PART I

Our Insurance Law is found now under the Insurance Code which was enacted during
the time of President Noynoy Aquino. It took effect on August 15, 2013 or 15 rather
days after it was published on August 15, 2013 or it took effect on August 30, 2013 but
before that our insurance law was included in the Code of Commerce. Our Code of
Commerce then was changed or it was repealed and the new insurance code was
enacted in 1915. Basically, our insurance law is American in origin. We copied our first
insurance law from the Civil Code of California which embodied the insurance code in
the Philippines. When there was a new law, when the new insurance law was adopted,
there were new principles that were adopted which are not included in the previous
law. For example, you have, microinsurance, bancassurance, trust for charitable uses,
and trust for insurance companies.

What is microinsurance?
Microinsurance was intended to be insurance for the poor. It is the financial product
that is intended to meet the risk protection needs of the poor where the amount of
contribution premiums does not exceed 7.5% of the current daily minimum wage of
nonagricultural workers in Metro Manila.

For example, if the daily minimum wage of a nonagricultural worker in Metro Manila is
100 pesos then the premium should not exceed 7.5% of 100 pesos.

The law speaks of minimum wage of nonagricultural workers in Metro Manila but I’ve
been thinking are there agricultural workers in Metro Manila? I’m not aware of any
agricultural worker in Metro Manila except some would claim that San Andres Bukid is
a rural agricultural area dahil San Andres BUKID ang pangalan pero hindi that’s only a
name. Wala kang matatanim doon except sa paso you cannot plan anything there.

Nonetheless what the law requires is that the premium should not exceed 7.5% of the
current daily minimum wage of nonagricultural workers in Metro Manila and then the
amount of the policy should not be more than 1000 times of the current daily minimum
wage. So, if the current daily minimum wage is 100 pesos, it should not exceed 1000
times so it should be 100,000 pesos is the maximum amount of the policy of the
microinsurance.

The intention of the law is to give insurance for the poor, but then our honorable
congressmen and senators forgot that somewhere in the previous insurance law there
is already an insurance for the poor which we call Industrial Life Insurance. Yun nga
lang, they forgot to amend or repeal the provision about Industrial Life Insurance. It
still exists. Our legislator did not remove Industrial Life Insurance nor amend the same.
Industrial Life Insurance is said to be the insurance for the poor, microinsurance is also
insurance for the poor. Isang katutak na yung insurance para sa mahirap.

Now alin talaga ang para sa mahirap? A microinsurance is an insurance where the
amount of the policy should not exceed 1000 times the daily minimum wage of
nonagricultural workers in Metro Manila. Industrial Life Insurance on the other hand,
500 times that of the current minimum wage in Metro Manila.

So alin talaga ang para sa mahirap?

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Ang lumabalas ang Industrial Life Insurance ay para sa saksakan ng hirap at yung
microinsurance ay doon sa mahirap pero hindi saksakan ng hirap kase ang Industrial
Life Insurance ay 500 times the daily minimum wage of workers in Metro Manila.

How do you distinguish Industrial Life Insurance from Microinsurance?

Amount of the policy:

Industrial Life Insurance – the maximum amount is 500 times that of the current daily
minimum wage in Metro Manila
Microinsurance – 1000 times that of the daily minimum wage

Kaya ang lumalabas, para sa mas mahirap ang Industrial Life Insurance.

Premium
Mircoinsurance – should not exceed 7.5% of the current daily minimum wage of the
nonagricultural workers in Metro Manila
Industrial Life Insurance – there is no such limitation.

Industrial Life Insurance – pag hindi nabayaran yung premium, due to the failure of the
insurer to send a collector, the policy will not lapse unless it covers a period which is
longer than a period of 3 months

Grace Period
Industrial Life Insurance – the insured has a grace period of 30 days within which to
pay the premium

Microinsurance – not applicable.

Monthly Premiums
Industrial Life Insurance – premiums are payable every month or oftener

Microinsurance – there is no such scheme

Yung Industrial Life Insurance ay parang insurance ng bumbay yung araw araw o
weekly may nangongolekta. Yung bumbay o 5/6 every day o every week nangongolekta
yun ganun din ang insurance premiums ng Industrial Life Insurance every week or
every month depending on the provision in the policy.

What are the laws governing insurance in the Philippines?

The primary law will be the Insurance Code of the Philippines. In the absence of any
applicable provision in the Insurance Code then we apply the provisions of the Civil
Code because the Civil Code shall apply to insurance in its suppletory character, if there
is still no such provision in the Civil Code then we apply the generally accepted
principles in insurance as followed in the United States.

Bakit? Is it because of our colonial mentality? No. Simply because our insurance law is
basically American Law. We copied the first insurance act from the Civil Code of
California.

What are the facts and issues in the case of Enriquez vs. Sun Life Assurance
of Canada?

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This is a case that calls for the application of the Civil Code. What happened here is
that the applicant died before receiving the notice of acceptance of his application for
life insurance.

So, the issue is, is there a law in the insurance law providing for the effectivity of the
policy entered into by correspondence?

There is none. There being no such provision what shall we apply? We shall apply the
Civil Code. Under the Civil Code, when a contract was entered into by correspondence,
it shall not be binding until the acceptance is made known to the offerer. Since in this
case the applicant is considered to be the offerer in life insurance, has not received
notice of the acceptance of his application then the policy has not been effective.

Another case is the case of Insular Life vs. Ebrado

This again calls for the application of the Civil Code.

The issue in this case is, in case the person designated as beneficiary is the common
law wife of the insured, will the policy be binding in so far as the designation of
beneficiary is concerned?

There is no provision in the Insurance Code about designation of a common law wife
as beneficiary in a life insurance, so we apply the Civil Code. Is there a provision in the
Civil Code about this? Yes. Under Article 739 of the Civil Code, no person who is guilty
of adultery or concubinage could designate each other as beneficiary in life insurance.
And if the designation is made, it shall not be valid.

So, in this case, the designation of the beneficiary is not valid because the person
designated is the common law wife of the insured. Bawal yun under Arti. 739, you will
take note that the law applied is the Civil Code because there is no provision applicable
in the Insurance Code.

On the other hand, if there is no applicable provision in the Insurance Act and neither
is there a provision in the Insurance Code (civil code ata dapat), what principles are we
going to apply? Has there been a case applying that kind of principle? The answer is,
we apply the American Principles. And yes, there has been a case.

Constantino vs. Asia Life Insurance Company

There was non-payment of premium because of war, may giyera non panahon ng
hapon, because of the war premiums were not paid.

Now the question is, will the non-payment of premium be excused because of the war?

There is no applicable provision in the Insurance Code neither is there an applicable

provision in the Civil Code, and therefore we apply the generally accepted principles in
the United States. In the United States, we have what we call the United States Rules
which declares the contract is not merely suspended by war but abrogated in case of
non-payment of premiums, since time of the payment of premiums is of the essence in
the contract. Therefore, we apply the generally accepted principles in the United States,
particularly the United States Rule applicable in non-payment of premiums in times of
war.

How is a contract of insurance perfected?

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A contract of insurance is a consensual contract, consensual means it is perfected by
mere consent. And how is consent manifested? Consent is manifested whenever there
is a concurrence of the offer and acceptance. In other words, if the offer and acceptance
should concur then there is a perfected contract. If a contract is entered into by
correspondence then it shall not be binding until the acceptance is made known to the
offerer, the one applying for insurance. Perfection of the contract is different from
effectivity of the contract because the contract may be perfected or binding and yet it
is not effective. No policy shall be valid and binding unless and until the premiums are
paid.

No policy shall be valid and binding unless and until the premiums are paid. So while
contract is perfected by mere consent, however, it shall not be effective until the
premiums are paid.

One of the hottest question in the bar in insurance is construction or interpretation of

a contract of insurance. It has been asked many times in the bar. If it has been asked
many times in the bar, I don’t see any reason why I should not ask it in the midterm
exam or in the final exam.

How should a contract of insurance be construed?

We speak of interpretation or construction of a contract if there is a doubt. If the

provisions are clear and unambiguous, there is no room for interpretation. Then we
shall apply the literal meaning of the contract, if it is clear. So let me repeat, if the
provisions are clear and there is no room for interpretation, we apply the plain, ordinary
and popular sense of the contract.

But if there is a doubt, how should the doubt be resolved?

The doubt should be resolved in favor of the insured and against the insurer. Why?
Because a contract of insurance is a contract by adhesion. What is the meaning of a
contract by adhesion? It means that one party prepares the contract and the other
party’s choice is either to accept it as it is or to reject it. In other words, when the
insurance company prepares the contract, it is given to the insured and the insured has
no choice but to accept it, as is, where is, you cannot change it. Therefore, if there is a
doubt in the provision, whose fault is it? It is the fault of the insurance company and
that is why the doubt should be resolved against the insurance company. It has been
said that ambiguous provisions are construed strictissimi juris or the strictest terms
against the insurer.

So let me repeat why must it be interpreted against the insurer and in favor of the
insured. Because it is a contract by adhesion. What is the meaning of contract of
adhesion or contract by adherence. Insurance policies are contracts by adherence or
contract by adhesion because the agreements are prepared by one party and the other
party should either adhere or agree to it as it is without giving the privilege of changing
the same. Therefore if there is a doubt, the doubt should be resolved against the party
who made the contract.

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Justice Bersamin call these contract proferentem. So if you are asked, what is the
meaning of contract proferentem?

Contract proferentem rule provides that in interpretation of contracts, ambiguities are

to be resolved against the party who made the contract. By its nature, the precept
assumes the existence of an ambiguity. That is why it is applicable only if there is a
doubt. And contract proferentem means it is resolved against the party who drafted the
contract.

In one case, in the case of Alpha Insurance v. Arsenia Sonia Castor, where the CJ of
the SC now, CJ Peralta was the ponente, the provision was this, a motor vehicle
insurance where a Toyota Revo was insured. The policy provides that the insurance
shall not be liable for any malicious damage caused by the insured or a person in the
insured’s service. The driver of the insured was asked to bring it to a repair shop but
he carnapped it. When the insured demanded payment from the insurance company,
the latter refused to pay because the company said, the policy provides that the
insurance company shall not be liable for any malicious damage caused by person in
the insured’s service. It was stolen or carnapped by the driver of the insured, a person
under the insured’s service. Therefore the insurance company said “no we are not going
to pay”. Is the refusal of the insurance company correct?

The court said, that the refusal of the insurance company is not correct. Because what
the policy provide as an exclusion as a provision where the insurance company is not
liable is for malicious damage. Court said there was no malicious damage. Malicious
damage means there is an injury to the thing insured. Ninakaw eh. Loss is different
from damage. Ang nangyari loss, ninakaw. Damage means deterioration or injury to
the property. Loss means nawala. So the loss is not covered under the provision about
malicious damage. So the insurance company’s refusal to pay is not correct and the
court said that the provision exempting the insurer from liability for malicious damage
shall not apply because there was no malicious damage here, there was loss. And loss
is different from malicious damage. The provisions should be interpreted in favor of the
insured and against the insurance company.

Eduardo dela Cruz v. Capital Insurance (the boxer)

Dela Cruz was a holder of an accident insurance policy. In its provision, he will be paid
in case of death caused by accident. In a boxing bout, nadulas at pagkatapos tumama
yung ulo, saka namatay. The insurance company refused to pay on the ground that the
cause of the death of the insured was not accidental. Nakipagbuntalan siya. Di naman
accident yun eh. Talagang binuntal siya. Was the death of the insured covered by the
policy?

Court said yes. The terms accident and accidental should be used in the ordinary and
common meaning. Ano ba ibig sabihin ng accidental? Yung hindi sinasadya. Sinasadya
ba siya patayin sa boksing? In a boxing contest, hindi naman sinasadyang patayin. Di
naman patayan yun, buntalan lang yun. So if death occurs in a boxing bout, it is purely
accidental because death is not intended in any sport. Therefore, the insurance
company is liable.

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Ty v. First National Surety

Diosdado Ty obtained a personal accident policy that provides for compensation in case
of loss of hand. Loss of hand means the amputation of the bones of the wrist. In other
words, putol yung kamay. So, he was insured. Then a fire broke out in his place of
work. He was injured on the left hand by a heavy object. As a result of which, he
suffered from total temporary disability of the left hand. So he filed a claim. The
insurance company said why are you filing a claim? Naputol ba yan? The policy is clear,
it says we will be liable in case of loss of hand and loss of hand means amputation
through the bones of the wrist. Kailangan putol, eh hindi naman naputol. Therefore the
insurance company refused to pay. Was the refusal correct?

Yes. The insurance company is not liable because the policy is very clear. The provides
that loss of hand means the amputation through the bones of the wrist. Since there
was no amputation, then there should be no liability on the part of the insurance
company.

Panaton v. Malayan Insurance

Same provision with the Ty case. The insurance company shall be liable in case of loss
of legs. But loss of legs means amputation of the legs – putol. Then Panaton had an
accident that resulted in total paralysis of both legs. Hindi na siya makakalakad because
of the accident. So Panaton filed a claim in the insurance company. The company said
that what was provided in the policy is loss of legs means amputation. Since there was
no amputation, the insurance company should not be made liable. So Panaton filed a
case.

The Court allowed recovery. Why? Court said that total paralysis of both legs should be
tantamount to loss of legs. It will be immoral to require amputation kung hindi din
naman magagamit. Why will you require the insured to have his legs cut off just to
collect in the policy. It is immoral, unjust. Since he cannot use his legs anymore, that
should be tantamount to loss of legs.

Difference between the case of Ty case and the case of Panaton.

TY CASE PANATON CASE

Partial disability Total disability; total paralysis

He could not walk anymore, he could not

use his legs anymore. There was total
paralysis. Total permanent disability and
therefore that is equivalent to loss of legs
even if there is no amputation. It will be
immoral to require Panaton to have his legs
No amputation, so no right to recover cut off just so he could collect insurance

Qua Chee Gan v. Law Union Rock Insurance

Qua Chee Gan obtained a fire insurance policy covering his warehouse. In the policy, it
was stated that the insured is prohibited from storing in the insured premises oils,
mineral and/or vegetable, and/or mineral and/or liquid products thereof having a flash

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point below 300 degrees Fahrenheit. Qua Chee Gan stored gasoline in the insured
premises. There was a fire. The insurance company refused to pay on the ground that
Qua Chee Gan violated the provision in the policy. Sabi ni Qua Chee Gan – anong
violation? You are prohibited from storing oil – mineral oil and/or vegetable with a flash
point below 300 degrees Fahrenheit. Sabi ni Qua Chee Gan – ano yun? – Gasolina!
Gasoline is a product of petroleum.

Qua Chee Gan stored gasoline in the insured premises. There was a fire. The insurance
company refused to pay on the ground that QCG violated this provision in the policy.

Sabi ni QCG: anong violation?

“Eto, you’re prohibited from storing oils, minerals, and/or vegetable with a flash point
below 300 degrees Fahrenheit.”

Sabi ni Qua Chee Gan, “ano yun?”

“Gasolina. Di mo ba alam, gasoline is a product of petroleum which is mineral oil. And

it has a flash point below 300 degrees Fahrenheit.”

“Ano yung flash point sabi ni Qua Chee Gan.

“Ignition point, ay talaga naman to si Qua Chee Gan, kahina-hina” sabi ng insurance
company. “Yun lang, di mo pa alam that gasoline is included in the term oil, mineral,
and/or vegetable with a flash point below 300 degrees Fahrenheit?”

“Hindi”

So, the issue is as to whether Qua Chee Gan violated the provision?

Qua Chee Gan said “How can I violate it when I didn’t even know or understand what
it provides. At saka hindi naman kasali ang gasoline dun e.”

So, the Court said, when you speak of oil, what comes to mind? Oil is susceptible of
more than one meaning. It could mean fuel, or it could mean lubricant. Let me repeat,
oil could mean fuel or panggatong or lubricant, yung pampadulas—that’s lubricant. And
whenever you speak of oil, what comes to mind? And nasa isip mo baga’y fuel o
pampadulas?

When you speak of oil, well you speak, ala ay ang iniisip mo ay yung lubricant. Pag
pupunta ka sa gasolinahan, gusto mo ng gasolina, sasabihin mo “put gas”, pag ang
gusto mo lalagyan ng oil, e di sasabihin mo “put oil”

So, the term oil is susceptible of one meaning, more than one meaning. And therefore,
it should be resolved against the insurance company. There is no reason why the
insurance company didn’t include gasoline, a word that could be plainly understood by
everyone, as rather by calling it as oil, mineral, and/or vegetable with a flash point
below 300 degrees Fahrenheit.

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What is an insurance contract and what are the elements of an insurance contract?
(See page 27 of the book)

An insurance contract is one whereby a party undertakes for a consideration

to indemnify another against loss, damage, or liability arising from an
unknown or contingent event.

The elements are:

1. The insured must possess an interest known as insurable interest

2. The insured is subject to a risk of loss
3. The insurer assumes that risk of loss
4. The assumption is part of a general scheme to distribute losses among persons
similarly situated
5. As a consideration of insurer’s promise, the insured should pay a ratable
contribution which we call premium

What are the characteristics of an insurance contract? (See page 32)

1. It is an aleatory and not a wagering contract

2. It is a contract of indemnity
3. It is a personal contract
4. It is an executory contract after payment of premiums
5. It is a conditional contract

What is the meaning of a contract of indemnity?

It is a contract of indemnity because the insurance company shall be liable only if the
insured suffers a loss. The insured is going to recover only exactly the damage that he
will suffer, not more than that. The insured is not supposed to profit from the effects of
insurance.

For example, the insured has a house valued at 1M pesos. He insured the same to the
extent of 500k and it was damage to the extent of 100k pesos. How much is the liability
of the insurance company? It will only be 100k pesos because that it the extent of the
damage that he suffered.

Why is the insurance considered to be a personal contract?

It is a personal contract because the insurance company will not be liable to a person
who is not insured. In other words, insurance should be applied exclusively to the
proper interest of the person in whose name it is issued. It cannot be made payable to
a third person as a general rule.

For example, if I am the insured of the property owned in common with my brother
and that property is damaged. Who can recover? Ako lang, kasi ako lang yung insured

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e. My brother, although a co-owner, who did not insure the property, has no right to
recover. Because again, insurance should be applied exclusively to the proper interest
of the person in whose name it is issued. That is why we call it a personal contract.

We said that insurance is a contract of indemnity, that recovery is limited to the amount
of damage suffered. Is life insurance a contract of indemnity?

As a rule, it is not. Life insurance is not a contract of indemnity because no value to be

placed on human life. Therefore, if I insured my life for 10M, but I’m only earning, every
year, 100k pesos (sic, see page 35 for example), in 10 years, how much were (? 44:49),
12M. In that case, will the company refuse upon the ground that the insurance is
beyond my earning capacity? The answer is no, because no value should be placed on
human life.

Is there an exception to the rule? The answer is yes. If the policies obtained by creditor
on the life of a debtor, it is a contract of indemnity. Therefore, the debtor cannot insure,
cannot be insured by the creditor for more than the amount of the loan. So, if the
debtor borrowed 1M, the creditor cannot insure his life for more than 1M, because life
insurance taken by the creditor on the life of the debtor is a contract of indemnity.

E papano ngayon kung bayad na yung utang, tapos namatay yung insured? Namatay
yung debtor? Can the creditor recover? The answer is no because in – (di ko gets haha,
46:11) case, life insurance is a contract of indemnity.

What can be insured?

Any unknown event, whether past or future, which may damnify a person having
insurable interest or create a liability against him, may be insured.

So what can be insured is any unknown or contingent event, whether past or future. In
other words, what is the meaning of ‘a past event could be insured?’ There are some
policies that provides that the insurance company shall be liable in case of [47:04]
destruction between insurer, whether lost or not lost at the time the policy was issued.

What’s the meaning of the term lost or not lost? It means whether it was lost at the
time the policy was issued or not yet lost, it is covered. So, that means, past event is
covered PROVIDED that the insured did not know that the loss already occur and the
parties agreed that the past lost is covered.

Is the consent of the other’s spouse needed in the insurance procured on his own
life or on the life of his children?

A married person may insure his or his own life or that of the children without the
consent of the other’s spouse. Nung araw, yung babae, hindi pwedeng kumuha ng
insurance on her own life or the life of the children without the consent of her husband.

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Nunga raw yun. Kasi nung araw, yung mga babae do not have the full civil rights. Nung
araw, in fact during the Roman times, women are considered properties of the husband,
kaya walang karapatan. Pero ngayon, hindi na. Mas may Karapatan ang mga babae at
sa ngayon, yung mga babae, mas marami ngayon ang mga professionals na babae.
Tingnan nyo, kahit yung mga kumukuha ng law mas maraming babae. Tumingin kayo
sa paligid nyo, mas marami ang ka-eskwela ninyong babae kesa lalaki. At mas matalino
daw, DAW, DAW, sabi nila ang mga babae. Tama na, baka magka-away-away pa tayo

What will happen in case the original owner of the policy should predeceased the
person whose life was insured? For example, Juan insured the life of his son, Juan, Jr.
and designate himself as beneficiary. Pero, si Juan, the one who obtained the policy
dies ahead. What will happen to the policy?

In that case, the policy shall be transferred automatically to Juan, Jr. Kung sila’y
mamatay, the estate of Juan will be [50:22, inaudible] to recover the policy.

Let me repeat. The proceeds of the policy should go to the estate of Juan Jr because in
case the original owner of a policy taken on the life of another should predecease the
latter, all rights, title, and interest in the policy shall automatically vest in the insured
or his estate (see page 42)

Exception: When otherwise provided in the policy. So, in that case, if the beneficiary
designated is not the one who obtained the policy, then even if he died ahead of the
insured, then the estate will not go to the person insured but it will go to the beneficiary.

May gambling be covered by insurance?

For example, Atong, insured with Malayan Insurance, losses

in jueteng for 10M, he lost (but I think this is insured not lost,
based on his powerpoint). How much can Atong recover from
Malayan Insurance?

Atong cannot recover anything because the insurance is void,

in as much as gambling cannot be insured. And what is the
reason why gambling cannot be insured?

Gambling cannot be insured because it may possibly result in profit which is not true in
insurance and therefore, gambling of any sort may not be insured. Gambling courts
fortune; the insured seeks to avoid misfortune. Gambling tends to increase the
inequality of fortune while contract of insurance tends to equalize fortune.

Who are the parties to a contract of insurance?

In every contract of insurance, we have:

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 1. The insurer – that is the person who undertakes to pay for the loss of another
2. The insured – the person to be indemnified
3. The beneficiary – who receives the benefit or advantage or who is entitled to the
benefit of the insurance, which is why he is called ‘beneficiary’
Sometimes, a person on whose application the policy was issued is called the assured.

Who may be insured?

1. Anyone except a public enemy is insured

a. A public enemy is nation at war with the Philippines and also every citizen
or subject of such nation. Such term does not include robbers, thieves, and
riotous mobs
For example, Abu Nani obtained a contract of insurance from Insular Life. Abu Nani was
declared public enemy and wanted with a 10M prize on his capture, dead or alive. Is
the policy on Abu Nani void or will it continue?

A: Abu Nani’s policy will continue because he is not a public enemy. To be a public
enemy, he must be a citizen or subject of a country at war with the Philippines and it
does not include those who are wanted for robbery, murder, or any other crime.

Now the question is, right now, who are the public enemies of our country? Are drug
lords public enemies? President Duterte said that drug lords are public enemies.
Question, are they public enemies in the sense understood in insurance? No, they are
not public enemies. To be a public enemy, you must be a subject or citizen of a country
at war with the Philippines. So right now, we do not have public enemy because we are
not at war with any country.

To be a public enemy, it must be a citizen or subject of a nation at war with

the Philippines. The Philippines is not at war at any nation and now we have no public
enemy. Aside therefrom, a Filipino cannot be a public enemy in the Philippines.

What are the facts and issues in the case of Compañia de Seguros vs. Christen
Huenefeld & Co.?

Facts: Christen Huenefeld & Co., a corporation controlled by German subjects, obtained
a fire insurance policy in the Philippines on October 1, 1941. On December 10, 1941, a
war broke out between the United States and Germany. Thereafter, the goods insured
were burned.

Issue: Can the insurer be held liable?

Held: The Court said that the insurance company cannot be made liable. Because of
the war broke out, the insured became a public enemy because it was a corporation
owned by German subjects and Germany is at war with the Philippines. What is the
reason why public enemies cannot be insured in the Philippines? The reason is because,
again, it is a public enemy. The purpose of war is to destroy the resources of the enemy

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and it will be inconsistent if we will destroy the resources of the enemy and yet pay him
insurance for the property he may have lost. This is against the purpose of war.

Q: Whenever a property is mortgage, who may insure the property, the mortgagor or
the mortgagee?

For example: A is the mortgagor. He is the debtor. He borrowed money from B, the
creditor-mortgagee, amounting to P2,000,000. He mortgaged a property worth
P3,000,000. Who may insure the property and for how much? Will it be A? Or will it be
B?

A: In this case, A may insure the property to the extent of P3,000,000 because that is
the value of his property. B, the mortgagee, may also insure it but only to the extent
of the loan that he granted which is P2,000,000.

Q: In case of loss where the insurance is procured by the mortgagor, who may recover?

For example, A is the insured mortgagor. A obtained a loan from B amounting to

P1,000,000. He mortgage a house valued at P2,000,000. A insured that house with X
Company for P1,500,000 with the loss payable to himself, that is A. In case of loss,
who may recover from the insurer? Does B have the right to recover the proceeds of
the policy?

A: In every insurance, you must understand that insurance should apply only to the
interest of the person insured. Siya lang ang nagpa-insure. Siya lang ang
makakarecover, as a general rule. Only A, the mortgagor, may recover from the insurer
because the mortgagor insured the property without the loss payable to the mortgagee.
And hence, only the mortgagor may recover from the insurer since the policy taken by
the mortgagor should be applied exclusively to his interest.

So let me repeat the principle that you should remember. In insurance, the policy
should be applied to the proper interest of the insured. And only the insured or the
beneficiary may recover from the insurance company. A third person, as a rule, cannot
recover from the insurance company. In this case, may B, the mortgagee, recover? The
answer is no. B cannot recover because B is not the insured neither does he is a
beneficiary. However, B, as a mortgagee, has a lien on the proceeds of the policy
because under the Civil Code, the mortgage constituted shall continue to the proceeds
of the policy paid by the insurer. Therefore, the proceeds of the policy should be subject
to the lien of the mortgagee because the proceeds of the insurance take the place of
the property mortgaged to the mortgagee.

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Q: On the other hand, A insured the property with X company. A is the mortgagor. He
obtained a loan from B amounting to P1,000,000. A insured that house with X Company
for P1,500,000. The value of the house is P2,000,000. The loss was made payable to
the mortgagee. In case of loss, who may recover form insurance company?

A: The insurance shall be deemed to be upon the interest of the mortgagor who does
not cease to be a party to the contract of insurance. Even if the loss is made payable
to the mortgagee, the proper party to the insurance is still the mortgagor. So if the
policy is cancelled, the notice of cancellation should be given to the mortgagor because
the mortgagor is the proper party to the contract of insurance.

Q: Suppose that the policy prohibited the storage of inflammable materials and A, the
mortgagor, stored gasoline in large quantity in the property insured. In case of loss,
may B the mortgagee recover from the insurer?

A: No, B the mortgagee cannot recover because the act of the mortgagor in violation
of the policy avoided the contract although the loss is made payable to the mortgagee.
After all, A does not cease to be a proper party of the contract even if the loss is made
payable to B.

Now, let us go back to the illustration that I have given before. A, (the insured or) the
mortgagor, obtained a loan from B, the mortgagee. He obtained an insurance from X
company for P1,500,000. The loan is for P1,000,000 and he made the loss payable to
B. The question is: Who is the proper party to the contract? It is still A because the
policy must obtain by A. Therefore, if A violated the contract, can be recover from the
insurance company? The answer is no, because any act of the mortgagor who is the
insured which will violate the policy shall result to the cancellation of the policy, because
he is the proper party to the contract of insurance.

The loss may be recovered from the insurer from that example. Let us go back again
to the illustration. In case of loss, who may recover from the insurance company? Will
it be A or will it be B? B may recover but only up to the extent of the interest of B. How
much is the interest of B? It is P1,000,000 because that is the amount of the mortgage
that of A. So B recovers P1,000,000. But then, take into consideration, that the policy
is worth for P1,500,000. Who will recover the balance of one-half million. It will be B
because in this case although the loss is made payable to A, who can recover the
balance of one-half million. Because although the loss is made payable to B, since the
insurance is procured by A, it is deemed for the interests of A and B. So, in summary,
B recovers up to extent of the loan he extended which is P1,000,000 and A will recover
the balance of one-half million because the total amount of the policy was for
P1,500,000.

Q: What is mortgage redemption insurance and what are the effects thereof?

13
There are instances when a person borrows money from the bank and the bank will
require the borrower to obtain mortgage redemption insurance.

A: So, the mortgage redemption insurance is an insurance that is procured by the

borrower or the mortgagor and the losses made payable to the mortgagee. This is an
added security for the payment of the loan. The understanding is that if the mortgagor-
insured dies, the proceeds of the policy will go to the mortgagee in payment of the debt
of the mortgagor.

For example, A the mortgagor borrowed money from B amounting to P1,000,000. A

obtained a mortgage redemption insurance with X Company and the loss is made
payable to B. In that case, the understanding of mortgage redemption insurance is in
case A dies, the proceeds of the policy will be paid to the mortgagee B in payment of
the loan of A. Once payment is made to B, then the obligation of A is released to the
extent of the amount paid by the insurance company.

So let me repeat. Where the mortgagor pays the insurance premium under mortgage
redemption insurance, making the loss payable to the mortgagee, the insurance is still
on the interest of the mortgagor who continues to be a part to the contract. Such kind
of policy of the insurance upon life or health may pass by transfer, will or succession to
any person may recover whatever the insured might have recovered and therefore, the
designated beneficiary or the estate of the insured may recover.

Q: What are the effects of insurance procured by mortgagee without reference to the
right of the mortgagor?

In the previous examples, what we have studied is that the insurance was obtained by
the mortgagor and we discussed the effects of the insurance procured by the
mortgagor. This time, the mortgagee or the creditor obtained the insurance without
reference to the right of the mortgagor. What are the consequences of this insurance?

A: In that case, where the mortgagee insured his interest in the property without
reference to the right of the mortgagor. The effects of the policy are as follows:

1. The mortgagee may collect from the insurer upon occurrence of the loss to the
extent of his credit.
2. Unless otherwise stated In the policy, the mortgagor has no right to collect the
balance of the proceeds of the policy after the payment of the interest of the
mortgagee. Why? It is because insurance is a personal contract. The insurance
obtained by the mortgagee applies only to his interest. Only the mortgagee may
recover unless somebody else has been designated as beneficiary.
3. The insurer upon payment to the mortgagee-insured becomes subrogated to the
rights of the mortgagee. In property insurance, when the insurer pays the
insured, he shall be subrogated to the rights of the insured against a party liable
to the insured or the guilty party who caused the loss.

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 4. The mortgagee-insured can no longer collect the mortgagor’s indebtedness after
receiving full payment because his right to collect has been transferred to the
insurer.
5. The mortgagor is not released from his obligation because the insurer assumes
the right to collect.

For example, C is the mortgagee-creditor. He granted a loan to D, the debtor-

mortgagor for P2,000,000. D mortgaged the house valued with P3,000,000. C
insured the mortgaged property with X Company for P3,000,000. It was totally
burned.

Q: Who may collect with the insurance company?

A: In this case, C may collect up to the extent of the loan which is P2,000,000. He
cannot recover more than that because insurance is a contract of indemnity. He
may recover only the loss he may have suffered.

Q: Can D recover the balance of P1,000,000?

A: No. because insurance should be applied only to the interest of C who obtained
the policy

Q: Will the obligation of D be extinguished?

A: No, because after X made the payment, X is subrogated to the rights of C as

against D. X will be the one to collect the amount of the loan.

So, in summary, in that case, the mortgagee may collect from the insurer but only
P2,000,000 since the mortgagee’s interest is limited to the amount of his credit. D
, the mortgagor has no right to collect because insurance should be applied
exclusively to his interest. After paying C P2,000,000, the insurer is automatically
subrogated to the rights of C against D and therefore collects the amount paid to
C. from D. The mortgagee after collecting the full amount of the loan can no longer
hold B liable because the right to collect has been transferred to the insurer. The
payment made by the insurer to the mortgagee will not extinguish the debtor’s debt
because that is transferred to the insurer.

Q; What is a union mortgage clause?

A: It creates a relation of the insurer and insured between the mortgagee and the
mortgagor. The result is, if the insurer assents to the transfer of the insurance to the
mortgagor to the mortgagee and imposes further obligations, any act of the mortgagor
will not affect the mortgagee.

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PART I

One of the elements of a contract of insurance is that the party procuring insurance
must have an insurable interest in the subject matter of the insurance.

In general, when does a person have an insurable interest in the subject-

matter of the insurance?

In general, a person has an insurable interest in the subject-matter of the insurance

when he will suffer damage from its destruction and obtain benefits from its
preservation. Or stated otherwise, whenever he has a relation or connection with, or
concern in the subject matter of the insurance that he will derive pecuniary benefit from
its preservation and suffer loss from its destruction.

For example, do you have insurable interest in the house of your neighbor?

Ask yourself. Will you suffer damage if it is destroyed? You will not. Therefore, you have
no insurable interest in the house of your neighbor because you will not obtain any
pecuniary benefit from its preservation and neither will you suffer damage from its
destruction.

In life insurance, when does a person have insurable interest?

Whenever he has a reasonable ground, founded on the relation of the parties, either
by blood or contractual or affinity, to expect some benefit or advantage from the
continuance of life (of the insured). The insurable interest must be in the continuation
of life not in the cessation of life.

For example, Manuel V. Pangilinan executed his last will and testament and
provided therein a legacy of P10 million in favor of his closest friend, Ray
Espinosa. Does Ray Espinosa have insurable interest in the life of Manuel V.
Pangilinan?

Ask yourself. If Manuel Pangilinan dies will Ray Espinosa suffer damage? The answer is
no. On the other hand, if Manuel Pangilinan dies then Ray Espinosa will obtain benefit
because he tends to inherit from Manuel Pangilinan. So, in other words, the interest of
Ray Espinosa in the life of Manuel Pangilinan is not in the continuation of his life but in
the cessation of his life. Because if Manny Pangilinan dies, Ray Espinosa obtains benefit.

Now let us go over the answer again.

Ray Espinosa does not have insurable interest on the life of Manuel V. Pangilinan since
he will not obtain any benefit during the lifetime of Mr. Pangilinan. He will be benefited
only when Mr. Pangilinan dies. Since Ray’s interest on the life of Mr. Pangilinan is not
the continuance of the life of the latter but on its loss or destruction, Ray has no
insurable interest on his life.

Upon whose life and health does a person have insurance interest?

(a) Every person has an insurable interest in the life and health of himself, or
his spouse and his children.

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Let us begin with that. He has insurable interest with his own life. Of course, everybody
has an interest in his own life. Everybody is interested in the preservation of his own
life and his spouse and his children.

But let us suppose, you do not obtain any benefit from your spouse. Your spouse does
not work. Doesn’t give you anything. But do you have insurable interest on his life? The
answer is yes. So, if a woman cannot obtain support from the husband, he still has
insurable interest on his life because the husband has a legal obligation to give him
support.

(b) A person has insurable interest also, on any person on whom he depends
wholly or in part for education or support.

For example, I give your support out of generosity. We have no relation whatsoever
but I want you to become lawyers and so I am giving you support regularly. Do you
have insurable interest on my life? Taking into account that we have no relationship
whatsoever?

The answer is yes because you depend on me wholly or in part for education or support.

(c) any person has a legal obligation for the payment of money.

If I borrowed money from you and you granted a loan to me, do you have insurable
interest on my life?

The answer is yes because my death might delay or prevent the performance of my
obligation. If I die, I might not be able to pay you the loan you granted to me which is
the reason why you have insurable interest on my life.

(d) any person upon whose life any estate or interest vested in him depends.

For example, I own a real property. I allowed you to till my land for free. I gave you
the right to use it. We call that in law usufruct. So, if I grant you usufruct of my land
for as long as I live, do you have insurable interest on my life?

Yes. Because an estate vested in you depends on my life if I die the usufruct will
extinguish. You will suffer damage and that is why you have insurable interest on my
life.

In all of those cases we’ve sited, the person procuring insurance will suffer damage by
the death of the person whose life will be insured and that is the reason he has insurable
interest on his life. Because the possibility of damage to him will give him interest on
the preservation of the life of the insured.

As of what time must insurable interest in life exist?

Life insurance is a contract wherein the interest must exist at the time the policy exists
or taken and not at the time of death. Why? Because life insurance is not a contract of
indemnity.

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For example, you got married. You insured the life of your husband or wife as the case
may be. Then later you obtained insurance on your spouse, on the life of your spouse.
But later your marriage has been dissolved. And after your marriage have been
dissolved, your spouse died. Will you be able to recover from the insurance company?

If you still have insurable interest on the life of your spouse, the answer is yes. If not,
no more. In this case, should you be allowed to recover? Bear in mind that life insurance
is not a contract of indemnity. Therefore, insurable interest must only exist at the time
the policy was obtained. It is not necessary at the time of death. So, in that case, even
if you have no more insurable interest at the time of death, you will be entitled to
recover. Because, I repeat, life insurance is not a contract of indemnity. And therefore,
insurable interest must exist only at the time the insurance was taken.

Insurable interest in life must exist at the time of the effectivity of the policy and need
not exist at the time of death of the insured, as life insurance is not a contract of
indemnity. Hence, where a life insurance policy is valid at its inception by reason of the
existence of insurable interest at the time, the subsequent diminution or cessation of
that interest does not invalidate the policy. However, insurable interest of a creditor on
the life of a debtor must exist not only at the time the policy takes effect, but also at
the time of the debtor’s death, for such kind of life insurance is still a contract of
indemnity because he procured the insurance to be sure to be able to collect the debt
owed by the insured to him.

For example, Raymart and Claudine were married in 2016. Raymart insured the life of
Claudine on January 12, 2017 with Raymart as beneficiary. The marriage between
Raymart and Claudine was subsequently annulled on February 25, 2018. Claudine was
killed by Ramon on May 15, 2018. Take note that at the time the insured died, the
marriage between Raymart, who procured the insurance, and Claudine had already
been dissolved because the marriage was annulled. Considering that the marriage
between Raymart and Claudine was already annulled at the time the insured, Claudine,
died, may Raymart, the beneficiary, recover the proceeds of the insurance?

Raymart may recover the proceeds of the policy even if his marriage with Claudine was
already annulled at the time of the death of Claudine because insurable interest in life
need exist only at the time of the effectivity of the policy and need not exist at the time
of death of the insured because life insurance is not a contract of indemnity.

Does the creditor have insurable interest in the life of the debtor?

The answer is yes. The creditor has insurable interest on the life of the debtor because
the death of the debtor might delay the performance of his obligation to pay the debt.
Therefore, the creditor will suffer damage. Hence, he has insurable interest on the life
of the debtor.

A creditor has an insurable interest in the life of the debtor, at least to the extent of
the indebtedness. Thus, a person has insurable interest on the life of another “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.”

18
Stated otherwise, the creditor will suffer damage if the debtor dies because the debtor
might not be able to pay his obligation anymore. His estate may not be enough to cover
the debt that he owes to the creditor.

For example, C the creditor granted a loan to D the debtor amounting to P100,000. C
insured the life of the debtor for P100,000 and had himself designated as beneficiary.
The policy was insured by X Insurance Company.

1. Is the insurance taken by C on the life of D valid?

The answer is yes because if D dies, C may not be able to collect his indebtedness or
his claim against D and therefore the death of D might cause damage to C. Therefore,
C has insurable interest on the life of D.

2. Would your answer be the same if the policy taken by C on the life of D is
P5 million?

If it is exceedingly or disproportionately bigger than the amount of the loan then it

might not be valid because in that case it might be considered as speculative. It may
be considered as gambling or a wagering of contract.

Answer:

1. The policy taken by C on the life of D for P100,000 is valid because as creditor, C
has insurable interest in the life of D up to the extent of the loan which is P100,000. In
case D dies, C suffers a loss for which reason, he may insure the life of D.

PART II

But, if the policy taken by C on the life of D is P5 Million but the debt is only
P100,000.00, will it be valid?

It cannot be valid because it is grossly disproportionate with the amount of the loan.
Insurance on the life of the debtor to be valid must be for an amount which is not
grossly disproportionate to the amount of the obligation, otherwise the contract will be
considered as a wagering contract. If the amount of the debt is out of proportion with
the policy taken, the creditor lacks insurable interest and the contract of insurance is
nothing more than a wagering contract.

Who is a beneficiary?

Beneficiary is the person for whose benefit the insurance was taken. He is the one cited
in the policy as the one to receive the proceeds of the policy. Beneficiary is the person
for whose benefit the policy is issued and to whom the loss is payable. So it’s easy to
remember. He is a beneficiary if he gets the benefit.

May the beneficiary in life insurance be changed? Does the insured have the
right to change the beneficiary in life insurance?

The insured has the right to change the beneficiary unless he waived the right to change
the beneficiary. In other words, the designation of a beneficiary is presumed to be

19
revocable unless the insured waived the right to change the beneficiary.
Notwithstanding the foregoing, in the event the insured does not change the beneficiary
during his lifetime, the designation cannot be changed anymore.

So let me repeat, the designation of a beneficiary is presumed to be revocable. The

person procuring the insurance can change the beneficiary at any time; he can revoke
it unless he has waived the right to change the beneficiary.

If he waived the right to change the beneficiary, then the designation becomes
irrevocable. Then you may ask, which is better? To designate the beneficiary as
irrevocable? Or allow it to be revocable? Well it’s a matter of trust. If you trust the
beneficiary, then by all means, make it irrevocable, waive the right to change the
beneficiary. But if you do not trust the beneficiary, then make it revocable. But then if
you don’t trust the beneficiary, why will you designate him as beneficiary?

So, as a lawyer, many clients ask: Atty., which one is better? To designate my
beneficiary as irrevocable by waiving the right to revoke the beneficiary? Or
allow it to be revocable?

Pag girlfriend lang, aba you should not make the girlfriend or boyfriend as irrevocable
beneficiary. Aba, eh mamaya makakita ng mas pogi sa iyo, iiwanan ka, lugi ka if the
designation is irrevocable. If you’re thinking, hindi bale, pag iniwan ako, hindi ko
babayaran ang premium. You know, if the designation is irrevocable and the insured
does not pay the premium, the beneficiary can continue the payment of premium. And
pray, that the insured will die soon. Wag papatayin dahil if the beneficiary feloniously
kills the insured intentionally, then he forfeits the right to claim the proceeds of the
insurance.

Pero kung asawa mo na, do not make it revocable. Allow it to be irrevocable. Waive the
right to change the beneficiary. Asawa mo na yan eh. That is my personal opinion. Pero
kayo rin, kung diskumpyado kayo sa asawa ninyo, then you should not waive the right
to change the beneficiary. Pero kung diskumpyado naman kayo, eh bakit nyo naman
pakakasalan? Eh talagang malaking problema yan. Yan ay problema sa pag-ibig, kayo
lamang ang makakasagot nyan.

Who may be beneficiary in life insurance?

Beneficiary in life insurance is not provided for in the Insurance Code. And as we have
said, if there is no provision in the Insurance Code what law shall be applied?

Then we should apply the Civil Code. And under the law, a person may be designated
as beneficiary even if he is stranger to the contract except those who are forbidden
from receiving donations under Article 739 of the Civil Code. For example, can you
designate me as beneficiary in your life insurance despite the lack of relation
between us?

The answer is YES. Should you do that? Ba ewan ko sa inyo. But if you will do that, you
will make me very very happy if you designate me as beneficiary. You could designate
a stranger as beneficiary.

20
In life insurance, the beneficiary need not have insurable interest in the life of insured.
So a perfect stranger may be designated as beneficiary. However, those who are
prohibited from giving donations to each other under Article 739 of the Civil Code
cannot designate each other as beneficiary.

Then who are those persons who are prohibited from receiving donations from
each other? You better study this, this will be question no. 7 in your midterm
exam.

(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.

Let us take at the first one, those who are guilty of adultery or concubinage. The
persons disqualified are those guilty with each other of adultery or concubinage. For
example, you are guilty of adultery having a relation with somebody else. I designated
you as beneficiary in my life insurance. We are not guilty of adultery or concubinage.

Is the designation valid considering that you are guilty of adultery with
another person?

The designation is still valid. The disqualification applies only between the two guilty
parties. Ngayon kung tayong dalawa yun, we are the ones guilty of adultery or
concubinage, we cannot designate each other as beneficiary. But if we are guilty of
adultery or concubinage with another person, then we are still qualified to designate
each other as beneficiary.

To disqualify a person guilty of adultery or concubinage with each other, must

there be a prior conviction?

The answer is NO. Prior conviction is not needed. The disqualification could be done
during the proceedings for the collection of the proceeds of the insurance policy. So let
us go over it again. With respect to the disqualification of persons who are guilty of
adultery or concubinage, a criminal conviction for the disqualifying offense is not
required. The guilt of the insured and beneficiary may be proven by preponderance of
evidence in the same action for declaration of nullity of the designation.

Of course, you know what adultery or concubinage is. When you took up criminal law,
among the crimes you find to be interesting are adultery, concubinage, rape, abduction,
seduction or cheap xxx crime, yung acts of lasciviousness, yung pahipo hipo lang.

But let us have a cursory examination of what adultery or concubinage is. So as to

refresh your memory, adultery is committed by a married woman who shall have sexual
relation with a man other than the husband. It is also committed by a person who shall
have sexual relation with a married woman knowing her to be married. So, it does not

21
apply if you don’t know that she is married. But you have to bear in mind that in
adultery, there are as may crimes committed for as many intercourse that was done.
So if you do it five times a day, you are guilty of adultery five times, if you do it with a
married woman knowing her to be married. Five times? Nevermind.

How about concubinage?

In concubinage, a single act is not enough. A single act of indiscretion by the man is
not enough. It is committed by a married man who shall bring a woman who is not his
wife into the conjugal home. Mag-uuwi siya ng babae sa kanyang bahay and cohabit
with her or if he cohabits with her in some other place. Nag-maintain siya sa ibang
bahay. Or he shall do it under scandalous circumstances. If you will examine the
jurisprudence in concubinage, you will see that no one has ever been convicted of
concubinage committed under scandalous circumstances. My professor said the reason
why no one was ever convicted of that crime is that no one can testify. Because if you
look and watch, then you are not scandalized and therefore it is not under scandalous
circumstances. If you do not look on the other hand, then you cannot testify. So walang
testigo. So, ang no. 3 ay yun lamang first two instances and it is characterized by
cohabitation. Hindi yung one-night stand, hindi yung one shot deal kung hindi
cohabitation living as husband and wife.

When I was a congressman, somebody filed a bill, a female legislator filed a bill saying
that these provisions about adultery and concubinage is unfair to the women. Because
adultery is committed by a married woman who shall have sexual relation even once
with a man other than the husband. But the husband who will have sexual relation with
a woman other than the wife will not be guilty unless he knows her to be married.
Because concubinage requires cohabitation.

They said the unfairness occurred because at the time the law was enacted, all
legislators were males, no female legislators. That is wrong. That is not the reason why
there is that discrepancy, that difference between cohabitation and a single act between
adultery and concubinage.

PART III

The unfairness occurred because at the time the law was enacted, all legislators were
males, no female legislators? That is wrong. That is not the reason why there is that
discrepancy, that difference between cohabitation and a single act between adultery
and concubinage.

The reason why the law is like that is not because there are no female legislators at
that time, the reason is when a woman who have sexual relation with a man other than
his husband, she could possibly bring into the conjugal home, a child who is not that
from the husband. And under the law, that child is conclusively presumed to be that of
the husband. And that is why the law is very strict to married women because she could
possibly bring into the conjugal home, a child who is not that of the husband who will
be conclusively presumed to be the father of that child. But in case of a married man,

22
he could not possibly bring into the conjugal home a child who is not that of his wife
without the wife knowing. And that is the reason why there is that difference.

Those who are guilty of the same criminal offense in consideration thereof.
Like for example, there was an instance when a beautiful woman from Davao, conspired
with somebody to kill her husband, a car racer. Pinapatay nya. Question, can that
woman obtain life insurance and designate the killer that she hired to kill her husband?

The answer is no. Because they are guilty of the same criminal offense in consideration
thereof.

Or can you designate President Duterte as your beneficiary in your life insurance, in
consideration of his office?

The answer is no, you cannot do that. That is a form of bribery. So, it cannot be legally
done.

Now, in case of disqualification because of adultery or concubinage, are adulterous

children disqualified from being designated as beneficiary in the life insurance
of the parents?

The answer is no. The disqualification of persons who are guilty of adultery or
concubinage does not apply to the children. Wala namang kasalanan yung bata, bakit
mo paparusahan yung bata. Sino bang gustong maging anak sa labas? Sino bang
gustong maging adulterous child?

Aside from that, under the Civil Code, adulterous children are allowed to inherit from
their adulterous parent. Such being the case, adulterous children may be designated
as beneficiary.

So, if a man and a woman went to your office, as a lawyer, and said “hindi po kami
kasal, kami po’y nagsasama sa pagkakasala. Kami po’y may sariling mga asawa pero
naaksidente po kami, nagkaroon po kami ng anak.”

“Ay ako po,” sabi nung lalaki, “mahal na mahal ko po itong babaeng ito kahit hindi po
kami kasal. Mas mahal ko po ito kesa sa aking sariling asawa. Ay ako po’y gustong
kumuha ng insurance, pwede ho bang gawin kong beneficiary itong aking
kinakasamang babae?”

What should be your answer? Or your advice?

Your advice should be no. Don’t do that because that is not valid. Persons who are
guilty of adultery and concubinage cannot designate each other as beneficiary in life
insurance.

Eto ituro ninyo, ang gawin mo, itong anak ninyo sa labas, ito ang gawin nyong
beneficiary. Yan, valid. Nobody can question that/

Kaya kayong makakasalanan, yung mga anak nyo sa pagkakasala ang gawin ninyong
beneficiary sa life insurance. Wag ninyong sasabihin kay Dean, baka magalit. Yan ay
payo ng isang abogado.

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What is the effect of adultery on the right to recover SSS benefits?

E di hindi, kung life insurance hindi mo makuha, yung SSS benefits, hindi mo rin
makukuha.

(Note: From PPT)

What is the extent of the interest of an irrevocable beneficiary in the life

insurance policy where he was designated as beneficiary?

As we have said, life insurance designation of beneficiary is presumed to be revocable

unless there is a waiver of the right to change the beneficiary. The moment there is a
waiver of the right to change the beneficiary, then the beneficiary becomes irrevocable.

Now, what is the interest or the nature of interest of upon the irrevocable
beneficiary in the life insurance of the insured?

Then it is revocable, then it cannot be changed. And therefore, he has a vested right
on the policy. If the insured should discontinue the payment of the premium, the
beneficiary may continue to pay the premium.

Who should receive the proceeds of a life insurance policy in case no beneficiary
has been designated or the designation is not valid?

In case of failure to designate the beneficiary or where the designation is not valid, the
proceeds should accrue to the estate of the insured.

What are the facts in the case of Phil-am Life Ins. Co vs Pineda?

Of course, you will recite on the cases I have assigned. But in the meantime, let us
discuss the salient features of the case.

On Jan 15, 1968, DImayuga procured an ordinary life insurance from Phil-am Life and
designated his wife and children as irrevocable beneficiaries. The wife died while the
children were still minors. Dimayuga filed a petition in court to change his beneficiaries.
The minors gave their consent to the change of beneficiaries. Dimayuga claimed that
the court upon any just and reasonable ground may change an irrevocable
beneficiaries.

Question: Should the court grant the petition to change the beneficiary who have been
designated as irrevocable?

24
The petition should be denied. When the designation is irrevocable, they cannot be
changed. They can be changed only with the consent of the beneficiary and since the
beneficiaries are minors, they cannot give their consent.

There is the other exception in this case. The consent given by minors was not effective
since they cannot validly give their consent to the change of beneficiary.

But then the question arises, when can be consent of a minor to change name as
beneficiary be given by the guardian or parents?

When a minor was so designated as beneficiary and the interest of the minor does not
exceed P500,000, his consent to the change of beneficiary may be given by his judicial
guardian or in his absence, by his father or in the latter’s incapacity, his mother.

In the absence or in case of incapacity of the father or mother, the grandparent, the
eldest brother or sister at least 18 years of age or any relative who has actual custody
of the minor insured shall act as guardian without need of a court order and they could
give the consent.

What is the interest of the insured in an endowment policy?

(QN in the PPT: What is the interest of the beneficiary in an endowment life insurance?)

Let me explain to you first what endowment life insurance policy is. In case of
endowment insurance, there is a period granted or provided in the policy which they
call as the period of endowment.

Let us suppose that the period agreed upon is 2 years. So, it is a 20-year endowment
life insurance policy. What does it mean?

It means that if the insured dies within the period of 20 years, then the proceeds of the
policy will go to his beneficiary. On the other hand, if the insured survives the 20-year
period, then he himself will get the proceeds of the policy.

There are policies that I obtained in my life. But all of them are life, ordinary life
insurance policy. Then my wife and children have been designated as beneficiary. Some
of them are limited payment life insurance which means that I pay premium for a
limited period of time, then after that, I stop paying the premium, and I will be
protected for life BUT the proceeds will not be payable until I die. Many of them, many
of the policies I obtained, are like that. So, I’ve been paying premiums for many years,
from 20 years, before that happened, before the lapse of 20 years. My wife told me,
“Luging lugi naman tayo sa insurance mo. Bayad ka nang bayad ng premium. Every
year, bayad ka nang bayad. Wala naman akong nakokolekta. Luging-lugi.” Sinagot ko
“Oo nga.” “Dapat may nakokolekta ako” “Oo nga,” sabi ko.

Then later naisip ko, “aba teka, e baka nakakolekta lang sya pag namatay ako. Anong
ibig sabihin nun?” Wag na nating pag-usapan yan. Wag ng pag-usapan

25
But if the policy is endowment, and I survive the period of endowment, I, the insured,
will be the one to get the proceeds of the policy. If I die within that period, the
beneficiary will get the proceeds.

So, what is the interest of the beneficiary in an endowment policy? Remember, the
beneficiary will get the proceed only if the insured dies within the period of endowment.
So in that case, the interest of the beneficiary is a contingent one. It is subject to a
condition. The condition being that the insured will die within the period of endowment.

So, if you are designated as beneficiary in an endowment policy, you know what to do.
You should pray, pray only. Do not kill the insured. Pray. Because if he survive the
period of endowment, gutom, gutom kayo. The proceeds will go to the insured himself.
Joke only yun, wag nyo namang ipagdasal mamatay yung insured. Wag. Siguro pwede,
konsumihen ninyo, sigawan nyo nang sigawan, asarin ninyo, para atakehin sa puso.
Huwag. Joke only. Char.

Elvis procured a life insurance policy and designated his son, Elvis Jr. as beneficiary.
While Elvise and Elvis Jr were riding a car, they met an accident. Elvis Jr died 1 day
ahead of Elvis. To whom should the proceeds of the policy go?

It depends whether the designation is revocable or irrevocable.

If the beneficiary is irrevocable and hence, he has a vested interest in the policy, the
representatives of such beneficiary are entitled to the proceeds of the insurance unless
the proceeds are made payable to the beneficiary only if living. Meaning to say, pag
patay na, wala na.

On the other hand, where the beneficiary is revocable and therefore, he has no vested
interest in the policy at the time of death, his estate or insured (legal representative
ata to as per his PPT) derives no interest but the proceeds will go to the estate of the
insured.

May revocation of a beneficiary be done in the last will and testament of the
insured?

There was a time in my, in the course of my law practice, I handle some quirk cases
about last will and testament. In one case, a client of mine is Swiss client, rich person,
who owns a laboratory—a pharmaceutical company, asked me to write a last will and
testament. Alright, I said, let me get to details. [---END: 53:41]

PART IV

(story time about clients’ last will and testaments)

Q: May revocation of a beneficiary be done in the last will and testament of the insured?

A: In the event that the insured does not change the beneficiary during his lifetime, the
designation shall be deemed irrevocable. The revocation of the beneficiary therefore,
should be done during the lifetime of the insured. Hence, the revocation of the

26
beneficiary cannot be done in the last will and testament of the insured because it takes
effect upon the death of the insured.

Q: In case the beneficiary did not submit an insurance claim against the insurer because
he did not know of the existence of the insurance. Is he bound by the prescriptive
period stated in the contract?

There are many instances when the insured procures many insurances for the insurance
company and designated the beneficiary without telling the beneficiary. So the
beneficiary did not know that he was designated as such in the life insurance of the
insured or he did not even know about the existence of the life insurance. But the policy
says that the claim against the insurer should be made within a period of 60 days from
the death of the insured. And because of the beneficiary did not know of the existence
of the policy and his designation as a beneficiary, he failed to file a claim. Is he bound
by the prescriptive period stated in the contract?

A: It is incumbent upon the agent of the insurer to give proper notice of the existence
of the insurance coverage and the stipulation in the insurance contract for filing a claim
to the beneficiary upon the death of the insured. The agent and not the beneficiary
shall bear the loss. It is unfair to deny the claim of the beneficiary where he was unable
to file the claim within the period provided in the policy in case he did not even know
the policy existed.

BPI & FGU v. LAINGO

In essence, what was discussed is whether the beneficiary forfeits its claim for failure
to file a claim with the insurer not knowing of the existence of the policy

Q: What is the effect of the exact of the beneficiary in willfully killing the insured?

(story time)

A: In case the beneficiary is the principal, accomplice or accessory in willfully bringing

about the death of the insured, the interest of the beneficiary in the policy shall be
forfeited and in such a case, the share forfeited shall pass on to the other beneficiaries,
unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall
be pain in accordance with the policy contract. If the policy contract is silent, the
proceeds shall be paid to the estate of the insured. So the beneficiary will not benefit if
he willfully kills the insured. He will not get the proceeds of the policy. But the insurance
company will not also profit by keeping the proceeds of the policy. It has to be paid to
someone. It has to be paid to other beneficiary designated if he has one. If none or if
he is disqualified, then it should be given to the estate of the insured.

For example, Elias obtained a life insurance with X Company and designated Eliza as
beneficiary. Eliza killed the insured Elias.

Q: May Eliza recover from the insurer? If Eliza cannot recover from the insurer, who
may collect?

27
A: Eliza cannot recover from the insurer even if she is the beneficiary because she killed
the insured, and hence, her interest as beneficiary in the policy has been forfeited. The
share forfeited shall pass on to the other beneficiaries unless otherwise disqualified. In
the absence of other beneficiaries, the proceeds shall be paid in accordance with the
policy contract. If the policy contract is silent, the proceeds shall be paid to the estate
of the insured.

Q: The law specifically disqualified the beneficiary from receiving the proceeds of the
policy if he willfully brings about the death of the insured. Suppose the beneficiary’s act
of killing the insured was neither intentional nor felonious, will he still be disqualified
from receiving the proceeds of the policy?

For example, the insured was riding in a car driven by the beneficiary. The beneficiary
was guilty of reckless imprudence and the car fell off the cliff. The insured died. So in
a manner of speaking, it was the beneficiary caused the death of the insured. It was
the negligence of the beneficiary that caused the death of the insured. But then, that
is not willful. Or let us suppose that in this case, Elias wanted to rape Eliza. So Eliza, in
defense of her honor, killed Elias the insured. Will Eliza still be disqualified from
receiving the proceeds of the policy?

A: Although the law specifically mentioned only the act of “willfully” killing the insured,
it has been ruled that such act must not only be willful or intentional but must likewise
be felonious. And where the killing was unintentional or not felonious, the beneficiary
will not be denied recovery by reason of his causing the death of the insured.

Q: Under Section 89, “an insurer is not liable for a loss caused by the willful act of
through the connivance of the insured.” Suppose X who had insurable interest in the
life of Y insured the latter and had himself (X) designated as beneficiary. Thereafter, X
willfully killed Y. is the insurer exempted from liability as apparently provided for in
Section 89 or, would the insurer be liable (a) to the other beneficiaries who are not
disqualified; or (b) in accordance with the policy contract; or (c) to the estate of the
insured as provided for in Section 12?

So, in other words, in case of conflict between Section 89 which says the insurer is not
liable and Section 12 which says the insurer is still liable but not to the beneficiary who
killed the insured but to the other beneficiaries or as provided for in the contract or to
the estate of the insured.

A: Section 12 should be applicable and hence, the insurer shall be liable (a) to the other
beneficiaries who are not disqualified; or (b) in accordance with the policy contract; or
(c) to the estate of the insured. Section 12 is a new provision while Section 89 is an old
provision, (and the rule is when there is conflict between the old and the new, it shall
be the new provision that shall prevail), and where the former made the insurer liable
instead of exempting it from liability, the intention against exempting the insurer from
liability is evident. Aside therefrom, Section 89 is a general provision applicable to all
kinds of insurance while Section 12 is a special provision applicable only to life
insurance, and therefore, the latter shall prevail over the former.

28
Q: What is the test of insurable interest in the property?

A: The test of insurable interest in the property is whether the insured has such a right,
title, or interest therein, or relation thereto that he will be benefited by its preservation
and continued existence, or suffer a direct pecuniary loss from its destruction or injury
by the peril insured against.

29
PART I

What may insurable interest in property consist of?

An insurable interest in property may consist of: EIE

a) An existing interest

b) An inchoate interest founded on an existing interest

c) An expectancy, coupled with an existing interest in that out of which the

expectancy arises.

Existing interest is so simple, like for example the interest in the car that you own. That
is an existing interest.

On the hand, what is an inchoate interest?

An inchoate interest is one which is not a present interest, but will ripen into an existing
interest, if not barred or extinguished. To constitute insurable interest, such inchoate
interest must be founded on an existing interest. The best example would be the
interest of a stockholder in a corporation owning a ship, cargo, or other property, while
he has no legal title to the corporate property however he has inchoate interest therein
that out of which the expectancy arises.

For example, Randy Perez is the owner of 20% of the outstanding capital stock of
University of Batangas. University of Batangas is the owner of a building worth P200
million. Randy Perez insured the property of University of Batangas up to P40 million
with Fortune Insurance Company. Randy Perez is not the owner of the property; the
owner is University of Batangas. And you must have heard that a corporation has a
personality separate and distinct from its stockholders and therefore the property of
the corporation is not the property of the stockholder.

In this case, Randy Perez does not have existing interest on the property of University
of Batangas. But does he have an inchoate interest?

The answer is yes. He has inchoate interest because when the corporation or University
of Batangas is dissolved, he is entitled in the share of assets of University of Batangas
after paying all the liabilities. He will get 20% of the assets of University of Batangas
upon dissolution. Therefore, he has incomplete interest in the assets of University of
Batangas. To which he will be entitled if it is not divested or it is not cancelled.

UB’s property cannot be attached to satisfy the liability of a stockholder because it has
a personality separate and distinct from that of the stockholder and therefore, the
property of a corporation is not the property of the stockholder.

Randy may insure the property of UB because he has an inchoate interest in the
property of UB which is founded on an existing interest. When UB is dissolved, Randy
may share in the net assets of UB in proportion with his stockholdings. That is the
meaning of inchoate interest which is founded on existing interest.

30
(When) May expectancy be insured?

Expectancy alone may not be insured. However, when expectancy is coupled with
existing interest or founded on an actual right to the thing then it may be insured.

Expectancy to be insurable must be coupled with an existing interest or founded on an

actual right to the thing, or upon any valid contract for it, otherwise, it does not
constitute insurable interest.

For example, Lucio Tan is an owner of a house in Forbes Park. His only son is Lucio Tan
Jr. When Lucio Tan dies, Lucio Tan Jr. will inherit the house but that is a mere
expectancy, it is not coupled with existing interest. Therefore, may Lucio Tan (Jr.?)
insure the house with Fortune Ins. Co.

The insurance taken by the son on the property of his father is not valid because he
has a mere expectancy on such property which is not coupled with an existing interest
in that our of which the expectancy arises.

So, in that particular case, the insurance will not be valid because the interest of Lucio
Tan Jr. is purely an expectancy. To be insurable, it must be coupled with an existing
interest.

If I’m an owner of a parcel of land and I planted rice on that parcel of land of
mine, may I insure the future crops?

Future crops are mere expectancy, but can I insure it? Yes, because that expectancy is
coupled with an existing interest. Because I am the owner of the land and therefore, I
expect to harvest the crops. Therefore, my interest in the crops, is expectancy coupled
with existing interest.

Does a carrier or depositary have insurable interest in the property under his
custody?

Any person having custody of the property of another and responsible for it may insure
such property in his own name as he may suffer pecuniary loss from its destruction or
damage. Thus a “carrier or depositary has insurable interest in a thing held by him as
such, to the extent of his liability but not the exceed the value thereof.

A person is engaged in the business of dyeing and washing clothes. Does he

have insurable interest on the clothes delivered to him for dyeing or washing?

Yes, because the destruction of the clothes will mean pecuniary loss to him as he will
be deprived of compensation aside from pecuniary liability for the loss or destruction
of the clothes.

What is the measure of indemnity in property insurance?

The measure of indemnity in property insurance is the extent to which the insured
might be damnified by the loss or injury thereof.

31
Property insurance is a contract of indemnity therefore the measure of insurable
interest is the extent to which the insured might be damnified by the loss or injury of
the property insured. Said principle, however, applies only to property insurance and
not to life insurance which is not regarded as a contract of indemnity unless it is taken
by a creditor on the life of the debtor.

Can a person without insurable interest on the property insured enforce the
insurance contract?

A contract or policy of insurance on property shall be enforceable only for the benefit
of the person having insurable interest in the property insured. The rule that in property
insurance that he will recover only to the extent of his damage is embodied in this
particular section because in this particular case he will not be able to recover unless
he has insurable interest in the property.

For example, suppose A the owner of the building insured the same against fire and
the proceeds of the policy was made payable to B, a person not having insurable
interest in the property insured. In case of loss, B cannot enforce the policy or recover
from the insurer because in property insurance only the person who has insurable
interest in the property may recover.

What are the differences between insurable interest in life insurance and
insurable interest in property insurance?

1. Insurable interest in property is based on pecuniary interest while in life the

interest need not necessarily be strictly and exclusively a pecuniary, as in the
case of affinity or consanguinity.

2. In property insurance, the interest must exist at the time the policy takes effect
and at the time of the loss, while in life insurance, insurable interest needs to
exist only at the time the policy takes into effect unless taken by the creditor on
the life of the debtor.

3. Insurable interest in property is limited to the actual value of the damage the
insured may suffer, while in life, there is no limit on the amount that a person
can have insurable interest except in the case of creditor with respect to his
interest in the life of the debtor.

A lot of question had been asked by way of a problem but ultimately it revolves to the
issue as to whether the beneficiary in life or the beneficiary in property must have
insurable interest in the subject matter of the insurance. Or stated otherwise, what is
the difference between a beneficiary in life insurance and a beneficiary in
property insurance?

The beneficiary in life insurance need not have insurable interest in the life insured
while the beneficiary in property insurance must have insurable interest in the property
insured.

For example, Derek is the boyfriend of Angelica. Derek obtained a life insurance
and designated his girlfriend Angelica as beneficiary. Derek is also an owner

32
of a house. He insured that house with Y insurance company and likewise
designated Angelica as beneficiary. The house of Derek was burned which
caused the death of Derek. May Angelica recover from X Ins. Co., the insurer
of the life of Derek and Y Ins. Co., the insurer of the property or house of
Derek.

In this particular case, Angelica can recover from X Ins. Co. the insurer of the life of
Derek because in life insurance the beneficiary need not have insurable interest in the
life of the insured. However, Angelica cannot recover from Y Ins. Co. the proceeds of
the fire insurance of the house because Angelica does not have insurable interest in the
house of Derek. In property insurance, the beneficiary must have insurable interest in
the subject matter of the insurance.

Angelica cannot recover from X Ins. Co., the insurer of the house of Derek because she
did not have insurable interest on the said house and therefore, she could not be validly
designated as beneficiary in the insurance of the house of Derek.

On the other hand, Angelica can recover from Y Ins. Co., the insurer of the life of Derek
even if she did not have insurable interest on the life of Derek because the beneficiary
in the life insurance need not have insurable interest on the life of the insured.

Another example, let us suppose I obtained a life insurance policy, I designated

you as my beneficiary. You do not have insurable interest on my life. In case
I die, will you recover from the insurance contract?

The answer is yes. Because in life insurance the beneficiary need not have insurable
interest in the life insured.

On the other hand, if insured my house against fire and designated you as my
beneficiary and then the house was burned. Will the insurance company will
be liable to you?

The answer is no. The insurance company will not be liable to you. The insurance
company will not be liable to you because you cannot be designated as beneficiary since
you do not have insurable interest in my property.

In that case if you cannot recover from the insurance company, will the
insurance company be liable to anyone?

Yes. The insurance company will not be liable to the beneficiary because the designation
is not valid but the insurance company is liable to the person insured because where
the designation of beneficiary is not valid then the loss is payable to the insured himself.

PART II

The facts and issue in the case of Cha v. CA.

Sps. Nilo and Stella Cha, leased a property of CKS. The lease contract provides that
Nilo and Stella cannot insure the contents or whatever goods that they may bring in to
the bldg. and if should do so then the loss should be made payable to the lessor. Nilo

33
and Stella obtained a fire insurance policy on the goods and merchandise they brought
in into the leased premises. Notwithstanding the stipulation, the spouses still insured
the merchandise against fire. When there was a fire, the lessor demanded payment
from the insurance company on the ground that under contract, the beneficiary should
be the lessor. Is that correct?

The answer is no because the lessor has no insurable interest on the properties of the
lessee. Even if the lessor was designated as beneficiary, the designation is not valid.
And therefore, there was no right to recover from the insurance company.

As of what time must insurable interest in property exist? And why is it so?

Insurable interest in property must exist at the time the policy was issued and also at
the time of the lost because property insurance is a contract of indemnity. Therefore
the insurable interest must exist both at the time of the effectivity of the contract and
at the time of the loss. Unlike in the case of life insurance which is not considered as a
contract of indemnity where insurable interest need exist only at the time the policy
was issued.

For example, A is the owner of the house. He insured that house with X
insurance company on January 15, 2012. A sold that house to B on March 2,
2012. Then the house was burned. Question, can A recover from the insurer?
Can B recover from the insurer? What happened to the policy?

Can A recover from the insurance company? The answer is no. Because A already
sold the house to B. insurable interest in property must exist not only at the time the
policy takes effect but also at the time of the loss. A has no longer insurable interest in
the property because he already sold the property. It must be borne in mind that
property insurance is a contract of indemnity. If the insured did not suffer any loss, he
cannot recover. In this case, A did not suffer any loss because at the time of the fire,
he already sold the property.

On the other hand, can B recover? The answer is no. B cannot recover also because
insurance is a personal contract and shall be applied exclusively to the proper interest
of the person in whose name it was issued or the beneficiary. B is neither the insured
nor the beneficiary. Therefore B cannot recover. Aside from that, at the time the policy
was issued, B had no insurable interest yet.

In that case, therefore, if A cannot recover, B cannot recover. What happened

to the policy?

The policy was suspended because the transfer of the thing insured unaccompanied by
transfer of the interest of the policy suspends the insurance. Therefore, I repeat, the
policy was suspended. Let’s go over the answer again.

1. A cannot recover from the insurer because he did not have insurable interest in
the house at the time of the loss because he already sold it. And therefore he did
not suffer any loss or damage.

34
 2. The policy was suspended because the house insured was transferred without the
corresponding transfer of the interest in the policy.

What is the consequence of the transfer of interest in the thing insured

unaccompanied by transfer of interest in the policy? Why?

A change of interest on the part of the thing insured unaccompanied by a corresponding

change of interest in the policy suspends the insurance. Until such time as the interest
in the thing insured, then the interest in the policy are vested in one and the same
person again. The reason here is because property insurance is a contract of
indemnity. So if there is transfer of interest in the thing insured without transferring
the policy, then the policy is suspended. Let us go over it again.

A change of interest in any part of the thing insured unaccompanied by a corresponding

change of interest in the policy, 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.
And where such loss occurs during the period the policy is under suspension, the insurer
is not liable.

The obvious reason for such rule is that insurance is a personal contract and while the
insurer may be willing to insure the property while owned by the insured, it may not be
willing to insure the same property if owned by another person.

I will cite you another example. Let us suppose I own a car. I sold that car to
you. My car is covered by comprehensive motor vehicle insurance. I sold the
car to you and after the sale, the car met an accident and it was damaged.
Since it was insured, will the insurance company be liable? If so, to whom will
the insurer be liable?

The insurer will not be liable either to me or to you. Because in that case, the policy is
suspend. Because I transferred my car to you and I did not transfer the policy to you.
So what should you do? When you buy a car and it is covered by insurance, see to it
that the interest in the policy is transferred to you with the permission of the insurance
company. If the car is sold to you but the policy is not transferred to you with the
consent of the insurer, the policy is suspended. And in case of damage, while the
insurance is under suspension, the insurer will not be liable.

What is the meaning of change of interest that will suspend the policy unless
accompanied by change of interest in the policy? Give illustrations/examples.

Change of interest in the thing insured that will suspend the policy is one that deprives
the insured of any and all interest in the property insured. But for as long as he retains
an interest in the property insured however small it may be, then the policy is not
suspended up to the extent of the interest that he retained.

For example, the property insured against fire was mortgaged without the
consent if the insurer. Will the mortgage suspend the policy?

35
The answer is no. The policy will not be suspended because the interest in the thing
insured did not pass to the mortgagee. Lease of the property will not also suspend the
policy.

Ordinarily, transfer of interest in the thing insured unaccompanied by transfer

of interest in the policy, suspends the insurance. What are the instances when
the policy is not suspended despite the transfer of the thing insured?

There are several exceptions. PLCoCo WPP

(1) When there is a prohibition against alienation. In which case, the policy is
not merely suspended but it is abrogated because of violation of the contract.

(2) In case of life, accident and health insurance. For example, I insured my
life and I am married. Who has insurable interest on my life as a spouse? Then it
will be my wife. But suppose our marriage was annulled and I married one of
you. In other words, the interest of my wife as spouse was transferred to you.
Will the policy be suspended? No. because in life insurance, insurable interest is
needed only at the time the policy takes effect and not at the time of the loss.
So, change of interest will not suspend the policy. So in that case, the policy is
not suspended.

(3) A change of interest in the thing insured after the occurrence of the loss.
Why? Because after the occurrence of the loss, the insured already has a vested
interest in the thing insured or in the proceeds of the policy. So even if the thing
has been transferred, the loss already occurred, the policy is not suspended.

(4) A change of interest in one or more several distinct things separately

insured under one policy.

(5) A change by will or succession.

(6) A change by one of the several partners to the others.

(7) And when the policy is so framed that it will inure to the benefit of
whomsoever, during the continuance of the risk, may become the owner of the
thing insured.

Example, Johann is the owner of two condo units, condo unit no. 27 and condo
unit no. 29. In one policy, Johann insured the two condo units to X insurance
company. Later, Johann sold condo unit no. 27 to Ludwig, the buyer. Then it
was burned together with condo unit no. 29 was also burned. In this case,
condo unit no. 27 was sold, condo unit no. 29 was not sold. Will the policy be
suspended?

The policy is not suspended insofar as condo no. 29 is concerned. Because in this case,
two or more things are insured under one policy. Therefore, the transfer of one will not
suspend the insurance as to the other.
36
But what happens to the insurance on condo unit no. 27?

The policy is suspended. So, with respect to the property that was insured and sold,
the policy is suspended. Let us go over the answer again.

Johann cannot recover the loss of unit 27 because the policy was suspended insofar as
unit 27 was concerned because Johann sold it to Lugwig. On the other hand, he may
recover the loss of unit 29 because the change of interest or the sale of unit 27 which
is insured under one policy together with unit 29 does not avoid the insurance as to the
other. The sale of 27 did not affect the insurance of unit 29. But, the insured may not
recover for the loss of unit 27 because it has already been sold.

Ordinarily, transfer of interest in the thing insured unaccompanied by transfer

of interest in the policy suspends the insurance. What are the instances when
transfer of the thing insured carries with it the transfer of the policy thereon?

(1) First, change of interest by will or succession upon death of the insured
passes the interest in the insurance to the person taking his interest in the thing
insured.

Let us suppose, a house was insured by Juan against fire.

PART 3

Then, Juan died and it was inherited by Juan Jr. Right after that, the house was burned.
Will Juan Jr be entitled to recover?

A: Yes, because transfer of property by will or succession carries with it the transfer of
interest in the policy.

(2) Transfer of interest by one of several partners or co-owners to the other

partner or owner in common carries with it the transfer of interest in the policy

(From PPT: Transfer of interest by one of several partners, joint owners or owners in
common who are jointly insured, to the others)

For example, I am a partner in the law firm of Baldos & Perez law offices. Our
partnership is the owner of a building. It is registered in the name of myself and my
partner. I sold my interest to my partner. Will the sale of my interest to my partner in
the property belonging to us carry with it the transfer of interest in the policy?

A: Yes, because it is the transfer by one of the partners to the other partner.

(3) When the policy is 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, a transfer of the property insured carries with it the transfer of the
policy

For example, the description of the person insured in the policy is: the owner of the
property at the time of the loss. In that case, even if the owner sells it to somebody

37
else, the sale would carry with it the insurance. Because, the policy is so framed that it
will inure to the benefit of whomsoever—maybe the owner of the property

Are there stipulations in a contract of insurance that are void?

Yes. Every stipulation in an insurance contract

a. For the payment of loss whether the person insured has or has no
insurable interest in the subject matter of insurance, or

b. That the policy shall be received as proof of such interest, and

c. Every policy executed by way of gaming wagering

is void.

CONCEALMENT

Now, let us venture on a topic that is the favorite in all examinations—my examination
and in the bar examination: concealment. What is concealment?

Marami sa inyo sanay dyan, concealment, itinatago yung ginawa. Hindi pinapaalam sa
asawa o girlfriend—concealment yun. But in law, what is concealment?

Concealment is the neglect to communicate that which a party knows and

ought to communicate. So, because concealment is the neglect to communicate that
which a party knows and ought to communicate, the fundamental element of
concealment is KNOWLEDGE. The party charged with concealment must have
knowledge of the factual scene.

As of what time must a party, charged with concealment, have knowledge of the fact
concealed?

A: The party charged with concealment must have the knowledge of the fact
concealed at the time of the effectivity of the policy. Even if he had no knowledge
of any fact material to the risk at the time he applied for insurance but he subsequently
acquired information before the effectivity of the policy, then he must inform the insurer
about it, otherwise, he is guilty of concealment.

OR, if he acquired knowledge of material information after the policy takes effect, then
he did not inform the insurer about it, he is not guilty of concealment. Because at the
time the policy goes into effect, he did not know of the fact that he was charged
considered (?41:26) with.

So, let us repeat. To be guilty of concealment, a party must have knowledge of the fact
concealed at the time of the effectivity of the policy. Even if a party did not know of the
existence of a material fact at the time of the application but acquired knowledge

38
thereof after the application, but before the effectivity of the policy, he is guilty of
concealment should he fail to communicate such fact to the other party.

For example, Erwin applied for life insurance on Jan 16, 2012 with X Ins. Co. At that
time, he had no knowledge of any ailment that he has. 10 days laters or on Jan 26,
2012, he had a physical examination and he had a CT scan and he acquired knowledge
of an ailment. He did not know inform the insurance company anymore. And therefore,
the policy was issued on Feb 14, 2012.

Question: Was Erwin guilty of concealment?

A: Yes, Erwin is guilty of concealment because he failed to communicate a fact that he

knows which is material to the risk. He should have informed the insurance company
about it. There’s a continuing obligation on the part of the insured to reveal material
information that he may acquire between the application and the effectivity of the
policy. Should he fail to do so, he is guilty of concealment.

Let us go over the answer again. Erwin is guilty of concealment he failed to inform the
insurer of the ailment he acquired knowledge of before the effectivity of the policy.
There is a continuing duty on the part of an applicant to disclose newly discovered
matters arising between the application for, and the confirmation and effectivity of the
contract, where they come to the applicant’s knowledge and render his former answers
no longer true.

So, if you acquire the information before the effectivity of the policy, you must inform
the insurance company about it.

Let me give you another example. For example, you applied for life insurance on June
10, 2020. At the time of the application, you did not know of any ailment that you have.
A week later, you went to a whorehouse, you got a woman. And so happen that she
has venereal disease. After a week, you had difficulty in urinating then you had yourself
examined by a doctor. The Chinese doctor said you have venereal disease.

“E papano doctor to? Puputulin?”

“Hindi, malalaglag na lang yan ng kusa.”

You did not inform the insurer about it. Later, the policy was issued and it goes into
effect. Are you guilty of concealment?

A: Yes, because you acquired information of a material disease between the application
and the effectivity of the policy. You shall have told the insurer about it, otherwise you
are guilty of concealment.

So, you boys, in case you should apply for life insurance, and after the application you
have contact with somebody with doubtful reputation then you contracted a venereal
disease. Wag na kayong mahiya, you tell the insurer. Otherwise, you are guilty of
concealment.

39
Now, on the other hand, would your answer be the same if he was physically examined
on Feb 16, 2012, or after the effectivity of the policy on Feb 14, and did not inform the
insurer of the ailment he came to know about?

A: The answer will not be the same because if the information was acquired after the
effectivity of the policy, it is no longer material and need not be communicated to the
insurance company.

Let us go over the answer again. The answer will not be the same. Erwin is not guilty
of concealment because he acquired information about his illness after the effectivity
of the policy. Where an information was acquired after the effectivity of the policy, a
failure to communicate the same to the other will not entitle the latter to rescind the
contract on the ground of concealment of material fact. The reason is that after the
policy has taken effect, information subsequently acquired could no longer be material
because it will not influence the insurance company to enter into contract in as much
as the insurer had already entered into a contract.

What is the right of the injured party where the other is guilty of concealment?
Must concealment be intentional?

A: Concealment whether intentional or unintentional entitles the injured party

to rescind the contract of insurance. The restoration in 1985 of BP 874 of the phrase
“Whether intentional or unintentional” discourages any change in doctrine and
underscores the fact that whether intentional or unintentional, the injured party may
rescind.

What happened here? Originally, the Insurance Act provides that concealment whether
intentional or unintentional entitles the injured party to rescind the contract. Then later
the law was amended. The phrase whether intentional or unintentional was removed.
So, the provision became “A concealment entitles the injured party to rescind the
contract.” A lot of confusion arose because formerly, the law was very clear—whether
intentional or unintentional, the insurer may rescind the contract. But the phrase
“whether intentional or unintentional” was removed. And you know the rule with
statutory construction, whenever the law is changed, then the presumption is that the
lawmakers wanted to change the rule. And therefore, some advocated the principle
that concealment must be intentional because the phrase “whether intentional or
unintentional” was removed. It caused a lot of confusion, so because of that, a young
and promising legislator at that time introduced an amendment to the law—going back
to the old provision that says “A concealment whether intentional or unintentional
entitles the injured party to rescind the contract.” It took a young and promising
legislator of that time to do it. I’m sure you know that young and promising legislator—
that’s me. I was the one who introduced the amendment, and believe it or not, once
upon a time, I was young and I was promising. Oh yes, I was promising and made a
lot of promises. So, in that case, the law now says “Concealment whether intentional
or unintentional entitles the injured party to rescind.”

You will have to recite the case of Great Pacific Life Assurance Company vs CA
because in this case, we might as well go over the basic facts.

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In this case, Ngo Hing was an insurance agent of Great Pacific. He insured the life of
his own daughter. He concealed the fact, he did not inform the insurance company that
his daughter whom he insured was mongoloid. Noong una, when the policy was being
casted? (52:30), sabi nya, “Di ko naman alam na mongoloid yang anak ko e.” Would
you believe that? No, when you look at the child, you’ll know whether he’s a mongoloid
or not. When you look at anyone, you will know whether he is a mongoloid or not.
Rekta. When I look at you, when I look around, I know he is mongoloid and I know
who is not. But I will not tell you who is mongoloid in your class. Pero halatang-halata.
Iba ang itsura e.

SC: The court is of the firm belief that private respondent had deliberately concealed
the state of health and physical condition of his daughter and that he was fully aware
that his daughter is typically a mongoloid child and withheld the fact material to the
risk to be assumed

He was guilty of concealment because he withheld the information, he knew of the fact
concealed.

What is the effect of concealment and what is the basis of such rule?

A policy may be vitiated by the suppression of known material facts by a party, and the
insurer may rescind a policy on the ground of concealment. The basis of the rule
vitiating the contract in case of concealment is that it misleads or deceives the
insurer into accepting the risk or accepting it at a lower rate of premium. That
is why the insurer may rescind the contract

PART IV

What are the requisites of the facts that must be communicated?

Each party is bound to communicate to the other all facts that meet the following
requisites:

(a) such facts must be within his knowledge (if he did not know of such fact, he cannot
be charge of concealment);

(b) must be material to the contract;

(c) the other party has no means of ascertaining such fact; and

(d) he makes no warranty as to such facts.

FACTS NOT NEEDED TO BE DISCLOSED

a. Those which the other knows;

b. Those which, in the exercise of ordinary care, the other ought to know, and of
which the former has no reason to suppose him ignorant;

c. Those of which the other waives communication;

41
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.”

How may information be waived?

Waiver of the information may be express or it could be implied. Expressive waiver is

easy because it is evident; waiver has been made. It is implied waiver that causes
confusion.

When is there implied waiver of information?

There is an implied waiver of information when there is failure to inquire as to facts

which are distinctly implied from other facts of which the communication is made. So
in other words, the information given may seem imperfect which would naturally
require the other party to ask further and he did not ask. Failure to ask for
clarification is a waiver of information.

For example, you applied for life insurance, you were asked, “Have you ever been
hospitalized?” You said, “Yes, I was hospitalized.” But the insurance company did not
ask for how long. It turned out that you were hospitalized for 3 years. That, definitely,
is material.

Will the insurance company have the right to rescind?

The answer is no because there is a waiver of communication. Because there is a

failure to inquire as to facts which are distinctly implied from other facts of which
communication is due. When you said, you were hospitalized before, the insurance
company should ask for how long. And if the company did not ask, then the insurance
company deemed to have waived the information about that fact.

You will recite the case of Ng Gan Zee v. Asian Crusader Life Assurance Corp. Basically,
he concealed the fact that he was operated on for tumor of his stomach. Was there
concealment since the insured impliedly waive the information?

The answer given is imperfect and therefore, failure to ask further will result to waiver.

The case of Sibya, you will discuss this. This is one of the most important cases
nowadays. It was decided by my former student of mine, Justice Andres Reyes Jr. (story
time). In that case, the issue was whether the incontestable clause is already
applicable.

Does waiver of the insurer of medical examination mean waiver of information

from the insured?

There are certain types of life insurance policy when there is a waiver of medical
examination. Will the waiver of medical examination carry with it waiver of
information?

42
No. waiver of medical examination should not be construed as a waiver of material
information. Since the waiver of medical examination is made when the insured
represents himself to be of good health. It is reasonably presumed that had the insured
revealed material information concerning his health, the insurer could not have waived
medical examination.

You will recite the case of Sun Life Assurance Company of Canada v. CA. In this case,
Bacani obtained a non-medical life insurance policy. The insurer waived medical
examination. It turned out that 2 weeks before the application, the insured was
examined and confined in the Lung Center where he was diagnosed of renal failure.
The insured died. The question now is, “Was there a waiver of the information?”

There was no waiver of information. It was necessary for the insured to reveal material
information even if there is a waiver of medical examination. Waiver of medical
examination renders even more material the information required from the applicant
concerning previous condition of health and diseases suffered because such information
constitutes an important factor which the insurer takes into consideration in accepting
the risk.

How is materiality of concealment determined? I will ask this in the midterms

and/or the finals. So you might as well remember it. If you can memorize it, memorize
it.

Materiality is to be determined not by the event but solely by the reasonable and
probable 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. So let me repeat, materiality is to be determined not by the event
but solely by the reasonable and probable 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.

What is the test of the materiality of information?

The test is, if the information has been revealed to the insurer, would the
insurer accept the risk? Or the insurer would accept the risk, will it be the same rate
of premium?

When the law says, materiality is determined not by the event. What does it
mean? It means the materiality is determined not by the cause of the loss or the cause
of death but materiality is determined by the importance of the facts concealed of the
other party. If the influence is to make the other party reject the application for
insurance or increase the rate of premium, then it is material.

For example, one of the gentlemen here, he applied for life insurance. He did not inform
the insurance company that he has venereal disease, tuberculosis, heart ailment,
cancer and renal failure. Then he died in a plane crash. When the beneficiary tried to
recover, the insurance company claimed “No, we are not going to pay because in this
particular case he is guilty of concealment. He did not reveal the disease that he had.
Eh sabi ng isa, “Teka muna ho. ‘Yung mga kasama niya sa eroplano, wala hong sakit

43
‘yon. Lahat walang sakit. Lahat ho sila namatay. In other words, sa may sakit siya o
hindi, mamamatay siya sa plane crash. Question, eh bakit ho magiging material ‘yon?
Eh samantalang may sakit siya o hindi, mamamatay din siya. Therefore, immaterial
’yung kanyang diseases.” The answer is no, it is not immaterial because materiality is
determined not by the event, not by the cause of the loss but it is determined by the
influence of the facts concealed of the other party in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries. Had the insurance
company known of al the diseases that the insured may have, the company will not
have issued the policy or the manner how you rate the premium. Therefore the fact
that he died of another cause will not affect the fact that it is material that entitles the
injured party to rescind the contract.

In another case, the case of Sun Life Assurance, Bacani made a concealment of material
fact. He concealed his disease real failure but he died in a plane crash. Will the insurance
company be liable? The beneficiaries contented that since the fact of death has no
bearing in the concealment; the insured is still liable. Sabi nila, “Eh kahit naman
malakas ang katawan niya, pag bumagasak 'yang eroplano, patay ka rin. Question: Is
the contention of the beneficiaries correct?

The contention of the beneficiaries was not correct. The insured need not die of the
disease that he did not disclose to the other. It is sufficient that by his non-disclosure
mislead the insurer in forming of the estimates of the risk of the proposed insurance
policy or in making his inquiries. The insurer is not liable because of concealment of
material facts.

Seigfrid applied for life insurance with X Insurance Company. He concealed the fact
that he has venereal disease. The policy was issued but Seigfrid was shot by terrorists.
May the beneficiaries of Seigfrid hold the insurer liable? (The insurer claimed
that he is not liable because of concealment of material fact.)

The insurer cannot be held liable because Seigfrid was guilty of concealment of material
fact. Even if the insured did not die of the ailment concealed such concealment is
material because causal connection between the fact concealed and the cause of death
is not necessary. Had the insurer been informed of the insured’s ailment, the insurer
would not have accepted the insurance policy.

Let us suppose that Philip applied for life insurance. He was asked by the doctor of the
insurer, “How long do you expect to live?”. He answered, “Till the end of time.”. The
policy was issued but one week later, Philip died. The insurance company refused to
pay on the ground that Philip gave wrong information about his health.

May the insurer be made liable?

Yes because the statement of Philip that he will live till the end of time or till the twelfth
of never is a mere opinion. And for that he could not be bound by mere opinion.

When must expectation or belief be considered material and therefore must

be communicated to the insurer?

44
In marine insurance, “information of the belief or expectation of a third person, in
reference to a material fact is material and must therefore be communicated to the
other party.

45
Define representation and misrepresentation.

Representation is an oral or written statement of a fact or condition affecting

the risk made by the insured to the insurer, tending the insurer to induce him
to enter into a contract.

Misrepresentation, on the other hand, is a statement which is false.

As of what time must representation be made?

Representation is a collateral inducement to enter to a contract of insurance and

therefore representation must be made before or at the same time of the effectivity of
the contract.

Let me repeat, it is a collateral inducement to enter to a contract of insurance and

therefore representation must be made before or at the time of the issuance of the
policy.

How would you distinguish concealment from misrepresentation?

When a woman covers herself, puts on a bra, what is it concealment of

misrepresentation? It is concealment because she is concealing something but if a
woman put in silicon, apples, oranges or anything that it will make it look bigger than
it is or trying to make small hills look like mountains, it is misrepresentation.
Concealment is passive; misrepresentation is active.

What are the kinds of representation? Give an example of each.

Representation could be affirmative or it is promissory. Affirmative representation

refers to the present. Promissory refers to the future.

For example, a statement that there are ten fire extinguishers in the building insured
is a representation because that refers to the present but a statement that there would
always be ten fire extinguishers in the building insured is a promissory representation.

Representation should not be understood literally. It could be understood at its logical

sense.

For example, a question was asked, “do you drink beer, liquor or any intoxicating
drink?” Eliza replied, “no, I don’t drink”. It turned out that before the policy was issued,
Eliza was seen drinking beer. Is that misrepresentation?

That is not misrepresentation because when a question is asked “do you drink beer or
intoxicating liquor” the meaning is, “is it habitually done”. Occasional drinking is not a
violation.

Misrepresentation need not be intentionally false. It could be just a misrepresentation.

Section 45 was amended by eliminating the word “intentionally” because the word
“intentionally” before the word “false” was not part of the original provision of the
Insurance Act. But fraudulent intent is not necessary in case of misrepresentation.

46
What is the effect of false statement of age?

False statement of age, if it is minor or misstatement of age, then it will require only
adjustment of the contract.

For example, I said I am 40 years old. Would that cause for the cancellation of the
contract or just an adjustment in the premium?

It depends. If the difference between my age and the age 40 that I represented is so
great that there is no other conclusion that it was intentionally done to deceive the
insurer to enter into a contract then the contract can be cancelled for misrepresentation.
But if I represented myself as 40 years old at kung ako naman ay 50 lang, the difference
is not so great there would only be adjustment of the rate of the premium.

What is the effect of acceptance of the payment of premium on the right of the
insurer to rescind?

Whenever the Code provides for a right to rescind a policy, such right is exercised
before acceptance of any premium. If premium have been accepted, acceptance
of the premium with the knowledge of the right to rescind will prevent the
cancellation of the contract.

Edillion vs. Manila Banker’s Life – over 65 when she applied but insurer accepted
the premium

Carmen Lapuz applied for life insurance. The policy stated that it will not be valid if the
insured is under 16 years of age or over 60. Lapuz stated that her date of birth was
July 11, 1904. The policy was issued on April 15, 1969. From 1904 to 1969, 65 years
have already elapsed. But it is a violation of the policy. The insurer still accepted the
premium. What is the effect of the acceptance of the premium? It is considered as a
waiver to the right to rescind because the insurance company knew that the insured
was already 65 years old yet the policy was issued.

Whenever the right to rescind is granted to the insurer, when should such
right be exercised?

The right to rescind must be exercised previous to commencement of an action on the

policy. Commencement of the action of the policy means filing of a case in court. So,
in other words, the rescission must be made before the case is filed in court. After the
filing of the case in court rescission cannot be made.

The insurer’s right to rescind a policy must be exercised previous to the commencement
of an action on the contract. “Action” means an ordinary suit in a court of justice and
an “action” is commenced “by filing a complaint with the court”. The insurer therefore,
must rescind the contract before the filing of the case in court even if it occurred after
the occurrence of the loss. If the case is already been filed, then the contract can no
longer be rescinded.

Philamcare vs. Court of Appeals

47
In this case the insurance company did not rescind the contract before the
commencement of the action of the policy. In that case the rescission cannot be done
anymore because it should have been exercised previous to the commencement of an
action on the policy.

What is the effect of failure to rescind despite knowledge of the facts giving
the insurer the right to rescind?

When an insurance company had knowledge of facts that entitled it to rescind, but
failed to cancel the policy and instead preferred to continue the contract, its inaction
amounted to a waiver of the right of rescission.

A policy required the disclosure of any other insurance on the same thing
insured against fire. The insurer had knowledge of other insurances on the
same property but said insurer did not rescind the policy. May the insurer
refuse payment of the proceeds of the policy on the ground of violation of the
policy?

The insurer cannot revoke the contract because it had knowledge of the existence of
the other insurances in violation of the policy and yet the insurer preferred to continue
the contract and therefore it is a waiver of the right of rescission.

What is the effect of the insured’s fraud on the assignee of the policy?

An assignee of the insured merely acquires the rights of the insured. It is but fair and
just that where the insured who is primarily entitled to receive the proceeds has by his
fraud and/or misrepresentation forfeited that right then the assignee also loses that
right.

The case of Pacific Banking Corp. You will recite this case also.

What is the meaning of incontestable clause? **#7 in midterm exam

**more questions about this

The incontestable clause in a life insurance policy is an agreement by which the

insurance company limits the period of time within which it will interpose
objections to the validity of the policy or set up any defense.

The policy becomes incontestable meaning it cannot be questioned anymore if

1. it is a life insurance policy

2. it is payable on the death of the insured
3. it must have been in force during the lifetime of the insured for a period of two
years.

What are the effects and purpose of the incontestable clause?

48
Whenever the requisites of the incontestable clause are present. The insurance
company cannot prove anymore that the contract is voidable or rescissible on
the ground of misrepresentation or concealment. It cannot be questioned
anymore.

How did it arise?

The incontestable clause was not a part originally of the insurance law. Later, the
practice of many insurance company was to allow the insured to continue payment
of premiums. Thereafter, many many years probably 20 years, the insured dies, after
the insured dies the insurer will investigate whether the insured committed fraud or
misrepresentation. And if they discover the insured made misrepresentation or
concealment, it will cancel the contract. So, the legislators thought it is unfair. And they
said, if that has sealed the lips of the insured, he cannot defend himself because he is
dead. Then it is the policy of the law to seal the lips of the insurer.

So, originally the version of incontestable clause was, if the insured is dead, the policy
becomes incontestable. But then somebody asked, suppose the insured is still living
but 25 years have already elapsed. After 25 years, the insurer, feeling that the insured
might die anytime, started to investigate. And when they discover fraud or
misrepresentation, they will cancel the contract. So, they said, the insured is still alive,
and therefore under the proposed bill the policy may still be canceled. So, they said it
is unfair. So, they agreed that the insurer should be given a specific period of time
within which to rescind the contract in case of concealment or misrepresentation. And
if it fails to rescind the contract within that period then it should hold its silence forever.

So, they said, what would be a reasonable period? Somebody brought an idea that 2
years will be reasonable. So, they said if the insurance policy has been enforced for a
period of 2 years during the lifetime of the insured, the policy becomes incontestable.
And therefore, it could no longer be rescinded on the ground of fraud or
misrepresentation or concealment.

Why 2 years? Why set the period of 2 years? Why not 3 years? Why not 4
years? Why not 5 years?

Actually, the choice of 2 years is arbitrary. There is no scientific reason for fixing
the period at 2 years. Wala, naisip lang nila 2 years. Yun na nga 2 years. So as it stands
now, under the incontestable clause, if a policy or life insurance payable upon the death
of the insured has been enforced for a period of 2 years during the lifetime of the
insured, it is already incontestable and it cannot be rescinded on the ground of fraud,
misrepresentation or concealment. That is the entire story about the incontestable
clause.

So, let me ask, within what time should the insurer rescind a life insurance
contract on the ground of concealment or misrepresentation or on the ground
that it is void ab initio?

49
The insurer can prove that the insurance policy made payable upon the death of the
insured is void ab initio or rescissible on the ground of concealment of
misrepresentation of the insured or his agent during the lifetime of the insured for a
period of two years.

There has been a lot of confusion with this particular provision. Before the case of Sibya,
the rule is very simple. If less than two years have elapsed, the insurance company
may still prove that the contract is void ab initio or rescissible on the ground of
concealment or misrepresentation even if the insured is already dead.

In the case of Tan v. CA which you will recite.

In the case of Tan, a period of less than 2 years from the time the policy was issued
had elapsed. In this case, the policy was issued and made effective on November 6,
1973. On April 26, 1975, the insured died of hepatoma. From November 6, 1973 to
April 26, 1975, how many years and months had elapsed? In this particular case, less
than 2 years had elapsed. So the insurance company refused to pay on the ground of
concealment. The beneficiaries demanded payment. The beneficiaries maintained that
the insurer may no longer rescind the contract because the insured is already dead.
They claimed that rescission must be done during the lifetime of the insured within 2
years prior to the commencement of the contract.

Ruling of the court: The contentions are without merit. The insurer has 2 years from
the date of the issuance of the contract or the last reinstatement within which to rescind
the contract. Whether or not the insured still lives within such period, the two year
period had not yet expired at the time the insured rescinded the contract. That was the
rule at the time. Then came the case of Sibya decided or penned by my former student
SC Justice Andres Reyes, Jr.

The case of Sibya arose. What happened in the case of Sibya?

On Feb 5 2001, Sunlife approved the application of Sibya for a life insurance. On May
11, 2001, Sibya died. So from February 5, 2001 to May 11, 2001 how many months
had elapsed? 3 months and 6 days had elapsed. The beneficiaries filed a claim against
the insurer but the latter refused to pay on the ground of concealment of material facts.
The beneficiaries claimed that the insurance company may no longer rescind the
contract because the insured is already dead and therefore the policy is already
incontestable. The insurance company, on the other hand, relied on the case of Tan
and said the insurance company has a period of two years within which to rescind the
contract on the ground of concealment whether the insured is dead or alive. So Sunlife
denied the claim on the ground of the medical history of the insured. May the insurer
rescind the contract after the death of the insured?

By the way, you will recite on the case of Sunlife v. Sibya together with case of
Tan so that you will see the difference between the two.

In the later case of Sibya, the SC ruled: The insurer may not rescind the contract.
After the 2 year period lapses, or when the insured dies within that period, the insurer
must make good on the policy even if the policy was obtained by fraud, concealment
or misrepresentation. Take note on the case of Sibya, the insured died when barely few
months had elapsed from the time the policy was issued. The policy was issued in

50
February, the insured died in May - 3 months and 6 days after the policy was issued.
The insurance company was still allowed to rescind the contract because after the
insured dies, the SC said the policy is already incontestable because the Insurance Code
provides that when a life insurance policy payable upon the death of the insured has
been enforced for a period of 2 years, during the lifetime of the insured, the policy is
already incontestable. So the SC meant that the policy becomes incontestable
after the lapse of 2 years during the lifetime of the insured or it becomes
incontestable upon the death of the insured. This is a clear departure from the
case of Tan. But, we follow the SC. Who knows, by the time you take the Bar, the
doctrine in Sibya might be changed again. So what am I going to do, then I will revise
my book and cite that Sibya’s case had already been overturned by the SC. But in the
meantime, we follow the case of Sibya.

If the insured is already dead or a period of 2 years during his

lifetime had already lapsed, the life insurance policy becomes
incontestable. In other words, we abandon the SC ruling in the
case of Tan v. CA.

When the policy is already incontestable, the insurance company cannot prove that it
is void ab initio or rescissible on the ground of concealment or misrepresentation. But
are there any defenses which are not barred by the incontestable clause?
Meaning to say, even if the policy is incontestable, defenses may still be raised by the
insurance company? YES. You should remember the defenses which are not barred by
the incontestable clause.

1. The defense that premium has not been paid. If the premium has not been paid,
then policy is ended. The insurance company cannot be made liable if the insured
did not pay the premium even if the policy is already incontestable;

2. The insurer may raise the defense that the insured violated the condition in the
policy relating to military or naval service in times of war. - Policies on life
contains a provision that if war breaks out and the insured enters or military or
naval service in times of war, the policy is abrogated. It is a defense not barred
by the incontestable clause. Why? Does it mean that a person cannot be insured
if war breaks out? NO, he can still be insured but at a higher rate of premium. If
war breaks out and the insured enters military or naval service, the risk of death
becomes higher and that changes the basis of the insurance for which the
insurance company has the right to rescind the contract even if the policy is
already incontestable;

Does it mean he can’t be insured in times of war? He can be but he pays a higher rate
of premium. In fact, during war, governments insured their soldiers but a higher rate
of premium than is being paid in times of peace.

Eh papano ngayon if he joins Air Force? Will that defense still survive the incontestable
clause? YES. Then why is Air Force not included? Because the law was passed in 1915.
In 1915, there was no Air Force yet. Air Force started in the First World War in 1917.
But it is understood that service in the Air Force in times of war is included in the phrase
military and therefore, that defense is not barred by the incontestable clause;

3. The insurer may raise the defense that the insured has no insurable interest in
the subject matter of the insurance. If I insured the life of somebody on whose
life, I have no insurable interest whatsoever, the defense of lack of insurable

51
 interest cannot be waived, it will survive the incontestable clause. It may still be
raised by the insurance company;

4. The insurer may raise the defense that the cause of death is excepted or not
covered in the policy. (STORY TIME) For example the policy provides that if the
insured dies violently, then the policy may be cancelled or the insurer shall not
be liable. That kind of defense is not barred by the incontestable clause. For
example, 20 years had already elapsed, somebody killed the insured. Can the
defense that the insured was killed by somebody be excepted or barred by the
incontestable clause? NO. It is not barred by the incontestable clause;

5. The insurer may raise the defense that fraud committed was of particularly vicious
type or that the necessary proof or notice of death has not been given.

If the policy is reinstated, from what time should the period of incontestability
begin? Will it begin from the original issuance of the policy? Or will it begin
from the date of reinstatement?

When a policy lapses for non-payment of premiums and he subsequently reinstated,

the two year period of incontestability should be computed from the date of the last
reinstatement and not from the date of issuance of the policy because the reinstated
policy should be viewed as a new contract. Therefore, you count the two year period
from the date of reinstatement.

Now let’s take up policy.

Policy is the written instrument in which a contact of insurance is set forth. While policy
is a written contract where is a written instrument where the contract of insurance is
set forth.

Does it mean that a contract of insurance must always be in writing?

NO, it could be written, it could be oral. But, an insurance company cannot enter into
an oral insurance contract. It must enter into a written contract and issue the necessary
policy.

If the contract of insurance is in a language which is not known to the person

insured, must the insurer prove that the contract was explained to the insured
in a language that the insured knows?

For example, Ng Su Su, a Chinese, entered into a contract with Bayan Insurance
Company. (Story time). Ng Su Su, client namin ito noong araw sa law office. Kasama
namin si Justice Vitug noong araw. Ang tunay na pangalan nito is Susan Ng Su Su. Nag
file ng petition for change of name. May kasabay pa ito isa pang client na nag file din
ng petition for change of name. Ang pangalan, Alexander Tan Pek Pek. Ngayon ako ang
humawak nung kay Alex, tinanong ng judge “Why do you want to change your name?”
“Because judge, when I tell a Filipino my complete name, the Filipino laughs.” “Why?
What is your complete name?” “My complete name is Tan Pek Pek and I want to change
it to Alexander Tan.” Nung sabihin ang pangalan niya ay Tan Pek Pek.

52
Ang tawag naming sa kanya sa opisina nung araw e “Hoy, Pekpek, halika nga.”And the
judge said, petition granted so her name was changed. Ganun din si Susan Ng Su Su,
pinayagan din.

Ng Susu is a Chinese. He entered into a contract with fire insurance policy. And the
policy was in the English. Ng Su Su was a Chinese who did not speak English. Then, Ng
Su Su died.

Bayan refused to pay the beneficiary. The beneficiary, on the other hand, claimed that
the contract was not explained to Ng Su Su, a Chinese who did not speak English.

Q: Considering that the insurer did not explain the policy in Chinese, a language known
to the insured, can the insurer be made liable despite concealment made?

A: The insurer was under no obligation to prove that the terms of the contract were
fully explained to the other party. Under the law, the obligation to explain the contract
if it is written in a language not known to the other party devolves of the party trying
to enforce the contract. The insurer is not trying to enforce the contract. The insurer
was trying to resist the enforcement of the contract. Therefore, it has no obligation to
prove that the contract was explained to Ng Su Su, a Chinese.

Cover note are preliminary contracts of insurance. And preliminary contract of

insurance is one that is issued pending the issuance of the formal policy. It goes by
many names, sometimes, it is called cover note or binding slip or binding receipt. By
any other name, it means the same.

You remember what Shakespeare said “A rose by any other name smells just as good.”

So, preliminary contract by any other name would have the same effect. Whether you
call it cover note, binding slip, or binding receipt, it is a preliminary contract of
insurance, then it will have the same effect.

How do you distinguish a preliminary contract of insurance from a real memorandum

of a future insurance?

If the intention of the parties is to insure the thing described in the preliminary contract,
immediately, then it is a contract of present insurance and binding.

If it is a mere memorandum of future insurance, then it will not afford any protection
at all.

To give adequate protection to the insured, it must be a preliminary contract of present

insurance and not a mere agreement to insure in some future time or subject to certain
conditions such as acceptance of the application or the issuance or delivery of the policy.

Lim vs Sun Life Assurance Co. of Canada

FACTS: An insurance agent issued a “Provisional Policy” which acknowledge the receipt
of premiums and stated that the insurance shall be effective upon approval and

53
issuance of the policy by the head office. The person whose life was supposed to be
insured died before the issuance of the policy.

ISSUE: Did the “Provisional Policy” afford adequate protection? (From PPT: Did the
“Provisional Policy” afford protection pending the issuance of the formal policy?”)

RULING: No, the “Provisional Policy” amounted to nothing because it is subject to

suspensive condition. The suspensive condition being—approval of the policy and
issuance of the policy by the head office. Since the head office has not approved the
application and has not issued a policy, there is no adequate protection. It was a mere
memorandum of future insurance.

Must separate premiums be collected on the cover note?

The Supreme Court said no, that is in the case of Pacific Timber Export Corporation
vs CA.

I was the lawyer who handled the case. Our office was the office that loss the case. I
won in the trial court, I won in the Court of Appeals. By the time the case reaches the
CA, the client has not been paying our retainer anymore. So, we have been asking for
payment of retainer. The client did not respond. So, what I did was to ask the Court to
withdraw us as counsel from the case. We were counsel for the insurance company. I
was asked to present the conformity of our client. Since my client does not agree nor
does it want to pay the retainer, you know the saying, how hard it is to open the mouth
of the lawyer without a retainer. They said it is easier to open oysters with the bare
hand than to open the mouth of a lawyer without retainer. So, sa loob-loob ko lang,
Grabe naman tong kliyenteng to. Kahit yung gastos sa brief, ayaw bayaran. Ayaw
naman kaming magwithdraw.

So, I cannot just fail to submit the brief. So what I did, I assigned that case that I won
in the trial court and in the Court of Appeals, and when there was appeal to the Supreme
Court, I gave it to the youngest lawyer in our law office. The youngest law made the
brief, we lost the case.

In that case, a governor was insured. The head office of the insurance company is in
Manila. The things to be insured were logs located in Dapitan Bay in Aurora. The
insurance company received an application from Pacific Timber asking for insurance.
They wanted to insure it so that they could present the insurance to the bank and be
able to draw on the letter of credit that was issued in favor of Pacific Timber.

The insurance company initially refused to issue the insurance because they said, “We
want to investigate the risk.” E ang layo nun, Dapitan Bay. Ang layo nun nung araw e.
Siguro mahigit isang araw bago ka makarating dun.

So, nagmamadali yung Pacific Timber. So, what the insurance company did was to issue
a cover note covering logs, let’s say 100,000 metric cubic meters, metric tons of logs.
So, the cover note was issued. No premium was paid on the cover note.

Later ½ of the logs were lost. Then, the insured inform the insurance company. The
insurance company issued the formal policy for the remaining half and premium was
made only on the basis of what may remain—the other half. No premium was paid on
the logs that were already lost.

54
Now, a claim was made by Pacific Timber. Pacific Timber lost in the trial court. Pacific
Timber lost in the Court of Appeals. But Pacific Timber won in the Supreme Court.

So the lawyer called me up, I congratulated him. And he said, “O, pababayaran mo na
sa kliyente mo ito?” E gusto ko sanang pabayaran, pero di ko makontak yung kliyente
e. Pati kami hindi binibayaran. So ang mangyayari, kayo hindi babayaran, kami hindi
babayaran.

So what happened was, Pacific Timber won the battle but lost the war. Nanalo sila sa
kaso pero ni isang sentimo, walang nakolekta. Kami rin, hindi binayaran. So that was
the case of Pacific Timber Expert Corporation versus the Court of Appeals.

So, the principle is, No separate premiums is required to be paid on the cover note.

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

To whom should the proceeds of the policy be paid?

An insurance contract is a personal contract. Since it is personal, it should be applied

exclusively to the proper interest of the person in whose name it was issued.
Therefore, to whom should the proceeds of the insurance be paid? It should be paid
either to the beneficiary or to the insured. A person who is neither the beneficiary
nor the insured cannot recover as a rule from the insurance company because as I have
said, the insurance should be applied to the proper interest of the person in whose
name it should be issued.

BUT, there are two exceptions to the rule:

1. If there is a stipulation in the policy in favor of a third person. If the policy

provides that a third person may recover from the insurer, then the third person
may recover from the insurance company.
2. If it is a motor vehicle insurance. Because in a motor vehicle insurance, it is
an insurance for indemnity against liability.
Ikaw nabundol dahil sa kotse. Sya nga pala, kung kayo’y magpapasagasa sa sasakyan,
huwag sa tricycle, ‘wag din sa jeep na kara-kara. Mamili kayo, dun sa Mercedes Benz,
dun sa mga Lamborghini, dun sa magagandang kotse, dun sa mayayaman—
magandang insurance nun.

So, let us supposed, you were walking, you were crossing the street. Nabundol kayo
ng kotse. The car is insured. It has a motor vehicle—a third party liability insurance.
You’re not the insured, you’re not the beneficiary. But can you hold the insurance
company, the company that insured the car, liable?

A: Yes. Because the insurance is an insurance against liabilities. It is covered by the

second exceptions and therefore, the third person may sue the insurance company.

55
[skipped but in PPT:

In a motor vehicle insurance, is the insurer solidarily liable with the insured or the party
at fault?

A: While it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer, the direct
liability of the insurer under indemnity contract to third persons does not
mean that the insurer can be held liable in solidum with the insured and/or
the other persons found at fault. The reason is that the liability of the insurer is
based on contract while that of the insured carrier or vehicle owner is based on tort.]

What are the kinds of policy? And define each one.

An insurance policy could be open, it could be valued or it could be running.

Open Policy is one where the value of the things insured has not been agreed
upon but left to be determined after the occurrence of the loss.

Valued Policy is one where the value of the things insured has been agreed upon
and the agreement shall be conclusive between the parties in the adjustment
of the total or partial loss.

For example, you insured your house. The amount of the insurance is 1M. The mere
fact that you insured your house for 1M does not mean that you will recover 1M. It is
only the maximum amount of recovery. After the occurrence of the loss, what should
you do?

You should prove the value of the house insured at the time of the loss. How do you
prove it? By affidavit, by opinion experts, by bill of sale or by any other acceptable
evidence.

So, in case of an open policy, the value has not yet been agreed upon at the time the
policy was issued. But, after the occurrence of the loss, the insured must prove the
value of the thing before he can recover.

On the other hand, in case of a valued policy, after the occurrence of the loss, what
happened? The insured may recover from the insurer the amount of the loss based on
the valuation agreed upon by the parties. If the parties agreed that the value of the
house is 1M, and it was completely burned, the insurance company will be liable for
1M. Because the valuation is conclusive between the parties in the adjustment of the
total or partial loss.

Eto ngayon ang tanong, e bakit open policy ang kukunin mo? In fact, majority of
the policy is issued on property are open policy—the value must be proven after the
occurrence of loss. Bakit open, why not valued? Simple, pag valued, the insured will
pay the cost of the valuation. How the valuation be determined? Through the use of
appraisers. Kaya meron tayong real estate appraisers. Those experts who will appraise
the value of the property. Yung insured yung magbabayad. It will be added to the cost
of the insurance.

56
E kung ikaw naman yung insured, why will you pay for the valuation written when
you’re not sure that you will suffer loss. E di antayin mo na lang, just wait for the loss
occur then get an expert to have the house valued. So, it is simple as that. Because
of the expense, it is advisable to get an open policy rather than a valued policy.

But in marine insurance, normally, the policy taken is valued policy.

How about life? Life insurance, no value could be paid for human life. You don’t have
to prove the value of a life except when the insurance is taken by the creditor on the
life of the debtor.

Let us suppose that I insured myself for 100M and paid the premium. It turned out that
the policy I obtained was a 10-year policy. In 10 years, I will earn only 10M but my
policy is 100M. Can the insurance company refuse to pay? No, because life insurance
is a valued (?55:37) policy because no value could be placed on human life. Kung anong
halaga ng buhay mo na sabihin mo, ganun na yon. Katulad din yan ng pag-ibig, walang
halaga.

Q: What is a running policy?

A: A running policy contemplates successive insurances. ‘Yung insurance ng mga

goods, ‘yung contents ng mga groceries, running policy ‘yon. Kase i-issue mo ‘yung
laman, e binebenta naman ‘yon. Then it is replenished. The contents are replenished.
In that case it is running kase as you sell, you replenish. So the amount or the value
of the policy is to be determined from time to time.

Q: May the parties agree on the period of prescription? Or stated otherwise, may
the parties to the contract of insurance agree that action on the policy must be
commenced within a certain period of time?

A: The answer is yes. The parties to the contract of insurance may agree that the action
on the policy must be brought within a certain period of time. Provided, that the period
agreed upon, should not be less than 1 year from the time the cause of action accrues.
The cause of action accrues from the time the claim is denied. So, stated otherwise,
the answer would be, the parties can agree on the period of prescription within which
the insured should file the claim against the insurer. Provided, that the period agreed
upon, should not be less than 1 year from the time of the denial of the claim.

So let us go over the answer again. The parties to a contract of insurance may validly
agree that the actions on the policy should be brought within a limited period of time.
Provided, such period is not less than 1 year from the time the cause of action accrues.
If the period agreed upon by the parties is less than 1 year from the cause of action,
then, the agreement is void.

Q: How should the period of prescription agreed upon by the parties be

computed?

A: The period of prescription to bring a suit under the policy begins to run from the
date of the insurer’s rejection of the claim filed by the insured, the beneficiary or the
person claiming under the insurance contract. The reason why the prescriptive period

57
should be counted from the time of the rejection of the claim is because the cause of
action does not accrue until the claim is rejected. Until the claim is rejected, there is no
reason for the insured to file the case.

Hollero Construction Inc. v. GSIS. In that case, the issue is whether the period
agreed upon has already lapsed. The action of the insured accrues from the receipt of
the letters dated April 26, 1990 and June 21, 1990 or the date the GSIS rejected the
claims in first instance.

Halimbawa, the insurance company rejected the claim. The insured ask for
reconsideration; rejected again. From what time should the period be counted?
From the time it was first rejected? Or from the time the reconsideration is
rejected?

A: It is from the time it is first rejected. If you will count it from the time the
reconsideration was rejected, walang katapusan ‘yan. The insured will keep on asking
for reconsideration so as to extend it either. Kaya the period of prescription should be
counted from the date it was first rejected.

Q: The policy provides that “if a claim is made and rejected and no action or suit is
commenced within 12 months after such rejection”, “all benefit under this policy shall
be forfeited.” From what time should the period of 12 months from final
rejection be computed?

A: Final rejection means denial by the insurer of the claims of the insured and not the
rejection or denial by the insurer of the insurer’s motion or request for reconsideration.
Basta nareject na, tama na ’yon. Wag na ‘yung reconsideration. ‘Yung reconsideration,
sa husgado lang ‘yon but not sa insurance company.

Fulton Fire Insurance Co., issued a fire insurance policy in favor of Sally Ang covering
stocks of general merchandise. The policy provided that if the claim is rejected and no
motion is commenced within 12 months after such rejection, all benefits under the
policy would be forfeited. On December 27, 1954, the stocks insured were destroyed
by fire and on December 30, 1954, the insured claimed the loss from the insurer. On
April 6, 1956, the claim was denied and the denial was received by the insured on April
19, 1956. On May 6, 1958, the insured filed an action against the insurer. Has the
action prescribed?

A; Yes. The period agreed upon is 1 year from the rejection of the claim. The claim was
rejected and the notice of rejection was given to the insured on April 19, 1956. From
April 19, 1956, he only had 1 year. And therefore by May, the 1-year period had already
lapsed.

The case of Eagle Star vs. Chia Yu. The policy provides that: “no action or suit on this
policy for the recovery of any claim, shall be sustainable in any court of law or equity
unless the insured shall have fully complied with all the terms and conditions of this
policy, nor unless commenced within 12 months next after the happening of the loss.”
Is this stipulation valid?

58
A: The answer is no because while the parties may agree with the period of prescription,
the agreement should not be less than 1 year from the accrual of the cause of action.
The accrual of the cause of action is the denial of the claim. So if the period provided
is 1 year from the occurrence of the loss, that period is less than 1 year from the accrual
of the cause of action because after that then the claim would have to be made and
then it will have to be denied and therefore that would be less than 1 year from accrual
of the cause of action.

Q: When the period of prescription is void. What is the period that will be observed?

A: It will be the one provided for in the Civil Code. It will be 10 years in case of a written
contract and 6 year in case of an oral contract.

Q: What is the period of prescription under the compulsory motor vehicle insurance?

A: Under the present law, the period of prescription is 1 year from the denial of the
claim.

Pero nung araw, in case of motor vehicle insurance, the insured must file the claim
within a period of 1 year from the occurrence of the loss or date of the accident. Kaya
ang nangyayari non, the insurance companies were delaying the approval of the claim.
Hindi na naaaprubahan, aantaying makalipas ang 1 year. Then after 1 year, when claim
is made, sasabihin na “Ay wala na. Prescribed na.” But that was the law. And dura lex
sed lex. The law may be harsh but law is the law. So, what happened? A young and
promising legislator filed an amendment to the law. He provided that the period of
prescription should be counted not from the date of the accident but from the date of
the denial of the claim. Who was that young and promising legislator? He is no longer
young and promising pero may nagsasabing pogi ‘yon nung bata-bata pa. Ako ‘yun.

Sept 17

Section 3 (6) of the Carriage of Goods by Sea Act states that the carrier and the shipper
shall be discharged from al liability for loss or damage to the goods if no suit is filed
within 1 year after the delivery of the goods or date when they should be delivered.

What is the effect of such provision on the period of prescription to file an

action on the policy?

A: The provision applies only to the carrier. It does not apply to the insured. So
let me repeat. Under the aforesaid provision, only the carrier's liability is extinguished
if no suit is brought within one year from delivery of the goods or the date the goods
should have been delivered. The liability of the insurer is not extinguished because the
insurance liability is based not on contract of carriage but on the contract of insurance.
A close reading of the law reveals that the Carriage of Goods by Sea Act governs
relationship between the carrier on one hand and the shipper, the consignee and/or the
insurer on the other hand. It does not affect the relationship between the insured and
the insurer.

59
You will recite the case of Mayer vs. Steel Pipe Corporation. In the case of
Mayer, the court ruled that under Carriage of Goods by Sea Act, the insurer, like the
shipper may no longer file a claim against the carrier beyond the one-year period
provided by law. But it doesn't mean that the carrier may no longer file a claim against
the insurer because the basis of the insurance liability is the insurance contract. The
action has not yet prescribed as the insured has 10 years from denial of the claimed
within which to file a case.

Q: The shipper filed a complaint against the insurer for recovery of indemnity for the
loss and damage sustained by the insured’s goods. The insurer, in turn, filed a third-
party complaint against the carrier for reimbursement of the amount claimed by the
insured. The insurer filed the third-party complaint more than one year after delivery
of the goods. Was the third-party complaint barred by prescription?

A: Yes. The insurer was already barred from filing a claim against the carrier because
under the Carriage of Goods by Sea Act, the suit against the carrier must be filed within
one year after delivery of the goods or the date when the goods should have been
delivered. The said Act includes the insurer of the goods in its action against the carrier.

Q: How do we distinguish the Mayer and Filipino Merchants cases?

A: In Filipino Merchants, it was the insurer which filed a claim against the carrier for
reimbursement of the amount it paid or might pay to the shipper. In the Mayer Steel
case, it was the shipper which filed a claim against the insurer. The bases of the
shipper’s claims in the Mayer Steel case are the insurance policy issued.

The ruling in Filipino merchants should apply only to suits against the carrier filed either
by the shipper, the consignee or the insurer.

Q: What are the grounds for cancellation of non-life insurance contract?

No policy of insurance other than life shall be cancelled by the insurer except
upon prior notice thereof to the insured, and no notice of cancellation shall be
effective unless it is based on the occurrence, after the effective date of the policy, of
one or more of the following:

a) Non payment of premium

b) Conviction of a crime arising out of acts increasing the hazard insured against;
c) Discovery of fraud or material misrepresentation
d) Discovery of willful or reckless acts or omissions increasing the hazard insured
against
e) Physical changes in the property insured which result in the property becoming
uninsurable
f) Discovery of other insurance coverage that makes the total insurance in excess
of the value of the property insured;
g) A determination by the Commissioner that the continuation of the policy would
violate or would place the insurer in violation of this code.

This is a new provision. Nung araw wala ito. Pero nung araw, arsonists had a thriving
business. What they do is to sell information to insurance companies that a certain

60
shopping mall will be burned. For example, they will sell to insurance company
information. “Hoy gusto niyong malaman kung anong company ang masusunog?”.
“Alin?”. “Bayad kayo.” So bayad for the information. Yung Divisoria Shopping Center,
susunugin namin. So what will the insurance company do? The insurance company will
cancel all the insurance policies it issued in Divisoria Shopping Center. So, the
information is being paid to the arsonist. If the arsonist gets paid, susunugin talaga
nila. So the government thought let us put an end to this. The government said, let us
pass a law providing that an insurance contract cannot be cancelled without cause. So
it was passed and this provision was enacted:

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 (see page 204). If the cancellation is based not any one of these grounds,
the cancellation is not valid. Not only that, the notice of cancellation must be received
by the insured. Otherwise, the cancellation is not valid.

61
What is a warranty?

Warranty is a written statement of stipulation inserted in the face of the contract.

How do you distinguish warranty from representation?

Warranty is part of the contract; representation is merely a collateral inducement to

enter into a contract of insurance.

What are the kinds of warranties and define each one of them?

Affirmative, promissory, express and implied

Affirmative warranty pertains to the present;

Promissory pertains to the future;

Express is contained in the policy itself;

Implied is not contained in any agreement but the warranties are presumed to exist
by the mere fact that a contract of insurance is entered into.

Affirmative warranty is one which relates to matters which exist at or before the
insurance of the policy.

For example, a statement that there are 10 fire hydrants in the building insured is an
affirmative warranty because it refers to the present. It means as of now, there are 10
fire hydrants in the insured premises.

But if pertains to the future it is promissory warranty, one in which the insured
undertakes that something shall be done or omitted after the policy takes effect and
during its continuance. For example, a statement that 10 fire hydrants will always exist
in the insured premises is a promissory warranty. (STORY)

Express warranty is contained in the policy itself, it must referred to in the policy as
making a part of it.

Ex. Express warranty – warranty stated in policy that the insured will not store gasoline
in the house against fire.

An implied warranty, however, is not agreed upon but the existence of the
warranty is presumed, by the mere fact that the contract of insurance is
entered into. The implied warranties in insurance are contained in marine insurance.

Ex. Implied warranty - In marine insurance there are warranties that are presumed to
exist even if there is no agreement entered into such as a warranty that a vessel is
seaworthy or that there would be no illegal deviation or that there would be neutrality
or nationality there would be an implied warranty that it would not carry anything that
will cast suspicion on the nationality or neutrality. Those are implied warranties.

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How should a warranty be construed?

Warranties must not only be strictly construed against the insurer but must
likewise be reasonably interpreted in favor of the insured. The application must
be reasonably applied.

For example, the warranty required the insured to maintain in efficient working order
on the premises insured, the following: portable extinguishers, internal hydrants,
external hydrants; fire pump and 24-hour security service, but the insured failed to
install internal fire hydrants. Was there a violation of the warranty?

Ruling: The court ruled that there was no more need for an internal hydrant considering
that there were numerous portable fire extinguishers, emergency fire engine and fire
hose connected to an external fire hydrant. What the warranty mandated was that the
insured should maintain in efficient working condition within the premises insured,
firefighting equipment as first line of defense against fire, which the insured did.

Where should an express warranty be contained?

It should be contained either in the policy itself or in another instrument

attached to the policy making it a part of it. We call that a rider.

Let me repeat, express warranty must be contained in the policy itself or it should be
contained in a separate paper attached to the policy making it a rider.

If it is contained in a separate instrument, it must be referred to the policy as making

part of it.

Must the signature of the insured be necessary?

The signature of the insured is not necessary unless it is contained in another

instrument and not when it is contained in the policy itself. Bear in mind that
a rider is part of the policy. Therefore, a rider need not be signed by the insured.
What the insurers do as a practice is to stamp the rider attached to the policy so that
the part of the stamp is on the rider itself and the other part is on the policy to show
that it has been there since the beginning of the effectivity of the policy

What is the effect of non-performance of a promissory warranty?

As a rule, non-performance of a promissory warranty entitles the insurer to rescind the

contract of insurance.

But there are instances when non-performance of a promissory warranty will not give
the insurer the right to rescind.

1. When before the time comes for the performance of the warranty, the loss insured
against happens

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 2. When before the time arrives for the performance of the warranty, the
performance becomes unlawful
3. When before the time arrives for the performance, the performance becomes
impossible
In all those 3 cases, the non-performance of the promissory warranty will not give the
insurer the right to rescind.

For example, the policy provides that on or before the 3rd day of the month from the
effectivity of the policy the fire hydrant must be installed. Before the time comes the
building was burned, it was destroyed. Question, will the non-performance give the
insurer the right to rescind?

No, because the loss occurred before the arrival of the time of the performance.

Second, when it becomes unlawful, nagkaroon ng ordinansa, ipinagbabawal ang fire

hydrants before the performance. In that case, non-performance will not give the
insurer the right to rescind.

Or when it is impossible, walang mabiling fire hydrants so it is impossible. So, non-

performance will not give the insurer the right to rescind.

What is the effect of the violation of a warranty? Is causal connection between

the violation and the cause of the loss necessary?

Violation of a material warranty, or any other material provision of the policy, entitles
the other party to rescind the contract. A causal connection between the violation
and the loss is not necessary. Thus, even though the violation did not in any way
contribute to the loss, the other party may still rescind the policy.

For example, this beautiful building was insured against fire. The policy provides that
no inflammable materials should be stored within the insured premises. The insured
stored in the portion of the building, firecrackers in large quantities and firecrackers are
inflammable. The firecrackers were stored in the area which is in red. Later, fire
occurred. It’s the other portion of the building that was burned. What was burned was
the portion of the building where the firecrackers were not stored. Therefore, it is clear
that the storage of the firecrackers did not in anyway contribute to the loss. Is the
insurer liable for the loss? Take note, let me repeat. The storage of the fire crackers
may have violated the contract, may have violated the warranty but it did not contribute
to the loss. If it contributed to the loss the then the fire would have occurred at the
place where the firecrackers were. But the fire happened in the other part of the building
where the firecrackers were not stored. Should the insurer be liable?

The insurer is not liable because the insured violated the warranty. And the
violation of the warranty increased the risk of loss. Whenever there is an increase in
the risk of loss, the insurer will not be liable because whenever there is an increase in
the risk of loss the basis of the insurance has been changed. For which the insurance
company should be paid additional premium but there is no additional premium. It was
exposed to a greater risk of loss. Therefore, even if the violation did not in anyway
contribute to the loss, the insurance company will nonetheless be exempted from
liability.

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Let me repeat the answer. The insurer is not liable because the insured violated
the warranty. Even if the violation did not contribute to the loss sill it cannot
be denied that the placing of the firecrackers in the building insured increased
the risk. The insured had not paid a premium based upon the increased risk, neither
had the insurer issued a policy upon the theory of different risk. An increase of risk
which is substantial and which is continued for a considerable period of time, is a direct
and certain injury to the insurer, and changes the basis upon which the contract of
insurance rests.

When is storage of inflammable materials not considered to be a violation of

the policy notwithstanding a prohibition to that effect? (When is warranty
prohibiting the storage of inflammable or hazardous goods not violated?)

The storage of inflammable materials will not be considered as a violation if its in a

small quantity for daily used, when it is incidental to the business of the
insured, and when it is only non-consequential storage of goods.

Let us suppose, that the policy prohibited the storage of inflammable materials, the
insured building was being used as a residential house. The insured bought a lpg
cannister yung lpg gas and stored it in the kitchen of the house insured without the
permission of the insurance company. Will the storage of that lpg cannister give the
insurer the right to rescind?

The answer is no. even if the policy prohibited the storage of inflammable materials
because that storage of inflammable material was only in small quantity for daily use.

But let us suppose, that in anticipation in the increase of the price of lpg, the insured
bought 10 cannisters 6 feet tall cannisters of lpg and stored all of them in his house.
Will the insurer have the right to cancel the contract for the violation of the warranty?

The answer is yes. Because that is no longer storage in small quantity for daily use.
You don’t use daily 10 cannisters of lpg measuring 6 feet tall. That is a violation of the
policy.

Let us suppose your business is furniture business. Your business entitles you or
requires you to use varnish or turpentine so that you could keep your furniture in good
condition. The policy ensuring the furniture house prohibited the storage of inflammable
materials. Is the storage of turpentine or varnish in such quantity needed for the use
of business a violation of the contract?

The answer is no. Because that is incidental to the business of the insured.

You know what turpentine is? Do you know where you get turpentine? The base of the
turpentine is the sap of the pili tree. The pili tree, yung lalake, hindi bumubunga yon
but they could get the sap, yung dagta. Parang rubber, you get the sap, you process
it, you convert it into turpentine. Turperntine is added to paint or varnish in order to
make it less thicker than usual. Kaya kung kayo’y merong pili tree, yung lalake, wag
ninyong putilin, kunan ninyo ng dagta at iyon ay pwede niyong gamitin na panggatong.

When is insurer entitled to the premium and what is the consequence of non-
payment of premium?

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The 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, the policy or contract of insurance insured by an insurance company is valid
and binding unless and until the premiums thereof has been paid, except in the case of
a life or industrial life policy whenever the grace period provision applies, or whenever
under the broker and agency agreements with duly licensed intermediaries, a 90-day
credit extension is given. No credit extension to a duly licensed intermediary should
exceed 90 days from date of issuance of the policy.

So let us go over the effect of non-payment of premium.

Payment of premium is the lifeblood of the insurance company. Without payment of

premium, the insurance company will not survive and that is why the insurance
company needs to be paid the premium. When premiums are not paid, the policy shall
be not valid and binding. Pero kung minsan, madaya ang insurance company.

Let us suppose, you paid a policy, you failed to pay the premium. Let’s say you got it
on January 2, 2020. You failed to pay the premium on July 2020. The insurance
company demanded payment. Ikaw naman, papagbayarin ka from January when the
date of the policy was issued. Tama ba iyon?

Mali. Why? Because if there was a loss between January and the time you made
payment, hindi kayo babayaran ng insurance company. Because no policy shall be valid
and binding unless and until the premiums are paid. Kaya sabihin ninyo, ah hindi,
baguhin ninyo ang date. Ngayon sabihin ninyo, ngayon ako nagbayad, July 2, 2020,
gawin ninyong July 2, 2020 ang effectivity of the policy for a period of one year. Because
the policy becomes effective only from the time payment of insurance premium has
been made.

Non-payment of premium does not merely suspend but puts an end to the contract
since time of payment is peculiarly of the essence of the contract. The burden is on the
insured to keep a policy in force by the payment of premiums, rather than on the insurer
to exert every effort to prevent the insured from allowing a policy to lapse through a
failure to make premium payments. The continuance of the insurer’s obligation is
conditioned upon the payment of premiums, so that no recovery can be had upon a
lapsed policy, the contractual relation between the parties having ceased.

For example, A is the insured. He obtained a policy covering his house with X Insurance
Co. The policy was issued but the premium was not paid. Suppose the property insured
was destroyed, will the insurer be liable? Second, the insurer sued the insured for non-
payment of premium. Will the action prosper?

Answer to the 1st: If the building insured was burned, destroyed, the insurance
company will not be liable. Why? Because the premiums were not paid. The policy never
became binding.

Answer to the 2nd: No. Because the policy was never binding.

So let us go again with the rule. The insurer is not liable because the insurance contract
did not take effect because the premium has not been paid. The insurance coverage
did not take effect upon non-payment of the premium. Hence, to allow the insurer,
which never had liability under the invalid policy, to demand from the insured the
unpaid premium would be the height of injustice and unfair dealings. The insurer
therefore, cannot collect the premium. Pero susubukan pa rin ng insurance company

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iyon, baka makalusot. That should not be allowed. You should not allow your client or
yourself to make payment for nothing.

Are there exceptions to the rule?

The general principle is that no policy shall be valid and binding unless and until the
premiums are paid. Let me repeat. Notwithstanding any agreement to the contrary, no
policy shall be valid and binding unless and until the premiums are paid.

There are exceptions provided for by the law itself and there are also exceptions
provided for by jurisprudence.

Now let us take up exceptions provided for by law. The exceptions under which the
insurance policy shall be valid and binding even if the premiums have not been paid.

1. When the insurance coverage relates to life or industrial life insurance

when the period of grace applies. If there is a grace period and there is
a grace period in life insurance and industrial life insurance for a period
of 30 days from the time the second premium is supposed to be paid,
then the policy is binding during the period of grace;
2. Whenever a 90-day credit extension is given for the premium due;
3. When the insurer makes a written acknowledgement of the receipt of
premium. This acknowledgment being conclusive between the parties in
making the policy effective.
4. When the obligee accepted the bond in which the bond became valid and
enforceable whether the premiums have been paid or not; and
5. In case of industrial life insurance, the policy shall not lapse for non-
payment of premium if such non-payment was due to the failure of the
insurer to send its representative or agent to the residence or place
indicated by the insured to collect the premium.
Let us begin with the first one, whenever there is a grace period applicable in
life or industrial life insurance.

The period of grace or grace period does not apply to any other kind of insurance other
than life insurance and industrial life insurance. It does not apply to fire insurance,
casualty insurance, marine insurance and motor vehicle insurance. Let me repeat, a
grace period of 30 days from the time the second premium is due applies only to life
insurance and industrial life insurance.

For example, Jessica obtained a life insurance policy from Buhay Life
Insurance Co. and paid the annual premium. The second annual premium was
due on May 1, 2012. Jessica was unable to pay the 2nd annual premium. Jessica
died on May 27, 2012 at which time she has not paid the premium due on the
2nd year of the policy. Will the insurer be liable?

The insurer will be liable because if you will notice, the 2 nd premium became due on
May 1, 2012. Under the law, in life insurance policy, the insured has a period of grace
of 30 days from the time the 2nd premium is due within which to pay the premium. If
she dies within the period of grace, the insurance company will still be liable but may
deduct from the amount payable to the beneficiary the amount of the premium due.

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For example in this case, payment was due on May 1, 2012, she died on May
27 or in other words, within the 30-day period of grace. Will the insurer be
liable?

In that case, the insurer is liable even if the premium has not been paid at the time of
death because in life insurance, the insured has a grace period of 30 days from the
time the succeeding premium is due within which to pay the same. The insured died
within the grace period, the insurer is liable but the amount of the premium due shall
be deducted from the proceeds of the policy.

Oct 22: Assignment Link 6

Let us say Philip applied for or obtained a fire insurance policy with American
Insurance. Philip did not actually pay the premium but American Insurance
issued a receipt and stating that the premium has been paid even if the
premium has not been paid. Later, there was a loss within the coverage of the
policy. Can the insured recover the loss? Suppose there was no loss, may the
insurer collect the premium?

You will notice in this case, there was an acknowledgement in the policy of the receipt
of premium. The insurance company acknowledged that it received payment of
premium even if it did not. So the effect is to make the policy binding. So if there is a
loss, the insurance company is liable for the loss. If there is no loss, then the insured
must pay the premium to the insurer.

Let us go over the answer again. An acknowledgement in a policy or contract of

insurance for the receipt of premium is conclusive evidence of its payment so
as make the policy binding notwithstanding a stipulation therein that it shall
not be binding until the premium is actually paid. The basis of that is the principle
of estoppel. If the insurance company acknowledges the receipt of premium, then that
acknowledgment is conclusive to make the policy binding.

Second, the acknowledgement of the receipt of premium, however, is conclusive only

to make the policy binding and not for purposes of collecting the premiums. Thus,
although there is an acknowledgment of the receipt of premium, the insurer may still
collect the premiums due from the insured for where the contract have become
perfected, the parties could demand from each other the performance of whatever
obligation they have assumed. In the case of the insurer, it is obvious it has the right
to demand from the insured the payment due.

D is a debtor, he obtained a loan from C. D obtained a performance bond from

Manila Surety. Manila Surety issued the performance bond in favor of C. So, D
gave the bond to C but D did not pay the premium. So Manila Surety did not
receive the premium. In case the debtor fails to pay or perform his obligation,
may the creditor hold the surety liable considering the premium on the bond
has not been paid?

Yes. When a surety issues a bond and it is accepted by the creditor, it shall be binding
even if the premium has not been paid. The creditor may hold the surety liable. The
creditor or obligee had already accepted the bond and thus the bond became valid and
enforceable irrespective of whether or not the premium has been paid.

Suppose in that case, may the surety sue and hold the insured liable?

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Yes, because the bond is already effective since it has already been accepted by the
creditor.

We have said that whenever there’s a credit agreement for the premium due, it shall
be valid even the premium has not been paid.

Yes, that is the present law.

Medyo magulo ang batas natin. Before, under the Insurance Act, the law provides, “No
policy shall be valid and binding unless and until the premiums are paid, unless there
is a credit extension for the credit due.” Later that law was amended, the credit
agreement provided for was removed. The Insurance Code later provide, “No policy
shall be valid and binding unless the premiums are paid, notwithstanding any
agreement to recover.”

So, the question was, supposed there was a policy issued, no premium was paid but
the insured was given a 60-day period of grace within which to pay the premium. Later,
the fire occurred and destroyed the building. And the insurance company refused to
pay on the ground that premiums have not been paid. That is basically the case of
Masagana Telamart (nakalimutan nya yung name ng insurance company hahaha). So,
premiums were not paid. So the insurance company was sued. The judgment of the
court was: the insurance company is not liable because the premiums were not paid.
It was appealed and finally, it went to the Supreme Court, the 3rd Division.

In the 3rd Division, presided over by Justice Pablo, the SC ruled that the insurance
company shall not be liable because the premiums have not been paid and the law is
clear “notwithstanding any agreement to the contrary, no policy shall be valid and
binding.”

The insured filed petition for reconsideration and it went to the SC En Banc. The SC En
Banc in a decision penned by Justice Davide ruled that the insurance company shall be
liable because there was a credit agreement for the premium due.

Several justices rendered their dissenting opinion. One of them was Justice Vitug.
Justice Vitug quoted yours truly and said that the policy shall not be valid and binding
because the provision about granting extension has been removed. So, that is the
[38:09]…

Later, as the law stands now, the law was further amended so as to include credit
extension in the law. Ngayon, nandito na to, pero noong araw, nung nagbigay kaming
opinion ni Justice Vitug, wala pang ganung opinion, wala pang ganung provision sa
batas. So ngayon nandito na, sasabihin natin, sasabihin naming ni Justice Vitug, dura
lex, sed lex. Iniligay nyo sa batas, you made the policy binding whenever there is
a grace period for the premium due, then so be it, the policy shall be binding.

Aside from the statutory provision, what are the other instances when the policy is
valid and binding notwithstanding the non-payment of premium?

1. In case of cover notes, as decided in Pacific Timber and Export Corporation vs

CA, the policy shall be binding even premiums have not been paid on the cover
note because no premium or separate premium is required for the cover note
2. When there is an agreement that payment of premium will be made by
installment. If made by installment, then it shall be binding even if the premium
has not been paid. (SEE Makati Tuscany case)

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What is the effect of failure of the insurer to send a representative to collect the
premiums in industrial life insurance?

In industrial life insurance, the policy shall not lapse for non-payment of
premium if such non-payment was due to the failure of the insurer to send its
representative or agent at the place of residence of the insured or some other place
indicated by him for the purpose of collecting premium. However, this does not apply
when the premium on the policy remains unpaid for a period of three months
or twelve weeks after the grace period has expired.

Ordinarily in insurance, it is not the duty of the insurance to seek the insured and collect
the payment. It is the duty of the insured to pay, to seek the insurer and pay the
premium. But in industrial life insurance, it is the duty of the insurer to go to the
residence or place indicated by the insured to collect the premium. If the insured has
not been paying premium because the insurer failed to send representative to collect,
then the policy shall continue to be valid and binding for a period only of 3 months or
12 weeks.

Makati Tuscany Condominium vs CA

Basically the policy was issued but no payment was made. But the practice was to pay
the premium by installment. So the question is: Will the policy be valid and binding to
justify an action by the insurer to collect the premium

FACTS (from PPT): Sometime in 1982, American Home Assurance issued in favor
of Makati Tuscany an insurance policy covering the building of the insured. The
premium amounting to P466, 103.05 was paid on installments. On February 10, 1983,
the insurer renewed said Insurance policy ad again the insured paid premium by
installments. On January 20, 1984, the policy was again renewed and the insured paid
2 installments in the amounts of P25k and P100k which the insurer accepted.
Thereafter, the insured refused to pay the balance of the premium. The insurer filed an
action to recover the balance of the premium amounting to P314,103.05. The insured
claimed that the policy was never binding and valid because no risks attached to the
policy for non-payment of the full premium.

RULING: The policy was valid and binding because there was an agreement to pay
premiums by installment.

From PPT: The policy was valid and binding. While it may be true that under Sec 77 of
the Insurance Code, the parties may not agree to make the insurance contract valid
and binding without payment of premiums, there is nothing in said section which
suggests that the parties may not agree to allow payment of the premiums in
installments, or to consider the contract as valid and binding upon payment of the first
premium. Otherwise, we would allow the insurer to renege on its liability under the
contract had a loss occurred before completion of payment of the entire premium,
despite its voluntary acceptance of partial payments, a result eschewed by basic
considerations of fairness and equity.

UCPB vs Masagana Telamart

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In this case, the premiums were not paid.

FACTS (from PPT): Masagana Telamart obtained from UCPB General Insurance fire
insurance policies covering its properties in Pasay City. The policies stated that the term
of the the policy as “from 4:00 pm of 22 May 1991 to 4:00 pm o 22 May 1992.”
Masagana had procured insurance coverage from UCPB for a number of years and had
been granted 60 to 90-day credit for the premium on the renewal policies. On June 13,
1992, Masagana’s Pasay properties were razed by fire. On July 13, 1992, Masagana
tendered and UCPB accepted 5 Manager’s Checks covering the renewal premium
payments. On the same day, UCPB returned the Manager’s checks on the grounds that
the policies expired on May 22, 1992 and the properties covered by the policies were
already burned before the payment of premiums. The practice of having a 60 to 90-
day credit for premium on the renewal policies continued up to the time the claim for
indemnification for the burned properties were filed on July 14, 1992.

ISSUE: Should the insurer be made liable?

RULING: The SC ruled that even if the premiums were not paid, the insurance
company shall nonetheless be liable.

(from PPT: The insurer should be made liable even if the premiums were not paid as of
the time of the loss since said loss occurred before the expiration of the credit term
that was practiced by the parties. It would be unjust and inequitable if recovery on the
policy would not be permitted against the insurer which had consistently granted 60 to
90-day credit term for the payment of renewal premiums despite its full awareness of
Section 77. Estoppel bars it from taking refuge under said Section, since the insured
relied in good faith on such practice.

Dissenting opinion of Justice Vitug and who was quoted by Justice Vitug, remember
that (around 44:10 – 44:17)

ASSIGNMENT – LINK 6

Gaisano vs Development Insurance and Surety Corporation

Eto, malas lagi si Gaisano e. What happened was that it obtained an insurance policy
on his car for Sept 27 1996 – Sept 27, 1997. E ngayon, yung collector ng premium was
not able to go and collect the premium. Nanakaw ngayon.

FACTS: Gaisano insured his Mitsu Montero with Development Insurance and Surety
Corporation which issued the insurance policy for Sept 27, 1996 – Sept 27, 1997.

To collect premiums, Trans-Pacific, the agent of Development Insurance, issued a

statement of account to Noah’s Ark, which insured the corresponding check covering
the payment of the premium dated Sept 27, 1996. However, nobody from Trans-Pacific
picked up the check on that day and instead informed Noah’s Ark that the messenger
will get the check on the next day, Sept 28.

In the evening of Sept 27, the car was stolen. Not knowing about the lost, Trans-Pacific
picked up the check the next day and issued an official receipt dated Sept 28, 1996. It
deposited the check for encashment on October 1, 1996.

On Oct 1, insurance company was informed of the loss of the vehicle and Gaisano
demanded payment of the loss. The insurance refused to pay on the ground that there
was no insurance contract due to the non-payment of the premium.

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ISSUE: Is the responded insurance company liable for the loss?

SC: No. Insurance requires a cause or consideration. The consideration is the premium,
which must be paid at the time and in the way and manner specified in the policy. If
not so paid, the policy will lapse and be forfeited by its own terms.

The policy in this case does not fall under one of the exceptions where the insurance
policy takes effect even if the premium is not paid. It does not fall under the exception
laid down in Makati Tuscany and UCPB cases. Both contemplates situation where the
insurers have considerably granted the insured a credit extension or term for the
payment of the premiums.

Here, however, Gaisano fialed to establish the fact of a grant by the insurance company
of a credit term in his favor, or that the grant has been consistent. To rule otherwise
would render nugatory the requirement in Section 77 of the Insurance Law.

What is the effect of the payment of premium by promissory note or post-dated

check?

Let us suppose that the premium was paid, the premium payment was made by the
issuance of a check. So, the check was received by the insurance company or
promissory note was received by the insurance company. But before the company could
encash the check, the loss occurred. Under the Civil Code, the receipt of a check or
other instrument of credits shall not produce the effect of payment until it has been
cashed or where through the fault of the creditor, it shall have been impaired. Will the
insurance company be liable?

Under the present law, a credit extension to make the policy binding. As a consequence,
it would seem that the delivery of a promissory note shall be considered under
the present rule as sufficient to make the policy binding. However, under
paragraph 2, Article 1249 of the Civil Code “The delivery of promissory notes payable
to order or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.”

Considering the present law allows credit agreement to make the policy
binding, the delivery of a promissory note or post-date check should be
considered as a grant of credit extension for the premiums due so as to make
the policy binding. It must be borne in mind that the Insurance Code has priority
in application over insurance cases and the Civil Code applies in insurance
cases only in a suppletory character and only when there is no specific
provisions in the Insurance Code.

What is the effect of acceptance of unpaid premium after the loss?

The effect of payment of overdue premiums after the loss will depend on whether
the insurer was aware of the loss or not at the time of the acceptance of
payment.

• With knowledge – evidences a waiver of the right to forfeit the policy

and, therefore, the insurer is bound under the policy.

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 • Without knowledge – insurer may still raise the defense of non-payment
of premiums
The acceptance and retention by the insurer of the overdue premium with knowledge
of the fact, evidences a waiver of the right to forfeit the policy and, therefore, the
insurer is bound under the policy.

However, where the insurer at the time of payment of the premium did not know of the
loss and subsequently returned the premium to the insured, the insurer may still raise
the defense of non-payment of premiums.

What devices are employed to prevent the forfeiture of

a life insurance policy?

A life insurance policy is treated differently from any other

kind of policies. The policy of the law is to make a life
insurance policy effective as much as possible or
prevent forfeiture of a life insurance policy because life
insurance policy is for a long period of time. Therefore,
certain devices are used to prevent the forfeiture of a life
insurance policy.

To prevent the forfeiture of a life insurance policy, certain devices are being used such
as

1. Employment of a grace period of period of grace

2. Payment of cash surrender value
3. Giving options to the insured after payment of the three full annual
premiums such as extended insurance and paid-up insurance
4. Automatic loan clause
5. Reinstatement of a lapsed policy

How does the period of grace in life insurance operate?

In life insurance, after the payment of the first premium, the insured is entitled to a
grace period, as we have discussed before, of 30 days. If the insured dies during
the period of grace, the insurance company is liable but the amount of the premium
shall de deducted from the amount payable to the beneficiary.

Cash surrender value

It means that after the payment of 3 annual premium, the insured may decide
not to continue the policy anymore and get back a cash surrender value.

Q: Will the cash surrender value be the same of the rate of the premium?

A: No. A cash surrender value will be less than the total amount of the premiums
paid by the insured.

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Q: How does cash surrender value arise?

A: I made a graph like this. In Insurance, premiums are commensurate with the risks
assumed. The greater is the risk, the higher should be the rate of the premium. So
when we are young and probability of death is lesser, then the premium should be
lesser than when we are old. When I was younger, I’ve been obtaining premiums and
I was paying premiums computed on the basis of my age at that time. Now, the
premium should be higher. Now that I am old. Not useless ah. Old lang, old. So at the
beginning or the earning years of your life, you should be paying a lesser amount of
premium. As you grow older, it should be higher. But what happens is that, the
actuarian computes the amounts of premium that you should pay. And it is fixed at a
certain level. Year-in and year-out, you will pay the same amount of premium. But at
the beginning of the policy, you are paying more than the risk assumed by the insurance
company and the excess is supposed to pay the deficiency in the later years of the
policy.

For example, here, the premium level is the one with a straight line. At the beginning
of the policy, you are paying up to the premium level. But actually the risk assumed by
the insurance company is lesser. The risk is the one indicated in color yellow. So at the
beginning of the policy, you are paying more than the risk assumed. Yung nasa itim,
the black portion is the excess. The black portion is intended to meet the deficiency in
the later years of the policy. Because in the later years you should be paying higher
based on the yellow graph but you are still paying the average premium level. So the
excess is what you called the “cash surrender value”.

Q: What if you surrendered the policy before the excess is applied to the
deficiency in the later years of the policy. That is the cash surrender value and
that is what you look at. (story time)

Q: What is extended insurance?

A: Extended insurance is that where the insurance company originally contracted

for is continued for such period as the amount available therefore will pay
when it will be terminated. In such case, the insurance will be for the same amount
as the original policy but for a period shorter than the period in the original
contract.

In case of paid-up insurance, it is the reverse. It will be for the said period of time
but for a lesser amount.

Q: How does automatic loan clause operate in the insurance?

A: Automatic loan clause means pag di mo binayaran yung premium, uutangin

ng insurance company yung cash surrender value mo and it will be applied to
the loan. Ay nako, heto raket ng insurance company, with all due respect to them. Pag
hindi ka nagbayad ng premium, may cash surrender value ka, uutangin yon. Kukunin
sa cash surrender value yung pambabayad sa premium mo. Pagkatapos sisingilin ka
ng interest. E sabi ko, “Bakit niyo ko sinisingil ng interest? Hindi ba akin naman yang

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cash surrender value?”. “Opo, kung kinuha ninyo, sa inyo yan. Hindi niyo kinuha e.
Kaya diyan namin kukunin yung pambayad sa premium niyo.” “Oh. E pera ko pala yan
e. Bakit ako magbabayad ng interest?” “Inadvance po namin e, kaya you pay interest.”
“Sus. Matindi. Kaya kung gusto niyong magnegosyo, magtayo kayo ng insurance
company.

Q: When may reinstatement of lapsed life insurance policy be availed of?

A: Every life insurance policy must contain a certain provision that the holder of the
policy shall be entitled to reinstatement of the contract at any time within three years
from the date of default in the payment of premium. (from PPT: unless the cash
value has been duly paid, or the extension period expired, production of
existence of insurability satisfactory to the company and the payment of all
overdue premiums and any indebtedness to the company upon said policy)

For example, I failed to pay my premium. It lapsed. Yung siguro 2 years pa lang, di ko
na nabayaran, it lapsed. I have the right to ask for reinstatement within the period of
3 years but I should pay all the marked premiums and the insurance company must be
satisfied of my insurability.

Q: When is the insured entitled to a return of the premium?

A: The insured is entitled to return of premium paid in the following instances:

1. When no part of the interest in the thing insured is 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 before the expiration of that period
3. When the contract is voidable and subsequently annulled under the
provisions of the Civil Code on account of the fraud or misrepresentation
of the insurer or his agent
4. When the contract is voidable and subsequently annulled under the
provisions of the Civil Code on account of facts the existence of which
the insured was ignorant without his fault
5. When by any default of the insured than actual fraud the insurer never
incurred any liability under the policy
6. If the policy is annulled, rescinded or the claim is denied by reason of
fraud
7. In case of over-insurance

Q: A obtained an insurance from X, an insurance company. He paid the premium on

March 25, 2014. The loss occurred on May 7, 2014. But the policy is to be effected on
June 1st yet. So in that case, may the insurer liable for the loss?

A: No, the insurer is not liable for the loss because the policy is not yet effective

Q: What right does the insured have?

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A: The insured has the right to recover the premium that was paid because the
insurer was never exposed to the peril insured against or if the insured
surrenders the policy before the expiration of the policy.

For example, A obtained fire insurance for a period of 1 year. He paid premium
amounting to 1 million for coverage for 1 year from January 15, 2014 to January 14,
2015. He surrendered the policy on June 2014 or ½ year before the expiration of the
policy.

Q: What right does A have when he surrendered the policy?

A: He has the right of return of the premium for the unexpired portion unless
a short period rate has been agreed upon in the policy.

Q: What is a short period rate?

A: A short period rate is the one stated in the policy as to what will be returned
if the policy is surrendered. So normally, if 6 months have already elapsed or ½ of
the period of the insurance. The insurance company should return ½ of the annual
premium that was paid unless a short period rate has been agreed upon. When there
is a short period rate, the agreement is that the insurance company will return not the
premium of the unexpired portion but according to the table provided there. Ang
nakalagay don sa table ay siguro mga, when it is surrendered after ½ year, siguro mga
60-75 % will be retained and only the excess will be returned. So if the short-period
range has been agree upon, and the short period rate says that if the policy is returned
before a period of 1 year had elapsed, then the insured is entitled to a return of the
premium of 40% if only ½ year had elapsed. Lugi ang insured, of course.

A was the owner of a house value at P3,000,000. A obtained the policies as follows:

In this case, the value of the house is only P3.000,000

but the total amount of the policy obtained was
P6,000,000. So this is what you called “over-
insurance”. When the policy obtained is over the
insurable interest of the insured. In that case, there
should be a return of the premium with respect to
the excess. The insured is entitled to the return of the
premium for the excess of P3.000,000. A may obtain a
return of the premiums: P10,000 from X and P20,000
from Y.

Q: When are premiums not recoverable?

A: In the following cases, the insured cannot recover the premium paid:

1. If the peril insured against has existed, and the insurer has been liable
for any period, the peril being entire and indivisible
2. In life insurance
3. When the insured is guilty of fraud or misrepresentation

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 4. When the policy is annulled or rescinded upon grounds other than those
attributable to the insurer or if a claim is denied by reason of fraud
If the peril is single and indivisible, let us suppose that the insurance is of the vessel
from the voyage from Manila to San Francisco, USA. In the middle of the voyage the
insured cancelled the policy. Will there be a return of the premium?

A: No, because the insurance is single and indivisible. Di mo naman pwedeng hati-
hatiin yung biyahe. It is only 1 voyage.

In lot insurance, even if you surrender the policy, there is no return of the premium.
Ang ibibigay sa inyo ay cash surrender value. Pero yung cash surrender value ay only
after 3 years that the policy has been enforced.

If the insured is guilty of fraud, aba’y parusa sa kanya iyon. If he is guilty of fraud hindi
siya makakarecover ng return of the premium or if it is annulled on ground other than
the fault of the insurer, then there is no return of the premium.

Q: May an insurer contract and accept payment in addition to regular premium,

for the purpose of paying future premiums on the policy of to increase the
benefits thereof?

A: The answer is yes. An insurer may contract and accept payment in addition to
regular premium for the purpose of paying future premiums on the policy of to
increase the benefits thereof.

Q: What are the losses for which the insurer is liable?

That concludes our discussion on today’s lesson.

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6

What are the losses for which the insurer is liable?

1. Loss of which a peril insured against was the proximate cause.

2. Loss caused by efforts to rescue the thing insured from a peril insured
against.
3. Loss caused by a peril not insured against to which the thing insured was
exposed in the course of rescuing the same from the peril insured
against.
4. Loss, the immediate cause of which was the peril insured against unless
the proximate cause thereof was expected in the contract.
5. Loss caused by the negligence of the insured.

What is a proximate cause?

A proximate cause is that cause, which in the natural and continuous sequence,
unbroken by any efficient intervening cause, produces the event that without
which the loss would not have happened.

So, in other words, it is that event which in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without which the
injury would not have occurred. It is that which sets others in motions.

For example, there was a fire, because of the fire an explosion was caused. Now
what is the proximate cause and what is the immediate cause?

• Proximate cause: Fire

• Immediate cause: Explosion

The proximate cause is which in the natural and continuous sequence produces the
event that without which the event would not have happened. So, what caused the
explosion? It is the fire. It is the fire that is the proximate cause and the immediate
cause is the explosion.

Where the peril insured against is the proximate cause, the insurance company shall
be liable.

What is the immediate cause of the loss?

Is the cause or condition nearest to the time and place of the injury. When the
immediate cause of the loss is a peril insured against, the insurer is liable therefor
unless the proximate cause is an excepted risk.

When the insurer claims that the proximate cause is an excepted risk, it must
prove that the excepted peril is the proximate cause.

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For example, the policy excepted loss by explosion then there was a fire and there was
an explosion. To be exempted from liability, the insurer must prove that the explosion
caused the fire. In other words, if the fire caused the explosion then the proximate
cause is the fire and the insurance company is still liable because the proximate
cause is the peril insured against. If on the other hand, the explosion caused the
fire, then the explosion is the proximate cause. And if its excepted in the policy then
the insurance company shall not be liable even if the immediate cause of the loss is the
fire, a peril insured against. But in such a situation, it is incumbent upon the insurer
to prove that the proximate cause is the peril insured against. The insurance
company must prove that the explosion caused the fire and if the insurance company
cannot prove that the explosion caused the fire then the insurance company shall
nonetheless be made liable.

For example, 20,000 tons of sugar stored in a warehouse were insured against fire.
When the fire broke out, the fire truck doused water on the warehouse, thereby saving
the warehouse from the fire but the sugar melted. Is the insurer liable for the
melted sugar?

The insurer of the sugar is liable for the loss because the damage caused was
due to an effort to save the sugar from the peril insured against.

The contents of the house of Dijay were insured against fire. When fire broke
out, Dijay brought the insured items out of the house to save them from the
fire but they were stolen. Is the insurer liable?

This is a very common incident. If you insured the contents of your house against fire
then the fire broke out so what you will do is to save your things put them in the side
walk, go back to your house try to save some more. When you get back to the side
walk, the things that you have saved were lost. Should the insurance company be
liable?

The insurer is liable. While the loss caused by theft is not insured against,
however, the thing insured was exposed to theft in the course of rescuing the
things insured from the peril insured against. The insurer is liable for loss
caused by a peril not insured against to which the thing insured was exposed
in the course of rescuing the same from the peril insured against.

Another example, you insured rice(aromatic/jasmine) against fire. The rice was stored
in a warehouse. Then fire broke out in the vicinity and the owner or the insured in an
effort to save the rice from fire, saw a hose. Pulled the hose and turned on the hose.
Yun pala the hose is connected to the truck of Malabanan sceptic tank. When he opened
the valve, instead of water coming out, the contents of the truck are what he got from
the sceptic tank. Nalagay ngayon sa bigas. Then the rice is no longer aromatic. It will
have a different aroma. Will the insurance company be liable?

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Yes. Because the loss was caused by an effort to save the thing from the peril insured
against and the rice is no longer usable because pag binabad mo yon don sa galling sa
tangke ni malabanan ay hindi maganda ang amoy ng kalalabasan non.

A car was insured against “own damage” due to accident. It was sideswiped
by a pick-up truck that was being driven recklessly. Was the insurer liable
considering that the damage was not caused by a third party who was guilty
of negligence?

The insurer was liable. “Own damage” did not mean damage to the insured
car caused by the insured herself but damage to the injured vehicle.
“Accident” does not exclude events resulting in damage or loss due to the
fault, recklessness or negligence of third parties.

Is the insurer liable for a loss caused by the negligence of the insured?

Noong araw, when I was still a student, I haven’t taken up insurance yet. E nag-dadrayb
ako. E nabangga ko yung kotse sa pader. Due to my negligence. So I denied that I was
the one negligent. Ang sabi ko, may bumangga sa akin hindi ko nakita. Because I was
afraid that if the insurance company finds out that I was negligent, the insurance
company will not pay the loss. That’s wrong. Negligence is covered by the insurance.
Negligence or damage by negligence is among the losses for which the insurance
company is liable. Unless, the negligence is a gross negligence. If it is simple negligence
then the insurance company shall nonetheless be liable.

So let us go over it again. The insurer is not relieved from liability by the mere
fact that the loss was caused by the negligence of the insured, or his agents
or others. Accordingly, it is no defense to an action on the policy that the
negligence of the insured caused or contributed to the injury. However, when
the insured’s negligence is so gross that it is tantamount to misconduct, or
willful or wrongful act, the insurer is not liable.

The case of Sun Ins. Office LTd. Vs. Court of Appeals

Facts: Lim obtained a personal accident insurance. Then one time he was playing with
his gun. And he pointed it to his secretary. Sabi ng secretary “Sir huwag huwag
natatakot ako sa baril”. Sabi ng insured “huwag kang matakot walang bala ito”.
Kinalabit. Peng (gunshot) patay si Lim. Should the insurance company be liable?

Yes. Because negligence was among the risk assumed by the insurance
company. In that case it was purely accidental.

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If the negligence is gross negligence, the insurance company is not liable like in the
case of FGU Insurance Corp. vs CA where a tugboat was insured. This is marine
insurance. Sinasabi na huwag mo ng hilain yung barko may bagyo. Mapilit. He still went
to Antique. Ang sabi “O itago mo na yang tugboat mo sa isang lugar na it could be safe.
Hindi pa rin. So the damage was caused. Should the negligence of the insured relieve
the insurer from liability?

In that particular case, while it is true that basic or ordinary negligence will
not exempt the insurer from liability. However, gross negligence is sufficient
to exempt the insurer from liability because gross negligence is tantamount
to willful act and therefore the insurance company should not be liable.

What is the effect of willful act or connivance of the insured or fraudulent claim
of the insured?

So if the loss or damage was caused by the willful act or connivance of the insured, the
insurance company shall not be liable.

For example, he insured his house against fire then he burned it. Question, should the
insurance company be liable?

The insurance company should not be liable because that is a willful act of the insured
for which the insurer should be exempted from liability.

Fraud in the statement of loss defeats recovery. Any fraud in the part of the
insured shall exempt the insurer from liability.

After the occurrence of the loss and after the proof of loss have been
submitted, what must the insured do?

First. He must give notice of loss and then proof of loss. If he didn’t give notice of
loss or proof of loss then he will not be able to recover.

What is the proof of loss necessary? Is it the proof beyond reasonable doubt or the
kind of evidence admissible in a court of justice?

No. In that particular case it is not necessary that the evidence presented is
one which is necessary or needed to establish proof in a court of justice.

Delay.

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If there is a delay without the explanation, insurer shall be exempted from
liability. But if there is a waiver of the notice of the proof of loss then the
insurance company shall nonetheless be liable.

As of what time should the proceeds of life insurance policy be paid?

It depends. It depends on whether it will mature upon a definite period of time

like in endowment or it will mature upon the death of the insured. In that case, if it
matures by the expiration of terms, then it should be paid immediately after
it matures.

If it is an endowment policy, the proceeds shall be due upon expiration of the

period of endowment, if the insured survives or if the insured dies, then upon the
death of the insured. If the policy matures upon the death of the insured, it should be
paid within a period of 60 days from the filing of the proof of death.

I have been getting life insurance policy not for myself but for my wife. I’m afraid that
if I die and if I am not insured, my wife will be left with nothing. So I saw to it that I’m
always heavily insured. So in case anything happens to me, my wife will not become
destitute. I had a sad experience when I was a student. When I was a student of law,
my father passed away. I was 19 years old and my father had no insurance whatsoever.
He had no insurance and he did not leave any money with us. So we had difficulty and
that became a lesson to me. I would not want my family to experience the same
incident. My mother had to get rid of our household helpers and we had to do our own
cooking, we had to clean the house, yung labada hindi na. Pinalalaba sa Batangas ang
damit namin dadalhin sa Maynila, kami na ang magpaplantsa. Ang problema ang
plantsa naming noon hindi yung katulad ng electric na may pati yung sumisirit na tubig.
Panahon namin hindi eh. Uling ang ginagamit, maiinit sa kamay at may pasador.
Pupunasan mo muna ng basa bago mo plantsahin. We have to do that because nobody
was working in our family at that time and my brother was studying in the US. And so
I was all of a sudden the head of the family at the age of 19. Ang hirap noon. Pero
nakatawid din kami sa pagsisikap ng aking ina. And she should be awarded as the
mother of year, mother of the century probably. Because she sent all three of us to
college. From that time on, I have always been thinking if I do not get life insurance,
what will happen to my family if I pass away. So I have been getting life insurance,
making my wife as beneficiary. Eh ang nangyari, my wife passed away last year. Andun
pa yung insurance ko. Ang ginawa ko, pinacancel ko na ang lahat. And I got the cash
surrender value. Kasi my intention was to give the proceeds to my wife. Eh wala nakong
asawa eh. Kaya tinigil ko na ang insurance ko. Pero those of you who are still young, if
you want to provide for your family, get an insurance.

In property insurance, after the payment of the loss, what right does the insurer
have as against the party liable to the insured? SUBROGATION

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In property insurance after the insured is paid, the insurance company shall be
subrogated to the rights of the insured against anyone who may be liable to
the person insured by reason of the thing insured.

For example, I’m the owner of a car, I have insured my car against loss or damage. I
was bumped by your car. Therefore, I should be able to collect from my insurer. My
insurance company paid me. After paying me, will you be released from liability?

NO. Because the insurance company will be subrogated to my rights and the company
can go after you and collect what I has paid to the person insured.

So, let us go over it again. In property insurance, after the insured has received
payment from the insurer of the loss covered by the policy, the insurance
company shall be subrogated to the rights of the insured against the
wrongdoer or the person who violated the contract or person liable to the
insured by reason of the thing insured. The insurer’s right of subrogation
accrues upon payment of the insurance claim. Subrogation here is automatic.
There is no need to execute a deed of subrogation. The mere fact that the
insurance company pays the loss, there is always be subrogation. This applies
only to property insurance. It does not apply to life insurance.

For example, the insured Juan obtained a life insurance. He was killed by Pedro. So the
insurance company paid the beneficiary of Juan the proceeds of the life insurance
policy. After the payment of the claim of the beneficiary, will the insurance company
be subrogated to the rights of Juan as against Pedro who killed him?

The answer is NO. There is no subrogation in life insurance. The reason being that
life insurance is not a contract of indemnity. The mere fact that the beneficiary is
paid the proceeds of the policy does not mean that his right is limited to that. Further
right is accruing to the heirs of the insured as against the guilty party. The right accrues
to the heirs of the insured as against the guilty party.

For example, Mina is the owner of a motor vehicle. Mina insured that car with X
Insurance Co. Then the car was negligently bumped by Cyrene, the car owner who
bumped the car of Mina. So the insurance company pays Mina the amount of the
damage. After paying the damage to the car insured, what right does the insurer have
against Cyrene?

In that case, the insurance company shall be subrogated to the rights of Mina as against
Cyrene and may recover the amount of the loss.

Must the insured assign his right to recover after the insurer paid?

The answer is NO. There is no need to make an assignment because subrogation

automatically takes place by operation of law.

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So let me repeat, the insured need not assign the right to recover against the
guilty party because subrogation is a normal incident of indemnity insurance.
Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right
of action which the insured may have against third persons whose negligence or
wrongful act caused the loss and who may be liable to the insured by reason of the
thing insured.

What is the basis of insurance(or subrogation?)?

The basis of the subrogation is not privity of contract. It does not depend on a
privity of contract. It accrues simply on the basis of equity because the insurance
company pays a loss that should have been paid by the guilty party.

What is the extent of the right of subrogation of the insurer?

The insured’s right to subrogation is limited to whatever rights that the insured
may have. Accordingly, the subrogated insurer cannot recover more that the
insured could have recovered from the wrongdoer. In other words, the rights to
which the subrogee or insurer succeeds are the same rights that the insured may have.

For example, under the contract of carriage, it is provided that the common carrier shall
be liable to the owner of the goods only up to the extent if P1,000.00. The insured
obtained an insurance over the goods to be carried by the common carrier amounting
to P10,000.00. There was a total loss. The insurance company paid the insured the
amount of P10,000.00 which is the one agreed upon. In that case after payment, the
insurance company is subrogated to the rights of the insured as against the common
carrier. But what is that extent of the right obtained by the insurer?

The insurer will be subrogated only to the very same right that the insured
may have. The insured may recover from the common carrier only P1,000.00
per agreement. And therefore, the subrogation shall be limited only to P1,000.00. It
could not exceed whatever the insured may recover from the other party.

The rights of the subrogee cannot be superior to the rights of the rights of the
subrogor. Subrogation is the substitution of a person in place of another. Therefore,
kung ano lang yung pwedeng makuha ng insured from the other party, yun din lang
ang makukuha ng insurance company.

The case of Asian Terminals Inc v. First Lepanto

In this case, 3,000 bags of tripolyphosphate containing 100 jumbo bags were loaded
on the vessel COSCO. This was covered by insurance. Then it turned that there was

84
shortage. So they file a claim against the insurance company. And the insurance
company made payment. In making the claim, there was non-presentation of the
insurance contract. Is the non-presentation of the insurance contract fatal to the
claim?

The answer is NO. The subrogation receipt is sufficient.

Let us suppose that the insured is a foreign company doing business in the Philippines
without license. Under the law, a foreign corporation doing business in the Philippines
without license cannot have access in our court of justice. They cannot sue with a court
of justice. In this particular case, the insurance company issued a policy in favor of a
foreign corporation. Then the loss occurred, the insurance company paid the loss. Then
the insurance company claiming subrogation from the foreign insurance company filed
an action against the carrier. The carrier said, no, we cannot be made liable because
the insured is a foreign company doing business with the Philippines without license
and they cannot sue in Philippine law.

RULING: The incapacity to sue is personal to the insured. IT cannot be transferred by

subrogation. So, in that case, the insurance company shall nonetheless be subrogated
to the right of the insured.

[From PPT: The incapacity of the insured to sue was not passed on to the
insurer-subrogee. When an insurer succeeds to the rights of the insured, he does so
only in relation to the debt. The rights inherited by the insurer pertain only to the
payment it made to the insured. Capacity to sue is a right personal to its holder. It is
conferred by law and not by the parties. Although the insurer was a foreign corporation,
it was not doing business in the Philippines but was suing only under an isolated
transaction, i.e. under one marine insurance policy issued in favor of Sumitomo
covering the damaged pipes. Such being the case, the insurer may sue in Philippine
courts]

When is the insurer not subrogated to the rights of the insured? Or in other words,
when is there no subrogation?

1. In life insurance. In life insurance there is no subrogation because subrogation

applies only to property insurance
2. When the proximate cause of the damage was the negligence of the
insured himself.
3. When the insurer pays to the insured a loss not covered by the policy
4. When the insured failed to comply with stipulation concerning the filing
of an action against the wrongdoer or no notice of loss was submitted
[PPT: When the insured failed to comply with the legal or stipulated condition
precedent prior to the filing of an action against the wrongdoer, as when no notice
of loss was given by the insured to the carrier liable for the loss despite the
stipulation to that effect, or the notice of claim required by law was not given by
the insured-consignee.]

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For example, Versoza obtained a life insurance with Insular Life and made the loss
payable to his beneficiary. Versoza was killed by Dominguez. The insurance company
paid the proceeds of the policy to the beneficiary. Now the insurance company is
claiming subrogation to the rights of the insured against the killer.

QN: Is there subrogation?

A: No, in life insurance, there is no subrogation. Insular Life is not subrogated

to the rights of the insured or his estate because subrogation does not apply
to life insurance policy since such insurance is not a contract of indemnity.

What is the effect of the release of the party liable to the right of subrogation?

Subrogation of the insurer is a very important right so much so that if the insured
releases the party from liability, then the insurer shall be released from
liability.

Let us go with it again. Subrogation of the insurer to the rights of the insured is so
important that whenever the insurer is prevented by the insured from being subrogated
to his rights against third persons liable for the loss, the insurer is released from liability.
So, if the insured released the guilty party from liability, then the insurance company
shall likewise be released from liability

Manila Mahogany Mfg. Corp. vs CA

In this case, the insured released the guilty party from liability.

[FROM PPT: Manila Mahogany insured its car with Zenith Insurance. The insured vehicle
was bumped and damaged by a truck owned by San Miguel Corporation. For the
damage caused, Zenith paid Manila Mahogany P5,000, subrogating Zenith to all its
rights against San Miguel. The insured executed a release of claim. Zenith demanded
reimbursement from San Miguel f the amount paid to the insured. San Miguel refused
on the ground that it already paid Manila Mahogany P4,500 for the damage to its car
and the insured executed a release of claim discharging San Miguel from all actions,
claims, and demands arising out of the accident. Zenith then demanded reimbursement
from the insured which refused to pay on the ground that it merely recovered from San
Miguel the deficiency of the damage caused to the car insured as the amount received
from the insurer was not sufficient to cover the full amount of the damage.

ISSUE: Should the insured return to the insurer the amount received from the latter?

RULING: The insurer is entitled to recover from the insured the amount of insurance
money paid. Since the insured by its own acts released San Miguel, thereby defeating
the insurer’s right of subrogation, the right of action of the insured against the insurer
was also nullified. “To the extent of the amount he has already received from the
insurer, the insurer enjoys the right of subrogation. Since the insurer can be subrogated

86
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 losses
its rights against the latter. But in such 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.” When the insured released San Miguel from any liability, the
insured’s right to retain the sum of P5,000 no longer existed, thereby entitling the
insurer to recover the same.

What is the adverse comment in the case of Manila Mahogany Mfg. Corp vs CA?

Upon payment of the loss the insurer is subrogated pro tanto to the rights of
the insured. (Fireman’s Ins. Co. vs Jamila, 70 SCRA 323). Hence, after receiving
payment the insured has no more right against the wrongdoer since it already passed
to the insurer by virtue of subrogation. The release made by the insured after receiving
payment could not be valid since the insured has no more right against the wrongdoer.

Stronghold Insurance Co vs Container Services

We will further discuss that when you recite the case

[FACTS: The vehicle owned by respondent Gloria Dee Chong was insured with
petitioner insurance company. The vehicle insured met an accident where 4 persons
died and 3 were seriously injured. The vehicle was also heavily damaged. The insurer
refused to pay the claim of the insured on the ground that the driver of the vehicle
insured was heavily drunk at the time of the accident which exempts the insurer from
liability pursuant to the provisions of the policy. At the trial, the allegation of the insurer
that the driver of the vehicle insured was drunk was based on a Pagpapatunay and a
medico-legal certificate which contained alterations. The police blotter did not also
contain any report of the driver’s intoxication.

ISSUE: May the insurer be exempted from liability?

RULING: In exempting insurers from liability under the contract, proof thereof must
be clear, credible and convincing. The insurer is not exempted from liability in this case.

What is double insurance and what are its requisites?

Double insurance exists when the same person is insured by several insurers
separately with respect to the same subject matter or interest.

For example, I’m the owner of a house in Batangas. I insured that house with X
Insurance company against fire. Then, later I also insured that house against fire with
Y Insurance Company. In that case, there is what you call double insurance because
the same person insured, insure the same thing against the same risk with several
insurers.

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The requisites are: PISIR

1. There must be same person insured

2. There must be several insurers
3. The subject matter must be the same
4. The interest insured must be the same
5. The risk insured against must be the same.

For example, Phillip insured his House 27 in Ayala with A Insurance Company. He
insured the same house with B Insurance Company and with C Insurance company. He
insured the same house. Is this triple insurance?
There might be three insurance contract but under the law, there are only double
insurance. There is no triple insurance in insurance law.

Would your answer be the same if the insurance with A Co. is against fire, with B against
earthquake, and C against typhoon? It would not be the same. This is not double
insurance because in double insurance, the same person insured must insure the same
interest against the same risk. In this case, they are insured against different risks.

Can there be a prohibition against double insurance?

Double insurance is actually not against the law. The law does not prohibit it but
the parties may agree that if the insured obtains another policy covering the same
subject matter of the same risks, then the insurer must be informed about it otherwise
the insurer shall have the right to rescind and that provision is valid.

For example, I insured my house against fire. The policy issued in my favor stated that
if I should procure another insurance covering the same property against the same risk,
I must inform the insurer against it. I obtained another insurance and I did not inform
the insurer about it. In case of loss, can the insurer, the first insurer, refuse to pay on
the ground of violation of contract?

The answer is yes. It is a reasonable prohibition and there was a violation of the
contract.

So, let us go over it again.

Double insurance is not contrary to law and hence, in case of double insurance, the
insurers may still be made liable up to the extent of the value of the thing insured but
not to exceed the amount of the policies issued.

However, a provision in the policy to the effect that the policy shall be void if
the insured has, or subsequently procures, any other insurance on the
property or nay part thereof without insurer’s consent, is reasonable and valid
and a breach thereof will prevent enforcement of the policy.

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In case of insurance upon stocks-in-trade, when will multiple insurance
thereon be considered as a violation against double insurance?

For example, I’m the owner of a grocery store. I insured the contents of the grocery
store against fire with A Insurance Company for 1M. Then I obtained another insurance
with B company for another million pesos. Both policies prohibited getting another
policy on the same thing insured without the consent of the insurer. The total amount
of the goods amounts to 3M. Is there a violation of the contract so as to relieve the
insurer from liability in case of loss?

There was no violation because the total amount of the policy is less than the
total value of the things insured. Therefore, there is no violation. Because you
cannot say that what A insured are the same properties that B insured because the
total is less than the amount of the policies obtained.

So, in case of insurance upon stocks-in-trade, there is no violation of the prohibition

against double insurance (1) where the policies taken cover less than the entire
quantity of the stocks-in-trade or (2) where the total amount of the policies
taken is less than the total value of the stocks-in-trade. The reason is that in
such cases, the things insured are not specific but described only in general terms. And
therefore, when another policy is taken we cannot say that what one insurance
company covered are the same properties covered by the other insurance company
because they are not specific.

A was the owner of more than P290k worth of leaf tobacco stored in a warehouse. You
obtained a fire insurance policy with X Company covering P100k worth of tobacco and
with Y and Z Co covering P190k worth of tobacco. The policies prohibited another
insurance without the consent of the insurers. The insured did not obtain the consent
of X Co. to the additional insurance. The tobacco was burned.

QN: Is the insurance company liable?

A: The tobacco insured with the other companies [Y and Z] was different from that
insured with the defendant [X], since the number of bales of tobacco in the warehouse
greatly exceeds 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 insured upon he same subject-
matter and upon the same interest therein. X therefore was liable.

Another example, A obtained a fire insurance policy from B Company for 15k covering
her stocks-in-trade. The policy required the disclosure of another insurance taken upon
the same subject matter. A subsequently obtained a fire insurance policy from C CO.
for P7k upon her stocks-in-trade without informing B Co. thereof. The properties
insured were and at the time of the loss, valued at P47,852.33. B Co refused to pay
because of the no-disclosure of the other insurance taken

QN: Was the refusal to pay correct?

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 A: The refusal to pay was not correct. There was no violation of the policy. The value
of the two insurance policies put together will only amount to P22k or less than ½ of
the aggregate value of the insured’s merchandise. The insurer cannot say that there
was a double insurance, or that the stocks-in-trade which were insured with it were the
stocks-in-trade insured with other insurer.

The insurer cannot say that there was double insurance or that the stocks-in-trade
which were insured with it were the stocks-in-trade insured with the other insurer.

Q: What is over-insurance?

A: There is over-insurance whenever the policy taken exceeds the insurable

interest of the parties insured.

For example, Juan is the owner of the house valued at P1,000,000. Juan insured that
house with A Ins. Co. for P1,000,000. Then, Juan insured the same house with B Ins.
Co. for P1,000,000 also. What is this: double insurance or over-insurance? Assuming
that both policies were against fire.

A: This is what you call as double insurance by over-insurance. There is double

insurance because the same thing is insured by the same person against same
risk and this is over-insurance because the total value of the policies taken
from A Ins. Co. and B Ins. Co. exceeded the amount of the insurable interest of
Juan. So these are double insurance by over-insurance.

Q; What are the consequences or effects of double insurance by over-

insurance?

A: The insured may claim payment from the insurers in any order that he may
select. He may collect from any one of them in any order that he may wish. But the
moment he collects an amount, he must credit or deduct it from the total
amount that he is entitled to collect. In case the insured received an amount in
excess of the valuation, the he must hold the excess in trust for the insurers. Among
themselves the insurers must contribute ratably to the loss.

For example, Juan is the owner of a house valued with P1,000,000. He insured that
house with A Ins. Co. for P1,000,000 Juan also insured the same house with B Ins. Co.
for P2,000,000. The total amount of the policies taken is P3,000,000. What is this:
double insurance or over-insurance?

A: It is over-insurance by double insurance. So it is both over-insurance and double

insurance.

Q: In case of loss, against whom may Juan collect?

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A: Juan can collect from any one of them. He could collect the full amount of P1,000,000
from A Ins. Co. or Juan may collect from B Ins. Co the whole amount of P1,000,000 or
if he wants he can collect P500,000 from A Ins. Co. and from B another P500,000.

In case he collect from all of them, then he must hold the excess of P2,000,000 in trust
for A Ins. Co. and B Ins. Co. in proportion to their respective interests. A is insuring
only 1/3 of the total amount and B is insuring 2/3.

(1) The insured may claim from the insurers in any order that he may select.
(2) In case the insured received any sum in excess of the insurable value from
any one of them, he must hold the excess in trust for the insurers according
to their right of contribution. B Ins. Co. must ask for the contribution from A Ins.
Co. which did not pay the insured.

Q: What is reinsurance?

A: The insurance is one by which an insurer procures a 3rd person to insure them against
loss or liability by reason of such original insurance.

For example, Anne Curtis insured her condominium with A Ins. Co. A Ins. Co., in turn,
went to B Ins. Co. and reinsured 50% of the amount of the policy issued in favor of
Anne Curtis with B Ins. Co. B is what you call as the reinsurer. So what is the contract
between A Ins. Co. and B Ins. Co.? It is what you call as reinsurance.

In case B Ins. Co. insures the risk, it assumes the insurance with A Ins. Co.

Q: What is the contact between B Ins. Co. and C Ins. Co.?

A: it is what you call as retrocession.

Q: Is reinsurance compulsory?

A: No, reinsurance is not compulsory. It is voluntary. The insurance company may

or may not reinsure as a general rule.

Except in two cases:

1. When a non-life insurer insures in any one risk or hazard an amount

exceeding 20% of its net worth, the insurer needs reinsurance of the
excess from another insurance company
2. When a foreign insurance company who insures in the Philippines and
withdraws from the Philippines, then it must reinsure the persons
insured under its policies with another insurance company

Q: Distinguish Facultative Reinsurance from Reinsurance Compact.

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A: Facultative reinsurance is one wherein the insurer has the right to accept or not
to accept participation in the risk while reinsurance compact means that whenever
2 or more insurance companies should enter into a reinsurance compact, the
policy issued by one is automatically reinsured with the other because they
enter into a reinsurance compact. If it is facultative reinsurance, the insurance
taken by one insurance company may or may not be reinsured by the other insurance
companies.

Q: What matters must be communicated by the reinsured to the reinsurer?

A: (a) all representations made by the original insured and (b) all information
it possesses which are material to the risk.

But if the reinsurance is automatic or there is a reinsurance compact,

information need not be communicated because that information will not be
material in as much as reinsurance takes place automatically, whether information
is revealed or not, whether the information is damaging or not, it will not affect the
other party because reinsurance is compulsory. So in that case, no information need
be communicated. But if it is not compulsory but facultative, that the other party may
or may not accept, then there must be revelation of material information.

Q: In reinsurance contract, may the insurer who obtained the insurance collect
from the reinsurer the amount of its liability even before it pays a loss?

For example, A is the insured. A obtained fire insurance policy with X Ins. Co. for
P10,000,000. X reinsured the risk with Y Ins. Co. the loss occurred. A claim was
submitted by A with X Ins. Co.

1. May X Ins. Co. collect from Y Ins. Co. even before paying A?

Yes because reinsurance is an insurance against liability and not against indemnity and
therefore the moment X became liable it has the right to collect from the insurer. When
the loss occurred and A made a claim against X Ins. Co., X Ins. Co. became liable. Since
the insurance is against liability, X may collect from Y Ins. Co. even before it has paid
A.

2. Suppose Y Ins. Co. paid P8,000,00 to X Ins. Co. which later settle the case with
A by paying A only P5,000,000, what right does Y Ins. Co. have?

Y may recover the excess of P3,000,000 from X Ins. Co. because while the reinsurance
is a contract pf insurance against liability, it is also a contract of indemnity and the
reinsured should not profit himself from the effects of the insurance.

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So let us go over the answer again.

(1) X Ins. Co. may collect from Y Ins. Co. even before the former has paid A
because reinsurance is a contract of insurance against liability and since X Ins.
Co. already incurred liability, it can collect from the reinsurer. When the reinsured
becomes liable under the original policy, it may contain payment from the
reinsurer even before paying the loss of the original insured.
(2) While reinsurance is a contract of insurance against liability, howver, it is
still a contract of indemnity and therefore, X Ins. Co. must return the excess of
P3,000,000 to Y Ins. Co.

Q: May the original insured hold the insurer liable?

A: As a rule, the insured may not sue the reinsurer because insurance should
be applied exclusively to the proper interest of the person in whose name it
was issued. There is no privity of contract between the insured and the reinsurer,
therefore, the insured cannot sue the reinsurer EXCEPT when there is a stipulation
in the insurance contract that the original insured may sue the reinsurer.

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7

MARINE INSURANCE

Does marine insurance cover only those that are subject to the maritime risks?

Now it is not. Because apparently what the framers of our insurance code did was to
classify an insurance which is not life, which is not fire, which is not casualty as marine.
So for lack of any other name, it is considered as marine.

What are these kinds of insurance that has no connection whatsoever with
maritime risk?

a. Insurance against loss of or damage to aircrafts. And I’m not referring to sea
plane. I’m referring to all kinds of aircraft.

For example, when Philippine Airlines insures its aircraft against damage, that kind of
insurance is called marine insurance. Even if it flies in the air it is considered as marine
insurance.

b. Insurance against loss of or damage to goods and merchandise while being

assembled, packed, crated, baled, compressed or similarly prepared for
shipment.

So from the time the goods are being prepared for shipment any insurance on these
goods against damage even before they are loaded on board the vessel are considered
to be marine insurance.

c. Insurance against loss of or injury to person in connection with marine transit or

transportation insurance.

That is logical if it is related only to marine transit but it also includes transportation
insurance. And transportation insurance is not limited to marine it could be by land, by
sea or by air. So this is a gray area.

Will the insurance of a person against injury while on board an aircraft be

considered as marine?

Apparently, what the law says is that it is considered as marine.

d. Insurance against loss of or damage to precious stones, jewels, jewelry, precious

metals, whether in the course of transportation or not.

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For example. You have diamond earrings, rings, and you are living in Sagada, Mountain
Province. You insured the diamond rings, the diamond necklace, against theft. And you
put it in the safe in your house in Sagada. Sagada is landlocked. It is so far away from
the sea. Question. What kind of insurance is it?

It is considered to be marine insurance. It might be absurd but there’s nothing we can

do about it. It is considered marine.

e. Insurance against loss of or damage to bridges, tunnels and other

instrumentalities of transportation and communication.

So when you insure Calumpang bridge or you insure any kind of bridge or tunnel, the
insurance is called marine. If you insure the tower being used for communication, Globe
satellite tower it is considered as marine insurance.

Even if you call it marine insurance so what? If you call the insurance of precious stones
while being kept in your house as marine insurance. What does it matter?

The problem here is, in marine insurance there are certain warranties which are implied.
By the mere fact that the marine insurance is entered into. When marine insurance is
entered into it is subject to implied warranties. One of them is that it is subject to the
implied warranty of seaworthiness. That if you keep the precious stone in the safe, the
safe must be seaworthy because that is the law. It is subject to implied warranty of
seaworthiness. Meaning to say, it will float in the sea. This is absurd. But then, this is
the law and dura lex sed lex.

Whenever marine insurance is entered into, ordinarily, the insurance covers only perils
of the sea and does not include perils of the ship.

Now what is the difference between perils of the sea and perils of the ship?

Perils of the sea are those caused by the extraordinary action of the winds and the
waves. Those cannot be foreseen or even if foreseen they could not be prevented.

Perils of the ship, on the other hand, are caused by the natural and inevitable action of
the sea, ordinary wear and tear of the vessel and negligent failure of the ship’s owner
to provide the vessel with necessary equipment to convey the cargo under ordinary
conditions.

So insurance in marine ordinarily covers only perils of the sea. Ordinarily, it does not
include perils of the ship. So what is being insure is damage caused by the violent action
of the winds or waves that which could not be foreseen and not attributable to the fault
of anyone.

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For example, in this vessel, cargo was stored and the cargo was insured, covered with
marine insurance. During the voyage, sea water entered the compartment where the
cargo was stored through a port hole not securely fastened and as a result the cargo
which is rice was damaged. Is the insurer of the rice liable?

The insurer is not liable under ordinary circumstances because the damage was caused
not by the peril of the sea but by the perils of the ship. The damage was not caused by
the extraordinary or violent action of the winds or the waves. But it was caused by lack
of necessary repairs and ordinarily perils of the ship is not covered by marine insurance.

As I have said, the risk covered by marine ordinarily are what we call as perils of the
sea and not perils of the ship. So perils of the ship are ordinarily not covered by the
marine insurance policy unless otherwise agreed upon.

So if the insurance is against all risks, does it include damage caused by the
perils of the ship?

The answer is yes. Because all risks literally mean all possible risks shall be covered
including perils of the ship.

So let us go over the situation or the answer once more. Unless otherwise stated in the
policy, loss due to perils of the ship is not within the coverage of marine insurance. A
marine policy in the usual form, therefore, includes perils of the sea and not perils of
the ship, and accordingly, a marine insurer upon a policy in the usual form is not liable
for a loss caused by a peril of the ship.

However, marine insurance policy providing that the insurance is “against all risks”
must be construed as creating a special insurance and extending to other risks than
are usually contemplated, and covers all losses including perils of the ship.

What is the insurable interest of the owner of a chartered vessel?

If the one who chartered the vessel undertakes to pay the damage, in case it is
damaged, it is still the value of the vessel.

The insurable interest of the owner of the vessel is not affected by a charter party on
the vessel. Thus, even if the vessel has been chartered by one who undertakes to pay
the owner the value of the vessel in case of loss, the owner still has insurable interest
on the vessel. However, in case of loss the owner may recover from the insurer
only that part of the loss which he cannot obtain from the charterer.

So even if the charterer agrees to pay the loss, the owner still has full insurable value
of the vessel.

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A is the owner of a vessel valued at P800M. It was covered by charter party. Charter
party means you are leasing the vessel to somebody else. You don’t call it a contract
of lease. You call it a charter party. It was chartered by B and B agreed that in case of
damage he will pay for 50% of the value of the vessel. (1) How much is the insurable
interest of the owner? (2) How much is the insurable interest of the charterer?

(1) The insurable interest of the owner is still P800M. Not only 50% but the full
value of the vessel. But in case of damage, he may recover from the insurer only
what he cannot recover from the charterer. So if the charterer paid only P300M
then the owner of the vessel can recover only the balance of P500M from the
insurer of the vessel.
(2) His insurable interest will be 50% of the value of the vessel because if the
vessel is damaged, then the charter will have to pay the value of the damage as
agreed upon which is 50%. And therefore, his insurable interest is P400M.

So let us go over the answer again.

(1) The insurable interest of A is P800M. The insurable interest of the owner of
the vessel is not affected by a charter party on the vessel. Thus, even if the vessel
has been chartered by one who undertakes to pay the owner the value in case of
loss, the owner still has insurable interest on the vessel. However, in case of loss,
the owner may recover from the insurer only that part of the loss which he cannot
obtain from the charterer.
(2) The insurable interest of B is 50% of the value of the vessel which is the
amount of the damage he will suffer when the vessel is lost.

What is loan on bottomry or respondentia?

Loan on bottomry or respondentia is an unusual kind of loan. It is subject to the

peculiarity that when the collateral is lost, the loan is extinguished. If the loan has the
vessel as security, we call it loan on bottomry. If the collateral is the cargo then we call
it loan on respondentia.

If the collateral is the cargo then we call it loan on respondentia. So therefore, in case
of loan on bottomry, and the security is the vessel and the vessel sinks, then the lender
cannot recover the amount of the loan.

If it is cargo and the cargo is lost, then he cannot recover from the borrower.

So noong araw, during the Galleon trade, marine insurance was already existing. The
Galleon trade was between Mexico and the Philippines. Goods are shipped from Mexico
to the Philippines and from the Philippines they will carry goods going to Mexico.

The peculiarity of the loan on bottomry or respondentia is if the collateral is lost, the
loan is extinguished. That is why during those times they would rather borrow from
religious institutions. They would borrow from religious organizations like Associacion
delos Padres Agustinos Recoletos or Monte de Piedad which is owned by the Archbishop
of Manila. Why?

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If you are borrowing money and you give a collateral, would you not want someone to
be praying for the safety of the collateral? If you are borrowing money to be used in
the voyage, would you not want someone to be praying for the safety of the vessel or
the cargo? Syempre mas gusto iyon. If you borrow from the religious institutions, you
could be assured that there will be prayed for the safety of the vessel and the cargo.
Because if the collateral which is the vessel or the cargo is lost, they cannot recover
the loan. Kaya, …. ipagdadasal ng mga pari na huwag lumubog ang barko. Huwag
lumubog ang cargo so they could collect. Because if the cargo is lost or the vessel sinks,
they cannot recover the loan. Kaya sila panay ang dasal for the safety of the vessel,
kaya dun sila umuutang. All things being equal, it is better to borrow from someone
who will pray for the safety of the vessel and the cargo.

Let us suppose that C, the creditor granted a loan to D, a loan of P20M. a loan on
bottomry. The value of the vessel is P100M and it was given as a security for the
payment of the loan. How much is the insurable interest of C in the vessel
hypothecated?

The insurable interest of C, the creditor, is P20M. Why? Because if the vessel sinks, the
creditor cannot recover the amount of the loan which is P20M. And that is the amount
of the damage that it will suffer.

How much on the other hand is the insurable interest of the debtor or the
owner of the vessel?

The owner of the vessel’s insurable interest will only be the difference between the
value of the vessel minus the amount of the loan. So it’s P100M less P20M and the
insurable interest is P80M only. Why? The reason there is because if the vessel sinks,
the owner of the vessel does not have to pay the loan of P20M. And actually, his loss
is only the remainder of P80M. And that is why his insurable interest is only P80M.

Let us go over the answer again.

1. The insurable interest of C (creditor) and the vessel hypothecated is P20M.

Because if the vessel is lost, the damage to the lender is the extent of the loan
which he cannot collect anymore;

2. The insurable interest of B, the owner of the vessel is only P80M which is the
difference between the value of the vessel and the loan because he does not have
to pay the loan of P20M and therefore, the damage he suffers in case of total loss
is only the balance of P80M.

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In marine insurance, what must be communicated by the insured to the
insurer?

In marine insurance, it is the duty of the insured to communicate the same kind of
information that he would reveal in case of ordinary insurance. He should reveal all
material information which he possesses which is material to the risk. However, in
ordinary insurance, there is no need to communicate opinion on the matter insured.
Opinion need not communicated. But in marine insurance, the opinion of a third person
with respect to the thing insured which is material to the risk must be communicated.
Therefore, if the insured at the time of effecting the insurance receives or has
intelligence or information or knowledge of facts which affects the condition or safety
of a vessel or the voyage and which in the mind of a prudent and rational underwriter
would increase the hazard or liability for loss, it must be revealed.

Therefore, the information received from others that there are pirates in the area must
be communicated. So, this is one of the instances when opinion on a subject must be
communicated. But it is not the opinion of the insured but it is the opinion of a third
person.

For example, On August 9, 1953, the vessel “Anim” was anchored at Mercedes wharf,
Camarines Norte. Logs being towed by another vessel, “Gloria” hit “Anim” on the bow,
causing the three ropes with which it was securely moored to the wharf to snap and
said “Anim” drifted to the mouth of Mercedes River where it was stranded. “Anim” was
towed to higher ground at high tide for repairs of the damage it sustained, consisting
of eight holes and several dents astern. It took three days to repair the damage. On
August 14, 1953, “Anim” loaded with heavy machineries, was towed for Banganga,
Davao. On the same date, the insurance on “Anim” and its cargo took effect and the
insurer was not informed of the incident with “Gloria”. On August 15, 1953, “Anim”
encountered bad weather, started to list astern or starboard side and finally sank off
San Bernardino strait together with its cargo. Was there a concealment of material
fact?

YES. The insured was guilty of concealment of a material fact. Despite the incident
which took place on August 9, that is five days before the issuance of the policy on
August 14, the insured deliberately omitted to inform the insurer about it. Under the
law, the insured was bound to disclose to the insurer such happening because it affected
the condition and safety of the vessel which undoubtedly will influence the mind of the
insurer whether to continue with the contract of insurance or not or to decide on the
rate of premium. The information that the vessel had been aground and had received
heavy blows was material.

We studied in connection with Section 29 on materiality on concealment. We studied

that materiality is not determined by the event but solely by the natural and logical
consequence of the fact on the party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract or in making his inquiries.

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Causal connection between the fact concealed and the cause of the loss is not
necessary.

For example, the insured concealed the fact that he was sick of cancer, venereal
disease, tuberculosis, COVID-19 and others at the time the policy took effect which he
did not tell the insurance company. He died in a plane crash. In other words, there is
no connection whatsoever between the fact concealed and the cause of the loss, will
the insurance company have a right to claim that it is not liable because of
concealment?

YES. It could claim that there was concealment because there is no need of connection
between the fact concealed and the cause of the loss. Causal connection is not
necessary. After all, materiality is determined not by the event but by the influence of
the fact concealed on the other party in forming his estimate of the disadvantages of
the proposed contract.

In marine insurance, the rule is the same. However, on certain matters, there must be
connection between the fact concealed and the cause of the loss in marine insurance.

So let us go over it again.

Usually, the concealment of material facts entitle the insurer to rescind the contract of
insurance even if the fact concealed is not the cause of the loss. However, in marine
insurance, concealment of the matters specified in Section 112 does not entitle the
insurer to cancel to contract but merely exonerate the insurer from the loss resulting
from the fact concealed. In other words, of those matters mentioned in 112, there must
be a connection between the fact concealed and the cause of the loss. And the insurance
company will be exempt from liability only if the fact concealed is the cause of the loss.
In other words, if the fact concealed is any one of the matters mentioned in Section
112, the insurer will still be liable if the cause of the loss is not the fact concealed but
will be exempted from liability should the fact concealed be the cause of the loss.

What are these matters mentioned in Section 112?

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) National character of the insured.

For example, during the Gulf War, a vessel of Iranian registry concealed the fact that
it was Iranian. They concealed the national character of the insured because of the
blockade that was imposed by the United States and other countries. So they concealed
that fact that it was Iranian. It sank because of a typhoon. Will the insurer be liable?

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YES. Why? Because there is no connection between the fact concealed and the cause
of the loss. If the one concealed in marine insurance is the national character of the
insured, the insurer will be exonerated from liability only if the fact concealed is the
cause of the loss. Since the cause of the loss was typhoon,

Since the cause of the loss was typhoon, the insurance company will not be exonerated
from liability. But if it was sunk because it was of Iranian registry and it violated the
block a[32:08, incomprehensible], will the insurance company be liable?

The answer is no because there was a concealment on the national character of the
thing insured

From PPT: (2) 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 trade
d. The want of necessary documents
e. The use of false and simulated papers
In all of those instances, the cause of the loss must be the fact concealed. If the cause
of the loss has nothing to do with the fact concealed, the insurer is still liable.

Marine insurance is the only kind of insurance that is subject to implied

warranties. What is the meaning of implied warranties?

Implied warranties mean that whenever marine insurance is entered into, these
warranties are part of the contract even if it was not agreed upon—it is implied. Only
marine insurance is subject to implied warranties

Implied warranties:

1.The vessel is seaworthy

2.No improper deviation or the agreed voyage will be made
3.The vessel will not engage in illegal venture and
4.Where 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 will not carry any document which costs reasonable suspicion
thereon.
They are implied by the mere fact that a contract of marine insurance is entered.

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Let us take up the first implied warranty: Seaworthiness of a vessel

1. When is a vessel seaworthy?

A vessel is seaworthy when it is reasonably fit to encounter the ordinary perils
contemplated.

2. What is the effect of violation of the implied warranty of seaworthiness?

Whenever the vessel is seaworthy, the insurer will not be liable for a loss occasioned
thereby whether such fact was known to the insured or not.

So let me just explain this further. Whenever marine insurance is entered into, there is
an implied warranty that a vessel is seaworthy; whether it is insurance on the vessel
or the cargo, the vessel must be seaworthy. The rule is not very strict. The law does
not require extraordinary preparedness of the vessel. The law only requires that it must
be reasonably fit to encounter the ordinary perils contemplated by the parties in the
policy.

If the vessel is not seaworthy, then the insurance company will not be liable for the
loss caused by the unseaworthiness of the vessel.

For example, the vessel insured cargo, like in the previous example that we gave. It
has a porthole through which seawater could enter. As a result, the cargo loaded on
the vessel will be damaged.

In that case, the vessel is not seaworthy for purposes of insurance upon cargo. So, if
the damage is caused by seepage of the water into the porthole or otherwise stated,
the damage is caused by that defect that made the vessel unseaworthy, the insurance
company is not liable.

But supposed the vessel is trapped on iceberg, like the Titanic. As a result, the entire
vessel sunk. Will the insurance company still be liable?

Yes, because the damage to the insured cargo is not caused by the defect that bring
the vessel unseaworthy but it is caused by collision or bumping into an iceberg and it
sunk. So, the insurance company will still be liable because the damage was not caused
by the defect that made it unseaworthy.

But the insurance of the cargo will not be liable for the damage caused by the seepage
of the water into the porthole (that causes damage to the rice insured.) That is an
instance when there is a connection between the defect that made the vessel
unseaworthy for insurance of the cargo and the cause of the damage occasioned by the
defect that made it unseaworthy.

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When is the implied warranty of seaworthiness complied with?

Seaworthiness of the vessel is complied with only when the vessel is reasonably fit
to encounter the ordinary peril contemplated at the commencement of the
voyage. Sa umpisa lang. Katulad lang yan ng ibang lalaki sa klase ninyo, kung umibig
sa umpisa lang. Magaling lang sa umpisa, naku, pagkananliligaw ang galing. Pero pag
nakuha na, naku, lalabas na ang ugali. Kaya yung seaworthiness, parang pag-ibig ng
iba. Ako hindi. Ako, iba ako. Ako pag umibig hanggang katapusan (sana alls) pero yung
ibang mga lalaki dyan, naku kung umibig yan sa umpisa lang, parang seaworthiness.
Kaya ang tatandaan ninyo, seaworthiness ay katulad nung karamihan dyan sa
kaeskwela nyong lalaki kung umibig—sa umpisa lang.

So, when is seaworthiness complied with?

Seaworthiness is complied with when the vessel is seaworthy at the time of the
commencement of the voyage. Para ngang yang si pogi, yan kung umibig sa umpisa
lang. Mabuti lang yan sa umpisa, parang seaworthiness yan. Kaya pagka may
nanliligaws sa inyong magaling lang sa umpisa, sabihan nyong para kang
seaworthiness, you’re only good at the commencement.

So, commencement of the voyage is the gauge to determine seaworthiness.

General Rule: The vessel must be seaworthy at the commencement of the sea voyage.

XPNS:

1. If in a certain voyage it will undertake several voyages, then it must be seaworthy

at the commencement of each and every voyage that it will undertake during the
period insured against.
2. If different degrees of seaworthiness will be required, then it must be seaworthy
at the commencement of each and every portion of the voyage.
3. When the insurance is upon cargo which is required to be transhipped to another
vessel, then the vessel on which it is loaded must be seaworthy at the
commencement of each and every portion of the voyage.
So, let us go over it again. Oh, yung mga lalaki, wag kayong magagalit sakin ha. Totoo
yun, ako lang ang talagang tapat kung umibig. Yung iba dyan, ku, yang mga ka-eskwela
nyo. Mga girls mag-iingat kayo dyan. Inyo munang titingnan kung sila ay tulad lamang
ni seaworthiness, magaling lamang sa umpisa.

So, seaworthiness is required only at the commencement of the voyage, that is the
general rule. Sa umpisa lamang, that is the requirement. But, when the insurance is
for a specified length of time, implied warranty is not complied with unless the vessel
is seaworthy at the commencement of every voyage it undertakes during that time.

For example, the insurance is for a period of 1 year insuring the vessel. Marine
insurance was issued. And in the period of 1 year, it undertakes 12 different voyages.
So, when is the seaworthiness complied with?

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It is complied with if at the beginning of each and every of the 12 voyages that it will
undertake, the vessel is seaworthy. Sa umpisa, it must be seaworthy.

If the insurance is upon cargo that is to be transhipped at an intermediate port, the

implied warranty is not complied with unless the vessel on which the cargo is shipped
or transhipped be seaworthy at the commencement of the voyage

So, if it is upon cargo that is required to be transferred to another vessel, then the
vessel on which the cargo is loaded must be seaworthy at the commencement of each
and every portion of the voyage.

When different portions of the voyage is to be undertaken and they will require different
degrees of seaworthiness, it must be seaworthy at the commencement of each and
every voyage.

For example, a vessel is insured for its voyage from Batangas to Mindoro. And in the
process, it will ask to pass through Calumpang River to pick up cargo. And then it will
enter Balayan Bay and then on to Mindoro via the China Sea, which they now called as
the China Sea. Pero sa atin, Philippine Sea ang tawag pero ayaw pumayag ng Intsik,
China Sea daw yun.

Now, the voyage insured is from Batangas to Mindoro but will pass through Calumpang
River, Balayan Bay, and then South China Sea. In that case, the vessel must be
seaworthy at the commencement of that portion of the voyage in Calumpang River.
Then, it must be seaworthy at the commencement of the voyage in Balayan Bay. Then,
it must be seaworthy at the commencement of the voyage in South China Sea. Because
different degrees of seaworthiness are required during the voyage.

Ano ngayon ang mangyayari if the vessel becomes unseaworthy during the
voyage. What must be done?

Then the defect that made it unseaworthy must be repaired without unnecessary
delay. And if there is no repair without unnecessary delay, the insurer is exonerated
from the liability for any loss resulting from the unseaworthiness of the vessel.

Seaworthiness of a vessel, as a rule, is required only at the commencement of the

voyage or the risk. The insured does not warrant that the vessel will be seaworthy
throughout the voyage. Accordingly, if the vessel is seaworthy at the inception of the
voyage, subsequent unseaworthiness does not avoid the policy.

However, when the ship becomes unseaworthy during the voyage to which the
insurance relates, it is the duty of the owner or the ship captain to have the defect
repaired without unreasonable delay. Otherwise, the insurer will be exonerated from
liability for any loss caused by the unseaworthiness of the vessel.

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For example, at the commencement of the voyage, the vessel was seaworthy. During
the voyage, the vessel broke its shaft and became unseaworthy. The vessel was towed
to the port of Calapan and thereafter towed to the port of Batangas without being
properly repaired. The vessel sprung a leak while at the port of Batangas and sunk.
Will the insurer be liable?

A: Unreasonable delay in repairing the defect that caused unseaworthiness arising after
the commencement of the risk will discharge the insurer from liability only when the
damage or loss was caused by the unseaworthiness of the vessel, and where the
damage was not caused by the particular defect that made the ship unseaworthy, the
insurer is still liable. In this case, since the particular defect that caused
unseaworthiness was not the cause of the loss, the insurer was liable although there
was a failure to repair the vessel’s defect.

Let us suppose, that cargo, jasmine rice, was insured. It was stored at the hub, as
depicted in the drawing. The cargo has a defective toilet pipe that whenever it is
flushed, the leaks below to the hold of the vessel the shipment of rice is loaded.
Tumutulo. Can the vessel still be seaworthy for the insurance of the vessel? Is it
seaworthy for the insurance of the cargo?

Let us be more dramatic to the presentation. Let us suppose that the hub, many
passengers here, most of them women and it was the time of the month when the red
flag was up. So whenever the ladies will go to the toilet and use it and will flush it, the
water will leak to the jasmine rice. Your jasmine rice is aromatic, kaya nga jasmine ang
tawag don mabango and very white. Yung tubig na finuflush ay kulay red, kulay pula.
Pag flush mo dun sa jasmine rice, yung jasmine rice hindi na puti, pula na. Parang
mountain rice, red rice. And it is no longer aromatic, the aroma is different already .
Hindi na mabango. Iba na ang amoy. Is that vessel seaworthy for insurance of
the cargo?

A: No. It is not because of the leak in the toilet, because the cargo is damaged by the
leak. So it is not seaworthy for the purposes of insurance upon the cargo. But, is it
seaworthy for purposes of insurance of the vessel?

A: yes, kase kahit na tumulo na nang tumulo ng pula yung toilet, the vessel will not
sink. The seaworthiness of the vessel will not be affected. Therefore, it is still seaworthy
for insurance upon the vessel.

So, let us go over the answer again. The vessel may still be considered seaworthy for
purposes of the insurance of the vessel because the leak in the toilet pipe does not
affect its fitness to pursue the voyage. However, it is not seaworthy for the insurance
of the cargo because it is not fit to receive cargo. A ship, therefore, which is seaworthy
for the purpose of insurance upon the ship, may, nevertheless, by reason of being unfit
to receive the cargo, be unseaworthy for the purpose of insurance upon cargo.

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Q: When there is deviation from the course of the voyage insured?

A: There are 3 ways in committing deviation: (a) departure from the course of the
voyage insured; (b) an unreasonable delay in pursuing the voyage; or (c) the
commencement of an entirely different voyage.

So, let us suppose, the voyage insured is from Manila up to Batangas. What the vessel
did was to go to Cagayan. So in that case there is a departure from the course of the
voyage insured or commencement of an entirely different voyage. And that is
considered to be a deviation.

On the other hand, in case the voyage insured is form Batangas to Calapan, Mindoro.
It takes only 45 minutes by fast craft and about 2 hours by RORO. If the vessel insured
is a RORO and it took it 3 days for travel from Batangas City to Calapan then that is an
unreasonable delay in pursuing the voyage and that is considered to be a deviation.

There are 2 kinds of deviation. It could be proper, it could be improper. The insurance
Code is very logical in making definitions. For example, when is deviation improper?

A: the law said, deviation is improper when it is not proper. What could be more logical
than that? If it is not proper, then it must be improper. Later or next meeting we will
discuss partial loss. Every loss which is not total is partial. Very logical provisions and
I have nothing to do with those provisions. But, I do not disown it because it is logical
although entirely unnecessary. So what you have to know is when is deviation is proper
and every deviation which is not proper is improper. So when is it proper?

A: A deviation is proper:

(a) When caused by the circumstances over which neither the master nor the owner
of the ship has any control;

For example, the voyage insured is from Europe up to Asia. When the voyage is from
Europe to Asia, the shortest route is via the Suez Canal. So let us suppose this is Europe
where Spain is. The voyage which is the shortest is passing through the Suez Canal
here, where Egypt is.

When there was a war between Egypt and Israel, the vessels where in danger in passing
throudh the Suez Canal because the Egyptians were bombing Israelis and the Israelis
were bombing the Egyptians and right in between is the Suez Canal. So in that case,
what I did was to skip the Suez Canal. Instead of passing through here, which is the
Suez Canal here between Israel and Egypt. They went around from Europe. They went
around Africa up to the tip of Africa, here South Africa, we call this the Cape of Good
Hope and then round it and then finally go to Asia. If there was a deviation because
the captain of the vessel was afraid of getting hit by the missiles being launched by

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Egyptians against Israel and Israel against Egyptians and made a deviation and passed
by South Africa. Definitely, there is deviation. But is it proper?

A: Yes, it is proper because it is caused by circumstances over which neither the master
nor the owner of the ship has any control. Delikado to pass through that way.

(b) When necessary to comply with a warranty, or to avoid a peril, whether or not the
peril is insured against;

For example, there is a warranty that it should carry a qualified pilot but the pilot they
have died. So they had to make a deviation in order to get a qualified pilot. The
deviation so made is considered to be a proper deviation.

(c) When made in good faith, and upon reasonable grounds of belief in its necessity to
avoid a peril

When there is a typhoon in the course of the voyage insured and the master of the
vessel decided to make a deviation to avoid the typhoon. That is a proper deviation
because it was made upon a reasonable ground of belief in its necessity to avoid a peril.

(d) When made in good faith, for the purpose of saving human life or relieving another
vessel in distress.

Let us suppose, deviation was made in order to save cargo that was thrown out of
board worth 1 billion dollars. Is the deviation proper?

A: The deviation is not proper because to save cargo is not a proper deviation.

But let us suppose, deviation was made to save one of your classmates. Yun, yung
nakasuot ng blue. Yung nakablue. Deviation was made to save him. Is deviation proper?

A: Yes, according to law, it is proper.

Where is justice there: to save cargo worth 1 billion dollars is improper but to save this
guy in blue is proper? It is not logical but no value could be placed on human lives.
Kahit anong itsura niyan. Kahit sino pa man siya, he is a human being and no value
could be placed on human lives. And therefore, a deviation made to save a human
being is a proper deviation.

So with the deviation that was made to save a vessel in distress, it is also considered
to be a proper deviation.

But let me repeat, a deviation made to save cargo, however valuable the cargo may be
is considered to be an improper deviation.

Q: What is the effect of a proper deviation? What happens when improper

deviation is made?

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A: The insurance company will be liable to any loss subsequent to a proper deviation.

So let us suppose an improper deviation was made, then the vessel went back to the
course of the voyage insured then it sunk. At the time it sunk, it was already pursuing
the course of the voyage insured. Is the insurance company liable?

A: The insurance company shall not be liable because the loss occurred subsequent or
after an improper deviation .

So let us go over the answer again. When there has been a deviation without just cause
or in other words, improper deviation, the insurers become immediately absolved from
liability for losses occurring subsequent to the deviation even if the risk has not been
increased or even if the risk has been partially diminished

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