INSURANCE LAW l Atty.
Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
GENERAL PROVISIONS
SECTION 1
Section 1. This Decree shall be known as 'The Insurance Code'.
Origin of present day insurance
Its origin is found in the mutual agreements among merchants of the
Italian cities in the early middle ages engaged in common shipping
ventures for distributing among the mutual contractors, the loss falling
upon any one by reason of the perils of navigation.
Development of insurance in England
1. Italian merchants founded trading houses in London and brought
the custom of insuring against the hazards of trade.
2. Insurance questions were decided by merchant courts and
merchant customs.
3. During the middle of the 18th century, the First English Insurance
Act was passed, where England’s common law courts began taking
cognizance of insurance cases and established a special court for
the trial of marine insurance cases.
4. Lord Mansfield was appointed as Chief Justice of the Court of King’s
Bench. He is likewise called as the Father of English Commercial
Law.
TN: The development of insurance has followed the same lines in the
United States as in England.
Development of insurance in the Philippines
1. Pre-Spanish times when the political unit was then the family – if a
member of the family died, it was borne by the family.
2. Communities like the barangays developed, and assistance was
extended accordingly.
3. Mutual benefit societies and fraternal associations were organized
for the purpose of rendering assistance to their members.
4. Lloyd’s of London appointed Stratcham, Murray & Co. Inc. as its
representative in the Philippines. Insurance then was limited to
non-life insurance.
5. 1898 when life insurance was introduced with the entry of Sun Life
Assurance of Canada.
Social Insurance
Government sponsored programs, i.e. GSIS and SSS.
RIGHT OF SUBROGATION OF INSURER TO RIGHTS OF
INSURED AGAINST WRONGDOER
Basis of right
Subrogation is the substitution of one person in place of another with
reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies and securities.
Subrogation has its roots in equity. It is designed to promote and to
accomplish justice and is the mode which equity adopts to compel the
ultimate payment of a debt by one who is in justice and good conscience
ought to pay.
Purpose of subrogation condition in policy
1. To make the person who caused the loss, legally responsible for it
2. To prevent the insured from receiving a double recovery.
Right of subrogation applicable only to property insurance
The value of human life is regarded as unlimited and therefore, no
recovery from third party can be deemed adequate to compensate the
insured’s beneficiary.
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Privity of contract or assignment by insured of claim not
essential
The right to subrogation is not dependent upon any privity of contract
or upon written or assignment of claim. It accrues simply upon payment
of the insurance claim by the insurer.
The subrogation receipt, by itself, is sufficient to establish not only the
relationship between the insured and the insurer, but also the amount
paid to settle the insurance.
Loss or injury for risk must be covered by the policy
The loss or injury must be covered by the policy for the insurer to be
subrogated of the rights of the insured.
Right of insured to recover from both insurer and third party
The right exists after indemnity has been paid by the insurer to the
insured who can no longer go after the third party. He can only recover
once. However, if the insurance company has not paid the full amount
of injury or loss, the aggrieved party, not the insurer, is entitled to
recover the deficiency from the person liable.
Right of insurer against third party limited to amount
recoverable from the latter by the insured.
Insurer is subrogated merely to the rights of the insured. It cannot
recover full amount paid to the insured if it is greater than that to which
the insured could lawfully lay claim against the person causing the loss.
Exercise of right of subrogation by insurer discretionary
The insurer has the discretion whether or not to exercise its right to
subrogate.
Loss of right of subrogation by act of insured or insurer
Should the insured, after payment from the insurer, release the
wrongdoer from liability, the insurer loses his right to subrogate. In this
case, the insured is in obligation to return to the insurer the payment
made.
Similarly, when the insurer pays the insured the value of the loss without
notifying the carrier who has, in good faith settle the claim for loss of
the insured, the settlement is binding on both insured and the insurer,
and the latter cannot bring an action against the carrier on his right to
subrogate.
CONSTRUCTION OF THE INSURANCE CODE
It is a settled rule of statutory construction that when a state has been
adopted from some other state or country and said statute has
previously been construed by the courts of such state or country, the
statute is usually deemed to have been adopted with the construction
so given.
SECTION 2.
Section 2. Whenever used in this Code, the following terms shall have
the respective meanings hereinafter set forth or indicated, unless the
context otherwise requires:
(a) 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.
A contract of suretyship shall be deemed to be an insurance
contract, within the meaning of this Code, only if made by a surety
who or which, as such, is doing an insurance business as
hereinafter provided.
(b) The term doing an insurance business or transacting an insurance
business, within the meaning of this Code, shall include:
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
(1) Making or proposing to make, as insurer, any insurance
contract
(2) Making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety
(3) Doing any kind of business, including a reinsurance
business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code
(4) Doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no
profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed conclusive
to show that the making thereof does not constitute the doing or
transacting of an insurance business. "
(c) As used in this Code, the term Commissioner means the Insurance
Commissioner.
LEGAL CONCEPT OF INSURANCE
A contract of insurance is an agreement by which one party (insurer) for
a consideration (premium) paid by the other party (insured), promises
to pay money or its equivalent or to do some act valuable to the latter
(or his nominee), upon the happening of a loss, damage, liability, or
disability arising from an unknown or contingent event.
In insurance, the insurer, for a stipulated consideration, undertakes to
compensate the insured for a future loss, damage or liability on a
specified subject caused by a specified event or peril.
DEFINITION OF INSURANCE FROM OTHER VIEWPOINTS
1. Economic
2. Business
3. Mathematical
4. Social
Economic
Insurance is a method which reduces risk by transfer and combination
of uncertainty in regard financial loss.
Business
A plan by which large number of people associate themselves and
transfer to the shoulders of all, risks that attach to individuals. Insurance
may also be looked upon as an important part of the financial world,
where insurance serves as a basis for credit and a mechanism for
savings and investments.
Mathematical
Insurance is the application of certain actuarial principles to calculate
the chance of loss.
Social
Social device whereby the uncertain risks of individuals may be
combined in a group and thus made more certain, with small periodic
contributions by the individuals providing a fund out of which those who
suffer losses may be reimbursed.
In other words, it is a plan by which the losses of the few are paid out
of the contributions of all members of a group.
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DETERMINATION OF THE EXISTENCE OF THE CONTRACT
Nature of the contract
The character of insurance is to be determined by the exact nature of
the contract actually entered into whatever the form it takes or whatever
name it may be called.
Under the Code, a contract of suretyship shall be deemed as insurance
contract “if made by a surety who or which as such, is doing an
insurance business,” within the meaning of the Code. But strictly
speaking, a contract of suretyship is entirely different from a contract of
insurance.
ELEMENTS OF THE CONTRACT
1. Subject matter – the thing insured. In marine and fire
insurance, it is the property; in life, health or accident insurance,
it is the life or the health of a person; in casualty insurance, it is
the insured’s risk of loss or liability.
2. Consideration – it is the premium paid by the insured. Its
amount is principally based on the probability of loss and extent
of liability for which the insurer may become liable under the
contract.
3. Object and purpose – it is the transfer and distribution of risk
of loss, damage or liability arising from unknown or contingent
event through the payment of a consideration by the insured to
the insurer under legally binding contract to reimburse the insured
for losses suffered on the happening of the stipulated event.
TN: In a contract of insurance, there must be an offer and acceptance
and the parties must have the legal capacity enter into such contract.
To be enforceable, all the requisites of a binding contract must be
present.
NATURE & CHARACTERISTICS OF AN INSURANCE CONTRACT
1. Consensual
2. Voluntary
3. Aleatory
4. Executed and executory
5. Conditional
6. Contract of indemnity
7. Personal contract
8. Property in legal contemplation
Consensual
It is perfected by the meeting of the minds of the parties.
Voluntary
It is not compulsory and the parties may incorporate such terms and
conditions as they may deem convenient which will be binding provided
that they do not contravene any provision of law and are not opposed
by public policy.
There are insurances that may arise by operation of law such as the War
Damage Corporation Act. There are also social insurances that are
compulsory such as SSS and GSIS.
Aleatory
It depends upon some contingent event. 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.
Executed and Executory
It is executed as to the insured after the payment of the premium and
executory on the part of the insurer in the sense that it is not executed
until payment for a loss. In other words, it is a unilateral contract
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
imposing legal duties only on the insurer who promises to indemnify in
case of loss.
Conditional
It is subject to conditions the principal one of which is the happening of
the event insured against. In addition to this main condition, the contract
usually includes many other conditions (such as payment of premium or
performance of some other act) which must be complied with as
precedent to the right of the insured to claim benefit under it.
Contract of Indemnity
The promise of the insurer is to make good only the loss of the insured,
except in life and accident insurance where the result is death.
If there is a stipulation of a possible gain on the insured, then it is
contrary to the proper nature of insurance. Also, it is void if the insured
has no insurable interest.
Personal Contract
The insured cannot assign, before the happening of a loss, his rights
under a property policy to others without the consent of the insured.
Life insurance policies, however, are generally assignable or transferable
as they are in the nature of property and do not represent a personal
agreement between insured and insurer.
Property in Legal Contemplation
Since insurance is a contract, it is property in legal contemplation. But
unlike property policies, life insurance policies are generally assignable
or transferable like any “chose in action.” They are in the nature of
property and do not represent a personal agreement between the
insurer and the insured.
DISTINGUISHING ELEMENTS OF THE CONTRACT OF
INSURANCE
1. Insurable interest or an interest of some kind susceptible of
pecuniary estimation
2. The insured is subject to a risk of loss through the destruction or
impairment of that interest by the happening of designated perils
3. The insurer assumes that risk of loss
4. Assumption of risk is part of a general scheme to distribute actual
losses among a large group or substantial number of persons
bearing a similar risk
5. As consideration, insured pays premium to the general insurance
fund.
INSURANCE, A RISK-DISTRIBUTING DEVICE
If it possesses the first three elements is a risk-shifting device, but not
a contract of insurance which is fundamentally a risk-distributing device.
Equitably distributes losses out of a general fund contributed
by all
By paying a pre-determined amount (premium) into a general fund out
of which payment will be made for an economic loss of a defined type,
each member (insured) contributes to a small degree toward
compensation for losses suffered by any member of the group. The
amount each member contributes is based on the value of the property
or other interest being protected and the likelihood of the occurrence of
the feared event.
Provides protection against absorbing one’s losses alone
The primary goal of the insured is to exchange the gamble into doing it
alone
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Coping with risk
In insurance, the uncertainty is normally described in terms of risk. Risks
cannot be totally prevented or avoided. People cope with risk in various
ways. Such as:
1. Limiting the probability of loss – example, building a concrete
building to make it less likely to catch fire.
2. Limiting the effects of loss – example is putting on a seatbelt
to lessen the effects of accident.
Diversification is an important way of limiting the effects of loss.
Like when you diversify your investment in stock to lessen the
effects of loss of sharp decline in stocks.
3. Self-insurance or self-financing – example, owner of the
restaurant setting aside a portion of yearly profits into a fund
designated to pay a loss that could occur from food poisoning of
customers.
4. Ignoring risk – example, a tightrope walker, even if he already
did everything to assure safety, would still ultimately decide to
ignore the risk and bear the loss if it materializes when he starts
walking on the tightrope.
5. Transferring risk to another – this is when there is transferring
or sharing of risk with someone else by a contractual obligation.
The value of transferring risk
1. Risk preferring – these people would forego the certain loss in
the hope of incurring no loss, despite the equal probability of
suffering a large loss.
2. Risk neutral – indifferent to the alternative
3. Risk averse – people who would rather lose with certainty
instead of confronting a bigger loss. As the potential magnitude
of loss increases, people become more risk averse.
Economic effect of transfer and distribution of risk
1. Benefit for society as a whole – the people insured will
completely eliminate the risk by transferring it to the insurers.
Also, insurers, by dealing in risk on a large scale, could earn a
profit. Indeed, society would be better off if a large number of
similar, mutually beneficial transactions would occur.
2. Undesirable side effects – the insured might have less
incentive to take measures to prevent the loss from occurring or
minimize the effect of loss once it occurs. This phenomenon is
called moral hazard.
3. Problem regarding measurement of amount of risk
transferred – because of moral hazard, the ideal response is to
monitor the insured’s behavior and adjust the premium of the
insured. But monitoring the behavior of each insured is not
feasible.
4. Sharing by insured of some responsibility for the risk – to
deal with the moral hazard, the insured shares the risk through
deductible or coinsurance.
A. Deductible- the insured bears the any loss up to the stated
amount with the insurer bearing the rest.
B. Coinsurance- the insured bears some stated percentage of
the loss regardless of its amount, with the insurer bearing
the rest.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
5. Problem regarding the computation of premium to be
charged – for the insurer to monitor the insured’s behavior and
adjust the premium based on the extent to which the insured
takes adequate steps to safeguard his property.
6. Classification of risks – because of the complete impracticality
of individual rating, insurers group similar risks together and
charge each member of the group the same premium.
7. Sub-classification of risks – further subdivision becomes too
expensive relative to the benefits gained. Thus, it is inevitable that
within the same group, some insured will be better risks than
others, even though all members of the group pay the same
premium. In fact, any group will have a higher proportion of less
desirable risks, since more applications for the insurance will tend
to come from those who get a better bargain. This is called
adverse selection.
Insurer and regulators must take this into account when deciding
upon the scope of coverage and premiums to be charged for the
coverage.
THE FIELDS OF INSURANCE
The basic classification emphasizes the difference between social and
voluntary insurance.
Social (government) insurance
It is compulsory and is designed to provide a minimum of economic
security for large groups of persons, particularly those in the lower
income groups. The concept is limited to that insurance which is
required by the government and have for their object the provision of a
minimum standard of living.
The compulsion element is predicated upon protecting general welfare
and some people not voluntarily purchasing insurance.
Voluntary (private) insurance
It is not based on government compulsion and sought by the insured to
meet a recognized need for protection.
1. Commercial Insurance – this is what persons usually have in
mind when they say insurance business. It receives its motivating
force from the profit idea.
A. Personal insurance – based on the nature of perils. They
are more directly concerned with losses due to loss of earning
power of a person. Life insurance, including annuities, and
health and accident insurance are included.
B. Property insurance – the purpose is for the protection
against loss arising from the ownership or use of property. It
can be indemnifying for the loss of the insured’s own property
or indemnifying the damage to other persons by the insured.
2. Cooperative insurance – the term cooperative is applied to
associations usually operating under hospital, medical, fraternal,
employee, or trade-union auspices. These associations are
organized without regard for profit. The non-profit cooperative
objective of insurance is emphasized.
3. Voluntary government insurance – there is no element of
compulsion. In the category are to be found such plans as the
insurance of mortgage loans and insurance of growing crops.
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CLASSIFICATION OF CONTRACT OF INSURANCE
The principal and older forms of insurance are marine, fire, life and
accident. The different kinds of insurance contracts written at the
present time vary in name and form but for convenience they may be
grouped under three great heads as follows:
1. Insurance against loss or impairment of property interest
2. Insurance against loss of earning power
3. Insurance against contingent liability to make payment to another
Insurance against loss or impairment of property interest
The loss or impairment may be due to:
1. Marine perils (marine insurance)
2. Fire (fire insurance), earthquake, explosion, etc. or
3. Due to the non-performance of contracts of which the insured is a
party (guaranty insurance)
4. The insolvency of the debtors (credit insurance)
5. The defalcation of employees and agents (fidelity insurance)
6. Theft or burglary (theft insurance policies)
7. Defective titles or interest in the property (title insurance)
Insurance against loss of earning power
This may be due to death (life insurance), accident injury, ill-health,
sickness, old age or other disability, or even unemployment
Insurance against contingent liability to make payment to
another
The insured is protected against his loss with regard to claims for
damages.
Example: Reinsurance, workmen’s compensation insurance and motor
vehicle liability insurance, all of which are designed to reimburse the
insured for any liability he might incur to a third party.
TN: A modernized classification scheme recognizes four categories:
marine, property, personal and liability. They are also divided into two
larger classes: property and personal.
CLASSIFICATION BY INTEREST PROTECTED
Another way to classify insurance is to categorize the subject matter
according to the interests being protected by the arrangement. At least
two such methods of categorization exist: the third-party/first-party
distinction and the all-risk/specified-risk distinction
First-party vs. third-party insurance
In first-party insurance, the contract between the insurer and the
insured is designed to indemnify the insured for a loss suffered directly
by the insured.
1. Property insurance – is a first-party insurance; the damage to
the property is an immediate, direct diminution of the insured’s
assets.
2. Liability insurance – sometimes described as a third-party
insurance because the interests protected by the contract are
those of a third person. The insured’s loss is “indirect.”
3. Life insurance – although there is a beneficiary, it is the insured
who suffers the loss. It is the insured who loses his life. Unless
the insured designates a beneficiary, the proceeds will go to the
estate of the insured.
4. Health insurance – the loss and illness is suffered by the
insured.
TN: All Insurance except liability can be fairly thought of as first-party
insurance.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Important: The distinction between first-party and third-party
insurance assists in understanding the concept of “no-fault” insurance.
No-fault insurance is essentially the substitution of first-party insurance
for tort liability. The victim of tort, instead of looking for the tortfeasor
and his insurer for reimbursement, looks to his own insurer for first-
party protection.
The term “no-fault” connotes that the victim recovers for his loss from
his own insurer, without regard to the fault of the third party or his own
contributory fault.
ALL-RISK VS SPECIFIED-RISK
All-risk reimburses the insured for damage to subject matter of the
policy from all causes except those specifically excepted in the policy.
Specified-risk insurances covers only if it results from specifically
identified causes listed in the policy.
Language of the policy
It is helpful but not necessarily determinative on whether a policy is all-
risk or specified-risk.
Coverage of policy
The distinction can make a considerable difference in whether a
particular loss is covered by the policy. If there is no specific exclusion
pertaining to a certain event, the insured’s loss is covered.
Burden of proof
A. Under specified-risk – the burden is ordinarily placed on the insured
to initially prove that the loss fall within the policy’s provisions on
coverage.
B. Under an all-risk policy – once the insured establishes that a loss
occurred through some event other than an inherent defect or
normal depreciation, the burden is ordinarily placed on the insurer
to prove that the loss falls within an explicit exception to coverage.
In property insurance, the insured merely has to show the
condition of the property insured when the policy attaches and the
fact of damage or loss.
Example: A plane was hijacked and destroyed. The insurer argues that
there are three exclusions that bars recovery: (1) capture or seizure of
property by governmental authority or agent; (2) war, invasion or civil
war; (3) strikes, riots or civil commotion
Treating the policy as all-risk coverage, court held that insurers had
failed to prove that the cause of the loss was within the scope of the
policy’s exclusions. Consistent with well-established rules of
interpretation, the exclusions were construed in a manner most
beneficial to the insured.
Other advantages of all-risk coverage
1. The coverage is presumably easier to understand.
2. Duplication of coverages and premiums from separate, specified-
risk policies is avoided.
3. Pressures toward adverse selection are minimized.
4. Policies are easier and less expensive for the insurer to administer.
5. The most widely perceived advantage is the avoidance of gaps in
coverage.
All-risk coverage not absolute
An all-risk coverage does not include:
1. Undisclosed event that existed prior to coverage
2. Events caused by the consummation during the period of coverage
of an indwelling fault in the goods that had existed prior to
coverage
3. Losses which are certain to occur, such as loss due to normal wear
and tear
4. Losses which are not fortuitous and, therefore, is not insurable.
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5. Losses from the willful and fraudulent act of the insured
Important: Also, all-risk coverage does not alter basic insurance law
principles that can operate to limit coverage such as insurable interest
requirement, causation rules, the requirement that the loss not be
intentionally caused by the insured and implied exceptions.
CLASSIFICATIONS UNDER THE CODE
1. Life insurance contracts
a. Individual life
b. Group life
c. Industrial life
2. Non-life insurance contracts
a. Marine
b. Fire
c. Casualty
3. Contracts of suretyship or bonding
Contracts written by guaranty or surety companies
This comprises principally fidelity, title, bond, and security guaranty.
Contracts of this kind are now almost regarded as those of insurance
where the underwriter engages in the business for profit, especially
since the terms of such contracts usually closely resemble the essential
elements of an insurance contract.
They are construed strictly against the insurer.
Important: Under the Code, a contract of suretyship shall be deemed
to be an insurance contract only if made by a surety who or which is
doing an insurance business within the meaning of the Code.
CONSTRUCTION OF INSURANCE CONTRACTS
They provisions should be interpreted in consonance with each other. It
cannot be interpreted piece-meal.
Where there is ambiguity or doubt
As a general rule, it should be interpreted liberally in favor of the insured
and strictly against the insurer so as to effect its purpose to pay or
indemnify the insured. A policy of insurance is a contract of adhesion.
When restrictive provisions have two interpretations, the one most
favorable to the insured is adopted.
Where terms are clear
The court is bound to adhere to the insurance contract as an authentic
expression of the intention of the parties and it must be construed and
enforced according to the sense and meaning of the terms which the
parties themselves have used. They must be taken in their plain and
ordinary sense.
Where contract is silent with respect to a particular matter
Any doubt that may arise for the failure of the contract to provide with
respect to a particular matter must be resolved against the insurer.
WHAT CONSTITUTES DOING OR TRANSACTING AN
INSURANCE BUSINESS
Name or designation by insurer not controlling
The name or designation of the company is not determinative. Basically,
insurance, whether fire, marine or any other form, is that which the law
defines it to be.
Acts deemed included by law
Sec 2(2) enumerates the acts deemed as “doing an insurance business”
or “transacting an insurance business.” The fact that no profit is derived
from the making of insurance contracts or that no separate or direct
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
consideration is received or the fact that the contract states that it is not
an insurance policy, is not conclusive to show that the making does not
constitute the doing or transacting of an insurance business.
Principal object and purpose to determine nature of contract
Under the “principal object and purpose test,” if the principal object and
purpose is “indemnity,” the contract constitutes insurance, but if it is
“service,” risk transfer and distribution being merely incidental, then the
arrangement is not insurance, therefore, not subject to laws on
insurance.
Example: A health maintenance organization (HMO) whose main
objective is to provide the members of a group with health care service,
rather than assumption of risk, is not engaged in an insurance business.
FUNCTIONS OF INSURANCE
Principal function
The principal function is risk-bearing. The financial losses of the few are
equitably distributed over the many out of a fund (premium) contributed
by all. What it does is to spread the losses over a large number of
persons.
Subsidiary functions
1. Stimulates business enterprise – No large-scale enterprise
could function in the modern world without the transference of
many of its risks to insurers. It also allows them to use their capital
instead of freezing it for contingencies.
2. Encourages business efficiency and enterprise – Elimination
of risk is an increase in business efficiency. By reducing risk, it will
increase willingness to invest business capital in business and
lessen worry of risk.
3. Promotes loss-prevention – Insurers encourage loss-
prevention through a system of rating which allows discounts for
good features and impose special conditions where the risk is
unsatisfactory.
4. Encourage savings – It provides a climate in which savings are
encouraged. A more direct stimulus is provided through a life
insurance which include a savings or investment elements as well
as a protection element
5. Solves social problems – Compensation is available to victims
of loss or injuries, while the financial difficulties arising from old
age, disability or death are mitigated.
Indirect functions
1. Investment of funds – Insurers can accumulate large funds
which they hold as custodians. These funds are invested not only
to provide for the interest but also to invest in other industries
that contribute to national development.
2. Use of reserve funds – Reduction of cost of insurance to the
insuring public.
3. Effect on prices – The existence of insurance benefits the
consumers in terms of reduced prices since the cost of insurance
is less than the cost of risk without the insurance.
4. As a basis of credit – Credit extension is the most important
phase of modern business and is contributed to by virtually all
forms of insurance.
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CHAPTER 1. CONTRACT OF INSURANCE
TITLE 1. WHAT MAY BE INSURED
SECTION 3.
Section 3. Any contingent or unknown event, whether past or future,
which may damnify a person having an insurable interest, or create a
liability against him, may be insured against, subject to the provisions
of this chapter.
The consent of the spouse is not necessary for the validity of an
insurance policy taken out by a married person on his or her life or that
of his or her children.
All rights, title and interest in the policy of insurance taken out by an
original owner on the life or health of the person insured shall
automatically vest in the latter upon the death of the original owner,
unless otherwise provided for in the policy.
REQUISITES OF A CONTRACT OF INSURANCE
1. A subject matter in which the insured has an insurable interest
2. Event or peril insured against which may be any contingent or
unknown event, past or future and a duration of the risk
3. A promise to pay or indemnify in a fixed or ascertainable amount
4. A consideration for the promise, known as “premium”
5. A meeting of the minds
Important: Of course, the parties must be competent to enter into the
contract.
SUBJECT MATTER OF CONTRACT OF INSURANCE
In general
Anything that has appreciable pecuniary value which is subject to loss
or deterioration or of which one may be deprived so that his pecuniary
interest is or may be prejudiced.
Property insurance
The property covered by a policy is regarded the subject matter of the
insurance, but it is apparent that in the last analysis, it is the risk of loss
of such property that is primarily involved.
Life, health and accident insurance
While it is true that the person becomes the subject of insurance, the
matter is generally viewed as one in reference to the insured as a party
to the contract.
Casualty insurance
In insurance against perils giving rise to a liability on the part of the
insured to pay damages to the others, the subject matter is the risk
involved in its use, or the insured’s risk of loss or liability, that he may
suffer loss or be compelled to indemnify for the loss suffered by a third
person.
Event or peril insured against
The contingency or unknown event must
1. Damnify or cause loss to a person having an insurable interest
2. Create a liability against him
Insurance by a married woman
She may take out an insurance on her life or her children or husband
without the consent of her husband. She may also do the same to her
paraphernal or separate property or on property given to her by her
husband.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Insurance by a minor
It is not entirely void. It is one which merely voidable, that is, it is valid
until annulled in a proper action in court by the minor or his legal
representative.
If contract is not disaffirmed by the minor, the insurer cannot escape
liability by pleading minority as a defense. But if the contract is fair and
no fraud or undue influence was practiced by the insurer, the minor
cannot recover the premiums paid, if he cannot return the benefits
received. The result is that an insurance company contracting with a
minor is bound by the contract; the minor ordinarily is not.
OWNERSHIP OF LIFE INSURANCE POLICY
Ownership divided between insured and beneficiaries
The insured being the owner of its various marketing and sales features,
such as the loan and cash surrender values, and the beneficiary being
the owner of a promise to pay the proceeds at the death of the insured
subject to the insured’s right of revocation.
Interest of insured and beneficiary
The nature of the interest of the beneficiary depends on the terms of
the insurance contract, including the existing statutes by which the
insurer and its policyholders are bound.
Transfer of rights to minor insured upon death of original owner
of policy
All the rights, title and interest in the policy shall be automatically vest
in the minor unless otherwise provided for in the policy.
SECTION 4.
Section 4. The preceding section does not authorize an insurance for or
against the drawing of any lottery, or for or against any chance or ticket
in a lottery drawing a prize.
CONCEPT OF LOTTERY
Extends to all schemes for the distribution of prizes by chance. There
are three essential elements:
1. Consideration
2. Prizes
3. Chance
Important: If the prize does not come out of the fund or contributions
by the participant, no consideration has been paid and consequently,
there is no lottery.
Contract of insurance not a wagering contract
The distinction are as follows:
1. In gambling contract, the parties contemplate gain through mere
chance while in insurance, parties seek to distribute possible loss
by reason of mischance
2. The gambler courts fortune, while the insured seeks to avoid
misfortune
3. Contract of gambling tends to increase the inequality of fortune,
while contract of insurance tends to equalize fortune
4. In gambling, whatever one person wins is lost by the other. In
insurance, what insured gains is not at the expense of another
insured
5. When party makes a wager, he creates a risk when no such risk
existed. In insurance, there is no new risk created. It is already an
existing risk.
7|U N I V E R S I T Y O F S A N C A R L O S
Similarity between insurance and gambling
In both cases, one party promises to pay a given sum to the other upon
occurrence of a given future event, the promise being conditioned upon
the payment of, or agreement to pay, a stipulated amount by the other
party to the contract.
SECTION 5.
Section 5. All kinds of insurance are subject to the provisions of this
chapter so far as the provisions can apply.
TITLE 2. PARTIES TO THE CONTRACT
SECTION 6
Section 6. Every corporation, partnership, or association, duly
authorized to transact insurance business as elsewhere provided in this
Code, may be an insurer.
PARTIES TO A CONTRACT
There are two parties to the contract: the insurer and the insured.
Insurer
The party who assumes or accepts the risk of loss and undertakes for a
consideration to indemnify the insured or to pay him a certain sum on
the happening of a specified contingency or event.
Insured
The person in whose favor the contract is operative and who is
indemnified against, or is to receive a certain sum upon the happening
of a specified contingency or event. He is the person whose loss is the
occasion for the payment of the insurance proceeds by the insurer.
The insured is not always the person whom the proceeds are paid. It
may be the beneficiary or someone whom the proceeds are assigned by
the insured.
Terms used
A. Insurer – synonymous with the term “assurer” or “underwriter.”
The insurance company is sometimes called “underwriter.”
B. Insured – refers to the owner of the property insured or the person
whose life is the subject of the policy
C. Assured – person for whose benefit the insurance is granted.
Sometimes used as a synonym of “beneficiary.”
D. Beneficiary – person designated to receive the proceeds of the
insurance. He is the third party in a contract of life insurance for
whose benefit the policy is issued and to whom loss is payable.
There are occasions when the proceeds are paid to the estate of
the insured.
TN: the terms “insured” and “assured” are generally used
interchangeably.
Who may be an insurer?
1. Foreign or domestic insurance company or corporation- it must first
obtain a certificate of authority for that purpose from the Insurance
Commissioner who may refuse to issue such.
2. Partnership or corporation
Important: Individuals, under the new Insurance Code can no longer
qualify as an insurer.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Business of insurance affected with public interest
It is subject to regulation and control by the state by virtue of the
exercise of its police power or in the interest of public convenience and
the general good of the people.
SECTION 7
Section 7. Anyone except a public enemy may be insured.
CAPACITY OF THE PARTY INSURED
Natural person
There are two essential requisites.
1. He must be competent to make a contract
2. He must possess an insurable interest in the subject of the
insurance.
TN: A third requite, applicable also to juridical persons, may be added
and that is that the insured must not be a public enemy.
Juridical person
A juridical person, like a partnership or a corporation, may take out
insurance on property owned by it. Note that Section 3 specifically
authorizes minors, 18 years or more to take out insurance payable to a
limited class of beneficiaries.
Meaning of public enemy
A nation with whom the Philippines is at war and it includes every citizen
or subject of such nation. A mob or robbers or thieves whoever they
may be, are never considered as public enemies under Sec 7.
EFFECT OF WAR ON EXISTING INSURANCE CONTRACT
Where parties rendered enemy aliens
By law of nations, all intercourse between citizens of belligerent powers
which is inconsistent with a state of war is prohibited. The purpose of
war is to cripple the power and exhaust all the resources of the enemy.
It is inconsistent that the subjects of one country should lend their
assistance to protect by insurance. Of course, if the parties are not
rendered enemy aliens, the policy continues.
1. With respect to property insurance – the insurance policy ceases
to be valid and enforceable as soon as an insured becomes a public
enemy.
2. With respect to life insurance – the insurance is abrogated but the
insured is entitled to the cash or reserve value of the policy (if any),
which is the excess of the premiums paid over the actual risk
carried during the years when the policy had been in force.
Where loss occurs after the end of war
The termination of the war does not revive the contract. Consequently,
the insurer is not liable even of the loss is suffered by the insured after
the end of the war.
efdsg
SECTION 8
Section 8. Unless the policy otherwise provides, where a mortgagor of
property effects insurance in his own name providing that the loss shall
be payable to the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original contract,
and any act of his, prior to the loss, which would otherwise avoid the
insurance, will have the same effect, although the property is in the
hands of the mortgagee, but any act which, under the contract of
insurance, is to be performed by the mortgagor, may be performed by
the mortgagee therein named, with the same effect as if it had been
performed by the mortgagor.
8|U N I V E R S I T Y O F S A N C A R L O S
INSURABLE INTEREST OF MORTGAGEE AND MORTGAGOR
Separate insurable interest
Both have insurable interest in the mortgaged property and this interest
is separate and distinct from each other. Consequently, insurance taken
by one in his own name only and in his favor alone, does not inure to
the benefit of the other. In case both of them take out separate
insurance policies, the same is not open to the objection that there is
double insurance.
Extent of insurable interest of mortgagor
As owner, he has insurable interest to the extent of the value, even
though the mortgage debt equals such value. the reason is that the loss
or destruction of the property insured will not extinguish his mortgage
debt.
Extent of insurable interest of mortgagee
He has an insurable interest in the mortgaged property to the extent of
the debt secured. He is not insuring the property but his interest or lien
in such property. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt. Such interest
continues until the mortgage debt is extinguished.
Extent of amount of recovery
The mortgagor cannot recover upon the insurance beyond the full
amount of his loss and the mortgagee, in excess of the credit at the time
of the loss nor the value of the property mortgaged.
INSURANCE BY MORTAGEE IN CASE OF LOSS
Right of the mortgagee in case of loss
He is entitled to the proceeds of the policy in case of loss before payment
of the mortgage.
Subrogation of insurer to right of mortgage
The mortgagee does not retain his claim against the mortgagor but it
passes by subrogation to the insurer to the extent of the insurance
money paid.
Change of creditor
The payment of insurance to the mortgagee by reason of loss does not
relieve the mortgagor from his principal obligation but only changes the
creditor.
INSURANCE BY MORTGAGOR OF HIS OWN INTEREST
For his own benefit
In case of loss, the insurance proceeds do not inure to the benefit of the
mortgagee who has no greater right than unsecured creditors in the
same.
For the benefit of mortgagee
This is where the mortgagor pays the insurance premium, making the
loss payable to the mortgagee. The mortgagee may be made the
beneficial payee in several instances:
1. He may become the assignee of the policy with the consent of the
insurer
2. He may be mere pledgee without such consent
3. A rider making the policy payable to the mortgagee “as his interest
may appear” may be attached
4. A “standard mortgage clause” continuing a collateral independent
contract between the mortgagee and the insurer may be attached
5. The policy, though, by its terms payable absolutely to the
mortgagor; may have been procured by a mortgagor under a
contract duty to insure for the mortgagee’s benefit, in which case
the mortgagee acquires an equitable lien upon the proceeds.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
INSURANCE BY MORTGAGOR FOR BENEFIT OF MORTGAGEE,
OR POLICY ASSIGNED TO MORTGAGEE
Where the mortgagor of the property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a
policy of insurance to the mortgagee, the following are the legal effects:
1. The contract is deemed to be upon the interest of the mortgagor;
he does not cease to be party to the contract
2. Any act of the mortgagor prior to the loss, which would otherwise
avoid the insurance affects the mortgagee even if the property is
in the hands of the mortgagee
Example: Storing inflammable materials in the insured house
3. Any act which under the contract of insurance is to be performed
by the mortgagor may be performed by the mortgagee with the
same effect.
Example: Payment of the premium by the mortgagee
4. In case of loss, the mortgagee is entitled to the proceed to the
extent of his credit
5. Upon recovery by the mortgagee to the extent of his credit, the
debt is extinguished
Important: The rule on subrogation by the insurer to the right of the
mortgagee does not apply in this case.
Example: R insured his house worth P1,200,000 for P1,000,000 with the
policy providing that the loss shall be payable to E. the house was
mortgaged to E as security for a loan of P600,000. The house was
destroyed by fire. Who may recover?
E, as the mortgagee, is entitled to the extent of his credit of P600,000.
He shall hold as trustee for R, mortgagor, the excess of P400,000. If
before the loss, the mortgage debt has already been paid, R can recover
the entire P1,000,000. R effected the insurance in his own name and he
did not cease to be a party to the original contract.
EFFECT OF STANDARD AND OPEN CLAUSE IN FIRE INSURANCE
POLICY
If fire insurance contains a standard or union mortgage clause
The acts of the mortgagor do not affect the mortgagee. The purpose of
the clause is to make a separate and distinct contract of insurance on
the interest of the mortgagee.
Contains an open or loss-payable mortgage clause
It merely provides for the payment of the loss, if any, to the mortgagee
as his interest may appear and under it, the acts of the mortgagor affect
the mortgagee. The mortgagee is only beneficiary under the contract
and not made a party. Hence, any act of the mortgagor which defeats
his right will also defeat the right of the mortgagee.
RIGHT OF MORTGAGEE UNDER MORTGAGOR’S POLICY
The contract of indemnity under such policy is primarily with the
mortgagor, but the mortgagee is a third party beneficiary.
Before loss
The mortgagee is a conditional appointee of the mortgagor entitled to
receive so much of any sum that may become due under the policy as
does not exceed his interest as mortgagee. Such right becomes absolute
upon the occurrence of the loss.
9|U N I V E R S I T Y O F S A N C A R L O S
After loss
If loss happens when the credit is not due, the mortgagee is entitled to
receive the money to apply to the extinguishment of the debt. If the loss
happens after the credit has matured, the mortgagee may apply the
proceeds to the extent of his credit.
EFFECT OF INSURANCE BY MORTGAGEE ON BEHALF OF THE
MORTGAGOR
Discharge of debt
Upon the destruction of the property, the mortgagee is entitled to
receive payment from the insured but such payment discharges the debt
if equal to it, and if greater than the debt, the mortgagee holds the
excess as trustee for the mortgagor.
Right to subrogation
If there is a stipulation that the insurer shall be subrogated to the rights
of the mortgagee, the payment of the policy will not discharge the debt
even though the mortgagee may have procured the policy by
arrangement with the mortgagor. If there is no such stipulation, the rule
on subrogation does not apply except where the mortgagee insures only
his interest.
sdf SECTION 9
Section 9. If an insurer assents to the transfer of an insurance from a
mortgagor to a mortgagee, and, at the time of his assent, imposes
further obligations on the assignee, making a new contract with him,
the acts of the mortgagor cannot affect the rights of said assignee.
ASSIGNMENT OR TRANSFER OF INSURANCE POLICY
The effect of assignment or transfer is to substitute the assignee or
transferee in place of the original insured in his right to claim indemnity
or payment as well as the obligation to perform the conditions if any, of
the policy.
As to fire policy
A fire policy before it becomes fixed liability is not subject to assignment,
being strictly a personal contract, in the absence of provision in the
contract or subsequent consent of the insurer. The insurer is naturally
concerned about the moral character of the insured and should not be
compelled to become an insurer to an assignee to whom he would have
declined to issue a policy and who could materially alter the risks
assumed by the insurer without his consent.
As to marine policy
A policy of marine insurance is assignable even without the consent of
the insurer unless required by the terms of the policy. Nevertheless, it
is believed that marine policy is not assignable without the consent of
the insurer.
As to casualty policy
The insurer’s consent is required. This insurance commonly involves
moral hazards at least as great as those of fire insurance.
As to life insurance
The policy may be freely be assigned before or after the loss occurs, to
any person whether he has an insurable interest or not. However, if
without insurable interest and made in bad faith and preconceived for
an illegal purpose will not be upheld.
Important: A distinction must be made between the assignment or
transfer (a) of the policy itself which transfers the rights to the contract
to another insured (b) of the proceeds of the policy after a loss has
happened which involves a money claim under, or a right of action on,
the policy and (c) of the subject matter of the insurance, such as a house
insured under a fire policy which has the effect of suspending the
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
insurance until the same person becomes the owner of both the policy
and the thing insured.
RIGHT OF MORTGAGOR TO ASSIGN INSURANCE POLICY TO
MORTGAGEE
The right of the mortgagor to assign or transfer an insurance policy is
recognized in Section 8. Section 9 only gives the effect if the insurer
agrees to the transfer of the policy and at the time of his assent, imposes
new obligations on the assignee.
EFFECT OF NEW CONTRACT BETWEEN INSURER AND
MORTGAGEE-ASSIGNEE
GR: The contract remains with the mortgagor as it is his interest alone
that is covered. The assignment operates merely as an equitable
transfer of the policy so as to enable the mortgagee to recover the
amount due in case of loss of subject to the conditions of the policy.
XPN: Where a new and distinct consideration passes from the
mortgagee to the insurer, a new contract is created between them.
Novation takes place.
TITLE 3. INSURABLE INTEREST
SECTION 10
Section 10. Every person has an insurable interest in the life and health:
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in part for education
or support, or in whom he has a pecuniary interest;
(c) Of any person under a legal obligation to him for the payment of
money, or respecting property or services, of which death or illness
might delay or prevent the performance; and
(d) Of any person upon whose life any estate or interest vested in him
depends.
INSURABLE INTEREST IN GENERAL
An insurable interest is that interest which the law requires the owner
of an insurance policy to have in the person or thing insured.
Pecuniary in nature
A person has insurable interest over the thing insured where he has a
relation or connection with or concern in it that he will derive pecuniary
or financial benefit or advantage from its preservation and will suffer
pecuniary loss or damage from its destruction.
Interest does not necessarily imply a right to the whole or part of a
thing. It is to be circumstanced with respect to it as to have benefit from
its existence and prejudice from its destruction.
Exception
It has a broader meaning in life insurance. To have an insurable interest
in the life of a person, the expectation of benefit from the continued life
of that person need not necessarily be of a pecuniary nature.
NECESSITY OF INSURABLE INTEREST
Existence of insurable interest is the primary concern in determining the
liability of an insurer under a policy of insurance.
Legal right to insure
Existence of insurable interest gives a person the legal right to insure
the subject of insurance. In its absence, it would be gambling which is
prohibited by law.
10 | U N I V E R S I T Y O F S A N C A R L O S
Validity of the contract
Without an insurable interest, the contract of insurance is void for
illegality. This requirement is held not to apply to industrial life
insurance.
REQUIREMENT, A MATTER OF PUBLIC POLICY
As a deterrence to the insured
This is to prevent a wager policy which is contrary to public interest. To
allow insurable interest to not exist will allow the insured to have an
interest in the destruction of the subject matter or to bring pass an event
that will make the insurance payable.
As a measure of limit of recovery
Insurance should not provide the insured a means to gain a net profit
from the happening of the event. The requirement is enforced and the
defense permitted not in the interest of the insurer but of a sound public
policy.
TWO GENERAL CLASSES OF LIFE POLICIES
Insurance upon one’s life
In can be for the benefit of himself or his estate, or for the benefit of a
third person who may be designated as a beneficiary. This does not
usually present an insurable interest question.
Insurance upon the life of another
In this case, he must have an insurable interest in the life of that person.
INSURABLE INTEREST IN ONE’S OWN LIFE
Every person has an unlimited insurable interest in his own life. It is not
necessary that the beneficiary designated in the policy should have any
interest in the life of the insured.
Insurance taken out on his life for the benefit of another
The presence of insurable interest is required only as an evidence of
good faith. The mere fact that a man on his own motion insures his life
for the benefit either of himself or of another is sufficient evidence of
good faith to validate the contract.
When the insurance regarded a wagering policy
Evidence of wagering policy is usually found in such facts as:
1. The original proposal to take out insurance was that of the
beneficiary
2. That premiums are paid by the beneficiary
3. That the beneficiary has no interest, economic or emotions, in the
continued life of the insured
SIMILARITY BETWEEN A LIFE INSURANCE POLICY AND A
CIVIL DONATION
Both are founded upon the same consideration: liberality.
INSURABLE INTEREST IN LIFE OF ANOTHER
Insurance for the benefit of insured
A person cannot lawfully procure insurance for his own benefit on the
life of another in whose life he has no insurable interest. The policy of
the law requires that the assured shall have an interest to preserve the
life insured in spite of insurance, rather than destroy it because of the
insurance.
Insurance for benefit of a third party
When the owner insures a life of another and assigns a third person as
a beneficiary, both the owner and beneficiary must have an insurable
interest in the life of the cestui que vie.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
INSURABLE INTEREST IN LIFE OF PERSON UPON WHOM ONE
DEPENDS FOR EDUCATION OR SUPPORT OR IN WHOM HE HAS
A PECUNIARY INTEREST
When mere blood relationship sufficient
The mere relationship of brother or sister, father or child is sufficiently
close to give either an insurable interest in the life of the other. The
reason is that the natural affection in case of this kind is considered
sufficient, if not more powerful, to protect the life of the insured than
any other consideration. The essential thing is this: that the policy shall
be obtained in good faith, and not for the purpose of speculating upon
the hazard of a life in which the insured has no interest.
Persons obliged to support each other
1. The spouse
2. Legitimate ascendants and descendants
3. Parents and their legitimate children and the legitimate or
illegitimate children of the latter
4. Parents and their illegitimate children and the legitimate or
illegitimate children of the latter
5. Legitimate brothers and sisters, whether of the full or half-blood
Important: Brothers and sisters not legitimately related, whether the
full or half-blood, are likewise bound to support each other except only
when the need for support is due to a cause imputable to the claimant’s
fault or negligence.
When pecuniary benefit essential
In other cases, mere blood relationship does not create an insurable
interest. Also, mere relationship by affinity ordinarily does not constitute
insurable interest. There must be an expectation of pecuniary benefit.
If the party who takes out the insurance is dependent on the insured for
support and care, it is strong evidence of insurable interest even in the
absence of close blood relationship.
The expectation need not have a legal basis. It is sufficient that it be
actual. Thus:
1. The assumption of parental relations when a man sends a girl to
school and pays her expenses is sufficient.
2. A woman who takes a girl from an orphan asylum and gives her
home under circumstances calculated to raise a reasonable
expectation of help and care from the girl during the declining years
of the benefactress, has an insurable interest in the girl’s life.
3. A corporation has an insurable interest in the life of an officer on
whose services the corporation depends for its prosperity and
whose death will be the cause of a substantial pecuniary loss to it.
4. A person may take out a policy on the life of his business partner.
5. In case of employees, insurable interest is dependent upon the
value of the employee to the business.
INSURABLE INTEREST OF A PERSON IN LIFE OF ANOTHER
UNDER A LEGAL OBLIGATION TO FORMER
Related by contract or commercial relation
A right possessed by a person that will be extinguished or impaired by
the death or illness of another will give a right to lawfully procure
insurance on the other’s life.
Example: A surety on the life of the principal.
Risk that performance of obligation might be delayed or
prevented.
It must appear that illness or death of the insured person who is under
a legal obligation might delay or prevent its performance.
11 | U N I V E R S I T Y O F S A N C A R L O S
INSURABLE INTEREST OF CREDITOR IN LIFE OF HIS DEBTOR
Extent of interest
A creditor may insure the life of a debtor for the purpose of protecting
his debt but only to the extent of the amount of the debt and cost of
carrying the insurance of the debtor’s life.
Right of the debtor in insurance taken by creditor
The contract is purely between the insurer and the insuring creditor. The
insurance does not inure to the benefit of the debtor unless the contrary
is stipulated.
Extent of the amount that may be recovered by insuring
creditor
The principle of indemnity applies in this case because this is not purely
a life insurance. The insuring creditor could only recover such amounts
as remain unpaid at the time of the death of the debtor. If the whole
debt has been paid, the recovery on the policy is no longer permissible.
Where insurance taken by debtor for the benefit of creditor
Where a debtor in good faith insures his life for the benefit of the
creditor, full payment of the debt does not invalidate the policy. The
proceeds should go to the estate of the debtor.
Where debt becomes legally unenforceable
Under US cases, if debt becomes unenforceable because of statute of
limitations or insolvency, it does not cut off the insurable interest of the
creditor although there is no reasonable expectation of the debtor
becoming solvent so as to be able to pay his debt. The reason given is
that the moral or equitable obligation of the debtor to pay his debt is
not destroyed by the discharge which affects only the legal obligation to
pay.
Under Philippine laws, it is clear that a creditor may not insure the life
of his debtor unless the latter has a legal obligation to him for the
payment of money.
INSURABLE INTEREST IN LIFE OF PERSON UPON WHICH AN
ESTATE OR INTEREST DEPENDS
One may insure the life of a person where the continuation of the estate
or interest vested in him who takes the insurance depends upon the life
insured.
CONSENT OF PERSON WHOSE LIFE IS INSURED
Essential to validity of policy
The consent is strong evidence of good faith of the person procuring the
insurance, and thus affords a needed guaranty to society.
Not essential to validity of policy
It seems that under our law, the consent of the person insured is not
essential to the validity of the policy so long as it could be proved that
there is insurable interest.
detdas a detter SECTION 11
Section 11. The insured shall have the right to change the beneficiary
he designated in the policy, unless he has expressly waived this right in
said policy. Notwithstanding the foregoing, in the event the insured does
not change the beneficiary during his lifetime, the designation shall be
deemed irrevocable.
BENEFICIARY DEFINED
It refers to the person who is named or designated in a contract of life,
health or accident insurance as the one who is to receive the benefits
upon the death of the insured.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
KINDS OF BENEFICIARY
The beneficiary in a life insurance policy may be the insurer himself or
his personal representatives or someone other than the insured. Where
the beneficiary is other than the insured, such person may occupy one
of the three relations to the insured:
1. Insured himself
2. Third person who paid a consideration
3. Third person through mere bounty of insured
Insured himself
He may himself be the person who procures the contract and pays the
premiums necessary to maintain it. Such a person is thus an immediate
party to the contract and is ordinarily called the assured, as where the
creditor insures the life of his debtor
Third person who paid a consideration
The third person named as the beneficiary may have paid a valuable
consideration for his selection.
Example: The insured may have taken the policy for the benefit of a
creditor or to secure some other obligations
Third person through mere bounty of insured
The beneficiary designated may be the estate of the insured or a third
party.
TN: In the second and third cases, the beneficiary is not a party to the
contract. In all the three cases, the proceeds of the life insurance
becomes the exclusive property of the beneficiary upon the death of the
insured.
LIMITATIONS IN THE APPOINTMENT OF BENEFICIARY
A person may take out a policy on his own life payable to whoever
provided that he acts in good faith and without intent to make the
transaction merely a cover for a forbidden wagering contract. The
limitation of the Civil Code is found in Articles 2012 and 739.
1. Article 2012
Any person who is forbidden from receiving any donation under
Article 739 cannot be named beneficiary of a life insurance policy
by the person who cannot make any donation to him, according
to the said article.
2. Article 739
The following donations shall be void:
A. Those made between persons who were guilty of adultery or
concubinage at the time of the donation
B. Those made between persons found guilty of the same
criminal offense, in consideration thereof
C. Those made to public officer or his wife, descendants and
ascendants, by reason of his office
Important: In order that Article 739 may apply, it is not required that
there be a previous conviction for adultery or concubinage. This can be
inferred from the clause that “guilt of the donor and done may be proved
by preponderance of evidence.”
RIGHT OF INSURED TO CHANGE BENEFICIARY IN LIFE
INSURANCE
General rule
Whether or not the policy reserves to the insured the right to change
the beneficiary, he has the power to change the beneficiary without the
consent of the latter who acquires no vested right but only an
expectancy of receiving the proceeds under the insurance.
12 | U N I V E R S I T Y O F S A N C A R L O S
Effect of death of insured
The insured’s power to extinguish the beneficiary’s interest ceases at his
death and cannot be exercised by his personal representative or
assignee.
Where right to change is waived
If it is expressly waived, then the insured has no power to make such
change without the consent of the beneficiary.
The beneficiary acquires an absolute and vested interest to all benefits
accruing to the policy. A new beneficiary cannot be added as it will
reduce the latter’s vested rights. The insured cannot destroy the
contract by refusing to pay the premiums for the beneficiary can protect
his interest by paying the premiums.
MEASUREMENT OF VESTED INTEREST OF BENEFICIARY ON
POLICY
It should be measured on its full face value and not on its cash surrender
value for in case of death of the insured, said beneficiary is paid on the
basis of its face value. In case the insured should discontinue to pay the
premiums, the beneficiary may continue paying it and is entitled to
automatic extended term, or paid-up insurance options, etc., and that
said vested right under the policy cannot be divisible at any given time.
WHERE BENEFICIARY DIES BEFORE THE INSURED
If the beneficiary is revocable
The heirs of the insured will be entitled to the proceeds of the insurance.
If the beneficiary is irrevocable
There are two views.
1. Beneficiary’s representative is entitled to insurance proceeds – it
would necessarily follow as a consequence of the vested interest
rule, where the right to change the designated beneficiary is
expressly waived, if the beneficiary dies before the insured, his
rights so vested should pass to his representatives.
2. Estate of the insured is entitled to insurance proceeds – because
the deceased scarcely have intended to make a provision for the
heirs of the deceased beneficiary, who may be persons without
claim to his bounty or interest in his life.
Important: According to sir, the second view is better.
DESIGNATION OF BENEFICIARY
Words used in designating the beneficiaries of a life policy will not be
given their technical significance but will be construed broadly in order
that the benefit of the insurance shall be received by those intended by
the insured as the object of his bounty.
Children
It includes an adopted child, an adult child not forming part of the
household, after-born children even of a marriage subsequently
contracted. This never intended to include grandchildren.
Where the children are named individually, other children cannot share
in the insurance proceeds unless the insured subsequently amended his
designation to include them.
Husband; wife or widow
This is a descriptio personae and the fact that one who otherwise
answers the description does not have a legal status of a wife/husband
of the insured does not prevent her from taking as beneficiary, as when
she is designated by name although the words “his wife” or “her
husband” are added.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
However, if the beneficiary is not name and only designated as “wife”
or “husband”, the legal person as ascertained at the death of the insured
is entitled to the benefits.
Husband and children; wife and children
The policy which designates the wife of the insured and “their children”
includes children by another wife, although the prevailing view state that
the beneficiaries are limited to children common to both. But if the
designation is made to the insured’s “wife and children” or “my wife and
children,” the insurance is deemed for the benefit of all children of the
insured, whether by the named wife or those of another.
Family
The court will ascertain whether that person was so regarded by the
insured.
Heirs or legal heirs
It includes a class of persons who would take the property of the insured
in case he died intestate. It is generally held that the widow of the
deceased in entitled to take under a policy payable to his “heirs” or “legal
heirs” as well as the children of the deceased.
Estate or legal representatives of deceased
Must be construed in their strict technical sense and the courts will
ordinarily assume that they are used to mean executors or
administrators unless it appears that the deceased intended to use these
expressions in the sense of heir or next of kin.
TN: If no beneficiary is designated in the life insurance policy, the
proceeds will go to his legal heirs in accordance with law.
SECTION 12
Section 12. The interest of a beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other beneficiaries, unless
otherwise disqualified. In the absence of other beneficiaries, the
proceeds shall be paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid to the estate of the
insured.
FORFEITURE OF THE INTEREST OF THE BENEFICIARY IN A LIFE
INSURANCE POLICY
“Interest”, how construed
The word “interest” in this section means the right of the beneficiary to
receive the proceeds of the life insurance policy. It does not mean
insurable interest since the beneficiary need not have an insurable
interest in the life of the insured.
OTHER QUALIFIED BENEFICIARIES OF THE INSURED
In case the interest of the beneficiary is forfeited, the nearest relatives,
not otherwise disqualified, of the insured shall, inherit the proceeds paid
to the estate of the insured.
Nearest relatives of the insured
In the order of the enumeration.
1. The legitimate children
2. The mother and father, if living
3. The grandfather and the grandmother, or ascendants nearest in
degree, if living
4. The illegitimate children
5. The surviving spouse
6. The collateral relatives
a. Brothers and sisters full blood
b. Brothers and sisters half-blood
c. Nephews and nieces
13 | U N I V E R S I T Y O F S A N C A R L O S
7. In default, the State
LIABILITY OF THE INSURER ON DEATH OF INSURED
Death at the hands of the law
According to Prof. Vance, this is one of the risks assumed by the insurer
under a life insurance policy in the absence of a valid policy exception
Death by self-destruction
It is quite clear, under Section 87, that the insurer is not liable in case
the insured commits suicide intentionally. To hold otherwise is to say
that the insured may have to option when the event should happen.
This is against the very essence of the contract.
Death by suicide while insane
The suicide of the insured while insane does not discharge the insurer
from his liability in the contract. Insanity is one of the diseases that the
insurer must have known that the insured was subject and the unwitting
act of self-destruction is as much as the consequence of that disease as
if some vital organs were totally affected.
Death caused by the beneficiary
The beneficiary is not deprived of the proceeds in case where he killed
the insured if it does not amount to felony such as self-defense or
accident or the beneficiary is insane.
Death caused by violation of law
The mere fact that the insured died while he was committing a felony
or violating a law would not warrant denial of liability. The insurer, to
avoid liability, must prove that the commission of the crime had a causal
connection with the accident resulting in the death of the insured.
SECTION 13
Section 13. Every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured, is an insurable
interest.
INSURABLE INTEREST IN PROPERTY
The interest may be in property itself (eg. ownership), or any
relationship thereto (eg. Interest of a trustee or a commission agent),
or liability in respect thereof (eg. Interest of a carrier or depository of
goods). Anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction.
Occurrence of loss may be uncertain
It is not necessary that the interest is such that the event insured against
would necessarily subject the insured to loss. It is sufficient that it might
do so, and that pecuniary injury would be the natural consequence.
Title or right to possession not essential
What is important is that the person has an insurable interest if he is so
situated with respect to the property that he will suffer loss as the
proximate result of its damage or destruction.
Legal expectation of loss or benefit
Insurable interest in the property is not necessarily an interest in the
property in the sense of title, but a concern in the preservation of the
property and such a relation to or connection with it as will necessarily
entail a pecuniary loss in case of its injury or destruction.
As a general rule, the expectation of benefit to be derived from the
continued existence of property must have a basis of legal right,
although the person insured has no title, either legal or equitable, to the
property insured.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Mere factual expectation of loss
Expectation not arising from legal right or duty does not constitute an
insurable interest.
Important: Factual expectation, though usually insufficient in strict
indemnity insurance, will suffice in life insurance.
SECTION 14
Section 14. An insurable interest in property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in that out of
which the expectancy arises.
An existing interest
This may be a legal title or equitable title. Undoubtedly, the absolute
owner of the property has an insurable interest.
Examples of those persons with insurable interest arising from legal title:
1. Trustee, as in case of seller of property not yet delivered
2. Mortgagor of the property mortgaged
3. Lessor of the property leased
4. Lessee and sub-lessee may also insure property leased or
subleased
5. Assignee of property for the benefit of creditors
Examples of persons with insurable interest arising from equitable title:
1. Purchaser of property before delivery or before he has performed
the conditions of sale
2. Mortgagee of property mortgaged
3. Mortgagor, after foreclosure but before expiration of the period
within which redemption is allowed
4. Beneficiary under a deed of trust
5. Creditors under a deed of assignment
6. Judgment debtor whose property has been seized under execution
until the right to redeem or the right to have the sale set aside
has been lost
7. Builders and constructors in the buildings pending payment of the
construction price
Important: More than one insurable interest may exist over the same
property.
An inchoate interest
It must be founded on an existing interest.
Example: A stockholder has an inchoate interest in the property of the
corporation which he is a stockholder, which is founded on existing
interest arising from his ownership of shares in the corporation. His
insurable interest is limited to the extent of the value of his interest or
share in the distribution of the corporation assets.
Likewise, a partner has an insurable interest in the firm property which
will support a separate policy for his benefit.
As expectancy
The expectancy must be coupled with an existing interest in that out of
which such expectancy arises.
Example: A farmer may insure future crops if they are to be grown on
land owned by him at the time of the issuance of the policy, or although
the crops are to be raised by him on the land of another, provided the
crops will belong to him when produced.
Similarly, an owner of a business can insure against a contingency which
may cause loss of profits resulting from the cessation or interruption of
his business.
14 | U N I V E R S I T Y O F S A N C A R L O S
SECTION 15
Section 15. A carrier or depository of any kind has an insurable interest
in a thing held by him as such, to the extent of his liability but not to
exceed the value thereof.
INSURABLE INTEREST OF CARRIER OR DEPOSITORY
The reason for this provision is that the loss of the thing may cause
liability to the carrier or depository to the extent of its value.
SECTION 16
Section 16. A mere contingent or expectant interest in any thing, not
founded on an actual right to the thing, nor upon any valid contract for
it, is not insurable.
A mere hope or expectation of benefit which may be frustrated by the
happening of some event uncoupled with any present legal right will not
support a contract of insurance.
Property of father/son/spouse
A father cannot insure his son’s property or vice versa because the
interest is merely an expectancy of inheriting. This is also similar to the
spouse’s situation.
Life of parents/children/spouses
By statutory provisions, parents and children, and spouses can insure
each other’s life. Since under the law, there are under mutual obligation
to support each other, a life policy is held to be a means of fulfilling that
obligation or a means of saving the party entitled to support from being
the subject of public charity.
Property of debtor
A general or unsecured creditor cannot insure specific property of his
debtor who is alive, even though the destruction of such would render
worthless any judgment he might obtain.
But an unsecured creditor may insure the property of a deceased debtor
since all personal liability ceases with the death of the debtor. The
proceedings to subject the estate to the payment of the debt of the
deceased debtor are in rem.
Also, an unsecured creditor who obtains a judgment in his favor
becomes a judgment creditor and has been held to have insurable
interest in the debtor’s property as he has right to levy on such property
as may be necessary to satisfy judgment. However, to recover
insurance, he must show that the debtor has no other property out of
which the judgment may be satisfied.
Property of testator still alive
One named as beneficiary in a will has no insurable interest in a property
designated before the testator’s death. His expectation has no legal
basis since the will has no legal effect before the death of the testator.
The will can be revoked unless the testator has expressly waived.
SECTION 17
Section 17. The measure of an insurable interest in property is the extent
to which the insured might be damnified by loss or injury thereof.
MEASURE OF INSURABLE INTEREST IN PROPERTY
The purpose of property insurance is to indemnify a person against
actual loss, and not to wager on the happening of the event.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
SECTION 18
Section 18. No contract or policy of insurance on property shall be
enforceable except for the benefit of some person having an insurable
interest in the property insured.
EFFECTS OF ABSENCE OF INSURABLE INTEREST IN PROPERTY
INSURED
1. Principle of indemnity applicable
2. Doctrine of waiver or estoppel not applicable
Principle of indemnity applicable
An insurance taken out by a person on property which he has no
insurable interest is void.
Where the insurance is invalidated on the ground that no insurable
interest exists, the premium is ordinarily returned to the insured unless
he is in pari delicto with the insurer.
In life insurance taken by a person on his own life, it is not necessary
for the beneficiary to have an insurable interest in the life insured.
Doctrine of waiver or estoppel not applicable
This doctrine cannot be invoked since the public has an interest in the
matter independent of the consent or concurrence of the parties.
Measures of indemnity in insurance contracts
1. Contracts of marine or fire insurance
2. Liability insurance contracts
3. Life insurance contracts
4. Personal accident insurance contracts
5. Health insurance contracts
6. Health care agreement
Contracts of marine or fire insurance
The amount of insurance being limited by the value of the interest to be
protected. The real purpose of the contract is, in case of loss, to place
the insured in the same situation on which he was before the loss
subject to the terms and conditions of the policy. The amount of
indemnity may be determined after the loss or is previously fixed in the
contract.
Pursuant to the general rule of indemnity, the amount of insurance fixed
in the policy is not the exact measure of indemnity to which the insured
is entitled, but the maximum indemnity which he might obtain.
Liability insurance contracts
This is against liability and not loss. If the insured suffers no loss because
his liability to the third person cannot be enforced, the insurer has no
obligation to pay the proceeds.
Life insurance contracts
This is not a contract of indemnity. The amount fixed payable at the
death of the insured is not considered as the true value of the thing
insured because the life of the person is priceless. It is simply the
measure of indemnity which the insurer has bound himself to pay the
insured.
The amount for which a person is insured is governed by the amount of
premium that he contracted to pay. Life insurance is more of an
investment than indemnification protection against loss.
Personal accident insurance contracts
This is not a contract of indemnity. However, if a person effects a
personal accident insurance on the life of another person, the amount
recoverable is the loss sustained by the person who effected the policy.
15 | U N I V E R S I T Y O F S A N C A R L O S
In theory, this becomes a contract of indemnity but it is often impossible
exactly to assess the injury suffered.
Health insurance contracts
Not a contract of indemnity. But those that cover medical expenses are
contracts of indemnity. In these contracts, only medical expenses
incurred by the insured are paid.
Health care agreement
Agreement with a health maintenance organization (HMO) is in the
nature of a non-life insurance which is a contract of indemnity. Once a
member incurs medical or hospital bills from sickness, injury and the
like, the health care provider must pay for the same to the extent agreed
upon under the contract.
SECTION 19
Section 19. An interest in property insured must exist when the
insurance takes effect, and when the loss occurs, but need not exist in
the meantime; and interest in the life or health of a person insured must
exist when the insurance takes effect, but need not exist thereafter or
when the loss occurs.
TIME WHEN INSURABLE INTEREST MUST EXIST
1. When insurance takes effect and loss occurs
2. When insurance takes effect
3. When liability attaches
4. Need not exist during intervening period
When insurance takes effect and loss occurs
Insurable interest in property must exist on the date of execution of the
contract of insurance and on the date of the occurrence of the risk,
otherwise, policy is void. If he has no insurable interest, he suffered no
loss because it is an insurance of indemnity.
When insurance takes effect
This is applicable in life insurance, even if it has ceased to exist at the
time of the insured’s death. Since the event which payment to be made
is certain to happen, it is logical to determine insurable interest at the
time the contract was entered in to.
When liability attaches
In liability insurance, questions of insurable interest are not important.
It necessarily exists when the liability of the insured to a third party
attaches.
Need not exist during intervening period
The purpose of the provision is to prevent the issue of wagering policies.
Existence of insurable interest when risk attaches
Existence of insurable interest at the inception of the contract, unless
made so by a statute, is not at all necessary to its validity. It is sufficient
that insurable interest exists at the time the risk attaches.
INSURABLE INTEREST IN LIFE AND PROPERTY
DISTINGUISHED
As to extent of insurable interest
In life insurance, it’s unlimited and in property, it is limited to the actual
value of the interest.
As to time when insurable interest must exist
In life insurance, it is enough that the insurable interest exists at the
time the policy takes effect and need not exist at the time of the loss,
while in property insurance, it must exist when the insurance takes
effect and when the loss occurs, but need not exist at the meantime.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
As to expectation of benefit to be derived
In life insurance, the expectation of benefit to be derived from the
continued existence of life need not have any legal basis. In property
insurance, an expectation of benefit, to be derived from the continued
existence of the property insured, however likely and morally certain of
realization it may be, will not afford a sufficient insurable interest unless
that expectation has a basis of legal right.
SECTION 20
Section 20. Except in the cases specified in the next four sections, and
in the cases of life, accident, and health insurance, a change of interest
in any part of a thing insured unaccompanied by a corresponding change
of interest in the insurance, suspends the insurance to an equivalent
extent, until the interest in the thing and the interest in the insurance
are vested in the same person.
Effect, in general, of change of interest
Generally speaking, 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. This is in accordance to
Sec. 19 that an insured must have an insurable interest in the property
insured at the time of the loss.
Object of rule against alienation
This is to provide against changes which might supply a motive to
destroy the property, or might lessen the interest of the insured in
protecting and guarding it.
Change of interest covered by law
The change of interest covered in Sections 20-24 means absolute
transfer of property insured such as the conveyance of the property by
means of an absolute deed of sale. Consequently, the interest in the
property insured does not pass by mere execution of a pledge or a
mortgage.
Exceptions to the general rule
The rule that change of interest suspends the insurance is subject to
these exceptions:
1. In life, health and accident insurance
2. A change of interest in the thing insured after the occurrence of an
injury which results in a loss
3. A change of interest in one or more several things, separately
insured in one policy
4. A change of interest by will or succession on the death of the
insured
5. A transfer of interest by one of the several partners, joint owners
or owners in common, who are jointly insured, to the others
6. When a policy is so framed that it will inure to the benefit of
whomsoever, during the continuance of a risk, may become the
owner of the interest insured
7. When there is an express prohibition against alienation in the
policy, in case of alienation, the contract of insurance is not merely
suspended but is avoided.
SECTION 21
Section 21. A change of interest in a thing insured, after the occurrence
of an injury which results in a loss, does not affect the right of the
insured to indemnity for the loss.
CHANGE OF INTEREST IN A THING INSURED AFTER LOSS
After the loss happened, the liability of the insurer becomes fixed. The
insured has a right to assign his claim against the insurer as freely as
any other money claim. This right is absolute and cannot be delimited
by an agreement. The insured has also the absolute right to transfer the
16 | U N I V E R S I T Y O F S A N C A R L O S
thing insured after the occurrence of the loss. Such change of interest
does not after his right to indemnity for the loss.
SECTION 22
Section 22. A change of interest in one or more of several distinct things,
separately insured by one policy, does not avoid the insurance as to the
others.
CHANGE OF INTEREST WHERE SEVERAL THINGS SEPARATELY
INSURED BY ONE POLICY
It is important to make a distinction between a divisible contract and an
indivisible contract.
Effect dependent on divisibility of contract
If the things are “separately insured in one policy” the contract is
divisible and the violation of a condition which avoids the policy with
respect to one or more of the things does not affect the others.
Conversely, if the things are insured under one policy for a gross sum
and for an entire premium, the contract is indivisible so that a change
in interest in one or more of the things will also avoid the insurance as
to the others.
Divisibility of a contract, a question of intention
This is to be determined by the language employed by the parties.
Example: where only one premium was paid for the entire shipment of
goods, the insurance contract is indivisible and the fact that the goods
are loaded on two different vessels does not make the contract several
and divisible as to the items insured.
SECTION 23
Section 23. A change of interest, by will or succession, on the death of
the insured, does not avoid an insurance; and his interest in the
insurance passes to the person taking his interest in the thing insured.
CHANGE OF INTEREST BY DEATH OF THE INSURED
It passes to the person’s heir, legatee or devisee who acquired interest
in the thing insured. This passes from the moment of death of the
decedent.
SECTION 24
Section 24. A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured, to the others,
does not avoid an insurance even though it has been agreed that the
insurance shall cease upon an alienation of the thing insured.
TRANSFER OF INTEREST BY ONE OF THE SEVERAL PARTNERS,
ETC. JOINTLY INSURED
Effect where transfer is to the others
It will not avoid the insurance. The rule is the same even if there is a
stipulation that the insurance shall cease upon an alienation of the thing
insured.
Reason for the rule
Each partner is interested in the whole property and the hazard is not
increase because the purchasing partner has acquired a greater interest
in the property by a transfer of his co-partner’s share. The transfer does
not affect the risk because no new party is brought into contractual
relationship with the insurer.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Exception to the rule
A policy will be avoided by a sale of an interest in partnership property
by the partner to one of his co-partners, without the consent of the
insurer and before the loss occurs, where the policy contains the
condition “that in case of any sale, transfer, or change of title of any
property insured by this company, or of any undivided interest therein,
such insurance will be void and cease.”
Effect when transfer is to a stranger
It is alienation or transfer to a stranger or third person that will avoid
the policy. A sale of a partner of his interest to a stranger ends the
contract of insurance as to him but does not affect the insurance as to
the others.
SECTION 25
Section 25. Every stipulation in a policy of insurance for the payment of
loss whether the person insured has or has not any interest in the
property insured, or that the policy shall be received as proof of such
interest, and every policy executed by way of gaming or wagering, is
void.
STIPULATIONS PROHIBITED IN AN INSURANCE POLICY
Stipulation for the payment of loss whether the person insured
has or has not any interest in the subject matter of the
insurance
This is a mere wager policy or contract and is void. A wager policy has
been defined as a pretended insurance where the insured has no
interest in the thing insured and can sustain no loss by the happening
of the misfortunes insured against him. The law, however, makes an
exception in the cases mentioned in Section 181 regarding life
insurance.
Stipulation that the policy shall be received as a proof of
insurable interest
WON insurable interest exists does not depend upon the contract of
insurance or the stipulations therein. The insurer can always show lack
of insurable interest after the issuance of a policy of insurance. Such
defense of absence of insurable interest is available only to the insurer.
WAGERING OR GAMING POLICIES VOID
A contract of insurance is void for illegality unless the insured has an
insurable interest in the subject matter insured.
A mere bet upon a future event
Wager or gaming policies are disapproved and condemned not only
under statutes declaring them void, but also on the ground of public
policy. They are regarded as detrimental to society. Such policies have
a tendency to create a desire for the event.
Non-existence of loss from the occurrence of event
Wagers suffer no loss from the occurrence of the contingent event. They
actually profit from it. The insurable interest requirement intends to
deter the insured from the temptation to bring about by unnatural
means the results of the contingent event.
TITLE 4. CONCEALMENT
SECTION 26
Section 26. A neglect to communicate that which a party knows and
ought to communicate, is called a concealment.
Primary concerns of the parties to an insurance contract
1. The correct estimation of the risk which enables the insurer to
decide whether he is willing to assume it, and if so, at what rate
of premium.
17 | U N I V E R S I T Y O F S A N C A R L O S
2. The precise delimitation of the risk which determines the extent
of the contingent duty to pay by the insurer
3. Control of the risk after it is assumed as will enable to insurer to
guard against the increase of risk due to change in conditions
4. Determining whether a loss occurred and if so, the amount of
such loss
DEVICES FOR ASCERTAINING & CONTROLLING RISK & LOSS
1. Concealment
2. Representations
3. Warranties
4. Conditions
5. Exceptions
Concealment and representation
To enable the insurer to secure the same information with respect to
the risk that was possessed by the applicant for insurance, so that he
might be equally capable of forming a just estimate or its quality.
Warranties and conditions
Deals with conditions existing at the inception of the contract. They
involve facts the existence of which shows the risk to be greater than
that intended to be assumed and operates to create in the insurer the
power to extinguish if he so desires, the legal relations already created.
Example: The insured is required the warrant that he had not been
subject to a major operation or a stipulation in the policy may be inserted
that the policy shall be void should the insured be guilty of concealment
or representations.
Exceptions
Used for the purpose of making more definite the coverage indicated by
the general description of the risk by excluding certain specified risks
that otherwise would have been included under the general language
describing the risks assumed.
The general description of the risk concerned has two parts:
1. Designation of the specific property interest to be covered
2. Specification of such of the perils to which that property interest
would be exposed
Example: “This policy shall not cover accounts, bills, currency, deeds,
evidences of debt, money or securities; nor bullion or manuscripts,
unless specifically named hereon in writing.”
Q. How may an insurer protect himself against fraudulent
claims of loss?
By inserting in the policy various conditions which take the form of
conditions precedent, i.e. there are conditions requiring immediate
notice of loss or injury and detailed proofs of loss within a limited period.
CONCEALMENT DEFINED
A neglect to communicate that which a party knows and ought to
communicate. It is the intentional withholding by the insured of any fact
material to the risk.
Requisites of concealment:
1. A party knows the fact which he neglects to communicate or
disclose to the other
2. Such party concealing is duty bound to disclose such fact
3. Such party concealing makes no warranty of the fact concealed
4. The other party has no means of ascertaining the fact concealed
Important: Where a warranty is made of the fact concealed, the non-
disclosure of such fact is not concealment but constitutes a violation of
warranty.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
SECTION 27
Section 27. A concealment whether intentional or unintentional entitles
the injured party to rescind a contract of insurance.
EFFECT OF CONCEALMENT
A. Concealment by the insured – Failure on the part of the insured
to disclose conditions affecting the risk, of which he is aware,
makes the contract voidable at the insurer’s option.
Reason: Insurance policies are traditionally contracts uberrimae
fidae – that is contracts of the utmost good faith.
Important: It is not limited to material facts which the applicant
knows. It extends to those which he ought to know, they being
necessary for the insurer to evaluate the risk. Therefore, it is no
defense to plead mistake or forgetfulness.
B. Concealment by the insurer – Injured party is entitled to
rescind the contract.
Reason: The contractual duty of disclosure is not required of the
insured alone, but is imposed with equal stringency upon the
insurer, since his dominant bargaining position carries with it
stricter responsibility.
PROOF OF FRAUD IN CONCEALMENT NOT REQUIRED
Existence of fraud not required
Fraud is not essential in order that the insured may be guilty of
concealment. The duty to communicate is independent of the intention.
Thus, the absence of an intent to deceive is immaterial.
Reason: It would be impossible for the insurer to protect itself and its
honest policyholders against fraudulent and improper claims. It would
be wholly at the mercy of any one who wished to apply for insurance,
as it would be impossible to show actual fraud except in the extremest
cases.
Basis of this provision
Because it misleads or deceives the insurer into accepting the risk, or
accepting it at the rate of premium agreed upon.
Principal question therefore must be:
“Was the insurer misled or deceived into entering a contact obligation
or in fixing the premium of insurance by a withholding of material
information or facts within the assured’s knowledge or presumed
knowledge?”
SECTION 28
Section 28. Each party to a contract of insurance must communicate to
the other, in good faith, all facts within his knowledge which are material
to the contract and as to which he makes no warranty, and which the
other has not the means of ascertaining.
Matters that must be communicated even in the absence of
inquiry
This section makes it the duty of each party to communicate in good
faith all facts within his knowledge only when:
1. They are material to the contract
2. The other has no means of ascertaining the said facts
3. The party with the duty to communicate makes no warranty.
Important: The test is, if the applicant is aware of the existence of
some circumstances which he knows would influence the insurer in
acting upon his application, good faith requires him to disclose that
circumstance, through unasked.
18 | U N I V E R S I T Y O F S A N C A R L O S
Q. What is the effect if the insurer failed to verify the
statements made by the insured in his application?
Nothing. The insurer has no such obligation to verify. It has the right to
rely on the statements of the insured as to the material facts stated in
his application.
SECTION 29
Section 29. An intentional and fraudulent omission, on the part of one
insured, to communicate information of matters proving or tending to
prove the falsity of a warranty, entitles the insurer to rescind.
When fraudulent intent necessary
Unlike in ordinary concealment (Sec 27), the non-disclosure under this
Section must be intentional and fraudulent in order that the contract
may be rescinded.
A. Insured – the one guilty of the omission
B. Insurer – the one entitled to rescission of the contract
This section relates to “falsity of a warranty”
In every contract of marine insurance, there is an implied warranty that
the ship is seaworthy. Thus, the intentional and fraudulent omission on
the part of the insured when applying for a policy to communicate
information that his ship is in distress or in peril – would entitle the
insurer to rescind because said concealment tends proves or tends to
prove the falsity of the warranty that the ship is seaworthy.
SECTION 30
Section 30. Neither party to a contract of insurance is bound to
communicate information of the matters following, except in answer to
the inquiries of the other:
(a) Those which the other knows
(b) Those which, in the exercise of ordinary care, the other ought to
know, and of which the former has no reason to suppose him
ignorant
(c) Those of which the other waives communication
(d) Those which prove or tend to prove the existence of a risk excluded
by a warranty, and which are not otherwise material; and
(e) Those which relate to a risk excepted from the policy and which
are not otherwise material.
When there is no duty to make disclosure
1. Matters known to, or right to be known by insurer, or of which he
waives disclosure
2. Risks excepted from the policy
3. Nature or amount of insured’s interest
XPN: In answer to the inquiries of the insurer.
Matters made the subject of special inquiries material
Matters made the subject of inquiry must be deemed material even
though otherwise they might not be so regarded and this insured is
required to make full and true disclosure to questions asked.
Important: The failure of an apparently complete answer to make full
disclosure will avoid the policy. However, an answer incomplete on its
fact will not defeat the policy in the absence of bad faith.
Example: In an application for fire insurance, the one applying was
asked whether the property is encumbered and for what amount.
A. If he answers one mortgage when in fact there are two – the policy
is void.
B. If he merely answered that the property is encumbered without
stating the amount of encumbrance – the issue of the policy
without further inquiry is a waiver of the omission to state the
amount.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
SECTION 31
Section 31. Materiality is to be determined not by the event, but solely
by the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries.
DETERMINATION OF MATERIALITY
Test of materiality
The effect which the knowledge of the fact in question would have on
the making of the contract. To be material, a fact need not increase the
risk or contribute to any loss or damage suffered. It is sufficient if the
knowledge of it would influence the parties in making the contract.
Important: No information possessed by one party can be material, in
the sense of requiring disclosure, unless it is possible that it may
influence the other in the making of the contract.
Example:
Feds insured his house against fire, but did not disclose the fact that he
received 2 letters threatening to set his house on fire if he did not pay
P50, 000 to the sender. Feds’ house was destroyed by an accidental fire.
Here, the insurer can deny liability for the loss.
From the standpoint of the insurer
A fact is material if the knowledge of it would have a probable and
reasonable influence upon the insurer in assessing the risk involved,
even though such fact may not even remotely contribute to the
contingency upon which the insurer would become liable.
Example: Feds concealed the fact that he had diabetes and pneumonia.
The policy is avoided although the cause of death (i.e. plane crash) be
totally unconnected with the material fact concealed.
Important: It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed insurance policy or in
making inquiries.
When concealment regarded as intentional
Intention being a state of mind, can be determined only by the external
acts or failure to act from which inferences as to subjective belief may
be reasonably drawn.
Important: The nature of the facts not conveyed must have been
intentional rather than inadvertent.
Examples:
1. Concealment of the fact that he was operated on for cancer
involving complete removal of the right breast
2. Withholding by the father of the fact that his daughter was typically
a mongoloid child
Where fact concealed not material
The insured cannot be guilty of concealment where the fact concealed
is not material.
Example: Insured underwent an ECG test and the results showed a
normal condition but he gave a negative answer to the question of
whether he had such test – did not amount to concealment because
even if the test was related to the insurer, the same would not have
affected its decision to insure the deceased.
TIME WHEN INFORMATION ACQUIRED
Important: The concealment must take place at the time the contract
is entered into in order that the policy may be avoided. The duty of
disclosure ends with the completion and effectivity of the contract.
19 | U N I V E R S I T Y O F S A N C A R L O S
After contract has become effective
If the contract is already complete and binding before the information is
acquired – there is no duty on the insured to disclose the same, even
though the policy is yet to issue.
Before contract becomes effective
If the contract is to be effective only upon the issuance of the policy –
an applicant is under the duty to disclose material facts occurring or
coming to his knowledge between the date of submitting his application
and the date the policy is delivered.
SECTION 32
Section 32. Each party to a contract of insurance is bound to know all
the general causes which are open to his inquiry, equally with that of
the other, and which may affect the political or material perils
contemplated; and all general usages of trade.
Matters each party bound to know
1. General causes open to inquiry equally with that of the other (i.e.
that a nation is at war, or the laws and political conditions in other
countries)
2. Those which affect the political or material perils contemplated
3. All general usages of trade (i.e. rules of navigation, kinds of
seasons, and all risks connected with navigation)
SECTION 33
Section 33. The right to information of material facts may be waived,
either by the terms of insurance or by neglect to make inquiry as to such
facts, where they are distinctly implied in other facts of which
information is communicated.
Right to information may be waived
A. Express – by the terms of the insurance contract
B. Implied – by neglect to make inquiry as to such facts
Important: If the applicant has answered the questions asked in the
application, he is justified in assuming that no further information is
desired. A waiver is a type of estoppel.
Example: In an answer to a question, the insured communicated to the
insurer that he had once stayed in a hospital. The insurer did not inquire
as to the cause of the confinement. Here, there is implied waiver on the
part of the insurer of its rights to be informed of the kind of sickness
which caused insured’s confinement in the hospital.
A.G. Factor v. Phil. American Life Insurance
Facts: Insured died of stage 3 cancer of the cervix. Insurer denied the
claim of death benefits on the ground that insured concealed the fact
that he had cancer in her application. However, it appeals that the
insured faithfully answered the questions in the application, even
indicating the addresses and names of the persons, laboratories and
hospitals when and where she had consultations.
Issue: Was the insured guilty of concealment of fact material to the
insurance contract?
Held: No. The insurer had every means to ascertain the truth of the
matter alleged in the application. Insurer’s failure to make inquiry
constituted a waiver of its right to information of the facts.
Ng Zee v. Asian Crusader Life Assurance Corp
Facts: Insured stated that he was operated on for a tumor of the
stomach associated with ulcer. It turned out however that his aliment
was diagnosed as peptic ulcer where a portion of his stomach was
removed.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Issue: Was the insurer deceived into entering the contract or accepting
the risk at the rate of premium agreed upon?
Held: No. In the absence of evidence that the insured had sufficient
medical knowledge as to enable him to distinguish between peptic ulcer
and a tumor, his statement that said tumor was associated with peptic
ulcer of the stomach should be construed as an expression in good faith
of his belief as to the nature of his ailment and operation.
While the information was imperfect, the same was nevertheless
sufficient to have induced the insurer to make further inquiries about
the ailment and operation of the insured. Insurer’s failure to make
further inquiry therefore waives the imperfection of the answer.
SECTION 34
Section 34. Information of the nature or amount of the interest of one
insured need not be communicated unless in answer to an inquiry,
except as prescribed by Section 51.
DISCLOSURE OF NATURE & EXTENT OF INTEREST OF INSURED
General Rule: There is no need to disclose the interest in the property
insured.
Exceptions:
1. In answer to an inquiry
2. If the person applying for the policy is not the absolute owner
thereof (Section 51)
Example:
A fire insurance policy was issued to Feds. He was described as the
owner of the property, but in fact, he was only given the privilege of
occupying the property, rent-free for life by the terms of his father’s will.
Is the policy valid? No. Feds is guilty of misrepresentation. He should
have disclosed the nature of his interest in the property inasmuch as he
is not the absolute owner thereof.
SECTION 35
Section 35. Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own judgment upon
the matters in question.
Disclosure of judgment upon the matters in questions
The duty to disclose is confined to facts. Hence, there is no duty to
disclose mere opinion, speculation, intention or expectation.
Important: This is true even if the insured is asked.
Example: If the insurer asks “how long do you think you will live?”, the
insured need not answer the question. The fact that he committed error
in answering such a question calling for an expression of opinion does
not constitute fraud in law.
TITLE 5. REPRESENTATION
SECTION 36
Section 36. A representation may be oral or written.
REPRESENTATION AND MISREPRESENTATION DEFINED
Representation
Statement made by the insured at the time of, or prior to the issuance
of the policy relative to the risk to be insured, as to an existing or past
fact or state of facts, or concerning a future happening – to give
20 | U N I V E R S I T Y O F S A N C A R L O S
information to the insurer and otherwise induce him to enter into the
insurance contract.
Misrepresentation
A statement
1. As a fact of something which is untrue
2. Which the insured stated 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 he has tendency to mislead
3. Where such fact in either case is material to the risk
TN: Misrepresentation may be viewed as the active form of concealment
Important: The misrepresentation has the effect of rendering the
contract voidable at the option of the insurer, even though innocently
made and without wrongful intent.
FORMS AND NATURE OF REPRESENTATION
Information given concerning risk
The person applying for insurance must give the insurer all information
concerning the risk as will be of use to the latter in estimating the
character and in determining whether or not to assume it.
The information may be given:
1. Orally
2. Written in papers not connected with the contract (i.e. circulars,
prospectuses, examiner’s report)
3. In the policy itself
Forms the basis of contract
The information, however given, forms the basis of the contract. It
describes, marks out and defines the risk assumed. Here arises the
reasonable rule that the untruth of any material representation relied on
by the insurer will avoid the contract, wholly irrespective of the intent,
whether innocent or fraudulent.
Intended as collateral inducements
Representations are made to influence the insurer to accept the risk.
Thus, it may be communicated in any manner whatsoever that is
intelligible.
SECTION 37
Section 37. A representation may be made at the time of, or before,
issuance of the policy.
Time when representation may be made
The very nature of representation requires that it precede the execution
of the contract.
XPN: A representation may be performed after the issuance of the
policy.
Important: The insurer must be induced by the misrepresentation of
the application for insurance to issue the policy. Clearly, a representation
made after the policy is issued could not have influenced the insurer.
SECTION 38
Section 38. The language of a representation is to be interpreted by the
same rules as the language of contracts in general.
Construction of representations
Representations are construed liberally in favor of the insured, and are
required to be only substantially true.
TN: Warranties, in contrast, must be literally true, otherwise the contract
will fail.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Examples:
1. Questions as to the use of liquor – will be construed as referring to
habitual use and not occasional use.
2. Questions as to illness or disease – refer to serious ailments and
not to minor indispositions
SECTION 39
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.
KINDS OF REPRESENTATION
A representation must be made at the time of issuing the policy or before
and may be:
1. Oral or written
2. Affirmative or promissory
A. Affirmative representation – Any allegation as to the
existence or non-existence of a fact when the contract begins.
Example: A statement of the insured that the house to be
insured is used only for residential purposes.
B. Promissory representation – Any promise to be fulfilled
after the contract has come into existence or any statement
concerning what is to happen during the existence of the
insurance.
NATURE OF PROMISSORY REPRESENTATION
The term “promissory representation” is used in two senses:
1. It is used to indicate a parol or oral promise made in connection
with the insurance but not incorporated in the policy.
2. An undertaking by the insured, indicated in the policy, but not
specifically made a warranty. It is however in such a case, merely
an executory term of the contract and not properly a
representation.
Important: A promissory representation is substantially a condition or
a warranty.
EFFECT ON POLICY OF EXPRESSIONS OF OPINION OR
EXPECTATION
Good faith or bad faith of the insured
A representation of the expectation, intention, belief, or opinion of the
insured, although false, will not avoid a policy of insurance if there is no
actual fraud in inducing the acceptance of the risk.
Liability of the insurer
The good faith of the insured furnishes the criterion of truth. Thus, to
avoid liability, the insurer must prove both (1) materiality of the insured’s
opinion and (3) the latter’s intent to deceive.
Important: If the representation is one of fact, all the insurer need to
prove is its falsity and materiality as defined in Sections 44, 45, 46. The
intent to deceive is presumed.
When representation deemed a mere expression of opinion
An oral representation as to a future event or condition, over which the
insured has no control, with reference to property or life insured, will be
deemed a mere expression of opinion which will avoid a contract only
when made in bad faith.
Example: Insured made an oral promise that the building shall be
occupied. The failure to fulfill the promise if made in good faith, will not
avoid the policy.
21 | U N I V E R S I T Y O F S A N C A R L O S
SECTION 40
Section 40. A representation cannot qualify an express provision in a
contract of insurance, but it may qualify an implied warranty.
Effect of representation on express provisions of policy
A representation cannot qualify an express provision or an express
warranty in a contract of insurance. This is because a representation is
not part of the contract but only a collateral inducement to it.
Important: A representation however, may qualify an implied
warranty.
Examples:
1. If the policy expressly provides that the house insured is used as a
warehouse, any representation made by the insured prior to the
issuance of the policy that the house was used only as a resident
– is not a defense in the action for recovery of the amount of
insurance.
2. If the insured makes a representation that the vessel insured was
deficient for the voyage because it was not duly manned, such
representation may qualify the implied warranty that the vessel is
seaworthy.
SECTION 41
Section 41. A representation may be altered or withdrawn before the
insurance is effected, but not afterwards.
Time to which representation refers
Representations refer only to the time of making the contract.
Representations found to be untrue may be withdrawn prior to the
completion of the contract but not afterwards.
Rules:
A. There is no false representation, if it is true at the time the contract
takes effect although false at the time it was made and vice versa.
Example: If the insured represented that his vessel was in Tokyo
when it fact it was in Hongkong, but at the taking into effect of the
contract, it was already in Tokyo – there is no misrepresentation.
B. There is false representation if it is true at the time it was made
but false at the time the contract takes effect.
Example: Assuming the representation that the vessel was in Tokyo
to be true but on the date of the execution of the contract the
vessel was no longer in Tokyo but in Hongkong and is shipwrecked
there, the insurer is not liable under the policy on the ground of
false representation.
TN: In other words, a representation is a continuing representation until
the contract takes effect.
SECTION 43
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.
Effect where information obtained from third persons
The insured is given discretion to communicate to the insurer what he
knows of a matter of which he has no personal knowledge. If the
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

representation turns out to be false, he is not responsible therefore, representation. To be deemed false, it is sufficient if the representation
provided he gives explanation that he does so on the information of fails to correspond with the facts in a material point
others.
Effect of collusion or fraud of agent of insurer
Example: If the insured has no personal knowledge of the cause of the
death of his parents because they died when the insured was still an A. Collusion with insured – collusion between the agent and the
infant, he may report information obtained from friends and relatives, insured in misrepresenting the facts will vitiate the policy even
expressly stating that he does not possess knowledge personally but though the agent is acting within the apparent scope of his
through others. In this case, the insured is not responsible for the truth authority.
of the information.
B. Principal of agent – where the insured merely signed the
Effect where information obtained from agent of insured or application form and made the agent of the insurer fill the same
insurer for him, it was held that by doing so, the insured made the agent
of the insurer his own agent. The insurer is liable when its agent
A. Agent of the insured – if it was possible for the agent under such writes a false answer into the application without the knowledge of
circumstances in the exercise of due diligence to have made such the insured.
communication before the making of the contract, the insured will
be liable for the truth. Important: But where the insurer required its medical examiner to put
the questions and fill out the answers in his own handwriting, the writer
B. Agent of the insurer – the same principle applies to the insurer of the application is not the agent of the insured.
though in the nature of things, the question does not occur so
frequently.
SECTION 46
SECTION 44 Section 46. The materiality of a representation is determined by the
same rules as the materiality of a concealment.
Section 44. A representation is to be deemed false when the facts fail to
correspond with its assertions or stipulations.
Test materiality of representation
The materiality of the representation is to be determined not by the
When representation deemed false
event, but solely by the probable and reasonable influence of the facts
In order that a policy shall be avoided, a representation relied upon must
upon the party to whom the representation is made.
be false in a substantial and material respect.
Important: Materiality is a judicial question. The matter
Important: Unlike warranties, representations are not required to be
misrepresented must be of that character which the court can say would
literally true. They need only be substantially true.
reasonably affect the insurer's judgment.
The rule does not apply in marine insurance
Concealment and misrepresentation compared
In marine insurance, substantial truth of a representation is not
sufficient. The insured is required to state the exact and whole truth in
1. As to definition:
relation to all matters that he represents, or upon inquiry discloses or
A. Concealment – the insured withholds information of material
assumes to disclose.
facts from the insurer
B. Misrepresentation – the insured makes erroneous statements
TN: A statement that the applicant is in good health is held not to mean
of facts with the intent of inducing the insurer to enter into
that he is in perfect health, but that he is not aware of any disease of
the insurance contract
such a serious nature as to impair his health permanently. That he is
temporarily ill because of some passing malady does not render his
2. The materiality of a concealment is determined by the same rules
representation substantially untrue
as applied in cases of misrepresentation.
Construction of representation as affirmative.
3. A concealment on the part of the insured has the same effect as a
A representation written in the policy even in such form as to admit of
misrepresentation and gives the insurer a right to rescind the
its being construed as an executory agreement or promissory
contract.
representation will rather be construed, when possible, as an affirmative
representation of a present fact in order to save the policy from
4. Whether intentional or not, the injured party is entitled to rescind
avoidance.
a contract of insurance on ground of concealment or false
representation.
Example: The insured states that no smoking is allowed on the premises.
The truth of the representation at the time the contract takes effect is
5. Since the contract of insurance is said to be one of utmost good
sufficient to validate the insurance which will not be affected by a
faith on the part of both parties to the agreement, the rules on
subsequent change in the practice as to smoking in the premises.
concealment and representation apply likewise to the insurer.

SECTION 45
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.
Effect of falsity of representation
Fraud or intent to misrepresent facts is not essential to entitle the injured
party to rescind a contract of insurance on the ground of false
SECTION 47
Section 47. The provisions of this chapter apply as well to a modification
of a contract of insurance as to its original formation.
Applicability of Sections 26 to 48.
The provisions of Sections 26 to 35 governing concealment and Sections
36 to 48 governing representations apply not only to the original
formation of the contract but also to a modification of the same during
the time it is in force.

22 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Important: Thus, where the insurer is induced to modify the insurance
policy as to the rate of premium by a misrepresentation on the part of
the insured in a material point, the insurer is entitled to rescind such
modification.
SECTION 48
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 (2) years from the date of its issue or of its last reinstatement,
the insurer cannot prove that the policy is void ab initio or is rescindable
by reason of the fraudulent concealment or misrepresentation of the
insured or his agent.
WHEN AN INSURER MUST EXERCISE HIS RIGHT TO RESCIND
In general
A contract of insurance may be rescinded on the ground of:
1. Concealment
2. False representation
3. Breach of warranty
Important: A defense to an action to recover insurance that the policy
was obtained through false representations, fraud and deceit is not in
the nature of an action to rescind and is thus not barred by the provision.
There is no time limit imposed for interposing this defense.
In non-life policy
In order that the insurer may rescind a contract of insurance, such right
must be exercised prior to the commencement of an action on the
contract. In other words, the insurer is no longer entitled to rescind a
contract of insurance after the insured has filed an action to collect the
amount of the insurance.
Life policy
The foregoing rulings should be understood to be qualified by the
second paragraph of Section 48. By virtue of the second paragraph, the
defenses mentioned are available only during the first two years of a life
insurance policy.
INCONTESTABILITY OF LIFE POLICIES
Incontestability means that after the requisites are shown to exist,
the insurer shall be estopped from contesting the policy or setting up
any defense, except as is allowed, on the ground of public policy
Incontestable clauses
Clauses in life insurance policies known as incontestable clauses
stipulating that the policy shall be incontestable after a stated period are
in general use, and are now required by statutes in force in many states.
They create a kind of contractual statute of limitations on certain
defenses that may be raised by the insurer.
Incontestability is not absolute
The incontestability of a policy under the law is not absolute. Otherwise,
a beneficiary of any person who had procured a life policy more than
two years before his death would automatically be entitled to the
proceeds upon that person's death.
Incontestability only deprives the insurer of those defenses which arise
in connection with the formation and operation of the policy prior to
loss.
23 | U N I V E R S I T Y O F S A N C A R L O S
Theory and object of the incontestable clause
A. As to the insurer – An insurer should have a reasonable
opportunity to investigate the statements which the applicant
makes in procuring his policy and that after a definite period, the
insurer should not permitted to question the validity of the policy
either by affirmative action or by defense.
B. As to the insured – The clause has as its object to give the
greatest possible assurance to a policyholder that his beneficiaries
would receive payment without question as to the validity of the
policy or the existence of the coverage once the period of
contestability passes.
Requisites for incontestability
In order that the insurance shall be incontestable, the following must be
present:
1. The policy is a life insurance policy
2. It is payable on the death of the insured
3. It has been in force during the lifetime of the insured for at least 2
years from its date of issue or of its last reinstatement
Important: The period of two (2) years for contesting a life insurance
policy by the insurer may be shortened but it cannot be extended by
stipulation. The phrase "during the lifetime" simply means that the policy
is no longer considered in force after the insured has died. The key
phrase is "for a period of two years."
Effects when policy becomes incontestable
The insurer may not refuse to pay the same by claiming that:
1. The policy is void ab initio
2. It is rescissible by reason of the fraudulent concealment of the
insured or his agent, no matter how patent or well-founded
3. It is rescissible by reason of the fraudulent misrepresentations of
the insured or his agent.
Rule in case of reinstatement
A policy of insurance, after it has lapsed or become forfeited as for non-
payment of premiums or breach of a warranty or condition may be
revived or reinstated pursuant to a provision in the policy or the
agreement of the parties.
Important: In which case, the period of contestability should be
counted from the date of reinstatement and not from the date of the
issuance of the policy.
Defenses not barred by incontestable clause
The insurer may still contest the policy by way of defense to a suit
brought upon the policy or by action to rescind the same, on any of the
following grounds:
(1) That the person taking the insurance lacked insurable interest as
required by law
(2) That the cause of the death of the insured is an excepted risk;
(3) That the premiums have not been paid
(4) That the conditions of the policy relating to military or naval
service have been violated
(5) That the fraud is of a particularly vicious type, as where the policy
was taken out in furtherance of a scheme to murder the insured,
or where the insured substitutes another person for the medical
examination, or where the beneficiary feloniously kills the insured
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
TITLE 6. THE POLICY
SECTIONS 49-50
Section 49. The written instrument in which a contract of insurance is
set forth, is called a policy of insurance.
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.
Notwithstanding the foregoing, the policy may be in electronic form
subject to the pertinent provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to such rules and
regulations as may be prescribed by the Commissioner.
Policy of insurance defined
See definition under Section 49. It is the written document embodying
the terms and stipulations of the contract of insurance between the
insured and the insurer.
POLICY CONTROLS TERMS OF INSURANCE CONTRACT
Measure of insurer’s liability
The terms of the insurance contract constitute the measure of the
insurer’s liability, and in order to recover, the insured must show himself
within the terms.
Presence of requisites for validity
To create an enforceable agreement, all the requisites necessary in
order that there will be a valid contract of insurance must be present.
Compliance of insured with conditions of policy
Insurance companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best upon their
obligations not inconsistent with public policy.
TN: The compliance by the insured with the terms of the policy is a
condition precedent to the right of recovery.
POLICY IS A CONTRACT OF ADHESION
Terms drafted and imposed by insurer
Insurance contracts are drafted with the aid of skilful and highly paid
legal talent. The applicant on the other hand, is a shorn lamb driven to
accept whatever contract may be offered on a take it or leave it basis if
he wishes insurance protection.
Ambiguity resolved against insurer
These types of contracts are viewed as traps for the weaker party whom
the courts of justice must protect. Consequently, where the language in
the insurance contract is ambiguous, the same should be resolved
liberally in favor of the insured and strictly against the party responsible
therefor.
24 | U N I V E R S I T Y O F S A N C A R L O S
Finman General Assurance v. CA
Where the personal accident insurance policy involved specifically
enumerated only 10 circumstances wherein no liability attaches to the
insurer for any injury, the failure of the insurer to include death resulting
from murders or assault among the prohibited risks lead inevitably to
the conclusion that it did not intend to limit or exempt itself from liability
for such death. The principle of expressio unius est exclusion alterius
applies.
When terms of contract clear
There is no room for construction and such terms cannot be enlarged
or diminished by judicial construction.
POLICY DIFFERENT FROM CONTRACT ITSELF
A policy of insurance is different from the contract of insurance. The
policy is the formal written instrument evidencing the contract of
insurance.
Form thereof previously approved by Insurance Commissioner
Insurance policies generally are required in standard forms. Section 226
would make it seem that every contract of insurance in the Philippines
must be evidenced by a policy and that policy must be in the form
previously approved by the Insurance Commissioner.
FORM OF CONTRACT OF INSURANCE
Modern-day insurance contracts are evidenced by writing, which may be
informal as a binding slip, or it may be formal, being the carefully drawn
written policy in customary use.
Under the Insurance Code, the policy must be in printed form.
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 in the policy.
Important: In case of conflict between the written and printed portions
of a policy, the written portion prevails.
PERFECTION OF INSURANCE CONTRACT
A contract of insurance, like other contracts, must be consented to by
the parties. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract.
Acceptance of application
Acceptance must be unconditional but it need not be by formal act. Such
acceptance must likewise be accepted to the other party.
Thus, the contract is not perfected where the applicant for life insurance
dies before its approval or it does not appear that the acceptance-of the
application ever came to the knowledge of the applicant.
Compliance with conditions precedent
The usual conditions found in the application for insurance or in the
policy are that the contract shall not become binding until the policy is
delivered and the first premium paid. These conditions are valid and
enforceable. Until the conditions are fulfilled, the policy is of no binding
effect.
Important: A binding deposit receipt is intended to be merely a
provisional or temporary insurance contract and to be binding only upon
compliance with the said conditions. In life insurance, a binding slip or
binding receipt does not insure by itself.
Cover notes
They may be issued to bind the Insurance temporarily pending the
issuance of the policy. (Sec. 52.) Coverage then can begin depending
upon their terms.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
OFFER AND ACCEPTANCE IN INSURANCE CONTRACT
In insurance transaction, it is important to know who makes the offer
and who accepts the offer. The applicant usually makes the offer to the
insurer through an application for insurance.
(1) In property and liability insurance. — It is the insured who
technically makes an offer to the insurer, who accepts the offer,
rejects it, or makes a counter-offer. The offer is usually accepted
by an insurance agent on behalf of the insurer.
(2) In life and health insurance. — The situation depends upon
whether the insured pays the premium at the time he applies for
insurance.
A. If he does not pay the premium – his application is
considered an invitation to the insurer to make an offer
which he must then accept.
B. If he pays the premium with his application – his application
will be considered an offer.
DELIVERY OF POLICY
Delivery is the act of putting the insurance policy (the physical
document) into the possession of the insured.
Importance of delivery of the policy
The delivery of the policy is important in at least two ways:
1. As evidence of the making of a contract and of its terms
2. As communication of the insurer’s acceptance of the insured’s offer
3. Delivery is also important because it may affect the term of the
coverage.
Example: If a policy provides that the coverage terminates 1 year after
delivery, it therefore, becomes the important fact for determining when
the policy ends.
Effect of absence of delivery
The delivery of a policy is not a prerequisite to a valid contract of
insurance, unless the parties have so agreed in clear language. The
contract may be completed prior to or even without the delivery of the
policy depending on the intention of the parties.
Important: The widespread use of binding receipts has made delivery
less important than it used to be in the process of forming a contract
between the insurer and the insured, but delivery still has significance
as the "decisive act that ordinarily marks the end of the insurer's
opportunity to decline coverage.
Mode of delivery of policy
A. Actual delivery – delivery to the insured in person or his duly
constituted agent
B. Constructive delivery – may be constructively delivered when it is
deposited in the mail duly directed to the insured or his agent.
TN: In the final analysis, whether or not the policy was delivered after
its issuance depends not upon its manual possession by the insured, but
rather upon the intention of the parties which may be shown by their
acts or words.
Presumption of delivery
Possession by the insured raises the presumption that the policy was
delivered to him, while possession by the insurer is prima facie evidence
that no delivery was made.
Important: If the application contains a provision that the insurance
shall not be effective until the delivery of the policy, delivery is essential
to the consummation of the contract.
25 | U N I V E R S I T Y O F S A N C A R L O S
Liberty National Life Insurance Co. v. Patterson
Facts: Feds made a written application for a $10,000 policy. He paid the
premiums and was given a receipt. The application provided that “no
insurance would take effect until the policy had been manually delivered
to and accepted by Feds and the first premium paid during his lifetime.
Feds then died of a coronary disease before the policy was issued and
delivered to him.
Issue: Was the policy enforceable although it was not manually delivered
to and accepted by Feds?
Held: Yes. The requirement of delivery was modified by the reference
to the receipt, which receipt made the insurance effective upon the
payment for the premium by Feds. Here, the premium was paid when
the application for insurance was made.
Delivery to insurer’s agent as to delivery to insured
Suppose, the applicant dies after a life policy has been delivered to the
insurance agent by the Head Office but before it is delivered to the
applicant, can his beneficiary recover on the policy?
Two views:
1. Beneficiary cannot recover for the simple reason that the insurance
agent is not his agent
2. Beneficiary can recover because the contract is to be deemed
complete when the policy has been delivered to the insurance
agent. The insured having complied with every condition required
of him, actual delivery to him is not essential to give the policy
binding effect.
Effect of delivery of policy
A. Where delivery is conditional – non-performance of the condition
precedent prevents the contract from taking effect.
B. Where delivery is unconditional – ordinarily consummates the
contract, and the policy as delivered becomes the final contract
between the parties.
C. Where premium still unpaid after conditional delivery – in the
absence of any clear agreement, the policy will lapse if the
premium is not paid.
RIDER IN A CONTRACT OF INSURANCE
A rider is a small printed or typed stipulation contained on a slip of paper
attached to the policy and forming an integral part of the policy.
Reason: Riders are usually attached to the policy because they
constitute additional stipulations between the parties. Any rider properly
attached to a policy is part of the contract as if embodied in the policy.
Necessity for riders
Because in the conduct of insurance business, it often becomes
necessary to add a new provision to a policy, or to modify or waive an
existing provision, or to make any desired change in the policy. This
saves the trouble and expense of making an entirely new contract.
Rule in case of conflict between a rider, etc. and printed
stipulations of a policy
The rider prevails, as being a more deliberate expression of the
agreement of the contracting parties.
Example: The fire insurance policy on a building excludes loss by
earthquake. For the payment of an additional premium, the insurer
attached a rider, in which it agrees to indemnify the insured against loss
by earthquake. The rider becomes a part of the policy and supersedes
any part of the policy in conflict with its provisions.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
ATTACHED PAPERS ON INSURANCE POLICY
General rule: A rider, slip, or other paper becomes a part of a contract
or policy of insurance if properly and sufficiently attached or referred to
therein in a manner as to leave no doubt as to the intention of the parties
in such respect.
Exception: If the descriptive title or name of the rider, etc. is not
mentioned and written on the blank spaces provided in the policy.
Important: The lack of description will not affect the other provisions
of the policy except where without such rider, etc., the contract would
be incomplete.
Warranties
Inserted or attached to a policy to eliminate specific potential increases
of hazard during the policy term owing to (1) actions of the insured or
(2) condition of the property.
Example: Hazardous Trades warranty
Clause
Agreement between the insurer and the insured on certain matter
relating to the liability of the insurer in case of loss.
Examples:
1. Three-fourths clause
2. Loss payable clause
3. Change of ownership clause
Endorsement
Provision added to an insurance contract altering its scope or
application. Examples of endorsements are those extending the
Perils covered.
Effect of lack of signature
GR: Where the rider, etc. is physically attached to a policy of insurance
contemporaneously with its execution, the fact that it is without the
signature of the insurer or of the insured will not prevent its inclusion
and construction as a part of the insurance contract.
XPN: But the countersignature of the insured or owner is required to
any rider, etc. not applied for by him if issued after the delivery of the
policy, which countersignature shall be taken as his agreement to the
contents of the matter so attached.
EFFECT OF FAILURE OF INSURED TO REAL POLICY
Majority rule
In most jurisdictions, the fact that it is customary for insured persons to
accept policies without reading is judicially recognized. The basis for the
decisions is that insurance contracts are contracts of "adhesion" and not
of bargaining, that is, the insured purchases the contract prepared solely
by the insurer.
Minority rule
The insured has the duty to read his policy and is bound by his contract
as written whether he reads it or not.
Exceptions:
1. Where the insured could not have discovered the erroneous
statement by such reading.
2. Where the insured is induced by the fraud of the agent of the
insurer not to read his policy
3. Where the insured is illiterate or unable to read English
4. Where contracts are long, complicated and difficult to understand
even if read
26 | U N I V E R S I T Y O F S A N C A R L O S
Important: There is no sufficient reason in contracts of insurance why
a party should be relieved from the duty of exercising the ordinary care
and prudence that would be exacted in relation to other contracts. The
conformity of the insured to the terms of the policy is implied from his
failure to express any disagreement with what is provided for.
Trend in modern cases
In forming a contract, an insured relies not upon the text of the policies
but on the general descriptions of the coverage provided by the insurer
and its agents during the time he is considering whether to submit an
application.
Absent a special request, an insured will not see the text of the policy
until after the application has been submitted and the first premium
paid. Under these circumstances, it is not surprising that the so-called
"duty to read" has less significance in modern cases.
INSURER’S DUTY TO EXPLAIN THE POLICY
Where terms of policy are clear
The insurer has no affirmative duty to explain the policy or its exclusions
to the insured. This principle, however, is subject to some important
caveats.
Important caveats:
1. Reasonable expectations of insured –If a court holds that an
insured's reasonable expectations entitle him to coverage despite
policy language to the contrary, the insurer must pay for the loss
because the insurer failed to explain the limitations on coverage
to the insured.
2. Options available to insured – in the area of motor vehicle
insurance where legislations have made certain kinds of coverage
optional, courts have sometimes imposed a duty on the insurer to
explain the options to the insured.
3. Information expected by insured by insurer’s agent –In
the exercise of skill and care that a reasonable agent would
exercise, he has the obligation to explain to the customer the
kinds of coverage available and to help the insured in choosing
an appropriate coverage.
4. Contractual rights of insured after denial of coverage –
when the insured disputes a denial of coverage, the insurer has
the obligation to alert the insured to his rights under the policy.
The insurer must take affirmative steps to make sure that the
insured is informed of his remedial rights.
SECTION 51
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.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
CONTENTS OF THE POLICY
Section 51 enumerates what the policy of insurance must contain.
1. Names of parties
Take note:
A. Incorrect spelling of a name is not fatal, so long as the identity
of the party can be sufficiently established.
B. It is not essential to the effectiveness of the contract that the
name of the insured should appear therein, as he may be
described in other ways, such as “for the owner” of specified
property.
2. Amount of insurance – necessary to easily and exactly
determine the amount of indemnity to be paid to the insured. The
sum insured is a basis for calculating the premium.
Exceptions: The sum need not be specified in cases of open or
running policies.
3. Premium – it represents the consideration of the contract, what
the insured pays the insurer to assume the risk of loss.
A. Life insurance – premiums are based on the average life span
predicted from mortality tables.
B. Fire insurance – factors affecting the rate are its structure or
construction, occupancy, use, location, etc.
4. Property or life insured – constitutes the subject matter of the
contract.
5. Interest of insured in property – only required when the
insured is not the absolute owner of the property insured.
Especially important in fire insurance to determine the actual
damage suffered by the insured in case of loss, if he is not the
absolute owner thereof. (i.e. mortagagee)
6. Risks insured against – because the undertaking of the insurer
is to indemnify the insured for loss, damage or liability caused only
by the risks insured against.
7. Term or duration of insurance – The duration may be
expressed in terms of dates, or in terms of voyage. This is
important because the insurer will not be liable unless it occurred
during such duration of the insurance.
TN: The period of time during which the insurer assumes the risk
of loss is known as the life of the policy.
A. Annual policies – policies issued for a term of 12 months
B. Short period policies – policies issued for a less period
KINDS OF INSURABLE RISKS
Risks are ordinarily divided into three classifications:
1. Personal risks – those involving the person, i.e. death or
disability. Personal risks are often divided into life and health risks.
2. Property risks – those involving loss or damage to property.
A. Direct losses – fire, lightning, flood, and other forces of nature
B. Indirect losses – loss of profits, rents or favorable leases
3. Liability risks – those involving liability for the injury to the person
or property of others. These risks are occasioned by the operation
of the law of liability (tort) and may sometimes be called third party
risks.
TN: This involves both bodily injury and property damage risks.
27 | U N I V E R S I T Y O F S A N C A R L O S
RISK, PERIL, AND HAZARDS DISTINGUISHED
A. Risk – chance or possibility of loss based on known and unknown
factors. If loss is certain to happen, no risk is involved.
B. Peril – contingent or unknown event which may cause a loss. It is
the contingency that one insures against. Its existence creates the
risk and its occurrence results in loss.
Examples: Fires, flood, theft, illness, death, etc.
C. Hazard – the condition or factor which may create or increase the
chance of loss from a given peril.
Two major classifications:
1. Physical hazards – everything relating to location, structure,
occupancy, exposure, i.e. gasoline stored in the premises,
unsafe brake in a car, weak construction, etc.
2. Moral hazards – factors that have their inception in mental
attitudes, including hazards created by dishonesty, insanity,
carelessness, indifference and other causes psychological in
nature.
TN: However, the terms are sometimes given more than one meaning,
and is true even in the insurance business.
REQUIREMENT FOR RISKS TO BE INSURABLE
Not all risks are insurable. To be considered insurable, it must
substantially meet certain requirements.
1. Important – the loss to be insured against should be important
enough to warrant the existence of an insurance contract.
Otherwise, to cover every small loss would increase greatly the cost
of protection. Thus, a person may not insure against losing his
ballpen or glasses.
2. Calculability – the risk must permit a reasonable statistical
estimate of the chance of loss. If it cannot be calculated
statistically, it is impossible to determine the amount of premiums.
3. Definiteness of loss – losses should be fairly definite as to cause,
time, place and amount, otherwise, estimates of possible loss are
difficult.
4. No catastrophic loss – When large people are subject to the
same kind of losses, i.e. war, it is an obvious deviation from the
principle that the losses of the few are borne by many. Thus, it is
usual to exclude political and war risks.
5. Accidental in nature – insurable risks must normally be
accidental in nature. Intentional losses caused by the insured are
not insurable because they cannot be predicted and payment for
them is against public policy.
Requirement not absolute
However, the requirements above for an insurable risk are not absolute.
Insurability is best described as a relative matter. What is insurable
varies amount insurers and may change over time and with the use of
several limitations.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
SECTION 52
Section 52. Cover notes may be issued to bind insurance temporarily
pending the issuance of the policy. Within sixty (60) days after issue of
a 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 (60) 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.
PRELIMINARY CONTRACTS OF INSURANCE
There are two kinds of preliminary contract of insurance:
1. Preliminary contract of present insurance
The insurer subjects the subject matter usually by a “binding slip”
or “binder” or “cover note” – the contract to be effective until the
formal policy is issued or the risk rejected.
TN: The binder is actually a temporary contract of insurance and is
usually issued after the applicant pays the first premium.
2. Preliminary contracts of executory insurance
The insurer makes a contract to insure the subject matter at some
subsequent time which may be definite or indefinite. Here, the right
acquired by the insured is merely to demand the delivery of a policy
in accordance with the terms agreed upon and the obligation
assumed by the insurer is to deliver such policy.
Examples:
A. X signed an application for a fire insurance of his house. The insurer
accepted the application and issued a cover note for the insurance.
Before the policy could be issued, the house was burned. In this
case, the insurer would have to reimburse X for his loss.
B. Suppose, in the same example, the agreement of the insurer is to
issue the policy within a certain date and the house was destroyed
by fire before such date. Here, the insurer would not be liable on a
claim for loss as there was merely an executory contract of
insurance.
ISSUANCE AND RENEWAL OF COVER NOTES
Cover notes or binders
Short-term insurance policies that may be issued to afford immediate
provisional protection to the insured until the insurer can inspect or
evaluate the risk in question and issue the proper policy or until the risk
is declined and notice thereof given.
Take note:
1. Being temporary, it is sufficient that the cover note shows by
necessary implication an agreement to pay whatever rate may be
fixed.
2. The fact that no separate premium was paid on the cover note
before the loss insured against occurred, does not militate against
its binding effect as an insurance contract.
Rules on cover notes:
1. Insurance companies doing business in the Philippines may issue
cover notes to bind insurance temporarily, pending the issuance of
the policy.
28 | U N I V E R S I T Y O F S A N C A R L O S
2. A cover note shall be deemed to be a contract of insurance within
the meaning of Section 1 (1) of the Code.
3. No cover note shall be issued or renewed unless in the form
previously approved by the Insurance Commission.
4. A cover note shall be valid and binding for a period not exceeding
sixty (60) days from the date of its issuance, whether or not the
premium therefor has been paid, but such cover note may be
cancelled by either party upon at least seven (7) days notice to the
other party.
5. If a cover note is not so cancelled, a policy of insurance shall, within
sixty (60) days after the issuance of such cover note, be issued in
lieu thereof. Such policy shall include within its terms the identical
insurance bond under the cover note and the premium therefor.
6. A cover note may be extended or renewed beyond the
aforementioned period of sixty (60) days with the written approval
of the Insurance Commission, provided that such written approval
may be dispensed with upon the certification of the president, vice-
president, or general manager of the insurance company
concerned that the risks involved, the values of such risks and/or
the premiums therefor have not as yet been determined or
established and that such extension or renewal is not contrary to
and is not for the purpose of violating any provisions of the
Insurance Code, or of any of the rulings, instructions, circulars,
orders or decisions of the Insurance Commissioner.
7. Insurance companies may impose on cover notes a deposit
premium equivalent to at least 25% of the estimated premium of
the intended insurance coverage but in no case less than P500.00.
SECTION 53
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.
Persons entitled to recover on policy
As discussed, insurance is a personal contract between the insured and
the insurer.
1. As against the insured – Third persons have no right to the
proceeds of the policy unless there be some contract of trust,
express or implied, between the insured and third persons. So that
where different persons have different interests in the same
property (like the mortgagor and mortgagee of the property), the
insurance taken by one in his own right and in his own interest
does not in any way inure to the benefit of the other.
2. As against the insurer – A third person, in the absence of any
provision in the policy, has also no right to the proceeds thereof.
Pursuant to Section 53, only the insured, if still alive, or the
beneficiary, if the insured is already deceased, is entitled to claim
the insurance proceeds upon the maturation of the policy.
SECTION 54
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.
An insurance may be taken personally or through an agent
An insurance may be taken by a person personally or through his agent
or trustee since by the provision of Section 53, the insurance is to be
applied exclusively to the interest of the person in whose name or for
whose benefit it is made,
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
Rule in case insurance is made by an agent or trustee
The agent or trustee when making an insurance contract for or on behalf
of his principal should indicate that he is merely acting in a
representative capacity by signing as such agent or trustee, or by other
general terms in the policy.
However, where the defendant acted as plaintiff's agent for the
insurance of goods stored with the defendant, the plaintiff cannot claim
the benefit of the agency without sharing in the expenses.
SECTION 55
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.
Where insurance effected by partner or part owner
Rules:
1. Insurable interest in the property of a partnership exists in both
the partnership and the partners
2. A partner has an insurable interest in the firm property which will
support a policy taken out thereon for his own benefit
Important: But a partner who insures partnership property in his own
name limits the contract to his individual share unless the terms of the
policy clearly show that the insurance was meant to cover also the
shares of the other partners,
SECTIONS 56-57
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.
WHERE DESCRIPTION OF INSURED GENERAL
The policy of insurance must specify the parties between whom the
contract is made. Although it is usual to insert in a policy the name of
the person insured, it is not essential as he may be described in other
ways.
What must a person claiming benefit show so the insurance
may be applied to his interest?
In order that the insurance may be applied to the interest of the person
claiming the benefit of the policy, he must show that he is the person
named or described or that he belongs to the class of persons
comprehended in the policy.
Example: Where the policy is "for the owner" of specified property, it is
necessary for such person to prove that at least he was the owner of
the thing insured at the time of the loss.
SECTION 58
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.
Effect of transfer of thing insured
Since a contract of insurance is a personal contract, it does not attach
to or run with the property insured.
29 | U N I V E R S I T Y O F S A N C A R L O S
Important: A purchaser of property who does not take the precaution
to obtain a transfer of the policy of insurance cannot, in case of loss,
recover upon such contract, as the transfer of the property has the effect
of suspending the insurance until the purchaser becomes the owner of
the policy as well as of the property insured.
SECTION 59-62
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, and the amount of the insurance merely represents
the insurer’s maximum liability. The value of such thing insured shall be
ascertained at the time of the loss.
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.
KINDS OF POLICIES
Open or unvalued policy
This is defined in Section 60. It does not predetermine the value of the
insured property but establishes a maximum amount the insurer will pay
in case of total loss of the property. It is one in which a certain agreed
sum is written on the face of the policy not as the value of the property
insured, but as the maximum limit of the insurer’s liability.
The insured must establish the FMV of the insured property at the time
of the loss. If the FMV exceeds the maximum, the latter will control; if
below, the former will control.
The insurer will only pay the actual cash value of the property as
determined at the time of the loss.
Valued policy
This is defined in Section 61. The value of the insured property is
predetermined and the value is the amount to be used in case of total
loss. Therefore, it is one in which the insured and the insurer expressly
agree in advance on the value of the subject property.
There are two values – the face value of the policy and the value of the
thing insured. In the absence of fraud or mistake, the agreed value of
the thing insured will be paid in case of total loss of the property, unless
the insurance is for a lower amount.
Running policy
This is intended to provide indemnity for property which cannot well be
covered by a valued policy because of its frequent change of location
and quantity, or for property of such nature as not to admit of a gross
valuation. This means that insurance may be carried out for constantly
changing stock of goods, or on grain that is being carried to and from
the harbor on lighters.
Advantages of a running policy
1. He is neither underinsured or overinsured at any time, the premium
being based on the monthly values reported
2. He avoids cancellations that would otherwise be necessary to keep
insurance adjusted to value each location and for which
cancellations he would be charged the expensive short rate
3. He is saved the trouble of watching his insurance and the danger
of being underinsured is spite of his care, through oversight or
mistake
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia
4. The rate is adjusted to 100% insurance, whereas valued policies
requiring insurance only to, say 80% of the value, give either a
small or no reduction for amounts of insurance above this figure.
SECTION 63
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 (1) year from the time when the cause of action
accrues, is void.
Validity of agreement limiting time for commencing action
A clause in the policy to the effect that an action upon a policy by the
insured must be brought within a certain period is valid and will prevail
over the general law on limitations of actions as prescribed by the Civil
Code, if not contrary to Section 63.
TN: if the period fixes less than one year from the time the cause of
action accrues, the stipulation would be void. In the case, however, of
a policy of industrial life insurance, the period cannot be less than six
years after the cause of action accrues.
Nature of condition limiting period for filing claim
The condition that claims must be presented within a certain period after
rejection is not merely a procedural requirement.
It is in the nature of condition precedent to the liability of the insurer,
or, in other terms, a resolutory cause, the purpose of which is to
terminate all liabilities in case the action is not filed by the insured within
the period stipulated.
Where action brought against insurer’s agent
Bringing the action against the agent of the insurer is not just a
procedural mistake where there is no condition that the action must be
filed against the agent.
The court cannot extend the clear scope of the agreement beyond what
is agreed upon by the parties. The bringing of such action against the
agent cannot have any legal effect except that of notifying the agent of
the claim. Beyond such notification, the filing of the action can serve no
other purpose.
WHERE CAUSE OF ACTION ACCRUES
The cause of action in an insurance contract does not accrue until the
insured’s claim is finally rejected by the insurer.
1. Stipulated prescriptive period begins from the happening
of the loss – it has been held that the stipulation is repugnant to
Section 63 because it would reduce the period allowed the insured
for bringing his action to less than one year.
2. Stipulated prescriptive period begins from rejection of
claim – The court interpreted the words “action or suit” in the
policy as referring to a claim or demand in a court of justice. But,
a complaint or claim filed by the insured with the Office of the
Insurance Commissioner would now be considered an “action” or
“suit” the filing of which would have the effect of tolling or
suspending the running of the prescriptive period.
3. Stipulated prescriptive period begins from filing of claim
– Where a fidelity bond requires action to be filed within one year
from the filing of the claim of loss, such condition contradicts the
public policy of discouraging unnecessary litigation expressed in
Section 63. The cause of action does not accrue until the party
obligated refuses, expressly or impliedly, to comply with its duties.
30 | U N I V E R S I T Y O F S A N C A R L O S
SECTION 64
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 following:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard
insured against;
(c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the
hazard insured against;
(e) Physical changes in the property insured which result in the
property becoming uninsurable;
(f) Discovery of other insurance coverage that makes the total
insurance in excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the
policy would violate or would place the insurer in violation of this
Code.
SECTION 65
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, or to his broker provided the broker is
authorized in writing by the policy owner to receive the notice of
cancellation on his behalf, and shall state:
(a) Which of the grounds set forth in Section 64 is relied upon; and
(b) That, upon written request of the named insured, the insurer will
furnish the facts on which the cancellation is based.
CANCELLATION OF NON-LIFE INSURANCE POLICY
Cancellation
The right to rescind, abandon or cancel a contract of insurance. It is the
termination by either the insurer or the insured of the policy of insurance
before its expiration. A contract of insurance is permitted to lapse when
the insured fails to take some action to keep the insurance in force.
The right of the insurer to cancel is found in Sections 64 and 65 while
the insured can cancel at his election by surrendering the policy. Such
surrender entitles him to the return of the premiums on the customary
short-rate basis.
Forms and sufficiency of notice of cancellation by the Insurer
The conditions under which the right may be exercised are:
1. There must be prior notice of cancellation to the insured
2. The notice must be based on the occurrence, after the effective
date of the policy, of one or more of the grounds mentioned
(Section 64)
3. It must be in writing, mailed or delivered to the named insured at
the address shown in the policy, or to his authorized broker and
4. It must state which of the grounds set forth is relied upon.
Important: It is the duty of the insurer upon written request of the
named insured to furnish the facts on which the cancellation is based
(Section 65). The premium referred must be premium paid subsequent
to the first since it mentions of non-payment “after effective date.”
Section 77 ordains that “no policy or contract of insurance is issued by
an insurance company is valid and binding unless and until the premium
thereof has been paid.”
PRIOR NOTICE OF CANCELLATION TO INSURED
The purpose of provisions for notice of the insured is to prevent the
cancellation of the policy without allowing the insured ample opportunity
to negotiate for other insurance in its stead for his own protection.
INSURANCE LAW l Atty. Eduardo Soleng l Reviewer by Tanya Ibanez & Federic Regencia

Notice given to insured himself

The notice should be personal to the insured and not to/through any
unauthorized person by the policy.

Notice delivered personally or sent by mail

The notice need not be delivered personally. It may be mailed (Section
65). But there is no proof that the notice, assuming it complied with the
other requisites or conditions, was actually mailed to and received by
the insured, where all that the insurer offers to show that the
cancellation was communicated is its employee’s testimony that it was
mailed.

SECTION 66

Section 66. In case of insurance other than life, unless the insurer at
least forty-five (45) days in advance of the end of the policy period mails
or delivers to the named insured at the address shown in the policy
notice of its intention not to renew the policy or to condition its renewal
upon reduction of limits or elimination of coverages, the named insured
shall be entitled to renew the policy upon payment of the premium due
on the effective date of the renewal. Any policy written for a term of
less than one (1) year shall be considered as if written for a term of one
(1) year. Any policy written for a term longer than one (1) year or any
policy with no fixed expiration date shall be considered as if written for
successive policy periods or terms of one (1) year.

RENEWAL OF NON-LIFE INSURANCE POLICY

As a new contract or extension of old one

GR: A renewal of insurance by the payment of a new premium and the

issuance of a receipt where there is no provision in the policy for its
renewal, is a new contract on the same terms as the old one.

XPN: Where the renewal is in pursuance of a provision to that effect, it

is not a new contract but an extension of the old one.

TN: In the last analysis, however, the resolution of the question depends
primarily on the intention of the parties as ascertained from the
instrument itself.

Rights of the parties

The named insured is given the right to renew upon the same terms and
conditions the original policy upon payment of the premium due on the
effective date of the renewal unless the insurer at least 45 days in
advance of the end of the period mails or delivers the insured notice of
its intention not to renew the policy or to condition its renewal upon
reduction of its amount or elimination of some coverages.

The general rule is that the insurance company is bound by the greater
coverage in an earlier policy where the renewal policy is issued without
calling to insured’s attention a reduction in the policy coverage.

Period for giving notice of non-renewal by insurer

A policy written for a term of less than one year is considered as if
written for a term of one year while a policy written for a longer term or
with no fixed expiration date is considered as if written for successive
policy periods terms of one year (Section 66). Thus, where the term of
the policy is five years, the notice must be given at least 45 days before
the anniversary date of any given policy year. If the 45 days rule is not
complied with, the insurer may not refuse to renew a policy upon
payment of the premium due.

Unless the insurer complies with the requirements of Sections 65 and

66, he has to renew the policy whether he likes it or not.

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