that the malefactor aimed at the insured precisely because the
killer wanted to take his life. In any event, while the act may not exempt
the unknown perpetrator from criminal liability, the fact remains that the
happening was a pure accident on the part of the victim. The insured died
from an event that took place without his foresight or expectation, an
event that proceeded from an unusual effect of a known cause and,
therefore, not expected. Neither can it be said that there was a capricious
desire on the part of the accused to expose his life to danger considering
that he was just going home after
CHAPTER 14 411
attending a festival. (Finman General Assurance Corporation v.

The Hon. Court of Appeals and Julia Surposa, G.R. No. 100970,
September 2, 1992)
§5. GLASS INSURANCE. Normally, glass insurance insures against breakage

or damage caused by chemicals accidentally or maliciously applied. There is breakage
when the break penetrates through the entire thickness of the glass. 14
a. In addition to the cost of the glass, the policy may likewise provide for
coverage for the following: (1) repairing or replacing damage to the frame, (2)
boarding up or installing temporary plates in openings, (3) removing and replacing
any fixtures and other obstructions, and (4) removal of debris of covered property
resulting from a covered loss.15
§6. EMPLOYER’S LIABILITY INSURANCE. Insurance against employer’s
liability covers injuries sustained by their employees which arise out of and in the
course of the insured employee’s employment.
a. Usual exclusions in Employer’s Liability Insurance include: (1) When there
is serious or willful misconduct on the part of the insured, (2) When the employee was
hired in violation of law, (3) When the insured failed to comply with health and safety
regulations, and (4) When the employer discharges, coerces, or discriminates against
an employee.
§7. MOTOR VEHICLE LIABILITY INSURANCE. Under this policy, the
insurer becomes liable for the damage or injury caused in the operation of motor
vehicles. This type of insurance may be voluntary or compulsory and covers death,
incapacity or injury and damage to property. However, motor vehicle liability
insurance is not limited to third party liability. It may be comprehensive and may
cover damage or injury to the person or property of the insured himself or third
persons.
§7.01. DIRECT LIABILITY. The third party victim may proceed directly
against the insurer for indemnity. It is significant to point out that the right of a third
person to sue the insurer depends on whether the contract of insurance is intended to
benefit third persons also or only the insured. The right of the person injured to * 6
14
Huebner, Black and Webb,
p.Ibid.,
l6 304. p. 305.
sue the insurer of the party at fault (insured), depends on whether the contract of
insurance is against liability to third persons or for the benefit of the insured.
a. Test. The test that can be applied is this: Where the contract provides for
indemnity against liability to third persons, then third persons to whom the insured is
liable can sue the insurer. Where the contract is for indemnity against actual loss or
payment, then third persons cannot proceed against the insurer, the contract being solely
to reimburse the insured for liability actually discharged by him through payment to
third persons, said third persons’ recourse being thus limited to the insured alone. 16 The
Supreme Court observed:17
: “It is settled that where the insurance contract provides for indemnity against
n
liability to a third party, such third party can directly sue the insurer. ( C o q u i a
v . F i e l d m a n ’ s I n s u r a n c e C o . , I n c . ,
G . R . N o . 2 3 2 7 6 , N o v e m b e r 2 9 ,
1 9 6 8 , 2 6 S C R A 1 7 8 ) . The liability of the insurer to such
11 •:
third person is based on contract while the liability of the insured to the third party is
based on tort. ( M a l a y a n I n s u r a n c e C o . , I n c .
v . C A , L - 3 6 4 1 3 , S e p t e m b e r 2 6 ,
1 9 8 8 , 1 6 5 S C R A 5 3 6 ) . This rule was explained in the
case of S h a f e r v . J u d g e , R T C o f
O l o n g a p o C i t y , B r . 7 5 , G . R . N o .
7 8 8 4 8 , N o v e m b e r 1 4 , 1 9 8 8 :
. ‘The injured for whom the contract of insurance is intended can sue directly the
dJ
AJ insurer. The general purpose of statutes enabling an injured person to proceed directly
N/ against the insurer is to protect injured persons against the insolvency of the insured
1 who causes such injury, and to give such injured person a certain beneficial interest in
the proceeds of the policy, and statutes are to be liberally construed so that their
intended purpose may be accomplished. It has even been held that such a provision
creates a contractual relation which inures to the benefit of any and every person who
may be negligently injured by the named insured as if such injured person were
specifically named in the policy.
‘In the event that the injured fails or refuses to include the insurer as party
defendant in his claim for indemnity against the insured, the latter is not prevented by
law to avail of the procedural rules intended to avoid multiplicity of suits. Not even a
‘no action’ clause under the policy which requires that a final judgment be first obtained
against the insured and that only thereafter can the person insured recover on the policy
16
Travellers Insurance & Surety Corporation v. Hon. Court of Appeals and Vicente
Mendoza, G.R. No. 82036, May 22,1997; Dionisia Guingon, et al. v. Iluminado Del Monte, et
al., G.R. No. L-22042, August 17, 1967, 20 SCRA 1043.
17
First Integrated Bonding & Insurance Company, Inc. v. The Hon. Harold M.
Hernando, et al., G.R. No. 51221, July 31, 1991.
CHAPTER 14 413
b. Not joint tortfeasor. The third party liability is only up to the extent of the
insurance policy and those required by law. While it is true that where the insurance
contract provides for indemnity against liability to third persons, and such persons can
directly sue the insurer, the direct liability of the insurer under indemnity contracts against
third party liability does not mean that the insurer can be held liable i n
s o l i d u m with the insured and/or the other parties found at fault for all the
damages sustained by the insured. For the liability of the insurer is based on contract; that
of the insured carrier or vehicle owner is based on tort.18 However, the insurer may be held
solidarily liable up to the extent that the insurer may be held liable under the contract of
insurance. Thus, if the damage is less than the face value of the policy, the insurer may be
held solidarily liable up to the full value of the damage or loss.19
c. Policy as measure of liability. The nature of the liability of the insurer and
the insured v i s - a - v i s the third party injured in an accident is measured by or
circumscribed by the policy.20 The extent of the liability and manner of enforcing the same
in ordinary contracts should also be distinguished from extent and manner in insurance
contracts. While in solidary obligations, the creditor may enforce the entire obligation
against one of the solidary debtors, in an insurance contract, the insurer undertakes for a
consideration to indemnify the insured against loss, damage or liability arising from an
unknown or contingent event and the indemnity is fixed in the policy.21
d. No action clause disallowed. However, if direct liability to third party is
provided for, a “ n o a c t i o n c l a u s e ” cannot be provided for in
the policy. A “ n o a c t i o n c l a u s e ” i s a clause that disallows
suit against the insurer unless final judgment is obtained by a third party against the
insured. This clause cannot prevail over the Rules of Court. It cannot override procedural
rules aimed at avoidance of multiplicity of suits.22
18
Malayan Insurance Co., Inc. v. Philippine First Insurance Co., Inc. and Reputable Forwarder
Services, Inc., G.R. No. 184300, July 11, 2012; Heirs of George Poe v. Malayan Insurance Co., G.R.
No. 156308, April 7, 2009; Government Service Insurance System v. Court of Appeals, 308 SCRA 559
(1999).
19
William Tiu, et al. v. Pedro A. Arriesgado, et al., G.R. No. 138060, September 1, 2004, 437
SCRA 426, 449.
20
Figuracion Vda. de Maglana, et al. v. Honorable Francisco Z. Consolacion, et al., G.R. No.
60506, August 6, 1992.
Zl
lbid.
22
Dionisia Guingon, et al. v. Iluminado Del Monte, et al., G.R. No. L-22042, August 17, 1967.
PROBLEM:
1. Mr. JA insured his jeepneys against third party liability with C Insurance. The
insurance policies contain the following stipulation:
E. Action Against Company
No action shall lie against the Company unless, as a condition precedent
thereto, the Insured shall have fully complied with all of the terms of this Policy,
nor until the amount of the Insured’s obligation to pay shall have been finally
determined either by judgment against the Insured after actual trial or by written
agreement of the Insured, the claimant, and the Company.
Any person or organization or the legal representative thereof who has
secured such judgment or written agreement shall thereafter be entitled to
recover under this policy to the extent of the insurance afforded by the Policy.
Nothing contained in this policy shall give any person or organization any right
to join the Company as a co-defendant in any action against the Insured to
determine the Insured’s liability.
Bankruptcy or insolvency of the Insured or of the Insured’s estate shall
not relieve the Company of any of its obligations hereunder.
One of the drivers of Mr. JA was negligent in operating a jeepney covered
by the insurance policy and Mr. GG was bumped as a consequence. Thereafter,
Mr. GG filed a case against Mr. JA and C Insurance. The insurer is asking for the
dismissal of the case arguing that it cannot be included in the action because of
the above-quoted action clause. Should the case against the insurer be dismissed?
A: No. The action against the insurer should proceed. It is true
that the policy requires that suit and final judgment be first obtained
against the insured; that only “thereafter” can the person injured recover
on the policy and it expressly disallows suing the insurer as a co-
defendant of the insured in a suit to determine the latter’s liability.
However, the “no action” clause in the policy of insurance cannot prevail
over the Rules of Court provision aimed at avoiding multiplicity of suits.
A “no action” clause in a policy of insurance cannot override procedural
rules aimed at avoidance of multiplicity of suits. Similarly, in the instant
case the provisions of the Rules of Court on “Joinder of causes of action”
and “permissive joinder of parties” cannot be superseded, a t
l e a s t w i t h r e s p e c t t o t h i r d
p e r s o n s n o t a p a r t y t o t h e
c o n t r a c t by a “no action” clause in the contract of insurance.
( G u i n g o n v . l l l u m i n a d o d e l
M o n t e , e t a l . , G . R . N o . L -
2 2 0 4 2 , A u g u s t 1 7 , 1 9 6 7 )
§7.02. AUTHORIZED DRIVER CLAUSE. This is a typical provision in a Motor

Vehicle Liability Insurance. As the term
CHAPTER 14 415
implies, this means that the insurer will be liable only if the driver is an
“authorized driver” at the time of the accident. A typical provision may state
that the driver at the time of the accident must be “permitted in accordance
with the licensing or other laws or regulations to drive the Motor Vehicle and
is not disqualified from driving such motor vehicle by order of a Court of
Law or by reason of any enactment or regulation in that behalf.” 23 It was
explained in an early case:24
“The cases cited by the appellant are a p r o p o s . In C r a h a n v .

A u t o m o b i l e U n d e r w r i t e r s , I n c . , e t a l .,
1 7 6 A . ( P a . ) 8 1 7 , a clause in the policy excluding loss while the motor
vehicle ‘is being operated by any person prohibited by law from driving an automobile was held
to be free from doubt or ambiguity, reasonable in its terms and in furtherance of the policy of the
law prohibiting unlicensed drivers to operate motor vehicles. In Z a b o n i c k v .
R a l s t o n , e t a l . , 2 6 1 N . W . ( M i c h . ) 3 1 6 ,
the insured was driving with an expired license, in violation of law ( A c t N o . 9 1
o f t h e P u b l i c A c t s o f 1 9 3 1 ) , when the accident
occurred. Under a provision in the policy that the insurer shall not be liable while the automobile
is operated ... by any person prohibited by law from driving, the insurance company was
absolved, the Supreme Court of Michigan saying: To require a person to secure an operator’s
license and meet certain requirements before driving an automobile is a regulation for the
protection of life and property, the wisdom of which can scarcely be questioned. The Legislature
has also provided that every three years such licenses expire and may be renewed under certain
conditions. If one fails to comply with the regulation, the statute says, he or she shall not drive a
motor vehicle upon the highway. Under the terms of the contract, while under such statutory
prohibition, plaintiff could not recover under his policy. To permit such recovery,
notwithstanding the lack of a driver’s license, would tend to undermine the protection afforded
the public by virtue of Act No. 91.
The exclusion clause in the contract invoked by appellant is clear. It does not refer to
violations of law in general, which indeed would tend to render automobile insurance practically
a sham, but to a specific situation where a person other than the insured himself, even upon his
order or with his permission, drives the motor vehicle without a license or with one that has
already expired. No principle of law or of public policy militates against the validity of such a
provision.”
23
Andrew Palermo v. Pyramid Insurance Company, Inc., G.R. No. L-36480, May 31,
1988.
Ârturo R. Tanco, Jr. v. Philippine Guaranty Company, G.R. No. L-17312, November
29, 1965.
a. The main purpose of the “authorized driver” clause is to make sure that
a person other than the insured owner who drives the car on the insured’s order (such
as his regular driver, or with his permission, such as a friend or member of the family
or the employees of a car service or repair shop) is a duly licensed driver and has no
disqualification to drive a motor vehicle.25 26
b. The “authorized driver clause” applies only when the driver “is driving
on the insured’s order or with his permission.” It does not apply when the person
driving is the insured himself. Operating an automobile on a public highway without
a license, which act is a statutory crime is not precluded by public policy from
enforcing a policy indemnifying her against liability for bodily injuries inflicted by
use of the automobile.26 While the Motor Vehicle Law prohibits a person from
operating a motor vehicle on the highway without a license or with an expired
license, an infraction of the Motor Vehicle Law on the part of the insured, is not a bar
to recovery under the insurance contract. It however renders him subject to the penal
sanctions of the Motor Vehicle Law.27
§7.03. THEFT CLAUSE. The motor vehicle insurance may contain a theft
clause that makes theft a risk insured against. The taking of a vehicle by another
person without the permission or authority from the owner thereof is sufficient to
place it within the ambit of the word theft as contemplated in the policy, and is
therefore, compensable.28
a. Theft clause likewise applies when one takes the motor vehicle of
another without the latter’s consent even if the motor vehicle is later returned, there
is theft - there being intent to gain as the use of the thing unlawfully taken constitutes
gain.29
b. In ! P a r a m o u n t I n s u r a n c e v .
S p o u s e s R e m o n d e u l a z , 3 0 the insurance policy over
the vehicle likewise contained a theft clause. Possession of the vehicle was entrusted
to another to the a certain Sales who was supposed to introduce repairs who
permanently deprived the owners of possession thereof. Hence, there was theft
25
Villacorta v. Insurance Commission, 100 SCRA 467.
26
Andrew Palermo v. Pyramid Insurance Company, Inc., G.R. No. L-36480, May 31, 1988.
2n
Ibid.
28
Malayan Insurance Co., Inc. v. Court of Appeals, 230 Phil. 145, 147 (1986).
29
People v. Bustinera, G.R. No. 148233, June 8, 2004.
^G.R. No. 173773, November 28, 2012.
CHAPTER 14 417
of the vehicle. Although there was turn-over of physical possession of the vehicle, there
was no transfer of physical possession. The failure of the owner of the repair shop to
return the subject vehicle to insured owner constitutes theft and the insurer is for the loss
of insured vehicle under the “theft clause.”
c. Not Covered by Malicious Damage Clause. The theft clause also
applies even if the person who took the vehicle is an employee of the insured. In
A l p h a I n s u r a n c e a n d S u r e t y C o m p a n y
v . C a s t o r i l the insurance policy over a car included theft as a risk insured
against. One of the exclusions or the risks that is not covered by the insurance was
“malicious damage” caused by the insured, members of the family and those employed by
the insured. It was argued that taking of the vehicle by the driver of the insured constitutes
“malicious damage” and is not covered by the theft clause. The Supreme Court rejected
the argument explaining that the exclusion for “material damage” refers to damage that is
the direct result of the deliberate or willful acts where the deliberate plan or purpose was to
cause damage to the vehicle for purposes of defrauding the insurer.
§7.04. AUTHORIZED DRIVER CLAUSE AND THEFT CLAUSE
DISTINGUISHED. Where a car is unlawfully and wrongfully taken without the
owner’s consent or knowledge, such taking constitutes theft, and, therefore, it is the
‘THEFT” clause, and not the “AUTHORIZED DRIVER” clause that should apply.
Theft is an entirely different legal concept from that of accident. Theft is committed by
a person with the intent to gain or, to put it in another way, with the concurrence of the
doer’s will. On the other hand, accident, although it may proceed or result from
negligence, is the happening of an event without the concurrence of the will of the
person by whose agency it was caused. Clearly, the risk against accident is distinct
from the risk against theft. The “authorized driver clause” in a typical insurance policy
is in contemplation or anticipation of accident in the legal sense in which it should be
understood, and not in contemplation or anticipation of an event such as theft.31 32
a. It is worthy to note that there is no causal connection between the possession of a
valid driver’s license and the loss of a
31
G.R. NO. 198174, September 2, 2013.
32
Perla Compania de Seguros, Inc. v. The Court of Appeals, Herminio Lim and Evelyn Lim,
G.R. No. 96452, May 7, 1992.
vehicle through theft. To rule otherwise would render car insurance practically a
sham since an insurance company can easily escape liability by citing restrictions
that are not applicable or germane to the claim, thereby reducing indemnity to a
shadow.33
§8. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
(CMVLI). The Insurance Code makes it mandatory for all motor vehicles to be
covered by motor vehicle liability insurance as defined and governed by Sections
386 to 402 thereof. Motor vehicles will not be registered by the Land
Transportation Commission 34 without the required insurance. Thus, Sections 387
to 389 as amended provides:
SEC. 387. It shall be unlawful for any land trans-

portation operator or owner of a motor vehicle to
operate the same in the public highways unless there
is in force in relation thereto a policy of insurance or
guaranty in cash or surety bond issued in accordance
with the provisions of this chapter to indemnify the
death, bodily injury, and/or damage to property of a
third-party or passenger, as the case may be, arising
from the use thereof.
SEC. 388. The Commissioner shall furnish the
Land Transportation Office with a list of insurance
companies authorized to issue the policy of
insurance or surety bond required by this chapter.
SEC. 389. The Land Transportation Office shall
not allow the registration or renewal of registration of
any motor vehicle without first requiring from the
land transportation operator or motor vehicle owner
concerned the presentation and filing of a
substantiating documentation in a form approved by
the Commissioner evidencing that the policy of
insurance or guaranty in cash or surety bond
required by this chapter is in effect.
^Perla Compania de Seguros, Inc. v. The Court of Appeals, Herminio Lim and
Evelyn Lim, supra.
^Section 375 (As amended by P.D. No. 1814) provides that the Commissioner shall furnish the
Land Transportation Commissioner with a list of insurance companies authorized to issue the policy of
insurance or surety bond required by the Code.
CHAPTER 14 419
a. Rationale. The nature of Compulsory Motor Vehicle Liability

Insurance is such that it is primarily intended to provide compensation for the
death or bodily injuries suffered by innocent third parties or passengers as a result
of the negligent operation and use of motor vehicles. The victims and/or their
dependents are assured of immediate financial assistance, regardless of the
financial capacity of motor vehicle owners.35
b. No Unreasonable Denial. Section 392 of the Insurance Code provides
that “no land transportation operator or owner of motor vehicle shall be
unreasonably denied the policy of insurance or surety bond required by this
chapter by the insurance companies authorized to issue the same, otherwise, the
Land Transportation Commission shall require from said land transportation
operator or owner of the vehicle, in lieu of a policy of insurance or surety bond, a
certificate that a cash deposit has been made with the Commissioner in such
amount required as limits of indemnity in section three hundred seventy-seven to
answer for the passenger and/or third-party liability of such land transportation
operator or owner of the vehicle.” The authority to engage in the casualty and/ or
surety lines of business of an insurance company that refuses to issue or renew,
without just cause, the insurance policy or surety bond therein required shall be
withdrawn immediately.
c. Premium. Premiums are paid by the operators or owners of vehicles.
It shall be unlawful for a land transportation operator or owner of motor vehicle to
require his or its drivers or other employees to contribute in the payment of
premiums.36
d. Agents. No government office or agency having the duty of
implementing the provisions of this chapter nor any official or employee thereof
shall act as agent in procuring the insurance policy or surety bond provided for
herein.37
(1) The commission of an agent procuring the said policy or bond
shall in no case exceed ten p e r c e n t u m (10%) of the
amount of the premiums therefor.38
e. Damage Coverage. The liability covered is for death and bodily
injury. Section 374 of the Insurance Code provides that
36
William Tiu v. Pedro Arriesgado, et al., G.R. No. 138060, September
1, 2004. 36Section 399,1.C.
37
Section 400,1.C.
s*Ibid.
the Compulsory Motor Vehicle Liability Insurance covers “death, bodily injury,
and/or damage to property.” However, the phrase “damage to property’’ appears
in both Sections 386(f) and 387 of the Insurance Code. The Insurance
Commission believes that the words “and damage to property” in Section 386(f)
is merely descriptive and the prevailing provision for purposes of determining the
coverage of the policy is Section 387 which contains the disjunctive words
“and/or.” The Insurance Commission therefore concluded that the amended
Insurance Code “makes the acquisition of property damage coverage merely
optional on the part of the policy owner, and not mandatory.”39
§8.01. DEFINITIONS. The following terms may be defined for purposes of
applying the provisions on Compulsory Motor Vehicle Liability Insurance:40
(1) “ M o t o r V e h i c l e ” i s any vehicle as
defined in Section 3, paragraph (a) of Republic Act No. 4136 otherwise
known as the “Land Transportation and Traffic Code.” Section 3, paragraph
[a] of the Land Transportation and Traffic Code provides that a “Motor
Vehicle” means any vehicle propelled by any power other than muscular
power using the public highways, but excepting road rollers, trolley cars,
street-sweepers, sprinklers, lawn mowers, bulldozers, graders, fork-lifts,
amphibian trucks, and cranes if not used on public highways, vehicles
which run only on rails or tracks, and tractors, trailers and traction engines
of all kinds used exclusively for agricultural purposes. The law likewise
provides that trailers having any number of wheels, when propelled or
intended to be propelled by attachment to a motor vehicle shall be classified
as separate motor vehicle with no power rating.
(2) “ P a s s e n g e r ” is any fare paying person being
transported and conveyed in and by a motor vehicle for transportation of
passengers for compensation, including persons expressly authorized by law
or by the vehicle’s operator or his agents to ride without fare.41
39
Circular Letter No. 2014-52 dated December 15, 2014. (The Insurance
Commission noted that P.D. 1814 deleted the words “damage to property” and “and/
or damage to property” from the coverage of CMLVI that were previously part of P.D.
612. RA 10607 reintegrated the same words in the present law.)
40
Section 386(a), I.C.
41
Section 386(b), I.C.
CHAPTER 14 421
(3) “ T h i r d - P a r t y ” is any person other than a

passenger and shaU also exclude a member of the household, or a member
of the family within the second degree of consanguinity or affinity, of a
motor vehicle owner or land transportation operator or his employee in
respect of death, bodily injury, or damage to property arising out of and in
the course of employment.42
(4) “ O w n e r ” or “ M o t o r v e h i c l e
o w n e r ” means the actual legal owner of a motor vehicle, in
whose name such vehicle is duly registered with the Land Transportation
Commission.43
(5) “ L a n d t r a n s p o r t a t i o n
o p e r a t o r ” means the owner or owners of motor vehicles for
transportation of passengers for compensation, including school buses.44
(6) “ I n s u r a n c e P o l i c y ” or
“ P o l i c y ” refers to a contract of insurance against passenger
and thirty-party liability for death or bodily injuries and damaged to
property arising from motor vehicle accidents.45
§8.02. ALTERNATIVE COMPLIANCE. Under Section 390, every land
transportation operator and every owner of a motor vehicle shall, before
applying for the registration or renewal of registration of any motor vehicle, at
his option, either:
(1) Secure an insurance policy issued by any insurance company
authorized by the Commissioner; or
(2) Post a surety bond issued by any insurance company
authorized by the Commissioner; or
(3) Make a cash deposit in such amount which is the required
limit of liability for Compulsory Motor Vehicle Liability Insurance.
a. It should be noted that the cash deposit made to, or surety bond posted
with, the Commissioner shall be resorted to by him in cases of accidents the
indemnities for which to third-parties and/or passengers are not settled
accordingly by the land transportation operator. In that event, the said cash
deposit shall be replenished or such surety bond shall be restored within 60
days after impairment
42
Section
386(c),
SectionI.C.
43
““Section
“Section
386(f), I.C.
or expiry, as the case may be, by such land transportation operator, otherwise, he
is required to secure the insurance policy. The aforesaid cash deposit may be
invested by the Commissioner in readily marketable government bonds and/or
securities.
§8.03. COVERAGE. Section 390 of the Insurance Code provides for the
coverage of the CMVLI:
SEC. 390. Every land transportation operator

and every owner of a motor vehicle shall, before
applying for the registration or renewal of registration
of any motor vehicle, at his option, either secure an
insurance policy or surety bond issued by any
insurance company authorized by the Commissioner
or make a cash deposit in such amount as herein
required as limit of liability for purposes specified in
Section 387.
(a) In the case of a land transportation operator,
the insurance guaranty in cash or surety bond shall
cover liability for death or bodily injuries of third-
parties and/or passengers arising out of the use of
such vehicle in the amount not less than Twelve
thousand pesos (P12,000.00) per passenger or third-
party and an amount, for each of such categories, in
any one accident of not less than that set forth in the
following scale:
(1) Motor vehicles with an authorized
capacity of twenty-six (26) or more passengers:
Fifty thousand pesos (P50,000.00);
capacity of from twelve (12) to twenty-five (25)
passengers: Forty thousand pesos (P40,000.00);
capacity of from six (6) to eleven (11) passengers:
Thirty thousand pesos (P30,000.00);
(4) Motor vehicles with an authorized ca-
pacity of five (5) or less passengers: Five
thousand pesos (P5,000.00) multiplied by the
authorized capacity.
Provided, however, That such cash deposit
made to, or surety bond posted with, the
Commissioner shall be resorted to by him in cases of
CHAPTER 14
indemnities for which to third-parties and/or

passengers are not settled accordingly by the land
transportation operator and, in that event, the said cash
deposit shall be replenished or such surety bond shall
be restored within sixty (60) days after impairment or
expiry, as the case may be, by such land transportation
operator, otherwise, he shall secure the insurance
policy required by this chapter. The aforesaid cash
deposit may be invested by the Commissioner in readily
marketable government bonds, and/or securities.
(b) In the case of an owner of a motor vehicle, the
insurance or guaranty in cash or surety bond shall
cover liability for death or injury to third-parties in an
amount not less than that set forth in the following
scale in any one accident:
(1) Private Cars
(i) Bantam: Twenty thousand pesos
(P20,000.00);
(ii) Light: Twenty thousand pesos
(P20,000.00); and
(iii) Heavy: Thirty thousand pesos
(P30,000.00).
(2) Other Private Vehicles
(i) Tricycles, motorcycles and scoot-
ers: Twelve thousand pesos (P12,000.00);
(ii) Vehicles with an unladen weight
of 2,600 kilos or less: Twenty thousand
pesos (P20,000.00);
(iii) Vehicles with an unladen weight
of between 2,601 kilos and 3,930 kilos:
Thirty thousand pesos (P30,000.00); and
(iv) Vehicles with an unladen weight
over 3,930 kilos: Fifty thousand pesos
(P50,000.00).
The Commissioner may, if warranted, set forth
schedule of indemnities for the payment of claims
for death or bodily injuries with the coverages set
forth herein.
(Republic Act No. 10607 with Notes oo Pre-Need Acs J
a. Amount of Coverage Per IC Circular. The last paragraph of Section

390 of the Insurance Code states that “the Commissioner may, if warranted, set
forth schedule of Indemnities for the payment of claims for death or bodily
injuries setting forth the each coverage” Accordingly, the Insurance
Commissioner issued Insurance Memorandum Circular No. 4-2006 dated July
26. 2006 providing for the amount of the compulsory coverage for CMVLL*
The said Circular provides for the third party liability’ coverage of P100,000.00
with additional P100,000.00 coverage for passenger liability for public utility
vehicle.
b. Schedule of Indemnity. The Circular likewise provides that the
death indemnity is P70,000.00 while the indemnity for burial and funeral
expenses is P30,000.00. The schedule of indemnity for bodily injuries and
fractures are likewise provided for.47
c. Maximum Indemnity. It should be noted that the previous Insurance
Memorandum Circular fixed the maximum indemnity for death at P12,000.00
per victim and the maximum limit per accident was pegged at P50,000.00. An
insurer in an indemnity contract for third party liability is directly liable to the
injured party up to the extent specified in the agreement but it cannot be held
solidarily liable beyond that amount.4* It means that the insurer’s maximum
liability for any single accident will not exceed P50,000.00 regardless of the
number of passengers killed or injured therein. 49 If we apply the ruling in the
said cases to Insurance Memorandum Circular No. 4-2006, this means that the
present maximum liability per accident is now P100,000.00 (plus another
P100,000.00 for passengers of a common carrier) irrespective of the number of
victims. However, the present rules issued by the Land Registration and
Franchising Regulatory Board (LTFRB) requires insurance coverage on a per
passenger or per person basis. 50 The LTFRB rules provide for enhanced and
detailed benefits for the required Passenger Personal Accident Insurance
Program. For example, under the LTFRB rules, the benefit for accidental death
is
48
In relation to Section 390,1.C. IMC No. 4-2006 dated July 26, 2006
repealed IMC No. 1-96.
41
Ibid. See Appendix “C” of this work.
4M
William Tiu v. Pedro Arriesgado, et al., G.R. No. 138060, September 1,
2004. 49First Quezon City Insurance Company, Inc. v. The Hon. Court of
Appeals, et al., G.R. No. 98414, February 8, 1993.
50
See Eastern Assurance and Surety Corporation v. LTFRB, G.R. No.
149717, October 7, 2003 (re validity of LTFRB rules).
CHAPTER 14 425
PI50,000.00 per passenger while loss of two limbs and loss of sign in both eyes are
both covered by a required P75,000.00 insurance coverage per passenger.61
(1) Nevertheless, the parties may voluntarily enter into an insurance
contract that provides for a bigger coverage. The owner of the motor vehicle
may likewise secure a “comprehensive” insurance coverage that makes the
liable vehicle for his own damage as well as liability to third persons.
§8.04. NO FAULT INDEMNITY CLAUSE. Section 391 of the Insurance
Code allows a passenger or third party to recover without proof of fault or negligence
on the party of the driver of the insured vehicle:
SEC. 391. Any claim for death or injury to any

passenger or third-party pursuant to the provisions of
this chapter shall be paid without the necessity of
proving fault or negligence of any kind: Provided, That
for purposes of this section:
(a) The total indemnity in respect of any person
shall not be less than Fifteen thousand pesos
(P15,000.00);
(b) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to substantiate
the claim:
(c) Police report of accident; and

(d) Death certificate and evidence
sufficient to establish the proper payee; or
(e) Medical report and evidence of medical
or hospital disbursement in respect of which
refund is claimed;
(f) Claim may be made against one motor
vehicle only. In the case of an occupant of a vehicle,
claim, shall lie against the insurer of the vehicle in
which the occupant is riding, mounting or dismounting
from. In 51
51
LTFRB Memorandum Circular No. 2014-002 dated January 23, 2014 and LTFRB
Memorandum Circular No. 2001-010 dated February 28, 2001 which were issued by the
LTFRB under Section 5(k) of Commonwealth Act No. 146 as amended by E.O. No. 202.
(The detailed schedule of benefits per passenger is provided for).
any other case, claim shall lie against the insurer of the
directly offending vehicle. In all cases, the right of the
party paying the claim to recover against the owner of
the vehicle responsible for the accident shall be
maintained.
a. Limitations. From a reading of the provision, which is couched in straight-

forward and unambiguous language, the following rules on claims under the “no
fault indemnity” provision, where proof of fault or negligence is not necessary for
payment of any claim for death or injury to a passenger or a third party, are
established:52
(1) A claim may be made against one motor vehicle only.
(2) If the victim is an occupant of a vehicle, the claim shall lie

against the insurer of the vehicle in which he is riding, mounting or
dismounting from.
(3) In any other case (i . e ., if the victim is not an occupant of a
vehicle), the claim shall lie against the insurer of the directly offending
vehicle.
(4) In all cases, the right of the party paying the claim to recover
against the owner of the vehicle responsible for the accident shall be
maintained.
(5) The total indemnity in respect of any person shall not exceed
fifteen thousand pesos (P15,000.00);53
(6) The following proofs of loss, when submitted under oath, shall
be sufficient evidence to substantiate the claim:
(i) Police report of accident, and
(ii) Death certificate and evidence sufficient to establish the
proper payee, or
(iii) Medical report and evidence of medical or hospital
disbursement in respect of which refund is claimed.
52
Section 391, I.C.; Perla Compania de Seguros, Inc. v. Hon. Constante Ancheta,
et al„ G.R. No. L-49699, August 8, 1988.
“Section 391(a), I.C.; Paragraph III, Insurance Memorandum Circular No. 4-
2006, July 26, 2006. The original amount fixed by Section 378 (now Section 391) was
P5,000.00.
CHAPTER 14 427
b. Insurance Memorandum Circular No. 4-2006 provides for an increased

coverage under the “No-Fault Indemnity Clause.” This was later adopted under
Section 391(a) as amended by R.A. No. 10607. The Circular provides:
III. NO FAULT INDEMNITY
Any claim for death or bodily injuries sustained

by a passenger or third party shall be paid without the
necessity of proving fault or negligence of any kind
provided the total indemnity in respect of any person
shall be fifteen thousand pesos (Php15,000.00) for all
motor vehicles.
§8.05. CANCELLATION OF CMVLI. The rules on cancellation of the

CMVLI policy are embodied in Sections 380 and 381 of the Insurance Code which
provides:
SEC. 393. No cancellation of the policy shall be

valid unless written notice thereof is given to the land
transportation operator or owner of the vehicle and to
the Land Transportation Commission at least fifteen
(15) days prior to the intended effective date thereof.
Upon receipt of such notice, the Land Transportation
Commission, unless it receives evidence of a new valid
insurance or guaranty in cash or surety bond as
prescribed in this chapter, or an endorsement of revival
of the cancelled one, shall order the immediate
confiscation of the plates of the motor vehicle covered
by such cancelled policy. The same may be re-issued
only upon presentation of a new insurance policy or
that a guaranty in cash or surety band has been made
or posted with the Commissioner and which meets the
requirements of this chapter, or an endorsement or
revival of the cancelled one.
SEC. 394. If the cancellation of the policy or
surety bond is contemplated by the land
transportation operator or owner of the vehicle, he
shall, before the policy or surety bond ceases to be
effective, secure a similar policy of insurance or
surety bond to replace the policy or surety bond to be
cancelled or make a cash deposit in sufficient amount
with the Commissioner and
without any gap, file the required documentation with

the Land Transportation Commission, and notify the
insurance company concerned of the cancellation of
its policy or surety bond.
§8.06. CHANGE OF OWNERSHIP. Transfer of ownership does not

suspend the policy provided that Section 395 of the Insurance Code is complied
with.
SEC. 395. In case of change of ownership of a

motor vehicle, or change of the engine of an insured
vehicle, there shall be no need of issuing a new policy
until the next date of registration or renewal of
registration of such vehicle, and: Provided, That the
insurance company shall agree to continue the policy,
such change of ownership or such change of the
engine shall be indicated in a corresponding
endorsement by the insurance company concerned,
and a signed duplicate of such endorsement shall,
within a reasonable time, be filed with the Land
Transportation Commission.
§8.07. CLAIMS SETTLEMENT. In the settlement and payment of claims,

the indemnity shall not be availed of by any accident victim or claimant as an
instrument of enrichment by reason of an accident, but as an assistance or
restitution insofar as can fairly be ascertained.54
SEC. 397. Any person having any claim upon the

policy issued pursuant to this chapter shall, without
any unnecessary delay, present to the insurance
company concerned a written notice of claim setting
forth the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician.
Notice of claim must be filed within six (6) months from
the date of accident, otherwise, the claim shall be
deemed waived. Action or suit for recovery of damage
due to loss or injury must be brought, in proper cases,
with the Commissioner or the courts within one (1)
year from denial of the claim, otherwise, the claimant’s
right of action shall prescribe.
54
Section 396,1.C.
CHAPTER 14 429
a. Prescriptive Period. The prescriptive period is one year from the time the
cause of action accrues. The period is counted from the date of rejection by the insurer as
this is the time when the cause of action accrues. If the claim has not been rejected then
there has yet been no accrual of cause of action and prescription has not yet set in. 65 Thus,
in one case, the insured made an extrajudicial demand for payment but the insurer failed to
respond to the same and the complaint was filed even before a denial of the claim was
made by petitioner. The Supreme Court ruled that for all legal purposes, the one-year
prescriptive period provided for in Section 384 of the Insurance Code has not begun to run.
The cause of action arises only and starts to run upon the denial of the claim by the
insurance company.56
b. Section 398 of the Insurance Code provides for two periods — that is, the
six-month period for filing the notice of claim and the one-year period for bringing an
action or suit. The Supreme Court observed that there is absolutely nothing in the law
which mandates that the two periods must always concur. On the contrary, it is very clear
that the one-year period is only required in proper cases. Had the lawmakers intended it to
be that the two periods must concur, then the phrase “in proper cases” would not have been
inserted.57
c. Indeed, the Supreme Court has ruled with consistency that the prescriptive
period to bring suit in court under an insurance policy begins to run from the date of the
insurer’s rejection of the claim filed by the insured, the beneficiary or any person claiming
under an insurance contract. However, this ruling is premised upon the compliance by the
persons suing under an insurance contract, with the indispensable requirement of having
filed the written claim mandated by Section 397 of the Insurance Code. Absent such written
claim filed by the person suing under an insurance contract, no cause of action accrues
under such insurance contract, considering that it is the rejection of that claim that triggers
the running of the 55
55
Summit Guaranty & Insurance Co., Inc. v. The Honorable Gregoria Arnaldo, G.R. No.
L-48546, February 29, 1988; Summit Guaranty & Insurance Co., Inc. v. The Hon. Jose C. de
Guzman, etc., et al., G.R. No. 50997; Summit Guaranty & Insurance Co., Inc. v. The Hon.
Gregoria C. Arnaldo, etc., G.R. No. L-48679; and Summit Guaranty & Insurance Co., Inc. v. The
Hon. Ramon B. Jabson, etc., G.R. No. L-48758; Travellers Insurance & Surety Corporation v.
Hon. Court of Appeals and Vicente Mendoza, supra.
^Summit Guaranty & Insurance Co., Inc. v. The Honorable Gregoria Arnaldo,
supra.
hl
IbidL.
one year prescriptive period to bring suit in court, and there can be no opportunity for
the insurer to even reject a claim if none has been filed in the first place.58
d. Section 385 of the Insurance Code provides for the procedure that will be
undertaken after the claim, duly supported by documents, is filed with the insurance
company:
SEC. 398. The insurance company concerned shall

forthwith ascertain the truth and extent of the claim and
make payment within five (5) working days after reaching
an agreement. If no agreement is reached, the insurance
company shall pay only the no-fault indemnity provided
in Section 391 without prejudice to the claimant from
pursuing his claim further, in which case, he shall not be
required or compelled by the insurance company to
execute any quit claim or document releasing it from
liability under the policy of insurance or surety bond
issued.
In case of any dispute in the enforcement of the
provisions of any policy issued pursuant to this chapter,
the adjudication of such dispute shall be within the
original and exclusive jurisdiction of the Commissioner,
subject to the limitations provided in Section 439.
§8.08. PENALTY CLAUSES.
SEC. 401. Any land transportation operator or owner

of motor vehicle or any other person violating any of the
provisions of the preceding sections shall be punished
by a fine of not less than Five hundred pesos (P500.00)
and/or imprisonment for not more than six (6) months.
The violation of Section 390 by a land transportation
operator shall be a sufficient cause for the revocation of
the certificate of public convenience issued by the Land
Transportation Franchising and Regulatory Board
covering the vehicle concerned.
SEC. 402. Whenever any violation of the provisions
of this chapter is committed by a corporation or asso
58
TraveUers Insurance & Surety Corporation v. Hon. Court of Appeals a
afl Vicente Mendoza, supra.
CHAPTER 14 431
ciation, or by a government office or entity, the executive

officer or officers of said corporation, association or
government office or entity who shall have knowingly
permitted, or failed to prevent, said violation shall be held
liable as principals.
PROBLEMS:
1. Mr. Gonzales was the owner of a car insured with Masagana Insurance Company for “Own
Damage,” “Theft,” and “Third Party Liability” effective May 14, 1986 to May 14, 1987,
the car was brought to a machine shop for repairs. On May 11, 1987, while in the
custody of the machine shop, the car was taken by one of the employees (of the machine
shop) to show off to his girlfriend. While on the way to his girlfriend’s house, the car
smashed into a parked truck and was expensively damaged, Mr. Gonzales filed a claim
for recovery under the policy but was refused payment. The insurance company averred
that the car was stolen, and therefore, was not covered by the “Theft” clause. It was also
argued that there was a violation of the Authorized Driver Clause because the drivers are
not authorized. Decide the merits of the insurer’s contentions, with reasons.
A: I would decide in favor of the insured. Theft is a peril insured
against under the “Theft Clause.” Theft was committed in the present case
because unlawful and wrongful taking of the car by persons without the
knowledge and consent of the owner constitutes theft under Article 308 of the
Revised Penal Code. The crime is committed whether the persons who took the
instrument are employees of the car shop or not to whom it had been entrusted.
Even temporary taking is sufficient to warrant the finding the theft was
committed.
The contention that the “Authorized Driver Clause” bars recovery is also
not tenable. The Theft Clause and not the Authorized Driver Clause is
applicable. Under the Authorized Driver Clause, the insured cannot recover if
the driver at the time of the accident does not have the required driver’s license.
It does not mean that the “authorized driver” clause has. been violated if there
was unlawful taking of the car. ( S e e V i l l a c o r t a v .
I n s u r a n c e C o m m i s s i o n e r , 1 0 0
S C R A 4 6 7 )
2. Spouses PA and FA were passengers of the passenger bus operated by
Mr. T. The bus collided with a cargo truck causing injury to Mr. PA and the death of FA.
Mr. PA filed a complaint for breach of contract of carriage against Mr. T, his driver Mr. R
and PPS Insurance Company praying that they be held jointly and solidarity liable for
P500,000 the value of the damage or injury. PPS admitted that it issued a P300,000 policy
against third party liability over the bus of Mr. T but claims
that it cannot be held solidarily liable for the total. Assume that the amount being
claimed can be duly established, that the negligence of the driver of Mr. T was the
proximate cause of the loss and that the negligent act is a peril insured against.
a. Is the insurer correct in claiming that it cannot be held jointly and
severally liable?
b. What if the loss was only P250,000, can the insurer be held solidarily
liable?
A: (a) Yes, the insurer is correct in claiming that it cannot be
held jointly and severally liable for P500,000. The Lability of the
insurer is based on the contract of insurance and not on tort. Hence,
the insurer can be made liable only up to the extent fixed in the
policy and not for every natural and probable consequence of the
negligent act of the insured or his agent.
(b) Yes, the insurer can be held solidarily liable. If the loss is P250,000, the
same is well within the limit prescribed in the policy which is
P300,000. The insurer can be held directly liable because the
insurance is against third party liability subject to the qualification
that such Lability is only up to the extent specified in the agreement.
It cannot be held sohdarily Lable beyond that amount. ( S e e
W i l l i a m T i u , e t a l . v .
P e d r o A r r i e s g a d o , G . R . N o .
1 3 8 0 6 0 , S e p t e m b e r 1 , 2 0 0 4 )
3. HL insured his brand new car with P insurance company for comprehensive
coverage wherein the insurance company undertook to indemnify him against loss
or damage to the car: a) by accident; b) by fire, external explosion, burglary, theft;
and c) maLcious act. After a month, the car was carnapped while parked in the
parking space in front of the International Hotel in Makati. HL’s wife who was
driving the car before it was carnapped, reported the incident immediately to
various government agencies in comphance with the insurance requirements.
Because the car could not be recovered, HL filed a claim for the loss of the car
with the insurance company but it was denied on the ground that his wife who was
driving the car when it was carnapped was in possession of an expired driver’s
license, a violation of the authorized driver’s clause of the insurance company.
May the insurance company be held Lable to indemnify HL for the loss of the
insured vehicle? Explain.
A: Yes. The insurance company is Lable. Theft is a peril insured
against hence, the insurer is Lable under the theft clause. The fact that HL’s
wife was driving a car with an expired driver’s Lcense at the time it was
carnapped is immaterial. ( S e e P e r l a C o m p a n i a
d e S e g u r o s v . C A , 2 0 8 S C R A
4 8 7 )
CHAPTER 14 433
Sheryl insured her newly acquired car, a Nissan Maxima, against any loss or damage for
P50,000 and against third party liability for P20,000 with the XYZ Insurance Corp. (XYZ).
Under the policy, the car must be driven only by an authorized driver who is either a) the
insured; or b) any person driving on the insured’s order or with his permission:
P r o v i d e d , That the person driving is permitted in accordance with the
licensing or other laws or regulations to drive the motor vehicle and is not disqualified
from driving such a vehicle by order of a court. During the effectivity of the policy, the
car, then driven by Sheryl herself, who had no driver’s license, met an accident and was
extensively damaged. The estimated cost of repair was P40,000. Sheryl immediately
notified XYZ, but the latter refused to pay on the policy alleging that Sheryl violated the
authorized driver clause when she drove it without a driver’s license. Is the insurer correct?
A: No. The insurer is not correct in denying the claim on the ground
that there is a violation of the Authorized Driver Clause. The clause can be
invoked only if the person driving the vehicle is other than the insured. It does not
apply if the person driving the vehicle is the insured herself. Thus, the insurer is
liable because it is immaterial that the insured did not have a driver’s license.
( P a l e r m o v . P y r a m i d I n s u r a n c e ,
G . R . N o . 3 6 4 8 0 , M a y 3 1 , 1 9 8 8 )
Mayari obtained a comprehensive insurance policy on his car. The policy carried the
standard Authorized Driver Clause which states that the insurance company is not liable
for any loss, accident or damages sustained while the car is being driven by someone other
than a duly authorized driver. One day, Mayari allowed his friend, Kaibigan to drive the
car. Kaibigan figured in a mishap and the car was a total loss. Kaibigan had been driving
for the past five years but it appears that his license was irregularly issued because he
cannot read or write; neither did he take any of the prescribed driver’s tests. After the
initial license was issued, he merely asked his wife to go to the LTC office to get a renewal
of his license. Mayari did not know about the irregularity in the driver’s license of
Kaibigan. Can Mayari recover on the insurance policy? Explain.
A: No. Mayari cannot recover under the policy. The Authorized
Driver Clause requires that the driver other than the insured must have a valid
driver’s license at the time of the accident. What Kaibigan possessed is a license
that was irregularly issued. Hence, Kaibigan was in possession of an invalid
license at the time of the accident. For all intents and purposes, the license is
legally non-existent.
It should be noted however that there is another view to the effect that
the Authorized Driver Clause is not violated because the license has not yet
been revoked at the time of the
accident. The view is that until his license is revoked, it cannot be said that he
does not have a license at the time of the accident. However, it is believed that the
view that the Authorized Driver Clause is violated is the better view.
6. Driving his car one night, Mr. A crossed an intersection as the signal light turned
green. Suddenly, he saw an old woman crossing the street just a few feet from his
car. He applied the brakes immediately but the same, he hit the woman, who
turned out to be senile already. He brought her to the hospital where she was
confined for three days due to her injuries. Upon her discharge, A had to pay the
hospital bill which amounted to P2,000 including x-rays, doctor’s fee and
medicines. Being covered by the compulsory Lability policy required of all vehicle
owners under the Insurance Code, A referred the matter to his insurance company,
which refused to reimburse him, claiming that since A was not at fault (it was
admitted that he was not speeding or in any way negligent), there was no third
party liability for which the insurance company could be liable under A’s policy. Is
the insurance company liable to reimburse Mr. A for the hospital expenses?
Explain.
A: Yes, the insurance company is liable. Mr. A can recover under
the No-Fault Indemnity Clause provided for under Section 378 of the
Insurance Code which provides for indemnity up to P15,000 (previously
P5,000). It is not necessary to establish fault or negligence under this
provision and all that is required is for Mr. A to present the police report of
the accident and the medical report as well as the hospital receipts.
7. Jose, driving his own car, together with his wife, Maria, were on then- way home
from their respective offices when a car driven by Pedro hit them from behind
which was in turn hit by a gasoline tanker driven by Mario, causing the car to turn-
turtle, thus resulting to the death of Maria. All motor vehicles being insured, Jose
filed his claim for the death of Maria against the insurers of said three motor
vehicles under the No-Fault Indemnity Clause under Section 378 of Insurance
Code. If Jose includes in the claim damage for his car, will the claim prosper?
Why?
A: No, the claim of Jose claim for damages for his car will not
prosper. The No-Fault Indemnity Clause covers only claims for death or
injury to any passenger or third party. It does not apply to damage to
property that is being claimed by Jose. 8
8. Jose, driving his own car, together with his wife, Maria, were on their way home
from their respective offices when a car driven by Pedro hit them from behind
which was in turn hit by a gasoline tanker driven by Mario, causing the car to
turn-turtle, thus resulting to the death of Maria. All motor vehicles being insured,
Jose filed his claim for the death of Maria against the insurers of said three motor
vehicles under
CHAPTER 14 435
the No-Fault Indemnity Clause under Section 378 of Insurance Code. Will Jose’s claim
for the death of Maria against insurers of said three motor vehicles prosper and up to
what amount? Reasons.
A: No, Jose’s claim for the death of Maria will not prosper against
all the insurers of three motor vehicles. The claim under the No-Fault
Indemnity Clause may be made against one motor vehicle only. In the case of
an occupant of a vehicle, claim shall lie against the insurer of the vehicle, in
which the occupant is riding, mounting, or dismounting from. Hence, the
insurer of the vehicle where Maria is riding is the only one that can be made
liable.
While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the
latter. Roberto sued Cezar and the third party liability insurer for damages and/or
insurance proceeds. The insurance company moved to dismiss the complaint,
contending that the liability of Cesar has not yet been determined with finality. Is the
contention of the insurer correct? Explain.
A: No. The contention of the insurer is not correct. A final judgment
is not required before the insurer can be made liable under a third party liability
insurer. The liability of the insurer accrues immediately upon the occurrence of
the injury or event upon which the liability depends. ( S e e
S h e r m a n S h a f e r v . J u d g e , R T C ,
O l o n g a p o C i t y , B r a n c h 7 5 , e t
a l , G . R . N o , L - 7 8 8 4 8 , N o v e m b e r
1 4 , 1 9 9 8 ; 1 6 7 S C R A 3 8 6 )
CHAPTER 15
SURETYSHIP
Security for financial obligation is not a modern concept. It has been said
that the earliest form of suretyship dates back to biblical times and was personal in
nature.1 In the Philippines, collaterals were already used to secure debts before the
arrival of Magellan in these shores. Historian William Henry Scott noted the use in
pre- Spanish time of “ G a o n ” which was a kind of involuntary collateral
seized until the debt was paid. 2 When the Spaniards came, there was likewise
already in existence in the archipelago a security known as “T o k o d ” that
is somewhat similar to our present day concept of a surety. “ T o k o d ”
allows the creditor “to collect a debt from somebody other than the debtor, who
thus effectively acquired a new creditor who then had to collect as best as he
could.”3
§1. GENERAL CONCEPTS. By suretyship, a person known as surety
binds himself solidarily to the creditor to fulfill the obligation of the principal
debtor. On the other hand, Sections 177 and 178 of the Insurance Code provides:
SEC. 177. A contract of suretyship is an

agreement whereby a party called the surety
guarantees the performance by another party called
the principal or obligor of an obligation or undertaking
in favor of a third party called the obligee. It includes
official recognizances, stipulations, bonds or
undertakings issued by any company by virtue of and
under the provisions of Act No.
536, as amended by Act No. 2206.
Jerome Trupin and Arthur L. Flitner, Commercial Property Insurance and Risk
Management, Vol. 2, 5th Ed., p. 231, hereinafter referred to as “Trupin and Flitner.”
2
William Henry Scott, Barangay, Sixteenth Century Philippine Culture and Society,
1994 Ed., p. 135.
Hbid.
436
SURETYSHIP INSURANCE
There are three parties. The principal, There are two parties, the insurer and the
obligee and surety. insured.
The surety, in theory, expects no loss to
occur.
The insurer expects loss to occur and in some
cases, like life insurance, the loss is a certainty.
The surety has the right of
reimbursement against the defaulting The insurer does not have the right of
principal. reimbursement from the insured.
Insurance covers losses that are beyond the
control of the insured.
The surety guarantees qualities that are
within the control of the insured, that is,
the insured's character, honesty, and
integrity to perform the obligation.
§1.02. THREE “Cs.” Theoretically, the surety expects no loss to occur. Before
issuing a bond, the surety should undertake the required investigations in order to
determine if the principal can and will perform its obligations. Thus, prior to the issuance
of the bond, the surety will apply what is referred to by the American Insurance Institute
as the three "Cs” of suretyship, namely, c h a r a c t e r , c a p a c i t y ,
4
Section 2,1.C.
SURETY GUARANTY
The surety insures the debt.
The guarantor insures the debtor’s
solvency.
The surety is primarily liable. The guarantor is subsidiarily liable.
The surety is not entitled to the benefit The guarantor is entitled to the benefit
of excussion. of excussion.
a. The Supreme Court explained: “While a guarantor may bind himself

solidarily with the principal debtor, the liability of a
5
Trupin and Flitner, p. 233. See also David Porter, Fundamentals of Bonding, pp.
53-54.
^Trupin and Flitner, p. 233.
7
Title XV, Book IV, Articles 2047 to 2084, New Civil Code.
8
Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998.
CHAPTER 15 439
SURETYSHIP
guarantor is different from that of a solidary debtor. Thus, Tolentino explains: “A

guarantor who binds himself i n s o l i d u m with the principal debtor
under the provisions of the second paragraph does not become a solidary co-
debtor to all intents and purposes. There is a difference between a solidary co-
debtor, and a f i a d o r i n s o l i d u m (surety). The latter,
outside of the liability he assumes to pay the debt before the property of the
principal debtor has been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the f i a n s a ; while a solidary
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter
3, Title I, Book IV of the Civil Code”9
§1.04. CIVIL CODE APPLICABLE. The New Civil Code provisions on
surety applies suppletorily in accordance with the following provision:
SEC. 180. Pertinent provisions of the Civil Code
of the Philippines shall be applied in a suppletory
character whenever necessary in interpreting the
provisions of a contract of suretyship.
§1.05. NATURE OF LIABILITY. Suretyship involves two types of
relationship - the underlying principal relationship between the creditor and the
debtor, and the accessory surety relationship between the principal and the
surety.10 “The creditor accepts the surety’s solidary undertaking to pay if the
debtor does not pay. Such acceptance, however, does not change in any material
way the creditor’s relationship with the principal debtor nor does it make the
surety an active party to the principal creditor-debtor relationship. In other words,
the acceptance does not give the surety the right to intervene in the principal
contract. The surety’s role arises only upon the debtor’s default, at which time, it
can be directly held liable by the creditor for payment as a solidary obligor.” 11
The Supreme Court explained the nature of the liability of the surety in this wise:
“Section 17512 of the Insurance Code defines a suretyship as a contract or agreement
whereby a party, called the surety, guarantees
9
Inciong, Jr. v. Court of Appeals, G.R. No. 96405, June 26, 1996.
10
Stonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd.,
G.R. Nos. 158820-21, June 5, 2009.
ll
Ibid.
12
Now Section 177.
the performance by another party, called the principal or obligor, of an obligation or

undertaking in favor of a third party, called the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued under Act 536, as amended. Suretyship arises
upon the solidary binding of a person - deemed the surety - with the principal debtor, for
the purpose of fulfilling an obligation. Such undertaking makes a surety agreement an
ancillary contract as it presupposes the existence of a principal contract. Although the
contract of a surety is in essence secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses no direct or personal
interest over the obligations nor does it receive any benefit therefrom. And
notwithstanding the fact that the surety contract is secondary to the principal obligation,
the surety assumes liability as a regular party to the undertaking.”13
a. The Supreme Court explained in S t r o n g h o l d

I n s u r a n c e C o . , I n c . v . T o k y u
C o n s t r u c t i o n C o m p a n y , L t d . 1 4 that “the
surety is considered in law as possessed of the identity of the debtor in relation to
whatever is adjudged touching upon the obligation of the latter. Their Labilities are
so interwoven as to be inseparable. Although the contract of a surety is, in essence,
secondary only to a valid principal obligation, the surety’s liability to the creditor is
direct, primary, and absolute; he becomes liable for the debt and duty of another
although he possesses no direct or personal interest over the obligations nor does he
receive any benefit therefrom.” It was further explained that “a surety is released
from its obligation when there is a material alteration of the principal contract in
connection with which the bond is given, such as a change which imposes a new
obligation on the promising party, or which takes away some obligation already
imposed, or one which changes the legal effect of the original contract and not
merely its form. However, a surety is not released by a change in the contract, which
does not have the effect of making its obligation more onerous.”15
b. T h u s , i n First Lepanto-Taisho Insurance Corp. v. Chevron
Philippines, Inc.,16 t h e bond that was issued by the
petitioner
13
First Lepanto-Taisho Insurance Corp. v. Chevron Philippines, Inc., G.R. No.
177839, January 18, 2012. See also Philippine Charter Insurance Corp. v. Central Colleges of
the Philippines, G.R. Nos. 180631-33, February 22, 2012.
14
G.R. Nos. 158820-21, June 5, 2009 citing Trade and Investment Development
Corporation of the Philippines v. Roblett Industrial Construction Corp., G.R. No. 139290,
November 11, 2005.
1B
Stonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd., ibid., citing
Intra-Strata Assurance Corp. v. Republic, G.R. No. 156571, July 9, 2008.
l6
Supra.
CHAPTER 15 441
SURETYSHI
P
was supposed to secure the obligations under written contract between the
respondent and the latter’s distributor. Under the circumstances, the Supreme
Court ruled that respondent is charged with notice of the specified form of the
agreement or at least the disclosure of basic terms and conditions of its
distributorship and credit agreements with its distributor after its acceptance of
the bond delivered by the latter. However, it never made any effort to relay those
terms and conditions of its contract with the distributer upon the commencement
of its transactions with said client, which obligations are covered by the surety
bond issued by petitioner. Since the bond that was issued and accepted by
respondent specifically referred to a “written agreement,” then the surety is not
liable in the absence of such written agreement.
c. Because of the solidary nature of its obligation, the surety is not an
indispensable party in a suit against the principal. Neither is the principal an
indispensable party in an action to claim indemnity from the surety.17
§1.06. EXTENT OF LIABILITY. The extent of a surety’s liability is
determined by the language of the suretyship contract or bond itself. It cannot be
extended by implication, beyond the terms of the contract. 18
§2. THE PARTIES. There are three persons involved in a contract of
suretyship. These are the principal, the obligee, and the surety (obligor).
a. Principal. The principal is the person whose obligation is secured by
the bond or suretyship. He is the person who agrees to perform certain acts — the
person who fulfills certain obligations.
b. Obligee. The obligee is the person in whose favor the bond is issued or
the undertaking of the surety is made. He will be paid or reimbursed if the
principal fails to perform his obligation. In relation to the obligation of the
principal and the surety, the obligee is the creditor or the active subject.
c. Surety. The surety is the party who answers for the debt, default or
obligation of the principal. The liability of the surety or
17
Ldving@Sense, Inc. v. Malayan Insurance Company, Inc., G.R.
No. 193753, September 26, 2012.
18
Stonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd.,
supra.
sureties shall be joint and several with the obligor and shall be limited to the amount
fixed in the agreement.19 The surety undertakes that the debt shall be paid 20 and this
undertaking is usually in the form of a bond.
§3. PREMIUM. The surety may be liable even if the bond is already accepted
by the obligee. An accepted bond is valid and binding whether or not the premium
has been paid by the principal.21 Section 179 of the Insurance Code provides:
SEC. 179. The surety is entitled to payment of the

premium as soon as the contract of suretyship or bond
is perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless
and until the premium therefor has been paid, except
where the obligee has accepted the bond, in which
case the bond becomes valid and enforceable
irrespective of whether or not the premium has been
paid by the obligor to the surety: Provided, That if the
contract of suretyship or bond is not accepted by, or
filed with the obligee, the surety shall collect only a
reasonable amount, not exceeding fifty percent (50%)
of the premium due thereon as service fee plus the cost
of stamps or other taxes imposed for the issuance of
the contract or bond: Provided, however, That if the
nonacceptance of the bond be due to the fault or
negligence of the surety, no such service fee, stamps
or taxes shall be collected.
In the case of a continuing bond, the obligor shall
pay the subsequent annual premium as it falls due until
the contract of suretyship is cancelled by the obligee or
by the Commissioner or by a court of competent
jurisdiction, as the case may be.
§4. INTERPRETATION. The obligation of the surety is determined

strictly by the terms of the contract of suretyship in relation to the principal
contract between the obligor and the obligee. 22 Thus, a surety may bind himself
for less, but not for more
19
Section 178,1.C.
20
Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998.
21
Philippine Pryce Assurance Corporation v. Court of Appeals, 230 SCRA 164
[1994].
22
Section 176 (as amended by P.D. No. 1455), I.C.
CHAPTER 15 443
SURETYSHIP
than the principal both as regards the amount and the onerous nature of the
conditions.23 The liability of the surety cannot be extended by implication.24
a. Under the New Civil Code, the suretyship will not be effective without a
valid obligation. Nevertheless, a surety may guarantee a voidable or unenforceable
contract.25
b. As already stated, Section 180 of the Insurance Code provides that the
pertinent provisions of the Civil Code of the Philippines shall be applied in a
suppletory character whenever necessary in interpreting the provisions of a contract of
suretyship. Hence, even the doctrines and interpretation of the Supreme Court should
also be applied whenever there is a need to interpret the provisions of suretyship
contracts.
c. Just like the contract of insurance, the contract of suretyship is a contract
of adhesion. Hence, suretyship agreements or bonds must be construed strictly against
the surety. In case of doubt, the doubt must be resolved against the surety who
received consideration for the issuance of the bond and who prepared the language of
the bond.26 Article 2055 of the New Civil Code provides that a guaranty (suretyship)
is not presumed; it must be express and cannot extend to more than what is stipulated.
Nevertheless, Justice J.B.L Reyes commented that the rule of strict interpretation must
be limited to gratuitous guaranties. “There is no reason for favoring those who make
guaranty a profession and who charge premiums for the risk they run, besides
demanding a counter guaranty that protects them from all loss.”27
d. “ C o m p l e m e n t a r y C o n t r a c t s -
C o n s t r u e d - t o g e t h e r D o c t r i n e ” finds
application in construing surety agreements. According to this doctrine, an
accessory contract must be read in its entirety and together with the principal
agreement.28 For instance, under this doc-
23
24
Visayan Surety & Insurance Corporation v. Court of Appeals, 364 SCRA 631 (2001).
Ârticle 2052, New Civil Code.

26
Philippine National Bank v. Court of Appeals, 198 SCRA 767 (1991).
27
Justice J.B.L. Reyes, Observations on the New Civil Code on Points Not
Covered by Amendments already Proposed, reproduced in Ipse Loquitur, p. 260, Balane,
editor.
^Stronghold Insurance Company, Inc. v. Spouses Stroem, G.R. No. 204689, January
21, 2015.
trine the silence of the accessory contract in this case could only be construed as
acquiescence to the main contract.29
§5. KINDS OF BONDS. The surety business of insurance companies
usually takes the form of issuance of bonds. Traditionally, bonds may be
classified into Fidelity Bond and Surety Bond.
a. Fidelity Bond is a bond that answers for the loss of an employer
who is the obligee, for the dishonesty of the employee.
b. Surety Bond may be further classified into the following:
(1) Contract bonds which include (a) Bid Bond; (b) Performance
Bond; (c) Payment Bond; and (d) Maintenance Bond;
(2) Legal Bonds;
(3) Judicial Bonds;
c. Contract Bonds. As the term implies, this bond guarantees the
performance of contractual obligations.
(1) Bid Bond30 — A proposal or bid bond has for its purpose the
assurance of the owner of the project, the good faith of the bidder and that
the bidder will enter into a contract with the project owner should his
proposal be accepted.
(2) Performance Bond — It is designed to afford the project
owner security that the bidder (the contractor) will faithfully comply with
the requirements of the contract awarded to the contractor and make good
damages sustained by the project owner in case of the contractor’s failure
to so perform.31
(3) Payment Bond — This bond secures the payment of bills for
the labor and materials used in building a project.
(4) Maintenance Bond — This bond answers for breach of
warranties in a building project; the principal agrees to correct poor
workmanship and to replace defective materials.
29
Stronghold Insurance Company, Inc. v. Spouses Stroem, supra.
30
Trade and Investment Development Corporation of the Philippines v. Roblett
Industrial and Construction Corporation, et al., G.R. No. 139290, November 11,2005.
3l
Ibid.
CHAPTER 15 445
SURETYSHIP
d. Legal Bonds. They are bonds that are submitted “ i n v i r t u e

o f a p r o v i s i o n o f l a w . ’ * 2 T h e s e
i n c l u d e 'License and Permit Bonds” which are bonds imposed by law to
guarantee that the persons concerned will comply with the provisions of the license or
permit issued to him. For example, corporations that deploy workers abroad are required
by law to post a bond with the Philippine Overseas Employment Administration.
Similarly, the Corporation Code requires the filing of a bond if a foreign corporation will
secure a license to do business. Legal bonds likewise include Customs and Internal
Revenue Bonds.
e. Judicial Bonds. They are bonds that are issued in virtue of judicial orders
and/or pursuant to the Rules of Court. Examples are: (1) Replevin Bond; (2) Injunction
Bond; (3) Attachment Bond;
(4) Supersedeas Bond in ejectment cases; (5) Administrator’s Bond; or (6) Bail bond in
criminal cases. The rules on the issuance of the Certificates of Accreditation and
Authority for corporate surety bonds are embodied in the Guidelines on Corporate Surety
Bond issued by the Supreme Court on August 6, 2004.32 33
f. Classification of the Insurance Commission. In the Rules and Regulations
Governing the Issuance of Bonds in the Philippines 34 issued by the Insurance
Commission, bonds are classified into: (1) Judicial Civil Bonds; (2) Judicial Criminal
Bonds;
(3) Firearms Bonds; (4) Internal Revenue Bonds; (5) Customs Bonds;
(6) Guaranty Bonds; (7) Fidelity Bonds; (8) Promissory Notes; and (9) Immigration
Bonds.
§6. CONTINUING SURETY. Unless a specific period is fixed in the contract or
the bond, the obligation of the surety subsists so long as the principal obligation subsists.
There may even be cases when a surety may enter into a Continuing Surety. By
executing such an agreement, the principal places itself in a position to enter into the
projected series of transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor. 35 The issuance of this type of
bond is consistent with Article 2053 of the New Civil Code which provides
32
^See Circular No. 04-970-SC.
Însurance Memorandum Circular No. 1-7, March 1, 1977.
Âtok Finance Corporation v. Court of Appeals, 222 SCRA 232 (1999).
that a surety may also be given as security for future debts, the amount of which
is not yet known.
a. Section 179 of the Insurance Code provides that in “continuing bond,
the obligor shall pay the subsequent annual premium as it falls due until the
contract of suretyship is cancelled by the obligee or by the Commissioner or by
a court of competent jurisdiction, as the case may be.”
§7. REIMBURSEMENT. A surety who paid the obligee can recover what
he paid from the principal. Normally, this right is also covered by a separate
Indemnity Agreement signed by the principal in favor of the surety whereby the
principal expressly agrees to reimburse the surety whatever amount that it will
be required to pay the oblige. In other words, the Indemnity Agreement is
executed in favor of the surety.36
a. An Indemnity Agreement may provide either or both “indemnity
against payment” and “indemnity against liability.” In
\ other words, the parties may provide that the surety can recover upon actual
payment to the obligee and/or the moment the liability to the principal arises.37
b. The Indemnity Agreement usually includes the signature of another
person who makes himself solidarily liable with the principal. In the case of
corporations, its officers often affix their signatures to make them solidarily
liable. This is known as the joint and solidary signature of the officer (JSS) or
the signature of the “coindemnitor.”
c. For the protection of the insurer-bonding company, it is more
tt
Nt
prudent to obtain a security for the performance of the obligations of the
\/r
Pr'
principal under the Indemnity Agreement like a mortgage. Otherwise, the
bonding company will have to go through the inconvenience of litigation. This
becomes more important if the bonding company will issue a “high risk” bond
like a supersedeas bond in labor cases or an appeal bond in ejectment cases.
§8. EXTINGUISHMENT. The obligation of the surety is extinguished
at the same time as that of the principal and for some causes as all other
obligations.38
36
Mercantile Insurance Co., Inc. v. Ysmael, Jr. & Co., 169 SCRA
66Manila
37 (1989).Surety & Fidelity Co. v. Court of Appeals, 191 SCRA
38
CHAPTER 15 447
SURETYSHIP
a. It also basic that suretyship is extinguished if there is material alteration

or novation of the principal obligation. 39 For example, an extension granted to the
debtor by the creditor without the consent of the surety extinguishes the surety. 40
As a corollary to this rule, the surety is not released from its obligation if the
changes in the agreement does not substantially or materially alter the surety’s
obligation to guarantee the performance of its principal. 41
PROBLEM:
1. TCCL, was awarded by the Manila International Airport Authority a contract for the
construction of the Ninoy Aquino International Airport (NAIA) Terminal 2. On July 2,
1996, respondent entered into a Subcontract Agreement-with GE for the construction of
the project’s Storm Drainage System (SDS) for P33,007,752 and Sewage Treatment
Plant (STP) for P23,500,000, or a total contract price of P56,507,752. The parties agreed
that the construction of the SDS and STP would be completed on August 10, 1997 and
May 31, 1997, respectively. In accordance with the terms of the agreement, TCCL paid
GA 15% of the contract price, as advance payment, for which the latter obtained from S
Insurance Company two Surety Bonds to guarantee its repayment to TCCL. GA also
obtained from S Insurance Performance Bonds to guarantee to respondent due and
timely performance of the work. Both bonds were valid for a period of one year from
date of issue. GA defaulted in the performance of her obligations and on February 10,
1997, TCCL manifested in writing its intention to terminate the subcontract agreement.
TCCL also demanded that S Insurance comply with its undertaking under its bonds. On
February 26, 1997, TCCL and GA agreed to revise the scope of work, reducing the
contract price for the SDS phase from P33,007,752 to Pi,175,175 and the STP from
P23,500,000 to Pll,095,930.50, fixing the completion time on May 31, 1997. Gabriel
thereafter obtained from T Surety Company Bonds to guarantee the repayment of the
advance payment given by respondent to Gabriel and the completion of the work for the
SDS. Still, GA failed to accomplish the works within the agreed completion period.
Eventually, on April 26, 1997, GA abandoned the project. On August 8, 1997, TCCL
served a letter upon GA terminating their and demanded from Gabriel the return of the
balance of the advance payment. TCCL likewise demanded the payment of the ad-
ditional amount that it incurred in completing the project. Finally, TCCL made formal
demands against S Insurance and T Surety to
39
Security Bank and Trust Company, Inc. v. Cuenca, 341 SCRA 781 (2000).
40
41
People’s Trans-East Asia Insurance Coi v. Doctors of New Millennium
> Holdings, Inc., G.R. No. 172404, August 13, 2014.
make good their obligations under their respective performance and surety
bonds. However, all of them failed to TCCL’s demand. S Insurance denied
the claim of TCCL based on the following grounds: (a) It was allegedly
released from liability because of the novation of the principal obligation
when the contract price was reduced and the completion time was
extended; and (b) It was allegedly released from liability because of the
issuance of new bonds by T Surety. Are the grounds relied upon tenable?
A: The grounds relied upon by S Insurance are not tenable. S
Insurance is liable to TCCL. The revision of the subcontract
agreement did not in any way make the obligations of both the
principal and the surety more onerous. To be sure, GA never
assumed added obligations, nor were there any additional
obligations imposed, due to the modification of the terms of the
contract. Failure to receive any notice of such change did not,
therefore, exonerate petitioner from its liabilities as surety.
With respect to the issuance, the impending expiration of the
bonds issued by S Insurance. The issuance of the new bonds, the
fact remains that the event insured against, which is the default in
the performance of GA’s obligations set forth in the subcontract
agreement, already took place. By such default, the liability of S
Insurance had already set in. Thus, S Insurance remains solidarily
liable with Gabriel, subject only to the limitations on the amount of
its liability as provided for in the Bonds themselves. However,
considering that the performance bonds issued by petitioner were
valid only for a period of one year, its liabilities should further be
limited to the period prior to the expiration date of said bonds.
(Stronghold Insurance Company, Inc. v. Tokyu Construction Company,
G.R. Nos. 158820-21, June 5, 2009)
a
CHAPTER 16
REGULATION OF INSURANCE BUSINESS
The insurance industry is one of the most heavily regulated industries because it is
impressed with public interest. Insurance companies hold funds paid by the public so that
they can maintain a pool of funds to answer for unfortunate events. However, the purpose of
the funds received by insurers is not limited to claim settlement. Insurance companies are
also financial intermediaries that help channel funds from the public to productive
endeavors. Economic development will be directly affected if the insurance industry is weak.
These considerations justify the intervention by the State in the operation of insurance
companies.
§1. SOURCES OF REGULATION. In general, regulation may be made by: (1) law
or statute, (2) administrative regulation, and (3) court decisions.
a. The primary source of insurance regulations is the Insurance Code. It
contains provisions that regulate the formation, organization, financial structure, business
and practices and other facets of insurance contract and the business of insurance.
b. Other regulations can be found in the administrative rules and regulations
issued by the Insurance Commissioner in the performance of its functions. The Insurance
Commissioner is the administrative authority who is vested under the Insurance Code with
the power to regulate insurers and the business of insurance. 1
c. Section 192 provides that “every entity receiving any such certificate of
authority shall be subject to the insurance and other applicable laws of the Philippines
and to the jurisdiction and supervision of the Commissioner.”
d. The decisions of the Supreme Court form part of the law of the land. Hence,
the interpretations of the Court of the provisions
Section 437, I.C.
449
of statutes and administrative regulations are part of the regulatory blanket that covers
parties who are involved in the business of insurance including the insurers, insured,
insurance agents, insurance brokers, underwriters, or adjusters.
§1.01. AUTHORITY OF LGU RESTRICTED. R.A. No. 10607 inserted a
paragraph in Section 193 that effectively limits the authority of Local Government
Units over insurance companies. The last paragraph of Section 193 expressly provides:
No insurance company issued with a valid cer-

tificate of authority to transact insurance business
anywhere in the Philippines by the Insurance Commis-
sioner, shall be barred, prevented, or disenfranchised
from issuing any insurance policy or from transacting
any insurance business within the scope or coverage of
its certificate of authority, anywhere in the Philippines,
by any local government unit or authority, for whatever
guise or reason whatsoever, including under any kind
of ordinance, accreditation system, or scheme. Any
local ordinance or local government unit regulatory
issuance imposing such restriction or
disenfranchisement on any insurance company shall be
deemed null and void ab initio.
§2. REASONS AND BASES OF REGULATION. Regulation of insurance

business is being undertaken pursuant to the police powers of the State. Regulation
is generally necessary because of the following: (1) It is necessary to maintain the
solvency of the insurers; (2) Consumer information is inadequate; (3) It is neces -
sary to insure reasonable rates; (4) It is necessary to make insurance available to all
persons who need insurance coverage; and (5)
It is necessary to ensure that the practice of insurance is ethical and competent. 2
§3. AREAS OF REGULATION. The principal areas of regulation include
the following: (1) Formation of insurers; (2) Licensing of insurers; (3) Financial
Regulation; (4) Rate Regulation;
(5) Policy Forms Regulation; (6) Licensing of other persons involved in insurance
business including agents, brokers, underwriters, adjusters, actuaries and the like;
and (7) Regulation of sales practices and consumer protection.
2
Redja, p. 576; Huebner, Black & Webb, p. 641.
CHAPTER 16 451
§4. FORMATION AND LICENSING OF INSURERS. Section 190 of the

Insurance Code states that the terms “ i n s u r e r or i n s u r a n c e
c o m p a n y 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 term shall also include professional
reinsurers defined in Section 288.”
a. “ D o m e s t i c C o m p a n y ” shall include
companies formed, organized or existing under the laws of the Philippines. 3
b. “ F o r e i g n c o m p a n y ” when used without
limitation shall include companies formed, organized, or existing under any laws other
than those of the Philippines. 4
§4.01. APPLICABLE LAW. With respect to insurance corporations, the
provisions of the Corporation Code of the Philippines shall apply unless the provisions
of the Insurance Code provide otherwise.5 Thus, in case of conflict with the provisions
of the Insurance Code and the Corporation Code, the Insurance Code prevails when it
comes to insurance corporations.
§4.02. BASIC REQUIREMENTS. There are two basic requirements for the
formation of insurance corporations, t o w i t : 6
(1) It must possess the capital and assets required of an insurance corporation
doing the same kind of business in the Philippines and invested in the
same manner;
(2) The Insurance Commissioner had granted a certificate to the effect that
the insurer has complied with the provisions of the Insurance Code;
(3) It must have obtained a certificate of authority to transact business from
the Insurance Commissioner.
§4.03. CERTIFICATE OF AUTHORITY. Section 193 of the Insurance Code
provides that “no insurance company shall transact any insurance business in the
Philippines until after it shall have obtained a certificate of authority for that purpose
from the * *
3
Section 190,1.C.
*Ibid.
Section 191,1.C.
Sections 192 and
193,1.C.
Commissioner.” Section 193 likewise provides that “the certificate of authority

issued by the Commissioner shall expire on the last day of December, three (3)
years following its date of issuance, and shall be renewable every three (3) years
thereafter, subject to the company’s continuing compliance with the provisions
of this Code, circulars, instructions, rulings or decisions of the Commission.”
a. The law provides that “no insurance company may be authorized to
transact in the Philippines the business of life and non-life insurance
concurrently, unless specifically authorized to do so by the Commissioner.” 7
The terms l i f e and n o n - l i f e insurance shall be deemed to
include health, accident and disability insurance.8
§4.04. WHEN ISSUANCE OF CERTIFICATE CAN BE REFUSED.
The Insurance Commissioner may refuse to issue a Certificate of Authority in
any of the following cases:9
(1) If such refusal will best promote the interest of the people;
(2) If the Commissioner has not satisfied himself upon examination
that such company is qualified by the laws of the Philippines to
transact business therein;
(3) If the Commissioner is not satisfied that the grant of such authority
appears to be justified in the light of economic requirements;
(4) If the Commissioner is not satisfied that the direction and
administration, as well as the integrity and responsibility of the
organizers and administrators, the financial organization and the
amount of capital, reasonably assure the safety of the interests of
the policyholders and the public; and
(5) If the Commissioner is not satisfied that the name of the company
is not that of any other known company transacting a similar
business in the Philippines, or a name so similar as to be calculated
to mislead the public.
§4.05. SUSPENSION AND CANCELLATION OF AUTHORITY.
Section 254 of the Insurance Code provides that the Commissioner, upon
examination, is authorized to suspend or revoke *
’Section
193,1.C.
*Ibid.
Hbid.
CHAPTER 16 453
all certificates of authority granted to the insurance company, its officers and
agents in the following cases:
(1) There is evidence that any domestic or foreign insurance company
is in an unsound condition; or
(2) That any domestic or foreign insurance company has failed to
comply with the provisions of law or regulations obligatory upon
it; or
(3) That any domestic or foreign insurance company’s condition or
method of business is such as to render its proceedings hazardous
to the public or to its policyholders; or
(4) That any domestic or foreign insurance company’s net worth
requirement, in the case of a domestic stock company, or its available cash
assets, in the case of a domestic mutual company, or its security deposits, in
the case of a foreign company, is impaired or deficient; or
(5) That the margin of solvency required of such company is deficient.
a. Restoration of Business. No new business shall thereafter be done by
such company or for such company by its agent in the Philippines while such
suspension, revocation or disability continues or until its authority to do business
is restored by the Commissioner. Before restoring such authority, the
Commissioner shall require the company concerned to submit to him a business
plan showing the company’s estimated receipts and disbursements, as well as the
basis therefor, for the next succeeding three years.
§4.06. OTHER ASPECTS OF CORPORATE ORGANIZATION. The
following areas are likewise regulated under the Insurance Code:
(1) Financial Regulations including regulations on capitalization,10
solvency,11 assets,12 investments,13 and reserves;14
10
Section 194,1.C.
"Sections 200 to
l2
Sections 202 to
13
203,1.C.
Sections 204 to
"Sections 216 to
220,1.C.
<* (ZB

(2) Limitation on Risks;15

(3) Consolidation and merger of Insurance Companies.16
(4) Regulation of directors and officer;17
(5) Regulation imposing reportorial requirements like financial reporting
framework18 and annual statements;19
(6) Examination of Insurance Companies;
§5. DIRECTORS AND OFFICERS. The Commissioner may refuse to issue
a certificate until the Commissioner shall have satisfied himself that the direction
and administration, as well as the integrity and responsibility of the organizers and
administrators reasonably assure the safety of the interests of the policyholders and
the public.20
a. In order to maintain the quality of the management of the insurance

companies and afford better protection to policyholders and the public in general,
any person of good moral character, unquestioned integrity and recognized
competence may be elected or appointed director or officer of insurance companies
in accordance with the pertinent provisions contained in the corporate governance
circulars prescribed by the Commissioner. In addition hereto, the Commissioner
shall prescribe the qualifications of directors, executive officers and other key
officials of insurance companies for purposes of this section. No person shall
concurrently be a Director and/or Officer of an insurance company and an
adjustment company.21
§5.01. CORPORATE GOVERNANCE. On September 26, 2005, the
Insurance Commission issued Circular No. 31-2005 promulgating a Code of
Corporate Governance Principles and Leading Practices which is meant to achieve
policyholder and market investor confidence and to sustain the growth of the
insurance industry. The Code likewise seeks to enhance the corporate responsibility
of insurers and intermediaries, promote the interest
15
Section 221,1.C.
16
Sections 252 to
17
Section 193,1.C.
18
Section 189,1.C.
19
Sections 229 to
20
Section 193,1.C.
2l
Ibid.
CHAPTER 16 455
of their stakeholders specifically those of policyholders, claimants and

creditors.
a. Corporate governance means the system by which companies are
directed and managed. It influences how the objectives of the company are
set and achieved, how risk is monitored and assessed, and how performance
is optimized.22
§6. FINANCIAL REGULATIONS. Financial regulations are imposed on
insurance companies to help maintain the healthy financial status of the companies.
This healthy state of insurance companies will, in turn, help in the effort of the
government to maintain a stable economy because insurance companies are also
considered financial intermediaries.
a. Asymmetric Information and Adverse Selection. Moreover, the financial
regulations are also part of the regulations that are meant to guard against
asymmetric information in insurance business. This asymmetric information arises
when one of the parties has insufficient knowledge about the other party in the
contract that makes it impossible to make the correct decision before entering into
the contract. One of the problems involved when there is asymmetric information is
“adverse selection” under which a person who is more likely to be unreliable is the
more likely to seek out the transaction. After entering into the contract, the problem
of moral hazards will also be guarded against. On the part of the consumers, they
must be assured that the insurance company with whom that they are entering into
an insurance contract can be relied upon to pay the insurance proceeds upon the
happening of the peril insured against. Financial regulations give the consumers
sufficient information about the insurer. In addition, financial regulations likewise
seek to assure the public that insurance companies are in a state of robust financial
condition and are therefore financially capable of answering the losses of their
clients.
§6.01. PAID-UP CAPITAL AND NET WORTH. Section 194 of the
Insurance Code provides for the required paid-up capital and net worth of
insurance companies. Section 194 provides:
SEC. 194. Except as provided in Section 289, no
new domestic fife or non-life insurance company shall,
in a stock corporation, engage in business in
“Section 1(1), Circular No. 31-2005.

the Philippines unless possessed of a paid-up capital

equal to at least One billion pesos
(P1,000,000,000.00): Provided, That a domestic
insurance company already doing business in the
Philippines shall have a net worth by June 30, 2013 of
Two hundred fifty million pesos (P250,000,000.00).
Furthermore, said company must have by December
31, 2016, an additional Three hundred million pesos
(P300,000,000.00) in net worth; by December 31,2019,
an additional Three hundred fifty million pesos
(P350,000,000.00) in net worth; and by December 31,
2022, an additional Four hundred million pesos
(P400,000,000.00) in net worth.
The Commissioner may, as a pre-licensing
requirement of a new insurance company, in addition
to the paid-up capital stock, require the stockholders
to pay in cash to the company in proportion to their
subscription interests a contributed surplus fund of
not less than One hundred million pesos
(P100,000,000.00). He may also require such company
to submit to him a business plan showing the
company’s estimated receipts and disbursements, as
well as the basis therefor, for the next succeeding
three (3) years.
If organized as a mutual company, in lieu of
such net worth, it must have available total members
equity in an amount to be determined by the
Insurance Commission above all liabilities for losses
reported; expenses, taxes, legal reserve, and
reinsurance of all outstanding risks, and the
contributed surplus fund equal to the amounts
required of stock corporations. A stock insurance
company doing business in the Philippines may,
subject to the pertinent law and regulation which now
or hereafter may be in force, alter its organization and
transform itself into a mutual insurance company.
The Secretary of Finance may, upon
recommendation of the Commissioner, increase
such minimum paid-up capital stock or cash assets
requirement under such terms and conditions as he
may impose, to an amount which, in his opinion,
would reasonably assure the safety of the interests
of the policyholders and the public. The minimum
paid-up capital and net worth requirement must
CHAPTER 16 457
require the adoption of the risk-based capital approach

and other internationally accepted forms of capital
framework.
For the purpose of this section, net worth shall
consist of:
(a) Paid-up capital;
(b) Retained earnings;
(c) Unimpaired surplus; and
(d) Revaluation of assets as may be approved
by the Commissioner.
The Commission may adopt for purposes of
compliance with capital build up requirement under this
Code the recognition as part of the capital account,
capital notes or debentures which are subordinate to all
credits and senior only to common capital stocks.
The President of the Philippines may order a
periodic review every two (2) years the capital structure
set out above to determine the capital adequacy of the
local insurance industry from and after the integration
and liberalization of the financial services, including
insurance, in the ASEAN Region. For this purpose, a
review committee consisting of representatives from the
Department of Finance (DOF), the Insurance
Commission (1C), the National Economic and
Development Authority (NEDA), the Securities and
Exchange Commission (SEC) and other agencies which
the President may designate shall conduct the review
and may recommend to the President to adopt for
implementation the necessary capital adjustment.
a. Paid-Up Capital Requirement for New Insurance Company. Section 194 as

amended by R.A. No. 10607 adopt the capitalization requirement prescribed by the
Insurance Commission and the Department of Finance for new insurance companies
effective July 1, 200623 which provides that no new life or non-life insurance
company shall be allowed to do business in
“Department Order No. 27-06.

(Republic Act No. 10607 with Notes on Pre-Need Act/
the Philippines unless it has a capitalization of One Billion Pesos (Php1,000,000,000)

paid in cash. Section 194 now pro\ides that “except as provided in Section 289, no new
domestic life or non-life insurance company shall, in a stock corporation, engage in
business in the Philippines unless possessed of a paid-up capital equal to at least One
billion pesos (Pi,000,000,000).” Under the implementing regulation, the Insurance
Commission may also require, as a prelicensing requirement of the new insurance
company, in addition to the required capital or assets, that the “stockholders or
parent company to pay in cash to the company in proportion to their subscription or
interests, a contributed surplus fund of not less than PKXÔOOÔO.OO.” 24
b. Mandatory Net Worth. In addition to the paid-up capital requirement, the
new law likewise provides for a mandatory Net Worth. Net Worth shall consist of:
(1) Paid-up capital;
(2) Retained earnings;
(3) Unimpaired surplus; and
(4) Revaluation of assets as may be approved by the

Commissioner.
c. Paid-up Capital of Reinsurance Companies. No new reinsurance
company shall be allowed to do business in the Philippines unless it has a
capitalization of P2,000,000,000.00, paid in cash, of which at least 50% consists of
paid-up capital and the remaining portion thereof as contributed surplus, which in no
case shall be less than P400,000,000.00.
d. Capitalization for Existing Company. The Insurance Commission
likewise increased the minimum capitalization requirements of existing companies
because the current requirements are inadequate relative to: (1) the needed business
infrastructures and quality management team that will ensure better service to all
stakeholders and expand its market penetration; and (2) the adequate allowance for
increased business volatility and for mitigating market imperfections. 25 The Insurance
Commission likewise observed that the capital bases must be rebuilt because low
24
Insurance Commission Circular Letter No. 2015-02-A dated January 13, 2015;
Sec. 194,1.C.
2B
Department Order No. 27-06.
CHAPTER 16 459
capitalization levels have resulted in low retention ratios and heavy reliance on
reinsurance and that the solvency positions of insurers must be secured and stable
capital bases reduce insolvency risk and afford better protection for the insuring
public.26
§6.02. MARGIN OF SOLVENCY.27 Section 200 of the Insurance Code
provides that “an insurance company doing business in the Philippines shall at all
times maintain the minimum paid-up capital, and net worth requirements as
prescribed by the Commissioner. Such solvency requirements shall be based on
internationally accepted solvency frameworks and adopted only after due
consultation with the insurance industry associations.”
a. If the Commissioner finds the paid-up capital and net worth be found to
be less than that herein required to be maintained, the Commissioner shall
forthwith direct the company to make good any such deficiency by cash, to be
contributed by all stockholders of record in proportion to their respective
interests, and paid to the treasurer of the company, within 15 days from receipt of
the order.28
§6.03. ADMITTED ASSETS. The assets which can and cannot be part of
admitted assets are specified in Sections 202 and 203 of the Insurance Code.
Admitted assets are assets that are allowed by law to be part of assets that will be
part of the bases in determining the financial conditions of the insurance company.
These assets are limited to assets that are legally or beneficially owned by the
insurance company.29 Non-admitted assets are the assets that will not be allowed to
be carried on the balance sheet of the insurance company. 30 They are believed to be
of marginal quality or of little liquidity for policyholders if the insurer should get
into financial difficulty.31
§6.04. DIVIDEND POLICY. The Insurance Code prohibits the declaration or
distribution of dividends if the following are impaired:
(1) The entire paid-up capital stock;32 (2) The margin of solvency;33
26
Department Order No. 27-06.
27
Section 200,1.C.
28
Ibid.
^Section 202,1.C.
30
Section 203,1.C.
31
Burton T. Beam, Jr., David L. Bickelhaupt, Robert M. Crowe,& Barbara S.
Poole, Fundamentals of Insurance for Financial Planning, 3rd Ed., 2002, p. 130,
hereinafter cited as Beam, Jr., et al., p. 130.
32
Section 201,1.C.
"Ibid.
(3) In the case of life insurance corporation, the legal reserve fund;34
(4) In the case of corporations other than life, the legal reserve fund; 35 and (5) A sum
sufficient to pay all net losses reported, or in the course of settlement, and all liabilities
for expenses and taxes.36
§6.05. INVESTMENTS. The type, nature and amounts of investments of
insurance companies are likewise regulated.37 The Insurance Code provides for
limitations on (1) loans and the security therefor, 38 (2) purchase or ownership of
assets,39 (3) purchase or ownership of securities40 including bonds.41 R.A. No. 10607
made important changes on Title 4, Sections 204 to 214 of the Insurance Code not only
by providing for additional investment items but also by reinforcing the safeguards.
Title 4 contains one of the most amendments under R.A. No. 10607.
a. Reportorial Requirement. Section 215 of the Insurance
Code provides that it shall be the duty of the officers of the insurance company to
report within the first 15 days of every month all such investments as may be made by
them during the preceding month, and the Commissioner may, if such investments or
any of them seem injudicious to him, require the sale or disposal of the same. The
report shall also include a list of investments sold or disposed of by the company during
the same period.
§6.06. RESERVES. Legal reserves are provided for under the Insurance Code
for Life Insurance Companies and Non-Life Insurance Companies. 42 In Insurance Law,
reserve is not equivalent to surplus but is in fact obligations to the insured.
a. Simply defined, in life insurance, reserve is the amount that,
together with future premiums, interests and benefit of survivorship, will be
sufficient, according to valuation assumptions, to pay future claims. 43 Under
the Insurance Code, all “such valuations shall be made according to the
standard adopted by the company, as
34
Sections 201 and
217.1.C.
35
Sections 201 and
^Section 201(e), I.C.
37
See Sections 204 to 215,
38
See Section 204 to 206,
39
See Section 206, I.C.
40
See Sections 207, I.C.
41
42
Sections 216 to 220, I.C.
43
Huebner and Black, p.
349.
CHAPTER 16 461
prescribed by the Commissioner in accordance with internationally accepted

actuarial standards, which standard shall be stated in its annual report.” 44 The
amended provisions already remove the words “net premium basis” with respect
to valuation.45 “The aggregate net value so ascertained of the policies of the
company shall be deemed its reserve liability” which shall be provided for by
holding funds in secure investments equal to such net value. 46
b. Section 219 of the Insurance Code provides that “every insurance
company, other than life, shall maintain a reserve for unearned premiums on its
policies in force, which shall be charged as a liability in any determination of its
financial condition. Such reserve shall be calculated based on the twenty-fourth
(24th) method.”47
§6.07. EXAMINATIONS AND REPORTS. The solvency of insurance
companies is monitored and maintained through reports submitted by the
insurance companies and through examinations undertaken by the Insurance
Commission.
a. Insurance companies are required to keep its books, records,
accounts and vouchers in such manner that they may be readily examined by the
Insurance Commissioner or his agent to determine the solvency of the insurance
companies.48 Examination shall be done at least once a year and whenever the
Insurance Commissioner considers the public interest demands an examination
of the affairs, financial condition and method of business of the insurance
company.49
b. The Insurance Code likewise provides that insurance companies are
required to submit annual statements.50
§6.08. LIMIT OF SINGLE RISK. Section 221 of the Insurance Code
provides that “no insurance company other than life, whether
44
Section 216,1.C.
45
Previously Section 210,1.C., now Section 216,1.C.
^Section 217,1.C.
47
Section 219,1.C. which was previously Section 213 which provides that in non life insurance,
the Insurance Code provides that every non-life insurance company must maintain a reserve for
unearned premiums on its policies that are in force which shall be charged as a liability for the
determination of its financial condition. The reserve was fixed at 40% of the gross premiums with
certain deductions.
^Section 245,1.C.
49
Section 246,1.C.
“See Sections 223 to 225,1.C.
foreign or domestic, shall retain any risk on any one subject of insurance in an amount
exceeding twenty percent (20%) of its net worth. For purposes of this section, the term
s u b j e c t o f i n s u r a n c e shall include all properties or risks
insured by the same insurer that customarily are considered by non-life company
underwriters to be subject to loss or damage from the same occurrence of any hazard
insured against.”
(1) The Commissioner may issue regulations providing for a
maximum limit on the overall retained risks of insurers to serve as a
catastrophe cover requirement for the same. 51
(2) Reinsurance ceded as authorized under the succeeding title shall
be deducted in determining the risk retained. As to surety risk, deduction shall
also be made of the amount assumed by any other company authorized to
transact surety business and the value of any security mortgaged, pledged, or
held subject to the surety’s control and for the surety’s protection. 52
§7. SECURITY DEPOSIT. Section 209 of the Insurance Code provides that
every domestic insurance company shall maintain a security deposit to be held by the
Insurance Commissioner. Section 209 provides:
SEC. 209. Every domestic insurance company

shall, to the extent of an amount equal in value to
twenty-five percent (25%) of the minimum net worth
required under Section 194, invest its funds only in
securities, satisfactory to the Commissioner,
consisting of bonds or other instruments of debt of the
Government of the Philippines or its political
subdivisions or instrumentalities, or of government-
owned or -controlled corporations and entities,
including the Bangko Sentral ng Pilipinas: Provided,
That such investments shall at all times be maintained
free from any lien or encumbrance: Provided, further,
That such securities shall be deposited with and held
by the Commissioner for the faithful performance by
the depositing insurer of all its obligations under its
insurance contracts. The provisions of Section 198
shall, so far as practicable, apply to the securities
deposited under this section. * 62
“Section
221,1.C.
62
Ibid.
CHAPTER 16 463
Except as otherwise provided in this Code, no judgment

creditor or other claimant shall have the right to levy upon
any of the securities of the insurer held on deposit under this
section or held on deposit pursuant to the requirement of the
Commissioner.
a. As worded, the Section 209 of the Insurance Code expressly and clearly
states that the security deposit shall be (1) answerable for all the obligations of the
depositing insurer under its insurance contracts, (2) at all times free from any liens or
encumbrance, and
(3) exempt from levy by any claimant. The Supreme Court explained the nature of
security deposit under Section 209 (previously Section 203):
“Our Insurance Code is patterned after that of California. Thus, the ruling of the state’s
Supreme Court on a similar concept as that of the security deposit is instructive.
E n g w i c h t v . P a c i f i c S t a t e s L i f e
A s s u r a n c e C o . held that the money required to be deposited by a mutual
assessment insurance company with the state treasurer was “a trust fund to be ratably distributed
amongst all the claimants entitled to share in it. Such a distribution cannot be had except in an
action in the nature of a creditors’ bill, upon the hearing of which, and with all the parties
interested in the fund before it, the court may make equitable distribution of the fund, and appoint
a receiver to carry that distribution into effect.”
Basic is the statutory construction rule that provisions of a statute should be construed in
accordance with the purpose for which it was enacted. That is, the securities are held as a
contingency fund to answer for the claims against the insurance company by a l l its policy
holders and their 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 lay
stake on the securities to the exclusion of all others. The other parties may have their own claims
against the insurance company under other insurance contracts it has entered into.
X X X
Included in the above regulatory responsibilities is the duty to hold the security
deposits under Sections 19163 and 203 of the Code, for the benefit and security of all policy
holders. In relation to these provisions, Section 19254 of the Insurance Code states:
“Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the
benefit and security of all the policyholders of 64
53
Now Section
197,1.C.
64
Now Section
198,1.C.
the company depositing the same, but shall as long as the company is solvent,
permit the company to collect the interest or dividends on the securities so
deposited, and, from time to time, w i t h h i s a s s e n t , t o
w i t h d r a w a n y o f s u c h s e c u r i t i e s ,
upon depositing with said Commissioner other like securities, the market value of
which shall be equal to the market value of such as may be withdrawn. In the
event of any company ceasing to do business in the Philippines t h e
s e c u r i t i e s d e p o s i t e d a s
a f o r e s a i d s h a l l b e r e t u r n e d u p o n
t h e c o m p a n y ’ s m a k i n g
a p p l i c a t i o n t h e r e f o r a n d p r o v i n g
t o t h e s a t i s f a c t i o n o f t h e
C o m m i s s i o n e r t h a t i t h a s n o
f u r t h e r l i a b i l i t y u n d e r a n y o f
i t s p o l i c i e s i n t h e P h i l i p p i n e s ”
(Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of
discretion to regulate the insurance industry so as to protect the insuring public. The law
specifically confers custody over the securities upon the commissioner, with whom these
investments are required to be deposited. An implied trust is created by the law for the
benefit of all claimants under subsisting insurance contracts issued by the insurance
company.
As the officer vested with custody of the security deposit, the insurance
commissioner is in the best position to determine if and when it may be released without
prejudicing the rights of other policy holders. Before allowing the withdrawal or the
release of the deposit, the commissioner must be satisfied that the conditions
contemplated by the law are met and all policy holders protected.”55
b. An individual policy holder cannot garnish the security deposit to satisfy his
claim against the insurer on his policy. To allow the garnishment of that deposit would
impair the fund by decreasing it to less than the percentage of paid-up capital that the law
requires to be maintained. Further, garnishment would create a preference of credit over
the other policy holders and beneficiaries. 56 The right to lay claim on the fund is
dependent on the solvency of the insurer and is subject to all other obligations of the
company arising from its insurance contracts. In the absence of insolvency proceedings,
an individual insured’s interest on the security deposit is merely inchoate. Being a mere
expectancy, it has no attribute of property. In addition, if there is still no insolvency
proceedings against the
55
Republic of the Philippines v. Del Monte Motors, Inc., G.R. No. 156956, October 9,
2006, 504 SCRA 53; See also Capital Insurance and Company, Inc. v. Del Monte Motor Works,
Inc., G.R. No. 159979, December 9, 2015 (the Court cannot order the release of the security
deposits levied upon by the sheriff).
56
Republic of the Philippines v. Del Monte Motors, Inc., ibid.
CHAPTER 16 465
insurer, it would be impossible to establish at this time which claimants are entitled to
the security deposit and in what pro-rated amounts. Only after all other claimants under
subsisting policies issued by insurer have been heard can an individual insured’s share
can be determined.57
§8. REGULATION OF PERSONS INVOLVED IN THE BUSINESS. The
Insurance Code likewise regulates other entities that are engaged in insurance business
or are part of the industry. Thus, the Insurance Code contains provisions on: (1)
Reinsurers,58 (2) Mutual Life Insurers,59 (3) Holding Companies,60 (4) Foreign
Companies, (5) Insurance Agents and Brokers, (6) Reinsurance Brokers, (7) Resident
Agents, (8) Non-Life Insurance Underwriter, (9) Adjusters, (10) Actuaries, (11) Rating
Organizations, and (12) Self-Regulatory Organizations.
§8.01. REINSURANCE BUSINESS. An insurance company doing business in
the Philippines may accept reinsurances only of such risks, and retain risk thereon
within such limits, as it is otherwise authorized to insure.61
a. Required Cession to Reinsurers. Section 224 of the Insurance Code
provides that “all insurance companies, both life and non-life, authorized to do business
in the Philippines shall cede their excess risks to other companies similarly authorized
to do business in the Philippines in such amounts and under such arrangements as
would be consistent with sound underwriting practices before they enter into
reinsurance arrangements with unauthorized foreign insurers.”
b. The preference under Section 224 is to cede the risk to domestic
reinsurers. However, Section 225 of the Insurance Code provides that “any insurance
company doing business in the Philippines desiring to cede their excess risks to foreign
insurance or reinsurance companies not authorized to transact business in the
Philippines may do so under such terms and conditions which the Commissioner may
prescribe.” “Should any reinsurance
57
Republic of the Philippines v. Del Monte Motors, Inc., supra.
58
See Sections 222 to 228,1.C. governing reinsurance transactions.
S9
See Sections 268 to 289,1.C. which governs mutualization of stock
^Sections 290 to 306,1.C.
61
Section 222, I.C; See Communication and Information Systems
Corporation v. Mark Sensing Australia Pty. Ltd., G.R. No. 192169, January 25,
2017.
466 ESSENTIA I OE INSURANCE LA 7/
(Republic Act No. 10607 with Note-, on W^Ne*^ Actj
agreement be for any reason cancelled or terminated, the ceding company concerned
shall inform the Commissioner in vrming of such cancellation or termination within
thirty ( ? / ) ) days from the date of such cancellation or termination or from the
date notice 0/ information of such cancellation or termination is received by seen
company as the case may be.”02
§8.02. FOREIGN COMPANIES. Foreign companies are companies
formed, organized or existing under any laws other than those of the Philippines.
These companies are likewise subject to regulation of the Insurance Commission. 03
a. Resident Agent. Appointment of a resident agent of the foreign
company is also required. The resident agent will receive summons and legal
processes in connection with actions and other legal proceedings. 62 63 64
b. Capital. No foreign company shall be allowed to do business in the
Philippines unless it has a capitalization of P3,000,000,000.00, paid in cash, of
which at least 50% consists of paid-up capital and the remaining portion thereof as
contributed surplus, which in no case shall be less than P400,000,000.00.
§8.03. HOLDING COMPANIES. Holding company means any person who
directly or indirectly controls any authorized insurer.65 The holding company and the
controlled insurer or person are subject to certain regulatory provisions. For
instance, there are transactions between these persons that are certain requirements
including prior approval by the Commissioner in certain instances.66
a. The following terms are defined by Section 290 of the Insurance Code in
relation to holding companies:
(1) C o n t r o l , including the terms
c o n t r o l l i n g , c o n t r o l l e d b y and
u n d e r c o m m o n c o n t r o l w i t h , means
the possession directly or indirectly of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities by a contract other than a commercial
contract for goods or non-management services or
62
Section 225,1.C.
63
Sections 196 to 199,1.C.
64
65
Section 290(c), I.C.
66
See for example Sections 298 and
299, I.C.
CHAPTER 16 467
otherwise. Subject to Section 292, control shall be presumed to exist if any person
directly or indirectly owns, controls or holds with the power to vote 40% or more of
the voting securities of any other person: P r o v i d e d , That no person
shall be deemed to control another person solely by reason of his being an officer or
director of such other person.
(2) C o n t r o l l e d i n s u r e r means an authorized
insurer controlled directly or indirectly by a holding company.
(3) C o n t r o l l e d p e r s o n means any person, other
than a controlled insurer, who is controlled directly or indirectly by a holding
company.
(4) H o l d i n g c o m p a n y s y s t e m means a
holding company together with its controlled insurers and controlled persons.
§8.04. SELF-REGULATORY ORGANIZATIONS. One of the innovations under
R.A. No. 10607 is the introduction of Self- Regulatory Organizations in the Insurance Code.
Section 430 provides that “the Commissioner shall have the power to register as a self-
regulatory organization, or otherwise grant licenses, and to regulate, supervise, examine,
suspend or otherwise discontinue, as a condition for the operation of organizations whose
operations are related to or connected with the insurance market such as, but not limited to,
associations of insurance companies, whether life or nonlife, reinsurers, actuaries, agents,
brokers, dealers, mutual benefit associations, trusts, rating agencies, and other persons
regulated by the Commissioner, which are engaged in the business regulated by this Code.”
a. Thus, as contemplated by Section 430 a Self-Regulatory Organization is an
association of entities whose operations are related to or connected with the insurance market
such as, but not limited to, associations of insurance companies, whether life or nonlife,
reinsurers, actuaries, agents, brokers, dealers, mutual benefit associations, trusts, rating
agencies, and other persons regulated by the Commissioner. Thus, the new provisions of the
Insurance Code under R.A. No. 10607 regulates associations that have long been existing in
this jurisdiction.
b. The recognition of self-regulatory organizations is also a recognition that “to
the extent that a business provides adequate self-regulation, government regulation is often
unnecessary, or at least can be somewhat diminished. For insurance, it is not realistic
to think that the entire job of regulation can be done by internal, as opposed to
external, methods of supervision.”67
c. Section 430 further provides that “the Commissioner may prescribe
rules and regulations which are necessary or appropriate in the public interest or
for the protection of investors to govern self-regulatory organizations and other
organizations licensed or regulated pursuant to the authority granted hereunder
including, but not limited to, the requirement of cooperation within and among all
participants in the insurance market to ensure transparency and facilitate exchange
of information .”
d. Since the aim is self-regulation, an association cannot be registered
as a self-regulatory organization unless the Commissioner determines that “the
association is so organized and has the capacity to be able to carry out the
purposes of this Code and to comply with, and to enforce compliance by its
members and persons associated with its members, with the provisions of this
Code, the rules and regulations thereunder, and the rules of the association.” 68
§8.05. OTHER PERSONS SUBJECT TO REGULATION. The Insurance
Code regulates the qualifications, authority and other matters relating to insurance
brokers and agents. The concept of brokers and agents are discussed in Chapter 2
of this work. In addition to brokers and agents, the following persons are likewise
involved and are subject to regulations:
(1) R e i n s u r a n c e B r o k e r — one who, for
compensation, not being a duly authorized agent, employee or
officer of an insurer in which any reinsurance is effected, acts or
aids in any manner in negotiation contracts of reinsurance or
placing risks of effecting reinsurance for any insurance company.69
(2) N o n - l i f e C o m p a n y
U n d e r w r i t e r — a person whose duty and
responsibility is to select, evaluate and accept risks for, and to
determine the terms and conditions, including those pertaining to
amounts of relations, under which such risks are to be accepted by
the company.70
67
Burton T. Beam, Jr., Davil L. Bickelhaupt, Robert M. Crowe, and Barbara S. Poole,
Fundamentals of Insurance for Insurance Financial Planning, 3rd Ed., 2002,
p. 118.
68
Section 431,1.C,
69
70
CHAPTER 16 469
(3) A d j u s t e r — He may be a public adjuster or an independent

adjuster. The term * ' i n d e p e n d e n t
a d j u s t e r ” means any person, partnership, association or
corporation which, for money, commission or any other thing of value,
acts for or on behalf of an insurer in the adjusting of claims arising under
insurance contracts or policies issued by such insurer. The term
“ p u b l i c a d j u s t e r ” means any person,
partnership, association or corporation which, for money, commission or
any other thing of value, acts on behalf of an insured in negotiating for, or
effecting, the settlement of a claim or claims of the said insured arising
under insurance contracts or policies, or which advertises for or solicits
employment as an adjuster of such claims.71
(4) A c t u a r y — the person who makes financial calculations for
the life insurance company and who will certify the documents such as
reserves and net due and deferred premium, valuation of annuity funds
or retirement plans, financial projections and the like. 72 The functions
of the actuary include the calculation of the following with the help of
a mortality table: (1) premium rates, (2) gains and losses from
insurance operations, (3) nonforfeiture benefits on lapse or surrender,
(4) dividends on participating contracts, and (5) value of contract
liabilities.73
(5) R a t e O r g a n i z a t i o n — Every organization
which now exists or which may hereafter be formed for the purpose of
making rates to be used by more than one insurance company
authorized to do business in the Philippines.74
a. Adjusters. Two conditions must be complied with in order to be allowed to
act as an adjuster: (1) the citizenship requirement — for natural persons, he/she must
be a Filipino citizen and for juridical entities, at least 60% of its capital must be
owned by Filipino citizens; and (2) he/she must secure a license from the Insurance
Commission.75
7
‘Sections 332 to 343,1.C.; See Circular Letter No. 2015-24, dated May 8, 2015.
72
73
Bickelhaupt, p. 239.
74
Section 348,1.C.
7B
Section 332,1.C.
b. Exception to License Requirement. By way of exception, a license is not

necessary for adjusting insurance claims for the following:
(1) A lawyer who acts or aids in adjusting insurance claims as an
incident to the practice of his profession and who does not advertise himself as
an adjuster;76 and
(2) Any company adjuster who is a salaried employee of an insurance
company for the adjustment of claims filed under policies issued by such
insurance company.77
§9. CORPORATIONS IN DISTRESS. The Insurance Code provides for rules
that deal with Insurance Corporations that are in financial distress. These corporations
may either be placed under conservatorship, receivership, or may be ultimately
dissolved and liquidated.78
§9.01. CONSERVATORSHIP. A conservator may be appointed if at any time
before, or after, the suspension or revocation of the certificate of authority of an
insurance company, the Insurance Commissioner finds that such company is in a state
of continuing inability or unwillingness to maintain a condition of solvency or liquidity
deemed adequate to protect the interest of policy holders and creditors. 79 The Supreme
Court explained:80
“Conservatorship proceedings against a financially distressed insurance

company are statutory in nature and are resorted to only if and when the Insurance
Commissioner finds that such company is in a state of continuing inability or
unwillingness to maintain a condition of solvency or liquidity deemed adequate to
protect the interest of policy holders and creditors. In other words, the insurance
company placed under conservatorship is facing financial difficulties which require the
appointment of a conservator to take charge of its assets, liabilities, and management
aimed at preserving its assets and restoring its viability as a going business enterprise.
xxx Rightly so, for conservatorship proceedings contemplate, not the
liquidation of the insurance company involved, but a conservation of com
76
Section 338,1.C.; Circular Letter No. 2016-24, dated May 8, 2016.
71
Ibid.
78
79
Section 255,1.C.
“Elias Garcia v. National Labor Relations Commission, G.R. No. L-6782
September 4, 1987.
CHAPTER 16 471
pany assets and business during the period of stress by the Commissioner of
Insurance, who thereafter yields control to the regular officers of the company. The
power of the Insurance Commissioner with respect to the statutory proceedings
against insolvent or delinquent insurer is of general public concern, to which
contract and property rights must yield.
Essentially, conservatorship under Section 248 of the Insurance Code is in
the nature of rehabilitation proceedings. As such, the CONSERVATOR may only
act with the approval of the Insurance Commissioner with respect to the major
aspects of rehabilitation. With respect to the ordinary details of administration, the
CONSERVATOR has implied authority by virtue of his appointment to proceed
without the approval of the Insurance Commissioner. He is clothed with such
discretion in conducting and managing the affairs of the insurance company placed
under his control.”
a. Powers of Conservator. The conservator shall have the following powers

and functions:
(i) Take charge the assets, liabilities, and the management
of the company;
(ii) Collect all moneys and debts due said company;
(iii) Exercise all powers necessary to preserve the assets of
said company and restore its viability;
(iv) Reorganize the management of the company;
(v) Overrule or revoke the actions of the previous
management and board of directors of the said company, any
provision of law, or of the articles of incorporation or by-laws of the
company, to the contrary notwithstanding; and
(vi) Other powers as the Commissioner shall deem

necessary.81
(1) The retrenchment of personnel is one of the powers of the
conservator. Retrenchment as a consequence of conservatorship proceedings
against an insurance company in financial difficulties is a cost-saving
measure resorted to by the conservator to preserve the assets of the company
for the protection not only of the policy-holders and creditors but also of the
investors and the public in general.82
81
Section 255,1.C.
82
Elias Garcia v. National Labor Relations Commission,
supra.
b. Qualifications and Remunerations of Conservator. The conservator may be

another insurance company doing business in the Philippines, by officer or officers of
such company, or any other competent and qualified person, firm, or corporation. The
remuneration of the conservator and other expenses attendant to the conservation shall
be borne by the insurance company concerned.83
c. Free and Harmless Clause. The conservator, just like a receiver and
liquidator,84 shall not be subject to any action, claim or demand by, or liability to, any
person in respect of anything done or omitted to be done in good faith in the exercise, or
in connection with the exercise, of the powers conferred on the conservator.85
(1) However, this could not be construed to prohibit suits against the
conservator or the receiver as custodian and manager of the funds and property
of the insurance company. To do so would work inequity and injustice upon
parties with just claims. The exemption against liability applies only with
reference to acts done or left undone in good faith by the receiver or conservator
in the discharge of his functions.86
d. The conservator appointed shall report and be responsible to the
Commissioner until such time as the Commissioner is satisfied that the insurance
company can continue to operate on its own and the conservatorship shall likewise be
terminated should the Commissioner, on the basis of the report of the conservator or of
his own findings, determine that the continuance in business of the insurance company
would be hazardous to policy holders and creditors.87
§9.02. RECEIVERSHIP. The proceedings on insolvency provided for in Section
256 of the Insurance Code applies whenever, upon examination or other evidence, the
condition of the insurance company falls under any of these two cases:
(1) The condition of any insurance company doing business in the
Philippines is one of insolvency. “Insolvency”
“Section 255,1.C.
84
Section 257,1.C.
“Section 255,1.C.
“Pioneer Insurance and Surety Corporation v. The Hon. Willelmo C. Fortun,
et al., G.R. No. L-44959, April 15, 1987.
s7
Ibid.
CHAPTER 16 473
shall mean the inability of an insurance company to pay its lawful obligations as
they fall due in the usual and ordinary course of business as may be shown by its
failure to maintain the margin of solvency.
(2) The continuance in business of the insurance company would be
hazardous to its policyholders and creditors.
a. Actions of Commissioner. In any of the two cases specified above, the
Commissioner shall issue the orders and undertake the actions specified hereunder:88
(1) Order the company to cease and desist from transacting business in
the Philippines and designate a receiver;
(2) Within ninety (90) days from the appointment of a receiver, to
determine whether the insurance company may be reorganized or otherwise
placed in such condition so that it may be permitted to resume business with
safety to its policyholders and creditors;89
(3) If the insurance company is determined to be insolvent or cannot
resume business with safety to its policyholders and creditors, he shall, if the
public interest requires, order its liquidation, indicate the manner of its
liquidation and approve a liquidation plan and implement it immediately.
(4) In connection with number 3, appoint a liquidator who will
undertake the liquidation of the company.
b. Powers of the Receiver. Upon his designation, the receiver shall:90
(1) Immediately take charge of its assets and liabilities;
(2) Collect and gather all the assets and administer the same for the
benefit of its policyholders and creditors;
(3) Exercise all the powers necessary for the preceding purposes
including, but not limited to, bringing suits and foreclosing mortgages in the
name of the insurance company.
““Section 256,1.C.
^nd paragraph, Section 256,1.C., as amended by R.A. No. 10607. ““Section
256,1.C.
c. Functions of the Liquidator.91

(1) Take over the functions of the receiver previously designated;
(2) Reinsure all the outstanding policies of the company;
(3) Convert the assets of the insurance company to cash, or sell,
assign or otherwise dispose of the same to the policyholders, creditors and
other parties for the purpose of settling the liabilities or paying the debts of
such company;
(4) Institute actions in the name of the company as may be
necessary in the appropriate Court to collect and recover accounts and assets
of the insurance company; and
(5) To do such other acts as may be necessary to complete the
liquidation as ordered by the Commissioner.
T d. Binding Effect of the Actions of Commissioner. The actions of the
Commissioner under Section 256 shall be final and executory, and can be set
aside by the Court upon petition by the company and only if there is convincing
proof that the action is plainly arbitrary and made in bad faith.92
(1) No restraining order or injunction shall be issued by the Court
enjoining the Commissioner from implementing his actions unless there is
convincing proof that the action of the Commissioner is plainly arbitrary
and made in bad faith and the petitioner or plaintiff files with the clerk or
Judge of the Court in which the action is pending a bond executed in favor
of the Commissioner in an amount to be fixed by the Court. The
restraining order or injunction shall be refused or, if granted, shall be
dissolved upon filing by the Commissioner, if he so desires, of a bond in
an amount twice the amount of the bond of the petitioner or plaintiff
conditioned that it will pay the damages which the petition or plaintiff
may suffer by the refusal or the dissolution of the injunction. The
provisions of Rule 58 of the New Rules of Court insofar as they are
applicable shall govern the issuance and dissolution of the restraining
order or injunction contemplated in this Section.93
91
Se
c.Ibi
92
93
Ibi
d.
CHAPTER 16 475
§9.03. CAPITALIZATION WHILE UNDER CONSERVATORSHIP. The

corporations under conservatorship or receivership are subject to the following
capitalization requirements effective July 1, 2006:94 95
(1) No life or non-life insurance companies under conservation or
receivership or for liquidation may be rehabilitated unless it has a net
worth of PI,000,000,000.00, computed in accordance with the Insurance
Code, and of which at least 50% consists of paid-up capital and the
remaining portion thereof as contributed surplus, which in no case shall be
less than P200,000,000.00.
(2) No reinsurance companies under conservation or receivership
or for liquidation may be rehabilitated unless it has a net worth of
P2,000,000,000.00, computed in accordance with the Insurance Code, and
of which at least 50% consists of paid- up capital and the remaining portion
thereof as contributed surplus, which in no case shall be less than
P400,000,000.00.
§10. RATE REGULATION. Section 348 of the Insurance Code provides
that the term “ r a t e ” “shall generally mean the ratio of the premium to
the amount insured and shall include, as the context may require, either the
consideration to be paid or charged for insurance contracts, including surety
bonds, or the elements and factors forming the basis for the determination or
application of the same, or both.
a. On the part of the insurer, it is required for ratemaking that the
amount of premium is fixed in such a way that the amount paid by an individual
combined with payments by other customers must provide for the losses
sustained, the expenses of operation, a reasonable allowance for profit, and
whenever necessary, an accumulation of reserve for catastrophes.96
b. Rate Organization. Insurance companies may be members or
subscribers to rating organizations. As noted earlier, a r a t e
o r g a n i z a t i o n is an organization formed for the purpose of
making rates to be used by more than one insurance company authorized to do
business in the Philippines. 96 A rate organization develops rates based on pooled
experience of its members or
94
Administrative Order
No.
95 27-06. Black &
Huebner,
“Section 348,1.C.
476 ESSENTIALS OF INSURANCE LAW Act
No. 10607 with Notes on Pre-Need Act)
subscribers. The advantages of utilizing a rate organization include the following:

<T> they provide more credible statistical data for rate making: < 2 ) they'
make available a group of highly qualified experts at minimum cost; and ( Z )
to the extent that they require adherence to their rates, they reduce the possibility
of cutthroat competition, unfair discrimination, and insolvency.97
§10.01. PURPOSES OF RATE REGULATION. The purpose of rate
regulation is to ensure that the rates imposed by insurers are adequate, reasonable
and no unfairly discriminatory.98 Thus, the basic standards under rating laws
include: (1) the rates must be adequate for the class of business to which they
apply; (2) that no rate be unfairly discriminatory; and (3) the rates shall not be
unreasonably excessive/*7
a. Consistently, Section 358 of the Insurance Code provides:
SEC. 358. Every rating organization and every

insurance company which makes and files its own
rates, shall make rates for all risks rated by such
organization or insurance company in accordance
with the following provisions:
(a) Basic classification, manual, minimum,
class, or schedule rates or rating plans, shall be
made and adopted for all such risks. Any departure
from such rates shall be in accordance with
schedules, rating plans and rules filed with the
Commissioner;
(b) Rates shall be reasonable and adequate for
the class of risks to which they apply;
(c) No rate shall discriminate unfairly between
risks involving essentially the same hazards and
expense elements or between risks in the application
of like charges and credits;
(d) Consideration shall be given to the past
and prospective loss experience, including the
conflagration and catastrophe hazards, if any, to all
factors reasonably attributable to the class of risks,
to a reasonable profit,
^
W
i"Beam, et al., p. 127.
CHAPTER 16 477
to commissions paid during the most recent annual

period and to past and prospective other expenses. In
case of fire insurance rates, consideration shall be given
to the experience of the fire insurance business during a
period of not less than five (5) years next preceding the
year in which the review is made;
(e) Risk may be grouped by classifications for the
establishment of rates and minimum premiums.
Classification rates may be modified to produce rates for
individual risks in accordance with rating plans which
establish standards for measuring variations in hazards
or expense provisions, or both. Such standards may
measure any difference among risks that can be
demonstrated to have a probable effect upon losses or
expenses.
§10.02. POWER OF THE COMMISSIONER OVER RATES. Section 364 of

the Insurance Code provides that “if the Commissioner finds that any rate filings
theretofore filed with him do not comply with the provisions of this title or that they
provide rates or rules which are inadequate, excessive, unfairly discriminatory or
otherwise unreasonable, he may order the same withdrawn and at the expiration of 60
days thereafter, the same shall be deemed no longer on file. Before making any such
finding and order, the Commissioner shall give notice, not less than 10 days in
advance, and a hearing, to the rating organization, or to the insurer, which filed the
same. Such order shall not affect any contract or policy made or issued prior to the
expiration of such 60-day period.”
§11. POLICY FORMS. The use of policy forms is likewise regulated under
the Insurance Code. Section 232 provides that “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.”
§12. SALES PRACTICES AND CONSUMER PROTECTION. Regulations
designed to protect consumers include rules on the registration of insurance
brokers, insurance agents and other persons involved in insurance business.
§12.01. PROHIBITIONS. In addition, the Insurance Code likewise defines

certain acts that are prohibited for the protection of consumers. These include
twisting, rebate of premium, misrepresentation, and other acts.
a. Twisting. Twisting means inducing an insured to drop an existing policy
in one company for another policy in another company due to misrepresentation.
b. Rebate. The prohibition on rebate of premium is designed to ensure fair
and equitable treatment of all policymakers by preventing one insured from obtaining
an unfair price advantage over another.100 Section 370 of the Insurance Code
specifically prohibits the following acts on insurance company doing business in the
Philippines or any agent thereof, no insurance broker, and no employee or other
representative of any such insurance company, agent, or broker, directly or indirectly,
to give or share a commission or in any manner whatsoever, pay or allow or offer to
pay or allow to the insured or to any employee of such insured, either as an
inducement to the making of such insurance or after such insurance has been effected,
any rebate from the premium which is specified in the policy, or any special favor or
advantage in the dividends or other benefits to accrue thereon.
c. Hidden Agreement. It is prohibited for insurance company doing
business in the Philippines or any agent thereof, no insurance broker, and no employee
or other representative of any such insurance company, agent, or broker to make,
procure or negotiate any contract of insurance or agreement as to policy contract,
other than is plainly expressed in the policy or other written contract issued or to be
issued as evidence thereof.101
d. Additional Inducement. It is prohibited for insurance company doing
business in the Philippines or any agent thereof, no insurance broker, and no
employee or other representative of any such insurance company, agent, or broker
to give or offer to give any valuable consideration or inducement of any kind,
directly or indirectly, which is not specified in such policy or contract of insurance.
e. Discrimination. It is prohibited for insurance company doing business

in the Philippines or any agent thereof, no insurance
100
Redja, p.
582.
101
Section
370,1.C.
CHAPTER 16 479
broker, and no employee or other representative of any such insurance company,

agent, or broker to make any discrimination against any Filipino in the sense that he is
given less advantageous rates, dividends or other policy conditions or privileges than
are accorded to other nationals because of his race.
f. Misrepresentation. Special rules against misrepresentation are provided
for in Section 371 which provides as follows:
SEC. 371. No insurance company doing business in

the Philippines, and no officer, director, or agent thereof,
and no insurance broker or any other person, partnership
or corporation shall issue or circulate or cause or permit
to be issued or circulated any literature, illustration,
circular or statement of any sort misrepresenting the
terms of any policy issued by any insurance company of
the benefits or advantages promised thereby, or any
misleading estimate of the dividends or share of surplus
to be received thereon, or shall use any name or title of
any policy or class of policies misrepresenting the true
nature thereof; nor shall any such company or agent
thereof, or any other person, partnership or corporation
make any misleading representation or incomplete
comparison of policies to any person insured in such
company for the purpose of inducing or tending to induce
such person to lapse, forfeit, or surrender his said
insurance.
g. Unfair Claims Settlement. Penalties are provided for unfair claims

settlements practices.102 The acts enumerated in Section 247 (discussed in Chapter 8 of
this work) shall be considered unfair claims settlement practices if committed without
just cause and performed with such frequency as to indicate a general business practice.
(1) Evidence as to numbers and types of valid and justifiable complaints
to the Commissioner against an insurance company, and the Commissioner’s
complaint experience with other insurance companies writing similar lines of
insurance shall be admissible in evidence in an administrative or judicial
proceeding brought under Section 247.103
102
Section 247,1.C.; See Chapter 8,
Section
103 1.01.
(2) If it is found, after notice and an opportunity to be heard, that an

insurance company has violated this section, each instance of
noncompliance may be treated as a separate violation of this section and
shall be considered sufficient cause for the suspension or revocation of the
company’s certificate of authority.104
§13. ANTI-MONEY LAUNDERING. Insurance companies are covered
institutions under the Anti-Money Laundering Act of 2001.105 Consequently, in
2005, the Insurance Commission promulgated the Guidelines in the Preparation of
the Revised Operating Manual in Combating Money-Laundering and Financing of
Terrorism for Insurance Commission Covered Institution.106
§13.01. LAYERING. Under the Guidelines,107 layering is defined as the
separation of the criminal proceeds from their source by the creation of layers of
transactions designed to disguise the audit trail and provide the appearance of
legitimacy. The Guidelines provide that insurance companies may provide a
potential avenue which may allow a dramatic alteration of the form of funds. 108
Money laundering and the financing of terrorism using reinsurance may likewise
occur by establishing fictitious reinsurance companies, reinsurance intermediaries,
fronting arrangements and captives or by the misuse of normal reinsurance
transactions.109
104
l05
RA. No. 9194 as amended by RA. No. 9160.
106
I.C. Circular Letter 32-2006, September 18,
107
Section 2(b), ibid.
108
2bwf.
los
Ibid.
CHAPTER 17
THE INSURANCE COMMISSIONER
The Insurance Commission is headed by a Commissioner and is appointed by

the President. It is on the Insurance Commissioner that the law imposes the duty to
regulate insurance companies. The broad powers that the Insurance Commissioner
possesses are the key to the enforcement of insurance laws in this jurisdiction.1
§1. INSURANCE COMMISSIONER. The Insurance Commissioner regulates
insurance companies and pre-need companies in the Philippines. The Insurance
Commissioner shall have the duty to see that all laws relating to insurance, insurance
companies, and other insurance matters, mutual benefit associations, and trusts for
charitable uses are faithfully executed and to perform the duties imposed upon him by
the Insurance Code.2
a. In addition, the Insurance Commissioner have sole and exclusive authority to
regulate the issuance and sale of variable contracts 3 and to provide for the licensing of
persons selling such contracts, and to issue such reasonable rules and regulations
governing the same.4
§2. TERM OF THE COMMISSIONER. The Insurance Commissioner shall
be appointed by the President of the Republic of the Philippines for a term of six
years without reappointment and who shall serve as such until the successor shall
have been appointed and qualified.5 If the Insurance Commissioner is removed
burton T. Bean, Jr., David L. Bickelhaupt, Robert M. Crowe and Barbara S. Poole,
Fundamentals of Insurance for Financial Planning, 3rd Ed., 2002, p. 122, hereinafter cited as
“Bean, Bickelhaupt, Crowe and Poole.”
2
Section 414, I.C.
3
4
Section 414, I.C.
5
lst paragraph, Section 437, I.C. as amended by R.A. No. 10607.
481
before the expiration of his term of office, the reason for the removal must be
published.6
a. The logic of the rule that the President chooses that head insurance
regulatory official is that the Chief Executive is ultimately responsible for the
economic success during the latter’s term. 7 The longer term of six years will
free the Insurance Commissioner of the vagaries of politics.
§3. AUTHORITY OF THE COMMISSIONER. The Com missioner
may issue such rulings, instructions, circulars, orders and decision as he may
deem necessary to secure the enforcement of the provisions of this Code,
subject to the approval of the Secretary of Finance. 8 The Supreme Court
observed in Republic of the Philippines u. Del Monte Motors, Inc.9 that:
“The Insurance Code has vested the Office of the Insurance Commission with
both r e g u l a t o r y and a d j u d i c a t o r y authority over
insurance matters.
The general regulatory authority of the insurance commissioner is described in
Section 414 of the Code as follows:
X X X
Pursuant to these regulatory powers, the commissioner is authorized to (1) issue

(or to refuse to issue) certificates of authority to persons or entities desiring to engage in
insurance business in the Philippines; (2) revoke or suspend these certificates of authority
upon finding grounds for the revocation or suspension; (3) impose upon insurance
companies, their directors and/or officers and/or agents appropriate penalties — fines,
suspension or removal from office — for failing to comply with the Code or with any of
the commissioner’s orders, instructions, regulations or rulings, or for otherwise conducting
business in an unsafe or unsound manner.”
a. Specific Functions. In addition to the foregoing, the

Commissioner shall have the following powers and functions:
(a) Formulate policies and recommendations on

issues concerning the insurance industry, advise
Congress and other government agencies on all aspects
of the insurance industry and propose legislation and
amendments thereto;
6
Section 414,1.C.
7
Bean, Bickelhaupt, Crowe and Poole, p. 122.
8
Section 437,1.C.
9
G.R. No. 156956, October 9, 2006, 504 SCRA
53.
CHAPTER 17 483
(b) Approve, reject, suspend or revoke licenses or

certificates of registration provided for by this Code;
(c) Impose sanctions for the violation of laws and
the rules, regulations and orders issued pursuant thereto;
(d) Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions and provide
guidance on and supervise compliance with such rules,
regulations and orders;
(e) Enlist the aid and support of, and/or deputize any
and all enforcement agencies of the government in the
implementation of its powers and functions under this
Code;
(f) Issue cease and desist orders to prevent fraud or
injury to the insuring public;
(g) Punish for contempt of the Commissioner, both
direct and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules of
Court;
(h) Compel the officers of any registered insurance
corporation or association to call meetings of stockholders
or members thereof under its supervision;
(i) Issue subpoena duces tecum and summon
witnesses to appear in any proceeding of the Commission
and, in appropriate cases, order the examination, search
and seizure of all documents, papers, files and records, tax
returns, and books of accounts of any entity or person
under investigation as may be necessary for the proper
disposition of the cases before it, subject to the provisions
of existing laws;
(j) Suspend or revoke, after proper notice and
hearing, the license or certificate of authority of any entity
or person under its regulation, upon any of the grounds
provided by law;
(k) Conduct an examination to determine compli-
ance with laws and regulations if the circumstances so
warrant as determined by appropriate rules and regulations;
(l) Investigate not oftener than once a year from

the last date of examination to determine whether an
institution is conducting its business on a safe and sound
basis: Provided, That, the deficiencies/ irregularities found
by or discovered by an audit shall be immediately
addressed;
(m) Inquire into the solvency and liquidity of the
institutions under its supervision and enforce prompt
corrective action;
(n) To retain and utilize, in addition to its annual
budget, all fees, charges and other income derived from
the regulation of insurance companies and other
supervised persons or entities;
(o) To fix and assess fees, charges and penalties
as the Commissioner may find reasonable in the exercise
of regulation; and
(p) Exercise such other powers as may be
provided by law as well as those which may be implied
from, or which are necessary or incidental to the express
powers granted the Commission to achieve the objectives
and purposes of this Code.10
§4. SECURITY FOR THE COMMISSIONER AND OTHER OFFICERS.

Section 437 as amended by R.A. No. 10607 expressly provides for indemnity for costs
and expenses of litigation that arises in the performance of the functions of the
Commissioner, Deputy Commissioner and other Officers, thus:
The Commission shall indemnify the Commissioner,

Deputy Commissioner, and other officials of the
Commission, including personnel performing supervision
and examination functions, for all costs and expenses
reasonably incurred by such persons in connection with
any civil or criminal actions, suits or proceedings to which
they may be made a party to by the reason of the
performance of their duties and functions, unless they are
finally adjudged in such actions, suits or proceedings to
be liable for negligence or misconduct.
10
Section 439,1.C. as amended by R.A. No. 10607.
CHAPTER 17 485
In the event of settlement or compromise,

indemnification shall be provided only in connection with
such matters covered by the settlement as to which the
Commission is advised by external counsel that the
persons to be indemnified did not commit any negligence
or misconduct:
The costs and expenses incurred in defending the
aforementioned action, suit or proceeding may be paid by
the Commission in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by
or on behalf of the Commissioner, Deputy Commissioner,
officer or employee to repay the amount advanced should it
ultimately be determined by the Commission that the
person is not entitled to be indemnified.
§5. ADMINISTRATIVE SANCTIONS. Administrative sanctions may be

imposed by the Insurance Commissioner in accordance with the following statutory
provisions:
SEC. 438. In addition to the administrative sanctions

provided elsewhere in this Code, the Insurance
Commissioner is hereby authorized, at his discretion, to
impose upon insurance companies, their directors and/or
officers and/or agents, for any willful failure or refusal to
comply with, or violation of any provision of this Code, or
any order, instruction, regulation, or ruling of the Insurance
Commissioner, or any commission or irregularities, and/or
conducting business in an unsafe or unsound manner as
may be determined by the Insurance Commissioner, the
following:
(a) Fines not less than Five thousand pesos
(P5,000.00) and not more than Two hundred thousand pesos
(P200,000.00); and
(b) Suspension, or after due hearing, removal of directors
and/or officers and/or agents.
a. The administrative case is separate and distinct from the case to enforce
insurance claim.11
“Malayan Insurance Co., Inc. v. Lin, G.R. No. 207277, January 16, 2017; Al- mendras Mining
Corp. v. Office of the Insurance Comm., 243 Phil. 805 (1988); Go v. Office of the Ombudsman, 460
Phil. 14 (2003).
§6. QUASI-JUDICIAL FUNCTIONS. The Insurance Commission has

limited quasi-judicial functions. It has jurisdiction over insurance claims if any single
claim does not exceed P5,000,000.00. The jurisdiction is concurrent with regular
courts. Section 439 provides:
SEC. 439. The Commissioner shall have the power

to adjudicate claims and complaints involving any loss,
damage or liability for which an insurer may be
answerable under any kind of policy or contract of
insurance, or for which such insurer may be liable
under a contract of suretyship, or for which a reinsurer
may be sued under any contract of reinsurance it may
have entered into; or for which a mutual benefit
association may be held liable under the membership
certificates it has issued to its members, where the
amount of any such loss, damage or liability, excluding
interest, cost and attorney’s fees, being claimed or sued
upon any kind of insurance, bond, reinsurance contract,
or membership certificate does not exceed in any single
claim Five million pesos (P5,000,000.00).
The power of the Commissioner does not cover
the relationship between the insurance company and its
agents/brokers but is limited to adjudicating claims and
complaints filed by the insured against the insurance
company.
The Commissioner may authorize any officer or
group of officers under him to conduct investigation,
inquiry and/or hearing and decide claims and he may
issue rules governing the conduct of adjudication and
resolution of cases. The Rules of Court shall have
suppletory application.
The party filing an action pursuant to the
provisions of this section thereby submits his person
to the jurisdiction of the Commissioner. The
Commissioner shall acquire jurisdiction over the
person of the impleaded party or parties in accordance
with and pursuant to the provisions of the Rules of
Court.
The authority to adjudicate granted to the Com-
missioner under this section shall be concurrent with
that of the civil courts, but the filing of a complaint
with
CHAPTER 17 487
the Commissioner shall preclude the civil courts from

taking cognizance of a suit involving the same subject
matter.
Any decision, order or ruling rendered by the
Commissioner after a hearing shall have the force and
effect of a judgment. Any party may appeal from a final
order, ruling or decision of the Commissioner by filing
with the Commissioner within thirty (30) days from
receipt of copy of such order, ruling or decision a
notice of appeal to the Court of Appeals in the manner
provided for in the Rules of Court for appeals from the
Regional Trial Court to the Court of Appeals.
For the purpose of any proceeding under this
section, the Commissioner, or any officer thereof
designated by him is empowered to administer oaths
and affirmation, subpoena witnesses, compel their
attendance, take evidence, and require the production
of any books, papers, documents, or contracts or
other records which are relevant or material to the
inquiry.
A full and complete record shall be kept of all
proceedings had before the Commissioner, or the
officers thereof designated by him, and all testimony
shall be taken down and transcribed by a
stenographer appointed by the Commissioner.
In order to promote party autonomy in the
resolution of cases, the Commissioner shall establish
a system for resolving cases through the use of
alternative dispute resolution.
a. The quasi-judicial function of the Insurance Commissioner is limited
to resolving claims “where the amount of any such loss, damage or liability,
excluding interest, cost and attorney’s fees, being claimed or sued upon any
kind of insurance, bond, reinsurance contract, or membership certificate does
not exceed in any single claim Five million pesos (P5,000,000).” 12 The power to
adjudicate claims and complaints involve any loss, damage or liability for which
an insurer may be answerable:
(1) Under any kind of policy or contract of insurance; or
12
Section 439,1.C., as amended by RA. No. 10607.
(2) For which such insurer may be liable under a contract of

suretyship; or
(3) For which a reinsurer may be sued under any contract of
reinsurance it may have entered into; or
(4) For which a mutual benefit association may be held liable
under the membership certificates it has issued to its members.
b. Hence, its quasi-judicial power does not cover the relationship
affecting the insurance company, its agents but it is limited to claims filed by the
insured against the insurance company. Thus, in one case, the issue of legality of
an agency agreement falls within the jurisdictions of regular courts and not the
Insurance Commissioner.13 Section 439 as amended by R.A. No. 10607 expressly
adopts this rule and now expressly provides that: ‘The power of the Commissioner
does not cover the relationship between the insurance company and its
agents/brokers but is limited to adjudicating claims and complaints filed by the
insured against the insurance company.”
c. However, the Insurance Commission has jurisdiction over complaints
against insurance agents who were terminated due to settlement or compromise.14
d. The jurisdiction of the Insurance Commissioner is concurrent with
regular courts. However, only one case can be maintained. The moment a case is
filed with the Insurance Commissioner, the insured or beneficiary can no longer
file a case in Court.
§7. PROCEDURE. The rules that apply in administrative proceedings
before the Insurance Commission are embodied in Insurance Memorandum 2014-
01.15 The principal objective of the rules is to adjudicate or settle claims and
complaints and/or assist the parties in obtaining just, speedy and inexpensive
determination of claims and complaints involving any loss, damage or liability for
13
Philippine American Life Insurance Company v. Ansaldo, 234 SCRA 509
(1994).
14
Circular Letter No. 2015-45 dated September 8, 2015; Circular Letter No. 17-
2006.
15
RuIes of Procedure Governing Trial and Hearing of Claim Cases on
Insurance, Reinsurance, and those Arising under the Membership Certificates Issued
by Mutual Benefit Associations, in the Insurance Commission.
CHAPTER 17 489
which the insurer may be held liable.16 The Rules of Court may apply in said proceedings
in suppletory character whenever practicable.17
a. The rules provide that “except as to the amount of actual damages, legal
interest, attorney’s fees and costs which include filing fees and litigation expenses, no
other form of damages shall be recoverable” in the case filed before the Insurance
Commission.18
b. For small claims where the amount claims does not exceed P200,000.00,
the applicable rule is 2016 Rules of Procedure for Small Claims Cases before the
Insurance Commission which took effect on September 1, 2016.19
c. It should be noted that under the 1987 Rules of Civil Procedure, decisions
of the Insurance Commission are appealable to the Court of Appeals within 15 days from
receipt of the decision.20
d. In one case, the Supreme Court explained that the findings of the Insurance
Commission are entitled to great respect:
“x x x His (Insurance Commissioner) interpretation of the provisions of the law

carries great weight and consideration, as he is the head of a specialized body tasked with
the regulation of insurance matters and primarily charged with the implementation of the
Insurance Code.
The emergence of the multifarious needs of modern society necessitates the
establishment of diverse administrative agencies. In addressing these needs, the
administrative agencies charged with applying and implementing particular statutes
have accumulated experience and specialized capabilities. Thus, in a long line of
cases, this Court has recognized that their construction of a statute is entitled to great
respect and should ordinarily be controlling, unless clearly shown to be in sharp
conflict with the governing statute or the Constitution and other laws.”21
§8. PRE-NEED. Section 55 of the Pre-Need Code (R.A. No. 9829) gives
exclusive original jurisdiction to the Insurance Commission over claims involving
pre-need plans. Sections 55 and 56 of the Pre-Need Code provide:
16
Section 3, Rule 1, Insurance Memorandum No. 2014-1.
17
18
insurance Memorandum Circular No. 2016-1.
20
Rule 43, Rules of Civil Procedure; Section 1, Rule 14, Insurance Memorandum
No. 2014-1.
21
Republic of the Philippines v. Del Monte Motors, Inc., G.R. No. 156956, October
9, 2006, 504 SCRA 53.
SEC. 55. Claims. — The Commission shall have the

primary and exclusive power to adjudicate any and all
claims involving pre-need plans. If the amount of
benefits does not exceed One hundred thousand pesos
(P100,000.00), the decision of the Commission shall be
final and executory.
SEC. 56. Review of Commission Orders or Deci-
sions. — Any person aggrieved by an order or decision
of the Commission, whether in relation to its settlement
of a claim of a planholder or in the exercise of its regula-
tory authority, may appeal the order or decision to the
Court of Appeals by petition for review in accordance
with the pertinent provisions of the Rules of Court.
CHAPTER 18
PRE-NEED PLANS
Pre-Need Plans is not a new invention in the Philippines. It has been with us
since 1966.1 The collapse of the Pre-Need Industry starting in 2004 brought about
untoward hardships among plan holders who were left holding empty bags. For
instance, thousands of holders of educational plans lost the amount due for the
education of their children as one pre-need company after another closed their
businesses. With the immensity of the problems of the industry, the fact that the
pre-need business is now under the regulatory powers of the Insurance Commission
is an affirmation of the trust reposed on the expertise of this government agency.
§1. GOVERNING LAW AND STATE POLICY. The governing law is
Republic Act No. 9829 otherwise known as Pre-Need Code of the Philippines. 2
a. Section 2 of the Pre-Need Code provides the objectives thereof:3
(1) Regulate the establishment of pre-need companies and place
their operation on sound, efficient and stable basis;
(2) Derive the optimum advantage from them in the
mobilization of savings;
(3) Prevent and mitigate, as far as practicable, for the protection
of planholders practices prejudicial to public interest; and
(4) Regulate, through an empowered agency, pre-need
companies based on prudential principles to promote sound-
EttpiZ/business.inquirer.net/143337/list-of-distres8ed-preneed-firm8. (Accessed: Jan. 14, 2014-

Ed.)
2
Section 1, R.A. No. 9829 otherwise known as the Pre-Need Code of the Philippines, referred to
herein as PNC.
Enumerated in Section 2, Rule 1 of the Implementing Rules and Regulations of R.A. No.
9829, hereinafter referred to as IRR.
491
/

/
ness, stability and sustainable growth of the pre-need industry.
§2. PRE-NEED PLAN DEFINED. “P r e - n e e d
p l a n s ” are contracts, agreements, deeds or plans for the benefit of the
planholders which provide for the performance of future service/s, payment of
monetary considerations or delivery of other benefits at the time of actual need or
agreed maturity date, as specified therein, in exchange for cash or installment
amounts with or without interest or insurance coverage and includes life, pension,
education, interment and other plans, instruments, contracts or deeds as may in
the future be determined by the Commission. 4
a. The “ B e n e f i t s ” that will be received by the
beneficiary of the plan “refers to the payment of monetary considerations and/ or
performance of future services which the pre-need company undertakes to deliver
either to the planholder or his beneficiary at the time of actual need or agreed
maturity date, as specified in the pre-need plan.”5
b. As the term implies, a pre-need plan covers a specific need of the
planholder in the future. The planholder will invest to cover for such future need;
hence, the planholder will save “pre-need” or before the need.
§3. PARTIES. The parties in a pre-need plan are the Pre- Need Company,
the Planholder and the Beneficiary.
a. Pre-need company “refers to any corporation registered with the
Commission and authorized/licensed to sell or offer to sell pre-need plans. The
term “pre-need company” also refers to schools, memorial chapels, banks,
nonbank financial institutions and other entities which have also been
authorized/licensed to sell or offer to sell pre-need plans insofar as their pre-need
activities or business are concerned.” 6 No person is allowed to operate a pre-need
company or engage in the business of a pre-need company unless licensed by the
Commission.7 It is required that the word “Plan” or “Plans” is included in the
corporate name of the company.8
4
Section 4, PNC.
6
Ibid.
6
Ibid.
7
Section 10, Rule 3, IRR.
8
Circular Letter No. 2015-41, dated August 3,
2015.
CHAPTER 18 493
PRE-NEED PLANS
b. Planholder “refers to any natural or juridical person who purchases

pre-need plans from a pre-need company for whom or for whose beneficiaries’
benefits are to be delivered, as stipulated and guaranteed by the pre-need
company. The term includes the assignee, transferee, and any successor-in-
interest of the planholder.”9
c. Beneficiary “refers to the person designated by the planholder as
the recipient of the benefits in the pre-need plan.”10
§3.01. OTHER PERSONS REGULATED BY THE COMMISSIONER.
Although not parties to the plan, the following persons or entities are also
regulated by the Commissioner:
(1) “Sales counselors” refers to natural persons who are engaged in the
sale of, or offer to sell, or counsel of prospective planholders for the
purpose of selling, whether or not on commission basis, pre-need
plans upon the authority of the pre-need company.11
(2) Actuary — a professional duly accredited by the Insurance
Commission, who, among other things, deals with the financial
impact of risk and uncertainty and who has been trained in
mathematics and statistics in calculating premiums, dividends,
pensions, reserves, employee benefits and risks.12
(3) General agent — a corporation or entity engaged in the sales of, or
offering to sell, or advising prospective planholders for the purpose
of selling pre-need plans in behalf of the pre-need company and/or
performing other acts and things in its behalf in the conduct of its
business as specified in the general agency agreement executed by
and between them.
(4) “Affiliate of, or affiliated with, a specified person” refers to a person
that directly or indirectly, through one (1) or more intermediaries, controls,
or is controlled by, or is under common control with, the person specified.
Exercising control over a legal entity shall mean any one of the following:
(1) owning either solely or together with affiliated persons more than
twenty-five percent (25%)
Section 4(d), PNC.

10
Section 4(e), PNC.
“Section 4(h), PNC.
12
Section 3(a), Rule 1, IRR to the Pre-Need Code, hereinafter referred to as
IRR.
of the outstanding capital stock of a legal entity: and ( 2 ) being

an officer or director of such legal entity.13
§3.02. SUSPENSION OR REVOCATION OF AUTHORITY. The
authority to operate given to pre-need companies may be suspended or revoked
in accordance with Section 48 of the Pre-Need Code which states that the
Commission may suspend or revoke all certificates of authority granted to such
pre-need company, its officers and agents, after notice and hearing in the
following cases when the Commission is of the opinion, upon examination or
other evidence:
(1) That any pre-need company is in an unsound condition: or
(2) That it has failed to comply with the provisions of law or
regulations; or
(3) That its condition or method of business is such as to render its
proceedings hazardous to the public or to its planholders; or
(4) That its paid-up capital stock is impaired or deficient.
a. No new business shall thereafter be done by such company or for such
company by its agent in the Philippines. The Commission may not lift the order
of suspension or revocation of the said authority until the concerned pre-need
company shall have submitted a viable business plan showing the company’s
estimated receipts and disbursements, as well as the basis therefor for the next
succeeding three years.14
§4. KINDS OF PRE-NEED PLANS. The plans that may be issued by pre-
need companies include (1) Life Plans, (2) Pension Plans, (3) Educational Plans,
(4) Memorial or Interment Plans, and other plans identified by the
Commission.15 Other plans that are expressly defined in the Pre-Need Code are
as follows:
(1) “Fixed value plans” refers to pre-need plans whose benefits and costs
are fixed and predetermined at the inception or purchase of the
plan.16
13
Section 4, PNC.
14
Section 48, PNC; Section 51,
15
Section 4, PNC; Section 10,
16
Section 4, PNC.
CHAPTER 18 495
PRE-NEED PLANS
(2) “In-force plan” refers to a plan for which the pre-need company has an
outstanding obligation for the delivery of benefits or services or
payment of termination value.17
(3) “Lapsed plan” refers to a plan that is delinquent in payment of
installments provided for in the contract, the delinquency of which
extends beyond the grace period provided for in the plan or contract.18
(4) “Cancelled plan” refers to a plan that can no longer be reinstated by
reason of delinquency in the payment of installments for more than two
years or a longer period as provided in the contract, counted from the
expiry of the grace period provided for in the plan or contract.
(5) “Scheduled benefit plans” refers to plans the date of availment of the
benefits of which is set at the inception or purchase of the plan.
(6) “Contingent benefit plans” refers to plans the timing of the provision of
the benefits of which is conditional on the occurrence of the
contingency.
§5. PRE-NEED CONTRACT. Section 17 of the Pre-Need Code provides that
“All forms, including amendments thereto, relating to the pre-need plans shall be
approved by the Commission. No pre-need contracts or certificates shall be issued or
delivered within the Philippines unless in the form previously approved by the
Commission.”
a. The Standard provisions of the different kinds of preneed plan including
Pension Plan, Educational Plans, and Memorial Plans are provided for Insurance
Commission Circular Letter No. 2016-11 dated March 8, 2016.
§5.01. INTERPRETATION. Section 3 of the Pre-Need Code provides that
“Any doubt in the interpretation and implementation of any provision in this Code
shall be interpreted in favor of the rights and interests of the planholder.” On the other
hand, Section 4 provides that “the terms not otherwise defined under this Code shall
be construed in their usual and commonly understood trade, business, commercial, or
investment meaning.”
17
Section 4,
lPNC.
*Ibid.
a. A Pre-Need Plan is a contract of adhesion and the stipulations are

generally unilaterally prepared and imposed by company on a take-it-or-leave-it basis. 19
Thus, it should be liberally construed in favor of the planholder.
b. A contract of adhesion, wherein one party imposes a readymade form of

contract on the other, is not strictly against the law. A contract of adhesion is as binding
as ordinary contracts, the reason being that the party who adheres to the contract is free
to reject it entirely. Not every contract of adhesion is an invalid agreement. 20 Hence, the
fact that the pre-need plan is a contract of adhesion does not mean, however, that
planholder cannot be bound by its terms nor can the planholder unilaterally change it to
suit her whim.21
PROBLEM:
In 1982, Visitacion Gavina Gaw (petitioner) bought a pre-need Provincial
Memorial Plan with Pacific Plans, Inc. (private respondent) under Pre-Need Agreement
No. 93945-5. In the morning of July 9, 1996, petitioner’s mother died. Immediately
thereafter, petitioner’s brother engaged Funeraria Baluyot to perform the mortuary
services on their mother’s remains. It was in the evening of the same date that petitioner
informed private respondent of her intention to assign her plan to her mother. When
private respondent’s representative arrived to pick up the corpse, private respondent
found out that it had already been embalmed and a casket provided. Thus, private
respondent denied petitioner’s request for the rendition of memorial services. Later,
petitioner negotiated with Funeraria Tolete, a servicing mortuary accredited by private
respondent, for viewing and interment, and for the replacement of the casket that was to
be provided under the memorial plan. The pertinent provision of Pre-Need Agreement
No. 93945-5 are the following stipulations:
III REQUEST FOR RENDITION OF MEMORIAL SERVICES

PACIFIC shall have the sole and exclusive right to make all negotiations and
necessary arrangements with a mortuary of its choice for the rendition of memorial
services provided for in this Pre-Need Agreement. When memorial services contracted
for is requested to be rendered and performed in a locality where such is not available,
PACIFIC shall be allowed and authorized to make reasonable substitution and/or
adjustments thereof.
19
Gaw v. Court of Appeals, G.R. No. 147748, April 19, 2006.
20
Dio v. St. Ferdinand Memorial Park, Inc., G.R. No. 169578, November 30,
2006.
21
Gaw v. Court of Appeals, supra.
CHAPTER 18
PRE-NEED PLANS
V. ASSIGNMENT
The planholder may designate another member of his family or any third person alive
on the date of this Pre-Need Agreement arul l/jcated at the time of assignment within 25
kilometers from the nearest branch of PACIFIC, to receive the memorial services described
herein, subject UJ the following conditions:
1. Any and all installments due on the Pre-Need Agreement shall be
accelerated and the outstanding balance thereon fully paid before the memorial
services contracted for can be effected.
2. The designation shall be in writing, in proper form, and shall become
valid and effective only upon approval thereof by PACIFIC.
3. Such transfer shall automatically terminate all insurance coverages
being then enjoyed by the planholder under Paragraph VI.
xxx
Aggrieved by private respondent’s acts, petitioner filed on December 12, 1996, a
complaint for damages with the Metropolitan Trial Court (MeTC) of Pasay City, Branch 44.
Petitioner alleged that because of private respondent’s failure to render the necessary memorial
services, she was constrained to sell her family’s farm lot valued at P150,000.00 for only
P50,000.00 in order to pay for the memorial services, and she also incurred additional funeral
expenses amounting to P23,500.00. Is private respondent liable for the damages sought by
petitioner?
A: No, the petitioner is not liable. The pre-need plan is the law between
petitioner and private respondent and they are bound by its stipulations. 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.
Time, being of essence, it is, therefore, imperative for the planholder, his heirs,
successors and assigns, to give immediate notification directly to, and acknowledged
by PACIFIC, for the latter to make said arrangements. Such notice may be
communicated to PACIFIC either in person, by telephone or cable.
Private respondent’s refusal to reimburse petitioner of the expenses she
incurred for her mother’s funeral is not without basis. The provisions of Pre-Need
Agreement No. 93945-5 set out in clear terms the respective rights and obligations of
petitioner and private respondent. Under paragraph III, private respondent had the sole
right to make all negotiations and necessary arrangements for the memorial services.
On the other hand, it was necessary for petitioner to immediately notify private
respondent of the need for the memorial services. Thus, when petitioner’s mother died
in the morning of July
9, 1996, it was petitioner’s responsibility to notify private respondent

immediately; however, it was only in the evening of said date that petitioner
informed private respondent, and at that juncture, the remains were already
embalmed and a casket provided for. This, of course, pre-empted private
respondent from exercising its sole prerogative of arranging for the memorial
services on the remains of petitioner’s mother, and effectively violated the
terms of the pre-need plan.
The “upgrading” of the casket likewise violated the terms of the pre-need
plan. Under paragraph 1A (SERVICES) of Pre-Need Agreement No. 93945-5,
one of the services to be provided by private respondent is a memorial casket
pre-selected by petitioner. When petitioner opted for another casket, again, this
contravened the terms of the pre-need plan inasmuch as there is already a casket
that has been selected by petitioner herself at the time the contract was entered
into. Petitioner cannot complain that she did not like the casket that was made
available because the memorial plan clearly provided that the casket to be used
is the one that she pre-selected. Whatever expenses she incurred for the
purchase of the different casket should be solely borne by her, as private
respondent did not consent thereto and was never a party to the transaction. It is
fundamental that contracts can only bind the parties who had entered into it, and
it cannot favor or prejudice a third person. Parties to a contract cannot thereby
impose any liability on one who, under its terms, is a stranger to the contract.
Thus, the CA was correct in upholding the ruling of the RTC that private
respondent is not liable for any damages. As correctly stated by the CA:
Evidently, petitioner not only failed to comply with her obligation
to immediately inform respondent PPI of the fact of death, she
encroached on respondent PPI’s sole and exclusive right to make all
negotiations and necessary arrangements with a mortuary of its choice
for the rendition of memorial services. She likewise breached the
contract when she availed of a coffin different from that provided under
her memorial plan. Verily, she must be solely responsible for the
expenses incurred.
Pre-Need Agreement No. 93945-5 is, indeed, a contract of adhesion in
that the stipulations therein were unilaterally prepared and imposed by private
respondent on a take-it-or-leave-it basis. This does not mean, however, that
petitioner cannot be bound by its terms nor can she unilaterally change it to suit
her whim. A contract of adhesion is “as binding as ordinary contracts, the
reason being that the party who adheres to the contract is free to reject it
entirely.”16 Neither will the Court interpret the terms and conditions of the pre-
CHAPTER 18 499
PRE-NEED PLANS
need plan since its language is explicit and leaves no doubt as to the intention of
the parties. As the Court held in T h e I n s u l a r L i f e
A s s u r a n c e C o m p a n y , L t d . v .
C o u r t o f A p p e a l s :
fA] court, even the Supreme Court, has no right to make new
contracts for the parties or ignore those already made by them, simply to
avoid seeming hardships. Neither abstract justice nor the rule of liberal
construction justifies the creation of a contract for the parties which they
did not make themselves or the imposition upon one party to a contract of
an obligation not assumed. ( G a w v . C o u r t o f
A p p e a l s , G . R . N o . 1 4 7 7 4 8 ,
A p r i l 1 9 , 2 0 0 6 )
§6. REGISTRATION AND DISCLOSURE OF INFORMATION. Pre-Need

Plans were previously governed by the Securities Regulations Code. They were
considered securities under the same Code. However, although Pre-Need Plans are no
longer securities that are within the power of the Securities and Exchange
Commission, the regime of full disclosure of information to investors is carried over
to the Pre-Need Code. Sections 14, 18, and 19 of the Pre-Need Code provide:
SEC. 14. Registration of Pre-need Contracts/Pians.

— Within a period of forty-five (45) days after the grant of
a license to do business as a pre-need company, and for
every pre-need plan which the pre-need company
intends to offer for sale to the public, the pre-need
company shall file with the Commission a registration
statement for the sale of pre-need plans pursuant to this
Code. The Commission shall promulgate rules governing
the registration of pre-need plans and the required
documents which include, among others, the viability
study with certification, under oath, of a pre-need
actuary accredited by the Commission, any information
brochure, a copy of the pre-need plan, and information
and documents necessary to ensure the protection of
planholders and the general public. Said rules shall
further set forth the conditions under which such
registration may be denied, revoked, suspended or
withdrawn, and the remedies of pre-need companies in
such instances.
SEC. 18. Pre-need Advertising Ruies. — Pre-need plans
shall be advertised and sold in an appropriate
non-misleading manner in accordance with the rules to be

prescribed by the Commission.
It shall be unlawful for any pre-need company to
advertise itself or its pre-need plans unless the
Commission has approved such advertising material.
The Commission shall have a period often (10) working
days to approve or deny the advertising material and
failure to act within the said period shall cause the
advertising material to be approved. For purposes
hereof, the Commission shall have the power to define
the scope of its advertising rules to appropriately cover
advertising or other communications to the public. Any
person who sells or offers to sell any preneed plan or
contract by any means or instruments of
communication in violation of this section shall be
liable to the person purchasing such pre-need contract
who may sue to recover the consideration paid for such
pre-need contract with interest thereon. In addition
hereto, the Commission shall have the power to pursue
the erring pre-need company in an administrative or
criminal proceeding. A fine of One hundred thousand
pesos (P100,000.00) shall be imposed on any pre-need
company found to have violated this Section: Provided
That a second violation of this Section shall, in addition
to the fine imposed, result in the suspension of the
license of the pre-need company.
SEC. 19. Disclosures to Prospective Planholders.
— No registered pre-need plan shall be sold to
prospective planholders unless an information
brochure, which has been filed with the Commission,
has been provided to the purchaser. The information
brochure shall contain an explanation of the principal
features of the pre-need plan, a statement that the
planholder may avail of a default or reinstatement
period within which to reinstate his lapsed plan, and
the conditions of the same and the rates of return for
scheduled benefit plans and illustrative yields for
contingent benefit plans, and such other information
that the Commission shall require by rule.
a. Hence, no pre-need company can offer plans to the public unless the same is
registered with the Commission. “As the foregoing
CHAI’TKR 1H r,<H
IMtK-NEKI) PLANS
provisions are necessary for the protection of investor and the public in general,
even the Pre-Need Code, which now governs preneed companies and their
activities, contains similar conditions for the regulation of pre-need plans.”"
b. Thus, in P r i m a m a n i l a , I n c . v .
S e c u r i t i e s a n d K o u i h a n g e
C o m m i s s i o n ,22 23 there was advertisement of the pre-need plan
products in the website of the issuer without securing a license.
It was discovered that the website contained the company's offer for sale thereon of
the pension plan product with instructions on how interested applicants and
planholders could pay their premium payments for the plan. One of the payment
options was through bank deposit to the company’s given bank account. Hence, a
cease and desist order against the company was held to be proper.
c. Disclosure of information is the function of Registration Statements
that are submitted to the Commission. Brochures are likewise subject to the approval
of the Commission. Misleading statements in advertisements are likewise prohibited.
In addition, reportorial requirements are imposed on pre-need companies.24
d. Within 45 days after the grant of a license to do business as a pre-need
company, and for every pre-need plan which the company intends to offer for sale to
the public, the pre-need company must file with the Commission, among other
things, the following:25
(1) Duly accomplished Registration Statement;
(2) Board Resolution authorizing the registration of the applicant’s
pre-need plan;
(3) Opinion of independent counsel on the legality of the issue; and
(4) Supporting documents such as Articles and By- Laws, Trust
Agreement, related contracts and other documents specified by the
Commission;26
22
Primamanila Plans, Inc. v. Securities and Exchange Commission, G.R. No.
193791, August 6, 2014.
“Primamanila Plans, Inc. v. Securities and Exchange Commission, ibid.
“Sections 41 to 45, PNC; Sections 44 to 48, Rule 10, IRR.
“Section 14, Rule 4, IRR.
“See Section 14(4)(i) to (xvi), Rule 4, IRR for the complete list of supporting
documents.
(Republic Act No. 10607 with Notes on Pre-Need Act>
(5) Audited Financial Statement accompanied by an audit report

of the certifying auditors as of a date not more than 90 days prior to the
date of filing of the registration statement; and
(6) Actuarial Feasibility Study.
§7. CONSIDERATION. Pre-Need Companies are obligation to pay the

benefits under the Plan so long as the consideration agreed upon is paid by the
planholder in the form of cash or installment amounts.
a. Section 23 of the Pre-Need Code states the rules in case of non-

payment by the planholder of the consideration agreed upon:
SEC. 23. Default; Reinstatement Period. — The

preneed company must provide in all contracts
issued to planholders a grace period of at least sixty
(60) days within which to pay accrued installments,
counted from the due date of the first unpaid
installment. Nonpayment of a plan within the grace
period shall render the plan a lapsed plan. Any
payment by the planholder after the grace period
shall be reimbursed forthwith, unless the planholder
duly reinstates the plan. The planholder shall be
allowed a period of not less than two (2) years from
the lapse of the grace period or a longer period as
provided in the contract within which to reinstate his
plan. No cancellation of plans shall be made by the
issuer during such period when reinstatement may
be effected. Within thirty (30) days from the
expiration of the grace period and within thirty (30)
days from the expiration of the reinstatement period,
which is two (2) years from the lapse of the grace
period, the pre-need company shall give written
notice to the planholder that his plan will be
cancelled if not reinstated within two (2) years.
Failure to give either of the required notices shall
preclude the pre-need company from treating the
plans as cancelled.
b. The rules are similar to the rules under the Insurance Code in the
sense that the planholder can prevent the plan to permanently lapse if the
following remedies are availed of:
(1) Pay within the 60-day grace period counted from the due date of
the first unpaid installment; and
CHAPTER 18 503
PRE-NEED PLANS
(2) Reinstate the plan within a period of not less than

two years from the lapse of the grace period unless a longer
period is provided for in the plan.27
§8. TERMINATION OF THE PLAN. The termination of the plan can be at
the instance of the planholder or the pre-need company. With respect to the
planholder, termination is a matter of right and with corresponding right to demand
the termination value of the plan. With respect to the pre-need company, termination
is always subject to the consent of the planholder.
§8.01. TERMINATION BY PLANHOLDER. A planholder may terminate
his pre-need plan at any time by giving written notice to the issuer.28
a. A pre-need plan shall contain a schedule of termination values to which
the planholder is entitled to upon termination. Such schedule of termination value
shall be required for all in-force preneed plans and shall be fair, equitable and in
compliance with the Commission issuances. The termination value of the pre-
need plan shall be pre-determined by the actuary of the pre-need company upon
application for registration of the pre-need plans with the Commission and shall
be disclosed in the contract.29
§8.02. TERMINATION BY PRE-NEED COMPANY. Any offer by the
pre-need company to terminate the pre-need plan for consideration exceeding the
termination value provided in the plan contract shall not require the prior
approval of the Commission, provided that the following concur:
(1) The consideration shall be below the pre-need reserves for the specific
plan;
(2) The offer is accepted by the planholder; and
(3) The offer shall not prejudice the planholders who do not avail of such
offer.30
§9. CLAIMS SETTLEMENT. The planholder is entitled to the benefits or
proceeds of the plans within the following period:31
See also Section 25, Rule 6, IRR.

27
28
Section 24, PNC; Section 26, Rule 6,
"Ibid.
^Section 24, PNC; Section 26, Rule 6,
31
Section 26, Pre-Need Code.
504 ESSENTIALS OF INSURANCE Iv\W
(1) In the case of scheduled benefit plans, the proceeds of the plan shall
be paid immediately upon maturity of the contract, unless such
proceeds are made payable in installments or as an annuity, in which
case the installments or annuities shall be paid as they become due.
(2) In the case of contingent benefit plans, the benefits shall be paid by
the pre-need company 30 days upon submission of all necessary
documents.
a. In the case of scheduled benefit plans, refusal or failure to pay the
claim within 15 days from maturity or due date will entitle the beneficiary to
collect interest on the proceeds of the plan for the duration of the delay at the rate
twice the legal interest unless such failure or refusal to pay is based on the ground
that the claim is fraudulent.32 It is necessary, however that the planholder has duly
complied with the documentary requirements of the pre-need company.33
b. Delay in the payment will entitle the planholder to damages in
accordance with Section 28 of the Pre-Need Code which provides:
SEC. 28. Consequences of Delay or Default — In

case of any litigation for the enforcement of any pre-
need plan, it shall be the duty of the Commission to
determine whether the payment of the claim of the
planholder has been unreasonably denied or
withheld. If found to have unreasonably denied or
withheld the claim, the pre-need company shall be
liable to pay damages, consisting of actual damages,
attorney’s fees and legal interest, to be computed
from the date the claim is made until it is fully
satisfied: Provided, That the failure to pay any such
claim within the time prescribed in Section 26 hereof
shall be considered prima facie evidence of
unreasonable delay in payment.
§10. UNFAIR CLAIMS SETTLEMENT. Section 25 of the Pre-Need
Code expressly provides that “no pre-need company shall refuse, without just
cause, to pay or settle claims arising under
32
Section 26,
33
PNC.
Ibid.
CHAPTER 18 505
PRE-NEED PLANS
coverages provided by its plans nor shall any such company engage in unfair
claim settlement practices. Any of the following acts by a pre-need company, if
committed without just cause, shall constitute unfair claims settlement practices
and may result in the suspension or revocation of the company’s certificate of
authority:
(1) Knowingly misrepresenting to claimants pertinent facts or
plan provisions relating to coverages at issue;
(2) Failing to acknowledge with reasonable promptness
pertinent communications with respect to claims arising under its plan;
(3) Failing to adopt and implement reasonable standards for the
prompt investigation of claims arising under its plan;
(4) Failing to provide prompt, fair and equitable settlement of

claims submitted in which liability has become reasonably clear; or
(5) Compelling planholders to institute suits or recover amounts
due under its plan by offering, without justifiable reason, substantially
less than the amounts ultimately recovered in suits brought by them.
a. Evidence as to the number and types of valid and justifiable
complaints to the Commission against a pre-need company shall be deemed
admissible in an administrative or judicial proceeding brought under Section 25.
§11. TRUST FUND. Trust fund is a fund set up from the planholders’
payments to pay for the cost of benefits and services, termination values payable
to planholders and other costs necessary to ensure the delivery of benefits or
services to planholders as provided for in the contracts.34
a. The Trust Fund is mandated by Section 30 of the Pre- Need Code with
provides that:
SEC. 30. Trust Fund. — To ensure the delivery of
the guaranteed benefits and services provided
under
^Section 30, Pre-Need Code; See Circular Letter No. 2015-43 dated August
7, 2015 which provides for the “Guidelines on the Management of the Trust Fund
Surplus of Pre-Need Companies.”
a pre-need plan contract, a trust fund per pre-need plan

category shall be established. A portion of the
installment payment collected shall be deposited by the
pre-need company in the trust fund, the amount of
which will be as determined by the actuary based on the
viability study of the pre-need plan approved by the
Commission. Assets in the trust fund shall at all times
remain for the sole benefit of the planholders. At no time
shall any part of the trust fund be used for or diverted to
any purpose other than for the exclusive benefit of the
planholders. In no case shall the trust fund assets be
used to satisfy claims of other creditors of the preneed
company. The provision of any law to the contrary
notwithstanding, in case of insolvency of the pre-need
company, the general creditors shall not be entitled to
the trust fund. Except for the payment of the cost of
benefits or services, the termination values payable to
the planholders, the insurance premium payments for
insurance-funded benefits of memorial life plans and
other costs necessary to ensure the delivery of benefits
or services to planholders, no withdrawal shall be made
from the trust fund unless approved by the Commission.
The benefits received by the planholders shall be
exempt from all taxes and the trust fund shall not be
held liable for attachment, garnishment, levy or seizure
by or under any legal or equitable processes except to
pay for the debt of the planholder to the benefit plan or
that arising from criminal liability imposed in a criminal
action. The trust fund shall at all times be sufficient to
cover the required pre-need reserve.
b. The Trust Fund is for the sole benefit of the planholders and cannot be
used to satisfy the claims of other creditors of the insolvent pre-need corporation.
The Supreme Court explained:
“First, it must be stressed that a person is considered as a beneficiary of a

trust if there is a manifest intention to give such a person the beneficial interest over
the trust properties. This is the considered opinion expressed in the Restatement of
the Law of Trust (Restatement) which Justice Vicente Abad Santos has described in
his contribution to the Philippine Law Journal as containing the more salient
principles, doctrines and rules on the subject. Here, the terms of the trust agreement
plainly confer the status of beneficiary to the planholders, not to Legacy. In the
recital clauses of the said agreement, Legacy bound itself to provide for the sound,
CHAPTER 18 507
PRE-NEED PLANS
prudent and efficient management and administration of such portion of the collection “for
the benefit and account of the planholders,” through LBP (as the trustee).
This categorical declaration doubtless indicates that the intention of the trustor is to
make the planholders the beneficiaries of the trust properties, and not Legacy. It is clear that
because the beneficial ownership is vested in the planholders and the legal ownership in the
trustee, LBP, Legacy, as trustor, is left without any iota of interest in the trust fund. This is
consistent with the nature of a trust arrangement, whereby there is a separation of interests
in the subject matter of the trust, the beneficiary having an equitable interest, and the trustee
having an interest which is normally legal interest.
x x x
It is clear from Section 16 that the underlying congressional intent is to make the
planholders the exclusive beneficiaries. It has been said that what is within the spirit is within
the law even if it is not within the letter of the law because the spirit prevails over the letter.
This will by the legislature was fortified with the enactment of R.A. No. 9829 or the Pre-Need
Code in 2009. The Congress, because of the chaos confounding the industry at the time,
considered it necessary to provide a stronger legal framework so that no entity could claim
that the mandate and delegated authority of the SEC under the SRC was nebulous. The Pre-
Need Code cemented the regulatory framework governing the preneed industry with precise
specifics to ensure that the rights of the pre-need planholders would be categorically defined
and protected. . . .”35
§12. REGULATION OF PRE-NEED COMPANIES. In addition to the above-

discussed rules, there are other provisions in the Pre-Need Code to ensure protection of
the planholders and to make sure that the planholders will get their benefits. These
include: (1) Regulations on the management of the pre-need company; 36 (2) Rules on
Licensing of Sales Counselors and General Agents; 37 (3) Rule for Accreditation of
Actuaries;38 (4) Reportorial Requirements of Pre-need Companies; 39 (5) Examination
of Pre-Need Companies by the Commission at least once a year and whenever the
needs of public interests so demands;40 (6) Imposition of Financial Accounting
36
Securities and Exchange Commission v. Laigo, G.R. No. 188639, September 2,
2015.
^Sections 7 to 13, PNC; Sections 7 to 12, Rule 3, IRR.
37
Sections 20 to 22, PNC; Sections 22 to 24, Rule 5, IRR.
38
Sections 16, 39, and 40, PNC; Sections 41 to 43, Rule 9, IRR.
39
40
Section 46, PNC; Section 49, Rule 10, IRR.
y,',; R88 ENTTA l A 0 V INSURA NC E I AW
(k*rv\iYnit. Act N>». 10607 with Notes on Pre-Need Act)
'■iUih'ihrri* byt.h<; CornrruMiony 1 (7) Rules on Conservatorship and

4
Insolvency; * and (8) Imposition of Administrative H h m f i and Criminal
Penalties.**
a It should be recalled that Health Maintenance Organizations Of MO) are
now under the supervision of the Insurance Commission pursuant to E.O. No. 192
dated November 12, 2015 issued by the Office of the President. Supervision was
transferred to the Insurance Commission from the Department of Health. HMO re-
fers to a juridical entity legally organized to provide or arrange for the provision of
pre-agreed or designated health care services to its enrolled members for a fixed pre-
paid fee for a specified period of t,ime.“ The specific powers of the Insurance
Commission in relations to HMOs are enumerated in the Executive Order.41 42 43 * 45
§13. PRE-NEED COMPANIES IN DISTRESS. It should be noted that pre-
need companies, as debtors, are excluded from the operation of the FRIA and still
governed by the Pre-Need Code with respect to insolvency and rehabilitation. 46 The
governing statutory provides are Sections 49 to 52 of the Pre-Need Code that
provides:
SEC. 49. Appointment of Conservator. — If at any

time before or after the suspension or revocation of the
license of a pre-need company as provided in Section
27 hereof, the Commission finds that such company is
in a state of continuing inability or unwillingness to
comply with the requirements of the Code and/or
orders of the Commission, a conservator may be
appointed to take charge the assets, liabilities, and the
management of such company, collect all moneys and
debts due the company and exercise all powers
necessary to preserve the assets of the company,
reorganize its management, and restore its viability.
The conservator shall have the power to overrule or
revoke the actions of the previous management and
board of directors of the said company,
41
Section 47, PNC; Section 50, Rule 11, IRR.
42
Sections 49 to 52, PNC; Sections 52 to 55, Rule13, IRR.
43
“DOH Administrative Order No. 34 Series of 1994; E.O No. 192 dated November 12,
2015.
45
Section 4, E.O. No. 192 dated November 12, 2015.
48
Section 5, Financial Rehabilitation and Insolvency Act of 2010, R.A- No- 10142.
CHAPTER 18 509
PRE-NEED PLANS
any provision of law, or of the articles of incorporation or by-

laws of the company, to the contrary notwithstanding, and
such other powers as the Commission shall deem necessary.
The conservator may be another pre-need company, by
officer or officers of such company, or any other competent
and qualified person, firm or corporation. The remuneration of
the conservator and other expenses attendant to the
conservation shall be borne by the pre-need company. The
conservator shall not be subject to any action, claim or
demand by, or liability to, any person in respect of anything
done or omitted to be done in good faith in the exercise, or in
connection with the exercise, of the powers conferred on the
conservator. The conservator appointed shall report and be
responsible to the Commission until such time as the
Commission is satisfied that the preneed company can
continue to operate on its own and the conservatorship shall
likewise be terminated should the Commission, on the basis
of the report of the conservator or of his own findings,
determine that the continuance in business of the pre-need
company would be hazardous to planholders and creditors, in
which case the provisions of Chapter XVI shall apply.
SEC. 50. Proceedings Upon Insolvency. — Whenever,
upon examination or other evidence, it shall be disclosed that
the condition of any pre-need company is one of insolvency,
or that its continuance in business would be hazardous to its
planholders and creditors, the Commission shall forthwith
order the company to cease and desist from transacting
business and shall designate a receiver to immediately take
charge of its trust fund, assets and liabilities, as expeditiously
as possible collect and gather all the assets and administer
the same for the benefit of its planholders and creditors, and
exercise all the powers necessary for these purposes
including, but not limited to, bringing suits and foreclosing
mortgages in the name of the pre-need company. The
Commission shall thereupon determine within thirty (30) days
whether the pre-need company may be reorganized or
otherwise placed in such condition so that it may be
permitted to resume business with safety to its planholders
and creditors and shall
510 ESSENTIAL OF INSURANCE LAW
(Republic Act No. 10007 with Notes on l*ro-Neo<l Act)
prescribe the conditions under which such resumption

of business shall take place as well as the time for ful-
fillment of such conditions. In such case, the expenses
and fees in the collection and administration of the pre-
need company shall be determined by the Commission
and shall be paid out of the assets of such company. If
the Commission shall determine and confirm within the
said period that the pre-need company is insolvent, as
defined hereunder, it shall, if the public interest so
requires, order its liquidation, indicate the manner of its
liquidation and approve a liquidation plan and implement
it immediately. The Commission shall designate a
competent and qualified person as liquidator who shall
take over the functions of the receiver previously desig-
nated and, with all convenient speed, distribute the trust
fund exclusively to the planholders in proportion to ter-
mination values of their respective pre-need plans, con-
vert the assets of the pre-need company to cash, or sell,
assign or otherwise dispose of the same to the plan-
holders, creditors and other parties for the purpose of
settling the liabilities or paying the debts of such com-
pany and he may, in the name of the company, institute
such actions as may be necessary in the appropriate
Court to collect and recover accounts and assets of the
pre-need company, and to do such other acts as may be
necessary to complete the liquidation as ordered by the
Commission.
The provisions of any law to the contrary not-
withstanding, the actions of the Commission under this
section shall be final and executory, and can be set
aside by the Court upon petition by the company and
only if there is convincing proof that the action is plainly
arbitrary and made in bad faith. The Commission shall
then file the corresponding answer reciting the
proceeding taken and praying for the assistance of the
Court in the liquidation of the company. No restraining
order or injunction shall be issued by the Court
enjoining the Commission from implementing his
actions under this section, unless there is convincing
proof that the action of the Commission is plainly
arbitrary and made in bad faith and the petitioner files a
bond in favor of the Commission with the Court in an
amount
CHAPTER 18 511
PRE-NEED PLANS
fixed by it. The restraining order or injunction shall be

refused or, if granted, shall be dissolved upon filing by
the Commission, if he so desires, of a bond in an amount
twice the amount of the bond of the petitioner
conditioned that it will pay the damages which the
petition may suffer by the refusal or the dissolution of
the injunction. The Court shall give preference to all
proceedings under this chapter. The Commission shall
not be required to pay any fee to any public officer for
filing, recording, or in any manner authenticating any
paper or instrument relating to the proceedings. As used
in this Title, the term “Insolvency” shall refer to the
financial condition of a pre-need company that is
generally unable to pay its liabilities as they fall due in
the ordinary course of business or that has liabilities that
are greater than its assets. In case of liquidation of a pre-
need company, after payment of the cost of the
proceedings, including reasonable expenses and fees
incurred in the liquidation to be allowed by the Court, the
Commission shall pay all allowed claims against such
company, under order of the Court, in accordance with
their legal priority. The receiver or the liquidator, as the
case may be, designated under the provisions of this
title shall not be subject to any action, claim or demand
by, or liability to, any person in respect of anything done
or omitted to be done in good faith in the exercise, or in
connection with the exercise, of the powers conferred on
such receiver or liquidator.
SEC. 51. Commission’s Power to Assume Trustee
Functions. — In cases where the Commission has
ordered the liquidation of the pre-need company, the
Commission may immediately take custody of the trust
fund established by the pre-need company, and the pre-
need company shall forthwith deliver custody and an
accounting of the same. Henceforth, the Commission
shall have the full power and control over the Fund to
satisfy the pre-need company’s obligations to
planholders.
SEC. 52. Liquidation. — (a) In cases where the
Commission determines that the pre-need company shall
be liquidated, it shall have the power to commence
insolvency proceedings in the appropriate court which

shall have jurisdiction over the assets of the pre-need
company, excluding trust fund assets that have been
established exclusively for the benefit of planholders.
(b) Proceedings in court shall proceed indepen-
dently of proceedings in the Commission for the liqui-
dation of claims, and creditors of the pre-need company
shall have no personality whatsoever in the Commis-
sion proceedings to litigate their claims against the
trust funds.
(c) In liquidating claims of planholders, the
Commission shall ensure that all planholders receive an
equitable distribution of their claims, considering the
amounts each has paid into their plans, the termination
values due each planholder, the present value of their
claims and other equitable considerations. The only
other claims which may be satisfied by the Commission
out of the trust funds are the claims for trustees’ fees
which are reasonable and can be shown to have been
incurred in the administration of the trust fund, and
taxes incurred under trust.
a. A Stay Order issued by the court in a rehabilitation proceeding involving

a pre-need company applies to a claim for reimbursement of the tuition fees and
other expenses allegedly covered by a plan that was incurred by a planholder. The
Court ruled that if it will allow the reimbursement action against petitioner to
proceed, and if planholder’s claim were granted, the latter would be in a position to
assert a preference over other creditors. Certainly, the planholder’s “claim for
reimbursement cannot be considered as an ordinary expense of petitioner for the
conduct of its usual business operations.”47
47
College Assurance Plan Philippines, Inc. v. Spouses Lao, G.R. No. 19303 August 6,
2014 (Extended Resolution).

Insurance Law: (Republic Act No. 10607 With Notes On Pre-Need Act)

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ESSENTIALS OF

856 Nicanor Reyes, Sr. St.

UNIVERSITY OF THE CORDILLERAS'

This latest edition includes a discussion of new cases promulgated by the

We are still in what is fittingly called by Mr. Allan Greenspan as the

CHAPTER 1. GENERAL CONCEPTS

CHAPTER 3. INSURABLE INTEREST

CHAPTER 6. ASCERTAINING AND

CHAPTER 11. MARINE INSURANCE

CHAPTER 12. FIRE INSURANCE

CHAPTER 13. LIFE INSURANCE

CHAPTER 14. CASUALTY INSURANCE

CHAPTER 17. THE INSURANCE COMMISSIONER

CHAPTER 18. PRE-NEED PLANS

Justice Laurel commented on the growth of insurance business in this wise:

SEC. 2. Whenever used in this Code, the following

another against loss, damage or liability arising from an

§1.01. TEST. Whether or not a contract is one of insurance is to be

avails of medical services to be paid or already paid in advance at a pre-agreed price

tially a contract of indemnity, the CBA provision obligates MMPC to indemnify

the Pre-Need Code ( R . A . N o . 9 8 2 9 ) . Pre-need plans are

emergency, listed therein. He was also entitled to avail of

paid or already paid in advance at a pre-agreed price under the agreements.

§2. DOING AN INSURANCE BUSINESS. The term "doing an insurance

§2.01. MUTUAL INSURANCE COMPANIES. Mutual Insurance Companies are

b. Previously, the Code of Commerce, which took effect in 1888, governed

§3.02. CORPORATION CODE. By express provisions of Section 191 of the

(4) Such assumption of risk is part of a general scheme to distribute actual

Sec. 3. Any contingent or unknown event,

a. Under Section 3, the risk must be (1) a contingent or unknown event,

c. Willful Acts. Similarly, as will be discussed in Chapter 7, Section 89 of

c. Personal. The contract is personal because the contract is entered into

“Vaguely, a sense of antagonism is aroused in a community of workers

a. Under the same principle, Section 4 prevents insurance on a lottery or

SEC. 4. The preceding section does not authorize

f. It should also be noted that Article 2014 of the New Civil

a. General Benefits of Insurance. It has been observed that the benefits of

Art. 1319. Consent is manifested by the meeting of

a. Cognition Theory. Particularly, consistent with the C o g n i t i o n

b. Insured Usually Makes the Offer. In insurance contract, the insured

(1) The decision in Eternal Gardens Memorial Park v.

^Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance

! UNIVERSITY OF THE CORDILLERAS

Court explained in De Lira u. Sun Life Assurance Company of Canada:100 *

e. Rules on Acceptance by an Agent. The Supreme Court likewise relied

f. Where an agreement is made between the applicant and the agent,

h. Tort Liability. Even if there is no perfected contract, the insurer may

§9. KINDS OF INSURANCE. Insurance may be: (1) private insurance or

b. General Classification. Professor Vance declared that there are

that Microinsurance is a financial product or service that meets the risk

“Insurance ideas and practices define central privileges and responsibilities

$1.0 U ASSURED AND OWNER. In life insuwiw, if a person tusurtNS

a. Spouses. Married women can enter into insurance contracts without

•"The consent of the spouse is not necessary for the

(1) The above-quoted provision is consistent with E.O. No. 209

age of majority at 18 years. 7 At 18, a person is capacitated to act for all

§1.03. EFFECT OF DEATH OF OWNER. The last paragraph of Section 3

“All rights, title and interest in the policy of

’Article 234, Family Code, as amended by R.A. No. 6809.

abrogated by reason of nonpayment of premiums, since the time of the payments is

“Effect of war, generally. — All intercourse between citizens of belligerent

§1.05. RIGHTS OF POLICYHOLDERS. An insured may be considered a

“1) Right to a financially sound and viable insurance company.