Page 1 of 62 1

What is a contract of insurance?

It is an agreement whereby one undertakes for a consideration to indemnify another
against the loss, damage or liability arising from an unknown or contingent event. (Sec.
2[1], Insurance Code) Note: A contract of insurance is still a contract, thus it must have
all the essential elements of a valid contract as enumerated in Art. 1318 of the New Civil
Code.
Section 54. When an insurance contract is executed with an agent or trustee as the
insured, the fact that his principal or beneficiary is the real party in interest may be
indicated by describing the insured as agent or trustee, or by other general words in the
policy.

Who may take insurance?

An insurance may be taken by a person, personally or through his agent or trustee.

If the insurance is taken by an agent or trustee, what must the agent or trustee do?
Since the insurance is to be applied exclusively to the interest of the person in whose
name and for whose benefit it is made, the agent or trustee when making an insurance
contract for or on behalf of his principal should, indicate that he is merely acting in a
representative capacity by signing as such agent or trustee, or by other general terms in
the policy.
Section 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.

What happens when the insurance is effected by a partner or a part-owner?

A partner or part-owner who insures partnership property in his own name limits the
contract to his individual share UNLESS the terms of the policy clearly show that the
insurance was meant to cover also the shares of the other partners.
Section 56. When the description of the insured in a policy is so general that it may
comprehend any person or any class of persons, only he who can show that it was
intended to include him can claim the benefit of the policy.

What happens when the description of the insured is general?

In order that the insurance may be applied to the interest of the person claiming the
benefit of the policy, he must show that he is the person named or described or that he
belongs to the class of persons comprehended in the policy.

Example?
If the policy is payable “to the children”, you must show that you are a child of the
deceased. Not a grand-child, nor a great-grand-child.
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.
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 and the thing
insured.
Page 2 of 62 2

What is the reason behind Sec. 58?

Sec. 58 follows from the well established principle that a policy is a personal contract with
the insured and does NOT run with the insured property unless so expressly stipulated,
and in the absence of an assignment of the policy with the insurer’s consent, the
purchaser of the interest of the property requires no privity with the insurer.
Note: The rule that change in interest suspends the insurance is subject to the
exceptions, to wit:
(1) Section 20- Life, health and accident insurance;
(2) Section 21- Change of interest in the thing insured after the occurrence of an injury
which results in a loss. (After a loss has happened, the liability of the insurer becomes
fixed. The insured has a right to assign his claim against the insurer as freely as any other
money claim.)
(3) Section 22- Change in interest in one or more of several things, separately insured by
one policy. Distinction between a divisible and indivisible contract must be made ( See
Art. 1420 Civil Code).
(1) Effect dependent on divisibility of contract- It things are separately insured in
one policy, the contract is divisible and the violation of a condition which avoids
the policy with respect to one or more of things does not affect the others.
Example: Supposed D owner of a car and a jeep insured the car for P 100k and
the jeep for P 50k under a single policy for which he paid a premium of P 6k. The
sale of jeep will not affect the insurance of the car.
(2) On the other hand, if things are insured under one policy for a gross sum and
for an entire premium, the contract is indivisible so that a change of interest in
one or more of the things will also avoid the insurance of the others.
Thus in the came facts, if the car and jeep were not separately value in the policy and D
paid P 6k as the premium for the insurance of both the car and the jeep, the sale of the
jeep without the insurer’s consent affects also the insurance of the car. Hence after the
sale of the jeep, the car was lost or destroyed , C cannot recover on the insurance of the
car.
(4) Section 23- Change of interest by will or succession on the death of the insured.-
Insurance on the property passes automatically on the death of the insured, to the heir,
legatee or devisee who acquired interest on the thing insured. Art .777.
(5) Section 24- Transfer of interest by one of several partners, joint owners, or owners in
common, who are jointly insured, to the others.
(6) When policy is so framed that it will inure to the benefit of whomsoever , during the
continuance of the risk, may become the owner of the interest insured. (Sec. 57)
(7) When there is an express prohibition against alienation in the policy, in case of
alienation, the contract of insurance is not merely suspended but is avoided. (Art. 1306,
See Sec. 24)
In reading sec. 58, take note of Sec. 19 and 20.
Section 19. An interest in property insured must exist when the insurance takes effect,
and when the loss occurs, but need not exist in the meantime; and interest in the life or
health of a person insured must exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs.
Page 3 of 62 3

Section 20. Except in the cases specified in the next four sections, and in the cases of
life, accident and health insurance, a change of interest in any part of a thing insured,
unaccompanied by a corresponding change of interest in the insurance, suspends the
insurance to an equivalent extent, until the interests in the thing and the interest in the
insurance are vested in the same person.
Problem.
A borrowed 5,000 from B, and to secure payment of his obligation, he mortgaged his
house to B. B then insured the house for 5T. Subsequently, B assigned his mortgage credit
to X, but did not make the corresponding transfer of his right over the insurance policy. IF
the house burns down, is x entitled to collect the insurance money as assignee-
mortgagee?
NO, since B did not assign his right over the insurance policy to X. A purchaser of
insured property who does Not take the precaution to obtain a transfer of the policy on
the insurance, cannot in case of loss, recover upon the contract, as the transfer of the
property has the effect of suspending the insurance until the purchaser becomes the
owner of the policy as well as the property insured.

RCBC v. CA - Insurance Proceeds

289 SCRA 292 (1998)

Facts:
> GOYU applied for credit facilities and accommodations with RCBC. After due
evaluation, a credit facility in the amount of P30 million was initially granted. Upon
GOYU's application increased GOYU's credit facility to P50 million, then to P90 million,
and finally to P117 million
> As security for its credit facilities with RCBC, GOYU executed two REM and two CM in
favor of RCBC, which were registered with the Registry of Deeds at . Under each of these
four mortgage contracts, GOYU committed itself to insure the mortgaged property with
an insurance company approved by RCBC, and subsequently, to endorse and deliver the
insurance policies to RCBC.
> GOYU obtained in its name a total of 10 insurance policies from MICO. In February
1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the
Malayan insurance policies, issued nine endorsements in favor of RCBC seemingly upon
instructions of GOYU
> On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire.
Consequently, GOYU submitted its claim for indemnity.
> MICO denied the claim on the ground that the insurance policies were either attached
pursuant to writs of attachments/garnishments issued by various courts or that the
insurance proceeds were also claimed by other creditors of GOYU alleging better rights
to the proceeds than the insured.
> GOYU filed a complaint for specific performance and damages. RCBC, one of GOYU's
creditors, also filed with MICO its formal claim over the proceeds of the insurance
policies, but said claims were also denied for the same reasons that AGCO denied
GOYU's claims.
Page 4 of 62 4

> However, because the endorsements do not bear the signature of any officer of GOYU,
the trial court, as well as the Court of Appeals, concluded that the endorsements are
defective and held that RCBC has no right over the insurance proceeds.

Issue:
Whether or not RCBC has a right over the insurance proceeds.

Held:
RCBC has a right over the insurance proceeds.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the
same property for his own sole benefit. There is no question that GOYU could insure the
mortgaged property for its own exclusive benefit. In the present case, although it
appears that GOYU obtained the subject insurance policies naming itself as the sole
payee, the intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and equity.
It is to be noted that 9 endorsement documents were prepared by Alchester in favor of
RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any
specific insurance policy in favor of any particular beneficiary or payee other than the
insured had not such named payee or beneficiary been specifically disclosed by the
insured itself. It is also significant that GOYU voluntarily and purposely took the
insurance policies from MICO, a sister company of RCBC, and not just from any other
insurance company. Alchester would not have found out that the subject pieces of
property were mortgaged to RCBC had not such information been voluntarily disclosed
by GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's
intention of obtaining insurance coverage in compliance with its undertaking in the
mortgage contracts with RCBC, and verify, Alchester would not have endorsed the
policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained
to rule in favor of mortgagor RCBC. RCBC, in good faith, relied upon the endorsement
documents sent to it as this was only pursuant to the stipulation in the mortgage
contracts. We find such reliance to be justified under the circumstances of the case.
GOYU failed to seasonably repudiate the authority of the person or persons who
prepared such endorsements. Over and above this, GOYU continued, in the meantime,
to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence
of the loss insured against, it was too late for GOYU to disown the endorsements for any
imagined or contrived lack of authority of Alchester to prepare and issue said
endorsements. If there had not been actually an implied ratification of said
endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least
estopped from assailing their operative effects.
To permit GOYU to capitalize on its non-confirmation of these endorsements while it
continued to enjoy the benefits of the credit facilities of RCBC which believed in good
faith that there was due endorsement pursuant to their mortgage contracts, is to
countenance grave contravention of public policy, fair dealing, good faith, and justice.
Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances
obtaining in this case, the Court is bound to recognize RCBC's right to the proceeds of
the insurance policies if not for the actual endorsement of the policies, at least on the
basis of the equitable principle of estoppel.
Page 5 of 62 5

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that
the proceeds of insurance shall exclusively apply to the interest of the person in whose
name or for whose benefit it is made. The peculiarity of the circumstances obtaining in
the instant case presents a justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the intention of the parties
to designate RCBC as the party for whose benefit the insurance policies were taken out.
Consider thus the following:
1. It is undisputed that the insured pieces of property were the subject of mortgage
contracts entered into between RCBC and GOYU in consideration of and for securing
GOYU's credit facilities from RCBC. The mortgage contracts contained common
provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property
properly covered against any loss by an insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged property
from MICO, no less than a sister company of RCBC and definitely an acceptable
insurance company to RCBC.
3. Endorsement documents were prepared by MICO's underwriter, Alchester
Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO and RCBC. GOYU
did not assail, until of late, the validity of said endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit
facilities extended by RCBC which was conditioned upon the endorsement of the
insurance policies to be taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the absence written
conformity thereto, obviously considered said endorsement to be sufficient compliance
with its obligation under the mortgage contracts since RCBC accordingly continued to
extend the benefits of its credit facilities and GOYU continued to benefit therefrom.
Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of
the various insurance policies obtained by GOYU. The intention of the parties will have
to be given full force and effect in this particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which under the factual circumstances of the
case, is truly the person or entity for whose benefit the policies were clearly intended.

Great Pacific Life v. Court of Appeals G.R. 113899 Oct. 13, 1999,

316 SCRA 677

Note:
Mortgage Redemption Insurance (MRI), Mortgagor continues to be party to the contract, even if
proceeds is assigned to mortgagee. Insured –Mortgagor is real party in interest.

And since 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 it whatever the
insured might have recovered (Sec. 181)

The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage
redemption insurance," is a device for the protection of both the mortgagee and the mortgagor.
Page 6 of 62 6

On the part of the mortgagee, it has to enter into such form of contract so that in the event of
the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the
proceeds from such insurance will be applied to the payment of the mortgage debt, thereby
relieving the heirs of the mortgagor from paying the obligation. 7 In a similar vein, ample
protection is given to the mortgagor under such a concept so that in the event of death; the
mortgage obligation will be extinguished by the application of the insurance proceeds to the
mortgage indebtedness. 8 Consequently, where the mortgagor pays the insurance premium
under the group insurance policy, making the loss payable to the mortgagee, the insurance is
on the mortgagor's interest, and the mortgagor continues to be a party to the contract. In this
type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such
loss-payable clause does not make the mortgagee a party to the contract.

When mortgagee under a MRI has already foreclosed on the mortgage, it can no longer collect
on the insurance proceeds, which would then rightly belong to the heirs of mortgagor.

Insular Life vs. Ebrado

80 SCRA 181

Facts:
> Buenaventura Ebrado was issued al life plan by Insular Company. He designated
Capriona as his beneficiary, referring to her as his wife.
> The insured then died and Carponia tried to claim the proceeds of the said plan.
> She admitted to being only the common law wife of the insured.
> Pascuala, the legal wife, also filed a claim asserting her right as the legal wife. The
company then filed an action for interpleader.

Issue:

Whether or not the common law wife named as beneficiary can collect the proceeds.

Held:
NO.
The civil code prohibitions on donations made between persons guilty of adulterous
concubinage applies to insurance contracts. On matters not specifically provided for by
the Insurance Law, the general rules on Civil law shall apply. A life insurance policy is no
different from a civil donation as far as the beneficiary is concerned, since both are
founded on liberality.

Why was the common law wife not ed to collect the proceeds despite the fact that
she was the beneficiary? Isn’t this against Sec. 53?
It is true that SC went against Sec. 53. However, Sec. 53 is NOT the only provision that
the SC had to consider. Art. 739 and 2012 of CC prohibit persons who are guilty of
adultery or concubinage from being beneficiaries of the life insurance policies of the
persons with whom they committed adultery or concubinage. If the SC used only Sec.
53, it would have gone against Art. 739 and 2012.

Del Val v. Del Val

Page 7 of 62 7

29 Phil 535

Facts:
> Petitioners and private respondents are brothers and Sisters and are the only heirs
and next of kin of Gregorio del Val who died intestate.
> It was found out that the deceased took out insurance on his life for the sum of 40T
and made it payable to private respondents as sole beneficiary.
> After Gregorio’s death, Andres collected the proceeds of the policy.
> Of the said policy, Andres paid 18T to redeem some real property which Gregorio had
sold to third persons during his lifetime.
> Said redemption of the property was made by Andres’ lawyer in the name of Andres
and the petitioners. (Accdg to Andres, said redemption in the name of Petitioners and
himself was without his knowledge and that since the redemption, petitioners have
been in possession of the property)
> Petitioners now contend that the amount of the insurance policy belonged to the
estate of the deceased and not to Andres personally.
> Pet filed a complaint for partition of property including the insurance proceeds
> Andress claims that he is the sole owner of the proceeds and prayed that he be
declared:
> Sole owner of the real property, redeemed with the use of the insurance proceeds
and its remainder;
> Petitioners to account for the use and occupation of the premises.

Issue:
Whether or not the petitioners have a right to the insurance proceeds?

Held:
NOPE.
The contract of life insurance is a special contract and the destination of the proceeds
thereof is determined by special laws which deal exclusively with the subject. Our civil
code has no provisions which relate directly and specifically to life-insurance contracts
of to the destination of life-insurance proceeds that subject is regulated exclusively by
the Code of Commerce. Thus, contention of petitioners that proceeds should be
considered as a donation or gift and should be included in the estate of the deceased is
UNTENABLE.

Since the repurchase has been made n the names of all the heirs instead of the
defendant alone, petitioners claim that the property belongs to the heirs in common
and not to the defendant alone. The SC held that if it is established by evidence that
that was his intention and that the real estate was delivered to the plaintiffs with that
understanding, then it is probable that their contention is correct and that they are
entitled to share equally with the defendant. HOWEVER, it appears from the evidence
that the conveyances were taken in the name of the plaintiffs without the knowledge
and consent of Andres, or that it was not his intention to make a gift to them of real
estate, when it belongs to him.
Page 8 of 62 8

Guingon v. Del Monte

80 SCRA 181

Facts:
> The insured owned a fleet of jeepneys. He insured the operation of his jeepneys
against “accidents with third part liability” with Capital Insurance and Surety Co.
> One day, one of his jeepney dirivers, bumped and killed Guingon.
> An action for damages was then filed against the owner-insured, the driver and the
company.
> The company sough to dismiss the charges against it on the ground of lack of cause
of action against it.

Issue:

Whether or not there is a cause of action against the company.

Held:
YES.
The right of a person injured to sue the insurer of the party at fault depends on whether
the contract of insurance was intended to benefit third persons. The test applied here
is: Where the contract provides for indemnity against liability to third persons, then
third persons to whom the insured is liable, can sue the insurer. On the other hand,
where the contract is for indemnity against actual loss or payment, then third persons
cannot proceed against the insurer, the contract being solely to reimburse the insured
for liability actually discharged by him through payment to third persons, said third
persons' recourse being thus limited to the insured alone

The policy in the present case, is one whereby the insurer agreed to indemnify the
insured "against all sums . which the Insured shall become legally liable to pay in
respect of: a. death of or bodily injury to any person . . ." Clearly, therefore, it is one for
indemnity against liability from the fact then that the insured is liable to the third
person, such third person is entitled to sue the insurer.

Since the policy in questioned contained a stipulation pour autrui, then the insurance
company must deliver the proceeds to the claimants.

Coquia v. Fieldmen’s Insurance

Page 9 of 62 9

26 SCRA 172

Facts:
> On Dec. 1, 1961, Fieldmen’s Insurance co. Issued in favor of the Manila Yellow Taxicab
a common carrier insurance policy with a stipulation that the company shall indemnify
the insured of the sums which the latter wmy be held liable for with respect to “death or
bodily injury to any fare-paying passenger including the driver and conductor”.
> The policy also stated that in “the event of the death of the driver, the Company shall
indemnify his personal representatives and at the Company’s option may make indemnity
payable directly to the claimants or heirs of the claimants.”
> During the policy’s lifetime, a taxicab of the insured driven by Coquia met an accident
and Coquia died.
> When the company refused to pay the only heirs of Coquia, his parents, they
institued this complaint. The company contends that plaintiffs have no cause of action
since the Coquias have no contractual relationship with the company.

Issue:

Whether or not plaintiffs have the right to collect on the policy.

Held:
YES.
Although, in general, only parties to a contract may bring an action based thereon, this
rule is subject to exceptions, one of which is found in the second paragraph of Article
1311 of the Civil Code of the Philippines, reading: "If a contract should contain some
stipulation in favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person." This is but the restatement of a
well-known principle concerning contracts pour autrui, the enforcement of which may
be demanded by a third party for whose benefit it was made, although not a party to
the contract, before the stipulation in his favor has been revoked by the contracting
parties

In the case at bar, the policy under consideration is typical of contracts pour autrui this
character being made more manifest by the fact that the deceased driver paid fifty
percent (50%) of the corresponding premiums, which were deducted from his weekly
commissions. Under these conditions, it is clear that the Coquias — who, admittedly,
are the sole heirs of the deceased — have a direct cause of action against the Company,
and, since they could have maintained this action by themselves, without the
assistance of the insured it goes without saying that they could and did properly join
the latter in filing the complaint herein.

Bonifacio Bros. v. Mora

Page 10 of 62 10

20 SCRA 262

Facts:
> Enrique Mora mortgaged his Odlsmobile sedan car to HS Reyes Inc. with the
condition that Mora would insure the car with HS Reyes as beneficiary.
> The car was then insured with State Insurance Company and the policy delivered to
Mora.
> During the effectivity of the insurance contract, the car figured in an accident. The
company then assigned the accident to an insurance appraiser for investigation and
appraisal of the damage.
> Mora without the knowledge and consent of HS Reyes, authorized Bonifacio Bros to
fix the car, using materials supplied by the Ayala Auto Parts Company.
> For the cost of Labor and materials, Mora was billed P2,102.73. The bill was sent to
the insurer’s appraiser. The insurance company drew a check in the amount of the
insurance proceeds and entrusted the check to its appraiser for delivery to the proper
party.
> The car was delivered to Mora without the consent of HS Reyes, and without
payment to Bonifacio Bros and Ayala.
> Upon the theory that the insurance proceeds should be directly paid to them,
Bonifacio and Ayala filed a complaint against Mora and the insurer with the municipal
court for the collection of P2,102.73.
> The insurance company filed its answer with a counterclaim for interpleader,
requiring Bonifacio and HS Reyes to interplead in order to determine who has a better
right to the proceeds.

Issue:
Whether or not there is privity of contract between Bonficacio and Ayala on one hand
and State Insurance on the other.

Held:
NONE.
It is fundamental that contracts take effect only between the parties thereto, except in
some specific instance provided by law where the contract contains some stipulation in
favor of a third person. Such stipulation is known as a stipulation pour autrui; or a
provision in favor of a third person not a party to the contract.

Under this doctrine, a third person is ed to avail himself of a benefit granted to him by
the terms of the contract, provided that the contracting parties have clearly and
deliberately conferred a favor upon such person. Consequently, a third person NOT a
party to the contract has NO action against the aprties thereto, and cannot generally
demand the enforcement of the same.
Page 11 of 62 11

The question of whether a third person has an enforceable interest in a contract must
be settled by determining whether the contracting parties intended to tender him such
an interest by deliberately inserting terms in their agreement with the avowed purpose
of conferring favor upon such third person. IN this connection, this court has laid down
the rule that the fairest test to determine whether the interest of a 3rd person in a
contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the
intention of the parties as disclosed by their contract.

In the instant case the insurance contract does not contain any words or clauses to
disclose an intent to give any benefit to any repairmen or material men in case of repair
of the car in question. The parties to the insurance contract omitted such stipulation,
which is a circumstance that supports the said conclusion. On the other hand, the "loss
payable" clause of the insurance policy stipulates that "Loss, if any, is payable to H.S.
Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended to
benefit.

A policy of insurance is a distinct and independent contract between the insured and
insurer, and third persons have no right either in a court of equity, or in a court of law, to
the proceeds of it, unless there be some contract of trust, expressed or implied, by the
insured and third person. In this case, no contract of trust, express or implied. In this
case, no contract of trust, expressed or implied exists. We, therefore, agree with the
trial court that no cause of action exists in favor of the appellants in so far as the
proceeds of insurance are concerned. The appellant's claim, if at all, is merely equitable
in nature and must be made effective through Enrique Mora who entered into a
contract with the Bonifacio Bros Inc. This conclusion is deducible not only from the
principle governing the operation and effect of insurance contracts in general, but is
clearly covered by the express provisions of section 50 of the Insurance Act (now Sec.
53).

The policy in question has been so framed that "Loss, if any, is payable to H. S. Reyes,
Inc." which unmistakably shows the intention of the parties.

Binding Receipt

What is a binding receipt according to Glora v. Philamlife?

A binding receipt or slip is ordinarily a document, slip or memorandum given to the
insured, which binds the insurance company to pay insurance should a loss occur
pending action upon the application and actual issuance of a policy.

The purpose of a binder is to provide temporary insurance pending an inquiry by the

insurer as to the character of the risk and to take the place of the policy until the latter
can be issued.

The issuance of a binder evidences, a complete, temporary or preliminary contract of

insurance effective from that time until the issuance of the formal policy or until
rejection of the risk. Under a life policy, it would establish liability upon the insurer if
death occurred prior to the issuance of the policy.
Page 12 of 62 12

A binder receipt would be misnamed if it does NOT bind the insurer. If the insurer
issues a binder receipt with terms which will negate, or neutralize the binding result of
the receipt, then the insurer would have actually practiced fraud on the applicant for
insurance.

Gloria v. Philamlife Insurance Co.

73 OG 8660

Facts:
> In 1966, Roberto Narito applied for a 100T life insurance policy with Philamlife
Insurance Company. Narito was examined by Dra. Vergel de dios, the insurer’s medical
examiner.
> She opined that Narito was insurable. Her opinion was confirmed by Dr. Orobia, the
Associate Medical Director of the insurer.
> On Oc. 31, 1966, an agent of the insured prepared an application for the life insurance
whose annual premium was P1,178. On the same date, the application was signed by
Narito.
> Narito paid the first annual premium on the policy applied for. The insurer’s
application form contained a so-called “Binding Receipt” which was detachable.
> It is not sure whether or not Narito was given the Binding Receipt upon his payment
of the first premium, but what is certain that he was handed a Cashier’s Receipt.
> From the time the insured received the application form its agent on Nov. 5, 1966, up
to Dec. 6, 1966, it did not take any action with regard to the controverted insurance
coverage.
> On Dec. 6, 1966, Narito was shot and killed. The beneficiaries submitted a claim to
the insurer. After an underwriting analysis conducted by the insurer, it found out that
Narito was unacceptable as an insurance risk. The claim was denied.

Issue:
Whether or not the beneficiaries can claim.

Held:
YES.
The application for insurance signed by the deceased contained the following
stipulation: “The binding receipt must NOT be issued unless a binding deposit is paid which
must be at least equal to the first full premium.” The preponderance of evidence is to the
effect that the binding receipt was not issued to the deceased when he paid the
company’s agent, the first annual premium of P1,178. Hence the rights of the
beneficiaries and the obligation of the company have to be determined solely in the
application for insurance an in the Cashier’s receipt.
Page 13 of 62 13

The application for insurance contained the following clause: “There shall be no contract
of insurance unless a policy is issued on this application and the full first premium thereon
actually paid.” It should be conceded that there shall be a contract of insurance once
the first premium is paid and a policy is issued. There is no question that the first
premium was paid.

The problem is to resolve whether or not it can be said that the policy has been
issued. IN this connection, what may be noted is that, in contrast to the requirement of
actual payment of the premium, it was NOT required that the policy be actually
issued. An assuming that no policy had indeed been issued, it should still be held that
the application for insurance was approved by the company, with the actual issuance of
the policy being a mere technicality. When an insurer accepts and retains the first
premium for an unreasonable length of time, it should be presumed that the insurer
had assumed the risk. It should therefore be liable for loss before the application is
subsequently rejected. In the case at bar, the company did NOT act on the application
for insurance, one way or the other, from Nov. 2 to Dec. 5, 1966, and no justification for
the delay had been proven.

Hence, it should be held that the application for insurance of the deceased had been
approved prior to his death, although the policy had not actually been issued, for which
reason, the company should be liable to the beneficiaries.

Pacific Timber v. CA

112 SCRA 199

Facts:
> On March 13, 1963, Pacific secured temporary insurance from the Workemen’s
Insurance Co. for its exportation of logs to Japan. Workmen issued on said date Cover
Note 1010 insuring said cargo.
> The regular marine policies were issued by the company in favor of Pacific on Apr 2,
1963. The 2 marine policies bore the number 53H01032 and 53H01033.
> After the issuance of the cover note but BEFORE the issuance of the 2 policies, some
of the logs intended to be exported were lost due to a typhoon.
> Pacific filed its claim with the company, but the latter refused, contending that said
loss may not be considered as covered under the cover note because such became null
and void by virtue of the issuance of the marine policies.

Issue:

Whether or not the cover not was without consideration, thus null and void.
Page 14 of 62 14

Held:
It was with consideration.
SC upheld Pacific’s contention that said cover not was with consideration. The fact that
no separate premium was paid on the cover note before the loss was insured against
occurred does not militate against the validity of Pacific’s contention, for no such
premium could have been paid, since by the nature of the cover note, it did not contain,
as all cover notes do not contain, particulars of the shipment that would serve as basis
for the computation of the premiums. As a logical consequence, no separate premiums
are required to be paid on a cover note.

If the note is to be treated as a separate policy instead of integrating it to the regular

policies subsequently issued, its purpose would be meaningless for it is in a real sense a
contract, not a mere application.

Grepalife v. CA

89 SCRA 543

Facts:
> On March 14, 1957, respondent Ngo Hing filed an application with Grepalife for a 20-
yr endowment policy for 50T on the life of his one year old daughter Helen Go.
> All the essential data regarding Helen was supplied by Ngo to Lapu-Lapu
Mondragon, the branch manager of Grepalife-Cebu. Mondragon then typed the data
on the application form which was later signed by Ngo.
> Ngo then paid the insurance premium and a binding deposit receipt was issued to
him. The binding receipt contained the following provision: “If the applicant shall not
have been insurable xxx and the Company declines to approve the application, the
insurance applied for shall not have been in force at any time and the sum paid shall be
returned to the applicant upon the surrender of this receipt.”
> Mondragon wrote on the bottom of the application form his strong recommendation
for the approval of the insurance application.
> On Apr 30, 1957, Mondragon received a letter from Grepalife Main office
disapproving the insurance application of Ngo for the simple reason that the 20yr
endowment plan is not available for minors below 7 yrs old.
> Mondragon wrote back the main office again strongly recommending the approval of
the endowment plan on the life of Helen, adding that Grepalife was the only insurance
company NOT selling endowment plans to children.
> On may 1957, Helen died of influenza with complication of broncho pneumonia. Ngo
filed a claim with Gepalife, but the latter denied liability on the ground that there was
no contract between the insurer and the insured and a binding receipt is NOT evidence
of such contract.

Issue:
Whether or not the binding deposit receipt, constituted a temporary contract of life
insurance.
Page 15 of 62 15

Held:
NO.
The binding receipt in question was merely an acknowledgement on behalf of the
company, that the latter’s branch office had received from the applicant, the insurance
premium and had accepted the application subject for processing by the insurance
company, and that the latter will either approve or reject the same on the basis of
whether or not the applicant is insurable on standard rates.

Since Grepalife disapproved the insurance application of Ngo, the binding deposit
receipt had never became on force at any time, pursuant to par. E of the said receipt. A
binding receipt is manifestly merely conditional and does NOT insure outright. Where
an agreement is made between the applicant and the agent, NO liability shall attach
until the principal approves the risk and a receipt is given by the agent.

The acceptance is merely conditional, and is subordinated to the act of the company in
approving or rejecting the application. Thus in life insurance, a binding slip or binding
receipt does NOT insure by itself.

Lim v. Sun Life

41 PHIL 263

Facts:
> On July 6, 1917, Luis Lim Y Garcia of Zamboanga applied for a policy of life insurance
with Sunlife in the amount of 5T.
> He designated his wife Pilar Lim as the beneficiary. The first premium of P433 was
paid by Lim and company issued a “provisional policy”
> Such policy contained the following provisions “xx the abovementioned life is to be
assured in accordance with the terms and conditions contained or inserted by the
Company in the policy which may be granted by it in this particular case for 4 months only
from the date of the application, PROVIDED that the company shall confirm this
agreement by issuing a policy on said application xxx. Should the company NOT issue such
a policy, then this agreement shall be null and void ab initio and the Company shall be held
not to have been on the risk at all, but in such case, the amount herein shall be returned.
> Lim died on Aug. 23, 1917 after the issuance of the provisional policy but before the
approval of the application by the home office of the insurance company.
> The instant action is brought by the beneficiary to recover from Sun Life the sum of
5T.

Issue:
Whether or not the beneficiary can collect the 5T.
Page 16 of 62 16

Held:
NO.
The contract of insurance was not consummated by the parties. The above quoted
agreement clearly stated that the agreement should NOT go into effect until the home
office of the Company shall confirm it by issuing a policy. It was nothing but an
acknowledgment by the Company that it has received a sum of money agreed upon as
the first year’s premium upon a policy to be issued upon the application if it is accepted
by the Company.

When an agreement is made between the applicant and the agent whether by signing
an application containing such condition or otherwise, that no liability shall attach until
the principal approves the risk and a receipt is given by the agent, such acceptance is
merely conditional and is subordinated to the company’s act in approving or rejecting;
so in life insurance a “binding slip or receipt” does not insure itself.

What is a cover note?

The cover note is merely a written memorandum of the most important terms of the
preliminary contract of insurance, intended to give temporary protection pending the
investigation of the risk by the insurer, or until the issuance of a formal policy, provided
that it is later determined that the applicant was insurable at the time it was given.

By its nature, it is subject to all conditions in the policy expected even though that
policy may never issue. In life insurance, where an agreement is made between an
applicant and the insurers’ agent, no liability shall attach until the insurer approves the
risk. Thus, in life insurance, a binding slip or binding receipt DOES NOT insure itself.

Can you explain a preliminary executory contract of insurance?

By a preliminary executory contract of insurance, the insurer makes a contract to insure
the subject matter at some subsequent time which may be definite or indefinite. Under
such an executory contract, the right acquired by the insured is merely to demand the
delivery of the policy in accordance with the terms agreed upon and the obligation
assumed by the insurer is to deliver the said policy.

What are the rules governing 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 not shall e deemed to be a contract of insurance within the meaning of

Sec. 1(1) of IC.

3) NO cover note shall be issued or renewed unless in the form previously approved
by the Insurance Commission.
Page 17 of 62 17

4) A cover note shall be valid and binding for a period NOT exceeding 60 days from
the date of its issuance, whether or not the premium therefore has been paid or not,
BUT such cover note may be canceled by either party upon at least 7 days notice to the
other party.

5) If a cover note is not so canceled, a policy of insurance shall, within 60 days after
the issuance of the cover note be issued in lieu thereof. Such policy shall include within
its terms the identical insurance bound under the cover note and the premiums
therefore.

6) A cover note may be extended or renewed beyond the aforementioned period of

60 days with the written approval of the Insurance Commissioner, provided that such
written approval may be dispensed with upon the certification of the Pres, VP or
General Mgr of the Insurance company concerned, that the risks involved, the values of
such risks, and the premiums therefore 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 provision of the Insurance Code.

7) The 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 than P500.

Preliminary Contracts of Insurance

Section 52. Cover notes may be issued to bind insurance temporarily pending the
issuance of the policy. Within sixty days after the issue of the 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 purpose 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.

What are two types of preliminary contracts of insurance?

The preliminary contract of present insurance and the preliminary executory contract
of insurance.

What is a preliminary contract of present insurance?

By a preliminary contract of insurance, the insurer insures the subject matter usually by
what is known as a “binding slip” or “binder” or “cover note” which is the contract to be
effective until the formal policy is issued or the risk is rejected.
Page 18 of 62 18

What are the kinds of insurable risks?

1) Personal risks – life or health risks
2) Property risks – loss or damage to property
3) Liability risks – involve liability of the insured for an injury caused to the person or
property of another

What are the requirements in order that a risk be insurable?

1) The loss to be insured against must be important enough to warrant the existence
of an insurance contract
2) Risk must permit a reasonable statistical estimate of the chance of loss in order to
determine the amount of premium to be paid
3) The loss should be definite as to cause, time, place and amount
4) The loss is not catastrophic
5) Risk is accidental in nature

0
Tweet

Share

Requirements of an Insurance Policy

Section 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 the basis and rates
upon which the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute owner
thereof;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.

What must a policy contain and what are the reason behind such requirements?
A policy must contain:
1. Names of the parties
2. Amount of insurance
Ø to easily and exactly determine the amount of indemnity to be paid in case of loss or
damage. This requirement however can be dispensed with in cases of open or running
policies.
3. Rate of premium
Ø Because the premium represents the consideration of the contract; these rates are
developed on the basis of the nature and character of the risk assumed. Remember
Atty. Quimson’s famous words? As the risk increases, the rate of premium also
Page 19 of 62 19

increases.
4. Property or life or thing insured
Ø Constitutes the Subject Matter
5. Interests of the insured in the property
Ø In order to determine actual damage. Remember, an owner gets the full value of the
loss while a mortgagee gets only the value of his credit.
6. Risks insured against
Ø In order to know when the insurer is called to indemnify the insured, because if this is
NOT stated, and you hold the insurer liable for any loss due to any cause whatsoever, it
will result to a big loss on the part of the insurer.
7. Duration of the insurance

Ø This period signifies the life of the policy. If the duration of insurance has already
ended, it can no longer be revived.

CIR v. Lincoln Phil Life - Automatic Increase Clause

379 SCRA 423 (2002)

Facts:
> In the years prior to 1984, Lincoln issued a special kind of life insurance policy known
as the "Junior Estate Builder Policy," the distinguishing feature of which is a clause
providing for an automatic increase in the amount of life insurance coverage upon
attainment of a certain age by the insured without the need of issuing a new policy. The
clause was to take effect in the year 1984.
> Documentary stamp taxes due on the policy were paid to the petitioner only on the
initial sum assured.
> Subsequently, petitioner issued deficiency documentary stamps tax assessment for
the year 1984, corresponding to the amount of automatic increase of the sum assured
on the policy issued by respondent.
> Lincoln questioned the deficiency assessments and sought their cancellation in a
petition filed in the Court of Tax Appeals. CTA found no basis for the assessment. CA
affirmed.

Issue:
Whether or not the automatic increase of the sum assured on the policy is taxable.
Held:
YES.
CIR claims that the "automatic increase clause" in the subject insurance policy is
separate and distinct from the main agreement and involves another transaction; and
that, while no new policy was issued, the original policy was essentially re-issued when
the additional obligation was assumed upon the effectivity of this "automatic increase
clause" in 1984; hence, a deficiency assessment based on the additional insurance not
covered in the main policy is in order. The SC agreed with this contention.
Page 20 of 62 20

The subject insurance policy at the time it was issued contained an "automatic increase
clause." Although the clause was to take effect only in 1984, it was written into the
policy at the time of its issuance. The distinctive feature of the "junior estate builder
policy" called the "automatic increase clause" already formed part and parcel of the
insurance contract, hence, there was no need for an execution of a separate agreement
for the increase in the coverage that took effect in 1984 when the assured reached a
certain age.

It is clear from Section 173 of the NIRC that the payment of documentary stamp taxes is
done at the time the act is done or transaction had and the tax base for the
computation of documentary stamp taxes on life insurance policies under Section 183
of NIRC is the amount fixed in policy, unless the interest of a person insured is
susceptible of exact pecuniary measurement.

Logically, we believe that the amount fixed in the policy is the figure written on its face
and whatever increases will take effect in the future by reason of the "automatic
increase clause" embodied in the policy without the need of another contract.

Here, although the automatic increase in the amount of life insurance coverage was to
take effect later on, the date of its effectivity, as well as the amount of the increase, was
already definite at the time of the issuance of the policy. Thus, the amount insured by
the policy at the time of its issuance necessarily included the additional sum covered by
the automatic increase clause because it was already determinable at the time the
transaction was entered into and formed part of the policy.

The "automatic increase clause" in the policy is in the nature of a conditional obligation
under Article 1181, 8 by which the increase of the insurance coverage shall depend upon
the happening of the event which constitutes the obligation. In the instant case, the
additional insurance that took effect in 1984 was an obligation subject to a suspensive
obligation, 9 but still a part of the insurance sold to which private respondent was liable
for the payment of the documentary stamp tax.

Perez v. CA- Perfection of the Contract of Insurance

323 SCRA 613 (2000)

Facts:
> Primitivo Perez had been insured with the BF Lifeman Insurance Corporation since
1980 for P20,000.00.
> In October 1987, an agent of Lifeman, Rodolfo Lalog, visited Perez in Quezon and
convinced him to apply for additional insurance coverage of P50,000.00, to avail of the
ongoing promotional discount of P400.00 if the premium were paid annually.
> Primitivo B. Perez accomplished an application form for the additional insurance
coverage. Virginia A. Perez, his wife, paid P2,075.00 to Lalog. The receipt issued by
Lalog indicated the amount received was a "deposit."
Page 21 of 62 21

> Unfortunately, Lalog lost the application form accomplished by Perez and so on
October 28, 1987, he asked the latter to fill up another application form. On November
1, 1987, Perez was made to undergo the required medical examination, which he
passed.
> Lalog forwarded the application for additional insurance of Perez, together with all
its supporting papers, to the office of BF Lifeman Insurance Corporationn in Quezon
which office was supposed to forward the papers to the Manila office.
> On November 25, 1987, Perez died while he was riding a banca which capsized during
a storm.
> At the time of his death, his application papers for the additional insurance were still
with the Quezon office. Lalog testified that when he went to follow up the papers, he
found them still in the Quezon office and so he personally brought the papers to the
Manila office of BF Lifeman Insurance Corporation. It was only on November 27, 1987
that said papers were received in Manila.
> Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance
Corporation approved the application and issued the corresponding policy for the
P50,000.00 on December 2, 1987
> Virginia went to Manila to claim the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first insurance policy for P20,000.00
(double indemnity in case of accident) but the insurance company refused to pay the
claim under the additional policy coverage of P50,000.00, the proceeds of which
amount to P150,000.00 in view of a triple indemnity rider on the insurance policy.
> In its letter of January 29, 1988 to Virginia A. Perez, the insurance company
maintained that the insurance for P50,000.00 had not been perfected at the time of the
death of Primitivo Perez. Consequently, the insurance company refunded the amount
of P2,075.00 which Virginia Perez had paid
> Lifeman filed for the rescission and the declaration of nullity. Perez, on the other
hand, averred that the deceased had fulfilled all his prestations under the contract and
all the elements of a valid contract are present.
> RTC ruled in favor of Perez. CA reversed.

Issue:
Whether or not there was a perfected additional insurance contract.

Held:
The contract was not perfected.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to
compensate the other for loss on a specified subject by specified perils. A contract, on
the other hand, is a meeting of the minds between two persons whereby one binds
himself, with respect to the other to give something or to render some service.

Consent must be manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain and
Page 22 of 62 22

the acceptance absolute. When Primitivo filed an application for insurance, paid
P2,075.00 and submitted the results of his medical examination, his application was
subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The
perfection of the contract of insurance between the deceased and respondent
corporation was further conditioned upon compliance with the following requisites
stated in the application form:
"there shall be no contract of insurance unless and until a policy is issued on this
application and that the said policy shall not take effect until the premium has been paid
and the policy delivered to and accepted by me/us in person while I/We, am/are in good
health."
The assent of private respondent BF Lifeman Insurance Corporation therefore was not
given when it merely received the application form and all the requisite supporting
papers of the applicant. Its assent was given when it issues a corresponding policy to
the applicant. Under the abovementioned provision, it is only when the applicant pays
the premium and receives and accepts the policy while he is in good health that the
contract of insurance is deemed to have been perfected.

It is not disputed, however, that when Primitivo died on November 25, 1987, his
application papers for additional insurance coverage were still with the branch office of
respondent corporation in Gumaca and it was only two days later, or on November 27,
1987, when Lalog personally delivered the application papers to the head office in
Manila. Consequently, there was absolutely no way the acceptance of the application
could have been communicated to the applicant for the latter to accept inasmuch as
the applicant at the time was already dead.

Tang v. CA- Insurance Fraud or Mistake

90 SCRA 236

Facts:
> On Sept. 25, 2965, Lee Su Guat, widow, 61 years old and illiterate who spoke only
Chinese, applied for life insurance for 60T with Philamlife. The application was in two
parts, both in English.
> The second part dealt with her state of health. Her answers having shown that she
was health, Philamlife issued her a policy effective Oct. 23, 1965 with her nephew
Vicente Tang as beneficiary.
> On Nov. 15, 1965, Lee again applied for additional insurance of her life for 40T. Since
it was only recent from the time she first applied, no further medical exam was made
but she accomplished Part 1 (which certified the truthfulness of statements made in
Part. 2)
> The policy was again approved. On Apri 20 1966, Lee Su Guat died of Lung cancer.
> Tang claimed the amount o 100T but Philamlife refused to pay on the ground that
the insured was guilty of concealment and misrepresentation.
> Both trial court and CA ruled that Lee was guilty of concealment.
Page 23 of 62 23

> Tang’s position, however, is that because Lee was illiterate and spoke only Chinese,
she could not be held guilty of concealment of her health history because the
application for insurance was English, and the insurer has not proven that the terms
thereof had been fully explained to her as provided by Art. 1332 of CC.

Issue:

Whether or not Art. 1332 applies.

Held:
NO.
Art. 1332 is NOT applicable. Under said article, the obligation to show that the terms of
the contract had been fully explained to the party who is unable to read or understand
the language of the contract, when fraud or mistake is alleged, devolves on the party
seeking to enforce it. Here, the insurance company is NOT seeking to enforce the
contract; on the contrary, it is seeking to avoid its performance.

It is petitioner who is seeking to enforce it, even as fraud or mistake is NOT

alleged. Accordingly, Philamlife was under no obligation to prove that the terms of the
insurance contract were fully explained to the other party. Even if we were to say that
the insurer is the one seeking the performance of the cont contracts by avoiding paying
the claim, it has to be noted as above stated that there has been NO imputation of
mistake of fraud by the illiterate insured whose personality is represented by her
beneficiary. In sum, Art. 1332 is inapplicable, and considering the findings of both the
trial court and the CA as to the Concealment of Lee, the SC affirms their decisions.

Concurring: J., Antonio

In a contract of insurance, each party must communicate to the other, in good faith, all
facts within his knowledge which are material to the contract, and which the other has
no means of ascertaining. As a general rule, the failure by the insured to disclose
conditions affecting the risk of which he is aware makes the contract voidable at the
option of the insurer.

The reason for this rule is that insurance policies are traditionally contracts uberrimae
fidei, which means “most abundant good faith”, “absolute and perfect candor or
openness and honesty,” “absence of any concealment or deception however
slight.” Here the CA found that the insured deliberately concealed material facts about
her physical condition and history and/or concealed with whoever assisted her in
relaying false information to the medical examiner. Certainly, the petitioner cannot
assume inconsistent positions by attempting to enforce the contract of insurance for
the purpose of collecting the proceeds of the policy and at the same time nullify the
contract by claiming that it was executed through fraud or mistake.
Page 24 of 62 24

NOTE: Art. 1332: When one of the parties is unable to read or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person enforcing
the contract must show that the terms thereof have been fully explained to him.

Enriquez v. SunLife- Insurance Policy

41 PHIL 269

Facts:
> On Sept. 24 1917, Herrer made an application to SunLife through its office in Manila
for life annuity.
> 2 days later, he paid the sum of 6T to the company’s anager in its Manila office and
was given a receipt.
> On Nov. 26, 1917, the head office gave notice of acceptance by cable to Manila. On
the same date, the Manila office prepared a letter notifying Herrer that his application
has been accepted and this was placed in the ordinary channels of transmission, but as
far as known was never actually mailed and never received by Herrer.
> Herrer died on Dec. 20, 1917. The plaintiff as administrator of Herrer’s estate brought
this action to recover the 6T paid by the deceased.

Issue:

Whether or not the insurance contract was perfected.

Held:
NO.
The contract for life annuity was NOT perfected because it had NOT been proved
satisfactorily that the acceptance of the application ever came to the knowledge of the
applicant. An acceptance of an offer of insurance NOT actually or constructively
communicated to the proposer does NOT make a contract of insurane, as the locus
poenitentiae is ended when an acceptance has passed beyond the control of the party.

NOTE: Life annuity is the opposite of a life insurance. In life annuity, a big amount is
given to the insurance company, and if after a certain period of time the insured is stil
living, he is entitled to regular smaller amounts for the rest of his life. Examples of Life
annuity are pensions. Life Insurance on the other hand, the insured during the period of
the coverage makes small regular payments and upon his death, the insurer pays a big
amount to his beneficiaries.

Sindayen v. Insular Life- Policy of Insurance

Page 25 of 62 25

62 PHIL 9

Facts:
> Arturo Sindayen was a linotype operator in the Bureau of Printing. He and his wife
Fortunat went to Camiling to spend Christmas with his aunt Felicidad Estrada.
> On Dec. 26, 1932, while still in Camiling, he made a written application to Insular Life,
through its agent, Cristobal Hendoza, for a policy of insurance on his life in the sum of
1,000.
> He paid the agent P15 as part of the first premium. It was agreed that the policy,
when and if issued, should be delivered to Felicidad with whom Sindayen left the sum
P25.06 to complete the payment of the first annual premium of P40.06.
> On Jan 1, 1933, Sindayen was examined by Insular’s doctor who made a favorable
report to Insular.
> The next day, Sindayen returned to Manila and resumed his work. On Jan. 11, 1933,
Insular accepted the risk and issued a policy, and mailed the same to its agent for
delivery to the insured.
> On Jan. 12, 1933, Sindayen complained of a severe headache. ON Jan. 15, 1933, he
called a physician who found that Sindayen was suffering from acute nephritis and
uremia. His illness did not yield to treatment and on Jan. 19, 1933, he died.
> The policy which the company issued and mailed in manila on Jan. 11 1933 was
received by its agent in Camilin on Jan. 16, 1933. On Jan 18, 1933, the agent, in
accordance with his agreement with the insured delivered the policy to Felicided upon
her payment of the balance of the 1st year’s premium.
> The agent asked Felicidad if her nephew was in good health and she replied that she
believed so because she had no information that he was sick, and thereupon , the policy
was handed to her by the agent.
> On Jan. 20, 1933, the agent learned of the death of Sindayen, afterwhich he called
upon Felicidad and asked her to return the policy. Felicidad did so.
> On Feb. 4, 1933, the company obtained from Sindayen’s widow Fortunata (also the
beneficiary), her signature on a legal document whereby in consideration of the sum
40.06 representing the amount of premium paid, Fortunata thereby releases forever
and discharges Insular from any and all claims and obligations she may have against the
latter.
> A check for the above-mentioned amount was drawn in the name of Fortunata, but
the same was never encashed.
> Instead, it was returned to Insular and this complaint to enforce payment under
the policy was instituted.
> The application which Sindayen signed in Camiling contained the following
provisions:
“xxx
(3) That the said policy shall not take effect until the first premium has been paid and the
policy has been delivered to and accepted by me, while I am in good health.”
Page 26 of 62 26

> The main defense of the company is the policy never took effect because of par. 3 of
the application, since at the time of the delivery of the agent, the insured was not in
good health.

Issue:
Whether or not the policy took effect.

Held:
YES.
There is one line of American cases which holds that the stipulation contained par. 3 is
in the nature of a condition precedent, that is to say, that there can be no valid delivery
to the insured unless he is in good health at that time; that this condition precedent
goes to the very essence of the contract and cannot be waived by the agent making
delivery of the policy; HOWEVER, there is also a number of American decision which
state the contrary.

These decisions say that an agent to whom a life insurance policy (similar to the one at
bar) was sent with instruction to deliver it to the insured, has authority to bind the
company by making such delivery, ALTHOUGH the insured was NOT in good health at
the time of delivery, on the theory that the delivery of the policy being the final act to
the consummation of the contract, the condition as to the insured’s good health was
WAIVED by the company.

These same cases further hold that the delivery of the policy by the agent to the insured
consummates the contract even though the agent knew that the insured was NOT in
good health at the time, the theory being, that his knowledge is the company’s
knowledge; and his delivery is the company’s delivery; that when the delivery is made
notwithstanding this knowledge of the defect, the company is deemed to have
WAIVED such defect.

The agent, Mendoza was duly licensed by the Insurance Commission to act for Insular
Life. He had the authority given by him by the company to withhold the delivery of the
policy to the insured until the first premium has been paid and the policy has been
delivered to and accepted by the insured while he is in good health. Whether that
condition had been met or not plainly calls for the exercise of discretion. Mendoza’s
decision that the condition had been met by the insured and that it was proper to make
delivery of the policy to him is just as binding on the company as if the decision had
been made by its Board of Directors. Admittedly, Mendoza made a mistake of
judgment because he acted on insufficient evidence as to the state of health of the
insured, and this mistake cannot be said to be induced by any misconduct on the part of
the insured.

It is in the interest of not only of the applicant but of all insurance companies as well
that there should be some act which gives the applicant the definite assurance that the
Page 27 of 62 27

contract has been consummated. This sense of security and of piece of mind that one’s
dependents are provided for without risk of either loss or of litigation is the bedrock of
life insurance.

A cloud will be thrown over the entire insurance business if the condition of health of
the insured at the time of the delivery of the policy may be inquired into years
afterwards with the view of avoiding the policy on the ground that it never took effect
because of an alleged lack of good health at the time of delivery.

It is therefore in the public interest that we are constrained to hold, as we do, that the
delivery of the policy to the insured by an agent of the company who is authorized to
make delivery or withhold delivery is the final act which binds the company and the
insured, in the absence of fraud or other legal grounds for rescission. The fact that the
agent to whom it has entrusted this duty is derelict or negligent or even dishonest in
the performance of the duty which has been entrusted to him would create an
obligation based upon the authorized acts of the agent toward a third party who was
not in collusion with the agent.

Insurance Policy

Section 49. The written instrument in which a contract of insurance is set forth, is
called a policy of insurance.

Section 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.

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.

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.

Group insurance and group annuity policies, however, may be typewritten and need not
be in printed form.
Page 28 of 62 28

What is a policy of insurance?

Sec. 49 defines a policy of insurance as a written instrument in which the contract of
insurance is set forth.

Who signs the policy of insurance:

Generally, only the insurer or his duly authorized agent signs the policy. It need not be
singed by the insured EXCEPT where the express warranties are contained in a separate
instrument forming part of the policy, in which case, Sec. 70 requires that the
instrument be so signed.

Why are the terms of the policy important?

They are important because they measure the liability of the insurer on one hand, and
the other hand, strict compliance with the terms are required for the recovery on the
part of the insured.

Is the policy and the Contract one and the same thing?
NOPE. A contract is a meeting of the minds of the insured and the insurer. (Remember
CLV?) The policy ONLY the formal written instrument evidencing the contract.

What is usually the best evidence that a contract has been entered into between
the insurer and the insured?
Delivery of the policy by the insurer to the insured.

What are the effects of the delivery of the policy?

If the delivery is conditional, non-fulfillment of the condition bars the contract from
taking effect.
If the deliver is unconditional, the insurance becomes effective at the time of delivery.

What is a rider?
It is a 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.

What happens if there is an inconsistency between the policy and the rider?
RIDER prevails, as being a more deliberate expression of the agreement of the
contracting parties.
Page 29 of 62 29

What are the requirements in order that a rider be binding upon the insured?
1) Descriptive title or name of the rider which is pasted or attached to a policy MUST
be mentioned and written on the blank spaces provided for in the policy; and
2) Unless applied for by the insured or owner, said insured or owner MUST
countersign the rider.

Do the preceding requirements apply only to riders?

NO. they apply also to warranties, clauses and endorsements.

What are warranties?

Warranties are inserted or attached to a policy to eliminate specific potential increases
of hazard during the policy term owing to actions of the insured, or conditions of
property.

What are clauses?

Clauses are agreements between the insurer and the insured on certain matters
relating to the laibiity of the insurer in case of loss.

What are examples of clauses:

1) ¾ Clause – where the insurer is liable for only ¾ of the loss or damage to the
insured
2) Loss Payable clause – where the loss if any is payable to the party or parties
named, as their interests may appear.
3) Change of Ownership clause where the insurance will insure to the benefit of
whomsoever, during the continuance of the risk, may become the owner of the interest
insured.

What is an endorsement?
An endorsement is any provision added to an insurance contract altering its scope or
application. Examples would be those additions to the contract changing the amount,
the rate or the term of the same.

What does Sec. 226 say?

Section 226. 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.
Page 30 of 62 30

Tan v. CA - Rescission of the contract of insurance

G.R. 48049 , June 29, 1989, 174 SCRA 403

Facts:
> Tan Lee Siong was issued a policy by Philamlife on Nov. 6, 1973.
> On April 26, 1975, Tan died of hepatoma. His beneficiaries then filed a claim with
Philamlife for the proceeds of the insurance.

> Philamlife wrote the beneficiaries in Sep. 1975 denying their claim and rescinding the
contract on the ground of misrepresentation. The beneficiaries contend that Philamlife
can no longer rescind the contract on the ground of misrepresentation as rescission
must allegedly be done “during the lifetime of the insured” within two years and prior
to the commencement of the action following the wording of Sec. 48, par. 2.

Issue:

Whether or not Philamlife can rescind the contract.

Held:

YES.

The phrase “during the lifetime” found in Sec. 48 simply means that the policy is no
longer in force after the insured has died. The key phrase in the second paragraph is
“for a period of two years”.

What is a simpler illustration of the ruling in Tan v. CA?

The period to consider in a life insurance policy is “two years” from the date of issue or
of the last reinstatement. So if for example the policy was issued/reinstated on Jan 1,
2001, the insurer can still exercise his right to rescind up to Jan. 1, 2003 or two years
from the date of issue/reinstatement,

REGARDLESS of whether the insured died before or after Jan. 1, 2003.

Soliman v. US Life- Rescind Contract of Insurance

104 PHIL 1046

Facts:
> US Life issued a 20 yr endowment life policy on the joint lives of Patricio Soliman and
his wife Rosario, each of them being the beneficiary of the other.
> In Mar. 1949, the spouses were informed that the premium for Jan 1949 was still
unpaid notwithstanding that the 31-day grace period has already expired, and they
were furnished at the same time long-form health certificates for the reinstatement of
the policies.
> In Apr 1949, they submitted the certificates and paid the premiums.
Page 31 of 62 31

> In Jan. 1950, Rosario died of acute dilation of the heart, and thereafter, Patricio filed a
claim for the proceeds of the insurance.
> US life denied the claim and filed for the rescission of the contract on the ground that
the certificates failed to disclose that Rosario had been suffering from bronchial asthma
for 3 years prior to their submission.

Issue:
Whether or not the contract can still be rescinded.

Held:

Yes.
The insurer is once again given two years from the date of reinstatement to investigate
into the veracity of the facts represented by the insured in the application for
reinstatement. When US life sought to rescind the contract on the ground of
concealment/misrepresentation, two years had not yet elapsed. Hence, the contract
can still be rescinded.

Right to Rescind a Contract of Insurance

Section 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 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.

When must the insurer exercise his right to rescind?

In a non-life insurance policy, the insurer may rescind a contract of insurance prior to
the commencement of an action on the contract.

In a life insurance policy, the insurer may rescind the contract of insurance during the
first two years when the policy was in force during the lifetime of the insured from the date
of its issue or of its last reinstatement.
Page 32 of 62 32

What are the requisites in order that the insurer may rescind a life insurance policy?
1) There must be a basis for the rescission (breach of warranty, concealment,
misrepresentation, etc.)
2) The rescission must be coupled with a check for the amount of premiums already
paid. (without this, the rescission is not effective)
3) The rescission must be exercised within the two years that the insurance is in force
during the lifetime of the insured.

What are the differences and similarities between a concealment and

misrepresentation?

CONCEALMENT MISREPRESENTATION
Insured withholds information of Insured makes erroneous statements of facts
material facts from the insurer with the intent of inducing the insurer to
enter into the insurance contract.
Materiality is determined by the same rules applied in cases of misrepresentation.
Concealment on the part of the insured has the same effect as a misrepresentation and
gives the insurer the right to rescind the contract.
Whether intentional or not intentional, the injured party is entitled to rescind the
contract of insurance on ground of concealment or false representation.
Rules on concealment and representation apply likewise to the insurer since the
contracts of insurance is said to be one of utmost good faith on part of both parties to
the agreement.

Test of Materiality
Section 46. The materiality of a representation is determined by the same rules as the
materiality of a concealment.

What is the 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.

Who determines materiality?

It is a judicial question. It is NOT left to the insurance company to say after the loss has
occurred that it would or would not have issued the policy had an answer been truly
Page 33 of 62 33

given. The matter misrepresented must be of that character which the court can say
would reasonably affect the insurer’s judgment.

Colado v. Insular Life - Tender of Overdue Payments

51 OG (No 12) 6269

Facts:
> Vivencio Collado applied for an insurance contract with Insular life in 1948. His
application was approved and he began started making premium payments. However,
he defaulted and the insurance was cancelled.
> He then applied for the reinstatement of his insurance policy in Nov. of 1951 and
tendered the amount of premium for the years 1950-1951.
> He stated that he was as of Nov. 1951 of good health, and that he had no injuries,
ailments or illnesses and had not been sick for any case since 1948 (his medical check up
when he applied for insurance) and that he had not consulted any physician or
practitioner for any case since the date of such latest medical exam.
> However, when Vivencio applied for the reinstatement, he was already sick of a fatal
disease known as carcinoma of the liver and that 4 days prior to his application for
insurance, he consulted a doctor regarding his condition.
> The reinstatement was approved. Vivencio again failed to pay the premiums for the
last quarter of Nov. 1951 and as such, Insular life sent him a notice canceling the policy.
> Vivencio then died. The beneificiaries instituted the present action to recover from
Insular life the death benefits of a life insurance policy valued at 2T. Insular refused to
pay claiming concealment on the part of Vivencio.
> Collado contends that Insular life had waived the right to rescine the policy in view of
its repeated acceptance of the overdue premiums for the second and third years.
> Municipal court of Manila found for Collado and Insular filed an appeal with CFI of
Manila. CFI rendered judgment in favor of Insular and dismissed Collado’s complaint.

Issue:

Whether or nor Insular life was estopped and could no longer cancel the contract due to
the fact that it accepted the tender of overdue payments from Vivencio.

Held:

NO.
It is enormously clear that when the deceased applied for a reinstatement of his policy
in Nov. 1951, he had already been afflicted with the fatal ailment for a period of about
four months. Furthermore, in submitting together with his application for
reinstatement, a health statement to the effect that he was in good health, Vivencio
Page 34 of 62 34

concealed the material fact that he had consulted a doctor and was then found to be
afflicted with the malady.

The acceptance of Insular life of the overdue premiums did not necessarily deprive it of
the right to cancel the policy in case of default incurred by the Insured in the payment
of future premiums. The case would be different had the insured died at any time after
the payment of overdue premiums but previous to the reinstatement of the policy, for
the, Insular, by its acceptance of its overdue premiums is deemed to have waived its
right to rescind the policy.

The evidence at hand shows that insofar as the payment of the last quarterly premium
for 1951 was concerned, Insular had availed of the right to rescind the policy by
notifying the Insured that the policy had lapsed.

Tan Chay Heng v. West Coast Life - Fraud

51 Phil 80

Facts:
> In 1926, Tan Chay Heng sued West Coast on the policy allegedly issued to his “uncle”,
Tan Caeng who died in 1925. He was the sole beneficiary thereof.
> West Coast refused on the ground that the policy was obtained by Tan Caeng with
the help of agents Go Chuilian, Francisco Sanchez and Dr. Locsin of West Coast.
> West Coast said that it was made to appear that Tan Caeng was single, a merchant,
health and not a drug user, when in fact he was married, a laborer, suffering form
tuberculosis and addicted to drugs.
> West Coast now denies liability based on these misrepresentations.
> Tan Chay contends that West Coast may not rescind the contract because an action
for performance has already been filed.
> Trial court found for Tan Chay holding that an insurer cannot avoid a policy which has
been procured by fraud unless he brings an action to rescind it before he is sued
thereon.

Issue:
Whether or not West Coast’s action for rescission is therefore barred by the collection
suit filed by Tan Chay.

Held:
NO.
Precisely, the defense of West Cast was that through fraud in its execution, the policy is
void ab initio, and therefore, no valid contract was ever made. Its action then cannot be
fore rescission because an action to rescind is founded upon and presupposes the
existence of the contract. Hence, West Coast’s defense is not barred by Sec. 47.
Page 35 of 62 35

In the instant case, it will be noted that even in its prayer, the defendant does not seek
to have the alleged insurance contract rescinded. It denies that it ever made any
contract of insurance on the life of Tan Caeng, or that any such a contract ever existed,
and that is the question which it seeks to have litigated by its special defense. In the
very nature of things, if the defendant never made or entered into the contract in
question, there is no contract to rescind, and, hence, section 47 upon which the lower
court based its decision in sustaining the demurrer does not apply.

As stated, an action to rescind a contract is founded upon and presupposes the

existence of the contract which is sought to be rescinded. If all of the material matters
set forth and alleged in the defendant's special plea are true, there was no valid
contract of insurance, for the simple reason that the minds of the parties never met and
never agreed upon the terms and conditions of the contract. We are clearly of the
opinion that, if such matters are known to exist by a preponderance of the evidence,
they would constitute a valid defense to plaintiff's cause of action. Upon the question as
to whether or not they are or are not true, we do not at this time have or express any
opinion, but we are clear that section 47 does not apply to the allegations made in the
answer, and that the trial court erred in sustaining the demurrer.

Gonzalez Lao v. Yek Tong Lin Fire & Marine Insurance - Insurance Premiums

55 PHIL 386

Facts:
> Gonzales was issued 2 fire insurance policies by Yek for 100T covering his leaf
tobacco prducts.
> They were stored in Gonzales’ building on Soler St., which on Jan. 11, 1928, burned
down.
> Art. 3 of the Insurance policies provided that: “Any insurance in force upon all or part of
the things unsured must be declared in writing by the insured and he (insured) should
cause the company to insert or mention it in the policy. Without such requisite, such policy
will be regarded as null and void and the insured will be deprived of all rights of indemnity
in case of loss.”
> Notwithstanding said provision, Gonzales entered into other insurance
contracts. When he sought to claim from Yek after the fire, the latter denied any
liability on the ground of violation of Art. 3 of the said policies.
> Gonzales however proved that the insurer knew of the other insurance policies
obtained by him long efore the fire, and the insurer did NOT rescind the insurance
polices in question but demanded and collected from the insured the premiums.

Issue:
Whether or not Yek is still entitled to annul the contract.
Page 36 of 62 36

Held:
NO.
The action by the insurance company of taking the premiums of the insured
notwithstanding knowledge of violations of the provisions of the policies amounted to
waiver of the right to annul the contract of insurance.

Edillon v. Manila Bankers Life Insurance Corp. - Concealment

117 SCRA 187

Facts:
> In Apr. 1969, Carmen Lapuz applied for insurance with Manila Bankers. In the
application she stated the date of her birth as July 11, 1904 (around 64 yrs old). The
policy was thereafter issued.
> Subsequently, in May 1969, Carmen died of a car accident. Her sister, as beneficiary
claimed the proceeds of the insurance.
> Manila Bankers refused to pay because the certificate of insurance contained a
provision excluding it’s liability to pay claims to persons under 16 or over 60.

Issue:
Whether or not the policy is void considering that the insured was over 60 when she
applied.

Held:
NO.
The age of Carmen was not concealed to the insurance company. Her application form
indicated her true age. Despite such information, Manila Bankers accepted the
premium and issued the policy. It had all the time to process the application and notice
the applicant’s age. If it failed to act, it was because Manila Bankers was willing to
waive such disqualifications or it simply overlooked such fact. It is therefore estopped
from disclaiming any liability.

Musngi v. West Coast Life Assurance Co.- False Representation

61 PHIL 864

Facts:
> Arsenio Garcia was insured by West Coast twice in 1931. In both policies, he was
asked to answer the question: “what physician or practitioners have you consulted or
been treated by, and for what illness or ailment?
> In both policies, he answered in the negative. It turned out that from 1929 to 1939,
he went to see several physicians for a number of ailments. So when he died in 1942,
the company refused to pay the proceeds of the insurance.
Page 37 of 62 37

Issue:
Whether or not the answer given by Arsenio in the policies justifies the company’s
refusal to pay?

Held:
YES.
Aresenio knew that he was suffering from a number of ailments, yet, he concealed
this. Such concealment and his false statements constituted fraud, because the
insurance company by reasons of such statement accepted the risk which it would
otherwise have rejected.

False Representation
Section 44. A representation is to be deemed false when the facts fail to correspond
with its assertions or stipulations.

What is the importance of Sec. 44?

This defines misrepresentation.

Must representation be literally true?

No. See Section 38. Representations are not required to be literally true unlike
warranties which must be literally true. It is sufficient that representations are
substantially true.

Is the same true in cases of marine insurance?

NO. In marine insurance, the substantial truth of a representation is NOT
sufficient. Accdg. to Sec. 107, the insured is required to state the exact and whole truth
in relation to all matters that he represents, or upon inquiry, discloses or assumes to
disclose.

When will a representation relied upon avoid a policy?

In order that a representation shall avoid a policy, it must be relied upon and be falise in
a substantial and material respect.

Section 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. The right to rescind granted by this Code to the insurer is
Page 38 of 62 38

waived by the acceptance of premium payments despite knowledge of the ground for
rescission. (As amended by Batasang Pambansa Blg. 874)

What does this section provide?

It provides that the falsity of a representation entitles the injured party to rescind the
contract from the time when the representation becomes false. And ordinarily, under
this section, fraudulent intent is IMMATERIAL. In other words, the injured party can
rescind the contract of insurance where there is a misrepresentation even without
fraud. And not that the false representation MUST be material.

Harding v. Commercial Union Assurance Company- Willful Misstatement

38 PHIL 464

Facts:
> Henry Harding bought a car for 2T in 1915. He then gave the car to his wife Mrs.
Harding.
> While Mrs. Harding was having the car repaired at the Luneta Garage (Luneta was an
agent of Smith Bell and Co., which in turn is Commercial Union’s agent), the latter
induced Mrs. Harding to insure the care with Commercial.
> Mrs. Harding agreed, and Smith Bell sent an agent to Luneta Garage, who together
with the manager of LUneta, appraised the car and declared that its present value was
P3T. This amt was written in the proposal form which Mrs. Harding signed.
> Subsequently, the car was damaged by fire. Commercial refused to pay because the
car’s present value was only 2.8T and not 3T.

Issue:
Whether or not Commercial is liable.

Held:
Commercial is liable.
Where it appears that the proposal form, while signed by the insured was made out by
the person authorized to solicit the insurance (Luneta and Smith Bell) the facts stated in
the proposal, even if incorrect, will not be regarded as warranted by the insured, in the
absence of willful misstatement. Under such circumstances, the proposal is to be
regarded as the act of the insurer.

Insurance- Information Obtained From Third Persons

Section 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
Page 39 of 62 39

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.

What is the effect where information is obtained from third persons?

Under Sec. 43, the insured is given discretion to communicate to the insurer what he
knows of a matter of which he has no personal knowledge. If the representation turns
out to be false, he is NOT responsible therefor, provided he gives the explanation that
he represents so on the information of others.

Example:
If the insured has no personal knowledge of the causes of the death of his parents
because they died when the injured was still an infant, he may report information
obtained from friends and relatives if he likes. In which case, he is not responsible for
the truth of the information.

What is the effect where information is obtained from the agent of the insured?
If the information proceeds from an agent of the insured, whose duty it is in the
ordinary course of business to communicate such information to his principal, and it is
possible for the agent under such circumstances in the exercise of due diligence to have
made such communication before the making of the contract, the insured will be liable
for the truth.

Representation and Misrepresentation in Insurance

Section 36. A representation may be oral or written.

What is a representation?
A representation is a factual statement made by the insured at the time of, or prior to,
the issuance of the policy to give, information to the insurer and otherwise induce him
to enter into the insurance contract.

What is the difference between a representation and concealment?

A concealment is a negative act, meaning it is the failure to do something which is
required while representation is positive act as the insured volunteers such
facts. Concealment usually occurs prior to making of the insurance contract, while
a representation may be made at the time of the issuance of the contract.
Page 40 of 62 40

What is a misrepresentation?
A Misrepresentation is a statement:
1. As a fact of something which is untrue
2. Which the insured stated with knowledge that it is untrue and with an intent to
deceive or which he states as true without knowing it to be true and which has the
tendency to mislead; and
3. Where such fact in either case is material to the risk.

What is the effect of a misrepresentation?

A misrepresentation by the insured renders the insurance contract voidable at the
option of the insurer, although the policy is not thereby rendered void ab initio.

Is misrepresentation synonymous with concealment?

NO. Misrepresentation is an active form of concealment.

What is the duty of the person applying for insurance?

It is duty to give the insurer all such information concerning the risk as will be of use to
the latter in estimating its character and in determining whether or not to assume
it. This information may be given orally or written in papers not connected with the
contract such as in the application or examiner’s report. Sometimes, it may appear on
the policy itself.

Why is such information important?

The information forms the basis of the contract as made. It describes, marks out and
defines the risk assumed. Hence the untruthfulness of any representation will
necessarily avoid the contract.

Example of misrepresentations such that the insurer avoids any liability to the
insured
If the insurer was made to believe that he was insuring a brick house when in truth and
in fact, the house was made of nipa, or when the insurer insured a man of thirty and it
turns out that the man who dies was a 130.

Section 37. A representation may be made at the time of, or before, issuance of the
policy.
Page 41 of 62 41

Section 41 provides that “A representation may be altered or withdrawn before the

insurance is effected, but not afterwards.”

Section 38. The language of a representation is to be interpreted by the same rules as

the language of contracts in general.

How are misrepresentations construed?

They are construed liberally in favor of the insured.

Must the representations be literally true?

No. It is sufficient that they be substantially true.

How can a representation be substantially true and not literally true?

De Leon cites two examples:
If one is asked if he drinks, the question will be construed as referring to habitual
use. So if you drink only when there is an occasion, they you can say NO.
If you are asked if you had any illnesses, local disease or injury in any organ, you can
still say NO even if three weeks before you were suffering from LBM because you ate
one kaing of avocados.

Section 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 are the different kinds of representations?

They may either be:
1. Oral or written;
2. Made at the time of the issuance of the policy or before;
3. Affirmative or promissory

What is an affirmative representation?

It is any allegation as to the existence or non-existence of a fact when the contract
begins. An example would be when the insured states that the house subject of the
insurance is used only for residential purposes.
Page 42 of 62 42

What is a promissory representation?

A promissory representation is any promise to be fulfilled after the contract has come
into existence or any statement concerning what is to happen during the existence of
the insurance.

What is the nature of a promissory representation?

First, it used to indicate a parol or oral promise made in connection with the insurance,
but NOT incorporated in the policy. The non-performance of such a promise CANNOT
be shown by the insurer in defense to an action on the policy, but proof that the
promise was made with fraudulent intent and will serve to defeat the insurance.

Second, it is an undertaking by the insured, inserted in the policy, but NOT specifically
made a warranty, is called a promissory representation. It is however in such a case
merely an executory term of the contract, and not properly a representation. A
promissory representation, is therefore, substantially a condition or a warranty.

Examples of promissory representations

1. An applicant for fire insurance on a building orally promised that the building will
be occupied.
2. An applicant for fire insurance on a building orally promised to install two fire
extinguishers within the bldg.
3. A TV hostess saying “Will be back.. promise.. saranghameda po…”

Does a false representation based on an opinion or expectation avoid the policy?

IT DEPENDS. A representation of an expectation, intention, belief opinion or judgment
of the insured, although false, will NOT avoid the policy of insurance if there is NO
actual fraud in inducing the acceptance of the risk or its acceptance at a lower rate of
premium and this is likewise the rule although the statement is material to the risk. In
such a case, the insurer is not justified in relying upon such statement but is obligated
to make further inquiry.

What must the insurer then to do to avoid liability?

The insurer must prove both the materiality of the insured’s opinion and the latter’s
intent to deceive. If the representation is one of fact, all the insurer needs to prove is its
falsity and materiality. The intent to deceive is already presumed.

When is a representation deemed a mere expression of opinion?

An oral representation as to a future event, or condition over which the insured has no
control, with reference to property or life insured will be deemed a mere expression of
opinion, which will avoid a contract ONLY when made in bad faith.
Page 43 of 62 43

Section 40. A representation cannot qualify an express provision in a contract of

insurance, but it may qualify an implied warranty.

Why is it that a representation cannot qualify an express provision in a contract of

insurance?
A representation cannot qualify an express provision or an express warranty in a
contract of insurance because a representation is not a part of the contract but only a
collateral inducement to it.

Examples
1) If the policy expressly provides that the house insured is used as a warehouse, any
representation made by the insured prior to the issuance of the policy to the effect that
the house was used only as a residence is NOT a defense in the action for the recovery
of the amount of the insurance.

2) The representation of the insured to the effect that the last time the vessel was
drydocked was six months ago would NOT qualify the implied warranty that the vessel
is seaworthy.

Section 41. A representation may be altered or withdrawn before the insurance is

effected, but not afterwards.

What is the reason for this provision?

As representations induce the insurer in assuming the risk insured against and in issuing
the insurance policy, it is but logical that representations may not be altered or
withdrawn after the insurance is affected.

Section 42. A representation must be presumed to refer to the date on which the
contract goes into effect.

To what time does representation refer?

Representations refer only to the time of making the contract. We earlier said that
promissory statements of conditions that exist subsequent to the completion of the
contract are conditions or warranties and not representations (See annotations under
Sec. 39). But now, we refer ONLY to conditions represented as ALREADY
EXISTING. These conditions must exist during the making of the contract.
Page 44 of 62 44

When is there false representation?

There is NO false representation if the representation was true at the time the contract
takes effect, although it became false at the time it was made.

There is false representation if although the representation was true at the time it was
made, it subsequently became false at the time the contract took effect.

Ng Gan Zee v. Asian Crusader Life - Imperfection in the Application Form

122 SCRA 61

Facts:
> In 1962, Kwon Nam applied for a 20yr endowment insurance on his life with his wife,
Ng Gan Zee as the beneficiary.
> He stated in his application that he was operated on for tumor of the stomach
associated with ulcer.
> In 1963, Kwong died of cancer of the liver with metastasis. Asian refused to pay on
the ground of alse information.
> It was found that prior to his application, Kwong was diagnosed to have peptic ulcers,
and that during the operation what was removed from Kwong’s body was actually a
portion of the stomach and not tumor.

Issue:
Whether or not the contract may be rescinded on the ground of the imperfection in the
application form.

Held:
NO.
Kwong did not have sufficient knowledge as to distinguish between a tumor and a
peptic ulcer. His statement therefore was made in good faith. Asian should have made
an inquiry as to the illness and operation of Kwong when it appeared on the face of the
application that a question appeared to be imperfectly answered. Asian’s failure to
inquire constituted a waiver of the imperfection in the answer.

Right to Information of Material Facts

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

May the right to information be waived?

Yes. The right to information of material facts may be waived either:
Page 45 of 62 45

1) Expressly, by the terms of the insurance; or

2) Impliedly, by neglect to make inquiry as to the facts already communicated.

If the applicant has answered the questioned asked in the application, he is justified in
assuming that no further information is desired.

What is an example of the operation of this provision?

The insurer asks the insured if he was ever confined in a hospital for more than a month
and the insured says “YES”. If the insurer does not inquire for the cause of the long
confinement, then he is deemed to have waived the information.

General Causes and General Usages of Trade

Section 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.

Under this section, what is each party to a contract of insurance bound to know?
There are two matters that each party to a contract of insurance is bound to know,
namely:
1. General clauses
2. General usages of trade.

A party however, is not bound to know all the classes of general clauses but only
such general causes:
a) Which are open to his inquiry, equally with that of the other;
b) Which may affect either the political or material perils contemplated.

What is the import of the aforementioned rules?

The insured need not communicate public events such as that the nation is at war, or
what the law is, or political conditions in other countries, the sources of this information
being equally open to the insurer who is also presumed to know such events. Likewise,
the insurer is charged with the knowledge or general trade usages and rules of
navigation, kinds of seasons and all the risks connected with navigation.

Test of Materiality in Insurance

Section 31. Materiality is to be determined not by the event, but solely by the probable
and reasonable influence of the facts upon the party to whom the communication is
due, in forming his estimate of the disadvantages of the proposed contract, or in
making his inquiries.
Page 46 of 62 46

What is the test of materiality?

The test is simply: IF the knowledge of a fact would cause the insurer to reject the risk ,
or to accept it only at a higher premium rate, that fact is material, though it may not
even remotely contribute to the contingency upon which the insurer would become
liable, or in any wise affect the risk.

What is the principal question that must be asked?

The principal question in determining whether the concealment is material is: Was the
insurer misled or deceived into entering a contract, obligation or in fixing the premium of
insurance by a withholding of material information or facts within the insured’s actual or
presumed knowledge? If so, then the contract is avoided, even if the cause of the loss
which subsequently occurred be unconnected with the fact concealed.

Aranilla v. Insular Life - Concealment

69 OG No. 4 637

Facts:
> In 1959, Jose Aranilla applied for life insurance with Insular. In his application, these 2
questions appeared:
o WON he has suffered from any disease of the kidney and urinary tract, to which he
answered NO.
o WON he has been confined in a hospital for consultation and treatment, to which he
answered that in 1947, he was confined due to influenza.
> The truth however, was that a few months prior to his application, he was confined
and treated for nephritis, a disease of the kidney and urinary tract, and he was
accordingly informed of the cause.
> When Aranilla died of cirrhosis of the liver, Insular refused to pay the proceeds due to
concealment.

Issue:
Whether the contract can be rescinded.

Held:
Yes.
If an answer given by the insured to a specific question asked by the insurer in an
application for life insurance turns out to be false, it is a concealment of a material fact
which entitles the insurer to rescind, even if the insured died of an ailment which has
NO connection with the specific questions falsely answered by him. This is because
Page 47 of 62 47

materiality is to be determined NOT by the event but ONLY 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.

Insular Life v. Feliciano - Concealment

73 PHIL 201

Facts:
> Evaristo Feliciano filed an application with Insular Life upon the solicitation of one of
its agents.
> It appears that during that time, Evaristo was already suffering from
tuberculosis. Such fact appeared during the medical exam, but the examiner and the
company’s agent ignored it.
> After that, Evaristo was made to sign an application form and thereafter the blank
spaces were filled by the medical examiner and the agent making it appear that
Evaristo was a fit subject of insurance. (Evaristo could not read and understand English)
> When Evaristo died, Insular life refused to pay the proceeds because of concealment.

Issue:
Whether or not Insular Life was bound by their agent’s acts.

Held:
Yes.
The insurance business has grown so vast and lucrative within the past
century. Nowadays, even people of modest means enter into insurance
contracts. Agents who solicit contracts are paid large commissions on the policies
secured by them. They act as general representatives of insurance companies.

IN the case at bar, the true state of health of the insured was concealed by the agents of
the insurer. The insurer’s medical examiner approved the application knowing fully well
that the applicant was sick. The situation is one in which of two innocent parties must
bear a loss for his reliance upon a third person. In this case, it is the one who drafted
and accepted the policy and consummated the contract. It seems reasonable that as
between the two of them, the one who employed and gave character to the third
person as its agent should be the one to bear the loss. Hence, Insular is liable to the
beneficiaries.

Fieldman’s Insurance v. Songco - Disclosure of Material Facts in Insurance

Page 48 of 62 48

25 SCRA 70

Facts:
> In 1960, Sambat, an agent of Fieldman’s Insurance, induced Songco, a man of scant
education to enter into a common carrier insurance contract with Fieldman.
> During the inducement, a son of Songco butted in and said that they could not accept
the type of insurance offered because theirs was an owner-type jeepney and not a
common carrier.
> Sambat answered that it did not matter because the insurance company was not
owned by the government and therefore had nothing to do with rules and regulations
of the latter (Fieldman).
> The insurance was executed and approved for a year from Sept. 1960-1961. It was
renewed in 1961 for another year.
> In Oct. 1961, the jeepney collided with a car in Bulacan and as a result, Sonco
died. The remaining members of the family claimed the proceeds of the insurance with
the company but it refused to pay on the ground that the vehicle was not a common
carrier.

Issue:

Whether or not the Songcos’ can claim the insurance proceeds despite the fact that the
vehicle concerned was an owner and not a common carrier.

Held:
Yes.
The company is estopped from asserting that the vehicle was not covered. After it had
led Federico Songco to believe that he could qualify under the common carrier liability
insurance policy, and to enter into a contract of insurance paying the premiums due, it
could not thereafter be permitted to change its stand to the detriment of the heirs of
the insured. It knew all along that Frederico owned a private vehicle. Its agent Sambat
twice exerted the utmost pressure on the insured, a man of scant education, and the
company did not object to this.

Communication in Good Faith of All Material Facts - Contract of Insurance

Section 28. Each party to a contract of insurance must communicate to the other,
in good faith, all facts within his knowledge which are material to the contract and as to
which he makes no warranty, and which the other has not the means of ascertaining.

According to Sec. 28, what are the matters that must be communicated by the
party to the other?
This section makes it the duty of each party to a contract of insurance to communicate
in good faith all facts that are material to the contract within his knowledge when:
1. the party with the duty to communicate makes no warranty; and
Page 49 of 62 49

2. the other party has no means of ascertaining the facts

Any exceptions to the duty to communicate?

Those falling under Sec. 30.

What is the test to determine whether or not one must communicate the facts to
the other party?
The test is: If the applicant is aware of the existence of some circumstance which he
knows would influence the insurer in acting upon his application, GOOD FAITH requires
him to disclose that circumstance, though unasked.

Problem.

If A consulted Dr. B for treatment of syphilis and gonorrhea when must A disclose the fact?
He must disclose such fact even if not inquired into, if such fact is material to the risk
assumed by the insurer.

In the problem above, how will A know if the fact is material or not?
The fact must be related to the insurance applied for. In the above example, such fact is
material in cases of life or health insurance and may even be material up to a certain
extent for accident insurance. It is far-fetched to require disclosing such information if
he is applying for fire or marine insurance.

What if the insurer with reasonable diligence could have known or discovered such
facts for himself, can the Insured be excused for his concealment and deny the
remedy of rescission to the insurer?
NO. The effect of the material concealment cannot be avoided by the allegation that
the insurer could have known and discovered a fact which the insured had
concealed. An allegation like this implies that there is an obligation on the part of the
insurance company to verify all the statements made by the insured in his
application. No such obligation exists on the part of the insurer. The insurer has the
right to rely upon the statements of the insured for he knows the facts and the insurer
does not.

What is deemed material?

See sec. 31.

Is the occurrence of a typhoon a fortuitous event?

Page 50 of 62 50

General Rule:
Yes, if all the elements of a natural disaster or calamity concur. This holds true
especially if the vessel was seaworthy at the time it undertook that fateful voyage and
that it was confirmed with the Coast Guard that the weather condition would permit
safe travel of the vessel to its destination. (Philippine American General Insurance Co.,
Inc. v. MGG Marine Services, Inc., G.R. No. 135645, Mar. 8, 2002)

Exception:
If a vessel sank due to a typhoon, and there was failure to ascertain the direction of the
storm and the weather condition of the path they would be traversing, it constitutes
lack of foresight and minimum vigilance over its cargoes taking into account the
surrounding circumstances of the case. Thus, the common carrier will still be
liable. (Arada v. CA, G.R. No. 98243, July 1, 1992)

What is suretyship?

It is an agreement whereby the surety guarantees the performance by another of an

undertaking or an obligation in favor of a third party. (Sec. 175)

What is a “no action” clause?

It is a requirement in a policy of liability insurance which provides that suit and final
judgment be first obtained against the insured, that only thereafter can the person
injured recover on the policy. (Guingon v. Del Monte, G.R. No. L-‐ 21806, Aug. 17, 1967)

Chris, a boxer, is a holder of an accident insurance policy. In a boxing match, he died

after being knocked out by the opponent. Can his father who is a beneficiary under said
insurance policy successfully claim indemnity from the insurance company?

Yes. Clearly, the proximate cause of death was the boxing contest. Death sustained in a
boxing contest is an accident. (De la Cruz v. Capital Insurance & Surety Co., G.R. No. L-
21574, June 30, 1966)

What is casualty insurance?

It is that which covers loss or liability arising from accident or mishap, excluding those
falling under types of insurance as fire or marine. (Sec. 174)

What is fire insurance?

Page 51 of 62 51

It is a contract of indemnity by which the insurer, for a consideration, agrees to

indemnify the insured against loss of or damage by fire, lightning, windstorm, tornado
or earthquake and other allied risks, when such risks are covered by extension to fire
insurance policies or under separate policies. (Sec. 167)

What does the phrase “port of refuge expenses” mean?

These are the additional 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 expense of launching or raising the vessel or of
towing or navigating it into port for her safety. These are items to be borne by the
insurer in addition to a total loss if that afterwards takes place. (Sec. 163)

What is the effect if unseaworthiness is unknown to the owner of the cargo?

It is immaterial in ordinary marine insurance and may not be used by him as a defense
in order to recover on the marine insurance policy. It becomes the obligation of a cargo
owner to look for a reliable common carrier, which keeps its vessels in seaworthy
conditions. The shipper may have no control over the vessel but he has control in the
choice of the common carrier that will transport his goods. (Roque v. IAC, G.R. No. L-
66935, Nov. 11, 1985)

What is the effect of the admission of seaworthiness by the insurer?

If the policy provides that the seaworthiness of the vessel as between insured and
insurer is admitted, the issue of seaworthiness cannot be raised by the insurer without
showing concealment or misrepresentation by the insured. (Phil. American General
Insurance Co. v. CA, G.R. No. 116940, June 11, 1997)

It may mean:

1. That the warranty of seaworthiness is to be taken as fulfilled; or

2. That the risk of unseaworthiness is assumed by the insurer. (Philippine American

General Insurance Co., Inc. v CA, GR No. 116940. June 11, 1997)

Are mechanical defects considered fortuitous events?

No. Mechanical defects in the carrier are not considered a caso fortuito that
exempts the carrier from responsibility. (Sweet Lines, Inc. v. CA, G.R. No. L-46340,
Apr. 29, 1983)
Page 52 of 62 52

1. Tire blowout of a jeep is not a fortuitous event where there exists a specific act of
negligence by the carrier consisting of the fact that the jeepney was overloaded and
speeding at the time of the incident. (Juntilla v. Fontanar, G.R. No. L-45637, May 31,
1985)
2. Defective brakes cannot be considered fortuitous in character. (Vergara v. CA, G.R.
No. 77679, Sept. 30, 1987)

What are the instances when the defects in the notice or proof of loss are considered
waived?

When the insurer:

1. Writes to the insured that he considers the policy null and void as the furnishing of
notice or proof of loss would be useless;
2. Recognizes his liability to pay the claim; 3. Denies all liability under the policy

4. Joins in the proceedings for determining the amount of the loss by arbitration,
making no objections on account of notice and preliminary proof; or
5. Makes Objection on any ground other than the formal defect in the preliminary
proof.

What is misrepresentation?

It is an affirmative defense. To avoid liability, the insurer has the duty to establish such
a defense by satisfactory and convincing evidence. (Ng Gan Zee v. Asian Crusader Life
Assn. Corp., G.R. No. L-30685, May 30, 1983)

Note: In the absence of evidence that the insured has sufficient medical knowledge to
enable him to do distinguish between “peptic ulcer” and “tumor”, the statement of
deceased that said tumor was “associated with ulcer of the stomach” should be
considered an expression in good faith. Fraudulent intent of insured must be
established to entitle insurer to rescind the insurance contract. Misrepresentation, as a
defense of insurer, is an affirmative defense which must be proved. (Ng Gan Zee v.
Asian Crusader Life Assn. Corp., G.R. No. L-30685, May 30, 1983).

Concealment of Non-Material Fact

Page 53 of 62 53

Joanna applied for a non-medical life insurance. Joanna did not inform the insurer that
one week prior to her application for insurance, he was examined and confined at St.
Luke’s Hospital where she was diagnosed for lung cancer. The insured soon thereafter
died in a plane crash. Is the insurer liable considering that the fact concealed had no
bearing with the cause of death of the insured? Why?

No. The concealed fact is material to the approval and issuance of the insurance policy.
It is well settled that the insured need not die of the disease she failed to disclose to the
insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimate
of the risk of the proposed insurance policy or in making inquiries.

What is the Test of Materiality?

It is determined not by the event, but solely by the probable and reasonable influence
of the facts upon the party to whom the communication is due, in forming his estimate
of the advantages of the proposed contract, or in making his inquiries. (Sec. 31)

When is the insurance contract perfected?

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

Angela, owner of a condominium unit, insured the same against fire with the ELM
Insurance Co., and made the loss payable to his sister, Antonette. In case of loss by fire
of the said condominium unit, who may recover on the fire insurance policy?

Angela can recover on the fire insurance policy for the loss of said condominium unit.
He has the insurable interest as owner-‐ insured. As beneficiary in the fire insurance
policy, Antonette cannot recover on the fire insurance policy. For the beneficiary to
recover on the fire or property insurance policy, it is required that she must have
insurable interest in the property insured. In this case, Antonette does not have
insurable interest in the condominium unit. (2001 Bar Question)

Differentiate insurable interest in life insurance and insurable interest in property

insurance.

Insurable interest in life exists when there is reasonable ground founded on the relation
of the parties, either pecuniary or contractual or by blood or affinity, to expect some
benefit or advantage from the continuance of the life of the insured.
Page 54 of 62 54

When a passenger jeepney, insured but with an authorized driver’s clause and was
driven by a driver who only holds a Traffic Violation report (TVR) because his license
was confiscated, met an accident, may the owner of the jeepney claim from the
insurance company?

Yes. The fact that the driver was merely holding a TVR does not violate the condition
that the driver should have a valid and existing driver’s license. Besides, such a
condition should be disregarded because what is involved is a passenger jeepney, and
what is involved here is not own damage insurance but third party liability where the
injured party is a third party not privy to the contract of insurance. (2003 Bar Question)

What is a cooperation clause?

It is that which provides that the insured shall give all such information and assistance
as the insurer may require, usually including attendance at trials or hearings.

What is the theft clause?

It is that which includes theft as among the risks insured against. Where a car is
unlawfully and wrongfully taken without the knowledge and consent of the owner, such
taking constitutes “theft” and it is the theft clause, not the authorized driver clause
which should apply. (Palermo v. Pyramid Inc., G.R. No. L-‐ 36480, May 31, 1988)

What is the authorized driver clause?

It indemnifies the insured owner against loss or damage to the car but limits the use of
the insured vehicle to: 1. The insured himself; or 2. Any person who drives on his order
or with his permission. (Villacorta v. Insurance Commissioner, G.R. No. 54171, Oct. 28,
1980)

What is the main purpose of an authorized driver clause

Its main purpose is to require a person other than the insured, who drives the car on the
insured’s order, such as, his regular driver, or with his permission, such as a friend or
member of the family or the employees of a car service or repair shop to be duly
licensed drivers and have no disqualification to drive a motor vehicle. (Villacorta v.
Insurance Commission, G.R. No. L-54171, Oct. 28, 1980)

What is a no fault indemnity clause?

Page 55 of 62 55

It is a clause where the insurer is required to pay a third party injured or killed in an
accident without the necessity of proving fault or negligence on the part of the insured.
There is a stipulated maximum amount to be recovered. (1994 Bar Question)

What is the meaning of “land transportation operator”?

It means the owner or owners of motor vehicles for transportation of a passenger for
compensation, including school buses. (Sec. 373, [e])

What is the meaning of a “motor vehicle owner”?

It means the actual legal owner of a motor vehicle, whose name such vehicle is duly
registered with the Land Transportation Office. (Sec. 373, [d])

Who is a third-party in insurance?

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. (Sec. 373, [c])

Who is a passenger?

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. (Sec. 373 [b])

What is the purpose of motor vehicle liability insurance?

To give immediate financial assistance to victims of motor vehicle accidents and/or

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

What is motor vehicle liability insurance?

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

What is life insurance?

Page 56 of 62 56

It is that which is payable on the death of a person or on his surviving a specified period,
or otherwise contingently on the continuance of cessation of life (Sec. 180). It is a
mutual agreement by which a party agrees to pay a given sum on the happening of a
particular event contingent on the duration of human life, in consideration of the
payment of a smaller sum immediately, or in periodical payments by the other party.
Right to Subrogation
Company X procured an “open-‐ policy” marine insurance from Y Insurance, a foreign
corporation. The insurance was for a transshipment of certain wooden work tools and
workbenches purchased for consignee Z. The cargo, packed inside one container van
was shipped from Hamburg, Germany en route to Manila, Philippines. The ship arrived
and docked where cargo was received by Aboitiz Shipping Corporation, thereafter it
issued a bill of lading containing a notation ‘grounded outside warehouse’. It was then
shipped to Cebu City and was released to Z. Two days after its release, Aboitiz received
a call from Z informing it that the cargo sustained water damage. Z then informed the
Philippine office of Y Insurance for insurance claims. Y Insurance got an official weather
report from PAGASA, it would appear that heavy rains caused water damage to the
shipment, noticeably the shipment was placed outside the warehouse of Aboitiz based
on the bill of lading containing an notation “grounded outside the warehouse”. Aboitiz
refused to settle the claim, Y Insurance paid the amount of Php 280, 176.92 to
consignee Z, and a subrogation receipt was thereafter signed.
Sue and labor clause – a clause under which the insurer may become liable to pay the
insured in addition to the loss actually suffered, such expenses as he may have incurred
in his efforts to protect the property against a peril for which the insurer would have
been liable (Sec. 163)
A case for collection of actual damages with interest and attorney’s fees was filed with
RTC. Aboitiz disavowed any liability and asserted that the claim had no factual and
legal bases, and that complaint had no cause of action, plaintiff Y Insurance had no
personality to sue, cause of action was barred, suit was premature there being no claim
made upon Aboitiz. RTC rendered decision against Y Insurance and case was elevated
to CA, which reversed RTC decision. Case was then elevated to SC.

ISSUES:

a. Is Respondent Y Insurance the real party-in-interest that possesses the right of

subrogation to claim reimbursement from Aboitiz?

b. Is this right to subrogation an absolute right?

RESOLUTION:

a. YES. A foreign corporation not licensed to do business in the Philippines is not

absolutely incapacitated from filing a suit in local courts. Only when that foreign
corporation is “transacting” or “doing business” in the country will a license be
necessary before it can institute suits. It may, however, bring suits on isolated business
Page 57 of 62 57

transactions, which is not prohibited under Philippine law. Thus, this Court has held
that a foreign insurance company may sue in the Philippine courts upon the marine
insurance policies issues by it abroad to cover international-‐ bound cargoes shipped
by a Philippine carrier, even if it has no license to do business in this country. It is the act
of engaging in business without the prescribed license, and not the lack of license per
se, which bars a foreign corporation from access to our courts. Thus, the payment by
the insurer to the assured operates as an equitable assignment of all remedies the
assured may have against the third party who caused the damage. Subrogation is not
dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance by the insurer.
(Aboitiz Shipping Corporation vs. Insurance Company of North America, G.R. No.
168402, August6, 2008, [Reyes, R.T.,J.])

b. NO. This Right of Subrogation has its limitations, to wit:

1. Both the insurer and the consignee are bound by the contractual stipulations under
the bill of lading;
2. The insurer can be subrogated only to the rights as the insured may have against the
wrongdoer.
Inchamaree clause – a clause which makes the insurer liable for loss or damage to the
hull or machinery arising from the:

a. Negligence of the captain, engineers, etc.

b. Explosion, breakage of shafts; and
c. Latent defect of machinery or hull. (Thames and Mersey Marine Insurance Co v.
Hamilton Fraser and Co [1887] 12 AC 484)

Like0
Tweet
in
Share

Barratry clause – a clause which provides that there can be no recovery on the policy in
case of any willful misconduct on the part of the master or crew in pursuance of some
unlawful or fraudulent purpose without the consent of the owner and to the prejudice
of owner’s interest. It requires an intentional and willful act in its commission. No
honest error or judgment or mere negligence, unless criminally gross, can be barratry.
(Roque v. IAC, G.R. No. L--‐ 66935, Nov. 11, 1985)

All-risks insurance policy – insurance against all causes of conceivable loss or

damage, except:

a. Excluded risk stipulated in the policy, or

b. due to fraud or intentional misconduct on the part of the insured (Chao Tiek Seng v.
CA, GR. No. 84507, Mar. 15, 1990).
Page 58 of 62 58

The insured has the initial burden of proving that the cargo was in good condition when
the policy attached and that the cargo was damaged when unloaded from the vessel;
thereafter, the burden shifts to the insurer to show the exception to the coverage.

What is a loan on bottomry?

It is one which is payable only if the vessel given as security for the loan completes in
safety the contemplated voyage.

What is the risk insured against in marine insurance?

General Rule: Only perils of the sea is insured against.

Exception: Unless perils of the ship are covered by an all-risks policy.

What is an “all risks” marine insurance policy?

General Rule:
It is that which insures against all causes of conceivable loss or damage.

Exception:
1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the part of the insured. (Choa Tiek v. CA,
G.R. No. 84507, Mar. 15, 1990) This type of policy grants greater protection than that
afforded by the “perils clause.”

What does “perils of the ship” mean?

It is a loss which, in the ordinary course of events, results from: 1. The natural and
inevitable action of the sea 2. The ordinary wear and tear of the ship 3. The negligent
failure of the ship’s owner to provide the vessel with proper equipment to convey the
cargo under ordinary conditions.

What does the phrase “perils of the sea or perils of navigation” mean?

It includes only those casualties due to the unusual violence or extraordinary action of
wind and wave, or to other extraordinary causes connected with navigation.

Marine insurance includes:

Page 59 of 62 59

1. Insurance against loss or damage to:

a. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers,

bottomry and respondentia, and interest in respect to all risks or perils of navigation;
b. Persons or property in connection with marine insurance;
c. Precious stones, jewels, jewelry and precious metals whether in the course of
transportation or otherwise; and
d. Bridges, tunnels, piers, docks and other aids to navigation and transportation (Sec.
99)
Note: Cargo can be the subject of marine insurance, and once it is entered into, the implied
warranty of seaworthiness immediately attaches to whoever is insuring the cargo,
whether he be the ship owner or not. (Roque v. IAC, G.R. No. L-‐ 66935, Nov. 11, 1985)

2. “Marine protection and Indemnity insurance” which means 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. (Sec. 99) Measure of indemnity:

a. Valued policy – the parties are bound by the valuation, if the insured had some
interest at risk and there is no fraud (Sec. 156)
b. Open policy – the following rules shall apply in estimating a loss: i. value of the ship--
‐ value at the beginning of the risk ii. value of the cargo-‐ actual cost when laden on
board or market value at the time and place of lading iii. value of freightage-‐ gross
freightage exclusive of primage iv. cost of insurance – in each case to be added to the
estimated value (Sec. 161)

What vessels are contemplated in marine insurance?

Those used, or at least, intended for navigation. E.g., one for shipping, chartering,
voyage and the like. Vessels which are used as museums or those that are stationary
are not entitled to be insured under this a marine insurance.

What is marine insurance?

Insurance against risks 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 fixed period of time.

What is the nature of a health care agreement? What is the effect of limited liability to
health care agreements?
Page 60 of 62 60

A health care agreement is in the nature of a non-‐ life insurance. It is an established

rule in insurance contracts that when their terms contain limitations on liability, they
should be construed strictly against the insurer. These are contracts of adhesion the
terms of which must be interpreted andenforced stringently against the insurer which
prepared the contract. This doctrine is equally applicable to health care agreements.
(Blue Cross Health Care, Inc. vs. Noemi and Danilo Olivares, G.R. No. 169737, February 12,
2008 [Corona, J.], citing Philamcare Health Systems, Inc. vs. CA)

What is Uberrimae Fides Contract?

The contract of insurance is one of Perfect Good Faith not for the insured alone, but
equally so far the insurer. It requires the parties to the contract to disclose conditions
affecting the risk of which He ought to know.

What are pre-need plans?

They are contracts which provide for the performance of future services of the payment
of future monetary considerations at the time of actual need, for which planholders pay
in cash or installment at stated prices, with or without interest or insurance coverage
and includes life, pension, education, interment, and other plans which the Commission
may from time to time approve. (Sec. 3.9. R.A. 8799)

Sun Life v. CA - Concealment in Insurance

245 SCRA 268 (1995)

Facts:
> On April 15, 1986, Bacani procured a life insurance contract for himself from Sun Life.
He was issued a life insurance policy with double indemnity in case of accidental death.
The designated beneficiary was his mother, Bernarda.
> On June 26, 1987, the insured died in a plane crash. Bernarda Bacani filed a claim with
Sun Life, seeking the benefits of the insurance. Sun Life conducted an investigation and
its findings prompted it to reject the claim.
> Sun Life discovered that 2 weeks prior to his application, Bacani was examined and
confined at the Lung Center of the Philippines, where he was diagnosed for renal
failure. During his confinement, the deceased was subjected to urinalysis, ultra-
sonography and hematology tests. He did not reveal such fact in his application.
> In its letter, Sun Life informed Berarda, that the insured did not disclosed material
facts relevant to the issuance of the policy, thus rendering the contract of insurance
voidable. A check representing the total premiums paid in the amount of P 10,172.00
was attached to said letter.
> Bernarda and her husband, filed an action for specific performance against Sun
Life. RTC ruled for Bernarda holding that the facts concealed by the insured were made
in good faith and under the belief that they need not be disclosed. Moreover, it held
that the health history of the insured was immaterial since the insurance policy was
"non-medical." CA affirmed.
Page 61 of 62 61

Issue:
Whether or not the beneficiary can claim despite the concealment.

Held:
NOPE.
Section 26 of the Insurance Code is explicit in requiring a party to a contract of
insurance to 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 no means of ascertaining.
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 communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries (The Insurance Code, Sec 31)
The terms of the contract are clear. The insured is specifically required to disclose to the
insurer matters relating to his health. The information which the insured failed to
disclose were material and relevant to the approval and the issuance of the insurance
policy. The matters concealed would have definitely affected petitioner's action on his
application, either by approving it with the corresponding adjustment for a higher
premium or rejecting the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application.
Thus, "good faith" is no defense in concealment. The insured's failure to disclose the
fact that he was hospitalized for two weeks prior to filing his application for insurance,
raises grave doubts about his bonafides. It appears that such concealment was
deliberate on his part.

(1) What are the effects of an irrevocable designation of a beneficiary under the
Insurance Code? Explain. (2%)

SUGGESTED ANSWER:
(1) The irrevocable beneficiary has a vested interest in the policy , including its
incidents such as the policy loan and cash surrender value. (Gercio v. Sun Life
Assurance Company of Canada. 48 Phil . 53 (1925)
(2) Jacob obtained a life insurance policy of P 1 Million designating irrevocably
Diwata , a friend , as his beneficiary. Jacob however , changed his mind and
wants Yob and Jojo , his other friends , to be included as beneficiaries
considering that the proceeds are sufficient for the three friends.

Can Jacob still add Yob and Jojo as his beneficiaries? Explain (2%)

SUGGESTED ANSWER:

(2) The insured cannot add other beneficiaries as this would diminish the interest of
Diwata who is the irrevocably designated beneficiary. The insured can only do so
witht eh consent of Diwata.

X
Page 62 of 62 62

(1) M/V Pearly Shells, a passenger and cargo vessel, was insured for P
40,000,000.00 against “constructive total loss” Due to a typhoon , it sank near
Palawan. Luckily, there were no casualties, only injured passenger. The ship
owner sent a notice abandonment of his interest over the vessel to the
insurance company which then hired professionals to afloat the vessel for P
900,000.00. When re-floated, the vessel needed repairs estimated at P
2,000,000.00. The insurance company refused to pay the claim of the ship
owner, stating company refused to pay the claim of the shipowner , stating that
there was “no” constructive total loss.”

a) Was there “constructive total loss “ to entitle the ship owner to recover from
the insurance company ? Explain.
b) Was it proper for the ship owner to send a notice of abandonment to the
insurance company? Explain. (5%)

SUGGESTED ANSWER:

(1) a. There was constructive total loss. When the vessel sank. It was likely that it
would be totally lost because of the improbability of recovery. (Arnold’s Law of
Marine Insurance and Average , 16th ed., Vol. II, pp. 954-955)

SUGGESTED ALTERNATIVE ANSWER:

a) There was no constructive total loss. The loss is not more than ¾ the value of
the vessel which was insured for P 40,000.000.00. The cost of refloating is
P900,000.00 and the needed repairs amount to P2,000,000.00 or a total of only
P2,900,000.00 which does not constitute more than ¾ the value of the vessel.
b) It was proper for the shipowner to send a notice of abandonment to the
insurance company , because there was reliable information of the loss of the
vessel. (Section 141, Insurance Code).

2) a When does double insurance exist? (2%)

SUGGESTED ANSWER:

2) a) Double insurance exist where the same person is insured by two or more insurers
separately with respect to the same subject matter and interest. (Section 93, Insurance
Code)

b) What is the nature of the liability of the several insurers in double insurance? Explain
(2%)

SUGGESTED ANSWER:

b) In double insurance, the insurance are considered as co-insurers. Each one is bound to
contribute ratably to the loss in proportion to the amount for which he is liable under his
contract. (Section 94 (e), Insurance Code)