Commercial Law Review

GROUP I
Dagupen, Karl
Lachica, Samm Adrian
Laguesma, Abrillius Raffy
Sawac, Jester
 I.

1. Distinguish Friendly Fire from Hostile Fire.

Friendly fire is one contained in its proper receptacle or place while hostile
fire refers to one that is uncontrolled, left its normal place, and became
destructive. A fire may start off as a friendly fire, however, once the fire has
passed outside the limits assigned to it, it becomes a hostile fire. For example, if
fire escapes through the crack of a grill and sets fire to the neighboring
properties, the fire is hostile and the loss is covered by the fire insurance.
In friendly fire, the liability of the insurer does not attach but such liability of
the insurer arises in case of a hostile fire. 1

II.

1. The owner of a freight truck, who is also a rice dealer, insured the rice it was
carrying for P200,000.00 based on the information relayed to him by the
purchaser. The actual value of the cargo is P150,000.00, the amount issued by
the owner for the rice his truck was carrying. Along its way to the owners
warehouse, the truck skidded, crashed against a bigger truck and fell on its side.
This caused the trucks cargo to fall from the truck. Since it was raining, the sacks
of rice were all soaked from the rain. Will the owner of the truck and cargo be
able to collect on the insurance of the cargo? If yes, how much? Justify
your answer.
The owner of the truck will be able to collect on the insurance of the cargo.
As the carrier of the cargo, he has insurable interest over the cargo. As provided
by the Insurance Code, a carrier or depositary of any kind has an insurable
interest in a thing held by him as such, to the extent of his liability but not to
exceed the value thereof.2 The extent of liability of the owner of the truck is the
value of the cargo. Therefore, as the carrier of the cargo, the owner of the truck
can collect as much as the actual value of the rice cargo, which will not exceed
P150,000.00.
The owner of the cargo, however cannot collect on the insurance policy
since he has a different insurable interest from that of the carrier which was not
insured in the given case.

1 Aquino, Timoteo B. 2014. Essentials of Insurance Law, citing Huebner, Black and
Webb, p.113.

2 Section 15, Insurance Code of the Philippines, Republic Act 10607

 Insurable interest in property is defined 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.3 Anyone
has an insurable interest in property who derives a benefit from its existence or
would suffer loss from its destruction whether he has or has not any title in, or
lien upon or possession of the property.4

2. Elsa insured her life for P500,000.00 from ABC Insurance Company and made
her mother, Edith, her irrevocable beneficiary. In her application for insurance,
she stated therein that she is a law graduate when, in fact, she still had one
semester to go. One year after, ABC Insurance Company learned about the
misrepresentation made by Elsa as to her educational attainment. Despite this
knowledge, it continued accepting the monthly premiums of Elsa. On the 18 th
month, Elsa died. Her mother who is the beneficiary named in the policy filed a
claim with the insurer. The insurer denied the claim saying that Elsa is guilty of
misrepresentation and said misrepresentation entitles the insurer to rescind the
contract of insurance.

a. What is misrepresentation?
A representation is to be deemed false when the facts fail to correspond
with its assertions or stipulations.5 This can refer to erroneous statements of
facts by the insured with the intent of inducing the insurer to enter into the
insurance contract. It is an affirmative defense. To avoid liability, the insurer
has the duty to establish such a defense by satisfactory and convincing
evidence.6 Misrepresentation has the following requisites:
i. The insured stated a fact which is untrue;
ii. Such fact was stated with knowledge that it is untrue and with
intent to deceive or which he states positively as true without
knowing it to be true and which has a tendency to mislead;
and
iii. Such fact in either case is material to the risk.

3 Section 13, Insurance Code of the Philippines, Republic Act 10607

4 Filipino Merchants Insurance Co., Inc. vs. Court of Appeals, G.R. No. 85141,
November 28, 1989

5 Section 44, Insurance Code of the Philippines, Republic Act 10607

6 Ng Gan Zee vs. Asian Crusader Life Assn. Corp., G.R. No. L-30685, May 30, 1983
b. Is the contention of ABC Insurance Company correct? Explain your
answer fully.
No. ABC Insurance Company is incorrect. Section 45 of the Insurance
Code provides:
Sec. 45. If a representation is false in a material point, whether affirmative
or promissory, the injured party is entitled to rescind the contract from the
time the representation becomes false.

This means that before a misrepresentation can be used as an affirmative

defense by the insurer to rescind the contract of insurance, the
misrepresentation must be material. Section 46 of the same Code provides
that the test of materiality in misrepresentation is the same as the materiality
of concealment. Hence:
Sec. 31. Materiality is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the party to whom
the communication is due, in forming his estimates of the disadvantages
of the proposed contract, or in making his inquiries.

There is material misrepresentation which will give rise to the right to

rescind the contract of insurance if the knowledge of one party will affect the
insurers action on his application for insurance coverage, either in the
approval of the contract and its corresponding adjustment for premiums or
rejecting the application or in fixing the terms and conditions of the policy.
Moreover, the right to rescind the contract based on misrepresentation is
qualified by Section 48 of the Code:
Section 48. Whenever the right to rescind a contract of insurance is given
to the insurer by any provision of this chapter, such right must be exercise
previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a period of
two (2) years from the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio or is rescindable by
reason of the fraudulent concealment or misrepresentation of the insured
or his agent.

In the case at bar, the misrepresentation of Elsa as to her education

attainment cannot be considered as material representation. ABC Insurance
company was not influenced in any manner in fixing and approving the
insurance contract with Elsa due to the misrepresentation of educational
attainment. Therefore, Elsas mother, Edith, is entitled to the insurance policy.
Even assuming arguendo, that the misrepresentation of Elsa is a material
misrepresentation that it induced that insurer to approve and fix the premiums
 as they are in the insurance contract, Section 48 would negate the right of
ABC Insurance Company to rescind the contract since it was opted to after a
claim was commenced by Elsas mother on the contract of insurance.

3. Eric Talbot took an insurance on the life of his son Sonny when he was just 6
years old. In the application from, he was asked by XYZ Insurance Company to
accomplish, he indicated therein that Sonny is in good health and is not suffering
from any illness., knowing him to be suffering from a congenital heart condition.
When Sonny was 20 years, he died in a car accident. Eric Talbot, who was the
beneficiary filed a claim with XYZ Insurance Company which denied the claim.
Thereafter, Eric Talbot filed suit on the contract, the insurer opted to rescind the
contract upon learning of the action filed by Eric Talbot.

a. Is the insurer correct in denying the claim of Eric Talbot?

No. The second paragraph of Section 48 provides:
After a policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a period of
two (2) years from the date of its issue or its last reinstatement, the insurer
cannot prove that the policy is void ab initio or rescindable by reason of
the fraudulent concealment or misrepresentation of the insured or his
agent.
This incontestable clause affords the insurer the opportunity to
investigate and act promptly if it wishes to avoid the policy. And the facts
can be determined if it were to be investigated within the soonest possible
time. The insurer has two (2) years from the date of the issuance of the
contract or its last reinstatement within which to contest the policy whether
due to misrepresentation or concealment. After the lapse of the two (2)
year period, the insurer can no longer put up the defense of
misrepresentation or concealment, no matter how clear and well-founded
they may be. Here, the contract of insurance was issued when the insured
was only six (6) years old. Although there was material misrepresentation
or concealment on the part of the applicant, the same can no longer be
raised as a defense by the insurer since more than 2 years has already
elapsed.

b. Is the insurer correct in rescinding the contract? Explain.

No. The right of the insurer to rescind the contract has been
forfeited. First, as stated in the first paragraph of Section 48 of the Code,
the right to rescind must be exercised previous to commencement of an
action on the contract. In the case at bar, Eric Talbot, the beneficiary and
father of the insured, already commencement an action in court to collect
on the insurance policy.
 Second, as stated on the second paragraph of Section 48, the
insurance contract becomes incontestable after the lapse of 2 years for
the date of its issuance or its last reinstatement. After such period, the
insurer can no longer prove that the policy is void ab ignition or is
rescindable by reason of fraudulent misrepresentation of concealment.

4. Is suicide compensable? Explain.

It depends. The insurance policy may provide for suicide as an excepted
peril or may include suicide as one insured against. However, Section 183
provides that a stipulation in contract of insurance is not necessary for the insurer
to be liable even in the case of suicide provided the insurance policy have been
in force for a period of two (2) years.:
Sec. 183. The insurer in a life insurance contract shall be liable in case of
suicide only when it is committed after the policy has been in force for a
period of two (2) years from the date of its issue or of its last
reinstatement, unless the policy provides a shorter period: Provided,
however, that suicide committed in the state of insanity shall be
compensable regardless of the date of commission.

From the above-quoted provision, the insurer may be held liable even
before the two-year period if:
i. A shorter period is provided for in the insurance contract; or
ii. When the suicide was committed in the state of insanity.

5. Explain when alteration will result in the rescission of the contract of

insurance.
In fire insurance contracts, as provided in Section 170 of the Insurance
Code:
Sec. 170. An alteration in the use or condition of a thing insured from that to
which it is limited by the policy made without the consent of the insurer, by means
within the control of the insured, and increasing the risks, entitles the insurer to
rescind the contract of fire insurance.
From the provision of the law, alteration will give the insurer the right to
rescind the contract of fire insurance if the following requisites are present:
a. The alteration is on the use or condition of the thing insured;
b. The use or condition of the thing insured is limited in the policy;
c. The alteration is made without the consent of the insurer;
d. The alteration is within the control of the insured; and
e. The alteration increases the risk.
 In Malayan Insurance Company, Inc. v. PAP Co. Ltd., 7 the Supreme Court
found that the insured machineries and equipment were moved from one building
to another which was not provided for nor stipulated in the insurance policy
without the consent of the insurer. The Court considered that transfer of the
machineries and equipment as an alteration of the location which increased the
risk of loss. The transfer of the things insured changes their condition. For
alteration to give rise to the right to rescind on the part of the insurer, it should be
material in such a way that there is an increase in the hazard or risk if there is
substantial change of conditions affecting the risk.
6. Explain the non-default options in an insurance contract.
Non-default options in a life insurance contract refers to the available
remedies and grants to the insured to prevent the lapse or forfeiture of the
insurance policy. They are in the nature of options to which the policyholder is
entitled in case he defaults in the payment of premiums after three (3) full annual
premiums have been paid.8
Section 233, paragraph f of the Insurance Code enumerates the options
available to the policyholder.
a. A cash surrender value payable upon surrender of the policy which shall
not be less than the reserve on the policy, the basis of which shall be
indicated, for the then current policy year and any dividend additions
thereto, reduced by a surrender charge which shall not be more than one-
fifth (1/5) of the entire reserve or two and one-half percent (2%) of the
amount insured and any dividend additions thereto; and
b. One or more paid-up benefits on a plan or plans specified in the policy of
such value as may be purchased by the cash surrender value;
c. Section 233, paragraph g which refers to an automatic loan clause
wherein in case the cash surrender value of the policy becomes available
while it is still in force, the insurer will advance a sum equal to or at the
option of the policyholder, less than the cash surrender value on the policy
at a specified rate and deduct from such loan any indebtedness or unpaid
premium for the current policy year. This clause can be deferred for not
exceeding six (6) months.
d. Section 233, paragraph j, which entitles the policyholder to reinstatement
of the policy at any time within the three (3) years from the date of default
of premium payment provided that the cash surrender value has not been
paid yet. Provided further that any overdue premiums and indebtedness

7 See Malayan Insurance Company, Inc. v. PAP Co., Ltd., (Phil. Branch), G.R. No.
200784, August 7, 2013.

8 Section 233 (f), Insurance Code of the Philippines, Republic Act 10607
 due to the insurer will be paid with interest and evidence of insurability
satisfactory to the insurance company.
e. Section 233, paragraph a, entitling the policy holder a grace period either
of 30 days or of one (1) month within which the payment of any premium
after the first may be made, subject to an interest rate not in excess of six
percent (6%) per annum for the number of days of grace elapsing before
the payment of premium, during which the policy is in full force and effect.

7. Explain the Test of Materiality.

Section 31 of the Code provides that it 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 advantages of the
proposed contract, or in making his inquiries.
The matter concealed or misrepresented is material if it relates to physical
hazard or moral hazards which affect the estimate of the disadvantages of the
proposed contract. According to Professor Vance, the test of materiality is the
effect which the knowledge of the fact in question would have on the making of
the contract. To be material, a fact need not increase the risk or contribute to any
loss or damage suffered. It is sufficient if the knowledge of it would influence the
parties in making the contract.9

8. Enumerate the matters that must be specified in the insurance policy.

Under section 51 of R.A 10607 a policy of insurance must specify:
a. The parties between whom the contract is made;
b. The amount to be insured except in the cases of open or running policies;
c. The premium, or if the insurance is of a character where the exact
premium is only determinable upon the termination of the contract, a
statement of the basis and rates upon which the final premium is to be
determined;
d. The property or life insured;
e. The interest of the insured in property insured, if he is not the absolute
owner thereof;
f. The risks insured against; and
g. The period during which the insurance is to continue.

9. Compare concealment from misrepresentation.

Concealment, as provided by Section 26 of the Code, is a neglect to
communicate that which a party knows and ought to communicate while in
misrepresentation one party makes erroneous statements of facts with the intent
of inducing the other to enter into insurance contract. In the former, the party
concealing is duty bound to disclose material facts to the other while in the latter,
9 Aquino, Timoteo B. 2014. Essentials of Insurance Law, citing Vance, p. 347.
 the party making misrepresentations used the same to collaterally induced the
other to enter in to an insurance contract.
In concealment, the party liable does not communicate facts which must
be communicated to the other. There is complete absence of communication. In
misrepresentation, communication of facts takes place, only that they are not as
what the party communicating ought to be. There is twisting of facts in
misrepresentation.
It must be noted, however, that in both cases, the right to rescind the
contract becomes available to the injured party once there is proof of materiality
of the concealment or misrepresentation.

10. Country Bankers Insurance Corporation vs. Antonio Lagman

G.R. No. 165487, July 13, 2012
Facts:
Nelson Santos applied for a license with the National Food Authority (NFA) to engage in
the business of storing not more than 30,000 sacks of palay valued at P5,250,000.00 in
his warehouse at Barangay Malacampa, Camiling, Tarlac. Before the license could be
approved, the General Bonded Warehouse Act, as amended, requires that the applicant
post a cash bond, a secured real estate, or a bond signed by a duly authorize bonding
company, which amount will be fixed by the NFA administrator at not less than thirty-
three and one third percent of the market value of the maximum quantity of rice to be
received. As such, Country Bankers Insurance issued Warehouse Bond Nos. 03304 and
02355 on 1989 through its agent Lagman. Santos was the principal, Lagman was the
surety and the Republic, through the NFA was the oblige. Succeeding Indemnity
Agreements were executed by Santos with several persons and Lagman as one of the
co-signors. They bound themselves jointly and severally liable to Country bankers for
any damages, prejudices, loss, payments, advances, expenses, legal cost and
attorneys fees which it may sustain as a consequence of the bond.
Thereafter, Santos secured a loan using the warehouse receipts as collateral.
The loan matured and Santos defaulted in payment and the sacks of palay covered by
the warehouse receipts were no longer found in the bonded warehouse. As a
consequence, Country Bankers was compelled to pay on the bonds it issued. In turn,
Country Bankers filed a complaint for sum of money but Lagman denied the claims
arguing that the 1989 bonds were only good for one (1) year, and they were
subsequently novated by the issuance of Warehouse Bond No. 03515. The trial court
found Lagman liable. The Court of Appeals reversed the decision siding on Lagmans
argument that the 1989 bonds were superseded by the 1990 bond.
Issue:
 Did the appellate court seriously erred in disregarding the express provision of
Section 177 of the Insurance Code when it held that the 1989 bonds were superseded
by the 1990 bond despite the non-cancellation by the bond oblige?
Held:
Yes. The official receipts in question serve as proof of payment of the premium
for one year on each surety bond. It does not, however, automatically mean that the
surety bond is effective for only one (1) year. In fact, the effectivity of the bond is not
wholly dependent on the payment of premium. Section 177 of the Insurance Code
expresses:

Sec. 177. The surety is entitled to payment of the premium as soon as the contract of
suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or
bonding shall be valid and binding unless and until the premium therefor has been paid,
except where the obligee has accepted the bond, in which case the bond becomes
valid and enforceable irrespective of whether or not the premium has been paid by
the obligor to the surety: Provided, That if the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety shall collect only reasonable amount,
not exceeding fifty per centum of the premium due thereon as service fee plus the cost
of stamps or other taxes imposed for the issuance of the contract or bond: Provided,
however, That if the non-acceptance of the bond be due to the fault or negligence of the
surety, no such service fee, stamps or taxes shall be collected. (Emphasis supplied)

The 1989 Bonds have identical provisions and they state in very clear terms the
effectivity of these bonds, viz:

NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the
depositors PALAY received by him for STORAGE at any time that demand therefore is
made, or shall pay the market value therefore in case he is unable to return the same,
then this obligation shall be null and void; otherwise it shall remain in full force and effect
and may be enforced in the manner provided by said Act No. 3893 as amended by
Republic Act No. 247 and P.D. No. 4. This bond shall remain in force until cancelled
by the Administrator of National Food Authority.

This provision in the bonds is but in compliance with the second paragraph of
Section 177 of the Insurance Code, which specifies that a continuing bond, as in this
case where there is no fixed expiration date, may be cancelled only by the obligee,
which is the NFA, by the Insurance Commissioner, and by the court. Thus, in case of a
continuing bond, the obligor shall pay the subsequent annual premium as it falls due
until the contract of suretyship is cancelled by the obligee or by the Commissioner or by
a court of competent jurisdiction, as the case may be.
 By law and by the specific contract involved in this case, the effectivity of the
bond required for the retention of a license to engage in the business of receiving rice
for storage is determined not alone by the payment of premiums but principally by the
Administrator of the NFA. From beginning to end, the Administrators brief is the enabling
or disabling document.

TRUE OR FALSE
1. Presidential Decree 1460 is also known as the Insurance Code of the Philippines
FALSE. It is the law which provided for the codification of all insurance laws.
2. A contract insurance is an agreement whereby one undertakes gratuitously or for
a consideration to indemnify another against loss or damage from a known
event.
FALSE. Section 2 (a) of the Insurance Code provides:
Sec. 2 (a). A contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event.
3. An insurance contract is an innominate contract.
FALSE. It is a nominate contract which has its own individuality and regulated by
special provisions of law. It is regulated by Republic Act 10607 also known as the
Insurance Code of the Philippines.
4. An insurance contract is characterized by an element of risk.
TRUE. Uncertainty or risk is a feature of insurance as provided in Section 3 of
the Code.
Sec. 3. Any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest, or create liability against him, may
be insured against.
5. An insurance contract is enforceable against the whole world.
FALSE. An insurance contract is entered into with great consideration to the
circumstances of the parties. Hence, it is personal. It is enforceable only between
the contracting parties.
6. Uberrimae fides is expected only from the insurer.
FALSE. Utmost good faith is not imposed only on the part of the insurer but also
on the part of the insured. The duty to disclose material facts is not expected only
from the insured but also from the insurer since the latter can avoid the policy if
the former fails.
7. Any contingent and known event, whether past or future, which may cause
damage to a person may be insured against.
 FALSE. To be insurable, the risk must be contingent and unknown, whether past
or future. In addition, the person damaged or injured must have insurable
interest.
8. The insured is the party to be indemnified in case of loss.
TRUE. In case of property insurance, the insured is the party to be indemnified in
case of loss. In addition, Section 53 of the Code states:
Sec. 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
In this case, such as in the case of life insurance, the person indemnified
is referred to as the beneficiary, if one is provided. If no beneficiary is designated,
or if it is void, the proceeds shall accrue and form part of the estate of the
deceased insured.
9. One who steals the property of the President of the Philippines may not be
insured.
FALSE. Section 7 of the Insurance Code provides that anyone except a public
enemy may be insured. A public enemy is a State, and its citizens, at war with the
Philippines. A thief of the Presidents property can be insured.
10. The mortgagor cannot insure the mortgaged property if the mortgagee has
already insured the same.
FALSE. The mortgagor and the mortgagee have independent insurable interest
in the mortgaged property. And each may take out a separate insurance policy
over the property covering his interest.
11. The mortgagor can insure the mortgaged property only to the extent of the
principal obligation.
FALSE. The mortgagors insurable interest over the mortgaged property covers
the full value of the property even though the debt is equivalent to the full value of
the property.
12. The mortgagee who insures the mortgaged property to the full extent of its value
can only recover to the extent of his credit.
TRUE. The insurable interest of the mortgagee is only to the extent of credit due
him at the time of the loss.
13. Parents and their illegitimate children and the legitimate, illegitimate and adopted
children of the latter are obliged to support each other.
TRUE. This is provided for under Articles 195 and 196 of the Family Code.
14. An interest in property insured must exists when the insurance takes effect and
when the loss occurs, but need not exist in the meantime.
TRUE.
15. Insurable interest in life is unlimited except that one taken by the creditor on the
life of the debtor.
FALSE. The interest of the person insured in his or another persons life is not
capable of pecuniary measurement. Under Section 186 of the code, the measure
of insurable interest is whatever is fixed in the policy. As to the creditor, the
measure of insurable interest over the life of the debtor is the amount of
indebtedness of the debtor
16. In case of life insurance, a change of interest affects the insurance policy.
FALSE. A change in interest in case of life insurance does not affect the policy.
This is specifically excepted by Section 20 of the Code. All that is required is that
the insured has insurable interest over the life that is insured at the time the
insurance takes effect.
17. An insurance policy executed by way of gambling is voidable.
FALSE. It is not voidable but it is null and void for being contrary to public policy.
18. Concealment is the willful neglect to communicate that which a party knows and
ought to know.
FALSE. It is the neglect to communicate that which a party knows and ought to
communicate as provided under Section 26 of the Insurance Code. It may either
be intentional or unintentional.
19. An intentional concealment entitles the injured party to rescind a contract of
insurance.
TRUE. Section 27 of the Insurance Code provides:
Sec. 27. A concealment whether intentional or unintentional entitles the injured
party to rescind a contract of insurance.
The concealment must be material.
20. An unintentional concealment entitles the injured party to rescind a contract of
insurance.
TRUE. Section 27 of the Insurance Code provides:
Sec. 27. A concealment whether intentional or unintentional entitles the injured
party to rescind a contract of insurance.
The concealment must be material.