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Insurance Reviewer

The question of whether a contract of insurance is perfected is NOT governed by the Insurance
Code but by the New Civil Code (re: perfection of contracts). The NCC applies in a suppletory
SECTION 2 defines a contract of insurance. Sec. 2 (1) says that a contract of insurance is an
agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.
Suretyship is different from an insurance contract because there are three parties in suretyship
and when the surety pays, he is entitled to reimbursement. In insurance, when the insurer pays,
he is not entitled to reimbursement.
Underlying concept in insurance: it deals with a scheme of distribution of risk/loss.
An insurance contract has the following elements:
1. Insurable interest the insured possesses an interest of some kind susceptible of pecuniary
2. Risk of loss the insured is subject to a risk of loss through the destruction or impairment of
the above insurable interest by the happening of designated perils
3. Assumption of risk the insurer assumes the risk of loss mentioned above
4. Scheme to distribute losses the said assumption of risk is a part of a general scheme (plan)
to distribute actual losses among a large group of persons bearing somewhat similar risks; and
5. Payment of premiums as consideration for the insurers promise to assume the risk and pay
the losses from such risk, the insured makes a ratable contribution, called a premium, to a
general insurance fund
If you only have insurable interest, risk of loss and assumption of risk of loss, you do not have a
contract of insurance. It is a mere risk-distributing device. But if it has all of the five, it is a
contract of insurance whatever its name or form.
What if it involves services? Like Maxicare? (-- I did not get this part, sorry.)
The following are the characteristics of an insurance contract:
1. Aleatory it is an aleatory but not a wagering contract. By an aleatory contract, one of the
parties or both reciprocally bind themselves to give or to do something in consideration of what
the other shall give or do upon the happening of an event which is uncertain, or which is to
occur at an indeterminate time (Art. 2010, NCC)
2. Unilateral a contract of insurance is wholly executed on the party of the insured by the
payment of the premium, and remains executory on the part of the insurer, subject to the
condition of the happening of the event insured against.
3. Personal it is personal in the sense that each party to it, in entering into the insurance
contract, takes into account the character, credit and conduct of the other.
4. Conditional the insurers liability is based on the happening of the event insured against
5. Indemnity is the basis
The general scheme/outline of the law on insurance
1. First it talks of who are the parties to the contract of insurance, the requisites to a valid
contract: object, consent, consideration (Sections 1 to 25)
a. Object insurable interest
b. Consent what vitiates consent (Sec. 26)
c. Consideration premium
2. Then it proceeds to the perfected contract of insurance
3. Then the obligations under the contract of insurance
4. It then speaks of other types of insurance contracts

SECTION 4 prohibits insuring ones chance in a wagering contract, in any lottery or in
gambling, whether or not gambling is permitted by law. What is prohibited is not only a chance
in lottery but all forms of gambling and wagering. See SECTION 25 which declares that every
policy executed by way of gambling or wagering is void.

SECTION 6 answers the question who may be an insurer?

SECTION 7 answers the question who may be insured? A public enemy is every citizen or
subject of a nation at war with the Philippines. It does not include robbers, thieves, private
depredators, or riotous mobs. A local criminal can be insured if the insurer is willing to take
him as a good risk. The citizen of a country with which we do not have diplomatic relations is
not a public enemy and can be insured.

SECTION 8 speaks of a mortgage clause in an insurance contract. This is common in car
insurance. It may be provided therein that in case of loss, the proceeds will be paid to the
mortgagee. But it is still the mortgagor who is the insured so he is the only one who can sue
Under the Civil Code, when the insurer pays, he is subrogated to the rights of the insured
against the wrongdoer.

SECTION 10 speaks of insurable interest in life and health. The general rule is that a person
may designate anyone to be his beneficiary. The exception is Art. 739 of the Civil Code in
relation to Art. 2012 (prohibited donations). See the case of Insular Life v. Ebrado, L-44059,
Oct, 28, 1977 which says that the reason for the exception is that a life insurance policy is no
different from a civil donation insofar as the beneficiary is concerned coz both are founded
upon the same consideration: liberality. Therefore the rule on prohibited donations apply in
cases life insurance.
When you insure the life of another, the consent of that person must be obtained and there must
also be insurable interest over the life of that person.

SECTION 11 says that the insured has the right to change beneficiary unless he has waived this
right in the said policy. Remember that if the designation of the beneficiary is irrevocable,
change of beneficiary can only be made with the consent of the said beneficiary.

SECTION 12 says that the interest of a beneficiary who is a principal, accomplice or accessory
to the killing of the insured will go the estate of the insured (intestacy). The beneficiary shall
not benefit from his criminal act.

(Yun lang nasa notes ko J - January)

DECEMBER 17, 2001 Peachy Selda

1. (a) The obligation to pay here is conditional - upon completion of the building. He promised
to pay upon completion of the building; that is conditional , thats not unconditional.
(b) Then it contains the option to do something other than the payment of money for the maker
is given the option to pay either in check or cash. Well, check is not cash, not money, so theres
an option to do something. So, thats not negotiable.
(c) Theres an acceleration clause, well thats express provision of the law. That is negotiable.
The payees alternative, the law allows that the sum is uncertain because of the 18% interest in
case of default Well, if a high penal interest is imposed in case of default the sum is uncertain-
thats the penalty.
2. Guzman cannot recover from Estrera because he is not a holder in due course. He was aware
that the power of attorney had been revoked so hes not a holder in due course. Therefore,
Estrera can raise the defense that the check was filled up without authority.
3. Sison entrusted to his employee a check in favor of Jalandoni. Ilagan forged the endorsement
and encashed the check. The bank state the amount, the bank argue there is an estoppel, because
Sison did not represent to the bank that Ilagan was authorized to indorse the check. Theres no
representation made; theres no estoppel.
4. Lopez issued a check payable to the order of Martin Martin indorsed in blank to Noble
Noble indorsed by special endorsement to Ocampo, Ocampo delivered it to Paz. It turned out
that the bank account of Lopez was closed, so Paz to Lopez as drawer. Lopez argued he is not
liable because Martin failed to deliver the rice which was the consideration of the check. Can
Martin invoke this defense? Yes, because the check was originally payable to order it was
endorsed in blank, but then the next endorsement was a special endorsement so it was payable
to order again, it will only be payable to bearer if the last endorsement is an endorsement in
blank. But the last endorsement is a special endorsement and therefore to negotiate it delivery is
sufficient because Ocampo merely delivered it.
5. Reyes issued a check payable to Santos Trading, Torres, the cashier, was authorized to
endorse check in his behalf. He endorsed the check to Conson to pay for his personal debt. The
check was dishonored for lack of funds. When Conson asked Reyes to make for the check,
Reyes argued that Santos Trading did not deliver the supplies he purchased. Conson argued that
he is a holder in due course. Well, hes not a holder in due course because the check was
payable to Santos trading and then pursued in order to pay for his personal debt. So we should
know that the title is defective. The check was payable to the corporation, therefore any
endorsement should be for the corporation. However here, he endorsed it to pay for his personal

BACK TO INSURANCE: (Note: jack did not go by sections in this lecture)

Sec. 13 deals with insurable interest in property.
Interest in property has the classic example, that is the ownership or any relation there to the
trustee or liability, like the third partys liability insurance for motor vehicle, so theres an
insurable interest.
An insurable interest in property may consist of an existing interest. Again the classic example
is ownership with interest found in an existing interest, like stockholders can insure the
properties of the corporation because they have an existing interest as stockholders, and in quo
with interest because in case of dissolution of the corporation the assets will be distributed
among the stockholders by way of liquidating dividends.
This is common. A foreign corporation sets up a domestic subsidiary and usually there is one
insurance company abroad with which they insure the assets of their subsidiary here. They can
do that, an expectancy coupled with an existing interest in that out of which expectancy arise; in
the same way as farmers can insure their future crops.
So, you have many examples of insurable interest.
Like the court said, the buyer of undelivered property in that Filipino Merchants case, that the
consignee of the goods that were stolen in the pier can be claimed and the defense of the
insurance company is the insurable terms of the buyer. He has equitable interest. The seller also
has an insurable interest because he still retains the legal title and unpaid salary with a lien on
the property.
A mortgage insurable interest on the property mortgaged, for example: a contractor who has not
been paid under the Civil Code has a lien on the building he constructed so he can insure that
building. In fact the Civil Code also says, until the construction is finished it is the contractor
who bears the risk of loss, so he can insure the building that he is constructing.
A lessor, a lessee can insure the premises he is leasing. Theres an interest in its preservation.
Or even mere possessory rights is sufficient- like the case of a Jewish garment factory. They
send textiles to garment factories to be converted into finished dresses. These factories also
have insurable interest over the garment packed. The court also ruled that if textiles are
delivered to be dyed, that fellow who was hired to dye the textile should have insurable interest
on that.
The law provides that the carrier and the depository have insurable interest on the property
entrusted to them because they will be liable in case of loss.
On the other hand, a mere expectancy that is founded on the actual right is not insurable, like
the prospective heirs of somebody. Children cannot insure the properties of their parents, for
there is a mere expectancy.
The Court of Appeals has ruled that where you have a simulated deed of sale, the buyer has no
insurable interest because he is not actually the owner.
Heres the case of Chuck. There was this landlord who required his tenant to insure his stocks in
trade. It is still ok to require it to insure. Usually it is the commercial centers part, in addition to
the basic rent. They charge 5% of your gross sales, so they want to make sure you always have
the stocks in trade so that if they get burned, you can replace them. But then the contract
provided that in case of losses, the proceeds should be payable to the lessor. The court says that
is void because theres no insurable interest in the stocks in trade. So, a review on the loan
agreement was required in a case where a bank was found to require the borrower to insure the
building, but the building was not mortgaged. Moreover, a provision was placed that in case of
loss, the proceeds should be payable to the bank. That is void. You have no insurable interest
because you have no lien on the building. The building is insured, but its not mortgaged to you.
The Court of Appeals ruled that smuggled properties couldnt be insured because smuggled
properties are subject to forfeiture under the law. To allow therefore its insurance is against
public policy.
Now, no contract of insurance shall be enforceable except for the benefit of the person having
an insurable interest in that property insured. Moreover, in property insurance, the insurable
interest must exist when the policy takes effect and when the loss occurs, but it need not exist in
the meanwhile.
If somebody insured his car and then sold it, but then it got lost, he cannot recover because he
no longer has any insurable interest. But if he redeemed it and the loss occurred after he has
redeemed the car, he can still collect.
This (inaudible) case was asked in the bar exam. The owner of the building insured the
building. Now, the building was mortgaged and the mortgage was foreclosed, but he failed to
redeem that. After the expiration of the period of redemption, the building was burned. The
court said he cannot collect. He had no more insurable interest. But if he still has the right of
redemption, he will also have insurable interest.
Insurance is a personal contract because it is not attached to the thing. That is why the law says
change of interest on the thing insured will suspend the insurance until interest in the insurance
is based on same person.
As a general rule, when a car is insured and it is sold, the insurance policy does not
automatically attach to the buyer unless you get the consent of the insurance company and it
issues an endorsement saying the policy is being assigned to the buyer. There are however
exceptions to that - in case of insurance upon life, accident or health, then a change of interest
inaudible the thing insured after the loss has occurred. Again, somebody insured the building.
The building was burned. He then assigned the proceeds of the policy because at that point in
time, the right to collect the proceeds has already accrued. There is now a chose in action which
can be assigned or a change of interest in one or some of several things separately insured by
one policy.
Heres a taxi company with a fleet of taxis, 20 units. The taxicabs were insured. The owner sold
3 of them. The policy will remain subsisting. It would remain with respect to the remaining 17
units of taxicabs.
A change of interest by succession because of death like, heres a father who insured his
house. When he died, his children inherited the house. The policy will remain in force.
The transfer of interest by one of several partners or co-owners - like here are brothers who
inherited a building. They insured it. Then one of them bought out the other three, so he became
the exclusive owner. The policy remains in force so that if it is burned he can collect.
A stipulation for payment of loss whether or not the person insured having insurable interest is
The policy or provision that executes by way of gaining or wagering is void.
In case the lessor requires the lessee to insure his stocks in trade and to provide that in case of
loss the proceeds be payable to him is of course void because he has no insurable interest in
stocks in trade.
Wagering, well, I mentioned to you the case of this fellow who got an ordinary manual laborer
earning minimum wage to insure his life with 6 insurance companies for fantastic amounts and
he named this person beneficiary and it was the person paying for the premiums. The Court of
Appeals disallowed the collection of the proceeds when that person died. This is a poor manual
laborer earning minimum wage. He was asked to insure his life with this well to do person as
beneficiary and this was this fellow paying for the premiums. The court said that this person is
actually wagering on the life of that manual laborer. He chose his life but the beneficiary is not
his relative. This total stranger who asked him to insure his life and was actually paying for the
premiums, he was actually wagering on his life.
After discussing the object of the contract, insurance next deals with consent, in the scheme of
the law. The law mentions what will vitiate consent concealment and misrepresentation.

Concealment is the neglect to communicate that which a party knows and ought to
communicate. It need not be intentional or fraudulent to entitle the insured to rescind the policy.
Originally, the law requires that concealment must be intentional. But then Mambabatas
Pambansa Hernando Perez amended that to eliminate that requirement because the Supreme
Court says it is very difficult to prove fraudulent intent. Even if the concealment was not made
with fraudulent intent, the fact remains that the insurance company was misled into entering
into a contract, which it would have not entered into had it known the facts, or it would have
charged a higher premium.
To constitute concealment, there are four requisites:
The party making the concealment must have the knowledge of the fact concealed;
The fact concealed must be material to the policy;
The party making the concealment makes no warranty as to the fact concealed;
The other party does not have the means of ascertaining the fact concealed.
Concealment often happens in life insurance. Where the applicant for a life insurance did not
disclose that he was sick because he was not aware of it. Thus, theres no concealment.
Now, when is the fact concealed material? The law said materiality is determined by the
probable influence of a fact upon the party to whom the communication is due, informing his
estimate of the disadvantages of the proofs. The contract makes inquiries. In other words, if the
fact had been disclosed, would the insurance company have issued the policy or would have it
willing, but for a higher premium?
Time and again, the courts have said that the failure to disclose serious ailments in life
insurance would constitute concealment. This would usually involve cancer, tuberculosis,
asthma, diabetes, high blood pressure, kidney ailments, liver disorders.
There was this Grepalife case where the parents insured the life of their daughter. However,
they did not disclose that their daughter was a mongoloid. The court said thats concealment, so
that is a material fact that the baby was a mongoloid. (WARNING: this would be a result of late
childbirth when the mother is in her late thirties or early forties when you have the risk to have
mongoloid baby because the quality of the ovum starts deteriorating after age 25. So it is
advisable to get pregnant as early as possible!)
But the failure to disclose an ailment which is merely temporary and light is not material. That
will not be concealment - like the failure to disclose that the applicant for a life insurance has
cough or sore throat, or say when he was in high school he was playing basketball he broke his
leg, or the failure to disclose that when he gets drunk he has stomach discomforts. Thats minor
and need not be disclosed. Then the party may conceal and makes no warranty. Why? If he
makes a warranty, the defense of the insurance company will be breach of warranty not
concealment. The insurance company will still escape liability but on the ground of breach of
Lastly, when the other party has the means of ascertaining it - like if a typical application for
life insurance policy, theres a question there had you been by the way, theres that law on
AIDS - theres a provision there that it is prohibited for an insurance company to refuse to
insure the life of someone who suffered AIDS, provided that the applicant discloses that the
suffered from AIDS. I think thats quite questionable on constitutionality.
Now the last requirement - does the other party have the means of ascertaining it? In the typical
application, theres a question there: Have you been hospitalized? And the applicant mention
there, yes, I was hospitalized, say at the Makati Medical Center, and he gave the date, but then
he did not disclose for what ailment. In this case, theres no concealment because the insurer
was already informed that he was hospitalized in a particular hospital, and even the date was
mentioned. The application will usually require the waiver of the confidentiality of his hospital
records. So with that lead, the insurance company could have inquired. If they did not do so,
they could not complain that there was concealment because they could have made inquiries
based on that lead.
(Side B) Insurance agents are very aggressive. They always want to close the deal. The
Supreme Court said that if the insurance agent fills up the application for the insured and then
the applicant signs it, he will bound if theres any concealment because by allowing the agent to
fill up for him, he makes the agent of the insurance company his own agent for purposes of
filling out the insurance application. However, the law says, either party is required to disclose
that which the other party knows.
Now theres somebody applying for a fire insurance policy. So the insurance company sent its
inspectors to the place. They saw that it is located in the slum area while the neighbors houses
are made up of flimsy materials. Then they issued a policy. They cannot claim that you did not
disclose to us that your neighbors are squatters that their houses are not made up of hollow
blocks or concrete but are made up of plywood and cardboards which when your inspectors
went there, you know; or which in exercise of ordinary care, the other ought to know or has no
reason to suppose him ignorant.
Like during the gulf war, an insurance company insured an oil tanker there, which turned into a
loss. You cannot say why did you not tell us that the gulf war was going on, you should know.
There was a case decided by the Court of Appeals, where a nurse was living and residing in
Pampanga. She obtained a personal accident insurance policy, and the hospital where she was
assigned was located also in Pampanga. Now the insurance company was denying liability on
the ground that there was concealment you did not tell us that the peace and order situation in
Pampanga is poor. The court said (this was in the 60s and 70s) its of public knowledge that
Pampanga was the hot bed of the dissident movements and you should know. There was no
need for the insured to disclose that the Huk element were active in Pampanga.
And those in which the other waives communication or those which prove or tend to prove the
existence of a risk excluded or a risk excepted. For instance, your fire insurance policy usually
provides that it will not answer to loss due to rebellion, sedition, coup de etat, riot. If the insured
did not disclose that there are members of the NPA roaming in the place, exacting revolutionary
taxes from the establishments there, and burning the properties of those who refuse to comply.
The insurance cannot claim you did not disclose that to us, because loss was due to insurgency,
rebellion would be excluded anyway in the policy.
Now even if the loss was not due to a fact concealed, the insurance company is not liable - like
somebody who applied for a life insurance policy. He did not disclose he had kidney ailment
and he died in a plane crash. The insurance company is not liable although the death was not
due to kidney ailment. The fact remains that the insurance company was misled into issuing a
policy it would not otherwise have issued because that risk was not acceptable.
Information as to the nature of interest need not be disclosed except in property insurance, if the
insured is not the owner. If somebody is insuring properties of which he is not the owner, he
must disclose why he has insurable interest that would entitle him to insure it.
The party is not bound to communicate information of his own judgment. Do you think youre
in good health and you will live long? Even if he does not answer that, it is still not

The other matter that would vitiate consent is misrepresentation. Misrepresentation is a
statement by an applicant about the subject matter being insured. In other words, these are
statements made to induce the other party to enter into a contract. They are not part of the terms
and conditions of the contract but rather, are statements to induce the party to enter into a
The law says, a representation is presumed to refer to the date on which the policy goes into
effect. That somebody insure his vessel for a trip say from Manila to Cebu on January 5 and he
represents, my vessel is in Manila, when actually the vessel is in Curimmao. There is no
misrepresentation, provided on the date the policy takes effect, the vessel is actually in Manila.
This is because the representation should be deemed to refer to the date when the policy takes
The representation cannot qualify an express provision on the policy, but may qualify an
implied warranty. You have implied warranties in marine insurance, which will be taken up
later on.
Now, representation is false when the facts do not correspond with the assertion. You have this
Ng Gan Zee case where a person applied for a life insurance policy with a question: Have you
ever applied for a life insurance policy or asked for the reinstatement of a lapse insurance policy
and your application was denied? He said no. It turned out however, that there was one time
where his policy lapsed and he applied for its reinstatement. Initially, his application was
disapproved but eventually it was approved but with a higher premium. The court said that there
was no misrepresentation because although initially the application for reinstatement was
disapproved, it was eventually approved.
The law says that if the insured has no personal knowledge of a fact, he may repeat the
information, which he has on the subject and which he believes to be true. The explanation is
based on the information of others.
In a typical application for a life insurance policy, theres a question there asking whether your
parents/brothers have tuberculosis, heart ailments, etc. or if they died, or of what they died of.
Like somebody whose parents died of tuberculosis, they died when he was still a small child but
then his aunts/uncles told him that his father was a soldier, was a hero who died in the line of
duty and that was what he told. So theres no concealment, no misrepresentation.
You have the Ng Gan Zee case again, where the insured was operated for tumor associated with
peptic ulcer. He was operated with peptic ulcer but then he said he was operated for tumor
associated with ulcer. The court said hes not guilty of misrepresentation because he relied on
what the physician told him.
In determining whether representation is material, the test is the same as in the case of
concealment: would the insurance company have issued a policy had it known the fact or would
it have issued it and asked for a higher premium. Example, a typical question: Have you ever
consulted a physician? Said no, but actually hes a regular patient of a physician, so theres
A typical misrepresentation is the failure to disclose the applicant is suffering from a serious
disease like tuberculosis, asthma, heart disease, kidney disorders, high blood pressure.
Theres a case where the applicant was a drug addict, but in the application is stated there that
he never used morphine, cocaine or any prohibited drugs. There is misrepresentation. Where the
applicant knows he has tuberculosis and he asked somebody else in good health to take his
place during the examination. That is misrepresentation. In big banks, they have this bankers
blanket policy to insure against loss due to defalcation by the tellers. In the application, the
insurance would be interested to find out about their system of controls whether they have
adequate systems control. In one case, a bank was asked and it stated that all transactions are
pre-audited by an internal auditor. It turned out to be false. That is misrepresentation.
But when somebody was asked Do you take alcoholic drinks? Said No, but he would take
small quantities of alcoholic drinks occasionally if theres party, well that is not material. That
is not misrepresentation.
Or there was a question: Have you ever consulted a physician? Said No. Actually, he underwent
a test in the hospital, but the test showed that he was in perfect health. There is no
misrepresentation because he was in good health. Thus, it would not have affected the decision
of the insurance company to accept the application.
In one case where the policy says it is good only up to age 60. The insured stated there his
date of birth and obviously, if you compute that, hes over 60, but the insurance company
accepted the application and accepted the premiums. The Court said that the insurance company
is deemed to have waived the misrepresentation. The law provides that if the insurance
company is aware of the misrepresentation and it accepted the policy, it will be deemed to have
waived the misrepresentation.
Again, if theres a misrepresentation, even if the loss was not due to the fact misrepresented, the
insurance company will not be liable. Again, in the case where a fellow misrepresented that hes
in good health, but died in a plane crash, the insurance company was misled into issuing an
insurance policy it would not have otherwise issued. Thus, it is not liable for the value of the

19 December 2001 Pepper
(Caveat: this is not a transcription of jacks lecture. We all thought were having a christmas
party that day. This is a summary of our insurance reviewer and Agbayani.)

SECTION 36. A representation may be oral or written.
SECTION 37. A representation may be made at the time of, or before, issuance of the policy.

Statement as a fact of something which is untrue and which the insured states with knowledge
that it is untrue and with an intent to deceive, or which he states positively as true without
knowing it to be true and which has a tendency to mislead, where such fact in either case is
material to the risk.

SECTION 38. The language of a representation is to be interpreted by the same rules as the
language of contracts in general.
SECTION 39. A representation as to the future is to be deemed a promise, unless it appears that
it was merely a statement of belief or expectation.
SECTION 40. A representation cannot qualify an express provision in a contract of insurance,
but it may qualify an implied warranty.
SECTION 41. A representation may be altered or withdrawn before the insurance is effected,
but not afterwards.
SECTION 42. A representation must be presumed to refer to the date on which the contract
goes into effect.
SECTION 43. When a person insured has no personal knowledge of a fact, he may nevertheless
repeat information which he has upon the subject, and which he believes to be true, with the
explanation that he does so on the information of others; or he may submit the information, in
its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it
proceeds from an agent of the insured, whose duty it is to give the information.

Distinction between ordinary and marine insurance as to information from others
1. Ordinary Insurance it is within the discretion of the insured to transmit information of a fact
of which he has no personal knowledge. If he chooses to do so, he shall not be responsible for
its truth unless it proceeds from an agent of the insured, whose duty it is to give the information
2. Marine Insurance information of the belief or expectation of a third person in reference to a
material fact is material. The insured is not given the discretion to transmit or withhold
information. He is required to give such information whether the third person is his agent or not.

Harding v Commercial Union Assurance Company
Harding bought a car worth P2,800. The agent of an insurance company appraised it and
declared its present value to be P3,000. Harding had the car insured. The car was subsequently
damaged because of fire. The insurer refused to pay saying that the cars value is only P2,800
and not P3,000. Held: Insurer liable. Where it appears that the proposal form, while signed by
the insured was made out by the agent of the insurer, the facts stated in the proposal even if
incorrect will not be regarded as warranted by the insurer, in the absence of willful
misstatement. Under such circumstances, the proposal is to be regarded as the act of the insurer.

SECTION 44. A representation is to be deemed false when the facts fail to correspond with its
assertions or stipulations.

Representations are not required to be literally true unlike warranties. It is sufficient that they
are substantially true.

Insular Life Co. v Pineda
It is not misrepresentation for the insured to state that he did not drink beer or other intoxicants
if he drank very seldom.

SECTION 45. If a representation is false in a material point, whether affirmative or promissory,
the injured party is entitled to rescind the contract from the time when the representation
becomes false. The right to rescind granted by this Code to the insurer is waived by the
acceptance of premium payments despite knowledge of the ground for rescission.

A sickly person filed an application for life insurance. During the medical examination
conducted by the insurer to determine the fitness of the applicant, a robust and healthy person
appeared pretending to be the applicant. Held: The contract is avoided on the ground of
fraudulent misrepresentation.

Musngi v West Coast Life Assurance Inc.
Garcia was insured by West Coast twice since 1931. In both policies, he answered in the
negative when asked if he consulted any doctor. It turned out that he actually consulted a
number of physicians for different ailments. When he died, the insurance company refused to
pay. Held: Refusal to pay is justified. The concealment and false statements constituted fraud
because the insurance company accepted the risk on the strength of such statements which it
would otherwise have rejected.

Edillon v Manila Bankers Life Insurance Co.
In April 1969, Lapuz applied for insurance stating her date of birth to be July 11, 1904
(meaning 65 years old na siya). She died in a car accident. The insurance company refused
payment saying that the certificate of insurance contained a provision excluding liability to pay
claims to persons under 16 and over 60. Held: Lapuzs age was not concealed. Her application
form reveals her true age and the company had all the time to process the application form and
notice that Lapuz was already 64 years old.

Stokes v Malayan Insurance Co.
Adolfson had a subsisting insurance policy when his car collided with another vehicle. Stokes,
an Irish citizen who had no Philippine drivers license, was the one driving the car. He had a
valid Irish license but he had been in the Philippines for more than 90 days when the collision
occurred. Adolfson claimed on the policy contending that Stokes was an authorized driver.
Held: Insurance company not liable. When an insurer is called upon to pay in case of loss or
damage, it has the right to demand strict compliance with the contract. In this case, Stokes may
not be considered an authorized driver under the policy because authority must come not only
from the insured but also the law. Stokes is not authorized under the law to drive because he has
no license.

Gonzales La O v Yek Tong Lin Fire Insurance
Gonzales was issued two fire insurance policies with provisions prohibiting Gonzales from
entering into other insurance contracts. Fire broke out. Yek refused to pay because Gonzales
violated the prohibition. Gonzales however was able to prove that Yek knew of the violation
long before the fire but did not make any effort to rescind the policies and even collected
premiums on the policies. Held: The action of the insurer constituted waiver of the right to
annul the insurance policies.

Tan Chay Heng v West Coast Life Insurance
Tan Caeng declared in his application that he was single, a merchant, healthy and not a drug
user when he was actually marries, a laborer , suffering form tuberculosis and addicted to drugs.
Upon his death, the designated beneficiary tried to collect from the insurer but the latter denied
liability. The beneficiary contends that the insurer cannot now rescind the contract because an
action for collection has already been filed. Held: Insurers action is not for rescission and
therefore not barred. Rescission contemplates the existence of a contract. What is involved in
the case at bar is a contract which is void ab initio because the defense was fraud in its

*In marine insurance, the misrepresentation must be false.

SECTION 46. The materiality of a representation is determined by the same rules as the
materiality of a concealment.

Test of materiality
Probable and reasonable influence of the facts upon the party of whom the representation is
made in forming his estimate of the disadvantages of the proposed contract or in making his

SECTION 47. The provisions of this chapter apply as well to a modification of a contract of
insurance as to its original formation.
SECTION 48. Whenever a right to rescind a contract of insurance is given to the insurer by any
provision of this chapter, such right must be exercised previous to the commencement of an
action on the contract.
After a policy of life insurance made payable on the death of the insured shall have been in
force during the lifetime of the insured for a period of two years from the date of its issue or of
its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the insured or his agent.

* this provision applies to concealment, misrepresentation and falsity of warranties.

When insurer may exercise his right to rescind:
1. Non-life policy prior to the commencement of an action on the contract
2. Life policy a period of two years from the date of issue or last reinstatement of the policy
(aka incontestable clause)

Tan v CA
Tan was issued a policy by PHILAMLife in November 1973. He died in April 1975.
PHILAMLife refused payment and in September 1975 notified the beneficiaries that it is
rescinding the contract on the ground of misrepresentation. The beneficiaries contend that
rescission should be done during the lifetime of the insured. Held: PHILAMLife can still
rescind. The phrase during the lifetime only means that the policy is no longer in force after
the insured died. The key phrase is for a period of two years. Where the insured died less than
2 years after the date of issue or last reinstatement, the policy could never become incontestable.

Paulino v Capital Insurance Co.
There is a difference between termination by the insured and by the insurer. Termination by the
insured requires only a request of such termination. Termination by the insurer requires the
refund of the portion of the premium proportional to the unexpired term of the policy.

SECTION 49. The written instrument in which a contract of insurance is set forth, is called a
policy of insurance.

The Policy is the measure of insurers liability

Ty v Filipina Compania
Where an insurance policy defines partial disability as loss of either hand by amputation
through the bones of the wrist, the insured cannot recover under the same policy for temporary
disability caused by fracturing of the hand. (loss of legs includes permanent paralysis of both
legs, Panaton v Malayan Co. Inc)

Del Rosario v Equitable Insurance and Casualty Inc.
Equitable issued an accident policy on the life of the insured, binding itself to pay P1000 to
P3000. The insured died. Held: Liable for P3000. Art 1377, Civil Code: The interpretation of
the obscure provisions of a contract should not favor the party that caused the obscurity.

Jarque v Union Fire Insurance
Types rider prevails over printed clause in case of inconsistency.

SECTION 50. The policy shall be in printed form which may contain blank spaces; and any
word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the
contract of insurance shall be written on the blank spaces provided therein.
Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance
and which is pasted or attached to said policy is not binding on the insured, unless the
descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and
written on the blank spaces provided in the policy.
Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued
after the original policy shall be countersigned by the insured or owner, which countersignature
shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.
Group insurance and group annuity policies, however, may be typewritten and need not be in
printed form.

Rider a printed or typed stipulation contained on a slip of paper attached to the policy and
forming an integral part thereof. They usually contain additional stipulations between the

Warranties are inserted or attached to the policy to eliminate specific potential increases of
hazard during the policy term owing to actions of the insured or conditions of property.

Clauses agreements between the insurer and the insured on certain matter relating to the
liability of the insurer in case of loss

Examples of Clauses:
1. Three-fourths clause where the insurer is liable only for of the loss or damage
2. Loss payable clause where the loss, if any, is payable to the named party or parties, as their
interest may appear
3. Change of ownership clause where insurance will inure to the benefit of whomsoever,
during the continuance of the risk, may become the owner of the interest insured

Enriquez v Sun Life Assurance of Canada
Herrer applied life annuity with SunLife. He paid the sum of P6,000 and was given a receipt.
His application was approved. A letter notifying him of the approval was made but there was no
proof that it was actually mailed or accepted by Herrer. Herrer died. Held: SunLife not liable.
The contract of insurance was not perfected absent any showing that acceptance of the
application ever came to the knowledge of the applicant.

Tang v CA
In September 1965, Lee Su Guat, an illiterate who spoke only Chinese, applied for life
insurance. The application was in English. Lee Su Guat declared that she was of good health.
The application was approved. A second application was filed in November 1965 and
subsequently accepted. Lee Su Guat died in April 1966 of lung cancer. The insurer denied
liability. The beneficiary claims that since the insured was illiterate and the policy was in
English, the insurer must show that it had fully explained the terms of the policy to the insured,
otherwise, the insurer will not be guilty of misrepresentation. Held: Insurer not liable. It was
under no obligation to prove that the terms of the insurance contract was fully explained to the
other party.

SECTION 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or running policies;
(c) The premium, or if the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis and rates upon which
the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute owner thereof;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
SECTION 52. Cover notes may be issued to bind insurance temporarily pending the issuance of
the policy. Within sixty days after the issue of the cover note, a policy shall be issued in lieu
thereof, including within its terms the identical insurance bound under the cover note and the
premium therefor.
Cover notes may be extended or renewed beyond such sixty days with the written approval of
the Commissioner if he determines that such extension is not contrary to and is not for the
purpose of violating any provisions of this Code. The Commissioner may promulgate rules and
regulations governing such extensions for the purpose of preventing such violations and may by
such rules and regulations dispense with the requirement of written approval by him in the case
of extension in compliance with such rules and regulations.

Ngo filed an application with GREPALIFE for a policy on the life of his 1-year old daghter. He
submitted an application form and gave the premium to the insurers agent for which a binding
deposit receipt was issued to him. The application was denied but the agent, instead of notifying
Ngo wrote back the insurer, strongly recommending the acceptance of the application. The chils
died in the meantime. Ngo claimed on the binding deposit receipt saying that it constituted a
temporary contract of life insurance. Held: Insurer not liable. A binding deposit receipt was
merely an acknowledgement of receipt of the application for processing by the insurance
company. A binding receipt is manifestly merely conditional and does not insure outright.

Pacific Timber Corp v CA
Pacific secured temporary insurance for the exportation of logs. A cover note was issued
securing the cargo. Marine policies were subsequently issued on the cargo but prior to such
issuance, some of the logs were lost. Pacific now claims against the insurer. The insurer denies
liability contending that the loss may not be considered as covered under the cover note because
such became null and void by virtue of the issuance of the marine policy because of lack of
consideration. Held: Insurer liable. Cover note issued for consideration. No separate premiums
are required on cover notes. (?)

SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless otherwise specified in the policy.

1. Art 739, Civil Code
a. between persons guilty of adultery or concubinage
b. in favor of a public officer, his spouse or child, by reason of his office
c. between persons guilty of a crime in consideration thereof
2. Section 12, Insurance Code
When the beneficiary is the principal, accessory or accomplice in willfully bringing about the
death of the insured

Bonifacio Brothers v Mora
Mora mortgaged his car to Reyes with thew condition that the former will insure the car with
the latter as beneficiary. Mora complied. The car figured in an accident and was brought for
repairs to Bonifacio Motors. Materials for the repair were provided by Ayala Auto Parts. The
car having been delivered to Mora without the costs of repair being paid, Bonifacio and Ayala
filed a complaint against the insurer for collection. Held: Payment must be made to Reyes.
Bonifacio and are not named beneficiaries. Their recourse is to collect from whoever brought
the car to them for repairs.

Coquia v Fieldmans Insurance Co. Inc.
Fieldman issued in favor of Manila Yellow Taxicab insurance policies in favor of fare-paying
passengers, drivers and/or conductors. A driver met an accident while driving a cab. His heirs
filed a claim against Fieldman. Fieldman refused to pay on the ground that the heirs have no
contractual relationship with the company. Held: Fieldman liable. Although in general only
parties to a contract may bring an action based thereon, this rule is subject to exceptions. Article
1311, Civil Code (contracts pour atrui): If a contract shuold contain a stipulation in favor of a
third person, he may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation.

Lampano v Jose
A is a building contractor of the house of B. A insured his interest in the house for P7,800. His
interest is actually only P7,000. The house is burned. Held: B is not entitled to the P800 in
excess of the interest of A.

SECTION 54. When an insurance contract is executed with an agent or trustee as the insured,
the fact that his principal or beneficiary is the real party in interest may be indicated by
describing the insured as agent or trustee, or by other general words in the policy.
SECTION 55. To render an insurance effected by one partner or part-owner, applicable to the
interest of his co-partners or other part-owners, it is necessary that the terms of the policy
should be such as are applicable to the joint or common interest.
SECTION 56. When the description of the insured in a policy is so general that it may
comprehend any person or any class of persons, only he who can show that it was intended to
include him can claim the benefit of the policy.
SECTION 57. A policy may be so framed that it will inure to the benefit of whomsoever,
during the continuance of the risk, may become the owner of the interest insured.
SECTION 58. The mere transfer of a thing insured does not transfer the policy, but suspends it
until the same person becomes the owner of both the policy and the thing insured.

Quimson says compare this with section 20.

SECTION 59. A policy is either open, valued or running.
SECTION 60. An open policy is one in which the value of the thing insured is not agreed upon,
but is left to be ascertained in case of loss.
SECTION 61. A valued policy is one which expresses on its face an agreement that the thing
insured shall be valued at a specific sum.
SECTION 62. A running policy is one which contemplates successive insurances, and which
provides that the object of the policy may be from time to time defined, especially as to the
subjects of insurance, by additional statements or indorsements.
SECTION 63. A condition, stipulation, or agreement in any policy of insurance, limiting the
time for commencing an action thereunder to a period of less than one year from the time when
the cause of action accrues, is void.
SECTION 64. No policy of insurance other than life shall be cancelled by the insurer except
upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it
is based on the occurrence, after the effective date of the policy, of one or more of the
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions increasing the hazard insured against;
(e) physical changes in the property insured which result in the property becoming uninsurable;
(f) a determination by the Commissioner that the continuation of the policy would violate or
would place the insurer in violation of this Code.
SECTION 65. All notices of cancellation mentioned in the preceding section shall be in writing,
mailed or delivered to the named insured at the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is relied upon and (b) that, upon written
request of the named insured, the insurer will furnish the facts on which the cancellation is

Saura Import-Export Co. v Philippine International Surety
Actual notice of cancellation in a clear and equivocal manner, preferable in writing, should be
given by the insurer to the insured so that the latter may given an opportunity to obtain another
insurance for his protection. Notice should be personal on the insured.

Malayan Insurance Co. v Cruz Arnaldo
Cancellation of policy requires:
1. prior notice of cancellation to the insured
2. cancellation based, on the occurrence after effective date of the policy, of one or more of the
ground mentioned
3. notice must be in writing, mailed or delivered to the insured at the address stated in the policy
4. notice must state the ground/s for cancellation

SECTION 66. In case of insurance other than life, unless the insurer at least forty-five days in
advance of the end of the policy period mails or delivers to the named insured at the address
shown in the policy notice of its intention not to renew the policy or to condition its renewal
upon reduction of limits or elimination of coverages, the named insured shall be entitled to
renew the policy upon payment of the premium due on the effective date of the renewal. Any
policy written for a term of less than one year shall be considered as if written for a term of one
year. Any policy written for a term longer than one year or any policy with no fixed expiration
date shall be considered as if written for successive policy periods or terms of one year.

January 3, 2002 Kelly

v Warranties may either be express or implied. Express if it is stated in the policy. Implied,
where there are implied warranties in a marine insurance for example, that the vessel that it
would not deviate.
v Warranties are different from representations because warranties are part of the terms and
conditions of the policy while representations are not part of the policy but statements made to
induce someone to enter into a contract.
v Warranty may relate to the past, present or the future or to any or all of them.

PAST: Somebody applying for life insurance warrants that he was never hospitalized for a heart
PRESENT: warrants he is in good health
FUTURE: common in a fire insurance policy there will be a warranty there that the insured will
not store inflammable materials.

v The law says that the warranty must be contained in the policy or in another statement signed
by the insured and referred to in the policy (known as a rider). But the SC has said that the rider
is valid even if it was not signed by the insured if it is attached to the policy, because it is
deemed to be contained in the policy because usually the rider, they just paste them in the
v The law says if before the time for the performance of a warranty relating to the future, a loss
insured against occurs or becomes unlawful or performance becomes unlawful or impossible
the omission will not avoid the policy.
a) Loss occurs. For instance, heres somebody applying for a fire insurance policy. The
insurance company sent their inspectors to the place and said you know this is not a nice
neighborhood. There are squatters in the vicinity, the houses are made of plywood. Well ok we
can insure your property but we have to take steps to minimize risks so, we will insure provided
you put up a firewall. We will give you 30 days to put up a firewall. Since he was given 30 days
to put up a firewall, if fire occurs during the 30-day period, the insurance company will be liable
because the period for him to put up the firewall has not yet expired.
b) Performance becomes unlawful. When you insure the property and the insurer says too many
occupants, this is risky. You better reduce the occupants. However, before he could file a case
to eject his tenants a house rental law was passed prohibiting the ejectment of tenants so failure
to comply with the condition will be excused.
c) Performance becomes impossible. Like when you were supposed to put up a fire wall but
then cement disappeared from the market, could not buy cement so that will be excused.
As you will see, in all these things in the last two, the matters are beyond the control of the
v Breach of Warranty. When there is breach of warranty, the insurance company can invoke
that to avoid liability and the fact that it is there in the policy will exempt insurance company
from liability. You dont discuss or argue anymore whether it is material or not. The fact that it
was there in the policy means the insurance company considers it material.
Example (Double Insurance): Its common in fire insurance policy that there will be a
requirement there that if the insured obtain other fire insurance policies he must disclose. If he
does not disclose the insurance company will not be liable. And that obligation applies not only
to policies already existing when he applied for the policy but even to policies he might obtain
in the future. When somebody insures his building against fire, lets say with MGU Insurance,
then six months later he insures it with Malayan if he does not disclose that then both of them
will avoid liability because both parties will invariably contain that provision that you must
disclose if you have other insurance policies.
Example (No Double Insurance): In one case where the insured are stocks in trade but the
stocks in trade insured with different companies were different. So there is no double insurance.
So there is no breach of warranty even if he does not disclose that he has obtained other
insurance. Or if he insured the building and there is a provision there he must disclose if he had
other insurance but then he obtained other insurance lets say for the stocks in trade so there is
no need to disclose.
Example (No Double Insurance) For the court has said in the Geagonia case where the owner of
the stock in trade insured them. The policy provided that in case of loss the policy is payable to
him but then he mortgaged them and because of that the mortgagee required him to insure the
stocks in trade and to put in the policy that in case of loss the proceeds will be payable to the
mortgagee. A fire occurred so the one who insured the stocks first refused to pay. He said he
obtained another insurance policy but he did not tell us. The court said, no! there is no violation
because the interest insured in the policy are different because the first one in case of loss, the
proceeds will be payable to the mortgagor. The second one the proceeds will be payable to the
mortgagee. So since the interest are different there is no need to disclose.

v If there is breach of warranty, even if the loss was not due to the breach of the warranty, the
insurance company is not liable because the fact remains that it was exposed to a risk which it
was not willing to assume.
Example: In a fire insurance policy there is a provision there you will not store inflammable
materials and this fellow brought fireworks in his house on new years eve then the cook who
was in the kitchen was negligent and a fire started in the kitchen. It has nothing to do with the
fireworks. The insurance company will not be liable because the fact remains that it was
exposed to a risk it was not willing to assume. That is no longer the risk which it agreed to
insure so it will not be liable.
Exception (Merely Incidental to the Business): However, even if there is a warranty the
presence of the prohibited material is merely incidental to normal course of business it is
understood that it is not covered by the prohibition. For example, here is somebody who has a
store that sells furniture. He insured his property against fire. There was a prohibition against
inflammable materials and he has there some alcohol that is used for retouching the varnish of
the furniture so that is incidental. That Qua Chee Gan case where the warehouse that was
insured there was gasoline there but that was the consumption of motor vehicles of the
warehouseman for two days. That is incidental to the business. Or a drugstore that was insure
and among the articles in the drugstore were moth balls which were highly inflammable but
because it was a drugstore is selling pharmaceutical products so that is incidental to the business
so there is no violation.
v Waiver. Now if the insurance company was aware that there was a breach of warranty but
despite that it continued the policy, it accepted the renewal premium, then it waives the
v The law says a breach of warranty without fraud merely exempts the insurer from the time it
occurred or when it is broken it prevents the (?) to attach to the risk. So in other words, here is
somebody insures his house against fire January 1st to December 31st and there is a warranty
that he would not store inflammable materials. September a fire broke out. Then on December
31st another fire broke out at that time there were fireworks stored in his house so the insurance
company liable for the fire that occurred in December 31st but it will be liable for the fire that
occurred in September because at that the time there were no fireworks there was no breach of
warranty at that time.
When there is a breach from the very beginning when the policy will not attach. If from the very
beginning there were inflammable materials there.
v Section 77 the insurer is entitled to the payment of the premium as soon as the thing insured is
exposed to the peril and says notwithstanding any agreement to the contrary no policy or
contract of insurance is valid and binding unless and until the premium has been paid except in
case of life or industrial life policy where grace period provision applies.
So the SC has said in a number of cases if the premium is not paid the policy is not valid and
binding because they said, you know insurance involve this actuarial scheme that everybody
chips in to a common pot and this is important for calculating the risk because if everybody will
delay the payment, the actuarial computations will be the out of (?) because insurance company
meanwhile invest the premiums so thats the rule.
The trouble is the decisions made many exceptions.
v Exceptions
First, under the Section 78 an acknowledgement in the policy that the premium has been paid is
conclusive evidence of payment to make the policy binding. So, even if the premium was not
actually paid there is a provision there in the policy that is saying that when payment is
acknowledged, then that is binding for purposes of making it effective but it is only for that
purpose but for purposes of actually collecting the premium that will not apply so if loss occurs
the insurance company will still be liable but it can still collect the premium. It can deduct the
premium from the proceeds of the policy.
Next, in that Makati Tuscany case where this condominium there was insured and then where
the insurance company agreed to give the insured time to pay in 12 equal monthly installments.
The Makati Tuscany paid a few installments and then it stopped. So the insurance company
sued and the defense of Makati Tuscany is that the policy is void under Section 77 because the
premium has not been paid therefore you cannot sue us to recover the premium and you should
refund the installments we have paid. The courts said no! because you know insurance is
becoming very competitive. I met Charlie Uy in a cocktail party and said you know everybody
is complaining that insurance is a cut throat competition business. What cut throat competition
are you talking about? Its not cut throat competition, its killing fields out there! So when you
have a client like San Miguel Corporation, Filipinas Shell, PLDT which pays more than 1
billion in premiums you will allow them to say we will let you pay in 12 installments. So, the
court said it is not void to stipulate that the premiums be paid in installments and if you have
such a stipulation then you can sue to collect installments which were not paid.
Third, Section 77 says also life and industrial life. The law provides and that is incorporated in
the policies that in subsequent premiums the insured is given a grace period of at least 30 days.
So, in life insurance policies you at least have 30 days to pay the subsequent premiums because
at times you will announcements in newspapers that because of a typhoon in that place the
insurance company is giving the insure there 60 days. So at least now in that Tibay case,
Malayan allowed payment of premiums in installment but there was an express provision that
the policy will not be binding until the premiums have been fully paid. The court said, this is
different from Makati Tuscany. Because here there is stipulation that while the premium will be
paid in installments the policy will not be binding until the premiums are fully paid. So the
insurance company will not liable for the loss that occurs before premium has been fully paid.

So based on Section 77, Makati Tuscany, Section 78, the court said that there are 3 exceptions
to the rule that the policy is not binding until the premiums are fully paid.
First, in life and industrial life where a grace period is given.
Secondly, Section 78 when theres an admission in the policy that the premiums have been
Then, Makati Tuscany which says that the parties can stipulate that the premiums be paid in
v Then you have this UCPB General Insurance Corp v. Masagana Dela(?)mart. Masagana
Delamart had been insuring its business with UCPB since 1988 and every year they would give
Masagana 60 to 90 days credit to pay and that is common. Now, 1992 the problem was that a
loss occurred within the usual 60-day period. A fire raised the premises. The next day masagana
paid the premium and UCPB accepted the premium. The following day they filed a claim, you
should now return the premium. Now they were claiming that the premium was not paid when
the loss occurred therefore they were not liable. In a decisions of the second division penned by
Justice Pardo reiterated Arce and another case, the premium was not yet paid and therefore the
insurance was not binding, UCPB not liable. A motion for reconsideration was filed and the
case was elevated to court en banc. In a split decision, Chief Justice Davide reversed the
decision. He said that heretofore there were three exceptions when policy should be binding
even if the premiums are not paid: 1) life and industrial life insurance policy where a grace
period is given; 2) when there is an acknowledgement in the policy that the premiums were
paid; 3) Makati Tuscany, where there is an agreement that the premiums will be paid in
installments; and now, he said, there are now two additional exceptions:
First, if the insurance company agreed to grant credit. The courts said that section 77 does not
say that the contract will be void and that it is not against the law, good customs, morals public
policy for the parties to stipulate that credit will be given. He said that is the 4th exception.
Thats why Justice Pardo dissented and also Justice Vitug, the commercial law expert, dissent,
he believes it is not valid and binding. But that was the majority decision.
Then Chief Justice Davide said that theres a fifth exceptionEstoppel. For many years the
insurance company had been granting credit to the insured. So it made them believe that they
will always be given credit and so it is now in estoppel. The court said that is the fifth
v Cash Surrender Value. Your book mentions that there are some of the devices which will be
made in order to temper the harshness of forfeiture in the policy because the premium has not
been paid. This is usually in connection with the life insurance policies. You have the cash
surrender value because if you insured your life from age 21 to age 60 you will be paying the
same premium every year. But in the early years the risk of the insured dying is less compared
if he is age 60. So at that point in time he is paying more than what would correspond to the risk
the insurance company is assuming and that excess is the cash surrender value. If you look at
the life insurance policy there is a table there indicating the cash surrender value so you can
surrender the policy and get the cash surrender value or you can even get a policy loan cheap
money you can borrow money with 6% interest. I used to borrow the cash surrender value of
my life insurance policy and pay 6% interest a year and then put the money in time deposit. I
will get more and then I could claim the interest as a tax deduction but now the insurance
increased interest of 14% so it doesnt pay anymore.
v Paid up insurance. So, the insured defaulted. They can say, ok, the fellow stopped paying
how much cash surrender value does he have? P6000. How much insurance can that buy up to
the end of his policy? P20,000. Ok we will apply that. He is insured up to the end of the policy.
Or extended insurance, they can say, he has cash P60,000 we will apply that as premium. For
how long can you extend the life insurance policy with that P60,000? Good for 1 years. They
will still insure you for 1 years even though he stopped paying the premiums. And then the
insured can also apply for reinstatement of the life insurance policy but they will require that he
must undergo medical examination again to show that he is insurable and then he must pay the
premiums in arrears.
v Refund of Premium. Section 79 deals with the refund of the premium. It says the insured is
entitled to a return of the premium if no part of his interest was exposed in the peril insure
against. Like you insured a shipment of rice but the rice was never shipped, so he is entitled to a
refund on the premium. Or the insurance made for a definite period and the insured surrenders
his policy, he is entitled to a partial refund as corresponds to his unexpired time after deducting
any loss previously paid. If you look at your motor vehicle insurance policy there is a provision
there that if you surrender the policy and ask that it be cancelled you will given a refund but it
will not be pro rated. In other words, if you surrender in 6 months, you will not get 50% of the
premium. You might probably get less than 40%. There is a table there. And if there was a loss
before, they paid, that will be deducted first from your refund. If you are entitled to a refund of
10,000 but then they previously paid 2,000 that will be deducted first and you get only 8000. In
life insurance that will not apply. In other words, somebody paid a premium in one year, then
after 3 months he changed his mind, he surrenders the policy, he cannot ask for partial refund
because insurance on human life is indivisible. The insurance company is already exposed to
the risk of loss, it has already earned the premium. The law says if the peril insured against
existed no mater how short the period, the insured is not entitled to return on the premium. Here
is somebody who insured his vessel for a trip from Manila to Cebu then, while the vessel was
near Romblon he decided to have the policy cancelled. He cannot ask for a partial refund. He
cannot say, well let us compute the distance from Manila to Cebubecause the insurance
company has already been exposed to the risk of loss it has already earned the premium. In case
the insured is entitled to refund, where the contract is voidable due to fraud of the insurer then
he will be entitled to the return of the entire premium. But if is it the fault on the part of insured
other than actual fraud, and insurer never incurred liability then the premium will be refunded.
For instance, this fellow was insuring his property against fire. The insurers inspector says well
your neighborhood is near the squatters area, we will insure it provided you build a fire wall.
They did not build a firewall and that was a condition precedent so he will entitled to a refund.
But if there was fraud on his part he is not entitled to refund. That is the penalty the law
imposes upon the insured for committing fraud. Like he insured a building and they did not
send inspectors, they relied good faith and he misrepresented that his building has a fire
sprinkler system. So they said that is safe! In turned out it was not so, there is fraud and he is
not entitled to refund of the premium.
v Over Insurance. That case of over insurance, when insured is to be entitled to a ratable return
of the premium. Example here is building worth P10M. He insured with MGU insurance for
10M, Malayan for 5M and Pioneer for 5M, it is over insured by 10M. Lets say that he paid 10T
premium to MGU, 5T to Malayan and 5T to Pioneer. So he is entitled to a refund from of
P5,000 from MGU, of P2,500 from Malayan and P2,500 from Pioneer.
The agreement not to transfer the claim after the (?) is void because at that time his liability has
already accrued. That is now a chose in action.
v Now, the insurer is liable for loss the proximate cause of which is the peril insured against
even in the immediate cause if not the peril insured against. Like fire insurance policy, fire
broke out in the house of the neighbor of the insured. As a result of that a wall collapsed from
his neighbors house and damages his property. So the proximate cause is the fire but
immediate cause is the collapse of the wall. Or loss, the immediate cause of which is the peril
insured against although the proximate cause may not be the peril insured against. Like faulty
wiring caused fire. The proximate cause is the faulty wiring, the immediate cause is the fire so
the insurance will be liable. The loss caused by the negligence of the insured. Common in motor
vehicle insurance damage coverage. This fellow was driving negligently and he bumped the car
of another. So the insurance company will be liable.
Proximate cause in insurance has more or less the same meaning as Proximate cause in quasi-
delict like in the Vda. de Bataclan case. And the insurer is liable for the thing insured is rescued
from the peril insured against that would otherwise have caused a loss if in the course of such
rescue the thing is exposed to a peril not insured against that would deprived the owner
possession in whole or in part or is caused by the efforts to rescue the insured from the perils
insured against. Like somebody who insures his house and his appliances against fire. The
neighbors house caught fire. He started bringing out his appliances and valuables to bring them
to a safer place but the proverbial looters came and took them so the insurance company will be
liable. So the loss occurred because of efforts to save them from the fire or caused by efforts to
rescue the thing insured from the peril insured against. So again, this fellow insured his house
against fire then his neighbors house caught fire and then the firemen arrived and then they
pointed their hoses to his house to prevent the fire from spreading there and some of his
furniture were soiled living room set, the piano so he can collect because they got soiled due to
the efforts to prevent fire from spreading to his house.
v Peril Especially Excepted. The loss which would have occurred on such peril excepted
although the immediate cause was a peril which was not excepted. Example, fire insurance
policies usually provide it will not cover loss due to riots, insurgency rebellion. In 1989 where
there was a coup d etat there was that store in the premises of Insular Life which was hit by
shell and it burned and the people there were claiming that their properties were damaged, xxx
advised them to file a claim with their insurance companies. It is not covered. So the immediate
cause was the fire but the proximate cause was the rebellion which is excepted from policy so
the insurance company will be not liable. The fire was caused by the rebellion. There was a case
that was referred to me, the lawyer who handled it, he raised the defense that the NPAs were
demanding revolutionary taxes and they did not pay one day the problem occurred but how do
you prove that it was the NPAs who burned the property? The court said that was not
sufficiently shown. Because of you talk of rebellion you have to show that it is politically
motivated, it is part of the scheme to overthrow the government and its hard to prove that
because these people will not admit that they just arrived there one day and they just burned the
place. I said, the lawyer should have invoked instead riot. Riot has a peculiar definition in
insurance. In English jurisprudence, every phrase, every word in insurance is being interpreted
by the English courts. For the American and English jurisprudence, riot does not mean labo-
labo. It means any act of violence by a group of armed men, thats riot. They should invoked
riot. There was a rural bank in Compostela. One day the members of the NPA raided and it
forced the safe open. They got the money. They were trying to claim from the insurance
company. They said riot! So it is not liable.
v The insurer will not be liable for certain losses.
1) Losses caused by the connivance of insured. Like he asks somebody to steal his car. Then he
files a claim.
2) Loss caused by the willful act of the insured. Arson. He set his house on fire so he could file
a claim against his insurance policy.
3) For negligence if it amounts to bad faith, in other words it is so gross, gross negligence
amounting to bad faith. American Jurisprudence will say negligence is gross if it is something
that would be obvious to a reasonable man. For example, here is somebody who insured his car
for damage and he went to a gasoline station to put gasoline. There was a big sign there no
smoking and then he lit a cigarette so his car caught fire that would be negligence amounting
to bad faith because it is so obvious. Lets say he insured his house against fire and he watching
a movie and smoking a cigarette when he fell asleep (walang ka storya storya naman to
pinapanood ko!) the cigarette fell and the rug caught fire that would be covered. There was a
man, somebody imported some material/chemical that were quite inflammable. Then he arrived
at the premises of the company then the was employee was supposed to open the van little by
little, let the fuse come out. And then, it was early in the morning and he said ano ba to ang
dilim dilim ah! so he flicked his lighter and there was an explosion and he died. There was
gross negligence. You should know na highly inflammable, nagsindi ka ng lighter. The loss, the
proximate cause of which is the excepted peril even though the immediate cause is a peril
insured against. In the case of the rebellion which caused the fire. The proximate cause there is
the rebellion but the immediate cause is the fire and that is not covered under the policy.
v Case: There was this case of this Fortune insurance company. The insured a pay roll against
robbery. They asked a security guard agency to transport the payroll. And so the security guard
agency provided the armored car, driver and security guard. The payroll policy had a provision
that insurance company will not be liable if the loss was caused by an employee or authorized
representative of the insured. The one who stole the money was the driver of the armored car
and the security guard. The claim was filed. The insurance company rejected the claim there
was a litigation which reached the SC. The insured argued that the guard and driver are not our
employees. They were the employees of the security guard agency. Neither were the are
representatives because the security guards were independent contractors. They were not our
employees, they were not our authorized representatives therefore were not liable. The court
said no! What is the purpose of that provision? What the provision is saying is that the
insurance company is not willing to assume the risk of loss caused by the person who has
immediate custody and safekeeping of the money because the risk is too high. They had
immediate access and custody of the money so the should be considered your representative
therefore the insurance company is NOT liable.

Jan 7, 2002 (Monday) Che Bassig

Losses for which the insurance coverage includes:
Losses caused by the connivance of the seller and injury suffered by the negligence that
amounts to bad faith; the loss the proximate insured cause of which is an accepted error; loss for
which the risks insured against is the remote cause of the loss. For instance you have this person
who insured his house against fire, the neighbors house caught fire, the neighbors flock to his
house and cause damage, he cannot recover because the fire is the remote cause of the damage
on his house.

Sec. 91
The insured must give notice without unnecessary delay. If proof is required, he must bring
with him the necessary proof whenever a loss is incurred. Usually when you file a claim most
people rely on the insurance agent.
If the insurance company has rejected the claim, but he did not invoke delay in filing as a
ground of objection or any other grounds, then it would be waived as a defense in a case suit.
This is normal for a claim of motor vehicle insurance. The insurance company will ask police
report, a photograph of the damaged portion, and get estimates from an accredited shop. If the
insurance company did not tell the insured that he needs, for the example photographs, he
cannot latter on say that the insured failed to substantiate the loss with a photograph.
Delay will also be excused is caused by a misrepresentation by the insurance agent that he will
take care of everything.

He cannot obtain despite reasonable delays suffered to show that the reason why he cannot
produce such certificate because the certificate required by court not available. For example fire
insurance, the insurance company will ask report of investigator.
You have this case where the person insured his premises he was leasing it to a restaurant, by
new years eve, he and his cook went out to look at the fire works, he neglected the gas range,
and a fire broke out. He went to file a claim, the arson investigator conducted an investigation
but never submitted his report. The investigator immigrated to the US and his whereabouts
unknown. It is enough to show that they cannot submit report of arson, not because the fire was
caused by arson but that the investigator immigrated.

In case of loss and the insurance company pays, it is subrogated to the rights of the insured and
he can collect from the wrongdoer. But if the insured has done any act which prevents the
insurance company from running after the wrongdoer, then the insurance company will be
relieved from liability because he will be prejudiced. For example the insured in a motor
vehicle insurance settled with the wrongdoer by accepting P2,500 in settlement. Then he filed a
claim with the insurance company. The insurance company will be subrogated to his rights
against the wrongdoer. The wrongdoer can raise the defense against the insurance company that
there was a settlement. The insurance company therefore cannot be liable- in fact they can get
the money from the insured on the theory of payment by mistake. Also in one case, where an
importer failed to file a claim in the Arrastre operator on time. The court said that the is barred.
The insurance company may be exempt from liability.
Where in the case of a shipping company where the liability in the bill of lading stipulated a
certain amount unless the owner declared a higher value, he can recover a higher claim from the
insurance company.

Double Insurance
This double insurance It exists where the same person is insured by several insurance
separately with respect to the same subject interest.
So there are 5 requisites of double insurance.
Insured must be the same so if a lessor insured a building that he owns, and the lessee insured
it also there is no double insurance for the insurers are different.
There must be several insurers somebody insured his building with FGU insurance and 6
months later on he takes another insurance from FGU, no double insurance.
When the subject matter must be the same the insured let say insured his building and then he
insured his stocks in trade, there is no double insurance for the subject matter is different.
The interest is the same where he insured his property and the proceeds payable to him and
because he mortgaged it, he insured it again but the proceeds are payable to the mortgagee this
time there is no double insurance, the interest covered are different.
The risk must be the same if somebody let say insured his building against fire, then later on
he obtained another insurance policy of course due to volcanic eruption then there will be no
double insurance.
Now double insurance is different from over insurance. The latter insures the property more
than what the property is worth. For example a building is worth P20M and it was insured for
P30M. Normally, as I said in insurance policies, they provide that the insured must disclose the
existence of other insurance policies otherwise the insurance company will not be liable and
that includes even policies he may obtained in the future, that is, it is not limited to policies
subsisting when he was obtained the policy.
And in case of over insurance Sec 94, relays down the different formulas for collecting
indemnity. We see the common theme that the insured cannot collect more than what he lost.
Here is somebody who has a building worth P10M. He insured it with FGU Insurance for P10M
with Malayan for P5M and Pioneer for P5M. So he is over insured by P10M. So under the law
he may decide to collect P10M from FGU, P5M from Malayan, P5M from Pioneer. Now if he
collected let say P5M from Malayan and he is filing a claim with FGU he can only collect P5M
from FGU.
Now if he collected from everybody, he is overpaid by P10M, so he must return it to them
proportionately the over payment. Return P5M to FGU, P2.5M to Malayan and P2.5M to
Pioneer. Now if FGU paid him only because he only filed a claim with FGU, FGU will be
entitled to collect P2.5M from Malayan and P2.5M from Pioneer.
Like in car insurance policies there is just a provision there that if the car is also insured with
another, then the insurance company will only pay proportionately in case of loss. For instance,
you have a car insured with 2 different insurance companies and it was stolen. Lets say that it
is worth P500T, I think you can collect P250T from each insurance company.

Then you have reinsurance, the law defines it as, which is one by which an insurance procures a
third person to insure him against loss for liability for reasons of such original insurance. The
re-insurer is nothing more than liability insurers. Original insurer reinsures risk of another
insurance company. This can go in several layers. You have 5 layers. First layer, you call it
reinsurance, subsequent layers you call it retro-cession. Now it could be automatic like if you
have a treaty maybe 15% of whatever we insure it will automatically be ceded.
Now the court has said a re-insurer cannot intervene in action filed against the original insurer
because his rights may be adequately protected by a separate action, when the original insurer
sues him, then he can raise whatever defenses he can found in the original action.
Just like original insurance, the re-insurers contract is of utmost good faith. That is why the
original insurer must communicate with the re-insurer all the important representation of the
original insured which are material to the risk. Now this is very important like when somebody
offers a reinsurance. You find outoh what kind of policies are you going to issue and where
will you issue these policies. Like this French companywho was ceding auto reinsurance here
and in their proposal they said we will not underwrite casualty policies. Then when the year
ends they will submit a report, here is the income, here is the output. This are the losses paid as
a result of the operation, here is your share in the profits, then when you receive the notice
katakot-takot na casualtyor they will say we will only insure buildings in New Yorksolid
as rock, but you receive claims to losses in Nigeria, which is notoriously corrupt or they will
say they will not insure long term risk.
The re-insurers is presumed as contracts of indemnity against liability and not against damage.
In other words if the original insurer does not pay, your re-insurer will be liable to pay and they
will be ordered to pay. For instance, the original insurer was not able to pay because it was
insolvent and the re-insurers will be liable. They will be required to pay it and the money they
will pay will be held as assets, amongst those to be paid to the creditors of the insurance
company. In other words the re-insurer agrees to rise and fall with the fortunes of the original
If there is a claim, you are creditor, litigate with the reinsurance, they say that it will go through
5 layers. And these could be ceded for all the work. 3% here, 2% there, there you can have
hundreds of re-insurers. If the original insurer paid, they are not going to litigate with every
reinsurance. Sometimes you have this clause, that they will abide with whatever results of the
suit against the insurer to settle the claim. They will follow his fortune.
Original insurers of interest in a contract of re-insurance, this is a new provision which codifies
the case of Wellington Insurance Co, Artex Development Co. had a factory that was burned
during the 60s, the insurance policy is worth P80M, a claim was filed, the insurance is not in
the position to pay so it reinsured abroad, so it needed time to be able to collect, so the defense
raised was that this reinsurance contracts have stipulations for the benefit of 3rd persons,
therefore the original insurer should pursue the claim against the reinsurers. Courts said no!
Because there is no privity of contract, therefore the original insured has the right to run after
the original insurer and not the reinsurer. However if the policy states a Cut Through Clause,
then the original insured can run after the reinsurer. There may be a provision there, the original
insured can directly proceed against the reinsurers and that may be done.

Special Types of Insurance
And the Law talks of special types of insurance. Take Marine Insurance. Our insurance
company use the Lloyds form for marine policies and because they use this form its the
Kingridge? jurisprudence that should be consulted in the interpretation of marine policies
because every phrase or word has a meaning.
Now if the vessel is insured, it need not only cover the vessel but all that is necessary for
navigation. If the insurance is in cargo, it only refers to articles loaded for commerce and not the
provisions of the crew and passengers for they are not cargo. Usually goods stored on deck are
not included because they are riskier, they are first ones jettisoned.
If it is an all- risk policy, the court has said that all insured has to prove that the property was
lost. He does not have to prove the cause or that it was due to fortuitous events. All he has to
prove is that was lost and it up to the insurance company to raise the defense. The only defense
that they could raise is that the loss was due to the misconduct of the insurer himself, like he
planted a bomb with the cargo or it is one of the excepted risks under the policy. So those would
be the defenses available.
But if it is not an all-risk policy, that will only cover perils of the sea and there are 2 requisites
for that: it must be due to unusual violence like waves or wind or must be connected with
navigation. In other words, the loss must be due to a fortuitous event. If cause is ordinary
typhoon, that is not peril of the sea. While I dont argue with the Cathay Ins. Case, where some
pipes were imported from Japan and when water seeped through the hull of the vessel, the pipes
became rusty. The court said the insurance company was liable because this was peril of the
sea. And no there was no unusual movement of the water and the sea. Now as we said, peril of
the sea means there must be fortuitous event. And if it is due to the fact that the ship is not sea
worthy, that is not covered but it is peril of the ship. The Roque case, where a barge ran a leak,
the insurance company is not liable for the loss of the cargo because it is peril of the ship.
Now the policy also mentions Barratry. In that case, what happened is that the captain of the
ship decided to cut loose the barge and the insured was trying to argue that it was barratry. Of
course, barratry means loss due to the misconduct of the master or the crew, but this is not
misconduct. It is negligence, error in judgment of the captain but not barratry.
And the policy also insures against arrest of the vessel. Now you have this Malayan Ins. Case
the Supreme Court through Justice Romero said that the vessel was ordered to be arrested
through court order. The court said the insurance company is liable for that, but you see, the
phrase arrest of the ship has a well settled meaning in English jurisprudence, lasting for over
200 years which means arrest due to an order of an administrative or executive official. But it
does not include arrest by order of the court. That is the interpretation of English courts for
centuries. Our SC did not follow.
Now under Section 100, the owner of the vessel has insurable interest even if he chartered it and
the charterer agreed to pay in case of loss. But, the insurance company is only liable for the
amount he did not recover from the charterer. The vessel for instance is worth P10M the
charterer paid P5M then he can only collect P5M form the insurer. Because again, insurance
again is a contract of indemnity the insured can only collect what he lost.
Freight refers to the benefits derived by the owner of a chartered vessel who carried goods and
that can be insured. Now the owner of the property can also insure not only the property but
also the expected profits. Now the charterer has an insurable interest to the extent that can be
indemnified for his loss.
Now I chartered this vessel and agreed to pay P500T and I look around for goods that I can
transport. Now I will pay only if the vessel arrives safely and I was able to solicit goods paying
freight of P600T. So if the vessel sinks, I need not pay the owner anymore, I only lost a profit of
P100T. That is all I can collect.
In marine insurance, the parties are bound to communicate all information material to the risk
because usually the vessel is out there and cannot be inspected. That is why in one case, where
the insured did not disclose that the vessel had been recently involved in a collision, of course
that was material. Failure to disclose it amounts to concealment.
And in marine insurance the belief and expectation of 3rd persons is material and must be
disclosed. If for instance surveyor inspected a vessel and gave its certification that is it is not sea
worthy that must be disclosed.
And insured is presumed to have knowledge of the loss if it might have been received in usual
rate of communication. I am not a maritime lawyer but according to Professor Tessoro, Llyods
can monitor every vessel in a given point in time, anywhere in the world.
Now concealment in maritime insurance is different from ordinary policies. Despite the
concealment, the insurance company would still be liable unless the loss was due to the fact
concealed. For example, the insured misrepresents that the vessel is from Liberia when it was
actually not.
Also where there is want of necessary document or loss of necessary papers and this is
concealed, then the vessel is lost by some other cause like it encountered a perfect storm, then
the insurance company must still be liable.
Representation as to expectation in the absence of fraud does not avoid the maritime policy.
Like somebody is insuring his vessel his trip from Manila to Cebu. So the Insurance company
will ask, when will you make the trip? And he said April. So that was his expectation but the
vessel became available only in June. There is no misrepresentation when the delay is
And in marine insurance, there are 4 implied warranties namely:
Vessel is seaworthy
It will not deviate from the agreed voyage
It will not engage in illegal ventures
That its nationality, neutrality and its cargo is expressly warranted that the ship will carry the
necessary documents to show these facts
However, there may be a waiver of warranty of seaworthiness. So, if there
is waiver, the insurance company will be liable even if the vessel is not seaworthy. If there is no
waiver, the insurance company will not be liable. The court has said it also applies with the
insurance of the cargo. The owner cannot say that he did not know that the vessel was not
seaworthy. The court said that it is the responsibility of the owner of the cargo to ensure that he
is dealing with a seaworthy vessel. So that case where a barge sprang a leak, then he was saying
he was not liable because the barge was not seaworthy, the court said you are responsible to see
to it that the vessel is seaworthy.
Now a vessel is seaworthy when it is fit to perform the services and encounter the perils of the
voyage contemplated. And the implied worthiness is complied with when the vessel is
seaworthy, when it commences the voyage. However, if the policy is for a specific length of
time let us say a year, then the vessel must be seaworthy, every time it leaves for a voyage. If it
is an insurance of the cargo with different ships, every vessel must be seaworthy. If you have
equipment from Japan which will be transported by a Japanese vessel from Tokyo to Manila,
and Manila to Cebu by a domestic vessel, all the vessels must be seaworthy. Now the
seaworthiness not only applies to the structure of the ship but it must also be properly loaded.
For example, the sides of vessels are painted in two colors red and black, the dividing line
means that the water cannot go beyond that line, if it goes beyond, it means it is overloaded. It
must also be provided with a competent master, one who is fully qualified and had passed all
examinations. Then you must also have the requisite equipment, radar, radio etc. Now if there
are different portions of the voyage, then the vessel must be seaworthy for every portion. If the
vessel becomes unseaworthy and there is unreasonable delay in making repairs, then the
Insurance co. is exempted from liability. The vessel must also be seaworthy for the type of
cargo, e.g. if it is to transport fruits and vegetable the vessel must have refrigeration.

January 9, 2002 By: Maria Micaela Anna Tujan Cayton Aka: Gorgeous

Secs. 121 126. The Voyage and Deviation
Secs. 121-123. For example, there was a case where the ship was supposed to sail from Paris to
New York, but it deviated to London first to pick up more cargo (greedy kasi eh!!!). Then it
sank before it could reach New York. The Court held it was deviation because it commenced an
entirely different voyage. Hence the insurer is not liable.
Another case: some one in India chartered a ship, and started soliciting cargoes but he still did
not pay the ship owner for the charter. So the ship owner sought to impound the ship to bar its
departure. But knowing that Indias government authorities are very corrupt the charterer was
able to leave after bribing customs authorities.
` Part of the cargo was soybeans to be brought to Manila. The charterer knew that the ship
owner might get an arrest order in Manila so he made the ship proceed to Singapore instead.
However, he made the ship stay outside Singapores maritime zone. He told the cargo owners to
pay the ship owner before they could get their cargo, and if they wont, he will proceed to
Vietnam and sell their cargo. The cargo owner of the soybeans sought to recover the value from
the insurance policy but the Court held the voyage was a deviation and so he could not recover.
Section 124 enumerates instances when deviation is proper. An example of (a) is when there is
a typhoon. An example of (b) is when the ship suddenly has engine trouble. An example of (c)
is when the shipper receives reports of pirates waiting in ambush, so must deviate. And (d) is
based on humanitarian considerations. Any other deviation relieves the insurance company. Just
like that ship that was supposed to sail from Paris to New York, once there was improper
deviation the insurer was relieved from liability.

Secs. 127-137. Loss
A loss may be either partial or total, and a total loss may be either actual or constructive. Now,
Sec. 130 enumerates what causes actual total loss. Here are examples for each:
(a) ship burned;
(b) it sunk or was broken up, making it irretrievable;
(c) in a decided case, palay was shipped but it came into contact with water. It arrived as
seedlings. There was loss because it was different from the cargo shipped and insured. Another
example a race horse was shipped, but in the ship it panicked, jumped and kicked around,
breaking its legs. There is loss because the race horse can no longer race with broken legs.
(d) for instance, it was ordered seized.
Section 133 says that if the vessel cannot continue but the cargo is transferred, the
marine policy on the cargo remains. Sec. 134 makes marine insurer liable for the cargo and for
additional expenses, such as discharge of cargoes, storage in a warehouse, additional freight.
This is because all this is done for account of the insurance company, under the principle of
sue and labor expenses- insurer is liable because the law presupposes that he is amenable for
such expenses to be incurred, lest loss is suffered which makes him liable for general average.
But when actual loss is suffered, there is no need for abandonment and the insurer is liable for
the actual loss. Sec. 136 says that the insurer is not liable for particular average loss. But in
London, the practice is that this can be adjusted, the adjuster makes a statement of how much
everyone contributed, then he makes the shipper or insurer sign it before the cargo is released.

Sec. 138 155. Abandonment
Section 139 talks of constructive total loss, where the cargo owner can abandon and claim for
loss, except when the loss is so extensive that it would be more practical to buy a new one.
Abandonment cannot be partial or conditional when one abandons, it must be abandonment of
the entire thing. It must be made within a reasonable time as well (Sec. 141). The insured
cannot be segurista!!
Now, Sec. 142 says that if the information relied upon is incorrect but abandonment was
already made, renders the abandonment ineffectual. There was this case where oranges from
Israel were shipped. Then the ship bumped a wharf, and the consignee of the cargo got
information that the oranges were extensively damaged. He abandoned it but later on it was
learned that the oranges were (naturally) ripening through the course of the voyage, prompting
the captain to sell it. Ineffectual abandonment!
Under 146-147, once interest is transferred, the insurer is entitled to the vessel salvaged or the
proceeds of the salvage. An example of Sec. 148 is when expenses are ordered by the captain to
repair the vessel, then abandonment is made, the order done in good faith are for the risk and
benefit of the insurer.
Under Sec. 150, the acceptance of an abandonment may either be express or implied. An
example of implied acceptance is when the insurer does not expressly say he accepts
abandonment but gives orders to the captain and crew.
Under Sec. 151 and 152, once abandonment is made, it is conclusive and irrevocable, unless the
ground relied upon is unfounded (as in the orange case, supra).
Now, an illustrative case of Sec. 153 is the Oriental Assurance case which was asked in the bar.
There was a shipment of logs, placed in two barges. One of the barges sank. The value of the
logs that sank is more than of the value of the logs in the other barge that didnt sink.
Abandonment was sought but the Court held it cannot be done, because only one insurance
policy covered both barges, hence it is an indivisible contract. To compute the loss the value of
all the logs both barges must be added before subtracting the loss.
Under Sec. 154, if the insurer refuses to accept a valid abandonment, the shipowner may sell the
vessel for scrap value and can sue the company for the balance.

Sec. 156 166. Measure of Indemnity
A valuation in a marine insurance policy is conclusive and if it is a devalued policy, where it is
underinsured and partial loss occurs, the loss will be proportionately shared. The shipper is
considered an insurer as to that part of the loss he must suffer due to the devalued policy. This is
done in order to avoid pointing whose share was damaged.
Now, an example of Sec. 158: a shipment of sugar, expected profit is P100 thousand. 50% of
the shipment was lost, can collect P50 thousand expected profit from the insurer, because
profits were separately insured. But under Sec. 162, if sugar worth P100 thousand if sold
wouldve made P120 thousand, but damaged value was only P50 thousand, only half of the
expected profits can be collected as lost profits. Hence he can collect only P10 thousand.
Sec. 163 is another provision pursuant to sue and labor expenses, because it is assumed the
insurer will be willing to incur such expenses to avoid loss. Sec. 164 talks of general average
loss, that goods jettisoned to save a vessel enables the owner of the jettisoned goods to recover
from other cargo owners the general average.

Sec. 167 173.
Section 168 talks of alteration. For example is this case where the Supreme Court ruled that
there was alteration, when the building is insured as a bookstore, but it was converted into a
restaurant, also because there is an increase in risk. Another example is when one stores canvass
in the premises (inflammable), or when the place is insured as a residence but used to store
leather and other inflammables.
Section 169, for example is when a place is insured as a residential condominium but is
converted into an office condominium, there is no increased risk, and no alteration. Now this
was asked in the bar: a policy answers only for hostile fire, not friendly fire. Friendly fire is one
which burns where it is intended to burn, like a gas range fire, or a bonfire. However, fire which
was initially friendly can convert into hostile fire.
There was a case where the restaurant was insured under a fire policy. The restaurant sought to
recover indemnity for soot on the wall caused by a gas range burner. This discoloration on the
wall was caused over time because the gas range was positioned in such a way that the fire was
near the wall. Of course they cannot collect, it was friendly fire! Kasalanan nila kung bakit nila
nilagay ang lutuan sa tabi ng pader! Bobo! Eng-eng!
Normally the insurance policy provides that insurer is not liable for loss caused due to war or
rebellion and the like. The Supreme Court held in a case that insurance companies are not liable
for buildings burned during World War II because the Japanese ordered those to be burned. But
if lets say that in the midst of those burning buildings done under the orders of the Japanese,
another building was independently burned (read: nakisali; saling kit-kit) that one building may
recover under the insurance policy.
Normally the policy has a proviso that if there is underinsurance, insured must share in the
partial loss suffered. Unlike in marine insurance where the law specifically says this, under fire
insurance this is a standard provision placed by insurance companies.
Under Sec. 171. For instance, if there is a loss, and the building cost P250 million to build, the
insurance wont pay the same amount if it is an old building. The value will be adjusted to
reflect depreciation suffered by the building before it was burned. There was this case, where
the San Miguel Corporation building claimed indemnity for fire that occurred in 1983 during
construction of the building. But at that time, that specific year, the value of construction
materials skyrocketed. The policy had a provision regarding underinsurance. San Miguel sought
indemnity, computing its losses based on the latest, sky-high value of construction materials.
San Miguel defended itself by saying that they are not underinsured, and for this purpose used
the old prices of construction materials as basis of its computation. The Supreme Court held that
San Miguel cannot use this double standard, it must use the same standard of prices to
determine if it underinsured the building and how much losses it suffered due to the fire.
A fire insurance policy has a stipulation that the insurer has the option to rebuild instead of
paying for the loss, much like motor vehicle insurance where insurer san opt to have the car
repaired instead of paying. But when the insurer exercises this option, the contract of insurance
is novated. It turns into a contract for piece of work and insurer becomes liable for quality of the
work done.
For example, Jack handled this case where my client owned dam trailers. The hydraulic lift
needed to be fixed. The insurer said they will have it fixed. They bought an old cannon barrel to
substitute the hoist of the thingamajig that needed replacement. It did not work. Jack sued and
the court ordered the insurer to pay damages and profits. Insurer gave a defense that the
insurance contract had a proviso that the company is not liable for consequential damages. The
Court ruled in favor of the argument Jack had, that it was a novated contract, and that Jacks
client were entitled to collect under the novated contract of piece of work under the Civil Code.

Section 174.
For example: personal accident insurance, third party liability insurance, contractors all risk
insurance (to indemnify for injury caused by falling debris from a construction area). In the
1950s a loss of thumb would rake in P6 thousand for the victim. Easy money! Ang daming
nawawalan ng daliri noon! When the indemnity was lowered, wala nang nawawalan ng daliri
Now, Philippine insurance policies usually state that if the death is due to a voluntary act, the
insurer will indemnify only if it is due to an external physical violent force. But in other
countries this proviso does not appear in the contract. In the USA, there was a case where this
guy heard that restricting the oxygen supply to the brain resulted in the total orgasmic
experience!!! So he put his head in a plastic bag and masturbated (doctrine of self help J
obviously, solo flight, cause whod wanna hang out with a guy like that??!). Surprise surprise,
he died. The US Courts ruled that his heirs could collect, because this was an accident. But the
Courts in Canada ruled the heirs cannot collect in this case because the person knew (or
shouldve known) that death was a foreseeable risk! Moral of the story? Stick to the tried and
tested modes of achieving an orgasm
Well, a good example of a genuine accident is when there is a boxing contest and one of the
boxers slipped in such a way that he died. The Courts ruled that this is accidental because in a
boxing match there is no intent to kill (nor is there an intent to die J).
There is this case Jack doesnt agree with A person showed off his gun to another person and
to prove it was empty, he aimed at his temple and pulled the trigger. Oops, booboo, may bullet
pala. He died. Supreme Court held heirs can collect because it was a mistake. But Jack says it is
common sense not to aim a gun at anyone, even oneself, even though the gun is empty. Jacks
viewpoint is more sensible, really!
An example of accident again: a seaman who jumped into the sea to save a child who fell
overboard. The seaman died. Seamans heirs can collect under accidental death, because he had
no intent to die.
A usual accident policy says it wont answer for death or injury caused by murder or assault. If
desired for the policy to cover these instances, the insured must pay extra.
In this case of FinMan Insurance, the insurance policy did not contain the abovementioned
clause. The insured was innocently waiting for public transportation along a sidewalk, when
someone approaches him and stabs him just like that. The Court ruled in favor of collection, and
said that one must look at the viewpoint of the insured to determine if the injury caused was
accidental. Since the bystander insured did not expect to be killed and because the policy did
not contain the clause mentioned above, the insurer is liable.
Another case: A group of policemen and a security guard were chasing a robber. The robber
fired killing the security guard. It was ruled as accidental death, because the victim was chosen
at random. Hence the guards heirs can collect.
Another case: if a robber holds up a bus he was riding and before he leaves shoots at one of the
passengers. Accident.
Jack handled this case before where in this restaurant, a customer tried to surreptitiously leave
without paying. The waiters caught him but in the course of the melee, he was able to
momentarily leave the premises. One of the customers wanted to avoid the fracas, so he paid for
his order and left. He had just stepped out of the door, when the estafador customer saw him
and thought he was one of the waiters out to catch him. The estafador shot the inocente. The
Court ruled that the heirs of the inocente could collect because there was an error in persona,
making the death accidental. Even if the act is considered under the Revised Penal Code as
homicide through reckless imprudence, under Insurance Law the death is considered accidental.

January 10 Lyn Torio

SEC. 175. A contract of suretyship is an agreement whereby a party called the surety guarantees
the performance by another party called the principal or obligor of an obligation or undertaking
in favor of a third party called the obligee. It includes official recognizances, stipulations, bonds
or undertakings issued by any company by virtue of and under the provisions of Act. No. 536,
as amended by Act No. 2206.
A surety is solidarily liable with the principal. The Civil Code provisions on guaranty are
applicable to suretyship in a suppletory character. The liability of the surety is, however, limited
to the amount of the bond. (SEC. 176. The liability of the surety or sureties shall be joint and
several with the obligor and shall be limited to the amount of the bond. It is determined strictly
by the terms of the contract of suretyship in relation to the principal contract between the
obligor and the obligee) For instance, an accused applies for a bond with an insurance company.
The obligee (the court) is not concerned if the premium is not paid. If the accused absconds, the
court will proceed against the insurance company.
If the bond is not accepted, the principal is entitled to the return of the premiums paid.
However, taxes (e.g., documentary stamp tax) cannot be refunded. In some instances, the
insurance company will charge a service fee because the insurance company took time to
review the application for the bond. For instance, the manager took time to go over the papers,
the clerk took time to type the application, etc.
But if the bond was denied because there was fault on the part of the insurance company, the
applicant is entitled to the return of the premiums paid AND the taxes paid. Example: Courts
require insurance companies to get a clearance. The bond which the accused applied for was not
approved because the surety company failed to get a clearance (because it had an outstanding
obligation with the court because it failed to make good on a prior bond). In this case, the
applicant is entitled to the return of the premiums paid and the whatever taxes he has paid as
Continuing bonds (e.g., judicial bonds) remain in force until the case is finally terminated. The
insurance company is entitled to charge premiums every year.

SEC. 179. Life insurance is insurance on human lives and insurance appertaining thereto or
connected therewith.

3 Principal types:
1. Term for a fixed period (e.g., for 5 years, for 10 years, etc), after that it expires. This is the
least expensive type of insurance. It does not have any cash surrender value.
2. Whole life the insured pays premiums up to a certain time and then he will be insured up to
a certain age or until he dies, whichever comes first. For example, the policy states that the
insured will pay premiums until hes 65. After that hell be insured until hes 96.
3. Endowments For example, the policy states that if the insured reaches 60, the insurer will
pay him annuities for life. This is the most expensive type of life insurance.

SEC. 180. An insurance upon life may be made payable on the death of the person, or on his
surviving a specified period, or otherwise contingently on the continuance or cessation of life.
Every contract or pledge for the payment of endowments or annuities shall be considered a life
insurance contract for purposes of this Code.
In the absence of a judicial guardian, the father, or in the latters absence or incapacity, the
mother, of any minor, who is an insured or a beneficiary under a contract of life, health, or
accident insurance, may exercise, in behalf of said minor, any right under the policy, without
necessity of court authority or the giving of a bond, where the interest of the minor in the
particular act involved does not exceed P20, 000. Such right may include, but shall not be
limited to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the policy,
and giving the minors consent to any transaction on the policy.
Note: the P20, 000 has been amended by the Family Code. Now its P50, 000. Parents dont
have to give a bond or apply for guardianship proceedings.

Go back to the Nario case.

Nario vs. Philamlife (L-22796, June 26, 1967) held that a father or mother or a guardian cannot
surrender a life insurance policy or obtain loan therefrom where a minor child is an irrevocable
beneficiary, without judicial authority. Because of Section 180, the father (or in his absence or
incapacity, the mother) is now authorized to do acts of ownership (e.g., obtaining a policy loan,
surrendering the policy) without judicial authority, so long as the interest of the minor does not
exceed P50, 000. The interest of the minor is based on the face value of the policy and not on its
cash surrender value.

SECTION 180-A. The insurer in a life insurance contract shall be liable in case of suicide only
when it is committed after the policy has been in force for a period of 2 years from the date of
its issue or of its last reinstatement, unless the policy provides a shorter period; provided,
however that suicide committed in the state of insanity shall be compensable regardless of the
date of commission.
The insurance company is not liable because the presumption is that the insurance was taken in
contemplation of suicide. But if the suicide is committed by the insured while he was in a state
of insanity, the insurance company is still liable. Thus, if Miriam commits suicide, the
beneficiary can collect.
Who has the burden of proving suicide? The basic instinct of self-preservation militates against
the commission of suicide. Thus, it is incumbent upon the party alleging suicide as a defense,
especially in actions involving insurance policies to prove it by clear and convincing proof.

SEC. 181. A policy of insurance upon life or health may pass by transfer, will or succession to
any person, whether he has an insurable interest or not, and such person may recover upon it
whatever the insured might have recovered.
The insured may assign a life insurance policy if the policy is payable to his estate or his legal
representative or where the insured has reserved the right to change the beneficiary. If the
policy is payable to an irrevocably appointed beneficiary, the insured cannot assign it because
that will prejudice the vested interest of the irrevocable beneficiary.
Q. When are the proceeds of a life insurance payable to the estate of the insured considered to
be conjugal?
A. The proceeds of a life insurance policy payable to the insureds estate, on which the
premiums were paid by the conjugal partnership, constitute conjugal property. Thus, half
belongs to the husband exclusively and the other half belongs to the wife. If the premiums were
paid partly with paraphernal and partly with conjugal funds, the proceeds are in the like
proportion paraphernal and conjugal (Bank of the P.I. vs Posadas 56 Phil 315). However, where
the proceeds are payable to an irrevocable beneficiary such proceeds belong exclusively to the
beneficiary although the premiums were paid out of conjugal funds (Del Val vs Del Val 29 Phil

SEC. 182. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the
validity of a policy of insurance upon life or health, unless hereby expressly required.
Q. Is consent of the beneficiary necessary for the validity of an assignment of a life insurance
A. If the designation of the beneficiary is irrevocable, the consent of such beneficiary is
necessary because he has a vested right on the policy that cannot be defeated by an assignment
or transfer without his consent. However, the consent of the beneficiary is not necessary where
the designation is revocable because in such case the beneficiary has no vested right.

SEC. 183. Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or health is the
sum fixed in the policy.

(My note: This is actually covered by Section 174. This is also related to compulsory motor
vehicle insurance, which is Sections 373-389 and the provisions are too long for me to
reproduce here. Bahala na lang kayong magbasa. This is his lecture and parts of the Perez
Whether or not a third party can sue the insurer depends upon the wording of the contract. For
instance, in third party liability insurance contracts (TPL contracts are usually motor vehicle
insurance contracts---you cant have your car registered if you dont have TPL at the least),
third parties can sue the insurer directly. If the indemnity is against actual loss or payment, third
parties cannot sue.
The injured party for whom the contract of insurance is intended can directly sue the insurer.
Thus, in a vehicular accident, a person injured by the motor vehicle covered by third-party
liability insurance may directly sue the insurer. The general purpose of statutes enabling an
injured person to proceed directly against the insurer is to protect injured person against the
insolvency of the insured who causes such injury and to give such injured person a certain
beneficial interest in the proceeds of the policy.
Where an insurance policy insures directly against liability, the insurers liability accrues
immediately upon the occurrence of the injury upon which the liability depends, and does not
depend on the recovery of judgement by the injured party against the insured.
Jack: Usually, these contracts contain a provision that in case of suit against the insured, the
insurance company will defend the case. For instance. Their client is this construction company
in Mindanao with an insurance contract with X. This physician had a violent argument with a
payloader belonging to the construction company. He filed an action court and was awarded
P500, 000 in moral damages because of a diminished sex drive. Plaintiff was able to levy on the
equipment belonging to the construction company and the sheriff sold the equipment at very
low prices. The construction company sued the insurance company. The insurance companys
defense was, wala pang final judgment. Under the contract of insurance, the insurer had two
obligations: indemnity and to defend the insured. Jack said, Were not suing you under you
first obligation. Were suing you because of your negligence in defending the case.

The business of Insurance
You need a certificate of authority from the Commissioner before you can engage in the
insurance business. A certificate of authority is valid for one year. Its issued on 1 July of a
given year and valid up to June 30 of the following year.

Q: What is the meaning of margin of solvency?
A: Margin of solvency is the excess of the value of an insurance companys 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 a foreign
company, over the amount of its liabilities, unearned premiums and reinsurance reserves in the
Philippines (Section 194)

Q: What is the margin of solvency required of insurance company? (Just try to look for it in the
Insurance Code, coz there was something wrong with Lyns file. File contained weird

Note also that Jack Discussed Sec. 241 and 242. (As to Claims Settlement)

AGENTS AND BROKERS: Must be licensed.. Soliciting for compensation without a license:
criminally liable. Rebate of premiums is also prohibited. Agreements regarding kickbacks cant
be enforced because they are illegal.


Its unlawful for any person to insure abroad if the risk is located in the Philippines because the
Commissioner has no jurisdiction over foreign insurers, but if the arrangement is CIF, its valid
because the risk occurs abroad.

Rating organizations they give a range of premiums and say that anyone who does not
prescribe the premiums prescribed by us, were not doing business with you. Its a valid
exercise of police power recognized in the US because if the premiums are no longer viable, the
business collapses, and the public is prejudiced. Also, there is no suppression of business.

Here, it covers only 2 instances: fire insurance and motor vehicle insurance.

Every vehicle must have compulsory insurance, otherwise you cant drive it on the road.
Even if the policy provides that final judgment is needed before liability attaches, its a void
Who can file a claim: Jack: Lawyer goes to a conference and his secretary is with him to take
down notes. If they have an accident she cant file a claim because her presence in the vehicle
arises out of the course of employment. But if theyre out on a date she can file. If the lawyer is
married I doubt if shell file a claim.

Q: How can the insurer be held liable under the no fault indemnity clause in a motor vehicle
third party liability insurance?

A: An insurer may be held liable under the no fault indemnity provision without the necessity
or proving fault or negligence of any kind, provided the following requisites are present:
1. The claim is for death or injury to any passenger or third party;
2. The total indemnity in respect of any one person does not exceed P 5, 000; and
3. The necessary proof of loss under oath to substantiate the claim must be submitted

(Note: Jack said that in case of death, you submit the death certificate. In case of injury, you
submit a medical report. In ALL cases, however, you have to submit a police report)

Q: Which insurer is liable under the no fault indemnity provision?
A: A claim under the no fault indemnity provision may be made against the insurer of one
motor vehicle only. Such claim may be made directly by the injured party against the insurer as
1. In 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;
2. In any other case, claim shall lie against the insurer of the directly offending vehicle.

Q: What right does the insurer paying no fault indemnity have?
A: 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 (Section 378). It is of no moment that
that the vehicle insured is not the one that caused the accident since the law provides that the
insurer paying the claim may recover from the owner of the vehicle responsible for the accident
(Perla Compania de Seguros case)

Jack: The no fault indemnity clause is without prejudice to the claimants getting more. For
instance, the claim is for 15, 000. Under the no fault indemnity clause, he gets 5, 000. But this
doesnt mean that the 10, 000 is barred. Only that the claimant has to prove that there was
negligence. Its void for the insurance company to require the claimant to waive his other
claims as a condition precedent to the release of the P5, 000 (which the claimant is entitled to as
a matter of right anyway. And kapal naman ng insurance company kung ganun, di ba?)

Two periods: you have to file the claim with the insurance company within 6 months from the
time of the accident, otherwise its deemed waived. Then you have to go to court within one
year from the denial of the claim, otherwise your claim will be barred. (See Section 384)

Importance of a license:
If the insured himself is the driver, he has the right to recover damages even if his license has
expired. If the driver is merely authorized by the owner (e.g, your chauffer or your friend or
your boyfriend), then the authorized driver must have a valid license (i.e, hindi expired),
otherwise the claim is barred.