2010 Purple Notes.insurance

purple notes2010 COMMERCIAL LAW

CENTER FOR LEGAL EDUCATION AND RESEARCH <<<<<<

APPLICABLE LAWS 1. Insurance Code of 19782. Civil Code, Art. 2011 and other related

articles3. Family Code (EO 209)4. Other special laws. (Example: GSIS,

SSS, Philhealth)

If the Insurance Code or a special law does not specifically provide for a particular matter in question, the provisions of the Civil Code on contracts shall govern suppletorily. (Villanueva, Commercial Law Review, 2002ed., page 277)

CONTRACT OF INSURANCE

An agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. (Sec. 2, par. 2, Insurance Code of the Philippines [ICP] )

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. (White Gold Marine Services v. Pioneer Insurance, July 28, 2005)

Requisites of a contract of insurance1. The subject matter in which the insured

has an insurable interest (Secs. 12-14);

2. Event or peril insured against which may be any future contingent or unknown event, past or future and a duration for the risk thereof (Sec. 51 [g]);

3. There must be a promise to pay or indemnify in a fixed or ascertainable amount (Sec. 2);

4. There must be a consideration known as “premium” (Sec. 77);

5. There must be meeting of the minds of the parties (Arts. 1318, 1319, NCC).

“Doing an insurance business or transacting an insurance business” (Sec 2, par. 4)

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 notas a mere incident to any other legitimate business of a surety;

3. Doing any insurance business, including a reinsurance business;

4. Doing or proposing to do any business in substance equivalent to any of the foregoing.

Elements of Insurance:1. Insurable Interest

The insured must possess an interest susceptible of pecuniary estimation, known as “insurable interest”;

2. Risk of LossThe insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils;

3. Assumption of RiskThe insurer assumes that risk of loss;

4. Scheme to Distribute LossesSuch assumption is part of a general scheme to distribute actual losses among a large group of persons bearing somewhat similar risks; and

5. Payment of PremiumAs consideration for the insurer’s promise, the insured makes a ratable contribution called premium, to a general insurance fund.

The above elements are IN ADDITION to the essential elements to an ordinary contract.

Moral Hazard- an undesirable side effect of transfer of risk is a phenomenon on which the existence of insurance could have the perverse effect of the probability of loss. (Over-insurance is an example which results to moral-hazard.)

Interpretation of Insurance Contracts:General Rule: In case there is no doubt, the provisions must be construed in their plain, ordinary and popular sense.Exception: When the terms are ambiguous, uncertain or doubtful, the terms should be interpreted strictly against the insurer and liberally in favor of the insured because an insurance contract is a contract of adhesion.

130

INSURANCE LAWICAL LAW INSURANCE LAW

Arellano University School of Law


FIVE CARDINAL PRINCIPLES IN INSURANCE1. Insurable Interest 2. Principle of Utmost Good Faith

An insurance contract requires utmost good faith (uberrimae fidei) between the parties. The applicant is enjoined to disclose any material fact, which he knows or ought to know. The insurer relies on the representation of the applicant, who is in the best position to know the state of his health.

3. Contract of IndemnityIt is the basis of all property insurance. The insured who has insurable interest over a property is only entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss (Sundiang and Aquino, Reviewer on Commercial Law 2004 ed., page 4)Rules:a. Applies only to property insurance

except when the creditor insures the life of his debtor.

b. Life Insurance is not a contract of indemnity but an investment,

c. Insurance contracts are not wagering contracts because they are not contract of chance and they are not used for profit. (Sec.4, ICP)

WAGERING CONTRACT

CONTRACT OF INSURANCE

The parties contemplate gain through mere chance.

The parties seek to distribute the possible loss by reason of mischance.

Gambler courts misfortune.

Insured seeks to avoid misfortune.

Tends to increase the inequality of fortune.

Tends to equalize fortune

Essence of gambling is that whatever one wins from a wager is lost y the other wagering party.

What one insured gains is not at the expense of another insured.

As soon as the party makes a wager, he creates a risk of loss to himself where no such risk exist previously.

The purchase of insurance does not create a new and non-existing risk of loss to the purchase.

4. Contract of Adhesion (Fine Print Rule)

A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, which the other party merely affixes his

signature or his “adhesion” thereto. (Gulf

Resorts, Inc v. Phil. Charter Ins. Corp, G.R. No. 156167, May 16, 2005)

This principle is the very reason why in every doubt or ambiguity in an insurance contract is resolved in favor of the insured and against the insurer.

Void Insurance Contract Stipulations:a. Stipulations for the payment of loss

regardless of whether the person injured does or does not have any interest in the subject matter of the insurance.

b. Stipulation that the policy shall be received as proof of insurable interest.

c. Policy executed by way of gaming or wagering.

d. Stipulations within the proscription of Article 739 of the New Civil Code.

e. Stipulations against public policy, public morals and public order.

5. Principle of SubrogationIt is legal substitution where the insurer steps into the shoes of the insured and he avails of the latter’s rights against the wrongdoer at the time of the loss.

Subrogation is a normal incident of indemnity insurance as a legal effect of payment. It inures to the insurer without any formal assignment or any express stipulations to that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to the insured makes the insurer a subrogee in equity. (Malayan Insurance Co., v. CA, 165 SCRA 536)

Purposes of Subrogation:1. To make the person who caused the loss

legally responsible for it;2. To prevent the insured from receiving

double recovery from the wrongdoer and the insurer; and

3. To prevent the tortfeasors from being free from liability and is thus founded on consideration of public policy.

When the Right of Subrogation is INAPPLICABLE:1. Where the insured by his own act

releases the wrongdoer/third person liable for the loss.

2. Where the insurer pays the insured for a loss or risk not covered by the policy (Pan Malayan Insurance v. CA, 184 SCRA 54).

3. In life insurance because the value of human life is regarded as unlimited and

131

2010 COMMERCIAL LAWpurple notes

>>>>>> PURPLE NOTES COMMISSION

no recovery from a third party can be deemed adequate to compensate the insured’s beneficiary.

4. For the recovery of loss in excess of insurance coverage.

The insurer can be subrogated to only such rights as the insured may have. Should the insured, after receiving payment from the insurer, released the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer (Manila Mahogany Manufacturing Corp. v. CA, 154 SCRA 650).

Characteristics of Insurance:1. Consensual – because it is

perfected by the meeting of the minds. 2. Voluntary – the parties may

incorporate such terms and conditions as they may deem convenient.

3. Aleatory – one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is occur at an indeterminate time. (Art. 010, Civil Code)

4. Executory- it is executory on the part of the insurer in the sense that it is not executed until payment for a loss. It is executed as to the insured after payment of the premium.

5. Unilateral – imposes legal duties on the insurer who promises to indemnify in case of loss.

6. Conditional – because recovery is commensurate with the amount of loss suffered. However, Life Insurance is not a contract of indemnity except if one is procured by a creditor on the life of the debtor.

7. Personal – each party having in view the character, credit and conduct of the other.

8. Formal – a policy in writing is required to be issued, and the premium must be paid.

9. Contract of Indemnity – Except life and accident insurance where the result is death, a contract of insurance is a contract of indemnity whereby the

insurer promises to make good only the loss of the insured.

10. An Investment- measure of economic security for the insured during life, and beneficiary after death. Financial assistance during financial crisis. Liability of insurer is face value of the policy and not the earning capacity of the insured at time of death.

11. Property – since an insurance is a contract, as such, it is property in legal contemplation.

Requisites for Recovery Upon Insurance a. The insured must have insurable

interest in the subject matter;b. That interest is covered by the policy;c. There must be a loss; and d. The loss must be proximately caused

by the peril insured against.

TYPES OF INSURANCE

1. Life Insurance a. Individual Life (Sec. 179-183, 227) –

insurance on human lives and insurance appertaining thereto or connected therewith.

b. Group Life (Sec. 50) – a blanket policy covering a number of individuals.

c. Industrial Life (Secs. 229-231) – a form of life insurance under which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy is not more than 500 times than that of the current statutory minimum daily wage in the City of Manila and if the words ‘”industrial” policy are printed upon the policy as part of the descriptive matter.

2. Non-Life Insurancea. Marine (Secs. 99-166)

b. Fire (Secs. 167-173)

c. Casualty (Secs. 174)

3. Contract of Suretyship (Secs. 175-178)

Health and accident insurance are either covered under life (Sec. 180); or casualty insurance (Sec. 174);

Marine, fire and the property aspect of casualty insurance are also

132



referred to as property insurance.PERFECTION OF CONTRACT OF INSURANCE

An insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration.

COGNITION THEORYWhat is being followed in insurance

contracts is what is known as the “cognition theory.” Thus, Article 1319 of the Civil Code provides that an acceptance of an offer by letter does not bind the offeror except from the time it came to his knowledge (Enriquez v. Sun Life Assurance Co. of Canada, 41 PHIL. 269).

If the binding receipt is conditioned upon approval of the application and the application is rejected, there is no contract. (General Pacific Life Insurance Co. v. CA 89 SCRA 543).[1979]

Where the applicant died before he received notice of the acceptance of his application for the insurance, there is no perfected contract. (Perez v. Court of Appeals, 323 SCRA 613) [ 2000] clear

Binding Receipt- a mere acknowledgment on behalf of the company that its branch office had received from the applicant the insurance premium and had accepted the application subject to processing by the head office.

PARTIES TO THE INSURANCE CONTRACT

1. Insurer – the person who undertakes to indemnify another.a. Insurers may be

individuals, partnerships, associations or corporations who are duly authorized by the Insurance Commission to engage in the insurance business. (Secs. 184-187, ICP)

b. Insurance Corporation – corporations formed or organized to save any person or persons or other corporations harmless from loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or other corporations for any such loss,

damage, or liability, or to guarantee the performance of or compliance with contractual obligations or the payment of debt of others. (Sec. 185, ICP) It must have sufficient capital and

assets required under the Insurance Code and the pertinent regulations issued by the Commission (Sec. 186, ICP).

It must have a certificate of authority to operate issued by the Insurance Commission which should be renewed every year (Sec. 187, ICP).

c. Foreign Insurance corporations may be authorized by the Commission to engage in insurance business in the Philippines provided the following requirements are met: 1. The appointment of a resident of the

Philippines as a general agent on whom any notice or proof of loss may be served and on whom summons and other processes may be served;

2. It must possess paid up unimpaired assets or capital and reserve not less than that the required of domestic corporations;

3. It must deposit for the benefit and security of policyholders, securities satisfactory to the Commission;

4. Its investments should not exceed 20% of the net worth of foreign corporation or 20% of the capital of the registered enterprise.

2. Insured – party to be indemnified upon the occurrence of the loss. a. Capacitated to enter into a contract;b. Possess an insurable interest in the

subject of the insurance; andc. Not a “public enemy” (refers to a

nation with which the Philippines is at war and includes the citizens thereof). (Sec. 7, ICP)

A public enemy may not be insured because the purpose of the war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent that one country should destroy its enemy’s property and repay in insurance the value of what has been so destroyed, or that it should in such manner increase the resources of the enemy or render it aid. However, elementary rules of justice require that the premium paid by the insured public enemy from first payment up to the time of its becoming public enemy, should be returned.

133



A member of the Moro Islamic Liberation Front (MILF) or its breakaway group or the Abu Sayyaf may be insured with a company licensed to do business under the ICP. The MILF or the Abu Sayyaf is not a citizen or national of another country, but of the Philippines.

Effect of war: It abrogates the contract of insurance; even if war terminates. It does not revive the contract.

Nationality of the corporation is determined by the place of incorporation or where it is registered (Incorporation Test);

Exception: During wartime where the Philippines is involved, what is decisive is not its registration but is the nationality of the majority of its stockholders (Control test).

Insured may be regarded as the real party in interest under an insurance policy, although he has assigned the policy for the purpose of collection, or has assigned as collateral security any judgment he may obtain there from. (Great Pacific Life vs. CA, 316 SCRA 677)

Insurance By A Married WomanA married woman may take out an

insurance on her life or that of her children without the consent of her husband, or that of her husband, having an insurable interest in the latter.

However, while either spouse may exercise any legitimate profession, occupation, business or activity without the consent of the other, the latter may object on valid, serious and moral grounds. (Art.73, Family Code)

3. Beneficiary and Cestui Que Vie – The beneficiary is the person designated to receive the proceeds of the policy when risk attaches while the cestui que vie is the person on whose life the insurance is written.

RULES IN THE DESIGNATION OF THE BENEFICIARY

A. Life Insurance1. Beneficiary of One Who Insures His

Own LifeGeneral Rule: Any person may be a beneficiary, whether or not he has an insurable interest in the life of the insured.Exception: Any person who is forbidden

from receiving any donation under Article 739 of the Civil Code cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him. (Art. 2012 NCC)

Prohibited Donations (Art. 739 NCC)a. Between persons guilty of

adultery or concubinage;b. Between persons guilty of

the same criminal offense;c. Made to a public officer or

his wife, descendants and ascendants, by reason of his office.

The designation of common law wife as beneficiary is void. This need only be proved by preponderance of evidence; no previous conviction is required. (Insular Life v. Ebrada, 80 SCRA 181)

The designation of adulterous children by a married man is valid. (Southern Luzon Emp. V. Golpeo, 96 Phil. 83)

2. A person who insures the life of another person and names himself as the beneficiary must have an insurable interest in such life. (Sec. 10, ICP)

3. General Rule: designation of beneficiary is revocable (Sec. 11, ICP)

Exception: When there is an express stipulation in the policy that it shall be irrevocable (express waiver).

Exception to the Exception: After the finality of the decree of legal separation, the innocent spouse may revoke the donations made by him or by her in favor of the offending spouse, as well as the designation of the latter as beneficiary in any insurance policy, even if such designation be stipulated as irrevocable. (Art. 64, Family Code)

Effects of Irrevocable Designation of Beneficiary: The insured cannot: 1. Assign the policy;2. Take the cash surrender value of the

policy;3. Allow his creditors to attach or execute

on the policy;4. Add new beneficiary; or5. Change the irrevocable designation to

revocable, even though the change is just and reasonable.

If the designation of the beneficiary is irrevocable, the designation

134



cannot be made revocable without his consent, as he has vested right. If the beneficiary is a minor child of the insured, the latter cannot give his consent because of conflict of interest. (Phil. American Life Insurance Co. v. Pineda, 175 SCRA 416)[1989]

4. Change of Beneficiary:General Rule: The insured shall have the right to change the beneficiary he designated in the policy.a. The beneficiary acquires no vested

right only expectancy of receiving the proceeds under the insurance.

b. The right may be expected in the manner provided in the policy.

c. The right ceases upon the insured’s death. It may not be exercised by his representatives.

Exceptions:a. If the right to change the beneficiary

is expressly waived in the policy then the insured has no power to make such change without the consent of the beneficiary; and

b. When the designation of beneficiary is irrevocable.

Note: If the insured refuses to pay the premiums, the designated irrevocable beneficiary may continue the policy by paying the premiums that are due.

Exception to exception: Under Articles 43 (4), 50 and 64 of the Family Code, the innocent spouse may revoke the designation of the other spouse who acted in bad faith as beneficiary in any insurance policy, even if such designation be stipulated as irrevocable.

5. Rules on liability of insurer on death of insured:a. Death at hands of law- the insurer is

liable. This is one of the risks assumed by the insurer in the absence of a valid policy exception.

b. Death by suicide/ Death by “one’s own hand”- the insurer is not liable if suicide is intentional, with whatever motive (from anger, pride, jealousy) because death is still caused by the voluntary act of the insured, he knowing and intending that his death shall be the result of his act (Sec 180-A).

c. Death by accident- death which is purely accidental, even though due to the insured’s own carelessness or negligence is not excluded from the coverage by the word “self-destruction,” “death by his own hand”, and the like which are generally considered synonymous with suicide.

d. Death by suicide while insane- the insurer is still liable since the insurer must have known that the insured was insane and the unwitting act of self-destruction is as much the consequence of that disease.

e. Death caused by the beneficiary-General Rule: the beneficiary cannot receive benefitsExceptions:1. The beneficiary acted in self-

defense;2. The insured’s death was not

intentionally caused.Note: Sec 12 provides in “willfully” bringing about the death.

f. Death caused by violation of law- the insurer is still liable. To avoid liability, the insurer must further establish that the commission of the felony or the violation of law was the cause or had a causal connection with the accident resulting in the death of the insured.

6. Effects when the beneficiary predeceased the insured:a. Where the beneficiary is

irrevocable, 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 made payable to the beneficiary only “if living”.

b. Where the beneficiary is revocable, the estate or legal representatives of the former derive no interest from or through him, but the proceeds passes to the estate of the insured.

Note: the reason for the different effects between the irrevocable and revocable beneficiary is that in the former, the beneficiary has a vested interest in the policy while the latter

135



does not.

c. In case of an insurance policy taken out by an original owner on the life or health of a minor, all rights, title and interest in the policy shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy.

7. The interest of the 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 event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified (Sec. 12, ICP).

B. Beneficiary of Property Insurance a. The beneficiary must

have an insurable interest in the property.

b. The designation is revocable unless the right to revoke is expressly waived in the policy (Sec. 11, ICP)

c. If the insured or beneficiary is a minor, and the amount involved does not exceed P20,000, the father, in the absence of a judicial guardian, or in his absence or incapacity, the mother, may exercise the minor’s rights under the policy , without the need of a court authority.

THE POLICY OF INSURANCE

Policy of Insurance is a written instrument where the terms and conditions of the contract of insurance are set forth. No policy of insurance shall be issued or delivered unless in the form previously approved by the Insurance Commission (Sec. 226, ICP).

Contents of Policy1. Parties;2. Amount of insurance, except in open or

running policies;3. Rate of premium;4. Property or life insured;

5. Interest of the insured in the property if he is not the absolute owner thereof;

6. Risk insured against;7. Period during which the insurance shall

continue.(Sec. 51, ICP) ausl

PAPERS ATTACHED TO THE POLICY AND THEIR BINDING EFFECT1. Riders

Printed stipulations attached to an insurance policy that modifies the conditions of the policy by expanding or restricting its benefits or excluding certain conditions from the coverage because they constitute additional stipulations between the parties. Riders are permitted in a policy provided

specific reference is made to them in the policy. (Sec. 50, ICP)

Rules Regarding Riders1. Riders,

together with other attachments to the policy like clause, warranty, or endorsements, are not binding on the insured unless the descriptive title or name thereof is mentioned and written on the blank spaces provided in the policy;

2. Riders and the like shall be countersigned by the insured or owner unless he was the one who applied for the rider, clause, warranty, etc. (Sec. 50, ICP)

3. When the requirements for a rider are complied with, it is considered part of the policy.

2. WarrantiesWarranty is a statement in the policy that its breach bars recovery even though such breach has nothing to do with the loss. (Sec. 67 to 76, ICP)

3. ClauseAn agreement between the insurer and the insured on certain matter relating to the liability of the insurer in case of loss.

4. EndorsementAny provision added to the contract altering its scope or application.

Kinds of Policy1. Open Policy - value of thing insured is

not agreed upon, but left to be ascertained at the time of loss (Development Insurance vs. IAC 143 SCRA 62).

In case of loss, insured must prove two things:

136



a. value of the property at the time of loss; b. loss was due to a peril insured against.

2. Valued Policy - definite valuation is agreed by both parties, and written on the face of the policy (Sec 61, ICP).

In case of marine insurance, a valuation in the policy is conclusive between the parties. (Sec. 156, ICP)

In case of loss, there is no need to prove value but only that the loss was due to a peril insured against.

3. Running Policy - contemplates successive insurances and which provides that the subject of the policy may, from time to time, be defined (Sec 61, ICP).

Cover Notes This is not the same as conditional or binding receipt. The distinctions are as follows:

CONDITIONAL OR BINDING RECEIPT

COVER NOTE OR BINDING SLIP

Acknowledgment on behalf of the company that their branch office had received from applicant the insurance premium and had accepted the application subject to processing by the head office.

It is that which insurance agents issue (since they do not have the authority to bind immediately the insurers they represent) that makes the coverage effective on (1) date of the application, or on (2) the date of medical examination, if the insurer determines later that the applicant was insurable on the date. It is a conditional acceptance by the insurer.

A concise and temporary written contract issued by the insurer through its duly authorized agent embodying the principal terms of an expected policy of insurance.

Purpose: It is intended to give temporary insurance protection coverage to the applicant pending the acceptance or rejection of his application. It shall be valid and binding for not more than 60 days unless a longer period is approved by the Insurance Commission (Sec 52, ICP).

Apply this term to life insurance.

Apply this term specifically, “cover notes” treated under Sec.52 to non-life insurance (such as in marine insurance) pending investigation of the vessel.

Since a cover note is not a separate policy, there is no need to pay a separate premium from it. (Pacific Timber Export Corporation v. CA, 112 SCRA 199).

Rules on Cover Notes1. Insurance companies doing business in

the Philippines may issue cover notes to bind insurance temporarily, pending issuance of the policy (Sec. 52 [1] ICP).

2. The cover note shall be valid and binding not more than 60 days from the date of its issuance;

3. No separate premium is required for the cover note;

4. The cover note may be cancelled by either party upon prior notice to the other of at least seven (7) days;

5. The policy should be issued within 60 days after issuance of the cover note;

6. The 60 day period may be extended

137



upon the written approval of the Insurance Commission; and

7. Insurance companies may impose on cover notes a deposit premium equivalent to at least 25% of the estimated premium of the intended insurance coverage but in no case less than P500.

Two Types of Conditional or Binding Receipt:1. One that affords immediate

protection- insured is covered so long as he files his application and pays the premium. The prevailing trend now is the use of this type, which is entirely fair to both parties to the contract.

2. One that does not afford immediate protection- there is no coverage if anything happens to the insured prior to favorable action on his application at the home office

When a Policy Becomes Binding1. When all the conditions precedent

stated in the offer have been satisfied; and

2. When delivered.

Requisites for a valid delivery:1. Intention of the insurer to give legal

effect as a completed instrument;2. Word or act by insurer putting the

instrument beyond his legal, though not necessarily, physical control;

3. Insured must acquiesce in this intention.

Possession of the policy by the insured raises the presumption of delivery, while the possession by the insurer is prima facie evidence of no delivery.

Two Types of Delivery:1. Actual- delivery to the person of the

insured.2. Constructive

By mail- if policy was mailed already and premium was paid and nothing is left to be done by the insured, the policy is considered constructively delivered if insured died before receiving the policy.By agent- if delivered to the agent of the insurer, whose duty is ministerial, or delivered to the agent of the insured, the policy is considered constructively

delivered.

Importance of delivery:1. It becomes the evidence of the making

of a contract and of its terms;2. It is considered as communication of the

insurer’s acceptance of the insured’s offer;

3. It becomes the determination of policy period;

4. It marks the end of insurer’s opportunity to decline coverage.

Delay in acceptance of application- in a situation where applicant submits application for insurance, but due to negligence of company, which takes an unreasonable long time before processing the application, and the applicant dies before the application is processed, thus the contract is not perfected.

Effect: The insurer is liable for damages under the Tort Theory, in the amount of the face value of the policy, which is given to the estate of the deceased applicant. Reason: It is not to be given to the beneficiary because the contract is not perfected. There is also no contractual liability because there is no contract.

Tort Theory- the insurance business is affected with public interest, thus, it is the duty of the insurer to act with reasonable promptness in either rejecting or accepting the application. In case of unreasonable delay and the applicant dies, applicant would have been deprived of opportunity to secure insurance from another source.

Two Views when there is a failure of the insured to read the policy: 1. Majority Rule- the insured’s acceptance and retention of the policy unread is not such laches as will defeat his right to reformation. This is so because the insurance contracts are contracts of adhesion.2. Minority Rule- the insured has the duty to read the policy and is bound by his contract as written whether he reads it or not. He may not thereafter be heard to say that he did not read the policy or knows its terms.Exception:

a. When the insured could not have

138



discovered the erroneous statement by such reading (e.g. the copy attached was illegible);b. He is induced by fraud of the

agent not to read the policy;c. He is illiterate; andd. When the contracts are long,

complicated and difficult to understand.

The Insurer has the duty to explain the policy when the policy is ambiguous and unclear. This, however, is subject to some important caveats:1. Reasonable Expectations Doctrine-

insurer must explain to the insured what is contained in the policy for the latter may have something in mind different from what is contained in the policy.

2. Insurer must explain the options available to the insured.

3. Agents owe their customers a duty to exercise the skill and care that a reasonable agent would exercise in the circumstances.

4. Insurer must take affirmative steps to make sure that the insured is informed of his remedial rights.

Cancellation of Non –Life Policy1. Grounds:

Cancellation by the insurer of an insurance policy, other than life, requires prior notice to the insured and any of the following grounds:a. Non-payment of premium;b. Conviction of a crime arising out of

acts increasing the hazard insured against;

c. Fraud or material misrepresentation;d. Willful or reckless acts or omissions

increasing the risk insured against;e. Physical changes in property making

the property uninsurable;f. Determination by the Insurance

Commissioner that the policy would violate the Insurance Code. (Sec. 64, ICP)

2. Requisites for Cancellation a. Prior notice of cancellation to insured;b. Notice must be based on the

occurrence after effective date of the policy or one or more of the grounds mentioned;

c. Notice must be in writing, mailed or delivered to the insured at address

shown in the policy; d. Notice must state the grounds relied

upon in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based.(Sec 65, ICP)

Prescriptive Period (Sec. 63, ICP)The parties may expressly provide a

stipulation as long as it is not less than 1 year from the time the cause of action accrues. The reckoning period shall begin from the date the cause of action accrues. “Cause of action” is upon the denial of the claim not from the date of loss.

In the ABSENCE of a stipulation, the action shall prescribe in 10 years.

In CMVLI, any person having any claim upon the policy issued shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting for the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six months from date of accident. Action or suit for recovery of damage due to lose or injury must be brought with the commissioner or the courts within one year from denial of the claim. (Sec. 384, ICP, As amended by 101814, BP 874, Vda., de Gabriel v. CA, GR 103883, 14 November 1996)

TRANSFER OF POLICY

Life insurance

Property insurance

Casualty insurance

Can be transferred even if without consent of insurer (Sec. 181, ICP)

Cannot be transferred without the consent of the insurer.

Cannot be transferred without the consent of the insurer

Reason: The policy does not represent personal agreement between the insurer and the insured.

Reason: The insurer approved the policy based on the personal qualification and insurable interest of the insured.

Reason: The moral hazards are as great as that of property insurance.

139



INSURABLE INTEREST

A person has an insurable interest in the subject matter if he is so connected, so situated, so circumstanced, so related that by the preservation of the same shall derive pecuniary benefit, and by its destruction he shall suffer pecuniary loss, damage or prejudice.

The consignee, before delivery of imported goods, has insurable interest because he has equitable title. (Filipino Merchant Insurance Co. Inc. v. Court of Appeals, 179 SCRA 638)

A provision in a lease contract that should the lessee insure his goods against fire without the consent of the lessor, the proceeds of the policy in case of loss will be assigned to the lessor is void, because the lessor has no insurable interest in the good. (Cha v. CA, 277 SCRA 690)

It is sufficient for the person to have insurable interest in property that he derives a benefit from its existence or would suffer loss from its destruction. A seller retains an insurable interest in the property so long as he may have any interest therein or so long as he would suffer by its destruction, as where he has a vendor’s lien. Unlike the Civil Code concept of res perit domino where title or ownership is the basis for determining who bears the risk of loss, in determining insurable interest, what counts is whether the insured has a substantial economic interest in the property insured, regardless of whether he has title. (Gaisano Cagayan v. Insurance Co. of North America, G.R. No. 147839, June 8, 2006)

Reason for the requirement of Insurable interest: 1. To avoid wagering policy (Sec. 4, ICP)- As

deterrence to the insured, the requirement of an insurable interest to support a contract of insurance is based upon considerations of public policy which render wager policies invalid. A wager policy is obviously contrary to public interest.

2. To measure the limit of recovery- if and to the extent that any particular insurance contract is a contract to pay indemnity, the insurable interest of the insured will be the measure of the upper limit of his provable loss under the contract.

WAGERING POLICY - pretended insurance where the insured has no interest in the thing

insured and can sustain no loss by the happening of the misfortune insured against.

TWO CLASSES OF INSURABLE INTEREST IN LIFE INSURANCE:1. On one’s life

The insured has unlimited interest. It is not necessary that the

beneficiary should have interest in the life of the insured.

2. Upon life of another Insurable interest in the life of

another must be pecuniary. The assured must have an interest

to preserve the life insured in spite of the insurance, rather than destroy it because of the insurance.

A. INSURABLE INTEREST IN LIFEEvery person has an insurable interest in the life and health: 1. Of Himself, of his spouse and of his

children;2. Of any person on whom he depends

wholly or in part for Education or support, or in whom he has a pecuniary interest;

3. 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

4. Of any person upon whose Life any estate or interest vested in him depends (Sec. 10. ICP). In par(a) of Sec. 10, were relationship is sufficient while the rest (Par. b, c and d) required pecuniary interest.

General Rule: In life insurance, there is no limit as to the amount of insurable interest the insured can insure his life. Exception: In creditor-debtor relationship where the creditor insures the debtor, the limit of insurable interest is equal to the amount of the debt.

General Rule: A general or unsecured creditor cannot insure specific property of his debtor who is alive, even though destruction of such property would render worthless any judgment he might obtain.Exceptions:a. When the debtor has died (all

personal liability ceases with the

140



death of the debtor);b. When the unsecured creditor

obtains a judgment in his favor (becomes a judgment creditor);

c. An unsecured creditor may insure the life of his debtor to the extent of the amount of the debt.

When Insurable Interest Must Exist:General Rule: The insurable interest in the life of another must exist only at the time of perfection of the contract and need not exist thereafter.

Exceptions:1. When the creditor procures

insurance on life of his debtor, insurable interest must also exist at the time of loss. (Sec. 18, ICP)

Reason: the insurance in this case is considered as contract of indemnity.

2. When the insurance is taken by the employer on the life of the employee.

It is generally held that a corporation has an insurable interest in the life of an officer on whose services the corporation depends for its prosperity, and whose death will be of a substantial pecuniary loss to it. (Murray v. G.E. Higgins Co., 300 Pa.341) An employer corporation has an insurable interest on its manager where the death of the manager will be detrimental to the corporation’s operations. (El Oriente Fabrica de Tabacos v. Posada, 56 Phil. 147)

B. INSURABLE INTEREST IN PROPERTY INSURANCEEvery interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest (Sec. 13, ICP).

Test of Insurable Interest in the Property: A person has an insurable interest in the property, if he derives pecuniary benefit or advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction whether he has or has no title in, or lien upon, or possession of the property (Filipino Merchants Co. v. CA, 179

SCRA 459). clear

Extent of Insurable Interest in Property: Value of the loss or amount of loss suffered.

Insurable Interest in Property may Include (Sec. 14, ICP). 1. Existing interest which may be legal

title or equitable title;

Example of insurable interest arising from legal title: mortgagor of the property mortgaged

Example of insurable interest arising from equitable titile: purchaser of property before delivery or before he has performed the conditions of the sale;

2. Inchoate interest founded on an existing interest(as owner or mortgagee); or

3. Expectancy, coupled with an existing interest in that out of which the expectancy arises.

Interest of a Stockholder/ Partner of a Firm- he has sufficient interest in the property of the corporation. Interest is not measured by value of what is destroyed. But the interest is to share in the distribution of the proceeds only after the payment of the corporation’s debts. The stockholder or the partner must prove actual injury, otherwise cannot recover more than the nominal damages.

Insurable interest in property need not be an existing interest. It may exist merely in an inchoate interest or as all expectancy. However, the expectancy must be coupled with an existing interest in that out of which such expectancy. (Sundiang & Aquino. Reviewer on Commercial Law 2006 ed., p. 29)

The insurable interest must exist in the same person both at the perfection of the contract as well as at the time of loss. In between, the effect of loss of insurable interest is merely to suspend the policy. (Sec. 19, ICP)

What May Be Insured Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him. (Sec. 3, ICP).

General Rule: A future event is the only event that can be covered by an insurance

141



contract.Exception: A past event may be covered by a marine insurance if the loss of the vessel in the past could not have been known by ordinary means of communication.

In Property Insurance, insurable interest is measured in terms of possible damage. (Sec. 17, ICP)

InsurableInterest in

Life

InsurableInterest inProperty

As to extent

Unlimited, except in life insurance effected by a creditor on the life of the debtor.

Limited to the actual value of the interest in property.

As to time when insurable interest must exist

Must exist at the time the policy takes effect and need not exist at the time of the loss.

Must exist when the policy takes effect and when the loss occurs

As to expectation of benefit to be derived

From the continued existence of life, beneficiary need not have any legal basis.

From the continued existence of the property insured there must be legal basis.

As to the beneficiary’s interest

Beneficiary need not have insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured.

Beneficiary must have insurable interest over the thing insured in property insurance.

SPECIAL CASES:1. Insurable Interest Of A Carrier Or

DepositoryA carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof.

2. Insurable Interest In Case Of Mortgaged Property

Insurable Interest of Mortgagor and Mortgagee over the Mortgaged Property1. Mortgagor – may insure the

mortgaged property to the full value of such property.Reason: the loss or destruction of the property insured will not extinguish the mortgage property.

2. Mortgagee – can insure the mortgaged property only to the extent of the amount of his credit.Reason: the property relied on as mortgaged is only a security. In insuring the property, he insures his interest or lien thereon.

Standard / Union Mortgage ClauseIt creates the relation of insured and

insurer between the mortgagee and the insurer independent of the contract with the mortgagor. Hence, subsequent acts of the mortgagor cannot affect the rights of the assignee.Open / Loss Payable Mortgage Clause

Acts of the mortgagor affects the mortgagee because the mortgagor does not cease to be a party to the contract (Secs. 8 and 9, ICP)

Effects of Insurance procured by the mortgagor without assigning the loss to the mortgagee Only the mortgagor may recover

from the 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.

Effects of Open or Loss Payable Clause 1. Insurance is still deemed to be upon

the interest of the mortgagor who does not cease to be a party to the original contract. If the policy is cancelled, notice is still given to the mortgagee.

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.

3. Any act which, under the insurance contract, is to be performed by the mortgagor, may be performed by the mortgagee with the same effect as if it had been performed by the mortgagor;

142



4. Upon occurrence of the loss, mortgagee is entitled to recover to the extent of his credit and the balance, if any, is payable to the mortgagor;

5. Upon recovery by the mortgagee to the extent of his credit from the insurer, the mortgagor is released from his indebtedness. (Sec. 8, ICP)

Effect of transfer of the Thing Insured: The mere absolute transfer of the thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured (Sec. 58, ICP).

Effect of Change of Interest in Thing Insured Unaccompanied by a Change of Interest in Insurance

General Rule: It SUSPENDS the insurance to an equivalent extent, until the thing and the interest in the insurance are vested in the same person. (Sec 20, ICP)

Exceptions:1. In life, health, and accident insurance

(Sec. 20, ICP);2. Change in interest in the thing insured

after the occurrence of an injury which results in a loss (Sec. 21, ICP);

3. Change in interest in one or more several distinct things separately insured by one policy (Sec. 22, ICP);

4. Change in interest by will or succession on death of the insured does not avoid an insurance, and his interest in the insurance passes to the person taking his interest in the thing insured (Sec. 23, ICP);

5. Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured (Sec. 24, ICP);

6. When a 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 (Sec. 57, ICP);

7. When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but AVOIDED

(Art. 1306, Civil Code).

RISKWhat may be insured against:1. Future contingent event resulting in loss

or damage;2. Past unknown event resulting in loss or

damage3. Contingent liability

PREMIUM

The consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.

Ratio for the Full Payment of PremiumTo safeguard the interest of the insured, it

must not be ignored that the contract of insurance is primarily a risk-distributing device, a mechanism by which all members of a group exposed to a particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to exposure to the peril insured against. (Tibay v. CA, 257 SCRA 126)

General Rule: Cash and Carry Rule- No insurance policy issued or renewed is valid and binding until actual payment of the premium. Any agreement to the contrary is void. However, there is no express prohibition by Sec. 77 against an agreement granting credit extension of the premium due. (Gabriel vs. Mateo, 91 Phil 497, 1941) (Sec. 77,

ICP).

Unless the premium is paid, the policy is not binding. (Arce v. Capital Insurance, 117 SCRA 63)

Liability for premium on a bond ceases if it is not renewed even if there is a lawsuit to enforce liability. (Capital Insurance & Surety Co. v. Ronquillo Trading, 123 SCRA 526)

Exceptions: 1. In case of Life and Industrial Life

whenever the grace period provision applies (Sec. 77).

2. Where there is an Acknowledgement in the contract or policy of insurance that the premium had already been paid (Sec 78).

3. If the parties agreed to the payment of the premium in Installments and partial payments have been made at the time of the loss (Makati Tuscany v. CA, 215 SCRA 462).

143



4. Where the Credit term was agreed upon. (UCPB General Insurance v. Masagana Telamart, 308 SCRA 251).

5. Paries are barred by estoppel.

Sec. 77 merely percludes the parties from stipulating that the policy is valid even if the premiums are not paid (Makati Tuscany Condominium v. CA, 215 SCRA 462).

Premium is different from assessment wherein premium is levied and paid to meet anticipated losses, while assessment is collected to meet actual losses. Also, while premium is not a debt, as assessment properly levied, unless otherwise expressly agreed, is a debt.

Effect of Acknowledgment of Receipt of Premium in Policy:

Conclusive evidence of its payment, in so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid (Sec. 78).

Reason: When the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of prepayment.

Note: The conclusive presumption extends only to the question on the binding effect of the policy. As far as the payment of the premium itself is concerned, the acknowledgment is only a prima facie evidence of the fact of such payment. The insurer may still dispute its acknowledgment but only for the purpose of receiving the premium due and unpaid (The Insurance Code of the Philippines Annotated, Hector de Leon, 2006 ed.).

Effect of Acceptance of Premium:Acceptance of premium within the

stipulated period for payment thereof, including the agreed period of grace, merely assures the continued effectivity of the insurance policy in accordance with its terms.

Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf. The insurer is bound by its agent’s acknowledgment of the receipt of payment of premium.

Effect of Payment of Post-Dated Check:The payment of premium by a post-

dated check at a stated maturity subsequent to the loss is insufficient to put the insurance into effect. Payment however, by means of a check or note, accepted by the insurer, bearing a date prior to the loss, assuming an availability of the funds thereof, would be sufficient even if it remains unencashed at the time of the loss. The subsequent encashment would retroact to the date of the instrument and its acceptance by the creditor.

Effects of Non-Payment of Premium1. First premium – nonpayment of the 1st

premium unless waived, prevents the contract from becoming binding notwithstanding the acceptance of the application nor the issuance of the policy. But nonpayment of the balance of the premium due does not produce the cancellation of the contract. (Phil. Phoenix Surety & Insurance Co v. Woodworks Inc, 20 SCRA 1270)

2. Subsequent premiums – Nonpayment of subsequent premiums does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse.

Non-payment of BALANCE of premium does not cancel the policy.

Instance when the insured is EXCUSED from paying premiums:

1. The insurer has become insolvent and has suspended business or has refused without justification a valid tender of premiums.

2. Failure to pay was due to the wrongful conduct of the insurer.

3. The insurer has waived his right to demand payment.

INSTANCES WHEN INSURED IS ENTITLED TO RETURN OF PREMIUMSA. WHOLE:

1. If the thing insured was never exposed to the risks insured against (Sec. 79); ICP

2. if the contract is voidable due to the fraud or misrepresentation of the insurer or his agents (Sec. 81); ICP

3. if contract is voidable because of the existence of facts of which the

144



insured was ignorant without his fault (Sec. 81) ICP;

4. when any default of the insured other than actual fraud, the insurer never incurred liability (Sec. 81); ICP

5. when rescission is granted due to the insurer’s breach of the contract (Sec. 74) ICP

B. PRO RATA:1. When the insurance is for a definite

period and the insured surrenders his policy before the termination thereof;Exceptions:a. Policy not made for a definite period

of time;b. Short period rate is agreed upon;c. Life insurance policy.

2. When there is over – insurance. a. In case of over- insurance by

double insurance- the insurer is not liable for the total amount of insurance taken, his liability being limited to the property insured. Hence, the insurer is not entitled to that portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured.

b. In case of over-insurance by several insurers- the insured is entitled to a ratable return of the premium, proportioned to the amount which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk (Sec. 82, ICP).

DEVICES USED TO PREVENT THE FORFEITURE OF A LIFE INSURANCE AFTER THE PAYMENT OF THE FIRST PREMIUM:1. Grace period- after the payment of the

first premium, the insured is entitled to a grace period of thirty days within which to pay the succeeding premiums.

2. Cash Surrender Value- the amount the insurer agrees to pay to the holder of the policy if he surrenders is and releases his claim upon it.

3. Extended Insurance- where the insurance originally contracted for is continued for such period as the amount available therefore will pay when it will terminate. In such a case, the insurance will be for the same amount as the

original policy but for a period shorter than the period in the original contract.

4. Paid Up Insurance- no more payments are required, and consists of insurance for life in such an amount as the sum available therefore, considered as a single and final premium, will purchase. It results to a reduction of the original amount of insurance but for the same period originally stipulated.

5. Automatic Loan Clause- a stipulation in the policy providing that upon default in payment of premium, the same shall be paid from the loan value of the policy until that value is consumed. In such a case, the policy is continued in force as fully and effectively as though the premiums had been paid by the insured from funds derived from other sources.

6. Reinstatement- provision that the holder of the policy shall be entitled to reinstatement of the contract at any time within three years from the date of default in the payment of premium, unless the cash surrender value has been paid or the extension period expires 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 (Reviewer on Insurance, Insolvency and Code of Commerce, Perez H., 2000ed).

ASCERTAINMENT AND CONTROL OF RISK AND LOSS

Kinds of Insurable Risks:1. Personal risks (death involving the

person, life and health risks); 2. Property risks (loss or damage to

property);3. Liability risks (those involving liability for

the injury/damage caused to third persons).

Four Primary Concerns of Insurer:1. Correct estimation of risk which

enables insurer to determine if he will approve the policy application and if so, at what premium rate;

2. Delimitation of the risk;3. Control of risk to guard against

increase of risk;

145



4. Determine if loss occurs and if so, the amount thereof.

DEVICES USED TO ASCERTAIN AND CONTROL RISK AND LOSS (CREW-CO)1. Concealment2. Representation3. Warranties4. Conditions5. Exceptions6. Other Insurance

Clause

Concealment - neglect to communicate that which a party knows and ought to communicate (Sec. 26, ICP).

Requisites: a. Party concealing must have

knowledge of the fact concealed;b. Such party concealing is duty bound

to disclose such fact to the other;c. Party concealing makes no warranty

as to the fact concealed;d. The other party has no means of

ascertaining the fact concealed; ande. Fact concealed must be material to

the risk.

Effects of ConcealmentIt vitiates the contract and entitles the insurer to rescind even if the death or loss is due to a cause not related to the concealed matter (Sec 27, ICP).

Good faith is not a defense in concealment; the concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of insurance (Sec 27, ICP).

Test of MaterialityMateriality is 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 or in fixing the premium rate (Sec. 31, ICP) Vda. De Canilang v. CA, 223 SCRA 443).[1993]

Exception to Sec. 31a. Incontestability Clauseb. Matters under Sec. 110 (marine

insurance)

The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered (Sunlife Assurance Co. of Canada v. CA, 245 SCRA 268).

Rules on concealment are stricter because the insurer would have to depend almost entirely on the matters communicated by the insured.

In addition to material facts, each party must disclose ALL the information he possesses which are material to the information of the belief or expectation of a third person, in reference to a material fact.

Matters that must be communicated even in the absence of inquiry (Sec. 28):1. Those material to the contract (Secs 31,

34, 35); ICP2. Those which the other has no means

of ascertaining (Secs 20, 32, 33); ICP

3. Those as to which the party with the duty to communicate makes no warranty (Secs 67-76) ICP

GENERAL RULE: Matters made subject of special inquiries under Sec. 30 must be deemed material, even though otherwise they might not be so regarded and the insured is required to make full and true disclosure to questions asked.

EXCEPTIONS: There is no duty to make a disclosure on the following instances:1. Those which the other knows;2. 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;

3. Those of which the other waives communication;

4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material;

5. Those which relate to a risk excepted from the policy and which are not otherwise material (Sec. 30);

6. Information of the nature or amount

146



of the interest of one need not be communicated unless in answer to an inquiry, except as prescribed by Sec. 51 (Sec. 34).

Ordinarily, the matters concealed need not be the cause of the loss. In Marine Insurance, there are instances when matters, although concealed, will not vitiate the contract except when they caused the loss (Sec. 110, ICP):

a. Nation character of the insured;b. Liability of the thing insured to and

detention;c. The liability to seizure from breach

of foreign laws of traded. Want of necessary documents; ande. The use of false and simulated

papers.

Where the insured authorized the insurance company to investigate his medical history, the insurance company cannot avoid liability on the ground that the insured concealed that he had high blood pressure. (Philamcare Health Systems, Inc. v. CA, 379 SCRA 356)

An insurance company cannot refuse to pay the proceeds of a group life insurance on the ground of concealment by the insured that he had hypertension where the widow of the insured merely stated that it was possible that the insured had hypertension and the attending physician did not conduct an autopsy and merely stated in the death certificate that hypertension was the possible cause of his fatal cerebral hemorrhage. (Great Pacific Life Assurance Corporation v. CA, 316 SCRA 677)

Where the insured stated he was operated upon for tumor associated with ulcer of the stomach when he was actually operated upon for peptic ulcer because he believed in good faith that it was his ailment, there is no concealment, because there was no fraudulent intent. The failure of the insurer to inquire further is waived under Sec. 32. (Ng Gan Zee v. Asian Crusaders Life Corporation, 122 SCRA 461)

Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue.

Reason: The insurer cannot rely on those statements. He must make further

inquiry (Philamcare Health Systems v. CA, G.R. No. 125678, March 18, 2002).

2. Representation - factual statements made by the insured at the time of or prior to the issuance of the policy to give information to the insurer and otherwise induce him to enter into the insurance contract. They are considered an active form of concealment.

Requisites of False Representation:a. Insured stated a fact which is untrue;b. Such fact was stated with knowledge

that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead;

c. Such fact in either case is material to the risk.

Characteristics:1. It is not a part of the contract but

merely a collateral inducement to it;2. It may be oral or written;3. It is made at the time of, or before

issuing the policy and not after;4. It may be altered or withdrawn before

the insurance is effected but not afterwards;

5. It always refers to the date the contract goes into effect.

Kinds of Representation:1. Affirmative - affirmation of a fact

when the contract begins.2. Promissory - promise to be

performed after policy was issued.

Test of Materiality: same as that of concealment. (Sec. 46, ICP) Where the insured merely

signed the application form and made the agent of the insurer fill the same for him, it was held that by doing so, the insured made the agent of the insurer his own agent and he was responsible for his acts for that purpose (Insular Life v. Feliciano, 73 Phil 201).

Where the insured stated he never had an application for insurance refused but his request for reinstatement of a lapsed policy was initially denied but was eventually approved, there is no misrepresentation. (Ng Gan Zee v. Asian Crusaders Life Assurance Corporation, 123 SCRA 461)

Where the insured died within two years from the issuance of a life

147



insurance policy, the insurer can refuse to pay on the ground of misrepresentation and concealment even if it did not rescind the policy during his lifetime, for the phrase “during his lifetime” in Section 48 means the policy is no longer in force upon the death of the insured. Otherwise, if the insured dies right after taking a life insurance, his beneficiary will be entitled to collect. (Tan v. Court of Appeals, 174 SCRA 403)

CONCEALMENT MISREPRESENTATION

The insured withholds information of material facts from the insurer.

The insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract.

SAME rules apply to determine materiality

BOTH grounds for rescission

Remedies Available In Case of Concealment or False Representation

1. Rescission2. Incontestability Clause

RECISSION Grounds for Rescission:1. Concealment / Misrepresentation;2. Breach of Warranty; and3. Breach of a Condition Subsequent.

Limitations on the Right of the Insured to Rescind Contract:

1. In a NON-LIFE policy – such right must be exercised prior to the commencement of an action in the contract (Sec. 48).

2. In a LIFE insurance – defenses are available only during the first two years of a life insurance policy.

The injured party is entitled to rescind the contract from the time when the representation becomes false. (Sec. 45, ICP)

Waiver of Right to RescindAcceptance of premium payments despite knowledge of the ground for rescission (Sec. 45, ICP)

INCONTESTABILITY CLAUSE

Clauses in life insurance policies, which are incontestable (after the requisites are shown to exist), whereby the insurer shall be barred from contesting the policy (i.e. policy is void ab initio) or setting up a defense (i.e. fraudulent concealment, misrepresentation etc.) except when allowed by reason of public policy.

Requisites: (Sec. 48, ICP)1. The insurance is a life insurance

policy payable on the death of the insured.

2. It has been in force during the lifetime of the insured for at least 2 years from the date of its issue or its last reinstatement. The period of two years may be shortened but it cannot be extended by stipulation.

The insurer has two years from the date of its 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. The phrase “during the lifetime” found in Section 48 simply means that the policy is no longer considered in force after the insured has died. (Tan v. CA, 174 SCRA 403).[1989]

Defenses available against Incontestability Clause1. That the person taking the

insurance lacked insurable interest as required by law;

2. That the cause of the death of the insured is an excepted risk;

3. That the premiums have not been paid;

4. That the conditions of the policy relating to military or naval service have been violated;

5. That the fraud is of a particularly vicious type;

6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened;

7. That the action was not brought within the time specified.

Barred Defenses of the Insurer1. Policy is void ab initio;2. Policy is rescindable by reason of

the fraudulent concealment or misrepresentation of the insured or his agent.

148



3. Warranties - statements or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or non-fulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment. The same may be expressed, implied, affirmative or promissory. It is the essence of warranty that its

breach bars recovery even though the breach has nothing to do with the loss. (Villanueva, Commercial Law Review, 2002ed, page 337)

Kinds:a. Expressb. Implied - warranties that are

deemed included in the contract, although not expressly mentioned. They are found only in marine insurance.

c. Affirmative - asserts the existence of a fact or condition at the time it is made.

d. Promissory - the insured stipulates that certain facts or conditions shall exist or a thing shall be done or omitted.

Where the car is admittedly unlawfully taken without the driver’s consent and knowledge, such taking constitutes theft, covered by the “theft clause” and not by the “authorized driver” clause. (Perla Cia. De Seguros, Inc. v. CA, 208 SCRA 487)

Effects of Breach of WarrantyA. Material Provisions

General Rule: It gives the insurer the right to rescind. (Secs 74-76, ICP)Exceptions:a. Loss occurs before the time of

performance of the warranty;b. The performance becomes

unlawful;c. Performance becomes

impossible.

Breach of warranty in insurance must be proven to entitle insurer to rescind. (Prudential Guaranty v. Trans-Asia Shipping Lines, June 20, 2006)

B. Immaterial ProvisionsGeneral Rule: It will not avoid the policy (Sec. 75, ICP).

Exception: When the parties stipulate that violation of particular provisions, though normally immaterial, shall avoid the policy. In effect, the parties converted the immaterial provision in to a material one.

Where a policy provided that an action must be filed within a specified period from receipt of denial of claim; a request for consideration or request to specify ground for denial, as the case may be does not suspend the running of the period to file an action. (New Life Enterprises v. Court of Appeals, 207 SCRA 669)

Warranty vs. Representation WARRANTY REPRESENTATION

Part of the contract. Collateral inducement.

Written on the policy or in a valid rider or attachment.

Need not be written.

Generally, it is conclusively presumed to be material.

Should be established to be material.

Facts warranted must be strictly complied with.Falsity or non-fulfillment amounts to breach of contract.

Requires only to be substantially true.

Falsity renders the policy voidable on the ground of fraud.

4. Conditions - Events signifying in its broadest sense either an occurrence or non-occurrence that alters the previously existing legal relations of the parties to the contract. They may be conditions subsequent.

Effects of Breach of Conditions:a. Condition precedent –

prevents the accrual of cause of action.

b. Condition Subsequent – avoids the policy or entitles the insurer to rescind.CONDITION WARRANTY

Limitation to the attachment of the risk.

Does not have that effect.

Non-performance of which, although

Does not suspend or defeat the

149



in form executed by the parties and delivered, does not spring into life.

operation of the contract.

The occurrence of breach temporarily renders the entire contract voidable.

5. Exception - It makes more definite the coverage indicated by the general description of the risk by excluding certain specified risk that otherwise would be included under the general language describing the risks assumed.

Other Insurance Clause A clause in the policy which provides that the policy shall be void if the insured procures additional insurance without the consent of the insurer. The purpose is to prevent over-insurance and, thus, avert the possibility of perpetration of fraud.

DOUBLE INSURANCE AND OVER INSURANCE

Over-insuranceOver-insurance results when the insured insures the same property with the same insurance company for an amount beyond the value of the insured’s insurable interest. Effects of Over-insurance in case of Loss:1. The insurer is bound only to pay to the

extent of the real value of the property lost;

2. The insured is entitled to recover the amount of premium corresponding to the excess in value of the property.

Double InsuranceWhere the same person is insured by several insurers separately in respect to the same subject and interest. It may be prohibited by an “other insurance clause.” (Sec. 93, ICP)

Not prohibited by law but may in prohibited by “an” other insurance clause” (Sundiang, Aquino reviewer on Commercial Law, 2006 ed., p. 46)

Double insurance is different from Double Indemnity where in the latter,

after payment of extra-premium, when the insured dies of an accident, the face value of the policy will double in amount and such will be paid to the beneficiary. (Villanueva, Commercial Law Review 2000ed, p. 308)

Requisites:1. The person insured is the same;2. There are two or more insurers insuring

separately;3. The subject matter is the same;4. The interest is also the same;5. The risk or peril insured against is

likewise the same.

RULES OF PAYMENT WHERE THERE IS OVER-INSURANCE BY DOUBLE INSURANCE:

Principle of Contribution is applied.1. The insured, unless the policy otherwise

provides, may claim payment from the insurers in such order as he may select, up to the amount for with the insurers are severally liable under their respective contracts;

2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured;

3. Where the policy under which the insured claims is an unvalued policy he must give credit as against the full insurable value, for any sum received by him under any policy;

4. Where the insured received any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of the unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves;

5. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (Sec. 94, ICP) Where a fire insurance policy required

the insured to disclose other fire insurance policies before the occurrence of any loss, the failure of the insured to comply with such requirement bars his claim for indemnity in case of loss, even if the insurance agent might have been aware of the other insurance policies. (New Life Enterprises v. Court of Appeals, 207 SCRA 669)[1992]

Additional or Other Insurance ClauseA condition in the policy requiring the

150



insured to inform the insurer of any other insurance coverage of the property insured. It is lawful and specifically allowed under Sec.75 which provides that “(a) policy may declare that a violation of a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it”. It is also a stipulation against double insurance.

Purposes:1. To prevent an increase in the moral

hazard;2. To prevent over-insurance and fraud;

OVER-INSURANCEDOUBLE

INSURANCEWhen the amount of the insurance is beyond the value of the insured’s insurable interest.

There may be no over-insurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured.

There may only be one insurer involved.

There are always several insurers.

REINSURANCEIt is a contract through which the insurer

procures a third person to insure him against loss or liability by reason of such original insurance. It has also been referred to simply as

“an insurance of an insurance. (44 Am.Jur.2d.283)

Nature of Reinsurance1. It is a contract of indemnity, not

merely against damage;2. They are independent but related

contracts; and3. Contract is between insurer and

reinsurer.

Note: Reinsurance does not result to double insurance because there are different insurable interests.

Where the reinsurer indemnified the insurer, the latter has no cause of action to sue for reimbursement for a claim it paid. (Pioneer Insurance & Surety Corporation v. Court of Appeals, 175 SCRA 668) [1989]

Limit of Single Risk

No insurance company other than life, shall retain ay risk on any one subject of insurance in an amount exceeding 20% of its net worth (Sec. 215, ICP).

Double Insurance (Sec. 93)

Reinsurance (Sec. 95)

Involves same interest.

Insurance of different interest.

Insurer remains in such capacity.

Insurer becomes insured in relation to reinsurer.

Insured in the 1st contract is a party in interest in the 2nd contract.

Original insured has no interest in reinsurance contract.

Subject of insurance is property.

Subject of insurance is the insurer’s risk.

Insured has to give his consent.

Consent of original insured not necessary.

Terms:1. Reinsurance treaty – merely an agreement

between two insurance companies whereby one agrees to cede and the others to accept reinsurance business pursuant to provisions specified in the treaty.

2. Automatic Reinsurance – reinsured is bound to cede and the reinsurer is obligated to accept a fixed share of the risk which has to be reinsured under the contract.

3. Facultative Reinsurance – there is no obligation to cede or accept participation in the risk each party having a free choice. But once the share is accepted, the obligation is absolute and the liability hereunder can be discharged only by payment.

4. Retrocession – a transaction whereby the reinsurer in turn, passes to another insurer a portion of the risk reinsured. It is really the reinsurance of reinsurance (The ICP Annotated, Hector de Leon, 2002 ed.).

Duty of the Reinsured to Disclose Facts:Where an underwriter is seeking to insure

his risks, his duty to disclose all material facts is no less than the similar duty imposed on a person seeking an original insurance; the duty in both cases is one of the strictest good faith since the risk insured against in a contract of reinsurance is the probability that the original insurer may be compelled to indemnify for the loss under the policy issued by him. Thus, a policy may be avoided were the reinsured conceals the fact that a loss has taken place or that the property is over-insured where he has

151



knowledge thereof. (De Leon, The Insurance Code of the Philippines, 2006ed, pages 298-299)

MARINE INSURANCE

Insurance against risks connected with navigation to which a ship, cargo, freightage, profits, or other insurable interest in movable property may be exposed during a certain voyage or a fixed period of time.

Scope of Marine Insurance:Coverage:1. Insurance against loss or damage to:

a. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation;b. Persons or property in connection with marine insurance;c. Precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; andd. Bridges, tunnels, piers, docks and other aids to navigation and transportation (Sec. 99, ICP). Cargo can be the subject of marine

insurance and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not (Roque v. IAC, GR No. L-66935, Nov. 11, 1985).

2. Marine Protection and Indemnity Insurance

Measure of Indemnity:1. Valued Policy- the parties are bound by

the valuation, if the insured had some interest at risk and there is no fraud (Sec.

156). 2. Open Policy- the following rules shall

apply in estimating a loss:a. Value of the ship- value at the beginning

of the risk;b. Value of the cargo- actual cost when

laden on board or market value at the time and place of lading;

c. Value of freightage- gross freightage exclusive of primage;

d. Cost of insurance- in each case, to be added to the estimated value (Sec. 161, ICP)

Major Divisions of Transportation Insurance:1. Ocean Marine Insurance

Scope:a. ships and hulls;b. goods and cargoes;c. earnings such as freight, passage,

money, commissions or profit; and,d. liability incurred by reason of

maritime perils

2. Inland Marine InsuranceClasses:a. Property in transit- provides

protection to property frequently exposed to loss while it is being transported from one location to another.

b. Bailee liability- insurance for those who have temporary custody of the goods.

c. Fixed transportation property- they are so insured because they are held to be an essential part of the transportation system such as bridges, tunnels, etc.

d. Floater- provides an insurance to follow the insured property wherever it may be located, subject always to the territorial limits of the contract.

Risk or Losses Covered in Marine Insurance1. Perils of the sea vs. perils of the ship2. “All risks” in marine insurance policy

Perils of the Sea Perils of the Ship

Include only those casualties due to the unusual violence or extraordinary causes connected with navigation.

It includes only such losses as are of extraordinary nature or arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or

Loss which in the ordinary course of events, results: From the

ordinary, natural and inevitable action of the sea;

From ordinary wear and tear of the ship; and

From the negligent failure of the ship’s owner to provide the vessel with the proper equipment to convey the cargo

152



prudence. under ordinary conditions.

SPECIAL MARINE INSURANCE CONTRACTS AND CLAUSES1. All Risks Policy

Insurance against all causes of conceivable loss or damage except: a. As otherwise excluded in the

policy; or b. Due to fraud or intentional

misconduct on the part of the insured.Burden of proof insurance company has the burden of proving that the loss is caused by risk excepted and for want of proof, the company is liable.

2. Barratry Clause – a clause which provides that there can be no recovery on the policy in case any willful misconduct on the part of the master or crew in the pursuance of some unlawful or fraudulent purpose without consent of owners, and to the prejudice of the owner’s interest.

3. Inchamaree Clause – a clause which makes the insurer liable for loss or damage to the hull or machinery arising from the:a. Negligence of the

captain, engineer, etc.b. Explosions,

breakage of shafts; andc. Latent defect of

machinery or hull.4. Sue and Labor Clause – a clause

wherein the insurer may become liable to pay the insured, in addition to the loss actually suffered, such expenses as the property against a peril for which the insurer would have been liable. ausl

The insured has the initial burden of proving

that the cargo was in good condition when the policy attached and the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage (Choa Tiek Seng v. CA 183, SCRA 223)

Insurable Interest in Marine Insurance:a. Shipowner has insurable interest on the

vessel though it is under a charter party. (Sec.100, ICP)

b. There is insurable interest on freightage which begins when the vessel breaks ground for voyage. (Secs. 102-104 ICP)

c. The charterer has insurable interest (Sec. 106,ICP)

d. Insurable interest in profits (Sec. 105, ICP)

In loans on bottomry and respondentia, repayment of the loan is subject to condition that the vessels or goods, respectively, given as security shall arrive safely at the port of destination.

INSURABLE INTEREST in Marine Insurance:A. Shipowner:1. Over the value of the vessel.

Exceptions: a. If chartered and the charterer

agreed to pay the shipowner the value of the vessel in case of loss, the insurer’s liability is only up to the amount not recoverable from the charterer (Sec. 100, ICP);

b. If hypothecated by a bottomry loan, the insurable interest is only up to the excess of the value of the vessel over the loan (Sec. 101, ICP).

2. Over expected freightage

B. Freightage or Cargo

C. Charterer 1. Over the vessel up to the extent of

the amount he is liable to the shipowner, if the ship is lost or damaged during the voyage (Sec 106,

ICP)2. Over his expected profits or

freightage if he accepts cargoes from other persons for a fee.

3. Over his own cargo or his client’s cargo.

D. In loans on bottomry and respondentia, repayment of the loan is subject to the condition that the vessels or goods, respectively, given as security, shall arrive safely at the port of destination. arellano law

1. Owner/Debtor – difference between the value of vessel or goods and the amount of loans (Sec. 101, ICP)

2. Creditor/Lender – amount of the loan

If the vessel is hypothecated by bottomry, only the excess is insurable, since a loan on bottomry partakes of the nature of an insurance coverage to the extent of the loan accommodation. The same rule

153



applies to the hypothecation of the cargo by respondentia.

CONCEALMENT in Marine InsuranceDefinition: It is the failure to disclose any material fact or circumstance which in fact or in law is within, or which ought to be within the knowledge of one party and which the other has no control or presumptive knowledge.

Matters Although Concealed Will Not Vitiate the Contract Except When They Caused the Loss (Sec. 110, ICP)

1. National character of the insured;2. Liability of the thing to capture or

detention;3. Liability to seizure from breach of

foreign laws;4. Want of necessary documents; and5. Use of false or simulated papers.

Effect: It merely exonerates insurer from a loss resulting from the risk concealed.

Representations in Marine Insurance:Effect of false representation by the insured:the insurance is avoided if:1. False representation is intentional2. It is not intentional but the fact

misrepresented is material.

Implied Warranties in Marine Insurance1. That the ship is seaworthy at the

inception of the insurance (Sec. 113, ICP);

2. That the ship will not deviate from agreed voyage unless deviation is proper (Secs. 123,124,125, ICP);

3. That the ship will not engage in an illegal venture;

4. Warranty of neutrality : that the ship will carry the requisite of documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted (Sec. 120, ICP);

5. Presence of insurable interest.

SEAWORTHINESS

A ship is seaworthy when it is reasonably fit to perform the service, and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy (Sec 114, ICP).

A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be properly laden and provided with a competent master, a sufficient number of appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage (Sec. 116, ICP).

Seaworthiness does not only mean that the ship will not leak, but rather that it is equipped and manned for the purpose of the voyage it is to undertake, (Villanueva, Commercial Law Review, 2002ed, page 326)

When Ship should be Seaworthy General Rule: An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk. Exceptions:1. Time Policy- the ship must be

seaworthy at the commencement of every voyage she may undertake

2. Cargo Policy- each vessel upon which the cargo is shipped or transshipped must be seaworthy at the commencement of each particular voyage.

3. Voyage Policy- contemplating a voyage in different stages, the ship must be seaworthy at the commencement of each stage of the voyage.

Rule Where the Ship Becomes Unseaworthy on the Course of the VoyageUnreasonable delay in repairing the defect exonerates the insurer on ship or shipowner’s interest from liability from any loss arising therefrom. Applicability of Implied Warranty of Seaworthiness to Cargo Owners

The fact that the seaworthiness of the ship was unknown to insured is immaterial in ordinary marine insurance and may not be used by him as a defense in order to recover on the marine insurance policy.

It becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has full control in the choice of the common carrier that will transport his goods. (Roque v. IAC, 139 SCRA 596).

154



DEVIATION

Departure of vessel from course of voyage or an unreasonable delay in pursuing voyage, to the commencement of an entirely different voyage (Sec. 123, ICP).

Four Cases of Deviation in Marine Insurance:

1. Departure from the course of sailing fixed by the mercantile usage between the places of beginning and ending specified in the policy (Sec. 121).

2. Departure from the most natural, direct, and advantageous route between the places specified if the course of sailing is not fixed by mercantile usage (Sec

122).3. Unreasonable delay in pursuing the

voyage (Sec. 123)

4. The commencement of an entirely different voyage.

When Deviation is Proper:1. Due to circumstances outside the

control of the ship captain or ship owner;2. To comply with a warranty;3. In good faith to avoid peril;4. To save human life or another

distressed vessel. (Sec 124, ICP)

Effects of Proper Deviation: In case of loss, the insurer is still liable.

Effects of Improper Deviation: The insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation. (Sec. 126, ICP) Just as a surety is discharged, if the creditor

materially changes the contract with the principal debtor, irrespective of actual injury to the surety, so as the marine underwriter is entitled to be discharged if the risk assumed is changed by a deviation from the voyage insured. And the fact that the deviation did not increase the risk, or in any wise contribute to the loss suffered, is wholly immaterial. (De Leon, Insurance Code of the Philippines, Annotated, 2002 Edition, page 353)

LOSS AND ABANDONMENT

Kinds of LossA. Total

1. Actual Total Loss2. Constructive total Loss A valuation in policy of marine insurance is

conclusive between the parties thereto in the adjustment of either a partial or total loss, if the insured has some interest at risk, and there is no fraud on his part. (Sec. 156, ICP)

Actual Total Loss 1. Total destruction;2. Loss by sinking;3. Damage rendering the thing valueless; or4. Other event which effectively deprives

the owner of possession, at the port of destination, of the thing insured. (Sec. 130, ICP) clear

Constructive Total Loss (Sec. 131, in relation to Sec 134, ICP)1. Actual loss of more than three-fourths

(3/4) of the value of the object;2. Damage reducing value by more than

three-fourths (3/4) of the value of the vessel and of cargo; and

3. Expenses of transshipment exceed three-fourths (3/4) of value of cargo.

The logs having been insured as one inseparable unit, the correct basis for determining the existence of constructive total loss is the totality of the shipment of the logs (Oriental Assurance Co. vs. CA, 200 SCRA 459). [1991]

In case of constructive total loss, insured may:

a. Abandon goods or vessel to the insurer and claim for whole insured value (Sec. 139, ICP) or

b. Without abandoning vessel, claim for partial actual loss (Sec. 155, ICP)

B. PARTIAL LOSS- that which is not total (Sec. 128, ICP)

A marine insurer is liable only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. (Sec. 157, ICP)

ABANDONMENTThe act of the insured by which, after

constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured (Sec. 138, ICP).

Requisites:1. There must be an actual relinquishment

155



by the person insured of his interest in the thing insured (Sec. 138, ICP);

2. There must be a constructive total loss (Sec. 139, ICP);

3. The abandonment be neither partial nor conditional (Sec. 140, ICP);

4. It must be within reasonable time after receipt of reliable information of the loss (Sec. 141, ICP);

5. It must be factual (Sec. 142, ICP);

6. It must be by giving notice thereof to the insurer which may be done orally or in writing (Sec. 143, ICP);

7. The notice of abandonment must be explicit and must specify the particular cause of the abandonment (Sec. 144, ICP).

Notice of AbandonmentGeneral Rule: there is no particular form of giving the notice of abandonment. It may be made orally unless the policy requires that it be made in writing. Notice by telegraph may be sufficient.

If notice is done orally, the insured must submit to the insurer a written notice within 7 days from the oral notice.

In cases of actual total loss, no abandonment is necessary; but if the loss is merely constructively total, abandonment becomes necessary in order to recover as for a total loss. (38 C.J. 1136)

Effect of Transfer:1. Transfer of Interest- it is equivalent to a

transfer by the insured of his interest to the insurer with all the chances of recovery and indemnity (Sec 146, ICP)

2. Transfer of agency- acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at risk of the insurer and for his benefit (Sec 148, ICP).

If an insurer refuses to accept a valid abandonment, he is liable upon actual total loss, deducting from the amount any proceeds of the thing insured which may come to the hands of the insured (Sec. 154, ICP).

AVERAGEAn extraordinary or accidental expense

incurred during the voyage for the preservation of the vessel, cargo, or both, and all damages to the vessel and cargo

from the time it is loaded and the voyage commenced until it ends and the cargo unloaded.

Kinds of Average:1. Particular2. General

General Average Loss

Particular Average Loss

To whom inures

Includes all damages and expenses caused to the vessel or to her cargo which have inured to the common benefit and profit of all persons interested in the vessel and her cargo.

Includes all damages and expenses caused to the vessel or to her cargo which have not inured to the common benefit and profit of all persons interested in the vessel and her cargo.

By whom borne

It is suffered and borne equally by all of the interests concerned in the venture.

It is suffered by and borne alone by the owner of the cargo or of the vessel, as the case may be (De Leon, The Insurance code of the Philippines. 2006 page 136.)

Requisites:1. There must be a

common danger to the vessel or cargo;

2. Part of the vessel or cargo was sacrificed deliberately;

3. The sacrifice must be for the common safety or for the benefit of all;

4. It must be made by the master or upon his authority;

5. It must not be caused by any fault of the party asking the contribution;

6. It must be successful, i.e., resulted in the saving of the vessel or cargo; and

7. It must be necessary.

Right of Insured in Case of General AverageGeneral Rule: The insured may either hold the insurer directly liable for the whole of the

156



insured value of the property sacrificed for the general benefit subrogating him to his own right of contribution or demand contribution from the other interested parties as soon as the vessel arrives at her destination. (Sec. 164, ICP)Exceptions:1. After the separation of interests

liable to contribution;2. When the insured has neglected or

waived his right to contribution. (Sec. 164, ICP)

FPA CLAUSE (Free from Particular Average)A clause agreed upon in a policy of

marine insurance in which it is stated that the insurer shall not be liable for a particular average, such insurer shall be free therefrom, but he shall continue to be liable for his proportion of all general average loss assessed upon the thing insured (Sec. 136, ICP).

CO-INSURANCEA clause requiring the insured to

maintain insurance to an amount equal to the value or specified percentage of the value of the insured property under the penalty of becoming co-insurer to the extent of such deficiency.

There is co-insurance if the value of the insured’s interest exceeds the amount of insurance; he is considered the co-insurer for an amount determined by the difference between the insurance taken out and the value of the property.Requisites of co-insurance:1. The amount of insurance is less than the

insured’s insurable interest;2. The loss is partial.

Formula to determine the amount recoverable:

Illustration:If a vessel valued at P1M is insured for only P800, 000 and is damaged to the extent of P400, 000, the insurer will be required to pay only 80% of the loss suffered, or P320, 000; the other 20% or P80, 000 being borne by the insured himself.

P400, 000 or 2/5 x P800, 000 = P320, 0000 P1M

The insured is considered a co-insurer as to the uninsured portion of P200, 000.

Note: If the loss is total, the insurer is liable for the full amount if P800, 000. On the other hand, if the property is insured to its full value, the insured is entitled to recover the full amount of the partial loss of P400, 000.

A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured (Sec.157, ICP).

The insured bears part of the loss when property is insured for less than the value it really has. When there is partial loss on marine insurance, there will always be co-insurance even if there is full coverage. When there is partial loss, under Standard Policy Stipulation, and there is underinsurance, there will be co-insurance.

Rules:1. Co-insurance applies only to marine

insurance.2. There cannot be co-insurance in life

insurance.3. Co-insurance applies in fire insurance

when expressly provided for by the parties.

FIRE INSURANCE

It is a contract of indemnity by which the insurer, for a consideration, agrees to indemnify the insured against loss of, or damage to, property by fire, but may include loss by lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate polices

(Sec 167, ICP).

Risk or loss covered:1. Direct losses2. Indirect or Consequential losses:

a. Physical damagesb. Loss of Earnings

157

Partial loss --------------------- x Amount of = Amount of Value of thing Insurance Recovery insured



c. Extra Expenses

Prerequisites to recovery:1. Notice of loss- must be immediately

given, unless delay is waived expressly or impliedly by the insurer; and

2. Proof of loss- according to best evidence obtainable. Delay may also be waived expressly or impliedly by the insurer.

Measure of Indemnity1. Open Policy - only the expense

necessary to replace the thing lost or injured in the condition it was at the time of the injury.

2. Valued Policy - the parties are bound by the valuation, in the absence of fraud or mistake.

Note: It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance. The determination is important for 3 reasons:1. Rules on constructive total loss and

abandonment- applies only to marine insurance;

2. Rule on co-insurance- applies primarily to marine insurance;

3. Rule on co-insurance applies to fire insurance ONLY if express agreed upon (Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Agbayani, 1988 ed).

Marine and Fire Insurance:Marine Insurance Fire Insurance

Rule on Constructive Total Loss and abandonment applies

Does not apply

In case of partial total loss, insured is co-insurer of uninsured portion (Sec. 157, ICP)

Express stipulation of co-insurance as agreed by the parties. (Sec. 172, ICP)

Hostile Fire Friendly Fire

Fire that escapes and burns in a place where it is not supposed to be or a fire that started out to be a friendly fire but escapes from its original place and becomes too strong as it becomes out of control.

Fire that burns in a place where it is supposed to burn.

Insurer is liable. Insurer is not liable.

ALTERATIONEffect of Alteration in the thing insured:Alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles the insurer to rescind a contract of fire insurance (Sec. 168, ICP).

Requisites of Rescission of Contract:1. The use or condition of the thing insured

is specially limited or stipulated in the policy;

2. Such use or condition is altered;3. The alteration is made without the

consent of the insurer;4. The alteration is made by means within

the control of the insured;5. The alteration increases the risk;6. There must be a violation of a policy

provision.

Alterations not Avoiding Policy:1. Where risk of loss not increased. Such

as when a different use is made on insured premises which is no longer hazardous.

2. When the articles insured are required by the business of the insured.

3. Where insured property would be useless if questioned acts were prohibited.

4. At time of loss. (Sec. 76, ICP)

FALL-OF-BUILDING CLAUSEA clause in a fire insurance policy that if

the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease.

OPTION TO REBUILD CLAUSEA clause giving the insurer the option to

reinstate or replace the property damaged or destroyed or any part thereof, instead of paying the amount of the loss or the damage. The insurer, after electing to rebuild, cannot

be compelled to perform this undertaking by specific performance because this is an obligation to do, not to give. Remedy: Article 1167, Civil Code.

CASUALTY INSURANCE

158



An insurance covering loss or liability arising from accident of mishap excluding those falling under other types of insurance as fire or marine (Sec. 174, ICP).

Classification: 1. Accident or health insurance-

insurance against specified perils which may affect the person and/or property of the insured. (ie: Personal accident, robbery/theft insurance).

2. Third party liability insurance- insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to or damage to property of others. (ie: third party liability insurance).

THIRD PARTY LIABILITY 1. Casualty insurance may provide for third

party liability (stipulation pour atrui) in which case, the third party may directly sue the insurer upon the occurrence of the loss. (First Integrated Bonding and Ins. Co. v. Hernando, 199 SCRA 769)

2. If there is no stipulation in favor of a third person but the insurance is an insurance against liability to third persons, any third person who might be injured may not sue the insurer. Only the insured can recover from the insurer.(Guingona v. Del Monte, 20 SCRA 1043)

3. Liabilities arising out of acts of negligence which are criminal are also insurable on the ground that such acts are accidental.

Exception: Consequences of deliberate criminal acts are not insurable.

4. Insurable interest is based on the interest of the insured in the safety of persons, and their property, who may maintain an action against him in case of their injury or destruction, respectively.

5. In a third party liability (TPL) insurance contract, the insurer assumes the obligation by paying the injured third party to whom the insured is liable. Prior payment by the insured to the third person is not necessary in order that the obligation may arise. The moment the insured becomes liable to third persons, the insured acquires an interest in the insurance contract which may be garnished like any other credit (Perla Compania de Seguros, Inc. v. Ramolete, GR No. L-60887, November 13, 1991).

6. Aside from compulsory motor vehicle liability insurance, casualty insurance are governed by the general provisions applicable to all types of insurance, and outside of such statutory provisions, the rights and obligations of the parties must be determined by their contract, taking into consideration its purpose and always in accordance with the general principles of insurance law.

7. In burglary, robbery and theft insurance, the opportunity to defraud the insurer- the moral hazard- is so great that insurer have found it necessary to fill up the policies with many restrictions designed to reduce the hazard. Persons frequently excluded are those in the insured’s service and employment. The purpose of the exception is to guard against liability should theft be committed by one having unrestricted access to the property (Fortune Insurance vs. CA, 244 SCRA 208).

8. Right of a third party injured to sue the insurer of party at fault depends on whether the contract of insurance is intended to benefit third persons also or only the insured.

Tests applied:1. Indemnity against third party liability-

injured third party can directly cue the insurer.Purpose: To protect injured person against the insolvency of the insured who causes such injury.

2. Indemnity against actual loss or payment- third party has no cause of action against the insurer. The third person’s recourse is limited to the insured alone (Sec. 53, Bonifacio Bros. vs. Mora, GR L-20853, May 29, 1967).

Note: The insurer is NOT solidarily liable with the insured. The insurer’s liability is based on contract; that of the insured is based on torts. Furthermore, the insurer’s liability is limited by the amount of the insurance coverage (Pan Malayan Insurance Corporation v. CA, GR No. 77397, 184 SCRA 54, April 3, 1990).

INTENTIONAL vs. ACCIDENTAL‘Intentional’ as used in an accident policy

excepting intentional injuries inflicted by the insured or any other person implies the exercise of the reasoning faculties, consciousness and

159



volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries clearly resulted from the intentional act of a third person, the insurer is relieved from liability as stipulated (Biagtan v. The Insular Life Assurance Co., 44 SCRA 58).[1972]

The terms ‘accident’ and ‘accidental’ as used in insurance contracts, have not acquired any technical meaning. They are construed by the courts in the ordinary and common acceptation. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual, and unforeseen (Pan Malayan Insurance Corp. v. CA, 184 SCRA 54).

NO ACTION CLAUSEA requirement in a policy of liability

insurance which provides that suit and final judgment be first obtained against the insured; that only thereafter can the person injured recover on the policy (Guingona v. Del Monte, 20 SCRA 1043).

A “no action clause” must yield to the provisions of the Rules of Court regarding multiplicity of suits (Shafer v. RTC, GR No. 78848, 167 SCRA 386, November 14, 1988).

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI)

The Insurance Code makes it unlawful for any land transportation operator or owner of a motor vehicle to operate the same in public highways unless there is an insurance or guaranty to indemnify the death or bodily injury of a third party or passenger arising from the use thereof (Sec. 374, ICP).

Registration of any vehicle will not be made or renewed without complying with the requirement (Sec. 376, ICP).

Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/ or their dependents, especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained (Shafer v. Judge RTC, 167 SCRA 386 [1988]; First Integrated Bonding and Ins. v. Hernando, 199 SCRA 746[1991]). Claimants/ victims may be a “passenger”

or a “3rd party”. It applies to all vehicle whether pulic or

private vehicles.

Note: It is the only compulsory insurance coverage under the Insurance Code.Methods of Coverage:1. Insurance policy2. Surety bond3. Cash Deposit Passenger

Any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without fare. (Sec. 373,ICP)

Third-PartyAny person other than a passenger and shall

also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment. (Sec 373, ICP as amended by PD 1814)

SPECIAL CLAUSES:

A. “No-Fault” ClauseThe injured third party or passenger is given the option to file a claim for death or injury without the necessity of proving fault or negligence of any kind under the following conditions:1. The total indemnity in respect of any

person shall be P15,000.00 per claim for all motor vehicle. As amended IMC No. 4-2006, July 26, 2006

2. Proof of loss Police report of accident; Death certificate and

evidence sufficient to establish the proper payee; and

Medical report and evidence of medical or hospital disbursement.

3. Claim may be made against 1 motor vehicle only.

From Whom Should the Injured Recover:1. In the case of an occupant of a

vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting, or dismounting from.

160



2. If not an occupant, claim shall lie against the insurer of the directly offending vehicle.

3. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained.

This no-fault claim does NOT apply to property damage. If the total indemnity exceeds P15,000.00 and there is controversy in respect thereto, the finding of fault may be availed of by the insurer only as to the excess. The first P15, 000.00 shall be paid without regard to fault.

The essence of the no-fault indemnity insurance is to provide victims of vehicular accidents or their heirs’ immediate compensation although in limited amount, pending final determination of who is responsible for the accident and liable for the victim’s injuries or death.

Time To File & Process Claim Under Third Party Liabilitya. Period to File Notice- within six

(6) months from the date of the accident otherwise the claim is deemed waived (Sec. 384, ICP).

b. Prescriptive Period- within one (1) year from the denial of the claim with the commissioner on the Courts (Sec. 384, ICP)

c. If There is an Agreement- The insurance company concerned shall forthwith ascertain the truth and extent of the claim and make payment within 5 working days after reaching an agreement (Sec 385, ICP).

d. If no agreement is reached, the insurance company shall pay only the “no fault” indemnity without prejudice to the claimant from pursuing his claim further, in which case, he shall not be required or compelled by the insurance company to execute any quit claim or document releasing it from liability under the policy of insurance or surety bond issued (Sec. 385, ICP)

If the policy provides for indemnity against liability, the insurer can be sued directly by a third person. However, if the policy provides for reimbursement after actual payment by the insured or for the indemnity against loss, a third person has no cause of action against the insurer (Sec 53, ICP; Bonifacio Bros v. Mora, 20 SCRA 26].

While the insurer’s liability may be direct, it does not mean that the insurer can be held solidarily liable with the insured. The insurer’s liability is based on contract; that of the insured is based on torts. Furthermore, the insurer’s liability is limited to the amount of the insurance coverage (Pan Malayan v. CA 184 SCRA 54).

In third party liability insurance, the insurer assumes the obligation of paying the injured party to whom the insured is liable. The insurer becomes liable as soon as the liability of the insured attaches. From the moment the insurer becomes liable to the third person, the insured acquired interest in the insurance contract, which interest may be garnished just like any other credit. (Perla Compania de Seguros, Inc. v. CA, GR No. L-76884 May 28, 1990).

B. Authorized Driver Clause - a clause which aims to indemnify the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission (Villacorta v. Insurance Commissioner, 100 SCRA 467).

▪ The requirement that the person driving the insured vehicle is permitted in accordance with the licensing laws or other laws or regulations to drive the motor vehicle (licensed driver) is applicable only if the person driving is other than the insured.

▪ The insured need not prove that he has a driver’s license at the time of the accident if he was the driver.

If the claimant was able to present a driver’s license, the same is presumed to be genuine. Thus, even if it was established that the driver does not know how to read and write, the license will still be sustained in the absence of proof that it was not validly issued (CCC Insurance Corp. v. CA, 31 SCRA 264).

161



A driver who holds an expired driver’s license is not an authorized driver (Gutierrez v. Capital Insurance Co., 130 SCRA 618).

C. Theft Clause - a clause which includes theft as among the risks insured against.

Where the car is unlawfully and wrongfully taken without the owner’s consent or knowledge, such taking constitutes theft, and thus, it is the “theft clause” and not the “authorized river clause” that should apply (Palermo v. Pyramids Insurance, 161 SCRA 677).

D. Cooperation Clause - a clause which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings.

SURETYSHIP

An agreement whereby the surety guarantees the performance by another of an undertaking or an obligation in favor of a 3rd party called the obligee (Sec. 175, ICP).

Nature of liability of surety1. Solidary;2. Limited to the amount of the bond;3. It is determined strictly by the terms of

the contract of suretyship in relation to the principal contract between the obligor and the oblige (Sec. 176, ICP).

Types of Surety Bonds:1. Contract Bonds- these are connected

with construction and supply contracts. They are for the protection of the owner against a possible default by the contractor or his possible failure to pay material men, laborers and sub-contractors.The position of surety, therefore, is to answer for a failure of the principal to perform in accordance with the terms and specifications of the contract.

There may be two kinds:a. Performance bond- one covering the

faithful performance of the contract; and

b. Payment bond- one covering the payment of laborers and material men.

2. Fidelity Bond- contract of insurance against loss from misconduct.

For purposes of underwriting, they are classified as:a. Industrial bond- one required by

private employers to cover loss through dishonesty of employees; and

b. Public official bond- one required of public officers for the faithful performances of their duties and as a condition of entertaining upon the duties of their offices.

3. Judicial bonds- they are those which are required in connection with judicial proceedings.

Fidelity Guaranty Insurance - contract whereby one, for a consideration, agrees to indemnify the assured against loss arising from the want of integrity, fidelity or honesty of employees or other persons holding positions of trusts.

Suretyship Deemed to be an Insurance Contract

Suretyship is 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.

Distinction Between Suretyship and Property Insurance

Suretyship Property Insurance

Accessory contract Principal contract

There are 3 parties: surety, debtor, and creditor.

Only 2 parties: insurer and insured.

A credit accommodation with insurer assuming primary liability.

A contract of indemnity.

Insurer is entitled to reimbursement from principal and guarantors for the

No right of recovery for the loss the insurer may sustain. Exception: when

162



loss. there is right of subrogation.

Bond can be cancelled only with the consent of oblige, Commissioner or court.

Contract may be cancelled unilaterally.

Acceptance of obligee is necessary to be valid.

Acceptance of third party is unnecessary to be valid.

It is a risk-shifting device; premium paid being in the nature of a service fee.

It is a risk-distributing device; premium paid as a ratable contribution to a common fund.

LIFE INSURANCE

Insurance on human life and insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities (Sec. 179, ICP).

Kinds :1. Ordinary Life, General Life or Old

Line Policy - Insured pays a fixed premium every year until he dies. Surrender value after three (3) years.

2. Group Life – Essentially a single insurance contract that provides coverage for many individuals.

3. Limited Payment Policy – Insured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if he outlives the period, he does not get anything.

4. Endowment Policy – Pays premium for specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit.

5. Term Insurance – Insurer pays once only and he is insured for a specified period. If he dies within the period, he beneficiaries benefits. If he outlives the period, no person benefits from the insurance.

6. Industrial Life – life insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener (but not less than weekly), if the face value is P2, 000.00 or less, and the words “industrial policy” printed upon the policy

7. Variable Contract- policy or contract on either group/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 investment (Bar Review Materials in Commercial Law, Miravite, 2009 ed).

MORTGAGE REDEMPTION INSURANCEA life insurance taken pursuant to a

group mortgage redemption scheme by the lender of money on the life of a mortgagor who, to secure the loan. Mortgages the house constructed from the use of the proceeds of the loan, to the extent of the mortgage indebtedness such that if the mortgagor dies, the proceeds of his life insurance will be used to pay for his indebtedness to the lender assured and the deceased’s heirs will thereby be relieved from paying the unpaid balance of the loan (Great Pacific Life Assurance Corp. v. CA, 316 SCRA 677).

Effect of Death of Insured1. Through Suicide:

The insurer shall be liable for suicide by the insured if:

a. Suicide was committed after the policy has been in force for a period of two years from the date of its issue or its last reinstatement, unless the policy provides a shorter period. (Sec. 180-A, ICP)

b. Suicide committed in a state of insanity regardless of the date of the commission of the suicide, unless suicide is an excepted risk (Sec. 180-A, ICP).

c. If committed after a shorter period provided in the policy.

Any stipulation extending the 2-year period is null and void.

2. At the hands of law (execution by lethal injection)

It is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception.

163



The beneficiary of the insured who is executed for a crime cannot recover from the insurer for 2 reasons: 1.) his death is caused through his connivance, and 2.) any stipulation to render the insurer liable under these circumstances would be contrary to public policy (Bar Review Materials in Commercial Law, Miravite, 2009 ed).

3. Killing by the BeneficiaryGeneral Rule: 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 which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified (Sec. 12, ICP).

Exceptions: 1. Accidental killing;2. Self-defense;3. Insanity of the beneficiary at the

time he killed the insured. If the premiums paid came

from the conjugal funds, the proceeds are considered conjugal. If the beneficiary is other than the insured’s estate, the source of premiums would not be relevant.

Must distinguish when the policy does not expressly state whether suicide is excepted from the policy:1. If committed while insane – Insurer is

liable2. If committed while sane – Insurer not

liable in the absence of an express stipulation, it is an implied exception and is against public policy.

Cash Surrender Value - As applied to a life insurance policy, it is the amount the insured in case of default, after the payment of at least 3 full annual premiums, is entitled to receive if he surrenders the policy and releases upon it.

LOSS AND CLAIM SETTLEMENT

Loss- Injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to indemnify

the insured (Bonifacio Bros, Inc v. Mora, 20 SCRA 261).

The insured can transfer HIS CLAIM AGAINST the insurer after a loss has occurred because it is not the personal contract which is being assigned but a money claim under or a right of action on the policy (Ocean Acci. & G. Corp. v. southwestern Bell Telephone Co., 122 A.L.R. 133). Any stipulation to the contrary is void if made before the loss except as otherwise provided in the case of life insurance (Sec. 83, ICP).

An insurance company which insured a payroll against robbery is not liable where the policy excluded loss caused by an authorized representative of the insured if the armored car transporting the payroll was robbed by the driver and the security guard provided by an independent contractor, for they were entrusted with the custody of the payroll and could be considered authorized representatives of the insured. (Fortune Insurance & Surety Co. Inc. v. Court of Appeals, 244 SCRA 308)

Loss for which Insurer is Liable

Loss for which Insurer is NOT

Liable

Loss, the proximate cause of which is the peril insured against (Sec 84, ICP).

Loss by insured’s willful act or gross negligence.

Loss, the immediate cause of which is the peril insured against except where the proximate cause is an excepted peril.

Loss where the excepted peril is the proximate cause.

Loss through negligence of insured except where there was gross negligence amounting to willful act.

Loss due to connivance of the insured (Sec. 87, ICP).

Loss caused by efforts to rescue the thing from peril insured against- if during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part (Sec 85, ICP).

Notice of Loss

164



a. In fire insurance - notice of loss should be given without unnecessary delay; otherwise, the insurer is exonerated (Sec. 88, ICP).

b. In other types of insurance - Not required; failure to give will not exonerate the insurer; unless there is a stipulation in the policy requiring the insured to do so.

Proof of loss- is the more or less formal evidence given the company by the insured or claimant under a policy of the occurrence of the loss, the particulars thereof and the data necessary to enable the company to determine its liability and the amount thereof.

Purposes:a. To give the insurer information by which

he may determine the extent of his liability.

b. To afford the insurer a means of detecting any fraud that may have been practiced upon him.

c. To operate as a check upon extravagant claims.

Instances when the defects in the notice or proof of loss are considered waived:When the Insurer:1. Writes to the insured that he considers

the policy null and void as the furnishing of notice or proof of loss would be useless;

2. Recognizes his liability to pay the claim;3. Denies all liability under the policy;4. Joins in the proceedings for determining

the amount of the loss by arbitration, making no objections on account of notice and preliminary proof; or

5. Makes objection on any ground other than the formal defect in the preliminary proof.

Claim Settlement1. Life Insurance (Sec. 242, ICP)

a. The proceeds shall be paid immediately upon the maturity of the policy if there is such a maturity date.

b. If the policy matures by the death of the insured, within 60 days after presentation of the claim and filing of the proof of the death of the insured.

2. Property Insurance (Sec. 243)

a. Proceeds shall be paid within thirty (30) days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement or by arbitration.

b. If no ascertainment is made within 60 days after receipt of proof of loss shall be paid within 90 days after such receipt.

Effects of DelayIf the prescribed period for both life and

property insurance are not complied with, the beneficiary is entitled to payment of: a. Interest for the duration of the delay at

the rate of twice the legal interest (ceiling prescribed by the Monetary Board);

b. Attorney’s fees and other litigation expenses;

c. Appropriate damages under the Civil Code like moral and exemplary damages when requisites are present (Sec. 244, ICP).

In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorney’s fees an other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in Sec.242 or Sec. 243 of the ICP.(Commonwealth

Insurance Corp v. CA, G.R. No. 133194-95, January 29, 2004)

When Insurer Liable to Pay Damages and Interest (Secs. 243 and 244):

Sections 243 and 244 shall apply only when the Court or Commissioner finds that there was unreasonable delay or refusal by the insurer in the payment of the claim. The legal rate is 6%, as provided under Article 2209, NCC. The adjusted rate under CB Circular 416, pursuant to PD 116 refers only to loans

165



and forbearance of money, goods or credit and court judgments thereon (Tio Kho Chio v. CA, 202 SCRA 119).

The term “double interest” as used in Section 243 and 244 can only be interpreted to mean twice 12% per annum or 24% per annum interest thus: the “ceiling prescribed by the Monetary Board” means the legal rate of interest of 12% per centum per annum (12%) as prescribed by the Monetary board in CB circular No. 416, pursuant to PD No. 116, amending the Usury Law, so that when Section 242, 243 and 244 of the Insurance Code provide that the insurer shall be liable to pay interest “twice the ceiling prescribed by the Monetary Board”, it means twice 12% per annum or 24% per annum interest on the proceeds of the insurance. (Prudential Guarantee and Assurance Inc. v. Trans-Asia Shipping Lines, Inc. 491 SCRA 411, June 26, 2006)

PERIOD OF PRESCRIPTION

In the absence of an express stipulation in the policy, it being based on a written contract, the action prescribes in 10 years. However, the parties may validly agree on a shorter period, provided, it is not less than one year from the time the cause of action accrues. The cause of action accrues from the final rejection of the claim of the insured and not from the time of loss. (Sec 63, ICP)

It shall commence from the denial of the claim, not from the resolution of the motion for reconsideration, otherwise it can be used by the insured as a scheme or device to waste time until the evidence which may be used against him is destroyed (Sun Insurance Office Ltd v. CA, 195 SCRA 193).[1991]

GOVERNMENT REGULATION OF INSURANCE BUSINESS

Requisites Prior to Operation:1. Certificate of authority and payment of fees

No insurance company, whether domestic or foreign, can transact any business in the

Philippines until after it shall have obtained a certificate of authority for that purpose from the Insurance Commissioner upon application therefore and payment by the company concerned of the fees prescribed by the Code (Sec 187, Insurance Code).

The Insurance Commissioner has the discretion to refuse the issuance of a certificate of authority on the very broad ground that “such refusal will best promote the interest of the people of this country.”

No certification can be granted until the Commissioner is satisfied that:a. The applicant is qualified under Philippine laws to transact business in the country;b. The grant of such authority of the organizers and administrators, the financial organization and the amount of capital reasonably assure the safety and interests of the policy holders and the public.

2. Capital Requirements

166



Except in case of reinsurers whose capital requirements are higher, the paid up capital stock of a domestic insurance company must be at least 5 million pesos (P5, 000,000.00).

The amount may be increased by the Secretary of Finance upon recommendation of the Commissioner which would reasonably assure the safety of the interests of the policyholders and the public.

The Commissioner may require as a condition to licensing that its stockholders pay in cash in proportion to their subscription, a contributed surplus fund of not less than 1 million pesos in life insurance company or not less than P500, 000.00 in case of a non-life insurance company.

3. Filing of Necessary DocumentsA certified copy if the last annual statement showing the condition and affairs of such company.

If incorporated under Philippine laws, a copy of the articles of incorporation and by-laws, and amendments thereto, certified by the SEC to be a copy of that which is filed in its office.

4. Additional requirements for foreign corporationsIn addition to the requirements imposed on domestic insurance companies, the following requirements must be fulfilled by foreign corporations:a. Secure a license from the SEC to do

business in the Philippines by following the requirements of the Corporation Code;

b. File a copy of the SEC certificate showing that it is duly registered in accordance with paragraph 1;

c. If incorporated, it must file a certified copy of its articles of incorporation and its by-laws, certified by the SEC as a copy of that filed in its office;

d. If not incorporated, file a certificate setting forth the nature and character of the business, the location of its principal office, the names of the persons composing the partnership or association, the amount of the capital employed and the names of the persons managing the business. The certificate must be verified by the affidavit of the chief officer, or the manager or the agent of the company accompanied by a copy of the written articles of said company, if any;

e. Must fulfill the same capital requirements as domestic companies and in addition, must deposit with the Commissioner securities for the benefit and security of its policyholders and creditors.

Security deposits shall be (1) answerable for all the obligations of the depositing insurer under its insurance contracts; (2) at all times free from any liens or encumbrance; and (3) exempt from levy by any claimant (Republic v. del Monte Motors, GR 156956, October 9, 2006).

The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all other obligations of the company arising from its insurance contracts. Thus, claimant’s interest is merely inchoate. Being a mere expectancy, it has no attribute of property (Ibid).

f. Must set aside an amount corresponding to the legal reserves of the policies written in the Philippines and invest the same only in such classes of Philippine securities as described by the Code which securities cannot be taken out of the country without the written consent of the Commissioner.g. File with the Commissioner a written power of attorney designating some person who must be a resident of the Philippines as its general agent, on whom any notice or summons or legal processes may be served. It must also sign an agreement that in case it shall be without any agent, the service upon the Insurance Commissioner shall have the same effect as if made on the company.

REQUISITES FOR CONTINUANCE IN BUSINESS

167



1. Reserve Requirementsa. Every life insurance company must

make an annual valuation of its policies, unpaid dividends and other obligations outstanding on December 31 of the preceding year. The aggregate net value so ascertained of the policies of the company is deemed its reserve liability to provide for which it must hold funds to secure investments equal to such net value.

b. Every non-life insurance company must ascertain reserve for unearned premiums on its outstanding policies equal to 40% of the gross premiums received on policies having not more than 1 year to run and pro rate on all gross premiums received on policies having more than 1 year to run.

2. Margin solvencyMargin of solvency is the excess value of an Insurance company’s admitted assets exclusive of its paid up capital, in case of a domestic company, or an excess of the value of its admitted assets in the Philippines, exclusive of its security deposits, in case of foreign company, over the amount of its liabilities, unearned premiums and reinsurance reserves in the Philippines (Sec 194, ICP).

INSURANCE COMMISSIONER

Main agency charged with the enforcement of the Insurance Code and other related laws.

Adjudicatory / Quasi-judicial Powersa. Exclusive Original Jurisdiction -

Dispute in the enforcement of any policy issued pursuant to Compulsory Motor Vehicle Insurance.

b. Concurrent Original Jurisdiction (with RTC) - where the amount of loss damage, or liability, excluding interests, cost and attorneys’ fees being claimed or sued upon any kind of insurance, bond, reinsurance contract, or membership certificate does not exceed in any single claim P100,00.00.

Insurance Commission have no jurisdiction to decide the legality of a contract of agency entered into between an insurance company and its agent since the same is not covered by the term “doing or transacting insurance business” under Sec. 2 of the Insurance Code, neither is it covered by Sec. 416 of the same Code which grants the Commissioner adjudicatory powers. (Philippine American Life Insurance v. Ansaldo, 234 SCRA 509).[1994]

Circumstances when the Commissioner may revoke or suspend the license of an insurer:1. If insurance company is in unsound

condition;2. If it has failed to comply with the

provisions of law or regulations obligatory upon it;

3. Its conditions or methods of business ins such as to render its proceedings hazardous to the public or to its policyholders;

4. That its paid up capital stock, or its available cash assets, or its security deposits, as the case may be, is impaired or deficient; and

5. That the margin of solvency required of each company is deficient.

Administrative/Regulatory powers1. Enforcement of Insurance Laws2. Issuance, suspension, revocation of

certificate of authority3. Power to examine books and records,

etc.4. Rule-making authority5. Punitive

168

2010 Purple Notes.insurance

Documents

Transcript of 2010 Purple Notes.insurance