Aquino Book Insurance 2018

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
Author, 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)
Co-Author, 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 “Age of Turbulence.” 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 terra firma 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. ................................................................................................
Assignee in Life Insurance........................................................ 110
6.1. Assignee in Property Insurance ................................... Ill
CHAPTER 4. PREMIUM
1. Premium Required for Policy to beBinding ........................ 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 ........................................................................ 177

1.1. Materiality ............................................................. 178
1.2. Examples of Material Facts .................................. 180
1.3. Causation Not Necessary ..................................... 182
1.4. Requisites ............................................................... 182
1.5. Knowledge of Agent of Insured............................. 182
1.6. When There Is No Concealment ........................... 184
1.7. Judgment or Opinion............................................. 187
1.8. Knowledge of the Insurer ...................................... 189
1.9. Intentional and Unintentional
Concealment........................................................... 191
1.10. Knowledge of the Fact Concealed ......................... 193
1.11. Waiver of Insurer ................................................... 195
1.12. Remedy ..................................................................... 197
2. Representation ..........................................................................
2.1. Time of Representation .......................................... 207
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 orWar 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
6. Continuing Surety ................................................... 445
446
7. Reimbursement .......................................................
446
8. Extinguishment.......................................................
CHAPTER 16.
REGULATION OF
INSURANCE BUSINESS 449
1. Sources of Regulation .............................................. 450
1.1. Authority of LGU Restricted ....................... 450
2. Reasons and Bases of Regulation ........................... 450
3. Areas of Regulation .................................................
4. Formation and Licensing of Insurers...................... 451
4.1. Applicable Law ............................................ 451
4.2. Basic Requirements..................................... 451
4.3. Certificate of Authority ............................... 451
4.4. When Issuance of Certificate Can 452
Be Refused ................................................... 452
4.5. Suspension and Cancellation of Authority. 453
4.6. Other Aspects of Corporate Organization., 454
5. Directors and Officers ............................................. 454
5.1. Corporate Governance................................. 455
6. Financial Regulations ............................................. 455
6.1. Paid-up Capital and Net Worth .................. 459
6.2. Margin of Solvency ...................................... 459
6.3. Admitted Assets .......................................... 459
6.4. Dividend Policy ............................................ 460
6.5. Investments ................................................. 460
6.6. Reserves....................................................... 461
6.7. Examinations and Reports .......................... 461
6.8. Limit of Single Risk .....................................
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 “contract of insurance”
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.
2Section 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
678
a. For instance, a contract may be considered an insurance

contract even if it is referred to as a health plan. In Philamcare Health
Systems v. Court of Appeals,* 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
Fortune Medicare, Inc. v. Amorin1 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 Philippine
Health Care Provider, Inc. v. CIR8 where it concluded that the elements of
insurance contract are absent. The Court ruled that there was no indemnity
precisely because the member merely
3National Auto Service Corporation v. State, Texas Civ. App., 55 S.W. (2d) 209.
4White 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.
6G.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.
7G.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.
8Supra (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
Mitsubishi Motors Philippines Salaried Employees Union (MMPSEU) v.
Mitsubishi Motors Philippines Corp.,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
9Section 4(b), R.A. No. 9829. Section 10, IRR of the Pre-Need
10G.R. No. 175773,Code.
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 Pandiman Philippines, Inc. v. Marine Manning
Management Corp.,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
nG.R. No. 143313, June 21, 2005.

12Williams, Jr. and Heins, Risk Management and Insurance, 1989 Ed., p.
™Ibid.
14Philippine Health Care Providers, Inc. v. CIR, supra.
15Section 2,1.C.; See §2 of this Chapter.
16Section 2047, New Civil Code.
the Pre-Need Code (R.A. No. 9829). 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.” “Variable contract”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? (2011
Bar)
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
17Section 4(b), R.A. No. 9829.

18See Chapter 18, of this
19Section 238, I.C. as
amended.
CHAPTER 1 7
GENERAL CONCEPTS
emergency, listed therein. He was also entitled to avail of “outpatient

benefits” 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. (Philamcare Health Systems, Inc. v. Court of Appeals
and Julita Trinos, G.R. No. 125678, March 18, 2002. But see
contrary view in Phil. Health Care Providers, Inc. v. CIR,
September 18, 2009 below)
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. (Philippine Health Care Providers,
Inc. v. CIR, G.R. No. 167330, September 18, 2009) 4
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 Sun Richie Five, 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 “Class 1 - Protection
and Indemnity” agreement?
A: No, PPI is not liable under the "Class 1 - Protection and In
demnity” 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 Sun Richie Five 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. (Padiman Philippines, Inc. v.
Marine Manning Management Corp., G.R. No. 143313, June 21,
2005)
§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 bancassurance. The term
bancassurance 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 Bangko Sentral ng Pilipinas
or any of its branches under such rules and regulations which the
Commissioner and the Bangko Sentral ng Pilipinas may promulgate.”22 The
Insurance Commissioner and the Bangko Sentral ng Pilipinas shall
promulgate rules and regulations to effectively supervise the business of
bancassurance.23
“Section 2,1.C.
nIbid.
^Section 375,1.C., as amended by R.A. No. 10607.

23IbidSee 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. In Philippine Health Care Providers, Inc. v. Commissioner
of Internal Revenue,21 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
24Republic 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.
25Pandiman 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.
26DOH Administrative Order No. 34 Series of 1994; E.O. No. 192 dated
November 12, 2015.

27G.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. (White Gold
Marine Services, Inc. v. Pioneer Insurance Surety Corporation, et al.,
G.R. No. 154514, July 28, 2005)
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
28The 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.
31Sections 430 to 436,1.C., as added by R.A. No. 10607.
32Section 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.

33Section 197,1.C., as amended by, R.A. No. 10607.
^Chapter II-A, Section 189,1.C., as added by R.A. No. 10607.

35Section 193,1.C., as added by R.A. No. 10607.
38First paragraph, Section 437,1.C., as added by R.A. No. 10607.
39Section 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.
40G.R. No. L-15895, November 29, 1920.

41The 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).
42Ang 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
Philippines45 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;
43See 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).
44See Chapter 8, Claims Settlement and Subrogation.
45B.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
46Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No.
156167, May 16, 2005.

47Sulpicio 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.
49Mitsubishi 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.
51Vicente Francisco, Commentaries on the Insurance Act, 1933 Ed., p. 4,
hereinafter cited as “Francisco, p. 4” citing 1 Joyce Ins., Sec. 6.

52Chitty 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 in-
surable, the losses should also be not too miniscule. Trivial losses
are not insurable in accordance with the principle of De minimis
non curat lex.55
(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
o4Robert I. Mehr and Emerson Cammack, Principles of Insurance, 7th
Ed., p. 32, herein after referred to as “Mehr and Cammack.”

55The law does not concern itself with trifles.
56I.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
57Philippine Health Care Provider, Inc. v. CIR, G.R. No. 167330,
September 18, 2009.

58George 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 property7 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.
60See Chapter 7.
61Chitty on Contracts, p. 1162.
62Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek
Seng, G.R. No. 85141, November 28, 1989.
63Ibid.
64Physicians’ Defense Co. v. Cooper, (C.C.A. 9th) 199 F. 576, 47 L.R.A. (N.S.)
290.
65See 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.
670ng 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.
69Redja, p. 14.
70Adam 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) Uberrimae Fidae.
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.
71Ibid., p. 961.
72Robert I. Mehr and Sandra C. Gustavson, Life Insurance: Theory and
Practice, 4th Ed., p. 31, hereinafter referred to as “Mehr and Gustavson.”
73William 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. Uberrimae Fidae. 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 caveat emptor 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
74Vance, p. 69.
75Burton 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.”
7eVance, p. 75.
77Vance, 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 El Debate, Inc. v.
Topacio,®° 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
78Edwin 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 Palomar v. Court of First Instance81 and Philippine
Refining Company v. Palomar*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
81G.R No. L-29881, August 31, 1988.

82G.R. No. L-29062, 148 SCRA 313 (1987).
83Francisco,
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 Cognition

Theory89 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.
87David L. Bickelhaupt, General Insurance, 1974 Ed., pp. 75-77, hereinafter
referred to as “Bickelhaupt.”
88As distinguished from real contracts which are perfected by delivery and
formal contracts which require certain formalities like a public instrument to be

perfected.
89This 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.
91Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 2009 Ed.,
Section 4.2, hereinafter referred to as “Beam, Jr. and Wiening.”

92Vance, p. 175.
93Eternal 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.

cr
Philippine American Life Insurance Corporation95 may also be

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.
95Ibid. jj
96See 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 Eternal Gardens Memorial Park v. Philippine
American Life Insurance Corporation97 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 Eternal Gardens Memorial Park v.
Philippine American Life Insurance Corporation98 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
91Supra.
98Ibid.
"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
Canada101 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
100G.R. No. L-15774, November 29,

1920,
lQ1 41citing
Ibid., Phil. 263.
Joyce, 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.
102Great Pacific Life Assurance Co. v. Hon. Court of
Appeals, G.R. No. L-31845, April 30, 1979.

103G.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
104Vance, p. 192.
105Aguedo 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,
106New 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. (Great Pacific Life Assn
Co. v. Court of Appeals, G.R. No. L-31845, April 30, 1979)
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
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. (John Hancock Mutual Life Insurance Company
v. Donald H. Dietlin, et al., 199 A 2d 311, April 6, 1964)
§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 sector107 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
punong harangay, the members of the sangguniang barangay, the
harangay secretary, the harangay treasurer, and the members of the
harangay tanod.109 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
107R.A. No. 8282.

108R.A. No. 8291.
109Section 522, Local Government Code.
110Bikelhaupt, p. 66.
mBikelhaupt, ibid.
U2R.A. No. 10606.
113Sections 386 to 402,1.C.; See Chapter 14 of this work.

114Section 14, R.A. No. 9295; See Chapter 11 of
115Section 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
116William R. Vance, Handbook of the
Law of Insurance, 2nd Ed., p. 34, hereinafter

referred
117 to as “Vance, p. 34.”
Ibid.
ll8Ibid.
n9Ibid.
120Beam, Jr. and Wiening,
Fundamentals of Insurance Planning, 3rd

Ed., (2009),
121 SeeSection 1.32, Serrano
for example hereinafter referred
v. Court of Appeals, G.R. No. L-35529,
1984. July 16,
(Republic Act No. 10607 with Notes on Pre-Need
Act)
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
122Section 235,1.C., as
amended
123 by46.
Vance, p. RA. No. 10607.
l2iIbid.
125Sections 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 contribu-
tions, 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
1
1
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
lrTom Baker, On the Genealogy of Moral Hazard, 75 Texas Law Review 237
(1996).
2Par. 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
Philippines8 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
3Ardcle 1390, New Civil Code.

4Article38, New Civil Code.
hereinafter referred to as the “Family
6See Article 73, Family Code.
Act)
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
8James 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.
9Ibid.
10Filipinas Compania de Seguros v. Christern, Huenenfeld & Co., G.R. No. L-
2294, May 25, 1951.

nIbid., 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, so far as not vested, 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,
12Filipinas 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
uSupra.
15Par. 5.1 (j), I.C. Circular Letter 2015-58-A dated December 21, 2015.
16Section 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
17The provision was Section 184 of the I.C. before R.A.

No. 10607.
™Ibid.
19Section 190,1.C., as amended by R.A. No. 10607.
“Section 404,1.C., as amended by R.A, No. 10607.

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
24Section 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”
26See I.C. Circular Letter No. 2017-06, dated January 23, 2017
providing for rules on demutualization.

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
29White 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) the financial organization and the
amount of capital; and (4) reasonable assurance of the safety
SOc
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 cir-
culated 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
32Section 370,1.C., as amended by R.A.

No. 10607.
™Ibid.
34Ibid.
™Ibid.
^Section 371,1.C., as amended by R.A.
No.
31 10607.
Ibid.
CIlArJ’KK 2 U
Tin-; PARTIES
induct; Much person to lapse, forfeit, or Htjrrender hm

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. Ax 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. (Nora Lumibao v. The Hon. Intermediate Appellate Court and
Eugenio Trinidad, G.R. No. L-64677, September 13, 1990)
§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
*
38Section 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
40Luz 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.
41The 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 cestui s widow or other dependent furnishes a possible motive for the cestui to
procure the policy upon his own initiative; and yet it gives B a greater incentive to desire
the cestui 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 cestui, 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 cestui 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 cestui was but a tool in the hands of the beneficiary.”42
42Edwin 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. (19 Cyc883.)
In the case of Shadgett v. Phillips and Crew Co.. 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.
If her interest was small, on account of [ejncumbrances existing in favor of the
complainant, 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, as where there is no agreement, express or implied, 43
43G.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 Heirs of Loreto C. Maramag v. Eva Verna
De Guzman Mara mag, ei
“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
44G.R. No. 181132, June 5, 2009.

46Social Security System v. Candelaria D. Davac, ei al, G.R. No. L-
21642, July 30, 1966.
46Heirs 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.
47Sulpicio 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,
48The 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
49Vol. separate
9, page estate,
589 cited inand
Thethe remainder
Bank to theIslands
of Philippine community
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;
50Delfin 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 pour autrui 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. (Bonifacio Brothers v. Mora, G.R. No. 20853, May
29, 1967)
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.

52Delfin
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
Un ne dolt prise advantage de son tort desmene54 and Nemo ex suo
delicto melloram suam conditionem facere potestNote 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 * * *
540ne ought not to take advantage of his own wrong.

55No one can improve his condition through his own misdeed.
56Before the amendatory provisions of R.A. No. 10607, if there are no other
beneficiaries, the nearest relative of the insured shall receive the

insurance
proceeds ofifsaid
not otherwise disqualified.
b7Supra.
(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'E
H2
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)
62Del 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-
oeSharuff & Co. v. Baloise Insurance Company, et al., G.R. No.
44119, March 30. 1937.

67Janine 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 “American Rulen 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 prius tempore portior jure — 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.
70San Miguel Brewery v. Law Union & Rock Insurance Co., G.R. No. L-14300,
January 19, 1920, 40 Phil. 674.

71Sections 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
72Section 318, as amended by R.A. No. 10607 which increased the penalty
of a fine of P10,000.00.
73Section 317,1.C.
74Pandiman 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
75This provision was inserted in Section 309 of the I.C., as amended by R.A.
No. 10607.
76G.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).
77Tongko v. The Manufacturers Life Insurance Company, G.R. No. 167622,
November 7, 2008.
78Tongko v. The Manufacturers Life Insurance Company, ibid., 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 Tongko v. The Manufacturers Life Insurance
Company, 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 indicia 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
81Section 308,1.C.
82Philippine 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). Life Assurance Company v. Clemente N. Pedroso, et al., G.R.
^Filipinas
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 pressure 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. They supply all the information, prepare and
answer the applications, submit the applications to their companies,
conclude the transactions, and otherwise smooth out all difficulties.
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
87Supra.
88John, 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
89Pandiman 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. (Bank
of Philippine Islands v. Laingo, G.R. No. 205206, March 16, 2016)
§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.
91Section 315,1.C. as amended by RJL No.
10607.
952Ibid.
(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 Philippine American Life Insurance
Company and Rodrigo De Los Reyes v. Hon. Armando Ansaldo, et al.,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 Warnock v.
Davis:'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.”
2Greiber and Beadles, p. 121.
3104 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 Lalican v. The Insular Life
Assurance Company Ltd.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
4Hugh J. Fegan, Insurance from Ballantine's

Problems
6 p. 569.
in Law,
Ibid., p. 569.
6G.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:
1See Section
18,1.C. 8Francisco,
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
9Croswell 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.
,0Harvard Law Review, Vol. 23, No. 1 (1909), pp. 57-59.

"Columbia Law Review, Vol. 22, No. 2 (Feb. 1922), p. 170.
,2Robert I. Mehr and Emerson Cammack, Principle of Insurance, 1980 Ed., p.
97, hereinafter cited as “Mehr and Cammack, p. 97.”

13U.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
14Mehr and Cammack, p. 97.

15Erskine 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
HiDickson, p.
162. 17Guevarra,
p. 12.
18Francisco, p.
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
19Great 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.
20Paramount Life & General Insurance Corporation v. Castro, ibid.
21“Mehr and Cammack, p. 97.”
22Perez, 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
23Perez, ibid.
24Vance,pp. 172-173.
262Agbayani 34.
26Hector S. De Leon, The Insurance Code of the Philippines,
Annotated, 1998 Ed., p. 97.

27Vance, p. 171.
28Ibid.
29Vance, p. 172.
30Perez, 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 cestui que vie. 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 cestui que vie is sui juris 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 cestui que vie 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 cestui
que vie. Moreover, such a delectus personae 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 cestui que vie 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 cestui que vie 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 cestui que vie, 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 cestui que vie 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 cestui
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. (Section
19,1.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. (Section 19,1.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
34Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country
Bankers Insurance Corporation, CA GR CV No. 03771, January 6, 1986, 1

CARA 35 5.
1,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
in commodatum.
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
36Section 13,1.C.
37Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers
Insurance Corporation, supra.
38Gaisano 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.
39Filipino 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.)”
40Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers

41Lampano v. Jose, G.R. No. L-9401, March 30, 1915.
42Ibid.
CHAPTER 3 93
INSURABLE INTEREST
g. Inchoate Interest. Inchoate interest must be founded on an

existing interest, otherwise, the loss of the property will not directly damnify
the insured. For example, a shareholder has inchoate interest on the
properties of the corporation. His inchoate interest over the properties of the
corporation is founded on his existing interest in the corporation as a
shareholder. Another example is the interest of a purchaser of a property in a
judicial sale subject to redemption.43
h. Expectancy. Expectancy must likewise be coupled with an existing

interest. For instance, the interest of an heir over the properties of his
successor who is still alive is a mere expectancy that is not coupled with an
existing interest. Hence, the heir does not have insurable interest over the
properties of his successor-in- interest. Prof. Vance explained:
“It may be true that one cannot have insurable interest in property
that does not exist. Nor is it correct to say that the possibility that property
may come into existence in the future gives a present insurable interest
therein. But the mere fact that property has no present existence affords no
reason why a bona fide contract should not be made for its protection when it
shall be subsequently acquired or come into being. Such expectant insurance
may be said to be subject to a suspensory condition, and attaches to any
specific property only upon its emerging into the realm of existent things.”44
i. Other examples of insurable interest out of expectancy are the

interests over the profits that are to be earned by a business establishment,
interest over future crops of farmers, and expected commissions of agents.45
Section 105 of the Insurance Code likewise expressly provides that the
owner of a ship has an insurable interest in expected freightage.
§3.03. DISTINCTIONS BETWEEN INSURABLE INTEREST IN

PROPERTY INSURANCE AND LIFE INSURANCE.
INSURABLE INTEREST IN
PROPERTY INSURABLE INTEREST IN LIFE
1. As to extent: Limited up to the 1. Unlimited except if secured by
value of the property. the creditor.
43Guevara, p. 13 citing Aetna Ins. Co. v. Miers, 5 Sneed (Tenn.) 139.

44Vance,p. 19.
452 Agbayani 42-43.
2. At the time of the perfection of the

insurance contract.
2. Time when it must exist: At the time
of perfection of the contract and at
the time of the loss.
3. 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.
4. Beneficiary’s interest: Beneficiary
must have insurable interest. 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. (Filipino Merchants Insurance Co. v.CA,
179SCRA638)
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. (AngKa Yu, et al. v. Phoenix Assurance Co.,
Ltd., et al., CA, G.R. No. 27881-R, September 28, 1961, 1 CAR
704, 709)
§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
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
46Guevara, p. 14 citing 26 C.J. 26, 27.

47G.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
Act)
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
Lopez v. Del Rosario™ 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 prima facie 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.
49Armando 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. Geagonia v. Court of Appeals, ibid.
Ârmando
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
51Great Pacific Life Assurance Corp. v. Court of Appeals and Medarda
V. Leuterio, G.R. No. 113899, October 13, 1999.

62Ibid.
53Vance, 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
^Cherie Palileo v. Beatriz Cosio, G.R. No. L-7667, November 28,

1955, citing Vance, pp. 654, 772-773.
55Cherie 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
57San 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
^Francisco, p. 11; See also Chapter 8 for extensive discussion of subrogation.
61Francisco, 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.
62Vicente 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. (Article 2207 NCC; Fireman’s Fund Insurance Co. v.
Jamilla & Co., 70 SCRA 323)
§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
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
65Section
21,1.C.
66 Section
67Section
^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
69Section 24,1.C.
702 Agbayani 49.
71Patterson, p. 414 citing Dalby v. India and London Life Assurance Co.
(1854) 15 C. B. 365
72Patterson, 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
73Great 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
74Spouses Nilo Cha, et al. v. Court of Appeals, et al., G.R. No. 124520,
18, 1997. August

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 elixir vitae 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
lrTibay 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
2Malayan 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.
:1Section 235, I.C.
42nd 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
a. It was observed that the payment of the premium creates the

vinculum juris between the parties. It was observed that “so essential is the
premium payment to the creation of the vinculum juris 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
vinculum juris 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.
b. If the insurer has no liability under the lapsed and inexistent
policies, the insurer has no right to demand, much less
6Separate Opinion of Justice Vitug in UCPB General Insurance Co., Inc. v.
Masagana Telamart, Inc., G.R. No. 137172, April 4, 2001.

6Ibid., 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
c. 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
Gaisano v. Development Insurance and Surety Corp ,,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.
d. 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 UCPB General Insurance Co., Inc. v. Masagana Telamart,
Inc.,12 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;
7Arturo P. Valenzuela, et al. v. The Hon. Court of Appeals, et al.

t
G.R. No. 83122, October 19, 1990.
8Gaisano v. Development Insurance and Surety Corp., G.R. No.
190702, February 27, 2017.

9Ibid.
10Justice Jose C. Vitug, Pandect of Commercial Law and
Jurisprudence, 1st Ed., p. 68.

nIbid.
12G.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:
13Harvey 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 Makati Tuscany Condominium Corporation v.

The Court of Appeals, et al.,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. (De Leon, the
Insurance Code, at p. 175) 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 Arce v. Capital Surety and Insurance Co.14
15is unavailing because the facts therein are substantially different from
those in the case at bar. In Arce, 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
14G.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).
15G.R.No. L-28501, September 30, 1982.
16Gasiano 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 UCPB General Insurance Co., Inc. v. Masagana
Telamart, Inc.17 that by the approval of the afore- quoted findings
and conclusion of the Court of Appeals, Makati Tuscany
Condominium Corporation v. The Court of Appeals, et al.18 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 observed19 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
17G.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.
18G.R. No. 95546, November 6, 1992.
19UCPB 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 Velasco v. Apostol21 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 vinculum juris between the insurer and
the insured. He explained in his Separate Opinion in UCPB v.
Masagana Telamart:22
“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
20Laura Velasco, et al. v. Hon. Sergio A.F. Apostol, et al., G.R. No. L-44588,
May 9, 1989.
21Ibid.
22G.R. No. 13712, April 4, 2001.
23Section 77,1.C.
CHAPTER 4 121
PREMIUM
conclusive evidence of payment of premium (Section 78). 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”
(Velasco v. Apostol, 173 SCRA 228)
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 vinculum juris
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
pro tanto, 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
24Acme 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? (2013 Bar)
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 11.25
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
25Ibid., Gasiano v. Development Insurance and Surety Corporation, G.R. No.
190702, February 27, 2017.

26This is a new provision inserted by R.A. No. 10607.
CHAPTER 4 123
PREMIUM
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
27AFP General Ins. Corp. v. Molina, G.R. No. 151133, June 30, 2008.
28AliciaS. 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 pro tanto. 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:
(1) 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
(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.31
b. 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
29The Manufacturers Life Insurance Co. v. Bibiano L. Meer, G.R. No. L-
2910, June 29, 1951, citing Cyclopedia Law Dictionary, 3rd Ed., 1077.
30The Manufacturers Life Insurance Co. v. Bibiano L. Meer, ibid.
31Par. (f), Section 233,1.C.
CHAPTER 4 125
PREMIUM
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.”
c. 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
d. 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
32Rubin, p. 44.
33Board of Assessors v. New York Life Insurance Co., 216 U.S. 517, 30
S.Ct. 385 (1910).
34The Manufacturers Life Insurance Co. v. Bibiano L. Meer, G.R. No. L-
2910, June 29, 1951.
cent per annum, 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
35Section 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,
36Section 2330), I.C.

37RufinoD. 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 pro rata);39
(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
42Ibid.
"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 pro rata 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.
44Makati Tuscany Condominium Corporation v. The Court of Appeals, et al,
G.R. No. 95546, November 6, 1992.

45Great 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. (UCPB General Insurance Company, Inc. v. Masagana
Telamart, Inc., G.R. No. 137172, April 4, 2001)
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. (Makati
Tuscany Condominium Corporation v. The Court of Appeals, et
al., G.R. No. 95546, November 6, 1992)
Act)
§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 pay-

ments, 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 because of his race.
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
46Nora 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). 47Nora 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
2See Article 1403, New Civil Code.

3Section 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.
4Section 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.

“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
9Ibid. Company of Canada, 41 Phil. 264.
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
10Circular Letter No. 11-90, July 10, 1990.

uCircular Letter No. 14-93; See also Circular Letter No.
2015-12-C dated March 24, 2015 for the Changes in the Approved
12Section 233,1.C.
13Ibid.
14Section 234,1.C.
16Section 235,1.C.
16Circular Letter No. 2015-58-A dated December 21, 2015.
17Ibid.
18Par. 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;
19Stokes 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. 20Steamship Mutual Underwriting Association (Bermuda) Limited v.
Sulpicio Lines, Inc., G.R. Nos. 196072 and 208603, September 20, 2017.
21Perla 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.
22C. Arthur Williams, Jr. and Richard M. Heins, Risk Management and
Insurance, 1989 6th Ed., p. 339 hereinafter referred to as “Williams, Jr. and
23Williams, Jr. and Heins, ibid. Heins.”
^Williams, Jr. and Heins, p. 340.
“Williams, Jr. and Heins, p. 341.
26Aboitiz 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,
27Par. 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 desig-
nated 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
2
8
B
i 1lbid.
S
(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 Per Stirpes 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
32Greider and Beadles, p. 146.

33Ibid.
34IbidSimmons v. Simmons, 272 S.W. 2d 913.
™Ibid.
37Del 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
38Misamis 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
^Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance
Company, G.R. No. 1190176, March 19, 2002.
41Section 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
42Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984.

Act)
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 Garcia v. Hongkong Fire & Marine Insurance Co.,
Ltd.,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
43G.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 new oil mill
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, then
there is no need to specify it as new.
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 aliunde, 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 new 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. (American Home Assurance Company v.
Tantuco Enterprises, Inc., G.R. No. 13894, October 8, 2001) 2
2. On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance)
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 Au-
gust 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.
1Bounds 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, to
wit:
“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. (Rizal Surety & Insurance Company v. Court
of Appeals, G.R. No. 112360, July 18, 2000)
§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
45See 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.

47Chitty on Contracts, ibid., p. 1166.

§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, viz.:
“Any rider, clause, warranty or endorsement pur-

porting 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 Endorse-
ments 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

“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. 159.
CHAPTER 5 153
THE POLICY
c. An Endorsement is a written agreement attached to a property

insurance policy to add or subtract insurance coverages.51 The Insurance
Commission defines an Endorsement as “a written document attached to an
insurance policy that modifies the policy by changing the coverage afforded
under the policy. An Endorsement 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
51Rubin, p. 153.
52Paragraph 5.1 (f), I.C., Circular Letter No. 2015-58-A dated December 21,
2015.
53Rubin, 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.
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 per se. 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.
57New 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
58New 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.
59Ang 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.
61New 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.
62G.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.

63G.R. No. L-21881, March 1, 1969, 22 SCRA 917.
MNew 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.
65Rizal 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 (contrats d’adhesion), 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 Qua Chee Gan u. Law Union and Rock Insurance Co., Ltd.,69
that
^Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 54 Cal. Rptr. 104, 419 P.2d
168 (1966).
67Del 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.
6998 Phil. 85 (1955).
Act)
the contract of insurance is one of perfect good faith (uberima fides) 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 Landicho v. Government Service
Insurance System“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
70G.R.
No. L-28866, March 17, 1972, citing 29 Am. Jur. 181 & 44 CJS 1174.
71Rizal
Surety and Insurance Company v. Court of Appeals and
Transworld Knitting Mills, Inc., G.R. No. 112360, July 18, 2000.
72Malayan Insurance Corporation v. The Honorable Court of Appeals and
TKC Marketing Corporation, G.R. No. 119599, March 20, 1997.

73DiMugno 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. Expresso unius exclusio alterius — 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
74Sun
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).
75Trinidad v. Orient Protective Ass’n., 67 Phil. 181.
76State Farm Mutual Auto Insurance Co. v. Partridge, 10 Cal. 3df 94, 109 Cal.
Rptr. 811 (1973).
77Delgado v. Heritage Life Insurance Co., 157 Cal. App. 3d 262, 271, 203 Cal.
Rptr. 672, 677 (2nd Dist. 1984).

78Finman General Assurance Corp. v. The Hon. Court of Appeals, G.R. No.
100970, September 2, 1992.

79Jarque 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.
Act)
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.
81Ibid.
82Mori 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. (Del Rosario
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. (Perla Compania de Seguros, Inc. v. Court of Appeals,
G.R. No. 78860, May 28, 1990, 185 SCRA 741) 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-
85Vance, 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.
87Vance, 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.
91Capital 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. (Gulf Resorts, Inc.
v. Philippine Charter Insurance Corporation, G.R. No. 156167, May
16, 2005)
92Capital 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, viz.:
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 vis-a-vis that of the insured. Unlike its most
prospective customers, the insurer has the necessary resources to
determine the correct valuation of the property.
93Ins. Memo. Circ. No. 3-75.
94Pacific Timber Export Corp. v. Court of Appeals, 112 SCRA

95Section 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 palay (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
97Tan 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
"Couch on Ins. Co., 9 Ind.,
Insurance, 2nd 443.
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.
101Lee 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. (Sec. 94, ICP) 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 misrepresenta-
tion;
(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
102Section64(f) was added by R.A. No. 10607.

103Philamcare 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
104Saura 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
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.”
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 ipso facto 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
107Vance, pp. 444-445.

108Leona Paulino v. The Capital Insurance & Surety Co., Inc., G.R.
No. L-11728, May 15, 1959.
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
U0Par. 7.5,1.C. Circular Letter 2015-58-A dated December

21,
nl 2015.
Ibid.
112Section 45,1.C.
113Section 74,1.C.
114Section 27,1.C.
115Section 75,1.C.
u6Section 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
n8Par. 5.1 (q), I.C. Circular Letter 2015-58-A dated December 21, 2015.
U9Par. 5.1 (m), I.C. Circular Letter 2015-58-A dated December 21, 2015.
120San 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,
121San 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).
122San Miguel Brewery, et al. v. Law Union and Rock Insurance Company
(Ltd.), ibid.
123Ibid., citing Smell v. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.
Act)
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
l24Domingo 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 uberrimae fidae, 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 Argente v. West Coast Life Insurance Company,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
2Carter v. Boehm, 3 Burr. 1905 (1766).

3G.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
4Victor Dover, A Handbook to Marine Insurance, 1975 Ed., p. 346, citing
Ionides v. Pender, 1874, hereinafter referred to as “Dover.”

6Vance, p. 347.
6Argente 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 Malayan Insurance v. PAP Co. Ltd.,10 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.
7Vance, p. 351; Miller v. Republic Nat. Life Ins. Co., 789 F.2d 1336 (9th Cir.
1986).
8Birds,
p. 111.
9Birds,
pp. Ill to 112.
10G.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
ASCERTAINING AND CONTROLLING
RISKS
b. In Florendo u. Philam Plans, Inc.,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
nG.R. No. 186983, February 22, 2012.

12Wilson 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.
,aCivil 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 Florendo v. Philam Plans, Inc.,15 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.
14Sun Assurance Company of Canada v. The Hon. Court of Appeals
SpousesandRolando and Bernarda Bacani, G.R. No. 105135, June 22, 1995;
Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48
(1960).16Supra.
16Sections 26 and 27,1.C.
17Section 28,1.C.
18Ibid.
19Section 28,1.C.; Florendo v. Philam Plans, Inc., supra.
20Vance, p. 354.
CHAPTER 6 183
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 Florendo v. Philam Plans, Inc.,21 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 The Insular Life Assurance Co. Ltd. v. FelicianolA
that are also persuasive:
21 Supra.
22Florendo 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.
23Manila Bankers Life Insurance Corp. v. Aban, G.R. No. 175666, July 29,
2013.
24G.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. vs. 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.” Home Ins. Co. vs. Mendenhall, 154 111., 452, 45 NE., 1078, 36 LRA.,
374; Phoenix Ins. Co. vs. Tucker, 92 111., 64, 34 Am Rep., 106; Commercial Ins.
Co. vs. Spanknoble, 52 111., 53, 4 Am. Report, 582; Young vs. Hartford F. Ins.
Co. 45 Iowa, 377, 24 Am. Rep., 754; Welsh vs. London Assur. 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
RISKS
(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, etc. 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, etc.
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.”
25Carter v. Boehm, supra.

CHAPTER 6 187
RISKS
§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 Philamcare Health Systems, Inc. u. Court of

Appeals,29 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
26John Birds, Modern Insurance Law, 4th Ed. (1997), p. 102, hereinafter
referred to as “Birds.”
27Philamcare 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.
Act)
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 Sun Life Insurance Company of Canada v. Court of Appeals and
Rolanda and Bernarda Bacani,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
30Sun Life of Canada (Philippines), Inc. v. Sibya, G.R. No. 211212,

2016. June 8,
31G.R. No. 105135, June 22, 1995. See case digest below.
CHAPTER 6 189
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
32Qua 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.” (29 Am. Jur., Insurance, Section 807,
at pp. 611-612)
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.” (Wilson v. Commercial
Union Assurance Co., 96 Atl. 540, 543-544)
A similar view was upheld in the case of Capital Insurance & Surety Co.,
Inc. v. Plastic Era Co., Inc., 65 SCRA 134, which involved a violation
33Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., ibid., citing
Wilson v. Commercial Union Assurance Co., 96 Atl. 540, 543-544.

34Edillon v. Manila Bankers Life Insurance Corp., G.R. No. L-34200,
September 30, 1982.

CHAPTER 6 191
RISKS
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 Argente
v. West Coast Life Insurance 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 suppressio veri, is nearly allied to
allegatio falsi, 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, “good faith” is no defense in
concealment.
35Ignacio 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.
37Joyce, Law of Insurance, 2nd Ed., Vol. 3.
38Dover, 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 bona fides. 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.
40Ng 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
Saturnino v. The Philippine American Life Insurance Company 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 Carter v.
Boehm46 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.
41Birds, p. 103.
42Supra, citing Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211, 214.
43Saturnino v. The Philippine American Life Insurance Co., supra.
44Ibid.
45Vance, p. 339. This is in contrast to the American Doctrine where the
presence of fraud is necessary before the concealment can be invoked.

463 Borrows, 1905, 1909.
Act)
(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
47Suggested answers to the Bar Examinations in Commercial Law
of the UP Law Center.

48This 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
RISKS
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 Philamcare
Health System, Inc. v. Court of Appeals,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. In Ng Gan Zee v. Asian Crusader Life Assurance Corporation,52 the
alleged false statements given by Kwong Nam
49See §1.10 below.

“G.R. No. 125678, March 18, 2002.
51Ng Gan Zee v. Asian Crusader Life Assurance Corporation, G.R. No. L-30685,
May 30, 1983.

b2Ibid. 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 Sun Life of Canada (Philippines), Inc. v. Sibya,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.
53Supra.
^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
RISKS
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.
Act)
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
RISKS
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. (See
Malayan Insurance Corp. v. Pinca, G.R. No. 67835, October 12, 1987
and Great Pacific Life u. CA, 89 SCRA 543)
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,
Act)
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 (Section 30)
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. (Ignacio Saturnino v. The Philippine American Life
Insurance Company, G.R. No. L-16163, February 28, 1963)
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. {Rollo, 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 bona
fides. 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
RISKS
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. (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 [I960])
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
RISKS
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.”
(Thelma Vda. de Canilang v. Hon. Court of Appeals, et al., G.R. No.
92492, June 17, 1993)
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 his57
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. (Yu Pang Cheng u. The Court
of Appeals, et al, G.R. No. L-12465, May 29, 1959)
§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
57V
anc
58 V
59D
ove
CHAPTER 6 207
a. In Pacific Banking Corporation u. Court of Appeals, et al.m the

Supreme Court explained that if the Vhole foundation of the contract fails,
the risk does not attach and the policy never becomes a contract between
the parties. Representations of facts are the foundation of the contract and
if the foundation does not exist, the superstructure does not arise.
Falsehood in such representations is not shown to vary or add to the
contract, or to terminate a contract which has once been made, but to show
that no contract has ever existed.”
§2.01. TIME OF REPRESENTATION. Since representations are

supposed to induce the other party to enter into the policy, they are made
at the time or before the issuance of the policy. Obviously, information
statements made after the policy takes effect will no longer have any
bearing on the decision of the insurer to issue the policy or the decision of
the insured to enter into the contract.
SEC. 37. A representation may be made at the time

of, or before, issuance of the policy.
a. Modification. An exception to the rule embodied in Section 37 is
that which is contemplated in Section 47 of the Insurance Code which
provides:
SEC. 47. The provisions of this chapter apply as

well to a modification of a contract of insurance as to its
original formation.
b. In other words, the representation may also be one that
induces the party to agree to modify the contract. This may therefore
cover representations that induce the other party to agree to novate the
agreement. It follows from the provision that representations may also be
made at the time of or before the renewal of the policy.
§2.02. DISTINCTIONS AND SIMILARITIES.
CONCEALMENT REPRESENTATION
1. It involves an omission - non- 1. It involves a positive assertion or
disclosure. affirmation.
60168 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.
Act)
2. Concealment cannot refer to

2. Representation can pertain to the
future acts.
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
61Section
36,1.C.
62 Vance,p.
Ârticle 1370,
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.
66Taylor 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.
Langan v. United States Life Insurance Co., 344 Mo. 989, 130 So. W. (2d)
67
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 ubberimae
fidae.
(5) In Edillon v. Manila Banker’s Life Insurance Corp.,68 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
68G.R. No. L-34200 September 30, 1982.

69Domingo Garcia v. Hong Kong Fire & Marine Insurance, Co.,
Ltd., G.R. No. 20341, September 1, 1923, 45 Phil. 122.
701 Couch 215.
71Mrs. 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
72Section 48,1.C.
73Ibid.
74Before 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. (Ng Gan Zee v. Asian Cruzader Life Assurance
Corporation, G.R. No. L-30685, May 30, 1983)
§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 non-
fulfillment, 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
75Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping
Lines, G.R. No. 151890, June 20, 2006, 491 SCRA 411, 435.
76Dover, p. 369.
77Section 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 vs. Howard [1880], 55 Cal., 564; People vs. 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 *
78Ang 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
mSee Chapter 9, Section 3 discussing the “Other Insurance Clause.”

81PrudentialGuarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines, Inc.,
G.R. No. 151890, June 20, 2006.
82Ibid.
Act)
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 non-
compliance 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.
CIIAITKIt 0 2 J9
ASOKIU'AfNIN<! AND OONTIfOIJ JNf i
KI.HKH
§3.07. BREACH WITHOUT FRAUD. Section 70 of the Insurance Code

provides Mini, a breach of warranty without fraud merely exonerates an
insurer from the time that it occurs, or where it is broken in its inception,
prevents the policy from attaching to the risk.
§3.08. DISTINCTIONS.
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 must be established to be
3. It is presumed to be material. 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 uberrimae fidae 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 Perla Compania De Seguros, Inc. v. Court of Appeals,™
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
87Rafael (Rex) Verandia v. Court of Appeals, et al., G.R. No.
75605, January 22, 1993.

™Ibid.
89G.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
MNew Life Enterprises v. Court of Appeals, G.R. No. 94071, March 31,
1992; see Note 3 of Chapter 9 of this book.

91Malayan Insurance Corporation v. The Honorable Court of Appeals
and TKC Marketing Corporation, G.R. No. 119599, March 20, 1997.
92Virginia Calanoc v. Court of Appeals, G.R. No. L-8151, December 16,
1955.
93 Ibid.
94See 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 “expressio unius est
exclusio alterius”— 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 Fortune Insurance & Surety Co. u.
Court of Appeals.91 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:
95Paris-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.
97G.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 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 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:
(b) A provision that the policy shall be incontest-

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:
“Early Use of the Clause. 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,

102G.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 Ser-
vices, 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.
103Emilio Tan, et al. v. The Court of Appeals and Philippine American Life
Insurance Company, G.R. No. 48049, June 29, 1989.

i04Supra.
105G.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 Emilio Tan, et al. v. The Court of Appeals106 107 is to the effect that
the policy can still be rescinded or
106G.R. No. 175666, July

29,G.R.
107 2013.
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. Aban110 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. Aban114 had already been in
force for more than three
108Emilio Tan, et al. v. The Court of Appeals and Philippine American Life
Insurance Company, ibid.

109G.R. No. 211212, June 8, 2016.
u0Supra, 715 Phil. 404 (2013).
inG.R. No. 48049, June 29, 1989.
ll2Supra.
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
Supr
116Sec
tion
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.

a. 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
b. 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-
117Section 227,1.C.
118Section 48,1.C.
1192 Agbayani 100.
120Ibid.
l2lIbid.
l2zSee for example Eguaras v. Great Eastern Assurance Co., Ltd.,
G.R. No. L-10436, January 24, 1916, 33 Phil. 263 .

123Obartuch v. Security Mutual Life Insurance Company, 114 F.
(2d) 873 (C.CA. 111. 1940) cited in Greider and Beadles, p. 250.
124Amex 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,

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

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
127Ibid., p. 401; Kallman v. Equitable Life Assurance Society, 248
A.D. 146,288 N.Y.S. 1032 (1936).

128Kallman v. Equitable Life Assurance Society, ibid.
™Ibid.
130Ibid., 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:
131Banas v. Oriental Life Insurance Co., (CA) 52 O.G. 5898 (No. 13).
132Philamcare Health Systems, Inc. v. Court of Appeals, G.R. No. 125678, March
18, 2002. .
133Tan Chay Heng v. The West Coast Life Insurance Company, G.R. No. L-27541,
November 21, 1927.

134Bemardo 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.” (Codes of
California annotated; Tan Chay Heng v. West Coast Life Insurance Company
[1927], p. 80, ante.) 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. (Rankin v.
Amazon Insurance Co. [1891], 89 Cal, 203.)"
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
135Bemardo Argente v. West Coast Life Insurance Company,

13eVance, p. 451. supra.
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 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, 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. Que Chee Gan v. Law Union Insurance Co., Ltd.139 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
137Edillon 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.
138Ng Gan Zee v. Asian Cruzader Life Assurance Corporation, supra.
139Supra.
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 in pais 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
140Par. 7.21, Guidelines on the Approval of Non-Life Policy Forms,
I.C. Circular Letter dated 2015-58-A dated December 21, 2015.

141Fieldmen’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.
142Fieldmen’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 System of Logic:
“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.
1Book III, Chapter 10, Section 1.

2Bonifacio 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 — causaproxima
non remota spectator.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
3Bataclan v. Medina, 102 Phil. 181 (1957).

'U’imoteo B. Aquino, Torts and Damages, 2016 Ed., p. 302, citing 57
Am. Jur. 2d 484.
5Regard the proximate cause and not the remote cause.
6Cited in Victor Dover, A Handbook to Marine Insurance, 1975 Ed.
(Revised by Robert H. Brown), p. 398, hereinafter cited as “Dover.”

7Dover, 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
quasi-delict 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
9Sectio
n
10Ibid.
“Sectio
12Ibid.
13Sectio
14Ibid.
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
Article 2194, New Civil Code.
16See 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.
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
20See 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.
2xIbid.
22Kenneth York and John Whelan, Insurance Law General Practices,

p.Ibid.,
23 228. citing State Farm Mutual Auto Ins. Co. v. Partridge, 10 Cal.
3d 94 Cal. Rprt. 811 (1973).
24Ibid., citing Safeco Ins. Co v. Guyton, 692 F. 2d 551 (9th Cir. 1982).
2SIbid., 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 blatant negligence 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
26FGU Insurance Corporation v. The Court of Appeals, et al., G.R.
No. 137775, March 31, 2005.

27Jbid.
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
28FGU 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. Vance31 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
29Vance, p. 781.
Ê.M. Bachrach v. British American Assurance Company, G.R. No. L-5715,
December 20, 1910.
31Vance, pp. 780-781.
32Ibid.
^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
36Malayan 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
37Jacqueline 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.
39Finman 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
40Finman General Assurance Corporation v. Court of Appeals and USIPHIL
Incorporated, supra.
CHAPTER 7 249
LOSS AND NOTICE OF
LOSS
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
Finman General Assurance Corporation v. Court of Appeals and USIPHIL

Incorporated, supra.
Act)
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 and
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. (Norman Noda v.
Hon. Gregoria Cruz-Arnaldo and Zenith Insurance Corporation, G.R.
No. 57322, June 22, 1987)
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 avoids an insurance
policy. (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.)
That has become the settled doctrine 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 Yu Cua case, the claim was 14 times bigger than
the real loss; in the Go Lu case, eight (8) times; and in the Tuason case, six
(6) times. In the Tan It 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. (Tan It v. Sun Insurance Office, G.R. No. L-
27847, December 12, 1947)
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;
2Section 333,1.C; See Chapter 16 for further discussion on the law on adjusters.
3Ibid.
AIbid.
5Smith 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
7Se
cti
6Ib
9Ib
10I
“Section 249,1.C.
bi
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
13Section 249, I.C. (previously Section 243).

14Ibid.
15Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines,
Inc., G.R. No. 151890, June 20, 2006.

16Stronghold Insurance Co., Inc. v. Pamana Island Resort Hotel and Marina
Club, Inc., G.R. No. 174838, June 1, 2016.

17Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-67835,
October 12, 1987.

Section 250, I.C.
18
within the time prescribed in Sections 248 and 249 of the Insurance Code
shall be considered prima facie 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% per annum from the time
of demand. As already stated earlier, under BSP
19See discussion in Section 1.02 and 1.03 above, Notes 6 and 10.
20Prudential 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.

22Sun Life of Canada (Philippines), Inc. v. Sandra Tan Kit, G.R. No.
183272, October 15, 2014.

23The 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.
24G.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.
25Tio Kho Cho v. Hon. Court of Appeals, G.R. Nos. 76101-02, September 30,
1991.
26Ibid.; Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, July 12,
1994.
27Sun 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 per se 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 fraudu-
lent 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
28Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and
Nerissa Lim, G.R. No. 92383, July 17, 1992.

29Tan 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.
31The 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 mala prohibita, 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:
(a) The person who presented the fraudulent claim;

(b) The person who caused the filing of the fraudulent
claim;
(c) 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
(d) 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.
b. 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
32Section 250,1.C.
Act)
c. 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 Uy Hu & Co. v. The Prudential Assurance Co., Ltd., 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 Yu Ban Chuan v. Fieldmen’s Insurance, Co., Inc., 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 Verendia v. Court of Appeals, 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 Yu Cua v. South
British Insurance Co., the claim was fourteen times bigger than the real loss; in
Go Lu v. Yorkshire Insurance Co., eight times; and in Tuason v. North China
Insurance Co., six times. In the present case, the claim is twenty-five times 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
34United 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).
35Sun 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.
37Travellers 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.
38Star Insurance Co. v. Chia Yu, 96 Phil. 696 (1955).
39ACCFA v. Alpha Insurance & Surety Co., Inc., 24 SCRA 151 (1968); See also
H.H. Hollero Construction, Inc. v. Government Service Insurance System, G.R.

152334, September 24, 2014. No.
40Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No.
89741, March 13, 1991.

CHAPTER 8 263
CLAIMS SETTLEMENT AND
SUBROGATION
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
41Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, supra.
42Eagle 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).
43New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No.
94071, March 31, 1992.

44Ibid.
45E. Macias & Co. v. The China Fire & Insurance Co., Ltd., et al., G.R. No. L-
21881, October 3, 1924.

46Mayer 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 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
47Republic Flour Mills Corp. v. Forbes Factors, Inc., G.R. No.
152313, October 19, 2011.

48Ibid., 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.
49Fireman’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
SUBROGATION
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
51Loadstar 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.
o2The Philippine American General Insurance Company v. The Hon. Court of
Appeals and Felman Shipping Lines, G.R. No. 116940, June 11, 1997.
53Pan 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.
54Danzas 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).
55Pan 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).
56Jbid., citing Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G.R.
No. L-22146, September 5, 1967, 21 SCRA 12.

57See Article 2207, New Civil Code.
CHAPTER 8 267
SUBROGATION
§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
58Aboitiz Shipping Corp. v. Insurance Company of North America, G.R.
No. 168402, August 6, 2008.

59Federal Express Corporation v. American Home Assurance Company,
G.R. No. 150094, August 18, 2004, 437 SCRA 50, 56.
"Ibid.
61Aboitiz Shipping Corp. v. Insurance Company of North America, supra.
62St. Paul’s Fire & Marine Insurance Co. v. Macondary Co., Inc., et al.
y
G.R. No. L-27796, March 25, 1976.
63G.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.
64Rizal 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 * *
65G.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
SUBROGATION
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.
69Federal Express Corporation v. American Home Assurance Company, et al.,
G.R. No. 150094, August 18, 2004, 437 SCRA 50, 56-57.
70Ibid.
71Mayer 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 Vector Shipping Corporation v. American Home Assurance
Co./* 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, supra, 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 Vector Shipping Corporation
v. American Home Assurance Co.72 73 74 75 is not correct and the rulings in
Domingo Ang u. Compania Maritima, et al and Ang v. American Steamship
Agencies, Inc. 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
72FederalExpress Corporation v. American Home Assurance Company, et al.,

supra.
73Fil Merchants v. Alejandro, 145 SCRA 42 (1986).
74G.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
76FF 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).
77Malayan Insurance Company, Inc. v. Regis Brokerage Corporation, G.R. No. 172156,
November 23, 2007.

1HIbid.
7ttG.R. No. 109293, August 18, 1993, 225 SCRA 411.
"°G.R. No. 172156, November 23, 2007.

H,G.R. No. 152158, February 7, 2003.
Act)
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 Delsan
Transport Lines, Inc. v. Court of Appeals 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 International Container Terminal Services, Inc. v. FGU
Insurance Corporation,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 Asian Terminals, Inc. v. Malayan Insurance Co.,
Inc.85 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
82Eastem 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% per 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 pro tanto 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. (Federal Express Corporation
v. American Home Assurance Company and Philam Insurance
Company, Inc., G.R. No. 150094, August 18, 2004)
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). (Malayan Insurance Company,
Inc. v. The Hon. Court of Appeals, et al., G.R. No. L-36413, September 26,
1988)
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. (Manila Mahogany Manufacturing
Corporation v. Court of Appeals and Zenith Insurance Corporation, G.R.
No. 52756, October 12, 1987)
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) me 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. There 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-insurance5 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 ipso facto.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
BSections
93 and 94,1.C.
6Ulpiano
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 ipso facto 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, ipso facto
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
7Pioneer Insurance and Surety Corporation v. Olivia Yap, G.R. No. L-36232,
December 19, 1974.

8Ulpiano 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.
10Union Manufacturing Company, Inc. and Republic Bank v. Philippine Guar-
anty 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 Corpora-
tion 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 Santa Ana v. Commercial Union Assurance 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 Ang Giok Chip v.
Springfield Fire & Marine Ins. Co., 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 ponente, 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 Young v. Midland Textile
Insurance Company, 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 Santa Ana
ruling in a decision by the then Justice, later Chief Justice, Bengzon, in General
Insurance & Surety Corp. v. Ng Hua. 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. (Sec. 69, Insurance Act) Such
misrepresentation is fatal in the light of our views in Santa Ana v. Commercial
Union Assurance Company, Ltd. ... The materiality of non-disclosure of other
insurance policies is not open to doubt.” As a matter of fact, in a 1966 decision,
Misamis Lumber Corp. v. Capital Ins. & Surety Co., Inc., 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 Emilio Gonzalez La’O
v. Yek Tong Lin Fire & Marine Insurance Co., Ltd.11 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 26 Corpus Juris 188,
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
Gonzalez La’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 Gonzalez La’O case
should already be abandoned because even
nG.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. (General Insurance
and Surety Corporation v. Ng Hua, G.R. No. L-14373, January 30,
1960)
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 inter se.
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 overinsurance
over the life of any person.
b. Section 96 of the Insurance Code provides the rules, viz.:
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
12Section 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 Decision40 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
13InsuranceCode of 1978.
MG.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 tort should be ignored even if the beneficiary is the same plaintiff in the
tort 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
15Timoteo B. Aquino, Torts and Damages, 2016

Ed.,
16 p.
Ibid. 817.
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.”
2Golding, ibid.
3Golding, p. 7.
4Golding, 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.
6Section 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.
6John 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 10 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 pour autrui 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 pour
autrui 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.
8Artex Development Co., Inc. v. Ellington Insurance, Co., Inc., G.R. No. L-
29508, June 27, 1973,

9Ibid.
10S.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
nIvor 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.
12See Avon Insurance, et al. v. Court of Appeals, et al., G.R. No. 97642,
August 29, 1997.

CHAPTER 10 291
REINSURANCE
are insured by the original insurer company are located in that

state. The reason for this is that a contract of reinsurance is
generally a separate and distinct arrangement from the original
contract of insurance, whose contracted risk is insured in the
reinsurance agreement. Hence, the original insured has generally
no interest in the contract of reinsurance. Hence, Y cannot be said
to have performed an act that placed it within the jurisdiction of
Philippine courts. (Avon Insurance, et ah v. Court of Appeals, et al.,
G.R. No. 97642, August 29, 1997)
§3. DISTINGUISHED FROM DOUBLE-INSURANCE AND CO-

INSURANCE
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
3. The subject matter is the liability of the
insured. insured.
4. Involves separate interests.
4. The same interest is insured.
5. Same peril is insured against in
5. Different perils are insured against in
separate policies. separate policies.
REINSURANCE CO-INSURANCE
1. There is only one contract.
1. Two separate contracts are involved.
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
3. the
The insured will share in the loss
loss contemplated by the reinsurance contemplated by the original contract.
contract.
4. Not mandated by law in marine 4. Co-insurance is provided by law in

insurance. 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
13Golding, p. 18.
14Golding, p. 17.
16Huebner, Black & Webb, pp. 610-
16Huebner, Black & Webb, p. 611.
17Redja, p. 546.
18Golding, p. 36.
CHAPTER 10 293
REINSURANC
E
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) Quota-share Treaty — The insurer and the reinsurer agree
to share losses and premiums based on some proportion.
(2) Surplus-share Treaty — The reinsurer accepts in excess of
the ceding company’s retention limit up to a maximum
amount.
(3) Excess-of-Loss Treaty — 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) Reinsurance Pool — 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
19Equitable Insurance and Casualty Company, Inc. v. Rural Insurance and Surety
Co., Inc., G.R. No. L-17436, January 31, 1962.

20Article 1206, New Civil Code.
21Redja, pp. 546-547.
22Golding, 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 uberrimae
fidae. 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.
23Government 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
2
6
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; (ii) The
experience and quality of its management;
(iii) The general underwriting policy of the reinsured; (iv) 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 continue in full force
and effect until their natural expiry ...;” 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
27Golding, p. 11.
™Ibid.
^Golding, p. 22.
^Rubin, p. 58.
31Fieldmen’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 shall continue in full
force until their expiry 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 ipso facto 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.
(Fieldmen’s Insurance Company, Inc. u. Asia Surety and
Insurance Company, Inc., G.R. No. L-23447, July 31, 1970)
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-
lfThe 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 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.
(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 Law2 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, viz.:
(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.

3See 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-
4Par. 2, Section 101, I.C.

5MalayanInsurance Co., Inc. v. Jardine Davies Transport Services, Inc., G.R. No.
181300, September 18, 2009.
Act)
ment or declaration of the shipper about the specific ship-

ment 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 “Domestic Shipping Development
Act of 2004” 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.
6Malayan 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
»Ibld. No. 40.
x0Ibid.
"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
12Paragraph 1(a), Section

101,1.C.
13Paragraph 1(d), Section
101,1.C.
14Paragraph 1(c), Section
15 Ibid.
101,1.C.
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,
“from” 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:
16Section 51,1.C.
17Choa Tiek Seng v. Hon. Court of Appeals, et al., G.R. No. 84507, March 15,
1990.
18Filipino 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 Paris-Manila Perfumery Co. v. Phoenix
Assurance Co., Ltd., 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
Act)
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 cited in one case is

as follows:19 “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
“Perils Clause. ”
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:
19Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa
Tiek Seng, supra.

20New World International Development (Phils.), Inc. v. NYK-FilJapan
Shipping Corp., G.R. No. 171468, August 24, 2011.

21Malayan Insurance Corporation v. The Hon. Court of Appeals & TKC
Marketing Corporation, G.R. No. 119599, March 20, 1997.

22Ibid.
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 “perils of the sea” 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
23Malayan Insurance Corporation v. The Honorable Court of Appeals and
TKC Marketing Corporation, supra.

to be considered definitely settled.24 “Perils of the sea” 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 “Perils of the sea” are
restricted to such accidents and misfortunes only as proceed from
mere sea-damage, that is, such as arise, ex vi divina 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 Transimex, Co. v.
Mafre Asian Insurance Corp.29 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
24La Razon Social “Go Tiacoy Hermanos” v. Union Insurance Society of
Canton, Ltd., G.R. No. 13983, September 1, 1919.

25Dover, p. 262.
26Ibid. citing Cargo ex Xantho v. Owners of Xantho, 1887.
21Ibid.
28La Razon Social v. Union Insurance Society of Canton, supra.
29G.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
“peril of the ship. "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
30La Razon Social v. Union Insurance Society of Canton, supra.

31Ibid.
32Cathay Insurance Co. v. Hon. Court of Appeals and Remington Industrial
Sales Corporation, G.R. No. 76145, June 30, 1987.

$12 ESSENTIALS OK INSURANCE LAW
(Republic Art No. 10607 with Notes on Pro-Need Act)
the question now under consideration. We refer to Hamilton, Fraser & Co. v.
l\mciorf i$ Co.. (fl887J. 12 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 Hamilton, Fraser & Co. v. Pan
dorf & Co., ([1887], 12 A. C., 518), 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 ((Perils Clause” 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.
33La 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 (ejusdem generis)
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
34Timoteo 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.”
35La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton,
Ltd., G.R. No. 13983, September 1, 1919.

36See 4.01 of this Chapter.
37Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc., et al., G.R.
No. 132607, May 5, 1999.

38La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton,
Ltd., supra.
Mx 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
39Malayan Insurance Corporation v. The Hon. Court of Appeals &
TKC Marketing Corporation, G.R. No. 119599, March 20, 1997.

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 Hondagua 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. (La Razon Social "Go Tiaco y Hermanos v.
Union Insurance Society of Canton, Ltd., G.R. No. 13983,
September 1, 1919)
§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
40Section
102,1.C.
41Section
Section
103,1.C.
42
108,1.C.
43Section
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 Malayan Insurance Co., Inc. v. Philippine First Insurance Co.4b

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.”

45G.R. No. 119599, March 20, 1997.
Act)
§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
46Section 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 Compagnie Maritime Des Chargeurs Reunis 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,
Act)
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. (See Berk
v. Style [1956J cited in Marine Insurance Claims, ibid., p. 125).
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.”
(Filipino Merchants Insurance Co., Inc. v. Court of Appeals and
Choa Tiek Seng, G.R. No. 85141, November 28, 1989)
§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
47Section
109,1.C.
48Dover,
p.Section
49 346.
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
51Dove
r,Dove
52 p.
r, p.
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:
53Dover, supra.
54Madrigal,Tiangco and Co. v. Hanson, Ort and Stevenson, Inc., G.R.
No. L-6106-07, April 18, 1958.
55Isabel Roque, et al. v. Hon. Intermediate Appellate Court and Pioneer
Insurance & Surety Corp., G.R. No. L-66935, November 11, 1985.
56Section 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
57The 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
59La 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.
61Delsan 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. (Delsan Transport Lines,
Inc. v. Court of Appeals, G.R. No. 127897, November 15, 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:
62Dover,
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;
65Section 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.
67Section
68Section
69Section
70Dover,
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
71Philippine Manufacturing Co. v. Union Insurance Society of Canton, Ltd.,
G.R. No. L-16473, November 22, 1921.

72Pan Malayan Insurance Corporation v. Court of Appeals, et al., G.R. No.
95070, September 5, 1991.
73Dover, 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
740riental 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.
75Keppel 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 pre-
mium 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. (Oriental Assurance Corporation v. Court of Appeals
and Panama Saw Mill Co., Inc., G.R. No. 94052, August 9, 1991)
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 Philmaco 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 Philippine Shipping Company v.
Garcia,76 which is an action for damages instituted by the Philippine
Shipping Company for the loss of Steamship uNtra. Sra. de Lourdes*'as a
result of the collision with the Steamship “Navarra” of Garcia, it was found
that the “'Navarra” 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 “Navarra” at the time of its loss, in
accordance with the provision of Article 837 of the Code of Commerce, and that
it was immaterial that the “Navarra” had 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. The 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 constructive 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 Vasquez v. Court of
Appeals,71 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 (Sec. 140, ICP);
(2) There must be a constructive total loss (Sec. 141,
ICP);
(3) The abandonment be neither partial nor conditional
(Sec. 142, ICP);
(4) It must be made within a reasonable time after receipt
of reliable information of the loss (Sec. 143, ICP);
(5) It must be factual (Sec. 144, ICP);
(6) It must be made by giving notice thereof to the insurer
which may be done orally or in writing (Sec. 145, ICP)] and
78Sundiang 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 (Sec. 146, ICP).
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 “may” 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.
79Keppel 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 prop-
erly given, the rights of the insured are not prejudiced
by the fact that the insurer refuses to accept the aban-
donment.
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.
81Section
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 con-
clusive 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 Insurer82
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,
83Section 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
84Section 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 force majeure, 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 force majeure, 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.
87Jerome Trupin and Arthur

Flitner, supra.
Ârticle 809, Code of Commerce.
mIbid.
Act)
(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.
90Article
811, Code of Commerce.
91A.
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
92Aquino and Hernando, Essentials of Transportation and Public Utilities
Law, 2011 Ed., p. 458.

93Ibid.
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
(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 “total loss
only.,%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.
Act)
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.
2Section 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.
3Westem Woolen Mill Co. v. Northern Assurance Co. of London, 139 Fed.
637, 639 (1905).
4Hueber, 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
6Huebner, 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.
7American 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 Malayan Insurance Company, Inc. u. PAP Co. Ltd., (Phil.
Branch)™ the Supreme Court considered as an alternative ground for denying
the claim or rescinding the policy on the ground
wSee 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
13Section
172,1.C.
14Sections
173 and
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
17Huebner, Black and

Webb, p. 260.
Ibid., p.
lg 259.
19Ibid ., p. 273.
“ibid., p. 282.
21E.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 Galian v. State Assurance Company,24 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
^G.R. No. Lr-8405, February 10, 1915.
“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
25FiIipinas Compania de Seguros v. Tan Chuaco, G.R. No. L-1559, January 31,
1950.
26Section 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.
27E.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, does not void it if such
keeping is incidental to the business: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
28The 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.
30Ibid., 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.
2Gallardo 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. (Bowless v. Mutual Ben. Health & Accident Assn., C.C.A.
Va. 99F. 2d 44. 48, 49.)
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. (Mutual Life Ins. Co. 100 Pa
172, 180.)
In its broader sense, ‘life insurance' includes accident insurance, since life is
insured under either contract. (American Trust & Banking Co. v. Lessly, 106 S.W. 2d.
551, 552, 171 Tenn. 561, 111A.L.R. 59.)
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. (Code
1932, B 8456. American Trust & Banking Co. v. Lessly, 106 S.W. 2d 551, 171 Tenn. 511
III A.L.R. 59.)
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. (Code S.C. 1932 ss 7986, 7987; Pacific Mut. Life Ins. Co. of California
v. Parker, C.CA.S.C., 71 F. 2d 872, 875.)
‘Life insurance’ includes all policies of insurance in which payment of insurance
money is contingent upon loss of life. . . . (Smith v. Equitable Life Assur. Soc. of U.S., 89
S.W. 2d 165, 167, 169 Tenn. 477.)
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 (Hemingway’s Code 1927, ss 5830, 5856), and Law 1924, c. 191, s I (Hemingway’s
Code 1927, s 5995); 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. (Universal Life Ins. Co. v. State, 121 So. 849, 850, 155 Miss.
358.) (25 Words & Phrases 260, 261, 262.)
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 insurance in the Equitable Life Assurance
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 other than life insurance, 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
3Huebner & 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
4Huebner & Black, p. 15.

5Huebner & Black, Chapters 32 and 33, pp. 442-463.
6Section 182, 1st paragraph, I.C.
7Beam, 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 “short-
term 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 *industrial life insurance”
as used in this Code shall mean that form of life insurance under which the
premiums are payable either monthly or oftener,
10Mariano 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.
12Ibid., citing 29 Am. Jur., Section 1277, pp. 952, 953.
13Beam, 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 “industrial policy” are printed upon
the policy as part of the descriptive matter.14
e. Variable Life or Variable Unit-Linked (VUL) Insur-
ance 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
14Section 235,1.C. See also Articles 2021 to 2027, New Civil Code.
15Section 238(b), I.C.; See Circular Letter No. 2017-34, June 15,
2017, Revised Guidelines on Variable Life Insurance Contracts.
16Vance, p. 46.
17Ibid.
18Beam, Jr. and Wiening, Fundamentals of Insurance Planning,
3rd Ed., 2009, Sec. 8.24.

19Gallarado v. Morales, G.R. No. 12189, April 29, 1960.
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
21Section 181, 2nd Paragraph, I.C.

221Appleman, Insurance Law and Practice, Section 83, p. 76 (1941) cited in
Prudential Insurance Company v. Howell, 148 A (2d) 145 (1959).
Îbid.
24Ibid.
25Beam, Jr., et al., p. 335.
Act)
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
26Beam, Jr., et al., p. 335.

27Beam, 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
Act)
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
28Article 225, Executive Order No. 209, Family Code. See also Luz
Pineda, et al. v. Court of Appeals, G.R. No. 105562, September 27, 1993.
29Article 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:
^Republic Act No. 10607 with Notes on Pre-Need Act)
SEC. 183. The insurer in a life insurance contract

shall be liable in case of suicide only when it is committed
after the policy has been in force for a period of two (2)
years from the date of its issue or of its last reinstatement,
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 case of Oj.lar.oc tr. COL. ri of Appeals, 98 Phil. 79, 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, etc., 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 Hutchcraft’s Ex’r. v. Travelers’Ins. Co., 87Ky. 300, 8 S. W. 570, 12
Am. St. Rep. 484, 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.”
In Butero v. Travelers’ Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61,
71 S.W. 811, 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.
32Di Mugno and Glad, p. 1620, citing Harloe v. California State Life Ins.
Co., 206 Cal. 141, 273 P. 560 (1928).

MIbid., citing Horton v. Travelers’ Ins. Co., 45 Cal. App. 462, 187 P. 1070
(2d Dist. 1920).

MIbid., 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 primarily 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
35Gallardo v. Morales, G.R. No. L-12189, April 29, 1960.

36This corresponds to Section 14 of the American Bankruptcy Act of
1867, or under Section 70(a) of the American Bankruptcy Act of 1898.
37Sun 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 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;
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 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
38See Sections 229, 230 and 231,1.C.

Act)
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 Commissioner; and that the company
will deduct from such loan value
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
39Luz 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 ElffiLrorn v. New York Life Insurance ('Company, 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.
In Neider v. Continental Assurance Company, which was cited in Elfstrom,

it was held that:
[tjhe employer owes to the employee the duty of good faith and due
care 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 any omission of duty to the employee in its
administration should be attributable to the insurer.”
(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 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 industrial life insurance 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 industrial policy 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
40Section 235, Insurance Code.

^Republic Act No. 10607 with Notes on Pre-Need
Act)
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 specifi-
cally 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 determin-
ing the premium, or the benefits accruing under the pol-
icy, 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 insurance

policy is issued providing for accidental or health benefits,
or both, in addition to life insurance, the foregoing
provisions shall apply only to the life insurance portion of
the policy.
Any of the foregoing provisions or portions thereof
not applicable to nonparticipating or term policies shall to
that extent not be incorporated therein. The foregoing
provisions shall not apply to policies issued or granted
pursuant to the nonforfeiture provisions prescribed in
provisions of paragraphs (f) and (i) of this section, nor shall
provisions of paragraphs (f), (g), (h), and (i) hereof be
required in term insurance of twenty (20) years or less but
such term policies shall specify the mortality table, rate of
interest, and method of computing reserves.
(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 provision
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 scheduled
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
41Bickelhaup
42Ibid.
43Bickelhaup
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
Act)
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
4Fortune Insurance and Surety Company, Inc. v. Court of Appeals and
Producer’s Bank of the Philippines, supra.

bIbid.
6Ibid.
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. (Fortune Insurance and Surety Company, Inc. v.
Court of Appeals and Producer’s Bank of the Philippines, G.R. No.
115278, May 23, 1995)
§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
-1 ■ science. . . Violent it is for the same reason, and external because the train of
tiNt
consequences is set in motion by the rays of the sun beating down upon the
body, a cause of operating from without.
vr
U- In my view this man died from an accident. What killed him was a
heat-stroke coming suddenly and unexpectedly upon him while at work.
Such a stroke is an unusual 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 course of his
employment. In common language, it was a case of accidental death.”8
7Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa
Lim, G.R. No. 92383, July 17, 1992.

8Dissenting 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 in pari materia 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
9Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim,
supra.
l0Ibid.
nFGU 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
i> the ropes of the ring. Without this unfortunate incident, that is, the
-c unintentional slipping of the deceased, perhaps he 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:
T
.Miin'
1. The petitioner issued Personal Accident Policy No. 05687 to Felix Lim,
Jr. with a face 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 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
12Sun 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.
13Simon 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
in the case at bar. (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
“Maskarra 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
14Huebner, Black and

Webb,
l6Ibid., p.
p. 304.
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
: n
against liability to a third party, such third party can directly sue the insurer.
(Coquia v. Fieldman’s Insurance Co., Inc., G.R. No. 23276, November 29, 1968,
26 SCRA 178). The liability of the insurer to such third person is based on
contract while the liability of the insured to the third party is based on tort.
11 •:
(Malayan Insurance Co., Inc. v. CA, L-36413, September 26, 1988, 165 SCRA
536). This rule was explained in the case of Shafer v. Judge, RTC of Olongapo
City, Br. 75, G.R. No. 78848, November 14, 1988:
‘The injured for whom the contract of insurance is intended can sue
directly the insurer. The general purpose of statutes enabling an injured
person to proceed directly against the insurer is to protect injured persons
against the insolvency of the insured who causes such injury, and to give such
.dJAJN/1
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 can prevail over
the Rules of Court provisions aimed at avoiding multiplicity of suits.’ ”
16Travellers 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.
17First 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 in solidum 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 vis-a-vis 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 “no action clause” cannot be provided for in the policy. A
“no action clause”is 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
18Malayan 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).
19William Tiu, et al. v. Pedro A. Arriesgado, et al., G.R. No. 138060, September 1,
2004, 437 SCRA 426, 449.

20Figuracion Vda. de Maglana, et al. v. Honorable Francisco Z. Consolacion, et al.,
G.R. No. 60506, August 6, 1992.

Zllbid.
22Dionisia Guingon, et al. v. Iluminado Del Monte, et al., G.R. No. L-22042,
August 17, 1967.

Act)
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, at least with respect to third persons not a party to
the contract by a “no action” clause in the contract of insurance.
(Guingon v. llluminado del Monte, et al., G.R. No. L-22042,
August 17, 1967)
§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 apropos. In Crahan v. Automobile

Underwriters, Inc., et al., 176 A. (Pa.) 817, 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 Zabonick v. Ralston, et al., 261 N.W. (Mich.) 316, the insured was driving
with an expired license, in violation of law (Act No. 91 of the Public Acts of 1931), 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.”
23Andrew 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 !Paramount Insurance v. Spouses Remondeulaz,30 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
25Villacorta v. Insurance Commission, 100 SCRA 467.

26Andrew Palermo v. Pyramid Insurance Company, Inc., G.R. No. L-36480, May 31,
1988.
2nIbid.
28Malayan Insurance Co., Inc. v. Court of Appeals, 230 Phil. 145, 147 (1986).
29Peoplev. 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 Alpha Insurance and Surety Company v. Castoril 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
31G.R. NO. 198174, September 2, 2013.

32PerlaCompania de Seguros, Inc. v. The Court of Appeals, Herminio Lim and
Evelyn Lim, G.R. No. 96452, May 7, 1992.
Act)
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 Commission34 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 per centum (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
36WilliamTiu v. Pedro Arriesgado, et al., G.R. No. 138060,

September 1, 2004. 36Section 399,1.C.
37Section 400,1.C.
s*Ibid.
Act)
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) “Motor Vehicle”is 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) “Passenger” is any fare paying person being trans-
ported 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
39Circular 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.)
40Section 386(a), I.C.
41Section 386(b), I.C.
CHAPTER 14 421
CASUALTY INSURANCE AND
COMPULSORY
(3) “Third-Party” 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) “Owner” or “Motor vehicle owner” means the actual
legal owner of a motor vehicle, in whose name such vehicle is duly
registered with the Land Transportation Commission.43
(5) “Land transportation operator” means the owner or
owners of motor vehicles for transportation of passengers for
compensation, including school buses.44
(6) “Insurance Policy” or “Policy” 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
42Section
386(c),
43 I.C.
Section
““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 capa-
city of twenty-six (26) or more passengers: Fifty
thousand pesos (P50,000.00);
(2) Motor vehicles with an authorized
capacity of from twelve (12) to twenty-five (25)
passengers: Forty thousand pesos (P40,000.00);
(3) Motor vehicles with an authorized
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 accidents the
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
48In 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.
4MWilliam Tiu v. Pedro Arriesgado, et al., G.R. No. 138060,
September 1, Quezon
49First 2004. City Insurance Company, Inc. v. The Hon.
Court of Appeals, et al., G.R. No. 98414, February 8, 1993.
50See 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:
(1) Police report of accident; and

(2) Death certificate and evidence sufficient
to establish the proper payee; or
(3) Medical report and evidence of medical
or hospital disbursement in respect of which
refund is claimed;
(c) 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
51LTFRB 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.
52Section 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.
54Section 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
55Summit 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.
hlIbidL.
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. (See Villacorta v. Insurance
Commissioner, 100 SCRA 467)
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
Act)
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. (See William Tiu, et al.
v. Pedro Arriesgado, G.R. No. 138060, September 1, 2004)
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. (See Perla Compania de
Seguros v. CA, 208 SCRA 487)
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: Provided, 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. (Palermo v. Pyramid Insurance, G.R. No.
36480, May 31, 1988)
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. (See Sherman Shafer v. Judge, RTC, Olongapo City, Branch
75, et al, G.R. No, L-78848, November 14, 1998; 167 SCRA 386)
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
“Gaon” 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 “Tokod” that is
somewhat similar to our present day concept of a surety. “Tokod” 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.”
2William Henry Scott, Barangay, Sixteenth Century Philippine Culture
and Society, 1994 Ed., p. 135.

Hbid.
436
CHAPTER 15 437
SURETYSHIP
SEC. 178. The liability of the surety or sureties shall be

joint and several with the obligor and shall be limited to the
amount of the bond. It is determined strictly by the terms of
the contract of suretyship in relation to the principal contract
between the obligor and the obligee.
§1.01. DISTINGUISHED FROM INSURANCE CONTRACTS. A contract

of suretyship may be entered into as an isolated transaction. If a person or entity
is engaged in the business of acting as surety, then that person or entity is
engaged in insurance business.4 However, strictly speaking, the contract of
suretyship is essentially different from insurance contract. The two contracts are
distinguished hereunder.
SURETYSHIP INSURANCE
There are three parties. The There are two parties, the insurer and the
principal, obligee and surety. insured.
The surety, in theory, expects no loss
The insurer expects loss to occur and in
to occur.
some cases, like life insurance, the loss is a
certainty.
The surety has the right of
reimbursement against the The insurer does not have the right of
defaulting 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,
character, capacity,
4 Section 2,1.C.
and capital.5 6 Before issuing the bond, the surety will determine if the
record of the principal indicates that he is one of good character and
that he will be faithful to the obligation or trust reposed upon him.
Secondly, the surety will determine if the principal has the necessary
skill, experience and knowledge essential to the performance of the
obligation. Finally, the surety will likewise check if principal is
financially capable of performing the obligation. In other words, the
following questions should be asked:
“(1) Character. Does the bond applicant possess the traits of
integrity, reliability, and leadership or drive necessary to
accomplish goals in spite of difficulties?
(2) Capacity. Does the bond applicant have the technical
or professional ability to meet commitments necessary to perform
the obligation to be carried out?
(3) Capital. Does the principal have sufficient resources,
financial strength, and credit standing to perform the obligation
to be secured by the bond?”6
§1.03. DISTINGUISHED FROM GUARANTY. The contract of
suretyship and the contract of guaranty are both governed by the same
Title of the New Civil Code.7 However, these contracts are essentially
different because the surety is an insurer of debt while the guarantor is
the insurer of the solvency of the debtor.8
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 The guarantor is entitled to the

benefit of excussion. benefit of excussion.
a. The Supreme Court explained: “While a guarantor may bind

himself solidarily with the principal debtor, the liability of a
5Trupin and Flitner, p. 233. See also David Porter, Fundamentals of

Bonding, pp. 53-54.
^Trupin and Flitner, p. 233.
7Title XV, Book IV, Articles 2047 to 2084, New Civil Code.
8Palmares 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 in solidum 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 fiador in solidum (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 fiansa;
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
9Inciong,
Jr. v. Court of Appeals, G.R. No. 96405, June 26, 1996.
10StongholdInsurance Company, Inc. v. Tokyu Construction
Company, Ltd., G.R. Nos. 158820-21, June 5, 2009.
llIbid.
12Now 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 Stronghold Insurance Co.,

Inc. v. Tokyu Construction Company, Ltd.14 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. Thus, in First Lepanto-Taisho Insurance Corp. v. Chevron
Philippines, Inc.,16 the bond that was issued by the petitioner
13First 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.
14G.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.
1BStonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd.,
ibid., citing Intra-Strata Assurance Corp. v. Republic, G.R. No. 156571, July 9,
l6Supra.
CHAPTER 441
15
SURETYSH
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
17Ldving@Sense, Inc. v. Malayan Insurance Company,

Inc., G.R. No. 193753, September 26, 2012.
18Stonghold 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 paid20 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
19Section 178,1.C.
20Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998.
21Philippine Pryce Assurance Corporation v. Court of Appeals, 230 SCRA
164 [1994].
22Section 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. “Complementary Contracts-Construed-together Doctrine”
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-
23Article 2054, New Civil Code.

24Visayan Surety & Insurance Corporation v. Court of Appeals, 364 SCRA
631 (2001).
Ârticle 2052, New Civil Code.
26Philippine National Bank v. Court of Appeals, 198 SCRA 767 (1991).
27Justice 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.
Act)
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.
29Stronghold Insurance Company, Inc. v. Spouses Stroem, supra.

30Trade and Investment Development Corporation of the Philippines v.
Roblett Industrial and Construction Corporation, et al., G.R. No. 139290,
3lIbid.
CHAPTER 15 445
SURETYSHIP
d. Legal Bonds. They are bonds that are submitted “in virtue of a
provision of law. ’*2 These include '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 Philippines34 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
32Article
2082, New Civil Code.
^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.”
ttNt\/rPr'
c. For the protection of the insurer-bonding company, it is

more prudent to obtain a security for the performance of the
obligations of the 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
36Mercantile Insurance Co., Inc. v. Ysmael, Jr. & Co., 169

SCRA
37 66 Surety
Manila (1989). & Fidelity Co. v. Court of Appeals, 191
38Article
SCRA 8052076, New Civil Code.
(1990).
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 additional
amount that it incurred in completing the project. Finally, TCCL made formal
demands against S Insurance and T Surety to
39Security Bank and Trust Company, Inc. v. Cuenca, 341 SCRA 781
40Article 2079, New Civil Code. (2000).
41People’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 necessary 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.
2Redja, 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 “insurer or insurance company
shall include all partnerships, associations, cooperatives or corporations,
including government-owned or -controlled corporations or entities, engaged
as principals in the insurance business, excepting mutual benefit
associations. Unless the context otherwise requires, the term shall also
include professional reinsurers defined in Section 288.”
a. “Domestic Company” shall include companies formed, organized
or existing under the laws of the Philippines.3
b. “Foreign company” 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, to wit: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 * *
3Section 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 life and non-life 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
REGULATION OF INSURANCE
BUSINESS
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 capital-
ization,10 solvency,11 assets,12 investments,13 and reserves;14
10Section
194,1.C. 200 to
"Sections
l2Sections 202 to
13Sections 204
"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
15Section
221,1.C.
16Sections 252 to
17Section
18Section
19Sections 229
20Section
2l Ibid.
CHAPTER 16 455
of their stakeholders specifically those of policyholders, claimants

and creditors.
a. Corporate governance means the system by which com-
panies are directed and managed. It influences how the objectives of
the company are set and achieved, how risk is monitored and as-
sessed, 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.

Act)
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 recommen-
dation 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 remain unimpaired for the
continuance of the license. The Commissioner may
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.

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
24Insurance Commission Circular Letter No. 2015-02-A dated January
13, 2015; Sec. 194,1.C.

2BDepartment Order No. 27-06.
CHAPTER 16 459
BUSINESS
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
26Department Order No. 27-06.

27Section 200,1.C.
28Ibid.
^Section 202,1.C.
30Section 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.
32Section 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
34Sections 201 and

217.1.C.
35Sections 201 and
^Section 201(e), I.C.
37See Sections 204 to
38See Section 204 to
39See Section 206, I.C.
40See Sections 207, I.C.
42Sections 216 to 220,
43Huebner 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
44Section 216,1.C.
45Previously Section 210,1.C., now Section 216,1.C.
^Section 217,1.C.
47Section 219,1.C. which was previously Section 213 which provides that in nonlife
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.
49Section 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 subject of insurance 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.
62Ibid.
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. Engwicht v. Pacific States Life Assurance Co. 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 all 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
53Now Section
197,1.C.
64Now Section
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, with his assent, to
withdraw any of such securities, 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 the securities
deposited as aforesaid shall be returned upon the company’s making
application therefor and proving to the satisfaction of the Commissioner
that it has no further liability under any of its policies in the Philippines”
(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
55Republic 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).
56Republic 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.
58See Sections 222 to 228,1.C. governing reinsurance transactions.
S9See 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,
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) Control, including the terms controlling, controlled by and
under common control with, 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
62Section 225,1.C.
63Sections 196 to 199,1.C.
65Section 290(c), I.C.
66See 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: Provided, 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) Controlled insurer means an authorized insurer controlled
directly or indirectly by a holding company.
(3) Controlled person means any person, other than a controlled
insurer, who is controlled directly or indirectly by a holding company.
(4) Holding company system 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
Act)
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) Reinsurance Broker — 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) Non-life Company Underwriter — 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
67Burton T. Beam, Jr., Davil L. Bickelhaupt, Robert M. Crowe, and Barbara S.

Poole, Fundamentals of Insurance for Insurance Financial Planning, 3rd Ed.,
2002,
p. 118.68Section 431,1.C,
CHAPTER 16 469
BUSINESS
(3) Adjuster — He may be a public adjuster or an independent

adjuster. The term *'independent adjuster” 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 “public
adjuster” 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) Actuary — 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) non-
forfeiture benefits on lapse or surrender, (4) dividends on
participating contracts, and (5) value of contract liabilities.73
(5) Rate Organization — 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,
72Sections 344 to 347,1.C. 2015.
73Bickelhaupt, p. 239.
74Section 348,1.C.
7BSection 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
76Section 338,1.C.; Circular Letter No. 2016-24, dated May 8, 2016.

71Ibid.
78Sections255 to 257,1.C.
79Section255,1.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 CONSER-
VATOR 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
81Section
255,1.C.
82Elias
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.
84Section 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.
s7Ibid.
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
T the liquidation as ordered by the Commissioner.
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
d.Ibi
93
d.
CHAPTER 16 475
BUSINESS
§9.03. CAPITALIZATION WHILE UNDER CONSERVA-

TORSHIP. 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 “rate” “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 rate
organization 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
94Administrative
Order
95 No. 27-06.
Huebner, Black &
“Section
Webb, p. 348,1.C.
621.
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
100Redja,
p.
101 582.
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.
Section 247(b), I.C.
Act)
(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
104Section 247(b), I.C.

l05RA. No. 9194 as amended by RA. No.
106I.C. Circular Letter 32-2006,
107Section 2(b), ibid.
2bwf.
108
losIbid.
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 contracts3 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.”
2Section 414, I.C.

4Section 414, I.C.
5lst 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 regulatory and adjudicatory 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;
6Section 414,1.C.
7Bean, Bickelhaupt, Crowe and Poole, p.
8Section 437,1.C.
9G.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 compliance
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.
10Section 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 INSURANCE
COMMISSIONER
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
12Section 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 rela-
tionship 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
13Philippine American Life Insurance Company v. Ansaldo, 234 SCRA
509 (1994).
14Circular Letter No. 2015-45 dated September 8, 2015; Circular
Letter No. 17-2006.

15RuIes 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
THE INSURANCE
COMMISSIONER
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 necessi-
tates the establishment of diverse administrative agencies. In addressing
these needs, the administrative agencies charged with applying and imple-
menting 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 ordi-
narily 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:
16Section 3, Rule 1, Insurance Memorandum No. 2014-1.

17Section4, Rule 1, Insurance Memorandum No. 2014-1.
18Section1, Rule 20, Insurance Memorandum No. 2014-1.
insurance Memorandum Circular No. 2016-1.
20Rule 43, Rules of Civil Procedure; Section 1, Rule 14, Insurance
Memorandum No. 2014-1.
21Republic 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 regulatory
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.)
2Section 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
/

Act) /
ness, stability and sustainable growth of the pre-need industry.
§2. PRE-NEED PLAN DEFINED. “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 in the future be determined by
the Commission.4
a. The “Benefits” 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
4Section 4, PNC.
6Ibid.
6Ibid.
7Section10, Rule 3, IRR.
8CircularLetter 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 plan-
holder as the recipient of the benefits in the pre-need plan.”10
§3.01. OTHER PERSONS REGULATED BY THE COM-
MISSIONER. 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.

10Section 4(e), PNC.
“Section 4(h), PNC.

12Section 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
13Section 4, PNC.
14Section 48, PNC; Section 51,
16Section 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.”
17Section
4, PNC.
*Ibid.
l
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.
19Gaw v. Court of Appeals, G.R. No. 147748, April 19, 2006.

20Dio v. St. Ferdinand Memorial Park, Inc., G.R. No. 169578, November 30,
2006.
21Gaw 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 The Insular Life
Assurance Company, Ltd. v. Court of Appeals:
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. (Gaw v. Court of Appeals, G.R. No. 147748, April
19, 2006)
§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 Primamanila, Inc. v. Securities and Kouihange
Commission,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
22Primamanila 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.
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

Rule
"Ibid.6, IRR.
^Section 24, PNC; Section 26,
Section
Rule
31 26, Pre-Need Code.
6, IRR.
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
32Section
33Ibid.
26, PNC.
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 settle-

ment of claims submitted in which liability has become reason-
ably clear; or
(5) Compelling planholders to institute suits or recover
amounts due under its plan by offering, without justifiable rea-
son, 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
36Securities and Exchange Commission v. Laigo, G.R. No. 188639,
September 2, 2015.
^Sections 7 to 13, PNC; Sections 7 to 12, Rule 3, IRR.
37Sections 20 to 22, PNC; Sections 22 to 24, Rule 5, IRR.
38Sections 16, 39, and 40, PNC; Sections 41 to 43, Rule 9, IRR.
40Section 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)
t.h<; CornrruMiony 1 (7) Rules on Conservatorship and

'■iUih'ihrri* by
Insolvency;4* 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 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 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,
41Section 47, PNC; Section 50, Rule 11, IRR.

42Sections49 to 52, PNC; Sections 52 to 55, Rule13, IRR.
“DOH Administrative Order No. 34 Series of 1994; E.O No. 192 dated
November 12, 2015.
45Section 4, E.O. No. 192 dated November 12, 2015.
48Section 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 fulfillment
of such conditions. In such case, the expenses and fees
in the collection and administration of the preneed
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 designated and, with
all convenient speed, distribute the trust fund exclusively
to the planholders in proportion to termination values of
their respective pre-need plans, convert the assets of the
pre-need company to cash, or sell, assign or otherwise
dispose of the same to the planholders, creditors and
other parties for the purpose of settling the liabilities or
paying the debts of such company 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 preneed
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 Commission
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
47College Assurance Plan Philippines, Inc. v. Spouses Lao, G.R. No. 19303
August 6, 2014 (Extended Resolution).

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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

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

CHAPTER 1. GENERAL CONCEPTS

CHAPTER 3. INSURABLE INTEREST

CHAPTER 6. ASCERTAINING AND

1. Concealment ........................................................................ 177

CHAPTER 11. MARINE INSURANCE

CHAPTER 12. FIRE INSURANCE

CHAPTER 13. LIFE INSURANCE

CHAPTER 14. CASUALTY INSURANCE

1. Definition .................................................................................... 402

CHAPTER 17. THE INSURANCE COMMISSIONER

CHAPTER 18. PRE-NEED PLANS

Modern insurance contracts originated from the practice of merchants

Justice Laurel commented on the growth of insurance business in this

‘The phenomenal growth of insurance from almost nothing a hundred

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

hereinafter referred to as I.C.

another against loss, damage or liability arising from an

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

a. For instance, a contract may be considered an insurance

reported in 554 SCRA 511 [2008]).

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

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

nG.R. No. 143313, June 21, 2005.

17Section 4(b), R.A. No. 9829.

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

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

4. Respondent Rosita Singhid’s deceased husband Benito Singhid (Benito) was

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

^Section 375,1.C., as amended by R.A. No. 10607.

Implementing Title 9, Chapter IV of the Amended Insurance Code on

§2.01. MUTUAL INSURANCE COMPANIES. Mutual Insurance

“Various courts in the United States, whose jurisprudence has a

November 12, 2015.

Commissioner of Internal Revenue, G.R. No. 222743, April 5, 2017.

§3. APPLICABLE LAWS. The primary law that governs insurance

otherwise known as Insurance Code of 1978.

required for new domestic life or non-life stock corporation.

^Chapter II-A, Section 189,1.C., as added by R.A. No. 10607.

36Section 200,1.C., as added by R.A. No. 10607.

87Section 204,1.C., as added by R.A. No. 10607.

38First paragraph, Section 437,1.C., as added by R.A. No. 10607.

39Section 439,1.C., as modified by R.A. No. 10607.

prevailing jurisprudence. For instance, the law now expressly allows in

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

d. Interpretation. There are provisions of The Insurance Act (Act

40G.R. No. L-15895, November 29, 1920.

L-33637, December 31, 1931.

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

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

46Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No.

156167, May 16, 2005.

contracts without a general scheme to distribute actual losses but only to

Sec. 3. Any contingent or unknown event, whether

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

hereinafter cited as “Francisco, p. 4” citing 1 Joyce Ins., Sec. 6.

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

o4Robert I. Mehr and Emerson Cammack, Principles of Insurance, 7th

Ed., p. 32, herein after referred to as “Mehr and Cammack.”

Risk.” It is the risk that the cost of insurance claims might be