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November 17, 2014
GENERAL PROVISIONS
SOURCES OF INSURANCE LAW IN THE PHILIPPINES
1. RA 10607 or “An Act Strengthening the Insurance
Industry, Further Amending PD No. 612, otherwise known
as the ‘Insurance Code,’ as amended xxx.” – It is the
latest Insurance Law in the Philippines. It is basically a
reinstatement of the provisions of PD 1460 which is also a
restatement of the provisions of PD 612. The new features
deal mostly with increase capitalization for insurance
companies. Otherwise, the basic provisions of the
insurance law pertaining to the type of insurance now
prevailing are the same.
2. PD 612 sort of codified the different insurance laws then
prevailing in Philippine jurisdiction. It instituted the
insurance code of the Philippines and amendments were
made by PD 1460.
3. Sometime in 1978, PD 1460 consolidated all insurance
laws into a single code and last year president Aquino
signed RA 10607.
LAWS GOVERNING INSURANCE
AS we said, insurance is a special contract. The law that
applies to insurance contracts is now RA 10607.
Q: Now in the event that there are other matters that are not
addressed, what are the laws, if any, that apply to conflicts or
issues that arise from insurance?
A: Civil Code and other Special laws shall apply suppletorily.
From the book…
1. Insurance Code of 1978
2. Civil Code –
a. Articles 739 and 2012 on void donations
b. Article 2011
c. Articles 2021-2027 with respect to life annuity
contracts
d. Article 2207 on the insurer’s right of subrogation
3. Special Laws – among such special laws on insurance are:
a. Insurance Code (PD 612, as amended)
b. Revised Government Service Insurance Act of
1977 (PD No. 1146) – for government employees
c. The Social Security Act of 1954 – for private
employees
4. Others – in addition, there is
a. RA No. 656, known as the “Property Insurance
Law”
b. RA 4898 providing life, disability and accident
insurance
c. EO 250 increasing the insurance benefits of
barangay officials
So insurance contract is primarily governed by the insurance
code but if it does not provide for a particular matter, the
provisions of the civil code, the contract and other special laws
shall apply. So, when you are confronted by a BAR question
and there is a question where you feel that the provisions of
the insurance code do not directly apply you can apply your
stock knowledge on the law of contracts from the civil code
provisions.
RIGHT OF SUBROGATION OF INSURER TO RIGHTS OF
INSURED AGAINST WRONGDOER
1. Subrogation
It is a very important principle in insurance contracts. It is the
process of legal substitution. In insurance contracts, the
insurance company is placed in the shoes of the insured once
the insurance company has paid the damages to the insured.
That is the function of equity. Equity is applied in cases
where you have to weigh the different rights of the parties to a
contract. Why? The insurance contract is designed in such a
way that nobody gains from the loss or damage. It is not
something that you earn your income over, it is not a profit
venture seeking arrangement between parties but a
compensation for loss or damage. So, once the insured suffers
loss or damage, the insured merely get the equivalent or worth
of the said loss.
Doctrine of Subrogation – the insurer after paying the
amount covered by the insurance policy steps into the shoes of
the insured
2. Purposes of subrogation condition in policy
Its principal purpose is to make the person who caused the
loss, legally responsible for it and at the same time prevent the
insured from receiving a double recovery from the wrongdoer
and the insurer.
So the injured cannot run after the insured having received
compensation from the insurance company. The insured also
cannot run again the third party who caused the loss or
damage. So who should run against the third party? It should
now be the insurance company.
3. Right of subrogation applicable only to property
insurance
Subrogation is not applicable to life insurance contract because
the pecuniary value of human life can seldom be determined
with accuracy.
4. Privity of contract or assignment by insured of
claim not essential
The defendant cannot raise the defense of privity of contract.
For example, XYZ Company is the insurer of a building owned
by D Company. Now, here comes Pitt (?), Pitt suffers a slip and
fall. You remember your torts? Pitt now goes after D, the
insured. Now, XYZ will come to the rescue of D by paying for
the damages caused by the injury suffered by Pitt. Notice that
there is really no privity of contract between Pitt and XYZ but
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XYZ it still liable to pay Pitt because of the insurance contract
between XYZ and D.
So the privity of contract, therefore, is not a proper defense in
an insurance contract. What is necessary is only the
subrogation receipt. If the insurance company intends to
recover, it must prove that it was the negligence, for example,
on the part of the maintenance operator that caused the slip
and fall or the injury. It can now go after the maintenance
operator.
5. Loss or injury for risk must be covered by the policy
Under Article 2207 of the Civil Code, the cause of the loss or
injury must be a risk covered by the policy to entitle the
insurer to subrogation.
It simply means that the loss must be one of those
enumerated in the policy. In insurance law, the insurer will try
to really minimize his loss. As much as possible, when
something happens, they will run thru a check list because
they really want to minimize its loss or to share the loss with
other insurance companies. Now, if the insured wants to
recover as much as possible, all the risks that the insured can
imagine must be indicated or included in the policy itself. If
there are risks not covered by the policy, you can have it
covered by paying additional premium. Otherwise, the insured
will not be paid at all.
6. Right of insured to recover from both insurer and
third party
Basis: Principle of Indemnity
No double recovery. However, if the amount paid by the
insurance company does not fully cover the injury or loss, the
aggrieved party, i.e. insured, can recover the deficiency from
the person responsible for the loss or injury.
NOTE: This is wholly applicable only to property insurance. In
life insurance you have as many insurance policies as you can
afford.
7. Right of insured to recover from insurer instead of
the third party
As long as the insured can show that he has an insurance
contract with the insurance company, the insured can right
away ask for indemnity. That is why it is always good to be
covered by insurance policies. If the insurer would ask the
insured to seek redress from the third party, you will later on
learn that it is an act of unfair claim settlement which can
suspend the license of the said insurance company.
8. Right of insurer against third party limited to
amount recoverable from latter by the insured
As the insurer is subrogated merely to the rights of the
insured, it can necessarily recover only the amounts
recoverable by the insured from the party responsible for the
loss.
Remember that when an insurance company exercises its right
of subrogation the insurance company can only recover from
the third party that amount which the insured can recover
from the third party. It cannot ask for more or for less, this is
because of the principle of indemnity and subrogation.
9. Exercise of right of subrogation by insurer
discretionary
Is it mandatory that the insurance company exercise its right
of subrogation at all times?
NO. The insurance company is not under any pain of law to
exercise its right of subrogation. The right of subrogation can
be exercised only in accordance with the sound discretion of
the insurance company. Sometimes the insurance company
would just forego claiming refund for the damages that it has
paid to the insured for practical reasons. If it is not a big
amount, the insurance company would just forego refund.
10. Loss of right of subrogation by act of the insured or
insurer
If the insured enters into a settlement with the third party, can
the insurance company still run after the third party?
The settlement entered into by the insured with the third party
diminishes or releases the third party of any liability. If
payment has already been paid by the insurance company,
after payment but, let’s say, there is still a recoverable
amount, the release of the third party also affects the
insurance company’s right of subrogation. The insurance
company also cannot seek refund for the amount paid but
what can happen is the insured has the obligation to pay back
to the insurance company whatever amount it has paid to the
third party. For defeating the insurer’s right of subrogation, the
insured is under obligation to return to the insurer the amount
paid thereby entitling the latter to recover the same.
Now, I want you to look at the case of Manila Mahogany
Manufacturing Corp vs. CA, 154 S 650 and Pioneer
Insurance & Surety Corp. vs. CA, 175 S 668.
11. Effect of assignment by insured of its right against
third party to insurer
In a case where the insured (shipper) has assigned its rights
against defendant (carrier) for damages caused to the cargo
shipped to the insurer which paid the amount represented by
the loss, the case is not between the insured and the insurer
but one between the shipper and the carrier because the
insurance company merely stepped into the shoes of the
shipper.
APPLICABILITY OF THE CIVIL CODE
So again, the provisions of the Civil Code apply suppletorily.
The provisions of the Civil Code may be applied to matters of:
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ü Perfection of the insurance contract – was the insurance
contract perfected considering that the acceptance by the
insurance company of the policy or the application for
insurance was not received by the other party?
ü Consent – it is also very essential. Was the policy vitiated
by error?
ü Nullity of the contract for false or fraudulent consideration
ü Rescission – what are the effects of rescission? Under the
civil code, it is mutual restitution
ü Common law wife – disqualified from becoming a
beneficiary because of article 2012 in relation to article
739.
There was actually a BAR question, 2 or 3 years ago,
where this was asked. Common law wife and their
children were made beneficiaries of a life insurance policy.
The legal family then questioned the inclusion of the
common law wife, was the designation of the beneficiaries
valid? What about the children of the common law wife
and the policy holder?
ü Award of moral and exemplary damages in case of
unreasonable delay in the payment of insurance claims.
CONSTRUCTION OF THE INSURANCE CODE
There is a body of jurisprudence that is established in more
sophisticated jurisdictions in North America, etc. If there are
questions on interpretation, you can apply established
interpretations given by the courts of the said jurisdiction when
it can be proven that the statutes in question were actually
lifted from those jurisdictions. You can bring in the
interpretation of the jurisdiction, other than the Philippine
jurisdiction, and apply it to your own case.
(Ma’am talking about the development of the insurance
industry and the Philippine economy)
SEC. 2. Whenever used in this Code, the following terms shall
have the respective meanings hereinafter set forth or
indicated, unless the context otherwise requires:
(a) A “contract of insurance” is an agreement whereby one
undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent
event.
A contract of suretyship shall be deemed to be an insurance
contract, within the meaning of this Code, only if made by a
surety who or which, as such, is doing an insurance business
as hereinafter provided.
(b) The term doing an insurance business or transacting an
insurance business, within the meaning of this Code, shall
include:
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) 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;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized as constituting
the doing of an insurance business within the meaning of this
Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that
no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business.
(c) As used in this Code, the term Commissioner means the
Insurance Commissioner.
Concept of Insurance
Q: What is a contract of insurance?
A: A “contract of insurance” is an agreement whereby one
undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent
event. (Sec. 2(a))
Q: What is the consideration here?
A: The consideration is the premium paid by the insured to the
insurer.
So in insurance contract, the one factor that distinguishes it
from other contracts is that the consideration is specifically
called a “premium”. Failure to pay premium will terminate the
insurance contract.
Q: If you belatedly pay the premium, will it cure the defect in
the contract?
A: It depends on the policy. In life insurance policy, there is
such a thing as a “grace period”. The grace period may be for
a period of thirty days and within that period you can still pay
the premium and it’s as though your payment never lapsed. In
property insurance, however, it is very crucial that you pay the
premium on time; otherwise, the contract will simply lapse.
Contract of Suretyship
It is only an insurance contract if made by a surety who or
which, as such, is doing an insurance business.
Doing an Insurance Business
Q: How do you define “doing an insurance business”?
A: The term doing an insurance business or transacting an
insurance business, within the meaning of this Code, shall
include:
(1) Making or proposing to make, as insurer, any
insurance contract;
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(2) 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;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized as
constituting the doing of an insurance business within
the meaning of this Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this
Code. (Section 2(b))
Q: Sometimes you come across companies that put out
advertisements for insurance coverage, are these companies
considered engaged in insurance?
A: YES. They are engaged in the business of insurance
because they are proposing to make an insurance contract but,
of course, at that stage there no perfected contract of
insurance yet. In other words, you have to fill up the details (in
the application) and send it to the insurance company. Is there
a perfected insurance contract once the insurance company
receives the application? Not yet, the insurance company must
accept the application and such acceptance must be relayed to
the applicant. It is only when the insurance company has made
known to the applicant that they have accepted the application
that a perfected contract of insurance arises. If there is no
perfected contract, the contract is null and void.
In the application of the provisions of this Code, the fact that
no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business.
The subparagraph of section 2 tells us that just because no
profit was derived from contract does not mean that there is
no perfected insurance contract.
Now let’s go to the determination of the existence of the
contract…
DETERMINATION OF THE EXISTENCE OF THE
CONTRACT
Elements of the contract:
1. Subject matter – the subject matter is the thing insured in
the policy
2. Consideration – is the premium
3. Object or purpose – transfer and distribution of risk of loss
In a nutshell that is what an insurance contract is.
NATURE AND CHARACTERISTICS OF AN INSURANCE
CONTRACT
These are the characteristics that set the insurance contract
apart from other contracts.
1. Consensual – there must be a meeting of the minds
between the parties
2. Voluntary
3. Aleatory – something must happen before the other party
is bound to perform his obligation; dependent upon a
contingency
4. Executed as to the insured after the payment of the
premium and executory on the part of the insurer
5. Conditional – subject to the happening of an event insured
against
6. A contract of indemnity – you are indemnified only in so
far as the loss you suffered
7. Personal contract
November 24, 2014
(Ma’am reviewing last meeting’s discussion)
DISTINGUISHING ELEMENTS OF THE CONTRACT OF
INSURANCE
The contract of insurance made between the parties is
distinguished by the presence of 5 elements, namely:
1. The insured possesses an interest of some kind
susceptible of pecuniary estimation, known as “insurable
interest”;
2. The insured is subject to a risk of loss through the
destruction of that interest by the happening of
designation perils;
3. The insurer assumes that risk of loss;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group or substantial
number of persons bearing similar risk; and
5. As consideration for the insurer’s promise, the insured
makes a ratable contribution called “premium,” to a
general insurance fund.
COPING WITH RISK
I did mention in our past meeting that in so far as insurance
companies, in their business of insurance, what they are most
concerned with is how they could come up with schemes to
cope with risk.
The inherent uncertainty of events can be described in terms
of chance or probability. A person usually makes some sort of
calculation, perhaps instinctively, before deciding to engage or
not to engage in an activity. So similarly, an insurance
company also makes calculations. An insurance company may
jack-up the premium if the applicant is considered “high risk”
or when a building is already old. There are people called
“insurance adjuster” who evaluates the pecuniary value of the
loss and the insurance company would consider highly their
recommendation.
1. Limiting the probability of loss
For example, many industries utilize complex, dangerous
machinery, which place the employees who use them at
some risk. However, the probability that an employee will
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lose a finger or hand in a cutting machine is reduced if when it provides medical care, but the insurance is designed,
guards or other safety devices are used around the cutting first and foremost, not to help health care providers but to
device. Sometimes, insurance companies would advise the help individuals who incur medical bills. The health insurer
management that there should be hazards installed to pays the provider for health care services directly rather than
minimize the probability of the occurrence of an accident paying it the insured. This is same with the concept of
that would cause damage or loss. transportation insurance explained earlier, that the insurance
company directly pays the provider but it is to the benefit of
2. Limiting effects of loss the insured. The example here (book) is the auto repair shop
that fixes the insured’s automobile – you have a car that
For example, you are a passenger in a vehicle. In case suffered damage because of collision, the insurance company
collision occurs, for sure, there will be damage, but how will pay the auto repair shop directly not because the auto
would you limit the effects of loss? By encouraging the repair shop is privy to the insurance contract. Payment was not
wearing of seat belt, among others. for the benefit of the repair shop but is for the benefit of the
insured.
3. Self-insurance or self-financing
4. Ignoring risk No-fault Insurance
5. Transferring risk to another It is the term that you often hear in compulsory motor vehicle
insurance. When we say “no-fault insurance,” there is no need
These are the different devices of which insurance companies to determine who is at fault at the first instance before the
may reduce the risk. insurance receipt is released. As long as damage is incurred
and is proven, then the insurance company has no recourse
FIELDS OF INSURANCE but to pay the insured.

1. In general It is essentially the substitution of first-party insurance for tort

2. Social (government) insurance – example is Obama’s
health care insurance (ma’am gives lengthy opinion on
Obama’s administration and other health programs)
3. Voluntary (private) insurance
CLASSIFICATION BY INTEREST PROTECTED
1. First-party vs. third-party insurance
liability. The term “no-fault” connotes that the victim recovers
for his loss from his own insurer, without regard to the
fault of the third-party or his own contributory fault.
2. All-risk versus specified-risk
It is important to determine if your policy is an all-risk policy of
a specified-risk policy.

Q: What is the difference between first-party and third-party
insurance?
In first-party insurance, the contract between the insurer and
the insured is designed to indemnify the insured for loss
suffered directly by the insured.
In third-party insurance, on the other hand, the insured’s loss
is “indirect” in the sense that the third party suffers the
“direct” loss. The liability insurer will reimburse the insured for
any liability the insured may have to the third party, but in the
event of payment, the insured merely serves as a conduit for
transmission of the proceeds from the insurer to the third
party. It is third-party because ultimately, the proceeds are
received by a third-party. Example of which is a motor vehicle
insurance.
Life Insurance
Q: Is life insurance a first-party or third-party insurance?
A: It is a first-party insurance. There are instances, however,
that the owner of the policy designates a beneficiary to receive
the proceeds of the policy, but this does not mean that the
insurance is third-party.
Health Insurance
Health insurance can be categorized as a third-party
insurance. The health care provider suffers a loss in a sense
What is an all-risk policy? It means it covers all risks except
those excepted in the policy. So, in an all-risk, the insurance
company covers everything with a few exceptions.
Who bears the burden of proof?
All-risk Specified risk
Burden is with the insurer to Burden is ordinarily placed
prove that the loss falls within with the insured to initially
an explicit exception to prove that the loss falls within
coverage. the policy’s provisions on
coverage.
ü If the loss is due to normal wear and tear, the loss is not
fortuitous and, therefore, is not insurable.
ü You have to remember that when you have an all-risk
policy, it does not mean that the insurance company
cannot put up a defense. If the loss is by reason of fraud,
if there is wilful act or negligence on the part of the
insured, then that can be raised as a defense
CONSTRUCTION OF INSURANCE CONTRACTS
General Rule: Contracts of insurance are to be construed or
interpreted liberally in favor of the insured and strictly against
the insurer. Why? A policy of insurance is a contract of
adhesion, that is to say, most of the terms of the contract do
not result from mutual negotiation between the parties.
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Exception: When the intention of the policy is clear or the
language is sufficiently clear to convey the meaning of the
parties.
CHAPTER 1
THE CONTRACT OF INSURANCE
TITLE 1
WHAT MAY BE INSURED
SEC. 3. Any contingent or unknown event, whether past or
future, which may damnify a person having an insurable
interest, or create a liability against him, may be insured
against, subject to the provisions of this chapter.
The consent of the spouse is not necessary for the validity of
an insurance policy taken out by a married person on his or
her life or that of his or her children.
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.
SEC. 4. The preceding section does not authorize an insurance
for or against the drawing of any lottery, or for or against any
chance or ticket in a lottery drawing a prize.
SEC. 5. All kinds of insurance are subject to the provisions of
this chapter so far as the provisions can apply.
Lottery
If you take out an insurance for lottery, that cannot be a legal
insurance. A contract of insurance is not a wagering contract
but a contract of indemnity. Class, you cannot have a valid
insurance contract over a lottery or a raffle.
TITLE 2
PARTIES TO THE CONTRACT
SEC. 6. Every corporation, partnership, or association, duly
authorized to transact insurance business as elsewhere
provided in this Code, may be an insurer.
Who are parties to the insurance contract? The insurer
and the insured
Who may be insured? Section 6
December 1, 2014
Let’s go to this very interesting area of law called Insurance.
We’re in Title 2, Parties to the Contract. We have to determine
who are the proper parties in an insurance contract.
Sec. 6. Every person, partnership, association, or corporation
duly authorized to transact insurance business as elsewhere
provided in this code, may be an insurer.
So it can be a person, a corporate entity, an association, a
corporation. What about a non-profit organization? Can it
conduct the business of insurance? A non-profit organization,
you have to determine first if that non-profit organization is an
association. If it is an association or a corporation, partnership
duly organized under the laws of the Philippines and complying
with the requirements under the Insurance Code then that
nonprofit-organization can also be in the Business of
insurance.
Now, Section 7:
Sec. 7. Anyone except a public enemy may be insured.
So we know who can be an insurer. Now we have to know
who can be the insured. Section 7 says that, anybody except
a public enemy may be insured.
How do you define a public enemy?
A public enemy designates a nation with whom the Philippines
is at war and it includes every citizen or subject of such nation.
The term may be taken to mean “alien enemy.” A mob,
however numerous they may be, or robbers or thieves
whoever they may be, are never considered public enemies for
purposes of the above provision.
What about a private corporation? It’s not a nation. Can a
private corporation be treated as a public enemy? How can
you tell that a private corporation is a public enemy? Is there a
test that we used? What do you look at to determine
citizenship of a corporation? What do you mean by the control
test?
During wartime, a private corporation is deemed an enemy
corporation although organized under the Philippine laws if
they are controlled by enemy aliens. This is the so called
“control test” whereby a corporation is deemed to have the
same citizenship as the controlling stockholders in time of war.
(Filipinas Cia de Seguros vs Hunefeld & Co)
Atty. Angeles: Citizens of a nation which our country is at war.
So if the controlling stockholders are not citizens of a nation
against which we are at war then they are not considered
public enemy.
Now, what is the effect of war on an existing property
insurance? And what is the effect of war on existing life
insurance?
By the law of nations, all intercourse between citizens of
belligerent powers which is inconsistent with a state of war is
prohibited. The purpose of war is to cripple the power and
exhaust the resources of the enemy. It is inconsistent that the
subjects of one country should lend their assistance to protect
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by insurance, the commerce or property of belligerent alien
subjects or to do anything detrimental to their country’s
interest.
Of course, if the parties are not rendered enemy aliens by the
intervention of war, the policy continues to be enforceable
according to its terms and the laws governing insurance and
the general rules regarding contracts.
1. With respect to property insurance
The rule adopted in the Philippines is that an insurance policy
ceases to be valid and enforceable as soon as an insured
becomes a public enemy
2. With respect to life insurance
Three rules of doctrine have arisen. One of these rules is the
United States Rule which declares that the contract is not
merely suspended but is abrogated by reason of nonpayment
of premiums, since the time of payments is peculiarly of the
essence of the contract. However the insured is entitled to the
cash or reserve values of the policy (if any), which is the
excess of the premiums paid over the actual risk carried during
the years when the policy had been in force.
At the end of the war is the property insurance reinstated? Can
a Life insurance policy be reinstated?
Since the effect of war is not merely to suspend but to
abrogate the contract of insurance between citizens of
belligerent states, the termination of the war does not revive
the contract. Consequently, the insurer is not liable even if the
loss is suffered by the insured after the end of the war.
Atty. Angeles: Allright, that’s very clear that a public enemy
cannot be insured. Theoretically speaking, let’s say the
MILF/MNLF for example, are these organizations considered
public enemy of the States? Can they be insured under
section 7? What about the CPP-NPA?
These associations/organizations for purposes of discussion are
not treated as enemies of the state. If you take a look at the
definition, being a public enemy there is a sentence there:
A public enemy designates a nation with whom the Philippines
is at war and it includes every citizen or subject of such nation.
The term may be taken to mean “alien enemy.” A mob,
however numerous they may be, or robbers or thieves
whoever they may be, are never considered public enemies for
purposes of the above provision. (De Leon)
Of course I’m not saying that the MILF/MNLF/CPP-NPA is a
mob or robbers, nothing of that sort. What I’m saying is, this
particular provision; Section 7, really refers to a nation we are
at war with. So if there is no war then this particular section
does not apply. The famous case under this Section would be
Filipinas Cia de Seguros vs. Christern Huenefeld & Co.
Remember class, anybody can be insured except a public
enemy.
Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or
assigns a policy of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the mortgagor, who does
not cease to be a party to the original contract, and any act of
his, prior to the loss, which would otherwise avoid the
insurance, will have the same effect, although the property is
in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein named, with the
same effect as if it had been performed by the mortgagor.
Section 8 gives a situation where there is a mortgagor and a
mortgagee.
Can you give us the difference between the insurable
interest of the mortgagor and the insurable interest of
the mortgagee over the property?
Separate insurable interest
The mortgagor and the mortgagee have each an insurable
interest in the property mortgage (Sec.13), and this interest is
separate and distinct from the other.
Consequently, insurance taken by one in his own name only
and in his favor alone, does not inure to the benefit of the
other (Sec. 53). And in case both of them take out separate
insurance policies on the same property, or one policy covering
their respective interests, the same is not open to objection
that there is double insurance (Sec 93).
Extent of insurable interest of mortgagor and
mortgagee
The mortgagor of property, as owner, has an insurable interest
therein to the extent of its value, even though the mortgage
debt equals such value. The reason is that the loss or
destruction of the property insured will not extinguish his
mortgage debt.
The mortgagee (or his assignee) as such has an insurable
interest in the mortgaged property to the extent of the debt
secured, since the property is relied upon as security thereof,
and in insuring, he is not insuring the property itself but his
interest or lien thereon. His insurable interest (Sec 10) is prima
facie the value mortgaged and extends only to the amount of
the debt, not exceeding the value of the mortgaged property.
Such interest continues until the mortgage debt is
extinguished.
Thus, separate insurances covering different insurable interests
may be obtained by the mortgagor and mortgagee.
Atty. Angeles: So we have a situation where there is a
mortgagor and mortgagee. It is a credit relationship between
the two parties. It is important to know that different parties
can have different insurable interest over one property. They
would have different insurable interest in the sense that the
mortgagor as the owner would have a different interest over
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the property. What sort of interest would that be? His/her
interest as owner over the property. The mortgagee on the
other hand, his/her interest over the property would actually
just be simply the credit that he or she extended to the
mortgagor. There is no double insurance in this respect. They
are separate insurable interest.
Let’s take a look at Section 8.
. . .“a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to
the mortgagee, or assigns a policy of insurance to a
mortgagee,”
So we have two situations. The mortgagor takes on an
insurance policy for the property in his own name but provides
that the loss shall be payable to the mortgagee or assigns the
policy itself to the mortgagee. Did the mortgagor loss his
interest over the property? The answer is NO. The mortgagor
continues to have insurable interest over the property and
such he does not ceased to be a party to the original contract.
What is the effect now of that arrangement? What is the effect
on the mortgagor’s actions? What happens now when he
performs certain actions during the period of the insurance
contract? What are the consequences of his actions? What is
the effect if the mortgagor performs an act prior to the loss
that will abort the insurance? What is the effect on the
insurance?
Insurance of the mortgagor for the benefit of the
mortgagee or policy assigned to the mortgagee.
Under Section 8, where the mortgagor of the property effects
insurance in his own name providing that the loss shall be
payable to the mortgagee, or assigns a policy of insurance to
the mortgagee, the following are the legal effects:
1. The contract is deemed to be upon the interest of the
mortgagor, hence, he does not cease to be a party to the
contract;
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the mortgagee
even if the property is in the hands of the mortgagee;
3. Any act which under the contract of insurance is to be
performed by the mortgagor may be performed by the
mortgagee with the same effect;
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit; and
5. Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished.
Let’s try to simplify Section 8.
Let’s take a look at section 8 because it is a basic provision
that will guide the relationship of the mortgagor and a
mortgagee. Earlier we said that when the mortgagor of a
property effects insurance in his own name - here comes the
owner of the building taking out an insurance in his own name.
But In that policy, by way of rider or clause probably, the
mortgagor provides that in case of loss the proceeds shall be
payable to the mortgagee or that the policy of the insurance is
assign to the mortgagee. So those are the two instances:
1. loss the proceeds shall be payable to the mortgagee
or;
2. that the policy of the insurance is assign to the
mortgagee.
In those 2 instances the insurance policy is still deemed to be
in the interest of the mortgagor. So he does not lose his
insurable interest over the property. However, (this is the
important part) any act of his, meaning the mortgagor prior to
the loss which would otherwise avoid the insurance. Actions
prior to the loss that would nullify the insurance will have the
same effect although the property is in the hands of the
mortgagee. Let’s try to visualize that.
The mortgagor instead of strictly following the policy that
states no flammables in the building. He nonetheless puts
flammable materials inside the building. That fact alone would
have nullified or avoided the insurance because that would be
in violation of the policy. Even if the deed or the title to the
land together with the building has already been delivered to
the mortgagee. Even if the deed has already been delivered to
the mortgagee, what happens? It will still void the insurance
policy. Why? Because these actions were in violation of the
policy. In this arrangement the mortgagee actually suffers.
Now, vice versa, if the mortgagee wants to perform actions
that the mortgagor would have otherwise been allowed to
perform the mortgagees action would be, for example, the
mortgagor does not pay the premium and then the mortgagee
pays the premium, that would still benefit the insurance policy.
. . . “but any act which, under the contract of
insurance, is to be performed by the mortgagor, may
be performed by the mortgagee therein named, with
the same effect as if it had been performed by the
mortgagor”.
So actions done by the mortgagor prior to the loss which
would nullify the insurance contract, would affect the
mortgagee in the same manner that actions performed by the
mortgagee will redound to the benefit of the mortgagor. That’s
the simple restatement of Section 8.
What is the extent of the insurable interest of the mortgagor to
the value of the property? When we are talking of property
insurance, because it is a contract of indemnity when the
owner of the property suffers loss, he/she may only get the
value of the loss not the value of the property itself. So if the
building is partially damaged, the owner does not get the value
or the cost of the entire building. The owner will only get
whatever has been lost, that portion that is considered as lost.
As far as the mortgagee is concerned his insurable interest is
again limited to the credit. If there has been partial payment
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and the loss occurs. How much is he entitled to recover? Only
the balance of the credit. That’s just what each of them is
entitled to recover.
I want you to go over, just read through the Insurance by the
mortgagor for his own interest and insurance of the mortgagor
for the benefit of the mortgagee or policy assigned to the
mortgagee.
Insurance by mortgagee of his own interest
Right of mortgagee in case of loss
Where the mortgagee, independently of the mortgagor,
insures his own interest in the mortgaged property, he is
entitled to the proceeds of the policy in case of loss before
payment of the mortgage.
Subrogation of insurer to the right of mortgagee
In such case, the mortgagee 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.
Change of Creditor
In other words, the payment of the insurance of the
mortgagee by reason of the loss does not relieve the
mortgag0r from his principal obligation but only changes the
creditor.
Insurance by the mortgagor of his own interest
For his own benefit
The mortgagor may insure his own interest as owner for his
benefit. In case of loss, the insurance proceeds do not inure to
the benefit of the mortgagee who has no greater right than
unsecured creditors in the same.
For the benefit of mortgagee
It is competent, however, for the mortgagor to take out
insurance for the benefit of the mortgagee, where he pays the
insurance premium, making the loss payable to the mortgagee.
There is a discussion under the topic insurance by the
mortgagor of his own interest. There is a discussion of what is
the standard mortgage clause.
A “Standard mortgage Clause” containing a collateral
independent contract between the mortgagee and the insurer
may be attached.
A standard mortgage clause is an agreement whereby the
mortgagee and the insurer enter into a separate contract. Now
do you ask is there a need for standard clause for all mortgage
contract. This is it actually. But there are also mortgage
contracts where the – in banks for example. The Banks would
require endorsements(?) of the fire insurance policy. An
endorsement(?) would be for the benefit of the bank for
example or of the mortgagee that entered into a mortgage
contract with the mortgagor.
Sec. 9. If an insurer assents to the transfer of an insurance
from a mortgagor to a mortgagee, and, at the time of his
assent, imposes further obligation on the assignee, making a
new contract with him, the act of the mortgagor cannot affect
the rights of said assignee.
Section 9 Discusses about transfer or assignment of insurance
policy. Can the insurance policy be transferred? Of course, but
under certain conditions.
What is the consequence or the effect when the insurance
company assents or gives consent to the transfer of the
insurance policy to the mortgagee? What is the exception?
Section 9 only gives the effect if the insurer agrees to the
transfer of the policy and, at the time of his assent, imposes
new obligations on the assignee.
What about the actions of the mortgagor can it affect the
rights of the assignee? No, only when the insurance company
imposes further conditions/obligations thereby making a new
contract. Why? Why is it the actions of the mortgagor do not
affect the new contract? What is the legal operation that took
place there? Novation, because the original insurance contract
was novated.
Let’s take a look at the different policies and how does section
9 apply as to fire policy.
Fire policy is not transferrable without the consent of the
insurance company, because a fire policy is a personal policy.
The insurance company needs to give consent to the transfer
of the policy because he wants to know if the new party is
reliable, there is no fraud, or if he is a party that the insurance
company does not want to insure.
What about marine policy? It says generally it is assignable
even though without the consent of the insurer unless required
by the terms of the policy. However the author believes that it
is still not assignable without the consent of the insurer.
Casualty policy, it’s more like liability insurance, it is also not
assignable unless the insurance company gives consent.
As to Life policy, the policy may be freely assigned before or
after the loss occurs, to any person whether he has any
insurable interest or not. The assignee, whether that assignee
has insurable interest or not. But of course the person taking
life insurance must have insurable interest. And we will find
out later on what are those insurable interests.
Right of the mortgagor to assign insurance policy to
mortgagee is recognized in Section 9. Remember it is possible
to assign the proceeds of the policy to the mortgagee. It is
allowed under section 8. Section 9 only refers to situation
where the insurer assents to the transfer but further imposes
obligations. In that case, the actions of the mortgagor do not
affect the new contract between the insurance company and
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the mortgagee. Why? Because the original contract of
insurance is considered novated.
What are the kinds of insurable interest?
Section 10 Every person has…
Student: Under Section 10 par.C, the insurance is taken out by
the insured upon the of the life of the other. The assured here
is the creditor while the insured here is the debtor because the
creditor takes out an insurance policy for his benefit upon the
life of the debtor so that in the event of the happening of the
risk insured against such as the death of the debtor, the
creditor may still claim the insurance proceeds proper.
What is the meaning of insurable interest being pecuniary in
interest?
In general, a person is deemed to have an insurable interest in
the subject matter insured where he has a relation or
connection with or concern in it that he will derive pecuniary or
financial benefit or advantage from its preservation and will
suffer pecuniary or financial benefit or advantage from its
destruction, termination, or injury by the happening of the
event insured against.
Two general classes of life policies:
1) Insurance upon one’s life- In one class are those
taken out by the insured upon his own life for the benefit of
himself, or of his estate, in case it matures only at his death,
or for the benefit of a third person who may be designated as
beneficiary.
2) Insurance upon life of another- In the other class
belong policies taken out by the insured upon the life of
another .
REMEMBER:
An application for insurance on one’s own life does not usually
present an insurable interest question. On the other hand,
when one applies for insurance on the life of another for the
former’s benefit, he must have an insurable interest in the life
of that person.
Section 10 par. A) indicates that the husband has an insurable
interest in the life and health of himself, of his wife and of his
children.
What about insurable interest over the life of their mother or
father? Where does it fall?
It falls under Section 10 par. B) Of any person on whom
depends wholly or in part for education or support, or in whom
he has a pecuniary interest.
Let’s say you are in graduate school and your father is paying
for your tuition fee, do you have insurable interest over the life
of your father? It seems so because your father is paying for
your matriculation.
Section 10 par. C) 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.
If you are financial executive who runs the business of your
employer, the latter has an insurable interest over your life
because if anything happens to you your employer will suffer
greatly for your loss.
Sec. 10 par. D) Of any person upon whose life any estate or
interest vested in him depends
Example: A receives as legacy , the usufruct of a house. The
ownership of which is vested in B. It is provided in the legacy
that should B die first, both the usufruct and the ownership of
the property will pass to C.
In this case, A has an insurable interest in the life of B for A
will suffer pecuniary loss by B’s death.
To sum it up, the insurable interest in the life or health of a
person is one that is defined in section 10. All other
relationships there can be no insurable interest. You may have
an interest but not insurable. In other words, if the nature of
the insurance cannot be found under sections 10 pars. A, B,C,
or D, then it is not an insurable interest at all.
You play golf. It seems that your cuddy brings you luck. You
always win whenever he is your cuddy. You tell to yourself that
you have an insurable interest over the life of your cuddy. You
may have interest over his life but it is not insured. It is not an
insurable interest that can allow to get insurance policy for
you. The law is very specific. It is not one of those allowed by
the law.
There are certain insurance policies that are tainted with fraud
such as when a wagering policy has been taken out by the
insured on his life at the behest of a third person who is
named as beneficiary. Evidence of a wagering policy is usually
found in such facts as:
a.) That the original proposal to take out insurance was
that of the beneficiary;
b.) That premiums are paid by the beneficiary;
c.) That the beneficiary has no interest, economic or
emotional, in the continued life of the insured;
d.) The insured designates himself as the beneficiary.
On finding that such policy is primarily a wager, the court will
generally void the policy entirely.
In any case, there is no question that under our law, a person
has an insurable interest in his own life. But if the policy is
applied for and owned by someone other than the insured, the
applicant-owner must have insurable interest in the life of the
insured.
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Similarity between a life insurance policy and a civil donation
A life insurance policy is no different from a civil donation
insofar as the beneficiary is concerned. Both are founded upon
the same consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds
or profits of said insurance.
Insurable interest in the life of another
The mere fact that two persons are engaged to be married
does not give one an insurable interest in the life of the other.
The law talks of spouses and not fiancées. It is very specific.
However an insurance policy can be taken out over the ring
that is given to the fiancé.
Insurable interest in life of person upon whom one depends for
education or support or in whom he has a pecuniary interest.
Blood or material relationships fit the concept of insurable
interest. The following have an insurable interest in each
other’s life since under the provisions of Article 195 of the
Family Code, they are obliged to support each other:
a) The spouses;
b) Legitimate ascendants and descendants;
c) Parents and their legitimate children and the
legitimate or illegitimate children of the latter;
d) Parents and their illegitimate children and the
legitimate or illegitimate children of the latter;
e) Legitimate brothers and sisters, whether of the full or
half-blood.
The relationship that is covered by this category refers to a
relationship brought about by family or blood not by in laws or
affinity.
. So if you insure somebody because you depend on that
person for education or support, that means that education or
support is owed to you because of blood relationship. Even
illegitimate relationship, it is still insurable because there is a
blood relationship that can be established.
When pecuniary benefit essential.
In other cases, mere blood relationship does not create an
insurable interest in the life of another. There must be an
expectation of pecuniary benefit in the life of the insured to
sustain the insurance, that is, a risk of actual monetary loss
from his death.
Section 11. The insured shall have the right to change the
beneficiary in the policy, unless he has expressly waived this
right in said policy.
Q: Can the insured changed his beneficiary?
A: Yes, unless there is express waiver in the policy.
Q: Who can be the legal beneficiary?
A: The beneficiary in a life insurance policy may be either the
insured himself or his personal representatives or someone
other than the insured. Where the beneficiary designated is a
person other than the insured, such person may occupy one of
three relations to the insured: a.) insured himself, b.) third
person who paid a consideration, and c.) third person through
mere bounty of insured.
Q: Does a beneficiary need to have an insurable interest?
A: NO. beneficiary ka lang eh. You are merely the recipient of
the liberality of the insured.
Limitations in the appointment of beneficiary
We said in the early of the course that the provisions of the
Civil Code applies suppletorily to insurance contracts. Under
Article 2012, any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary. So
this provision puts the limitation on the designation of the
beneficiary. We know that insured can designate his own
beneficiaries in both that he can also change them unless he
has expressly waived his right. But that right to designate his
own beneficiary is limited by Article 2012 of the Civil Code
which further refers to Article 739.
Article 739. The following donations shall be void:
1.) Those made between persons who were guilty of
adultery or concubinage at the time of donation;
2.) Those made between persons who were guilty of the
same criminal offense, in consideration thereof;
3.) Those made to a public officer or his wife,
descendants and ascendants, by reason of his office.
Applying the same to insurance contracts, if the beneficiary of
the insurance policy is guilty of adultery or concubinage even
without finding of guilt, that designation of such beneficiary is
null and void.(NB: we’re only talking of parties directly
engaging in concubinage and not their children.)
Situation:
Out of adulterous relationship of A and B, three children were
born. If the designation of the beneficiaries in the insurance
policy was B (mistress) and our three children. So B’s share in
the policy is null and void pursuant to Article 739 while the
illegitimate children’s shares are not because they are not ones
in the adulterous relationship.
Q:During the lifetime of the insurance policy, does the
designation of the beneficiary limit the insured’s control over
the benefits of the policy? Does the beneficiary have the
control over the policy itself?
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A: NO because the beneficiary’s right over the proceeds is
realized only when the loss of life has already occurred. Upon
the death of the insured, that’s when the right of the
beneficiary accrues. The beneficiary has only an inchoate right.
So much so that the insured decides to surrender the policy,
the beneficiary can do nothing about it. The insured can do
anything on the policy even without the consent of the
beneficiary.
Q: When the designation of beneficiary is irrevocable, what is
the nature of his right?
A: The beneficiary acquires an absolute and vested interest to
all benefits accruing to the policy.
Q: When does it accrue?
A: from the date of its issuance and delivery, including that of
obtaining a policy loan to the extent stated in the schedules of
values attached to the policy.
Q: What happens now when the insured wants to surrender
the policy or pays out a loan, what he should do?
A: He must obtain the consent of the beneficiary. Without the
consent of the beneficiary, all actions of the insured in the
policy are rendered void.
Measurement of vested interest of beneficiary in policy
The vested right or interest of the beneficiary in a policy
should be measured on its full value and not on its cash
surrender value for in case of death of the insured, said
beneficiary is paid on the basis of its face value. Face Value is
the value of the policy as stated on the cover of the policy.
Cash surrender value is the accumulated value that the
schedule of the insurance company gives to a particular policy
at some point in the life of the insurance contract. So if you
have parents and say na isurrender na lang natin itong policy,
kailangan na natin ng pambayad sa bar exam because the
insurance policy has a cash surrender value. It may not be the
full value of the policy but if your policy has been in existence
for several years and it has big face value, in all probability
you’ll have big cash surrender value especially if you did not
pay out a loan. It is only when you take out a loan that your
policy is really affected.
An application of loan under the policy and the surrender of
the policy by the insured constitute acts of disposition or
alienation of property rights of the beneficiary and not merely
management or administration because they involve the
incurring or termination of contractual obligations. So when the
insured exercises such and if the designation of the beneficiary
is irrevocable, those acts are not permitted without the
consent of the beneficiary. When you exercise those acts, you
are already exercising acts of ownership.
December 15, 2014
Sec. 11. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has expressly
waived this right in said policy.
Section 11 deals with the beneficiaries. By the way, a
beneficiary can be both natural and juridical person. An
employer of a high ranking executive can be a beneficiary in
the life insurance policy they may have taken on the life of the
CEO/CFO.
Kinds of Beneficiary:
1. Insured himself
2. The third person who paid a consideration
Like the employer for example or the creditor. He is the third
person to the contract of insurance.
3. Third person through the mere bounty of insured
There is no reason for the beneficiary to become one when he
has no insurable interest over the life of the insured but the
insured nevertheless specifies that the third party is the
beneficiary to the proceeds of the insurance policy.
In the second and third kind of beneficiary, the proceeds of the
life insurance policy become the exclusive property of the
beneficiary upon the death of the insured. Once the death
occurs (life insurance policy) the rights of a revocable
beneficiary becomes vested in the beneficiary himself/herself.
From that time on, it becomes his property right. It is
translated now into a property right in favor of the beneficiary
himself. So once it becomes a property right he can actually
assign the proceeds, that is one of the effects of ownership.
You can assign, transfer to the one whomever you want to
transfer or you can transfer to an assignee the proceeds which
you will be receiving from the insurance policy. But such right
only ripens when death of the insured occurs.
We also discuss the limitations in the appointment of
beneficiary. So anyone can be appointed as beneficiary. There
are limitations. And one of the major limitations set forth is
under Article 2012 of the Civil Code. Article 2012 refers to
Article 739 which enumerates the people who cannot donate
among themselves or who cannot receive donations or whose
act of donating is rendered null and void.
Art. 739. The following donations shall be void:
(1) Those made between persons who were guilty of adultery
or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same
criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
Going back to adultery and concubinage do we need a final
judgment? No. the guilt of the person may be proven by mere
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preponderance of evidence. If you want to contest a
designation of a beneficiary on the ground that the beneficiary
was engaged in an adulterous relationship with the insured,
how do you prove that? It’s merely a civil action that you will
institute. A civil action to render null and void the designation
of the defendant as beneficiary on the grounds of violations
under Art 739 and you’re degree of proof is merely
preponderance of evidence.
Right of the insured to change the beneficiary in life
insurance policy
You must always remember that when it is a revocable
beneficiary the insured has the right to continuously enjoy the
rights of ownership in the policy. What are those? Surrendering
the policy for its cash surrender value, taking up a loan on the
policy, all these things. Probably even giving up or quitting on
the insurance policy. Those are parts and parcel of the
ownership of the insured of the policy.
In contrast to that if it is an irrevocable beneficiary; the
beneficiary acquires an absolute and vested interest to all the
benefits accruing from the policy. All the benefits accruing
from the policy from the date of its issuance and delivery.
What does that mean? What is the significance of that? The
insured losses control over the policy, over his own policy and
practically for all intents and purposes surrenders the policy to
the irrevocable beneficiary. Because the right of the beneficiary
becomes vested upon its issuance and delivery, the beneficiary
can take out a loan to the extent stated in the schedule of the
values(?) because now he has a property right in the policy.
Can the owner/ insured continue to exercise ownership during
the time that he is alive notwithstanding the irrevocable
designation of the beneficiary? Is there an instance where the
insured can avail the benefits of the insurance policy despite
the irrevocable designation?
The beneficiary has thus a property right in the policy of which
could not be deprived without his consent.
Okay, understand section 11 and understand also the
irrevocable designation concept. The rights once irrevocably
designated, the rights now transferred to the beneficiary and
the rights become vested in him and he has all the rights. But
the insured is still the insured.
What will the insured do to be able to still enjoy the benefits of
the policy? - If the beneficiary consents. That’s why the hard
thing about irrevocable designation is anything you want to do
with the policy you have to get the consent of the beneficiary.
That’s all. You can still continue enjoying the benefits. Actually
the insured still owns the insurance policy itself. The proceeds
are owned already by the irrevocable beneficiary but that does
not render the owner of the policy useless or inutile. You can
still avail of a loan, get the cash surrender value. Now if you do
not get the consent of the beneficiary you cannot do that. But
if you get the consent of the beneficiary then you can still do
those things. You have to get the consent.
The beneficiary has thus a property right in the policy of which
could not be deprived without his consent (De leon).
Can a new beneficiary be added to the policy? No, if again
without the consent of the beneficiary. No new beneficiary can
be added because it will diminish his property right, it would
reduce the irrevocable beneficiary’s vested interest. But again
if he consents there should be no problem. What is unique
about the irrevocable designation is that the owner itself
cannot destroy the policy in the sense that he will simply just
runaway from his obligations under the policy. If the
irrevocable beneficiary feels that there is an intent on the part
of the insured not to continue paying the premiums, the
irrevocable beneficiary if he has the means to do it can actually
continue paying the premiums on the insurance contract.
What will you advice your client if he goes to you for advice
before he signs a 10Million insurance policy on his life? To
designate a beneficiary only as revocable.
Measurement of vested interest of beneficiary in the
policy
What is the measurement of the vested interest of your
beneficiary in the policy?
The vested right or interest of the beneficiary in a policy
should be measured on its full face value and not on its cash
surrender value.
The cash surrender value is taken from the schedule provided
for by insurance companies depending on the life of your
insurance policy. They have a schedule. If your policy has been
in existence for so many number of years, they have
equivalent cash value for that policy at that point in time of the
life of the policy. The measurement of the vested interest of
your beneficiary in the policy is the full face value. So if your
insurance policy says that you are insured for 5Million, the
beneficiary gets the full amount of 5Million. We must
remember in the Nario case that the application of a loan,
surrender of the policy, these are acts that constitute
disposition or alienation of property rights. They are not merely
acts of administration because they involve terminating or
incurring contractual obligations.
An application of loan under the policy and the surrender of
the policy by the insured constitute acts of disposition or
alienation of property rights of the beneficiary and not merely
of management or administration because they involve the
incurring or termination of contractual obligations (Nario vs.
Philippine American Life Insurance Co., 20 scra 436)
Where beneficiary dies before the insured
There are two views, what are these two views? What is the
criticism of the first view?
1. View that beneficiary’s representative is entitled to
insurance proceeds
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It would necessarily follow as a consequence of the vested The beneficiary designated may be the insured or his estate, a
interest rule, where the right to change the designated specifically designated person or persons, or a class or classes
beneficiary is expressly waived in the policy, that if the of person
beneficiary dies before the insured, his rights so vested should
pass to his representatives, and on the death of the insured, 1. Children
the proceeds of the policy should belong, not to estate of the
insured, but to the representatives of the beneficiary. But this The word “children” used to designate beneficiaries, is broad
result, however logical in form, does great violence to the enough to include the following:
purpose of the insured, who must have intended, in the
ordinary case, to provide a fund for the support after his a. Adopted child; or
death, of those whom he was accustomed to support during
his lifetime. He can scarcely have intended to make a provision b. An adult child not forming a part of the household of
for the distributes and legatees if the deceased beneficiary, the insured; or
who may well be persons without claim to his bounty or
interest in his life. c. After-born children even of a marriage subsequently
contracted.
2. View that estate of the insured is entitled to insurance
proceeds The word “children” in an insurance policy ordinarily means a
descendant of the first degree and is never intended to include
It is believed that where the beneficiary predeceases the grandchildren.
insured, the estate of the insured should be entitled to the
2. Husband; wife or widow
proceeds of the insurance especially where the designation is
subject to the express condition to pay the beneficiary if he
The word “wife: in the description of the beneficiary of life
survives the insure or “if surviving”. However, most but not all,
insurance is generally regarded as descriptio personae, and the
courts hold that the mere fact that such policy is made payable
fact that one who otherwise answer the description does not
to the designated beneficiary, “his executors, administrators,
have the legal status of the wife of the insured does not
or assigns,” is sufficient to negative the implied condition that
prevent her from taking as beneficiary, when she is designated
death of the beneficiary before maturity of the policy
by name, although the word “his wife” were added. However,
terminated all his rights to it.
if the beneficiary is not named but is designated merely by a
It is simple if the beneficiary dies, if you invoke the first view, status, such as “the husband”, “wife”, or “widow” of the
you are actually asking the insured to give out money to insured, the legal husband or wife as ascertained at the death
of the insured, is entitled to the benefits of such insurance.
people he doesn’t even know. So that is the objection to the
first view, that the insured was only being liberal, or being
If the designation is merely wife, it merely describes the
generous to the person or the beneficiary itself. But if the
person. If there is a name of the person it will be given more
representatives of the beneficiary will partake of the proceeds
preference, more weight than the general designation of
after his death it would be too much of an imposition on the
“wife”. If there is no name appearing in the policy, it is only a
insured for him to be compelled under the law to give out his
designation of the husband or wife, widow of the insured then
funds to people he doesn’t even know or care about.
it is taken to mean the legal wife or the legal husband. What if
The second view on the other hand, is that if the beneficiary they’ve never been married? If they’ve never been married,
dies before the insured the proceeds will go to his estate. In that’s __ determined provided there is no other party
the example, the estate of the insured should be entitled to interested to share in the pie. The problem always arises when
there are other parties claiming their shares in the proceeds.
the proceeds of the insurance especially where the designation
is subject to the express condition to pay the beneficiary if he
3. Husband and children; wife and children
survives the insured or “if surviving”. However, most but not
all, courts hold that the mere fact that such policy is made
A policy payable to the wife of the insured and “their children”
payable to the designated beneficiary, “his executors,
includes children by another wife, although the prevailing view
administrators, or assigns.” When you have a phrase worded
state that the beneficiaries are limited to children common to
in that way there is no other choice but to interpret it in the
both. But if the designation is made to the insured’s “wife and
manner the insured wishes, that is to pay to the beneficiary, if
children” or “my wife and children”, the insurance is deemed
he dies, “his executors, administrators, or assigns,”. When the
for the benefit of all children of the insured, whether by the
policy is worded in such a way you cannot deny his heirs,
named wife or those of another.
executors from getting hold of the policy because it was
intended by the insured. 4. Family
Go over the discussion on designation of beneficiary. The term “family” is sometimes used to indicate the recipient
of the proceeds of an insurance policy. In deciding whether a
Designation of Beneficiary
particular person claiming a share of the fund is of the family
of the insured, the court will ascertain whether that person
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was so regarded by the insured. If he was so regarded, he will
be allowed to participate although in no way related to the
insured.
5. Heirs or legal heirs
When a life policy is made payable to the insured’s “heirs” or
“legal heirs”, these terms will not ordinarily be construed as
indicating merely the heirs at law but rather that class of
persons who would take the property of the insured in case he
died intestate.
6. Estate or legal representatives of deceased
The words “estate”, “representative”, or “legal
representatives”, when used in designating beneficiaries, are
to be construed in their strict technical sense and the courts
will ordinarily assume that they are used to mean executors or
administrators, unless it appears that the insured intended to
use these expressions in the sense of heirs or next kin.
Words used in designating the beneficiaries of a life policy will
not be given their technical significance but will be construed
broadly in order that the benefit of the insurance shall be
received by those intended by the insured as the object of the
bounty. The beneficiary designated may be the insured or his
estate, a specifically designated person or persons, or a class
or classes of persons.
1. Children
2. Husband; wife or widow
3. Husband and children; wife and children
4. Family
5. Heirs or legal heirs
6. Estate or legal representatives of deceased
(Ma’am: Just read. Please see the explanation in the book)
Consuegra vs. GSIS
If no beneficiary is designated in the life insurance policy, the
proceeds thereof will go to the legal heirs in accordance with
law. It has been held, however, that where women, innocently
and in good faith, contracted marriage with the same man, the
insured, and the latter did not designate any beneficiary who
would receive the proceeds of his life insurance, each family
shall be entitled to one half of the insurance benefits.
Section 12. The interest of a beneficiary in alife 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.
The word “interest” mentioned in Section 12 means the right
of the beneficiary to receive the proceeds of the life insurance
policy. It does not mean insurable interest since the
beneficiary need not have an insurable interest in the life of
the insured.
Ma’am: We talk of insurable interest only in property
insurance. Interest here as mentioned by the law is actually an
interest over the right of the beneficiary to receive the
proceeds of the life insurance policy.
In case the interest of a beneficiary in a life insurance policy is
forfeited as provided in Sec. 12, the nearest relatives, not
otherwise disqualified, of the insured shall receive the
proceeds of the insurance in accordance with the rules on
intestate succession provided in the Civil Code.
The nearest relatives of the insured in the order of
enumeration are the following:
1. The legitimate children;
2. The father and mother, if living;
3. The grandfather and grandmother, or ascendants
nearest in degree, if living;
4. The legitimate children;
5. The surviving spouse;
6. The collateral relatives, to wit;
a. Brothers and sisters of the full blood;
b. Brothers and sisters of the half-blood;
c. Nephews and nieces
7. In default of the above, the State shall be entitled to
receive the insurance proceeds.
Liability of the insurer on death of insured
Death at the hands of the law- It does not affect the liability of
the insurer.
For example, you are convicted criminally and you have to
suffer death penalty. Is the insurance company freed from
paying your beneficiaries in the insurance policy? NO, the
insurance company continues to be liable unless it is one of
the exceptions in the policy.
Death by self destruction- The insurer is not liable in case the
insured commits suicide intentionally, with whatever motive,
when in sound mind.
Death by suicide while insane- The suicide of an insured while
insane does not discharge the insurer from his liability on his
contract.
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Ma’am: But later on, we will see under section 180, there is a
period within which insurance policy can be contested on the
basis of insanity and beyond that period it could no longer be
contested. Meaning, the insurance company could no longer
raise the defense of insanity.
Death caused by the beneficiary- Where the beneficiary, as
principal, accomplice, or accessory, intentionally brings about
the death of the insured under such circumstances as to
amount to a felony, he cannot receive any benefit under the
contract of insurance. However, where the death of the
insured was caused under circumstances as do not amount to
a felony as when the killing was accidental or in self-defense,
or where the beneficiary was insane, the rights of the
beneficiary under the policy are not affected.
Death caused by the violation of law- There must be a causal
relationship established first, that the violation of the law led to
the accident resulting in to the death of the insured.
Sections 13 to 24 deal with property insurance.
Section 13 defines insurable interest in property. It provides
that every interest in property, whether real or personal, or
any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the
insured, is an insurable interest.
Principle: Anyone has an insurable interest in property who
derives a benefit from its existence or would suffer loss from
its destruction.
Note that under the law, it is not necessary that the interest is
such that the event insured against would necessarily subject
the insured to loss. It is sufficient that the risk of loss might
occur and pecuniary injury would be the natural consequence.
What is more, although a person has no title, legal or
equitable, in the property, and neither possession nor right to
possession, yet he has an insurable interest if he is so situated
with respect to the property that he will suffer loss as the
proximate result of its damage or destruction.
Unlike the civil law concept of jus perit domino, where
ownership is the basis for consideration of who bears the risk
of loss, in property insurance, one’s property insurance, one’s
interest is not determined by concept of title, but where the
insured has substantial economic interest in the property.
Ma’am: Substantial economic interest is the key in determining
your insurable interest. A mortgagee may take out an
insurance policy over the property mortgaged but he does not
have title over the property itself yet he takes out an insurance
because he have an insurable interest and that comes in under
the concept of substantial economic interest in the property.
Legal expectation of loss or benefit
The expectation of benefit to be derived from the continued
existence of property must have a basis of legal right, although
the person insured must have a basis of legal right, although
the person insured has no title, either legal or equitable, to the
property insured.
Mere factual expectation of loss does not constitute an
insurable interest.
Situation:
An owner of a gasoline filling station near a hotel has no
sufficient insurable interest in the hotel simply because its
burning or destruction, though it leaves the filling station
physically unharmed, will lessen his income from guests of the
hotel.
NB: This type of interest called “factual expectation, though
usually insufficient strict indemnity insurance, will suffice in life
insurance.
Section 14. An insurable interest in property may consist in:
a. An existing interest;
b. An inchoate interest founded on an existing interest;
• A stockholder has an inchoate interest in the property
of the corporation of which he is stockholder, which is founded
on an existing interest arising from his ownership of shares in
the corporation. His insurable interest is limited to the extent
of the value of his interest or to his share in the distribution of
the corporate assets upon dissolution.
c. An expectancy, coupled with an existing interest in
that out of which the expectancy arises.
• A farmer may insure future crops if they are to be
grown on land owned by him at the time of the insurance of
the policy, or although the crops are to be raised by him on
the land of another, provided the crops will belong to him
when produced.
Sec. 15. A carrier or depository of any kind has an insurable
interest in a thing held by him as such, to the extent of his
liability but not to exceed the value thereof.
The reason for this provision is that the loss of the thing may
cause liability to the carrier or depository to the extent of its
value.
Under the General Bonded Warehouse Act, a warehouseman,
licensed to engage in the business of receiving commodities for
storage, is required to insure the same against fire.
Sec. 16. A mere contingent or expectant interest in anything,
not founded on an actual right to the thing, nor upon any valid
contract for it, is not insurable.
Ma’am: Do you have insurable interest over your legitime?
According to the author, the right to legitime may form the
legal basis of a compulsory heir’s insurable interest. However,
in a case decided by the Supreme Court which was decided in
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the late 2000, there were twelve children. Now the parents The doctrine of waiver or estoppels cannot be invoked since
while still alive decided to sell some of their properties to some the public has an interest in the matter independent of the
of their children. There were several properties that were sold consent or concurrence of the parties.
to six of the children and so the six other children instituted an
action to nullify the deed of sale because they were saying it How do we measure the indemnity in insurance contracts?
would impair their legitime. The Court ruled that their right to
their legitime is an inchoate right. The parents while alive can General Rule: The amount of insurance fixed in the policy of a
choose to dispose of their properties whatever they want. And marine or fire insurance is not the exact measure of indemnity
it was determined that there was consideration in the deed of to which the insured is entitled, but the maximum indemnity
absolute sale. The Court allowed the sale to be valid. which he might obtain. The insured cannot recover in excess
of his actual loss.
It seems the author is saying that the heir can insure his
legitime. Well if it is find with the heir that he pays for the Exception:
insurance premium, why not? But he cannot come to court and
say I have already right to my legitime because I already pay a.) In valued policies (Sec.61), however, the valuation of
for my insurance premium. the thing insured is conclusive between the parties thereto in
the adjustment of loss, if the insured has some interest at risk,
Sec.17. The measure of an insurable interest in property is and there is no fraud on his part, although it might be proved
the extent to which the insured might be damnified by loss or that the actual value of the thing is less.
injury thereof.
b.) Similarly, the principle of indemnity cannot be invoked
by the insurer who agreed to repair or replace the thing
In case of a contract of mortgage, a mortgagor has an
insured with a new one even though the cost of the
insurable interest equal to the value of the mortgaged property
undertaking may exceed the original amount of the insurance.
and a mortgagee, only to the extent of the credit secured by
the mortgage. In property insurance, the amount appearing on
January 5, 2015 (Happy New Year)
the policy itself is the limit of the amount the insured may
claim. But if it can be proven that the loss or damage was far
(Ma’am reviewing past discussions)
less than the amount appearing in the insurance policy, then
what will be paid is the actual loss. Why so? Because the
TITLE 4
insurance is a contract of indemnity.
CONCEALMENT
Sec.18. No contract or policy of insurance on property shall be
As we’ve said class, insurance companies have certain
enforceable except for the benefit of some person having an
mechanisms, devices which their liabilities are diminished.
insurable interest in the property insured.
What are these? One of these is concealment.
Cha vs. Court of Appeals What is concealment?
The contract of lease provides that any fire insurance policy
SEC. 26. A neglect to communicate that which a party knows
obtained by the lessee over his merchandise inside the leased
premises without the consent of the lessor is deemed assigned and ought to communicate, is called a concealment.
or transferred to the lessor. It held that such automatic
assignment is void for being contrary to law and public policy, Two aspects
hence, the insurer cannot be compelled to pay the proceeds of
the policy to the lessor who has no interest in the property ü “which a party knows”
insured. If a party doesn’t know, there is no concealment because
you will not be hiding anything.
No the lessor has no insurable interest. The owner of the
building is primarily interested in the payment of the rentals of ü “ought to communicate”
the lessee. So regardless if the merchandise of the lessee It is a duty imposed on the person applying for an
stored in the building will be destroyed by fire or not still the insurance policy
interest of the lessor with respect to the lessee is still existing
to the extent of the rentals so since the rentals are not based If you fail in these two aspects then there is concealment.
on the merchandise therefore the lessor has no interest.
Four primary concerns of the parties to an insurance
Where the insurance is invalidated on the ground that no contract.
insurable interest exists, the premium is ordinarily returned to
the insured unless he is in pari de licto. In making a contract, so highly aleatory as that of insurance,
the parties have 4 primary concerns, to wit:

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1. The correct estimation of the risk which enables the
insurer to decide whether he is willing to assume it, and if
so, at what rate of premium;
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; and
4. Determining whether a loss occurred and if so, the
amount of such loss.
If the loss never occurred the insurance company can never be
liable. So you can, year-in and year-out, buy insurance for your
building or for your house but when the risk never occurred,
the insurance company can never be liable under the policy.
Same with life insurance, ordinarily a life insurance is an
insurance for life all the way to age 99 but when you don’t
want to pay that long, what will you do? Make sure your policy
is earning dividends. During your lifetime, when you are able
to work, you are able to pay the premiums over that policy and
for a certain period of time, let’s say 20 years, dividends will
accrue and no loan payments is set-off against the dividends,
in time it will accumulate to such degree as it can pay-off your
yearly premium. That’s how you manage your insurance policy,
especially life insurance policy.
So concealment and representation are very important in the
sense that these pertain to information that the insurance
company need to have to be able to assess the extent of the
insurer’s eventual liability when the risk happens. (ma’am
talking about how the US deals with insurance fraud)
Devices for ascertaining and controlling risks –just go
over it J
What are the requisites of concealment? The four
requisites are:
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; and
4. The other party has not the means of ascertaining the fact
concealed.
What is the effect of concealment?
SEC. 27. A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance.
What is the effect of rescission? Mutual restitution, the
parties are restored to their original condition. The premium
will have to be returned to the insured.
Rescission, actually, may or may not be resorted to by the
party. It depends, that is only an option for him. Failure on the
part of the insured to disclose conditions affecting the risk, of
which he is aware, makes the contract voidable at the
insurer’s option. Now we have to relate that with Section 48,
class. Let’s look at section 48 –
SEC. 48. Whenever a right to rescind a contract of
insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to
the commencement of an action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force during
the lifetime of the insured for a period of two (2)
years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of
the insured or his agent.
The second paragraph, there is a period imposed by law
beyond which the insurance company can no longer contest
the policy on the ground of concealment or misrepresentation.
So, we know that concealment, whether intentional or
unintentional, will cause the injured party to rescind the
contract of insurance but we also know that if the policy of the
insurance has been enforced for a period of more than 2 years
already (we are talking here of life insurance), so on the third
year, the insurance company cannot rescind or prove that the
insurance is void ab initio because there is concealment or
misrepresentation. So you have to make sure that if
mandadaya ka, your policy must be more than 2 years old so
that the insurance company can no longer question the validity
of your policy.
Now, do you need to prove fraud? NO. There is no need to
prove fraud because, as we’ve learned, whether intentional or
unintentional, if there is concealment then the policy is
voidable.
What do you think is the reason why the insurance
company need not prove fraud? The reason why there is
no need to prove fraud is because if you impose such condition
on the insurance company, that means that you have to prove
clearly that an intention was there to defraud the insurance
company. It is really too much of an obligation to be imposing
on the insurance company. The insurance company will
actually be wasting resources just to investigate an applicant
thoroughly of whether he/she is guilty of fraud, or whether the
representations made by the insured can be relied upon. At
best, the insurance company can only rely on the good faith of
the applicants.
There is a presumption that if you file an application for a life
insurance policy that all the information stated in that
application are true and there are no other information that
may be useful to the insurance company to assess the risk
properly. For example, if you apply for an insurance policy,
there is a section (in the policy) asking if you have been
hospitalized for a particular illness, so they provide for a list of
illnesses. Now you tend to forget that you have been confined
for that illness because it has been quite some time and the
illness is not that threatening that you easily forget about it,
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e.g. diarrhea, and if in the future something happens to you
and the insurance company discovers that you failed to
indicate that you have been hospitalize, they may say that you
have concealed some information from them. So, it is really
important that if you believe that that information may change
the way that the insurance company would look at you as a
risk, then you have to come forward. I believe that the
insurance company would not really disallow your application,
they would just ask for a higher premium.
Let’s go to Section 28…
What are the matters that must be communicated even
in the absence of inquiry?
SEC. 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 as to which
he makes no warranty, and which the other has not the means
of ascertaining.
This section makes it the duty of each party to a contract of
insurance to communicate in good faith all facts within his
knowledge only when:
1. They are material to the contract;
2. The other has not the means of ascertaining said facts;
and
3. As to which the party with the duty to communicate
makes no warranty.
So, it’s important that the fact which you ought to
communicate must be material to the contract. Under the
annotation of section 28, the author sights few examples of
instances where the health conditions were concealed.
Example, an applicant for life insurance concealed that he was
treated or hospitalize for pneumonia. You must disclose these
facts even when not inquired into where the facts are material
to the risk assumed by the insurer. So we can conclude that
when you are taking out a life insurance policy, any condition
suffered, pwera na lang siguro cold, must be indicated in your
application.
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 requires him to disclose
that circumstance, though unasked.
SEC. 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:
(a) Those which the other knows;
(b) 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;
(c) Those of which the other waives communication;
(d) Those which prove or tend to prove the existence of a risk
excluded by a warranty, and which are not otherwise material;
and
(e) Those which relate to a risk excepted from the policy and
which are not otherwise material.
When there is a specific inquiry from the insurance company,
then you ought to reply accurately. Otherwise, there is no
need to communicate these matters.
What is materiality?
SEC. 31. Materiality is to be determined not by the event, but
solely by the probable and reasonable influence of the facts
upon the party to whom the communication is due, in forming
his estimate of the disadvantages of the proposed contract, or
in making his inquiries.
How do you measure materiality? So materiality is determined
not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the
communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his
inquiries.
So if the insurance company needed to know this information,
and it is not one of those under Section 30, then you have to
apply the test of materiality. In an example, under
subparagraph (a), the applicant concealed the fact that he had
pneumonia, diabetes and syphilis, the policy is avoided
although the cause of the death (e.g. plane crash) is totally
unconnected with the material fact concealed or
misrepresented. What was the material fact concealed here?
The fact of his illnesses. Decision held that the insurance
company can raise that as a defense, the insurance company
can argue that there was concealment. You know why class?
You are taking money from the insurance company. The
moment the insurance company sees a way out of its
obligation it will really try its best to get out of its contractual
obligation.
In other words, if the information concealed was not material,
then there is no concealment. That’s the bottomline. It would
seem that any disease could me material to a life insurance
policy.
So section 32, just read that…
SEC. 32. Each party 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.
It talks about matters which the parties ought to know.
General usages of trade are those that are open to inquiry, in
other words magtanong ka lang alam mo na. So the insurance
company is given the task or ought to know matters, e.g.
areas frequently hit by typhoon.
SEC. 33. The right to information of material facts may be
waived, either by the terms of insurance or by neglect to make
inquiry as to such facts, where they are distinctly implied in
other facts of which information is communicated.
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So, there is a duty for you to obtain information and that duty
is expected where the fact that ought to have been
communicated is material to the policy. But what if the other
party waives it? So this duty can actually be waived under
Section 33.
How does waiver happen? By expressly stipulating it in the
contract itself or by failure to make inquiry.
Just look at the cases mentioned there. Will the insured be
faulted for not being able to distinguish between “peptic ulcer”
and “tumor?” No, in the absence of evidence that the insured
had sufficient knowledge as to enable him to distinguish
between “peptic ulcer” and a “tumor,” his statement, that said
tumor was “associated with peptic ulcer of the stomach”
should be construed as an expression made in good faith of his
belief as to the nature of his ailment and operation.
SEC. 34. Information of the nature or amount of the interest
of one insured need not be communicated unless in answer to
an inquiry, except as prescribed by Section 51.
SEC. 35. Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own
judgment upon the matters in question.
What is your opinion? Your opinion does not matter. So you
need not communicate your opinion. If there is a question in
the policy, “How long do you think you will live?” So it is calling
for an opinion, so even if you answer, “may be 50 more
years,” but you did not live that long, the insurance company
cannot take it up against you for it is not considered
misrepresentation.
So let’s move to representation…
TITLE 5
REPRESENTATION
SEC. 36. A representation may be oral or written.
What is representation? It is a statement by the insured at
the time of, or prior to, the issuance of the policy, relative to
the risk to be insured, as to an existing or past fact or state of
facts, or concerning a future happening, to give information to
the insurer and otherwise induce him to enter into the
insurance contract.
The representation may pertain to a facts or a situation, past,
present, or future. So when you say representation, you
positively indicate or affirm a fact or situation which occurred
in the past or is on-going.
How do you distinguish representation from
concealment?
SEC. 37. A representation may be made at the time of, or
before, issuance of the policy.
SEC. 38. The language of a representation is to be interpreted
by the same rules as the language of contracts in general.
Insurance contract is just another form of contract.
SEC. 39. A representation as to the future is to be deemed a
promise, unless it appears that it was merely a statement of
belief or expectation.
What is an affirmative representation? What does it constitute?
How about promissory representation?
SEC. 40. A representation cannot qualify an express provision
in a contract of insurance, but it may qualify an implied
warranty.
Representation must be an active statement on the part of the
applicant.
SEC. 41. A representation may be altered or withdrawn before
the insurance is effected, but not afterwards.
So why is it important that there is no
misrepresentation? It is important because the
representation was made the basis for the insurance company
entering into an insurance contract. The insurance company is
relying on the representation and on the basis of your
representation it has made its assessment on your insurability.
In liability insurance, the same principle applies.
SEC. 42. A representation must be presumed to refer to the
date on which the contract goes into effect.
SEC. 43. When a person insured has no personal knowledge
of a fact, he may nevertheless repeat information which he has
upon the subject, and which he believes to be true, with the
explanation that he does so on the information of others; or he
may submit the information, in its whole extent, to the insurer;
and in neither case is he responsible for its truth, unless it
proceeds from an agent of the insured, whose duty it is to give
the information.
Section 43 talks about information obtained from third
persons.
SEC. 44. A representation is to be deemed false when the
facts fail to correspond with its assertions or stipulations.
When the facts failed to correspond to its assertions, of course
that is false representation.
Now, does it have to be strictly interpreted? Or can substantial
compliance enough? Substantial truth is enough.
SEC. 45. If a representation is false in a material point,
whether affirmative or promissory, the injured party is entitled
to rescind the contract from the time when the representation
becomes false.
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Take note that in this provision, the right to rescind by the
insurance company is waived by the acceptance of insurance
premiums despite knowledge of the ground for rescission.
SEC. 46. The materiality of a representation is determined by
the same rules as the materiality of a concealment.
What is the test of materiality of a representation? It is the
same as concealment. It is not determined by the event but by
the reasonable and probable influence it has on the person
who is making the assessment.
SEC. 47. The provisions of this chapter apply as well to a
modification of a contract of insurance as to its original
formation.
SEC. 48. Whenever a right to rescind a contract of insurance
is given to the insurer by any provision of this chapter, such
right must be exercised previous to the commencement of an
action on the contract.
After a policy of life insurance made payable on the death of
the insured shall have been in force during the lifetime of the
insured for a period of two (2) years from the date of its issue
or of its last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation of the insured or
his agent.
Section 48, we’ve taken that earlier. The 2nd paragraph
pertains to life insurance policies.
Incontestability
It happens when the insurance company fails to contest the
policy by reason of concealment or misrepresentation.
So section 48 speaks of commencing an action on the contract.
So you must exercise first, you simply have to write a letter to
the other party informing of your decision to rescind the
contract, before the commencement of a civil action could be
had over the insurance policy.
Requisites for incontestability
1. The policy is a life insurance policy;
2. It is payable on the death of the insured; and
3. It has been in force during the lifetime of the insured for
at least two years from its date of issue or of its last
reinstatement.
Why reinstatement? What is the significance of this word?
Sometimes the insured fails to pay the premium even within
the grace period given under the policy and so the policy
lapses. When the policy lapses, the insured has the option to
reinstate the policy. How? By just paying the premium due.
When the policy is reinstated 6 months down the road, the
reckoning point, of the 2-year period, will be the date of the
reinstatement.
Take note, the 2-year period for questioning the policy may be
shortened but it cannot be extended by stipulation.
Defenses not barred by inconstestable (see enumeration
in the book)
January 10, 2015
Review of Title 5:
Remember that rules on representation are more or less the
same with concealment; same requirement of materiality. In
representation, there has to be substantial compliance in
material aspect of the insurance policy. It does not need a
literal or strict compliance.
2nd par.of Section 48 provides that after a policy of life
insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of
two years from the date of its issue or of its last reinstatement,
the insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. This provision
applies to life insurance with its incontestable clauses.
Incontestability means that after the requisites are shown to
exist, the insurer shall be estopped from contesting the policy
or setting up any defense, except as is allowed, on the ground
of public policy. (MEMORIZE)
The remedy when there is misrepresentation is rescission. It is
the same when there is concealment.
Significance of the 1st par.of Sec. 48
If the insured has already filed an action in court to collect the
amount of the insurance, the insurer cannot anymore rescind
the policy. The rescission of the insurer of the policy must
come before an action is commenced before the court. The
right to rescind, however, is waived by acceptance of
premiums.
Requisites for incontestability
Under our law, in order that the insurance shall be
incontestable, the following requisites must be present:
(1) The policy is a life insurance policy;
(2) It is payable on the death of the insured; and
(3) It has been in force during the lifetime of the insured for at
least two (2) years from its date of issue or of its last
reinstatement.
Ma’am: Incontestable clause applies only to life insurance
policies. Do not apply it when is at issue is a property
insurance.
Effect when policy becomes incontestable
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When a policy of life insurance becomes incontestable, the
insurer may not refuse to pay the same by claiming that:
(1) the policy is void ab initio; or
(2) it is rescissible by reason of the fraudulent concealment of
the insured or his agent, no matter how patent or well-
founded; or
(3) it is rescissible by reason of the fraudulent
misrepresentations of the insured or his agent.
Since the law speaks of a policy in force for two years, the
expression "void ab initio" should be understood in the sense
of "voidable" and the fraud contemplated should refer to fraud
in the inducement.4 (see Art. 1338, Civil Code.)
The Policy
Sec. 49. The written instrument in which a contract of
insurance is set forth, is called a policy of insurance.
It is the written document embodying the terms and
stipulations of the contract of insurance between the insured
and the insurer.
Ma’am: There is no verbal policy of insurance. It must be in a
written instrument.
Sec. 50. The policy shall be in printed form which may contain
blank spaces; and any word, phrase, clause, mark, sign,
symbol, signature, number, or word necessary to complete the
contract of insurance shall be written on the blank spaces
provided therein.
Ma’am: All these must be contained in the insurance policy. If
they are not and conflict arises, it may render your insurance
policy rescissible.
Any rider, clause, warranty, or endorsement purporting to be
part of the contract of insurance and which is pasted or
attached to said policy is not binding on the insured, unless the
descriptive title or name of the rider, clause, warranty, or
endorsement is also mentioned and written on the blank
spaces provided in the policy.
Ma’am: The keyword is RCWE. So You have a main policy. You
have riders, clause, warranty, or endorsement which are
usually found in a separate document. All these RCWE must in
the descriptive title of your attachments, must be found in the
policy itself. Otherwise, it will not be binding.
Last year’s exam in Insurance: How will the insurance
company be liable? This was on the basis of Sec.50. So
whenever there’s a movement in the life of the insurance
policy, endorsements particularly, property was mortgaged to
the bank. The bank must ask the insured to have the
insurance policy transferred in the name of the bank or at least
indicated that it was already mortgaged to the bank then the
endorsement is a very vital act to make the insurance company
liable. Dapat talaga nakaendorse. And where does the
endorsement appear? That endorsement appears in the policy
itself. It is important in the sense that it is required by law. We
cannot assume that because of the movement in the deed of
mortgage, the insurance policy is automatically liable to the
main parties involved in the transaction. If there is
endorsement but not indicated in the policy itself, then the
insurance will not be liable.
Unless applied for by the insured or owner, any rider, clause,
warranty, or endorsement issued after the original policy shall
be countersigned by the insured or owner, which
countersignature shall be taken as his agreement to the
contents of such rider, clause, warranty, or endorsement.
Ma’am: This particular paragraph assumes that it is the
insurance company that initiated the RCWE.
Group insurance and group annuity policies, however, may be
typewritten and need not be in printed form.
Compliance of the insured with conditions of policy
Insurance companies have the same rights as individuals to
limit their liability and to impose whatever conditions they
deem best upon their obligations not inconsistent with public
policy. The compliance by the insured with the terms of the
policy is a condition precedent to the right of recovery. Read
Fortune Insurance & Surety Co., Inc. vs. Court of Appeals, 244
SCRA 308 [1995].)
A policy of insurance is a contract of adhesion. Consequently,
where the language used in an insurance contract or
application is such as to create ambiguity, the same should be
resolved liberally in favor of the insured and strictly against the
party responsible therefore. However, if there are
circumstances that will point out that the insured has the
capacity, knowledge and expertise, all of these to protect his
interest, then the court will decide in favor of the insurance
company and against the insured.
It is well-settled that "contractual limitations of liability found in
insurance contracts should be regarded by courts with a
jaundiced eye and extreme care and should be so construed as
to preclude the insurer from evading compliance with its just
obligations. This is on the part of the insurance company but is
equally applicable to the insured.
A policy of insurance is different from the contract of
insurance. The policy is the formal written instrument
evidencing the contract of insurance entered into between the
insured and the insurer. It is the law between them.
Ma’am: Do not use these terms interchangeably.
Perfection of insurance contract.
A contract of insurance, like other contracts, must be assented
to by the parties either in person or by their agents. Under the
law, 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. (Art. 1319, Civil Code.)
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If an application for insurance has not been either accepted or
rejected, there is no contract yet as it is merely an offer or
proposal.
The mere signing of an application for life insurance and the
payment of the first premium do not bind the insurer to issue a
policy where there is no evidence of any contract between the
parties that such acts should constitute a contract of
insurance.
The contract, to be binding from the date of the application,
must have been a completed contract, one that leaves nothing
to be done, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be
no contract of insurance unless the minds of the parties have
met in agreement.
Similarly, the contract is not perfected where the applicant for
life insurance dies before its approval or it does not appear
that the acceptance-of the application ever came to the
knowledge of the applicant.
The acceptance of an insurance policy must be unconditional,
but it need not be by formal act.
Ma’am: Because it is a contract, the parties may add additional
terms and conditions, that’s why it is necessary for you to look
the policy itself. If there are terms and conditions that are
unique to your circumstances which the insurance company
feel are necessary to protect its interest in the insurance, the
insurance companies will add the terms and conditions already
in the printed form. Likewise for the insured, if the insured also
wants more of protection, because of his special circumstance,
the insured may so indicate in the policy itself.
The parties may impose additional conditions precedent to the
validity of the policy as a contract as they see fit. The usual
conditions found in the application for insurance or in the
policy are that the contract shall not become binding until the
policy is delivered and the first premium paid. These conditions
are valid and enforceable. Until the conditions are fulfilled, the
policy is of no binding effect.
There is no valid and binding insurance contract where no
premium is paid unless credit is given or there is a waiver or
some agreement obviating the necessity for prepayment of the
premium. But where the premium has been previously paid,
the contract is perfected upon approval of the application
although the policy has not yet been issued, unless there is a
stipulation to the contrary.
The binding deposit receipt is intended to be merely a
provisional or temporary insurance and to be binding only
upon compliance with the conditions precedent indicated in the
policy. In life insurance, a "binding slip" or "binding receipt"
does not insure by itself.
Cover notes. — They may be issued to bind the Insurance
temporarily pending the issuance of the policy. Coverage then
can begin depending upon their terms.
Ma’am: Cover notes are different from binding slip. The former
form part of your policy itself.
Offer and acceptance in insurance contract
The applicant usually makes the offer to the insurer through an
application for insurance which is usually attached to policy
and made a part of the insurance contract.
1. In property and liability insurance
It is the insured who technically makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter-offer. The
offer is usually accepted by an insurance agent on behalf of
the insurer.
2. In life and health insurance
The situation depends upon whether the insured pays the
premium at the time he applies for insurance.
(a) If he does not pay the premium, his application is
considered an invitation to the insurer to make an offer, which
he must then accept before the contract goes into effect. If he
pays the premium with his application, his application will be
considered an offer. Life and health insurance agents,
however, do not have the authority to bind immediately the
insurers they represent. Instead they customarily issue a
binding receipt that makes the coverage effective on (1) the
date of the application, or (2) the date of the medical
examination, if the insurer determines later that the applicant
was insurable on that date. The binding receipt is, therefore, a
conditional acceptance by the insurer.
(b) Where the application for insurance constitutes an
offer by the insured, a policy issued strictly in accordance with
the offer is an acceptance of the offer that perfects the
contract.
What about offer and acceptance, because this is also found in
basic contract law. Do they also apply to insurance contract?
Yes they do. The applicant usually makes the offer which is in
the form of an application. The applicant fills out an application
form; they do this sometimes with the assistance of an
insurance agent. You will check those boxes whether you are
smoking, you have serious illnesses before, medical procedures
performed, family history is also there. So these are all
information contained in an application for a life insurance
policy. You also apply for property insurance; there are also
forms that you have to fill out. Because those forms are the
basis for making a reasonable assessment of how much a risk
you are, how much a risk your business is and the proper
payments you ought to pay for the policies.
In property and liability insurance it is the insured who
technically makes an offer to the insurer, and the insurer either
accepts it or rejects it, or makes a counter-offer. So if the
insurance company does not 100% approve your application
you may make a counter-offer. In life and health insurance the
situation depends upon whether the insured pays the premium
at the time he applies for insurance. If you do not pay the
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premiums, if you do not issue a check, you do not give the
cash equivalent of the premium at the time the application is
submitted, the application is merely considered as an invitation
to the insurer to make an offer to you. Life and health
insurance agents, however, do not have the authority to bind
immediately the insurers they represent. So what do they do?
They customarily issue a binding receipt that makes the
coverage effective on the date of the application, or the date
of the medical examination, if the insurer requires the
applicant that - in a way it is a conditional acceptance.
Importance of delivery of policy
What is the importance of the delivery of the policy?
Delivery is the act of putting the insurance policy – the physical
document – into the possession of the insured. The delivery of
the policy is important in at least 2 ways:
a. As evidence of the making of a contract and of its
terms; and
b. As communication of the insurer’s acceptance of the
insured’s offer
Absence of delivery
The delivery of a policy is not however, a prerequisite to a
valid contract of insurance. The contract may be completed
prior to delivery of the policy or even without the delivery of
the policy depending on the intention of the parties.
Modes of delivery of policy
Actual/Constructive delivery
There can be no contract of insurance unless the minds of the
parties have met in agreement. However, actual manual
transfer of the policy is not a prerequisite to its validity unless
the parties have so agreed in clear language. Constructive
delivery may be sufficient.
It can be actual delivery or constructive delivery. So if your
insurance agents fail to deliver the contract, does that mean
that the contract is void ab inito, null and void, or rescissible?
No. not necessary. Actual manual transfer of the policy is not a
prerequisite for its validity unless the parties have agreed in a
language that is clear.
Delivery, primarily a matter of intention
In the final analysis, whether or not the policy was delivered
after its issuance, depends, not upon its manual possession by
the insured but rather upon the intention of the parties which
may be shown by their acts or words. It may depend on the
wording of the application for Insurance, But possession by the
insured raises the presumption that the policy was delivered to
the insured, while possession by the insurer is prima facie
evidence that no delivery was made.
Effect of delivery of policy
What is the effect of delivery of policy?
Delivery conditional
Where there is conditional delivery of an insurance policy, non-
performance of the condition precedent prevents the contract
from taking effect.
Delivery unconditional
The unconditional delivery of an insurance policy
corresponding to the terms of the application ordinarily
consummates the contract, and the policy as delivered
becomes the final contract between the parties.
Rider in a contract of insurance
A rider is a small printed or typed stipulation contained on a
slip of paper attached to the policy and forming an integral
part of the policy.
Riders are usually attached to the policy because they
constitute additional stipulations between the parties.
So it forms an integral part of the policy. By the way, what is a
rider? Sometimes you have accident riders. You take out a life
insurance policy, payable upon the death of the insured. Death
here is the loss that is being insured against. But let’s say you
did not die, there was an accident. The insured severed an
arm, finger, hand. You did not die, you are simply rendered
incapacitated. How can you pay(?) now your premiums
because the policy is not extinguished by your accident. What
happens is, the insurance companies or its agents usually
advice you take out a rider. Riders require you to pay
additional premiums but they are not as big as the premiums
on the life insurance policy itself. They add up for each rider
that you take. You are assessed a separate premium. Once
their descriptive title is included in the blank space of the
policy itself, it forms an integral part of the insurance. Don’t
forget the requirement that it must be indicated in the main
policy itself.
Necessity for riders, etc
The necessity for riders, etc. is found in the fact that in the
conduct of insurance business, it often becomes necessary to
add a new provision to a policy, or to modify or waive an
existing provision, or to make any desired change in the policy.
This saves the trouble and expense of making an entirely new
contract.
Now do you only add riders at the beginning of the issuance of
the policy? Riders may come in in the middle of the life
insurance policy itself.
Rule in case of conflict between a rider, etc. and
printed stipulations of a policy
When there is an inconsistency between a rider and the
printed stipulations in the policy, the rider prevails, as being
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more deliberate expression of the agreement of the
contracting parties.
Examples:
1. The fire insurance policy on a building excludes loss
by earthquake. For the payment of an additional premium, the
insurer attached a rider, in which it agrees to indemnify the
insured against loss by earthquake.
The rider becomes a part of the policy and supersedes any
part of the policy in conflict with its provisions.
So a fire insurance policy may sometimes not include
Earthquakes. Sometimes the policy will state that fire
originated by earthquake will not be covered. Where there is a
strong earthquake and fire results, the fire insurance policy will
not include that as one of the risks they are willing to cover.
Why? Because they say you do not have control when
earthquake happens. If the insured wants total coverage
against fire, recovery from fire whatever the cause is. Then the
insured must secure a rider stating exactly that. In the
example, the insurer attached a rider, in which the insurance
company agrees to indemnify the insured against loss by
earthquake. The rider becomes part of the policy. It will now
prevail against other stipulations in the contract.
2. A printed stipulation provides that any other
insurance upon all or part of the thing covered by the policy
should be notified in writing to the company, or the policy will
be avoided, but a clause was inserted by typewriter to the
following effect “Subject to clauses G and A and other
insurance with a special short period attached to the policy.”
There is here sufficient notification to the company that other
insurances existed.
So the rider indicated by a typewritten clause said that there
are other insurance procure with a special short period
attached to the policy. The insurance company is procured
with notice that there other policies of insurance.
Attached papers on insurance policy
As a general rule, a rider, slip or other paper becomes a part of
a contract or policy of insurance if properly and sufficiently
attached or referred to therein in a manner as to leave no
doubt as to the intention of the parties in such respect.
In other words, as long as they are in the policy itself they are
part of the insurance contract.
Section 50 (pars 2 and 3) states the requirements that must be
observed in order that a rider etc., may be binding on the
insured. Section 50 is very important, insurance companies
must take care that additional terms, additional enforcements
must be indicated in the insurance policy itself. Later when we
discuss forms of policies. The Insurance Commission also pre-
approved the wordings of riders, there are pre-approved forms
for riders. Just like the main policy of insurance. The pre-
approved rider form will be stapled in the main policy itself. Is
that enough? No, because it did not comply with the
requirement of Section 50 that descriptive title of the rider
must be indicated in the policy itself. Hindi yan pwede istaple
lang it must be indicated in the policy itself.
What is the effect of lack of description?
Any rider, clause, warranty or endorsement purporting to be
part of the contract of insurance and which is pasted or
attached to said policy is not binding on the insured unless the
descriptive title or name of the rider, etc. is also mentioned
and written on the blank spaces provided in the policy. The
lack of description will not affect the other provisions of the
policy except where without such rider, etc., the contract
would be incomplete.
Effect of Failure of insured to read policy
Majority rule
In most jurisdictions, 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 such laches as will defeat his right to
reformation.
The basis for the decisions is that insurance contracts are
“contracts of adhesion” and not of bargaining, that is, the
insured purchases the contract prepared solely by the insurer.
Minority rule
On the other hand, there are many courts which apply to
insurance contracts the rule general contract law that one who
accepts a contractual instrument is conclusively presumed, in
the absence of fraud or mutual mistake, to know and assent to
its contents. The insured has the duty to read his policy and is
bound by his contract as written whether he reads it or not.
Usually you don’t read the policy at all. You only read the
policy when your insurance company refuses your claim for
payment of the proceeds. But the courts also will require the
insured the basic requirement at least to know the major
stipulation of the contract.
Insurer’s duty to explain policy
In most jurisdictions, if the terms of an insurance policy are
clear, unambiguous, and explicit, the insurer has no affirmative
duty to explain the policy or its exclusions to the insured.
This principle, however, is subject to some important caveats.
1. Reasonable expectations of insured
The doctrine of “reasonable expectations” can operate to
impose de facto a duty on the insurer to explain the policy’s
coverage to the insured.
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2. Options available to insured
In the area of motor vehicle insurance where legislations have
made certain kinds of coverage optional, usually uninsured or
underinsured motorist insurance, courts have sometimes
imposed a duty on the insurer to explain the options to the
insured.
3. Information expected by insured from insurer’s agent
Agents owe their customers a duty to exercise the skill and
care that a reasonable agent would exercise in the
circumstances. This duty encompasses many situations i an
obligation to explain to the customer the kinds of coverage
available and to help the insured in choosing an appropriate
coverage.
4. Contractual rights of insured after denial of coverage
When the insured disputes a denial of coverage, the duty of
good faith and fair dealing may impose an obligation on the
insurer to alert the insured on his rights.
Reasonable expectation, what is that? The doctrine of
“reasonable expectations” can operate to impose de facto a
duty on the insurer to explain the policy’s coverage to the
insured. So they will not go at length to read to you each and
every paragraph contained in the policy. If they read to you,
explain to you, pointed out to you the coverage and the
exceptions that would already been a substantial compliance of
the doctrine of reasonable expectations.
Alright, let’s go to Section 51
Sec. 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open
or running policies;
(c) The premium, or if the insurance is of a character
where the exact premium is only determinable upon the
termination of the contract, a statement of he basis and rates
upon which the final premium is to be determined;
(d) The property or life insured
(e) The interest of the insured in property insured, if he is
not the absolute owner thereof; and
(f) The risks insured against; and the period during
which the insurance is to continue
Sec. 51 enumerates what the policy of insurance must contain.
Their inclusion in insurance policies is essential to enable the
parties to determine easily the nature and effect of the
contract entered by them thereby avoiding lawsuits.
5. The interest of the insured in property insured, if he is
not the absolute owner thereof; and
So if the property is owned by several co-owners, the different
co-owners or their names must be indicated or reflected in the
policy itself.
6. The risks insured against; and the period during
which the insurance is to continue
It is important that the period of the policy is likewise
indicated. Property insurance is usually annual. It is usually for
a year, 12 noon or 12 midnight something like that. Different
from life insurance policy. Sa life insurance policy it is usually
the premium that is falling due on a certain period of the year.
If you pay your premiums annually, they will send you a
statement to remind you of your __ payments. That’s how the
life insurance policy is. The period of the life insurance policy is
necessarily the whole life of the person.
Risk, peril, hazards distinguished
So what is a risk, peril and hazards? How do you distinguish
one from the other?
1. Risk is the chance of loss or the possibility of the
occurrence of a loss, based on known and unknown factors. If
a loss is absolutely certain to happen or not to happen, no risk
is involved.
2. Peril is the contingent or unknown event which may
cause a loss. It is the contingency that one insures against. Its
existence creates the risk, and its occurrence results in loss. It
may be covered or excluded by a policy of insurance.
3. Hazard is the condition or factor, tangible or
intangible, which may create or increase the chance of loss
from a given peril.
Sec. 52. Cover notes may be issued to bind insurance
temporarily pending the issuance of the policy. Within sixty
days after issue of cover note, a policy shall be issued in lieu
thereof, including within its terms the identical insurance
bound under the cover note and the premium therefor.
Cover notes may be extended or renewed beyond such sixty
days with the written approval of the Commissioner if he
determines that such extension is not contrary to and is not for
the purpose of violating any provisions of this Code. The
Commissioner may promulgate rules and regulations governing
such extensions for the purposes of preventing such violations
and may by such rules and regulations dispense with the
requirement of written approval by him in the case of
extension in compliance with such rules and regulations.
The cover note is 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 a
formal policy, provided it is later determined that the applicant
was insurable at the time it was given.
Cover notes (also called binder) may be issued to afford
immediate provisional protection to the insured until the
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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.
Atty. Angeles: So the binding slip is not a cover note. In life
insurance policy the binding slip does not have the same
contractual obligation as a cover note. Cover notes yes, they
bind the insurance company temporarily pending the issuance
of the policy. But under the condition that within sixty days a
policy shall be issued in lieu thereof, including within its terms
the identical insurance bound under the cover note and the
premium therefor.
Second paragraph, cover notes may be extended or renewed
beyond such sixty days with the written approval of the
Commissioner. In life insurance where the agreement is made
between the applicant and the insurance agent no liability shall
attach until the insurer approves it.
Look at the rules on cover notes. Sometimes insurance
companies will require additional premiums for cover notes.
Rules on Cover Notes
1. Insurance companies doing business 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 Section 1(1) of the Code.
3. No cover note shall be issued or renewed unless in
the form previously approved by the Insurance Commission.
4. A cover note shall be valid and binding for a period
not exceeding 60 days from date of its issuance, whether or
not the premium therefor has been paid, but such cover note
may be cancelled by either party upon at least 7 days notice to
the other party.
5. If a cover note is not so cancelled, a policy of
insurance shall, within 60 days after the issuance of such cover
note, be issued in lieu thereof. Such policy shall include within
its terms the identical insurance bond under the cover note
and premium therefor.
6. A cover note may be extended or renewed beyond
the aforementioned period of 60 days with the written
approval of the Insurance Commission, provided that such
written approval may be dispensed with upon the certification
of the president, vice-president, or general manager of the
insurance company concerned that the risks involved, the
value of such risks and/or the premiums therefor have not as
yet been determined or established and that such extension or
renewal is not contrary to and is not for the purpose of
violating any provisions of the Insurance Code, or of any of the
rulings, instructions, circulars, orders or decisions of the
Insurance Commissioner.
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 case
less htan P500.00.
Why is there a cover note? Because sometimes insurance
company will take time to assess the kind of risk that you are
insured against. Sometimes they cannot inspect the property
you want to be insured right away. Sometimes you have to call
the experts. So the cover note is just really to cover the
transition period that’s why it is still binding between the
insurer (and the insured), because the insured is already ___
in. You want the property covered already but the insurance
company still unable to make a definite offer of the amount of
premium that will be demanded from you. That’s why there is
such a thing as a cover page.
Sec. 53. The insurance proceeds shall be applied exclusively
to the proper interest of the person in whose name or for
whose benefit it is made unless otherwise specified in the
policy
Applied exclusively to the proper interest of the person - so the
benefits will not inure to other persons that are not included in
the insurance contract itself. Again the 3rd person has no right
either in a court of equity or in a court of law to the proceeds
of the policy unless there be some contract of trust, express or
implied, between the insured and third persons.
Read this paragraph class (RCBC vs. CA), this is very
important. This particular provision applies when there are
many parties to a contract or the insurance policy. For
example, the building has been mortgaged to another so the
bank has interest on the credit extended to you. As owner you
also have your own insurance interest.
Thus, where the insurance policies on the mortgaged
properties have been endorsed by the mortgagor to the
mortgagee-bank, the proceeds being exclusively payable to the
bank by reason of the endorsement, these policies cannot be
attached by the mortgagor’s other creditors up to the extent of
the mortgagor’s outstanding obligation in the bank’s favor.
Under Section 53, to the extent of the mortgagor’s obligation
with the bank, his interest in the subject policies had been
transferred to the bank effective as of the time of the
endorsement, It is basic that the first mortgagee has superior
rights over junior mortgagees or attaching creditors. (Rizal
Commercial Banking Corporation vs. CA 289 scra 292)
In other words, your other creditors will not have any hold on
the proceeds of the insurance policy. Because when the owner
endorses the contract of insurance in favor of the bank the
proceeds will redound only to the benefit of the bank. The
other creditors of the mortgagor will have no say, or will have
no interest in the proceeds of the policy. Going back to Section
53, it shall apply exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
Sometimes there are questions where, included in the facts is
a deliberate attempt for you to be misled. For example, “the
parties deemed agreed”, ok lang yan if the law says, “unless
the parties agreed.” When you say that the parties agreed that
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means that agreement is also allowed under the law. But if it is
not in the first place allowed then even if the parties agreed
that agreement of the parties will not validate an otherwise
void contract. Remember that. Not all contracts are made by
the consent of two people on all aspect or features of the
contract. If it is not allowed under law, even if the parties
agreed to such terms it will not validate the contract at all. In
Section 53 while it says, “shall be applied exclusively to the
proper interest of the person in whose name or for whose
benefit it is made,” if the parties did so agree then that is an
exception to the rule in Section 53. If there is an agreement
between the bank (mortgagee) and the owner that other
creditors may partake certain percentage of the proceeds.
Then that will be allowed under Section 53. That is the only
excuse there. That is the only way out of this provision.
Sec. 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.
This is where one who took up the insurance is not the owner
himself but merely an agent. Then there is a principal that an
insurance agent is working for. The interest of the principal
must be indicated also in the policy itself.
Sec. 55. To render an insurance effected by one partner or
part-owner, applicable to the interest of his co-partners or
other part-owners, it is necessary that the terms of the policy
should be such as are applicable to the joint or common
interest.
Sec. 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.
Section 56, pertains to the description of the insured
Sec. 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.
Sec. 58. The mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person
becomes the owner of both the policy and the thing insured.
Sec. 59. A policy is either open, valued or running.
Sec. 60. An open policy is one in which the value of the thing
insured is not agreed upon, but is left to be ascertained in case
of loss.
Sec. 61. A valued policy is one which expresses on its face an
agreement that the thing insured shall be valued at specified
sum.
Sec. 62. A running policy is one which contemplates
successive insurances, and which provides that the object of
the policy may be from time to time defined, especially as to
the subjects of insurance, by additional statements or
indorsements.
An open policy is one in which the value of the thing insured is
not agreed upon, but is left to be ascertained in case of loss.
So there is no definite figure that is stated in the face of the
policy itself. How do you determine the amount of the loss?
Only when the loss happens and the parties agreed on the
value of the thing insured.
Value policy is one which expresses on its face an agreement
that the thing insured shall be valued at specified sum.
Going back to open policy why do you think this kind of
policies exist? Sometimes there are transactions, example, you
are a bonded warehouse. So goods come in and out. When
you took up a policy, you cannot say that the value of the
property is 100Thou today, tomorrow, every week or every
month thereafter. Because you’re a warehouse, you cannot
limit yourself to the exact value of the property at the time the
policy is taken. So if necessarily, it has to be an open policy,
the parties will agree to the amount of the insured only when
the loss occurs. So when the loss occurs then you will have to
evaluate the extent of the loss, the value of the loss. Valued
policy eksakto, so you know how much it’s worth. When you
take out just a regular fire insurance or property insurance for
a residential building you take out a valued policy.
What is running policy? A running policy is one which
contemplates successive insurances, and which provides that
the object of the policy may be from time to time defined,
especially as to the subjects of insurance. How do you do that?
By additional statements or indorsements. Successive policies,
so it’s one policy after another. These policies are usually
common in commercial establishments.
Sec. 63. A condition, stipulation, or agreement in any policy of
insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time
when the cause of action accrues, is void.
Section 63, this is some sort of a Statute of Limitations,
“condition, stipulation, or agreement in any policy of insurance,
limiting the time for commencing an action thereunder to a
period of less than one year from the time when the cause of
action accrues, is void.” You cannot agreed that the insurance
policy to have this kind of limitation. It shortens the period
within which you can commence an action against the
insurance company, that stipulation is void.
“One year from the time when the cause of action accrues.”
When does a cause of action accrues in an insurance policy?
When cause of action accrues
The right of the insured to the payment of his loss accrues
from the happening of the loss. However, the cause of action
in an insurance contract does not accrue until the insured’s
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claim is finally rejected by the insurer. This is because before
such final rejection, there is no real necessity for bringing suit.
Since a “cause of action” requires as essential elements not
only a legal right of the plaintiff and a correlated obligation of
the defendant, but also an act or omission in violation of the
said legal right, the cause of action does not accrue until the
party obligated (insurer) refuses, expressly or impliedly, to
comply with its duty to the insured to pay the amount of
insurance.
In other words, the period for commencing an action under a
policy of insurance under Section 63 is to be computed not
from the time when the loss actually occurs but from the time
when the insured has a right to bring an action against the
insurer.
Atty. Angles: The cause of action accrues when the risk
happens or arises, right? Not necessarily. Sometimes the law
gives you a chance to bring an action where your claim was
finally denied by the insurance company. So when your claim
was finally denied that’s the time when your cause of action
accrues. In other words, the fire took place in January 2012;
you filed a claim against the insurance company. There is a
process you have to go through before the claim is finally
denied. You kept on reminding the insurance company to
process your policy as soon as possible. They replied saying,
“we will sent investigators to investigate the cause of fire.” The
investigators would have to render a report etc etc. So when
the time the back and forth of correspondence was finally done
it was already at the end of the 2nd year. When does the
cause of action accrue? What is the cause of action? The
denial of your application. Unjust naman masyado diba if the
fire took place in January 2012 and the final denial of your
claim took place only in December of 2014. Alangan naman
the 1 year period will accrue or commence at the time the fire
took place, it’s unfair. You have to argue that the cause of
action accrued upon the final denial of your claim.
Sec. 64. No policy of insurance other than life shall be
cancelled by the insurer except upon prior notice thereof to the
insured, and no notice of cancellation shall be effective unless
it is based on the occurrence, after the effective date of the
policy, of one or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the
hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions increasing
the hazard insured against;
(e) physical changes in the property insured which result in the
property becoming uninsurable; or
(f) a determination by the Commissioner that the continuation
of the policy would violate or would place the insurer in
violation of this Code.
Section 64, how to cancel a non-life insurance policy. “No
policy of insurance other than life shall be cancelled by the
insurer except upon prior notice thereof to the insured,” prior
notice is a condition sine qua non. They also have to make
sure that, “no notice of cancellation shall be effective unless it
is based on the occurrence, after the effective date of the
policy, of one or more of the following.” So take note of the
prerequisites for cancellation.
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the
hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions increasing
the hazard insured against;
Increasing the hazard, if it does not increase then it is not a
ground for cancellation.
(e) physical changes in the property insured which result in the
property becoming uninsurable; or
If there are physical changes which you have made in the
property uninsurable walang problema yan. Let’s say, if your
physical change is to put up a higher fence. Yes indeed there
is a physical change, but it will not result to the property
becoming uninsurable. What is imagine here actually is you
assured that your warehouse will contain non-combustible
goods and then midway on the life of the policy, you decided
to store goods, materials probably that are easily combustible
then that will fall under (d) reckless acts increasing the hazard
insured against.
(f) a determination by the Commissioner that the continuation
of the policy would violate or would place the insurer in
violation of this Code.
Sec. 65. All notices of cancellation mentioned in the preceding
section shall be in writing, mailed or delivered to the named
insured at the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is relied
upon and (b) that, upon written request of the named insured,
the insurer will furnish the facts on which the cancellation is
based.
Section 65 gives you the forms of the notice of cancellation.
How notice of cancellation should be sent? First of all it must
be in writing. They cannot call you, text you. So it must be in
writing that your insurance policy is being cancelled. Mail or
delivered, how will the notice of cancellation be served? Snail
mail or courier? Well it doesn’t mention, as long as you have
proof that it has been delivered, it’s been received by you. And
shall state:
(a) which of the grounds set forth in section sixty-four is relied
upon and
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(b) that, upon written request of the named insured, the
insurer will furnish the facts on which the cancellation is based
So the two items must appear in the notice of cancellation. If
you so desire they will furnish you with the facts on which the
cancellation is based. Section 64 and 65 go hand in hand. It
talks about how the policy is cancelled, what are the grounds
for cancellation. We know that before a policy is cancelled
there must be a written notice of cancellation, prior notice. And
what are the grounds of notice of cancellation and how is the
notice of cancellation made and/ or delivered. Sufficiency, it’s
important. Is the notice of cancellation sufficient?
Sec. 66. In case of insurance other than life, unless the
insurer at least forty-five days in advance of the end of the
policy period mails or delivers to the named insured at the
address shown in the policy notice of its intention not to renew
the policy or to condition its renewal upon reduction of limits
or elimination of coverages, the named insured shall be
entitled to renew the policy upon payment of the premium due
on the effective date of the renewal. Any policy written for a
term of less than one year shall be considered as if written for
a term of one year. Any policy written for a term longer than
one year or any policy with no fixed expiration date shall be
considered as if written for successive policy periods or terms
of one year.
Section 66 on the other hand deals with the renewal of a non-
life insurance policy. There’s also a requirement of 45 days.
“…the named insured shall be entitled to renew the policy
upon payment of the premium due on the effective date of the
renewal.” Here it focuses on the renewal of the non-life policy.
That’s why when you get the insurance policy of your car, your
house the insured shall be entitled to the renewal of the policy.
So it is assumed that you are going to renew your policy. What
is the requirement? “upon payment of the premium due on the
effective date of the renewal. Any policy written for a term of
less than one year shall be considered as if written for a term
of one year”. Look at Section 66, assumption is you are going
to renew your policy unless you sent out a notice of
cancellation or the insurance company decides that it will not
renew the policy. Non renewal is different from cancellation.
Non renewal, paabutin mo talaga yong katapusan ng insurance
period. Cancellation may happen during the life of the policy
itself. Section 66 deals with a different situation from Section
64 and 65 (grounds for cancellation). The policy can be on its
6th or 7th month and then the insurance company decides to
cancel. Here, in the renewal it means that the policy has lived
out its period. So that’s the two situations that are being
addressed by these three last provisions.
Review:
Section 58 should be correlated to Section 20. The latter
applies when there is a transfer of the object insured from the
insured to another person. The former says that the transfer of
the thing insured does not carry with it the transfer of the
insurance policy.
SECTION 58. The mere transfer of a thing insured does not
transfer the policy, but suspends it until the same person
becomes the owner of both the policy & the thing insured.
The transfer of the thing insured does not result to the transfer
of the policy in the insurance contract. It has only the effect of
suspending the insurance until the purchaser becomes the
owner of the policy as well as of the property insured.
The delivery by the vendor of his insured motor vehicle to his
vendee without any written endorsement to transfer the policy,
any loss that the motor vehicle might suffer will not give the
vendee the standing to lay claim against the insurer of the
vendor. The liability of the insurer does not automatically
attach by the mere transfer of the thing insured. The buyer
must make an effort to secure the transfer or endorsement of
the policy in his favor.
For exceptions to this rule, see Sections 20-24 and 57.
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.
The insurance may be applied to the interest of the person
claiming the benefit of the policy, by showing that he is the
person named or described or that he belongs to the class of
persons comprehended in the policy. In this case the transfer
of the policy is automatic, that is no endorsement is necessary.
SECTION 59. A policy is either open, valued or running.
SECTION 60. An open policy is one in w/c the value of
the thing insured is not agreed upon, but is left to be
ascertained in case of loss.
It is 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 (i.e., face value), in
case of destruction by the peril insured against. The insured
must establish the fair market value (FMV) of the insured
property at the time of the loss. If the FMV exceeds the
maximum, the latter will control; if below, the former will
control. The insurer, however, only pays the actual cash value
of the property as determined at the time of loss.
SECTION 61. A valued policy is one w/c expresses on its
face an agreement that the thing insured shall be valued at a
specific sum.
It is one in which the parties expressly agree on the value of
the subject matter of the insurance.— 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.
SECTION 62. A running policy is one w/c contemplates
successive insurances, & w/c provides that the object of the
policy may be from time to time defined, especially as to the
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subjects of insurance, by additional statements or
indorsements.
This kind of 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 of such a nature as not to admit of a gross valuation.
It also denotes insurance which contemplates that the risk is
shifting, fluctuating or varying, and which covers a class of
property rather than any particular thing.
Ma’am: You usually see this when you are dealing with
inventories.
Sec. 63. A condition, stipulation, or agreement, in any policy of
insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time
when the cause of action accrues, is void.
If the period fixed is less than one year from the time the
cause of action accrues, the stipulation would be void. The
period for commencing an action under a policy of insurance
under Section 63 is to be computed not from the time when
the loss actually occurs but from the time when the insured
has a right to bring an action against the insurer.
Where the policy provided that if a claim be made and
rejected, an "action or suit" should be commenced
within twelve months after such rejection otherwise the claim
would prescribe, a complaint or claim filed by the insured with
the Office of the Insurance Commissioner would now be
considered an "action" or "suit" the filing of which would have
the effect of tolling or suspending the running of the
prescriptive period. The new Insurance Code empowers the
Insurance Commissioner to adjudicate disputes relating to an
insurance company's liability to an insured under a policy
issued by the former to the latter.
The purpose of provisions or stipulations in insurance policies
for notice of cancellation to the insured, is to prevent the
cancellation of the policy, without allowing the insured ample
opportunity to negotiate for other insurance in its stead for his
own protection. (Saura Import & Export Co., Inc. vs. Phil.
International Surety
Co., 8 SCRA 143 [1963].)
The notice need not be delivered personally to the insured. It
may be mailed. (Sec. 65.) But there is no proof that the notice,
assuming it complied with the other requisites or conditions
mentioned, was actually mailed to and received by the insured,
where all that the insurer offers to show that the cancellation
was communicated to the insured is its employee's testimony
that the said cancellation was sent "by mail through our
mailing section" without more. (Malayan Insurance Co., Inc.
vs. Cruz-Amaldo, 154 SCRA 672 [1987].)
Warranties
Warranty is a statement or promise by the insured set forth in
the policy itself or incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect and without
reference to whether the insurer was in fact prejudiced by
such untruth or nonfulfillment, renders the policy voidable by
the insurer.
Kinds of Warranties
(1) An express warranty is an agreement contained in the
policy or clearly incorporated therein as part thereof whereby
the insured stipulates that certain facts relating to the risk are
or shall be true or certain acts relating to the same subjects
have been or shall be done.
(2) An implied warrranty is a warranty which from the
very nature of the contract or from the general tenor of the
words, 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.
Warranties distinguished from representations.
There are well recognized distinctions between warranties and
representations in contracts of insurance, to wit:
(1) Warranties are considered parts of the contract, while
representations are but collateral inducements to it;
(2) Warranties are always written on the face of the
policy, actually or by reference, while representations may be
written in a totally disconnected paper or may be oral;
(3) Warranties must be strictly complied with, while in
representations, substantial truth only is required
(4) The falsity or nonfulfillment of a warranty operates
as a breach of contract, while the falsity of a representation
renders the policy void on the ground of fraud and
Ma’am: The remedy for both is rescission although the grounds
are different.
(5) Warranties are presumed material, while the insurer
must show the materiality of a representation in order to
defeat an action on the policy.
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.( Please read the case
illustrated in the book)
Unless the contrary intention appears, the courts will presume
that the warranty is merely affirmative. An affirmative warranty
is one which asserts the existence of a fact or condition at the
time it is made.
Sec. 68. A warranty may relate to the past, the present, the
future, or to any or all of these.
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Sec. 69. No particular form of words is necessary to create a
warranty.
Sec. 70. Without prejudice to section fifty-one, every express
warranty, made at or before the execution of a policy, must be
contained in the policy itself, or in another instrument signed
by the insured and referred to in the policy as making a part of
it.
Representation is found in the application form which does not
form part of the policy itself. Warranty, on the other hand,
must be contained in the policy itself and can never be found
in the application form for insurance policy. If contained in
another instrument, it must be signed by the insured and
referred to in the policy as making a part of it. Mere reference
alone is not sufficient to give this effect. Please correlate this
to the 2nd par.of Sec. 50 which provides that warranty is not
binding to the insured even if it is signed by the insurer where
the descriptive title of the warranty is not mentioned or written
in the blank spaces provided for in the policy.
Sec. 71. A statement in a policy, of a matter relating to the
person or thing insured, or to the risk, as a fact, is an express
warranty thereof.
Opinions and beliefs are not considered as warranty.
Sec. 73. When, before the time arrives for the performance
of a warranty relating to the future, a loss insured against
happens, or performance becomes unlawful at the place of
the contract, or impossible, the omission to fulfill the
warranty does not avoid the policy.
The general rule is that a violation of a warranty avoids the
insurance, give me the exceptions.
Section 73, which refers to those warranties relating to the
future, provides 3 exceptions:
1. When loss occurs before time of performance
2. When performance becomes unlawful
3. When performance becomes impossible
Sec. 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.
What is the course of action of the injured party when there is
a violation of the warranty?
The violation of the terms of contract of insurance
entitles either party to terminate contractual relations.
Under Section 74, 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.
What happens to violations of immaterial provisions?
The breach of any provision which is not material will
not avoid the policy (Section 74). However, the
parties may expressly stipulate that the violation of a
particular provision (although immaterial) in the policy
shall avoid it. (Sec 75) By such stipulation, the parties
convert an immaterial warranty into a material one.
Sec. 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.
I’ve mentioned earlier that the omission to fulfill the warranty
does not avoid the policy. If the loss occurs prior to the time of
performance, or when the performance is unlawful or when
the performance has become impossible.
What happens if there is waiver or estoppel? Do those
doctrines of estoppels or waiver apply?
Breach of warranty operates to discharge the insurer from
liability unless the insurer is liable because of a waiver of
the warranty or an estoppels.
1. The omission to fulfill a warranty or condition will
likewise be excused where there is a waiver on the
part of the insurer. Failure on the part of the insurer
to assert a forfeiture upon breach of warranty or
condition, after knowledge thereof, amounts to a
waiver or estoppel.
2. Under estoppels, the insurer is precluded, because of
some action or inaction on its part, from relying on an
otherwise valid defense as against the insured who
has been induced to enter into the contract by the
insurer’s representation or conduct.
So the Doctrine of waiver or estoppel can be raised as a
defense or as a counter-argument in favor of the insured. If
the insurance company continued the relationship knowing the
violation of the warranty then the insurer cannot back out of
its contractual obligations under the policy because the insurer
is estopped from asserting the breach or the insurer is deemed
to have waived its right to avail of eviction(?).
Sec. 76. A breach of warranty without fraud merely
exonerates an insurer from the time that it occurs, or where
it is broken in its inception, prevents the policy from
attaching to the risk.
Can you give me the distinction between warranty and
condition?
The term “warranty” and “conditions precedent” are often
used interchangeably or synonymously. However, some
courts have recognized material differences.
1. As to effect
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Warranty does not suspend or defeat the operation of
the contract, but a breach affords either the remedy
expressly provided in the contract or that furnished by
law, while condition precedent is one without the
performance of which the contract although in form
executed by the parties and delivered, does not
spring into life.
In other words, a condition precedent is a limitation
to the attachment of the risk, whereas a warranty
does not necessarily have that effect.
2. As to nature
If the insured person contracts and warrants that if
representations made by him in his application for
insurance are not true, the policy shall be null and
void, such statements are not conditions precedent
but rather of the nature of a defeasance. Also,
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.
Conditions are actually more like - there is already a valid
contract. When there is already a valid contract, the contract is
to be executed and one of the parties merely needs to comply
with certain conditions. But a violation of a warranty goes to
the very core of the validity of the contract itself. That’s how
different they are. Sometimes they are used interchangeably.
But when you are confronted with facts where in such a way if
the terms, stipulation are not complied with it would render
the contract null and void then that would be more likely a
violation of a warranty. But if it is merely a restriction of a
process(?), then it is more likely a condition.
What are exceptions in an Insurance Policy?
Exceptions are inserted in a contract of insurance for
the purpose of withdrawing from the coverage the
policy, as delimited by the general language
describing the risk assumed some specific risks which
the insurer declares himself unwilling to undertake.
In other words, these terms that you will find in an insurance
policy: warranties, conditions precedent, exception they have
certain significance when they appeared in an insurance policy.
What is tricky there is when one is very closely related to the
other. We must know what distinguishes one from the other.
In section 74, what is the remedy? Rescission, the remedy
when there is a violation of a material warranty or other
material provision of a policy. It talks about material. When
you test a materiality for warranty, where do you find that? In
representation - they have the same test of materiality that
applies to warranty.
Sec. 46. The materiality of a representation is
determined by the same rules as the
materiality of a concealment.
Test of materiality
The materiality of the representation 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.
Both parties can be guilty of misrepresentation. The insurance
company can also misrepresent certain facts to the insured.
Likewise the insured is usually the one guilty of
misrepresentation if there is misrepresentation. So the same
test is applied to both representation and violation warranty. It
must be a violation of a material one. If it is not material
warranty, then there is no ground, it would be unreasonable
on your part to seek for rescission of the insurance contract.
The remedy is rescission.
What about violation of immaterial provisions? Does that void
the policy? No, unless such violation is a specified provision in
the contract. You have to determine if the violation is a
violation of a material warranty or just an immaterial warranty.
If it is violation of a material warranty either party may seek
for a rescission of the contract on the ground of breach of
contract, he did not comply with the warranty. If an
Immaterial warranty has been violated it doesn’t automatically
void the policy. However, if it is so stated in the policy itself
you can’t do anything about it; the violation of a particular
provision no matter how immaterial will avoid it.
Effects of breach of warranty by insured
The breach referred to in Section 76 is without fraud. In order
that the insurer may be entitled to rescind a contract of
insurance on the ground of breach of warranty, fraud is not
essential. Falsity, not fraud is the basis of liability on warranty.
1. Without fraud
When there is no fraud, the policy is avoided only
form the time of breach (Sec 76).
2. With fraud
When there is fraud, the policy is avoided ab
initio, and the insured is not entitled to the return
of the premium paid.
I want you to go over the discussion on Conditions in
insurance policy. There is a condition precedent and condition
subsequent. This is just for the academic discussion on what
these two animals are.
Let’s take a look at
Effects of breach on legal relations of parties
Warranties, conditions, and exceptions affect the legal
relations of the parties quite differently.
On binding force of contract
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
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of an excepted peril, does not in the least affect the January 26, 2015
binding force of the contract.
TITLE 8
On liability where there is waiver PREMIUM

Such a breach of warranty or of condition may be What is a premium?

waived without consideration; but the insurer does
not become liable for an excepted loss by waiver It may be defined as the agreed price for assuming and
unless such waiver amounts to a new contract on carrying the risk – that is, the consideration paid an insurer for
valuable consideration. The insurer cannot, by a undertaking to indemnify the insured against a specified peril.
naked waiver, assume a non-existent duty. Nor is the
defense that the loss is excepted barred by the What is assessment?
incontestable clause.
It is the sun specifically levied by mutual insurance companies
Remember that the doctrine of estoppels and waiver played a or associations, upon a fixed and definite plan, to pay losses
big role in insurance contract just like in other forms of and expenses.
contracts, which are generally entered into by parties. So when
you look at insurance contract you do not only look at the Premium distinguished from assessment
violation of the insurance code but also the possibility of
applying these doctrines. You apply these doctrines as your PREMIUM ASSESSMENT
defenses or your cause of action. So now we finish warranty. Levied and paid to meet Collected to meet actual
Next meeting we will go on premium J anticipated losses losses
The payment of premium, Legally enforceable once
END after the first, is not levied, unless otherwise
enforceable against the agreed
insured
Not a debt Considered a debt if properly
levied, unless otherwise
expressly agreed

What is the rule on the payment of premium?

SEC. 77. An insurer is entitled to payment of the premium as

soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company
is valid and binding unless and until the premium thereof has
been paid, except in the case of a life or an 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.

Is a premium a debt or an obligation?

Payment of premium is ordinarily not a debt or obligation.

What do you understand by the phrase cash-and-carry

basis?”

The contract in order to be valid an binding bust be paid in

cash.

Excuses for non-payment of premium

1. Fortuitous event
• Will not prevent the forfeiture of the policy when
premium remains unpaid.

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• The rule is not affected by the fact that the non-
payment is due to war or that the insured has not
been negligent.
2. Condition, conduct or default of insurer – indeed no
excuse whatever will avail to prevent a forfeiture except
only when the non-payment has in some way been
induced by the condition, conduct or default of the
insurer.
Thus, non-payment is excused:
a) Where the insurer has become insolvent and has
suspended business, or has refused without
justification a valid tender of premiums; or
b) Where the failure to pay was due to the wrongful
conduct of the insurer as when the insurer induced
the beneficiary under a policy to surrender it for
cancellation by falsely representing that the insurance
was illegal and void, and returning the premiums
paid; or
c) Where the insurer has in any wise waived his right to
demand payment.
Is credit extension on the payment of premium valid?
Yes. Section 78 of the Insurance Code, in effect, allows waiver
by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium
as conclusive evidence of payment so far as to make the policy
binding despite the fact that premium is actually unpaid.
Instances where the insured is entitled to recover
premium
1. SEC. 80. A person insured is entitled to a return of
premium, as follows:
(a) To the whole premium if no part of his interest in the
thing insured be exposed to any of the perils insured
against;
(b) Where the insurance is made for a definite period of
time and the insured surrenders his policy, to such portion
of the premium as corresponds with the unexpired time,
at a pro rata rate, unless a short period rate has been
agreed upon and appears on the face of the policy, after
deducting from the whole premium any claim for loss or
damage under the policy which has previously
accrued: Provided, That no holder of a life insurance
policy may avail himself of the privileges of this paragraph
without sufficient cause as otherwise provided by law.
2. SEC. 82. A person insured is entitled to a return of the
premium when the contract is voidable, and subsequently
annulled under the provisions of the Civil Code; or on
account of the fraud or misrepresentation of the insurer,
or of his agent, or on account of facts, or the existence of
which the insured was ignorant of without his fault; or
when by any default of the insured other than actual
fraud, the insurer never incurred any liability under the
policy.
3. SEC. 83. In case of an over insurance by several insurers
other than life, 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 at risk.
Let’s go back to the beginning of this title…
We understand that an insurance contract, in order to be valid,
binding and enforceable, must have a consideration.
It is also important to distinguish premium from an
assessment. All payments of premiums and assessments are
but contributions from all members of the insuring organization
to make good the losses of individual members. However the
distinctions are:
PREMIUM ASSESSMENT
Levied and paid to meet Collected to meet actual
anticipated losses losses
The payment of premium, Legally enforceable once
after the first, is not levied, unless otherwise
enforceable against the agreed
insured
Not a debt Considered a debt if properly
levied, unless otherwise
expressly agreed
But we will concentrate on the effects of payment and non-
payment of the premium. There is a long discussion here
(book) of three important cases, and these cases highlight
different situations that will affect the validity of an insurance
contract – Phil. Phoenix vs. Woodworks, 92 SCRA 219;
Makati Tuscany vs. CA, 215 SCRA 462; UCPB General
Insurance vs. Masagana Telemart, 356 SCRA 307.
Before we go to the cases, let’s take a look at Section 77:
SEC. 77. An insurer is entitled to payment of the premium as
soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company
is valid and binding unless and until the premium thereof has
been paid, except in the case of a life or an 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.
General Rule: No policy or contract of insurance issued by an
insurance company is valid and binding unless and until the
premium thereof has been paid.
This is the CASH-AND-CARRY RULE.
Exception/s:
In case of a life or an industrial life policy whenever the grace
period provision applies, or whenever under the broker and
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agency agreements with duly licensed intermediaries, a ninety
(90)-day credit extension is given.
What if the payment is in check?
Well, check is a legal tender so that is also considered payment
in cash as long as the payment was tendered at the time the
insurance policy was issued.
Does an unpaid premium constitute a debt?
Non-payment of the balance of the premium is not a ground
for cancellation of the contract. This is the decision in
Philippine Phoenix.
Now, let’s go back to the cases I’ve mentioned. These cases
talk about the non-payment of premium. What happens to the
contract of insurance?
Phil. Phoenix vs. Woodworks: This was a partially
performed contract, there was payment of the premium but
not of the entire amount. In so far as the insurance company
is concerned, there is meeting of the minds, there was delivery
of fire insurance policy to the insured. On September 22, the
insured paid P3,000 on account of the total premium worth
P6,000. There was a balance of P3,000. The insurance
company now went to the court to collect on the balance. Now
the insured is saying that it was not a valid contract because
the premium was not fully paid.
What did the court say? There was a perfected contract of
insurance. As the contract had become perfected, the parties
could demand from each other their respective obligations. In
the case of the insurer, it had the right to demand from the
insured the completion of the payment of the premium or sue
for rescission. So these were the two options available to the
insurer:
1. demand the fulfilment of the obligation which is for
the insured to fully pay the insurer; or
2. if the insured fails to pay on demand, ask for the
rescission of the contract of insurance itself.
So the partially paid insurance policy is deemed a perfected
contract. Why? The contract of insurance has already been
performed. So it is not a defense that the premium has not
been fully paid.
Makati Tuscany vs. CA: This is a case where the insurance
company, in previous years, accepted payments in
installments. You know class, when the premium for
multimillion policies is big, sometimes the clients cannot pay
outright the premium so they would pay in installments. In this
case, it is a peculiar feature that in the previous years, the
insurance company accepted installment payment on the
premium. In the last year, when the insurance policy was
renewed the insured made two installment payments, both
were accepted by the insurance company. The keyword there
is accepted. Thereafter, the insured refused to pay the balance
of the premium. Bakit kaya? All of a sudden the insured
desisted from fully complying with the payment of premium.
Why? It is because the policy, issued by the insurance
company, did not contain a credit clause in its favor and the
receipts for the installment payments stated the following
reservations:
2. Acceptance of this payment shall not waive any of
the company rights to deny liability on any claim
under the policy arising before such payments or after
the expiration of the credit clause of the policy; and
3. Subject to no loss prior to premium payment. If
there be any loss such is not covered.
Insured realized that it was paying for something but the
insurance company will not honor its obligation when the loss
arises because of the conditions found in the insurance policy.
Kaya nagstop si insured.
Can premium be on installments? The insurer’s intention is to
honor policies’ payable on installments. You look at the facts of
the case. The facts say that in previous years the insurance
company received payment in installments, so now the
insurance company cannot turn around and say, “hindi naman
kayo nagbayad ng full.” Such acceptance in previous years
speaks loudly of the insurer’s intention to honor the policy
issued to petitioner. Basic principles of equity and fairness
would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and
later deny liability on the lame excuse that the premiums were
not prepared in full. Section 77 merely precludes the parties
from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is not
contrary to morals, good customs, public order or public policy.
You have to be careful of the credit extension clause. In all
contracts, class, there may or may not be a credit extension
clause. Now, if a problem is presented to you, in the exam,
that says there is a credit extension clause, then that clause is
a stipulation that has been agreed upon by the parties. In
other words, they cannot back-out of that agreement and
claim that the insurance premium was not paid in full. Section
79 of the Insurance Code in effect allows waiver by the insurer
of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive
evidence of payment so far as to make the policy binding
despite the fact that premium is actually unpaid.
Let’s go back to Sec. 77…
Section 77 states that no policy or contract of insurance issued
by an insurance company is valid and binding unless and until
the premium thereof has been paid. What are the
exceptions?
1. Life insurance and industrial insurance policy within a
grace period;
2. Makati Tuscany case – when there is an agreement
allowing the insured to pay the premium installments and
partial payment has been made at the time of loss;
3. When there is an agreement to grant the insured credit
extension for the payment of the premium (Art. 1306, CC)
and loss occurs before the expiration of the credit terms;
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4. Estoppel bars the insurer from invoking Section 77 to
avoid recovery on a policy providing a credit term for the
payment of the premiums, as against the insured who
relied in good faith on such extension; and
5. Section 79.
Let’s take a look at Section 79…
SEC. 79. An acknowledgment in a policy or contract of
insurance or the receipt of premium is conclusive evidence of
its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid.
It says “conclusive,” but can it be disproved? YES! It can be
disproved through actual or real evidence.
**BREAK**
Let’s go back a little…
The insurer may grant credit extension, no doubt about it.
Credit extension is acceptable, it does not invalidate the
contract and it does not go against Sec. 77.
If the insurer has granted the insured a credit extension and
loss occurs before the expiration of the term, recovery of the
policy should be allowed. So you can still recover from your
policy even if the premium is paid after the loss but within the
credit term. That’s what happened in the case of Masagana
Telemart.
UCPB General Insurance vs. Masagana Telemart: In this
case, nasunog ang building ng Masagana, and then Masagana
went to UCPB, the insurance company, and tendered the
checks for the balance of the premium. The cashier of UCPB
accepted the checks and, in fact, issued receipt. On the same
day, the checks were returned to Masagana. UCPB raised the
defense that the premium was not fully paid.
The Court held that the credit extension is valid and that the
payment of the premium, even after the loss has occurred,
must be accepted by the insurance company. The insured can
recover from the said loss as long as the payment is still within
the period.
Now, I want you class to just go over the receipt of
acknowledgment of premium. Here, the law establishes a legal
fiction. Section 79 says:
SEC. 79. An acknowledgment in a policy or contract of
insurance or the receipt of premium is conclusive evidence of
its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid.
The author said that this merely establishes a legal fiction in
the payment of premium. The reason for the rule is founded
on the fact that when the policy contains such written
acknowledgment, it is presumed that the insurer has waived
the condition of prepayment, the acknowledgment being
declared by law to be conclusive evidence of premium
payment.
So, it just affirms that the policy is legally binding. In other
words, the insurer may still dispute if there is evidence to the
contrary, why not? The court will still receive that evidence.
Instances where the insured is entitled to a return of
premium
1. Section 81
2. Section 82
3. Section 83
Sections 80-83 deal with return of premium.
SEC. 80. A person insured is entitled to a return of premium,
as follows:
(a) To the whole premium if no part of his interest in the thing
insured be exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time
and the insured surrenders his policy, to such portion of the
premium as corresponds with the unexpired time, at a pro rata
rate, unless a short period rate has been agreed upon and
appears on the face of the policy, after deducting from the
whole premium any claim for loss or damage under the policy
which has previously accrued: Provided, That no holder of a
life insurance policy may avail himself of the privileges of this
paragraph without sufficient cause as otherwise provided by
law.
SEC. 81. 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
is concerned.
SEC. 82. A person insured is entitled to a return of the
premium when the contract is voidable, and subsequently
annulled under the provisions of the Civil Code; or on account
of the fraud or misrepresentation of the insurer, or of his
agent, or on account of facts, or the existence of which the
insured was ignorant of without his fault; or when by any
default of the insured other than actual fraud, the insurer
never incurred any liability under the policy.
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.
SEC. 83. In case of an over insurance by several insurers
other than life, 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 at risk.
Section 80
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(a) To the whole premium if no part of his interest in the
thing insured be exposed to any of the perils insured
against.
Let’s say you took out a fire insurance policy, for a period of 1
year, from Dec. 21, 2014 to Dec. 21, 2015. Walang sunog, so
can you say, “My building has never been exposed to peril.”
Can you get back the premium from the insurance company?
Of course not! As your building stood there, it has really been
exposed to the risk of fire.
What this means is, for example in marine insurance, the
insured got insurance for the voyage, from port A to port B,
but the ship never left. Because it never left the port, it never
went for a voyage, you can say that it was never exposed to
the peril insured against. That’s what it meant. Once the ship
sails, it is already exposed to the perils of the sea, to the perils
insured against. So, you cannot recover your insurance
premium even if it arrived safely at the destination. Ok?
How much do you recover if the thing insured was
never exposed to peril? The whole premium.
(b) Where the insurance is made for a definite period of time
and the insured surrenders his policy, to such portion of the
premium as corresponds with the unexpired time, at a pro rata
rate, unless a short period rate has been agreed upon and
appears on the face of the policy, after deducting from the
whole premium any claim for loss or damage under the policy
which has previously accrued: Provided, That no holder of a
life insurance policy may avail himself of the privileges of this
paragraph without sufficient cause as otherwise provided by
law.
So, you bought a car and you took out an insurance for 1 year.
Now, on the 6th month you decided to sell the car but you
don’t want to indorse the policy in favor of the new buyer.
What happens? You take hold of your insurance policy and
then go to the insurance company and tell the insurance
company, “I’ve sold the car but I still have 6 months more to
go on the policy. Can I get back the premium for the
remaining 6 months since I am no longer the owner of the
car?” So where the insurance is made for a definite period of
time and the insured surrenders his policy, to such portion of
the premium as corresponds with the unexpired time, at a pro
rata rate. So only the value of the unexpired term, unless a
short period rate has been agreed upon and appears on the
face of the policy, after deducting from the whole premium
any claim for loss or damage under the policy which has
previously accrued.
What is a short period rate?
The short period rate is actually defined by the policy itself, it
is indicated in the policy.
For example (in the book):
“It is hereby agreed that, in the event of this policy being
surrendered by the insured for cancellation, the company
shall retain a premium in accordance with the following
scale for the time the policy has been in force.”
Then follows the scale:
For 1 month or less – 20% of the Annual Rate
For 2 months - 30% of the Annual Rate
In other words, this is the pre-agreed rate placed by the
insurer in the policy itself. If there is a short period rate in your
policy, and if you decide to surrender it on the 2nd month, the
insurance company will retain 20% of the annual rate.
Go over the example in the book.
Which one takes precedence, the short period rate in
the policy or Section 80 (b)? Of course you give credence
to the short period rate in the policy. You follow what is stated
in the policy.
Now, before you get the amount that’s due you, the law says
that after deducting from the whole premium any claim for loss
or damage under the policy which has previously accrued. So
there is a definite period of time and there is a short period
rate, you are entitled only to the excess or unexpired term,
right? Unless there is a short rate period. Now, where losses
occurred, let’s say from month 1 to month 12, you surrender
the policy on month 6, you still have 6 more months to go. If
within the first 6 months of the policy, there were losses, for
example you insured a building and in that building there were
valuables that were taken out or a portion of it was burned.
You claimed for coverage for that partial part, you don’t
actually surrender your entire policy. The insurance company
will only pay you for that particular portion that was burned.
Now, this loss will be deducted from the premium that’s due
you. Let’s say the value of that partial destruction is P5, 000,
you paid a premium of P10,000, so you are going to deduct
the value of that partial loss from the whole premium and then
whatever is the excess iyan ang marerecover mo. Ok? So, it
doesn’t mean that the basis of the unexpired 6 months is going
to be the premium itself that I paid at the beginning of the
policy. So the net premium will now be the one that will be
used in calculating the unexpired term.
Now, I want you to look closely at Section 83…
SEC. 83. In case of an over insurance by several insurers
other than life, 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 at risk.
What do you mean by double insurance? Can there be
double insurance on life insurance?
So there is no double insurance in life insurance policy. Why?
Because life is incapable of pecuniary estimation. So if a
person is capable of taking out more than 1 life insurance
policy that is fine provided you can afford to pay the premium.
Double insurance is more on property insurance
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So section 82 simply says that if there is over insurance by
several insurers, the insured is entitled to a ratable return of
premium. Now, you are the insured, you are responsible for
getting all these insurances for your property. Now, you want
to discontinue some of these insurances, how much could you
get back from your insurers? This provision states that 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 at risk.
Let’s go to the example (refer to the book):
X insures his house which has an insurable value of
P1,500,000 as follows:
Sec. 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 except as otherwise provided in the case of life
insurance.
Ma’am: You have here two parties: the insurer and the
insured. At the beginning of the contract, they right away
agree that the insured cannot transfer the claim against the
insurer after the loss has happened. That contract is void
because the insurance contract is a personal contract.
However, if the transfer of the claim is that after the loss has
occurred, the peril insured against has already happened, at
that point in time the transfer of the claim in favor of the third
party has become valid because it is now merely a money
claim against the insurance company.

Insurer Amount of Premiums paid Sec. 84. Unless otherwise provided by the policy, an insurer is
Insurance liable for a loss of which a peril insured against was the
A Co P 1,200,000 P 24,000
proximate cause, although a peril not contemplated by the
B Co. 600,000 12,000 contract may have been a remote cause of the loss; but he is
P 1,800,000 P 36,000 not liable for a loss of which the peril insured against was only
a remote cause.
So the amount of his insurance is P 300,000 more than the
insurable value of his house. The total premium paid was P The insurer assumes liability only for a loss proximately caused
36,000. In this case, there is an over-insurance of P300,000. by the perils insured against although a peril not insured
The proportion is now computed as follows: against may have been a remote cause of the loss. But the
insurer is still liable even if the proximate cause is not the peril
Over insurance: P300,000/P1,800,000 = 1/6 insured against if the immediate cause is the
peril insured against.
So how much can X recover from A company? From B
company? What is proximate cause?

A Co. P 24,000 x 1/6 P4,000 Proximate cause is that which, in a natural and continuous
B Co. P 12,000 x 1/6 P2,000 sequence, unbroken by any new independent cause, produces
an event and without which the event would not have
So, he cannot go back to A and ask that he recover the whole occurred.
P 24,000. Everything has to be prorated. Alright, that’s
basically the explanation if you are trying to recover your Proximate cause is the efficient cause — the one that sets
premium if there is over insurance. others in motion — to which the loss is to be attributed,
although other and incidental causes may be nearer in time to
Where insurance is illegal the result and operate more immediately in producing the loss.

What’s void is definitely illegal. Can the parties recover? No,
the parties cannot recover unless they are not in pari delicto.
Remember that.
That’s it for premium, class. Please read the three cases that I
gave you earlier.
Proximate cause is not, therefore, equivalent to immediate
cause.
The question that needs to be asked is: If the event
did not happen, could the injury have resulted? If the answer
is NO, then the event is the proximate cause.

February 9, 2015 If the perils insured against is a remote cause, the insurance
company is not liable.
TITLE 9
LOSS Example:

Ma’am: This is the meat of the insurance contract. Loss covers
accident leading to physical injury, death if it is life insurance,
property damage, or destruction if it is property insurance.
If fire causes an explosion which results in a loss, fire is the
proximate cause of the loss while explosion is the immediate
cause. The insurer is liable where either peril is covered by the
policy .

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Maam: There was a fire. It was not yet burning or damaging.
But because of fire, the explosives stored in that building
exploded which caused the destruction of a nearby structure
for example. Looking how old the structure, can you say that
the fire is the proximate cause? Yes, it is because if the fire did
not start, the explosives would not have exploded and the
structure would not have been destroyed.
When fire a friendly fire.
So long as a fire burns in a place where it was intended to
burn, and ought to be, it is to be regarded as merely an
agency for the accomplishment of some purpose and not as a
hostile peril. It is a friendly fire.
Example: a fire burning in a furnace or stove.
When fire a hostile fire.
It is hostile when it occurs outside of the usual confines or
begins as a friendly fire and becomes hostile by escaping from
the place where it ought to be to some place where it ought
not to be.
Example: where a fire in a chimney, due to the ignition of soot
there, caused soot and smoke to issue from the stove so as to
damage the property insured, the court very properly held the
damage due to a hostile fire. The fire was intended to bum in
the stove and not in the chimney.
Sec. 85. An insurer is liable where the thing insured is rescued
from a peril insured against that would otherwise have caused
a loss, if, in the course of such rescue, the thing is exposed to
a peril not insured against, which permanently deprives the
insured of its possession, in whole or in part;or where a loss is
caused by efforts to rescue the thing insured from a peril
insured against.
Two cases contemplated by this section:
a) The insurer is liable where the insured is permanently
deprived of the possession, in whole or in part, of the
thing insured by a peril not insured against provided
it is shown that said property would have been
lost by the peril insured against had there been
no attempt to rescue it.
Thus, 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 unless, of course the policy
itself contains a stipulation exempting the insurer
from liability for such loss.
b) The insurer is liable where the loss is caused by
efforts to rescue the thing insured from a peril
insured against.
Here, it is the efforts to rescue the
thing that caused the loss.
Thus, damages to goods by being trampled on or
thrown about in the efforts to put out the fire are
covered by the policy of fire insurance.
Sec. 86. Where a peril is especially excepted in a contract of
insurance, a loss, which would not have occurred but for such
peril, is thereby excepted although the immediate cause of the
loss was a peril which was not excepted.
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.
The insurance company has the burden of proving that the
loss is caused by the risks excepted and for want of such
proof, the company is liable. The insured, on the other hand,
has only to prove the fact of loss.
Sec. 87. An insurer is not liable for a loss caused by the willful
act or through the connivance of the insured; but he is not
exonerated by the negligence of the insured, or of the
insured’s agents or others.
The insurer is not liable for a loss caused by the intentional act
(e.g., suicide) of the insured or through his connivance. Such
loss is not within the contemplation of a contract of insurance
one of the requisites of which is that the risk should not be
subject in any wise to the control of the parties.
Ma’am: That’s why if the insurer is able to prove that there is
willful act or connivance, then the insurer will not be held
liable. If the cause of fire in the building was a willful act like
arson or if there is connivance like when you knew that a
jewelry shop was not properly secured but you didn’t take the
necessary steps to secure it, if the insurer can prove that the
insured is grossly negligent in securing its property, then the
insurance company may be off the hook.
Will the rule apply if there is only simple negligence?
One of the purposes for taking out insurance is to protect the
insured against the consequences of his own negligence and
that of his agents. Thus,
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. The doctrine of contributory
negligence does not in any way apply to rights under a
contract of insurance.
Mere negligence or carelessness on the part of the insured or
of his servants, although directly causing or contributing to the
loss, usually is one of the risks covered by the insurance and
does not relieve the company from liability.
But gross negligence or recklessness on the part of the
insured, the consequence of which must have been palpably
obvious to him at the time, will relieve the insurer from
liability.
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Case:
Wife started a fire that damaged the house and some of its
contents.
Facts: H had an argument with his wife, W, and left his home.
After he left, W started a fire that damaged the house and
some of its contents. H filed a claim on the insurance policy
that covered the house. The policy was in the names of H and
W.
Issue: Can H, an innocent co-insured, collect the policy when
the jointly insured party started the fire.
Held: Yes. H was not guilty of wrongdoing. When an insurance
policy is ambigiuous or unclear, it must be construed against
the insurer. The intentional destruction of the property by one
of the co-insured should not be interpreted to deny recovery
by the other co-insured unless the policy specifically so states.
Since the policy does not so state, H is entitled to recovery for
the damages to his property interest as covered by the policy.
Important things to remember under the chapter loss:
• Determine whether the peril insured against is the
proximate cause or immediate cause of the loss.
• The effect of agreement to transfer the claim of
insured before or after a loss. Before a loss has
occurred, an insurance policy is not assignable
without the consent of the insurer. After a loss has
occurred, the insured has an absolute right to transfer
or assign his claim against the insurer.
• Just go over the examples of hostile and friendly fire
in the book.
• Sections 85 and 86. Go over with these provisions.
The circumstances envisioned by these two provisions
are very complicated. When they arise, there’s
probably more than one peril happening. That’s why
you have to come up with sections 85 and 86.
Sec. 85. An insurer is liable where the thing insured is rescued
from a peril insured against that would otherwise have caused
a loss, if, in the course of such rescue, the thing is exposed to
a peril not insured against, which permanently deprives the
insured of its possession, in whole or in part; or where a loss is
caused by efforts to rescue the thing insured from a peril
insured against.
Sec. 86. Where a peril is especially excepted in a contract of
insurance, a loss, which would not have occurred but for such
peril, is thereby excepted although the immediate cause of the
loss was a peril which was not excepted.
Sec. 87. An insurer is not liable for a loss caused by the willful
act or through the connivance of the insured; but he is not
exonerated by the negligence of the insured, or of the
insured’s agents or others.
• So remember this is very basic in insurance law. This is
one of the oft-repeated defenses of the insurance
company. There was a connivance or the peril happens
because of the willful act of the insured but the insurance
company is not exonerated by the simple negligence of
the insured or of its agents.
Notice and Proof of loss
These are the conditions after loss has occurred. In the earlier
chapters, we discuss condition precedent. Now condition
precedent must complied with. Your interpretation, a lot of you
said the contract must be construed liberally in favor of the
insured and strictly against the insurer. That will only come
into play if there is really vagueness in the situation between
the parties. But is there is clearly stipulation condition
precedent, that stipulated condition precedent must be
complied with. Otherwise, it amounts to breach of material
warranty.
Notice and proof of loss are conditions after the loss has
occurred.
Sec. 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 is the notice required to be given to the
insurance company?
The notice must be given "without unnecessary delay." Notice
of loss be given immediately or forthwith requires the giving of
notice within a reasonable time.
What constitutes a reasonable time for giving notice depends
on the circumstances of the particular case although the courts
construe the requirement of immediate notice liberally in favor
of the insured. Thus, notice will be considered as given
immediately, forthwith, as soon as possible or "without
unnecessary delay," if it has been given "as soon as
circumstances permitted the insured, in the exercise of
reasonable diligence, to communicate."
So however the mode of informing the insurance company
whether it is in writing or thru phone calls, it must be done
without unnecessary delay.
Sec. 89. When a preliminary proof of loss is required by a
policy, the insured is not bound to give such proof as would be
necessary in a court of justice; but it is sufficient for him to
give the best evidence which he has in his power at the time.
Conditions after loss that must be fulfilled before the
insured becomes entitled to the benefit of the policy:
• notice of loss must be given to the insurer (Sec.
88.);and
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• when required by the policy, a preliminary proof of company gets adjusters to do the investigation for them. And
loss must likewise be given. (Sec. 89.) with the notice of loss, you are apprising the insurance
company that the peril, loss, or damage is there so that they
It is called preliminary because maybe it will be can act right away before the evidence is lost. And also to
supplemented later on by other proofs. insure that there is no fraud involved. With regard the damage
to property, informing the insurer will enable him to take
While an insured, in submitting his proof of loss is measures to limit the damage of the property itself in case it is
"not bound to give such proof as would be only partially damaged.
necessary in a court of justice" under Section 88,
the same section does not give him any justification Formal notice of loss is not necessary if the insurer already has
for submitting false proofs. actual notice.

TITLE 10 What is the purpose of proof of loss?

NOTICE OF LOSS
The statement of loss is, however, a very much more formal
Can the defects in notice or proof be waived? requirement, and intended not only: (1) to give the insurer
information by which he may determine the extent of his
Yes. liability but also; (2) to afford him a means of detecting any
fraud that may have been practiced upon him; and (3) to
Sec. 90. All defects in a notice of loss, or in preliminary proof operate as a check upon extravagant claims.
thereof, which the insured might remedy, and which the
insurer omits to specify to him, without unnecessary delay, as Maam: It is basically similar to notice of loss given to the
grounds of objection, are waived. insurer. Remember that insurance contract is ac contract of
indemnity. It is not for revenue generation. It is for the
payment of the loss suffered. The insured cannot just file an
It is the duty of the dissatisfied insurer to indicate the defects
imaginary claim in an extravagant amount. This is precisely
in the proofs of loss as given, so that the deficiencies may be
the reason why notice and proof of loss is necessary to be
supplied. His retention of the defective proofs constitutes a
given so that the insurer can have information from which it
waiver of his objections.
can ascertain the extent of its liability. Remember always that
insurance is one founded on trust and no one is supposed to
However if the requirements are in the policy itself and the
profit from the contract itself.
insurance company did not waive and the insured did not
comply with the requirement of notice and proof of loss, then
When delay in presentation of notice
the insured may not recover at all.
or proof deemed waived.
What is the rule of construction with regard the
Waiver of delay in the presentation of notice or proof of loss
submission of documents to prove loss?
may be made:
Substantial, not strict compliance with the requirements will
(1) by an act of the insurer; and
always be deemed sufficient.
Why is notice of loss necessary?
(2) by failure to take objection promptly and specifically upon
that ground. ( Sec. 91)
The insurer cannot be held liable to pay a claim unless he
receives notice of that claim.
An insurance company, by accepting payment of premium with
full knowledge that the premises had been injured or
If notice of loss is not given to the insurer by
destroyed by fire, is estopped from claiming that notice of the
the person insured or by the person entitled to the benefit of
fire was not given forthwith to the insurer by the insured as
the insurance without unnecessary delay, or in a timely
required by the terms of the policy.
manner, the insurer is exonerated or discharged from liability
even though the loss is one the policy was designed to protect
Ma’am: If there is unreasonable delay in the notice or proof, it
against.
can be a ground for the denial of the claim. But if inspite of the
delay, the insurance company still acted on the claim then the
The purpose of a notice of loss is to apprise the insurance
insurance company is deemed to have waived that defect.
company with the occurrence of the loss, so that it may gather
information and make proper investigation while the evidence
What is the effect of failure to secure certificate or
is still fresh, and take such action as may be necessary to
testimony of third person?
protect its interest from fraud or imposition; in the case
of property insurance, to prevent further loss to the property.
If the policy requires, by way of preliminary proof of loss, the
certificate or testimony of a person (like a notary public) other
Ma’am: To give the insurance company the chance to
investigate with the damage. Sometimes, the insurance
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than the insured, such requirement must be complied with by
the insured as part of the contract.
However, the insured is only required to exercise due diligence
to procure it. In the event of the refusal of such person to give
the certificate or testimony, the insured must furnish
reasonable evidence to the insurer that the person's refusal
was not induced by any just grounds of disbelief of said person
in the truth of the facts necessary to be certified or testified
but, because of other grounds.
TITLE 11
DOUBLE INSURANCE
When does double insurance exist?
Sec. 95. 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
There is no double insurance unless the following requisites
exist:
(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.
Ma’am: If one is absent, there is no double insurance. If the
risk insured is different, there is no double insurance. If the
insurable interest is different, there is no double insurance. Of
course if the person insured is not the same, there is no
double insurance. So all these requisites must concur.
Distinguish double insurance from over-insurance
(1) There is over-insurance when the amount of the
insurance is beyond the value of the insured's
insurable interest. In double insurance, there may be
no over-insurance as when the sum total of the
amounts of the policies issued does not exceed the
insurable interest of the insured.
(2) While in double insurance there are always several
insurers, in over-insurance there may be only one
insurer involved.
Ma’am: In over-insurance, you can have one insurance
company. Now, if you have a car insured for P 2M but it is
a 1975 Toyota model surely, that’s over-insurance.
Let’s say if you have a property along the road of Sta.
Ana, it’s a wooden building, it’s in the state of disrepair
and yet because you feel that is a prime property, you
ought to insure it for P5M, that is an over-insurance.
So the prominent distinction between over-insurance and
double insurance is that in the latter, there is more than
one insurance company. You can have two or more
insurance companies but they do not go beyond the limit.
Situation:
You have a piece of real property in Matina and the
property is assessed at par value P5M. You get several
companies. One company insures the property for P1M.
The other company insures it for another P1M. The third
company insures it for another P1M. The fourth and fifth
insurance companies also insure the same for P1M.
Is there a double insurance there?
Yes there is. All requisites are met.
Is there over-insurance?
NONE. There is no over-insurance.
Can there be over- insurance in life insurance?
No.
Can there be double insurance in life insurance?
No.
You can have as many policies as you want provided you are
able to pay the premiums.
Sec. 96. Where the insured is over-insured by double
insurance:
(a) The insured, unless the policy otherwise provides, may
claim payment from the insurers in such order as he may
select, up to the amount for which the insurers are
severally liable under their respective contracts;
(b) Where the policy under which the insured claims is a
valued policy, the insured must give credit as against the
valuation for any sum received by him under any other
policy without regard to the actual value of the subject
matter insured;
(c) Where the policy under which the insured claims is an
unvalued policy he must give credit, as against the full
insurable value, for any sum received by him under any
other policy;
(d) 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;
(e) Each insurer is bound, as between himself and the other
insurers, to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract.
Ma’am: Section 94 deals with over-insurance by double
insurance. Here, there is more than one insurance company.
This section enunciates the principle of contribution which
requires each insurer to contribute ratably to the loss or
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damage considering that the several insurances cover the
same subject matter and interest against the same peril. They
apply only where there is over-insurance by double insurance,
that is, the insurance is contained in several policies the total
amount of which is in excess of the insurable interest of the
insured.
The insured, unless the policy otherwise provides, may
claim payment from the insurers in such order as he
may select, up to the amount for which the insurers are
severally liable under their respective contracts.
A owns a house valued at P180,000.00 and
he insures the same with three insurance companies as
follows:
X Co.- P60,000
Y Co.- 180,000
Z Co.- 240,000
If the house is totally burned, A, unless the policies
otherwise provide, may claim payment from each of them in
such order as he may select, up to the amount for which each
is liable under its contract.
What if A demands indemnity from Y Co., can the latter
recover from X and Z Cos. what it gave to the insured?
Yes. (e) Each insurer is bound, as between himself and the
other insurers, to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract.
Ma’am: Take note that the choice is with the insured. The
insured can choose among his insurers from whom he will
collect subject to the right of the paying insurer to recover
from the other insurers what it pays to the insured. That is
why it is so important to reveal to them if you have other
insurance policies. If you did not reveal that you have taken
out other insurance policies, that is a major breach of a
material warranty.
Transcriber’s note: Please refer to the examples illustrated in
the book esp.for the computation. Ma’am just said that this
section is a matter of computation and it is self-explanatory.
TITLE 12
REINSURANCE
What is reinsurance?
It is a contract whereby one party, the reinsurer, agrees to
indemnify another, the reinsured (original insurer), either in
whole or in part, against loss or liability which the latter may
sustain or incur under a separate and original contract of
insurance with a third party, the original insured.
In this kind of contract, who pays the insurance premiums?
It is the insurance company.
Distinguish reinsurance from double insurance
(1) In double insurance, the insurer remains as the
insurer of the original insured, while in reinsurance,
the insurer becomes the insured, insofar as the
reinsurer is concerned;
(2) In double insurance, the subject of the insurance is
property, while in reinsurance, it is the original
insurer's risk;
(3) Double insurance is an insurance of the same interest
while reinsurance is an insurance of a different
interest;
(4) In double insurance, the insured is the party in
interest in all the contracts, while in reinsurance, the
original insured has no interest in the contract of
reinsurance which is independent of the original
contract of insurance ;and
(5) In double insurance, the insured has to give his
consent, while in reinsurance, the consent of the
original insured (who is hardly even aware of the
reinsurance transaction) is not necessary.
Sec. 98. Where an insurer obtains reinsurance, except under
reinsurance treaties, he must communicate all the
representations of the original insured, and also all the
knowledge and information he possesses, whether previously
or subsequently acquired, which are material to the risk.
Illustartion:
X insurance company issued a fire policy covering a building
owned by Y. Z insurance company accepted reinsurance
coverage under the policy. Thereafter, Y married H, an ex-
convict for arson. All the members of the board of directors of
X were invited as guests at the wedding and knew who H was.
Subsequently, the building was completely destroyed by fire.
May X recover from Z notwithstanding that X did not disclose
H's previous conviction for arson?
No. Generally, when a contract of insurance has been entered
into, the insured cannot be charged with fraudulent
concealment by reason of the fact that he fails to disclose
matters material to the risk arising thereafter. Section 96,
however, covers knowledge or information possessed by the
insurer "whether previously or subsequently acquired, which
are material to the risk."
Thus, a policy may be avoided where the reinsured conceals
the fact that a loss has taken place or that the property is
over-insured where he has knowledge thereof.
Sec. 99. A reinsurance is presumed to be a contract of
indemnity against liability, and not merely against damage.
In reinsurance, the reinsurer agrees to indemnify the insurer,
not against actual payment made but against liabilities
incurred. Therefore, it is by no means necessary that the
insurer shall first have paid a loss accruing, as a condition
precedent to his demanding payment of the reinsurer. In fact,
the insolvency of the insurer, which precludes him from
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fulfilling in full the obligation incurred to the insured under the
original policy, does not in any wise affect the right of the
insurer to demand payment in full under the policy of
reinsurance and this is true even if the original insured should
decide not to enforce his claim against the insurer.
Does the principle of subrogation apply in reinsurance?
Yes. A reinsurer, on payment of a loss, acquires the same
rights by subrogation as are acquired in similar cases where
the original insurer pays a loss.
Sec. 100. The original insured has no interest in a contract of
reinsurance.
What are the rights of original insured in contract of
reinsurance?
(1) The insured, unless the contract so provides, has no
concern with the contract of reinsurance, and the
reinsurer is not liable to the insured either as surety
or otherwise.
(2) There is no privity of contract between the original
reinsured and the reinsurer. A contract of reinsurance
rarely explicitly permits direct action by the original
insured against the reinsurer.
However, the contract of reinsurance may contain a provision
whereby the reinsurer binds himself to pay to the policyholder
any loss for which the insurer may become liable. Therefore,
the reinsurer who has promised to pay the losses accruing
under the original policy will be liable to a suit by the original
insured under the contract of reinsurance. The remedy of the
insured is both against the insurer and the reinsurer.
The original insured may also maintain an action directly
against the reinsurer in those cases in which the circumstances
attending the making of the contract of reinsurance amount to
a novation of the original contract and hence, operate to
discharge that contract and the original insurer from all
obligations thereunder. The original insurer, however, will be
released only when the insured agrees with the insurer and
reinsurer to the novation.
According to Ma’am study the following terms in preparation
for the just in case it will be asked by a tricky examiner:
The amount of loss payable is affected by stipulations in the
policy such as "franchise clause" in a marine cargo policy
under which no loss is payable if it does not reach a certain
amount, otherwise the entire loss is payable; "co-insurance
clause" in fire insurance
see Sec. 172.); "deductible clause" in motor vehicle
insurance against loss or damage which provides for the
deduction of a stipulated amount from the damage payable;
and "contribution clause" in case of double insurance, (see
Sec. 94[1].)
The deductible clause is a standard feature in the
loss/damages cover in motor vehicle insurance and may vary
depending on the make/type and classification of the vehicle.
By making the insured shoulder the amount of the deductible
stipulated in the policy, small "nuisance claims" are eliminated
and this in the long run helps provide for lower insurance
premium. The insurer is liable only in excess of the deductible
or the stated amount to be deducted from the loss.
Furthermore, the insure shoulders a portion of the cost of
brand new parts to replace damaged parts of his depreciated
parts. He is charged with what is called "depreciation" or
"betterment" for the improvement on his vehicle. Insurance is
for indemnity and not for profit.
February 16, 2015
CHAPTER II
CLASSES OF INSURANCE
TITLE I
MARINE INSURANCE
We are now in Marine Insurance. We are now actually under
the classes of insurance. Marine insurance is the first on the
list. As we will discover in the following provisions or in the
discussions that Marine insurance is not necessarily limited to
vessels it may also include other kinds of properties which
properties may be subject of Property insurance.
What is the distinction now between Marine Insurance and
Property Insurance?
If you look at the list under Section 99, Marine insurance
includes loss of or damage to, so there is an enumeration
there:
Sec. 101. Marine Insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects, disbursements, profits,
moneys, securities, choses in action, evidences of
debts, valuable papers, bottomry,
and respondentia interests and all other kinds of
property and interests therein, in respect to,
appertaining to or in connection with any and all risks
or perils of navigation, transit or transportation, or
while being assembled, packed, crated, baled,
compressed or similarly prepared for shipment or
while awaiting shipment, or during any delays,
storage, transhipment, or reshipment incident
thereto, including war risks, marine builder's risks,
and all personal property floater risks;
(b) Person or property in connection with or
appertaining to a marine, inland marine, transit or
transportation insurance, including liability for loss of
or damage arising out of or in connection with the
construction, repair, operation, maintenance or use of
the subject matter of such insurance (but not
including life insurance or surety bonds nor insurance
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against loss by reason of bodily injury to any person
arising out of ownership, maintenance, or use of
automobiles);
(c) Precious stones, jewels, jewelry, precious metals,
whether in course of transportation or otherwise;
(d) Bridges, tunnels and other instrumentalities of
transportation and communication (excluding
buildings, their furniture and furnishings, fixed
contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to navigation
and transportation, including dry docks and marine
railways, dams and appurtenant facilities for the
control of waterways.
(2) "Marine protection and indemnity insurance," meaning
insurance against, or against legal liability of the insured for
loss, damage, or expense incident to ownership, operation,
chartering, maintenance, use, repair, or construction of any
vessel, craft or instrumentality in use of ocean or inland
waterways, including liability of the insured for personal injury,
illness or death or for loss of or damage to the property of
another person.
What do you recall about choses in action? What is that?
You find that in Civil Code.
From the net: Choses in Action
The right to bring a lawsuit to recover chattels, money, or a de
bt.
A chose in action is a comprehensive term used to describe a
property right or the right to possession of something that can
only be obtained or enforced through legal action. It is used in
contradistinction to chose in possession, which refers to cases
where title to money or Property is in one person but
possession is held by another.
Examples of a chose in action are the right of an heir to
interest in the estate of his or her decedent; the right to sue
for damages for an injury; and the right of an employee to
unpaid wages.
So that can be also part of a marine insurance policy.
Bottomry, we will find out later on what is bottomry,
Respondentia, valuable papers.
You will see that the list here is very encompassing.
…all other kinds of property and interests therein, in
respect to, appertaining to or in connection with any
and all risks or perils of navigation, transit or
transportation.
All of these must pertain to navigation. Transit means moving
one object to another. There is a movement of goods or
transportation. Transportation, another term for the shipment
of goods or delivery of goods.
…or while being assembled, packed, crated, baled,
compressed or similarly prepared for shipment or
while awaiting shipment, or during any delays,
storage, transhipment, or reshipment incident
thereto, including war risks, marine builder's risks,
and all personal property floater risks;
Shipment, you are preparing these things for shipment. You
are packing them and while these objects are being prepared
for shipment they can be covered by Marine Insurance.
Paragraph b;
(b) Person or property in connection with or
appertaining to a marine, inland marine, transit or
transportation insurance, including liability for loss
of or damage arising out of or in connection with
the construction, repair, operation, maintenance or
use of the subject matter of such insurance (but not
including life insurance or surety bonds nor
insurance against loss by reason of bodily injury to
any person arising out of ownership, maintenance,
or use of automobiles);
Let’s analyze paragraph b. It can also cover person, loss or
damage to person but not life insurance. Life insurance is
totally out of the coverage of Marine insurance.
…in connection with inland marine, transit or
transportation insurance,
In other words you are envisioning a situation where the
object of the insurance is not necessarily on sea. It can be on
land and yet it can be covered by a marine insurance policy.
Why will you get a marine insurance policy and you can get
let’s say property insurance over a shipment of rice. Why? You
know property insurance is quite limited, marami yang
exclusions. Minsan you get property insurance to ensure your
goods only against fire and then there are several exceptions
under the policy. In marine insurance in most cases it is an all-
risk policy. That means that whatever is the cause for the loss
or damage, unless otherwise provided for in the policy itself is
presumed to be an all risk policy. That is a very significant
departure from ordinary property insurance. Again you are
looking at goods, objects, personal properties, infrastructure.
All being prepared for transportation, all necessary to
transportation, all related to transportation. Subparagraph B is
what is referred to as inland marine insurance.
(c) Precious stones, jewels, jewelry, precious
metals, whether in course of transportation or
otherwise;
Otherwise, meaning if they are stored in a warehouse. It’s not
being transported it can still be covered by Marine insurance.
Pearls they come under par C because they are covered by the
word jewelry. If it is in storage or safety deposit box of the
bank, in the vault, pwede pa rin yan covered by Marine
Insurance.
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“…whether in course of transportation or otherwise;”
Nakastorage siya sa safety deposit box ng bank for one year
but the goods every now and then are being transported, that
can be covered by Marine Insurance. Why not Property
Insurance? As I’ve said the determining factor at the end of
the day is whether you can afford the premium for a marine
insurance policy because most of the time it is an all risk
policy. It is your choice if you can afford just a property
insurance, then you get a property insurance for let’s say fire,
Theft or robbery.
But if you want a wider coverage you have the option of taking
out marine insurance. Especially if you are an alahera. Once
you bought it you have to get insurance to cover the goods
that you bought. Never be an alahera without a proper
insurance. I ask these car garages, these businesses ought to
have insurance policies. If something happens, there’s fire,
theft, the customer can recover from them. These business
establishments should secure an Insurance policy to cover
their business. In the event of loss or damage is afflicted on
the property of the clients, the clients have easy access to
compensation. If you are an owner of business establishment
you must also have in mind that insurance is really part and
parcel of your business cause. Kahit na bigasan, kunan mo ng
insurance policy yan so you will not be bankrupted by
calamities.
(d) Bridges, tunnels and other instrumentalities of
transportation and communication (excluding
buildings, their furniture and furnishings, fixed
contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to
navigation and transportation, including dry docks
and marine railways, dams and appurtenant
facilities for the control of waterways.
Excluding, that is the operative word there, there is a limiting
word.
…(excluding buildings, their furniture and
furnishings, fixed contents and supplies held in
storage).
What kind of insurance will cover these exclusions? You take
out a regular property insurance. They are not insurable
under marine insurance policy it’s clearly stated there, but the
owner has the option of getting a simple property insurance
to cover furnishings, fixed contents and supplies held in
storage.
…piers, wharves, docks and slips, and other aids to
navigation and transportation,
(Maa’m explains the distinction between piers and wharves)
Aids to navigation - lighthouse. Can they be insured? Do you
think lighthouses are rendered irrelevant nowadays in view of
the technology that our ships are supposed to have? Well if
you are talking about relevance, there are substitutes for
lighthouses now, the instrumentation, most instruments of
big ships are powered by computers they can even see the
topography of the port that they approaching. There’s really
no need for lighthouses.
What else would come to your mind as aid to navigation?
Anyway this just gives you a very encompassing picture of
what can be covered by marine insurance policy.
…including dry docks and marine railways, dams
and appurtenant facilities for the control of
waterways.
Dams are covered by marine insurance because if it is part of a
waterway it’s part of the transportation of goods.
Ok we now go to
(2) "Marine protection and indemnity
insurance," meaning insurance against, or against
legal liability of the insured for loss, damage, or
expense incident to ownership, operation,
chartering, maintenance, use, repair, or construction
of any vessel, craft or instrumentality in use of
ocean or inland waterways, including liability of the
insured for personal injury, illness or death or for
loss of or damage to the property of another
person.
It also includes legal liability. Another term for legal liability
is casualty insurance. When you are made liable, you don’t
want to get from your own funds so you get an insurance
policy just in case you are made liable under a judgment. For
example, in tort law, employers have vicarious liability to their
employees. If you are running a warehouse for example and
there was a lot of moving of goods inside the warehouse and
one employee is negligent. The driver of the forklift
accidentally hurt a passerby. Who was at fault?? It’s the
employee but as far as the third person is concerned, he will
sue not the employee but the employer. Because under the
tort law the employer is liable for the actions of the employee.
So if you are the employer you don’t have any control of the
actions of your employees 24/7, you better get - and your
business may prove hazardous at some point in time. There
are times when liability may be committed by your employees
so you take out casualty insurance.
So marine protection and indemnity insurance this is an
insurance against or against legal liability of the insured for
loss, damage, or expense incident to ownership, operation,
chartering, maintenance, use, repair, or construction of any
vessel, craft or instrumentality in use of ocean or inland
waterways. Ocean or inland waterways So yung mga rivers.
…including liability of the insured for personal injury,
illness or death or for loss of or damage to the
property of another person
So that is the whole of the coverage of marine insurance. It’s
not limited to ocean going vessels, not limited to freight of
ocean going vessels. It’s more than that. As long as it is ___ to
or related to transportation of goods. Parang naging
transportation insurance ang marine insurance except that it
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does not cover motor vehicles, there is a separate law for
motor vehicles.
Transportation Insurance defined
Transportation insurance is concerned with the perils
of property in (or incidental to) transit as opposed to
property perils at a generally fixed location.
Going back to your jewelry in storage in a safety deposit box,
that will still be considered in transit if the situation will arise
where ___ and moved out to another location. You are in the
business of buying and selling of jewelry, the moment you take
out of the supplier’s premises, make sure that you are covered
by insurance. If you get robbed along the way, if there is any
loss along the way you will be covered by marine insurance.
Going back to par A - storage, transhipment, or reshipment
incident.
Transhipment, or reshipment, from point to point. for example
a 100 sacks of rice from Central Luzon is transported to Cebu
for final destination to Iloilo. The goods are actually
transshiped from Pangasinan, the goods traveled by land to
the port of Batangas and then from there it is loaded onto a
vessel shipped to Cebu. From Cebu is again loaded to another
vessel for final shipment to Iloilo. That whole process can be
covered by Marine insurance.
Major Division of Marine Insurance
1. Ocean Marine Insurance
An insurance against 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.
When you talk about marine insurance, it is there in
the outset that you are talking of vessels. Vessels that
will be plying the oceans and laden with cargo for
profits or whatever other insurable interest they are
making.
2. Inland Marine insurance
Covers primarily the land or over the land
transportation perils of property shipped by railroads,
motor trucks, airplanes, and other means of
transportation. It also covers risks of lake, river, or
other inland waterway transportation and other
waterborne perils outside of those risks that fall
definitely within the ocean marine category.
This is what we will be talking about, it is transshipped over
land. This inland marine insurance, the concept has been
brought about by the way goods are being shipped from point
to point as businesses expanded to the next country, province,
state and eventually abroad. The means of transporting goods
also varies, so sometimes from the depot for example it’s
transported by trucks.
If you come from a manufacturing outfit you have container
vans. When you move your goods to the container vans these
container vans have certain distances and then when they get
to their transshipment point they will unload. From trucks to
vessels, and then from trucks again, then maybe a smaller
ship, the entire process will be the delivery process. This
comes under what is considered as inland marine insurance. If
you are conscientious enterprise owner then when you get an
insurance for business like that, that will be considered under
inland.
It also covers risks of lake, river, or other inland waterway
transportation and other waterborne perils outside of those
risks that fall definitely within the ocean marine category. So if
they are not allowed under the ocean marine category then
they will be properly covered under inland marine insurance,
Why did we discuss Section 99 extensively? Because this gives
you a picture. When you say marine insurance the first thing
that come to your mind barko yan. NO. It can even cover
bridges, jewelries, it is really wide classification of insurance.
Marine insurance can be divided into two categories: Ocean
Marine Insurance, Inland Marine Insurance.
February 23, 2015
Before we proceed, class, I just have to mention a few things,
I want to point out the new provisions in the Insurance Law…
SEC. 78. Employees of the Republic of the Philippines,
including its political subdivisions and instrumentalities, and
government-owned or -controlled corporations, may pay their
insurance premiums and loan obligations through salary
deduction: Provided, That the treasurer, cashier, paymaster or
official of the entity employing the government employee is
authorized, notwithstanding the provisions of any existing law,
rules and regulations to the contrary, to make deductions from
the salary, wage or income of the latter pursuant to the
agreement between the insurer and the government employee
and to remit such deductions to the insurer concerned, and
collect such reasonable fee for its services.
This provision formalizes all the important agreements that
GOCCs, being financially independent or GOCCs being
financially viable with insurance providers to cover medical
coverage to their employees. So, this provision formalizes this
practice and provides for the legal basis for the act of these
government offices and GOCCs to enter into insurance
contracts with insurance providers and giving authority to their
paymaster, cashier or treasurer to deduct insurance premium
from the salaries and wages of these employees.
There is a new Section 8. A second paragraph is provided
under this section:
SEC. 82. A person insured is entitled to a return of the
premium when the contract is voidable, and subsequently
annulled under the provisions of the Civil Code; or on account
of the fraud or misrepresentation of the insurer, or of his
agent, or on account of facts, or the existence of which the
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insured was ignorant of without his fault; or when by any The phrase “perils of the sea” or “perils of navigation” includes
default of the insured other than actual fraud, the insurer only those casualties due to the unusual violence or
never incurred any liability under the policy. extraordinary action of wind and wave, or to other
extraordinary causes connected with navigation.
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 Perils of the sea vs. perils of the ship
fraud.
Perils of the sea Perils of the ship
It simply translates the several Supreme Court decisions that Include only such losses as Include losses which, in the
where there is fraud employed, you cannot return the premium are of extraordinary nature or ordinary course of events,
in case the policy is annulled. arise from overwhelming results:
power which cannot be a) From the natural and
And then, under Title 11 Double Insurance, look for that guarded against by the inevitable action of the
provision that deals with what happens when there is over ordinary exertion of human sea;
insurance by double insurance. That is now Section 96, and skill or prudence, as b) From the ordinary wear
there is now paragraph (b) and (c). It simply changes the distinguished from the and tear of the ship; or
wordings of the law. Very important, the opening of the ordinary wear and tear of the c) From the negligent
section now reads… voyage and from injuries failure of the ship’s
suffered by the vessel in owner to provide the
SEC. 96. Where the insured in a policy other than life is over consequence of her not being vessel with proper
insured by double insurance: seaworthy. equipment to convey the
cargo under ordinary
(a) The insured, unless the policy otherwise provides, may conditions.
claim payment from the insurers in such order as he may
select, up to the amount for which the insurers are severally You should be able to distinguish perils of the sea from perils
liable under their respective contracts; of the ship. In simpler terms, perils of the sea pertain to the
violent, not just the action of the wind and the waves but
(b) Where the policy under which the insured claims is a violent and unusual. Why? Marine insurance policy covers only
valued policy, any sum received by him under any other policy perils of the sea. Hence, if it is perils of the ship, the insurance
shall be deducted from the value of the policy without regard company will not be liable. Marine insurance policies are all-
to the actual value of the subject matter insured; risk policies but they may provide certain exceptions.
Remember, class, that even if you have an all-risk policy,
(c) Where the policy under which the insured claims is an marine insurance covers only perils of the sea. It is only in
unvalued policy, any sum received by him under any policy marine insurance policy that the discussion on perils of the sea
shall be deducted against the full insurable value, for any sum and perils of the ship is very important.
received by him under any policy;
If the sail is lost because of the wind, can that be considered
(d) Where the insured receives any sum in excess of the perils of the sea? Is that covered by the marine insurance
valuation in the case of valued policies, or of the insurable policy? If the wind is strong BUT it is not a violent wind, it will
value in the case of unvalued policies, he must hold such sum not be covered by the marine insurance policy because it is
in trust for the insurers, according to their right of contribution something expected. It is not unusual for a ship to lose its sail
among themselves; by reason of the wind. But, if it is the mast that is completely
broken off by a violent action of the sea, then that means that
(e) Each insurer is bound, as between himself and the other
the damage would fall under the perils of the sea.
insurers, to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract.
Right away, when an insurance company is presented with a
claim for insurance under a marine insurance policy, all that
This clarifies now the position that there is no over insurance the insured will need to prove is proof of loss or damage.
in a life insurance policy. That’s it! The burden is right away shifted to the insurance
company to prove that the loss or the damage was caused by
Let’s continue with marine insurance…
an exception to the all-risk marine insurance policy. The
insurance company will try its very best to get out of the
We have discussed open marine insurance policy. Remember
insurance policy. How? By proving that the proximate cause of
that in marine insurance, we are not only dealing with the
the loss or damage is excepted from the coverage.
vessel itself, there are many insurable interests in marine
insurance policy depending on the position where you are in in
The book cited the case of Go Tiaco vs. Union Ins. Society
relation to the vessel. Your insurable interest may be that of
of Canton, it’s an old case. A similar decision was reiterated in
the owner, charterer, vendee or consignee, vendor of goods
the case of Cathay Insurance Co. vs. CA. What is the gist of
carried by the vessel itself.
the decision in these two cases? Loss was caused to the cargo
Perils of the sea of rice by the entrance of sea water through the ship’s
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defective pipe, of which the shipowner was apprised but failed
properly to repair. Damage to the structure of the ship that
pertains to the seaworthiness of the vessel would fall under
perils of the ship.
“All risks” marine insurance policy
It creates a special type of insurance which extends coverage
to risks not usually contemplated and avoids putting upon the
insured the burden of establishing that the loss was due to
peril falling within the policy’s coverage.
It saves the insured the burden of proving that the loss or
damage was caused by a peril that’s covered by the policy.
Development of inland marine insurance
As you can see, the development of the inland marine
insurance can be seen as an offshoot of commercial
enterprises.
Sub-Title 1-B
INSURABLE INTEREST
What is the insurable interest of the owner of the ship?
SEC. 102. 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: Provided, That
in this case the insurer shall be liable for only that part of the
loss which the insured cannot recover from the charterer.
As long as you are the legal owner of the ship and you take
out an insurance policy, you have a right even if it has been
chartered. You know, this thing about chartering, I guess, is
applicable to airplanes as well. (cheka about Cebu Pacific being
a mere charter party)
The charterer of a ship has an insurable interest in it to the
extent that he is liable to be damnified by its loss. The charter
party will now have an interest over the vessel itself and one
of the obligations of a charter party is to pay the legal owner
damages in case of loss provided that in this case the insurer
shall be liable for only that part of the loss which the insured
cannot recover from the charterer.
Insurable interest and sale contracts
1. In case of a vessel – the insurable interest is commonly
possessed by the owner, and also if money has been
borrowed, by one who holds mortgage on the vessel. If
the vessel is mortgaged, or hypothecated by bottomry,
the one who owns the mortgage of the vessel has an
insurable interest in the vessel itself. One who leases the
vessel may agree to assume responsibility for its
insurance, in which case he has an insurable interest.
2. In the case of cargo – the insurable interest is in the
shipper or the consignee depending upon the terms of
sale. The following are some of the common terms of
sale:
a. F.O.B. (free on board):
i. FOB Factory – buyer assumes
responsibility when the goods leave the
factory; or
ii. FOB point of destination – buyer does
not assume responsibility until the
goods are received from the carrier.
b. C.I.F. (cost, insurance, and freight) – the seller
assumes complete responsibility for securing all
necessary insurance; and
c. C & F (cost and freight) – the buyer procures his
own insurance.
3. In the case of a vendee/consignee of goods in transit –
whether or not the contract was perfected is an essential
consideration in determining who has insurable interest at
that point of transit.
a. No perfected contract of sale – the owner of the
goods remains to have insurable interest even if
there is a consignee waiting there at the end of a
journey. The possible consignee, at the other
end, doesn’t have insurable interest.
b. Perfected contract of sale – consignee may
already have an equitable title over the goods in
transit. Hence, the consignee may claim insurable
interest in the goods.
**BREAK**
SEC. 103. The insurable interest of the owner of the ship
hypothecated by bottomry is only the excess of its value over
the amount secured by bottomry.
SEC. 104. Freightage, in the sense of a policy of marine
insurance, 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.
What is a loan on bottomry?
It is one which is payable only if the vessel, given as a security
for the loan, completes in safety the contemplated voyage.
What is a respondentia loan?
Similar to loan on bottomry only that it is secured by the cargo
or some part thereof.
What is the meaning of freightage?
It is the benefit which is to accrue to the owner of the vessel
from its use in the voyage contemplated or the benefit derived
from the employment of the ship.
It may be derived from:
1. The chartering of the ship;
2. Its employment for the carriage of his own goods; and
3. Its employment for the carriage of the goods of others.
It actually refers to income derived from the chartering of the
ship. It is another word for income, rental income.
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What is the insurable interest of the owner/lender of a
vessel hypothecated by bottomry?
1. Owner – has an insurable interest only in the excess of its
value over the amount of the bottomry loan;
2. Lender – has an insurable interest to the extent of the
loan.
What is the meaning of expected freightage?
SEC. 105. The owner of a ship has an insurable interest in
expected freightage which according to the ordinary and
probable course of things he would have earned but for the
intervention of a peril insured against or other peril incident to
the voyage.
This is expected income. We’re not talking only of the physical
structure of the ship itself but also of the expected freightage
that he will get out of leasing or chartering the ship.
SEC. 106. The interest mentioned in the last section exists, in
case of a charter party, when the ship has broken ground on
the chartered voyage. If a price is to be paid for the carriage
of goods it exists when they are actually on board, or there is
some contract for putting them on board, and both ship and
goods are ready for the specified voyage.
The chartered party also has insurable interest in expected
freightage.
What is the insurable interest in expected profits?
SEC. 107. One who has an interest in the thing from which
profits are expected to proceed has an insurable interest in the
profits.
What is the extent of the insurable interest of the
charterer of a ship?
SEC. 108. The charterer of a ship has an insurable interest in
it, to the extent that he is liable to be damnified by its loss
So the ship may value P20M but if the chartered party insured
it only for P2M and then the vessel suffers loss, the chartered
party’s interest is only to the extent that he will be damnified
by the loss.
What are the types of charter parties?
1. Bareboat or demise charter
• The shipowner turns over full possession and control
of his vessel to the charterer, who then undertakes to
provide a crew and victuals and supplies and fuel for
her during the term of the charter.
• The charterer becomes, in effect, the owner of the
voyage or service stipulated, subject to liability for
damages caused by negligence.
• Bareboat meaning walang crew, walang victuals, boat
lang. It is the chartered party who will man the ship
for voyage.
2. Contract of affreightment
• The owner of the vessel leases part or all of its space
to haul goods for others. It is a contract of special
service to be rendered by the owner of the vessel
who retains the possession, command and navigation
of the ship, the charterer or freighter merely having
use of the space in the vessel in return for the
payment of the charter hire or freight.
• It is only the space that is being leased. The charterer
or freighter merely having use of the space in the
vessel in return for the payment of the charter hire or
freight. The contract may either be (a) voyage charter
or (b) time charter.
• The charterer is free from liability to third person in
respect to the ship.
**maam talking about container ships and the US
warship/carrier for 20 minutes J
March 2, 2015
Let’s go back a little. Section 108, the types of charter parties.
Sec. 108. The charterer of a ship has an insurable interest in
it, to the extent that he is liable to be damnified by its loss.
A charter party is a contract by which an entire ship or some
principal part thereof is lent by the owner to another person
for a specified time or use.
By the way, I already verified what’s the difference between a
pier and a wharf. A wharf, it’s a structure that may include
piers. A wharf is made up of structure that sits parallel to the
coastline. It’s made up of buildings, other structures that will
service virtually vessels, ships. As long as it runs parallel to the
coastline it’s called a wharf. A wharf may also include
structures that protrude into the sea. These structures are
called piers, they protrude towards the sea and they are also
built on top of columns. That’s the main distinction between a
wharf and a pier. When you talk about pier, it’s just a simple
structure. The wharf itself is a complete structure and it is
supported by columns that go all the way to the seabed.
Sometimes by wear and tear if the port authority is not careful
in the maintenance of the wharf by sheer action of the sea
they can actually eat up the columns that support the wharf.
We discussed about the bareboat or demise charter. Demise is
not just a synonym for death or the passing of a person. Under
Maritime insurance law demise is simply another word for
lease.
Then you have contract of affreightment where what is being
leased is just a space. In a Bareboat or demise charter you are
leasing an unfurnished vessel. Under the contract of
affreightment you are leasing space, all of it or just a part of it.
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You also have a voyage charter or trip charter which is a
contract for the carriage of goods from one port to another.
And then a time charter.
What do you mean by owner pro hac vice? - “By this instance”.
In other words when you are the charter party, the charterer
in the demise or bareboat charter the charterer is treated as
the owner pro hac vice of the vessel. The charterer assuming
in large measure customary rights and liabilities of the
shipowner.
I want you to read in relation to this topic San Miguel Corp
vs. Heirs of S. Inguito 384 scra 87 and Caltex vs.
Sulpicio Lines 315 scra 709.
Q: So in such case if you have a demise or bareboat charter,
when do we usually have this? Could you imagine a situation
when this kind of contract may exist?
A: Usually bareboat charter is resorted to by companies that
need to transport their goods or merchandise in bulk and when
they really need the space of the boat. NFA for example
sometimes resort to bareboat charter party to ship the rice.
What else? Motor vehicles. The motorcycle industry is really a
big industry in the Philippines. How do they ship from the
manufacturing plant all the way to their distributors
nationwide? So they resort to bareboat or demise charter in
lease of space.
Let’s go to concealment.
Sub-Title 1-C
CONCEALMENT
What is concealment in Marine issuance?
Concealment in marine insurance 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.
Sec. 109. In marine insurance each party is bound to
communicate, in addition to what is required by section
twenty-eight, all the information which he possesses, material
to the risk, except such as is mentioned in Section thirty, and
to state the exact and whole truth in relation to all matters that
he represents, or upon inquiry discloses or assumes to
disclose.
What is the difference between concealment in marine
insurance and the general provision on concealment?
So the definition is very much similar to the definition or to the
standard under the general provision of concealment.
…in addition to what is required by section twenty-
eight, all the information which he possesses,
material to the risk, except such as is mentioned in
Section thirty, and to state the exact and whole truth
in relation to all matters that he represents, or upon
inquiry discloses or assumes to disclose.
So Concealment here applies to both the
underwriter/insurance company and to the insured. The matter
of concealment in misrepresentation in marine insurance is
much stricter than under the general insurance law. Why?
Because of the risk involved. The subject of insurance is out
there in the sea and if anything happens, if the object of
insurance whether it be the vessel or the cargo once they are
destroyed, damaged, exposed to any of the peril insured
against, the loss or the damage most of the time involves huge
amounts. So the law looks up marine insurance with higher
standards, stricter standards than the regular (perhaps)
property insurance.
The rules as to concealment or misrepresentation are more
strict in cases of marine insurance than fire insurance. This is
because of the nature, the different character of the insurance
involved and the surrounding circumstances.
Sec. 110. In marine insurance, information of the belief or
expectation of a third person, in reference to a material fact, is
material.
The information, opinion or belief of the third party unlike in
the general insurance law is a material element in marine
insurance. In section 35, it is not material at all it can be
disregarded but in marine insurance the opinion, expectations
of third persons are material to the insurance contract of
marine insurance.
Section 111, prior loss, just read that
Sec. 111. A person insured by a contract of marine insurance
is presumed to have knowledge, at the time of insuring, of a
prior loss, if the information might possibly have reached him
in the usual mode of transmission and at the usual rate of
communication.
Sec. 112. A concealment in a marine insurance, in respect to
any of the following matters, does not vitiate the entire
contract, but merely exonerates the insurer from a loss
resulting from the risk concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to capture and
detention;
(c) The liability to seizure from breach of foreign laws
of trade;
(d) The want of necessary documents;
(e) The use of false and simulated papers.
Q: What are the circumstances under which the concealment
does not vitiate the entire contract?
A: Section 112.
Q: At which point is the insured exonerated from the loss?
A: From the time that the concealed fact is revealed.
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If any of these from A to D is concealed, it does not
automatically vitiate the contract but merely exonerates the
insurer from the loss resulting from the risk concealed and the
exoneration may arise only from the time the concealed fact is
discovered.
What are the important things to remember under
concealment?
• The definition of concealment under marine insurance
• what is not considered concealment in marine
insurance.
In Section 35, if there is concealment of information, belief or
expectation of a third party – referring now to marine experts
in reference to a material fact, that will be considered as
material concealment. As long as the Opinion rendered, as
long as the beliefs that is expressed by these experts are
opinions or beliefs related to a material fact. If you suppressed
that, that would be concealment. If it is an opinion of a
nonmaterial matter then it does not fall under this provision.
Opinions, beliefs, expectancy third persons must be divulged to
the insurance company provided that they are related to a
material fact.
Sub-Title 1-D
REPRESENTATION
What is representation under Marine Insurance?
The rules governing representations with respect to
insurance policies have been held to apply to marine
insurance policies.
Is there any distinction or difference between how
representation in general insurance law treated from marine
insurance?
Pretty much the same definition as representation is defined
under the general provision. The only big distinction there is,
in Marine insurance law intent plays a big role in avoiding the
policy. If it is intentionally false in any material respect the
insurer may rescind the entire contract. What happens if it is
not intentional? If the misrepresentation is not intentional or
fraudulent but the fact represented is material to the risk the
insurer may also rescind the contract from the time the
representation become false. That’s the distinction. In marine
insurance if the misrepresentation may not be intentional but if
the fact misrepresented is material to the risk the insurer still
has the option to rescind the contract from the time the
representation becomes false.
Sec. 113. If a representation by a person insured by a
contract of marine insurance, is intentionally false in any
material respect, or in respect of any fact on which the
character and nature of the risk depends, the insurer may
rescind the entire contract.
Sec. 114. The eventual falsity of a representation as to
expectation does not, in the absence of fraud, avoid a contract
of marine insurance.
Sub-Title 1-E
IMPLIED WARRANTIES
Q: What are the implied warranties in the marine insurance?
A: Section 115, implied warranty of seaworthiness
Sec. 115. In every marine insurance upon a ship or freight, or
freightage, or upon any thing which is the subject of marine
insurance, a warranty is implied that the ship is seaworthy.
When is the ship considered seaworthy? Section 116
Sec. 116. 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.
Q: As to the nature to the voyage what seaworthiness?
A: What is reasonable fitness to encounter the perils expected
to arise in the course of the voyage vary, naturally, with the
character of the particular voyage.
Q: As to nature of service what is the seaworthiness?
A: The seaworthiness of a vessel is also to be determined with
regard to the nature of the cargo which she undertakes to
transport, the requirement being that she shall be reasonably
capable of safely carrying the cargo to its port of destination.
Q: What about the nature of the ship?
A: The vessel must be in a fit state as to repair, equipment,
crew and in all other respects to perform the voyage insured
and to encounter the ordinary perils of navigation. She must
also be in a suitable condition to carry the cargo put on board
or intended to be put on board.
I want you to memorize Section 116. Reasonably fit, it does
not require that the ship must be in a perfect condition. It does
not require a brand new anchor; it does not require a rust-free
boat or deck. It merely requires reasonable fitness to perform
the service and to encounter the ordinary perils of the voyage.
What are the ordinary perils of the voyage? Storms will have to
be considered an ordinary peril of the voyage, unless it is
maybe a category 6 or 7 then that would be unusual. But if it
just a strong winds or waves - unless probably if it’s a tsunami,
that is an unusual action of the sea.
Contemplated by the parties to the policy, that’s why you have
to look at the nature of the voyage. You have to look at the
nature of the service and the nature of the ship because they
all have different requirements. They will all be under different
circumstances if you are talking about a regular passenger
ship, or a container ship. So if a __ goods for example, is the
vessel fit to carry the cargo that is shipped on that vessel? For
example you are shipping barrels of oil and then you decide to
get a rickety wooden ship. Nothing in that ship is fire retardant
and an accident happens. The ship was clearly unseaworthy
for that particular cargo, for that particular voyage. Failure of
common carrier to maintain in seaworthy the vessel involved in
the contract of carriage is a clear breach of its duty. There are
certain provisions in the civil code that will be considered hand
in hand with the standards required under the insurance law.
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Take note of the case of Caltex vs. Sulpicio Lines.
Because of the implied warranty of seaworthiness,
shippers of goods are not expected when transacting
with common carriers, to inquire into the vessel’s
seaworthiness, genuineness of its licenses and
compliance with all maritime laws.
As far as the shipper is concerned, if they decided to ship their
goods on your vessel, the fact that you are in the business of
shipping is already good enough for them to assume that your
vessel is seaworthy. They don’t have to go to PH Port
Authority, maritime authority to check if your vessel underwent
annual repair, if your whole crew is properly trained or licensed
to undertake the duties. The fact that they are in business it is
presumed that the ship is seaworthy. There is no need to
inquire further or make an effort to inquire seaworthiness of
the vessel. So the duty rests upon the common carrier to make
sure that the vessel is seaworthy. If anything happens to the
vessel the presumption is the owners are negligent. Negligence
is presumed where the vessel for example sinks when there is
no reason for the vessel to sink, there is no storm there is no
unusual action of the elements in the area and all of a sudden
the vessel sank. The presumption is, you did not exercise due
diligence in the maintenance of your vessel.
If you are a carrier, what is the standard of care that the
common carrier is expected to exercise? Extraordinary
diligence. The degree of care that is demanded from the
common carrier is extraordinary diligence. If it is extraordinary
diligence if an accident happens the presumption right away is
that that carrier did not exercise the extraordinary diligence
required. As a general rule common carriers are presumed to
have been at fault or to have acted negligently for the loss,
destruction or deterioration of goods unless they prove that
they observe diligence.
Criterion of Seaworthiness
A perfect vessel or one impervious to the assaults of the
elements is not required; nor is the best and most skillful form
of construction required, but only such as is sufficient for the
kind of vessels insured with reference to their physical and
mechanical condition, the extent of its fuel and provisions
supply, the quality of its officers and crew, and its adaptability
for the service in which they are employed. (San Miguel Corp
vs. Heirs of S Inguito)
Sufficient - that is the standard there. If you look at this
decision of the court - the nature of the service, nature of the
voyage as well as the nature of the ship all come into play.
What is notable here is that it is not required that the ship be
in perfect condition but all the three - what is it for, what is it
being used for. The fuel and provisions are they apt to the
length of time that the journey will take for the vessel. These
are the things will come into play in determining whether the
ship is seaworthy or not, the kind of cargo that’s loaded on
your ship.
Sec. 117. An implied warranty of seaworthiness is complied
with if the ship be seaworthy at the time of the
of commencement of the risk, except in the following cases:
(a) When the insurance is made for a specified length
of time, the implied warranty is not complied with
unless the ship be seaworthy at the commencement
of every voyage it undertakes during that time;
(b) When the insurance is upon the cargo which, by
the terms of the policy, description of the voyage, or
established custom of the trade, is to
be transhipped at an intermediate port, the implied
warranty is not complied with unless each vessel
upon which the cargo is shipped, or transhipped, be
seaworthy at the commencement of each particular
voyage.
When is seaworthiness complied? Does it have to be complied
all the way to the end of the journey?
When it is transshipped it must be - when you say transship,
Transship being transferred from one port to another. If the
vessel had to make several stops because it’s a cargo policy
then at the commencement of each voyage the vessel must be
seaworthy. So it’s probably from A to B and then you start
your journey from B to C, seaworthiness must commence
when the ship leaves port B. But it can suffer defects during
the entire trip, that’s ok, it does not negate the seaworthiness
of the vessel. But upon the arrival at the next port the damage
must be repaired, because if there is undue delay that would
be taken against the ship owner when the insurance is made:
(a) When the insurance is made for a specified length of
time, the implied warranty is not complied with unless
the ship be seaworthy at the commencement of every
voyage it undertakes
So that’s the time policy.
For cargo policy that is paragraph b.
(b) When the insurance is upon the cargo which, by the
terms of the policy, description of the voyage, or
established custom of the trade, is to be transhipped at an
intermediate port, the implied warranty is not complied
with unless each vessel upon which the cargo is shipped,
or transhipped, be seaworthy at the commencement of
each particular voyage.
The issuance of a certificate
Take note of this, Deltan Transport Lines vs. CA. I actually
asked this in the exam last year.
The issuance of certificate neither negates the
presumption of unseaworthiness triggered by
unexplained sinking or establishes seaworthiness.
Here, there was a defense that was raised by the ship-owner.
He said, “we have a certificate issued by the maritime
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authority that the vessel was seaworthy.” No amount of
certification from anybody can prove otherwise. What is
required under the law is that seaworthiness must refer to the
actual condition of the vessel at the commencement of the
voyage. Actual condition does not mean that if you present a
certificate let’s say from Marina that certified that your ship is
seaworthy even if they inspected your ship and you will
present that to counter the accusation that your ship was not
seaworthy, the court will not take that into consideration
because what the court will look at will be the actual condition
of the ship at the time of commencement of the voyage.
Section 118, the scope of the seaworthiness of the vessel
Sec. 118. 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.
Q: Can you explain what the scope of the seaworthiness of the
vessel is?
A: Seaworthiness requires that the vessel must have
equipment and appliances appropriate to the voyage in which
it is engaged and the cargo it carries; it must have sufficient
number of competent officers and men; and if the insurance is
on the cargo, the same must be properly loaded, stowed,
dunnaged and secured so as not to imperil the navigation of
the vessel or to cause injury to the vessel or cargo.
It’s very clear what is the scope of the seaworthiness of the
vessels, we have repeated that. It only does not extend 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.
So if it is a 4-day voyage you must be properly laden for a 4-
day voyage. The shipping industry because of the technology,
advancements of maritime industry has really gone a long way.
(nagchika si Maam sa history of the maritime industry in
the1600s, whale hunting J)
All these equipments you have to have it in the ship itself, you
have the proper stores and implements. There is an industry
that caters to the needs of the ships. If you get a contract to
replenish, like water, that’s a big contract. If your contract is
just to supply fresh meat, that’s your business then that will
really keep you afloat. There are ships whose voyages are very
long sometimes they change crew in the middle of the voyage.
They replenish and they change crew.
Sec. 119. Where different portions of the voyage
contemplated by a policy differ in respect to the things
requisite to make the ship seaworthy therefor, a warranty of
seaworthiness is complied with if, at the commencement of
each portion, the ship is seaworthy with reference to that
portion.
Seaworthiness during voyage in stages
Always at the commencement of each portion. A ship is
seaworthy with reference to that portion. This is a voyage
policy.
Sec. 120. When the ship becomes unseaworthy during the
voyage to which an insurance relates, an unreasonable delay
in repairing the defect exonerates the insurer on ship
or shipowner's interest from liability from any loss
arising therefrom.
When the ship becomes unseaworthy during the voyage to
which an insurance relates, an unreasonable delay in repairing
the defect exonerates the insurer on ship or shipowner's
interest from liability from any loss arising therefrom. Now we
know that the vessel must be seaworthy at the
commencement of each voyage.
If it is a time voyage, at the commencement of each voyage. If
the vessel suffers any damage before reaching its destination
there is a need for the owner of the ship, of course upon
information from the master that the defect must be repaired
otherwise the delay will exonerate the insurer from any loss
arising therefrom.
Sec. 121. A ship which is seaworthy for the purpose of an
insurance upon the ship may, nevertheless, by reason of being
unfitted to receive the cargo, be unseaworthy for the purpose
of the insurance upon the cargo.
Q: What is seaworthiness as to cargo? If you are an insurer for
the cargo what is the seaworthiness required?
A: The seaworthiness of a vessel is also to be determined with
regard to the nature of the cargo which she undertakes to
transport, the requirement being that she shall be reasonably
capable of safely conveying the cargo to its port of destination.
Sec. 122. Where the nationality or neutrality of a ship or cargo
is expressly warranted, it is implied that the ship will carry the
requisite documents to show such nationality or neutrality and
that it will not carry any documents which cast reasonable
suspicion thereon.
Q: What about the warranty as to nationality or neutrality?
A: 1.) A warranty of national character may be gathered from
the language of the policy describing the vessel as the
“Philippine”, “American”, ”British” or “Spanish”, etc., although
an exception has been made where the fact recited could have
no relation to the risk. A warranty of nationality does not mean
that the vessel was built in such country, but that the property
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belongs to a subject thereof. It refers to beneficial ownership
rather than to the legal title.
2.) A warranty of neutrality imports that the property insured is
neutral in fact, and shall be so in appearance and conduct,
that the property shall belong to neutrals, and that no act of
the insured or his agent shall be done which can legally
compromise its neutrality.
Usually we are talking here of the neutrality of the ship and
when you say neutrality of the ship or nationality of the ship
you are looking at who is the beneficial owner of the ship. This
has reference to the registration of the ship, what flag does it
fly.
Where the nationality or neutrality of a ship or cargo is
expressly warranted, so it is in the contract itself there is a
warranty of nationality. A warranty that it will fly under the
British flag, a warranty that it will fly under the Philippine flag,
is implied that the ship will carry the requisite document to
show such nationality or neutrality and that it will not carry any
documents which cast reasonable suspicion thereon. This is
very important when especially for ships to travel in
international waters. If you are travelling on the shipping lane
in international waters that is practically a free for all. But your
insurance may require an express warranty that the ship will
only fly under this national flag or the ship will be a neutral
ship.
A warranty of neutrality imports that the property insured is
neutral and shall be so in appearance and conduct. Just
remember that you are looking at the beneficial ownership
rather than the legal ownership
Let’s look at voyage and deviation.
Sub-Title 1-F
THE VOYAGE AND DEVIATION
Sec. 123. When the voyage contemplated by a marine
insurance policy is described by the places of beginning and
ending, the voyage insured in one which conforms to the
course of sailing fixed by mercantile usage between those
places.
Sec. 124. If the course of sailing is not fixed by mercantile
usage, the voyage insured by a marine insurance policy is that
way between the places specified, which to a master of
ordinary skill and discretion, would mean the most natural,
direct and advantageous.
Sec. 125. Deviation is a departure from the course of the
voyage insured, mentioned in the last two sections, or an
unreasonable delay in pursuing the voyage or the
commencement of an entirely different voyage.
Q: What’s the meaning of deviation?
A: Any unexcused departure from the regular course or route
of the insured voyage or any other act which substantially
alters the risk constitutes deviation. (Sec 125)
Four (4) cases of Deviation
1. Departure from the course of sailing fixed by
mercantile usage between the places of beginning
and ending specified in the policy;
2. Departure from the most natural, direct, and
advantageous route between the places specified if
the course of sailing is not fixed by mercantile
usage;
3. Unreasonable delay in pursuing the voyage;
4. The commencement of an entirely different voyage.
So those are the four cases of deviation. Now what is the
voyage insured? When did you depart from the voyage? If it is
describe by the places from beginning to end and then you did
not follow that particular voyage. Who prescribed that voyage?
The voyage is fixed by mercantile usage. For example in the
Philippines, if the voyage is only from Cebu to Antique but you
opted to go from Cebu to Caticlan and you went to another
port. Obviously that is a departure from the prescribed voyage
because in the mercantile usage the straight path is always the
fastest path. So that’s one.
Q: What if there is no route that is fixed by the mercantile
usage, what is the standard?
A: It is that way between the places specified, which to a
master of ordinary skill and discretion, would mean the most
natural, direct and advantageous.
And then when you commenced a new voyage, that is also a
deviation and when there unreasonable delay in pursuing the
voyage that will also count as deviation.
Now, any deviation is illegal but there is also proper deviation.
When the deviation is proper that will not be taken against the
vessel.
Q: There is also proper deviation. When is deviation proper?
A: (Section 126)
Sec. 126. A deviation is proper:
(a) When caused by circumstances over which
neither the master nor the owner of the ship has any
control;
(b) When necessary to comply with a warranty, or to
avoid a peril, whether or not the peril is insured
against;
(c) When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
(d) When made in good faith, for the purpose of
saving human life or relieving another vessel in
distress.
(a) When caused by circumstances over which
neither the master nor the owner of the ship
has any control;
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For example, you are in the eastern seaboard in the coast of
Mati and then suddenly there is a category 5 warning. The
storm is moving so fast you didn’t have time to look for cover.
You decide to deviate, took another path away from what has
been agreed upon. That is proper deviation.
(b) When necessary to comply with a warranty, or
to avoid a peril, whether or not the peril is
insured against;
(c) When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a
peril; or
So comply with the warranty and to avoid a peril, whether or
not the peril is insured against. And then made in good faith,
and upon reasonable grounds of belief in its necessity to avoid
a peril.
(d) When made in good faith, for the purpose of
saving human life or relieving another vessel in
distress.
Made in good faith again and this time for the purpose of
saving human life or relieving another vessel in distress. The
deviation must be in good faith, it is a requirement that the
deviation is in good faith. There is no intention to cut corners,
no intention to defraud. These are allowed deviations. If it is
merely to save property it is not proper deviation. It says here
relieving another vessel in distress. The vessel must be in
distress. For example you are going to deviate because
another vessel decided to call you to move some cargo to your
ship that is a deviation that is not proper.
Sec. 127. Every deviation not specified in the last section is
improper.
Sec. 128. An insurer is not liable for any loss happening to the
thing insured subsequent to an improper deviation.
Q: What is the consequence of improper deviation?
A: The insurer is not liable for any loss
Q: What are the kinds of Losses?
A: Total and Partial Loss
These two losses are further subdivided into actual or
constructive loss.
March 7, 2015 (Make-up Class)
Review:
What is Deviation?
Any unexcused departure from the regular course or route of
the insured voyage or any other act which substantially alters
the risk, or, an unreasonable delay in pursuing the voyage or
the commencement
of an entirely different voyage.
Kinds of deviation.
Deviation may be proper or improper.
When deviation is proper.
Sec. 124. A deviation is proper:
(a) When caused by circumstances over which neither the
master nor the owner of the ship has any control;
(b) When necessary to comply with a warranty, or to avoid a
peril, whether or not the peril is insured against;
(c) When made in good faith, and upon reasonable grounds of
belief in its necessity to avoid a peril; or
(d) When made in good faith, for the purpose of saving human
life or relieving another vessel in distress.
Effect of Proper deviation
The insurer is not exonerated from liability for loss happening
after proper deviation. The effect is as if there were no
deviation.
When is deviation improper
Sec. 125. Every deviation not specified in the last section is
improper.
Effect of improper deviation
Where there has been any deviation or change of the risk
without just cause, the insurer becomes immediately absolved
from further liability under the policy for losses occurring
subsequent (not before) to the deviation. And the fact that
the deviation did not increase the risk, or in any wise
contribute to the loss suffered, is wholly immaterial.
Kinds of losses.
Sec. 127. A loss may be either total or partial.
Sec. 128. Every loss which is not total is partial.
Sec. 129. A total loss may be either actual or constructive.
The law classifies loss into either total or partial. There are two
kinds of total loss: actual or absolute; (Sec. 130.) and
constructive or
technical. (Sec. 131.)
Ma’am: Do not confuse yourself with these kinds of losses.
Total loss is quite different from Partial loss. Constructive loss
is not equivalent to Partial loss. So remember that the
classification of loss as actual or constructive will only come
into play when we talk of total loss. There’s no such thing as
Constructive Partial loss. Partial loss has no categories. Please
do not confuse.
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What is constructive total loss?
A constructive total loss, or, as it is sometimes called, a
"technical total loss," is one in which the loss, although not
actually total, is of such a character that the insured is entitled,
if he thinks fit, to treat it as total by abandonment.
Why is it important to know the distinction between actual and
constructive total loss?
It is highly important that the two kinds of total loss be
carefully differentiated, for upon them depends the whole
doctrine of abandonment, so important in
the law of marine insurance.
In cases of actual total loss, no abandonment is necessary; but
if the loss is merely constructively total, an abandonment
becomes necessary in order to recover as for a total loss.
Ma’am: Occurrence of a constructive total loss is a condition
for the exercise of the right of abandonment in order to
recover from the marine insurance.
What is actual total loss?
An actual total loss exists when the subject matter of the
insurance is wholly destroyed or lost or when it is so damaged
as no longer to exist in its original character.
When is there an actual total loss?
Sec. 130. An actual total loss is caused by:
a) A total destruction of the thing insured;
b) The irretrievable loss of the thing by sinking, or by being
broken up;
c) Any damage to the thing which renders it valueless to the
owner for the purpose for which he held it; or
d) Any other event which effectively deprives the owner of
the possession, at the port of destination, of the thing
insured.
Ma’am: Any event means anything which effectively
deprives the owner of the possession of the thing
insured. That by the time it reaches the destination,
that event that happens along the way will render the
object of the insurance unavailable or useless to the
insured or the owner.
The complete physical destruction of the subject matter as in
the case of fire is not essential to constitute an actual total
loss. Such a loss may exist where the form and specie of the
thing is destroyed although the materials of which it consisted
still exist.
Ma’am: Shipment of sacks of rice from Port A to Port B. Along
the way nabasa ang rice. While the sacks of rice were not lost,
the fact that they were found wetted were determinative that
they suffered actual total loss as they no longer remain the
same kind of thing as before.
Example if 45 sacks of rice were shipped from Port A to Port
B. In the midway, 35 sacks got wet and the other 10 sacks
didn’t, there can still be actual total loss because what is
intended to be delivered is 45 sacks of rice although only
portions thereof suffered damages.
Pan Malayan Insurance Corp. vs. Court of Appeals, 201
SCRA 382 [1991]
Ruling:
An actual total loss is suffered where the cargo, by
the process of decomposition or other chemical agency, no
longer remains the same kind of thing as before. Thus, in a
case, the insured rice seeds found wetted were determined to
be lost and rendered valueless to the insured for planting
or seeding purposes since the wetting or contact with water
had definitely activated their tendency to germinate. The rice
seeds were treated and would germinate upon mere contact
with water.
Limited liability rule
The shipowner's or ship agent's liability is usually coextensive
with his interest in the vessel such that a total loss thereof
results in its extinction. In our jurisdiction, the limited liability
rule is embodied in Articles 587, 590 and 837 under Book
III of the Code of Commerce, thus:
Art. 587. The ship agent shall also be civilly liable for the
indemnities in favor of third persons which may arise from the
conduct of the captain in the care of the goods which he
loaded on the vessel; but he may exempt himself therefrom by
abandoning the vessel with all her equipment and the freight it
may have earned during the voyage.
Art. 590. The co-owners of the vessel shall be civilly liable in
the proportion of their interests in the common fund for the
results of the acts of the captain referred to in Article 587.
Each co-owner may exempt himself from this liability by the
abandonment, before a notary, of the part of the vessel
belonging to him.
Ma’am: If there is co-ownership, it will be half-half. In order
for co-owner A to exempt himself from the liability by
abandoning his own share in the vessel.
Art. 837. The civil liability incurred by shipowners in the case
prescribed in this section, shall be understood as limited to the
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value of the vessel with all its appurtenances and freightage
served during the voyage.
What is constructive loss?
A constructive total loss, or, as it is sometimes called, a
"technical total loss," is one in which the loss, although not
actually total, is of such a character that the insured is entitled,
if he thinks fit, to treat it as total by abandonment.
Ma’am: So the insured is given the right to assess this loss and
if he thinks that the thing is of no use, he is given the right to
abandon. The law did not say that he can abandon right away,
the law only say he has the right to abandon. He may or may
not exercise such right.
Importance of distinction between actual
and constructive total loss.
It is highly important that the two kinds of total loss be
carefully differentiated, for upon them depends the whole
doctrine of abandonment (see Secs. 138, 139.), so important
in the law of marine insurance.
In cases of actual total loss, no abandonment is necessary; but
if the loss is merely constructively total, an abandonment
becomes necessary in order to recover as for a total loss.
Ma’am: This is very important in marine Insurance because
nowhere in other kinds of insurance that we’re studying is the
right of abandonment given. Nothing that similar under fire
insurance, in casualty insurance nor in life insurance, it is only
under the marine insurance.
Remember that it is only in constructive total insurance can an
insured exercise the right of abandonment. In actual total loss,
there’s no such thing.
Presumption of actual total loss.
Sec. 132. An actual loss may be presumed from the continued
absence of a ship without being heard of. The length of time
which is sufficient to raise this presumption depends on the
circumstances of the case.
Where a vessel is not heard of at all within a reasonable time
after sailing, or for a reasonable time after she was last seen,
she will be presumed to have been lost from a peril insured
against.
What is the proof needed to lay a foundation of this
presumption?
• enough to prove that the vessel was not heard of at
her port of departure after she sailed.
• No witnesses necessary to show that she never
arrived there.
• But plaintiff must prove that when the vessel left her
port of outfit, she was bound on the voyage insured.
What is the length of time required to raise this
presumption?
There is no fixed rule with regard to the
time after which a missing vessel will be presumed to be lost.
It depends upon the circumstances of each case.
What is the liability of insurer in case of reshipment?
Sec. 133. When a ship is prevented, at an intermediate port,
from completing the voyage, by the perils insured against, the
liability of a marine insurer on the cargo continues after they
are thus reshipped.
If the original ship be disabled, and the master, acting with a
wise discretion, as the agent of the merchant and the
shipowners, forwards the cargo in another ship, such
necessary and justifiable change of ship will not discharge the
underwriter
on the goods from liability for any loss which may take place
on goods subsequently to such reshipment.
Ma’am: This contemplates an insurance upon cargo. If the
goods were transferred to another vessel, the change of ship
does not negate the liability of the marine insurer. The liability
continues.
In any case, the insurer may require an additional
premium if the hazard be increased by the extension of
liability.
Sec. 134. In addition to the liability mentioned in the last
section, a marine insurer is bound for damages, expenses of
discharging, storage, reshipment, extra freightage, and all
other expenses incurred in saving cargo reshipped pursuant to
the last section, up to the amount insured.
This section refers to the additional liability that the marine
insurer may incur due to the reshipment of the goods insured.
The liability, however, of the insurer under Section 134 cannot
exceed the amount of the insurance.
Is notice of abandonment necessary before the insured
can be entitle to payment for the loss suffered?
It depends.
In constructive total loss, an abandonment by the insured
is necessary in order to recover for a total loss (Sec. 138.) in
the absence of any provision to the contrary in the policy.
In case of actual total loss, the right of the insured to claim
the whole insurance is absolute. Hence, he need not give
notice of abandonment nor formally abandon to the insurer
anything that may remain of the insured property.( Sec. 135)
Ma’am emphasized that when what is involved is an actual
total loss, there is no point of discussing whether the insured
gives a notice of abandonment to the insurer as the insured’s
right is absolute. It is only in constructive total loss it is
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necessary to determine whether there was notice of
abandonment or none.
What is an average?
Average is defined by the Code of Commerce as 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.
What are the two kinds of average?
1.) Gross or general averages which include damages
and 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.
2.) Simple or particular averages which 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.
Give examples of general average.
The effects jettisoned to lighten the vessel, whether they
belong to the cargo, to the vessel, or to the crew; the damage
caused to the vessel which had to be opened, scuttled or
broken in order to save the cargo.
Give examples of particular average.
The damage suffered by the cargo from the time of its
embarkation until it is unloaded; the damage and expenses
suffered by the vessel from the time it is put to sea from the
port of departure until it anchors in the port of destination;
wages and victuals of the crew when the vessel is detained or
embargoed by legitimate order or force majeure.
Who shoulder the general average?
A general average loss must be borne equally by all of the
interests concerned in the venture as it inures to the to the
common benefit and profit of all the persons interested in the
vessel and her cargo.
Who shoulder the particular average?
A particular average loss is suffered by and borne alone by the
owner of the cargo or of the vessel, as the case may be as this
kind of average loss occurs under such circumstances that it
does not
entitle the unfortunate owners to receive contribution from
other owners concerned in the venture as where a vessel
accidentally runs aground and goes to pieces after the cargo is
saved.
What is the Principle of general average contribution?
General average is a principle of customary law, independent
of contract, whereby, when it is decided by the master of a
vessel, acting for all the interests concerned, to sacrifice any
part of a
venture exposed to a common and imminent peril in order to
save the rest, the interests so saved are compelled to
contribute ratably or proportionately to the owner of the
interest sacrificed, so that the cost of the sacrifice shall fall
equally upon all.
Ma’am: The loss is shared proportionately on the basis of
the interest befitted by the sacrifice and NOT totally.
Requisites to the right to claim general average
contribution
(1) There must be a common danger to the vessel or
cargo;
(2) Part of the vessel or cargo was sacrificed deliberately;
(3) The sacrifice must be for the common safety or for
the benefit of all;
(4) It must be made by the master or upon his authority;
(5) It must not be caused by any fault of the party asking
the contribution;
(6) It must be successful, i.e., resulted in the saving of
the vessel and/or cargo; and
(7) It must be necessary.
Ma’am: The party who exercises this right is the owner of the
cargoes sacrificed to save the vessel of the ship owner and the
other cargoes.
What is the extent of the liability of the insurer for
general average?
He is liable for his proportion of all general average loss
assessed upon the thing insured.
What is the extent of the liability of the insurer for
particular average?
Where it has been agreed that an insurance upon a particular
thing, or a class of things, shall be free from particular
average, a marine insurer is not liable for any particular
average loss not depriving the insured of the possession, at
the port of destination, of the whole of such thing, or class of
things, even though it becomes entirely worthless. ( Art. 136)
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If such particular average loss has the effect of "depriving the
insured of the possession at the port of destination of the
whole" of the thing insured, then the marine insurer will be
liable.
In the absence of any contrary stipulation, the insurer is liable
for particular average loss.
What is the scope of insurance against actual total
loss?
Sec. 137. An insurance confined in terms to an actual total
loss does not cover a constructive total loss, but covers any
loss, which necessarily results in depriving the in sured of the
possession, at the port of destination, of the entire thing
insured.
• An insurance against "total loss only" will cover any
total loss, whether it is actual or constructive.
• Where the insurance is against "absolute" total loss or
"actual" total loss, the insurer will not be liable for
constructive or technical total loss.
• If the insured is deprived of the possession of the
entire thing insured at the port of destination, the
insurer is liable because the permanent non-arrival
thereof is really an actual total loss.
Sec. 138. Abandonment, in marine insurance, 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.
What is abandonment?
It is the act of an insured in notifying the insurer that owing to
damage done to the subject of the insurance, he elects to take
the amount of the insurance in the place of the subject
thereof, the remnant of which he cedes to the insurer.
Ma’am: Only in marine insurance is there is a right of
abandonment. And remember that only in constructive total
loss, there is a need to ascertain whether there is a notice of
abandonment or none. This is not available in the case of
actual total loss.
Requisites for valid abandonment.
The requisites for a valid abandonment in marine insurance
are:
(1) There must be an actual relinquishment by the person
insured of his interest in the thing insured (Sec.
138.);
(2) There must be a constructive total loss (Sec. 139.);
(3) The abandonment be neither partial nor conditional
(Sec.140.);
(4) It must be made within a reasonable time after
receipt of reliable information of the loss (Sec. 141.);
(5) It must be factual (Sec. 142.);
(6) It must be made by giving notice thereof to the
insurer which may be done orally or in writing (Sec.
143.); and
(7) The notice of abandonment must be explicit and must
specify the particular cause of the abandonment.
(Sec. 144.)
When is abandonment necessary?
When the loss is only technically total, the insured cannot
claim the whole insurance without showing due regard to the
interest which the underwriter may take in the abandoned
property. Therefore, whenever the underwriter by prompt
action might be able to save some portion of the insured
property, he is entitled to timely notice of abandonment
by the insured and he cannot be made liable for a total
loss without it.
NB: But there is no obligation upon the insured to abandon. It
is a matter of his own election. If he omits to abandon, he may
nevertheless recover his actual loss. (Sec. 155.)
When the vessel is totally lost, abandonment is not
required as there is no vessel to abandon. By reason of
such total loss, the liability of the ship's owner or agent for
damages extinguished in the absence of any finding of fault on
other part.
When constructive total loss exists.
(1) According to the English rule, when the subject
matter of the insurance, while still existent in specie,
is so damaged as not to be worth, when repaired, the
cost of the repairs.
(2) According to the American rule, when it is so
damaged that the cost of repairs would exceed one-
half of the value of the thing as required. The
American rule is ordinarily spoken of as the "fifty
percent rule."
(3) In the Philippines, the insured may not abandon the
thing insured unless the loss or damage is more than
three-fourths of
its value as indicated in Section 139.
Under the first paragraph of Section 139, any particular
portion of the thing insured separately valued by the
policy may be separately abandoned as it is deemed
separately insured.
Whether a contract is entire or severable is a question of
intention to be determined by the language employed by the
parties.
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Oriental Assurance Corp. vs. Court of Appeals, 200
SCRA 459 [1991]
Ruling:
The policy in question showed that the subject
matter insured was the entire shipment of 2,000 cubic meters
of logs. It was held that the fact that the logs were loaded in
two different barges did not make the contract of insurance
several and divisible as to the items insured because the
logs on the two barges were not separately valued or
separately insured, for only one premium was paid for
the entire shipment making only one cause or
consideration. The logs having been insured as one
inseparable unit, the totality of the shipment of logs should be
the basis for the existence of constructive total loss.
What is the criterion as to extent of loss?
The extent of the injury to the vessel is to be considered with
reference to its general market value immediately before the
disaster. The expenses incurred or to be incurred by the
insured recovering the thing insured {e.g., expenses of
refloating a vessel) are also taken into account.
Sec. 140. An abandonment must be neither partial nor
conditional.
Must the abandonment be absolute?
Yes. The abandonment must be entire and cover the whole
interest insured; it must be unconditional, unfettered by
contingencies and limitations.
What if only a part of a thing is covered by the
insurance?
The insured need only abandon that part.
When must abandonment be made?
When the insured has received notice of a loss, he must elect
within a reasonable time whether he will abandon to the
insurer, and if he elects to abandon, he must give notice
thereof.
But where the information is of a doubtful character
the insured is entitled to a reasonable time to make
inquiry. (Sec.141) Thus, if from information first received,
the character of the loss is not made clearly to appear, the
insured is entitled to a sufficient interval to ascertain its real
nature, but he cannot wait an undue length of time to see
whether it will be more profitable to abandon or to claim for a
partial loss. After the property passes beyond the control of
the insured, as from an unjustifiable sale, an abandonment is
too late.
Sec. 142. Where the information upon which an
abandonment has been made proved incorrect, or the
thing insured was so far restored when the
abandonment was made that there was then in fact no
total loss, the abandonment becomes ineffectual.
The right of the insured to abandon and recover for a total loss
depends upon the state of facts at the time of the offer
to abandon, and not upon the state disclosed by the
information received, or upon the state of loss at a prior or
subsequent time. (The loss must exist at the time of
abandonment)
What is the effect of subsequent events to the right of
abandonment?
• If the abandonment when made is good, the rights of
the parties are definitely fixed, and do not become
changed by any subsequent events.
• If, on the other hand, the abandonment, when made,
is not good, subsequent circumstances will not affect
it so as retroactively, to impart to it a validity which it
has not at its origin.( the invalidity of the
abandonment is not cured by the subsequent loss of
the thing insured)
Instances that do not justify abandonment
• the insured cannot abandon when the thing insured is
safe; or
• when he knew, at the time of his offer to abandon,
that the vessel has been repaired and is successfully
pursuing her voyage .
Instances justifying abandonment.
The insured may abandon for a total loss under a marine
insurance policy in case of capture, seizure, or detention of the
ship or cargo; restraint by blockade or embargo; where
through no fault of the owner, funds for repair cannot be
raised; where the voyage is absolutely lost; or where under
urgent necessity, the master of a vessel at an intermediate
port, makes a sale of the insured property.
But If, after a valid abandonment has been made, the insured
property was recovered, the insured cannot withdraw the
abandonment.
How is notice of abandonment made?
The law requires no particular form for giving notice of
abandonment.
(1)The notice may be made orally unless the policy requires it
to be in writing, and even then a notice by telegraph is
sufficient if it otherwise complies with the requirements.
(2) If the notice be done orally, the insured must submit to the
insurer within seven days from such oral notice, a written
notice of the abandonment. (Sec. 143.)
By whom and to whom notice made.
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(1) The abandonment need not necessarily be made by
the insured but may be made by an authorized agent,
and an agent having an authority to insure has prima
facie an authority to abandon.
(2) The abandonment may be made to an agent of the
underwriter and abandonment to a broker who is
agent for both parties is sufficient.
Sec. 144. A notice of abandonment must be explicit, and must
specify the particular cause of the abandonment, but need
state only enough to show that there is probable cause
therefor, and need not be accompanied with proof of interest
or of loss.
The notice of abandonment must be explicit, and not left open
as a matter of inference from some equivocal acts. There must
be an intention to abandon, apparent from the communication
to the insurer, and a relinquishment of all rights to the insurer.
But there is no abandonment although the insured may have
given notice of an intention to abandon, if he continues to
claim and use the property as his own.
The grounds for the abandonment must be stated with such
particularity as to enable the underwriter to determine whether
or not he is bound to accept the offer. However, it is sufficient
if the notice shows probable cause for the abandonment; nor
is it required that it be accompanied with proof of interest or of
loss. (Sec. 144.)
Sec. 145. An abandonment can be sustained only upon the
cause specified in the notice thereof.
The insured must state sufficient grounds for the
abandonment to make it valid and he cannot avail himself of
any ground of abandonment other than that stated at the time
thereof.
What is the effect of abandonment?
A valid abandonment transfers to the insurer the interests in
the subject matter covered by the policy subject to the rights
and interests, if any, of third persons. The insurer acquires
thereby the entire interest insured, together with all its
incidents, including rights of action which the insured has
against third persons for the injury. In other words, the insurer
becomes entitled to all the rights which the insured possessed
in the thing insured.
The effect of the abandonment retroacts to the time of the
loss. (Sec. 148.)
What is the right of the insurer who pays partial loss as
actual total loss?
An election and notice of abandonment is a condition
precedent to a claim for a constructive total loss.
Under Section 147, the interest of the insured over the thing
covered by the policy will be transferred to the insurer,
notwithstanding the lack of abandonment, as if there
had been a formal abandonment, in case the insurer pays
for a loss as if it were an actual total loss. The
acceptance by the insured of the payment is deemed an offer
of abandonment on his part. Hence, the insurer is entitled to
whatever may remain of the thing insured, or its proceeds or
salvage.
Sec. 148. Upon an abandonment, acts done in good faith by
those who were agents of the insured in respect to the thing
insured, subsequent to the loss, are at the risk of the insurer,
and for his benefit.
The captain or master continues to be the agent of the insured
until abandonment, but from the moment of a valid
abandonment, the master of the vessel and agents of the
insured become the
agents of the insurer, and the latter becomes responsible for
all their acts in connection with the insured property and for all
the expenses and liabilities in respect thereof.
When can the insurer be held liable for expenses and
wages of the crew?
The effect of the abandonment retroacts to the time of the
loss. (Sec. 148.) The title of the insurer becomes vested as of
that date and he is responsible for the reasonable expenses
incurred by the master after that date in an attempt to save
the vessel. Insurers are also liable for the wages of seamen
earned subsequent to the loss, but take free from any lien or
liability for wages earned prior thereto.
What is the effect of insurer’s refusal to accept
abandonment on insured’s rights.
Sec. 149. Where notice of abandonment is properly given, the
rights of the insured are not prejudiced by the fact that the
insurer refuses to accept the abandonment.
What are the forms of acceptance?
Sec. 150. The acceptance of an abandonment may either
express or implied from the conduct of the insurer. The mere
silence of the insurer for an unreasonable length of time after
notice shall be construed as an acceptance.
Thus, where the insurer refused the abandonment of a ship
but took possession of the same for the purpose of making
repairs and retained it for an unreasonable time, he will be
deemed to have accepted the abandonment.
Mere silence after notice would not operate as an
acceptance, if it is not "for an unreasonable length of time."
What are the effects of acceptance?
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(1) Upon receiving notice of abandonment, the insurer
may accept or reject the abandonment. If he accepts,
he becomes at once liable for the whole amount of
the insurance, and also becomes entitled to all rights
which insured possessed in the thing insured,
(2) The acceptance of an abandonment fixed the rights of
the parties; whether expressed or implied, is
conclusive upon them (Sec. 151.), and irrevocable.
(Sec. 152.)
(3) the acceptance of an abandonment stops the insurer
to rely on any insufficiency in the form, time, or right,
of abandonment.
The only exception provided by law is the case where the
ground upon which it was made proves to be unfounded.
(Sec.152.) Under Section 145, an abandonment can be
sustained only upon the ground specified in the notice thereof.
When is the insurer entitled to freightage?
When abandonment is validly made, the interest of the insured
in the thing covered passes to the insurer.
The insurer of the ship becomes the owner thereof after an
abandonment, and his title becomes vested as of the time of
loss. Hence, freightage earned subsequent to the loss belongs
to the insurer of said ship. But freightage earned previously
belongs to the insurer of said freightage who is subrogated to
the rights of the insured up to the time of loss.
What is the effect of refusal to accept a valid
abandonment on insurer’s liability.
(1) If the insurer declines to accept a proper
abandonment, he is liable as upon an actual
total loss less any proceeds the insured may have
received on account of the damaged property as
when the insured succeeds in selling the property as
damaged.
(2) If the abandonment was improper, the insured may
nevertheless recover to the extent of the damage
proved.
What is the effect of insured’s failure to make
abandonment.
Sec. 155. If a person insured omits to abandon, he may
nevertheless recover his actual loss.
The insured has an election to abandon or not, and cannot be
compelled to abandon although abandonment is proper. He
may await the final event, and recover accordingly for a total
or a partial loss, as the case may be.
Remember that in actual loss, no notice of abandonment is
necessary for the recovery against the marine insurer.
What is the difference between Sec. 154 and Sec. 155?
Under Section 155, the insured fails to make an
abandonment. On the other hand, Section 154 applies where a
valid abandonment has been made but the insurer refuses to
accept the same without any valid reason.
Measure of Indemnity
Section 156 refers to a valued marine policy. The object of a
valuation in a policy is to fix in advance the value of the
property and thus avoid the necessity of proving its actual
value in case of loss.
The insured value must be taken to be that which
is stated in the policy. It is conclusive upon the parties
provided that (a) the insured has some interest at risk and (b)
there is no fraud on his part.
What if the valuation is fraudulent?
The insurer is entitled to rescind the contract.
Can the parties adduce evidence to prove the real value
of the thing insured in a valued marine policy?
General Rule: Neither party can give evidence of the real value
of the thing insured. This is because of the object of a
valuation in a policy that is to fix in advance the value of the
property to avoid the necessity of proving its actual value in
case of loss.
What is the exception?
when the thing has been hypothecated by bottomry or
respondentia before its insurance and without the knowledge
of the person who actually procured
the insurance, the insurer may show the real value but he is
not entitled to rescind the contract unless he can prove
that the valuation was in fact fraudulent.
Sec. 157. A marine insurer is liable upon a partial loss, only
for such proportion of the amount insured by him as the loss
bears to the value of the whole interest of the insured in the
property insured.
Section 157 contemplates co-insurance.
If the value of his interest exceeds the amount of insurance,
he is considered the co-insurer for an amount determined by
the difference between the insurance taken out and the value
of the property.
Note this Section applies only if (1) the loss is partial and (2)
the amount of insurance is less than the insured's entire
insurable interest in the property insured.
Illustration:
A vessel valued at P 1M is insured for only 900K and suffered
damage to the extent of 500K. In this problem, the insurer will
be required to pay only for 80% of the loss suffered( 900K/1M)
or P 400K; the other 20% or P100K being borne by the insured
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himself. The insured is considered a co-insurer to the
uninsured portion of P 100K (P1M-P900K).
Clearly, Section 157 applies in this case. The loss suffered is
only partial(i.e., out of 900k insured amount, only 500k were
damaged) and the amount of insurance is less than the
insured's entire insurable interest in the property insured (i.e.,
the insurable interest amounts to P1M but only 900K thereof
were insured)
If it is total, then the insurer is liable for the full amount of
P900K. On the other hand, if the property is insured to its
full value, the insured is entitled to recover the full amount of
the partial loss of P 500K.
Sec. 158. Where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover, in case of
loss, a proportion of such profits equivalent to the proportion
which the value of the property lost bears to the value of the
whole.
The formula may be stated as follows:
Value of property lost over
Value of whole property insurance =
Rate x the amount of the profit insured=
amount to be recovered
Illustration:
Assuming that the amount of the profits insured is
P20/000.00, the value of the whole cargo from which such
profits are expected to be realized is P80,000.00, and the value
of the goods lost is P48,000.00, then the insured is entitled to
recover P12,000.00 computed as follows:
P48K/P80K= 3/5(rate) X P20K= P12K
What is the valuation where only part of a cargo or
freightage insured is exposed to risk.
Where cargo is insured under a valued policy but only a
portion of the cargo is actually carried by the vessel at the time
of loss, the valuation will be reduced proportionately. The
insurer is bound to return such portion of the premium as
corresponds with the portion of the cargo which had been
exposed to the risk. (Sec. 159)
Sec. 160. When profits are valued and insured by a contract
of marine insurance, a loss of them is conclusively presumed
from a loss of the property out of which they were expected to
arise, and the valuation fixes their amount.
Illustration:
Where the value of the profits insured is fixed at PI00,000.00
and the cargo out of which said profits are expected to arise is
completely lost by the peril insured against, the insured can
recover the total amount of P100,000.00. The loss of the profit
of P100,000.00 is conclusively presumed from the total loss of
the cargo and the insurer is bound
by the valuation.
Discuss the rules for estimating loss under an open
policy of marine insurance.
Section 161 refers to an open policy.
In determining the loss under an open policy of marine
insurance, the real value of the thing insured must be proved
by the insured in each case. This section lays down the value
to be
used for indemnity purposes
(a) The value of a ship is its value at the beginning
of the risk, including all articles or charges
which add to its permanent value or which are
necessary to prepare it for the voyage insured;
Note: the value is to be taken as of the commencement of the
risk and not its value at the time she was built.
(b) The value of cargo is its actual cost to the
insured, when laden on board, or where that
cost cannot be ascertained, its market value at
the time and place of lading, adding the
charges incurred in purchasing and placing it
on board, but without reference to any loss
incurred in raising money for its purchase, or to
any drawback on its exportation, or to the
fluctuation of the market at the port of
destination, or to expenses incurred on the way
or on arrival;
Note: The expected profits from the cargo are not considered
since they can be covered by a separate insurance.
(c) The value of freightage is the gross freightage,
exclusive of primage, without reference to the
cost of earning it; and
Note: The gross freightage and not the net freightage is the
basis for determining the value of the freightage.
Primage is excluded from gross freightage. It is a small
compensation paid by a shipper to the master of the vessel for
his care and trouble bestowed on the shipper's goods and
which the master is entitled to retain in the absence of an
agreement to the contrary with the owners of the vessels.
(d) The cost of insurance is in each case to be
added to the value thus estimated.
Sec. 162. If cargo insured against partial loss arrives at the
port of destination in a damaged condition, the loss of the
insured is deemed to be the same proportion of the value
which the market price at that port, of the thing so damaged,
bears to the market price it would have brought if sound.
The formula may be stated as follows:
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Market price in sound state
Less: Market price in damaged state
= Reduction in value (depreciation)
Reduction in value/ Market price in sound state= Rate x
Amount of Insurance = Amount of recovery
Illustration:
Suppose that goods valued at P500,000.00 and insured for
P300,000.00 were damaged on the way so that their market
price at the port of destination was only P400,000.00.
Assuming that the market price of the goods would have
brought if sound is also P500,000.00, the amount recoverable
is P60,000.00 determined as follows:
P500,000.00 - P400,000.00 = P100,000.00
P100,000.00 or 1/5xP3oo/ooo.OO = P60,000.00
P500,000.00
What is Port of Refuge Expenses?
Under Section 163, however, expenses incurred in repairing
the damages suffered by a vessel because of the perils insured
against as well as those incurred for saving the vessel from
such
perils, such as the expenses of launching or raising the vessel
or of towing or navigating it into port for her safety, are items
to be borne by the insurer in addition to a total loss if that
afterwards takes place.
This is exception to the general rule that a marine insurer is
not liable for more than the amount of the policy.
Sec. 164. A marine insurer is liable for a loss falling upon the
insured, through a contribution in respect to the thing insured,
required to be made by him towards a general average loss
called for by a peril insured against: Provided, That the liability
of the insurer shall be limited to the proportion of contribution
attaching to his policy value where this is less than the
contributing value of the thing insured
Sec. 165. When a person insured by a contract of marine
insurance has a demand against others for contribution, he
may claim the whole loss from the insurer, subrogating him to
his own right to contribution. But no such claim can be made
upon the insurer after the separation of the interests liable to
contribution, nor when the insured, having the right and
opportunity to enforce contribution from others, has neglected
or waived the exercise of that right.
Gen. Rule: The insurer is liable for any general average loss
where it is payable or has been paid by the insured in
consequence of a peril insured against.
The insured may either:
a) hold the insurer directly liable for the whole
of the insured value of the property sacrificed for the general
benefit;
b)subrogating him to his own right of contribution; or
c)demand contribution from the other interested parties as
soon as the vessel arrives at her destination.
In other words, the insured need not wait for an adjustment of
the average.
Exceptions. — However, there can be no recovery for general
average loss against the insurer:
(a) after the separation of the interests liable to
contribution, that is to say, after the cargo liable for
contribution has been removed from the vessel; or
(b) when the insured has neglected or waived his right
to contribution.
That the liability of the insurer shall be limited to the
proportion of contribution attaching to his policy value
where this is less than the contributing value of the
thing insured.
The formula may be stated as follows:
Amount of Insurance/ Value of the thing=
Rate X Proportion of general limit of insurance= liability of the
insurer
Illustration:
If the vessel worth P8,000,000.00 was insured by A for only
P4,000,000.00 with Y Co., then Y Co. is liable for only 1/2 of
P800,000.00, the proportion of the general average loss
assessed upon the vessel, while A is liable to contribute the
other P400,000.00.
What is the extent of the liability of the insurer in case
of partial loss of ship or its equipment?
Sec. 166. In the case of a partial loss of a ship or its
equipment, the old materials are to be applied towards
payment for the new. Unless otherwise stipulated in the policy,
a marine insurer is liable for only two-thirds of the remaining
cost of repairs after such deduction, except that anchors must
be paid in full.
March 9, 2015
Title 2
FIRE INSURANCE
We finished marine insurance, we start with fire insurance
Q: How do you define Fire Insurance? And what is fire-and-
extended coverage?
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A: Fire insurance is a contract of indemnity by which the
insurer, for a stipulated premium, agrees to indemnify the
insured against loss of, or damage to, a property caused by
hostile fire.
Fire-and-extended coverage includes not only insurance
against loss by fire, but also insurance in the so-called “allied
lines” but only when such risks are covered by extension to fire
insurance policies or under separate policies subject to the
payment of additional premiums.
Q: What are these so-called Allied risk?
A: Lightning, windstorm, earthquake, etc.
Q: Under the fire insurance category, what is the meaning of
indirect loss coverage?
A: Consequential losses. The consequence of a direct loss may
be greater than the damage itself.
The amount of loss incurred as a result of being unable to use
business property or equipment (investopedia.com)
Q: Can you give us an example/kinds of indirect loss?
A: 1. Physical damage caused to other property.
2. Loss of earnings due to the interruption of business by
damage to insured’s property
3. Extra expense or additional expenditure or charges
incurred by the insured following damage or destruction of
the buildings or contents by an insured peril.
Q: Can you distinguish ocean marine policy from fire policy?
A: 1. In marine insurance, the rules on constructive total
loss and abandonment apply but not in fire insurance
2. In case of partial loss of a thing insured for less than its
actual value, the insured in a marine policy is a co-insurer
of the uninsured portion, while the insured may only
become a co-insurer in fire insurance if expressly agreed
upon by the parties.
Ma’am: Ocean marine insurance would usually connote
navigation or in reference to navigation. That’s the most
important definition of ocean marine insurance. Does ocean
marine insurance also include fire? If the peril insured against
is fire and it is in a vessel/ship or any of those items
enumerated under the definition of marine insurance then the
ocean marine insurance will also cover the risk of fire. But in a
regular fire insurance policy, it is limited only to fires and the
allied risks as mentioned in the definition of fire insurance.
Q: What is an alteration? And what is the effect of alteration in
the policy?
A: Sec 170. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the control
of the insured, and increasing the risks, entitles an insurer to
rescind a contract of fire insurance.
Q: What it the measure of indemnity under an open policy?
A: Section 173. If there is no valuation in the policy, the
measure of indemnity in an insurance against fire is the
expense it would be to the insured at the time of the
commencement of the fire to replace the thing lost or injured
in the condition in which at the time of the injury;
Q: What it the measure of indemnity under a valued policy?
A: The effect of a valuation in a policy of fire insurance is the
same as in a policy of marine insurance. (Sec 61)
Sec. 61. A valued policy is one which expresses on its face
an agreement that the thing insured shall be valued at a
specific sum.
Q: What is an option to rebuild clause?
A: See Section 172.
The mere fact that the parties have fixed a valuation in the
policy does not prevent them from stipulating in the policy
concerning the repairing, rebuilding, replacing of buildings or
structures wholly or partially damaged or destroyed. Thus, the
insurer may be given the option to reinstate or replace the
property damaged or destroyed or any part thereof, instead of
paying the amount of the loss or damage.
Sec. 169. As used in this Code, the term "fire insurance" shall
include insurance against loss 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.
Sec 169 gives you the definition for fire insurance. Obviously
from the term fire we know what kind of peril is being insured.
It is not limited to fire only there is also lightning windstorm,
tornado, earthquakes etc.
If you have lightning, windstorm, tornado, earthquakes does it
necessarily have to result to fire? Because there can be a
tornado but there’s no fire. Well under the definition it doesn’t
need to result to fire. It can be covered by fire insurance
provided there is extended fire-and-extended coverage. So
if your policy has that coverage, the allied risks are covered as
well. If you have a property, let’s say your neighborhood was
struck by – suddenly there was a tornado and the trees landed
on your house, the property insurance against fire must also
bear those extended risks, those allied risks. It has to have
that kind of coverage so that any damage, any loss cause by
earthquake, windstorm, tornado are likewise covered under
your policy.
It makes you think really when you get your fire insurance
policy to take a look at what are the different kinds of perils
insured against. Because when you say fire and the destruction
is not at all fire but destruction brought about by fallen trees,
brought about by earthquakes. Earthquakes are very
destructive they can actually cause a whole house to come
down but there’s no fire paano yan? You say, my house is
destroyed and then you go to the insurance company there is
no extended coverage there. The insurance company will try to
find a way to get out of the insurance policy by pointing out
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that the damage was not cause by fire. It important that the
fire insurance policy must also have this what you call fire-and-
extended-coverage. We discussed in the earlier titles what is
fire. It should be a hostile fire, it should not be caused by
friendly fire.
**Ma’am talks about friendly fires and SAF
Take a look at what is the concept of fire.
The presence of heat, steam or even smoke is evidence of fire,
but taken by itself will not prove the existence of fire. So heat
can be evidenced of fire but if it’s just heat but there is no fire,
there’s no fire at all.
In our jurisprudence it says, fire may not be considered a
natural disaster or calamity since it almost always arises from
some act of man or by human means. It cannot be an act of
God unless caused by lightning or a natural disaster or casualty
not attributable to human agency. So if it caused by fire it
connotes human intervention it’s not an act of God at all,
unless it is by lightning. But of course lightning can cause fire.
So we have to be clear about that. If it is also covered by your
fire-and-extended-coverage, the better for you to be able to
recover from the insurance company.
Indirect loss coverage
When property is razed by fire what you lose is not just the
building itself. But if it is a commercial building you loss the
income from the rentals, you also incur additional expenses. If
it is a partially damage building you incur expenses to clean
the damage area, to repair the damage area, all other
expenses necessary to put the property back to its condition
prior to the fire.
Loss of earnings is also an indirect loss. Additional expenses -
following the damage like clearing up is also an additional
expense. If you are looking forward to reconstructing the
building right away who is going to clean up the mess left by
the fire? The property owner, the insured, that is an additional
expense on his part and that can also be covered by the fire
insurance policy.
Of course the wide the coverage the more expensive the
premium. It all boils down to how much you can afford. If you
want total(?) coverage the insurance company would welcome
that as long as you can pay the premium.
Some people they have 10M worth of commercial building but
they will only insure it for 2M. Not all of the building is usually
destroyed by fire only a portion of that. Firemen will come
around and maybe try to extinguish the fire but still
remember- well if you are covered by a marine insurance you
will be deemed as a coinsurer for the amount that is not
covered by the marine insurance. Here in fire insurance it is
the actual value of the loss or the amount of the policy of the
insurance whichever is lower. If the maximum amount, if the
value of the policy is 2M and then the cost of the loss is
actually 10M you can only recover 2M. If the cost of the loss is
500k you can only recover 500k. There is no coinsurance in
fire insurance. HOWEVER, most if not all of fire insurance
policies now indicate or include a stipulation that makes you a
co-insurer in case the risk arises, in case the property is
damage, this is to stem the tide of people who have very
expensive property but will only insure for a minute amount.
That co-insurance is not found in the law but as a stipulation in
the contract of insurance. As we know the parties can stipulate
additional stipulations in the contract of insurance. Just
remember that it’s not in the law, fire insurance there is no co-
insurance. However most of the contracts of insurance
nowadays have a stipulation on co-insurance. So the insured is
obligated to get additional insurance because of that
stipulation if you do not get additional insurance or if you stick
to your insurance policy you might be in breach of a warranty.
Ocean and marine - the important distinction there is the right
to abandonment. When is the right to abandonment exercised
or available? Only when there is constructive total loss. There
is no right to abandon when you have total actual loss.
Alteration
Alteration is a very important feature in fire insurance policies.
Sometimes you forget that we shouldn’t be altering buildings.
Sometimes property owners, you are looking at buildings,
warehouses or even your very own house if you alter the use
of the house -
…alteration in the use or condition of a thing insured
from that to which it is limited by the policy
So you alter the use or the condition and there is an express
limitation in the policy stating that the structure must be used
for residential purposes only or the structure is for commercial
building or a warehouse. There would be other stipulations
regarding what kind of materials must be found in the building,
what kind of materials must not be anywhere the building.
The contract of insurance, the policy itself will be the proof of
what the property should be used for. So if the property was
identified as residential then it should only be used for
residential purposes. If you convert your residence into a place
of business as well as a warehouse that is a major alteration of
the used of your residential building. When you do that you
must get the consent of the insurance company. Alteration is
not per se illegal it does not negate the insurance contract, it
does not void the insurance contract.
If the alternation is with the express consent of the insurance
company, then fine, even if it changes the use or the condition
of the building for as long as the insurance company consents.
Why do you need the consent of insurance company? Because
for the insurance company it’s just a matter of business. If you
change it to commercial building they will charge additional
premium. That’s the business of insurance. If you add another
floor to the house that’s a big alteration. Does it increase the
risk? Well, maybe you can say it doesn’t increase the risk it’s
just an additional building.
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But remember that this condition, if you look at Section 171 if
there is an alteration in the use or condition of a thing insured
but it does not increase the risk, so that alteration will not
affect the contract of insurance.
Going back to my example, residential building. It was just a
starter house for your parents, one floor bungalow with 3
bedrooms. You inherited the house you added a 2nd floor. Does
the 2nd floor posed a risk, does it increase the risk?
Brunx: the addition of the 2nd floor does not pose a risk
because the liability for the risk assumed by the insurer in that
case is relatively the same with or without the increase of the
2nd floor.
Maa’m: Right, so it is usually still for fire. I will agree with that,
if it doesn’t increase the risk…..
**BREAK**
To continue…
SEC. 170. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the control
of the insured, and increasing the risks, entitles an insurer to
rescind a contract of fire insurance.
SEC. 171. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy, which
does not increase the risk, does not affect a contract of fire
insurance.
You have to take note of these two provisions, sections 170
and 171, about alterations. These two particular provisions are
very important in this title just as deviation and seaworthiness
is important in marine insurance. Don’t forget, class,
remember that there are many parties involved in the shipping
of produce or merchandise. We have the vessel owner, the
charter party, etc. and each party has a different insurable
interest. In the exam, you have to analyze the problem, see
the distinctions between the actors in the problem, and avoid
shotgun answer.
**Maam talking about how to answer the essay problem, brief
and concise, cite the pertinent provision lang daw dapat and
explain very well.
Who is entitled to exercise the right to rescind when
there are alterations? It is the insurer.
Let’s take a look at the character of the increase in risk:
Increase of hazard takes place whenever the insured property
is put to some new use, and the new use increases the chance
of loss.
For example, you entered into a fire insurance contract with
Phoenix Insurance Company and the policy was issued to
cover your warehouse. You represented that the warehouse
will only store dry goods, e.g. clothing material, paper, you are
not supposed to be storing paint, gasoline, gas tanks. At one
point, during the existence of the policy, a customer came and
asked if he could store paint as he ran out of storage in his
own stockroom. You allowed the customer, totally forgetting
about the insurance policy. An accident then happened, there
was conflagration. Did the storing of the paint increase the
risk? Well, I would submit that it increased the risk because it
changed the make-up of the things stored in the warehouse.
Pero kunyare brownout and you have to bring in candles and
the candle accidentally fell and caused fire, eventually it raised
the entire building. Did that increase the risk? Well, here, it
says, mere negligent acts temporarily endangering the
property will not violate the policy nor the temporary acts or
conditions which have ceased prior to the occurrence of the
loss. There must be an actual increase of risk and while it is
not necessary that the increased risk should have caused or
contributed to the loss, still it is necessary that the increase be
of substantial character. Keywords: substantial character.
So if you stored five dozen cans of paint, 12 tanks of cooking
gas, these changes increased the risk substantially. You have
to look at the matter that increased the risk. Kelangan, the
increase must be of substantial character.
Alright, just look at the alterations avoiding policy.
Alterations not avoiding policy
1. Where risk of loss not increased
2. Where questioned articles required by insured’s business
You are into the business of repacking. Alam nyo yung old
style of packing? You seal the plastic by letting the corner
pass through the flame, so they have candles. Imagine 20
people doing the packing. What is nasunog? The
insurance company refuses to pay for the insurance
proceeds arguing that the presence of candles
substantially increased the risk. Is that a defense? No, it is
not. Why? It is because the said candles are part and
parcel of the insured’s business. If the articles are
necessary or ordinarily used in the business conducted in
the insured premises, like benzine kept in a furniture
factory for purposes of operating or for cleaning
machinery.
3. Where insured property would be useless if questioned
acts were prohibited
If you have a small catering business inside your house
but you only have a stove top, a range, and then you do
all the cooking there and then bad luck happens – you
have plenty of oil in the pot and you accidentally toppled it
to your stove causing explosion. Do you think the
insurance company is correct to say that the conduct of
your cooking and the conflagration caused by your
cooking gas altered the condition of your property? NO!
everybody has a cooking range in their house, it does not
substantially increase the risk.
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Again the keywords are: the alterations must substantially
increase the risk.
**Ma’am talking about her car insurance. J
NOTE: There is no insurance against acts of terrorism.
Where insure has no control or knowledge of alteration
You are an owner of a dormitory and you didn’t know that
some illegal business has been going on inside the dormitory,
or when you are an owner of a house leased to somebody and
the lessee has practically altered the use of the residence. So,
if you tell the insurance company that you have no knowledge
of the alteration. Is that a valid defense? Let’s see…
1. Insurer’s liability unaffected – 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. Thus, increase in risk
resulting from adjacent premises over which the insured
has no control will not avoid a policy unless actually
known to the insured.
2. Insured’s knowledge presumed – It would seem, however,
that every act of the insured’s tenant substantially and
permanently affecting the conditions of the property so as
to constitute an increase in risk, would be presumptively
known to the insured.
This is debatable, class. This is just a presumption that
can be defeated by contrary evidence. If you are in the
business of renting out houses, and then the lessee
decided to conduct a cottage industry inside your
residence and this substantially increased the risk, if you
really didn’t know about these changes, you can actually
present evidence.
Application of Section 77 and Section 171
SEC. 77. An insurer is entitled to payment of the premium as
soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company
is valid and binding unless and until the premium thereof has
been paid, except in the case of a life or an 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.
SEC. 171. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy, which
does not increase the risk, does not affect a contract of fire
insurance.
Now, the law says, if the alteration doesn’t increase the risk, it
will not rescind the contract. However, if the insurance policy
itself will state that certain activities must not be conducted in
the premises, the said stipulation will take precedence over the
right given by the law in favor of the insured.
Section 77 gives the insurer the right to insert terms and
conditions in the policy which if violated would avoid it. An
alteration made in the use of condition of the thing insured will
thus avoid a policy under the same section if such alteration is
expressly prohibited although it does not increase the risk.
SEC. 172. 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.
Measure of indemnity
SEC. 173. If there is no valuation in the policy, the measure
of indemnity in an insurance against fire is the expense it
would be to the insured at the time of the commencement of
the fire to replace the thing lost or injured in the condition in
which it was at the time of the injury; but if there is a
valuation in a policy of fire insurance, the effect shall be the
same as in a policy of marine insurance.
SEC. 174. Whenever the insured desires to have a valuation
named in his policy, insuring any building or structure against
fire, he may require such building or structure to be examined
by an independent appraiser and the value of the insured’s
interest therein may then be fixed as between the insurer and
the insured. The cost of such examination shall be paid for by
the insured. A clause shall be inserted in such policy stating
substantially that the value of the insured’s interest in such
building or structure has been thus fixed. In the absence of
any change increasing the risk without the consent of the
insurer or of fraud on the part of the insured, then in case of a
total loss under such policy, the whole amount so insured upon
the insured’s interest in such building or structure, as stated in
the policy upon which the insurers have received a premium,
shall be paid, and in case of a partial loss the full amount of
the partial loss shall be so paid, and in case there are two (2)
or more policies covering the insured’s interest therein, each
policy shall contribute pro rata to the payment of such whole
or partial loss. But in no case shall the insurer be required to
pay more than the amount thus stated in such policy. This
section shall not prevent the parties from stipulating in such
policies concerning the repairing, rebuilding or replacing of
buildings or structures wholly or partially damaged or
destroyed.
Open Policy (No valuation stated)
• Measure of indemnity: The expense that is required to
replace the thing lost or injured, or to reinstate the
property to its condition before the fire.
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What is the reckoning period in determining the amount of the
expense? The reckoning period is at the time of the fire.
So if at the time of the fire, the subject property, let’s say a
car, is already 75% depreciated, the expense is up to the
amount needed to restore it to its 25% condition and not to its
brand new condition. That is the measure of indemnity in an
open policy. Another example, a piano stored in the basement.
When water enters the basement and caught the legs of the
piano, you try to get compensation form the insurance
company. How much is the compensation? Only for the
amount required to put the piano back to its condition prior to
the flooding.
Valued Policy (There is valuation in the policy)
• Measure of indemnity: That stipulated or agreed upon by
the parties in the insurance policy.
If there is a valuation in a policy of fire insurance, the effect
shall be the same as in a policy of marine insurance.
Valuation conclusive between the parties – the measure of
indemnity is that amount agreed upon by the parties.
Remember class that property insurance is a contract of
indemnity. Nothing is to be gained, you are not looking
forward to profiting. Kahit na P1M pa ang value ng property
but if you agreed only for P500k, the threshold of the
insurance company’s liability could be less than P500k, if the
damage is just partial, but it cannot be more than P500k.
Insured not a con-insurer under fire policies IN THE
ABSENCE OF STIPULATION
The trend now in the insurance policy is to put in the policy
itself a stipulation that the insured is a con-insurer to protect
itself.
Look at the discussion in the book. Under the usual contract of
fire insurance, the insurer, in case of a partial loss of the
subject of the contract, is required to give full indemnity for
such loss up to the amount written in the policy even though
the property be very inadequately insured.
Why is co-insurance important? The co-insurance stipulation is
very important in the sense that this encourages property
owners to get the appropriate amount of insurance for the
property. By doing so, if you pay for the proper amount vis-a-
vis the value of the property then you actually pay higher
premium which is better for the insurance company. Meaning,
more money is coming in and more coverage is going around.
The insured is also encouraged to protect his property by
increasing the coverage of the insurance. Remember that in
marine insurance, there is co-insurance but only as far as
partial loss is concerned. If there is total loss, there is no
question that the insurer is liable.
Option to rebuild clause
This section shall not prevent the parties from stipulating in
the policy concerning the repairing, rebuilding or replacing of
buildings or structures wholly or partially damaged or
destroyed.
Why is this given or afforded to the parties? This is primarily
for the insurer. Where there is no valuation, there is usually
third parties that would come in and evaluate the loss or
damage. Sometimes the insurance company would not agree
and would look at it as an expensive valuation, maybe the
insurance company would want to take care of it and rebuild
or replace it thinking that it would be cheaper. The clause can
be availed of by the insurance company. The mere fact that
the parties have fixed a valuation in the policy does not
prevent them from stipulating in the policy. Even if an amount
has already been agreed by the parties but there is an
additional stipulation affording the insurer the right to replace,
repair, rebuild, then that insurer may exercise such option
instead of paying outright the proceeds to the insured. It must
be exercised within a reasonable period of time.
Unless the policy has limited the cost of rebuilding to the
amount of the insurance, the insurer, after electing to rebuild,
ca be compelled to perform his undertaking, even though the
cost may exceed the original amount of insurance. If the
insurer opts to rebuild and then he realizes that it is more
costly, he cannot withdraw from that obligation after exercising
the said option.
SEC. 175. No policy of fire insurance shall be pledged,
hypothecated, or transferred to any person, firm or company
who acts as agent for or otherwise represents the issuing
company, and any such pledge, hypothecation, or transfer
hereafter made shall be void and of no effect insofar as it may
affect other creditors of the insured.
Title 3
CASUALTY INSURANCE
SEC. 176. Casualty insurance is 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. It includes, but is not limited to, employer’s
liability insurance, motor vehicle liability insurance, plate glass
insurance, burglary and theft insurance, personal accident and
health insurance as written by non-life insurance companies,
and other substantially similar kinds of insurance.
Definition
It refers to any loss or liability arising from accident or mishap
excluding certain types of loss or liability which are not within
the scope of other types of insurance, namely: marine; fire;
suretyship; and life.
So, if this particular liability arose from marine, fire, surety, you
address the loss under that particular kind of insurance. If not
covered, you go to casualty insurance. Usually, this is where
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court liabilities, motor vehicle accidents come under. You have 1. Torts – the insurance considered under tort is actually
the enumeration – marine, fire, surety and others – this is the casualty insurance
“and others.” 2. Criminal negligence – liability arising out of criminal
negligence also comes under casualty insurance as it is
What is an accident? accidental
3. Non-fulfilment of contract – can also be covered by
So, under this chapter, there is a discussion of what an casualty insurance
accident is. What struck me here is the example of this worker 4. Deliberate criminal acts – not covered, e.g. if you were
whose duty is lift some heavy objects and to transport these found guilty of murder, you cannot claim casualty
from point A to point B. At the process, his back snapped, he insurance because it is a deliberate act
suffered from a back injury. Now, he wanted to claim accident
insurance. The court ruled that the snapping of his back was When do you usually get casualty insurance?
not an accident but is more of an injury. • If you are a building owner, other than the property
insurance, you also get casualty insurance.
Let’s take a look at the definition here of accident. The term • Slip and fall resulting to broken shoulder or concussion. In
accident and accidental, as used in insurance contracts, have such a case, you can sue the building owner.
not acquired any technical meaning. They are construed by
courts in their ordinary and common acceptation. Thus, the
terms have been taken to mean that which happens by chance
or fortuitously, without intention or design, and which is **END**
unexpected, unusual and unforeseen. If you look at the
snapping of the back, it is more an injury but not an accident.

Another example, motor vehicle accident, yan klaro yan, it is

an accident. **ma’am talking about the speed of motor
vehicles J

Rule as to death or injury resulting from “accidental” or

“accidental means”

GENERAL RULE: The generally accepted rule is that death or

injury does not result from accident or accidental means within
the terms of an accident policy if it is the natural result of the
insured’s voluntary act, unaccompanied by anything
unforeseen except death or injury.

If there is a voluntary act involved, if you exposed yourself to

danger, and you suffer loss or damage, that is not accidental.
You knew that if you are going to jump from the rooftop of
Marco Polo, you will risk losing your life or limb.

If you are a skydiver and your parachute did not open on time,
is that an accident? Unless you specifically got a parachute
insurance contract, that probably has a different coverage or
definition of accident, said accident is not the accident
contemplated by the health or casualty insurance.

Normally, in a life insurance policy, there are accident riders. It

means that the insurance company will double the proceeds
but of course you have to pay additional premium.

Health insurance

This is insurance more for medical insurance purposes. It

reimburses the insured for pecuniary loss arising out of
disease-related illness.

Take note of the discussion on liability. What sort of liability is

the insurer liable for?

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Going back to casualty insurance, I want you to take a look at
the discussion on the effect of “no action” clause in policy of
liability insurance.
Effect of “no action” clause in policy of liability
insurance
Sometimes, we find in casualty insurance policies that they do
not allow the insured to sue the insurer as a co-defendant in a
suit to determine the latter’s liability to a third person. So, in
other words, the insurer wants a judgment first against the
insured before the third party can run after them. What did the
court say? Is that allowed? The court said that this is in
violation of the Rules of Court on joinder of parties.
Example, you are the injured party and you want to recover
from the owner of a building and the building owner has a
casualty insurance policy effective over the premises. The
building owner refuses to pay for your medical expenses so
you sue him under his casualty insurance policy. In order to
file only one action, you decide to join the insurance company
in the same suit as a co-defendant. So your action will be
“Maria Santiago vs. DBL Realty Management Company and
Paramount Insurance Company” that’s your suit. That is if you
want, once there is a finding of liability and the insured will be
found guilty, that the insurance company will right away be
adjudged in the same action.
Some insurance policies will require, before they are sued, that
you sue first the insured and get a judgment against the latter.
Afterwards, if you don’t get anything from the insured, you
institute another action to recover from the insurance
company. That’s what is going to happen if you follow the
insurance policy of the insurance company strictly. Now, is that
a valid defense on the part of the insurance company? Let’s
take a look at the discussion (refer to the book). The query is
which procedure to follow – that of the insurance policy or the
Rules of Court. It was held that “no action” clause policy
cannot prevail over the Rules of Court provisions aimed at
avoiding multiplicity of suits. Section 5 of Rule 2 on “joinder of
causes of actions” and Section 6 of Rule 3 on “permissive
joinder of causes of parties” cannot be superseded, at least
with respect to third persons not a party to the contract by a
“no action” clause on the contract of insurance.
So it cannot defeat the provisions of Rules of Court. It’s just
one cause of action, right? In our example, it is the right of the
insured to safety while in the premises which was violated by
the building owner. So, arising out of that cause of action
there are actually two parties involved – the building owner
and his insurance company. Why do you have to separate
that? So, if you are the counsel for the injured party all you
have to do is implead the insurance company in the same
action to recover from the insured.
Now, let’s go to suretyship.
TITLE 4
SURETYSHIP
**RECITATION**
What is a contract of suretyship?
A contract of suretyship 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.
What is included under the so-called contract of
suretyship?
It includes official recognizances, stipulations, bonds or
undertakings issued by any company by virtue of and under
the provisions of Act No. 536, as amended by Act No. 2206.
What is the nature of the liability of surety?
The liability of the surety or sureties shall be joint and several
with the obligor and shall be limited to the amount of the
bond. It is determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the
obligor and the obligee.
Could you explain further what solidary liability
means?
This means that upon default by the obligor in complying with
his obligation as secured by the bond, the surety becomes
primarily liable to the obligee who has right to demand
payment under the terms and conditions of the bond.
What do you mean when we say that the liability of a
surety is a contractual one?
It is determined strictly by the terms of (a) the contract of
suretyship in relation to the (b) principal contract between the
obligor and the obligee.
What is the relationship of the surety contract to the
contract existing between the obligor and the obligee?
The contract between the obligor and the obligee is the
principal contract. A surety contract is a collateral contract and
its basis is the principal contract or undertaking which it
secures.
In order to indemnify the surety who has just been
made liable under the suretyship contract, what kind of
instrument must exist?
There must be an “Indemnity Agreement.”
Distinguish suretyship from property insurance
SURETYSHIP PROPERTY INSURANCE
It is an accessory contract. It is a principal contract.
There are always three There are only two parties:
parties: the surety; the the insurer and the insured.
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principal debtor or obligor; 6. In the case of a continuing bond, the obligor shall pay the
and the creditor or obligee. subsequent annual premium as it falls due until the
It is more of a credit It is, generally, a contract of contract is cancelled.
accommodation with the indemnity.
surety assuming primary Types of bonds
liability.
The surety is entitled to There is no right of recovery 1. Contract bonds – these bonds are connected with
reimbursement for the loss it for the loss the insurer may construction and supply contracts. The position of surety
may suffer under the sustain, except when the is to answer for failure of the principal to perform in
contract. insurer is entitled to accordance with the terms and specifications of the
subrogation. contract.
Generally, a bond can only be It may be cancelled
cancelled by or with the unilaterally either by the Example, when you submit a bid, some of GOCCs require
consent of the obligee. insured or by the insurer on you to put up a contractor’s bond or a cash bond. If it is a
grounds provided by law. cash bond, you have to deliver the cash itself. If it is a
It requires the acceptance of It does not need the contractor’s bond, you have to get a performance bond
the obligee before it becomes acceptance of any third party. from a surety company. There are non-life insurance
valid and enforceable. companies that are also surety companies and are
It is a risk-shifting device. It is a risk-distributing device. engaged in the business of issuing bonds. Bond is another
word for suretyship.
Distinguish suretyship from guaranty
There may be two bonds:
SURETYSHIP GUARANTY a. Performance bond – once covering the faithful
Surety assumes liability as a Liability of the guarantor performance of the contract; and
regular party to the depends upon an b. Payment bond – one covering the payment of
undertaking. independent agreement to laborers and material men.
pay if the primary debtor fails
to do so. 2. Fidelity bonds – they pay an employer for loss growing
Surety is primarily liable. Guarantor is secondarily out of a dishonest act of his employee.
liable.
For employment purposes, usually, cashiers are required
Surety is not entitled to the Guarantor is entitled to the
to post bonds. Who else? Those positions that are
benefit of exhaustion of the benefit of exhaustion.
considered sensitive because there’s money involved. This
debtor’s assets.
is to discourage dishonesty of employees.
What is the benefit of exhaustion?
They are further classified as:
The right to have all the property of the debtor and legal
a. Industrial bond – one required by private
remedies against the debtor first exhausted before the
employers to cover loss through dishonesty of
guarantor can be compelled to pay the creditor.
employees; and
b. Public official bond – one required by public
What are the rules to follow in so far as the payment of
officers for the faithful performances of their duties
premiums in a contract of suretyhip is concerned?
and as a condition of entering upon the duties of their
offices.
The rules are as follows:
1. The premium becomes a debt as soon as the contract of
3. Judicial bonds – those which are required in connection
suretyship or bond is perfected and delivered to the
with judicial proceedings.
obligor;
2. The contract of suretyship or bonding shall not be valid
Examples of judicial bonds are attachment bonds,
and binding unless and until the premium therefor has
injunction bonds and/or bonds that the court will require
been paid;
of you when the court grants your writ of preliminary
3. Where the obligee has accepted the bond, it shall be valid
injunction. The amount of the bond is such as to
and enforceable notwithstanding that the premium has
compensate the other party for loss that he may incur
not been paid;
during the duration of the injunctive period.
4. If the contract of suretyship or bond is not accepted by, or
filed with the obligee, the surety shall collect only a
I want you to take note of the case of Finman General
reasonable amount;
Assurance Corp. vs. Inocencio, it is cited in the book. The
5. If the non-acceptance of the bond be due to the fault or
decision said that, it is a settled doctrine that the
negligence of the surety, no service fee, stamps, or taxes
conditions of a bond specified and required in the
imposed shall be collected by the surety; and
provisions of the statute or regulation providing for the
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submission of the bond are deemed incorporated or built
into all bonds tendered under the statute or regulation,
even though not there set out in printer’s ink. So, all the
conditions in that statute or regulation requiring the
posting of the bond are deemed incorporated as part of
the terms and conditions of the bond itself. So, there is no
more need to expressly indicate or repeat the condition
set in the statute in the bond itself. Ok?
Suretyship
SEC. 177. A contract of suretyship 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 of and under
the provisions of Act No. 536, as amended by Act No. 2206.
OK. Class, always remember, in a surety contract there are
always three types of contract. We look at the:
1. Principal contract
This is the contract between the obligor and the obligee. The
obligor is the principal or the person primarily liable under this
contract.
2. Suretyship contract
It is usually procured by the obligor. As explained by the book,
it is a guaranty. The surety is guaranteeing the obligee that
the obligor, or the principal, will deliver or perform the
obligation in favor of the obligee. So, in so far as the
suretyship contract is concerned, the obligee is the third party.
Who is the principal in the suretyship contract? The person
primarily liable is the surety company. The surety company has
entered into a contract with the obligor, who is the second
party there, in favor of the obligee, the third party.
The surety contract is the collateral contract. Without the main
contract, there would be no suretyship contract. It is useless to
be talking about a suretyship contract if there is no main
contract involved.
So, what does the suretyship contract undertakes? The
contract of suretyship is an agreement whereby the surety
company undertakes to answer, under specified terms and
conditions, for the debt, default or miscarriage of the obligor,
such as failure to perform a contract or certain duties, or for
breach of trust, negligence and the like, in favor of the obligee.
If the main party does not deliver, then the suretyship contract
shall be solidarily liable.
Let’s jump to a guaranty contract. Under a contract of
guaranty, the liability of the guaranty shall not kick in until all
properties and legal remedies are exhausted against debtor.
So, if you have a friend who asks you to guaranty, you always
remember that you will not be solidarily liable with your friend.
There must be a showing that the creditor has exhausted all
remedies first. At the end of the day, you may still be liable but
not right away. That is the benefit of exhaustion.
3. Indemnity agreement
This is a third-party contract as far as the obligee is concerned.
The obligee is not involved in the indemnity agreement. The
indemnity agreement is only between the surety and the
obligor.
SEC. 178. The liability of the surety or sureties shall be joint
and several with the obligor and shall be limited to the amount
of the bond. It is determined strictly by the terms of the
contract of suretyship in relation to the principal contract
between the obligor and the obligee.
Nature of liability of surety
Now the liability of the surety is solidary with the obligor and it
is only limited to the amount indicated in the bond and not
beyond. So the contract of surety will indicate how much the
surety will be liable and you cannot enforce the surety for an
amount more than what in indicated in the contract. It is
determined strictly by the terms of the contract of suretyship
in relation to the principal contract between the obligor and
the obligee. It is in essence a contractual obligation, a mere
collateral contract.
The surety has the duty to investigate and ascertain bond
application before it is approved. Why? The misrepresentation
of the principal, under the principal contract, will not affect the
right of the obligee to demand from the surety. Whose
responsibility is it to ensure that all representations are
correct? It is the responsibility of the surety company. The
obligee simply demands payment from the surety as soon as
the undertaking is not performed.
What is the basis of the recovery of the surety against the
insured? The surety company will ask the insured to execute
an “Indemnity Agreement” in favor of the surety.
SEC. 179. The surety is entitled to payment of the premium
as soon as the contract of suretyship or bond is perfected and
delivered to the obligor. No contract of suretyship or bonding
shall be valid and binding unless and until the premium
therefor has been paid, except where the obligee has accepted
the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has
been paid by the obligor to the surety: Provided, That if the
contract of suretyship or bond is not accepted by, or filed with
the obligee, the surety shall collect only a reasonable amount,
not exceeding fifty percent (50%) of the premium due thereon
as service fee plus the cost of stamps or other taxes imposed
for the issuance of the contract or bond:Provided, however,
That if the nonacceptance of the bond be due to the fault or
negligence of the surety, no such service fee, stamps or taxes
shall be collected.
In the case of a continuing bond, the obligor shall pay the
subsequent annual premium as it falls due until the contract of
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suretyship is cancelled by the obligee or by the Commissioner No, there is no over insurance in life insurance.
or by a court of competent jurisdiction, as the case may be.
What do you think is the limitation in coming out with
Rules on payment of premiums: the amount of a life insurance policy?

1. The premium becomes a debt as soon as the contract of
suretyship or bond is perfected and delivered to the
obligor;
2. The contract of suretyship or bonding shall not be valid
and binding unless and until the premium therefor has
been paid;
3. Where the obligee has accepted the bond, it shall be valid
and enforceable notwithstanding that the premium has
not been paid;
4. If the contract of suretyship or bond is not accepted by, or
filed with the obligee, the surety shall collect only a
reasonable amount;
5. If the non-acceptance of the bond be due to the fault or
negligence of the surety, no service fee, stamps, or taxes
imposed shall be collected by the surety; and
6. In the case of a continuing bond, the obligor shall pay the
subsequent annual premium as it falls due until the
contract is cancelled.
What is the consideration for the contract of suretyship? It is
the premium.
It is limited to the capacity of a person to pay premium.
Life insurance
SEC. 181. Life insurance is insurance on human lives and
insurance appertaining thereto or connected therewith.
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 this Code.
The second paragraph is a new provision. This paragraph
refers to certain retirement programs that are part of the
benefits a company can give to the employees. You shall see
later on what annuities are.
SEC. 182. An insurance upon life may be 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.

TITLE 5 Every contract or pledge for the payment of endowments or

annuities shall be considered a life insurance contract for
LIFE INSURANCE purposes of this Code.
**RECITATION**
In the absence of a judicial guardian, the father, or in the
latter’s absence or incapacity, the mother, of any minor, who is
What is a life insurance policy?
an insured or a beneficiary under a contract of life, health, or
accident insurance, may exercise, in behalf of said minor, any
Life insurance is insurance on human lives and insurance
right under the policy, without necessity of court authority or
appertaining thereto or connected therewith.
the giving of a bond, where the interest of the minor in the
particular act involved does not exceed Five hundred thousand
Why is a life insurance policy not a contract of
pesos (P500,000.00) or in such reasonable amount as may be
indemnity?
determined by the Commissioner. Such right may include, but
shall not be limited to, obtaining a policy loan, surrendering
It is not capable of pecuniary estimation. Hence, there is no
the policy, receiving the proceeds of the Policy, and giving the
limit as to the amount of insurance which may legally be
minor’s consent to any transaction on the policy.
placed upon the life of any person even though that person
might be one whose life was rather a burden upon the party in
In the absence or in case of the incapacity of the father or
interest than a benefit possessing a pecuniary value.
mother, the grandparent, the eldest brother or sister at least
eighteen (18) years of age, or any relative who has actual
Who are the parties to a life insurance policy?
custody of the minor insured or beneficiary, shall act as a
guardian without need of a court order or judicial appointment
There are three characters involved in the policy of life
as such guardian, as long as such person is not otherwise
insurance:
disqualified or incapacitated. Payment made by the insurer
1. The owner of the policy;
pursuant to this section shall relieve such insurer of any liability
2. The cestui que vie of the person whose life is the subject
under the contract.
of the policy; and
3. The beneficiary to whom the proceeds are paid.
Section 182 is very important, class. This was amended by the
Is there a limit to the amount of insurance in a life latest law passed in 2013.
insurance policy?

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An insurance upon life may be 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.
An example is an endowment policy which may provide that at
the end of a specified period, the insured will be able to get
lump sums.
Another example is a term policy, meaning the life insurance
policy is good, let’s say, only for 5 years and at the end of the
5th year you are not covered anymore. Of course, your
obligation to pay premiums will also end after the lapse of the
agreed period. There are insurance policies where even if the
period has already ended you are no longer required to pay
but you are still covered for life.
Every contract or pledge for the payment of endowments or
annuities shall be considered a life insurance contract for
purposes of this Code.
So, there is a contract for the payment of endowments or
annuities.
What do you mean by endowment?
In an endowment policy, 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, to some other person
indicated. The premium is higher because the cash values of
the policy grow more rapidly. This kind of policy differs from
the limited payment life policy in that in the case of latter, the
policy is paid only upon the death of the insured.
So, in an endowment policy, you earn during the period of the
policy. It grows, that’s why it is more expensive than an
ordinary life insurance policy. You already get the investment
portion of 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 policy.
This paragraph (3rd) is very important class because it tells us
who are able to control the policy if the beneficiary is a minor.
In the old law, it is P20,000, now they have increased it to
P500,000. So, where the proceeds of the insurance policy
exceeds P500,000, what does that mean? It means that the
minor must have a judicial guardian. But, if the minor does not
have a judicial guardian, the following may exercise the rights
of the minor:
1. The father; or
2. The mother, in the absence or incapacity of the father;
It’s not that the father or mother have no right over the
minor’s insurance proceeds. It’s just that, the court gives
precedence to the authority of the judicial guardian over the
father or the mother.
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.
March 27, 2015
SEC. 181. Life insurance is insurance on human lives and
insurance appertaining thereto or connected therewith.
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 this Code.
SEC. 182. An insurance upon life may be 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.
Every contract or pledge for the payment of endowments or
annuities shall be considered a life insurance contract for
purposes of this Code.
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 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
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disqualified or incapacitated. Payment made by the insurer
pursuant to this section shall relieve such insurer of any liability
under the contract.
What are the important provisions of life insurance?
Just try to remember who has the personality to represent a
minor in as far as insurance policies are concerned. If the
minor is the one insured who can exercise said rights on his
behalf? What is the threshold of the amounts? What is the
threshold before judicial guardianship is required? It’s 50
Thousand.
Who are the people involved in the policy of life insurance?
1. Owner of the policy
2. The person whose life is subject of the policy,
also known as the cestui que vie
3. beneficiary
Remember cestui que vie and the beneficiary of the policy. So
your father when you were young may have taken an
educational/life policy for you. Your father is the owner of the
policy, you are the cestui que vie or the person whose life is
subject of the policy. And the beneficiary can be another
person, maybe your mother.
Maybe your Lola took out an educational insurance policy for
you, your beneficiary would be your father but you are the
subject of the policy.
Go over the Kinds of life insurance policies. Just for your
information, what are they?
1. Ordinary Life Policy
The insured is required to pay a certain fixed
premium annually or at more frequent intervals
throughout his entire life and the beneficiary is
entitled to receive payment under the policy only
after the death of the insured.
Mahirap ang Ordinary life policy, you know why because you
pay for it 99 years. But you know how to escape from this?
Just don’t touch your policy. Do not take out a loan on your
policy maybe for the next 15 years. And then it will just earn
on its own. Your dividends, especially if it is a dividend earning
policy will accumulate enough that at some point in the life of
your policy you can just let it self-liquidate. Otherwise you go
for endowment. For Endowment you pay higher policies. Many
insurance companies consider this policy paid-up when the
insured reaches the age of 100. Paid-up meaning to say done.
Seriously, can you really continue living up to the age of 100?
J Thus, the ultimate payment of the insurance proceeds
(either at that age or at death) is as certain as death itself.
2. Limited Payment Life Policy
The premiums are payable only during a limited
period of years, usually 10, 15, or 20. When the
specified number of premium payments have been
made, the insurance is fully paid for.
The policy here, the terms only required premiums to be paid
during a limited period of years, 10, 15, 20. This has a cash
surrender value. In the ordinary life insurance policy, just
make sure that there is also a feature called cash surrender
value because after payment of 3 annual premiums your policy
earns a cash surrender value. So if After 20 years you don’t
like the idea of paying further or you are simply in need of
cash you can surrender the policy. But the amount of the cash
surrender value is not equal to the aggregate of the premiums
you have paid. It’s not the same; it’s a little bit less than the
total premiums you have paid in the insurance company.
3. Term Insurance Policy
Provides coverage only if the insured dies during a
limited period. It is an insurance for a fixed or specific
term, such as 2, 5, or 10 years.
The premium is lower than in the case of straight life insurance
because of the possibility that the insurer may not be obliged
to pay anything in proceeds whatsoever if the insured survives
the term. This kind of policy, very similar to a Limited Payment
Life policy there is no investment aspect. So what is the policy
that has investment aspect? It is usually Endowment. We will
find out later on that there is such a thing as variable.
4. Endowment Policy
Is one under the terms of which the insurer binds
himself to pay a fixed sum to the insured if he
survives for a specified period (maturity date stated in
the policy), or if he dies within such period, to some
other person indicated.
How is this different from the limited payment life policy? In
endowments the Premiums are a little bit higher. In other
words, they are more expensive than a limited payment life
policy because the cash value of the policy grows more rapidly.
This kind of policy differs from Limited life policy in that in the
Limited Payment Life Policy it is paid only upon the death of
the insured. That is one difference there. Mamatay muna ang
insured in the Limited Payment Life Policy before the proceeds
will be paid but in Endowment if you survive the number of
years, the period stated in the policy, then you can actually get
the proceeds of your life insurance policy.
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Here, the insured stands a chance of being paid the proceeds
of the policy while still alive. Endowment, this kind of policy
does not require death before payment of insurance proceeds.
After receiving the face amount of the policy, all coverage will
terminate. The proceeds on the maturity can be paid either in
a lump sum or as an annuity. This type represents both term
insurance and a form of annuity. So this type of policy is useful
in retirement planning. When you plan for retirement, when
you get to 40 for example and you are planning for retirement.
This is a good form of investment. Maybe when you get your
first salary as a lawyer, you buy your first insurance policy then
make it an endowment policy right away. By the time you
reach 50 your policy already matures and you can get either
lump sump or treat it as annuity every year.
Look at the Scope of life insurance
1. Life Insurance undertakes to protect the insured’s
family, creditors, or others against pecuniary loss
which may be the outgrowth of the death of the
insured. The loss occasioned by death against which
life insurance attempts to provide protection is the
cessation of the current earning power of the insured.
2. Health, accident and disability insurance provide
benefits for hospital or medical expenses, or for loss
of time or earning power because of injury or illness.
While health insurance is written by life insurers,
injury and illness are also viewed as casualties, that
is, both as life and non-life insurance; hence, such
policies may be issued by either life or non-life
insurance companies.
Life insurance is not limited only to life itself but also to health
and accident and disability insurance. You are not dead but
you are disabled. You lose income for the family, for yourself.
These are features of life insurance with riders. Remember the
provisions on riders; they are attached to the policy itself.
Those riders, you pay additional premium. But the premiums
are not really that hefty.
Contract of life annuity
“By the aleatory contract of life annuity, the debtor binds
himself to pay an annual pension or income during the life of
one or more determinate persons in consideration of a capital
consisting of money or other property, whose ownership is
transferred to him at one with the burden of the income.”
What is the annuity concept?
The annuity has been called the “upside-down
application of the life insurance principle”. This
concept is based on the notion that the purpose of life
insurance is the scientific creation of an estate,
whereas the purpose of the annuity is the scientific
liquidation of an estate.
That’s the whole concept of annuity. You buy an annuity
policy, then you pay the premium but at the same time for a
number of years you receive income. Parang nagreretirement
kumbaga while you are still alive. Some people they invest in
annuity, payable for 5 years and then next 5 years you receive
your annuity while you are still living. Yong endowment naman
you receive it at the end of the period, at the end of the period
you lose coverage. The annuity concept it’s like buying(?) into
a retirement plan. You want to enjoy the proceed while you
are alive.
Under a life insurance contract, the estate is created at death.
Under the annuity contract the estate is fully liquidated by
death. So by the time the insured dies wala ng pera.
Reduced to its ultimate simplicity, the idea can be expressed
by comparing the nature of the two types of agreements. In
exchange for his premium, the purchaser of life insurance
expects his insurer to pay his beneficiary a specified sum upon
his death. For his premium the purchaser of an annuity
expects his insurer to pay him a periodic income as long as he
lives. Thus under a life insurance contract, the insurer starts
paying upon the death of the insured, whereas in annuity
contract the insurer stops paying upon the death of the
insured.
You have to remember the concept of annuity, I think this is
the only place in the whole of commercial law when you
encounter the business of annuity.
Remember what is the concept of annuity, what is the concept
of __, what is an endowment, what is annuity. What are the
differences bet these three terms? Next time na may
magbebenta sa inyo you tell the agent that you are looking for
an annuity policy. Of course an annuity policy is a bit more
expensive than a straight life insurance policy. Because here
you will be receiving income after a certain period and for a
particular length of time. Annuity sometimes does not wait
until you die. Sometimes the annuity is good for five years but
you are earning. Some people they like to travel. What do you
do? When you are still a very hot lawyer, making loads of
loads of money you buy an annuity. And you say at the age of
50, “I want to get my income from that annuity policy for 5
years.” That is what you are going to spend on your vacation.
That is a good way of putting aside money for you to spend at
a later time in your life. That is the annuity concept.
“SEC. 183. The insurer in a life insurance contract shall be
liable in case of suicide only when it is committed after the
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policy has been in force for a period of two (2) years from the
date of its issue or of its last reinstatement, unless the policy
provides a shorter period: Provided, however, That suicide
committed in the state of insanity shall be compensable
regardless of the date of commission.
What is the provision similar to this one? Where there is also a
two year period required.
Incontestability clause (Sec 48)
“SEC. 48. Whenever a right to rescind a contract of insurance
is given to the insurer by any provision of this chapter, such
right must be exercised previous to the commencement of an
action on the contract.
“After a policy of life insurance made payable on the death of
the insured shall have been in force during the lifetime of the
insured for a period of two (2) years from the date of its issue
or of its last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation of the insured or
his agent.
There was a bar question on suicide. There was also a bar
question on incontestability clause. Don’t forget the insurance
company cannot say, (even if the policy has already been
effective for like 5 years), “there was
misrepresentation/concealment on their part.” They could only
do that within the 2 year period from whence it was issued or
reinstated. Beyond that even if you practically lied in your
insurance policy. If the policy had been effective for the last
10 years the insurance company cannot deny on the ground of
concealment or misrepresentation.
So here, essential in 183 - the insurer in a life insurance
contract shall be liable in case of suicide only when it is
committed after the policy has been in force for a period of
two (2) years from the date of its issue or of its last
reinstatement, unless the policy provides a shorter
period: Provided, however, That suicide committed in the state
of insanity shall be compensable regardless of the date of
commission.
If the insured is insane whether the policy was only effected
for 6 months whether it was effected for one year or a year
and a half insanity excuses the insured and makes the insurer
liable. When the suicide is committed in the state of insanity,
always, the insurance company will be liable. Take a look at
those instances when it is liable and when it is not liable.
Liability of insurer in case of suicide
• When Liable – in a life insurance contract, the insurer
is liable in case of suicide in the following cases:
a. 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
b. The suicide is committed after a shorter
period provided in the policy although within
the 2 year period; and
c. The suicide is committed in the state of
insanity regardless of the date of
commission, unless suicide is an excepted
risk.
Note that the policy cannot provide a period longer than 2
years. Thus, if the policy provides for a 3 year period and
the suicide is committed within said period but after 2
years, the insurer is liable.
• When not Liable
a. The suicide is not by reason of insanity and
is committed within the 2-year period.
b. The suicide is by reason of insanity but is not
among the risks assumed by the insurer
regardless of the date of commission; and
c. The insurer can show that the policy was
obtained with the intention to commit suicide
even in the absence of any suicide exclusion
in the policy.
“SEC. 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.
There is also a limitation in property insurance that you can
only transfer the proceeds of the insurance after the loss has
occurred. By then it will be considered a debt. But you cannot
transfer property insurance, fire insurance policy without the
consent of the insurer because it is a contract of indemnity.
The insurer - there is good faith entrusted in an insurance
policy. But a life insurance policy may pass by transfer, will or
succession to any person, whether he has insurable interest or
not, and such person may recover upon it whatever the
insured might have recovered.
That’s why in a lot of mortgage, a contract of loan, some
people take out a life insurance policy and assigns the
proceeds of the life insurance policy to that lender. If the
insured suffers some sort of insolvency, dies, the lender is
protected because the proceeds of the life insurance policy will
pass to him.
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Take a look at the contract of Mortgage Redemption Insurance Unless thereby expressly required, where? In the insurance
(MRI). In a mortgage redemption insurance, the insured signs policy itself. If there is no notice required by the policy the
on to a mortgage agent, takes out an MRI for the benefit of transfer or request is still valid even if without notice to the
the lender, most of the time for the benefit of the bank. So insurer.
that if the insured/the borrower dies, the proceeds of the life
insurance policy will go directly to the lender. The loan will “SEC. 186. Unless the interest of a person insured is
automatically be considered paid off. It’s being paid already by susceptible of exact pecuniary measurement, the measure of
the MRI. indemnity under a policy of insurance upon life or health is the
sum fixed in the policy.
Remember this feature is available only in life insurance
policies.
I did mention that in life insurance policies there is no such
It can pass by transfer, will or succession to any person,
thing as measure of indemnity. What it meant really is that you
whether he has an insurable interest or not. What about in
don’t fix it anymore after the occurrence of the loss or damage
ordinary property insurance, can you actually assign the
or before loss or damage. The indemnity will be stated already
proceeds of a fire insurance policy to a person who has no
in the policy itself. You do not get a life insurance policy that is
insurable interest? I don’t think so. You cannot do that
open.
because a fire insurance policy is a contract of indemnity. The
person to whom the proceeds shall be paid must have an
OK, we are done with life insurance. Micro insurance, that is a
insurable interest. However the book says; if it is to cover an
new provision under RA 10607.
illegal scheme the law will not allow that but you have to prove
that such is the intention of party.
TITLE 6

Necessity of consent of beneficiary to Assignment MICROINSURANCE

Can there be waiver of the right to change beneficiary? “SEC. 187. Microinsurance is a financial product or service
that meets the risk protection needs of the poor where:
A beneficiary of an ordinary life insurance policy which
contains an express waiver of the right to change the
“(a) The amount of contributions, premiums, fees or charges,
beneficiary acquires a vested and absolute interest which
computed on a daily basis, does not exceed seven and a half
cannot be divested without his consent.
percent (7.5%) of the current daily minimum wage rate for
nonagricultural workers in Metro Manila; and
If the life insurance policy contains an irrevocable beneficiary,
what is the remedy if you want to transfer by will or succession
“(b) The maximum sum of guaranteed benefits is not more
that policy to another person? What will you do to be able to
than one thousand (1,000) times of the current daily minimum
transfer life insurance policy that has an irrevocable
wage rate for nonagricultural workers in Metro Manila.
designation?
- Obtain the consent of the beneficiary.
“SEC. 188. No insurance company or mutual benefit
Why does he need to get the consent? association shall engage in the business of microinsurance
- The beneficiary acquires a vested interest, a unless it possesses all the requirements as may be prescribed
proprietary interest already in the proceeds of by the Commissioner. The Commissioner shall issue such rules
the insurance policy itself. and regulations governing microinsurance.

Where there is no waiver, that means that the designation is
not irrevocable, the insured may assign the policy without the
consent of the beneficiary.
“SEC. 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.
This chapter is meant to address the insurance requirements
of those who are considered poor by economic standards so
they too can enjoy the coverage of insurance. But in micro
insurance, will again have to be done by insurance companies
that have all the requirements prescribed by the commissioner.
Parang yong sa mga Bombay, mga utang-utang sa palengke.
This is the regulating provision for that kind of business. This is
to afford poor members of our population to avail of insurance.

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Premiums or contributions are collected or deducted prior to
the occurrence of a contingent event and the granting of
benefits are provided upon the concurrence of the contingent
event.
Then we have the Financial Reporting framework which is a
new provision as well.
CHAPTER II-A
FINANCIAL REPORTING FRAMEWORK
“SEC. 189. All companies regulated by the Commission,
unless otherwise required by law, should comply with the
financial reporting frameworks adopted by the Commission for
purposes of creating the statutory financial reports and the
annual statements to be submitted to the Commission.
Financial reporting framework means a set of accounting and
reporting principles, standards, interpretations and
pronouncements that must be adopted in the preparation and
submission of the statutory financial statements and reports
required by the Commission. This financial reporting
framework is not the same as the financial reporting
framework used to prepare the financial statements that the
Securities and Exchange Commission may require. The main
purpose of the statutory statements is to present important
information about the level of risk and solvency situation of
insurers. In prescribing the applicable statutory financial
reporting framework, the Commissioner shall take into account
international standards concerning solvency and insurance
company reporting as well as generally accepted actuarial
principles concerning financial reporting promulgated by the
Actuarial Society of the Philippines.
“The assets and investments discussed in Sections 204 to 215
shall be accounted for in accordance with this section.
“The valuation of reserves shall be accounted for in accordance
with Title 5 of this Code.
What’s with all these new provisions? Because of what
happens with college assurance plan and other smaller
insurance company that purport to offer pre-need? plans that
take on the characteristics of an insurance business as well.
CHAPTER III
THE BUSINESS OF INSURANCE
TITLE 1
INSURANCE COMPANIES, ORGANIZATION,
CAPITALIZATION AND AUTHORIZATION
Business of Insurance, we know that all insurance companies
must get the certificate of authority from the insurance
commissioner.
SEC. 190. For purposes of this Code, the
term insurer or insurance company shall include all
partnerships, associations, cooperatives or corporations,
including government-owned or -controlled corporations or
entities, engaged as principals in the insurance business,
excepting mutual benefit associations. Unless the context
otherwise requires, the term shall also include professional
reinsurers defined in Section 288. Domestic company shall
include companies formed, organized or existing under the
laws of the Philippines. Foreign company when used without
limitation shall include companies formed, organized, or
existing under any laws other than those of the Philippines.
SEC. 191. The provisions of the Corporation Code, as
amended, shall apply to all insurance corporations now or
hereafter engaged in business in the Philippines insofar as they
do not conflict with the provisions of this chapter.
SEC. 192. No corporation, partnership, or association of
persons shall transact any insurance business in the Philippines
except as agent of a corporation, partnership or association
authorized to do the business of insurance in the Philippines,
unless possessed of the capital and assets required of an
insurance corporation doing the same kind of business in the
Philippines and invested in the same manner; unless the
Commissioner shall have granted it a certificate to the effect
that it has complied with all the provisions of this Code.
“Every entity receiving any such certificate of authority shall be
subject to the insurance and other applicable laws of the
Philippines and to the jurisdiction and supervision of the
Commissioner.
SEC. 193. No insurance company shall transact any insurance
business in the Philippines until after it shall have obtained a
certificate of authority for that purpose from the Commissioner
upon application therefor and payment by the company
concerned of the fees hereinafter prescribed.
“The Commissioner may refuse to issue a certificate of
authority to any insurance company if, in his judgment, such
refusal will best promote the interest of the people of this
country. No such certificate of authority shall be granted to
any such company until the Commissioner shall have satisfied
himself by such examination as he may make and such
evidence as he may require that such company is qualified by
the laws of the Philippines to transact business therein, that
the grant of such authority appears to be justified in the light
of local economic requirements, and that the direction and
administration, as well as the integrity and responsibility of the
organizers and administrators, the financial organization and
the amount of capital, reasonably assure the safety of the
interests of the policyholders and the public.
“In order to maintain the quality of the management of the
insurance companies and afford better protection to
policyholders and the public in general, any person of good
moral character, unquestioned integrity and recognized
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competence may be elected or appointed director or officer of
insurance companies in accordance with the pertinent
provisions contained in the corporate governance circulars
prescribed by the Commissioner. In addition hereto, the
Commissioner shall prescribe the qualifications of directors,
executive officers and other key officials of insurance
companies for purposes of this section.
“No person shall concurrently be a Director and/or Officer of
an insurance company and an adjustment company.
“Before issuing such certificate of authority, the Commissioner
must be satisfied that the name of the company is not that of
any other known company transacting a similar business in the
Philippines, or a name so similar as to be calculated to mislead
the public. The Commissioner may issue rules and regulations
on the use of names of insurance companies and other
supervised persons or entities.
“The certificate of authority issued by the Commissioner shall
expire on the last day of December, three (3) years following
its date of issuance, and shall be renewable every three (3)
years thereafter, subject to the company’s continuing
compliance with the provisions of this Code, circulars,
instructions, rulings or decisions of the Commission.
“Every company receiving any such certificates of authority
shall be subject to the provisions of this Code and other
related laws and to the jurisdiction and supervision of the
Commissioner.
“No insurance company may be authorized to transact in the
Philippines the business of life and non-life insurance
concurrently, unless specifically authorized to do so by the
Commissioner: Provided, That the terms life and non-
life insurance shall be deemed to include health, accident and
disability insurance.
“No insurance company shall have equity in an adjustment
company and neither shall an adjustment company have
equity in an insurance company.
“No insurance company issued with a valid certificate of
authority to transact insurance business anywhere in the
Philippines by the Insurance Commissioner, shall be barred,
prevented, or disenfranchised from issuing any insurance
policy or from transacting any insurance business within the
scope or coverage of its certificate of authority, anywhere in
the Philippines, by any local government unit or authority, for
whatever guise or reason whatsoever, including under any
kind of ordinance, accreditation system, or scheme. Any local
ordinance or local government unit regulatory issuance
imposing such restriction or disenfranchisement on any
insurance company shall be deemed null and void ab initio.
“SEC. 194. Except as provided in Section 289, no new
domestic life or non-life insurance company shall, in a stock
corporation, engage in business in the Philippines unless
possessed of a paid-up capital equal to at least One billion
pesos (P1,000,000,000.00): Provided, That a domestic
insurance company already doing business in the Philippines
shall have a net worth by June 30, 2013 of Two hundred fifty
million pesos (P250,000,000.00). Furthermore, said company
must have by December 31, 2016, an additional Three
hundred million pesos (P300,000,000.00) in net worth; by
December 31, 2019, an additional Three hundred fifty million
pesos (P350,000,000.00) in net worth; and by December 31,
2022, an additional Four hundred million pesos
(P400,000,000.00) in net worth.
“The Commissioner may, as a pre-licensing requirement of a
new insurance company, in addition to the paid-up capital
stock, require the stockholders to pay in cash to the company
in proportion to their subscription interests a contributed
surplus fund of not less than One hundred million pesos
(P100,000,000.00). He may also require such company to
submit to him a business plan showing the company’s
estimated receipts and disbursements, as well as the basis
therefor, for the next succeeding three (3) years.
“If organized as a mutual company, in lieu of such net worth, it
must have available total members equity in an amount to be
determined by the Insurance Commission above all liabilities
for losses reported; expenses, taxes, legal reserve, and
reinsurance of all outstanding risks, and the contributed
surplus fund equal to the amounts required of stock
corporations. A stock insurance company doing business in the
Philippines may, subject to the pertinent law and regulation
which now or hereafter may be in force, alter its organization
and transform itself into a mutual insurance company.
“The Secretary of Finance may, upon recommendation of the
Commissioner, increase such minimum paid-up capital stock or
cash assets requirement under such terms and conditions as
he may impose, to an amount which, in his opinion, would
reasonably assure the safety of the interests of the
policyholders and the public. The minimum paid-up capital and
net worth requirement must remain unimpaired for the
continuance of the license. The Commissioner may require the
adoption of the risk-based capital approach and other
internationally accepted forms of capital framework.
“For the purpose of this section, net worth shall consist of:
“(a) Paid-up capital;
“(b) Retained earnings;
“(c) Unimpaired surplus; and
“(d) Revaluation of assets as may be approved by the
Commissioner.
“The Commission may adopt for purposes of compliance with
capital build up requirement under this Code the recognition as
part of the capital account, capital notes or debentures which
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are subordinate to all credits and senior only to common
capital stocks.
“The President of the Philippines may order a periodic review
every two (2) years the capital structure set out above to
determine the capital adequacy of the local insurance industry
from and after the integration and liberalization of the financial
services, including insurance, in the ASEAN Region. For this
purpose, a review committee consisting of representatives
from the Department of Finance (DOF), the Insurance
Commission (IC), the National Economic and Development
Authority (NEDA), the Securities and Exchange Commission
(SEC) and other agencies which the President may designate
shall conduct the review and may recommend to the President
to adopt for implementation the necessary capital adjustment.
“SEC. 195. Every company must, before engaging in the
business of insurance in the Philippines, file with the
Commissioner the following:
“(a) A certified copy of the last annual statement or a verified
financial statement exhibiting the condition and affairs of such
company;
“(b) If incorporated under the laws of the Philippines, a copy of
the articles of incorporation and bylaws, and any amendments
to either, certified by the Securities and Exchange Commission
to be a copy of that which is filed in its Office;
“(c) If incorporated under any laws other than those of the
Philippines, a certificate from the Securities and Exchange
Commission showing that it is duly registered in the mercantile
registry of that Commission in accordance with the Corporation
Code. A copy of the articles of incorporation and bylaws, and
any amendments to either, if organized or formed under any
law requiring such to be filed, duly certified by the officer
having the custody of same, or if not so organized, a copy of
the law, charter or deed of settlement under which the deed of
organization is made, duly certified by the proper custodian
thereof, or proved by affidavit to be a copy; also, a certificate
under the hand and seal of the proper officer of such state or
country having supervision of insurance business therein, if
any there be, that such corporation or company is organized
under the laws of such state or country, with the amount of
capital stock or assets and legal reserve required by this Code;
“(d) If not incorporated and of foreign domicile, aside from the
certificate mentioned in paragraph (c) of this section, a
certificate setting forth the nature and character of the
business, the location of the principal office, the name of the
individual or names of the persons composing the partnership
or association, the amount of actual capital employed or to be
employed therein, and the names of all officers and persons by
whom the business is or may be managed.
“The certificate must be verified by the affidavit of the chief
officer, secretary, agent, or manager of the company; and if
there are any written articles of agreement of the company, a
copy thereof must accompany such certificate.
“SEC. 196. The Commissioner must require as a condition
precedent to the transaction of insurance business in the
Philippines by any foreign insurance company, that such
company file in his office a written power of attorney
designating some person who shall be a resident of the
Philippines as its general agent, on whom any notice provided
by law or by any insurance policy, proof of loss, summons and
other legal processes may be served in all actions or other
legal proceedings against such company, and consenting that
service upon such general agent shall be admitted and held as
valid as if served upon the foreign company at its home office.
Any such foreign company shall, as further condition precedent
to the transaction of insurance business in the Philippines,
make and file with the Commissioner an agreement or
stipulation, executed by the proper authorities of said company
in form and substance as follows:
“The (name of company) does hereby stipulate and agree in
consideration of the permission granted by the Insurance
Commissioner to transact business in the Philippines, that if at
any time said company shall leave the Philippines, or cease to
transact business therein, or shall be without any agent in the
Philippines on whom any notice, proof of loss, summons, or
legal process may be served, then in any action or proceeding
arising out of any business or transaction which occurred in
the Philippines, service of any notice provided by law, or
insurance policy, proof of loss, summons, or other legal
process may be made upon the Insurance Commissioner, and
that such service upon the Insurance Commissioner shall have
the same force and effect as if made upon the company.
“Whenever such service of notice, proof of loss, summons, or
other legal process shall be made upon the Commissioner, he
must, within ten (10) days thereafter, transmit by mail,
postage paid, a copy of such notice, proof of loss, summons,
or other legal process to the company at its home or principal
office. The sending of such copy by the Commissioner shall be
a necessary part of the service of the notice, proof of loss, or
other legal process.
“SEC. 197. No insurance company organized or existing under
the government or laws other than those of the Philippines
shall engage in business in the Philippines unless possessed of
unimpaired capital or assets and reserve of not less than One
billion pesos (P1,000,000,000.00), nor until it shall have
deposited with the Commissioner for the benefit and security
of the policyholders and creditors of such company in the
Philippines, securities satisfactory to the Commissioner
consisting of good securities of the Philippines, including new
issues of stock of registered enterprises, as this term is defined
in Executive Order No. 226 of 1987, as amended, to the actual
market value of not less than the amount herein
required: Provided, That at least fifty percent (50%) of such
securities shall consist of bonds or other instruments of debt of
the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or -controlled
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corporations and entities, including the Bangko Sentral ng which is affected with public interest. It is a proper subject of
Pilipinas:Provided, further, That the total investment of a regulation and control by the state. The state has the
foreign insurance company in any registered enterprise shall sovereign duty to regulate the business of insurance. The
not exceed twenty percent (20%) of the net worth of said
business of insurance is conducted mostly by corporations.
foreign insurance company nor twenty percent (20%) of the
capital of the registered enterprise, unless previously Why? You need substantial capitalization to answer the
authorized in writing by the Commissioner. liabilities at the end of the periods provided for in your
insurance policies.
“The Commissioner may, as a pre-licensing requirement of a
new branch office of a foreign insurance company, in addition There are a lot of insurance companies that have investments
to the required asset or net worth, require the company to in real properties because with real properties their
have an additional surplus fund in an amount to be determined investments grow. It must be conservative investments; you
by the Insurance Commission. don’t want an insurance company that trades highly on
equities or securities that are very shaky. When you go for
“For purposes of this Code, the net worth of a foreign higher yield securities, investments, the risks are also very
insurance company shall refer only to its net worth in the
high. Your returns are very high but you can also lose very
Philippines.
deeply.
“SEC. 198. The Commissioner shall hold the securities,
deposited as required in the immediately preceding section, for Also, Minimum capitalization requirements, deposits and
the benefit and security of all the policyholders and creditors of withdrawals of securities by foreign companies. (Refer to the
the company depositing the same: Provided, That the book)
Commissioner may as long as the company is solvent, permit
the company to collect the interest or dividends on the TITLE 2
securities so deposited, and, from time to time, with his SOLVENCY
assent, to withdraw any of such securities, upon depositing
with said Commissioner other like securities, the market value
“SEC. 200. An insurance company doing business in the
of which shall be equal to the market value of such as may be
Philippines shall at all times maintain the minimum paid-up
withdrawn. In the event of any company ceasing to do
capital, and net worth requirements as prescribed by the
business in the Philippines, the securities deposited as
Commissioner. Such solvency requirements shall be based on
aforesaid shall be returned to the company upon the
internationally accepted solvency frameworks and adopted
Commissioner’s written approval and only after the company
only after due consultation with the insurance industry
has duly proven in its application therefor that it has no further
associations.
liability whatsoever under any of its policies nor to any of its
creditors in the Philippines.
“Whenever the aforementioned requirement be found to be
less than that herein required to be maintained, the
“SEC. 199. Every foreign company doing business in the
Commissioner shall forthwith direct the company to make good
Philippines shall set aside an amount corresponding to the
any such deficiency by cash, to be contributed by all
legal reserves of the policies written in the Philippines and
stockholders of record in proportion to their respective
invest and keep the same therein in accordance with the
interests, and paid to the treasurer of the company, within
provisions of this section. The legal reserve therein required to
fifteen (15) days from receipt of the order:Provided, That the
be set aside shall be invested only in the classes of Philippine
company in the interim shall not be permitted to take any new
securities described in Section 206:Provided, however, That no
risk of any kind or character unless and until it make good any
investment in stocks or bonds of any single entity shall, in the
such deficiency: Provided; further, That a stockholder who
aggregate exceed twenty percent (20%) of the net worth of
aside from paying the contribution due from him, pays the
the investing company or twenty percent (20%) of the capital
contribution due from another stockholder by reason of the
of the issuing company, whichever is the lesser, unless
failure or refusal of the latter to do so, shall have a lien on the
otherwise approved in writing by the Commissioner. The
certificates of stock of the insurance company concerned
securities purchased and kept in the Philippines under this
appearing in its books in the name of the defaulting
section, shall not be sent out of the territorial jurisdiction of
stockholder on the date of default, as well as on any interests
the Philippines without the written consent of the
or dividends that have accrued or will accrue to the said
Commissioner.
certificates of stock, until the corresponding payment or
reimbursement is made by the defaulting stockholder.
The power of the state to regulate insurance business
Because this particular industry or sector is vested with public “SEC. 201. No domestic insurance corporation shall declare or
interest. The state has the power to regulate the insurance distribute any dividend on its outstanding stocks unless it has
business and which entails the exercise of police power. met the minimum paid-up capital and net worth requirements
Generally recognized that the business of insurance is one under Section 194 and except from profits attested in a sworn
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statement to the Commissioner by the president or treasurer “(a) Cash in the possession of the insurance company or in
of the corporation to be remaining on hand after retaining transit under its control, and the true and duly verified balance
unimpaired:
of any deposit of such company in a financially sound bank or
trust company duly authorized by the Bangko Sentral ng
“(a) The entire paid-up capital stock;
Pilipinas.

“(b) The solvency requirements defined by Section 200;

“(b) Investments in securities, including money market
instruments, and in real property acquired or held in
“(c) In the case of life insurance corporations, the legal reserve
accordance with and subject to the applicable provisions of this
fund required by Section 217;
Code and the income realized therefrom or accrued thereon.

“(d) In the case of corporations other than life, the legal

reserve fund required by Section 219; and
“(e) A sum sufficient to pay all net losses reported, or in the
course of settlement, and all liabilities for expenses and taxes.
“Any dividend declared or distributed under the preceding
paragraph shall be reported to the Commissioner within thirty
(30) days after such declaration or distribution.
“If the Commissioner finds that any such corporation has
declared or distributed any such dividend in violation of this
section, he may order such corporation to cease and desist
from doing business until the amount of such dividend or the
portion thereof in excess of the amount allowed under this
section has been restored to said corporation.
“The Commissioner shall prescribe solvency requirements for
branches of foreign insurance companies operating in the
Philippines.
“(c) Loans granted by the insurance company concerned to the
extent of that portion thereof adequately secured by non-
speculative assets with readily realizable values in accordance
with and subject to the limitations imposed by applicable
provisions of this Code.
“(d) Policy loans and other policy assets and liens on policies,
contracts or certificates of a life insurance company, in an
amount not exceeding legal reserves and other policy liabilities
carried on each individual life insurance policy, contract or
certificate.
“(e) The net amount of uncollected and deferred premiums
and annuity considerations in the case of a life insurance
company which carries the full mean tabular reserve liability.
“(f) Reinsurance recoverable by the ceding insurer:

“(1) From an insurer authorized to transact business in this

Solvency requirements
country, the full amount thereof; or
Every insurance company doing business in the Philippines
must maintain at all times the margin of solvency required
“(2) From an insurer not authorized in this country, in an
under Section 200 of the code.
amount not exceeding the liabilities carried by the ceding
insurer for amounts withheld under a reinsurance treaty with
The corporate structure, the capitalization of the company are
such unauthorized insurer as security for the payment of
regulated by the insurance law, by this insurance code in
particular. obligations thereunder if such funds are held subject to
withdrawal by, and under the control of, the ceding insurer.
Then assets are very crucial to insurance companies because The Commissioner may prescribe the conditions under which a
they eventually answer the liabilities of the insurance ceding insurer may be allowed credit, as an asset or as a
deduction from loss and unearned premium reserves, for
companies. What are these assets?
reinsurance recoverable from an insurer not authorized in this
country but which presents satisfactory evidence that it meets
TITLE 3
the applicable standards of solvency required in this country.
ASSETS

“(g) Funds withheld by a ceding insurer under a reinsurance

“SEC. 202. In any determination of the financial condition of
treaty, provided reserves for unpaid losses and unearned
any insurance company doing business in the Philippines, there
premiums are adequately provided.
shall be allowed and admitted as assets only such assets
legally or beneficially owned by the insurance company
concerned as determined by the Commissioner which consist “(h) Deposits or amounts recoverable from underwriting
of: associations, syndicates and reinsurance funds, or from any

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suspended banking institution, to the extent deemed by the
Commissioner to be available for the payment of losses and
claims and values to be determined by him.
“(i) Electronic data processing machines, as may be authorized
by the Commissioner to be acquired by the insurance company
concerned, the acquisition cost of which to be amortized in
equal annual amounts within a period of five (5) years from
the date of acquisition thereof.
“(j) Investments in mutual funds, real estate investment trusts,
salary loans, unit investment trust funds and special deposit
accounts, subject to the conditions as may be provided for by
the Commissioner.
“(k) Other assets, not inconsistent with the provisions of
paragraphs (a) to (j) hereof, which are deemed by the
Commissioner to be readily realizable and available for the
payment of losses and claims at values to be determined by
him in a circular, rule or regulation.
“SEC. 203. In addition to such assets as the Commissioner may
from time to time determine to be non-admitted assets of
insurance companies doing business in the Philippines, the
following assets shall in no case be allowed as admitted assets
of an insurance company doing business in the Philippines, in
any determination of its financial condition:
“(a) Goodwill, trade names, and other like intangible assets.
“(b) Prepaid or deferred charges for expenses and
commissions paid by such insurance company.
“(c) Advances to officers (other than policy loans), which are
not adequately secured and which are not previously
authorized by the Commissioner, as well as advances to
employees, agents, and other persons on mere personal
security.
“(d) Shares of stock of such insurance company, owned by it,
or any equity therein as well as loans secured thereby, or any
proportionate interest in such shares of stock through the
ownership by such insurance company of an interest in
another corporation or business unit.
“(e) Furniture, furnishing, fixtures, safes, equipment, library,
stationery, literature, and supplies.
“(f) Items of bank credits representing checks, drafts or notes
returned unpaid after the date of statement.
“(g) The amount, if any, by which the aggregate value of
investments as carried in the ledger assets of such insurance
company exceeds the aggregate value thereof as determined
in accordance with the provisions of this Code and/or the rules
of the Commissioner.
“All non-admitted assets and all other assets of doubtful value
or character included as ledger or non-ledger assets in any
statement submitted by an insurance company to the
Commissioner, or in any insurance examiner’s report to him,
shall also be reported, to the extent of the value disallowed as
deductions from the gross assets of such insurance company,
except where the Commissioner permits a reserve to be
carried among the liabilities of such insurance company in lieu
of any such deduction.
Those are the assets of the corporation.
Treatment of premium receivables
We’re looking at an endowment plan of 20 years. The premium
receivables under this endowment plans are treated in the
books of the corporation as assets.
TITLE 4
INVESTMENTS
“SEC. 204. A life insurance company may lend to any of its
policyholders upon the security of the value of its policy such
sum as may be determined pursuant to the provisions of the
policy.
“No insurance company shall loan any of its money or deposits
to any person, corporation or association, except upon the
security of any of the following:
“(a) First mortgage or deeds of trust of registered,
unencumbered, improved or unimproved real estate, including
condominiums;
“(b) First mortgages or deeds of trust of actually cultivated,
improved and unencumbered agricultural lands in the
Philippines;
“(c) Purchase money mortgages, lease purchase agreements
or similar securities executed or received by it on account of
the sale or exchange of real property acquired pursuant to
Sections 206 and 208;
“(d) Bonds or other instruments of indebtedness issued or
guaranteed by the Government of the Philippines or its political
subdivisions authorized by law to incur such obligations or
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issue such guarantees or of government-owned or -controlled
corporations and instrumentalities including the Bangko Sentral
ng Pilipinas; or
“(e) Obligations issued or guaranteed by universal banks,
commercial banks, offshore banking units, investment houses
or other financial intermediaries duly registered with the
Bangko Sentral ng Pilipinas; or
“(f) Obligations issued or guaranteed by foreign banks or
corporations, each of which shall have total net worth of at
least One hundred fifty million US dollars ($US150,000,000.00)
or such other higher net worth as may be prescribed by the
Insurance Commission, as shown in their financial statements
as of the immediately preceding fiscal year; or
“(g) Assignments of monetary instruments such as cash
deposits, deposit certificates or other similar instruments of
universal banks, commercial banks, investment houses or
other financial intermediaries duly registered with the Bangko
Sentral ng Pilipinas; or
“(h) Pledges of shares of stock, bonds or other instruments of
indebtedness specified in Section 209; or
“(i) Chattel mortgages over equipment not more than three (3)
years old; and
“(j) Such other security as may be approved by the
Commissioner.
“The loans provided in the preceding subsection shall be
subject to the following conditions:
“(1) The amount of loan secured by real estate mortgage over
a non-agricultural land shall not exceed seventy percent (70%)
of its appraised value, and in the case of a loan secured by a
real estate mortgage over an agricultural land, the amount of
loan shall not exceed forty percent (40%) of its market
value: Provided, That, in no case shall such loan have a
maturity period in excess of twenty-five (25) years;
“(2) Unless approved by the Commissioner, no loan may be
granted upon the security of a mortgage on improved real
estate if the improvements thereon do not belong to the owner
of the land, and the owner of the improvements does not sign
the deed of mortgage. However, if the owner of the land is the
Government of the Philippines or any of its political
subdivisions and a long-term lease has been executed in favor
of the owner of the improvements, the owner of the land need
not be a party to the deed of mortgage. The expiration date of
the lease shall not, however, precede the maturity of the loan.
The phrase ‘improved real estate’ as used herein shall mean
land with permanent building or buildings erected thereon;
“(3) Lease-agreements or similar securities received on the
sale of real estate property shall not exceed one hundred
percent (100%) of the selling price of said property, or one
hundred percent (100%) of its market value at the time of its
disposition, whichever amount is lower. However, in no case
shall such agreement have a maturity period not exceeding
thirty (30) years;
“(4) Loans secured by shares of stock of solvent corporations
or institutions shall not exceed fifty percent (50%) of:
“(i) The weighted average market price for the one hundred
eighty (180) days preceding the approval of the loan for shares
listed in the stock exchange; and
“(ii) For unlisted shares, the adjusted book value of such
shares.
“(5) Loans secured by the chattel mortgages over equipment
shall not exceed seventy percent (70%) of the market value of
said equipment.
A life insurance company may lend to any of its
policyholders upon the security of the value of its
policy such sum as may be determined pursuant to
the provisions of the policy.
Every policy holder may borrow on the basis of the policy that
he holds from the insurance company. When you talk of
borrow that means there is also a corresponding interest levied
on your loan.
It could be that you borrowed money from your policy, by the
time you’re dead and your beneficiaries are looking forward to
getting the proceeds, the insurance company will try to have
the loan amount paid first before they gave the rest to your
beneficiaries. Payment of your loan would be taken out of the
proceeds of the insurance policy before they are turn over to
your beneficiaries.
What are these investments that are allowed under the law?
Just go over that.
“SEC. 205. No loan by any insurance company on the security
of real estate shall be made unless the title to such real estate
shall have first been registered in accordance with the existing
Land Registration Act, or shall have been previously registered
under the provisions of the existing Mortgage Law and the lien
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or interest of the insurance company as mortgagee has been
registered.
“SEC. 206. (a) An insurance company may purchase, hold,
own and convey such property, real and personal, as may have
been mortgaged, pledged, or conveyed to it in good faith in
trust for its benefit by reason of money loaned by it in
pursuance of the regular business of the company, and such
real or personal property as may have been purchased by it at
sales under pledges, mortgages or deeds of trust for its benefit
on account of money loaned by it; and such real and personal
property as may have been conveyed to it by borrowers in
satisfaction and discharge of loans made by the company in
payment or by reason of any loan made by the company in
payment or by reason of any loan made by it shall be sold by
the company within twenty (20) years after the title thereto
has been vested in it.
“(b) An insurance company may purchase, hold, and own the
following:
“(1) Real properties which serve as its main place of business
and/or branch offices: Provided, That such investment shall
not in the overall exceed twenty percent (20%) of its net
worth as shown by its latest financial statement approved by
the Commissioner.
“(2) Bonds or other instruments of indebtedness of the
Government of the Philippines or its political subdivisions
authorized by law to issue bonds at the reasonable market
value thereof.
“(3) Bonds or other instruments of debt of government-owned
or -controlled corporations and entities, including the Bangko
Sentral ng Pilipinas.
“(4) Bonds, debentures or other instruments of indebtedness
of any solvent corporation or institution created or existing
under the laws of the Philippines: Provided, however, That the
issuing, assuming or guaranteeing entity or its predecessors
shall not have defaulted in the payment of interest on any of
its securities and that during each of any three (3) including
the last two (2) of the five (5) fiscal years next preceding the
date of acquisition by such insurance company of such bonds,
debentures, or other instruments of indebtedness, the net
earnings of the issuing, assuming or guaranteeing institution
available for its fixed charges, as hereinafter defined, shall
have been not less than one and one-quarter (1¼) times the
total of its fixed charges for such year: Provided, further, That
no life insurance company shall invest in or loan upon the
obligations of any one institution in the kinds permitted under
this subsection an amount in excess of twenty-five percent
(25%) of the total admitted assets of such insurer as of
December thirty-first next preceding the date of such
investment.
“As used in this subsection the term net earnings available for
fixed charges shall mean net income after deducting operating
and maintenance expenses, taxes other than income taxes,
depreciation and depletion; but excluding extraordinary
nonrecurring items of income or expense appearing in the
regular financial statement of the issuing, assuming or
guaranteeing institution. The termfixed charges shall include
interest on funded and unfunded debt, amortization of debt
discount, and rentals for leased properties.
“(5) Preferred or guaranteed stocks of any solvent corporation
or institution created or existing under the laws of the
Philippines:Provided, That if the stocks are guaranteed, the
amount of stocks so guaranteed is not in excess of fifty
percent (50%) of the amount of the preferred or common
stocks, as the case may be, of the guaranteeing
corporation: Provided, finally, That no life insurance company
shall invest in or loan upon obligations of any one institution in
the kinds permitted under this subsection an amount in excess
of ten percent (10%) of the total admitted assets of such
insurer as of December thirty-first next preceding the date of
such investment.
“(6) Common stocks of any solvent corporation or institution
created or existing under the laws of the Philippines: Provided,
however, That no life insurance company shall invest in or loan
upon the obligations of any one corporation or institution in
the kinds permitted under this subsection an amount in excess
of ten percent (10%) of the total admitted assets of such
insurer as of December thirty-first next preceding the date of
such investment.
“(7) Securities issued by a registered enterprise, as this term is
defined in Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, as amended: Provided,
That the total investment of a domestic non-life insurance
company in any registered enterprise shall not exceed twenty
percent (20%) of the net worth of said insurance company as
shown by its aforesaid financial statement unless previously
authorized by the Commissioner.
“(8) Certificates, notes and other obligations issued by the
trustees or receivers of any institution created or existing
under the laws of the Philippines which, or the assets of which,
are being administered under the direction of any court having
jurisdiction:Provided, however, That such certificates, notes or
other obligations are adequately secured as to principal and
interests.
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“(9) Equipment trust obligations or certificates which are
adequately secured or other adequately secured instruments
evidencing an interest in equipment wholly or in part within
the Philippines: Provided, however, That there is a right to
receive determined portions of rental, purchase or other fixed
obligatory payments for the use or purchase of such
equipment.
“(10) Any obligation of any corporation or institution created or
existing under the laws of the Philippines which is, on the date
of acquisition by the insurer, adequately secured and has
qualities and characteristics wherein the speculative elements
are not predominant.
“(11) Such other securities as may be approved by the
Commissioner.
“(c) Any domestic insurer which has outstanding insurance,
annuity or reinsurance contracts in currencies other than the
national currency of the Philippines may invest in, or otherwise
acquire or loan upon securities and investments in such
currency which are substantially of the same kinds, classes and
investment grades as those eligible for investment under the
foregoing subdivisions of this section; but the aggregate
amount of such investments and of such cash in such currency
which is at any time held by such insurer shall not exceed one
and one-half (1½) times the amount of its reserves and other
obligations under such contracts or the amount which such
insurer is required by the law of any country or possession
outside the Republic of the Philippines to be invested in such
country or possession, whichever shall be greater.
“SEC. 207. An insurance company may:
“(1) Invest in equities of other financial institutions; and
“(2) Engage in the buying and selling of long-term debt
instruments: Provided, That any or all of such investments
shall be with the prior approval of the Commissioner.
Insurance companies may, however, invest in listed equities of
other financial institutions without need of prior approval by
the Commissioner.
“SEC. 208. Any life insurance company may:
“(a) Acquire or construct housing projects and, in connection
with any such project, may acquire land or any interest therein
by purchase, lease or otherwise, or use land acquired pursuant
to any other provision of this Code. Such company may
thereafter own, maintain, manage, collect or receive income
from, or sell and convey, any land or interest therein so
acquired and any improvements thereon. The aggregate book
value of the investments of any such company in all such
projects shall not exceed at the time of such investments
twenty-five percent (25%) of the total admitted assets of such
company on the thirty-first day of December next
preceding: Provided, That the funds of the company for the
payment of pending claims and obligations shall not be used
for such investments.
“(b) Acquire real property, other than property to be used
primarily for providing housing and property for
accommodation of its own business, as an investment for the
production of income, or may acquire real property to be
improved or developed for such investment purpose pursuant
to a program therefor, subject to the condition that the cost of
each parcel of real property so acquired under the authority of
this paragraph (b), including the estimated cost to the
company of the improvement or development thereof, when
added to the book value of all other real property held by it
pursuant to this paragraph (b), shall not exceed twenty-five
percent (25%) of its admitted assets as of the thirty-first day
of December next preceding.
“SEC. 209. Every domestic insurance company shall, to the
extent of an amount equal in value to twenty-five percent
(25%) of the minimum net worth required under Section 194,
invest its funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other instruments of
debt of the Government of the Philippines or its political
subdivisions or instrumentalities, or of government-owned or -
controlled corporations and entities, including the Bangko
Sentral ng Pilipinas: Provided, That such investments shall at
all times be maintained free from any lien or
encumbrance: Provided, further, That such securities shall be
deposited with and held by the Commissioner for the faithful
performance by the depositing insurer of all its obligations
under its insurance contracts. The provisions of Section 198
shall, so far as practicable, apply to the securities deposited
under this section.
“Except as otherwise provided in this Code, no judgment
creditor or other claimant shall have the right to levy upon any
of the securities of the insurer held on deposit under this
section or held on deposit pursuant to the requirement of the
Commissioner.
“SEC. 210. After satisfying the requirements contained in the
preceding section, any domestic non-life insurance company,
shall invest, to an amount prescribed below, its funds in, or
otherwise, acquire or loan upon, only the classes of
investments described in Section 206, including securities
issued by any registered enterprise, as this term is defined in
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Executive Order No. 226, otherwise known as ‘The Omnibus
Investments Code of 1987′ and such other classes of
investments as may be authorized by the Commissioner for
purposes of this section: Provided, That:
“(a) No more than twenty percent (20%) of the net worth of
such company as shown by its latest financial statement
approved by the Commissioner shall be invested in the lot and
building in which the insurance company conducts its business;
and
“(b) The total investment of an insurance company in any
registered enterprise shall not exceed twenty percent (20%) of
the net worth of said insurance company as shown by its
aforesaid financial statement nor twenty percent (20%) of the
paid-up capital of the registered enterprise excluding the
intended investment, unless previously authorized by the
Commissioner: Provided, further,That such investments, free
from any lien or encumbrance, shall be at least equal in
amount to the aggregate amount of: (1) its legal reserve, as
provided in Section 219, and (2) its reserve fund held for
reinsurance as provided for in the pertinent treaty provision in
the case of reinsurance ceded to authorized insurers.
“SEC. 211. After satisfying the requirements contained in
Sections 197, 199, 209 and 210, any non-life insurance
company may invest any portion of its funds representing
earned surplus in any of the investments described in Sections
204, 206 and 207, or in any securities issued by a registered
enterprise mentioned in the preceding sections: Provided, That
no investment in stocks or bonds of any single entity shall in
the aggregate, exceed twenty percent (20%) of the net worth
of the insurance company as shown in its latest financial
statement approved by the Commissioner or twenty percent
(20%) of the paid-up capital of the issuing company,
whichever is lesser, unless otherwise approved by the
Commissioner.
“SEC. 212. After satisfying the minimum capital investment
required in Section 209, any life insurance company may invest
its legal policy reserve, as provided in Section 217 or in Section
218, in any of the classes of securities or types of investments
described in Sections 204, 206, 207 and 208, subject to the
limitations therein contained, and in any securities issued by
any registered enterprise mentioned in Section 210, free from
any lien or encumbrance, in such amounts as may be
approved by the Commissioner. Such company may likewise
invest any portion of its earned surplus in the aforesaid
securities or investments subject to the aforesaid limitations.
“SEC. 213. Any investment made in violation of the applicable
provisions of this title shall be considered non-admitted assets.
“SEC. 214. (a) All bonds or other instruments of indebtedness
having a fixed term and rate of interest and held by any life
insurance company authorized to do business in this country, if
amply secured and if not in default as to principal or interest,
shall be valued based on their amortized cost using effective
interest method less impairment and unrecoverable amount
based on appropriate measurement methods which are
generally accepted in the industry and accepted by the
Commissioner. The Commissioner shall have the power to
determine the eligibility of any such investments for valuation
on the basis of amortization, and may by regulation prescribe
or limit the classes of securities so eligible for amortization. All
bonds or other instruments of indebtedness which in the
judgment of the Commissioner are not amply secured shall not
be eligible for amortization and shall be valued in accordance
with paragraph two. The Commissioner may, if he finds that
the interest of policyholders so permit or require, by official
regulation permit or require any class or classes of insurers,
other than life insurance companies authorized to do business
in this country, to value their bonds or other instruments of
indebtedness in accordance with the foregoing rule.
“(b) The investments of all insurers authorized to do business
in this country, except securities subject to amortization and
except as otherwise provided in this chapter, shall be valued,
in the discretion of the Commissioner, at their amortized cost
using effective interest method less impairment and
unrecoverable amount or at valuation representing their fair
market value. If the Commissioner finds that in view of the
character of investments of any insurer authorized to do
business in this country it would be prudent for such insurer to
establish a special reserve for possible losses or fluctuations in
the values of its investments, he may require such insurer to
establish such reserve, reasonable in amount, and include a
report thereon in any statement or report of the financial
condition of such insurer. The Commissioner may, in
connection with any examination or required financial
statement of an authorized insurer, require such insurer to
furnish him complete financial statements and audited report
of the financial condition of any corporation of which the
securities are owned wholly or partly by such insurer and may
cause an examination to be made of any subsidiary or affiliate
of such insurer as appropriate to specific investments as
provided in appropriate circulars issued by the Commissioner.
“(c) Investments in equity of an insurance company shall be
valued as follows:
“(1) Listed stocks shall be valued at market value and
periodically adjusted to reflect market changes through a
special valuation account to reflect their realizable value when
sold;
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“(2) Unlisted stocks shall be valued at adjusted book value
based on the latest unqualified audited financial statements of
the company which issued such stocks; and
“(3) Stocks of a corporation under the control of the insurer
shall be valued using the equity method which is the cost plus
or minus the share of the controlling company in the earnings
or losses of the controlled company after acquisition of such
stocks.
“(d) The stock of an insurance company shall be valued at the
lesser of its market value or its book value as shown by its last
approved audited financial statement or the last report on
examination, whichever is more recent. The book value of a
share of common stock of an insurance company shall be
ascertained by dividing (1) the amount of its capital and
surplus less the value of all of its preferred stock, if any,
outstanding, by (2) the number of shares of its common stock
issued and outstanding.
“Notwithstanding the foregoing provisions, an insurer may, at
its option, value its holdings of stock in a subsidiary insurance
company in an amount not less than acquisition cost if such
acquisition cost is less than the value determined as
hereinbefore provided.
“(e) Real estate acquired by foreclosure or by deed in lieu
thereof, in the absence of a recent appraisal deemed by the
Commissioner to be reliable, shall not be valued at an amount
greater than the unpaid principal of the defaulted loan at the
date of such foreclosure or deed, together with any taxes and
expenses paid or incurred by such insurer at such time in
connection with such acquisition, and the cost of additions or
improvements thereafter paid by such insurer and any amount
or amounts thereafter paid by such insurer or any assessments
levied for improvements in connection with the property.
“(f) Purchase money mortgages received on dispositions of
real property held pursuant to Section 208 shall be valued in
an amount equivalent to ninety percent (90%) of the value of
such real property. Purchase money mortgages received on
disposition of real property otherwise held shall be valued in an
amount not exceeding ninety percent (90%) of the value of
such real property as determined by an appraisal made by an
appraiser at or about the time of disposition of such real
property.
“(g) The stock of a subsidiary of an insurer shall be valued on
the basis of the greater of:
“(1) The value of only such of the assets of such subsidiary as
would constitute lawful investments for the insurer if acquired
or held directly by the insurer; or
“(2) Such other value determined pursuant to standards and
cumulative limitations, contained in a regulation to be
promulgated by the Commissioner.
“(h) Notwithstanding any provision contained in this section or
elsewhere in this chapter, if the Commissioner finds that the
interests of policyholders so permit or require, he may permit
or require any class or classes of insurers authorized to do
business in this country to value their investments or any class
or classes thereof as of any date heretofore or hereafter in
accordance with any applicable valuation or method.
“SEC. 215. It shall be the duty of the officers of the insurance
company to report within the first fifteen (15) days of every
month all such investments as may be made by them during
the preceding month, and the Commissioner may, if such
investments or any of them seem injudicious to him, require
the sale or disposal of the same. The report shall also include a
list of investments sold or disposed of by the company during
the same period.
TITLE 5
RESERVES
“SEC. 216. Every life insurance company, doing business in
the Philippines, shall annually make a valuation of all policies,
additions thereto, unpaid dividends, and all other obligations
outstanding on the thirty-first day of December of the
preceding year. All such valuations shall be made according to
the standard adopted by the company, as prescribed by the
Commissioner in accordance with internationally accepted
actuarial standards, which standard shall be stated in its
annual report.
“Such standard of valuations shall be according to a standard
table of mortality with interest to be determined by the
Insurance Commissioner. When the preliminary term basis is
used, the term insurance shall be limited to the first policy
year.
“The results of such valuations shall be reported to the
Commissioner on or before the thirtieth day of April of each
year accompanied by a sworn statement of a designated
company officer and stating the methods and assumptions
used in arriving at the values reported.
“SEC. 217. The aggregate net value so ascertained of the
policies of such company shall be deemed its reserve liability,
to provide for which it shall hold funds in secure investments
equal to such net value, above all its other liabilities; and it
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shall be the duty of the Commissioner, after having verified, to
such an extent as he may deem necessary, the valuation of all
policies in force, to satisfy himself that the company has such
amount in safe legal securities after all other debts and claims
against it have been provided for.
“The reserve liability for variable contracts defined in Section
238 shall be established in accordance with actuarial
procedures that recognize the variable nature of the benefits
provided, and shall be approved by the Commissioner.
“SEC. 218. Every life insurance company, conducted on the
mutual plan or a plan in which policyholders are by the terms
of their policies entitled to share in the profits or surplus shall,
on all policies of life insurance heretofore or hereafter issued,
under the conditions of which the distribution of surplus is
deferred to a fixed or specified time and contingent upon the
policy being in force and the insured living at that time,
annually ascertain the amount of the surplus to which all such
policies as a separate class are entitled, and shall annually
apportion to such policies as a class the amount of the surplus
so ascertained, and carry the amount of such apportioned
surplus, plus the actual interest earnings and accretions to
such fund, as a distinct and separate liability to such class of
policies on and for which the same was accumulated, and no
company or any of its officers shall be permitted to use any
part of such apportioned surplus fund for any purpose
whatsoever other than for the express purpose for which the
same was accumulated.
“SEC. 219. Every insurance company, other than life, shall
maintain a reserve for unearned premiums on its policies in
force, which shall be charged as a liability in any determination
of its financial condition. Such reserve shall be calculated
based on the twenty-fourth (24th) method.
“SEC. 220. In addition to its liabilities and reserves on
contracts of insurance issued by it, every insurance company
shall be charged with the estimated amount of all of its other
liabilities, including taxes, expenses and other obligations due
or accrued at the date of statement, and including any special
reserves required by the Commissioner pursuant to the
provisions of this Code.
Reserves
What are reserves in general?
The term “reserve” or “reserves” in the law of
insurance means a sum of money variously computed
or estimated, which, with accretions from interest, is
set aside, “reserved,” as a fund with which to mature
or liquidate either by payment or reinsurance with
other companies, future unaccrued and contingent
claims and claims accrued but contingent and
indefinite as to amount or time of payment.
Reserve/s are amounts set aside that means it is not part of
the original funds. They are set-aside by the Insurance
companies to meet contingencies, to meet maturing policies.
These are monies that must be there in the bank. These are
reserves for certain contingencies, to meet certain liabilities,
obligations of the insurance company. You cannot just dip your
hands into those reserves if not for the purpose for which they
were intended. So there’s reserve in life insurance policy and
you also have reserves in property insurance. And valuation of
reserves and cash surrender values in life policies.
What’s a cash surrender value?
Cash surrender value in life insurance contracts represents the
insurance company’s obligation to the policy owner in the
event that he desires to surrender the contract.
Is there a cash surrender value element in property insurance,
under marine insurance?
You don’t find cash surrender value in marine, property
insurance, it’s only in life insurance policies - are required by
law.
Cash surrender value is an asset of the policy owner it is yours.
In 5 years time, 10 years, in 15 year time your cash surrender
grows even bigger so that is actually yours therefore the
company must have a reserve for that liability. Because
anytime you can walk into the office and say, “I would like to
surrender my life policy”. It does not equal to the premiums
you paid but it can be substantial. As long as you have an
existing loan in your insurance policy, the insurance company
will pay your existing liabilities with the cash surrender value of
your policy or with proceeds of your life insurance policy prior
to handing them over to your beneficiaries.
Limit of Single Risk, reinsurance transaction let’s skip that. You
don’t have to know about that it would only make our life
miserable J
TITLE 9
POLICY FORMS
“SEC. 232. No policy, certificate or contract of insurance shall
be issued or delivered within the Philippines unless in the form
previously approved by the Commissioner, and no application
form shall be used with, and no rider, clause, warranty or
endorsement shall be attached to, printed or stamped upon
such policy, certificate or contract unless the form of such
application, rider, clause, warranty or endorsement has been
approved by the Commissioner.
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The forms of the insurance companies are all pre-approved by
the insurance commissioner. So Standardization of insurance
contracts, why do they do that? So that everybody is at a level
playing field. No confusion, no vague provisions will be allowed
there. The state comes in thru the insurance commissioner.
Forms of policies
Every insurance company doing business in the Philippines is,
therefore, required to submit first to the Insurance
Commissioner for approval the policy, certificate or contract of
insurance from which it intends to issue in the Philippines, as
well as the application, rider, clause, warranty, or endorsement
form which will be used with, attached to, or printed or
stamped upon, such policy, certificate or contract of insurance
form.
“SEC. 233. In the case of individual life or endowment
insurance, the policy shall contain in substance the following
conditions:
“(a) A provision that the policyholder is entitled to a grace
period either of thirty (30) days or of one (1) month within
which the payment of any premium after the first may be
made, subject at the option of the insurer to an interest charge
not in excess of six percent (6%) per annum for the number of
days of grace elapsing before the payment of the premium,
during which period of grace the policy shall continue in full
force, but in case the policy becomes a claim during the said
period of grace before the overdue premium is paid, the
amount of such premium with interest may be deducted from
the amount payable under the policy in settlement;
“(b) A provision that the policy shall be incontestable after it
shall have been in force during the lifetime of the insured for a
period of two (2) years from its date of issue as shown in the
policy, or date of approval of last reinstatement, except for
nonpayment of premium and except for violation of the
conditions of the policy relating to military or naval service in
time of war;
“(c) A provision that the policy shall constitute the entire
contract between the parties, but if the company desires to
make the application a part of the contract it may do so
provided a copy of such application shall be indorsed upon or
attached to the policy when issued, and in such case the policy
shall contain a provision that the policy and the application
therefor shall constitute the entire contract between the
parties;
“(d) A provision that if the age of the insured is considered in
determining the premium and the benefits accruing under the
policy, and the age of the insured has been misstated, the
amount payable under the policy shall be such as the premium
would have purchased at the correct age;
“(e) If the policy is participating, a provision that the company
shall periodically ascertain and apportion any divisible surplus
accruing on the policy under conditions specified therein;
“(f) A provision specifying the options to which the policyholder
is entitled to in the event of default in a premium payment
after three (3) full annual premiums shall have been paid. Such
option shall consist of:
“(1) A cash surrender value payable upon surrender of the
policy which shall not be less than the reserve on the policy,
the basis of which shall be indicated, for the then current
policy year and any dividend additions thereto, reduced by a
surrender charge which shall not be more than one-fifth (1/5)
of the entire reserve or two and one-half percent (2½%) of
the amount insured and any dividend additions thereto; and
“(2) One or more paid-up benefits on a plan or plans specified
in the policy of such value as may be purchased by the cash
surrender value.
“(g) A provision that at any time after a cash surrender value is
available under the policy and while the policy is in force, the
company will advance, on proper assignment or pledge of the
policy and on sole security thereof, a sum equal to, or at the
option of the owner of the policy, less than the cash surrender
value on the policy, at a specified rate of interest, not more
than the maximum allowed by law, to be determined by the
company from time to time, but not more often than once a
year, subject to the approval of the Commissioner; and that
the company will deduct from such loan value any existing
indebtedness on the policy and any unpaid balance of the
premium for the current policy year, and may collect interest in
advance on the loan to the end of the current policy year,
which provision may further provide that such loan may be
deferred for not exceeding six (6) months after the application
therefor is made;
“(h) A table showing in figures cash surrender values and paid-
up options available under the policy each year upon default in
premium payments, during at least twenty (20) years of the
policy beginning with the year in which the values and options
first become available, together with a provision that in the
event of the failure of the policyholder to elect one of the said
options within the time specified in the policy, one of said
options shall automatically take effect and no policyholder shall
ever forfeit his right to same by reason of his failure to so
elect;
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“(i) In case the proceeds of a policy are payable in installments
or as an annuity, a table showing the minimum amounts of the
installments or annuity payments;
“(j) A provision that the policyholder shall be entitled to have
the policy reinstated at any time within three (3) years from
the date of default of premium payment unless the cash
surrender value has been duly paid, or the extension period
has expired, upon production of evidence of insurability
satisfactory to the company and upon payment of all overdue
premiums and any indebtedness to the company upon said
policy, with interest rate not exceeding that which would have
been applicable to said premiums and indebtedness in the
policy years prior to reinstatement.
“Any of the foregoing provisions or portions thereof not
applicable to single premium or term policies shall to that
extent not be incorporated therein; and any such policy may
be issued and delivered in the Philippines which in the opinion
of the Commissioner contains provisions on any one or more of
the foregoing requirements more favorable to the policyholder
than hereinbefore required.
“This section shall not apply to policies of group life or
industrial life insurance.
“(f) A provision specifying the options to which the
policyholder is entitled to in the event of default in a premium
payment after three (3) full annual premiums shall have been
paid. Such option shall consist of:
“(1) A cash surrender value payable upon surrender of the
policy which shall not be less than the reserve on the policy,
the basis of which shall be indicated, for the then current
policy year and any dividend additions thereto, reduced by a
surrender charge which shall not be more than one-fifth (1/5)
of the entire reserve or two and one-half percent (2½%) of
the amount insured and any dividend additions thereto; and
“(2) One or more paid-up benefits on a plan or plans specified
in the policy of such value as may be purchased by the cash
surrender value.
So there is a Grace period of 30 days
“…the policyholder is entitled to a grace period either
of thirty (30) days or of one (1) month within which
the payment of any premium after the first may be
made...”
It is available to the insured – grace period. That is true to all
life insurance policies. There is also the cash surrender value
again. Cash surrender value is the amount that the insured, in
case of default, after the payment of at least 3 full annual
premiums, is entitled to receive if he surrenders the policy and
releases his claims upon it. What are the options that are
available to the insured who is giving up on his insurance
policy after 3 full annual payments? So there is the:
(1) A cash surrender value payable upon surrender
of the policy
(2) One or more paid-up benefits on a plan or plans
specified in the policy of such value as may be
purchased by the cash surrender value.
Dividends are also indicated. How dividends are going to be
distributed. What are the policies that have dividends? Is it an
income generating policy? So that is under forms.
There is a case where the court is to decide if the insurance
company also lends -The Insurance Company is also a lender.
But the lending is actually to the policy holder. The question
that came out before the SC is whether or not the lender’s tax
under the internal revenue code is applicable to life insurance
policies or to insurance policies. The court said that they are
not to be regarded as engaged in the lending business.
Because lending investors do not become liable for any loss or
damage of the insured and for which they are to compensate
the insured. In other words, the lending business of the
insurance company only is an attribute of their business
therein. But the lending investors are different from an
insurance company in the sense that an insurance company
also undertakes the duty to compensate the insured in case of
loss or damage. In life insurance policy upon the death of the
insured, the insurance company will have to pay out the
proceeds of the life insurance policy to the beneficiaries.
Protection functions of Life Insurance, we know that.
1. Pooling of Risk
All insurance is a matter of pooling, of group-sharing
of losses.
2. Prediction of number of death claims
In addition to the pooling principle, life insurance
relies on the ability of the insurer to predict with
reasonable accuracy the number of death claims it
can expect to have in a given year.
You go to cash surrender value, we already discuss this very
briefly but I want you to take a look at The Nature of the cash
surrender value
Nature of Cash Surrender Value
The cash surrender value arises from the fact that the fixed
annual premium is much in excess of the annual risk during
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the earlier years of the policy, an excess made necessary in
order to balance the deficiency of the same premium to meet
the annual risk during the latter years of the policy.
1. This excess of the premium paid over the annual
cost of insurance, with accumulations of interest,
constitutes the surrender value.
2. Though this excess of premiums paid is legally
the sole property of the company, still, in
practical effect, though not in law, it is the
money of the assured deposited with the
company in advance to make up the deficiency in
later premiums to cover the annual cost of
insurance, instead of being retained by the
assured and paid by him to the company in the
shape of greatly-increased premiums, when the
risk is greatest.
3. It is the net reserve required by law to be kept
by the company for the benefit of the assured
and to be maintained to the credit off the policy.
4. So long as the policy remains in force, the
company has practically no beneficial interest in
it except as its custodian, with the obligation to
maintain it unimpaired and suitably invested for
the benefit of the insured. This is the practical,
though not the legal, relation of the company to
this fund.
These features of the insurance policy must appear in the
policy forms that are preapproved by the insurance company.
If you get a life insurance policy from the insurance company,
99% of the time, most of the time the provisions, terms and
conditions are similar to the other insurance companies for the
same kind of policy. There may be additional provisions but
these are provisions that are not considered basic under the
insurance policy. These are provisions that the insured as well
as the insurer have to agree upon.
TITLE 10
VARIABLE CONTRACTS
“SEC. 238. (a) No insurance company authorized to transact
business in the Philippines shall issue, deliver, sell or use any
variable contract in the Philippines, unless and until such
company shall have satisfied the Commissioner that its
financial and general condition and its methods of operations,
including the issue and sale of variable contracts, are not and
will not be hazardous to the public or to its policy and contract
owners. No foreign insurance company shall be authorized to
issue, deliver or sell any variable contract in the Philippines,
unless it is likewise authorized to do so by the laws of its
domicile.
What are variable contracts?
“(b) The term variable contract shall mean any policy or
contract on either a group or on an individual basis issued by
an insurance company providing for benefits or other
contractual payments or values thereunder to vary so as to
reflect investment results of any segregated portfolio of
investments or of a designated separate account in which
amounts received in connection with such contracts shall have
been placed and accounted for separately and apart from
other investments and accounts. This contract may also
provide benefits or values incidental thereto payable in fixed or
variable amounts, or both. It shall not be deemed to be a
security or securities as defined in The Securities Act, as
amended, or in the Investment Company Act, as amended, nor
subject to regulations under said Acts.
“(c) In determining the qualifications of a company requesting
authority to issue, deliver, sell or use variable contracts, the
Commissioner shall always consider the following:
“(1) The history, financial and general condition of the
company: Provided, That such company, if a foreign company,
must have deposited with the Commissioner for the benefit
and security of its variable contract owners in the Philippines,
securities satisfactory to the Commissioner consisting of bonds
of the Government of the Philippines or its instrumentalities
with an actual market value of Two million pesos
(P2,000,000.00);
“(2) The character, responsibility and fitness of the officers and
directors of the company; and
“(3) The law and regulation under which the company is
authorized in the state of domicile to issue such contracts.
“(d) If after notice and hearing, the Commissioner shall find
that the company is qualified to issue, deliver, sell or use
variable contracts in accordance with this Code and the
regulations and rules issued thereunder, the corresponding
order of authorization shall be issued. Any decision or order
denying authority to issue, deliver, sell or use variable
contracts shall clearly and distinctly state the reasons and
grounds on which it is based.
What are variable contracts?
variable contract shall mean any policy or contract
on either a group or on an individual basis issued by
an insurance company providing for benefits or other
contractual payments or values thereunder to vary so
as to reflect investment results of any segregated
portfolio of investments or of a designated separate
account in which amounts received in connection with
such contracts shall have been placed and accounted
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for separately and apart from other investments and
accounts.
You look at the Business pages of newspapers. You find there
a little box where they will say variable, some sort of an Index
on how the business are performing.
A variable contract is simply a contract that has a life insurance
portion and an investment portion. What really _ here is that
investment portion. That is the portion of the money that you
paid into the policy that fluctuates depending on the business
environment(/). It’s like depositing money and making your
money earn. It’s like banking with the insurance company.
A portion of the premium is really fixed, that is the life
insurance aspect of your policy. A portion of that is variable.
That means that you paid, probably let’s say on the first year
you have a lot money, you paid 30k. Then the following year
you pay again 30k. These payments will earn depending on
the fluctuations of the stock market, equity market, bonds
market, wherever your investments are placed by the
insurance company. In other words, the insurance company is
actually dabbing on investments, putting your funds into
investments they believe will earn you income, to generate
income for you.
But the life insurance aspect of that is steady, will still be
covered by the life insurance aspect of your variable contract.
That is a feature of a variable contract.
Claims settlement we will take this up tomorrow.
March 28, 2015
SEC. 247. (a) No insurance company doing business in
the Philippines shall refuse, without just cause, to pay
or settle claims arising under coverages provided by its
policies, nor shall any such company engage in unfair
claim settlement practices. Any of the following acts by
an insurance company, if committed without just cause
and performed with such frequency as to indicate a
general business practice, shall constitute unfair claim
settlement practices:
Ma’am: If there is just cause, then the insurer may justify
refusal to pay your insurance proceeds. If there is just cause,
one cannot throw accusation to the insurance company that it
is engaged in unfair claim settlement.
To constitute unfair claim settlement, the acts committed must
be without just cause and performed with such frequency as to
indicate a general business practice. One act alone may not be
considered as unfair claim settlement.
Let’s go to the different acts:
(1) Knowingly misrepresenting to claimants pertinent
facts or policy provisions relating to coverage at issue;
(2) Failing to acknowledge with reasonable
promptness pertinent communications with respect to
claims arising under its policies;
Ma’am: Inuupuan lang yung claim mo sa insurance policy.
(3) Failing to adopt and implement reasonable
standards for the prompt investigation of claims arising
under its policies;
Ma’am: Sometimes, the insurance company failed to refer the
matter to an insurance adjuster. Insurance adjuster is a third
party who will investigate the veracity or truthfulness of your
claim. He has also expertise to ascertain the value of the loss
or the damage.
(4) Not attempting in good faith to effectuate prompt,
fair and equitable settlement of claims submitted in
which liability has become reasonably clear; or
Ma’am: There is criteria of good faith and that the liability is
clear. Parang simple lang, pinapahirapan pa nya.
(5) 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.
Ma’am: This is where the insurance company will retaliate on
your claims which will compel you to bring a suit against it to
recover from it. Once you have filed a complaint against it,
then it will offer you an amount less than what is owed.
(b) 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.
You can file your claims either before the Office of the
Insurance Commissioner or with the court.
(c) If it is found, after notice and an opportunity to be
heard, that an insurance company has violated this
section, each instance of noncompliance with
paragraph (a) may be treated as a separate violation of
this section and shall be considered sufficient cause for
the suspension or revocation of the company’s
certificate of authority.
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The ultimate penalty that may be imposed by the Office of the
Insurance Commissioner or the court for the violation of this
section is the revocation of the certificate of authority.
Claims settlement is the indemnification of the loss suffered by
the insured. The claimant may be the insured or reinsured, the
insurer who is entitled to subrogation, or a third party who has
a claim against the insured.
Cases:
Facts: On its way to Baguio, a spark coming from the
generator caught a fuel line, causing fire inside engine of D's
vehicle which is covered by a comprehensive motor policy. R
(insurer) contended that there was violation of the "Authorized
Repair Limit Clause."
It appeared that notice of the accident was sent to R without
the latter taking any action thus compelling D to have the
vehicle towed to Manila and repaired.
Issue: Is D entitled to indemnity under the foregoing
circumstances?
Held: Yes. D, under the situation, acted in evident good faith,
with no other purpose but to expedite the repair, to prevent
further inconvenience, it appearing that loss of use being a
consequential loss is excepted from the policy. R was ordered
to pay the amount of repair and towing expenses as limited by
the policy, plus attorney's fees. (Phil. Episcopal Church vs. The
New Zealand Insurance Co., Ltd., I.C. Case No. 40, March
24,1977.)
Facts: A claim was filed by D (insured) for damage caused to
his truck covered by a commercial vehicle comprehensive
policy with R (insurer) which assigned its adjuster to
investigate and inspect the damaged vehicle. An estimate of
damage by C. Machineries, Inc. was submitted by the adjuster.
Because R did not settle the claim despite the adjuster's
report, D initiated the repair of the truck with C. Machineries,
Inc.
Issue: Is D entitled to be indemnified for the damages caused
to his vehicle?
Held: Yes. Same ruling as in preceding case. (]. Guanco vs.
Summit Guaranty & Insurance Co., Inc., I.C. Case No. 115,
May 31, 1977.)
There are situations where the insured would rather enter into
compromise agreement with a third party against whom he is
liable rather than to litigate it before the court.
Where a policy gives the insurer control of the decision to
settle claim or litigate it, the insurer nevertheless is required to
observe a certain measure of consideration for the interest of
the insured.
The rule has come to be generally accepted that while the
express terms of the policy do not impose on the insurer the
duty to settle the claim at all costs, there is an implied duty on
his part to give due consideration to the interest of the insured
in its exercise of the option to reject a compromise settlement
and proceed with litigation.
SEC. 248. The proceeds of a life insurance policy shall be paid
immediately upon maturity of the policy, unless such proceeds
are made payable in installments or as an annuity, in which
case the installments, or annuities shall be paid as they
become due:Provided, however, That in the case of a policy
maturing by the death of the insured, the proceeds thereof
shall be paid within sixty (60) days after presentation of the
claim and filing of the proof of death of the insured. Refusal or
failure to pay the claim within the time prescribed herein will
entitle the beneficiary to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure
or refusal to pay is based on the ground that the claim is
fraudulent.
The proceeds of the policy maturing by the death of the
insured payable to the beneficiary shall include the discounted
value of all premiums paid in advance of their due dates, but
are not due and payable at maturity.
Ma’am: When are proceeds payable to the beneficiary of life
insurance policy? They shall be paid immediately upon
maturity of the policy. So a life insurance policy, an
endowment type whereby the insurance company is obliged to
pay the full amount or the face value at the end of the
endowment period. Then the proceeds of that policy is to be
paid immediately upon the insured unless such proceeds are
made payable in installments or as an annuity, in which case
the installments, or annuities shall be paid as they become
due. So if the annuity is for a period of five years, until the fifth
year, the proceeds is to be paid to the policyholder every year
continuously for five years. And it ends at the end of the fifth
year. Provided, however, That in the case of a policy maturing
by the death of the insured, the proceeds thereof shall be paid
within sixty (60) days after presentation of the claim and filing
of the proof of death of the insured. After presentation of the
claim and filing of the proof of death of the insured, so you file
the claim and you support it with proof of death. What is proof
death that will be accepted? It is the death certificate issued
by the Local Civil registrar.
Refusal or failure to pay the claim within the time prescribed
herein will entitle the beneficiary to collect interest on the
proceeds of the policy for the duration of the delay at the rate
of twice the ceiling prescribed by the Monetary Board, unless
such failure or refusal to pay is based on the ground that the
claim is fraudulent. So there is the penalty imposed against the
insurance company if there is delay in the payment of the
proceeds. You can ask for interest on top of the proceeds for
the duration of the delay. What is the rate? It is at the rate of
twice the ceiling prescribed by the Monetary Board. What is
the rate now? 6% in the form damages. That means 12%,
twice the rate of 6%.
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So Remember that life insurance policy can be ordinary,
limited, term, or endowment policy. When will it mature? It
will mature at the end of the period that is indicated in the
policy or by death.
The sixty day period fixed by law within which to pay the
proceeds after presentation of proof of death is merely
procedural in nature. The proceeds shall be paid from the time
of death and not from the presentation of the proof of death.
The death of the insured may be sufficiently established by the
death certificate issued by the Civil Registrar of the place
where the insured died. The insurer's liability may arise on a
presumption of death.
Art. 390. After an absence of seven years, it being unknown
whether or not the absentee still lives, he shall be presumed
dead for all purposes, except for those of succession.
The absentee shall not be presumed dead for the purpose of
opening his succession till after an absence of ten years. If he
disappeared after the age of seventy-five years, an absence of
five years shall be sufficient in order that his succession may
be opened. (n)
Art. 391. The following shall be presumed dead for all
purposes, including the division of the estate among the heirs:
(1) A person on board a vessel lost during a sea
voyage, or an aeroplane which is missing, who has
not been heard of for four years since the loss of the
vessel or aeroplane;
(2) A person in the armed forces who has taken part
in war, and has been missing for four years;
(3) A person who has been in danger of death under
other circumstances and his existence has not been
known for four years.
Art. 392. If the absentee appears, or without appearing his
existence is proved, he shall recover his property in the
condition in which it may be found, and the price of any
property that may have been alienated or the property
acquired therewith; but he cannot claim either fruits or rents.
So if a judgment is rendered by the court declaring the insured
presumably death, then that can be presented as proof to the
insurer in support of the beneficiary’s claim.
The sixty- period is crucial in the sense that if it is not complied
with by the insurer, then that would be considered as unfair
claim settlement practice.
Sec. 249. The amount of any loss or damage for which an
insurer may be liable, under any policy other than life
insurance policy, shall be paid within thirty days after proof of
loss is received by the insurer and ascertainment of the loss or
damage is made either by agreement between the insured and
the insurer or by arbitration; but if such ascertainment is not
had or made within sixty days after such receipt by the insurer
of the proof of loss, then the loss or damage shall be paid
within ninety days after such receipt. Refusal or failure to pay
the loss or damage within the time prescribed herein will
entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure
or refusal to pay is based on the ground that the claim is
fraudulent.
How about Fire insurance losses? What is the period? There is
30-day, 60-day, and 90-day period.
Section 249 refers to insurance policies other than life. The
proceeds shall be paid within thirty (30) days after receipt by
the insurer of proof of loss, and ascertainment of the loss or
damage by agreement of the parties or by arbitration but not
later than ninety (90) days from such receipt of proof of loss
whether or not ascertainment is had or made.
The fire insurance contract imposes definite obligations upon
the insured immediately upon the occurrence of a loss.
(a) Two of these, the requirement of the notice of loss
and obligation to file a proof of loss, are conditions
with which the insured must comply before there is
any liability on the part of the insurer,
(b) Furthermore, after a fire, the insured is required to
do everything reasonable to prevent further damage
to the property insured. An insured who fails to
protect his property adequately from further loss after
the fire, cannot collect for the additional loss thus
occasioned.
The fire insurance contract usually provides for two options of
settlement by the insurer: the payment of damages for the
loss; or the restoration of the subject matter of the insurance
to its former condition.
If the insurer elects to rebuild, the amount of damage
recoverable for a breach is not thereafter limited to the
amount of insurance. The option to repair or replace involves
the insurer in the business of building construction and it is
very uncommon to exercise the option. When at all possible,
insurers prefer to settle all losses by a cash payment.
Sufficiency of proof of loss
While the insurer, and the Insurance Commissioner for that
matter, have the right to reject proofs of loss if they are
unsatisfactory, they may not set up for themselves an arbitrary
standard of satisfaction. Substantial compliance with the
requirements will always be deemed sufficient.
Where the insured's proof of loss is based on the report of
insurer's adjuster which the insurer itself introduced in
evidence, the report should be given weight and credence as it
could very well be considered as an admission of its liability up
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to the amount recommended. (Noda vs. Cruz-Amaldo, 151
SCRA 227 [1987].)
Under policies, particularly against fire, which contain a
provision to the effect that all benefits under the policy shall be
forfeited if the claim for loss be in any respect fraudulent, or if
any false declaration be made by the insured or his agent to
obtain any benefit under the policy, a serious discrepancy
between the actual loss and that claimed in the proof of loss,
shall avoid it.
Who has the burden of proving fraud?
The burden of proving fraud rests on the insurer.
Reference to arbitration
Sometimes the insurance policy will stipulate that in the event
of a loss, unless the company should deny liability, as a
condition precedent to bringing an action on the policy by the
insured, the latter should first submit to an arbitration is one
valid at law and unless it be first complied with, no action can
be brought. But, if in the course of the settlement of the loss,
the company should in any case refuse to pay, it will be
deemed to have waived the condition precedent with reference
to arbitration, and suit upon the policy will lie.
Where there is an agreement to arbitrate and one party puts
up a claim which the other disputes, the need to arbitrate is
imperative.
Now in the course of the arbitration proceeding, there is
hearing. After hearing, a decision was rendered in favor of the
insured and despite that the insurance company still refused to
pay. Then the insured can file a judicial action before the court
to enforce the payment.
Right of insurer to subrogation
Subrogation, a normal incident of indemnity insurance – It’s a
very essential characteristic of insurance contract.
Limit of recovery
A subrogee cannot succeed to a right not possessed by the
subrogor. The rights to which the subrogee succeeds are the
same as, but not greater than the subrogor. Thus, as
subrogee, the insurer, after paying the claim of the insured for
damages under the insurance, is subrogated merely to the
rights of the insured. It is not greater than the rights of the
insured. The insurer can recover only the amount that is
recoverable by the insured and can recover only if the insured
likewise could have recovered. So that is the basis for the
recovery of the insurance company in the exercise of the right
of subrogation.
An example, where the right of the insured in case of loss or
damage owned by him is limited or restricted by the provisions
of the bill of lading issued by the common carrier, a suit by the
insurer as subrogee necessarily is subject to like limitations
and restrictions.
This is the exception – the rule does not apply where it would
be unfair and equitable to limit the liability of the wrongdoer to
the amount stipulated between him and the insured. This
applies, class, in cases of liability insurance.
I want you to read the case of Cebu Shipyard and
Engineering Works, Inc. vs. William Lines, Inc.
Let’s proceed to liability of insurer to pay damages and
interest…
SEC. 250. In case of any litigation for the enforcement of any
policy or contract of insurance, it shall be the duty of the
Commissioner or the Court, as the case may be, to make a
finding as to whether the payment of the claim of the insured
has been unreasonably denied or withheld; and in the
affirmative case, the insurance company shall be adjudged to
pay damages which shall consist of attorney’s fees and other
expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment plus interest of
twice the ceiling prescribed by the Monetary Board of the
amount of the claim due the insured, from the date following
the time prescribed in Section 248 or in Section 249, as the
case may be, until the claim is fully satisfied: Provided, That
failure to pay any such claim within the time prescribed in said
sections shall be considered prima facie evidence of
unreasonable delay in payment.
Finding of unreasonable delay
Under Sections 248, 249, and 250, the Commissioner or the
Court must still make a finding that the payment of the claim.
That should be part of the judgment of the Insurance
Commissioner or as the case may be.
If, there is unreasonably denial or withholding of the
claim, insured shall be entitled to collect damages which shall
consist of attorney’s fees and other expenses incurred by the
insured person by reason of such unreasonable denial or
withholding. Again, interest is twice the ceiling prescribed by
the Monetary Board of the amount claim due the insured, from
the date following the time prescribed in Section 248 or in
Section 249, as the case may be, until the claim is fully
satisfied. When does this interest reckon? After 60 days in case
of life insurance policies or after the 20/60/90 day period in
case of fire insurance policies.
The failure to pay any such claim within the time prescribed
shall be considered prima facie evidence of unreasonable delay
in payment. You just have to prove to the court that failure
was due you on a particular date but payment did not come
within that period. Of course, it is just prima facie so it can be
rebutted by the insurance company.
After there is a finding of unreasonable delay, what do you
get? Damages which may consist of attorney’s fees and other
expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment plus interest of
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twice the ceiling prescribed by the Monetary Board of the
amount of the claim due the insured.
SEC. 251. It is unlawful to:
(a) Present or cause to be presented any fraudulent claim for
the payment of a loss under a contract of insurance; and
(b) Fraudulently prepare, make or subscribe any writing with
intent to present or use the same, or to allow it to be
presented in support of any such claim. Any person who
violates this section shall be punished by a fine not exceeding
twice the amount claimed or imprisonment of two (2) years, or
both, at the discretion of the court.
Section 251 is a new section. It presents for the circumstances
considered unlawful.
(a) Present or cause to be presented any fraudulent claim for
the payment of a loss under a contract of insurance;
You present a false claim, you are committing an unlawful act.
This is really a categorical statement, para wala ng labo-labo.
Under section 251, the law categorically declares that action to
be unlawful when you present a false claim.
(b) Fraudulently prepare, make or subscribe any writing with
intent to present or use the same, or to allow it to be
presented in support of any such claim.
You know class, I was asked to prepare a deed of sale of a
motor vehicle. The parties came up to me and present the
deed. I was hesitant at first because the name on the ORCR is
not the name of the vendor, it has a different name pero
pwede naman yan, we just refer to the previous transaction. I
said, “Well, why don’t you check it with the LTO just to make
sure?” so they went, they came back saying that “Sa
Saranggani pala eto naka-register.” Word of advice, just like
when you buy a piece of real estate, check the status of the
property.
Any person who violates this section shall be punished by a
fine not exceeding twice the amount claimed or imprisonment
of two (2) years, or both, at the discretion of the court.
So what are the types of damages that may be
recovered?
It is clear that under Section 250, in case of unreasonable
delay in the payment of the proceeds of an insurance policy,
the damages that may be awarded are:
1. Attorney’s fees;
2. Other expenses incurred by the insured person by
reason of such unreasonable denial or withholding of
payment;
3. Interest at twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the
insured; and
4. The amount of the claim.
Damages may be recovered only when there is unreasonable
delay. So what if there is just delay? Not considered
unreasonable? Damages cannot be recovered because in the
business of insurance the possibility of delay is very real. You
are claiming compensation for a loss or damage so it is but fair
for the insurance company to check on the basis of that loss.
It is generally agreed that an insurer may, in good faith and
honesty, entertain a difference of opinion as to its liability.
Accordingly, the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be imposed unless the
evidence and the circumstances show that such refusal was
wilful and without reasonable cause as the facts appear to a
reasonable and prudent man. The court gives some leeway to
the insurance company to contest and verify if the actions of
the insurance company show wilfulness without blatant
disregard to ones claim. Blatant in the sense that the insurance
company is not replying to you or makes it difficult for you, not
replying on your inquiries, then, it can be a basis for the
imposition of damages. Remember, damages will only attach if
there is a finding of unreasonable delay.
Where the delay in payment was due to the investigation the
insurer conducted to ascertain the truth of the information it
received that the insured was not insurable at the time of his
application, then the delay was held justifiable. Similarly,
where the insurer was faced by the problem of determining
who was the actual beneficiary of the insurance policies
involved, aggravated by the claim of various creditors who
wanted to partake of the insurance proceeds, not to mention
the endorsement by the insured of the policies to a bank to
which he mortgaged the properties covered by the insurance,
it was held that the insurer was justified in withholding
payment to the insured. In other words, when there is no
intent on the part of the insurance company to delay, it may
be justified.
Presumption of unreasonable delay
There is prima facie presumption of unreasonable delay,
however, if the insurer fails to pay any such claim within the
time prescribed in Sections 248 and 249. Again and again, the
presumption is only prima facie and may be rebutted with
proof to be presented by the insurance company.
Conflicting resolutions of trial court and Commission
Aside from the revocation or suspension of license, the
Insurance Commissioner also has the discretion to impose
upon the erring insurance companies and its directors, officers
and agents, fines and penalties, as set out in Section 438. So,
the Director could also be liable.
The finding of the trial court will not necessarily foreclose the
administrative case before the Commission, or vice versa. So
there is a possibility that you have a case before the insurance
commissioner and you also have a case pending in court. True,
the parties are the same, and both actions are predicated on
the same set of facts, and will require identical evidence. But
the issues to be resolved, the quantum of evidence, the
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procedure to be followed, and the reliefs to be adjudged by directly but to the client. This is really an agreement between
these two bodies are different. That’s where the fault arise --- the lawyer and the client as to how his attorney’s fees be paid.

Civil Case Administrative In a case, the petitioner contends that while the complaint of
Case the insured prayed for P10,000 moral damages, the lower
Degree of proof Preponderance of Substantial court awarded twice the amount without factual or legal basis;
required evidence, or simply evidence, or that while private respondent prayed for P5,000 exemplary
put, such evidence amount of relevant damages, the trial court awarded P20,000; and while private
that is of greater evidence that a respondent prayed for P3,000 attorney’s fees, the trail court
weight, or more reasonable mind awarded P5,000.
convincing than might accept as
that which is adequate to justify In one case the propriety of the award of moral damages,
offered in the conclusion. exemplary damages and attorney’s fees was raised as an
opposition to it. issue. What did the court say?
Procedure to be Governed by the Commission has its
followed Rules of Court own set of rules The Rules of the Civil Code of the Philippines shall govern as to
and it is not bound the award of moral and exemplary damages. So there must be
by the rigidities of a basis when you pray for damages. It must be proved. The
technical rules of purpose of moral damages is essentially indemnity or
procedure. reparation, not punishment of correction. Moral damages are
not intended to enrich the complainant at the expense of the
These two bodies conduct independent means of ascertaining defendant. They are awarded to enable the injured party to
the ultimate facts of their respective cases that will serve as obtain means, diversions or amusements that will serve to
basis for their respective decisions. If, for example, the trial alleviate the moral suffering he has undergone by reason of
courts find that there was no unreasonable delay or denial of the defendant’s culpable action. While it is true that no proof
the claim, it does not automatically mean that there was in fact of pecuniary loss is necessary in order that moral damages
no such unreasonable delay of denial that would justify the may be adjudicated, the assessment of which is left to the
revocation or suspension of the licenses of the concerned discretion of the court according to the circumstances of each
insurance companies. It only means that the insured failed to case. So, there is no necessity of pecuniary loss or actual
prove by preponderance of evidence that he is entitled to nawalan talaga sya. It is equally true that in awarding moral
damages. damages in case of breach of contract, there must be a
showing that the breach was wanton and deliberately injurious
So we are looking at a situation where there is a pending or the one responsible acted fraudulently or in bad faith. Just
administrative action and there is also a pending court action. because your rights were violated, it does not mean that you
Remember, that if there is a finding of unreasonable delay, the deserve to be compensated by way of moral damages, there
proof supporting such finding may not be the same with that must be a blatant violation of your rights.
required by the court. The insurance commissioner may accept
your proof in order to cancel or suspend your license. It So, when you pray for damages, the court may disagree with
doesn’t mean that it requires as much evidence as the court the amount you prayed for. To determine damages, it must be
would require before it wards damages. Such finding would based on proof and it is up to the appreciation of the Court as
not restrain the Insurance Commission, in the exercise of its to how much should be awarded.
regulatory power, from making its own finding of unreasonable
delay or denial as long as it is supported by substantial So we are done with claim settlement, I have discussed to you
evidence. Please understand the mechanics of this kind of the important provisions of claim settlement and that should
proceeding between these two independent bodies, the Court guide you. Then, the next title is the about the examination of
and the Commission. companies (Title 12), appointment of a conservator,
proceedings upon insolvency (Title 15), consolidation and
While the possibility that these two bodies will come up with merger of insurance companies (Title 16), mutualization of
conflicting resolutions on the same issue is not far-fetched, the stock life insurance (Title 17)…we don’t need that. Next,
finding or conclusion of one would not necessarily be binding withdrawal of foreign insurance companies (Title 18)
on the other given the difference in the issues involved, the
quantum of evidence required, and the procedure to be Chapter IV, Title 1, insurance agents and insurance brokers.
followed. Now, as a lawyer, what would you do? Maybe FYI, just read this title. What are insurance agents?
What are their liabilities and obligations as insurance agents?
Propriety of award of moral and exemplary damages Who are insurance brokers? What is the difference any way?
and attorney’s fees
What is an insurance agent? The term refers to a person
We know class, that when we are awarded the attorney’s fees expressly or impliedly authorized to represent it in dealing with
as part of the damages, this amount does not go to the lawyer third persons in matters relating to insurance. You know class

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that before you become a legitimate insurance agent you have
to take an exam before the insurance commission office.
What are adjusters? You know class, the adjusters, this group
of people, they don’t make a fuss. They are actually key
players in the insurance policy.
March 30, 2015
Try to look at what is Mutualization of Stock Life of Insurance
Companies. What do you mean by mutualization?
Mutualization usually involves the insurer and the insured.
What kind of a business is that?
Holding Companies, what are they? How did they function? So
you now look at Compulsory Motor Vehicle Insurance.
CHAPTER VI
COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
“SEC. 386. For purposes of this chapter:
“(a) Motor Vehicle is any vehicle as defined in Section 3,
paragraph (a) of Republic Act No. 4136, otherwise known as
the ‘Land Transportation and Traffic Code’.
“(b) Passenger is any fare paying person being transported
and conveyed in and by a motor vehicle for transportation of
passengers for compensation, including persons expressly
authorized by law or by the vehicle’s operator or his agents to
ride without fare.
“(c) Third party is any person other than a passenger as
defined in this section and shall also exclude a member of the
household, or a member of the family within the second
degree of consanguinity or affinity, of a motor vehicle owner or
land transportation operator, as likewise defined herein, or his
employee in respect of death, bodily injury, or damage to
property arising out of and in the course of employment.
“(d) Owner or motor vehicle owner means the actual legal
owner of a motor vehicle, in whose name such vehicle is duly
registered with the Land Transportation Office;
“(e) Land transportation operator means the owner or owners
of motor vehicles for transportation of passengers for
compensation, including school buses.
“(f) Insurance policy or Policy refers to a contract of insurance
against passenger and third-party liability for death or bodily
injuries and damage to property arising from motor vehicle
accidents.
There are a lot of accidents on the road. That is undeniable,
that the lawmakers felt there is a need to provide some sort of
compensation for the victims of motor vehicle accidents. That
is the rationale behind the mandatory requirement by the law
of all land transportation operators as well as motor vehicle
owners.
People who have a certificate of convenience to get
passengers from the riding public and also private motor
vehicle owners to secure at the very least that Compulsory
Motor Vehicle Liability Insurance (MVLI). In the driver’s
parlance that’s actually the TPL (Third Party Liability
insurance). You may opt not to have a comprehensive property
insurance or comprehensive car insurance coverage which
simply means that you have coverage when your car is stolen,
when your motor vehicle suffers damage. This will be
voluntary on your part and it will be a different kind of
insurance from the TPL insurance.
When you need to register your vehicle The LTO will require
you to submit the comprehensive Motor Vehicle Insurance or
Third Party Liability (TPL) certificate of cover along with your
certificate of registration and your official receipt. That is what
the law requires as basic requirement for all motor vehicles
What is the importance of TPL? No fault feature of the policy.
We shall see later on what NO-FAULT means under the
compulsory MVLI. Under Family Law under other jurisdiction,
there is also such a thing as NO-FAULT DIVORCE. That means
nobody will accuse you of psychological incapacity in order to
get annulment or to have your marriage declared void ab
initio. In other words, there is no need to have a judgment
rendered by the court finding fault on one of the parties before
you can have the compensation.
What is the declared policy of the law in so far as operation of
motor vehicle without insurance is done by owners? What is
the effect of your liability? Section 387
It shall be unlawful for any land transportation
operator or owner of a motor vehicle to operate the
same in the public highways unless there is in force in
relation thereto a policy of insurance or guaranty in
cash or surety bond issued in accordance with the
provisions of this chapter to indemnify the death,
bodily injury, and/or damage to property of a third-
party or passenger, as the case may be, arising from
the use thereof.
Is it legal to operate motor vehicle in public highways without
insurance?
No. See Section 387
What are the other options?
• Cash guaranty or;
• surety bond
What are the proofs of loss which must be submitted when
claiming against a motor vehicle insurance policy?
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“(b) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim:
“(1) Police report of accident; and
“(2) Death certificate and evidence sufficient to
establish the proper payee; or
“(3) Medical report and evidence of medical or
hospital disbursement in respect of which refund is
claimed;
Against whom may a claim be made by an occupant of a
vehicle? SEC. 391
“(c) Claim may be made against one motor vehicle
only. In the case of an occupant of a vehicle, claim,
shall lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from.
So that’s clear if you are an occupant of a vehicle then the TPL
will be claimed against the owner of the motor vehicle or the
Land Transportation Operator which vehicle he was riding,
mounting or dismounting from. If you are an occupant of a
vehicle you cannot claim TPL against the insurer of the other
colliding vehicle.
What are the requirements if any when there is a change of
ownership of a motor vehicle or a change of engine? Is there
an exception to that? SEC. 395.
In case of change of owner ship of a motor vehicle, or
change of the engine of an insured vehicle, there
shall be no need of issuing a new policy until the next
date of registration or renewal of registration of such
vehicle, and: Provided, That the insurance company
shall agree to continue the policy, such change of
ownership or such change of the engine shall be
indicated in a corresponding endorsement by the
insurance company concerned, and a signed duplicate
of such endorsement shall, within a reasonable time,
be filed with the Land Transportation Office.
Against whom shall a claim be made by a 3rd party in case of
vehicular accident? A third party not an occupant. Earlier we
talked about the occupant of the vehicle against whom he can
claim. This time if you are not an occupant of a vehicle against
whom can you make the claim for insurance? Section 391(c)
In any other case, claim shall lie against the insurer of
the directly offending vehicle. 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.
So yong nakabangga sayo. You claim the insurance against the
insurer of the offending vehicle.
Under the Compulsory Motor vehicle Liability Insurance we are
not talking about property damage. They took that away from
the coverage because statistic showed that there is a tendency
to _ amount of damage on the property. So they want to do
away with that instead they just focus on death and bodily
injuries.
If you have a car, that’s also being hit by an offending vehicle
that is a separate insurance coverage. You will not claim
compensation for the physical damage under your TPL.
Sec 386 defines what is a motor vehicle, passenger.
“(a) Motor Vehicle is any vehicle as defined in Section
3, paragraph (a) of Republic Act No. 4136, otherwise
known as the ‘Land Transportation and Traffic Code’.
“(b) Passenger is any fare paying person being
transported and conveyed in and by a motor vehicle
for transportation of passengers for compensation,
including persons expressly authorized by law or by
the vehicle’s operator or his agents to ride without
fare.
Taxi, jeepney, bus, mini-vans, multicab as long as you are a
paying passenger then you are considered as a passenger.
“(c) Third party is any person other than a passenger
as defined in this section and shall also exclude a
member of the household, or a member of the family
within the second degree of consanguinity or affinity,
of a motor vehicle owner or land transportation
operator, as likewise defined herein, or his employee
in respect of death, bodily injury, or damage to
property arising out of and in the course of
employment.
Member of the family within the second degree of
consanguinity or affinity – relatives riding in the car. Member
of the household - your helper, your visiting aunt.
When they are riding on your car they don’t come under the
definition of a 3rd party. Do they come under the definition of a
passenger? Definitely not because under the compulsory MVLI,
Passenger has a very technical definition. “To ride without
fare”, so there is a little group of people who are considered as
passenger even if without paying the fare. IF they are:
• Expressly authorized by the law. Meaning, by their
situation they have to be in that vehicle for the
transportation
• or by the vehicle’s operator or his agents authorizing
that person to ride without fare
So a passenger there must be fare payment involved here.
Nakikisakay ka, libre ka lang. So yong mga naghi-hitch, they
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do not pay. They are in a bus which transports people for The LTFRB is the governing or regulatory body that issues
compensation but they don’t pay. Are they expressly these franchises.
authorized by law to be on the bus? I don’t think so, they are
hitchhikers. Are they authorized by the vehicle operator to ride “(f) Insurance policy or Policy refers to a contract of
the bus for free? Or his agents to ride without fare? If the bus insurance against passenger and third-party liability
conductor expressly allowed you to get inside the bus, ride the for death or bodily injuries and damage to property
bus without paying, if that is the factual circumstances of your arising from motor vehicle accidents.
situation then you are considered a passenger. But if you just
insisted, sometimes you see buses where there are people
Look at the definition of insurance policy. There are 3 risks
hanging onto the door of the buses, they are not considered
that are being insured under an insurance policy these are:
passengers. We will presume that they were not allowed by
death or bodily injuries and damage to property arising from
the conductor inside the bus. If an accident happens you don’t
motor vehicle accidents.
get any compensation because you are not considered a
passenger.
The damage to property here would be covered by a separate
3rd party is a person other than the passenger and shall insurance contract. The TPL does not cover property damage.
exclude a member of the household, or a member of the
family within the second degree of consanguinity or affinity, of “SEC. 387. It shall be unlawful for any land transportation
a motor vehicle owner or land transportation operator, as operator or owner of a motor vehicle to operate the same in
likewise defined herein, or his employee in respect of death, the public highways unless there is in force in relation thereto
bodily injury, or damage to property arising out of and in the a policy of insurance or guaranty in cash or surety bond issued
course of employment in accordance with the provisions of this chapter to indemnify
the death, bodily injury, and/or damage to property of a third-
Under the definition of a 3rd party, there is a mention of
party or passenger, as the case may be, arising from the use
damage to the property. The death of this 3rd party was a
thereof.
result of damage to the property arising out of or in the course
of employment. There are specific requirements for a person
to qualify as a passenger or as a 3rd party. In case you are the Section 387, this is the Declared Policy of the Law. Those
lawyer for the 3rd person or the passenger you have to look at trucks, jeepneys, taxis that are running on the road without
the definition of the law, if they fall under the definition of the coverage of compulsory MVLI law their operation is illegal and
law to be able to be covered by the provision under this title. unlawful. For purposes of damages when you file a suit against
the offending vehicle, the fact that they operate on the road
“(d) Owner or motor vehicle owner means the actual would have to be stated in the complaint itself to recover from
legal owner of a motor vehicle, in whose name such exemplary damages.
vehicle is duly registered with the Land
Transportation Office; Exemplary damages on top of the Moral Damages that you
may recover because there is a blatant violation of the law
You have to be the actual legal owner of the motor vehicle. against motor vehicle running on a public highways without
coverage.
Sometimes there are issues that will arise from this because
what about if you buy a motor vehicle under installment? If the
vendor has transferred the title right away in your name “SEC. 388. The Commissioner shall furnish the Land
maybe there is no problem. That is very clear that you are the Transportation Office with a list of insurance companies
legal owner of the vehicle. But what if that particular vendor authorized to issue the policy of insurance or surety bond
retains ownership of the motor vehicle, are they considered required by this chapter.
still to be the actual legal owner of the motor vehicle in
question? Well, under this definition, for purposes of this type
I don’t know if this is observed. Probably it is. There is
of insurance, we are looking at the actual legal owner of the
probably a list that the insurance commissioner gives to Land
vehicle. Where do you look for that? In the car registration, in
Transportation Office in Manila. But for practical purposes all
the papers. Kung kanino ang name doon siya yong actual legal
you have to do if you are a vehicle owner whether you are an
owner of the vehicle.
Operator or a private owner, is go to a reputable insurance
company.
“(e) Land transportation operator means the owner or
owners of motor vehicles for transportation of
“SEC. 389. The Land Transportation Office shall not allow the
passengers for compensation, including school buses.
registration or renewal of registration of any motor vehicle
without first requiring from the land transportation operator or
School buses also fall under the definition of LTO. You operate motor vehicle owner concerned the presentation and filing of a
a business of transporting passengers for compensation. That substantiating documentation in a form approved by the
means you have to have the certificate of public convenience. Commissioner evidencing that the policy of insurance or

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guaranty in cash or surety bond required by this chapter is in
effect.
“SEC. 390. Every land transportation operator and every
owner of a motor vehicle shall, before applying for the
registration or renewal of registration of any motor vehicle, at
his option, either secure an insurance policy or surety bond
issued by any insurance company authorized by the
Commissioner or make a cash deposit in such amount as
herein required as limit of liability for purposes specified in
Section 387.
“(a) In the case of a land transportation operator, the
insurance guaranty in cash or surety bond shall cover liability
for death or bodily injuries of third-parties and/or passengers
arising out of the use of such vehicle in the amount not less
than Twelve thousand pesos (P12,000.00) per passenger or
third-party and an amount, for each of such categories, in any
one accident of not less than that set forth in the following
scale:
“(1) Motor vehicles with an authorized capacity of twenty-six
(26) or more passengers: Fifty thousand pesos (P50,000.00);
“(2) Motor vehicles with an authorized capacity of from twelve
(12) to twenty-five (25) passengers: Forty thousand pesos
(P40,000.00);
“(3) Motor vehicles with an authorized capacity of from six (6)
to eleven (11) passengers: Thirty thousand pesos
(P30,000.00);
“(4) Motor vehicles with an authorized capacity of five (5) or
less passengers: Five thousand pesos (P5,000.00) multiplied
by the authorized capacity.
“Provided, however, That such cash deposit made to, or surety
bond posted with, the Commissioner shall be resorted to by
him in cases of accidents the indemnities for which to third-
parties and/or passengers are not settled accordingly by the
land transportation operator and, in that event, the said cash
deposit shall be replenished or such surety bond shall be
restored within sixty (60) days after impairment or expiry, as
the case may be, by such land transportation operator,
otherwise, he shall secure the insurance policy required by this
chapter. The aforesaid cash deposit may be invested by the
Commissioner in readily marketable government bonds, and/or
securities.
“(b) In the case of an owner of a motor vehicle, the insurance
or guaranty in cash or surety bond shall cover liability for
death or injury to third-parties in an amount not less than that
set forth in the following scale in any one accident:
“(1) Private Cars
“(i) Bantam: Twenty thousand pesos (P20,000.00);
“(ii) Light: Twenty thousand pesos (P20,000.00); and
“(iii) Heavy: Thirty thousand pesos (P30,000.00).
“(2) Other Private Vehicles
“(i) Tricycles, motorcycles and scooters: Twelve thousand
pesos (P12,000.00);
“(ii) Vehicles with an unladen weight of 2,600 kilos or less:
Twenty thousand pesos (P20,000.00);
“(iii) Vehicles with an unladen weight of between 2,601 kilos
and 3,930 kilos: Thirty thousand pesos (P30,000.00); and
“(iv) Vehicles with an unladen weight over 3,930 kilos: Fifty
thousand pesos (P50,000.00).
“The Commissioner may, if warranted, set forth schedule of
indemnities for the payment of claims for death or bodily
injuries with the coverages set forth herein.
Section 390, There is a requirement that before applying for
the registration or renewal of registration of any motor vehicle,
at his option, either secure an insurance policy or surety bond
issued by any insurance company authorized by the
Commissioner or make a cash deposit in such amount as
herein required. It is the choice, the option of the motor
vehicle owner. There are amounts specified under this section.
“(a) In the case of a land transportation operator, the
insurance guaranty in cash or surety bond shall cover
liability for death or bodily injuries of third-parties
and/or passengers arising out of the use of such
vehicle in the amount not less than Twelve thousand
pesos (P12,000.00) per passenger or third-party and
an amount, for each of such categories, in any one
accident
If you are a public transportation owner this is the sum
required by law, 12,000 per passenger. On top of that you will
still have the amounts to pay depending on the capacity of
your motor vehicle.
For private vehicles, the smaller cars (under Section B) the
coverage are less than the stated amounts for vehicles use for
public transportation.
“SEC. 391. Any claim for death or injury to any passenger or
third-party pursuant to the provisions of this chapter shall be
paid without the necessity of proving fault or negligence of any
kind: Provided, That for purposes of this section:
“(a) The total indemnity in respect of any person shall not be
less than Fifteen thousand pesos (P15,000.00);
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“(b) The following proofs of loss, when submitted under oath,
shall be sufficient evidence to substantiate the claim:
“(1) Police report of accident; and
“(2) Death certificate and evidence sufficient to establish the
proper payee; or
“(3) Medical report and evidence of medical or hospital
disbursement in respect of which refund is claimed;
“(c) Claim may be made against one motor vehicle only. In the
case of an occupant of a vehicle, claim, shall lie against the
insurer of the vehicle in which the occupant is riding, mounting
or dismounting from. In any other case, claim shall lie against
the insurer of the directly offending vehicle. 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.
Section 391 explains the NO-FAULT feature of this insurance.
No need to prove contributory fault, the amounts are fixed. It
doesn’t mean to say you that if you were able to prove
contributory fault of the other party then you can reduce your
liability. Or the insurance coverage, the proceeds can be
reduced accordingly cause there was contributory negligence.
This does not happen under NO-FAULT insurance policy.
Provided of course that for purposes of this section:
(a) The total indemnity in respect of any person shall
not be less than Fifteen thousand pesos
(P15,000.00);
15,000, that’s a fix amount, you don’t get more than that; you
don’t get less than that. There are proofs to be submitted.
“(b) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim:
“(1) Police report of accident; and
“(2) Death certificate and evidence sufficient to
establish the proper payee; or
“(3) Medical report and evidence of medical or
hospital disbursement in respect of which refund is
claimed;
If you fail to submit any of the 3, you may not be able to get
your compensation. It is a NO-FAULT but it doesn’t mean that
it’s going to be a free handout. You need to comply with the
requirements.
Paragraph C tells us against whom we should claim
compensation. This paragraph gives us two separate
claimants. A claimant who is an occupant of a vehicle and a
claimant that is NOT an occupant of a vehicle (3rd party).
“(c) Claim may be made against one motor vehicle
only. In the case of an occupant of a vehicle, claim,
shall lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from. In
any other case, claim shall lie against the insurer of
the directly offending vehicle. 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.
In any other case, claim shall lie against the insurer of the
directly offending vehicle. Without of course prejudice to the
right of the owner of that vehicle who was made responsible
under this provision to recover from the vehicle that is
ultimately responsible for the accident.
For example, a pedestrian was crossing the street. You (car A)
were at the stoplight and the sign for pedestrians to cross was
on. You were stopped right in front of the pedestrian lane. This
vehicle (Car B) behind you eventually hit you with such impact
that your vehicle actually moved into the pedestrian lane and
hit the pedestrian. For purposes of getting compensation for
bodily injuries right away, against whom will the pedestrian
claim liability? Even if Car A was not at fault, Car A’s insurer
will be forced to pay the insurance proceeds but without
prejudiced of Car A to recover from the insurer of car B.
If Car B does not have a TPL insurance kawawa ka. You really
have to run after the other guy because under the law you
remain liable. You cannot say that you have not gotten the
compensation from the other car (car b) who collided with you.
That is not a defense.
“SEC. 392. No land transportation operator or owner of motor
vehicle shall be unreasonably denied the policy of insurance or
surety bond required by this chapter by the insurance
companies authorized to issue the same, otherwise, the Land
Transportation Office shall require from said land
transportation operator or owner of the vehicle, in lieu of a
policy of insurance or surety bond, a certificate that a cash
deposit has been made with the Commissioner in such amount
required as limits of indemnity in Section 390 to answer for the
passenger and/or third-party liability of such land
transportation operator or owner of the vehicle.
“No insurance company may issue the policy of insurance or
surety bond required under this chapter unless so authorized
under existing laws.
“The authority to engage in the casualty and/or surety lines of
business of an insurance company that refuses to issue or
renew, without just cause, the insurance policy or surety bond
therein required shall be withdrawn immediately.
You cannot be denied by an insurance company.
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No land transportation operator or owner of motor
vehicle shall be unreasonably denied the policy of
insurance or surety bond required by this chapter by
the insurance companies authorized to issue the
same,
If you were denied by the insurance company the LTO can
require you instead to put up a cash deposit. Does that ever
happen? Well, yes. Because insurance companies track your
reliability, your track record. So you are an insurance company
and you can see that this client has a track record of erring
process. You try to limit your liability by not issuing insurance
policy anymore to that company. It makes business sense; you
are trying to curtail your losses.
But you need an insurance policy to let your buses run. What
do you do? You follow the option given by the law. You can
put up a certificate that a cash deposit has been made with
the commissioner in such amount required by Section 390. And
such deposit will be to answer for passenger or TPL of such
Land Transportation Operator. That is a remedy provided by
law.
“SEC. 393. No cancellation of the policy shall be valid unless
written notice thereof is given to the land transportation
operator or owner of the vehicle and to the Land
Transportation Office at least fifteen (15) days prior to the
intended effective date thereof. Upon receipt of such notice,
the Land Transportation Office, unless it receives evidence of a
new valid insurance or guaranty in cash or surety bond as
prescribed in this chapter, or an endorsement of revival of the
cancelled one, shall order the immediate confiscation of the
plates of the motor vehicle covered by such cancelled policy.
The same may be reissued only upon presentation of a new
insurance policy or that a guaranty in cash or surety bond has
been made or posted with the Commissioner and which meets
the requirements of this chapter, or an endorsement or revival
of the cancelled one.
Cancellation of the policy.
In previous title we found out how to cancel a policy. there is a
period within which the notice of cancellation must be sent out
to cancel if the insurance company wishes to cancel out the
policy. Here there is also cancellation of insurance company
and the insured. Section 393 deals with cancellation by the
insurance company. Notice must be given to the owner or
operator 15 days prior to the intended effectivity of
cancellation.
In the earlier chapter what is the period within which to send
out the notice? See Section 66.
“SEC. 393. No cancellation of the policy shall be valid unless
written notice thereof is given to the land transportation
operator or owner of the vehicle and to the Land
Transportation Office at least fifteen (15) days prior to the
intended effective date thereof. Upon receipt of such notice,
the Land Transportation Office, unless it receives evidence of a
new valid insurance or guaranty in cash or surety bond as
prescribed in this chapter, or an endorsement of revival of the
cancelled one, shall order the immediate confiscation of the
plates of the motor vehicle covered by such cancelled policy.
The same may be reissued only upon presentation of a new
insurance policy or that a guaranty in cash or surety bond has
been made or posted with the Commissioner and which meets
the requirements of this chapter, or an endorsement or revival
of the cancelled one.
Ma’am: For motor vehicle, the written notice of cancellation of
the policy must be given at least 15 days prior to the intended
effective date. Upon receipt of such notice, the Land
Transportation Office, unless it receives evidence of a new
valid insurance or guaranty in cash or surety bond as
prescribed in this chapter, or an endorsement of revival of the
cancelled one, shall order the immediate confiscation of the
plates of the motor vehicle covered by such cancelled policy.
“SEC. 394. If the cancellation of the policy or surety bond is
contemplated by the land transportation operator or owner of
the vehicle, he shall, before the policy or surety bond ceases to
be effective, secure a similar policy of insurance or surety bond
to replace the policy or surety bond to be cancelled or make a
cash deposit in sufficient amount with the Commissioner, and
without any gap, file the required documentation with the Land
Transportation Office, and notify the insurance company
concerned of the cancellation of its policy or surety bond.
Ma’am: This deals with the cancellation by the insured.
“SEC. 395. In case of change of owner ship of a motor vehicle,
or change of the engine of an insured vehicle, there shall be
no need of issuing a new policy until the next date of
registration or renewal of registration of such vehicle,
and: Provided, That the insurance company shall agree to
continue the policy, such change of ownership or such change
of the engine shall be indicated in a corresponding
endorsement by the insurance company concerned, and a
signed duplicate of such endorsement shall, within a
reasonable time, be filed with the Land Transportation Office.
Ma’am: so for the middle of the year or the 12-year period,
from January to December, if there is a change in the
ownership what will happen in the policy. Remember that we
learn in property insurance that the owner of the policy must
also be the owner of the subject of the insurance otherwise,
the insurance is effectively suspended unless these things are
vested with the same person.hip Here, in case of change of
ownership of motor vehicle or change of the engine, there is
no need to issue a new policy until the adte of the registration
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or the renewal of registration of such vehicle. In other words,
the TPL( third party liability) can go on even if the new owner
did not cancel it provided it is effective. If there is change of
ownership, the original TPL can continue to be effective until
the next date of registration or renewal of registration of such
vehicle. The purpose of the law is to make sure that there is
TPL insurance covering at any point in the life of the policy.
The TPL must be valid and effective at least for one year. And
also the insurance company consents to the continuation of
the policy. Such change of ownership or such change of the
engine shall be indicated in a corresponding endorsement by
the insurance company concerned, and a signed duplicate of
such endorsement shall, within a reasonable time, be filed with
the Land Transportation Office.
This is important to remember because it is possible that in the
transaction, people forget to deal with the TPL. They just
concentrate on the conveying of the property itself. The court
of registration where the State is able to check whether you
are compliant with this particular law because when you
register the LTO will never let you register without a valid TPL.
That’s the only time the State is able to intervene and checked
if you are compliant with the law. So there is really no need to
get a new policy you just get the consent of the insurance
company and then make that endorsement indicating that
there is a change of ownership then you wait until the next
registration period
“SEC. 396. In the settlement and payment of claims, the
indemnity shall not be availed of by any accident victim or
claimant as an instrument of enrichment by reason of an
accident, but as an assistance or restitution insofar as can
fairly be ascertained.
Ma’am: This is the declared policy of the law. This is not
supposed to enrich the claimant. This means that you just
comply with the requirements demanded by law. This is
availed as restitution. Meaning, to put you back where you
were before the risks happen. In a way, it is still form of
indemnity. Hanggang doon lang at a certain point when you
are not fully compensated. It will not go beyond.
“SEC. 397. Any person having any claim upon the policy issued
pursuant to this chapter shall, without any unnecessary delay,
present to the insurance company concerned a written notice
of claim setting forth the nature, extent and duration of the
injuries sustained as certified by a duly licensed physician.
Notice of claim must be filed within six (6) months from the
date of accident, otherwise, the claim shall be deemed waived.
Action or suit for recovery of damage due to loss or injury
must be brought, in proper cases, with the Commissioner or
the courts within one (1) year from denial of the claim,
otherwise, the claimant’s right of action shall prescribe.
Ma’am: Within what period should the claim be filed? Notice of
claim must be filed within six (6) months from the date of
accident otherwise, the claim shall be deemed waived. If you
are injured, it is not necessary that you yourself will file the
claim. You can appoint someone but make sure that there is
no unnecessary delay. You present to the insurance company
concerned a written notice of claim setting forth the nature,
extent and duration of the injuries sustained as certified by a
duly licensed physician that will give the insurance company
information how accident happened. How about action or suit
for recovery of damage due to loss or injury, where will you
file it? If you will see the law, you are given two options, you
may file it either the Commissioner or the courts within one (1)
year from denial of the claim, otherwise, the claimant’s right of
action shall prescribe. It would seem that the Commissioner
and the courts have concurrent jurisdiction over cases like
these. The choice is given to you.
Rule:
• Notice of claim must be filed within six (6) months
from the date of accident otherwise, the claim shall
be deemed waived.
• Action or suit for recovery of damage due to loss or
injury must be brought, in proper cases, with the
Commissioner or the courts within one (1) year from
denial of the claim, otherwise, the claimant’s right of
action shall prescribe.
Case:
If the written notice of claim is filed beyond six (6) months
from the date of the accident, that claim shall be deemed
waived. If the action for recovery is brought after one (1) year
from denial of the claim, the right of action shall prescribe,
(see Vda. de Gabriel vs. Court of Appeals, 264 SCRA 137
[1996].)
Ma’am: Each period if unavailed of by the insured has different
effects.
“SEC. 398. The insurance company concerned shall forthwith
ascertain the truth and extent of the claim and make payment
within five (5) working days after reaching an agreement. If no
agreement is reached, the insurance company shall pay only
the no-fault indemnity provided in Section 391 without
prejudice to the claimant from pursuing his claim further, in
which case, he shall not be required or compelled by the
insurance company to execute any quit claim or document
releasing it from liability under the policy of insurance or surety
bond issued.
“In case of any dispute in the enforcement of the provisions of
any policy issued pursuant to this chapter, the adjudication of
such dispute shall be within the original and exclusive
jurisdiction of the Commissioner, subject to the limitations
provided in Section 439.
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 Cecilia
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Ma’am: When is the insurance company supposed to pay you?
After ascertaining the truth and extent of the claim, it shall
make payment within five (5) working days after reaching an
agreement. This presupposes that you have filed all the
necessary documents with the insurance company and that the
latter has reviewed all those documents, filed them in order. If
no agreement is reached, the insurance company shall pay
only the no-fault indemnity that is the sum of P 15,000.00. So
in other words, if you have filed your claims and you have
proved more than what we call the threshold amount (P
15,000.00) for the TPL, you can actually recover more. It’s just
that there must be an agreement with the insurance company.
The latter agrees that you are entitled to more than P
15,000.00 compensation because there is basis. But if there is
no agreement between the insured and the insurance
company and the latter plans to contest your other claims then
you are only entitled to the threshold amount. Without
prejudice to the claimant from pursuing his claim further, in
which case, he shall not be required or compelled by the
insurance company to execute any quit claim or document
releasing it from liability under the policy of insurance or surety
bond issued. So if there are more negotiations, that would be
okay, you will not be prevented from proving your other claims
but you can be paid already the P15,000, the no-fault
indemnity amount.
“SEC. 399. It shall be unlawful for a land transportation
operator or owner of motor vehicle to require his or its drivers
or other employees to contribute in the payment of premiums.
If you are a land transportation operator, it is not legal for you
to ask your drivers or employees to contribute in the payment
of premiums.
“SEC. 400. No government office or agency having the duty of
implementing the provisions of this chapter nor any official or
employee thereof shall act as agent in procuring the insurance
policy or surety bond provided for herein. The commission of
an agent procuring the said policy or bond shall in no case
exceed ten percent (10%) of the amount of the premiums
therefore.
Bawal mag negosyo sa loob ng LTO. If the cooperative of the
LTO will put up a sign saying that TPL is available here then
that is not allowed.
“SEC. 401. Any land transportation operator or owner of motor
vehicle or any other person violating any of the provisions of
the preceding sections shall be punished by a fine of not less
than Five hundred pesos (P500.00) and/or imprisonment for
not more than six (6) months. The violation of Section 390 by
a land transportation operator shall be a sufficient cause for
the revocation of the certificate of public convenience issued
by the Land Transportation Franchising and Regulatory Board
covering the vehicle concerned.
What is the penultimate penalty for a land transportation
operator or owner of a motor vehicle who violates the
provision of this Title? The punishment is a fine of not less
than Five hundred pesos (P500.00) and/or imprisonment for
not more than six (6) months. The violation of Section 390 by
a land transportation operator shall be a sufficient cause for
the revocation of the certificate of public convenience issued
by the Land Transportation Franchising and Regulatory Board
covering the vehicle concerned. Certificate of public
convenience is your license to operate. So once confiscated,
you cannot conduct business anymore.
“SEC. 402. Whenever any violation of the provisions of this
chapter is committed by a corporation or association, or by a
government office or entity, the executive officer or officers of
said corporation, association or government office or entity
who shall have knowingly permitted, or failed to prevent, said
violation shall be held liable as principals.
If the violation is committed by a corporation, then the penalty
will be meted out to its officers of said corporation.
So Just go over the discussion on no-indemnity fault, I really
want you to grasp the principle. The limited amount is P
15,000.00. You can claim more, it’s just that P15,000 is readily
available, no need to prove fault or negligence. Property
damage will be shouldered by separate policy.
Certificate of cover will serve as the substantiating
documentation that will be accepted by and filed with the LTC
during registration of motor vehicles as proof of insurance
upon such motor vehicle. It is also a secondary proof of such
coverage and may be presented in the investigation of traffic
accident by the MVO or in the investigation of traffic accident
by the MVO or LTO, or his representative, to Government
agents charged with the duty to enforce traffic laws, rules and
regulations.
Case:
Perla Compania de Seguros, Inc. vs. CA
FACTS:
The Lim spouses opened a chattel mortgage and bought a
Ford Laser from Supercars for Php 77,000 and insured it with
Perla Compania de Seguros. The vehicle was stolen while
Evelyn Lim was driving it with an expired license. The spouses
requested for a moratorium on payments but this was denied
by FCP, the assignee of rights over collection of the mortgage
amount of the car. The spouses also called on the insurance
company to pay the balance of the mortgage due to theft but
this was denied by the company due to the spouses’ violation
of the Authorized Driver clause stating (driving with an expired
license before being carnapped):
Any of the following: (a) The Insured (b) Any person driving
on the Insured's order, or with hispermission. Provided that
the person driving is permitted, in accordance with the
licensing or other laws or regulations, to drive the Scheduled
Vehicle, or has been permitted and is not disqualified by order
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Atty.
 Cecilia
 Jover-­‐Angeles
 

 
of a Court of Law or by reason of any enactment or regulation
in that behalf.
Since the spouses didn’t pay the mortgage, FCP filed suit
against them. The trial court ruled in its favor ordering spouses
to pay. The appellate court reversed their decision. FCP and
Perla appealed to the SC.

ISSUE: Was there grave abuse of discretion on the part of the

appellate court in holding that private respondents did not
violate the insurance contract because the authorized driver
clause is not applicable to the "Theft" clause of said Contract?

RULING: NO

Ratio: The car was insured against a malicious act such as

theft. Therefore the “Theft” clause in the contract should apply
and not the authorized driver clause. The risk against accident
is different from the risk against theft.
The appellate court stated: The “authorized driver clause” in a
typical insurance policy is in contemplation or anticipation of
accident in the legal sense in which it should be understood,
and not in contemplation or anticipation of an event such as
theft. The distinction — often seized upon by insurance
companies in resisting claims from their assureds — between
death occurring as a result of accident and death occurring as
a result of intent may, by analogy, apply to the case at bar.
There was no connection between valid possession of a license
and the loss of a vehicle. Ruling in a different way would
render the policy a sham because the company can then easily
cite restrictions not applicable to the claim.

That’s end our lectures in Insurance Law. I just want you to go

over the Mutual Benefits Associations just to know what they
are. And then, look at the Office of the Insurance
Commissioner, what are its powers and duties. This is a quasi-
judicial office. Any decision, order or ruling rendered by the
Commissioner after a hearing shall have the force and effect of
a judgment. Any party may appeal from a final order, ruling or
decision of the Commissioner by filing with the Commissioner
within thirty (30) days from receipt of copy of such order,
ruling or decision a notice of appeal to the Court of Appeals in
the manner provided for in the Rules of Court for appeals from
the Regional Trial Court to the Court of Appeals.

There is also Philippine Deposit Insurance Corporation. It is the

regulatory body for all the banks in so far as the insurance
companies are concerned. The subject of the insurance here
are deposits. So look at the coverage of the PDIC. What are
the types of deposits that are covered? Are all types of
investments in the banks covered by the PDIC? No, they are
not. There are particular deposit that are covered by the law
so if the bank closes, some of the deposits may be qualified for
the coverage. There are also deposits that are not covered by
the insurance.

**END**

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