Rider – any printed or typed stipulation contained on a slip of paper attached to the policy and

forms an integral part of the policy. They are attached to the policy because they constitute
additional stipulations between the insurer and the insured. Thus riders should be given effect to
the same extent or in like manner as though they were originally embodied in the policy.
Rider is necessary because in the course of the insurance business, it is often necessary to add
stipulations to the policy, or to waive certain stipulations or amend certain stipulations therein.
This saves time and effort in making new policy.
Rule in case of conflict between a policy and a ride – the rider prevails because it is a more
deliberate expression of the will or intent of the contracting parties.

Warranties – are inserted or attached to a policy to eliminate potential increases of hazard

during the policy term owing to:
1. Actions of the insured; or
2. Condition of the property
Example: “Hazardous Trades Warranty” which stipulates that none of the enumerated trades
considered hazardous will be carried on the building insured.

Clause – an agreement between the insurer and the insured on certain matter relating to the
liability of the insurer in case of loss.
Example: A “3/4 Clause” limiting the liability of the insurer to ¾ of the loss or damage to the
insured.

Endorsement – any provision added to the insurance contract altering its scope or application.
Example: Those extending the perils covered.
Note, if an endorsement is already attached at the time of the issuance of the policy, then it is
not an endorsement.

Effect of failure of the insured to read policy:

1. Majority rule – the fact that it is customary for insured persons to accept policies without
reading is judicially recognized. It follows that such acceptance is not negligence per
se and in proceedings to reform insurance contracts, most courts hold that the insured’s
acceptance and retention of the policy unread is not laches as will defeat his right of
reformation. Rationale: insurance contracts are contracts of adhesion.
2. Minority rule – one who accepts a contractual instrument conclusively presumed, in the
absence of fraud or mutual mistake, to know and assent to its contents. The insured has
the duty to ready his policy and is bound by his contract as written whether he reads it or
not (Vance).
a. Exceptions:
i. Where a copy of the application was not attached to the policy or where
the copy attached was illegible.
ii. Fraud by the agent of the insurer.
iii. The insured will not see the text of the policy until delivered to him.

Duty of the insurer to explain the policy:

1. General rule – when the text of the policy is clear and unambiguous, then no duty on the
part of the insurer to explain.
2. Exceptions:
a. Reasonable expectations of the insured – Doctrine of reasonable expectations
operates to impose de facto duty on the insurer to explain the policy’s coverage
to the insured. If the insured’s reasonable expectations entitled him to the
 coverage, even if the actual coverage does not provide so, then the insurer is
obliged to pay the insured.
b. Options available to the insured – the insurer failed to explain each option.
c. Information expected by the insured from the insurer’s agent
d. Contractual rights of the insured after denial of coverage

Section 51. Contents of an insurance policy:

1. Name of the parties – mere fact that the name is misspelled is of no importance provided
that the identity of the party can be sufficiently established.
2. Amount of insurance – necessary to exactly determine the amount of indemnity to paid
the insured in case of loss or damage especially if it is only partial and not total. The sum
insured is the basis for calculating the premium. However, it need not be specified in the
cases of open or running policies.
a. The amount of insurance is the maximum amount of liability for loss or damage
suffered by the insured, as in fire and casualty insurance. Such amount is not
necessarily the value of the property insured.
b. In other kinds of insurance such as life and health, a fixed sum is payable.
c. Deductible – amount deducted from any loss, which is shouldered by the insured
making the insurer liable only for the excess amount.
3. Premium – essential because it represents the consideration of the contract. It is what
the insured pays the insurer to assume the risk or the value of loss.
a. Net premium – portion of the premium that is chargeable to the risk assumed by
the insurer.
b. Gross premium – the total amount charged to the insured, which necessarily
includes the net premium plus administrative charges.
4. Property or life insured – they are the subject matter of the contract.
5. Interest of insured in property – important in fire insurance policies to determine the
actual damage of the insured if he is not the owner thereof.
6. Risks insured against
7. Term or duration of insurance – the insurer would not be liable if the risk insured against
happened outside the term of coverage.

Kinds of insurable risks:

1. Personal risks – those involving the person. Divided into life and health risks.
2. Property risks – involving loss or damage to property. Arises from destruction of
property.
a. Direct loss – lightning, fire, earthquake
b. Indirect loss – loss of profits, etc.
3. Liability risks – involving liability for injury to the person or property of others. Torts.
Sometimes called third party liability.

Section 52. Cover Notes.

1. Preliminary contracts of insurance:
a. Preliminary contracts of present insurance – the insurer insures the subject
matter usually by what is known as the binding slip, or binder, or cover note, the
contract to be effective until the formal policy is issued or the risk rejected. The
binder is usually a temporary contract of insurance and is issued after the
payment of the first premium.
i. Cover note – merely a written memorandum of the most important terms
of a preliminary contract of insurance, intended to give temporary
protection pending the investigation of the risk by the insurer, or until the
 issue of the formal policy, provided it is later determined that the applicant
was insurable at the time it was given.
ii. In life insurance, no liability attached until the insurer approves the risk.
Thus, in life insurance, a binding slip or binding receipt does not insure by
itself.
b. Preliminary contracts of executory insurance – the insurer makes a contract to
insure the subject matter at some subsequent time which may be definite or
indefinite. The right acquired by the insured is merely to demand delivery of a
policy in accordance with the terms agreed upon and the obligation assumed by
the insurer is to deliver such policy.

Cover notes – may be issued to afford immediate provisional protection to the insured until the
insurer can inspect or evaluate the risk in question and issue the proper policy, or until the risk is
declined and notice thereof is given.
1. Being of temporary nature, it is sufficient that the cover note shows by necessary
implication an agreement to pay whatever rate may be fixed.
2. The fact that no separate premium was paid on the cover note before the loss
insured against occurred does not militate against its binding effect as an insurance
contract. By their nature, cover notes do not contain particulars that would serve as
basis for the computation of the premiums and consequently, no separate premiums
are intended or required to paid therefor.
3. If a cover note would be treated as a separate policy instead of integrating it to the
regular policy to be subsequently issued, its purpose and function would be set to
naught or rendered meaningless, for it is in a real sense a contract, not a mere
application for insurance which is a mere offer.
Rules on cover notes:
1. Insurance companies in the Philippines may issue cover notes to bind insurance
temporarily, pending the issuance of the policy.
2. A cover note shall be deemed to be a contract of insurance within the meaning of the
Code.
3. No cover note shall be issued or renewed unless in the form previously approved by
the Commissioner.
4. A cover note shall be valid and binding for a period not exceeding 60 days from the
date of its issuance, whether or not the premium therefor has already been paid, but
such cover note may be cancelled by either party upon at least 7 day-notice to the
other party.
5. If a cover note is not cancelled, an insurance policy shall within 60 days be issues in
lieu of the cover note. Such policy shall include within its terms the identical
insurance bond under the cover note and the premium therefor.
6. A cover note may be issued beyond the 60-day period with the written approval of
the Insurance Commission provided that such written approval may be dispensed
with upon the certification of the president, VP, or general manager of the insurance
company.
7. Insurance companies may impose on cover notes a deposit premium equivalent to at
least 25% of the estimated premium of the intended insurance coverage but in no
less than P500.00

Open policy – one which the value of the thing insured is not agreed upon, but is left to be
ascertained in case of loss. One in which a certain agreed sum is written on the face of the
policy not as the value of the property insured, but as the maximum limit of the insurer’s liability
in case of loss. The insured must establish the FMV of the property at the time of loss. If the
FMV exceeds the maximum, the latter prevails. If below, FMV prevails.

Valued policy – one which express on its face an agreement that the thing insured shall be
valued at a specified amount. Thus there are two values – the face value of the policy and the
value of the thing insured. In the absence of fraud or mistake, the agreed value of the thing
insured will be paid in case of total loss of the property, unless the insurance is for a lower
amount.

Running policy – 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 the
insurance, by additional statement or indorsement. This policy is intended to provide indemnity
for property which cannot well be covered by a valued policy because of its frequent change of
location and quantity, or for property such a nature as not to admit of a gross valuation.
Contemplates that the risk is shifting, fluctuating, or varying and which covers a class of
property rather than any particular thing. This kind of insurance which may be carried on a
constantly changing stock of goods, or on grain that is being carried to and from harbor on
lighters. These policies are usually known as floating, running or blanker.
Example – he has many stores located across the country and the value of the stocks
sometimes reaches to 50K minimum and 1M maximum.
Advantages:
1. He is neither uninsured nor overinsured at any time, the premium is being based on
monthly values reported.
2. He avoids cancellations that would otherwise be necessary to keep insurance adjusted
to value at each location, and for which cancellations he would be charged the
expensive short rate.
3. He is saved the trouble of watching his insurance and the danger of being underinsured
in spite of his care, through oversight or mistake.
4. The rate is adjusted to 100% insurance, whereas valued policies requiring insurance
only to, say 80% of the value, give either a small or no reduction for amounts of
insurance above this figure.

Parties to a contract of insurance:

1. Insurer
2. Insured – one who receives the indemnity

In life insurance however, a third party comes into the picture – the beneficiary who receives the
proceeds of the life insurance.
Insurer
1. Every person, partnership, association or cooperative duly authorized to transact
insurance business as provided in the Code may be an insurer.
2. The authority to transact insurance business is embodies in a certificate of authority
granted by the Insurance Commission upon compliance with the conditions imposed by
law or the Code.
Insurance agent: may be
- Salaried employee (not required to secure license if they are not given additional
compensation for acting as such agents) – governed by Labor Code
- One who works on commission basis – governed by contract of agency
Payment of claims arising from the peril insured against is definitely not one of the liabilities of
an insurance agent. Companies are enjoined from:
1. Requiring their insurance agents to assume liability under, or
 2. Demanding from their insurance agents the reimbursement of the amounts paid on
claims arising from such policies or bonds issued.
Insurance broker: one who acts as a middleman between the insured and the insurer, and who
solicits insurance from the public and either places the insurance with a company selected by
the insured, or in the absence of any selection by him, then with the company selected by such
broker.
1. He cannot issue policies nor can he involve in the process of its issuance.
2. In theory represents the insured and not the insurance policy. He is the applicant’s
agent.

The Insured
Section 54. When an insurance contract is executed with an agent or trustee as the insured, the
fact that his principal or beneficiary is the real party in interest may be indicated by describing
the insured as agent or trustee, or by other general words in the policy.
Section 55. Where insurance effected by partner or part-owner.
1. The terms of the policy should be such as are applicable to the joint or common interest.
2. But a partner who insures partnership property in his own name limits the contract to his
individual share unless the term clearly show that the insurance was meant to cover also
the share of other partners.
Section 56. When the description of the insured in a policy is so general that it may comprehend
any person or any class of persons, only he who can show that it was intended to include him
can claim the benefit of the policy.
1. In order that an insurance may be applied to the interest of the person claiming the
benefit, he must prove the he is the person named or described or that he belongs to
the class of persons comprehended in the policy.
2. Example: if the policy is for the benefit of the owner of the property, then he must
prove that his ownership thereof.
Section 57. A policy may be so framed that it will inure to the benefit of whomsoever, during the
continuance of the risk, may become the owner of the interest insured.
Art. 110. The spouses retain the ownership, possession, administration and enjoyment of their
exclusive properties.
Either spouse may, during the marriage, transfer the administration of his or her exclusive
property to the other by means of a public instrument, which shall be recorded in the registry of
property of the place the property is located. (137a, 168a, 169a)
Art. 111. A spouse of age may mortgage, encumber, alienate or otherwise dispose of his or her
exclusive property, without the consent of the other spouse, and appear alone in court to litigate
with regard to the same. (n)
Art. 1390. The following contracts are voidable or annullable, even though there may have been
no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification. (n)

Section 11. The insured shall have the right to change the beneficiary he designated in the
policy, unless he expressly waived this right in said policy.
Beneficiary – is used to refer to persons designated in a contract of life, health or accident
insurance as the one who is to receive the benefits which become payable upon the death of
the insured.
Kinds of beneficiary:
1. Insured himself – he may himself be the person who procures the contract and pays the
premiums necessary to maintain it. Ordinarily called the assured.
2. Third person who paid a consideration – the third person named as beneficiary may
have paid a valuable consideration for his selection as such. Example, the insured may
have taken the policy for the benefit of a creditor or to secure some other obligations.
3. Third person through mere bounty of the insured – may be one who gives no
consideration whatsoever for any right that may be acquired in the policy but is
designated as recipient of the proceeds of the policy through mere bounty of the insured.
The beneficiary may be the estate or a third person.
In 2nd and 3rd, the beneficiary is not a party to the contract.
Limitations:
1. Article 2012 - Any person who is forbidden from receiving any donation under Article 739
cannot be named beneficiary of a life insurance policy by the person who cannot make
any donation to him, according to said article. (n) Rationale: a life insurance policy is no
different from a civil donation insofar as the beneficiary is concerned. The insured pays
the premium and the beneficiary receives the proceeds.

The right to change beneficiary ceases at the insured’s death and cannot be exercised by his
representatives or assignees. Beneficiary’s right becomes completely fixed.
If the right to change is waived, then insured has no power to make such change without the
consent of the beneficiary. The insured cannot even destroy the contract by refusing to pay the
premiums. The beneficiary may continue payment of premiums and is entitled to automatic
extended terms.

What if the beneficiary predeceased the insured and it is irrevocable: 2 views:

1. The proceeds will go the assignees, heirs, etc.
2. The proceeds will go to the estate of the insured.

Section 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the
insured; in which event, the nearest relative of the insured shall receive the proceeds of said
insurance if not otherwise disqualified.
Nearest relative:
1. Legitimate children
2. Father and mother, if living
3. Grandfather and grandmother, or ascendants nearest in degree if living
4. Illegitimate children
5. Surviving spouse
6. Collateral relatives
a. Brothers and sisters of the full blood
b. Brothers and sister s of the half-blood
c. Nephews and nieces
7. In default of the above, the state.

Right to assign.
Section 184. A policy of insurance upon life or health may pass by transfer, will or succession to
any person, whether he has an insurable interest or not, and such person may recover upon it
whatever the insured might have recovered.
1. Insurable interest of the assignee in the life of the insured is not required. (Life insurance
is not a contract of indemnity.)
 2. A provision in a contract of life insurance denying the insured his right to assign without
the consent of the insured will be void.
3. To deny the right to assign a life insurance policy except to a person having an insurable
interest is to diminish appreciably the investment value of the contract to the owner.
4. An assignment is to be distinguished from a change in the designated beneficiary (Sec
11).
5. Consent of the beneficiary – if the life insurance is irrevocable. If revocable, not required.
Section 185. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve
the validity of a policy of insurance upon life or health, unless thereby expressly required.
1. Notice not required by policy – notice to the insurer not required.
2. Notice required by policy -
Concealment
Section 26. A neglect to communicate that which a party knows and ought to communicate is
called a concealment.

The parties have four primary concerns:

1. The correct estimation of the risk which enables insurer to decide whether to assume
it, and if so at what premium rate.
2. The precise delimitation of the risk which determines the extent of the contingent duty
to pay undertaken by the insurer.
3. Such control of the risk after it is assumed as will enable the insurer to guard against
the increase of the risk because of change in conditions.
4. Determining whether a loss occurred and if so, the amount of loss.

Requisites of concealment
1. A party knows the fact which he neglects to communicate or disclose to the other.
2. Such party concealing is duty bound to disclose such fact to the other.
3. Such party concealing makes no warranty of the fact concealed.
4. The other party has not the means in ascertaining the fact concealed.
Note – where a warranty is made of the fact concealed, the nondisclosure of such fact is not
concealment but constitutes violation of warranty.

Section 27. A concealment whether intentional or unintentional entitles the injured party to
rescind the contract of insurance.
Effect:
1. General rule – concealment makes the contract voidable at the insurer’s option.
a. Rationale: the full circumstances of the subject matter of insurance are known to
the insured only and the insurer must rely primarily upon the information supplied
to him.
2. Not limited to material facts which applicant knows, but extends to those which he
ought to know.
Duty of utmost good faith is breached by concealment or misrepresentation. Section 27 entitles
the injured party to rescind a contract of insurance by reason of concealment, implying that the
right to rescind is optional on the injured party.

It is no defense to plead mistake or forgetfulness.

The insurer need not prove fraud in order to rescind a contract on the ground of concealment.
b. Existence of fraud not required – the duty of communication is independent of the
intention and is violated by the fact of concealment, even when there is no design
to deceive.
i. The legal effect of concealment is the same, whether intentional or
unintentional – it entitles the insurer to rescind the contract of insurance.
ii. Note – Ng Gan Zee is no longer controlling.
c. Reason for the rule – if it were necessary for insurance companies to prove
actual fraud on the part of the insured, it is plain that it would be impossible for it
to protect itself and its honest policyholders against fraudulent and improper
claims.
i. There would be no incentive on the part of the applicant to tell the truth.
ii. The question thus is: Was the insurer misled or deceived into entering
a contract obligation or in fixing the premium of insurance by a
 withholding of material information or facts within the assured’s
knowledge or presumed knowledge?
iii. Examples – In his application for life insurance, D did not reveal the fact
that he was suffering from an ailment.
1. WON D was aware of the ailment, there is no concealment where
the ailment was not material to the contract.
2. WON D was aware of the ailment, there is concealment where the
ailment was material to the contract.
a. If D was aware of the ailment but honestly believed that it
was not material, the concealment is not fraudulent or
intentional.
b. If D was aware of the ailment, there is fraudulent
concealment where the ailment was material to the
contract and D knew or believed that it was material.

Section 28. Each party to a contract of insurance must communicate to the other, in good faith,
all facts within his knowledge which are material to the contract, and which the other has not the
means of ascertaining, and as to which he makes no warranty.
1. Matters must be communicated even in the absence of inquiry only when.
a. They are material to the contract.
b. The other has not the means of ascertaining the said facts.
c. As to which the party with the duty to communicate makes no warranty.
2. The Test is: if the applicant is aware of the existence of some circumstances which
he knows would influence the insurer in acting upon his application, good faith
required him to disclose that circumstance, though unasked.
3. The effect of material concealment cannot be avoided by the allegation that the insurer
could have known and discovered the illness or disease which the insured had
concealed.
a. The insurer has the right to rely on the statements of the insured as to material
facts such as to his previous sickness, for he knows the facts, and the matter is
not one of which disclosure is excused by law.

Section 29. An intentional and fraudulent omission on the part of one insured, to communicate
information on matters proving or tending to prove the falsity of a warranty, entitles the insurer to
rescind.
1. Unlike in ordinary concealment in Section 27, the nondisclosure under Section 29 must
be intentional and fraudulent in order that the contact may be rescinded.
2. Note that in this case, the omission is on the part of the insured and the party
entitled to rescind is the insurer.
3. Example – in a marine insurance contract, warranty is implied that the ship is seaworthy.
The intentional and fraudulent omission on the part of the insured when applying for a
policy to communicate information that the ship is in distress or in special peril would
entitle the insurer to rescind because the concealment refers to matters proving or
tending to prove the falsity of the warranty that the ship is seaworthy.

Section 30. Neither party to a contract of insurance is bound to communicate information of the
matters following, except in answer to the inquiries of the other:
1. Those which the other knows;
2. Those which, in the exercise of ordinary care, the other ought to know, and of which the
former has no reason to suppose him ignorant;
3. Those of which the other waives communication;
 4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and
which are not otherwise material; and
5. Those which relate to a risk excepted from the policy, and which are not otherwise
material.

General rule: Matters made the subject of inquiry must be deemed material, even though
otherwise they might not be so regarded and the insured is required to make full and true
disclosure to questions asked.

The failure of an apparently complete answer to make full disclosure will avoid the policy. But
an answer incomplete on its face will not defeat the policy in the absence of bad faith.

Example: if one applying for a fire insurance policy, he is asked whether the building is
encumbered, then he answered that the property is encumbered by one mortgage when in fact
it is encumbered by two mortgages, the policy will be avoided.
But if he only states that the building is encumbered, without stating the number of
encumbrances, the policy shall not be avoided and the same will be deemed to have been
waived by the insurer if the insurer does not inquirer further.

When there’s no duty to disclose:

1. Matters known to, or right to be known by the insurer, or of which he waives disclosure:
a. Insured cannot be penalized for matters already known to the insurer.
b. Or ought to be known to the insurer or his agent.
c. Or of which the insurer waives communication for the insurer is in estoppel.
2. Risks excepted from the policy:
a. The insurer cannot complain of the insured’s failure to disclose facts that concern
only risks excepted from the policy, either expressly or by warranty, from the
liability assumed under the policy.
b. The undisclosed fact must not be material for otherwise, the rule will not apply.
3. Nature or amount of insured’s interest:
a. Nature or amount of the interest of the insured need not be communicated unless
in an answer to an inquiry except as prescribed by Section 51.

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

The test is in the effect which the knowledge of the fact in question would have on the
making of the contract. Not necessary that it would increase or decrease the risk or contribute
to any loss or damage suffered. It is sufficient if the knowledge of it would influence the parties
in making the contract.

From the standpoint of the insurer: A fact is material if it has probable and reasonable influence
upon the insurer in assessing the risk involved and in making or omitting further inquiries, and
cause him either to reject the risk or to accept it only at a higher premium rate or on different
terms though the fact may not even remotely contribute to the contingency upon which the
insurer would become liable, or in any wise affect risk.

The insured cannot be held guilty of concealment is the fact concealed is not material.
Concealment must take at the time the contract is entered into in order that the policy may be
avoided and not afterwards. The duty of disclosure ends with the completion and effectivity of
the contract. The rule is different in reinsurance. Note, if the contract of insurance is to be
effective only after the issuance of the policy, an applicant has the duty to disclose between the
date of submitting his application and the date the policy is delivered.

Section 32. Each part to a contract of insurance is bound to know all the general causes which
are open to his inquiry, equally with that of the other, and which may affect the political or
material perils contemplated; and all general usages of trade.

Parties need not communicate public events, such as that a nation is at war, or the laws and
political conditions in other countries, among others.

Also, the insurer is charged with the knowledge of the general trade usages and rules of
navigation, kind of seasons, and all the risks connected with navigation.

Section 33. The right to information of material facts may be waived, either by the terms of
insurance policy or by neglect to make inquiries as to such facts where they are distinctly
implied in other facts of which information is communicated.

Right to information of material facts may be waived by express terms either by:
a. By the terms of the insurance.
b. By neglect to make inquiry as to the facts already communicated. (If the applicant
in the application, he is justified in assuming that no further information is
desired.)