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THE INSURANCE CODE OF THE PHILIPPINES 2. It started with the practice of giving abuloy to the relatives of the
P.D. 612, AS AMENDED BY R.A. 10607 dead. And rendering financial aid when family members suffered any
sort of misfortune
GENERAL PROVISIONS 3. Eventually mutual benefit societies and fraternal organizations
were organized for the purpose of rendering assistance.
4. What worked against the early development of insurance in the
SEC. 1.This Decree shall be known as “The Insurance Code.” Philippines was the fatalistic attitude exemplified by the phrase “bahala
na.”
MUTUAL INSURANCE AS OLD AS SOCIETY ITSELF -
BIRTH IN THE PHILIPPINES
1. 1829 Lloyd’s of London appointed Stracham, Murray & Co., Inc. as its
1. Based upon the principle of aiding another from a loss caused by an representative here.
unfortunate event. 2. 1939 The Union Insurance Society of Canton appointed Russel &
2. Existed among the Egyptians, Chines, Hindus, Romans and are known Sturgis
to have been established among the Greeks as early as the third century as its agent in Manila
before Christ. -Both were limited to non-life insurance
3. Origin of present day insurance attributed to merchants of Italian cities 3. 1898 Life insurance was introduced by Sun Life Assurance of Canada
who sought to distribute the loss falling upon any one by reason of the
4. First domestic non-life insurance company was Yek Tong Lin Fire and
perils of navigation.
Marine Insurance Co. in June 8, 1906
4. From Italy the practice of insuring commercial ventures against disaster
5. First domestic life insurance company, the Insular Life Assurance Co.,
spread to other maritime States of Europe such as England.
Ltd., in 1910.
5. Lombards founded trading houses in London in the 12 th Century. All
6. In 1950 reinsurance was introduced with Reinsurance Company of The
questions of insurance were decided based on the customs of merchants
Orient for both life and non-life.
and merchant courts
7. First Workmen’s Compensation Pool was organized in 1951 as the
6. Middle 18th Century – Common law courts of England began to take
Royal Group Inc.
adequate cognizance of insurance cases
8. 1949, a government agency was formed to handle insurance affairs, The
7. Lord Mansfield was the “Father of English Commerical Law” and the
Insular Treasurer was appointed Commissioner ex-officio.
same law was used to determine questions in insurance.
9. Social insurance was established in 1936 through the GSIS.
10. SSS followed suit in 1954.
DEVELOPMENT IN THE UNITED STATES
SOURCES OF INSURANCE LAW IN THE PHILIPPINES
1. With the exception of maritime insurance, English practices and English
decisions have little influence in the United States. DEVELOPMENT IN THE
1. Spanish Period – Old Civil Code of 1889 and the Code of Commerce
PHILIPPINES
2. Insurance Code expressly repealed the provisions on insurance in the
1. Insurance in the Philippines is rather a nascent institution. It did not
Code of Commerce
exist prior to the 19th Century.
3. Civil Code of The Philippines
4. P.D. 612 instituted “The Insurance Code” in 1974

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5. P.D. 1460 consolidated all insurance laws into a single code known as
“The Insurance Code of 1978” INSURER’S RIGHT OF SUBROGATION
6. R.A. 10607 mad many substantial amendments to the Insurance Code
1. Basis – Substitution of one person in place of another with reference to a
LAWS GOVERNING INSURANCE lawful claim or right, so that he who is substituted succeeds to the rights
of the other in relation to a debt or claim, including its remedies and
1. Insurance Code of 1978 securities.
-Governs the different types of insurance contracts and those engaged in -Basically a process of legal substitution. The insurer, after paying
insurance business in the Philippines. the amount covered by the policy, steps into the shoes of the
2. Civil Code insured, availing of himself the latter’s rights that exist against the
a. Void Donations – Arts. 739 and 2012 wrongdoer at the time of the loss.
b. Applicability of the Civil Code –Art. 2011 2. Purposes of subrogation condition in policy
c. Life Annuity Contracts – Arts. 2021-2027 1. To make the person who caused the loss legally responsible
d. Compulsory M.V. Liability Insurance – Art. 2186 2. Prevent the insured from having double recovery from the
e. Insurer’s right of subrogation – Art. 2207 wrongdoer and the insurer.
f. . -The insurer has the right to recover
1. Directly in a suit against the wrongdoer or
Note: Insurance contracts are governed primarily by the Insurance 2. As the real party in interest in a suit brought by the
Code but if it doesn’t specifically provide for a particular matter in insured
question, the provisions of the Civil Code on contract and other special
laws shall govern. Case Doctrine: Whenever the wrongdoer settles with the insured
without the consent of the insurer and with the knowledge of the
3. Special Laws insurer’s payment and right of subrogation, such right is not
a. The Insurance Code defeated by settlement.

b. The Revised Government Insurance Act of 1977 3. Right of subrogation applicable only to property insurance
c. The Social Security act of 1954 -Value of human life is unlimited thus no recovery from a third party can be
deemed adequate to compensate the insured’s beneficiary. Life insurance
4. Others – Insofar as the Civil Code is concerned, the Code of Commerce is contracts are not ordinarily contracts of indemnity.
a special law
a. R.A. 656 known as the “Property Insurance Law” dealing with 4. Privity of contract or assignment by insured of claim not essential.
government property a. Payment by the insurer to the insured serves as an
b. R.A. 4898 providing life, disability and accident insurance coverage equitable assignment to the former of all the remedies which the
to barangay officials latter may have against the third party.
c. E.O. 250 increases, integrates and rationalizes the insurance benefits b. Right of subrogation does not come from privity of
of barangay officials and members of the Sanggunians. contract but it accrues upon payment of the claim by the insurer
d. R.A. 3591 established the Philippine Deposit Insruance Corporation

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c. The subrogation receipt is sufficient to establish not only the -Where the insured (shipper) has assigned its rights against defendant
relationship of the insurer and the insured, but also the amount paid to (carrier of goods) for damages caused to the cargo shipped, to the insurer
settle the insurance. which paid the indemnity, the case isn’t between the insured and insurer but
5. Loss or injury for risk must be covered by the policy otherwise there could one between the shipper and the carrier because the insurance company
be no subrogation. merely stepped into the shoes of the shipper. And if the shipper has a direct
6. Right of insured to recover from both insurer and third party – The right of cause of action vs. the carrier on account of the damage to cargo such action
subrogation given to the insurer prevents the insured from obtaining more can be asserted or availed of by the insurer as a subrogee of the insured and
than the amount of his loss (Remember that it is a contract of indemnity the carrier cannot set up as a defense any defect in the insurance policy
hence the insured cannot profit). because it is not privy to it.
-If the amount paid bu the insurance company does not fully cover the injury or
loss, the aggrieved party viz. the insured is entitled to recover the deficiency APPLICABILITY OF THE CIVIL CODE
NOT the insurer.
7. Right of insured to recover from insurer instead of the third party – The Doctrines:
insurer cannot defeat the claim on the ground that the insured has the right to 1. If the insurer’s company is vitiated by error then such fact may be
be indemnified by the third person who caused the loss. used to give rise to the nullity of the contract
8. The right of the insurer against the third party who caused the loss is limited 2. Contract for a life annuity was not perfected where the acceptance
to the amount recoverable from the latter by the insured. of the home office of the insurer never came to the knowledge of the
9. The exercise of the right of subrogation by the insurer is purely discretionary applicant who perished
10. The right of subrogation has its limitations 3. An insurance contract is null and void where the consideration is false
a. Both the insurer and the consignee are bound by the or fraudulent
contractual stipulations under the bill of lading 4. When an insurance contract is rescinded then the obligation of mutual
b. The insurer can be subrogated only to the rights as the insured restitution under the Civil Code shall apply
may have against the wrongdoer 5. A common-law wife is disqualified from becoming the
beneficiary of the insured
Note: If the insured, after receiving payment from the insurer, by his 6. The award of moral and exemplary damages in case of
own act, releases the wrongdoer from liability then the insurer loses his unreasonable delay in the payment of insurance claims shall be governed
rights to the wrongdoer. Consequently, the insured will be bound to by the Civil Code
return to the insurer, the amount it paid as indemnity. Under Art. 2207,
the insurer is the REAL PARTY IN INTEREST as re: the portion of the CONSTRUCTION OF THE INSURANCE CODE
indemnity paid. 1. The interpretation of the judicial authorities of the State from where
Case: Where the insurer pays the insured the value of the lost goods the Insurance Code was taken shall be instructive, at the very least, in terms
without notifying the carrier who has, in good faith, settled the claim of the fundamental points.
for loss of the insured, the settlement is binding on both the insured and 2. The rules enunciated by the best considered American authroties
the insurer, and the latter can’t bring an action against the carrier on his involving similar provisions of the Philippine law on insurance should be
right of subrogation adopted for the purpose of having our law on insurance conform as nearly as
possible to the modern law of insurance as found in the United States.
11. Effect of assignment by insured of its rights against third party to insurer

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SEC. 2. Whenever used in this Code, the following terms shall have the -Under the Code, however, the term “insurance” covers “assurance”
respective meanings hereinafter set forth or indicated, unless the context
otherwise requires: 2. Better definition – a contract of insurance is an agreement by which one
party for a consideration paid by the other party, promises to pay money
(a) A “contract of insurance” is an agreement whereby one undertakes for a or its equivalent or to do some act valuable to the latter, upon the
consideration to indemnify another against loss, damage or liability arising from happening of a loss, damage, liability, or disability arising from an
an unknown or contingent event. unknown or contingent event.

A contract of suretyship shall be deemed to be an insurance contract, within the 3. In general, an insurance contract is a promise by one person to pay
meaning of this Code, only if made by a surety who or which, as such, is doing another upon the happening of a fortuitous event beyond the effective
an insurance business as hereinafter provided. control of either party in which the promise has an interest apart from the
contract. -A written insurance contract is called a policy
(b) The term “doing an insurance business” or “transacting an insurance
business,” within the meaning of this code shall include: DEFINITION OF INSURANCE FROM OTHER VIEWPOINTS

(1) Making or proposing to make, as insurer, any insurance contract; 1. Economic – reduces risk by a transfer and combination of uncertainty in
(2) Making or proposing to make, as surety, any contract of suretyship as a regard to financial loss
vocation and not as merely incidental to any other legitimate business or 2. Business – serves as basis for credit and a mechanism for savings and
activity of the surety; investments
(3) Doing any kind of business, including a reinsurance business, specifically 3. Mathematical – application of actuarial principles to calculate risk
recognized as constituting the doing of an insurance business within the 4. Social – social device whereby uncertain risks of individuals may be
meaning of this Code; combined in a group and this made more certain, with small periodic
(4) Doing or proposing to do any business in substance equivalent to any of the contributions by the individuals providing a fund out of which those who
foregoing in a manner designed to evade the provisions of this Code. suffer losses may be reimbursed

DETERMINATION OF THE EXISTENCE OF THE CONTRACT

In the application of the provisions of this Code the fact that no profit is derived
from the making of insurance contracts, agreements or transactions of that no
separate or direct consideration is received 1. Nature – to be determined by the exact nature of the contract actually
therefor, shall not be deemed conclusive to show that the making thereof does entered into whatever form it takes or whatever name it may be called.
not constitute the ding or transacting of an insurance business (c) as used in this Note- Under the code, a contract of suretyship shall be deemed an insurance
contract “if made by a surety who or which as such is doing an insurance
Code, the term “Commissioner” means the “Insurance Commissioner.
business.” But strictly, a contract of suretyship is different from an insurance
contract.
LEGAL CONCEPT OF INSURANCE
2. Elements of the contract
1. Subject matter – thing insured
1. “Assurance” is also used instead of “insurance.” But strictly, Assurance –
2.Consideration – premium paid by insured
refers to an event like death, which is certain to happen
Insurance – refers to a contingent event which may or may not happen

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3. Object and purpose – risk-bearing contract; transfer and distribution of risk of 1. If you have no insurable interest then you cannot be
loss, damage, or liability arising from an unknown or contingent event insured and the contract will be void and unenforceable
Note – to be binding there must be an acceptance of the offer and legal 7. Personal – between insurer and insured
capacity. To be enforceable, all the requisites of a binding contract must 1. Insured generally cannot assign before the happening of
be present the loss, his rights under a property policy without the consent of
the insurer. The obligation to pay does not attach to the object
NATURE AND CHARACTERISTICS OF AN INSURANCE CONTRACT insured. If a transfer is allowed in the policy then such contracts by
which insurance is made to pass from one owner to another are in
1. Consensual – perfected by a meeting of the minds of the parties the nature of successive novations.
2. Voluntary – parties may incorporate such terms and conditions as they please. 2. Life insurance policies, however, are generally assignable
EXCEPTIONS: or transferable as they are in the nature of property.
1. May be required by law such as in motor vehicles or as a condition to 8. Since insurance is a contract then such is considered property in legal
granting a license to conduct a business affecting public safety or welfare contemplation. But unlike property policies, life insurance policies are
2. May arise by operation of law e.g. War Damage Corporation Act generally assignable like any chose in action
3. Social insurance for members of the government service or for employees
of the private sector DISTINGUISHING ELEMENTS OF THE CONTRACT OF INSURANCE

3. Aleatory – it depends on some contingent event thus it is not a contract of 1. Insurable interest
chance and in an insurance contract each party must take a risk. Insurer: 2. Insured is subject to a risk of loss
Risk of having to pay the indemnity if the contingent event happens 3. Insurer assumes risk of loss or a portion of it
Insured: Risk of paying the premium without receiving anything 4. Such assumption of risk is part of a general scheme to distribute actual
therefor if the contingent event does not happen except protection, losses among a large group or substantial number of persons bearing a
which in itself is a valuable consideration similar risk and 5. Payment of premium – ratable contribution to a general
4. Unilateral – imposing legal duties only on the insurer who promises to insurance fund
indemnify in case of loss
-It is executed as to the insured after payment of the premium and Note- ALL the elements must be present, otherwise it is not an insurance
executory on the part of the insurer in the sense that it is not executed contract. And even if all the elements are present, it is not an insurance
until payment for a loss. contract if the same is entered into for the purpose of rendering service and
-Insured usually assumes no duty to pay subsequent premiums unless not indemnification for a loss.
the insurer has continued the insurance after maturity of the premium,
in consideration of the insured’s express or implied promise to pay. INSURANCE AS RISK-DISTRIBUTING DEVICE
BUT he has the right to pay the stipulated premium and the insurer has
the duty to accept the payment when tendered. A contract which only possesses the following elements:
5. Conditional – Subject to conditions the principal one of which is the 1. Insurable interest
happening of the contingent event insured against 2. Risk of loss
6. A contract of INDEMNITY – except for life and accident insurance where the 3. Assumption of risk by insurer is only a risk-shifting device not a contract
result is death because the promise of the insurer is only to make good the loss of insurance e.g. contract of guaranty
of the insured.

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have less incentive to take measures that prevent loss 3. Problem re:
1. Equitably distributes losses out of a general fund contributed by all measuring of amount of risk transferred – because the insurer cannot always
2. Provides protection against absorbing one’s losses alone monitor the behavior of the insured
4. Sharing by insured of some responsibility for the risk – commonly
COPING WITH RISK termed as deductible or coinsurance to make the insured retain some
responsibility for the loss
Different ways of coping with risk a. Deductible – insured bears any loss up to some stated amount
1. Limiting probability of loss – e.g. use of safety measures and devices b. Coinsurance – insured bears some stated percentage of the loss
2. Limiting effects of loss – e.g. sprinkler systems, fire extinguishers regardless of the amount
3. Diversification in investment – basically this is the opposite of putting all your 5. Problem re: computation of premium to be charged – difficult to
eggs in one basket. You manage your portfolio so you could gain on your calculate but generally the amount of the fee should equal the insured’s
investments in terms of a net profit while incurring some losses in some areas. expected loss e.g. a 1 in 5 probability of losing P100 computes to an
4. Self-insurance or self-financing – e.g. rainy day money expected loss of P20
5. Ignoring risk – bahala na si batman 6. Classification of risks – Insurers group similar risks together and
6. Transferring risk to another - by contractual arrangement such as a seller’s charge each member of the same group, the same fee.
warranty. If your T.V. breaks within a couple of years, the manufacturer’s 7. Sub-classification of risks – At a certain point, further subdivision
warranty handles the repairs and defrays the costs. of the group becomes too expensive relative to the benefits gained. As a
result, some
VALUE OF TRANSFERRING RISK insureds will be better risks than others

1. Risk preferring – those who choose to forego the certain loss in the hope of THE FIELDS OF INSURANCE
incurring no loss, despite the equal probability of suffering a large loss 2. Risk
neutral – indifferent to the alternatives 1. Social (Government)
3. Risk averse – people who do not want to play ball. They’d rather choose to -Compulsory and designed to provide a minimum of economic
lose P500 with certainty than confront the 50% chance of losing twice as much security for large groups. It is compulsory because some person
Notes – As the potential magnitude of loss increases, most people become more can’t or won’t voluntarily purchase insurance
risk averse. This is true even though the probability of loss declines. 2. Voluntary (Private)
-The more wealth a person has the less likely it is that the person will be * subgroups based on nature of perils
risk averse 1. Commercial insurance
-When people are averse to the risk of a loss, they are usually willing to 1. Personal
pay someone else to assume the risk. - Losses due to loss of earning power
2. Property
ECONOMIC EFFECTS OF THE TRANSFER & DISTRIBUTION OF RISK a. Indemnifies the owner for destruction or
damages to property e.g. Fire and Marine
1. Benefit to society as a whole – society as a whole would be better off if a large b. As a consequence of negligent acts that
number of similar, mutually beneficial transactions would occur 2. Undesirable result in injuries to other persons or damage to
side effects – If X’s risk is completely eliminated through transfer to Y, X would their property e.g. Casualty and Surety

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2. Cooperative insurance – “Cooperative” is applied to assoc’s usually -the distinction between 1st and 3rd party insurance is useful in understanding
operating under hospital, medical, fraternal, employee, or trade-union the concept of no-fault insurance which is the substitution of 1 st party
auspices. Usually non-profit insurance for tort liability.
3. Voluntary Government Insurance – e.g. insurance of mortgage loans 2. All risk vs. Specified Risk
and insurance of growing crops Note – The burden of proof in a specified risk policy is placed on the insured
to prove that the loss falls within the policy’s provisions on coverage. In an
-Multiple Line Insurance – combination of at least two kinds e.g. fire all-risk policy, the burden of proof is on the insurer to prove that the loss
and casualty falls within an explicit exception to coverage it wants to avoid paying.
-All Lines Insurance – denotes the broadening nature of insurance -If the exact cause of the loss is difficult to determine then an all-risk policy
operations which combine at least most of the basic types of insurance. THREE can be highly beneficial for the insured
MAIN CLASSIFICATIONS -All risk coverage does not alter basic insurance law principles like the
insurable interest requirement, causation rules, the requirement that the loss
1. Insurance against loss or impairment of property interests not be intentionally caused by the insured, and implied exceptions.
2. Insurance against loss of earning power due to death
3. Insurance against contingent liability to make payment to another e.g. CLASSIFICATIONS UNDER THE CODE
reinsurance, workmen’s compensation insurance and M.V. Liability Insurance
MODERNIZED CLASSIFICATION 1. Life insurance contracts which may be:
a. Individual Life
1. Marine b. Group Life
2. Property 3. Personal c. Industrial Life
4. Liability 2. Non-life insurance contracts which may be:
a. Marine
CLASSIFICATION BY INTERESTS PROTECTED b. Fire
c. Casualty
1. 1st Party vs. 3rd Party insurance 3. Contracts of suretyship or bonding
-In the former the contract between the insurer and insured indemnifies the
insured in the event of a loss suffered by him directly. In the latter a third person Note – In theory, it would be possible for an insurance company to insure
damaged or injured by the insured is paid the indemnity - Property Insurance is against any risk whatever associated with any lawful activity as long as
first party insurance there is no prohibition by a statute or violation of public policy.
- Liability Insurance is third-party insurance
Note – All insurance except liability can be fairly thought of as first-party CONTRACTS WRITTEN BY GUARANTY OR SURETY COMPANIES
insurance
-In life insurance the insured designates a beneficiary to receive the proceeds of Designated as:
the policy but this does not mean that such is third-party insurance -Fidelity
-Health insurance is also first party -Title
-Bond
-Security Guaranty

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Note: The underwriter engages in the business for profit, especially since the 2. Deceased has already been paid under the Workmen’s
terms of such contracts usually closely resemble the essential elements of an Compensation Act from another policy
insurance contract. They are construed strictly against the insurer. -A contract of
suretyship shall be an insurance contract only if Policy stipulated that any authorized driver of Taxi Co. should not
1. Made by a surety be entitled to any indemnity under any other policy. The deceased,
2. Who is doing an insurance business within the meaning of the code however, was paid his workmen’s compensation from a different
policy. The Court held that despite the prohibition, it is too
CONSTRUCTION OF INSURANCE CONTRACTS wellsettled that what the law requires enters into and forms
part of every contract. If there is any doubt concerning the
Insurance contracts are to be examined and interpreted holistically liability of the insurer, nonetheless it should be resolved in
-Generally insurance contracts are contracts of adhesion favor of the insured.

Rules: 3. Insured owner of a vehicle was not aware that his driver’s license
1. Interpreted liberally in favor of the insured and strictly against the insurer 2. was irregularly issued.
Interpreted as to carry out the purpose for which the parties entered into the
contract, which is to insure against risks of loss, damage or liability on the part The policy states that the Insurer shall not be liable if damages
of the insured. caused
3. When it contains exceptions or conditions to insured vehicle if driven by a person not permitted in accordance
1. Interpreted most favorably toward those against whom they are with licensing laws or regulations to drive the MV covered in the
intended to operate and most strictly against the insurance company or policy. The driver was illiterate but was able to obtain a license by
the party for whose benefit they are inserted. paying P25. The insurance company presented a certification from
2. Where restrictive provisions are open to 2 interpretations, that the Motor Vehicle Office that his license was not issued by it. No
which is most favorable to the insured is adopted. proof that the insured knew that the circumstances surrounding
3. Limitations of liability must be construed in such a way as to such issuance was irregular. The Court held that the insurer is still
preclude the insurer from non-compliance with its obligations. liable because (1) Driver’s license is as a public document is
presumed genuine. (2) The issuance of such is proof that the
Cases: M.V.O. considered the person to be qualified to operate a M.V. and
1. Amount recoverable in case of death by drowning is not stated in the considering the weight of authority is in favor of a liberal
policy. interpretation of the insurance policy for the benefit of the party
insured.
Insured died of drowning. The insurer only bound itself to pay 1K-3K
in case of death or bodily injury. It didn’t say anything about 4. Insured car in the custody of the repair shop was taken out for a
drowning although it gave specific amounts for specific causes of joyride by employees of the shop owner
death. In this case the Court held that the insured may recover 3K. It is
the interpretation that favors the insured because it allows greater The Insurance Commission initially ruled that the accident did not
indemnity. fall neither within the “authorized driver” clause nor the theft
clause. The Court held that the ruling is too restrictive and contrary
to the established principle that insurance contracts, being contracts

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of adhesion are to be construed liberally in favor of the insured. The 7. Insurer resisted the claim of the insured on the ground that the
fact that the car was driven in violation of the trust relationship between burned oil mill is not covered by any insurance policy because the
the owner of the car and the repair shop does not mean that the description of the insured establishment referred to another building.
‘authorized driver’ clause cannot apply as long as the one who took it
for a joyride was duly licensed. HOWEVER, it is the theft clause that Insured owned two oil mills. One was destroyed by fire. Insurer resists
applies since the car was unlawfully taken. paying the indemnity because the description, which consists of boundaries
and descriptions of adjacent structures, of the property insured allegedly
Quantum of evidence to prove theft: In the absence of any stipulation to pertains to the oil mill that was left standing. There was even a stipulation in
the contrary, a prior conviction isn’t required to establish the fact of the policy that mistakes or errors in the description must be corrected
theft. It is only to be determined by mere preponderance of evidence. immediately but such was not done. The Court held that the insured may
still recover because descriptive words are to be construed with the
5. Policy contains conflicting provisions on effect of non-payment of greatest liberality in giving effect to the insurance. The courts are
premium inclined to consider that the policy covers any building, which the
parties manifestly intended to insure, however inaccurate the
Policy states that “my policy shall be made effective on the first day of description may be.
the month next following the month the first premium is paid;x x x.”
Another condition provides: “That failure to deduct from my salary the Note that there was a categorical statement in the policy which used the
monthy premiums shall not make the policy lapse, however, the word NEW, pertaining to the NEW OIL MILL. If the parties intended to
premium account shall be considered as indebtedness which, I bind insure the old oil mill, there would have been no need to use the word NEW.
myself to pay the System.” Applicant died in a plane crash. No
premium has yet been remitted. The Court held that the policy is still Cardinal Rule: VERBA LEGIS applies and the insurance contract
effective considering the ambiguity created by the operation of the is the law between the parties except when there is doubt. When
conditions should be interpreted adversely against the GSIS which there is doubt the application of the aforementioned rules of
prepared the application. interpretation applies.

6. Insured spouses died when passenger truck they were driving was Cases:
ambushed by Muslim rebels 1. Liability is limited to P150 if repair of insured was undertaken
without notice to insurer – Even if the insured paid a greater
Insurer paid the face value of the life insurance policies of D and E. But denied amount that P150, the indemnity he will get will be limited to
liability for accidental death benefits of double indemnity on the ground that P150 because the repair was undertaken without notifying the
their cause of death was an excluded risk n the rider to wit, “ the policy shall not insurer.
cover loss or disability caused directly or indirectly by war, declared or
undeclared, strikes, riots, and civil war, revolution, or any warlike operation.” D 2. Insurer must be given notice of other fire policies – In the
and E were killed in an ambush by Muslim rebels. The Court held that the cause absolute absence of notice by the insured to the insurer of the
of death was not contemplated by the phrase “warlike operation” and thus the existence of other policies of insurance against fire upon the
insurer must pay the indemnity. The ambush was an isolated one, not done property insured when it is one of the conditions specified in the
pursuant to a prosecution of hostilities between warring parties. fire insurance policy for the validity of the policy and entitlement
to indemnity in case of loss, the policy is null and void. But

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where the condition does not absolutely declare void any violation of There is nothing unreasonable or objectionable in this stipulation that would
the additional or “other insurance” clause, but on the contrary, it warrant its nullification. It is designed to safeguard the insurer’s interest
expressly provides that the condition “shall not apply when the total against collusion between the insured and the claimant.
insurance or insurances in force at the time of the loss or damage is
not more than P200,000,” the policy is not totally free of ambiguity. Note – Where a contract is silent on any particular matter, the doubt arising
The only reasonable conclusion is that (a) the prohibition applies from such silence shall be construed strictly against the insurer.
only to double insurance and (b) the nullity of the policy shall only
be to the extent exceeding P200,000 of the total policies issued i.e. Ex. The insurer contended that the amount recoverable on the car insurance
under the condition, the insurer is amenable to assume a co-insurer’s policy is subject to a deductible franchise. It was ruled that the deductions of
liability up to the loss not exceeding P200,000. Forfeitures are not P250 and P274 as deductible franchise and 20% depreciation on parts,
favored. respectively, claimed by the insurer as agreed upon in “the contract, has no
basis” because “the policy does not
3. Only amputation of hand is considered a loss thereof mention any deductible franchise.”
The insured suffered injuries, which rendered his hand to be temporarily
but totally disabled, he cannot recover the insurance policy provision, WHAT CONSTITUTES DOING OR TRANSACTING AN
which covers the loss of a hand. Such has been defined as only INSURANCE BUSINESS
pertaining to amputation.
1. Name or designation by insurer not controlling. The exact nature of
4. The prescriptive period on claims on insurance policies may be the contract is to be determined by the stipulations thereof.
stipulated in the contract. When it is stipulated such is the period that
shall govern, not the Civil Code provision. 2. Acts deemed included by law – The Code enumerates acts which
are deemed included in the term “doing an insurance business” or
5. The policy states that “Use of M.V. must be for social, domestic or “transacting an insurance business.”
pleasure purpose. This does not cover use for hire, or reward, or for
racing, pacemaking, reliability trial and speed testing.” Ex. A company may be found to be engaged in an insurance business

Car rallying is excepted. Despite the fact that car rallying is not technically a
race, it is definitely a contest based on precision and coordination of crew as
well as on road worthiness. Since the contest was timed, controlled and
conducted under the conditions with a crew to test the precision of the driver and
road worthiness of the car, the “auto rally” falls within the exception, particularly
under pace-making.

6. Written permission of insurer is required before insured may effect

payment in settlement of claim

The policy specifically requires that the insurer’s written consent be first secured
before any payment in settlement of the claim against the insured can be made.

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even though it expressly disclaims any intention to sell insurance. Thus, Note – Even life insurance has the same principle of spreading a newspaper which, in order to
increase its circulation, promises to pay of risk as long as the same does not lapse.
a certain amount to the heirs of one who meets death by accident while
pursuing his ordinary avocation, provided a copy of the paper or a 2. Subsidiary Functions coupon taken from it is found in his possession at the time of the 1. Stimulates
business enterprises – No large-scale commercial and accident, carries an accident insurance business which is unauthorized industrial organizations could function in the
modern world without under a charter empowering it to publish a newspaper. insurance. It allows capitalists to use their capital without freezing a huge portion to
guard against potential losses.
Ex. A contract for the payment of burial or funeral expenses at the
death of the holder is a contract of life insurance subject t the insurance 2. Encourages business efficiency and enterprise – The natural result of laws. elimination of
risk is an increase in business efficiency. The worry of uncertainty of such risk could seriously diminish the personal Ex. An agreement, however, to service and
repair, at a flat monthly fee, efficiency of business managers but for the way on which insurance any burned out and defective parts of fluorescent fixtures has been held
relieves them of these strains. not to constitute an insurance contract since any element of warrant or guaranty in the agreement is merely incidental to the servicing 3.
Promotes loss-prevention – The community would suffer much business. greater economic impoverishment through material losses if it were not for the loss-
prevention measures of insurers. Insurers encourage loss-
The principal object and purpose test – If the principal object and prevention through a system of rating which allows discounts for good purpose is indemnity then it is
an insurance contract. If the principal features and impose special conditions where the risk is unsatisfactory. purpose and object is a service or risk transfer and
distribution then it is neither an insurance contract nor will it be subject to the laws 4. Encourages savings – By protecting individuals against unforeseen governing
insurance. events.

Ex. Health Maintenance Organizations, whether or not organized for 5. Solves social problems – GSIS and SSS provide amelioration for the profit, whose main object is
to provide the members of a group with suffering of the many from loss of life, injuries, old age, disability.
health care services, rather than assumption of insurance risk is not
engaged in the insurance business. 3. Indirect Functions
1. Investment of funds – Insurers accumulate large funds which they
FUNCTIONS OF INSURANCE hold as custodians out of which claims and losses are met. These funds themselves are invested so that not only do they earn interest
to be
1. Principal Function – The main function of insurance is risk-bearing. added to the funds but they also make available huge resources for The financial losses of the few
are equitably distributed over the many underwriting industrial, agricultural, cultural, and other projects that out of a fund contributed by all. contribute to national
development

Ex. In fire insurance, the policyholders pay premiums to a 2. Use of reserve funds – Because of the investment policy of insrurers, common pool, out of which
those who suffer loss are their reserve funds are not static, but are used productively. This results compensated. Thus when a fire guts the property of an insured,
in the reduction of the cost of insurance to the insuring public. If the the indemnity is paid for by all the insureds proportionately. reserve funds are not used, the
income they earn now would have to be
obtained through higher premiums
3. Effect on prices – The cost of insurance to the businessman is
passed on to the consumers, along with other production costs, but
paradoxically, the existence of insurance benefits the consumer public

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in terms of reduced prices. This is because the cost of insurance is less

than the cost of risk without insurance
Note:
4. As basis of credit – Credit extension is the most important • Parties must be competent to enter into the contract
phase of modern business and is contributed to by virtually all forms of • Policy must be in the form previously approved by the
insurance. No dealer cares to sell goods to a retailer on credit unless he Insurance Commissioner
has some assurance that the goods and the business of the retailer are
protected from sudden disaster by fire. Subject Matter of the Contract of Insurance

TITLE 1 • Generally, anything appreciable pecuniary value, which is

WHAT MAY BE INSURED subject to loss or deterioration or of which one may be
deprived so that his pecuniary interest is or may be
prejudiced, may properly constitute the subject matter of
insurance.
SEC. 3. Any contingent or unknown event, whether past or future, which • Property Insurance – ordinarily property covered by a policy
may damnify a person having an insurable interest, or create a liability against is regarded the subject matter of the insurance.
him, may be insured against, subject to the provisions of this chapter. • Life, health, and accident insurance – the person becomes the
subject of insurance, the matter is generally viewed as one in
The consent of the spouse is not necessary for the validity of an insurance reference to the insured as a party to the contract
policy taken out by a married person on his or her life or that of his or her • Casualty insurance – The subject matter is the risk involved
children. in its use, or the insured’s risk of loss or liability that he may
suffer loss or be compelled to indemnify for the loss suffered
All rights, title and interest in the policy of insurance taken out by an original by a third person.
owner on the life or health of the person insured shall automatically vest in
the latter upon the death of the original owner, unless otherwise provided for Event or Peril insured against
in the policy.
• The contingency or unknown event must be such that its
happening will:
a. damnify or cause loss to a person having an insurable
REQUISITES OF A CONTRACT OF INSURANCE (SI-PA-Pro-Pre-M) interest
b. Create liability against him
8. Subject matter in which the insured has an Insurable interest • The unknown event may be past or future.
9. Event or Peril insured Against which may be any (future contingent or
unknown event, past or future) and a duration for the risk thereof Insurance by a married woman
10. A Promise to pay or indemnify in a fixed or ascertainable amount • A married woman without the consent of her husband may take out
11. A consideration for the promise, known as the “Premium” an insurance on o her life o that of her children o
12. Meeting of the minds of the parties upon all the foregoing essentials that of her husband o paraphernal or separate property

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o property given to her by her husband 3. Chance

•
There is consideration of price paid if it appears that prizes offered by
Insurance by a minor whatever name they may be called came out of the fund raised by the
• Insurance contract entered into by a minor is not entirely void but sale of chances among participants. No consideration has been paid and
merely voidable consequently, there is no lottery.
• Insurer may not annul the contract on the ground of incapacity • e.g. A sweepstakes holder cannot insure himself against the failure of
• If the contract is fair and no fraud, the minor cannot recover his ticket to win a prize
premiums if he cannot return the benefits received. Contract of Insurance not a wagering contract
• If the minor is the beneficiary under a contract of life, health or • A contract of insurance is a contract of indemnity and is not a wagering
accident insurance, the judicial or natural guardian may exercise in or gambling contract.
behalf of the minor any right under the policy • While it is based on contingency, it is not a contract of chance used for
Ownership of life insurance policy profit.
• Ownership divided between insured and beneficiaries – the insured is • The very purpose of insurance is the reimbursement of the holder of
the owner of its various marketing and sales features, such as the loan insurance for the actual loss suffered.
and cash surrender values, and the beneficiary being the owner of a
promise to pay the proceeds at the death of the insured subject to the Gambling contract Insurance Contract
insured’s right of revocation Parties contemplate Parties seek to distribute
• Interest of insured and beneficiary - one who takes a policy of gain through mere possible loss by reason of
insurance on his own life becomes a party to the contract even though chance mischance
the benefits of the contract will accrue to another known as Gambler courts fortune Insured seeks to avoid
beneficiary. He may still maintain a suit. misfortune
• Transfer of rights – Upon death of the original owner, all rights, title Essence of gambling: What one insured gains is not at
and interest in the policy shall automatically vest in the beneficiary
whatever one person wins the expense of another insured.
unless otherwise provided for in the policy.
from a wager is lost by the
other wagering party
As soon as a party makes a The purchase of insurance does
SEC. 4. The preceding section does not authorize an insurance for or wager, he creates a risk of not create a non-existing risk of
against the drawing of any lottery, or for or against any chance or ticket in loss to himself loss to the purchaser
a lottery drawing a prize.
Similarity between insurance and gambling

Concept of Lottery • Insurance and gambling are similar only in one respect: one party
• Lottery externs to all schemes for the distribution of prizes by chances, promises to pay a given sum to the other upon the occurrence of a given
such as policy playing, gift exhibition, prize concerts, raffles at fairs. future event, the promise being conditioned upon the payment of, or
• Three essential elements of lottery: (C.P.C.) agreement to pay, a stipulated amount by the other party to the contract.
1. Consideration
2. Prizes

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• The person in whose favor the contract is operative and who is

SEC. 5. All kinds of insurance are subject to the provisions of this chapter so far
indemnified against or is to receive a certain sum upon the
as the provisions can apply. happening of a specified contingency or event.
• Person whose loss is the occasion for the payment of the insurance
• Applicable to Marine Insurance, Fire Insurance, Casualty Insurance, proceeds by the insurer.
Suretyship and to any other kind of insurance insofar as said provisions • Insured is not always the person to whom the proceeds are paid.
can apply. o This person may be the beneficiary designated in the
• Matters not expressly provided for in the Insurance Code and special policy
laws on insurance are regulated by the Civil Code. o The insured may also assign the proceeds to someone
• RA No. 1161 (Social Security Act) shall be governed primarily by the else
said law and subsidiarily by Chapter 1 of the Insurance Code and in the • Synonymous to “assured”; but strictly speaking, the term insured
absence of applicable provisions in both laws, the Civil Code. refers to the owner of the property insured or the person whose
life is the subject of the contract of insurance, while “assured”, to
the person whose benefit the insurance is granted
o Also synonymous to the word beneficiary o Beneficiary
is the person designated by the terms of the policy as the
one to receive the proceeds of the insurance.
! He is the third party to the contract of life
TITLE 2 insurance.
PARTIES TO THE CONTRACT ! There are occasions where the proceeds are paid
to the estate of the insured.
SEC. 6. Every corporation, partnership, or association, duly authorized to
transact insurance business as elsewhere provided in this Code, may be an • It is said that the relation between the insurer and the insured is that of a
insurer. contingent debtor and creditor, subject to the conditions of the policy
and not that of trustee and cestui que trust.

Parties to the Contract of Insurance Who may be an insurer

1. Insurer 1. Foreign or domestic insurance company – Before they may transact

• The party who assumes or accepts the risk of loss and undertakes business they must first obtain a certificate of authority from the
for a consideration to indemnify the insured or to pay him a certain Insurance Commissioner who can also refuse if in his judgment such
sum of on the happening of a specified contingency or event. refusal will best promote the interests of the people.
• The business of insurance may be carried only by corporations, ! An insurance corporation is defined as one “formed and
partnerships and associations organized to save any person or persons or other
• Synonymous to “assurer” or “underwriter” corporations harmless from loss, damage, or liability
2. Insured arising from unknown or future or contingent event, or to

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indemnify or to compensate any person or persons or • Public enemy designates a nation with whom the Philippines is at war and
other corporations for any such loss, damage or liability. it includes every citizen or subject of such nation. o Alien enemy o A
2. Individual, partnership or association – the only requisite being that he mob is not a public enemy
holds a certificate of authority from the Insurance Commissioner o During wartime, a private corporation is deemed an enemy
which shall be given when such possesses capital assets required of an corporation although organized under Philippine laws if they
insurance corporation doing the same kind of business in the are controlled by enemy aliens.
Philippines and invested in the same manner. ! Control test – whereby a corporation is deemed to
! Insurer and insurance company include all individuals, have the same citizenship as the controlling
partnerships, associations, or corporations, including stockholders in time of war.
GOCCs and entities engaged as principals in the
insurance business, excepting mutual benefits Effects of war on existing insurance contracts
associations.
• Where parties rendered enemy aliens – by law of nations, all
Business of Insurance affected with public interest intercourse between citizens of belligerent powers which is inconsistent
with the state of war is prohibited.
• One affected with a public interest and is subject to the regulation and o With respect to property insurance – insurance policy ceases
control by the State to be valid and enforceable as soon as an insured becomes a
• An insurance company is an instrumentality which gather funds upon the public enemy
basis of equality of risk from a greater number of persons, sufficiently large o With respect to life insurance – US rule: the contract is not merely
in number to arouse the element of chance to step out and the law of
suspended but is abrogated by reason of nonpayment of premiums,
averages to step in as the controlling factor.
since the time of the payments is peculiarly of the essence of the
• A law requiring to file schedule of rates and prohibiting discriminatory rate
contract.
was held to be valid.
• Where the loss occurs after the end of war – Since the effect of war is
not merely to suspend but to abrogate, the insurer is not liable even if
the loss is suffered by the insured after the end of the war.
SEC. 7. Anyone except a public enemy may be insured.

SEC. 8. Unless the policy otherwise provides, where a mortgagor of property

Capacity of party insured effects insurance in his own name providing that the loss shall be payable to
• Natural persons – 3 essential requisites (C.P.P.) o 1. He must be the mortgagee, or assigns a policy of insurance to a mortgagee, the
Competent to make a contract o 2. He must Possess an insurable insurance is deemed to be upon the interest of the mortgagor, who does not
interest in the subject insurance cease to be a party to the original contract, and any act of his, prior to the
o 3. Must not be a Public enemy loss, which would otherwise avoid the insurance, will have the same effect,
• Juridical persons – may take out insurance on property 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
Meaning of Public Enemny performed by the mortgagee therein named, with the same effect as if it had
been performed by the mortgagor.

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2. He may be a mere pledgee without such consent

Insurable interest of mortgagee and mortgagor 3. A rider making the policy payable to the mortgagor as his
interest may appear
• Separable insurable interests – mortgagor and mortgagee has insurable 4. A standard mortgage clause containing a collateral
interest in the property mortgaged and this interest is separate and independent contract
distinct from each other. In case, both of them take out separate 5. Mortgagee acquired equitable lien when mortgagor
insurance policies, the same is not open to objection that there is procured a policy to insure mortgagee’s benefit.
double insurance
• Extent of insurable interest of mortgagor – the mortgagor has insurable Insurance by mortgage for benefit of mortgage, or policy assigned to
interest as owner to the extent of its value even though the mortgage mortgagee
debt equals such value. • The following are the legal effects:
• Extent of insurable interest of mortgagee – the mortgagee has insurable 1. Contract is deemed to be upon the interest of the mortgagor;
interest in the property to the extent of the debt secured, since the hence he does not cease to be a party to the contract
property relied upon as security thereof, and in insuring, he is not 2. Any act of the mortgagor prior to the loss, which would
insuring the property itself but his interest or lien thereon. otherwise avoid the insurance, affects the mortgagee even if
• Extent of amount of recovery – The mortgagor cannot recover upon the the property is in the hands of the mortgagee
insurance beyond the full amount of his loss and the mortgagee, in 3. Any act under the contract which may be performed by the
excess of the credit at the time of the loss nor the value of the property mortgagor may also be performed by the mortgagee
mortgaged. 4. In case of loss, mortgagee is entitled to the proceeds to the
extent of the credit
Insurable by mortgagee on his own interest 5. Upon recovery, mortgagee to the extent of the credit, the debt
• He is entitled to the proceeds of the policy in case of loss before is extinguished.
payment of the mortgage.
• In subrogation of insurer to right of mortgagee, the mortgagee is not Note: The rule of subrogation by the insurer to the right of the
allowed to retain his claim against the mortgagor but it passes by mortgagee is not applicable.
subrogation to the insurer to the extent of the insurance money paid
• The payment of the insurance to the mortgagee by reason of the loss Effect of standard and open clauses in fire insurance policy
does not relieve the mortgagor from his principal obligation but only
changes in the creditor. • If a fire insurance policy contains a standard or union mortgage
clause, the acts of the mortgagor do not affect the mortgagee. The
Insurable by mortgagor of his own interest purpose of the clause is to make a separate and distinct contract of
• Mortgagor may insure for his own benefit. In case of loss, the proceeds insurance on the interest of the mortgagee.
does not inure to the benefit of the mortgagee • An open or loss-payable mortgage clause merely provides for the
• Mortgagor may take out an insurance for the benefit of the mortgagee. payment of loss, if any, to the mortgagee as his interest may appear and
• Mortgagee may be made the beneficial payee in several ways: under it, the acts of the mortgagor affect the mortgagee.
1. He may become an assignee of the policy with the • If the policy is obtained by the mortgagor with a loss-payable clause in
consent of the insurer favor of the mortgagee, the mortgagee is only a beneficiary under the

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contract and recognized as such by the insurer but not made a party to • As to fire policy. —a fire policy before it becomes a fixed liability is not
the contract itself. Hence, any act of the mortgagor which defeats his subject to assignment, being strictly a personal contract, in the absence
right will also defeat the right of the mortgagee. of provision in the contract or subsequent consent of the insurer.
o The insurer is naturally concerned about the moral character
Right of mortgagee under mortgagor’s policy. of the insured and should not be compelled to become an
insurer to an assignee to whom he would have declined to
• Before loss. — Before a loss occurs, the mortgagee is a conditional issue a policy and who could materially alter the risks
appointee of the mortgagor entitled to receive so much of any sum that assumed by the insurer without his consent.
may become due under the policy as does not exceed his interest as • As to marine policy. — It is generally recognized, however, that a policy
mortgagee. Such right becomes absolute upon the occurrence of the of marine insurance is assignable even without the consent of the
loss. insurer unless required by the terms of the policy. The policy is not
• After loss. — If the loss happens when the credit is not due, the assignable without the consent of the insurer
mortgagee is entitled to receive the money to apply to the • As to casualty policy. — The insurer's consent is also required. Thus,
extinguishment of the debt as fast as it becomes due. theft and burglary insurance and motor vehicle insurance involve
o On the other hand, if the loss happens after the credit has matured, the obvious moral hazards; hence, such policies are not freely assignable
mortgagee may apply the proceeds to the extent of his credit. without the insurer's consent.
• As to life policy. — With respect to life insurance, the policy may freely
Effect of insurance by mortgagee on behalf of mortgagor. be assigned before or after the loss occurs, to any person whether he has
an insurable interest or not.
o Upon the destruction of the property, the mortgagee is entitled to o However, an assignment of a life policy to a person without an
receive payment from the insured but such payment discharges the insurable interest, which the insured makes in bad faith and
debt if equal to it, and if greater than the debt, the mortgagee holds the under such circumstances as where there was a preconceived
excess as trustee for the mortgagor. agreement that the policy was to be assigned for the purpose
o If there is a stipulation that the insurer shall be subrogated to the rights of accomplishing an illegal purpose, that is, permitting the
of the mortgagee, the payment of the policy will not discharge the debt assignee of the policy to wager on the length of life of the
even though the mortgagee may have procured the policy by insured, will not be upheld.
arrangement with the mortgagor. • Note: A distinction must be made between the assignment or transfer (a)
of the policy itself which transfers the rights to the contract to another
SEC. 9. If an insurer assents to the transfer of an insurance from a mortgagor insured, (b) of the proceeds of the policy after a loss has happened,
to a mortgagee, and, at the time of his assent, imposes further obligations on which involves a money claim under, or a right of action on, the policy
the assignee, making a new contract with him, the acts of the mortgagor cannot (see Sec. 83.), and (c) of the subject matter of the insurance, which has
affect the rights of said assignee. the effect of suspending the insurance until the same person becomes
the owner of both the policy and the thing insured.
Assignment or transfer of insurance policy
• The assignee, unless he makes a new contract with the insurer, acquires
no greater right under the insurance than the assignor had, subject to
insurer's defenses.

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Right of mortgagor to assign insurance policy to mortgagee

• Section 9 only gives the effect if the insurer agrees to the transfer of the
policy and, at the time of his assent, imposes new obligations on the
assignee.

Effect of new contract between insurer and mortgagee-assignee

• The assignment of a fire insurance policy by the mortgagor to the
mortgagee with the consent of the insurer does not convert the contract
into one of indemnity to the mortgagee.
o The assignment operates merely as an equitable transfer of the SEC. 10. (H-ESPI-LO-Ve)
policy so as to enable the mortgagee to recover the amount due in - Every person has an insurable interest in life and health:
case of loss subject to the conditions of the policy. o However, (e) Of Himself, of his spouse and of his children;
where a new and distinct consideration passes from the mortgagee (f) Of any person on whom he depends wholly or in part for Education or
to the insurer, a new contract is created between them. A novation Support, or in whom he has a Pecuniary Interest;
of the original contract takes place. Hence, the acts of the (g) Of any person under a Legal Obligation to him for the payment of
mortgagor cannot affect the rights of the mortgagee, the assignee. money, or respecting property or services, of which death or illness
might delay or prevent the performance; and
TITLE 3 (h) Of any person upon whose life any estate or interest Vested in him
INSURABLE INTEREST depends.

Insurable interest in general

SEC. 10. Every person has an insurable interest in life and health:
(a) Of himself, of his spouse and of his children; • In essence, it is that interest which the law requires the owner of an
(b) Of any person on whom he depends wholly or in part for education or insurance policy to have in the person or thing insured.
support, or in whom he has a pecuniary interest;
(c) Of any person under a legal obligation to him for the payment of money, (1) Pecuniary in nature – In general, a person is deemed to have an
or respecting property or services, of which death or illness might delay insurable interest in the subject matter insured where he has no relation
or prevent the performance; and or connection with or concern in it that he will derive pecuniary or
(d) Of any person upon whose life any estate or interest vested in him financial benefit or advantage from its preservation and will suffer
depends. pecuniary loss or damage from its destruction, termination, or injury by
the happening of the event insured against.

(2) Exception – To have an insurable interest in the life of a person, the

expectation of benefit from the continued life of that person need not
necessarily be of a pecuniary nature.

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Necessity of insurable interest provide the insured with the means of making a net profit from the
• The existence of insurable interest is a primary concern in determining the happening of the event insured against.
liability of an insurer under a policy of insurance. Insurable interest may
be in life and health (Sec.10), or in property (Secs.13,14). Two general classes of life policies
(1) Insurance upon one’s life – In one class are those taken out by the
(1) Legal right to insure – The existence of insurable interest gives a insured upon his own life (Sec.10[a]) for the benefit of himself, or of
person the legal right to insure the subject of the policy of insurance. In his estate, in case it matures only at his death, or for the benefit of a
the absence of such interest, the person insuring in effect would be third person who may be designated as beneficiary. An application for
gambling, which is prohibited by law (RPC, Art.195). It is a insurance one one’s own life does not usually present an insurable
fundamental postulate of all insurance that it must not be a mere bet interest question.
upon a future event.
(2) Insurance upon life of another – When one applies for insurance on
(2) Validity of the contract – The rule is that an insurable interest is the life of another for the former’s benefit, he must have an insurable
necessary to the validity of an insurance contract whatever the subject interest in the life of that person.
matter of the policy, whether upon property or life. A policy issued to a
person without interest in the subject matter insured is a mere wagering Insurable interest in one’s own life
policy or contract and is void for illegality (Secs.18,25). • Every person has an unlimited insurable interest in his own life whether
the insurance is for the benefit of himself or another; and it is not at all
Exception: The insurable interest requirement is held not to apply to necessary that the beneficiary designated in the policy should have any
industrial life insurance (Secs. 235-237). interest in the life of the insured.

Requirement, a matter of public policy (1) Insurance taken out by insured on his life for the benefit of another –
(1) As a deterrence to the insured – the requirement of an insurable The presence of insurable interest is really required only as evidence of
interest to support a contract of insurance is based upon considerations the good faith of the parties. Consequently, the mere fact that a man on
of public policy which render wager policies invalid. It is demoralizing his own motion insures his life for the benefit either of himself or of
in that: another is sufficient evidence of good faith to validate the contract.
a. It allows the insured to have an interest in the destruction of
the subject matter rather than in its preservation. (2) When the insurance regarded a wagering policy – An exception to the
b. It affords a temptation or an inducement to the insured, having general rule exists in cases in which the court finds that a wagering
nothing to lose and everything to gain, to bring to pass the policy has been taken out by the insured on his life at the behest of a
event upon the happening of which the insurance becomes third person who is named as beneficiary.
payable.
Evidence of a wagering policy (Secs.18,25) is usually found in such
(2) As a measure of limit of recovery – If and to the extent that any facts as:
particular insurance contract is a contract to pay indemnity, the (a) That the original proposal to take out insurance was that of the
insurable interest of the insured will be the measure of the upper limit beneficiary;
of his provable loss under the contract. The insurance should not (b) That premiums are paid by the beneficiary; and

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(c) That the beneficiary has no interest, economic or emotional, in party as beneficiary, both the owner and beneficiary must have an
the continued life of the insured. insurable interest in the life of the cestui qui vie. If the insurable
interest requirement is satisfied (Sec.19), a life policy is assignable
On finding that such a policy is primarily a wager, the court will regardless of whether the assignee has an insurable interest in the life
generally void the policy entirely. In any case, there is no question that of the cestui qui vie (Sec.184).
under our law, a person has an insurable interest in his own life. But if Under our law, in order that one may have an insurable interest in the
the policy is applied for and owned by someone other than the insured, life of another, it must be one of those mentioned ([a], [b], [c], [d]) in
the applicant-owner must have an insurable interest in the life of the Sec.10, i.e. the interest is pecuniary or founded upon the close
insured. relationship between the parties. Hence, the mere fact that two (2)
persons are engaged to be married does not give one an insurable
Similarity between a life insurance policy and a civil donation interest in the life of the other.
• A donation is an act of liberality whereby a person disposes
gratuitously a thing or right in favor of another who accepts it Ex. X takes an insurance on his own life and names his friend Y as
(Art.725, Civil Code). beneficiary, and another insurance on Y’s life with himself (X) as
• In essence, a life insurance policy is no different from a civil donation beneficiary.
insofar as the beneficiary is concerned. Both are founded upon the
same consideration: liberality. A beneficiary is like a done, because The first insurance is valid because the beneficiary (Y) need not have
from the premiums of the policy which the insured pays out of an insurable interest in the life of the insured. The second insurance is
liberality, the beneficiary will receive the proceeds or profits of said void because X has no insurable interest on the life of Y.
insurance. As a consequence, the proscription in Article 739 of the
Civil Code should equally operate in life insurance contracts. Insurable interest in life of person upon whom one depends for education or
• A life insurance policy taken by a spouse on his (her) life in favor of support or in whom he has a pecuniary interest
the other takes effect after the death of the insured. (1) When mere blood relationship sufficient – Mere relationship of brother
or sister, father or child is sufficiently close to give either an insurable
Insurable interest in life of another interest in the life of the other.
(1) Insurance for benefit of insured – A person cannot lawfully procure
insurance for his own benefit on the life of another in whose life he has (2) Persons obliged to support each other – Generally, blood or material
no insurable interest. relationships fit the concept of insurable interest. In any event, the
following have an insurable interest in each other’s life since under
The insurable interest in the life of another must be a pecuniary one Article 195 of the Family Code, they are obliged to support each other:
(related to money) and it exists whenever the relation between the (a) The spouses;
assured and the insured, whether by blood, marriage or commercial (b) Legitimate ascendants and descendants;
intercourse, is such that the assured has a reasonable expectation of (c) Parents and their legitimate children and the legitimate or
deriving benefit from the continuation of the life insured or of illegitimate children of the latter;
suffering detriment or incurring liability through its termination. (d) Parents and their illegitimate children and the legitimate or
illegitimate children of the latter;
(2) Insurance for benefit of a third party – When the owner of the policy (e) Legitimate brothers and sisters, whether of the full or
insures the life of another – the cestui que vie – and designates a third halfblood.

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affect the business operations which can, in turn, cause

Note: Brothers and sisters not legitimately related, whether of financial losses.
the full or half-blood, are likewise bound to support each other (e) In the case of employees, insurable interest is dependent
except only when the need for support of the brother or sister, upon the value of the employee to the business. A business
being of age, is due to a cause imputable to the claimant’s fault usually has an interest in other employees occupying key
or negligence. positions, such as the president, executive officers, and
department heads who are important to the organization
(3) When pecuniary benefit essential – In other cases, mere blood which expects to receive some necessary gain form the
relationship (e.g. lesser degree of kinship, such as uncle or aunt, and continuation of their lives or some financial loss from their
nephew or niece, and cousins) does not create an insurable interest in death. However, valid insurance may be written when the
the life of another. Also, mere relationship by affinity (e.g. son-in-law, employee himself applies for the policy and designates the
brother-in-law, step-children) ordinarily does not constitute an insurable employer as beneficiary.
interest.
Insurable interest of a person in life of another under a legal obligation to
Under our law, there must be an expectation of pecuniary benefit in the former
life of the insured to sustain the insurance, that is, a risk of actual (1) Related by contract or commercial relation – Any person so related to
monetary loss from his death. If the party who takes out the insurance another, either by contract or commercial relation, that a right
is dependent on the insured for support and care, it is strong evidence possessed by him will be extinguished or impaired by the death or
of insurable interest even in the absence of close blood relationship. illness of the other may lawfully procure insurance on the other’s life.
Hence, “love and affection,” “gratitude,” or “friendship,” by itself is Thus, the employer may insure the life of the employee and vice versa:
not efficient. The expectation, however, need not have legal basis (a) A corporation, the life of its manager; (b)
whatever; it is sufficient that it be actual. Thus: A partner, the life of his co-partner;
(a) The assumption of parental relations when a man sends a girl (c) A partnership, the life of each partner;
to school and pays her expenses is sufficient to give her an (d) A surety, the life of his principal although the
insurable interest in his life. principal has no insurable interest in the life of his
(b) Upon like principle, a woman who takes a girl from an surety.
orphan asylum and gives her a home under circumstances (2) Risk that performance of obligation might be delayed or prevented –
calculated to raise a reasonable expectation of help and care In all the instances mentioned, it must appear that the death or illness of
from the girl during the declining years of the benefactress, the insured person who is under a legal obligation, might delay or
has an insurable interest in the girl’s life, although she is not prevent its performance (Sec.10[c]).
formally appointed her guardian.
(c) It is generally held that a corporation has an insurable While a partner has an insurable interest in the life of a co-partner who
interest in the life of an officer on whose services the is indebted to him for his proportion of the capital or against whose
corporation depends for its prosperity, and whose death will skill the said partner has advanced money, a partner has no insurable
be the cause of a substantial pecuniary loss to it. interest in the life of the other if both have no capital invested and
(d) A person may take out a policy on the life of his business neither is indebted to the other.
partner on the theory that the latter’s death may adversely

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Insurable interest of creditor in life of his debtor Insurable interest in life of person upon which an estate or interest depends
(1) Extent of interest – The creditor has unquestionably an insurable • Section 10(d) simply means that one may insure the life of a person
interest in the life of his debtor under Sec.10(c). Thus, a creditor may where the continuation of the estate or interest vested in him who takes
insure his debtor’s life for the purpose of protecting his debt but only the insurance depends upon the life insured.
to the extent of the amount of the debt and the cost of carrying the
insurance on the debtor’s life. Ex. Suppose A receives as legacy, the usufruct of a house. The
ownership of which is vested in B. It is provided in the legacy that
The amount of the policy must not be so disproportionate to the amount should B die first, both the usufruct and the ownership of the property
of the debts and liens thereon plus the cost of the insurance as to justify will pass to C.
the conclusion that the policy is merely a wagering or speculative one.
For instance, a policy on the life of another for P300,000 to cover a In this case, A has an insurable interest in the life of B for A will suffer
debt of P50,000 is a mere wagering policy, and is void. pecuniary loss by B’s death.

(2) Right of debtor in insurance taken by creditor – A creditor who Consent of person whose life is insured
insures the life of his debtor does not act as the agent of the latter (1) Essential to validity of policy – A leading authority has said that all
(Sec.53), cases to the contrary notwithstanding. The contract is one contracts (without the consent of the insured) are contrary to public
purely between the insurer and the insuring creditor inasmuch as by policy, and void. His very consent is strong evidence of the goo faith of
law, the creditor is given an insurable interest on the life of his debtor the person procuring the insurance, and thus affords a needed guaranty
(Sec.10[c];8). In other words, the insurance does not inure to the to society.
benefit of the debtor unless the contrary is expressly stipulated.
(2) Not essential to validity of policy – It seems, however, that under our
(3) Extent of the amount that may be recovered by insuring creditor – law (Sec.10), the consent of the person insured is not essential to the
The insuring creditor could only recover such amounts as remain validity of the policy. So long as it could be proved that the assured has
unpaid at the time of the death of the debtor. If the whole debt has a legal insurable interest at the inception of the policy, the insurance is
already been paid, then recovery on the policy is no longer permissible. valid even without such consent.

(4) Where insurance taken by debtor for the benefit of creditor – Where SEC. 11. The insured shall have the right to change the beneficiary he designated
a debtor in good faith insures his life for the benefit of the creditor, full in the policy, unless he has expressly waived this right in said policy.
payment of the debt does not invalidate the policy; in such case, the Notwithstanding the foregoing, in the event the insured does not change the
proceeds should go to the estate of the debtor. beneficiary during his lifetime, the designation shall be deemed irrevocable.

(5) Where debt becomes legally unenforceable – Under our law, it is clear
that a creditor may not insure the life of his debtor, unless the latter has Beneficiary defined
a legal obligation to him for the payment of money (Sec.10[c]). (1) In insurance cases, the term beneficiary is ordinarily used in referring
to the person who is named or designated in a contract of life, health,
or accident insurance as the one who is to receive the benefits which

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become payable, according to the terms of the contract, upon the death
of the insured. (2) Article 739 of the Civil Code “The following
(2) Only those persons, whether natural or juridical, who, though not donations shall be void:
parties to the contract, are mentioned in it as the intended recipients of 1. Those made between person who were guilty of adultery or
the proceeds or benefits of the insurance if the insured risk occurs. concubinage at the time of the donation;
(3) A broader use of the term would include also those who, upon a proper 2. Those made between persons found guilty of the same criminal
basis of insurable interest, secure insurance for their own benefit upon offense, in consideration thereof;
the lives of others. 3. Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
Kinds of beneficiary
• The beneficiary in a life insurance policy may be either the insured In the case referred to in No.1, the action for declaration of nullity may
himself or his personal representatives or someone other than the be brought by the spouse of the donor or done; and the guilt of the
insured. Where the beneficiary designated is a person other than the donor and done may be proved by preponderance of evidence in the
insured, such person may occupy one of three (3) relations to the same action.
insured:
Note: In order that Article 739 may apply, it is not required that there be
(1) Insured himself – Such a person is thus an immediate party to the a previous conviction for adultery or concubinage.
contract and is ordinarily called the assured, as where the creditor
insures the life of his debtor; (3) The proscription in Article 739 of the Civil Code
(2) Third person who paid a consideration – The insured may have taken should equally operate in life insurance contracts.
the policy for the benefit of a creditor or to secure some other
obligation; or Ex. M, a married man, takes out an insurance policy on his life and
(3) Third person through mere bounty of insured – The beneficiary designate B, with whom M is cohabiting at the time, as beneficiary.
designated may be the estate of the insured or a third party.
The designation of B is void since M and B are guilty of concubinage
Note: In (2) and (3), the beneficiary is not a party to the contract. In all at the time it is made. Hence, in case M dies, his legal heirs and not B
three cases, the proceeds of the life insurance policy become the exclusive will be entitled to the insurance proceeds. But the designation is valid
property of the beneficiary upon the death of the insured. Therefore, where if both M and B are single.
the insured, before dying, was judicially declared insolvent, the proceeds
should be paid to the beneficiary and not to the assignee in insolvency. The insured in a life insurance may designate any person as beneficiary
unless disqualified to be so under the provisions of the Civil Code. In
Limitations in the appointment of beneficiary (1) Article 2012 of the Civil the absence of any beneficiary named in the life insurance policy or
Code where the designated beneficiary is disqualified, the proceeds of the
“Any person who is forbidden from receiving any donation under insurance will go to the estate of the deceased insured.
Article 739 cannot be named beneficiary of a life insurance policy by
the person who cannot make any donation to him, according to said Right of insured to change beneficiary in life insurance
article.” (1) General rule – Whether or not the policy reserves to the insured the
right to change beneficiary, he has the power to so change the

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beneficiary without the consent of the latter who acquires no vested Where beneficiary dies before insured
right but only an expectancy of receiving the proceeds under the (1) View that beneficiary’s representative is entitled to insurance
insurance. It follows that the insured retains the right to receive the cash proceeds – Where the right to change the designated beneficiary is
value of the policy, to take out loans against the cash value, to assign the expressly waived in the policy, that if the beneficiary dies before the
policy, or to surrender it without the consent of the beneficiary. insured, his rights so vested should pass to his representatives, and on
the death of the insured, the proceeds of the policy should belong, not
(2) Effect of death of insured – The right must be exercised specifically in to estate of the insured, but to the representatives of the beneficiary.
the manner provided in the policy or contract. But the insured’s power
to extinguish the beneficiary’s interest ceases at his death, and cannot be This result, however logical in form, does great violence to the purpose
exercised by his personal representatives or assignees. The beneficiary’s of the insured, who must have intended, in the ordinary case, to
designation shall be deemed irrevocable. provide a fund for the support after his death, of those whom he was
accustomed to support during his lifetime.
(3) Where right to change is waived – If the right to change the beneficiary
is expressly waived in the policy, then the insured has no power to make (2) View that estate of the insured is entitled to insurance proceeds –
such change without the consent of the beneficiary. Where the beneficiary predeceases the insured, the estate of the insured
(a) The beneficiary has a property right in the policy of which should be entitled to the proceeds of the insurance especially where the
could not be deprived without his consent. designation is subject to the express condition to pay the beneficiary if
(b) Neither can a new beneficiary be added to the irrevocably he survives the insured or “if surviving.”
designated beneficiary for this would in effect reduce the
latter’s vested rights. However, most but not all, court hold that the mere fact that such a
(c) The insured does not even retain the power to destroy the policy is made payable to the designated beneficiary, “his executors,
contract by refusing to pay premiums for the beneficiary can administrators, or assigns,” is sufficient to negative the implied
protect his interest by paying the premiums for the reason that condition that death of the beneficiary before maturity of the policy
the fulfillment of an obligation may be made by a third person terminated all his rights to it.
even against the will of the debtor and if he has an interest in
the fulfillment of the obligation, even against the will of the Designation of beneficiary
creditor (Art.1236, Civil Code) • The beneficiary designated may be the insured or his estate, a specifically
designated person or person, or a class or classes of persons.
Measurement of vested interest of beneficiary in policy
• The vested right or interest of the beneficiary in a policy should be (1) Children – The term is broad enough to include the following:
measured on its full face value and not on its cash surrender value for in a. An adopted child; or
case of death of the insured, said beneficiary is paid on the basis of its b. An adult child not forming part of the household of the
face value. In case the insured should discontinue paying premiums, insured; or
the beneficiary may continue paying it and is entitled to automatic c. After-born children even of a marriage subsequently
extended term or paid up insurance options, etc., and that said vested contracted
right under the policy cannot be divisible at any given time. In an insurance policy, the word ordinarily means a descendant of the
first degree and is never intended to include grandchildren.

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Where the children are named individually, other children cannot share (6) Estate or legal representatives of deceased – The words when used in
in the insurance proceeds unless the insured subsequently amend his designating beneficiaries, are to be construed in their strict technical
designation to include them. sense and the courts will ordinarily assume that they are used to mean
executors or administrators, unless it appears that the insured intended
(2) Husband; wife or widow – The word “wife” is generally regarded as to use these expressions in the sense of heirs or next of kin.
descriptio personae, and the fact that one who otherwise answer the
description does not have the legal status of the wife of the insured does If no beneficiary is designated in the life insurance policy, the
not prevent her from taking as beneficiary, as when she is designated by proceeds thereof will go to his legal heirs in accordance with law.
name, although the words “his wife” are added. However, if the However, it has been held that where two (2) women innocently and
beneficiary is not named but is designated merely by a status, such as in good faith contracted marriage with the same man, the insured, and
the “husband,” “wife,” or “widow” of the insured, the legal husband or the latter did not designate any beneficiary who would receive the
wife as ascertained at the death of the insured, is entitled to the benefits proceeds of his life insurance, each family shall be entitled to one half
of such insurance. the insurance benefits.

Note: Under our law, any person who is forbidden from receiving any
donation, such as a common-law spouse, cannot be named beneficiary SEC. 12. The interest of a beneficiary in a life insurance policy shall be forfeited
of a life insurance policy by the person who cannot make any donation when the beneficiary is the principal, accomplice, or accessory willfully bringing
to him. 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
(3) Husband and children; wife and children – A policy payable to the beneficiaries, the proceeds shall be paid in accordance with the policy contract if
wife of the insured and “their children” includes children by another the policy contract is silent, the proceeds shall be paid to the estate of the
wife, although the prevailing view state that the beneficiaries are limited insured.
to children common to both. But if the designation is made to the
insured’s “wife and children” or “my wife and children,” the insurance
is deemed for the benefit of all children of the insured, whether by the Forfeiture of the interest of the beneficiary in a life insurance policy
named wife or those of another. • The word “interest” here means the right of the beneficiary to receive the
proceeds of the life insurance policy. It does not mean insurable interest
(4) Family – The term is sometimes used to indicate the recipient of the since the beneficiary need not have an insurable interest in the life of the
proceeds of an insurance policy. In deciding whether a particular person insured.
claiming a share of the fund is of the family of the insured, the court
will ascertain whether that person was so regarded by the insured. (1) Other qualified beneficiaries of the insured – In case the interest of a
beneficiary in a life insurance policy is forfeited, the nearest relatives,
(5) Heirs or legal heirs – These terms will be construed as indicating that not otherwise disqualified, of the insured, shall, inherit the proceeds
class of persons who would take the property of the insured in case he paid to the estate of the insured in accordance with the rules on intestate
died intestate. Therefore, it is generally held that the widow of the succession provided in the Civil Code.
deceased is entitled to take under a policy payable to his “heirs” or
“legal heirs” as well as the children of the deceased.

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(2) Nearest relatives of the insured – In the order of enumeration, they are • The mere fact that the insured died while he was committing a felony
the following: or violating a law would not warrant denial of liability. To avoid
a. Legitimate children; liability, the insurer must further establish that the commission of the
b. Father and mother, if living; felony or the violation of law was the cause or had a casual
c. Grandfather and grandmother, or ascendants nearest in degree, connection with the accident resulting in the death of the insured.
if living;
d. Illegitimate children;
e. Surviving spouse; and SEC. 13. Every interest in property, whether real or personal, or any relation
f. Collateral relatives, to wit: thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured, is an insurable interest.
i. Brothers and sisters of the full blood;
ii. Brothers and sisters of the half-blood;
iii. Nephews and nieces Insurable interest in property
g. In default of the above, the State shall be entitled to receive (1) In general – The interest may be in the property itself (e.g. ownership),
the insurance proceeds (Art.1011). or any relation thereto (e.g. interest of a trustee or a commission
agent), or liability in respect thereof (e.g. interest of a carrier or
Liability of insurer on death of insured depository of goods).
• Insurer is not liable in case the insured commits suicide intentionally, (2) Occurrence of loss may be uncertain – It is not necessary that the
with whatever motive, when in sound mind. interest is such that the event insured against would necessarily subject
• But death which is purely accidental, even though due to the insured’s the insured to loss. It is sufficient that it might do so, and that
own carelessness or negligence is not excluded from the coverage by pecuniary injury would be the natural consequence.
the words “self-destruction,” “death by his own hand,” and the like (3) Title or right to possession not essential – It has been held that where
which are generally considered synonymous with suicide. the mortgagor had sold the mortgaged premises to a vendee who
• Where the insured is insane, it is the settled rule that, in the absence of assumed the payment of the mortgage debt, and had thus parted with
express conditions to the contrary, the suicide of an insured while all his interest in the property, the mortgagor yet had an insurable
insane does not discharge the insurer from his liability on his contract. interest in the property because of his personal liability for the debt and
• The beneficiary is not deprived of the insurance proceeds in every his right be subrogated to the mortgage security in case he should be
case where the beneficiary killed the insured. Thus, where the death compelled to make payment. Similarly, a vendor or seller retains an
of the insured was caused under circumstances as do not amount to a insurable interest so long as he has nay interest therein as when he has
felony as when the killing was accidental or in self-defense, or where a vendor’s lien i.e. he retains ownership merely to insure that the buyer
the beneficiary was insane, the rights of the beneficiary under the will pay the price (Art.1504[1], Civil Code).
policy are not affected. (4) Legal expectation of loss or benefit – Insurable interest in property is
• It has also been held that even though the beneficiary was guilty of a not necessarily an interest in property in the sense of title, but a
felony, the beneficiary’s interest in the insurance is not forfeited concern in the preservation of the property and such a relation to or
where the insured’s death was not intentionally caused. connection with it as will necessarily entail a pecuniary loss in case of
• The insurer may properly insert in the contract an express provision its injury or destruction. As a general rule, however, the expectation of
excepting from coverage death caused by the beneficiary, whether benefit to be derived from the continued existence of property must
lawfully or unlawfully. have a basis of legal right, although the person insured has no title,

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either legal or equitable, to the property insured. The rule is different in iii.Mortgagor, after foreclosure but before expiration
life insurance. of the period within which redemption is allowed
(5) Mere factual expectation of loss – Such expectation not arising from iv. Beneficiary under a deed of trust
any legal right or duty in connection with the property, does not v. Creditors under a deed of assignment
constitute an insurable interest. vi. A judgment debtor whose property has been seized
under execution until the right to redeem or the
Note: This type of interest called “factual expectation,” though usually right to have the sale set aside has been lost
insufficient in strict indemnity insurance, will suffice in life insurance. vii. Builders and constructors in the buildings pending
the payment of the construction price
SEC. 14. An insurable interest in property may consist in:
(a) An existing interest; A purchaser of an option to buy real estate has an insurable
(b) An inchoate interest founded on an existing interest; or interest to the extent of the advance payment for the option.
(c) An expectancy, coupled with an existing interest in that out of which the Thus, more than one insurable interest may exist over the
expectancy arises. same property.

Insurable interest in property in particular cases (2) An inchoate interest – Must be founded on an existing interest
(1) An existing interest – May be a legal title or equitable title a. A stockholder has in inchoate interest in the property of the
a. Insurable interest arising from legal title: corporation, which is founded on an existing interest arising
i. Trustee, as in the case of the seller of property not yet from his ownership of shares in the corporation. His insurable
interest is limited to the extent of the value of his interest or to
delivered
his share in the distribution of the corporate assets upon
ii. Mortgagor of the property mortgaged
dissolution.
iii. Lessor of the property leased iv. Lessee and
sublessee may also unsure the property leased or
Note: A stockholder has neither legal nor equitable title to
subleased
assets of the corporation.
v. Assignee of property for the benefit of creditors
b. A partner has an insurable interest in the firm property which
Where legal title is held in a representative capacity, as by an
will support a separate policy for his benefit.
executor, administrator, trustee, or receiver, the representative
has sufficient insurable interest for the purpose of taking out
(3) An expectancy – Must be coupled with an existing interest in that out of
insurance on the property under his control, but any proceeds
which such expectancy arises.
from such insurance are to be held for the benefit of those for
a. A farmer may insure future crops if they are to be grown on
whose benefit the representative is acting.
land owned by him at the time of the issuance of the policy, or
although the crops are to be raised by him on the land of
b. Insurable interest arising from equitable title:
another, provided the crops will belong to him when
i. Purchaser of property before delivery, or before he
produced.
has performed the conditions of sale
ii. Mortgagee of property mortgaged;

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b. An owner of a business can insure against a contingency, (3) Property of debtor – Nor can a general or unsecured creditor insure
which may cause loss of profits resulting form the cessation specific property of his debtor who is alive, even though destruction of
or interruption of his business. such property would render worthless any judgment he might obtain.
a. But an unsecured creditor may insure the property of a
SEC. 15. A carrier or depository of any kind has an insurable interest in a thing deceased debtor since all personal liability ceases with the
held by him as such, to the extent of his liability but not to exceed the value death of the debtor. The proceedings to subject the estate to
thereof. the payment of the debt of the deceased debtor are in rem.
b. An unsecured creditor who obtains judgment in his favor
becomes a judgment in his favor becomes a judgment
Insurable interest of carrier or depository creditor and has been held to have insurable interest in the
• It has been held that a policy effected by a bailee and covering by its debtor’s property as he has a right to levy on such property as
terms his own property and property held in trust, inures, in the event may be necessary to satisfy the judgment. However, to
of loss, equally and proportionately to the benefit of all the owners of recover under the insurance, he must show that the debtor has
the property insured. no other property out which the judgment may be satisfied.
• Under the General Bonded Warehouse Act, a warehouseman, c. An unsecured creditor has an insurable interest in the life of
licensed to engage in the business of receiving commodities for his debtor to the extent of the amount of the debt (Sec.10[c]).
storage, is required to insure the same against fire.
(4) Property of testator still alive – One named as beneficiary in a will has
no insurable interest in a property designated before the testator’s
SEC. 16. A mere contingent or expectant interest in any thing, not founded on an
death, however reasonable his expectation of benefit to be derived
actual right to the thing, nor upon any valid contract for it, is not insurable.
from the continued existence of the property. His expectation has no
Mere contingent or expectant interest not insurable legal basis since the will has no legal effect before the death of the
testator.
• A mere hope or expectation of benefit which may be frustrated by the
happening of some event uncoupled with any present legal right will
not support a contract of insurance. Thus: SEC. 17. The measure of an insurable interest in property is the extent to which
(1) Property of father/son/spouse – A father cannot insure his son’s the insured might be damnified by loss or injury thereof.
property nor can a son insure the property that he expects to inherit
from his father as his interest is merely an expectancy of inheriting. The measure of insurable interest in property
Similarly, a spouse has no insurable interest in the property of the
• A contract of insurance is one of indemnity. Any contract of property
other.
insurance that gives to the insured more than indemnity against his
actual loss that may be suffered by the happening of the event insured
(2) Life of parents/children/spouses – By statutory provisions, parents against in the nature of a wagering policy contrary to public policy and
and children, and spouses can insure the life of each other as they are void.
under mutual obligation to support each other under the law. • Thus, a mortgagor has an insurable interest equal to the value of the
mortgaged property and a mortgagee, only to the extent of the credit
secured by the mortgage (Sec.8).

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• The purpose of property insurance is to indemnify a person against issued for P15,000 was for the building in which the goods were stored
actual loss, and not to wager on the happening of the event. which building the insured never owned or had any insurable interest, it
was held in case of loss of the goods, the insured can recover.
Ex. X insured his property valued at P100,000, for P120,000. X suffered a
total loss. The amount of the insurance (P120,000) is not the amount Note: The above is a case where the insured’s lack of insurable interest
payable in the event of a loss but rather represents the maximum limit of in property insured is not sufficient to avoid an insurance.
recovery of the insured (Sec.60).
Measure of indemnity in insurance contracts
(1) Contracts of marine or fire insurance – They are contracts of
SEC. 18. No contract or policy of insurance on property shall be enforceable
indemnity, the amount of insurance being limited by the value of the
except for the benefit of some person having an insurable interest in the property
interest to be protected. The real purpose of the contract is, in case of
insured.
loss, to place the insured in the same situation in which he was before
the loss subject to the terms and conditions of the policy. The amount
Effect of absence of insurable interest in property insured of indemnity may be determined after the loss (Sec.60) or is previously
• An insurance taken out by a person on property in which he has no fixed in the contract (Sec.61).
insurable interest is void.
• It has been held that fire insurance taken on property belonging to Pursuant to the general rule regarding indemnity, the amount of
another is void, although the insurer had full knowledge of the fact of insurance fixed in the policy of a marine or fire insurance is not the
ownership and even if the insured subsequently acquired insurable exact measure of indemnity to which the insured is entitled, but the
interest (Sec.19). maximum indemnity which he might obtain. The insured cannot
• In a case, the contract of lease provides that any fire insurance policy recover in excess of his actual loss.
obtained by the lessee over his merchandise inside the leased premises a. In valued policies (Sec.61), however, the valuation of the
without the consent of the lessor is deemed assigned or transferred to thing insured is conclusive between the parties thereto in the
the lessor. It held that such automatic assignment is void for being adjustment of loss, if the insured has some interest at risk, and
contrary to law and public policy, hence, the insurer cannot be there is no fraud on his part (Secs.158,173), although it might
compelled to pay the proceeds of the policy to the lessor who has no be proved that the actual value of the thing is less.
interest in the property insured. b. Similarly, the principle of indemnity cannot be invoked by the
• Where the insurance is invalidated on the ground that no insurable insurer who agreed to repair or replace the thing insured with
interest exists, the premium is ordinarily returned to the insured unless a new one even though the cost of the undertaking may
he is in pari delicto with the insurer. exceed the original amount of the insurance (Sec.174).
• In life insurance taken by a person on his own life, it is not necessary
for the beneficiary to have an insurable interest in the life insured (2) Liability insurance contracts – They are considered contracts of
(Secs.10,19,184). indemnity against liability and not against loss (Sec.176). The insurer’s
• Doctrine of waiver or estoppel cannot be invoked since the public has promise is to pay the proceeds of the policy on behalf of the insured to
an interest in the matter independent of the consent or concurrence of a third person to whom the insured is liable. If the insured suffers no
the parties. loss because his liability to the third person, for some reason, cannot be
• But where the real intention of the insured was to insure his goods for enforced, the insurer has no obligation to pay the proceeds (Sec.176).
P15,000 but through the error or mistake of the insurer, the policy

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(3) Life insurance contracts – They are not contracts of indemnity. The b. On the date of the of the occurrence of the risk insured against
amount fixed payable at the death of the insured is not considered as Otherwise, the policy is void. Rationale: If the insured has no
the true value of the thing insured because the life of a person is more interest in the property at the time of the injury, loss, or
priceless, but is simply the measure of indemnity which the insurer is destruction, he has suffered no loss.
bound himself to pay the insured.
Thus, if a fire occurs after the sale or alienation of the property,
The amount for which a person is insured is governed by the amount former owner cannot recover on the policy.
of premium that he contracted to pay. Life insurance is more of an
investment than indemnification protection against loss. (2) When insurance takes effect – In life insurance (Secs.179-180), the
insurable interest requirement is satisfied if the interest exists at the
(4) Personal accident insurance contracts – They are not contracts of time the policy is procured or took effect, even if it has ceased to exist
indemnity. Life and limb are not susceptible to exact or uniform at the time of the insured’s death.
valuation.
Thus, if a debtor whose life was insured by a creditor (Sec.10[c])
(5) Health insurance contracts – Health insurance contracts that provide a subsequently pays the debt, the insurance remains in force, provided
specific periodic income to disabled persons are not contracts of the former creditor continues to pay the premiums.
indemnity. But those that cover medical expenses are contracts of
indemnity. In these contracts, only medical expenses incurred by the Under the law, health, accident, and disability insurance is deemed
insured are paid. included in the terms “life” and “non-life” insurance (Sec.193, par.8).
(6) Health care agreement – Such an agreement with a health
maintenance organization (HMO) is in the nature of a non-life (3) When liability attaches – In liability insurance, questions of insurable
insurance which is primarily a contract of indemnity. Payment should interest are not particularly important. It necessarily exists when the
be made to the party who incurred the expenses. liability of the insured to a third party attaches (Sec.172).

SEC. 19. An interest in property insured must exist when the insurance takes (4) Need not exist during intervening period – The purpose is to prevent
effect, and when the loss occurs, but need not exist in the meantime; and interest the issue of wagering policies. It is well-settled that in the absence of
in the life or health of a person insured must exist when the insurance takes special provision in the policy to the contrary, the alienation of insured
effects, but need not exist thereafter or when the loss occurs. property will not defeat a recovery if the insured has subsequently
reacquired the property and possesses an insurable interest at time of
loss.
Time when insurable interest must exist
• The general stated in this section is applicable only to insurance on Ex.1. D insured his house on May 15, 2014 for a period of one year. C is an
property and not to life insurance except that on the life of the debtor. unsecured creditor of D for the amount of P100,000 and he insured D’s
house on Sept.12, 2014 for the same amount. The house burned
(1) When insurance takes effect and loss occurs – Insurable interest in accidentally on Sept.15, 2014.
property must exist at two (2) distinct times:
a. On the date of execution of the contract of insurance C has no right to collect the proceeds of the insurance because being a
general creditor without any lien on D’s house, C had no insurable interest

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when he insured it (Sec.16). But suppose D sold the house to C before

Sept.15, 2014 when the loss occurred. Not even then. C did not have
insurable interest in the house when the insurance took effect (Sec.19).

Ex.2. D issued a promissory note in favor of C to secure a loan of P100,000

payable within one (1) year. To add further protection, C insured D’s life
for the amount of the note for the year it was to run. D died on the 10 th
month after paying the note at the end of the 9th month.

C cannot recover on the insurance. The principle of indemnity applies in

this as in property insurance. Neither can the estate of D recover since the
contract was purely between C and the insurer, unless the contrary is
stipulated.

But if the insurance was taken by D on his life for the benefit of C, the
payment of the debt did not invalidate the policy which would remain in
force for the full year for which the premium was paid. In this case, the
proceeds of the insurance would be paid to the estate of D.

Ex.3. X corporation insures the life of Y, its President, for P100,000 with X
as beneficiary. Thereafter, Y sells his stockholdings and severs connections
with X which continues to pay the annual premiums. During the currency
of the policy, Y dies. X is entitled to recover the insurance proceeds
(Sec.19).

Existence of insurable interest when risk attaches

• It is sufficient that insurable interest exists at the time the risk attaches.

Ex. D, contemplating of buying B’s house, may take out a policy of

insurance under which the risk is to attach upon D’s purchase and

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acquisition of inters tint he house. In this case, the requirement of good faith Effect, in general, of change of interest and a real interest at the time of the loss is
sufficient to satisfy the demand • The mere transfer of a thing insured does not transfer the policy but of public policy. suspends it until the same person becomes the
owner of both the policy and the thing insured (Sec.58).
Insurable interest in life and property • Thus, a purchaser of insured property who does not take the precaution to obtain a transfer of the policy of insurance, cannot,
in case of loss, recover upon such contract. The purchaser cannot recover because he has
LIFE PROPERTY no contract with the insurer. The seller (insured) cannot also recover because having sold
As to extent of (Save in life insurance Limited to the actual value the property, he has no more insurable interest in the same.
insurable interest effected by creditor on life of the interest thereon
of debtor) is unlimited (Sec.17) Note: The contract is not rendered void but is merely suspended by a change of
interest.
As to time when Save above exception, it is It is necessary that the
insurable interest enough that insurable insurable interest “must
must exist interest exists at the time exist when the insurance
the policy takes effect and takes effect and when the
need not exist at the time loss occurs, but need not
of the loss (Sec.181) exist in the meantime
(Sec.19)

As to expectation The expectation of benefit An expectation of benefit, to

of benefit to be to be derived from the be derived from the
derived continued existence of life continued existence of the
need not have any legal property insured must have
basis; a reasonable a basis of legal right, which
probability is sufficient i.e. even if remote, constitutes
one who is dependent on
an insurable interest e.g. an
another for support has an
expectant heir cannot insure
insurable interest in the
latter’s life, even though the property he expects to
there is no legal right to inherit. But a stockholder
support. may insure corporation
property though he has no
legal interest in such.
Change of interest covered by law
• The change of interest in Secs.21-24 means absolute transfer of the property insured such as the conveyance of the property by means of an absolute deed of sale.
• The interest in the property insured does not pass by mere execution of a pledge or mortgage. Thus, it has been held that in a chattel mortgage, there is no
alienation within the meaning of the insurance law until the mortgagee acquires a right to take possession of the property by default of the mortgagor under the
terms of the mortgage.

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Exceptions to general rule

• The rule that change of interest suspends the insurance is subject to exceptions:
(1) In life, health, and accident insurance (Sec.20);
(2) A change of interest in the thing insured after the occurrence of an injury which results in a loss (Sec.21);
(3) A change of interest in one or more of several things, separately insured by one policy (Sec.22);
(4) A change of interest by will or succession on the death of the insured (Sec.23);
SEC. 20. Except in cases specified in the next four sections, and in the cases of (5) A transfer of interest by one of several partners, joint owners, or owners in common,
life, accident, and health insurance, a change of interest in any part of a thing who are jointly insured, to the others (Sec.24);
insured unaccompanied by a corresponding change of interest in the insurance, (6) When a policy is so framed that it will inure to the benefit of whomsoever,
suspends the insurance to an equivalent extent, until the interest in the thing and during the continuance of the risk, may become
the owner of the interest insured (Sec.57); and
the interest in the insurance are vested in the same person.
Change of interest in one or more of several distinct things, separately
(7) When there is an express prohibition against alienation in the policy, in insured by one policy
case of alienation, the contract of insurance is not merely suspended but • It is important to make a distinction between a divisible contract and an
is avoided (Art.1306, Civil Code; Sec.24). indivisible contract (Art. 1420, Civil Code).

SEC. 21. A change of interest in a thing insured, after the occurrence of an injury Divisible Indivisible
which results in a loss, does not affect the right of the insured to indemnity for the Effect dependent • The cause or • The cause or consideration
loss. on divisibility of consideration is made is entire and single;
contract up of several parts; • Things are insured under
Change of interest in a thing insured after loss • Things are “one policy” for a gross
“separately insured in sum and for an entire
• After a loss has happened, the liability of the insurer becomes fixed. The
one policy” and the premium so that a change
insured has a right to assign his claim against the insurer as freely as
violation of a condition of interest in one or more
any other money claim. This right is absolute and cannot be delimited which avoids the
by agreement (See.83,173).The insured has also the absolute right to of the things will also
policy with respect to
transfer the thing insured after the occurrence of the loss. Such change avoid the insurance as to
one or more of the
of interest does not affect his right to indemnity for the loss (Sec.21). the others.
things does not affect
the others.
Note: Sec.20 refers to change of interest in the thing insured before loss
has occurred.
• Whether a contract is entire or severable is a question of intention to be
determined by the language employed by the parties.
SEC. 22. A change of interest in one or more several distinct things, separately
• Where only one premium was paid for the entire shipment of goods
insured by one policy, does not avoid the insurance as to the others.
(which are not separately valued) are loaded on two (2) different vessels
does not make the contract several and divisible as to the items insured.

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• It has been held that where the amount of the insurance agreed upon was his interest to a stranger ends the contract of insurance as to him but
merely apportioned among the various items insured to limit the extent does not affect the insurance as to the others.
of the risk of the insurer as regards each item, the contract of insurance
is still indivisible. Ex. A policy of fire insurance was issued to partnership X under its
firm name. The policy makes no provision for changes in the
personnel of the firm.
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 passes to the person The subsequent withdrawal of a partner or admission of a new partner
taking his interest in the thing insured. will not affect the validity of the policy. Under Sec.26, the insurance
continues despite the changes in the firm’s membership. The policy
was taken in the name of the partnership X which has a juridical
Change of interest by death of insured personality separate and distinct form that of each of its members
• Here, the insurance on property passes automatically, on the death of the (Art.1768,CC)
insured, to the heir, legatee or devisee who acquired interest in the thing
insured. The rights to the succession are transmitted from the moment of
SEC. 25. Every stipulation in a policy of insurance for the payment of loss
the death of the decedent (Art.777, Civil Code).
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
SEC. 24. A transfer of interest by one of several partners, joint owners, or owners executed by way of gaming or wagering, is void.
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. Stipulations prohibited in an insurance policy
(1) Stipulation for the payment of loss whether the person insured has or
Transfer of interest by one of the several partners, etc. jointly insured has not any interest in the subject matter of the insurance – A policy
(1) Effect where transfer is to the others – Will not avoid the insurance. issued to a person without interest in the subject matter of the contract is
The rule is the same even if there is a stipulation that the insurance a mere wager policy or contract and is void.
shall cease upon an alienation of the thing insured.
(2) Reason for the rule – Each partner, etc. is interested in the whole A wager policy is a pretended insurance where the insured has no
property and the hazard is not increased because the purchasing partner interest in the thing insured and can sustain no loss by the happening of
has acquired a greater interest in the property by a transfer of his the misfortunes insured against.
copartners’ share. The transfer does not affect the risk because no new
party is brought into contractual relationship with the insurer. Note: The law, however, makes an exception in the cases mentioned in
(3) Exception to the rule – But a policy will be avoided by a sale of an Sec.181 regarding life insurance.
interest in partnership property by the partner to one of his co-partners,
without the consent of the insurer and before the loss occurs, where the (2) Stipulation that the policy shall be received as proof of insurable
policy contains the condition “that in case of any sale, transfer, or interest – Whether or not insurable interest exists does not depend upon
change of title of any property insured by this company, or of any the contract of insurance or the stipulations therein. The insurer can
undivided interest therein, such insurance will be void and cease.” always show lack of insurable interest after the issuance of a policy of
(4) Effect where transfer is to strangers – It is alienation or transfer to a insurance (Sec.83).
stranger or third person that will avoid the policy. A sale by a partner of

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The defense of absence of insurable interest is available only to the

insurer being the only party to the insurance contract who has a • Nature of an insurance contract is that it is done in good faith
legitimate interest in raising the defense. It may be raised by and for the (Rodriguez)
benefit of the insurer alone. • Fact concealed – MUST be MATERIAL to the risk

Wagering or gaming policies void Devices for ascertaining and controlling risk and loss
• A contract of insurance is void for illegality unless the insured has an 1. Concealment and representations – enabling the insurer to secure the
insurable interest in the subject matter insured. same information with respect to the risk that was possessed by the
• All insurance must not be a mere bet upon a future event. applicant for insurance, so that he might be equally capable of forming a
• Wagers suffer no loss from the occurrence of the contingent event ; on just estimate of its quality
the contrary, they actually profit from it. The insurable interest 2. Warranties and conditions – involve facts the existence of which shows
requirement intends to deter the insured from the temptation to bring the risk to be greater than that intended to be assumed and operates to
about by unnatural means the results of the contingent event. create in the insurer the power to extinguish the legal relations already
created
3. Exceptions – making more definite the coverage indicated by the general
TITLE 4 description of the risk by excluding certain specified tasks that would
CONCEALMENT otherwise have been included under the general language describing the
risk assumed
SEC 26. 4. Executory warranties and conditions – undertaking that certain
A neglect to communicate that which a party knows and ought to conditions should or should not exist in the future; enable the insurer to
communicate, is called a CONCEALMENT. rescind the contract in case subsequent events increased the risk to such
an extent that he is no longer willing to bear
5. Conditions precedent – ex. Conditions requiring immediate notice;
Notes: action be brought within a limited amount of time
Requisites (KB/NW-FC/NM-AF)
1. Party knows the fact SEC 27.
2. Bound to disclose such fact A concealment whether intentional or unintentional:
3. There is no warranty of the fact concealed - entitles the injured party to rescind a contract of insurance
4. The other party has no means of ascertaining such fact
• Presence of bad faith – not necessary Notes:
• Insurance Contracts are uberrimae fidae (of utmost good faith)
Reason for rule • Duty is on both insured and insurer o Insured: Alone knows the full
Four primary concerns of parties in the contract: circumstances of the subject matter
1. Correct estimation of the risk o Insurer: Dominant bargaining position carries with it stricter
2. Precise limitation of the risk responsibility
3. Control of the risk after assumed • Existence of fraud not required. Bad faith is not required.
4. Determining whether loss occurred and amount of loss • Rescission is OPTIONAL on the part of the injured party

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• Reason for the provision: the party is misled or deceived into accepting • It must be a fact of such nature that had the insurer known of it, it would
the risk not have accepted the risk or would have demanded a higher
• Argente v. West Coast Life premium or different terms
Principal question to determine whether there is concealment o “Was
the insurer misled or deceived into entering a contract obligation or Insurance company does not have an obligation to verify the statements made by
in fixing the premium of insurance by a withholding of material the insured in his application before issuing the policy.
information or facts within the assured’s knowledge or presumed It has a right to rely on the statements of the insured as to material facts.
knowledge?”
o Must be material to the contract “No means of Ascertaining”
• In the Philippines: Applies to all kinds of insurance • If the other party merely neglects to make inquiries – the right to
• information is waived
• In the US: Applies only to marine insurance
When there is a warranty such fact is covered by such warranty – it is
SEC 28. superfluous to require disclosure
Each party to a contract of insurance:
- must communicated to the other – in good faith
- all facts within his knowledge which SEC. 29
• are material to the contract and An intentional and fraudulent omission:
• as to which he makes no warranty, and - on the part of one insured,
• which the other has not the means of ascertaining - to communicate information of matters o
proving or tending to prove the
falsity
entitles the insurer to rescind.
Notes:
Matters must be communicated even in the absence of inquiry:
All facts within the party’s knowledge only when
• Material to the contract
• Other has not the means of ascertaining facts Notes:
• Party with the duty to communicate makes no warranty • Facts of matters covered by the warranty does not have to be disclosed
BUT matters proving or tending to prove the FALSITY of the
warranty must be communicated o There is a difference between
Knowledge:
• Must be proven by the party claiming falsity of warranty and violation of warranty o
• Must be at the time the insurance takes effect • Must be INTENTIONAL and FRAUDULENT for the contract to be
rescinded
Test of Materiality o Ex. Failure to communicate that the ship’s equipment is out of
• If the applicant is aware of the existence of some circumstances which order entitles the insurer to rescind since it tends to prove the
he knows would influence the insurer in acting upon his application, falsity of the warranty that the ship is seaworthy.
good faith requires him to disclose that circumstance, though asked o In marine insurance, the warranty implied is that the ship is

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seaworthy Materiality is to be determined

• NOTE: Omission is on the part of the insured - NOT by the event,
- but solely by the probable and reasonable influence of the facts
SEC 30. - upon the party to whom the communication is due, in forming his estimate
Neither party to a contract of insurance is bound to communicate of the disadvantages of the proposed contract, OR in making his inquiries.
information of the matters following,
EXCEPT in answer to the inquiries of the other Notes:
1. Those which the other knows • Test of materiality o Effect which the knowledge of the fact in question
2. Those which, in the exercise of ordinary care, the other ought to would have on the making of the contract. It is sufficient that it would
know, and of which the former has no reason to suppose him ignorant 3. influence the parties in making the contract
Those of which the other waives communication o Matter must be determined ultimately by the court
4. Those which prove or tend to prove the existence of a risk excluded by a • Effect on insurer: a probable and reasonable influence upon the insurer
warranty, and which are not otherwise material
in assessing the risk involved and in making or omitting further
5. Those which relate to a risk excepted from the policy and which are
inquiries, and cause him to either reject the risk or to accept it only at a
not otherwise material higher premium or on different terms
• It is sufficient that the non-disclosure misled the insurer in forming his
Notes: estimates of the risk or in making inquiries
• Direct questions are considered material therefore the insured is required • In case of avoided insurance, return premiums
to make full and true disclosure of questions asked. • The nature of facts not conveyed to the insurer may be such that failure
• Failure of an apparently complete answer to make full disclosure will of the insured to communicate must have been intentional rather than
avoid the policy inadvertent
• However, an answer incomplete on its face will NOT avoid the policy • Insured cannot be guilty of concealment where the fact concealed is not
in the absence of bad faith material
Ex. When asked whether the property is encumbered and for • If information acquired AFTER contract becomes binding and effective
what amount, answer discloses one mortgage when in fact o No duty to disclose information even if the policy is yet to issue
there are two – avoids the policy o Concealment must take place at the time the contract is entered
o To the same question, merely states that it is encumbered • If information acquired BEFORE contract becomes effective o
without stating amount – issue of policy without further inquiry There is a duty to disclose
is a waiver of the omission to state amount
• No duty to make disclosure:
o Matters known to or right to be known by insurer, of which he
waives disclosure
Notes:
o Risks excepted from policy
• Insured need not disclosed public events such as that a nation is at war
o Nature or amount of insured’s interest need not be disclosed
o Sources of information equally open to insurer who is presumed to
unless in answer to an inquiry
know
• Insurer is also charged with the knowledge of general usages of trade o
SEC 31.
Rules of navigation, kind of seasons, risks connected with navigation

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• Such information are equally presumed to be known by both parties. 1. Sec 51: Policy must specify the interest of the insured in the property only
when he is not the absolute owner
SEC 33. o Example: Trustee, mortgagee or building contractor must
The right to information of material facts may be waived, either: communicate EVEN IF no inquiry is made by the insurer
- By terms of insurance or 2. When the insurer makes inquiry from the insured
- By neglect to make inquiries as to such facts o Where they are
distinctly implied in other facts of which information is communicated SEC 35.
Neither party to a contract of insurance
- is bound to communicate, EVEN upon inquiry,
Notes:
- information of his own judgment upon the matters in question
• Right to info may be waived: o Expressly o Impliedly
• If the applicant has answered the questions in the application, he is
justified in assuming that no further information is desired.
Notes:
• No waiver where the failure to make further inquiries was due to
• Duty to disclose is confined to facts, opinions not covered
concealment of the insured
• Ng Zee v. Asian Crusader Life Assurance Corp.
o Wrong ruling; not applicable as fraud need not be proven o
Whether upon the face of the application, a question appears to
TITLE 5
be not answered at all or to be imperfectly answered and the
insurer issues a policy without any further inquiry, it waives the REPRESENTATION
imperfection of the answer and rendered the omission to
answer more fully immaterial SEC 36. A representation may be oral or written

SEC 32. SEC 34.

Each party to a contract of insurance is bound to know: Information of the nature or amount of the interest of one insured
- all the general causes - Need not be communicated UNLESS in
- which are open to his inquiry, equally with that of the other, and answer to an inquiry,
- which may affect the political or material perils contemplated; and EXCEPT as prescribed by Section 51
- all general usages of trade - 51(e) – must specify the interest in the
property insured if not absolute

owner Notes:
• Representations o Factual statements made by the insured at the
Notes: time of, or prior to, the issuance of the policy to induce the insurer to
GR: Nature or amount of interest need not be communicated enter into the insurance contract
EX: • Misrepresentation (all 3 elements must concur) o A fact which is
untrue o Stated:

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! With knowledge that it is untrue with intent to deceive Active form of deceit Passive form of deceit
OR Because there is an oral or written Because there is neglect or failure
! Stated positively as true without knowing it to be true false statement to induce to disclose a material fact
and which has a tendency to mislead
o Where such fact in either case is material to the risk
• Renders the contract VOIDABLE: o At the option of insurer o No need to distinguish since the rules applicable to both are similar:
Regardless of intent • Both requires the fact to concealed or misrepresented to be material
• Misrepresentation may be viewed as an active form of concealment • Both entitles the injured party to rescind the contract at his option
• It is the duty of the person applying for insurance to give all the • Both may be committed intentionally or unintentionally
information necessary regarding the risk Representation may be performed after the issuance of the policy (Sec. 39)
• Information given (which can be communicated in any manner) forms
the basis of the contract
• Representations are collateral inducements o Made to influence SEC 38.
the insurer to accept the risk o Not part of the contact unless The language of a representation is to be interpreted by the same rules as the
expressly made so language of contracts
• Insurer cannot decline to pay for the loss of a white painted house or
ship because it was described as painted green, although identical in Notes:
description with subject of loss • Constructed liberally in favor of insured
• Once its written in a contract, it becomes a warranty or condition • Representation need ONLY to be substantially true and need not be
literally true and accurate in every aspect
SEC 37. • Warranties must be literally true, otherwise, the contract will fail •
A representation may be made: - Examples:
At the time of, OR o Use of liquor = habitual drinking o Free from illness = true
- Before, issuance of policy despite inflammation of eyes o Illness = serious ailments
• Nature of information asked – such that no human being could, with
safety, undertake to answer correctly and warrant the correctness of his
Notes: answers
Very nature of representation is that it precedes the execution of the contract.

Argente vs. West Coast life Ins., Co. SEC 39.

• Concealment is equivalent to a false representation that such fact does A representation as to the future is to be deemed a promise:
not exist UNLESS it appears that it was merely a statement of belief or expectation.
• Terms have been used interchangeably
Notes:
Misrepresentation Concealment • Kinds of Representation o Oral OR Written o Made
before OR during the issuance of the policy o Affirmative OR
Promissory

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• Affirmative representation o Allegation as to the existence or Notes:

non-existence of a fact when the contract begins • Representation is a mere collateral inducement to a contract – it is not
o Ex. He is in good health part of the contract that is why it cannot qualify its express provisions
• Promissory representation: Any promise to be fulfilled after the •
contract has come into existence or any statement concerning what is to SEC 41.
happen during the existence of the insurance A representation may be altered or withdrawn:
o Promise made in connection but not incorporated in the policy before the insurance is effected,
! Promise made with fraudulent intent will serve to but NOT afterwards
defeat the insurance
o Undertaking by insured inserted in policy but not specifically
made in a warranty is also a promissory representation Notes:
o A promissory representation is substantially a condition • May be done ONLY before the insurance is effected:
or warranty • IF Representation is one of • Since the insurer has not yet been induced
• If done during such time – policy is NOT rescissible anymore
Fact Mere Expression of Opinion
SEC 42.
Must prove to be false and Must prove to be false and A representation must be presumed to refer to the date on which the contract
material material goes in effect.
Need not be in bad faith Must be made in bad faith - Which he has upon the subject, and which he believes to
(intent to deceive presumed) (intention to deceive) be true,
- With the explanation that he does so on the information of
others; OR he may submit the information, in its whole extent, to the
insurer In NEITHER case is he responsible for its truth,
• Deemed to be a mere expression of opinion: Representation as to a
UNLESS it proceeds from an agent of the insured, whose duty it is to give the
future event or condition over which the insured has no control
information.
• If the promise is oral, the insurer may not be allowed to prove it by the
operation of the rule of evidence forbidding the admission of parol
testimony to add prior or contemporaneous terms to a written
Notes:
instrument.
• There is no false representation if it is true at the time the contract goes
• The promise, however, may be proved for a different purpose, that is to
into effect but false at the time it was made
prove that the insured made the promise in bad faith.
• The contract can be rescinded ONLY when it is false at the time when
the contract is effected
SEC 40.
A representation
- Cannot qualify an express provision in a contract of insurance
- BUT it may qualify an implied warranty

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SEC 43. • A representation written in the policy which could be interpreted as a

When a person insured has no personal knowledge of a fact promise will be construed as affirmative representation when possible to
He may nevertheless repeat information save the policy
- Which he has upon the subject, and which he believes to be true,
- With the explanation that he does so on the information of others; SEC 45.
OR he may submit the information, in its whole extent, to the insurer If a representation is false in a material point, whether affirmative or
In NEITHER case is he responsible for its truth, promissory: the injured party is entitled to rescind the contract from the time
UNLESS it proceeds from an agent of the insured, whose duty it is to give the when the representation becomes false.
information. The right to rescind granted by this Code to the insurer is waived: by
the acceptance of premium payments
DESPITE knowledge of the ground for rescission
Notes:
• The insured is given discretion to communicate what he knows of a
matter which he as no personal knowledge o GR: If it turns out to be
FALSE – he is not responsible o EX: He is responsible IF the Notes:
information proceeds from an agent of the insured, whose duty is to give • Fraud not essential for right to rescind
information to his principal • Representation may be intentional or unintentional
• Rule on agency: • Collusion between agent and insured will vitiate the policy
o Knowledge of the agent is knowledge of the principal o Applies
to insured and insurer o Failure to communicate: contract will be avoided
NOTE: If the insured receives information material to the risk, or has
knowledge of a loss, he ought to communicate

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

Notes:
• Unlike warranties, representation are not required to be literally true,
only be substantially true
• Substantial AND material misrepresentation, avoids the contract o EX:
marine insurance – insurer is required to state the exact and whole truth
• The representation is substantially true and valid - EVEN if there are
some discrepancies which are minor or not material to the risk

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SEC 46. IN life insurance,

The materiality of a representation is determined by the same rules as the • The defenses are available ONLY during the first two years of a life insurance policy
materiality of concealment • Incontestable clause requisites:
o It is a life insurance policy
Notes: o Payable on death of insured
• Materiality is a judicial question o In force during the lifetime of the insured for at least 2 years
• Concealment and misrepresentation give right to rescind from its date of issue or of its last reinstatement
• Rules apply both to the insurer and insured (Note: Period may be shortened but cannot be extended)
• See discussion in SEC 31 • When it becomes incontestable insurer cannot claim that policy is:
o Void ab initio (means voidable) due to fraud in inducement;
SEC 47. o Cause of death is an excepted risk
The provisions of this chapter apply as well to a modification of a contract of o Non-payment of premium
insurance as to its original formation o Conditions relating to military or naval service violated
The rules on concealment and misrepresentation applies to both the: o Fraud is of a particularly vicious type (scheme to murder,
Notes: o Original execution of the insurance policy o insured substitutes a person for exam, beneficiary kills
Any alteration or modification of the insured)
• Beneficiary failed to furnish proof of death or to comply with
contract o

o Rescissible due to concealment or misrepresentation

• Defenses not barred by incontestability clause: o Lack of insurable interest any condition imposed by policy after loss happened

o Action not brought within time specified

TITLE 6
THE POLICY
SEC 48.
Whenever a right to rescind a contract of insurance is given to the insurer: SEC. 49. The written instrument in which a contract of insurance is set forth, is
such right must be exercised previous to the commencement of an action on the called a policy of insurance.
contract.
After a policy of LIFE insurance made payable on the death of the insured: SEC. 50. The policy shall be in printed form which may contain blank spaces;
shall have been in force during the lifetime of the insured for a period of 2 years and any work, phrase, clause, mark, sign, symbol, signature, number, or word
from the date of its issue or of its last reinstatement, the insurer cannot prove necessary to complete the contract of insurance shall be written on the blank
that the policy is void ab initio or is rescindable by reason of the fraudulent spaces provided therein.
concealment or misrepresentation of the insured or his agent.
ANGELO ARAYATA | LEO GALANG | CARA HENARES | JAN PADIERNOS | JESSE TANTOCO (BAny LOCKrider, clause, warranty, or endorsement purporting to be part
B 2016) 42 of the contract
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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
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Notes:
In NON-Life Policy
• Insurer may rescind even after the loss and filing of claim provided it is done BEFORE the insured files an action against the insurer
• However, a defense to an action that it was secured through concealment or misrepresentation o is not in a nature of an action to rescind o Hence, not barred by
the provision
bargaining power. However, this classical model is far removed from the reality of the
Unless applied for by the insured or owner, any rider, clause, warranty, or insurance business.
endorsement issued after the original policy shall be countersigned by the insured o Insurance contracts are drafted with the aid of skillful and highly paid legal talent,
or owner, which countersignature shall be taken as his agreement to the contents from which no deviation desired by an applicant will be permitted.
of such rider, clause, warranty, or endorsement. o Except for riders which may later be inserted, the insured sees the contract in its
final form and has had no voice in the selection or arrangement of the words
Notwithstanding the foregoing, the policy may be in electronic form subject to employed therein.
the pertinent provisions of Republic Act No. 8792, otherwise known as the o The insured cannot negotiate the substance of the contract with the insurer. The
“Electronic Commerce Act” and to such rules and regulations as may be provisions are normally
prescribed by the Commissioner. drafted by industry experts.
POLICY OF INSURANCE DEFINED. • Since the parties do not bargain on equal footing, the
weaker party’s participation is reduced to the alternative “to take it or leave
• It is the written document embodying the terms and stipulations of it.” Consequently, where the language use in an insurance contract the contract of insurance
between the insured and the insurer. or application is such as to create ambiguity, the same should be resolved liberally in favor of the insured and strictly
against the Signature of the parties party responsible therefor. The reason being, to afford the greatest protection to the insured.

• General Rule: The policy of insurance is signed only by the o insurer or his duly authorized agent. Forfeitures are not favored and that any construction
• Exception: Where express warranties are contained in a separate o instrument forming part of the which would result in the forfeiture of the policy benefits
policy, the law requires that the instrument must be signed by the insured. for the person claiming thereunder will be avoided if it is
possible to construe the policy in a manner which would
Policy controls terms of insurance contract permit recovery.
o This rule that insurance contracts are to be construed
• The terms of the insurance policy constitute the measure of the insurer’s liberally in favor of the insured and strictly against the
insurer applies to suretyship agreements.
liability. In order to recover, the insured must show Construe contracts as to
preclude the insurer from evading compliance with its just obligations.

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himself within the terms. • If the terms of the contract are clear and unambiguous, there is no • In the absence of fraud or mistake, a policy of insurance,
upon room for construction and such terms cannot be enlarged or acceptance, constitutes a valid and binding contract, superseding diminished by judicial
construction.
all preliminary agreements and negotiations. o The courts will only rule out blind adherence to terms
• The compliance with the insured with the terms of the policy is a where facts and circumstances will show that they are condition precedent to the right of
recovery. basically one-sided.

Policy a contract of “adhesion” Policy different from contract of insurance itself

• The terms are drafted and imposed by the insurer. Ordinarily, • The policy if the formal written instrument evidencing the contract contracts are freely
negotiated by parties with roughly equivalent of insurance. It is the law between them.

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• Insurance policies are generally required in standard forms as o approved by the Insurance The application may be so drafted that the insurance
Commissioner under Sec. 226. became effective on its signing by the prospective insured
• Every contract of insurance in the Philippines must be evidenced by a policy and that policy until the insurance is terminated by rejection of the
must be in the form previously approved by the Insurance Commissioner. application. The insurer may expressly limit the duration
o of the temporary insurance.
Form of contract of insurance The contract, to be binding from the date of the
application, must have been a completed contract, one that
• The contract may be informal, e.g. as a binding slip, or a written application informally leaves nothing to be done, nothing to be completed,
accepted. nothing to be passed upon, or determined, before it shall
take effect.
• The contract may be formal, being the carefully drawn written • The parties may impose additional conditions precedent to the policy in customary use.
validity of the policy as a contract as they see fit.
• The policy must be in written form. Any word, sign, symbol, etc. • Usual conditions found in the application for insurance contract.
necessary to complete the contract of insurance shall be written on o That the contract shall not become binding until the policy the blank spaces provided in
the policy. is delivered and;
• In case of conflict between the written and printed portions of a o The first premium paid.
policy, the written portion prevails. • Until the conditions are fulfilled, the policy is of no binding effect. o Where the premium has been
previously paid, the contract
Perfection of insurance contract is perfected upon approval fo the application although the policy has not yet been issued, unless there is a stipulation
• It must, like other contracts, be assented to by the parties either in to the contrary. person or by their agents. • Binding receipt is sometimes issued and is
intended to be merely a
• Assent is manifested by the meeting of the offer and the acceptance provisional or temporary insurance contract and to be binding only upon the thing and
cause which are to constitute the contract. upon compliance with the said conditions. In life insurance a • If an application has not been either accepted or
rejected, there is binding slip does not insure by itself.
not contract of insurance yet as it is merely an offer or proposal. o Cover notes may be issued to bind the Insurance o Mere signing of an application and
payment of the first temporarily pending the issuance of the policy.
premium do not bind the insurer to issue a policy where there is no evidence of any contract between the parties
Offer and acceptance in insurance contract that such acts should constitute a contract of insurance.
o The contract is not perfected where the applicant for life • Applicant usually makes the offer to the insurer through an insurance dies before its
approval or it does not appear application for insurance that the acceptance of the application ever came to the • In property and liability insurance. – It
is the insured who knowledge of the applicant. technically makes and offer to the insurer. The offer is usually o Acceptance of the contract
unconditional. But it need not accepted by an insurance agent.

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be by formal act. Reception and retention of the policy • In life and health insurance. – The situation depends upon whether without objection
beyond a reasonable time may be the insured pays the premium at the time he applies for the deemed to be an acceptance. Retention by the insurer
of insurance.
the premium for an unreasonable length of time may If he does not pay the premium, his application is constitute an acceptance. considered an
invitation to the insurer to make an offer. o If he pays the premium with his application, his Constructive delivery may be sufficient.
application will be considered an offer. o Where no further conditions are to be fulfilled, a policy of
• Life and health insurance agents do not have the authority to bind insurance may be constructively delivered when it is immediately the insurers they
represent. Instead, they customarily deposited in the mail duly directed to the insured or his issue a binding receipt that makes the coverage effective on
agent.
o Date of the application, or • W/N the policy was delivered depends, not upon its manual o Date of the medical examination. possession by the
insured but rather upon the intention of the
• The binding receipt is a conditional acceptance by the insurer. parties which may be shown by their acts or words.
• If the application constitutes and offer. A policy issued strictly in o But possession by the insured raises the presumption that accordance with the offer is an
acceptance of the offer that perfects the policy was delivered to the insured, while possession the contract. by the insurer is prima facie evidence that
no delivery was
• If the policy does not conform to the application, it is an offer to made.
the insured which he may accept or reject. o If the application contains a provision that the insurance shall not be effective until the delivery of the policy,
Importance of delivery of policy delivery is essential to the consummation of the contract.
• (Illustrative Case): While the application for insurance states that,
• Delivery – act of putting the insurance policy (the physical the policy must be delivered manually to the insured before the document) into the possession of
the insured. insurance becomes effective, the receipt for the premium paid
• The delivery is important as makes the insurance effective upon the issuance of the policy.
o Evidence of the making of a contract and its terms o o In this case the insured paid the premiums before the
Communication of the insurer’s acceptance of policy was manually delivered to him. He was given a
the insured’s offer. receipt for the payment.
Delivery may also affect the term of the coverage. o The statement in the application that the policy must be
o e.g. if a contract of insurance provides that the policy is to delivered manually before the insurance became effective
• expire after 1 year, the delivery becomes the important was modified by the reference to the receipt, which
fact for determining when the policy period ends. receipt made the insurance effective upon the issuance of
However, the delivery of a policy is no a prerequisite to a valid the policy by the home office, subject to the condition that
contract of insurance. The contract may be completed prior to the the insured was in good health when the policy was
• delivery or without delivery depending on the intention of the issued.
parties.

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o The policy may also contain a provision that states that Delivery to insurer’s agent as delivery to insured the insurance is
not effective until the delivery of the
policy. • Is the delivery to the agent of the insurance company delivery to
• Delivery has significance as the “decisive act that ordinarily marks the insured? There has been much conflict of view on the question.
the end of the insurer’s opportunity to decline coverage.” • (NO) Beneficiary cannot recover. – The insurance agent is not his agent.
Modes of delivery of policy • (YES) Beneficiary can recover. – The contract is deemed complete when the policy has been delivered to the insurance agent.
• Actual manual transfer of the policy is not a prerequisite to its The insured having complied with every condition validity unless the parties have so agreed in
clear language. required of him, actual delivery to him is no essential to
give the policy binding effect.
o A contrary rule would be financially unfair to the Attached papers on insurance policy beneficiary where the amount
of the premium is
computed from the date of the application. Because, in • Generally, the rider, slip or other paper becomes a part of a effect, the insured paid a
premium for a period during contract or policy of insurance if properly and sufficiently attached which he did not actually receive any protection. or referred to therein in
a manner as to leave no doubt as to the intention of the parties in such respect.
Effect of delivery of policy • Section 226: no rider shall be attached to, printed, or stamped upon a policy of insurance unless the form of such rider has been
• If there is conditional delivery of an insurance policy, non- approved by the Insurance Commissioner.
performance of the condition precedent prevents the contract from • A rider, clause, warranty or endorsement is not binding on the taking effect. insured
unless the descriptive title or name of the rider, etc. is also • The unconditional delivery of an insurance policy corresponding to mentioned and written on the
blank spaces provided in the the terms of the application ordinarily consummates the contract, policy.
and the policy as delivered becomes the final contract between the parties. o Warranties are inserted or attached to a policy to
• But the insurer cannot be presumed to have extended credit from the eliminate specific potential increases of hazard owing to
mere fact of unconditional delivery of the insurance policy without (1) actions of the insured or (2) condition of the property.
the prepayment of premium. o A clause is an agreement between the insurer and the
o In the absence of any clear agreement granting credit insured on certain matter relating to the liability of the
extension, the policy will lapse if the premium is not paid, insurer in case of loss.
at the time and in the manner specified in the policy. o An endorsement is any provision added to an insurance
contract altering its scope or application. (Like extending
Rider in a contract of insurance the perils covered)
! An endorsement may be in the nature of a permit
• A rider is a small printed or typed stipulation contained on a slip of such as one authorizing the removal of the
paper attached to the policy and forming an integral part of the insured property and providing for coverage in
another location.
policy. • As to the lack of signature

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• Riders constitute additional stipulations between the parties. It is a o General Rule: If the rider is physically attached to a part of the contract to the same
extent and with like effect as if policy of insurance contemporaneously with its execution actually embodied in the policy. and delivered to the insured so
attached, and sufficient
• The necessity for riders is found in the fact that in the conduct of reference is made in the policy, the fact that it is without insurance business, it often
becomes necessary to add a new the signature of the insurer or of the insured will not provision to a policy, or to modify or waive an existing provision,
prevent its inclusion and construction as a part of the or to make any desired change in the policy. insurance contract.
• When there is an inconsistency between a rider and the printed ! Same rule as above if the rider, although issued stipulations in the policy, the rider
prevails, as being a more after the original policy, was applied for by the deliberate expression of the agreement of the contracting parties. insured or owner.
(This principle applies to the interpretation of clauses, warranties, Exception: The countersignature of the insured or owner or indorsements which are
attached to policies to vary their terms) is required to any rider, etc. not applied for by him if

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issued after the delivery of the policy. The • If the terms of an insurance policy are clear, unambiguous, and countersignature shall be taken as his
agreement to the explicit, the insurer has no affirmative duty to explain the policy or contents of the matter so attached. its exclusions to the
insured.
• Caveats to the abovementioned rule
Effect of failure of insured to read policy o The doctrine of “reasonable expectations” can operate to impose de facto a duty on the insurer to explain the
• Majority Rule: The fact that it is customary for insured persons to policy’s coverage to the insured. accept policies without reading is judicially recognized.
Such ! If the insurer had provided an explanation of the acceptance is not negligence per se. Most courts would hold that coverage, the insured’s
expectations of different the insured’s acceptance and retention of the policy unread is not coverage would have been rendered such laches as will defeat his
right to reformation. unreasonable.
o Basis: the insurance contracts are contracts of adhesion. o In the area of Motor Vehicle Insurance courts have
• Minority Rule: Courts apply to insurance contracts the rule of sometimes imposed a duty on the insurer to explain the general contract law that one who
accepts a contractual instrument options to the insured. is conclusively presumed to know and assent to its contents. The o Agents owe their customers a
duty to exercise the skill insured has the duty to read the policy and is bound by his and care that a reasonable agent would exercise in the contract as
written whether he reads it or not. circumstances.
• Exceptions to the Minority Rule: ! This duty encompasses and obligation to explain o Where the insured could not have discovered the to the customer the
kinds of coverage available erroneous statement by such reading. and to help the insured in choosing an o Insured’s failure to read the policy is excused
where he is appropriate coverage. induced by the fraud of the agent of the insurer no to read • Contractual rights of insured after denial of coverage.
his policy. o When the insured disputes a denial of coverage, the duty o Insured’s failure to read the policy should be overlooked of good faith and
fair dealing may impose an obligation if the insured is illiterate or unable to read English. on the insurer to alert the insured to his rights.
o Where the contract is long, complicated and difficult to ! For example, if an insurer denies the claim of understand even if read. insured
under a health policy the insurer must
• Trends in modern cases. – There is an increased willingness to inform the insured of his contractual right to protect insureds and other consumers who would
suffer forfeiture. impartial review and arbitration (if the right o An insured relies not upon the text of the policies but on exists).
the general descriptions of the coverage provided by the o If the insurer had reason to know that the insured was insurer and its agents during the time he is
considering unaware of his rights, the insurer must explain such whether to submit an application. available rights. o Absent a special request, an insured will
not see the text of the policy until after the application has been submitted and the first premium paid.

Insurer’s duty to explain the policy SEC. 51. A policy of insurance must specify:

(a) The parties between whom the contract is made;

is only determinable upon the termination of the contract, a statement of the basis •
and rates upon which the final premium is to be determined; The (b) The amount to be insured except in the cases of open or running policies;
(d) The property or life insured; (c) The premium, or if the insurance is of a character where the exact premium
(e) The interest of the insured in property insured, if he is not the absolute property or life insured constitutes the subject matter of the contract.
owner thereof; and o It has been suggested that the proper phrase to use is “thing insured” because insurable
(f) The risks insured against; and interest may be in liability and not in life or property.
(g) The period during which the insurance is to continue.

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• The requirement of interest insured in property is especially important in fire insurance policies to determine the actual damage
suffered by the insured in case of loss of the property covered by the Contents of the policy policy if he is not the absolute owner thereof.
• The risks insured against must be stated because the insurer’s • Names of the parties are essential. But the mere fact that the name undertaking is to indemnify the
insured for loss, damage or liability of the insured was incorrectly spelled is of no importance whatever, caused or created only by the risks insured against.
provided that the identity of the party can be sufficiently o Almost any contingent or unknown event, whether past or established. future, may be insured
against except those repugnant to • Amount of insurance is necessary in order to easily and exactly public policy, positively prohibited, or those occasioned by
determine the amount of indemnity to be paid the insured in case of the insured’s own fraud or misconduct.
loss or damage especially if it is only partial and not total. The sum • The period during which the insurance is to continue must also be insured is the basis for
calculating the premium. However, it need stated because although the loss suffered by the insured was caused not be stated in the case of open or running
policies. by the risk insured against, the insurer would not be liable unless it o The amount of insurance is the maximum limit on the occurred during such
duration of the insurance. insurer’s liability for loss or damage. o It may be expressed in terms of time, distance or voyage.
o Such amount is not necessarily the value of the property o The period of time during which the insurer assumes the insured nor the extent of
liability of the insurer in the event risk of loss is known as the life of the policy. (12 mos. – of loss unless it is otherwise stipulated. annual policy; <12
mos. – short period policies) o In life, health, accidental, and injury insurance, a fixed sum
is payable. Kinds of insurable risks (3 classifications) o In workmen’s compensation insurance, the amount is not specified in the policy but by
the law imposing liability • Personal Risks. – Those involving the person. This is chiefly upon the employer, which is, by reference, made part of the
concerned with the time of death or disability. This is often divided contract. into life and health risks.
o The amount insured is the amount fixed in the policy • Property Risks. – Those involving loss or damage to property. This o The deductible is
the stated amount to be deducted from arises from the destruction of property.
any loss, which is shouldered by the insured making the o Direct losses by fire, lightning, flood, and other forces of insurer liable only for the excess
of said amount. nature.
• The premium is also essential because it represents the o Indirect losses may occur like loss of profits, rents, or consideration of the contract. This is what the
insured pays the favorable lease.
insurer to assume the risk of or the value of the loss. • Liability Risks. – Those involving the liability for the injury to the o The rates of premium are
developed on the basis of the person or property of others. This is occasioned by the operation of nature and character of the risk assumed and also on the
the law of liability (torts) and may sometimes be called third-party value of the property or other interest insured. risks.
o The liability risk includes both bodily injury and property • Peril. – The contingent or unknown event which may cause a loss.
damage risks. Its existence creates the risk, and its occurrence results in loss. (e.g.
fires, flood, theft, illness, death)
Risk, peril, and hazards distinguished • Hazard. – The condition or factor which may create or increase the
chance of loss from a given peril. Ordinarily there are many separate
• Risk. – The chance of loss. The possibility of the occurrence of a hazards and the sum total of the hazards constitute the perils which
loss, based on known and unknown factors. cause the risk.
o Physical hazards. – The term includes everything relating
to location, structure, occupancy, exposure, and the like.

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(e.g. unsafe brake in a car, weak construction, waste paper • The requirements abovementioned are NOT absolute. Insurability is
piled under a staircase) best described as a relative matter.
o Moral hazards. – The term is applied to those factors that • What is “insurable” varies among insurers, and may change over
have their inception in mental attitudes. Appraisal of moral time and with the use of certain limitations such as the amount of
hazards requires the study of the character of the person coverage, specific contract definitions, deductibles, reinsurance, etc.
under consideration in the light of his reputation. (e.g.
dishonesty, insanity, carelessness, indifference, other SEC. 52. Cover notes may be issued to bind insurance temporarily pending the
psychological causes in nature). issuance of the policy. Within sixty (60) days after issue of a cover note, a policy
• However, in practice these terms are sometimes given more than one shall be issued in lieu thereof, including within its terms the identical insurance
meaning. The word “risk” is also loosely used to refer to the subject bound under the cover note and the premium therefor.
matter insured and also as a synonym of the words “peril” and
“hazard” Cover notes may be extended or renewed beyond such sixty (60) days with the
written approval of the Commissioner if he determines that such extension is not
Requirements for risks to be insurable contrary to and is not for the purpose of violating any provisions of this Code.
The Commissioner may promulgate rules and regulations governing such
• Importance. – The loss to be insured against should be important extensions for the purpose of preventing such violations and may by such rules
enough to warrant the existence of an insurance contract. and regulations dispense with the requirement of written approval by him in the
• Calculability. – The risk must permit a reasonable statistical estimate case of extension in compliance with such rules and regulations.
of the chance of loss and possible variations from the estimate.
• Definiteness of loss. – The losses should be fairly definite as to Preliminary contracts of insurance (2 kinds)
cause, time, place, and amount.
• No catastrophic loss. – When large numbers of people are subject to • Preliminary contract of present insurance. – The insurer insures the
the same kind of losses at the same time, it is an obvious deviation subject matter through a “binding slip” or “cover note” which is to
from the principle that the losses of the few are borne by the be effective until the formal policy is issued or the risk rejected. o
contributions of the many who do not suffer loss. (e.g. it is usual to The “binder” is a temporary contract of insurance and is usually
exclude political and war risks) issued after the applicant pays the first premium. o The cover note
• Accidental nature. – Insurable risks must also normally be contains the most important terms of a preliminary contract of
accidental in nature. Insurance is intended to cover fortuitous or insurance and is intended to give temporary protection pending
unexpected losses. investigation or issue of the formal policy. By its nature, it is subject
o Intentional losses caused by the insured are usually to all the conditions in the policy expected even though that policy
uninsurable because they cannot be reasonably predicted, may never issue. o In life insurance no liability shall attach until the
and payment for them would be against public policy. insurer approves the risk. Thus a binding slip or binding receipt does
not insure by itself.
o Binders or cover notes serve the needs of commercial
Requirements not absolute convenience and yet are more definite and reliable than oral
agreement.

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• Preliminary executory contract of insurance. – Here, the insurer • If the cover note is NOT cancelled, within 60 days after its issuance,
makes a contract to insure the subject matter at some subsequent a policy of insurance shall be issued in lieu thereof. o This policy
time which may be definite or indefinite. In this contract, the right will include an identical insurance bond and premium provided
acquired by the insured is merely to demand the delivery of a policy under the cover note.
in accordance with the terms agreed upon and the obligation • A cover note may be extended or renewed beyond the period of 60
assumed by the insurer is to deliver such policy. days with the written approval of the Insurance Commission. The
written approval may be dispensed with upon the certification of the
Issuance and renewal of cover notes president, vice-president, or general manager of the insurance
company concerned that the risks involved, the values of such risks,
• Cover notes are short-term insurance policies that may be issued to and the premiums therefor have not as yet been determined or
afford immediate provisional protection to the insured until the established and that such extension is not for the purpose of
insurer can inspect or evaluate the risk in question and issue the violating any provisions of the Insurance Code or any rulings,
proper policy or until the risk is declined and notice thereof given. instructions, circulars, orders or decisions of the Insurance
o It is sufficient that the cover note shows, by necessary Commissioner.
implication, an agreement to pay whatever rate may be • Insurance companies may impose on cover notes a deposit premium
fixed. equivalent to at least 25% of the estimated premium coverage but in
o Cover notes do not contain particulars that would serve as no case less than P500.
basis for the computation of the premiums and
consequently, no separate premiums are intended or SEC. 53. The insurance proceeds shall be applied exclusively to the proper
required to be paid therefor. interest of the person in whose name or for whose benefit it is made unless
o A cover note is integrated with the regular policy to be otherwise specified in the policy.
subsequently issued.
Persons entitled to recover on policy

Rules on cover notes • As against the insured. – Third persons have no right to the proceeds
of the policy unless there be some contract of trust, express or
• Insurance companies doing business in the Philippines may issue implied, between the insured and third person.
cover notes to bind insurance temporarily, pending the issuance of o GR: So if persons have different interests in the same property (like
the policy. a mortgagor and mortgagee), an insurance taken by one in his own
• A cover note shall be deemed to be a contract of insurance within right and in his own interest does not in any way inure to the benefit
the meaning of Section 1(1) of the Code. of the other.
• No cover note shall be issued or renewed unless in the form o E: If the bailee secures insurance covering his own goods
previously approved by the Insurance Commission. and goods stored with him, and even if the owner of the
• A cover note shall be valid and binding for a period not exceeding stored goods did not request or know of the insurance and
60 days from the date of its issuance, whether or not the premium did not ratify it before payment of the loss, it has been held
therefor has been paid. The cover not may be cancelled by either that the warehouseman is liable to the owner of such stored
party upon at least 7 days notice to the other party. goods for his share in the insurance money.

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• As against the insurer. – A third person, in the absence of any SEC. 56. When the description of the insured in a policy is so general that it may
provision in the policy, has also no right to the proceeds thereof. comprehend any person or any class of persons, only he who can show that it
Only the insured, if still alive, or the beneficiary, if the insured is was intended to include him, can claim the benefit of the policy.
already deceased, is entitled to claim the insurance proceeds upon
the maturation of the policy. SEC. 57. A policy may be so framed that it will inure to the benefit of
whomsoever, during the continuance of the risk, may become the owner of the
SEC. 54. When an insurance contract is executed with an agent or trustee as the interest insured.
insured, the fact that his principal or beneficiary is the real party in interest may
be indicated by describing the insured as agent or trustee, or by other general Where description of insured general
words in the policy.
• The policy of insurance must specify the parties between whom the
Where insurance made by an agent or trustee contract is made.
o Although it is usual to insert in a policy the name of the
• The agent or trustee when making an insurance contract for or on person, it is NOT essential. He may be described in other
behalf of his principal should indicate that he is merely acting in a ways.
representative capacity by signing as such agent or trustee, or by • In order to claim the benefit of the policy, the person claiming must
other general terms in the policy. show that he is the person named or described or that he belongs to the
• However, it has been held that where the defendant acted as class of persons comprehended in the policy.
plaintiff’s agent for the insurance of goods stored with the • Example: a policy states: “payable to X (insured), mortgagee, as his
defendant, the plaintiff cannot claim the benefit of the agency interest may appear, remainder to whomsoever, during the continuance
without sharing in the expenses. of the risk, may become the owner of the interest insured” o This
insures the entire interest in the property NOT just that of the
SEC. 55. To render an insurance effected by one partner or part-owner, mortgagee.
applicable to the interest of his co-partners or other part-owners, it is necessary o It also shows to whom the money, in case of loss, should be
that the terms of the policy should be such as are applicable to the joint or paid.
common interest.
SEC. 58. The mere transfer of a thing insured does not transfer the policy, but
Where insurance effected by partner or part owner suspends it until the same person becomes the owner of both the policy and the
thing insured.
• GR: Insurable interest in the property of a partnership exists in both
the partnership and the partners. A partner has an insurable interest Effect of transfer of thing insured
in the firm property which will support a policy taken out thereon
for his own benefit. • A contract of insurance is personal. Hence, it does not attach to or run
• E: If a partner who insures partnership property in his own name with the property insured.
limits the contract to his individual share. • A purchaser of property who does not obtain a transfer of the policy
cannot, in case of loss, recover upon such contract, as the transfer of the

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property has the effect of suspending the insurance until the purchaser o There are 2 values, the face value and the value of the thing
becomes the owner of the policy as well as of the property insured. insured. In the absence of fraud or mistake, the agreed value of
o Exceptions: Sections 20-24 and 57. the thing insured will be paid in case of total loss of the
property. o In life insurance, the liability of the insurer is
SEC. 59. A policy is either open, valued, or running. measured by the face value of the policy.
o Example: A policy insuring a ship “valued at P50 million” is a
SEC. 60. An open policy is one in which the value of the thing insured is not valued policy.
agreed upon and the amount of insurance merely represents the insurer’s • A running policy is intended to provide indemnity for property which
maximum liability. The value of such thing insured shall be ascertained at the cannot well be covered by a valued policy because of its frequent
time of the loss. change of location and quantity, or for property of such a nature as not
to admit of a gross valuation.
SEC. 61. A valued policy is one which expresses on its face an agreement that o Here the risk is shifting, fluctuating, or varying, and which
the thing insured shall be valued at a specified sum. covers a class of property rather than any particular thing. o In
some cases, the nature of the property insured or the
SEC. 62. A running policy is one which contemplates successive insurances, and circumstances are such as to make it impossible to designate
which provides that the object of the policy may be from time to time defined, the subject matter of insurance with certainty or particularity.
especially as to the subjects of insurance, by additional statements or These policies are usually known as “floating,” “running,” or
indorsements. “blanket.” o A blanket policy (in the US) is one covering by a
single amount of insurance the same kind of property at different
locations or different kinds of property at a single location. o
Kinds of policies Running policies are in reality open policies.
o When the goods change location frequently so as to make it
• An open or unvalued policy does not predetermine the value of the difficult to insure its whole value, the remedy is a contract that
insured property but establishes a maximum amount the insurer will pay has no fixed face value, the face value adjusting itself to the
in case of a total loss of the property insured. changing value at one specified location or at each of several
o It is one in which a certain agreed sum is written on the face of locations.
the policy NOT as the value of the property insured, but as the
maximum limit of the insurer’s liability. Advantages of a running policy
o The insured must establish the FMV of the property at the time
of the loss. • Neither underinsured or overinsured at any time, the premium being
! If the FMV exceeds the maximum, the insurer will based on the monthly values reported
pay the maximum. • He avoids cancellations that would otherwise be necessary to keep
! If the FMV is less than the maximum, the insurer will insurance adjusted to the value at each locations. (These cancellations
pay the FMV. would also be charged an expensive short rate)
• A valued policy is one where the value of the property is predetermined • To save the trouble of watching his insurance and the danger of being
and the value is the amount to be used in case of a total loss. underinsured in spite of his care.

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• The rate is adjusted to 100% insurance, whereas valued policies • It demands that insurance suits be brought by the insured while the o
requiring insurance only to, say 80%, of the value, give either a small or evidence as to the origin and cause of the loss or destruction has not yet
no reduction for amounts of insurance above this figure. disappeared.
• It is a resolutory cause, the purpose of which is to terminate all
SEC. 63. A condition, stipulation, or agreement, in any policy of insurance, liabilities in case the action is not filed by the insured within the period
limiting the time for commencing an action thereunder to a period of less than o stipulated.
one (1) year from the time when the cause of action accrues, is void.
Where action brought against insurer’s agent
Validity of agreement limiting time for commencing action
“for the recovery of any claim shall be sustainable in any court of law or equity
• General rule. – A clause in the policy providing that an action unless the insured shall have fully complied with all the terms and conditions of
must be brought within a certain period is valid if not contrary the policy nor unless commenced within 12 months next after the happening of
to Section 63. the loss,” it has been held that such stipulation is repugnant to Section 63.
• Period limitation. – If the period fixed is less than 1 year, it is ! In effect, it reduces the period allowed the insured for bringing his
void. action to less than 1 year.
o EXCEPT: In a policy of industrial life ! Obviously, compliance with the terms and conditions would require
insurance, the period cannot be less some time and that will shorten the period for bringing the suit.
than six (6) years after the cause of ! As the stipulation is upon a written contract, the time limit is 10 years
action accrues. from the time the cause of action accrues.
Where the policy provided that if a claim be made and rejected, an “action or
Nature of condition limiting period for filing claim suit” should be commenced within 12 months after such rejection otherwise the
claim would prescribe, it has been held that such a stipulation is valid.
• The condition is an important matter, not merely a procedural Where a fidelity bond requires action to be filed within 1 year from the filing of
requirement, essential to prompt settlement of claims against insurance the claim of loss, such condition contradicts Section 63.
companies. ! A fidelity bond is in the nature of a contract of insurance against loss
from misconduct.
• The bringing of such action against the agent cannot have any legal • Contractual limitations contained in insurance policies are regarded effect except that of
notifying the agent of the claim. with extreme jealousy by courts and will be strictly construed against the insurer.
When cause of action accrues • The new Insurance Code empowers the Insurance Commissioner to adjudicate disputes relating to an insurance company’s liability
to an
• The right of the insured to the payment of his loss accrues from the insured. Hence, a complaint or claim filed by the insured with the happening of the loss.
Office of the Insurance Commissioner would now be considered an • However, the cause of action in an insurance contract does not accrue “action” or “suit” the
filing of which would have the effect of tolling or until the insured’s claim is finally rejected by the insurer. suspending the running of the prescriptive period.
o Before such final rejection, there is no real necessity for bringing suit.
• The period for commencing an action under a policy of insurance under Section SEC. 64. No policy of insurance other than life shall be cancelled by the insurer
63 is to be computed not from the time when the loss actually occurs but from the except upon prior notice thereof to the insured, and no notice of cancellation
time when the insured has a right to bring an action against the insurer. shall be effective unless it is based on the occurrence, after the effective date of
the policy, of one or more of the following:

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• Examples:
o Where the policy provided that no such suit or action thereon
against; • It must state which of the grounds set forth is relied upon. o It is the duty of the
(c) Discovery of fraud or material misrepresentation; insurer upon written request of the named insured to furnish the facts on which the
(d) Discovery of willful or reckless acts or omissions increasing the hazard cancellation is based.
insured against;
(e) Physical changes in the property insured which result in the property Prior notice of cancellation to insured
becoming uninsurable; or
(f) Discovery of other insurance coverage that makes the total insurance in
excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the policy
would violate or would place the insurer in violation of this Code.

SEC. 65. All notice of cancellation mentioned in the preceding section shall be
in writing, mailed or delivered to the named insured at the address shown in the
policy or to his broker provided the broker is authorized in writing by the policy
owner to receive the notice of cancellation on his behalf, and shall state (a)
Which of the grounds set forth in Section 64 is relied upon and (b) That, upon SEC. 66. In case of insurance other than life, unless the insurer at least forty-five
written request of the named insured, the insurer will furnish the facts on which (45) days in advance of the end of the policy period mails or delivers to the
the cancellation is based. 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
• The purpose for notice to the insured is to prevent the cancellation of the elimination of coverages, the named insured shall be entitled to renew the policy
policy without allowing the insured ample opportunity to negotiate for other upon payment of the premium due on the effective date of the renewal. Any
insurance in its stead for his own protection. policy written for a term of less than one (1) year shall be considered as if
• Notice given to insured himself. – The notice should be personal to the written for a term of one year. Any policy written for a term longer than one (1)
insured and not to and/or through any unauthorized person by the policy. year or any policy with no fixed expiration date shall be considered as if written
• Notice delivered personally or sent by mail. – There must be proof that it was for successive policy period or terms of one (1) year.
actually sent by mail.

Cancellation of non-life insurance policy

• Cancellation is broadly regarded as the right to rescind, abandon or cancel a contract of insurance.
• It is the termination by either the insurer or the insured of a policy of

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insurance before its expiration.

• The insured can cancel an insurance contract at his election by Renewal of non-life insurance policy surrendering the policy. Such surrender, however, entitles
him to the
return of the premiums on the customary short-rate basis. • As a new contract or extension of old one. – As a general rule, a renewal of insurance by the
payment of a new premium and the
Form and sufficiency of notice of cancellation by the Insurer issuance of a receipt therefor where there is no provision in the policy for its renewal, is a new
contract on the same terms as the old one.
• There must be prior notice of cancellation to the insured; o But where the renewal is in pursuance of a provision to that
• The notice must be based on the occurrence, after the effective date of effect, it is not a new contract but an extension of the old one.
the policy, of one or more of the grounds mentioned (Sec 64); o In the last analysis, the resolution of the question depends o The premium referred to in Sec
64(a) must be a premium primarily on the intention of the parties as ascertained from the subsequent to the first, because it speaks of non-payment
instrument itself.
“after the effective date of the policy.” • Rights of parties. – In the case of insurance other than life, the name
• It must be in writing, mailed or delivered to the named insured at the insured is given the right to renew upon the same terms and conditions address shown in
the policy, or to his authorized broker; and the original policy upon payment of the premium due on the effective
date of the renewal o Unless the insurer, at least 45 days in advance of
the end of the period, mails or delivers to the insured notice of its Sec. 67. A warranty is either express or implied.
intention not to renew the policy or to condition its renewal upon
reduction of its amount or elimination of some coverages. o If the
insured’s attention was not called as regards a reduction in the Warranty defined
policy coverage, the insurance company is bound by the greater • Warranty is a statement or promise by the insured set forth in the policy
coverage in an earlier policy. itself or incorporated in it by proper reference, the untruth or
• Period for giving notice of non-renewal by insurer. – For the purpose of nonfulfillment of which in any respect and without reference to whether
determining whether or not the insurer has given such notice, a policy the insurer was in fact prejudiced by such untruth or nonfulfillment,
written for a term of less than one (1) year is considered as if written for renders the policy voidable by the insurer
a term of one (1) year while a policy written for a longer term or with • Contract of insurance is rendered voidable by the insurer without
no fixed expiration date is considered as if written for successive policy reference to the materiality of the statement or promise and whether the
period terms of one (1) year. insurer was prejudiced.
• A warranty may also be made by the insurer.
Thus, where the term of the policy is 5 years. Notice must be given at least 45
days before the anniversary date of any given policy year. If the 45-day rule is Kinds of warranties
not complied with, the insurer may not refuse to renew a policy upon payment
of the premium due • Warranties are either affirmative or promissory and either express or
implied.
1. An express warranty is an agreement contained in the policy or clearly
TITLE 7 incorporated therein as part thereof whereby the insured stipulates that
WARRANTIES

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certain facts relating to the risk are or shall be true or certain acts any heart ailment is a warranty that relates to the past, while a
relating to the same subjects have been or shall be done. stipulation that a building is occupied as a dwelling is a warranty that
2. An implied warrranty is a warranty which from the very nature of the relates to the present.
contract or from the general tenor of the words, although no express
warranty is mentioned, is necessarily embodied in the policy as a part
thereof and which binds the insured as though expressed in the Sec. 69. No particular form of words is necessary to create a warranty.
contract. o Implied warranties are generally warranties in marine
insurance although it is infrequently applied in other than marine
insurance. It is only in marine insurance that the law provides for Intention of parties governs
implied warranties. • Whether a statement made by the insured in the policy is a warranty
depends upon the intention of the parties in regard thereto.
3. An affirmative warranty is one which asserts the existence of a fact or • In case of doubt, a statement will be construed as a representation rather
condition at the time it is made. than a warranty especially if such statement is contained in any
o The warranty is continuing if it is one that must be satisfied instrument other than the policy like an application which is, in itself,
during the entire coverage period of the insurance. collateral merely to the contract of insurance.
4. A promissory warranty, not infrequently called "executory" warranty, is • The parties must intend a statement to be a warranty and it must be
one where the insured stipulates that certain facts or conditions included as a part of the contract.
pertaining to the risk shall exist or that certain things with reference • It has been held that gratuitous answers written in the application, that
thereto shall be done or omitted. It is in the nature of a condition is, answers not responsive to any questions asked, are not warranties
subsequent. even though the policy makes the statements in the application
warranties.
Warranty presumed affirmative
• Unless the contrary intention appears, the courts will presume that the Warranties distinguished from representations
warranty is merely affirmative.
• But the answer "Yes" to the question: "Will you keep your book of Warranties Representations
accounts in an iron safe or secure in another building?" was held a Warranties are considered parts While representations are but
promissory warranty breach of which precluded recovery. of the contract collateral inducements to it
Warranties are always written While representations may be
Sec. 68. A warranty may relate to the past, the present, the future, or to any or all on the face of the policy, written in a totally
of these. actually or by reference, disconnected paper or may be
oral
Warranties must be strictly While in representations,
Time to which warranty refers
complied with substantial truth only is
• Although the provision employs the term "warranty" in general, in the required
case of a promissory warranty, the same may refer only to future
The falsity or nonfulfillment of While the falsity of a
events. E.g. A stipulation in the policy that the insured never suffered
a warranty operates as a breach representation renders the
of contract. policy void on the ground of

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fraud Section 70, according to the Supreme Court, could not mean a mere
Warranties are presumed While the insurer must show slip of paper like a rider, but something akin to the policy itself, which
material, the materiality of a in Section 49 is defined as a written instrument in which a contract of
insurance is set forth.
representation in order to
defeat an action on the policy
Sec. 71. A statement in a policy, of a matter relating to the person or thing
insured, or to the risk, as a fact, is an express warranty thereof.
• Before a representaion will be considered a warranty, it must be
expressly included or incorporated by clear reference in the policy and
the contract must clearly show that the parties intended that the rights
Express warranty regarding person, thing or risk
of the insured would depend on the truth or fulfillment of the warranty.
Obviously, where a statement is true, it is ordinarily immaterial • Under Section 71, the statement in the policy relating to the person or
whether it is a warranty or a representation. thing insured, or to the risk, must be as a fact and not as an opinion, or
belief, to constitute an express warranty thereof.
• Warranties are strictly construed. — It ought to be remembered that
not only are warranties strictly construed against the insurer, but they • A statement in the policy which, from the very nature of the subject
should, likewise, by themselves be reasonably interpreted. That matter of the inquiry, can only be an expression of an opinion is not,
reasonableness is to be ascertained in light of the factual conditions strictly speaking, a warranty of its truthfulness. Such a statement, if
prevailing in each case. deemed a warranty at all, is merely a limited warranty as to the honesty
and good faith of the insured — a warranty that the statement is his
honest opinion or judgment.
Sec. 70. Without prejudice to section fifty-one, every express warranty, made at EXAMPLES:
or before the execution of a policy, must be contained in the policy itself, or in o Where the answers in an application are qualified by the words,
another instrument signed by the insured and referred to in the policy as making appended at its foot, "the above is as near correct as I remember,"
a part of it. "to the best of my knowledge and belief," or similar words, the
right to recover on the policy will not be defeated unless some
Express warranty, where contained answers are consciously incorrect. o There is authority to the
effect that a breach of warranty as to the value of the property
• In a policy itself, or another instrument. — In order that a stipulation insured, which involves a matter of mere opinion, where the
may be considered a warranty, it must not only be clearly shown that property does not have a fixed market value, must be substantial
the parties intended it as such but it must also form part of the contract in order to constitute a ground for avoiding the policy.
itself or if contained in another instrument, it must be signed by the
insured and referred to in the policy as making a part of it. Mere
reference alone is not sufficient to give this effect. Sec. 72. A statement in a policy, which imparts that it is intended to do or not
• "Another instrument" construed as excluding a rider. — It was held to do a thing which materially affects the risk, is a warranty that such act or
that a rider attached to a policy is a part of the contract, to the same omission shall take place.
extent and with like effect as if actually embodied therein.
Consequently, it need not be signed by the insured nor referred to in Warranty of facts or omissions which materially affect the risk.
the policy as making a part of it. "Another instrument," as used in

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• Section 72 refers to a promissory warranty. o Failure on the part of the insurer to assert a forfeiture upon
• Breach of promises or agreements as to future acts will not avoid a breach of warranty or condition, after knowledge thereof,
policy unless the promises are material to the risk. amounts to a waiver or estoppel.
• The act or omission is material to the risk if it increases the risk, and o If waiver is to be implied from conduct mainly, said conduct
under the law, only substantial increase of risk works forfeiture of the must be clearly indicative of a clear intent of the insurer to
policy, which is avoided for increase in hazard. waive its right under the policy
• If it is stipulated in a policy requiring owner occupancy that the house • Under estoppel, the insurer is precluded, because of some action or
shall not be occupied by a tenant, there is a warranty that such inaction on its part, from relying on an otherwise valid defense as
condition shall not take place. against the insured who has been induced to enter into the contract by
• A violation of the warrant in this case avoids the policy. the insurer's representation or conduct.
o The ground of estoppel is that it would be against equity and
good conscience for the insurer to assert such defense.
Sec. 73. When, before the time arrives for the performance of a warranty • The insurer, knowing that the insured has violated a clause of the policy
relating to the future, a loss insured against happens, or performance becomes prohibiting the making of other insurances on the same property without
unlawful at the place of the contract, or impossible, the omission to fulfill the giving notice to the insurer, preferred to continue the policy by
warranty does not avoid the policy. demanding and collecting the premium. This act constitutes a waiver of
the right to rescind the insurance contract.
• Premium not paid. — Similarly, an extension of time for the payment of
When breach of warranty does not avoid policy a premium amounts to a waiver of the insurer's right to require payment
of the premium on the due date or within the grace period.
• The general rule is that a violation of a warranty avoids a contract of • Warranty clause violated. — The insurance company was aware, even
insurance which refers to those warranties relating to the future. before the policy was issued, that in the premises insured, the number of
• Three (3) exceptions: fire hydrants was less than that demanded in the warranty. Nevertheless,
1. When loss occurs before time for performance it issued the policy and accepted and retained the corresponding
2. When performance becomes unlawful. premiums.The insurer is barred by waiver or estoppel to claim violation
3. When performance becomes impossible of the said (fire hydrant) warranty.

Where insurer barred by waiver or estoppel

Sec. 74. The violation of a material warranty, or other material provision of a
• Breach of warranty operates to discharge the insurer from liability policy, on the part of either party thereto, entitles the other to rescind.
unless the insurer is liable because of a waiver of the warranty or an
estoppel.
• The omission to fulfill a warranty or condition will likewise be excused Right to rescind for violation of a material warranty
where there is a waiver on the part of the insurer.
o Waiver may be defined as "an intentional relinquishment of a • The violation of the terms of a contract of insurance entitles either party
known right." to terminate the contractual relations.
o It may be express or implied.

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• Thus, the insured can sue for rescission for breach of contract due to • Falsity, not fraud, is the basis of liability on a warranty.
the refusal of the insurer to grant a loan applied for although this was o Without fraud. — Where there is no fraud, the policy is avoided
expressly agreed upon in the policy and he can recover the full amount only from the time of breach and the insured is entitled (a) to the
of the premiums paid by him up to the filing of the action. return of premium paid at a pro rata rate from the time of breach
• Under Section 74, the insurer is entitled to rescind a contract of if it occurs after the inception of the contract; or (b) to all the
insurance for violation of a warranty only if said warranty is material; premiums if it is broken during the inception of the contract. In
otherwise, the breach thereof will not avoid the policy. the latter case, the contract is void ab initio and never becomes
• The right of the insurer to rescind under Section 74 exists even though binding. o With fraud. — Where there is fraud, the policy is
the violation was not the direct cause of the loss. avoided ab initio, and the insured is not entitled to the return of
the premium paid.
Sec. 75. 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 Conditions in insurance policy.
policy. • In law, a condition is an event signifying in its broadest sense either an
occurrence or a non-occurrence that alters the previously existing legal
When violation of immaterial provisions shall avoid policy. relations of the parties to the contract.
• Every warranty is conclusively presumed material. • Insurers may impose whatever conditions they please upon their
• Hence, a warranty as to any fact will preclude any inquiry as to the obligations, as long as they are not contrary to law, morals, good
materiality of that fact. customs, public order, or public policy.
• It need only be false. The law makes a distinction between provisions • Conditions in an insurance policy are of two kinds:
1. A condition precedent calls for the happening of some event
that are material and provisions that are immaterial. The breach of any
provision which is not material will not avoid the policy. or the performance of some act after the terms of the contract
• However, the parties may expressly stipulate that the violation of a have been agreed upon, before the contract shall be binding
particular provision (although immaterial) in the policy shall avoid it. on the parties, such as that the policy shall not take effect until
delivery and payment of the first premium during the good
• By such stipulation, the parties convert an immaterial warranty into a
health of the applicant.
material one
2. A condition subsequent is that which pertains not to the
attachment of the risk and the inception of the policy, but to
Sec. 76. A breach of warranty without fraud, merely exonerates an insurer from the contract of insurance after the risk has attached and during
the time that it occurs, or where it is broken in its inception, prevents the policy the existence thereof such as the condition requiring notice
from attaching to the risk. and proof of loss in case of loss upon an insurance against
fire.

Effect of breach of warranty by insured. Warranties and conditions distinguished

• The breach referred to under Section 76 is one without fraud.
• In order that the insurer may be entitled to rescind a contract of WARRANTY CONDITION
insurance on the ground of a breach of warranty, fraud is not essential, As to effect Warranty does not suspend or Condition precedent is one
(see Sec. 74.) defeat the operation of the without the performance of

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contract, but a breach affords which the contract, although • On liability where there is waiver. — Such a breach of warranty or of
either the remedy expressly in form executed by the condition may be waived without consideration; but the insurer does
provided in the contract or parties and delivered, does not become liable for an excepted loss by waiver unless such waiver
that furnished by law not spring into life amounts to a new contract on valuable consideration.
o The insurer cannot, by a naked waiver, assume a non-existent
In other words, a condition precedent is a limitation to the duty. Nor is the defense that the loss is excepted barred by the
attachment of the risk, whereas a warranty does not incontestable clause.
necessarily have that effect.
TITLE 8
As to Nature • If the insured person contracts and warrants that if the
PREMIUM
representations made by him in his application for
insurance are not true, the policy shall be null and void,
such statements are not conditions precedent but rather Sec. 77.
of the nature of a defeasance. An insurer is entitled to payment of the premium as soon as the
• Also, promissory warranties are usually regarded as thing insured is exposed to the peril insured against.
conditions subsequent to be performed after the policy has
Notwithstanding any agreement to the contrary, NO policy or contract of
become a valid contract, non-performance of which will work
insurance issued by an insurance company is VALID and BINDING
a defeasance.
UNLESS and UNTIL the premium thereof has been PAID,
EXCEPT in the case of a LIFE or INDUSTRIAL LIFE POLICY
Exceptions distinguished from warranties and conditions
- whenever the grace period provision applies or
• In most cases, exceptions are easily distinguished from warranties and
- whenever under the broker and agency agreements with duly licensed
conditions.
intermediaries, a 90-day credit extension is given.
• If the policy contains warranted statement that the insured building is No credit extension to a duly licensed intermediary should exceed 90 days
occupied, we have an undoubted warranty. If the policy declares that from date of issuance of the policy.
"this entire policy shall be void if the insured building be or becomes
vacant or unoccupied and so remained for more than ten days," we have
just as clearly a condition. If the provision is that "this company shall
not be liable for any loss while the insured building is vacant or Sec. 78
unoccupied" we have an unmistakable exception. • Employees of the Republic of the Philippines including its political
. subdivisions and instrumentalities, and GOCCs may pay their
insurance premiums and loan obligations through SALARY
Effects of breach on legal relations of parties
DEDUCTIONS
• Provided; that the treasurer, cashier, paymaster or official of the entity
• On binding force of contract. — The occurrence of a breach or
employing the government employees is authorized notwithstanding
warranty or condition even though such breach be but temporary the provisions of any existing law, rules and regulations to the contrary,
renders the entire contract defeasible or voidable and even though such to MAKE DEDUCTIONS from salary, wage or income of the latter
breach may not have affected the risk or contributed to the loss in any pursuant to an agreement between the insurer and the government
way. employee and to remit such deductions to the insurer concerned, and

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collect such reasonable fees for its services. o Makati Tuscany vs. CA, “when the parties agree to the payment
in installments and partial payment has been made at the time
of loss.”
o Makati Tuscany vs. CA, insurer may grant credit extension
Notes: o Estoppel
• Insurance Premium
o Agreed price for assuming or carrying the risk o Consideration Life Insurance
paid an insurer for undertaking to indemnify the former against a • No duty for the insured to pay any premiums subsequent to the first
specified peril • It is purely UNILATERAL
• Where only one premium is paid for several things, not separately • Cannot compel the insured to pay a premium because insured is not a
valued or separately insured, making only one cause or consideration, debtor of the insurer
the insurance contract is entire or indivisible as to the items insured • It is a contractual obligation
• Assessment – a sum specifically levied by mutual insurance companies
or associations, upon a fixed and definite plan, to pay losses and No excuse for non-payment or premiums
expenses • GR: Non-payment cannot be excused even for a fortuitous event since the
• Payment of premium – one of the essential elements of an insurance payment of a premium is of essence of a contract
contract • EXCEPTIONS
• Non-payment puts an end to the insurance contract and the insurer has 1. Insurer has become insolvent and suspended business
no right to collect the premium 2. Insurer has refused without justification a valid tender of payments
• Distinction between Premium and Assessment o 3. When the failure to pay was due to the wrongful act of the insurer
Premium – levied and paid to meet anticipated or his agent (he is estopped)
losses 4. Insurer waived his right to demand payment
! Not a debt o Assessments – collected • Nonpayment does not merely suspend, it actually puts an end to the
to meet actual losses insurance contract since time of payment is the essence of the contract
! If properly levied, is a debt (unless • There is a valid payment even if check is encashed after the occurrence
expressly agreed) of the risk insured against
• When premium becomes a debt o Fire, casualty and marine insurance – On Partial Payments
as soon as the risk attaches
o Suretyship – as soon as the contract or bond is perfected and Non-payment of Non-payment of subsequent premiums
delivered to the obligor 1st premium
Prevents the Does not affect the validity of the contract
GR: If no premium is paid – contract is NOT effective contract from UNLESS by express stipulation the policy
Exceptions: UCPB General Insurance Inc v. Masagana becoming binding provides that it shall be suspended
• Sec 77: “in case of a life or industrial life policy whenever the grace UNLESS waived
period provision applies” Note:
• Sec 78: “Any acknowledgment in a policy or contract of insurance of BUT nonpayment Individual life insurance, endowment insurance
the receipt of premium is conclusive evidence of its payment”

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of balance of and group life insurance – policyholder is entitled 5. Agreement to grant insured credit extension for payment of premium
premium DOES to a grace period of 30 days to pay the premium and loss occurs before expiration of credit term 6. Estoppel
NOT cancel the after the first
contract Industrial life insurance – 4 weeks grace period - Credit extension = 90 DAYS MAXIMUM
where premiums are payable monthly (30 days/1 - Receipt of the insurer of the premium even after expiration of credit
month) term but before loss, renders the insurance valid and binding
- Once a policy has been issued, the presumption lies that premium has
• GR: Partial payment makes the policy effective during the whole period been duly paid and where nonpayment is attributable to the fault or
of the policy misrepresentation of insurer, insured is entitled to recover in case of loss
• EX: When the parties expressly stipulate that the policy will not be in
force UNTIL the full payment of premium Payment of the premium to the insurance agent or broker is payment to the
• Partial payment – considered as a deposit held in trust by the insurer insurance company
• If there is a partially performed contract (as far as payment of premium) • Misappropriation of the premiums paid by the agent is imputable to the
= insurer and insured’s obligations arise; nonpayment of the balance of insurance company
the premium does not produce the cancellation of the
contract of insurance in the sense that it can no longer be enforced
Sec. 79.
Validity of policy where credit extension granted to insured An acknowledgment in a policy or contract of insurance of the receipt of
• Intention: Put a contract of insurance on a cash-and-carry basis premium
• Premium must be paid in cash as a condition precedent for non-life - Is conclusive evidence of its payment, so far as to make the policy
insurance policy to be valid and binding (except Sec. 79) binding,
• Makati Tuscany o Sec. 77 merely precludes the parties from - Notwithstanding any stipulation therein that it shall not be binding until
stipulating that the policy is valid even if premiums are not paid, but the premium is actually paid.
does not expressly prohibit an agreement granting credit extension, and
must not be contrary to morals, public policy, etc.
• Credit extension agreement is valid Notes:
• Establishes legal fiction of payment
Exceptions to Section 77 When policy is valid and binding notwithstanding • There is a waiver of the condition of prepayment – since it is declared
nonpayment of premium by law to be conclusive evidence of payment
1. Life or industrial policy when the grace period provision applies • Conclusive Presumption extends ONLY to the question of the binding
2. Under the broker or agency agreements, a 90-day extension is given effect of the policy
3. Acknowledgement in a policy or contract of receipt of premium • Insurer may still dispute it but ONLY for the purpose of recovering the
(conclusive evidence of payment) despite fact that it is actually unpaid premium due and unpaid
(Sec. 79) • Acknowledgement is only prima facie evidence of payment of premium
4. Agreement allowing the insured to pay the premium in installments and • Section 79 should be treated as an exception to Section 77
partial payment made at time of loss (Makati Tuscany) • Capital Insurance v. Plastic Era o Considering that the policy is silent
as to the mode of payment, the insurer is deemed to have accepted the

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promissory note in the payment of premium instead of cash. This - or on account of fraud or misrepresentation of the insurer, or of his
rendered the policy immediately operative on the date it was delivered. agent
o The payment of the premium is an independent obligation, the - or on account of facts, the existence of which the insured was ignorant
nonfulfillment of which would entitle the insurer to recover without his fault
• Acceptance of premium (assures continued effectivity) does not - or when by any default of the insured other than actual fraud, the
preclude insurer from interposing any valid defense under the terms of insurer never incurred any liability under the policy
the contract.
Sec. 80. (2) A person insured is not entitled to a return of premium if the policy is
A person insured is entitled to a return of premium, as follows: annulled, rescinded or if a claim is denied by reason of fraud.
(a) To the whole premium if no part of his interest in the thing insured be
exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time AND the Sec. 83.
insured surrenders his policy In case of an over-insurance by several insurers other than life, the insured: -
- to such portion of the premium as corresponds with the is entitled to a ratable return of the premium,
unexpired - proportioned to the amount by which the aggregate sum insured in all
time, at a pro rata rate, the policies exceeds the insurable value of the thing at risk.
- UNLESS a short period rate has been agreed upon and appears
on the Notes:
face of the policy, • If insurance is illegal – premiums cannot be recovered
- after deducting from the whole premium any claim for loss or • But if they are not in pari delicto – innocent party may recover
damage under the policy which has previously accrued
Provided, that no holder of a life insurance policy may avail himself of the 7 Instances when the insured is entitled to recover premiums already made:
privileges of this paragraph without sufficient cause as otherwise provided by
law. 1. When no part of the interest in the thing insured has been exposed to
any of the perils insured against
2. Insurance is for a definite period and the insured surrenders his policy
Sec. 81. before termination
If a peril insured against has existed, and the insurer has been liable for any 3. Contract is voidable and subsequently annulled because of fraud or
period, however short, the insured is not entitled to return of premiums, so misrepresentation of the insurer or agent
far as that particular risk is concerned. 4. Contract is voidable because of existence of facts of which insured was
ignorant without his fault
Sec. 82. 5. Insurer never incurred any liability under the policy because of the
(1) A person insured is entitled to RETURN of the premium when the default of the insured other than actual fraud 6. There is over-insurance
contract is VOIDABLE, and subsequently ANNULLED under the provisions of 7. When rescission is granted due to the insurer’s breach of contract
the
Civil Code In 1, 3, 4 and 5 – the insured is entitled to a return of the ENTIRE premium
paid

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• They have to be actually paid PERIOD % of Annual PERIOD % of Annual

• Payment to insurer’s agent is sufficient Rate Rate
1 or less 20% 7 mos 75%
The assumption of risk is one of the essential elements in the insurance contract
2 mos 30% 8 mos 80%
– if there is no risk – premium may be recovered
When the risk never attached 3 mos 40% 9 mos 85%
1. Application for a policy was not approved, no premium can be 4 mos 50% 10 mos 90%
recovered 5 mos 60% 11 mos 95%
2. Loss occurs before effective date 6 mos 70%
3. Insured and insurer become public enemies because of state of war o
War abrogates insurance contracts between citizens of belligerent states In Life Insurance
• It is an indivisible contract so insured cannot recover
When the risk attaches: • HOWEVER, he is entitled to receive to the “cash surrender value”
• If risk is entire + contract is indivisible: insured is not entitled to AFTER 3 full annual premiums have been paid
return of premium if insurer is exposed to the peril however short
• If contract is divisible (involves several distinct risks) – the premium When contract is voidable
for the risk which does not attach can be claimed Where the contract is voidable on account of fraud or misrepresentation of the
insurer or his agent
Where the insurance is made for a definite period of time and the • If the insured is in fraud – he is NOT entitled to return of the premium
insured surrenders his policy before the expiration of that period
Section 80(b) does NOT apply: When the contract is voidable on account of facts, the existence of which the
1. When the insurance is not for a definite period insured was ignorant of without his fault
2. A short period has been agreed upon
3. The policy is for life insurance policy When by any default of the insured other than actual fraud, the insurer never
Example incurred any liability under the policy
• X insures house for 1 year and pays 16k for a 1-year premium. After Example: insured a vessel but it was destroyed before the actual voyage
lapse of 3 months, X surrenders his policy. He is entitled to collect ¾ of
premium paid or 12k, representing the portion of the premium for When there is over-insurance
unexpired period of policy. In case of an over-insurance by several insurers
In short period rates: • Insurer is not entitled to the portion of the premium corresponding to
• Return of the premium in the proportion stipulated the excess of the insurance over the insurable interest of the insured
• Usually found in a table of figures stipulating the amount for the • Return is only for the proportion which exceeds the insurable interest
premium • Proportioned to the amount by which the aggregate sum insured in all
• The amount recoverable will not be the unexpired period BUT ONLY the policies exceeds the insurable value of the thing at risk
the balance after deducting the percentage to be retained by the insurer • Example (see page 282, De Leon 2014) o House has insurable value
as stated in the table
of 1.5 M o Insurer A – 1.2 M – paid 24k o Insurer B – 600k

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– paid 12k o Total amount of insurance 1.8 M, premiums paid 36k • Agreement hinders free transmission of property
o Proportion of 300k to 1.8 or 1/6 • Transfer involves money claim; it is not the personal contract being
o 1/6 of 24k = 4k; 1/6 of 12k =2k " amounts to be returned assigned but the money claim under or right of action on the policy
• It involves no moral hazard – does not increase the insurer’s risk;
Sec. 84. transfer does not do harm to its duty EX:
An insurer may contract and accept payments, in addition to regular premium, • Sec 173. Which prohibits the transfer of a fire insurance policy to any
for the purpose of paying future premiums on the policy or to increase the person who acts as an agent of the issuing company and declares such
benefits thereof transfer void insofar as it affects the creditors of the insured.

Notes: Sec. 86.

• Insured is duty bound only to make prompt payment of only the Unless otherwise provided by the policy, an insurer is liable for a loss: of
insurance premiums due under the policy 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: which the peril insured against was only a
remote cause.

TITLE 9 Notes:
LOSS • Loss: Injury, damage, or liability sustained by the insured in
consequence of the happening of one or more of the perils against
which the insurer has undertaken to indemnify the insured
Sec. 85.
• Scope of Loss o Reinsurance – reinsurer’s share of the loss on risks
An agreement not to transfer the claim of the insured against the insurer after
ceded either automatically or facutatively
the loss has happened is VOID IF made BEFORE the loss
EXCEPT as otherwise provided in the case of life insurance. o Insurance – bodily, etc.
• Extent of Loss
o Total, partial, constructive total o May be
Notes: satisfied by
• Claim – demand for the satisfaction of a loss suffered within the ! Payment of loss
purview of an insured’s policy ! Reinstatement (repair or restoration)
• Before a loss has occurs, an insurance policy except life, is not ! Replacement
assignable without the consent of the insurer as it is a personal contract o Cannot recover greater than loss
• But after a loss has occurred, insured has the absolute right to transfer or • Cause of Loss o Liable if peril is the proximate cause and immediate
assign his claim against insurer. cause
• Scope of the Peril o Loss of income o Bodily Injury o
GR: A prohibition against the transfer of the claim after the loss is against public Legal liability to 3rd party
policy – therefore VOID • Insurer is Liable: when the peril insured is the proximate cause
• The rights of the parties are already fixed after the loss

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• Insurer is NOT liable: when the peril insured is ONLY a remote cause Where a peril is especially excepted in a contract of insurance: a loss, which
• Burden of proof: Insurer has the burden of proof to show that he is not would not have occurred but for such peril, is thereby excepted although the
liable immediate cause of the loss was a peril which was not excepted.
• Proximate Cause: is that which in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces an injury without
which the injury would not have occurred. o Not equivalent to
immediate cause Notes:
• Hostile Fire – occurs outside the usual confines or begins as a friendly • The insurer is NOT liable if the proximate cause is an excepted peril
fire and becomes hostile by escaping from the place where it ought to be even if the immediate peril is a peril not excepted
to some place where it ought not to be • Immediate Cause: cause or condition nearest to the time and place of
• Friendly Fire – fire burns in a place where it was intended to burn and injury
ought to be • Insurer has the burden of proof that the risk causing the loss is excepted

Sec. 87. Sec. 89.

An insurer is liable where the thing insured is rescued from a peril insured An insurer is not liable:
against that would otherwise have caused a loss, IF, in the course of such - for a loss caused by the willful act or through the connivance of the
rescue, the thing is exposed to a peril not insured against, which insured;
permanently deprives the insured of its possession, in whole or in part; or BUT he is NOT exonerated:
where a loss is caused by efforts to rescue the thing insured from a peril by the negligence of the insured, or of the insurance agents or others
insured against.
Notes:
Notes: • It must be caused by a willful act
• For as long as the loss occurred in the course of rescuing or by efforts to • GR: Negligence of the insured or his agents – insurer is LIABLE
rescue from a peril INSURED against and also PROVIDED that the • EX: If the negligence is so gross – insurer is NOT liable
property would have been lost by the peril insured against – the insurer • The doctrine of contributory negligence does not in any way apply
is liable, example – goods getting stolen while taken out coz there was to rights under a contract of insurance.
fire
• Loss is caused by the efforts to rescue the thing insured from the peril TITLE 10
insured against – example, pouring water to save from fire NOTICE OF LOSS
• Insured is bound to exercise reasonable degree of care in removing the
goods
Sec. 90.
• The necessity of removal is to be determined by the circumstances as
In case of loss upon an insurance against fire, an insurer is exonerated IF
they appear at that time, and not to the result. notice thereof be NOT given to him by
• However, if it did not take place in the “course of the rescue” nor • An insured, or
“caused by efforts to recue” – insurer is not liable • Some person entitled to the benefit of the insurance without
unnecessary delay
Sec. 88.

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For other non-life insurance, the Commissioner may specify the period for the • Construed liberally in favor of the insured
submission of the notice of loss. • Non-life insurance other than fire – the Commissioner may specify
the period for the submission of the notice of loss
Sec. 91. • Parties may stipulate the period but must not be unreasonably short
When a preliminary proof of loss is required by a policy, the insured is NOT • Lindus v. Northern Insurance Co. of New York o Duty of insurer to
BOUND to give such proof as would be necessary in a court of justice show it has been prejudiced because of delay in the giving of notice
BUT it is sufficient for him to give the best evidence which he has in his o Burden of proving actual prejudice is on the insurer o Duty of
power at the time. insurer to show that an additional insured knew of the policy and
it conditions
Notes: ! Or that they made a reasonable effort to apprise the
• Sections 90 and 91 establish conditions concerning matters after the loss insured of the extent and conditions of the policy
that must be fulfilled before the insured becomes entitled to the
benefit of a fire insurance policy o Written notice of loss Proof of Loss
given to the insurer o When required by the policy, preliminary • Proof of loss: more or less formal evidence given the company by the
proof of loss • No justification for submitting false proofs insured or claimant under a policy of the occurrence of the loss, the
• Breach affects a right that has already accrued particulars and the data necessary to enable the company to determine
• Until a loss occurs, through a peril covered by the policy, the insurer’s its liability and amount
liability under his contract is altogether contingent, but with the • Best evidence which he has in his power at the time is sufficient o
happening of the capital fact of loss, his liability arises and becomes Need not be of such persuasiveness of that required in judicial
properly fixed. proceedings
• All conditions/requirements after the loss are merely for EVIDENTIAL • In loss upon an insurance against fire – written notice needed
PURPOSES and DO NOT form part of the conditions of liability. • But GR: NO FORM REQUIRED o Orally o In
o Substantial compliance with the requirements is sufficient (with writing
regard to submission of documents to prove loss Notice of loss – formal notice ! Though more advisable if in writing for the protection
given the insurer by the insured or the claimant under a policy of the occurrence of the insured or his beneficiary
of the loss insured against; necessary for the insurer to be liable to pay the claim. • Notice of loss may be in the form of:
• Purpose: is to enable the insurer to gather information and make the o Informal/Provisional claim
proper investigation while evidence is still fresh and take such action as ! Containing minimum information o Formal
may be necessary to protect his interest from fraud or imposition claim
• No particular form is needed ! Contains the full details of the loss,
• Formal notice of loss is not necessary if the insurer has actual notice o computations of the amounts claimed, and
It is immaterial that if the notice was not given, the company would not supporting evidence
be prejudiced; and if given, the company would not be benefitted. together with request or demand for payment

Time for giving notice of loss • “Without unnecessary delay” – within

reasonable time
• Depends on the circumstances of the case

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Purpose of Proof of Loss • Failure to serve notice or proof may be excused when the
• Notice – give information upon which he may act promptly in circumstances are such as to make strict compliance with the
protecting the property from further loss for which he may be liable or requirement impossible
enable him to take any other steps that his interests may require • Example: Insured died before the fire and the heirs did not know about
• Notice of loss is different from proof of loss. the policy
• Statement of loss is a more formal requirement. • Effect of fraudulent claim of loss
o Give the insurer information by which he may determine the • Mere filing of such claim will exonerate the insurer if such clause is part
extent of his liability of the contract
o Afford him a means of detecting any fraud that may have been • Good faith however will not exonerate the insurer
practiced upon him 3. There must be positive proof of fraud – burden is on the insurer
o Operate as a check upon extravagant claims
• May avail the services of ADJUSTERS in effecting the settlement of Sec. 92.
an insurance claim All defects in a notice of loss, or in preliminary proof thereof,:
which the insured might remedy, and which the insurer omits to specify to
Burden of Proof of Loss in Court Action him, without unnecessary delay, as grounds of objection, are WAIVED.
1. INSURED has the burden of proving that he suffered loss.
a. In life insurance – death of insured must be proven
2. Once insured makes a prima facie case in his favor, burden SHIFTS to When defects in notice or proof deemed waived
the INSURER to controvert insured’s prima facie case • Proofs of loss satisfactory to the insurer are required to be given
a. Insurer who seeks to defeat a claim because of an exception • But the insurer must be satisfied when the insured has done all in his
or limitation in the policy has the burden of establishing that power to furnish the information stipulated for in the policy
the • It is the DUTY of the dissatisfied insurer to indicate the defects in the
loss comes within the purview of the exception or limitation proofs of loss as given, so that the deficiencies may be supplied
o Retention of defective proofs constitute as a waiver of his
• Fire insurance objections
• Plaintiff has to prove the amount of loss by preponderance of • Waiver of the insurer is present in the following instances
evidence a. Writes to the insured that he considers the policy null and void
• Cost price is competent evidence to show value of articles (as the notice of proof or loss would be useless)
destroyed by fire b. Recognizes his liability to pay the claim
• BUT INVENTORY OF GOODS destroyed by fire is a mere claim c. Denies all liability under the policy
for loss and does not constitute evidence of loss. Testimony or d. Joins in the proceedings for determining the amount of loss by
evidence must be given to sustain the correctness of claim. arbitration, making no objections on account of notice and
preliminary proof
Excuses for non-compliance with conditions e. Makes objection on any ground other than a formal defect in
• Timely compliance with conditions is a condition precedent to right to the preliminary proof
recover under the policy

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• A general statement that proofs are defective is not sufficient to impose

on the insured the duty to supply the defects not pointed out. o
Example: If the policy required an affidavit of loss and a defective one TITLE 11
is accepted – there is a waiver on such defect. DOUBLE INSURANCE

Sec. 93. Sec. 95.

Delay in the presentation to an insurer of notice or proof of loss is WAIVED A double insurance exists where:
• If caused by any act of his, or - the SAME person is insured
• If he omits to take objection promptly and specifically upon that - by SEVERAL insurers separately
ground. - in respect to the same subject and interest.

When Delay in Presentation of Notice or Proof Deemed Waived

• Waiver of delay may be made: Notes:
o By an act of the insurer • Additional insurance, other insurance and double insurance are used
o Failure to take objection promptly and specifically upon that interchangeably although there is a technical difference in their
ground meanings
• Other instances mentioned in the book o By accepting payment of • In double insurance, there is co-insurance by two or more insurers,
premium with full knowledge that the premises had been injured or hence it is also known as CO-INSURANCE.
destroyed by fire = estopped from claiming that notice of fire was not Requisites: (All 4 must concur)
given • Same person is insured
o If insured has attempted to comply with stipulations of the • Two or more insurers insuring separately
policy and the company makes objections which necessitate • Identity of subject matter
amended or supplemental prods, the insured will be allowed a • Identity of interest insured
reasonable time after he is appraised within which to remedy • Identity of risk or peril insured against
the defects Examples
• X insures his house against fire with Y company and Z company
Sec. 94. • X mortgages house to B, insurance taken by X and another by B on the
If the policy requires, by way of preliminary proof of loss, the certificate or same house = not double insurance; not same insurable interest
testimony of a person other than the insured, it is sufficient for the insured to • X insures his car against fire with Y and theft with Z = not double
use reasonable diligence to procure it, and in case of the refusal of such insurance; not same risk or peril
person to give it, then to furnish reasonable evidence to the insurer that such
refusal was not induced by any just grounds of disbelief in the facts necessary to • Double insurance is NOT prohibited IF the policy does not contain any
be certified or testified. stipulation against such
• Prohibition for double insurance is valid in order to prevent over
Effect of Failure to secure certificate or testimony of third person insurance and thus avert the perpetration of fraud
• Insured only required to exercise reasonable diligence to procure it • IF the insurer knows the existence of other insurances AND continued
• Liberally construed in favor of the insured the policy – it amounts to a waiver of the annulment for such cause

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• “Additional/Other insurance clause” o Valid in the absence of which the insurers are severally liable under their respective contracts
consent, waiver or estoppel o In order to be violation, the other (b) Where the policy under which the insured claims is a valued policy, any
insurance must be upon the same subject matter, same interest and same sum received by him under any other policy shall be deducted from the
risk value of the policy without regard to the actual value of the subject-matter
• Additional insurance obtained by a third person without the knowledge insured
or consent of the insured = prohibition will NOT affect his rights under (c) Where the policy under which the insured claims is an unvalued policy,
the policy in the absence of ratification any sum received by him under any policy shall be deducted against the
full insurable value, for any sum received by him under any policy
Double insurance is different from over-insurance (d) Where the insured receives any sum in excess of the valuation in the case
• DI and OI may exist at the same time or neither may exist at all 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
• Double insurance is the term used instead of “co-insurance” when the
right of contribution among themselves
sums insured exceed the insurable interest. In such case, there is
(e) Each insurer is bound, as between himself and the other insurers, to
overinsurance by double-insurance
contribute ratably to the loss in proportion to the amount for which he is
liable under his contract
Double Insurance Over Insurance
There may be no over-insurance as Amount of the insurance is beyond the
when the sum total of the amounts of value of the insured’s insurable Notes:
the policies issued does not exceed the interest • Principle of Contribution – requires each insurer to contribute ratably
insurable interest of the insured There There may only be one insurer to the loss or damage considering that the several insurances cover the
involved same subject matter and interest against the same peril
are always several insurers
• Contribution clause – stipulation that the insurance company shall not
be liable to pay or contribute more than its ratable proportion of the loss
Sec. 96. or damage
Where the insured in a policy other than life over-insured by double • They apply only where there is OVER-INSURANCE by DOUBLE-
insurance:
INSURANCE
(a) The insured, unless the policy otherwise provides, may claim payment
o Insurance is contained in several policies the total amount of
from the insurers in such order as he may select, up to the amount for
which is in excess of the insurable interest of the insured
• Paragraph (e) governs the liability of the insurers among themselves
where the total insurance taken exceeds the loss. If the loss is greater
than the sum total of the policies issued, each insurer is liable for the
amount of his policy.
• The insured can only recover the amount of his insurable interest
whether in one policy or several policies
• Since a contract of insurance is one of indemnity – the amount of
recovery is limited to the value of the insured’s insurable interest

Double Insurance Over Insurance

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There must be several insurers One insurer is sufficient contract of insurance

The total of the sum of the policies Amount of the insurance is always In double insurance, the insured While in reinsurance, the consent
need not exceed the insurable interest beyond the value of the has to give his consent of the original insured (who is
insurable interest hardly even aware of the
reinsurance transaction) is not
TITLE 12 necessary.
REINSURANCE

Sec. 97. A contract of reinsurance is one by which an insurer procures a third Value of reinsurance
person to insure him against loss or liability by reason of such original insurance.
From the standpoint of the insurer:
1. Every insurance company, in accordance with its financial strength,
Reinsurance defined establishes a limit on the maximum claim it wishes to pay out of its own
• It is a contract whereby one party, the reinsurer, agrees to indemnify resources. This limit is called a "retention." At the same time, a
another, the reinsured (original insurer), either in whole or in part, company wants its salesmen to be able to take an application for any
against loss or liability which the latter may sustain or incur under a amount the applicant is willing to seek. When such applications are for
separate and original contract of insurance with a third party, the a sum over the company's retention, it handles the excess by means of
original insured. reinsurance.
• It has been referred to simply as "an insurance of an insurance". 2. Through the use of reinsurance, then, an insurer is able to issue policies
• Such contracts are sometimes referred to as "treaties". for amounts in excess of its retention limit or beyond the capacity of its
• The reinsurance of a reinsurance is called retrocession. financial resources in case of a loss, rather than inconvenience a client
by referring him to other insurance companies. This is in the best
Reinsurance distinguished from double insurance. interest of the insuring public, the insurer, and the reinsurer.
3. Also, insurance protection will be distributed to a greater proportion of
DOUBLE INSURANCE REINSURANCE those needing protection if the underwriters of many companies are in
In double insurance, the insurer While in reinsurance, the insurer position to supply insurance protection to applicants requiring large
remains as the insurer of the becomes the insured, insofar as the amounts and to applicants who are not eligible for insurance at standard
original insured reinsurer is concerned rates.
In double insurance, the subject While in reinsurance, it is the 4. Underwriters benefit through the placing of additional insurance in an
of the insurance is property original insurer's risk expanded market. The insurance industry benefits by reducing the waste
Double insurance is an insurance Reinsurance is an insurance of a arising out of policies which are applied for but not issued.
of the same interest different interest 5. The knowledge of the industry regarding classification of impaired risks
is increased in the most economical manner. Reinsuring companies
serve as focal point for the collection of such risks where statistically
In double insurance, the insured While in reinsurance, the original
significant volumes of consistently underwritten substandard business
is the party in interest in all the insured has no interest in the
are accumulated and subjected to extensive analyses by an experienced
contracts contract of reinsurance which is
independent of the original staff.

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6. Finally, the reinsurer benefits through the acquisition of business which • Thus, a policy may be avoided where the reinsured conceals the fact
is expected to prove profitable in the long run. that a loss has taken place or that the property is over-insured where he
has knowledge thereof.
From the standpoint of the insured: • Section 98, however, covers knowledge or information possessed by
1. It gives insurance companies that practice in greater financial stability the insurer "whether previously or subsequently acquired, which are
and thus makes the insured's individual policy more reliable; material to the risk."
2. If a large amount of insurance is needed, the insured may obtain it
without negotiating with numerous companies; Automatic and facultative methods of ceding reinsurance
3. It enables the insured to obtain protection promptly, without the delay • Reinsurance may be placed in effect either automatically or
that would be required to divide and distribute the amount among many facultatively
companies; • Share or participation in risk insured. — The rule in Section 98 does
4. All the insurance can be written under identical contract provisions, not apply in case of automatic reinsurance treaties under which the
whereas otherwise these might vary with the different companies among ceding company (reinsured) is bound to cede (give off by way of
whom the insurance is divided; and reinsurance) and the reinsurer is obligated to accept a fixed share of the
5. Small companies are encouraged to divide large exposures for safety risk which has to be reinsured under the contract.
and enabled to accept a wide variety of applicants. • In a facultative insurance, which covers liability on individual risk,
there is no obligation either to cede or to accept participation in the risk
From the standpoint of the insuring public insured, each party having a free choice. But once the share is accepted,
• Contracts or "treaties" of reinsurance are plainly beneficial to the public the obligation is absolute and the liability assumed thereunder can be
inasmuch as they promote both efficiency and stability in the conduct discharged by one and only way — payment of the share of the losses.
of the reinsurance business. There is no alternative or substitute prestation.
• Advantage to insurer. — The main advantage to the insurer of the
Sec. 98. Where an insurer obtains reinsurance, except under reinsurance automatic method is avoidance of any delay in issuing its policy. o The
treaties, he must communicate all the representations of the original insured, advantage to the insurer of the facultative method is that it receives the
and also all the knowledge and information he possesses, whether previously reinsurer's underwriting opinion before the policy is issued.
or subsequently acquired, which are material to the risk. • Protection to reinsurer. — By agreeing to accept business automatically,
the reinsurer is relying on the underwriting judgment of the insurer and
is bound to accept a case even though it may not agree with the
Duty of reinsured to disclose facts underwriting decision.
o The reinsurer is protected by the requirement that the original
• Where an underwriter is seeking to insure his risks, his duty to disclose insurer retains its full retention limit, which assures a measure of self-interest. In
all material facts is no less than the similar duty imposed on a person actual practice, when any question of proper underwriting classification exists,
seeking an original insurance; the duty in both cases is one of the the insurer usually does not use its automatic facility but instead secures the
strictest good faith since the risk insured against in a contract of reinsurer's underwriting opinion by submitting the case facultatively.
reinsurance is the probability that the original insurer may be Reinsurance treaty distinguished from reinsurance policy
compelled to indemnify for the loss under the policy issued by him.
REINSURANCE POLICY REINSURANCE TREATY

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A reinsurance policy is a contract of In contradistinction, a reinsurance • Contract, separate from original insurance policy. — The contract of
indemnity one insurer makes with treaty is merely an agreement insurance is independent of and separate from the contract of
another to protect the first insurer from between two insurance companies reinsurance. The practice is for the reinsurer to pay the insurer even
a risk it has already assumed whereby one agrees to cede and the before the latter has indemnified the original insured.
other to accept reinsurance business • Contract based on original policy. — The policy of reinsurance,
pursuant to provisions specified in however, is necessarily based upon the original policy, and the rights of
the treaty. the parties while, of course, fixed by the terms and conditions of the
policy of reinsurance are yet greatly affected by the terms and
conditions of the original policy upon which the reinsurance contract is
The practice of issuing policies by The lumping of the different based.
insurance companies includes, among agreements under a contract has • Insurable interest requirement applicable. — The doctrine of insurable
other things, the issuance of resulted in the term known to the interest applies to reinsurance just as it does to any insurance contract.
reinsurance policies on standard risks
insurance world as 'treaties.' Such a Therefore, the primary insurer is not entitled to contract for reinsurance
and also on substandard risks under treaty is, in fact, an agreement exceeding the limits of the policy ceded to the reinsurer.
special arrangements. between insurance companies to • Rule on subrogation applicable. — In general, a reinsurer, on payment
cover the different situations of a loss, acquires the same rights by subrogation as are acquired in
described. similar cases where the original insurer pays a loss.
Reinsurance treaties and reinsurance Treaties are contracts for insurance
policies are not synonymous. Sec. 100. The original insured has no interest in a contract of reinsurance.

It is only after a reinsurance cession is Rights of original insured in contract of reinsurance

made that the obligation of the insurer • The insured, unless the contract so provides, has no concern with the
to pay the reinsurance premium arises. contract of reinsurance, and the reinsurer is not liable to the insured
either as surety or otherwise.
• There is no privity of contract between the original reinsured and the
reinsurer.
Sec. 99. A reinsurance is presumed to be a contract of indemnity against liability, • A contract of reinsurance rarely explicitly permits direct action by the
and not merely against damage. original insured against the reinsurer.

Liability of reinsurer to reinsured.

Nature of contract of reinsurance • In an action on a contract of reinsurance, as a general rule, the reinsurer
• Contract, one of indemnity against liability. — In reinsurance, the is entitled to avail itself of every defense which the reinsured might urge
reinsurer agrees to indemnify the insurer, not against actual payment in an action by the person originally insured.
made but against liabilities incurred. Therefore, it is by no means o Thus, the reinsurer is not liable to the reinsured for a loss
necessary that the insurer shall first have paid a loss accruing, as a under an original policy if the latter is not liable to the
condition precedent to his demanding payment of the reinsurer. original insured or for an amount more than the sum actually
paid to the insured.

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o It has been held that the clause "to pay as may be paid surrender of the original policy and issuance of a new one
thereon" does not preclude the reinsurer from insisting upon including the same terms and conditions, by the so-called
proper proof that a loss within the terms of the original policy "reinsurer."
has taken place; it does not enable the reinsured to recover However, such a transaction is not one of technical reinsurance, for here, the
from his reinsurer to an extent beyond the subscription of the socalled "reinsurer" is but substituted for the original insurer and hence,
latter under the contract of reinsurance. becomes the immediate insurer of the subject of the original policy.

Liability of reinsurer to original insured.

• Contract of reinsurance solely between insurer and reinsurer. — In case

the contract is solely between the insurer and the reinsurer,
contemplating only an indemnity to the insurer against losses suffered
by reason of the policies carried by him, the original insured has
absolutely no interest in the contract and is a total stranger to it.
o Unless the reinsurance contract contains a stipulation
assigning the right of the insurer in favor of the insured, the
latter, not being a privy to the contract, has no cause of action
against the reinsurer, but only against the insurer.
• Contract of reinsurance with stipulation in favor of original insured. —
The contract of reinsurance may contain a provision whereby the
reinsurer binds himself to pay to the policyholder any loss for which the
insurer may become liable.
o Therefore, the reinsurer who has promised to pay the losses
accruing under the original policy will be liable to a suit by
the original insured under the contract of reinsurance. The
remedy of the insured is both against the insurer and the
reinsurer.
• Contract of reinsurance amounting to novation of original contract. —
The original insured may also maintain an action directly against the
reinsurer in those cases in which the circumstances attending the
making of the contract of reinsurance amount to a novation of the
original contract and hence, operate to discharge that contract and the
original insurer from all obligations thereunder.
o The original insurer, however, will be released only when the
insured agrees with the insurer and reinsurer to the novation.
o Such an agreement is ordinarily carried into effect by a

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