NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
NOTES ON INSURANCE
WHAT LAWS GOVERN INSURANCE
1. The laws governing insurance in the order of priority are:
(1) The Insurance Code, as amended by Batas Pambansa Blg. 872
(approved: June 12, 1985);
(2) In the absence of applicable provisions, the Civil Code;
(3) In the absence of applicable provisions of the Insurance Code and
the Civil Code, the general principles on the subject in the United
States (Constantino v Asia Life Insurance, 87 Phil. 248).
NOTE: On August 15, 2013, RA 10607 was signed into law. It is a
restatement of the Insurance Code [PD 612], with amendments. While
RA 10607 restated the whole law, most of the amendments touch only
the administrative portion of the Code, and very little on the substantive
portion.
2. H applied for insurance with S Company with offices in Montreal,
Canada. The application was mailed to S and on November 26, the
insurer gave notice of acceptance by cable. H never received the cable
and he died on December 20. The Insurance Code is silent as to
acceptance by cable. HELD: The Civil Code shall apply and under Art.
1319, an acceptance made by letter shall not bind the person making
the offer except from the time it came to his knowledge. There was no
valid contract as H died without knowing the acceptance of his
application (Enriquez v Sun Life Assurance of Canada, 41 Phil. 269).
2.1. B, a married man obtained a life insurance policy designating
his common law wife, C as beneficiary. Upon B’s death, his
widow contested the right of C to receive the proceeds. HELD:
Since the Insurance Code did not contain a specific provision
applicable to the case, the provisions of Art. 2012 of the Civil
Code provides, “any person forbidden from receiving any
donation under Art. 739 cannot be named as a beneficiary of a
life insurance policy by a person who cannot make a donation
to him.” Art. 739 declares as void those donations “made
between persons guilty of adultery or concubinage at the time
of the donation.”
3. Asia Life Insurance Co., an American corporation insured the life of
Constantino. The first premium covered the period up to September 26,
1942, after which no premium payments were made. By reason of the
Japanese occupation, the insurer had to close its offices until 1945.
Upon a subsequent claim, the insurer refused to pay due to non-
payment of the premium. The beneficiary maintains that the non-
payment should be excused by reason of war. HELD: Since the law is
did not provide for the situation and the fact that the law on insurance
and the Civil Code was largely copied from the Civil Code of California,
the court applied the United States Rule that declares that the contract
is not merely suspended as held by New York Rule, but instead is
abrogated (revoked) by reason of non-payment of the premium, since
payment of the same is peculiarly of the essence of the contract.
WHAT IS A CONTRACT OF INSURANCE?
1. 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 [Sec. 2(a), Insurance
Code].
Bar Question (2011)
Q: In return for the 20 years of faithful service of X as a house helper to
Y, the latter promised to pay P100,000 to X’s heirs if he (X) dies in an
accident by fire. X agreed. Is this an insurance contract?
A: No, since Y actually made a conditional donation in X’s favour.
2. A contract of suretyship shall also be deemed an insurance contract if
made by a surety who or which is doing an insurance business [Sec. 2
(a)].
3. Doing an insurance business or transacting an insurance business is:
1
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(a) Making or proposing to make as insurer, any insurance contract;
(b) 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;
(c) Doing any business including a reinsurance business, specifically
recognized as doing an insurance business within the meaning of
the Code;
(d) 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.
3.1. The fact that no profit is derived from making of insurance
contracts, agreements, or transactions or that no separate or
direct consideration is received shall not be deemed conclusive
to show that the making thereof does not constitute the doing
or transacting of an insurance business.
3.2. Philippine Health Care Providers v CIR (2009) has stated that:
(1) Contracts of law firm with clients whereby in consideration
of periodical payments, the law firm promises to present
such clients in all suits for or against them are not
insurance contracts;
(2) A contract by which a corporation, in consideration of a
stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is
one of insurance, and the corporation will be deemed as
engaged in the business of insurance.
WHAT IS THE CONCEPT OF INSURANCE?
 Insurance is a means by which one seeks to be covered against the
consequences of an event that may cause loss or damage.
 The concept is that the premiums that are paid are accumulated in a
pool from which payment of claims are to be obtained. As a basis, it is
assumed that the people contributing premiums are in excess of those
making claims resulting in a larger pool of money than the amounts
being claimed.
WHAT ARE PURE AND SPECULATIVE RISKS?
 The risks that may be insured against are what are known as pure risks,
as opposed to speculative risks.
 A pure risk is whether a person will suffer or will not suffer a loss from
the occurrence of an event.
 A speculative risk is whether a person will profit or suffer a loss from the
occurrence of an event.
INSURANCE IS RISK- DISTRIBUTING
 Insurance is a risk-distributing device because when the insurer
assumes the risk, it is distributing potential liability in part, among others.
 It is not risk shifting because the entirety of the risk of loss is not shifted
to another.
NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE
What is the nature of a healthcare agreement?
In the case of Fortune Medicare, Inc. v Amorin (GR No.
195872; March 12, 2014), it was held to be in the nature
of non-life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital, medical, or
any other expense arising from sickness, injury or other
stipulated contingency, the health care provided must pay
for the same to the extent provided under the contract.
The Court also interpreted an ambiguity in favour of the
insured allowing him to recover for his medical expenses
incurred while abroad.
2
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
1. It is an aleatory contract as the liability of the insured depends upon the
happening of a contingent event. It is not a wagering contract (Bar 2012
MCQ).
2. It is a contract of indemnity if it is a non-life insurance contract as
recovery must be commensurate to the loss. It is an investment or a
contract to pay a sum certain in money upon death if it is a life insurance
contract as it is secured by the insured as a measure of economic
security for him during his lifetime and for his beneficiary upon his death,
life not being subject to a valuation nor the loss being adjustable on any
principle of indemnity, except when it is secured by the creditor on the
life of the debtor.
2.1. An employee earns P20,000 a month. Over a 10-year period,
he will receive P2,400,000. He obtains a 10-year life insurance
policy for P5,000,000. When the employee dies, his beneficiary
makes a claim on the policy but the insurer refused to pay the
full amount, instead it offers to pay the amount that the
employee would have earned had he not died. The refusal of
the insurer to pay is not valid because life insurance is a not
contract of indemnity.
3. It is a personal contract as an insurer contracts with reference to the
character of the insured and vice versa. It might be willing to make good
the loss of a person by the destruction of his property, while it would
altogether be unwilling to insure the same property if owned by another.
On the other hand, the insurance taken by one person will not apply to
the interest of another person in the same property.
4. It is an executor and conditional contract on the part of the insurer
because upon happening of the event or peril insured against, the
conditions having been met, it has the obligation to execute the contract
by paying the insured. On the other hand, it is an executed contract on
the part of the insured after payment of the premium.
5. It is a contract of perfect good faith for both insurer and insured, but more
so for the insurer, since its dominant bargaining position imposes a
stricter liability/ responsibility.
6. It is a contract of adhesion as insurance companies manage to impose
upon the insured prepared contracts which the insured cannot change.
6.1. The first rule of construction is: In case there is no doubt as to
the terms of the insurance contract, it is to be construed in its
plain, ordinary and popular sense.
Illustration:
P Bank obtained insurance against robbery which excluded
loss by any criminal act of the insured or any authorized
representative. While transferring funds from one branch to
another, the insured’s armored truck was robbed. The driver
was assigned by a labor contractor with the insured, while the
security guard was assigned by an agency contracted by the
insured. Both driver and guard were found to be involved. Can
the loss be excluded? HELD: the loss is excluded as while the
driver and guard are assigned by labor contractors, they are
still within the term “authorized representative (Fortune
Insurance v CA, 244 SCRA 308).
Illustration 2:
Personal Accident policies providing payment for “loss of
hand.” The insurance policy defines it as amputation. Insured
has an accident resulting in a temporary total disability but hand
is not amputated. HELD: Insurer is not liable (Ty v First National
Surety and Assurance Co., 17 SCRA 364). Note though in a
case where the policy provided for loss of both legs by
amputation, a claim against the policy was allowed for a total
paralysis to be excluded is contrary to public policy, public good
and sound morality, as it would force the insured to have his
legs amputated to be able to claim on the policy (Panaton v
Malayan, 2 Court of Appeals, 783).
6.2. The second rule of construction is: If the policy or its terms are
doubtful, ambiguous, or uncertain, it is to be construed strictly
3
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
against the insurer and in favour of the insured because the
latter has no voice in the selection of the words used, and the
language used is selected by the lawyers of the insurer.
Bar 2012
An insurance contract is a contract of adhesion, which means
that in resolving ambiguities in the province of the insurance
contract, they are to be construed liberally in favour of the
insured and strictly against the insurer who drafted the
insurance policy.
Illustration:
Warranty in a fire insurance policy prohibited storage of oils
having a flash point of below 300 Fahrenheit. Gasoline is
stored. Is there a policy violation? HELD: The clause is
ambiguous. In ordinary parlance, oil means lubricants – not
gasoline. There is no reason why gasoline could not be
expressed clearly in the language the public can readily
understand (Que Chee Gan v Law Union Rock Ins. Co. Ltd., 98
Phils. 85).
Illustration 2:
An action to recover the amount of P2,000 due to death by
drowning where the policy provided for indemnity in the amount
of P1,000 to P3,000. HELD: The interpretation of the obscure
stipulation in contract must not favour the one who caused the
obscurity. Hence, judgment for an additional P2,000 was
affirmed (Del Rosario v Equitable Insurance and Casualty Co.,
8 SCRA 343).
Illustration 3:
7.
Denial of a claim on the ground that the insured vehicle was a
private “owner” type vehicle on the ground that the policy
issued to the insured was a Common Carrier’s Liability
Insurance Policy which covers a public vehicle for hire. HELD:
Insurer is liable as it was aware all along that the vehicle of the
insured was a private vehicle (Fieldmans Insurance v De
Songco, 25 SCRA 70).
Illustration 4:
Denial of claim for benefit due to the death of Flaviano Landicho
in a plane crash under GSIS Policy on the ground of non-
payment of the premium. HELD: The policy contained a
provision that the application for insurance is authority for GSIS
to cause the deduction of premium from the insured’s salary
(Landicho v GSIS, 44 SCRA 7).
6.3. The third rule of construction is: Provisions in the insurance
contract must be read in its entirety and the stipulation therein
cannot be segregated in determining the intention of the
parties. The provisions must be construed together to arrive at
their true meaning.
Illustration:
An insurance policy covers loss due earthquake shock to two
swimming pools and for which a premium was paid. In a rider
entitled Earthquake Endorsement, it stated that in
consideration of a premium, but without any amount filled in,
the company agrees to be liable for earthquake shock damage
for other properties, the policy provisions notwithstanding. They
insured claims that the conflict between the policy and the rider
should be resolved in its favour. HELD: Only the pools are
insured against earthquake shock. The rider cannot be
construed to prevail over the policy (Guld Resorts, Inc. v Phil.
Charter Insurance Corp., 458 SCRA 550).
It is consensual because it is perfected by the meeting of the minds of
the parties. There must be concurrence of offer and acceptance. Unless
otherwise stipulated, the policy is not essential to the existence of the
4
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
contract. It merely evidences the terms and conditions thereof [Campos,
Insurance (1983)].
NOTE: UST Golden Notes
Consensual – acceptance of the offer perfects the contract of insurance.
Insurance contracts through correspondence follow the “cognition
theory” wherein an acceptance made by letter shall not bind the person
making the offer except from the time it came to his knowledge (Enriquez
v Sun Life Assurance Co. of Canada, GR No L-15774; November 29,
1920).
8. It is voluntary. As a general rule, it is voluntary in the sense that it is not
compulsory and the parties are free to incorporate such terms and
conditions they may deem convenient provided they are not contrary to
law, morals, good customs, public order or public policy.
8.1. Exceptions: Insurance contracts particularly liability insurance,
may be required by law in certain instances:
a. For motor vehicles [Secs. 386 – 402];
b. For employees [Arts. 168 – 184, Labor Code].
As a condition to granting a license to conduct business or
calling affecting the public safety or welfare [De Leon (2010)].
Also, there are insurance which may arise by operation of law.
Social insurance for members of the GSIS and for the
employees in the private sector covered by the SSS is
established by law.
9. It is unilateral because it imposes legal duties only on insurer who
promises to indemnify in case of loss.
10. It is onerous there is a valuable consideration called the “premium.”
 Theory of Cognition vs Theory of Manifestation (Bar 1997)
Q: The Civil Code adopts the Theory of Cognition, while the Code of
Commerce generally recognizes the Theory of Manifestation, in the
perfection of contracts. How do these two theories differ?
A: under the Theory of Cognition, the acceptance is considered to
effectively bind the offeror only from the time it came to his knowledge.
Under the Theory of Manifestation, the contract is perfected at the
moment when the acceptance is declared or made by the offeree.
WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT?
1. Existence of Insurable Interest – the insured should possess an interest
of some kind, susceptible of pecuniary estimation – known as “insurable
interest.”
1.1. Generally, a person has insurable interest in the subject matter
when: He has such a relation or connection with, or concern in,
such subject matter that he will derive pecuniary benefit or
advantage from its preservation or will suffer pecuniary loss or
damage from its destruction, termination, or injury by the
happening of the event insured against (Lalican v Insular Life
Ins. Co., 2009).
Bar 2000
Q: BD has a bank deposit of half a million pesos. Since the limit
of the insurance coverage of the PDIC is only 1/1o of BD’s
deposit, he would like some protection for the excess by taking
out an insurance against all risk or contingencies of loss arising
from any unsound or unsafe banking practices including
unforeseen adverse effects of the continuing crisis involving the
banking and financial sector in the Asian region. Does BD have
an insurable interest within the meaning of the Insurance Code
of the Philippines?
A: Yes, BD has insurable interest in his bank deposit. In case
of loss of said deposit, more particularly to the extent of the
amount in excess of the limit covered by the PDIC Act, BD will
be damnified. He will suffer pecuniary loss of P400,000, that is,
5
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
his bank deposit of half a million pesos minus P100,000 which
is the maximum amount recoverable from the PDIC.
1.2. Exception: the expectation of benefit from the continued life of
the person insured need not be of a pecuniary nature.
1.3. A person has insurable interest in life, health and property.
1.4. It is necessary because its absence renders th contract of
insurance void. This is based on the principle that insurance is
a contract of indemnity. If the insured has no interest, he will
not stand to suffer loss or injury by the happening of the event
insured against.
2. Risk of loss – the insured is subject to risk of loss through the destruction
or impairment of that interest by the happening of the designated risks.
3. Assumption of Risk – the insurer assumes the risk of loss
4. Scheme to Distribute Losses – such assumption is part of a general
scheme to distribute actual loss among a large group of persons bearing
somewhat similar risks.
5. Payment of Premium – as a consideration for the insurer’s promise, the
insured makes a ratable contribution called a “premium” to the general
insurance fund.
NOTE: Requisites for a Valid Insurance Contract (UST Golden Notes)
(1) Subject Matter in which the insured has an insurable interest;
(2) Consideration which refers to the premium payments based on
probability of loss and extent of liability;
(3) Object and purpose which is the transfer and distribution of risk of
loss, damage or liability;
(4) Cause which refers to an event or peril insured against; and
(5) A meeting of minds of the parties upon all the foregoing essentials.
PERFECTION OF AN INSURANCE CONTRACT
An insurance contract is a consensual contract. Therefore, it is perfected the
moment there is meeting of minds with respect to the object and the cause of
consideration. Specifically, it is perfected the minute the offeror learns of the
acceptance of his offer by the offeree. It must be assented to by both parties,
either in person or through their agents, and sol long as an application for
insurance has not been either accepted or rejected, it is merely a proposal or an
offer to make a contract.
Mere submission of the application without the corresponding approval of the
policy does not result in the perfection of the contract of insurance (Bar 2011).
Q: On June 1, 2011, X mailed to Y Insurance, Co., his application for life
insurance, with payment for 5 years of premium enclosed in it. On July 21, 2011,
the insurance company accepted the application and mailed on the same day its
acceptance plus the cover note. It reached X’s residence on August 11, 2011.
But, as it happened, on August 4, 2011, X figured in a car accident. He died a day
later. May X’s heir recover on the insurance policy?
A: No, since X had no knowledge of the insurer’s acceptance of his application
before he died.
Note: What is being followed in insurance contracts is what is known as the
“cognition theory.”
Bar 2012
For both the life insurance and property insurance, the insurable interest is
required to be existing at the time of perfection and at the time of loss for property.
In life insurance, however, it need not be present at the time of loss occurs.
CONSENT REQUIREMENTS WHEN INSURANCE IS TAKEN
1. Generally, the law does not require the consent of the person insured
and such has been considered as not essential to the validity of the
contract as long as there is insurable interest at the beginning.
2. The consent of the husband is not necessary for the validity of an
insurance policy taken out by a married woman on her life or that of her
children. She may exercise all rights and privileges of an owner under a
policy.
6
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
2.1. She may also insure her separate property without the consent
of her husband as she has the right to administer her own
property (Art. 145, Family Code).
3. The provision of the law regarding a minor 18 years of age or more has
been rendered moot and academic by RA 6809 which reduced the age
of majority to 18 years.
3.1. Regarding an unemancipated minor, he cannot enter into a
contract of insurance without the consent of his parents or
guardian and when he does, the contract is voidable (Art. 1327
and 1390, Civil Code).
3.2. If the original owner of a policy covering the life of a minor will
die ahead of the minor, all rights, title and interest in the policy
shall automatically vest in the minor unless otherwise provided
in the policy.
HOW IS AN OFFER AND ACCEPTANCE MADE IN PROPERTY AND
LIABILITY INSURANCE
When the insured applies for the insurance, he is already making an offer to the
insurer, who may now accept, reject or make a counter-offer.
Acceptance occurs in the same manner as in life and health insurance.
INSURABLE INTEREST
Insurable interest will exist when the insured has such a relation or connection
with, or concern in, such subject matter that he will derive pecuniary benefit or
advantage from its preservation or will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening of the event insured against.
IN WHOSE LIFE AND HEALTH DOES A PERSON HAVE INSURABLE
INTEREST IN
1. Himself, his spouse and of his children;
2. Any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest.
2.1. Art. 195 of the Family Code specifies the persons obligated to
support each other.
2.2. A pecuniary interest exists as between partners or between the
employer and employee.
3. Any person under a legal obligation to him for the payment of money,
respecting property or services, which death or illness might delay or
prevent performance.
3.1. A creditor has insurable interest in the life and health of his
debtor.
4. Any person upon whose life, any estate or interest vested in him
depends
4.1. When usufructuary X allows Y to receive fruits of the land of the
former as long as he is alive, Y has insurable interest in the life
of X, because the death of X will terminate his right and cause
him damage.
WHEN MUST INSURABLE INTEREST IN LIFE EXIST?
Insurable interest in life must exist at the time of the effectivity of the policy and
need not exist at the time of the death of the insured as life insurance is not a
contract of indemnity.
However, insurable interest of a creditor on the life of a debtor exists not only at
the time of effectivity but also at the time of the death of the debtor because in
this instance, it is a contract of indemnity. The interest of the creditor is capable
of pecuniary estimation.
WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONE’S LIFE?
1. A person has unlimited interest in his own life or that of another person
regardless of whether or not the latter has insurable interest. Provided,
that if the beneficiary has no insurable interest, there is no force or bad
faith.
2. However, if a person takes out a policy on the life of another and names
himself as the beneficiary, he must have an insurable interest in the life
of the insured.
Bar 1984
Q: On January 4, 1983, Mr. P joined Alpha Corp. (Alpha) as President
of the company. Alpha took out a life insurance policy on the life of Mr.
7
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
P with Mutual Insurance Co., designating Alpha as the beneficiary.
Alpha also carried fire insurance with Beta Insurance Co. on a house
owned by it, but temporary occupied by Mr. P again with Alpha as
beneficiary.
On September 1, 1983, Mr. P resigned from Alpha and purchased the
company house he had been occupying. A few days later, a fire occurred
resulting in the death of Mr. P and the destruction of the house.
What are the rights of Alpha against Mutual Life Insurance on the life
insurance policy?
A: Alpha can recover against Mutual Life in the life insurance policy as
its insurable interest in the life of the person insured, Mr. P, existed when
the insurance took effect. In life insurance, insurable interest need not
exist thereafter or when the loss occurred.
Bar 1987
Q: Blanco took out a P1,000,000 life insurance policy naming his
girlfriend and creditor, Montenegro, as his beneficiary. When Blanco
died, his outstanding loan obligation to Montenegro was only P50,000.
Blanco’s executor contended that only P50,000 out of the insurance
proceeds should be paid to Montenegro and the balance of P950,000
should be paid to Blanco’s estate.
Is the executor correct?
A: the contention of the executor is incorrect. The beneficiary of a life
insurance need not have any insurable interest in the life of the insured.
Alternative Answer:
The contention of the executor is incorrect because it was Blanco himself
who took out the life insurance policy on his own life, naming
Montenegro as the beneficiary. It would have been different if it was
Montenegro, as creditor, who took out a life insurance policy on the life
of Blanco, as a debtor. In that case, Montenegro’s insurable interest in
the life of Blanco would be only to the extent of P50,000, which is the
amount of his credit.
Bar 1987
Q: On July 14, 1985, X, a homosexual, took an insurance policy on the
life of his boyfriend, Y. in the insurance application, X misrepresented
that Y was in perfect health although he knew all the time that Y was
afflicted with AIDS. On October 18, 1987, Y died in a motor accident.
Shortly thereafter, X filed his insurance claim. Should the insurer pay?
A: the insurer is not obliged to pay. Friendship alone is not the insurable
interest contemplated in life insurance. Insurable interest in the life of
others (other than one’s own life, spouse or child) is merely to the extent
of the pecuniary interest in that life.
Assuming that such pecuniary interest exists, an insurer would be liable
despite concealment or misrepresentation if the insurance had been in
effect for more than 2 years (Incontestability Clause).
Bar 1997
Q: A obtains insurance over his life and names his neighbour B the
beneficiary because of A’s secret love for B. If A dies, can B successfully
claim against the policy?
A: Yes. In life insurance, it is required that the beneficiary must have
insurable interest in the life of the insured. It was the insured himself
who took the policy on his own life.
Bar 2000
Q: IS is an elderly bachelor with no known relatives. He obtained life
insurance coverage for P250,000 from Starbite Insurance Corp., an
entity licensed to engage in the insurable business under the Insurance
Code of the Philippines. He also insured his residential house for twice
that amount with the same corporation. He immediately assigned all his
rights to the insurance proceeds to BX, a friend-companion living with
him. 3 years later, IS died in a fire that gutted his insured house 2 days
after he had sold it. There is no evidence of suicide or arson or
involvement of BX in these events. BX demanded payment of the
insurance proceeds from the 2 policies, the premiums for which IS had
been faithfully paying during all the time he was alive. Starbite refused
payment, contending that BX had no insurable interest and therefore
was not entitled to receive the proceeds from IS’ insurance coverage on
his life and also on his property. Is Starbite’s contention valid?
8
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
A: Starbite is correct with respect to the insurance coverage on the
property of IS. The beneficiary in the property insurance policy or the
assignee thereof must have insurable interest in the property insured.
BX, a mere friend-companion of IS, has no insurable interest in the
residential house of IS. BS is not entitled to receive the proceeds from
IS’ insurance on his property.
As to the insurance coverage on the life of IS, BX is entitled to receive
the proceeds. There is no requirement that he should have insurable
interest in the life of IS. It was IS himself who took the insurance on his
own life.
Bar 2002
Q: Distinguish insurable interest in property from insurable interest in life
insurance.
A:
1) In property insurance, the expectation of benefit must have a legal
basis. In life insurance, the expectation of benefit to be derived from
the continued existence of a life need not have any legal basis.
2) In property insurance, the actual value of the interest therein is the
limit of the insurance that can validly be placed thereon. In life
insurance, there is no limit to the amount of insurance that may be
taken upon life.
3) In property insurance, an interest insured must exist when the
insurance takes effect and when the loss occurs but need not exist
in the meantime. In life insurance, it is enough that insurable interest
exists at the time when the contract is made but need not exist at
the time of loss.
Bar 2011
Q: X Co., a partnership, is composed of A (capitalist), B (capitalist)
and C (industrial). If you were partner A, who between B and C
would have an insurable interest on your life, such that you my then
insure him?
A: Both B and C, as they are your partners.
Bar 2011
Q: X has been a long-time household helper of Z. X’s husband, Y,
has also been Z’s long-time driver. May Z insure the loves of both
X and Y as beneficiary?
A: No, since Z has no pecuniary interest in the lives of X and Y
arising from their employment with him.
Bar 2012
Q: X, a minor, contracted an insurance on his own life. What is the
status of the policy?
A: the life insurance policy is valid, provided the beneficiary is his
estate or his parents, spouse or child.
Bar 2013
Q: In 2010, the PNP declared Kadafi “Public Enemy No. 1” because
of his terrorist activities in the country that have resulted in the death
of thousands of Filipinos. A ransom of P15, 000, 000 was place on
his head.
Worried about the future or their family, Kadafi’s wife, Aurelia,
secured in December 2010 a life insurance policy on his life and
designated herself as beneficiary. Is the policy binding?
A: Yes. The policy is valid and binding because Aurelia has an
insurable interest on the life of Kadafi.
Bar 2014
Q: Carlo and Bianca met in the La Boracay festivities. They fell in
love with each other and got married soon after. They have been
cohabiting blissfully as husband and wife, but they did not have any
offspring. As the years passed by , Carlo decided to take out an
insurance on Blanca’s life for P1,000,000 with him (Carlo) as sole
beneficiary, given that the did not have a steady source of income
and he always depended on Blanca both emotionally and
financially. During the term of the insurance, Blanca died of what
appeared to be a mysterious cause so that Carlo immediately
requested for an autopsy to be conducted. It was established that
9
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Blanca died of a natural cause. More than that, it was also
established that Blanca was a transgender all along – a fact
unknown to Carlo. Can Carlo claim the insurance benefit?
A: Yes, Carlo can claim the insurance benefit. If a person insures
the life or health of another person with himself as beneficiary, all
his rights, title, and interests in the policy shall automatically vest in
the person insured. Carlo, as husband of Blanca, has insurable
interest in the life of the latter. Also, every person has an insurable
interest in the life and health of any person on whom he depends
wholly or in part for support. The insurable interest in the life of the
person insured must exist when the insurance takes effect but need
not exist when the loss occurs. Thus, the subsequent knowledge of
Carlo, upon the death of Blanca, that the latter is a transgender does
not destroy his insurable interest on the life of the insured.
Bar 2014
Q: On July 3, 1993, Delia Sotero took out a life insurance policy
from Ilocos Bankers Life Insurance Corp., designating Cresencia
Aban, her niece, as her beneficiary. Ilocos Life issued Policy No.
747 with a face valie of P100,000 in Sotero’s favour on August 30,
1993, after the requisite medical examination and payment of the
premium.
On April 10, 1996, Sotero died. Aban filed a claim for the insurance
proceeds on July 9, 1996. Ilocos Life conducted an investigation
into the claim and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she
was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have financial capability to pay the premium on
the policy;
4. Sotero did not sign the application for insurance;
5. Aban was the one who filed the insurance application and
designed herself as beneficiary.
For the above reasons and claiming fraud, Ilocos Life denied
Aban’s claim on April 16, 1997, but refunded the premium paid
on the policy. May Sotero validly designate her niece as
beneficiary?
A: Yes, Sotero may validly designate her niece, Aban, as
beneficiary. Sotero had insurable interest in her own life, and
could validly designate anyone as her beneficiary.
WHEN DOES A PERSON HAVE INSURABLE INTEREST IN PROPERTY?
1. A person has insurable interest in property, as 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.
WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN
PROPERTY
1. Whether one will derive pecuniary benefit or advantage from its
preservation or will suffer pecuniary loss or damage from its destruction.
WHAT DOES INSURABLE INTEREST IN PROPERTY CONSIST OF
1. An existing interest
1.1. By means of a conditional deed of sale, A sold his house to B
for P2,000,000. B pays a down payment of P500,000. Prior to
full payment and execution of an absolute sale, A has insurable
interest in the house equivalent to the balance due him, while
B has insurable interest to the extent of the down payment
because loss of the house will mean that he will suffer a loss of
P500,000.
2. An inchoate interest founded on an existing interest
2.1. An inchoate interest has been defined as: Interest in real estate
which is not a present but which may ripen into a vested interest
if not barred, extinguished, or divested.
2.2. Interest in corporate property arising from stockholdings but
limited to its value is an inchoate interest founded on an existing
interest.
3. An expectancy, coupled with an existing interest in that out of which the
expectancy arises.
10
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
3.1. The expectancy must be founded on an actual right to the thing
or a valid contract for it.
3.2. A farmer has insurable interest on an anticipated harvest of the
crops that he will grow on land belonging to him at the time of
the issuance of the policy.
4. A carrier depositary of any kind has insurable interest in the thing held
by him as such to the extent of his liability but not to exceed the value
thereof.
5. But a mere contingent or expectant interest in anything, not founded on
contract or actual right to the thing is not insurable as there is no
insurable interest.
5.1. A son has no insurable interest on a building owned by father
despite being designated as an heir in the will as the will does
not produce any effect before the testator’s death.
Bar 1982
Q: A owns a house valued at P50,000 which he had insured against fire
for P100,000. He obtained a loan from B in the amount of P100,000, and
to secure payment thereof, he executed a deed of mortgage on the
house, but without assigning the insurance policy to the latter. For A’s
failure to pay the loan upon maturity, B initiated foreclosure proceedings
and in the ensuing public sale, the house was sold by the sheriff to B as
highest bidder. Immediately upon issuance of the sheriff’s certificate of
sale in his favour, B insured the house against fire for P120,000 with
another insurance company. In order to redeem the house, A borrowed
P100,000 from C and, as security device, he assigned the insured policy
of P100,000 to C. However, before A could pay B his obligation of
P100,000, the house was accidentally and totally burned.
Does A, B, or C have any insurable interest in the house? May A, B, and
C recover under the policies? If so, how much?
A: As to A, he has insurable interest in his house, an existing interest,
but only for P50,000, the value of said house. But, when he assigned it
to C, said A had no more interest in his insurance policy, and A cannot
anymore recover on said insurance policy.
As to B, he has insurable interest on A’s house, having an interest
founded upon an existing interest, but only for P50,000, the value of A’s
house, and therefore, he can recover only the amount of P50,000.
As to C, he has no insurable interest on A’s house, being mere
contingent or expectant interest not founded on an actual right or valid
contract to A’s house; besides, the assignment to him of A’s insurance
policy was not approved by the insurer. Hence, C cannot recover.
MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE
INTEREST ON THE PROPERTY INSURED?
1. Yes, as no contract or policy of insurance on property shall be
enforceable except for the benefit of some person having insurable
interest in the property insured.
1.1. The owner insures his building against fire, naming his nephew
as beneficiary. In case of loss, only the owner can recover.
What is not enforceable is the designation of beneficiary, not
the entire policy itself.
Bar 2009
Q: Ciriaco leased a commercial apartment from Supreme
Building Corp. One of the provisions of the provisions of the
one-year lease contract states:
“ –18. Xxx The LESSEE shall not insure against fire the
chattels, merchandise, textiles, goods and effects placed at any
stall or store or space in the leased premises without first
obtaining the written consent of the LESSOR. If the lessee
obtains fire insurance coverage without the consent of the
lessor, the insurance policy is deemed assigned and
transferred to the lessor for the latter’s benefit.”
Notwithstanding the stipulation in the contract, without the
consent of SBC, Ciriaco insured the merchandise inside the
leased premises against loss by fire in the amount of P500,000
with First United Insurance Corp. A day before the lease
contract expired, fire broke out inside the leased premises,
damaging Ciriaco’s merchandise. Having learned of the
insurance earlier procured by Ciriaco, SBC demanded from
FUIC that the proceeds of the insurance policy be paid directly
to it, as provided in the lease contract. Who is legally entitled to
receive the insurance proceeds? Explain.
11
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
A: Ciriaco is entitled to receive the proceeds of the insurance
policy.
No contact or policy of insurance on property shall be
enforceable except for the benefit of some person having
insurable interest in the property insured. The stipulation that
the policy is deemed assigned and transferred to SBC is void,
because SBC has no insurable interst in the merchandise of
Ciriaco (Cha v CA, 277 SCRA 690; 1997).
WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST?
1. Must exist at the time the insurance takes effect and when the loss
occurs but need not exceed in the meantime.
Change of Interest
2. 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 interest in the thing and interest
in the insurance is vested in the same person.
2.1. The contemplated change is an absolute transfer of the
DISTINGUISHING INSURABLE INTEREST IN LIFE FROM INSURABLE
insured’s entire interest in the property insured to one not
INTEREST IN PROPERTY
previously interested or insured.
2.2. The reason for the rule is that insurance is a personal contract.
The insurer may not be willing to insure the same property if
owned by another person.
2.3. The policy is revived by the assignment of the policy to the
transferee with the consent of the insurer or the reacquisition
by the insured of his interest in the property.
2.4. If there is a prohibition against alienation or change of interest
without the consent of the insurer, the policy is not suspended
but rather it is avoided. Hence, the subsequent reacquisition of
the interest will not revive the policy.
WHEN IS INSURANCE CONTRACT NOT SUSPENDED?
1. Life, health or accident insurances because they are not contracts of
indemnity and insurable interest is not required at the time of loss.
2. A change in interest after occurrence of an injury that results in loss does
not affect the right of the insured to indemnify as the occurrence of the
loss will fix the liability of the insurer.
3. A change of interest in one or more several distinct things, separately
insured by one policy, does not avoid the insurance as to the others.
4. A change in interest by will or succession on the death of the insured
does not avoid the insurance and his interest passes in the thing insured
to the person taking his interest in the thing insured.
5. A transfer of interest by one or several partners, joint owners, or owners
in common, who are jointly insured to the others, does not avoid
insurance even though it has been agreed that insurance shall cease
upon an alienation of the thing insured.
5.1. The transfer contemplated is that to a stranger and if so, the
policy is only suspended to such equivalent extent as that
transferred.
6. When notwithstanding a prohibition, the consent of the insurer is
obtained.
7. When the policy is so framed that it will inure to the benefit of
whomsoever may become the owner during the continuance of the risk.
1. Insurable interest in life can be based on consanguinity, affinity, contract
or a pecuniary interest, while insurable interest in property is based on
pecuniary interest;
2. Insurable interest in life must exist only at the effectivity of the contract
except that taken by a creditor in the life of the debtor while insurable
interest in property must exist at the time of effectivity of the contract and
when loss occurs, although it may not exist in the meantime.
3. The value of insurable interest in life is not limited unless taken by a
creditor on the life of the debtor while insurable interest in property is
limited to the actual value of the interest in the property.
Bar 2002
Q: Distinguish insurable interest in property insurance from insurable
interest in life insurance.
12
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
A:
1) In property insurance, the expectation of benefit must have a legal
basis. In life insurance, the expectation of benefit to be derived from
the continued existence of a life need not have any legal basis;
2) In property insurance, the actual value of the interest therein is the
limit of the insurance that can validly be placed thereon. In life
insurance, there is no limit to the amount of insurance that may be
taken upon life.
3) In property insurance, an interest insured must exist when the
insurance takes effect and when the loss occurs, but need not exist
in the meantime. In life insurance, it is enough that insurable interest
exists at the time when the contract is made but it need not exist at
the time of the loss.
Bar 1977
Q: A owns a house worth P500,000. He insured it against fire for
P250,000 for the period from January 1, 1977 to January 1, 1978. At the
instance of B, who is a judgment creditor of A, the said house was levied
upon by the Sheriff and sold at a public auction on March 15, 1977. It
was adjudicated to B for P150,000 at the auction sale. B insured the
house against fire for P150,000 for the period from March 16, 1977 to
March 16, 1978. The house was accidentally burned on April 1, 1977.
May A recover under his policy? How about B?
A: A can recover under his policy. A judgment debtor whose property
has been seized on execution has an insurable interest therein until the
right to redeem or have the same set aside has been lost. Inasmuch as
the right of A to redeem has not expired, the 12 months’ time after the
sale having not elapsed before the loss occurred. A has an insurable
interest in the house at the time of the loss.
As regards B, he can recover upon his policy because as purchaser at
a judicial sale, he has an insurable interest in the property to the extent
of the amount for which he insured it not exceeding his interest in the
property.
Bar 1980
Q: N owns a condominium unit presently insured with the Holy Insurance
Co. for P1,000,000. N later sells the condominium unit to O. Somehow,
O fails to obtain the transfer of the insurance policy to his name from N.
subsequently, fire of unknown origin destroys completely the
condominium unit. Who may collect the insurance proceeds?
A: Neither N nor O may collect the insurance proceeds. As to N: An
interest in property insured must exist when the insurance takes effect
and when the loss occurs. Although N had insurable interest when the
insurance took effect, he had no more interest when the loss happened.
Further, 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 insured and the interest in the insurance are vested in the same
person.
As to O: He cannot recover because he had no insurance contract on
the said condominium unit which he bought from N.
Bar 1979
Q: The agent of the insured A was employed to ship A’s copra to Manila
and to communicate the shipment to the buyer A in Manila. The said
agent wrote the owner of the copra announcing the sailing of the ship,
but failed to state that the ship had run aground, which fact he already
knew before announcing the sailing. A, the buyer of the copra, in all good
faith, took out a marine insurance on the copra. The copra was badly
damaged and was a total loss. Can the insured recover on the policy?
A: The insured may not recover on the policy, since the subject matter
of the marine insurance at the time of contracting the insurance was
already lost. An interest in property insured must exist when the
insurance takes effect and when the loss occurs.
Bar 1984
Q: On January 4, 1983, P joined Alpha Corp. as president of the
company. Alpha took out a life insurance policy on the life of P with
Mutual Insurance, designating Alpha as beneficiary. Alpha also carried
13
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
fire insurance with Beta Insurance on a house owned by it, but
temporarily occupied by P again with Alpha as beneficiary.
On September 1, 1983, P resigned from Alpha and purchased the
company house he had been occupying. A few days later, a fire occurred
resulting in the death of P and the destruction of the house.
What are the rights of Alpha against Beta Insurance on the fire
insurance?
A: Alpha cannot recover from Beta Insurance since an interest in the
property insured must exist not only when the insurance took effect but
also when the loss occurs. Since the fire that destroyed the insured’s
house took effect after Alpha had sold the house of P, the insurable
interest of Alpha in the property insured no longer exists when the loss
occurred.
Bar 1987
Q: On February 3, 1987, while Jose Palacio was in the hospital
preparatory to a heart surgery, he called his only son, Boy Palacio, and
showed the latter a will naming the son as sole heir to all the father’s
estate including the family mansion in Forbes Park. The following day,
Boy took out a fire insurance policy on the mansion. One week later, the
father died. After his father’s death, Boy moved his wife and children to
the family mansion which he inherited. On March 30, 1987, a fire
occurred razing the mansion to the ground. Boy then proceeded to
collect on the fire insurance he took earlier on the house.
Should the insurance company pay?
A: In property insurance, insurable interest must exist both at the time of
the taking of the insurance and at the time the risk insured against
occurs. The insurable interest must be an existing interest. The fact
alone that Boy was the expected sole heir of his father’s estate does not
give the prospective heir any existing interest prior to the death of the
decedent.
Bar 1991
Q: A piece of machinery was shipped to Pablo on the basis of C&F,
Manila. Pablo insured said machinery with the Talaga Merchants
Insurance for loss or damage during the voyage. The vessel sank en
route to Manila. Pablo then filed a claim with Talaga Merchants which
was denied for the reason that prior to delivery, Pablo had no insurable
interest. Decide.
A: Pablo had an existing insurable interest on the piece of machinery he
bought. The purchase of goods under a perfected contract of sale
already vested equitable interest on the property in favour of the buyer
while it is pending delivery.
Bar 1994
Q: In a civil suit, the Court ordered Benjie to pay Nat P500,000. To
execute the judgment, the sheriff levied upon Benjie’s registered
property (a parcel of land and the building thereon), and sold the same
at public auction to Nat, the highest bidder. The latter, on March 18,
1992, registered with the Register of Deeds the certificate of sale issued
to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured
with Garapal Insurance for P1,000,000 the same building that was sold
at public auction to Nat. Benjie failed to redeem the property by March
18, 1993.
On March 19, 1993, a fire razed the building to the ground. Garapal
Insurance refused to make good its obligation to Benjie under the
insurance contract.
1. Is Garapal Insurance legally justified in refusing payment to Benjie?
2. Is Nat entitled to collect on the insurance policy?
A:
1. Yes. At the time of the loss, Benjie was no longer the owner of the
property insured as eh failed to redeem the property. The law
requires in property insurance that a person can recover the
proceeds of the policy if he has insurable interest at the time of the
issuance of the policy and also at the time when the loss occurs. At
14
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
the time of fire, Benjie no longer had insurable interest in the
property insured.
2. No. While at the time of the loss he has insurable interest in the
building, as he was the owner thereof, Nat did not have any interest
in the policy. There was no automatic transfer clause in the policy
that would give him such interest in the policy.
Bar 1997
Q: A obtains a fire insurance on his house and as a generous gesture
names his neighbour as beneficiary. If A’s house is destroyed by fire,
can B successfully claim against the policy?
A: No. In property insurance, the beneficiary must have insurable
interest in the property insured. B does not have insurable interest in the
house insured.
Bar 1999
Q: A businessman in the grocery business obtained from First Insurance
an insurance policy of P5,000,000 to fully cover his stocks-in-trade from
the risk of fire. Three months later, a fire of accidental origin broke out
and completely destroyed the grocery including his stocks-in-trade. This
prompted the businessman to file with the First Insurance a claim for
P5,000,000 representing the full value of his goods.
First Insurance denied the claim because it was discovered that at the
time of the loss, the stocks-in-trade were mortgaged to a creditor who
likewise obtained from Second Insurance for insurance coverage for the
stocks at their full value of P5,000,000.
a) May the businessman and the creditor obtain separate insurance
coverage over the same strocks-in-trade?
b) Suppose you are the judge, how much would you allow a
businessman and the creditor to recover from their respective
insurers?
A:
a) Yes. The businessman, as owner, and the creditor, as mortgagee,
have separate insurable interests in the same stocks-in-trade. Each
may insure such interest to protect his own separate interest.
b) As judge, I would allow the businessman to recover his total loss of
P5,000,000 representing the full value of his goods which were lost
through fire. As to the creditor, I would allow him to recover the
amount to the extent of or equivalent to the value of the credit he
extended to the businessman for the stocks-in-trade which were
mortgaged by the businessman.
Bar 2000
Q: IS, an elderly bachelor with no known relatives, obtained life
insurance coverage for P250,000 from Starbite Insurance, an entity
licensed to engage in the insurable interest business under the
Insurance Code of the Philippines. He also insured his residential house
for twice that amount with the same corporation. He immediately
assigned all his rights to the insurance proceeds to BX, a friend-
companion living with him. Three years later, IS died in a fire that gutted
his insured house 2 days after he had sold it. There is no evidence of
suicide or arson or involvement of BX in these events. BX demanded
payment of the insurance proceeds from the 2 policies, the premiums
for which IS had been faithfully paying during all the time he was alive.
Starbite refused to pay, contending that BX had no insurable interest
and therefore not entitled to receive the proceeds from IS’ insurance
coverage on his life and also on his property.
Is Starbite’s contention valid?
A: Starbite is correct with respect to the insurance coverage on the
property of IS. The beneficiary in the property insurance policy or the
assignee thereof must have insurable interest in the property insured.
BX, a mere friend-companion of IS, has no insurable interest in the
residential house of IS. BX is not entitled to receive the proceeds from
IS’ insurance on his property.
As to the insurance coverage on the life of IS, BX is entitled to receive
the proceeds. There is no requirement that BX should have insurable
15
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
interest in the life of IS. It was IS himself who took the insurance on his
own life.
Bar 2001
Q: JQ, owner of a condominium unit, insured the same against fire with
XYZ Insurance Co., and made the loss payable to his brother, MLQ. In
case of loss by fire of the said condominium unit, who may recover on
the fire insurance policy?
A: JQ can recover on the fire insurance policy for the loss of said
condominium unit. He has the insurable interest as owner-insured. As
beneficiary in the fire insurance policy, MLQ cannot recover on the fire
insurance policy. For the beneficiary to recover on the fire or property
insurance policy, it is required that he must have insurable interest in the
property insured. In this case, MLQ does not have insurable interest in
the condominium unit.
WHAT ARE THE VOID STIPULATIONS IN A CONTRACT OF INSURANCE?
1. A stipulation for the payment of the loss whether the person insured
has or has no interest in the property insured because it is a contract
of indemnity.
2. A stipulation that the policy shall be received as proof of such
interest because the existence of insurable interest does not
depend on the policy.
3. Every policy issued by way of gaming or wagering shall be void
because those insured without insurable interest do not suffer a
damage from the occurrence of the event insured against. Instead,
they will profit. Further, it brings a strong temptation to bring about
the occurrence of the event insured against.
WHAT MAY BE INSURED AGAINST?
1. Any unknown or contingent event, whether past or future, which may
damnify a person having insurable interest or create a liability against
him;
2. Insurance against damage or liability arising from and unknown past
event must ne expressly stipulated as in marine insurance where the
insurance over the vessel against perils of the sea will be paid lost or not
lost;
3. Insurance risks are:
a. One that may cause damage to the insured; or
b. One that may create liability against him.
WHAT CANNOT BE INSURED?
1. Insurance for or against the drawing of any lottery or for or against any
chance or ticket in a lottery drawing a prize cannot be acquired;
2. It cannot be insured because gambling results in profit, while the object
of insurance is to indemnify the insured against loss;
WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE?
1. The Insurer – every person, partnership, association or corporation duly
authorized to transact insurance business as provided in the Code may
be an insurer.
Bar 2000
Q: X Co. procured a group accident insurance policy for its construction
employees variously assigned to its provincial infrastructure projects. Y
Insurance Co. underwrote the coverage, the premiums of which were paid
for entirely X Co. without any employee contributions.
While the policy was in effect, five of the covered employees perished at sea
on their way to their provincial assignments. Their wives sued Y Insurance
for payment of death benefits under the policy. While the suit was pending,
the wives signed a power of attorney designating an X Co. executive, PJ, as
their authorized representative to enter into a settlement with the insurance
company. When a settlement was reached, PJ instructed the insurance
company to issue a settlement check to the order of the X Co., which will
undertake the payment to the individual claimants of their respective shares.
PJ misappropriated the settlement amount and the wives pursued their case
against Y Insurance.
Will the suit prosper?
16
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
A: Yes. Y Insurance is liable. X Co., through its executive PJ, acted as agent
of Y Insurance. The latter is thus bound by the misconduct of its agent. It is
the usual practice in the group insurance business that the employer-policy
holder is the agent of the issuer.
1.1. It is the party who agrees to indemnify another upon the happening
of a specified contingency.
2. The Insured – who is the party to be indemnified in case of a loss
2.1. Anyone, except a public enemy or a nation at war with the
Philippines and every citizen or subject of such nation, may be
insured. The reason is that the purpose of war is to cripple the power
and exhaust the resources of the enemy, and it is inconsistent to
destroy its resources then pay it the value of what has been
destroyed.
Bar 2000
Q: May a member of the MILF or its breakaway group, the Abu
Sayyaf, be insured with a company licensed to do business under
the Insurance Code of the Philippines?
A: A member of the MILF or the Abu Sayyaf may be insured with a
company licensed to do business under the Insurance Code of the
Philippines. What is prohibited to be insured is a public enemy. A
public enemy is a citizen or national of a country with which the
Philippines is at war. Such member of the MILF or the Abu Sayyaf
is not a citizen or national of another country, but of the Philippines.
2.2. Both the mortgagor and the mortgagee may take out separate
policies with the same or different companies. The mortgagor, up to
the extent if the value of his property; the mortgagee, up to the
extent of his credit.
2.3. When the mortgagor insures the property in his own name but
assigns the policy to or makes loss payable to the mortgagee and
unless the policy provides otherwise, the consequences are:
(a) The insurance is still deemed to be upon the interest of the
mortgagor who does not cease to be a party to the original
contract. Hence, if the policy is cancelled, notice must be given
to the mortgagor.
(b) Any act of the mortgagor, prior to loss, which would otherwise
avoid the policy of insurance, will have the same effect,
although the property is in the hands of the mortgagee. Hence,
if there is a violation of the policy by the mortgagor, the
mortgagee cannot recover.
(c) Any act required to be done by the mortgagor may be
performed by the mortgagee with the same effect as if it has
been performed by the mortgagor as when if notice of loss is
required, the mortgagee may give it.
(d) Upon the occurrence of the loss, the mortgagee is entitled to
recover to the extent of his credit, and the balance, if any, is to
be paid to the mortgagor, since such is for both their benefits.
(e) Upon recovery by the mortgagee, his credit is extinguished.
However, if the insurer assents to the transfer of the insurance
from the mortgagor to the mortgagee, and at the time of his
assent, imposes further qualifications on the assignee, making
a new contract under him, the acts of the mortgagor cannot
affect the rights of the assignee. This is known as the Union
Mortgage Clause, which creates the relation of the insured and
insurer between the mortgagee and the insurer independent of
the contract of the mortgagor. In such case, any act of the
mortgagor can no longer affect the rights of the mortgagee. The
insurance contract is now independent of that with the
mortgagor. On the other hand, of the mortgagor still remains as
a party, the policy is said to contain an Open Mortgage Clause.
2.4. When the mortgagee procures the insurance without reference to
the right of the mortgagor, the consequences are:
(a) The mortgagee may collect from the insurer upon occurrence
of the loss to the extent of his credit.
(b) Unless otherwise stated, the mortgagor cannot collect the
balance of the proceeds after the mortgagee is paid.
(c) The insurer, after payment to the mortgagee, becomes
subrogated to the rights of the mortgagee against the
17
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
mortgagor and may collect the debt to the extent paid to the
mortgagee.
(d) The mortgagee after payment cannot collect anymore from the
mortgagor but if he is unable to collect in full from the insurer,
he can recover from the mortgagor.
(e) The mortgagor is not released from the debt because the
insurer is subrogated in place of the mortgagee
Bar 1984, 2010
Q: To secure a loan of P10,000,000, Mario mortgaged his building
to Armando. In accordance with the loan arrangements, Mario had
the building insured with First Insurance for P10,000,000,
designating Armando as the beneficiary. Armando also took an
insurance of the building upon his own interest with Second
Insurance for P5,000,000.
The building was totally destroyed by fire, a peril insured against
under both insurance policies.it was subsequently determined that
the fire had been intentionally started by Mario and that in violation
of the loan agreement, he had been storing flammable materials in
the building.
a) How much, if any, can Armando recover from either or both
insurance companies?
b) What happens to the P10,000,000 debt of Mario to Armando?
A:
a) Armando can receive P5,000,000 from Second Insurance. As
mortgagee, he had an insurable interest in the building.
Armando cannot collect anything from First Insurance.
First Insurance is not liable for the loss of the building. First, it
was due to a wilful act of Mario, who committed arson. Second,
fire insurance policies contain a warranty that the insured will
not store hazardous materials within the insured premises.
Mario breached this warranty when he stored inflammable
materials in the building. These two factors exonerate First
Insurance from liability to Armando as mortgagee even though
it was Mario who committed them (Sec. 8, IC).
b) Since Armando would have collected P5,000,000 from Second
Insurance, this amount shold be considered as partial payment
of the loan. Atmando can still collect the balance of P5,000,000
from Mario, the mortgagor.
It is a well-settled rule that the mortgagee after
payment cannot collect anymore from the mortgagor but if he
is unable to collect in full from the insurer, he can recover from
the mortgagor. Also, under the Code, the insurer, after payment
to the mortgagee, becomes subrogated to the rights against the
mortgagor and may collect the debt to the extent paid to the
mortgagee. Thus, Mario, mortgagor, is not released from the
debt because Second Insurance is subrogated in place of
Armando, the mortgagee. Hence, Second Insurance can
recover from Mario the amount of P5,000,000 it paid, because
it became subrogated to the rights of Armando.
2.5. When a person has dual citizenship, what will be material is his
choice of allegiance. Dual citizenship arises as a result of the
concurrent application of different laws, a person is simultaneously
considered a national of the said states. Dual allegiance, which is
declared inimical to national interest (Art. IV, Sec. 5, Constitution)
arises when a person simultaneously owes, by some positive act,
loyalty to two or more states. In this sense, dual citizenship can be
said to be involuntary, while dual allegiance is a result of the
exercise of volition. Hence, if he opts for allegiance to the country
which the Philippines is at war with, he is not insurable.
3. The Beneficiary is the person who receives the benefits of an insurance
policy upon its maturity.
3.1. In life insurance, anyone, except those who are prohibited by law to
receive donations from the insured. Under Art. 739 of the Civil Code,
the following cannot be designated as beneficiaries:
(a) Those made between persons guilty of adultery or
concubinage at the time of the designation;
18
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(b) Those found guilty of the same criminal offense by reason
thereof;
(c) Those made to a public officer, or his wife, descendants/
ascendants, by reason of his office.
Bar 1981, 1985, 1998
Q: On July 1, 1979, Crispulo, married to Laura with whom he has
two legitimate children, was issued Policy No. 8008 of the Midland
Life Insurance, on a whole-life plan for P10,000. He designated
Angie, his common-law wife as the revocable beneficiary. He
referred to her, in his application and policy, as his wife.
Two years later, Crispulo died. Angie filed her claim for the proceeds
of the policy as the designated beneficiary therein. The widow,
Laura, also filed her claim as legal wife.
If you were the legal counsel for the insurance company, to whom
would you adjudicate the proceeds of the insurance policy?
A: I would adjudicate the proceeds of the policy to Laura, the legal
wife.
Under Art. 739 of the Civil Code, one cannot be designated as
beneficiary if made between persons guilty of adultery or
concubinage at the time of the designation.
Since Crispulo was married to Laura at the time when he designated
his beneficiary, his concubine, Angie, with whom he was guilty of
concubinage at the time of designation, Laura may have said
designation of Angie nullified by mere preponderance of evidence
in the same action for nullification. There is even no need of the
criminal conviction for concubinage.
3.2. A prior conviction for adultery or concubinage is not required as it
can be proven by a prepondenrance of evidence in the same action
nullifying the designation. The common law wife of the insured who
is married could not be named as a beneficiary (Insular Life
Assurance v Ebrado, 80 SCRA 181). Note where the insured
designated his second wife as beneficiary, the same was upheld as
the later was not aware of the first marriage (SSS v Davac, 17
SCRA 863).
3.3. The disqualification does not extend to the children of the adultery
or concubinage in view of the express recognition of the
successional rights of illegitimate children.
3.4. Generally, there is no requirement that the beneficiary shall have
insurable interest in the life of the insured as it is recognized that the
insured may name anyone he chooses, except those disqualified to
receive donations, as beneficiary, in his life insurance, even if he is
a stranger and has no insurable interest in the life of the insured.
The designation, however, must be in good faith and without fraud
or intent to enter into a wagering contract, as when: Jose obtains
several life insurance policies that he cannot afford; named as
beneficiary is Juan, the spouse or children are not named as
beneficiaries.; the premiums paid by Juan, who did not have
insurable interest in the life of Jose; in this case, the policies are
void because they were entered into as wagering contracts.
3.5. The designated beneficiary can be changed as the insured shall
have the right to change the beneficiary he designated – unless he
was expressly waived the right in the policy. If he has waived the
right, the effect is to make the designation as irrevocable.
Bar 1978
Q: On December 20, 1974, A took out a life insurance policy and
named his wife B, as beneficiary. The policy was silent with regard
to any change of beneficiary. Suspecting that B was committing
adultery, A immediately notified the insurance company in writing
that he is substituting his brother C as beneficiary in place of B. A
died later on June 30, 1975. B claims the proceeds of the insurance
policy, contending that as designated beneficiary, she cannot be
changed without her consent, she having acquired a vested right to
the proceeds of the policy.
19
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
A: B cannot claim the proceeds to A’s life insurance policy. A’s
action in substituting his brother C as his beneficiary in place of B,
his wife, in his insurance policy, is valid. The insured, A, can change
the beneficiary in a policy of life insurance, without consent of the
beneficiary.
Bar 1998
Q: On October 18, 1988, P took out a life insurance policy and
named his only son Q as beneficiary. The policy was silent with
regard to any change of beneficiary. P later learned that Q was
hooked on drugs and immediately notified the insurance company
in writing that he is substituting his sister, R, as his beneficiary in
place of Q. P later died of advanced tuberculosis. In the application
form filled up by the agent of insurance company prior to the
issuance of the life insurance policy by the insurance company, the
agent, without the knowledge of P, filled in a false answer and made
it appear that P was in good health. Upon P’s death, Q claimed the
proceeds of the insurance policy contending that as designated
beneficiary, he cannot be changed without his consent, he having
acquired a vested right to the proceeds of the policy. Is Q’s
contention correct?
A: No. The designation of the beneficiary is revocable unless the
right to revoke is expressly waived.
3.6. Note thought that the designation of the guilty spouse as irrevocable
beneficiary is revocable at the instance of the innocent spouse in
cases of:
a) termination of a subsequent marriage;
b) nullification of marriage;
c) annulment of marriage;
d) legal separation (Art. 43, Family Code).
3.7. When an irrevocable beneficiary is designated in a life insurance
contract, the beneficiary has a vested right that cannot be taken
away without his consent (Bar 2005). In fact, should the insured
discontinue payment of the premium, the beneficiary may continue
paying. Neither can the insured get a loan or obtain the cash
surrender value of the policy without his consent (Nario v Philamlife,
20 SCRA 434). Where the wife and minor children were named
irrevocable beneficiaries and the wife dies, the husband’s change
of the beneficiaries with the consent of the children is not valid die
to the minority of the children (Philamlife v Pineda, 170 SCRA 416).
Bar 2005
Q: Jacob obtained a life insurance policy for P1,000,000
designating irrevocably Diwata, a friend, as his beneficiary. Jacob,
however, changed his mind and wants Yob and Jojo, his other
friends, to be included as beneficiaries considering that the
proceeds of the policy are sufficient for the three friends. Can Jacob
still add Yob and Jojo as his beneficiaries?
A: The insured cannot add other beneficiaries as this would diminish
the interest of Diwata who is the irrevocably designated beneficiary.
The insured can only do so with the consent of Diwata.
3.8. The interest of an irrevocable beneficiary in an endowment policy is
contingent as benefits are to be paid to him only if the assured dies
before the specified period. If the insured outlives the period, the
benefits are to be paid.
3.9. The effect of the failure to designate a beneficiary or when the
beneficiary is disqualified is that the benefits of the policy shall
accrue to the estate of the insured.
3.10. When the beneficiary will predecease the insured, the effects are:
(a) If the designation is irrevocable, the legal representatives of the
beneficiary may recover unless it was stipulated that the
benefits are payable only “if living”;
(b) If the designation is revocable, and no change is made, the
benefits pass to the estate of the insured. The rule holds also if
benefits were payable “only if living” or “if surviving” and the
beneficiary dies before the insured.
20
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
3.11. If the beneficiary is the principal, an accomplice or an accessory in
the wilful killing of the insured, his interest is forfeited. The nearest
relative of the insured will be entitled to the proceeds if not otherwise
disqualified. If not wilful or felonious, the provision does not apply.
Bar 2008
Q: On January 1, 2000, Antonio Rivera secured a life insurance
from SOS Insurance Corp. for P1,000,000 with Gemma Rivera, his
adopted daughter, as the beneficiary. Antonio Rivera dies on March
4, 2005 and in the police investigation, it was ascertained that
Gemma Rivera participated as an accessory in the killing of Antonio
Rivera. Can SOS Insurance avoid liability by setting up as a defense
the participation of Gemma Rivera in the killing of Antonio Rivera ?
A: No, SOS Insurance cannot avoid liability.
Under Sec. 12 of the Insurance Code, the interest of a beneficiary
shall be forfeited when the beneficiary is the principal, accomplice,
or accessory in wilfully bringing about the death of the insured. In
which event, the nearest relative of the insured shall receive the
proceeds of said insurance, if not otherwise disqualified.
Here, even if Gemma Rivera wilfully participated in the killing of
Antonio Rivera, the law provides that the nearest relative of the
insured shall be the one entitled to receive the proceeds of the
policy. Thus, the insurance company must still pay out the proceeds
of the life insurance policy to the nearest qualified relative of the
insured.
RESCISION OF INSURANCE CONTRACT
Instances wherein a contract of insurance may be rescinded:
1. Concealment
2. Misrepresentation/ Omission
3. Breach of Warranties
CONCEALMENT
Concealment is a neglect to communicate that which a party knows and ought to
communicate.
 Requisites:
(1) A party knows a fact which he neglects to communicate or disclose
to the other;
(2) Such party concealing is duty bound to disclose such fact to the
other;
(3) Such party concealing makes no warranty of the fact concealed;
(4) The other party has not the means of ascertaining the fact
concealed;
(5) The fact concealed is material.
Concealment may be committed by either the insured or the insured [Qua Chee
Gan v Law Union & Rock Insurance (1955); Fieldmen’s Insurance v Vda. de
Songco (1968)].
Generally, a party must have knowledge of the fact concealed at the time of the
effectivity of the policy.
1. Note that even if a party did not know of the existence at the time of
application, but before its effectivity, there is still concealment.
2. Information acquired after effectivity is not concealment and does not
constitute ground to rescing the policy, as after the policy is issued,
information subsequently acquired is no longer material as it will not
affect or influence the party to enter into contract. However, in case of
reinstatement of a lapsed policy, facts known after effectivity but before
reinstatement must be disclosed.
 Reinstatement of Lapsed Life Policy
Reinstatement of a lapsed life policy is not a non-default option. It does
not create a new contract, but merely revives the original policy so
insurer cannot require a higher premium than the amount stipulated in
the contract. It does not apply to group/ industrial life insurance.
21
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Requisites:
(1) It must be exercised within three years from date of default;
(2) The insured must present evidence of insurability satisfactory to the
insurer;
(3) He must pay all back premiums and all indebtedness to the insurer;
(4) The CSV must not have been duly paid to the insured nor the
extension period expired;
(5) The application must be filed during the lifetime of the insured
[Andres v Crown Life Insurance (1958)].
3. The party claiming the existence of concealment must prove that there
was knowledge on the part of the party charged with concealment. If the
insured stated that there was no hereditary taint or illness that has
affected members of the family to my knowledge, in order to show or
prove concealment, the insurer must prove that the hereditary taint
alleged to exist was known to the insured.
4. The materiality of the fact concealed or misrepresented is determined
not by the event, but solely by the probable and reasonable influence of
the facts upon the party to whom the communication is due, in forming
his estimate of the disadvantages of the proposed contract or in making
his inquiries.
4.1. The test of materiality is whether knowledge of the true facts
could have influenced a prudent insurer in determining whether
to accept the risk or in fixing the premiums.
5. Concealment need not, in order to be material, be of facts which bring
about or contribute to, or are connected of the insured’s loss. It is
immaterial that there is no causal relationship between the fact
concealed and the loss sustained. It is sufficient that the non-revelation
has misled the insurer in forming its estimate of disadvantage or in fixing
the premium as when the insured had concealed that he had kidney
disease. He later dies in a plane crash. The insurer would not be liable
due to concealment [Sunlife v CA, 245 SCRA 269].
 Concealment in Non-Medical Insurance
The waiver of medical examination in a non-medical insurance contract
renders even more material the information required of the applicant
concerning the previous conditions of health and diseases suffered. The
fact that the matter concealed had no bearing on the cause of death is
not important because it is well settled that the insured need not die of
the disease he had failed to disclose to the insurer. It is sufficient that his
nondisclosure misled the insurer in forming his estimates of the risks of
the proposed policy or in making inquiries [Sunlife v Sps. Bacani (1995)].
Where matters of opinion or judgment are called for, answers made in
good faith and without intent to deceive will not avoid the policy even
though they are untrue. Reason: The insurer cannot simply rely on those
statements. He must make further inquiry [Philamcare Health Systems
v CA (2002)].
Bar 2001
Q: A applied for a non-medical life insurance. The insured did not inform the
insurer that one week prior to his application for insurance; he was examined and
confined at St. Luke’s Hospital where he was diagnosed for lung cancer. The
insured soon thereafter died in a plane crash. is the insurer liable considering that
the fact concealed had no bearing with the cause of death of the insured?
A: No. The concealed fact is material to the approval and issuance of the
insurance policy. It is well-settled that the insured need not die of the disease he
failed to disclose to the insurer. It is sufficient that his non-disclosure misled the
insurer in forming his estimate of the risks of the proposed insurance policy or in
making inquiries.
Bar 1975
Q: In a non-medical insurance contract (one where the company waives medical
examination) the insured failed to disclose that she had once been operated on,
although the information on this matter was supposed to have been supplied the
company. Within the proper period, may the insurance company have the contract
rescinded?
A: Yes, the insurance company can rescind the contract on the ground of
misrepresentation or concealment of material fact. The fact of the insured’s
operation is material to the insurer, who may have refused to issue the life policy
22
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
had it known of such fact. This is even more true in a non-medical insurance
where no medical examination is made and the information given by the insured
concerning his past health and diseases is a very important factor which the
insurer takes into consideration in deciding to issue the policy.
Bar 1979
Q: A fire insurance policy in favour of the insured contained a stipulation that the
insured shall give notice to the company of any insurances already effected or
which may subsequently be effected, covering the property insured and that
unless such notice be given before the occurrence of any loss, all benefits shall
be forfeited. The face of the policy bore the annotation “Co-Insurance Declared.”
The things insured were burned. It turned out that several insurances were
obtained on the same goods for the same term. The insurer refused to pay on the
ground of concealment. May the insured recover?
A: Yes, the insured may recover since there is no concealment. The face of the
policy already bore the annotation “Co-Insurance Declared” which is a notice to
the insurer as to the existence of other insurance contracts on the property
insured [Gen. Insurance v Ng Hua; January 30, 1960].
Bar 1983
Q: In June 1981, Juan applied for a life insurance policy with a double indemnity
provision in case of death by accident. Despite an express inquiry in the
application form for insurance, he did not mention the fact that he had suffered
from viral hepatitis the previous year. As Juan had fully recovered from the
disease, the medical examination performed by the insurance company’s
physician did not reveal such previous illness, and showed that Juan was healthy
and was an insurable risk. The policy was issued forthwith.
In March 1983, Juan died in an automobile accident. Subsequent investigation
revealed that Juan was negligent in not having his brakes checked.
The insurance company refused to pay Juan’s wife, the designated beneficiary,
on two grounds: that Juan was guilty of fraudulent concealment of his liver
ailment, and that Juan’s death was caused by his own negligence.
The policy is silent as to the effect of the insured’s negligence on the right to
recover thereunder. Juan’s wife insists that she has a right to recover because
Juan’s death was caused by an accident which had nothing to do whatsoever with
his liver ailment. She therefore insists on double indemnity.
a) Is she entitled to any indemnity?
b) If Juan’s accident occurred in July 1983, would your answer be the
same?
A:
a) No, she is not entitled to any indemnity. Although Juan did not die of a
liver ailment, the fact of his concealment vitiated the insured’s consent
to the contract of insurance. Under the Insurance Code, concealment of
a material fact is a ground for rescission. And materiality is determined
not by the event which caused the death but by the probable and
reasonable influence of the fact concealed upon the other party in
forming his estimate of the disadvantages of the proposed contract, or
in making inquiries. If the insurer had known of Juan’s previous ailment,
it would in all probabilities have at least made more detailed inquiries
about it or make a special examination of his liver function, or perhaps
even charge a higher premium because of the greater risk involved. The
concealment was therefore of a material fact, relieving the insurer from
any liability on the policy, regardless of the cause of death. Since the
insurer is relieved from liability, the question as to whether the event was
an accident or not becomes moot. In any case, under the Insurance
Code, negligence of the insured or of others does not exonerate the
insurer.
b) My conclusion would be different. The insurer would be liable despite
the fraudulent concealment because the policy has become
incontestable since more than two years had elapsed from the date
thereof.
PROOF OF FRAUD IN CONCEALMENT
General Rule: Fraud need not be proven in order to prove concealment. Good
faith is not a defense.
23
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Exception: When the concealment is made by the insured in relation to the falsity
of a warranty, the non-disclosure must be intentional and fraudulent in order that
the contract may be rescinded.
WHAT IS THE EFFECT OF CONCELAMENT?
1. Whether intentional or not, it entitles the injured party to rescind the
contract of insurance.
Bar 1989
Q: X applied for life insurance with Metropolitan Life. The application
contained this question: “Have you ever had any ailment or disease of
xxx (b) the stomach or intestines, liver, kidney or genitourinary organ?”
X, a laundrywoman who has no medical knowledge answered “No.” The
application was approved, premium was paid and six months later, X
died from cancer of the stomach. The post medical examination of X
shows that she had the cancer at the time she applied for a policy. Can
the beneficiary of X collect on the policy?
A: No. Concealment, as a defense against liability by the insurer, may
either be intentional or unintentional. Lack of knowledge on the part of
the insured about her ailment will not preclude the insurer from raising
the defense. The insurer my be held in estoppel only if, having known of
the concealed or misrepresented fact, still accepts the payment of
premium which is not the situation in this case.
Bar 1979
Q: Marine insurance was secured upon goods on board a ship which
departed from Madagascar to Manila, without any disclosure to the
insurer of the fact that the ship had been reported at Lloyd of London as
seen at sea, deep in water and leaky. This report turned out to be wrong
because the ship was at no time during the voyage leaky or in trouble,
but was lost through another insured risk. The insurer refuses to pay the
insured, claiming concealment. The insured counters that the fact not
disclosed was erroneous and did not increase the risk and therefore
immaterial. Decide on the dispute.
A: The insured may not recover from the insurer. The information that
the ship in question was seen at sea, deep in water and leaky, although
erroneous, was material, and its concealment entitled the insurer to
rescind the contract of insurance.
Bar 2014
Q: On May 13, 1996, PAM, Inc. obtained a P15,000,000 fire insurance
policy from Ilocano Insurance covering its machineries and equipment
effective for one year or until May 14, 1997. The policy expressly stated
that the insured properties located at “Sanyo Precision Phils. Building,
Phase III, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite.” Before its
expiration, the policy was renewed on “as is” basis for another year until
May 14, 1998. The subject properties were later transferred to Pace
Factory also in PEZA. On October 12, 1997, during the effectivity of the
renewed policy, a fire broke out at the Pace Factory which totally burned
the insured properties.
The policy forbade the removal of the insured properties unless
sanctioned by Ilocano Insurance. Condition 9 (c) of the policy provides
that “the insurance ceases to attach as regards the property affected
unless the insured, before the occurrence of any loss or damage, obtains
the sanction of the company signified by endorsement upon the policy
xxx (c) if the property insured is removed to any building or place other
than in that which is herein stated to be insured.” PAM claims that it has
substantially complied with notifying Ilocano for the insurance coverage.
Is Ilocano liable under the policy?
A: Ilocano is not liable under the policy. With the transfer of the location
of the subject properties, without notice and without the insured’s
consent, after the renewal of the policy, the insured clearly committed
concealment, misrepresentation and a breach of material warranty. The
Insurance Code provides that a neglect to communicate that which a
party knows and ought to communicate, is called concealment. It entitles
the injured party to rescind a contract of insurance in case of an
alteration in the use or condition of the thing insured. An alteration in the
use or condition of a thing insured from that to which it is limited b the
policy made without the consent of the insurer, by means within the
24
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
control of the insured, and increasing the risks, entitles the insurer to
rescind the contract of fire insurance.
Bar 2013
Q: Benny applied for life insurance for P1,500,000. The insurance
company approved his application and issued an insurance policy
effective November 6, 2008. Benny named his children as his
beneficiaries. On April 6, 2010, Benny died of hepatoma, a liver ailment.
The insurance company denied the children’s claim for the proceeds of
the insurance policy on the ground that Benny failed to disclose in his
application two previous consultations with his doctors for diabetes and
hypertension, and that he had been diagnosed to be suffering from
hepatoma. The insurance company also rescinded the policy and
refunded the premiums paid. Was the insurance company correct?
A: Under Sec. 27 of the Insurance Code, whether intentional or not,
concealment entitles the injured party to rescind the contract of
insurance.
Here, Benny did not disclose that he was suffering from diabetes,
hypertension, and hepatoma. The concealment is material, because
these are serious ailments (Florendo v Philam Plans, 666 SCRA 618;
2012). Thus, the insurance company has the right to rescind the life
policy within two years from the date of issue or its reinstatement (Sec.
48, Insurance Code).
1.1. Note though that the right to rescind is optional on the part of
the injured party. Rescission is an option because it misleads
or deceives the insurer into accepting the risk of accepting it at
the rate of premium agreed upon.
WHAT FACTS THEN MUST BE COMMUNICATED?
2. The provisions on concealment and representation finds basis in the fact
that it is a fundamental characteristic of a contract of insurance that it is
one of perfect/ utmost good faith.
 Notes on Effects of Concealment
General Rule: Concealment vitiates the contract and entitles the insurer
to rescind, even if the death or loss is due to a cause not related to the
concealed matter.
Exceptions:
1) Incontestability Clause, which stipulates that the policy shall be
incontestable after a stated period. The incontestability clause is a
mandatory provision in life policies. The policy must be payable on
the death of the insured and 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;
2) Concealment after the contract has become effective, because
concealment must take place at the time of the contract is entered
into in order that the policy may be avoided. Information obtained
after the perfection of the contract is no longer necessary to be
disclosed by the insured, even if the policy has not been issued
(except in reinstatement);
3) Waiver or Estoppel;
4) Marine insurance, where concealment of the following matters does
not vitiate the entire contract:
(a) The national character of the insured;
(b) The liability of the thing insured to capture and detention;
(c) The liability to seizure from breach of foreign laws of trade;
(d) The want of necessary documents; and
(e) The use of false and simulated papers [Sec. 112 (e)].
1. Each party to an insurance contract is bound to communicate to the
other all facts that meet the following requisites:
(a) Such facts that must be within his knowledge as concealment
requires knowledge of the fact concealed by the party charged with
concealment;
25
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(b) Fact/s must be material to the contract as it must be of such nature
that had the insurer known of it, it would not have accepted the risk
or demanded a higher premium’
(c) That the other party had no means of ascertaining such fact/s
(d) That the party with a duty to communicate makes no warranty.
1.1. The existence of a warranty makes the requirement to disclose
superfluous but an intentional and fraudulent omission on the
part of the one insured to communicate information on a matter
proving or tending to prove the falsity of the warranty entitles
the insurer to rescind, as when there is a warranty that the ship
is seaworthy, the intentional and fraudulent omission of the
insured to state that the ship’s communications equipment is
out of order will entitle the insurer to rescind.
 If the applicant is aware of the existence of some circumstance which he
knows would influence the insurer in acting upon his application, food
faith requires him to disclose that circumstance, though unasked [Vance
(1951)].
(a) The mere fact of being a “mongoloid” is a material fact that needs
to be disclosed {Great Pacific Life v CA (1979)].
(b) Mere possibility of previous hypertension is not enough to establish
concealment.
WHEN IS THERE A WAIVER OF INFORMATION?
A waiver takes place either, by the terms of the insurance or by the neglect to
make inquiries as to such facts where they are distinctly implied in other facts of
which information is communicated.
WHAT MATTERS NEED NOT BE COMMUNICATED?
1. Except in answer to the inquiries of the other, the following facts needs
not be communicated.
1.1. Matters already known to the insurer [Sec. 30 (a)]
Those which the other knows as the insurer cannot say that it
has been deceived or misled as when the insured discloses
that he has tuberculosis to the agent of the insurer, who in turn
omits to state the same in the application of the insured was
deemed knowledge of the insurer (Insular Life Assurance v
Feliciano, 74 SCRA 468), or when the insurer had surveyed the
location and surrounding area of a building that is to be insured
against fire, an omission to state that there are neighboring
building will not avoid the policy.
1.2. Matters which each party is bound to know [Sec. 30 (b) and
Sec. 32]
Those which, in the exercise of ordinary care, the
other ought to know, and of which, the former has no reason to
suppose him to be ignorant.
The facts that the other ought to know are:
(a) All general causes which are open to his inquiry, equally
with that of the other, and which may affect the political or
material perils contemplated such as public events like the
fact that a nation is at war, or laws or political conditions in
other countries. Here, the source of information is equally
open to the insurer, who is therefore presumed to know
them; and
(b) All the general uses of trade such as the rules of
navigation, kinds of seasons, all the risks of navigation.
1.3. Matters of which the insurer waives communication [Sec. 30 (c)
and Sec. 33]
A waiver takes place either, by the terms of the insurance or by
the neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is
communicated.
As when, an application for insurance is made in writing and
the questions therein are unanswered or incompletely
answered, and the insurer without further inquiries, issues the
26
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
policy. It thereby waives all right to a disclosure or to a more
complete answer. If question asks whether the insured has
submitted himself to any infirmary, sanitarium or hospital for
consultation or treatment. Insured replies that he was confined
at the Quezon Memorial Hospital for 5 days due to influenza.
There is no waiver and shall constitute concealment as the
answer was complete and could be relied upon by the insurer.
If the insured answered “Yes”, the answer would have been
incomplete and ambiguous. This would constitute a waiver as
the insured did not make any further inquiry (Ng Gan Zee v
Asian Crusader, 112 SCRA 461). Note that the waiver of a
medical examination is not tantamount to a waiver of material
information because waiver of medical examination is made
when the insured represents himself to be in good health. It is
reasonable to assume that had the insured revealed material
information, the insurer would not have waived the examination
(Saturnino v Philamlife, 7 SCRA 316).
Bar 1996
Q: Juan procured a “non-medical” life insurance from Good Life
Insurance. He designated his wife, Petra, as the beneficiary.
Earlier, in his application response to the question as to
whether or not he had ever been hospitalized, he answered in
the negative. He forgot to mention his confinement at the
Kidney Hospital. After Juan died in a plane crash, Petra filed a
claim with Good Life. Discovering Juan’s previous
hospitalization, Good Life rejected Petra’s claim on the ground
of concealment and misrepresentation. Petra sued Good Life,
invoking good faith on the part of Juan. Will her suit prosper?
A: No. Petra’s suit will not prosper (assuming that the policy of
life insurance has been in force for a period of less than 2 years
from the date of its issue). The matter which Juan failed to
disclose was material and relevant to the approval and
issuance of the insurance policy. They would have affected
Good Life’s action on his application, either by approving it with
the corresponding adjustment for a higher premium or rejecting
the same. Moreover, a disclosure may have warranted a
medical examination of Juan by Good Life in order for it to
reasonably assess the risk involved in accepting the
application. In any case, good faith is no defense in
concealment. The waiver of a medical examination in the “non-
medical” life insurance from Good Life makes it even more
necessary that Juan supply complete information about his
previous hospitalization for such information constitutes an
important factor which Good Life takes into consideration in
deciding whether to issue the policy or not.
If the policy of life insurance has been in force for a
period of 2 years or more from the date of its issue (on which
point the given facts are vague), then Good Life can no longer
prove that the policy is void ab initio or is rescindable by reason
of fraudulent concealment or misrepresentation of Juan.
Bar 1997
Q: The assured answers “No” to the question in the application
for a life policy, “Are you suffering from any form of heart
illness?” In fact, the assured has been a heart patient for many
years. On September 2, 1991, the assured is killed in a plane
crash. The insurance company denies the claim for insurance
proceeds and returns the premium paid. Is the decision of the
insurance company justified?
A: assuming that the incontestability clause does not apply
because the policy has not been in force for 2 years from date
of issue, during the lifetime of the insured, the decision of the
insurance company not to pay is justified. There was fraudulent
concealment. It is not material that the insured died of a
different cause than the fact concealed. The fact concealed,
that is the heart ailment, is material to the determination by the
insurance company whether or not to accept the application for
insurance and to require the medical examination of the
insured.
However, if the incontestability clause applies to the
insurance policy covering the life of the insured had been in
27
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
force for 2 years from date of issuance thereof, the insurance
company would not be justified in denying the claim for the
proceeds of the insurance and in returning the premium paid.
In that case, the insurer cannot prove the policy void ab initio
or rescindable by reason of fraudulent concealment or
misrepresentation of the insured.
Bar 1998
Q: Renato was issued a life insurance policy on January 2,
1990. He concealed the fact that 3 years prior to the issuance
of his life insurance policy, he had been seeing a doctor about
his heart ailment, and on March 1, 1992, he died of heart
failure. May the heirs file a claim on the proceeds of the life
insurance policy of Renato?
A: Yes. The life insurance policy in question was issued on
January 2, 1990. More than 2 years had elapsed when Renato,
the insured, died on March 1, 1992. The incontestability clause
applies.
1.4. Matters which prove or tend to prove the existence of a risk
excluded by a warranty and which are not otherwise material
[Sec. 30 (d)]
As when, the insured makes a warranty that when the covered
vessel sails to the Middle East, loss occasioned thereby shall
not be covered. There is thus no need to disclose the
anticipated dangers in the area.
1.5. Matters which relate to a risk excepted in the policy, and which
are not otherwise material [Sec. 30 (e)]
As when, the policy covers against loss by theft. There is no
need to disclose that the area where the object is located in
earthquake-prone area if loss due to earthquake is not covered
by the policy.
OTHER MATTERS THAT DO NOT NEED TO BE COMMUNICATED
1. Information of the nature or amount of the interest of one insured unless
if inquired upon by the insurer, except if required by Sec. 51 [Sec. 34].
Such information need not be communicated unless in answer to inquiry,
except as prescribed by Sec. 51 as the extent of the interest of the
insured in property insured must be specified if he is not the absolute
owner. Also, a trustee, mortgagee or building contractor must
communicate his particular insurable interest in the property even if no
inquiry is made.
2. Matter of opinion [Sec. 35]
Neither a party to a contract is bound to communicate even upon inquiry
any information of his own opinion or judgment upon the matters in
question as only material facts are required – not opinions, speculations
or expectations, except in marine insurance – where the belief or the
expectation of a 3rd person in reference to a material fact is material and
must be communicated.
As when, the insured is required to disclose an opinion of marine experts
as to seaworthiness of a vessel.
REPRESENTATIONS
1. A representation is an oral or written statement of a fact or a condition
affecting the risk made by the insured to the insurance company tending
to induce the insurer to take the risk.
2. It is made at the same time as or before the issuance of a policy since it
is an inducement to entering into a contract.
2.1. It can also be made after the issuance of the policy when the
purpose thereof is to induce the insurer to modify an existing
insurance contract, as the provisions likewise apply to a
modification. Note that the rule is the same when it comes to
concealment.
28
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
3. The language of representation is to be interpreted by the same rules as
the language of contracts in general.
3.1. Consequently, it need not be literally true and correct/ accurate
in every respect. Rather it is sufficient that it is substantially or
materially true. In the case of a promissory representation, it is
sufficient if it is substantially complied with.
As when, H bought a car for P2,800 and spent P900 for repairs.
H then gave it to W as a gift. W secures insurance and says the
price is around P4,000, though the present actual value is
about P3,000. Is W guilty if misrepresentation because she did
not pay for the car? No, because the literal truth is not
necessary. The insurer can value the car independently.
WHAT ARE THE FORMS AND KINDS OF
REPRESENTATION?
1. Representations may be oral or written.
1.1. They can be affirmative, when it is an affirmation
of a fact existing when the contract begins.
As when, the insured states that he is of good
health at the time of the contract.
1.2. They can be promissory, when it is a statement
by the insured concerning what is to happen
during the term of the insurance.
As when, the insured will install additional fire
extinguishers at a stipulated future date. A
representation as to the future is to be deemed a
promise, unless it was merely a statement of
belief or expectation.
2. A representation does not form part of the contract as an
express provision thereof as it is a collateral inducement
to the same.
2.1. While it does not form part of the contract, it may
qualify an implied warranty.
As when, under Sec. 115, it is implied that a ship
is seaworthy. A representation. A representation
by the insured that its communication system is
defective will qualify the warranty. Hence, insured
can still recover in case of loss.
IS A REPRESENTATION PART OF THE INSURANCE CONTRACT?
a representation does not form part of the contract as an express provision thereof
as it is a collateral inducement to the same.
While it does not form part of the contract, it may qualify an implied warranty.
CAN A REPRESENTATION BE WITHDRAWN OR ALTERED?
A representation can be withdrawn as long as the insurance has not yet been
effected and the insured has not yet been induced to issue the policy. If withdrawn
or altered afterwards, the contract can be rescinded as the insurer has already
been led to issue the policy.
TO WHAT DATE DOES A REPRESENTATION REFER?
1. It must be presumed to refer to the date on which the contract goes into
effect.
2. There is no false representation of it is true at the time the contract takes
effect although false at the time it is made.
As when, the insured states at application that vessel in satisfactory
operating condition but is really undergoing maintenance, there is no
false representation if at issuance the vessel has completed
maintenance.
2.1. Conversely, there is a false representation if it true at the time
it was made but false at the time the contract takes effect.
29
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
As when, insured states that he has never been affected with
pneumonia at the application, but if in the meantime, he is
afflicted with pneumonia before the policy takes effect, and he
does not disclose, there is a false representation.
WHEN IS A REPRESENTATION SAID TO BE FALSE?
A representation is said to be false when the facts fail to correspond with its
assertions or stipulations.
MUST THE INSURED COMMUNICATE INFORMATION OF WHICH AS NO
PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM
OTHERS?
1. When a person has no personal knowledge of a fact, he may or may not
communicate such information to the insurer. If he does communicate,
he is not responsible for its truth. Hence, there can be no
misrepresentation.
2. However, when the information material to the transaction was acquired
by an agent of the insured, the same must be communicated, as
knowledge of the agent is also knowledge of the principal.
As when: a ship captain is aware of a defect that affects the
seaworthiness, that defect must be communicated as the ship captain is
under obligation to disclose it to the owner.
WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT?
1. If it false in a material point, whether affirmative or promissory, the
injured party is entitled to rescind the contract from the time the
representation becomes false.
 Exceptions:
(1) Incontestability Clause;
(2) Misrepresentation after contract takes effect;
(3) Waiver, made by acceptance of insurer of premium payments
despite knowledge of the ground for rescission;
(4) A representation of the expectation, belief, opinion, or judgment of
the insured, although false, and even if material to the risk
[Philamcare Health Systems v CA (2002)]; and
(5) Representation by insured based on information obtained from 3 rd
persons (not his agent), provided the insured:
(a) Has no personal knowledge of the facts;
(b) Believes them to be true; and
(c) Explains to the insurer that he does so on the information of
others.
2. However, the right to rescind is considered waived by the acceptance of
premium payments despite knowledge of the ground to rescind.
As when: insurer was aware of the lack of extinguishers required by the
policy.
2.1. There is no waiver, if the insurer had no knowledge of the
ground at the time of the acceptance of the premium [Stokes v
Malayan, 127 SCRA 766].
 A representation cannot qualify an express provision or an express
warranty of insurance [Sec. 40] because a representation is not party of
the contract but only a collateral inducement to it. However, it may qualify
as an implied warranty.
There is fraud and misrepresentation when another person takes the
place of the insured in the medical examination [Eguaras v Great
Eastern (1916)].
The insurer is not entitled to rescission for misrepresentation of age if
the birth date on the policy leads to the conclusion that the insured is
beyond the age covered and yet insurer continued to accept payment
and had issued the policy. Insurer is deemed estopped [Edillon v Manila
Bankers Life (1982)].
HOW IS MATERIALITY DETERMINED?
30
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
The materiality of a representation is determined like in a concealment, that is the
probable and reasonable influence of the facts upon the party to whom the
representation is made in forming his estimate of the advantages/ disadvantages
of the contract or in making inquiries.
WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED?
1. The right to rescind must be exercised prior to the commencement of an
action on the contract.
2. The right to rescind is also qualified by the 2 nd paragraph of Sec. 48
which provided: that after a policy of life insurance payable on the death
of the insured shall have been in force during the lifetime of the insured
for a period of 2 years from the date of issue or its last reinstatement,
the insurer cannot prove that the policy is void ab initio or is subject to
rescission by reason of a fraudulent concealment or misrepresentation
of the insured or his agent. This is known as the Incontestability Clause.
 INCONTESTABILITY CLAUSE – a clause in a policy of a life insurance
that is payable on the death of the insured which will prevent the insurer
from claiming if the policy is void ab initio or is subject to rescission by
reason of a fraudulent concealment or misrepresentation of the insured
or his agent if it shall have been in force during the lifetime of the insured
for a period of 2 years from the date of issue or its last reinstatement.
2.1. The theory and object of the clause on the part of the insurer is that
an insurer has/ should have a reasonable opportunity to investigate
the statements which are made by the applicant and that after a
definite period, it should no longer be permitted to question its
validity.
On the part of the insured, its object is to give the greatest possible
assurance that the beneficiaries would receive payment of the
proceeds without question as to validity of the policy.
3. The requisites of its application are:
(a) It is a life insurance policy;
(b) It is payable on the death of the insured;
(c) It has been in force during the lifetime of the insured for at least 2
years from date of issue or last reinstatement.
3.1. The two-year period within which to contest the policy is regardless
of whether or not the insured is still living within the period [Tan v
CA, 174 SCRA 403].
3.2. The defenses that are not barred by the incontestability clause are:
(a) Non-payment of premiums;
(b) Lack of insurable interest;
(c) That the cause of death was expected or not covered by the
terms of the policy;
(d) That the fraud was of a particular vicious type such as:
(1) Policy was taken in furtherance of a scheme to murder the
insured;
(2) Where the insured substituted another for the medical
examination;
(3) Where the beneficiary feloniously killed the insured.
(e) Violation of a condition in the policy relating to military or naval
service in time of war;
(f) The necessary notice or proof of death was not given;
(g) Action is not brought within the time specified in the policy,
which in no case should be less than 1 year.
3.3. If the incontestability clause applies, the insurer can no longer
escape liability under the policy or be allowed to prove that the
policy is void ab initio or may be rescinded by reason of
concealment or misrepresentation by the insured or his agent.
Bar 1984
Q: On May 5, 1982, Juan applied for a life insurance policy with
Acme Life. The policy was issued to Juan on June 30, 1982, but the
date of issue, as appearing on the policy was May 15, 1982, the
date of his application. Juan subsequently realized that some of his
answers in the insurance application were erroneous. Accordingly,
he supplied the insurance company with the correct replies.
However, his letter to the insurance company was lost in the mails.
He died on June 1, 1984.
31
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
The insurance company now refuses to pay Juan’s beneficiary
contending that Juan misrepresented the state of his health at the
time of his application. Is the insurance company liable?
A: Yes. The incontestability clause that must be contained in every
individual life insurance policy refers to the date of its issue as
shown in the policy. Since the policy of life insurance had been in
force during the lifetime of the insured, Juan, for a period of 2 years
from May 15, 1982, the date of issue as shown in the policy, the
policy has become incontestable. The insurance company can no
longer prove that the policy is void ab initio or rescindable by reason
of fraudulent concealment or misrepresentation of the insured.
Bar 1989
Q: Manpower Co. obtained a group life insurance for its employees
from Phoenix Insurance. The master policy issued by Phoenix on
June 1, 1986 contained a provision that eligible employees form
insurance coverage were all full time employees of Manpower
regularly working at least 30 hours per week. The policy also had
an incontestable clause. Beforehand, Phoenix sent enrolment cards
to Manpower for distribution to its eligible employees. X filled out the
card which contained a printed clause: “I request the insurance for
which I may become eligible under said Group Policy.” The cards
were then sent to Phoenix and X was among the employees of
Manpower who was issued a certificate of coverage by Phoenix.
On July 3, 1988, X was killed on the occasion of a robbery in their
house. While processing the claim of X’s beneficiary, Phoenix found
out that X was not an eligible employee as defined in the group
policy since he has not been employed 30 hours a week by
Manpower. Phoenix refused to pay. May X’s beneficiary invoke the
incontestability clause against Phoenix?
A: The beneficiary of X may validly invoke the incontestability clause
can apply even to cases of intentional concealment and
misrepresentation; there would be no cogent reason for denying
such application where the insured had not been guilty thereof.
When X filled out the card, it behoved the insurer to look into the
qualification of X whether he can thus be covered or not by the
group life insurance policy. In issuing the certificate of coverage to
X, Phoenix may, in fact, be said to have waived the 30-hour per
week requirement.
Bar 1991
Q: Atty. Roberto took out a life insurance policy from Dana
Insurance on September 1, 1989. On August 31, 1990, Roberto
died. Dana Insurance refused to pay his beneficiaries because it
discovered that Roberto had misrepresented certain material facts
in his application. The beneficiaries sued on the basis that Dana
Insurance can contest the validity of the insurance policy only within
2 years from the date of issue and during the lifetime of the insured.
Decide.
A: I would rule in favour of the insurance company. The
incontestability clause applies only of the policy had been in effect
for at least 2 years. The two-year period is counted from the time
the insurance becomes effective until the death of the insured and
not thereafter.
Bar 1994
Q: On Septemeber 23, 1990, Tan took a life insurance policy from
Philam. The policy was issued on November 6, 1990. He died on
April 26, 1992 of hepatoma. The insurance company denied the
beneficiaries’ claim and rescinded the policy by reason of alleged
misrepresentation and concealment of material facts made by Tan
in his application. It returned the premiums paid.
The beneficiaries contend that the company had no right to rescind
the contract as rescission must be done “during the lifetime” of the
insured within 2 years and prior to the commencement of the action.
Is the contention of the beneficiaries tenable?
32
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
A: No. The incontestability clause does not apply. The insured died
within less than 2 years from the issuance of the policy on
September 23, 1990. The insurance died on April 26, 1992, or less
than 2 years from September 23, 1990.
The right of the insurer to rescind is only lost if the beneficiary has
commenced an action on the policy. There is no such action in this
case.
Bar 1998
Q: Renato was issued a life insurance policy on January 2, 1990.
He concealed the fact that 3 years prior to the issuance of his life
insurance policy, he had been seeing a doctor about his heart
ailment. On March 1, 1992, Renato died of heart failure. May the
heirs file a claim on the proceeds of the life insurance policy of
Renato?
A: Yes. The life insurance policy in question was issued on January
2, 1990. More than 2 years had elapsed when Renato, the insured,
died on March 1, 1992. The incontestability clause applies.
Bar 2014
Q: On July 3, 1993, Delia Sotero took out a life insurance policy
from Ilocos Bankers Life Insurance Corp. designating her niece
Cresencia Aban as her beneficiary. Ilocos Life issued Policy No.
747, with a face value of P100,000, in Sotero’s favour on August 20,
1998, after the requisite medical examination and payment of the
premium.
On April 10, 1996, Sotero died. Aban filed a claim for the insurance
proceeds on July 6, 1996. Ilocos Life conducted an investigation
into the claim and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she
was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have financial capability to pay the premium on
the policy;
4. Sotero did not sign the application for the insurance;
5. Aban was the one who filed the insurance application and
designated herself as beneficiary.
For the above reasons and claiming fraud, Ilocos Life denied Aban’s
claim on April 6, 1997, but refunded the premium paid on the policy.
a. May the incontestability period set in even in cases of
fraud as alleged in this case?
b. Is Aban entitled to claim the proceeds under the
policy?
A:
a. Yes. The incontestability clause is a provision in law that 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 2 years from 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 fraudulent concealment or misrepresentation of the
insured or his agent.
In this case, the policy was issued on August 30, 1993, and the
insured died on April 10, 1996. The insurance policy was thus in
force for a period of 3 years, 7 months and 24 days. considering
that the insured died after the 2-year period, Ilocos Life is, therefore,
barred from proving that the policy is vod ab initio by reason of the
insured’s fraudulent concealment or misrepresentation or want of
insurable interest on the part of the beneficiary.
b. Yes. After the 2-year period lapse, or when the insured dies within
the period, the insurer must make good on the policy, even though
the policy was obtained by fraud, concealment, or
misrepresentation, as in this case, when the insured did not
personally apply for the policy as she was illiterate and that it was
33
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
the beneficiary who filled up the insurance application designating A: No, the insurer cannot escape liability. The insurance agent is an agent not of
herself as beneficiary. the insured but of the insurer and the latter must thus suffer for the misconduct of
the agent. The result would have been different had the false answer been made
Bar 1976 by the agent in connivance with the insured.

Q: A, an agent of life insurance company X, induced B who has been suffering
from advance tuberculosis to apply for P10,000 life insurance which B did and
requested A to fill the application form. Thru the connivance of the physician, it
was made to appear in the application that B is in good health and the P10,000
life insurance policy was issued by X to B. If B dies of tuberculosis, may his
beneficiaries recover?
A: It depends. The insurer is bound when its agent writes a false answer into the
application without the knowledge of the insured, in which case, the insured’s
beneficiaries may recover but a collusion between the agent and the insured in
misrepresenting the facts will vitiate the policy. Thus, in the instant case, if A
obtained from B a correct and truthful answer to interrogatories contained in the
application but without the knowledge of B filed in a false answer and thru the
connivance with the company physician, it was made to appear that B was in
good health, the insurer cannot assert the falsity of such answers as a defense to
liability on the policy.
DISTINGUISH CONCEALMENT FROM REPRESENTATION
1. Concealment is the neglect of one party to communicate to the other
material facts. The information he gives in compliance with his duty
to reveal information is representation. Representation therefore, is
the communication required to comply with the prohibition against
concealment.
2. Concealment is the passive and misrepresentation is the active
form of the same bad faith.
CONCEALMENT AND REPRESENTATION COMPARED
1. In concealment, the insured withholds information of material facts; in
representation, the insured makes erroneous statements.

Bar 1988 2.
On October 18, 1980, P took out a life insurance policy and named his only son
Q as beneficiary. The policy was silent with regard to any change of beneficiary.
P later learned that Q was hooked on drugs and immediately notified the 3.
insurance company in writing that he is substituting his sister, R, as his beneficiary
in place of Q. P later died of advanced tuberculosis. In the application form filled
up by the agent of the insurance company prior to the issuance of the life 4.
insurance policy by the insurance company, the agent, without the knowledge of
P, filled in a false answer and made it appear that P was in good health. Upon P’s
death, Q claimed the proceeds of the insurance policy contending that as
designated beneficiary, he cannot be changed without his consent, he having 5.
acquired a vested right to the proceeds of the policy.
In concealment and misrepresentation, both give the insurer the right to
rescind the contract of insurance.
The materiality of concealment and representation are determined by
the same rules.
Whether the concealment and representation is intentional or not, the
injured party can rescind.
Since insurance contracts are of utmost good faith, the insurer is also
covered by the rules.

Can the insurance company refuse liability on the policy? Bar 2009

34
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Q: Antarctica Life Assurance publicly offered a specially designed insurance
policy covering persons between ages of 5- to 75 who may be afflicted with
serious and debilitating illnesses. Quirico applied for insurance coverage, stating
that he was already 80 years old.
Nonetheless, Antarctica Life approved his application. Quirico then requested
Antarctica Life for the issuance of a cover note while he was trying to raise funds
to pay the insurance premium. Antarctica Life granted the request. Ten days after
he received the cover note, Quirico had a heart seizure and had to be
hospitalized. He then filed a claim on the policy.
Can Antarctica Life validly deny the claim on the ground that the insurance
coverage, as publicly offered, was available only to persons 50 to 75 years of
age?
A: No. There is no misrepresentation or concealment in this case which would
result to the denial of Quirico’s claim because by approving the application of
Quirico who disclosed that he was already 80 years old. Antarctica Life waived
the age requirement. The insurance company is now estopped from raising such
defense of age of the insured.
WARRANTIES
DEFINED
1. It is a statement or promise stated in the policy or incorporated therein
by reference, whereby the insured, expressly or impliedly contracts as
to the past, present and future existence of certain facts, conditions, or
circumstances, the literal truth of which is essential to the validity of the
contract.
 Warranty is a statement or promise by the insured set forth in the policy
itself or incorporated in it by proper reference, the untruth or
nonfulfillment of which in any aspect and without reference to whether
the insurer was in fact prejudiced by such untruth or nonfulfillment,
renders the policy voidable by the insurer (Vance, 1951).
Bar 1986
Q: Pabaya paid for a fire insurance policy on his multi-storey building. At the time
he applied for the insurance, he told the representative of the insurance company
that he planned to assign a security guard on every floor of the building right away.
Except for the ground floor, no security guards were assigned. Eleven months
after the policy was issued, the building was gutted by fire which started on the
third floor. Unknown to Pabaya, the insurance company had incorporated his
planned undertaking in the policy. Can Pabaya recover on the fire insurance
policy?
A: Pabaya can recover under the insurance policy. The statement of Pabaya that
the planned to assign a security guard on every floor of the building, whether
incorporated in the policy or not, did not amount to firm commitment so as to
constitute an express warranty or representation. The facts indicate that it was
simply planned, not obligatory or promissory, undertaking.
FORM
1. No particular form of words is necessary to create a warranty.
2. What is essential is what the parties intend a statement to be, and if so
intended as a warranty, it must be included as part of the contract.
2.1. Whether a warranty is constituted or not depends upon:
(a) the intention of the parties,
(b) the nature of the contract, or
(c) the words used thereto.
2.2. In case of doubt, the statement is presumed to be a
representation, not a warranty.
WHAT ARE THE KINDS OF WARRANTIES?
1. Affirmative warranties – refer to those that relate to matters that exist at
or before the issuance of the policy.
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
2. Promissory warranties – refer to those where the insured promises or from the very nature of the insurance contract, a warranty is necessarily
undertakes that certain matters shall exist or will be done or will be inferred or understood.
omitted after the policy takes effect.
4.1. The law only provides for implied warranties only in contracts
2.1. It is a statement in the policy, which imports that it is intended of marine insurance.
to do or not to do a thing which materially affects the risk, is a
warranty that such act or omission shall take place.

As when: That a house shall not be leased our or that the EFFECT OF VIOLATION OR BREACH OF A MATERIAL WARRANTY
insured premises will be fenced.
1. The violation of a material warranty, or other material provision of the
policy, on the part of either party thereto, entitles the other to rescind.
2.2. Unless the contrary intention appears, the courts will presume
that the warranty is merely an affirmative warranty.
1.1. Note that the insured can exercise the right also when the
insurer violates a warranty, like when it refuses to grant a loan
As when: A description of the property as being a two-storey
on the policy.
residence, there is no promissory warranty that it will be
maintained as a residence or there is a statement that “there is
NOTE: Breach of a material warranty may either be:
a security guard on duty at night” is not a promissory warranty
that a security guard will be maintained.
(a) Without fraud, in which case, the insurer will be exonerated
from the time it occurs. If made during the inception, it will
3. Express warranty is a statement in a policy of a matter relating to the
prevent the policy from taking effect (Sec. 76).
person or the thing insured, or to the risk as a fact and where the
assertion or promise is clearly set forth in the policy or incorporated
(b) With fraud, in which case, the policy is avoided ab initio.
therein by reference.

2. The policy may declare that a violation of specified provisions thereof

3.1. They can be affirmative or promissory warranties.
shall avoid it, otherwise the breach of an immaterial provision does not
avoid the policy.
3.2. An express warranty made at or before the execution of the
policy should be contained:
2.1. This means that while ordinarily the breach of an immaterial
provision does not avoid the policy, a stipulation that any
(a) In the policy itself;
breach avoids the policy will cause it to be avoided.
(b) In another instrument signed by the insured and referred
to in the policy as making a part of it. This also includes a
3. A breach of warranty without fraud, merely exonerates an insurer from
rider. It is a part of the policy; it need not be signed unless
the time it occurs, or where it is broken at its inception, prevents the
the rider was issued after the original policy took effect.
policy from attaching to the risk.
4. Implied warranties are assertions or promises not expressly set forth in
the policy, but because of the general tenor of the terms of the policy, or

36
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
3.1. This means that if the breach is without fraud, the policy is
avoided only from the time of the breach, but prior to the
breach, it is still effective. Consequently, the insured is entitled
to:
(a) a pro-rata return of the premium paid under Sec. 80; or
(b) all premiums, if the breach occurs at the inception of the
contract, as such is void ab initio and had never become
binding.
4. Note that a causal connection between a violation of the warranty and
cause of the loss is not necessary. Hence, even if the violation did not
contribute to the loss, the other party may still rescind.
As when: A insured his building against fire. A warranty stated that no
hazardous goods would be stored. A stored fireworks. The building was
burned and the fireworks were discovered stored in the area not affected
by fire. The insurer was not held liable as the storage had increased the
risk [Young v Midland Textiles, 30 Phil. 617].
5. Exceptions:
The non-performance of a promissory warranty does not avoid the policy
before the arrival of the time for performance when:
(a) The loss insured against happens or loss occurs before thej time of
performance of the warranty.
As when: There is a warranty that a firewall will be constructed, but
fire occurs before the period for compliance.
(b) The performance becomes unlawful at the place of the contract.
As when: A law or ordinance prohibits the construction of the
specified firewall.
(c) The performance becomes impossible;
As when: A severe lack of materials to construct.
(d) Waiver or Estoppel.
Bar 1993
Q: Julie and Alma formed a business partnership. Under the business name Pino
Shop, the partnership engaged in a sale of construction materials. Julie insured
the stocks in trade of Pino Shop with WGC Insurance for P350, 000.
Subsequently, she again got an insurance contract with RSI for P1,000,000 and
then from EIC for P200,000. A fire of unknown origin gutted the store of the
partnership. Julie filed her claims with the 3 insurance companies. However, her
claims were denied separately for breach of policy. Julie went to court and
contended that she could not be blamed for the omission, alleging that the
insurance agents for WGC, RSI and EIC knew of the existence of the additional
insurance coverage and that she was not informed about the requirement that
such other or additional insurance should be stated in the policy.
May she recover on her fire insurance policies?
A: No, because she is guilty of violation of a warranty/ condition.
BREACH OF IMMATERIAL WARRANTY
1. General Rule: Breach of an immaterial provision does not avoid the
policy (Sec. 75).
2. Exception: Breach of an immaterial provision avoids the policy when the
parties stipulate that violation of a particular provision, though
immaterial, shall avoid the policy, in effect, the parties converted the
immaterial provision into a material one (Sundiang and Aquino, 2013).
2.1. A condition in the policy which requires insured to disclose to
the insurer of any insurance that, if violated by the insured,
would ipso facto avoid the contract (Pioneer v Yap, 1974).
2.2. Insurer is barred by waiver (or estoppel) to claim violation of the
so-called hydrants warranty when, despite knowing fully that
only 2 fire hydrants existed (out of the 11 hydrants required), it
37
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
still issued the insurance policies and received the premiums
(Qua Chee Gan v Law Union, 1955)
DISTINGUISHING IT FROM REPRESENTATIONS
FORM OF THE POLICY
1. As to Nature: A warranty is a part of the contract; a representation is
merely a collateral inducement thereto;
2. As to Form: A warranty is expressly set forth in the policy or incorporated
therein by reference, while a representation may be oral or written in
another statement.
3. As to Compliance: A warranty must be strictly and literally performed,
while a representation must be substantially true.
4. As to Materiality: A warranty is presumed material, while a
representation must be shown to be so.
5. As to Applicability of Incontestability Clause: Incontestability clause does
not apply to breach of warranty, while it applies in misrepresentation.
6. A breach of warranty is a breach of the contract itself while a
misrepresentation is ground to rescind the contract.
As when: The claim of the beneficiary that since the insured was illiterate
and spoke Chinese only, she could not be held guilty of concealment
because the application and policy was in English when upheld (Tang v
CA, 90 SCRA 236).
1. It shall be printed and may contain blank spaces and any word, phrase,
clause or mark, sign, symbol, signature, or number necessary to
complete it shall be written in the blank spaces.
2. If there are riders, clauses, warranties or endorsements purporting to be
part of the contract of insurance and which are pasted or attached to the
policy is not binding on the insured unless the descriptive title of the
same is also mentioned and written on the blank spaces provided in the
policy.
2.1. If pasted or attached after the original policy at the time it was
issued, the signature of the insured is not necessary to make it
binding.
2.2. If pasted or attached after the original policy is issued, it must
be counter-signed by the insured unless it was applied for by
the insured.

2.3. No rider, clauses, or warranties, or endorsements shall be

attached, printed or stamped on the policy unless the form of
POLICY such application has been approved by the Insurance
Commissioner.
It is the written instrument in which a contract of insurance is set forth.
2.4. Riders are forms attached to the policy when the policy finds it
HOW TO CONSTRUE THE POLICY
necessary to alter or amend the applicant’s answer to any
1. Generally, policy is construed in favour of the insured and against the question in the application.
insurer.
2.5. Clauses are forms containing additional stipulations.
2. The burden of proving that the terms of the policy have been explained
is upon the party seeking to enforce it. 2.6. Warranties are written statements/ stipulations inserted on the
face of the contract or incorporated by proper words of

38
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
reference where the insured contracts as to the existence of
facts, circumstances or conditions, the truth of which are
essential to the validity of the contract.
2.7. Endorsements are agreements not contained but may be
written or attached to policy, to change or modify a part thereof.
WHAT MUST A POLICY SPECIFY?
1. A policy must specify
(a) The parties between whom the contract is made;
(b) The amount to be insured except in open or running policies;
(c) The premium, or if the premium is to be determined at 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 the property insured, if not the absolute
owner;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
WHAT ARE COVER NOTES?
1. It is a written memorandum of the most important terms of a preliminary
contract of insurance intended to give protection pending investigation
by the insurer of the risk or until the issuance of the formal policy.
2. It is also known as a “binding slip” or “binder.”
3. The effectivity of a cover note is 60 days, as within such period, a policy
shall be issued including in its terms the identical assurance found under
the cover rate and the premium therefore. It may however, be extended
beyond 60 days and with the written approval of the Insurance
Commissioner if he determines that it does not violate the Insurance
Code.
3.1. The following rules have been promulgated by the Insurance
Commissioner to govern cover notes:
(a) A cover note is valid for 60 days whether or not a premium
is paid but it may be cancelled by either party upon at least
a 7-day notice to the other party;
(b) If the cover note is cancelled, a regular policy must be
issued within 60 days from the date of issue of the cover
note, including within its terms the identical insurance;
(c) It may be extended with the written approval of the
Commissioner but may be dispensed with by a certification
of the President, Vice-President, or General Management
of the insurer that the risks involved and the extension do
not violate the Code.
(d) Insurance companies may impose a deposit premium
equivalent to at least 25% of the estimated premium but in
no case less than P500.
4. A cover note will give adequate insurance protection when: it is
considered as a preliminary contract of present insurance and not a
mere agreement to insure at a future time, as on acceptance of the
application or issuance/ delivery of the policy (44 CJS 958).
4.1. As when: An agent issued a provisional policy acknowledging
receipt of premiums and stating that the insurance shall be
effective upon approval and issuance of the policy by the head
office. There is no protection as it is a mere acknowledgment
of the payment of premiums as the effectivity of the insurance
is expressly provided (Lim v Sunlife,, 41 Phil. 265), or a binding
slip stated that it was subject to the approval of the insurer and
the same was subsequently disapproved (Grepalife v CA, 89
SCRA 543).
39
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
5. Rules of Joyce (Joseph Joyce, Author of five volumes of Commentaries
on Insurance)
(a) If the act of the acceptance of the risk by the agent and the giving
by him of a receipt are within the scope of his authority, and nothing
remains but to issue the policy, then the receipt will bind the
company.
(b) Where an agreement is made between the applicant and the agent,
whether by signing an application containing such condition, or
otherwise, that no liability shall attach until the principal approves
the risk and a receipt is given by the agent, such acceptance is
merely conditional and subordinated to the act of the company in
approving or rejecting.
(c) Where the acceptance of the agent is within the scope of his
authority, a receipt containing a contract of insurance for a specified
time which is not absolute but conditional, upon acceptance or
rejection by the principal, covers the specified period unless the risk
is declined within the same period.
Bar 1980
Q: P filed an application with an insurance company for a 20-year endowment
policy in the amount of P50,000 on the life of his one-year old daughter, supplying
all the essential data in the application form, but without disclosing that his
daughter was a mongoloid child. Upon P’s payment of the annual premium, a
binding deposit receipt was issued to him by the insurance agent, subject to
processing by the company. The insurance company disapproved the insurance
application stating that the plan applied for was not available for minors below 7
years old, and offered another plan. The insurance agent did not inform P of the
disapproval nor of the alternative plan offered, and instead, strongly
recommended that the company reconsider and approve the insurance
application.
As fate would have it, P’s daughter died. P sought payment of the proceeds of
the insurance but the company refused on the grounds that there was
concealment of a material fact in the insurance application form and that it had
rejected the application. P contended, on the other hand, that the binding deposit
receipt constituted a temporary contract of life insurance.
How would you resolve this?
A: The insurance company is not liable. The binding deposit receipt is merely
conditional and does not insure outright. Where an agreement is made between
the applicant and the agent, no liability shall attach until the principal (insurance
company) approves the risk. The binding deposit receipt is subordinated to the
act of the insurance company in approving or rejecting the application. Thus, in
life insurance, a “binding slip” or “binding receipt” does not insure by itself. And,
when as in this case, the application was disapproved, before the death of the
insured, there was no perfected contract of insurance in order to make the
company liable [Great Pacific Life v CA; April 30, 1979 (89 SCRA 549)].
6. A cover note has been held to be binding despite the absence of a
premium payment for its issuance as no separate premiums are
intended or required to be paid on a cover note because they do not
contain the particulars of the property insured that would serve as the
basis for the computation of the premiums. The cover note should not
be treated as a separate policy but should be integrated in the regular
policy subsequently issued so that premiums on the regular policy
should include that for the cover note (Pacific Timber Export v CA, 112
SCRA 199).
Bar 2009
Q: Antarctica Life publicly offered a specially designed insurance policy covering
persons between the ages 50 to 75 who may be afflicted with serious and
debilitating illnesses. Quirico applied for insurance coverage, stating that he was
already 80 years old.
Nonetheless, Antarctica Life approved his application. Quirico then requested
Antarctica Life for the issuance of a cover note while he was trying to raise funds
to pay the insurance premium. Antarctica Life granted the request. Ten days after
he received the cover note, Quirico had a heart seizure and had to be
hospitalized. He then filed a claim on the policy.
40
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Did Antarctica Life’s issuance of a cover note result in the perfection of an
insurance contract between Quirico and Antarctica Life?
A: Yes. A cover note has been held to be binding despite the absence of a
premium payment for its issuance as no separate premiums are intended or
required to be paid on a cover note. The cover note should not be treated as a
separate policy but should be integrated in the regular policy subsequently issued
so that premiums on the regular policy should include that for the cover note. The
issuance of the cover note is because there is a delay on the issuance of the
policy. The rule on cover note is that it shall be valid for 60 days whether or not a
premium is paid, but it may be cancelled by either party upon at least a 7-day
notice to the other party and if not cancelled, the policy shall be issued.
7. As application for insurance is nothing more than an offer to enter into a
contract of insurance. Such application, therefore, shall not become a
contract until accepted by the insurer. Such acceptance cannot be
presumed from a delay on the part of the insurer in passing upon the
application. On the contrary, such delay for an unreasonable period of
time may be construed as a rejection of the application.
7.1. Acceptance is presumed when the insurer accepts and retains
for an unreasonable period of time (30 days) the first premium
covered by a cashier’s receipt stating that the policy is effective
on the date it is issued, without the policy being issued. If loss
occurs before the rejection of the policy, the insurer is liable
[Gloria, et. al. v Philamlife, (CA ) 73 OG 8660].
WHOSE INTEREST IS INSURED?
1. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit is made.
Unless otherwise specified in the policy
1.1. As when:
(a) The designation of sister as sole beneficiary in a life
insurance cannot be defeated by the contention of the
plaintiff that proceeds belong to the estate of the insured
was disregarded as insurance is to be governed by special
law, not by the law covering donations or succession (Del
Val v Del Val, 29 SCRA 534);
(b) In an action to recover cost of repairs and labor to a motor
vehicle where they policy states loss is payable to HS
Reyes, the mortgagee of the vehicle who had no
knowledge of the fact that Mara had it repaired with
Bonifacio Bros., the Court ruled that HS Reyes is the one
entitled to the proceeds because a policy of insurance is a
separate and independent contract between the insured
and the insurer, and that third persons have no right to the
proceeds of the insurance (Bonifacio Bros. v Mora; GR No.
L-20853; May 29, 1967).
1.2. Unless otherwise specified in the policy, a 3rd person may sue
the insurer if:
(a) The insurance contract contains a stipulation in favor of a
3rd person, the said 3rd though not a party may sue to
enforce before the contract is revoked by the parties.
As when: The insurance company undertook to indemnify
any authorized driver who was driving the motor vehicle
insured. Coquia, while driving the insured motor vehicle,
met an accident and died. His heirs were allowed to sue
the insurer, the policy being considered in the nature of a
contract pour autrui, and therefore the enforcement thereof
may be demanded by a 3rd party for whose benefit it was
made (Coquia v Fieldmen’s Insurance, 26 SCRA 179);
(b) The insurance contract provides for indemnity against
liability to 3rd persons.
As when: The insured procured insurance that would
indemnify him against any and all sums which he may be
legally liable to pay in respect to the death or bodily injury
to any person. A jeepney covered by the insurance had
bumped Guingon and had caused his death. The
insurance was held to be one for indemnity against liability
41
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
to 3rd persons, and therefore, such 3rd person is entitled to
sue the insurer (Guingon v del Monte, 20 SCRA 1043).
1.3. The test to determine whether a 3rd person may directly sue the
insurer of the wrongdoer is: If the contract provides for
indemnity against 3rd persons, then the latter to whom the
insured is liable may directly sue the insurer. On the other hand,
if the insurance is for indemnity against actual loss or payment,
then the 3rd person cannot sue the insurer, recourse is against
the insured alone.
5. When a policy is so framed that it will inure to the benefit of whomsoever,
during the continuance of the risk, may become the owner of the interest
insured (Sec. 57).
5.1. The proceeds become payable to who may be the owner at the
time the loss or injury occurs. This is an exception to Sec. 20.
6. The mere transfer of a thing insured does not transfer the policy but it
suspends it until the same person becomes the owner of both the policy
and the thing insured.

2. If the contract is executed with an agent or trustee as the insured, the 6.1. Note the exception to this rule as found in Secs. 20-24 and 57.
fact that his principal or beneficiary is the real party in interest may be
indicated by describing the insured as the agent/ trustee or by general WHAT ARE THE KINDS OF INSURANCE POLICIES?
words in the policy.
1. The kinds of policies are:
2.1. If not indicated, it is as if the insurance is taken out by the agent/ (a) Open;
trustee alone, consequently the principal has no right against (b) Valued;
the insurer. (c) Running or Floating.

3. If a partner or part owner effects insurance, it is necessary that the terms 2.
of the policy should be such as are applicable to the joint and common
interest so that it may be applicable to the interest of his co-partners/
owners.
. property but merely the maximum limit of the insurer’s liability.
3.1. Consequently, the policy must state that the interest of all is
insured. If not, it is only the interest of the one getting the policy
that is insured.
3.
4. When the description of the insured in the 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.
As when: In a fire insurance policy where the insured is Dela Cruz &
Associates, X to be able to recover his share, must prove that he is a
partner.
An open policy is one in which the value of the thing insured is not agreed
upon, but is left to be ascertained in case of loss.
2.1. What is mentioned as the amount is not the value of the
In case of loss, the insurer only pays the actual cash value at
the time of loss.
A valued policy is one which expresses on its face that the thing insured
shall be valued at a specified sum.
3.1. The valuation of the property insured is conclusive between the
parties. In the absence of fraud or mistake, such value will be
paid in case of a total loss.
3.2. A valued policy distinguished from an open policy:

42
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(a) In a valued policy, proof of value of the thing after the loss
is necessary. In an open policy, the insured must prove the
value of the thing insured;
(b) In a valued policy, the parties have conclusively stipulated
that the property insured is valued at a specified sum. In
an open policy, the value is not agreed but left to be
ascertained upon loss. This does not violate the principle
that a contact of insurance is a contract of indemnity as
long as the valuation is reasonable and is bona fide.
4. 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.
4.1. This is also known as “floating policy” which is usually issued
to provide indemnity for property which cannot be recovered by
specific insurance because of a frequent change in location
and quantity.
As when: Insurance procured by a retail establishment to cover
its inventory that fluctuates in quantity, or is located in several
areas.
Bar 1975
Q: In 1964, Jose constructed a house worth P50,000 which he insured against
fire for the same amount. The insurance for the same amount was renewed every
year. In 1974, when the house was already worth P100,000 on account of
inflationary prices (in case of rebuilding), 1/5 of the house was destroyed by fire.
As nothing illegal about the contract, how much, if any, can Jose successfully
recover from the insurance company?
A: If the insurance policy is a valued one, then Jose can recover 1/5 of P50,000,
i.e. P10,000. Under the Insurance Code, the valuation in a valued policy is
conclusive between the parties in the absence of fraud. So Jose cannot claim that
since his house was worth P100,000 at the time of the loss, he should be able to
recover P20,000 (actual value of loss – 1/5 of P100,000).
If the policy is an open policy then under the law, appraisal of loss is made after
the fire. Since the house was worth P100,000 at such time, then the loss of Jose
is P20,000 and he can recover this amount under such an open policy.
CANCELLATION OF POLICY
1. No policy other than life shall be cancelled by the insurer, except upon
prior notice thereof to the insured.
2. No notice of cancellation shall be effective if not based on the
occurrence, after effective date of one or more of the following grounds:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard
insured against
As when: Insured has been convicted of arson or car theft;
(c) Discovery of fraud or material misrepresentation
As when: Insured represents himself as the owner but is not actually
the owner;
(d) Discovery of willfull or reckless acts or omissions increasing the
hazard insured against
As when: There is storage of hazardous materials in the premises;
(e) Physical changes in the property insured which result in the property
being uninsurable
As when: A private vehicle is converted into a racing vehicle.
(f) Determination by the Insurance Commissioner that a continuation
of the policy would place the insurer in violation of the Code
As when: Policy was issued absent insurable interest.
3. As to form, the notice must be in writing, mailed or delivered to the
named insured at the address shown in the policy which shall state:
43
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(a) The grounds relied upon as per Section 64, and
(b) That upon written request of the named insured, the insurer will 2. This is not an absolute right as it is conditioned on the insurability of the
furnish the facts on which cancellation is based. insured or evidence of good health and the payment of all overdue
premiums and indebtedness, if any.
3.1. A fire insurance policy is cancelled on October 15, 1981. The
insurer’s clerk allegedly sent notice sent notice of cancellation by
mail but there was no proof that it was actually mailed and received.
Insurer relies on the presumption of regularity. It was held that PREMIUM
considering the strict language of the law that no policy can be
DEFINED
cancelled without prior notice, it behoved on the insurer to make
sure that cancellation was actually sent and received by the insured 1. The agreed price for assuming and carrying the risk which the insurer is
(Malayan Insurance v Cruz Arnaldo, 154 SCRA 672). entitled to the payment of a premium as soon as the thing insured is
3.2. A insured his building against fire and made the loss payable to the exposed to the peril insured against.
mortgagee. Upon cancellation, notice was sent to the mortgagee. It
was held that there was no valid notice of cancellation. The notice 2. The payment of a premium is essential to the validity of an insurance
is personal to the insured and not to any unauthorized person policy, known as the “cash and carry basis” or “no premium payment, no
(Saura Import v Phil. International, 8 SCRA 143). policy” rule.
DOES THE INSURED HAVE THE RIGHT TO RENEW HIS POLICY?

1. In insurance other than life, the named insured, may renew the policy
upon payment of the premium due on the effective date of the renewal,
if, he has not been given notice by the insurer of the intention not to
renew or to condition renewal upon reduction of limits or elimination of
coverages by mail or delivery at least 45 days in advance of the end of
WHEN IS THE INSURER ENTITLED TO A PREMIUM?
the policy.
2. For reckoning the end date of a policy: any policy written for a term of
less than one year shall be considered as if written for a term of one
year. If written for a term of more than one year or any policy with no
fixed expiration date, it shall be considered as if written for successive
periods or terms of one year.
3. As a rule, the obligation to pay the premium when due is considered an
indivisible obligation. Consequently, forfeiture is not prevented by a part
payment unless payment by instalment has been agreed upon or is the
established practice.
1. The insurer is entitled to the payment of a premium as soon as the thing
insured is exposed to the peril insured against.
2. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless
and until the premium is paid, except in:

HOW IS REINSTATEMENT OF THE POLICY EFFECTED?

(a) In case of life or industrial life where the premium is payable monthly
1. Reinstatement can be permitted within 3 years, or a stipulated longer or oftener, whenever the grace period applies;
period, from the date of default. (b) When the insurer makes a written acknowledgment of the receipt of
a premium, such is conclusive evidence of the payment of the

44
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
premium to make it binding notwithstanding any stipulation therein
that it shall not be binding until the premium is paid. Hence, the
effect of an acknowledgment in a policy or contract of insurance of
the receipt of the premium, is that it is conclusive evidence of its
payment so far as to make the policy binding, however it is not
conclusive for the purpose of avoiding collection of the premium;
and
(c) Where the oblige has accepted the bond or suretyship contract in
which case such bond or suretyship contract becomes valid and
enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety.
3. There is no excuse for non-payment of the premium since payment on
time is of the essence. The only recognized exception is when failure is
due to the wrongful conduct of the insurer.
As when: There is a baseless refusal to accept a validly tendered
payment of the premium (Gonzales v Asia Life, 92 Phil 197).
NOTE: Non-payment of premiums
Non-payment of first premium, unless waived, prevents the
contract from becoming binding notwithstanding the acceptance of the
application nor the issuance of the policy.
Non-payment of subsequent premiums does not affect the
validity of the contracts, unless by express stipulation, it is provided that
the policy shall in that event be suspended or shall lapse. In case of
individual life insurance, the policy holder is entitled a grace period of
either 30 days or one month within which payment of any premium after
the first may be made. In cases of industrial life insurance, the grace
period is 4 weeks, and where premiums are paid monthly, either 30 days
or one month.
NO EXCUSES
Fortuitous events which render payment by the insured wholly
impossible will not prevent forfeiture of the policy when the premium
remains unpaid.
Non-payment of premiums occasioned by war causes an
insurance to be not merely suspended, but is completely abrogated. It
would be unjust to allow the insurer to retain the reserve value of the
policy, which is the excess of the premium paid over the actual risk
carried during the years when the policy had been in force in time of war
[Constantino v Asia Life (1950)].
WHAT IS THE EFFECT OF PARTIAL PAYMENT?
1. As a rule, the obligation to pay the premium when due is considered
an indivisible obligation. Consequently, forfeiture is not prevented
by a part payment unless payment by instalment has been agreed
upon or is the established practice (Gulf Resorts v Philippine
Charter Insurance, 458 SCRA 550).
1.1. Payment made to an insurance agent or broker is payment
to the insurance company.
1.2. A payment by check or a promissory note will be sufficient
to make the policy binding when it is encashed (Art. 1249,
Civil Code).
NOTE: The payment of premium by a postdated check at
a stated maturity subsequent to the loss is insufficient to
put the insurance into effect. But payment by a check
bearing a date prior to the loss, assuming availability of
funds, would be sufficient, even if it remains unencashed
at the time of the loss. The subsequent effects of
encashment would retroact to the date of the instrument
and its acceptance by the creditor [Vitug, Commercial Law
and Jurisprudence (2006)].
Bar 1976
Q: A insured his house against loss by fire for P100,000. The policy provides that
the insurer shall be liable “if the property insured shall be damaged or destroyed
45
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
by fire after payment of premium, at any time from June 15, 1976 to June 15,
1977.” The policy was delivered to A on June 15, 1976. Instead of paying the
premium in cash, A issued a promissory note dated June 15, 1976, for the amount
of premium, payable within 30 days. The note was accepted. On June 29, 1976,
the property insured was burned. The insurer refused to pay on the ground that
the premium had not been paid, and the note did not have the effect of payment
as its valued had not been realized at the time the house was burned. Decide.
A: Since the case given took place after the effectivity of the Insurance Code, it
must be governed by its provisions. Section 77 thereof provides: “Notwithstanding
any agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof has
been paid…” Considering that this cited provision replaced Sec. 72 of the old
Insurance Act expressly by permitting the granting of credit extension, the only
conclusion is that the law-making power intended by the amendment to disallow
any agreement postponing payment of premium, including a grant of credit
extension. The issuance of a promissory note postpones payment by granting
credit extension. Therefore, the insurer is not liable under this express provision
of the new Insurance Code. The case of Capital Insurance v Plastic Era which
held that acceptance of a promissory note constitutes waiver of the stipulation as
to mode of payment, a promissory note constitutes payment, took place before
the Insurance Code came into effect and was based on Sec. 72 of the old
Insurance Act. It can therefore not be made applicable to the given case.
Answer from UST Golden Notes:
Yes, the insurer is liable because there has been a perfected insurance contract.
The insurer accepted the promise of the applicant to pay the insurance premium
within 30 days from the effective date of policy. By so doing, it has implicitly
agreed to modify the tenor of the insurance policy and in effect, waived any
provision therein that it would only pay for the loss or damage in case the same
occurs after the payment of the premium.
Considering that the insurance policy is silent as to the mode of payment, insurer
is deemed to have accepted the promissory note in payment of the premium. This
rendered the policy immediately operative on the date it was delivered [Capital
Insurance v Plastic Era; GR No. L-22375; July 18, 1975].
Bar 1978
Q: On December 17, 1975, a fire policy, insuring a building and its contents, was
delivered to the insured company. By agreement, it was allowed to pay the
premium within 30 days. On January 8, 1976, it paid the premium by means of a
check postdated January 16, 1976. The check was deposited by the insurance
company only on February 20, but the check bounced, although on January 19,
the insured had sufficient bank balance. On January 18, two days after the
premium became due, the insured property was burned and became a total loss.
Can the insurance company cancel the policy for non-payment of premium?
A: Yes, the insurance company can cancel the policy for non-payment of the
premium. The new Insurance Code provides that notwithstanding any agreement
to contrary, no policy or contract of insurance is valid and binding unless and until
the premium thereof has been paid.
Bar 2006
Q: The Peninsula Insurance Co. offered to insure Francis’ brand new car against
all risks in the sum of P1,000,000 per year. The policy was issued with the
premium fixed at P60,000 in 6 months. Francis only paid the first two months
instalments. Despite demands, he failed to pay the subsequent instalments, five
months after the issuance of the policy, the vehicle was carnapped. Francis filed
with the insurance company a claim for its value. However, the company denied
his claim on the ground that he failed to pay the premium resulting in the
cancellation of the policy.
Can Francis recover from Peninsula Insurance?
A: Yes, considering that his car was carnapped before the 6-month period to pay
the premium installments expired. An insurance premium can be paid in
instalments, and the insurance contract became valid and binding upon payment
of the first premium. When the insurer granted a credit term for the payment of
the premium, it is liable when the loss occurred before the expiration of such term.
It could not deny liability on the ground that payment was not made in full, for the
reason that it agreed to accept instalment payments. For the same reason, it
could not validly cancel the policy, more so, without giving notice to the insured
for its cancellation.
46
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Bar 2010
Q: Enrique obtained from Seguro Insurance a comprehensive motor vehicle
insurance to cover his top of the line Aston Martin. The policy was issued on
March 31, 2010 and, on even date, Enrique paid the premium with a personal
check postdated April 6, 2010.
On April 5, 2010, the car was involved in an accident that resulted in its total loss.
On April 10, 2010, the drawee bank returned Enriques’s check with the notation
“insufficient funds.” Upon notification, Enrique immediately deposited additional
funds with the bank and asked the insurer to redeposit the check. Enrique
thereupon claimed indemnity from the insurer.
Is the insurer liable under the insurance coverage?
A: No. Under Art. 1249 of the Civil Code, the delivery of a check produces the
effect of payment only when it is encashed. The loss occurred on April 5, 2010.
When the check was deposited, it was returned on April 10, 2010, for insufficiency
of funds. The check was honoured only after Enrique deposited additional funds
with the bank. Hence, it did not produce the effect of payment.
Bar 2007
Q: Alfredo took out a policy to insure his commercial building against fire. The
broker for the insurance company agreed to give a 15-day credit within which to
pay the insurance premium. Upon delivery of the policy on May 15, 2006, Alfredo
issued a postdated check payable on May 30, 2006. On May 28, 2006, a fire
broke out and destroyed the building owned by Alfredo.
May Alfredo recover on the insurance policy?
A: Yes. It is valid to stipulate that the insured will be granted credit term for
payment of premium. Payment by means of a check which was accepted by the
insurer, bearing a date prior to the loss, would be sufficient. The subsequent
effects of encashment retroact to the date of the check [UCPB General v
Masagana Telamart, 356 SCRA 307 (2001)].
Bar 2013
Q: Stable Insurance and St. Peter Manufacturing have had a long-standing
insurance relationship with each other: St. Peter secures the comprehensive fire
insurance on its plant and facilities from Stable Insurance. The standing business
practice between them has been to allow St. Peter a credit period of 90 days from
the renewal of the policy with which to pay the premium. Soon after the new policy
was issued and before premium payments could be made, a fire gutted the
covered plant and facilities to the ground. The day after the fire, St. Peter issued
a manager’s check to Stable Insurance for the fire insurance premium, for which
it was issued a receipt. A week later, St. Peter issued its notice of loss. Stable
Insurance responded by issuing its own manager’s check for the amount of the
premiums St. Peter has paid, and denied St. Peter’s claim on the ground that
under the cash and carry principle governing fire insurance, no coverage existed
at the time the fire occurred because the insurance premium had not been paid.
Is St. Peter entitled to recover from the loss from Stable Insurance?
A: St. Peter is entitled to recover for the loss from Stable Insurance. Stable
Insurance granted a credit term to pay the premiums. This is not against the law,
because the standing business practice of allowing St. Peter to pay the premiums
after 60 days or 90 days, was relied upon in good faith by St. Peter. Stable
Insurance is in estoppel.
Bar 2014
Q: On September 25, 2013, Danny procured a n insurance on his life with a face
value of P5,000,000 from RN Insurance, with his wife Tina as sole beneficiary.
On the same day, Danny issued an undated check to RN Insurance for the full
amount of the premium. On October 1, 2013, RN Insurance issued the policy
covering Danny’s life insurance. On October 5, 2013, Danny met a tragic accident
and died. Tina claimed the insurance benefit, but RN Insurance was quick to deny
the claim because at the time of Danny’s death, the check was not yet encashed
and therefore, the premium remained unpaid.
Is RN Insurance correct? Will your answer be the same if the check is dated
October 15, 2013?
A: No, RN Insurance is not correct. After the issuance of the check by Danny for
the full amount of the premium, the unconditional delivery of an insurance policy
of RN Insurance to Danny corresponding to the terms of the application ordinarily
47
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
consummates the contract, and the policy as delivered becomes the final contract
between the parties. Where the parties, so intend, the insurance becomes
effective at the time of the delivery of the policy notwithstanding the fact that the
check was not yet encashed.
My answer will still be the same even if the check is dated October 15, 2013 since
an acknowledgment in a policy of the receipt of premium is conclusive evidence
of its payment for the purpose of making the policy binding.
2. Basic principles of equity and fairness would not allow the insurer
to collect and accept instalments and later deny liability as
premiums were not paid in full (Philippine Phoenix Surety v
Woodworks, 20 SCRA 1272).
2.1. Should any partial payment be made when there is an
agreement that the policy shall not be effective pending
payment of full premium was in the concept of a deposit
(Tibay v CA, 257 SCRA 126).
REFUND OF PREMIUM
WHEN IS THE INSURED ENTITLED TO A RETURN (REFUND) OF THE
PREMIUMS PAID?
1. The insured will be entitled to a return of the premiums paid when:
1.1. To the whole premium, when no part of the interest in the thing
insured is exposed to any of the perils insured against.
As when: Insurance is taken on a vessel for a voyage that did
not take place.
1.2. Where the insurance is made for a definite period of time and
the insured surrenders his policy before the expiration of the
period. Here the insured only recovers a portion of the policy
premiums corresponding to the unexpired time, but it does not
apply if:
(a) A short period rate has been agreed upon. What will be
recoverable is the agreed percentage of premiums as
stated in the policy.
As when: The policy is returned after a month, the insurer
retains 20% of the premium because it has been agreed
upon, the insured then receives 80%, not the premiums
equivalent to the 11 months remaining on the term; or
(b) The policy is a life insurance policy as the same is
indivisible but the insured is entitled to a cash surrender
value.
NOTE: Cash Surrender Value
It is the amount that the insured is entitled to receive if he
surrenders the policy and releases his claims upon it. The
right to CSV accrues only after three full annual premium
payments. The insured is given the right to claim the
amount less than the reserve, reduced by surrender
surcharge.
The CSV is an amount which the insurance company hold
in trust for the insured to be delivered to him upon demand.
When the company’s credit for advances is paid out of the
cash value or CSV, that value and the company’s liability
is diminished [Manufacturer’s Life v Meer (1951)].
1.3. When the contact is voidable on account of fraud or
misrepresentation of the insurer or the agent.
As when: The insurer makes a representation regarding a loan
provision which is not contained in the policy that is issued.
1.4. Where the contract is voidable on account of facts, the
existence of which the insured was ignorant without his fault.
As when: The insurance is taken by the insured, who is ignorant
of the fact that he did not have insurable interest or a person,
48
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
not knowing that his car has been totally damaged, procured
insurance over it.
1.5. When by default of the insured other than actual fraud, the
insurer never incurred any liability under the policy.
As when: A person insured his vessel for a trip, but the vessel
is destroyed before the trip.
1.6. In case of over-insurance. Here, the insurance is in excess of
the amount of the insurable interest of the insured and it is
insured by several insurers, the insured is entitled to a ratable
return of premium, proportional to the amount by which the
aggregate sum insured in all the policies, exceeds the insurable
value.
As when: The insured’s property is valued at P1,500,000. He
obtains a policy from 1st Co. for P1,000,000, paying P10,000
and a policy from the 2nd Co. for P2,000,000, paying P20,000.
Since the value of the property is ½ the value of the insurance,
the insured is entitled to recover ½ of the premiums paid from
each of the insurers.
2. Unless otherwise stated, the premiums shall be returned to the insured
that paid them.
WHEN ARE THEY NOT RECOVERABLE?
Premiums cannot be recovered:
(1) If the peril insured against has existed, and the insurer has been liable
for any period, the period being entire and indivisible
As when: The vessel is insured for a voyage that will take 5 days; 2 days
into the voyage, the policy is surrendered.
(2) In life insurance because it is considered as an entire contract of
assurance for life; and
(3) When the insured is guilty of fraud or misrepresentation.
CLAIMS SETTLEMENT AND SUBROGATION
CONCEPT OF LOSS
Loss in insurance law embraces injury or damage [Bonifacio Bros. v Mora (1967)].
Requisites for Recovery upon Loss:
(1) The insured must have insurable interest in the subject matter;
(2) The interest is covered by policy;
(3) There be a loss;
(4) The loss must be one for which the insurer is liable;
(5) Notice and proof of loss must be given if policy is fire insurance or when
the same is stipulated in the policy.
Causes of Loss:
(1) Remote causes is an event preceding another in a causal chain, but
separated from it by other events;
(2) Proximate cause is “that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the
injury, and without which the result would not have occurred [Vda. de
Bataclan v Medina (1975)]”
(3) Immediate cause is the cause, not the proximate cause which
immediately precedes the loss.
LOSS AND NOTICE OF LOSS
WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS
LIABLE FOR THE LOSS OF THE THING INSURED
49
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
1. Loss of which a peril insured against is the proximate cause, although a
peril not contemplated by the contract may have been a remote cause
but the insurer is not liable for a loss of which the peril insured against
was only a remote cause.
1.1. The proximate cause is that which, in a natural and continuous
sequence, unbroken by any efficient intervening cause, produces
an injury and without which an injury and without which the injury
would not have occurred.
1.2. As when: In life insurance that covers death by accident, if the
insured sustains an accident that renders him weak, while in said
state, he contracts a cold that develops into pneumonia, the
proximate cause is the accident, while the remote cause is the
pneumonia. The insurer is liable.
1.3. As when: Firemen train their hoses at the house of the insured,
damaging windows and furniture, though not necessary to put out
the fire as the same was affecting the house of the neighbour. The
insured cannot claim loss due to fire as it is only a remote cause.
1.4. Recognizing that there are problems in determining probable cause,
note the following principles:
(a) If there is a single cause which is an insured peril, clearly it is
the proximate cause and there is liability.
As when: Insurance is against fire and the property insured is
burned or insurance covers accidental death and the insured
dies in an accident.
(b) If there are concurrent causes or those happening together,
with no excluded perils, there is liability if one of the causes is
an insured peril, the others may be ignored.
As when: In an accident insurance where the insured has a
heart disease. He is involved in an accident that causes
injuries, which coupled with his weak heart causes his death.
The proximate cause is the accident. The insurer is liable.
(c) If there are concurrent causes with an excepted peril or when
the insured peril and excepted peril operate together to
produce the loss, the claim will be outside the scope of the
policy.
As when: No liability in a claim for property stole by rioters
under a burglary policy, if the policy excludes riot risks.
(d) But, if the results of the operation of the insured peril can be
clearly separated from the effects of the excepted peril, the
insurer is liable.
As when: A personal accident policy will cover death by
accident although the insured was suffering from a disease
excluded by the policy.
(e) Where a number of causes operate one after the other, and the
original cause happens to be a peril insured against, there is
liability.
As when: The insured is injured in an accident, he scratches an
open wound, which gets infected, which ultimately results in
death, there is liability on the accident insurance policy,
 but if the direct chain of events can be traced to an excepted peril, there
is no liability
As when: An earthquake, if excepted, causes a fire that spreads, all
resulting fire damage is deemed caused by an excepted peril,
 but again, if the chain of events is broken by the intervention of a new
and independent cause, the liability will depend upon whether the new
cause is an insured or excepted peril.
As when: The insured is treated in the hospital for an accident but while
there he contracts a disease, the disease is the proximate cause, there
50
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
will be no liability under the accident policy. However, if death by disease
is covered, the insurer is liable.
2. Loss cause by efforts to rescue the thing insured from a peril insured
against that would otherwise have caused a loss, if in the course of such
rescue, the thing is exposed to peril not insured against, which
permanently deprives the insured of its possession, in whole or in part,
or where a loss is caused by efforts to rescue the thing insured from a
peril insured against.
2.1. As when: The thing insured is water damaged due to efforts to put
out a fire, the fire being a peril insured against, or theft by 3 rd
persons while the goods are brought out in the course of rescuing
them from a fire, which is the peril insured against, but there is no
liability for loss if the goods are left out and are lost as the same is
now due to lack of reasonable care and vigilance, or while removing
the contents of a burning house, they were stolen or they were
broken or damaged, theft or breakage not ordinarily being perils
insured against.
3. Where a peril is especially excepted in a contract of insurance, a loss,
which would not have occurred but for such peril, is thereby excepted
although the immediate cause of the loss was a peril which was not
excepted.
3.1. The immediate cause is the cause or condition nearest the time and
place of injury.
3.2. The insurer will be liable if both the immediate cause and the
proximate cause are not excepted. If the proximate cause is
excepted and the immediate cause is not, the insurer is not liable.
3.3. As when: A factory is insured against fire, but it excepts loss through
explosion. If an explosion occurs and results into a fire that creates
a loss, the insurer is not liable. If a fire occurs first, then an explosion
is caused, the insurer is liable.
Bar 2007
Q: Alfredo took out a policy to insure his commercial building against
fire. The broker for the insurance company agreed to give a 15-day
credit within which to pay the insurance premium. Upon delivery of
the policy on May 15, 2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28, 2006, a fire broke out and
destroyed the building owned by Alfredo.
Suppose it was found that the proximate cause of the fire was an
explosion and that fire was but the immediate cause of loss and
there is no excepted peril under the policy, may Alfredo recover on
the insurance policy?
A: Yes, recovery under the insurance contract is allowed if the
cause of the loss was either the proximate cause or the immediate
cause as long as an excepted peril, if any, was not the proximate
cause of the loss (Sec. 86, Insurance Code of the Philippines).
4. An insurer is not liable for a loss caused by the wilful act or through the
connivance of the insured; but he is not exonerated by the negligence of
the insured, or of the insured’s agent or others.
4.1. Consequently, if the insured was merely negligent, the insurer is still
liable as one of the principal reasons for procuring insurance is to
protect himself against the consequences of his own negligence or
that of his agents.
Bar 2007
Q: If the fire was found to have been caused by Alfredo’s
negligence, can he still recover?
A: Yes. Mere negligence on the part of the insured will not prevent
recovery under the insurance policy. The law merely prevents when
the cause of the loss is the wilful act of the insured, alone or in
connivance with others (Sec. 89, Insurance Code of the
Philippines).
Bar 1993
51
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
Q: S Insurance issued a Personal Accident Policy to Bob Tan with
a face value of P500,000.
In the evening of September 5, 1992, after his birthday party, Tan
was in a happy mood but not drunk. He was playing with his
handgun, from which he previously removed the magazine. As his
secretary was watching television, he stood in front of her and
pointed the gun at her. She pushed it aside and said that it may be
loaded. He assured her that it was not and then pointed the gun at
his temple. The next moment, there was an explosion and Tan
slumped on the floor lifeless.
The wife of the deceased sought payment on the policy but her
claim was rejected. The insurance company agreed that there was
no suicide. However, it was the submission of the insurance
company that there was no accident. In support thereof, it
contended that:
(a) There was no accident when a deliberated act was performed
unless some additional, unexpected, independent and
unforeseen happening occur which produces or bring about the
injury or death; and
(b) The insured wilfully exposed himself to needless peril and this
removed himself from the coverage of the insurance policy.
Are the two contentions of the insurance company tenable?
A: No. The insurer is liable for injury or death even due to the
insured’s gross negligence. The fact that the insured removed the
magazine from the handgun means that the insured did not wilfully
expose himself to needless peril. At most, the insured is only guilty
of negligence.
Bar 1995
Q: Sun-Moon Insurance issued a Personal Accident Policy to Henry
Dy with a face value of P500,000. A provision in the policy states
that “the company shall not be liable in respect of bodily injury
consequent upon the insured person attempting to commit suicide
or wilfully exposing himself to needless peril except in an attempt to
save human life.” Six months later, Henry died of a bullet wound in
his head. Investigation showed that one evening, Henry was in a
happy mood although he was not drunk. He was playing with his
handgun from which he had previously removed its magazine. He
pointed the gun at his sister who got scared. He assured her it was
not loaded. He then pointed the handgun at his temple and pulled
the trigger. The gun fired and Henry slumped dead on the floor.
Henry’s wife Beverly, as designated beneficiary, sought to collect
under the policy. Sun-Moon rejected her claim on the ground that
the death of Henry was not accidental. Beverly sued the insurer.
Decide.
A: Beverly can recover the proceeds of the policy from the insurer.
The death of the insured was not due to suicide or wilful exposure
to needless peril which are the excepted risks. The insured’s act
was purely an act of negligence which is covered by the policy and
for which the insured got the insurance for his protection. In fact, he
removed the magazine from the gun and when he pointed it to his
temple, he did so because he thought it was safe for him to do so.
He did so to assure his sister that the gun was harmless. There is
none in the policy that would relieve the insurer of liability for the
death of the insured since the death was an accident.
4.2. As when: The insured carelessly used kerosene in lighting a stove,
causing his house to catch fire, the insurer is liable for loss but if the
negligence is so gross so as to be sufficient basis for fraudulent
intent, it can amount to a wilful act.
TRANSFER OF CLAIMS
1. An agreement not to transfer the claim of the insured after the loss
happens is void if made before the loss, except as otherwise provided in
case of life insurance.
2. This means that the insured has an absolute right to transfer his claim
against the insurer after the loss occurs, what is prohibited is a transfer
52
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
prior to the loss. This is so because such a stipulation after the loss
occurs shall hinder the transmission of property. Neither does it affect
the insurer as its liability is already fixed and what is actually assigned is
the money claim or chose of action, not the contract itself.
3. The exception is Sec. 175 that provides that the transfer of a fire
insurance policy to any person or company who acts as an agent for or
otherwise represents the issuing company is prohibited and is void
insofar as it affects other creditors of the insured.
NOTICE AND PROOF OF LOSS
WHEN MUST NOTICE OF LOSS BE GIVEN AND BY WHOM
1. Notice of loss must be given without unnecessary delay by the insurer
or some person entitled to the benefit of the insurance. If not so given,
insurer is exonerated.
2. Unnecessary delay is within a reasonable time, depending on
circumstances of a peculiar case, although courts have construed the
requirement liberally in favour of the insured.
2.1. Note the specific application to fire insurance due to the nature
of the loss and urgent need to determine the cause thereof. The
longer the period that lapses from the time of the loss, the
greater is the opportunity of the insured to tamper with the
evidence in preparation for a fraudulent claim.
FORM OF NOTICE OF LOSS
1. In the absence of any stipulation in the policy, notice may be given orally
or in writing.
2. The notice of loss may be in the form of an informal or provisional claim
containing a minimum of information as distinguished from a formal
claim which contains the full details of the loss, computation of the
amounts claimed, and supporting evidence, together with a demand or
request for payment.
PROOF OF LOSS
1. If the policy requires Preliminary Proof of Loss or evidence given the
insurer of the occurrence of the loss, its particulars, and data necessary
to enable it to determine the liability and the amount thereof, it is not
necessary that the insured give such proof as may or would be sufficient
in a court of justice. What is sufficient is the best evidence that he has in
his power at that time.
NOTE: Like a notice of loss, in the absence of any stipulation in the
policy, proof may be given orally or in writing (UP 2014).
2. If in the giving of preliminary proof of loss, a certification or testimony of
a 3rd person other than the insured is required, it is sufficient for the
insured to use reasonable diligence to procure it. In case of refusal to
give it, the insured can furnish reasonable evidence to the insurer that
such refusal was not induced by any just grounds of disbelief in the facts
necessary to be certified or testified. Once shown or given, the
requirement may be dispensed with.
RULES FOR RECOVERY
General Rule:
Timely compliance with the notice and proof of loss is a condition precedent to
the right to recover if the policy is fire insurance, or when the same is stipulated
in the policy.
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss may be waived when such
defects, which the insured might remedy, are not specified, without
unnecessary delay, to him as ground of objection by the insurer
(Sec. 92);
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(b) Delay in presentation to an insurer of notice or proof of loss is
waived if caused by any act of his, or if he omits to take objection 2. Where a policy gives the insurer the control of the decision to settle claim
promptly and specifically upon that ground. or litigate it, the insurer nevertheless is required to observe a certain
measure of consideration for the interest of the insured.
(2) For notice of loss, a formal notice of loss is not necessary if insurer has
actual notice of loss. 3. In case of litigation, it is the duty of the Commissioner or the Court to
determine whether the claim has been unreasonably denied or withheld.
WHEN ARE DEFECTS IN THE NOTICE OR PROOF OF LOSS DEEMED
WAIVED BY THE INSURER? 4. Failure to pay any such claim within the time prescribed shall be
considered prima facie evidence of unreasonable delay in payment.
1. When the insurer fails to specify to the insured any defect which the
insured can remedy without unnecessary delay. CLAIMS LIFE INSURANCE NON-LIFE INSURANCE
Either:
As when: It is required to be sworn to but is accepted by the insurer. (1)Upon death of
the person insured;
(1)Upon happening of
2. When the insurer denies liability on a ground other than the defect in the event insured against;
(2)Upon his
notice or proof of loss. and
surviving a specific
period; or
As when: Denial of claim is based on nullity of the contract. MATURITY (2)Event must occur
within the period specified
(3)Otherwise
WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED? in the policy, otherwise,
contingently on the
insurer has no liability.
continuance or
1. If it is caused by any act of the insurer. cessation of life
(Sec. 180)
As when: The insurer accepts payment of the premium with full
knowledge that the premises have been lost or damaged will be
GR: The proceeds (1) Within 30 days after:
estopped from claiming delay in the giving of notice of loss.
should be delivered
immediately upon (a) Proof of loss is
2. If the insurer omits to make an objection promptly and specifically on maturity of policy. received by
that ground. insurer; and
DELIVERY OF EXCs: (b) Ascertainment of
As when: Despite a delay, the insurer does not object. PROCEEDS (1)If payable in loss or damage
instalments or as an is made either by
GUIDELINES ON CLAIMS SETTLEMENT annuity, when such agreement
instalments or between the
annuities become insured and
1. Claims settlement is the indemnification of the loss suffered by the
due; insurer or by
insured. The claimant may be the insured or reinsured, the insurer who arbitration;
is entitled to subrogation, or a 3rd party who has a claim against the
insured.

54
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(2)If maturity is (2)If ascertainment is not
upon death, within made within 60 days after
60 days after such receipt by insurer of
presentation of proof of loss, then loss or
claim and filing of damage shall be paid
proof of death of within 90 days after such
insured. receipt.
(1) This entitles the beneficiary to collect
interest on the proceeds of policy for the
duration of the delay at rate of twice the
ceiling prescribed by the monetary
Effect of refusal or
board (unless refusal to pay is based on
failure to pay
ground that claim is fraudulent);
claim within time
prescribed
(2) In case damages are awarded, this
includes attorney’s fees and other
expenses incurred due to delay (pus the
interest)
UNFAIR CLAIMS SETTLEMENT: SANCTIONS
No insurance company doing business in the Philippines shall refuse, without just
cause, to pay or settle claims arising under coverages provided by its policies.
Nor shall any such company engage in unfair claim settlement practices.
WHAT CONSTITUTES UNFAIR CLAIM SETTLEMENT?
Any of the following acts by an insurance company, if committed without just
cause and performed with such frequency as to indicate a general business
practice, shall constitute unfair claim settlement practices:
(1) Knowingly misrepresenting to claimants pertinent facts or policy
provisions relating to coverage at issue;
(2) Failing to acknowledge with reasonable promptness pertinent to
communications with respect to claims arising under its policies;
(3) Failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under its policies;
(4) Not attempting in good faith to effectuate prompt, fair and equitable
settlement of claims submitted in which liability has become reasonably
clear; or
(5) Compelling policyholders to institute suits to recover amounts due under
its policies by offering without justifiable reason substantially less than
the amounts ultimately recovered in suits brought by them.
Evidence as to numbers and types of valid and justifiable complaints the
Commissioner against an insurance company, and the Commissioner’s
complaint experience with other insurance companies writing similar lines of
insurance shall be admissible in evidence in an administrative or judicial
proceeding for the purpose of determining whether unfair claims settlement
practices have been committed.
It is found, after notice and an opportunity to be heard, that an insurance
company has violated this section, each instance of noncompliance may be
treated as a separate violation and shall be considered sufficient cause for
the suspension or revocation of the company’s certificate of authority (Sec.
247).
WHAT IS THE EFFECT OF A FRAUDULENT CLAIM?
In United Merchants v Country Bankers [GR No. 198588 (July 11, 2012)], it was
held that: Where a fire insurance policy provides that “if the claim be in any respect
fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the insured or anyone acting in his
behalf to obtain any benefit under the policy” and the evidence is conclusive that
the proof of the claim which the insured submitted was false and fraudulent as
both as to kind, quality and amount of the goods and their value destroyed by fire,
such proof of claim is a bar against the insured from recovering on the policy even
for the amount of his actual loss. It has long been settled that a false and material
statement made with intent to deceive or defraud voids on insurance policy. In Yu
Cua v South British Insurance, the claim was fourteen times bigger than the real
loss; in Go Lu v Yorkshire Insurance, eight times; in Tuason v North China
Insurance, six times. In the present case, the claim is twenty-five times the actual
claim proved.
55
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
SUBROGATION
Subrogation is a process of legal substitution. The insurer, after paying the
amount covered by the insurance policy, steps into the shoes of the insured and
avails himself of the latter’s rights that exist against the wrongdoer at the time of
loss.
WHEN DOES SUBROGATION TAKE PLACE?
Subrogation inures to the insurer without need of assignment or express
stipulation upon payment made to the insured. The act of payment makes the
insurer a subrogee in equity.
NOTE: Subrogation applies only to property insurance and non-life
insurance.
WHAT IS THE CONCEPT BEHIND SUBROGATION?
1. Subrogation is the substitution of one person by 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 or
securities. The payment by the insurer to the insured operates as an
equitable assignment to the insurer of all the remedies that the insured
may have against the 3rd party whose negligence or wrongful act caused
the loss [Malayan Insurance v Alberto; GR No. 194320 (February 1,
2012)].
2. The right of subrogation is not dependent upon, nor does it grow out of,
any privity of contract. It accrues simply upon payment by the insurance
company of the insurance claim (Keppel Cebu Shipyard v Pioneer
Insurance, 601 SCRA 96).
3. It is intended to make the person who caused the loss legally responsible
for it, prevents the insured from recovering twice, and upholds public
policy by preventing tortfeasors from being absolved from liability.
WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO
GIVING OF NOTICE OF LOSS?
1. In property insurance, after the insured has received payment from the
insurer of the loss covered by the policy, the insurance company is
subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. The insurer becomes entitled to
recover from the wrongdoer the amount of the loss it may have paid to
the insured.
1.1. The right of subrogation accrues upon payment of the insurance
claim.
1.2. The rights to which the subrogee succeeds are the same as, but not
greater than, those of the person for whom he is substituted.
1.3. The subrogee-insurer cannot acquire any claim, security, or remedy
the subrogor did not have. In other words, a subrogee cannot
succeed to a right not possessed by the subrogor. A subrogee can
recover only if the insured likewise could have recovered [Sulpicio
Lines v First Lepanto (2005); Lorenzo Shipping v Chubb and Sons
(2004)].
1.4. Subrogation takes effect by operation of law and does not require
the consent of the wrongdoer (Fireman’s Insurance v Jamilla & Co.,
70 SCRA 328).
2. There is no subrogation in
(a) Life insurance as it is not a contract of indemnity;
(b) When the proximate cause of the loss is the insured himself;
(c) When the insurer pays to be insured a loss not covered by the
policy.
2.1. The insured is no longer entitled to collect from the wrongdoer if the
amount that he received from the insurer has fully compensated for
the loss.
UP 2014: The insured can no longer recover from the offended party
what was paid to him by the insurer but he can recover any
deficiency if the damages suffered are more than what was paid.
The deficiency is not covered by the right of subrogation. The
56
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
insurer must present the policy as evidence to determine the extent
of its coverage [Wallen Phil. Shipping v Prudential Guarantee
(2003)].
3. No right of Subrogation:
(a) If the insured releases the wrongdoer from liability before payment
by the insurer, the insured destroys his right to collect from the
insurer (Sy Keng v Queensland Insurance, 45 OG 351). If the
insured releases the wrongdoer after receiving payment from the
insurer, the insurer can recover from the insured the proceeds paid
(Manila Mahogany v CA, 154 SCRA 651);
(b) Where the insurer pays the insured the value of the loss without
notifying the carrier who has in good faith settled the insured’s claim
for loss;
(c) Where the insurer pays the insured for a loss or risk not covered by
the policy [Pan Malayan v CA, (1997)].
(d) In life insurance;
(e) For recovery of loss in excess of insurance coverage [de Leon
(2010)]
NOTE: Since the insurer can be subrogated to only such rights as
the insured may have, should the insured, after receiving payment
from the insurer, release the wrongdoer who caused the loss, the
insurer loses his rights against the later, but in such case, the
insurer will be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the consent of
the insurer [Manila Mahogany v CA (1987)].
4. Subrogation is discretionary on the part of the insurer. It may or may not
exercise the right (FF Cruz v CA, 164 SCRA 731). Hence, no one can
force it to exercise the right even if it has paid the insured.
Bar 1978
Q: A helicopter of ABC Co. collided with XYZ’s tramway steel cables in its
logging area in Surigao resulting in the destruction of the helicopter and death
of two pilots. ABC insured at its expense the helicopter and death of two
pilots. ABC insured at its expense the helicopter for P80,000 and the two
pilots (life insurance) for P50,000 each, and as a result of the crash, the
insurer paid ABC a total indemnity of P180,000. Nevertheless, ABC
sustained additional damages of about P100,000 which were not covered by
insurance.
(1) ABC sued XYZ to recover not only the additional damages, but also the
P180,000 which was already compensated by the insurer. Decide.
(2) What right/ recourse, if any, has the insurer in order to be reimbursed for
the amount it paid to ABC?
A:
(1) ABC ay bring the action against XYZ for its claim for the additional
damages not covered by the insurance, but not for the P180,000
covered by the insurance. If a property is insured and the owner received
indemnity from the insurer, the latter is deemed subrogated to the rights
of the insured against the wrongdoer, and if the amount paid by the
insurer does not fully cover the loss, then the aggrieved party is the one
entitled to recover the deficiency.
(2) The insurer is deemed subrogated to the rights of ABC against XYZ to
the extent of P80,000 insurance paid for the helicopter only, but not for
the life insurance of the two dead pilots, since subrogation in the New
Civil Code refers only to property, and not to the life insurance [Philippine
Airlines v Herald Lumber; GR No. L-11497 (August 16, 1957)].
Bar 1980
Q: L borrows P50,000 from M payable 360 days after date, at 12% interest per
annum. To secure the loan, L mortgages his house and lot in favour of M. To
protect himself from certain contingencies, M insures the house for the full amount
of the loan with Rock Insurance. A fire breaks out and burns the house and M
collects from the insurance company the full value of the insurance.
Upon maturity of the loan, the insurance company demands payment from L. the
latter refuses to pay on the ground that the loan had been extinguished by the
57
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
insurance payment which M received from the insurance company. He argued (1)Is Cala, as subrogee of Luz, entitled to reimbursement from Raul?
that he has not entered into any loan or contract of whatever nature with the
insurance company. He further contends that it is bad enough to lose a house but (2)May Cala recover what it has paid to Luz?
it is worse if one has to pay off a paid obligation to somebody who has not
extended any loan to him. Besides, he states that the insurance payment should A:
inure to his benefit because he owns the house.
(1) No. Luz executed a release in favour of Raul.
Pass upon the merits of L’s contentions. (2) Yes. Cala lost its right against Raul because of the release executed by
Luz. Since the release was made without the consent of Cala, Cala may
A: Neither the loan of L was extinguished by the insurance payment which M recover the amount of P5,000.
received from the insurance company, nor the insurance payment inures to L’s
benefit. What was then insured was the interest of M, the secured creditor, and PRESCRIPTION OF AN ACTION
not the interest of L, so the proceeds shall be applied exclusively to the proper
CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR
interest of M.
LIMITATIONS ON THE PERIOD OF TIME TO BRING AN ACTION?
L’s argument that he has not entered into any loan or contract of whatever nature
1. In the absence of an express stipulation in the policy, it being based on
with the insurance company is also untenable. When the secured creditor’s
a written contract, the action prescribes in 10 years (Art. 1144, Civil
interest in the mortgaged property of the mortgagor, L, was insured and said
Code). However, there can be an agreement provided the period agreed
property would be burned, the insurance company had to pay the insured, M, and
upon should not be less than 1 year. If period agreed upon is less than
payment by the insurer to the insured creates legal subrogation and makes the
1 year, the agreement is void.
insurer an assignee on equity to run after the mortgagor, L. said right of the insurer
is not dependent upon or does it grow out of, any privity of contract, or upon
1.1. Prescription is essential for the prompt settlement of claims as
written assignment of claim, and payment to insured makes the insurer an
it demands for suits to be brought while the evidence as to the
assignee in equity. Thus, L’s consent to said subrogation is not necessary [Art.
origin and cause of the loss or destruction has not yet
2207, New Civil Code; Fireman’s Fund Insurance v Jamila and Co., 70 SCRA 323
disappeared.
(April 7, 1976)].

Bar 1994 1.2. In a comprehensive motor liability insurance claim, a written

Q: Raul’s car bumped the car owned by Luz. The car was insured by Cala
Insurance. For the damage caused, Cala paid Luz P5,000 in amicable settlement.
Luz executed a release claim, subrogating Cala to all her rights against Raul.
When Cala demanded reimbursement from Raul, the latter refused saying that
he had already paid Luz P4,500 for the damage to the car as evidence by a
release claim executed by Luz discharging Raul.
So, Cala demanded reimbursement from Luz, who refused to pay, saying that the
total damage to the car was P9,500. Since Cala paid P5,000 only, Luz contends
that she was entitled to go after Raul to claim the additional P4,500.
notice of claim must be filed within 6 months from the date of
accident. Otherwise, the claim is waived, even if an action is
subsequently brought within 1 year from rejection of the claim.
2. The period so agreed shall be considered as having commenced from
the time the cause of action accrues.
2.1. Usually, the cause of action accrues from the date of the
insurer’s rejection of the claim of the beneficiary or of the
insured, since prior to the same, there is no necessity to bring
suit.

58
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
2.2. If the insured will ask for reconsideration of the denial, the
period is still counted from the time the claim is denied at the
first instance as to hold otherwise gives the insured a scheme
or devise to waste time until evidence that may be considered
against him can be destroyed (Sun Insurance v CA, 196 SCRA
193).
2.3. In motor vehicle insurance, the period is also 1 year from denial
of the claim, not the date of the accident (Summit Guaranty v
Cruz Arnaldo, 158 SCRA 332)
3. Note Sec. 3 (6) of the provisions of Carriage of Goods by Sea Act, stating
that the carrier and the ship shall be discharged from all liability for loss
or damage to the goods if no suit is brought within 1 year from delivery
of the goods or date when they should have been delivered.
3.1. If the insurer of the goods brings an action against the carrier,
it must do so within 1 year as reckoned above (Filipino
Merchants v CA, 179 SCRA 638). However, while the action of
the insurer is barred, it does not mean that the shipper cannot
maintain an action against the insurer as its liability is
determined by the insurance contract and not by the contract
of carriage (Mayer Steel Pipe v CA, 274 SCRA 432).
3.2. When no period is stipulated as in the case of Mayer Steel Pipe,
or the stipulation is void, the period is within 10 years, under
Art. 1144 of the Civil code, as the policy is a written contract
(Eagle Star v Chia Yu, 96 Phil 696; ACCFA v Alpha Insurance,
24 SCRA 151).
4. An action may filed in the following:
(a) Courts;
(b) Insurance Commissioner, who has concurrent jurisdiction with
courts for claims not exceeding P100,000;
(c) POEA or DOLE have the power to compel a surety to make good
on a solidary undertaking in the same proceeding where the liability
of the principal obligor is determined.
Bar 1996
Q: Robin insured his building against fire with EFG Assurance. The insurance
policy contained the usual stipulation as to the origin and cause of the destruction
has not yet disappeared; that any action or suit must be filed within 1 year after
rejection of the claim.
After his building burned down, Robin filed his claim for the fire loss with EFG. On
February 28, 1994, EFG denied Robin’s claim. On April 3, 1994, Robin sought
reconsideration of the denial, but EFG reiterated its position. On March 20, 1995,
Robin commenced judicial action against EFG.
Should Robin’s action be given due course?
A: No. His filing of the request for reconsideration did not suspend the running of
the prescriptive period of 1 year stipulated in the insurance policy. Thus, when
Robin commenced judicial action against EFG on March 20, 1995, his ability to
do so had already prescribed. The 1 year period is counted from February 28,
1994 when EFG denied Robin’s claim, not from the date (presumably after April
3, 1994) when EFG reiterated its position denying Robin’s claim. The reason for
this rule is to insure that claims against insurance companies are promptly settled
and that insurance suits are brought by the insured while the evidence as to the
origin or cause of the loss or destruction has not yet disappeared.
DOUBLE INSURANCE
1. Double insurance exists when the same person is insured by several
insurers separately in respect to the same subject or interest.
2. The requisites are:
(a) Same person is insured;
(b) There are several insurers;
59
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(c) Subject insured is the same;
(d) Interest insured is the same; and
(e) Risk or peril insured against is the same.
A:
2.1. There is a provision as to double insurance to prevent over-
insurance, thereby preventing fraud.
Bar 1999
Q: A businessman in the grocery business obtained from First Insurance an
insurance policy for P5,000,000 to fully cover his stocks-in-trade from the risk of
fire.
Three months later, a fire of accidental origin broke out and completely destroyed
the grocery including his stocks-in-trade. This prompted the businessman to file
with First Insurance a claim for P5,000,000 representing the full value of his
goods.
First Insurance denied the claim because it discovered that at the time of the loss,
the stocks-in-trade were mortgaged to a creditor who likewise obtained from
Second Insurance for insurance coverage for the stocks at their full value of
P5,000,000.
First Insurance refused to pay claiming that double insurance is contrary to law.
Is this contention tenable?
A: No. There is no law providing that double insurance is illegal per se. Moreover,
in the problem at hand, there is no double insurance because the insured with the
First Insurance is different from the insured with the Second Insurance. The same
is true with respect to the interests insured in the two policies.
Bar 2012
Q: X borrowed from CCC Bank. She mortgaged her house and lot in favour of the
bank. X insured her house. The bank also got the house insured.
(a) Is this double insurance?
(b) Is this legally valid?
(c) In case of damage, can X and CCC Bank separately claim for the
insurance proceeds?
(a) No. Double insurance exists where the same person is insured by
several insurers separately with respect to the same subject and
interest.
(b) Yes, X and CCC Bank can both insure the house as they have different
insurable interest therein.
X, the borrower-mortgagor, has an insurable interest in the house being
the owner thereof, while CCC Bank, the lender, also has an insurable
interest I the house as mortgagee thereof.
Thus, the insurance contract entered into by both is legally binding.
(c) Yes.
If X obtained an open policy then she should claim an amount
corresponding to the extent of the damaged based on the value of the
house determined as of the date when the damage occurred, but not to
exceed the face value of the insurance policy. However, if she obtained
a valued policy then she could claim an amount corresponding to the
extent of the damage based on the agreed upon valuation of the house.
As for CCC Bank, it could claim an amount corresponding to the extent
of the damage but not to exceeds the amount of the loan it extended to
X or so much thereof as may remain unpaid.
Bar 2008
Q: Terrazas de Pation Verde, a condominium building, has a value of
P50,000,000. The owner insured he building against fire with 3
insurance companies for the following amounts:
Northern Insurance – P20,000,000;
Southern Insurance – P30,000,000;
Eastern Insurance – P50,000,000.
60
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(a) Is the owner’s taking of insurance for the building with 3 insurers
valid?
(b) The building was totally razed by fire. If the owner decides to claim
from Eastern Insurance only P50,000,000, will the claim prosper?
A:
(a) The taking of insurance from the 3 insurers is valid. It is a cause of
double insurance. The Insurance Code provides that double
insurance exists where the same person is insured by several
insurers separately in respect to the same subject and interest.
Double insurance is valid. What is prohibited is for the insured to
recover more than his interest or value of the property pursuant to
the principle of indemnity.
(b) Yes. The Insurance Code provides that where the insured is over
insured by double insurance, the insured, unless the policy
otherwise provides, may claim payment from the insurers in such
order as he may select, up to the amount for which the insurers are
severally liable under their respective contracts.
Each insurer is bound, as between himself and the other insurers,
to contribute ratably to the loss in proportion to the amount for which
he is liable under his contract.
Other Answer:
Insured can recover from Eastern Insurance up to the extent of his
loss. However, Eastern may refuse to pay if the policy contains an
“other insurance clause” stipulating that non-disclosure of double
insurance will avoid the policy. As there is no indication of a
contractual prohibition on double or other insurance, all insurance
contracts over the building are deemed valid and enforceable.
The law prohibits double or over-recovery, not double insurance.
Since Eastern Insurance insured the property up to 50% of the total
coverage, it is liable for only 50% of the total actual loss. Eastern
Insurance is liable to the extent of its coverage, but may recover
one-half of the total indemnity from the co-insurers in the proportion
of 60% for Southern Insurance to 40% for Northern Insurance.
EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE
1. Insured, unless the policy otherwise provides, may claim payment from
the insurers in such order as he may select up to the amount for which
the insurers are severally liable under their respective contracts.
As when: A house is insured with X Insurance for P10,000, with Y
Insurance for P20,000, and with Z Insurance for P20,000. It is valued for
P20,000. In case of loss, the insured can recover from any of the
insurers, but is limited to what is stipulated in their policy and in no case
to exceed the value of the property or P10,000 from X Insurance and
another P10,000 from either Y Insurance or Z Insurance.
2. Where the policy under which the insured claims is a valued policy, the
insured must give credit as against the valuation for any sum received
by him under any policy without regard to the actual value of the subject
matter insured.
As when: A owns a house valued at P40,000. He insured it with X
Insurance for P35,000, and with Y Insurance for P5,000. The value of
the house with both companies is P20,000. If it is lost, A can collect
P5,000 from Y Insurance. He cannot collect P35,000 from Y Insurance
but only the difference between the value of the house, P20,000, and
the value of the policy with Y Insurance, P5,000.
3. Where the policy under which the insured claims is an unvalued policy,
he must give credit, as against the full insurable value, for any sum
received by him under any policy.
As when: A insured his house with X Insurance for P40,000, and with Y
Insurance for P30,000, and with Z Insurance for P20,000. The policies
are open. The loss is P70,000. If Y Insurance and Z Insurance have
already paid P50,000, X Insurance will only have to pay A, the difference
between what he received from Y and Z Insurance, P50,000, and the
amount of loss P70,000, or P20,000.
61
NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
4. Where the insured receives any sum in excess of the valuation in case
of a valued policy or the insurable value in case of an unvalued policy,
he must hold such sum in trust for the insurers, according to their right
of contribution among them.
As when: If A collects P35,000 from X Insurance, and P5,000 from Y
Insurance when the value of the house is only P20,000, he must hold
the P20,000 excess in trust. If the policies are open, if A can collect
P40,000 from X Insurance, P30,000 from Y Insurance and P20,000 from
Z Insurance, when the actual loss is only P70,000, he must hold the
excess recovery in trust for the insurers subject to the application of the
contribution clause.
5. Each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which it is
liable under his contract. This is referred to as the Principle of
Contribution, which has been incorporated in almost all policies, that
should there be other insurances covering the same property, the liability
of the company would be limited to its ratable proportion of the loss or
damage.
5.1. This is also known as the contribution clause.
5.2. The formula is: Insurer’s Policy/ Total Amount of Policies,
multiplied by the amount of loss, equals the share of the
insurer.
Bar 2005
Q: What is the nature of the liability of the several insurers in double insurance?
A: In double insurance, the insurers are considered as co-insurers. Each one is
bound to contribute ratably to the loss in proportion to the amount for which he is
liable under his contract.
Bar 1999
Q: A businessman in the grocery business obtained from First Insurance an
insurance policy for P5,000,000 to fully cover his stocks-in-trade from the risk of
fire.
Three months later, a fire of accidental origin broke out and completely destroyed
the grocery including his stocks-in-trade. This prompted the business to file with
First Insurance a claim for P5,000,000 representing the full value of his goods.
First Insurance denied the claim because it discovered that at the time of the loss,
the stock-in-trade was mortgaged to a creditor who likewise obtained from
Second Insurance for insurance coverage for the stocks-in-trade at their full value
of P5,000,000.
(a) May the businessman and the creditor obtain separate insurance
coverage over the same stocks-in-trade?
(b) Suppose you are the Judge, how much would you allow the
businessman and the creditor to recover from their respective insurers?
A:
(a) Yes. The businessman, as owner, and the creditor, as mortgagee, have
separate insurable interests in the same stocks-in-trade. Each may
insure such interest to protects his own separate interest.
(b) As Judge, I would allow the businessman to recover his total loss of
P5,000,000 representing the full value of his goods which were lost
through fire. As to the creditor, I would allow him to recover the amount
to the extent of or equivalent to the value of the credit he extended to
the businessman for the stocks-in-trade which were mortgaged by the
businessman.
TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE
1. The test is : Whether the insured, in case of happening of the risk, can
be directly benefited by recovering on both policies? If so, there is double
insurance.
VALIDITY OF DOUBLE INSURANCE
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
1. If there is an “other insurance” clause or one that prevents other
insurance on the property except with the consent of the company, then
it will prevent the enforcement of the policy, the policy then will be null
and void.
2. If there is no “other insurance” clause, then double insurance is allowed
but the provisions of Section 96 must be followed because property
insurance is a contract of indemnity.
Bar 1993
Q: Julie and Alma formed a business partnership. Under the business name Pino
Shop, the partnership engaged in a sale of construction materials. Julie insured
the stocks in trade of Pino Shop with the WGC Insurance Company for
P350,000.00. Subsequently, she again got an insurance contract with RSI for
P1,000,000.00 and then from EIC for P200,000.00. A fire of unknown origin gutted
the store of the partnership. Julie filed her claims with the 3 insurance companies.
However, her claims were denied separately for breach of policy condition which
required the insured to give notice of any insurance effected covering the stocks
in trade. Julie went to court and contended that she should not be blamed for the
omission, alleging that the insurance agents for WGC, RSI and EIC knew of the
existence of the additional insurance coverage and that she was not informed
about the requirement that such other or additional insurance should be stated in
the policy.
Is the contention of Julie tenable?
A:
No. An insured is required to disclose the other insurances covering the subject
matter of the insurance being applied for.
DISTINGUISHING OVER-INSURANCE FROM DOUBLE INSURANCE
1. In double insurance, there must be 2 or more insurers. In over-
insurance, 1 insurer is sufficient.
2. In double insurance, the total amount of the policies need not exceed
the value of insurable interest. In over-insurance, the value must always
be in excess of the insurance interest.
Other Answers from Bar 1994
1. Co-insurance is the percentage in the value of the insured property
which the insured himself assumes or undertakes to act as insurer to the
extent of the deficiency in the insurance of the insurance of the insured
property. In case of loss or damage, the insurer will be liable only for
such proportion of the loss or damage as the amount of insurance bears
to the designated percentage of the full value of the property insured.
2. Reinsurance is where the insurer procures a 3rd party, called the
reinsurer, to insure him against liability by reason of such original
insurance. Basically, reinsurance is an insurance against liability which
the original insurer may incur in favour of the original insured.
REINSURANCE
Reinsurance occurs when an insurer procures a 3rd person to insure him against
loss or liability by reason of such original insurance.
WHEN COMPULSARY
1. When a non-life insurer insures in any one risk or hazard an amount
exceeding 20% of its net worth, the insurer needs reinsurance of the
excess over such limit.
2. When a foreign insurance company withdraws from the Philippines, it
should cause its primary liabilities under policies insuring residents of
the Philippines to be reinsured by another company authorized to
transact an insurance business in the Philippines.
DISTINGUISH REINSURANCE FROM DOUBLE INSURANCE
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
1. In double insurance, the insurer remains an insurer. In reinsurance, the
insurer becomes the insured.
2. In double insurance, the subject matter is property. In reinsurance, the
subject matter is the insurer’s risk or liability.
3. In double insurance, the same interest and risk is insured with another.
In reinsurance, different risk and interest are insured.
WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER
OBTAINS REINSURANCE?
1. Except in automatic reinsurance treaties, it must communicate:
(a) All representations of the original insured;
(b) All information or knowledge he possesses, whether previously or
subsequently acquired, which are material to the risk.
As when: After issuance of the policy, the original insured had a bad
reputation and that he had burned a building, the reinsurance is
rendered void if it is not disclosed.
Note though: The fact that the representations on the original
insured were untrue at the time of the execution of the reinsurance
will not affect liability of the insurer, provided they were true at the
time of the original contract.
1.1. An automatic reinsurance treaty is one where two or more
insurance companies agree in advance that they will
reinsure a part of any line of insurance, taken by the other.
Since such contracts are self-executing and the obligation
attaches automatically, the information required to be
communicated herein could not influence the reinsurer in
deciding whether or not to accept the reinsurance because
it is automatic.
WHAT KIND OF CONTRACT IS REINSURANCE?
1. It is presumed to be a contract of indemnity against liability, and not
merely against damage.
1.1. As a rule, the reinsurer is not liable to the reinsured for a loss
under an original policy if the reinsured is not liable to the
original policy holder.
As when: A insured his car against vehicular accidents with B
Insurance. B Insurance reinsures the policy with C Insurance.
A violates the policy by allowing an unlicensed driver to use the
vehicle. B Insurance cannot claim against C Insurance on the
reinsurance as it was never liable to A.
1.2. But, when the reinsured becomes liable under the original
policy, it may obtain payment from the reinsurer even before
paying the loss to the original insured.
As when: A insured his house with X Insurance. X Insurance
reinsures with Z Insurance. The house is burned, but X
Insurance cannot pay because it is insolvent. X Insurance can
still collect from Z Insurance because it is a contract of
indemnity against liability and not merely against damage. The
subject of the reinsurance contract is the insurer’s risk, not the
property insured in the original policy. It is not necessary that
the insurer first pay a claim on the original policy before
claiming from the reinsurer.
WHAT IS THE EXTENT OF THE LIABILITY OF THE REINSURER?
1. The liability of the reinsurer is measured by the liability of the reinsured to
the original policy holder; Provided, it does not exceed the amount of
reinsurance
As when: A insures his house valued at P1,000,000.00 with X Insurance for
P1,500,00.00. X Insurance then reinsured with Z Insurance for
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
P1,200,000.00. The house burns. The liability of Z Insurance is only up to
P1,000,000.00, which is the liability of X Insurance.
2. If the original insured and the original insurer will settle for less, the liability
of Z Insurance is still only up to what is paid by X Insurance, otherwise, the
original insurer profits and this violates the principle that it is a contract of
indemnity.
WHAT IS THE LIABILITY OF THE ORIGINAL INSURED IN THE CONTRACT
OF REINSURANCE?
The original insured has no interest in the contract of reinsurance. Hence, only
the reinsured can claim against the reinsurer.
CLASSES OF INSURANCE
MARINE INSURANCE
WHAT IS MARINE INSURANCE?
1. Insurance against loss or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes,
merchandise, effects, disbursements, profits, money, securities,
choses in action, evidences of debt, valuable papers, bottomry or
respondentia interest, and all kinds of property and interest therein,
in respect to, appertaining to or in connection with any and all risks
or perils of navigation, transit or transportation, or while being
assembled, packed, crated, baled, compressed, or similarly
prepared for shipment, while awaiting shipment or during delays,
storage, transhipment or reshipment incident thereto, including war
risks, marine builder’s risk and all personal property floater risks.
These types of insurance follow the property wherever it may be.
(b) Person or property in connection with or appertaining to marine,
island marine, transit or transportation insurance, including liability
for loss or in connection with the construction, repair, operation,
maintenance, use of the subject matter of the insurance, BUT not
including life insurance or surety bonds, nor insurance against loss
by reason of bodily injury to any person arising out of the ownership,
maintenance and use of automobiles.
(c) Precious stones, jewels, jewelry, precious metals whether in the
course of the transportation or otherwise.
(d) Bridges, tunnels or other instrumentalities of transportation and
communications (excluding buildings, their furniture and
furnishings, fixed contents, and supplies held in storage), piers,
wharves, docks, slips, and other aids to navigation and
transportation, including dry docks, marine railways, dams and
appurtenant facilities for the control of waterways, and
(e) “Marine Protection and Indemnity Insurance,” meaning insurance
against, or against legal liability of the insured for loss damage or
expense incident to ownership, operation, operation, chartering,
maintenance, use, repair or construction of any vessel, craft or
instrumentality in use in ocean or island waterways, including
liability of the insured for personal injury, illness or death or for loss
or damage to the property of another person.
2. Marine insurance is really transportation insurance which is a kind of
insurance that is concerned with the perils of property in, or incidental
to, transit as opposed to property perils at a generally fixed location.
2.1. It does not include normal motor vehicle insurance which is
treated separately by law.
WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE?
1. The divisions of transportation insurance are:
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(a) Ocean Marine Insurance pertaining primarily to sea perils of ships
and cargoes.
Scope: Goods or cargoes, Earnings such as freight, passage
money, Liability incurred by reason of maritime perils, Ships or
hulls), and
(b) Inland Marine Insurance pertaining primarily to land or over land,
but sometimes water transportation perils of property shipped by
railroads, motor trucks, airplanes and other means of transportation.
1.1. This includes four basic policies:
(a) Property in transit – providing protection for property frequently
exposed to loss while in transport from one place to another;
(b) Bailee liability – providing protection to persons who have
temporary custody of goods or personal property of others;
(c) Fixed transportation property – providing protection to fixed
property considered aids to the movement of property, like
bridges and tunnels, and
(d) Floater – providing protection to personal property, such as
precious stones, jewelry, works of art, wherever it may be
located subject always to the territorial limits of the contract and
need not necessarily be in the course of transportation.
2. Note: Marine insurance may be in the form of property insurance,
indemnifying the insured for loss or damage to property or liability
insurance, protecting the insured against the consequences of legal
liability for loss or damage to property or for personal injury, illness or
death of a person.
WHAT RISKS ARE INSURED AGAINST?
1. The basic risk insured against is what is commonly known as perils of
the sea or all kinds of marine casualties and damages done to the ship
or goods at sea by the violent action of the winds or waves, one that
could not be foreseen and is not attributable to the fault of anybody. Such
as: shipwrecks, foundering, stranding, collision, including the jettisoning
of cargo if made for the purpose of saving the vessel although it may
also include fire, enemies, pirates, thieves, surprisals, taking at sea,
arrests, restraints, detainments of kings, princes and people of what
nation, condition or quality of barratry of the master and all other perils,
losses, misfortunes that shall have or shall come to hurt, detriment, or
damages of said goods, merchandise, ship or any part thereof.
Note: Perils of the Sea
Ocean marine insurance protects ships at sea and the cargo or freight
on such ships from standard “perils of the sea” or “perils of navigation”
which includes casualties arising from the violent action of the elements
and does not cover ordinary wear and tear, or other damage usually
incident to the voyage. The mere fact that an injury is due to violence of
some marine force does not necessarily bring it within the protection of
the policy if such violence was not unusual or unexpected.
Perils of the sea or perils of navigation include only those casualties due
to the unusual violence or extraordinary causes connected with
navigation. It has been said to include only such losses as are of
extraordinary nature or arise from some overwhelming power which
cannot be guarded against by the ordinary exertion of human skill or
prudence, as distinguished from the ordinary wear and tear of the
voyage and from injuries suffered by the vessel in consequence of her
not being unseaworthy.
2. Generally, perils of the ship are not covered. There are losses or
damages that result from:
(a) Natural and inevitable action of the sea;
(b) Ordinary wear and tear of the ship;
(c) Negligent failure of the ship owner to provide the vessel with the
proper equipment to convey the cargo under ordinary conditions.
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
As when:
(a) Insurance upon a cargo of rice, when sea water entered the
compartment where the rice was found through a defective
steel pipe;
(b) The insured loaded logs unto a barge. The logs are covered
insurance. The barge sank due to improper loading and leaks
because the barge was not provided with tarpaulins that could
have prevented the barge from retaining sea water splashing
into it during the voyage.
2.1. In the absence of stipulation, the risks insured against
are only perils of the sea.
2.2. However, in an all risk policy, all risks are covered
unless expressly excepted. The burden rests on the
insurer to prove that the loss is caused by a risk that
is excluded.
Bar 1998
Q: A marine insurance policy on a cargo states that “the insurer shall be liable for
losses incident to perils of the sea.” During the voyage, seawater entered the
compartment where the cargo was sored due to the defective drainpipe of the
ship. The insured filed an action on the policy for recovery of the damages cause
to the cargo. May the insured recover damages?
A: No. The proximate cause of the damage to the cargo insured was the defective
drainpipe of the ship. This is peril of the ship, and not peril of the sea. The defect
in the drainpipe was the result of the ordinary use of the ship. To recover under a
marine insurance policy, the proximate cause of the loss or damage must be peril
of the sea.
WHAT RISKS ARE INSURED IN AN “ALL RISKS POLICY”?
1. It is to be construed as creating a special insurance and extending to all
risks than are usually contemplated and will cover all losses except such
that may arise from intentional fraud, intentional misconduct, or that
otherwise excluded. It may include all losses whether arising from a
marine peril or not, to include pilferage during a war.
2. This can also be contained in an All Risks Clause which is one that
covers any loss other than a willfull and fraudulent act of the insured and
avoid putting upon the insured the burden of establishing that the loss
was due to a peril within the policy’s coverage, whether arising from a
marine peril or not, provided the risk is not excluded.
DEFINITION OF OTHER TERMS
1. Barratry – a willful act of the master and crew in pursuance of some
fraudulent or unlawful purpose without the consent of the owner and to
the prejudice of his interest, such as the burning of the ship or unlawfully
selling the cargo.
2. Inchmaree Clause – a provision in marine insurance that it shall cover
loss or damage to the hull or machinery through the negligence of the
master, charterers, mariners, engineers or pilots through explosion,
bursting of boilers, breakage of shafts or through any latent defect in the
hull or machinery. This is also known as the Negligence Clause.
WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE
INSURANCE?
1. The owner of a vessel has insurable interest in the vessel, and such shall
continue even if the vessel has been chartered by one who covenants
to pay the owner the value of the vessel upon loss, but in case of loss,
the insurer is liable only for the part of the loss which the insured cannot
recover from the charterer.
2. The insurable interest of the owner of a ship hypothecated by bottomry
is only the excess of its value over the amount secured by bottomry.
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
2.1. Bottomry and respondentia are loans payable only if the vessel
(bottomry) or the goods (respondentia) given as security for
said loan arrives safely at port from contemplated voyage.
Note: Bottomry and Respondentia
Bottomry Loan – a loan that is obtained for the value of the
vessel on a voyage and the lender is repaid only if the vessel
subject of the loan arrives safely at its destination. The
insurable interest of a ship owner on its bottomed boat is the
difference between the amount of the loan and the value of the
boat. Thus, if the amount of the loan does not cover the total
value of the boat, the owner can still insure the boat.
Respondentia Loan - a loan that is obtained as security for the
value of the cargo to be transported and the lender is repaid
only if the cargo arrives safely at its destination.
2.2. These contracts are in the nature of mortgages as the owner
borrows money for the use, equipment or repair of the vessel
for a definite term with the ship as security with maritime or
extraordinary interest on account of the risks borne by the
lender, it being stipulated that if the ship be lost during the
voyage or within a limited period, the lender also loses his
money.
3. The owner of a vessel has insurable interest in expected freightage
which in the ordinary course of things he would have earned but for the
intervention of the peril insured against or other peril incident to the
voyage.
3.1. Freightage refers to the benefits derived by the owner from:
(a) Chartering of the ship
(b) Its employment for the carriage of his own goods or those
of others.
3.2. It exists:
(a) In case of a charter party when the ship has broken on the
chartered voyage;
(b) If a price is to be paid for the carriage of goods, when they
are actually on board or there is contract to put them on
board, and the vessel and goods are ready for the
specified voyage.
PERSONS/ PARTIES OTHER THAN THE OWNER WHO HAVE INSURABLE
INTEREST
1. One who has an interest in the thing from which profits are expected to
proceed, has insurable interest on the profits.
As when: Owner of the cargo transported on a vessel not only has
insurable interest on the cargo but also on the expected profits from a
future sale.
2. The charterer of a ship has insurable interest to the extent that he is
liable to be damnified by its loss.
As when: A charters B’s vessel on condition that A would pay B in case
of loss the amount of P300,000.00. A has insurable interest to the extent
of P300,000.00.
CONCEALMENT IN MARINE INSURANCE
1. A party is bound to communicate, in addition to what is required by
Section 28 referring to facts within his knowledge, material to the
contract, other party has not the means of ascertaining, as to which party
with duty to communicate makes no warranty, information that he
possesses, that are material to the risk, and to state the exact and whole
truth in relation to all matters that he represents, or upon inquiry
discloses or assumes to disclose, except those that the insurer knows
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
or those in the exercise of ordinary care, the other ought to know, and
which the former has no reason to suppose him to be ignorant under
Section 30.
1.1. Note: The rules on concealment in marine insurance are
stricter as it is sufficient that the insured is in possession of a
material fact, although he is unaware of it.
As when: If an agent fails to notify the principal of the loss of
the cargo and the latter, after the loss but ignorant thereof,
secured insurance lost or not lost, the insurance will be void
due to concealment.
2. A party is also bound to communicate the information, belief or
expectation of a 3rd person, in reference to a material fact, is material.
3. While concealment as a rule entitles the injured party to rescind, the rule
must yield to Section 112 as it does not vitiate the contract but merely
exonerates the insurer from a loss resulting from the risk concealed
when they relate to:
(a) The national character of the insured;
(b) The liability of the thing insured to capture and detention;
(c) The liability to seizure from breach of foreign laws of trade;
(d) The want of the necessary documents;
(e) The use of false/ simulated documents.
As when: The vessel is seized due to lack of documents, the insurer
is exonerated. If the vessel is lost due to a storm, the insurer is liable
despite concealment of the lack of documents.
DISTINGUISHING ORDINARY CONCEALMENT FROM THAT IN MARINE
INSURANCE
1. In ordinary insurance, opinion or belief of a 3rd person o own judgment
of the insured is not material and need not be communicated. In marine
insurance, the belief or expectation of a 3rd person in reference to a
material fact is material and has to be communicated.
2. In ordinary insurance, a causal connection between the fact concealed
and cause of loss is not necessary for the insurer to rescind; in marine
insurance, the concealment of any of the matters stated in Section 112
merely exonerates the insurer from loss, if the loss results from the fact
concealed.
PRESUMPTION OF A PRIOR LOSS
The insured in marine insurance is presumed to have knowledge, at the time of
insuring, of a prior loss, if information might possibly reach him in the usual mode
of transmission and at the usual rate of communication.
REPRESENTATION IN MARINE INSURANCE
WHEN IS THE INSURER ENTITLED TO RESCIND?
1. If the representation is intentionally false in any material respect, or, in
respect of any fact on which the character and nature of the risk
depends, the insurer may rescind.
2. However, the eventual falsity of a representation as to an expectation
does not, in the absence of fraud, avoid the contract. Such as statement
as to time of sailing, general nature of the cargo, or amount of profits.
IMPLIED WARRANTIES IN MARINE INSURANCE
The following warranties are implied in marine insurance:
a. That the ship is seaworthy to make the voyage and/or take in certain
cargoes;
b. That the ship shall not deviate from the voyage insured;
c. That the ship shall carry the necessary documents to show nationality
or neutrality and that it will not carry documents which will cast
reasonable suspicion thereon; and
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
d. That the ship shall not carry contraband, especially if it is making voyage
through belligerent waters.
1. In every contract of marine insurance upon a ship or freight, freightage
or upon anything which is the subject of marine insurance, there is an
implied warranty that the ship is seaworthy.
Bar 2010
Q: Paolo, the owner of an ocean-going vessel, offered to transport the
logs of Constantino from Manila to Nagoya. Constantino accepted the
offer, not knowing that the vessel was manned by an irresponsible crew
with deep-seated resentments against Paolo, their employer.
Constantino insured the logs against both perils of the sea and barratry.
The logs were improperly loaded on one side, thereby causing the
vessel to tilt on one side. On the way to Nagoya, the crew unbolted the
sea valve of the vessel causing water to flood the ship hold. The vessel
sank.
Constantino tried to collect from the insurance company which denied
liability, given the unworthiness of both the vessel and its crew.
Constantino countered that he was not the owner of the vessel and he
could therefore not be responsible for conditions about which he was
innocent.
Is the insurance company liable?
A: No. There is an implied warranty in every marine insurance that the
ship is seaworthy whoever is insuring the cargo, whether it be the
shipowner or not. There was a breach of warranty, because the logs
were improperly loaded and the crew was irresponsible. It is the
obligation of the owner of the cargo to look for a reliable common carrier
which keeps its vessel in seaworthy condition.
Bar 2008
Q: On October 30, 2007, M/V Pacific, a Philippine-registered vessel
owned by Cebu Shipping Company (CSC), sank on her voyage from
Hong Kong to Manila. Empire Assurance Company (EAC) is the insurer
of the lost cargoes loaded on board the vessel which were consigned to
Debenhams Company. After it indemnified Debenhams, EAC as
subrogee filed an action for damages against CSC.
a) Assume the vessel was not seaworthy as in fact its hull had leaked,
causing flooding in the vessel. Is CSC liable?
b) Assume the facts in question (a). Can the heirs of the 3 crew
members who perished recover from CSC?
A:
a) Yes, CSC is liable for the lost cargoes. Allowing the vessel to depart
on a voyage when it is not seaworthy is a violation of the implied
warranty of seaworthiness, and thus constitutes negligence on the
part of the owner of the ship and the ship captain. The hypothecary
principle in maritime commerce – limiting the ship owner’s liability
to the amount of insurance proceeds – it not applicable when the
unseaworthiness of the vessel is due to the owner’s fault or
negligence.
b) Yes, the heirs of the 3 crew members who perished can recover
from CSC for negligence which constitutes quasi-delict in this case.
1.1. A ship is seaworthy when it is reasonably fit to perform the service
and to encounter the ordinary perils of the voyage, contemplated by
the parties to the policy.
1.2. Note: Seaworthiness is relative and is made to depend on
circumstances.
1.3. The implied warranty of seaworthiness is complied with as a general
rule when it is seaworthy at the time of the commencement of the
risk, except:
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(a) When the insurance is made for a specified length of time, it
must be seaworthy at the commencement of every voyage it
undertakes at that time;
(b) When the insurance is upon cargo, which by the terms of the
policy, description of the voyage, or established custom of
trade, is required to be transhipped at an immediate port, in
which case – each vessel upon which the cargo is shipped or
transhipped must be seaworthy at the commencement of each
particular voyage;
(c) Where different portions of the voyage contemplated in the
policy differ in respect to the things requisite to make the ship
seaworthy, in which case it must be seaworthy at the
commencement of each portion.
1.4. The warranty of seaworthiness extends not only to the condition of
the structure of the ship, but it requires that:
(a) It be properly laden or loaded with cargo;
(b) Is provided with a competent master, sufficient number of
officers and seamen;
(c) It must have the requisite equipment and appurtenances like
ballasts, cables, anchors, cordage, sails, food, water, fuel,
lights, and other necessary and proper stores and implements
for the voyage.
1.5. Note: While a ship may be seaworthy for purposes of insurance on
it, it may by reason of being unfit to receive cargo, be unseaworthy
for the purpose of insurance on the cargo.
As when: A cargo of wheat was laden on a ship which had a port
hole not securely fastened at the time of lading. The port hole was
a foot above the water line, and in the course of the voyage, water
entered the cargo area and damaged the wheat. The ship was
deemed unseaworthy with reference to the cargo, hence the insurer
of the cargo was not liable.
1.6. Since there is an implied warranty of seaworthiness, it becomes the
obligation of the cargo owner or the insured to look for a reliable
common carrier which keeps its vessels seaworthy. The insured
may have no control on the vessel but has full control in the choice
of common carrier.
1.7. When a ship becomes unseaworthy during the voyage, it will not
avoid the policy, as long as there is no unreasonable delay in
repairing the defect. Otherwise, the insurer is exonerated on the
ship or the ship owner’s interest from any liability from any loss
arising therefrom. Hence, if loss is not one due to the defect or the
peril was not increased by the defect, the insurer is still liable.
Bar 1983
Q: A shipped 100 pieces of plywood from Davao City to Manila. He
took a marine insurance policy to insure the shipment against loss
or damage due to perils of the sea, barratry, fire, jettison, pirates
and other such perils.
When the ship left the port of Davao, the shipman in charge forgot
to secure one of the port holes, thru which sea water seeped during
the voyage, damaging the plywood. A filed a claim against the
insurance company which refused to pay on the ground that the loss
or damage was not due to a peril of the sea or any of the risks
covered by the policy. It was admitted that the sea was reasonably
calm during the voyage and that no strong winds or waves were
encountered by the vessel.
How would you decide the case?
A: I would decide in favour of the insured A because the insurer was
guilty of breach of implied warranty of seaworthiness.
The Insurance Code provides that in every contract of marine
insurance, there is a warranty that the ship is seaworthy at the
commencement of the risk. Seaworthiness refers not only to the
structure of the ship but also as to its being properly laden. In other
words, a ship which is seaworthy for the insurance on the ship, may,
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
by reason of being unfit to receive the cargo, be unseaworthy for
the purpose of insurance upon the cargo. In this case, the fact that
the port hole was not secured at the port of departure made the ship
unseaworthy as far as the cargo of plywood was concerned. Thus,
the insurer should be liable for the damage thereto although the loss
was not one due to perils insured against.
2. It shall carry the requisite documents to show its nationality or neutrality
and that it shall not carry any document that will cast reasonable
suspicion on the vessel.
2.1. This warranty arises only when the nationality or neutrality of the
vessel or the cargo has expressly been warranted.
3. That the vessel shall not make any improper deviation from the intended
voyage.
3.1. The intended voyage is determined as follows:
(a) When it is described by places of beginning and ending, the
voyage is the course of sailing fixed by mercantile usage
between those places;
(b) When it is not fixed by mercantile usage, the voyage is the way
between the places specified which to a master of ordinary skill
and discretion would seem the most natural, direct and
advantageous.
3.2. A deviation is a departure from the course of the voyage as defined
by law or an unreasonable delay in pursing the voyage, or the
commencement of an entirely different voyage.
3.3. A deviation is proper:
(a) When it is caused by circumstances over which neither the
master nor the owner of the ship has any control.
As when: An ailment strikes the crew of the vessel.
(b) When necessary to comply with a warranty, or to avoid a peril,
whether or not the peril is insured against.
As when: Repairs are necessary or to avoid getting caught in a
conflict.
(c) When made in good faith, and upon reasonable grounds of
belief in its necessity to avoid a peril.
As when: Undertaken to avoid the eye of a storm.
(d) When made in good faith, for the purpose of saving human life
or relieving another vessel in distress.
As when: Assistance is given.
Note: Any deviation that is not included is an improper deviation.
Bar 2008
Q: On October 30, 2007, M/V Pacific, a Philippine-registered vessel owned by
CSC, sank on her voyage from Hong Kong to Manila. EAC is the insurer of the
lost cargoes loaded on board the vessel which were consigned to Debenhams
Company. After it indemnified Debenhams, EAC as subrogee filed an action for
damages against CSC.
Assume that the vessel was seaworthy. Before departing, the vessel was advised
by the Japanese Meteorological Center that it was safe to travel to its destination.
But while at sea, the vessel received a report of a typhoon moving within its
general path. To avoid the typhoon, the vessel changed its course. However, it
was still at the fringe of the typhoon when it was repeatedly hit by huge waves,
foundered and eventually sank. The captain and the crew were saved except 3
who perished. Is CSC liable to EAC?
A: No. The doctrine of proper deviation is applicable in this case. The change of
course made by the vessel is proper as it was to avoid the typhoon and the huge
waves are considered perils of the sea.
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(c) Any damage to the thing which renders it valueless to the owner for
the purpose that he held it;
3.4. When there is an improper deviation, the insurer is not liable for any (d) Any other event which effectively deprives the owner of the
loss happening to the thing insured subsequent to an improper possession, at the port of destination, of the thing insured.
deviation. This is so whether risk has been increased or diminished.
1.1. As when: When palay was rendered valueless because they began
4. That the vessel does not or will not engage in any illegal venture. to germinate, thus it no longer remains as the same thing, it was
held to be an actual total loss.
LOSS AND ABANDONMENT
2. An actual total loss can be presumed from the continued absence of the
LOSSES IN MARINE INSURANCE
ship without being heard of.
1. Losses in marine insurance may be
2.1. The length of time which is sufficient to raise this presumption
(a) Partial, or depends on the circumstances of the case.
(b) Total
3. Upon an actual total loss, the insured is entitled to payment without
2. A loss that is not partial is total. notice of abandonment and if the insurance is confined to an actual loss,
it will not cover a constructive loss, but it will cover any loss, which
3. If the vessel be prevented, at an immediate port, from completing the necessarily results in depriving the insured of possession, at the port of
voyage, by the perils insured against, the liability of the marine insurer destination of the entire thing insured.
on the cargo continues after they are reshipped.
3.1. This means that the policy can limit a claim for payment to an actual
3.1. This liability extends to damages, expenses of discharging, loss only.
storage, reshipment, extra freightage and all other expenses
CONSTRUCTIVE TOTAL LOSSES
incurred in saving the cargo reshipped up to them amount
insured, nothing however shall render the insurer liable for an 1. It is a constructive total loss when the person insured is given the right
amount in excess of the insured value or if none, of the to abandon.
insurable value.
1.1. Abandonment is the act of the insured by which, after a
ACTUAL TOTAL LOSSES
constructive total loss, he declares to the insurer the
1. What constitutes actual total loss? relinquishment in its favour of his interest in the thing insured.

If it is an actual total loss, it may be caused by: 1.2. For a constructive total loss to exist in marine insurance, it is
required that the person insured relinquished his interest in the
(a) Total destruction of the thing insured; thing insured. This relinquishment must be actual.
(b) The irretrievable loss of the thing by sinking or by being broken up;

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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
2. A person insured by a contract of marine insurance may abandon the
thing insured, or any particular portion thereof separately valued by the
policy, or otherwise separately insured and recover a total loss, when
the cause of the loss is a peril insured against if:
(a) More than ¾ thereof in value is actually lost or would have to be
expended to recover it from the peril;
(b) If it is injured to such extent as to reduce its value by more than ¾
of the value;
(c) If the thing injured is a ship, and the contemplated voyage cannot
lawfully be performed without incurring either an expense to the
insured of more than ¾ the value of the thing abandoned or a risk
which a prudent man would not take under the circumstances;
(d) If the insured is freightage or cargo and the voyage cannot be
performed, nor another ship procured by the master, within a
reasonable with reasonable diligence to forward the cargo without
incurring the like expense or risk mentioned in item (c) but
freightage cannot be abandoned unless the ship is also abandoned.
Bar 1982
Q: An inter-island vessel, insured for P2,000,000.00 against “total and
constructive loss” sank in 50 feet of water one mile off Paranaque during a
typhoon. After the typhoon, the ship owner gave written notice of abandonment
of his interest in the entire sunken ship to the insurance company. Refusing to
accept the offer of abandonment, the insurer hired salvors to refloat the vessel at
a total cost of P40,000.00. because the refloated vessel needed repairs, the
insurer issued invitations to bid for repairs. Several firms submitted separate
sealed bids ranging from P1,200,000.00 to P1,300,000.00 for the complete
refurbishing and/or restoration of the vessel to its original condition. On the basis
of the following facts, the insurance company rejected the claim of the ship owner
for payment of total loss on the ground that there was no constructive total loss.
(a) Was the notice of abandonment given by the owner properly made?
(b) Is the position of the insurance company as to the absence of
constructive total loss well-taken?
(c) Assuming that the ship owner failed to give the proper notice of
abandonment, may he still recover from the insurer?
A:
(a) First suggested answer:
The notice of abandonment made in writing by the insured to the insurer
was sufficient, had the loss been a constructive total loss of the vessel,
meaning more than ¾ of the value of the vessel.
Second suggested answer:
The notice of abandonment made in writing was not proper, since the
existence of the constructive total loss of the vessel had not yet been
determined.
(b) Yes. The sum total of the damage to the vessel was only P1,340,000.00
(P40,000.00 for the salvors; P1,300,000.00 for the restoration of the
vessel to its original condition) which amount is not more than ¾ of the
value of the vessel which is P2,000,000.00.
(c) Yes. The ship owner may still recover from the insurer, his actual loss,
the amount of P1,340,000.00 which is now only partial loss, being not
total loss. But since the said amount was already spent by the insurer
on the vessel, the insurer is no longer liable to the ship owner, except to
deliver the vessel.
Bar 1992
Q: An insurance company issued a marine insurance policy covering a shipment
by sea from Mindoro to Batangas 1,000 pieces of Mindoro garden stones against
“total loss only.” The stones were loaded in two lighters, the first with 600 pieces
and the second with 400 pieces. Because of rough seas, damage was caused
the second lighter resulting in the loss of 325 out of the 400 pieces. The owner of
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
the shipment filed claims against the insurance company on the ground of
constructive total loss inasmuch as more than ¾ of the stones had been lost in
one of the lighters.
Is the insurance company liable under its policy?
A: The insurance company is not liable under its policy covering against “total loss
only” the shipment of 1,000 pieces of Mindoro garden stones. There is no
constructive total loss that can be claimed since the ¾ rule is to be computed on
the total 1,000 pieces of Mindoro garden stones covered by the single policy
coverage.
3. Abandonment when made must neither be partial or conditional. Hence,
it must be total and absolute.
Bar 2005
Q: M/V Pearly Shells, a passenger and cargo vessel, was insured for
P40,000,000.00 against “constructive total loss.” Due to typhoon, it sank near
Palawan. Luckily, there were no casualties, only injured passengers. The ship
owner sent a notice of abandonment of his interest over the vessel to the
insurance company which then hired professionals to afloat the vessel for
P900,000.00. when refloated, the vessel needed repairs estimated at
P2,000,000.00, the insurance company refused to pay the claim of the ship
owner, stating that there was “no constructive total loss.”
(a) Was there “constructive total loss” to entitle the ship owner to recover
from the insurance company?
(b) Was it proper for the ship owner to send a notice of abandonment to the
insurance company?
A:
(a) There was constructive total loss. When the vessel sank, it was likely
that it would be totally lost because of the improbability of recovery.
(b) It was proper for the ship owner to send a notice of abandonment to the
insurance company, because there was reliable information of the loss
of the vessel.
4. Abandonment must be made within reasonable time after receipt of
reliable information of the loss, but, where the information is of doubtful
character, the insured is entitled to a reasonable time to make an inquiry.
4.1. The requirement as to when notice must be made is to enable
the insurer to take steps to preserve the property.
4.2. If the information proves incorrect or thing insured is restored
when the abandonment was made that there was then in fact
no total loss, the abandonment becomes ineffectual.
5. Notice of abandonment is made by giving notice oral or written notice to
the insurer but if orally given, a written notice of such must be submitted
within 7 days from giving oral notice.
5.1. The notice must be explicit ad specify the particular cause of
the abandonment but need state only enough to show that
there is probable cause therefore and need not be
accompanied by proof of interest or loss.
5.2. The requirement as to the explicitness of the notice is due to
the fact that abandonment can only be sustained upon the
cause specified in the notice.
6. Abandonment becomes effective upon the acceptance of the insurer.
6.1. The acceptance may either be express or implied from the
conduct of the insurer.
6.2. The mere silence of the insurer for an unreasonable length of
time after notice shall be construed as acceptance.
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
6.3. Once accepted, it is conclusive between the parties. The loss If the ship is subsequently repaired, and continues on to Point
is admitted together with the sufficiency of the abandonment. Y, the freightage due belongs to the insurer of the ship.

6.4. It is also irrevocable upon acceptance and upon its being made
unless the ground upon which it was made proves to be
unfounded. Thus, if the insurer accepts the abandonment, it
cannot raise any question as to insufficiency of the form under
Section 145, time for giving notice under Section 143, or right
to abandon under Section 141. The exception is under Section
152 when the ground is unfounded which is defined in Section
154.
7. The effects of abandonment are:
8. If abandonment is not accepted despite its validity, the insurer is liable
upon an actual total loss, deducting from the amount any proceeds of
the thing insured that may have come to the hands of the insured. This
is due to the fact that under Section 1451 which provides that if notice is
properly given, it does not prejudice the insured, if the insurer refuses to
accept the abandonment.
9. The fact that abandonment is not made or is omitted does not prejudice
the insured as he may nevertheless recover his actual loss.

(a) It is equivalent to a transfer by the insured of his interest to the AVERAGES

insurer, with all the chances of recovery and indemnity.
LIABILITY FOR AVERAGES
Note: if the insurer pays for the loss as if it were an actual total loss,
1. An average is an extraordinary or accidental expense incurred during
he is entitled to whatever may remain of the thing insured, or its
the voyage for the preservation of the vessel, cargo, or both and all
proceeds or salvage as if there has been a formal abandonment. In
damages to the vessel or cargo from the time it is loaded and the voyage
this case, the insurer has opted to pay for an actual total loss
commenced until it ends and the cargo is unloaded.
notwithstanding the absence of actual abandonment.

2. The kinds of averages are:

(b) Acts done in good faith by those who were agents of the insured in
respect to the thing insured subsequent to the loss, are at the risk
(a) Particular or Simple – a damage or expense caused to the vessel
of the insurer and for his benefit. In effect, the agents of the agents
or cargo which has not inured to the common benefit and profit of
of the insured become agents of the insurer. This retroacts to the
all persons interested in the cargo or vessel. This damage or
date of the loss when abandonment is effectively made.
expense is borne ordinarily by the owner of the vessel or cargo that
gives rise to the expenses or suffered the damage.
7.1. On an accepted abandonment involving a ship, freightage
earned previous to the loss belongs to the insurer of the
As when: Damage sustained by a cargo from the time it is loaded
freightage, that subsequently earned belongs to the insurer of
to the time it is unloaded or additional expenses that are incurred
the ship.
by the vessel from the time it is loaded to the time it is unloaded or
additional expenses that are incurred by the vessel from the time it
As when: The contemplated voyage for the transport of cargo
puts out to sea until it reaches its destination.
is from Point X to Point Y. in between, a loss occurs and the
ship is abandoned. The freightage already earned from Point X
until the point of loss, belongs to the insurer of the freightage.

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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
(b) General or Gross – an expense or damage suffered deliberately in
order to save the vessel or its cargo or both from a real or known
risk. Thus, all persons having an interest in the vessel and cargo or
both at the occurrence of the average shall contribute to the loss.
As when: The ship is jettisoned.
RULE ON LIABILITY FOR AVERAGES
When it has been agreed that an insurance upon a particular thing or class of
things shall be free from a particular average, a marine insurer is not liable for a
particular average loss not depriving the insured at the port of destination, of the
whole such thing, or class of things, even though it becomes entirely worthless,
but such insurer is liable for his proportion of all general average loss assessed
upon the thing insured.
IN CASE OF A GENERAL AVERAGE LOSS
MEASURE OF INDEMNITY IN MARINE INSURANCE
1. The insurer is liable for the loss falling upon the insured through a
contribution in respect to the thing insured when required to be made by
him towards a general average loss called for a peril insured against but
liability is limited to the proportion of the contribution attaching to his
policy value where this is less than the contributing value of the thing
insured.
1.1. This means that the insured can hold his insurer liable for his
contribution up to the value of the policy.
RIGHT OF SUBROGATION
1. When a person insured in a contract of marine insurance has demand
against the others for contribution, he may claim the whole loss from his
insurer subrogating the insurer to his own right to contribution, but no
such claim can be made upon the insurer if:
(a) There is separation of the interest liable to contribution, nor
As when: The cargo liable for contribution has been removed from
the vessel.
(b) When the insured having the right and opportunity to enforce
contribution from others, has neglected or waived the exercise of
the right.
2. This means that the insured has a choice of recovery on the happening
of a general average loss. They are:
(a) Enforcing the contribution against interested parties; or
(b) Claiming from the insurer.
Note: If it be the latter, subrogation takes place.
1. If the policy is valued: A valuation in the policy of marine insurance is
conclusive between the parties thereto in the adjustment of either a
partial or total loss, if the insured has some interest at risk, and there is
no fraud on his part.
1.1. If there is fraud in valuation, it would entitle the insurer to
rescind by way an exception to conclusiveness.
1.2. If however, the subject of insurance is hypothecated by
bottomry or respondentia before insurance and without
knowledge of the person securing it, he may show the real
value.
As when: A person purchases a vessel subject to bottomry but
he is unaware of it, he may upon a loss show the real value of
the vessel. The insurer cannot rescind.
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
1.3. An insurer is liable upon a partial loss only for such proportion
of the amount insured by him, as the loss bears to the whole
interest of the insured. The effect is that the insured is deemed
a co-insurer if the value of the insurance is less than the value
of the property. This applies even in the absence of a stipulation
in the contract as is also known as the Average Clause.
As when: A vessel valued at P500,000.00 is insured for
P400,000.00. The vessel is damaged to the extent of
P200,000.00. The insurer is liable not for the P200,000.00, but
for only P160,000.00.
The formula is:
(Insurance / Value) X Loss = Liability
1.4. The requisites for the application of the Average Clause are:
(a) Insurance is for less than actual value;
(b) The loss is partial.
When does co-insurance exist?
Co-insurance exists when the subject matter is insured for
an amount less than its value. In this case, the insured is
considered as a co-insurer for the portion not covered by
insurance.
This will apply only if the loss is partial.
This is also known as the “Average Clause.”
1.5. Note: Co-insurance only exists in marine insurance, as a
general rule. In fire insurance, there is no co-insurance, unless
expressly stipulated. In life insurance, there is none as value is
fixed in the policy.
1.6. Section 159 is further qualified as in case of a partial loss of the
ship or its equipment, the old materials are t be applied towards
the payment of the new and unless stipulated in the policy, the
insurer is liable only for 2/3 of the remaining cost or repairs after
the deduction except that anchors are paid in full. This is the
1/3 old for new rule as it is contended that the repairs once
completed will enhance the value of the thing insured.
1.7. In case profits are separately insured in a contract of marine
insurance, the insured can recover in case of a loss, a
proportion of such profits equivalent to proportion of the value
of the property lost bears to the value of the whole.
As when: Goods are valued at P500,000.00, expected profits
are P50,000.00. Goods suffer a partial loss of P100,000.00.
The insured can recover P10,000.00 ion the insurance over
profits.
Formula:
Amount Recoverable = (Insurance of Profits/ Value of Goods)
X Loss
Note: There is a conclusive presumption of a loss from the loss
of the property out of which they were expected to arise, and
the valuation fixes their amount.
1.8. In case of a valued policy on freightage or cargo, if only a part
of the subject is exposed to the risk, the valuation applies only
in proportion to such part.
As when: Goods are valued at P500,000.00, if only
P250,000.00 are shipped and exposed to the risk, the valuation
is reduced by ½ . In case of a total loss, the insured can only
demand ½ of valuation, or P250,000.00.
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
2. If the policy is Open: The value of the ship is its value at the beginning
of the risk, including all articles or charges which add to its permanent
value or which are necessary to prepare it for the voyage insured. The
value at the time it was built or acquired is not the value that is material.
2.1. The value of the cargo is its actual cost to the insured, when
laden on board or where that cost cannot be ascertained, its
market value at the time and place of lading, adding the
charges incurred in purchasing and placing it on board, but
without reference to any loss incurred in raising money for its
purchase or any drawback on its exportation or fluctuation of
the market at the port of destination or expenses incurred on
the way or on arrival.
A drawback is government allowance upon duties on imported
merchandise when the importer re-exports instead of selling it.
2.2. The value of freightage is the gross freightage, exclusive of
primage, without reference to the cost of earning it.
Primage is the compensation paid by the shipper to the master
of the vessel for his care and trouble bestowed on the goods of
the shipper, which he retains in the absence of a contrary
stipulation with the owner of the vessel.
2.3. The cost of insurance is in each case to be added to the value
thus estimated.
WHAT IS INCLUDED IN FIRE INSURANCE?
2.4. If the cargo is insured against a partial loss and it arrives at the
port of destination in a damaged condition, the loss of the
insured is deemed to be the same proportion of the value which
the market price at that port of the thing so damaged bears to
the market price it would brought if sound. Meaning, if reduction
in value is 1/5, then the amount of recovery in the insurance is
also 1/5.
The formula is:
(a) Market Price in sound state – Market Price in damaged
state = Reduction in Value
(b) (Reduction in Value / Market Price in sound state) X
Amount of Insurance = Amount of Recovery
3. Regardless of whether the policy is Valued or Open: An insurer is liable:
(a) Port of Refuge Expenses - all the expenses attendant upon a loss
that forces the ship into port to be repaired. These refer to expenses
for repairing the ship due to damages attributable to perils insured
against, as well as other expenses such as launching, towing,
raising and navigating the vessel.
(b) Sue and Labor Clause – if so stipulated, that the insured shall labor
for recovery of the property insured, the insurer is liable for
expenses incurred thereby.
As when: The vessel is unlawfully detained.
3.1. In either case, said expenses are to be added to a total loss, if
that afterwards occurs.
FIRE INSURANCE
1. Insurance against fire may include loss or damage due to lightning,
windstorm, tornado, earthquake or other allied risks when such risks are
covered by extensions to the fire insurance policy or under separate
policies.
1.1. Hence, while it is not limited to loss or damage due to fire,
coverage as to other risks is not automatic.
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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
FIRE, DEFINED
1. In insurance, fire is “the active principle of burning, characterized by heat
and light combustion.”
ALTERATION, DEFINED
Combustion without visible light or glow is not fire.
As when: Damage caused by smoke from a lamp when no ignition
occurred outside the lamp.
1.1. Fire cannot be considered a natural disaster or calamity since
it almost always arises from some acts of man or by human
means. It cannot be an act of God unless caused by lightning
or a natural disaster or casualty not attributable to human
agency.
2. To allow recovery, it must be the proximate cause of the damage or loss
and the fire must be hostile.
2.1. The fire is hostile if:
(a) Burns at a place where it is not intended to burn;
(b) Starts as a friendly fire but becomes hostile if it should
escape from the place where it is intended to burn and
becomes uncontrollable;
(c) Is a friendly fire which becomes hostile by not escaping
from its proper place but because of the unsuitable
material used to light it, and it becomes inherently
dangerous and uncontrollable as opposed to a friendly fire
that burns in a place where it is intended to burn and
employed for the ordinary purpose of lighting heating or
manufacturing.
2.2. Note: The policy itself may limit or restrict coverage to losses
under ordinary conditions but not those due to extraordinary
circumstances or abnormal conditions like war, invasion,
rebellion, civil war, or similar causes. In these cases, recovery
is still possible.
1. An alteration is a change in the use or condition of a thing insured from
that to which it is limited by the policy made without the consent of the
insurer by means within the control of the insured and increasing the
risk, which entitles the insurer to rescind the contract of insurance.
2. From the foregoing definition, the following requisites must be present
to constitute an alteration so as to allow the rescission of the contract:
2.1. The use or condition of the thing insured is specifically limited
or stipulated in the policy. Note that the contract of insurance is
not affected by an act of the insured subsequent to the
execution of the policy, which does not violate its provisions,
even though it increases the risk and is the cause of the loss.
As when: If the insured stored thinner, paints and varnish; a fire
subsequently occurs and there is no express prohibition as to
storage of such items, even if the risk is increased, the insurer
is still liable or the policy states that the 1st floor is unoccupied,
it is later occupied. There is no alteration that entitles the
insurer to rescind, the description of the house cannot be said
to be a limitation as to use.
2.2. There is an alteration in the said use or condition;
2.3. The alteration is without the consent of the insurer;
2.4. The alteration is made by means within the insured’s control. If
the alteration be by accident or means beyond the control of
the insured, this requisite is not met.
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From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
As when: The alteration is made by a tenant with the consent
or knowledge of the insured, the insurer can rescind. If the
alteration was undertaken by the tenant without the consent or
knowledge of the insured, the insurer cannot rescind.
2.5. The alteration increases the risk of loss. Note that any alteration
in the use or condition of the thing insured from that which is
limited by the policy, which does not increase the risk does not
affect the contract.
3. Rescission is due to the fact that payment of the premium is based on
the risk as assessed at the time of the issuance of the policy when the
risk is increased without a corresponding increase in premium, it is as if
no premium is paid.
MEASURE OF INDEMNITY IN FIRE INSURANCE
1. In an Open policy, it is the expense it would be to the insured at the time
of the commencement of the fire to replace the thing lost or injured in
the condition in which it was at the time of the injury.
2. In a Valued Policy, it is the same as in marine insurance, the valuation
as agreed upon by the parties is conclusive in the adjustment of either a
partial or total loss in the absence of fraud.
HOW VALUATION IS MADE
1. Whenever the insured would like to have a valuation stated in a policy
insuring a building or structure against fire, it may be made by an
independent appraiser, who is paid by the insured and the value may
then be fixed between the insurer and the insured.
2. Subsequently, the clause is then inserted in the policy that said valuation
has thus been fixed.
3. In case of loss, provided there is no change increasing the risk without
the consent of the insurer, or fraud on the part of the insured, the insurer
will pay the whole amount so insured and stated in the policy is paid.
3.1. If it is a partial loss, the whole amount of the partial loss is paid.
3.2. In case there are 2 or more policies, each shall contribute pro-
rata to the total or partial loss but the liability of the insurers
cannot be more than the amount stated in the policy.
4. Or the parties may stipulate that instead of payment, the option to repair,
rebuild, or replace the property wholly or partially damaged or destroyed
shall be exercised.
5. No policy of fire insurance shall be pledged, hypothecated or transferred
to any person, firm or company that acts as agent for or otherwise
represents the issuing company, such shall be void and of no effect
insofar as it may affect other creditors of the insured.
CASUALTY INSURANCE
CASUALTY INSURANCE, DEFINED
1. Generally, it is one that covers loss or liability arising from an accident
or mishap, excluding those that fall exclusively within other types of
insurance like fire or marine.
Bar 1975
Q: In a course of a voluntary boxing contest, B who had an accident
insurance policy, slid and slipped, enabling his opponent boxer to hit him
with a blow that threw him to the ropes, hitting his head against the
canvass, causing his eventual death. There is nothing in the insurance
contract appertaining to boxing. Is the insurance company liable?
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Bar Qs & As, and Other Review Materials on Insurance
A: The insurer is liable because the death in this case was an accident
within the meaning of the policy. It was an accident because the insured
did not expect to die by entering such contest. His slipping was
accidental and this caused him to hit his head against the canvass,
leading to his death.
Case: Finman General Assurance Corp. v. CA
There is no “accident” in the context of an accident policy, if it is the
natural result of the insured’s voluntary act, unaccompanied by anything
unforeseen except the injury. There is no accident when a deliberate act
is performed, unless some additional and unforeseen happening occurs
that brings about the injury.
2. It includes:
(a) Employer’s liability;
(b) Workmen’s compensation
(c) Public liability;
(d) Motor vehicle liability;
(e) Plate glass liability;
(f) Burglary and theft;
(g) Personal accident and health insurance as written by non-life
companies; and
(h) Other substantially similar insurance.
DEFINITIONS
1. Employer’s Liability – insurance obtained by the employer against
liability to an employee for damages caused or arising from injuries by
reason of his employment.
2. Workmen’s Compensation – insurance secured by an employer for the
benefit of his employees and laborer for loss resulting from injuries,
disablement, or death through industrial accident, casualty or disease in
LIABILITY OF THE SURETY
connection with their employment. Note that most if not all types of this
insurance is underwritten by the GSIS or the SSS.
3. Public Liability – insurance against liability of the insured to pay damages
for accidental bodily injury or damage to property arising from an activity
of the insured defined in the policy.
4. Motor Vehicle Liability – insurance against loss or injury arising from the
use of a motor vehicle by its owner as opposed loss or damage to the
vehicle itself. Coverage for both may however be contained in one
policy.
5. Plate Glass – insurance that indemnifies the insured against loss caused
by the accidental breaking of plate glass, windows, doors, or show
cases.
6. Burglary and Theft – insurance against loss of property through burglary
and theft.
7. Personal Accident – insurance against expense, loss of time and
suffering from accidents that cause a physical injury.
8. Health – insurance for indemnity for expenses or loss occasioned by
sickness or disease.
SURETYSHIP
1. An agreement whereby a party called the surety guarantees the
performance by another party called the principal or obligor of an
obligation or undertaking in favour of a 3rd party called the obligee.
2. This includes official recognizances, bonds, or undertakings issued by
any company under Act No. 536, as amended by Act No. 2206 in relation
to government transactions by authorized companies.
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It is joint and several or solidary with the obligor but limited to the amount of the (a) Death of the person; or
bond and determined strictly by the terms of the contract in relation to the principal (b) His surviving a specified period; or
contract between obligor and obligee. (c) Or otherwise, contingently on the continuance or cessation of life.

IS A SURETYSHIP CONTRACT VALID AND BINDING WHERE THE PREMIUM
HAS NOT YET BEEN PAID?
Generally, payment of the premium is a condition precedent. Hence, the bond is
not valid. An exception is when it is issued and accepted by the obligee, it is valud
despite the non-payment of the premium.
WHAT OTHER LAWS GOVERN A SURETYSHIP CONTRACT?
In the absence of specific provisions, the Civil Code will apply in a suppletory
character if necessary to interpret contract provisions.
DISTINGUISHED FROM GUARANTY
(a) A surety assumes liability as a regular party to the agreement; a
guarantor’s liability depends on an independent agreement to pay if
primary debtor fails to pay.
(b) A surety is primarily liable; a guarantor is secondarily liable.
(c) A surety is not entitled to exhaustion; a guarantor is entitled to
exhaustion.
COMMON KINDS OF LIFE INSURANCE
1. Whole Life/ Ordinary Life/ Straight Life – premiums are payable for life
and the insurer agrees to pay the face value upon the death of the
insured.
2. Limited Payment Life – insured pays premiums for a limited period after
which he stops with a guarantee by the insurer that upon death, the face
amount is to be paid – if death occurs while payment is not complete –
beneficiary receives face amount.
3. Term Policy – insurer is liable only upon death of the insured within the
agreed term or period. If insured survives, the insurer is not liable.
4. Endowment – protection is for a limited period, if the insured is still alive
at the end of the period, the value of the policy is paid to him. If he dies
before the end of the period, it is paid to the beneficiaries.
5. Annuity – where the insured or a named person is paid a sum or sums
periodically during life or a certain period. Note that contracts for the
payment of endowment or annuities are considered as life insurance
contracts.

LIFE INSURANCE DISTINGUISHING LIFE INSURANCE FROM PAYMENT OF ANNUITY

LIFE INSURANCE PAYMENT OF ANNUITY

Payable upon the death of the
It is insurance on human lives and insurance appertaining thereto or connected insured
therewith. Premium is paid in instalments
There is lump sum payment upon
WHEN PAYABLE death
Payable during the lifetime of the
annuitant
Annuitant pays a single premium
Annuities are paid until death

An insurance upon life may be made payable on:

EXERCISE BY THE MINOR OF HIS RIGHTS AS INSURED OR BENEFICIARY

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As far as a minor, who is the insured or a beneficiary in an insurance contract, in
the absence or capacity of a judicial guardian, the father, in default, the mother,
may act in behalf of the minor without need of bond or court authority when it
involves the exercise of any right under the policy, to include but not limited to
obtaining a policy loan, surrendering the policy, receiving the proceeds of the
policy and giving the minor’s consent to any transaction on the policy provided
the interest of the minor does not exceed P20,000.00.
WHAT RISKS ARE COVERED?
1. Generally, all causes of death are covered unless excluded by law, by
the policy or public policy.
2. A cause is excluded by law, as when the beneficiary is the principal,
accomplice or accessory in bringing the death of the insured.
2.1. It is excluded by the policy, as when it is stipulated that it does
not cover assault, murder or injuries inflicted intentionally by a
3rd person.
Note: Where the insured is not the intended victim, the insurer
is liable. What must be considered is that death or injury is not
the natural or probable result of the insured’s voluntary act as
opposed to an act of the insured to confront burglars.
2.2. It is excluded by public policy, as when the insured is executed
for a crime that he committed.
3. Suicide is not generally compensable unless committed after the policy
has been in force for a period of 2 years from date of issue or last
reinstatement, or a shorter period if provided, or if committed in a state
of insanity.
IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE?
1. Life insurance may pass by transfer, will or succession to any person,
whether he has insurable interest or not.
2. The effect is that the person to whom it is transferred may recover upon
it whatever the insured might have recovered.
2.1. Note: While there is no need for the assignee/ transferee to
have insurable interest, it should not be used to circumvent the
law prohibiting insurance without insurable interest. Thus, an
assignment contemporaneous with issuance may invalidate
the policy unless made in good faith.
3. Notice to the insurer is not necessary to preserve the validity of the policy
unless thereby expressly reserved.
4. The consent of the irrevocable beneficiary would be required as he has
acquired a vested right.
Bar 1991
Q: The policy of insurance upon his life, with a face value of P100,000.00, was
assigned by Jose, a married man with 2 legitimate children, to his nephew, Y, as
security for a loan of P50,000.00. He did not give the insurer any written notice of
such assignment despite the explicit provision to that effect in the policy. Jose
died. Upon the claim on the policy by the assignee, the insurer refused to pay on
the ground that it was not notified of the assignment. Upon the other hand, the
heirs of Jose contended that Y is not entitled to any amount under the policy
because the assignment without due notice to the insurer was void.
Resolve the issues.
A: A life insurance is assignable. A provision, however, in the policy stating that
written notice of such an assignment should be given to the insurer is valid. The
failure of the notice of assignment would thus preclude the assignee from claiming
rights under the policy. The failure of the notice did not, however, avoid the policy;
hence, upon the death of Jose, the proceeds would, in the absence of a
designated beneficiary, go to the estate of the insured. The estate, in turn, would
be liable for the loan of P50,000.00 owing in favour of Y.
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Bar Qs & As, and Other Review Materials on Insurance
WHAT IS THE MEASURE OF INDEMNITY IN LIFE INSURANCE
1. Unless the interest of a person insured is susceptible of pecuniary
estimation, the amount stated or specified in the policy is the measure
of indemnity.
2. Hence, a life insurance policy has been held to be a Valued policy.
WHAT ARE THE NON-DEFAULT OPTIONS IN LIFE INSURANCE?
To prevent a life insurance policy from lapsing, the following devices are used:
(a) Grace Period
In life insurance, after the payment of the 1st premium, the insured is
entitled to a grace period of 30 days or one month within which to pay
the succeeding premiums.
(b) Automatic Loan Clause
It is the stipulation in the policy providing that upon default on the
payment of premium, the same shall be paid from the loan value of the
policy until the value is consumed.
(c) Paid-Up Insurance
No more payments are required and consists of insurance for life in such
amount as the sum available therefore, considered as single and final
premium will purchase. It results in the reduction of the original amount
of insurance but for the same period originally stipulated.
(d) Cash Surrender Value
As applied to life insurance, it is the sum of money the company agrees
to pay to the holder of the policy if he surrenders it and releases his claim
upon it. The greater the sum of CSV will be if more premiums are paid;
but the CSV is always a lesser sum than the total amount of premiums
paid.
(e) Reinstatement
Every life insurance policy must contain a provision that the holder of the
policy shall be entitled to reinstatement of the contract at any time within
3 years from the date of default in the payment of the premium, unless
the cash value has been duly paid or the extension period expired upon
production of evidence of insurability satisfactory to the company and
payment of all overdue premiums and any indebtedness to the company
upon such policy.
COMPULSARY MOTOR VEHICLE LIABILITY INSURANCE
CONCEPT OF MVLI
1. It is to provide protection or coverage to answer for bodily injury or
property damage that may be sustained by another arising from the use
of a motor vehicle.
2. Note: What is now compulsory is death or bodily injury arising from MV
accidents as per amendment of the Insurance Code, brought about by
insurance losses due to padded claims form property damage. Hence,
property damage is now optional.
HOW IS THE COMPULSARY NATURE ENFORCED?
1. The compulsory nature of the insurance is enforced by prescribing that
any land transportation operator/ owner or MVs for transportation of
passengers for compensation, including school buses or owner of a
motor vehicle, referring to the actual legal owner of a MV in whose name
the vehicle is registered with LTO, would be considered as unlawfully
operating a MV, unless, there is a:
(a) Policy of insurance or contract of insurance against passenger or
3rd party liability for death or bodily injury arising from MV accidents;
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(b) Guaranty in cash;
(c) Surety bond, to indemnify the death or injury to a 3rd party other than
a passenger, excluding a member of the household, or a member
of the family of a MV owner or land transportation operator or his
employee in respect to death, bodily injury or damage to property
arising out of and in the course of employment, or passenger
referring to any fare paying person being transported or conveyed
in and by MV for transportation of passengers for compensation,
including persons expressly authorized by law or by the vehicle’s
operator or his agents to ride without fare arising from the use
thereof.
2. Compliance by the MV owner or the land transportation operator is
monitored as the LTO shall not allow registration or renewal of
registration without compliance with Section 390.
3. A violation of the provision is punishable by a fine not less than
P500,000.00, but not less than P1,000.00 and/ or imprisonment of not
more than 6 months.
3.1. If a land transportation operator violated the prescribed
minimum limits of coverage, it is sufficient cause for revocation
of a certificate of public convenience.
3.2. If the violation is committed by a corporation/ association or
government office/ entity, the executive officer/s who shall have
knowingly permitted or failed to prevent the violation shall be
held liable as principals.
DISTINGUISHED FROM OWN DAMAGE COVERAGE AND
COMPREHENSIVE MV INSURANCE
1. Third party liability answers for liabilities arising from death or bodily
injury to 3rd persons or passengers.
1.1. Own damage insurance answers for reimbursement of the cost
of repairing the damage to vehicle of the insured.
1.2. Comprehensive insurance answers for all liabilities/ damages
arising from the use/ operation of a MV; it includes Third Party,
Own Damage, Theft, and Property Damage.
How can the theft clause be interpreted?
In Paramount Insurance v. Spouses Remondeulaz, the respondents entrusted
possession of their vehicle only to the extent that Sales will introduce repairs and
improvements thereon and not to permanently deprive them of possession
thereof. Since theft can also be committed by misappropriation, the fact that Sales
failed to return the subject vehicle to the respondents constitutes Qualified Theft.
Hence, since the respondents’ car is undeniably covered by a Comprehensive
MV Insurance Policy that allows for recovery in cases of theft, petitioner is liable
under the policy for the loss of respondents’ vehicle under the “theft clause.”
Case: Villacorta v. Insurance Commissioner
The taking of a car even though temporary ad only for a joy ride, without the
consent of the car owner, is theft; and therefore, insurer is liable for total loss due
to car accident of insured’s car wrongfully taken, without the insured’s consent,
from repair shops entrusted for repairs.
WHEN DOES THE LIABILITY OF THE INSURER ACCRUE?
1. In an insurance policy that directly insures against liability, the insurer’s
liability accrues immediately upon the occurrence of the injury upon
which liability depends, and does not depend on the recovery of
judgment by the injured party against the insured. Hence, there is no
need for the insured to wait for a decision of the court finding him guilty
of reckless imprudence.
2. The occurrence of an injury for which the insured may be liable
immediately gives rise to insurer liability. In fact, since third party liability
insurance insures against 3rd persons, the injured party for whom the
contract is intended can directly sue the insurer. The purpose is to
enable the injured person to proceed directly against the insurer so as
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to avoid the probable insolvency of the insured who had directly caused
the damage.
2.1. The provision creates a contractual relation, which inures to the
benefit of any person who may be negligently injured by the
insured, as if such person was specifically named in the policy.
2.2. The insurer is not solidarily liable with the insured as its liability
is based on contract, while that of the insured is based on tort.
Bar 2000
Q: X was riding a suburban utility vehicle covered by a comprehensive motor
vehicle liability insurance underwritten by FastPay Insurance when it collided with
a speeding bus
owned by RM Travel. The collision resulted in serious types of injuries to X; Y, a
passenger of the bus; and Z, a pedestrian waiting for a ride at the scene of the
collision. The police report established that the bus was the offending vehicle. The
bus had a CMVLI policy issued by Dragon Insurance. X, Y and Z jointly sued RM
Travel and Dragon Insurance for indemnity. The lower court applied the “no-fault”
indemnity policy of the statute, dismissed the suit against RM Travel, and ordered
Dragon Insurance to pay indemnity to all three plaintiffs.
Do you agree with the court’s judgment?
A: No. The cause of action of Y is based on the contract of carriage, while that of
X and Z is based on torts. The court should not have dismissed the suit against
RM Travel. The court should have ordered Dragon Insurance to pay each of X, Y
and Z to the extent of the insurance coverage, but whatever amount is agreed
upon in the policy should be answered first by RM Travel and the succeeding
amount should be paid by Dragon Insurance up to the amount of the insurance
coverage. The excess of the claims of X, Y and Z, over and above such insurance
coverage, if any, should be answered or paid by RM Travel.
Bar 1996
Q: While driving his car along EDSA. Cesar sideswiped Roberto, causing injuries
to the latter. Roberto sued Cesar and the third party liability insurer for damages
and/ or insurance proceeds. The insurance company moved to dismiss the
complaint, contending that the liability of Cesar has not yet been determined with
finality.
(1) Is the contention of the insurer correct?
(2) May the insurer be held liable with Cesar?
A:
(a) No. There is no need to wait for the decision of the court determining
Cesar’s liability with finality before the third party liability insurer could be
sued. The occurrence of the injury to Roberto immediately gave rise to
the liability of the insurer under its policy. In other words, where an
insurance policy insures direct liability, the insurer’s liability accrues
immediately upon the occurrence of the injury or event upon which the
liability depends.
(b) The insurer cannot be held solidarily liable with Cesar. The liability of the
insurer is based on contract while that of Cesar is based on tort. If the
insurer were solidarily liable with Cesar, it could be made to pay more
than the amount stated in the policy. This would, however, be contrary
to the principles underlying insurance contracts. On the other hand, if
the insurer were solidarily liable with Cesar and it is made to pay only up
to the amount stated in the insurance policy, the principles underlying
solidary obligations would be violated.
EFFECT OF CHANGE IN OWNERHIP OR CHANGE IN ENGINE
There is no need to issue a new policy until the next date of registration; provided,
the insurer shall agree to continue the policy and such change shall be indicated
in a second duplicate which is filed with the LTO.
PAYMENT OF CLAIMS
1. A claim for payment shall be filed without unnecessary delay, within 6
months from the date of accident by giving notice setting forth the nature,
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extent, and duration of the injuries as certified by a duly licensed
physician.
1.1. The failure to file a claim will be deemed as a waiver.
1.2. If a claim is filed but denied, an action must be brought within
1 year from date of denial with the Insurance Commissioner or
the Court, otherwise the right of action will be deemed as
having prescribed.
WHAT SHALL THE INSURANCE COMPANY DO UPON FILING OF THE
CLAIM?
1. It shall forthwith ascertain the truth and extent of the claim and make
payment within 5 working days after reaching an agreement. If no
agreement is reached, it must nevertheless pay the No Fault Indemnity
without prejudice to a further pursuit of claim, in which case he shall not
be required or compelled to execute a quit-claim or release from liability.
1.1. In case of dispute as to enforcement of policy provisions, the
adjudication shall be within the original and exclusive
jurisdiction of the Commissioner subject to Section 439, which
provides for concurrent jurisdiction but the filing with the
Insurance Commissioner shall preclude filing with the Court.
NO FAULT INDEMNITY
1. It is a claim for payment for death or injury to a passenger or 3 rd party
INTERPRETATION OF THE AUTHORIZED DRIVER CLAUSE
without necessity of proving fault or negligence.
2. This is payable by the insurer, provided:
(a) Indemnity in respect of one person shall not exceed P15,000.00;
(b) The necessary proof of loss under oath to substantiate the claim is
submitted.
These are:
a. Police report of accident
b. Either death certificate and sufficient evidence to establish the
payee; or
c. The medical report and evidence of medical or hospital
disbursement in respect of which refund is made.
3. A claim under the No Fault Indemnity Clause may be made against one
motor vehicle insurer only as follows:
(a) In case of an occupant of a vehicle – against the insurer of the
vehicle in which the occupant is riding, mounting or dismounting
from;
(b) In any other case – from the insurer of the directly offending vehicle;
(c) In all cases – the right of the party paying the claim to recover
against the owner of the vehicle responsible for the accident shall
be maintained.
3.1. The term “occupant” must be distinguished from a
“passenger” who is “any fare-paying person being
transported and conveyed in and by a motor vehicle for
transportation of passengers for compensation including
persons expressly authorized by law or by the vehicle’s
operator or his agents to ride without fare.” Any person
other than a passenger is a “third-party” so long as they
are riding in, or mounting, or dismounting from a motor
vehicle.
1. Purpose: To assure that the persons other than the insured owner, who
drives the car on the insured’s order, such as his regular driver, or with
his permission, such as friends or family members or employees of a car
service or repair shop, are duly licensed drivers and have no
disqualification to drive a motor vehicle.
2. Thus, the authorized driver clause is interpreted to refer to the insured
or any person driving on the order of the insured or with his permission,
provided, such person is permitted to operate a motor vehicle in
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accordance with our licensing laws or regulations and who is not
otherwise disqualified.
2.1. When the insured is the one driving the vehicle, a license is not
necessary. He has a right to recover the damage even if he has
no driver’s license or that the same had expired at the time of
the accident.
3. Jurisprudence on the interpretation and application of the authorized
driver clause:
3.1. If the license of the driver other than the insured has expired,
such person is not authorized to operate a motor vehicle. The
renewal of the license a week after the accident shall not cure
ORGANIZATION
the defect.
3.2. When a driver is issued a Temporary Operator’s Permit or a
Temporary Vehicle Receipt, such person is authorized to
operate a motor vehicle, but if it has expired, it is as if he had
no license.
3.3. A tourist with a license issued in his home country but in the
Philippines for more than 90 days, is not authorized to operate
a motor vehicle because it is as if he had no license.
3.4. A driver’s license that bears all the earmarks of a duly issued
license is a public document that is presumed genuine.
3.5. When the driver is authorized to drive, the fact that the purpose
of the trip was not authorized will not affect the right of the
insured to recover from the insurer should the vehicle be
damaged.
3.6. When a motor vehicle is covered by a policy that includes theft,
the insurer is liable for the damage sustained by the insured
vehicle on occasion of or while the theft is being committed by
a thief without a license to drive. The same is true if the thief
had an expired license.
3.7. The unauthorized use of a motor vehicle for a joy-ride
constitutes theft and a prior criminal conviction is not necessary
to enable the insured to recover under a comprehensive
insurance policy.
4. The standard Authorized Driver clause requires that the driver at the time
of the accident must be duly authorized and licensed to drive. An
irregular license is not a license at all.
BUSINESS OF INSURANCE
1. The term insurer or insurance company shall include all individuals,
partnerships, associations or corporations, including GOCCs or entities
engaged as principals in the insurance business.
2. Expressly excluded is Mutual Benefit Association which is based on
reciprocal contracts and requires that the members receive benefits as
a matter of right. Commonly, a fraternal or social organization that
provides insurance for members on an assessment basis. However,
before it is allowed to transact, the law requires it to secure a license
from the Insurance Commissioner.
2.1. It is formed without capital stock and not organized for profit. Its
main purpose is paying sick benefits to members, or furnishing
financial support to its members while out of employment or of
paying to relatives of deceased members a fixed or any sum of
money, irrespective of whether such aim or purpose is carried
out by means of fixed dues, assessments, or voluntary
contributions, or of providing by the issuance of certificates
insurance benefits, out of dues, assessments, collected from
members.
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2.2. The insurance aspect of their operations, being an incident and
not the main purpose of the organization, and the insurance
feature is adopted, not for purpose of gain, but with the object
of benevolence.
2.3. Do not confuse with Mutual Insurance Company, which is a
cooperative or enterprise where the members are both insurer
and insured. In it, the members all contribute, by a system of
premiums or assessments, to the creation of a fund from which
all losses and liabilities are paid, and where the profits are
divided among themselves, in proportion to their interest.
2.4. An example is a “Protection and Indemnity Club,” which is an
association composed of ship owners in general who band
together for the specific purpose of providing insurance cover
on a mutual basis against liabilities incidental to ship owning
that the members incur in favour of 3rd parties. It is a form of
insurance against 3rd party liability, where the 3rd party is
anyone other than the P&I and its members. It is therefore, a
mutual insurance association engaged in the marine insurance
business and must be duly licensed by the Insurance
Commission.
2.5. If a Labor Union shall provide its members with a mutual benefit
feature, it shall be governed by the provisions of the Labor
Code.
3. Insurance Corporation – one that is formed or organized to have any
person or persons or other corporations harmless from loss, damage or
liability arising from any unknown or future or contingent event, or to
indemnify or to compensate any person or persons or other corporations
for any such loss, damage or liability, or to guarantee the performance
of or compliance with contractual obligations or the payment of debts of
others.
REQUIREMENTS FOR A CERTIFICATE OF AUTHORITY FROM THE
INSURANCE COMMISSION
1. The requirements are:
(a) Qualified by Philippine laws to transact insurance business;
(b) Has a name that is not in any way similar to another company;
(c) If organized as a stock corporation, it should have a paid-up capital
of no less than P5,000,000.00;
(d) If organized as a mutual company or one whose capital funds are
not contributed by stockholders but by policy holders, it must have
available cash assets of at least P5,000,000.00 above all liabilities
for losses reported, expenses, taxes, legal reserves and
reinsurance of all outstanding risks, and the contributed surplus
fund equal the amounts required of stock corporations,
P1,000,000.00 if life insurance company, P500,000.00 if non-life.
MARGIN OF SOLVENCY
1. The margin of solvency is the excess of the value of insurance
company’s admitted assets, exclusive of its paid up, in case of a
domestic insurance company or an excess of the value of its admitted
assets in the Philippines exclusive of security deposits, in case of a
foreign company, over the amount of its liabilities, unearned premiums,
and reinsurance reserves in the Philippines.
2. The required margin in case of life insurance companies is 2% of the
total amount of its insurance in force as of the preceding calendar year
on all policies except term insurance.
2.1. In case of non-life insurance companies, at least 10% of the
total amount of its net premium during the preceding calendar
year.
3. In no case shall the margin of solvency be less than P500,000.00.
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3.1. If the requirement is not met, the insurance company is not receipts and disbursements, as well as the basis therefor, for the next succeeding
permitted to take on any new risk and no dividends can be 3 years.
declared by the deficient company.
OTHER PROVISIONS
LIQUIDATION OF INSURANCE COMPANY
BANCASSURANCE
If the company is determined by the Commissioner to be insolvent, or cannot
resume business, he shall, if public interest so requires, order its liquidation RA 10607 introduced provisions governing bancassurance.
(Section 256).
Such term shall mean the presentation and sale to bank customers by an
This should be distinguished from a situation where a conservator is appointed insurance company of its insurance products within the premises of the head
when the Commissioner finds that a company is in a state of continuing inability office of such bank duly licensed by the BSP, or any of its branches under rules
or unwillingness to maintain a condition of solvency or liquidity adequate to protect and regulations which the Commissioner and the BSP may promulgate.
the policy holders and creditors. The conservator will take charge of the
management of the insurance company (Section 255). To engage in a bancassurance arrangement, a bank is not required to have equity
ownership of the insurance company. No insurance company shall enter into a
REVOCATION OF CERTIFICATE OF AUTHORITY bancassurance arrangement unless it possesses all the requirements as may be
prescribed by the Commissioner and the BSP.
Grounds:
No insurance product, whether life or non-life, shall be issued or delivered
(a) The company is in an unsound condition; pursuant to a bancassurance arrangement, unless in the form previously
(b) That it has failed to comply with the provisions of law or regulations approved by the Commissioner (Section 375).
obligatory upon it
(c) That its condition or method of business is such as to render its Personnel tasked to present and sell insurance products within the bank premises
proceedings hazardous to the public or its policy holders; shall be duly licensed by the Commissioner and shall be subject to the rules and
(d) That its paid-up capital stock, in the case of a domestic stock regulations of this Act (Section 376).
corporation, or its available cash assets, in the case of a domestic
mutual company, or its security deposits, in the case of a foreign
company, is impaired or deficient;
INSURANCE COMMISSIONER
(e) That the margin of solvency required of such company is deficient.
JURISDICTION AND ADJUDICATORY POWERS
The Commissioner is authorized to suspend or revoke all certificates of authority
granted to such insurance company, its officers and agents, and no new business 1. The Insurance Commissioner has, among other functions, concurrent
shall thereafter be done by such company or for such company by its agents in jurisdiction with the courts for claims under any kind of policy or contract
the Philippines, while such suspension, revocation or disability continues or until of insurance where the amount of the loss, damage or liability, excluding
its authority to do business is restored by the Commissioner. interest, costs, attorney’s fees does not exceed P100,000.00.
Before restoring such authority, the Commissioner shall require the company
concerned to submit to him a business plan showing the company’s estimated

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NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,
Bar Qs & As, and Other Review Materials on Insurance
1.1. With the increase in the jurisdictional amounts for the courts, Note: However, the Commission has no jurisdiction to decide the legality of a
that of the Insurance Commissioner was not increased. Hence, contract of agency entered into between an insurance company and its agent.
the court with which he as concurrent jurisdiction refers to the The same is not covered by the term “doing or transacting insurance business”
MTC. under Section 2, neither is it covered by Section 439, which grants the
Commissioner adjudicatory powers.
2. The filing with the Commissioner shall preclude civil courts from taking
cognizance of a suit over the same subject matter. However, this does
not preclude a claimant who has filed an action with the courts from
pursuing an administrative action against the insurer simultaneously.

3. Decisions are appealable to the CA within 30 days by notice of appeal.

This matter is now open to question.

The Commissioner has the power to adjudicate disputes relating to an insurance

company’s liability to an insured under a policy. A complaint or claim filed with
such official is considered an “action” or “suit” the filing of which would have the
effect of tolling the suspending the running of the prescriptive period.

Concurrent jurisdiction (with regular civil courts) over cases where any single
claim does not exceed P5,000.00 involving liability arising from:

(a) Insurance contract;

(b) Contract of suretyship;
(c) Reinsurance contact;
(d) Membership certificate issued by members of mutual benefit association
(Section 439).

Primary and exclusive jurisdiction over claims for benefits involving pre-need
plans where the amount of benefits does not exceed P100,000.00 (Section 55,
Pre-Need Code).

For the purpose of proceeding under its adjudicatory powers under the Insurance
Code, the Commissioner or any officer thereof designated by him, is empowered
to administer oaths and affirmation, subpoena witnesses, and compel their
attendance, take evidence and require the production of any books, papers,
documents or contracts or other records which are relevant or material to the
inquiry (Section 439).

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