Contract of insurance

It is an agreement whereby one undertakes for a consideration to indemnify another against the loss, damage or liability
arising from an unknown or contingent event. (IC, Sec. 2[a])

“Doing an insurance business” or “transacting an insurance business” (ISRA)

The term “doing an insurance business” or “transacting an insurance business” means:

 Making or proposing to make, as Insurer, any insurance contract;

 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;
 Doing any kind of business, including a Reinsurance business, specifically recognized as constituting the doing of
an insurance business.
 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 Insurance Code. (Sec. 2[b], ibid)

In the application of the provisions of the Insurance Code, the fact that no profit is derived from the making of the
insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall
NOT be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an
insurance business.
ELEMENTS OF CONTRACT OF URANCE
Elements of Insurance

SPEAR:
Scheme to distribute losses – Such assumption of risk is part of a general scheme to distribute actual losses
among a large group or substantial number of persons bearing a similar risk.
Payment of premium – As consideration for the insurer’s promise, the insured makes a ratable contribution
called “premium,” to a general insurance fund.
Existence of insurable interest – The insured possesses an interest of some kind susceptible of pecuniary estimation,
known as “insurable interest.”
Assumption of Risk – The insurer assumes that risk of loss for a consideration.
Risk of loss – The insured is subject to a risk of loss through the destruction or impairment of that interest by the
happening of designated peril.

Characteristics/Nature of Insurance Contracts

1. Risk-distributing device- The insurer assumes the risk of loss which an insured might suffer in
consideration of premium payments under a risk-distributing device. Such assumption of risk is a
component of general scheme to distribute actual losses among a group of persons, bearing similar
risks, who make ratable contributions to a fund from which the losses incurred due to exposures to
the peril insured against are assured and compensated.
2. Aleatory- The liability of the insurer depends upon some contingent event.
3. Executory and conditional- It is not executed until payment of the loss. – It is subject to conditions,
the principal one of which is the happening of the event insured against.
4. Synallagmatic-A highly reciprocal contract where the rights and obligations of the parties correlate
and mutually correspond. (See separate opinion of Vitug J. in UCPB General Insurance vs Masagana
Telemart)
5. Contract of Adhesion-Insurance is a contract of adhesion considering that most of the terms of the
contract do not result from mutual negotiations between the parties as they are prescribed by the
insurer in printed form to which the insured may “adhere” if he chooses but which he cannot
 change. Hence, in case of doubt the contract shall be interpreted strictly against the insurer and
liberally in favor of the insured.

6. Consensual and Voluntary- It is perfected by the meeting of the minds of the parties as to the
object, cause and consideration of the insurance contract. There should be acceptance of the
application for insurance.

The parties may incorporate such terms and conditions as they may deem convenient: Provided
they do not contravene any provision of law and are not opposed to public policy, law, morals, good
customs, or public order.

7. Personal and Highest degree of good faith(Uberrimae Fidae)- The contract of insurance is one of
perfect good faith (uberrimae fidei) not for the insured alone, but equally so for the insurer; in fact,
it is more so for the latter, since its dominant bargaining position carries with it stricter responsibility
(Qua Chee Gan vs. Law Union and Rock Insurance, Co. Ltd., GR No. L-4611, December 17, 1955). It
requires the parties to the contract to communicate that which a party knows and ought to
communicate, that is, the duty to disclose in good faith all facts material to the contract. This
doctrine is essential on account of the fact that the full circumstances of the subject matter of
insurance are, as a rule, known to the insured only and the insurer, in deciding whether or not to
accept a risk, must rely primarily upon the information supplied to him by the applicant.

8. Contract of Indemnity- Recovery is commensurate with the amount of

the loss suffered.

GR: The insurer promises to make good only the loss of the insured.

XPN: The principle is not applicable to life and accident insurance where the result is death
because life is not capable of pecuniary estimation. The only situation where the principle of
indemnity is applicable to life insurance is when the interest of a person insured is capable of
exact pecuniary measurement. An example would be in a case where a creditor insures the life
of his debtor to the extent of the latter’s debt to the former.

Parties to the contract of insurance

Insurer – party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured
on the happening of a specified contingency or event.

Insured – person in whose favor the contract is operative and is indemnified.

The insured is not always the person to whom the proceeds are paid.

Assured/Beneficiary- a person designated by the terms of the policy to receive the proceeds of the insurance. He
may be the insured or a third party in the contract for whose benefit the policy is issued and to whom the loss is
payable.

Insurer

Every corporation, partnership, or association duly authorized (by the Insurance Commission) to transact insurance
business may be an insurer. (IC, as amended by RA 10607, Sec. 6)
 The term “insurer” no longer includes “individuals” under RA 10607. Hence, an individual natural person is no longer
allowed to be an insurer. However, it includes the following:
“Professional reinsurer” as any person, partnership, association or corporation that transacts solely and exclusively
reinsurance business in the Philippines.
“Mutual Insurance Companies”. The law also provides for the procedure for mutualization of domestic stock life
insurance companies. A new provision on RA 10607 is on demutualization or conversion of mutual insurance
companies into stock corporations. (IC, as amended by RA 10607, Sec. 280)
Cooperatives are now expressly included in the term “insurer” or “insurance company.”
However, the cooperative must:
Have a sufficient capital and asset required under the Insurance Code and the pertinent regulations issued by
the Commission. (IC, as amended, Sec. 192)
Have a certificate of authority to operate issued by the Commission which should be renewed every year. (IC, as
amended, Sec. 193, Sundiang Sr. & Aquino, 2014)

Note: No insurance company shall transact any insurance business in the Philippines until after it shall have obtained
a certificate of authority for that purpose form the Insurance Commissioner. The certificate of authority issued by the
Commissioner shall expire on the last day of December, 3 years following its issuance, and shall be renewable every 3
years thereafter.

Persons who may be insured (2000 Bar)

-The person with capacity to contract and having an insurable interest in the life or property of the insured.

Anyone except a public enemy may be insured. (IC, Sec. 7)

Subject matter of a contract of insurance

Anything having an appreciable pecuniary value, which is subject to loss or deterioration or of which one may be
deprived so that his pecuniary interest is or may be prejudiced.

Event or peril insured against

It is any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest,
or create a liability against him subject to the provisions of Chapter I of the Insurance Code. (IC, Sec. 3)

Effect of death of policy’s original owner

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of the
person insured shall automatically vest in the latter upon the death of the original owner, unless otherwise provided
for in the policy. (IC, Sec. 3)

CLASSES OF INSURANCECLASSES OF INSURANCE

Life insurance
Individual life
Group life
Industrial life
Non-Life Insurance
Marine
Fire
Casualty
Contracts of suretyship or bonding.
Compulsory Motor Vehicle Liability Insurance
 Microinsurance

INSURABLE INTEREST

INSURABLE INTEREST

An insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a
relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the
preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or
injury by the happening of the event insured against. (Violeta R. Lalican vs. The Insular Life Assurance Company Limited,
G.R. No. 183526, August 25, 2009)

 In Life Insurance
Every person has an insurable interest in the life and health:
1. Of himself
-The question of insurable interest is immaterial where the policy is procured by the person whose
life is insured. A person who insures his own life can designate any person as his
beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured
subject to the limits under Articles 739 and 2012 of the New Civil Code.
2. His spouse and of his children.
3. Any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest.
4. Of any person under a legal obligation to him for the payment of money, or respecting property or
services, of which death or illness might delay or prevent the performance.
5. Of any person upon whose life any estate or interest vested in him depends

NOTE: In number 2,mere relationship is sufficient while the rest (3,4,5) requires pecuniary interest. Thus, the
interest of the creditor over the life of the debtor ceases upon full payment.

The consent of the person whose life is insured is not necessary if one insures the life of another.

Persons prohibited from being designated as beneficiaries (1998 Bar)

Under the Article 739 of the New Civil Code, the following are prohibited designation of beneficiaries:

Those made between persons who were guilty of adultery or concubinage at the time of donation. Finding of guilt in
a civil case is sufficient.
Those made between persons found guilty of the same criminal offense, in consideration thereof.
Those made to a public officer or his wife, descendants or ascendants by reason of his office.

The designation of the above-enumerated persons is void but the policy is binding. The estate will get the proceeds.
(Sundiang Sr. & Aquino, 2009)

Note: There is no proscription in naming illegitimate children as beneficiaries. It is only in cases where the insured has
not designated beneficiary or when the designated beneficiary is disqualified by law to receive the proceeds, that the
policy proceeds shall redound to the benefit of the estate of the insured. Because no legal proscription exists in
naming as beneficiaries, children of illicit relationships by the insured, the shares of the common-law spouse in the
insurance proceeds, whether forfeited by the Court in view of the prohibition on donation under Article 739 of the
Civil Code or by the insurers themselves for reasons based on the insurance contracts, must be awarded to the said
illegitimate children, the designated beneficiaries, to the exclusion of the legitimate heirs.

Beneficiary willfully brought about the death of the insured (2008 Bar)
 GR: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the death of the insured. In such a case, the share forfeited shall
pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds
shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the
estate of the insured. (Sec. 12, ibid)

XPNs:
The beneficiary acted in self-defense;
The insured’s death was not intentionally caused (e.g., thru accident);
Insanity of the beneficiary at the time he killed the insured.

 In Property Insurance

Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that contemplated peril might directly damnify the insured, is insurable interest.

In general, a person has an insurable interest in the property, if he derives pecuniary benefit or
advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction
whether he has or has no title in, or lien upon or possession of the property. Hence, pecuniary interest
over the property is always necessary although the interest is not limited to interest of an owner.

Insurable interest in property may consist of the following (1991 Bar):

1. An existing interest – The existing interest in the property may be legal or equitable title.

Examples of insurable interest arising from legal title:

Trustee, as in the case of the seller of property not yet delivered;
Mortgagor of the property mortgaged;
LIFE PROPERTY L
esso
r of
the
prop
erty
leased (De Leon, supra).

Examples of insurable interest arising from equitable title:

Purchaser of property before delivery or before he has performed the conditions of the sale;
Mortgagee of property mortgaged;
Mortgagor, after foreclosure but before the expiration of the period within which redemption is allowed (De
Leon, 2010).

2. An inchoate interest founded on an existing interest.

Example: A stockholder has an inchoate interest in the property of the corporation of which he is a stockholder,
which is founded on an existing interest arising from his ownership of shares in the corporation. (De Leon, 2014)

3. An expectancy coupled with an existing interest in that out of which the expectancy arises.

NOTE: Existence of insurable interest is a matter of public policy. Hence, the principle of estoppel cannot be
invoked. (Sundiang Sr. & Aquino, 2014)

A mere hope or expectancy is not insurable. It must be coupled with existing interest out of which the
expectancy arises. It must be founded on an actual right to the thing or upon a valid contract.
As to extent
As to when insurable
interest must exist
Unlimited save in life
insurance effected by a
creditor on the life of the
debtor
Must exist at the time the
policy took effect and need
not exist at the time of the
loss
Limited to the actual value
of the interest therein
It is necessary that the
insurable interest exists
when the insurance takes
effect and when the loss
occurs but need not exist in
the meantime

As to expectation of Need not have any legal Must have a legal basis
benefit to be derived basis

As to beneficiary’s The beneficiary need not The beneficiary must have

interest have insurable interest over insurable interest over the
the life of the insured if the thing insured.
insured himself secured the
policy. Otherwise, he must
have insurable interest over
the life of the insured.

Mea
sure
of
insurable interest in property (2000 Bar)

The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury
thereof (IC, Sec. 17). Insurable interest in property does not necessarily imply a property interest in, or lien upon, or
possession of, the subject matter of the insurance, and neither title nor a beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is insured. Anyone has an insurable interest in property
who derives a benefit from its existence or would suffer loss from its destruction. (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8, 2006)

A common carrier or depository’s extent of insurable interest in a thing held by him

A carrier or depositary 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.

Change of interest in any part of a thing insured

“Change of interest” contemplated by law is an absolute transfer of the insured’s entire interest in the property insured
to one not previously interested or insured. (Perez, 2006)

GR: 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; Sec.58, ibid)

XPNs:
  When there is a prohibition against alienation or change of interest without the consent of the insurer in which
case the policy is not merely suspended but avoided. (Sundiang & Aquino, 2014., citing Curtis vs. Girard Fire and
Marine Ins., 11 SE 3, 190 Ga. 954)
 In life, accident, and health insurance. (IC, Sec. 20)
 A change of interest in a thing insured, after the occurrence of an injury which results in a loss does NOT affect
the right of the insured to indemnity for loss. (IC, Sec. 21)
 A change of interest in one or more distinct things, separately insured by one policy does NOT avoid the
insurance as to the others. (IC, Sec. 22)
 A change of interest by will or succession, on the death of the insured, does NOT avoid an insurance; and his
interest in the insurance passes to the person taking his interest in the thing insured. (IC, Sec. 23)
 A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to
the others does NOT avoid an insurance even though it has been agreed that the insurance shall cease upon an
alienation of the thing insured. (IC, Sec. 24)
 When the 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. (IC, Sec. 57)

Note: When there is an express prohibition against alienation in the policy, in case of alienation, the contract is not
merely suspended but avoided.

Double insurance

Double insurance exists where the same person is insured by several insurers separately, in respect to the same
subject and interest. (Sec. 95, ibid)

Requisites of double insurance (STRIP)

Subject matter is the same

Two or more insurers insuring separately
Risk or peril insured against is the same
Interest insured is the same
Person insured is the same

There is no double insurance even though two policies were both issued over the same subject matter and both
covered the same peril insured against if the two policies were issued to two different entities. (Malayan Insurance
Co. vs. Philippine First Insurance Co., G.R. No. 184300, July 11, 2012)

Double insurance is not prohibited by law

It is not contrary to law and hence, in case of double insurance, the insurers may still be made liable up to the extent
of the value of the thing insured but not to exceed the amount of the policies issued. (Perez, 2006)

A provision in the policy that prohibits double insurance is valid. However, in the absence of such prohibition, double
insurance is allowed. (ibid)

Nature of the liability of the several insurers in double insurance (2005 Bar)

In double insurance, the insurers are considered as co-insurers. Each one is bound to contribute ratably to the loss in
proportion to the amount for which he is liable under his contract. This is known as the “principle of contribution” or
“contribution clause”. (IC, Sec. 96 [e])

Over insurance
 There is over insurance whenever the insured obtains a policy in an amount exceeding the value of his insurable
interest. (Perez, 2006)

Double Insurance vs. Over Insurance

DOUBLE INSURANCE OVER INSURANCE

There may be no over When the amount of
insurance as when
the the insurance is
beyond the value of
sum total of the the
amounts of the
policies insured’s insurable
issued does not
exceed interest.
the insurable interest
of the insured.

There are two or There may be only

more one
insurer, with whom
insurers insuring the the
same subject matter. insured takes
insurance beyond the
value of his insurable
interest.

Rules when the insured in a policy other than life is over insured by double insurance

 The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he
may select, up to the amount which the insurers are severally liable under their respective contracts;
 Where the policy under which the insured claims is a valued policy, any sum received by him under any other
policy shall be deducted from the value of the policy without regard to the actual value of the subject matter
insured;
 Where the policy under which the insured claims is an unvalued policy, any sum received by him under any
policy shall be deducted against the full insurable value, for any sum received by him under any policy;

 Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable
value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right
of contribution among themselves.
 Each insurer and the other insurers, to contribute ratably to the loss in proportion to the amount for which he
is liable under his contract. (Sec. 96, ibid)

Additional or other insurance clause (2008 Bar)

A clause in the policy that provides that the policy shall be void if the insured procures additional insurance without the
consent of the insurer. (Pioneer Insurance and Surety Corp vs. Yap, G.R. No. L-36232, December 19, 1974)

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 and thus avert the possibility of perpetration of fraud (ibid). It is
lawful and specifically allowed under Sec. 75 of the Insurance Code which provides that “a policy may declare that a
violation or a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid
it.”
Waiver of violation

When the insurer, with the knowledge of the existence of other insurances, which the insurer deemed a violation of the
contract, preferred to continue the policy, its action amounted to a waiver of annulment of the contract. (Perez, 2006
citing Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co., G.R. No. L-33131, December 13, 1930)

Absence of notice of existence of other insurance constitutes fraud

When the insurance policy specifically requires that notice should be given by the insured of the existence of other
insurance policies upon the same property, the total absence of such notice nullifies the policy. Such failure to give
notice of the existence of other insurance on the same property when required to do so constitutes deception and it
could be inferred that had the insurer known that there were many other insurance policies on the same property, it
could have hesitated or plainly desisted from entering into such contract. (Perez, 2006)

Cancellation of policy of insurance by reason of over insurance

Sec. 64 of the Insurance Code of 2013 provides that upon discovery of other insurance coverage that makes the total
insurance in excess of the value of the property insured, the insurer may cancel such policy of insurance; provided
there is prior notice and such circumstance occurred after the effective date of the policy.

Reinsurance
-It is a contract through which the insurer procures a third person to insure him against loss or liability by reason of
such original insurance. In every reinsurance, the original contract of insurance and the contract of reinsurance are
separate and distinct from each other and covered by separate policies.

Double Insurance vs. Reinsurance

Double Insurance Reinsurance

Involves the same interest
Insurer remains in such capacity
Insurer in the first contract is a party in interest in
the second contract
Subject of insurance is property
Insured has to give his consent
Insurance of different interests
Insurer becomes an insured in relation to reinsurer
Original insured has no interest in reinsurance
contract
Subject of insurance is the original insurer’s risk
Consent of original insured not necessary

MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY

Instances where more than one insurable interest may exist in the same property

In trust, both trust or and trustee have insurable interest over the property in trust.
In a corporation, both the corporation and its stockholders have insurable interest over the assets.
In partnership both the firm and partners have insurable interest over its assets.
In assignment both the assignor and assignee have insurable interest over the property assigned.
In lease, the lessor, lessee and sub-lessees have insurable interest over the property in lease.
In mortgage, both the mortgagor and mortgagee have insurable interest over the property mortgaged.

Insurable interest of mortgagor and mortgagee in case of a mortgaged property are NOT the same (1999, 2010 Bar)

Each has an insurable interest in the property mortgaged and this interest is separate and distinct from the other.
Therefore, insurance taken by one in his name only and in his favor alone does not inure to the benefit of the other. The
same is not open to objection that there is double insurance (RCBC vs. CA, 289 G.R. Nos. 128833-34, 128866, April 20,
1998; IC, Sec. 8).
Extent of insurable interest of mortgagor and mortgagee (1999 Bar)

Mortgagor – The mortgagor of property, as owner, has an insurable interest to the extent of its value even though
the mortgage debt equals such value.
Mortgagee – The mortgagee as such has an insurable interest in the mortgaged property to the extent of the debt
secured; such interest continues until the mortgage debt is extinguished. (Sundiang Sr. & Aquino, 2014)

NOTE: In case of an insurance taken by the mortgagee alone and for his benefit, the mortgagee, after recovery from the
insurer, is not allowed to retain his claim against the mortgagor but it passes by subrogation to the insurer to the extent
of the insurance money paid. (De Leon, 2010)

PERFECTION OF THE INSURANCE

The contract of insurance is perfected when the assent or consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. Mere offer or proposal is not
contemplated (De Lim v. Sun Life Assurance Co., G.R. No. L-15774, November 29, 1920)

Cognition Theory

Mere submission of the application without the corresponding approval of the policy does not result in the perfection of
the contract of insurance.

Insurance contracts through correspondence follow the “cognition theory” wherein an acceptance made by letter shall
not bind the person making the offer except from the time it came to his knowledge. (Enriquez v. Sun Life Assurance Co.
of Canada, GR No. L-15774, Nov. 29, 1920)

Where the applicant died before he received notice of the acceptance of his application for the insurance, there is no
perfected contract. (Perez v. Court of Appeals, G.R. No. 112329, January 28, 2000)

DELAY IN ACCEPTANCE

The acceptance of an insurance policy must be unconditional, but it need not be by a formal act. (De Leon, 2010)

Delay in acceptance of the insurance application will not result in a binding contract. Court cannot impose upon the
parties a contract if they did not consent. However, in proper cases, the insurer may be liable for tort. (Sundiang Sr.
& Aquino, 2014)

Unreasonable delay in returning the premium raises the presumption of acceptance of the insurance application.
(Gloria v. Philippine American Life Ins. Co., CA 73 O.G. [No.37] 8660)

DELIVERY OF POLICY
Delivery is not necessary in the formation of the contract of insurance since the contract of insurance is consensual.
(Sundiang Sr. & Aquino, 2014).

The mere delivery of an insurance policy to someone does not give rise to the formation of a contract in the absence
of proof that he had agreed to be insured.

Two types of delivery

Actual – delivery to the person of the insured.

Constructive
By mail –If policy was mailed already and premium was paid and nothing is left to be done by the insured,
the policy is considered constructively delivered if insured died before receiving the policy.
 By agent –If delivered to the agent of the insurer, whose duty is ministerial, or delivered to the agent of the
insured, the policy is considered constructively delivered. (De Leon, 2010)

Types of policy of insurance

Open – one in which the value of the thing insured is not agreed upon, and the amount of the insurance merely
represents the insurer’s maximum liability. The value of such thing insured shall be ascertained at the time of the
loss. (IC, Sec. 60)
Valued – is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum. (IC,
Sec. 61)
Running – 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.
(IC, Sec. 62)

Form of an insurance contract

The policy shall be in printed form which may contain blank spaces to be filled in;

Basic contents of a policy

Parties;
Amount of insurance, except in open or running policies;
Rate of premium;
Property or life insured;
Interest of the insured in the property if he is not the absolute owner;
Risk insured against; and
The period during which the insurance is to continue. (IC, Sec. 51)

Rider

An attachment to an insurance policy that modifies the conditions of the policy by expanding or restricting its benefits or
excluding certain conditions from the coverage. (Black’s Law Dictionary)

Riders are not binding on the insured unless the descriptive title or name thereof is mentioned and written on the blank
spaces provided in the policy. It should be countersigned by the insured or owner unless he was the one who applied for
the same. (IC, Sec. 50)

Cover notes

Persons who wish to be insured may get protection before the perfection of the insurance contract by securing a cover
note. The cover note issued by the insurer shall be deemed an insurance contract as contemplated under Section 1(1) of
the Insurance Code subject to the following rules:

The cover note shall be issued or renewed only upon prior approval of the Insurance Commission;
The cover note shall be valid and binding for not more than sixty (60) days from the date of its issuance;
No separate premium (separate from the policy or main contract) is required for the cover note;
The cover note may be canceled by either party upon prior notice to the other of at least seven
(7) days;
The policy should be issued within sixty (60) days after the issuance of the cover note;
The sixty (60)-day period may be extended upon written approval of the Insurance Commission; and
The written approval of the Insurance Commission is dispensed with upon the certification of the president, vice-
president or general manager of the insurer that the risk involved, the values of such risks and premium therefor,
 have not as yet been determined or established and the extension or renewal is not contrary to or is not for the
purpose of violating the Insurance Code or any rule

Premium

It is an agreed price for assuming and carrying the risk – that is, the consideration paid to an insurer for undertaking to
indemnify the insured against a specified peril.

“Cash and carry” rule (2003 Bar)

GR: No policy or contract of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid. Any agreement to the contrary is void.

XPN: A policy is valid and binding even when there is non-payment of premium:
1. In case of life or industrial life policy whenever the grace period provision applies, or whenever under the broker
and agency agreements with duly licensed intermediaries, a ninety (90)-day credit extension is given. No credit
extension to a duly licensed intermediary should exceed ninety (90) days from date of issuance of the policy. (IC,
Sec. 77)

2. When there is acknowledgment in a policy of a receipt of premium, which the law declares to be conclusive
evidence of payment, even if there is stipulation therein that it shall not be binding until the premium is actually
paid. This is without prejudice however to right of insurer to collect corresponding premium. (Sec. 77, ibid)

3. When there is an agreement allowing the insured to pay the premium in installments and partial payment has
been made at the time of loss. (Makati Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992)

4. When there is an agreement to grant the insured credit extension for the payment of the premium. (Art. 1306,
NCC), and loss occurs before the expiration of the credit term. (UCPB General Insurance v. Masagana Telemart, G.R.
No. 137172, Apr. 4, 20012006, 2007 Bar)

5.When estoppel bars the insurer to invoke non-recovery on the policy.

When the public interest so requires, as determined by the Insurance Commissioner

NOTE: Payment of the premium to agent of the insurance company is binding on it (Malayan Insurance v. Arnaldo
G.R. No. L-67835, October 12, 1987 and Areola v. CA G.R. No. 95641, September 22, 1994). If an insurance company
delivers a policy to an insurance broker, it is deemed to have authorized him to receive the payment of the premium.
(Sec. 306, South Sea v. CA G.R. No. 102253, June 2, 1995; American Home Assurance v. Chua, G.R. No. 130421, June
28, 1999)

Payment of premium by post-dated check

Delivery of a promissory note or a check will not be sufficient to make the policy binding until the said note or check has
been converted into cash. This is consistent with Article 1249 of the New Civil Code.

NOTE: Payment by means of a check or note, accepted by the insurer, bearing a date prior to the loss, assuming
availability of the funds thereof, would be sufficient even if it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor

Non-payment of premiums

Non-payment of the premium will not entitle the insured to recover the premium from the insurer. The continuance
of the insurer’s obligation is conditioned upon the payment of the premium, so that no recovery can be had upon a
lapsed policy, the contractual relation between the parties having ceased. If the peril insured against had occurred,
the insurer would have had a valid defense against recovery under the policy.

Non-payment of the first premium prevents the contract from becoming binding notwithstanding the acceptance of
the application or the issuance of the policy, unless waived. But nonpayment of the balance of the premium due does
not produce the cancellation of the contract.

With respect to subsequent premiums, non-payment does not affect the validity of the contracts unless, by express
stipulation, it is provided that the policy shall in that event be suspended or shall lapse. (De Leon, 2010)

Non-payment of premiums by reason of the circumstances or conduct of the insurer

GR: Non-payment of premiums does not merely suspend but put an end to an insurance contract since the time of
the payment is peculiarly of the essence of the contract. (De Leon, 2010)

XPN:
The insurer has become insolvent and has suspended business, or has refused without justification a valid tender
of premiums. (Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, Oct. 29, 1952)
Failure to pay was due to the wrongful conduct of the insurer.
The insurer has waived his right to demand payment

NON-DEFAULT OPTIONS IN LIFE INSURANCE

Devices used to prevent the forfeiture of a life insurance after the payment of the first premium

Grace period – After the payment of the first premium, the insured is entitled to a grace period of 30 days within
which to pay the succeeding premiums. (Sec. 233 [a], ibid)
Cash surrender value – The amount the insurer agrees to pay to the holder of the policy if he surrenders it and
releases his claim upon it. (Cyclopedia Law Dictionary, 3rd ed.)
Extended insurance – It is where the insured is given a right, upon default, after payment of at least three full annual
premiums (IC, Sec. 233 [f]) to have the policy continued in force from the date of default for a time either stated
or equal to the amount as the net value of the policy taken as a single premium, will purchase. (De Leon, 2010)
Paid up Insurance – The insured is given a right, upon default, after the payment of at least three annual premiums
to have the policy continued in force from the date of default for the whole period of the insurance without
further payment of premiums. It results to a reduction of the original amount of insurance, but for the same
period originally stipulated. (6 Couch 2d., 355; 37 C.J.S. 364)
Automatic Loan Clause – A stipulation in the policy providing that upon default in payment of premium, the same
shall be paid from the loan value of the policy until that value is consumed. In such a case, the policy is continued
in force as fully and effectively as though the premiums had been paid by the insured from funds derived from
other sources. (6 Couch 2d., 383)
Reinstatement – Provision that the holder of the policy shall be entitled to reinstatement of the contract at any time
within 3 years from the date of default in the payment of premium, unless the cash surrender value has been
paid, or the extension period expired, upon production of evidence of insurability satisfactory to the company
and the payment of all overdue premiums and any indebtedness to the company upon said policy.

REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE

Purpose of the reinstatement provision

The purpose of the provision is to clarify the requirements for restoring a policy to premium-paying status after it has
been permitted to lapse.
The law requires that the policy owner be permitted to reinstate the policy, subject to the violations specified, any time
within three (3) years from the date of default of premium payment. A longer period, being more favorable to the
insured, may be used.

Reinstatement is not an absolute right of the insured, but discretionary on the part of the insurer, which has the right to
deny reinstatement if it were not satisfied as to the insurability of the insured, and if the latter did not pay all overdue
premiums and other indebtedness to the insurer. (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-3581, September
21, 1950)

Purpose of the reinstatement provision

The purpose of the provision is to clarify the requirements for restoring a policy to premium-paying status after it has
been permitted to lapse.

The law requires that the policy owner be permitted to reinstate the policy, subject to the violations specified, any time
within three (3) years from the date of default of premium payment. A longer period, being more favorable to the
insured, may be used.

Reinstatement is not an absolute right of the insured, but discretionary on the part of the insurer, which has the right to
deny reinstatement if it were not satisfied as to the insurability of the insured, and if the latter did not pay all overdue
premiums and other indebtedness to the insurer. (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-3581, September
21, 1950)

REFUND OF PREMIUMS

Instances when the insured entitled to recover premiums already paid or a portion thereof (2000 Bar)

Whole:
When no part of the thing insured has been exposed to any of the perils insured against. (IC, Sec. 80)
When the contract is voidable because of the fraud or misrepresentations of the insurer of his agent. (IC, Sec.
82)
When the insurance is voidable because of the existence of facts of which the insured was ignorant without his
fault. (IC, Sec. 82)
When the insurer never incurred any liability under the policy because of the default of the insured other than
actual fraud. (IC, Sec. 82)
When rescission is granted due to insurer’s breach of contract. (IC, Sec. 74)

NOTE: When the contract is voidable, a person insured is entitled to a return of the premium when such contract is
subsequently annulled under the provisions of the New Civil Code.

A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if a claim is denied by
reason of fraud. (IC, Sec. 82)

Pro rata:
When the insurance is for a definite period and the insured surrenders his policy before the termination
thereof; (IC, Sec. 80 [b]); except:
Policy not made for a definite period of time;
Short period rate is agreed upon;
Life insurance policy.
When there is over-insurance. The premiums to be returned shall be proportioned to the amount by which
the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. (IC, Sec. 83)
In case of over-insurance by double insurance, the insurer is not liable for the total amount of the
insurance taken, his liability being limited to the property insured. Hence, the insurer is not entitled to
 that portion of the premium corresponding to the excess of the insurance over the insurable interest of
the insured. (1990 Bar)
In case of over-insurance by several insurers, the insured is entitled to a ratable return of the premium,
proportioned to the amount by which the aggregate sum insured in all the policies exceeds the
insurable value of the thing insured. (IC, Sec. 83)

Insured is not entitled to return of premiums paid

If the peril insured against has existed, and the insurer has been liable for any period, the peril being entire and
indivisible (IC, Sec. 81);
In life insurance policies (IC, Sec. 80 [b]);
If the policy is annulled, rescinded or if a claim is denied by reason of fraud (IC, Sec. 82);
If contract is illegal and the parties are in pari delicto.

RESCISSION OF INSURANCE CONTRACTS

 May the policy be transferred without the consent of the insurer? Effect if transferred without consent?

-Yes, in life insurance but no for property insurance because the insurer approved the policy
based on the personal qualification and the insurable interest of the insured.

EFFECT: The insurance policy is suspended and will not be avoided until the interest in the thing
and the interest in the insurance are vested in the same persons.

Concealment

Concealment is a neglect to communicate that which a party knows and ought to communicate. (IC, Sec. 26)

Under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a contract of insurance.”
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the insurance contract in case of
an alteration in the use or condition of the thing insured. (Malayan Insurance Company vs. PAP Co. (Phil. Branch), G.R.
No. 200784, August 7, 2013, in Divina 2014)

Requisites

A party knows a fact which he neglects to communicate or disclose to the other party
Such party concealing is duty bound to disclose such fact to the other
Such party concealing makes no warranty as to the fact concealed
The other party has no means of ascertaining the fact concealed
The fact must be material

Test of materiality (2000 Bar)

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 disadvantages of the
proposed contract, or in making his inquiries. (IC, Sec. 31)

NOTE: As long as the facts concealed are material, concealment, whether intentional or not, entitles the injured party to
rescind. (IC, Sec.27)

Matters that need not be disclosed

GR: The parties are not bound to communicate information of the following matters:
Those which the other knows
Those which, in the exercise of ordinary care, the other ought to know and of which, the former has no reason to
suppose him ignorant
Those of which the other waives communication
Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise
material
Those which relate to a risk excepted from the policy and which are not otherwise material;
The nature or amount of the interest of one insured (except if he is not the owner of the property insured). (IC, Sec.
34)

XPNs:

In answer to inquiries of the other. (IC, Sec. 30)

Neither party is bound to communicate, even upon inquiry, information of his own judgment, because such would
add nothing to the appraisal of the application. (IC, Sec. 35)
The parties are bound to know all the general causes which are open to his inquiry, equally with the other, and all
general usages of trade. (IC, Sec. 32)

Matters that must be disclosed even in the absence of inquiry

Those material to the contract

Those which the other has no means of ascertaining
Those as to which the party with the duty to communicate makes no warranty

NOTE: Matters relating to the health of the insured are material and relevant to the approval of the issuance of the
life insurance policy as these definitely affect the insurer’s action to the application. It is well -settled that the insured
need not die of the disease he had failed to disclose to the insurer, as it is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries. (Sunlife
Assurance Company of Canada v. CA, G.R. No. 105135, June 22, 1995)

Information as to the nature of interest need not be disclosed except in property insurance, if the insured is not the
owner. If somebody is insuring properties of which he is not the owner, he must disclose why he has insurable
interest that would entitle him to ensure it, and the extent thereof. (IC, Secs. 34 & 51 [e])

Rules on concealment

If there is concealment under Section 27, the remedy of the insurer is rescission since concealment vitiates the
contract of insurance.
(1996 Bar)
The party claiming the existence of concealment must prove that there was knowledge of the fact concealed on the
part of the party charged with concealment.
Good faith is not a defense in concealment. Concealment, whether intentional or unintentional entitles the injured
party to rescind the contract of insurance. (IC, Sec. 27)
The matter concealed need not be the cause of loss. (IC, Sec. 31)
To be guilty of concealment, a party must have knowledge of the fact concealed at the time of the effectivity of the
policy

In order for concealment to produce the effect of avoiding the policy, it should take place at the time the contract is
entered into
Concealment should take place at the time the contract is entered into and not afterwards in order that the policy may
be avoided. The duty of disclosure ends with the completion of the contract. Waiver of medical examination in a non-
medical insurance contract renders even more material the information required of the applicant concerning previous
condition of health and diseases suffered, for such information necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether to issue the policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be a ground to rescind the contract.

NOTE: The reason for this is that if concealment should take place after the contract is entered into, the information
concealed is no longer material as it will no longer influence the other party to enter into such contract.

MISREPRESENTATION/OMISSION
Representation

An oral or written statement of a fact or condition affecting the risk made by the insured to the insurance company,
tending to induce the insurer to assume the risk.

Representation should be made, altered or withdrawn at the time of or before the issuance of the policy. (Sec. 37,
Insurance Code). It may be altered or withdrawn before the insurance is effected, but not afterwards. (Sec.41, ibid)

Characteristics of representation

Not a part of the contract but merely a collateral inducement to it

Oral or written
Made at the time of, or before issuing the policy and not after
Altered or withdrawn before the insurance is effected but not afterwards
Must be presumed to refer to the date the contract goes into effect. (IC, Sec. 42)

Similarities of concealment and representation

Both refer to the same subject matter and both take place before the contract is entered.
Concealment or representation prior to loss or death gives rise to the same remedy; that is rescission or
cancellation.
The test of materiality is the same. (IC, Secs. 31, 46)
The rules of concealment and representation are the same with life and non-life insurance.
Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of
concealment or false representation.
Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the
agreement, the rules on concealment and representation apply likewise to the insurer.

Kinds of representation

Oral or written (Sec. 36, ibid);

Affirmative (Sec. 42, ibid); or
Promissory (Sec. 39, ibid).

Affirmative representation

Any allegation as to the existence or non-existence of a fact when the contract begins (e.g. the statement of the
insured that the house to be insured is used only for residential purposes is an affirmative representation).

Promissory representation

Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen
during the existence of the insurance.
Representation as to a future undertaking

A representation as to the future is to be deemed a promise unless it appears that it was merely a statement of belief
or an expectation that is susceptible to present, actual knowledge. (IC, Sec. 39)

An erroneous opinion or belief will not avoid the insurance policy

The statement of an erroneous opinion, belief or information, or of an unfulfilled intention, per se, will not avoid the
contract of insurance, unless fraudulent.

Misrepresentation

Misrepresentation is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by
satisfactory and convincing evidence. (Ng Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L- 30685, May 30,
1983). [See also Sec. 44 (when the facts fail to correspond to the assertions or stipulations), Insurance Code]

Requisites of misrepresentation

The insured stated a fact which is untrue;

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;
Such fact in either case is material to the risk.

A representation cannot qualify an express provision in a contract of insurance but it may qualify an implied
warranty. (IC, Sec. 40)

Test of materiality

It 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 representation is made, in forming his estimates of the disadvantages of the proposed contract
or in making his inquiries (similar with concealment). (IC, Sec. 46)

Effects of misrepresentation

It renders the insurance contract voidable at the option of the insurer, although the policy is not thereby rendered
void ab initio. The injured party entitled to rescind from the time when the representation becomes false;
When the insurer accepted the payment of premium with the knowledge of the ground for rescission, there is
waiver of such right;
There is no waiver of the right of rescission if the insurer had no knowledge of the ground therefor at the time of
acceptance of premium payment.

Effect of collusion between the insurer’s agent and the insured

It vitiates the policy even though the agent is acting within the apparent scope of his authority. The agent ceases to
represent his principal. He, thus, represents himself; so, the insurer is not estopped from avoiding the policy.

Concealment Misrepresentation

The insured withholds The insured makes

the information of erroneous statements
material facts from the of facts with the intent
insurer of inducing the insurer
 to enter into the
insurance contract

Application Of concealment and

misrepresentation in case of loss or death

GR: If the concealment or misrepresentation is discovered before loss or death, the insurer can cancel the policy. If the
discovery is after loss or death, the insurer can refuse to pay.

XPN: The incontestability clause under paragraph 2 of Section 48.

XPN to XPN: (i.e., when the contract may be rescinded even beyond the incontestability period)

Non-payment of premiums.
Violation of condition. (IC, Secs. 233 [b], 234 [b])
No insurable interest
Cause of death was excepted or not covered
Fraud of a vicious type
Proof of death was not given. (IC, Sec. 248)
That the conditions of the policy relating to military or naval service. (IC, Secs. 233 [b], 234 [b])
That the action was not brought within the time specified. (IC, Sec. 63)

Incontestability clause (1991, 1994, 1996 – 1998 Bar)

After the policy of life insurance made payable on the death of the insured shall have been in force during the lifetime
of the insured for a period of two
years from the date of its issue or its last reinstatement, the insurer cannot prove that the policy is void ab initio or
is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. (Sundiang Sr. &
Aquino, 2014, citing IC, Sec. 48; Florendo v. Philam Plans, G.R. No. 186983, February 22, 2012)

The “Incontestability Clause” under Section 48 of the Insurance Code regulates both the actions of the insurers and
prospective takers of life insurance. It gives insurers enough time to inquire whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at
insurance fraud would be timely uncovered – thus deterring them from venturing into such nefarious enterprise.
(Manila Bankers Life Insurance Corporation vs. Cresencia-Aban, G.R. No. 175666, July 29, 2013)

Defenses that are not barred by incontestability clause

The following defenses are not barred by the incontestability clause:

That the person taking the insurance lacked insurable interest as required by law;
That the cause of the death of the insured is an excepted risk;
That the premiums have not been paid (IC, Secs. 77, 233[b], 236[b]);
That the conditions of the policy relating to military or naval service have been violated (IC, Secs. 233[b], 234[b]);
That the fraud is of a particularly vicious type;
That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after
the loss has happened; or
That the action was not brought within the time specified. (Sundiang Sr. & Aquino, 2014)
Remedy of the injured party in case of misrepresentation

If there is misrepresentation, The injured party is entitled to rescind from the time when the representation becomes
false.

Exercise of the right to rescind the contract

It must be exercised previous to the commencement of an action on the contract (the action referred to is that to
collect a claim on the contract). (IC, Sec.48, par.1)

Warranties (1993 Bar)

Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference, the
untruth or non-fulfillment of which in any respect, and without reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment render the policy voidable by the insurer.

Purpose of warranties

To eliminate potentially increasing moral or physical hazards which may either be due to the acts of the insured or to
the change of the condition of the property.

Basis of warranties

The insurer took into consideration the condition of the property at the time of effectivity of the policy.

Kinds of warranties

Affirmative warranty – one which relates to matters which exist at or before the issuance of the policy.
Promissory warranty – one in which the insured undertakes that something shall be done or omitted after the
policy takes effect and during its continuance.
Express warranty – a statement in a policy, of a matter relating to the person or thing insured, or to the risk, as a
fact.
Implied warranty – an agreement or stipulation not expressed in the policy but the existence of which is admitted
or presumed from the fact that the contract of insurance has been executed.

Warranty vs. Representation

WARRANTY REPRESENTATION
Collateral inducement to
Considered parts of the
the contract. contract.
Always written on
the face of the May be written in a totally
policy,
disconnected paper or may
actually or by
be oral.
reference.
Must be strictly Only substantial proof is
complied with. required.
Its falsity or non-
Its falsity renders the
fulfillment operates policy
void on the ground of
as a breach of fraud.
contract.
Insurer must show its
Presumed material. materiality in order to
defeat an action on the
policy.

Effects of breach of warranty

Material

GR: Violation of material warranty or of material provision of a policy will entitle the other party to rescind the
contract.

XPN: (with regard to “promissory” warranties)

Loss occurs before the time of performance of the warranty;
The performance becomes unlawful at the place of the contract; and
Performance becomes impossible (IC, Sec. 73).

Immaterial

GR: It will not avoid the policy.

XPN: When the policy expressly provides, or declares that a violation thereof will avoid it.

For instance, an “Other Insurance Clause” which is a condition in the policy requiring the insured
 to inform the insurer of any other insurance coverage of the property. A violation of the clause by the insured will
not constitute a breach unless there is an additional provision stating that the violation thereof will avoid the policy.
(IC, Sec. 75)
Effect of a breach of warranty without fraud

The policy is avoided only from the time of breach (IC, Sec. 76) and the insured is entitled:
To the return of the premium paid at a pro rata from the time of breach or if it occurs after the inception of the
contract; or
To all premiums if it is broken during the inception of the contract.

Omission

The failure to communicate information on matters proving or tending to prove the falsity of warranty. In case of
omission, the aggrieved party may rescind the contract of insurance.

LOSS AND CLAIMS SETTLEMENT

The insurer is liable if:

1. Loss, the proximate cause of which is the peril insured against;
2. Loss, the immediate cause of which is the peril insured against except where the proximate cause is an excepted
peril
3. Loss through negligence of insured except where there was gross negligence amounting to willfull act and
4. Loss caused by efforts to rescue the thing from peril insured against-if during the course of rescue the thing is
exposed to a peril not insured against, which permanently deprives the insured of its possession in whole or in
part.

Conditions before the insured may recover on the policy after the loss

The insured or some person entitled to the benefit of the insurance, without unnecessary delay, must give written
notice to the insurer (IC, Sec. 90);
When required by the policy, insured must present a preliminary proof loss which is the best evidence he has in his
power at the time (IC, Sec. 91).

Claims Settlement

Rules in claim settlement

No insurance company doing business in the Philippines shall refuse, without justifiable cause, to pay or settle claims
arising under coverage provided by its policies, nor shall any such company engage in unfair claim settlement
practices.
Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance
company, and the
Commissioner’s complaint experience with other insurance companies writing similar lines of insurance shall be
admissible in evidence in an administrative or judicial proceeding brought under this section. (IC, Sec. 247 [b])

Claims settlement in life insurance

The proceeds shall be paid immediately upon the maturity of the policy if there is such a maturity date.

If the policy matures by the death of the insured, within sixty (60) days after presentation of the claim and filing of
the proof of the death of the insured. (Sundiang Sr. & Aquino, 2014; IC, Section 248)

Claims settlement in property insurance

Proceeds shall be paid within thirty (30) days after proof of loss is received by the insurer and ascertainment of the
loss or damage is made either by agreement or by arbitration.
If no ascertainment is made within sixty (60) days after receipt of proof of loss, it shall be paid within ninety (90)
days after such receipt. (Sundiang Sr. & Aquino, 2014; IC, Sec. 249).

Unfair settlement practices (MAI-GL)

The following constitutes unfair settlement practices:
Knowingly misrepresenting to claimant’s pertinent facts or policy provisions relating to coverage at issue;
Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under
its policies;
Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its
policies;
Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which
liability has become reasonably clear; or
Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable
reason substantially less than the amounts ultimately recovered in suits brought by them.

Sanction for the insurance companies which engaged to unfair settlement practices

The sanction for insurance companies engaged in unfair settlement practices can either be [a] suspension; or [b]
revocation of an insurance company’s certificate of authority. (IC, Sec 247)

Effect of refusal or failure to pay the claim within the time prescribed

The insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary Board on the proceeds of the
insurance from the date following the time prescribed under the Insurance Code, until the claim is fully satisfied.
(Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No. 151890, June 20, 2006)

NOTE: Refusal or failure to pay the loss or damage will entitle the assured to collect interest UNLESS such refusal or
failure to pay is based on the ground that the claim is fraudulent.

Where the mortgagor and the mortgagee were, both claiming the proceeds of a fire insurance policy and the creditors
of the mortgagor also attached the proceeds, the insurance company cannot be held liable for damages for withholding
payment since the delay was not malevolent. (Rizal Commercial Bank Corporation v. Court of Appeals, supra)

PRESCRIPTION OF ACTIONS

In the absence of express stipulation-10 years

The parties 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 1 year from the time the cause of action accrues(i.e. from the denial of the claim).

In a comprehensive motor vehicle liability insurance (CMVLI), the written notice of claim 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 1 year from its
rejection. The suit for damages, either with the proper court or with the Insurance Commissioner, should be filed within
1 year from the date of the denial of the claim by the insurer, otherwise, claimant’s right of action shall prescribe.

Prescriptive period in motor vehicle insurance

It is one (1) year from denial of the claim and not from the date of the accident.

Principle of Subrogation

If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury
or loss arising out of wrong or breach of contract complained of, the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the person who has violated the contract. (NCC, Art. 2207)
The insurer, upon happening of the risk insured against and after payment to the insured is subrogated to the rights
and cause of action of the latter. As such, the insurer has the right to seek reimbursement for all the expenses paid.
(Eastern Shipping Lines vs. Prudential Guarantee and Assurance, Inc., G.R. No. 174116, September 1, 2009)

NOTE: The principle of subrogation inures to the insurer without any formal assignment or any express stipulation to
that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to
the insured makes the insurer a subrogee in equity. (Malayan Insurance Co., Inc. v. CA, G.R. No. L-36413, Sept. 26,
1988)

Incapacity of the insured will not affect the capacity of the subrogee because capacity is personal to the holder.
(Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724, June 8, 2004)
Purposes of subrogation

To make the person who caused the loss legally responsible for it.
To prevent the insured from receiving double recovery from the wrongdoer and the insurer.
To prevent the tortfeasors from being free from liability and is thus founded on consideration of public policy.

Rules on subrogation

Applicable only to property insurance – the value of human life is regarded as unlimited and therefore, no recovery
from a third party can be deemed adequate to compensate the insured’s beneficiary.
The right of insurer against a third party is limited to the amount recoverable from latter by the insured.

Rules on indemnity
Applies only to property insurance except when the creditor insures the life of his debtor.
Insurance contracts are not wagering contracts or gambling contracts.

NOTE: Under the collateral source rule, if an injured person receives compensation for his injuries from a source wholly
independent of the tortfeasor, the payment should not be deducted from the damages which he would otherwise
collect from the tortfeasor. It finds no application to cases involving no-fault insurances under which the insured is
indemnified for losses by insurance companies, regardless of who was at fault in the incident generating the losses.
Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to pay hospitalization expenses of the
dependents of its employees which had already been paid by separate health insurance providers of said dependents.
(Mitsubishi Motors Philippines Salaried Employees Union vs. Mitsubishi Motors Corporation G.R. No. 175773, June 17,
2013, in Divina, 2014)

When amount paid by the insurance company does not fully cover the injury or loss

The aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. (NCC, Art.
2207)

Instances where the right of subrogation does not apply

Where the insured by his own act releases the wrongdoer or third party liable for loss or damage from liability
The insurer loses his rights against the wrongdoer since the insurer can only be subrogated to only such rights as the
insured may have
Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled
the insured claim for loss
Where the insurer pays the insured for a loss or risk not covered by the policy
Life insurance
For recovery of loss in excess of insurance coverage

NOTE: Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after
receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the
latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter,
unless the release was made with the consent of the insurer. (Manila Mahogany Manufacturing

MARINE INSURANCE

Traditionally, marine insurance it includes policies that cover risk connected with navigation to which a ship, cargo,
freightage, profits or other insurable interest in movable property may be exposed during a certain voyage or a fixed
period of time. However, under the present laws, it also covers inland marine insurance.

Marine insurance now includes, not only risks connected with marine navigation, but which are otherwise connected
therewith such as insurance of aircraft, goods while being packed or assembled, injury to passengers, precious stones,
jewels, jewelry whether in the course of transportation or not.

Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness
immediately attaches to whoever is insuring the cargo, whether he be the ship owner or not.

GR: In the usual form of a marine policy, the risks insured against are only “perils of the sea”.

XPN: When the insurance is an “all risk policy” and thus covers even “perils of the ship”.

XPN to XPN: When the risks are expressly excepted by the “all risk policy”.

The insured is bound to prove that the cause of the loss is a peril of the sea. The burden rests on the insurer to prove
that the loss is caused by a risk that is excluded

An “all risks” policy grants greater protection than that afforded by the “perils clause” (De Leon, supra). The insured
under an "all risks insurance policy" has the initial burden of proving that the cargo was in good condition when the
policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to
the insurer to show the exception to the coverage.

“Perils of the sea or perils of navigation” (1998 Bar)

It includes only those casualties due to the (WiN):

Unusual violence or extraordinary action of WInd and wave, or
Other extraordinary causes connected with Navigation. (De Leon, 2010)

“Perils of the ship”

It is a loss which, in the ordinary course of events, results from the (NON):
Natural and inevitable action of the sea;
Ordinary wear and tear of the ship;
Negligent failure of the ship’s owner to provide the vessel with proper equipment to convey the cargo under
ordinary conditions.
Extent of the insurable interest

Ship owner
Over the value of the vessel, even when it has been chartered by one who covenants to pay him its value in case
of loss. In such a case, the insurer shall be liable for only that part of the loss which the insured cannot recover
from the charterer. (IC, Sec. 102)
If hypothecated by a bottomry loan, the insurable interest is only the excess of the value of the vessel over
the amount secured by bottomry. (IC, Sec. 103)
He also has an insurable interest on expected freightage. (IC, Sec. 104)

 The real and hypothecary nature of maritime law simply means that the liability of the carrier in
connection with losses related to maritime contracts is confined to the vessel, which is hypothecated for
such obligations or which stands as the guaranty for their settlement.
 Cargo owner – over the cargo and expected profits. (IC, Sec. 107)

Charterer
Over the vessel, to the extent of the amount he is liable to the shipowner, if the ship is lost or dameged
during the voyage. (IC, Sec. 108)
Over his expected profits or freightage if he accepts cargoes from other persons for a fee. (Sundiang Sr. &
Aquino, 2014)
Over his own cargo or his client’s cargo.
(Sundiang Sr. & Aquino, 2014)

Creditor/lender – over the amount of the loan.

Loan on bottomry or respondentia

A loan in which under any condition whatever, the repayment of the sum loaned, and of the premium stipulated,
depends upon the safe arrival in port of the goods on which it is made or of the price they may receive in case of
accident. (Code of Commerce, Art. 719)

Loan on bottomry vs. Loan on respondentia

They are basically the same. The only distinction is, a loan on bottomry involves a vessel as a security, while a
respondentia has cargo as its security. (Perez, 2010)

Concealment in marine insurance

It is the failure to disclose any material fact or circumstance which in fact or law is within, or which ought to be within
the knowledge of one party and of which the other has no actual or presumptive knowledge. (De Leon, 2010)

NOTE: Information of the belief or expectation of a third person, in reference to a material fact, is material.

Ordinarily, the matters concealed need not be the cause of the loss. In marine insurance, there are instances when
matters, although concealed will not vitiate the contract except when they cause the loss:

National character of the insured;

The liability of the thing insured to capture and detention;
The liability to seizure from breach of foreign laws of trade;
The want of necessary documents; and
The use of false and simulated papers. (IC, Sec. 112)

Implied warranties in marine insurance (SINAI)

(2000 Bar)

1. Seaworthiness (IC, Sec. 115 to 121);- It is when a ship is reasonably fit to perform the service and to encounter the
ordinary perils of the voyage contemplated by the parties to the policy.
- A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires
that it be properly laden, and provided with a competent master, a sufficient number of competent officers and
seamen, and the requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and
sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage.

- It is immaterial in ordinary marine insurance and may not be used by him as a defense in order to recover on
the marine insurance policy. It becomes the obligation of a cargo owner to look for a reliable common carrier,
 which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has
control in the choice of the common carrier that will transport his goods.

2.Non-engagement from Illegal venture;

3.Warranty of Neutrality – The ship will carry the requisite documents to show the nationality or neutrality of the
ship or its cargo and will not carry any documents that cast reasonable suspicion on it if the nationality or neutrality
of the ship or its cargo is expressly warranted (IC, Sec. 122);
4.Non-deviation from the Agreed voyage (IC, Secs. 125, 126, 127);

Deviation

It is a departure from the course of the voyage insured, mentioned in Sec. 123 and Sec. 124, or an unreasonable
delay in pursuing the voyage or the commencement of an entirely different voyage. (IC, Sec. 125)

Instances when deviation is proper (2000, 2005 Bar)

 When caused by circumstances over which neither the master nor the owner of the ship has any
control;
 When necessary to comply with a warranty, or to avoid a peril, whether or not peril is insured against;
 When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or

 When made in good faith, for the purpose of saving human life or relieving another vessel in distress.

5. Presence of Insurable interest.

LOSS AND ABANDONMENT

Actual total loss (1996 Bar)

The following constitutes actual total loss: (DIVE)

A total destruction of the thing insured;
The irretrievable loss of the thing by sinking, or by being broken up;
Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or
Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing
insured. (IC, Sec. 132)

Constructive total loss

There is constructive total loss when:

More than ¾ thereof in value is actually lost, or would have to be expended to recover it from the peril;
The thing insured is injured to such extent as to reduce its value more than ¾;
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 ¾ the value of the thing abandoned or a risk which a prudent man would not
take under the circumstances; or
The thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the
master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like
expense or risk mentioned in no. (3). But freightage cannot in any case be abandoned (and thus declared
constructively lost) unless the ship is also abandoned. (IC, Sec. 141)

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 actual partial loss

Average
 It 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 and cargo from the time it is loaded and the voyage commenced until it ends and
the cargo unloaded. (Code of Commerce, Art. 806)

Kinds of average

Gross or general averages – damages or expenses which are deliberately caused by the master of the vessel or upon
his authority, in order to save the vessel, her cargo or both at the same time from a real and known risk. (Code of
Commerce, Art. 811)

This kind of average must be borne equally by all of the interests concerned in the venture. (De Leon, 2010)

Simple or particular averages – they include all damages and expenses caused to the vessel or to her cargo which
have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo. (Code
of Commerce, Art. 809)

This kind of average is suffered by and borne alone by the owner of the cargo or of the vessel, as the case may
be. (De Leon, 2010)

Abandonment

It is the act of the insured by which, after a constructive total loss he declared the relinquishment to the insurer of his
interest in the thing insured. (Sec. 140, ibid)

Effect of a valid abandonment

It is equivalent to a transfer by the insured of his interest, to the insurer, with all the chances of recovery and indemnity
(Sec. 148, ibid).

Requisites of valid abandonment

There must be an actual relinquishment by the person insured of his interest in the thing insured. (Sec. 140, ibid)
There must be a constructive total loss. (Sec. 141, ibid)
The abandonment must neither be partial nor conditional. (Sec. 142, ibid)
It must be made within a reasonable time after receipt of reliable information of the loss. (Sec. 143, ibid)
It must be factual. (Sec. 144, ibid)
It must be made by giving notice thereof to the insurer which may be done orally or in writing; Provided, that if the
notice be done orally, a written notice of such abandonment shall be submitted within 7 days from such oral notice.
(Sec. 145, ibid)
The notice of abandonment must be explicit and must specify the particular cause of abandonment. (Sec. 146, ibid)

Such notice must state only enough to show that there is probable cause for abandonment, but need not be
accompanied with proof of interest or of loss.

FIRE INSURANCE

It is a contract of indemnity by which the insurer, for a consideration, agrees to indemnify the insured against loss of or
damage by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by
extension to fire insurance policies or under separate policies. (IC, Sec. 169)
NOTE: The liability of an insurer is to pay for direct loss only. The insurer may be liable to pay for consequential or
indirect losses if covered by extension to such fire policies or insured under separate policy. (De Leon, 2010)

FRIENDLY FIRE VS. HOSTILE FIRE

Friendly Fire-Fire that burns in a place where it is supposed to burn.E.g. Gas stove, fire place
Hostile Fire-Fire that escapes and burns in a place where it is not supposed to be. It may also refer to fire that started
out as a
friendly fire escapes from original place or becomes too strong as it becomes out of control.

Alteration made in the use or condition of the thing insured

Insurer may rescind a fire insurance policy on the ground of alteration made in the use or condition of the thing
insured, following the requisites:

The use or condition of the thing is specially limited or stipulated in the policy;
Such use or condition is altered;
The alteration is made without the consent of the insurer;
The alteration is made by means within the control of the insured; and
The alteration increases the risk. (IC, Sec. 170)
There must be a violation of a material policy provision. (Sundiang Sr. & Aquino, 2014)

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 provisions even though it increases the risk and is the cause of the loss. (IC, Sec. 172)

Effect when the insured has no control or knowledge of the alteration

GR: The insurer is not relieved from liability if the acts or circumstances by which the risk is increased are occasioned by
accident, or a cause over which the insured has no control.

XPNs:
Actually known to the insured; or
Insured is presumed to know of the alteration when the acts or circumstances, permanently and substantially
affects the conditions of the property so as to constitute an increase in risk. (De Leon, supra, 2010)

Co-insurance clause in fire policies

The co- insurance clause is a clause requiring the insured to maintain insurance to an amount equal to the
value or specified percentage of the value of the insured property under penalty of becoming co-insurer to
the extent of such deficiency. This is to prevent the property owners from taking out such small amount of
insurance, and thereby reducing the premium payments and thereby increasing the rates of premium for all.
(De Leon, 2010)

NOTE: A co-insurance cannot exist in fire insurance if there is no stipulation to that effect.

Option to rebuild clause

It gives the insurer the option to rebuild the destroyed property instead of paying the amount of the loss or damage,
notwithstanding a fixed valuation in the policy (IC, Sec. 174). This clause serves to protect the insurer against
unfairness in the appraisal and award rendered by a packed board of arbitrators, or in the proof of loss.

NOTE: The insurer must exercise his option to rebuild within the time stipulated in the policy, or in the absence of
stipulation, within a reasonable time. The choice by the insurer shall produce no effect except from the time it has
been communicated to the insured. (Article 1201, NCC)
Unless the policy has limited the cost of rebuilding to the amount of the insurance, the insurer, after electing to
rebuild, can be compelled to perform his undertaking, even though the cost may exceed the original amount of
insurance. (De Leon, 2010)

Insured can pledge, hypothecate or transfer a fire insurance policy or rights thereunder

He may do so after a loss has occurred and even without the consent of, or notice to, the insurer. In such a case, it is
not the personal contract which is being assigned, but a claim under or a right of action on the policy against the
insurer. (De Leon, 2010)

Limitation to the right of the insured in pledging, hypothecating or transferring his right under a fire insurance
policy

Section 175 of the Insurance Code prohibits the exercise of this right in the case where the pledging, hypothecating,
or transferring is made to any person, firm or company who acts as agent for or otherwise represents the insurer.

NOTE: Any such pledge, etc. shall be void and of no effect insofar as it may affect other creditors of the insured (ibid).

CASUALTY INSURANCE

It is an insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by
law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or
marine. (IC, Sec. 176)

Two divisions of casualty insurance

Accident or health insurance – Insurance against specified perils which may affect the person and/or property of the
insured. (E.g. personal accident, robbery/theft insurance)
Third party liability insurance (TPL) – Insurance against specified perils which may give rise to liability on the part of
the insured of claims for injuries or damage to property of others. (De Leon, 2010)

“Accidental” vs. “Intentional” as used in insurance

ACCIDENTAL INTENTIONAL

The terms “accident” Intentional as used in

acciden
and “accidental” have an t policy
been taken to mean excepting intentional
that which happens injuries inflicted by
th
by chance or e insured or any
fortuitously
, without other person, implies
intentio th
n or design, e exercise of the
whic
h is unexpected, reasoning faculties,
an
unusual or consciousness, d
Wher
unforeseen. The term volition. e a
does not, without provision of the policy
qualification exclude excludes intentiona
 , l
events resulting in injury, it is the
damage or loss due to intention of the
fault, recklessness or person inflicting the
negligence of third injury that is
parties. (Sundiang Sr. controlling. If the
suffere
& Aquino, 2014 citing injuries d by
th
Pan Malayan e insured clearly
Insurance Corp. V. CA, resulted from the
G.R. No. 81026, April intentiona
3, l act of a
1990 person
) third , the
relieve
insurer is d
from liability as
stipulated
. (Sundiang
Aquino
Sr. & , 2014
citing Biagtan v. The
Insular Life Assurance

Rules on Third party liability insurance

Insurable interest is based on the interest of the insured in the safety of the persons, and their property, who may
maintain an action against him in case of their injury or destruction respectively. (De Leon, 2010)

In a TPL insurance contract, the insurer assumes the obligation by paying the injured third party to whom the
insured is liable. Prior payment by the insured to the injured third person is not necessary in order that the
obligation of the insurer may arise. The moment the insured becomes liable to third persons, the insured acquires
an interest in the insurance contract which may be garnished like any other credit. (Perla Compania de Seguros, Inc.
vs. Ramolete, G.R. No. L-60887, November 13, 1991)

The right of the person injured to sue the insurer of the party at fault (insured), depends on whether the contract of
insurance is intended to benefit third persons also or only the insured (Eulogio vs. Del Monte, GR No. L-22042,
August 17, 1967). If the contract provides for:
Indemnity against third party liability – The third persons to whom the insured is liable, can sue directly the
insurer upon the occurrence of the injury or event upon which the liability depends.The purpose is to protect
the injured person against the insolvency of the insured who causes such injury and to give him a certain
beneficial interest in the proceeds of the policy. It is as if the injured person were especially named in the policy.
(Shafer vs. RTC Judge, G.R. No. 78848, November 14, 1988, 1996 Bar)
Indemnity against actual loss or payment – The third persons cannot proceed against the insurer, the contract
being solely to reimburse the insured for liability actually discharged by him through payment to third persons,
said third person’s recourse being thus limited to the insured alone. (Guingon vs. Del Monte, G.R. No. L-22042,
August 17, 1967) Prior payment by the insured is necessary to give rise to the obligation of the insurer.

Source of liability of third party liability insurance (1996, 2000 Bar)

The direct liability of the insurer under indemnity contract against third party liability does not mean that the insurer
can be held solidarily liable with the insured. The insurer’s liability is based on contract; that of the insured is based on
tort. (Figuracion vda. De Maglana, et. al. v. Hon. Francisco Consolacion, G.R. No. 60506, August 6, 1992)

Liability of insurer if the insured was committing a felony

Liabilities arising out of acts of negligence, which are also criminal, are also insurable on the ground that such acts
are accidental. Thus, a motor insurance policy covering the insured’s liability for accidental injury caused by his
negligence, even though gross and attended by criminal consequences such as homicide through reckless
imprudence, will not be void as against public policy. But liability consequences of deliberate criminal acts are not
insurable. (Sundiang Sr. & Aquino, 2014)

“No action” clause

It is a requirement in a policy of liability insurance which provides that suit and final judgment be first obtained
against the insured, that only thereafter can the person injured recover on the policy. It expressly disallows suing the
insurer as co-defendant. (Guingon v. Del Monte, supra)

A “no action” clause must yield to the provisions of the Rules of Court regarding multiplicity of suits. (Shafer v. RTC
Judge, supra.)

SURETYSHIP

Contract of suretyship

It is an agreement whereby a party called the “surety” guarantees the performance by another party called the
“principal or obligor” of an obligation or undertaking in favor of a third party called the “obligee”. It includes official
recognizances, stipulations bonds or undertakings issued by any company by virtue and under the provisions of Act
No. 536, as amended by Act No. 2206. (IC, Sec. 177)

The extent of surety’s liability is determined by the language of the suretyship contract or bond itself. It cannot be
extended by implications beyond the terms of the contract. Having accepted the bond, the creditor is bound by the
recital in the surety bond that the terms and conditions of distributorship contract be reduced in writing or at the
very least communicated in writing to the surety. Such non-compliance by the creditor impacts not on the validity
or legality of the surety-contract but on the creditor’s right to demand performance. (First Lepanto–Taisho
Insurance Corporation vs. Chevron Philippines, G.R. No. 177839, January 18, 2012)

LIFE INSURANCE

It is insurance on human lives and insurance appertaining thereto or connected therewith (Sec. 181, Insurance Code).
It is made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the
continuance or cessation of life. (IC, Sec. 182)

NOTE: Every contract or undertaking for the payment of annuities including contracts for the payment of lump sums
under a retirement program where a life insurance company manages or acts as a trustee for such retirement
program shall be considered a life insurance contract for purposes of the Insurance Code. (IC, Sec. 181)

Every contract or pledge for the payment of endowments or annuities shall also be considered a life insurance
contract under the Insurance Code. (IC, Sec. 182)

Who may exercise any right under the policy

In the absence of a judicial guardian, the father, or in the latter’s absence or incapacity, the mother, of any minor,
who is an insured or a beneficiary under a contract of life, health, or accident insurance, may exercise, in behalf of
 said minor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest
of the minor in the particular act involved does not exceed Five hundred thousand pesos (P500,000.00) or in such
reasonable amount as may be determined by the Commissioner. Such right may include, but shall not be limited to,
obtaining a policy loan, surrendering the policy, receiving the proceeds of the Policy, and giving the minor’s consent
to any transaction on the minor’s consent to any transaction on the policy.

In the absence or in case of the incapacity of the father or mother, the grandparent, the eldest brother or sister at
least eighteen (18) years of age, or any relative who has actual custody of the minor insured or beneficiary, shall
act as a guardian without need of a court order or judicial appointment as such guardian, as long as such person is
not otherwise disqualified or incapacitated. Payment made by the insurer pursuant to this section shall relieve
such insurer of any liability under the contract. (IC, Sec. 182)

Reasons why a Life insurance is also a contract of indemnity

This is because of the following reasons:

The liability in life insurance is absolutely certain
Amount of life insurance generally is without limit
The policy is a valued policy
There is no direct pecuniary loss required. (De Leon, 2010)

Kinds of life insurance policies

Ordinary life, general life or old line policy – Insured pays a premium every year until he dies. Cash surrender value
after 3 years.
Limited payment – Insured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if
he outlives the period, he does not get anything.
Endowment – insured pays premium for specified period. If he outlives the period, the face value of the policy is paid
to him; if not, his beneficiaries receive the benefit.
Term insurance – insured pays premium only once, and he is insured for a specified period. If he dies within the
period, his beneficiaries benefit. If he outlives the period, no person benefits from the insurance.
Industrial life – entitles the insured to pay premiums weekly, or where premiums are payable monthly or oftener.
(Sundiang Sr. & Aquino, 2014)
Liability of the insurer in case of suicide

The insurer shall be liable in case of suicide by the insured if:

The suicide is committed after the policy has been in force for a period of 2 years from the date of its issue or of its
last reinstatement.
The suicide is committed within a shorter period as provided in the policy.
The suicide is committed in the state of insanity regardless of the date of commission. (IC, Sec. 183)

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

Motor vehicle liability insurance

It is a protection coverage that will answer for legal liability for losses and damages for bodily injuries or property
damage that may be sustained by another arising from the use and operation of a motor vehicle by its owner.

The Insurance Code makes it unlawful for any land transportation operator or owner of a motor vehicle to operate
the same in public highways unless there is an insurance or guaranty to indemnify the death or bodily injury of a third
party or passenger arising from the use thereof (IC, Sec. 387). Registration of any vehicle will not be made or renewed
without complying with the requirement. (IC, Sec. 389)

Purpose of motor vehicle liability insurance

To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if
they are poor regardless of financial capability of motor vehicle owners or operators responsible for the accident
sustained. (First Integrated Bonding Insurance Co., Inc. v. Hernando, G.R. No. L-51221, July 31, 1991)

NOTE: The insurer’s liability accrues immediately upon the occurrence of the injury or event upon which the liability
depends, and does not depend on the recovery of judgment by the injured party against the insured. (Shafer v.
Judge, RTC, supra)

No fault indemnity clause (1994 Bar)

It is a clause where the insurer is required to pay a third party injured or killed in an accident without the necessity of
proving fault or negligence on the part of the insured. There is a stipulated maximum amount to be recovered.

Rules under the “no fault indemnity clause”

The total indemnity in respect of any one person shall not exceed P15,000 for all motor vehicles. (Ins. Memo. Circ.
No. 4-2006)

Proof of loss:
Police report of accident
Death certificate and evidence sufficient to establish proper payee
Medical report and evidence of medical or hospital disbursement (IC, Sec. 391 [3]).
Claim may be made against one motor vehicle only (Sec. 391 [c], ibid).
In case injury of an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which the occupant
is riding, mounting or dismounting from (ibid).
In any other case (not an occupant), claim shall lie against the insurer of the directly offending vehicle (ibid).
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 (ibid).

Authorized driver clause

It indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to:

The insured himself; or

The insured need not prove that he has a driver’s license at the time of the accident if he was the driver.
(Sundiang Sr. & Aquino, 2014)

Any person who drives on his order or with his permission; provided, that the person driving is permitted to drive
the motor vehicle in accordance with the law, and is not disqualified. (Villacorta v. Insurance Commissioner, G.R.
No. 54171, October 28, 1980)

The main purpose of this clause is to require a person other than the insured, who drives the car on the insured’s
order or with his permission, to be duly licensed drivers and have no disqualification to drive a motor vehicle.

An Irish citizen whose 90-day tourist visa had expired, cannot recover on his car insurance policy, not being
authorized to drive a motor vehicle without a Philippine driver’s license. (Stokes v. Malayan Insurance Co., Inc. G.R.
No. L-34768, February 24, 1984)

A driver with an expired Traffic Violation Receipt or expired Temporary Operator’s permit is not considered an
authorized driver within the meaning of the insurance policy. The Traffic Violation Receipt is coterminous with a
confiscated license under the Motor Vehicle Law. (Gutierrez v. Capital Insurance & Surety Co., Inc., G.R. No. L-26287,
June 29, 1984)
 Theft clause

It is that which includes theft as among the risks insured against. Where a car is unlawfully and wrongfully taken
without the knowledge and consent of the owner, such taking constitutes “theft” and it is the theft clause, not the
authorized driver clause which should apply. (Perla Compania de Seguros, Inc. v. CA, supra)

The “Theft Clause” of a comprehensive motor vehicle insurance policy has been interpreted by the Court in several
cases to cover situations like (1) when one takes the motor vehicle of another without the latter’s consent even if the
motor vehicle is later returned, there is theft- there being intent to gain as the use of the thing unlawfully taken
constitutes gain or (2) when there is taking of a vehicle by another person without the permission or authority from
the owner thereof. (Paramount Insurance vs. Spouses Remondeulaz, G.R. No. 173773, November 28, 2012)

Theft

There is theft if the vehicle is taken with intent to gain without the consent of the insured-owner. Thus, there is theft
even if:

The vehicle is returned;

The vehicle was stolen by the driver of the insured (Alpha Insurance and Surety Company v. Castor, G.R. 198174,
September 2, 2013);
The vehicle was taken to the owner of a repair shop for the purpose of repair and in order to attach accessories.
(Paramount Insurance v. Spouses Remondeulaz, G.R. No. 173773