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INSURANCE LAWAtty. Villanueva

I. INTRODUCTIONA. Laws governing insurance

a. Insurance Code of 1978 (PD 1460) as amended by PD 1814 and BP 874b. Civil Codec. Revised Government Service Insurance Act of 1977d. Social Security Act of 1954 (RA 1161)e. Property Insurance Law (RA 656)f. Philippine Deposit Insurance Corp (RA 3591)g. Executive Order 250h. RA 4898

B. General Concept of Insurance – Sec 2 of the Insurance Code, “A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.”

C. Characteristicsa. Risk distributing device – the device of insurance serves to distribute the risk of economic loss among as

many as possible to those who are subject to the same kind of risk. By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contribute to a small degree toward compensation for losses suffered by any member of the group. This broad sharing of economic risk is the principle of risk-distribution.

b. Contract of adhesion – most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed form to which the insured may “adhere” if he chooses but which he cannot change. Hence, in case of doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the insured. However, of the terms of the contract are clear, there is no room for interpretation and the courts are bound to abide by the provisions of the insurance contract although the contract may be rather onerous.

c. Aleatory – the obligation of the insurer to pay the proceeds of the insurance arises only upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. In a sense, however, the contract of insurance is commutative bec there is still exchange of equivalents – the amount paid by the insured is deemed the equivalent of the protection given by the insurer based on the insurance contract.

d. Contract of indemnity – it is the basis of all property insurance. It simply means that the insured who has insurable interest over a property is only entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of loss.

i. Applicable only to property insurance, except creditor insuring the life of his debtorii. Life insurance is not a contract of indemnity. There is no over insurance in life insurance. There

is over insurance only in property insurance and if this is present, the insurer is only liable up to the extent of the loss.

iii. Insurance contracts are not wagering contractse. Uberrimae Fides – the contract of insurance is one of perfect or utmost good faith not for the insured

alone, but equally so for the insurer, in fact, it is more so for the latter since its dominant bargaining position carries with it stricter responsibility. It requires the parties to the contract of insurance to disclose conditions affecting the risk of which he is aware, or material fact, which the applicant knows, and those, which he ought to know. This doctrine is essential on account of the fact that the full circumstances of the subject matter of insurance are, as a rule, known to the insured only and the insurer in deciding whether or not to accept a risk, must rely primarily upon the information supplied to him by the applicant.

D. Elements of insurancea. Existence of an insurable interestb. Risk of lossc. Assumption of riskd. Scheme to distribute lossese. Payment of premiums

E. Subrogationa. There is no need for a formal assignment or an express stipulation in the policy. It is a legal effect of

payment.b. The insurer can only recover from the third person what the insured could have recovered. Thus, there

can be no recovery if the insurer voluntarily paid even if the loss is not covered by the policy.The insured can no longer recover from the offending party what was paid to him the by insurer but he can recover any deficiency, that is, if his damages is more than what was paid. The deficiency is not covered by the right of subrogation.

c. The insurer must present the policy as evidence to determine the extent of its coverage.d. Cases when there is no right of subrogation

i. The insured by his own act releases the offending party liable for the lossii. In life insurance

iii. Where the insurer pays the insured for a loss or risk not covered by the policy.iv. For recovery of loss in excess of insurance coverage.

II. Contract of Insurance

A. Requisites of a contract of insurance

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a. Subject matter in which the insured has an insurable interest- anything having an appreciable pecuniary value, which is subject to loss or deterioration or of which one may be deprived so that his pecuniary interest is or may be prejudiced, may properly constitute the subject matter of insuranceb. Event or peril insured against which may be any future contingent or unknown event, past or future, and a

duration for the risk thereof- Sec 3 par 1 states, the contingency or unknown event must be such that its happening will damnify or cause loss to a person having insurable interest or create a liability against him.c. A promise to pay or indemnify in a fixed or ascertainable amountd. A consideration for the promise, known as the premiume. A meeting of the minds of the parties upon all the foregoing essentials- cognition theory; mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance; Art 1319 of the Civil Code provides that acceptance of an offer by letter does not bund the offerer except from the time the acceptance is made known to both parties.f. Parties must be competent to enter into the contract

B. Partiesa. Married women can enter into insurance contracts without the assistance of their husbandsb. Minors can no longer enter into insurance contracts bec the age of majority has already been lowered to

18.C. Insurance not a wagering contract

a. In a gambling contract, the parties contemplate gain through mere chance while in a contract of insurance, the parties seek to distribute possible loss by reason of mischance

b. The gambler courts fortune, while the insured seeks to avoid misfortunec. The contract of gambling tends to increase the inequality of fortune, while the contract of insurance tends

to equalize fortuned. The essence of gambling is this: whatever one person wins from a wager is lost by the other wagering

party. In a contract of insurance, what one insured gains is not at the expense of another insured. Basically, it can be said that the entire group of insured provides through the premiums paid, the funds which make possible the payment of all claims

e. As soon as a party makes a wager, he creates a risk of loss to himself where no such risk existed previously. On the other hand, the purchase of insurance does not create a new and, therefore, nonexistent risk of loss to the purchaser. Instead, the only intelligent reason for purchasing insurance is that the purchaser faces an already existing risk of economic loss.

D. Similarity of contract of insurance and wageringa. One party promises to pay a given sum to the other upon the occurrence of a given future event, the

promise being conditioned upon the payment, or agreement to pay, a stipulated amount by the other party to the contract.

III. Insurable Interest – In general, a person is deemed to have an insurable interest in the subject matter insured where he has a relation or connection with or concern in it that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against.

- interest does not necessarily imply a right to the whole or a part of the thing. To have an interest in the preservation of a thing is to be circumstanced with respect to it as to have benefit from its existence and prejudice from its destruction.

- A policy issued to a person without interest in the subject matter is a mere wager policy or contract ad is void.- The requirement of an insurable interest to support a contract of insurance is based upon considerations of

public policy which render wager policies invalid. A wager policy is obviously contrary to public interest. It is demoralizing in that:

o It allows the insured to have an interest in the destruction of the subject matter rather than its preservation

o It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain, to bring to pass the event upon the happening of which the insurance becomes payable.

- Insurance should not provide the insured with the means of making a net profit from the happening of the event insured against. The requirement is enforced and the defense permitted not in the interest of the insurer but of a sound public policy.

A. Life Insurancea. Insurance upon one’s own life - taken out by the insured upon his own life for the benefit of himself, or of

his estate, in case it matures only at his death, or for the benefit of a third person who may be designated as beneficiary. An application for insurance on one’s own life does not usually present an insurable interest question.o Every person has an unlimited insurable interest in his own life whether the insurance is for the

benefit of himself or another; and it is not at all necessary that the beneficiary designated in the policy should have any interest in the life of the insured.

o An exception to the general rule exists in cases in which the court finds that a wagering policy has been taken out by the insured on his life at the behest of a third person who is named as beneficiary. Evidence of a wagering policy is usually found in such facts as:

That the original proposal to take out insurance was that of the beneficiary; That premiums are paid by the beneficiary That the beneficiary has no interest, economic or emotional in the continued life of the

insured.o On finding that such a policy is primarily a wager, the court will generally void the policy entirely.

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o In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. As a consequence, the proscription in Art 739 of the Civil Code (people prohibited from receiving donations – people engaged in adultery or concubinage[only preponderance of evidence]; people guilty of the same offense as principal, accomplice or accessory; made to a public officer or his wife, ascendants, descendants by reason of his office) should equally operate in life insurance contracts.

b. Insurance upon the life of another – When one applies for insurance on the life of another for the former’s benefit, he must have an insurable interest in the life of that person. o There is no need for pecuniary benefit in the ff cases bec theses are required to support each other:

Spouse; legitimate ascendants and descendants; Parents and their legitimate children and the legitimate or illegitimate children of the latter Parents and their illegitimate children and the legitimate or illegitimate children of the latter Legitimate brothers and sisters, whether full or half-blood Brothers and sisters not legitimately related whether full or half-blood are likewise bound to

support each other except only when the need for support of the brother or sister, being of age, is due to a cause imputable to the claimant’s fault or negligence.

o When pecuniary benefit is essential: Relationship by affinity The assumption of parental relations when a man sends a girl to school and pays her

expenses A corporation in the life of an officer whose services the corporation depends for its

prosperity, and whose death will be the cause of substantial pecuniary loss to it On the life of a business partner In the case of employees, insurable interest is dependent upon the value of the employee to

the business. One who could be easily replaced would hardly be one in whom the employer could reasonably claim insurable interest

o Insurable interest of creditor in life of his debtor A creditor may insure his debtor’s life for the purpose of protecting his debt but only to the

extent of the amount of the debt and the cost of carrying the insurance on the debtor’s life. The insurance does not inure to the benefit of the debtor unless, the contrary is expressly

stipulated. It follows that the insuring creditor could only recover such amounts as remain unpaid at the

time of the death of the debtor. If the whole debt has already been paid, then recovery on the policy is no longer permissible.

o It seems under our law, the consent of the person insured is not essential to the validity of the policy so long as it could be proved that the assured has a legal insurable interest at the inception of the policy. The presence of insurable interest takes the contract out of the class of forbidden wages.

B. Insurable interest in property – that anyone has an insurable interest in property who derives benefit from its existence or would suffer loss from its destruction.

- Insurable interest in a property is not necessarily an interest in property in the sense of title, but a concern in the preservation of the property and such a relation to or connection with it as will necessarily entail a pecuniary loss in case of its destruction or injury. As a general rule however, the expectation of benefit to be derived from the continued existence of property must have a basis of legal right, although the person insured has no title, either legal or equitable to the property insured.a. Existing interest – under legal or equitable title (purchaser of property before delivery; mortgagee, etc)b. An inchoate interest founded on an existing interest – stockholder as to the property of the corporation,

partner as to the property of the partnershipc. Expectancy, coupled with an existing interest in that out of which the expectancy arises – farmer as to

future crops to be grown on land owned by him at the time of the issuance of the policy; owner of a business against a contingency which may cause loss of profits resulting from the cessation of business or its interruption; workman as to any building he may be contracted to repair.

- A person has no insurable interest in a property he expects to inherit under Sec 16 of the ICP- An insurance taken out by a person on property in which he has no insurable interest is void.- In Cha v. CA, the contract of lease provides that any fire insurance policy obtained by the lessee over his

merchandise inside the lease premises without the consent of the lessor is deemed assigned or transferred to the lessor. It was held that such automatic assignment is void for being contrary to law and public policy, hence, the insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no interest in the property insured.

- Where there is no insurable interest, the premium is ordinarily returned to the insured unless he is in pari delicto with the insured.

- The doctrine of waiver or estoppel cannot be invoked since the public has an interest in the matter independent of the consent or concurrence of the parties.

- An owner whose property was levied upon by a judgment creditor and who lost the same in an execution sale retains insurable interest thereon during the redemption period for he is still the owner of that property for that period. However, the buyer during the auction sale also has an interest over the subject property subject to the condition that the property will not be redeemed. Hence, the purchaser acquires insurable interest at the time of the purchase.

C. Time when insurable interest must exist – 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 must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.

- A decree of legal separation does not remove the insurable interest of a spouse over the other whether or not one insures the life of a spouse before or after legal separation. But if in case of annulment, the policy must have existed before the declaration of annulment, otherwise, there is no insurable interest.

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D. Insurable interest over mortgaged property – both the mortgagor and the mortgagee have an insurable interest in the property mortgaged and this interest is separate and distinct from the other. They may take out separate policies at the same time or at separate times.a. Mortgagor – the mortgagor of a property, as owner, has an insurable interest to the extent of its value,

even though the mortgage debt equals such value. The reason is that the loss or destruction of the property insured will not extinguish his mortgage debt. In Geagonia vs. CA, it was ruled that when the mortgagor secures insurance, the mortgagee may be the beneficial payee in the ff ways:

- He may become the assignee of the policy with the consent of the insurer- He may be the pledge without the consent of the insurer- The original policy may contain a mortgage clause- A rider making the policy payable to the mortgagee as his interest may appear, may be

attached.- A standard mortgage clause containing a collateral independent contract between the

mortgagor and the insurer, may be attached- The policy, though by its terms is absolutely payable to the mortgagor, may have been

procured by a mortgagor under a contract duty to insure for the mortgagee’s benefit, in which case the mortgagee acquires an equitable lien upon the proceeds.

b. Mortgagee – as such has an insurable interest in the mortgaged property to the extent of the debt secured; such interest continues until the mortgaged debt is extinguished.o It has been noted that although the mortgagee is himself the insured, as where he applies for a policy,

fully informs the authorized agent of his interest, pays premiums, and obtains the policy on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with “loss payable clause”

c. Standard or union mortgage clause – the subsequent acts of the mortgagor cannot affect the rights of the mortgagee.

d. Open or loss payable mortgage clause – the mortgagor does not cease to be a party to the contract.- In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his

interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself. This kind of policy covers only such interest as the mortgagee has at the issuance of the policy.

e. An insurance procured by either the mortgagor or the mortgagee will not inure to the benefit of the other bec an insurance contract is a personal contract and just like any other contract, it takes effect only between the contracting parties, their heirs and successors and assignees , unless it contains a stipulation in favor of a third person.

f. Where the mortgagor takes out an insurance over the mortgaged property and endorsed the same to the mortgagee, Sec 53 of the ICP ordains that the insurance proceeds of the endorsed policy shall be applied exclusively to the proper interest of the person for whose benefit it was made, the mortgagee. Hence, creditors of the mortgagor cannot garnish or levy upon the proceeds up to the extent of the debt to the mortgagee.

E. Effect of change of interest in thing insured – 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 interest in the thing and the interest in the insurance are vested in the same person. Thus, a purchaser of insured property who does not take the precaution to obtain a transfer of the policy of insurance, cannot, in case of loss, recover upon such contract, as the transfer has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as the property insured. The purchaser cannot recover bec he has no contract with the insurer. The seller (insured) cannot also recover bec having sold the property, he has no more insurable interest in the same.a. Except:

- In life, health and accident insurance- A change of interest in the thing insured after the occurrence of an injury which results in the

loss- A change of interest in one or more of several distinct things, separately insured by one policy

1. suppose D is the owner of a car an a jeep. He insured the car for P500,000 and the jeep for P200,000 under a single policy for which he paid a total premium of P15,000. Under Sec 22 the sale of the jeep will not affect the insurance of the car. But if the car and the jeep were not separately valued in the policy and D paid P15,000 as the premium for the insurance of both the car and jeep, the sale of the jeep without the insurer’s consent affects also the insurance on the car. Hence, if after the sale of the jeep, the car was lost or destroyed, C cannot recover on the insurance of the car.

- A change of interest by will or succession on the death of the insured- A transfer of interest by one of several partners, joint owners, or owners in common, who are

jointly insured, to the others- When a policy is so framed that I will inure to the benefit of whomsoever, during the

continuance of the risk, may become the owner of the interest insuredb. When there is an express prohibition against alienation in the policy, in case of alienation, the contract of

insurance is not merely suspended but avoided.c. 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. This right is absolute and cannot be delimited by agreement. The insured has also the absolute right to transfer the thing insured after the occurrence of the loss. Such change of interest does not affect his right to indemnify for the loss.

d. Sec 20 refers to a change of interest in the thing insured before the loss.

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IV. CONCEALMENT, WARRANTIES, REPRESENTATION

A. Concealment – Sec. 26 of ICP – “A neglect to communicate that which a party knows and ought to communicate.”a. Requisites:

1) A party knows the fact which he neglects to communicate or disclose to the other;2) Such party concealing is duty bound to disclose such fact to the other (even w/o inquiry); 3) Such party concealing makes no warranty of the fact concealed;4) The other party has not the means of ascertaining the fact concealed.5) They are material to the contract

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

- The test is in the effect which the knowledge of the fact in question would have on the making of the contract. To be material, a fact need not increase the risk or contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the parties in making the contract. The matter must of course be ultimately determined by the court.

- Ex. The insured underwent an electrocardiogram which resulted negative and he gave a negative answer to the question whether he had such test. Since the result of the test was negative, even if the test was related to the insurer, the same would not have affected its decision to insure the deceased.

- The concealment must take place at the time the contract entered into in order that the policy may be avoided and not afterwards. The duty of disclosure ends with the completion and effectivity of the contract.

- If the contract is to be effective only upon the issuance of the policy, an applicant for life insurance, for instance is under the duty to disclose to the insurer, changes in his health occurring or coming to his knowledge between the date of submitting his application after satisfactory medical examination and the date the policy is delivered.

- Waiver of a medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning previous conditions of health and disease suffered. Matters relating to the health would affect the insurer either by approving it with the corresponding adjustment for a higher premium or rejecting the same(Sunlife Assurance Co. of Canada v. CA).

- Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue(Philamcare Health Sys Inc. v. CA).

c. Effect of concealment – Sec. 27 of ICP – “A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.”

- Rational – If it were necessary for the insurance company to show actual fraud on the part of the insured, then it is plain that it would be impossible for it to protect itself and its honest policy holders against fraudulent and improper claims. It would wholly be at the mercy of one who wished to apply for insurance, as it would be impossible to show actual fraud except in the extremest cases.

d. Cause of loss – the matter concealed need not be the cause of the loss. It is enough that the non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries.

- Good faith is no defense in concealment. Indeed, the materiality of the facts concealed does not depend on the state of mind of the insured but rather to the probable and reasonable influence of the facts upon the party to whim communication should have been made.

e. Matters which need not be communicated:1) Those which the other knows;2) Those, which in the exercise of ordinary care, the other ought to know, and of which the

former has no reason to suppose him ignorant;3) Those which the other waives communication;4) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which

are not otherwise material;5) Those which relate to a risk excepted from the policy, and which are not otherwise material.6) Those each party is bound to know all the general causes which are open to his inquiry such as

public events, general trade usage and rules of navigation, kind of seasons.7) Information of the nature or amount of the interest of one insured, unless in an answer to an

inquiry, except as prescribed by Sec. 51(if absolute owner).8) Information of his own judgment upon matters of question, even upon inquiry – because the

duty to disclose is confined to facts. There is no duty to communicate mere opinion or speculation.

f. Waivers and Estoppel – An insurer may be deemed to be estopped from raising concealment (as well as exclusionary conditions or warranties) as a defense if it accepts the premium payments and issued the policy even if the insured already supplied the insurer such facts or information which could hardly be overlooked in the application form considering its prominence and its materiality to the coverage applied for. This may also be true if the insured already supplied such information that requires further inquiries from the insurer but it failed to do so.

- However, the insurer is not estopped from raising concealment as a defense if there was connivance between the insured and the soliciting insurance agent as well as the medical examiner

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B. Representation - An oral or written statement of a fact or condition affecting the risk, made by insured to insurer, tending to induce insurer to assume risk. Such misrepresentation renders the contract rescindable at the option of the insurer.a. Requisites:

1) As a fact of something which is untrue2) Which the insured stated with knowledge that it is untrue and with an intent to deceive, or

which he states positively as true without knowing it to be true and which has a tendency to mislead

3) Where such fact in either case is material to the riskb. Kinds:

1) Made at the time of the issuance of the policy2) Made before the issuance of the policy3) Affirmative – affirmation of a fact when the contract begins; any allegation as to the existence

or non-existence of a fact when the contract begins. - The statement of the insured that the house to be insured is used only for residential

purposes is an affirmative representation.4) Promissory – promise to be performed after the policy was issued; 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.

c. Test of materiality – it is determined by the probable and reasonable influence of the facts on the party on whom communication is due, in forming his estimate of the contract, risks and premium.

d. Effect of alteration or withdrawal – A representation, not being a part of the contract of insurance may be altered or withdrawn before the contract actually takes effect but not afterwards since the insurer already had been led by the representation in assuming the risk contemplated in the contract.

e. A representation must be presumed to refer to the date on which the contract goes into effect.- Ex. At the time X applied for a life insurance policy on June 10 he had never suffered from

any of the enumerated diseases including pneumonia. On July 12 he became ill with pneumonia and completely recovered on July 25. When the policy was delivered on July 30 and premium paid on July 30, X did not disclose his having been sick with pneumonia. There is here misrepresentation and the insurer is entitled to rescind the policy.

f. Sec. 43 of ICP – “When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for the truth, unless it proceeds from an agent of the insured, whose duty it is to give the information.”

- It must be borne in mind that the same principle applies to the insurere. When presumed false – Sec. 44 of ICP - When the facts fail to correspond with its assertions or

stipulations.- Unlike in the case of warranties, representations are not required to be literally true; they need

only be substantially true. In order that a policy be avoided, a representation relied upon must be false in a substantial and material respect.

- In marine insurance, substantial truth of a representation is not sufficient. The insured is required to state the exact whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose.

- Confinement in childbirth is not personal ailment; failure of insured to include an illness occasioned by a fall from a tree which he had completely recovered, was held not to avoid the policy; a statement that the applicant is in good health is held not to mean that he is in perfect health, but that he is not aware of any disease of such serious nature as to impair his health permanently. That he is temporarily ill bec of some passing malady does not render his representation substantially untrue.

- Construction – when possible, as an affirmative representation of a personal fact in order to save the policy from avoidance.

1. Ex. The insured states that a building is used for a certain purpose or that no smoking is allowed on the premises. The truth of the representation at the time of the contract takes effect is sufficient to validate the insurance which will not be affected by a subsequent change in the use to which the building is put or in the practice as to smoking in the premises.

f. Sec. 45 of ICP – “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 waived by the acceptance of premium payments despite knowledge of the ground for rescission.”

- It is not misrepresentation for the insured to state that he did not drink beer or other intoxicants if he drank very seldom. Here, the representation is false but not in a material point.

- Collusion between the agent and the insured in misrepresenting the facts will vitiate the policy even though the agent is acting within the apparent scope of his authority.

- Likewise, where the insured merely signed the application form and made the agent of the insurer fill the same for him, it was held that by doing so, the insured made the agent of the insurer his own agent.

- The insurer is liable when his agent writes false answer into the application form without the knowledge of the insured.

g. Concealment and representation compared:

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- In concealment, the insured withholds information of material facts from the insurer, whereas in misrepresentation, the insured makes erroneous statement of facts with the intent of inducing to enter into the insurance contract.

- Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or false representation

- Since the contract of insurance is said to be one of utmost good faith on the part of both parties, the rules on concealment and representation apply likewise to the insurer.

h. Sec. 48 of ICP – “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 ignition or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.”

- The theory is that an insurer should have a reasonable opportunity to investigate the statements which the applicant makes in procuring his policy and that after a definite period, the insurer should not be permitted to question the validity of the policy.

- The clause has as its object to give the greatest possible assurance to a policy holder that his beneficiaries would receive payment without question as to the validity of the policy or the existence of the coverage once the period of contestability has lapsed.

- No prescriptive period unless provided for in the second paragraph or by stipulation of parties.- Incontestability – after the requisites are shown to exist, the insurer shall be estopped from

contesting the policy or setting up any defense, except as is allowed, on the ground of public policy.

- Requisites:1. The policy is a life insurance policy2. It is payable on the death of the insured3. It has been in force during the lifetime of the insured for at least 2 years from its date of

issue or of its last reinstatement.- The period of 2 years for contesting a life insurance by the insurer may be shortened but it

cannot be extended b y stipulation. The phrase “during the lifetime” simply means that the policy is no longer considered in force after the insured has died.

- Defenses not barred by incontestable clause:1. That the person taking the insurance lacked insurable interest2. That the cause of death of the insured is an excepted risk3. That the premiums have not been paid4. That the conditions of the policy relating to military or naval service have been violated5. That the fraud is of a particularly vicious type, as where the policy was taken out in

furtherance of a scheme to murder the insured, or where the insured substitutes another person for the medical examination, or where the beneficiary feloniously kills the insured.

6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened.

7. That the action was not brought within the time specified.C. Warranty – a statement or promise by the insured set forth in the policy itself or incorporated in it by proper

reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer. A warranty may also be made by the insurer.a. Warranties distinguished from representations

- Warranties are considered parts of the contract, while representations are but collateral inducements to it.

- Warranties are always written on the face of the policy actually or by reference, while representations may be written in a totally disconnected paper or oral

- Warranties must be strictly complied with, whole in representations, substantial truth is only required

- The falsity or nonfulfillment of a warranty operates as a breach of contract, while falsity of a representation renders the policy void ab initio e on the ground of fraud

- Warranties are presumed material, while the insurer must show the materiality of a representation in order to defeat an action on the policy.

b. Before a representation will be considered a warranty, it must be expressly included or incorporated by clear reference in the policy and the contract must clearly show that the parties intended that the rights of the insured would depend on the truth or fulfillment of the warranty. Obviously, where a statement is true, it is immaterial whether it is a warranty or representation.

c. Kinds of warranty:1) Express – an agreement contained in the policy or clearly incorporated therein as part thereof

whereby the insured stipulates that certain facts relating to the risk are or shall be true or certain acts relating to the same subjects have been or shall be done.

2) Implied – deemed included in the contract, although not expressly mentioned. They are found only in marine insurance (shipworthiness).

3) Affirmative – asserts the existence of a fact or condition at the time it is made4) Promissory – the insured stipulates that certain facts or conditions shall exist or thing shall be

done or omitted. It is the nature of a condition subsequent.d. Effects of breach of warranty – insurer has right to rescind, except:

1) Loss occurs before the time of performance of the warranty

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2) The performance becomes unlawful3) The performance becomes impossible- Sec. 76 of ICP – “A breach of warranty without fraud, merely exonerates an insurer from

the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.”

- Where there is no fraud, the policy is avoided only from the time of breach and the insured is entitled to the return of premium paid at a pro rata from the time of breach if it occurs after the inception of the contract or; to all the premiums if it is broken during the inception of the contract. In the latter case, the contract is void ab initio and never becomes binding.

e. Immaterial provisions do not avoid the policy, except when the parties stipulate that the violation of a particular provision though normally immaterial, shall avoid the policy. In effect, the parties converted the immaterial provision to a material one.

f. Sec. 68 of ICP – “A warranty may relate to the past, the present, the future, or to any or all of these.”

V. THE POLICY

A. Definition and Forma. Sec. 49 of the ICP – “The written instrument in which a contract of insurance is set forth, is called a

policy of insurance.”b. Sec. 50 of the ICP – “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 typrewritten and need not be in printed form.”

c. The policy is not necessary for the perfection of the contract.d. The policy is signed only by the insurer or his duly authorized agent. It need not be signed by the insured

except where express warranties are contained in a separate instrument forming part of the policy in which case the law requires that the instrument must be signed by the insured.

e. It is also a cardinal principle of law that forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming thereunder will be avoided if it is possible to construe the policy in a manner which would permit recovery, as for example, by finding a waiver for such a forfeiture.

f. The courts will only rule out blind adherence to terms where facts and circumstances will show that they are basically one-sided. The “fine print” or contract of adhesion rule does not apply where the petitioner is an acute businessman of experience who is presumed to have assented to the assailed provisions of the policy with full knowledge and, therefore, cannot claim he did not know its terms. It goes without saying that if the terms of the contract are clear and unambiguous, there is no room for construction and such terms cannot be enlarged or diminished by judicial construction.

g. Policy different from the contract itselfi. The policy is the formal written instrument evidencing the contract of insurance entered into

between the insured and the insurer. It is the law between them.ii. Under Sec. 226 of the ICP, no policy of insurance shall be issued or delivered within the

Philippines unless in the form previously approved by the Insurance Commissioner. h. Perfection of an insurance contract

i. The mere signing of an application for life insurance and the payment of the first premium do not bind the insurer to issue a policy where there is no evidence of any contract between the parties that such acts should constitute a contract of insurance.

ii. The contract, to be binding from the date of the application must be a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement.

iii. The acceptance of an insurance policy must be unconditional, but it need not be by formal act. Reception and retention of the policy without objection beyond a reasonable time may be deemed to be an acceptance.

iv. Until the condition precedents are fulfilled, the policy is of no binding effect.v. There is no valid and binding insurance contract where no premium is paid unless credit is given

or there is a waiver or some agreement obviating the necessity for prepayment of the premium. But where the premium has been previously paid, the contract is perfected upon approval of the application although the policy has not yet been issued, unless there is a stipulation to the contrary.

vi. Usual condition precedents:1. that that insurer shall be satisfied that the applicant was insurable;2. that if the insurer does not accept the application but offers another plan, the insurance

contract shall not take effect unless the applicant accepts the same

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3. that if the applicant is not insurable, and the insurer disapproves the application, the insurance applied for shall not be in force and the premium paid shall be returned to the applicant.

i. Offer and acceptance in insurance contract – It is usually the applicant that makes the offer.i. In life and health insurance –

1. If the applicant does not pay the premium, his application is considered an invitation to the insurer to make an offer, which he must then accept before the contract goes into effect. If the applicant pays the premium with his application, his application will be considered an offer. Life and health insurance agents, however, doe not have the authority to bind immediately the insurers they represent. Instead, they customarily issue a binding receipt that makes the coverage effective on (1) the date of the application, or (2) the date of the medical examination, if the insurer determines later that the applicant was insurable on that date. The binding receipt is, therefore, a conditional acceptance by the insurer.

2. Where the application for insurance constitutes an offer by the insured, a policy issued strictly in accordance with the offer is an acceptance of the offer that perfects the contract. If the policy issued does not conform to the insured’s application, it is an offer to the insured which he may accept or reject.

j. Importance of delivery – Delivery is the act of putting the insurance policy (the physical document) into the possession of the insured.

i. The delivery of the policy is important in 2 ways:1. as evidence of the making of a contract and of its terms2. as communication of the insurer’s acceptance of the insured’s offer

ii. Delivery may also affect the term of the coverage, where a policy for example, provides that the coverage terminates 1 year after delivery.

iii. Delivery still has significance as the decisive act that ordinarily marks the end of the insurer’s opportunity to decline coverage.

iv. Actual manual transfer of the policy is not a prerequisite to its validity unless the parties have so agreed in clear language. Constructive delivery may be sufficient.

1. Delivery may be made to the insured in person or to his duly constituted agent2. Where no further conditions are to be fulfilled, a policy of insurance may be

constructively delivered when it is deposited in the mail duly directed to the insured or his agent.

v. The possession by the insured of the policy raises the presumption that the policy was delivered to the insured, while possession by the insurer is prima facie evidence that no delivery was made. If the application contains a provision that the insurance shall not be effective until the delivery of the policy, delivery is essential to the consummation of the contract.

vi. Where there is conditional delivery of an insurance policy, non-performance of the condition precedent prevents the contract from taking effect. Thus, a stipulation that the policy shall not become operative unless the applicant is in good health at the time of the delivery of the policy is valid, binding and enforceable.

vii. Where the parties so intend, the insurance becomes effective at the same time of the delivery of the policy.

viii. But the insurer cannot be presumed to have extended credit from the mere fact of unconditional delivery of the insurance policy without the prepayment of premium; and even if such presumption may be inferred, there must be a clear and express acceptance by the insured of the insurer’s offer to extend credit. In the absence of any clear agreement granting credit extension, the policy will lapse if the premium is not paid, at the time and in the manner specified in the policy.

B. Contents of the policyi. Parties – the mere fact that the name of the insured was incorrectly spelled is of no importance

whatever, provided that the identity of the party can be sufficiently established. Nor is it essential to the effectiveness of the contract that the name of the insured should appear therein, as he may be described in other ways than by name, such as where the policy is “for the owner” of specified property, for the benefit of “whom it may concern” or contains words of similar import.

ii. Amount of insurance, except in open or running policies – This requirement is necessary in order to easily and exactly determine the amount of indemnity to be paid the insured incase of loss or damage especially if it is only partial and not total. The sum insured is a basis for calculating the premium. It however, need not be specified in the cases of open or running policies.

iii. Rate of premium – This requirement is also essential considering that the premium represents the consideration of the contract, what the insured pays the insurer to assume the risk of loss.

iv. Property or life insuredv. Interest of the insured in the property if he is not the absolute owner – so a mortgagee must

disclose his particular interest in the property insured by him.vi. Risk insured against – the necessity for the requirement becomes obvious when it is considered

that the insurer’s undertaking is to indemnify the insured for loss, damage, or liability caused or created only by the risks insured against.

vii. The period during which the insurance is to continue – the period during which the insurance is to continue must also be stated bec although the loss suffered by the insured was caused by the risk insured against, the insurer would not be liable unless it occurred during such duration of the insurance. The duration may be expressed in terms of dates, in terms of distance. The period of

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time during which the insurer assumes the risk of loss is known as the life of the policy. Policies issued for a term of 12 months are known as annual policies while those for a less period are known as short term policies.

b. Rider – An attachment to an insurance policy that modifies the conditions of the policy by expanding or restricting its benefits or excluding certain conditions from the coverage.

i. Any rider properly attached to a policy is a part of the contract to the same extent and with like effect as if actually embodied in the policy

ii. The necessity for riders is found in the fact that in the conduct of insurance business, it often becomes necessary to add a new term to a policy, or to modify or waive an existing term. This saves the trouble and expense of making an entirely new contract.

iii. When there is an inconsistency between a rider and the printed stipulations in the policy, the rider prevails, as being a more deliberate expression of the agreement of the contracting parties. This principle applies to the interpretation of clauses, warranties, or endorsements which are attached to policies to vary their terms.

C. Attached papers on insurance policyi. As a general rule, a rider, slip, or other paper becomes part of a contract or policy of insurance if

properly and sufficiently attached or referred to therein in a manner as to leave no doubt as to the intention of the parties in such respect.

ii. Another provision of the Insurance Code which imposes a restriction on the use of riders, is Sec. 226 which states that no rider, etc. shall be attached to, printed or stamped upon a policy of insurance unless the form of such rider, etc., has been approved by the Insurance Commissioner.

iii. Any rider, clause, warranty, or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured unless the descriptive title or name of the rider, etc. is also mentioned and written on the blank spaces provided in the policy. The lack of description will not affect the other provisions of the policy except where without such rider, etc. the contract would be incomplete.

iv. An endorsement is any provision added to an insurance contract altering its scope or application. Examples of endorsements are those extending the perils covered. An endorsement may be in the nature of a permit such as one authorizing the removal of the insured property and providing for coverage in another location. Many endorsements are merely typrewritten additions to the contract, changing its amount, rate or term. Errors may be corrected in the same manner. If the endorsement is already attached to the policy at the time of its issue, it is not an endorsement, strictly speaking.

v. As a general rule, where the rider, etc. is physically attached to a policy of insurance contemporaneously with its execution and delivered to the insured so attached, and sufficient reference is made in the policy, the fact that it is without the signature of the insurer or of the insured will not prevent its inclusion and construction as a part of the insurance contract. But the countersignature of the insured or owner is required to any rider, etc. not applied for by him if issued after the delivery of the policy, which countersignature shall be taken as his agreement to the contents of the matter so attached.

b. Effect of failure of insured to read policyi. Majority rule – In most jurisdictions, the fact that it is customary for insured persons to accept

policies without reading is judicially recognized. It follows that such acceptance is not negligence per se and in proceeding to reform insurance contracts, most courts hold that the insured’s acceptance and retention of the policy unread is not such laches as will defeat his right to reformation. The basis for the decisions is that insurance contracts are contracts of adhesion.

ii. Minority rule – The conformity of the insured to the terms of the policy is implied from his failure to express any disagreement with what is provided for. He may not thereafter be heard to say that he did not read the policy or know its terms since it is his duty to read his policy and it will be assumed that he did so, especially where the insured is a businessman and the contract concerns indemnity in case of loss in his money-making trade (fine print rule).

iii. Exceptions to the minority rule – 1. It is obvious that the insurer cannot complain of the failure of the insured to read his

policy where the insured could not have discovered the erroneous statement by such reading. Thus, where a copy of the application containing the false statements was not attached to the policy or where the copy attached was illegible, the insured cannot be charged with any duty to read the application.

2. Likewise it has been held that the insured’s failure to read the policy us excused where he is induced by the fraud of the agent of the insurer not to read his policy.

3. In settings where the contracts are long, complicated and difficult to understand even if read, it may not be reasonable to expect people to take the time to read the contracts before manifesting intent to be bound by them.

4. The insured’s failure to read the policy should be overlooked if the insured is illiterate or unable to read English.

c. Insurer’s duty to explain the policyi. Where the terms of policy are clear – the insurer has no affirmative duty to explain the policy or

its exclusions to the insuredii. Important caveats:

1. Reasonable expectations of insured – the doctrine of “reasonable expectations” can operate to impose de facto a duty on the insurer to explain the policy’s coverage despite policy language to the contrary, the court said, in effect, that the insurer must pay for the loss bec the insurer failed to explain the limitations on coverage to the insured. In

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other words, if the insurer had provided an explanation of the coverage, the insured’s expectations of different coverage would have been rendered unreasonable.

2. Options available to the insured – In the area of motor vehicle insurance where legislations have made certain kinds of coverage optional, usually uninsured or underinsured motorist insurance, courts have sometimes imposed a duty on the insurer to explain the options to the insured. Where the insurers have failed to do so, they have been held liable for loss despite the fact that the policy issued did not provided the coverage. Not all courts however agree with this result.

3. Information expected by insured from insurer’s agent – this duty encompasses in many situations an obligation to explain to the customer the kinds of coverage available and to help the insured in choosing an appropriate coverage. To the extent agents and the insurers who retain them are held liable for the negligence of agents in performing their professional duties, a duty to explain coverage is effectively imposed upon the insurer.

4. Contractual rights of insured after denial of coverage – When the insured disputes a denial of coverage, the duty of good faith and fair dealing may impose an obligation on the insurer to alert the insured to his rights. The insurer must instead take affirmative steps to make sure that the insurer is informed of his remedial rights.

d. Group Insurance – Generally speaking, group insurance is the coverage of a number of individuals by means of a single or blanket policy, thereby effecting economies which frequently enable the insurer to sell its services at lower premium rates than are ordinarily obtainable for the same type of insurance protection on life policies sold to individuals.

i. Form and nature – It is essentially a single insurance contract that provides coverage for many individuals. In its original and most common form, group insurance provides life or health insurance coverage for the employees of one employer.

1. It is not indemnity for the benefit of the employer but insurance upon the life of the employee for his personal benefit and the protection of those depending upon him and is in addition to and distinct from workmen’s compensation insurance.

2. Such contracts are generally construed as creating a contract between the employer and the insurance company but for the benefit of the insured employees. It affects four parties – the insurer, the employer, the insured and the beneficiary.

ii. Collection and payment of premiums – a group insurance plan is considered to be “contributory” if each member pays all or some part of the premiums and “non-contributory” if the representative (employer) pays all of the premiums. One reason for the attractiveness of group insurance as a fringe benefit to employees is that the amounts of premiums paid by the employer are tax deductible, within limits, while the premiums paid by the employee are not considered taxable income to the employee.

iii. Constituent parts of contract – when group insurance is effected, a group or “master” policy is customarily issued by the insurer to the employer or analogous policyholder and certificates of participation are issued to the individual employees or participants. It is generally held then that an employee’s contract of insurance under the group plan consists of the parent or master policy, the individual certificate being no part of such contract but only an instrument reciting the employee’s right to protection under the terms of the group policy.

iv. For the purposes of construction, however, both the master policy and the certificate are to be considered together as parts of the same contract.

v. Employer acts as agent of insurer – It cannot be said that the employer acts entirely for its own benefit or for the benefit of its employees in undertaking administrative functions. While a reduced premium may result if the employer relieves the insurer of these tasks, and this, of course, is advantageous to both the employer and the employees, the insurer also enjoys significant advantages from the rearrangement. The reduction in premium which results from the employer-administration permits the insurer to realize a large volume of sales, and at the same time the insurer’s own administrative costs are markedly reduced. The most persuasive rationale for adopting the view that the employer acts as the agent of the insurer, however, is that the employee has no knowledge of or control over the employer’s actions in handling the policy or its administration.

vi. Employees are real parties in interest – although the employer may be the titular or named insured, the insurance is actually related to the life and health of its employee. Indeed, the employee is in the position of a real party to the master policy, and even in an non-contributory plan, the payment by the employer of the entire premium is a part of the total compensation paid for the services of the employee. Put differently, the labor of the employees is the true source of the benefits, which are a form of additional compensation to them. It has been stated that every problem concerning group insurance presented to a court should be approached with the purpose of giving to it every legitimate opportunity of becoming a social agency of real consequence considering that the primary aim is protection for his employees and their families at the lowest possible cost, and in so doing, the employer creates goodwill with his employees, enable them to carry a larger amount of insurance than they could otherwise and helps to attract and hold a permanent class of employees.

e. Risks, perils, hazardsi. Risk – the chance of loss. If a loss is absolutely certain to happen or not to happen, no risk is

involved.ii. Peril – the contingent or unknown event which may cause a loss. It is the contingency that one

insures against. Its existence creates the risk.

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iii. Hazard – the condition or factor, tangible or intangible, which may create or increase the chance of loss from a given peril. Ordinarily, there are many separate hazards that attach to any particular object or persons. The sum total of hazards constitute the perils which cause the risk.

1. Physical hazards – this term includes everything related to location, structure, occupancy, exposure and the like such as waste paper piled under a staircase, gasoline..

2. Moral hazards – the term is applied to those factors that have their inception in mental attitudes. Included in this second group are the hazards created by dishonesty, insanity, carelessness…

iv. Requirements for risks to be insurable1. Importance – for instance, a person may not insure against the loss of his pen or

breaking of his eyeglasses2. Calculability – if the incidence of loss cannot be calculated statistically, it is impossible

to determine the amount of premiums that would be required to accumulate a common fund or pool, to meet the losses arising.

3. Definiteness of loss – The losses should be fairly definite as to cause, time, place, and amount, for otherwise, estimates of possible loss are difficult.

4. No catastrophic loss – it is an obvious deviation from the principle that the losses of the few are borne by the contributions of the many who do not suffer loss.

5. Accidental nature – Insurable risks must also normally be accidental in nature. Intentional losses caused by the insured are usually uninsurable bec they cannot be reasonably predicted, and payment for them would be against public policy. Other losses are common as to be expected rather than unexpected. Wear and tear are examples.

v. The above requirements are not absolute. Is fire caused by carelessness? Aren’t typhoons catastrophic in nature?

D. Kinds of policyi. Open or unvalued policy – Sec. 60 of the ICP – “An open policy is one which the value of the

thing insured is not agreed upon, but is left to be ascertained in case of loss.” In other words, it is one in which a certain agreed sum is written on the face of the policy not as the value of the property insured, but as the maximum limit of the insurer’s liability, in case of destruction by the peril insured against. The insurer however, only pays the actual cash value of the property as determined at the time of loss.

ii. Valued policy – Sec. 61 of the ICP – “A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specified sum.” Thus, there are two values – the face value of the policy and the value of the thing insured. In the absence of fraud or mistake, the agreed value of the thing insured will be paid in case of total loss of the property, unless the insurance is for a lower amount. The liability of the insurer under a life policy is measured by the face value of the policy.

iii. Running policy – Sec. 62 of the ICP – “A running policy is one which contemplates successive insurances, and which provides that the object of the policy may be from time to time defined, especially as to the subjects of insurance, by additional statements or indorsements.”

1. This kind of policy is intended to provide indemnity for property which cannot well be covered by a valued policy bec of its frequent change of location and quantity; or for property of such a nature as not to admit of a gross valuation. It also denotes insurance which contemplates that the risk is shifting, fluctuating or varying, and which covers a class of property rather than any particular thing.

2. In some cases, the nature of the property insured, or the circumstances of the granting of the insurance, as such as to make it impossible to designate the subject matter of insurance with certainty and particularity. Under such circumstances, these policies are usually known as “floating,” “running,” or “blanket” policies.

3. In the US, a blanket policy is one covering by a single amount of insurance the same kind of property at different locations or different kinds of property at a single location.

4. Running policies are in reality open policies.5. Advantages:

a. He is neither underinsured nor overinsured at any time the premium being based on the monthly values reported

b. He avoids cancellations that would otherwise be necessary to keep insurance adjusted to value at each location, and for which cancellations he would be charged the expensive shortage rate

c. He is saved the trouble of watching his insurance and the danger of being underinsured in spite of his care, through oversight or mistake

d. The rate is adjusted to 100% insurance, whereas valued policies requiring insurance only to, say 80% of the value, give either a small or no reduction for amounts of insurance above this figure.

E. Cover notes – Sec. 52 of the ICP – “Cover notes may be issued to bind insurance temporarily pending the issuance of the policy. Within 60 days after issue of a 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 therefore. Cover notes may be extended or renewed beyond such 60 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

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regulations dispense with the requirement of written approval by him in the case of extension in compliance with such rules and regulations.”

i. Kinds of preliminary contract of insurance:1. By a preliminary contract of present insurance – the insurer insures the subject mater

usually by what is known as the “binding slip,” or “binder,” or “cover note,” the contract to be effective until the formal policy is issued or the risk rejected. This is usually issued after the applicant pays the first premium.

a. A cover note is merely a written memorandum of the most important terms of a preliminary contract of insurance, intended to give temporary protection pending investigation of the risk by the insurer, or until formal issuance of the policy, provided it is later determined that the applicant was insurable at the time it was given. By its nature, it is subject to all the conditions in the policy expected even though that policy may never issue.

b. In life insurance, where an agreement is made between an applicant and the insurer’s agent, no liability shall attach until the insurer approves the risk. Thus, in life insurance, a binding slip does not insure by itself.

c. While the issuance of a binder is ordinarily conclusive evidence of the making of a contract, yet the insurer may show the contrary by proving, for example, that he delivered the binder with an oral understanding , that it was not to take effect until other insurers had taken part of the risk.

2. 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 a policy in accordance with the terms agreed upon and the obligation assumed by the insurer is to deliver such policy.

a. Example: X signed an application for a fire insurance of his house. The insurer accepted the application and issued a cover note for the insurance. Before the policy could be issued, the house was burned. In this case, the insurer would have to reimburse X for his loss.

b. Example: Suppose in the same example, the agreement of the insurer is to issue the policy within a certain date and the house was destroyed by fire before such date. Here, the insurer would not be liable on a claim for loss ass there was merely an executory contract of insurance.

3. Being of temporary in nature, it is sufficient, for example that the cover note shows by necessary implication an agreement to pay whatever rate may be fixed.

4. The fact that no separate premium was paid on the cover note before the loss insured against occurred, does not militate against its binding effect as an insurance contract. By their nature, cover notes do not contain particulars that would serve as basis for the computation of the premiums and consequently, no separate premiums are intended or required to be paid therefore.

5. Rules on cover notes:a. Insurance companies doing business in the Philippines may issue cover notes

to bind insurance temporarily, pending the issuance of the policyb. A cover note shall be deemed to be a contract of insurance within the meaning

of Sec. 1(1) of the Codec. No cover note shall be issued or renewed unless in the form previously

approved by the Insurance Commissiond. A cover note shall be valid and binding for a period not exceeding 60 days

from the date of its issue, whether or not the premium therefore has been paid, but such cover note may be cancelled by either party upon at least 7 days notice to the other party.

e. If a cover note is not so cancelled, 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 bond under the cover note and the premium therefore.

f. A cover note may be extended or renewed beyond the aforementioned period of 60 days with the written approval of the Insurance Commission provided that such written approval may be dispensed with upon certification of the president, vice-president, or general manager of the insurance company concerned that the risks involved, the values of such risks and/or 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 provisions of the Code.

g. 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.

F. Cancellation of policy – Sec. 64 of the ICP – “No policy of insurance other tan life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the ff: (a) non-payment of premium; (b) conviction of a crime arising out of acts increasing the hazard insured against; (c) discovery of fraud or material misrepresentation; (d) discovery of willful or reckless acts or omissions increasing the hazard insured against; (e) physical changes in the property

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insured which result in the property becoming uninsurable; (f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code.”a. Sec. 65 of the ICP – “All notices mentioned in the preceding section shall be in writing, mailed or

delivered to the named insured at the address shown in the policy, and shall state (a) which of the grounds set forth in section 64 is relied upon and (b) that, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based.”

i. Form and sufficiency of notice of cancellation:1. There must be prior notice of cancellation to the insured2. The notice must be based on the occurrence, after the effective date of the policy, of

one or more of the grounds mentioned3. It must be in writing, mailed or delivered to the named insured at the address shown in

the policy4. It must state which of the grounds set forth is relied upon

ii. The premium referred to in Sec. 64 (a) must be a premium subsequent to the first, bec it speaks of non-payment after the effective date of the policy

iii. The purpose of provisions or stipulations in insurance policies for notice to the insured, is to prevent the cancellation of the policy, without allowing the insured ample opportunity to negotiate for other insurance in its stead for his own protection.

iv. There is no proof that the notice, assuming it complied with the other requisites or conditions mentioned, was actually mailed to and received by the insured, where all that the insurer offers to show that the cancellation was communicated to the insured is its employee’s testimony that the said cancellation was sent “by mail through our mailing section” without more.

G. Time to commence action on the policy; effect of stipulation – Sec. 63 of the ICP – “A condition, stipulation, or agreement, in any policy of insurance, limiting the time for commencing an action thereunder to a period less than 1 year from the time when the cause of action accrues, is void.”a. In case of a policy of industrial life insurance, the period cannot be less than 6 years after the cause of

action accrues.b. Nature of condition limiting period for filing claim – the condition is an important matter essential to

prompt settlement of claims against insurance companies, as it demands that insurance suits be brought by the insured while the evidence as to the origin and cause of the loss or destruction has not yet disappeared. It is in the nature of a condition precedent to the liability of the insurer, or, in other terms, a resolutory cause, the purpose of which is to terminate all liabilities in case the action is not filed by the insured within the period stipulated.

c. The court cannot, by interpretation, extend the clear scope of the agreement beyond what is agreed upon the parties.

d. The bringing of such action against the agent cannot have any legal effect except that of notifying the agent of the claim. Beyond such notification, the filing of the action serves no purpose. There is no law giving any effect to such action upon the principal.

e. The right of the insured to the payment of loss accrues from the happening of the loss. However, the cause of action in an insurance contract does not accrue until the insured’s claim is finally rejected by the insurer. In other words, the period for commencing an action under a policy of insurance under Sec. 63 is to be computed not from the time when the loss actually occurs but from the time when the insured has a right to bring an action against the insurer.

f. Stipulated prescriptive period begins from happening of the loss – Where the policy provided that no suit or action thereon “for the recovery of any claim shall be sustainable in any court of law or equity unless the insured shall have fully complied with all the terms and conditions of the policy or unless commenced within 12 months next after the happening of the loss,” it has been held that the above stipulation is void bec if given effect, it would reduce the period allowed the insured for bringing his action to less than 1 yr.

g. As the stipulation is upon a written contract, the time limit is 10 yrs from the time the cause of action accrues.

h. Stipulated prescriptive period begins from rejection of claim – On the other hand, where the policy provided that if a claim be made and rejected, an “action or suit” should be commenced within 12 months after such rejection otherwise the claim would prescribe, it was held that an action filed 17 months after the rejection had already prescribed although the insured, 1 month after his claim was rejected, by the insurer, had filed a complaint with the Insurance Commissioner, the Court interpreting the words “action or suit” in the policy as referring to a claim or demand in a court of justice.

i. Under Sec. 384, “an action or suit for recovery of damage due to loss or injury must be brought in proper cases, with the Commissioner or the Courts within 1 year from denial of the claim, otherwise, the claimant’s right of action shall prescribe.”

j. Stipulated prescriptive period beings from filing of claim – A fidelity bond is, in effect, in the nature of a contract of insurance against loss from misconduct and is governed by the same principle of interpretation. Consequently, the condition of the bond is subject to the provisions of Sec. 63, and may be brought within the statutory period of limitation of 10 yrs for written contracts.

k. Contractual limitations contained in insurance policies are regarded with extreme jealousy by courts and will be strictly construed against the insurer and should not be permitted to prevent a recovery when their just and honest application would not produce that result.

VI. PREMIUM – The consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.

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A. Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf. The insurer is bound by its agent’s acknowledgment of receipt of payment of premium.

B. The payment of a premium by a post-dated check at a stated maturity subsequent to the loss is insufficient to put the insurance into effect. Payment, however, by means of a check or a note, accepted by the insurer, bearing a date prior to the loss, assuming an availability of the funds thereof, would be sufficient even if it remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor.

C. Sec. 77 of the ICP – “An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.”a. Where only 1 premium is paid for several things not separately valued or separately insured, making for only

one cause or consideration, the insurance contract is entire or indivisible, not severable, or divisible, as to the items insured. It is immaterial that they are shipped or transported separately.

b. Assessment – a sum specifically levied by mutual insurance companies or associations, upon a fixed and definite plan, to pay losses and expenses. A policy is sued on the assessment plan has been defined as one where the payment for the benefit is in any manner or degree dependent upon the collection of an assessment upon persons holding similar policies.

c. Premium distinguished from assessment – the chief distinction lies in the fact that premiums are levied and paid to meet anticipated losses, while an assessment is collected to meet actual losses. The payment of premium, after the first, is not enforceable against the insured; while assessments, unless otherwise agreed, are legally enforceable once levied. Hence, while premium is not a debt, an assessment, properly levied, unless otherwise expressly agreed, is a debt.

d. In Phil. Phoenix Surety & Insurance Co. v. Woodworks, Inc, it was held that nonpayment of the balance of the premiums due does not produce the cancellation of the contract of insurance in the sense that it can no longer be enforced.

e. Balance of premium was not paid: On April 1, 1960, the insurer issued and delivered a fire policy for the amount of P300,000. The premium of said policy amounted to P6,000. On Sept. 22, 1960, Y Co. paid P3,000. Did the non-payment cancel the policy? No. The risk attached upon the issuance and delivery of the fire policy. As the contract had become perfected, the parties could demand from each other the performance of whatever obligations they had assumed. In the case of the insurer, it had the right to demand from the insured, the completion of the payment of the premium due or sue for rescission of the contract. As it chose to demand specific performance of the insured’s obligation to pay the balance, the latter’s duty to pay is indubitable.

f. No premium was paid: Suppose no partial payment of the premium was made. May the insured recover the unpaid premium from the insured? No. The continuance of the insurer’s obligation is conditioned upon the payment of the premium, so that no recovery can be had upon a lapsed policy, the contractual relation between the parties having ceased. In fact, if the peril insured against had occurred, the insurer would have a valid defense against recovery under the policy.

g. The balance of the premium which was only partially paid, was paid only after the loss had occurred: Is the fire insurance policy valid and enforceable upon mere partial payment of the premium? No. See Tibay v. CA; Phil Phoenix Surety v. Woodworks; and Makati Tuscany v. CA cases.

i. Dissenting opinion: Not only is there an insurance perfected but also a partially performed contract.h. To avoid liability, insurer claims that insured forfeited the renewal policy for failure to pay the full amount of

premium: The amount of the premium stated on the face of the policy was P89,770.20. From the admission of respondent’s own witness, Mr. Borja, which the petitioner cited, the former paid only P75,147, leaving a difference of P14,623.20. The deficiency, petitioner argues, suffices to invalidate the policy, in accordance with Sec. 77 of the ICP. Is the petitioner’s argument tenable? No. Petitioner’s answer contains no specific and definite allegation of non-payment. Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings, the question of the supposed inadequate payment was never raised. Most significant to point, petitioner fatally neglected to present, during the whole course of the trial, any witness to testify that respondent indeed failed to pay the full amount of the premium. It must be remembered that the witness was called to the stand basically to demonstrate that an existing policy issued by the petitioner covers the burned building. (American Homes Assurance Co. Inc. v. Tantoco Enterprises, Inc.)

i. In life insurance – the premium becomes a debt only when in the case of the first premium, the contract has become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after maturity of the premium, in consideration of the insured’s express or implied promise to pay.

i. The fact that the insurance policy contains an automatic premium payment clause does not divest such policy of its contractual nature for the result of such failure would only be for him to pay the premium plus the corresponding interest depending upon the condition of the policy. The insurer therefore cannot compel the insured to pay the premium bec the insured is by no means a debtor of the insurer, nor is the insurer creditor of the insured.

D. Effect of Non-payment of premium - As a general principle, the time specified for the payment of the premiums is of the essence of the contract.

a. First premium – Non-payment of the first premium unless waived, prevents the contract from becoming binding notwithstanding the acceptance of the application nor the issuance of the policy. But nonpayment of the balance of the premium due does not produce the cancellation of the contract.

b. Subsequent premiums – Nonpayment of subsequent premiums does not affect the validity of the contract unless, by express stipulation, it is provided that the policy shall in that even be suspended or shall lapse. In case of individual life or endowment insurance and group life insurance, the policyholder is entitled to a grace period of either 30 days or 1 month within which the payment of any premium after the first may

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e made. In the case of industrial life insurance, the grace period is 4 weeks, and where premiums are payable monthly, either 30 days or 1 month.

c. Excuses for nonpayment of premiums:i. Fortuitous events – even the act of God, rendering the payment of the premium by the insured

wholly impossible, will not prevent the forfeiture of the policy when the premium remains unpaid. If the insured can neglect payment at maturity and yet suffer no loss or forfeiture, premiums will not be punctually paid. The insurer must have some efficient means of enforcing punctuality; hence, insurance contracts usually provides for the forfeiture of the policy upon default of prompt payment of premiums.

ii. Condition, conduct or default of the insurer – indeed, no excuse whatsoever will avail to prevent a forfeiture except only when the nonpayment has in some way been induced by the condition, conduct or default of the insurer. Thus, nonpayment is excused: where the insurer has become insolvent and has suspended business or has refused without justification a valid tender of premiums; or where the failure to pay was due to the wrongful conduct of the insurer as when the insurer induced the beneficiary under a policy to surrender it for cancellation by falsely representing that the insurance was illegal and void, and returning the premiums paid; or where the insurer has in any wise waived his rights to demand payment.

iii. But the insurer will not be deemed to have waived his privilege of forfeiture by mere inaction or silence if the ground be default in the payment of premiums, going as it does to the whole consideration inducing the insurer to enter into the contract. Furthermore, while the insured has the privilege of continuing the policy in force by making premium payments, the insurer cannot ordinarily force the insured to make these payments.

d. Exceptions Sec. 77 of the ICP:i. In the case of a life or an industrial policy whenever the grace period applies

ii. When there is an acknowledgment in a policy or contract of insurance of receipt of premium even if there is a stipulation therein that it shall not be binding until the premium is actually paid

iii. When there is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of the loss

iv. When there is an agreement to grant the insured credit extension for the payment of the premium and loss occurs before the expiration of the credit term

v. When estoppel bars the insurer from invoking Sec. 77 to avoid recover on a policy providing a credit term for the payment of such premiums, as against the insured who relied in good faith of such extension.

e. Dissenting opinion: By weight of authority, estoppel cannot create a contract of insurance, neither can it be successfully invoked to create a primary liability, nor can it give validity to what the law so proscribes as a matter of public policy. So essential is the premium payment to the creation of the vinculum juris between the insured and the insurer than it would be doubtful to have that payment validly excused even for a fortuitous event.

f. $Be that as it may, once a policy has been issued, the presumption lies that the premium has been duly paid, and where the nonpayment of the premium is attributable to the fault or misrepresentation of the insurer, the insured is entitled to recover in case of loss.

g. In the case of Makati Tuscany Condominium Corp v. CA, the Court held that the insurance policies were valid and binding bec there was partial payment of the premiums and a clear understanding between the parties that they had intended the insurance policies to be binding and effective notwithstanding the staggered payment of the premiums – equity and fairness.

E. Sec. 78 of the ICP – “An acknowledgment in a policy or contract of insurance of receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid.”

a. Waiver of condition of prepayment – The law establishes a legal fiction of payment. The reason for the rule is founded on the fact that when the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of prepayment, the acknowledgment being declared by law to be conclusive evidence of premium payment.

b. Recovery of premium if unpaid – It must be noted however, that the conclusive presumption extends only to the question of the binding effect of the policy. As far as the payment of the premium itself is concerned, the acknowledgment is only a prima facie evidence of the fact of such payment. In other words, the insurer may still dispute its acknowledgment but only for the purpose of recovering the premium due and unpaid. Whether payment was indeed made is a question of fact.

c. According to the SC, Sec. 78 should be interpreted as an exception to Sec. 77.d. By accepting the promise of the insured to pay the insurance policy, the insurer implicitly agreed to

modify the tenor of the insurance policy and, in effect, waived the provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium. Considering that the policy is silent as to the mode of payment, the insurer is deemed to have accepted the promissory note as payment instead of cash. The fact that the check was later on dishonored did not in any way operate as a forfeiture of the insured’s right under the policy, in the absence of an express stipulation threreon to that effect. The payment of the premium is an independent obligation the nonfulfillment of which would entitle the insurer to recover. Where credit is given by an insurance company for the payment of the credit is given by an insurance company for the payment of the premium it has no right to cancel the policy for nonpayment except by putting the insured in default and giving him personal notice.

F. When insured entitled to return (or recover) of premiums:a. When no part of the thing insured has been exposed to any of the perils insured against (Sec. 79[a])

i. When risk has never attached:

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1. Where the insured pays in advance the annual premiums on a certain property insured by him, the insurance to take effect on a certain date and the loss occurs before the said date, the insured is entitled to a return of the whole premium

2. Where the parties in a contract of insurance have become public enemies bec of the existence of a state of war, justice requires that premiums paid after the declaration of war between the belligerent states be returned to the insured. War abrogates insurance contracts between citizens of belligerent states, and therefore, the insured is not entitled, notwithstanding the payment of premiums, to indemnity for loss occurring after such declaration of war.

3. Where short period rate has been stipulated: a. 1 month or less - 20% of the annual rateb. 2 months - 30%c. 3 months - 40%d. 4 months - 50%e. 5 months - 60%f. 6 months - 70%g. 7 months - 75%h. 8 months - 80%i. 9 months - 85%j. 10 months - 90%k. 11 months - 95%

4. Recovery of premiums is not allowed in life insurance if the insured surrenders his policy bec life insurance is not a divisible contract, but only with a privilege of renewal from year to year.

ii. When risk has never attached:1. The general rule is that the insurance granted is the entire consideration for the

premium received; hence, if the risk has attached by reason of the contract’s becoming binding upon the insurer, the whole premium must be considered as earned, and therefore cannot be apportioned in case the risk terminates before the end of the term for which the insurance was granted. Thus, in the absence of any agreement to the contrary, if a peril insured against has existed, and the insurer has been liable for any period, however short, the insured is not entitled to return of premiums so far as that particular risk is concerned.

a. Ex: X procures insurance for a vessel against perils of the sea for a voyage from Manila to London, the voyage to last for 5 days. If X cancels the policy 2 days after the voyage has commenced, no portion of the premium is returnable bec the thing insured has already been exposedto the perils insured against.

2. Where insurance divisible – Of course, if the contract of insurance is divisible, consisting of several distinct risks for which different amounts premiums have been paid, the premium paid for any particular risk is not earned until that risk has attached.

a. Ex: Suppose the insurance procured by X upon his vessel contemplates a voyage in 3 different stages – from Port A to Port B, then to Port C and finally to Port D – and X paid a different amount of premium as regards each portion.

b. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof (Sec. 79 [b])

i. Does not apply where the insurance is not for a definite period; or where a short period rate has been agreed upon or; where the policy is a life insurance policy.

ii. X insures his house for 1 yr and pays the amount of P16,000 corresponding to the premium for 1 yr. IF after the lapse of 3 months, X surrenders his policy, he shall be entitled to collect ¾ of the premium paid or P12,000 representing the portion of the premium for the unexpired period of the policy.

iii. Now suppose that the insurance of the house also covers furniture, some of which were burned prior to the cancellation of the policy and the insured paid the amount of P4,000 for the damage. In this case, the sum of P4,000 shall be deducted from P16,000 thereby leaving a balance of P12,000. X will thus be entitled to a return of P9,000 which is ¾ of P12,000.

c. When the contract is voidable bec of the fraud or misrepresentations of the insurer or his agent (Sec. 81)i. Where the insured is induced to take out an insurance upon the representation of the insurer’s

agent that the policy will be issued to him within 1 month, the insured may refuse the contract and recover the premiums paid by him if the policy is not issued within said period.

d. When the contract is voidable be of the existence of facts of which the insured was ignorant without his fault (Sec. 81)

i. Where the insured pays insurance premiums on his vessel not knowing that it has already been lost, he can recover back the premiums so paid in the absence of stipulation in the policy that the insurer will remain liable even if the vessel is already lost.

ii. The insured is not entitled to a return of the premium paid of the policy is annulled by reason of the fraud or misrepresentation of the insured (Sec. 81).

e. When the insurer never incurred any liability under the policy bec of the default of the insured other than actual fraud (Sec. 81)

f. When there is overinsurance (Sec. 82) – In case of overinsurance by double insurance, the insurer is not liable for the total amount of insurance taken, his liability being limited to the amount of the insurable

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interest on the property insured. Hence, he is not entitled to that portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured.

i. The premiums to be returned where there is overinsurance by several insurers shall be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk.

ii. Ex. Suppose X insures his house which has an insurable value of P1,500,000.00 as follows: A Insurance Co. – P1,200,000.00 (amount of insurance), P24,000.00 (premiums paid); B Insurance Co. – P600,000.00 (amount of insurance), P12,000.00 (premiums paid). In this case, there is an over insurance of P300,000.00. The proportion is P300,000 to P1,800,000 (total insurance amount) or 1/6. Hence, 1/6 of P24,000 or P4,000 is what A Insurance Co. must return; and 1/6 of P12,000 or P2,000 is what B Insurance Co. must return. Since the insurable interest of X is only P1,500,000; he cannot recover the whole of the amount insured in case of loss,

g. When rescission is granted due to the insurer’s breach of contract G. When the insurance is void bec illegal, the general rule is that the premiums cannot be recovered. But if in fact,

the parties are not in pari delicto, the law will allow an innocent insured to take again his premiums as when the insured was ignorant of the facts which rendered the insurance illegal.

H. Basis of the right to recover premium: a. Insurer could have been called to pay the whole sum insured – if the insurer could at any time, and under

any conceivable circumstances, have been called on to pay the whole sum on which he has received premium, in such cases the whole premium is earned and there shall be no return.

b. If on the other hand, he could never in any event have thus been called on to pay the whole, but only a part of the amount of his subscription – say a half – he ought to retain a larger portion than a half of the premium and must return the residue.

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VII PERSONS ENTITLED TO RECOVERY ON THE POLICY AND CONDITIONS TO RECOVERY

A. Beneficiarya. Sec. 11 of the ICP – “The insured shall have the right to change the beneficiary he designated in the

policy, unless he has expressly waived his right in said policy.”b. Kinds of beneficiary:

i. The insured himselfii. Third person who paid the consideration

iii. Third person through mere bounty of insuredc. In the second and third cases, the beneficiary is not a party to the contract. In all three cases, the proceeds

of the life insurance policy become the exclusive property of the beneficiary upon the death of the insured. Therefore, where the insured, before dying, was judicially declared insolvent, the proceeds should be paid to the beneficiary and not to the assignee in insolvency.

d. Sec. 12 of the ICP – “The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.”

i. Under Sec. 87 of the ICP, it is quite clear that the insurer is not liable in case the insured commits suicide intentionally, with whatever motive, when in sound mind. To hold otherwise is to say that the occurrence of the event, upon the happening of which the insurer undertook to pay, was intended to be left to the insured’s option. That view is against the very essence of the contract.

ii. Suicide of an insane insured does not discharge the insurer from his liability on his contract. Such insanity is one of the diseases to which the insurer must have known that the insured was subject and the unwitting act of self-destruction is as much the consequence of that disease as if some vital organs were totally affected.

iii. The mere fact that the insured died while he was committing a felony or violating a law would not warrant denial of liability. To avoid liability, the insurer must further establish that the commission of the felony or the violation of law was the cause or had a casual connection with the accident resulting in the death of the insured.

e. Sec. 53 of the ICP – “The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy.”

i. Where different persons have different interests in the same property, the insurance taken by one in his own right and his own interest does not in any way inure to the benefit of the other.

ii. But if the bailee secures insurance covering his own goods and goods stored with him, even if the owner of the stored goods did not request or know of the insurance and did not ratify it before payment of the loss, it has been held that the warehouseman is liable to the owner of such stored goods for his share in the insurance money (Lopez v. Del Rosario).

iii. Where insurance policies on the mortgaged property has been endorsed by the mortgagor to the mortgagee, the proceeds being exclusively payable to the mortgagee by reason of the endorsement, these policies cannot be attached by the mortgagor’s other creditors.

f. Sec. 56 of the ICP – “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.”

g. Sec. 57 of the ICP – “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.”

i.B. Limitations on the appointment of beneficiary

a. Art. 2012 of the NCC – “Any person forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article.”

b. Art. 739 of the NCC – “The ff donations shall be void: 1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; 2) Those made between persons found guilty of the same criminal offense, in consideration thereof; 3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office. In the case referred to in no. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and donee may be proved by preponderance of evidence in the same action.”

c. In the absence of any beneficiary named in the life insurance policy or where the designated beneficiary is disqualified, the proceeds of the insurance will go to the estate of the deceased insured.

d. The right of the insured to change beneficiary in life insurance must be exercised specifically in the manner provided in the policy. But the insured’s power to extinguish the beneficiary’s interest ceases at his death, and cannot be exercised by his personal representative or assignee. The beneficiary’s right then becomes completely fixed.

e. Where the right to change is waived

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i. Neither can a new beneficiary be added to the irrevocably designated beneficiary for this would in effect reduce the latter’s vested rights (Go v. Redfern).

ii. The insured does not even retain the power to destroy the contract by refusing to pay premiums for the beneficiary can protect his interest by paying the premiums for the reason that the fulfillment of an obligation may be made by a third person even against the will of the debtor and if he has an interest in the fulfillment of the obligation even against the will of the creditor.

f. Where beneficiary dies before the insuredi. View that beneficiary’s representative entitled to insurance proceeds

ii. View that estate of insured entitled to insurance proceeds – However, most but not all courts hold that the mere fact that such a policy is made payable to the designated beneficiary, “his executors, administrators, or assigns,” is sufficient to negative the implied condition that death of the beneficiary before the maturity of the policy terminates all his rights to it.

C. Sec. 54 of the ICP – “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.”a. It has been held however, that, where the defendant acted as plaintiff’s agent for the insurance of goods

stored with the defendant, the plaintiff cannot claim the benefit of the agency without sharing in the expenses (Lopez v. Del Rosario).

D. Sec. 55 of the ICP – “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.”a. But a partner 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 share of the other partners.

E. Notice and Proof of Lossa. Sec. 88 of the ICP – “In case of loss upon an insurance against fire, an insurer is exonerated, if

notice thereof be not given to him by an insured, or some other person entitled to the benefit of the insurance, without unnecessary delay.”

b. Sec. 89 of the ICP – “When a preliminary proof of loss is required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time.”

i. Construction – All those conditions in the policy-making requirements of the insured after the loss are intended merely for evidential purposes and do not properly form any part of the conditions of liability. Such being the nature of these conditions, it is manifest that the general rules of construction require that they shall be construed with much less strictness than those conditions that operate prior to loss. Indeed, as regards the submission of documents to prove loss, substantial, not strict compliance with the requirements will always be deemed sufficient.

ii. Notice of loss is more or less formal notice given the insurer by the insured under a policy of the occurrence of the loss insured against.

iii. The purpose of notice of loss is to apprise the insurance company with the occurrence of the loss, so that it may gather information and make proper investigation while the evidence is still fresh, and take such action as may be necessary to protect its interest from fraud or imposition; in the case of property insurance, to prevent further loss to the property.

iv. It has been held that formal notice of loss is not necessary if the insurer already has actual notice (Fidelity-Phoenix F. Insurance Co v. Friedman).

v. The notice must be given without unnecessary delay. It has been held that a requirement of the policy that notice of loss be given immediately or forthwith requires that giving of notice within a reasonable time.

vi. Notice will be considered as given immediately or without unnecessary delay if it has been given “as soon as circumstances permitted the insured, in the exercise of reasonable diligence, to communicate.”

vii. The insurance contract may provide that the notice of loss shall be given within a stated time after the loss occurs and that failure to give the notice within such time shall preclude recover. Such provision is valid provided the time so fixed is not unreasonably short.

viii. Form – The law does not make any requirement as to the form in which notice or proof of loss must be given. Accordingly, in the absence of any stipulation in the policy, notice or proof may be given orally or in writing. However, it is advisable to give the notice or proof of loss in writing for the protection of the insured or his beneficiary. The notice of loss may be in the form of an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment.

ix. Notice of loss is distinct from proof of loss. The requirement of notice is intended merely to give the insurer information upon which he may act promptly in protecting the property from further loss for which he may be liable or to enable him to take any other immediate steps that his interests may require. The statement of loss, is however, a much more formal requirement, and intended not only to give the insurer information by which he may determine the extent of his liability but also, to afford him a means of detecting any fraud that may have been practiced upon him, and to operate as a check upon extravagant claims.

x. In an action on a fire insurance policy to recover the value of goods alleged to have been destroyed by fire, it devolves upon the plaintiff to prove the amount of his loss by a preponderance of evidence. But an inventory of goods destroyed by fire is a mere claim for loss, and where the insurer denies liability, does not certainly constitute evidence of loss. Testimony or evidence must be given to sustain the correctness of the claim.

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xi. Failure to give notice and proof of loss will be excused when it is due to the death or incapacity of the insured or the fact that the beneficiary had no knowledge of the existence of the policy of the insured who died before the loss.

c. Sec. 90 of the ICP – “All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived.”

i. It is the duty of the dissatisfied insurer to indicate the defects in the proofs of loss as given, so that the deficiencies may be supplied. His retention of the defective proofs constitutes a waiver of his objections. Thus, there is waiver where the insurer:

1. Writes to the insured that he considers the policy null and void as the furnishing of the notice or proof of loss would be in vain and useless

2. Recognizes his liability to pay the claim3. Denies all liability under the policy4. Joins in the proceedings for determining the amount of the loss by arbitration, making

no objection on account of notice and preliminary proof.5. Makes objection on any ground other than a formal defect in the preliminary proof

ii. It has been held that a general statement that proofs are defective is not sufficient to impose on the insured the duty to supply defects not pointed out.

d. Sec. 91 of the ICP – “Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his, or if he omits to take objection promptly and specifically upon that ground.”

i. An insurance company, by accepting payment of premium with full knowledge that the premises had been injured or destroyed by fire, is estopped from claiming that notice of the fire was not given forthwith to the insurer by the insured as required by the terms of the policy.

ii. “Instead of invoking the ground of delay, it took steps clearly indicative that this particular ground for objection to the claim was never in his mind. The nature of this specific ground for resisting a claim places the insurer on duty to require when the loss took place so that it could determine whether delay would be a valid ground upon which to object to a claim against it. From April 1963 to July 1963, enough time was available for the insurer to determine that the insured was guilty of delay in communicating the loss to the insurer. Furthermore, in the proceedings that took place in the Office of the Insurance Commissioner, the insurer did not raise the defense of delay to avoid liability when it should have done so, indicating that it did not find any delay. But even on the assumption that there was delay, waiver can be successfully raised against the insurer.” (Pacific Timber Export Corp. v. CA)

e. Sec. 92 of the ICP – “If the policy required, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified.”

i. It has been held that such requirement in the policy must be liberally construed in favor of the insured.

f. Is a stipulation in a policy of insurance requiring that the consent of the insurer must be first obtained before any payment by the person responsible for the loss in the settlement of the claim against the insured can be made valid? Yes. The stipulation is valid, the purpose of which is to avoid collusion between the insured and the claimant.

F. Loss and claims settlementa. The insurer is liable if:

i. Loss the proximate cause of which is the peril insured againstii. Loss the immediate cause of which is the peril insured against except where proximate cause is

an excepted periliii. Loss through the negligence of the insured except where there was gross negligence amounting

to willful activ. Loss caused by efforts to rescue the thing from peril insured against – if during the course of

rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part

b. The insurer is NOT liable if:i. Loss by insured’s willful act or gross negligence

ii. Loss due to connivance of the insurediii. Loss where the excepted peril is the proximate cause

c. Sec. 84 of the ICP – “Unless otherwise provided by the policy, an insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.”

d. Sec. 85 of the ICP – “An insurer is liable where the thing insured is rescued from a peril insured against that would otherwise have caused a loss, if, in the course of such rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part; or where a loss is caused by efforts to rescue the thing insured from a peril insured against.”

VIII DOUBLE INSURANCE

A. Sec. 93 of the ICP – “A double insurance exists where tB. he same person is insured by several insurers separately in respect to the same subject and interest.”

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a. Requisites:i. The person insured is the same

ii. Two or more insurers insuring separatelyiii. The subject matter is the sameiv. The interest insured is also the samev. The risk or peril insured against is likewise the same

C. Double Insurance distinguished from over-insurancea. There is over-insurance when the amount of the insurance is beyond the value of the insured’s insurable

interest. In double insurance, there may be no over-insurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured.

b. While in double insurance there are always several insurers, in over-insurance, there may be only one insurer involved.

D. A policy which contains no stipulation against additional insurance is not invalidated by the procuring of such insurance.a. The purpose of the prohibition against double insurance is to prevent over-insurance and thus avert the

perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a loss would be profitable to the insured.

E. Sec. 94 of the ICP a. “Where the insured is over-insured by double insurance:

i. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts;

ii. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured;

iii. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any other policy;

iv. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves;

v. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion for which he is liable under his contract.” (see page 48-49 of Commercial Law Reviewer of Dean Sundiang)

Sec. 100 – The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss; Provided, that in this case the insurer shall be liable for only that part of the loss which the insured cannot recover from the charter.

In the case of a vendee/consignee of goods in transit – The vendee/consignee has such existing interest therein as may be the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale between him and the shipper of the goods which operates to vest in him an equitable title even before the delivery or before he performed the conditions of the sale.

Sec. 101 – The insurable interest of the owner of a ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry.

Loan on bottomry – one which is payable only if the vessel given as security for the loan completes in safety the contemplated voyage. The lender in bottomry is entitled to receive a high rate of interest to compensate him for the risk of losing his loan. The owner of the vessel receives in case of loss no indemnity for his loss, but he does secure immunity from payment of the loan.

Obviously, many of the elements of an insurance contract are present in a bottomry loan as well as in the respondentia loan, which is secured in similar manner on the cargo or some part thereof.

The insurable interest of the lender on bottomry in the Bessel given as security is to the extent of the loan.

Sec. 102 – Freightage, in the sense of a policy of marine insurance, signifies all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others.

Sources of freightage:1) The chartering of the ship2) Its employment for the carriage of his own goods;3) Its employment for the carriage of the goods of others

Sec. 103 – The owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage.

Freight money may be:a) Freight, in its ordinary acceptation, to be earned and payable upon the completion of the voyage;b) The hire of the vessel, payable by the charter;

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c) The benefit accruing to the owner from the use of his vessel in the way of profits upon carriage of his own goods

The owner of a ship has an insurable interest in expected freightage which he may not earn as a result of the intervention of a peril insured against or other peril incident to the voyage. The rule is the same although the freight has been paid in advance. However, where the agreement is that the freight is payable in any event, whether the vessel is lost or not, the ship-owner no insurable interest in such freight. But the shipper who has prepaid the freightage under such condition, has an insurable interest on the same.

Passage money, unlike freight, is customarily payable in advance; it cannot be recovered if the vessel is lost before the completion of the passage. Under such circumstances, the passenger can clearly insure his advances of passage money but the shipowner may not insure it unless it is payable only upon the completion of the voyage.

Sec. 104 – The interest mentioned in the last section exists, in case of a charter party, when the ship has broken ground on the chartered voyage. If a price is to be paid for the carriage of goods, it exists when they are actually on board, or there is some contract for putting them on board. And both ship and goods are ready for the specified voyage.

When it exists – To give an insurable interest in expected freightage, the insured must have an inchoate right to freight, that is, he must be in such position with regard to freight that nothing could prevent him from ultimately having a perfect right to it but the intervention of the perils insured against.

a) Where freight is the price to be paid for the hire of the ship under a charter party, the shipowner has an inchoate right to freight as soon as there is an inception of performance by the ship under the charter party.

b) Where the inchoate right to freight accrues as soon as the goods are actually put on board and where part of the goods have been loaded and the balance is ready, there is an insurable interest in the whole freight.

c) Where the shipowner has made a binding contract for the freight and the ship is in readiness to receive the goods, he has an insurable interest.

When none existsa) Where there is no contract and no part of the good expected to be carried are on board, there is no insurable

interest in freight although there are goods ready for shipment or the master is provided with funds for the purpose of purchasing a cargo.

b) Where the vessel is a mere “seeking ship” or a vessel looking for cargo to be transported, the owner has no insurable interest in freight to be earned on goods not loaded.

Sec. 105 – One who has an interest in the thing from which profits are expected to proceed, has an insurable interest in the profits.

Sec. 106 – The charterer of a ship has an insurable interest in it, to the extent that he is liable to be damnified by its loss.

A charter party - a contract by which an entire ship or some principal part thereof is lent by the owner to another person for a specified time or use.

Bareboat or demise charter – the shipowner turns over full possession and control of his vessel to the charterer, who then undertakes to provide crew and victuals and supplies and fuel for her during the term of the charter. The charterer becomes in effect, the owner for the voyage or service stipulated, subject to liability for damages caused by negligence. Charterer becomes pro hac vice of the ship. As such, he is alkso liable for the expenses of the voyage including the wages of the seamen.

Affreightment – owner of the vessel leases part or all of the space to haul goods for others.a) Voyage charter – contract for the carriage of goods, from one or more ports of loading to one or more ports of

unloading, one or on a series of voyages. Master and crew remain in the employ of the owner of the vesselb) Time charter – contract for the use of a vessel for a specified period of time or for the duration of one or more

specified voyages. Owner of the vessel likewise remain the employer of the master and the crew.

Sec. 107 – In marine insurance, each party is bound to communicate, in addition to what is required by section 28, all the information which he possesses, material to the risk, except such is mentioned in section 30 and to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses assumes to disclose.

Sec. 108 – In marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material.

There is concealment where the insured at the time of the application for insurance did not disclose the opinion of marine experts who inspected the vessel insured that it was unseaworthy.

Sec. 109 – A person insured by a contract of marine insurance is presumed to have knowledge, at the time of insuring, of a prior loss, of the information might possibly have reached him in the usual mode of transmission and that the usual rate of communication.

When rule applicable – Sec 109 establishes a rebuttable presumption of knowledge of a prior loss on the part of the insured if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication.

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When rule not applicable – The insured is not bound, however, to use all accessible means of information at the very last instant of time to ascertain the condition of the property insured. Thus, when having no cause to expect information the insured omits to call at the post office where a letter was received on the morning of the day the insurance was effected, containing the material information, he is not guilty of negligence which will vitiate the policy.

Sec. 110 – A concealment in a marine insurance, in respect to any of the ff matters, does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed:

a) The national character of the insured;b) The liability of the insured to capture and detention;c) The liability to seizure from breach of foreign laws of trade;d) The want of necessary documents;e) The use of false and simulated papers.

Sec. 111 – If a representation, by a person insured by a contract of marine insurance, is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract.

Sec. 112 – The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance.

Sec. 113 – In every marine insurance upon a shi or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy.

The insurer will not be liable for any loss under his policy in case the vessel is:1) unseaworthy at the inception of the insurance;2) deviates from the agreed voyage3) engages in an illegal venture4) that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such

nationality or neutrality is expressly warranted.

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

The warranty of seaworthiness is not absolute guaranty that the vessel will safely meet all possible perils.

Sec. 115 – An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk, except in the ff cases:

a) When the insurance is made for a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the commencement of every voyage it undertakes during that time;

b) When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established customs of the trade, is to be transshipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transshipped, be seaworthy at the commencement of each particular voyage.

The unexplained sinking of a vessel creates the presumption of unseaworthiness. The issuance of the certificate neither negates the presumption of unseaworthiness triggered by an unexplained sinking or established seaworthiness. Securing a certificate of seaworthiness, or the approval of the shipper of the cargo, or his surveyor, of the condition of the vessel or her stowage does not satisfy the vessel owner’s obligation nor does it establish due diligence if the vessel was, in fact, unseaworthy, for the cargo owner has no obligation in relation to seaworthiness.

Sec. 116 – A warranty of seaworthiness extends not only to the condition of the structure of the shi itself, but requires that it be properly laden, and provided with a competent master, a sufficient number of competent officers and seamen, and the requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage.

It is settled that carrying cargo on deck raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship. A ship may not be designed to carry substantial amount of cargo on deck and the inordinate loading of cargo on deck may result in the decrease of the vessel’s metacentric height thus making it unstable.

Sec. 117 – Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefore, a warranty of seaworthiness is complied with if, at the time of the commencement of each portion, the ship is seaworthy with reference to that portion.

The stages must be separate and distinct in order to have a different degree of seaworthiness for particular parts.

Sec. 118 – When a ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner’s interest from liability from any loss arising therefrom.

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Sec. 119 – A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of insurance upon the cargo.

Sec. 120 – Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any document which cast reasonable suspicion thereon.

A warranty of nationality does not mean that the vessel was built in such country, but that the property belongs to a subject thereof. It refers to the beneficial ownership rather than to the legal title.

The warranty is a continuing one and a change of nationality is a breach of the warranty, but the warranty is not broken by a contract for sale and transfer to an alien at a future date.

A warranty of neutrality requires that the insured property shall be accompanied by documentary evidence of its neutral character, and not by any other papers which compromise such character. The proper papers must be produced when necessary to prove ownership, and such production is not excused because the papers were lost by the fault of the master.

Sec. 121 – When the voyage contemplated by a marine insurance policy is described by the places of beginnings and ending, the voyage insured is one which conforms to the course of sailing fixed by mercantile usage between those places.

Sec. 122 – If the course of sailing is not fixed by mercantile usage, the voyage insured by a marine insurance policy is that way between the places specified, which to a master of ordinary skill and discretion, would mean the most natural, direct and advantageous.

Sec. 123 – Deviation is a departure from the course of the voyage insured, mentioned in the last 2 sections, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage.

In other words, any unexcused departure from the regular course or route of the insured voyage or any other act which substantially alters the risk constitutes a deviation.

Sec. 124 – A deviation is proper:a) When caused by circumstances over which neither the master nor the owner of the ship has any

control;b) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured

against;c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; ord) When made in good faith, for the purpose of saving human life or relieving another vessel in distress.

Sec. 125 – Every deviation not specified in the last section is improper.

Deviation may be proper or improper. The insurer is not exonerated from liability for loss happening after proper deviation. The effect is as if there were no deviation.

Sec. 127 – A loss may be either total or partial.Sec. 128 – Every loss which is not total is partial.Sec. 129 – A total loss may be either actual or constructive.Sec. 130 – An actual total loss is cause by:

a) A total destruction of the thing insured;b) The irretrievable loss of the thing by sinking, or by being broken up;c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; ord) Any other even which effectively deprives the owner of the possession, at the port of destination, of the

thing insured.

An actual total loss exists when the subject matter of the insurance is wholly destroyed or lost or when it is so damaged as no longer to exist in its original character.

The fact that insured vessel which sank and was finally raised was in such condition that much further time would be required to make the necessary repairs and install the new machinery before it could be placed in commission and the further fact that the cost of salvage, repair and construction was more than the original cost of the vessel or its value at the time the policy was issued, constitute actual total loss of the vessel.

There is also an actual total loss if the insured is effectively deprived of the use and possession of the property as where the property insured passes into the possession of captors or salvors, and the owners are thus in fact dispossessed, provided the owners cannot in either case recover the possession except by disproportionate exertions, expenses or hazard.

Sec. 131 – A constructive total loss is one which gives to a person insured a right to abandon, under section 139.

Sometimes called “technical total loss.” – one although not actually total, is of such a character that the insured is entitled, if he thinks fit, to treat it as total by abandonment.

It is highly important that the two kinds of total loss be carefully differentiated, for upon then depends the whole doctrine of abandonment.

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In cases of actual total loss, no abandonment is necessary; but if the loss is merely constructively total, an abandonment becomes necessary ion order to recover as for a total loss.

Sec. 132 – An actual loss may be presumed from the continued absence of a ship without being heard of. The length of time which is sufficient to raise this presumption depends on the circumstances of the case.

Where a vessel is not heard of at all within a reasonable time after sailing, or for a reasonable time after she was last seen, she will be presumed to have been lost from a peril insured against.

To lay a foundation for the presumption, it is enough to prove that the vessel was not heard of at her port of departure after she sailed without calling witnesses from her port of destination to show that she never arrived there. But plaintiff must prove that when the vessel left her port of outfit, she was bound on the voyage insured. There is no fixed rule with regard to the time after which a missing vessel will be presumed to be lost. It depends upon the circumstances of the case.

Sec. 133 – When a ship is prevented, at an intermediate port, from completing the voyage, by the perils insure against, the liability of a marine insurer on the cargo continues after they are thus reshipped.

Nothing in this section shall prevent an insurer from requiring an additional premium if the hazard be increased by this extension of liability.

The above section contemplates an insurance upon cargo.

If the original ship be disabled, and the master, acting with a wise discretion, as the agent of the merchant and the shipowners, forwards the cargo on another ship, such necessary and justifiable change of ship will not discharge the underwriter on the goods from liability for any loss which may take place on goods subsequently to such reshipment.

In any case, the insurer may require an additional premium if the hazard be increased by the extension of liability.

Sec. 134 – In addition to the liability mentioned in the last section, a marine insurer is bound for damages, expenses of discharging, storage, reshipment, extra freightage, and all other expenses incurred in saving cargo reshipped pursuant to the last section, up to the amount insured.

Nothing in this or the preceding section shall render a marine insurer liable for any amount in excess of the insured value or, if there be none, of the insurable value.

Sec. 135 – Upon an actual total loss, a person insured is entitled to payment without notice of abandonment.

In constructive total loss, an abandonment by the insured is necessary in order to recover for a total loss in the absence of any provision to the contrary in the policy.

In case of an actual total loss, the right of the insured to claim the whole insurance is absolute. Hence, he need not give notice of abandonment nor formally abandon to the insurer anything that may remain of the insured property.Sec. 136 – Where it has been agreed that an insurance upon a particular thing, or a class of things, shall be free from particular average, a marine insurer is not liable for any particular average loss not depriving the insured of the possession, at the port of destination, of the whole of such thing, or class of things, even though it becomes entirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured.

Average – any ordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo,, or both and all damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo is unloaded.

Kinds of average:1) Gross or general average – which included damages and expenses which are deliberately caused by the master

of the vessel or upon his authority, in order to save the vessel, her cargo, or both at the same time from a real and known risk. In a general average, the loss must be borne equally by all of the interests concerned in the venture.

2) Simple or particular average – includes all damages and expenses caused to the vessel or to her cargo which have not inured to the benefit and profit of all the persons interested in the vessel and her cargo. They refer to those losses which occur under such circumstances as do not entitle the unfortunate owners to receive contribution from other owners concerned in the venture as where a vessel accidentally runs aground and goes to pieces after the cargo is saved. A particular average loss is suffered by and borne alone by the owner of the cargo or of the vessel as the case may be.

Requisites to the right to claim general average contribution:1) There must be a common danger to the vessel or to the cargo;2) Part of the vessel or cargo was sacrificed deliberately;3) The sacrifice must be for the common safety or for the benefit of all;4) IT must be made by the master or upon his authority5) It must not be caused by any fault of the party asking the contribution;6) It must be successful7) It must be necessary

Jettison – intentional casting overboard of any part of a venture exposed to a peril in the hope of saving the rest of the venture.

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The liability of the insurer for general average is clearly provided for in Sec. 136 which states “but he is liable for his proportion of all general average loss assessed upon the thing insured.”

Amount of insurance x General Average Loss = Proportion of GAL for which insurer is liableTotal amount or value

Ex: A is the owner of a vessel worth P8M insured against absolute total loss only with Y Co. The vessel ran into very heavy sea and it became necessary to jettison the cargo belonging to B valued at P1M. As a result of the jettison, the vessel was saved together with the cargo belonging to C valued at P600K and to D valued at P400K. Here, Y Co, is liable to contribute to the indemnity of the general average although the policy makes it liable only upon actual total loss of the vessel. The total value involved is P10M consisting of the value of the cargo sacrificed and that of the vessel and cargo saved. The ratable contribution of the parties will be as follows: Y Co., 4/5 of P1M or P800K; B, 1/10 of P1M or P100K; C, 3/50 of P1M or P60K; D, 2/5 of P1M or P40K.Note that B contributes P100K as his part of the indemnity for the general average brought about by the jettison of his cargo. The liability of Y Co. cannot exceed the contributing value of the vessel.

It may be agreed by the parties that the insurance shall be free from particular average. In this case, the insurer shall only be liable for the general average and not for particular average, unless the particular average loss has the effect of depriving the insured of the possession at the port of destination of the whole of the thing insured. In the absence of any stipulation to the contrary, the insurer is liable for particular average loss.

Examples of particular average: The damage suffered by the cargo from the time of its embarkation until it is unloaded; the damage and expense suffered by the vessel from the time it is put to sea from the port of departure until it anchors in the port of destination; wages and victuals of the crew when the vessel is detained or embargoed by legitimate order or force majeure.

Sec. 137 – An insurance confined in terms to an actual total loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the entire thing insured.

An insurance against “total loss only” will cover any total loss whether it is actual or constructive, although there is authority to the contrary. Where the insurance is against “absolute” total loss or “actual” total loss, the insurer will not be liable for constructive or technical loss. If the insured is deprived of the possession of the entire thing insured at the port of destination, the insurer is liable because the permanent non-arrival thereof is really an actual total loss.

Sec. 138 – Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declared the relinquishment to the insurer of his interest in the thing insured.

It has also been defined as the act of an insured in notifying the insurer that owing to damage done to the subject of the insurance, he elects to take the amount of the insurance in the place of the subject thereof, the remnant of which he cedes to the insurer.

Requisites for valid abandonment:1) There must be an actual relinquishment by the person insured of his interest in the thing insured;2) There must be a constructive total loss;3) The abandonment be neither partial nor conditional4) It must be made within a reasonable time after receipt of reliable information of the loss5) It must be factual6) It must be made by giving notice thereof to the insurer which may be done orally or in writing;7) The notice of abandonment must be explicit and must specify the particular cause of the abandonment.

Reason for need for timely notice – the underwriter may by prompt action be able to save some portion of the insured property.

There is no obligation upon the insured to abandon. It is a matter of his own election. If he omits to abandon, he may nevertheless recover his actual loss.

Sec. 139 – A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against:

a) If more than ¾ thereof in value is actually lost, or would have to be expended to recover it from the peril;

b) It is injured to such an extent as to reduce its value more than 3/4;c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without

incurring either an expense to the insured of more than ¾ the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or

d) If the thing insured is cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence to forward the cargo, without incurring the like expense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case be abandoned, unless the ship is also abandoned.

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The extent of the injury to the vessel is to be considered with reference to its general market value immediately before the disaster. In determining the extent of loss, the expenses incurred or to be incurred by the insured recovering the thing insured (refloating) are taken into account.

Sec. 140 – An abandonment must be neither partial nor conditional.Sec. 141 – An abandonment must be made within a reasonable time after the receipt of reliable information of the loss, but where the information is of a doubtful character the insured is entitled to a reasonable time to make inquiry.

When the insured has received notice of a loss, he must elect within a reasonable time whether he will abandon to the insurer, and if he elects to abandon, he must give notice thereof. This is in order that the insurer may not be prejudiced by the delay, and may take immediate steps for the preservation of such of the property insured as may remain in existence.

What is a reasonable time is a question depending on the facts and circumstances of each case. After the property passes beyond the control of the insured, as from an unjustifiable sale, an abandonment is too late.

Sec. 142 – Where the information upon which an abandonment has been made proved incorrect, or the thing insured was so far restored when the abandonment was made that there was then in fact no total loss, the abandonment becomes ineffectual.

Accordingly, the insured cannot abandon when the thing insured is safe; or when he knew, at the time of his offer to abandon, that the vessel has been repaired and is successfully pursuing her voyage; and the invalidity of the abandonment is not cured by the subsequent loss of the thing insured. But if, after a valid abandonment has been made, the insured property was recovered, the insured cannot withdraw the abandonment.

Instances of justifying abandonment – It has been held that the insured may abandon for a total loss under a marine insurance in case of capture, seizure, or detention of the ship or cargo; restraint by blockade or embargo; where through no fault of the owner, funds for repair cannot be raised; where the voyage is absolutely lost; or where under urgent necessity, the master of the vessel at an intermediate port, makes a sale of the insured property.

The intelligence which authorized the insured to abandon need not be direct or positive information. The protest of the master, a newspaper report, the report of a pilot, or a letter from an official or an agent, is sufficient. The information must be of such facts and circumstances as to render it highly probable that a constructive total loss has occurred, and facts sufficient to constitute a total loss must exist. But the facts and the information need not be the same.

Sec. 143 – Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing; Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within 7 days from such oral notice.

The abandonment need not be necessarily be made by the insured but may be made by an authorized agent, and an agent having an authority to insure has prima facie an authority to abandon.

The abandonment may be made to an agent of the underwriter and abandonment to a broker who is agent for both parties is sufficient.

Sec. 144 – A notice of abandonment must be explicit, and must specify the particular cause of the abandonment, but need state only enough to show that there is probable cause therefore, and need not be accompanied with proof of interest or of loss.

The use of the word “abandon” is not necessary; it is sufficient if expressions are used which inform the insurer that it is the intention of the insured to give up the property insured. But there is no abandonment although the insured may have given notice of an intention to abandon, if he continues to claim and use the property as his own.

The grounds for the abandonment must be stated with such particularity as to enable the underwriter to determine whether or not he is bound to accept the offer. However, it is sufficient if the notice shows probable cause for the abandonment; nor is it required that it be accompanied with proof of interest or of loss.

Sec. 145 – An abandonment can be sustained only upon the cause specified in the notice thereof.

The insured must state sufficient grounds for the abandonment to make it valid and he cannot avail himself of any ground of abandonment other than that stated at the time thereof. If he assigns an insufficient cause or causes which do not in fact exist, proof of other causes will not be admitted in suing for a total loss.

Sec. 146 – An abandonment is equivalent to a transfer by the insured of his interest, to the insurer, with all the chances of recovery and indemnity.

The insurer acquires thereby the entire interest insured, together with all its incidents, including rights of action which the insured has against third persons for the injury.

The execution of a formal instrument is not necessary to effect an abandonment for, by Sec 146, the act of abandonment when accepted, has all the effects which the most carefully drawn assignment would accomplish.

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The effect of abandonment retroacts to the time of the loss.

Sec. 147 – If a marine insurer pays for a loss as if it were an actual loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been formal abandonment.

An election and notice of abandonment is a condition precedent to a claim for a constructive total loss. The acceptance by the insured of the payment is deemed an offer of abandonment on his part.

Sec. 148 – Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer, and for his benefit.

The captain or master continues to be the agent of the insured until abandonment, but from the moment of valid abandonment, the master of the vessel and the agents of the insured become the agents of the insurer, and the latter becomes responsible for all their acts in connection with the insured property and for all the expenses and liabilities in respect thereof.

Insurers are also liable for the wages of seamen earned subsequent to the loss, but take free from any lien or liability for wages earned prior thereto.

Sec. 149 – Where notice of abandonment is properly given, the rights of the insured are not prejudiced by the fact that the insurer refuses to accept the abandonment.

Acceptance is in no case necessary if the abandonment is properly made. The insured’s right to abandon, in a policy of marine insurance, is absolute when justified by the circumstances.

Sec. 150 – The acceptance pf an abandonment may either express or implied from the conduct of the insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed as an acceptance.

Thus, where the insurer refused the abandonment of the ship but took possession of the same for the purpose of making repairs and retained it for an unreasonable length of time, he will be deemed to have accepted the abandonment.

Sec. 151 – The acceptance of an abandonment, whether expressed or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment.

Sec. 152 – An abandonment once made and accepted is irrevocable, unless the ground upon which it was made was proved to be unfounded.

Therefore, the acceptance of the abandonment stops the insurer to rely on any insufficiency in the form, time, or right of abandonment. Whether or not the insured has a right to abandon is immaterial where the abandonment is accepted and there is no fraud.

The only exception provided by law is the case where the ground upon which the abandonment was made proves to be unfounded.

Sec. 153 – On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insurer of said freightage; but the freightage subsequently earned belong to the insurer of the ship.

Sec. 154 – If an insurer refuses to accept a valid abandonment, he is liable as upon an actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured.

The insured’s right to abandon, in marine insurance, is absolute when justified by the circumstances and no acceptance is necessary to validate the abandonment.

If the insurer declines to accept a proper abandonment, he is liable as upon an actual total loss less any proceeds the insured may have received on account of the damaged property as when the insured succeeds in selling the property damaged.

If the abandonment was improper, the insured may nevertheless recover to the extent of the damage proved.

Sec. 155 – If a person inured omits to abandon, he may nevertheless recover his actual loss.

Measure of Indemnity

Sec. 156 – A valuation in a policy of marine insurance is conclusive between the parties thereto in the adjustment of either a partial or a total loss, if the insured has some interest at risk, and there is no fraud on his part; except that when a thing has been hypothecated by bottomry or respondentia before its insurance, and without the knowledge of the person actually procuring the insurance, he may show the real value. But a valuation fraudulent in fact, entitles the insurer to rescind the contract.

The policy of marine insurance may be valued or open. In a valued marine policy, neither party can thus give evidence of the real value of the thing insured.

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Sec. 157 – A marine insurer is liable upon a partial loss only for such proportion of the amount insured by him s the loss bears to the value of the whole interest of the insured in the property insured.

Partial Loss x Amount of insurance = Amount of recoveryValue of the thing insured

If a vessel valued at P500,000 is insured for onlyP400,000 and is damaged to the extent of P250,000, the insurer will be required to pay only 80% of the loss suffered, or P200,000; the other 20% or P50,000 being borne by the insured himself.

Sec. 158 – Where profits are separately insured in a contract of marine insurance, the insured is entitled to recover, in case of loss, a proportion of such profits equivalent to the proportion which the value of the property lost bears to the value of the whole.

Value of property lost x Amount of profit = Amount of recoveryValue of whole property insured

Assuming the amount of the profits insured is P20,000, the value of the whole cargo from which such profits are expected to be realized is P80,000, and the value of the goods lost is P48,000, then the insured is entitled to recover P12,000 computed as follows:

48,000 or 3/5 x 200,000 = 12,00080,000

Sec. 159 – In case of a valued policy of marine insurance on freightage or cargo, if a part of the subject is exposed to risk, the valuation applies only in proportion to such part.

Sec. 160 – When profits are valued and insured by a contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which they were expected to arise, and the valuation fixes their amount.

When profits are separately insured from the property out of which they are expected to arise, the insured, incase of partial loss of the property, is entitled merely to partial indemnity for the profits lost. If the property is totally lost, pro tanto the total profits are also lost.Sec. 161 – In estimating a loss under an open policy of marine insurance, the ff rules are to be observed:

a) The value of the ship is its value at the beginning of the risk, including all articles or charges which add to its permanent value or which are necessary to prepare it for the voyage insured;

b) The value of the cargo is its actual cost to the insured when laden on board, or where that cost cannot be ascertained, its market value at the time and place of lading, adding the charges incurred in purchasing and placing it on board, but without reference to any loss incurred in raising money for its purchase, or to any drawback on its exportation, or to the fluctuation of the market at the port of destination, or to the expenses incurred on the way or on the arrival;

c) The value of the freightage is the gross freightage, exclusive of primage, without reference to the cost of earning it;

d) The cost of insurance is in each case to be added to thte value thus estimated.

This section refers to open policies.

Sec. 162 – If cargo insured against partial loss arrives at the port of destination in a damaged condition, the loss of the insured is deemed to be the same proportion of the value which the market price at that port, of the thing is damages, bears to the market price it would have brought if sound.

Market price in sound state – Market price in damaged state = Reduction in value

Reduction in value x Amount of insurance = Amount of recoveryMarket price in sound state

Sec. 163 – A marine insurer is liable for all the expenses attendant upon a loss which forces the ship into port to be repaired; and where it is stipulated in the policy that the insured shall labor for the recovery of the property, the insurer is liable for the expense incurred thereby, such expenses, in either case, being in addition to a total loss, if that afterwards occurs.

As a general rule, a marine insurer is not liable for more than the amount of the policy. Under Sec 163, however, expenses incurred in repairing the damage suffered by a vessel bec 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, are items to be borne by the insurer in addition to a total loss if that afterwards takes place. Such expense is called “port of refuge” expense.

Sec. 164 – A marine insurer is liable for a loss falling upon the insured through a contribution in respect to the thing insured, required to be made by him towards a general average loss called for by a peril insured against: Provided, That the liability of the insurer shall be limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured.

Sec. 165 – When a person insured by a contract or marine insurance has a demand against others for contribution, he may claim the whole loss form the insurer, subrogating him to his own right to contribution. But no such claim

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can be made upon the insurer after the separation of the interests liable to contribution, nor when the insured, having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of that right.

General rule – The insurer is liable for any general average loss.Exceptions:

a) After the separation of interests liable to contribution, that is to say, after the cargo liable for contribution has been removed from the vessel;

b) When the insured has neglected or waived his right to contribution.

Liability of the insurer:

Amount of insurance x Proportion of general average loss assessed = Limit of liability of Value of the thing insured upon the thing insured insurer

Sec. 166 – In the case of a partial loss of a ship or its equipment, the old materials are to be applied towards payment for the new. Unless otherwise stipulated in the policy, a marine insurer is liable for only 2/3 of the remaining cost of repairs after such deduction, except that achors must be paid in full.

FIRE INSURANCE

Sec. 167 – As used in this Code, the term “fire insurance” shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies.

Fire insurance – a contract of indemnity by which the insurer, for a consideration, agrees to indemnify the insured against loss of, or damage to, a property by hostile fire. As used in this Code, it includes “allied lines” that protect against loss by lightning, windstorm, etc. but only when such risks are covered by extension to fire insurance policies or under separate policies subject to the payment of additional premiums. The coverage may be attached by endorsements.

Fire – oxidation which is so rapid as to produce either flame or a glow.

In our jurisprudence, fire may not be considered a natural disaster or calamity since it almost always arises from some act of man or by human means. It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency.

In determining whether a risk or cause of loss is written, the scope and coverage of a fire insurance policy and the intention of the parties, as indicated by their contract controls.

The standard fire contract is an agreement to repay for a direct loss.

Indirect loss:1) Physical damage caused to other property such as spoiling of food inside a cooler or refrigerator that is

insured by fire insurance and which is damaged.2) Loss of earnings due to the interruption of business by damage to the insured’s property3) Extra expenses such as cost of doing business at another location.

Importance of distinction between fire insurance on vessels and marine insurance (as long as ship is engaged in navigation, marine insurance even though insures against fire risks only):

1) In marine insurance, the rules on constructive total loss and abandonment apply but not in fire insurance,2) In case of a partial loss of a thing insured for less than its actual value, the insured in a marine policy is a co-

insurer of the uninsured portion, while the insured may only become a co-insurer in a fire insurance, if expressly agreed upon by the parties.

Sec. 168 – An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured and increasing the risks, entitles an insurer to rescind a contract of fire insurance.

Sec. 169 – An alteration in the use or condition of a thing insured from that to which it is limited by the policy, which does not increase the risk, does not affect a contract of fire insurance.

When alteration entitles insurer to rescind:1) The use or condition of the thing is specially limited or stipulated in the policy;2) Such use or condition as limited by the policy is altered3) The alteration is made without the consent of the insurer4) The alteration is made by means within the control of the insured;5) The alteration increases risk.

Increase in risk – when the insured property is put to some new use, and the new use increases the chance of loss.

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The insurer would still be liable if the increase in hazard was no longer existing at the time of the loss as when the firecrackers in the insured dwelling house had already been removed and in no way contributed to the loss unless there is a breach of warranty that no hazardous goods should be stored or kept in the property insured.

Even though the policy contains certain provisions prohibiting specified articles from being kept in the insured premises, the policy will not be avoided by a violation of these provisions if the articles are necessary or ordinarily used in the business conducted in the insured premises, like benzene kept in a furniture factory for purposes of operating or for cleaning machinery.

Making repairs, painting or doing other acts of similar character on the thing insured are not to be regarded acts of increasing the risk since the property would be useless to the insured if such acts were prohibited even though by reason therof, the property may be exposed to some additional risk. Thus, keeping in the house of a small quantity of gasoline for removing old paint during the course of making repairs does not increase the risk.

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

It would seem however that every act of the insured’s tenant substantially and permanently affecting the conditions of the property so as to constitute an increase in risk, would be presumptively known to the insured.

Sec. 169 applies to policies which are silent upon the subject.

Sec. 170 – A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of a loss.

If the policy does not contain any prohibition limiting the use or condition of the thing insured, an alteration in said use or condition does not constitute a violation of the policy. Hence, the contract is not affected by such alteration even though it increases the risk and is the cause of the loss. Sec 170 may be considered as an exception to the rule in Sec. 168. However, Sec 170 is now practically of no importance since at present, most insurance companies, to protect themselves expressly provide in every policy of fire insurance that it shall be avoided by any part of the insured which increases the risk.

Sec. 171 – If there is no valuation in the policy, the measure of indemnity in an insurance against fire is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in the condition which it was at the time of the injury; but if there is a valuation in a policy of fire insurance, the effect shall be the same as in a policy of marine insurance.

Sec. 172 – Whenever the insured desires to have a valuation named in his policy, insuring any building or structure against fire, he may require such building or structure to be examined by an independent appraiser and the value of the insured’s interest therein may then be fixed as between the insurer and the insured. The cost of such examination shall be paid for by the insured. A clause shall be inserted in such policy stating substantially that the value of the insured’s interest in such building or structure has been thus fixed. In the absence of any change increasing the risk without the consent of the insurer or of fraud on the part of the insured, then in case of a total loss under such policy, the whole amount so insured upon the insured’s interest in such building or structure, as stated in the policy upon which the insurers have received a premium, shall be paid, and in case of a partial loss, the full amount of the partial loss shall be so paid, and in case there are two or more policies covering the insured’s interest therein, each policy shall contribute pro rata to the payment of such whole or partial loss but in no case shall the insurer be required to pay more than the amount thus stated in such policy. This section shall not prevent the parties from stipulating in such policies concerning the repairing, rebuilding, or replacing of buildings or structures wholly or partially damaged or destroyed.

In the absence of express valuation in a fire insurance, the insured is only entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss by preponderance of evidence.

In the case of goods or personal property having a market value which can readily be determined, such market value may be applied in determining the actual loss sustained.

A total loss of insured building exists when the result of the fire is such as to render the property wholly unfit for use as a building however valuable it may be as mere material.

If the thing is insured under 2 or more policies, each policy shall contribute pro rata to the payment of such whole or partial loss.

In life insurance, the measure of indemnity is the sum fixed in the policy. The principle of indemnity does not apply.

Under the usual contract of fire insurance, the insurer, in case of a partial loss of the subject of the contract, is required to give full indemnity for such loss up to the amount written in the policy event though the property be very inadequately insured. Thus, if property which is valued at 100,000 is insure for 50,000 and is damaged by fire to the extent of ½ of its value, the insurer will be compelled to pay the entire 50,000 necessary to repair the loss. This, however, as already pointed out earlier, is not the rule in marine insurance. But a similar result is now frequently obtained in fire insurance by the insertion of a co-insurance clause in the policy.

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Co-insurance clause – requiring the insured to maintain insurance to an amount equal to the value or specified percentage of the value of the insured property under the penalty of becoming a co-insurer to the extent of such deficiency: the difference between the value or percentage insured and the amount of insurance.

To prevent property owners from taking out such small amount of insurance, and thereby reducing the premium payments and thereby increasing the rates of premiums for all, the insurers often insert the co-insurer’s clause.

Example: If a house valued at 500,000 is insured for only 300,000 and is damaged to the extent of 300,000, the insurer is liable, where there is a co-insurance clause in the policy, for 3/5 of the loss or only 280,000, 2/5 of the loss or 120,000 being borne by the insured himself. Thus, the insured is considered a co-insurer for the amount determined by the difference between the insurance taken out and the value of the property insured. This difference is assumed to be the personal risk of the insured. In case of a total loss, the insurer is liable for the full amount of 300,000.

Option to rebuild clause – reserved by the insurer in order to protect himself against unfairness un the appraisal and award rendered by a Packard board of arbitrators, or in the proof of loss. The insurer must exercise his option to rebuild within the time stipulated in the policy or in the absence of a stipulation, within a reasonable time. The choice by the insurer shall produce no effect except from the time it has been communicated to the insured.

Unless the policy has limited the cost of rebuilding to the amount of the insurance, the insurer, after electing to rebuild, can be compelled to perform his undertaking, even though the cost may exceed the original amount of insurance.

Sec. 173 – No policy of fire insurance shall be pledged, hypothecated, or transferred to any person, firm, or company who acts as agent for or otherwise represents the issuing company, and any such pledge, hypothecation, or transfer hereafter made shall be void and of no effect insofar as it may affect other creditors of the insured.

After a loss has occurred, the insured may pledge, hypothecate, or transfer the fire insurance or rights thereunder. This he may do even without the consent or notice to the insurer. In such a case, it is not the contract that is being assigned but the right of action on the policy.

CASUALTY INSURANCE

Sec. 174 – Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer’s liability insurance, workmen’s compensation insurance, public liability insurance, motor vehicle liability insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance.

Casualty insurance includes all forms of insurance against loss or liability arising from accident or mishap excluding certain types of loss or liability which are not within the scope of other types of insurance, namely: fire, marine, suretyship and life.

2 General divisions of casualty insurance:1) Insurance against specified perils which may affect the person and/or property of the insured such as personal accident, robbery, or theft, damage to or loss of motor vehicle, insolvency of debtors, defalcation or employees2) Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to others or for damage to their property, such as workmen’s compensation, motor vehicle liability, professional liability, products liability.

Liability insurance – a contract of indemnity for the benefit of the insured and those in privity with him, or those to whom the law upon the grounds of public policy extends the indemnity against liability.

Liability insurable1) Liability for quasi-delict or non-fulfillment of contract2) Liability for criminal negligence – liabilities arising out of acts of negligence which are also criminal are also

insurance on the ground that such acts are accidental. Thus, a motor vehicle insurance policy covering the insured’s liability for accidental injury caused by his negligence, even though gross and attended by criminal consequences such as homicide through reckless imprudence, will not be void as against public policy. But liability consequences of deliberate criminal acts are not insurable. Thus, it was held that a motorist guilty of deliberate crime resulting in payment of damages to an injured third party is not entitled to recover on the policy.

Insurable interest in liability insuranceIn liability insurance, questions of insurable interest are not particularly important. As a general rule, liability insurance, like other forms of insurance, must be supported by an insurable interest in the insured, although there is some authority to the contrary.

The insurable interest is to be found in the interest the insured has in the safety of persons who may maintain, or in the freedom from damage of property which may become the basis of suits against him in case of their injury or destruction. The interest does not depend upon whether the insured has a legal or equitable interest in property, but upon whether he may be charged by law with the liability against which insurance is taken out. Thus, liability insurance is always supported by insurable interest. If one were to conclude that an insurable interest is not required in liability insurance, such a rule would have no significant adverse implications.

When liability insurance in policy payable

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In a third party liability insurance contract, the insurer assumes the obligation of paying the injured third parties to whom the insured is liable. From the moment that the insured becomes liable to the third person, the insured acquires an interest in the insurance contract which may be garnished like any other credit.

In general, the class into which particular policy falls depends on the intention of the parties as evidenced by the phraseology of the agreement in such respect in the policy.

Right of the injured person to sue insurer of party at faultThe right of the person injured to sue the insurer of the party at fault depends on whether the contract of insurance is intended to benefit the third person also or only the insured.

Test:1) Indemnity against third party liability – where the contract provides for indemnity against liability to third

persons, then third persons to whom the insured is liable, can sue directly the insurer upon the occurrence of the injury or event upon which the liability depends. The purpose is to protect the injured person against the insolvency of the insured who causes the injury. It is as if such person were specially named in the policy. Where the contract is one of indemnity against liability, it becomes operative as soon as the liability of the person indemnified arises irrespective of whether or not he has suffered actual loss.

2) Indemnity against actual loss or payment – 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. Prior payment by the insured is necessary in order that the obligation of the insurer may arise.

Basis and extent of the insurer’s liabilityThe direct liability of the insurer under indemnity contract against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer to the third party is based on contract; that of the insured is based on tort.To make the insurer solidarily liable with the insured’s entire obligation beyond the sum limited in the insurance contract would result in evident breach of the concept of solidary obligations.

Ex. The policy 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. Is the policy for indemnity against liability? Yes. From the fact that the insured is liable to third persons, such third persons are entitled to sue the insurer.

Ex. M Co., insurer, issued in favor of S, insured, a private comprehensive policy for own damage not to exceed P6,000 and a third party liability in the amount of P20,000. The insured jeep, while being driven by C, an employee of D Co., collided with a passenger bus belonging to P Co. causing damage to the insured vehicle and injuries to C, and T, who was riding the ill-fated jeep. Answer: Only S and D Co. are solidarily liable to T. S is made liable to T pursuant to Article 2184 of the Civil Code, while the basis of liability of D Co. is Article 2180. It thus appears that S and D Co. are the principal tortfeasors who are primarily liable to T. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidary. On the other hand, the basis of M Co.’s liability is its insurance contract existing between it and S at the time of the complained vehicular accident. M Co. upon paying T the amount of P20,000 shall be subrogated to whatever rights S has against D Co. in accordance with Article 1217 of the Civil Code which gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtor for the share which corresponds to each.

Burden of proof – In accident insurance, the insured’s beneficiary has the burden of proof in demonstrating that the cause of death is due to the covered peril. Once that fact is established, the burden then shifts to the insurer to show any excepted peril that may have been stipulated by the parties. An accident insurance is thus not to be likened to an ordinary life insurance where the insured’s death, regardless of the cause thereof, would normally be compensable.

Accident – an event that takes place without one’s foresight or expectation – an event that proceeds from an unknown cause or is an unusual effect of a known cause and, therefore is not expected.

The terms of an accident insurance do not, without qualification, exclude events resulting in damage or loss due to the fault, recklessness or negligence of third parties. The concept accident is not necessarily synonymous with the concept of no fault. It may be utilized simply to distinguish intentional or malicious acts from negligent or careless acts of man.

Rule as to death or injury resulting from accidental or accidental meansGeneral rule – death or injury does not result from accident or accidental means within the terms of an accident policy if it is the natural result of the insured’s voluntary act, unaccompanied by anything unforeseen except the death or injury. Exception – There is no accident when a deliberate act is performed unless some additional unexpected, independent and unforeseen happening occurs which produces or brings about the result of injury or death. In other words, where the death or injury is not the natural and probable result of the insured’s voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the resulting death is within the protection of policies insuring against death or injury from accident.

Suicide and willful exposure to needless perilBoth are in pari matere because they both signify a disregard for one’s life.

But the mere act of the insured of pointing the gun to his temple, believing that the gun was not loaded and the gun fired when he pulled the trigger resulting in his death, was held as an accident. The insured was unquestionably negligent but it should not prevent his beneficiary from recovering from the insurance policy he obtained precisely against accident where

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there is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by negligence.

Meaning of “intentional” as used in accident policyIntentional – implies the exercise of the reasoning faculties, consciousness, and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of a third person, the insurer is relieved from liability as stipulated.Ex. D (insured) lifted heavy objects all day as a result of which he suffered injury to his back. For a claim to be payable under an accident policy, both the cause and the result of the death or injury must be accidental. Here, the cause was the heavy work – which was intentional. The injury therefore, is not covered by the policy. On the other hand, if D slips and falls while lifting the heavy objects, the cause and the result are both accidental. His injury is covered by the policy.

Insured stabbed by escaping robbers – The house of the insured was robbed by a band of robbers, in committing the robbery the robbers rushed towards the door of the second floor, and coming fact to fact with the owner, even if unexpectedly, stabbed him repeatedly, causing wounds on the body resulting in his death. Under the circumstances, it is contrary to all reason and logic to say that his injuries were not intentionally inflicted.

Effect of “no action” clause in policy of liability insuranceIn Guingon v. Del Monte, the policy requires that a suit and final judgment be first obtained against the insured; that only thereafter can the person injured recover on the policy; it expressly disallows suing the insurer as a co-defendant of the insured in a suit to determine the latter’s liability to the third person.

The query is which procedure to follow – that of the insurance policy or the Rules of Court. It was held that “no action” clause in the policy cannot prevail over the Rules of Court provisions aimed at avoiding multiplicity of suits. Sec 5 of Rule 2 on joinder of causes of action and Sec 6 of Rule 3 on permissive joinder of causes of parties cannot be superseded, at least with respect to third persons not a party to the contract by “no action” clause on the contract of insurance.

SURETYSHIP

Sec. 175 – A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the oblige. It includes official recognizances, stipulations bonds, or undertakings issued by any company by virtue and under provisions of Act. No. 536.

Surety – It is an agreement whereby one undertakes to answer, under specified terms and conditions, for the debt, default or miscarriage of another, such as failure to perform a contract or certain duties, or for breach of trust, negligence and the like, in favor or a third party.

The Act provides that such recognizances be approved by the head of Department, court, judge, officer, board or body required to approve or accept the same.

Sec. 176 – The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.

The contract of a surety is evidenced by a writing called surety bond which is essentially a promise to guarantee the debt or obligation of the obligor.

Nature of liability of surety:1) Solidary2) Limited or fixed – it is limited to the amount of the bond3) Contractual – it is determined strictly by the terms of the contract of suretyship in relation to the principal

contract between the obligor and the obligee. A surety is merely a collateral contract. Its basis is the principal contract which it secures.

Distinctions between suretyship and property insurance:1) Suretyship is an accessory contract, while a contract of insurance is a principal contract2) In the first, there are always three parties: the surety, the principal debtor and the creditor, while in the second,

there are only two parties, the insurer and the insured.3) The first is more of a credit accommodation with the surety assuming primary liability, while the second is

generally a contract of indemnity4) In the first, the surety is entitled to reimbursement from the principal and his guarantors for the loss it may

suffer under the contract, while in the second, there is no right of recovery for the loss the insurer may sustain except when the insurer is entitled to subrogation. In case of subrogation, however, the third party against whom the insurer may proceed is not a party to a contract;

5) Generally, a bond can only be cancelled by or with the consent of the oblige or by the Commissioner or by a court of competent jurisdiction, while a contract of insurance may be cancelled unilaterally either by the insured or by the insurer on grounds provided by law.

6) The first requires the acceptance of the oblige before it becomes valid and enforceable, while the second does not need the acceptance of any third party

7) The first is a risk-shifting device, the premium being in the nature of a service fee, while the second is a risk-distributing device, the premium paid being considered a ratable contribution to a common fund.

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Sec. 177 – The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefore has been paid, except where the oblige has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety; Provided, that if the contract of suretyship or bond is not accepted by, or filed with the oblige, the surety shall collect only a reasonable amount, not exceeding fifty per centum of the premium due thereon as service fee plus the cost of stamps or other taxes imposed for the issuance of the contract or bond; Provided however, that if the non-acceptance of the bond be due to the fault of the surety, no such service fee, stamps or taxes shall be collected.

In the case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the oblige or by the Commissioner or by a court of competent jurisdiction, as the case may be.

Rules in payment of premiums:1) The premium becomes a debt as soon as the contract for suretyship or bond is perfected and delivered to the

obligor2) The contract of suretyship or bonding shall not be valid and binding unless and until the premium therefore

has been paid3) Where the oblige has accepted the bond, it shall be valid and enforceable notwithstanding that the premium

has not been paid4) If the contract of suretyship or bond is NOT accepted by, or filed with the oblige, the surety shall collect only

a reasonable amount5) If the non-acceptance of the bond be due to the fault or negligence of the surety, no service fee, stamp, or

taxes imposed shall be collected by the surety6) In the case of a continuing bond (for a longer term than one year or with no fixed expiration date), the obligor

shall pay the subsequent annual premium as it falls due until the contract is cancelled.

Types of surety bonds:1) Contractual bonds – these bonds are connected with construction and supply contracts. They are for the

protection of the owner against possible default by the contractor to comply with his contract or his possible failure top pay material, men and subcontractors. The position of a surety is to answer for a failure of the principal to perform in accordance with the terms and specifications of the contract.a. Performance bond – one covering the faithful performance of the contractb. Payment bond – one covering the payment of laborers and material men

2) Fidelity bonds – they pay an employer for loss growing out of a dishonest act of his employee. For the purpose of underwriting, they are classified as:a. Industrial bond – one required by private employers to cover loss through dishonesty of employeesb. Public official bond – one required of public officers for the faithful performance of their duties and as a

condition of entering upon the duties of their offices.

Note that in the case of fidelity bond, the obligation of the employee to be honest with his employer is implied rather than contractual. The ordinary surety bond, on the other hand, obligates the surety to hold himself responsible for the performance of an express obligation of the principal

3) Judicial bonds – they are those which are required in connection with judicial proceedings. Some of the most common kinds are injunction bonds, attachment bonds, replevin bonds and appeal bonds.

LIFE INSURANCE

Sec. 179 – Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith.

Sec. 180 – An insurance upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life.

Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purposes of this Code.

In the absence of a judicial guardian, the father, or in the latter’s absence or incapacity, the mother, or any minor, who is an insured or beneficiary under a contract of life, health or accident insurance, may exercise, in behalf of said minor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest of the minor in the particular act involved does not except 20,000 pesos. Such right may include, but shall not be limited to obtaining a policy loan, surrendering the policy, receiving the proceeds of the policy, and giving the minor’s consent to any transaction on the policy.

Kinds of life insurance policies:1) Ordinary life policy – one under the terms of which the insured is required to pay a certain fixed premium

annually or at more frequent intervals throughout life and the beneficiary is entitled to receive payment under the policy only after the death of the insured. Thus, the ultimate payment of the insurance proceeds is as certain as death itself. An alternative form of payment, can come about by the inclusion of an investment feature through the payment of the “cash surrender value” of the policy in case it is cancelled by the owner or it lapses through nonpayment of premiums. Sometimes, it permits the insured to borrow against the value without surrender of the policy. This policy is for the whole duration of life. It carries the lowest rate of premium. This is also called whole life, regular life or straight life policy.

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2) Limited payment life policy – one under the terms of which the premiums are payable only during limited period of years usually ten to twenty. When the specified number of premiums have been made, the insurance is fully paid for. It is like ordinary life policies in that it is payable only at the death of the insured. If the insured should die within the specified period, his beneficiary is entitled to all the proceeds of the policy without any liability for the unpaid premiums. This kind of policy is also called limited premium insurance policy.

3) Term insurance policy – one which provides coverage only if the insured dies during a limited period. It is an insurance for a fixed or specified term, such as two, five or ten years. If the insured dies within the period specified, the policy is paid to the beneficiary. If he survives the period, the contract terminates. This is also called temporary insurance.

4) Endowment policy – one under the terms of which the insurer binds himself to pay a fixed sum to the insured if he survives for a specified period, or if he dies within such period, to some other person indicated. This type of policy is thus useful in retirement planning. For the purpose of the Insurance Code, endowment contracts shall be considered life insurance policies.

Scope of life insuranceFrom the economic standpoint, death may be:

a) Actual death – “casket death”b) Living death – permanent disabilityc) Retirement death – living beyond the period of earning capacity.

Contract of life annuity – the debtor binds himself to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income.

Annuity has been called the “upside-down application of life insurance principle” because it is based on the notion that the purpose of life insurance is the scientific creation of an estate, whereas the purpose of an annuity is the scientific liquidation of an estate. For his premium, the purchaser of an annuity expects his insurer to pay him a periodic income as long as he lives. Thus, under a life insurance contract, the insurer starts paying upon death of the insured, whereas under an annuity contract, the insurer stops paying upon death of the insured.

Annuity distinguished from ordinary life policies:1) An annuity contract, unlike life insurance contract, insures against economic problems resulting from a long

life rather than an early death2) From the insurer’s point of view, insurance looks to longevity, while annuity, to transiency3) Under the ordinary life insurance policy, the insured pays to the insurer an annuity and his beneficiary

receives at the insured’s death the lump sum payment. Under the usual form of annuity, the lump sum is paid to the insurer immediately and the annuitant receives the annuity payments as long as he lives.

4) An annuity appears more like an investment instead of an insurance, which may or may not turn out to be profitable while life insurance has a characteristic akin to indemnity.

Sec. 180-A – The insurer in a life insurance contract shall be liable in case of suicide only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides for a shorter period; Provided, however, that suicide committed in the state of insanity shall be compensable regardless of the date of commission.

Note that the policy cannot provide for a period longer than 2 years. Thus, if a policy provides for a 3 year period and the suicide is committed within said period but after two years, the insurer is liable.

Sec. 181 – A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered.

All life insurance policies are declared by law to be assignable regardless of whether the assignee has an insurable interest in the life of the insured. A provision in a contract of life insurance denying the insured his right to assign without the consent of the insurer will be void. This is so because life insurance is not a contract of indemnity.

The courts will not, however, permit the process of assignment to be used as a cloak to hide an illegal intent to make contracts on human life. The usual evidence of this scheme is the fact that the assignment occurred almost immediately after the policy was issued.

An assignment is to be distinguished from a change in the designated beneficiary (see Sec 11).

When the right to change the beneficiary is waived by the insured, the beneficiary has acquired a vested right and the insured cannot assign such policy without the consent of the beneficiary.

Sec. 182 – Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly required.

If the policy does not expressly require the insured to give notice of an assignment or transfer of the policy to the insurer, such notice is not essential to the validity of the assignment.

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Whether or not the policy expressly requires that notice of an assignment or transfer must be given to the insurer, the assignment with the consent of the insurer creates, in effect, a novation. The assignee takes the newly formed contract free of defenses available to the insurer against the insured under the old contract.

Ex. X insured his life, naming his estate as his beneficiary. Later, he assigned the policy to Y who has no insurable interest in his life. X died without notifying the insurer of the transfer. A clause in the policy expressly provides that no assignment shall be effective until the insurer has been notified in writing. May Y collect from the insurer? In view of Sec. 182, the insurer may legally pay the beneficiary which shall become the trustee of the amount received in favor of Y. However, the insurer may waive the requirement as to notice and pay Y. Where such notice is not required by the policy, the insurer is under the obligation to pay Y after acquiring knowledge of the assignment.

Sec. 183 – Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of the indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

Strictly speaking, there could be no exact pecuniary measurement of a person’s interest in his life or the life of another. Hence, a person can purchase life insurance for any amount as long as he can pay the premium. The exception is when a person insures the life of another, as where a creditor insures the life of his debtor. In this case, the interest of the creditor in the life of the debtor is susceptible of exact pecuniary measurement or estimation.

CLAIMS SETTLEMENT

Sec. 241 – (1) No insurance company doing business in the Philippines shall refuse , without just cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices. Any of the ff acts by an insurance company, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practice:

a) knowingly misrepresenting to claimants pertinent facts of policy provisions relating to coverages at issue;

b) failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies

c) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies

d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear

e) compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought against them

(2) Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the Commissioner’s complaint experience with other insurance companies writing similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding brought under this section.

(3) If it is found, after notice and an opportunity to be heard, than an insurance company has violated this section, each instance of non-compliance with paragraph (1) may be treated as a separate violation of this section and shall be considered sufficient cause for the suspension or revocation of the company’s certificate of authority.

Claims settlement – is the indemnification of the loss suffered by the insured. The claimant may be the insured, or reinsured, the insurer who is entitled to subrogation, or a third party who has a claim against the insured.

Where a policy gives the insurer control of the decision to settle claim or litigate it, the insurer nevertheless is required to observe a certain measure of consideration for the interest of the insured.

Ex. In the suit for personal injuries filed by T against D (insured), D offered to settle for a sum that was within the policy limits of P10,000. R (insurer) refused the offer and elected to go with the trial of the case. T obtained a verdict for P15,000. Is R also liable for the P5,000, the amount in excess of the policy limits? It depends. No, if R acted honestly under the circumstances. The insurer has the right to refuse an offer of settlement which it believes to be unreasonably excessive. Yes, if the verdict resulted from R’s negligence or bad faith.

Sec. 242 – The proceeds of a life insurance policy shall be paid immediately upon maturity of the policy, unless such proceeds are made payable in installments or as an annuity, in which case the installments or annuities shall be paid as they become due; Provided, however, that in the case of policy maturing by the death of the insured, the proceeds thereof shall be paid within 60 days, presentation of the claim and filing of the proof of death of the insured. Refusal or failure to pay the claim within the time prescribed herein will entitle the beneficiary to collect interest on the proceeds of the policy for the duration of the delay at the rate twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.

The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall include the discounted value of all premiums paid in advance of their due dates, but are not due and payable at maturity.

Time for payment of claims in life policies:

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1) In policies maturing upon the expiration of the term set forth therein, the proceeds are immediately payable to the insured, unless they are made payable in installments or as annuity, in which case, the installments or annuities shall be paid as they become due

2) In policies maturing at the death of the insured occurring prior to the expiration of the term stipulated, the proceeds are payable to the beneficiaries within 60 days after presentation of the claim and filing of proof of death.

60 day period is procedural in natureThe 60 day period fixed by law within which to pay the proceeds after presentation of proof of death is merely procedural in nature, evidently, to determine the exact amount to be paid and the interest thereon to which the beneficiaries may be entitled to collect in case of unwarranted refusal of the company to pay, and also to enable the insurer to verify or check on the fact of death which it may even validly waive.

It is the happening of the suspensive condition of death that renders the life policy matured and NOT the filing of proof of death.

The death of the insured may be sufficiently established by the death certificate issued by the Civil Registrar of the place where the insured died. The insurer’s liability may arise on a presumption of death.

Sec. 243 – The amount of any loss or damage for which an insurer may be liable, under any policy other than life insurance policy, shall be paid within 30 days after proof of loss is received by the insurer and ascertained of the loss or damage is made either by agreement between the insured and the insurer or by arbitration; but if such ascertainment is not had or made within 60 days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within 90 days after such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the calling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.

Obligations of the insured:File notice of loss and file proof of loss. Also, the insured us required to do everything reasonable to prevent further damage to the property insured. An insured who fails to protect his property adequately from further loss after the fire, cannot collect for the additional loss thus occasioned.

Substantial compliance with the proof of loss requirement will always be deemed sufficient.

The measure of loss is the difference in value between the property undamaged and the property in its damaged condition.

While the cost of repair may serve as a measure of damage, there is no legal obligation to restore a property in its original condition if the cost for repair exceeds the value of the property before the damage. For example, an old automobile virtually demolished, is worth a claim for the value of the car before the accident less its salvage value.

One point in respect to property damage liability claims must first be differentiated from direct loss insurance claims. A fire claim, for example, usually includes only payment for the direct damage to the property unless additional coverage is purchased to provide for the indirect results of the loss of use of the property, such as loss of profits or rents.

Effect where claim is fraudulentUnder policies, particularly against fire, which contains a provision to the effect that all benefits under the policy shall be forfeited if the claim for loss be in any respect fraudulent, or if any false declaration be made by the insured or his agent to obtain any benefit under the policy, a serious discrepancy between the actual loss and that claimed in the proof of loss, shall avoid it as when the claim exceeds the true value of property lost by 50%, as to indicate that the false statements were made willfully and intentionally.

The same is true of a claim for loss of articles and goods not existing at the time of the fire.

The burden of proving fraud is on the insurer.

The insured’s inventory of stocks is NOT binding on the insurer where it was prepared without the latter’s intervention.

Effect of false statement innocently madeThe rights of the insured, are however, in no way prejudiced by false statements inadvertently and innocently made in his proofs of loss despite a clause in the policy providing for its forfeiture in the event of any false swearing and although the false statements are as to a material matter to the insurer’s liability, the insured can recover for his loss.

This rule has been applied to the overvaluation of the property insured; a misstatement regarding the details of an accident or in reference to the cause of the loss, as for example, a statement that goods were destroyed by fire, when, in fact, most of them were destroyed by water; a misstatement regarding the insured’s title or ownership of the insured property; and the inclusion in the proofs of property not destroyed or not insured. There may be honest mistake in valuation without fraud being involved. Numerical precision should not be expected.

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Reference to arbitration1) Where arbitration not required should insurer deny liability – A stipulation in a fire insurance policy that in

the event of a loss unless the company should deny liability, as a condition precedent to bringing an action on the policy by the insured, the latter should first submit to an arbitration, is one valid at law and unless it be first complied with, no action can be brought. But if in the course of the settlement of the loss, the company should in any case refuse to pay, it will be deemed to have waived the condition precedent with reference to arbitration, and suit upon the policy will lie.

2) Where arbitration limited to amount of insurer’s liability – If any dispute shall arise as to the amount of the company’s liability under the policy…was held to apply only as to disputes regarding the amount of the insurer’s liability but not as to any dispute as to the existence or non-existence of liability i.e. where the insurer completely denies any liability.

3) Where arbitration required only when there is dispute – Where there is an agreement to arbitrate and one party puts up a claim which the other disputes, the need to arbitrate is imperative.

4) Where settlement by arbitration not invoked – A clause in a policy concerning reference of dispute to an arbitrator, as a condition precedent to a right of action or suit upon the policy, was deemed waived where none of the parties to the contract invoked the same, or made any reference to arbitration during the negotiations preceding the institution of the action against the insurer; and in fact, counsel for the both parties stipulated in the trial court that none of them had, at any time during said negotiations, even suggested the settlement of the issue between them by arbitration, as provided in said clause.

5) Where insured voluntarily submitted to arbitration – On the other hand, where the insured commenced an action to recover an insurance policy and then voluntarily agrees to an arbitration and submits his proofs to the arbitrator, in the absence of fraud or mistake, is estopped and bound by the award.

The principle of subrogation does not apply to life and accident policies as they are not contracts of indemnity.

Loan repayable from collection and deemed payment of insuranceIt is customary for insurers, in order to save the right to their assureds and to promptly place them in funds, so that their business might continue without embarrassment, to lend to their assureds the amount of the loss payable only out of money collected on account of the loss. Such losses are not payment of insurance.

Consequently, in a suit by the insured against the party indisputably liable for the loss, recovery should not be denied merely because the insured received such loan from the insurer. As the advancement does not constitute payment of loss, the insurer is not, therefore, subrogated to the rights of the insured who is not divested of his right file the suit. Furthermore, to permit the insured to recover, subject to his obligation to the insurer, would avoid unnecessary delay and multiplicity f suits in the attainment of the same result, namely, the enforcement of the undisputed liability on the part of one of the parties.

Sec. 244 – In case of any litigation for the enforcement f any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been reasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorney’s fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest twice the ceiling prescribed by the Monetary Board of the amount of the claim due to the insured, from the date following the time prescribed in section 242 or in section 243, as the case may be, until the claim is fully satisfied; Provided, that the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment.

It is generally agreed that an insurer may, in good faith and honesty, entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be imposed unless the evidence and the circumstances show that the refusal was willful and without reasonable cause as the facts appear to a reasonable and prudent man.

Where delay in payment was due to the investigation the insurer conducted to ascertain the truth of the information it received that the insured was not insurable at the time of his application, the delay was held justifiable.

Conflicting resolutions of trial court and the CommissionDue to the difference in the quantum of evidence required to base a decision, it is not far-fetched that they be different in these two tribunals. The finding or conclusion of one would not necessarily be binding on the other.

Damage recoverable:1) Attorney’s fees2) Other expenses incurred by the insured person by reason of such unreasonable denial or withholding of

payment3) Interest at twice the ceiling prescribed by the Monetary Board of the amount of claim due the insured4) The amount of the claim

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

Sec. 378 – Any claim for death or injury to any passenger or third party pursuant to the provisions of this Chapter shall be paid without the necessity of proving fault or negligence of any kind; Provided, that for purposes of this section:

1) The total indemnity in respect of any one person shall not exceed 5,000 pesos

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2) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim:a. Police report of the accidentb. Death certificate and evidence sufficient to establish the proper payeec. Medical report and evidence of medical or hospital disbursement in respect of which funds were

claimed3) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall

lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained.

Sec. 384 – Any person having any claim upon the policy issued pursuant to this Chapter shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting forth the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within 6 months from the date of the accident, otherwise, the claim shall be deemed waived. Action or suit for recovery for damage due to loss or injury must be brought, in proper cases with the Commissioner or the Courts within 1 year from denial of the claim, otherwise, the claimant’s right of action shall prescribe.

Spirit behind or need for compulsory third party liability insuranceThe overriding consideration in compelling motor vehicle owners or operators to have TPL insurance or surety bond is to assure victims of motor vehicle accidents, especially when they are poor, immediate financial assistance or indemnity regardless of the financial capacity of the motor vehicle owners or operators responsible. The insurer’s liability is primary and accrues immediately upon the occurrence of the injury or event upon which the liability depends, and does not depend on the recovery of judgment by the injured party against the insured. The injured or the heirs of the injured may directly sue the insurer of the vehicle.

Effect of insured’s violation of policy condition on insurer’s liability to third party claimantThe insurer’s liability to any party attaches during the effectivity of the policy in the absence of any showing that the same has been cancelled with proper notice to all parties concerned.

To allow therefore, the insurer to escape liability by interposing the defense that the owner of the insured motor vehicle has violated the contract would be to defeat the very purpose of the law.

Persons subject to CMVLI:1) Motor vehicle owner or one who is the actual legal owner of a motor vehicle in whose name such vehicle is

registered with the LTO;2) Land transportation operator or one who is the owner of a motor vehicle or vehicles being used for conveying

passengers for compensation including school buses.

Substitutes for CMVLI:1) Post a surety bond with the Insurance Commissioner who shall be made the obligee or creditor in the bond in

such amount required as limits of indemnity to answer for the same losses sought to be covered by the CMVLI policy;

2) Make a cash deposit with the Insurance Commission in such amount required as limits of indemnity also or the same purpose.

Scope of coverage required:1) For owners of private motor vehicles, the coverage must be comprehensive against third party liability for

death or bodily injuries. In case a private motor vehicle is being used to transport passengers for compensation, such coverage shall, in addition include passenger liability;

2) For operators of land transportation, the coverage must also be comprehensive against both passenger and third party liabilities for death and bodily injuries. The insurer may extend additional other risks at its option.

In case of excess over the minimum limit of coverage, such excess should be deemed as to have been taken on voluntary basis and not compulsory.

No fault indemnity claim – connotes that the victim of a tort can recover for his loss from his insurer without regard to his own contributory fault or the fault of the tortfeasor. The fundamental purpose of no-fault provision is to guarantee compensation or indemnity to persons suffering loss in motor vehicle accidents

1) Claim subject to certain conditions – Under Sec 378, the insurance company concerned shall pay any claim for death or bodily injuries sustained by a passenger or third party without the necessity of proving fault or negligence of any kind subject to certain conditions. This no-fault claim does not apply to property damage. If total indemnity claim exceeds 5,000 and there is controversy in respect thereto, the finding of fault may be availed of by the insurer only as to the excess. The first 5,000 should be paid without regard to fault.

2) Claim against insurer of vehicle in which victim is an occupant – Sec 378 (3) is very clear that the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting, or dismounting from. The claimant is not free top choose from which insurer e will claim the no-fault indemnity as the law makes it

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mandatory that the claim be made against the insurer of such vehicle, even if such vehicle is not the one at fault.

3) Claim against insurer of vehicle responsible for accident – In any other case (i.e. the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle.

* the term “occupant” includes both passenger and a third party so long as they are riding in or mounting or dismounting from a motor vehicle.

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