Chapter 4 - Premiums

General Rule: 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.

Exception: 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.

Five Exceptions where the policy is still binding even if the premiums have not been
paid:

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;
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.

Effect of Non Payment of Premium

The obligation of the insurer will not become valid and binding if the first premium has not
been paid.

Payment of Check

1. Delivery of a check after the loss is not effective.

2. Similarly, delivery of a post-dated check before the loss will not result in making the
policy binding if there is no credit agreement.
3. However, there is an opinion to the effect that if the check is not postdated and
covered by sufficient funds, delivery thereof will make the insurance policy valid
and binding even if the same is encashed after the loss.

Return of Premium

1. To the whole premium if no part of his interest in the thing insured be exposed to any of
the perils insured against.
2. 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.

Policy

Basic Provisions

1. It is a basic rule that the terms of the contract 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.
2. 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.
Declarations

● describe the property, activity or life insured;

● state the types of coverage purchased,
● the applicable policy limits and the term of the coverage

Insuring Agreements.

These provisions specify what the insurer promises to do. “The insuring agreements describe
the characteristics of the events covered under the contract.”

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.

Conditions

These provisions define terms used in the other parts of the contract, prescribe conditions
that must be compiled before the insurer can be made liable and may describe the basis for
computing the premium.

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.”

Risk Insured Against

The concept of risk was discussed in Chapter l. 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.”

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).
Riders

Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance
and which is pasted or attached to said policy is not binding on the insured, unless the
descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and
written on the blank spaces provided in the policy.

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.

Reasonable Expectation Doctrine

Under which the language of the insurance policy is interpreted to give effect to the reasonable
expectation of the insured.

Forfeiture Clause

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. Hence, coverage
provisions are construed broadly to provide the broadest possible coverage while exclusions are
construed narrowly.

Exclusions are strictly construed against the insurer and liberally interpreted in favor of the
insured.
Kinds of Property Insurance Policy

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 a
thing shall be ascertained in case of loss.

A valued policy is one which expresses on its face an agreement that the thing insured shall
be valued at a specific sum.

A running policy is one which contemplates successive insurances, and which provides
that the object of the policy may be from time to time defined, especially as to the subjects
of insurance, by additional statements or indorsements.

Ground for Rescission

Chapter 6

Devices to ascertain risks:

1. Concealment
2. Representation
3. Warranty
4. Conditions and Exceptions
Concealment

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 neglect to communicate that which
a party knows and ought to communicate, is called a concealment.

Materiality

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.

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.

Physical and Moral Hazard

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.”

Causation is 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.

Neither party to a contract of insurance is bound to communicate information of the matters

Following (General Rule)

Except in answer to the inquiries of the other:

(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) 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.

A concealment whether intentional or unintentional entitles the injured party to rescind a

contract of insurance.

Exception that concealment is intentional or unintentional

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.

REPRESENTATION

Representations are statements made to give information to the insurer to induce him to
enter into the insurance contract. A representation is a collateral communication made
to the other party in writing or by word of mouth.

concealment representation

It involves an omission - n o n - It involves a positive assertion or

disclosure. affirmation.

Concealment cannot refer to future Representation can pertain to the future

acts because it can be promissory.

Same test of materiality applies. Same test applies.

A party can rescind A party can rescind

When Rescission is unavailable in misrepresentation

Warranties

A warranty is an affirmation of fact or a promise that forms part of the terms and conditions of
the policy. Otherwise stated, a warranty is a statement or promise set forth in the policy, or
by reference incorporated therein, the untruth or nonfulfillment, renders the policy voidable by
the insurer.

express warranty is one that is stated in the implied warranty is a natural element of the
policy or any of its attachments. contract imposed by law and is a part of the
policy without the need that it be stated in the
policy.

An affirmative warranty is an affirmation of Promissory warranty stipulates that certain

fact that exists at the time they are made. It is things shall be done or a specified condition
an undertaking that some positive allegation shall exist during the currency of life of the
of fact is true. insurance contract.
 For example, the insured may warrant that In promissory warranty, one party is bound by
the insured building is not being for an executory stipulation.
commercial purposes.

WARRANTIES REPRESENTATION

It is part of the contract. It is not part of the contract hut a

collateral inducement.

It is written on a policy or its rider. It can be oral or in writing.

It is presumed to be material. It must be established to be material.

There must be strict compliance. | 4. It must be substantially true.

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.

Conditions

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.

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.

Incontestable Clause

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 incontestable clause cannot be invoked in the following cases:

1. Non-payment of premium;
2. Violation of the conditions of the policy relating to military or naval service in times of
war.
3. Property Insurance
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.
6. Where the cause of the loss is an excepted risk
7. Where the beneficiary feloniously kills the insured
8. The beneficiary failed to comply with conditions subsequent like failure to submit notice
of loss;
9. If the claim is barred by extinctive prescription.
10. The incontestability clause does not apply if the insured applied vicious fraud.

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 tnon-payment of premium and
except for violation of the conditions of the policy relating to military or naval service in time of
war;

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.

(1) Guaranteed Insurability Clause, (2) Failure to invoke before commencement of the action,
(3) Waiver, and (4) Estoppel.

Guaranteed Insurability Clause - 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.
Failure to invoke before commencement of the action - 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.”

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. Waiver may be express or implied.

Chapter 7 - LOSS AND NOTICE OF 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.

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.

Proximate Cause - 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.

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.

Rules of Proximate Cause in Insurance Code - 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.
Chapter 8 -Claims Settlement and Subrogation

The liability of the insurer attaches the moment the risk insured against causes loss to the
insured.

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.”

Unfair Claims Settlement Practices

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.
(4) Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear;
(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.

Subrogation

If the plaintiff’s 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.
Chapter 9 -

Double Insurance
A double insurance exists where the same person is insured by several insurers separately
in respect to the same subject and interest.

5. The same peril is insured against

Chapter 10

Reinsurance

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.