CHAPTER I

INTRODUCTION

A. Insurance Law in Legal Education

Insurance law has not been popular among legal scholars

here and abroad. It has never been the staple diet of law students
or a favorite subject in legal periodicals. It does not have the
constant invocation and application of tort law nor the lure and
appeal of criminal law; neither does it have the formidable
challenges of constitutional law nor the seminal appeal of newly
developing laws, such as space law, environmental law, gender
sensitivity law and even terrorism law, among others.*

B. Origin and Growth of Insurance

On the history and origin of insurance, an extensive

discussion may be found in Trennery, Origin and Early History of

*Typical, perhaps, is the lament and observation of Professor Jeffrey W. Stempel,

William S. Boyd School of Law, University of Nevada, that "insurance law
scholars and teachers feel with a mixture of paranoia and justification, that
insurance law simply does not receive its proper respect in the hierarchy of legal
education and law generally" (Nev. L, J. 287, Summer, 2002). A more incisive
comment comes from Judge Richard A. Posner, to the effect that "many legal
scholars who today are breathing the heady fumes of deconstruction,
structuralism, moral philosophy, and the theory of the second best would be
better employed.., synthesizing the law on insurance" (See 100 Harv. L Rev. 761
at 777 [1987).
2 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Insurance (1926), cited in VANCE (1951). Considering the

hazards of navigation with which maritime commerce was carried
on, and from the extensive practice of bottomry and respondentiain
ancient maritime commerce, gradually emerged the law of marine
insurance - the earliest form of insurance business.1 Apparently,
insurance appears to have a history that goes back to the
Babylonians, but became dearly established among the town
guilds of Europe by the fourteenth century when every ship
owner and merchant in Italy was required by the state to
contribute two percent of the profits of each voyage to a common
fund from which to pay losses when they occurred. Eventually,
the practice of paying premium in exchange for insurance
coverage was conceptualized by Italian capitalists who were
willing to guaranty against losses upon the payment of a small
consideration. The word "policy" appears to be a testament to the
Italian origin of insurance. It is derived from the word "poliza"
which is Italian for "folded writing."

The credit for the introduction of insurance business in

England is attributed to the Lombards, the sea merchants from
northern Italy who founded trading houses in London. The rapid
growth of international trade engaged in by these sea merchants
led to the introduction of new commercial mechanisms like bills of
exchange and the development of recognizably modem methods
of insurance. This trade naturally involved enormous financial
risks and insurance enabled these risks to be shared among others
similarly exposed to those risks. Accounts indicate that as early as
the seventeenth century, the Edward Lloyd's Coffee House in
Tower Street, London, became the hub of insurance transaction,
where those who sought insurance and those who provided it

I VANCE, pp. 7-21. A paper, written by W.S. Holdsworth of St. John's College,
Oxford, entitled "The Early History of the Contract of Insurance," may be found
in XVII Columbia Law Review (February, 1917), pp. 85-113. This paper traces
the evolution, as far back as the early years of the 14th Century of such a contract.
Some reference books have indicated what may be called "traces of insurance"
from early benevolent societies among the Egyptians, the Chinese, the Hindus,
and the Roman Collegia. See Tremmery, 2ocit.
 CHAPTER I: INTRODUCTION 1 3

could conduct their business. Seafaring men billeted in Lloyd's

passed around slips of papers detailing a description of their
vessels and cargoes, while the merchants in the group wrote the
amount they were willing to be liable for as insurer. The practice
gave rise to the use of the term "underwriter." The business
successfully flourished, and in the late eighteenth century, the
famous "Lloyd's Policy" was adopted as the standard form of
marine insurance by the English Parliament and despite many
criticisms, has remained the basis of the modem marine insurance
contract. The insurance company, Lloyd's of London, was
eventually incorporated in the late nineteenth century, and to this
day continues to be an important player in the insurance
2
business.

Tracing the origin or "birth" of insurance and its

development into current practices and rules is not merely to lay
down a chronology of events, nor to lay down tomes of data from
antiquity and determine which of those data most closely can be
considered to have given birth to the concept of insurance. Much
more significant is the relevance to current jurisprudence of
centuries-old practices and rules. The merchants who plied the
seas had their own laws and they knew that these must be obeyed
or there could be no satisfactory commerce. It can be said that
maritime law, for thousands of years, lived an independent life, a
3
law created by traders and not by rulers, yet observed by all.
Among these are some laws and principles which have become
part of current laws. As earlier mentioned, the practice of bottomry
and respondentia in ancient maritime commerce is an aspect of the
real and hypothecary nature of maritime law. A loan on bottomry
is made upon the security of the vessel, while a loan on
respondentia is made upon the security of the cargo. Both loans
depend upon the safe conclusion of the voyage. The practice of

2See COUCH, [Link]., Sec. 1.1; KEETON & WIDISS, [Link], Sec. 2.1; also, LOWRY
& RAWLINGS, Insurance Law. Doctrines & Principles,p. 1
3WORMSER, Rene A., The Law: The Story of Lawmakers and the Law We have
Lived By, pp. 497-501 ("Origins of Commercial and Maritime Law")
4 I THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

"general average" contribution from owners of other interests

benefited by the sacrifice, like, for instance, a jettison of cargo to
save the voyage, was a device for the limited distribution of loss -
a practice which is recognized even now in the Code. The so-
called real and hypothecary nature of maritime law and the
doctrine of limited liability of the shipowner or agent, both of
which are validly recognized today, had their origins in the
prevailing conditions of the maritime trade and sea voyages
during the medieval ages, with innumerable hazards and perils.
To offset against these adverse conditions and to encourage
shipbuilding and maritime commerce, it was deemed necessary to
confine or limit the liability of the owner or agent arising from the
operation of a ship only to the vessel, equipment, and freight.4

The development of fire, life and accident insurance

occurred at a later date and at a much slower pace. Fire insurance
was initially looked upon with some disfavor; while life insurance
was looked upon with religious underpinnings, and was deemed
immoral. It was only at the latter part of the nineteenth century
when fire insurance, then life insurance, gradually and eventually
gained acceptance. 5

At present, insurance products have multiplied at a

remarkable pace. The number and types of risks that can be
insured have grown from the rudiments of marine insurance to
what, at present, encompass practically every conceivable form or
kind of risk that may be encountered in modem life. One will
now find political risk insurance, identity insurance, malicious
mischief insurance, business interruption insurance, credit
insurance, professional liability insurance and innumerable types

4 See PhilppineShipping Co., v. Garcia,6 Phil 281 (1906); Abueg v. San Diego, 77
Phil. 730 (1946); Yangco v. Laserna, 73 Phil. 320 (1941); Manila Steamship v. Insa
Abdulhaman, 101 Phil. 381 (1986), cf. Chua v. Intermediate Appellate Court; 166
SCRA183 (1988); Heirs of De Los Santos v. CA, 186 SCRA 49 (1980); and Aboitiz
Shipping v. New India Assurance, 488 SCRA 563 (2006)
s VANCE, [Link]., pp. 19-21.
 CHAPTER I: INTRODUCTION 1 5

of liability insurance 6, and even sabotage and terrorism insurance,

as well as one of recent vintage, "warranty insurance for the green
market"

Incidentally, "casualty insurance" is covered by a single

section of the Insurance Code, Section 174, but covers practically
all kinds of insurance covering loss or liability from accident or
mishap. Because of the very nature of insurance, it has become an
integral and important part of modem-day living and of doing
business. In Chapters II and VII of this work are species or kinds
of insurance indicating the almost inexhaustible types created by
insurance companies to serve their clientele. Insurance affords
protection to businesses and individual lives, as well as security to
those who may not actually suffer any loss, the threat of such loss
being somehow tempered by the protection provided by an
insurance coverage.

C. Growth of Insurance in the Philippines

It may be recalled that in the case of Insular Life v.

Feliciano,7 Justice Jose P. Laurel aptly described the growth, even
then, and significance of the insurance business in the Philippines,
to wit:

"The phenomenal growth of insurance from

almost nothing a hundred years ago to its present
gigantic proportion is one of the outstanding marvels
of present-day business life. The demand for
economic security, the growing need for social
stability, and the clamor for protection against the
hazards of cruel-crippling calamities and sudden

6 A decision of the State of Georgia Appellate Court considered as insurance a

contract to indemnify the sponsor of a golf tournament for its loss of a prize for a
player for making a "hole-in-one." See Golf Marketing Inc. v. Atlanta Classic Cars,
Inc. 245 Gas. App. 720; 528 S.E. 2d 809 (2000)
7 73 Phil. 201 (1941)
6 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

economic shocks, have made insurance one of the felt

necessities of modem life."

Currently, from the records of the Insurance Commission,

it appears that marine insurance was first introduced in the
country when Lloyd's of London appointed Strachen, Murray and
Co. as agents for the Philippines. In 1906, the first domestic non-
life insurance company Yek Tong Lin Fire and Marine Insurance
Co. Ltd. was organized. It continues to be in business under the
corporate name, Philippine First Insurance Co. The year 1898
heralded the entry of Sun Life Assurance Co. of Canada as the
first life insurance company in the Philippines. In 1910, Insular
Life Assurance Co., Inc. was established as the first domestic life
insurance company.

Latest figures indicate that for the year ending December

31, 2012, there were 110 insurance companies authorized by the
Insurance Commission to transact business in the country,
composed of 4 composite, 29 life, 76 non-life and 1 reinsurance
company. Also given licenses were 28 mutual benefit
associations, 2 trusts for charitable uses and 21 pre-need
companies.8 The Insurance Commission also issued during the
year licenses/accreditations for 46,030 insurance intermediaries
and technical support entities (ordinary agents, general agents,
brokers, underwriters, resident agents, actuaries and adjusters.)

Finally, the Annual Report of the Insurance Commission

for the year 2011 contains significant figures dealing with what is
referred to as the "insurance penetration rate." 9 The figures show

8Annual Report of the Insurance Commission dated December 16, 2013 for the
year ending December 31, 2012.
9 This rate indicates the level of development of the insurance sector and is
calculated by finding the ratio between the total amount of premiums
underwritten for the year and the country's gross domestic product. This figure
essentially measures the contribution of the income generated by the industry to
the income generated by industries within the country as a whole. Refer to Table
3 of the Report on Philippine Economic Indicators.
 CHAPTER I: INTRODUCTION 1 7

that while the insurance industry has been experiencing steady

growth over the past few years, the industry is still not quite as
developed as in neighboring countries. This may indicate a
relative lack of awareness or confidence among Filipinos of the
benefits of transferring risk by investing in insurance.

The total premium income and net premiums written as of the

end of 2012 for the life insurance sector amounted to P120.30
billion, a 39.32% increase from the P86.35 billion income of 2011.10

D. Laws Governing Insurance

Before July 1, 1915, the Spanish Code of Commerce and the

Civil Code of 1889 governed insurance transactions in the
Philippines. On December 11, 1914, the Insurance Act (Act No.
2427) was enacted and took effect on July 1, 1915.

Act No. 2427 was superseded by P.D. 612, otherwise

known as the then Insurance Code, enacted on December 19,1974
which was later codified and consolidated by P.D. 1460 (1978)
with all then existing laws on insurance. This latest P.D. was
further amended by Batas Pambansa 874 in 1985. Currently,
Republic Act 10607, approved on August 15, 2013, is the
governing law on insurance. R.A. 10607 was published in the
Philippine Star on September 5, 2013 and took effect on September
20, 2013 (R.A. 10607 shall hereafter be cited in this work as the
Code.) As ruled by the Supreme Court, for deficiencies in the
Insurance Code, the Civil Code of the Philippines (1950) is given
suppletory effect."

10 Rid p. 8.
11 See Gercio v. Sun L'fe Assurance of Canada, 48 Phil. 54 (1925); Ang Giok Chip v.
Springfield, 56 Phil. 375 (1931), and more recently, Philippine Health Care v.
Commissioner of Internal Revenue, 600 SCRA 413 (2009), footnote 21 on our
adoption of the construction given by the courts of the State from which we
based our law on insurance.
8 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Other special laws dealing with various aspects of the

insurance business are the National Health Insurance Act of 2013
(Republic Act No. 10606, amending Republic Act No. 7875),
endeavoring to make essential social services available to all
people at affordable cost;" the Revised Government Service
Insurance Act of 1997 (Republic Act No. 8291) covering
government employees; the Social Security Act (Republic Act No.
8282) dealing with employees in the private sector; the Property
Insurance Law (Republic Act No. 656, as amended by P.D. 245)
dealing with government property; and the Philippine Deposit
Insurance Act of 1963 (Republic Act No. 3591), as amended. Other
special laws cover, among others, crop insurance, cooperative
insurance, and even insurance for Barangay Officials and
personnel. The Government Service Insurance Act (GSIS) and the
Social Security Act (SSS) may be considered "social insurance,"
which is compulsory in nature, to distinguish them from "private"
insurance, which is essentially voluntary in nature.

E. The Insurance Commissioner

The Insurance Commissioner, under Section 437 of the

Code, exercises exclusive administrative supervision over
insurance companies, mutual benefit associations and trusts for
charitable uses. He has the duty to see that all laws relating to
insurance companies and other insurance matters are faithfully
executed. Under RA 9829 (December 3, 2009) all pre-need
companies are now under the primary and exclusive supervision
and regulation by the Office of the Insurance Commission.12

In addition to administrative powers, the Commissioner

has the power to adjudicate claims and complaints involving any
loss, damage or liability for which an insurer may be answerable
under any kind of policy or contract of insurance, or under a
contract of suretyship, or a contract of "reinsurance", when the

12 See discussion infra

 CHAPTER 1:INTRODUCTION 1 9

amount being claimed or sued upon does not exceed in any single
claim P5,000,000.00.13

13Section 439. Code. See discussion in Chapter KX dealing with "Claims

Settlement"
 CHAPTER II

THE CONTRACT OF INSURANCE

A. Definitions

Insurance is generally understood to be an arrangement

for transferring and distributing risks. Many authors are hesitant
to give a precise definition of the term. Variations in such
definition are primarily semantic. 14 Moreover, the uncertainty as
to the precise scope of regulatory statutes caused by broad
definitions of "insurance" as well as what constitutes "doing an
insurance business" has resulted in quite a number of disputes.15
There is, however, some degree of acceptability that insurance is
essentially a contract by which one party (the insurer), for a
consideration that is usually paid in money, either in a lump sum
or at different times during the continuance of the risk, promises
to make a certain payment, usually of money, upon the
destruction or injury of "something" in which the other party (the
16
insured) has an interest.

On the matter of definitions, the Code provides the

following:
"Sec. 2. Whenever used in this Code, the
following terms shall have the respective meanings

14 See KEETON & WIDISS, op. cit. Sec. 1.1(b)

I KEETON & WIDISS, Sec. 8.3(a), pp. 942-943
16 COUCH, op. it., Sec. 1.6., citing, among others, State v. Blue Crest Plans,Inc 421
N.Y.S. 2d 579 (1979)
 CHAPTER II: THE CONTRACT OF INSURANCE 1 11

hereinafter set forth or indicated unless the context

otherwise requires:

(a) A contract of insurance is an agreement whereby

one undertakes for a consideration to indemnify
another against loss, damage or liability arising
from an unknown or contingent event.

A contract of suretyship shall be deemed to be an

insurance contract, within the meaning of this
Code, only if made by a surety who or which, as
such, is doing an insurance business as hereinafter
provided.

(b) The term doing an insurance business or transacting

an insurance business, within the meaning of this
Code, shall include:

(1) Making or proposing to make, as insurer, any

insurance contract;

(2) Making or proposing to make, as surety, any

contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;

(3) Doing any kind of business, including a

reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;

(4) Doing or proposing to do any business in

substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of this Code.

In the application of the provisions of this

Code, the fact that no profit is derived from
12 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the making of insurance contracts, agreements

or transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business."

A number of decisions of State courts in the United States

have ruled, however, that the character of insurance is not to be
determined by the nomenclature used or the manner or mode of
affording insurance. The dominant purpose of the agreement
between the parties, as reflected by the risk or contingency
insured against is usually determinative of the nature of
insurance.17 As will be discussed in the topic "Contracts for
Contingent Benefits," there are a number of factors to be
considered whether a particular arrangement between the parties
is a contract of insurance, suretyship, or something else.
Warranties and so-called "pre-need plans" easily come into mind.

From the very definition found in the Code, a contract of

insurance (incidentally, copied almost verbatim from Section 22 of
the California Insurance Code), has the following elements:

(1) Insurable interest - the insured possesses an

interest of some kind which the event insured
against may cause loss or damage;
(2) Peril insured against;
(3) Risk of loss or damage being assured by the
insurer;
(4) Consideration - the premium paid by insured; and,
(5) Risk-distributing scheme - (though not in the
definition, is the primary or basic element of

17 COUCH, Sec. 1.8 and cases cited therein, including Insurance Company of North
America v. Commissioner of Insurance,334 Mass. 108,134 N.E. 2d. 423 (1956)
 THE CONTRACT OF INSURANCE I 13
CHAPTER I1:

insurance) the assumption of risk by the insurer is

part of a general scheme to distribute (not merely
"transfer") losses among persons having similar
risks.

B. Characteristics of an Insurance Contract

(1) Aleatory - Under Article 2010 of the Civil Code, in an

aleatory contract "one of the parties or both reciprocally
bind themselves to give or to do something in
consideration of what the other shall give or do upon the
happening of an event which is uncertain or which is to
occur at an indeterminate time."

Being an aleatory contract does not necessarily mean a

"contract of chance." As VANCE puts it, "in a wagering
contract, the parties contemplate gain through mere
chance; in a contract of insurance, the parties seek to
distribute possible loss by reason of mischance."18

(2) Executory and conditional - After the payment of the

premium, the contract becomes wholly executed on the
part of the insured. However, it is executory on the part of
the insurer and conditional in the sense that it is only when
the event insured against happens that the insurer
becomes liable to pay the insured. Simply put, once
perfected, the contract is executed as to the insured
although still executory as to the insurer until such time
the insurer becomes liable to pay the insured.

(3) A contractof adhesion - Contracts of insurance come in

printed forms prepared by the insurer. There is hardly any
negotiation on the printed terms and conditions.
Nonetheless, contracts of adhesion have been declared as

i8 VANCE, p. 93
14 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

binding as ordinary contracts, the reason being that the

party who adheres to the contract is free to reject it
entirely. Such agreement is not per se inefficacious. As can
be seen later, any doubt or ambiguity is construed,
however, against the insurer and in favor of the insured. 19

(4) A personal contract - The contract of insurance is

basically between the insurer and the insured. It does not
follow the property covered such that when a person
acquires an insured property, he does not ipsofacto acquire
any right over the insurance contract. Upon strict analysis,
it is not the property which is insured but the rights of the
insured, the intention being to avert any loss or damage
that the insured might sustain because of a covered risk to
the property.

(5) A contractof uberrimaefides - The contract requires the

highest degree of good faith in both the insurer and the
insured. 20 This characteristic feature of an insurance
contract will be more extensively discussed in the topics of
concealment and misrepresentation.

(6) A voluntary and consensual contract - The parties, as

long as they act in good faith, may incorporate such
provisions and conditions as they choose. This is covered
by Article 1306 of the Civil Code dealing with the so-called
"principle of autonomy of contracts."

(7) A synallagmatic contract, or one where the parties have

reciprocal obligations - In his dissenting opinion in UCPB

19 See South Pachem Dev. [Link], 449 SCRA 85 (2004) for definition of a contract of
adhesion. Hereafter is a discussion on "Interpretation and Construction of
Insurance Contracts," infra.
20 VANCE, op. dt. p. 100. This is understandable as insurance started with
marine insurance where the vessel or the cargo or both were not available for
inspection. The parties rely on disclosures and representations. See also, Stipcich
v. Metropolitan Life, 277 U.S. 311.
 CHAPTER I1: THE CONTRACT OF INSURANCE 1 15

General Insurancev. MasaganaTelamart (356 SCRA 307), Mr.

Justice Vitug strongly argued that a contract of insurance
being synallagmatic, the insured has the critical and highly
important obligation of paying the premium as his
obligation, reciprocating the conditional obligation of the
insurer to pay the proceeds upon the occurrence of the
event insured. It has been mistakenly argued that when
the peril insured against does not arise, the insured does
not receive anything in return for the premium paid and,
thus, there is no reciprocity. The insured actually receives
"coverage" or "protection" from the date of effectivity of
the contract of insurance.

C. Contracts for Contingent Benefits or Services; Pre-Need

Plans and Similar Arrangements

Some contractual arrangements easily resemble insurance

as they may contain what are traditionally considered elements of
insurance. Often, purveyors of goods assume risks which may
occur in the future relative to those goods. That the amount of
service to be rendered over a given period is uncertain and
dependent on future events does not render the agreement for
such services necessarily one of insurance. It appears that there is
no judicial unanimity in considering as insurance such contractual
arrangements for payment, or to provide services in the future,
unless, of course, declared by statute as insurance.

Whether a contractual arrangement is insurance would naturally

determine what laws or regulation apply, whether a license to sell
insurance has to be obtained and what agency or office governs
such arrangements. Controversies often arise as a consequence of
disputes over the applicability of regulatory measures.
16 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Warranty for Goods Sold or Services Rendered

Easily the least controversial in contracts for contingent

benefits are arrangements involving a warranty given by the seller
or dealer in respect of the goods sold or services to be performed
incidental thereto. These arrangements oftentimes give rise to the
issue of whether the same constitute insurance or not as they do
involve the element of risk transference. As a general statement, a
warranty that covers extended service contracts within the scope
of goods sold for defects that likely existed in the goods at the
time of sale is not an insurance contract, while a warranty that
goes materially beyond the goods, or beyond defects in the goods
to compensate for losses due to causes unrelated to the general
merchantability of the goods is an insurance contract. 21

Where the seller of goods agrees to indemnify the

purchaser for loss or damage due to, or caused by, inherent
weakness of the goods sold, the agreement does not amount to
insurance. However, if the agreement to indemnify covers perils
outside of, or unrelated to the quality of the goods sold, the
agreement is substantially one of insurance. 22

Thus, where a dealer undertook to guarantee the tires sold

against defects in material or workmanship without limit as to
time, mileage, or service, and further expressly guarantees them
against "blowouts, cuts, bruises, rim cuts, under inflation, wheels
out of alignment, faulty brakes or other road hazards that may
render the tire unfit for further service," or contracts to indemnify
the purchaser "should the tire fail within the replacement period"
specified, without limitation as to the cause of such failure, the
warranty or guaranty is insurance. Similarly, where a store selling
21
See Rayos v. Chrysler Credit Corp., 683 SW2d 506 (1985). See, also PATTERSON,
Sec. 1, p. 10.
22 See Mein v. United States Car Testing Co., 115 Ohio App. 145, 184 N.E. 2d 489;
Duffy v. Western Auto Supply Co., 16 N.E. 2d 256, 119 [Link] 1236; Douglas v.
Dynamic, 315 Ark. 575, 869 S.W. 2d 14 (1994). See KEETON & WIDISS, pp. 949-
950.
 CHAPTER II: THE CONTRACT OF INSURANCE I 17

watches agreed with the purchaser to replace the watch lost

through certain hazards (e.g. snowstorm, floods, or fire which
may raze the purchaser's house) within a year of purchase was
held to be a contract of insurance.23 But a "lifetime" termite
treatment agreement, whereby the exterminator assumed
responsibility for the treatment of reappearing termites or to
replace damaged property, was not considered insurance. 24

Likewise, services of lawyers to their clients under the

usual "retainer" contracts which, in consideration of periodic
payments, agree to represent the client in any and all litigations,
whether brought by or against such client, are not insurance.
While the risk of a suit against the client, or the need to prosecute
in the future, may be an uncertain "contingent" event, there is,
strictly speaking, no "indemnity" for loss or damage which the
client may suffer. In fact, the client may not even win his case
and, still, the retainer contract subsists.

Pre-Need Plans

A few years back, a lot of attention has been focused on so-

called "pre-need" plans. These are contracts which provide for
the rendering of services or payment of money to plan holders or
their beneficiaries when the actual need for such payment or
rendition of services accrues. The attention generated comes from
the grave concern of the plan holders about the stability and
liquidity of the companies which will provide the future services
or payments.

23 Ollendof Watch Co. v. Pink 270 N.7. 32,17 N.E. 2d. 676 (1938). The New York
Court of Appeals rejected the contention that the contract was but a warranty,
stating that a warranty does not cover a hazard having nothing to do with the
make or quality of the watch.
24 Boyle v. Orkin Extenninating Co., 578 S. 2d 786 (1991); See COUCH, Sec. 1:20.
18 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Concededly, people want to provide for their future needs

by setting aside small amounts over a certain period of time
(usually during a time when they are very much capable of
earning) such that when the need arises to actually shoulder the
cost of such future services or to make payments for them, the
plans would take care of such costs and the payments for such
services.25

Since 1978, entities selling or marketing such plans are

under the supervision of the Philippine Securities and Exchange
Commission (SEC), not by the Office of the Insurance
Commission. 26 There was, however, a move to place those entities
under the Office of the Insurance Commission as a result of the
inability of some of those entities to make good their obligations,
especially in connection with "open-ended" educational plans.
This happened when tuition fees such entities agreed to shoulder
dramatically increased, sometimes by as much as 1000%. The
unforeseen rise in tuition fees and other expenses brought down
some of the entities which sold them.

Memorial or burial plans are pre-need plans but are not

considered as insurance but pure service contracts in which the
price paid is intended to correspond to the benefits contracted for.
A memorial or burial plan is really a pre-need purchase of
services. The argument raised in support therefor is that the risks
involved in pre-need plans are definite - the ever increasing costs
for such services. However, in view of the fact that those services
are to be rendered in the event of the death of the person who
bought, or for whom the plan was bought, raises some questions
on whether such plans are really insurance and not only a pre-
need purchase of services. 27 There may be statutes which declare
25
See discussion, infra, on the Pre-Need Code.
26
See the New Rules on the Registration of Pre-need Plans under Section 16 of
the Securities Regulation Code. Note, however, that while the Revised Securities
Act includes pre-need plans in the definition of "contracts," the Securities
Regulation Code does not mention pre-need plans in its definition of that term.
2
7See COUCH, pp. 1-65.
 CHAPTER THE CONTRACT OF INSURANCE I 19
I1:

such memorial plans as insurance;28 however, absent statutory

provisions, such plans are, as yet, definitively not considered as
insurance. Incidentally, companies selling these pre-need plans
claim that these are really investments.

In Philamlife Health Systems, Inc. (PHSI) v. Court of Appeals

and Julita Trinos,29 the Supreme Court First Division passed upon a
health care agreement. Ernani Trinos, deceased husband of
claimant, applied for a health care coverage with PHSI. The
application was approved for a period of one year (renewed twice
for one year period each), which entitled Ernani to hospitalization
benefits, whether ordinary or emergency, listed in the agreement.
He was also entitled to avail of "out-patient benefits" such as
annual physical examinations, preventive health care and other
out-patient services. During the period of coverage as last
renewed, Ernani suffered a heart attack and was confined at the
Manila Medical Center. While still confined, his wife tried to
claim the benefits under the agreement. PHSI denied the claim
saying that the agreement was void on the ground of concealment
of applicant's state of health. The wife paid all hospitalization
expenses, including those incurred at the Chinese General
Hospital where Ernani was later confined and subsequently died.
The wife sued PHSI and both the trial court and the Court of
Appeals ordered reimbursement.

Before the Supreme Court, PHSI raised the primary

argument that a health care agreement is not an insurance contract
and, hence, the "incontestability clause" 30 under the Insurance
Code does not apply. The Supreme Court, relying heavily on the
definition of a contract of insurance in Section 2(1) of the
Insurance Code, found the health care agreement was "in the

28
See Harrisonv. Tanner-PoindexterCo.. 187 Ga.678, 1 S.E. 2d 646 (1939). See also,
43 AM JUR 2d for conflicting views.
29379 SCRA 356 (2002).
30
See discussion on "Incontestability Clause," infra, under "Concealment and
Misrepresentation."
20 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

nature of non-life insurance which is primarily a contract of

indemnity."

The ruling is not beyond question considering the fact that

the agreement provides for out-patient benefits as well as
preventive health care services. The element of contingency is not
very clear. Nonetheless, it will be noted that in the United States,
variations on the terms and overall structure of health care
programs have undergone drastic changes and have a very wide
market, 31 so much so that the health care agreement is no longer
considered beyond the coverage of insurance.

In the case of Blue Cross Health Care, Inc. v. Olivares32,

Olivares applied for a health care program with Blue Cross. In the
agreement, ailments due to pre-existing conditions were excluded
from coverage. Barely 38 days from the effectivity of her health
insurance, Olivares suffered a stroke and was admitted in one of
the hospitals accredited by Blue Cross. Olivares requested Blue
Cross for a representative to settle her medical bills but Blue Cross
refused pending the submission of a certification from her
attending physician that her stroke was not caused by a pre-
existing condition.

The Supreme Court reiterated its ruling in the Philamcare

Health case, stating that both cases involve health care agreements
which are in the nature of a non-life insurance. Thus, the rule in
insurance contracts that "when their terms contain limitations on
liability, they should be construed strictly against the insurer" is
equally applicable to health care agreements. The burden of
proving exception to liability rests on the insurer. Not having
been able to discharge the burden, it cannot now deny its liability.

31 See COUCH, Section 1:24

32 544 SCRA 580, (2008)
 CHAPTER I1: THE CONTRACT OF INSURANCE 1 21

In the 2008 case of Philippine Health Care Providers vs.

Commission of Internal Revenue, 3 the Commission of Internal
Revenue (CIR) sent Philippine Health Care a formal demand letter
for deficiency VAT, including Documentary Stamp Tax (DST)
assessments, surcharges and interest, on the basis that a health
care agreement was a contract of insurance.

Philippine Health Care is a domestic corporation whose

purpose is to operate a prepaid group practice health care
delivery system or a health maintenance organization to take care
of the sick and disabled persons enrolled in their health care plan.
People enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic
and curative medical services by its duly licensed physicians,
specialists and other professional technical staff participating in
the group practice health delivery system at a hospital or clinic
owned, operated or accredited by it. The health care agreement
includes among others provisions for in-patient services, out-
patient services and emergency care.

The Court of Tax Appeals held that Philippine Health

Care's health care agreement was in the nature of a non-life
insurance contract subject to DST. It was Philippine Health Care's
contention that its health care agreement is not a contract of
insurance but a contract for the provision on a prepaid basis of
medical services, including medical check-up. The Supreme
Court (First Division), however, held that Philippine Health Care
does not actually provide medical or medical services but merely
arranges for the same and pays for them up to the stipulated
maximum amount of coverage. Further, Philippine Health Care
does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is,
among all the other members of the health care program, which
clearly is insurance.

33554 SCRA 511 (2008)

22 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

But in September 18, 2009, acting on motions for

reconsideration, the Supreme Court en banc reversed and declared
that Philippine Health Care is not engaged in the business of
insurance. The Supreme Court, in arriving at this ruling, applied
the "principal object and purpose test" which is based on
American case law.34 The test determines whether the assumption
of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the
organization or whether they are merely incidental to its business.
If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance. This test
forwards the argument that a corporation, whose main object is to
provide the members of a group With health services, is not
engaged in the insurance business. Further, the mere presence of
risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment
made directly to the provider of these services. Thus, although
Philippine Health Care assumes the risk of paying the cost of
these services even if significantly more than what the member
has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.

The Court also took note of the fact that a significant

portion of Philippine Health Care's services covers preventive and
diagnostic medical services, which are programs that are designed
to prevent or to minimize the possibility of any assumption of risk
on its part. Hence, its goal is dearly not to indemnify its members
against any loss or damage arising from a medical condition but
to provide the health and medical services needed to prevent such
loss or damage. And though it appears that Philippine Health
Care provides insurance-type benefits to its members as in their

34Citing the seminal case of Jordan v. Group Health Association (107 F. 2d 239),
where the Court of Appeals, District of Columbia, ruled that the association was
not engaged in insurance as it was "primarily for the disbbution of health care
services rather than the assumption of insurance risks." (600 SCRA 413,428).
 CHAPTER I1: THE CONTRACT OF INSURANCE I 23

curative services, these are merely incidental to the principal

activity providing them medical care.

Since the objective is to provide medical services at

reduced cost, it does not distribute risk like an insurer and only
undertakes business risk. The Court said that although risk is a
primary element of an insurance contract, it is not necessarily true
that risk alone is sufficient to establish it because almost anyone
who undertakes a contractual obligation always bears a certain
degree of financial risk. Indeed, the petitioner undertakes the risk
that it might fail to earn a reasonable return on its investment but
this type of risk is not the risk of the type peculiar only to
insurance companies.

Finally, the Court clarified that the cases of Blue Cross

Health Care v. Olivares and PhilamcareHealth Systems, Inc. v. CA are
not on all fours with the present case because those cases did not
involve the interpretation of a tax provision. Instead, they dealt
with the liability of a health service provider to a member under
the terms of their health care agreement. Such contracts, as
contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO.

A couple of months after the promulgation by the

Supreme Court of its resolution declaring the questioned health
care agreement before it does not constitute an insurance contract,
Congress enacted the Pre-Need Code of the Philippines (Republic
Act 9829) on December 3, 2009. The law intends to address the
numerous complaints of holders of educational plans against the
providers on their obligations. The providers, as mentioned
earlier, could not service the plans they issued considering the
exponential rise in tuition fees and other school expenses which
these providers agreed to shoulder under the plans.

The main thrust of the Pre-Need Code is to place the pre-

need companies under the supervision and control of the
24 I THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

Insurance Commission, instead of the Securities and Exchange

Commission. Sections 2 and 5 of the Pre-Need Code declare the
policy of the law, as well as the agency/offices which would
regulate pre-need companies in the following provisions:

"Section 2. Declaration of Policy. - It is the

policy of the State to regulate the establishment of
pre-need companies and to place their operation on
sound, efficient and stable basis to derive the
optimum advantage from them in the mobilization of
savings and to prevent and mitigate, as far as
practicable, practices prejudicial to public interest and
the protection of planholders."

xxx

"Section 5. Supervision. - All pre-need

companies as defined under this Act, shall be under
the primary and exclusive supervision and regulation
of the Insurance Commission. The Commission is
hereby authorized to provide for its reorganization, to
streamline its structure and operations, upgrade its
human resource component to enable it to effectively
and efficiently perform its functions and exercise its
powers under this Code."

Not surprisingly, nowhere in the Pre-Need Code is a

declaration that pre-need contracts are contracts of insurance.
Thus, pre-need plans are defined as "contracts, agreements, deeds
or plans for the benefit of the planholders which provide for the
performance of future service/s, payment of monetary
considerations or delivery of other benefits at the time of actual
need or agreed maturity date, as specified therein, in exchange for
cash or installment amounts with or without interest or insurance
coverage and includes life, education, interment and other plans,
instruments, contracts or deeds as may in the future be
determined by the Commission." Note that the consideration
 CHAPTER THE CONTRACT OF INSURANCE I 25
I1:

given by the planholder is "cash or investment amounts with or

without interest or insurance coverage."

A pre-need company may not engage as such without a

license issued by the Insurance Commission. The license,
however, expires one (1) year from the time of registration,
although renewable yearly (Section 10, RA 9829.) Under the
Implementing Rules and Regulations of the Code (IRR), a pre-
need company may be licensed and authorized to issue any or all
of the following plan types: (i) educational; (ii) pension; and (iii)
life or memorial plan (Section 10, IRR).

Protection and Indemnity Clubs

In PandimanPhilippines,Inc. v. Marine ManningManagement

Corporation,34 the Supreme Court had occasion to deal with, albeit
not very incisively, the status of the so-called "Protection &
Indemnity Club" (P & I Club) which is actually "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 favor of third parties." 35 The case involves claims for
benefits arising from the death of a chief cook on board a
merchant vessel. The vessel and its crew were insured with
Ocean Marine Mutual Insurance Association Limited (Mutual), a
P & I Club of which the owner of the vessel is a member. Mutual
transacted business in the Philippines through its local
correspondent Pandiman Philippines (Pandiman.) The deceased
was hired by Fullwin Maritime Limited (Fullwin) through its local
agent in the Philippines, Marine Manning Management
Corporation (Manning.) The widow filed the claim with
Manning, which referred said claim to Pandiman, which
favorably considered the claim and recommended payment.

34460 SCRA 418, (2005)

35
See Hyopsung Maritime Co. v. Court of Appeals, 165 SCRA 258 (1988).
26 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Not having received any payment, the widow filed a case

before a Labor Arbiter of the National Labor Relations
Commission (NLRC.) The Labor Arbiter dismissed the case
against Pandiman; however, the dismissal was reversed by the
NLRC which absolved Manning and held Pandiman and Mutual
solidarily liable. The Court of Appeals sustained the NLRC.

The Supreme Court considered the protection and

indemnity agreement as an insurance contract. The issue,
however, was whether Pandiman was an insurance agent or
merely the correspondent of the P & I Club. It appears that the
Court of Appeals held Pandiman as an insurance agent under
Section 300 of the 1978 Insurance Code. Actually, the insurer is
Mutual. The Supreme Court, however, found nothing in the
records to indicate that Pandiman negotiated the contract of
insurance; however, the claim of Pandiman to be the local
representative or correspondent of the P & I Club was, in effect,
sustained.36

To be distinguished from Pandiman is the case of White

Gold Marine Services, Inc. v. Pioneer Insurance and the Steamship
Mutual Underwriting Association (Bermuda) Ltd.37 The undisputed
facts of the case are as follows:

White Gold Marine Services, Inc. (White Gold) procured a

protection and indemnity coverage for its vessels from the
Steamship Mutual Underwriting Association (Bermuda) Limited
(Steamship Mutual) through Pioneer Insurance and Surety
Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance. Pioneer also issued receipts
evidencing payments for the coverage. When White Gold failed
to fully pay its accounts, Steamship Mutual refused to renew the
coverage.

36 For a discussion of the precise nature of the "P & I Club", see Hernandez,
Phih'ppine Admiralty & Maritime Law pp. 733 to 736.
37 464 SCRA 448, (2005)
 CHAPTER II: THE CONTRACT OF INSURANCE I 27

Steamship Mutual thereafter filed a case against White

Gold for collection of a sum of money to recover the latter's
unpaid balance. White Gold, on the other hand, filed a complaint
before the Insurance Commission claiming that Steamship Mutual
violated Sections 186 and 187 of the Insurance Code, while
Pioneer violated Sections 299, 300 and 101 in relation to Sections
302 and 303 thereof.

The Insurance Commission dismissed the complaint. It

said that there was no need for Steamship Mutual to secure a
license because it was not engaged in the insurance business. It
explained that Steamship Mutual was a P & I Club. Likewise,
Pioneer need not obtain another license as insurance agent and/or
a broker for Steamship Mutual because Steamship Mutual was not
engaged in the insurance business. Moreover, Pioneer was
already licensed, hence, a separate license solely as agent/broker
of Steamship Mutual was already superfluous.

Respondents, while admitting that Steamship Mutual is a

P & I Club, claimed that it is not engaged in the insurance
business, its primary purpose being to solicit and provide
protection and indemnity coverage and, for this purpose, it has
engaged the services of Pioneer as its agent

Both the Insurance Commission and the Court of Appeals

held that there was no violation of the Insurance Code. The
Supreme Court, however, ruled that a P & I Club is "a form of
insurance against third party liability where the third party is
anyone other than the P & I Club and the members."3 8 The
Supreme Court relied on Section 2(2) of the Insurance Code on
what constitutes "doing an insurance business" and ruled that
Steamship Mutual and its agent, Pioneer, must secure licenses and
authorizations to do business as insurer and insurance agent,
respectively.

38 Citing BENNETT, The Law of Marine Insurance, p. 236 (1966).

28 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

D. Kinds of Insurance Contracts under the Code

As mentioned in the introductory chapter of this work,

insurance products have multiplied at a remarkable pace such
that the kinds or types of risks that can be insured against
encompass practically every conceivable event. It is quite strange,
then, that Chapter II of the Code, dealing with "Classes of
Insurance" is somewhat misleading, in the sense that the Code
appears to limit the classification of insurance to cover marine
(Title 1), fire (Title 2), casualty (Title 3), suretyship (Title 4) and life
(Title 5).

In general, insurance may easily be broadly classified as

either life or non-life. Insurance other than life can be considered
as non-life and will include all kinds of property and all forms of
liability which, as a contingent event, may be covered by
insurance. Such liability may be contractual or one arising from
accidents or mishaps under Section 176 on "Casualty Insurance."

Aside from the classification in the Code, contracts of

insurance may likewise be classified as to whether coverage is
voluntary or compulsory. Examples of laws providing for social
insurance are the Government Service Insurance Act covering
government employees and the Social Security Act covering
employees in the private sector. Under Republic Act No. 7875, a
National Health Insurance Program was adopted and a National
Health Insurance Fund was created. This program was aimed at
providing for social insurance covering not only GSIS and SSS
members but eventually all Filipino citizens. To this end, the
Philippine Health Insurance Corporation or PHILHEALTH has
been established to administer the fund.

On the basis of the nature of the interest being protected,

insurance may be one which is referred to as "first party
insurance," the contract being for the loss which the insured
suffers directly; or one referred to as "third party insurance,"
 CHAPTER THE CONTRACT OF INSURANCE I 29
I1:

wherein the interest actually being protected is that of a third

party and whose interest suffers damage or loss caused by the
insured. This is popularly known as liability insurance, a species
of insurance covering an infinite variety of liabilities which an
insured may incur. The most common of this kind of insurance is
professional liability insurance (those procured by doctors,
contractors, homeowners, employers, businessmen and others too
39
numerous to mention.)

For purposes of this work, the main classification made by

the Code will be followed hereunder, with a more exhaustive
discussion in Chapter VII, infra, dealing with "Risks and
Coverages."

(1) Life Insurance

Under Section 181, life insurance is defined as "insurance

on human lives and insurance appertaining thereto or connected
therewith." A second paragraph has been added by RA 10607 to
the then Insurance Code of 1978, as follows:

"Every contract or undertaking for the payment of

annuities including contracts for the payment of lump sums under
a retirement program where a life insurance company manages or
acts as a trustee for such retirement program shall be considered a
life insurance contract for purposes of this Code."

Under Section 182, "an insurance upon life may be made

payable on the death of the person, or on his surviving a specified
period, or otherwise contingently on the continuance or cessation
of life."

In addition, the Code, in the same Section 182, second

paragraph, considers "every contract or pledges for the payment

39 See VANCE, COUCH and KEETON & WIDISS, which respectively treats the
various types of insurance not only on the basis of risk and of interest protected.
30 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

of endowments or annuities" a life insurance contract. Article

2021 of the Civil Code provides: "By the aleatory contract of life
annuity, the debtor binds himself to pay an annual pension or
income during the life of one or more determinate persons in
consideration of a capital consisting of money or other property,
whose ownership is transferred to him at once with the burden of
the income."

The common law definition of an annuity is generally

stated to be "a yearly sum stipulated to be paid to another in fee,
or for life or years, and chargeable only on the person of the
grantor." Annuities, as used at present, are much broader and
include contracts to make periodic payments at monthly or other
intervals.40 As stated by Mr. Justice Murphy of the U.S. Supreme
Court in Halvering v. le Giersa "the fact remains that annuity and
insurance are opposites; x x x one neutralizes the risk customarily
inherent in the other x x x insurance looks to longevity, annuity to
transiency." 41 Under Philippine Law, the Civil Code, Articles 2022
to 2027 provide detailed rules to govern annuities.

The Code contains, likewise, provisions for special kinds of

life insurance, such as group life and industrial life insurance.
Sections 181 and 182 cited above, deal with individual life
insurance. Section 234, on the other hand, without defining group
life insurance, mandates that certain provisions, as enumerated in
said section, must be substantially included in a policy of group
insurance. The insurance usually consists of the group policy or
master contract, the policyholder's application therefor, and the
individual applications, if any. The premium for group life
insurance is, by the terms of the master policy, paid by the
policyholder, who is usually the employer, the insurance being
considered as a "non-contributory plan." However, the insured
sometimes contribute a certain amount to be applied to the
premium, deductible from the wages due the employee and the

40
See VANCE, Chapter 17, pp. 1020-1021.
41312 U.S. 531, 85 L Ed. 9% (1941)
 THE CONTRACT OF INSURANCE 1 31
CHAPTER I1:

arrangement now being referred to as a "contributory plan."

Thus, generally, the contracting parties in a group life insurance
policy are the employer and the insurance company.

In Pineda v. Court of Appeals and the Insular Life Assurance

Co.,42 our Supreme Court ruled that in a group insurance policy,
the employer is the agent of the insurer, citing decisions of the
California Supreme Court.43 As aptly described by the Supreme
Court, the coverage terms for group insurance are usually stated
in a master agreement or policy that is issued by the insurer to a
representative of the group or to an administrator of the insurance
program, such as an employer. The employer acts as a
functionary in the collection and payment of premiums and in
performing related duties. Likewise falling within the ambit of
administration of a group policy is the disbursement of insurance
payments by the employer to the employees. Although the
employer may be the titular or named insured, the insurance is
actually related to the life and health of the employee.

Industrial life insurance is defined in Section 235 to mean

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

42 226 SCRA 754 (1993)

43Elfstrom v. New York Life Insurance Co., 432 P. 2d 731 (1967); citing Neider v.
ContinentalAssurance Co., 35 So. 2d 237 (1948). In the latter case, the California
Supreme Court stated that the "employer owes to the employee the duty of good
faith and due care in attending to the policy, and that the employer should make
dear to the employee anything required of him to keep the policy in effect and
the time that the obligations are due. In its position as administrator of the
policy.. .any omission of duty to the employee.. .should be attributed to the
insurer."
32 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In individual policies, the insured person or entity is

essentially the party purchasing the insurance, while in group
policies, there is an inherent middleman, usually an employer, but
sometimes a union, business association or similar organization
44
playing some role in the transaction.

On individual life insurance, the following are some of the

plans available in the market:

(a) Whole life plan - The insured pays premium at

specified regular intervals (quarterly, semi-
annually or annually) for as long as he is alive;

(b) Limited payment plan - The obligation to pay

premium is limited to a specified period, usually
ten or twenty years. The insurance is considered
fully paid when the specified number of premium
payments have been made. If he survives the
period, there is no more obligation to pay
premiums but the individual remains insured;

(c) Term plan - The insured is covered or insured

only for a specific period of time and with the lapse
of such period the policy expires or lapses.
However, there can be provisions for renewal but
with a corresponding increase of premiums for the
new term;

(d) Pure endowment plan - Under this plan, the

insured pays premiums for a specified period of
coverage. If the insured survives the period, the
insurer pays the insured the face value of the
policy. If, however, the insured dies before the
period expires, the insurer is released from liability;

44 See COUCH, supra, Sec. 1.2. See also KEETON & WIDISS.
 CHAPTER II: THE CONTRACT OF INSURANCE I 33

(e) Endowment plan - The insurer pays the value of

the policy to the insured in the event he outlives
the period fixed. However, should the insured die
during the endowment period, his beneficiaries get
the proceeds of the policy.

There may be other plans which an insurer may adopt as

part of its marketing strategy and based, naturally, on actuarial
studies. Thus, a plan may provide for a very much lower
premium during the first three or five years; thereafter, the
premiums dramatically increase.

To be distinguished from all of the foregoing is what is

known as "tontine insurance" which is based upon survivorship
among a number of individuals. A tontine contract of insurance is
more than a policy of life insurance since, in addition, it is an
agreement to hold all the premiums collected for the duration of
the tontine period.45

(2) Non-Life or Property Insurance

(a) Fire Insurance - Under Section 169, the term "fire

insurance" shall include insurance against loss by fire,
lightning, windstorm, tornado or earthquake and other
allied risks, when such risks are covered by extension to
fire insurance policies or under separate policies.

(b) Marine Insurance - Under Section 101, marine

insurance includes loss or damage to vessels, goods,
cargoes and other properties exposed to risks or perils of
navigation, as well as marine protection and indemnity
insurance, meaning insurance against, or against legal
liability of the insured for loss, damage, or expense

45 See Equitable Lfe Assurance v. M/nn, 137 Ky. 641, 126 S.W. 153. See, also, 43
Am. Jur 2d,Section 15.
34 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

incident to ownership, operation, chartering,

maintenance, use, repair, or construction, of any vessel,
craft or instrumentality in use of ocean or inland
waterways, including liability of the insured for personal
injury, illness or death or for loss of or damage to the
property of another person.

(c) Suretyship - Under Section 177, a contract of

suretyship is "an agreement whereby a party called the
surety guarantees the performance by another party
called the principal or obligor of an obligation or
undertaking in favor of a third party called the obligee. It
includes official recognizances, stipulations, bonds or
undertakings issued by any company by virtue of and
under the provisions of Act No. 536, as amended by Act
No. 2206." Note that under the second paragraph of
Section 2(a) of the Code,46 a contract of suretyship shall
be deemed to be an insurance contract "only if made by a
surety who or which, as such, is doing an insurance
business."

(d) Casualty or Liability Insurance - Under Section 174,

"casualty insurance is insurance covering loss or liability
arising from accident or mishap, excluding certain types
of loss which by law or custom are considered as falling
exclusively within the scope of other types of insurance
such as fire or marine. It includes, but is not limited to,
employer's liability insurance, workmen's compensation
insurance, public liability insurance, motor vehicle
liability insurance, plate glass insurance, burglary and
theft insurance, personal accident and health insurance as
written by non-life insurance companies, and other
substantially similar kinds of insurance."

4
6Supra.
 CHAPTER I1: THE CONTRACT OF INSURANCE I 35

E. Constructiol/Interpretation of Insurance Contracts

An insurance policy is a contract and, thus, subject to the

terms and conditions thereof. One of the most fundamental
principles of the law on contracts is the right of the parties to
establish and stipulate the terms and conditions they may deem
convenient, subject only to the condition that such are not
contrary to law, morals, good customs, public order or public
47
policy.

While the parties may agree upon the provisions of a

contract of insurance, it is inevitable that there may be a need to
interpret or construe such provisions where there is some
ambiguity in order to ascertain the intention of the parties. The
Insurance Code does not contain special provisions dealing with
rules on interpretation or construction. Insurance contracts are,
thus, to be construed by the same principles governing contracts
in general.48 The following decisions of the Supreme Court
illustrate the interpretation or construction made regarding the
terms or conditions of insurance contracts.

Strict Implementation of Terms

The Civil Code provides that when the terms of a contract

are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control. The
first set of cases provides illustrations of when the contract
presents no ambiguities in its terms and there is therefore no need
for interpretation. In such cases, the Court will strictly apply the
terms of the policy.

47 Article 1306, Civil Code; Jurado, Comments and Jurisprudenceon Obligationsand

Contracts, 10t ec., 1993, pp. 359-364
48 See Artides 1370 to1379 of the Civil Code.
36 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In Cebu Shipyard and Engineering Works and Engineering

Works (CSEN) v. William Lines, 49 the Supreme Court saw no
necessity to extend or enlarge the contract to include an
interpretation outside the original contemplation of the parties.

William Lines owned a luxury passenger-cargo vessel

worth approximately P45,000,000. It caught fire and sank while
undergoing dry-docking and repairs within the premises of
CSEW. The vessel was insured with Prudential Guarantee
(Prudential) at the time of the fire, and was particularly covered
for loss or damage of vessel through negligence of ship repairmen.
William Lines promptly filed a claim with Prudential, and the
latter paid P45,000,000 in benefits. Prudential thereafter filed a
complaint for damages (having been subrogated to the rights of
William Lines) against CSEW for the insurance benefits it paid to
William Lines.

CSEW claimed that there can be no right of subrogation as

it was a co-assured under the subject insurance policy and that
under the dry-docking repair agreement, the owner of the vessel
has to maintain insurance on the vessel during the period of
repair. The Supreme Court negated this claim and held that:

"...the intention of the parties to make each

other a co-assured under the insurance policy is to
be gleaned principally from the policy itself, and
not from any other contract or agreement because it
is the policy which designates who the assured and
the beneficiary are under the contract. The hull
and machinery insurance procured by William
Lines from Prudential named only "William Lines,
Inc." as the assured. There was no manifestation of
any intention to constitute CSEW as a co-assured.
It is axiomatic when the terms of a contract are clear, its
stipulations control. Thus, when the insurance

49 306 SCRA 762 (1999).

 CHAPTER I1: THE CONTRACT OF INSURANCE j 37

policy involved named only William Lines as the

assured thereunder, the claim of CSEW that it is a
co-assured is unfounded."

Hence, the Supreme Court affirmed the decision of the trial court
and the Court of Appeals, and ordered CSEW to pay Prudential
P45,000,000.

In the case of New Life Enterprisesv. Court of Appeals,50 the

stocks in trade of a partnership were insured with three insurance
companies. When the insured properties were gutted by fire, all
three insurance companies denied the claims for payment of the
partnership on the ground of violation of the "Other Insurance
Clause" uniformly contained in all three policies and which
requires the insured to give notice of any insurance or insurance
already effected or will be subsequently effected covering the
insured stocks in trade. Under the clause, failure to give the
required notice will cause the forfeiture of all claims under the
policy. Since the coverage by other insurance subsequently
arranged by the partnership were neither stated nor endorsed in
the policies of the three insurers, the Supreme Court held that all
benefits under each policy were forfeited. The Court ruled that
the terms of contract are clear and unambiguous such that "when
the words and language of documents are clear and plain or
readily understandable by an ordinary reader thereof, there is
absolutely no room for interpretation or construction anymore."

In First Quezon City Insurance Co. v. Court of Appeals,51 a

passenger lost his balance and fell from a De Dios Marikina
Transportation Company (DMTC) bus when the latter sped
forward at high speed and was dragged along the asphalted road
until the driver realized what had happened and abruptly
stopped the bus. The passenger sustained severe and extensive

50 207 SCRA 669 (1992). Cf. Verandia v. Court of Appeals, 217 SCRA 417 (1993),
similarly involving multiple policies.
51218 SCRA 526 (1993)
38 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

lacerations on his right leg which required nearly P80,000 in

medical fees. Upon discharge from the hospital, he sued DMTC
and its insurer, First Quezon City Insurance Co. (First Quezon
City Insurance) for damages. The trial court ordered DMTC to
pay the passenger the full amount of his hospitalization fees, and
First Quezon City Insurance to indemnify DMTC in the sum of
P12,000. The Court of Appeals modified this decision and instead
ordered First Quezon City Insurance to indemnify DMTC the
amount of P50,000.

In upholding the decision of the trial court, and not that of

the Court of Appeals, the Supreme Court said that:

"...[t]he insurance policy clearly placed the

maximum limit of the First Quezon City's liability for
damages at P12,000 per passenger and its maximum
liability per accident at P50,000. Since only one
passenger was injured in the accident, the insured's
liability is pegged to the amount of P12,000 only.
What does the limit of P50,000 per accident mean? It
means that the insurer's maximum liability for any
single accident will not exceed P50,000 regardless of
the number of passengers injured therein. For
example, if ten passengers had been injured, the
insurer's liability would not be P120,000 (at the rate of
P12,000 per passenger) but would be limited to only
P50,000 for the entire accident, as provided in the
insurance contract. DMTC may not recover from the
insurance company more than P12,000 per passenger
killed or injured, or P50,000 per accident even if
under the judgment of the court, DMTC will have to
pay more than P12,000 to the injured passenger."

In an early case, Misamis Lumber Corporation v. Capital

Insurance & Surety Co., Inc.,52 the Supreme Court highlighted the
application of the strict interpretation rule. A Ford Falcon car

5217 SCRA 228 (1966).

 CHAPTER II: THE CONTRACT OF INSURANCE 1 39

owned by Misamis Lumber Corporation (Misamis Lumber), and

insured for P14,000 with Capital Insurance & Surety Co., Inc.
(Capital Insurance), was damaged in an accident. Misamis
Lumber immediately had the car repaired at a total cost of
P302.27. Thereafter, it made a claim for insurance benefits
amounting to the full amount of the cost of the repair. Capital
Insurance maintained that its liability is limited to P150 pursuant
to the clear wording of the policy, to the effect that "the
authorized repair limit is P150."

The lower court ordered Capital Insurance to pay P302.27

to Misamis Lumber. It reasoned that to do otherwise would
render the contract one-sided in favor of the insurer. On appeal,
the Supreme Court set aside the judgment of the trial court and
upheld the contention of Capital Insurance limiting its liability to
P150. The Court, speaking through Justice J.B.L Reyes, said:

"The literal meaning of the stipulation on

authorized repair limit must control, it being the
actual contract, expressly and plainly provided for in
the policy. The lower court's legal hermeneutics is
not called for because the policy is clear and specific
and leaves no room for interpretation. The
interpretation given is even unjustified because it
opposes what was specifically stipulated. Thus, it
will be observed that the policy drew out not only the
limits of the insurer's liability but also the mechanics
that the insured had to follow to be entitled to full
indemnity of repairs. The option to undertake repairs
is accorded to the insurance company by the policy.
Capital Insurance was deprived of the option because
the insured took it upon itself to have the repairs
made and only notified the insurer when the repairs
were done. As a consequence, paragraph 4 which
limits the insurer's liability to P150 applies.
40 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The insurance contract may be rather onerous

(one-sided as the lower court put it), but that in itself
does not justify the abrogation of its express terms,
terms which the insured accepted or adhered to and
which is the law between the contracting parties."

In Sun Insurance Office Ltd. v. Court of Appeals, 3 the

Supreme Court strictly applied the literal construction rule when
it denied the claim of the insured on account of the failure of the
latter to file the same within one year from the date of first
rejection by the insurer. Even if the insured and the insurer
continued communicating on the subject matter, the insured still
requested reconsideration of the initial rejection.

In Oriental Assurance Corporation v. Court of Appeals, 54

Panama Sawmill Co. (Panama) procured a marine insurance
policy for the transport of 2,000 cubic meters of apitong logs. It
was a "total loss only" policy. The logs were loaded on two
barges, with each barge containing 1,000 cubic meters of logs. In
transit, one of the barges was severely damaged by rough seas
and strong winds, resulting in the loss of nearly all of the 1,000
cubic meters of logs loaded therein. Panama demanded payment
for the loss but the insurer, Oriental Assurance Corporation
(Oriental) refused on the ground that the policy provided for total
loss only. Both the trial court and the Court of Appeals upheld
Panama's position and said that "the insurance contract should be
liberally construed in order to avoid a denial of substantial justice,
and that the logs loaded in two barges should be treated
separately such that the loss sustained by the shipment in one of
them may be considered as constructive total loss." 5 5

53 195 SCRA 193 (1991)

54 200 SCRA 459 (1991). See discussion on "Marine Insurance," infra.
ss Total loss includes "constructive total loss" which occurs when the loss or
damage amounts to 75% of the value of the property covered by a marine
insurance, is damaged. See Sections 131 and 141 of the Code, infra.
 THE CONTRACT OF INSURANCE 1 41
CHAPTER I1:

The Supreme Court overturned this position and stated

that:

"The terms of the contract constitute the

measure of the insurer's liability And compliance
therewith is a condition precedent-to the insured's
right to recovery from the insurer...The insurer's
liability was for "total loss only."...In the absence of
either actual or constructive loss, there can be no
recovery by the insured Panama."

In Fortune Insurance & Surety Co. v. Court of Appeals, 56 the

insured, Producers Bank lost P725,000 when its armored van was
robbed while traversing Taft Avenue en route to its head office. It
appears, however, that the driver of the van and the security
escort of the same were somehow involved in the robbery. For
this reason, Fortune Insurance & Surety Co. (Fortune Insurance)
refused to pay the claim of Producers Bank for the loss it incurred.
The insurer invoked the "Exceptions Clause" of the policy which
provided that
"The Company shall not be liable under this
policy, in respect of any loss caused by any dishonest,
fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representatives of the insured whether
acting alone or in conjunction with others."

The trial and appellate courts ruled in favor of the insured

and held the insurer liable for the loss. They based their decision
on the finding that the driver and the security guard were not
employees of the bank, and, hence, the exception clause of the
policy does not apply.

56244 SCRA 308 (1995).

42 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The Supreme Court held that the insurance company is

exempt from liability under the policy. The Court noted that in
burglary, robbery, and theft insurance, insurers often exclude
risks arising from people who are in the insured's service and
employment. According to the Court, "in such cases, the terms
specifying the excluded classes are to be given their meaning as
understood in common speech." Thus, the Court interpreted the
term "employee" as "any person who qualifies as such as
generally and universally understood, or jurisprudentially
established," and the term "representative" was defined as "one
who represents others or stands in the place of another." In
having been entrusted with the transfer of the insured's money,
the driver and the security guard were considered by the Court as
the insured's representatives, thereby effectively bringing the
incident within the ambit of the Exceptions Clause.

In the recent case of Gulf Resorts, Inc. v. Philippine Charter

Insurance Corporation,7 the Supreme Court, through Justice Puno,
again applied a literal interpretation of the contract of insurance
therein involved.

The insured is the owner of a resort in La Union, who took

out insurance policies against the risk of loss from earthquake
shock which was extended to the two swimming pools in the
resort. From 1988 to 1989, the insurance policies stated that the
coverage was extended to the two swimming pools only. The
premiums against the peril of earthquake shock paid by the
insured in all of his six insurance policies was of the same amount,
although in the last policy, the shock endorsement provided that
the "insurance covers loss or damages to shock to any of the
property insured by this Policy occasioned by or through or in
consequence of earthquake." This endorsement is the object of the
dispute. When an earthquake damaged the insured's properties,
he claimed that under this endorsement the insurance policy
covered not only two swimming pools but all the properties

57 G.R. No. 156167, May 16,2005.

 CHAPTER I1: THE CONTRACT OF INSURANCE I 43

covered by the policy. On the other hand, the insurer refused to

pay the claim, arguing that the policy only covers the two
swimming pools.

The Court held that only two swimming pools are covered
under the policy. There is no need for the application of the "fine
print" or "contract of adhesion" rule in this case where the intent
of the parties to limit the coverage of the policy to the two
swimming pools only is not ambiguous. This intent was gleaned
from the fact that in the designation of location of risk under the
policy, only the two swimming pools were specified as included
and that the premium payment shows that there was no increase
from the original rates when the policy clearly covered only two
swimming pools. Moreover, the Court was not persuaded by the
insured's argument that the rider attached to the policy which
stated that "the insurance covers loss or damage to any of the
property insured by the policy occasioned by or through or in
consequence of earthquake" meant that there were no
qualifications placed on the scope of the earthquake shock
coverage such that everything is covered. The Court interpreted
the contract using the following principles:

"It is basic that all the provisions of the

insurance policy should be examined and interpreted
in consonance with each other. All its parts are
reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations
cannot be segregated and then made to control;
neither do particular words nor phrases necessarily
determine its character. Petitioner cannot focus on
the earthquake shock endorsement to the exclusion of
the other provisions. All the provisions and riders,
taken and interpreted together, indubitably show the
intention of the parties to extend earthquake shock
coverage to the two swimming pools only."
44 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Furthermore, the Court noted that one of the elements of an

insurance contract under Section 2(1) of the then Insurance Code,
the payment of a premium, as the consideration for the contract,
was complied only with respect to the two swimming pools.
There is no mention of any premium payment for the other resort
properties with regard to earthquake shock. Thus, it is correct to
interpret the endorsement as excluding other properties.

Liberal Interpretationof Terms

On the other hand, where the terms and conditions are

ambiguous and susceptible to various interpretations or
construction, the issue is to be resolved against the insurer, being
the party which prepared the contract. As it has been said,
insurance is a contract of adhesion being presented in hardly
readable print and made by the insurer. Thus, courts justify the
interpretation against the insurer, contra proferentem, or against
one who makes or offers. Moreover, courts are now leaning
towards what they consider as the reasonable expectations of the
parties, more so, that of the insured. Considering such nature of
an insurance contract and the reasonable expectation of the
insured, terms of a contract of insurance are construed liberally in
favor of the insured when there are ambiguities. The liberal
interpretation in favor of the insured and against the insurer is
based on the perceived reasonable expectations of the insured
prompting courts to be reluctant to enforce exclusions and
exceptions; instead, they rule in favor of coverage.

The following decisions of our Supreme Court are

illustrative of a more liberal construction or interpretation of the
terms of a contract of insurance. Where an ordinary lay person
would not misunderstand the coverage or the precise terms and
conditions of the policy, these rulings would not apply.
 THE CONTRACT OF INSURANCE I 45
CHAPTER I1:

In the case of Fieldmen'sInsurance Co. Inc. v. de Songco,5 8 the

Supreme Court sustained the right of the insured to the proceeds
of the common carrier insurance policy he purchased from the
insurer, even though his vehicle is dearly not for public
convenience but is a private jeepney. The Court took cognizance
of the fact that the policy was issued upon the insistence of the
agent that the privately owned vehicle may be covered by a
common carrier insurance contract. The agent even represented
that "whether your vehicle is an 'owner' type or for passengers, it
could be insured because the insurance company is not owned by
the government and the government has nothing to do with their
company."

In upholding the contention of the insured, the Supreme

Court, speaking through Justice Fernando, ruled that:

"It is now beyond question that where

inequitable conduct is shown by an insurance firm, it
is estopped from enforcing forfeitures in its favor, in
order to forestall fraud or imposition on the insured.
This is a case where the doctrine of estoppel
undeniably calls for application. After the insurer
had led the insured to believe that he could qualify
under the common carrier liability insurance policy,
and to enter into contract of insurance paying the
premiums due, it could not thereafter, in any
litigation arising out of such representation, be
permitted to change its stand to the detriment of the
heirs of the insured. As estoppel is primarily based
on the doctrine of good faith and the avoidance of
harm that will befall the innocent party due to its
injurious reliance, the failure to apply it in this case
would result in a gross travesty of justice."

W825 SCRA 20 (1968). See also Del Rosario v. EquitableInsurance Co., 8 SCRA 343
(1963).
46 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

But more than estoppel, the Court noted that even if it be assured
that there was an ambiguity in the policy, "ambiguities or
obscurities must be strictly interpreted against the party that
caused them." The Court considered "contracts of adherence" as
reducing a weaker party's participation to the agreement to the
alternative of "take it or leave it." Such contracts "obviously call
for greater strictness and vigilance on the part of the courts of
justice with a view to protecting the weaker party from abuses
and imposition and prevent their becoming traps for the unwary."

In Western Guaranty Corporation v. Court of Appeals, 59 a

passenger bus owned by the insured company struck a crossing
pedestrian. The policy issued by the insurance company provided
for protection against third party liability, indicated in the
Schedule of Indemnities provided for in this policy. The Schedule
of Indemnities provides for specific amounts recoverable under
the policy for the death of, or a corresponding bodily injury
suffered by, a third person or passenger. The insurance company
contends that the Schedule of Indemnities should be read as
excluding liability for other injuries suffered by a third person if
such injuries are not enumerated in the Schedule.

In ruling against the insurance company, the Supreme

Court, speaking through Justice Feliciano, held that "the Schedule
of Indemnities does not purport to limit, or to enumerate
exhaustively, the species of bodily injury occurrence of which
generate liability" for the insurer. The Court believed that the
insurer's reading of the Schedule of Indemnities would limit the
otherwise unlimited scope of liability assumed by it under the
policy, particularly the provision that the insurer will "pay all
sums necessary to discharge liability of the insured in respect.. .of
death, bodily injury or damage to property of any third party."
Finally, the Court reiterated the doctrine that "contractual
limitations of liability found in insurance contracts should be
regarded by courts with a jaundiced eye and extreme care and

59187 SCRA 652 (1990).

 CHAPTER I: THE CONTRACT OF INSURANCE I 47

should be so construed as to preclude the insurer from evading

compliance with its just obligations."

In Rizal Surety & Insurance Company v. Court of Appeals,60

the insurer issued a fire insurance policy covering stocks, raw
materials, and other properties of the insured whilst "contained
and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic)
within own compound."

Fire broke out in the insured's compound, destroying a

two-storey building where machines and spare parts were stored.
The insurer refused to pay the claim, contending that the policy
protected only the contents of the main building described in the
policy and not those included in the two-storey annex building,
which the insured theorized as actually an integral part of the
main building.

The Supreme Court resolved the case by interpreting the

above-quoted stipulation in the policy as not intended to "limit its
coverage to what were stored in the four-span building" and by
h6lding that the two-storey building was not an annex but an
integral part of the main building citing Article 137761 of the Civil
Code and held that the ambiguity in the policy should be strictly
construed against the insurer who drafted it.

In Malayan Insurance Corporation v. Court of Appeals, 62 the

insurer issued two marine cargo policies covering soya bean meal
owned by the insurer. While the vessel carrying the cargo was
docked in South Africa, it was arrested and detained by the civil-
authorities in said country. The insurer denied the claim made by

60 336 SCRA 12 (2000)

61 Article 1377. The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.
62 270 SCRA 242 (1997)
48 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the insured on the ground that arrest of the vessel by civil

authority was not a peril covered by the policies.

The Supreme Court held that the "Perils Clause" in the

policy did not limit the insurer's assumed risks to arrests caused
solely by executive and political acts of the government of the
seizing state thereby excluding arrests caused by ordinary legal
processes. In ruling against the insurer, the Court upheld well-
settled principles of construction, to the effect that "exceptions to
the general coverage are construed most strongly against the
company" in order to avoid forfeiture, "unless no other result is
possible from the language used. If a marine insurance company
desires to limit or restrict the operation of the general provisions
of its contract by special proviso, exception, or exemption, it
should express such limitation in clear and unmistakable
language."

In Geagoniav. Court of Appeals,63 the insured obtained a fire

insurance policy from an insurance company, covering the stock-
in-trade usual to the former's business. The policy contained a
condition which states that "the insured shall give notice to the
Company of any insurance or insurances already effected, or
which may subsequently be effected" covering the same
properties insured, and that failure to give such notice shall cause
the forfeiture of the insured's claim under the policy.

When the insured's stocks-in-trade were completely

destroyed by fire, he filed a claim with the insurance company.
The latter denied the claim because it found that the properties
insured were covered by two insurance policies taken out by the
insured's mortgagee.

The Supreme Court, however, noted that the condition in

the policy, commonly known as the additional or "Other
Insurance Clause," is not free from ambiguity. Thus, the Court

63241 SCRA 152 (1995)

 CHAPTER I1: THE CONTRACT OF INSURANCE I 49

applied the rule that "provisions, conditions or exceptions in

policies which tend to work a forfeiture of insurance policies
should be construed most strictly against those for whose benefit
they are inserted, and most favorably toward those whom they
are intended to operate." The pivotal issue was the fact that the
two insurances were obtained to cover separate interests."

The use of obscure words and phrases has been frowned

upon by courts and issues arising from such use were invariably
construed against the insurer. An old case, Qua v. Law Union &
Rock Insurance Co.65 is most illustrative. The case involved a very
substantial amount of insurance covering four bodegas in Albay
used in the hemp business of the insured. Several warranties, in
the form of riders, were claimed by the insurer to have been
breached and, thus, justifying the refusal by the insurer to pay the
proceeds after fire razed the premises. One deals with the fire
hydrant warranty of "not less than one for each 150 feet of
external wall, with not less than 100 feet of hose piping and
nozzles for every two hydrants...the hydrants being supplied
with water pressure by a pumping engine.. .capable of
discharging at the rate of not less than 200 gallons of water per
minute into the upper story of the highest building protected..."
Another was the hemp warranty provision against storage of "oils
(mineral and/or vegetable and/or mineral and/or their liquid
products) having a flash point below 3000 Fahrenheit."

The first warranty was alleged to have been violated

because at the time of the fire there were only two fire hydrants
when there should have been eleven. The Supreme Court
considered the insurer as barred by waiver or estopped for the
reason that the insurer knew fully well that the number of
hydrants never existed from the beginning but issued the policies
nonetheless.

6See discussion on "Multiple or Several Insurable Interests," infra.

63 98 Phil. 85 (1955) with Justice J.B.L Reyes as ponente.
50 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

On the second warranty against storage of oils, the same

was claimed to have been violated by the insured having kept
thirty-six cans of gasoline incident to its business. On this, the
Supreme Court said that- "We see no reason why the prohibition
of keeping gasoline in the premises could not be expressed clearly
and unmistakably, in the language and terms that the general
public can readily understand, without resort to obscure esoteric
expressions (now derisively termed 'gobbledygook').""

Apropos to this statement of Justice J.B.L. Reyes is that made by

a well-known judge in the United States. In Gaunt v. John Hancock
Mutual Life,67 Judge Learned Hand said that "Insurers who seek to
impose upon words of common speech an esoteric significance intelligible
only to theircraft must bear the burden ofany resultingconfusion.

66At p. 94.
67 fcuit Court of Appeah, 160 F. 2d. 599 (1947)
 CHAPTER III

INSURABLE INTEREST

A. Definition and Purpose

An insurable interest is necessary to the validity of a

contract of insurance whatever may be the subject matter insured,
both for reasons of public policy and as a measure of the limits of
recovery. In the early years of insurance, insurable interest was
not required; this was true in marine insurance in sea policies with
the word "interest or no interest" on the face of the policy.68 There
were popular accounts of insurance taken on the lives of those on
trial for capital crimes (whether they would be convicted or not)
or on the lives of famous elderly persons. 69 Today, however, if
there is no insurable interest the contract is void.70 The Code
dearly and emphatically declares:

"Sec. 25. Every stipulation in a policy of

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

66VANCE, Chap. 15, p. 910.

69 See Note 79, infra, on the article of Swisher, "The Insurable Interest
Requirement for Life Insurance," 53 Drake Law Review (Winter 2005) 477.
70 Crotty [Link] Mutual Life (144 U.S. 621, 36 LEd. 566). See also Warnock v.
Davis (104 U.S. 775, 26 L Ed. 924). For decisions of various State courts, see 43
Am. Jur. 2d, p. 963.
52 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Insurable interest, defined in its broadest sense, is that

interest which the law requires a person making a contract of
insurance to have in the thing or person insured so that the
contract may escape the charge of a wagering contract.7" In terms
of the event insured against, it is the relation between the insured
and the risk insured such that the occurrence of the risk will cause
substantial loss or harm of some kind to the insured. 72 The
doctrine of insurable interest requires that there be some
significant relationship between the insured and the person, the
object, or the activity that is the subject of an insurance
transaction.73

The requirement of insurable interest was devised to meet

two purposes: (1) to prevent the contract from being a mere
wager; and (2) to provide a measure of the limits of recovery.

As the above-cited section of the Code provides, wagering

contracts are held void;74 and agreements of insurance of any
subject in which the contracting parties have no interest partake of
this nature.75 As a corollary, this requirement prevents the
temptation of bringing about the event insured against in order to
collect on the policy. The general rule is that the insured must
have an insurable interest at the time of the policy's inception;
otherwise, there can be no insurance if there is nothing to insure.

As to the second purpose, the law also looks at whether

the interest of the insured is grossly disproportionate to the
amount of the insurance, because recovery should be limited to
the extent of his actual interest. The concept that insurance
contracts on property shall confer a benefit no greater in value

7 VANCE, at p. 156.
72 See Patterson, Essentials of Insurance Law, 154 2d ed., (1957).
73KEETON & WIDISS, Sec.3, 1(b), pp. 135-136. See case of Lalican v. Insular I'fe,
597 SCRA 159 (2009) at p. 174, defining what is insurable interest (although issue
was not insurable interest).
74 Nelson v. New Hampshire FireInsurance Co., 263 586 (9th Cir. Idaho).
75 VANCE, op. cit, 156.
 CHAPTER III: INSURABLE INTEREST I 53

than the loss suffered by an insured is usually referred to as the

"principle of indemnity." 76

B. Insurable Interest in Life Insurance

Generally, life insurance policies fall into two classes. One

class consists of those taken out by the insured upon his own life,
either for his own benefit, for the benefit of his estate, or for a
person designated as his beneficiary. In another class belong
those which are taken out upon the life of another. The person
upon whose life an insurance is taken is the cestui que vie.

The Code provides that every person has an insurable

interest in the life and health:

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

(b) of any person on whom he depends wholly or in

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

(c) of any person under a legal obligation to him for

the payment of money, or respecting property or
services, of which death or illness might delay or
prevent the performance; and

(d) of any person upon whose life any estate or

interest vested in him depends."77

In the first class of life insurance policies, those taken upon

one's own life, it is generally conceded that the question of
insurable interest is of so little importance to merit even scant
consideration, and that a man has unlimited insurable interest in

76 KEETON & WIDISS, Sec.3, 1(a), pp/ 134-135. See discussion on "Measure of
Insurable Interest in Property," infra.
77 Section 10, Code.
54 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

his own life.78 Moreover, it is more accurate to say that the

question of insurable interest is hardly material, since a man does
not suffer loss by his own death nor benefit from it. A pure
endowment is, however, a different situation as the insured
definitely benefits from his surviving the endowment period.

The requirement is strikingly different in life insurance

policies taken out upon the life of another. The policy of the law
requires that the assured shall have an interest to preserve the life
of the insured in spite of the insurance, rather than to destroy it
because of the insurance. 9 Thus, the circumstances attending the
making of the contract must be such as to prove the existence of a
bona fide desire and interest on the part of the assured that the life
insured (the cestui que vie) shall continue during its natural term.
These circumstances which evidence that desire are what
constitute insurable interest.

The loss in life insurance can seldom be measured

pecuniarily. Still, a definitive interest of some sort in the life of the
cestui que vie is required. Certainly a person is not allowed to take
out insurance upon the life of a stranger. No court seems to have
attempted to formulate a general rule fixing the degree of
relationship within which an insurable interest exists, but most
decisions are found supportive of the rule that close relationship
by blood or marriage between the insured and the cestui que vie is
sufficient to constitute insurable interest. This is covered by
paragraph (a) of Section 10 of the Code, expressly referring to the
spouse and children of the assured. Relationship by affinity (in-
laws), however, is usually held insufficient by itself to constitute
insurable interest, and in such cases it would help if such relation

78 VANCE, op. cit., pp. 157; 188-192. A recent article, "The Insurable Interest
Requirement for Life Insumnce: A Critical Reassessment" by Professor Peter
Swisher, appears in 53 Drake L Rev. 477 (Winter 2005) and is a valuable critique
on the subject. See, also Warnock v. Davis defining this unlimited insurable
interest as a "reasonable expectation of advantage or benefit from the
continuation of life"
7Rumsey [Link] York Insurance Co., 25 Hawaii 141 (1919).
 CHAPTER III: INSURABLE INTEREST 1 55

is accompanied by a pecuniary interest In so far as support is

concerned, resort must be made to the provisions of the Family
Code regarding persons who are legally entitled to support.80
There are cases, however, where familial relation being absent,
one is actually dependent upon another for education or support.
It is not uncommon for someone to voluntarily, without any legal
obligation, answer for all expenses incident to the education of his
ward. Here, the ward acquires an insurable interest on the life of
his benefactor. In an American case 8' it was held that the
assumption of parental relations, although without any legal
obligation, by a man who sends a girl to school and pays her
expenses was considered sufficient to give her an insurable
interest in his life so as to sustain a policy which he procured and
82
assigned to her.

A person who is related to another, either by contractual or

commercial relation, such that a right held by him might be
prejudiced by the death of the other, may lawfully take out
insurance upon the other's life. Thus, under paragraph (c) of
Section 10 of the Code, a company has an interest in the continuity
of the life of its officers and, therefore, it may procure insurance
on their lives with the company as the beneficiary.8 3 A creditor
80 Under Article 195 of the Family Code, the following are obliged to support
each other, namely: (1) the spouses; (2) legitimate ascendants; (3) parents and
their legitimate children and the legitimate and illegitimate children of the latter;
(4) parents and their illegitimate children and the legitimate and illegitimate
children of the latter; (5) legitimate brothers and sisters, whether of the full or
half-blood. Quer) guardian and ward; foster parent and foster child?
81 Carpenterv. United States Lift InsuranceCo., 161 Pa. 9,28 A 943.
82 Cf. Thomas v. National Benefactors Association, 84 NJL 281, 86 A 375, where a
woman took a girl from an orphan asylum and gave her a home under
circumstances calculated to raise a reasonable expectation of help and care from
said girl during the declining years of the benefactress. The latter was
considered to have an insurable interest in the life of the girl although the latter
was not appointed her guardian.
8
3 In El Oriente Fabricade Tabacos, Inc. v. Posadas, 56 Phil 147 (1931) Malcolm, J., the
life of the manager of the company with 35 years of experience in the
manufacture of cigars, was insured by the said company with itself as
benefidary.
56 1 THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

has an insurable interest in the life of the debtor where the debt is
unsecured but not when the debt is adequately fully secured.

The question has been raised regarding the effect of a

termination of the contractual relationship before the death of the
cestui que vie. Under Section 19 of the Code, insurable interest in
life (as distinguished from insurable interest in property, infraj
must exist only when the insurance takes effect and need not exist
thereafter. Insurable interest is necessary only when the policy is
issued in order to sustain the validity of a life insurance contract.

In some courts in the United States, an employer-

beneficiary is not prevented from receiving the policy proceeds
because the insured's employment was terminated prior to his
death. 84 Even where the insured does not have control of the
policy, the general rule is that the termination of an insurable
interest which existed when the policy was issued will not defeat
the beneficiary's rights. For example, a corporation may continue
a policy on the life of an officer in which the corporation is named
as beneficiary even after the termination of the insured's
connection with the corporation.85 Our Supreme Court has yet to
be squarely confronted with this particular issue. In some courts
of the United States, the appropriateness of continuing to apply
the rule that an insurable interest is only required at the inception,
for life insurance coverage acquired in business situations, has
been questioned where it is evident that the commercial reason for
the coverage has ceased.86

It is widely recognized that a person who takes out

insurance on his own life has the power to designate any
beneficiary, subject only to statutory limitations regarding persons
disqualified to be such (see infra). On the other hand, the

84 Secon v. PioneerFoundingCo., 20 Mich App 30,173 NW2d 788 (1969).

85
See Edwin Patterson, Essentials of Insurance Law, Sec. 36, pp. 162-66 (1935).
86 Bauer v. Bates Lumber Co., 84 N.M. 391, 503 P.2D 1169 (1972); Manhattan Life
Insurance Co. v. Lacy J. Miller, 60 N.C App. 155; 298 S.E.2d 190 (1982).
 CHAPTER III: INSURABLE INTEREST 1 57

beneficiary need not have an insurable interest in the life of the

insured. 87 It is feared, however, that the lack of such requirement
might bring about the moral hazard on the part of the beneficiary
to cause the risk insured against with a view of taking the
proceeds of the policy. The Code, however, provides for a check
against this moral hazard. The beneficiary will not be allowed to
gain the proceeds of the policy where he acts as a principal,
accomplice or accessory in willfully bringing about the death of
the insured under circumstances which would amount to a felony,
his interest to such proceeds being forfeited. 88 Note, however, that
the beneficiary's act must be intentional; thus, the forfeiture shall
not be effected in cases where the beneficiary acts in self-defense,
is insane, or is otherwise justified or exempt from criminal liability
under the Revised Penal Code.

C. Insurable Interest in Property

The Code provides:

"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
89
interest."

Generally, a person has an insurable interest in property

when he sustains such relation with respect to it that he has a
reasonable expectation of benefit to be derived from its continued
existence, or of loss or liability from its destruction. 90 It is
immaterial whether the insured has a title to or possession of the
property, so long as he would sustain a loss by its destruction. 91
8
7See COUCH, Sec. 43; KEETON &WIDISS, Sec. 3.5(b)(i)
88 Section 12, Code.
89 Section 13, Code.
90 VANCE, op. cit., p. 161.
91 Jason's Foods, Inc. v. Peter Eckrich & Sons, Inc., 774 F.2d 214.
58 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Corollary to the provision of Section 25 of the Code, cited

at the beginning of this Chapter, is Section 18 which provides that
"no contract or policy of insurance on property shall be
enforceable except for the benefit of some person having an
insurable interest in the property insured." Thus, in the case of
Cha v. Court of Appeals,92 a lease contract prohibited the lessees
from insuring against fire, chattels, goods or merchandise placed
in the leased premises without the written consent and approval
of the lessor; otherwise, "the policy is deemed assigned and
transferred to the lessor for its benefit."

The spouses Cha, as lessees, notwithstanding the above-

mentioned stipulation, had their merchandise in the leased
premises insured against fire without the written consent of the
lessor. During the term of the lease, the merchandise was gutted
by fire. The lessor demanded the proceeds from the insurer based
on the provision of the lease contract. The insurance company
refused to pay. The lessor filed an action against the insurance
company and the spouses Cha. Both the Regional Trial Court and
the Court of Appeals ruled that the lessor is entitled to the
proceeds. In a petition for certiorari, the Supreme Court set aside
the decision of the Court of Appeals and, instead, awarded the
proceeds to the spouses Cha.

The Supreme Court held that the automatic assignment of

the policy as provided in the lease contract is void being contrary
to law and/or public policy. The Supreme Court noted, however,
that the liability of the spouses for violating the lease contract is "a
separate and distinct issue which we do not resolve in this case."

What ConstitutesInsurable Interest in Property

While Section 13 of the Code defines insurable interest in
property, Section 14 amplifies this definition by providing that

92 Nilo Cha, et al. v. Court of Appeals, et al., 277 SCRA 690 (1997).
 CHAPTER III: INSURABLE INTEREST I 59

such insurable interest in property may consist in: "(a) an existing

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

The enumeration shows that the benefit expected, or the

detriment that is feared, from the existence or loss of the property
insured shall have a legal basis. The basis could be an existing
interest, an inchoate interest or an expectancy; however, the
inchoate interest or expectancy must be founded on an existing
interest. Examples of existing interest are title and possession, as
in the case of an owner, a trustee and an executor. The interest
may be inchoate or an expectancy but founded on an existing
interest. For example, a stockholder has an inchoate interest in the
assets of the corporation, the existing interest being his ownership
of shares. Similarly, a farmer has an insurable expectant interest
in the fruits of trees (over which he has an existing interest)
planted on his land, or for that matter, on crops he expects to
harvest.

On the other hand, an expectant heir cannot insure the

property still belonging to his relative from whom he expects to
inherit. His expectancy in the property may never materialize.
He may be the only heir to an unencumbered property but such
fact does not constitute an "existing interest" which can only arise
"from the moment of the death of the decedent.'93 Prior to such
moment, the property could have been validly sold or transferred
by the decedent by an act inter vivos. A mere naked expectation,
which may be frustrated by the happening of some intervening
event, is not an insurable interest.94

93 Article 777 of the Civil Code, provides: "The rights to the succession are
transmitted from the moment of the death of the decedent"
94
GermanInsurance Co. [Link], 1892 34 Neb. 704, 52 N.W. 401.
60 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Measure of Interest in Propery

A contract of insurance being a contract of indemnity, the

measure of insurable interest must be equal to the value of the loss
or injury on the property suffered by the insured. This is because
the purpose of the contract is to place the insured in the situation
in which he was before the event insured against occurred. Thus,
Section 17 of the Code provides: "[Tihe measure of an insurable
interest in property is the extent to which the insured might be
damnified by loss or injury thereof." A contract of insurance
which gives to the insured more than indemnity for his actual loss
is a wagering contract and is void for being contrary to law and
public policy.

When Interest in PropertyMust Exist

Section 19 of the Code provides that "an interest in

property insured must exist when the insurance takes effect, and
when the loss occurs, but need not exist'in the meantime."
Insurable interest in property must exist both at the inception of
the contract and at the time of the loss. The purpose of the rule is
to prevent the use of insurance for illegitimate purposes. 95 The
insurance contract procured by a person who has no interest in
the property at the time the risk attached is a wagering contract.
The interest must also exist at the time the loss occurs. This is
pursuant to the character of insurance as a contract of indemnity.
Where the insured has no more insurable interest at the time the
event insured against occurs, he can no longer be considered as
having incurred any loss or damage arising from the event.

The Code provides that "the mere transfer of a thing

insured does not transfer the policy but suspends it until the same
person becomes the owner of both the policy and the thing

95 Womble v. Dubuque Fire & MarineInurance. Co., 1941, 310 Mass. 14Z 37 N.E. 2d
263.
 CHAPTER III: INSURABLE INTEREST I 61

insured."9 Thus, where the owner of an insured house sells it and

after such sale the loss occurs, he will not be able to recover on the
policy. The law provides, however, that insurable interest need
not exist in the intervening period, between the effective date of
the policy and the date loss occurs. Where the owner sells his
house after procuring the insurance contract and thereafter
reacquires his interest therein before the loss occurs, e.g., a
repurchase under a pacto de retro sale or in any manner whatever,
he may recover from the policy. 97 Consistent with the foregoing,
the Code provides:

"Sec. 20. Except in the cases specified in the

next four sections, and in the cases of life, accident,
and health insurance, a change of interest in any part
of a thing insured unaccompanied by a corresponding
change in interest in the insurance, suspends the
insurance to an equivalent extent, until the interest in
the thing and the interest in the insurance are vested
in the same person."

The next four sections referred to deal with instances

where the law considers an automatic transfer of interest and,
thus, are considered as exceptions to the general rule that
insurable interest in property must exist both at the assumption of
risk and the occurrence of the loss. These exceptions are covered
by the following provisions of the Code, to wit:

(a) Change of interest after the loss:

"Sec. 21. A change in interest in a thing insured,

after the occurrence of an injury which results in a
loss, does not affect the right of the insured to
indemnity for the loss."

96 Section 58. Again, this situation illustrates the characteristic feature of

insurance as personal to the insured (except as provided in Section 23, infra) and
does not attach to the property as an attribute.
9 Ibid.
62 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Since insurable interest need only exist at the time that the
risk attaches and at the time of the loss,9 8 and the liability of the
insurer attaches at the time of the occurrence of the risk insured
against, Section 21 is not really an exception as a change in interest
is made after the loss. Here the liability of the insurer has already
attached. In effect, the liability of the insurer, having been fixed,
the insured has now a right to assign his claim against the insurer
just like any other money claim. In fact, in some cases where the
loss is only partial for which the insured has acquired a valid
claim on the policy, the insured may transfer or assign whatever
may be left, if any, of the property insured, without affecting his
right to the proceeds for the partial loss incurred.

(b) Separately insured properties:

"Sec. 22. 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."

The effect of change in interest where there are several

things separately insured by one policy depends on whether the
contract was intended as a divisible or an indivisible contract. If
divisible, the properties are separately insured; thus, the violation
of any condition with respect to only one of the properties will not
affect the others. However, if the contract is indivisible, meaning
all things are insured for a gross sum, and a single premium, then
the violation of a condition as to some of the properties will
similarly avoid the others. 99

(c) Change of interest by will or succession:

"Sec. 23. A change of interest, by will or

succession, on the death of the insured, does not
avoid an insurance; and his interest in the insurance

9
8 Section 19, Insurance Code.
" 9See OrientalAssurance v. Court of Appeals, et al., 200 SCRA 459 (1991).
 CHAPTER III: INSURABLE INTEREST I 63

passes to the person taking his interest in the thing

insured."

This provision decrees the automatic transfer of interest in

the property, upon the death of the insured, to the heir, legatee or
devisee who succeeded in his interest on the property. The heir,
legatee or devisee gets the proceeds although he did not have any
insurable interest at the time the insurance was affected.

(d) Co-ownership of property jointly insured:

"Sec. 24. A transfer of interest by one of several

partners, joint owners, or owners in common, who are
jointly insured, to the others, does not avoid an
insurance even though it has been agreed that the
insurance shall cease upon an alienation of the thing
insured."

This section makes a distinction between a transfer or

alienation in favor of a partner or co-owner and a transfer in favor
of strangers or third persons. The latter will avoid the policy,
while the former will not. The rationale for the distinction is that
in the former, there is no effect on the risk because no other party
was brought into the contract. The moral hazard does not
increase just because the purchaser acquires a greater interest in
the property. Note, too, that under this particular section, the
partners are jointly insured. Section 55, on the other hand, deals
with how the insurance was effected, thus: "To render an
insurance effected by one partner or part-owner applicable to the
interests of his co-partners or other part owners, it is necessary
that the terms of the policy should be such as are applicable to the
joint or common interest."

Finally, under Section 57, "a policy may be so framed that

it will insure to the benefit of whomsoever, during the
continuance of the risk, may become the owner of the interest
insured." In effect, this may be considered an exception to Section
64 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

20, designed to support advancing business usages with

"anticipatory insurances" and saved valuable business interest.100

D. Double Insurance and Over-Insurance

The Code defines double insurance as follows:

"Sec. 95. A double insurance exists where the

same person is insured by several insurers separately
in respect to the same subject and interest."

Double insurance exists where there are two or more

insurers insuring the same insured, covering the same subject
matter and interest, and against the same risk.101 Obviously, when
the risks insured differ, or where the interests being insured differ,
there is no double insurance. Where there is double insurance,
and loss occurs, each of the insurers will be liable only up to the
face value of their respective policies. The insured has the option
of choosing the order by which he would file a claim with the
several insurers. 102 However, he can recover his loss only once.
The co-insurers stand in relation to one another in the mutual
relation of principal and surety. The insurer who paid the loss has
a right to recover proportionately from his co-insurers.103

Double insurance is different from over-insurance. Over-

insurance exists where the value of the insurance exceeds the
value of the insurable interest. It does not necessarily mean that
there should be two or more insurers involved. Over-insurance
may occur even if there is only one insurer involved. On the other
hand, double insurance does not necessarily mean that there is
over-insurance. There may be several insurers insuring the same
100 See VANCE, Chap. 4, Sec. 30, pp. 179-183.
101 VANCE, op. cit., pp. 842-843.
102 See discussion on "Multiple or Several Interests," infra; also, see Geagonia
case, infra.
10 3 Sec. 96(a), infra
 CHAPTER III: INSURABLE INTEREST I 65

subject matter and interest, but for as long as their aggregate value
does not exceed the value of the insurable interest, there is no
over-insurance.

Usually, insurers provide in their insurance policies an

"other insurance clause" (sometimes referred to as an "escape
clause") which provides that the insurance shall be avoided if
another policy is outstanding upon the whole or a portion of the
property or is to be procured by the insured without the consent
of the insurer. Such stipulation is valid and enforceable.104 The
purpose of the "other insurance clause" prohibition is to decrease
the moral hazard regarding the risk insured against. The law
recognizes that there might be the temptation to bring about the
destruction of the thing insured or to lessen the care that must be
exercised in preventing the loss if the insured stands in a position
to profit from such an event.

Where over-insurance results from double insurance, the

several policies are not necessarily void. However, the Code
delineates the rights and liabilities both of the insured and the
several insurers, the insured may not, of course, receive more than
his loss:
"Sec. 96. Where the insured is over-insured by
double insurance:

(a) 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;

104 KEETON & WIDISS, [Link], p. 259. See also Ulpiano Sta. Ana v. Commercial
Union Co., 55 Phil. 329 (1930); Pioneer Insurance and Surety Corp. v. Oliva Yap, 61
SCRA 426 (1974); also other cases discussed in Chap. VI, infra dealing with
concealment as ground for rescission of insurance contracts.
66 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

(b) Where the policy under which the insured

claims is a valued policy, any sum received by
him under any other policy shall be deducted
from the value of the policy without regard to
the actual value of the subject matter insured;

(c) Where the policy under which the insured

claims is an unvalued policy, any sum received
by him under any other policy shall be
deducted against the full insurable value, for
any sum received by him under any policy;

(d) Where the insured receives any sum in excess of

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

(e) 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"

There are instances, however, when the several insurers

have agreed to be liable sequentially, the others being liable, if at
all, for the excess or amount beyond the face value of a particular
policy. This is usually referred to as "excess clause" to distinguish
it from the "pro-rata clause."

A contract of insurance is a contract of indemnity.105

Consequently, the insured cannot recover more than the amount
of his insurable interest. Thus, over-insurance is not per se void.
Recovery is allowed only to the extent of the loss or damage
incurred by the insured. This is so, regardless of whether the
insurance is contained in one or several policies. The insured can

103 See discussion on so-called "principle of indemnity,"

 CHAPTER III: INSURABLE INTEREST 1 67

recover only to the extent of his interest pursuant to the "principle

of indemnity". However, the policy may contain a provision
expressly prohibiting such recovery should there be over
insurance. (cf. Sta. Ana case, supra note 105.)

Section 94 applies only where there is over-insurance by

double insurance, that is, the amount of the several insurances
which are contained in different policies exceeds the value of the
insurable interest of the insured. Under Section 96, the principle of
contribution is enunciated, which requires insurers to contribute
ratably to the loss or damage in proportion to the amount for
which they may be liable under the contract, unless there is a
common provision referred to as "excess dause."106 The insured
is given the right to choose as to whom among the insurers he
would go after the first. However, if the policy is an unvalued
one, then he can claim the amount of the loss from only one
insurer and let all the other insurers settle their pro rata
contributions amongst themselves. It must be noted that the
insured who has been fully indemnified for his loss by one or
more insurers cannot file subsequent claims against the others.
He can only claim up to the full amount of his loss under the
"principle of indemnity."

E. Where Multiple or Several Interests are Involved

To be distinguished from double insurance of property are

situations where the insurable interests over the same property
differ from each other and may pertain to several insured.
Leaseholds are situations of such divided interests. Both the
owner or lessor and the lessee have sufficient interests over the
property leased. 107 The destruction of the leased premises may
cause loss or damage to the lessee to the extent that he would be
deprived of a dwelling and/or incur expenses in relocation. A

107 See KEETON &WIDISS, op. c/L, pp, 334-338.

68 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

bailor and a bailee have distinct and separate interests on the

property covered by the bailment. The first, being the owner,
incurs loss to the extent that the liability of the bailee would not
cover the entire loss. The situation where property is "held in
trust" or "on commission" is analogous to property held in
bailment.108 Under the Code, a "carrier or depositary of any kind
has an insurable interest in a thing held by him as such, to the
extent of his liability but not to exceed the value thereof." 109

E. Special Provisions on Mortgagor and Mortgagee

Under the Code, the respective interests of the mortgagor

and the mortgagee are accorded separate treatment. Thus:

"Sec. 8. Unless the policy otherwise provides,

where a mortgagor of property effects insurance in
his own name providing that the loss shall be payable
to the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the
interest of the mortgagor, who does not cease to be a
party to the original contract, and any act of his, prior
to the loss, which would otherwise avoid the
insurance, will have the same effect, although the
property is in the hands of the mortgagee, but any act
which, under the contract of insurance, is to be
performed by the mortgagor, may be performed by
the mortgagee therein named, with the same effect as
if it had been performed by the mortgagor."

The mortgagor and the mortgagee each have separate and

distinct insurable interests in the property insured. The interest of
the mortgagor, as owner of the property, is to the extent of the
value of the property, regardless of whether it equals the

108 bid. See, especially, the topic, "Multiple Interests and Separate Insurance
Policies," pp. 353-355.
109 Section 15.
 CHAPTER III: INSURABLE INTEREST I 69

mortgage debt or not. His interest lies in that the loss or

destruction of the property will not extinguish his mortgage debt.
On the other hand, the interest of the mortgagee is only to the
extent of the debt secured, since the property was offered as
security therefor. Thus, what was insured was not the property,
but his interest thereon as mortgagee, which subsists until the
mortgage debt is extinguished.

The case of Geagonia v. Court of Appeals & Country Bankers

Insurance Corporation"O clearly illustrates the foregoing
disquisitions. The principal issue in this case was whether there
was a violation of the other insurance clause for failure of the
insured to give notice to the insurer of other insurance/s covering
the subject matter.

Aside from the opinion of the Supreme Court that the

provisions of the other insurance clause are not totally free from
ambiguity, the Court ruled that the prohibition therein applies
only to double insurance which exists where the same person is
insured by several insurers separately in respect of the same
subject and interest. The insurable interests of a mortgagor and a
mortgagee on the mortgaged property being distinct and separate,
and the policies in dispute not covering the same interests, no
double insurance exists and, thus, there is no violation of the other
insurance clause.

The mortgagor may take out an insurance policy on the

property either for his own benefit or for the benefit of the
mortgagee. In the former case, he is insuring as owner of the
property, and hence the proceeds will not inure to the benefit of
the mortgagee. In the latter case, the mortgagor takes out an
insurance for the benefit of the mortgagee by making the proceeds
payable, or by assigning the policy to the latter. In this case the
contract is deemed upon the interest of the mortgagor, and he

110 Armando Geagonia v. Court of Appeals, et al., 241 SCRA 152 (1995) with then
Justice Davide as ponente.
70 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

does not cease to be a party to the contract; hence, his acts will
affect the mortgage. However, in case of loss, the mortgagee will
recover the extent of the mortgage debt because he has an
equitable lien on the proceeds.

A standard or "union mortgage clause" makes a separate

and distinct contract of insurance on the interest of the mortgagee;
thus, any act of the mortgagor will not affect the mortgagee.
However, an "open mortgage clause" merely provides for the
payment of loss to the mortgagee to the extent that his interest
may appear. The mortgagee is only made a beneficiary under the
contract, not a party to it. Under the contract, the acts of the
mortgagor will affect the mortgagee.

Section 9 of the Code recognizes the right of the mortgagor

to assign or transfer an insurance policy, to wit:

"Sec. 9. If an insurer assents to the transfer of

an insurance from a mortgagor to a mortgagee, and,
at the time of his assent, imposes further obligation on
the assignee, making a new contract with him, the act
of the mortgagor cannot affect the rights of said
assignee."

Where there is a transfer or assignment of interest, the

assignee substitutes in the place of the original insured with
respect to the right to claim indemnity in case of loss or
destruction of the property. Under the present section, the Code
provides for the effect if the insurer agrees to the transfer of the
policy, and at the time of his assent, imposes new obligations on
the assignee. In such a case, a new contract is created between
them. A new consideration passes from the mortgagee to the
insurer. The consequence is that the acts of the mortgagor can no
longer affect the rights of the mortgagee.
 CHAPTER IV

PERFECTION OF THE CONTRACT OF INSURANCE

A. Consensuality of Contracts of Insurance

When, precisely, is a contract of insurance deemed

perfected or considered to have taken effect and validly binding?
There is no specific provision in the Insurance Code which
categorically answers this issue. Under the Civil Code, a contract
is described as a "meeting of the minds"' and contracts are
perfected by mere consent.1 2 It is axiomatic that for a contract of
insurance to exist, there must be both an offer and an acceptance,
resulting from such "meeting of the minds."113

With about 150 insurance companies authorized by the

Insurance Commission to transact business in the country, and the
thousands of brokers and agents aggressively soliciting business
from the community, with elaborate presentations of the products
of their principals, one gets the wrong impression that it is the
insurance company which makes an offer of coverage and the
would-be insured to accept or reject the offer. As a matter of fact,
it is the would-be insured who makes the offer by filling up an
application form supplied by the broker/agent, and submitting

"ISee Article 1305, Civil Code.

112 SeeArticle 1315, Civil Code.
ConneUy v. Prudential Insurance, 610 F. 2d 1215 (1979); Insurance Company of
113
North America v. Bordlee Contractors,543 F. Supp. 597 (1982).
72 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

relevant information called for by the kind of insurance being

applied for.

An application for life insurance usually calls for a medical

examination of the person whose life is to be insured, over and
above the extensive questions in the application which have to be
answered fully and truthfully. In property insurance, the
application calls for particulars on both the applicant and on the
property to be insured, such as the interest, rights or title of the
applicant, and the kind, nature, location and value of the
property. Where information is withheld, or the answer is false,
there can be concealment or misrepresentation which would
entitle the insurer to avoid liability upon the occurrence of the risk
114
insured against.

While it is conceded that the insurance company has to

make an assessment of the merits of the application, conduct
whatever investigation may be called for, determine the terms and
conditions which it considers appropriate, including premium
rate and exclusions or exceptions to the risk covered, and decide
whether to accept or reject the application, the insurance company
must act within a reasonable time. In applications for a life
insurance, the application calls for detailed information regarding
the life and health of the cestui que vie. Incidentally, the
application is invariably accompanied by the payment of the first
premium. The most positive evidence of acceptance of the
application is the delivery of the policy." 5

When the insurance company incurs unreasonable delay in

acting on the application, there being negligence, recovery may be
had, not based on contract (there being no perfection thereof, such
perfection being made subject to the condition that the policy is
delivered to the insured in good health) but on tort. This is

114 See discussion on "Concealment and Misrepresentations," infra.

11s See discussion on "Delivery of the Policy," infra.
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 73

usually referred to as recovery under the "tort theory".116 The

theory is based on the proposition that insurance, more so life
insurance, being one affected with public interest, the insurer
should act with reasonable dispatch in acting on the application,
or else the applicant loses the opportunity to secure such
insurance from another source. Incidentally, where there was
such negligence, recovery is for the face value of the policy
applied for, on the theory that had the application been acted
upon promptly, the applicant would have been covered and
recovery made. Courts, however, are divided on whether it
should be the beneficiary named or the estate of the applicant who
will get the proceeds. In fact, there is some disagreement on
117
whether recovery is really based on tort.

B. May an Insurance Contract Be Oral?

The Insurance Code has no provision requiring a

particular form for the validity of an insurance contract. There are
provisions, however, dealing with the form of the policy and of
riders and endorsements as will be discussed later. In the United
States, some jurisdictions uphold the validity of oral contracts of
insurance, especially where specific statutory prohibitions are
absent118 Where oral contracts are allowed, there should be a
"meeting of the minds" of the parties regarding terms and
conditions, the subject matter, the risk insured against, the amount
of insurance, premium rate and payment mode, risk duration and
identity of parties. 119 In upholding the validity of oral contracts of

116 See definition of "quasi-delict" in the Civil Code. Also, Smith v. Minnesota
Mutual Life, 86 Cal. App. 2d 581,195 P 2d 457 (1948).
117 See COUCH, Sec. 11.10. Also 43 Am. Jr. 2d., Section 199 et seq.
118 See cases cited in COUCH, Chapter 13, pp. 13-41.
119 Gulf Insurance v. Grisham, 126 Ariz. 123, 613 P 2d 283 (1980); South Carolina
Insurance. Co. v. Wolf, 331 So. 2d 337 (1976); Cincinnati Insurance Co. v. Stuart, 138
Ga. App. 80, 227 S.E. 2d 771 (1976); GRP Ltd. v. United States Underwriters, Inc.,
402 Mich. 107, 261 N.W. 2d 707 (1978); Gulf Gate Management Corp. v. St. Paul
74 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

insurance, especially in property insurance, there is usually a

request by the applicant that the commencement of coverage
coincides with the imminent acquisition, movement or transfer of
the property. Despite the difficulties of ascertaining proof of
coverage and of terms and conditions, some courts in the United
States consider these difficulties not compelling enough to restrict
or limit the enforceability of insurance commitments orally
120
given.

In our jurisdiction, the Supreme Court has not made a

categorical ruling against the validity of an oral contract of
insurance.

In Badger v. New York Life Insurance Co.,121 an application

for life insurance was duly signed and the first premium paid.
The applicant died within a month thereafter. The Supreme Court
absolved the insurance company from the claims of the
beneficiaries, on the basis of what was printed in the provisional
receipt that the insurance would not be effective "until a definitive
policy comes from New York" (the head office), but without any
ruling that the insurance contract should be in writing.

However, in Gomez v. Government Insurance Board,122

without categorically stating that a contract of insurance can be
oral, the Supreme Court allowed the beneficiary of a government
employee to receive the death benefits under the system, although
no insurance policy was ever issued. The Court of First Instance

Surplus Lines Insurance Co., 646 So. 2d 654, Supreme Court of Alabama (1994);
Pooell v. State FarmMutual Auto InsuranceCo., 601 So. 2d 60 (1992).
12 0
State Farm Mutual Automobile Insurance. Co. v. Newell, 270 Ala. 550, 120 So. 2d
390. In Brandywine Shoppe v. State Farm Fire and Casualty Co., 307, A.2d 806, p.
808, the Supreme Court of Delaware observed: "It is well recognized that oral
contracts of insurance, or binders, are valid and this is so even in jurisdiction
which require that insurance contracts be in writing."
121
Viola Badger v. New York Life InsuranceCo., 7 Phil. 381 (1907).
122 Adelaida Ocampo Vda. de Gomez v. Government Insurance Board, 78 Phil. 216
(1947).
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 75

of Pampanga denied the claims of the beneficiary on the ground

that no insurance existed inasmuch as the deceased was merely a
temporary employee and was not entitled to coverage under the
GSIS. In reversing the trial court, the Supreme Court ruled that,
given a liberal interpretation of civil service laws, the deceased
possessed all the requirements for a regular and permanent
appointment at the time of his death. It is, perhaps, the nature of
social insurance which explains the magnanimous approach of the
Supreme Court, especially in view of the fact that GSIS accepted
the premiums paid.

Finally, it will be recalled that even before the proliferation

of electronic communication, vending machines, especially at
airports, dispense travel or trip insurance the validity of which
has never been questioned. Thus, under our Electronic Commerce
Act of 2000 (Republic Act 8792), expression of offer or acceptance
of insurance may result in the formation of a valid insurance
contract.

C. Payment ofPremium

The payment of the premium, being the undertaking

performed by the insured in return for the insurer's assumption of
the risk, is essential to the formation of the contract of insurance. 2 3
Thus, payment of the premium is the foundation of a life
insurance policy.124 It is often expressly provided, however, in the
case of life insurance, that the policy shall not take effect unless
the first premium is paid. Thus, it will be noted that under
Section 233(a) of the Code, it is mandated that the policyholder is

123 American InternationalLife Insurance Co. v. Harsfield, 147 Ga. App. 213, 248 S.E.
2d 518 (1978); Paul Mercury Insurance Co. v. Hurst, 207 Neb. 840, 301 N.W. 2d 352
(1981).
124 Travelers Insurance Co. v. Castro,341 F. 2d 882 (1965).
76 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

entitled to a grace period of 30 days or 1 month to pay any

premium after the firt.125

As to when the premium should be paid is far from

definitively settled. The old Insurance Code (P.D. 612) originally
contains the following provisions:

Sec. 77. An insurer is entitled to payment of

the premium as soon as the thing insured is exposed
to the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid
and binding unless and until the premium thereof has
been paid, except in the case of a life or an industrial
life policy whenever the grace period provisions
applies."

"Sec. 78. An acknowledgment in a policy or

contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make
the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium
is actually paid."

The wording of Section 77 is confusing, if not outright

misleading. Under the earlier Insurance Law (Act No. 2427), the
provision reads as follows:

125 "Section 233. In the case of individual life or endowment insurance, the policy
shall contain in substance the following conditions:
(a) A provision that the policyholder is entitled to a grace period either
of thirty days or of one month within which the payment of any premium after
thefirst may be made, subject at the option of the insurer to an interest charge not
in excess of six per centum per annum for the number of days of grace elapsing
before the payment of the premium, during which period of grace the policy
shall continue in full force, but in case the policy becomes a claim during the said
period of grace before the overdue premium is paid, the amount of such
premium with interest may be deducted from the amount payable under the
policy in settlement"
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 77

"Sec. 72. An insurer is entitled to the payment

of premium as soon as the thing insured is exposed to
the peril insured against, unless there is clear agreement
to grant the insured credit extension of the premium due.
No policy issued by an insurance company is valid
and binding unless and until the premium thereof has
been paid" (italics supplied).

The old Insurance Code, promulgated on December 18,

1974, deleted the italicized portion and added "Notwithstanding
any agreement to the contrary" at the beginning of the second
sentence of what is now Section 77 of the Insurance Code of 1978.
To make matters worse, the phrase "except in the case of life or
industrial life policy whenever the grace period applies" was
added, an addition which does not make any sense at all.

It is submitted that there is every reason to limit the

provision of then Section 77 to non-life or property insurance.
There is a very basic and fundamental difference between
premium payments in life insurance and those in property
insurance.

Property insurance usually covers a period of only one

year. In fact, the Insurance Code provides that in case of
insurance other than life, "any policy written for a term longer
than one year, or any policy with no fixed expiration date shall be
considered as if written for successive policy periods or terms of
one year" (italics supplied), the renewal being conditioned "upon
payment of the premium due on the effective date of the
renewal." 26 Premium is, thus, for a period of only one year.

126 Section66 (in the Insurance Code of 1978) reads in full: "In case of insurance
other than life, unless the insurer at least forty-five days in advance of the end of
the policy period mails or delivers to the named insured at the address shown in
the policy notice of its intention not to renew the policy or to condition its
renewal upon reduction of limits or elimination of coverages, the named insured
shall be entitled to renew the policy upon payment of the premium due on the
effective date of the renewal. Any policy written for a term longer than one year
78 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

A life insurance policy, on the other hand, is usually

intended to be in force for a period much longer than one year
and involves several periodic premium payments (annually, semi-
annually, quarterly, monthly or even oftener). A life insurance
contract takes effect upon the payment of the first periodic
premium (subject to other specified pre-conditions for effectivity
such, as "delivery of the policy to the insured, alive and in good
health"). Thus, after such "first premium payment," the insured
is given a grace period of at least thirty days within which to pay
each of the subsequent periodic premium payments. Upon the
expiration of the grace period, the life insurance policy lapses,
unless the policy has acquired the status of one wherein the
provisions therein on options upon default, or the so-called "non-
forfeiture clauses" may be invoked.127 Should a life insurance
policy lapse for non-payment of the periodic premium, notice
from the insurer is not even required by law. The provisions of
Sections 64 and 65 on required notice of cancellation for non-
payment of premium apply only to "a policy of insurance other
than life." 128

As mentioned earlier, property insurance, under Section

66, is only for a one-year period. This limited period of effectivity
of property insurance will explain why property insurers are
concerned that credit arrangements would result in the
accumulation of premium receivables, where the policy is
renewed yearly and the risk insured against did not happen. It is
not difficult to surmise that this concern must have led to a strong
lobby by insurance companies to have the original provisions of

or any policy with no fixed expiration date shall be considered as if written for
successive policy periods or terms of one year." (Note: The present Code
amended the last sentence, changing the same to two sentences to read as
follows: "Any policy written for a term of less than one (1) year shall be
considered as if written for a term of one (1) year. Any policy written for a term
longer than one (1) year or any policy with no fixed expiration date shall be
considered as if written for successive policy periods or terms of one (1) year."
127 See succeeding discussion on "non-default options", infra.
128 See Sections 64(a) and 65.
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 79

Section 77 (Sec. 72 of Insurance Law, Republic Act No. 2427, supra)

amended and for them to advocate the "cash-and-carry" scheme
in the matter of premium payment such that "no premium, no
policy" will be the rule. After all, accumulated premium
receivables affect the legal reserves insurance companies are
required to maintain, consistent with the concept of insurance
being one involving the pooling of resources from among those
exposed to the same or similar risks. 29

Understandably, the numerous decisions of the Supreme

Court on the issue of non-payment of premium and the
consequent invalidity of the contract of insurance, or the non-
liability of the insurer, deal with property insurance. 130 Some of
these cases are discussed hereunder, having been decided under
the Insurance Law (Republic Act No. 2427) or the 1974 Insurance
Code (P.D. 612 and P.D. 1460).

In Arce v. Capital Insurance,131 the insured owner of a

residential house promised to pay the renewal premium on
January 4, 1966, a promise accepted by the insurance company.
The house was burned on January 8, 1966 without the premium
being paid. The Supreme Court absolved the insurance company.

129 See discussion on "Elements of Insurance," supra. Also see Tibay v. Court of
Appeals, 257 SCRA 126 (1996).
130 See Capital Insurance & Surety Co., Inc. v. Mario Delgado, et al., 9 SCRA 177
(1963); PhilippinePhoenix Surety & Insurance,Inc v. Woodworks, Inc., 20 SCRA 1270
(1967); Capital Insurance & Surety Co., Inc. v. Plastic Era Co., 65 SCRA 134 (1975);
Arce v. Capital Insurance& Surety Co., Inc., 117 SCRA 63 (1982); Acme Shoe Rubber
& PlasticCorp. v. Court of Appeals, et al., 134 SCRA 155 (1985); Laura Velasco v. Hor.
Sergio Apostol, et al., 173 SCRA 228 (1989); South Sea Surety & Insurance Co. v.
Court of Appeals, et al., 244 SCRA 744 (1995); Antonio Tibay, et al. v. Court of
Appeals, et al., 257 SCRA 126 (1996); Makati Tuscany Condominium Corp. v. Court of
Appeals, 215 SCRA 463 (1992); and the fairly recent case of UCPB General
InsuranceCo., Inc. v. Masagana Telamart,Inc., 356 SCRA 307 (2001).
131 See preceding footnote. The case was decided under Section 72, before the
amendment by Presidential Decree No. 612.
80 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The case of Acme Shoe Rubber & Plastic Corp. v. Court of

Appeals 132is similar. A promissory note was executed by the
insured which categorically stated that the policy would "stand
automatically cancelled, without further notice" if the insured
failed to pay the premium within ninety days from its stated
effective date of renewal, May 15, 1964. The trial court held for
the insured but was reversed by the Court of Appeals. The
Supreme Court sustained the appellate court. Both the Arce and
the Acme Shoe cases were decided before the Insurance Code of
1978.

The case of Capital Insurance & Surety Co. v. Plastic Era

CO., 1 3 3
is somewhat similar, in that it involves an express provision
in the policy on prepayment of premium (the case was decided
under the old Insurance Act). However, in this case, the Supreme
Court held the insurance company liable as follows:

"In clear and unequivocal terms, the

insurance policy provides that it is only upon
payment of the premiums by Plastic Era that Capital
Insurance agrees to insure the former's properties. x x
x It appears on record that on the day the insurance
policy was delivered, Plastic Era did not pay Capital
Insurance, but instead executed an acknowledgment
receipt of Policy No. 22760. In said receipt Plastic Era
promised to pay the premium within thirty (30) days
from effectivity date of the policy on December 17,
1960 and Capital Insurance accepted it. x x x
Considering that the insurance policy is silent as to
the mode of payment, Capital Insurance 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."

132 Acme Shoe Rubber & PlasticCorp. v. Court of Appeals, et al., 134 SCRA 155 (1985).
The case was decided under Act 2427, the operative acts having occurred before
the effectivity of the 1974 Insurance Code.
133 CapitalInsurance & Surety Co., Inc. v. Plastic Era Co., 65 SCRA 134 (1975).
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 81

In PhilippinePhoenix Surety & Insurance Co. v. Woodworks,134

the Supreme Court held the contract of insurance to have been
duly perfected, although the premium therefor was only partially
paid. The case was decided before the effectivity of the Insurance
Code, i.e., before Section 72 was amended. Section 72 then
included in the first sentence the phrase "unless there is a clear
agreement to grant the insured credit extension on the premium
due."

In Velasco v. Apostol,135 although decided in 1989, the

controversy arose under the aegis of the old Insurance Act, the
incident having occurred on November 27, 1973 and the
complaint filed on July 20, 1974, both before the effectivity of the
Insurance Code on December 18,1974. The issue was whether the
insured was given a credit extension. The Court found no cogent
proof of any such implied agreement.

After the promulgation of the Insurance Code under P.D.

612 and P.D. 1460, with an amended Section 72 (Act No. 2427),
becoming Section 77 of said Insurance Code of 1978, the following
cases, among others, came before the Supreme Court: Valenzuela
v. Court of Appeals, 136 Makati Tuscany Condominium Corp. v. Courtof
Appeals,137 South Sea Surety v. Court of Appeals,138 and Tibay v. Court
ofAppeals & Fortune Insurance.3 9

In the Valenzuela case, the issue is not the liability of an

insurance company on a policy for which premium has not been
paid. It is actually a reverse situation as the case involves the
liability of the insured for unpaid and uncollected premiums. The
Court of Appeals held for the insurance company and ordered

134 Philippine Phoenix Surety & Insurance, Inc. v. Woodworks, Inc., 20 SCRA 1270
(1967).
13 Laura Velasco v. Hon. Sergio Apostol, etal., 173 SCRA 228 (1989).
136 Arturo Valenzuela, et al. v. Court of Appeals, et al.,
191 SCRA 1 (1990).
137 Makati Tuscany Condominium [Link] of Appeals, 215 SCRA 462 (1992).
138 South Sea Surety & InsuranceCo. v. Court ofAppeals, et al., 244 SCRA 744 (1995).
139 Antonio Tibay, et al. [Link] ofAppeals, et al., 257 SCRA 126 (1996).
82 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Valenzuela to pay Philamgen the amount of P1,932.531.17,

representing the unpaid and uncollected premiums. The Supreme
Court reversed, ruling that there is no factual and legal basis for
the award since under Section 77 "the remedy for the non-
payment of premiums is to put an end to and render the insurance
policy not binding." The Court cited the ruling in the Philippine
Phoenix case.

In the Makati Tuscany case, the question was whether

premium payments by installment invalidate the insurance, in
view of the first sentence of Section 77. In January 1982, American
Home Assurance issued an insurance policy to Makati Tuscany
Condominium Corp. for the period 1982-1983. The premium
payment was made in four equal installments, all of which were
accepted by the insurer. Thereafter, the insurance was renewed
under the same scheme of premium payments. On the third
renewal, however, Makati Tuscany refused to pay the third and
fourth installments because, it said, the policy did not contain a
credit clause in its favor, thereby making the policies invalid and
unenforceable on account of his installment payments. The
Supreme Court ruled:

"...while the import of Section 77 is that

prepayment of premiums is strictly required as a
condition to the validity of the contract, we are not
prepared to rule that the request to make installment
payments duly approved by the insurer, would
prevent the entire contract of insurance from going
into effect despite payment and acceptance of the
initial premium or first installment Section 78 in
effect allows waiver by the insurer of the condition of
prepayment by making an acknowledgment in the
policy of receipt of premium as conclusive evidence
of payment so far as to make the policy binding
despite the fact that premium is actually unpaid."
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 83

In the South Sea Surety & InsuranceCo. case, 141 the Supreme
Court held an insurance covering a shipment of logs to have been
duly perfected when the premium was paid to the agent of the
insurance company. The Court affirmed the decisions of the trial
court and the appellate court which applied the second paragraph
of Section 306 of the Insurance Code of 1978, to wit:

"Any insurance company which delivers to an

insurance agent or broker a policy or contract of
insurance shall be deemed to have authorized such
agent or broker to receive on its behalf payment of
any premium which is due on such policy of contract
of insurance at the time of its issuance or delivery or
which becomes due thereon." 4 2

In the Tibay case," 3 the ponencia starts with the question,

"May a fire insurance policy be valid, binding and enforceable
upon mere partial payment of premium?"

The facts show that Violeta Tibay, on July 22, 1989, was
issued a fire insurance policy by Fortune Insurance covering a
two-storey residential building for P600,000 for the period January
23, 1987 to January 23, 1988. Of the total premium of P2,983.50,
only P600 was paid on January 23, 1987. On March 8, 1987, the
building was completely destroyed by fire. On March 10, 1987,
Tibay paid the balance on the premium due and, on the same day,
filed a claim on the policy. On June 11, 1987, Fortune Insurance
denied the claim for violation of Policy Condition No. 241 and of

141 South Sea Surety & Insurance Co. v. Courtof Appeals, et at., 224 SCRA 744
(1995).
142 Now second paragraph of Section 315 of the current Code (RA 10607).
143 Antonio Tbay, et al. v. Court ofAppeals, et al. 257 SCRA 126 (1966). First
Division, Justice Bellosillo as ponente. Justice Vitug dissenting, with Justice
Padilla concurring in the dissent
141 The condition reads: "2 This policy including any renewal thereof and/or
any endorsement thereon is not in force until the premium has been fully paid to
and duly receipted by the Company in the manner provided hereinr..that this
84 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Section 77 of the Insurance Code. The trial court held Fortune

Insurance liable. On appeal, the Court of Appeals reversed and
absolved the insurance company. On a petition for review, the
Supreme Court sustained the Court of Appeals.142

The Supreme Court considered the provision of Section 77

stating "unless and until the premium thereof has been paid" to
mean payment in full.143 The Supreme Court considered the case
of Phoenix Insurance v. Woodworks'44 on which petitioners relied
heavily, as not persuasive or decisive of the case at bench, even
though in said decision, the Supreme Court sustained the ruling
of the trial court that the partial payment of the premium made
the policy effective during the whole period of the policy. Neither
did the Supreme Court consider the Makati Tuscany case145
applicable, having observed that in said case, the parties mutually
agreed on the installment payment of the premium. Thus, the
Supreme Court considered the Phoenix and Makati Tuscany cases
as involving waiver, either express or implied - Phoenix
Insurance being the one which sued for the balance of the
premium due, while in Makati Tuscany, there was an express
agreement. The Supreme Court did not touch upon the express
provision of Section 77 of "notwithstanding any agreement to the
contrary."

policy shall be deemed effective, valid and binding upon the Company only
when the premiums therefor have actually been paid in full and duly
acknowledged in a receipt signed by any authorized official or
representative/agent of the Company..." This provision in a policy of non-life
insurance is usually referred to as "Receipt of Payment Clause."
142 A footnote indicates that the decision was originally a dissenting opinion.
143 Quite interestingly, the Court used Labor Law provisions and decisions
dealing with maternity leaves, employment of women and children, and
domestic help, to the effect that the laws involved merely state "with pay" which
decisions consider to mean payment in full.
I44 Philippine Phoenix Surety & Insurance, Inc. v. Woodworks, Inc., 20 SCRA 1271
(1%7).
145 Makati Tuscany Condominium Corp.v. Court ofAppeals, 215 SCRA 462 (1992).
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 85

A subsequent case, that of UCPB General Insurance Co. v.

Masagana Telamart, 146 is an interesting case on premium
payments. A decision of the Supreme Court, First Division,
sustaining the rulings of the trial court and the Court of Appeals,
was later reversed in an en banc resolution of the Supreme Court.

The facts of the case are undisputed. Masagana Telamart

was issued five insurance policies, for the period May 22, 1991 to
May 22, 1992. Without the policies being renewed, fire destroyed
the properties on June 13, 1992. Exactly one month later, or on
July 13, 1992, Masagana tendered the premium payments
consisting of five Manager's Checks for a total amount of
P225,753.95 for the renewal of the policies from May 22, 1992 to
May 22, 1993. The following day, July 14, 1992, Masagana
Telamart made a formal claim, which was rejected by the
insurance company, which, on the same day, returned the checks
covering the premiums. Upon such denial, Masagana Telamart
filed a case to recover P18,645,000 as the insurance proceeds, plus
attorney's fees, litigation expenses and costs. Both the trial court
and the Court of Appeals found that sufficient proof exists that
Masagana Telamart, which had procured insurance coverage from
the insurance company for a number of years, had been granted a
sixty- to ninety-day credit term for the renewal of the policies.

On appeal via certiorari,the insurance company sought to

set aside the decision of the Court of Appeals. The Supreme
Court, First Division 147 gave due course to the appeal and
considered the basic issue to be "whether the fire insurance
policies had already expired or had been extended or renewed by
"an implied credit arrangement." The Supreme Court, First
Division resolved the issue in the following manner, thereby
reversing the Court of Appeals:

146 UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,356 SCRA 307
(2001).
147 UCPB General Insurance Co., Inc. v. AMasagana Telamart, Inc.,308 SCRA 259
(1999).
86 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

"The answer is easily found in the Insurance

Code. No, an insurance policy, other than life, issued
originally or on renewal, is not valid and binding
until actual payment of the premium. Any agreement
to the contrary is void.148 The parties may not agree
expressly or impliedly on the extension of credit or
time to pay the premium and consider the policy
binding before actual payment"

On a motion for reconsideration, however, the Supreme

Court, en banc, reversed the foregoing decision. In the en banc
resolution, the Court considered the crucial issue to be whether
Section 77 of the then Insurance Code (P.D. 612 and P.D. 1460)
must be strictly applied to the advantage of the insurance
company. In reversing the resolution of the First Division, the
majority ruled that said Section 77 is not without exceptions and
considered five exceptions, to wit:

"The first exception is provided by Section 77

itself, and that is, in case of a life or industrial life
policy whenever the grace period provision applies.

The second is that covered by Section 78 of the

Insurance Code.

xxx

A third exception was laid down in Makati

Tuscany Condominium Corp. v. Court of Appeals,
wherein we ruled that Section 77 may not apply if the
parties have agreed to the payment in installments of
the premium and partial payment has been made at
the time of loss.
148 The ponente citing Section 77, Code; Arturo Valenzuela, et al. v. Court of Appeals,
et al., 191 SCRA 1 (1990); South Sea Surety & InsuranceCo. v. Courtof Appeals, et al.,
244 SCRA 744 (1995); Antonio Tibay, et al. v. Court of Appeals, et al.,257 SCRA 126
(1996).
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 87

By the approval of the aforequoted findings

and conclusions of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely,
that the insurer may grant credit extension for the
payment of the premium. This simply means that if
the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before
the expiration of the term, recovery on the policy
should be allowed even though the premium is paid
after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust

and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently
granted a 60- to 90- day credit term for the payment
of premiums despite its full awareness of Section 77.
Estoppel bars it from taking refuge under said
Section, since Respondent relied in good faith on such
practice. Estoppel then is the fifth exception to
Section 77."

This en banc decision has been the subject of much

discussion, especially in the academe. One is reminded of the
9
statement of Justice Holmes that "hard cases make bad laws."14
This case must be one of those cases; perhaps, the reverse of the
quotation may even be more appropriate-that bad laws generate
hard cases. Sections 77 and 78 (Insurance Code of 1978) then are
really tricky provisions. As mentioned earlier, there is every
reason to consider Section 77 as applicable only to property

149In his dissenting opinion in Northern Securities Co. v. United States, 193 U.S. 197
(1904), p. 400. The quotation reads in full: "Great cases like hard cases make bad
law. For great cases are called great not by reason of their real importance in
shaping the law of the future but because of some accident of immediate interest
which appeals to the feeling and distorts the judgment These immediate interest
exercise a kind of hydraulic pressure which makes what previously was dear
seem doubtful, and before which even well settled principles of law will bend."
88 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

insurance, life insurance being inherently dissimilar. On the other

hand, Section 78 (now Section 79 in the Code) appears to
contradict Section 77. Then Section 78, which considers an
"acknowledgment.. .of a receipt of premium" as prevailing over
"any stipulation therein that the policy shall not be binding until
the premium is actually paid" (underscoring supplied), hardly
makes any sense. The dissenting opinion of Justice Vitug in this
case, as well as his dissent in the Tibay case, may, perhaps, deserve
a second look.

With the enactment of the present Code (Republic Act

10607, effective September 20, 2013), the confusion was not
completely removed. The new Section 77 now reads as follows:

"Sec. 77. An insurer is entitled to payment of

the premium as soon as the thing insured is exposed
to the peril insured against Notwithstanding any
agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid
and binding unless and until the premium thereof has
been paid, except in the case of a life or an industrial
life policy whenever the grace period provision
applies, or whenever under the broker and agency
agreements with duly licensed intermediaries, a ninety
(90)-day credit extension is given. No credit extension to a
duly licensed intermediary should exceed ninety (90) days
from the date of issuance of the policy."

Note that the phrase "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..." remains untouched. There is,
of course, some qualification added by RA 10607 where Section 77
appears to restrain the validity of a credit extension to only those
covered by broker or agency agreements with "licensed
intermediaries." What the amendment RA 10607 did in Section 77
was to expressly put into law one of the exceptions to the strict
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 89

provisions of said section, albeit bringing the same closer to that in

Republic Act No. 2427.

D. Premium Payment in Life Insurance Compared

As mentioned in the preceding discussion, the inherent

nature of a life insurance contemplates a much longer period of
coverage compared with property insurance. The perfection of a
life insurance contract basically depends upon the payment of the
first premium. There is no provision in the Code (even under the
earlier codes) which makes it obligatory for the insured to pay the
subsequent premiums, nor can the insurer compel him to do so.
The insurer is not even required to give notice to the insured of
the failure of the latter to pay such subsequent premiums as a
prerequisite for the cancellation of the policy, Section 64 being
limited to a "policy other than life."150 Nonetheless, whether
premiums in life insurance are payable quarterly, semi-annually,
or annually, the insured is entitled to a "grace period" of thirty
days or one month within which to pay premiums after the first.151
In fact, some insurance companies give as much as three to five
months grace period, a provision favorable to the insured. 5 2 If the
policy becomes a claim during the grace period, the claim is valid
but the overdue premium, with interest, will be deducted from
the proceeds. If the insured fails to pay the premium due within
the grace period, the policy lapses and all the premiums
previously paid are forfeited, unless the policy has become
entitled to any one of the non-default provisions of the policy, the
insured having paid three annual premiums by then.

150 Sec. 64, in part provides: "No policy of insurance other than life shall be
cancelled by the insurer except upon prior notice thereof to the insured, and no
notice of cancellation shall be effective unless it is based on the occurrence, after
the effective date of the policy, of one or more of the following: "(a) Nonpayment
of
151
premium x x x"
See Footnote 127.
152 See penultimate paragraph of Section 233, validating provisions more
favorable to the insured than the "mandated" ones in said Section 233.
90 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In property insurance, there is no grace period mandated

by the Code. Sections 77 and 79, as well as Sections 64 and 66 of
the Code govern.

E. Refund of Premiums

The Code provides for the return of premiums in several

instances, the most notable of which is where no part of the
interest of the insured has been exposed to the risk insured
againsti5 For example, where insured goods are to be shipped or
transported but the trip has been cancelled. Along this same line,
when insurance is made for a definite period of time and the
insured surrenders his policy before the expiration of that period,
the insured is entitled to a return of such portion of the premiums
as corresponds with the unexpired time, at a pro rata rate, unless a
short period rate has been agreed upon. 154 Likewise, the insured
is entitled to a return of the premium where the contract is
voidable by reason of fraud or misrepresentation of the insurer. 155
Lastly, in case of over-insurance by several insurers, the insured is
entitled to a ratable retum.156

In Great Pacific Life Insurance v. Court of Appeals, 157 the

insurance agency advised the insured, four months after he paid
his first premium, that his policy had never been in force and he
had to pay another premium and undergo another medical
examination. A suit filed by the insured to recover premiums
paid, plus damages, was sustained by the trial court and the Court
of Appeals. The Supreme Court affirmed and held that since the
policy, although actually delivered, was in fact inoperative or
ineffectual from the beginning, the insurer was never at risk.

153 Section 80(a).

154 Section 80(b).
155 Section 82.
156 Section 83
157 Great PacificLife Insurance Corp. v. Court of Appeals, et al., 184 SCRA 501 (1990).
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 91

Moral damages were awarded, the insurer having been found to

have committed in bad faith, a serious breach of the contract of
insurance.

In life insurance policies, there are certain rights of the

insured, mandated by the Code, in cases involving premium
defaults. These rights will be discussed in the next chapter.

F. Delivery of the Policy

To complete the issue of perfection of a contract of

insurance, the matter of delivery of the policy needs to be
looked into. In property insurance, there is not much dispute
regarding the perfection of the insurance contract covering
property. Rarely, if ever, has such condition been imposed in
property insurance.

However, life, health and/or accident insurance, are

invariably conditioned upon delivery of the policy, to the insured,
while in good health. This condition may be found in the
application or in the policy itself. Comparable to the principles
under which an insurer may incur a liability in tort, for the
unreasonable delay in acting upon an application for insurance, is
the rule that imposes tort liability upon an insurer for its negligent
failure to issue a policy of insurance pursuant to an agreement to
do so, or for the negligent delay of its agent in delivering a policy
to the insured, when delivery was necessary to make the policy
effective. 58

Other issues which may arise in relation to the

requirements of delivery of the policy are: whether delivery may
be conditional; whether it should be in a particular manner (e.g.

158 Wallace v. HartfordFire Insurance Co., 31 Idaho 481, 174 P. 1009 (1918); Telford v.
Bingham County FarmersMutual Insurance Co., 52 Idaho 461,16 P. 2d 983 (1932).
92 1 THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

by mail, by leaving the policy at the residence or place of business

of the insured); whether such delivery should be actual, manual or
personal and not merely constructive, etc..

Delivery of the policy to the insured while in good health

is a requirement to protect insurers from assuming a risk that
arises between the time of application and the final act necessary
to create a contract of insurance. Such requirement has been
considered valid. 59

In Vda. De Sindayen v. Insular Life Co.,16 the insured had

applied for a life policy while vacationing in his aunt's home in
the province. The application contained the usual condition that
the policy would not be effective until the first premium was paid
and the policy delivered to the insured while he was in good
health. The insured, after making his application, came to Manila,
felt sick and was found to be suffering from acute nephritis, from
which he died a few days later. The policy was mailed to the
agent before the applicant fell ill. Upon receiving it, the agent
immediately sought the aunt and inquired about the applicant's
health, whereupon the aunt replied that since she had not heard
anything from him, she assumed he was all right. She then paid
to the agent the balance of the premium and the agent delivered to
her the policy. At the time of such delivery, the insured was
already ill but the aunt did not know this fact. After the insured
died, and the insurance company refused to pay her proceeds, the
insured's widow sued to compel such payment.

The main defense rested on the alleged non-compliance

with the express condition in the application that the policy would

159 Bryant v, Standard Life, 348 F. 2d 649 (1965); Life & Casualty Insurance v. Latlam,
255 Ala. 160, 50 So. 2d 727 (1951); American National Insurance Co. v. Herrera,211
Cal. App.. 2d 793 27 Ca. Rgter. 641 (1963); Borer v. Security IndustrialLife Insurance
Co., 245 So. 2d (1971). See additional cases in COUCH, Section 15.1 See also 44
A.L.R 2d, 472.
160 Fortunata Lucero vda. de SIndayen v. Insular Life Assurance CLtd., 62 Phil 9
(1935).
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 93

take effect only upon its delivery to the insured while he was in
good health. The Supreme Court was of the view that delivery to
the insured in person is not necessary and that delivery may be
made by mail or to a duly authorized agent (like the insured's
aunt in this case), but it refused to adopt the prevailing view in the
American decisions that the delivery of the policy to the agent
completes the contract. It adopted the view which it thought was
more consonant with the well-known practice of life insurance
companies and the evidence of the case, that an insurance agent is
not a mere automaton and is vested with some discretion in
deciding whether the condition as to the health of the applicant
has been complied with. Once he decides that it has and delivers
the policy, then, in the absence of fraud, the insurance company is
bound by his act and will be estopped to claim that it never
intended that the policy would take effect. The Court, thus,
arrived at the same conclusion as the prevailing view, without
however agreeing that delivery to the insurance agent is delivery
to the insured.

As to the insurance company's argument that the act of its

agent in delivering the policy could not bind it because it
constituted a waiver of the contractual condition regarding
delivery of the policy, and that the contract expressly provided
that the agent had no authority to waive any condition or
stipulation thereof, the Supreme Court held that the agent's act
was not one of waiver of condition, for in fact he had inquired into
the insured's health to determine whether the condition had been
complied with. His act was therefore within the authority granted
to him by the insurance company. The widow was thus able to
collect the proceeds of the policy.

In Perez v. Court of Appeals,161 Primitivo Perez had been

insured with the insurer since 1980. Sometime in 1987, an agent of
the insurance corporation convinced him to apply for additional
insurance coverage. Primitivo Perez accomplished an application

161VirginiaPerez v. Courtof Appeals, et al.,323 SCRA 613 (2000).

94 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

form for the additional insurance coverage. On the same day,

Primitivo's wife paid P2,075 to the agent. The latter issued a
receipt, which indicated the amount received as a deposit.
Unfortunately, the agent lost the application form accomplished
by Perez and asked the latter to send another application for
additional insurance, together with all its supporting papers, to
the office of the insurer in Quezon, which office was supposed to
forward the papers to the Manila office.

Unfortunately, Perez died in an accident, during which

time, his application papers for the additional insurance were still
with the Quezon office. Without knowing that Perez died
already, the insurer approved the application and issued the
corresponding policy. The insured's widow went to claim the
benefits under the insurance policies of the deceased. The insurer
paid the proceeds under the prior insurance policies, but not
under the additional insurance coverage, claiming that such
insurance had not been perfected at the time of the death of
Primitivo Perez.

The Supreme Court ruled in favor of the insurer, and held

that the contract of insurance had not been perfected at the time of
the insured's death, the insured's application for insurance being
subject to the acceptance of the insurer. In fact, the perfection of
the contract of insurance was further conditioned upon
compliance with the following requisites in the application form:
"...there shall be no contract of insurance unless and until a policy
is issued on this application and that the said policy shall not take
effect until the premium has been paid and the policy delivered to
and accepted by me/us in person while I/We, am/are in good
health."

Thus, the Supreme Court held that the assent of the insurer
has not been given when it merely received the application form
and all the requisite supporting papers of the applicant. Its assent
 CHAPTER IV: PERFECTION OF THE CONTRACT OF INSURANCE I 95

would have been given when it issues a corresponding policy to

the applicant.

Summarizing the basic principles on the perfection of a

contract of insurance, the Supreme Court held that:
"...a contract of insurance, like other
contracts, must be assented to by both parties either
in person or by their agents. So long as an application
for insurance has not been either accepted or rejected,
it is merely an offer or proposal to make a contract.
The contract, to be binding from the date of
application, must have been a completed contract,
one that leaves nothing to be done, nothing to be
completed, nothing to be passed upon, or determined,
before it shall take effect. There can be no contract of
insurance unless the minds of the parties have met in
agreement."

Finally, the claim of the beneficiary that the condition is

potestative or facultative was rejected by the Supreme Court
which ruled that the health of the applicant is beyond the control
or will of the insurer. Rather, the condition is a suspensive one
whereby the acquisition of rights depends upon the happening of
an event which constitutes the condition. The suspensive
condition was that the policy must have been delivered and
accepted by the applicant while he is in good health.

It may be noted that our own jurisprudence on execution

and delivery of the policy is very limited. This is, perhaps, due to
the fact that we are still far from being insurance-conscious. In the
United States, however, practices and rulings vary so much that
even the basic terms "issuance," "delivery," "good health" have
spawned extensive litigation.162

162 See COUCH, Chapter 15, Section 15.2 on issues regarding "Good Health" and
Chapter 14, Sections 14.10 to 14.20 on "Method and Proof of Delivery."
 CHAPTER V

THE POLICY OF INSURANCE; PARTIES THERETO

AND THEIR RIGHTS THEREON

A. Definition

The Code defines a "policy of insurance" as a written

instrument in which a contract of insurance is set forth.163 The
policy specifies the parties, the premium, the property or the life
insured, the interest of the insured in the property if he is not the
absolute owner, the risks insured against, and the period of
insurance. 164 The Code has no provision regarding a particular
form for the validity of the insurance contract. As earlier
discussed, an oral contract of insurance can be valid provided that
all the essential elements for the existence of a contract are
present. 6 5

Regardless of how the contract of insurance was perfected,

the Code requires that the same be evidenced by a policy which is
not only required to be in writing but should be printed in the
form approved by the Insurance Commissioner. 66 It is submitted,

163 Section 49, Code

164 Section 51 (a) to (g), Code.
165 Supra, Chapter IV, footnotes 119 to 123.
166 Section 232 provides: "No policy, certificate or contract of insurance shall be
issued or delivered within the Philippines unless in the form previously
approved by the Commissioner, and no application form shall be used with, and
no rider, clause, warranty or endorsement shall be attached to, printed or
stamped upon such policy, certificate or contract unless the form of such
 CHAPTER V: THE POLICY OF INSURANCE 1 97

however, that a contract of insurance in a form not approved by

the Insurance Commissioner is not invalidated per se where such
contract is otherwise valid. The insurer may, however, be subject
to sanctions for the non-observance of the requirement

The Code, by way of an amendment, recognizes an

insurance in an electronic form as follows:

"Notwithstanding the foregoing, the policy

may be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, otherwise
known as the "Electronic Commerce Act" and to such
rules and regulations as may be prescribed by the
Commissioner."167

B. Riders and Endorsements

In Insurance law, a rider is a printed or typed stipulation

contained in a slip of paper attached to the policy and forming an
integral part thereof. To be binding, such rider or endorsement
must conform to the requirements of the Code as provided in
Section 50, to wit:

"Any rider, warranty or endorsement

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

Unless applied for by the insured or owner,

any rider, clause, warranty or endorsement issued

application, rider, clause, warranty or endorsement has been approved by the

Commissioner."
167 Section 50, last paragraph, Code.
98 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

after the original policy shall be countersigned by the

insured or owner, which counter-signature shall be
taken as his agreement to the contents of such rider,
clause, warranty or endorsement." 168

Note that the signature of the insured is required only if

such riders or endorsements are made or issued after the issue of
the original policy.

C. CoverNotes/Temporary orProvisionalInsurance

There are situations where temporary coverage is required

by the insured pending the issuance or renewal of a policy of
insurance. These situations are addressed by what are known as
"cover notes" or by a "binding slip," "binding receipt," or just
"binders." They all refer to a unique type of contract of insurance,
in effect an interim policy, until a formal policy is issued.

The Code does not exactly define a cover note but

authorizes its issuance in the following provisions, to wit:

"Sec. 52. Cover notes may be issued to bind

the insurer temporarily pending the issuance of the
policy. Within sixty (60) days after issue of a cover
note, a policy shall be issued in lieu thereof, including
within its term the identical insurance bound under
the cover note and the premium therefor.

Cover notes may be extended or renewed

beyond such sixty (60) days with the written approval
of the Commission if he determines that such
extension is not contrary to and is not for the purpose
of violating any provisions of this Code. The
Commissioner may promulgate rules and regulations

168 See Ang Giok aip v. Springfield Fire & Marine Insurance, 56 PhiL 375 (1931).
Section 50, Second and third paragraphs.
 CHAPTER V: THE POLICY OF INSURANCE I 99

governing such extensions for the purpose of

preventing such violations and may by such rules and
regulations dispense with the requirement of written
approval by him in the case of extension in
compliance with such rules and regulations." 169

Whether what seems to be a cover note does, in fact,

amount to a contract of insurance depends on it fulfilling the
normal requirements for a contract; it is possible that the note is
merely a receipt for money paid in advance and that there is no
insurance until the company has properly considered the
proposal. The cover note will not amount to a contract unless
there is agreement on the material terms (risk, duration of cover,
premium). If the cover note is issued following the expiration of a
policy, the presumption will be that the cover is on the same terms
as the old policy.170

In Great Pacific Life v. Court of Appeals,'?' aside from the

issue of concealment, there was the issue of whether a deposit
receipt constituted a temporary contract of insurance in
connection with a twenty-year endowment plan. It appears that
there were provisions in the so-called "Binding Receipt" from
which could be clearly implied that the binding receipt in question
is merely an acknowledgment, on behalf of the company, that the
latter's branch office had received from the applicant the
insurance premium and had accepted the application subject for
processing by the insurance company; and that the latter will
either approve or reject the same on the basis of whether or not
the applicant is "insurable on standard rates." The Supreme

169Note that the matter of extension, as well as the promulgation of rules and
regulations relative thereto, lies with the Insurance Commissioner. See Insurance
Memo Circular No. 3-75, September 29, 1975, and Insurance Commission
Circular Letter dated January 17,1980 on premium deposit for cover notes.
170 See Insurance Law Doctrines and Principles by Rawlings, 2nd ed.., pp. 144-145
(2005).
inGreat Pacific Life Assurance Co. v. Court of Appeals, 89 SCRA 543 (1979).
100 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Court, citing De Lim v. Sunlife72 ruled that the Binding Receipt in

question never became in force at any time, because the insurance
company never approved the application.

In Enriquez v. Sunlife,173 a "receipt" was issued making the

effectivity of the insurance dependent upon the approval of the
application by the head office of the insurance company. Such
approval was made and sent through ordinary channels but never
came to the knowledge of the applicant. The Supreme Court
ruled that the contract was not perfected, applying the provisions
of the Civil Code on acceptance, with the conclusion that there
was no "meeting of the minds" of the parties.

In De Lim v. Sunlife, 174 the insurance company, upon

receipt of the first premium, issued a "provisional policy" to be
enforceable for a period of four months, provided the head office
of the insurance company confirms the agreement by the issuance
of a policy. The applicant died within the four-month period but
the insurance company refused to pay the proceeds on the ground
that death occurred before a policy could be issued. The Supreme
Court sustained the insurance company.

To be distinguished from the above-cited cases is the case

of Pacific Timber Export Corp. v. Court of Appeals,l7 where a "Cover
Note" was considered binding although no separate premium
was paid before the loss insured against occurred. The issue in
this case appears to be whether such separate premium is
necessary. Normally, cover notes do not contain particulars as
bases for the computation of premiums and, as a consequence, no
separate premium was intended to be paid on a cover note.

172 Pilar de Lim v. Sun Life Assurance Company of Canada,41 Phil 264 (1920); infr4.
173 Raftel Enriquez v. Sun Life Assurance Company of Canada,41 Phil. 269 (1920).
174
Pilarde Lir v. Sun Lift Assurance Company of Canada,41 Phil. 264 (1920).
175 Pacific limber Export Corp. v. Court of Appeds, et al., 112 SCRA 199 (1982).
 CHAPTER V: THE POLICY OF INSURANCE I 101

While the rulings in the foregoing cases may technically be

defensible, the argument may be raised regarding the reasonable
expectations of the applicants who may have been lulled into a
false sense of security as against the restrictive provisions in the
so-called temporary receipts or provisional policies. The current
provisions of the Code on "cover notes" have somehow improved
the situation of applicants for immediate insurance coverage,
especially considering the more active role of the Insurance
Commissioner regarding such cover notes. The law itself binds
the insurer within the sixty-day period or within any extension
period approved by the Insurance Commissioner.

D. Types of Policies

At the beginning of this work, mention was made of the

remarkable pace with which insurance products have multiplied,
from marine insurance to the latest variations of insurance against
liability. Policies of insurance are, thus, classified depending
upon the risk insured against The Insurance Code, in fact, in
Chapter II thereof, divides the classes of insurance into marine,
fire, casualty, suretyship, and life insurance.

Casualty insurance covers the widest area, involving as it

does any loss or liability "arising from any accident or mishap"
excluding those falling within the scope of the other classes of
insurance under the Code.176

When property is involved, the Code defines the usual

types of policies which may be issued, as well as the limits of the
liability of the insurers thereon. Under Section 59, a policy is
either "open, valued, or running."

Section 60 defines an "open policy" as "one in which the

value of the thing insured is not agreed upon to be ascertained at

176 Section 176.

102 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the time of loss."177 There is, however, a face value in an open

policy to indicate the limit of the insurer's liability.

In Development Insurance v. Intermediate Appellate Court,178

the Supreme Court considered a fire insurance policy, with a face
value of PZ500,000 as an open policy, the covered building, then,
being under construction and not yet completed. The claim of the
insurance company that at the time of the fire, the building was
worth P5,800,000 and that the insured should be considered its
own insurer for the difference between said amount and the face
value of the policy, was rejected and the valuation by the
insurance company was considered self-serving. As an open
policy, the Supreme Court, citing Section 60 of the Insurance
Code, ruled that "the actual loss, as determined, will represent the
total indemnity due the insured from the insurer except only that
the total indemnity shall not exceed the face value of the policy."

On the other hand, the Supreme Court pointed out that a

"valued policy" is "one which expresses on its face an agreement
that the thing insured shall be valued at a specific sum."1'9

To be distinguished from an open and valued policy is a

"running policy" which, under Section 62, is defined as "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." A running policy, at times referred to as
"floating" or "blanket" policies, is intended to provide cover for
property which frequently changes in location and quantity.

17 Cf. Section 163, re: open policy in marine insurance. See, also, Section 173 on
fire insurance.
17 Development Insurance Corp. v. Intermediate Appellate Court, et al., 143 SCRA 62
(1986).
17 Section 61. Cf. Section 158, where the valuation in a policy of marine
insurance is considered conclusive between the parties. Also, see Section 173
where the valuation in a fire insurance policy has the same effect as in a policy of
marine insurance.
 CHAPTER V: THE POLICY OF INSURANCE I 103

Examples of such kind of property are those being moved from

one location to another, like from different warehouses or
otherwise being transported from place to place. The products of
a manufacturer being delivered to various outlets countrywide are
usually covered by a running policy. Stocks-in-trade of a
department store are usually covered by such running policies; it
would be very difficult to ascertain, at any one time, the precise
quantity of such stocks-in-trade, except by indispensable record-
keeping, considering their movement, disposition and additions
or deliveries.

E. Parties

Basically, the principal parties to a contract of insurance

are the insured and the insurer. At bottom, the insurer is the
party who agrees to indemnify another for loss or liability upon
the happening of the event insured against causing such loss or
liability. The insured is the party to be indemnified.

In life insurance, however, a third party comes into the

picture, the beneficiary who receives the proceeds of the life
insurance policy. Then, too, there is the cestui que vie or the person
whose life is being insured and with another person as beneficiary
of the proceeds. Finally, the policy, by its term or by law may be
assigned or transferred in which situation there is an assignee,
with the insured as assignor. This situation is discussed in the
next topic on special rights of the insured on the policy.

Insurer

Under the Code, "every person, partnership, association,

or cooperative duly authorized to transact insurance business as
elsewhere provided in this Code, may be an insurer." 180 The term

Iso Section 6.
104 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

"insurer" includes person or entities, except mutual benefit

associations, engaged as principals in the insurance business.181
The term also includes "professional reinsurers". 182

Under the Insurance Code of 1978, there was a provision

that insurance corporations refer to those "formed or organized to
save any person or persons or other corporations harmless from
loss, damage, or liability arising from any unknown or future
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."183 This
provision has been deleted in RA 10607 or the current Code. The
authority to transact insurance business is embodied in a
"certificate of authority" granted by the Insurance Commissioner
upon compliance with the conditions imposed by law or the
Code. 184

Insured

Under Section 7 of the Insurance Code, "anyone except a

public enemy may be insured." There is, however, no definition
of "public enemy." A definition which is generally accepted, and
in keeping with the nature of an insurance contract, is one where a
person possesses the nationality of the state with which another is
at war.185 Thus, in FilipinasCia de Seguros v. Christern, Huenefeld &
Co.,186 a fire insurance policy issued on October 1, 1941, in favor of

181 Section 190.

182 See Section 288.
183 Section 185 of the Insurance Code of 1978.
184 See Section 193 and succeeding sections on registration and authorization
required of insurers. See also White Cold Marine Services v. Pioneer Insurance,464
SCRA 418 (2005).
185 Black's Law Dictionary; Am=Jur. Words & Phrases p. 157
186 Filipinas Compaiia de Seguros v. Christern, Huenefeld & Co. Inc., 89 PhiL 54
(1951).
 CHAPTER V: THE POLICY OF INSURANCE I 105

the insured, a corporation whose majority stockholders were

German subjects, ceased to be valid and enforceable, the
corporation having become an enemy corporation on December
10, 1941 (World War II). The insured goods were burned on
February 27, 1942 The Supreme Court held that the insured was
not entitled to any indemnity.

The effect of war between countries of the insured and the

insurer upon contracts of insurance entered into before the
declaration of war is illustrated in several decisions by our
Supreme Court rendered immediately following the Second
World War (1941-1945).187 In the United States, there is a conflict
of opinion with respect to the effect of war on life insurance
policies. One rule declares that the contract is merely suspended.
Another rule declares the contract as abrogated for the reason that
the premiums, essential to sustain the validity of the policy, were
not or could not be paid. These decisions of our Supreme Court in
the cases cited in the footnote follow the so-called United States
Rule which VANCE considers the correct rule, to the effect that
the contract of life insurance is deemed abrogated, not merely
suspended during the war.

Just like in any other contract, the parties in a policy of

insurance must have the capacity to contract. As earlier stated,
the insurer must be duly authorized to act as such. On the part of
the insured, capacity to contract is determined by law, the Civil
Code or any special law.

Republic Act No. 6809 lowered the age of majority from

twenty-one to eighteen years. Consequently, the third paragraph
of Section 3 of the then Insurance Code of 1978 (allowing a minor,

James McGuire
187 See Paz Constantinov. Asia Lift Insurance Co., 87 Phil. 248 (1950);
v. Manufacturer'sLife, 87 Phil 370 (1950); National Leather Company, Inc. v. U.S. Lift
Insurance Co., 87 Phl. 410 (1950); Victoria vda. de Carrero v. Manufacturer's Life
InsuranceCo., 87 Phil. 460 (1950); Fidela de Gonzaga v. Crown Life Insurance Co., 91
Phil. 10 (1952).
106 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

eighteen years or more to take out certain specified insurance

policies) is no longer found in the current Code.

An insurance policy taken by a married woman on her life

or that of her children does not require the consent of the
husband.18 In so far as the separate properties of the husband
and the wife are concerned, the consent of the other spouse is not
189
necessary to enter into an insurance contract.

Where there is a lack of capacity, the contract is considered

voidable under the Civil Code.190

Beneficiaries

In life insurance, the insured indicates the beneficiary who

will get the proceeds upon the death of the insured. Unless the
insured expressly waives, in the policy, his right to change the
beneficiary, the insured retains such right Where there are
several and only one of them was irrevocably designated, the
others may be changed.

The beneficiary need not have any insurable interest in the

life of the insured. As such, the insured may designate even a
stranger. Insurance, as a matter of fact, is considered no different
from a civil donation, founded on the liberality of the insured in
so far as the beneficiary is concerned, as noted by the Supreme
Court in Insular Life Assurance Co. v. Ebrado.191 Thus, in the Ebrado
case, the issue raised was whether a common-law wife,
designated as beneficiary, may recover the proceeds of the life
insurance policy of the husband as against the widow who was,

188 Section 3, paragraph Z Code.

189 Article 111, Family Code (Executive OrderNo. 209).
190 Article 1390.
191 Insular Life Assurance Company, Ltd. v. Carpnia Ebrado, et al., 80 SCRA 181
(1977).
 CHAPTER V: THE POLICY OF INSURANCE I 107

likewise, claiming the proceeds. It was categorically admitted that

the designated beneficiary was living with the insured without the
benefit of marriage.

On the bases of Articles 2011 and 2012 of the Civil Code,

the Supreme Court denied recovery by the common-law wife.
Under Article 2011, insurance is governed by special laws;
however, "matters not expressly provided for in such special laws
shall be regulated by this Code." Article 2012 of the same Code
provides: "Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make a donation to
him according to said article." Article 739 considers certain
donations void, including "those made between persons who
were guilty of adultery or concubinage at the time of the
donation." The common-law relation having been admitted in the
pre-trial of the Ebrado case, such admission was considered
judicial proof of concubinage. Conviction for adultery or
concubinage is not required. The Supreme Court gave the
following rationale for disqualifying the named beneficiary in the
case:

"Policy consideration and dictates of morality

rightly justify the institution of a barrier between
common-law spouses in regard to property relations
since such relationship ultimately encroaches upon
the nuptial and filial rights of the legitimate family.
There is every reason to hold that the bar in donations
between legitimate spouses and those between
illegitimate ones should be enforced in life insurance
policies since the same are based on similar
consideration. As above pointed out, a beneficiary in
a life insurance policy is no different from a donee.
Both are recipients of pure beneficence. As long as
marriage remains the threshold of family laws, reason
and morality dictate that the impediments imposed
upon married couple should likewise be imposed
108 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

upon extra-marital relationship. If legitimate

relationship is circumscribed by these legal
disabilities, with more reason should an illicit
relationship be restricted by these disabilities."

The Supreme Court awarded the proceeds not to the

widow but to the estate of the insured, presumably because she
was not the designated beneficiary and, possibly, would share in
the ultimate distribution of the estate.

However, in two other cases, the Supreme Court

somewhat deviated from the stringent proscriptions in the Ebrado
case. In Social Security System v. Davac,192 the Supreme Court did
not apply Article 739 of the Civil Code, there being no proof that
the second wife had knowledge of the previous marriage.
Thereafter, in the case of Vda. De Consuegra v. GSIS,193 the
deceased, a GSIS member, designated in his life insurance policy,
Basilia Berdin and her children as beneficiaries. The deceased,
however, did not designate any beneficiary to his retirement
benefits, which were claimed by the first wife, Rosario Diaz. The
deceased married Diaz in 1937 and Berdin in 1957. Berdin and her
children got the proceeds of the life insurance policy being the
beneficiaries named therein. For the retirement benefits, the GSIS
divided the same equally between the first wife, together with her
children, and the second wife Diaz. The Supreme Court sustained
the decision of the GSIS, having found as being accepted as a fact
that the second marriage was contracted in good faith. The
decision to divide the retirement benefits equally between the two
wives can hardly be justified as Solomonic. Perhaps, the
Consuegra and Davac decisions may be defended considering the
fact that they involve social insurance where a more special law
has to be applied in the concept of social legislation. Otherwise,

192 Social Security System v. CandelariaDavac, 17 SCRA 863 (1966).

193 Basilia vda de Consuegra v. Government Service Insurance System, 37 SCRA 315
(1971).
 CHAPTER V: THE POLICY OF INSURANCE I 109

the Ebrado ruling, being the most recent of the three decisions,
may have somewhat modified the two earlier decisions.

To be distinguished from the foregoing cases is a much

earlier case, Del Val v. Del Val,194 which involved a life insurance
with only one of the children of the insured designated as sole
beneficiary. The other siblings contended that the proceeds, upon
the death of the insured, who died intestate in 1910, belonged to
the estate of the insured. In ruling that the proceeds pertain solely
to the named beneficiary, the Supreme Court declared:

"With the finding of the trial court that the

proceeds of the life-insurance policy belong
exclusively to the defendant as his individual and
separate property, we agree. That the proceeds of an
insurance policy belong exclusively to the beneficiary
and not to the estate of the person whose life was
insured, and that such proceeds are the separate and
individual property of the beneficiary, and not of the
heirs of the person whose life was insured, is the
doctrine in America. We believe that the same
doctrine obtains in these Islands by virtue of sections
428 of the Code of Commerce which reads:

'The amounts which the underwriter

must deliver to the person insured, in
fulfillment of the contract, shall be the
property of the latter, even against the claims
of the legitimate heirs or creditors of any kind
whatsoever of the person who effected the
insurance in favor of the former."'

The decision was promulgated on February 16, 1915,

before the effectivity of the Insurance Act on July 1, 1915. Thus,
the Spanish Code of Commerce was applied. The contention then

194 Franciscodel Val v. Andres del Val, 29 Phil. 534 (1915).

110 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

of the plaintiff that the proceeds should be considered a donation,

was rejected by the Supreme Court, as follows:

"The contract of life insurance is a special

contract and the destination of the proceeds thereof is
determined by special laws which deal exclusively
with that subject The Civil Code has no provisions
which relate directly and specifically to life insurance
contracts or to the destination of life insurance
proceeds. That subject is regulated exclusively by the
Code of Commerce which provides for the terms of
the contract, the relations of the parties and the
destination of the proceeds of the policy."

In the law of succession in civil law, collation, which is the

process of adding the value of donations to the net value of the
hereditary estate, was not enforced, insurance being considered
not subordinate thereto.

Effects of IrrevocableDesignation

Where the insured expressly waives/renounces his right to

change the beneficiary, or is otherwise irrevocably designated, the
beneficiary acquires a vested right on the policy. Thus, where the
irrevocable beneficiary predeceased the insured, the estate of the
beneficiary is entitled to the proceeds of the policy. Whether the
proceeds are taxable as part of the estate of the insured depends
on whether the designation of the beneficiary is revocable or
irrevocable. Where it is irrevocable, the proceeds are excluded
from the estate of the deceased insured.195 The insured may not
even designate additional beneficiaries as this will diminish the
rights of the irrevocable beneficiary.196 Further, the insured may
not even preterminate the insurance, nor apply for a loan
19
5 See Sec. 85(E) of the National Internal Revenue Code. Also, Tabios, Law on
Taxation,
196
157.
See Go v. Redfrn, 72 Phil. 71 (1941).
 CHAPTER V: THE POLICY OF INSURANCE I 111

extension or get the cash surrender value thereof, without the

consent of the irrevocable beneficiary.197 For instance, should the
insured stop paying the premium installments, the irrevocable
beneficiary may continue paying the same.

In Nario v. Philam Life Insurance Co.198, Alejandra Nario

procured a life insurance policy on herself designating her
husband and son Ernesto as irrevocable beneficiaries. When she
applied for a loan on the policy, as provided for in the contract,
Philarn denied her claim on the ground that consent of her minor
son to the loan must be obtained by means of a competent
guardianship proceeding in court. The same position was
contended by Philam when she decided to surrender her policy
and demanded the cash surrender value thereof. The Supreme
Court (with Justice J.B.L. Reyes as ponente) held that, as an
irrevocably designated beneficiary, Ernesto's vested right in the
policy extends to the application for a loan and the demand for
the cash surrender value thereof. The Court held that it was
necessary for the couple to institute proper guardianship
proceeding as the acts involved are acts of disposition of property
rights.

This ruling was made before the effectivity of then

Insurance Code of 1978 and has been superceded by the current
provisions of the third paragraph of Section 182 of the Code which
reads:

"In the absence of a judicial guardian, the

father or, in the latter's absence or incapacity, the
mother, of any minor, who is an insured or a
beneficiary under a contract of life, health, or accident
insurance, may exercise, in behalf of said minor, any
right under the policy, without necessity of court
authority or the giving of a bond, where the interest

197 Delfin Nario v. PhilippineAmerican Life InsuranceCo., 20 SCRA 434 (1967).

198 Ibid.
112 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

of the minor in the particular act involved does not

exceed five hundred thousand pesos (P500,000.00).
Such right may include, but shall not be limited to,
obtaining a policy loan, surrendering the policy,
receiving the proceeds of the policy, and giving the
minor's consent to any transaction on the policy.

In the absence or in case of the incapacity of

the father or mother, the grandparent, the eldest
brother or sister at least eighteen (18) years of age, or
any relative who has actual custody of the minor
insured or beneficiary, shall act as a guardian without
need of a court order or judicial appointment as such
guardian, as long as such person is not otherwise
disqualified or incapacitated. Payment made by the
insurer pursuant to this section shall relieve such
insurer of any liability under the contract"

Forfeitureof Benefits by the Beneficiary

As earlier mentioned, the beneficiary need not have an

insurable interest on the life of the insured. 9 9 The rationale for
this is that an insured would not designate a person as his
beneficiary who is likely to cause his death. Unfortunately, a
beneficiary killing the insured is not uncommon in the United
States. 200 Accordingly, it is generally held that a beneficiary who
intentionally kills the insured cannot, and should not, recover the
insurance proceeds, the underlying rationale being such situation
is contrary to public policy under the common law or under what

199
See Section 10 of the Code on insurable interest in life.
For a depressingly long list of judicial opinions covering more than 40 states,
2w00
see Ferdinand S. Tinio (an alumnus, incidentally of the U.P. College of Law)
Annotation, Killing of Insured by Beneficiary as Affecting Life Insurance or Its
Proceeds 27 ALR.3d 794 (1969 and 2004 Supp.).
 CHAPTER V: THE POLICY OF INSURANCE I 113

is referred to as "slayer statute."2 01 Our Code has what may be

termed a "slayer statute" embodied in Section 12 which provides:

"Sec. 12. The interest of a beneficiary in a life

insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or accessory
in willfully bringing about the death of the insured. In
such a case, the share forfeited shall pass on to the
other beneficiaries, unless otherwise disqualified. In
the absence of other beneficiaries, the proceeds shall
be paid in accordance with the policy contract If the
policy contract is silent, the proceeds shall be paid to
the estate of the insured."

"Interest" here refers to the "right" of the beneficiary to the

proceeds. Note, that the beneficiary must have acted willfully;
thus, he may yet get the proceeds if the killing of the insured was
justified or accidental. 2

F. Certain Rights of the Insured in a Life Insurance Policy

(1) Right to Assign the Policy

Life insurance is concededly considered not merely as a

contract of indemnity, as in property insurance, but as an
investment. The right to assign the policy is understood as an
incidence of ownership, the ultimate objective being the right
to receive the proceeds therefrom. The validity of the
assignment is not affected by the fact that the assignee has no
insurable interest in the life of the insured. Of course, the right
to assign will not be permitted if such is to evade the law

201Lunsford v. W. States Life Insurance, 908 P. 2d 79 (1995); Wunsch v. Sun Life

Assurance
2
of Canada, 92 S2. 3d 146 (2002).
m See Franklin Lfe Ins. V. Striddand,376 F. Supp. 280 (N.D. Miss. 1974); Ca/way
v. S. Farms Human Life Insurance Co. 619 (S.W. 2d 301 (1981); Provident Life &
Accident Insurance Co. v. Carter,345 So. 2d 1245 (1977).
114 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

prohibiting speculation in human life by a device of a

colorable assignment, more specifically to circumvent the
requirement of insurable interest at the inception of the
contract of life insurance.

Life insurance policies are usually assigned by the insured

to secure a loan or to enter into other commercial transactions.
However, problems may arise as to the extent of the assignment,
such as whether the assignee may change the beneficiary or
designate additional beneficiaries. A lot depends on the terms of
the policy itself. Where the designation of the beneficiary is
irrevocable, 203 the assignee's rights are subordinate to those of the
irrevocable beneficiary; in fact, the assignment may even require
the consent of such beneficiary and not only that of the insurer.
However, if the insured has retained the right to change the
beneficiary, the right of the assignee will prevail over those of that
beneficiary. The assignee may even exercise a right to change and
the assignee may, with the consent of the insurer, modify the
terms of the policy.0 4

The Code recognizes the right of the insured in a life

insurance to assign the policy in the following provisions:

"Sec. 184. A policy of insurance upon life or

health may pass by transfer, will or succession to any
person, whether he has an insurable interest or not,
and such person, may recover upon it whatever the
insured might have recovered."

"Sec. 185. Notice to an insurer of a transfer or

bequest thereof is not necessary to preserve the
validity of a policy of insurance upon life or health,
unless thereby expressly required."

03 See discussion
on "Beneficiaries," supra.
For a more detailed discussion of assignment of life insurance policies, see
204
KEETON & WIDISS, Sections 4.1 (2)(ii) and 4.11.
 CHAPTER V: THE POLICY OF INSURANCE I 115

Note that notice to the insurer of an assignment or transfer

is not required, unless the policy so requires.

(2) Right to Exercise Non-Default Options

Section 227(f of the Code deals with the so-called "non-

default options" available to the insured after he shall have paid
three annual premiums. 205 These options are sometimes referred
to as "guaranteed values" or "policy surrender options." These
options are: (1)receive the cash surrender value upon surrender
of the policy; (2) apply the cash surrender value as the premium
for a "paid-up insurance;" (3) apply such value as the premium
for an "extended insurance;" or (4) secure from such value an
automatic premium loan before the expiration of the grace period.

The premiums being paid by the insured is uniform

throughout the lifetime of the policy, whether such premiums are
paid annually, semi-annually, or quarterly (or oftener). The
premiums paid during the early years of the policy are much
more than the computed cost of the insurance, the insured being
younger and the risk insured against is less likely to occur,
compared with the later years of the policy. This excess
accumulates and, together with the interest earned, constitute the
"reserve value" (sometimes referred to as "guaranteed value") of
the policy. At the time of the application, the subsequent
applicant is usually required to indicate the option he wants to

205 Section 227(f) reads: "(f) A provision specifying the options to which the
policyholder is entitled to in the event of default in a premium payment after
three full annual premiums shall have been paid. Such option shall consist of:
(1) A cash surrender value payable upon surrender of the policy which
shall not be less than the reserve on the policy, the basis of which shall
be indicated, for the then current policy year and any dividend
additions thereto, reduced by a surrender charge which shall not be
more than one-fifth of the entire reserve or two and one-half per centum
of the amount insured and any dividend additions thereto;
(2) One or more paid-up benefits on a plan or plans specified in the policy
of such value as may be purchased by the cash surrender value,"
116 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

avail of in case of default in any premium payment after having

paid three annual premiums on the policy. If the applicant fails to
indicate his choice, the insurer will specify in the policy the option
to be used.

Where the insured elects to receive the cash surrender

value, he surrenders the policy and is paid such value. The
relation of insured and insurer terminates. Should the insured opt
for an extended insurance, the cash surrender value will be
applied as a single premium to pay for the period of insurance
such cash surrender value can purchase. If death occurs during
this period of extension, the beneficiary can recover the
unchanged face value of the policy; however, if the insured
survives the period, the beneficiary gets nothing. The insured,
however, may reinstate the original policy during the extension
period by complying with the requirements prescribed by law.0 6

A paid-up insurance, on the other hand, is an amount of

insurance the cash surrender value can purchase. The terms and
conditions of the original policy will be the same, except only that
the amount will be much less than the original face value.

The automatic premium loan simply means that the

insurer will advance the overdue premium from the cash
surrender value. The Insurance Commission, in Circular Letter
No. 18/94, dated August 15,1994, has decreed that:

"No life insurance policy shall be issued or

delivered in the Philippines unless its provisions on
Premium Loan and Automatic Option in case of
default in premium payment conform with the
following conditions:

26 See discussion on "Reinstatement" infir.

 CHAPTER V: THE POLICY OF INSURANCE I 117

1. In the event of default in premium payment,

the Premium Loan provision shall only apply
if requested in writing by the policyholder
either in the application or at any time before
the expiration of the grace period.

2. The moment there is default in premium

payment and no option has been elected,
either in the application or within the time
specified in the policy, one of the paid-up
options specified therein shall automatically
take effect"

(3) Right to Reinstate a Lapsed Life Insurance Policy

One provision mandated by law to be substantially included

in a whole life or endowment policy is the following:

"Sec. 233. x x x (j) A provision that the

policyholder shall be entitled to have the policy
reinstated at any time within three years from the
date of default of premium payment unless the cash
surrender value has been duly paid, or the extension
period has expired, upon production of evidence of
insurability satisfactory to the company and upon
payment of all overdue premiums and any
indebtedness to the company upon said policy, with
interest rate not exceeding that which would have
been applicable to said premiums and indebtedness
in the policy years prior to reinstatement."

Compared with the exercise of non-default options

requiring the payment of three annual premiums, this right to
reinstatement simply requires that it be exercised within three
years from date of default of premium payment (obviously
referring to any premium after the first premium). An application
118 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

has to be made by the insured who must comply with the pre-
condition set in the above-quoted provision of the law.

The requirement that the insured submit "evidence of

insurability satisfactory to the company" may create some
problems. The law does not specify the meaning of "insurability"
and the insurer may consider the evidence submitted by the
insured (over and above the examination or other inquiry the
insurer may conduct) unsatisfactory and deny the application for
reinstatement. Considering the fact that reinstatement revives the
old policy, with the same terms and conditions, including the
same premium rate, the determination by the insurer of the
insurability of the insured becomes very critical. It is possible that
the insurer may condition the reinstatement with a higher
premium rate supposedly by reason of changed circumstances.

In one case 207 involving the application for the

reinstatement of a lapsed policy of a married woman, the Court of
Appeals ruled that the insurer could not impose an additional
"pregnancy premium" simply because the insured was then
pregnant when she applied for the reinstatement. Pregnancy,
according to the Court, is not an ailment or disease and was
already a "calculated risk" assumed by the insurer at the time of
issue of the original policy. As a matter of fact, it can be argued
that a woman unmarried at the time of issue of an original policy
may later be married during the effectivity of such policy, bear
children and have a family. These would not be a hindrance
should her policy lapse and she apply for reinstatement

The other preconditions, like payment of all back

premiums and loans, have to be complied with.28

W Ba&s v. OccidentialLife Insurance, Court of Appeals, 52 O.G. 5898 (1956).

28
N See Rufino Andres v. Croon Life Insurance Co., 102 Phi 919 (1958); Soliman v.
U.S. Life InsuranceCo., 104 Phil. 1046 (1958).
 CHAPTER V: THE POLICY OF INSURANCE I 119

(4) Right to Borrow on the Polic

Section 233(g) of the Code provides:

"A provision that at any time after a cash

surrender value is available under the policy and
while the policy is in force, the company will
advance, on proper assignment or pledge of the
policy and on sole security thereof, a sum equal to, or
at the option of the owner of the policy, less than the
cash surrender value on the policy, at a specified rate
of interest, not more than the maximum allowed by
law, to be determined by the company from time to
time, but not more often than once a year, subject to
the approval of the Commissioner, and that the
company will deduct from such loan value any
existing indebtedness on the policy and any unpaid
balance of the premium for the current policy year,
and may collect interest in advance on the loan to the
end of the current policy year, which provision may
further provide that such loan may be deferred for
not exceeding six months after the application
therefor is made."

The foregoing provision of the Code refers to a loan which

the insured can obtain from the insurer. Note that the amount
which can be borrowed is limited. This should be distinguished
from the right of the insured to assign the policy to a third person
to secure a loan which can be much greater than the cash
surrender value of the policy which is usually only part of the
collaterals securing the loan.
120 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

(5) Right to Dividends

Life insurance contracts may be "participating" or "non-

participating". If it is a "participating" policy, the company shall
periodically apportion any divisible surplus accruing on the
policy and the amount given to the policyholder as policy
dividend.209 These dividends may be either: (a) paid in cash; (b)
applied to the next premium; or (c) retained with the company to
accumulate interest, as may be provided in the policy.

(6) Other Rights

The foregoing rights are found in the Code; in fact, with

the exception of the right to assign the policy, under Section 184,
the others are mandated to be substantially incorporated in a life
insurance policy by virtue of the provisions of Section 233.

It is possible that the insurer may grant to the insured

other rights than those discussed above. Such rights will naturally
be among the terms and conditions of a life insurance policy.

M See Sec. 233(e), Code.

 CHAPTER VI

RESCISSION OF INSURANCE CONTRACTS:

CONCEALMENT, MISREPRESENTATION
& BREACH OF WARRANTIES

As discussed in Chapter IV dealing with perfection of

insurance contracts, an applicant for insurance coverage makes an
"offer." The insurance company makes an assessment of the offer,
of the risk being insured against, and of the terms and conditions
to govern the insurance coverage, including premium rates and
exclusions or exceptions from the insurance. The insurer relies on
the information given by the applicant in making an assessment of
the projected transaction. This reliance characterizes insurance as
being one of uberrimae fides or of perfect good faith.210 In the
formative years of insurance business, insurers had to rely heavily
on data and information given by the would-be-insured.

Our Code has adopted detailed rules on concealment,

misrepresentation and breach of warranty. These rules are
oftentimes considered as risk management devices by insurers.
The data or information required of the applicant are
determinative of whether the insurance company would accept
the offer and issue the corresponding insurance policy. Once the

210 This is not meant to consider this characteristic as expected only of the
insured. In the case of Qua Chee Gan v. Law Union & Rock Insurance Co. Ltd., 98
Phil. 85 (1955), Justice J.B.L. Reyes made the following statement "The contract
of insurance is one of perfect good faith (uberrimaefides)not for the insured alone,
but equally so for the insurer; in fact it is more so for the latter, since its dominant
bargaining position carries with it the stricter responsibility."
122 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

policy is issued, the insured should not increase the risk insured
against by, for instance, changing the use of the property insured
or making alterations therein, without the consent of the insurance
company, or by having the insured violate the warranties given
regarding the use or condition of the property insured.

From the various laws and jurisprudence on insurance

evolving in the United States, our Insurance Code has adopted
detailed rules on concealment, misrepresentation, and breach of
warranty.

A. Concealment

There seems to be no objection to the observation that the

doctrine of concealment is the last resort of the insurer in its
efforts to select and control risks.211 The Code defines
concealment and explains its consequence in the following
manner.

"Sec. 26. A neglect to communicate that

which a party knows and ought to communicate, is
called a concealment.

Sec. 27. A concealment whether intentional or

unintentional entitles the injured party to rescind a
contract of insurance."

The phrase "whether intentional or unintentional" is found in the

old Insurance Act (Republic Act No. 2427); however, the phrase
was deleted with the enactment of the Insurance Code of 1978.
Then in 1985, when Batas Pambansa Blg. 874 amended the Code,

2n See Patterson, Essentials of Insurance Law, p. 444

 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 123

the phrase was restored. The significance of the deletion of the

phrase and, thereafter, its restoration is discussed hereafter. 212

Simply put, concealment is the failure to disclose facts

which the applicant at the time of application, knows or ought to
know and are material to the insurance applied for. Thus, the
Code provides:

"Each party to a contract of insurance must

communicate to the other, in good faith, all facts
within his knowledge which are material to the
contract, and as to which he makes no warranty, and
which the other has not the means of ascertaining.2 13

There is, however, no obligation to disclose everything. In fact, as

provided in Section 30 of the Code, there is no need to disclose,
except in answer to inquiries, the following:

(a) those which the other knows;

(b) those which, in the exercise of ordinary care, the

other ought to know, and of which the former has
no reason to suppose him ignorant;

(c) those of which the other waives communication;

(d) those which prove or tend to prove the existence

of a risk excluded by a warranty, and which are
not otherwise material; and

(e) those which relate to a risk excepted from the policy

and which are not otherwise material." 21 4

212 See Thelma vda. de Canilangv. Court of Appeals, et al., 223 SCRA 443 (1993), infra.
213 Section 28.
214 Section 30, Code.
124 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

To constitute concealment, the insured must have known

of the conceded fact at the time of the application for insurance.

When knowledge of a material fact is acquired after the

effectivity of the policy, non-disclosure of such fact will not
constitute concealment. This is because after the policy takes
effect, subsequent knowledge of a material fact can no longer
influence the insurer whether or not to accept the risk for he has
already done so on the basis of material facts subsisting prior to
the effectivity of the policy. There can be no concealment in this
case because such material fact was not known to the insured
before and upon the effectivity of the contract. However, where
knowledge of the information is acquired after the submission of
the application and pending action thereon by the insurer is a
situation not specifically covered by the Code. In some courts in
the United States, it has been held that the duty to disclose
subsists, the duty of disclosure being considered the same as that
which exists at the time the application was submitted. 215

The insured, likewise, is under no obligation to disclose or

reveal things of which he makes a warranty. To require otherwise
would constitute a superfluity in disclosure. The warranty is
more of an avoidance of increasing the risk. For example, in the
insurance of homes against fire, it is common for policies to
require the insured to expressly warrant that the insured premises
are used solely and exclusively for residential purposes. Having
warranted such use, it would be superfluous to further require the
insured to disclose such a fact, that the premises are indeed used
solely for residential purposes.

ns See United Savings Life Insurance v. Coulson, 560 S.W. 2d 211 (1977). In
MacKenzie v. Prudential Insurance, 411 F. 2d 781 (1969), the insured failed to
disclose substantial increase in his blood pressure, exceeding normal limits after
submitting his application but before issuance of the policy, failure to disclose
was considered fatal.
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 125

The law takes a twist, however, if the insured has

knowledge of facts and circumstances which would prove or tend
to prove that what was warranted was actually a falsehood.
Section 29 of the Code provides that an "intentional and
fraudulent omission on the part of one insured to communicate
information of matters proving or tending to prove the falsity of a
warranty, entitles the insurer to rescind."

The reason for this is that the insurer needs to rely not so
much on the fact that a warranty was made, but rather on the
truth of what was warranted. Hence, if the insured has
knowledge of such facts falsifying the warranty and he
fraudulently conceals the same, then the insurer is given the
remedy to avoid or rescind the contract. In the example in the
preceding paragraph, knowledge of the insured that his wife is
using the premises for a small store would entitle the insurer to
rescind.

In addition to matters covered by Section 30, there is no

obligation to communicate or disclose "general causes" open to
the inquiry of the parties as well as "all general usages of trade." 216
Neither is a party bound to communicate, even upon inquiry,
information of his own judgment. 217 However, information on the
nature or amount of interest of the applicant need not be
disclosed, unless inquired into or when called for under Section
51.218

Finally, there can be waiver of the right to information.

Section 33 of the Code provides:

"Sec. 33. The right to information of material

facts may be waived, either by the terms of insurance

216 Section 32
217 Section 35.
218 Under Section 51, the insurance policy must specify the interest of the insured
in the property insured if he is not the absolute owner thereof.
126 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

or by neglect to make inquiry as to such facts, where

they are distinctly implied in other facts of which
information is communicated."

The case of Ng Gan Zee v. Asian Crusader Life Assurance

Corporation2 19 is illustrative of what may or may not constitute
material concealment. In said case, the insurer issued an insurance
policy on the life of the insured with the latter's wife as
beneficiary. The insured died of cancer of the liver. When his
widow filed a claim with the insurer, the latter denied it on the
ground that the insured was guilty of misrepresentation when he
gave the insurer's medical examiner false and misleading
information as to his ailment and previous operation. The
insured's alleged misrepresentation consisted of his statement in
the application that he was operated for a tumor associated with
ulcer of the stomach. According to medical reports, the insured's
ailment was peptic ulcer and what was removed during his
operation was a portion of his stomach and not merely a tumor.

The Supreme Court held that the insured's statements did

not constitute material concealment. The Court noted that under
Section 27 of the Code "concealment exists where the assured had
knowledge of a fact material to the risk, and honesty, good faith,
and fair dealing requires that he should communicate it to the
insurer, but he designedly and intentionally withholds the
same."220 The law not only requires that the concealment be
material, but also fraudulent, or that the fact must have been
intentionally withheld. According to the Court: "...[i]n the
absence of evidence that the insured had sufficient medical
knowledge as to enable him to distinguish between 'peptic ulcer'
and a 'tumor,' his statement that said tumor was 'associated with
ulcer of the stomach' should be construed as an expression made
in good faith of his belief as to the nature of his ailment and
operation."

219 Ng Gan Zee v. Asian CrusaderLife Assurance Corp., 122 SCRA 461 (1983).
220
Citing Bernardo Argente v. West Coast Life InsuranceCo., 51 Phil. 725 (1928).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 127

The Supreme Court arrived at a different ruling in Vda. de

Canilangv. Court of Appeals,22 1 where on August 4, 1982, one day
after the insured was diagnosed with acute bronchitis, he applied
for and was issued a non-medical insurance policy by the insurer.
The insured died of congestive heart failure, anemia and chronic
anemia on August 2, 1983.

When his beneficiary filed a claim with the insurer, the

latter denied it on the ground that the insured had concealed
material information from it. The application for insurance
contained a medical declaration worded as follows: "I hereby
declare that: (1) I have not been confined in any hospital,
sanitarium or infirmary, nor received any medical or surgical
advice/attention within the last five years. (2) I have never been
treated nor consulted a physician for a heart condition..."

In ruling that there was material concealment, the

Supreme Court applied Sections 26 and 28 of the then Insurance
Code under which provides that "the information concealed must
be information which the concealing party knew and ought to
have communicated." Applying the test of materiality in Section
312 of the same Code, the Court concluded that the information
which the insured failed to disclose "was material to the ability of
the [the insurer] to estimate the probable risk he presented as a
subject of life insurance." The Court stated that the materiality of
the information withheld did not depend on the state of mind of
the insured; neither does materiality depend upon the actual or
physical event which ensue. It said:

"Materiality relates rather to the 'probable

and reasonable influence of the facts' upon the party
to whom the communication should have been made,
221Thelma vda. de Canilang v. Court of Appeals, et al., 223 SCRA 443 (1993).
222Section 31 provides: "Materiality is to be determined not by the event but
solely by the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the disadvantages of
the proposed contract or in making his inquiries.
128 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

in assessing the risk involved in making or omitting

to make further inquiries and in accepting the
application for insurance."

Finally, as to whether Section 27 was intended to limit the

kinds of concealment which generate a right to rescind on the part
of the injured party to "intentional" concealments,Z the ponente,
Justice Feliciano, stated that

"... [a]s a simple matter of grammar, it may be

noted that 'intentional' and 'unintentional' cancel
each other out. The net result therefore of the phrase
'whether intentional or unintentional' is precisely to
leave unqualified the term 'concealment' Thus
Section 27 of the Insurance Code of 1978 is properly
read as referring to 'any concealment' without regard
to whether such concealment is intentional or
unintentional."

Nevertheless, whether or not the concealment was

intentional is unimportant in this case since the Court found that
the failure of the insured to communicate had been intentional
rather than inadvertent since he could not have been unaware of
the condition of his heart which actually prompted him to consult
the doctor.

. The case of Yu Pang Cheng v. Court of Appeals224 also

illustrates concealment which would render a policy ineffective.
In said case, the insured answered "no" to questions propounded
by the physician asking him whether he ever had the following
diseases or symptoms: gastritis, ulcer of the stomach, vertigo,

2n3 When the Insurance Code of 1978 was enacted, the phrase "whether
intentional or unintentional" was deleted from the Insurance Act (Act 2427).
Then, in 1985, Batas Pambansa 874 restored the phrase. The widow, thus, in the
Cailing case argued that with the deletion in the governing law which was then
applicable, Section 27 should be limited to intentional concealment
224 Yu Pang Cheng v. Court of Appeals, et al., 105 Phil. 930 (1959)
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 129

dizziness, fainting spells or unconsciousness and cancer, tumors

or ulcers of any kind. However, it appears that he had actually
undergone medical treatment for peptic ulcer months before he
applied for insurance.

The Supreme Court held that when he gave his answers to

the questions given by the physician, "he concealed the ailment of
which he was treated" which precisely had direct connection with
the subject of the questions propounded. Thus, the Court
concluded that there was concealment on the part of the insured
which renders the policy ineffective.

The same conclusion was arrived at by the Court in Great

Pacific Life Assurance Company v. Court of Appeals,25 where a father
applied for a twenty-year endowment policy on the life of his one-
year old daughter. He supplied the essential data which the
insurer's agent wrote on the application form. The one-year old
child died of influenza and his father filed a claim with the
insurer. The insurance company refused to pay on the ground
that no insurance contract was perfected as there was concealment
of material facts relating to the state of health and physical
condition of the child.

The Supreme Court stated that it is of "the firm belief that

private respondent [the father] had deliberately concealed the
state of health and physical condition of his daughter. When
private respondent supplied the required essential data for the
insurance application form, he was fully aware that his one-year-
old daughter is typically a mongoloid child. Such a congenital
physical defect could never be ensconced nor disguised.
Nonetheless, private respondent, in apparent bad faith, withheld
the fact material to the risk to be assumed by the insurance
company." The Court reiterated that a "contract of insurance is
one of perfect good faith (uberrimaefides) which requires perfect

=25 Great PacificLift Assurance Co. v. Court of Appeals, 89 SCRA 643 (1979).
130 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

candor and openness between the insured and the insurer." Thus
the concealment committed by the father voided the contract.

In the foregoing cases (as well as those relating to

misrepresentation, infra), the cause of death may have no relation
to the fact or facts concealed. As clearly provided in Section 31,
the test of materiality is whether the insurer would have agreed to
issue the policy had it known of the facts concealed or, perhaps,
impose additional terms or require higher premium.

B. Misrepresentation

A representation is an oral or written statement of a

material fact, made by the insured to the insurer tending to induce
the latter to assume the risk. It may be either affirmative, i.e.,
allegations of fact as then existing; or promissory, i.e., statements
concerning what is to happen during the existence of the contract.

On the other hand, misrepresentation is a false

representation which the insured states with the knowledge that it
is untrue, intended to deceive the insurer into accepting the risk.

Misrepresentation may be distinguished from concealment

in the sense that the former is an active form of deception,
whereas concealment is the passive form thereof. In
misrepresentation, an oral or written assertion is made, whereas
in concealment, there is a failure to disclose a material fact.

There is, however, no need to distinguish these two terms,

because the rules pertinent to both are similar. Thus, in the cases
of Musfigi v. West Coast Life Insurance Co.226 and Argente v. West
Coast Life Insurance Co., 227 the terms concealment and
misrepresentation were used interchangeably. In these cases, the

226
Segundina Musfigi v. West Coast Life InsuranceCo., 61 Phil 864 (1935).
22 BernardoArgente v. West Coast Life InsuranceCo., 51 Phi 725 (1928).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS 1 131

insured made a false statement that they have no pre-existing

ailments prior to the commencement of the contract. Clearly there
was a misrepresentation of facts. But this misrepresentation
likewise constituted a failure to make a disclosure of such pre-
existing ailments. Therefore, in failing to disclose the illnesses by
stating that there was none, misrepresentation and concealment
were committed at the same time.

Just like concealment, misrepresentation is committed

before or at the time of the commencement of the insurance
contract. Subsequent to this time, an insured may no longer be
guilty of misrepresentation as the insurer had already been
persuaded to assume the risk. As such, any representation may
be altered or withdrawn before the insurance takes effect, but not
afterwards. 8

In Pacific Banking Corporation v. Court of Appeals,22 the

Supreme Court held that there is a clear misrepresentation. In
said case, the insurer issued a fire insurance policy covering the
property of the insured company. Fire broke out in the insured's
premises, destroying the goods therein. The insurer refused to
pay the claim for indemnity made by the insured for the reason
that the latter did not declare other existing insurance policies
covering the same properties, in violation of a condition in the
policy.

The Supreme Court held that the insured's failure to reveal

the other insurances was "a clear misrepresentation and a vital
one." This is because "had the insurer known that there were
many co-insurances, it could have hesitated or plainly desisted
from entering into such contract." The Court explained the effect
of such misrepresentation, thus:

228 See Sec. 41, Code.

29 Pacific Banking Corp. v. Court of Arpeals, et al., 168 SCRA 1 (1988).
132 j THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

"...[t]he whole foundation of the contract

fails, the risk does not attach and the policy never
becomes a contract between the parties.
Representations of facts are the foundation of the
contract and if the foundation does not exist, the
superstructure does not arise."

In Eguaras v. Great Eastern Life Assurance Co. and Smith,230

the insured was issued a life policy after the insurance company's
physician made a physical examination of a healthy and robust
person. The insured died a month later. The insurance company
refused to pay on the ground that the insurance policy was
obtained through fraud and deceit, the person given the physical
examination was not the insured but a substitute.

The Supreme Court, invalidated the contract under the

provisions of the old Civil Code,231 and ruled:

"A contract is therefore deceitful, for the

execution whereof the consent of one of the parties
has been secured by means of fraud, because he was
persuaded by words and insidious machinations,
statements, or false promises."

The deceit practiced by the insured in procuring the

contract was considered by the Court as so serious which made
the insurance policy ipsofacto void and ineffective.

In the recent case of Florendo v. PHILAM PlanS22 the main

issue was the insured's alleged concealment in his pension plan
application of his true state of health and its effect on the life
insurance portion of that plan in case of death. On October 23,

23
o Francisca Eguaras v. Great Eastern Assurance Co., Ltd., et al., 33 Phil. 263 (1916).
23, Article 1269 of the old Civil Code provides "There is deceit when by words
or insidious machinations on the part of one of the contracting parties the other is
induced to execute a contract which without them he would not have made."
232
Ma. Lourdes Florendo [Link] Plans, Inc., et al.,
666 SCRA 618 (2012).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 133

1997, Manuel Florendo filed an application for comprehensive

pension plan with respondent Philarn Plans, Inc. (Philam Plans)
with a pre-need price of P997,050.00, payable in 10 years, and had
a maturity value of P2,890,000.00 after 20 years. Aside from
pension benefits, the comprehensive pension plan also provided
life insurance coverage in a Group Master Policy that Philippine
American Life Insurance Company (Philam Life) issued to Philam
Plans. Philam Life was to automatically provide life insurance
coverage, including accidental death to all who signed up for
Philam Plans, if the plan holder died before maturity of the plan,
his beneficiary was to instead receive the proceeds of the life
insurance equivalent to the pre-need price.

On October 30, 1997, Philam Plans issued Pension Plan

Agreement to Manuel, with petitioner Ma. Lourdes S. Florendo,
his wife, as beneficiary.

Eleven months later or on September 15, 1998, Manuel

died of blood poisoning. Lourdes filed a claim with Philam Plans.
Because Manuel died before his pension plan matured and his
wife was to get only the benefits of his life insurance plan, Philam
Plans forwarded her claim to Philam Life.

Philam Plans declined her claim having found that Manuel

was on maintenance medicine for his heart and had an implanted
pacemaker. Lourdes renewed her demand but Philam Plans
rejected it, prompting her to file the present action against the
pension plan company before the Regional Trial Court.

RTC rendered judgment ordering Philam Plans to pay

Lourdes all the benefits from her husband's pension plan, namely:
P997,050.00, the proceeds of his term insurance, and P2,890,000.00
lump sum pension benefit. The RTC ruled that Manuel was not
guilty of concealing the state of his health from his pension plan
application. Court of Appeals (CA) reversed the RTC decision
134 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

holding that insurance policies are traditionally contracts

uberrimaefidaeor contracts of utmost good faith.

Before the Supreme Court, the primary issue was whether

or not the CA erred in finding Manuel guilty of concealing his
illness when he kept blank and did not answer questions in his
pension plan application regarding the ailments he suffered from.
The Court ruled that since Philam Plans waived medical
examination for Manuel, it had to rely largely on his stating the
truth regarding his health in his application.

When Manuel signed the pension plan application, he

adopted as his own the written representations and declarations
embodied in it. It is clear from these representations that he
concealed his chronic heart ailment and diabetes from Philam
Plans. The pertinent portion of his representations and
declarations read as follows:
"I hereby represent and declare to the best of
my knowledge that.

xxx

I have never been treated for heart condition, high

blood pressure, cancer, diabetes, lung, kidney or
stomach disorder or any other physical impairment in
the last five years.

I am in good health and physical condition.

If your answer to any of the statements above reveal

otherwise, please give details in the space provided
for:

Date of confinement
Name of Hospital or Clinic
Name of Attending Physician
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 135

Findings
Others: (Please specify)

xxX"

On the other hand, in the following cases the Supreme

Court ruled that there was no concealment

In Great Pacific Life Assurance Corp. v. Court of Appeals,233 a

contract of group life insurance was executed between petitioner
the insurer and the Development Bank of the Philippines (DBP).
It appears that the insured borrower, in his application for
membership in the group life insurance plan, responded to the
following questions as follows: "7. Have you ever had, or
consulted, a physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other
physical impairment? Answer: No. If so give details
8. Are you now, to the best of your knowledge, in good
health? Answer: [ x ] Yes [ ] No."

Less than a year after the effectivity of cover, the insured

died due to massive cerebral hemorrhage. DBP submitted a death
claim to the insurer, who denied the claim on the ground that the
insured was not physically healthy when he applied for an
insurance coverage, alleging that there was concealment when the
insured did not disclose he had been suffering from hypertension
which caused his death. The widow filed a complaint against the
insurer and during trial, the doctor who issued the death
certificate testified that his findings only point to the fact that the
insured complained of headaches presumably due to high blood
pressure. The trial and appellate courts ruled against the insurer
and ordered the same to pay the widow.

The Supreme Court upheld the disquisition of the Court of

Appeals on the matter, to wit:

233 Great Pacific Life Assurance Corp. v. Court of Appeals, et al., 316 SCRA 677 (1999).
136 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

"Contrary to appellanfs [insurer] allegations,

there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement
of the insured's widow who was not even sure if the
medicines taken by Dr. Leuterio [insured] were for
hypertension, the appellant had not proven nor
produced any witness who could attest to Dr.
Leuterio's medical history...

Appellant insurance company had failed to

establish that there was concealment made by the
insured, hence, it cannot refuse payment of the claim."

In Insular Life Assurance Co., Ltd. v. Feliciano,3 4 Evaristo

Feliciano filed an application for insurance with the insurance
company upon the solicitation of one of its agents. Two insurance
policies were issued to him. When Feliciano died and his
beneficiary filed a claim with the insurer, the latter refused to pay
on the ground that the policies were fraudulently obtained. The
insurer claimed that the insured gave false answers and
statements in the application and in the medical report. It was
proven during trial that at the time Feliciano filed his application
and at the time he was subjected to physical examination by the
medical examiner of the herein petitioner, he was already
suffering from tuberculosis. Furthermore, Feliciano was made to
sign the application and the examiner's report in blank, and that
afterwards the blank spaces therein were filled in by the agent and
the medical examiner, who made it appear therein that Feliciano
was a fit subject for insurance. It also appears that neither the
insured nor any member of his family concealed the real state of
health of the insured.

The main issue considered in the case was the liability of

the insurer where its agent knowingly and intentionally wrote
down the answers in the application for insurance, which answers

2
% Insulr Life Assurance Co. v. Serafin Felidano,et al., 73 Phil. 201 (1941).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS 1 137

were different from those made by the insured. The Court ruled
mainly on the basis of equitable considerations, to wit:

"In the present case, the agent knew all the

time the true state of health of the insured. The
insurer's medical examiner approved the application
knowing full well that the applicant was sick. The
situation is one in which one of two innocent parties
must bear a loss for his reliance upon a third person.
In this case, it was the insurer who gave the agent
authority to deal with the applicant It was the one
who selected the agent, thus implying that the
insured could put his trust on him. It was the one
who drafted and accepted the policy and
consummated the contract. It seems reasonable that as
between the two of them, the one who employed and
gave character to the third person as its agent should
be the one to bear the loss."

The Court also ruled that the insurer is bound by the

agent's act of inserting or writing false information in the
application for insurance where the insured gave correct
information. The insurer is not allowed to assert the falsity of the
information as a defense to liability on the policy, at least if not
brought to the attention of the applicant.

A representation need not be literally true and accurate. It

is sufficient that it is substantially or materially true, and in case of
promissory representation, it is sufficient that it is substantially
complied with.

In the case of Hardingv. Commercial Union Assurance Co.,235

the insured represented that the purchase value of her car was
P3,500 when in fact her husband paid only PZ800 for the same.
The Supreme Court held that the insured was not guilty of

23
Henry Harding v. Commercial Union Assurance Co., 38 Phil 464 (1918).
138 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

misrepresentation inasmuch as literal truth was not necessary.

The Court considered the fact that it was not the insured who
actually paid for the insured car, and therefore may not be
expected to know the actual or literal value thereof.

Strictly speaking, representations are not part of the

insurance policy, unless otherwise provided, and as such may not
qualify express provisions in the policy, except that a
representation may qualify or, modify an implied warranty. 236

Misrepresentation/Misstatementas to Age

A misrepresentation as to the age of the insured does not,

however, constitute a ground for rescission. Under Section 233(d)
of the Code, if the age of the insured was considered in
determining the premium and the benefits under the policy, and
the age of the insured has been misstated, the amount payable
under the policy shall be such as the premium would have
purchased at the correct age."

The Supreme Court found no concealment or

misrepresentation as to the age of the insured in the case of Edillon
v. Manila Bankers Life Insurance Corp.237 When the insured correctly
indicated her age-nearly 65 years old, and birthdate-11 July
1904, in the application form. The insurer, nonetheless, rejected
the claims for benefits under the policy pointing to a provision
therein which excludes its liability to pay claims in behalf of
"persons who are under the age of sixteen or over the age of
sixty." And since the insured was over 60 when she applied for
the insurance coverage, the insurer contended that the policy was
null and void. The Court rejected this position, and held that:

23
See Sec. 40, Code.
23
2 Regina Edillon v. Manila Bankers i'fe InsuranceCorp., 117 SCRA 187 (1982).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 139

"The age of the insured was not concealed

from the insurance company. Despite such
information which could hardly be overlooked in the
application form, considering its prominence thereon
and its materiality to the coverage applied for, the
respondent insurance company received her payment
and issued the corresponding certificate of insurance
without question. There was sufficient time for the
company to process the application and to notice that
the applicant was over 60 years of age and thereby
cancel the policy on that ground if it was minded to
do so. If [it] failed to do so, it is either because it was
willing to waive such disqualification; or through the
negligence or incompetence of its employees for
which it has only itself to blame, it simply overlooked
such fact. Under the circumstances, the insurance
23 8
corporation is already deemed in estoppel.

C. The "Incontestable Clause" in Life Insurance Policies

The incontestable clause has been defined as a clause in life

or health insurance policy providing that after the policy has been
in force for a given length of time (e.g. two or three years) the
insurer shall not be able to contest it as to statements contained in
the application. 239

The incontestable clause has been in use since before the

end of the nineteenth century, generally in life and health
insurance policies. It has been observed that there is no other field
of business enterprise where it is customary for the parties to
agree that the validity of the contract shall not be contested. The
clause is said to have originated due to the desire of life insurance
companies to give the greatest possible assurance that the

2M Ibid.
239 Black's Law Dictionary, 5th ed. (1979). See VANCE [Link], pp. 575-583;
KEETON & WIDISS, [Link]., Sec. 3.3(3) and 6.6(d)
140 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

beneficiaries of life insurance policyholders will receive the

proceeds without contest.240 The purpose of the incontestable
clause has been described as follows:

"The object of the [incontestable] clause is

plain and laudable, to create an absolute assurance of
the benefits as free as may be from dispute of fact
except the fact of death, and as soon as it reasonably
can be done."241

A more practical reason has also been offered, to wit:

"The clause, required by statute in many

states, is designed to protect the policyholder from a
lawsuit contesting the validity of the policy after
considerable time has passed and evidence of the
facts surrounding the purchase may be
unavailable." 242

The incontestability clause is made for the benefit of the

insured, and not the insurer, considering that its effect and
purpose is to cut off, after a considerable period, any assertion
that the policy is invalid. 243

In its early stages, the incontestability clause barred

potential defenses which, however, were not specified.
Undisputedly, fraud was the generally recognized defense which
the insurer may no longer raise after the expiration of the period
for incontestability. There were no clear and specific references to
the concepts of warranty, representations and concealment.

240 Meyer, Life and Health Insurance Law. (1972).

241 Ibid. citing Northwestern Mutual Life Insurance Co. v. Johnson, 254 US 96, 101
(1920).
242
See 62 Harvard L. Rev 890 (1949).
243 Ibis
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 141

The clause is now generally required by statute. This trend

started in 1909, when it was required by statute in New York.244
In our jurisdiction, the incontestable clause is required to be
included in an individual life or endowment insurance policy
under Section 233(b) of the Insurance Code, to wit.

"Sec. 233. In the case of individual life or

endowment insurance, the policy shall contain in
substance the following conditions:
XXX
(b) A provision that the policy shall be
incontestable after it shall have been in force during
the lifetime of the insured for a period of two years
from its date of issue as shown in the policy, or date
of approval of last reinstatement, except for non-
payment of premium and except for violation of the
conditions of the policy relating to military or naval
service in time of war."

In addition to the above provision is the second paragraph

of Section 48 of the Code, which provides for the effect of the
incontestable clause:

"Sec. 48. x x After a policy of life insurance

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

The effect, which is to deny any claim of the insurer that

the policy is invalid after two years that the policy has been in
force, is in accordance with the rationale of the clause since its
inception in the 1900s.
244 Tid., pp. 225-226.
142 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Historically, as far as the insurance law of the Philippines

is concerned, the original statutory provision on incontestability
clause was limited to then Section 184(b) of the Insurance Act
(Republic Act No. 2427) which read:

"(b) a provision that the policy shall, in the

absence of fraud, be incontestable after five years
from its date of issue except for nonpayment of
premiums and except for violation of the conditions
of the policy relating to military or naval service in
time of war."

The present Section 48 was then Section 47, which

contained only one paragraph exactly the same as the first
paragraph of now Section 48, which read as follows:

"Whenever a right to rescind a contract of

insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to
the commencement of an action on the contract."

Republic Act No. 171 (June 20, 1947) amended Section 47

by adding a second paragraph as it is now in Section 48. Also,
then Section 184(b) was amended as it is now worded in Section
233(b).

Thus, there are now two provisions on incontestability,

one in the second paragraph of Section 48 and the provision in
Section 233(b), the amendments having been carried over to the
present Code.

The issue raised in Tan Chay v. West Coast Life Insurance

Co.,245 decided under the Insurance Act (Republic Act No. 2427),
regarding rescission of an insurance contract on the ground of
fraudulent concealment is now academic considering the law (PD

245 Tan Chay Heng v. West Coast Life Insurance Co., 51 Phil. 80 (1927).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS 1 143

612 then and now RA 10607). In theTan Chay case, the claim of
non-liability of the insurance company was raised after an action
had already been brought by the beneficiaries to recover the
proceeds of the policy. The insurance company claimed that there
was no contract, the same being void and inexistent and,
therefore, there was no contract to rescind.

As presently worded, the incontestability clause under the

second paragraph of Section 48 states that "the insurer cannot
prove that the policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of the insured or
his agent."

The case of Tan v. Court of Appeals, 246 decided under the

Code of 1978 (PD 612), illustrates the fact that there is still some
ambiguity in the provisions on incontestability. In this case, Tan
Lee Siong applied on September 23, 1973, for life insurance with
the Philippine American Life Insurance Company. Said
application was approved and the corresponding policy was
issued, with the insured's children as beneficiaries. On April 26,
1975, the insured died of hematoma. Thereafter, the beneficiaries
filed a claim for the proceeds of the life insurance policy; however,
the insurance company denied the claim and rescinded the policy
by reason of the alleged misrepresentation and concealment of
material facts made by the deceased Tan Lee Siong in his
application for insurance. Thereafter, the insurance company
refunded the premiums paid on the policy.

Aggrieved, the beneficiaries filed a complaint with the

Insurance Commissioner who dismissed said complaint. The
beneficiaries' main argument is that the insurance company is no
longer allowed to rescind the contract of insurance, as rescission
must be done during the lifetime of the insured.

246 Emilio Tan, et a. v. Court ofAppeals, et al., 174 SCRA 403 (1989).
144 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The Supreme Court rejected the arguments of the

beneficiaries in the following words:

"The so-called 'incontestability clause'

precludes the insurer from raising the defenses of
false representations or concealment of material facts
insofar as health and previous diseases are concerned
if the insurance has been in force for at least two years
during the insured's lifetime. The phrase 'during the
lifetime' found in Section 48 simply means that the
policy is no longer considered in force after the
insured has died. The key phrase in the second
paragraph of Section 48 is 'for a period of two years."'

In this case, the insured died when the policy was in force
for only one year and five months. Since the two-year period had
not lapsed when the insured died, the insurance company is not
barred from proving that the policy is void ab initio by reason of
the insured's fraudulent concealment or misrepresentation.

It would seem that the present wording of Section 48 is not

really free from ambiguity. The phrase "in force during the
lifetime of the insured for a period of two years" should not have
included the portion "during the lifetime of the insured;" after all,
the assumption is that the policy has taken effect and, in fact, the
only issue is the period within which the policy may be contested.
The statement of the Supreme Court to the effect that the phrase
"during the lifetime" simply means that the policy is no longer in
force after the insured has died is a somewhat gratuitous statement.
The following explanation by the Court is more appropriate, to
wit:

"The insurer has two years from the date of

issuance of the insurance contract or of its last
reinstatement within which to contest the policy,
whether or not, the insured still lives within such
period. After two years, the defenses of concealment
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 145

or misrepresentation, no matter how patent or well

founded, no longer lie. Congress felt this was a
sufficient answer to the various tactics employed by
insurance companies to avoid liability. The
petitioners' interpretation would give rise to the
incongruous situation where the beneficiaries of an
insured who dies right after taking out and paying for
a life insurance policy, would be allowed to collect on
the policy even if the insured fraudulently concealed
material facts."

Questions have been raised whether the insurance

company may raise concealment or misrepresentation made in
connection with the original application for insurance during the
two year period "from date of last reinstatement," which will, in
effect, make the period of contestability run anew. There are
opinions that the period runs anew from the date of last
reinstatement only with respect to defenses based on the
application for reinstatement. 247 Note that under Section 233(j),
while the policyholder is entitled to reinstatement of a lapsed
policy within three years from date of default of premium
payment, the policyholder has to produce "evidence of
insurability satisfactory to the insurance company." Thus, it may
be that in producing such evidence, together with the application
for reinstatement, the insurer may base "contestability" on matters
relating to such application, and/or the evidence of insurability
submitted by the insured applying for reinstatement.

Defenses Not Barred

The incontestability clause refers only to attacks on the

legality of the contract by reason of concealment or
misrepresentation on the part of the insured. While breach of

247 McCary v. John Hancock Mutual Life Insurance Co., 236 [Link].2d 501, 46
[Link]. 121, 23 [Link]. 3d 733 (1969).
146 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

warranty is not mentioned in Section 48, such defense may be

raised under Section 233(b). Defenses, other than concealment,
misrepresentation, and breach of warranty are still available to the
insurer, subsequent to the two-year period.

The insurer may still challenge the policy by way of

defense to an action brought against the policy by the insured, on
any of the following grounds:

(1) Non-payment of premium to make the policy effective

or remain in force;

(2) Lack of insurable interest;

(3) Coverage such that the loss/damage did not arise

from the risks covered;

(4) Violation of military or naval service provisions of the

policy (also an issue of coverage);

(5) Failure to commence action within reglementary

period;

(6) Failure to comply with conditions (proof of loss, etc.)

subsequent to the loss; or

(7) The particular viciousness of the fraud employed by

the insured to procure the contract, such as (1) where
the policy was taken pursuant to a scheme to murder
the insured, or (2) the insured substitutes himself with
another during the medical examination. 248

248 See Francisca Eguaras v. Great Eastern Assurance Co., Ltd., et al, 33 Phil. 263
(1916).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS 1 147

D. Warranty

Warranty has been defined as a "statement or promise set

forth in the policy, or by reference incorporated therein, the
untruth or non-fulfillment of which in any respect, and without
reference to whether the insurer was in fact prejudiced by such
untruth or non fulfillment, renders the policy voidable by the
insurer, wholly irrespective of the materiality of such statement or
promise."249

The definition is inadequate, for it only defines warranty

from the perspective of the insurer. Warranties may work in favor
of both the insured and the insurer. Statements or promises
agreed upon by both parties to the insurance contract which are
contained in the contract itself or incorporated by proper reference
constitute warranties. The subject matter of these warranties may
differ - some may be material to the risk insured against, but
some may be trivial. For as long as both parties agree that a
particular fact or promise shall become part of the contract, such
fact or promise shall constitute warranties, which shall have the
effects provided in Sections 74 to 76 of the Code.

Sections 67 to 69 indicate the forms of warranties under the

Code. A warranty is either expressed or implied. 250 As stated
above, the subject matter of a warranty may be a material risk or a
trivial matter. Almost anything may be a subject of a warranty. It
may relate to the past, the present, the future, or to any or all of
these.25 ' Warranties may be classified as affirmative or
promissory based on "whether they represent facts as existing at
the time they are made, or stipulate that certain things shall be
done or that specified conditions shall exist during the currency of
the policy." 252 The operative fact in determining whether the

249 VANCE, op. cit, p. 408.

20 Section 67, Insurance Code.
251 Section 68, Insurance Code.
252 VANCE, p. 410.
148 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

warranty was intended to be a representation of an existing fact or

25 3
as a promise in the future is the language used by the parties.

Expressed and Implied Warranties

As stated earlier, a warranty may be express or implied.

Section 71 states what an express warranty is, to wit:

"A statement in a policy of matter relating to

the person or thing insured, or to the risk, as a fact, is
an express warranty thereof."

The Code does not prescribe a particular form for

warranty to be considered as such. This is expressly stated in
Section 69 of the Code, which states that "no particular form of
words is necessary to create a warranty."

However, the Code does prescribe a requirement that

every express warranty, made at or before the execution of a
policy, be contained in the policy itself, or in another instrument
signed by the insured and referred to in the policy as making a
part of it. This is without prejudice to the provisions of Section 51,
which enumerates what should be specified in an insurance
contract. 254 Thus, it is not enough, for a stipulation to become a
warranty, that the parties intended it as such. It must form part of
the contract of insurance.

Should such stipulations or promises be written in a

separate instrument, then such instrument must be incorporated
in the contract, so that they will be given the effect of warranties.
Thus, in Ang Giok Chip v. Springfield Fire and Marine Insurance
Co.,25 5. a warranty contained in a rider securely pasted on the left

25 id., p. 411.
254
Section 70, Insurance Code.
2. Ang Giak Cuip v. Springfeld Fire & Marine Insurance, 56 Phil. 375 (1931).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS 1 149

hand margin of the policy, and specifically referred to in said

policy, was considered enforceable and is not violative of Section
70.

Implied warranties, on the other hand, only exist in marine

insurance as will be discussed in Chapter VIII of this work.

Section 72 provides for another instance of warranty, one

which may be considered a promissory warranty. The Code,
states:

"A statement in a policy, which imparts that it

is intended to do or not to do a thing which materially
affects the risk, is a warranty that such act or omission
shall take place."

Breach of Warranties

The general rule with respect to violations of warranty is

that violation entitles the other party to the contract to rescind.
Thus:

"Sec. 74. The violation of a material warranty,

or other material provision of a policy, on the part of
either party thereto, entitles the other to rescind."

The materiality of stipulations to be considered warranties

depend on the agreement of the parties, as reflected by the
language of the policy. The test of materiality of warranties is
provided in Section 75 of the Code, to wit:

"A policy may declare that a violation of

specified provisions thereof shall avoid it, otherwise
the breach of an immaterial provision does not avoid
the policy."
150 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

However, the law recognizes certain instances which

justify the violation of the warranty, with the corresponding effect
that the violation will not entitle the other party to rescind the
contract of insurance. These situations are provided for in
Sections 73 and 76 of the Code, to wit:

"Sec. 73. When, before the time arrives for the

performance of a warranty relating to the future, a
loss insured against happens, or performance
becomes unlawful at the place of the contract, or
impossible, the omission to fulfill the warranty does
not avoid the policy.

"Sec. 76. A breach of warranty without fraud

merely exonerates an insurer from the time that it
occurs, or where it is broken in its inception, prevents
the policy from attaching to the risk."

From the provisions of Sections 74, 75 and 76, it would

appear that for a breach of warranty to be a ground for rescission,
fraud is not required. Note, however, that under Section 76, a
breach of warranty without fraud exonerates the insurer from the
time the breach occurs. The implication is that when there was
fraud the insurer is exonerated completely, especially where the
breach was at the inception and which prevented the policy from
attaching to the risk.

On the other hand, it may be noted that under Section 75,

the parties may stipulate that the violation of a specific provision,
not necessarily material to the contract, may avoid the policy.

WarrantiesDistinguishedfrom Representations

Representations are mere collateral inducements to the

contract of insurance. They may be oral or written on the policy.
The insurer has the burden of proving that the representation
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS 1 151

made is material to the contract. Moreover, only substantial truth

is required of representations. On the other hand, warranties are
required to be part of the contract; they must be written on the
face of the policy, either actually stated therein or incorporated by
reference. Warranties are conclusively presumed material and
2
must strictly be complied with. 56

Illustrative Cases

A provision in a property insurance dealing with the so-

called "other insurance clause" may give rise to either a
concealment or a warranty that such other insurance did not exist
or that the insured will not effect such other insurance without
notice and consent of the insurer. A typical provision is as
follows:

"The insured shall give notice to the company

of any insurance or insurances already effected, or
which may subsequently be effected, covering any of
the property hereby insured, and unless such notice
be given and the particulars of such insurance be
stated in or endorsed on this policy by or on behalf of
the Company before the occurrence of any loss or
damage, all benefits under this Policy shall be
forfeited."

The obvious purpose of the aforesaid requirement in the

policy is to prevent over-insurance and thus avert the perpetration
of fraud.

Among the cases dealing with violations of the "other

insurance clause" are Sta. Ana v. Commercial Union Assurance
Co.;257 Union Manufacturing Co. v. Philippine Guaranty Co., Inc.;258

2
56 See VANCE, pp. 412-416.
257 Ulpiano Sta. Ana [Link] Union Assurance Co, Ltd., 55 Phil. 329 (1930).
152 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Pioneer Insurance Ins. & Surety Corp. v. Yap;259 Pacific Banking Corp.
v. Court of Appeals;260 New Life Enterprises v. Court of Appeals;261 and
Geagoniav. Court ofAppeals.z2

To be distinguished from these cases is American Home

Assurance Co. v. Chua 263 where the insurer was not allowed to
deny liability on the ground that the insured seemingly violated
the "other insurance warranty" in the policy. The Supreme Court
held that:

"[1It can not be said that the insurer was

deceived by the insured by the latter's non-disclosure
of the other insurance contracts when the insurer
actually has prior knowledge thereof. Insurer's loss
adjuster had known all along of the other existing
insurance contracts, yet, he did not use that as a basis
for his recommendation of denial. The loss adjuster,
being an employee of the insurer, is deemed a
representative of the latter whose awareness of the
other insurance contracts binds the insurer."

Then there are cases where the Supreme Court did not
consider certain prohibited acts as breach of warranty:

In Bachrach v. British American Assurance Co.,264 the keeping

of alcohol and varnish which was necessary for the preservation
of furniture in a salable condition does not violate the warranty
prohibiting the storage of inflammable materials.

258 Union Manufacturing Co, Inc., et al. v. PhilippineGuaranty Co,Inc., 47 SCRA 276
(1972).
2
% PioneerInsurance & Surety Corp. [Link] Yap, 61 SCRA 432 (1974).
26
PacificBanking Corp. v. Court of Appeals, et al., 168 SCRA 1 (1988).
261 New Life Enterprises,et al. v. Court of Appeals, et al., 207 SCRA 669 (1992).
= Armando Geagoniav. Court of Appeals, et al., 241 SCRA 152 (1995).
263 American Home Assurance Co. [Link] Chua, 309 SCRA 250 (1999).
264 [Link] Bachrach v. British American Assurance Co., 17 Phil. 555 (1910).
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 153

In Young v. Midland Textile Insurance Co., 26 the warranty

prohibiting the storage of hazardous or inflammable materials is
not violated by a deposit in small quantities of such materials
which was needed for daily use.

In Qua Chee Gan v. Law Union & Rock Insurance Co.,26 it was
ruled that gasoline was not specifically mentioned among the
prohibited articles listed in the so-called "hemp warranty." The
clause relied upon by the insurer speaks of "oils" and is
ambiguous and uncertain. Besides, the gasoline kept by the
insured was only incidental to his business, being no more than a
customary two-day supply for the five or six motor vehicles used
for transporting the copra and hemp stored in the warehouse.

E. Action to Rescind; Other Grounds for Rescission

The first paragraph of Section 48, to the effect that the right
to rescind given to the insurer must be exercised previous to the
commencement of an action on the contract (by the
insured/beneficiaries), applies to both life and non-life insurance
policies. However, in view of the second paragraph, the right to
rescind a life insurance policy can only be exercised within the
two-year period of contestability, subject nonetheless to the
condition that such right to rescind must be exercised before any
action on the life insurance policy is commenced.

The right to rescind non-life insurance policies must be

exercised within the prescriptive period of ten years under the
Civil Code.267 The policy, however, may provide for a shorter
period within which an action thereon may be brought but such

2 KS. Young v. Midland Textile Insuance Co., 30 Phil. 617 (1915).

266 Qua Owe Gan v. Law Union & Rock Insurance Co. Ltd., 98 Phil. 85 (1955).
26
7 Article 1144.
154 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

period may not be shorter than one year from the time the cause
of action accrued. 268

In Sun Insurancev. Court of Appeals,269 the insured sought a

reconsideration of the denial by the insurer of the claim. The
insured thereafter argued that the prescriptive period fixed in the
policy did not run until after the petition for reconsideration is
resolved by the insurers. The Supreme Court easily rejected this
argument and even pointed out that to uphold such an argument
can be used by insured persons as "a scheme or device to waste
time until any evidence which may be considered against them is
destroyed."

F. Waiver of Right to Rescind

There may be instances where the insurer issues a policy

with the knowledge that a particular warranty has not been
complied with, as where the insurer knows of other existing
insurance on the property and still issues the policy and collects
the premium, or where there is a warranty that a certain number
of fire hydrants exist when in fact only two were installed and still
issued the policy. In all these instances, the insurer is deemed to
have waived the right to rescind.2 70

G. Other Grounds for Cancellation of Policy

Section 64 of the Insurance Code provides:

26 Section 63, Insurance Code.

269 Sun Insurance Office, Ltt v. Courtof Appeals, et al., 195 SCRA 193 (1991).
270 See American Home Assurance Co. v. Antonio Clua, 309 SCRA 250 (1999); also
Emilio Gonzales La 0 v. Yek Tong Lin Fire & Marine InsuranceCo, Ltd., 55 Phil. 386
(1930); Qua Chee Gan v. Law Union Rock Insurance Co., 98 Phil. 85 (1955). See also
Bachrach& Young cases, footnotes 213 and 214, supra.
 CHAPTER VI: RESCISSION OF INSURANCE CONTRACTS I 155

"No policy of insurance other than life shall

be cancelled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
shall be effective unless it is based on the occurrence,
after the effective date of the policy, of one or more of
the following-

(a) non-payment of premium;

(b) conviction of a crime arising out of

acts increasing the hazard insured
against;,

(c) discovery of fraud or material

misrepresentation;

(d) discovery of willful or reckless acts or

omissions increasing the hazard
insured against;

(e) physical changes in the property

insured which result in the property
becoming uninsurable; or

(f) a determination by the Commissioner

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

Moreover, the Code provides, in connection with the

required prior notice:

"Sec. 65. All notices of cancellation

mentioned in the preceding section shall be in
writing, mailed or delivered to the named insured at
the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is
relied upon and (b) that, upon written request of the
156 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

named insured, the insurer will furnish the facts on

which the cancellation is based."

When the cancellation deals with compulsory motor

vehicle liability insurance, the Code requires that "no cancellation
of the policy shall be valid unless written notice thereof is given to
the land transportation operator or owner of the vehicle and to the
Land Transportation Commission at least fifteen days prior to the
intended effective date thereof."M

The grounds enumerated in Section 64 deal mostly with

acts or matters increasing the risk or those considered moral
hazards affecting the risks insured. Item (d) deals with willful or
reckless acts or omissions increasing the hazard. These acts
should not be confused with simple negligence which is a prime
reason why insurance is taken in the first place. The acts of
negligence should be willful or gross, to the extent that they may
be considered intentional for which the insurer should not be
liable.

Finally, the grounds in Section 64 are not exclusive.

Fraudulent concealment, misrepresentation or breach of warranty
are equally grounds for cancellation of the policy (assuming, of
course, that no action on the policy has been commenced by the
insured/beneficiaries), subject to those specifically covered by the
incontestability clause.

2n See Section 393, Code.

 CHAPTER VII

RISKS AND COVERAGES

In the earlier part of this work there is ample discussion of

the definition and elements of insurance. Central to said
discussion is the element of risk, the very foundation of insurance.
It can even be said that insurance is the answer to risks. Human
activity or endeavor is invariably susceptible to risks or failure,
losses or liability. Since only a portion of the relevant facts
affecting such activity or endeavor can ever be known, predictions
about the occurrence of a potential loss are based on estimates or
guesswork. This speculative aspect is considered as the "element
of risk" in an insurance transaction.2'

Intimately related to the risk element is that of causation.

From the very concept and definition of insurance, the loss,
damage or liability which may befall the insured must be caused
by the risk insured against. Short of its causation, there can never
be an insurance situation.

In this chapter, discussion will focus on the risk factor

which results in a loss, damage or liability. The greater portion of
this chapter will deal with the various "kinds" or "classifications"
of insurance, not merely the interest of the insured (e.g. life and
risks related thereto; property and risks resulting in its destruction
or loss; etc.) but the events or factors which adversely affect such
interest. Finally, it will be noted from the ensuing discussion that

27 KEETON & WIDISS, [Link], Sec. 1.3(a), p. 8

158 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the divisions made by the Code in Chapter II, Titles 1 to 5, on the

subjects of insurancen to wit: marine, fire, casualty, suretyship
and life will be followed sequentially, except marine insurance
which will be treated as a separate chapter.27 4

A. The Concepts of InsurableRisk and Causation

Title I of Chapter I of the Code, under the heading "What May

Be Insured" specifically provides that-

"Section 3. Any contingent or unknown event,

whether past or future, which may damnify a person
having an insurable interest, or create a liability against
him may be insured against, subject to the provisions
of this Chapter."

In general, therefore, any contingent or unknown event which

may cause damage to a person having an insurable interest or
which may create a liability against the person insured may be
insured against, provided that they are not contrary to law, public
order, public policy, morals, or good customs. n Reference to a
past event which may be insured against reflects the early days of
marine insurance covering vessels or cargo whether "lost or not
lost".276 In these situations, the parties are not aware of the loss or
destruction of the thing insured. Contrary to some
misconceptions, even a fortuitous event, definitely unknown, may
be the peril insured against.v7

273
See discussion in Chapter II-D "Kinds of Insurance Contracts Under the
Code," supra
274
See Chapter VIII, infra.
M71306, Civil Code.
276 See discussion on Chapter VIII, Marine Insurance, infra. See also, Pendergrastv.
Globe & Rutgers FireInsurance Co. of City of New York, 159 N.E. 183 (1927); and St.
Paul Fire &Marine Insurance Co. v. Pure Oil Co., 63 F 2d 771 (1933).
V7 See Article 1174, Civil Code.
 CHAPTER VII: RISK AND COVERAGES I 159

Both the insurer and the insured may stipulate in a contract

between the two of them the risk being insured against, that they
may limit the scope of such a policy either by enumerating certain
risks or events which are expressly covered or by excluding
certain events or perils from the coverage.

Specified Risks and "All Risk" Policies

An insurance company has the unqualified right to select

the risks it considers profitable to insure.2n An insurer may offer
to cover only certain risks to which a person may be exposed or
offer to cover all. Generally, insurance policies only insure against
"specified risks". In this type of insurance contract, the policy will
specify the risks the insurer has agreed to grant coverage for, and
beyond this it may not be held liable.

Early Philippine jurisprudence, particularly the case of

Gloren Inc. v. FilipinasCia. De Seguros279 has defined an "all risk"
insurance policy as that "policy which insures against all causes of
conceivable loss or damage, except as otherwise excluded in the
policy or due to fraud or intentional misconduct on the part of the
insured." It has also been defined in other jurisdictions as a
promise to pay for loss caused by a fortuitous or extraneous event
happening, but it is not a promise to pay for loss or damage which
is almost certain to happen because of the nature and inherent
qualities of the property insured.n 0 Policies of this kind are very
rare and can only be found in marine insurance. Marine
insurance developed as an all risk coverage, using the phrase
"perils of the sea" to encompass the wide and varied range of
risks that were covered.28 '

27
8 Edelstein v. Nationwide Mut. Ins. Co., 252 Md 455, 250 A2d 241.
279 65 O.G. 339, cited in the case of Choa Tiek Seng v. CA, 183 SCRA 223.
2O Glassner v. DetroitFire & Marine Ins. Co., 23 Wis 2d 532,127 NW2d 761.
28
'Malayan Insurance v. Court ofAppeals, 336 Phil. 977, citing KEETON & WIDISS,
Insurance Law, 467, (1988).
160 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Exceptions and Exclusions

Exceptions or exclusions in a policy work to limit or

restrict the operation of the general provisions in the contract.
Parties may agree to exclude certain risks and limit the coverage
of the policy to certain particular events.

Ordinarily, an exclusion in a policy is a means employed

by the insurer to protect itself from an additional risk or hazard
against which it does not wish to insure without the payment of
an additional premium.282 Exceptions on the other hand, as
limitations in the policy, work to constitute as a defense which the
insurer may urge to defeat a claim since it has not assumed that
risk against such perils and hazards.28 3 However, an insurer who
seeks to defeat a claim because of an exception or limitation in the
policy has the burden of establishing that the loss comes within
the purview of the exception or limitation.284

In the case of DBP Pool of Accredited Insurance v. Radio

Mindanao Network Inc. 285 the Supreme Court ruled on the risks
covered by an insurance policy which did not specifically exclude
the event which led to its loss. In said case, the owner of several
broadcasting stations procured insurance coverage over its
transmitter equipment and generating set. The policy was issued
by Provident Insurance Corporation (Provident) as a fire
insurance policy. On the other hand, DBP Pool of Accredited
Insurance Companies covered the stations' transmitter, furniture,
fixture and other transmitter facilities. The radio station located in
Bacolod City was razed by fire causing damage to more than one
million pesos. When the insured sought recovery under the two
insurance policies, its claims were denied. The theory of the
20 43Am Jur 2d, 461; Jarmanv. Export Ins. Co., 59 Tenn App 245,439 SW2d 785.
8
M Country Bankers InsuranceCorp. v. Lianga Bay & Community Multi-Purpose
Cooperative, Inc., 425 Phil. 511.
28
4 United Merchants Corp. v. Country Bankers Insurance Corp., G.R. No. 198588, July
11,2012.
=85430 SCRA 314, G.R. No. 147039, January 27,2006.
 CHAPTER VII: RISK AND COVERAGES I 161

insurers was that the cause of loss, which consisted of certain acts
of approximately twenty armed men who were allegedly
members of the Communist Party of the Philippines/New
People's Army (CPP/NPA), was an excepted risk under condition
number 6(c) and (d) of the policies, which state

"6. The insurance does not cover any loss or

damage occasioned by or through or in consequence,
directly or indirectly, of any of the following
consequences, namely: (xxx)

(c) War, invasion, act of foreign enemy,

hostilities or warlike operations (whether war be
declared or not), civil war.

(d) Mutiny, riot, military or popular

uprising, insurrection, rebellion, revolution, military
or usurped power."

The Supreme Court rejected the insurer's argument that it is

incumbent upon the insured to prove that the cause of loss was
covered by the insurance policy. It ratiocinated in this wise:

"Particularly, in an insurance case, where a risk is

excepted by the terms of a policy which insures
against other perils or hazards, loss from such a risk
constitutes a defense which the insurer may urge,
since it has not assumed that risk, and from this it
follows that an insurer seeking to defeat a claim
because of an exception or limitation in the policy has
the burden of proving that the loss comes within the
purview of the exception or limitation set up. If a
proof is made of a loss apparently within a contract of
insurance, the burden is upon the insurer to prove
that the loss arose from a cause of loss which is
162 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

excepted or for which it is not liable, or from a cause

which limits its liability." 2

When the loss results from an excepted or excluded risk,

the insurer is not liable. However such exceptions and exclusions
are strictly construed against the insurer. An insurance contract,
being a contract of adhesion, should be so interpreted as to carry
out the purpose for which the parties entered into the contract
which is to insure against risk of loss or damage to the goods. As
the Court said in a ponencia by Justice Davide Jr., in the very
interesting case of Fortune Insurance and Surety Co., v. Court of
Appeals, "[l]i m itations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the
28 7
insurer from non-compliance with their obligations."

This case was discussed earlier in this work 28 and involves

a payroll robbery policy containing the following exclusion
provision:

"The Company shall not be liable under this policy, in

respect of any loss caused by any dishonest,
fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee, or
authorized representative of the insured whether
acting alone or in conjunction with others."

There was a robbery while the funds of the bank were in transit.
The insurer denied liability claiming that in the robbery the driver
of the van and the security guard were involved. The trial court
and the Court of Appeals ruled against the insurer on their
finding that the driver and the security guard were not employees
of the insured bank. The Supreme Court reversed and pointed
26
MCiting Country Bakers Insurancev. Lianga Bay & Community Multi-Purpose
Cooperative,supra.
2"FortuneInsurance and Surety Co., Inc. v. Court of Appeals, 244 SCRA 308
288
See Chapter II-E, "Construction and Interpretation of Insurance Contracts"
 CHAPTER VII: RISK AND COVERAGES I 163

out that in burglary, robbery, and theft insurance, insurers often

exclude risks arising from people who are in the insured's service
and employment. 289 In having been entrusted with the transfer of
the insured's money, the driver and the security guard were
considered by the Court as the insured's representatives, thereby
effectively bringing the incident within the ambit of the
Exceptions Clause.

Cause-Event-Result Trichotomy/Principlesin Causation

Both in tort and insurance cases, the rules of causation are

applied for the single purpose of fixing culpability and for that
reason, the rules consider both the injury and the principal cause
to fix the blame on those who created the situation in which the
physical laws of nature operated. In insurance, the concern is
with the nature of the injury and how it happened. If the peril
insured against is the proximate cause, the court will look no
further.2 0

Sections 86 to 89 of the Code are the statutory provisions

on causation in relation to loss, damage or liability suffered by the
insured in an insurance transaction. It will be noted that the
causes mentioned are "proximate" (Sec. 86), "remote" (also in Sec.
86), and "immediate" (Sec. 88). There is, however, no attempt to
define the terms.

Section 86 provides:

"Unless otherwise provided by the policy, an

insurer is liable for a loss of which a peril insured
against was the proximate cause, although a peril not
contemplated by the contract may have been a
remote cause of the loss; but he is not liable for a loss

2" See VANCE, Chap. 17, Sec. 199, pp. 1014-1015.

29 See KEETON & WIDISS, [Link], pp. 556-559.
164 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

of which the peril insured against was only a remote

cause."

The usual and frequently given as an example applying

Section 86 is when a fire insurance policy excludes explosion
which, however, damaged the property and where the
explosion was caused by a fire which is considered the
proximate cause. Further discussion is found in Vda. de
Bataclan case in the following paragraph. Section 88, on the
other hand, may be considered an opposite of the situation
covered by Section 86. Section 88 will cover a situation
where a fire policy excludes explosion which, however,
caused a fire which burned the property-the insurer is not
liable. The fire is the "immediate" cause.

Section 88 provides:

"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."

The case of Vda. de Bataclan v. Medina291 is a classic case

defining proximate cause. In this case, at around 2:00 o'clock in
the morning, a passenger bus's front tires burst, causing the bus to
zig-zag until it fell into a ditch on the right side of the road and
turned turtle. Three passengers were trapped inside the bus,
shouting for help to the houses in the neighborhood. Ten men
then came to their aid, one of them carrying a lighted torch. Upon
approaching the overturned bus, a fierce fire started burning and
consuming the bus, including the trapped passengers. The
families of those deceased passengers sued the carrier.

The Supreme Court ruled that the defendant carrier is

liable, and that the overturning of the bus and not the fire, was the
proximate cause. It is interesting how the Supreme Court
2K102 PhiL 181.
 CHAPTER VII: RISK AND COVERAGES I 165

connected all the circumstances -from the overturning of the bus,

the leaking of the gas from its tank, and the coming of persons
responding to the cries for help of the trapped passengers and the
use of torches in the dark (2:30 a.m.)- to come to the conclusion
that all these were a natural sequence of events. Citing American
Jurisprudence, the Court defined proximate cause as follows:

"...That cause, which, in natural and

continuous sequence, unbroken by new independent
cause, produces the event, and292
without which that
event would not have occurred."

There are basic differences between principles of legal

cause that apply to tort claims and those that apply to contract
disputes in general or to insurance claims in particular. In a
New York case, then Judge (later Justice) Benjamin Cardozo
observed that there is a tendency in tort law to go farther back in
the search for causes than there is in the law of contracts.2 The
case, Bird v. St. Paul Fire & Marine Insurance Co., 224 N.Y. 47, 120
N.E. 86 (1921), denied liability under a fire insurance policy on a
canal boat for concussion damage from an explosion about 1,000
feet distant from the boat, the explosion being part of a chain of
events started by a fire in a freight yard, a fire considered to have
occurred too far to be considered a "proximate" cause.

There are, however, many instances involving causation

questions where judicial inclination is to favor coverage either by
construing ambiguous policy provisions against an insurer or by
protecting the reasonable expectations of an insured. 295 From
judicial decisions, it would appear that the resolution of coverage
questions frequently involves classification which is very "fact
sensitive."
292
See Graham vs. PublicEmployees Mutual InsuranceCo., 98 Wash. 2d 533,656 P.
2d 1077 (1983), dted in KEETON & WIDISS, [Link]., pp. 556-557
2%KEETON & WIDISS, [Link]., see 5.5(d), p. 556.
29 KEETON & WIDISS, [Link], Chapters 5 & 6.
m FGU Insurance Corp.v. Court of Appeals, 454 SCRA 337.
166 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Rescue from Covered Peril

Section 87 of the Code provides that "An insurer is liable

where the thing insured is rescued from a peril insured against
that would otherwise have caused a loss, if, in the course of such
rescue, the thing is exposed to a peril not insured against, which
permanently deprives the insured of its possession, in whole or in
part; or where a loss is caused by the efforts to rescue the thing
insured from a peril insured against."

To illustrate: a house and its contents were covered by a

policy of insurance against fire only, not theft. When the house
was about to be consumed by fire, some appliances and
furnishings were brought out and placed in an empty lot across
the house where thieves took advantage of the confusion and
stole the appliances and furnishings. The insurer would still be
liable. Likewise, the insurer is liable if damage is caused by the
strong pressure of water used to extinguish the fire because the
damage was caused by efforts to rescue the thing insured from a
peril insured against.

Loss Due to Negligence

Under Section 89 of the Code "an insurer is not liable for a

loss caused by the willful act or through the connivance of the
insured; but he is not exonerated by the negligence of the insured,
or of the insurance agents or others."

One of the purposes for taking out insurance is to protect

the insured against the consequences of his negligence and that of
his agents. 296 However, there is a certain degree of negligence the
happening of which would exempt the insurer from liability.

2%FGU Insurance Corp. vs. Court of Appeals, 454 SCRA 337.

 CHAPTER VII: RISK AND COVERAGES I 167

Such was the case in FGU Insurance Corp. v. Court of

Appeals 297. In this case, San Miguel Corporation (SMC) shipped
several thousands of cases of beer from Cebu to Iloilo and
Antique. It engaged the services of ANCO which loaded the
cargo on board an engineless barge towed by a tugboat M/T
Anco. The barge and tugboat arrived at Antique with the weather
showing signs of an impending storm. The tugboat left
immediately, leaving the barge alone at the port, since other vessel
had already moved to another wharf to avoid the oncoming
storm. The District Supervisor of SMC requested ANCO to move
the barge fearing that it might not be able to withstand the waves
but ANCO refused to heed the request. Come midnight, the barge
ran aground and was broken, and the cargo of beer was swept
away.

SMC sued ANCO for breach of contract and damages.

ANCO denied liability attributing the loss of the cargo to
fortuitous event i.e. the storm. Upon reaching the Supreme Court,
the Court ruled that ANCO's negligence was the proximate cause
of the loss. While the loss was admittedly caused by the typhoon,
a natural disaster, ANCO could not escape liability to SMC, since
record shows that it did not exercise the extraordinary diligence
that was asked of it. There was blatant negligence from its crew,
particularly that of M/T Anco in leaving the engineless-barge at
the mercy of the storm in the port.

FGU as ANCO's insurer is likewise not liable. While basic

is the rule in insurance that the carelessness and negligence of the
insured or his agents constitute no defense on the part of the
insurer, this rule is not without exception since it presupposes that
the loss has occurred due to causes which could not have been
prevented by the insured despite the exercise of due diligence.

n7 Id.
168 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Therefore, when the insured's negligence is so gross as to

constitute willful act, the insurer will be exonerated.

B. PreliminaryStatements on Classes of Insuranceand Multiplication

of Risks

As mentioned in the earlier part of this work, the number or

types of risks that can be insured against, as well as the interests
to be protected, have grown considerably to encompass
practically every conceivable form or kind of work that may be
encountered in modem life. From its roots in marine insurance to
date, writers and authorities on insurance law have considered the
following as the general classification of insurance: (1) fire and
marine; (2) life and accident; and (3) casualty.% The present day
complexity of insurance law may be attributed to, among others,
the sheer number of risks that may be covered; growth of
corporate business forms; and the incredible ease of transportation
299
and communication in the modem world.

The Code, as likewise pointed out earlier, divided the fields of

insurance regulated as follows: (1) life; (2) fire; (3) casualty, (4)
suretyship; and (5) marine. The following discussion on the
specific risks and extent of coverage in these classes of insurance
will follow their sequential treatment in the Code, except marine
insurance which will be covered by another chapter. Although
not strictly a class or division of insurance, the topic
"Reinsurance" is added to the discussion in this chapter; after all,
as will be discussed later, reinsurance is in the nature of a liability
insurance.

2
" See VANCE, [Link]., Chap. 17; COUCH, Sec. 101; KEETON & WIDISS, [Link],
Chap. 1,16-19; and 43 An. Jur. 2d Sec. 461 [Link].
2" bid.
 CHAPTER VII: RISK AND COVERAGES I 169

C. Life Insurance

Life insurance is an insurance policy the proceeds of which are

payable either upon (a) death of the person; (b) his surviving a
specified period; or (c) on the continuance or cessation of life.M
But essentially, it is the contract where a beneficiary shall be paid,
upon the death of the insured.

The parties involved in a life insurance are (1) the owner of the
policy-with the power to name or change the beneficiary, assign
it, cash it in or use as collateral, with the obligation to pay
premiums; (2) the cestui que vie - one on whose life insurance is
obtained; and (3) the beneficiary-one to whom the proceeds may
be paid. There are also cases wherein there may be one person
only for all the three parties, for instance, if the beneficiary is the
estate upon the death of the insured who is equally the cestui que
vie.

The event insured against is not confined to the termination of

life but the continuance. Where the proceeds of life insurance
policy is payable upon the insured surviving a specified peril, the
insurance is commonly referred to as pure endowment or as an
annuity. Life insurance actually includes personal accident
insurance, health insurance as well as contracts providing for the
payment of specific benefits upon the death of a person whose life
is insured. Actually, life insurance involves many types of
coverages. Those different plans or types are briefly described
hereunder.

(1) Whole Life Insurance 2 refers to one wherein the benefits are
payable upon the death of the person whose life is insured.
Some of the more distinct types are the following:

3w Sec. 182, Insurance Code.

M See discussion on annuities in Chapter II, supra.
MSee KEETON & WIDISS, [Link]., pp. 21-26.
170 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

(a) Ordinary life insurance. Premiums are paid (either

quarterly, semi-annually or annually) throughout the
lifetime of the person insured or until the person
reaches a predetermined specified age (such as 50, 65
or 70 years) at which point the coverage continues
without the payment of additional premiums.

(b) Limited payment life insurance. Premiums are paid

only during a specified number of years or until a
specified event occurs.

(c) Single premium life insurance. The coverage is

acquired by the payment of a single premium.

(d) Joint life insurance. Coverage is payable upon the first

death among two or more insured. This type is usually
purchased by business partners or spouses. Upon the
death of one of the insureds, the insurance is paid to
the survivor(s).

(e) Universal life insurance. This coverage emphasizes the

separation of the portion of the premium that is used to
cover the insurance protection from the portion of the
premium allocated to an investment.

(f) Variable life insurance. Some amount of death benefit

provided by a variable life insurance policy is
guaranteed by the insurer, but the total death benefit
and the cash value of the insurance before death
depend on the investment performance of that portion
3
of the premium which is allocated to a separate fund.N

(g) Endowment life insurance. Endowment life insurance

provides for the payment of a specified amount in the
event of death before the end of the endowment

m See KEETON & WIDISS, Ibid.

 CHAPTER VII: RISK AND COVERAGES I 171

period, commonly twenty years. In addition, this

coverage also provides that if the insured survives to a
specified maturity date, the insured will be paid a
specified endowment.

(2) Term life insurance provides for the payment of a specified

amount if death occurs within the time period designated in
the policy, usually for periods of one to five years.

(3) Modified life insurance is generally understood to describe a

policy that combines terms and whole life insurance in a single
insurance policy. The objective is to provide a coverage in
which the premiums paid by the insured during the first few
years are substantially less than the cost of a whole life policy.
During the remaining policy term, the premiums increase.

(4) Group life insurance, comparatively a new form of insurance,

is a type of life insurance in which a single contract covers an
entire group of people. Typically, the policy owner is an
employer or an entity such as a labor organization, and the
policy covers the employees or members of the group. Group
life insurance is often provided as part of a complete employee
benefit package, the actual insurance policy, known as the
master contract, being kept by the employer. Where the
employee is required to pay a portion of the premium, the
arrangement is known as a "contributory plan." The share of
the employee is deducted from his wages.

The specific rules in the Code governing the issue of

group life insurance policy, as well as the provisions
mandated to be included in such policy, are found in Section
234(a) to (k).
172 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Illustrativecases of Group Lift Insurance

In the case of Pineda vs. CA3O4, the employer got the

insurance proceeds of the beneficiaries of his employees through
special powers of attorney executed by such beneficiaries. The
insurer refused to pay the beneficiaries because they already paid
the employer. The Court held that group insurance is essentially a
single insurance contract that provides coverage for many
individuals. It is usually provided by an employer, being the
policy holder, in favour of its employees, as the insured. The
employer-policyholder is the agent of the insurer in collecting the
premium, thus any omission of duty to the employee in its
administration should be attributable to the insurer. Although the
policy is in the name of the employer, the real policy holders are
the employees. After all, the premiums paid came from their
labor.

In Eternal Gardens vs. Philamlifem °5 , respondent insurance

company entered into a Creditor Group Life Policy agreement

with Eternal Gardens Memorial (Eternal), where those who
purchased burial lots from it on installment basis would be
insured by Philamlife. The policy was effective for a period of one
year, renewable on a yearly basis. As required under the said
policy, Eternal submitted a list of all new lot purchasers, including
the application of a certain John Chuang.

When Chuang died, Eternal sent a letter, together with the

pertinent papers, to Philamlife which served as an insurance claim
for Chuang's death. After more than one year, there was no reply
from Philamlife, prompting Eternal to file a case before the RTC of
Makati.

3
H Pinedavs. Court of Appeals, G.R. No. 105562 (September27, 1993), 226 SCRA 754.
See also, Elfstrom v. New York Life Ins. Co., 432 P. 2d 731 (Cal. Sup. CL 1967), citing
Neider v. ContinentalAssurance, 35 So. 2d 239 (La. Sup. Ct 1948).
3w Eternal Gardensv. PHILAMUFE, 551 SCRA 1 (2008).
 CHAPTER VII: RISK AND COVERAGES 1 173

The Court held that Philamlfe assumed the risk of loss

without approving the application. An insurance contract
covering the lot purchased is created and the same is effective,
valid, and binding until terminated by Philamlife by disapproving
the insurance application. However, the mere inaction of the
insurer on the insurance application must not work to the
prejudice of the insured; nor should it be interpreted as a
termination of the insurance contract. The termination of the
insurance contract by the insurer must be explicit and
unambiguous.

In the case of Grepalife vs. Court of Appeals3°6, Great Pacific

Life Assurance Corporation (Grepalife) executed a contract of
group life insurance with the Development Bank of the
Philippines (DBP) wherein Grepalife agreed to insure the lives of
eligible housing loan mortgagors of DBP. One such loan
mortgagor was Dr. Wilfredo Leuterio. In an application form, Dr.
Leuterio answered questions concerning his health and attestin&
among others, that he did not have any heart condition and that
he was in good health to the best of his knowledge. However,
after about a year, Dr. Leuterio died due to "massive cerebral
hemorrhage." Grepalife denied the claim, alleging concealment.
Hence, the widow of the late Dr. Leuterio filed a complaint
against Grepalife for "Specific Performance with Damages." The
trial court, Court of Appeals and the Supreme Court were all in
agreement that there was no concealment.

The Supreme Court, in refuting the claim of Grepalife that

Mrs. Leuterio was not the real party in interest, explained that the
rationale of a group insurance policy of mortgagors, otherwise
known as the 'mortgage redemption insurance,' was that it was a
device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it had to enter into such
form of contract so that in the event of the unexpected demise of
the mortgagor during the subsistence of the mortgage contract,

GREPALIFE v. CA, 316 SCRA 677 (1999).

3W6
174 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the proceeds from such insurance would be applied to the

payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation. In a similar vein, ample
protection is given to the mortgagor under such a concept so that
in the event of death, the mortgage obligation will be extinguished
by the application of the insurance proceeds to the mortgage
indebtedness.

(5) Industrial life insurance is defined by Section 235 of the Code

as follows:

"Sec. 235. The term industrial life insurance as

used in this Code shall mean that form of life
insurance under which the premiums are payable
either monthly or oftener, if the face amount of
insurance provided in any policy is not more than
five hundred times that of the current statutory
minimum daily wage in the City of Manila, and if this
words industrialpolicy are printed upon the policy as
part of the descriptive matter. x x x"

Industrial life insurance refers to an insurance which

provides insurance coverage to industrial workers or people who
are unable to afford insurance for bigger amounts. It is tailored to
meet the needs of majority of its purchasers - the urban industrial
class or blue collar workers - thus, the premiums are typically
small and the proceeds are generally small too. 307 Unlike an
ordinary life insurance, this kind of insurance shall not lapse after
non-payment of premiums in 3 months after the expiration of the
grace period, if such non-payment is due to the failure of the
company to send its representatives to the insured to collect
premium.30

WSee COUCH, [Link], Sec. 12.

3W See second paragraph of Sec. 235, Code.
 CHAPTER VII: RISK AND COVERAGES 1 175

Although an insurance contract is generally considered as

a contract of indemnity, this is not the case in life insurance.30 9 In
a contract of indemnity, the insurer is liable to the insured for the
amount enough to bring the insured back to his situation before
the loss happened. Such is not possible with life insurance, the life
of a person being incapable of pecuniary estimation. The measure
of recovery is, therefore, the face value of the policy, and not the
value of the loss.

Suicide

Most life insurance policies contain a suicide provision

depending on the date of its commission compared to the policy
issue date. Section 183 of the Code provides:

"Sec. 183. The insurer in a life insurance contract

shall be liable in case of suicide only when it is
committed after the policy has been in force for a
period of two (2) years from the date of its issue or of
its last reinstatement, unless the policy provides a
shorter period. Provided, however, that suicide
committed in the state of insanity shall be
compensated regardless of the date of commission."

Normally, suicide is a willful and intentional act. As such,

the Code provides that the insurer is liable only if the same is
committed after two years from the effectivity of the insurance
contract, unless a shorter period is provided in the policy. A two-
year period is designed to decrease the moral hazard.

However, a suicide committed while the insured is insane

or incapable of comprehending the consequences of his acts, is
compensable, regardless of the date of the suicide.

3w See Chapter IIof this work, supra.

176 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

From this provision, it can be surmised that while a policy

may expressly exclude suicide from its coverage, it may not
exclude suicide while insane. A possible explanation for this
position is that death in such a circumstance should be
contemplated as one resulting from the illness, sickness, i.e.
insanity, of the insured. It is neither a willful nor an intentional
act, and therefore may not be excluded by a life insurance policy.

The Supreme Court in the case of Sun Life Insurance vs.

Court of Appeals had occasion to explain the difference between
suicide as an excepted risk and willful exposure to needless peril,
the latter usually excluded, likewise by a life insurance policy in
the following words:

"It should be noted at the outset that suicide

and willful exposure to needless peril are in pan
materia because they both signify a disregard for one's
life. The only difference is in degree, as suicide
imports a positive act of ending such life whereas the
second act indicates a reckless risking of it that is
almost suicidal in intent. To illustrate, a person who
walks a tightrope one thousand meters above the
ground and without any safety device may not
actually be intending to commit suicide, but his act is
nonetheless suicidal. He would thus be considered as
'willfully exposing himself to needless peril' xxx 310

Accidental Death and Death by Accidental Means

The terms "accident" and "accidental means," as used in

insurance contracts have not acquired any technical meaning, and
are construed by the courts in their ordinary and common
acceptation. Thus, the terms have been taken to mean that they
happen by chance or fortuitously, without intention and design,

310 G.R. No. 92383, July 17,1992; 211 SCRA 554.

 CHAPTER VII: RISK AND COVERAGES I 177

and are unexpected, unusual, and unforeseen. Where the death or

injury is not the natural or probable result of the insured's
voluntary act, or if something unforeseen occurs in the doing of
the act which produces the injury, the resulting death is within the
protection of the policies insuring against death or injury from
accident. 311

In the case of Calanoc v. CA312, a watchman died of a

gunshot wound in a robbery incident near his post. His widow
successfully claimed the face value for the life insurance policy
from the Philippine American Life Insurance Company, but when
she demanded the payment of the additional sum of P2,000
representing the value of the supplemental policy, the company
refused due to a dispute as to whether the watchman's death was
due to an accident or not. This was determinative of whether the
widow would get the additional benefit in the policy, since the
insurer, as its defense, alleged that the deceased died because he
was murdered by a person who took part in the commission of the
robbery and while making an arrest as an officer of the law. These
contingencies were expressly excluded in the contract and had the
effect of exempting the company from liability.

On the issue of whether or not the death of the watchman

came within the purview of the exception clause of the
supplemental policy, and hence, exempted the insurer from
liability, the Supreme Court ruled in the negative. An event is not
an accident if it is due to a voluntary and intentional act on the
part of anyone, including third parties. The Court noted that there
was no proof that the incident was intentional, that the robber had
aimed for the watchman, because there was nothing on record
that showed how the fatal shot was fired. The house being robbed
was not even the one he was guarding. Thus, the insurer was
ordered to pay the widow the value of the supplemental policy.

311 Finman v. CA, 213 SCRA (1992); Sun Insurancev. CA, 211 SCRA 554 (1992)
31 Calanocv. CA, 98 PhiL 79 (1955).
178 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

On the other hand, in the case of Biagtan v. Insular13 with a

similar issue arising from a supplemental policy, the Court
arrived at a different conclusion. Biagtan had a life insurance with
Insular Life for P5,000, and a supplementary contract
denominated "Accidental Death Benefit Clause" for an additional
sum of P5,000 in case of death resulting from bodily injury
effected solely through external and violent means sustained in an
accident, independent of all other causes. Robbers entered the
house of Biagtan and he was stabbed to death. The robbers were
convicted of robbery with homicide. Insular Life paid the P5,000
for life insurance but refused to pay under the Accidental Death
Benefit Clause, saying that the stabs were intentionally inflicted by
third parties and therefore not covered. The trial court held that it
was covered. The SC reversed the decision and ruled in favor of
Insular Life.

Unlike the ruling in the Calanoc case, where the killing of

the victim was held as accidental and thus covered by the
supplemental policy, the Supreme Court held that the insured was
killed intentionally. The term "intentional" implies the exercise of
the reasoning faculties, consciousness and volition. The Supreme
Court pointed out that there were nine wounds in all. The
provision in the accidental benefit clause does not speak of the
purpose - whether homicidal or not - of a third party in causing
the injuries, but only of the fact that such injuries have been
intentionally inflicted. Nine wounds inflicted with bladed
weapons at close range cannot be considered innocent insofar as
intent is concerned. The Court ruled that the manner of execution
of the crime permits no other conclusion.

Justice Teehankee delivered a strong dissenting opinion,

arguing that the case of Calanoc , cited by the lower court, is
indeed controlling in this instant case. The Supreme Court ruled
that the burden of proving that the killing was intentional must be
discharged by the insurance company. But to Justice Teehankee

313 Biagtan v. Insular, 44 SCRA 58 (1972).

 CHAPTER VII: RISK AND COVERAGES I 179

the defendant company patently failed to discharge its burden of

proving that the fatal injuries were inflicted upon the deceased
intentionally, i.e. deliberately. There was an "utter absence of
evidence in this case as to the real intention of the malefactors in
making a thrust with their sharp-pointed instrument(s) on any
person, the victim in particular." From the undisputed facts, the
robbers had "rushed towards the doors of the second floor room,
where they suddenly met a person ... who turned out to be the
insured Biagtan who received thrusts from their pointed
instruments." The thrusts were indeed properly termed "purely
accidental" since they seemed to be a reflex action on the robbers'
part upon their being surprised by the deceased. To argue, as
defendant does, that the robbers' intent to kill must necessarily be
deduced from the four mortal wounds inflicted upon the deceased
is to beg the question.

The accidental death clause assuring the insured's

beneficiaries of additional benefits, usually double indemnity,
upon payment of an extra premium, in the event that the death of
the insured is accidental is usually contractually stipulated in the
policy in the following words: "that the death of the insured
resulted directly from bodily injury effected solely through external
and violent means sustained in an accident". Justice Teehankee
pointed out that the exception provided in paragraph 5 (e) of the
policy, refers to injuries "inflicted intentionally by a third party, either
with or without provocation on the part of the insured, and whether
or not the attack or the defense by the third party was caused by a
violation of the law by the insured."

The above dissent of Justice Teehankee calls to mind the

various decisions of the State courts in the United States in
making distinctions between "accidental means" and "accidental
results" 3 4 No less than Mr. Justice Cardozo, in his dissenting

314 See KEETON & WIDISS, Sec. 5.4(e); also, VANCE, Chap. 16, Sec. 181, pp. 947-
988)
180 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

opinion in Landress v. Phoenix Mutual Life315 remarked that "the

attempted distinction will plunge this branch of the law into a
'Serbonian Bog"." 316

D. Fire Insurance

Fire Insurance, as defined by the Code, includes insurance

"against loss by fire, lightning, windstorm, tornado, or earthquake
and other allied risks when such risks are covered by extension to
37
fire insurance policies or under separate policies." 1

Hostile Fireand Friendly Fire

In fire insurance, the risk assumed by the insurer is loss

and damage caused by "hostile fire" and not those caused by
"friendly fire".318

Friendlyfire is fire that burns in a place where it is intended

to burn and ought to be. Conversely, hostilefire is fire which burns
at a place where it is not intended to burn or ought not to be.
Friendly fire may become hostile fire by escaping from the place
where it ought to be to some place in which it ought not to be.

The principle underlying this distinction is that the policy

shall not be construed to protect the insured from injury
consequent upon his negligent use or management of fire, so long
as it bums in the place where it ought to be.319

315 219 U.S. 491, 78 LEd. 934 (1934)

316 Refers to Lake Serbonia in Egypt as described by Heredotus as having a
deceptive appearance and the term is metaphorically applied to any situation in
which one is entangled and from which extrication is difficult; See Dictionary of
Modem Legal Usage, p. 531.
317 Section 169, Code
318
See VANCE, [Link] .pp. 869-871; also KEETON & WIDISS, [Link], Sec. 5.3(d)
319 Ibid.
 CHAPTER VII: RISK AND COVERAGES I 181

In the case of Philippine Home Assurance v CA,320 cargo on

board the SS Eastern Explorer had been salvaged and forwarded
to the consignees after the ship had caught fire due to a small
flame in an acetylene container near the engine room. The
shipping company Eastern Shipping Lines charged the consignees
additional freight and salvage costs which were paid on their
behalf under protest by Philippine Home Assurance. Philippine
Home filed a complaint to recover the sums paid alleging that
these were damages caused by the fault, negligence, illegal act
and/or breach of contract of Eastern Shipping.

Eastern Shipping raised the defense that the fire had been
caused by an unforeseen event. The trial court agreed with them,
finding that the fire had been caused by a natural calamity,
making the charging of additional costs legal according to the
Salvage Law, the Code of Commerce and the Bill of Lading. The
Court of Appeals affirmed their ruling.

The Supreme Court disagreed saying that fire may not be

considered a natural calamity as it almost always arises from
some act 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. Having found that Eastern
Shipping had been negligent in storing the acetylene cylinder near
the engine room, the Court ruled that the consignees should not
have been made liable and ordered Eastern Shipping Lines to
reimburse the amount paid by Philippine Home Assurance under
protest.321

W0257 SCRA 468 (19%)

M bid
182 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Increase of Risks and Moral Hazardclauses

Section 170 of the Code provides that "an alteration in the

use or condition of a thing insured from that to which it is limited
by the policy made without the consent of the insurer, by means
within the control of the insured, and increasing the risks, entities
an insurer to rescind a contract of fire insurance." Notable from
the foregoing are the elements that the use or condition of the
property has been limited by the policy and that the alteration
increases the risk.

Section 172 of the Code, however, creates some confusion

or ambiguity, even inconsistency, when said section provides that
an act of the insured in a fire insurance policy which does not
violate its provisions, "even though it increases the risk and is the
cause of the loss," does not affect the fire insurance contract. It is
quite difficult to imagine a situation where an alteration which the
Code declares to be a ground for rescinding a fire insurance
contract can be considered as NOT violative of the provisions of
the policy!

The rule on alteration was strictly applied in the case of

Malayan Insurance Co, Ltd. V. Pap Co, Ltd.322 In that case, fire
insurance covering machinery and equipment located in the
Sanyo building in Rosario, Cavite was procured by Pap Co. for
Rizal Commercial Banking Corporation (RCBC), the mortgagee of
the said equipment. After almost a year but before the expiration
of the policy, it was renewed on an "as is" basis. During the
subsistence of this renewal policy, the insured machinery was lost
by fire not in the Sanyo building but in the Pace Pacific building
also in Rosario, Cavite. The transfer had been made prior to the
renewal of the policy. Pap filed a claim with Malayan but the
latter refused on the ground that the insured machinery had been
transferred to a location different from that stated in the policy
without their consent In a suit filed by Pap, the RTC ruled in

= 703 SCRA 314 (2013).

 CHAPTER VII: RISK AND COVERAGES 1 183

favor of Pap, finding that Malayan failed to show that the

alteration resulted in an increase of risk. The CA affirmed the
ruling, agreeing that Malayan had failed to show such increase
but furthermore adding that Malayan had also failed to cite
specific provisions in the policy prohibiting the transfer of the
machinery or requiring the consent of Malayan before such
transfer.

In turn, the Supreme Court ruled in favor of Malayan. It

found that such transfer of the properties subject of the policy was
in fact prohibited under Condition No. 9(c) of the policy, to wit:

"9. Under any of the following circumstances the insurance

ceases to attach as regards the property affcted unless the
insured, before the occurrence of any loss or damage, obtains
the sanction of the company signified by endorsement upon
the policy, by or on behalfof the Company:

xxx xxx xxx

(c) If property insured be removed to any building or place

other than in that which is herein stated to be insured."

Furthermore, Pap had been unable to show that it had complied

with the sanction by Malayan for the transfer or removal. As to
increase of risk, the Court found that there was proof of such
increase as there would have been an increase in the fire rating as
a result of the transfer which should have resulted in payment of
higher premiums. The Court concluded that the transfer without
the notice to and consent of Malayan constituted an alteration in
the condition and location of the thing insured. The Malayan was
therefore not liable to Pap for the proceeds of the insurance policy.
184 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Measure of Indemnity

The Code provides in section 173 that if there is no

valuation in the policy of fire insurance, the measure of indemnity
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. The liability
of the insurer is in no case to exceed what it would cost to repair,
or replace the thing with material of like kind or quality with
proper deduction for depreciation considering the age or
condition of the thing before the loss.

The same section provides that if there is a valuation, the

effect shall be the same as in a policy of marine insurance, namely
that the valuation is conclusive between the parties in adjusting
total or partial loss.323

In fire insurance, there is no implied co-insurance between

the insured and insurer as in marine insurance under Section 159.
Section 174 provides that when there is total loss, the whole
amount stated in the policy shall be paid; in case of partial loss,
the full amount of the loss shall be paid. However, in no case shall
the insurer be required to pay more than the amount stated in the
policy.

However, the parties may stipulate a co-insurance clause

such that the insured is required to proportionately bear the
uninsured portion in case of partial loss. For example, the insured
property is worth P1,000,000 and the policy with a co-insurance
clause has a face value of only P800,000.00. A loss of half the
property would result in payment of only half the actual valuation
of the insurance, or P400,000, while the insured bears the
uninsured loss of P100,000.

3
W, See Section 158, Code, on "Measure of Indemnity" in Marine Insurance. See,
also Malayan Insurance v. Cruz-Arnaldo, 154 SCRA 672.
 CHAPTER VII: RISK AND COVERAGES I 185

Finally, under section 174 of the Code, the parties may

provide for an option-to-rebuild clause or similar stipulations
concerning the repairing, rebuilding or replacing of buildings or
structures wholly or partially damaged or destroyed.

E. Casualty Insurance

Quite interestingly, the whole Code assigns only one

section to casualty insurance, limiting said section to its definition,
to wit:

"Sec. 176. Casualty insurance is insurance

covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law
or custom are considered as falling exclusively within
the scope of other types of insurance such as fire or
marine. It includes, but is not limited to, employer's
liability insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft insurance,
personal accident and health insurance as written by
non-life insurance companies, and other substantially
similar kinds of insurance."

The word "casualty" is generally used in legal contexts to

mean either an "accident" or an event that results from a
"sudden, unexpected, or unusual cause." 324 This definition led
Professor Keeton of Harvard University to remark that in a sense
almost all types of insurance could be regarded as casualty
insurance.325 There is, indeed, a proliferation of different types
of insurance coverages that are neither "fire insurance" or "life
insurance". The tremendous variety of coverages would require
volumes to list what are casualty insurance contracts in the
market. A big portion of these coverages deal with liability
M Black's Law Dictionary (5th Edition, 1979 at p. 198; Ballentine's Law
Dictionary, (Third Edition, 1969, at p. 180.
3M KEETON & WIDISS, [Link], Chap. 1, Sec. 1.5(d)
186 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

insurance procured by professionals, contractors, obligors,

debtors, doctors, property owners, and more. For instance, a
homeowner's insurance would cover liability of the homeowner
to third persons who may suffer injuries or damages caused by
the fault of the homeowner or occupants of the house, or even
due to the structure of the house. This will distinguish such
liability insurance from a "household insurance" which covers
loss or destruction of the house or its contents.

Credit protection is another type of casualty insurance.

Thus, there is "payment protection insurance" which covers
borrowers against accident, sickness, unemployment, and other
circumstances which may prevent the borrowers from servicing
currently standing debts. This kind of insurance is also known
as "credit protection insurance" or sometimes "loan repayment
insurance." Somewhat similar is "landlord insurance" which is
procured by lessors to protect their investments, guarding their
property from the lack of care of the lessees. A "private
mortgage insurance" is a protection against absconding
mortgagors. Almost of the same kind as the foregoing is
insurance to protect identity against fraud and similar incidents.
Finally as Section 176 deals with loss or liability arising from
"accident or mishap," it is not difficult to envision a coverage
that runs the gamut of human activity or endeavor.

In the case of Fortune Insurance & Surety Co. v CA326, the

Court commented that except with respect to compulsory motor
vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance. These contracts are,
therefore, governed by the general provisions applicable to all
types of insurance. Outside of these, the rights and obligations of
the parties must be determined by the terms of their contract,
taking into consideration its purpose and always in accordance
with the general principles of insurance law.

244 SCRA 308 (1995).

 CHAPTER VII: RISK AND COVERAGES I 187

The general principle of insurance law applicable in this

case was the use of exceptions and exclusions as discussed earlier
in this chapter. It may be recalled that Producers Bank had taken
out a Money, Security and Payroll Robbery Policy with Fortune
Insurance. The policy provided that the insurer shall not be liable
for any loss caused by any dishonest, fraudulent or criminal act of
the insured or any officer, employee, partner, director, trustee or
authorized representative whether acting alone or in conjunction
with others. Fortune raised the defense that the case fell under the
general exceptions clause as the persons named can be considered
either employees or authorized representatives of Producers. The
Supreme Court ultimately found the driver of the van and the
security guard, both assigned by an independent contractor, to be
"authorized representatives" of the bank having been contracted
with the duty to transfer funds of the bank.

F. Suretyship

The Code defines suretyship in the following provision:

"Sec. 177. A contract of suretyship is an

agreement whereby a party called the surety
guarantees the performance by another party called
the principal or obligor of an obligation or
undertaking in favor of a third party called the
obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by any
company by virtue of and under the provisions of Act
No. 536, as amended by Act No. 2206."

Under Section 2(a), second paragraph of the Code, a contract of

suretyship shall be deemed an insurance contract only if made by
v
a surety doing an insurance business.W

S27Section 2(a) and (b)(1) (c)(1)

188 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Section 178 of the Code, it provides that "the liability of the

surety shall be joint and several with the obligor, and shall be
limited to the amount of the bond."

Illustrative Cases

In the case of National Power Corporationv CA328, National

Power Corporation (NPC) entered into a contract with Far Eastern
Electric Inc. (FEEI) for the erection of transmission lines to be
completed within 120 days. PHILAMGEN, an insurance and
bonding company, issued a bond for the faithful performance of
the undertaking. In correlation with the bond, the contract
between NPC and FEEl contained the following provision:

(b)... It is expressly agreed that in the event the

corporation takes over the work from the Contractor,
the latter and his bondsmen shall continue to be
liable under this contract for any expense in the
completion of the work. x x x"

FEEI would later withdraw from the project due to

financial difficulties, informing NPC of this withdrawal in a joint
letter along with PHILAMGEN. On the same day, NPC wrote
PHILAMGEN a letter formally informing them of the withdrawal
and that they would be holding both FEEI and PHILAMGEN
liable for the cost of the completion of the work. NPC later wrote
PHILAMGEN informing the latter that FEEI had an outstanding
obligation of P75,019 and demanding remittance of the proceeds
of the bond. PHILAMGEN refused to pay contending that the
bond had expired and that NPC had failed to notify them within
30 days of the expiration as required by the bond.

The Court ruled in favor of NPC, finding that the 30-day

limitation pertained to the situation wherein FEEI completed the

M222 SCRA 415 (1993).

 CHAPTER VII: RISK AND COVERAGES I 189

project and not to the situation wherein NPC takes over the work
from the contractor. The breach of the contract in the
abandonment of unfinished work was within the effective date of
the contract and surety bond. The abandonment gave rise to
continuing liability of the bond as provided for in the contract
which is deemed incorporated in the surety bond.

In the case of Zaragosa v Fidelino329, Zaragosa brought a suit

of replevin against Fidelino to recover a car he had sold to the
latter after she (Fidelino) was unable to pay according to their
agreement. The car was taken from Fidelino on the strength of a
writ of delivery but had been returned upon posting of a counter-
bond issued by Mabini Insurance & Surety Co. When judgment
was finally rendered against Fidelino, Zaragosa moved for the
amendment of the decision to include the surety as a party
solidarily bound for the amounts adjudged. Despite having been
furnished with copies of the motion, neither the defendant nor the
surety appeared to oppose the motion. The trial court, therefore,
made the amendment sought by Zaragosa. The surety appealed to
the Supreme Court, raising the argument that the court did not
acquire jurisdiction over the defendant and the surety as they
were not served summons. The Court disagreed stating that the
terms of the counter-bond leave no doubt of the surety's assent to
be bound by the judgment. Furthermore, the bond implicitly
prayed for affirmative relief in the release of the seized car, which
constituted an act of voluntary submission before the Court and
gave the latter jurisdiction over its person.

In deciding the case, the Court stated the requisites for

holding liable the surety in a counter-bond, to wit:

"(1) the filing of an application therefor with the

Court having jurisdiction of the action; (2) the
presentation thereof before the judgment becomes
executory (or before the trial or before appeal is

329 163 SCRA 443 (1988).

190 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

perfected); (3) the statement in said application of the

facts showing the applicant's right to damages and
the amount thereof, (4) the giving of due notice of the
application to the attaching creditor and his surety or
sureties; and (5) the holding of a proper hearing at
which the attaching creditor and the sureties may be
heard on the application."

The Court stated that a separate action to hold the surety on a

counter-bond liable is not necessary. Finding that there was
substantial compliance with the requirements and that the surety
had received a copy of the motion but failed to oppose the same,
the Court affirmed the amended decision.

Stronghold Insurance v. CA330 is another case of a surety

bond issued in relation with judicial process. In that case, the
Leisure Club filed a case against Northern Motors to recover office
furniture and equipment. An order to deliver the said equipment
was granted subject to the posting of a replevin bond, which was
duly issued by Stronghold Insurance. Northern Motors filed a
counter-bond to release the seized equipment but Leisure Club
could not be contacted and indeed was never heard of again. The
trial court rendered judgment in favor of Northern Motors for the
value of the equipment as well as exemplary damages.
Ultimately, the case reached the Supreme Court which found that
all of the conditions had been met. Leisure Club, in bad faith,
failed to prosecute and disappeared after retrieving the property.
The property was not returned though it was adjudged in favor of
the defendants. The defendants were adjudged the value of the
equipment as well as exemplary damages. The Court thus upheld
the decision of the lower courts holding Stronghold Insurance
liable.

208 SCRA 336 (1992)

 CHAPTER VII: RISK AND COVERAGES I 191

In Eastern Assurance & Surety Co v. Intermediate Appeals

Court (AC)331, the Department of Agrarian Reform put up for
public bidding a job for the repair of seven jeeps. The winning
bidder was Motor City, the bid accompanied by a Proposal Bond
issued by Eastern Assurance. Under the contract between DAR
and Motor City, the latter was to put up a Performance Bond.
When Motor City was only able to repair six of the seven jeeps,
DAR filed a complaint against Motor City and Eastern. The latter
argued that they did not incur liability under their Proposal Bond
which did not bind them as the subject was merely a proposal and
not an actual undertaking.

The Supreme Court stated that the reliance of Eastern on

the difference between a Proposal Bond and a Performance Bond
was not helpful as it is not the abstract nature, title or caption
which determines liability but the terms of the bond. It found that
Eastern would have incurred liability under the terms of the bond
upon failure of Motor City:

"(1)' to guarantee the true and faithful performance of

the contract in case of an award; (2) 'to accept the
[award]; and (3) to 'answer for any delay and/or
default in the execution of the contract as provided in
the proposal."

The failure of Motor City to post a Performance Bond

unquestionably resulted in a breach of the first condition. On the
third condition, Eastern argued that the term "execution" referred
to the signing of the contract and not the performance thereof. The
Court disagreed stating the ordinary meaning of execution
includes the performance and implementation of terms.
Furthermore, if "execution" only refers to signing then the second
and third conditions would refer to the same circumstance.
Moreover, the Court held that the bond was a contract of

33 G.R. No. L-69450, November 22,1988 (Unreported).

192 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

adhesion. Accordingly, any ambiguity must be construed against

Eastern, the party who prepared the contract.

In Prudential Guarantee and Assurance Inc v. Equinox Land

Corporation33 2, J'Marc entered into an agreement with Equinox

Land for the construction of five additional floors to its existing

building. J'Marc submitted two bonds issued by Prudential.
Equinox eventually terminated the contract and took over the
construction project. After measuring the amount of work actually
accomplished and comparing the same with the cash advances
given to J'Marc, it was found that there was overpayment of
P3,974,300. Equinox had also paid the laborers, suppliers and
subcontractors an amount totaling P664,998.

Equinox filed a complaint with the Regional Trial Court to

recover these amounts, as well as damages. Prudential filed a
motion to dismiss arguing that jurisdiction over the case was
vested with the Construction Industry Arbitration Commission
(CIAC). The court thus dismissed the case and it was re-filed
before the CIAC.

Before the CIAC, the surety argued that the tribunal had
no jurisdiction over them as they were not privy to the
construction contract and its surety and performance bonds were
not construction agreements. The CIAC rendered its decision
holding Prudential liable to Equinox on its two bonds. This
decision was affirmed on appeal by the Court of Appeals.

Before the Supreme Court, Prudential reiterated its

argument that the CIAC had no jurisdiction over the claim against
them and they should not have been liable solidarily with J'Marc.

The Court disagreed with both contentions. On the first

issue, it stated that Prudential was estopped from denying the

S533 SCRA 257 (2007), citing Security PacificAssurance Corporationv. Trias

Infante, 468 SCRA 526 (2005).
 CHAPTER VII: RISK AND COVERAGES I 193

jurisdiction of the CIAC, since they had moved for the dismissal of
the case before the RTC precisely on the ground that jurisdiction
lay with the CIAC.

On the second issue, the Court stated:

"[While a contract of surety is secondary only to a

valid principal obligation, the surety's liability to the
creditor is said to be direct, primary, and absolute. In
other words, the surety is directly and equally bound
with the principal."

In Inter-Strata Assurance Co v. Republic333 , Grand Textile

imported various articles such as dyestuff, spare parts for
machinery, yarn, chemicals and the like. These articles were
transferred to a Customs Bonded Warehouse where the charges
due were computed at P2,363,147. To secure the payment of these
obligations pursuant to the Tariff and Customs Code, Inter-Strata
and Philippine Home Assurance issued general warehousing
bonds in favor of Grand Textile.

Without payment of the charges due, Grand Textile

withdrew the imported goods from storage. Thus, the Bureau of
Customs demanded payment of the amounts due from Grand
Textile as well as the two sureties. When all three failed to pay, a
collection suit was filed against them. Judgment was rendered
against all three in the RTC and the CA.

On appeal to the Supreme Court, the sureties argued that

the withdrawal of Grand Textile of the goods without notice to
them released them from liability. The sureties argued that they
should have been entitled to participate in the handling of the
imported articles and were entitled to notice of any act of the
obligee and obligor affecting the risks secured. Otherwise, there

M 557 SCRA 363 (2008).

194 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

might be fraudulent conspiracy between the two to defraud the

surety.

The Court reiterated the nature of suretyship wherein

there is a principal relationship between the obligor and obligee
and an accessory surety relationship whereby the surety binds
itself to be liable to the creditor or the debtor's default. The surety
does not by reason of the agreement earn the right to intervene in
the principal relationship. Its role only comes alive upon the
debtor's default. It was also noted that by the terms of the bond
the surety "hereon agrees to accept all responsibility jointly and
severally for the acts of the principal done in accordance with the
terms of this bond".

Premium Payment

As to premium payment, section 179 of the Code provides:

"Sec. 179. The surety is entitled to payment of

the premium as soon as the contract of suretyship or
bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and
binding unless and until the premium therefor has
been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety x
x x []n the case of a continuing bond, the obligor shall
pay the subsequent annual premium as it falls due
until the contract of suretyship is cancelled by the
obligee or by the Commissioner or by a court of
competent jurisdiction, as the case may be."

The provision actually treats of two separate but connected

matters: entitlement of the surety to premium payment and
validity of the surety bond.
 CHAPTER VII: RISK AND COVERAGES 1 195

As to entitlement to premium, the surety is entitled to

premium payment as soon as the contract or bond is perfected
and delivered to the obligor. For continuing bonds, the obligor
must pay annual premium as it falls due until the suretyship is
cancelled by the obligee, by the Insurance Commissioner or by a
court of competent jurisdiction.

As to validity and binding effect of the bond, the general

rule is that no contract of suretyship or bond shall be binding
unless and until premium has been paid. However, when the
obligee has accepted the bond, the payment of premium is no
longer required and the bond is given binding effect.

This rule is distinct to suretyship as compared with other

types of insurance. It may be recalled that, generally, the
perfection of the contract of insurance is tied to the payment of
premium. Though there are several exceptions to this rule, these
are tied to the acts of the parties to the contract such as conduct
amounting to estoppel or the granting of a credit extension 3 4 . In
the case of suretyship, conduct of a third person, in this case the
obligee, may render the contract valid and effective irrespective of
whether or not the premium has been paid.

In Philippine Pryce Assurance Co v. CAM, a collection suit

was filed against the surety on its bond issued for Sagum General
Merchandise. The surety claimed that there was no contract of
surety because the checks issued to pay for the premiums were
dishonored. Before the Supreme Court, they also raised as a
defense the fact that when they issued the bonds, they were not
authorized to do so by the Insurance Commission.

The case was decided on procedural grounds but the

Court also stated that Philippine Pryce had no meritorious

, Refer to earlier discumon in Chapter IV.

G.R. No. 107062, February 21,1994,230 SCRA 164
196 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

defense. They had admitted in their answer that they had issued
the bonds subject matter of the action. Furthermore, it appeared
from the testimony that the obligee had accepted the surety
bonds, meaning they had become valid and enforceable
irrespective of whether or not the premium had been paid.
Finally, their contention that they had not been authorized to issue
the bond would be an admission of fraud and was not considered
by the Court. No person can claim benefit from the wrong he
himself committed.

Applicability of the Civil Code

In Section 180, the Code provides that pertinent provisions

of the Civil Code of the Philippines shall be applied in a
suppletory character whenever necessary in interpreting the
provisions of a contract of suretyship. In particular, the Civil Code
provides that if a person binds himself solidarily with the
principal debtor, the contract is called suretyship and the
provisions of Section 4, Chapter 3, Title 1 of Book IV of the Code
shall be observed (Article 2047, Civil Code). The Section referred
to contains the provisions on Joint and Solidary Obligations.

G. Motor Vehicle Insurance (limited discussion)

Compulsory Motor Vehicle Insurance

The Code (similarly as in the Insurance Code of 1978)

requires this coverage for the registration of motor vehicles. The
purpose of this requirement is to limit situations in which an
individual is injured in a vehicular accident and does not have
insurance to assist in compensating for the injuries. Every motor
vehicle owner must obtain an insurance to indemnify the death,
bodily injury, and/or damage arising from motor vehicle use, to
 CHAPTER VII: RISK AND COVERAGES I 197

third-party passengers.3 6 The provisions of the Compulsory

Motor Vehicle Liability Insurance states that, any person having a
claim upon the policy must without unnecessary delay, present to
the insurer a written notice of claim which must be filed within six
(6) months from the date of accident, otherwise the claim shall be
deemed waived. 337

The rationale behind the compulsory nature of this kind of

insurance is explained in the case of Shaer v. Judge3 . Shafer got
involved in a vehicle collision. He filed a third party complaint
against Makati Insurance where he obtained a third party liability
insurance. The lower court dismissed his 3d-party complaint
saying that he cannot claim until his liability in the criminal case
filed by the owner of the vehicle collided with is determined. The
Supreme Court eventually held that there is no need on the part of
the insured to wait for the decision of the trial court finding him
guilty of reckless imprudence. The Court ruled that the occurrence
of the injury to the third party immediately gave rise to the
liability of the insurer under its policy.

Compulsory Motor Vehicle Liability Insurance (third party

liability or TPL) is primarily intended to provide compensation
for the death or bodily injuries suffered by innocent third parties
or passengers as a result of a negligent operation and use of motor
vehicles. The victims and/or their dependents are assured of
immediate financial assistance, regardless of the financial capacity
of motor vehicle owners. 33 9

In further discussing the issues, the Court declared that in

the liability of the insurance company under the Compulsory
Motor Vehicle Liability Insurance, the insurer's liability accrues
immediately upon the occurrence of the injury or event upon

W6Sec. 387, Insurance Code.

337 Sec. 397, Insurance Code.
338Shafer v. Judge, 167 SCRA 386 (1988).
339 Ibid.
198 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

which the liability depends, and does not depend on the recovery
or judgment by the injured party against the insured. The Court
stated further, that the general purpose of statutes enabling an
injured person to proceed directly against the insurer is to protect
injured persons against the insolvency of the insured who causes
such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy x x x" 340

Other illustrative casesfor Compulsory Motor Vehicle Insurance

In Perla Compania de Seguros v. Court of Appeals & Lim341,

spouses Lira purchased a car from Supercars Inc. Thereafter, the
spouses had the car insured under a comprehensive car insurance
policy by Perla Compania de Seguros. The insurance contract had
an "Authorized Driver" clause which precluded recovery under
the policy if the insured, or any person driving under the
insured's order, were violating any licensing or other related
driving laws or regulations.

"The risk against accident is distinct from the risk against

theft. The 'authorized driver clause' in a typical insurance policy is
in contemplation or anticipation of accident in the legal sense in
which it should be understood, and not in contemplation or
anticipation of an event such as theft."342 Thus, where a car is
admittedly unlawfully and wrongfully taken without the owner's
consent or knowledge, such taking constitutes theft, and therefore,
it is the "THEFT" clause, and not the "AUTHORIZED DRIVER"
clause that applies. There is no causal connection between the
possession of a valid driver's license and the loss of the vehicle.

340 bid.
3
4. PerlaComnpania de Seguros v. Court of Appeals & Lim, 208 SCRA 487 (1992).
u2 Ibid., at p. 494.
 CHAPTER VII: RISK AND COVERAGES I 199

Somewhat similar to the foregoing case is the case of

ParamountInsuranceCompany v. Spouses Remondeulaz3 0

Spouses Remondeulaz insured their car with Paramount

Insurance Corporation under a Comprehensive Motor Vehicle
Insurance Policy for one year. During the effectivity of said
insurance, the car was unlawfully taken. The owners alleged that
a certain Ricardo Sales took possession of the subject vehicle to
add thereto accessories and improvements; however, Sales failed
to return the subject vehicle within the agreed three-day period.
Spouses Remondeulaz notified Paramount to claim for the
reimbursement of their lost vehicle. However, the insurer refused
to pay, prompting the owners to sue. The primary issue is
whether the policy which includes "theft" as a risk applies to the
factual situation of the case. The Supreme Court noted that the
principal distinction between theft and estafa is that in the former,
the thing is taken while in the latter, the accused receives property
and converts it to his own use or benefit. However, there may be
theft even if the accused has possession of the property. If he was
entrusted only with the material or physical (natural) or de facto
possession of the thing, his misappropriation of the same
constitutes theft, but if he has the juridical possession of the thing
his conversion of the same constitutes embezzlement or estafa.

In the instant case, the Court found that Sales did not have
juridical possession of the vehicle. Hence, it is apparent that the
taking of the vehicle by Sales is without any consent or authority
from the owners. Records show that Spouses Remondeulaz
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"

%3 ParamountInsurance Company v. Spouses Remondeulaz, G.R. 173773, November

28,2012, 686 SCRA 567.
200 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

can also be committed through misappropriation, the fact that

Sales failed to return the subject vehicle to the owners constitutes
Qualified Theft. Hence, since the car is undeniably covered by a
Comprehensive Motor Vehicle 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." The
Supreme Court, incidentally, cited People v. Bustinera, 431 SCRA
284 (2004) and Malayan Insurance v. Court of Appeals, 146 SCRA 45
(1986).

In Vda. de Maglana v. Consolacion3 44, Destrajo's PUJ jeep,

while overtaking another jeep, bumped Maglana's motorcycle. As
a result, Maglana was thrown from the road and died. Maglana's
heirs filed an action for damages against Destrajo and AFISCO,
Destrajo's jeepney's insurer. The Court of First Instance held
Destrajo liable and AFISCO was ordered to reimburse Destrajo the
amounts he would have paid up to the extent of the insurance
coverage. The Maglana heirs were contending that AFISCO
should be directly and solidarily liable with Destrajo. The
Supreme Court held, however, that AFISCO's liability is direct but
not solidarily with Destrajo, citing Malayan Insurance v. Court of
Appeals,345 to wit:

"While it is true the insurance contract

provides for indemnity against liability to third
persons, such third persons can directly sue the
insurer; however, the direct liability of the insurer under
the indemnity contracts against third party liability does
not mean that the insurer can be held solidarily liable with
the insured and/or the other parties found at fault. The
liability of the insurer is based on contract; that of the
insured is based on tort.x x x" "

3" Vda. De Maglanav. Consolacion,212 SCRA 268 (1992).

us 165 SCRA 536.
3WThid., at p. 544.
 CHAPTER VII: RISK AND COVERAGES I 201

In the case of Far Eastern Surety v. Misa347, a collision

occurred between a truck and a taxicab which bore a sticker that
stated that its passengers are insured. The passengers of the
taxicab suffered injuries and sued the operator of the taxicab for
damages. The operator then sued the insurance company for any
damages that might be recovered by the injured passengers.

If the insured carrier company made representations that

its passengers are insured, it cannot be heard to deny it under the
principle of estoppel. And if its insurer did not consent to such
representations, the principle of estoppel does not extend to the
insurer. So that if the insured is found liable for damages it would
not have been otherwise liable without such representations made
by the insured, the source of the award of damages was beyond
the contemplation of the insurer and the insured alone must bear
8
the liability.M

The case of Peza v. Alikpala349, involves an accident where

the license of the driver of insured vehicle was confiscated by an
LTC agent and the driver issued a temporary permit to drive or
TVR which, at the time of the accident had already expired. The
insurer refused liability relying on its defense that the driver was
not an authorized person under the explicit provisions of the
policy. The lower court ruled in favor of the insurance company,
a ruling sustained by the Supeme Court. Both courts ruled that a
"driver with a temporary operator's permit that had already
expired is not an 'authorized person' where the policy defines
'authorized persons' as (a) the insured, (b) or any person driving
on the insured's order or with his permission, provided that the
person driving is permitted, in accordance with the licensing or
other laws or regulations to drive the motor vehicle or has been
permitted and not disqualified by order of the Court of Law or by

347 FarEasternSurety v. Misa, 25 SCRA 662 (1968).

34sbid., at p. 667 (ponente, Justice J.B.L. Reyes.)
349
Peza v. Alikpala, 160 SCRA 31 (1988).
202 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

reason of any enactment or regulation from driving such motor

vehicle."

Lastly, in the case of Western Guaranty v. Court ofAppealso,

Priscilla Rodriguez was struck by a bus, causing her face to be
permanently disfigured, causing her serious anxiety and moral
distress, and to incur expenses for hospitalization. She filed a
complaint against the bus driver and the bus company, who in
turn filed a third party complaint against Western, the insurance
company. The Regional Trial Court, affirmed in toto by the Court
of Appeals, ruled in favor of Rodriguez, awarding her actual and
moral damages, compensation for loss of earning and attorney's
fees. Western contends that it should not be liable for those items
not set forth in its policy's schedule of indemnities. The Supreme
Court, with Mr. Justice Florentino Feliciano as ponente disagreed
with such contention and upheld the decision of the lower courts.
The Supreme Court ruled that the "Schedule of Indemnities" does
not purport to restrict the kinds of damages that may be awarded
against Western once liability has arisen. Within the over-all
quantitative limit of P50,000 per person per accident, all kinds of
damages allowable by law may be awarded by a competent court
against the insurer once liability is shown to have arisen, and the
essential requisites/conditions for grant or each species of
damages are present." According to the Court, "if what Western
now urges is what it intended to achieve by its Schedule of
Indemnities, it was incumbent upon Western to use language far
more specific and precise than that it used in fact, so that the
insured and potential purchasers of its Master Policy, and the
Office of the Insurance Commissioner, may be properly informed

3w Western Guarantyv. Court ofAppeals, 187 SCRA 652 (1990).

 CHAPTER VII: RISK AND COVERAGES I 203

and act accordingly."351 An insurance contract is a contract of

adhesion. The terms of such contract are to be construed strictly
against the party which prepared the contract.

As earlier discussed is the unique case of Far Eastern Surety

v. Misa35 2 when an award was made against the insurer of a
taxicab simply on the basis of the taxicab operator representing
that the passengers were insured against accidents as shown by
the "sticker" affixed to the vehicle. The Supreme Court
considered the decision of the Court of Appeals not legally
tenable. The Supreme Court noted that the negligence of the other
vehicle (a sand and gravel truck) was the causative factor without
the taxicab driver nor the operator contributing thereto. Thus, the
award was set aside being beyond or outside of the contemplation
of the parties to the contract of insurance.

No-Fault Clause

Chapter VI of the Code dealing with "Compulsory Motor

Vehicle Liability Insurance" includes a provision known as "the
no-fault clause" regarding claims for death or injury to a
passenger or third party on a liability insurance policy covering
the vehicle. The Code provides:

Sec. 391. Any claim for death or injury to any

passenger or thirdparty353 pursuant to the provisions of
this chapter shall be paid without the necessity of

3 Ibid., at p. 659. What the policy provided is in the following words: "all sums
necessary to discharge liability of the insured in respect of [the precipitating
events]"
352 25 SCRA 662 (see Note 349, supra)
3B It would seem that for purposes of the "no-fault clause," only claims for death
or injury can be made. On the other hand, Section 387 mandating a policy of
insurance to cover all motor vehicles the purpose of the insurance is "to
indemnify the death, bodily injury and/or damage to property of a third party or
passenger.. .arising from the use thereof."
204 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

proving fault or negligence of any kind: Provided,

That for purposes of this section:

(a) The total indemnity in respect of any

person shall not be less than Fifteen thousand pesos
(P15,000.00);& 4

xxx

(c) Claim may be made against one motor

vehicle only. In the case of an occupant of a vehicle,
claim shall lie against the insurer of the vehicle in
which the occupant is riding, mounting or
dismounting from. In any other case, claim shall lie
against the insurer of the directly offending vehicle.
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.

The case of Perla Compania de Seguros, Inc. v. Honorable

Judge Ancheta, et al.m clarified against whom the claim under the
no-fault clause should be addressed. In a case involving a collision
between two vehicles, the trial court ordered Perla Compania, the
insurer of the bus company that collided with another vehicle, to
pay the passengers of the latter indemnity under the "no fault
clause" under then Sec. 378 of the Insurance Code of 1978 (now
Sec. 391) of the Code. The Supreme Court declared that the law is
very clear "the claim shall lie against the insurer of the vehicle in
which the 'occupant' is riding, and no other. The claimant is not
free to choose from which insurer he will claim the 'no fault
indemnity.'" 3

354 Note that the provision states "no less than P15,000.00." Perhaps the provision
should read "no more than P15,000" as it would be ridiculous to allow a trial
court to award, "without the necessity of proving fault or negligence of any
kind," an unlimited amount above P15,000. The previous Insurance Code of 1978
provides "shall not exceed Five Thousand pesos," (Sec. 378, then).
M55Perlav. Ancheta, 164 SCRA 144 (1988).
&%Ibid., at p. 148
 CHAPTER VII: RISK AND COVERAGES 1 205

H. Reinsurance

A contract of reinsurance is one where one party agrees to

indemnify another, either in whole or in part, against loss or
liability which the latter may sustain or incur under a separate
and original contract of insurance with a third party. 357
Reinsurance is governed under the Code by sections 97-100.
Section 97 in particular defines such contract as "one by which an
insurer procures a third person to insure him against loss or
liability by reason of such original insurance."

In the case of PHILAM v. Auditor GeneraI358 the Supreme

Court differentiated a reinsurance treaty from a reinsurance
policy. A reinsurance policy is a contract one insurer makes with
another to protect the first insurer from a risk it already assumed;
while a treaty is merely an agreement between two insurance
companies whereby one agrees to cede and the other to accept
reinsurance business pursuant to provisions specified in the
treaty. "Treaties", therefore, are contracts for insurance and
policies are contracts of insurance. Where the reinsurer retains
the right to accept or not to accept the cession being made by the
original insurer, the "treaty" is usually referred to as "facultative."

Reinsurance is also different from double insurance. In

double insurance, the insurer remains the insurer of the original
insured while in reinsurance the insurer becomes the insured
insofar as the reinsurer is concerned. In double insurance, the
subject of the insurance is property while in reinsurance the
subject of the contract is the original insurer's risk. Jurisprudence
has held that a 'reinsurance policy is a contract of indemnity one
insurer makes with another to protect the first insurer from a risk
it has already assumed.' Thus, Section 99 of the Code provides:
that "[a] reinsurance is presumed to be a contract of indemnity
against liability, and not merely against damage."

W544 Am Jur 2d, §1831

39 G.R. No. L-19255 (1968), 22 SCRA 135.
206 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In reinsurance contracts, it is the duty of the original

insurer to make a full disclosure, of all the representations of the
original insured, and all the knowledge and information he
possesses whether previously or subsequently acquired material
to the risk.359 This is a duty similar to that of a person seeking
original insurance, a duty of strictest good faith. As discussed in
Chapter VI, a policy may be avoided where the original insured
conceals facts from the original insurer.

As to the contractual relation between the reinsurer and

the original insured, the original insured in reinsurance has no
interest in the contract of reinsurance,w which is independent of
the original contract of insurance. Article 1311 of the Civil Code
expresses the universal rule that "[c]ontracts take effect only
between the parties, their assigns and heirs" and the exception to
this rule are stipulations pour autrui or in favour of a third person
not a party to the contract. Such stipulations, however, must be
clearly and deliberately conferred. In reinsurance, therefore, the
original insured, not being a party or privy to the reinsurance
contract could not directly demand enforcement of such
contract.361

Under Chapter III, Title 7 of the Code (Sections 222 to 228),

are the regulatory provisions on reinsurance transactions.

Importance of Reinsurance

The following are some of the reasons why reinsurance is

important in our society today: 362 "(1) to protect an insurer
against very large claims. Insurers spread the costs of paying out

359 Section 98., Code

3
60 Section 100, Code
36
1 Artex Dev't Co., Inc. v. Wellington InsuranceCo., Inc., G.R. No. L-29508 (1973), 51
SCRA 352.
w As seen in the website of Uoyd's The World's Specialist Insurance Market,
[Link]
 CHAPTER VII: RISKAND COVERAGES 1 207

on large risks by reinsuring part of what they have agreed to

insure with other reinsurers. This 'spread' means that the loss
incurred by each individual insurer is not as severe. (2) to reduce
exposure to 'peaks and troughs'. Insurers want a balanced set of
underwriting results each year, without peaks and troughs.
Because reinsurance covers them against unusually large losses,
this keeps a cap on the claims the insurer has to pay. (3)To obtain
an international spread of risk. When a country is vulnerable to
natural disasters and an insurer is heavily committed in that
country, insurance may be reinsured to spread the risk outside the
country. Finally, (4) to increase the capacity of the direct insurer.
By using reinsurance, the insurer can accept the whole risk and
then reinsure the parts it cannot keep with other insurers.

Bancassurance

Under Republic Act 10607, the Code introduced an entirely

new provision, one on "bancassurance" (Sections 375 to 377).
Before this provision was incorporated, it was not permissible for
insurance companies to present and sell its products within the
premises of a bank. Some regulations, however, have been issued
now and then covering such arrangement. The Code now
provides in Sections 375 and 377 the following:

"Section 375. The term bancassurance shall

mean the presentation and sale to bank customers by
an insurance company of its insurance products
within the premises of the head office of such bank
duly licensed by the Bangko Sentral ng Pilipinas, or
any of its branches, under such rules and regulations
which the Commissioner and the Bangko Sentral ng
Pilipinas may promulgate. To engage in
bancassurance arrangement, a bank is not required to
have equity ownership of the insurance copany. No
insurance company shall enter into bancassurance
arrangement unless it possesses all the requirements
208 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

as may be prescribed by the Commissioner and the

Bangko Sentral ng Pilipinas."

xxx

"Section 377. The Commissioner and the

Bangko Sentral ng Pilipinas shall promulgate rules
and regulations to effectively supervise the business
of bancassurance.
 CHAPTER VIII

MARINE INSURANCE

A. Definition and Risks Covered

As stated at the beginning of this book, the perils of

maritime adventures led to the creation of protective mechanisms
to encourage maritime trade. Thus, from the extensive practice of
bottomry and respondentia in ancient maritime commerce gradually
emerged marine insurance. 363 Considering the peculiar provisions
of the Code on marine insurance, this chapter has been separately
allocated.

The Code provisions on marine insurance are not a direct

definition and only provides a general statement of what it
includes. Thus, under Sec. 101 of the Code, marine insurance has
been given a very wide coverage and includes risks much more
than the one provided in its original provision in Section 92 of the
1914 Insurance Acts". As presently worded, marine insurance
covers loss or damage to property, and even persons, in
connection with all risks or perils of navigation. In addition,
marine insurance includes "marine protection and indemnity
insurance" against liability incidental to ownership, operation,
maintenance or construction of vessels and facilities therefore.

MChapter I, pp. 3-4; See VANCE, [Link]., pp. 7 to 21.

3"Act No. 2427.
210 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The current Code retains verbatim the provisions in Section 99 of

the Insurance Code of 1978 (PIs 612 and 1460).

The changes reflected in the current definition have made

the coverage of marine insurance reflective of advances in
commerce and transportation. Under the 1914 Insurance Act (Act
No. 2427), marine insurance may cover all kinds of movable
property, provided the risks are linked with navigation. On the other
hand, the Code includes other properties and risks which may not
be necessarily connected at all with navigation but include "any
and all risks or perils of navigation, transit or transportation,"6
and even precious stones, jewels, jewelry, and precious metals"
whether in the course of transportation or otherwise.3 66

Constructionof a Marine Insurance Policy

A marine insurance policy may cover any property or

interest therein, coming reasonably within the words of the
description used, which may be exposed to the perils of
navigation insured against. The question of what may be a
covered risk depends on the construction of the language
employed by the contracting parties in describing the subjects of
the insurance. It is worth noting that a marine insurance contract
is categorized under the contracts of the law merchant. By virtue
of this fact, more weight is given to established usage pertinent to
that branch of law in the construction of marine insurance
contracts.3 6 7

3 Section 101, (a) (1) Code

3"Section 101 (a)(3).
367 VANCE, pp. 910-941. The usual formal words of description printed in a
marine policy of the things or properties covered are as follows: "The body,
tackle, apparel, and other furniture of the good ship, or upon all kinds of lawful
goods and merchandise laden or to be laden upon the good ship, or upon the
freight, etc." These general terms may be modified by the terms written in the
policy specifically descriptive of the interests intended to be protected.
 CHAPTERVIII: MARINE INSURANCE 1 211

The term "goods and merchandise" generally cover all

articles laden upon the ship for mercantile purposes, excluding
those boarded upon the ship for other reasons. For instance,
clothing of the officers and the crew as well as provisions
intended to be consumed on a passenger vessel would not be
embraced by the term, unless such objects are transported as
merchandise. The owner of the vessel has an insurable interest in
expected freightage.36

B. General and Particular Average

The liability of an insurer under an insurance contract may

be affected by the averages suffered by the subject of the
insurance and also by the agreement under the policy regarding
the inclusion or exclusion of any particular average under the
policy. The doctrine of general average contribution in cases of
marine disaster belongs properly to admiralty law, but such
doctrine is frequently used in adjusting insurance payments 369 as a
particular policy may or may not declare that it is free from a
certain kind of average loss.

The Code of Commerce defines average as any

extraordinary or accidental expense incurred during the voyage
for the preservation of the vessel, cargo, or both and all damages
to the vessel and the cargo from the time it is loaded and the
voyage commenced until it ends and the cargo is unloaded. 370 A
common example of average is jettison, which is the intentional
casting overboard of any part of a venture exposed to peril,
whether it be of the cargo, or of the ship's furniture or tackle, in
the hope of saving the rest of the venture. The loss incurred in

368
See Section 105, Code. Also, discussion, infra, on insurable interest in marine
insurance.
w VANCE, [Link]., p. 934.
370 Article 806.
212 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

doing so is an extraordinary expense made to preserve the ship

itself and the cargo.

In admiralty law, there are two kinds of averages: general

average losses and particular average losses.

General Averages

The Code of Commerce3 "' provides that general averages

include damages and expenses which are deliberately caused by
the master of the vessel or upon his authority, in order to save the
vessel, her cargo, or both at the same time, from a real and known
risk.

General average is a principle of customary law,

independent of contract, whereby when it is decided by the
master of a vessel, acting for all the interests concerned, to
sacrifice any part of a venture exposed to a common and
imminent peril in order to save the rest, the interests so saved are
compelled to contribute pro rata to the owner of the interests
sacrificed. The object is to make the cost of the sacrifice fall equally
upon all who are benefited. 372 The loss is borne not by the owner
of the vessel alone, but by all the owners of the interests involved,
who are pro tanto obliged to give proportionate or "general
average" contributions to make up for such loss. Hence, Vance
calls this principle "a device for the limited distribution of loss." 373
The reason for this distribution of loss is that the sacrifice was
made for the common benefit of all who have an interest in the
venture. 374

37 Article 811.
372 VANCE, pp. 933-944.
s3Ibid.
374
Article 812, Code of Commerce.
 CHAPTER VIII: MARINE INSURANCE I 213

The example given previously, jettison, falls under the

classification of general averages. Another example is the bringing
into port of vessels for repairs or re-handling of cargo.

In the early case of Magsaysay, Inc. v Agan 7 cited in the

Commentaries on the Code of Commerce by Tolentino, the Supreme
Court laid down the requisites for general average, to wit:

"First, there must be a common danger. This means,

that both the ship and the cargo, after having been
loaded, are subject to the same danger, whether during
the voyage, or in the port of loading or unloading; that
the danger arises from the accidents of the sea,
dispositions of the authority, or faults of men, provided
that the circumstances producing the peril should be
ascertained and imminent or may rationally be said to
be certain and imminent. This last requirement exclude
measures undertaken against a distant peril.

"Second, that for the common safety part of the vessel

or of the cargo or both is sacrificed deliberately.

"Third, that from the expenses or damages caused

follows the successful saving of the vessel and cargo.

"Fourth, that the expenses or damages should have

been incurred or inflicted after taking proper legal steps
and authority."

Vance, however, includes as part of the requisites the fact that the
sacrifice was made by the master or upon his authority and that it
was not caused by any fault of the party asking for the
contribution. 377

5 96 Phil. 504 (1955).

37 VANCE, pp. 933-934.
214 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The last clause of Section 138 of the Code clearly sets forth
the liability of an insurer for general average. It states:

"Sec. 138. Where it has been agreed that an insurance

upon a particular thing, or class of things, shall be
free from particular average, a marine insurer is not
liable for any particular average loss not depriving
the insured of the possession, at the port of
destination, of the whole of such thing, or class of
things, even though it becomes entirely worthless;
but such insureris liable for his proportion of all general
average loss assessed upon the thing insured."

The case of Jarque v. Smith, Bell, & Co. Ltd.37 is illustrative.

Here, the Court held that in this jurisdiction, the liability for
contribution to general average is not based on the express terms
of the policy, but rests upon the theory that from the relation of
the parties and for their benefit, a quasi-contract is implied by law.
Although the case was decided under the Code of Commerce, the
same rule still holds true as expressed in the aforementioned
provision. Article 859 of the Code of Commerce 379 is mandatory;
and the insurers, whether for the vessel or for the freight or for the
cargo, are bound to contribute to the indemnity of the general
average. There is nothing unfair in the provision; it simply places
the insurer on the same footing as other persons who have an
interest in the vessel, or the cargo therein, at the time of the
occurrence of the general average by compelling them to
contribute.8 0

Therefore, if the cargo was in peril to the extent of a call for

general average, the ship must also have been in great danger,
possibly sufficient to cause its absolute loss. The jettison was

37 56 Phil. 758 (1930).

3" Under Article 859 of the Code of Commerce, the underwriters of the vessel, of
the freight, and of the cargo shall be obliged to pay for the indemnity of the gross
average in so far as is required of each one of these objects respectively.
80 Art. 812, Code of Commerce.
 CHAPTER VIII: MARINE INSURANCE I 215

therefore as much to the benefit of the underwriter as to the owner

of the cargo. The latter was compelled to contribute to the
indemnity; why should not the insurer be required to do likewise?
If no jettison had taken place and if the ship by reason thereof had
foundered, the underwriter's loss would have been many times as
large as the contribution now demanded.

The insurer is, therefore, always bound to pay its

contribution to the indemnity of the general average losses.
However, the Code reasonably protects the insurer in that it limits
the insurer's liability for contribution to the portion attaching to
the value of the policy. Thus:

"Sec. 166. A marine insurer is liable for a loss falling

upon the insured, through a contribution in respect
to the thing insured, required to be made by him
towards a general average loss called for by a peril
insured against; provided, that the liability of the
insurer shall be limited to the proportion of
contribution attaching to his policy value where this
is less than the contributing value of the thing
insured."

The rules on subrogation also apply in cases of

contribution for average losses. The insurer may opt to pay the
insured the full amount of the loss, subject to its reimbursement
by those obliged to give their contributions. This right is expressly
provided for in the Code:

"Sec. 167. When a person insured by a contract of

marine insurance has a demand against others for
contribution, he may claim the whole loss from the
insurer, subrogating him to his own right to
contribution. But no such claim can be made upon
the insurer after the separation of the interests liable
to the contribution, nor when the insured, having the
right and opportunity to enforce the contribution
216 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

from others, has neglected or waived the exercise of

that right."

The rationale behind the rules on general averages was

explained by the Supreme Court in the case of Compagnie de
Commerce et de Navigation D'Extreme Orientv. The HamburgAmerika
Packetfacht Actien Gesselschaft.381In that case, there was a charter
party agreement whereby a vessel was obliged to deliver cargo
from Saigon to a port in Hamburg. However, due to the
impending war among European countries, the vessel obtained a
bill of health38 2 and stayed in Manila. As a result, the cargo
deteriorated. The owner of the cargo filed an action to recover the
full value of the cargo. The Court did not sustain the claim of the
ship owner for general average because under the said rules, it is
necessary that the loss or damage was made for the "common
safety" in order to successfully claim for a general average.
Authorities, according to the Court, are of the unanimous opinion
that claims for general average must be supported by proof that
the sacrifices "were made to avert a common imminent peril, and
that extraordinary expenses, for which reimbursement is sought,
were incurred for the joint benefit of ship and cargo." There was
no general average in this case because the act of the master of the
vessel of taking refuge in Manila was solely for the purpose of
saving the vessel and not for the common safety of vessel and
cargo.

ParticularAverages

Under the Code of Commerce, 383 particular averages

include all damages and expenses caused to the vessel or to her

38t 36 Phil. 590 (1917).

S2 During those times, this was required to ensure that the vessel was not
carrying infectious diseases from the port of origin.
mArticle 809.
 CHAPTERVIII: MARINE INSURANCE I 217

cargo that have not inured to the common benefit and profit of all
the persons interested in the vessel and her cargo.

Particular average losses are usually partial losses. These

are the losses which occur under such circumstances which do not
entitle the unfortunate owners to receive contribution from the
other owners concerned in the same venture (e.g. a vessel is
accidentally run aground and gets destroyed after the cargo is
saved.) Such a loss is particular average, and must be borne by the
owner of the vessel alone. Simply put, particular average losses
are merely those losses suffered by and borne alone by particular
interests in a venture, and not by all persons contributing ratably.

An example of particular average loss would be the wages

of the crew when the vessel is detained by reason of Jbrce majeure.
In such a case, the loss is only partial and must be borne by the
owner of the vessel alone.

The liability of the insurer for particular average would

depend on the terms of the policy. The insurer may stipulate that
it shall not be liable for particular average ("FPA" or free from
particular average), in which case the stipulation would control
and its liability would be limited to contribution to general
average only under Section 136 of the Code. 8 4

In Magsaysay v. Agan, 5 the Supreme Court explained how

to classify a loss as a general or particular average. In that case a
vessel owned and operated by Magsaysay ran aground while in a
port for a stopover. Because attempts to refloat the vessel using its
own power failed, Magsaysay had it refloated by a stevedoring
company at an agreed compensation. At the port of destination,
the cargo was delivered to their respective owners and
consignees. However, the shippers refused to contribute to the
average.

S%As discussed under "General Averages," supra.

u Supra.
218 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Magsaysay theorized that the expenses in floating the

vessel constitute a general average to which both the ship and the
cargo owners should contribute. On the one hand, Agan denies
liability alleging that the stranding of the vessel was due to the
fault, negligence and lack of skill of its master and, hence, the
expenses for refloating the vessel did not constitute a general
average.

The Court noted that the stranding of the vessel was

accidental, but it was held that such expenses incurred by reason
of accidental stranding of a vessel falls under particular average.
The Court used the enumerations under Article 809 and 811 of the
Code of Commerce, and number 2 of Article 809 referring to
expenses suffered by the vessel "by reason of an accident of the
sea or force majeure." For general averages to apply, under Article
811, these should have been expenses caused in order to float a
vessel when it was intentionallystranded for purposes of saving it.

The Court also ruled that since the requisite procedure for
general averages was not followed, the claim of Magsaysay cannot
be granted.

In the more recent case of Philippine Home Assurance

Corporationv. Court ofAppeals38 6, the Court upheld the rule that the
procedure prescribed by Article 813 and 814 of the Code of
Commerce must be complied with so that expenses and damages
may be classified as general average. The case involved salvaging
of a vessel due to a small flame in the acetylene cylinder that
exploded, and the Court ruled that due to non-compliance with
the prescribed procedure, it cannot be a claim for general averages
and the insurer cannot recover from the consignees what it has
paid the owner of the vessel.

38 257 SCRA 468 (1996)

 CHAPTER VIII: MARINE INSURANCE I 219

C. "Perils of the sea" and "perils of the ship"

In ascertaining the liability of an insurer under a marine

policy, a distinction is often made between "perils of the sea" and
"perils of the ship." Marine policies generally cover only "perils of
the sea." The phrase covers only those casualties due to unusual
violence or extraordinary action of wind and wave, or to other
extraordinary causes connected with navigation. It does not
include losses resulting from ordinary wear and tear, or other
damage incident to the voyage, which would fall under the
387
category of perils of the ship.

In the case of La Razon Social "Go Tiaoco y Hermanos" v.

Union Insurance Society of Canton, Ltd.,3 88the Supreme Court had
occasion to explain the concept of "perils of the sea." Under the
marine policy issued by the insurer in that case, the cargo was
insured against "Perils... of the seas, men of war, fire, enemies,
pirates, rovers, thieves, jettisons, letters of mart and countermart,
surprisals, takings at sea, arrests, restraints, and detainments, of
all kings, princes , and people, of what nation, condition, or
quality soever, barratry of the master and mariners, and of all
other perils, losses, and misfortunes that have or shall come to the
hurt, detriment, or damage of the said goods and merchandise or
any part thereof." It was found that the cause of the damage of the
vessel in this case was a defect in one of the drain pipes of the
ship. The Supreme Court characterized the loss occasioned by the
inflow of sea water into the ship's hold through the defective pipe
as a "peril of the ship." This was because the defect causing the
damage was not due to any accident but to the failure of the ship
owner to properly repair a defect of which he was apprised. The
loss was, thus, due to simple unseaworthiness. Moreover, the
defect was due to ordinary wear and tear. Therefore, it was not
caused by a "peril of the sea."

38 VANCE, pp. 910-941

38840 Phil. 40 (1919)
220 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In the later case of Roque v. Intermediate Appellate Court,389

the Court again distinguished between "perils of the sea" and
"perils of the ship." It was reiterated that in marine cases, the risks
insured against are "perils of the sea." These cover only losses that
are of an extraordinary nature, or arise from some overwhelming
power, which cannot be guarded against by the ordinary exertion
of human skill and prudence. Any damage attributable to the
inherent vice of the vessel or to the act of the owners, masters, or
shippers, shall not be considered a peril, unless the policy
provides otherwise.

In this case, the Court again absolved the insurer because

the vessel sank on account of "perils of the ship." This was
because at the time of the misfortune, there was no typhoon but
ordinary strong wind and waves, a condition which is natural and
normal in the open sea. The sinking of the vessel was found to be
due to the improper loading of the cargo logs such that the barge
tilted to one side, hence, could not be navigated or even keeled.
This ultimately led to the sinking of the vessel, due to the
unseaworthiness of the vessel and the negligence of the crew.

However, in Cathay Insurance v. Court of Appeals3 9° , the

Court considered the rusting of seamless steel pipes in transit as
"perils of the sea," because of the "toll on the cargo of wind, water
and salt conditions."

The exception to a "perils of the sea" condition for insurer

liability is when there is an "all-risk policy" as demonstrated in
the case of Malayan Insurance Corporation v. Court of Appeals.391 In
this case, there was a deletion of the "Free from Capture &
Seizure" clause from the policy, which meant that when the
vessel's cargo of soya bean meal was arrested and detained by the
authorities in South Africa, it was an arrest that was a covered risk

139 SCRA 5% (1985)

390 151 SCRA 710 (1987)
39 270 SCRA 242 (1997)
 CHAPTER VIII: MARINE INSURANCE I 221

in the insurance policy, since the risk of "arrest" is caused by any

ordinary judicial process.

D. Insurable Interest in Marine Insurance

Insurable interest is a staple element for insurance, and

marine insurance is no different. There can be no valid marine
insurance if there is nothing to insure. However, there is also the
concept of "lost or not lost" provision in reference to the subject of
marine insurance, wherein both the insurer and the insured are
not certain if the vessel is already lost at sea. 392

a. Ship Owner

The owner of a ship has an insurable interest in two things:

(1) the vessel in all cases 393 ; and (2) the expected freightage in
some situations.3 94

The owner of the vessel always has an insurable interest in

it. However, in the event the vessel has been chartered, and the
charterer contracts to pay him its value in case of loss, the insurer
is liable only for the part of the loss that cannot be recovered from
the charterer. 395 Where the ship is hypothecated by bottomry, that
is when the owner secures a loan against his interest in the vessel
and is payable only when the vessel has completed its voyage, the
insurable interest is only the value of the ship not secured by
bottomry. 39

39VANCE, p. 911
m"Sec. 102, Code.
3%Sec. 105, Code.
395 Sec. 102, Code.
3 Sec. 103, Code.
222 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

b. Freightage

Freightage in marine insurance, according to Section 104 of

the Code signifies all the benefits derived by the owner either
from (1) the chartering of the ship; or (2) its employment for the
carriage of his own goods or those of others. Under Section 105,
the ship owner also has an insurable interest in expected
freightage, which he would have earned in the ordinary and
probable course of things if it were not for the happening of a peril
insured against or other peril incident to the voyage. The Code
lists instances where there are special rules for the commencement
of existence of the interest. In the specific case of a charter party,
the insurable interest in expected freightage exists only when the
ship has broken ground on the chartered voyage. 397 In the instance
where a price is to be paid for the carriage of the goods, the
interest exists when (1)the goods are actually on board, or there is
some contract for putting them on board, and (2) both the ship
and goods are ready for the specified voyage. 398

c. Charterer

The charterer of a ship has an insurable interest in the

vessel to the extent that he is liable to be damnified by its loss, as
stated in Section 108 of the Code. A charter party is a contract by
which an entire ship or some principal part thereof is let by the
owner to another person for a specified time or use. 399 The ship
owner and the charterer could stipulate that the latter pay for the
value of the vessel in case of loss; the charterer, then, has insurable
interest over the extent of its value. The charterer also has
insurable interest in the profits he expects to earn by carrying the
goods in excess of the amount he agreed to pay for the charter of
the vessel.

39Sec. 106, Code.

398 Ibid.
399
Puromines,Inc. vs. Court ofAppeals, 220 SCRA 281 (1993)
 CHAPTER VIII: MARINE INSURANCE I 223

There are two types of charter parties: first, is the bareboat

or demise charter, which refers to where the whole vessel itself is
leased out, and the charterer must provide his own crew and
supplies for the voyage. This has powerful implications on the
liability of the charterer for loss or damage because he is
essentially in charge of the vessel. The other is a contract of
affreightment, wherein the owner of the vessel only leases part or
all of its space to haul the goods of others. It is a contract of special
service to be rendered by the owner of the vessel who retains the
possession, command and navigation of the ship, the charterer or
freighter merely having use of the space in the vessel in return for
the payment of the charter hire or freight. 400 There are two sub-
classes of contracts of affreightment. First is the voyage or trip
charter, a contract for only one or a series of voyages. The other
kind is a time charter, where the vessel can be used for a specified
period of time.

The type of charter parties becomes controversial in

determining the liability of the ship owner. In the case of Coastwise
Lighterage Corporation v. Court of Appeals, 401 the contract was
deemed to be that of affreightment and not of a demise, and the
transaction was not said to be a private carrier on lease, but rather,
the ship owner was a common carrier, making the ship owner
liable for breach of contract when it failed to exercise
extraordinary diligence in avoiding the loss or destruction of the
goods transported. This doctrine was reiterated in the 2005 case of
Lea Mer Industries,Inc. v. Malayan Insurane,402 where the Supreme
Court ruled that the contract was that of affreightment as shown
by the fact that it was the ship owner's crew that manned the
tugboat and controlled the barge.

400 Ibid.
40 245 SCRA 796 (1995)
402 471 SCRA 698 (2005)
224 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

A year after, the same issue was raised in Loadstar Shipping

Co., Inc. v. Pioneer Asia Insurance C,orp. The Court citing Planters
Products,Inc. v. Court ofAppeals,4o 7 gave the following explanation:

"It is therefore the imperative that a public

carrier shall remain as such, notwithstanding the
charter of the whole or portion of a vessel by one or
more persons, provided the charter is limited to the
ship only, as in the case of a time charter or voyage-
charter. It is only when the charter includes both the
vessel and its crew, as in a bareboat or demise that a
common carrier becomes private, at least insofar as the
particular voyage covering the charter-party is
concerned. Indubitably, a shipowner in a time or
voyage charter retains possession and control of the
ship, although her holds may, for the moment, be the
property of the charterer."

In Loadstar, the existence of a charter agreement did not

remove the status of the ship owner as a common carrier. The
agreement was limited to the ship only and did not involve both
the vessel and its crew. Its charter is only a voyage-charter, not a
bareboat charter.

E. Concealment and Representations

In marine insurance, the law requires a broader spectrum

of information to be disclosed by the parties compared to what the
law generally requires for all contracts of insurance. The more
stringent rules on concealment in marine insurance is usually
explained by the fact that until the advent of advanced
communication, the insurer had to rely heavily on the insured for
facts affecting the degree of risk. KEETON and WIDISS are of the
opinion, however, that because of today's improvement in
4 479 SCRA 655 (2006)
07 226 SCRA 476 (1993)
 CHAPTER VIII: MARINE INSURANCE 1 225

information speed, the differentiation cannot hold based on this

reasoning. However, they also opined that there are other factors
which justify the stricter rules, among which is that the parties in
marine insurance contracts are likely to be of equal bargaining
power and business skill.40

The rules on disclosure applicable to every insurance

contract also apply to marine insurance contracts, but it does have
additional safeguards and in a sense stricter, given the additional
requirements. Thus, as required by Section 28 of the Code, "each
party must communicate all facts within his knowledge which are
material to the contract and as to which he makes no warranty,
and which the other has no means of ascertaining." In addition to
these facts, each party in marine insurance must communicate all
the information in his possession which is material to the risk
except those which he is not bound to communicate according to
Section 304o of the Code except upon inquiry by the other party.
Material information includes the information of the belief or
expectation of a third person regarding a material fact. 410 There is
also a presumption of knowledge of a prior loss at the time of
insuring, if the information might have possibly reached the
insured in the usual mode of transmission and at the usual rate of
411
communication.

However, not all concealments in a marine insurance

render the entire contract void. In the following, the insurer is

4w KEETON and WIDISS, p. 578

o9 Under Section 30 of the Code, the following are information that need not be
disclosed, except upon inquiry by the other party: "(a) Those which the other
knows; (b) Those which, in the exercise of ordinary care, the other ought to
know, and of which the former has no reason to suppose him ignorant; (c) Those
of which the other waives communication; (d) Those which prove or tend to
prove the existence of a risk excluded by warranty, and which are not otherwise
material; and (e) Those which relate to a risk excepted from the policy and which
are not otherwise material."
410 Section 110, Code.
411 Section 111, Code.
226 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

merely exonerated from losses resulting from the risk which was
concealed, to wit:412

"(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;
"(e) The use of false and simulated papers."

On the matter of representations, the Code provides:

"Sec. 113. If a representation by a person insured by a

contract of marine insurance 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 the entire contract."

"Sec. 114. The eventual falsity of a representation as to

expectation does not, in the absence of fraud, avoid a contract of
marine insurance."

F. Implied Warranties

Implied in every contract of marine insurance are three

conditions upon the insurer' liability for the risks assumed else the
insurer will not be liable. These conditions are usually termed
implied warranties.413 In the Code are three implied warranties:
seaworthiness of the vessel, improper deviation, and proper
documentation." 4 A fourth implied warranty can be considered,

412 Section 112, Code.

413 See VANCE, Section 169, pp. 920-925.
414 Section 115,122 & 125, Code.
 CHAPTER VIII: MARINE INSURANCE I 227

and that is not to engage in an illegal venture, such as carrying

415
out illegal trade or contraband.

1. Seaworthiness of the vessel

Every contract of marine insurance, whatever the subject,

has an implied warranty that the ship is seaworthy.416 The 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. 417 This is not an absolute guarantee that the
vessel will safely meet all possible perils.

According to Section 118 of the Code, the warranty of

seaworthiness extends not only to the condition of the structure of
the ship, but requires that the ship be (1) properly laden; (2)
provided with a competent master, and a sufficient number of
competent officers and seamen; and (3) provided with the
requisite appurtenances and equipment.

Generally, this warranty is complied with if the ship is

seaworthy at the time of the commencement of the risk, which is
the start of the voyage. 418 Thereafter, the Code provides special
rules for different cases to determine the seaworthiness. Thus,
when the insurance is for a specified length of time, the
seaworthiness must exist at the commencement of every voyage
of the ship covered by the period; when the insurance is upon
cargo which must be transhipped at an intermediate port,
seaworthiness is a requirement for each vessel which will carry
the cargo at the commencement of each particular voyage. 419

415 VANCE, p. 920.

416 Section 115, Code
417
Section 116, Code
418
Section 117, Code
4 19
Section 117(a) & (b), Code.
228 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

However, even if the ship starts out as seaworthy but

becomes unseaworthy at some time during the voyage, any
unreasonable delay in repairing the defect exonerates the insurer
on ship or shipowner's interest from any liability for loss arising
therefrom.40

Seaworthiness also depends on the type of insu'ance

taken. A ship seaworthy for purposes of insurance on the ship
may not be seaworthy for purposes of insurance on the cargo if
the ship is not reasonably capable of safely carrying the cargo to a
proper port of destination. American jurisprudence has shown
that this provision can be cited to rule against the liability of the
insurer because the ship was deemed to be unseaworthy with
respect to the cargo. While these rulings were applied in the case
of La Razon under the old Insurance Act, the same ruling can still
be applied under the present Code.m

In the case of Roque v. IntermediateAppellate Court,42 it was

held that there is an implied warranty of seaworthiness upon the
ship or upon any thing which is the subject of marine insurance,
following the clear provision of Section 115 of the Code. In the
Roque case, the owner of the cargo sought indemnity from the
insurer, claiming that as mere owner of the cargo, she had no
control over the vessel and, therefore, the warranty of
seaworthiness does not apply to her. The court rejected this
argument and explained how the warranty attaches, in this wise:

"x x x there can be no mistaking the fact that the term

'cargo' can be the subject of marine insurance and that
once it is so made, the implied warranty immediately
attaches to whoever is insuring the cargo whether he be the
shipowner or not. x x x

420 Section 120, Code

4= Steel v. State Line Steamship
Co. [L.R. 3 A.C., 72 (1877)]; Gilroy, Sons & Co. V.
Price & Co. [17 AC, M 56 (1893)] - as cited in the case of La Razon Social "Go
Tiaoco Y Hermanos" v. Union Insurance Society of Canton, Ltd. (supra).
MSupra.
 CHAPTER VIII: MARINE INSURANCE 1 229

Since the law provides for an implied warranty of

seaworthiness in every contract of ordinary marine
insurance, it becomes the obligationof a cargo owner to look
for a reliable common carrier which keeps its vessels in
seaworthy condition. The shipper of cargo may have no
control over the vessel but he has full control in the
choice of the common carrier that will transport his
goods." (Emphasis supplied)

2. Implied Warranty against Improper Deviation

In marine insurance policies which describe the voyage by

naming the ports of departure and of destination, the voyage
insured would depend on whether the course of sailing is fixed by
mercantile usage. If it is so fixed, the voyage insured is one which
conforms to the course of sailing fixed by mercantile usage
between the ports of departure and destination named. 424 If the
course of sailing is not fixed by mercantile usage, the voyage
insured is that way between the places specified, which to a
master of ordinary skill and discretion, would mean the most
natural, direct and advantageous. 42 5

If the voyage insured is not followed, there is a deviation.

Deviation occurs in any of three ways: (1) a departure from the
course of the voyage insured, as expressed in the preceding
paragraph, (2) an unreasonable delay in pursuing the voyage, or
(3) the commencement of an entirely different voyage. 4

A deviation may either be proper or improper. According

to Section 126 of the Code, a deviation is proper under the
following circumstances:

4M
Section 123, Code
40 Section 124, Code
426
Section 125, Code
230 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

"(a) When caused by circumstances over which neither

the master nor the owner of the ship has any control;

(b) When necessary to comply with a warranty, or to

avoid a peril, whether or not the peril is insured against;

(c) When made in good faith, and upon reasonable

grounds of belief in its necessity to avoid a peril; or

(d) When made in good faith, for the purpose of saving

human life or relieving another vessel in distress."

Every deviation which does not fall within the above

enumeration is considered improper deviation. 427 Improper
deviation exonerates the insurer because the insured, in effect,
novated the contract without the consent of the insurer. In effect, it
has put additional risks that affected the seaworthiness of the
vessel.

3. Implied Warrantyof Proper Documentation

Under Section 122 of the Code, where the nationality or

neutrality of a ship or cargo is expressly warranted, it is implied
that the ship will carry the requisite documents to show such
nationality or neutrality and that it will not carry any document
which casts reasonable suspicion thereon.

G. Kinds of Losses Covered by Marine Insurance

The liability of the insurer in marine insurance is

determined by the terms of the contract. However, there are
principles unique to marine insurance which must be considered.
Among these are the concepts of total and partial loss.

427 Section 127, Code

 CHAPTER VIII: MARINE INSURANCE 1 231

There are only two types of losses in marine insurance:

total and partial. Every loss which is not total is partial. 429 Total
loss, however, may either be actual or constructive total loss. 430

KEETON AND WIDISS differentiate the two kinds of total

loss. In actual total loss, an insured event makes it impossible for
the subject to reach its destination in specie. Whereas in
constructive total loss, it would be possible for the property to
reach the destination in specie but the cost of doing so is greater
than the value of the subject.431 The Insurance Code has specific
provisions on actual and constructive total loss.

1. Actual Total Loss

Total loss is when the things insured are wholly lost or

destroyed, or when they are so greatly damaged as to be
worthless. 432 The Insurance Code provides for the causes of actual
total loss, thus:

"Sec. 132. An actual total loss is caused by:

(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking,
or by being broken up;
(c) Any damage to the thing which renders it
valueless to the owner for the purpose for which
he held it; or
(d) Any other event which effectively deprives the
owner of the possession, at the port of destination,
of the thing insured.

429Section 130, Code

40 Section 131, Code
431KEETON and WIDISS, p. 195
M VANCE, pp. 935-937
232 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Where a vessel sinks deep in sea and can no longer be

refloated, or when it gets burned or reefed or is wholly broken to
pieces, the loss is total. Also, where the ship has gotten so injured
that it no longer exists as a ship, but is a mere confused mass of
material, an actual total loss has been suffered.03 Such destruction
may equally apply to goods covered by marine insurance.

Paragraph (c) of Section 130 is illustrated in the case of Pan

Malayan Insurance Corporation v. Court of Appeals.434 The insured
cargo in this case consisted of rice seeds, which was prone to the
risks of germination and spoilage. The barge sank after the carrier
deviated from its route. The insured was notified that only 78% of
the cargo was destroyed. The insurer refused recovery, so the
question of total loss was issued in the case.

The Supreme Court sided with the insured and held that
there was indeed an actual total loss. The rice seeds in this case
were treated and would germinate upon mere contact with water.
The Court explained that there is an actual total loss where the
cargo no longer remains the same kind of thing it was before
because of decomposition or other chemical agency. It was
emphasized that the complete physical destruction of the subject
matter is not essential to constitute a total loss. There may be such
a loss where the form and specie of the thing is destroyed,
although the materials constituting it still exist.

In PhilippineManufacturing Co. v. Union Insurance Society of

Canton, Ltd.,4w an insurance company insured a steel tank under a
policy which stipulates "warranted against the absolute loss of the
lighter only." During the life of the policy and as a result of a
typhoon, the lighter was sunk in Manila Bay. The insurer denied
liability on the ground that there was no absolute total loss as,
upon its instruction, the insured was able to raise the vessel and

3 id
4M 201 SCRA 382 (1991)
4W 42 Phil. 378 (1921)
 CHAPTER VIII: MARINE INSURANCE I 233

reconstruct it, although the cost of the salvage and repairs were
substantially equal to the original cost of the lighter and its value
as stipulated in the policy.

The Supreme Court ruled that there was, again, an actual

total loss for which the insurer is liable on the basis of then Section
123 (c)4m of the Insurance Act (Act 2427). The provision states that
there is an actual total loss where there exists any damage to the
thing which renders it valueless to the owner for the purpose for
which he held it. The Court observed that at the time the lighter
was sunk and in the bottom of the bay under the conditions then
and there existing, it was of no value to the owner, and, hence, an
actual total loss according to the above provision. The Court
explained:

"To render it valueless to the owner, it is not

necessary that there should be an actual or total loss
or destruction of all the different parts of the entire
vessel. The question here is whether, under the
conditions then and there existing and as the lighter
laid in the bottom of the bay, was it of any value to
the owner. If it was not of any value to the owner,
then there was an actual loss or a "total destruction
of the thing insured [xxx]..."

The decision also cited the case of The Great Western

Insurance Company v. Fogarty,3 7 which discussed when a loss may
be considered total. That case stated that in the English practice, a
vessel is a total loss when it has sustained such extensive damage
which renders it reasonably impractical to repair it. The courts
have adopted the rule that if the ship, when repaired, will not be
worth the sum necessary to repair her, the repairs are considered
impossible and it is a case of total loss.

&%
Same provision as the current Section 132(c) of the Code.
43 86 U.S. 216
234 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Presumption ofActual Total Loss

The Code provides a presumption of actual total loss when

there is continued absence of a ship without being heard of. The
length of time before the presumption arises would depend on the
circumstances of the case.4m

2. Constructive Total Loss

The Code defines constructive total loss as such a loss

which gives to a person a right to abandon under Section 141. 439
The difference between actual and constructive loss is that in the
latter, there is a need for proper abandonment before the insured
can claim total loss; whereas in the former, the insured has a right
to claim payment even without notice of abandonment.44 °

It must be stressed that the requirements for abandonment

under Section 141 must be complied with to recover under a
policy for constructive total loss. Non-compliance is fatal to
recovery. This is precisely what happened in Oriental Assurance
Corporationv. Court ofAppeals. 441

In this case, Panama Sawmill hired a carrier to transport

1,208 pieces of apitong logs. The shipment was insured for
"TOTAL LOSS ONLY." The logs were loaded on two barges and
these barges were towed by one tugboat. During the voyage,
rough seas and strong winds caused damage to one of the barges,
resulting in the loss of 497 pieces of logs out of the 598 pieces
loaded thereon. The insurer refused to pay on the ground that its
contracted liability was for "TOTAL LOSS ONLY." The main
issue arose as to whether or not the insurer could be held liable on

WSection 134, Code

49 Section 133, Code
"0 Section 137, Code
441200 SCRA 455 (1991).
 CHAPTER VIII: MARINE INSURANCE I 235

the policy based on the theory of a divisible contract of insurance

and, consequently, a constructive total loss.

The Supreme Court ruled that no liability attaches to the

insurer under the policy. The Court maintained that the terms of
the contract are the measure of the insurer's liability and
compliance therewith is a condition precedent to the insurer's
liability. 442 Whether a contract is entire or severable is a question
of intention to be determined by the language employed by the
parties. In this case, the Court found that the contract was
indivisible. It took into consideration several factors such as the
fact that the logs on the two barges were not separately valued or
separately insured and that only one premium was paid for the
entire shipment so there was only one cause/consideration.

It is important to link the indivisibility of the contract with

the insurer's liability for "TOTAL LOSS ONLY." Total loss may be
actual or constructive. The case here was argued to be a
constructive total loss. But the Court declared that there was no
such loss in this case because the requirements for the application
of Section 141 of the Code and then Section 139 of the Insurance
Code of 1978 for the determination of constructive total loss have
not been met. Said section requires that more than three-fourths of
the value of the shipment is actually lost before there can be a
right to abandon, resulting in the constructive total loss asserted.

In light of the fact that the logs have been insured as one
inseparable unit, both barges must also be treated as an
inseparable unit for the 75% requirement for a constructive total
loss. Since the cost of the loss did not exceed 75% of the value of
all the insured logs, the shipment cannot be said to have sustained
a constructive total loss under Section 141(a). Absent a total loss,
there can be no recovery against the insurer.

4 42Citing PerlaCompaniade Seguros, Inc. v. Court of Appeals, 185 SCRA 741 (1990).
236 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

"All Risks" Clause

Most insurance policies cover a specific risk, and the value

of that risk is calculated and the insurer decides whether it will
assume it and for what premium. A defined risk is also needed to
determine the extent of the liability of the insurer and when the
insurer will be liable. For example, a property insurance
specifically for fire is undertaken specifically for the risk of the
destruction of the property through fire, and not for any other
causes that will lead to the demise of the property.

However, there are non-traditional policies known as "all-

risk" insurance policies. Unlike traditional policies that exclude all
risks not specifically included in the policy, all-risk policies
assume loss/damage arising from any fortuitous event, that is,
unexpected events caused by external forces. Thus, risks not
caused by any internal characteristic of the insured property, if
not specifically excluded by the policy, and does not involve fraud
or other wrongdoing on the part of the insured, are deemed
covered by the policy. The purpose of this kind of insurance
policy is to protect the insured where the losses involved have
unknown causes. Further,when a loss is caused by a combination
of covered and specifically excluded risks, the loss is covered if the
covered risk was the efficient proximatecause of the loss; the loss
is not covered if the covered risk was only a remote cause of the
loss, or the excluded risk was the efficient proximate, or
predominate, cause."4 The concept of efficient proximate cause
will be discussed later.

All-risk insurance policies operate to create a "rebuttable

presumption" of coverage in favor of the insured. Courts have
therefore considered such policies as having a broad and
comprehensive meaning such that "it raises reasonable
expectations on the part of the insured that coverage will be
provided for all losses that are not unintentional or excepted."

"s AmJur 2d §513.

 CHAPTER VIII: MARINE INSURANCE 1 237

However, the contract may also specifically provide that the

burden of proof as to the cause of the loss may be specifically
shifted to the insured when the insurer denies coverage on the
basis of an excluded peril.

All-risk insurance policies are policies which are so drafted

that the coverage is expressed in terms which insure against all
risks, with the exceptions specifically named therein. One
exception is the "inherent vice" clause. It means that deterioration
of the insured property attributable to ordinary wear and tear is
excluded from the coverage of the insurance.4" But there can be
recovery when the natural deterioration is caused or hastened by
a "peril of the sea." 445

In the case of Choa Tiek Seng v. Court of Appeals4 6 lactose

crystals imported from Holland were insured under an "all risks"
clause that read as:

"The insurance is against all risks of loss or damage

to the subject matter insured but shall in no case be
deemed to extend to cover loss, damage, or expense
proximately caused by delay or inherent vice or
nature of the subject matter insured. Claims
recoverable hereunder shall be payable irrespective
of percentage."

The lactose crystals, upon arrival at the port of Manila,

were discharged into the custody of the arrastre operator, prior to
delivery to the consignee. 403 of the 600 bags were found to be in
bad order, prompting the cargo owner to file a claim for loss. The
insurer refused to pay and filed a third-party complaint against
the arrastre operator. The appellate court dismissed the complaint,
holding that the "all risks" coverage embraces only losses

4" KEETON and WIDISS, Sec. 5.3 (c), pp. 485-486.

'"Thid.
44 183 SCRA 223 (1990).
238 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

occasioned by and resulting from "extra and fortuitous events." It

held that an "all risk" coverage has a technical meaning in marine
insurance, which necessitates the occurrence of a fortuitous event
in order to impose liability on the insurer.

The Supreme Court overturned this ruling, citing the case

of Gloren Inc., v. FilipinasCia. de Seguros. 447 It was ruled in that case
that "an all-risk insurance policy insures against all causes of
conceivable loss or damage, except as otherwise excluded in the
policy or due to the fraud or intentional misconduct on the part of
the insured." Applying this, the Court pronounced that the clear
terms of the "all risks" clause in the policy require no
interpretation. There are only two excluded risks according to the
clause and it is the insurer's duty to establish that the loss falls
within those exceptions provided for by law or the contract.
Failing in this, the claim for recovery was sustained.

The doctrine was likewise applied in the case of Filipino

Merchants v. Court of Appeals,44 where the exact same clause was
involved. A shipment of fishmeal insured was found to be in
damaged condition upon unloading. The cargo owner filed an
action to recover under the "all risks" policy clause of the policy
but the insurer refused claiming that there must be a casualty or
accidental cause to which the loss is attributable.

The Supreme Court rejected the submissions of the insurer.

It held that an "all-risks" policy must be interpreted literally as
covering all risks whatsoever and covering all losses by an
accidental cause of any kind. Such a policy has evolved to grant
greater protection than that afforded by the "perils" clause for the
purpose of assuring that no loss can happen through a cause
neither insured against nor creating liability in the ship. The
insured in an "all-risks" policy has the initial burden of proving
that the cargo was damaged when unloaded. Thereafter, the

44 65 O.G. 3392
40 179 SCRA 638 (1989)
 CHAPTER VIII: MARINE INSURANCE I 239

burden shifts to the insurer to show that the risk is an excluded

risk under the policy. Under this kind of policy, it was held that it
is sufficient to show that the damage was occasioned by some
accidental cause of any kind and there is no necessity to point to
any particular cause.

3. Abandonment

Abandonment in marine insurance is defined by Section

140 of the Code as the act of the insured by which, after a
constructive total loss, he declares the relinquishment to the
insurer of his interest in the thing insured.

The right to abandonment belongs to the insured and

arises only in cases of constructive total loss. In contrast, there is
no necessity to abandon the insured property in an actual total
loss because in such a case the insured's right to claim the whole
insurance is absolute. However, where the loss is only
constructive total loss, there must be a showing of due regard to
the insurer's interest in the abandoned property, or to anything
which may remain of the insured property. The insurer, by
prompt action, might be able to save part of the insured property
and it is in his interest in this which makes it necessary for the
insured to give timely notice to the insurer about his intent to
abandon. The Code provides the period in which notice must be
made in this wise:

"Sec. 143. An abandonment must be made within a

reasonable time after receipt of reliable information
of the loss, but where the information is of a
doubtful character, the insured is entitled to a
reasonable time to make inquiry."

As to what constitutes constructive total loss, different

rules obtain in different jurisdictions. There are two prevailing
rules in this matter: the English Rule and the American Rule.
240 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Under the English Rule, if an insured owner, "in the

exercise of an interested discretion, would abandon his property,
though still existing in specie, as not being worth the probable
cause of raising or repairing or other necessary expense required
to make it available, it is properly regarded as constructively lost
to him."449

On the other hand, the American Rule is also known as the

"fifty per cent rule." Here, the insured may claim a total loss
where "the vessel or other thing insured is damaged to an extent
greater than fifty per cent of its value."4

In our jurisdiction, the rule is similar to the formulation of

the American Rule; only we require that the loss or damage be
more than three-fourths of the value of the insured property. Our
rule on constructive loss is found in the following provision of the
Code:
"Sec. 141. 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
for a total loss thereof, when the cause of the loss is a
peril insured against

(a) If more than three-fourths 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 an extent as to reduce its

value more than three-fourths;

(c) If the thing insured is a ship, and the

contemplated voyage cannot be lawfully performed
without incurring either an expense to the insured of
more than three-fourths the value of the thing

"9 VANCE, p. 936-937

M Ibid, p. 937.
 CHAPTER VIII: MARINE INSURANCE 1 241

abandoned or a risk which a prudent man would not

take under the circumstances; or

(d) If the thing insured, being cargo or freightage,

and the voyage cannot be performed, nor another
ship procured by the master, within a reasonable
time and with reasonable diligence, to forward the
cargo, without incurring the like expense or risk
mentioned in the preceding sub-paragraph. But
freightage cannot in any case be abandoned unless
the ship is also abandoned."

Abandonment must neither be partial nor conditional. 45 1 It

must be noted that this is different from abandonment of a
divisible part of an insured property, which is allowed by the
above-cited provision, provided the portion of the insured
property is separately valued or separately insured.

The abandonment must be based on facts which are

obtaining at the time of the abandonment, otherwise the
abandonment would be ineffectual. The reason for this is that the
existence of constructive total loss must be ascertained because
this is what gives birth to the right to abandon. Hence, when the
information upon which the abandonment was based proves
incorrect or the thing insured was so far restored at the time of the
abandonment, the abandonment becomes ineffectual because
there was in fact no total loss when the abandonment was
made. 4 2

Procedurefor Notice ofAbandonment

The procedure and requisites for giving notice of

abandonment is found in Sections 145 and 146 of the Code. A

4% Section 142, Code

4 Section 144, Code
242 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

written or oral notice is given to the insurer. When the notice is

made orally, there must be a subsequent written notice submitted
within seven days from the date of giving notice. 453 The notice
must contain the particular cause of the abandonment and must
be explicit enough so as to provide a showing of probable cause
for abandonment. 454 The importance of indicating the particular
cause is that an abandonment can be sustained only upon the
cause specified in the notice. 455

Effects of Abandonment

The acceptance of an abandonment by an insurer may

either be express or implied from the conduct of the insurer as per
Section 152 of the Code. His silence for an unreasonable length of
time shall be construed as acceptance. 456

The following are the effects of an accepted abandonment:

(1) The interest of the insured is transferred to the insurer,

with all the chances of recovery and indemnity. 457 The
insurer "acquires the same title to the abandoned vessel as
he might have acquired by purchase. He may save and
repair her, sell her, or otherwise do as he will with her." 48

(2) 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 of the insurer and for his benefit.459 This

4
W Section 145, Code
4
%Section 146, Code
4
%Section 147, Code
M4Section 152, Code
4
57 Section 148, Code
4N VANCE, p. 939; citing North of England Iron Steamship Ins. Ass'n v. Armstrong
(1870, L.R. 5 Q. B. 244) and other cases.
09 Section 150, Code.
 CHAPTER VIII: MARINE INSURANCE 1 243

is a necessary consequence of the transfer of interest of the

insured to the insurer upon acceptance of abandonment.

(3) The acceptance of an abandonment, whether express or

implied, is conclusive upon the parties and admits the loss
and the sufficiency of the abandonment. 46° The acceptance
fixes the rights of the parties and neither party can rescind
the transaction by reason of subsequent developments
affecting the expediency of either the abandonment or the
acceptance. 461

(4) An abandonment once made and accepted is irrevocable,

unless the ground upon which it is made proves to be
unfounded.462

(5) Freightage earned previous to the loss belongs to the

insurer of said freightage; but freightage subsequently
earned belongs to the insurer of the ship. 6

However, it is possible to have the effects of abandonment

even without giving notice or even upon the insurer's non-
acceptance of abandonment. The insurer may not unduly refuse
or decline an abandonment declared by the insured with proper
notice because such refusal would prejudice the insured's rights.
Should the insurer refuse to accept a valid abandonment, he
would still be liable as upon an actual total loss, subject only to
deductions which the insured received from the proceeds of the
thing insured. 464 The Code does not provide for instances when
the insurer refuses to accept an improperly made abandonment
but VANCE submits that the insurer must be liable to the extent of
the damage proved. 465
4
60 Section 153, Code.
461 VANCE, p. 939.
"2 Section 154, Code.
4
3Section 155, Code.
4" Section 156, Code.
465 VANCE, p. 939.
244 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

The effects of abandonment may still obtain even in the

absence of a formal abandonment. This is sanctioned by the
following provision of the Code:

"Sec. 149. If a marine insurer pays for a loss as if it

were an actual total loss, he is entitled to whatever
may remain of the thing insured, or its proceeds or
salvage, as if there had been a formal
abandonment."

Where the insured omits to abandon, he may recover only

to the extent of his actual loss."6

4. PartialLoss

A marine insurance policy may also stipulate that it

insures partial loss. The Code defines partial loss as every loss
which is not total.467 One example is in the case of pilferage in
Aboitiz Shipping Corp. v. PhilippineAmerican GeneralInsurance Co." 8

In this case, Marinduque Mining shipped valve parts from

the United States. When the cargo arrived in Manila, it was
deposited in the office of Aboitiz Shipping for transhipment to
Nocnoc Island. However, before it was transhipped, the cargo was
pilfered. The insurer paid Marinduque. The insurer sought
reimbursement from Aboitiz. Aboitiz claimed that the cargo was
not covered by any insurance policy when the pilferage occurred.
The Court held Aboitiz liable after a finding that the
shipment was shielded by a continuing open insurance coverage
from the time it was loaded on the vessel to the time of deposit
with Aboitiz. The contention of Aboitiz that stealing happened
before it was loaded on its own vessel was not recognized in view

4
%Section157, Code.
467
Section 130, Code.
"B173 SCRA 357 (1989).
 CHAPTER VIII: MARINE INSURANCE I 245

of the fact that the cargo was in possession of Aboitiz in its office
when the pilferage took place.

H. Measure of Indemnity

1. "Valued" Policy

Where a valuation of a property is already fixed in

advance, the policy is called a "valued policy." This avoids the
necessity of having to prove the value in case of loss. Generally, a
valuation in a marine insurance policy is conclusive between the
parties in the adjustment of a partial or total loss. 469 The
exceptions are: (1) if the insured has no interest in the risk; (2) if
there is fraud on the part of the insured; and (3) when the subject
has been hypothecated by bottomry or respondentia before its
insurance and without the knowledge of the person actually
procuring the insurance. When the vessel is subject to a loan on
bottomry or a respondentia loan, the insured may show the real
value of the vessel. This is not so in the second case of fraudulent
valuation, where the insurer is given the right to rescind the
4
contract. 70

In a valued policy on freightage and cargo, if only a part is

exposed to the risk, the insurer will be liable only for that
proportionate value of the portion of the subject exposed to the
risk as against the total value of the thing as stated in the policy. 471

In a marine insurance on profits where the profits are

valued in the policy, loss is conclusively presumed from a loss of
the thing from which the profits are expected to arise. The
valuation of the profits will fix the amount of the loss.

469 Section 158, Code.

470 Ibid.
4
n Section 161, Code.
246 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

2. "Open Policy"

In an open policy, the value of the property is not stated in

the policy, as differentiated from a "valued" policy. The value of
the loss is estimated only subsequent to the loss. The following
rules are laid down by the Code in determining the value of the
loss'n

"(a) The value of a 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;
"(b) The value of the cargo is its actual cost to the
insured, when laden on board, or where the 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 to any drawback on its exportation,
or to the fluctuation of the market at the port of
destination, or to expenses incurred on the way or
on arrival";
"(c) The value of freightage is the gross freightage,
exclusive of primage, without reference to the cost of
earning it; and:
(d) The cost of insurance is in each case to be added
to the value thus estimated."

3. PartialLoss

There are particular rules that apply to the determination

of the amount of liability of the insurer in case of partial loss. The
simplest way of computing for the value of recovery in a marine

2
M Section 163, Code.
 CHAPTER VIII: MARINE INSURANCE I 247

insurance policy is to find the percentage or fraction of loss and

multiply the value of the policy by this amount.4n The fraction of
loss is calculated by comparing the value the insured property
would have had at the port of destination if it were undamaged as
against its value now that it is damaged. The insurer is liable
only for the proportionate amount of the insurance taken. The
extent of the liability is only as to the value of the loss as against
the value of the whole insurable interest in the insured
property.474 This means that if the subject is valued at P100,000,
which is also the insurable interest of the insured, if an insurance
taken is P100,000 and the partial loss amounted to only P20,000,
the insurer is only liable for P20,000. The insurer is only liable to
pay 20% of the value of the insurance taken.

If the insurance taken is less than the value of the insurable

interest, the insured is deemed by law to be a co-insurer of the
insurer. In fact, marine insurance is said to be customarily co-
insurance unless the policy value is greater than the value of the
insured property.475 This is because if the loss does not cover the
entire value of the thin& the insured only receives from the
insurer the proportion of the insurance corresponding to the
percentage of the loss. For example, in the same facts mentioned
in the previous paragraph, except that now, the value of the
insurance taken is P60,000 (instead of P100,000), following the
same loss percentage above, the insured will only get 20% of the
P60,000, which is P12,000, because there was only a 20% loss. As a
result, the insured will therefore bear the value of the loss which
the insurer is not liable to pay, which is the difference between the
total value of the loss and what he will recover. Thus, P8,000 of
the loss of P20,000 will be shouldered by the insured.

In insurance on cargo, where the cargo arrives at the port

of destination in a damaged condition, the loss of the insured is

MKEETON and WIDISS, p. 200.

47
4Secton 159, Code.
475 KEETON and WIDISS, p. 198.
248 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the same percentage as the difference between the market price of

the damaged goods at the port of destination and the market price
if the goods had arrived in good condition.476

Where there is a partial loss of the ship or its equipment,

the old materials are to be deducted from the payment for the new
ones. A marine insurer is liable for only two-thirds of the
remaining cost of repairs after such deduction, unless the policy
4
stipulates to the contrary, but anchors must be paid in full. 77

4. Where Profits are Separately Insured

In case of loss where profits are separately insured, the

insured can recover a proportion of the profits equivalent to the
478
percentage of lOSS.

5. Other Expenses for which Marine Insurer is Liable

a. Repairs and Recovery

The liability of the insurer includes expenses incurred

when the ship is forced into port for repairs because of a loss.
Also, where the policy stipulated that the insured must try to
recover the property, the insurer is liable for the expense incurred
in such recovery. These expenses in both cases can be added to the
value of the total loss if it occurs afterwards.479

476 Section 164, Code.

477 Section 168, Code.
4
Section 160, Code.
4" Section 165, Code.
 CHAPTERVIII: MARINE INSURANCE I 249

b. Contributionto General Average

The insurer is liable for any general average loss where it is

payable or has been paid by the insured if there has been loss or
damage from a peril insured against. The liability of the insurer
shall be limited to the proportion of the contribution attaching to
his policy value where there is less than the contributing value of
the thing insured. 4 °

6. Subrogation

When the insured has a demand against others for

contribution, he may choose to claim the whole loss from the
insurer. The insurer is now subrogated to the right of the insured
to proceed against the others against which contribution can be
demanded. But the insurer can no longer make this claim (1) after
the separation of interests liable to the contribution or (2) when
the insured has neglected or waived the exercise of the right.4M

W0 Sec.
4
166, Code.
4
K Section 167, Code.
 CHAPTER IX

CLAIM SETTLEMENT
&
SUBROGATION

A. Prerequisites to Establishing Insurance Benefits

As discussed in the beginning of this work, the very

definition of insurance provides a view of the steps to ultimately
receive the benefits therefrom. Being an indemnity agreement for
"loss, damage or liability arising from an unknown or contingent
event," the occurrence of the "unknown or contingent event"
must be brought to the attention of the party insurer, pursuant to
law or the agreement. 476 This signifies that a "claim" on the policy
is to be made upon "notice" given of the occurrence of the
"event".
The Code contains specific provisions dealing with these
prerequisites of notices, proofs of loss, as wel as actions or suits
(where necessary) to receive insurance benefits. Along with these
prerequisites are the "timeliness provisions" imposed either by
law or by the policy,477 and with which the parties have to comply
within the specific periods fixed therein.

For an insured to be able to claim from the insurer, there

are provisions that stipulate certain acts that the insured must do
476Sec. 2(a), Code.
477KEETON & WIDISS, op. dc, sec. 7.2 pp. 749 et seq.
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 251

after the loss insured against has taken place. Loss shall only be
payable upon notice of the loss, and presentation of satisfactory
proof of loss by the insured or claimant to the insurer. Though
required, Vance advances that the said giving of notice and proofs
of loss are not conditions for the liability of the insurer. To be
exact, the liability of the insurer arose when the loss happened.
Notice and proof of such loss are therefore merely for evidentiary
purposes - for the insurer to know to what extent he is liable.
They do not properly form any part of the conditions of
liability.478

After a claim settlement, the right of subrogation, if

proper, accrues in favor of the insurance company upon its
payment to the insured.

Notice and Proof of Loss

Notice of loss is distinct and separate from proof of loss.

Notice is intended merely to give the insurer information upon
which he may act promptly to take steps that his interests may
require. Proof of loss on the other hand is to give the insurer
information by which he could determine the extent of his
liability.

Notice of loss in particular is the formal notice given to the

insurer by the insured or claimant under a policy that the loss or
event insured against has occurred. The purpose of the notice is to
apprise the insurer of the loss, so that the insurer may act
promptly to take whatever steps his interests may require. In
other words, the notice requirement is to afford the insurer a
reasonable opportunity to protect its rights. The insurer readily
acquires information about the circumstances of a loss by means

'78See VANCE, p. 894.

252 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

of a timely investigation when witnesses are most likely to be

9
available.47

Under a fire insurance policy, for example, the Code

provides that it is the duty of the insured to present a written
notice of loss to the insurer without unnecessary delay. 480 Failure
to comply with said duty exonerates the insurer from having to
pay the claim of the insured. For other non-life insurance, the
Commissioner may specify the period for submission of the notice
of loss. 481

Under the Code, every motor vehicle owner must obtain

insurance to indemnify the death, bodily injury, and/or damage
482
to property of a third party or passenger from the use thereof.
The provisions on the Compulsory Motor Vehicle Liability
Insurance state that any person having a claim upon such policy
must, without unnecessary delay, present to the insurer a written
notice of claim setting forth the nature, extent and duration of the
injuries, if any, certified by a licensed physician. Such notice must
be filed within six (6) months from the date of the accident,
otherwise the claim shall be deemed waived.483

Proof of Loss

Proof of loss on the other hand is the evidence given to the

insurer by the insured or the claimant regarding the particulars of
said loss, and other information necessary to enable the insurer to

479KEM'ON & WMDISS, sec. 7.2(b), p. 753. Also, cross-cited therein: Brown vs.
Maryland Casualty Co. 111 Vt 30, A. 2d 222(1940); Gerrard Realty Corp. vs.
American States Insurance Co. 89 Wis, 2d. 130, 277 N.W. 2d 863 (1979); and
Stonewall Insurance Co. vs. Moorby, 130 Vt. 562, 298 A. 2d 829 (1972).
480Sec. 92, Code.
4/biLd.
482
Sec.387, Code.
3
0 Sec. 397, Code.
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION 1 253

determine the extent of his liability, and also to detect if the claim
is fraudulent or not based on the evidence presented.

Under the Code, proof of loss that is satisfactory to the

insurer is required to be given. But it is not that evidence which is
necessary in a court of justice that is required of the insured or
claimant to present. 484 The insurer must be satisfied that the
insured engaged in diligent efforts and has done all within his
power at the time to give the "best evidence" within his power at
the time.4

An example of a situation where the best evidence rule is

applied is when an original copy of a document cannot be
obtained by any available judicial process. In the New York case
Allegra v. Bowen4" 6, the plaintiff applied for disability insurance,
alleging that she was diagnosed with muscular atrophy by her
childhood physician back in Italy. Since the original clinical
documents were in Italy and the application for the insurance was
made in New York, plaintiff instead submitted a sworn letter from
her physician, attesting to the said diagnosis. The District Court
for the Eastern District of New York allowed the plaintiff's
submission of secondary evidence such as the physician's letter,
the original clinical documents being unobtainable by available
process or procedure since these were in Italy.

When the policy requires, by way of preliminary proof of

loss, the certificate or testimony of a person other than the
insured, it is sufficient for the insured to use reasonable diligence
to procure it 487 In case of refusal of such person to give it, it is the
duty of the insured to furnish reasonable evidence to the insurer

4"Sec.
91, Code.
M/Ti
Allegra v. Bowner, 670 F. Supp. 465 (E.D.N.Y. 1987).
487Sec. 94, Code.
254 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

that such refusal was not induced by any just grounds of disbelief
in the facts necessary to be certified or testified. 488

In the case of PHILAM v. Court of Appeals,489 a beneficiary

of a non-medical life insurance was claiming under the policy but
PILAM denied the claim, saying that it was fraudulent since the
insured was allegedly dead at the time the policy was applied for,
presenting as evidence documents submitted by their
investigators. The Court ruled in favor of the beneficiary stating
that there is no reason to doubt the correctness of the entries in the
Certificate of Death which declared that the insured died while
the policy was already in effect. Death certificates and notes by a
municipal health officer prepared in the regular performance of
his duties are prima fade evidence of the facts stated therein. A
duly registered death certificate is considered as public document
and entries found therein are presumed correct, unless a party
who contests its accuracy can produce positive evidence
establishing the contrary.

No-Fault Clause (in Motor Vehicle Insurance)

Pursuant to the provisions of the chapter on Compulsory

Motor Vehicle Insurance, any claim for death or injury to
passengers or third parties pursuant to the provisions of the said
chapter shall be paid without necessity of provingfault or negligence
of any kind, provided that total claim in respect of any person
shall not be less than fifteen thousand pesos P15,000.490 As for the
proofs of loss to substantiate a claim, the following, when

4NIbid
4"344 SCRA 620 (2000).
391(a), Code (emphasis supplied). Note that in the provision the amount
490 Sec.
shall NOT be less than P15,000.00. There seems to be an error here considering
that, without the necessity of proving fault, the passenger or third party can
claim ANY amount MORE than P15,000.001 In the Insurance Code of 1978,
Section 378, the provision reads "total indemnity in respect of any one person
shall not exceed P5,000.00."
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 255

submitted under oath, shall be sufficient: "(1)Police report of

accident; and (2) Death certificate and evidence sufficient to
establish the proper payee; or (3) Medical report and evidence of
medical or hospital disbursement in respect of which refund is
claimed" 491

Such claim may be made against one motor vehicle only,

and if the claimant is an occupant of a vehicle, his claim shall lie
against the insurer of the vehicle in which he is riding, mounting
or dismounting from. 492 In any other case, his claim shall lie
against the insurer of the directly offending vehicle. 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. 493

Delay orfailure to serve notice or proof of loss as required by the policy

It can be gleaned from the said provisions on notice and

proof of loss that the rationale of the law in providing that no
unnecessary delay should be committed extend to all types of
insurance. This is because it is upon these two that the insured is
allowed to claim. The longer the period that lapses from the time
of the loss, the more possible it is to actually tamper with evidence
and for fraudulent claims to be presented to the insurer.

The Code prohibits filing of notice and proof that is

attended by unnecessary delay. There are no explicit provisions as
to the effects of delay or of failure to serve such notice and proof,
which implies that parties may stipulate among themselves as to
the effects. Since the evidence necessary to prove the claim is with
the insured, then it is but reasonable for the insurer to lay down

49
lSec. 391(b), Code
42 Sec. 391 (c),Code.
"3 See earlier discussion in Chapter VII of this work See, also, Per/a v. Ancheta,
164 SCRA 144 (1988)
256 I THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

penalties to be suffered by the insured in case of delay or failure

by the latter to serve such notice or proof because it is the right of
the insurer to have evidence before it to be able to ascertain the
extent of its liability as soon as the loss occurred and to be able to
protect its interests against fraudulent claims.

However, where notice or proof of loss was given but not

within the time provided for by the law or the policy, such delay
is considered waived if 1) caused by any act of the insurer; or 2) if
494
insurer fails to object promptly and specifically to such delay.

Also, when there are defects in the notice and proof, it is

the duty of the insurer to indicate the defects in the notice or in the
proofs of loss as given, so that the defects may be remedied by the
insured or claimant. Failure to do so, without unnecessary delay,
constitutes waiver of said defects by the insurer. 495

In the case of Aboitiz Shipping Corporation v. Insurance

Company of North America496 the Court said that giving notice of
loss or injury is a condition precedent to the action for loss or
injury or the right to enforce the carrier's liability. But said
conditions must be given reasonable and practical construction
rather than strict construction. Said pronouncement of the Court is
consistent with the discussion in VANCE that when policies
contain provisions of forfeiture in case of failure or delay, such
conditions must be regarded as penalties defeating a right that has
already accrued. "Such being the nature of these conditions, it is
manifest that the general rules of construction require that they
shall be construed with much less strictness than those conditions
that operate prior to the loss. A condition subsequent should
never be construed as defeating an already vested right, unless the
intention of the parties to create a forfeiture is unquestionable." 497

494
Sec. 93, Code.
4 5
9 Sec. 92, Code.
496561 SCRA 262 (2008).
W/See VANC, p. 894.
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 257

B. Action by the Insurer

Upon the occurrence of the loss or damage, the insured has

to furnish the insurer a notice of claim and proof of loss within the
period prescribed by law or by contract. After receipt of such
notice and proof, the obligation of the insurer to act on them
arises. Simply put, the insurer has to accept or reject their claim.
If rejected, the cause of action of the insured accrues. If accepted,
the insurer must pay the proceeds of the policy within the period
provided by law or by the policy.

Periodswithin which insurerhas to act

The obligation of the insurer to pay the amount of the

proceeds which the beneficiary is entitled to has to be complied
with within the time prescribed by law. The prescribed period by
law is dependent on whether the policy is a life insurance, or a
non-life insurance policy.

A life insurance matures upon the death of the person

insured (cestui que vie), or upon surviving a specific period. In
contrast, a non-life insurance policy matures upon the happening
of a loss due to an event insured against. Of course, the happening
of these events insured against should occur within the period
specified in the insurance policy; otherwise, the insurer incurs no
liability.

The time for payment of claims in life insurance policies is

dependent upon its maturity. If it is predicated upon the death of
498
the insured, proceeds should be delivered within sixty (60) days
after presentation of the claim and the filing of proof of the death
of the insured. If the maturity of the life insurance policy is based
on the survival by the insured of the period specified in the policy,
proceeds are immediately payable. The exception to this rule

4" Section 248, Code.

258 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

would be if the proceeds are payable in installments or as an

annuity. In such cases, these installments or annuities shall be
paid as they become due.499

In the case of Fernandez v. National Life Ins. Co500., the

Supreme Court ruled that in life insurance, the policy matures
either upon expiration of the term set forth therein in which case
proceeds are immediately payable to the insured himself, or upon
his death occurring at any time prior to the expiration of such
stipulated term. The sixty-day period fixed by law within which
to pay the proceeds after presentation of proof of death is merely
procedural in nature, evidently to determine the exact amount to
be paid and the interest thereon to which the beneficiaries may be
entitled to collect in case of unwarranted refusal of the company
to pay, and also to enable the insurer to verify or check on the fact
of death which it may even validly waive. It is the happening of
the suspensive condition of death that renders a life policy
matured and not the filing of proof of death. Consequently, the
delay in the presentation of proof of death does not make any
difference, for it does not alter the date of maturity of the policy
nor the ability of the company to pay the proceeds of the
insurance.5

With regard to the time for payment of claims in non-life

insurance policies, it should be within thirty (30) days after proof
of loss is received by the insurer and an ascertainment of loss or
damage is made either by agreement between the insured and
insurer or by arbitration. However, if an ascertainment is not had
or, made within sixty (60) days after such receipt by the insurer of
proof of loss, the proceeds are payable within ninety (90) days
after such receipt.m

s5105 Phil. 59(1959).

smlbid.
502Sec. 249, Code.
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 259

Consequences of Delay

A contract of insurance is a contract of indemnity. It seeks

to put the insured back in his condition before the damage
incurred due to the happening of the risk insured against If the
insurer does not comply with its obligation to indemnify the
insured immediately once the obligation to do so arises, the
amount of damage of the insured might increase, which is
contrary to the core objective of a contract of insurance.

Unreasonabledenial or withholding

Under the Code, the failure to pay any such claim within
the time prescribed for life insurance policies in Section 248 and
for non-life insurance policies in Section 249, respectively, shall be
considered prima ficie evidence of unreasonable delay in payment
Furthermore, refusal or failure to pay the claim within the time
prescribed entitles the beneficiary to collect interest on the
proceeds of the policy for the duration of the delay at the rate of
twice the ceiling prescribed by the Monetary Board, unless refusal
to pay is based on the ground that the claim is fraudulent. 031n
case damages are awarded, these will include the attorney's fees
and other expenses incurred by the insured due to the
unreasonable clerical or withholding of payment, plus interests
prescribed in Sections 248 & 249.504

In Cathay Insurance Co. v. Court of AppealsOS, beneficiary

Emilia Lugay submitted sworn Statements of Loss and Formal
Claims to the insurers but was still waiting to collect on the fire
insurance policies eight (8) years after the event. The insurance
companies refused to pay due to alleged violation of certain
conditions of the policy. The Supreme Court ruled that non-

5s Secions 248 & 249, Code.

s04Sec. 250, Code.
50174 SCRA 11 (1989).
260 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

payment of the claim within the maximum period of 90 days or

after receipt of the proofs of loss by the insurer or within the time
fixed in both Sections 242 and 243 of the then Insurance Code of
1978 (now Sections 248 and 249 of the Code)is primafacie evidence
of unreasonable delay in payment of the claim. 06

The Court also held that under said sections of the then Insurance
Code of 1978, in case of any litigation for the enforcement of any
policy or contract of insurance, it shall be the duty of the
Commissioner or the Court to make a finding as to whether the
payment of the claim of the insured has been unreasonably denied
or withheld.507

The insurance company, in judging whether or not

evidence presented by the insured as to the extent of loss is
satisfactory or not may not set up for themselves an arbitrary
standard of satisfaction. Substantial compliance with the
requirements will always be deemed sufficient.o 8

In the case of Finman General Assurance Corporationv. Court

of Appeals5O9, the trial court ordered insurer Finman General to pay
the amount of the insurance proceeds plus a 24% interest rate per
annum until fully paid. Finman General argued among others,
that since there was no express finding that it unreasonably
withheld or denied the payment of the subject insurance claim,
then the award of 24% per annum was not proper. The Supreme
Court upheld the validity of the 24% interest rate per annum
awarded by the lower courts as the same is authorized by Section
244 of the then Insurance Code of 1978 (now Section 249 of the
Code).

506Thid.
N07Sec. 250, Code.
5o8 Noda v. Cruz-Arnaldo, 151 SCRA 214 (2001).
59361 SCRA 214(2001).
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 261

Unfair claim settlement practices

Section 247(a) of the Code enumerates the common

practices by insurers considered as unfair claim settlement. These
are:

"(1) knowingly misrepresenting to claimants

pertinent facts or policy provisions relating to
coverage at issue;

"(2) failing to acknowledge with reasonable

promptness pertinent 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 polices by offering
without justifiable reason substantially less than the
amounts ultimately recovered in suits brought by
them."

The foregoing grounds are considered sufficient cause for

the suspension or revocation of the insurer's certificate of
authority.51 0

510 Sec. 247(c), Code.

262 I THE PHILIPPINE INSURANCE LAw: CODE, COMMENTS AND CASES

C. Fraudulent Claims by the Insured

While the insured is protected against the unreasonable

withholding or denial by, and unfair settlement practices of the
insurer, the insurer is likewise protected against any fraudulent
claims that the insured might set up. A fraudulent claim is made
by giving a false testament as to the existence of a legitimate
claim, in order to receive the proceeds of the insurance policy, to
which the insured is not otherwise entitled.

The Code has a new provision providing for fraudulent

claims, to wit:

"SEC. 251. It is unlawful to:

(a) Present or cause to be presented any fraudulent

claim for the payment of a loss under a contract of
insurance; and

(b) Fraudulently prepare, make or subscribe any

writing with intent to present or use the same, or to
allow it to be presented in support of any such
claim.

Any person who violates this section shall be punished by

a fine not exceeding twice the amount claimed or imprisonment of
two (2) years, or both, at the discretion of the court."

This new provision is similar to the previous Section 566 of

the California Insurance Code. Thus, interpretations of said Code
may be considered highly persuasive in interpreting the former.
Under said Section 566, the California Appellate Court ruled that
intent cannot always be proved by direct evidence. Many times it
has to be determined from a consideration of all the circumstances
surrounding the doing of an act. An intention to defraud is an
essential element of the charged offense, but such intention is
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 263

inferable from all the facts of the case and need not be
substantially proved. 511

Before the current Code, our then existing insurance law

did not specifically provide for the effect of fraudulent claims.
Nonetheless, jurisprudence has held that fraudulent claims avoid
the insurer's liability under the contract. In the case of Tan It v.
Sun Insurance Office5M2, the contract of fire insurance contained a
clause relating to fraudulent claims. It provided that "If the claim
be in any respect fraudulent, or if any false declaration be made or
used in support thereof.., all benefit under this Policy shall be
forfeited." A fire of unknown origin destroyed a portion of the
goods and merchandise covered by the insurance policy. The
evidence presented constituted a serious discrepancy between the
true value of the property and that sworn to in the proofs of loss.
The Court characterized such discrepancy as more than an honest
misstatement, more than inadvertence or mistake, more than a
mere error in opinion, more than a slight exaggeration, and in
connection with all the surrounding circumstances, discloses a
material overvaluation made intentionally and willfully.
In Yu Cua v. South British Insurance Co.513, actions were
taken to recover P110,000.00 on seven fire insurance policies for
property said to be valued at P128,062.50, destroyed by fire at San
Quintin, Pangasinan. The trial court found that "the fire destroyed
but a negligible amount of palay and other merchandise." The
appeal consequently raises a question of fact. One of the
conditions in the policies was to the effect that "[i]f 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 ... all benefits under this policy shall be forfeited."
The Supreme Court sustained the decision of the lower court that
the plaintiffs having made a false claim with respect to their loss,
5"People v. Ralph Benson, 206 [Link]. 2d 519 (1962), citing People v. Frederick
Henderson, 79 [Link]. 2d94 (1947).
51 Phil. 212 (1927).
51341 Phil. 134(1920).
264 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

they must, in accordance with the contract of insurance, suffer the

consequences and forfeit all benefits under the policies.
The Supreme Court similarly held in Uy Hu & Co. v. The
Prudential Assurance Co., Ltds 4that 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 on his behalf to obtain any benefit under this Policy," and
the evidence is conclusive that the proof of claim which the
insured submitted was false and fraudulent both as to the kind,
quality and amount of the goods and their value destroyed by the
fire, such a proof of claim is a bar against the insured from
recovering on the policy even for the amount of his actual loss.

D. Bringing an Action
The earlier parts of this Chapter have dealt with the
manner of bringing claims with the insurer and how action may
be taken thereon. Should the insurer reject the claim of the
insured, the remedy of the latter would be to file an action against
the insurer with the proper tribunal. An "action" or "suit" has
been defined, in the case of Lopez v. Filipinas Compania de
Seguros5 15 , to mean "act by which one sues another in a court of
justice for the enforcement or protection of a right, or the
prevention or redress of a wrong."

In the Lopez case, the plaintiff wanted to recover on

insurance taken out on two of his vehicles which later figured in
an accident. Upon rejection of the claim on April 28, 1960, Lopez
initially filed a complaint with the Office of the Insurance
Commissioner and did not file a complaint before the court until
September 29, 1961. The insurer raised the defense of prescription

51451 Phil. 231(1927).

s1516 SCRA 855(1966).
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 265

as the policy provided that action must be commenced within

twelve months from the rejection of the claim. The lower court
dismissed the case on the ground of prescription and the Supreme
Court affirmed this dismissal. The Court sustained the lower court
in its ruling that the filing of the complaint with the Insurance
Commissioner could not be considered an "action or suit" which
may toll the running of the period as it was not a court of justice.
There was nothing in the then applicable law, the Insurance Law,
Act No. 2427, which empowered the Insurance Commissioner to
adjudicate on disputes relating to an insurance company's liability
to an insured under a policy.

With the enactment of the Insurance Code of 1978, the

Insurance Commissioner was given adjudicatory powers with
respect to claims on contracts of insurance, where the amount of
loss, damage or liability did not exceed a single claim of
P100,000.00."516 Under RA 10607, the Code retained the same
adjudicatory power but increased the jurisdictional amount to five
million pesos (P5,000,000.00).517

The adjudicatory power of the Insurance Commissioner is

not exclusive. In Finman General Assurance v. Inocencio 518,
applicants for overseas employment wanted to hold the surety
bond of the recruitment agency liable for violations of the Labor
Code. The surety argued that the Philippine Overseas
Employment Administration (POEA) has no jurisdiction over
surety bonds as the same is lodged with the Insurance
Commission and the regular courts. The Court allowed the POEA
to decide on the claims of plaintiffs on the surety bond posted by
the recruitment agency:

"There appears nothing so special or unique

about the determination of a surety's liability under

516 Sec. 416 of the Insurance Code of 1978.

517 Sec. 439, Code.
518179 SCRA 480(1989).
266 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

its bond as to restrict that determination to the Office

of the Insurance Commissioner and to the regular
courts of justice exclusively. x x x We believe and so
hold that to compel the POEA and private
respondents (the beneficiaries of Finman's bond) to go
to the Insurance Commissioner or to a regular court
of law to enforce that bond, would be to collide with
the public policy which requires prompt resolution of
claims against private recruitment and placement
agencies." 19

It should be noted that the POEA is not a court but is an

administrative agency vested with quasi-judicial powers as
provided in its charter

"(a) The Administration shall formulate and

undertake, in coordination where necessary with the
appropriate entities concerned, a systematic program
of promoting and monitoring the overseas
employment of Filipino workers x x x It shall have
original and exclusive jurisdiction over all cases,
including money claims, involving employer-
employee relations arising out of or by virtue of any
law or contract involving Filipino workers for
overseas employment, including seamen. x x x5 20

Cause of Action

In claims of recovery from a policy of insurance, the cause

of action of the insured or the beneficiary would be the rejection of
the insurance claim. Until the insurer has refused to pay on the

519id.
32 Section 4, par. (a) of Executive Order No. 797, promulgated on May 1,198Z
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 267

claim, they cannot be said to have acted in such a way as to violate

the right of the insured.52 '

Thus, in Travellers Insurance v. Court of Appeals522 , the

plaintiff Mendoza filed a case against the taxi company involved
in an accident which killed his mother. He also impleaded the
Traveller's Insurance & Surety which was alleged to have covered
the taxicab in a policy of third-party liability insurance. The
insurer argued against recovery partly on the ground that
Mendoza did not file a written notice of claim with the insurer
company. The Court held that the lack of any written notice of
claim means that no cause of action accrued. It is the rejection of
the claim which forms the cause of action and triggers the
prescriptive period to bring action before the proper tribunal.
Without the written notice of claim, the insurer does not even
have an opportunity to reject the claim as none had been filed in
the first place.

In Cathay Insurancev. Court ofAppealsS23, on the other hand,

the insurer argued that action filed against them was premature as
they had not rejected the claim. Plaintiffs here were claiming on
fire insurance policies covering stocks of printing material and
general merchandise found belonging to Cebu Filipina Press.
When the building was razed, plaintiff filed claims with the
insurers but up to ten months later, they did not act thereon.
Plaintiff thus brought a suit against the insurers.

The trial court ruled in favor of the insured but on appeal

the insurers reiterated their argument that the filing of the case
was premature. The Supreme Court held that the cause of action
had indeed accrued since the insurer failed to act upon the claim
in violation of then section 243 of the then Insurance Code of 1978

Rule Z Section 1,Rules of Court, which defines a cause of actionas an act or

521
omission by which a party violates a right of another.
522272 SCRA 536(1997).
523174 SCRAll (1989).
268 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

(now Sec. 249 of the Code). Proof of loss had been submitted from
January 15, 1982 up to June 21,1982. Applying the provision, then,
the insurer should have paid on September 21 even if they had not
made ascertainment of the loss. When the plaintiff filed their
complaint on December 15, their cause of action had already
accrued due to the non-payment of the insurer.

Period to Commence Action

Once the cause of action has accrued, the claimant has to

bring the action before the proper tribunal before the right of
action is lost by extinctive prescription. Under Article 1144 of the
Civil Code, actions upon written contracts must be brought within
ten years.5 24 Section 63 of the Insurance Code, however, provides
that stipulations limiting the time for commencing an action to
less than a year from accrual are void. 525 Apart from this
limitation, then, parties are free to stipulate as to the period to
commence actions on insurance contracts.

52 6, the plaintiffs
In Ang v. Fulton Fire Insurance filed a claim
to recover on a fire insurance policy. Their claim was denied in
April 1956 but they did not file a case before the court until May
1958 though the policy contained a condition that action must be
commenced within twelve months. Ang explained this late filing
by saying they had previously filed an action in May 1956 against
their insurance agent to assert their claim but this had been
dismissed, without prejudice, in September 1957. The trial court
held that in suing first the insurance agent, Ang had merely
committed a procedural mistake which led to the tolling of the
prescriptive period.

524
Art. 1144, Civil Code.
52 5
Section 63, Code.
5262 SCRA 945(1961).
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 269

The Supreme Court disagreed saying that the condition to

bring action within a specific time is not a mere procedural
requirement but is an important matter as it is essential to bring
action on the claim while the relevant evidence has not yet
disappeared. Because of the plaintiff's non-compliance with the
condition, their case was ordered dismissed.2 7

The Ang case ruled that the filing of a case against the
insurance agent did not toll the running of the prescriptive period.
Likewise, in Sun Insurance v. Court of AppealsS28, the Court held
that the filing of a motion for reconsideration with the insurer
after it has already rejected the claim does not toll the running of
the prescriptive period either. The rationale is to bring action on
the claim while the evidence has not yet disappeared. To allow the
filing of a motion for reconsideration to toll the period would run
counter to the intention of the condition as it might give time to
insured persons to dispose of evidence disproving their claims.

When the condition indirectly but effectively violates the

limitation set forth in section 63 of the Code, however, the Court
has struck down the stipulation and held that the applicable
period to commence action on the claim would be the ten years
provided in the Civil Code.

In Eagle Star Insurance v. Chia Yu5 29, the insurer raised the
defense of prescription in a case for recovery on a marine
insurance, arguing that the action had been filed out of time. The
condition in the policy provided that the action must be brought
within twelve months from the happening of the loss. The Court
held that this provision was void because it effectively reduces the
time for commencing action to a period less than one year from
the time the cause of action accrues. Though the period provided
is a year, it is counted from the happening of the loss and not from

s27Tid.
528195 SCRA 193(1991).
52969 Phil. 696(1955).
270 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

the accrual of the cause of action. The time between the happening
of the loss and the accrual of the cause of action would consume
part of the one year period resulting in a remaining period of less
than a year to commence the action.

Likewise, in ACCFA v. Alpha Insurance & Surety 53 0, a similar

provision requiring the action to be commenced one year from the
filing of the claim with the insurer was held void by the Court for
again effectively reducing the time for commencement of action to
a period less than one year from the time the cause of action
accrued.

The confusion on the prescriptive period may arise from

an effort to standardize the period applicable to the insurer with
the periods applicable to other parties to the transaction. In the
Eagle Star case mentioned earlier, a claim had also been brought
against the carrier but this was held to have prescribed by the
Court. The bill of lading had provided that actions against the
carrier should be commenced within one year from the delivery of
the goods or the date the goods should have been delivered. As
the action was brought two years after the cargo was incompletely
delivered, plaintiff could no longer recover from the carrier.
However, as mentioned earlier the claim against the insurer was
allowed.m 3

The confusion between the periods pertaining to different

parties to the transaction also appears in the case of Mayer Steel
Pipe v. South Sea Surety & Insurance.s 2 In that case, Hongkong
Government Supplies Department had contracted Mayer Steel
Pipe Corporation to supply steel pipes and fittings. Mayer Steel
had insured the pipes with South Sea Surety and Insurance Co.,
Inc. and Charter Insurance Corp. When the pipes had been

53024 SCRA 153(1968).

531Eagle Starv. Chia Yu, supra.
5N274 SCRA 432 (1997).
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 271

damaged while being transported to Hong Kong, Mayer Steel

filed a daim with the insurers for payment of indemnity.

The Court of Appeals had ruled that the loss was covered
by an "all-risks" insurance policy but it applied the Carriage of
Goods by Sea Act (COGSA) to absolve the insurer from liability.
The Act provided that "the carrier and the ship shall be
discharged from all liability in respect of loss or damage unless
suit is brought within one year after delivery of the goods or the
date when the goods should have been delivered".S3 The Court
explained that the liability of the insurer is not extinguished
because the insurer's liability is based not on the contract of
carriage but on the contract of insurance. x x x The Carriage of
Goods by Sea Act governs the relationship between the carrier on
the one hand and the shipper, the consignee and/or the insurer on
the other hand. It defines the obligations of the carrier under the
contract of carriage. It does not, however, affect the relationship
between the shipper and the insurer. The latter case is governed
by the Insurance Code.

The Supreme Court held that the application by the Court

of Appeals of COGSA was improper because the said law
governs the relationship between the consignee and the carrier,
not the relationship between the insured and the insurer.3 4 The
Supreme Court declared that the citation by the Court of Appeals of
the ruling in Filipino Merchant Insurance Co. v. Alejandro 535 is
misplaced bearing in mind that that case involves an action
brought by the insurer against the carrier for reimbursement.

m Sec. 3(6), Carriage of Goods by Sea Act

MCf. ACCFA v. Alpha Insurance,24 SCRA 153, supra. See, also St. Paul Fire and
MarineInsurandev. Macondray, 70 SCRA 122 (1976).
M5179 SCRA 638 (1989)
272 1 THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

Appeal

The judgment of the Insurance Commissioner on the claim

of the insured can be appealed to the Court of Appeals as
provided in section 439, paragraph 6 of the Insurance Code:

"Any decision, order or ruling rendered by the

Commissioner after a hearing shall have the force and
effect of a judgment. Any party may appeal from a
final order, ruling or decision of the Commissioner by
filing with the Commissioner within thirty (30) days
from receipt of copy of such order, ruling or decision
a notice of appeal to the Court of Appeals in the
manner provided for in the Rules of Court for appeals
from the Regional Trial Court to the Court of
Appeals." 3

The procedure for such appeal is provided for in Rule 41 of

the Rules of Court.

E. Subrogation

The earlier parts of this chapter have discussed the process

of filing claims with the insurer and the actions both insured and
insurer may take in the process of settling such claims. This part of
the chapter discusses the effect of payment made by the insurer to
the insured, which is the subrogation of the former into the rights
of the latter.

The right of subrogation is provided not in the Code but in

the Civil Code, to wit:

"Art. 2207 If the plaintiffs property has been insured,

and he has received indemnity from the insurance
company for the injury or loss arising out of the

swSection 439, par. 6, Insurance Code.

 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION 1 273

wrong or breach of contract complained of, the

insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person
who has violated the contract If the amount paid by
the insurance company does not fully cover the injury
or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the
loss or injury."

By subrogation, the insurer steps into the shoes of the

insured and becomes entitled to whatever the latter may claim
from the third party responsible for the loss or damage to the
extent of what the insurer has paid. The provision expressly
reserves to the insured the right to claim from the party
responsible the deficiency when the proceeds do not cover the
entirety of the loss.

In each of the following cases the Supreme Court decided

that there had been subrogation in favor of the insurer, allowing
them to exercise and claim such rights as the insured had against
third parties responsible for the loss.

In Malayan Insurance v. Court of Appeals53 7, a bus had

collided with the jeep insured by Malayan Insurance. The insured
jeep, while being driven by an employee of San Leon Rice Mill,
collided with a PANTRANCO passenger bus causing damage and
or injury to the vehicle, its driver and its passenger. The passenger
filed an action for damages against Sio Choy (owner of the jeep),
Malayan and PANTRANCO. Sio Choy paid the passenger
P5000.00 for which he filed a counterclaim against Malayan.
Malayan in turn filed a third party complaint against San Leon
Rice Mill claiming that it was the latter's employee who caused
the accident and prayed that San Leon reimburse Malayan for any
sum that it may pay. The trial court rendered judgment in favor of
the passenger. On appeal, the Court of Appeals modified the

537165 SCRA 536 (1988).

274 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

judgment and ruled that San Leon Rice Mill need not reimburse
Malayan as there was no privity with the driver of the jeep.

The Court reversed this pronouncement of the lower court,

saying that the rights of Malayan against San Leon Rice Mill
would not stem from having privity of contract but would arise
from having been subrogated into the rights of the owner of the
jeep when they assumed the liability of the latter.

In PHILAMGEN v. Court of AppealsS38 , the Court reiterated

that the doctrine of subrogation has its roots in equity. It is
designed to promote and to accomplish justice and is the mode
which equity adopts to compel the ultimate payment of a debt by
one who in justice, equity and good conscience ought to pay.

In this case, Coca-Cola loaded on board a vessel owned

and operated by Felman 7,500 cases of 1-liter Coca-Cola bottles for
shipping from Zamboanga to Cebu. Said shipment was insured
with PHILAMGEN. On its way to Cebu, the vessel sank, bringing
down the entire cargo, including said 7,500 cases of Coca-Cola
bottles. Coca-Cola then filed a claim against the carrier Felman for
the cost of the bottles but Felman denied the claim. As a result,
Coca-Cola filed the daim against PHILAMGEN, who paid the
claim. PHILAMGEM, claiming its right of subrogation, sued
Felman for sum of money and damages. Felman, who disclaimed
liability for any loss, alleged that no right of subrogation in favor
of PHILAMGEN was transmitted by the shipper.

The Court, in ruling for PFHILAMGEN, held that

PHILAMGEN's action against Felman is sanctioned by Art. 2207
of the Civil Code. The Court reiterated the well-known doctrine of
legal subrogation that payment by the insurer to the insured
operates as an equitable assignment to the insurer of all the
remedies which the insured may have against the third party
whose negligence or wrongful act caused the loss. The right is not

5N273 SCRA 262 (1997).

 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 275

dependent upon, nor does it grow out of privity of contract. It

accrues simply upon payment by the insurance company of the
insurance claim. Therefore, when PHILAMGEN paid Coca-Cola,
such act gave the former the right to bring an action as subrogee
against FELMAN. Having failed to rebut the presumption of fault,
the liability of FELMAN for the loss of the 7,500 cases of Coca-
Cola softdrink bottles was inevitable.

In Pan Malayan v. Court ofAppeal 5 39, Pan Malayan was the

insurer of a car belonging to Canlubang Automobile Resources
Corp. Said car figured in a collision and was damaged. Pan
Malayan paid the assured the costs of the repair of the car, and
was therefore subrogated to the rights of Canlubang against the
driver and owner of the pick-up who hit the insured car. Pan
Malayan demanded reimbursement from Fabie, the owner of the
pick-up but the latter refused to pay the claim despite repeated
demands, prompting Pan Malayan to file a case against her and
the driver.

Fabie filed a motion to dismiss, alleging that Pan Malayan

had no cause of action since the "own damage" clause in their
policy precluded subrogation under Article 2207 of the Civil
Code. It was argued that indemnification under said article is on
the assumption that there was no fault on the part of third parties.

The defendants' contention was overruled by the Court,

ruling that Pan Malayan was indeed subrogated to the rights of
Canlubang against Fabie and her driver. The Court stated that
Article 2207 of the Civil Code is founded on the well-settled
principle of subrogation. The general rule reiterated by the Court
is that if the insured property is destroyed or damaged through
the fault or negligence of a party other than the assured, then the
insurer, upon payment to the assured, will be subrogated to the
rights of the assured to recover from the wrongdoer to the extent
that the insurer has been obligated to pay. Payment by the

59184 SCRA 54 (1990).

276 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

insurer to the assured operates as an equitable assignment to the

former of all remedies which the latter may have against the
third party whose negligence or wrongful act caused the loss.
The right of subrogation is not dependent upon, nor does it
grow out of, any privity of contract or upon written assignment
of claim. It accrues simply upon payment of the insurance claim
by the insurer." (at p. 58)

In deciding the case, the ponente, Justice Irene Cortes

pointed to three exceptions to this general rule of subrogation,
namely, (1) where the assured by his own act releases the
wrongdoer or third party liable for the loss or damage; (2) where
the insurer pays the assured the value of the lost goods without
notifying the carrier who has in good faith settled the assured's
claim for loss; and, (3) where the insurer pays the assured for a
loss which is not a risk covered by the policy, thereby effecting
"voluntary payment"540 . But none of these exceptions are present
in this case.

The Court also stated that even assuming arguendo that

the insurance policy does not cover damage to the insured vehicle
caused by negligent acts of third parties, and that Pan Malayan's
settlement of Canlubang's claim for damages allegedly arising
from a collision due to Fabie and her driver's negligence would
amount to unwarranted or "voluntary payment", Pan Malayan
may still recover from the third party responsible for the damage
to the insured property under Article 1236 of the Civil Code.541

S4 OThe Supreme Court citing Phoenix Ins. Co. of Brooklyn v. Erie & Western
Transport, Co., 117 US 31Z 29 L. Ed. 873 (1886); InsuranceCompany of North
America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956); McCarthy v.
Barber Steamship Unes, Inc., 45 Phil 488 (1923); and Sveriges Angfr&iygs Assurans
Foreningv. Qua Chee Gan, 21 SCRA 12 (1967), respectively
541 Article 1236 of the Civil Code provides: "x x x Whoever pays for another may
demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor."
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 277

In Fireman's Fund Insurance v. Jamila & Co., 542 some

properties of Firestone Tire and Rubber Company were lost due to
the connivance of some of its employees with the security guards
of Jamila & Company (which provided Firestone with the security
guard), prompting Fireman's Fund as insurer to pay Firestone the
value of said property. With Fireman's Fund subrogated to
Firestone's right to indemnification, the former filed a complaint
to recover money against Jamila and its surety First Quezon City
Insurance. CFI dismissed the complaint citing that there is no
cause of action as Jamila did not consent to subrogation and there
are no allegations in the complaint that Firestone investigated the
loss.

Reversing the lower court, the Supreme Court held that

there was cause of action on the part of Fireman's Fund pursuant
to Article 2207 of the Civil Code. Payment by the assurer to the
assured operates as an equitable assignment to the assurer of all
the remedies which the assured may have against the third party
whose negligence or wrongful act caused the loss.543 Payment to
the insured makes the insurer an assignee in equity.

Divesting the Insured of Interest

When the insurer is subrogated into the rights of the

insured, the latter is divested of their rights over such portion of
the amount as has already been indemnified by the insurer. This
has the effect of barring them from recovering this amount from
third parties liable for the loss as the real-party-in-interest as to
such amount is now the insurer and the insured has no cause of
action against the third party as to such amount.

4270 SCRA 323 (1976).

w'Citing Activa L Insurance Co. v. Moses, 287 U.S. 450, 77 LEd. 477.
278 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In Pioneer Insurance & Surety v. Court of AppealsS", the

petitioner company had bound itself as surety in a contract of sale
entered into between Jacob Lim and Japan Domestic Airlines.
Other investors with Lim also executed indemnity agreements in
favor of Pioneer and Lim executed a deed of chattel mortgage in
favor of Pioneer over the aircraft subject of the contract of sale.
Lim defaulted on the payments and Pioneer was made to pay.
When Pioneer sued, the trial court ruled in its favor but the Court
of Appeals reversed and dismissed the complaint. The Court of
Appeals took note of the fact that Pioneer had reinsured the
amounts it would be made to pay under the surety agreement and
had in fact collected proceeds from its reinsurer. The Supreme
Court agreed with the Court of Appeals, finding that Pioneer was
not the real-party-in-interest in the claim and did not, therefore,
have a cause of action against the defendants.

In FF Cruz v. Court of AppealsS4S, the plaintiff had brought a

case for damages against the adjacent property owner whose
negligence caused the burning of their house. A fire had broken
out in the furniture manufacturing shop of the defendant and this
fire spread to the plaintiff's house, causing it to burn down. The
plaintiffs had repeatedly requested the defendants to construct a
firewall between their properties but the defendants refused.

The Court ruled in favour of the plaintiffs finding that the

defendants had been negligent not only in causing the fire but also
in allowing it to spread due to their refusal to construct the
firewall. However, the amount of actual damages awarded was
reduced by the Court as plaintiffs had already received P35,000 as
insurance proceeds from the loss of the house. It was stated that
when the insured has received indemnity but this is not enough to
cover the loss, the insured is only entitled to the deficiency. The
real-party-in-interest as to the portion of the loss already paid is
the insurance company.

5"175 SCRA 668(1989).

S0164 SCRA 731(1988).
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 279

Evidentiary Requirements for Subrogation

The Supreme Court, in a line of cases has decided that

production of the policy is necessary in order for a claim filed by
the insurer against a third party to prosper. As mentioned earlier,
one of the circumstances in which there will be no subrogation is
the situation of "voluntary payment" wherein the loss of the
insured is not actually covered by the policy but is nonetheless
paid by the insurer. It is therefore vital that the policy be
produced in order for the court to ascertain that the payment
made by the insurer to the insured was for a loss covered by the
policy.

In Eastern Shipping Lines v. Prudential Guarantee &

Assurance546 , the insurer had paid the proceeds of a marine
insurance policy to insured Nissan for automobile parts damaged
during shipping from Japan to Manila. The insurer in turn sued
the shipping company as well as the arrastreoperator. During the
proceedings, the insurer produced only a Marine Cargo Risk Note
which contained a reference to the insurance policy and not the
policy itself. The defendants promptly objected to the non-
presentation of the policy but the trial court denied their
manifestations and adjudged them liable to the insurer.

The Supreme Court held that inasmuch as the marine

insurance policy is an actionable document integral to the cause of
action of the plaintiffs, it should have been attached to the
complaint. Furthermore, the Court took note of the fact that the
Marine Cargo Risk Note presented was issued on the day of the
arrival of the cargo in the Philippines and could not establish with
certainty the precise date when the insurance contract was
executed. This fact would be crucial because there can be no
insurance of a risk that had already occurred. Based on these, the
Court held that the non-production of the policy was fatal to the
cause of the plaintiff and ordered the case be dismissed.

546599 SCRA 56 (2009).

280 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

In Wallem Philippines Shipping v. Prudential Guarantee &

Assurance 547 , the insurer had paid the proceeds of a marine
insurance policy for soybean meal for alleged shortage incurred
during the voyage. In suing the shipping company, the insurer
produced only the subrogation receipt and the Marine Cargo Risk
Note. The trial court had ruled against the insurer, finding that
they had not been able to prove that there was a shortage, but the
Court of Appeals had reversed and awarded damages to the
insurer.

The Supreme Court ruled, however, that while the

subrogation receipt may prove the relationship of insurer-insured
between the company and the consignee as well as the amount
paid to the latter, it does not establish the claim of the insurer
against third parties. As a subrogee of the insured, the insurer can
only exercise those rights granted the latter under the insurance
contract. The policy must be produced in order to determine the
extent of its coverage.

In contrast, the Court had ruled in Delsan TransportLines v.

Court of Appeals548 that the production of the marine insurance
policy was not indispensible to the claim of the plaintiff. The
plaintiff-insurer had paid the proceeds of the insurance for
industrial fuel oil being shipped for Caltex and which was lost
after the vessel of the defendant shipping company had sunk. The
insurer brought a case against the shipping company to recover
the amounts they have paid but they only produced the
subrogation receipt.

The Court here ruled that the subrogation receipt was

sufficient inasmuch as it proved the relationship of insurer-
insured between the insurance company and Caltex as well as the
amount paid the latter. The right of subrogation arises upon
payment of the insurer of the insurance claim.

547397 SCRA 158 (2003).

50268 SCRA 597 (1997).
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION 1 281

The Court distinguished this case from the earlier case of

Home Insurance Corporation v. Court of Appeals wherein the non-
production of the policy was ruled as fatal to the cause of the
insurer. In that case, the shipping of the cargo involved several
stages during which the damage may have occurred. Production
of the policy would have indicated the scope of the insurer's
liability since there was no evidence showing at what stage of the
voyage the damage was sustained. In the present case, however,
the Court stated as there was no doubt that the cargo was lost
during the time that it was on board the defendant company's
vessel when it sank, the ruling in Home Insurance Corp v. Court of
Appeals does not apply.

This case had also been mentioned in the earlier Eastern

Shipping v. Prudential case where production of the policy had
been held as integral to the cause of the plaintiffs. The Court
distinguished this case by saying that in this case, there is no issue
as to the provisions of the policy and its existence had been
admitted by the petitioner-defendants in open court. There was
therefore no need to present the policy.

Finally, in Sveriges Angfartygs Assurans Forening (SAAF) v.

Qua Chee Gan549, there was an alleged shortage in cargo shipped
by Qua Chee Gan to Sweden, prompting the Polish cargo insurer
to indemnify the consignee. The Polish cargo insurer and the
shipowner, the Swedish East Asia Company, entered into a
settlement where the former paid approximately $60, 733.53 to the
Polish cargo insurer. Claiming to have been subrogated to the
rights of the carrier, SAAF sued Qua Chee Gan before the CFI of
Manila. The lower court dismissed the complaint due to the fact
that, among others, SAAF's insurance policy did not cover the
alleged short shipment

Since the insurance policy was not presented by the

plaintiff, the lower court, affirmed by the Supreme Court, ruled

54921 SCRA 12 (1967).

282 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

that it was fatal to the case. Unless the insurance policy - as the
best evidence - were presented, it could not be conclusively
determined if "liability for short shipment" was a covered risk.
The Court stated the general rule that an insurer who pays the
insured for loss or liability not covered by the policy is not
subrogated to the latter.

However, even assuming that there was a "volunteer

payment", plaintiff could still recover what it paid from defendant
shipper under Art. 1236 of the Civil Code which allows a third
person who pays on behalf of another to recover from the latter.
Although there is no subrogation, there can be recovery only up to
the amount by which the defendant was benefited.

Limitations

While there may have been subrogation in favor of the

insurer, this does not necessarily guarantee recovery from third
parties responsible for the loss. The insurer is merely stepping into
the shoes of the insured. Limitations on the rights of the insured to
recover from the third party at fault also apply to the insurer and
may have the effect of barring recovery.

In Federal Express Corporation v. American Home Assurance

Companyf5 o, the Supreme Court held that filing of a notice of loss
or injury is a condition precedent, and not a limitation, to the
accrual of right of action against a carrier for loss or damage to the
goods. Thus if the insured did not file a notice of loss with the
carrier within the time prescribed by law, no right would be
subrogated to the insurer despite its payment to the insured.

In this case, Smithkline delivered to Burlington Express, an

agent of FedEx, a shipment of veterinary biologicals for delivery
to Smithkline in Makati. Burlington insured the cargo with

50437 SCRA 50 (2004).

 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 283

American Home Assurance Company (AHAC). The cargo arrived

in Manila but was allegedly stored improperly before the broker
hired by Smithkine Makati could facilitate their release.
Smithkline therefore abandoned the shipment, declaring a total
loss for the unusable shipment. It filed a claim with AHAC
through its representative in the Philippines, PHILAM, which
compensated the former the whole insured amount. AHAC in
turned filed an action for damages against FedEx and the
warehouse for negligently handling the [Link] Court did not
hold FedEx liable. In so doing, the Court stated that undeniably,
upon payment to the insured consignee of an indemnity for loss
or damage of the goods insured, the insurer's entitlement to
subrogation equips it with a cause of action in case of breach or
negligence. However, in this jurisdiction, the filing of a claim
with the carrier within the time limitation therefore actually
constitutes a condition precedent to the accrual of a right of action
against a carrier for loss of or damage to the goods.

The requirement of giving notice of loss of, or injury to the

goods is not an empty formalism. The Court said that the reasons
for such requirement are (1) to inform the carrier that the cargo
has been damaged and that it is being charged with liability
therefore; and (2) to give the carrier an opportunity to examine the
nature and extent of injury. This is to allow the carrier to protect
and safeguard itself from false and fraudulent claims. The
shipper or consignee must allege and prove the fulfillment of this
condition precedent of notice. Failure to comply with it bars
recovery for the loss or damage suffered. In this case, no notice of
loss or injury to the goods was filed within the prescribed period.
While respondents may have had a cause of action then, they
cannot now enforce it for their failure to comply with the
aforesaid condition precedent

In Manila Mahogany v. Courtof Appeals55 l,Manila Mahogany

insured its car with Zenith Insurance. The car got hit by a truck

551164 SCRA 650 (1987).

284 I THE PHILIPPINE INSURANCE LAW: CODE, COMMENTS AND CASES

owned by San Miguel Corporation. In an amicable settlement,

Zenith paid Manila Mahogany P5,000.00, as a consequence of
which the latter executed a 'release of claim', subrogating Zenith
to all its rights of action against San Miguel. But when Zenith tried
to recover from San Miguel, the latter refused to pay because
apparently, San Miguel had already paid Manila Mahogany
P4,500.00 for damages and Manila Mahogany had likewise
executed a 'release of claim' discharging San Miguel from "all
actions, claims, demands, and rights of actions" that arose from
the accident.

In a suit for reimbursement filed by Zenith against Manila

Mahogany, the latter contended that it was not bound to pay
Zenith. Since the total damages were P9,486.00 and Zenith only
paid P5,000.00, Manila Mahogany claims it was entitled to go after
San Miguel to claim the additional P4,500 citing Art. 2207 of the
Civil Code, notwithstanding the "release claim" it executed
subrogating Zenith to any right of action it had against San
Miguel.

The Court overruled Manila Mahogany's contention and

ruled for Zenith. It stated that the insurer can only be subrogated
to such rights as the insured may have. Should the insured release
the wrongdoer who caused the loss thereby defeating the
insurer's right of subrogation, the insurer however 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 had the right to file a deficiency claim

against San Miguel should Zenith not fully pay for the injury
caused. However, when it executed a "release of claim" in favor of
San Miguel, defeating the right of Zenith to subrogation, the right
of Manila Mahogany to retain the amount Zenith paid to it was
also nullified. Therefore Zenith is entitled to recover from Manila
Mahogany the amount of insurance money it paid.
 CHAPTER IX: CLAIM SETTLEMENT & SUBROGATION I 285

In Cebu Shipyard and EngineeringWorks Inc., v. William Lines

Inc., et al.552, the insurer of the vessel of William Lines undergoing
drydocking and repair paid the latter the value of the policy
worth P45,000,000.00 after the insured vessel had been lost in a
fire. Prudential claims subrogation for the amount but CSEW
contends that Prudential is not entitled to subrogation because the
fire was an excluded risk as it resulted from the "want of due
diligence of assured, owner or managers" and because CSEW was
co-assured under the contract. They also raised a stipulation in
their contract with William Lines limiting their liability to
P1,000,000.00.

The Court ruled that there was subrogation. The Court

upheld the ruling of the Court of Appeals that it was not the
personnel of the insured which caused the fire but the negligence
of the CSEW employees. As to their claim of being co-assured, this
was denied by the Court as discussed in an earlier chapter.553

The contractual stipulation limiting liability was not

applied by the Court which found that it would be unfair and
inequitable as it would effectively sanction a degree of diligence
short of what is ordinarily required.

552306 SCRA 762 (1999).

See "Construction/ Interpretation of Insurance Contracts", Chapter I of this
553
work.