1.

CONCEPT OF INSURANCE

Applicable laws: Article 2011 of the Civil Code states that the contract of insurance is governed by special laws and that matters not expressly provided for in the special laws shall be regulated by the Civil Code. Therefore, the laws applicable to insurance shall be in the following order: (a) Insurance Code of 1978 (Pres. Decree, 1460, as amended); (b) In the absence of applicable provisions in the Insurance Code, the Civil Code; (c) In the absence of applicable provisions in the Insurance Code and the Civil Code, the general principles prevailing on the subject in the United States, particularly in the State of California where our Insurance Code was based ( Constantino v. Asia Life Ins. Co., 87 Phil 246)

Insurance defined A contract of insurance is an agreement whereby one (insurer) undertakes for a consideration to indemnify another (insured) against loss, damage or liability arising from an unknown or contingent event. (Sec 2, Insurance Code of 1978; Gulf Resorts, Inc. v. Philippine Charter Insurance Corp., 458 SCRA 550 [2005]) A contract of suretyship shall be deemed to be an insurance contract if made by a surety who or which is doing insurance business. (2nd par, par (1) Sec 2, ICP) The term doing an insurance business or transacting an insurance business, shall include: a) Making or proposing to make, as insurer, any insurance contract; b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety;

c) Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; d) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Code. The fact that no profit is derived from the making of insurance contracts, agreements, or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof do thereof does not constitute the doing or transacting of an insurance business. (Par(3) Sec 2 ICP)

Interpretation of Insurance Contracts. a) When there is no doubt as to the terms of the insurance contract, the provisions must be construed in their plain, ordinary and popular sense. (Union Mfg. Co., v. Republic Bank, 47 SCRA 271). b) When the terms of the policy are ambiguous, uncertain or doubtful, the provisions must be interpreted strictly and most strongly against the insurer, and liberally in favor of the insured. Reasons: 1) the insured usually has no voice in the selection or arrangement of the words employed, and the language of the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of the insurance company. (Gulf Resorts, Inc. v. Phil Charter Ins. Corp., 458 SCRA 551, May 16, 2005) 2) Insurance policies are contracts of adhesion (Mackenzie v. Phil am Life, 69 OG 9918) c) The provisions of the insurance contract must be read in its entirety, that is, the provisions must be construed together to arrive at the correct and true intention of the partied in the contract. Note: Insurance contracts are to be construed according to the sense and meaning of the term which parties, themselves, have used. (New Life Enterprises v. CA, 2001 SCRA 669)

 Events Covered by Insurance: General Rule: Only a future event can be covered by an insurance contract. (Section 3) Exception: A past event may be covered by marine insurance if the loss of the vessel in the past could not have been known by ordinary means of communication, then it could be the subject of marine insurance. (Sec 109) NOTE: Ordinarily, the event covered by the policy is a future contingency. However a past event may likewise be included within the coverage of a policy. To be so covered, the past event causing the loss must be unknown to both parties and they must expressly stipulate that a prior loss is insured in the policy.

Insurable Risks: The risks that may be insured may either be: (a) one that may cause damage to the insurer, or (b) one that may create liability against him.

Who are the parties to an insurance contracts? (a)Insurer the person who undertakes to indemnify another by a contract of insurance; (b)Insured the person to be indemnified. (Note: Anyone except a public enemy may be insured) (c)Beneficiary the person who receives benefit or advantage, or the one who is entitled to the benefit of a contract, that is, the one to whom the insurance is payable or is entitled to the proceeds of the policy on the occurrence of the event designated. - Public enemy defined: Public enemy is a nation at war with the Philippines and also every citizen or subject nation. Such term does not include robbers, thieves or riotous mobs. -Who may insure a mortgage property: Both the Mortgagor and the Mortgagee may take out separate polices with the same of different

companies. The mortgagor to the extent of the value of his property, the mortgagee to the extent of his credit. Who may be beneficiary: Any person may be designated as beneficiary in a life insurance contract even though he is a stranger and has no insurable interest in the insured, except those who are forbidden by law to receive donations from the insured

2. ELEMENTS OF AN INSURANCE CONTRACTS

What are the essential elements of an Insurance Contract? The following are the elements of Insurance Contract: (a) (b) (c) (d) (e) Insured has an insurable interest; Insured is subject to a risk of loss by the happening of the designated peril; Insurer assumes risk; Such assumption of risk is part of the general scheme to distribute actual losses among large group of persons bearing similar risk; and In consideration of the insurers promise, the insured pays a premium. (Philamcare Health System v. CA 273 SCRA 432 [1997])

3. CHARACTERISTICS / NATURE OF INSURANCE CONTRACTS

a) It is an ALEATORY CONTRACT - by an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. (Sec 2010, Civil Code). Insurance is aleatory in the sense that the liability of the insurer depends upon the happening of a contingent event. It is not a wagering contract.

b) It is a CONTRACT OF INDEMNITY for NON-LIFE INSURANCE; it is an INVESTMENT in LIFE INSURANCE - Non-life insurance is a contract of indemnity, because the party insured is entitled to compensation for such loss as has been occasioned by the perils insured against. The right to recover is commensurate with the loss sustained. (RULE: RECOVERY = LOSS) - Life insurance is not a contract of indemnity, but a contract to pay a certain sum of money in the event of death, for life cannot be the subject of valuation or the loss adjustable on any principle of indemnity. - Life insurance is an investment because it is secured by the insurer as a measure of economic security for him during his lifetime and for his beneficiary upon his death EXCEPT one secured by the creditor on the life of the debtor the reason being, the amount of insurable interest is already susceptible of pecuniary estimation, which value ordinarily equivalent to the amount of the debt.

c) It is a PERSONAL CONTRACT - An insurer contracts with reference to the character of the insured and vice versa. As a consequence, the assignment or conveyance of the property insured does not transfer the insurance and instead the policy is suspended.

d) It is an EXECUTORY AND CONDITIONAL on the part of the INSURER and it is EXECUTED on the part of the INSURED. -Insurance contract is executory after payment of premiums, that is, executed on the part of the insured upon payment of premium and wholly executory on the part of the insurer. - Insurance is conditional in the sense that the insurer is not obligated to pay unless the loss arises from the specified perils.

e) It is an ONEROUS CONTRACT - There is valuable consideration (premium)

f) It is a BILATERAL CONTRACT - Both parties, the insured and the insurer, are bound to do something.

g) It is a FORMAL CONTRACT - Insurance contract is formal and real (not consensual) in nature because a policy is required to be issued, and the premium must be paid.

h) It is one of ABSOLUTE/PERFECT GOOD FAITH - It is required that the parties, the insurer and the insured, but more so with the insurer since its dominant bargaining position imposes a stricter liability or responsibility, to deal with each other in absolute good faith.

i) It is a CONTRACT OF ADHESION - Insurance policies are contracts of adherence, that is, agreements prepared by one party and imposed upon parties dealing with it which may not be changed, the latters participation in the agreement being reduced to the alternative to take it or leave it.

4. CLASSES OF INSURANCE

A. Marine Insurance

WHAT IS MARINE INSURANCE?

Marine Insurance Includes: (1) Insurance against loss of damage to: - Vessels, crafts, cargo, profits, papers, bottomry, respondentia all exposed to perils of the sea, transit or while awaiting or transshipment including war risk, marine builders risk and floater risk. -It also includes: (a) persons connected with marine insurance including construction, repair and maintenance; (b) precious stones, jewelry and metals; (c) bridges, tunnels, and piers and the furnishings as aids to navigation.

(2)Marine protection and indemnity insurance, meaning insurance against, or against legal liability of the insured for loss damage or expense incident to ownership, operation, chartering, maintenance, use, repair or construction of any vessel, craft, or instrumentality in use in ocean or island waterways, including liability of the insured for personal injury, illness or death or for loss or damage to the property of another person (Sec 99)

 What are the Forms of Marine Insurance? (a) Property Insurance, as it indemnifies the insured for loss or damage to property. (Par 1, Section 99) (b) Liability insurance, as it protects the insured against the consequences of legal liability for loss or damage to property or for personal injury, illness or death of a person (Par 2, Section 99)

Perils of the sea vs. perils of the ship. Perils of the sea embrace all kinds of marine casualties, and damages done to the ship or goods at sea by the violent action of the winds or waves, one that could not be foreseen and not attributable to the fault of anybody. Perils of the ship on the other hand, are losses or damages resulting from (a)the natural and inevitable action of the sea,(b) ordinary wear and tear of the ship, or (c) negligent failure of the ships owner to provide the vessel with proper equipment to convey the cargo under ordinary condition. Unless otherwise stated in the policy, loss due to perils of the ship is not within the coverage of marine insurance. A marine policy in the usual form, therefore, includes perils of the sea and not perils of the ship. (Go Tiaco Y Hermanos v. Union Insurance Society of Canton 40 Phil. 40). Thus the insured is bound to prove that the cause of the loss is a peril of the sea. However, in an all risk policy, all risks are covered unless expressly excepted. The burden rests on the insurer to prove that the loss is caused by a risk excluded. (Choa Tiek Seng v. CA, 183 SCRA 223 [1990])

All risks policy in marine insurance A marine insurance policy providing that the insurance is against all risks must be construed as creating a special insurance and extending to other risks than the usually contemplated, and covers all losses except such as may arise from the fraud of the insured, intentional misconduct on the part of the insured, or otherwise excluded in the policy. It cover all losses

during the voyage whether arising from a marine peril or not, including pilferage losses during war. The burden of the insured, therefore, is to prove merely that the goods he transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted perils. To impose on the insured the burden of proving the precise cause of the loss or damage would be inconsistent with the broad protective purpose of all risks insurance.

Definition of some terms Barratry any willful misconduct on the part of the master crew in pursuance of some unlawful or fraudulent purpose without the consent owners, and t the prejudice of owners interest. This may be expressly covered by the policy. When so covered, proof of willful and intentional act is necessary. No honest error of judgment or mere negligence, unless criminally gross, can be barratry. (Roque v IAC, 139 SCRA 596 [1985]) Inchmaree clause (also known as negligence clause) is a provision in marine insurance policy that the insurance shall cover loss of, or damage to, the hull or machinery through the negligence of the master, charterers, mariners, engineers, or pilots, or through explosions, bursting of boilers, breakage of shafts, or through any latent defect in the machinery or hull not resulting from want of due diligence. Charter Party a contract by virtue of which the owner or the agent of a vessel binds himself to transport merchandise or person for a fixed price. Bottomry is a loan payable only if the vessel given as a security for said loan arrives safely at port from contemplated voyage. Respondentia a loan payable only upon the safe arrival in port of the goods given as security. Note: Both the contracts of bottomry and respondentia are in the nature of a mortgage, as the owner borrows money for the use, equipment or repair of the vessel for a definite term with the ship as security with maritime or extraordinary interest on account of the risks borne by the lender, it being stipulated that if

the ship be lost during the voyage or within the limited period, the lender also loses his money. Freightage in the sense of a policy of marine insurance, signifies all the benefits derived by the owner, either from (a) the chartering of the ship or (b) its employment for the carriage of his own goods or those of others.(Sec 102, ICP) It exists, in case of (a) charter party, when the ship has broken on the chartered voyage (b) if a price is to be paid for the carriage goods, when they are actually on board and the vessel and the goods are ready for specified voyage (Sec 104, ICP)

Insurable Interest The insurable interests in marine insurance are as follows; a) Shipowner 1) over the value of the vessel though it is under a charter party (Sec. 100, ICP) Note: i) if the chartered and the charterer agreed to pay the shipowner the value of the vesel in case of loss, the shipowner can recover only the amount not recoverable from the charterer. (Sec 100, ICP); ii) if the ship is hypothecated by a bottomry loan, the insurable interest is only up to the excess of the value of the vessel over the loan.(Sec 101,ICP) 2) over the expected freightage, which according to the ordinary course of things would have earned but for the intervention of a peril insured against or other peril incident to the voyage.

b) Cargo Owner/ Shipper -over the cargo and expected profits (Sec 105,ICP)

c) Charterer -1) over the vessel up to the extent of the amount he is liable to the shipowner, if the ship is lost or damaged during the voyage. (Sec 106, ICP); -2) over his expected profits or freightage if he accepts cargoes from other persons for a fee. -3) over his own cargo or his clients cargo.

Concealment in Marine Insurance There is concealment where the insured has knowledge of facts, material to the risk, and good faith and fair dealing requires him to reveal them, and he fails to do so.

What needs to be communicated? 1) Each party must communicate to the other, in good faith, all facts within his knowledge which are material to the contract as to which he makes no warranty, and which the other has no means of ascertaining. (Sec 28, ICP.) 2) Each party is bound to communicate all information which he possesses, material to the risks and to state the exact truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose (Sec 107, ICP) 3) Information of the belief or expectation of a third person, in reference to a material fact, is material in marine insurance, hence it must also be communicated. (Sec 108, ICP)

Presumption of Loss The insured in marine insurance is presumed to have knowledge, at the time of insuring, of a prior loss, if information might possibly have reached him in the usual mode of transmission and at the usual rate of communication (Sec 109)

A past event is within the scope of insurance, provided that it is known to the parties and the parties expressly stipulate on the coverage of a past event. Knowledge of the past event on the part of the insured may be difficult to prove. The law intended to overcome such difficulty by raising this presumption.

Effect of Concealment General Rule: Concealment entitles the injured party to rescind the contract Exception: Concealment in marine insurance in respect to any of the following matters does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: a) The national character of the insured; b) The liability of the thing inured to capture and detention; c) The liability to seizure from breach of foreign laws of trade; d) The want of necessary documents; e) The use of false and simulated papers. (Sec 110, ICP) Distinguishing ordinary concealment from that in marine insurance 1) In ordinary insurance, opinion or belief of a third person or own judgment of the insured is not material and need not be communicated.(Sec 35, ICP) In marine insurance, belief or expectation of a third person in reference to a material fact is material and has to be communicated. 2) In ordinary insurance, a causal connection between the fact concealed and cause of loss is not necessary for the insurer to rescind, in marine insurance the concealment of any of the matters stated in Section 110 merely exonerates the insurer from loss, if the loss results from the fact concealed.

 Representation Definition - Representation is a statement incidental to the contract of insurance relative to some fact having reference thereto and upon the faith of which the contract is entered into. Misrepresentation - In marine insurance a misrepresentation to entitle the insurer to rescind the contract, must be intentionally false in any material respect, or in respect of any fact on which the charterer and nature of the risk depends. (Sec 111) - The false representation that will entitle the insurer to rescind the contract of insurance must be representation of positive facts and not mere expectation or belief. The eventual falsity, therefore, of a representation as to expectation, does not, in the absence of fraud, avoid a contract of insurance. (Sec 112)

Implied Warranties Warranty defined: - A warranty is a statement in the policy, part of the contract, a condition on which, the contract depends and is conclusively presumed material. It is the essence of warranty that its breach bars recovery even though the breach has nothing to do with the loss. (Secs 67 76)

Implied Warranties in Marine Insurance (a) That the ship is seaworthy at the inception of the insurance (Sec 113, ICP); (b) That the ship will not deviate from agreed voyage unless deviation is proper (Secs. 123, 124,125, ICP); (c) That the ship will not engage in illegal venture; (d) warranty of possession of documents of neutrality: that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted;

(e) presence of insurable interest. Note: The foregoing warranties are implied as they exist by the mere fact that a contract of marine insurance is entered into.

Seaworthiness as the main warranty in marine insurance: Definition: - A ship is seaworthy, when reasonably fit to perform the service, and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy. (Sec 114, ICP) - Seaworthiness of a vessel is a relative term, depending on the nature of the ship, the voyage, and the service in which she is at the time engaged. - Thus, a vessel seaworthy for one purpose may be unseaworthy for another purpose.

Requirement of seaworthiness, when satisfied? General Rule: The requirement of seaworthiness is satisfied when the vessel is seaworthy at the commencement of the risk. Exceptions: (a) When the insurance is for a specific period, in which case, the vessel must be seaworthy at the commencement of every voyage she may undertake during such period; (b) When the insurance is upon the cargo required to be transshipped at an indeterminate port, in which case each vessel upon which the cargo is shipped, or transshipped, must be seaworthy at the commencement of each particular voyage; (Sec 115, ICP) and (c) Where different portions of the voyage contemplated by the policy differ in respect to things requisite to make the ship seaworthy at the commencement of each portion with reference to that portion. (Sec 117, ICP)

 To what does the warranty of seaworthiness extend to? - The warranty if seaworthiness extends not only to the condition of the structure of the ship, but it requires that: (a) it be properly laden or loaded with cargo; (b) is provided with a competent master, sufficient number of officers and seamen; (c) it must have the requisite equipment and appurtenances. (Sec 116, ICP)

Unseaworthiness during the voyage: - Seaworthiness of a vessel, as a general rule, is necessary only at the commencement of the risk. - Accordingly, if a vessel is seaworthy at the inception of the voyage, subsequent unseaworthiness does not avoid the policy. Provided there is no unreasonable delay in repairing the defect. Otherwise, the insurer is exonerated on the ship or the shipowners interest from any liability arising from therefrom. (Sec 118, ICP) - Unreasonable delay in repairing the defect causing the unseaworthiness arising after the commencement of the risk will discharge the insurer from liability only when the damage or loss was caused by the unseaworthiness of the vessel. (Sec 118, ICP) - However, where the damage was not caused by the particular defect that made the ship unseaworthy, the insurer is still liable.

The Voyage and Deviation Deviation defined: - Deviation is the departure of the vessel from course of voyage, or an unreasonable delay in pursuing voyage, or an unreasonable delay in pursuing voyage or the commencement of an entirely different voyage (Sec 123, ICP). - Unjustified deviation will bar recovery from marine policy.

 Kinds of deviation: Proper and Improper a) Deviation is proper when: 1) if due to circumstances outside the control of the ship captain or ship owner; 2) If done to comply with a warranty; 3) if made in good faith to avoid a peril; 4) if made to save human life or another distressed vessel. (Sec 124, ICP.) b) Improper deviation is every deviation not specified in Sec 124. (Sec 125, ICP)

Effect of improper deviation? - An insurer is not liable for any loss happening to a thing insured subsequent to an improper deviation. (Section 126 ICP). This applies whether the risk increased or diminished. Loss Kinds of Losses: Loss in marine insurance may be: 1) TOTAL a total loss ay either be: (a) Actual Loss which is caused by: (i) A total destruction of the thing insured; (ii) The irretrievable loss of the thing by sinking, or by being broken up; (iii) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or (iv) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured.

(b) Constructive total loss, which is one that gives to a person insured a right to abandon under the following circumstances. (Sec 131) (i) If more than thereof in value I actually lost, or would have to be expended to recover it fro the peril; (ii) If it is injured to such an extent as to reduce its value more than ; (iii) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; (iv) If the thing insured, being cargo or freightage and the voyage cannot be performed, nor another ship procured by the mater, within reasonable diligence, to forward the cargo, without incurring the like expense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case be abandoned unless the ship is also abandoned. (Sec 139) Note: In case of constructive total loss, insured may abandon the goods or vessel to the insurer and claim for whole insured value, or he may, without abandoning vessel, claim for partial actual loss. 2. PARTIAL a loss other than a total loss

Actual Loss - An actual loss can be presumed from the continued absence of the ship without being heard of (Sec 132). The length of time which is sufficient to raise this presumption depends on the circumstances of the case. - Upon actual total loss, the insured is entitled to payment without notice of abandonment (Sec 135.) Furthermore,, if the insurance is confined to an actual loss it will not cover a constructive loss, but will cover any loss, which necessarily results in depriving the insured of possession, at the port of destination of the entire thing insured (Sec. 137)

 Abandonment - Abandonment is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured (Sec 138, ICP).

Requisites of valid abandonment: 1) There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec 138, ICP); 2) There must be a constructive total loss (Sec 139, ICP); 3) The abandonment must neither be partial nor conditional (Sec 140, ICP); 4) It must be made within a reasonable time after receipt of reliable information of the loss. (Sec 141, ICP); 5) It must be factual (Sec 142, ICP); 6) It must be made by giving notice thereof to the insurer which may be done orally or in writing (Sec 143, ICP); 7) The notice of abandonment must be explicit and must specify the particular cause of the abandonment (Sec144, ICP).

Effects of Abandonment: 1) It is equivalent to a transfer of his interest to the insurer, with all the chances of recovery and indemnity (Sec. 146, ICP). Note though, if the insurer pays for a loss as if it were an actual loss, he is entitled to whatever may remain of the thing insured, or its proceed or salvage as if there has been a formal abandonment. (Here the insurer opted to pay for a total actual loss, notwithstanding the absence of actual abandonment)

2) Acts done in good faith by those who were agents of the insured in respect to the thing insured subsequent to the loss, are at the risk of the insurer and for his benefit (Sec 148). The agents of the insured becomes the agents of the insurer. Note: The fact that abandonment is not made or is omitted does not prejudice the insured as he may nevertheless recover his actual loss (Sec 155.)

Effectivity of abandonment 1) Upon acceptance of the Insurer. - Acceptance may either be express or implied from the conduct of the insurer. - The mere silence of the insurer for an unreasonable length of time after notice shall be construed as acceptance (Sec 150). - Once accepted, abandonment is conclusive between the parties, that is, the loss is admitted together with the sufficiency of abandonment. (Sec 151) - Once accepted and made, abandonment is irrevocable, unless the ground upon which it was made proves to be unfounded (Sec 152), that is, where the information upon which abandonment has been made proves incorrect, or the thing insured was so far restored when the abandonment was made that there was in fact no total loss.(Sec 142) 2) On an accepted abandonment involving a ship, freightage earned previous to the lo belongs to the insurer of the freightage, that subsequently earned belongs to the insurer of the ship.(Sec 153) 3) If abandonment is not accepted despite validity, the insurer is liable upon an actual total loss, deducting from the amount any proceeds of the thing insured may have come to the hands of the insured (Sec 154). This is due to the fact that under Sec 149, which provides, that if notice is properly given, it does not prejudice the insured, if the insurer refuses to accept the abandonment.

Liability for averages -AVERAGE DEFINED: Average is any extraordinary or accidental expense incurred during the voyage for the preservation of

the vessel, cargo, or both, and all damages to the vessel or cargo from the time it its loaded and the voyage commenced until it ends and the cargo is unloaded.

-KINDS of AVERAGES: a) Particular or simple average damage or expense caused to the vessel or cargo which has not inured to the common benefit and profit of all persons interested in the cargo or the vessel. This damage or expense is borne ordinarily by the owner of the vessel or cargo that gives rise to expenses or suffered the damage. b) General or gross average damage or expense suffered deliberately in order to save the vessel, or its cargo, or both from real or known risk. Thus, all average shall contribute. -The insured has a choice of recovery on the happening of the general average loss. They are: (a) enforcing the contribution against interested parties, or (b) claiming from the insurer. If it be the latter, subrogation takes place - The insured can hold his insurer liable for his contribution up to the value of the policy.

Measure of Indemnity Effect of Valuation. - A valuation in a policy of marine insurance is conclusive between the parties thereto in the adjustment of either a partial or total loss provided: (a) the insured has some interest at the risk and (b) there is no fraud on his part. - In such case, the insured does not have to prove the value of the insured at the time of the loss except when it has been hypothecated by bottomry or respondentia before its insurances, and without the knowledge of the person procuring the insurance, in which case the real value thereof must be shown. - A valuation fraudulent in fact, entitles the insurer to rescind the contract. This is an exception to conclusiveness.

Effect of Over-valuation - Overvaluation of property by the insured may take place either at the time of making the contract or at the time of submission of the proof of loss. - In either event, under the conditions of the standard policy, such overvaluation, if fraudulent, entirely avoids the insurance. - But the mere fact of overvaluation, even though it is great, is not sufficient proof of fraud. It must be alleged and clearly proven by the insurer, that the insured, in overvaluing his property, did so knowingly and with fraudulent intent.

Co-Insurance (also known as Average Clause) -Co-insurance defined: It is a form of insurance in which the person who insures his property for less than the entire value is understood to be his own insurer for the difference which exist between the true value of the property and the amount of the insurance. -Requisites for application: The principle of co-insurance applies only where the (a) insurance taken is less than the actual value of the thing insured and (b) the loss is partial. (Sec 157) -Where co-insurance exists: In marine insurance, there is always co-insurance (Sec 157). While in fire insurance there is no co-insurance unless expressly stipulated in the policy. (Secs. 171 and 172) -Effect of Co-insurance: The insurer is liable upon the partial loss only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. (Sec 157). The formula to determine the extent of the insurers liability is: __Loss__ x Insurance = Insurers Liability Value - Under-insurance must be proven: In order that the principle of co-insurance can apply, the insurer must prove that the value of the property insured is more than the amount of the policy obtained. In case the insurer should fail to do so, there can not be any pro rata sharing of the loss under the policy and the recovery under the policy is the actual loss except that it can not exceed the face value of the policy.

- Note: In case of a partial loss of the ship or its equipment, the old materials are to be applied towards the payment of the new and unless stipulated in the policy, the insurer is liable only for 2/3 of the remaining cost or repairs after the deduction, except that anchors are paid in full (Sec 166) Valuation of insurance as to profits In case of insurance of expected profits the loss of the cargo or property out of which profits are expected to arise, carries with it a conclusive presumption of loss of the expected profits (Sec 160).
-

- When profits are separately insured, and the property out of which profit are expected to rise is partially lost, the insurer is liable to a proportion of such profits equivalent to the proportion which the value of the property lost bears to the value of the whole. (Sec 163)

Valuation if the policy is open (a) The value of the ship is its value at the beginning of the risk, including all articles or charges which add to its permanent value or which are necessary to prepare it for the voyage insured. (b) The value of the cargo is its actual cost to the insured, when laden on board or where that cost cannot be ascertained, its market value at the time and place of lading, adding the charges incurred in purchasing and placing it on board but without reference to any sum incurred in raising money for its purchase or any drawback on its exportation or fluctuation of the market at the port of destination or expenses incurred on the way or on arrival. (c) Value of freightage is the gross freightage, exclusive of primage without reference to the cost of earning it. (d) The cost of insurance is in each case to be added to the value thus estimated. - Drawback it is the government allowance upon duties on imported merchandise when the importer re-exports instead of selling it. - Primage it is the compensation paid by he shipper to the master of the vessel for his care and trouble bestowed on the goods of the shipper, which he retains in the absence of a contrary stipulation with the owner of the vessel.

 If cargo is insured against partial loss: - If the cargo arrives at the port of destination in a damaged condition, the loss of the insured is deemed to be the same proportion of the value which the market place at that port of the thing so damaged bears to the market price it would have brought if sound (Sec 162). -The formula is: (a) Market price in Market Price in = Reduction in value sound state damaged state

(b) ____Reduction in Value___ x Amount of Insurance = Amount of Recovery Market Price in Sound State

Measure of indemnity, regardless of whether the policy is valued or open:

- An

insurer is liable

(a) for all expenses attendant upon a loss that forces the ship into a port to be repaired. These refer to expenses for repairing the ship due to damages attributable to perils insured against, as well as other expenses such as launching, towing, raising, and navigating the vessel. These expenses are also called port of refuge expenses. (b) If so stipulated, that the insured shall labor for recovery of the property insured, the insurer is liable for expenses incurred thereby. This is also known as the sue and labor clause -In either case, said expenses are to be added to a total loss, if that afterwards occurs (Sec 163).

B. FIRE INSURANCE
Fire defined: In insurance, it is defied as the active principle of burning , characterized by heat and light combustion.

 Coverage Insurance against fire includes loss or damage due to lightning, windstorm, tornado, earthquake or other allied risks when such risks are covered by extensions to the insurance policy or under separate policies (Sec 167). Requisites to allow recovery (a) The fire must be the proximate cause of the damage or the loss; AND (b) The fire must be hostile as opposed to friendly fire.

Hostile fire vs. friendly fire: Hostile fire is a fire that: (a) burns at a place where it is intended to burn; (b) starts as a friendly fire but becomes hostile if it should escape from the place where it is intended to burn and becomes uncontrollable; (c) is a friendly fire which becomes hostile by not escaping from its proper place but because of the unsuitable material used to light it and it becomes inherently dangerous and uncontrollable. Friendly fire on the other hand, is one that burns in place where it is intended to burn and employed for the ordinary purpose of lighting, heating or manufacturing.

Alteration defined: It is a change in the use or condition of a thing insured from that which is limited by the policy, made without the consent of the insurer, by means within the control of the insured, and increasing the risk, which entitles the insurer to rescind the contract of insurance (Sec 168).

Effect of Alteration:

An alteration in the use or condition of the thing insured will entitle the insurer to rescind the contract of insurance provided the following requisites are present, to wit: (a) The use or condition of the thing insured is specifically limited or stipulated in the policy. (note: A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provision, even though it increases the risk and is the cause of the loss (Sec 170)); (b) There is an alteration in the said use or condition; (c) The alteration was made without the consent of the insurer; (d) The alteration was made by means within the control of the insured (note: If the alteration be by accident or means beyond the control of the insured, this requisite is not met); and (e) The alteration increased the risk of loss. But any alteration in the use or condition of the thing insured from that to which is limited by the policy, which does not increase the risk, does not affect the contract (Sec 169).

Basis for rescission: Payment of the premium is based on the risk as assessed at the time of the issuance of the policy when the risk is increased without a corresponding increase in premium, it is as if no premium is paid.

Measure of Indemnity: a) In Open Policy it is the expense it would be to the insured to replace the thing lost or insured in the condition it was at the time of the injury (Sec 171). b) In case of Valued Policy the valuation as agreed upon by the parties is conclusive in the adjustment of either a partial or total loss in the absence of fraud (Sec 171)

How valuation is made?

1) Whenever insured would like to have the valuation stated in a policy insuring a building or structure against fire, it may be made by an independent appraiser, who is paid by the insured and the value may then be fixed between the insurer and the insured. 2) Subsequently, the clause is then inserted in the policy that said valuation has thus been fixed; 3) In case of loss, provided there is no change increasing the risk without the consent of the insurer or fraud on the part of the insured, the insurer will pay the whole amount so insured and stated in the policy is paid. If it is a partial loss, the whole amount of the partial loss is paid. In case there are two or more policies, each shall contribute pro-rate to the total or partial loss but the liability of the insurers cannot be more than the amount stated in the policy. 4) Or the parties may stipulate that instead of payment the option to repair, rebuild or replace the property wholly or partially damaged or destroyed shall be exercised (Sec 172). This is also known as the option to rebuild clause. - No policy of fire insurance shall be pledged, hypothecated or transferred to any person, firm or company that acts as agent for or otherwise represents the issuing company. Any of such pledge, hypothecation or transfer hereafter made shall be void and of no effect as it may affect other creditors of the insured.

C. CASUALTY INSURANCE

Casualty Insurance defined: Generally, it is one that covers loss or liability arising from an accident or mishap, excluding those that fall exclusively within other types of insurance like fire or marine. It includes, but not limited to, employers liability insurance, workmens compensation insurance, public liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life companies and other substantially similar kinds of insurance. (Sec 174)

Examples of Casualty Insurance

(a) Employers liability insurance obtained by employer against liability to an employs for damages cause or arising from injuries by reason of his employment. (b) Workmens Compensation insurance secured by an employer for the benefit of his employees and laborers for loss resulting from injuries, disablement, or death through industrial accident, casualty, or disease in connection with their employment. (c) Public utility insurance against liability of the insured to pay damages for accidental bodily injury or damage to property arising from an activity of the insured defined in the policy. (d) Motor vehicle liability insurance against passenger and third-party liability for death or bodily injuries and damage to property arising from motor vehicle accidents. (e) Plate glass insurance against loss from accidental breaking of plate-glass windows, doors, show-case, etc. (f) Burglary and theft insurance against loss of property through burglary and theft (g) Personal Accident insurance against expense, loss of time, and suffering from accidents that causes physical injury. (h) Health insurance for indemnity for expenses or loss occasioned by sickness or disease.

When third persons can directly sue the insurer in liability insurance? When the policy provides for indemnity against liability to third persons, such third person can directly sue the insurer since they have beneficial interest in the proceeds of the policy However, when the policy provides indemnity against actual loss or payment, third persons cannot directly sue the insurer since the only duty of the insurer in this case is to reimburse the insured for liability paid to him to third persons.

Life insurance distinguished fro accident and health insurance:

The usual object of life insurance is to provide a fund for the benefit of the estate or the heirs or beneficiaries of the insured after the latters death. While the usual purpose of personal accident and health insurance is to protect against not a loss of life, but a loss of time, earning capacity, and expenses. However, when one of the risks insured in an accident insurance is death of the insured by accident, such insurance may also be regarded as a life insurance.

D. SURETYSHIP

Suretyship defined: A contract of suretyship is an agreement whereby the surety guarantee the performance by the principal or obligor of an obligation or undertaking in favor of a third party or obligee. It is a collateral contract in relation to the principal contract between the obligor and the obligee. It includes official recognizance, bonds and other undertaking (Sec 175).

Liability of the Surety: The liability of the surety shall be joint and solidary with the obligor and shall be limited to the amount of the bond and determined strictly by the terms of the contract in relation to the principal contract between obligor obligee. (Sec 176)

Payment of premium on bonds: General Rule: Exception: Payment of premium is a condition precedent for the validity of suretyship contract or bond. When it is issued and accepted by the obligee, it is valid despite non-payment of the premium (Sec 177)

When surety entitled to service fee only? The surety shall be entitled only o a reasonable service fee in an amount not exceeding fifty per centum of the premium due, plus the cost

stamps and other taxes imposed for the issuance of the bond, in the following cases: a) When the contract of suretyship or bond is not accepted by the obligee; or b) When the contract of suretyship or bond is not filed with the obligee. However, if the non-acceptance of the bond or suretyship contract is due to the fault or negligence of the surety, no service fee, stamps or taxes can be collected. (Sec 177)

Suretys Right to collect: The surety can demand payment from the principal upon the latters default even before the former has paid the creditor. (Merchantile Ins. Co., Inc. v. Felipe Ysmael, Jr. & Co., Inc., 169 SCRA 66)

E. LIFE INSURANCE

Life Insurance defined: Is insurance on human lives and insurance appertaining thereto or connected therewith. (Sec 179) When Payable? An insurance upon life may be made payable on (1) death of the person, or (2) his surviving a specified period, or (3) or otherwise, contingently on the continuance or cessation of life.

Usual Kind of Life Insurance: (a) Whole life / Ordinary Life / Straight Life premiums are payable for life and the insurer agrees to pay the face value upon the death of the insured.

(b) Limited payment life insured pay premiums for a limited period after which he stops with a guarantee by the insurer that upon death amount is to be paid death occurs while payment is not complete beneficiary receives face amount. (c) Term Policy Insurer is liable only upon death of the insured within the agreed term or period, the value of the policy is paid to him. If h die before the end of the period, it is paid to the beneficiaries. (d) Advance Insurance a contract which provides for the payment to the insured of a lump sum immediately, in consideration of his agreement to make certain periodical payments to the insurer for a specified period, or for the end of that period, the performance of insureds obligation being secured by mortgage or deed of trust. (e) Endowment protection is for a limited period, if the insured is still alive at the end of the period, the value of the policy is paid to him. If he dies before the end of the period, it is paid to the beneficiaries.

Annuity defined: Annuity is a contract to pay the insured, or a named person or persons, sum or sums periodically during a life or a certain period.

Annuity distinguished from life insurance: Although annuity is considered life insurance for purposes of the Insurance Code, the following distinctions between annuity and life insurance could be made: (a) Annuity is payable during the lifetime of the annuitant, while life insurance I usually payable upon the death of the insured. (b) The annuitant pays a single premium, while insured in life insurance pays premiums by installments. (c) In annuity, the insurer undertakes to pay annuities until the death of the annuitant, while in life insurance, the insurer pays a lump sum upon death of the insured.

Where the insured is a minor:

As far as a minor, who is the insured or a beneficiary in an insurance contract, in the absence or incapacity of a judicial guardian, the father, in default, the mother, may act in behalf of the minor without need of bond or court authority, when it involves the exercise of any right under the policy to include but not limited to, obtaining a policy, loan, surrendering the policy, receiving the proceeds of the policy and giving the minors consent to any transaction on the policy, provided, the interest of the minor does not exceed Php 20,000.00. Risks Covered: 1) Generally, all causes of death are covered, unless: 1.a. Excluded by law, i.e. beneficiary is the principal accomplice or an accessory in bringing the death of the insured. 1.b. Excluded by policy, i.e. when it does not cover assault, murder or injuries inflicted intentionally by 3rd persons 1.c. Excluded by public policy, i.e when the insured is executed for a crime committed. 2) Suicide, if (a) committed after the policy has been in force for a period of two years from date of issue or last reinstatement unless policy provides a shorter period (b) but it is nevertheless compensable if committed in the date of insanity regardless of the date of commission (Sec 180-A)

Assignment of Life Insurance: A life insurance may pass by transfer, will or succession to any person, whether he has insurable interest or not (Section 181). - The person to whom the life insurance is transferred may recover upon it whatever the insured might have recovered. - While there is no need for the assignee to have insurable interest, it should not be used to circumvent the law prohibiting insurance without insurable interest. Thus, an assignment contemporaneous with issuance may invalidate the policy unless made in good faith.

- Notice to the insurer of transfer or bequest is not necessary to preserve the validity of the policy, unless thereby expressly required (Sec 182). - Where the policy is payable to a beneficiary other than the insured or his estate or personal representatives, and the right to change the beneficiary is expressly waived, the consent of such beneficiary to the assignment of the policy must be obtained since the beneficiary, in such case, has a vested right on the policy that cannot be defeated by an assignment or transfer without his consent. -The consent of the beneficiary to an assignment by the insured is not necessary where the insured has not expressly waived the right to change the beneficiary, for in such case the beneficiary has no vested right as the insured may still change him.

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

Life Insurance is Valued Policy: Life insurance contract is a valued policy in the sense that the sum payable to the beneficiary is the amount specified in the policy. - This is a consequence of the rule that life insurance is not a contract of indemnity and since the value of life lost could not be ascertained, the amount of the policy should be paid. - However, when the insurable interest is susceptible of pecuniary measurement, then the amount of the loss suffered should be the basis of payment, as in the case of insurance procured by a creditor on the life of the debtor, for then, life insurance of such nature is a contract of indemnity.

F. COMPULSORY MOTOR LIABILITY INSURANCE

VEHICLE

 Concept: It is to provide protection to answer for bodily or property damage that may be sustained by another arising from the use of a motor vehicle. What is now compulsory is death or bodily injury arising from motor vehicle accidents. Property damage is now optional.

How Its Compulsory Nature enforced? The Insurance code makes it unlawful for any land transportation operator or owner of a motor vehicle to operate in highways unless there is: (a) a policy insurance, or (b) guaranty in cash, or (c) surety bond, to indemnify the death or bodily injury of a third party or passenger arising from the use thereof (Sec 374). - Compliance by the motor vehicle owner or the land transportation operator is monitored as the Land Transportation Office shall not allow registration or renewal of registration without compliance with Section 374 (Sec 376).

Extent of the Liability: Every insurance policy, surety or cash deposit required by Section 374 shall comply with the minimum limits prescribed under Section 377, summarized as follows: (a) in case of a Land transportation operator, motor vehicles with an authorized capacity of: a.1. 26 or more passengers a.2. from 12 to 25 passengers a.3. from 6 to 11 passengers a.4. five or less passengers multiplied by the Php 50,000; Php 40,000; Php 30,000; Php 5,000

authorized capacity (b) In case of owner of a motor vehicle:

b.I.

Private cars i. Bantam: Php 20,000.00 ii. Light: Php 20,000.00

iii. Heavy: Php 30,000.00 b.II Other Private Vehicles i. Tricycles, motorcycles, and scooters: 12,000.00 ii. Vehicles with an unladen weight of 2,600 kilos or less: 20,000.00 iii. Vehicles with an unladen weight between 2,601 kilos and 3930 kilos: 30,000.00 iv. Vehicles with an unladen weight over 3930 kilos: 50,000.00 Php Php Php Php

- If Land Transportation operator violates these minimum limits of coverage, it is sufficient cause for the revocation of a certificate of public convenience.

When liability accrues? Where the insurance policy insures directly against liability, the insurers liability accrues immediately upon the occurrence of the injury upon which the liability depends, and does not depend on the recovery of judgment by the injured party against the insured.

Nature of the liability of the insurer:

It is not solidary with the insured. The liability of the insurer is based on contract, while that of the insured is based on tort. (Malayan Insurance v. CA 165 SCRA 536).

Who can issue policy or surety bond? Those authorized by the commissioner in the list furnished to LTO (Sec 375). -If the motor vehicle owner or the land transportation operator is unable to obtain or is unreasonably denied the policy insurance, they will be required to show proof of a cash deposit with the commissioner, but the authority of the insurance company to engage in casualty or surety lines of business shall be withdrawn immediately. (Sec 379)

Cancellation of the policy: a) By the insurer, it requires written notice to Motor Vehicle Owner / Land Transportation operator at least 15 day prior to intended effective date. - If so cancelled, the LTO may order the immediate confiscation of license plates, unless it receives new valid insurance / surety / proof of cash deposit or revival b y endorsement of the cancelled policy (Sec 380). b) By the insured, the Motor Vehicle owner / Land Transportation operator shall secure a similar policy or surety before the cancelled policy / surety ceases to be effective or make cash deposit and file the same or proof thereof with the LTO (Sec 381).

Other Prohibited Acts: 1) The Motor Vehicle Owner or the Land Transportation Operator cannot require drivers or employees to contribute to the payment of the premium (Sec 386). 2) Any government office or agency having the duty to implement the provisions, official or employee thereof shall not act as an agent in procuring the policy or surety bond and in no case shall the commission of the procuring agent exceed 10% of the premiums paid (Sec 387).

 Payment of Claims: A claim for payment is to be filed without unnecessary delay, within 6 months, from the date of accident by giving written notice setting forth the nature, extent and duration of the injuries as certified by the duly licensed physician. - The failure to file claim will be deemed a waiver. If a claim is filed but denied, an action must be brought within 1 year from date of denial with the Insurance Commissioner or the Court, otherwise the right of action will be deemed as having prescribed.

No fault indemnity claim: It is a claim for payment for death or injury to a passenger or third party without the necessity of proving fault or negligence, provided the following requisites are present: a) The claim is for death or injury to any passenger or third party; b) The total indemnity in respect of any one person does not exceed P5,000.00 c) The necessary proof of loss under oath to substantiate the claim must be submitted. - Note: Where the claim exceeds P5,000.00, the insurance company shall pay only P5,000.00 without prejudice to the claimant from pursuing his claim further, in which case, he shall not be required or compelled by the insurance company to execute any quitclaim or document releasing it from liability under the policy.

Rules on No fault indemnity claims: 1) A claim may be made against one motor vehicle only. 2) If the victim is an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which he is riding, mounting or dismounting from;

3) In any other case, (i.e. if the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle. 4) In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained.

Sufficient proof of loss: The following proofs of loss, when submitted under oath shall be sufficient evidence to substantiate the claim: 1) Police report of the accident and; 2) Death certificate and evidence sufficient to establish the proper payee or; 3) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed.

Authorized Driver Clause : The authorized driver clause is interpreted to refer to the insured or any person driving on the order of the insured or with his permission, provided, such person is permitted to operate a motor vehicle in accordance with our licensing laws or regulations and who is not otherwise disqualified. The main purpose of the authorized driver clause is to assure that the persons other than the insured owner, who drive the car on the insureds order, are duly licensed drivers and have no disqualification to drive a motor vehicle.

Note the following jurisprudence: 1) If the license is expired, person is not authorized to operate a motor vehicle (Tarco Jr. v. Philn Guaranty 15 SCRA 313) 2) Issued a Temporary Operators Permit or a Temporary Vehicle Receipt, a person is authorized to operate a motor vehicle, but

if it has expired, it is as if he ha no license (Gutierrez v. Capital Insurance 130 SCRA 618) 3) A tourist with license but in the country for more than 90 days is not authorized to operate a motor vehicle because it is as if he had no license. (Stokes vs. Malayan 127 SCRA 766) 4) A drivers license that bears all the earmarks of duly issued license is presumed genuine. ( CCC Insurance Corporation v CA 31 SCRA 264) 5) a license is not necessary, where the insured himself is the driver (Paterno v. Pyramid Insurance 161 SCRA 677)

5. Insurable Interest
It is required that the insured in an insurance contract should posses an interest of some kind, susceptible of pecuniary estimation--- known as insurable interest. Generally, a person has insurable interest in the subject matter insured when: He has such a relation or connection with, or concern in, such subject matter that he will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction, termination or injury by the happening of the event insured against.

Purpose of insurable interest requirement: 1. The existence of insurable interest is necessary because its absence renders the contract VOID. This is based on the principle that insurance is a contract of indemnity; 2. Without such insurable interest, the contract would in effect be a mere wager or gambling which is VOID.

A. Insurable Interest in Life and Property Insurance

Insurable interest in life insurance

Pertinent provisions of the Insurance Code:

SECTION 10. Every person has an insurable interest in the life & health: (a) (b) (c) Of himself, of his spouse & of his children; Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; Of any person under a legal obligation to him for the payment of money, or respecting property or services, of w/c death or illness might delay or prevent the performance; and Of any person upon whose life any estate or interest vested in him

(d) depends.

What is the basis of insurable interest in life? It exist when there is reasonable ground founded on the relation of the parties, either pecuniary or contractual or by blood or by affinity to expect some benefit from the continuance of life of the insured. When must insurable interest in life exist?

Insurable interest in life must exist at the time of the effectivity of the policy and need not exist at the time of the death of the insured as life insurance is not a contract of indemnity. It is meant to give financial security to the insured or his beneficiaries (Section 19). However, insurable interest of a creditor on the life of the debtor must exist only at the time of effectivity but also at the time of the death of the debtor as in this instance it is a contract of indemnity. His interest is capable of exact pecuniary measurement.

What is the extent of insurable interest in ones life?

He has unlimited interest in his own life or that of another person regardless of whether or not the latter has insurable interest. Provided, that if the beneficiary has no insurable interest, there is no force or bad faith. But, if he takes out a policy on the life of another and names himself as

beneficiary, he must have an insurable interest in the life of the insured.

NOTE: The insurable interest of every member of petitioners health care program in obtaining the health care agreement is his own health. Under the agreement, petitioner is bound to indemnify any member who incurs hospital, medical or any other expense asising from sickness, injury or other stipulated contingency to the extent agreed upon under the contract. (Philippine Health Care Providers Inc. V. Commissioner of Internal Revenue, Jun. 12 2008 G.R. 167330)

WHO MAY INSURANCE?

BE

BENEFICIARIES

IN

LIFE

Anyone, except who are prohibited by law to receive donations from the insured. Note art. 739 of the Civil Code, hence the following cannot be designated as beneficiaries; 1. 2. thereof; 3. Those made between persons guilty of adultery or concubinage at the time of the designation; Those guilty of the same criminal offense in consideration Those made to a public officer or his descendants/ascendants by reasons of his office; wife,

NOTE:
A prior conviction for adultery/concubinage is not required, it can be proven by proponderance of evidence in the same action nullifying the designation. Note the cases of Insular Life vs. Ebrado, 80 SCRA 181, where a common law wife of the insured who is married could not be named as a beneficiary and SSS vs. Davac, 17 SCRA 863, where the insured designated his second wife as a beneficiary was upheld as the latter was not aware of the first marriage; The disqualification does not extend to the children of the adultery or concubinage in view of the express recognition of the successional rights of illegitimate children (Art. 287, NCC and Art. 176, Family Code);

 MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE INSURED?

It is recognized that the insured may name anyone he chooses except those disqualified to receive donations as a beneficiary in his life insurance, even if he is a stranger and has no insurable interest in the life of the insured. The designation, however, must be in GOOD FAITH AND WITHOUT FRAUD OR INTENT TO ENTER INTO A WAGERING CONTRACT.

NOTE: Pertinent Decisions of the Supreme Court

Beneficiary in life and property insurance (2005 bar exams)

SC Ruling: Under the law, the beneficiary designated in a life insurance contract cannot be changed without his or her consent because of the beneficiarys vested interest in the policy. In this regard, it is worth nothing that the beneficiary designation indorsement which forms part of the policy in the name of Rodolfo Dimayuga states that the designation of the beneficiaries is irrevocable and no right or privilege under the policy may be exercised, or agreement made with the insurance company to any change in or amendment to the policy without the consent of the said beneficiary. Accordingly, based on the provisions of the contract and the law applicable, it is only with the consent of all the beneficiaries that any change or amendment to the policy concerning the irrevocability of beneficiaries may be legally and validly effected. [Philippine American Life Insurance Company v. Pineda (175 SCRA 416)]

Insurable interest on property

SC RULING: 1. The lessor cannot validly be a beneficiary of the fire insurance policy taken by the spouses Cha. It has no insurable interest on the merchandize insured because it remains with the spouses. 2. The automatic assignment of the policy to the lessor is void for being contrary to law and public policy. The proceeds of the fire insurance policy rightfully belong to the spouses cha.

The insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no insurable interest on the property insured. (Spouses Nilo Cha v. CA Aug. 18, 1997, 2009).

CAN THE BENEFICIARY BE CHANGED? The insured shall have the right to change the beneficiary he designated unless he has expressly waived the right in the policy (Section 11); If he has waived the right, the effect is to make the designation as irrevocable. Note that the designation of the guilty spouse as irrevocable beneficiary is revocable as the instance of the innocent spouse in cases of termination of: (1) (2) (3) (4) a subsequent marriage; nullification of marriage; annulment of marriage; and legal separation (Art. 34, (4) Family Code

WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE CONTRACT? The beneficiary has a vested right that cannot be taken away without his consent. In fact should the insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs. Philamlife, 20 SCRA 434).Note: where the wife and minor children were named
irrevocable beneficiaries, wife dies, the husband seeks to change the beneficiaries with the consent of the children. The consent is not valid due to minority. (Philamlife vs. Pineda, 170 SCRA 416).

NOTE: 2005 BAR EXAM (NO. IX -1) Q: What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. (2%)

A: The irrevocable beneficiary has a vested interest in the policy, including its incident such as the policy loan and cash surrender value. (Grogorio v. Sun Life Assurance Company of Canada, 48 Phil. 53 [1925])

2005 BAR EXAM (NO. IX- 2) Q: Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a friend, as his beneficiary. Jacob, however, changed his mind and wants Yob and Jojo, his other friends, to be included as beneficiaries considering that the proceeds of the policy are sufficient for the three friends.Can Jacob still add Yob and Jojo as his beneficiaries? Explain. (2%) A: The insured cannot add other beneficiaries as this would diminish the interest of Diwata who is the irrevocably designated beneficiary. The insured can only do so with the consent of Diwata.

WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT POLICY?

His interest is contingent as benefits are to be paid only if the assured dies before the specified period. If the insured outlives the period, the benefits are paid to the insured;

WHAT IS THE EFFECT OF FAILURE TO DESIGNATE OR BENEFICIARY IS DISQUALIFIED

The benefits of the policy shall accrue to the estate of the insured;

WHO RECOVERS IF PREDECEASES THE INSURED?

BENEFICIARY

If the designation is irrevocable, the legal representatives of the beneficiary may recover unless it was stipulated that the benefits are payable only if living. If designation is revocable, and no change is made, the benefits passes to the estate of the insured. The rule holds also if benefits were

payable only if living or if surviving and the beneficiary dies before the insured.

*WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE WHERE HE WILLFULLY KILLS THE INSURED?

If the killing is willful, the interest is forfeited, if he is the principal, an accomplice, or an accessory. The nearest relative of insured gets the proceeds if not otherwise disqualified (Section 12). If not willful or felonious, the provision does not apply.

B. Insurable interest in property insurance

Pertinent provisions of the Insurance Code:
SECTION 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest.

SECTION 14. An insurable interest in property may consist in: (a) (b) (c) An existing interest; An inchoate interest founded on an existing interest; or An expectancy, coupled w/ an existing interest in that out of w/c the expectancy arises.

In what does a person have insurable interest in property?

A person has insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or

liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured is an insurable interest (section 13). It may consist of:

(a) An existing interest;

(b) An inchoate interest founded on an existing interest (Defined: Interest in real estate which is not a present interest but which may ripen into a vested interest if not barred, extinguished, or divested);

(c ) An expectancy coupled with an existing interest in that out of which the expectancy arises.

Note:
1. Expectancy must be founded on an actual right to the thing or a valid contract for it; 2. A carrier or depository of any kind has insurable interest in the thing held by him such to the extent of his liability but not to exceed the value thereof (Sections 13, 14, and 15), such as a warehouseman.

But, a mere contingent or expectant interest in anything, not founded on contract or actual right to the thing is not insurable as there is no insurable interest (Section 16);

What is the test or measure of insurable interest in property? Whether one will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction. (Section 17)

 Must the beneficiary in property insurance have insurable interest on the property insured? YES, as no contract or policy of insurance on property shall be enforceable. Except for the benefit of some person having insurable interest in the property insured. WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST Must exist at the time the insurance takes effect and when the loss occurs but need not exits in the meantime (Section 19).

Distinctions
Insurable Interest in Life Insurable Interest in Property

1. Must exist at the time the 1. Must exist at the time the policy policy is taken. is taken and at the time loss occurs. 2. Taken on insureds life, his 2. Beneficiary must have an beneficiaries need not have insurable interest in property insurable interest on his life. insured. 3. No limit on the amount of 3. Insurable interest is limited to insurable interest. the value of interest in property insured.

In life insurance, the general rule is no limit on the amount of insurable interest. The exception is an insurance taken by the creditor on the life of his debtor. In which case, the insurable interest is limited only to the extent of the debt. (Sec. 10)

In relation to the need for the existence of insurable interest: GENERAL RULE: The effect of a change of interest in any part of a thing insured unaccompanied by a corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person. (Sec. 20)

No claim in insurance contract while it is suspended because it can happen that the insurable interest will be returned.

WHAT CHANGE IS CONTEMPLATED

An absolute transfer of the property not life, a lease/mortgage;

EXCEPTIONS TO THE REQUIREMENTS OF INSURABLE INTEREST: (1) Life, health or accident insurance because they are not contracts of indemnity and insurable interest is not required at the time of loss;

(2) A change of interest after occurrence of an injury and results in loss does not affect the right of the insured to indemnity; - After a loss, the liability of the insurer is fixed

(3) A change of interest in one or more several distinct things, separately insured by one policy, does not avoid as to the others (Section 22);

(4) A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the insured; (Section 23)

(5) A transfer of interest by one or several partners, joint owners, or owners in common, who are jointly insured to the others, does not avoid insurance even though it has been agreed that the insurance shall lease upon an allocation of the thing insured;

Note: There must be no stipulation against it otherwise it is avoided; Transfer to strangers avoid the policy

(6) When notwithstanding a prohibition, the consent of the obtained;

insurer is

(7) When the policy is so framed that it will insure to the benefit of whomsoever may become the owner during the continuance of the risk.

C. DOUBLE INSURANCE AND OVER INSURANCE

When does double insurance exist?

Double Insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. (Sec. 93)

REQUISITES OF DOUBLE INSURANCE

1. Same person is insured; 2. There are several insurers; 3. Subject insured is the same; 4. Interest insured is the same; and 5. Risk of peril insured against is the same;

Take Note: Double insurance is not prohibited by law. A person may therefore procure two or more insurances to cover his property. However, the insurer may insert an Other Insurance Clause which will prohibit double insurance. The rationale is to prevent the danger that the insured will over insure his property.

EFFECTS OF INSURANCE

OVER-INSURANCE

BY

DOUBLE

1. Insured, unless the policy otherwise provide, may claim payment from the insurers in such order as he may select up to the amount for which the insurers are severally liable under their respective contracts.

2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any policy without regard to the actual value of the subject matter insured.

3. Where the policy under which the insured claims is an unvalued policy, he must give credit, as against the full insurable value, for any sum received by him under the policy.

4. Where the insured receives any sum in excess of the valuation in case of a valued policy or the insurable value in case of an unvalued policy, he must hold such sum in trust for the insurers, according to their right of contribution among them;

5. In relation paragraph (4) Each insurer is bound, as between himself and the other insurers to contribute ratably to the loss in proportion to the amount for which it is liable under

his contract. ALSO REFERRED TO AS THE PRINCIPLE OF CONTRIBUTION WHICH HAS ALREADY BEEN INCOPORATED IN ALMOST ALL POLICIES that should there be other insurances covering the same property, the liability of the company would be limited to its ratable proportion of the loss or damage (Also known as CONTRIBUTION CLAUSE)

TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE

Whether the insured, in case of happening of the risk, can directly benefited by recovering on both policies? If yes there is double insurance.

IS DOUBLE INSURANCE VALID?

It depends, if there is prohibition in the policy then it is not valid, but if there is no prohibition, it is valid provided it must follow the provisions of the law.

If there is an OTHER INSURANCE CLAUSE one that prevents other insurance on the property except without the consent of the company THEN IT WILL PREVENT ENFORCEMENT OF THE POLICY, the policy will be NULL and VOID. If there is no OTHER INSURANCE CLAUSE, then double insurance is allowed but the provisions of Section 94 must be followed because property insurance is a contract of indemnity.

DISTINGUSHING INSURACE

OVER

INSURANCE

FROM

DOUBLE

DOUBLE OVER INSURANCE INSURANCE - there must be - one insurer is two or more sufficient; insurers; - the total - the value must amount of the always be in policies need excess of the not exceed the insurable value of the interest; insurable interest;

REINSURANCE occurs when an insurer procures a 3RD person to insure him against loss or liability by reason of such original insurance. (Section 95)

WHEN IS REINSURANCE COMPULSORY? 1. When a non-life insurer insured in any one risk or hazard an amount exceeding 20% of its net worth, the insurer needs reinsurance of the excess over such limit (Section 215 (1)) 2. When a foreign insurance company withdraws from the Philippines, it should cause its primary liabilities under policies insuring residents of the Philippines to be reinsured by another company authorized to transact an insurance business in the Philippines; WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER OBTAINS REINSURANCE?

Except in automatic reinsurance treaties (when two or more insurance companies agree in advance that they will reinsure a part of any line of insurance taken by the other. Since such contracts are self-executing and the obligation attaches automatically, the information required to be communicated herein could not influence the reinsurer in deciding whether or not to accept the reinsurance because it is automatZ representations of the original insured;all information or knowledge he possesses whether previously or subsequently acquired, which are material to the risk (Section 96)

WHAT KIND OF CONTRACT IS REINSURANCE? It is presumed to be a contract of indemnity against liability, and merely against damage (Section 97). As a RULE, the reinsurer is not liable to the reinsured for a loss under an original policy if the reinsured is not liable to the original policyholder.

Note: The subject of the reinsurance contract is the insurers risk not the property insured in the original policy Thus, it is not necessary that the insurer first pay on the claim on the original policy before claiming from the insurer.

WHAT IS THE EXTENT OF LIABILITY OF THE REINSURER? The liability of the reinsurer is measured by the liability of the reinsured to the original policy holder PROVIDED, it does not exceed the amount of reinsurance.

Example: A insures his house valued at 1 million to X insurance for 1.5 Million. X insurance reinsured with Z insurance for 1.2 million. The house burns. The liability of Z insurance is only up to 1 million, which is the liability of X Insurance. What if the original insured and insurance company settles for less, the liability of Z Insurance is still only up to what is paid by X Insurance OTHERWISE, the original insurer profits and thus violates that the principle that is a contract of indemnity.

 WHAT IS THE INTEREST OF THE ORIGINAL INSURED IN THE CONTRACT OF REINSURANCE? The original insured has no interest in the contract of reinsurance (section 98). Hence only the reinsured can claim against the reinsurer.

D. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY

INSURABLE INTEREST OF MORTGAGOR AND MORTGAGEE OVER MORTGAGED PROPERTY

Both the mortgagor and mortgagee each have an insurable interest in the property mortgaged and this interest is separate and distinct from the other, such that each of them may insure the same property for his own benefit. While the mortgagor, as owner, has an insurable interest equivalent to the value of the property, the mortgagees interest is only up to the extent of his debt.

WHO MAY INSURE A MORTGAGED PROPERTY?

Both the mortgagor and the mortgagee may take out separate policies with the same or different companies. The mortgagor to the extent of his property, the mortgagee to the extent of his credit; (section 8)

WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE PROPERTY MORTGAGED IN HIS OWN NAME BUT MAY THE

LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM?

UNLESS THE POLICY PROVIDES OTHERWISE:

a. The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be a party to the original contract. Hence, if the policy is cancelled, notice must be given to the mortgagor;

b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance, will have the same effect although the property is in the hands of the mortgagee. Hence, if there is a violation of the policy by the mortgagor, the mortgagee cannot recover;

c. Any act required to be done by the mortgagor may be performed by the mortgagee with the same effect if it has been performed by the mortgagor. Example: If notice of loss is required, the mortgagee may give it;

d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit and the balance if any to be paid to the mortgagor, since such is for both their benefits;

e. Upon recovery by the mortgagee, his credit is extinguished;

If on the other hand, (section 9), the insurer assents to the transfer of the insurance from the mortgagor to the mortgagee, and at the time of his assent, imposes further qualifications on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of the assignee Note the Union Mortgage Clause creates the relation of insured and insurer between mortgagee and the insurer independent of the

contract of the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee the insurance contract is now independent of that with the mortgagor.

WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR?

a. The mortgagee may collect from the insurer upon the occurrence of the loss to the extent of his credit; b. Unless otherwise stated, the mortgagor cannot collect the balance of the proceeds after the mortgagee is paid;

c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee;

d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is unable to collect in full from insurer, he can recover from the mortgagor;

e. The mortgagor is not released from the debt because the insurer is subrogated in place of the mortgagee; TAKE NOTE: A person who is interested in the safety and preservation of materials in his possession belonging to third parties because he stands either to benefit from their continued existence or to be prejudiced by their destruction, has an insurable interest thereon which is not necessarily limited to the extent of his liability to the owners thereof. A person having mere right of possession of property may insure it to its full value and in his own name, even when he is not responsible for its safekeeping. (ANG KA YU vs. PHOENIX ASSURANCE CO. LTD 1CAR 2)

6. Perfection of the Contract of Insurance

A. Offer and Acceptance/Consensuality

1.Delay in Acceptance

Take Note of this case:

VIRGINIA A. PEREZ vs. CA (G.R. No. 112329 2000)

January 28,

Only when the applicant pays the premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected. Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils. A contract, on the other hand, is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service. Under Article 1318 of the Civil Code, When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination, his application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased and respondent corporation was further conditioned upon compliance with the following requisites stated in the application form:

there shall be no contract of insurance unless and until a policy is issued on this application and that the said policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us in person while I/We, am/are in good health.

The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected. In the case at bar, the following conditions were imposed by the respondent company for the perfection of the contract of insurance:

(a) a policy must have been issued; (b) the premiums paid; and (c) the policy must have been delivered to and accepted by the applicant while he is in good health.

The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant while he is in good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the applicant at the time of the delivery of the policy is beyond the control or will of the insurance company. Rather, the condition is a suspensive one whereby the acquisition of rights depends upon the happening of an event which constitutes the condition. In this case, the suspensive condition was the policy must have been delivered and accepted by the applicant while he is in good health. There was non-fulfillment of the condition, however, inasmuch as the applicant was already dead at the time the policy was issued. Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract. No contract of insurance, unless unless the minds of the parties have met in agreement.- A contract of insurance, like all other contracts,

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

Delay in acting on the application not unreasonable so as to constitute gross negligence for which the insurance corporation may be penalized. - Respondent corporation cannot be held liable for gross negligence. It should be noted that an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application. The corporation may not be penalized for the delay in the processing of the application papers. Moreover, while it may have taken some time for the application papers to reach the main office, in the case at bar, the same was acted upon less than a week after it was received. The processing of applications by respondent corporation normally takes two to three weeks, the longest being a month.12 In this case, however, the requisite medical examination was undergone by the deceased on November 1, 1987; the application papers were forwarded to the head office on November 27, 1987; and the policy was issued on December 2, 1987. Under these circumstances, we hold that the delay could not be deemed unreasonable so as to constitute gross negligence

2. Delivery of Policy

DEFINE POLICY It is the written instrument in which a contract of insurance is set forth (Section 49.).

 HOW IS IT CONSTRUED, WHAT IF THE INSURED DOES NOT UNDERSTAND THE CONTENTS OF THE POLICY? Generally in favor of the insured and against the insurer. The burden of proving that the terms of the policy have been explained is upon the party seeking to enforce it. The claim of the beneficiary that since the insured was illiterate and spoke Chinese only, she could not be held guilty of concealment because the application and policy was in English (Tang vs. CA, 90 SCRA 236).

FORM OF THE POLICY It shall be printed and may contain blank spaces and any word, phrase, clause or mark, sign, symbol, signature, or number necessary to complete it shall be written in the blank spaces (Section 50). If there are riders, clauses, warranties or endorsements purporting to be part of the contract of insurance and which are pasted or attached to the policy is not binding on the insured unless the descriptive title of the same is also mentioned and written on the blank spaces provided in the policy. Note: if pasted or attached to the original policy at the time it was issued the signature of the insured is not necessary to make it binding. If after the original policy is issued, it must be countersigned by the insured unless applied for by the insured. No rider, clauses, or warranties, or endorsements shall be attached, printed or stamped on the policy unless the form of such application has been approved by the insurance commissioner.

Riders are forms attached to the policy when the company finds it necessary to alter or amend the applicants answer to any question in the application;

Clauses are forms containing additional stipulations;

Warranties are written statement/stipulations inserted on the face of the contract or incorporated by proper words or reference

 where the insured contracts as to the existence of facts, circumstances or conditions the truth of which are essential to the validity of the contract;

Endorsements are agreements not contained but may be written or attached to policy to change or modify a part thereof;

WHAT MUST A POLICY SPECIFY?

A policy must specify: (1) The parties whom the contract is made;

(2) The amount to be insured except in open or running policies; (3) The premium, or if the premium is to be determined at the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined; (4) The property or life insured;

(5) The interest of the insured in the property insured, if not the absolute owner; (6) The risks insured against;

(7) The period during which the insurance is to continue (Section 51).

WHAT ARE COVER NOTES?

It is a written memorandum of the most important terms of a preliminary contract of insurance intended to give protection pending investigation by the insurer of the risk or until the insurance of the formal policy (Section 52). It is also known as binding slip or receipt or binder.

 EFFECTIVITY OF A COVER NOTE

The effectivity of a cover note is 60 days as within such period, a policy shall be issued including in its terms the identical assurance found under the cover rate and the premium therefore. It may however, be extended beyond 60 days and with the written approval of the Insurance Commissioner if he determines that it does not violate the Insurance Code.

NOTE THE FOLLOWING PROMULGATED BY COMMISSIONER:

RULES THE

HAVE BEEN INSURANCE

(1) A cover note is valid for 60 days whether or not a premium is paid but may be cancelled by either party upon at least 7 day notice to the other party;

(2) If the other note is not cancelled, a regular policy must be issued within 60 days from the date of issue of the cover note including within its terms the identical insurance;

(3) It may be extended with the written approval of the commissioner but may be dispensed with by a certification of the President, Vice-President or General Manager of the insurer that the risks involved and the extension do not violate the code;

(4) Insurance companies may impose a deposit premium equivalent to at least 25% of the estimated premium but in no case less than Php500.00;

 WHEN WILL A COVER NOTE GIVE ADEQUATE INSURANCE PROTECTION? It gives adequate insurance protection when it is a preliminary contract of present insurance and not a mere agreement to insure a future time, as on acceptance of the application or issuance/delivery of the policy. (44 CJS 958)

Example: (1) Agent issued a provisional policy acknowledging receipt of premiums and stating that the insurance shall be effective upon approval and issuance of the policy by the head office. There is no protection as it is a mere acknowledgement of the payment of premiums as the effectivity of the insurance is expressly provided (Lim vs. Sunlife, 41 Phil 265); (2) In life insurance, a binding slip does not insure by itself as it was stated that it was subject to the approval of the insurer and the same was subsequently disapproved (Grepalife vs. CA, 89 SCRA 546);

IS PAYMENT OF A PREMIUM PAYMENT FOR THE COVER NOTE NECESSARY TO BE PROTECTED AGAINST RISK INSURED AGAINST?

Cover note held to be binding despite the absence of a premium payment for its issuance. No separate premiums are intended or required to be paid on a cover note because they do not contain particulars of the property insured that would serve as the basis for the computation of premiums such being the case no premium can be fixed. The cover notes should not be treated as a separate policy but should be integrated in the regular policy subsequently issued so that premiums on the regular policy should include that for the cover note (Pacific Timber vs. CA, 112 SCRA 199);

 WHOSE INTEREST IS INSURED (1) The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy (Section 53).

Example: (a) In the case of Del Val vs. Del Val, 29 Phil 534, the designation of a sister as a sole beneficiary in life insurance cannot be defeated by the contention of the plaintiff that the proceeds belong to the estate of the insured was disregarded as insurance is to be governed by special law, not by the law covering donations or succession;

(b) In the case of Bonifacio Bros. vs. Mara, G.R. No. 20853, 29 May 1967, action to recover cost of repairs and labor to a motor vehicle where the policy states loss is payable to H.S. Reyes, the mortgagee of the vehicle who had no knowledge of the fact that Mara had it repaired with Bonifacio Bros., where the court ruled that H.S. Reyes is the one entitled to the proceeds because a policy of insurance is a separate and independent contract between the insured and the insurer, and that third persons have no right to the proceeds of the insurance.

MAY A 3RD PERSON SUE THE INSURER?

No, in general rule unless there is stipulation. Unless otherwise specified in the policy, a 3RD person may sue if: (a) The insurance contract contain stipulation in favor of a 3RD person, the latter though not a party may sue to enforce before the contract is revoked by the parties;

Example: In case of Coquia vs. Fieldmens Insurance Co. 26 SCRA 179, the insurance company undertook to indemnify any authorized driver who was driving the motor vehicle insured. Coquia, while driving the insured motor vehicle met an accident and died. His heirs were allowed to sue the insurer, the policy being considered in the nature of a contract pour autrui and therefore the enforcement thereof may be demanded by a 3rd party whose benefit it was made;

(b) The insurance contract provides for indemnity against liability to 3RD persons.

Example: In the case of Guingon vs. Del Monte, 20 SCRA 1043, the insured procured insurance that would indemnify him against any and all sums, which he may be legally liable to pay in respect to the death or bodily injury to any person. A jeepney covered by the insurance had bumped Guingon and had caused his death. The insurance was held to be one for indemnity for liability to third persons (Third Party Liability), and therefore, such third person is entitled to sue the insurer. The test to determine whether a 3rd person may directly sue the insurer of the wrongdoer is: if the contract provides indemnity against liability to 3RD persons, then the latter to whom the insured is liable may directly sue the insurer, on the other hand, if the insurance if for the indemnity against actual loss or payment then the 3rd person cannot sue the insurer recourse is against the insured alone.

(2) If the contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as the agent/trustee or by general words in the policy (Section 54). If not indicated, it is as if the insurance is the taken out by the agent/trustee alone, consequently the principal has no right against the insurer;

(3) If a partner or part owner effects insurance, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest so that it may be applicable to the interest of his co-partners/owners (Section 55). Consequently, the policy must state that the interest of all is insured, if not, it is only the interest of the one getting the policy that is insured;

(4) When the description of the insured in the policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy (Section 56).

(5) When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk may become the owner of the interest insured (Section 57). The proceeds become payable to who may be the owner at the time the loss or injury occurs. This is an exception to section 20.

(6) The mere transfer of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured (Section 58). Note the exceptions to this rule as found in sections 20-24 and 57.

WHAT ARE KINDS OF INSURANCE POLICIES?

The kinds of policies are (1) Open, (2) Valued, or (3) Running (Section 59); An Open Policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss (Section 60). What is mentioned, as the amount is not the value of the property but merely the maximum limit of the insurers liability. In case of loss,

the insurer only pays the actual cash value at the time of loss;

A Valued Policy is one, which expresses on its face that the thing insured shall be valued at a specified sum (Section 61). The valuation of the property insured is conclusive between the parties. In the absence of fraud or mistake, such value will be paid in case of a total loss;

A Running Policy (Floating Policy) is one which contemplates successive insurances and which provides that the object of the policy may be from time to time defined especially as to the subjects of insurance, by additional statements or indorsements (Section 62). This is also known as a Floating Policy usually issued to provide indemnity for property, which cannot be covered by specific insurance because of a frequent change in location and quantity.

Example: Insurance procured by a retail establishment to cover its inventory that fluctuates in quantity, or is located in several areas;

VALUED POLICY DISTINGUISHED FROM AN OPEN POLICY

(1) In a valued policy, proof of value of the thing after the loss is not necessary. In an open policy, the insured must prove the value of the thing insured; (2) In a valued policy, the parties have conclusively stipulated that the property insured is valued at a specified sum. In an open policy, the value is not agreed but left to be ascertained upon loss;

Note: this does not violate the principle that a contract of insurance is a contract of indemnity as long as the valuation is reasonable and is bonafide).

WHAT IS THE PRESCRIPTIVE MOTOR VEHICLE INSURANCE?

PERIOD

OF

One year from denial of the claim not date of accident (Summit Guaranty vs. De Guzman, 15 SCRA 389)

WHERE IS THE ACTION FILED?

The action may be filed in the following: (1) Courts;

(2) Insurance Commissioner, who has concurrent jurisdiction with courts for claims not exceeding Php100,000.00; (3) POEA/DOLE have the power to compel a surety to make good on a solidary undertaking in the same proceeding where the liability of the principal obligor is determined.

Note that the claim becomes action upon filing with the court.

CANCELLATION OF THE POLICY

If policy other than life shall be cancelled by the insurer except upon prior notice thereof to the insured. No notice of

cancellation shall be effective if not based on the occurrence, after effective date of one or more grounds: (Section 64)

(1)Non payment of premium;

(2)Conviction of a crime arising out of acts increasing the hazard insured against

(3)Discovery of material representation;

(4)Discovery of willful or reckless acts or omissions increasing the hazard insured against;

(5)Physical changes in the property insured which the result in the property being uninsurable;

(6)Determination by the insurance commissioner that continuation of the policy would place the insurer in violation of the code.

FORM OF NOTICE OF CANCELLATION

It must be in writing, mailed or delivered to the name insured at the address shown in the policy which shall state:

(1)

The grounds relied upon as per section 64, and;

(2) That upon written request of the named insured, the insurer will furnish the facts on which cancellation is based (Section 65).

Notes: (1) A fire insurance policy is cancelled on October 15, 1981. The insurers clerk allegedly got notice of cancellation by mail but there was no proof that it was actually mailed and received. Insurer relies on the presumption of regularity. Held: Considering the strict language of the law that no policy can be cancelled without prior notice it behooved on the insurer to make sure that cancellation was actually sent and received by the insured (Malayan vs. Arnaldo, 156 SCRA 762); (2)A insured his building against fire and made the loss payable to mortgagee. Upon cancellation notice was sent to the mortgagee. Held: There was no valid notice of cancellation. The notice is personal to the insured and not to any unauthorized person (Saura Import Export vs. Philippine International Surety Co., Inc., 8 SCRA 143).

IS THE INSURED HAVE THE RIGHT TO RENEW HIS POLICY?

Yes, in insurance other than life, the named insured, may renew the policy upon payment of the premium due on the effective date of the renewal, if, he has not been given notice by the insurer of the intention not to renew or to condition renewal upon reduction of limits or elimination of coverages by mail or delivery at least forty five days in advance of the end of the policy.

B. Premium Payment

What is a premium?

The agreed price for assuming and carrying the risk.

WHEN IS THE PREMIUM?

INSURER

ENTITLED

TO

The insurer is entitled to the payment of a premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium is paid except in:

(1)In case of life or industrial life (life insurance policy where the premium is payable monthly or oftener) whenever the grace period applies (Section 77); (2)When the insurer makes a written acknowledgement of the receipt of premium, such is conclusive evidence of the payment of the premium to make it binding notwithstanding any stipulation therein that it shall not be binding until the premium is paid (Section 78) HENCE, the effect of an acknowledgement in a policy or contract of insurance of the receipt of the premium is that it is conclusive evidence of payment so far as to make the policy binding. However, it is conclusive only to make the policy binding and not for the purpose of collecting premium, and; (3)Where the obligee has accepted the bond or suretyship contract in which case such bond or suretyship contract becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety (Section 177.)

WHAT IS THE EFFECT OF PARTIAL PAYMENT?

Ordinarily, the obligation to pay premium when due is considered an indivisible obligation. Hence, forfeiture is not prevented by a part payment unless, payment by installment has been agreed

upon or is the established practice the basic principles of equity and fairness would not allow the insurer to collect and accept installments and later deny liability as premiums were not paid in full. (See Philippine Phoenix Surety and Ins. vs. Woodworks 20 SCRA 1270, Makati Tuscany Condominium Corporation vs. CA, payment by installment was agreed upon, note also Tibay vs. CA 257 SCRA 126 any partial payment when there is an agreement that the policy shall not be effective pending payment of full premium was in the concept of deposit.)

Note: PAYMENT TO INSURANCE AGENT OR BROKER is payment to the insurance company;

WILL PAYMENT BY PROMISORY NOTE OR CHECK BE SUFFICIENT TO MAKE THE POLICY BINDING?

No, art. 1249 2ND paragraph of the Civil Code, that such produces payment only when it is ENCASHED;

C. Non-Default Options in Life Insurance D. Reinstatement of a Lapsed Policy of Life Insurance E. Refund of Premiums

WHEN IS THE INSURED ENTITLED TO A RETURN OF THE PREMIUMS PAID?

The insured is entitled to a return when:

(1) To the whole premium, when no part of the interest in the thing insured is exposed to any of the perils insured against (Section 79 A);

(2) Where the insurance is made for a definite period of time and the insured surrenders his policy before the expiration of the period, here the insured only recovers a portion of the policy premiums corresponding with the unexpired time but it does not apply if: (a) the policy is not so definite;

(b) a short period rate (insurance is for a period of less than a year and a rate has been agreed to if the policy is surrendered; Example: If the policy is in force for a month the insurer retains 20% of the premium) has been agreed upon; (c) the policy is a life insurance policy it is indivisible but he has a cash surrender value;

(3) When the contract is voidable on account of fraud or misrepresentation of the insurer or the agent (Section 81);

(4) Where the contract is voidable on account of facts, the existence of which the insured was ignorant without his fault (Section 81);

(5) When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy; (Section 81);

(6) In case of over insurance. Here the insurance is in excess of the amount of the insurable interest of the insured and it is insured by several insurers, the insured is entitled to a RATABLE RETURN OF PREMIUM, proportional to the amount by which the aggregate sum insured in all the policies exceeds the insurable value.

 WHOM ARE THE PREMIUMS RETURNED?

Unless otherwise stated, they shall be returned to the insured who paid them.

WHEN ARE THEY NOT RECOVERABLE?

Premiums cannot be recovered:

(1) If the peril insured against has existed, and the insurer has been liable for any period, the period being entire and indivisible (Section 80);

(2)

In life insurance (Section 79-b) cash surrender value;

(3) When the insured is guilty of fraud or misrepresentation (Section 81).

7. Rescission of Insurance Contracts

A. Concealment

WHAT IS CONCEALMENT? Concealment is a neglect to communicate that which a party knows and ought to communicate (Section 26)

 WHAT IS THE EFFECT OF CONCEALMENT? Whether intentional or not, it entitles the injured party to rescind the contract of insurance (Section 27). Examples: (1) The insured does not disclose sickness but dies of another cause. There is concealment because it is material to a determination of the assumption of risk by the insurer; (2) The father of the insured obtained an insurance policy over his daughter, but did not disclose that she was a mongoloid child, the child dies of influenza, the concealment relieves the insurer of liability (Grepalife vs. CA 89 SCRA 543)

BASIS OF PROVISIONS CONCEALMENT/REPRESENTATION

ON

Fundamental characteristic of a contract of insurance that it is one of perfect/utmost good faith;

NOTE: 2001 BAR EXAM (N0.XVI): A applied for a non-medical life insurance. The insured did not inform the insurer that one week prior to his application for insurance, he was examined and confined at St. Lukes hospital where he was diagnosed for lung cancer. The insured soon thereafter died in a plane crash. Is the insurer liable considering that the fact concealed had no bearing with the cause of death of the insured? Why? A: No. The concealed fact is material to the approval and issuance of the insurance policy. It is well settled that the insured need not die of the disease he failed to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimate of the risks of the proposed insurance policy or in making inquiries.

 WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED? The party claiming existence of concealment must prove that there was knowledge on the part of the party charged with concealment.

AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT HAVE KNOWLEDGE OF THE FACT CONCEALED? Generally, a party must have knowledge of the fact concealed at the time of the effectivity of the policy. Note that even if a party did not know of the existence at the rime of application but before its effectivity, there is concealment. Information acquired after effectivity is not concealment and does not constitute ground to rescind the policy, as after the policy is issued, information subsequently acquired is no longer material as it will not affect or influence the party to enter into contract. However, in case of the reinstatement of a lapsed policy, facts known after effectivity but before reinstatement must be disclosed.

HOW IS THE CONCEALMENT DETERMINED?

MATERIALITY OF THE OR REPRESENTATION

Materiality is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (Section 31).

WHAT IS THE TEST OF MATERIALITY?

The test of materiality is whether knowledge of the true facts could have influence a prudent insurer in determining whether to accept the risk or in fixing the premiums.

MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED AND THE CAUSE OF THE LOSS? Not necessary Concealment need not be material, be of facts which about or contribute to or are connected of the insureds loss. It is immaterial that there is no causal relationship between the fact concealed and the loss sustained. It is sufficient that the nonrevelation has misled the insurer in forming its estimate of disadvantage of fixing the premium.

Examples: Insured concealed kidney disease and enlarged liver later he died of thrombosis, is the insurer liable? No, since the fact concealed was material though the insured did not die therefrom (Henson vs. Philam 50 OG 73428). Insured had concealed that he had kidney disease. He dies in plane crash. The insurer is not liable (Sunlife vs. CA, 245 SCRA 269.

WHAT FACTS MUST BE COMMUNICATED? Each party to an insurance contract is bound to communicate to the other all facts that meet the following requisites: (a) Such fact that must be within his knowledge as concealment requires knowledge of the fact concealed by the party charged with concealment; (b) Fact/s must be material to the contract it must be of such nature that had the insurer known of it, it would not have accepted the risk or demanded a higher premium; (c) That the other party had no means of ascertaining such fact/s; (d) That the party with a duty to communicate makes no warranty (Section 28) as the existence of a warranty make the

requirement to disclose superfluous but an intentional fraudulent omission on the part of the one insured to communicate information on a matter proving or tending to prove falsity of a warranty entitles the insurer to rescind (Section 29).

WHAT MATTER COMMUNICATED?

NEED

NOT

BE

Except in answer to the inquiries of the other: (1) Those which the other knows as the insurer cannot say that it has been deceived or misled;

Example: Insured discloses that he has tuberculosis to he agent of the insurer, who in turn omits to state the same in the application of the insured was deemed knowledge of the insurer (Insular Life Assurance Co. vs. Feliciano, 74 Phil 468). Insurer had surveyed the location and surrounding area of a building that it is to be insured against fire, an omission to state that there are neighboring buildings will not avoid policy;

(2) Those which in the exercise of ordinary care, the other ought to know, and of which, the former has no reason to suppose him to be ignorant. The facts that the other ought to know as per section 32 are:

(3) Those of which the other waives communication. A waiver takes place either, by the terms of the insurance or by he neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated (section 33).

(4) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material.

(5) Those which relate to the risk exempted from the policy, and which are not otherwise material (section 30).

Note:
SUNLIFE ASSURANCE CO. OF CANADA VS. CA, JUNE 22, 1995 (1996, 1997, and 2001 Bar Exams)

Robert Bacani was issued life insurance non-medical policy for P100,000.00 with his mother as beneficiary. In his application, he concealed his confinement at the Lung Center of the Philippines for certain illness. He died of a plane crash. The insurance company refused to pay for breach of the insurance contract.RTC and CA granted the claim of the beneficiary because the concealed facts were not material or irrelevant to the cause of death.

SC RULING: The SC reversed the ruling and held that the information which the insured failed to disclose was material and relevant to the approval and issuance of the policy. The facts concealed would have affected the insurers action on the application either by charging a higher rate of premium or rejecting the same. The insured need not die of the disease he concealed. It is sufficient that his nondisclosure misled the insurer in forming his estimate of the risk involved or in making inquiries. The contract of insurance can be rescinded by reason of concealment and this has to be exercised within the two year contestability period.

B. Misrepresentation/Omissions

WHAT IS REPRESENTATION?

Oral or written statement of a fact or a condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to take the risk (Section 36)

 WHEN MAY REPRESENTATION BE MADE?

Since it is an inducement to entering a contract it must ordinarily be made at the same time as or before the insurance of the policy (section 37). Note that it can also be made after the issuance of the policy when the purpose thereof is to induce the insurer to modify an existing insurance contract as the provisions also apply to a modification (Same with concealment)

HOW SHOULD CONSTRUED?

REPRESENTATION

BE

The language of a representation is to be interpreted by the same rules as the language of the contracts in general (section 38). Hence, it need not be literally true and correct/accurate in every respect, rather, it is sufficient if it is substantially or materially true. In case of a promissory representation, it is sufficient if it is substantially complied with.

WHAT ARE THE FORMS REPRESENTATION?

AND

KINDS

OF

Representations may be Oral or Written and can either be:

(a)Affirmative which is an affirmation of a fact existing when the contract begins;

(b) Promissory which is a statement by the insured concerning what is to happen during the term of the insurance.

IS A REPRESENTATION CONTRACT?

PART

OF

THE

No, it cannot qualify as an express provision in a contract (it is a collateral inducement to the contract but it may qualify an implied warranty (section 40).

CAN A REPRESENTATION BE WITHDRAWN OR ALTERED?

Yes, as long as the insurance has not yet been effected and the insurer has not yet been induced to issue the policy. If withdrawn or altered afterwards, the contract can be rescinded as the insurer has already been led to issue the policy (section 41).

TO WHAT DATE DOES A REPRESENTATION REFER?

It must be presumed to refer to the date on which the contract goes into effect (section 42).

Note: There is no false representation if it is true at the time the contract takes effect although false at the time it is made.

WHEN IS A REPRESENTATION SAID TO BE FALSE?

When the facts fail to correspond with its assertions or stipulations (Section 44)

MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HE HAS NO PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS?

When a person has no personal knowledge of facts he may or may not communicate such information to the insurer. If he does communicate, he is not responsible for its truth (section 43). Hence, there can be no misrepresentation.

WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD PERSON?

When the information material to the transaction was acquired by an agent of the insured, as knowledge of the agent is also knowledge of the principal.

WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT?

If it is false on material point, whether affirmative or promissory the injured party is entitled to rescind the contract from the time the representation becomes false. However, the right to rescind is considered waived by the acceptance of premium payments despite knowledge of the ground to rescind (section 45).

Examples: (a)Insurer was aware of the lack of the extinguishers required by the policy. But there is no waiver if the insurer had no knowledge of the ground at the time of the acceptance of the premium; (b)Unauthorized driver (Strokes vs. Malayan, 127 SCRA 766)

HOW IS MATERIALITY DETERMINED?

The same as concealment (Section 46) probable and reasonable influence of the facts upon the party to whom the representation is made in forming his estimate of the advantage/disadvantages of the contract or I making inquiries.

WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED?

The right to rescind must be exercised previous to the commencement of an action on the contract (section 48). Note the case of Tan Chay Hing vs. West Coast Life Insurance Co., 51 Phil 80, where an insurer interposed the defense in an action to claim the proceeds that the contract is null and void. Section 48 was held to apply only when there is a contract to rescind. It is also qualified by 2nd paragraph of section 48 which provides that after a policy of life insurance payable on the

death of the insured shall have been in force during the lifetime of the insured for a period of 2 years from the date of issue or its last reinstatement, the insurer cannot prove that the policy is void ab initio or is subject to rescission by reason of a fraudulent concealment or misrepresentation of the insured or his agent (known as the incontestability clause).

WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITY CLAUSE?

(a) On the part of the insurer an insurer has/should have a reasonable opportunity to investigate the statements which are made by the applicant an that after a definite period, it should no longer be permitted to question its validity; (b)On part of the insured its object is to give the greatest possible assurance that the beneficiaries would receive payment of the proceeds without question as to validity or the policy.

REQUISITES OF INCONTESTABILITY CLAUSE

The requisites are:

(1)

It is a life insurance policy;

(2)

It is payable on the death of the insured;

(3)

It has been in force during the lifetime of the insured for at least two years from date of issue/or last reinstatement.

Tan vs. CA, 174 SCRA 403 during the lifetime of the insured means that the policy is no longer in force if the insured dies.

Facts: Philam issued policy on November 6, 1973. On April 26, 1975 the insured died. The beneficiaries claimed but the insurer denied the claim on September 11, 1975 and rescinded the policy on the ground of misrepresentation and concealment. Held: Insurer has two years from date of issue/reinstatement within which to contest the policy whether or not the insured still lives within the period.

WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE LAPSE OF 2 YEARS?

(1)non-payment of premiums; (2)lack of insurable interest; (3)that the cause of death was excepted or not covered by the terms of the policy; (4)that the fraud was of a particular vicious type such as: a. policy was taken in furtherance of a scheme to murder the insured; b. where the insured substituted another for the medical examination; c. where the beneficiary feloniously killed the insured; (5)violation of a condition in the policy relating to military or naval service in time of war; (6)the necessary notice or proof of death was not given; (7)action is not brought within time specified in the policy, which in no case should be less than 1 year as per section 63.

 WHAT ARE THE INCONTESTABILITY?

EFFECTS

OF

The insurer can no longer escape liability, tender the policy or be allowed to prove that the policy is void ab initio or may be rescinded by reason of concealment or misrepresentation by the agent of the insured or the insured.

DISTINGUISH CONCEALMENT REPRESENTATION

FROM

Concealment is the neglect of one party to communicate to the other material facts. The information he gives in compliance with his duty to reveal information is representation. Representation therefore is the communication required to comply with the prohibition against concealment. Concealment is the passive and misrepresentation is the active form of the same bad faith.

CONCEALMENT COMPARED

AND

REPRESENTATION

1. In concealment the insured withholds information of material facts, while in representation the insured makes erroneous statements;

2. In concealment and misrepresentation both give the insurer the right to rescind the contract of insurance; 3. The materiality of concealment and representation are determined by the same rules; 4. Whether the concealment or representation is intentional or not, the injured party can rescind; 5. Since insurance contracts are of utmost good faith the insurer is also covered by the rule.

C. Breach of Warranties
Warranty defined

It is a statement or promise stated in the policy or incorporated therein by reference, whereby the insured expressly or impliedly (Section 67) contracts as to the past, present or future (Section 68) existence of certain facts, conditions or circumstances the literal truth of which is essential to the validity of the contract.

FORM

No particular form of words is necessary to create a warranty (Section 69). What is essential is what the parties intend a statement to be and if so intended as a warranty it must be included as part of the contract.

Note: (1) Whether a warranty is constituted or not depends upon the intention of the parties, the nature of the contract, or the words used thereto;

(2) In case of doubt, the statement is presumed to be a representation not a warranty.

WHAT ARE THE KINDS OF WARRANTIES?

(1)

Affirmative those that relate to matters that exist at or before the issuance of the policy;

(2) Promissory those where the insured promises or undertakes that certain matters shall exist or will be done or will be omitted after the policy takes effect. It is a statement in the policy, which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place (Section 72); Note that unless the contrary intention appears, the courts will presume that the warranty is merely an affirmative warranty.

(3) Express a statement in a policy of a matter relating to the person or thing insured or to the risk as a fact (Section 71) and where the assertion or promise is clearly set forth in the policy or incorporated therein by reference. They can be affirmative or promissory warranties;

An express warranty made at or before the execution of the policy should be contained (a) in the policy itself (b) in another instrument signed by the insured and referred to in the policy as making a part of it (Section 70). This includes

a rider it is a part of the policy, it need not be signed unless the rider was issued after the original policy took effect;

(4) Implied where the assertion or promise is not expressly set forth in the policy but because of the general tenor of the terms of the policy or from the very nature of the insurance contract, a warranty is necessarily inferred or understood. Note that the law only provides for implied warranties in contracts of marine insurance. See section 113 (seaworthiness) and 126 (deviation).

EFFECT OF VIOLATION OF A WARRANTY

The violation of a material warranty, or other material provision of the policy, on the part of either party thereto, entitles the other to rescind (Section 74.)

Note that the insured can exercise the right also when the insurer violates a warranty, like when it refuses to grant a loan on the policy. But as far as the insured,

Note also that:

(1) While a policy may declare that a violation of a specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy (Section 75). Meaning ordinarily a breach of an immaterial provision does not avoid a policy, however, if stipulated that any breach avoids the policy, the policy is avoided;

(2) A breach of a warranty without fraud, merely exonerates an insurer from the time it occurs, or where it is broken at its inception, prevents the policy from attaching

to the risk (Section 76). Meaning that if the breach is without fraud the policy is avoided only from the time of the breach it is still effective. Consequently, the insured is entitled to a pro-rate return of the premium paid under section 79 (b) or all premiums, if the breach occurs at the inception of the contract, as such is void ab initio and had never become binding;

Note that a causal connection between the violation of the warranty is not necessary So, even if the violation did act contribute in the loss the other party may still rescind.

Example: A insured building against fire. A warranty stated that no hazardous goods should be stored. A stored fireworks. The building was burned and the fireworks were discovered stored in the area not affected by the fire. The insurer was not held liable as the storage had increased the risk (Young vs. Midland Textiles Ins. 30 Phil 617);

THE NON PERFORMANCE OF A PROMISSORY WARRANTY DOES NOT AVOID THE POLICY WHEN BEFORE THE ARRIVAL OF THE TIME FOR PERFORMANCE

(1)

The loss insured against happens;

(2)

The performance becomes unlawful at the place of the contract;

(3)

The performance becomes impossible.

DISTINGUISHING IT FROM REPRESENTATIONS

WARRANTY A warranty is part of the contract; A warranty is expressly set forth in the policy or incorporated therein by reference;

REPRESENTATIO N Repre sentation is merely a collateral inducement thereto; A Representation my be oral or written in another statement;

A warranty must strictly and literally performed;

Representation must be substantially true;

A warranty presumed material;

is A representation must be shown to be so;

A breach of warranty is a breach of the contract itself

(mis)representati on is a ground to rescind the contract;

8. Claims Settlement and Subrogation

A. Notice and Proof of Loss

 NOTICE AND PROOF OF LOSS Notice of loss must be given without unnecessary delay by the insured or some person entitled to the benefit of the insurance. IF NOT THEN, the insurer is exonerated (Section 88). WITHOUT UNNECESSARY DELAY is within a reasonable time, depending on circumstances of a peculiar case, although courts have construed the requirement liberally in favor of the insured.

PROOF OF LOSS If the policy requires Preliminary Proof of Loss (evidence given the insurer of the occurrence of the loss, its particulars, and data necessary to enable it to determine liability and the amount thereof) IT IS NOT NECESSARY that the insured give such proof AS MAY OR WOULD BE NECESSARY IN A COURT OF JUSTICE WHAT IS SUFFICIENT is the BEST EVIDENCE which he has in his power at that time (Section 89).

WHEN ARE DEFECTS IN THE NOTICE OR PROOF LOSS DEEMED WAIVED BY THE INSURER

1. When the insurer fails to specify to the insured any defect which the insured can remedy without delay;

2. When the insurer denies liability on a ground other than that defect in the notice or proof of loss;

Example: Denial is based on nullity of the contract (Section 90)

WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED

1. If it is caused by any act of the insurer.

3. If the insurer omits to make an objection promptly and specifically on that ground. despite delay, the insurer does not object (Section 91). REQUIREMENT OF CERTIFICATION TESTIMONY OF A THIRD PERSON OR

In the giving of preliminary proof of loss, a certification or testimony of a third person other than the insured is required, it is sufficient for the insured to use REASONABLE DILIGENCE to procure it. In case of REFUSAL to give it, the insured can furnish REASONABLE EVIDENCE to the insurer that such refusal WAS NOT INDUCED BY ANY JUST GROUNDS OF DISBELIEF in the facts necessary to be certified or testified ONCE SHOWN or GIVEN the requirement may be dispensed with (Section 92).

B. Guidelines on Claims Settlement

1. Unfair Claims Settlement; Sanctions

Claims of Settlement

The indemnification of the loss of the insured.

In case of an unreasonable delay/denial in the payment of the insureds claim by the insurer, the unsured can recover:

a. Attorneys fees b. Expenses incurred by reason of the unreasonablewithholding; c. Interest at double the legal interest rate fixed by the Monetary Board; and d. Amount of the claim. When should claims be paid? In case of life policies, it is maturing upon the expiration of the term or at the death of the insured, occurring prior to the expiration of the term stipulated. If maturing upon the expiration of the term, the proceeds are immediately payable to the insured, except if the proceeds are payable in installments or annuities, which shall be paid as they become due. If maturing upon death of the insured, the proceeds are payable to the beneficiaries within 60 days after presentation of the claim and filing of proof of death.

Effect of refusal or failure to pay claim within the time prescribed The insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary Board which means twice 12% per annum (legal rate of interest prescribed in CB No 416) or 24% per annum on the proceeds of the insurance from the date following the time prescribed in Secs. 242 or 243 of the Insurance Code, until the claim is fully satisfied, Except: Refusal of failure to pay the loss or damage will entitle the insured to collect interest unless such refusal or failure to pay is based on the ground that the claim is fraudulent.

2. Prescription of Action

RULES

1. The parties to a contract of insurance may validly agree that an action on the policy should be brought within a limited period of time, provided such period is not less than one (1) year from the time the cause of action accrues. If the period agreed upon is less than one (1) year from the time the cause of action accrues, such agreement is VOID. a. The stipulated prescriptive period shall begin to run from the date of the insurers rejection of the claim filed by the insured or beneficiary and not from the time of the loss; b. In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the prescriptive period should be counted from the date of the claim was denied and not at the first reconsideration. (Sun Life Office, LTD v. CA, March 13, 1991) 2. If there is no stipulation or the stipulation was void, the insured may bring the action within ten (10) years in case the contract is written. 3. In Compulsory Motor Vehicle Insurance, the written notice of claims must be filed within 6 months from the date of the accident, otherwise the claim is deemed waived even if the same is brought within one year from its rejection. 4. The suit for damages, either with the proper court or with the Insurance Commissioner, should be filed within one year from the date of the denial of the claim by the insurer, otherwise, claimants right of action shall prescribe.

3. Subrogation
WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO GIVING OF NOTICE OF LOSS?

In property insurance, after the insured has received payment from the insurer of the loss covered by the policy, the insurance company is SUBROGATED to the rights of the insured against the wrongdoer or the person who has violated the contract. The right of subrogation accrues upon payment of the insurance claim. NOTE: Subrogation takes effect by operation of law and does not require the consent of the wrong doer (Firemans Fire Insurance vs. Jamilla & Company, 70 SCRA 323).

THERE IS NO SUBROGATION IN: (a)Life insurance as it is not a contract of indemnity (b)When proximate cause of the loss is the insured himself (c)When the insurer pays to the insured a loss not covered by the policy; The insured is no longer to collect from the wrongdoer if the amount that he received from the insurer has fully compensated for the loss.

SUBROGATION (ART. 2207, NEW CIVIL CODE)

NOTE: PHILIPPINE AMERICAN GEN. INSURANCE CO. VS. CA & FELMAN SHIPPING LINES, JUNE 11,1997.

SC RULING: It ordered Felman to pay Phialamgen P 755, 250.00 plus interest pursuant to Art. 2207 0f the Civil Code which provides: Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract, the insurance company shall be subrogated to the right of the insured against the wrongdoer or the person who violated the contract.