INSURANCE (For FINAL)

2010 EDITION
Notes and Study Guide

SECTION 67
A warranty is either express or implied.
EXPRESS WARRANTY is an agreement contained in the policy or clearly whereby
the insured stipulates that certain facts relating to the risk are or shall be true or
certain acts to the same subjects have been or shall be done.
IMPLIED WARRANTY is a warranty which from the very nature of the contract,
although no express warranty is mentioned, is necessarily embodied in the policy as
a part thereof and which binds the insured as though expressed in the contract.
AFFIRMATIVE WARRANTY is one which asserts the existence of a fact or condition
at the time it is made. The warranty is continuing if it is one that must be satisfied
during the entire coverage period of the insurance.
PROMISSORY WARRANTY, also called executory warranty, is one where the
insured stipulates that certain facts or conditions pertaining to the risk shall exist or
that certain things with reference thereto shall be done or omitted.

Unless the contrary intention appears, the courts will presume that the
warranty is merely affirmative.
SECTION 68
A warranty may relate to the past, the present, the future, or to any or
all of these.

In the case of a promissory warranty, the same may refer only to future
events.
SSECTION 69

Gratuitous answers written in the application, that is, answers not responsive
to any questions asked, are not warranties even though the policy makes the
statements in the application warranties.
WARRANTY FROM REPRESENTATIONS (distinctions)
(1) The falsity or nonfulfillment of a warranty operates as a breach of contract,
while falsity of representation renders the policy void on the ground of fraud.

Before a representation will be considered a warranty, it must be expressly

included or incorporated by clear reference in the policy and the contract must
clearly show that the parties intended that the rights of the insured would depend
on the truth or fulfillment of the warranty.
SECTION 70

In order that a stipulation may be considered a warranty, it must form part of

the contract itself or if contained in another instrument, it must be signed by the
insured and referred to in the policy as making a part of it.
SECTION 71

A statement in a policy relating to the person or thing insured, or to the risk,

must be as a fact and not as an opinion, or belief, to constitute an express warranty
thereof.
SECTION 72
A statement in a policy, which imparts that it is intended to do or not to
do a thing which materially affects the risk, is a warranty that such act or
omission shall take place.
EXAMPLE
If it is agreed that the insured shall not store inflammable materials of any kind,
there is a warranty that such act will not be committed.
VIOLATION OF A WARRANTY AVOIDS A CONTRACT OF INSURANCE
EXCEPTIONS:

(1) When loss occurs before time for performance.

(2) When performance becomes unlawful.
(3) When performance becomes impossible.

Failure to comply with a promissory warranty may be due not only to legal
impossibility but also to physical impossibility.
INSURER BARRED BY WAIVER OR ESTOPPEL
Failure on the part of the insurer to assert forfeiture upon breach of warranty or
condition, after knowledge thereof, amounts to a waiver or estoppel.
SECTION 74
The violation of a material warranty, or other material provision of a
policy, on the part of either party thereto, entitles the other to rescind.
RESCISSION BY THE INSURED
The insured can sue for rescission for breach of contract due to the refusal of the
insurer to grant a loan applied for although this was expressly agreed upon in the
policy. He can recover the full amount of the premiums.
RESCISSION BY THE INSURER
The insurer is entitled to rescind a contract of insurance for violation of a
warranty only if said warranty is material; otherwise, the breach thereof will not
avoid the policy.
The insurer may rescind the contract even though the violation was not the
direct cause of the loss.
SECTION 75
A policy may declare that a violation of specified provisions thereof
shall avoid it, otherwise the breach of an immaterial provision does not
avoid the policy.

The parties may expressly stipulate that the violation of a particular

provision, although immaterial, in the policy shall avoid it.
SECTION 76
EFFECTS OF BREACH OF WARRANTY BY INSURED
(1) Without fraud
Where there is no fraud, the policy is avoided only from the time of breach and
the insured is entitled to the return of premium pro rata rate from the time of
breach if it occurs after the inception of the contract, or to all premiums if it is
broken during the inception of the contract.
(2) With fraud
Where there is fraud, the policy is avoided ab initio, and the insured is not
entitled to the return of the premium paid.
EXAMPLE

If the insured, without fraud, makes a false warranty, he cannot recover for
any loss thereafter because the breach prevents the policy from attaching to the
risk. But, all premiums should be
returned to the insured.

If the insured is guilty of fraud, he is not entitled to the return of premiums

paid.

Condition precedent calls for the happening of some event or the

performance of some act after the terms of the contract have been agreed upon.
Example of a condition subsequent is the condition requiring notice and
proof of loss in case of
loss upon an insurance against fire.

Promissory warranties are usually regarded as conditions subsequent to be

performed after the policy has become a valid contract, non-performance of which
will work a defeasance.
EXCEPTIONS DISTINGUISHED FROM WARRANTIES AND CONDITIONS
Warranty
If the policy contains warranted statement that the insured building is occupied.
Condition

 This entire policy shall be void if the insured building be or becomes vacant or
unoccupied and so remained for more than 10 days.
Exception
This company shall not be liable for any loss while the insured building is vacant.

EFFECTS OF BREACH ON LEGAL RELATIONS OF PARTIES

The occurrence of a breach of warranty or condition even though such breach

be but temporary renders the entire contract defeasible or voidable and even
though such breach may not have
affected the risk or contributed to the loss in
any way.

But the occurrence of an excepted peril, such as the vacancy of the insured
house, does not affect
the binding force of the contract.

If a loss happens during such vacancy, the insurer is not liable.

But if no loss occurs, and the house is reoccupied, the contract relations of
the parties continues
unchanged.
PREMIUM
SECTION 77
An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against.
No policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except in the case of a
life or industrial life policy whenever the grace period provision applies.
ASSESSMENT is a sum specifically levied by mutual insurance companies, upon a
fixed and definite plan, to pay losses and expenses.
PREMIUM FROM ASSESSEMENT
The chief distinction between premiums and assessments lies in the fact that the
former are levied and paid to meet anticipated losses, while the latter are collected
to meet actual losses.
EFFECT OF NONPAYMENT OF PREMIUM
(1) First Premium
Nonpayment of the first premium unless waived, prevents the contract from
becoming binding notwithstanding the acceptance of the application nor the
issuance of the policy.
But nonpayment of the balance of the premium due does not produce the
cancellation of the contract.
(2) Subsequent Premiums
Nonpayment thereof does not affect the validity of the contracts unless, by
express stipulation, it is provided that the policy shall in the event be suspended or
shall lapse.
IN CASE OF INDIVIDUAL LIFE OR ENDOWMENT INSURANCE OR GROUP LIFE
INSURANCE
The policyholder is entitled to a grace period of either 30 days or one month
within which the payment of any premium after the first may be made.
IN CASE OF INDUSTRIAL LIFE INSURANCE
The grace period is 4 weeks, and where premiums are payable monthly, either
30 days or one month.
EXCUSES FOR NONPAYMENT OF PREMIUMS
(1) Even the act of God, rendering the payment of the premium by the insured
wholly impossible will not prevent the forfeiture of the policy when the premium
remains unpaid.
(The time of the payment is the essence of the contract.)
NONPAYMENT IS EXCUSED:

(1) Where the insurer has become insolvent and has suspended business, or has
refused without justification a valid tender of premiums; or
(2) Where the failure to pay was due to the wrongful conduct of the insurer as when
the insurer induced the beneficiary to surrender it for cancellation by falsely
representing that the insurance was illegal and void and returning the premiums
paid; or
(3) Where the insurer has in any wise waived his right to demand payment.
UCPB General Insurance Co., Inc. v. Masagana Telemart, Inc., 308 SCRA
259
The Supreme Court ruled that an insurance policy other than life issued
originally or on renewal is not valid and binding until actual payment of
the premium.

WHEN POLICY VALID AND BINDING NOTWITHSTANDING NONPAYMENT OF

PREMIUM
(1) Whenever the grace period provision applies;
(2) An acknowledgement of receipt of premium in a policy of insurance;
(3) An agreement allowing the insured to pay the premium in installments;
(4) Agreement to grant the insured credit extension for such payment; and
(5) When estoppel bars the insurer form invoking Section 77.
SECTION 78

Acknowledgment in a policy of insurance of receipt of premium is conclusive

evidence of its payment, so far as to make the policy binding.
INSURER ACCEPTED THE PROMISE OF THE INSURED
Is the insurer liable for the loss?
Yes. By accepting the promise of the insured to pay the insurance policy, the
insurer implicitly agreed to modify the tenor of the insurance policy.
SECTION 80
If a peril insured against has existed, and the insurer has been liable
for any period, however short, the insured is not entitled to return of
premiums, so far as that particular risk concerned.
EXAMPLE
X procures insurance upon a certain vessel against the perils of the sea for a voyage
from Manila to London. The voyage is for 5 days. If X cancels the policy two days
after the voyage has commenced, no portion of the premium is returnable because
the thing insured has already been exposed to the perils insured against.
SECTION 79 AND 81
WHEN INSURED ENTITLED TO RECOVER PREMIUMS
(1) When no part of the thing insured has been exposed to any of the perils
insured against;
(2) When the insurance is for a definite period and the insured surrenders his
policy before the termination thereof;
(3) When the contract is voidable because of the fraud or misrepresentations
of the insurer;
(4) When the contract is voidable because of the existence of facts of which
the insured was
ignorant without his fault;
(5) When the insurer never incurred any liability under the policy because of
the default of the insured other than actual fraud;
(6) When there is over-insurance;
(7) When rescission is granted due to the insurers breach of contract.

Recovery of premiums paid is not allowed in life insurance if the

insured surrenders his policy
because life insurance is not a divisible
contract.


When the insurance is void because it is illegal, the general rule is
that the premiums cannot be
recovered. But if, in fact, the parties are
not in pari delicto, the law will allow an innocent
insured to take again
his premiums as when the insured was ignorant.
LOSS
SECTION 83

An agreement not to transfer the claim of the insured against the insurer
after the loss has happened, is void if made before the loss.

Before a loss has occurred, an insurance policy, except a life insurance

policy, is not assignable without the consent of the insurer on the theory that the
policy is a personal contract.
After a loss has occurred, the insured has an absolute right to transfer or
assign his claim against the insurer.
SECTION 84

An insurer is liable for a loss of which a peril insured against was the
proximate cause, although a peril not contemplated by the contract may have been
a remote cause of the loss; but he is not liable for a loss of which the peril insured
against was only a remote cause.
SECTION 85

The loss of goods by theft during the removal of the goods to save them from
loss by fire is covered by a policy against fire.

In one case, it was held that the loss is not covered by Section 85
since the loss did not take
place in the course of such rescue nor caused
by efforts to rescue from a peril insured against.
SECTION 86

The insurer is not liable if the proximate cause of the loss is a peril
excepted from the policy
although the immediate cause is a peril not
excepted.
EXAMPLE
In a fire insurance policy which excludes loss through explosion, if an explosion
occurs first and causes a fire which results in a loss, the insurer is not liable. The
proximate cause of the loss is the explosion which is an excepted peril.
SECTION 87

An insurer is not liable for a loss caused by the intentional act (suicide) of the
insured or through his connivance. Thus, when the insured intentionally burns the
insured goods and submits fraudulent proof of loss, the policy is avoided.
FGU Insurance Corporation v. CA, 454 SCRA 337
It is a basic rule in insurance that the carelessness and negligence of
the insured or his agents constitute no defense on the part of the insurer.

But gross negligence or recklessness on the part of the insured, the

consequence of which must have been palpably obvious to him at that time, will
relieve the insurer from liability.
NOTICE AND PROOF OF LOSS
SECTION 88
In case of loss upon an insurance against fire, an insurer is exonerated,
if notice thereof be not given to him by an insured, or some person
entitled to the benefit of the insurance, without unnecessary delay.

When it is required by the policy, a preliminary proof of loss must

likewise be given.


The purpose of a notice of loss is to apprise the insurer with the occurrence of
the loss, so that it may gather information and make proper investigation while the
evidence is still fresh.

Failure to give notice and proof of loss will be excused when it is due
to the death or incapacity of the insured or the fact that the beneficiary
had no knowledge of the existence of the policy of the insured who died
before the fire.
DEFECTS IN NOTICE OR PROOF OF LOSS DEEMED WAIVED
There is waiver where the insurer:
(1) Writes to the insured that the furnishing of the notice or proof of loss would be
vain and useless;
(2) Recognizes his liability to pay the claim;
(3) Denies all liability under the policy; or
(4) Joins in the proceeding for determining the amount of the loss by arbitration,
making no objections;
(5) Makes objection on any ground other than a formal defect in the preliminary
proof.
DOUBLE INSURANCE
SECTION 93
A double insurance exists where the same person is insured by several
insurers separately in respect to the same subject and interest.

REQUISITES OF DOUBLE INSURANCE

(1) The person insured is the same;
(2) Two or more insurers insuring separately;
(3) The subject matter is the same;
(4) The interest insured is also the same; and
(5) The risk or peril insured against is likewise the same.

As the contract of insurance is a contract of indemnity, the insured

can recover no more than
the amount of his insurable interest. Under
the principle of contribution, it requires each insurer
to
contribute
ratably to the loss or damage over the same subject matter and interest.
REINSURANCE
SECTION 95
A contract of reinsurance is one by which an insurer procures a third
person to insure him against loss or liability by reason of such original
insurance.

The reinsurance of a reinsurance is called RETROCESSION.

Every insurance company establishes a limit on the maximum claim it wishes
to pay out of its own
resources. This limit is called RETENTION.
SECTION 96

Where an insurer obtains reinsurance, he must communicate all the

representations of the original insured, and also the knowledge and information he
possesses, whether previously or subsequently acquired, which are material to the
risk.
REINSURANCE TREATY FROM REINSURANCE POLICY
A reinsurance policy is a contract of indemnity one insurer makes with another to
protect the first insurer from a risk it has already assumed.
A reinsurance treaty is merely an agreement between two insurance companies
whereby one agrees to cede and the other to accept reinsurance business.

SECTION 97
A reinsurance is presumed to be a contract of indemnity against
liability, and not merely against damage. (The practice is for the reinsurer to
pay the insurer even before the latter has indemnified the original insured.)
CLASSES OF INSURANCE
(1) Marine Insurance
(2) Life Insurance
(3) Fire Insurance
(4) Casualty Insurance
(5) Suretyship
TWO MAJOR DIVISION OF MARINE INSURANCE
(1) Ocean marine insurance (sea perils)
(2) Inland marine insurance (land perils)

Bailee Liability the insurance provides protection to persons who have

temporary custody of
the goods or personal property of others, such as carriers,
laundrymen, warehousemen and
garagekeepers.

Floater it provides insurance to follow the insured property wherever it

may be located, subject always to the territorial limits of the contract.
SECTION 100
The owner of a ship has in all cases an insurable interest in it, even when it has
been chartered by one who covenants to pay him its value in case of loss.

In this case the insurer shall be liable for only that part of the loss which the
insured cannot recover from the charterer.
SECTION 101
The insurable interest of the owner of a ship hypothecated by Bottomry
is only the excess of its value over the amount secured by Bottomry.
SECTION 102
Freightage signifies all the benefits derived by the owner, either from the
chartering of the ship or its employment for the carriage of his own goods or those
of others.

The owner of a ship has an insurable interest in expected freightage.

However, where the agreement is that the freight is payable in any event,
whether the vessel is
lost or is not lost, the shipowner has no insurable interest
in such freightage.

Passage money is customarily payable in advance; it cannot be recovered if

the vessel is lost before the completion of the voyage.

In marine insurance, the rule is quite strict because the insured is

bound to communicate not only facts but also beliefs or opinions of third
persons or expectations of third persons.
SECTION 113
In every marine insurance upon a ship or freight, or freightage, or upon
anything which is the subject of marine insurance, a warranty is implied
that the ship is seaworthy.
THE INSURER WILL NOT BE LIABLE FOR ANY LOSS IN CASE THE VESSEL:
(1) is unseaworthy at the inception of the insurance; or
(2) Deviates from the agreed voyage; or
(3) Engages in an illegal venture.
OTHER IMPLIED WARRANTY
The ship will carry the requisite document of nationality or neutrality of the ship
or cargo.

SECTION 114
A ship is seaworthy, when reasonably fit to perform the service, and to
encounter the ordinary perils of the voyage, contemplated by the parties
to the policy.

An implied warranty of seaworthiness is complied with if the ship is

seaworthy at the time of the commencement of the risk except where the insurance
is made for a specified length of time in which the implied warranty is not complied
with unless the ship be seaworthy at the commencement of every voyage it
undertakes during that time.
SECTION 118
When a ship becomes unseaworthy during the voyage to which an insurance
relates, an unreasonable delay in repairing the defect exonerates the insurer from
liability from any loss arising therefrom.
(TAKE NOTE)
VOYAGE AND DEVIATION
If the course of sailing is not fixed by mercantile usage, the voyage insured is
that way between the places specified, which to a master of ordinary skill and
discretion, would mean the most natural, direct and advantageous.
FOUR (4) CASES OF DEVIATION
(1) Departure from the course of sailing fixed by mercantile usage;
(2) Departure from the most natural, direct, and advantageous route;
(3) Unreasonable delay in pursuing the voyage; and
(4) The commencement of an entirely different voyage.

SECTION 124
A deviation is proper:
(1) When caused by circumstances over which the master or owner of the ship has
no control;
(2) When necessary to comply with a warranty, or to avoid a peril;
(3) When made in good faith, and upon reasonable grounds of belief in its necessity
to avoid a peril;
(4) When made in good faith, for the purpose of saving or relieving another vessel
in distress.
(Every deviation not specified under Section 124 is improper.)
SECTION 135
(1) In constructive total loss, abandonment by the insured is necessary in order to
recover for a total loss.
(2) In case of actual total loss, the right of the insured to claim the whole insurance
is absolute. There is no need to give notice of abandonment.
SECTION 138
Abandonment 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.
SECTION 142

Where the information upon which an abandonment has been made proved
incorrect, the abandonment becomes ineffectual.

After a valid abandonment has been made, the insured property was
recovered, the insured cannot withdraw the abandonment.
SECTION 143

Abandonment is made by giving notice to the insurer.

The notice may be done orally or in writing.
If done orally, a written notice of such abandonment shall be submitted
within 7 days from such oral notice.
FIRE INSURANCE
SECTION 167
Fire insurance shall include insurance against loss by fire, lightning, windstorm,
tornado or earthquake and other allied risks.
CASUALTY INSURANCE
SECTION 174

Casualty insurance is insurance covering loss or liability arising from

accident or mishap. It includes, but is not limited to:
(1) Employers liability insurance;
(2) Workmens compensation insurance;
(3) Public liability insurance;
(4) Motor vehicle liability insurance;
(5) Plate glass insurance;
(6) Burglary and theft insurance;
(7) Personal accident and health insurance.
TYPES OF SURETY BONDS
(1) Contract bonds these bonds are connected with construction and
supply contracts.
(a) Performance bond one covering the faithful performance of the
contract.
(b) Payment bond covering the payment of laborers and material men.
(2) Fidelity bonds they pay an employer for loss growing out of a
dishonest act of his employee.
(a) Industrial bond one required by private employers to cover loss through
dishonesty of
employees.
(b) Public official bond one required of public officers for the faithful
performances of their
duties.
(3) Judicial bonds they those which are required in connection with
judicial proceedings.
(a) Injunction bonds
(b) Replevin bonds
(c) Bail bonds, appeal bonds and attachment bonds.
KINDS OF LIFE INSURANCE POLICIES
(1) Ordinary life policy is one in which the insured is required to pay a certain
fixed premium annually or at more frequent intervals throughout his entire life.
(2) Limited payment life policy is one in which the premiums are payable only
during a limited period of years, usually ten, 15 or 20.
(3) Term insurance policy is one which provides coverage only if the insured dies
during a limited period. If the insured dies within the period specified, the policy is
paid to the beneficiary.
(4) Endowment policy is one in which the insurer binds himself to pay a fixed sum
to the insured if he survives for a specified period, or if he dies within such period.
(TAKE NOTE)
The insurer in a life insurance contract shall be liable in case of suicide
only when it is committed after the policy has been in force for a period of
2 years from the date of its issue or of its last reinstatement.
The insurer is liable where suicide is committed in the state of insanity
regardless of the date of commission, unless suicide is an excepted risk.

WHEN NOT LIABLE

The suicide is by reason of insanity but is not among the risks assumed by the
insurer regardless of the date of commission.