THE INSURANCE CODE

(REPUBLIC ACT NO. 10607)

GENERAL PROVISIONS

Q. Give a brief history of the Insurance Law of the Philippines.

A. Insurance law in the Philippines was formerly included in the Code of

Commerce until the Insurance Act took effect on July 1915. The Insurance Act
in turn, was repealed by the Insurance Code embodied in Presidential Decree
No. 612 which was issued and made effective on December 18, 1974. To
consolidate and codify all the insurance laws of the Philippines, Presidential
Decree No. 1460 enacted the Insurance Code of 1978 which took effect on
June 11, 1978.

The Insurance Code of 1978 was amended by Republic Act No. 10607 which
embodies the new Insurance Code. It took effect fifteen days after it was
published on August 15, 2013.

Notwithstanding the changes brought about on the Insurance Act by the

Insurance Code of 1978 and Republic Act No. 10607, the latter two codes like
the former Insurance Act are still basically American in origin having been
patterned principally on the Civil Code of California.

Q. What are the new concepts introduced by the New Insurance Code to
enhance the business of Insurance?

A. The new Insurance Code introduces new concepts or provisions to enhance

the business of insurance, such as:

(1) Microinsurance;
(2) Bancassurance
(3) Trust for charitable uses.
(4) Trust business of insurance companies.

Q. What is microinsurance?

A. Microinsurance is a financial product or service that meets the risk protection

needs of the poor where:
"(a) The amount of contributions, premiums, fees or charges, computed on a
daily basis, does not exceed seven and a half percent (7.5%) of the current
daily minimum wage rate for nonagricultural workers in Metro Manila; and

"(b) The maximum sum of guaranteed benefits is not more than one thousand
(1,000) times of the current daily minimum wage rate for nonagricultural
workers in Metro Manila."

Q. What is BANCASSURANCE?

A. The term bancassurance shall mean the presentation and sale to bank
customers by an insurance company of its insurance products within the
premises of the head office of such bank duly licensed by the Bangko Sentral
ng Pilipinas or any of its branches under such rules and regulations whiçh the
Commişsioner and the Bangko Sentral ng Pilipinas may promulgate.

To engage in bancassurance arrangement, a bank is the insurance company.

No insurance company shall enter into a bancassurance arrangement unless it
possesses all the requirements as may be prescribed by the Commissioner and
the Bangko Sentral ng Pilipinas.

Q. What is Industrial Life Insurance?

A. Industrial life insurance means that form of life insurance under which the
premiums are payable monthly or oftener, if the face amount of insurance
provided in any policy is not more than five hundred times that of the current
statutory daily wage of the City of Manila, and if the words industrial policy are
printed upon the policy as part of the descriptive matter.

Such kind of 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 insured at the residence of the insured or someplace indicated by
him for the purpose of collecting such 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.

Industrial life insurance is usually acquired by those without a fixed income or

belonging to the low income bracket.
Q. Distinguish Microinsurance from Industrial Life Insurance.

A. Industrial Life Insurance may be distinguished from Microinsurance as

follows:

The maximum amount of Industrial Life Insurance is 500 times that of the
current statutory daily wage in the City of Manila while Micro insurance’s
maximum is 4000 times of the current daily minimum wage in. Metro Manila.
Thus, while Micro insurance is for the "risk protection of the poor", Industrial Life
Insurance is for the protection of the poorer people.

Industrial Life Insurance 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 insured at the residence of the insured or someplace indicated by
him for the purpose of collecting such premium," while failure to collect the-
premium of Micro insurance is not an excuse for non-payment of premium and
the policy will lapse if the premium is not paid;"

In Industrial Life Insurance, the insured has a grace period of thirty days within
which to pay the succeeding premium while no such privilege is provided in
Micro insurance."

Premiums of Industrial Life Insurance are payable monthly or oftener" while

such scheme is not provided for in Micro insurance.

Q. What is a variable contract?

A. Variable Contract shall mean any policy or contract on either a group or on

an individual basis issued by an insurance company providing for benefits or
other contractual payments or values thereunder to vary so as to reflect
investment results of any segregated portfolio of investments or of a designated
separate account in which amounts received in connection with such contracts
shall have been placed and accounted for separately and apart from other
investments and accounts. This contract may also provide benefits or values
incidental thereto payable in fixed or variable amounts, or both.

Q. What are the laws governing insurance in the Philippines?

A. The laws governing insurance in their order of priority are: (a) Insurance
Code; (b) in the absence of applicable provisions in the Insurance Code, the
Civil Code and (c) in the absence of applicable provisions in the Insurance and
the the general principles prevailing on Civil Code, the subject in the United
States, particularly in the State of California where our Insurance Code was
based.

Q. On September 24, 1917 Joaquin Herrer of Manila applied for a contract

of life insurance with Sun Life Assurance Co., with offices at Montreal,
Canada. The application was mailed to Sun Life Assurance Co., and on
November 26, the insurer gave notice of acceptance by cable. On
December 4 the policy was issued in Montreal. Atty. Torres wrote Sun Life
on December 18, that he was withdrawing his application. Sun Life replied
that the policy had been issued which was received by Atty. Torres on
December 21. The said notice of Sun Life accepting the application was
never received by Herrer who died on December 20. The Insurance Act
was silent as to a contract entered into by Correspondence.

Issues: What law should be applied? Was there a valid contract?

A. The Civil Code should be applied and under Article 1319 thereof, an
acceptance made by letter shall not bind the person making the offer except
from the time it came to his knowledge. There was no valid contract as H died
without knowing the acceptance of his application."

Q. Buenaventura Ebrado, a married man, obtained a life insurance policy

and designated his Common-law beneficiary. Upon Buenaventura's death,
Pascuala Ebrado, his widow contested the right wife, Carponia Ebrado as
of Carponia to receive the proceeds of the policy. The Insurance Code
does not contain any specific provision applicable to the case. However,
Article 2012 provides, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make a donation to him."
Article 7393 declares as void those donations "made between persons
who were guilty of adultery or concubinage at the time donation," Issues:
(1) What law should be applied? (2) Should Carponia be disqualified as
beneficiary pursuant to the applicable provisions of the Civil Code? (3)
Who should recover the proceeds of the policy?
A. (1) There is no specific provision in the Insurance Code concerning the right
of a common law wife to be designated as beneficiary in a life insurance policy
and therefore, the provisions of the Civil Code should apply.
(2) The Civil Code provides, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life insurance
policy by the person who cannot make a donation to him." Article 739 declares
as void those donations made between persons who were guilty of adultery or
concubinage at the time donation." Therefore, Carponia, the common-law wife
cannot recover the proceeds of the insurance policy.

(3) Pascuala the legal wife cannot recover because she is not a beneficiary.
The proceeds of the policy should go to the estate of Buenaventura."

Q. Asia Life Insurance Co, insured the life of Arcadio Constantino for a
term of 20 years. The first premium covered the period up to September
26, 1942. After the first payment, no further premium was paid. The
insurer being an American corporation had to close its branch office in
Manila by reason of Japanese occupation i.e., from January 2, 1942, until
the year 1945. The insurer refused to pay the proceeds of the policy and
asserted the policy had lapsed for non-payment of premiums. Onthe other
hand, the beneficiary maintained that inasmuch as the non-payment of
premiums was the consequence of war, it should be excused and should
not cause forfeiture of the policy. Issue: Was the policy effective despite
non-payment of succeeding premiums?

A. Since the year 1917, the Philippine law on Insurance was found in Act no.
2427, as amended, and the Civil Code. Act No. 2427 was largely copied from
the Civil Code of California. And therefore, our insurance law should be
supplemented by the general principles prevailing on the subject in the United
States. In determining the effect of non-pavment of premiums occasioned by
war, the American cases may be divided into three groups, the so called
Connecticut Rule, the New York Rule, or the United States Rule.

The United States Rule declares that the contract is not merely suspended, but
is abrogated by reason of non-payment of premiums, since the time of payment
is peculiarly of the essence of the contract. In keeping with such legislative
policy, the court felt no hesitation to adopt the United States Rule." Hence,
since this rule is adopted in the Philippines, the policy was abrogated.
Q. How may a contract of insurance be perfected?

A. A contract of insurance, like other contracts, must be assented to by both

parties either in person or by their agents. So long as an application for
insurance has not been either accepted or rejected, it is merely an offer or
proposal to make a contract. There can be no contract of insurance unless the
minds of the parties have met in agreement. Hence, it is only when the insurer
accepts the application and communicates the same to the applicant that the
contract of and acceptance are made by Correspondence, the acceptance shall
not be binding until it has been made known to the one making the offer." Aside
from meeting of the minds of the parties, premium on the policy must be paid
before the contract can be valid and binding.

Q. Perez applied for life insurance coverage with the BF Lineman

Insurance Corporation and immediately paid part of the premium. The
application was forwarded to the office of BF Lineman at Gumaca, Quezon
for transmittal to its head office in Manila. Perez died before his
application was brought to the Manila Office of BF Lineman. Without
knowing of his death, BF Lineman approved the application and issued
the corresponding policy. The beneficiary filed a claim with the insurer
which refused to pay on the ground that the contract was not perfected.
Question: Was the insurance contract perfected?

A. The contract was not perfected. It is only when the insurer accepts the
application and communicates the same to the applicant and the latter pays the
premium while he is in good health that the contract of insurance is perfected.
The insurer's acceptance is manifested when it issues a corresponding policy to
the applicant. Perez died before his application was brought to the head office
of BF Lineman in Manila. There was absolutely no way the acceptance of the
application could have been communicated to the applicant inasmuch as the
applicant was already dead at that time. There can be no contract pf insurance
unless the minds of the parties have met in agreement."

Q. How should a contract of insurance be construed?

A. "If the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of the stipulations shall control." This
provision is akin to the "plain meaning rule" applied by Pennsylvania courts,
which assumes that the intent of the parties to an instrument is embodied in the
writing itself and when the words are clear and unambiguous the intent is to be
discovered only from the express language of the agreement.

Hence, in case there is no doubt as to the terms of an insurance contract, the

provisions, must be construed in their plain, ordinary and popular sense.
However, when the terms of the policy are ambiguous,, uncertain or doubtful,
they should be interpreted strictly against the insurer and liberally in favor of the
insured because the insured has no voice in the selection of the words used,
and the language of the contract is selected by legal advisers of the insurance
company. In such case, ambiguous provisions are construed strictissimi juris or
of strictest terms" against the insurer.

Q. Why is a contract of insurance called a "contract by adhesion" or

"contract by adherence?

A. Insurance contracts are contracts of adhesion or by adherence, that is,

prepared only by the insurer and imposed upon parties dealing with it which
may not be changed, the latter’s participation in the agreement being reduced
to the alternative to "take it or leave it", in contrast to those entered into by
parties bargaining on an equal footing and, therefore, any ambiguity thereon
must be resolved against the insurer, the party preparing the contract.

Q. What is contra proferentem rule?

A. Contra proferentem rule provides that in the interpretation of documents,

ambiguities are to be construed against the drafter. By its very nature, the
precept assumes the existence of an ambiguity in the contract, which is why
contraproferentem is also called the ambiguity doctrine. It is the same as an
adhesion contract
principle.

Q. Eduardo de la Cruz was the holder of an accident insurance policy. In

connection with the celebration of the New Year, the insured, a non-
professional boxer, participated in a boxing Contest. In the course of his
hout with another person, de la Cruz slipped and was hit by his opponent
on the left part of the back of the head, causing him to fall with his head
hitting the rope of the ring. The insured died with the cause of death
reported as "hemorrhage intracranial, left." The insurer refused to pay the
proceeds of the policy on the ground that the death of the insured, caused
by his participation in a boxing contest, was not accidental and, therefore
not covered by insurance. Was the death of the insured covered by the
policy?

A. The terms "accident" and "accidental “, as used in the insurance contract,

have not acquired any technical meaning and are construed by the courts in
their ordinary and common acceptation. Thus, the terms have been taken to
mean that which happen by chance or fortuitously, without intention and design,
and which is unexpected unusual and unforeseen. An accident is an event that
proceeds from an unknown cause and, therefore, not expected. Without the
unintentional slipping of the deceased, perhaps he would not have received the
blow in the head and would not have died. Boxing is attended with some risks
of external injuries, but any injury received in the course of the game could be
accidental. In boxing, as in other equally physically rigorous sports such as
basketball or baseball, death is not ordinarily anticipated to result. If, therefore,
it ever does, the injury or death can only be accidental or produced by some
unforeseen happening or event as what occurred in this case. The insurer was
liable.

Q. An insurance policy contained a provision known as "Other Insurance

Clause" which provided that, "The insured shall give notice to the
Company of any insurance or insurances already effected, or which may
subsequently be effected covering any of the properties insured, and
unless such notice be given before the occurrence of any loss or damage,
all benefits under this policy shall be deemed forfeited". The insured
obtained other policies covering the same property insured without
informing the insurer about it. The loss occurred but the insurer refused
to pay, claiming violation of the "Other Insurance Clause". The insured,
on the other hand, alleged that he did not read the policy and that the
insurer's agent knew of the existence of other insurance policies on the
property insured. Was the insurer liable?

A. The insurer was not liable since the insured violated the "Other Insurance
Clause". The terms of the contract were clear and unambiguous. The insured
was specifically required to disclose to the insurer any other insurance and its
particulars which he may have effected on the same subject matter. The
knowledge of such insurance by the insurer's agents, even assuming the
acquisition thereof by the former, was not the "notice" that would estop the
insurer from denying the claim. The parties must abide by the terms of the
contract because such terms constitute the meaning of the insurer's liability and
compliance therewith was a condition precedent to the insured's right to
recovery from the insurer."
Q. Producers Bank obtained an insurance against theft and robbery from
Fortune Insurance. The policy excluded "any loss caused by any
dishonest, fraudulent or criminal act of the insured or any officer,
employee partner, director trustee or authorized representative of the
insured whether acting alone or in conjunction with others". While in the
process of transferring cash in the sum of P725,000 from the Pasay
branch of the insured to its head office in Makati, its amored car carrying
the money was robbed. At the time, the armored car was driven by
Magalong and escorted by Security Guard Atiga. Magalong was assigned
by PRC Management Systems to the insured while Artiga was assigned
by Unicorn Security Services to the insured. After investigation, Magalong
and Artiga, together with three other persons were charged with the
violation of the Anti-Robbery Law. When the insured demanded payment
from the insurer, the latter refused to pay on the ground that the loss was
excluded from the coverage of the policy. Question: Was the loss
excluded by the policy? Yes

A. The loss was excluded by the policy. While the contracts of the insured from
PRC Management and Unicom Security Services provided "labor only",
Magalong and Artiga were, in respect of the transfer of Producer's money from
its Pasay branch to its head office in Makati, its "authorized representatives"
who served as such. Fortune Insurance under the general exception clause of
the policy was not liable for the loss caused by the "authorized representative"
of the insured. While limitations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the insurer from
non- compliance with the obligation, however if the terms of the contracts are
clear and unambiguous, there is no room for construction and such terms
cannot be enlarged or diminished by judicial construction.

Q. Castor insured her Toyota Revo against loss or damage. She

instructed her driver, Lanuza to bring the car to a repair shop. Lanuza did
not return the car and despite diligent efforts he could not be located
anymore. Castor reported this to the police and notified the insurer about
the loss and demanded payment of the proceeds of the insurance. The
insurer refused to pay on the ground that the person who stole the car
was her under her employ and pursuant to the policy, the insurer is not
liable for "any malicious damage caused by the insured, any member of
his family or by A PERSON IN THE INSURED'S SERVICE. Is the refusal
correct?
A. The insurer is liable. The court finds it puzzling that the insurer after using
the word "loss" and "damage" in the entire policy, suddenly went specific by
using the word "damage" only in the policy's exception regarding "malicious
damage". The court cannot believe that the policy really intended the word
"damage" in the term "malicious damage" to include the theft of the insured
vehicle. "Loss" and "damage" mean different things in common ordinary usage.
The word "loss" refers to the act or fact of losing, or failure to keep possession,
while the word "damage" means deterioration or injury to property". When the
terms of the policy are ambiguous, equivocal or uncertain, the policy should be
construed liberally in favor of the assured and strictly against the insurer.
Insurance is a contract of adhesion which must be construed liberally in favor of
the insured and strictly against the insurer. Loss is not included the term
"damage"

Q. Felipe obtained a life insurance policy from Insular Life. On June 23,
1999, the policy lapsed due to non-payment of premiums. Felipe applied
for reinstatement of the policy which Insular Life approved with the
following changes on the policy: (1) Extra premium and (2) Waiver of the
accidental death benefit and premium disability. Felipe agreed to the
added conditions. Insula Life issued an endorsement stating "This
certifies that as agreed by the Insured, the reinstatement of this policy has
been approved by the Company on the understanding that the following
changes are made on the policy effective June 22, 1999." Felipe paid the
adjusted premium on Dec. 27, 1999. Felipe died on Sept. 22, 2001. The
beneficiaries filed a claim with the insurer which the latter denied on the
ground of concealment and misrepresentation. The insurer claimed that
the two-year period of incontestability should be counted from Dec. 27,
1999 when the additional premium was paid and from such date to the
death of the insured on Sept. 22, 2001, less than 2 years had elapsed.

On the other hand, the beneficiaries claimed in letter of acceptance and

endorsement made by the insurer, the phrase "effective June 22, 1999"
appeared. From June 22, 1999 to the death of the insured on Sept. 22,
2001, more than 2 years had elapsed and hence the policy is already
incontestable. From what time should the incontestability period be
computed, Dec. 27, 1999 when payment of the adjusted premium was
made or June 22, 1999 as stated in the insurer's endorsement?

A. In the first sentence of the Endorsement, it is not entirely clear whether the
phrase, "effective June 22, 1999" refers to the subject of the sentence, namely,
"the reinstatement of this policy" or to the subsequent phrase, "changes are
made on the policy." Given the obscurity of the language, the construction
favorable to the insured will be adopted by the courts. Accordingly, the subject
policy is deemed reinstated as of June 22, 1999.

Thus, the period of contestability has lapsed. A contract of insurance being a

contract of adhesion, par excellence, any ambiguity therein should be resolved
against the insurer. Indeed, more than two years had elapsed from the time the
subject insurance policy was reinstated on June 22, 1999 vis-à-vis Felipe's
death on Sept. 11, 2001. As such, the subject insurance policy has already
become incontestable at the time of Felipe's death. 36

Q. A warranty in a fire insurance policy prohibited the storage in the

premises insured of "oils, (animal and/or vegetable and/or mineral and/or
their liquid products having a flash point below 300° Fahrenheit)."
Gasoline which has a flash point below 300° Fahrenheit, was stored
therein. Was the warranty violated?

A. No. The clause containing the prohibition was ambiguous and must be
construed strictly against the insurer and liberally in favor of the insured. In
ordinary parlance, "oils" means "lubricants" and not gasoline or kerosene.
There was no reason why the prohibition against keeping gasoline in the
premises could not be expressed clearly and in the language and terms that
the general public can readily understand. 37

Q. The Social Security System (SSS) was issued by the insurer with a
group mortgage redemption policy on the lives of its housing loan
mortgagors. Under the scheme, a grantee of housing loan of SSS is
required to mortgage to SSS the house constructed out of the loan and
the lot on which it stands. SSS takes a life insurance policy on the
mortgagor and if the mortgagor dies, the proceeds of his life insurance
will be used to pay his mortgage indebtedness and the deceased's heirs
will be relieved of the burden of paying the loan to SSS. Mortgage
redemption insurance is made compulsory by SSS for all qualified (not
more than 65 years old at the time of the loan and not more than 75 years
old at maturity of the loan) borrowers. A housing loan of P37,000 was
granted to Serrano by SSS. After obtaining a partial release of P35,400
from SSS, Serrano died. The widow tried to avail of the benefits of the
group mortgage redemption insurance but it was denied on the ground
that Serrano was not yet covered by the policy at the time his death.

Section 3 of Article II of the Group Mortgage Redemption Insurance Policy

provides that the insurance "shall take effect from the beginning of the
amortization period of such Mortgage Loan or partial release of Mortgage
Loan". Question: Section 3 presents an ambiguity as the e ffective date of
coverage can be interpreted to mean that the insurance takes effect from
the "beginning of the amortization period of such Mortgage Loan" or
"partial release of Mortgage Loan". How should the ambiguity be
resolved?

A. The ambiguity should be resolved in favor of the widow of Serrano. The

interpretation of obscure words or stipulation in a contract shall not favor the
party who caused the obscurity (Art. 1377, Civil Code) and provisions tending to
work as a forfeiture of insurance policies should be construed most strongly
against those for whose benefit they are inserted and most favorably toward
those against whom they are intended to operate While the issuance the Group
Mortgage Redemption Insurance is a contract between SSS and the insurer,
the fact is that SSS entered into such contract to afford protection not only to
itself should the mortgagor die before fully paying the loan, but also to afford
protection the mortgagor.

Q. Diosdado C. Ty obtained personal accident policies which stipulated,

among others, that for partial disability resulting to the loss of either
hand, the insurer shall be liable for P650.00. It was further stated in the
policies that, "The loss of a hand shall mean the loss by amputation
through the bones of the wrist." A fire broke out which totally destroyed
Broadway Cotton Factory, Ty's employer. Fighting his way out of the
factory, Ty was injured on the left hand by a heavy object. As a result, Ty
suffered a temporary total disability of his left hand which prevented him
from performing his work or labor necessary in the pursuance of his
occupation. Issue was the insurer liable? No

A. The insurer is not liable. The terms of the policies are clear, express and
specific that only amputation of the hand should be considered as a loss
thereof. An interpretation that would include a mere fracture or other temporary
disability not covered by the policies would be unwarranted.

Q. A personal accident policy was issued covering "loss of legs" which

was defined in the policy as the amputation of the legs. The insured met
an accident resulting in total paralysis of both legs. The insurer refused to
pay because there was no "loss of legs" since the legs of the insured
were not amputated. Was the insurer liable? Should permanent and total
paralysis of both legs be considered as equivalent to "loss of legs"? YES

A. The insurer was liable because "loss of legs" should be interpreted so to

include the permanent and total paralysis of both legs. The interpretation of the
term "loss of legs" as limited to amputation of both legs to the exclusion of
permanent total paralysis of both legs would be
contrary to public good, sound morality and public policy. It would force a
desperate man to cause an amputation to be performed since his legs are of no
use for life, in order to avail of the benefits of the policy. The permanent, total
paralysis of both legs suffered by the insured was equivalent to loss of both
legs, since he will obviously be bedridden for the rest of his natural life.

Q. Distinguish the case of Ty from the case of Panaton.

A. In the case of Ty Vs. National Surety & Assurance Co., Inc., the Supreme
Court ruled that since the policy expressly stipulated that disability means loss
of either hand by amputation, the insured whose left hand was injured but not
amputated was not entitled to the benefits of the policy. In distinguishing the
said case with the case of Ranaton vs. Malayan Insurance Co., Inc., the Court
of Appeals pointed out that the injuries sustained by Ty caused only temporary
total disability of his left hand. On the other hand, the injury suffered by
Panaton produced a total paralysis of both legs, resulting in the complete loss
of the use of both legs for life. It seems, therefore, that even if the policy
expressly requires amputation of both legs as a prerequisite for recovery in an
accident insurance, a total permanent paralysis of the legs would be sufficient
to entitle the insured to the proceeds of the policy. After all, where the insured
suffers from permanent total paralysis of both legs, he would be bedridden for
life and the amputation of his legs would not alter the result.

Q. Are insurance contracts entered into by the insured and the insurer on
equal footing?

A. To characterize the insurer and the insured as contracting parties on equal

footing is inaccurate at best. Insurance contracts are wholly prepared by the
insurer with vast amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry confusing if at all
understandable to lay persons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts
imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order
to interest of insurance applicants, insurance companies must be obligated to
act with haste upon insurance applications, to either deny or approve the same,
or otherwise be bound to honor the application as a valid, binding and effective
insurance contract.
Q. How should conflicting provisions be interpreted?

A. Conflicting provisions must be harmonized and construed liberally in favor of

the insured and strictly against the insurer.

Q. Philamlife and Eternal Gardens entered into a Group Life Policy under
which the clients of Eternal who purchased burial lots from it on
installment would be insured by Philamlife. Eternal was required under
the policy to submit a list of new lot purchasers, together with a copy of
the application of each purchasers and the amounts of the respective
unpaid balances of all insured lot purchasers. Eternal sent a letter dated
December 29, 1982, containing a list of insurable balances of its lot
buyers. One of those included in the list was John Chuang. Philamlife did
not reply to the said letter. On August 2, 1984 Chuang died. Eternal
demanded payment from Philamlife of the insurance claim for Chuang's
death. Philamlife denied the claim on the ground that no application for
Group Insurance was submitted to Philamlife prior to Chuang's death. The
contact between Philamlife and Eternal stated that the "insurance of any
eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured" (Eternal). It was further stated that "there shall be no
insurance if the application of the Lot Purchaser is not approved by the
Company (Philamlife). Question: there valid contract of insurance
covering Chuang's life considering the conflicting provisions of the
policy?

A. Yes The seemingly conflicting provisions must be harmonized to mean that

upon a party's purchase of a memorial lot on installment basis from Eternal, an
insurance contract covering the lot purchaser is created and the same is
effective, valid and binding until terminated by Philamlife
by disapproving the insurance application. Insurance is a contract by adhesion
which must be construed liberally in favor of the insured and strictly against the
insurer.
Q. Define a contract of insurance.

A. "A contract of insurance is an agreement whereby one undertakes, for a

consideration to indemnify another against Toss, damage or liability arising from
an unknown or contingent event."

Q. What are the elements of insurance?

A. Aside from the essential requisites of an ordinary contract such as consent,

subject matter, and consideration, an insurance contract must have the
following elements:

1. The insured possesses an interest of some kind susceptible of pecuniary

estimation, known as insurable interest.
2.The insured is subject to a risk of loss through the destruction or impairment
of that interest by the happening of designated perils.
3.The insurer assumes that risk of loss.
4.Such assumption is part of a general scheme to distribute actual losses
among a large group of persons bearing somewhat similar risks.
5.As consideration for the insurer's promise, the insured makes a ratable
contribution, called premium, to a general insurance fund.

Q. What is suretyship?

A. Suretyship is an agreement whereby a party called the surety guarantees the

performance by another party called the principal or obligor of an obligation or
undertaking in favor of a third party called obligee. It is also defined as a
contract whereby a person binds himself solidarily with the principal debtor for
the fulfillment of an obligation.

Q. When is a contract of suretyship deemed to be an insurance contract?

A. A contract of suretyship shall be deemed to be an insurance contract only if

made by a surety who or which, as such, is doing an insurance business, i.e.,
making, or proposing to make, as surety, any contract of suretyship as a
vocation and not merely incidental to any other legitimate business or activity of
the surety. When a person acts as surety in any contract of suretyship not as a
vocation but as a mere incident of a legitimate business or activity of the surety,
such contract shall not be deemed to be a contract of insurance since it lacks
the element of insurance that the assumption of risk should be a part of a
general scheme to distribute losses among a large group of persons bearing
somewhat similar risks.

Q. Gabriel was borrowing money from Bank of Commerce. His cousin,

Francisco, acted surety for the payment of the loan. Question: Was
Francisco's contract of suretyship deemed to be a contract of insurance?

A. Such contract was not a contract of insurance, since acting as surety did not
appear to be the vocation of Francisco and it was merely an isolated transaction
incidental to the legitimate activity of Francisco. However, if it wasFrancisco's
vocation to act as surety and therefore, the suretyship contract was part of the
general scheme to distribute losses among a large group of persons bearing
somewhat similar risks, then such contract shall be deemed to be a contract of
insurance.

Q. What does "doing insurance business" include?

A. "The term doing an insurance business transacting an insurance business

includes:
1. Making or proposing to make, as insurer, any insurance contract.
2.Making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or activity
of the surety;
3. Doing any kind of business, including reinsurance business, specifically
recognized as constituting the doing of an insurance business;
4.Doing or proposing to do any business substance equivalent to any of the
foregoing in a manner designed to evade the provisions of Insurance Code."

The "fact that no profit is derived from the making of insurance contract or that
no separate or direct consideration is received therefore shall not be conclusive
to show that the making thereof does not constitute the doing or transacting of
an insurance business.

Q. What is the test to determine if a contract is an insurance contract or

not?

A. The test to determine if a contract is an insurance contract or not, depends

on the nature of the promise, the act required to be performed, and the exact
nature of the agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes requisite. It is not by
what it is called. Thus, when ship owners band together for mutual protection
against liabilities, thereby contributing to a common fund from which losses and
liabilities are paid, their transaction is insurance even if they call it "Protection
and Indemnity".

Q. White Gold Marine Services, Inc. procured protection and indemnity for
its vessels from The Steamship Mutual Underwriting Association which
issued to White Certificate of Entry and Acceptance. Steamship Mutual
was a Protection and Indemnity (P & I) Club, an association composed of
ship owners who band together to provide mutual protection against
liabilities incidental to ship owning that members may incur in favor of
third parties. Steamship Mutual has license to do insurance business in
the Philippines as it claims that it is not doing insurance business. Issue:
Is Steamship Mutual engaged in the insurance business?

A. Steamship Mutual, as a P & I Club, is engaged in insurance business. A P &

I Club is a form of insurance against third party liability, where the third party is
anyone other than the P & I Club and its members. It is a cooperative enterprise
where the members are both the insurer and insured, where the members all
contribute, by a system of premiums or assessments to the creation of a fund
from which all losses and liabilities are paid, and where the profits are divided
among themselves, in proportion to their interest. Such being the case,
Steamship Mutual as a P & I Club is a mutual insurance association engaged in
marine insurance business.

Q. What is the test to determine whether an HMO or Health and

Maintenance Organization is engaged in insurance business or not?

A. The test to determine whether a company is engaged in the insurance

business or not is whether the assumption of risk and indemnification of loss
are the principal objectives and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely incidental and service is the
principal purpose then the business is not insurance. HMO whose main object
is to provide the members of a group with health services, is not engaged in the
insurance business.

Q. What are the characteristics of an insurance contract?

A. An insurance contract has the following characteristics:
It is an aleatory and not wagering contract.
It is a contract of indemnity.
It is a personal contract.
It is an executory contract after payment of. premiums.
It is a conditional contract.

Q. What is the meaning of an "aleatory contract"?

A. By an aleatory contract, one of the parties or both reciprocally bind

themselves to give or to do something in consideration of what the order shall
give or to do upon the happening of an event which is uncertain, or, which is to
occur at an indeterminate time. Insurance is aleatory in the sense that it
depends upon some contingent event against the occurrence of which it
intended. to provide, even though such event may never occur.

Q. Are all insurance contracts a contract of indemnity?

A. contract of Insurance other than that of life and accident where the result is
death, is a contract of indemnity by which is meant that the party insured is
entitled to compensation for such loss as has been occasioned by the perils
insured against, the right to recover being commensurate with the loss
sustained. Thus, the measure of insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof, as the purpose
of insurance is merely to reimburse the insured for his actual loss not exceeding
the amount agreed in the policy.

Q. A was the owner of the house valued at. P500,000.00. He obtained a

P200,000.00 fire insurance policy on the said house. Later the house was
damaged to the extent of P70,000.00. Question: How much may A
recover?

A. He may recover only P70,000.00.

insurance is of indemnity and therefore, he may collect only the amount of the
loss he sustained.

Q. is life insurance contract a contract of indemnity?

A. Life insurance is based upon the principle of indemnity, only in so far as it

cannot exist unless there is insurable interest in the life of the party insured at
the time of the making of the contract. But beyond this, the principle of
indemnity does not apply to life insurance. Thus, life insurance policy, as a rule,
is not a contract of indemnity, but a contract to pay a certain sum of money in
the event of death for life cannot be the subject of valuation nor the loss
adjustable on any principle of indemnity. However, where the amount of
insurable interest of a person procuring the insurance on the life of another is
susceptible
of pecuniary estimation, as in case of an insurance taken by a creditor on the
life of his debtor, life insurance is regarded as a contract of indemnity where the
creditor pays the premiums, but not where the premiums are paid by the
insured debtor

Q. A, an employee, earns P10,000 a month or P120,000 a year. In ten

years, he will earn 1,200,000php. He obtained a ten-year life insurance
policy on his own life for P5,000,000. A died, but the insurer refused to
pay P5,000,000 and instead offered to pay only P1,200,000 on the theory
that if A did not die, he would have earned only P1,200,000 in ten years.
Question: Was the refusal of the insurer to pay correct?

A. No, the refusal of the insurer to pay was not correct. The insurer was liable
for P5,000,000 since life insurance is not a contract of indemnity as no value
can be placed on human life.

Q. D borrowed money from C. C insured the life of D and paid the

premiums thereon. After six months and during the effectivity of the
policy, D paid the debt. One month later, D died. Question: May C still
recover from the insurer?

A. C cannot recover from the insurer anymore because the payment of the debt
removed the basis of recovery. C did not suffer any damage since the debt of D
had already been paid Insurance taken by a creditor on the life of the debtor is
a contract of indemnity, provided that the creditor paid the premiums.

Q. Why is an insurance contract a personal contract?

A. An insurer contracts with reference to the character of the insured for

integrity and prudence." It might be willing to make good the loss of a person by
the destruction of property owned by him, while it would be altogether unwilling
to insure the same property if owned by another. Accordingly, the insurance
taken by one person will not apply to the interest of another person in the same
property insured. And as a consequence of the principle that insurance is a
personal contract, the assignment or conveyance of the property insured does
not transfer the insurance and instead the policy is.
suspended.

Q. A insured his house against fire with X Co. Later, A sold his house to
B. After the sale, the house was totally burned. Question: May B, the new
owner, recover from X Co.?

A. No, since the policy taken by A applied to his interest alone and the sale of
the house did not automatically transfer the policy to B but instead, the policy
was suspended.

Q. A insured his house with X Ins. Co. on January 15. Later, on March 9, A
sold his house to B. On May 9, the house insured was burned. Can A
recover from the insurer? Can B recover from the Insurer? What
characteristics of insurance may be used to prevent A and/or B from
recovering?

A. In such case, A cannot recover because insurance is a contract of indemnity.

A did not suffer any loss because he already sold the property insured to B.
Neither can B recover because insurance is a personal contract which means
that the insurance taken by A does not apply to the interest of B.

Q. Why is an Insurance contract executory after the payment of

premiums?

A. Insurance contract is executory after payment of premiums, that is, executed

on the part of the insured upon payment of premium and wholly executory on
the part of the insurer.

Q. Why is insurance a conditional contract?

A. Insurance is conditional in the sense that the insurer is not obligated to pay
unless the loss arises from the specified perils." However, while a contract of
insurance is a conditional one, there is a distinction between property insurance
and life insurance. In property insurance, the loss may or may not occur, and,
when it occurs, it may be total or partial, while in life insurance, death will
definitely occur so that the time of the happening.
is the only contingent element.
 CHAPTER I THE CONTRACT OF INSURANCE.
TITLE 1.
WHAT MAY BE INSURED.

Q. What may be insured?

A. “Any contingent or unknown event, whether past or future, which may

damnify a person having an insurable interest, or create a liability against him,
may be insured against".

Q. What are the insurable risks?

A. The risks that may be insured may either be: (a). one that may cause
damage to the insurer, or (b). one that may create liability against him. Said
risks may be insured against events which are contingent or unknown, whether
past or future.

Q. Give illustrations/examples of insurable risks:

A. Illustrations/examples of insurable risks are:

Insurance against damage: An insurance taken by the owner of a house
against. destruction caused by fire is an insurance.
Insurance against liability: An insurance. taken by the owner of a car against
damage and injury he may cause while operating said car, is an insurance
against liability.

Q. When is the insurer liable for a past event or loss that occurred before
the policy was issued?

A. Ordinarily, the event covered by the policy is a future contingency. However,

a past event may likewise be included within the coverage of a policy. To be so
covered, the past event causing the loss must be unknown to both parties and
they must expressly stipulate that a prior loss is insured by the policy. Such
stipulation including a prior loss within the coverage of the policy is usually
expressed by the use of the phrase "lost or not lost.

Q. Is the insurer liable for a fortuitous event?

A. An insurer cannot exempt himself from liability by claiming that the cause of
the loss or damage to the thing insured is a fortuitous event where such event is
among the risks included in the policy, for the nature of the obligation of the
insurer requires the assumption of risk, and, accordingly, the insurer is still
responsible even if the event could not be foreseen, or though foreseen, is
inevitable.

Q. Does the insurance taken by one spouse on his or her own life or that
of their children require the consent of the other?

A. "The consent of the spouse is not necessary for married person on his or her
life or that of his or the validity of an insurance policy taken out by her children.

Q. May a minor enter into a contract of insurance without the consent of

the parents or guardian?

A. The Insurance Code is silent on the capacity of a minor to enter into a

contract of insurance and hence, the provisions of the Civil Code shall apply.
Thus, the minor cannot enter into a contract of insurance without the consent of
the parents or guardian and if he does, such contract is voidable. In such case,
the insurance company with which a minor contracted cannot, however, raise
the incapacity of the minor to contract as defense, as it is voidable at the option
of the insured by not of the insurer.

Q. In case the original owner of a policy taken on the life of another

should predecease the latter to whom should the proceeds of the policy
go?

A. "All rights, title and interest in the policy of insurance taken out by an original
owner on the health of the person insured shall automatically vest in the latter
upon the death of the original owner, unless otherwise provided for in the policy.
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, unless otherwise provided for in the policy. Thus, even if the
original owner of the policy designated himself as beneficiary in a policy
insuring the life of another, the death of the original policy owner. shall
automatically vest title on the policy to the insured. Suppose, however, the
husband took the policy on the life of his son and designated his wife as
beneficiary. In case the husband dies, would his wife be deprived of interest in
the policy so that the insured son could acquire the rights, title and interest
therein? It is submitted, that the interest on the policy should not pass to the
insured person upon the death of the original owner of the policy where another
person was designated as beneficiary. Such a situation should be considered
as an exception because the designation of a third person as beneficiary is
tantamount to a provision in the policy that the rights, title and interest in the
policy should not vest in the insured person when the original owner
predeceases the insured. And it must be borne in mind that by express
provision of Section 3, where the policy provides otherwise, the death of the
original policy owner shall not transfer the rights, title and interest on the policy
to the person whose life was insured.

Q. Juan insured the life of his son, Juan, Jr. and designated himself
(Juan) as beneficiary. Later, Juan died on January 16, 2018. Juan, Jr. died
on April 1, 2018. (1) Since Juan died ahead of Juan Jr., to whom should
the proceeds of the policy go? (2) Suppose the beneficiary is Marian, the
wife of Juan, who should get the proceeds of the policy?

A. (1) 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.
(2) The interest on the policy should not pass to Juan, Jr., the insured upon the
death of the original owner of the policy where another person was designated
as beneficiary. Such a situation should be considered as an exception because
the designation of a third person as beneficiary is tantamount to a provision in
the policy that the rights, title and interest in the policy should not vest in the
insured person. The proceeds should go to Marian, the beneficiary since by
express provision of Section 3, where the policy provides otherwise, the death
of the original policy owner shall not transfer the rights, title and interest on the
policy to the person whose life was insured.

Q. May an insurance be taken for or against the drawing of any lottery, or

for or against gambling?

A. "The preceding section does not authorize an insurance for or against the
drawing of any lottery, or for or against any chance or ticket in a lottery drawing
a prize."

Q. What is the reason why gambling cannot be insured?

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

TITLE 2.
PARTIES TO THE CONTRACT.

Q. Who are the parties to a contract of insurance?

A. The parties to a contract of insurance are:

1. The insurer, a person who undertakes to indemnify another by a contract of
insurance;
2. The insured, a person to be indemnified: and.
3. The beneficiary, who receives a benefit or advantage, or who is entitled to
the benefit of a contract, that is, the one to whom the insurance is payable or
who is entitled to the proceeds of the policy on the occurrence of the event
designated.
Sometimes, the person on whose application the policy was issued, who is the
beneficiary and who pays the premiums, is referred to as the "assured. The
"assured” is not necessarily the person on whose life or property the policy is
written. Thus, where a wife insures her husband's life for her own benefit and
he has no interest in the policy, she is the "assured" and the husband is the
"insured". This distinction, however, is not very material in modern insurance
under which the terms "insured" and "assured" are regarded synonymous.

Q. Who may be an insurer?

A. "Every corporation, partnership, or association, duly authorized to transact

insurance business as elsewhere provided in this Code, may be an insurer.

Q. Who may be insured?

A. "Anyone except a public enemy may be ensured insured.

Public enemy is a 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.

Q. What is the reason why a public enemy cannot be insured?

A. public enemy may not be insured because the purpose of war is to cripple
the power and exhaust the resources of the enemy, and it is inconsistent that
one country should destroy its enemy and repay in insurance the value of what
has been so destroyed, or that it should in such manner increase the resources
of the enemy or render it aid.

Q. Abu Nani, a citizen of the Philippines obtained a life insurance on his

own life in the Philippines. Later the Philippine government gave a P10
million prize for his capture dead or alive and was declared public enemy.
Will his life insurance continue?

A. YES! Abu Nani's policy can continue because he is not a public enemy
within the purview of the Insurance Code. A public enemy is a citizen or subject
of a nation at war with the Philippines. The Philippines is not at war with any
nation and now we have no public enemy. Aside therefrom, a Filipino cannot be
a public enemy in the Philippines because a public enemy must be a citizen of
another country.

Q. Christern, Huenfeld & Co., a corporation controlled by German

subjects, obtained a fire insurance policy in the Philippines on October 1,
1941. On December 10, 1941, war broke out between the United States and
Germany. Thereafter, the goods insured were burned.

Issue: Can the insurer be made liable?

A. No the insurer was not liable. The insured became an enemy corporation
because of the outbreak of the war between the United States and the policy
ceased to be allowable as soon as the insured became a public enemy.
However, the premium paid for the period after the insured became a public
enemy should be returned.

Q. Who may insure a mortgaged property?

A. When a property is mortgaged, the mortgagor and the mortgagee may take
out separate policies with the same or different insurance companies. The
mortgagor may insure the property mortgaged to the full value of such property
while the mortgagee can insure the same only to the extent of the amount of his
credit.

Q. A, the owner of a house valued at P500,000, borrowed P300,000 from B

and to secure payment of the loan, mortgaged said house to B.

Question: Who may insure the house mortgaged?

A. A, the owner may insure the house for P500,000 while B, the mortgagee,
may likewise insure the said house for P300,000.

Q. What is the effect of insurance procured by the mortgagor without

making the loss payable to the mortgagee?

A. Where the mortgagor insures the property mortgaged without making the
loss payable to the mortgagee, upon occurrence of the loss, only the mortgagor
may recover from insurer since the policy taken by the mortgagor shall be
applied exclusively to his interest. However, the mortgage constituted shall
extend to the proceeds of the indemnity paid by the insurer of the mortgaged
property upon occurrence of the loss and, therefore, the mortgagee has a lien
on the proceeds of the policy.

Q. What are the effects of insurance procured by the mortgagor providing

that the loss shall be payable to the mortgagee? Give
illustrations/examples.

A. Where the mortgagor insures the property mortgaged in his own name
providing that the loss shall be payable to the mortgagee, or assigns the policy
to the mortgagee, the effects thereof are as follows:

1. The insurance is still deemed to be upon the interest of the mortgagor, who
does not cease to be a party to the original contract." It is an insurance on the
property of the mortgagor as owner and not on the interest of the mortgagee,
and accordingly, the contract is one between the insurer and the mortgagor who
is the insured and not one between the insurer and the mortgagee.

Illustration:

A, the mortgagor insured his mortgaged building against fire and made
the loss payable to the mortgagee. Later on, the insurer cancelled the
policy pursuant to a stipulation thereon allowing either party to terminate
the contract by giving notice thereof to the other. The insurer gave notice
of cancellation to the mortgagee and not to the mortgagor. The building
was thereafter burned. Question: Was the insurer liable?
Answer: Yes, the insurer was liable. The cancellation of the policy was not
binding upon the mortgagor since the insurer failed to Comply with its duty to
notify the insured mortgagor of such cancellation of the policy so as to give the
latter ample opportunity to negotiate for another insurance. The notice should
be personal to the insured.
2. Any act of the mortgagor, prior to the loss, which would otherwise avoid the
insurance, will have the same effect although the property is in the hands of the
mortgagee.

Illustrations:

(a) A mortgaged his house to B to secure the payment of a loan. A then

insured his made the loss payable to the mortgagee. A violated the policy
by storing inflammable materials within the insured premises, as a result
of which, the house was burned.

Question: May the mortgagee recover from the insurer?

Answer: No, because the act of the mortgagor in violation of the policy avoided
the contract although the loss was made payable to the mortgagee.

(b) Paramount Shirt borrowed money from Pacific Banking Corporation.

To secure the loan, it mortgaged its properties and assigned thee fire
insurance policy issued by Oriental Assurance covering said properties to
Pacific Banking. Paramount violated a condition in the policy requiring
full disclosure of all insurance policies on the same properties insured
with Oriental. When the insured properties were burned, Pacific Banking
demanded payment from the insurer. The insurer refused to pay on the
ground of violation of the policy by the insured. Pacific Banking claimed
that the insured's violation of the policy can not affect the
mortgagee/assignee because the purpose for which the endorsement or
assignment of the policy was made was to protect the
mortgagee/assignee against any untoward act or omission of the insured
and it would be absurd to bar the mortgagee/assignee from recovery on
account of violation of the policy committed by the insured.

Question: Was the contention of Pacific Banking was correct?

Answer: No, Pacific Banking's contention was not correct. Where the insured
who was primarily entitled to receive the proceeds of the policy had by his fraud
and/or misrepresentation, forfeited said right, with more reason, Pacific Banking
which was merely claiming as indorsee of said insured, cannot be entitled to
such proceeds.

3. Any act which, under the insurance, is to be performed by the mortgagor,

may be performed by the mortgagee with the same effect as if it has been
performed by the mortgagor." As for example, the policy requires the insured to
give notice and proof of loss without unnecessary delay. Notice or proof of loss
may be given by the mortgagee to whom the loss is made payable with the
same effect as if the same is given by the mortgagor.

4. Upon occurrence of the loss, the mortgagee is entitled to recover to the

extent of his credit and the balance, if any, is payable to the mortgagor since
such policy is for the benefit of both the mortgagor and the mortgagee. The
mortgagee is the proper party to prosecute an action for a loss sustained under
a policy of insurance where the loss was made payable to him and such action
may be brought by the mortgagee even without including the mortgagor as
party to the action.

Illustration:

A, owned the house valued at P200,000. He mortgaged the said house to

B to secure a loan of P150,000. A then insured the house against fire for
P200,000 and made the loss payable to the mortgagee, B.

Question: Upon occurrence of the loss, who may recover from the
insurer?

Answer: The mortgagee, B, as beneficiary may recover to the extent of his

credit, P150,000, and as an insured, A may recover the balance of P50,000.

5. Upon recovery by the mortgagee to the extent of his credit from the insurer,
the mortgagor is released from his indebtedness.

Q. What is the consequence of assignment by the mortgagor-insured of

the insurance policy covering the property mortgaged?

A. In case the mortgagor insures the mortgaged property and assigns the policy
to the mortgagee, such assignment is merely to afford the mortgagee a greater
security for the settlement of the mortgagor's obligation and should not be
construed as payment in just the same way that delivery of negotiable
instruments does not constitute payment until the proceeds are realized or
collected. By such assignment, therefore, the mortgage indebtedness is not
extinguished until such time as the mortgagee has collected the proceeds of the
policy from the insurer after the occurrence of the loss.

Q. What are the effects of "mortgage redemption" insurance?

A. A "mortgage redemption" insurance is simply a kind of life insurance

procured by the mortgagor with the mortgagee as beneficiary up to the extent of
the mortgage indebtedness. Its rationale is to give protection to both the
mortgagee and the mortgagor. In case the mortgagor-insured dies, the
proceeds of such insurance will be applied to the payment of the mortgage debt
to the mortgagee, thereby relieving the heirs of the mortgagor of the burden of
paying the debt. Ample protection is likewise given to the mortgagor under this
insurance since the mortgage indebtedness will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness.

Where the mortgagor pays the insurance premium under the mortgage
redemption life insurance policy, making the loss payable to the mortgagee, the
insurance is still on the mortgagor's interest, and the mortgagor continues to be
a party to the contract, while the mortgagee is simply a beneficiary of the
insurance to the extent of the unpaid indebtedness and does not make the
mortgagee a party to the contract.

Q. Leuterio, a housing debtor of DBP applied for membership in the group

life insurance plan executed between Grepalife and DBP under which
Grepalife agreed to insure the lives of eligible housing loan mortgagors of
DBP. He was issued an insurance coverage to the extent of his DBP
mortgage indebtedness. Leuterio died, consequently, DBP submitted a
claim to Grepalife which refused to pay on the ground of concealment.
DBP collected the mortgage indebtedness by foreclosing the mortgage.
The widow of Leuterio filed an action against Grepalife for the collection
of the insurance proceeds, without including DBP as a party. Will the
action prosper?

A. The action will prosper. Since DBP has already foreclosed the mortgage, the
insurance proceeds shall inure to the benefit of the heirs of Leuterio. Where the
mortgagor pays the insurance premium under a group life insurance policy,
making the loss payable to the mortgagee, the insurance is still on the interest
of the mortgagor who continues to be a party to the contract. Such kind of policy
of insurance upon life or he alth may pass by transfer, will or succession to any
person, whether he has an insurable interest or not, and such person may
recover whatever the insured might have recovered and therefore, the widow of
Leuterno may recover from Grepalife.

Q. What are the effects of insurance procured by the mortgagee without

reference of the right of the mortgagor?

A. Where the mortgagee insures his interest in the property without reference to
the right of the mortgagor, the effects of such policy taken are as follows:

1. The mortgagee may collect from the insurer upon the 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 payment of the interest of the
mortgagee.

3. The insurer, upon payment to the mortgagee-insured, becomes subrogated

to the rights of the mortgagee against the mortgagor and may, therefore, collect
the
debt of the mortgagor to the extent of the amount paid to the mortgagee-
insured. This principle applies where the policy obtained by the mortgagee
covers his
interest alone.

4. The mortgagee-insured can no longer collect the mortgagor's indebtedness

after receiving full payment of his credit from the insurer since the latter thereby
acquires the right to collect from the mortgagor by virtue of subrogation.
However, if the mortgagee-insured is unable to collect the whole amount of his
credit from the insurer, he may still charge the mortgagor for the deficiency.

5. The mortgagor is not released from his debt by the insurer' s payment to the
mortgagee-insured.

Q. C granted a loan to D amounting to P2 million. D mortgaged his house

valued at P3 million to C. C insured the house mortgaged with X Ins. Co.
for P3 million and made the loss payable to C. The house was burned?
Discuss the rights of the parties.

A. (a) C, the mortgagee, may collect from the insurer only P 2 Million since the
mortgagee's insurable interest on the mortgaged property is limited to the
amount of his credit.

(b) D, the mortgagor has no right to recover the balance of P1 Million since the
policy covered the interest of the mortgagee alone without reference to the
interest of D.

(c) After paying C P2 Million, the insurer is automatically subrogated to the right
of C against D and, therefore, the insurer may collect the amount paid to C from
D, the mortgagor.

(d) C the mortgagee, after collecting the full amount of his credit from the
insurer, can no longer hold D, the mortgagor, liable, since the right of C Over
his credit is transferred to the insurer upon the latter's payment to C, by virtue of
subrogation. However, if C was able to collect only P1.5 Million from the insurer
due to the latter's insolvency, C may collect the balance of P500,000 from D.

(e) Payment by the insurer to the mortgagee will not extinguish the mortgagor's
debt since the insurer is subrogated to the mortgagee's right over the credit.

Q. What is a "Union Mortgage Clause"?

A. A union mortgage Clause, or its equivalent, creates the relation of insured

and insurer between the mortgagee and the insurance Company independent
of the contract with the mortgagor. If an insurer assents to the transfer of an
insurance from a mortgagor to a mortgagee, and, at the time of his assent,
imposes further obligations on the assignee, making a new contract with him,
the acts of the mortgagor cannot affect the rights of said assignee." Section 9
refers to a "Union Mortgage Clause.

Q. What is the effect of "Union Mortgage Clause"?

A. Ordinarily, where the mortgagor insures the property mortgaged and makes
the loss payable to the mortgagee, the mortgagor does not cease to be a party
to the insurance contract and, therefore, any act of his which would otherwise
avoid the policy shall have the same effect. In insurance parlance, such
stipulation is referred to as "open mortgage clause. " But where the policy
contains a "union mortgage clause," instead of an "open mortgage clause," the
mortgagee shall not be affected or prejudiced by any act or neglect of the
mortgagor" since the purpose of the "union mortgage clause" is to provide an
independent contract between the mortgagee and the insurer so that the
mortgagee will be responsible only for his own acts.

TITLE 3
INSURABLE INTEREST

Q. In general, when does a person have an insurable interest in the

subject-matter insured?

A. In general, a person has an insurable interest in the subject-matter insured

where he has such a relation or connection with, or concern in, such subject
matter that he derived pecuniary benefit or advantage from its preservation or
will suffer pecuniary loss or damage from its destruction, termination or injury by
the happening of the event insured against.

Different persons may have separate insurable interest in the same property.
Thus, in the same property mortgaged, the mortgagor has insurable interest
therein as owner while the mortgagee likewise has insurable interest in such
property to the extent of his lien.

Q. What is insurable interest on the part of the insured necessary?

A. An insurable interest on the part of the person taking out the policy is
essential to the validity and enforce ability of the contract of insurance, and if
such interest is lacking, the policy is void.

This is the consequence of the principle that insurance is a contract of

indemnity. If the insured has no insurable interest on the subject-matter of the
insurance, he will not stand to suffer any loss or damage by the happening of
the event insured against and hence, should that event occur, he should not be
allowed to recover from the insurer, otherwise he will profit from the effects of
insurance and thereby violate the principle that insurance is a contract of
indemnity. Furthermore, insurable interest is required to prevent speculative
insurances which are against public policy as they have the tendency to create
a desire for the event insured against to happen.
Q. In life insurance, when does insurable interest exist?

A. In life insurance, insurable interest exists where there is reasonable ground,

founded on the relation of the parties, either pecuniary or contractual or by
blood or affinity, to expect some benefit or advantage from the continuance of
the life of the insured. Insurable interest in life however, must be one in favor of
the continuance of life and not an interest in its loss or destruction.
The expectation of benefit or advantage giving rise to insurable interest
need not be based upon a right which can be enforced in law or upon a right
which can be enforced in law or equity against the person from whom pecuniary
benefit is expected. Intimate friendship of many years standing, however, does
not by virtue of such relationship alone create insurable interest in the life of one
another as there is no reasonable basis to expect benefit from one another.

Q. In life insurance, when does insurable interest exist?

A. In life insurance, insurable interest exists where there is reasonable ground,

founded on the relation of the parties, either pecuniary or contractual or by
blood or affinity, to expect some benefit or advantage from the continuance of
the life of the insured. Insurable interest in life however, must be one in favor of
the continuance of life and not an interest in its loss or destruction.

The expectation of benefit or advantage giving rise to insurable interest

need not be based upon a right which can be enforced in law or upon a right
which can be enforced in law or equity against the person from whom pecuniary
benefit is expected. Intimate friendship of many years standing, however, does
not by virtue of such relationship alone create insurable interest in the life of one
another as there is no reasonable basis to expect benefit from one another.

Q. A granted B, a talented neighbor a four-year scholarship with an

allowance of P5, 000 a month although they are not in any way related to
each other. Question: Does B have insurable interest on the life A?

A. B has insurable interest on the life of A since he obtains pecuniary benefit or

advantage from continuance of the life of A.

Q. A made a last will and testament and provided B, his talented student a
legacy of P1 million to be taken out of his estate upon his death.
Question: Does B have insurable interest on the life of A?
A. B does not have insurable interest on the life of A since he will not obtain any
benefit during the lifetime of A. He will be benefited only when A dies. Since B's
interest on the life of A is not the continuance of the life of the latter but on its
loss or destruction, B has no insurable interest on his life.

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

A. Espinosà does not have insurable interest on the not obtain any life of
Pangilinan since he will benefit during the lifetime of Pangilinan. He will be
benefited only when Pangilinan, dies. Since Espinosa's interest on the life of
Pangilinan is not the continuance of the life of the latter but on its loss or
destruction, Espinosa has no insurable interest on his life. Insurable interest in
life must be one in favor of the continuance of life and not an interest in its loss
or destruction.

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

A. "Every person has an insurable interest in the life and health:

"(a) Of himself, of his spouse and of his children;

"(b) Of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

"(c) Of any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or prevent
the performance; and

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

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

A. Espinosà does not have insurable interest on the not obtain any life of
Pangilinan since he will benefit during the lifetime of Pangilinan. He will be
benefited only when Pangilinan, dies. Since Espinosa's interest on the life of
Pangilinan is not the continuance of the life of the latter but on its loss or
destruction, Espinosa has no insurable interest on his life. Insurable interest in
life must be one in favor of the continuance of life and not an interest in its loss
or destruction.

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

A. "Every person has an insurable interest in the life and health:

"(a) Of himself, of his spouse and of his children;

"(b) Of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

"(c) Of any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or prevent
the performance; and

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

Q. A person has insurable interest in the life and health of any person on
whom he depends wholly or in part for education or support. Who are
obliged to support each other?

A. The following are the persons obliged to support each other:

1. The spouse;
2. Legitimate ascendants and descendants;
3. Parents and acknowledged natural children and the legitimate or the
illegitimate descendants of the latter;
4. Parents and natural children by legal fiction and the legitimate and illegitimate
descendants of the latter;
5. Parents and illegitimate children, who are not natural; and
6. Brothers and sisters.

Q. Does the creditor have insurable interest in the life of the debtor?
A. A creditor has an insurable interest in the life of his 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 o services, of which death or illness might delay or prevent the
performance. “
However, insurance on the life of the debtor to be valid must for an
amount which is not grossly disproportionate to the amount of the obligation,
otherwise the policy is not valid for being a wagering contract. Thus, the test of
a creditor's insurable interest is whether the amount of the debt is reasonably
proportionate to the amount of the insurance which he contracts. If the debt is
so small as to be out of proportion to the amount of insurance, the creditor lacks
insurable interest and the contract of insurance is nothing more than a wagering
scheme. For instance, C granted a loan to D amounting to P700. C then insured
the life of D for P30, 000. Such policy was a mere wagering contract and
therefore not valid.

Q. Give an example when insurable interest exists because the estate or

interest vested in the person procuring insurance is dependent on the life
of another.

A. A allows B to use his land as long as A is alive. B has insurable interest in

the life of A since A's death will terminate the right of B over the land and
consequently, cause damage to B."

Q. As of what time must insurable interest in life exist?

A. Insurable interest in life must exist at the time of the effectivity of the policy
and need not exist at time of the 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.

Where the wife insures the life of the husband, a subsequent divorce
does not terminate the policy since in life insurance, the fact that insurable
interest ceases before the death of the insured is immaterial.
Q. Christine and Renmarc got married on May 9, 2015. Christine insured
the life of Renmarc on June 20, 2015 with Christine as beneficiary. After a
violent quarrel, their marriage was annulled on September 27, 2017. The
annulment was too much for Renmarc to bear and so on March 9, 2018,
Renmarc died of heart failure. Christine filed a claim with the insurance
company for payment of the proceeds of the insurance on Renmarc's life.
The insurance company refused to pay on the ground that after the
annulment of their marriage, Christine lost her insurable interest on the
life of Renmarc. Decide with reason.

A. Christine may recover the proceeds of the policy even if her marriage with
Renmarc was already annulled at the time of the death of the latter because
insurable interest in life need exist only at the time of the effectivity of the policy
and need not exist at time of the death of the insured, as life insurance is not a
contract of indemnity.

Q. Must the beneficiary have insurable interest on the life of the insured?

A. A person procuring insurance on his own life may name anyone he chooses
as beneficiary thereof, even though he is stranger and has no insurable interest
in the life insured. However, a person who cannot receive donation from the
insured under Article 739 of the Civil Code cannot be designated as beneficiary.
The rule is different in property insurance where the law requires that the
beneficiary must have an insurable interest in the property insured.

Q. What is the effect if the designation of a beneficiary is in bad faith or

with fraud or made with an intent to enter into a wagering contract?

A. While the general principle is that a person may lawfully take out a policy of
insurance on his own life and make the benefit payable to whomsoever pleases
regardless of whether the beneficiary has an insurable interest or not, however,
it is necessary that such designation be made in good faith without fraud or
intent to enter into a wagering contract. Thus, it was held that the policy was not
valid where it was procured by the insured, on the inducement of the
beneficiary, for the purpose of enabling the latter in which he had no insurable
interest and thereby evade the law against speculative and wagering insurance.

Q. Misterioso San Juan, a common laborer earning a little over P1 a day

with a wife and five children to support, obtained several life insurance
policies from various companies in the total sum of P685,000.
Applications for the insurance on the life of San Juan were likewise made
with other companies for the total amount of P219,000 but said
applications were rejected. In all the policies obtained, Virginia Uy Parco,
and none of the five minor children of San Juan was made a beneficiary.
The premiums on the policies were paid by Luis Parco, who did not have
insurable interest in the life of San Juan.
Question: Were the policies valid?

A. The life insurance policies were void and without force and effect for reasons
of public policy and not being based on the existence of insurable interest on
the part of Luis Parco on the life of Misterioso San Juan. The insurance policies
in question belonged to the wagering or speculative classes designed to
perpetrate a massive fraud against the insurance companies.

Q. Who may be beneficiaries?

A. Any person may be designated as beneficiary in a life insurance contract

even though he is a stranger and has no insurable interest in the life insured,
except those who are forbidden by law to receive donations from the insured
such as:
(a) Those made between persons who are guilty of adultery or concubinage at
the time of the donation;
(b) Those made between persons found guilty of the criminal offense. in
consideration thereof;
(c) Those made to a public officer or his wife, descendants and ascendants, by
reason of his office."
In essence, a life insurance policy is no different from a civil donation insofar as
designation of beneficiary is concerned. Both are founded upon the same
consideration: liberality. A beneficiary is like a donee, because from the
premium of the policy which the insured pays out of liberality, the beneficiary
will receive the proceeds of the said insurance. As a consequence, the
proscription in Article 739 of the Civil should equally operate in life insurance
contracts. Any person who cannot receive a donation cannot be named as
beneficiary in the life insurance policy of the person who cannot make
donation."

Q. Is prior conviction for adultery or necessary to disqualify a

beneficiary?
A. With respect to the disqualification of persons who are guilty of adultery or
concubinage, criminal conviction for the disqualifying offense is not required.
The guilt of the insured beneficiary may be proved by preponderance of
evidence in the same action for declaration nullity of the designation.

Q. Are adulterous children disqualified from being designated as beneficiary?

A. The disqualification of "persons who are guilty of adultery or concubinage"
from being designated as beneficiary under Article 739 of the Civil Code does
not extend to the illegitimate children born out of the illicit relation between the
parties to the adultery or concubinage. As a matter of fact both the Civil Code
as well as the Family Code recognizes certain successional rights of illegitimate
children.

Q. What is the effect of adultery on the right to obtain Social Security

benefits?

A. In the case of Social Security System, et al. vs. Gloria de los Santos & the
Supreme Court ruled that a wife who left her husband and lived with another
man is no longer entitled to receive Social Security benefits upon the death of
the husband because she was no longer dependent upon him for her support.

Q. Less than a year after the marriage of Antonio de los Santos and Gloria
de los Santos, the latter left Antonio and contracted another marriage with
Domingo Talens in 1965. In 1969, Gloria went back to Antonio and lived
with him until 1983 when she again left Antonio and went to the United
States where she obtained a divorce from Antonio. In the meantime,
Antonio married Cirila de los Santos and amended his SSS records by
changing his beneficiary from Gloria to Cirila. Antonio died and Gloria
claimed the SSS insurance benefits. The Court of Appeals ruled that the
marriage between Antonio and Gloria still subsisted and the subsequent
marriages contracted by them were void. Thus, the Court of Appeals ruled
that Gloria was still the legal wife of Antonio hence entitled to the SSS
benefits. Question Should Gloria be entitled to the SSS benefits?

A. The divorce obtained by Gloria against Antonio was not binding in this
jurisdiction. Under Philippine law, only aliens may obtain divorce abroad
provided they are valid according to their national law. The divorce was
obtained by Gloria while she was still a Filipino citizen, hence it did not sever
her marriage with Antonio. However, although Gloria was the legal spouse, she
is still disqualified to be his primary beneficiary under the SSS law. A wife who
left her family until her husband died and lived with other men was not
dependent upon her husband for support, financial or otherwise, during the
same period.
Gloria left the conjugal abode and lived with two different men. These facts
remove her from qualifying as a primary beneficiary of her deceased husband.

Q. Who should receive the proceeds of a life insurance policy in case no

beneficiary has been designated or the designation is not valid?

A. In case of failure to designate a beneficiary or where such designation is not

valid the life insurance proceeds should accrue to the estate of the insured.

Q. May the beneficiary designated in the policy be changed?

A. "The insured shall have the right to change the beneficiary he designated in
the policy, unless he has expressly waived this right in said policy.
Notwithstanding the foregoing, in the event the insured does not change the
beneficiary during his lifetime, the designation shall be deemed irrevocable.

Q. What is the extent of interest of an irrevocable beneficiary?

A. When a beneficiary has been designated and the right to change him has
been expressly waived in the policy, he could not be deprived of his vested
interest by the insured by putting an end to the policy. Should the insured
discontinue paying premiums, the beneficiary may continue paying it and be
entitled to automatic extended term or paid-up insurance options.

An irrevocable beneficiary cannot be changed without his consent as he has a

vested interest in the policy, nor may the insured add other beneficiaries without
the consent of the irrevocable beneficiary as no amendment of the can the such
be effected irrevocable additional 191 designation of beneficiaries without the
consent of beneficiary Furthermore, beneficiaries will diminish the interest of the
irrevocable beneficiary in the policy and hence, it cannot be legally made
without the consent of such irrevocable beneficiary. In such case, the insured
cannot even obtain a policy loan or cash surrender value on the policy without
the consent of the irrevocable beneficiary because the latter's vested right
extends to all benefits accruing to the policy.

Q. On January 15, 1968, Dimayuga procured an ordinary life insurance

policy from Phil-am Life and designated his wife and children 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
irrevocable beneficiaries? NO

A. The petition should be denied. It is only with the consent of all the
beneficiaries that any change or amendment to the policy concerning the
irrevocable beneficiaries may be legally and validly effected. There is no other
exception thus; abrogating the contention of Dimayuga that said designation
can be amended if the court finds a just, reasonable ground to do so. The
consent given by the minors was not effective since they cannot validly give
their consent to the change of beneficiaries.

Q. Who may give consent change beneficiary who is a minor?

A. When a minor however, was designated as beneficiary and the interest of

the minor in the policy does not exceed five hundred thousand pesos
(P500,000), his consent to the change of beneficiary may be given by his
judicial guardian or, in the absence of the latter, by his father or in the latter's
absence or incapacity, his mother.

In the absence or in case of the incapacity of the father or mother, the

grandparent, the eldest brother or sister at least eighteen (18) years of age, or
any relative who has actual custody of the minor insured or beneficiary, shall
act as a guardian without need of a court order or judicial appointment as such
guardian, as long as such person is not otherwise disqualified or incapacitated.

Q. What is the extent of interest of the beneficiary in endowment life

insurance?

A. Endowment insurance is a contract to pay a certain sum to the insured if he

lives a certain length of time, or if he dies before that time, to some other person
indicated as beneficiary. In an endowment policy, the interest of the beneficiary
is a contingent one, and the benefits of the policy will only accrue to such
beneficiary in case the assured dies before the end of the period designated in
the policy. If the insured survives the endowment period, the benefits are
payable to him or his assignee, notwithstanding the designation of a beneficiary
in the policy.

Q. To whom should the proceeds of a life insurance policy be given if the

beneficiary predeceases the insured?

A. In the absence of an express provision in the policy providing for the

substitution of a contingent beneficiary upon the death of the beneficiary ahead
of the insured, the person to whom the proceeds of the policy are payable
depends on whether the beneficiary has a vested or non-vested interest in the
insurance prior to the insured's death.

Should the beneficiary predecease the insured and such beneficiary is

irrevocable and hence, has a vested interest in the policy, the legal
representatives of such beneficiary are entitled to the proceeds of the insurance
as assets of his or her estate200 unless the proceeds were made payable to
the beneficiary only "if living"? On the other hand, where the beneficiary is
revocable and therefore, does not have vested interest in the policy at the time
of his death, his estate or legal representatives derives no interest from or
through him, but the right to the proceeds passes to the estate of the insured.
The proceeds of the policy shall likewise pass to the estate of the insured where
the proceeds of the policy were payable to the beneficiary "if surviving" and he
died before the insured's death.

However, where the insurance was taken on the life of a minor, the death of the
original owner of the policy shall automatically vest in the minor all rights, title
and interest in the policy.

Q. Elvis procured a life insurance policy and designated his son, Elvis, Jr.
as beneficiary. While Elvis 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?

A. It depends on whether the designation of Elvis, Jr. as beneficiary is

revocable or irrevocable. If the beneficiary is irrevocable and hence, has a
vested interest in the policy, the legal representatives of such beneficiary are
entitled to the proceeds of the insurance as assets of his or her estate unless
the proceeds were payable to the beneficiary only "if living"

On the other hand, where the beneficiary is revocable and therefore, does not
have vested interest in the policy at the time of his death, his estate or legal
representatives derives no interest from or through him, but the right to the
proceeds passes to the estate of the insured.

The proceeds of the policy shall likewise pass to the estate of the insured where
the proceeds of the policy were payable to the beneficiary "if surviving" and he
died before the insured's death.

The designation of the beneficiary is revocable unless the right to change the
beneficiary has been waived and hence, in this case the proceeds should go to
the estate of the insured, Elvis.

Q. May revocation of a beneficiary be done in the last will and testament

of the insured?

A. In the event 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 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?

A. No. It was incumbent upon the agent 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.

Q. Rheozel opened a "Platinum 1-in-1 Savings and Insurance" account

with BPI. Such account is one wherein depositors are automatically
covered by an insurance policy against disability or death issued by FGU.
On Sept. 25, 2000, Rheozel died due to a vehicular accident. On Sept. 27,
2000, Laingo, the beneficiary of the insurance policy instructed the
family's secretary to go to BPI to inquire about the savings account of
Rheozel. Laingo wanted to use the moneyy in the savings account for
Rheozel's burial and funeral expenses. BP allowed withdrawal from the
account of Rheozel, More than two years later or on Jan 21, 2003,
Rheozel's sister while arranging Rheozel's personal things in his room
found the Personal Accident Insurance Policy issued by FGU. Upon being
informed of the existence of the insurance, Laingo sent two letters of
demand to FGU which denied the claim on the ground the policy provides
that the claim should have been filed within three calendar months from
the death of Rheozel.

Issue: Whether or not Laingo, as named beneficiary who had no

knowledge of the existence of the insurance contract, is bound by the
three calendar month deadline for filing a written notice of claim upon the
death of the insured.

A. The Platinum 2-in-1 Savings and Insurance account was BPI's commercial
product, offering the insurance coverage for free for every deposit account
opened. Rheozel directly communicated with BPI, the agent of FGU. BPI, as
agent of FGU had the primary responsibility to ensure that the 2-in-1 account be
reasonably carried out with full disclosure to the parties concerned, particularly
the beneficiaries. Thus, it was incumbent upon BPI to give proper notice of the
existence of the insurance coverage and the stipulation in the insurance
contract for filing a claim to Laingo, as Rhoezel's beneficiary, upon the latter's
death. Since BPI is the agent of FGU then notice of death of Rhoezel to BPI is
considered as notice to FGU. Both BPI and FGU shall bear the loss and must
compensate Laingo for actual damages and FGU must pay the proceeds of the
policy.

Q. What happens when the beneficiary in life insurance is the principal,

accomplice, or accessory in willfully bringing about the death of the
insured?

A. The interest of a beneficiary in a life insurance policy shall be forfeited when

the beneficiary is the principal, accomplice, or accessory in willfully bringing
about the death of the insured. In such 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 paid in accordance with the policy contract.
If the policy contract is silent, the proceeds shall be paid to the estate of the
insured.

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 or 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 to (a) 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 Section12?

A. It is submitted that in such case, 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 whereas Section 89 is an old provision, and when
the former made the insurer liable instead of exempting it from liability, the
intention against exempting the insurer 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
should prevail over the former."

Q. Marco insured his life with X Co., and designated Ganda as beneficiary.
Ganda killed Marco. (1) May Ganda recover from the insurer? (2) If Ganda
cannot recover from the insurer,
who may recover?

A. (1) Ganda 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.

(2) 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 disqualifies the beneficiary from receiving the

proceeds of the policy if he willfully brings about the death of the insured,
suppose the beneficiary's act was neither intentional nor felonious, will he
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. What is an insurable interest in property?

A. "Every interest in property, whether real or or "Every personal, or any relation

thereto, or liability in a nature that a contemplated peril might directly damnify
the insured, is an insurable interest."

Q. What is the test of insurable interest in property?

A. The test of insurable interest in 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.

Q. What is the meaning of "interest" in property?

A. The term "interest" in property is not limited to ownership of the subject-

matter of the insurance, it includes the liability which the insured incurs in
relation thereto, although he is not in possession of the property and has no
interest beyond the danger of pecuniary damage from the loss of the property
by reason of such assumed liability. Thus, a possessor of a building who
collects rentals from the occupants has insurable interest in such building as he
would be damnified by the loss thereof. Also, a purchaser under a contract of
conditional sale by which the title will not pass until full payment of the price has
an insurable interest, at least, to the extent of his down-payment. And the owner
who sold his property but retained a lien thereon until full payment of the price,
has insurable interest in such property.

Q. What may insurable interest in property consist of?

A. "An insurable interest in property may consist in:

"(a) An existing interest;
"(b) An inchoate interest founded on an existing interest; or
“(c) An expectancy, coupled with an existing interest in that out of which the
expectancy arises."

Q. What is an inchoate interest? Give an example of insurable inchoate

interest.
A. Inchoate interest is an interest in real estate which is not a present interest,
but which may ripen into a vested estate, if not barred, extinguished or divested.
To constitute insurable interest, such inchoate interest must be founded on an
existing interest. Thus, a stockholder in a corporation owning a ship, cargo, or
other property, while he has neither a legal title to the corporate property nor
any equitable thereto, has such right of a pecuniary nature growing out of his
situation as stockholder as will give him an insurable interest in the corporate
property to the extent of his shares.

Q. When may expectancy be insured? Give examples.

A. Expectancy to be insurable must be coupled with an existing interest or

founded on an actual right to the thing, or upon any valid contact for it
otherwise, it does not constitute insurable interest.

Examples:
(a)A son has no insurable interest in the property of his father," as his
interest in such property is a mere expectancy not founded on an actual
right or valid contact for it.
(b)The owner of a parcel of land has insurable interest on expected crops
even before they are sown.
(c) The owner of ship has insurable interest on expected freightage.

Q. Does a carrier or depositary have insurable interest in the property

under his custody?
A. 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 to exceed the
value thereof.

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

Question: Does he have insurable interest on the clothes delivered to him
for dyeing or washing?

A. Yes, because the destruction of the textiles will mean pecuniary loss to him
as he will be deprived of the compensation he would be entitled to for dyeing
the same, not to mention his pecuniary liability for labor and expenses.

Q. What are the distinctions between insurable interest in life insurance

and insurable interest in property insurance?

A. Insurable interest in life and insurable interest in property may be

distinguished as follows:
1. Insurable interest in property is based on pecuniary interest, while in life, the
interest need not necessarily be strictly and exclusively a pecuniary one, as in
case of consanguinity or affinity.

2. In property insurance, the interest must exist at the time the policy takes
effect and at the time of the loss ; while in the life insurance, interest need exist
only at the time the insurance takes effect except in life insurance taken by the
creditor on the life of debtor wherein interest must also exist at the time of the
loss.

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 of insurable
interest unless it is based on creditor-debtor relationship.

Q. What is the measure of indemnity in property insurance?

A. “The measure of an insurable interest in property is the extent to which the

insured might be damnified by loss or injury thereof.
Property insurance as a rule is a contract of indemnity and, hence, 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.

Q. Can a person without insurable interest on the property insured

enforce the insurance contract?

A. "No contract or policy of insurance on property shall be enforceable except

for the benefit of some person having an insurable interest in the property
insured."
The rule in property insurance as embodied in this section is that the
beneficiary therein must have insurable interest in the property insured. A
stranger having no insurable interest in the property insured, could not,
therefore, be made a beneficiary in a policy covering the said property.
This principle, however, does not apply to a life insurance wherein
insurable interest on the part of the beneficiary is not necessary.
It will be observed that this section did not declare the property insurance
For the benefit of a person not having insurable interest therein as invalid.
However it could not be enforced by the designated beneficiary.
Thus, suppose A, the owner of a building, insured the same against fire
and had the proceeds of the policy payable to B, a person not having insurable
interest on the policy insured. In case of loss, B, could not enforce the policy
since he had no insurable interest in the property insured. But would that mean
that the insurance company could evade liability? It could not be the intention of
Section 18 to exempt the insurer from liability but merely prevent recovery by a
person not having insurable interest in the property insured. In such case, the
owner who insured the property should be allowed to recover from the insurer
as only the designation of B as beneficiary should be considered unenforceable
and not the entire policy itself.

Q. Spouses Nilo and Stella Cha entered into a contract of lease with CKS
which provided that the lessees "shall not insure against fire the chattels,
merchandise, textiles, goods and effects placed at any stall or store or
space in the leased premises without first obtaining the written consent
and approval of the LESSOR. If the LESSEE obtain(s) the insurance
without the consent of the LESSOR then the policy is deemed assigned
and transferred to the LESSOR for its own benefit." Notwithstanding the
said stipulation, the Cha spouses insured against fire the merchandise
inside the leased premises for P500,000 with United Insurance without the
written consent of CKS. On the day the lease was to expire, fire broke out
inside the leased premises and burned the insured merchandise. When
CKS learned of the insurance earlier procured by the Cha spouses, it
wrote the insurer a demand letter asking that the proceeds of the
insurance be paid directly to CKS, based on its lease contract with the
Cha spouses. Question: Can CKS recover from the insurer the proceeds
of the insurance procured by Cha spouses?

A. CKS cannot recover. A non-life insurance policy Such as the fire insurance
policy taken by the Cha spouses over their merchandise is a contract of
indemnity. Insurable interest in the property insured must exist at the time the
insurance takes effect and at the time the loss occurs. The basis of such
requirement of insurable interest in property insured is based on sound public
policy: to prevent a person from taking out an insurance olicy on property upon
which he has no insurable interest and collecting the proceeds of said property
in case of loss. In such a case, the contract of insurance is a mere wager which
is void. It cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises. Therefore, CKS cannot be a
beneficiary of the fire insurance policy taken by Cha spouses. The automatic
assignment of the policy to CKS under the provision of the lease contract is void
for being contrary to law and/or public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Cha.
The insurer cannot be compelled to pay the proceeds of the fire insurance
policy to a person (CKS) who has no insurable interest in the property insured.

Q. What is the difference between a beneficiary in life insurance and a

beneficiary in property insurance?

A. 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.

Q. As of what time must insurable interest in property exist?

A. In property insurance, an insurable interest must exist both at the time of the
effectivity of the contract and at the time of the loss, while in life insurance, it is
ordinarily sufficient if an insurable interest exists at the inception of the contract
except when the life insurance is procured by a creditor on the life of a debtor.
This distinction is based on the fact that property insurance is a contract of
indemnity, while life insurance is not.

Q. Why must insurable interest in property exist at the time of the

effectivity of the contract and at the time of the loss?

A. Insurable interest at the time of the effectivity of the policy is required to

prevent speculative insurances which are against public policy, "while insurable
interest at the time of the loss, in case of property insurance, is necessary
because such kind of insurance is a contract of indemnity and where the
insured has no insurable interest at the time of the loss, he does not suffer any
damage for which he should be indemnified.
Q. A insured his house for P1 million beginning January 1, 2006. A sold
the house to B for P1.5M on February 10, 2006 without indorsing or
transferring the fire insurance policy to B. On March 20, 2006, the house
was completely destroyed on account of an accidental fire.
Question: Who can collect the proceeds of the policy from the insurance
company, A or B?

A. Neither A nor B may collect from the insurance company. A may not collect
because although he had insurable interest at the time the insurance took
effect, he did not have insurable interest at the time of the loss, as he already
sold the house. B may not also collect because he did not have insurable
interest at the time the policy took effect although he had insurable interest at
the time of the loss. Since the transfer of the house to B did not include the
transfer of the policy, said policy is suspended.

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

unaccompanied by transfer of interest in the policy? Why?

A. A "change of interest in any part of the thing insured accompanied 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 a 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.

Q. Mr. Simeon Garcia bought a house and lot from Mr. Sixto Gatchalian.
Receiving the agreed price, Mr. Gatchalian delivered to Mr. Garcia the
deed of sale, certificate of title, fire insurance policy for the building, and
other documents. The deed of sale was registered and a new title was
issued in the name of Mr. Simeon Garcia, but no request was made for the
transfer of the fire insurance policy. After one month, the building was
destroyed by fire of accidental origin which razed the whole block where
the building was located. Question: Under the facts enumerated above,
who had the right to collect the value of the policy?

A. No one may collect from the insurer because when Gatchalian sold the
house insured to Garcia without effecting the transfer of the policy, the contract
was thereby suspended and since the loss occurred while the policy was
suspended, the insurer was not liable. Furthermore, an insurable interest must
exist when the insurance take effect and when the loss occurs and neither
Garcia nor Gatchalian had insurable interest both at the effectivity of the policy
and at the time the loss.

Q. 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.

A. The change of interest contemplated by law is an absolute transfer of the

insured's entire interest in the property insured to one not previously interested
or insured.

Illustrations:
(a)The property insured against fire was mortgaged without the consent
of the insurer.
Question: Was there an alienation of the property insured which would
suspend the insurance?
Answer: No, the policy was not suspended since the interest in the
property insured did not pass by mere execution of a mortgage.

(b)A lease of the insured property is not a case of alienation or change of

title or interest in the property insured that would suspend the policy.

(c) A judgment debtor whose property has been sold on execution retains
insurable interest therein until the right to redeem or have the sale set
aside has been lost.

(d)A mortgagor whose property has been foreclosed still has insurable
interest on such property for he retains the equity or right of
redemption. Such interest is terminated only by a failure to redeem
within the specified time.

(e)A vendor who has not absolutely parted with all his rights respecting
the property, still has insurable interest on the property sold to the
extent of the interest retained. Thus, the vendor who has a lien on the
property sold until the purchase price is paid or the conditions of the
sale are performed retains insurable interest in such property.
 In the foregoing examples, the policy will not be suspended since
the insured is not divested of his entire interest in the property insured.
The policy subsists to the extent of the interest retained by the insured.

Q. 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 suspend are despite the transfer of the
thing insured?

A. The following are the exceptions to the rule that policy is suspended by the
transfer of interest is the thing insured without corresponding transfer of the
insurance:
1. When there is a prohibition against alienation or change of interest without
the consent of the insurer in which case the policy is not merely suspended but
avoided.

2. In case of life, accident, and health insurance.

3. A change of interest in a thing insured, after the occurrence of an injury which

results in a loss.

4. A change of interest in one or more of several distinct things, separately

insured by one policy, does not avoid the insurance as to others.

5. A change of interest, by will or succession, on the death of the insured

passes the interest in the insurance to the person taking the interest in the
things insured.

6. A transfer of interest by one of several partners, joint owners, or owners in

common, who are jointly insured, to the others.

7. 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.

Q. Johann is the owner of Unit 27 and Unit 29 in Bulaklak Townhouse

Center. He separately insured both units against fire with X Ins. Co., on
March 9, 2017 for a period of one year. X Ins. Co., issued one policy for
the insurance of both units. Johann sold Unit 27 to Sebastian on
September 27, 2017. On January 16, both Unit 27 and Unit 29 were
completely burned. May Johann recover the loss from the insurer?

A. Johann cannot recover the loss of Unit 27 because the policy was
suspended insofar as Unit 27 was concerned because Johann sold it. He may
recover the loss of Unit 29 because change of interest in one or more of several
distinct things, separately insured by one policy, does not avoid the insurance
as to others. The Sale of Unit 27 did not affect the insurance as to Unit 29.

Q. A transfer, assignment or conveyance of the property insured does not

transfer any right with respect to the insurance, unless with the insurer's
consent. When will transfer of insured makes an express assignment
thereof, interest in the thing insured carry with it the transfer of interest in
the policy? Give example of each.

A. A transfer, assignment or conveyance of the property insured does not

transfer any right with makes an express assignment thereof, with the respect
to the insurance, unless the insured makes an express assignment thereof, with
the insurers consent. Accordingly, a purchaser of the insured property cannot
recover from the insurer in case of loss, unless and until the policy is transferred
to him. However, in the following cases a transfer of the interest in the thing
insured carries with it a transfer of the policy:
1. Where by express stipulation of the parties, the policy is made to run with the
subject-matter, or the contract is so framed as to attach the risk inseparably to
the property, as where the insurance is on account of the "owners," or for whom
it may concern or where the loss is payable to the "bearer."

Q. Example: A fire insurance policy provided that the loss was: "Payable to the
San Miguel Brewery, mortgagee, as its interest may appear, the remainder to
whosoever, during the continuance of the risk, may become the owner of the
interest insured." The property insured was sold without transferring the policy
to the buyer. Question: Is the buyer entitled to recover?

A. Answer: Yes, because the transfer of the thing insured need not be
accompanied by the transfer of the policy, as it was 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.
2. A change of interest, by will or succession, on the death of the insured
passes the interest in the insurance to the person taking his interest in the thing
insured.

Q. Example: А insured his house against fire. Thereafter, A died leaving as his
only heir, B who inherited the house. The house was burned. Question: May B
recover from the insurer?

A. Answer: B may recover from the insurer because the transfer of the house
to B by succession upon death of A carried with it the transfer of the policy.
3. Transfer of interest by one of several partners, joint owners, or owners in
common who are jointly insured, to the others.

Q. Example. Perico and Añonuevo are co-owners of a building. They insured

the building against fire.Perico sold her share in the building to Añonuevo.
Thereafter, the building was burned. Can Añonuevo recover the insurance
proceeds from the insurer? Would your answer be the same if Perico sold her
share to Perez?

Answer: Transfer of interest by one of several partners, joint owners, or owners

in common who are jointly insured, to the others will carry with it the transfer of
the policy and therefore, Añonuevo can collect from the insurer of the building.
On the other hand, in case Perico sold her share in the building to Perez, the
policy is suspended.

Q. When will the suspended policy because of the transfer of interest in

the thing insured unaccompanied by transfer of interest in the policy be
revived?

A. Where a policy is suspended by the transfer of interest in the thing insured

unaccompanied by a corresponding transfer of interest in the insurance, the
policy is revived when the interest in the thing and the interest in the insurance
are vested in the same person again. This may occur by the assignment of the
policy to the transferee of the property insured or by the reacquisition by the
insured of the property previously transferred.

Q. When is the policy not suspended despite the transfer of interest in the
subject matter of insurance without transfer of interest in the policy?

A. The following are the exceptions to the rule that the policy is suspended by
the transfer of interest in the subject-matter insured without corresponding
transfer of the insurance:
1. When there is a prohibition against alienation or change of interest without
the consent of the insurer in which case the policy is not merely suspended but
avoided.
2. In case of life, accident, and health insurance.
3. A change of interest in a thing insured, after the occurrence of an injury which
results in a loss.
4. A change of interest in one or more of several distinct things, separately
insured by one policy, does not avoid the insurance as to others.
5. A change of interest, by will or succession, on the death of the insured
passes the interest in the insurance to the person taking the interest in the
things insured.
6. A transfer of interest by one of several partners, joint owners or owners, in
common, who are jointly insured, to the others.
7. 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.

Q. When there is a prohibition against alienation or change of interest

without the consent of the insurer, why is the policy not merely
suspended but avoided?

A. A provision of an insurance policy forbidding any alienation of the property

insured or any change in the title or interest insured is valid and enforceable
and a violation thereof is a ground for avoiding the policy. Since in such case
the policy is avoided, a subsequent reacquisition of the property before the loss
will not revive the policy unless the alienation merely temporary as when the
purchaser or grantee at the same time and as a part of the same is transaction
reconveys the property insured. The policy will not be avoided, however, where
the change of interest is affected with the knowledge and consent of the insurer.

Q. Why is the insurance not suspended in case of transfer of interest in

life, accident, and health insurance?

A. The reason why a change of interest will not affect an insurance upon life,
health or accident is that such kind of policies are not regarded as contracts of
indemnity and, therefore, insurable interest need exist only at the time the
insurance takes effect. And accordingly, the loss of insurable interest at the time
of the happening of the event insured against will not affect the right of recovery
from the insurer.
Q. Why is the insurance not suspended when the transfer of the thing
insured occurred after the loss?

A. After the loss occurs, the right of the insured under the policy becomes fixed
and a subsequent conveyance by the insured cannot affect the insurer's
liability.
Example: A insured his house against fire. One month later, one-half of the
house was burned. After filing a claim for the partial loss, A sold what remained
of the house to B. Such transfer will not affect the right of A to recover from the
insurer.

Q. What stipulations in a contract of insurance are void?

A. "Every stipulation in a policy of insurance for the payment of loss whether the
person insured has or has not any interest in the property insured, or that the
policy shall be received as proof of such interest, and every policy executed by
way of gaming or wagering, is void. Thus, 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 or wagering is void.

Q. What is gaming or wagering and why can it not be insured?

A. Gaming or wager policy is one which the persons for whose benefit it was
issued had no pecuniary interest in the subject matter insured.
Wagering or gambling policies of insurance are prohibited because they
have a tendency to create a desire for the event insured against to happen and
furnish strong temptations to the party interested to bring about, if possible, the
event insured against.

Q. Can objection to absence of insurable interest on the part of the person

procuring the insurance be waived?
A. Absence of the insurable interest on the part of the person procuring
insurance, as ground of objection, cannot be waived by the insurer. Thus,
where an insurance agent knew that the person procuring insurance did not
have insurable interest on the subject of the insurance, and it was contended
that lack of insurable interest was waived by the insurer so as to entitle the
insured to the benefits of the policy, the court denied such contention and ruled
that waiver could not validate the policy so as to permit recovery, since the
policy was illegal as against public policy.

TITLE 4 CONCEALMENT

Q. What is concealment?

A. "A neglect to communicate that which a party knows and ought to

communicate, is called concealment."

Q. Why are contracts of insurance traditionally considered as contracts

uberrimaefider?
A. Contracts of insurance are traditionally contracts uberrimaefidei, which
means “most abundant good faith: absolute and perfect candor or openness
and honesty; the absence of concealment or deception, however slight. In
insurance contracts, each party has the right to depend on the utmost good
faith, uberrimaefidei, of the other party regarding the nature of the risk to be
assumed. It is upon this principle that the doctrines of warranties,
representation and concealment are based.

Q. Must the insured have knowledge of the fact concealed?

A. A Concealment presupposes knowledge of the fact concealed on the part of
the party charged with concealment. Such knowledge must be proven by the
party claiming the existence of concealment.
Thus, where in the application for life insurance, the statement made by the
insured was "no hereditary taint on either side of the house (family) to my
knowledge," in order to show concealment, it was necessary for the insurance
company to prove that a hereditary taint alleged to exist was known to the
insured.

Q. As of what time must the insured have knowledge of the fact

concealed?
A. 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 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.
Likewise, known changes in conditions material to the risks which occur
between the opening of negotiation for insurance and the issuance of the policy
must be revealed. That is, 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.
Thus, when after applying for life insurance, but before the issuance of
the policy the insured learns that he is afflicted with a fatal disease, his failure to
disclose that information constitutes concealment of a material fact which will
avoid the policy.

Q. Must the insured reveal information about his health which he acquired
after the effectivity of the policy?
A. 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 as it will not influence a party anymore to enter into such contract.
Thus, whether or not the nondisclosure of a fact constitutes concealment is
determined as of the time the contract of insurance takes effect, and does not
depend upon or is affected by subsequent events or facts after the contract is
completed.

Q. Erwin applied for life insurance on January 16, 2018 with X Ins. Co. At
that time Erwin did not know of any ailment that he has. On January 21,
2018, he had himself physically examined and he found out that he had
heart ailment and kidney disease. On January 28, 2018 the life insurance
policy of Erwin was issued and he did not inform the insurer about his
ailment, believing that he need not reveal the same to the insurer because
he acquired knowledge thereof after he applied for life insurance. Was
Erwin guilty of concealment?
A. Erwin was quilty of concealment because 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.

Q. Would your answer be the same if he was physically examined on

February 1, 2018 and did not inform the insurer of the ailment he came to
know about?
A. 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, as it will not influence a party anymore to enter into such contract.
Thus, whether or not the non-disclosure of a fact constitutes concealment is
determined as of the time the contract of insurance takes effect, and does not
depend upon or is affected by subsequent events or facts after the contract is
completed.

Q. Are there instances that a party to an insurance contract need not

reveal information acquired after the application and before the effectivity
of the policy?

A. While the general rule is that a party is bound to disclose a material change
occurring after the application and before the effectivity of the contract,
however, such rule does not apply:
a) where the policy provides that if the application is approved and the
policy is issued, it shall be in force from the date of the application, and
b) where the change occurs after the consummation of the insurance
orally although the formal policy has not been issued yet.

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

A. "A concealment whether intentional or unintentional entitles the injured party

to rescind a contract of insurance.

Q. Ngo Hing was an authorized insurance agent of Great Pacific Life

Assurance Company. He applied with Great Pacific Life for a twenty- year
endowment policy on the life of his one- year old daughter, Helen Go. The
insurer issued a binding receipt. Ngo was aware that his daughter was a
Mongoloid child but he withheld such information from the insurer. Later,
Helen Go died of influenza with complication of bronco-pneumonia.
Question: Was the concealment sufficient to relieve the insurer of
liability?

A. The insurer cannot be liable. As an insurance agent, Ngo Hing ought to

know, as he surely must have known his duty and responsibility to supply a
material fact. Had he divulged that Helen Go was Mongoloid child in the
application form, the insurer would have disapproved the application. When
Ngo Hing concealed his daughter's physical defect which could never be
esconced nor disguised, he was in apparent bad faith. The contract of
insurance is one of perfect good faith, absolute and perfect candor or openness
and honesty. Ngo Hing was guilty of concealment which relieved the insurer of
any liability.

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

A. A party applying for insurance is bound to answer truthfully all questions

concerning facts material to the risk. Concealment or suppression of material
fact is a fraud, and as fatal to the contract as false answer would be. A policy
will 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 the
rate of premium agreed upon. The insurer relying upon the belief that the
assured will disclose every material fact within his actual or presumed
knowledge is misled into a belief that the circumstance withheld does not exist,
and he is thereby induced to estimate the risk upon a false basis that it does not
exist. The principal question, therefore, must be, was the insurer misled or
deceived into entering a contractual obligation or in fixing the premium of
insurance by a withholding of material information or facts within the insured's
presumed knowledge?

Q. The insured in applying for a reinstatement of a lapsed life insurance

policy, concealed his disease of both kidneys and enlarged liver. After his
death, an action was filed against the insurer. Question: Was the insurer
liable?

A. The insurer was not liable because concealment entitled the other to rescind
the contract.

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

A. "Each party to a contract of insurance must communicate to the other, in

good faith, all facts within his knowledge which are material to the contract and
as to which he makes no warranty, and which the other has not the means of
ascertaining."
 Each party is bound to communicate to the other all facts that meet the
following requisites: (a) such facts must be within his knowledge; ((b must be
material to the contract; (c) the other party has not the means of ascertaining
such fact; and (d) he makes no warranty as to such facts.

Q. A When the insurer conducts an investigation of the subject-matter

being insured, is the insured relieved of responsibility to reveal
information?
A. The fact that the insurer makes investigation of its own relative to the
insurability of the applicant does not absolve the latter from speaking the truth
or lessen the right of the insurer to rely on insured's statement as to his physical
condition, especially where the investigation failed to disclose falsity or any
suspicious circumstance.

Q. Why is the insured not bound to reveal information concerning matters

covered by a warranty in the contract of insurance?

A. The facts that a party is bound to communicate are those of which he makes
no warranty. it is not necessary to communicate or disclose matters concerning
which the insured makes a warranty, express or implied. Thus, where no inquiry
is made, the assured need not disclose matters affecting the seaworthiness of
the vessel, since seaworthiness is a warranty implied in marine insurance.
The reason is that where a fact is covered by a warranty, express or
implied, it is superfluous to require disclosure. However, when a fact proves or
tends to prove the falsity of a warranty, it must be revealed to the other. Thus,
the insured's concealment of facts or information that falsifies a warranty is in all
cases to be deemed a fraud that vitiates the policy, such as the concealment of
an incident which proves or tends to prove the falsity of the implied warranty of
seaworthiness of the vessel insured.

Q. When is the insured bound to reveal information concerning matters

covered by a warranty?

A. "An intentional and fraudulent omission, on the part of one insured, to

communicate information of matters proving or tending to prove the falsity of a
warranty, entitles the insurer to rescind."
Matters covered by a warranty need not be revealed except facts which
prove or tend to prove the falsity of a warranty. The insured must not conceal
facts or information which he knows falsify a warranty. It is on the truth of the
warranty, not merely on the fact that it is given, that the insurer relies. Had the
insurer believed it to be false, it would not consent to the insurance and incur
the hazard of being made the victim of a fraud.
Under the present law, fraudulent intent is not necessary to entitle to other
to rescind an insurance contract on the ground of concealment But where the
fact concealed proves or tends to prove the falsity of a warranty. concealment
must be intentional and fraudulent to entitle the other to rescind.

Q. What matters need not be communicated except in answer to

inquiries?
A. "Neither party to a contract of insurance is bound to communicate
information of the matters following, except in answer to the inquiries of the
other:
"(a) Those which the other knows;
"(b) Those which, in the exercise of ordinary care, the other ought to
know, and of which the former has no reason to suppose him ignorant;
"(c) Those of which the other waives communication;
"(d) Those which prove or tend to prove the existence of a risk excluded
by a warranty, and which are not otherwise material; and
"(e) Those which relate to a risk excepted from the policy and which are
not otherwise material.”

Q. Are matters known by the other party required to the revealed?

Α. A party is under no duty to disclose to the other what the latter already
knows or ought to know. Such rule is not limited to facts known personally to a
party but extends to matters known to his agent. Thus, any information material
to the transaction either possessed by the agent at the time of transaction or
acquired by him before its completion, is deemed to be knowledge of the
principal at least so far as the transaction is concerned even though in fact
knowledge is not communicated to the principal at all. Knowledge, therefore, of
the insurer's agent is knowledge of the insurer 345 345 However, where the
agent of the insurer fraudulently conspired with the insured, knowledge of the
agent will not bind the insurer.

Q. A applied for a fire insurance contract. The insurer's agent and

surveyor viewed the premises and the neighboring buildings. Question:
Will omission of the insured to mention the neighboring buildings to the
insurer entitle the latter to rescind?
А. Such omission will not avoid the policy for the insurer's agent knew the fact
not revealed.

Q. Sibya, Jr. applied for life Insurance with Sun Life. In his application for
insurance, he indicated that he had sought advice for kidney problems.
He indicated in his application: "Last 1987, had undergone lithoripsy due
to kidney stone under Dr. Jesus Benjamin Mendoza at National Kidney
Institute, discharged after 3 days, no recurrence as claimed." On February
5, 2001, Sun Life approved Sibya's application and issued the life
insurance policy. On May 11, 2001, Sibya died of gunshot wound. Sun Life
sought to rescind the policy on the ground of concealment. Sun Life
claimed that Sibya did not disclose his previous medical treatment at the
NKI in May and August 1994. The beneficiaries claimed that the insured
did not commit concealment or misrepresentation and he even authorized
Sun Life to inquire further into his medical history for verification
purposes. Issue: Was the insured guilty of concealment or
misrepresentation?

A. The insured did not commit concealment or misrepresentation. Sibya

admitted in his application his medical treatment for kidney ailment. He even
executed an authorization in favor of Sun Life to conduct investigation about his
medical history. It cannot be said that he concealed his medical history. The
insurer was aware of the medical condition of Sibya and further information
need not be communicated.

Q. What are the matters each party ought to know and need not be
communicated to the other? Give examples of each.

A. Matters supposed to be known by the other party need not be

communicated. The facts each party ought to know are: (a) all the general
causes which are open to his inquiry, equally with that of the other, and which
may affect either the political or material perils contemplated, or (b) all general
usages of trade.
Thus information or facts which, are of public knowledge, so notorious
that presumption may reasonably exist that the insurer has knowledge thereof
need not be disclosed.
Examples:
(a) The insurer is presumed to have knowledge of the political or
disturbed condition of the country at the time the policy was effected, and
cannot claim that such fact was concealed.
 (b) Knowledge of the state of the world, of the allegiance of
particular countries, of the risks and embarrassments affecting commerce,
or the course and incidents of the trade, on which they insure, must be
imputed to the insurers,
(c) The insurer is presumed to know the various usages and
customs pertaining to maritime matters.
(d) The insured is not obliged to disclose matters which are equally
within the reach of the insurer and which by fair inquiry and due diligence
he may learn from ordinary sources, Thus, the peace and order situation
in a certain locality need not be communicated by the insured to the
insurer.”

Q. What is the effect of waiver of information? How may information be

waived?

A. Information need not be revealed to the other where communication thereof

was waived. Waiver of the information may either be: (a) express when made
by the terms of the insurance or contained in the policy; or (b) implied, when
there was neglect to make inquiries as to such facts distinctly implied in other
facts of which information was communicated.

Q. When is there an implied waiver of information?

A. Where an application for insurance is made in writing, and the questions

therein as to material facts are unanswered or incompletely answered, and the
insurer without further inquiry, issues the policy, it thereby waives all right to a
disclosure, or to a more complete answer with respect to the fact to which the
unanswered question relates, and the policy cannot thereafter, in the absence
of clear proof of a fraudulent intention of suppression of the fact, be avoided on
the ground of concealment
Therefore, answers as to the insured's physical condition or disease,
which are such as ought to put a reasonably prudent on inquiry which would
have resulted on ascertaining the fact, are equivalent to actual notice. Thus,
"where the insured exhibited to the insurer an extract from a letter, and the
latter, knowing of the fact that it was such extract, does not ask to see the whole
letter, there is no material concealment of a fact contained in the part not
shown. "
However, where the answer of the applicant to a direct question of the
insurer purports to be a complete answer to the question, any substantial
misstatement or omission in the answer avoids a policy issued on the faith of
the application.
The distinction between an apparently complete, but in fact incomplete
and therefore untrue, and an answer manifestly incomplete and as such
accepted by the insurer, may be illustrated by two cases of fire insurance, which
are governed by the same rules in this respect as in cases of life insurance. If
one applying for insurance upon a building against fire is asked whether the
property is encumbered, and for what amount, and in his answer discloses only
one mortgage when in fact there are two, the policy issued thereon is avoided.
But if to the same question he merely answers that the property is encumbered,
without stating the amount of encumbrance, the issuance of the policy without
further inquiry is a waiver of the omission to state the amount.

Q. In the application for life insurance, the insured was asked if he had
ever submitted himself to any infirmary, sanitarium or hospital for
consultation and treatment. He answered that he was confined for 5 days
at the Quezon Memorial Hospital for influenza in 1947. It turned out that he
had been twice confined at the Alzona Clinic in Lucena City, the first was
on July 19-23, 1959, and the second was from January 29, 1960 which
were not mentioned by the insured. Question: Was there a waiver of
information as to the confinement at Alzona Clinic?

A. NO. There was no waiver of information. The answer of the insured to the
question propounded by the insurer was complete and the latter had the right to
rely on the correctness thereof. The insurer, having been informed that the
insured had been confined at the Quezon Memorial Hospital in 1947, without
mentioning his confinement at the Alzona Clinic, had the right to rely that the
insured had not been confined in any other hospital or clinic. There would have
been a waiver of further information if., on its face, the answer appeared to be
incomplete or ambiguous; if the insured had merely answered "Yes", to the
question "Have you ever been to any infirmary, sanitarium or hospital for
consultation and treatment? and the insurer did not make any further inquiry.

Q. On May 12, 1962, Kwang Nam obtained a 20-year endowment policy

and readily paid the premium thereon. Kwang Nam informed the insurer's
medical examiner as follows: "Operated on for tumor (myoma) of the
stomach. Claims that tumor has been associated with ulcer of stomach.
Tumor taken out was hard and of a hen's egg size. Operation was (2)
years ago in Chinese General Hospital by Dr. Yap. Now, claims he is
completely recovered The insurer made no further inquiry or
investigation. It turned out that the insured was operated on for "peptic
ulcer" and not a mere tumor. On Dec. 6, 1963, Kwang Nam died of cancer
of the liver with metastasis. The insurer denied the beneficiary's claim on
the ground that the answer given by the insured to the question appearing
in his application for life insurance was untrue. Question: Was Kwang
Nam guilty of concealment?

A. NO! There was no concealment since the insurer impliedly waived the
information. The information communicated by Kwang Nam was imperfect and
sufficient to have induced the insurer to make further l inquiries about the
ailment and operation of the insured. The failure of the insurer to make further
inquiries constituted a waiver of imperfection of the answer and rendered the
omission to answer more fully immaterial. Kwang Nam had informed the
insurer's medical examiner that the tumor for which he was operated on was
"associated with ulcer of stomach". In the absence of evidence that the insured
had sufficient knowledge as to enable him to distinguish between "peptic ulcer"
"tumor", his statement that said tumor was associated with ulcer of stomach"
should be construed as an expression made in good faith of his belief as to the
nature of his ailment and operation.

Q. Is waiver of medical examination tantamount to waiver of information?

A. Waiver of medical examination of the applicant for life insurance should not
be construed as a waiver of material information, since the waiver of medical
examination is made where the insured represents himself to be of good health.
It is reasonable to assume that had the insured revealed material information
concerning his health, the insurer would not have waived the medical
examination.

In a non-medical life insurance which dispenses with medical

examination, waiver of such medical examination renders even more material
the information required of the applicant concerning previous condition of health
and diseases suffered, for such information necessarily constitutes an important
factor, which the insurer takes into consideration in deciding whether to issue
the policy, or not.

Q. A obtained a "non-medical" life insurance policy, which dispensed with

the medical1 examination. In the policy A stated that she never had
cancer nor tumor nor undergone operation notwithstanding the fact that
two months before the issuance of the policy, she was operated on for
cancer. A died. The beneficiaries claimed that there was no material
misrepresentation in view of the waiver of medical examination by the
insurer. Question. Was the beneficiaries' contention meritorious?

A. The contention was without merit. The information required of the insured
concerning her previous condition of health constituted an important factor,
which the insurer took into consideration in deciding whether to issue the policy
or not. It was because the insured had given herself a clean bill of health that
the insurer had no longer considered an actual medical check-up necessary.

Q. Bacani obtained a "non-medical" life insurance. When asked in his

application for life insurance if he had consulted any doctor or health
practitioner, the insured limited his answer to a consultation with Dr.
Raymundo of Chinese General Hospital for cough and flu complications.
The insurer waived medical examination. It turned out however, that two
weeks before the application, the insured was examined and confined in
the Lung Center of the Philippines, where he was diagnosed tor renal
failure. The insured died and the insurer refused to pay the claim on the
ground that the insured did not disclose material facts. The beneficiaries
on the other hand, maintained that waiver of medical examination debunk
the materiality of the facts concealed. Question: Was it necessary for the
insured to reveal material information?

A. Yes. Since the waiver of a medical examination renders even more material
the information required of the applicant concerning previous condition of health
and diseases suffered because such information constitutes an important factor
which the insurer takes into consideration whether to issue the policy or not.

Q. How is materiality of concealment determined?

A. Materiality is to be determined not by the event, but solely by the probable

and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries.

The fact concealed must be material to entitle the other to rescind the
policy. A fact is immaterial where the knowledge or ignorance of it will naturally
influence the judgment of the Insurer in deciding Whether he will enter into the
contract, or in estimating the degree and character of the risk., or in fixing the
rate of premium. It operates as an inducement to the usurer to enter into the
contract, where, except for such inducement, it would not have done so, or
would have charged a higher premium.

Q. Are matters subject to special inquiry material? Give an example.

A. YES. Matters subject of special inquiries are deemed conclusively material,

and the failure of an apparently complete answer to make full disclosure will
avoid the policy. Such principle is applicable even though otherwise they might
not be regarded as material and, therefore, the insured is required to make full
and redisclosure to the questions asked.

Example:

In an application for life insurance, the insured was asked, "Have you ever
been to any infirmary, sanitarium or hospital for consultation and treatment? "
Question: Was the information sought by the insurer material?

Answer: YES. The information sought was material. The insurer had
asked specific question not a general one. Matters subject of special inquiries
are deemed conclusively material.

Q. What is the test of materiality of information? Give examples.

A. The test of materiality is whether knowledge of the true facts would have
influenced a prudent insurer in determining whether to accept the risk or in
fixing the amount of premiums. That is, if answers to questions propounded by
the insurer are such as may influence it in determining whether to accept risk
and what premium to charge, such answers are material and must be truthful.
Thus, every fact is material which increases the risk or which, if disclosed, might
have led the company to decline the risk, or to accept the risk only for higher
premium.

Examples:
(a) Material illness:
1. Operation for removal of infected cyst from abdomen, attacks of "acute
cholicystitis" or serious infection of the gall from bladder.
2 Cerebral congestion and Bell's palsy, cancer and disease of the
kidneys.
(b) Immaterial illness:
 1. A mere cold or slight attack of influenza.
2. Attack of diarrhea about two years previously.

Q. Is causal connection between the fact concealed and the cause of the
loss or death necessary?

A. Concealment need not, in order to be material, be of facts which bring about,

or contribute to, or are connected with, insured's loss. It is immaterial that there
is no causal relationship between the fact concealed and the loss sustained.
The insured, therefore, peed not die of the very disease he failed to reveal to
the insurer. It is sufficient that his non-revelation has misled the its estimate of
the insurer in forming disadvantages of the proposed policy or in making its
inquiries in order to entitle the insurance company to avoid the contract.

Q. In applying for reinstatement of a lapsed life insurance policy, A

concealed his disease of both kidneys and of an enlarged liver. Later,
after reinstatement of the policy, the insured died of thrombosis.
Question: Was the insurer liable?

A. The insurer was (not) liable since the fact concealed was material although
the insured did not die of the fact concealed.

Q. Bacani applied for a non-medical life insurance. Despite the fact that
he was asked if he consulted health practitioner any doctor or within the
past 5 years, the insured did not inform the insurer that two weeks prior to
his application for insurance, he was examined and confined at the Lung
Center of the Philippines, where he was diagnosed for renal failure. The
insured died in a plane crash. The beneficiaries contended that since the
fact concealed had no bearing with the cause of death of the insured, the
insurer was liable Question: Was such contention correct?

A. NO! The contention of the beneficiaries was not correct. The insured need
not die of the disease he failed to disclose to the insurer, It is sufficient that his
non-disclosure misled the insurer in forming his estimates of the risk of the
proposed insurance policy or in making inquiries. The insurer was not liable.

Q. Must information of the nature or amount of the interest of one insured

be communicated?

A. NO! "Information of the nature or amount of the interest of one insured need
not be communicated unless in answer to an inquiry, except as prescribed by
Section 51."

The insured need not communicate the nature or amount of his interest
except: (a) when the insurer makes an inquiry thereon, and (b) where the
insured is not the absolute owner of the property insured.

Q. Must opinion or judgment be communicated?

A. "Neither party to a contract of insurance is bound to communicate, even

upon inquiry, information of his own judgment upon the matters in question."

A party is not bound to Communicate information of his own opinion, or

judgment upon the matter in question even when asked. And in case a party
advances his opinion or judgment to the other, an untrue statement will not
avoid the policy if made in good faith without intention to deceive. Thus, where
the insured expresses an opinion that his house is of certain value, the insurer
cannot for a moment be justified in thinking that the value of the house is really
just what the owner estimates it to be for he must be deemed to know that the
value of the property ordinarily capable of exact ascertainment only by a sale.

Q. When must opinion be communicated?

A. In marine insurance, "information of the belief or expectation of a third

person, in reference to a material fact, is material" and must be communicated.
The opinion therein referred to is that of a third person and not that of the
insured.

TITLE 5
REPRESENTATION

Q. Define (a) representation and (b) misrepresentation.

A. A representation is an oral written statement of a fact or condition affecting

the risk made by the insured to the insurance company, tending to induce the
insurer to assume the risk.
Misrepresentation is a statement of something as a fact which is untrue
and material to the risk, and which the insured states, knowing it to be untrue in
an attempt to deceive, or which he states positively as true without knowing it to
be true, and which has a tendency to deceive.

Q. In what form may representation be? What is the nature of

representation?

A. "A representation may be oral or written.” Representation is a collateral

matter which induces the execution of the contract of insurance. They are
preliminary statements of facts or, circumstances relating to the proposed
adventure, made for the information of the insurer. It is a collateral inducement
for the insurer to enter into a contract of insurance.

Q. As of what time must representation be made and why at that time?

A. "A representation may be made at the time of, or before, issuance of the
policy. Since representation is an inducement to a contract of insurance, it
must, ordinarily, be made at the time of issuing the policy, or before it. It is
submitted, however, that representation may likewise be made after the
issuance of the policy when the purpose thereof is to induce the insurer to
modify an existing insurance contract since the provisions on representation are
applicable not only to the original formation of an insurance but also to its
modification.

Q. A insured his building against fire. After the policy was issued, A
realized that the premiums charged were higher because a part of the
building was occupied by a bakery. A asked the insurer to reduce the
premium for the unexpired portion of the policy on the pretext that the
bakery was no longer in the building when, it truth, it was still there. The
insurer reduced the premium. Question: Did the insured make a
misrepresentation?

A. Yes, the insured made a misrepresentation although the statement was

made after the issuance of the policy, because it was intended to deceive the
insurer into consenting to a modification of the policy.

Q. Distinguish concealment from misrepresentation.

A. A party to a contract of insurance is bound to communicate material facts to

the others. Should he fail to communicate such facts, he is guilty of
concealment and the information he gives in compliance with his duty to reveal
facts is representation. Representation, therefore, "is the communication
 required to comply with the prohibition against concealment. Concealment is
the passive, and misrepresentation the active, form of the same act of bad faith.

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

A. Representation may either be:

1. Affirmative which is an affirmation of a fact existing when the contract begins
or
2. Promissory which is a statement by the insured concerning what is to happen
during the term of the insurance.
Examples:
(a)Affirmative representation: A statement in the application that a force
pump and an abundance of water constitute the facilities for extinguishing
fire is an affirmative representation only and, therefore, does not mean
that there is a continuing guaranty that they shall be kept in good order for
use in the future.
(b)Promissory representation: A representation in an application for a
fidelity bond that the employee's books, etc. will be examined at stipulated
periods, is promissory representation.
Q. How should the language of representation be interpreted?

A. “The language of a representation is to be interpreted by the same rules as

the language of contracts in general."
A representation need not be literally true and accurate in every
respect, rather it is sufficient if they are substantially or materially true and in
case of promissory representations, it is sufficient if they are substantially
complied with.

Q. H bought a car for P2,800. H then gave the car as a gift to his wife. The
wife in applying for insurance on the said car represented that the "price
paid by the proposer" was P3,500 and the present value was P3,000.
Question: Considering that the wife who insured the car did not pay the
price as it was merely given to her as a gift, was she guilty of
misrepresentation?

A. There was no misrepresentation as literal truth was not necessary. It cannot

be assumed that the insurer should not have issued the policy unless it was
strictly true that the price representing the cost of the car had been paid by the
insured and by no other person.

Q. The insured represented that he did not drink beer or other intoxicants.
The truth, however was that he drank beer occasionally. Question: Was
there a misrepresentation that entitled the insurer to rescind the policy?

A. No, because the representation need not be literally true. Occasional drinking
by the insured was not a material circumstance that entitled the insurer to rescind
the policy.

Q. What is the effect of a representation as to the future?

A. “A representation as to the future is to be deemed a promise, unless it

appears that it was merely a statement of belief of expectation".

Q. Are representations of expectation the same as promissory

representation?

A. Representations of expectation or intention or belief are to be carefully

distinguished from promissory representations, as follows:
(a) Representations of expectation or belief are statements of future facts or
events which are in their nature contingent and which the insurer is bound to
know the insured could not have intended to state as known facts, but as
intentions merely; they are not susceptible of present., actual knowledge. While
promissory representation is a promise to be performed after the contract has
come into existence.
(b) Unless made with fraudulent intent, the eventual falsity or non-fulfillment of a
representation of expectation or belief will not avoid the policy, while the falsity of
a promissory representation on a material point entitles the injured party to
rescind the contract from the time the representation becomes false.
Illustrations:
(a) Representation of expectation:
The falsity of statements as to the time when the vessel insured will sail, the
nature of the cargo to be shipped, and the amount of the profits expected, will
not avoid the policy in the absence of fraud, as the same are merely
statements of expectation or belief.
(b)Promissory representation:
Statements that the vessel is to be repaired at a certain place or will be dry-
docked are promissory representations that must be substantially complied
with.
Q. May representation qualify, modify or change an express provision of
the policy? If not, why not?

A. "A representation cannot qualify an express provision in a contract of

insurance, but it may qualify an implied warranty.
An express warranty is part of the contract and contained in the policy itself or
in another instrument signed by the insured and referred to in the policy as
making a part of collateral inducement to a contract and not a part of the policy.
Such being the case, it must follow that a part of the contract cannot be
qualified or modified by a statement which is not a part of the contract. On the
other hand, an implied warranty not being a part of the policy may be qualified
or modified by representation.

Q. May representation be withdrawn or altered? If so, why? If not, why

not?

A. "A representation may be altered or withdrawn before the insurance is

effected, but not afterwards.”
As discussed above, representation is an inducement for the other party to
enter into a contract of insurance and, therefore, after the other party is so
induced, such inducement may no longer be altered or withdrawn. Thus, under
this section, "a representation may be altered or withdrawn before the
insurance is effected but not afterwards."

Q. To what time does representation refer?

A. "A representation must be presumed to refer to the date on which the

contract goes into effect.
A positive representation that a certain fact does or does not exist, refers
to the time when contract is completed, and becomes binding. And accordingly,
after a policy has been issued and delivered, a subsequent misstatement by the
insured made in good faith, in relation to the risk or subject-matter, will not bind
the insured.
Thus, even though the representation that no other insurance exists on
the property insured is true at the time it is made, yet it is untrue at the time the
application is accepted and the policy issued, the insured is guilty of
misrepresentation that vitiates the policy.

Q. When a person insured has no personal knowledge of a fact, and he

merely repeats information which he has upon the subject, is he
responsible for the truth of such statement?

A. "When a person insured has no knowledge of a fact, he may nevertheless

repeat information which he has upon the subject, and which he believes to be
true, with the explanation personal that he does so on the information of others;
or he may submit the information, in its whole extent to the insurer; and in
neither case is he responsible for its truth, unless it proceeds from an agent of
the insured, whose duty it is to give the information."
When the insured has no personal knowledge of a fact but merely
receives information from others, he may or may not communicate such
information to the insurer and when he does, he will not be responsible for its
truth.

Q. A purchased a car for P2,800. A gave the said car to his wife and
informed her that the value of the car was P3,000. The wife insured the car
and represented to the insurer's agent that according to her husband the
value the car was P3,000. Question: Was the insured guilty of
misrepresentation?

A. No, because the insured did not state of her own knowledge that the
automobile originally costP3,000, or that its value at the time of the insurance
was P3,000. She merely repeated the information given by her husband, and at
the Same time disclosed to defendant's agent the source of her information.

Q. When is the insured bound by the information he received from

others?

A. Although the general rule is that information received from others and of
which the insured has no personal knowledge need not be communicated to the
insurer, however, in the following cases, the insured must disclose information
received from another person:
1. When the information material to the transaction was acquired by the agent
of the insured, since knowledge of the agent is also knowledge of the principal.
In such case, the insured must not only reveal the information acquired from his
agent but is likewise responsible for its truth provided that it is the duty of the
agent to give the information.
2. In marine insurance, the information as to the belief or expectation of a third
person, in reference to a material fact, is material and must, therefore, be
communicated to the insurer.
Q. When is representation deemed to be false?

A. "A representation is to be deemed false when the facts fail to correspond

with its assertions or stipulations.
As previously discussed, literal truth of a representation is not necessary, it
being sufficient that the representation is substantially true and accurate.

Q. What right does the injured party have if the representation is

materially false? Must misrepresentation be intentionally false?

A. “If a representation is false in a material point, whether affirmative or

promissory, the injured party is entitled to rescind the contract from the time
when the representation becomes false.”
Insurance may be avoided where the insured made false statements as to
matters that are material to the risk for the purpose of obtaining the insurance
and thereby induce the insurance company to issue the policy. To constitute
misrepresentation, however, the statement must be substantially untrue. Thus,
the policy cannot be avoided where the statements are substantially true
although not strictly and literally true.

Q. The insured represented that she never had cancer or tumor or

undergone operation notwithstanding the fact that two months before the
issuance of the policy, she was operated on for cancer. Question: May the
policy be avoided?

A. The policy may be avoided. There can be no Recovery from the insurer
where the answers given by the insured were substantially false on a material
point.

Q. The insured was required to answer questions in the application for life
insurance as to what physicians had been consulted by, or had treated
the applicant. The applicant answered in the negative knowing that he had
been confined in a hospital and treated on a number of occasions for
various ailments, including incipient pulmonary tuberculosis. Question:
Upon death of the insured, may the beneficiary recover from the insurer?

A. There can be no recovery from the insurer since the answers given by the
insured were substantially false.
Q. What is the consequence if the applicant for insurance made truthful
statements to the agent of the insurer but the agent misrepresented the
facts?

A. Where an applicant for insurance made truthful statements of material facts

to the agent of the insurer and merely signed a blank application, but the agent
filled in the answers negativing or misrepresenting the facts, the insurer cannot
avoid the policy as the latter must assume responsibility for the acts of its
agents. However, where there was connivance between the insured and the
insurance
agent, the insurer may still be absolved from liability although the information in
the application was filled in by its agent.

Q. The applicant tor life insurance and members of his family disclosed to
the insurance agent to whom the application was made, that the applicant
had a lung trouble and had been confined in a sanitarium. Said applicant
merely signed the application form in blank and the agent filled in the
answers negativing ill health. Question: In an action on the policy, may
the insurer raise the defense of misrepresentation?

A. The insurer cannot assert misrepresentation as a defense because it must

assume responsibility for the acts of its agent. Furthermore, the insured himself
was not guilty of misrepresentation or concealment as he revealed the truth to
the insurer's agent. However, where there was evidence of connivance
between the insured and the agent of the insurer, the defense of
misrepresentation must be sustained although the insured himself did not fill in
the application blank but merely signed it.

Q. What is the effect of false statement of age by the insured in a life

insurance?

A. Where the age of the insured was falsely stated or misstated, the policy will
not be avoided but instead, the value of the insurance will be adjusted in such a
way that the “amount payable or benefit accruing under the policy shall be such
as the premium paid would have purchased at the correct age." Such principle,
however, is applicable only when there was a valid and binding contract, not
procured by fraud and where there was only an innocent misstatement of age
and does not apply where the difference between the true age and the age
given was so great that there was no doubt that it was knowingly and purposely
exaggerated by the insured.
Q. What is the effect of acceptance of premium payment after the insured
has violated the policy of insurance?

A. Where the insurer was aware of a violation of the policy at the time of the
acceptance of premium the insurer is barred from raising such violation as a
defense. However, where the insurer was not aware of a violation of the policy
at the time of the acceptance of premium, the insurer is not barred from raising
such violation as a defense.

Q. Carmen Lapuz applied for insurance coverage against accident and

injuries. In her application dated April 15, 1969, she gave the date of her
birth as July 11, 1904. She paid the premium and the insurer issued the
policy. The policy, however, excluded liability to persons who are under
16 years of age or over the age of 60. During the existence of the policy,
Lapuz died in a vehicular accident. The insurer refused to pay on the
ground that Lapuz was more than 60years old at the time the policy was
issued. Question: Was the refusal to pay correct?

A. The refusal of the insurer to pay was not correct because it was barred by
estoppel from claiming forfeiture of the policy. Lapuz indicated in her application
that she was 65 years of age by stating her date of birth and yet the insurer
accepted payment of premium and issued the policy.

Q. Adolfson obtained a car insurance policy covering own damage and

third-party liability from Malayan Insurance. Adolfson authorized Stokes,
an Irish tourist to drive the car insured. Stokes had been a tourist for more
than 90 days and had a valid Irish driver's license but without a Philippine
driver's license. While being driven by Stokes, the car insured collided
with another vehicle. One day after the accident, Malavan accepted
payment of the premium. Later Malayan denied liability for the damage on
the ground, that Stokes was not an "authorized driver" under the policy
which required the person authorized by the insured to drive the car to be
a licensed driver. Questions: (1) Is the insurer estopped from denying
liability by accepting payment of premium? (2) Is the insurer liable?

A. (1) Acceptance of premiums merely assures continued effectivity of the

insurance policy in accordance with its terms. Such acceptance does not estop
the insurer from interposing any valid defense under the terms of the insurance
policy.
(2) The insurer is not liable because the driver does not have a valid license to
drive in the Philippines. Under the law, a tourist duly licensed to drive in his
country is allowed to drive in the Philippines during but not after 90 days of his
sojourn in the Philippines. Stokes had been in the Philippines for more than 90
days and therefore he is not an authorized driver under the terms of the
insurance contract.

Q. Are the provisions on concealment and representation applicable also

to modification of the contract of insurance?

A. The provisions of this chapter apply as well to a modification of a contract of

insurance as to its original formation.
The provisions on concealment and representation are made applicable
by this section to a modification of a contract of insurance as well as to its
original formation. Thus, while the general rule is that concealment and
representation are made at or before the effectivity of the policy and that any
information acquired after the policy is issued and made effective is not covered
by the rule on concealment, modifying or amending their contract, said rules on
concealment and representation are likewise applicable.
Illustration:
A obtained a life insurance policy for P200, 000. Later after the policy was
issued, A applied for an increase of the amount of the policy. A concealed a
known material ailment he contracted after the policy was issued and before the
application for increase of the amount of the policy. The policy was increased to
P500,000. Question: Was he guilty of concealment?
Answer: Yes, because the rule on concealment requiring disclosure of
material facts applies also to a modification of the policy.

Q. Whenever the insurer is given the right to rescind the contract of

insurance, within what time should it be exercised?

A. "Whenever a right to rescind a contract of insurance is given to the insurer

by any provision of this chapter, such right must be exercised previous to the
commencement of an action on the contract.”
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 may rescind the
insurance contract even after the occurrence of the loss and filing of the claim
with the insurer provided that it is done before the filing of the complaint in court
against the insurer.
Q. The person whose life was insured died on November 25, 1925. The
beneficiary filed a claim with the insurer. Thereafter, on May 25 1926, the
insurer denied the claim and offered to refund the premium paid upon
return of the policy for cancellation. More than a month thereafter, the
beneficiary filed the necessary complaint in court. Question; Was there
rescission made within the period provided by law?

A. Yes, rescission was made within the period provided by law because the
insurance company more than a month previous to the commencement of the
present action, wrote the beneficiary and informed him that the company
was offering to refund the premium which the insured paid, upon the return of
the policy for cancellation. Such offer operated to rescind the contract

Q. Trinos applied for a health care coverage with Philamcare. In his

application, Trinos answered "no" to the question whether he or any of
his family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic
ulcer. The application was approved and under the agreement, Trinos was
entitled to avail of hospitalization benefits. Upon termination, the same
was extended to another year with an increased amount of coverage.
Trinos suffered heart attack and was confined at the hospital for one
month. His spouse's claim for benefit under the coverage was denied by
the insurer on the ground of concealment. The insurer did not rescind the
contract despite its claim of concealment. Trinos died a month later.
Trinos' spouse filed an action against the insurer without the insurance
being rescinded. Question: May the insurer still rescind the contract?
A. Concealment gives the injured party the right to rescind the contract. Such
right of rescission however, must be exercised previous to the commencement
of an action on the contract. In this case, no rescission was made before the
action was filed and therefore, the insurer may no longer rescind the contract.

Q. What is the meaning of rescind which the insurer must exercise

previous to the commencement of an action on the policy?

A. To rescind means to abrogate, to annul or cancel a contract. Such being the

case, it presupposes the existence of a contract to be rescinded. The provision
requiring the insurer to exercise the right to rescind previous to the
commencement of the action does not apply where the defense raised is that
the contract is void or that there is no contract between the parties, for in such
case, there is no existing contract to rescind.
Q. The insured died on May 10, 1925. In June, 1925, the beneficiary
submitted proof of death of the insured to the insurer which refused to
pay. The complaint was filed in court on January 4, 1925. In February,
1926, the insurer filed its answer The insurer amended its answer on
August 31, 1926, claiming that the contract was null and void. Question:
Was the insurer estopped from claiming that the contract was null and
void after the complaint had been filed in court?

A. No, because Section 48 applies only when there was a contract to be

rescinded and not when the defense raised was that the contract was void, for
when there was no contract, there was nothing to rescind.

Q. When is there a waiver of the right to rescind on the part of the

insurer?

A. Where 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,

Q. 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.
Question: May the insurer refuse payment of the proceeds of the policy
on the ground of violation of the policy?

A. The insurer cannot invoke the violation of the policy as a defense. If, with the
knowledge of the existence of other insurances in violation of the policy, the
insurer preferred to continue the policy, its action amounted to a waiver of the
rescission of the contract.

Q. The insurer had knowledge that the premises insured against fire did
not have the number of fire hydrants required in the policy. Question: May
the insurer later on refuse payment of the loss?

A. The insurer is barred by waiver or estoppel to claim violation of the policy.

When the policy contains a condition which renders it voidable at its inception
and this result is known to the insured, it will presume to have intended to waive
the condition rather than to have deceived the insured when, in fact, he is not
and to have taken his money without consideration.
Q. On April 15, 1969 Lapuz applied for accident insurance. She stated in
her application that she was born on July 11, 1904. She paid the premium
and the insurer issued her the policy, During the effectivity of the policy,
Lapuz died in a vehicular accident. The insurer denied the claim of the
beneficiary on the ground that the policy excluded liability in case the
insured is over the age of sixty and since Lapuz was over sixty when the
policy was issued, said policy was null and void, Question: Was the denial
of the claim correct?

A. The denial of the claim was not correct. Lapuz did not conceal her age
having stated in her application her date of birth which showed that she was
almost 65 years of age. The issuance of the policy by the insurer and its
subsequent failure to cancel the policy before the accident happened despite
the departure from the exclusionary condition contained in the said policy
constituted a waiver of such condition.

Q. Is an assignee of the rights of the insured affected by the fraud

committed by the insured?

A. An assignee of an 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 of the policy has by his fraud and/or misrepresentation forfeited said
right; with more reason the assignee who is merely an indorsee of the policy
cannot be entitled to such proceeds.

Q. Paramount Shirt borrowed money from Pacific Banking Corporation.

To secure the loan, it mortgaged its properties and assigned the fire
insurance policy issued by Oriental Assurance covering said properties to
Pacific Banking. Paramount violated a condition in the policy requiring
full disclosure of all insurance policies on the same properties insured
with Oriental. When the insured properties were burned, Pacific Banking
demanded payment from the insurer. The insurer refused to pay on the
ground of violation of the policy by the insured. Pacific Banking claimed
that the insured's violation of the policy can not affect the
mortgagee/assignee because the purpose for which the endorsement or
assignment of the policy was made was to protect the
mortgagee/assignee against any untoward act or omission of the insured
and it would be absurd to bar the mortgagee/assignee from recovery on
account of violation of the policy committed by the insured. Question.
Was the contention of Pacific Banking correct?

A. No, Pacifc Banking's contention Was, Not correct. Where the insured who
was primarily entitled to receive the proceeds of the policy had by fraud and or
misrepresentation, forfeited said right with more reason, Pacific Banking which
was claiming as indorsee of said insured cannot be entitled.

Q. When will an insurance policy become incontestable?

A. "After a policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a period of two (2)
years from the date of its issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is rescindable by reason of the
fraudulent concealment Or misrepresentation of the insured or his agent."

Q. What is the meaning of the incontestable clause and what are the
requisites thereof?

A. An 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.
A policy to become incontestable must have the following requisites;
1. It must be a life insurance policy;
2. It must be payable on the death of the insured; and It must have been
in force during the lifetime of the insured for a period of two years

Q. What are the Effects and purpose of incontestable clause?

A. Whenever all the requisites of incontestability mentioned above are present,

the insurer can no longer escape liability under the policy nor be allowed to
prove that the policy is void ab initio or rescindable by reason of concealment
Or misrepresentation of the insured or his agent. In other words, the insurer is
precluded from contesting the policy on any ground.
The incontestable clause was "designed to prevent the commission of one of
the inequities usually perpetrated by insurance companies" as there were cases
where "after the death of the insured, the insurer starts fishing for evidence to
show that the insured made false representations as to the state of his health"
and thus "escape liability on the policy" or "delay its payment, in order to compel
the beneficiary when he is badly in mood of money, only to accept only part of
the policy.

Q. A obtained a life insurance policy, payable up, his death. He made a

misrepesentation in the application for Insurance. Four years, ten months
and twelve days after the issuances, of the policy the insured died.
Question; Was the insurer liable?

A. The insurer was liable because the policy became incontestable after the
lapse of two years and therefore the insurer cannot rescind or annul the policy
on the ground of concealment misrepresentation of the insured.

Q. What is the period of contestability or within what time must the

insurer contest the validity of a life insurance policy?

A. Prior to the cases of Manila Bankers Lite Insurance Corp. v. Aban,7 and Sun
Life Canada (Phils.), Inc. vs. Sibya, et al. the "incontestability clause" which
precluded the insurer from raising the defenses of false representations or
concealment of material facts applied if the insurance had been in force for at
least two years from the time the policy was issued or reinstated.

The phrase "during the lifetime of the insured" found in Section 48 simply meant
that the policy was no longer considered in force after the insured died. The key
phrase in the second paragraph of Section 48 is "for a period of two years". The
insurer has two years from the date of issuance of the life insurance contract or
its last reinstatement within which to contest the policy,whether or not the
insured still lives within such period. After two years, the defenses of
concealment or misrepresentation, no matter how patent or well founded, no
longer lie. Congress felt this was a sufficient answer to the various tactics
employed by insurance companies to avoid liability. The case of Tan vs. Court
Appeals, SCRA 403 supports the view that the insurer hastwo years from the
issuance of the policy within which to contest the life insurance policy.

Illustration:
Phil-Am Life issued a life insurance policy amounting to P80,000 in favor
of Tan Lee Siong effective from Nov. 6, 1973. On April 26, 1975, the
insured died of hepatoma. The beneficiaries demanded payment but the
insurer denied the claim on September 11, 1975 and rescinded the policy
by reason of misrepresentation and concealment of material facts made
by the insured in his application for insurance. The beneficiaries
maintained that the insurer can no longer rescind the poly after the death
of the insured. They also claimed that recission must be done during the
lifetime of the insured within two years and to and prior to the
commencement of the action: Question: Are the contentions of the
beneficiaries, correct?

A. The contentions are without merit. The insure, has two years from the date of
issuance of the insurance contract or of its last reinstatement within which to
contest the policy, whether or not the insured still lives within such period.* from
November 6, 1973 when the policy was issued in April 26, 1975 when the
insured died, less than two years had elapsed and hence the policy was not yet
incontestable.

Q. Were there subsequent decisions of the Supreme Court that altered the
effect of the ruling in the a forecited case of Tan?

A. Yes. The decisions in the in the cases of Manila Bankers Life Insurance
Corp. v. Aban, and Sun Life of Canada (Phils.), Inc. vs. Sibya, et al,° changed
the effect of the ruling in the case of Tan vs. Court Appeals, by declaring that
the "insurer is given two years - from the effectivity of a life insurance contract
and while the insurer is alive to discover or prove that the contract is void ab
initio or rescindable" by reason of concealment or misrepresentation and
therefore if the insured is already dead the insurer cannot contest the life
insurance policy even if less than two years from the issuance of the policy had
elapsed.

Q. On July 3, 1993 Sotero took out a life insurance policy from Manila
Bankers Life Insurance with Aban as beneficiary. On April 10, 1996 when
the insurance policy had been in force for more than two years and seven
months, Sotero died. The beneficiary filed a claim with the insurer. The
insurer alleged that Sotero fraudulently obtained the policy and filed an
action to rescind the policy. May the policy be rescinded?

A. The insurer cannot rescind the contract of insurance. "An insurer is given two
years – from the effectivity of a life insurance contract and while the insurer is
alive to discover or prove that the policy is void ab initio or is rescindable by
reason of the fraudulent concealment or misrepresentation of the insured or his
agent. After the two-year period lapses, or when the insured dies within the
period, the insurer must make good on the policy, even though the policy was
obtained by fraud, concealment, or misrepresentation. This is not to say that
insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work for the detriment of bona
fide takers of insurance and the public in general.

Q. what was the subsequent case based on the Aban case?

A. In the subsequent Sibya case it was likewise ruled that "An insurer is given
two years - from the effectivity of a life insurance contract and while the insurer
is alive to discover or prove that that policy is void ab initio or is rescindable by
reasons of the fraudulent concealment misrepresentation of the insured or his
agent: After the two-year period lapses, or when the insured dies within the
period, the insurer must make good on the policy, even though the policy was
obtained by fraud, concealment, Or misrepresentation. This is not to say that
insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work to the detriment of bona
fide takers of insurance and the public in general."

Q. On February 5, 2001, Sun Life approved Atty.Jesus Sibya, Jr.'s (Sibya,

Jr.) application for lite insurance. On May 11, 2001, Sibya., Jr. died as a
result of a gunshot wound. The beneficiaries filed a claim against the
insurer, Sun Life. On August 27, 2001, Sun Life denied the claim on the
ground that the details of Sibya Jr.'s medical history were not revealed in
his application. Sun life tendered a check representing the refund of the
premiums paid. The beneficiaries reiterated their claim which Sun Life
refused and instead filed a complaint for rescission of the insurance
policy. Question: May the insurer rescind the life insurance contract after
the death of the insured?
A. The insurer may not rescind the contract. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the
policy, even though the policy was obtained by fraud, concealment, Or
misrepresentation.

It will be observed that in the Sibya case, the insured died barely three months
from the time the policy was issued and yet it was considered incontestable
because the insured was already dead. Hence, the insurer must rescind the life
insurance contract on the ground concealment or misrepresentation within two
years from the time the policy was issued provided the insured is still alive at
that time. If the insured is already dead, the life insurance policy is already
incontestable even if less than two years had elapsed at that time. In effect the
Sibya case overruled the ruling in the Tan case wherein the insured died 1 year
and five months from the time the policy was issued but the insurer was allowed
to rescind the contract less than two years had elapsed since the policy was
issued.

Q. What defenses are not barred by incontestable clause?

A. Notwithstanding the incontestability of the policy, insurer may still raise the
following defenses,
1. The insurer may raise the defense that the premiums were not paid
2. The insurer may raise the defense that the insured violated the condition in
the policy relating to military or naval service in time of war
3. The insurer may raise the defense that the insured has no insurable interest
in the subject-matter of the insurance. $90
4. The insurer may raise the defense that the cause of death was excepted or
not covered by the terms of the policy.
5. The insurer may raise the defense that the fraud committed was of a
particulary vicious type such as: (a) where the policy was taken in furtherance
of a scheme to murder the insured; (b) where the insured substituted another
person for the medical examination; and (c) where the beneficiary feloniously
killed the insured.
6. The insurer may raise the defense that the necessary notice or proof of
insured's death was not given

Q. In case of reinstated policy, when will the incontestable period begin?

A. When a policy lapses for non-payment of premiums and is subsequently

reinstated, the two year period of contestability should be computed from the
date of last reinstatement and not from the date of issuance of the policy
because the reinstated policy should be viewed as a new contract. Thus, where
the insurer asserts that the reinstatement was obtained through fraud, he may
raise this defense at any time before the expiration of the contest period,
reckoned from the date of reinstatement. Also when the insured Concealed in
the application for reinstatement the fact that she had been suffering for at least
three years from bronchial asthma, the period of incontestability should be
computed from the date of reinstatement.

TITLE 6
THE POLICY
Q. What is a policy?

A. the written instrument in which a contract, of insurance is set forth, is

called a policy

Q. In what form should a policy be? What is the effect of failure to comply
with such form?

A. The form of a policy must be submitted to the Insurance Commissioner for

approval disapproval to determine whether or not violates any law or principle of
equity. Hence, no policy of insurance shall be issued or delivered within the
Philippines unless in the form previously approved by the Insurance
Commissioner. The policy however, may be in electronic form.

The failure to obtain approval of the Insurance Commissioner does not affect
the validity of the terms of the contract and therefore, the policy may still be
enforced. The insurer cannot set up its own failure to comply with the
requirements of the law defense to in action against, it on the policy However,
the insurer which failed to obtain the approval be the Insurance Commissioner
will be liable to prosecution for having used an unapproved form. When the
terms of the policy, however, are contrary to law such provisions shall of
course, be void.

Q. When will an insurance contract entered into by correspondence be

perfected?

A. When the application and acceptance of insurance contract are made by

correspondence, such acceptance shall not give rise to a valid contract until the
acceptance is made known to the applicant.

Q. H of Manila, applied for a contract of life insurance with S Co., with

offices at Montreal Canada. The application was mailed to S Co., and on
November 26, the insurer gave notice of acceptance by cable. The said
notice of acceptance was never received by H who died on December 20.
Question: Was there a valid contract of insurance?

A. There was no valid contract as H died without knowing the acceptance of his
application. An acceptance made by letter shall not bind the person making the
offer except from the time it came to his knowledge
Q. In case the language of the policy is one which the insured cannot read
or understand, who has the obligation to show that the term of the
contract had been fully explained to insured?

A. In case the language of the policy is one which the insured cannot read or
understand, the obligation to show that the terms of the contract had been fully
explained to the insured devolves on the party seeking to enforce the contract.
Thus, if the insured seeks to enforce the contract, the insurer is under no
obligation to prove that the terms of the insurance contract were fully explained
to the insured. Such obligation pertains to the party seeking the performance of
the contract.

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

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

Q. When is a rider binding on the insured?

A. "Any rider, clause, warranty or endorsement purporting to be part of the

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

A rider pasted or attached to the insurance policy is part of the contract, to the
same extent and with the same effect as if actually embodied therein, provided,
however, that the descriptive title or name of the rider is written on the blank
spaces provided in the policy, otherwise, said rider shall not bind the insured.

Q. When must a rider or endorsement or warranty be signed by the

insured?

A. In case the rider, clause, endorsement or warranty was issued after the
original policy took effect, the said rider must be countersigned by the insured
or owner unless applied for by the latter. On the other hand, where the rider
was pasted or attached to the original policy at the time it was issued, the
signature of the insured is not necessary but the descriptive title or name of the
rider must be written on the blank spaces provided in the policy.

Q. What is the limit of a non-life insurance policy that an insurer may

issue?

A. No insurance company other than life, whether foreign or domestic, shall

retain any risk on any one subject of insurance in an amount exceeding twenty
percent (20%) of its net worth. However, when a non-life insurer insures in any
one risk or hazard an amount exceeding twenty per centum of its net worth, the
insurer needs reinsurance of the excess over said limit so that the retention of
the insurer will be reduced to the maximum of twenty per centum of its net
worth

Q. What is a cover note and when does it bind the insurer? Give
examples.

A. A çover note or a binding slip is merely a written memorandum of the mos t

important terms of a preliminary contract of insurance, intended to give
temporary protection pending the investigation of the risk by the insurer or until
the issuance of a formal policy.
A preliminary contract of insurance is one intended to afford protection
pending investigation of the risk and formal issuance of the policy." To give
adequate protection to the insured, it must be a preliminary contract of present
insurance and not a mere agreement to insure at. some future time, as on
acceptance of the application a or on issuance or delivery of the policy. Such
kind of contract need not contain all the essential terms provided the parties
have agreed upon some method of there after fixing such terms." It is called by
various terms such as "binders", "binding slip", "binding receipt or cover notes".

Examples :

(a) Preliminary contract of Present Insurance:

The following memorandum was issued: "About $3,000 insurance is
wanted by Scammel Bros., for account of whom, etc., loss, if any, payable to
them or order for $___ of Chartered freight per Bright. "Peerless valued at $
amount of charter at and from Santa Fe to a port in the UK or on the Continent.
Priv. of port call for orders. Premium, open for particulars. Binding."
Question: Did such kind of memorandum provide immediate protection?
Answer: Yes. The parties made a binding agreement for temporary insurance,
subject to the condition that the insured should, within a reasonable time,
furnish the insurer particular information concerning the risk which would enable
the insurer to fiz a reasonable rate to be paid for the protection given.
(b) Memorandum of future insurance.
An insurance agent issued a "Provisional Policy" which acknowledged
the receipt of premiums and stated that the insurance shall be effective upon
approval and issuance of the policy by the head office. The person whose life
was supposed to be insured died before the issuance of the policy.
Question: Did the "Provisional policy afford protection pending the issuance of
the formal policy?
Answer: The so called "provisional amounted to nothing but acknowledgment
of receipt of premiums. It constituted no agreement at all for preliminary or
temporary insurance since it expressly stated that it shall be effective only upon
approval and issuance of the policy by the head office. In the last illustration
given above, it will be noted that the parties did not agree on immediate
protection and instead stipulated that the insurance would be effective only
upon approval and issuance of the policy by the head office. It could not be
considered therefore, as a contract of present insurance but stipulation to insure
at some future time. It could only be considered as a mere memorandum of
future insurance.

Q. What are the rules on the effectiveness of binding receipt issued by an

insurance agent?

A. Joyce stated the general rules concerning the issuance by the insurance
agent of a receipt pending approval or issuance of the policy, as follows:
1. If the act of acceptance of the risk by the agent and the giving by him of a
receipt, are within the scope of the agent’s authority, and nothing remains but to
issue a policy, then the receipt will bind the company.
2. Where an agreement is made between the applicant and the agent whether
by signing an application containing such condition, or otherwise, that no liability
shall attach until the principal approves the risk and a receipt is given by the
agent, such acceptance is merely conditional and in subordinated to the act of
the company in approving or rejecting.
3. Where the acceptance by the agent is within the scope of his authority a
receipt containing a contract for insurance for a specified time which is not
absolute but conditional, upon acceptance or rejection by the principal, covers
the specified period unless the risk is declined within that are period.

Q. Ngo Hing applied with the Cebu City Branch of Pacific Life for a twenty-
year endowment policy on the life of his one-year old daughter, Helen.
Ngo Hing paid the annual premium and Mondragon, Branch Manager of
Pacific Life in Cebu City, issued him a binding deposit receipt. The
following were some of the conditions printed at the back of the binding
deposit receipt: (a) If the company or its agent received the premium
deposit and insurance application, the insurance shall be in force
provided the Company is satisfied that on said date, the applicant was
insurable under its rule; and (b) If the Company does not accept the
application or offers to issue a policy for a different plan, the insurance
shall not be in force. Pacific Life disapproved the application because the
twenty-year endowment plan was not available to minors below seven
years old under its rules. The denial of the application was allegedly not
communicated to Ngo Hing. Later, Helen died. Question: Is the insurer
liable?

A. In life insurance, a "binding slip" or "binding receipt" does not insure by itself.
Since the receipt stated that it was subject to the approval of the insurer and
Pacific Life disapproved the application, the binding deposit receipt never
became effective. The insurer is not liable.

Q. Are separate premiums necessary to make cover notes binding?

A. No separate premiums are intended or required to be paid on a cover note

because cover notes do not contain particulars of the property insured that
would serve as basis for the computation of premiums. Such being the case, no
premium could be fixed and paid on the cover note. Cover notes should not be
treated as separate policies should be integrated to the regular policies
subsequently issued so that the premiums on the regular policies include the
consideration for the cover notes

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

A. 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. 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.

Q. To whom should the proceeds of a policy be given?

A. "The insurance proceeds shall be applies exclusively to the proper interest of

the person in whose name or for whose benefit it is made unless otherwise
specified in policy. All persons specifically named as persons insured in a
policy insuring against loss of or damage to property are covered or protected
by the policy but a person not so named is not protected if the policy does not
contain a provision which indicates intent to cover the interest of another person
other than the named insured.523Insurance, therefore, shall be applied
exclusively to the proper interest of the person in whose name or of whose
benefit it is made unless otherwise specified in the policy. Accordingly, where
several persons have distinct interests in the same property, the insurance
taken by one in his own right does not in any way insure the interest of the
other.
Q. Mora insured his car against accidental damage and made the loss
payable to Reyes, Inc., the mortgagee of the car. The car was damaged
and repaired by Bonifacio Brothers., Inc. with materials supplied by Ayala
Auto Parts Co. Bonifacio Brothers Inc. and Ayala Auto Parts Co.
demanded the proceeds of the policy from the insurer. Question: Who
was entitled to the proceeds of the insurance?

A. Reyes, Inc. had the right to recover from the insurer since the policy made
the loss payable to such company. Bonifacio Brothers Inc. and Ayala Auto Parts
Co. had no right to the proceeds because "a policy of insurance is a distinct and
independent contract between the insured and the insurer, and third persons
have no right either in a court of equity, or in a court of law, to the proceeds.

Q. When may third persons who are neither insured nor beneficiary hold
the insurer liable?

A. The general rule is that the insurer shall be liable only to the insured or the
beneficiary named in a contract of insurance because the "insurance proceeds
shall be applied exclusively to the proper interest of the person in whose name
or for whose benefit it is made unless otherwise specified in the policy. Hence,
in general only parties to an insurance contract may bring an action on the
policy against the insurer.
However, if the insurance contract was intended to benefit third persons,
the latter may directly claim from the insurer and hold the latter liable. Thus
a. If the insurance contract should contain some stipulation in favor of a
third person, the latter although not a party to the contract may enforce
the stipulation in his favor before it is revoked by the contracting parties,
or
b. Where the insurance contract provides for indemnity against liability to
third persons, then third persons, to whom the insured is liable, can sue
the insurer.
Q. Fieldmen's Ins. Co., Inc., issued in favor of Manila Yellow Taxicab Co.,
Inc., a common carrier accident insurance policy wherein it was stipulated
that the insurer "will indemnify any authorized driver who is driving the
motor vehicle" of the insured and in the event of death of said driver, the
insurer shall "indemnify his personal representatives." A taxicab of the
insured, driven by Carlito Coquia, met a vehicular accident, as a
consequence of which Carlito died. Question: May the heirs of Coquia
hold the insurer liable?

A. The heirs of Coquia may hold the insurer liable. The policy under
consideration is typical of contracts pour autrui and therefore, the enforcement
thereof may be demanded by a third party for whose benefit it is made,
although not a party to the contract.

Q. Julio Aguilar insured the operation of his jeepneys against accidents

and third-party liability with Capital Insurance & Surety Co Inc. In the
policy, the insurer agreed to indemnify the insured against "all sums
which the insured shall become legally liable to pay in respect of death of
or bodily injury to any person." One of the jeepneys insured bumped
Gervacio Guingon who had just alighted from another jeepney and as
consequence; the heirs of Gervacio Guingon filed an action for damages
against the driver, the owner of the jeepney and the insurer. Question:
Can the
insurer be made directly liable to the third persons who are not parties to
the insurance contract?

A. The insurance taken was one for indemnity for liability to third person and,
therefore, such third person is entitled to sue the insurer.

Q. What is the test to determine if a third person may hold the insurer
liable?

A. The right of the person injured to sue the insurer of the party at fault
(insured) depends on whether the contract of insurance is intended to benefit
third persons also or only the insured. And the test applied has been this: where
the contract provides for indemnity against liability to third persons, then
third persons, to whom the insured is liable, can sue the insurer. Where the
contract is for the indemnity against actual loss or payment, then third
persons cannot proceed against the insurer, the contract being solely to
reimburse the insured for liability actually discharged by him through payment to
third persons, said third persons' recourse being thus limited to the insured
alone.

Q. Is the insurer solidarily liable with the insured carrier where the
insurance contract provides for indemnity against liability to third
persons?
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 contracts 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.

Q. A truck driven by Corbeta and owned by National Food Authority (NFA)

collided with a Toyota Tamaraw owned by Uy. The Toyota Guiongon vs.
del Monte, et al., supra., citing 29 A Am. Jur. 604, See cases collected in
Anno. 3 ALR 381; 13 ALR 136; 19 ALR 881; 23 ALR A. CODE Tamaraw was
insured with Mabuhay Insurance and Guaranty Co. (MIGC) while NFA's
truck was insured with GSIS against liabilities for death and injuries to
third persons for the maximum indemnity of P12,000. Five passengers
died and ten others were injured in the accident. All of them were
passengers of the Toyota Tamaraw. A case was filed by the injured
parties against Corbeta, NFA, Uy, GSIS and MIGC. Judgment was
rendered by the trial court ordering Corbeta, NFA, GSIS and MIGC jointly
and severally liable to pay damages to the victims of the collision, after
finding that the negligence of Corbeta was the proximate cause of the
collision. GSIS claimed that it was not solidarily liable with NFA. Question:
Can GSIS be held solidarily liable with its insured, NFA?

A. GSIS cannot be made solidarily liable with NFA. While it is true that where
the insurance contract provides for indemnity against liability to third persons,
the latter can directly sue the insurer however, the insurer cannot be held liable
in solidum with the insured and/or the other parties found at fault. The liability of
the insurer is based on contract; that of the insured carrier or vehicle owner is
based on tort. The liability of GSIS based on the insurance contract is direct, but
not solidary with that of the NFA. The latter's liability is based separately on
Article 2180 (quasi-delict) of the Civil Code. Furthermore, although the victims
may proceed directly against GSIS as insurer for indemnity, the third party
liability is only up to the extent of the amount covered by the insurance policy.

Q. When an insurance contract is executed with an agent or trustee as the

insured, how should the fact that his principal or beneficiary is the real
party in interest be described?

A. "When an insurance contract is executed with an agent or trustee as the

insured, the fact that his principal or beneficiary is the real party in interest may
be indicated by describing the insured as agent or trustee, or by other general
words in the policy.
When a property is in the possession of an agent, the principal may
insure the same as owner while the agent who is responsible for such property
may likewise insure the same.
If insurance is procured by the agent and it is intended to cover the
interest of the principal, that fact must be stated in the policy. On the other
hand, if the agent secures the policy in his name alone, it is deemed to cover
only the interest of the agent and the principal has no right of action against the
insurer.

Q. Where the policy is effected by one partner or part owner, how should
it be made applicable to the interest of his co-partners or other part
owners?

A. "To render an insurance effected by one partner or part-owner, applicable to

the interest of his co partners or other part-owners, it is necessary that the
terms of the policy should be such as are applicable to the joint or common
interest."
A partner has an insurable interest in the property of the partnership
which will support a separate policy for his benefit. When a partner takes a
policy on the partnership property in his own name, it is deemed to include his
separate interest alone, unless the "terms of the policy should be such as are
applicable to the joint or common interest".
The reason why the insurance taken by an agent or partner in their
respective names alone will not include the interest of their principal or co-
partners, as the case may be, is that the policy procured by them shall be
applied exclusively "to the proper interest of the person in whose name or for
whose benefit it is made unless otherwise specified in the policy."554
Furthermore, insurance is a personal contract and hence, a policy obtained by
one person covers his interest alone and does not include the interests of the
others.

Q. What must a person do to be able to claim the benefit of the policy

when the description of the insured in a policy is so general that it may
comprehend any person or any class of persons?

A. "When the description of the insured in a policy is so general that it may

comprehend any person or any class of persons, only he who can show that it
was intended to include him, can claim the benefit of the policy."
When there are several persons having insurable interest on the same
object of the insurance and the description of the persons insured is so general
that it comprehends any person or any class of persons, the person claiming
the proceeds of the policy must prove that such description was intended to
include him.

Q. A fire insurance policy describes the persons insured as the "co-

owners of the building insured." In case A wants to recover his share of
the proceeds of the policy after the loss of the building, what must A do?

A. A must prove that he is one of the co-owners thereof.

Q. (1) What are the kinds of policy? (2) Define each one.

A. (1) "A policy is either open valued or running.

(2a) "An open policy is one in which the value of the thing insured is not agreed
upon, and the amount of the insurance merely represents the insurer's
maximum liability. The value of such thing insured shall be ascertained at the
time of the loss.
(2b)"A valued policy is one which expresses on its face an agreement that the
things insured shall be valued at a specified sum. "
(2c) "A running policy is one which contemplates successive insurances, and
which provides that the object of the policy may be from time to time especially
as to the subjects of insurance, by additional statements indorsements."
Running policy is also called "floating policy. It is intended to supplement
specific insurance and to provide indemnity for property which cannot be
covered by specific insurance because of its frequent change in location and
quantity. It is usually issued when stocks-in-trade are insured which cannot be
covered by specific insurance because stocks are being sold and replenished
from time to time.

Q. Distinguish open from valued policy.

A. The distinctions between open valued and policies are as follows:

1. In open policy, the value of the thing insured is not agreed upon in the
policy, while in valued policy, the parties have stipulated in the policy that the
thing insured is valued at a specified sum;
2. In open policy, upon occurrence of the loss, the insured must prove the
value of the thing insured, while in valued policy proof of value of the thing
insured after the loss is no longer necessary.

Q. Can the parties to a contract of insurance agree on the period within

which an action on the policy may be brought?

A. The parties to a Contract of insurance may validly agree that an action on

the policy should be brought within a limited period of time, provided such
period is not less than one year from the time the cause of action accrues. If the
period agreed upon should be less than one year from the time the cause of
action accrues, such agreement is void.

Thus "A condition, stipulation, or agreement in any policy of insurance,

limiting the time for commencing an action thereunder to a period of less than
one (1) year from the time when the cause of action accrues," is void.

Q. A policy provides that: "No suit or action 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 twelve (12) months next after the
happening of the loss xxx".

Question: Is such stipulation valid?

A. The stipulation is void for if it will be given effect, the period allowed the
insured for bringing the action would be reduced to less than one year from the
time the cause of action accrues. This is so because the said clause makes the
prescriptive period begin from the happening of the loss and at the same time
requires the filing of a claim after the loss against the carrier, and that a copy of
the reply of the carrier should be sent to the insurer. Compliance with this
condition will necessarily consume time and thus shorten the period for bringing
suit to less than one year if the period will be computed from the happening of
the loss.

Q. What is the effect of a condition contained in the insurance policy that

claims must be presented within one year after rejection?

A. Whenever the insurance contract provides that an action thereon should be

brought within a period of one year from the denial of the claim such agreement
is in the nature of a condition precedent to the liability of the insurer and if the
action is not filed by the insured within the period agreed upon, the insurer is
relieved rom any liability under the policy. Such stipulation is not merely a
procedural requirement but an important matter essential to a prompt
settlement of claims against insurance companies as it demands that insurance
suits be brought by the insured while the evidence as to the origin and cause of
destruction have not yet disappeared.

The stipulation in the policy that an action on a claim denied by the

insurer must be brought within a certain period of time from the denial prevails
over the rules on prescription of actions, provided that the agreed period is not
less than one year from denial of the claim.

Q. 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 action 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 notice of denial was received
by the insured on April 19, 1956. On May 6, 1958, the insured filed an
action against. Question: Has the action the insurer. prescribed?

A. The action has prescribed. The condition contained in the insurance policy
that claims must be presented within one year after rejection is not merely a
procedural requirement. The condition is an important matter, essential to a
prompt settlement of claims against insurance companies, as it demands that
insurance suits be brought by the insured while the evidence as to the origin
and cause of destruction have not yet disappeared. It is in the nature of a
condition precedent to the liability of the insurer, the purpose of which is to
terminate all liabilities in case the action is not filed by insured within the
period stipulated.

Q. From what time should the prescriptive period agreed upon by the
parties be computed?

A. The prescriptive period to bring suit in court under an insurance policy

begins to run from the date of the insurer's rejection of the claim filed by the
insured, the beneficiary or any person claiming under an insurance contract.
The reason is that the prescriptive period must be counted from the accrual of
the cause of action. And the cause of action accrues from the time the insurer
rejects the claim of the insured since, before such rejection, there is no
necessity for bringing suit against the insurer.

Q. What is the period of prescription of an insurance action in case no

period has been stipulated?

A. When no period for bringing the action has been agreed upon in the policy,
or when such agreement is void, the insured may bring the action within the
prescriptive period provided for in the Civil Code, that is within ten years in case
the contract is written and within six years in case of an oral contract from the
time the cause of action accrues.

Q. From what time should the period of prescription be computed in case

a motion or request for reconsideration of the denial of the claim was
made by the insured?

A. In case the claim was denied by the insurer but the insured filed a petition for
reconsideration, the prescriptive period should be counted from the date the
claim was denied at the first instance and not from the denial of the petition for
reconsideration. To rule otherwise would give insured persons a scheme or
devise to waste time until any evidence which may be considered
against them is destroyed.

Q. The policy provides that "if a claim is made and rejected and no action
or suit is commenced within twelve months after such rejection" "all
benefits under this policy shall be forfeited". After the claim of the insured
was denied, he asked for reconsideration of the denial of the claim. Later
the request for reconsideration was also denied. From what time should
the period of twelve 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 insured's motion or request for
reconsideration. The rejection referred to should be construed as the rejection
in the first instance"

Q. The insured obtained a Contractors' All Risks (CAR) Policy from GSIS.
The policy provides that "all benefits thereunder shall be forfeited if no
action is instituted within twelve (12) months after the rejection of the
claim for loss, damage or liability." Because of typhoons "Biring"
"Huaníng" and "Saling", the insured typhoons property was damaged and
the insured made several claims for indemnity on June 30, 1988, August
25, 1988 and October 18, 1988 from GSIS. In a letter dated April 26, 1990,
GSIS rejected the claims for indemnity for damages wrought by typhoons
"Biring" and "Huaning". In a letter dated June 21, 1990, GSIS also denied
the claim for damages caused by typhoon "Saling". In a letter dated April
18, 1991, the insured impugned the rejection of the claims and reiterated
its demand for settlement of the claims. On September 27, 1991, the
insured filed a complaint against GSIS. The insured claims that the GSIS
letters dated April 26, 1990 and June 21, 1990 did not amount to a "final
rejection" of the claim. Has the action prescribed?

A. YES. The insured's causes of action accrued from its receipt of the letters
dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its
claims in the first instance. Since the insured allowed more than twelve (12)
months to lapse before filing the necessary action on September 27, 1991, its
causes of action had already prescribed.

Q. What is the period of prescription of action in motor vehicle insurance?

A. Section 384 of the Insurance Code of 1978 used to provide that an action for
recovery of damages under the compulsory motor vehicle insurance must be
brought "within one year from the date of the accident, otherwise, the claimant's
right of action shall prescribe." Such provision gave rise to confusion as to
whether the prescriptive period should be counted from the date of the accident
as the law expressly provided or from the denial of the claim. In some cases,
the court ignored section 384 probably because of the absurdity of said
provision.

Under the present law as amended, the period of prescription in compulsory

motor vehicle insurance is one year counted from denial of the claim and not
from the date of accident

Q. Ledesma was the owner of a tractor which was bumped by a minibus

insured with Summit Guaranty for purposes of Third Party Liability. The
incident occurred on March 10, 1977 Ledesma immediately gave a notice
of claim with Summit for the damage caused to the tractor. Summit
advised the claimant to have the tractor repaired by G.A. Machineries.
When the repair was finished, Ledesma made several demands on
Summit because the repair shop warned that failure to pay the repair bills
would result in the auctioning of the tractor to cove the mechanic's lien.
Summit made assurances of payment but did not pay the claim. On June
8, 1977, Ledesma wrote a letter to the Insurance Commission, which in
turn, wrote Summit to inquire about the status of the claim. In March,
1978, Summit promised to pay but did not fulfill its promise. On April 26,
1978, Ledesma filed a formal complaint against the insurer. Summit filed a
motion to dismiss on the ground of prescription. Question: Should the
complaint be dismissed considering that more than one year had elapsed
from March 10, 1977 when the accident occurred to April 26, 1978 when
the complaint was filed?

A. The insurer should count the one-year period within which an action on the
policy should be filed from the date of rejection as this is the time when the
cause of action accrues. Thus, Sec.384 made it clear that the action for
recovery of loss or injury under the policy should be filed within one year from
denial of the claim. Assemblyman H. Perez who was the sponsor of the Bill
(Parliamentary Bill No. 1340) that embodied the proposed amendment of
changing the period of prescription to run not from the date of the accident but
from the date of the denial of claim, explained that the latter is the date of
accrual of the cause of action. The insurer did not reject the Claim and instead
promised to pay the same and therefore, the period of prescription had not
begun. The motion to dismiss should be denied

Q. Is the right of the insured to file an action against the insurer affected
by Sec. 3 (6) of the Carriage of Goods by Sea Act that provides that the
carrier and the ship shall be discharged from all liability for loss or
damage to the goods if no suit is filed within one year after delivery of the
goods or date when they should be delivered?

A. Section 3 (6) of the Carriage of Goods by Sea Act states that the carrier and
the ship shall be discharged from all liability for loss or damage to the goods if
no suit is filed within one year after delivery of the goods or date when they
should be delivered. It will be observed that the prescriptive period in such case
begins to run from the date of delivery of the goods or date when they should
have been delivered and not from the denial of the claim.

Under the aforesaid provision, however, only the carrier's liability is

extinguished if no suit is brought within one year from delivery on the goods.
The Liability of the insurer is not extinguished because the insurer's liability is
based not on the contract of carriage but on contract of insurance. A close
reading of the law reveals that the Carriage of Goods by Sea Act governs the
relationship between the carrier on the one hand and the shipper, the
consignee and/or the insurer on the other hand. It defines the obligations of the
carrier under the contract of carriage. It does not, however, affect the
relationship between the shipper and the insurer. The latter case is governed by
the Insurance Code,

Q. From August to October, 1983, Mayer Steel shipped pipes and fittings
to Hongkong Company. Mayer insured the cargo with South Sea Surety
for Us212,772.09 and with Charter Insurance for US$149,470. When the
goods reached Hongkong, it was discovered that a substantial portion
thereof was damaged. Charter paid Hongkong Co., HK $64,904.75. Mayer
and Hongkong Co. demanded payment of the balance of HK $299,345.30
from the insurers. An action was filed against the insurers on April 17,
1986, more than two years from the time the goods were unloaded from
the vessel. The insurers claimed prescription under the Carriage of Goods
by Sea Act because more than one year had elapsed since the cargo was
unloaded. Question: Has the action prescribed as provided for in the
Carriage of Goods by Sea Act?

A. YES. Under the 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 does not mean that the upper may no longer file a claim
against the insurer because the basis of the insurer s liability is the insurance
contract. The action has not yet prescribed as the insured has ten years from
denial of the claim within which to file an action against the insurer

Q. What is the period of prescription of the action of the insurer against

the carrier?

A. Under Section 3(6) of 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 goods should have been delivered otherwise the action shall prescribe
principle applies not only to an action against the carrier by the shipper or
consignee but also to an action filed by an insurer against the carrier.

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.
Question: Was the third-party complaint barred by prescription?

A. 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. Distinguish the Mayer Steel case from the Filipino Merchants case.

A. The Filipino Merchants case is different from the Mayer Steel case. In
Filipino Merchants, it was the insurer which filed a claim against the carier 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 policies
issued.

The ruling in Filipino Merchants should apply only to suits against the
carrier filed either by the shipper, the consignee or the insurer. Under the
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 in the law. But
it does not mean that the shipper may no longer file a claim against the insurer
because the basis of the insurer's liability is the insurance contract and not the
contract of carriage of goods.

Q. When may an insurance policy other than life be cancelled and upon
what grounds?

A. "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 in based on the occurrence, after the effective date of
the policy, of one or more of the following

"(a) Nonpayment of premium;

"(b) Conviction of a crime arising out of acts increasing the hazard insured
against;

"(c) Discovery of material or 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; or

“(g) A determination by the Commissioner that the continuation of the policy

would violate or would place the insurer in violation of this Code.

The provision abrogated the ruling in the case of Abolafia vs Liverpool &
London & Globe Ins, Co. Ltd., wherein it was held that notice of cancellation
need not be in writing but may be oral It is now required that the notice of
cancellation be in writing and must state the grounds relied upon and, at the
written request of the insured, the facts on which the cancellation is based must
be furnished.

Q. Must notice of cancellation of the insurance policy be received by the

insured?

A. After canceling the policy pursuant to Section 64 allowing the same, notice of
cancellation must be sent to the insured himself or his authorized broker so as
to enable the insured to procure another insurance, otherwise, the cancellation
is not valid.

The notice of cancellation necessary to produce the effect of terminating

the contract must be actual notice. Thus, a notice of cancellation sent by mail,
but not received by the insured, is ineffective as cancellation.

Actual receipt of the notice of cancellation is absolutely essential and the

insurer could not merely rely on the presumption of regularity in the
performance of duty.

Q. A fire insurance policy was cancelled on October 15, 1981. The

insurer's clerk allegedly sent notice of cancellation by mail but there was
no proof that it was actually mailed to and received by the insured. The
insured denied receiving the notice. On other hand, the insurer relied on
the legal presumption of regularity and due performance of duty of its
employees. Question: Was the policy validly cancelled?

A. Considering the strict language of Sec. 64 that no insurance policy shall be

cancelled except upon prior notice, it behooved the insurer to make sure
that the cancellation was actually sent to and received by the insured. The
presumption cited by the insurer is unavailing against the positive duty enjoined
by Sec. 64 upon the insurer.

Q. A insured his mortgaged building against fire and made the loss
payable to the mortgagee. Later on, the insurer cancelled the policy
pursuant to the stipulation thereon allowing either party to terminate the
contract upon notice thereof to the other, the insurer gave the notice of
cancellation to the mortgagee. The loss insured against occurred.
Question: Was the cancellation valid?

A. The cancellation of the policy was not binding upon A, the insured, since the
insurer failed to comply with its primary duty to notify the insured so as to give
the latter an ample opportunity negotiate for another insurance. The notice
should be personal to the insured and not to and/or through any unauthorized
person

Q. Does the insured in non-life insurance have the right to have his policy
renewed?

A. In case of insurance other than life, unless the insurer at least forty-five (45)
days in advance of the end of the policy period mails or delivers to the named
insured at the address shown in the policy notice of its intention not to renew
the policy or to condition its renewal upon reduction of limits or elimination of
coverages, the named insured shall be entitled to renew the policy upon
payment of the premium due on the effective date of the renewal. Any policy
written for a term of less than one (1) year shall be considered as if written for a
term of one (1) year. Any policy written for a term longer than one (1) year or
any policy with no fixed expiration date shall be considered as if written for
successive policy periods or terms of one (1) year."

This provision gives the insured the option to renew property insurance
by the payment of the premium due on the effective date of renewal unless at
least forty-five days prior to the end of the policy, the insurer gives notice of its
intention not to renew the policy.
 TITLE 7
WARRANTIES
Q. What is a warranty?

A. Warranty is a written statement or stipulation inserted on the face of the

contract itself, or clearly incorporated therein as a part thereof by proper words
of reference, whereby the insured expressly contracts as to the existence of
certain facts, circumstances, or conditions, the literal truth of which is essential
to the validity of the contract of insurance.

Q. What are the kinds of warranties and in what form should warranties
be?

A. "A warranty is either express or implied.” A warranty may relate to the past,
the present, the future, or to any or all of these." "No particular form of words is
necessary to create a warranty."
The following are kinds of warranties:
1. Affirmative warranty is one which relates to matters which exist at or before
the issuance of the insurance of the policy.
2. Promissory warranty is one in which the insured undertakes that something
shall be done or omitted after the policy takes effect and during its continuance.
3. Express warranty is a statement in a policy, of a matter relating to the person
or thing insured, or to the risk, as a fact.
4. Implied warranty is an agreement or stipulation not expressed in the policy
but the existence of which is admitted or presumed from the fact that the
contract of insurance has been executed.

Q. Distinguish affirmative from promissory warranty. Give examples.

A. Affirmative warranty consists of statements in the policy of some fact or state

of things at, or previous to, the time of making the policy. It therefore, relates to
the past or the present. On the other hand, a promissory warranty refers to the
happening of some future event, or the performance of some act in the future.
In case of doubt, the warranty is presumed to be affirmative only. Thus, in
a case, in answer to the question, "Who sleeps in the store?" the insured had
written, "Watchman on premises at night." This statement was held to refer only
the time of making the contract, and not a warranty that a watchman would be
kept continuously the premises thereafter.
Examples:
 (a)A warranty that the person insured was never operated on for cancer is
an affirmative warranty since it relates to the past and the present.
(b)A warranty that the insured will not store inflammable materials in the
house insured against fire, is a promissory warranty since it relates to
the future.

Q. Distinguish express from implied warranty. Give an example of each.

A. An express warranty must be contained in the policy or in another
instrument signed by the insured and referred to in the policy as making a
part of it, while an implied warranty is not contained in the contract but its
existence is presumed by the mere fact that the contract is entered into.
Furthermore, an express warranty is specifically agreed upon by the
parties while implied warranty need not be agreed upon as its existence is
presumed.
Examples:
(a)A warranty stated in the policy that the insured will not store gasoline in
the house insured against fire is an express warranty.
(b)In marine insurance, the ship insured is presumed seaworthy.
Seaworthiness of the vessel, therefore, is an implied warranty.

Q. Distinguish warranty from representation.

A. The following are the distinctions between warranty and representation:
1. Representations while they precede the contract, are collateral thereto
and not apart thereof, are and must be a part of the contract itself.
2. Materiality of warranty is presumed, while representation must be
shown to be material.
3. Misrepresentation sets aside a policy on the ground of fraud, while
falsity or non-fulfillment of a warranty operates as a breach of contract.
4. Representation may be made by both the insured and insurer, while
warranty is made only by the insured.
Q. In case of doubt, how should warranty be interpreted?
A. Warranties must not only be strictly construed against the insurer but
must likewise be reasonably interpreted in favor of the insured. The
reasonableness is to be ascertained in the light of the factual
considerations. Thus, where the warranty required the insured to maintain
inefficient working order on the premises insured, the following: portable
extinguishers, hydrants, external hydrants; fire pump and 24-hour security
service, but the insured failed to install internal fire hydrants, 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 firehose connected to an external fire hydrant. What the warranty
mandated was that the insured should maintain in efficient working
condition within premises insured, fighting equipment as first line of
defense against fire, which the insured did.
Q. Where should an express warranty be contained?
A. Every express warranty made at or before the express execution of
policy, must be contained either:
(a) in the policy itself, or (b) in another instrument signed by the insured
and referred to in the policy as making a part of it.
It is to be noted that the signature of the insured is necessary only
when the warranty is contained in another instrument and not when it is
contained in the policy itself.
An express warranty is a part of the contract of insurance for which
reason it must be contained in the policy itself, or at least referred to in the
policy as making a part of it. Thus, statements in the application or
medical examination are representations only and not warranties, if the
application or medical examination is not incorporated in the policy or
made a part of it by reference.
Q. Must a warranty contained in a rider be signed by the insured?
A. A rider is a part of the policy and, therefore, a warranty contained in a
rider need not be signed by the insured unless such rider was issued after
the original policy took effect.
Q. What is the consequence of a promissory warranty?
A. A statement in a policy, which imparts that it intended to do or not to do
a thing which materially affects the risk, is a warranty that such act or
omission shall take place.
Q. When does the insurer have no right to rescind the contract
despite the non-performance of a promissory warranty? Give
examples.
A. "When before the time arrives for the performance of a warranty
relating to the future, a loss insured against happens, or performance
becomes unlawful at the place of the contract, or impossible, the omission
to fulfill the warranty does not avoid the policy.
As a general rule, non-performance of a promissory note warranty entitles
the insurer to rescind the contract except:
 (1.) When before the time arrives for the performance of a promissory
warranty, the loss, insured against happens.
Example: A warranty in a fire insurance policy stated that within two
months from the issuance of the policy, the insured will construct a fire
wall. One month after the policy was issued and before the insured could
comply with the warranty, the house was burned. In such case, the non-
fulfillment of the promissory warranty will not avoid the policy since the
loss occurred before the expiration of the period for the performance
thereof.
2. When before he time arrives for the performance of a promissory
warranty, the performance becomes unlawful at the place of the contract.
Example:
In the example given above, in case an ordinance was passed before the
expiration of the period for fulfillment of the warranty, prohibiting the
construction of a fire wall for the type of the house insured, the non-
performance of the warranty will not avoid the policy because the
fulfillment became illegal before the expiration of the period stipulated.
3. When before the time arrives for the performance of promissory
warranty, the performance becomes impossible.
Example:
In the example given above, in case the law required the consent of
the adjoining owner for the construction of a fire wall and the adjoining
owner of the insured refused to give his consent, the non-performance of
the warranty will not avoid the policy since fulfillment was impossible.

Q. What is the right of either party in case of violation of a warranty

or material provision of a policy?
A. The violation of a material warranty or other material provision of a
policy, on the part of either party thereto, entitles the other to rescind.
Q. Is causal connection between the violation of a warranty or
material provision of the policy and the loss necessary?
A. 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 of material warranty did not in any way contribute to the loss,
the other party may still rescind the policy.
Q.A insured a building against fire. A warranty stated that no
hazardous goods would be stored in the building insured. The
insured stored in the building three boxes of fireworks in
preparation for the Chinese New Year. The building was partially
burned and the fireworks were found in a part of the building not
destroyed by fire. The fireworks, therefore, did not in any way
contribute to the fire. Question: Was the insurer liable?
A. The insurer was not liable because the insured violated the warranty.
Even if the violation did not contribute to the loss still "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."
Q. When is a warranty prohibiting storage of inflammable materials
not violated?
A. A warranty prohibiting the storage of hazardous or inflammable
materials is not violated by a deposit in small quantities in a building for
daily use. Neither is such warranty violated when the inflammable or
hazardous goods are incidental to the business of the insured.
Q. Qua CheeGan insured a warehouse used for the storage of copra
and hemp. The insured owned six motor vehicles used for
transporting said merchandise. He stored in the insured premises
gasoline sufficient for two days' supply of his motor vehicles. The
warehouse was burned but the insurer refused to pay on the ground
that there was a violation of a warranty prohibiting the storage of
gasoline. Question: Was insurer liable?
A. The insurer was liable because the storage of gasoline was incidental
to the business insured. Keeping of inflammable oils or materials on the
premises, though prohibited by the policy, does not avoid it, if such
keeping is incidental to the business of the insured.
Q. Household furniture kept for the purpose of sale was insured
against fire. The policy prohibited storage of inflammable materials.
Alcohol and varnish were kept in the store where the furniture was.
The furniture was burned but the insurer refused to pay claiming
violation of warranty. Question: Was the insurer's refusal correct?
A. The insurer was wrong. Keeping alcohol and varnish was necessary
for the preservation of the furniture in a salable condition and,
therefore ,incidental to such business."
Q. Is storage of naphthalene balls in a drugstore a violation of the
warranty prohibiting storage or inflammable materials?
A. Storage of naphthalene balls in a drugstore a violation of the warranty
 prohibiting storage inflammable materials because naphthalene balls are
considered pharmaceutical products and therefore, storage thereof is a
mere incident of the business.
Q. Does violation of an immaterial provision give rise to a right to
rescind the contract?
A. “ A policy may declare that a violation of specified provisions thereof
shall avoid it, otherwise the breach of an immaterial provision does not
avoid the policy.”
Ordinarily, a violation of immaterial provision shall not avoid the policy.
However, this section allows the parties to stipulate that a violation of any
provision of the policy, material or immaterial shall avoid it, thereby
converting an immaterial provision in a policy into a material provision.
Q. What is the effect of breach of warranty without fraud?
A. "A breach of warranty without fraud merely exonerates an insurer from
the time that it occurs, or where it is broken in its inception, prevents the
policy from attaching to the risk.
The effect of a breach of warranty without fraud depends on the time such
breach is Committed. If it exists or is committed at the effectivity of the
policy, it prevents the policy from the beginning. On the other hand, where
the breach occurs after the effectivity of the policy, the insurer is
exempted from liability for losses incurred after such breach. Accordingly,
where a loss is sustained before the warranty, the insurer is still liable for
such loss.
TITLE 8
PREMIUM
Q. When is the insurer entitled to payment of premium?
A. “An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life
policy whenever the grace period provision applies, or whenever under
the broker and agency agreements with duly licensed intermediaries, a
ninety (90)-day) credit extension is given. No credit extension to a duly
licensed intermediary should exceed ninety (90)-days from date of
issuance of the policy.
Q. What is the effect of non-payment of premium?
A. Non-payment of premiums does not merely suspend but puts an end to an
insurance 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 policy to lapse through a failure to make premium
payments. The continuance of the insurers obligation is conditioned upon the
payment and that no recovery can be had upon a lapsed policy, the contractual
relation between the parties having ceased. This principle buttressed by Section
77 of the Insurance Code which provides that no contract of insurance is valid
and binding unless and until the premium the thereof has been paid,
notwithstanding agreement to the contrary.

Q. Petitioner Gaisano insured his Mitsubishi Montero with respondent

Insurance company which issued the corresponding insurance policy for
September 27, 1996 to September 27 1997. To collect the premiums,
respondent's agent, Trans-Pacific issued a statement of account to
petitioner's company, Noah's Ark which issued the corresponding check
covering the payment of the premium dated September 27, 1996.
However, nobody from Trans-Pacific picked up the check on that day and
instead informed Noah's Ark that its messenger will get the check on the
next day, September 28. In the evening of September 27, 1996, the
Mitsubishi Montero was stolen. Oblivious of the incident, Trans-Pacific
picked up the check the next day, September 28. It issued an official
receipt dated September 28, 1996 and deposited the check for
encashment on October 1, 1996. On October 1, was informed of the loss
of the vehicle and petitioner demanded-payment of the loss. The
respondent refused to pay on the ground that there was no insurance
contract due to the nonpayment of the premium. Is the respondent
insurance company liable for the loss?

A. The respondent insurance company is not liable. Just like any other contract,
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 fail
either under the exceptions laid down in Makati Tuscany Condominium Corp.
and UCPB General Insurance Co., Inc. cases. Both contemplate situations
where the insurer consistently granted credit extension or term for the payment
of the premium Here, however, petitioner failed to establish the fact of a grant
by respondent 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 that "notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and
premium thereof has been paid.

Q. The insured was thUNPe owner of a house insured yearly since 1961.
On November 27, 1965, the insurer sent to the insured, renewal certificate
covering said house for the period from December 5, 1965 to December 5
1966. The insurer asked for the payment of the corresponding premium.
The insured promised to pay the premium on January 4, 1966 but failed to
pay it. On January 8, 1966, the house was totally destroyed by fire.
Question: Is the The insurer liable?
A. The insurer is not liable because time is of the essence in the payment of
premium so that if it is not paid the insurance does not take effect.

Q. Acme Shoe had been insuring its properties yearly with Domestic
Insurance since 1946. On May 14, 1963 Acme renewed its insurance for
the period from May 15, 1963 to May 15, 1964 Acme did not pay the
premiums right away and instead paid the same only on January 8, 1964
which Domestic Insurance accepted. Later, Acme was issued a renewal
fire insurance policy by Domestic Insurance to cover the period from May
15, 1964 to May 15, 1965. The policy included a Credit Agreement which
provided "The premium corresponding to the first ninety days of the term
of this policy or any renewal thereof is hereby considered paid for the
purpose only of making this policy valid and binding during said portion
of the term." Acme's properties were completely destroyed by fire on
October 13, 1964 at which time the premiums on the renewed policy had
not been paid. Acme claimed that when the insurer accepted payment of
premiums in January, 1964 for the insurance covering from May 1963 to
May 1964, there was a clear intention to grant a credit extension beyond
90 days. Question: Is the contention valid?
A. It is clear from the Credit Agreement that the credit extension granted was
only for 90 days. Practices before RA 3540 which took effect on October 1,
1963 cannot change the express provision of the Act which provides that no
policy could be valid and binding unless and until the premiums thereof have
been paid.

Q. Valenzuela, a general agent of Philamgen had unpaid and uncollected

premiums. Philamgen sued Valenzuela for non-payment of premiums.
Question: Was Valenzuela liable?
A. Valenzuela was not liable. The remedy for nonpayment of premiums is to put
an end to and render the insurance policy not binding. Since the premiums had
not been paid, the policies issued had Tapsed. The insurance coverage did not
continue and the obligation of Philamgen insurer ceased. Hence, to allow
Philamgen, which had no more liability under the lapsed and inexistent policies,
to demand much less sue Valenzuela for the unpaid premiums would be the
height of injustice and unfair dealings.

Q. Gulf Resorts obtained several fire insurance policies from Philippine

Charter Insurane covering its properties at Plaza Resort, Agoo, La Union.
For its two swimming pools, additional premiums were paid to cover the
same against earthquake damage. No premiums were paid for the
earthquake coverage of the other properties an earthquake occurred
which damaged all the properties insured by Gulf Resorts. The insurer
denied the claim for damages to all properties except for the two
swimming pools on the ground that the earthquake shock coverage was
only on the two swimming pools for which separate premiums were paid.
Question: Is the insurer liable for the damages to the properties of the
insured other than the two swimming pools?
A. The insurer is not liable for the earthquake damage to properties other than
the two swimming pools. An insurance premium is the consideration paid to an
insurer for undertaking to Indemnify the insured against a specified peril, No
premium payments were made with regard to earthquake shock coverage,
except on the two Ways Court of Appeals swimming pools. There was even no
mention of any premium payable for the other resort properties with regard to
earthquake shock. Hence, the insurer's liability should be limited only to the
earthquake damage to the two swimming pools.

Q. What are the statutory exceptions to the rule that the insurer is entitled
to the payment of premium is soon as the thing insured 1 exposed to the
peril insured against?
A. The payment of premium is a condition precedent to, and essential for, the
efficacy of the contract of insurance. Unless the premium is paid, the policy
shall not be valid and binding notwithstanding any agreement to the contrary.
The statutory exceptions are:
(1) In case the insurance coverage relates to life or industrial life (health)
insurance when grace period applies:
(2) Whenever a ninety-day credit extension is given for the premium due
(3) When the insurer makes a written acknowledgement of receipt of premium,
this acknowledgement being conclusive evidence of payment of (4.) Where the
obligee has accepted the bond in which case the bond becomes valid
enforceable irrespective of whether or TV the premium has been paid by the
obligor to the surety.
(5) and 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 insured at the residence of the insured
or some place indicated by him for the purpose of collecting such 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 grade period has expired.
Of course, as hereinafter discussed, judicial interpretations have provided
additional exceptions to the general principle that the premium must be paid
before an insurance policy becomes effective. Aside therefrom, payment of the
premium to the agent of the insurer is sufficient to make the policy binding.

Q. Juan insured his own life and paid the corresponding premium for the
first year. The premium for the second year was due on March 1, 2018 but
Juan was unable to pay it. On March 20, 2018, Juan died at which time, the
premium was still unpaid. Is the insurer liable?
A. The insurer is liable even if the premium has not been paid at the time of the
death of the insured because in life insurance, after the payment of the first
premium the insured is entitled to a grace period of thirty days or one month
within which to pay the succeeding premiums. In case the insured dies during
the period of grace and before the payment of the premium due, the insurer is
liable as the policy continues in force during the grace period but the premium
due and the interest thereon may be deducted from the amount payable to the
beneficiary.

Q. Will credit extension for the premium due sufficient to make the policy
binding?
A. Under the former rule, whenever the insured was granted credit extension of
the premium due or given a period of time to pay the premium on the policy
issued, such policy was binding although premiums had not been paid.*** This
rule was changed by Section 77 of the Insurance Code of 1978 when the said
provision eliminated the portion concerning credit agreement, and added the
phrase "notwithstanding any agreement to the contrary" which precludes the
parties from stipulating that the policy is valid even if premiums are not paid.
even However, under the present law, a 90-day credit extension is allowed to
make the policy binding even if the premium has not been paid. It reverted to
the former rule embodied the Insurance Act which allowed a credit extension for
the premium due except that such credit extension is now limited to ninety days
Hence, under the present law, the policy is valid and binding even if the
premium has not been paid if there is a ninety-day credit extension given
 Even before this section amended Section 77 of the insurance Code of
1978, the Supreme Court noted that there is nothing in the said section which
prohibits the parties in an Insurance contract to provide a credit term within
which to pay the premiums. "The agreement is not against the law, morals,
good customs, public order or public policy. The agreement binds the parties.
Hence, it would be unjust and inequitable not to allow recovery on the policy on
the ground of non-payment of premiums because the insurer is barred by
estoppel from taking refuge under Section 77.

Q. Masagana Telamart obtained from UCPB General Insurance fire

insurance policies covering its properties in Pasay City. The policies
stated the term of the policy as "from 4:00 P. M. of 22 May 1991 to 4:00 P.
M. of 22 May coverage from UCPB for a number of years and 1992".
Masagana had procured insurance 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 five 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 claims for indemnification
for the burned properties were filed on July 14, 1992. Questions: Should
the insurer be made liable?
A. 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 ff
recovery on the policy would not be permitted against the insurer which had
consistently granted 60 to 90day 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.

Q. Will a promissory note or postdated check be Under the present law a

ninety-day credit extension is sufficient to make the policy binding.
A. Under the present law, a 90 day credit extension is sufficient to make the
policy binding. As a consequence, it would seem that the delivery of a
promissory note or postdated check should be considered under the present
code as sufficient to make the policy binding provided it does not exceed ninety
days 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 that the present law allows a ninety day credit agreement to make
the policy binding, the delivery of a promissory note or post-dated check should
be considered as a grant of credit extension for the premium dus-80-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 to insurance
cases only in a suppletory character and only when there is no specific
provision in the Insurance Code.

Q. What is the effect of a written acknowledgment by the insurer of the

receipt of premium?
A. "An acknowledgment in a policy or contract of insurance of the receipt of
premium is conclusive evidence of its payment, so far as to make the policy
binding, notwithstanding any stipulation therein that it shall not be binding until
the premium is actually paid.
When a policy was issued with an acknowledgement that premiums were
paid, such acknowledgement is conclusive to make the on the policy binding
although the policy contained a stipulation that it shall not be binding until the
premiums are paid. In such case, therefore, the insurer cannot deny the
payment of the loss to the insured the ground of non-payment of premiums.
Section 79 should be interpreted as an exception to Section 77, and thus,
the policy is binding whenever there is an acknowledgment of the receipt of
premium even if the same has not been actually paid. After all, where the
policy the acknowledging premium payment is delivered without requiring actual
payment of premium, presumption is that the policy is valid for it should not be
envisioned that the insurer would issue a policy is void by its own terms.
The acknowledgement of receipt of premium, however, is conclusive only
to make the policy binding, and not for purposes of collecting the premiums.
Thus, although such an acknowledgement exists, the insurer may still collect
the premiums due from the insured for "when the contract had become
perfected the parties could demand from each Other the performance of
whatever obligations they had assumed. In the case of the insurer, it is obvious
that it had the right to demand from the insured" the payment due.

Q. What is the effect of non-payment of the premium in a surety bond?

A. Bonds and suretyship contract are deemed to be insurance contracts when
issued by a surety doing an insurance business as defined by law and
therefore, as a general rule the surety is entitled to the payment of premium as
soon as the contract of suretyship or bond is perfected and delivered to the
obligor. No contract of suretyship or bond shall be valid and binding unless and
until the premium therefore has been paid. However, when a bond or suretyship
contract is issued and accepted by the obligee or creditor, said bond or
suretyship contract shall be valid and enforceable not with standing the
nonpayment of premium.

Q. Philippine Pryce Assurance Corporation issued two surety bonds in

favor of Gregroco, Inc. to guarantee the payment of the purchases of
Sagum General Merchandise. Gregroco accepted the bonds and delivered
the parts purchased by Sagum. Sagum was unable to pay the purchases.
When sued, Philippine Pryce Assurance Corporation claimed that the
checks issued by its principal, Sagum which were supposed to pay for the
premiums, bounced and hence there was no contract of suretyship to
speak of. Question: Was the defense tenable?

A. The defense was untenable because Gregroco, the obligee had already
accepted the bonds and thus, the said bonds became valid and enforceable
irrespective of whether or not the premiums had been paid by Sagum, the
obligor to Philippine Pryce, the surety.

Q. What is the effect of failure of the insurer to send a representative to

collect the premiums in industrial life insurance?

A. 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 insured at the residence of the insured or
someplace such premium. However, this does not apply when the premium on
the policy remains for a period of three months or twelve weeks after he grace
period has expired.

Q. What are the instances when the Supreme Court declared that the
policy is valid and binding notwithstanding the non-payment of premium?

A. Aside from the statutory exceptions, the following are the instances when the
Supreme Court ruled that the policy is valid and binding notwithstanding the
non-payment of premiums:
1. In case of cover notes which are binding even if premiums are not paid
thereon because no premium could be fixed on the cover note until all the
 particulars of the insurance are known. Cover notes should be integrated
to the regular policies so that the premiums on the regular policies include
the consideration for the cover notes
2. When the parties agreed to have the premiums paid by installments or
payment by installments is an established practice by the parties,
acceptance of the payment of premium by installments would suffice to
make the policy binding.

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

A. 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"binder" should legally operate; otherwise, it will serve no practical
purpose in the realm of commerce.

Q. What is the effect of payment of premium by installment?

A. If the parties have not agreed to have the premiums paid by installments or
payment by installments is not an established practice by the parties, the
obligation to pay premium when due is considered as an invisible obligation.
Hence, a forfeiture of the policy is not prevented by part payment thereof. This
means that a part payment will not keep the policy in force for even such a
proportionate part of the new period as the sum paid bears to the whole
premium due.
However, in case the parties agreed to have the premiums paid by
installments or payment by installments is established practice by the parties,
acceptance of the payment of premiums by installments would suffice to make
the policy binding because it reveals an intention on the part of the insurer to
honor the policy. Basic principles of equity and fairness would not allow the
insurer to continue collecting and accepting the premiums paid on installments,
ground that the premiums were not paid in full.

Q. 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 and again
the insured paid premium by installments. On January 20, 1984, the policy
was again renewed and the insured paid two installments in the amounts
of P25,000 and P100,000 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.
Question: Was the policy valid and binding even if the premium was not
paid in full so as to make the insured liable for the balance of the
premium?

A. The policy was binding and effective notwithstanding the staggered payment
of premiums. The initial insurance contract entered into in 1982 was renewed in
1983, then in 1984. In those (3) three years, the insurer accepted all the
installment payments speaks loudly of the insurer's intention to honor the
policies it issued Section 77 of the Insurance Code, the parties may to the
insured. While it may be true that under 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, eschewed by basic considerations of fairness and equity.
Furthermore, where the risk is entire and the contract is indivisible, the insured
is not entitled to a refund of the premiums paid if the insurer was exposed to the
risk insured for any period, however brief or momentary. The insured was liable
to pay the balance of the premium.

Q. Is there any excuse for non-payment of premium?

A. Non-payment of premiums cannot be excused by sickness or incapacity of
the insured, or by war, since the time of payment of premium is peculiarly of the
essence of the contract. It cannot even be excused by the failure of the insurer
to notify the insured of its change of address.

Q. The offices of the insurer were ordered closed by the Japanese Military
authorities, but the company opened an office clandestinely for the
purpose of receiving premiums from the policy holders. The insurer,
however, failed to advise the insured of its new address. Question: What
was the effect of failure to advise the insured of the change of insurer's
address on the right to have premiums paid promptly?

A. Such failure did not work as forfeiture or waiver of the insurer's right to have
premiums paid promptly.

Q. What is the effect of payment of overdue premiums after the loss

happened?

A. 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. 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, insurer is bound under the policy.
However, where the insurer at the time payment of premium did not know
of the loss and subsequent returned the premium to the insured, the insurer
may still raise the defense of non payment of premium.

Q. May the insurer assert forfeiture of a policy in case it refused to accept

payment of premium?
A. The act of insurer or his agent in refusing the tender of the premium properly
made will necessarily estop the insurer from claiming a forfeiture of the policy
for non-payment of premium.

Q. The insured tendered payment of premium for the succeeding year but
the insurer refused to accept it because the office was closing for the day
on account of threat of bombing by Japanese planes. Question: May the
insurer later on claim forfeiture of the policy for nonpayment of
premiums?
A. No, the insurer may not assert non-payment of premiums because the
refusal to accept payment estopped the insurer from claiming a forfeiture of the
policy for non-payment.

Q. What devices are usually used to prevent forfeiture of a life insurance

policy for nonpayment of premium?

A. To prevent the insured from losing the entire amount already paid to the
insurer in life insurance by reason of the insured's inability to pay the
succeeding premiums, the following devices are employed: (a) Period of grace;
(b) Payment of the cash surrender value; (c) Giving options to the insured after
payment of the three full annual premiums such as extended insurance and
paid-up insurance; (d) Automatic loan clause and (e) Reinstatement of lapsed
policies.

Q. Explain how period of grace works.

A. In life insurance, after the payment of the first premium, the insured is
entitled to a grace period of thirty days or one month within which to pay the
succeeding premiums.682 In case the insured dies during the period of grace
and before the payment of the premium due, the insurer is liable as the policy
continues in force during the grace period but the premium due and the interest
thereon may be deducted from the amount payable to the beneficiary.

Q. Explain cash surrender value.

A. Cash surrender value as applied to a life insurance policy, is the sum of

money the company agrees to pay to the holder of the policy if he surrenders it
and releases his claim upon it. The more premiums the insured has paid the
greater will be the surrender value; but the surrender value is always a lesser
sum than the total amount of premiums paid.

Cash surrender value "arises from the fact that the fixed annual
premiums is much in excess of the annual risk during the earlier years of the
policy, an excess made necessary in order to balance the deficiency the same
premium will meet for the annual risk during the later days of the policy."

Q. What are the usual options granted to the insured after payment of
three full annual premiums?
A. The law requires the insurer to provide in the policy the options to which the
insured is entitled in the event of default in a premium payment after three full
annual premiums shall have been paid.The usual options provided are the
payment of cash surrender value, the conversion of the policy to an extended
insurance, or the conversion of the policy to a paid-up insurance.

Q. What is extended insurance?

A. Extended insurance is that where the insurance originally contracted for is

continued for such period as the amount available therefore will pay when it will
terminate. In such case, the insurance will be for the same amount as the
original policy"89 but for a period shorter than the period in the original contract.
The policy usually designates the cash surrender value as the fund be used in
purchasing an extended to690 insurance.

Q. What is paid-up insurance?

A. Paid-up insurance means that no more payments are required, and consists
of insurance for life in such an amount as the sum available therefore,
considered as single and final premium will purchase. It results to a reduction of
the original amount of insurance, but for the same period originally stipulated.
Like an extended insurance, the policy usually designates the cash
surrender value as the fund applicable for the payment of the paid-up
insurance.

Q. What is automatic loan clause?

A. Automatic loan clause is a stipulation in the policy providing that upon default
in the payment of premium, the same "shall be paid from the loan value of the
policy until that value is consumed. In and effectively as though the premiums
had been such case, the policy is continued in force as full and effectively as
though the premiums had been paid by the insured from funds derived from
other sources.

Q. Explain how lapsed life insurance policy may be reinstated.

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

Q. Is reinstatement of a lapsed life insurance policy an absolute right on

the part of the insured?

A. To be entitled to a reinstatement of an insurance policy, the insured must

comply with the conditions imposed, such as the payment of pastd ue
premiums and furnishing the insurer of evidence of insurability. Reinstatement
therefore, is not an absolute right of the insured,
but discretionary on the part of the insurer, which has the right to deny
reinstatement if it is not satisfied as to the insurability of the insured, and if the
latter does not pay all overdue premiums and all other indebtedness to the
company.

Q. A life insurance policy lapsed. The insured applied for reinstatement of

the policy and paidpartof the overdue premiums. Subsequently, the
insured died. Question: Was the insurer liable?

A. The insurer was not liable as the policy was not reinstated. The failure to pay
the balance of the overdue premiums prevented reinstatement and recovery of
the face value of the policy.

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

A. The insured is entitled to a return of the 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 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 if a claim is denied by reason of fraud,

7. In case of over-insurance.

Q. Explain why there should be a return of the premium when no part of

the interest in the thing insured is exposed to any of the perils insured
against. Give examples.

A. "Premium and risk are the very essence of a contract of insurance and each
is dependent upon and inseparable from the other. It follows that if the risk has
not attached, or if no part of the interest is exposed to the peril insured against,
in the absence of any fault or fraud on the part of the insured, the insurer has no
claim to the premium and that, if paid, it must be returned. Thus, it is
fundamental that if no policy is ever issued or delivered as contracted for, the
applicant for insurance having acted in good faith, may recover any premium
that he has paid"' Likewise, when no valid contract was effected due to the
absence of any one of the essential requisites of a contract, i.e., consent and
subject matter, the whole premium paid may be recovered.

Examples:
(a) When an application for insurance was rejected by the insurer, the applicant
is entitled to a return of the whole premium paid,

(b) When the voyage insured never commences, the insured is entitled to return
of the premium paid."

(c) When the applicant for insurance withdraws his application before it is
accepted, he is entitled to a return of premium.

Q. What part of the premium must be returned where the insurance is

made for a definite period of time and the insured surrenders his policy
before the expiration of that period?

A. "Where the insurance is made for a definite period of time and the insured
surrenders his policy, to such portion of the premium as Corresponds with the
unexpired time, at a pro rata rate, unless a short period rate has been agreed
upon and appears on the face of the policy, after deducting from the whole
premium any claim for loss or damage under the policy which has previously
accrued: Provided, That no holder of a life insurance policy may avail himself of
the privileges of this paragraph without sufficient cause as otherwise provided
by law."

Thus, when the insurance is for a definite the period and insured surrenders the
policy before the expiration of the period, he is entitled corresponding to the to a
return of premium unexpired portion of the period.

Illustration:

A obtained a fire insurance policy for one year. He paid premium

amounting to P2,400 a year. On the sixth month, he surrendered the
policy. He is entitled to a return of the premium corresponding to the
unexpired period of six months or one-half of the premium paid, or
P1,200.

Q. What is "short period rate" and its effect on the amount of the premium
to be returned in case of surrender of the policy before the expiration of
the period of insurance?

A. A short period rate is a stipulation in the policy stating the amount or rate of
premium for Specified short times, or premiums at short-time rate. Such
stipulation is reflected in a table usually appearing at the last page of an
insurance policy. Whenever a short period rate has been agreed upon, the
amount recoverable upon surrender or the policy will no longer be the whole
premium corresponding to the unexpired portion of the policy, but only the
balance after deducting the percentage to be retained by the insurer as stated
in the short period rate table. The short period rate however, applies only if the
insured surrenders the policy and not when the insurer cancels the policy.

Illustration:

In the preceding illustration, in a fire insurance contract upon merchandise

for one year with P2,400 as premium, if the policy is surrendered on the sixth
month, the insured is entitled to a return of the premium corresponding to the
unexpired period, i. e., six months, or 50% of the whole premium paid or
P1,200. But if a short period rate or scale stipulated in the policy provides that
only 30% will be returned if the policy surrendered on the sixth month, following
said scale the insurer will retain 70% of the annual premium or P1,680 and only
30% of the premium or P720 will be returned to the insured instead of P1,200.

In the event that the insured suffered a partial loss during the existence of
the policy and before the surrender thereof, the amount of the loss paid by the
insurer shall be deducted from the whole premium and only the balance shall
be the basis of the return of the premium.

Illustration:

In the example given above, in case the insured suffers a loss amounting
to P1,200 before the policy is surrendered, said amount shall be deducted from
P2,400, the whole premium paid. The difference of P1,200 shall be the basis of
the computation of the premium to be returned. Since the period unexpired is
Six months or one-half of the whole period, the insured is entitled to a return of
% of P1,200 or P600.00, and should the short period scale mentioned above be
stipulated, the insured may obtain the return of 30% of P1,200 or P360.

Q. What is the consequence of a voidable contract or of the insurer's

fraud?

A. A person insured is entitled to a return of the premium when the Contract is

voidable, and subsequently annulled under the provisions of the fraud or
misrepresentation of the insurer, or of his agent, "

When the insurance contract is voidable on the ground of the fraud or

misrepresentation of the insurer, or of his agent, the insured is entitled to a
return of premium paid. Thus, where the insurer represented that the contract
entered into contained a provision whereby the insured may have a loan under
certain conditions and issued a
policy not containing such provision, the insured is entitled to a return of
premium on the ground of fraud of the insurer."

The present provision the made qualification that when the contract is voidable,
it must be subsequently annulled under the provisions of the Civil Code. It is not
clear what the intention of the lawmakers was in inserting this provision other
than to favor the insurer because the insured cannot obtain a return of the
premium until actual rescission of the contract pursuant to the Civil Code.
Hence, the insurer can withhold the return of the premium until the contract is
annulled in accordance with the provisions of the Civil Code.

Q. What is the consequence of a voidable contract of insurance on

account of facts, the existence of which the insured was ignorant of
without his fault; or by any default of the insured other than actual fraud?

A. "A person insured is entitled to a return of the premium when the contract is
voidable, and subsequently annulled under the provisions of the Civil Code xxx
on account of facts, or the existence of which the insured was ignorant of
without his fault; or when by any default of the insured other than actual fraud,
the insurer never incurred any liability under the policy."

The insured is entitled to a return of the premium where the contract is

voidable on account of facts the existence of which insured was ignorant
without his fault. Thus, when at the time the insurance was taken the
insured did not have insurable interest in the thing insured, the insured is
entitled to a return of premium. Again, the contract must be subsequently
annulled under the provisions of the Civil Code.

When, by any default of the insured other than actual fraud, the insurer
never incurred any liability under the policy, the insured is entitled to a return of
premium. Thus, where an insurance was procured on the life of another without
the Consent of the latter, the person procuring the policy who paid the premium
believing it to be valid is entitled to a return of the premium, since the insured's
default in obtaining the consent of the person whose life was insured prevented
the insurer from incurring any liability under the policy.

Illustration:
A wife who takes out insurance on her husband's life without the consent of the
latter and pays premiums thereon under the belief that the policy is valid, is
entitled to recover the premiums so paid."

Q. In case of over-insurance, is the insured entitled to a return of the

premium? Give illustration.

A. In case of over-insurance, i.e., insurance in excess of the amount of the

insurable interest of the insured is insured, by several insurers, entitled to a
ratable return of the premium, proportioned to the amount by which the
aggregate sum insured in all policies exceeds the insurable value of the thing at
risk.'
Illustration:
A was the owner of a house valued at P1,500,000. A obtained the policies
indicated below:

Insurer Premium Paid Amount of Policy

X Co P10,000 P1,000,000
Y Co. P20,000 P2,000,000
Total... P30,000 P3,000,000

Since the value of the house was only taken policies total the while P1,500,000
amounted to P3,000,000, there was an over insurance by P1,500,000, A may
obtain a return of the premiums paid on the excess of P1,500,000 as follows:
P5,000 from X Co. and P10,000 from Y Co.

Q. To whom should the premium be returned?

A. Unless otherwise stated in the policy," the premiums should be returned to

the insured that paid them. Thus, a premium cannot be recovered by a person
having no contractual relation with the insurer notwithstanding the fact that the
money with which the premium was paid was originally derived from such
party."

Illustrations:

(a) Under a lease contract requiring the tenant to protect the premises with
adequate insurance at his expense, there is no privity of contract between the
insurer and the landlord as far as premiums are concerned, therefore, the
landlord has no right to recover the premium paid.

(b) When an application for insurance was refused by the company, the
premium is recoverable by the applicant and not by a third party who has
advanced the money under a special agreement with the applicant providing for
reimbursement."

Q. When is the insured not entitled to a return of the premium?

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. when the policy is

annulled of rescinded upon grounds other than those attributable
to the insurer or if a claim is denied by reason of fraud."

Q. Why is premium not recoverable when the peril insured against has
existed and the risk is entire and indivisible?

A. When the risk is entire and the contract is indivisible, the insured is not
entitled to a return of the premium it the insurer was exposed to liability for any
period however short. "This rule is based upon just and equitable principles, for
the insurer has, by taking upon himself the peril become entitled to the
premium, and although the rule may result in profit to the insurer, it is but a just
Compensation for the dangers or peril assumed; besides, the danger incurred
may be peril greater in any one moment than during the entire remaining period
of insurance, and it would be extremely difficult fairly to apportion the premium,"

Hence, while the risk covered by a marine policy is considered divisible

where the policy covers distinct voyages however, a policy at and from" a port
is not divisible so as to apportion the premium between the parts of the risk "at
and from" the port."

Illustration:
A insured his cargo from Manila to San Francisco, California. After the
vessel upon which said cargo was loaded left the port of Manila and while it was
still five days away from San Francisco, A surrendered the policy. Question:
Was A entitled to a return of premium?

Answer: No, because the risk was entire and indivisible and the insurer had
been exposed to liability already.

Q. Why is there no return of the premium in life insurance?

A. In life insurance, the insured is not entitled to a return of the premium dpon
surrender of the policy.' The reason for such rule is that life insurance is
indivisible. Thus, the contract of life insurance i s not an assurance for a single
year, with a privilege of renewal from year to year by paying the annual
premium, but that it is an entire contract of assurance for life" and premiums
paid "are clearly not intended as the consideration for the respective years in
which they are paid; for, after they are all paid, the policy stands good for the
balance of the life insured, without further payment. Each installment is, in fact,
the consideration of the entire insurance for life."

Q. What is the consequence of the insured's fraud or misrepresentation

on his right to a return of the premium?

A. When the insured fraudulently violates a contract of insurance resulting to its

avoidance, the insured is not entitled to a return of premium. Thus, where a
marine policy is avoided on the ground of deviation, no part of the premium
need be returned.

Q. What is the effect of annulment or rescission of the contract of

insurance?

A. If the contract of insurance is rescinded on the ground of fraud or

misrepresentation on the part of the insurer or its agent, and the contract is
subsequently annulled in accordance with the Civil Code, the insured in entitled
to a return of the premium. But in any other case of rescission or annulment of
the contract the insured is not entitled to a return of the premium.

Q. May an insurer contract and accept payments, in addition to regular

premium, for the purpose of paying future premiums on the policy or to
increase the benefits thereof? YES

A. "An insurer may contract and accept payments, in addition to regular

premium, for the purpose or paying future premiums on the policy or to increase
the benefits thereof." This is a new provision that authorizes the insurer to
accept future premiums on the policy or to increase the benefits thereof.