NOTES ON INSURANCE

Kenneth & King Hizon (2A)

UNIVERSITY OF SANTO TOMAS

Faculty of Civil Law
A.Y. 2011-2012
Second Semester

LAW ON INSURANCE

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THE INSURANCE CODE OF THE PHILIPPINES trading houses in London in the 12 century and brought
(Presidential Decree No. 1460, As Amended) with them the custom of insuring against hazards of trade.
GENERAL PROVISIONS
Q: Questions of insurance, at the early times, were
Sec. 1. This Decree shall be known as "The Insurance Code". determined in accordance with what factors?

HISTORICAL ORIGIN A:

Insurance is based upon the principle of aiding another from 1. Customs of merchants
a loss caused by an unfortunate event. 2. Merchant courts
3. Custom of submitting all contracts involving
Q: Mutual insurance is said to be as old as society itself. Give mercantile rights to courts of merchants
some ancient civilizations where insurance already existed.
Q: In 1601, what essential event happened in England which
A: made a huge impact in the development of the field of
1. Egyptians insurance?
2. Chinese
3. Hindus A: In 1601, the common law courts of England began to take
4. Romans cognizance of insurance cases with the passage of the first
English Insurance Act by which a special court was
But, it is said to have been established among the Greeks as established for the trial of maritime insurance controversies.
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early as 3 century B.C.
Q: Give the important contribution of Lord Mansfield in the
Q: Give the origin of the present day insurance. field of insurance.

A: The practice of insurance as we know it today is relatively a A: With his appointment in 1756 as Chief Justice of Court of
modern invention. Its origin is to be found in the mutual King’s  Bench,  the  essential  principles  of  the  law  of  merchant  
agreement among merchants of the Italian cities in the early were incorporated into the common law system of England
middle ages engaged in common shipping ventures for and the common law courts thereby rendered competent to
distributing among the mutual contractors, the loss falling determine all questions involving insurance.
upon any one by reason of the perils of navigation.
Lord Mansfield is also known as “Father   of   English  
It is thus apparent that the law of insurance was derived Commercial Law.”
from the maritime law, and as such, was part of the general
law merchant, and international in its character. Q: How did insurance develop in the United States?

From Italy, the practice of insuring commercial ventures A: With the exception of ocean marine insurance, the English
against disaster rapidly extended to other maritime States of practices and the English decisions have little influence in the
Europe. United States.

Q: How did insurance develop in England? Q: How did insurance develop in the Philippines during the
Pre-Spanish times?
A: The Italian merchants from the commercial centers in
Northern Italy, generally known as the Lombards, founded
Facultad de Derecho Civil 1
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
th
A: Prior to the 19 century, insurance in its modern sense, A: In 1936 with the enactment of C.A. No. 186 which created
did not exist in the Philippines. During the Pre-Spanish times, the Government Service Insurance System (GSIS) which
when the political unit was then the family, if a member of started operations in 1937.
the family died or suffered any misfortune, it was borne by
the family. When the barangays developed, the assistance In 1954, R.A. No. 1161 was enacted which provides for the
was extended accordingly. Eventually, mutual benefit organization of Social Security System (GSIS) covering
societies and fraternal associations were organized for the employees of the private sector
purpose of rendering assistance, in money or in kind, to their
members. SOURCES OF INSURANCE LAW

Q: Why didn’t insurance in the Philippines work in the early Q: What are the sources of insurance law in the Philippines?
years?
A:
A: Aside from economic reasons (low per capita income), the 1. During the Spanish period, the Code of Commerce
fatalistic philosophy behind our oft-quoted expression and book 4 of the Old Civil Code of 1889
“bahala  na.”   2. Act. No. 2427 (Insurance Act) during the American
period
Q: How about in the present context, how was insurance 3. R.A. 386, Civil Code of the Philippines
introduced in the Philippines? 4. Presidential Decree No. 612 which ordained the
Insurance Code of the Philippines
A: It  was  first  introduced  sometime  in  1829  when  Lloyd’s  of   5. Presidential Decree No. 1460 consolidated all
London appointed Stracham, Murray & Co., Inc. as its insurance laws into a single code known as the
representative here. Insurance Code of 1978.
6. Presidential Decree No. 1814 and B.P. Blg. 874 which
In 1939, the Union Insurance Society of Canton appointed amended P.D. 1460
Russel & Sturgis as its agent in Manila. The business
transacted then was limited to non-life insurance. Laws governing insurance

Q: When was life insurance introduced in the Philippines? Q: What laws govern insurance?

A: It was only in 1898 with the entry of Sun Life Assurance of A:

Canada.
1. Insurance Code of 1978 (P.D. 1460)-It took effect on
Q: What was the first domestic non-life insurance company June 11, 1978, the date of its promulgation
in the Philippines?
2. Civil Code-The provisions dealing with insurance are
A: Yek Tong Lin Fire and Marine Insurance Company which Articles 739 and 2012 (on void donations), Art. 2011
was organized on June 8, 1906. (on the applicability of the Civil Code), Arts. 2021-
2027 (life annuity contracts), Art. 2186 (compulsory
Q: What was the first domestic non-life insurance company motor vehicle liability insurance), and Art. 2207
in the Philippines? (insurer’s  right  of  subrogation)

A: Insular Life Assurance Co., Ltd which was organized in NOTE: Insurance contracts are governed primarily by the
1910. Insurance Code but if it does not specifically provide for a
particular matter in question, the provisions of the Civil Code
Q: When was reinsurance introduced in the Philippines? on contracts and other special laws shall govern.

A: In 1950, with Reinsurance Company of the Orient which 3. Special laws

wrote treaties both for life and non-life.
a. Insurance Code of 1978
In 1949, a government agency was formed to handle
insurance affairs. The Insular Treasurer was appointed NOTE: Insofar as Civil Code is concerned, the Code of
Commisioner ex officio Commerce is considered a special law

Q: When was social insurance established? b. P.D. 1146 (The Revised Government Insurance
Act of 1977)

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
c. R.A. 1161 (The Social Security Act of 1954) assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer.
4. Others
Q: Is presentation of evidence of the insurance policy
a. R.A. 656 (Property Insurance Law) indispensable before the insurer may recover?
b. R.A. 4898 (for insurance coverage of barangay
officials) A: No. The subrogation receipt itself is sufficient to establish
c. E.O. 250 not only the relationship of the insurer and the insured, but
d. R.A. 3591 also the amount to settle the insurance.

DOCTRINE OF SUBROGATION Q: What if the insurer pays the insured for a loss which is
not  risk  covered  by  the  policy,  effecting  thereby  “voluntary  
Q: What is the doctrine of subrogation? payment,”  does  the  insurer  have  a  right of subrogation?

A: It is basically a process of legal subrogation. The insurer, A: No. Under Art. 2207, the cause of loss or injury must be
after paying the amount covered by the insurance policy, risk covered by the policy to entitle the insurer to
stepping into the shoes of the insured, as it were, and availing subrogation. Nevertheless, the insurer may recover from the
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himself  of  the  latter’s  rights that exist against the wrongdoer 3 party responsible for damage to the insured property
at the time of the loss. under Art. 1236 of the Civil Code.

Q: What is the basis of the doctrine? Note: The right of subrogation given to the insurer prevents
the insured from obtaining more than the amount he loss. It
A: It has its roots on equity. It is designed to promote and to is a method of implementing the principle of indemnity
accomplish justice and is the mode which equity adopts to which is the heart of insurance. The right exists after
compel the ultimately payment of debt by one who justice indemnity has been paid by insurer to the insured who can no
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and good conscience ought to pay. longer go after the 3 party. He can only recover once.

Q: What are the principal purposes of subrogation Q: What if the amount paid by the insurance company does
conditioned on policy? not fully cover the injury or loss?

A: A: It is the aggrieved party or the insured, not the insurer,

who is entitled to recover the deficiency from the person
1. To make the person who caused the loss, legally responsible for the loss or injury. This is true in case of
responsible for it under-insurance.
2. To prevent the insured from receiving a double
recovery from the wrongdoer and the insurer Q:  Explain:  The  insurer  cannot  defeat  the  insured’s  claim  for  
3. To prevent tortfeasors from being free from the indemnity on the ground that the insured has a right to be
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liabilities indemnified by a 3 person.

Q: It is said that the right of subrogation under Art. 2207 A: Having   been   paid   a   premium   to   make   good   the   insured’s  
applies only to property, and not to life insurance. Why? loss, the insurer cannot compel him to seek indemnity
elsewhere.
A: The value of human life is regarded as unlimited, and no
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recovery from a 3 party can be deemed adequate to Q: Explain: The right of insurer against 3 party is limited to
compensate  the  insured’s  beneficiary.  The  pecuniary  value  of   amount recoverable from the latter by the insured.
human life to the beneficiary of a life insurance policy can
seldom be determined with accuracy. A: As the insurer is subrogated merely to the rights of the
insured, it can necessarily recover only the amount
NOTE: Life insurance contracts are not ordinary contracts of recoverable by the insured from the party responsible for the
indemnity loss. It cannot recover in full the amount it paid to the insured
if it is greater than that which the insured could lawfully lay
Q: Explain: Privity of contract or assignment by insured claim against the person causing the loss.
claim is not essential.
Q: Is the exercise of the right of subrogation by the insurer
A: The right of subrogation is not dependent upon, not does mandatory or discretionary?
it grow out of, any privity of contract or upon written

Facultad de Derecho Civil 3

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: Discretionary. Whether or not the insurer should exercise 5. A common-law wife is disqualified from becoming the
the rights of the insured to which it has been subrogated lies beneficiary of the insured in view of prohibition under
solely  within  the  former’s  sound  discretion.   Art 2012
6. Award for moral & exemplary damages in case of
Q: When is the right of subrogation loss by act of insured or unreasonable delay in payment of insurance claims.
insurer?
INTERPRETATION OF INSURANCE CODE
A: If the insured, after receiving payment from the insurer,
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release by his own act the wrongdoer or 3 party responsible Q: When should the Insurance Code construed or
for loss or damage from liability, the insurer loses his rights interpreted?
against the wrongdoer since the insurer can be subrogated to
only such rights as the insured may have. A: Only when its provisions are not clear.

Q: What is the consequence of the same? When a statute has been adopted from some other state and
said statute has previously been construed by the courts of
A: For   defeating   the   insurer’s   right   of   subrogation,   the   such country, the statute is usually deemed to have been
insured is under obligation to return to the insurer the adopted with construction so given.
amount paid thereby entitling the latter to recover the same.
The rules enunciated by best American authorities involving
Also, where the insurer pays the insured the value of the lost similar provisions of the Philippine law on insurance should
goods without notifying the carrier who has in good faith be adopted for purposes of having our law on insurance
settled the claim for loss of the insured, the settlement is conform to the modern law on insurance as found in the U.S.
binding on both the insured and the insurer, and the latter
cannot bring an action against the carrier on his right of The courts should follow in fundamental points the
subrogation. construction placed by California courts on California law.

Q: What is the effect of assignment by insured of its rights

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against 3 party to insurer?
Sec. 2. Whenever used in this Code, the following terms
A: The case is not between the insured and the insurer but shall have the respective meanings hereinafter set forth or
one between the shipper, and the carrier, because the indicated, unless the context otherwise requires:
insurance company merely stepped into the shoes of the
shipper. And if the shipper has a direct cause of action against (1) A "contract of insurance" is an agreement whereby one
the carrier on account of damage to cargo, such action can be undertakes for a consideration to indemnify another against
availed of by insurer as a subrogee of the insured and the loss, damage or liability arising from an unknown or
carrier cannot set up as a defense any defect in the insurance contingent event.
policy because it is not privy to it.
A contract of suretyship shall be deemed to be an insurance
SUPPLETORY APPLICATION OF THE CIVIL CODE contract, within the meaning of this Code, only if made by a
surety who or which, as such, is doing an insurance business
Q: When does the Civil Code apply in insurance? as hereinafter provided.

A: Insurance contracts are governed primarily by the (2) The term "doing an insurance business" or "transacting
Insurance Code but if it does not specifically provide for a an insurance business", within the meaning of this Code,
particular matter in question, the provisions of the Civil Code shall include:
on contracts and other special laws shall govern.
(a) making or proposing to make, as insurer, any insurance
Ex: contract;
1. Where  the  insurance  company’s  consent  to  the  policy   (b) making or proposing to make, as surety, any contract of
was vitiated by error suretyship as a vocation and not as merely incidental to any
2. The contract of life annuity was not perfected where other legitimate business or activity of the surety;
the acceptance of the application by home office of (c) doing any kind of business, including a reinsurance
the insurer never came to the knowledge of the business, specifically recognized as constituting the doing of
applicant who died an insurance business within the meaning of this Code;
3. When the consideration is false or fraudulent
4. Recovery in case of rescission

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
(d) doing or proposing to do any business in substance and combination or pooling of uncertainty
equivalent to any of the foregoing in a manner designed to in regard to financial loss
evade the provisions of this Code. Business A plan by which large numbers of people
associate themselves and transfer to
In the application of the provisions of this Code the fact that shoulder of all, risks that attach to
no profit is derived from the making of insurance contracts, individuals.
agreements or transactions or that no separate or direct It serves as a basis for credit and a
consideration is received therefor, shall not be deemed mechanism for savings and investments
conclusive to show that the making thereof does not Mathematical The application of certain actuarial
constitute the doing or transacting of an insurance business. principles to calculate the chance of loss.
(3) As used in this code, the term "Commissioner" means The principles of probability are applied to
the "Insurance Commissioner". chanrobles virtual law statistical results of past experience
library represented by a mortality table.
Social A social device whereby the uncertain
LEGAL CONCEPT OF INSURANCE risks of individuals may be combined in a
group and thus made more certain, with
Q:  Is  “assurance”  also  used  interchangeably  with  insurance? small periodic contributions by the
individuals providing a fund out of which
A: Yes. Many writers use assurance instead of insurance to those who suffer loss may be reimbursed.
describe life insurance business. It is a plan by which the losses of the few
are paid out of contributions of all
ASSURANCE INSURANCE members of a group.
Refers to an event like death, Refers to a contingent event
which must happen which may or may not occur DETERMINATION OF THE EXISTENCE OF THE
CONTRACT
NOTE: As used in this Code, insurance covers assurance.
Q: How should the character of insurance be determined?
Q: Why is the definition given by law subject to criticism?
A: It is determined by the exact nature of the contract
A: For instance, it does not include life insurance which is a actually entered into whatever form it takes or by whatever
contract upon condition rather than to indemnify for no name it may be called.
recovery can fully repay a beneficiary for loss of life which is
beyond pecuniary value. Q: Under the Code, when is a contract of suretyship be
deemed as an insurance contract?
Q: What will be a better definition then?
A: If it is made by a surety who or which as such, is doing an
A: A contract of insurance is an agreement by which one insurance business, within the meaning of the Code. But
party (insurer) for a consideration (premium) paid by the strictly speaking, a contract of suretyship is entirely different
other party (insured), promises to pay money or its from a contract of insurance
equivalent or to do some act valuable to the latter (or his
nominee), upon the happening of a loss, damage, liability, or Elements in determining the existence of contract of
disability arising from an unknown or contingent event, insurance

Q: In general, what is an insurance contract? Q: What are the elements in determining the existence of
contract of insurance?
A: It is a promise by one person to pay another, money, or
any other thing of value upon the happening of a fortuitous A:
event beyond the effective control of either party which the
promise has an interest apart from the contract. 1. Subject matter- refers to the thing insured.
a. Fire and marine- thing insured is the property
Q: Give the definition of insurance from other viewpoints. b. Life, health, or accident- it is the health of the
person that is the subject matter
A: c. Casualty- the  insured’s  risk  of  loss  or  liability

VIEWPONT DEFINITION 2. Consideration- the premium paid by the insured. Its

Economic A method which reduces risk by transfer amount is principally based on the probability of loss
Facultad de Derecho Civil 5
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
and extent of liability for which the insurer may Note: No person may secure insurance upon
become liable under the contract. property in which he has no interest. If the insured
has no insurable interest, the contract is void and
3. Object and Purpose – the transfer & distribution of unenforceable as being contrary to public policy.
risk of loss, damage, or liability arising from an 7. Personal – each party having in view the character,
unknown or contingent event through the payment credit and conduct of the other.
of a consideration by the insured to the insurer a. As a rule, the insured cannot assign, before the
under a legally binding contract to reimburse the happening of the loss, his rights under a
insured for losses suffered on the happening of the property policy to others without the consent of
stipulated event. the insurer. Also, the obligation of the insurer to
pay does not attach to or run with the property
NATURE AND CHARACTERISTICS OF AN INSURANCE whether it be real or personal property.
CONTRACT b. All contracts of insurance share a common trait
of  “personalness”
Q: What are the characteristics of a contract of insurance? Ex:
i. life, accident, and disability insurance are
A: plainly personal
ii. liability insurance
1. Consensual – if an insurance has not been either iii. property insurance – the insurance is on the
accepted or rejected, there is no contract yet insured’s   interest   in the property and
2. Voluntary – not compulsory and parties may not on the property itself. It is damage
incorporate such terms and conditions as they may to the personal interest and not on the
deem convenient provided they do not contravene property that is being reimbursed
any provision of law and are not opposed to public iv. life insurance – generally assignable or
policy transferrable as they are in the nature
of property
XPNS: motor vehicles, employees
8. Property in legal contemplation – but unlike
NOTE: An insurance may arise by operation of law property policies, life insurance policies are
Ex: War Damage Corporation Act assignable or transferrable
GSIS
SSS Distinguishing elements of the contract of insurance
3. Aleatory – it depends upon some contingent event.
But it is not a contract of chance although the event Q: The contract of insurance made by parties usually called
may never occur. insured and insurer, is distinguished by the presence of 5
-one of the parties or both reciprocally bind elements. What are these?
themselves to give or do something in consideration
of what the other shall give or do upon the A:
happening of an event which is uncertain, or which is
to occur at an indeterminate time. 1. Insurable interest – interest susceptible of pecuniary
4. Unilateral- contract imposing legal duties only to the estimation
insurer who promises to indemnify in case of loss. It 2. The insured is subject to risk of loss through the
is executed as to the insured after payment of the destruction or impairment of that interest by the
premium and executory on the part of the insurer in happening of designated perils
the sense that it is not executed until payment for a 3. Insurer assumes risk of loss
loss. 4. Such assumption of risk is part of a general scheme
NOTE: The payment of the premium is a condition to distribute actual losses among large group or
precedent to the inception of the contract substantial no. of persons bearing a similar risk
5. Conditional- it is subject to conditions the principal 5. Premium- consideration  for  insurer’s  promise
one of which is the happening of the event insured
against. It also includes other conditions such as INSURANCE AS A RISK-DISTRIBUTING DEVICE
payment of premium or performance of some other
act Q: What if the contract only possesses 3 elements?
6. Contract of indemnity – except for life and accident
insurance where the result is death A: It is only a risk-shifting device and not a contract of
insurance which is a risk-distributing device.

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Ex: Contract of guaranty 3. Risk averse -they would choose to lose P500 with
certainty instead of confronting the 50% chance of
The device of insurance serves to distribute the risk of losing twice as much
economic loss among as many as possible of those who are
subject to the same kind of risk. As the potential magnitude of loss increases, most people
It  provides  protection  against  absorbing  one’s  loss  alone.  This   become more risk averse. This is true even though the
broad sharing of economic risk is the principle of risk- probability of loss declines.
distribution. When people are averse to risk of loss, they are usually
willing to pay someone else to assume the risk
COPING WITH RISK
ECONOMIC EFFECTS OF THE TRANSFER
Q: People cope with risk in various ways. Give some ways. AND DISTRIBUTION OF RISK

A: If the satisfaction of both parties was improved, the

transaction was a desirable one. Society as a whole would be
1. Limiting the probability of loss better off if a large number of similar , mutually beneficial
Ex: firewalls, sprinkler systems transactions would occur.

2. Limiting the effect of loss Q: Give some undesirable side effects of the transfer and
Ex: seatbelt distribution of risk?

Diversification- important way of limiting the effect A:

of loss
Ex: investors will own a wide variety of stocks to 1. People may have less incentive to take measures
offset the loss in other stocks that prevent the loss from occurring or minimizing
3. Self-insurance- or special funds the effect of loss once it occurs
4. Ignoring risk 2. It may have the perverse effect of increasing the
Ex: tightrope walker would purchase special shoes or probability of loss
may install a safety net
5. Transferring risk to another Moral hazard – ex: a mechanic knowing that in the event his
Ex:  seller’s  warranty  of  goods  sold tools are stolen, the insurer will reimburse his loss in full may
be less likely to suffer the inconvenience of putting his tools
THE VALUE OF TRANSFERRING RISK in a locked area.

Q: What factors influence an individual’s   attitude   toward   Q: Why is there a problem regarding measurement of
risk? amount of risk transferred?

A: A: Monitoring the behavior of each insured is not feasible.

1. Probability of loss Deductible insurance and coinsurance

2. Potential magnitude of loss
3. Person’s  ability  to  absorb  the  loss Q: What is deductible insurance?

Q: What are the 3 kinds of people with respect to loss? A: The insured bears any loss up to some stated amount with
the insurer bearing the rest
A:
Q: What is coinsurance?
1. Risk preferring- -these people would choose to
forego the certain loss in the hope of incurring no A: The insured bears some stated percentage of the loss
loss despite the equal probability of suffering large regardless of its amount, with the insurer bearing the rest.
loss
Q: What should be done to compensate for the moral
2. Risk neutral- Indifferent to the alternatives hazard phenomenon?

A: The premiums would have to be much higher if all of the

insured’s   risks   were   transferred;   the   insured   benefits   in   the  
Facultad de Derecho Civil 7
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
long run by paying lower premiums while simultaneously a. perils of accidental injury
taking some measures that prevent loss or limit its effects. b. sickness
c. old age
Q: What is the problem regarding computation of premium d. unemployment
to be charged? e. premature death of family earner

A: Because   life   is   uncertain,   calculating   each   person’s   Q: What is the object of social insurance?
expected loss with absolute precision is impossible.
Moreover, if predictions were possible on an individual basis, A: To provide a minimum standard of living
insurance would not be necessary, since each person would
know when loss would occur and then would take all Q: Why is it compulsory?
necessary preventive measures, thereby eliminating the value
of transferring risk. A:
a. It is predicated upon some experience that some
Q: Explain why is there a need to have classification of risks? persons cannot or will not voluntarily purchase
insurance, and
A: Because the complete impracticability of individual rating, b. The obligation of the government to protect the
insurers would group similar risks and charge each number of general welfare of its citizens.
the group the same premium.
3. Voluntary (private) insurance
Q: What is the phenomenon of adverse selection?
a. Commercial insurance
A: It is inevitable that within the same group, some insureds -it receives its motivating force from the profit
will be better risks than others, even though all members of idea
the group pay the same premium.
i. Personal insurance- it is based on the
FIELDS OF INSURANCE nature of the perils; whether they are
more directly concerned with losses
Q: What are the different fields of insurance? due to loss of earning power of a
person
A: Ex: life insurance, annuities, health and
accident insurance
1. In general ii. Property insurance- the purpose is the
protection against loss arising from the
a. Social or government ownership or use of property.
b. Voluntary 1. Indemnification for the destruction
i. Commercial insurance of his own property
-personal (life and health) Ex: fire and marine insurance
-property (fire-marine, and casualty-surety 2. Consequence of negligence acts
insurance) that result in the injuries to other
persons or damage to their
c. Multiple line insurance- denotes not just property
several kinds of insurance but the combination Ex: casualty and surety insurance
of at least 2 kinds of insurance specifically
traditional fire and casualty lines b. Cooperative insurance
d. All lines insurance- it is a term used to describe -without regard to profit motive and represent
the broadening nature of insurance operations an effort to accomplish the ends of social
which combine at least most of the basic types insurance by private enterprise.
of insurance including traditional fire, casualty,
life and health lines. c. Voluntary government insurance
-there is no element of compulsion in contrast
2. Social (government insurance) with social insurance.
-compulsory and is designed to provide a minimum -the various plans offered are designed to
of economic security for large groups of persons, benefit the entire community but are used only
particularly those in the lower income groups. by those persons who wish to use the available
-includes: benefits.

Facultad de Derecho Civil 8

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Ex: insurance of mortgage loans and insurance -the inured is protected against his loss with regard
of growing criops to claim for damages.

Principal and older forms of insurance NOTE: This includes:

Q: What are the different principal and older forms of a. Reinsurance

insurance? b. Workmen’s  compensation  insurance  
c. Motor vehicle liability insurance
A:
1. Marine -They are designed to reimburse the insured for any
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2. Fire liability he might incur to a 3 party
3. Life
4. Accident Principal and older forms of insurance

Q: What are the different classifications of contracts of Q: What are the different modern classifications of
insurance? insurance?

A: A:
1. Marine
1. Insurance against loss or impairment of property 2. Property –protection of property interests
interests- either: 3. Personal – protection of personal interests
a. In existence 4. Liability
b. Merely expected
Q: What are the 2 large classes of insurance contracts?
NOTE: This includes:
A:
a. Marine insurance- loss or impairment due to marine 1. Property insurance
perils 2. Personal insurance
b. Fire insurance
c. Earthquake CLASSIFICATION BY INTERESTS PROTECTED
d. Explosion
e. Guaranty insurance- due to non-performance of Q: What are the 2 methods of categorization according to
contracts of which the insured is a party the interests being protected by the arrangement?
f. Credit insurance- insolvency of debtors
g. Fidelity insurance – defalcations of employees and A:
agents
h. Theft insurance policies- for theft and burglary 1. First-party vs. Third-party insurance
i. Title insurance – defective titles or interest in
property First party insurance –the contract between the insurer and
the insured is designed to indemnify the insured (or his family
2. Insurance against loss of earning power members) for a loss suffered directly by the insured.

NOTE: This includes: Examples:

a. Property insurance
a. Life insurance – due to death -damage to property is an immediate diminution of
b. Accidental injury the  insured’s  assets  
c. Ill-health
d. Sickness b. Liability insurance
rd
e. Old age -described as 3 party insurance because the
f. Other disability interests protected by the contract are ultimately
rd
g. Unemployment those of 3 parties  injured  by  the  insured’s  conduct
rd
-the  insured’s  loss  is  indirect  in  the  sense  that  the  3
party suffers the direct loss.
rd
3. Insurance against contingent liability to make -designed to protect unknown 3 parties
payment to another
c. All insurance except liability

Facultad de Derecho Civil 9

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
-first party insurance
Q: Give advantages of all-risk coverage.
d. Life insurance
-designates a beneficiary to receive the proceeds of A:
the policy but it does not mean that the insurance is 1. The coverage is presumably simpler to understand
rd
3 party because the loss is suffered by the insured 2. Duplication of coverages and premiums from
and it is the insured who loses his life. separate, specified-risk policies is avoided
3. Pressures toward adverse selection are minimized
e. Health insurance 4. Policies are easier and less expensive for insurer to
-the health insurer pays the provider of health care administer.
services directly, rather than paying the proceeds to 5. Avoidance of gaps in coverage
the insured. But the loss, illness and its expenses, is
suffered directly by the insured. Q: Explain: All-risk coverage not absolute.

Q:  What  is  “No  fault  insurance”? A: All-risk event would not include an undisclosed event that
existed prior to coverage, or an event caused by the
A: It is the substitution of first party insurance for tort consummation during the period of coverage of an indwelling
liability. The victim of tort, instead of looking to the tortfeasor fault in the goods that had existed prior to that coverage.
and his insurer for reimbursement, looks to his own insurer
for first-party protection. First party insurance is compulsory Also, if the loss is certain to occur, such as loss due to normal
under the typical no fault scheme. wear and tear, the loss is not fortuitous, therefore, not
insurable.
The  term  “no  fault”  connotes  that  the  victim  recovers  for  his  
loss from his own insurer, without regard to the fault of the Q: What are the different classifications of insurance under
rd
3 party or his own contributory fault. the Code?

2. All-risk vs. specified-risk A:

ALL-RISK SPECIFIED-RISK 1. Life insurance contracts

Definition a. Individual life
Reimburses the insured for Covers damage to the b. Group life
damage to the subject subject matter of the policy c. Industrial life
matter of the policy from all only if it results from
causes except those specifically identified causes 2. Non-life insurance contracts
specifically excepted in the listed in the policy. a. Marine
policy. b. Fire
Example c. Casualty
Ex: marine insurance is Homeowner’s  insurance
traditionally treated as such 3. Contracts of suretyship or bonding
Burden of proof
Once the insured establishes The burden of proof is Q: Is it possible for an insurance company to insure against
that a loss occurred through ordinarily placed on the any risk whatever associated with any lawful activity?
some event other than an insured to initially prove that
inherent defect or normal the loss falls within the A: Yes, as long as there is no prohibition by a statute or
depreciation, the burden is policy’s  provision  coverage violation of public policy.
ordinarily placed on the
insurer to prove that the loss CONTRACTS WRITTEN BY GUARANTY OR SURETY
falls within an explicit COMPANIES
exception to coverage
Q: What are the contracts written by guaranty or surety
Jeweler’s  block  insurance companies and designated as guaranty insurance?

Q: What is the so-called  “jeweler’s  block  insurance”? A:

A: It provides jewelers with coverage regardless of the cause. 1. Fidelity

It is traditionally treated as all-risk insurance. 2. Title

Facultad de Derecho Civil 10

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
3. Bond A policy of insurance which contains exceptions or conditions
4. Security guaranty tending to work a forfeiture of the policy shall be interpreted
most favorably toward those against whom they are intended
Q: How are these contracts construed? to operate and most strictly against the insurance company
or the party for whose benefit they are inserted
A: Like other insurance contracts, they are construed strictly
against the insurer. When restrictive provisions are open to 2 interpretations,
that which is most favorable to the insured is adopted.
Q: The general rule that bonds of guaranty and surety
companies who engage in the business for profit are Limitations of liability shall be construed in such a way as to
essentially insurance contracts and are governed by rules of preclude the insurer from non-compliance with its
construction are applicable thereto, rather than by rules obligations.
applicable to strict or pure contracts of suretyship applies
only when? Q: What if the terms are clear?

A: It applies to bonds guaranteeing the carrying out or A: The cardinal principle of insurance law of interpreting
performance of contracts to do a particular act or carry out a insurance contracts favorably to the insured is applicable only
particular project. in case of doubt, not when the intention of the policy is clear
or the language is sufficiently clear to convey the meaning of
Q: When is a contract of suretyship deemed to be an the parties.
insurance contract?
Court is bound to adhere to the insurance contract as the
A: Only if it is made by a surety who or which is doing an authentic expression of the intention of the parties.
insurance business within the meaning of the Code. The terms of an unambiguous insurance policy cannot be
enlarged or diminished by judicial construction since the
CONSTRUCTION OF INSURANCE CONTRACTS court cannot make a new contract for the parties where they
themselves have used express and unambiguous words.
Provisions of insurance policy shall be examined and
interpreted in consonance with each other. Q: What if the contract is silent with respect to a particular
matter?
Q: In case of doubt, how should contracts of insurance
construed? A: Any doubt that may arise for failure of the contract to
provide with respect to a particular matter should be
A: As a general rule, contracts of insurance are to be resolved against the insurer.
construed or interpreted liberally in favor of the insured and
strictly against the insurer resolving all ambiguities against WHAT CONSTITUTES DOING OR TRANSACTING AN
the latter so as to effect its dominant purpose of indemnity or INSURANCE BUSINEES
payment to the insured, especially where forfeiture is
involved. 1. Name or designation by insurer not controlling
a. -insurance, whether fire, marine or any
Contract of adhesion v. Bargaining contract other form is that which the law defines it
to be
Q:  Is  an  insurance  contract  a  “contract  of  adhesion”?
2. Acts deemed included by law
A: Yes. It is a contract of adhesion, that is, most terms of the -the law enumerates the acts which are deemed
contracts do not result from mutual negotiation between the included   in   the   term   “doing   an   insurance   business”  
parties as they are prescribed by the insurer in final printed or  “transferring  an  insurance  business.”
forms which the insured may reject or to which he may
“adhere”  if he chooses but which he cannot change. Q: Does the fact that no profit is derived from the making of
insurance contracts or that no separate or direct
Q:  What  is  a  “bargaining  contract”? consideration is received therefor or it states that it is not
an insurance policy conclusive to show that the making
A: In this contract, both parties participate in drawing up its thereof does not constitute transacting of an insurance
terms and conditions or determining its wording. Any business?
ambiguity
A: No.
Facultad de Derecho Civil 11
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
-the natural result of the elimination of risk is an
NOTE: A company may be found to be engaged in an increase in business efficiency.
insurance business even though it expressly disclaims any -it also increases the willingness to invest new
intention to sell insurance. capital in business enterprise

The majority of cases have adopted the view that a contract 3. Promotes loss-prevention
for the payment of burial or funeral expenses at the death of -insurers encourage loss-prevention through a
the holder is a contract of life insurance subject to insurance system of rating which allows discounts for good
laws. features and impose special conditions where the
risk is unsatisfactory.
An agreement to service or repair at a flat monthly fee, any
burned out and defective parts of fluorescent fixtures has 4. Encourage savings
been held not to constitute an insurance contract since any -by protecting the individual against unforeseen
element of guaranty or warranty in the agreement is merely events, insurance provides a climate in which savings
incidental to the servicing business. are encouraged.

A tire manufacturing was held to be engaged in the insurance 5. Solves social problems
business when it promised to repair or replace the tire if any Ex: GSIS, SSS
defects were discovered or accidental losses incurred within a
states period. Indirect functions

Principal object and purpose test Q: What are the indirect functions of insurance?

Q:  What  is  the  “principal  object  and  purpose  test”? A:

A: Under   this,   if   the   principal   object   is   “indemnity”,   the   1. Investment of funds

contract   constitutes   insurance,   but   if   it   is   “service”,   risk   -the funds of the insurers are invested so that they
transfer and distribution being merely incidental, then the not only earn interest to be added to the funds but
arrangement is not insurance and, therefore, not subject to they also make available huge resources for
laws regulating insurance. underwriting industrial, agricultural, cultural, and
other projects.
FUNCTIONS OF INSURANCE
2. Use of reserve funds
NOTE: Insurance   is   also   known   as   the   “first modern -the reserve funds are not static, but are used
industry.” productively. If the reserve funds were not used, the
income they earn would have to be obtained
Principal function through higher premiums.

Q: What is the principal function of insurance? 3. Effect on prices

-the cost of insurance is less than the cost of risk
A: The main function of insurance is risk-bearing. The without insurance.
financial losses of the few are equitably distributed over the
many out of a fund contributed by all. What it does is to 4. As a basis of credit
spread the losses over a large no. of persons. -in case of mortgage upon real estate, no mortgagee
is willing to lend money unless he knows that the
Subsidiary function value of the property is protected from destruction
by fire
Q: What are the subsidiary functions of insurance?

A:

1. Stimulates business enterprises

-insurance helps maintain the present-day large
scale commercial and industrial organizations.

2. Encourages business efficiency and enterprise

Facultad de Derecho Civil 12
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: In general, anything having appreciable pecuniary value
Chapter 1 which is subject to loss or deterioration or of which one may
THE CONTRACT OF INSURANCE be deprived so that his pecuniary interest is prejudiced, may
properly constitute the subject matter of insurance
Title 1
WHAT MAY BE INSURED Both property and persons may be the subjects of insurance.
But the term subject matter is ordinarily used in reference to
Sec. 3. Any contingent or unknown event, whether past or the insurance of property.
future, which may damnify a person having an insurable
interest, or create a liability against him, may be insured NOTE:
against, subject to the provisions of this chapter.
a. In property insurance it is the risk of loss of such
The consent of the husband is not necessary for the validity property that is primarily involved
of an insurance policy taken out by a married woman on her b. In health, life, and accident insurance, the matter is
life or that of her children. generally viewed as one in reference to the insured as
party to the contract
Any minor of the age of eighteen years or more, may, c. In casualty insurance, the subject matter is the risk
notwithstanding such minority, contract for life, health and involved  in  its  use,  or  the  insured’s  risk of loss, or liability
accident insurance, with any insurance company duly that he may suffer
authorized to do business in the Philippines, provided the
insurance is taken on his own life and the beneficiary EVENT OR PERIL INSURED AGAINST
appointed is the minor's estate or the minor's father,
mother, husband, wife, child, brother or sister. Under sec. 3, the contingency or unknown event must be
such that its happening will:
The married woman or the minor herein allowed to take out
an insurance policy may exercise all the rights and privileges a. Damnify or cause loss to a person having an insurable
of an owner under a policy. interest
b. Create a liability against him
All rights, title and interest in the policy of insurance taken
out by an original owner on the life or health of a minor NOTE: The unknown event may be past or future
shall automatically vest in the minor upon the death of the
original owner, unless otherwise provided for in the policy. Q: In contract of insurance, when is the insurer liable for the
fortuitous event?
REQUISITES OF A CONTRACT OF INSURANCE
A:
Q: What are the requisites of a contract of insurance?
1. If it is the event or peril insured against and
A: 2. It is the proximate cause of the loss.

1. Subject matter in which the insured has insurable INSURANCE BY A MARRIED WOMAN
interest
2. Event or peril insured against which may be any Q: May a married woman take out an insurance on her life
future, contingent or unknown event, past or future, or that of her children without the consent of her husband?
and a duration for the risk thereof
3. Promise to pay or indemnify in a fixed or A: Yes. She may also take out insurance on her paraphernal or
ascertainable amount separate property, or on property given to her by her
4. A consideration for the promise known as the husband.
premium
5. A meeting of minds of the parties upon all foregoing INSURANCE BY A MINOR
essentials.
Q: A minor may enter into a valid contract of insurance
NOTE: The parties must also be competent to enter into the (health, life, and accident) provided that certain requisites
contract are present. What are these?

Q: What is the subject matter of insurance? A:

Facultad de Derecho Civil 13

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
1. He is 18 years of age or over
2. The contract is for life, health or accident insurance Sec. 4. The preceding section does not authorize an
3. The insurance is taken on his life insurance for or against the drawing of any lottery, or for or
4. The beneficiary or the person to receive the against any chance or ticket in a lottery drawing a prize.
proceeds of the insurance upon the happening of
the event insured againts is any of the enumerated CONCEPT OF LOTTERY
by law
Q: What is lottery?
Q: What if the minor entered into by a minor is a contract of
insurance other than life, health or accident insurance such A: It extends to all schemes for the distribution of prizes by
as fire, or maritime insurance, what is the effect? chance, such as policy playing, gift exhibition, prize concerts,
raffles at fairs, etc. and various forms of gambling.
A: A contract of insurance other than life, health or accident
insurance such as fire, or maritime insurance, entered into by Essential elements
a minor is not entirely void. It is merely voidable, that is, valid
until annulled in a proper action in court by the minor or his Q: What are the different essential elements of lottery?
legal representative.
A:
Q: In case of voidable insurance contract, what if the minor
did not disaffirmed the contract? 1. Consideration
2. Prizes
A: The insurer cannot escape liability by pleading minority as 3. Chance
a defense because persons who are capable cannot allege
incapacity of those with whom they contracted. Q: What if the prizes did not come out of the fund or
contributions by the participants?
A minor cannot recover the premiums he paid if he cannot
return the benefits received. A: In such case, there is no consideration. Consequently,
there is no lottery.
The result is that an insurance company contarcting with a
minor is bound by the contract; the minor ordinarily is not. Q: Can the sweepstake holder insure himself against the
failure of his ticket to win a prize?
OWNERSHIP OF LIFE INSURANCE POLICY
A: No, because even if he were not to win, it cannot be said
Q: The ownership of a modern life insurance policy is that he suffered a loss of the prize. The failure to win a prize
devided between whom? would not indemnify or create a liability against him.

A: It is divided between the insured and the beneficiary. The CONTRACT OF INSURANCE NOT
insured is the owner of the various marketing and sales A WAGERING CONTRACT
features such as loan and cash surrender values.
While a contract of insurance is based on contingency, it is
One who takes a policy of insurance on his own life becomes not a contract of chance and is not used for profit.
a party to the contract, even though the benefits of the
insurance are to accrue to someone else known as the Q: Distinguish between insurance contrcact and gambling
beneficiary. contract.

Q: To what depends the nature of interest of the INSURANCE CONTRACT GAMBLING CONTRACT
beneficiary? Parties seek to distribute Parties contemplate gain
possible loss by reason of through mere chance
A: It depends on the terns of the insurance contract including mischance
the existing statutes. Insured seeks to avoid Gambler courts fortune
misfortune
Upon the death of the original owner of the policy of Tends to equalize fortune The contract tends ro
insurance taken out by him on the life or health of a minor, all incerase the inequality of
rights and titile and interest in the policy shall be fortune
automatically vest in the minor unless otherwise provided for What one insured gains is not The essence is whatever one
in the policy. at the expense of another person wins from a wager is
Facultad de Derecho Civil 14
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
insured. lost by other waggering party
The purchase of insurance As soon as a party makes a Insured v. Assured
does not create a new and wager, he creates a risk of
therefore no existing risk of loss to himself, where no Q: Strictly speaking, give the difference between
less to the purchaser such risk existed before “assured”  and  “insured”?

Q: What are the similarities between the 2? A:

A: In both cases, one party promises to pay a given sum to INSURED ASSURED
the other upon the occurrence of a given future event, the Refers to the owner of the Refers to the person for
promise being conditioned upon the payment of, or property insured or the whose benefit the insurance
agreement to pay, a stipulated amount by other party to person whose life is the is granted
contract. subject of the contract of
insurance
In either case, one party may receive more than he paid or A synonym for beneficiary
agreed to pay.
Q: Can the business of insurance be carried on by
Sec. 5. All kinds of insurance are subject to the provisions of individuals?
this chapter so far as the provisions can apply.
A: Yes. It can be carried on by individuals just as much as by
Chapter 1 also applies to: corporations and associations.
a. Marine insurance
b. Fire insurance It has been stated also that the State itself may go into
c. Casualty insurance insurance business.
d. Suretyship
e. Life insurance Q: Is the insured always the person to whom the proceeds
f. Any other kind of insurance are paid?

A: No. This person may be the beneficiary designated in the

policy. It is also possible that insured may assign the proceeds
TITLE II of the insurance to someone else.
PARTIES TO THE CONTRACT
Q: Describe the relation between the insurer and the
Sec. 6. Every person, partnership, association, or insured?
corporation duly authorized to transact insurance business
as elsewhere provided in this code, may be an insurer. A: It is that of a contingent debtor and creditor, subject to the
conditions of the policy and not that of trustee and cestui que
PARTIES TO A CONTRACT OF INSURANCE trust.

Q: Who are the 2 parties in a contract of insurance? Q: If the wife insures the life of her husband for her own
benefit, who is the assured and the insured respectively?
A:
A: The wife is the assured and the husband is the insured.
1. Insurer- the party who assumes or accepts the risk of
loss and undertakes for a consideration to indemnify Q: Who is the beneficiary?
the insured or to pay him a certain sum on the
happening of specified contingency or event; A: He is the person designated by the terms of the policy as
rd
synonymous with assurer or underwriter the one to receive the proceeds of the insurance. He is the 3
party in a contract of life insurance for whose benefit the
2. Insured- the   “second   party”   to   the   contract   or   the   policy is issued and to whom the loss is payable.
person in whose favor the contract is operative and
who is indemnified against, or is to receive a certain WHO MAY BE AN INSURER
sum upon the happening of a specified contingency
or event; synonymous with assured. Q: Who may be an insurer?

A:
Facultad de Derecho Civil 15
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
1. Foreign or domestic insurance company or
corporation A: Yes. The business of insurance affects public welfare as to
2. Individual, partnership, or association invoke and require governmental regulation.

Q: What is the requirement before an individual, Sec. 7. Anyone except a public enemy may be insured.
partnership, corporation or company may transact
insurance business in the Philippines? CAPACITY OF PARTY INSURED

A: Q: Who may be insured?

1. They must fist obtain a certificate of authority for that A:

purpose from the Insurance Commissioner who may
refuse to issue such certificate of authority if in his 1. Natural person
judgment such refusal will best promote the interests of a. He must be competent to make a contract
the people of this country. b. He must possess an insurable interest in the
subject of the insurance
2. They  must  be  “possessed  of  the  capital  assets  required  of   c. He must not be a public enemy
an insurance corporation doing the same kind of business
in  the  Philippines  and  invested  in  the  same  manner.” 2. Juridical person
Ex: partnership
Insurance corporation
XPN: public enemy
Q:  What  is  an  “insurance  corporation”?
NOTE: Sec. 3 specifically authorizes minors, 18 years or more
A: Corporations formed or organized to save any person or to take out insurance payable to limited class of beneficiaries.
persons or other corporations harmless from loss, damage, or
liability arising from any unknown or future or contingent Q:  Who  is  a  “public  enemy”
event, or to indemnify or to compensate any person or
persons or other corporations for any such loss, damage, or A: It designates a nation with whom the Philippines is at war
liability, or to guarantee the performance of or compliance and it includes every citizen or subject of such nation. It may
with contractual obligations or the payment of debt of others also mean alien enemy.
(Sec. 185).
Q: Are mobs, however numerous, they may be, or robbers
The last part of the definition refers to suretyship. or thieves considered also as public enemy?

For the purpose of this Code, the terms   “insurer”   and   A: Yes.
“insurance   company”   shall   include   all   individuals,  
partnerships, associations, or corporations, including Q: Discuss the doctrine under Filipinas Cia de Seguros v.
government-owned or controlled corporations or entities, Christern Huenefeld.
engaged as principals in the insurance business, excepting
mutual benefit associations. Unless the context otherwise A: During wartime, a private corporation is deemed an enemy
requires, the terms shall also include professional reinsurers corporation although organized under Philippine laws if they
defined in section two hundred eighty (Sec. 184). are controlled by enemy aliens. This is the so-called “control  
test.”
BUSINESS OF INSURANCE AFFECTED
WITH PUBLIC INTEREST Control test

Q: What is the effect of having the business of insurance Q: What is the so-called  “control  test”?
affected with public interest?
A: Under this test, a corporation is deemed to have the same
A: It is subject to regulation and control by the state by virtue citizenship as the controlling stockholders in time of war.
of the exercise of its police power or in the interest of public
convenience and the general good of the people. EFFECT OF WAR ON EXISTING INSURANCE CONTRACTS

Q: A law was passed requiring companies to file schedule of Q: What is the effect of war on existing insurance contracts
rates and prohibiting discriminatory rates. Is the law valid? where the parties are rendered as enemy aliens?

Facultad de Derecho Civil 16

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

A: By the law of nations, all intercourse between citizens of INSURABLE INTEREST OF MORTGAGEE
belligerent powers which is inconsistent with a state of war is AND MORTGAGOR
prohibited.
The mortgagor and the mortgagee have each an insurable
Note that the purpose of war is to cripple the power and interest in the property mortgaged and this interest is
exhaust the resources of the enemy. It is inconsistent that the separate and distinct from the other.
subjects of one country should lend their assistance to
protect by insurance. Q: What if the insurance is taken by one in his own name
only and in his own favor alone?
Q: What if the parties are not rendered enemy aliens?
A: It does not inure to the benefit of the other.
A: If the parties are not rendered enemy aliens by the
intervention of the war, the policy continues to be Q: What is the extent of insurable interest of mortgagor?
enforceable according to its terms and the laws governing
insurance and the general rules regarding contracts. A: The mortgagor of property, as owner, has an insurable
interest therein to the extent of its value, even though the
Q: What is the rule with respect to property insurance? mortgage debt equals such value.

A: An insurance policy ceases to be valid and enforceable as Q: What is the reason for this?
soon as an insured becomes public enemy.
A: The loss or destruction of the property insured will not
Q: What is the rule with respect to life insurance? extinguish his mortgage debt.

A: United States Rule declares that the contract is not merely Q: What is the extent of the insurable interest of
suspended but is abrogated by reason of nonpayment of mortgagee?
premiums, since the time of the payment is peculiarly of the
essence of the contract. However, the insured is entitled to A: The mortgagee or his assignee as such has an insurable
cash or reserve value of the policy which is the excess of interest in the mortgaged property to the extent of the debt
premiums paid over the actual risk carried during the years secured, since the property is relied upon as security thereof,
when policy had been in force. and in insuring, he is not insuring the property itself but his
interest or lien thereon.
Q: What is the effect where loss occurs after end of war?
His interest is prima facie the value mortgaged and extends
A: The termination of the war does not revive the contract. only to the amount of debt, not exceeding the value of the
Consequently, the insurer is not liable even if the loss is mortgaged property.
suffered by the insured after the end of the war. Such interest continues until the mortgage debt is
extinguished.
Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name Q: What is the extent of amount of recovery?
providing that the loss shall be payable to the mortgagee, or
assigns a policy of insurance to a mortgagee, the insurance A: The mortgagor cannot recover upon the insurance beyond
is deemed to be upon the interest of the mortgagor, who the full amount of his loss and the mortgagee, in excess of
does not cease to be a party to the original contract, and the credit at the time of the loss nor the value of the property
any act of his, prior to the loss, which would otherwise mortgaged.
avoid the insurance, will have the same effect, although the
property is in the hands of the mortgagee, but any act INSURANCE BY MORTGAGEE OF HIS OWN INTEREST
which, under the contract of insurance, is to be performed
by the mortgagor, may be performed by the mortgagee Q: What is the right of mortgagee in case of loss?
therein named, with the same effect as if it had been
performed by the mortgagor. A: Where the mortgagee, independently of the mortgagor,
insures in his own interest in the mortgaged property, he is
entitled to the proceeds of the policy in case of loss before
the payment of the mortgage.

Facultad de Derecho Civil 17

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Q: What is the effect of subrogation of insurer to the right of 3. Any act which under the contract of insurance is to
mortgagee? be performed by the mortgagor may be performed
by the mortgagee with the same effect
A: The mortgagee is not allowed to retain his claim against 4. In case of loss, the mortgagee is entitled to the
the mortgagor but it passes by subrogation to the insurer to proceeds to the extent of his credit
the extent of the insurance money paid. 5. Upon recovery by the mortagagee to the extent of
his credit, the debt is extinguished.
Q: What is the effect of change of creditor?
The rule on subrogation by the insurer to the right of the
A: The payment of the insurance to the mortgagee by reason mortgagee does not apply in this case.
of the loss does not relieve the mortgagor from his principal
obligation but only changes the creditor. EFFECT OF STANDARD AND OPEN
CLAUSES IN FIRE INSURANCE POLICY
INSURANCE BY MORTGAGOR OF HIS OWN INTEREST
Q: What is the effect if a fire insurance policy contains a
Mortgagor may insure his own interest as owner for his own “standard  or  union  mortgage  clause”?
benefit. In case of loss the insurance proceeds do not inure to
the benefit of the mortgagee. A: The acts of the mortgagor do not affect the mortgagee.

Q: What are the ways where the mortgagee may be made Q: What is the purpose of the clause?
the beneficial payee?
A: To make a separate and distinct contract of insurance on
A: the interest of the mortgagee.

1. He may become the assignee of the policy with the Q:  What  is  an  “open  or  loss-payable  mortgage  clause”?
consent of the insurer
2. He may be the mere pledgee without such consent A: It merely provides for the payment of loss, if any, to the
3. A rider, making the policy payable to the mortgagee mortgagee as his interest may appear and under it, the acts
“as  his  interest  may  appear”  may  be  attached of the mortgagor affect the mortgagee.
4. A  “standard mortgage clause”  containing  a  collateral  
independent contract between the mortgagee and Q: What if the policy is obtained by the mortgagor with a
the insurer may be attached. loss-payable clause in favor of the mortgagee as his interest
5. The policy, though, by its terms payable absolutely may appear?
to the mortgagor; may have been procured by a
mortgagor under a contract duty to insure for the A: The mortgagee is only a beneficiary under the contract and
mortgagee’s   benefit,   in   which   case   the   mortgagee   recognized as such by the insurer but not made a party to the
acquires an equitable lien upon the proceeds. contract itself.

INSURANCE BY MORTGAGOR FOR BENEFIT OF MORTGAGEE, Any act of the mortgagor which defeats his right will also
OR POLICY ASSIGNED TO THE MORTGAGEE defeat the right of the mortgagee.

Q: What are the legal effects where the mortgagor of Q: What if the insurance contains a mortgage clause which
property effects insurance in his own name providing that reads:   “Loss,   if   any,   shall   be   payable   to   mortgagee   as   its  
the loss shall be payable to the mortgagee, or assigns a interest may appear subject to the terms of this policy?
policy of insurance.
A: It was held that this is clearly a simple loss payable clause,
A: not a standard mortgage clause.

1. The contract is deemed to be upon the interest of RIGHT OF MORTGAGEE UNDER  MORTGAGOR’S  POLICY
the mortgagor; hence, he does not cease to be a
party to the contract The contract of policy is primarily with the mortgagor, but the
rd
2. Any act of the mortgagor prior to the loss, which mortgagee is a 3 party beneficiary.
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of the Q: What is his right before the loss?
mortgagee

Facultad de Derecho Civil 18

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: The mortgagee is a conditional appointee of the The assignee, unless he makes a new contract with the
mortgagor entitled to receive so much of any sum that may insurer, acquires no greater right under the insurance than
become due under the policy as does not exceed his interest. the  assignor  had,  subject  to  the  insurer’s  defenses.

Q: What is his right upon the occurrence of the loss? Q: What will happen in case of assignment or transfer of a
fire insurance policy?
A: Such right becomes absolute.
A: A fire insurance policy before it becomes a fixed liability is
Q: What is his right after the loss? not subject to assignment, being strictly a personal contract,
in the absence of provision in the contract or subsequent
A: consent of the insurer.
1. If the loss happens when the credit is not due, the
mortgagee is entitled to receive the money to apply Q: Why?
to the extinguishment of the debt
2. If the loss happens after the credit has matured, the A: The insurer is naturally concerned about the moral
mortgage may apply the proceeds to the extent of character of the insured and should not be compelled to
his credit. become an insurer to an assignee to whom he would have
declined to issue policy and who would materially alter the
EFFECT OF INSURANCE BY THE MORTGAGEE ON BEHALF OF risks assumed by the insurer without his consent.
THE MORTGAGOR
Q: What will happen in case of assignment or transfer of a
Q: What is the effect of insurance by the mortgagee on marine insurance policy?
behalf of the mortgagor?
A: It is assignable even without the consent of the insurer
A: unless required by the terms of the policy. However, it is
believed that just like a fire insurance, it is not assignable
1. Discharge of debt -upon the destruction of the property, without the consent of the insurer.
the mortgagee is entitled to receive payment from the
insured but such payment discharges the debt if equal to Q: What will happen in case of assignment or transfer of a
it, and if greater than the debt, the mortgagee holds the casualty insurance policy?
excess as trustee for the mortgagor.
A: Insurer’s   consent   is   also   required.   This   type   of   insurance  
2. Right to subrogation -if there is such stipulation that the involves moral hazards at least as great as those of fire
insurer shall be subrogated to the rights of the insurance.
mortgagee, the payment of the policy will not discharge
the debt even though the mortgagee may have procured Q: What will happen in case of assignment or transfer of a
the policy by arrangement with the mortgagor. life insurance policy?

Sec. 9. If an insurer assents to the transfer of an insurance A: The policy may freely be assigned before or after the loss
from a mortgagor to a mortgagee, and, at the time of his occurs, to any person whether he has an insurable interest or
assent, imposes further obligation on the assignee, making a not.
new contract with him, the act of the mortgagor cannot
affect the rights of said assignee. However, an assignment of a life insurance without an
insurable interest, which the insured makes in bad faith and
ASSIGNMENT OR TRANSFER OF INSURANCE POLICY under such circumstances as where there was a preconceived
agreement that the policy was to be assigned for the purpose
Q: What is the effect of an assignment or transfer of the of accomplishing an illegal purpose will not be upheld.
insurance policy?
RIGHT OF MORTGAGOR TO ASSIGN INSURANCE POLICY TO
A: The effect is to substitute the assignee or transferee in MORTGAGEE
place of the original insured in respect to the right to claim
indemnity or payment for a loss as well as the obligation to The right of mortgagor to assign or transfer an insurance policy
perform the conditions, if any, of the policy. is recognized under Sec. 8.

Facultad de Derecho Civil 19

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

EFFECT OF NEW CONTRACT BETWEEN INSURER AND A: The price is the measure while the latter refers to every
MORTGAGEE-ASSIGNEE benefit or advantage arising out of or depending on such
thing.
The assignment of a fire insurance policy by the mortgagor to
the mortgagee with the consent of the insurer does not EXC: With regard to life insurances, to have an insurable
convert the contract into one of indemnity to the mortgagee. interest in the life of a person, the expectation of the benefit
from the continued life of that person need not necessarily
The contract remains with the mortgagor as it is his interest be of a pecuniary nature.
alone that is covered. The assignment operates merely as an
equitable transfer of the policy so as to enable the mortgagee NECESSITY OF INSURABLE INTEREST
to recover the amount due in case of loss subject to the
conditions of the policy. The existence of insurable interest is a primary concern in
However, where a new and distinct consideration passes determining the liability of an insurer under the policy of the
between from the mortgagee to the insurer, a new contract is insurance.
created between them. A novation of the original contract
takes place. Hence, the act of the mortgagor cannot affect the Q: What is the effect of the presence or absence of such
right of the mortgagee, the assignee. interest?

A: Its existence gives a person the legal right to insure the

subject of the policy. In the absence of which, the person
TITLE 3 insuring would be gambling which is prohibited by law. Thus,
INSURABLE INTEREST it is necessary to the validity of an insurance and a policy
issued to a person without interest in the subject matter is a
Sec. 10. Every person has an insurable interest in the life and mere wager and is void for illegality.
health:
Q: State the reasons why the law makes such requirement
(a) Of himself, of his spouse and of his children; that the person insuring must have insurable interest over
(b) Of any person on whom he depends wholly or in part for the subject?
education or support, or in whom he has a pecuniary
interest; A:
(c) Of any person under a legal obligation to him for the
payment of money, or respecting property or services, of 1. As deterrence to the insured and which renders wager
which death or illness might delay or prevent the policies invalid. A wager policy is contrary to public
performance; and interest and is demoralizing in that:
(d) Of any person upon whose life any estate or interest
vested in him depends. a. It allows the insured to have an interest in the
destruction of the subject matter rather than its
Q: What is insurable interest? preservation.
b. It affords inducement or temptation to bring to
A: It is one of the most basic of all requirements in insurance. pass the event so that the insurance becomes
It is the interest which the law requires the owner of an payable.
insurance policy to have in the person or thing insured.
2. As a measure of limit of recovery
Pecuniary in nature- where the insured has a relation or
connection with or concern with the subject matter that he The insurable interest accordingly is the measure of proper
will derive pecuniary benefit or advantage from its limit of his provable loss under the contract. The insurance
preservation and will suffer pecuniary loss or damage from its should not be a means of making a net profit from the
destruction, termination or injury. happening of the event insured against.

Q: Does the law require a right to the whole thing? LIFE INSURANCE

A: No, it may be a part of it. Q: What are the 2 classes of life policies?

Q: State the difference between the price and the interest in A:

a thing.
Facultad de Derecho Civil 20
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
1. Insurance   upon   one’s   life- those taken out by the because from the premiums
insured upon his life for the benefit of himself, or his of the policy which the
estate, in case it matures only at his death, or for the insured pays out of liberality,
benefit of a third person who may be designated as the beneficiary will receive
beneficiary. the proceeds or profits of
said insurance.
Q: Does it need an insurable interest?
Family Code
A: No, an application therefor does not usually present
an insurable interest question. Art. 87. Every donation or grant of gratuitous advantage,
direct or indirect, between the spouses during the marriage
2. Insurance upon life of another- taken out be the insured shall be void, except moderate gifts which the spouses may
upon the life of another. In this case, such person must give each other on the occasion of any family rejoicing. The
have an insurable interest in the life of that person. prohibition shall also apply to persons living together as
husband and wife without a valid marriage. (133a)
INSURABLE INTEREST IN  ONE’S  LIFE
A life insurance policy taken by a spouse on his life in favor of
The question of insurable interest is immaterial where the the other takes effect after the death of the insured.
policy is procured by the person whose life is insured.
INSURABLE INTEREST IN LIFE OF ANOTHER
1. Insurance taken out by the insured in his life for the
benefit of another- where insurable interest is really 1. Insurance for benefit of the insured- the policy of the
required only as evidence of the good faith of the law requires that the assured shall have an interest to
parties. The mere fact that a man on his own motion preserve the life insured in spite of the insurance, rather
insures his life for the benefit either of himself or of than destroy it because of the insurance.
another is sufficient evidence of good faith to validate
the contract. 2. Insurance for the benefit of a third party- when the
owner of the policy insures the life of another and
2. When the insurance regarded a wager policy- this is designates third party as beneficiary, both of them must
the exemption to the abovementioned rule. have an insurable interest in the life of the cestui que vie.

Q: What are the requirements for a wagering policy? The insurable interest must be pecuniary or founded upon
the close relationship between the parties. Thus, the mere
A: fact the 2 persons are engaged to be married does not give
one an insurable interest in the life of another.
1. That the original proposal to take out insurance was
that of the beneficiary; INSURABLE INTEREST IN LIFE OF A PERSON ON WHOM HE
2. That premiums are paid by the beneficiary; and DEPENDS WHOLLY OR IN PART FOR EDUCATION OR
3. That the beneficiary has no interest, economic or SUPPORT, OR IN WHOM HE HAS A PECUNIARY INTEREST
emotional in the continued life of the insured.
1. When mere blood relationship sufficient- in U.S. cases,
A person has an insurable interest in his own life. Yet if the pecuniary benefit is not the only test, blood relationship
policy is applied for and owned by someone other than the is also considered. Accordingly, natural affection is
insured, the applicant-owner must have an insurable interest considered sufficient and more powerful to protect the
in the life of the insured. life of the insured than any other consideration. The
policy should be obtained in good faith.
Q: What are the similarities between a life insurance and a
civil donation? The   following   have   an   insurable   interest   in   each   other’s   life  
since they are obliged to support each other (Art. 195 of
Donation Life insurance Family Code):
An act of liberality whereby a
person disposes gratuitously Art. 195. Subject to the provisions of the succeeding articles,
a thing or right in favor of the following are obliged to support each other to the whole
another who accepts it. extent set forth in the preceding article:
Consideration: Liberality
A beneficiary is like a donee, (1) The spouses;
Facultad de Derecho Civil 21
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
(2) Legitimate ascendants and descendants; INSURABLE INTEREST OF CREDITOR
(3) Parents and their legitimate children and the legitimate IN THE LIFE OF HIS DEBTOR
and illegitimate children of the latter;
(4) Parents and their illegitimate children and the legitimate Extent of interest- for the purpose of protecting his debt but
and illegitimate children of the latter; and only to the extent of the amount of the debt and the cost of
(5) Legitimate brothers and sisters, whether of full or half- carrying  the  insurance  on  the  debtor’s  life.   Yet   it  should   not  
blood (291a) be so disproportionate to the amount of debts and liens
thereon plus the cost of the insurance that the policy is
Art. 196. Brothers and sisters not legitimately related, merely a wagering or speculative one.
whether of the full or half-blood, are likewise bound to
support each other to the full extent set forth in Article 194, Right of debtor in insurance taken by the creditor- the
except only when the need for support of the brother or contact is between the insurer and the insuring creditor
sister, being of age, is due to a cause imputable to the inasmuch as by law, the creditor is given an insurable interest
claimant's fault or negligence. (291a) on the life of the debtor. It does not inure to the benefit of
the debtor unless the contrary is stipulated.
2. When pecuniary benefit essential- Yet, in other cases,
mere blood relationship does not create an insurable Extent of the amount that may be recovered by the insuring
interest in the life of another. Under the law, there must creditor- principle of indemnity applies in this kind of
be an expectation of pecuniary benefit in the life of the insurance as in the case of property insurance. Creditor can
insured to sustain the insurance. Nonetheless, the only recover such amounts as remain unpaid at the time of
expectation need not have a legal basis whatever; it is the death of the debtor.
sufficient that it be actual.
Q: What is the effect if the whole amount has been
A man who sends a girl to school and pays her expenses is discharged?
sufficient to give her an insurable interest in his life.
A: In such case, recovery on the policy is no longer
A corporation has an interest in the life of an officer on permissible.
whose service the corporation depends for its prosperity and
whose death will be the cause of a substantial pecuniary loss Where insurance taken by debtor for the benefit of creditor-
to it where a debtor in good faith insures his life for the benefit of
. the creditor, full payment of the debt does not invalidate the
In case of employees, insurable interest is dependent upon policy; in such case the proceeds shall go to the estate of the
the value of the employee to the business. debtor.

INSURABLE INTEREST OF A PERSON IN LIFE OF ANOTHER Where debt becomes legally unenforceable- like if it is
UNDER A LEGAL OBLIGATION TO HIM already barred by the stature of limitations or of the debtor’s  
discharge in insolvency—does not cut off the insurable
1. Related by contract or commercial relation- that a right interest of the creditor although there is no reasonable
possessed by him will be extinguished or impaired by the expectation of the debtor becoming solvent so as to be able
death or illness of the other may lawfully procure to pay his debt.
insurance  on  the  other’s  life.
e.g. Employer to the Employee and vice versa; a partner BASIS: the moral and equitable obligation of the debtor to
to his co-partner; a surety to his principal. pay his debt is not destroyed by the discharge which only
affects the legal obligation to pay.
2. Risk that performance of obligation might be delayed or
prevented-it must appear that the death or illness of the Yet on our law, it is clear that a creditor may not insure the
insured person who is under a legal obligation might life of the debtor unless the latter has a legal obligation to
delay or prevent its performance. him for the payment of money.
e.g. a partner has no insurable interest against another if
both have no capital invested and neither is indebted to INSURABLE INTEREST IN LIFE OF A PERSON UPON WHICH AN
the other. ESTATE OR INTEREST DEPENDS

One may insure the life of a person where the continuation of

the estate or interest vested in him who takes the insurance
depends upon the life insured.

Facultad de Derecho Civil 22

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Q: Is the consent of the person whose life is insured b. Third person through mere bounty of insured-
essential to the validity of the insurance taken by another? beneficiary may be one who gives no consideration
whatsoever but is designated as recipient of the
A: There are 2 conflicting schools of thought regarding this: proceeds of the policy through mere bounty of the
insured.
1. All contract without the consent of the insured are
contrary to public policy and therefore, void. In these cases, the proceeds of the life insurance policy
Accordingly, the danger to the public of become the exclusive property of the beneficiary upon the
circumstances like hastening the death of the death of the insured.
insured by criminal means is obviated when the
insured has given his consent to the contract. His Q: What if the insured before dying became insolvent, who
very consent is strong evidence of the good faith of should be entitled to the proceeds?
the person procuring the insurance.
2. According to sec. 10 however, the consent of the A: It should be paid to the beneficiary and not to the assignee
person insured is not essential so long as it could be in insolvency.
proved that the assured has a legal interest at the
inception of the policy. Q: What are the limitations in the appointment of the
beneficiary?
Sec. 11. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has A:
expressly waived this right in said policy.
G.R: A person may take out a policy of insurance on his own
BENEFICIARY life and make it payable to whomsoever he pleases whether
the beneficiary lacks insurable interest or not. However, he
Q: Who is a beneficiary? should act in good faith and without intent to make the
transaction merely a wagering contract.
A: He is the person who is named or designated in a contract
of life, health, or accident insurance as the one who is to EXC: Article 2012 of the NCC in relation to Art. 739.
receive the benefits which become payable upon the death of
the insured. Art. 2012. Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of
-refers to those persons who though not parties to the a life insurance policy by the person who cannot make any
contract are mentioned in it as the intended recipients of the donation to him, according to said article. (n)
proceeds or benefits of the insurance if the insured risk
occurs. Art. 739. The following donations shall be void:

-those who secure insurance for their own benefit upon the (1) Those made between persons who were guilty of
lives of others. adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same
Q: What are the kinds of beneficiary? criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descedants
A: and ascendants, by reason of his office.

1. Insured himself- he may himself be the person who In the case referred to in No. 1, the action for declaration of
procures the contract and pay the premiums nullity may be brought by the spouse of the donor or donee;
necessary to maintain it; an immediate party to the and the guilt of the donor and donee may be proved by
contract. He is the assured. preponderance of evidence in the same action. (n)
2. Personal representatives; and
3. Someone other than the insured: Q: For the prohibition to apply, is it required that there be
previous conviction for adultery or concubinage?
a. Third person who paid a consideration- third person
named as beneficiary may have paid a valuable A: No.
consideration for his selection as such; insured may
have taken the policy for the benefit of a creditor or Q: To whom shall the proceeds of the policy accrue in the
to secure some other obligation. absence of any beneficiary named in the life insurance
policy or where the designated beneficiary is disqualified?

Facultad de Derecho Civil 23

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
1. View   that   beneficiary’s   representative   is   entitled   to  
A: It shall go to the estate of the deceased insured. insurance proceeds- where the right to change the
designated beneficiary is expressly waived, that if the
Q: State the rule regarding the right of the insured to change beneficiary dies before the insured, his rights so vested
the beneficiary in life insurance. should pass to his representatives. Thus, upon the death
of the insured, the proceeds of the policy should belong
A: Whether or not the policy reserves to the insured the right to the representatives of the beneficiary.
to change the beneficiary, he has the power to so change the 2. View that the estate of the insured is entitled to
beneficiary without the consent of the latter who acquires no insurance proceeds- especially where the designation is
vested right but only an expectancy of receiving the proceeds subject to the express condition to pay the beneficiary if
under the insurance. he  survives  the  insured  or  “if  surviving.”

Effect of death Words used in designating the beneficiaries of a life policy

will not be given their technical significance but will be
Q: What is the effect of the death of the insured? construed broadly in order that the benefit of the insurance
shall be received by those intended by the insured ads the
A: The   right   or   the   insured’s   power   to   extinguish   the   object of his bounty.
beneficiary’s   interest   must   be   exercised   while   the   former   is  
alive. Thus, it ceases at his death and cannot be exercised by The following may be designated as beneficiaries:
his personal representatives or assignees.
1. Insured or his estate;
Q: What is the effect if the right to change is waived? 2. Specifically designated person or persons; and
3. Class or classes of persons
A: In such case, the insured has no power to make such
change without the consent of the beneficiary. In such case: a. Children- include an adopted child; or an adult child not
forming part of the household of the insured; or after-
The beneficiary acquires an absolute and vested interests from born children of a marriage subsequently contracted. It
the date of its issuance and delivery. Thus, he has a property means a descendant of the first degree and is never
right on the policy which could not be deprived without his intended to include grandchildren.
consent.
If the children were named individually, other children cannot
Neither can a new beneficiary be added for this would in effect share in the proceeds unless the insured amend his
reduce  the  latter’s  vested  rights. designation to include them.

Q: Can the insured destroy the contact by refusing to pay b. Husband, wife or widow- the  word  “wife”  is  regarded  as  
the premiums? a descrtiptio personae. Thus, the fact that one who
otherwise answers the description does not have the
A: No, the beneficiary can always pay them to protect his legal status of the wife of the insured does not prevent
interest. Accordingly, the fulfillment of the obligation may be her from taking as beneficiary as when she is designated
made by a third person even against the will of the debtor by name  although  the  words  “his  wife”  are  added.    
and if he has an interest in the fulfillment of the obligation,
even if against the will of the creditor. But if the beneficiary is not named but is designated merely
by status, the legal husband etc. as ascertained at the death
Q: How do we measure the insurable interest of the of the injured is entitled to the benefits of such insurance.
beneficiary in a policy?
c. Husband and children; wife and children-if the
A: It should be measured on its full value and not on its cash designation  is  made  to  the  insured’s  “wife  and  children”  
surrender value. or   “my   wife   and   children”,   the   insurance   is   deemed   for  
the benefit of all the children of the insured whether by
BENEFICIARY PREDECEASED THE INSURED the named wife or those of another.

Q: What will happen in case the beneficiary dies before the d. Family- the court in this case will ascertain whether that
insured? person was so regarded by the insured. If he was so
regarded, he will be allowed to participate although in no
A: way related to the insured.

Facultad de Derecho Civil 24

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
e. Heirs or legal heirs- these terms will not be construed as 2. Death by self-destruction- death by suicide is not by
indicating merely the heirs at law but rather that class of implication exempted from the risks assumed by the
persons who would take the property of the insured in insurer especially where the insurance is for the benefit
case he died intestate. of another rather than the insured.

f. Estate or legal representatives of the deceased- to be BUT:

construed in their strict technical sense and the courts
will ordinarily assume that they are used to mean Sec. 87. An insurer is not liable for a loss caused by the
executors or administrators, unless it appears that the willful act or through the connivance of the insured; but he
insured intended to use these expressions in the sense of is not exonerated by the negligence of the insured, or of the
heirs or next of kin. insurance agents or others.

If no beneficiary is designated, the proceeds will go to his Q: What is the reason behind such rule?
legal heirs in accordance with law.
A: In such circumstance, the death is still caused by the
Sec. 12. The interest of a beneficiary in a life insurance voluntary act of the insured, he knowing and intending that
policy shall be forfeited when the beneficiary is the his death shall be the result of his act. But death which is
principal, accomplice, or accessory in willfully bringing about purely accidental even if due to his own carelessness or
the death of the insured; in which event, the nearest negligence is not excluded from the coverage by the words
relative of the insured shall receive the proceeds of said “self-destruction”  or  “death  by  his  own  hands”  and  the  like.  
insurance if not otherwise disqualified.
3. Death by suicide while insane- in the absence of express
INTEREST conditions to the contrary, the suicide of an insured
while insane does not discharge the insurer from his
Q: What does interest mean? liability on his contract. It must have known to that the
insured was subject and the unwitting act of self-
A: It is the right of the beneficiary to receive the proceeds of destruction is as much the consequence of that disease.
the life insurance policy. It does not mean insurable interest
since the beneficiary need not have an insurable interest in 4. Death caused by beneficiary- where the beneficiary
the life of the insured. intentionally brings about the death of the insured under
such circumstances as to amount to a felony, he cannot
Q: Who are the nearest relatives of the insured? receive any benefit under the contract of insurance.
Thus, his interest shall be forfeited and the nearest
A: relative of the insured shall receive the proceeds of the
said insurance if not otherwise disqualified.
1. The legitimate children;
2. The father and mother, if living; EXC: When such killing was accidental or in self-defense
3. Grandfather and grandmother, or ascendants or where the beneficiary was insane, the rights of the
nearest in degree, if living; beneficiary under the policy are not affected. The same is
4. The illegitimate children; true   where   the   insured’s   death   was   not   intentionally  
5. The surviving spouse; and caused.
6. Collateral relatives, to wit:
a. Brothers and sisters of the full blood; Thus, it is well-settled that a deliberate killing of the insured
b. Brothers and sisters of the half-blood; and by the beneficiary suffices to work a forfeiture.
c. Nephews and nieces
7. In default of the above, the State 5. Death caused by violation of law- the mere fact that the
insured dies while he was committing a felony or
Q: What is the liability of the insurer on death of insured? violating a law would not warrant denial of liability. To
avoid liability, the insurer must establish that the
A: commission of the felony or the violation of law was the
cause or had a causal connection with the accident
1. Death at the hands of the law- according to Prof. Vance resulting in the death of the insured.
in his treatise on insurance, the death of the insured at
the hands of the law—as by legal execution-is one of the An act or omission punishable by a special law is not a felony
risks assumed by the insurer in the absence of a valid but more of the general term-crime, offense, transgression or
policy exception. infraction of law. Thus, the act of driving a motorcycle

Facultad de Derecho Civil 25

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
without the license to do so (although a violation of the Land
Transportation and Traffic Code) would not constitute a Sec. 14. An insurable interest in property may consist in:
felony. It must be shown that the violation of law was the
cause or had causal connection with the accident. a. An existing interest;
b. An inchoate interest founded on an existing
Sec. 13. Every interest in property, whether real or personal, interest; or
or any relation thereto, or liability in respect thereof, of c. An expectancy, coupled with an existing interest in
such nature that a contemplated peril might directly that out of which the expectancy arises.
damnify the insured, is an insurable interest.
Q: Does the interest in a property need to be an existing
INSURABLE INTEREST IN PROPERTY one?

Q: What is an insurable interest in property? A: No, it may consist merely of an inchoate interest or
expectancy.
A: It may be in the property itself (ownership) or any relation
thereto (interest of a trustee), or liability in respect thereto An existing interest- legal title or equitable title
(interest of a carrier).
Q: Give examples of persons who have insurable interest
Q: Who has an insurable interest in property? arising from legal title.

A: Anyone who derives benefit from its existence or would A:

suffer loss from its destruction.
1. Trustee-in case of seller of property not yet
The occurrence of the loss may be uncertain and it is not delivered;
necessary that the interest is such that the event insured 2. Mortgagor- in case of a property mortgaged;
against would necessarily subject the insured to loss. 3. Lessee and sub lessee; and
4. Assignee of property for the benefit of creditors
Q: In an insurance of property, is title or right to possession
not essential? A representative (an executor, administrator, trustee, or
receiver) who holds legal title in such capacity has sufficient
A: No, title in the property as well as possession or right to insurable interest for the purpose of taking out insurance on
possession is not essential. It is enough that he will suffer loss the property under his control but nay proceeds from such
as the proximate result of its damage or destruction. insurance are to be held for the benefit of those whose
benefit the representative is acting.
Mortgagor who sold the mortgaged premises to a vendee has
an insurable interest in the property because of his personal Q: Give examples of persons who have insurable interest
liability for the debt and his right to be subrogated to the arising from equitable title.
mortgage security in case he should be compelled to make
payment. A:

Insurable interest is more of a concern in the conservation of 1. Purchaser of property before delivery;
the property and such a relation to or connection with it as 2. Mortgagee;
will necessarily entail a pecuniary loss in case of its injury or 3. Mortgagor after foreclosure but before expiration;
destruction. Nonetheless, the expectation of benefit must of the period within which redemption is allowed;
have a basis of legal right although the person insured has no 4. Beneficiary under a deed of trust;
title. 5. Creditors under a deed of assignment;
6. A judgment debtor whose property has been seized
Q: Is a mere factual expectation of loss sufficient? under execution until the right to redeem or the
right to have the sale set aside has been lost;
A: No, such expectation not arising from any legal right or 7. Builders and constructors of buildings pending the
duty in connection with the property does not constitute an payment of the construction price;
insurable interest. 8. Purchaser of an option to buy real estate

Yet,   this   type   of   interest   of   “factual   expectation,”   though   is   Q: Is an inchoate right considered as sufficient? Cite
insufficient in strict indemnity insurance, will suffice in life examples.
insurance.

Facultad de Derecho Civil 26

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: Yes but it must be founded on an existing interest. Parents and children and spouses can insure the life of each
other
A stockholder in the property of the corporation of which he
is a stockholder—his insurable interest is limited to the extent Q: Can a general or unsecured creditor insure specific
of the value of his interest or to his share in the distribution property of his debtor who is alive?
of the corporate assets upon dissolution. Note that a
stockholder has neither legal nor equitable title to assets of A: No, even though destruction of such property would
the corporation.A partner with respect to property of the firm render worthless any judgment he might obtain.

Q: What about an expectancy, will that qualify as an But an unsecured creditor may insure the property of a
insurable interest? Give examples. deceased debtor since all personal liabilities ceases with the
death of the debtor. The proceedings to subject the estate to
A: Yes, but it must be coupled with an existing interest in that the payment of the debt of the deceased debtor are in rem.
out of which such expectancy arises.
A  judgment  creditor  has  an  insurable  interest  in  the  debtor’s  
A farmer may insure future crops if the same are to be grown property as he has been held to have insurable interest in the
on land owned by him at the time of the issuance of the debtor’s  property  as  he  has  a  right  to  levy  on  such  property  as  
policy or are to be raised by him in the land of another, may be necessary to satisfy the judgment. Yet, he has to
provided that it will belong to him when produced. show that the debtor has no other property out of which the
judgment may be satisfied.
A business owner with respect to a contingency which may
cause loss of profits An unsecured creditor has an insurable interest in the life of
his debtor to the extent of the amount of the debt.
A workingman has an insurable interest in any building he
may have contracted to repair or an artist might insure the Also, a person named as beneficiary in a will has no insurable
structure for the interior decoration of which he had been interest  in  a  property  designated  before  the  testator’s  death.  
employed. Accordingly, the will can be revoked anytime before the
death of the testator unless he has expressly waived this right
Sec. 15. A carrier or depository of any kind has an insurable in the policy.
interest in a thing held by him as such, to the extent of his
liability but not to exceed the value thereof. Sec. 17. The measure of an insurable interest in property is
the extent to which the insured might be damnified by loss
The basis of this provision is that the loss of the thing may or injury thereof.
cause liability to the carrier or depositary to the extent of its
value. A contract of insurance is one of indemnity. Thus, any
contract that gives to the insured more than indemnity
This includes bailees to protect him against the loss of the against his actual loss that may be suffered is in the nature of
benefits to which he is entitiled a wagering policy contrary to public policy and void.

Under the General Bonded Warehouse Act—a warehouse Sec. 18. No contract or policy of insurance on property shall
man license to engage in the business of receiving be enforceable except for the benefit of some person having
commodities for storage is required to insure the same an insurable interest in the property insured.
against fire.
BASIS: Principle of Indemnity. Thus, an insurance taken out
Sec. 16. A mere contingent or expectant interest in anything, by a person on property in which he has no insurable interest
not founded on an actual right to the thing, nor upon any is void.
valid contract for it, is not insurable.
Q: Cite an example where the rule will not apply.
A mere hope or expectation of benefit uncoupled with ay
present legal right will not support a contract of insurance. A: In case the real intention was to insured the goods for P
15,000.00 but instead it was the building in which the goods
A  father  cannot  insure  his  son’s  property  nor  can  a  son  insure   were stored (and which was not owned by the insured or had
the property that he expects to inherit from his father as his any insurable interest thereto). In such case, the insured can
interest is merely an expectancy. recover in case of loss of the goods.

Facultad de Derecho Civil 27

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Q: What will happen to the proceeds of the insurance in
such case where the insurance is void? PERSONAL ACCIDENT INSURANCE CONTRACTS

A: The premium will be returned to the insured unless he is in NOTE: Not contracts of indemnity. Life and limb are not
pari delicto with the insurer. susceptible to exact or uniform valuation.

In a life insurance taken by a person on his own life, the Yet if a person effects an personal accident insurance on the
beneficiary need not have an insurable interest in the life life of another person, the amount recoverable is the loss
insured. sustained by the person who effected the policy.

Doctrine of waiver or estoppel In theory, such contract becomes a contract of indemnity but
it is often impossible exactly to assess the injury suffered.
Q: Does the Doctrine of waiver or estoppel apply in the
aforesaid situation? HEALTH INSURANCE CONTRACTS

A: No, since the public has an interest in the matter NOTE: Not contracts of indemnity. But those covered by
independent of the consent or concurrence of the parties. medical expenses are contracts of indemnity.

CONTRACTS OF MARINE OR FIRE INSURANCE HEALTH CARE AGREEMENT

The amount of indemnity may be determined after the loss or An agreement with a health maintenance organization (HMO)
is previously fixed in the contract. is in the nature of non-life insurance which is primarily a
contract of indemnity.
The insured cannot recover in excess of his actual loss.
Payment must be made to the party who incurred the
In valued policies however, the valuation of the thing insured expenses.
is conclusive between the parties thereto in the adjustment
of loss. Sec. 19. An interest in property insured must exist when the
insurance takes effect, and when the loss occurs, but not
The principle of indemnity will not also apply in case the exist in the meantime; and interest in the life or health of a
insurer agreed to repair or replace the thing insured with a person insured must exist when the insurance takes effect,
new one even though the cost of the undertaking may exceed but need not exist thereafter or when the loss occurs.
the original amount of the insurance.
BASIS: To prevent the issue of wagering policies.
LIABILITY INSURANCE CONTRACTS
Q: When should insurable interest in property exist?
Contracts of indemnity against liability and not against loss.
A:
Accordingly,   the   insurer’s   promise   is   to   pay   the   proceeds   of  
the policy in behalf of the insured to a third person to whom 1. On the date of the execution of the contract
the insured is liable. 2. On the date of the occurrence of the risk secured
against
Hence, if the insured suffers no loss because the liability to
third persons cannot be enforced, the insurer has no Q: What is the effect if the above rule is not met?
obligation to pay the proceeds.
A: The policy is void. Hence, if a fire occurs after the sale or
LIFE INSURANCE CONTRACTS alienation of the property, the former owner cannot recover
on the policy.
Not contracts of indemnity. The amount fixed payable is not
considered as the true value of the thing insures because the Q: What about in life insurance, when is the insurable
life of a person is priceless. It is simply a measure of interest requirement satisfied?
indemnity which the insurer has bound himself to pay the
insured. A: If the same exists at the time the policy is procured, even if
it  has  ceased  to  exist  at  the  time  of  the  insured’s  death.  
The amount for which a person is insured is governed by the
amount of premium that he contracted to pay.

Facultad de Derecho Civil 28

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
In liability insurance, questions of insurable interest are not
particularly important. It necessarily exists when the liability A: It is to provide against changes which might supply a
of the insured to a third party attaches. motive to destroy the property or might lessen the interest of
the insured in protecting and guarding it.
Insurable interest in life and property
Q: What do you mean by transfer of interest?
Q: Distinguish between insurable interest in life and
property. A: It means absolute transfer of the property insured such as
the conveyance of the property by means of an absolute
A: deed of sale.

Life Insurance Property Insurance Thus, interest in the property does not pass by mere
As to extent of insurable interest execution of a pledge or mortgage.
Unlimited Limited to the actual value of
the interest thereon G.R.: Change of interest suspends the insurance
As to time when insurable interest must exist
At the time the policy takes It is necessary that the EXC:
effect and need not exist at insurable interest mist exist
1. In life, health, and accident insurance;
the time of the loss when the insurance takes
2. A change of interest in the thing insured after the
effect and when the loss
occurs, but need not to exist occurrence of an injury which results in a loss;
3. A change of interest in one or more of several things,
in the meantime
separately insured by one policy;
As to expectation of benefit to be derived
4. A change of interest by will or succession on the death of
It need not have any legal There must be legal basis
the insured;
basis whatever. A reasonable however remote to
5. A transfer of interest by one of several partners, joint
probability is sufficient constitute an insurable
owners, or owners in common, who are jointly insured,
without more interest.
to the others;
6. When a policy is so framed that it will inure to the
-no legal right to support if -an heir cannot insure the
benefit of whomsoever, during the continuance of the
there is reasonable ground property he expects to
risk, may become the owner of the interest insured;
for believing that the support inherit.
7. Where there is an express prohibition against alienation
will be continued. -stockholder may insure the
in the policy, in case of alienation, the contract of
property of the corporation
insurance is not merely suspended but is avoided.
although he has no legal
interest whatsoever in such
Sec. 21. A change in interest in a thing insured, after the
property.
occurrence of an injury which results in a loss, does not
affect the right of the insured to indemnity for the loss.
Sec. 20. Except in the cases specified in the next four
sections, and in the cases of life, accident, and health The liability of the insurer becomes fixed after the loss
insurance, a change of interest in any part of a thing insured happened.
unaccompanied by a corresponding change in interest in the
insurance, suspends the insurance to an equivalent extent, Insured has a right to assign his claim against the insurer and
until the interest in the thing and the interest in the the absolute right to transfer the thing insured after the
insurance are vested in the same person. occurrence of the loss.

The transfer of interest of a thing insured does not transfer Sec. 22. A change of interest in one or more several distinct
the policy but suspends it until the same person becomes the things, separately insured by one policy, does not avoid the
owner of both policy and the thing insured. insurance as to the others.

BASIS: Sec. 19 of the Insurance Code Divisible contract and indivisible contract

The contract in this case is not rendered void but is merely Q: What is the distinction between a divisible contract and
suspended by a change of interest. indivisible contract?

Q: State the purpose of the rule against alienation. A:

Facultad de Derecho Civil 29

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: If the transfer occurs without the consent of the insurer
Divisible Contract Indivisible Contract and before the loss occurs.
As to the effect
The cause of consideration is The cause or consideration is Q: What is the effect if the transfer is to a stranger?
made up of several parts. entire or single
A: Such will avoid the policy. It ends the contract of insurance
-if the things are separately -if the things are insured to as to him (the partner), but does not affect the insurance
insured in one policy, the under one policy for a gross as to the others.
contract is divisible and the sum and for an entire
violation of a condition which premium, the contract is Sec. 25. Every stipulation in a policy of insurance for the
avoids the policy with indivisible; change of interest payment of loss whether the person insured has or has not
respect to one or more of the in one or more of the things any interest in the property insured, or that the policy shall
things does not affect the will also avoid the insurance be received as proof of such interest, and every policy
others as to the others executed by way of gaming or wagering, is void.

Whether the contract is entire or severable is a question of Q: What are the stipulations which are declared void under
intention to be determined by the language employed by the this section?
parties.
A:
Sec. 23. A change on interest, by will or succession, on the
death of the insured, does not avoid an insurance; and his 1. Stipulation for the payment of loss whether the
interest in the insurance passes to the person taking his person insured has or has no interest in the subject
interest in the thing insured. matter of the insurance;
2. Stipulation that the policy shall be received as proof
The insurance on property passes automatically on the death of insurable interest- the insurer can always show
of the insured to the heir, legatee or devisee who acquired lack of insurable interest after the issuance of the
interest in the thing insured. policy insurance.

The right to succession is transmitted from the moment of Wager policy

the death of the decedent.
Q: What is a wager policy?
Sec. 24. A transfer of interest by one of several partners,
joint owners, or owners in common, who are jointly insured, A: It is a pretended insurance where the insured has not
to the others, does not avoid an insurance even though it interest in the thing insured and can sustain no loss by the
has been agreed that the insurance shall cease upon an happening of the misfortunes insured against.
alienation of the thing insured.
Q: Who has the right to raise the defense of the absence of
Q: What is the effect of transfer of interest in the insured an insurable interest?
property by a partner, joint owner, etc. to others who are
jointly insured? A: It is available only to the insurer being the only party to the
insurance contract who has a legitimate in interest in raising
A: It will not avoid the insurance. such defense.

The rule is the same even if there is a stipulation that the The insurable interest requirement intends to deter the
insurance shall cease upon alienation of the thing insured. insured from the temptation to bring about by unnatural
means the results of the contingent event.
Q: What is the reason for such rule?

A: That is so because, each partner is interested in the whole

property and the hazard is not increased because the
purchasing partner has acquired a greater interest in the
property by such transfer.

Q: Give the exemption to such rule.

Facultad de Derecho Civil 30

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: To make more definite and certain the general words used
TITLE 4 to describe the risk the insurer undertook to bear.
CONCEALMENT
Exceptions make more definite the coverage indicated by the
Sec. 26. A neglect to communicate that which a party knows general description of the risk by excluding certain specified
and ought to communicate, is called a concealment. risks that otherwise would have been included under the
general language describing the risks assumed.
FOUR PRIMARY CONCERNS OF PARTIES TO
AN INSURANCE CONTRACT Exceptions are also used for the purpose of controlling risks.

Q: What are the 4 primary concerns of the parties to an Ex: In a fire insurance policy, burning caused by lightning may
insurance contract? be excepted from the risks assumed

A: Q: What are the 2 parts of the general description of risk?

1. The correct estimation of the risk which enables the A:

insurer to decide whether he is willing to assume it,
and if so, at what rate of premium? 1. The designation of the specific property interest to
2. The precise delimitation of the risk which be covered
determines the extent of the contingent duty to pay 2. The specification of such of the perils to which the
undertaken by the insurer. property interest would be exposed.
3. Such control of the risk after it assumed as will
enable the insurer to guard against the increase of Warranties and conditions involve facts the existence of
the risk because of the change in conditions which shows the risk to be greater than that intended to be
4. Determining whether a loss occurred and if so, the assumed and operates to create in the insurer the power to
amount of such loss. extinguish, if he so desires, the legal relations already
created.
Q: What are the devices for ascertaining and controlling risk
and loss? Executory warranties and conditions

A: Q: What are executory warranties and conditions?

1. Concealment A: These are undertakings that certain conditions should or

2. Representations should not exist in the future.
3. Warranties
4. Conditions Q: What is the purpose of the same?
5. Exceptions
A: To enable the insurer to rescind the contract in case
Q: What is the original purpose for the development of subsequent events increased the risk to such an extent that
concealment and representations? he is no longer willing to bear.

A: For the purpose of enabling the insurer to secure the same conditions precedent
information with respect to the risk that was possessed by
the applicant for insurance, so that he might be equally Q: What is the purpose of conditions precedent?
capable of forming a just estimate of its quality.
A: The insurer must also protect himself against fraudulent
Q: Why are warranties and conditions considered as claims of loss through these conditions precedent.
“alternative”?
Ex: Conditions requiring immediate notice of loss or inquiry
A: They deal with conditions existing at the inception of the and detailed proofs of loss within a limited period.
contract
Q: It is necessary for the insurer to ascertain not only the
Exceptions fact of loss, but also the amount of any loss that may in fact
have occurred. How does an insurer do this?
Q: What is the purpose of exceptions?

Facultad de Derecho Civil 31

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: The insurer inserts the various conditions providing for the
appointment of appraisers, and for arbitration in case no PROOF OF FRAUD IN CONCEALMENT
agreement can be reached as to amount of loss.
Under Sec. 27, the insurer need not prove fraud in order to
Concealment rescind a contract on the ground of concealment (Saturnino
v. Phil. American Life Insurance Co).
Q:  What  is  “concealment”?
The duty of communication is independent of the intention
A: As defined under Sec. 26, it is the neglect to communicate and is violated by the fact of concealment, even when there is
that which a party knows and ought to communicate. no design to deceive.

Q: What are the different requisites for concealment? Q: Is the effect of concealment different when it is
intentional and when it is unintentional?
A:
1. A party knows the fact which he neglects to A: No. The legal effect of concealment, whether intentional
communicate or disclose to the other or unintentional, is the same, that is, it entitles the insurer to
2. Such party concealing is duty bound to disclose such rescind the contract of insurance, concealment being defined
fact to each other as neglect to communicate that which a party knows and
3. Such party concealing makes no warranty of the fact ought to communicate.
concealed
4. The other party has no means of ascertaining the Q: What is the reason for the above rule?
fact concealed.
A: If it were necessary for the insurance company to show
Q: What if a warranty is made of the fact concealed? actual fraud on the party of the insured, then it is plain that it
would be impossible for it to protect itself and its honest
A: The non-disclosure of such fact is not concealment but policy holders against fraudulent and improper claims. It
constitutes a violation of warranty. would be wholly at the mercy of anyone who wished to apply
for insurance, as it would be impossible to show actual fraud
Sec. 27. A concealment whether intentional or unintentional except in the external cases. There would be no incentive to
entitles the injured party to rescind a contract of insurance. an applicant to tell the truth.
(As amended by Batasang Pambansa Blg. 874)
Q: What is the basis of the rule vitiating the contract in cases
Q: What is the effect of concealment by the insured? of concealment?

A: As a rule, failure on the party of the insured to disclose A: The basis of the rule vitiating the contract in cases of
conditions affecting the risk, of which he was aware, makes concealment is that it misleads or deceives the insurer into
the contract voidable at the insurer’s  option.   accepting the risk, or accepting it at the rate premium agreed
upon.
RATIO: The insurance policies are contracts uberrimae fidae,
that is, contracts of the utmost good faith. RULES AS TO MARITIME INSURANCE

It is no defense to plead mistake or forgetfulness. Q: In U.S., the rule in Sec. 27 applies only to ocean marine
insurance.
Q: What is the effect of concealment by the insurer?
A: What is the reason for this?
A: The contractual duty of disclosure imposed by utmost
good faith is not required of the insured alone, but is imposed A: In marine insurance, the subject of the insurance is
with equal stringency upon the insurer; in fact, it is more generally beyond reach, and not open to inspection of the
upon the latter, since his dominant bargaining position carries underwriters, often distant ports or upon high seas and the
with it stricter responsibility. underwriter from the very necessities of his undertaking is
obliged to rely upon the assured and has the right to exact a
Q: How  is  the  “duty  of  utmost  good  faith”  breached? full disclosure of all the facts known to him which may in
anyway affect the risk to be assumed.
A: By concealment or misrepresentation
NOTE: In fire and other kinds of insurance, the subject is seen
and inspected before the risk is assumed and its construction,

Facultad de Derecho Civil 32

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
situation and ordinary hazards as well appreciated by the proving or tending to prove the falsity of a warranty,
underwriter as by the other and, therefore, no such necessity entitles the insurer to rescind.
for reliance exists.
WHEN FRAUDULENT INTENT NECESSARY
Q: In the Philippines, the rule that fraud is not essential in
order that the insured may be guilty of concealment, is Q: What kind of concealment this section refers to?
applicable to every kind of insurance. Why?
A: It relates to falsity of a warranty.
A: Under the California Insurance Code, from which Sec. 27
was taken considers the presence or absence of an intent to ORDINARY FALSITY OF A
deceive is immaterial. CONCEALMENT WARRANTY
Under Section 27 Under Sec. 29, Secs. 67-
Sec. 28. Each party to a contract of insurance must 76
communicated to the other, in good faith, all facts within his Intention is not Non-disclosure must be
knowledge which are material to the contract and as to important intentional and
which he makes no warranty, and which the other has not fraudulent in order that
the means of ascertaining. the contract may be
rescinded
MATTERS THAT MUST BE COMMINICATED EVEN IN THE The omission is on the
ABSENCE OF INQUIRY part of the insured and
the party entitled to
Q: What are the requisites to compel each party to rescind is the insurer
communicate in good faith all facts within his knowledge?
Q: In every contract of marine insurance, the warranty is
A: implied that the ship is seaworthy. What is the effect of
this?
1. They are material to the contract
2. The other has no means of ascertaining the said A: The intentional and fraudulent omission on the part of the
facts insured when applying for a policy to communicate
3. As to which the party with duty to communicate information that his ship is in distress or in special peril would
makes no warranty entitle the insurer to rescind because concealment refers to
matter proving or tending to prove the falsity of the warranty
An applicant for life insurance suffering from or who had that the ship is seaworthy.
been treated or hospitalized for some ailment like
pneumonia, diabetes or syphilis, or incipient pulmonary Sec. 30. Neither party to a contract of insurance is bound to
tuberculosis, or peptic ulcer, or cerebral congestion and Bells communicate information of the matters following, except
Palsy, among others must disclose such facts even if not in answer to the inquiries of the other:
inquired into where such facts are material to the risk
assumed. (a) Those which the other knows;
(b) Those which, in the exercise of ordinary care, the other
Q: What is the test? ought to know, and of which the former has no reason to
suppose him ignorant;
A: If the applicant is aware of the existence o some (c) Those of which the other waives communication;
circumstances which he knows would influence the insurer in (d) Those which prove or tend to prove the existence of a
acting upon his application, good faith requires him to risk excluded by a warranty, and which are not otherwise
disclose that circumstances, though unasked. material; and
(e) Those which relate to a risk excepted from the policy and
Q: What is the effect of failure of insurer to verify? which are not otherwise material.

A: The effect of material concealment cannot avoided by the MATTERS MADE THE SUBJECT OF
allegation that insurer could have known and discovered the SPECIAL INQUIRIES MATERIAL
illness or disease which the insured had concealed.
As a general proposition, matters made the subject of inquiry
Sec. 29. An intentional and fraudulent omission, on the part must be deemed material.
of one insured, to communicate information of matters

Facultad de Derecho Civil 33

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
The insured is required to make full and true disclosure to the Q: From the standpoint of the insurer, when is a fact
questions asked. material?

Q: What is the effect of failure to make full disclosure? A: If the knowledge of it would have a probable and
reasonable influence upon the insurer in assessing the risk
A: It will avoid the insurance policy. involved and in making or omitting further inquiries, and
cause him either to reject the risk or accept it only at a higher
Q: What is the effect of an incomplete answer on its face? premium rate or on different terms though the fact may not
even remotely contribute to the contingency upon which the
A: It will not defeat the policy in the absence of bad faith. insurer would become liable, or in any wise, affect the risk.

WHEN IS THERE NO DUTY TO MAKE DISCLOSURE In non-medical insurance, which does away with the usual
medical examination before the policy is issued, the waiver
The circumstances of the parties to an insurance contract or by the insurance company of medical examination renders
the conditions under which it is executed may be such as to more material, the information required of the applicant
render it unnecessary for the insured to disclose to the concerning the previous condition of health and disease
insurer facts that would otherwise be material. suffered, for such information necessarily constitutes an
important factor which insurer takes into consideration in
Q: What are the circumstances which would excuse non- deciding whether to issue the policy or not (Saturnino v. Phil
disclosure? American Insurance Co,; Sunlife Assur. Co of Canada v. CA)

A: Q: When is concealment regarded as intentional?

1. Matters known to, or right to be known by insurer, A: A  man’s  state  of  mind  or  subjective  belief  is  not  capable  of  
or of which he waives disclosure proof in our judicial process, except through proof of external
2. Risks excepted from the policy (either expressly or acts or failure to act from which inferences as to his
by warranty) subjective belief may be reasonably drawn.
3. Nature  or  amount  of  the  insured’s  interest
Cases under this:
The nature or amount of the interest of one insured need
not be communicated unless in answer to an inquiry except 1. Saturnino v. Phil American Insurance Co
as prescribed by Sec. 51. 2. Great Pacific Life Assurance Co. v. CA
3. Canilang v. CA
Sec. 31. Materiality is to be determined not by the event,
but solely by the probable and reasonable influence of the Q: What is the doctrine under the case Insular Life Assn. Co.
facts upon the party to whom the communication is due, in v. Pineda?
forming his estimate of the disadvantages of the proposed
contract, or in making his inquiries. A: In the absence of evidence of the insurability of a person
afflicted with chronic cough, concealment thereof is no
DETERMINATION OF MATERIALITY ground for annulment of the policy.

Q: What is the test for materiality? TIME WHEN INFORMATION ACQUIRED

A: The test is in the effect which the knowledge of the fact in Q: When should the concealment take place?
question would have on the making of the contract.
A: Concealment must take place at the time the contract is
Q: To be material, should the fact increase the risk or entered into in order that the policy may be avoided and not
contribute to any loss or damage suffered? afterwards. The duty of disclosure ends with the completion
and effectivity of the contract.
A: No. it is sufficient if the knowledge of it would influence
the parties in making the contract. NOTE: The rule is different in reinsurance

This is of course, determined by the court. The insured Q: What is the duty of the insured when the contract is to be
cannot be guilty of concealment where the fact concealed is effective only upon the issuance of the policy?
not material.

Facultad de Derecho Civil 34

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: An applicant for life insurance policy is under a duty to the insurer issues a policy without any further inquiry, it
disclose to the insurer, changes in his health occurring or waives the imperfection of the answer and renders the
coming to his knowledge between the date of submitting his omission to answer more fully immaterial.
application after satisfactory medical examination and the
date the policy is delivered. Sec. 34. Information of the nature or amount of the interest
of one insured need not be communicated unless in answer
Sec. 32. Each party to a contract of insurance is bound to to an inquiry, except as prescribed by section fifty-one.
know all the general causes which are open to his inquiry,
equally with that of the other, and which may affect the DISCLOSURE OF NATURE AND EXTENT OF
political or material perils contemplated; and all general INTEREST INSURED
usages of trade.
Under Sec. 51 (e), it is required that a policy insurance must
MATTERS EACH PARTY IS BOUND TO KNOW specify  “the  interest  of  the  insured  in  the  property  insured,  if  
he is not the absolute owner thereof.
Q: Under Sec. 3, is the insured under the obligation to
communicate public events, such as that a nation is at war Ex: Mortgagee must disclose his particular interest even if no
or the laws and political conditions in other countries? inquiry is made so that the insurer may determine the extent
of  the  insured’s  insurable  interest.
A: No. The sources of the information, being equally open to
the insurer who is presumed to know them. Q: If the interest in the property is absolute, is there a need
to disclose the interest in the property insured?
Q: What is the rule as to general trade usages and rules of
navigation? A: No.

A: The insurer is charged with knowledge of the general trade Sec. 35. Neither party to a contract of insurance is bound to
usages and rules of navigation, kinds of seasons, and all the communicate, even upon inquiry, information of his own
risks connected with navigation. judgment upon the matters in question.

Sec. 33. The right to information of material facts may be Disclosure of judgment upon matters in question
waived, either by the terms of the insurance or by neglect to
make inquiry as to such facts, where they are distinctly The duty of disclosure is confined to facts. There is no duty to
implied in other facts of which information is disclose mere opinion, speculation, intention, or expectation.
communicated. This is true even if the insured is asked.

RIGHT TO INFORMATION MAY BE WAIVED

Q: May the right to information be waived? Title 5

REPRESENTATION
A: Yes, either expressly, that is, by the terms of insurance, or
impliedly, by neglect to make inquiry as to facts already Sec. 36. A representation may be oral or written.
communicated. If the applicant has answered the questions
asked in the application, he is justified in assuming that no Q: What is representation?
further information is desired.
A: It is a statement made by the insured at the time of, or
Q: What is the doctrine under the case Ng Zee v. Asian prior to, the issuance of the policy, as to an existing or past
Crusader Life Assurance Corp.? fact or state of facts, or concerning a future happening to give
information to the insurer and otherwise induce him to enter
A: In the absence of evidence that the insured had sufficient into the insurance contract.
medical knowledge as to enable him to distinguish between
“peptic   ulcer”   and   a   “tumor,”   his   statement,   that   the   tumor   Q: Who makes a representation?
was   “associated   with   peptic   ulcer   of   stomach”   should be
construed as an expression made in good faith of his belief as A: It may also be made by the insurer but as the insured
to the nature of his ailment and operation. seldom desires to avoid the contract, the cases most of the
time involve to representations made by the insured.
Where upon the face of the application, a question appears
to be not answered at all or to be imperfectly answered and

Facultad de Derecho Civil 35

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Sec. 38. The language of a representation is to be
Misrepresentation interpreted by the same rules as the language of contracts
in general.
Q: What is misrepresentation?
CONSTRUCTION OF REPRESENTATIONS
A: It is a statement
a. As a fact of something which is untrue Q: How should representations be construed?
b. Which the insured stated with knowledge that it is
untrue and with an intent to deceive, or which he A: They must be construed liberally in favor of the insured,
states positively as true knowing it to be true and and are required to be only substantially true.
which has tendency to mislead, and
c. Where such fact in either case is material to the risk Q: How about warranties?

Q: What is the effect of misrepresentation by the insured? A: By contrast, must be literally true, or the contract will fail.

A: It renders the insurance contract voidable at the option of If the representation is written in the policy, the language in
the insurer, even though innocently made and without which it is expressed was chosen by the insurer; if answer to
wrongful intent. an inquiry, the agent of the insurer usually phrases the answer
to the question worded by the insurer.
NOTE: Misrepresentation is the active form of concealment
Q: How are questions as to use of liquors be construed?
FORM AND NATURE OF CONCEALMENT
A: In questions as to use of liquor- they will be construed as
It is the duty of the person applying for insurance to give to referring to the habitual use and not to occasional use or
the insurer all such information concerning the risk as will be even occasional sprees.
of use to the latter in:
Q: How about questions as to having any illness?
a. estimating its character and
b. in determining whether or not to assume it A: If   the   insured   had   stated   that   he   had   never   had   “any  
illness,  local  disease  or  injury  in  any  organ,”  it  was  held  that  
Q: How should the information be given? this representation was substantially true despite the fact
that the insured had been charged from the army because of
A: It may be given orally, or written in papers not connected inflammation of the eyes, which had been entirely cured
with the contract, such as circulars and prospectuses, or in before the application for the policy.
the  application  or  examiner’s  report,  or  it  may  appear  in  the  
policy itself. Q: What about questions as to illness or disease?

Representations are made to influence the insurer to accept A: They will refer to serious ailments and not to minor
the risk. They are merely collateral inducements. They are indispositions.
not part of the contract unless expressly made so.
Sec. 39. A representation as to the future is to be deemed a
Sec. 37. A representation may be made at the time of, or promise, unless it appears that it was merely a statement of
before, issuance of the policy. belief or expectation.

Q: When should the representation be made? Kinds of representation

A: The very nature of representation requires that it precede Q: What are the kinds of representation?
the execution of the contract.
A:
A representation made after the policy is issued could not
have influenced either party to enter into the contract. 1. Oral or
2. Written;
However, a representation may be performed after the 3. Made at the time of issuing the policy or
issuance of the policy. 4. Before
5. Affirmative
6. Promissory

Facultad de Derecho Civil 36

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: The insurer must prove both   materiality   of   the   insured’s  
Affirmative representation opinion  and  the  latter’s  intent  to  deceive.  

Q: What is affirmative representation? Q: What is the rule in case of representation of fact?

A: Any allegation as to the existence or non-existence of a A: The insurer must prove its falsity and materiality.
fact when the contract begins.
Q: When is representation deemed a mere expression of
Ex: statement that the house is used only for residential opinion?
purposes
A: Only if made in bad faith.
Promissory representation
Sec. 40. A representation cannot qualify an express
Q: What is promissory representation? provision in a contract of insurance, but it may qualify an
implied warranty.
A: Any promise to be fulfilled after the contract has come into
existence or any statement concerning what is to happen Q: What is the effect of representation on express
during the existence of the contract. provisions of policy?

Q: How is the term  “promissory  representations”  used? A: A representation cannot qualify an express provision or an
express warranty in contract of insurance. This is so because a
A: It is used in 2 senses: representation is not part of the contract but only a collateral
inducement to it.
a. It is used to indicate a parol or oral promise made in
connection with the insurance, but not incorporated A representation, however, may qualify an implied warranty.
in the policy. The non-performance of such promise
cannot be shown by the insurer in defense to an Sec. 41. A representation may be altered or withdrawn
action on the policy, but proof that the promise was before the insurance is effected, but not afterwards.
made with fraudulent intent will serve to defeat the
insurance. Q: When may representation be altered or withdrawn?
b. An undertaking by the insured inserted in the policy
but not specifically made a warranty is also called a A: A representation, not being a part of the contract of
“promissory   representation.”   It   is   merely   an   insurance, may be altered or withdrawn before the contract
executory term of the contract, and not properly a usually takes effect but not afterwards since the insurer has
representation already been led by the representation in assuming the risk
contemplated in the contract.
A promissory representation is, therefore, substantially a
condition or a warranty. Sec. 42. A representation must be presumed to refer to the
date on which the contract goes into effect.
EFFECT ON THE POLICY OF EXPRESSIONS OF OPINION OR
EXPECTATION TIME TO WHICH REPRESENTATION REFERS

A representation of the expectation, intention, belief, or Representation refer only to the time of making the contract.
opinion or judgment of the insured, although false, will not
avoid the policy of insurance if there is no actual fraud in Statements promissory of conditions to exist subsequent to
inducing the acceptance of the risk, or its acceptance at a the contemplation of the contract may be conditions or
lower rate of premium. warranties.

Q: What is the reason behind the said rule? Representations found to be untrue may be withdrawn prior
to the copletion of the contract but not afterwards.
A: This is the rule since the insurer is not justified in relying
upon such a statement, but is obligated to make further There is a false representation if it is true at the time it was
inquiry. made but false at the time the contract takes effect.

Q: What should the insurer do to escape liability? Sec. 43. When a person insured has no personal knowledge
of a fact, he may nevertheless repeat information which he

Facultad de Derecho Civil 37

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
has upon the subject, and which he believes to be true, with Q: What is the rule re: marine insurance?
the explanation that he does so on the information of
others; or he may submit the information, in its whole A: Substantial truth of a representation is not sufficient. The
extent, to the insurer; and in neither case is he responsible insured is required to state the exact and whole truth in
for its truth, unless it proceeds from an agent of the insured, relation to all matters that he represents, or upon inquiry
whose duty it is to give the information. discloses or assumes to disclose.
rd
Q: What is the effect where information obtained from 3 Examples:
persons?
1. Confinement  in  childbirth  is  not  a  “personal  ailment”
A: The insured is given the discretion to communicate to the 2. Failure of the insured to include an illness
insurer what he knows of a matter of which he has no occasioned by a fall from tree from which he had
personal knowledge. If the representation turns out to be completely recovered was held not to avoid the
false, he is not responsible therefor, provided he gives policy
explanation that he does so on the information of others. 3. A statement that the applicant is in good health is
held not to mean that he is in perfect health, but
Where a party orders insurance, and afterwards receives that he is not aware of any disease of such serious
information material to the risk, or has knowledge of a loss, be nature as to impair his health permenantly
ought to communicate it to his agent as soon as, with due and
reasonable diligence, it can be communicated for the purpose CONSTRUCTION OF REPRESENTATION AS AFFIRMATIVE
of countermanding the order or laying the circumstances
before the insurer. A representation written in the policy even in such form as to
admit of its being construed as an executor agreement or
Q: What is the effect of information obtained from agent of promissory representation will rather be construed as an
insured? affirmative representation of a present fact in order to save
the policy from avoidance.
A: If the information proceeds from an agent of the insured,
whose duty it is in the ordinary course of business such Sec. 45. If a representation is false in a material point,
information to his principal, and it was possible for the agent whether affirmative or promissory, the injured party is
under such circumstances in the exercise of due diligence to entitled to rescind the contract from the time when the
have made such communication before the making of the representation becomes false. The right to rescind granted
contract, the insured will be liable for the truth. by this Code to the insurer is waived by the acceptance of
premium payments despite knowledge of the ground for
Q: What is the effect of information obtained from the rescission. (As amended by Batasang Pambansa Blg. 874).
agent of the insurer?
EFFECT OF FALSITY OF REPRESENTATION
A: The same applies to the insurer though in the nature of
things, the question does not occur so frequently. Q: What is the effect of representation?

Sec. 44. A representation is to be deemed false when the A: Fraud or intent to misrepresent facts is not essential to
facts fail to correspond with its assertions or stipulations. entitle the injured party to rescind a contract of insurance on
the ground of false representation (B.P 874)
Representations are not required to be literally true; they
need only be substantially true Q: What is the rule in order for a representation to be false?

In order that policy be avoided, a representation relied upon A: It is sufficient if the representation fails to correspond with
must be false in a substantial and material respect. the facts in a material point. In other words, the minds of the
. parties never meet.
Q: When is representation deemed true?
It is not misrepresentation for the insured to state that he did
A: When it is true in every particular material to the risk, or is not drink beer or other intoxicants if he drank but very
so far true that the conduct of the insurer would not have seldom.
different if the exact truth had been alleged. Where a party
fails but is true or is complied with so far as is essential to the
risk insured against, the policy remains in force.

Facultad de Derecho Civil 38

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
rescind a contract of insurance on ground of concealment of
EFFECT OF COLLUSION OR FRAUD OF false misrepresentation
AGENT OF INSURER The rules on concealment and misrepresentation apply
likewise to the insurer
Q: What is the effect of collusion or fraud of agent of the
insurer? Sec. 47. The provisions of this chapter apply as well to a
modification of a contract of insurance as to its original
A: Collusion between the agent and the insured in formation.
misrepresenting the facts will vitiate the policy even though
the agent is acting within the apparent scope of his authority. The provisions of Sec. 26 to 35 governing concealment and
Sections 36 to 48 governing representations apply not only to
Where there is collusion, the agent ceases to represent his the original formation of the contract but also to a
principal, and represents himself; thus, the insurer is not modification of the same during the time it is in force.
estopped from avoiding the policy
If the insurer is induced to modify the insurance policy as to
Where the insured merely signed the application form and the rate of premium by a representation on the part of the
made the agent of the insurer fill the same for him, it was insured in a material point, the insurer is entitled to rescind
held that by doing so, the insured made the agent of the such modification.
insurer his own agent.
Sec. 48. Whenever a right to rescind a contract of insurance
The insurer is liable when its agent writes false answer into is given to the insurer by any provision of this chapter, such
the application without the knowledge of the insured right must be exercised previous to the commencement of
an action on the contract.
Sec. 46. The materiality of a representation is determined by
the same rules as the materiality of a concealment. After a policy of life insurance made payable on the death of
the insured shall have been in force during the lifetime of
MATERIALITY OF REPRESENTATION the insured for a period of two years from the date of its
issue or of its last reinstatement, the insurer cannot prove
Q: What is the test of materiality? that the policy is void ab initio or is rescindible by reason of
the fraudulent concealment or misrepresentation of the
A: It is determined not by the event, but solely by the insured or his agent.
probable and reasonable influence of the facts upon the
party to whom the representation is made, in forming his WHEN AN INSURER MUST EXERCISE HIS RIGHT TO RESCIND
estimates of the disadvantages of the proposed contract or in
making his inquiries. Q: When must an insurer exercise his right to rescind the
contract?
Q: Who determines the materiality of the representation?
A:
A: It is a judicial question. It is the Court which will
determine. 1. In general, a contract of insurance may be rescinded
on the ground of:
CONCEALMENT AND a. Concealment
MISREPRESENTATION COMPARED b. False representation
c. Breach of warranty
CONCEALMENT MISREPRESENTATION
The insured withholds The insured makes erroneous NOTE: A defense to an action to recover insurance
information of material statements of facts with the that the policy was obtained through false
facts from the insurer intent of inducing the insurer misrepresentations, fraud, or deceit is not barred by
to enter into the insurance the provision. There is no time limit imposed for
contract interposing this defense.
The materiality of concealment is determined by the same 2. In non-life policy, in order that the rescind a contract
rules in cases of misrepresentation of insurance, such right must be exercised prior to
Concealment on the part of the insured has the same effect the commencement of an action on the contract. In
as a misrepresentation and gives the insurer a right to rescind other words, the insurer is no longer entitled to
the contract rescind after the insured has filed an action to collect
Whether intentional or not, the injured party is entitled to the amount of the insurance.
Facultad de Derecho Civil 39
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
3. It has been in force during the lifetime of the insured
NOTE: However, where any of the material representations is for at least 2 years from its date of issue or of its last
false,   the   insurer’s   tender   of   the   premiums   and   notice   that   reinstatement.
the policy is cancelled before the commencement of the suit
thereon, operates to rescind a contract of insurance. Q: May the 2 year period of contesting a life insurance
policy by the insurer be shortened?
3. In life policy, the defenses mentioned are available
only during the first 2 years of a life insurance policy. A: Yes.

INCONTESTABILITY OF LIFE POLICIES Q: May it be extended by stipulation?

Q: What is incontestability? A: No.

A: It means that after the requisites are shown to exist, the The  phrase  “during  the  lifetime”  simply means that the policy
insurer shall be estopped from contesting the policy or is no longer considered in force after the insured has died.
setting up any defense, except as is allowed, on the ground of
public policy. Q: What is the effect when the policy becomes
incontestable?
Incontestable clauses create a kind of contractual statute of
limitations on certain defenses that may be raised by the A: The insurer may not refuse to pay the same by claiming
insurer. that:
1. The policy is void ab initio
THEORY AND OBJECT OF INCONTESTABLE CLAUSE 2. It is rescissible by reason of the fraudulent
concealment of the insured or his agent, no matter
A. As to the insurer how patent or well-founded; or
3. It is rescissible by reason of the fraudulent
The theory is that an insurer should have a reasonable misrepresentations of the insured or his agent
opportunity to investigate the statements which the
applicants make and that after a definite period, the insurer Since the law speaks of a policy in force for 2 years, the
should not be permitted to question the validity of the policy expression  “void  ab  initio”  should  be  understood  in  the  sense  
either by affirmative or by defense to a suit brought on the of “voidable” and the fraud contemplated should refer to
life policy by the beneficiary. fraud in inducement.

B. As to the insured Q: What will be the period in case of reinstated policy?

The object of the clause is to give the greatest possible A: The period of contestability should be counted from
assurance to a policyholder that his beneficiaries would the date of reinstatement, and not from the date of issuance
receive payment without question as to the validity of the of the policy.
policy or the existence of the coverage once the period of
contestability passes. A policy of insurance, after it has lapsed or become forfeited,
as for non-payment of premiums or breach of a warranty or
It is designed to protect the policyholder or beneficiary from condition, may be revived by or reinstated pursuant to a
a lawsuit contesting the validity of the policy after a provision contained in the policy or the agreement of the
considerable time has passed and evidence of the facts parties.
surrounding the purchase may be unavailable.
DEFENSES NOT BARRED BY INCONTESTABLE CLAUSE
Requisites for incontestability
The incontestable clause is not absolute.
Q: What are the requisites for incontestability?
Incontestability only deprives the insurer of those defenses
A: which arise in connection with the formation and operation of
the policy prior to loss.
1. The policy is a life insurance policy
2. It is payable on the death of the insured Q: What are the defenses which are not barred by the
incontestability clause?

Facultad de Derecho Civil 40

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: A: It is the written document embodying the terms and
stipulations of the contract of insurance between the insured
1. That the person taking the insurance lacked and the insurer.
insurable interest as required by law
2. That the cause of death of the insured is an expected Q: Who signs the policy?
risk
3. That the premiums have not been paid A: It is signed only by the insurer or his duly authorized agent.
4. That the conditions of the policy relating to military It need not be signed by the insured except where express
or naval service have been violated warranties are contained in a separate instrument forming
5. That the fraud is of a particularly vicious type, as part of the policy in which case the law requires that the
where the policy was taken out in furtherance of a instrument must be signed by the insured.
scheme to murder the insured, or where the insured
substitutes another person for the medical The standard practice is to have the prospective insured full
examination, or where the beneficiary feloniously out and sign an application prepared by the insurer.
kills the insured.
6. That the beneficiary failed to furnish proof of death POLICY CONTROLS TERMS OF INSURANCE
or to comply with any condition imposed by the
policy after the loss has happened The  insurance  policy  constitutes  the  measure  of  the  insurer’s  
7. That the action was not brought within the time liability, and in order to recover, the insured must show
specified. himself within the terms.

To create an enforceable agreement all the requisites

necessary in order that there will be a valid contract of
Title 6 insurance must be present.
THE POLICY
The insurance companies have the same rights as individuals
Sec. 49. The written instrument in which a contract of to limit their liabilities and to impose whatever conditions
insurance is set forth, is called a policy of insurance. they deem best upon their obligations not inconsistent with
public policy.
Sec. 50. The policy shall be in printed form which may
contain blank spaces; and any word, phrase, clause, mark, The compliance of the insured with the terms of the policy is
sign, symbol, signature, number, or word necessary to a condition precedent to the right of recovery.
complete the contract of insurance shall be written on the
blank spaces provided therein. POLICY AS A  “CONTRACT  OF  ADHESION”

Any rider, clause, warranty or endorsement purporting to be Q: What is a contract of adhesion?

part of the contract of insurance and which is pasted or
attached to said policy is not binding on the insured, unless A: It is essentially a description of the manner byb which the
the descriptive title or name of the rider, clause, warranty or contract is formed: one party having superior bargaining
endorsement is also mentioned and written on the blank power imposes its choice of terms on the other party.
spaces provided in the policy.
The insured sees the contract in its final form and has had no
Unless applied for by the insured or owner, any rider, voice in the selection or arrangement of the words employed
clause, warranty or endorsement issued after the original therein.
policy shall be countersigned by the insured or owner,
which countersignature shall be taken as his agreement to Although the insured can choose from variety of available
the contents of such rider, clause, warranty or coverages, he cannot negotiate the substance of the contract
endorsement. the insurer.

Group insurance and group annuity policies, however, may Q: How is ambiguity in the insurance policy construed?
be typewritten and need not be in printed form.
A: Since the parties do not bargain on equal footing, the
Q: What is policy of insurance? weaker  party’s  participation  is  reduced  to  the  alternative  “to  
take  it  or  leave  it.”  Where  the  language  used  in  an  insurance  
contract or application is such to create ambiguity, the same
should be resolved liberally in favor of the insured and strictly

Facultad de Derecho Civil 41

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
against the party responsible therefor (the insurance Under the Insurance Code, the policy must be in printed
company which prepared the contract) form. Group insurance and group annuity policies may be
typewritten.
Q: What is the rationale behind this?
Q: In case of conflict between the printed and written
A: To afford the greatest protection to the insured. portions of a policy, which should prevail?

Also, forfeitures are not favored and any construction which A: The written portion prevails.
would result in the forfeiture of the policy benefits for the
person claiming thereunder will be avoided if it is possible to PERFECTION OF INSURANCE CONTRACTS
construe the policy in a manner which would permit
recovery. A contract of insurance, like other contracts, must be
assented to by the parties either in person or by their agents.
Q: What is the exception to the general rule?
Q: How is assent or consent manifested ?
A: The courts will only rule out blind adherance to terms
where facts and circumstances will show that they are A: By the meeting of the offer and the acceptance upon the
basically one-sided.   The   “fine   print”   or   “contracts   of   thing and the cause which are to constitute the contract.
adhesion”   rule   does   not   apply   where   the   petitioner   is   an  
acute businessman of experience who is presumed to have Q: What if the application for insurance has not been either
assented to the assailed provisions of the policy with full accepted or rejected?
knowledge and, therefore, cannot claim he did not know its
terms. A: There is no contract yet as it is merely an offer or proposal.

If the terms of the contract are clear and unambiguous, there Q: Does the mere signing of an application for life insurance
is no room for construction and such terms cannot be enlarged and the payment of the first premium bind the insurer to
or diminished by judicial construction. issue a policy?

POLICY DIFFERENT FROM CONTRACT ITSELF A: No, where there is no evidence of any contract between
the parties that such acts should constitute a contract of
Policy of insurance insurance.
Formal written instrument evidencing the contract of
insurance entered into between the insured and the Q: What is the rule in order for the contract to be binding
insurer from the date of the application?
The law between the parties
Insurance contracts are required in standard forms A: It should be one that leaves nothing to be done, nothing
No policy of insurance shall be issued or delivered to be completed, nothing to be passed upon, or determined,
within the Philippines unless in the form previously before it shall take effect.
approved by the Insurance Commissioner
Every contract of insurance in the Philippines must be Also, the contract is not perfected where the applicant for life
evidenced by a policy and that policy must be in the insurance dies before its approval or it does not appear that
form previously approved by the Insurance the acceptance of the application ever came to the
Commissioner knowledge of the applicant.

FORM OF CONTRACT OF INSURANCE Q: What is the rule on the acceprtace of an insurance policy?

Modern-day insurance contracts are evidenced by writing. A: It must be unconditional, but it need not be by formal act.
Reception and retention of the policy without objection
Q: Should the written insurance contracts be in formal beyond a reaonable time may be deemed to be an
form? acceptance.

A: This wiritng may be informal, as a binding slip, or a written Q: May the parties impose additional conditions precedent
application informally accepted; or it may be formal, being to the validity of the policy?
the carefully written policy in customary use.
A: Yes. However, the usual conditions found in the
application for insurance are that the contract shall not

Facultad de Derecho Civil 42

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
become binding until the policy is delivered and the first b. If he pays the premium with his application, his
premium paid. This condition is valid. application will be considered an offer.

Q: Can there ne a valid and binding insurance contract Q: Does insurance agent have the authority to bind
where no premium is paid? immediately the insurers they represent?

A: A: No. Instead, they customarily issue a binding receipt that

makes the coverage effective on:
GR: No. 1. The date of the application
2. The date of the medical examinatio, if the insurer
XPN: Unless there is credit given or there is a waiver or some determines later that the applicant was insurable on
agreement obviating the necessity for prepayment of the that date
premium.
The binding receipt is a conditional acceptance by the
But where the premium has been previously paid, the contract insurer.
is perfected upon approval of the application although the
policy has not yet been issued, unless there is a stipulation to c. Where the application for insurance constitutes an
the contrary. offer by the insured, a policy issued strictly in
accordance with the offer is an acceptance of the
It may happen that the insurance applied for has never been in offer that perfects the contract. If the policy issued
force where the applicant dies after the disapproval or the does   not   conform   to   the   insured’s   application,   it   is  
insurance application notwithstanding that the initial premium an offer to the insured which he may accept or
has been paid and a binding deposit receipt issued. reject.

Cover notes IMPORTANCE OF DELIVERY OF POLICY

Q: What are cover notes? Q: What is delivery?

A: They may be issued to bind the Insurance temporarily A: It is the act of putting the insurance policy, the physical
pending the issuance of the policy. Coverage then can begin document, into possession of the insured.
depending upon their terms.
Q: Why is delivery of the policy important?
OFFER AND ACCEPTANCE IN INSURANCE CONTRACT
A:
Q: Who makes the offer and who accepts the offer?
1. As evidence of the making of a contract and of its
A: Generally, the applicant usually makes the offer to the terms
insurer through an application for insurance which is usually 2. As  communication  of  the  insurer’s  acceptance  of  the  
attached to policy and made a part of the insurance contract. insured’s  offer.
3. Delivery may affect the term of the coverage
Q: How about in property and liability insurance?
Example: where a policy provides that the coverage
A: It is the insured who technically makes an offer to the terminates 1 year after delivery, it becomes the important
insurer, who accepts the offer, rejects it, or makes a counter- fact for determining when the policy period ends
offer. The offer is usually accepted by an insurance agent on
behalf of insurer. Q: What if there was no delivery?

Q: How about in life and health insurance? A: The delivery of a policy is not a prerequisite to a valid
contract of insurance. The contract may be completed prior
A: The situation depends upon whether the insured pays the to delivery of the policy or even without the delivery of the
premium at the time he applies for insurance. policy depending on the intention of the parties.

a. If he does not pay the premium, his application is The widespread use of binding receipts has made delivery
considered an invitation to the insurer to make an less important than it used to be.
offer, which he must accept before the contract goes
into effect.

Facultad de Derecho Civil 43

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
But delivery still has significance as the decisive act that
ordinarily  marks  the  end  of  the  insurer’s  oportunity  to  decline   EFFECT OF DELIVERY OF POLICY
coverage.
Q: What is the effect of delivery of policy where the delivery
MODES OF DELIVERY OF POLICY is conditional?

Q: What are the different modes of delivery of policy? A: Where there is conditional delivery of an insurance policy,
non-performance of the condition precedent prevents the
A: Actual or constructive delivery contract from taking effect.

ACTUAL CONSTRUCTIVE Ex: stipulation that the policy shall not become operative
The delivery may be made to When it is deposited in the unless the applicant is in good health at the time of delivery
the insured in person or to mail duly directed to the of the policy is valid.
his duly constituted agent insured or his agent
Q: What if the delivery is unconditional?
Whether or not the policy was delivered after its issuance
depends, not upon its manual possession by the insured but A: It ordinarily consummates the contract, and the policy as
rather upon the intention of the parties which may be shown delivered becomes the final contract between the parties.
by their acts or words. Where the parties so intend, the insurance becomes effective
at the same time of the delivery of the policy.
Q: What is the effect of possession by the insured of the
policy? Q: How about when the premium is still unpaid after
unconditional delivery?
A: It raises the presumption that the policy was delivered to
the insured, whilen possession by the insurer is prima facie A: The insurer cannot be presumed to have extended credit
evidence that no delivery was made. from the mere fact of unconditional delivery of the insurance
policy without the pre-payment of the premium; and even if
If the application contains a provision that the insurance shall such presumption may be inferred, there must be a clear and
not be effective until the delivery of the policy, delivery is express   acceptance   by   the   insured   of   the   insurer’s   offer   to  
essential to the consummation of the contract. extend credit. In the absence of any clear agreement granting
credit extension, the policy will lapse if the premium is not
DELIVERY  TO  INSURER’S AGENT paid, at the time and in the manner specified in the policy.
AS DELIVERY TO INSURED
RIDER IN THE CONTRACT OF INSURANCE
Q: Is delivery to the agent of the insurance company
delivery to the insured? Q: What is a rider?

A: There are conflicting views as to the answer. A: It is a small or typed stipulation contained on a slip of
paper attached to the policy and forming an integral part of
1. Beneficiary cannot recover the policy.

RATIO: The insurance agent is not his agent They are usually attached to the policy because they
constitute additional stipulations between the parties. Any
2. Beneficiary can recover 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
RATIO: The contract is to be deemed complete when the the policy.
policy has been delivered to the insurance agent. The insured
having complied with every condition required of him, actual Q: What is the necessity for riders?
delivery to him is not essential to give policy binding effect. A
contrary rule would be financially unfair to the beneficiary A: In the conduct of insurance business, it often becomes
where the amount of the premium is computed from the necessary to add new provision to a policy, or to modify or
date of the application. waive an existiong provision, or to make any desired change
in the policy. This saves the trouble and expense of making an
entirely new contract.

Facultad de Derecho Civil 44

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Q: What is the rule in case of conflict between the rider and
printed stipulations of a policy? A: It states that the loss, if any, is payable to a named party or
parties as their interest may appear.
A: The rider prevails, as being more deliberate expression of
the agreement of the contracting paties. Q:  What  is  the  “Change  of  ownership  Clause”?

ATTACHED PAPERS ON INSURANCE POLICY A: It provides that it will inure to the benefit of whomsoever,
during the continuance of the riskm may become the owner
Q: What is the binding effect of rider, slip or other paper? of the interest insured, the insurer gives a written consent to
the assignment of the thing insured.
A: They become part of a contract or policy of insurance if
properly and sufficiently attached or referred to therein in a Endorsement
manner as to leave no doubt as to the intention of the parties
in such respect. Q: What is an endorsement?

Sec. 226 states that no rider, etc. shall be attached to, printed A: Any provision added to an insurance contract altering its
or stamped upon a policy of insurance unless the form of scope or application.
such rider has been approved by the Insurance
Commissioner Ex: those extending the perils covered
In the nature of a permit such as one authorizing the
Q: What is the effect of lack of description? removal of the insured property and providing for coverage in
another location
A: Any rider, clause, warranty, or endorsement purporting to
be part of the contract of insurance and which is pasted or Q: What is the effect of lack of signature?
attached to said policy is not binding on the insured unless
the descriptive title or name of the rider is also mentioned A: As a general rule, where the rider is physically attached to
and written on blank spaces provided in the policy. a policy of insurance contemporaneously with its execution
and delivered to the insured so attached, and sufficient
The lack of description will not affect the other provisions of reference is made in the policy, the fact that it is without the
the policy except where without such rider, the contract will signature of the insurer or of the insured will not prevent its
be incomplete. inclusion and construction as a part of the insurance contract.

Warranties A countersignature of the insured or owner is required to any

rider, etc. not applied for by him if ussued after delivery of
Q: What are warranties? the policy, which countersignature shall be taken as his
agreement to the contents of the matter so attached.
A: They are inserted or attached to a policy to eliminate
specific potential increases of hazard during the policy of the EFFECT OF FAILURE OF INSURED TO READ POLICY
term owing to:
a. Actions of the insured Q: What is the effect of failute of the insured to read the
b. Condition of the property policy?

Clause A:

Q: What is a clause? 1. Majority rule- such acceptance is not negligence per

se and in proceedings to reform insurance contracts,
A: It is an agreement between the insurer and the insured on most   courts   hold   that   the   insured’s   acceptance   and  
certain matter relating to the liability of the insurer in case of retention of the policy unread is not such laches as
loss. will defeat his right to reformation

Q:  What  is  a  “Three-fourths  Clause”? RATIO: Insurance contracts are contracts of adhesion

A: Under the same, the liability of the insurer shall not exceed 2. Minority rule- the one who accepts a contractual
¾ of the loss of or damage to the insured. instrument is conclusively presumed, in the absence
of fraud or mutual mistake, to know and assent to its
Q:  What  is  the  “Loss  payable Clause”? contents.

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

Q:  What  are  the  exceptions  to  the  “minority  rule”? GROUP INSURANCE

A: Q: What is group insurance?

1. It ia obvious that the insurer cannot complain of the A: It is the coverage of a number of individuals by means of a
failure of the insured to read his policy where the insured single or blanket policy, thereby effecting economies which
could not have discovered the erroneous statement by frequently enable the insurer to sell its services at lower
such reading. premium rates than are ordinarily obtainable for same type
2. He is induced by the fraud of the agent of the insurer not of insurance protection on life policies sold to individuals
to read his policy
3. The insured is illiterate or unable to read English Q: What is the form and nature of contract?
4. Where the contratcts are long, complicated and difficult
to understand even if read A: It is essentially a single insurance contract that provides
coverage for many individuals. In its original and most
The so-called “duty  to  read”   has less significance in modern common form, it provides life or health insurance coverage
cases for employees of one employer.

INSURER’S  DUTY  TO  EXPLAIN THE POLICY Q: Is it an indemnity insurance for the benefit of the
employer?
Q: What is the duty of the insurer in explaining the policy in
case the terms of policy are clear? A: No, but an insurance upon the life of the employee for his
personal benefit and the protection of those depending upon
A: The insurer has no affirmative duty to explain rthe policy him   and   is   in   addition   to   and   distinct   from   workmen’s  
or its exclusions to the insured. compensation insurance.

Q: What are the exceptions to this rule? Q: Who are affected by this insurance?

A: A:

1. Doctrine of reasonable expectations- imposes a de facto 1. Insurer

duty on the insurer to explain   the   policy’s   coverage   to   2. Employer
the  insured.  If  a  court  holds  that  an  insured’s  reasonable   3. Insured
expectations entitle him to coverage despite policy 4. Beneficiary
language to the contrary, the court in effect said that the
insurer must pay for the loss because the insurer failed Q: When is a group insurance plan considered as
to explain the limitations on coverage to the insured. In contributory?
other words, if the insurer had provided an explanation
of   the   coverage,   the   insured’s   expectations   of   different   A: If each member pays all or some part of the premiums
coverage would have been rendered unreasonable.
2. Options available to the insured- in motor vehicle Q: When is it non-contributory?
insurance where legislations have made certain kinds of
coverage optional, usually uninsured or underinsured A: If the representative pays all of the premiums.
motorist insurance, courts have imposed a duty of the
insurer to explain the options to the insured, otherwise, Q: What are the advantages of group insurance?
they will be held liable for loss.
3. Information   expected   by   insured   from   insurer’s   agent- A: The amounts of premiums paid by the employer are tax
agents owe their customers a duty to exercise the skill deductible, within limits, while the premiums paid by the
and care that a reasonable agent would exercise in the employee are not considered taxable income to the
circumstances. employee.
4. Contractual rights of insured after denial of coverage –
when the insured discputes a denial of coverage, the Most policies require an employee to pay a portion of the
duty of good faith and fair dealing may impose an premium which the employer deducts from wages or salaries
obligation on the insurer to alert the insured to his rights. while the remainder is paid by the employer.

Facultad de Derecho Civil 46

UNIVERSITY OF SANTO TOMAS
 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
The employer acts as a functionary in the collection and
payment of premiums and in performing related duties such as CONTENTS OF THE POLICY
the disbursement of insurance payments to the employees.
Q: What are the contents of the policy? What is the
Q: What are the constituent parts of the contract? consequence of their inclusion in the policy?

A: A:

1. Group or master policy 1. Name of the parties

2. Policyholder and certificates of participation 2. Amount of insurance
3. Premium
It consists of the parent or master policy, the individual 4. Property or life insured
certificate being no part of such contract but only an 5. Interest of insured in property
instrument  reciting  the  employee’s  right  to  protection  under   6. Risks insured against
the terms of group policy. 7. Term or duration of insurance

For purposes of construction, howver, both the master and Their inclusion is essential to enable the parties to determine
the certificate are to be considered together as parts of the easily the nature and effect of the contract entered by them
same contract. thereby avoiding lawsuits.

Q: Does the employer act as agent of insurer? NAME OF THE PARTIES

A: Yes. The Court held that the employer is the agent of the The mere fact the name of the insured was incorrectly spelled
insurer in performing the duties of administering group is of no importance whatever, provided that the identity of the
insurance policies. party can be sufficiently established.

Q:  Explain:  “The  employees  are  real  parties  in  interest.” It is also not important that the name should appear therein,
as he may be described in other ways than by name:
A: Although the employer may be the titular or named -“for  the  owner”  of  specified  property
insured, the insurance is actually related to the life and health - for  the  benefit  of  “whom  it  may  concern”  
of the employee. Indeed, the employee is in the position of a
real party to the master policym and even in a non- AMOUNT OF INSURANCE
contributoty plan, the payment by the employer of the entire
premium is a part of the total compensation paid for services Necessary to easily and exactly determine the amount of
of employee. indemnity to be paid the insured in case of loss or damage
especially if it is only partial and not total. It is the basis of
The labor of the employees is the true source of benefits. calculating the premium.

Sec. 51. A policy of insurance must specify: Yet, in cases of open running policies, it need not be
specified.
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or The amount of insurance is the maximum limit on the
running policies; insurer’s  liability  for  loss  or  damage  suffered by the insured as
(c) The premium, or if the insurance is of a character where in fire and casualty insurance.
the exact premium is only determinable upon the
termination of the contract, a statement of the basis and Such amount however is not necessarily the value of the
rates upon which the final premium is to be determined; property insured nor the extent of liability of the insurer in
(d) The property or life insured; the event of loss.
(e) The interest of the insured in property insured, if he is
not the absolute owner thereof; In life and health insurance and accidental death and injury
(f) The risks insured against; and insurance a fixed sum is payable—one not measured by the
(g) The period during which the insurance is to continue. proved  amount  of  the  insured’s  loss.

Where   the   policy   of   life   insurance   contains   an   “automatic  

increase   clause”   by   which   the   increase   of   the   insurance  
coverage shall depend upon the happening of an event, the

Facultad de Derecho Civil 47

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
amount insured necessarily includes the additional sum
covered by the said clause because it is already determinable INTEREST OF INSURED IN PROPERTY
at the time the transaction was entered into and formed part
of the policy. Important in fire insurance policies to determine the actual
damage suffered by the insured in case of loss of the property
Q: What is a deductible? covered by the policy if he is not the absolute owner thereof.

A: It is the amount to be deducted from any loss, which is RISKS INSURED AGAINST
shouldered by the insured making the insurer liable only for 
the excess of said amount. All foreseeable losses or risks may be insured against except
those the insurance of which would be repugnant to public
PREMIUM policy or positively prohibited, or those which are occasioned
by the insured’s  own  fraud  or  misconduct.
It represents the consideration of the contract; it is what the
insured pays the insurer to assume the risk of or the value TERM OR DURATION OF INSURANCE
loss.
It refers to the period during which the insurance is to
The rates of premium are based on the nature and character continue.
of the property or other interest insured.
The duration may be expressed in terms of dates, from one
Q: What is net premium? specified time to another, like in marine insurance or in terms
of distance or voyage.
A: It is the portion of the premium that is chargeable directly
to the risk assumed by the insurer. The period during which the insurer assumes the risk of loss is
known as the life of the policy.
Q: What is gross premium?
Policies issued for a term of 12 months are known as annual
A: It is the total amount charged to the insured, which policies while those for a less period are known as short
necessarily includes the net premium plus charges for period policies.
administrative expenses and profits.
INSURABLE RISKS
LIFE INSURANCE
Q: What are the kinds of insurable risks?
Premiums are based on the average life span at any given
age, predicted from statistical figures known as mortality A:
tables.
1. Personal risks
Thus, the life insurance policy of a father would require the 2. Property risks
payment  of  higher  premiums  than  his  son’s. 3. Liability risks

FIRE INSURANCE Personal risks

Factors that affect the rate of a building are its structure or They are risks involving the person.
construction, occupancy or use, location, and loss-prevention
or protection facilities (like fire-fighting equipments and It is chiefly concerned with the time of death or disability as
water supply) and the exposure or proximity to other risks. well as the risk of incapacity through accidental injury, illness
or old age.
PROPERTY OR LIFE INSURED
Property risks
They constitute the subject matter of the contract.
They are those involving loss or damage to property which
The insurer will not be liable for the property lost or damaged arises from the destruction of property. The possible loss of a
which is not the one insured. cargo or ship at sea is considered a risk to those engaged in
the maritime operations.

Q: What are direct losses?

Facultad de Derecho Civil 48

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: It is a condition or factor, tangible or intangible, which may
A: Those losses by fire, lightning, windstorm, flood and other create or increase the chance of loss from a given peril.
forces of nature. They offer a constant threat of loss to real Accordingly, the sum total of hazards constitute the perils
estate. which cause the risk.

Q: What are indirect losses? Q: What are the 2 major classifications of hazards?

A: They include loss of profits, rents or favorable leases. A:

Liability risks 1. Physical hazards-relates to location, structure,

occupancy, exposure, and the like.
They are those involving liability for the injury to the person
or property of others. 2. Moral hazards-factors that have their inception in
metal attitudes. They include those created by
It is sometimes called as third party risks. They are so-called dishonesty, insanity, carelessness, indifference and
when the insurance is used to shift the burden of other causes psychological in nature. This includes
responsibility, the insurer and insured person have agreed the study of the character of the person under
that a third party (the injured person) will be paid for injuries consideration in the light of his reputation.
which the insured is legally liable.
However, risks may be used when what is in mind is peril or
It includes both bodily injury and property damage risks. degree of hazard while a risk may refer to the subject-matter
of the insurance.
RISKS
Requirements for risks to be insurable
Q: What are the Risks?
Q: What are the requirements for risks to be insurable?
A: It is the chance of loss or the possibility of the occurrence
of a loss, based on known and unknown factors. A:

Q: When is a risk considered as negative and positive? 1. Importance- the loss to be insured against must be
important enough to warrant the existence of an
A: It is positive in the sense that it is a beneficial one; it is insurance contract.
negative when the same is undesirable. 2. Calculability- the risk must permit a reasonable
statistical estimate of the chance of loss and possible
If a loss is certain to happen or not to happen, no risk is variations from the estimate. Otherwise, it is
involved. impossible to determine the amount of premiums
that would be required.
PERIL 3. Definiteness of loss- the loss should be fairly definite
as to cause, time, place, and amount.
Q: What is peril? 4. No catastrophic loss- when large numbers of people
are subject to the same kind of losses, it is an
A: It is the contingent or unknown event which may cause a obvious deviation from the principle that the losses
loss. It is the contingency that one insures against. of the few are borne by the contributions of the
many who does not suffer loss.
Its existence creates the risk, and its occurrence results in 5. Accidental nature- insurance is intended to cover
loss. fortuitous or unexpected losses. Intentional loss
caused by the insured is uninsurable because they
Examples of perils are fires, flood, theft, automobile cannot be reasonably predicted and that the same is
accidents, illness, death, and hundreds of other causes of against public policy.
uncertainty.
Yet, insurability is best described as a relative matter.
HAZARD
Sec. 52. Cover notes may be issued to bind insurance
Q: What is Hazard? temporarily pending the issuance of the policy. Within sixty
days after the issue of the cover note, a policy shall be
issued in lieu thereof, including within its terms the identical

Facultad de Derecho Civil 49

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
insurance bound under the cover note and the premium
therefor. PRELIMINARY CONTRACTS OF EXECUTORY INSURANCE

Cover notes may be extended or renewed beyond such The insurer makes a contract to insure the subject matter at
sixty days with the written approval of the Commissioner if some subsequent time which may be definite or indefinite.
he determines that such extension is not contrary to and is
not for the purpose of violating any provisions of this Code. Accordingly, the right acquired by the insured is merely to
The Commissioner may promulgate rules and regulations demand the delivery of a policy in accordance with the terms
governing such extensions for the purpose of preventing agreed upon and the obligation assumed by the insurer is to
such violations and may by such rules and regulations deliver such policy.
dispense with the requirement of written approval by him in
the case of extension in compliance with such rules and RULES ON COVER NOTES
regulations.
Q: What are the rules on cover notes?
Q: What are the 2 kinds of preliminary contracts of
insurance? A:

A: 1. Insurance companies doing business in the

Philippines may issue cover notes to bind insurance
1. Preliminary contracts of present insurance; and temporarily.
2. Preliminary contracts of executory insurance. 2. It shall be deemed to be a contract of insurance
according to Sec.1 (1).
PRELIMINARY CONTRACTS OF PRESENT INSURANCE 3. No cover note shall be issued or renewed unless in
the form previously approved by the Insurance
This is where the insurer insures the subject matter usually by Commission.
what is known as binding slip or binder or cover note. 4. It shall be valid and binding for a period not
Accordingly, the contract is to be effective until the formal exceeding 60 days from the date of its issuance. Yet,
policy is issued or the risk is rejected. it may be cancelled by either party upon at least 7
days notice to the other party.
The binder is a temporary contract of insurance and is usually 5. If it is cancelled, a policy of insurance shall, within 60
issued after the applicant pays the first premium. days after the issuance of such cover note, be issued
in lieu thereof.
Cover Note 6. It can be extended or renewed beyond the
aforementioned period of 60 days within the written
Q: What is a cover note? approval of the Commission, provided that such
written approval may be dispensed with upon the
A: It is merely a written note memorandum of the most certification of the president, v-president, or general
important terns of a preliminary contract of insurance. manager of the insurance company concerned that
the risks involved, the values of the risk, the
It is intended to give temporary protection pending the premiums have not as yet been determined or
investigation of the risk by the insurer or until the issue of a established.
formal policy. 7. Insurance companies may impose on cover note a
deposit premium equivalent to at least 25% of the
It serves the needs of commercial convenience and yet more estimated premium but in no case less than P500.00.
definite and reliable than oral agreement.
Sec. 53. The insurance proceeds shall be applied exclusively
It may be used to afford immediate provisional protection to to the proper interest of the person in whose name or for
the insured until the insurer can inspect or evaluate the risk whose benefit it is made unless otherwise specified in the
in question and issue the proper policy. policy.

Being temporary, it is sufficient that it shows an agreement to A contract of insurance is a personal contract between the
pay whatever rate may be fixed. insured and the insurer.

The fact that no separate premium was paid on the cover As against the insured, third persons have no right either in a
note before the loss insured against occurred does not court of equity or in a court of law to the proceeds of the
militate against its binding effect as an insurance contract. policy unless there be some contract of trust.

Facultad de Derecho Civil 50

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

An insurance taken by one in his own right and his own Since a contract of insurance is a personal contract, it does
interest does not in any way inure to the benefit of the other. not attach to or run with the property insured.

As against the insurer, a third person has also no right to the The transfer of property has the effect of suspending the
proceeds thereof. A policy insurance is a distinct and insurance until the purchaser becomes the owner of the
independent contract between the insured and the insurer. policy as well as of the property insured.

Sec. 54. When an insurance contract is executed with an Sec. 59. A policy is either open, valued or running.
agent or trustee as the insured, the fact that his principal or
beneficiary is the real party in interest may be indicated by Sec. 60. An open policy is one in which the value of the thing
describing the insured as agent or trustee, or by other insured is not agreed upon, but is left to be ascertained in
general words in the policy. case of loss.

An insurance may be taken by a person personally or through Sec. 61. A valued policy is one which expresses on its face an
his agent or trustee. Thus, the agent or trustee when making agreement that the thing insured shall be valued at a
an insurance contract for or on behalf of the principal should specific sum.
indicate that he is merely acting in a representative capacity
by signing as such agent or trustee. Sec. 62. A running policy is one which contemplates
successive insurances, and which provides that the object of
Sec. 55. To render an insurance effected by one partner or the policy may be from time to time defined, especially as to
part-owner, applicable to the interest of his co-partners or the subjects of insurance, by additional statements or
other part-owners, it is necessary that the terms of the indorsements.
policy should be such as are applicable to the joint or
common interest. KINDS OF POLICIES

Insurable interest in the property of a partnership exists both Q: What is an open or unvalued policy?
the partnership and the partners. A partner has an insurable
interest in the firm property which will support a policy taken A: It is one in which a certain agreed sum written on the face
out thereon for his own benefit. of the policy not as the value of the property insured but as
the  maximum  limit  of  the  insurer’s  liability.
But for the co-partners to recover, the terms of the policy
must clearly show that the insurance was meant to cover also Accordingly, the insured must establish the fair market value
the shares of the other partners. (FMV) of the property at the time of the loss. If the FMV
exceeds the maximum, the latter will control whereas if
Sec. 56. When the description of the insured in a policy is so below, the former will control.
general that it may comprehend any person or any class of
persons, only he who can show that it was intended to The insurer only pays the actual value of the property as
include him can claim the benefit of the policy. determined at the time of loss.
The amount recoverable is determined by the amount of the
Sec. 57. A policy may be so framed that it will inure to the loss but not exceeding the face amount of the policy.
benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured. Valued policy

The policy must specify the parties between whom the Q: What is valued policy?
contract is made.
A: It is one which the parties expressly agree on the value of
In any case, in order that the insurance may be applied to the the subject matter of the insurance.
interest of the person claiming the benefit of the policy, he
must shown that he is the person named or described or that There are 2 values: the face value of the policy and the value
he belongs to the class of persons comprehended in the of the thing insured.
policy.
In the absence of fraud or mistake, the agreed valued of the
Sec. 58. The mere transfer of a thing insured does not things insured will be paid in case of total loss of the
transfer the policy, but suspends it until the same person property, unless the insurance is for a lower amount.
becomes the owner of both the policy and the thing insured.

Facultad de Derecho Civil 51

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Open policy
EXC: If the period fixed is less than 1 year from the time the
Q: What is an open policy? cause of action accrues.

A: It is where the value of the property insured is not agreed In case of industrial life insurance, the period cannot be less
upon although the parties may agree on the maximum than 6 years after the cause of action accrues.
amount of recovery or limit the liability of the insurer.
The bringing of action against the agent of insurer cannot
Running policy have any legal effect except that of notifying the agent of the
claim. Beyond such notification, the filing of the action can
Q: What is a running policy? serve no other purpose.

A: It is intended to provide indemnity for property which ACCRUAL OF CAUSE OF ACTION

cannot well be covered by a valued policy because its
frequent change of location and quantity or for property of Q: When does a cause of action accrues?
such a nature as not to admit of a gross valuation.
A: The right of the insured to the payment of his loss accrues
In this case the risk is shifting, fluctuating or varying and from the happening of the loss. Yet, it does not accrue until
which covers a class of property rather than any particular the   insured’s   claim   is   finally   rejected   by   the   insurer.  
thing. Accordingly, before such final rejection, there is no real
necessity for bringing the suit.
These policies are usually known as floating, running or
blanket. They are in reality, open policies. Cause of action does not accrue until the party obligated
refuses to comply with its duty to the insured to pay the
Q: What are the advantages of a running policy? amount of the insurance.

A: The New Insurance Code empowers the Insurance

Commissioner to adjudicate disputes relating to an insurance
1. He is neither under nor over-insured at anytime, the company’s  liability  to  an  insured  under  a  policy  issued  by  the  
premium being based on monthly values reported; former to the latter. Thus, a complaint or claim filed with the
2. He avoids cancellations that would otherwise be Commission is now considered as an action or suit the filing
necessary to keep insurance adjusted to value at each of which would have the effect of tolling or suspending the
location, and for which cancellations he would be running of the prescriptive period.
charged the expensive short rate;
3. He is saved the trouble of watching his insurance and Sec. 64. No policy of insurance other than life shall be
danger of being underinsured in spite of his care through cancelled by the insurer except upon prior notice thereof to
oversight or mistake; and the insured, and no notice of cancellation shall be effective
4. The rate is adjusted to 100% insurance. unless it is based on the occurrence, after the effective date
of the policy, of one or more of the following:
Sec. 63. A condition, stipulation, or agreement in any policy
of insurance, limiting the time for commencing an action (a) non-payment of premium;
thereunder to a period of less than one year from the time (b) conviction of a crime arising out of acts increasing the
when the cause of action accrues, is void. hazard insured against;
(c) discovery of fraud or material misrepresentation;
G.R.: A clause in an insurance policy to the effect that an (d) discovery of willful or reckless acts or omissions
action upon the policy by the insured must be brought within increasing the hazard insured against;
a certain period after rejection is valid. (e) physical changes in the property insured which result in
the property becoming uninsurable; or
Accordingly, the rights of the parties flow from the insurance (f) a determination by the Commissioner that the
contract; thus, they are not bound by the statute of continuation of the policy would violate or would place the
limitations nor by exemptions thereto. insurer in violation of this Code.

It is essential to prompt settlement of claims against the Sec. 65. All notices of cancellation mentioned in the
insurance companies as it demands that insurance suits be preceding section shall be in writing, mailed or delivered to
brought while the evidence as to the origin and cause of loss the named insured at the address shown in the policy, and
or destruction has not yet disappeared. shall state (a) which of the grounds set forth in section sixty-

Facultad de Derecho Civil 52

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
four is relied upon and (b) that, upon written request of the renew the policy or to condition its renewal upon reduction
named insured, the insurer will furnish the facts on which of limits or elimination of coverages, the named insured
the cancellation is based. shall be entitled to renew the policy upon payment of the
premium due on the effective date of the renewal. Any
CANCELLATION OF CONTRACT OF INSURANCE policy written for a term of less than one year shall be
considered as if written for a term of one year. Any policy
Q: What is cancellation? written for a term longer than one year or any policy with
no fixed expiration date shall be considered as if written for
A: It is the term used with regard to insurance regarding the successive policy periods or terms of one year.
right to rescind, abandon, or cancel a contract of insurance.
G.R.: A renewal of insurance by the payment of a new
It is the termination by either the insurer or the insured of a premium and the issuance of a receipt therefor where there
policy of the insurance before its expiration. Accordingly, a is no proviso nom the policy for its renewal, is a new contract
contract of insurance is permitted to lapse when the insured on the same terms as the old one.
fails to take some action to keep the contract in force.
The insured can cancel the contract at his election by EXC: Where the renewal is in pursuance of a provision to that
surrendering the policy. Such surrender however entitles him effect, it is not a new contract but an extension of the old
to the return of the premiums on the customary short-rate one.
basis.
In case of insurance other than life, the named insured is
Q: What are the conditions for the cancellation by the given the right to renew upon the same terms and conditions
insurer? the original policy upon payment of the premium due on the
effective date of the renewal unless the insurer at least 45
A: days in advance of the end of the period mails or delivers to
the insured notice of its intention not to renew the policy or
1. There must be prior notice of cancellation to the to condition its renewal upon the reduction of its amount or
insured; elimination of some coverage.
2. The notice must be based on the occurrence after
the effective date of the policy, of one or more of If the term of the policy is 5 years, the notice must be given at
the grounds mentioned; least 45 days before the anniversary date of any given policy
3. It must be in writing, mailed or delivered to the year. If the 45 days rule is not complied with, the insurer may
named insured at the address shown in the policy; not refuse to renew a policy upon payment of the premium
4. It must state which of the grounds set forth is relied due.
upon.

The premium referred to in Sec. 64 must be a premium

subsequent to the first because it speaks of non-payment Title 8
after the effective date of the policy (See Sec. 77). PREMIUM

Q: What is the purpose of the prior notice of cancellation to Sec. 77. An insurer is entitled to payment of the premium as
the insured? soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary,
A: It is to prevent the cancellation of the policy without no policy or contract of insurance issued by an insurance
allowing the insured ample opportunity to negotiate for other company is valid and binding unless and until the premium
insurance in its stead for his own protection. thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision
The notice must be personal to the insured and not to or applies.
through any unauthorized person by the policy.
Q: What is premium?
The notice need not be delivered personally to the insured. It
may be mailed. A: It is the agreed price for assuming and carrying the risk—
that is, the consideration paid an insurer for undertaking to
Sec. 66. In case of insurance other than life, unless the indemnify the insured against a specified peril.
insurer at least forty-five days in advance of the end of the
policy period mails or delivers to the named insured at the NOTE: Where only one premium is paid for several things not
address shown in the policy notice of its intention not to separately valued or separately insured, making for only one
Facultad de Derecho Civil 53
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
cause or consideration, the insurance contract is entire or
indivisible, not severable or divisible, as to the items insured. NATURE OF PARTIAL DEPOSIT
It is immaterial that they are shipped or transported
separately. Q: What is the nature of partial deposit?

Assessment A: The payment of the partial premium by the assured in this

particular instance should not be considered as payment
Q: What is assessment? required by the law and by the parties. Rather it must be
taken in the concept of a deposit to be held in trust by the
A: It is a sum specifically levied by mutual insurance insurer until such time that the full amount has been
companies or associations, upon a fixed and definite plan, to tendered and duly receipted for.
pay losses and expenses. A policy issued on the assessment
plan has been defined as one where the payment of the Q: Explain: Premium is the elixir vitae of insurance business.
benefit is in any manner or degree dependent upon collection
of an assessment upon persons holding similar policies. A: It cannot be disputed that premium is the elixir vitae of the
insurance business because by law the insurer must maintain
Q: Distinguish premium from assessment. a legal reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt payment
A: In theory, all payments or premiums and assessments are and full satisfaction. Upon this bedrock, the insurance firms
but contributions from all members of the insuring are enabled to offer the assurance of security to the public at
organization to make good the losses of individual members. favorable rates.

PREMIUM ASSESSMENT Q: What is the effect if the partial payment is accepted by

Levied and paid to meet Collected to meet actual the insurer?
anticipated losses losses
The payment of premium, Assessments unless A: An insurance is an aleatory contract which is at once
after the first, is not otherwise agreed, are legally effective upon its perfection although the occurrence of a
enforceable against the enforceable once levied. condition or event may later dictate the demandability of
insured certain obligations thereunder. Founded on the principle of
Not a debt Unless otherwise agreed, is a autonomy of contracts, the parties are generally not
debt prevented from imposing conditions that alone could trigger
the contract’s   obligatory   force.   These   conditions   however,  
Payment of premium ordinarily not a debt or obligation must not be contrary to law, morals, good customs, public
order and public policy.
In fire, casualty, and marine insurance-the premium payable
becomes a debt as soon as the risk attaches, an in suretyship¸
as soon as the contract or bond is perfected and delivered to In life insurance- the premium becomes a debt only when in
the obligor. the case of the first premium, the contract has become
binding, and in the case of subsequent premiums, when the
Q:   What   does   the   phrase   “the   thing   insured   is   exposed   to   insurer has continued the insurance after maturity of the
the  peril  insured  against”  assume? premium,  in  consideration  of  the  insured’s  express  or  implied  
promise to pay.
A: It assumes that the contract is perfected which takes place
when  the  applicant’s  offer  is  accepted  by  the  insurer. a. A life insurance policy involves a contractual obligation
wherein the insured becomes duty bound to pay
Q: What is the effect if as between the insurer and the premium agreed upon lest he runs the risk of having his
insured, there was not only a perfected contract of insurance policy lapse if he fails to pay such premiums.
insurance but a partially performed one? The fact that the insurance policy contains an automatic
premium payment clause cannot divest such policy of its
A: The non-payment of the balance of the premium due does contractual nature for the result of such failure would
not produce the cancellation of the contract of insurance in only be for him to pay the premium plus the
the sense that it can no longer be enforced. A contrary rule corresponding interest depending upon the condition of
would place exclusively in the hands of the insured the right the policy.
to decide whether the contract should stand or not. b. There is usually no duty assumed by the insured to pay
any premiums subsequent to the first. Insofar as the
contract is executory, the ordinary life insurance is purely

Facultad de Derecho Civil 54

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
unilateral. The insurer therefore cannot compel the c. Where the insurer has in any wise waived his
insured to pay the premium because the insure is by no right to demand payment.
means a debtor of the insurer, nor the insurer the
creditor of the insured. VALIDITY OF POLICY WHERE CREDIT EXTENSION GRANTED
TO INSURED
EFFECT OF NON-PAYMENT OF PREMIUM
It is submitted that a credit extension agreement is valid.
Q: What is the effect of non-payment of premium?
Q: What are the exceptions to Sec. 77?
A:
1. First premium- non-payment of the first premium A:
unless waived prevents the contract from becoming 1. In the case of a life or an industrial policy whenever
binding notwithstanding the acceptance of the grace period provision applies
application nor the issuance of the policy. 2. When there is an acknowledgement in a policy of
contract of insurance of receipt of premium even if
But non-payment of the balance of the premium does not there is a stipulation therein that it shall not be binding
produce the cancellation of the contract. until the premium is actually paid.
3. When there is an agreement allowing the insured to pay
2. Subsequent premiums- does not affect the validity of the the premium in installments and partial payment has
contract unless, by express stipulation, it is provided that been made at the time of the loss.
the policy shall in that event be suspended or shall lapse. 4. When there is an agreement to grant the insured credit
In case of individual life or endowment insurance and extension for the payment of the premium and loss
group life insurance, the policyholder is entitled to a occurs before the expiration of the credit term; and
grace period of either 30 days or 1 month within which 5. When estoppel bars the insurer from invoking section
payment of any premium after the first may be made. 77 to avoid recovery on the policy providing a credit
In case of industrial insurance, the grace period is 4 term for the payment of the premiums, as against the
weeks, and where premiums are payable monthly, either insured who relied in good faith on such extension.
30 days or 1 month.
NOTE: Once the premium has been issued, the
EXCUSES FOR NON-PAYMENT OF PREMIUM presumption lies that premium has been duly paid, and
where the non-payment of the premium is attributable
Q: What are the excuses for non-payment of premiums? to the fault or misrepresentation of the insurer, the
insured is entitled to recover in case of loss.
A:
1. Fortuitous events- even the act of god, rendering the Sec. 78. An acknowledgment in a policy or contract of
payment of the premium by the insured wholly insurance or the receipt of premium is conclusive evidence
impossible will not prevent the forfeiture of the policy of its payment, so far as to make the policy binding,
when the premium remains unpaid. The insurer must notwithstanding any stipulation therein that it shall not be
have some efficient means for enforcing punctuality. binding until the premium is actually paid.

NOTE: The insurance contracts are not affected by the EFFECT OF ACCEPTANCE OF THE PREMIUM
fact that the non-payment is due to war or that the
insured has not been negligent. Q: What is the effect of acceptance of the premium?

2. Condition, conduct, or default of insurer- non-payment A: Acceptance of premium within stipulated period for
is excused if: payment thereof, including agreed period of grace, merely
a. Where the insurer has become insolvent and assures continued effectivity of the insurance policy in
has suspended business, or has refused without accordance with its terms. Such acceptance does not stop the
justification a valid tender of premiums. insurer from in interposing any valid defense under the terms
b. Where the failure to pay was due to the of the insurance policy where such insurer is not guilty of any
wrongful conduct of insurer as when he induced inequitable act or representation.
the beneficiary to surrender it for cancellation
by falsely representing that the insurance was There is nothing inconsistent between acceptance of the
illegal and void, and returning the premiums premium due under an insurance policy and the enforcement
made of these terms.

Facultad de Derecho Civil 55

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Sec. 79. A person insured is entitled to a return of premium, 6. When there is over-insurance
as follows: 7. When the rescission   is   granted   due   to   insurer’s  
breach of contract.
(a) To the whole premium if no part of his interest in the
thing insured be exposed to any of the perils insured In the cases 1,3,4 and 5, the insured is entitled to return of
against; the entire premium paid. Of course, the insured cannot
(b) Where the insurance is made for a definite period of recover premiums unless they have actually deemed paid.
time and the insured surrenders his policy, to such portion
of the premium as corresponds with the unexpired time, at Fees like documentary stamps tax and other taxes are not
a pro rata rate, unless a short period rate has been agreed covered, thus they cannot be returned.
upon and appears on the face of the policy, after deducting
from the whole premium any claim for loss or damage EFFECT WHEN RISK NEVER ATTACHED
under the policy which has previously accrued; Provided,
That no holder of a life insurance policy may avail himself of Q: What if the risk has never attached?
the privileges of this paragraph without sufficient cause as
otherwise provided by law. A: Since the premiums are paid in consideration of the
assumption of specified risks by insurers, and since no
Sec. 80. If a peril insured against has existed, and the insurer premium is due unless the risk attaches, if the risk insured
has been liable for any period, however short, the insured is against does not or cannot attach, or if no part of the interest
not entitled to return of premiums, so far as that particular is subject to any of the specified perils, the insurer cannot
risk is concerned. claim or retain the premium thus paid, in the absence of any
fraud or fault on the part of the insured.
Sec. 81. A person insured is entitled to return of the
premium when the contract is voidable, on account of fraud Q: What is the effect is the approval of the application or
or misrepresentation of the insurer, or of his agent, or on acceptance of policy is absent?
account of facts, the existence of which the insured was
ignorant without his fault; or when by any default of the A: Where the application for the policy was not approved, no
insured other than actual fraud, the insurer never incurred premium can be recovered, and with respect to a policy
any liability under the policy. requiring acceptance to be effective, the insured cannot be
held liable for accruing premiums if the policy is not accepted.
Sec. 82. In case of an over-insurance by several insurers, the If no risk attaches or contract results, there is no meeting of
insured is entitled to a ratable return of the premium, minds of the parties on the subject matter of the insurance.
proportioned to the amount by which the aggregate sum
insured in all the policies exceeds the insurable value of the Q: What if the loss occurs before effective date?
thing at risk.
A: Where the insured pays in advance the annual premium on
RECOVERY OF THE PREMIUMS a certain property insured by him, the insurance to take
effect on a certain date and the loss occurs before said date,
Q: When is the insured entitled to recover premiums? the insured is entitled to a return of the whole premium

A: The insured has the right to recover premiums already EFFECT OF BEING PUBLIC ENEMIES
paid or a portion thereof in the following cases:
Q: What if the insured and insurer became public enemies?
1. When no part of the thing insured has been exposed
to any of the perils insured against A: Where the parties of insurance have become public
2. When the insurance is for definite period and the enemies because of the existence of a state of war, justice
insured surrenders his policy before the termination requires that premiums paid after the declaration of war
thereof between the belligerent states be returned to the insured.
3. When the contract is voidable because of the fraud War abrogates the insurance contracts between belligerent
or misrepresentations of the insurer or his agent states, and therefore, the insured is not entitled
4. When the contract is voidable because of the notwithstanding the payment of the premiums, to indemnify
existence of facts of which the insured was ignorant for loss occurring after such declaration of war.
without his fault
5. When the insurer never incurred any liability under Q: Enumerate the cases where Sec. 79 (b) will not apply.
the policy because of the default of the insured
other than actual fraud A: Sec. 79 (b) does not apply:

Facultad de Derecho Civil 56

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
a. Where the insurance is for a definite period WHERE THE RISK HAS ATTACHED
b. Where a short period rate has been agreed upon
c. Where the policy is a life insurance policy 1. Whole premium considered as earned
-the general rule is that the insurance granted is he
INSURED SURRENDERS THE POLICY BEFORE TERMINATION entire consideration for the premium received; hence, if
the   risk   has   attached   by   reason   of   the   contract’s  
Q: What if the insured suurenders the policy before becoming binding upon the insurer, the whole premium
termination? must be considered as earned and, therefore, cannot be
apportioned in case the risk terminates before the end of
A: If the insurance is for a definite period of time and the the term for which the insurance was granted.
insured cancels his policy by surrendering his policy, provided
this is allowed under the policy, the insured is entitled to NOTE: In the absence of any agreement to the contrary,
recover the premiums already paid equivalent to the if a peril insured against has existed, and the insurer has
unexpired period, retaining only the earned portion been liable for any period, however short, the insured is
corresponding to the portion expired. But there shall be a not entitled to return of premiums so far as the principal
deducted from the whole premiums any claim for loss or risk is concerned.
damage under the policy which has previously accrued.
2. Where insurance divisible
SHORT PERIOD RATE -if the contract of insurance is divisible, consisting of
several distinct risks for which different amount of
Q: What if a short period rate has been stipulated? premiums have been paid, the premium paid for any
particular risk is not earned until that risk has attached.
A: If a policy on which premiums have been paid for a year is
cancelled by insurer before the expiration of the year, it VOIDABLE INSURANCE CONTRACTS
retains only a proportion of the annual premium that the
expired time bears to the entire time. Q: What are the instances where the contract of insurance is
voidable?
If a policy is cancelled by the insured, the pro rata return of
premium will not be followed if the policy stipulates a short A:
period rate, in which case, the insured is entitled to return of
the premium in proportion stipulated. 1. Fraud of insurer and his agent
2. On account of facts, the existence of which the
A short period rate clause appears in most fire policies. insured was ignorant without his fault;
3. By any default of the insured other than actual
Q: Explain the right to recover premiums as to life insurance. fraud, the insurer never incurred liability under the
policy
A: Recovery of premiums paid is not allowed in life insurance 4. Fraud of the insured
if the insured surrenders his policy.
Q: Is the insured entitled to return of the premium if the
Q: What is the reason for this? policy is annulled by reason of his fraud or
misrepresentation?
A: Life insurance is not a divisible contract. It is not an
insurance for a single year, with privilege of renewal from A: The insured is not entitled. Sec. 81 impliedly prohibits the
year to year by paying the annual premium but that is an return of premium where the policy is annulled by reason of
entire contract of insurance for life subject to discontinuance the fraud of the insured.
and forfeiture for non-payment of any of the stipulated
premiums. OVER-INSURANCE

The  value  of  the  assurance  for  one  year  of  a  man’s  life  when   Q: Where is there over-insurance?
he is young, strong, and healthy is manifestly not the same
when he is old and decrepit. A: In case of over-insurance by double insurance, the insurer
is not liable for the total amount of insurance taken, his
In life insurance however, the insured will be entitled to liability being limited to the amount of the insurable interest
receive   the   “cash   surrender   value”   of   his   policy   “after   three   on the property insured. He is not entitled to that portion of
full  annual  premiums  shall  have  been  paid.” the premium corresponding to the excess of the insurance
over the insurable interest of the insured.

Facultad de Derecho Civil 57

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: It may be defined as a demand for the satisfaction of a loss
NOTE: The premiums to be returned where there is over- suffered  within  the  purview  of  an  insured’s  policy.  It  may  be  
insurance by several insurers shall be proportioned to the made by the party insured, the insurer with right of
amount by which the aggregate sum insured in all the policies subrogation, or non-party but with a right against the
exceeds the insurable value of the thing at risk. insured.

Q: What if the insurance is illegal? Q: What is the effect of agreement not to transfer claim of
insured after a loss?
A: When the insurance is void because it is illegal, the general
rule is that the premiums cannot be recovered. A: Before a loss has occurred, an insurance policy, except a
life insurance policy is not assignable without the consent of
Q: What is the exception to this general rule? he insurer on the theory that the policy is a personal contract
between the insured and insurer.
A:
After the loss has occurred, the insured has an absolute right
1. If in fact, the parties are not in pari delicto, the law will to transfer or assign his claim against the insurer. A
allow an innocent insured to take again his premiums as stipulation which attempts to prohibit such transfer is void.
when the insured was ignorant of the facts which
rendered the insurance illegal. Q: What if there is an agreement which hinders free
2. Where one having no insurable interest in the life transmission of property?
insured, paid premiums in the bona fide belief induced
by fraudulent statement of the insurer, that such A: Such stipulation is void as against public policy.
insurance was valid, he may recover the premiums paid
despite the fact that the contract was illegal. Q: What if the transfer involves money claim or right of
action?
Q: What are the bases of right to recover premiums with
regard the return of premium for short interest, over A: After the loss has been suffered, the policy or right
insurance, and double insurance? thereunder may be assigned without the consent of or notice
to the insurer for in such case, it is not the personal contract
A: which is being assgned, but a money claim under or a right of
1. Insurer could have been called to pay the whole sum action on the policy.
insured
-In such case, the whole premium is earned and there Q: What if the transfer involves no question of moral
shall be no return hazard?

2. Insurer could have been called to pay only part of the A: Such assignment of the right to collect from the insurer
whole sum insured involves no question of moral hazard because it cannot
-He ought not retain a larger portion than ½ or ¼ of the increase  the  insurer’s  risk  for  a  loss  that  has  already  occurred.  
premium (for example) of the premium and must return
the residue. Once a loss has occurred, the duty of the insurer to pay the
insurance proceeds is fixed and the transfer does no harm to
its duty.

Title 9 Sec. 173, however, prohibits that transfer of policy of fire

LOSS insurance to any person or company who acts as an agent for
or otherwise represents the issuing company and declares
Sec. 83. An agreement not to transfer the claim of the such transfer void insofar as it may affect other creditors of
insured against the insurer after the loss has happened, is the insured.
void if made before the loss except as otherwise provided in
the case of life insurance. Sec. 84. Unless otherwise provided by the policy, an insurer
is liable for a loss of which a peril insured against was the
CLAIM OF INSURANCE proximate cause, although a peril not contemplated by the
contract may have been a remote cause of the loss; but he is
Q: What is claim of insurance? not liable for a loss which the peril insured against was only
a remote cause.

Facultad de Derecho Civil 58

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Q: What is loss? Q: Who has the burden of proof in case of loss?

A: It may be defined as the injury, damage, or liability A: The insurer has the burden of proof to show that he is not
sustained by the insured in consequence of the happening of liable.
one or more of the perils against which the insurer, in
consideration of the premium, has undertaken to indemnify Q: What is the quantum of evidence required?
the insured.
A: Preponderance of evidence
SCOPE OF LOSS
PROXIMATE CAUSE, EFFICIENT CAUSE AND IMMEDIATE
Q: What is the scope of loss? CAUSE

A: It embraces: Q: What is proximate cause?

a. Bodily injury A: It is that which in a natural and continuous sequence,

b. Death unbroken by any new independent cause, produces an event
c. Property damage and without which the event would not have occurred.
d. Destruction
e. Loss of income Q: What is efficient cause?
f. Loss of profits
rd
g. Legal liability to a 3 party A: It is one that sets others in motion.

Q: In reinsurance, what is loss? Q: Is proximate the same as immediate cause?

A: It   refers   to   reinsurer’s   share   of   the   loss   on   risks   ceded   A: No.

either automatically or facultatively.
EXAMPLES:
Q: What is the extent of liability of the insurer for loss?
If the fire causes explosion which results in a loss, fire is the
A: How much the insurer will pay depends upon whether the proximate cause
insured suffers a loss and the extent of that loss. If the house is insured against fire and it is damaged by the
failing of a wall of a neighboring bldg. which is on fire, the fire
Q: What is the extent of the loss? is the proximate cause although no part of the insured house
is actually on fire.
A: An accidental injury resulting in hemia which forced the
1. Total insured, as a last result, to submit to a surgical operation
2. Partial which turns out unsuccessful, the accident is the proximate
3. Constructive total cause and not the surgical operation.

Q: How can the loss be satisfied? Hostile v. Friendly fire

A: Q:  Distinguish  “hostile”  from  “friendly”  fire.

1. Payment of the loss
2. Reinstatement (repair or restoration) of the property A:
damaged
3. Replacement with another similar property FRIENDLY FIRE HOSTILE FIRE
So long as a fire burns in a When it occurs outside of the
Q:  What  is  the  rule  with  respect  to  the  “cause  of  the  loss”? place where it was intended usual confines or begins as a
to burn, and ought to be, it is friendly fire and becomes
A: The insurer assumes liability only for a loss proximately to be regarded as merely an hostile by escaping from the
caused by the perils insured against although a peril not agency for the place where it ought to be to
insured against may have been a remote cause of the loss. accomplishment of some some place where it ought
But the insurer is still liable even if the proximate cause is not purpose and not as a hostile not to be.
the peril insured against if the immediate cause is the peril perile.
insured against. Examples: Example:
1. A fire burning in a 1. Where the flames
Facultad de Derecho Civil 59
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
furnace, stove or escaped through a In this case, it is the efforts to rescue the thing that caused
lamp is a friendly crack in a stove the loss.
fire, and it is not to releasing sprinkle
be considered to be head above, the Examples:
within the terms of insurer was held
the policy liable for the issuing a. damages to goods by being trampled on or thrown
2. Damage caused by loss about in the efforts to put out the fire
smoke issuing from 2. Even though the fire b. damage to goods by water during attempt to save it
a lamp that is may remain entirely from fire itself
turned too high within its proper
place, it may The insured is bound to exercise a reasonable degree of care
become hostile if it, in removing the goods
by accident,
becomes so Q: What is the test of the necessity of removal?
excessive as to
beyond control. A: It is to be determined not by the result alone but by the
3. A fire caused by a circumstances as they appear to the interested persons at the
lighted cigarette on time of the fire.
a rug
Sec. 86. Where a peril is especially excepted in a contract of
Q: What is the reason for the rule on friendly fire? insurance, a loss, which would not have occurred but for
such peril, is thereby excepted although the immediate
A: The policy shall not be construed to protect the insured cause of the loss was a peril which was not excepted.
from injury consequent upon his negligent use or
mismanagement of fire, so long as it is confined to the place Q: What is the effect if the proximate cause is an excepted
where it ought to be. peril?

Sec. 85. An insurer is liable where the thing insured is A: The insurer is not liable if the proximate cause of the loss is
rescued from a peril insured against that would otherwise a peril excepted from the policy although the immediate
have caused a loss, if, in the course of such rescue, the thing cause is a peril not excepted.
is exposed to a peril not insured against, which permanently
deprives the insured of its possession, in whole or in part; or Example: In a fire insurance policy which excludes loss
where a loss is caused by efforts to rescue the thing insured through explosion, if an explosion occurs first and causes a
from a peril insured against. fire which results in a loss, the insurer is not liable.

Q: What are the 2 occasions under Sec. 85 where the insurer Q: Who has the burden of proving that the loss is caused by
is liable? risks excepted?

A: A: The insurance company.

1. Where the loss took place while being rescued from the Sec. 87. An insurer is not liable for a loss caused by the
peril insured against willful act or through the connivance of the insured; but he
is not exonerated by the negligence of the insured, or of the
The insurer is liable where the insured is permanently insurance agents or others.
deprived of the possession, in whole or in part, of the thing
insured by peril not insured against provided it is shown that Q: Is the insurer liable for a loss caused by the intentional
said property would have been no attempt to rescue it. act of the insured or through his connivance?

Example: Loss of goods by theft during the removal of goods A: No. Such loss is not within the contemplation of a contract
to save them from loss by fire is covered by the policy against of insurance one of the requisites of which is that the risk
fire except when the policy contains a stipulation exempting should not be subject in any wise to the control of the
insurer from liability for such loss. parties.

2. Where the loss is cause by efforts to rescue the thing Q: Is the insurer liable for the negligence of the insured?
insured from a peril insured against.
A:

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 NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

1. Where there is ordinary negligence Example: where the policy provides that it shall be void if the
insured shall procure any other insurance on the property
The carelessness and negligence of the insured or his agents without the consent of the insurer, the violation of the
constitute no defense on the part of the insurer, as a general condition renders ipso facto the policy void.
rule.
Q: What is the rule regarding the conditions after loss?
The doctrine of contributory negligence does not in any way
apply to rights under a contract of insurance. A: Secs. 88 and 89 provides for the conditions concerning
matters after the loss which must be fulfilled before the
Mere negligence or carelessness on the part of the insured or insured becomes entitled to the benefit of the policy.
his servants, although directly causing or contributing to the
loss, usually is one of the risks covered by the insurance and Example: In some life and accident policies, a provision is
does not relieve the company from liability. included requiring that a certificate of attending physician of
the insured be furnished as part of the proof of death.
2. Where there is gross negligence
Q: What is the nature of these conditions?
Gross negligence or recklessness on the part of the insured,
the consequences of which must have been palpably obvious A: While in the form of conditions precedent, they are in
to him at the time, will relieve the insurer from liability. nature conditons subsequent to breach of which affects a
right that has already accrued.
Examples:
Q: How shall these conditions be construed?
a. Where the insured in his own house, sees the burning
coals in the fireplace, does not brush them up A: All these conditions in the policy-making reqiuirements of
b. Or when he makes no attempt to put it out. the insured after the loss are intended merely for evidential
c. There was no efforts taken to save personal property in purposes and do not properly form any part of the conditions
the building although there is ample time. of liability. Thus, it is the general rules of construction which
states that they shall be construed with much less strictness
than those conditions that operate prior to the loss that shall
apply.
Title 10
NOTICE OF LOSS Q: What is notice of loss?

Sec. 88. In case of loss upon an insurance against fire, an A: It is the more or less formal notice given the to the insurer
insurer is exonerated, if notice thereof be not given to him by the insured or claimant under a policy of the occurrence of
by an insured, or some person entitled to the benefit of the the loss insured againts.
insurance, without unnecessary delay.
Q: What is the purpose of the notice?
Sec. 89. When a preliminary proof of loss is required by a
policy, the insured is not bound to give such proof as would A: To apprise the insurance company with the occurrence of
be necessary in a court of justice; but it is sufficient for him the loss, so that it may gather information and make the
to give the best evidence which he has in his power at the proper investigation while the evidence is still fresh, and take
time. such action as be necessary to protect its interest from fraud
or imposition; in the case of property insurance, to prevent
Q: What is the rule regarding the conditions before the loss? further loss to the property.

A: There must be compliance on the part of the insured with Q: Is notice necessary?
the terms of the policy.
A: It is obvious that the insurer cannot be held liable to pay a
Q: What if he has violated or failed to perform the claim unless he receives notice of that claim.
conditions of the contract, and such violation or want of
performance has not been waived by the insurer? Under the law, if notice of loss is not given to the insurer by
the person insured or by the person entitled to the benefit of
A: The insured cannot recover. The non-compliance with the the insurance without unnecessary delay, or in a timely
contract bars his right of recovery.
Facultad de Derecho Civil 61
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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
manner, the insurer is exonerated or discharged from b. In writing
liability. c. Informal or provisional
d. Formal claim
NOTE:
It is immaterial that if the notice is not given, the company Q: What is the purpose of the proof of loss?
would not be prejudiced, and if given, the company would
not be benefited. A: The notice of loss is distinct from the proof of loss. The
requirement of notice is intended merely to give the insurer
Formal notice of the loss is not necessary if the insurer information upon which he may act promptly in protecting
already has actual notice, but there is authority to the the property from further loss for which he may be liable or
contrary. to enable him to take any other immediate steps that his
interests may require.
Q: What is the propert time for givig notice of loss?
The statement of loss is a very much formal requirement,
A: The  notice   must   be  given   “without   unnecessary  delay.”  A   and intended not only:
notice of loss must be given immediately or forthwith a. To give the insurer information by which he may
requires the giving of notice within a reasonable time. determine the extent of his liability
b. To afford him a means of detecting any fraud that
Q: What constitutes a reasonable time for giving notice? may have been practiced upon him
c. To operate as a check upon extravagant claims
A: It depends on the circumstances of the particular case
although the courts construe the requirement of immediate ADJUSTERS
notice liberally in favor of the insured.
Q. Who are adjusters?
NOTE: The insurance contract may provide that the notice of
the loss shall be given within a stated time after the loss A: The insurer or the insured may avail of the services of
occurs and that failure to give the notice within such time adjusters in effecting the settlement of an insurance claim.
shall preclude recovery. Such provision is valid provided the
time so fixed is not unreasonably short. Q: Who has the burden of proof of loss in court action?

PROOF OF LOSS A: If the insured has the burden of proving that he has
suffered a loss and in life insurance, death of the insured
Q: What is proof of loss? must be proven.

A: It is more or less the formal evidence given the company In an action on a fire insurance, it devolves upon the plaintiff
by the insured or claimant under a policy of the occurrence of to prove the amount of his loss by a preponderance of
its loss, the particulars thereof, and the data necessary to evidence.
enable the company to determine its liability and the amount
thereof. The cost price is competent evidence to show the value of
articles destroyed by fire.
Q: What should be the form of notice or proof of loss?
Q: Are inventory of goods constitute evidence of loss?
A: The law does not make any requirement as to the form in
which notice or proof of loss must be given. In the absence of A: No, they are mere claim for loss
any stipulation, notice or proof may be given orally or in
writing. However, it is advisable to give the notice of proof in NOTE: Testimony or evidence must be given to sustain
writing for the protection of the insured or his beneficiary. correctness of the claim.

The notice of loss may be in the form of an informal or Q: What may be the excuse/s for non-compliance with the
provisional claim containing a minimum information as conditions?
distinguished from a formal claim which contains the full
details of the loss, computations of the amounts claimed, and A: Failure on the part of the insured to comply strictly with
supporting evidence, together with a demand or request for the terms will be excused when the circumstances were such
payment. as to make strict compliance impossible.

a. Oral Examples:

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
If the insured has attempted to comply with the stipulations
1. failure to give notice and proof of loss will be excused of the policy and the company makes objections which
when it is due to the death or incapacity of the insured necessitate amended or supplemental proofs, the insured will
2. beneficiary had no knowledge of the existence of the be allowed a reasonable time after he is appraised thereof
policy of the insured who died before the fire. within which to remedy the defects regardless of the time
prescribed by the policy for furnishing proofs.
Sec. 90. All defects in a notice of loss, or in preliminary proof
thereof, which the insured might remedy, and which the Sec. 92. If the policy requires, by way of preliminary proof of
insurer omits to specify to him, without unnecessary delay, loss, the certificate or testimony of a person other than the
as grounds of objection, are waived. insured, it is sufficient for the insured to use reasonable
diligence to procure it, and in case of the refusal of such
Q: When is the defect in notice or proof deemed waived? person to give it, then to furnish reasonable evidence to the
insurer that such refusal was not induced by any just
A: It is the duty of the dissatisfied insurer to indicate the grounds of disbelief in the facts necessary to be certified or
defects in the proof of loss given, so that deficiencies may be testified.
supplied. His retention of the defective proofs constitutes
waiver of his objections. Q: What is the effect of failure to secure certificate or
rd
testimony of 3 person?
Thus, there is waiver where the insurer:
A: If the policy requires, by way of preliminary proof of loss,
1. writes the insured that he considers the policy null the certificate or testimony of a person (like notary public)
and void as the furnishing of the notice or proof of other than the insured, such requirement must be complied
loss would be vain and useless with by the insured as part of the contract.
2. recognize his liability to pay the claim
3. denies all liability under the policy However, the insured is only required to exercise due
4. joins in the proceedings for determining the amount diligence to procure it.
of the loss by arbitration, making no objections on
account of notice and preliminary proof Such requirement in the policy must be liberally construed in
5. makes objections on any ground other than formal favor of the insured.
defect in the preliminary proof
6. general statement that proofs are defective

Sec. 91. Delay in the presentation to an insurer of notice or Title 11

proof of loss is waived if caused by any act of him, or if he DOUBLE INSURANCE
omits to take objection promptly and specifically upon that
ground. Sec. 93. A double insurance exists where the same person is
insured by several insurers separately in respect to the same
DELAY IN THE PRESENTATION OF NOTICE OF PROOF subject and interest.

Q: When is delay in the presentation of notice or proof Q: What is double insurance?

deemed waived?
A: In double insurance, the same person is insured by several
A: Waiver of delay in the presentation of notice or proof of insurers separately in respect to the same subject and
loss may be made: interest.

a. by an act of the insurer NOTE: The   terms   “additional   insurance,”   “other   insurance,”  
b. by failure to take objection promptly and specifically and   “double   insurance”   are   used   interchangeably   although  
upon that ground there is technical difference in their meanings.

An insurance company, by accepting payment of premium Q: What are the requisites for double insurance?
with full knowledge that the premises had been injured or
destroyed by fire, is stopped from claiming that the notice of A:
the fire was not given forthwith to the insurer by the insured 1. The person insured is the same
as required by the terms of the policy. 2. Two or more insurers insuring separately
3. The subject matter is the same
4. The interest insured is also the same
Facultad de Derecho Civil 63
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
5. The risk or peril insured against is likewise the same. without knowledge or consent of the insured will not affect
his rights under the policy in the absence of ratification.
DOUBLE INSURANCE v. OVER INSURANCE
Q: What is the purpose for the prohibition against double
Q: Distinguish double insurance from over-insurance. insurance?

A: A: To prevent over-insurance and thus, avert the perpetration

of fraud. The public, as well as the insurer, is interested in
DOUBLE INSURANCE OVER INSURANCE preventing the situation in which a loss would be profitable
The same person is insured Where the amount of the to the insured.
by several insurers separately insurance is beyond the
in respect to the same value   of   the   insured’s   Sec. 94. Where the insured is overinsured by double
subject and interest insurable interest insurance:
There are always several There may be only 1 insurer
insurers involved (a) The insured, unless the policy otherwise provides, may
Used   instead   of   “co- claim payment from the insurers in such order as he may
insurance” select, up to the amount for which the insurers are severally
liable under their respective contracts;
Double insurance and over-insurance may exist at the same (b) Where the policy under which the insured claims is a
time or neither may exist at all. valued policy, the insured must give credit as against the
valuation for any sum received by him under any other
BINDING EFFECT OF STIPULATION AGAINST DOUBLE policy without regard to the actual value of the subject
INSURANCE matter insured;
(c) Where the policy under which the insured claims is an
A policy which contains no stipulation against additional unvalued policy he must give credit, as against the full
insurance, is not invalidated by the procuring of such insurable value, for any sum received by him under any
insurance. policy;
(d) Where the insured receives any sum in excess of the
Policies of fire insurance contain a stipulation or condition valuation in the case of valued policies, or of the insurable
that they be avoided if additional insurance is procured on value in the case of unvalued policies, he must hold such
the  property  without  the  insurer’s  consent. sum in trust for the insurers, according to their right of
contribution among themselves;
“ADDITIONAL  or  OTHER  INSURANCE  CLAUSE” (e) Each insurer is bound, as between himself and the other
insurers, to contribute ratably to the loss in proportion to
Q:   What   is   the   purpose   of   the   “additional”   or   “other   the amount for which he is liable under his contract.
insurance  clause”?
RULES FOR PAYMENT OF CLAIMS IN CASE OF OVER
A: It is intended to prevent an increase in the moral hazard. It INSURANCE BY DOUBLE INSURANCE
is valid and reasonable, and in the absence of consent, waiver
or estoppel on the part of the insurer, a breach thereof will Q: What are the rules for payment of claims where there is
prevent a recovery on the policy. over-insurance by double insurance?

Q: What is the requirement in order to constitute a A:

violation? 1. As the contract of insurance is a contract of indemnity,
the insured can recover no more than the amount of his
A: The other insurance must be upon: insurable interest whether the insurance is contained in
1. the same subject matter, one policy or several policies
2. the same interest therein, and 2. Principle of Contribution- requires each insurer to
3. the same risk contribute ratably to the loss or damage considering that
the several insurances cover the same subject matter
Q: What if the additional insurance was obtained by a 3
rd and interest against the same peril.
person? 3. If the loss is greater than the sum total of all the policies
issued, each insurer is liable for the amount of his policy.
A: The good faith or bad faith of the insured usually is
rd
immaterial. However, insurance obtained by a 3 person

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Title 12 A: Every insurance company, in accordance with its financial
REINSURANCE strength, establishes limit on the maximum claim it wishes to
pay out if its own resources. This limit is called retention.
Sec. 95. A contract of reinsurance is one by which an insurer
procures a third person to insure him against loss or liability At same time, a company wants its salesman to be able to
by reason of such original insurance. take an application for any amount the applicant is willing to
seek. When such applications are for a sum over the
Q: What is a contract of reinsurance? company’s   retention,   it   handles   the   excess   by   means   of  
reinsurance.
A: It is a contract whereby one party, the reinsurer, agrees to
indemnify another, the reinsured (original insurer), either in Q: What is the purpose of reinsurance?
whole or in part, against loss or liability which the latter may
sustain or incur under a separate or original contract of A: Through the use of reinsurance, then, an insurer is able to
rd
insurance with a 3 party, the original insured. It is issue policies for amounts in the excess of its retention limit
sometimes referred to as treaties. or beyond the capacity of its financial resources in cases of
loss, rather than inconvenience a client by referring him to
Reinsurance is required by law in certain cases. other insurance companies. This is in the best interest of the
insuring public, the insurer, and the reinsurer.
Q: How do you call the reinsurance of a reinsurance?
The knowledge of the industry regarding classification of
A: Retrocession impaired risks is increased in the most economical manner.
Reinsuring companies serve as focal point forund the
REINSURANCE v. DOUBLE INSURANCE collection of such risks where statistically significant volumes
of consistently underwritten substandard business are
Q:  Distinguish  “reinsurance”  from  “double  insurance.” accumulated and subjected to extensive analyses by an
experienced staff.
A:
2. From the standpoint of he insured- the practice of
DOUBLE INSURANCE REINSURANCE reinsurance is also beneficial to the insured in the
The insurer remains as the The insurer becomes the following reasons:
insurer of the original insured insured, insofar as the
reinsurer is concerned a. It gives insurance companies that practice in greater
The subject of the insurance It  is  the  original  insurer’s  risk   financial   stability   and   thus   makes   insured’s   individual  
is property policy more reliable
An insurance of the same An insurance of a different b. If a large amount of insurance is needed, the insured may
interest interest obtain it without negotiating with numerous companies
The insured is the party in The original insured has no c. It enables the insured to obtain protection promptly,
interest in all contracts interest in the contract of without the delay that would be required to divide and
reinsurance which is distribute the amount among many companies
independent of the original d. All the insurance can be written under identical contract
contract of insurance. provisions, whereas otherwise these might vary with the
The insured has to give his The consent of the original different companies among whom the insurance is
consent insured is not necessary since divided
he is sometimes hardly even e. Small companies are encouraged to divide large
aware of the reinsurance exposures for safety and enabled to accept a wide
transaction. variety of applicants.

Value of the reinsurance 3. From the standpoint of the public – contracts or

“treaties”   of   reinsurance   are   plainly   beneficial   to   the  
A: public inasmuch as they promote both efficiency and
stability in the conduct of the reinsurance business.
1. From the standpoint of the insurer- reinsuring companies
benefit from contracts of reinsurance. Sec. 96. Where an insurer obtains reinsurance, except under
automatic reinsurance treaties, he must communicate all
Q: What is retention? the representations of the original insured, and also all the
knowledge and information he possesses, whether

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
previously or subsequently acquired, which are material to A: It  receives  the  reinsurer’s  underwriting  opinion  before the
the risk. policy is issued.

DUTY OF REINSURED TO DISCLOSE FACTS PROTECTION TO REINSURER

Where an underwriter is seeking to insure his risks, his duty By agreeing to accept business automatically, the reinsurer is
to disclose all material facts is no less than the similar duty relying on the underwriting judgment of the insurer and is
imposed on a person seeking an original insurance; the duty bound to accept a case even though it may not agree with the
in both cases is one of the strictest good faith since the risk underwriting decision.
insured against in a contract of reinsurance is the probability
that the original insurer may be compelled to pay for the loss The reinsurer is protected by the requirement that the
under the policy issued by him. Thus, a policy may be avoided original insurer retains its full retention limit, which assures a
where the reinsured conceals the fact that a loss has taken measure of self-interest.
place or that the property is over-insured where he has
knowledge thereof. In practice, when any question of proper underwriting
classification exists, the insurer usually does not use its
AUTOMATIC AND FACULTATIVE METHODS OF automatic   facility   but   instead   secures   the   reinsurer’s  
CEDING REINSURANCE underwriting opinion by submitting the case facultatively.

Q: How may reinsurance be placed in effect? REINSURANCE TREATY v. REINSURANCE POLICY

A: Q: Distinguish reinsurance treaty from reinsurance policy.

1. Automatically A:
2. facultatively
REINSURANCE TREATY REINSURANCE POLICY
Q: Distinguish automatic from facultative reinsurance. Merely an agreement A contract of indemnity one
beween two insurance insurer makes with another
A: companies whereby one to protect the first insurer
agrees to cede and the other from a risk it has already
AUTOMATIC FACULTATIVE REINSURANCE to accept reinsurance assuned.
REINSURANCE business pursant to
Under this, the ceding Covers the liability on provisions specified in the
company (reinsured) is individual risk, there is no treaty.
bound to cede (give off by obligation either to cede or Contracts for insurance Contracts of insurance
way of reinsurance) and the to accept participation in the
reinsurer is obligated to risk insured, each party The lumping of the different agreements under a contract has
accept a fixed share of the having a free choice. But resulted in the term known to the insurance world as
risk which has to be once the shared is accepted, “treaties.”
reinsured under the contract the obligation is absolute and
the liability assumed Sec. 97. A reinsurance is presumed to be a contract of
thereunder can be indemnity against liability, and not merely against damage.
discharged by one and only
way—payment of he share of Q: What is the nature of the contract of reinsurance?
the losses. There is no
altrenative or substitute A: The subject of the contract of reinsurance is the primary
prestation. insurer’s   risk   and   not   the   property   under   the   original policy.
Its nature are:
Q: What is the advantage of the automatic method to the
insurer? 1. Contract is one of indemnity against liability
2. Contract that is separate from original insurance policy
A: There is avoidance of any delay in issuing its policy. 3. Contract based on original policy
4. Insurable interest requirement is also applicable.
Q: How about in facultative method? 5. Rule on subrogation applicable

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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
(a) Vessels, craft, aircraft, vehicles, goods, freights,
Sec. 98. The original insured has no interest in a contract of cargoes, merchandise, effects, disbursements,
reinsurance. profits, moneys, securities, choses in action,
evidences of debts, valuable papers, bottomry, and
Q: What are the rights of original insured in a contract of respondentia interests and all other kinds of
reinsurance? property and interests therein, in respect to,
appertaining to or in connection with any and all
A: risks or perils of navigation, transit or
1. The insured, unless the contract so provides, has no transportation, or while being assembled, packed,
concern with the contract of reinsurance, and the crated, baled, compressed or similarly prepared for
reinsurer is not liable the insured either as surety or shipment or while awaiting shipment, or during any
otherwise. delays, storage, transhipment, or reshipment
2. There is no privity of contract between the original incident thereto, including war risks, marine
reinsured and the reinsurer. A contract of reinsurance builder's risks, and all personal property floater
rarely explicitly permits direct action by the original risks;
insured against the reinsurer. (b) Person or property in connection with or
appertaining to a marine, inland marine, transit or
Q: What is the liability of the reinsurer to the reinsured? transportation insurance, including liability for loss
of or damage arising out of or in connection with
A: As a general rule, the reinsurer is entitled to avail itself of the construction, repair, operation, maintenance or
every defense which the reinsured might urge in an action by use of the subject matter of such insurance (but not
the person originally insured. including life insurance or surety bonds nor
insurance against loss by reason of bodily injury to
Thus, the reinsurer is not liable to the reinsured for a loss any person arising out of ownership, maintenance,
under an original policy if the latter is not liable to the original or use of automobiles);
insured or for an amount more than the sum actually paid to (c) Precious stones, jewels, jewelry, precious metals,
the insured. whether in course of transportation or otherwise;
(d) Bridges, tunnels and other instrumentalities of
Q: What is the liability of the reinsurer to original insured? transportation and communication (excluding
buildings, their furniture and furnishings, fixed
A: The original insured may stand in any of 3 relations contents and supplies held in storage); piers,
towards the reinsurer in accordance with the terms of the wharves, docks and slips, and other aids to
particular contract of reinsurance. navigation and transportation, including dry docks
and marine railways, dams and appurtenant
1. Contract of reinsurance solely between insurer and facilities for the control of waterways.
reinsurer
2. Contract of reinsurance with stipulation in favor of (2) "Marine protection and indemnity insurance," meaning
original insured insurance against, or against legal liability of the insured for
3. Contract of reinsurance amounting to novation of loss, damage, or expense incident to ownership, operation,
original contract chartering, maintenance, use, repair, or construction of any
vessel, craft or instrumentality in use of ocean or inland
waterways, including liability of the insured for personal
injury, illness or death or for loss of or damage to the
property of another person.
Chapter II
CLASSES OF INSURANCE TRANSPORTATION INSURANCE
Title I
MARINE INSURANCE Q: What is transportation insurance?

Sub-Title 1- A A: It is concerned with the perils of property in (or incidental

DEFINITION to) transit as opposed to property perils at a generally fixed
location.
Sec. 99. Marine Insurance includes:
It does not include normal motor vehicle insurance which is
(1) Insurance against loss of or damage to: treated separately by law.

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It is usually known as marine insurance. To sustain a recovery on a marine policy, the loss must have
been occasioned by a risk or peril insured against.
Q: What are the 2 major divisions of transportation
insurance? A contract of insurance on freight is that the perils insured
against shall not prevent the ship from earning full freight for
A: the insured in that voyage; such contract does not undertake
that the goods shall be delivered in a sound or merchantable
1. Ocean Marine Insurance—it has to do with the state or that the vessel shall be safe from the dangers of the
insurance of sea perils. sea.

The old law defines ocean marine insurance as an insurance An insurance on time by no means contains an engagement
against risk connected with navigation, to which a ship, cargo, that any particular voyage undertaken by the insured within
freightage, profits or other insurable interest in movable the prescribed period shall be performed before the
property, may be exposed during a certain voyage or a fixed expiration of the policy but only that the shop shall be
period of time. capable of performing the voyage undertaken
notwithstanding any loss or injury which may occur to her
2. Inland marine insurance- covers primarily the land during the time for which she is insured.
or over the land transportation perils of property
shipped by railroads, motor trucks, airplanes, and In marine policies, the insurer may except liability from
other inland waterway transportation and other certain causes.
waterborne perils outside of those risks that fall In marine insurance, the goods are presumed to be shipped
definitely within the ocean marine category. under deck—below the weather deck of the vessel.

This insurance may be in the form of property insurance, Q: What is the effect if the goods are shipped on deck?
indemnifying the insured for loss or damage to property or in
the form of liability insurance protecting the insured against A: They are not covered by the policy unless special notice of
liability for loss or damage to property or for personal injury, the stowage is given to the underwriter and he accepts the
illness or death of another person. enhanced risk.

SCOPE OF OCEAN MARINE INSURANCE (OMI) Accordingly, the deck of a vessel is not designed to carry
goods. Its function is to make the holds watertight and to
Q: What is the scope of OMI? protect the cargo laden in the holds.

A: It provides protecting for: Goods carried on a deck are subject to weather damage, sea
damage, and the hazard of being washed overboard.
1. Ships or hulls;
2. Goods or cargoes; Yet, certain goods, dangerous in themselves are, by custom
3. Earnings such as freight, passage, money, and sometimes by law, required to be shipped on deck so
commission, or profits; and that they will not endanger the other cargo and can, if
4. Liability (known as protection and indemnity necessity arise, be quickly thrown overboard.
insurance).
PERILS OF THE SEA
Q: What are the risks or losses covered in ocean marine
insurance? Q:  What  does  the  standard  “perils  of  the  sea”  include?

A: All risks and losses may be insured against, except such as A: It includes only those casualties due to the unusual
are repugnant to public policy or positively prohibited. violence or extraordinary action to wind and wave, or to
other extraordinary causes connected with navigation.
Q: What is the effect if a general marine insurance policy
does not state the risks assured? It embraces all kinds of marine insurance casualty:
a. Shipwreck
A: The same is valid and covers the usual marine risks; and in b. Foundering
marine   policy,   the   general   enumeration   of   “all   other   perils”   c. Stranding
etc. extends only to marine damage of like kind to those d. Collision, and
enumerated. e. Every specie of damage done to the ship or goods at
sea by violent action of the wind and waves; or

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Kenneth & King Hizon (2A)- UST Faculty of Civil Law
f. Losses occasioned by the jettisoning of cargo; It evolved to grant greater protection than that afforded by
g. Barratry the  “perils  clause.”

Q: What is barratry? It covers all losses during the voyage whether arising from a
marine peril or not.
A: It is any willful misconduct on the part of the master or
crew in pursuance of some unlawful or fraudulent purpose Q: Who has the burden of proof to establish damage or loss
without the consent of the owners, and to the prejudice of that has occurred is excluded from the coverage?
the  owner’s  interest.  
A: It is the duty to the insurance company to establish that
It must be willful and intentional act. said loss or damage falls within the exceptions provided for
by law; otherwise, it is liable therefor.
Q: What are the perils not covered by such insurance?
The insurer can avoid coverage upon demonstrating that a
A: It does not cover losses resulting from ordinary wear and specific provision expressly excludes the loss from coverage.
tear or other damage usually incident to the voyage.
Generally, the burden of proof is upon the insured to show
“Perils  of  the  sea”  is  a  relative  term. that a loss arose from a covered peril. Yet, in this case, the
burden is not on the insured to prove the precise cause of
Perils of the sea from perils of the ship loss or damage for which it seeks compensation.

Q: Distinguish perils of the sea from perils of the ship? The insured has the initial burden of proving that the cargo
was in good condition when the policy attached and that the
A: cargo was damaged when unloaded from the vessel;
thereafter, the burden then shifts to the insurer to show the
Perils of the sea Perils of the ship exception to the coverage.
Include only such losses as A loss which results from:
are or extraordinary nature NEED FOR INLAND TRANSPORTATION INSURANCE
or arise from some a. the natural and
overwhelming power which inevitable action of the The development of the land forms of transportation—
cannot be guarded against by sea; railroads, motor trucks, and airplanes.
the ordinary exertion of b. From the ordinary wear
human skill or prudence as and tear of the ship; and As business and commerce grew, many activities seemed to
distinguished from the c. From the negligent be served best by extension of land marine insurance to
ordinary wear and tear of the failure   of   the   ship’s   cover property while awaiting shipment, while being
voyage owner to provide the prepared for shipment, while being processed, and while in
vessel with the proper storage after shipment.
equipment to convey the
cargo under ordinary FLEXIBILITY OF INLAND MARINE RATES
conditions. AND COVERAGES

NOTE: Insurer does not As the demand for inland marine insurance coverages
undertake to insure against developed into a veritable boom, fire and casualty insurances
the perils of the ship were attracted to the business.

Perils of the sea must be the proximate cause of the loss. The original coverage under inland marine insurance gave
protection to the policyholder in case of loss or damage
ALL RISK MARINE INSURANCE POLICY resulting  from  the  “perils  of  transportation.”

Q: What is an all risk marine insurance policy? The scope was broadened until all risks policies were
reached, an almost unlimited insurance that appears in very
A: It insures against all causes of conceivable loss or damage many of the inland marine forms.
except as otherwise excluded in the policy or due to fraud or
intentional misconduct on the part of the insured. Today, there is no more distinction between ocean marine
and inland marine insurance. Accordingly, the definition is
less important today because multi-line law now permit a

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Kenneth & King Hizon (2A)- UST Faculty of Civil Law
single insurer to write all types of property and liability
insurance. Sub-Title 1-B
INSURABLE INTEREST
Q: What are the classes of inland marine insurance?
Sec. 100. The owner of a ship has in all cases an insurable
A: interest in it, even when it has been chartered by one who
covenants to pay him its value in case of loss: Provided,
1. Property insurance in goods in transit by railroad, That in this case the insurer shall be liable for only that part
express, mail, motor truck, aircraft and partly by of the loss which the insured cannot recover from the
water; charterer.
2. Property insurance on goods of certain specified
types, wherever they may be, against any peril, even NOTE: Marine insurance is invalid unless supported by an
though not in the course of transportation; insurable interest in the thing insured. There can be no valid
3. Property insurance on fixed property such as insurance unless there is something to insure.
bridges, tunnels, and the like;
4. Property insurance on a few of the means of INSURABLE INTEREST OF OWNER OF A SHIP
transportation such as small boats, railroad cars and
the like; and Q: What is the extent of the insurable interest of owner of a
5. Liability insurance to protect transportation carriers, ship?
warehousemen, processors and other bailees from
the consequences of legal responsibility for property A: The insurable interest is the extent of its value even if he
of customers while in their custody. has mortgaged the same or has chartered it to a third person
who agrees to pay him its value in case of loss. In the latter
CLASSES OF INLAND MARINE INSURANCE case, the insurer is liable only for that part of the loss which
the insured cannot recover from the charterer.
To be eligible for inland marine contract, the risk must
involve an element of transportation. Either the property is In case of a vessel
actually in transit held by persons (bailees) who are not its
owners, or at a fixed location but an important instrument of The insurable interest is commonly possessed by the owner,
transportation, or is a movable type of goods which is often and also if money has been barrowed, by one who holds
at different locations. mortgage on the vessel.

Q: What are the 4 divisions or classes of inland marine In case of cargo

insurance?
The insurable interest is with the shipper or the consignee
A: depending upon the terms of sale.

1. Property in transit- protection for property frequently COMMON TERMS OF SALE

exposed to loss while it is in transportation from one
location to another; Q: Enumerate and define the different common terms of
2. Bailee liability- protection to persons who have sale?
temporary custody of the goods or personal property of
others, such as carriers, laundrymen, warehousemen, A:
and garage keepers;
3. Fixed transportation property—bridges, tunnels, and 1. F.O.B (Free on board):
other instrumentalities of transportation and
communication although they are fixed properties. a. F.O.B factory—the buyer assumes responsibility when
Accordingly they are essential part of the transportation the goods leave the factory; and
system; and b. F.O.B point of destination—the buyer does not assume
4. Floater-an inland marine insurance provides insurance to responsibility until the goods are received from the
follow the insured property wherever it may located, carrier.
subject to the territorial limits of the contract. Floater
policies may be issued for such items as jewelry, furs, 2. C.I.F (Cost, Insurance, and Freight)- the seller assumes
works  of  art,  contractor’s  equipment  etc.   complete responsibility for securing all necessary
insurance; and

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Kenneth & King Hizon (2A)- UST Faculty of Civil Law
3. C&F (Cost, and freight)—the buyer procures his own 3. Its employment for the carriage of the goods of
insurance. others.

In case of a vendee/ consignee of goods in transit Sec. 103. The owner of a ship has an insurable interest in
expected freightage which according to the ordinary and
Q: What is the basis of interest of the vendee or consignee? probable course of things he would have earned but for the
intervention of a peril insured against or other peril incident
A: His interest over the goods is based on the perfected to the voyage.
contract of sale between him and the shipper of the goods
which operates to vest in him an equitable title even before INSURABLE INTEREST IN EXPECTED
delivery or before he performed the conditions of the sale. OR ANTICIPATED FREIGHTAGE
Such equitable title vests in the vendee an existing interest
over the goods sufficient to be the subject of insurance. The shipowner includes:

Sec. 101. The insurable interest of the owner of the ship a. Legal owner
hypothecated by bottomry is only the excess of its value b. Charterer who expects to earn in the transportation
over the amount secured by bottomry. of goods of others

LOAN ON BOTTOMRY Q:   What   is   included   in   “freight   money   assured   to   the  

shipowner”?
Q: What is a loan on bottomry?
A:
A: It is one which is payable only if the vessel, given as a
security for the loan, completes in safety the contemplated 1. Freight, in its ordinary acception, to be earned and
voyage. payable upon the completion of the voyage
2. The hire of the vessel, payable by the charterer
The lender in bottomry is entitled to receive a high rate of 3. The benefit accruing to the owner from the use of
interest to compensate him for the risk of losing his loan. his vessel in the way of profits upon carriage of his
own goods.
Where the vessel is bottomed, the owner has an insurable
interest only in the excess of its value over the amount of the The owner of ship has an insurable interest in expected
bottomry loan. The insurable interest of the lender on freightage which he may not earn in case of the intervention
bottomry in the vessel given as security is to the extent of the of peril insured against or other peril incident to the voyage.
loan. This rule is the same although the freight has been paid in
advance.
Sec. 102. Freightage, in the sense of a policy of marine
insurance, signifies all the benefits derived by the owner, Where the agreement is payable in any event, whether the
either from the chartering of the ship or its employment for vessel is lost or is not lost, the shipowner has no insurable
the carriage of his own goods or those of others. interest in such freight.

FREIGHTAGE The shipper who has prepaid the freightage under such
condition, has an insurable interest on the same.
Q: What is freightage?
INSURABLE INTEREST IN PASSAGE OF MONEY
A: It is also known as freight. It is the benefit which is to
accrue to the owner of the vessel from its use in the voyage Passage money is customarily payable in advance. It cannot
contemplated or the benefit derived from the employment of be recovered if the vessel is lost before the completion of the
the ship. passage.

Q: What are the sources of freightage? Passenger can insure his advances of passage money but the
shipowner may not insure it unless it is payable upon the
A: completion of the voyage.

1. The chartering of the ship Sec. 104. The interest mentioned in the last section exists, in
2. Its employment for the carriage of his own goods 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

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Kenneth & King Hizon (2A)- UST Faculty of Civil Law
of goods it exists when they are actually on board, or there Thus the owner of the cargo to be carried on a trading voyage
is some contract for putting them on board, and both ship has an insurable interest not only on the value of the cargo
and goods are ready for the specified voyage. but also on the expected profit from the sale of the cargo
which is liable to be affected by the perils of the sea.
INSURABLE INTEREST IN EXPECTED
FREIGHTAGE IN A CHARTER PARTY The insured has sufficient interest if it is based on a valuable
consideration paid.
Q: When does this insurable interest exist?
Sec. 106. The charterer of a ship has an insurable interest in
A: To give an insurable interest in expected freightage, the it, to the extent that he is liable to be damnified by its loss.
insured must have an inchoate right to freight, that is, he
must be in such position with regard to freight that nothing CHARTER PARTY
could prevent him from ultimately having a perfect right to it
but the intervention of the perils insured against. The insurable interest of a charterer of a ship is up to the
extent that he is liable to be damnified by its loss.
a. Where freight is the price to be paid for hire of the ship
under charter party, the shipowner has an inchoate right One who charters a vessel, with a stipulation to pay its value
to freight as soon as there is an inception of performance in case of loss, has an insurable interest to the extent of its
by the ship under the charter party. value
b. Where the inchoate right to freight accrues as soon as
the goods are actually put on board and where part of The charterer has also an insurable interest in the profits he
the goods has been loaded and the balance is ready, expects to earn by carrying in the goods in excess of the
there is an insurable interest in the whole freight. amount he agreed to pay for the charter of the vessel.
c. Where the shipowner has made a binding contract for
freight and the ship is in the readiness to receive the Q: What is a charter party?
goods, he has an insurable interest.
A: It is a contract by which an entire ship or some principal
Q: What are the interests where there are no insurable part thereof is lent by the owner to another person for a
interest in the freight? specified time or use.

A: Q: What are the types of charter parties?

1. Where there is no contract and no part of the goods 1. Charter party or demise charter –a lease of an
expected to be carried are on board, there is no unfurnished house. It is the charterer who shall provide a
insurable interest in freight although there are goods crew and victuals and supplies and fuel for her during the
ready for shipment or the master is provided with term of the charter. the charterer becomes, in effect, the
funds for the purpose of purchasing a cargo owner of the voyage or service stipulated, subject to the
2. Where the vessel is a mere seeking ship or a vessel liability for damages caused by negligence.
looking for the cargo to be transported, the owner 2. Contract of affreightment- the owner of the vessel
has no insurable interest in freight to be earned on leases part or all of its space to haul goods for others.
goods not loaded. The owner of the vessel retains the possession,
command and navigation of the ship, the charterer or
Sec. 105. One who has an interest in the thing from which freighter merely having use of the space in the vessel in
profits are expected to proceed has an insurable interest in return for payment of the charter hire or freight.
the profits.
Q: What are the 2 types of contracts of affreigment?
INSURABLE INTEREST IN EXPECTED PROFITS
A:
One having a reasonable expectation of profits from a marine
adventure may take out an insurance to protect such profits. 1. Voyage charter or trip charter
2. Time charter
The interest in the goods or adventure out of which the
profits are expected to be realized should be a legal interest
although such interest may be contingent like a commission
to an agent or consignee.

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him in the usual mode of transmission and at the usual rate
Sub-Title 1-C of communication.
CONCEALMENT
PRESUMPTIVE KNOWLEDGE BY
Sec. 107. In marine insurance each party is bound to THE INSURED OF PRIOR LOSS
communicate, in addition to what is required by section
twenty-eight, all the information which he possesses, Q: When is this rule applicable?
material to the risk, except such as is mentioned in Section
thirty, and to state the exact and whole truth in relation to A: The rebuttable presumption of knowledge of a prior loss
all matters that he represents, or upon inquiry discloses or on the part of the insured applies if the information might
assumes to disclose. possibly have reached him in the usual mode of transmission
and at the usual rate of communication.
Q: What is concealment in maritime insurance?
Q: What is the reason for the presumption?
A: It is the failure to disclose any material fact or
circumstance which in fact or law, is within or which ought to A: The reason is the quickness in the transmission of news by
be within the knowledge of one party and of which the order means of modern communications. Because of the rapidly
has no actual or presumptive knowledge. advanced means of transportation, the presumption that the
loss of a vessel due to disaster of the seas was duly
The rule applies to both the assured and the underwriter and communicated to the insured becomes stronger.
the rests upon the doctrine of good faith as well as the
prevention of fraud. Q: When is the rule not applicable?

RULES AS TO MISREPRESENTATIONS AND CONCEALMENTS A: When having no cause to expect information the insured
STRICTER IN MARINE INSURANCE omits to call at the post office where a letter was received in
the morning of the day the insurance was affected,
Q: What is the reason for the stricter rules? containing the material information, he is not guilty of
negligence which will vitiate the policy.
A: This is due to the difference in the character of the
property and the greater facility of the insurer possesses in Sec. 110. A concealment in a marine insurance, in respect to
obtaining information as to its conditions and surrounding any of the following matters, does not vitiate the entire
circumstances in cases of insurance on buildings, etc. than contract, but merely exonerates the insurer from a loss
the vessels, which are often insured when absent or afloat. resulting from the risk concealed:

To constitute concealment, it is sufficient that the insured is in (a) The national character of the insured;
possession of the material fact concealed although he may not (b) The liability of the thing insured to capture and
be aware of it. detention;
(c) The liability to seizure from breach of foreign laws of
Sec. 108. In marine insurance, information of the belief or trade;
expectation of a third person, in reference to a material fact, (d) The want of necessary documents;
is material.
WHEN CONCEALMENT VITIATES
OPINIONS OR EXPECTATIONS OF THIRD PERSONS THE ENTIRE CONTRACT

In marine insurance, the rule is quite strict because the Q: In what occasion concealment will not vitiate entire
insured is bound to communicate to the insurer not only facts contract?
but also:
a. Beliefs or opinions of third persons A: Concealment of any of the matters indicated from
rd
b. Expectations of 3 persons paragraphs a to e of Sec. 110 does not avoid the policy ab
initio. If the vessel was lost due to any of the causes
The only requirement is that the information be in reference mentioned which was concealed, the insurer is not liable; but
to a material fact if the vessel is lost due to the perils of the sea, like a storm,
the insurer is not exonerated from liability.
Sec. 109. A person insured by a contract of marine insurance
is presumed to have knowledge, at the time of insuring, of a Q: Is the national character of the vessel material?
prior loss, if the information might possibly have reached

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A: Generally, no. But facts lying within the knowledge of the A:
insured which will expose the property to belligerent risks of
seizure and condemnation for violation of the trade or REPRESENTATIONS OF PROMISSORY
navigation laws of another country must be disclosed. EXPECTATIONS EXPECTATIONS
Statements of future facts or
events which are in their
nature contingent and which
Sub-Title 1-D the insurer is bound to know
REPRESENTATION that the insured could not
have intended to as known
Sec. 111. If a representation by a person insured by a facts but as intentions and
contract of marine insurance, is intentionally false in any expectations merely
material respect, or in respect of any fact on which the Unless made with fraudulent
character and nature of the risk depends, the insurer may intent, their failure to
rescind the entire contract. fulfillment is not a ground for
rescission
Applicability of rules on representation to marine insurance
Q: What is the falsity of the representation as to
The general rules governing representations with respect to expectation?
insurance policies generally have been held to apply to
marine insurance policies. A: Unless made with fraudulent intent, their failure to
fulfillment is not a ground for rescission.
The general rule that a representation is material where it
would influence the judgment of a prudent insurer in fixing Q: In what statements this rule apply?
the premium or in determining whether he would take the
risk, is applicable to marine insurance. A:
1. statements of the time a vessel will sail or is
Q: What is the effect of false representation by insured? expected to sail
2. nature of the cargo to be shipped
A: 3. amount of profits expected
4. destination of the vessel
1. Intentional- avoids the policy 5. that the insured has no doubt that he can get
2. Not intentional- the insurer may rescind the contract insurance effected for a certain premium
from the time the representation becomes false
3. Materiality of representations-
a. Age
b. Equipment Sub-Title 1-E
c. Particular condition or IMPLIED WARRANTIES
d. rating of the vessel
e. repaired in a certain place Sec. 113. In every marine insurance upon a ship or freight,
f. she has arrived at her port of destination or freightage, or upon any thing which is the subject of
g. was at a certain place at a certain time marine insurance, a warranty is implied that the ship is
h. other underwriters had insured her at a certain seaworthy.
rate
Q: What is warranty in marine insurance?
Statements of the nature and amount of the cargo, where
she was not overloaded or where the underwriter did not rely A: It refers to a stipulation, either expressed or implied,
thereon, have been held to be immaterial. forming part of the policy as to some fact, condition, or
circumstances relating to the risk.
Sec. 112. The eventual falsity of a representation as to
expectation does not, in the absence of fraud, avoid a Q: What are implied warranties in marine insurance?
contract of marine insurance.
A: The insurer will not be liable for any loss under this policy
Q: Differentiate representations of expectation from in case the vessel:
promissory representations. a. is unseaworthy at the inception of the insurance
b. deviates from the agreed voyage
Facultad de Derecho Civil 74
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Kenneth & King Hizon (2A)- UST Faculty of Civil Law
c. engages in an illegal venture A: When the damage is due to the fault of the shipowner and
d. the ship will carry the requisite documents of the captain. In such case, the shipowner, unless it overcomes
nationality or neutrality of the ship or cargo where the presumption of negligence, is liable to the total value of
such nationality or neutrality is expressly warranted the damage or loss.

Q: What will the admission of seaworthiness by the insurer Sec. 114. A ship is seaworthy when reasonably fit to perform
may mean? the service and to encounter the ordinary perils of the
voyage contemplated by the parties to the policy.
A:
1. that the warranty of seaworthiness is to be taken as SEAWORTHINESS OF VESSEL
fulfilled
2. that the risk of unseaworthiness is assumed by the Q: What constitutes seaworthiness?
insurer.
A: It is a relative term depending on the nature of the ship,
Q: What if the unseaworthiness is unknown to the owner of the voyage, and the service in which she is at the time
the cargo insured? engaged. Generally for a vessel to be seaworthy, it must be
adequately equipped for the voyage and manned with a
A: The implied warranty of seaworthiness attaches to sufficient number of competent officers and crew.
whoever is insuring the cargo, whether he be the shipowner
or not. The fact that the unseaworthiness of the ship was Q: What if there is failure of a common carrier to maintain
unknown to insured is immaterial in ordinary marine in seaworthy condition the vessel?
insurance and may not be used by him as a defense in order
to recover on the marine insurance policy. A: It is a clear breach of its duty prescribed in Art. 1755 of
Civil Code.
NOTE: The shipper may have no control over the vessel but
he has full control in the choice of the common carrier that Q: What should be the nature of the ship to comply with
will transport his goods. seaworthiness?

The shipper may have no control over the vessel but he has A: The vessel must be in a fit state as to repair, equipment,
full control in the choice of the common carrier that he will crew, and in all other respects to perform the voyage insured
transport his goods. and to encounter ordinary perils or navigation. She must also
be in a suitable condition to carry the cargo put on board or
A charterer of a vessel has no obligation before transporting intended to be put on board.
its cargo to ensure that the vessel it chartered complied with
all the legal requirements. NOTE: It is not necessary that the cargo itself shall be
seaworthy.
The duty rests upon the common carrier simply for being
engaged in public services. Q: What should be the nature of the voyage?

Because of the implied warranty of seaworthiness, shippers A: What is reasonable fitness to encounter the perils
of goods are not expected when transacting with common expected to arise in the course of the voyage vary, naturally
carriers, to inquire   into   the   vessels’   unseaworthiness,   with the character of the particular voyage.
genuineness of licenses, and compliance with all maritime
laws. Q: What is the rule as to the nature of service?

Q: What if the vessel is found unseaworthy? A: The requirement is that she shall be reasonably capable of
safely carrying the cargo to its port of destination.
A: A shipowner is also presumed to be negligent since it is
tasked with the maintenance of its vessel. Though its duty Q: What are the criteria as to seaworthiness of a vessel?
can be delegated, the shipowner must exercise close
supervision over its men. A:
1. Physical and mechanical condition
Q: Give an exception to the limited liability doctrine which 2. The extent of its fuel and provisions supply
limits the liability to it pro rata share in the insurance 3. The quality of its officers and crew
proceeds? 4. Adaptability for the service in which they are
employed

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A: It covers the subject matter for the voyage named in the
Sec. 115. An implied warranty of seaworthiness is complied policy until the specified voyage ends, regardless of the time
with if the ship be seaworthy at the time of the of it takes to complete the voyage.
commencement of the risk, except in the following cases:
Q: Distinguish time from voyage policy?
(a) When the insurance is made for a specified length of
time, the implied warranty is not complied with unless the A:
ship be seaworthy at the commencement of every voyage it
undertakes during that time; TIME POLICY VOYAGE POLICY
(b) When the insurance is upon the cargo which, by the Gives protection for a Particularly adapted to tramp
terms of the policy, description of the voyage, or established stipulated period and steamers and sailing vessels,
custom of the trade, is to be transhipped at an intermediate therefore avoids the inasmuch as those do not
port, the implied warranty is not complied with unless each annoyance of constant move over fixed routes and
vessel upon which the cargo is shipped, or transhipped, be attention to the termination their travel may be more
seaworthy at the commencement of each particular voyage. of voyages and the renewal easily described by separate
of policies. On hulls (vessels), voyage policies. Because
COMMENCEMENT OF THE RISK they are common type. cargoes are subject to sea
By means of time policy, the risk for short periods, the
Q: When is the commencement of the risk? insured avoids the necessity voyage policy is frequently
of continually describing used.
A: The general rule is that the warranty of seaworthiness is separate voyages many of
complied with if the ship be seaworthy at the time of the which are over similar routes.
commencement of the risk. Prior or subsequent
unseaworthiness is not a breach of the warranty, nor is it Sec. 116. A warranty of seaworthiness extends not only to
material that the vessel arrives in safety at the end of her the condition of the structure of the ship itself, but requires
voyage. that it be properly laden, and provided with a competent
master, a sufficient number of competent officers and
Q: What are the exceptions to the rule? seamen, and the requisite appurtenances and equipment,
such as ballasts, cables and anchors, cordage and sails, food,
A: water, fuel and lights, and other necessary or proper stores
and implements for the voyage.
1. In the case of time policy, the ship must be
seaworthy at the commencement of every voyage Q: What is the scope of seaworthiness of vessel?
she may undertake.
2. In the case of cargo policy, each vessel upon which A: Seaworthiness requires that:
the cargo is shipped or transshipped must be
seaworthy at the commencement of each particular 1. Vessel must have the equipment and appliances
voyage. appropriate to voyage in which it is engaged and the
3. In case of voyage policy, contemplating a voyage in cargo it carries
different stages, the ship must be seaworthy at the 2. It must have sufficient fuel, stores, and provisions to last
commencement of each portion. for the entire voyage
3. It must have sufficient number of competent officers and
NOTE: The unexplained sinking of the vessel creates the men
presumption of unseaworthiness. The shipowner cannot 4. If the insurance is on cargo, the same must be properly
escape liability by presenting in evidence a certificate that loaded, stowed, dunnaged and secured so as not to
tends to show that at the time of dry-docking and inspection. imperil the navigation of the vessel or to cause injury to
vessel or cargo.
Time policy vs. Voyage policy
NOTE: The carrying of the cargo on deck raises the
Q: What is a time policy? presumption of unseaworthiness unless it can be shown that
the deck cargo will not interfere with the proper
A: Provides coverage for a fixed period of time, at the management of the ship.
expiration of which the insurance will lapse.
Sec. 117. Where different portions of the voyage
Q: What is a voyage policy? contemplated by a policy differ in respect to the things
requisite to make the ship seaworthy therefor, a warranty
Facultad de Derecho Civil 76
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
of seaworthiness is complied with if, at the commencement reasonably capable of safely conveying the cargo to its port of
of each portion, the ship is seaworthy with reference to that destination.
portion.
A ship which is seaworthy for the purpose of insurance upon
SEAWORTHINESS DURING VOYAGE IN STAGES the ship may yet be unseaworthy for the purpose of
insurance upon the cargo.
Q: What is the rule regarding voyage in stages?
Sec. 120. Where the nationality or neutrality of a ship or
A: Where the policy contemplates a voyage in different cargo is expressly warranted, it is implied that the ship will
stages during which the subject matter insured will be carry the requisite documents to show such nationality or
exposed to different degrees or kinds of perils, or the ship will neutrality and that it will not carry any documents which
require different degrees or kinds of perils, or the ship will cast reasonable suspicion thereon.
require different kinds of equipment, she must be seaworthy
at the commencement of each stage, but it is sufficient if at Q: How is a warranty of national character be known?
the commencement of each stage, she is seaworthy for the
purpose of that stage. A: It is gathered from the language of the policy describing
the   vessel   as   the   “Philippine,”   “American,”   “British,”  
The stages must be separate and distinct in order to have a “Spanish”  etc.  
different degree of seaworthiness for particular parts.
A warranty of nationality does not mean that the vessel was
Sec. 118. When the ship becomes unseaworthy during the built in such country but that the property belongs to a
voyage to which an insurance relates, an unreasonable subject thereof. It refers to the beneficial ownership rather
delay in repairing the defect exonerates the insurer on ship than to legal title.
or shipowner's interest from liability from any loss arising
therefrom. WARRANTY OF NEUTRALITY

EFFECT OF UNSEAWORTHINESS DURING THE VOYAGE Q: What is the import of warranty of neutrality?

Q: What if the ship becomes unseaworthy during the A: It imports that the property insured is neutral in fact, and
voyage? shall be so in appearance and conduct, that the property shall
belong to neutrals, and no act of insured or his agent shall be
A: The general rule is that there is no implied warranty that done which can legally compromise its neutrality.
the vessel will remain in a seaworthy condition throughout
the life of the policy. NOTE: The   warranty   extends   to   insured’s   interest   in   all the
property intended to be covered by the policy, but not to the
rd
When the vessel becomes unseaworthy during the voyage, it interest of a 3 person not covered by the policy.
is  the  duty  of  the  master,  as  the  shipowner’s  representative,
to exercise due diligence to make it seaworthy again, and if Q: Explain the implied warranty to carry requisite
loss should occur because of his negligence in repairing the documents.
defect, the insurer is relieved of liability but the contract of
insurance is not affected as to any other risk or loss covered A: The warranty of nationality also requires that the vessel be
by the policy and not caused or increased by such particular conducted and documented as of such nation, and a breach
defect. of warranty in either particular will avoid the policy. The
warranty of nationality requires that the insured property
Sec. 119. A ship which is seaworthy for the purpose of an shall be accompanied by documentary evidence of its neutral
insurance upon the ship may, nevertheless, by reason of character and not by any other papers which compromise
being unfitted to receive the cargo, be unseaworthy for the such character.
purpose of the insurance upon the cargo.

SEAWORTHINESS OF THE CARGO

Sub-Title 1-F
Q: What is the rule as to the seaworthiness as to cargo? THE VOYAGE AND DEVIATION

A: The seaworthiness of a vessel is also to be determined Sec. 121. When the voyage contemplated by a marine
with regard to the nature of the cargo which she undertakes insurance policy is described by the places of beginning and
to transport, the requirement being that she shall be ending, the voyage insured in one which conforms to the
Facultad de Derecho Civil 77
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
course of sailing fixed by mercantile usage between those A:
places. 1. When the ship is compelled to head for another port
by stress of weather
Sec. 122. If the course of sailing is not fixed by mercantile 2. Where a departure from the course is made to take
usage, the voyage insured by a marine insurance policy is on a pilot when necessary to the safety of the
that way between the places specified, which to a master of adventure
ordinary skill and discretion, would mean the most natural, 3. Proceed to a place where the ship will meet a
direct and advantageous. convoy if the policy warrants that the ship will not
proceed from one port to another without convoy
Sec. 123. Deviation is a departure from the course of the 4. To escape capture
voyage insured, mentioned in the last two sections, or an 5. Where the master seeks another port of discharge
unreasonable delay in pursuing the voyage or the when the water of the river is too shallow for his
commencement of an entirely different voyage. vessel to enter.

DEVIATION IN MARINE INSURANCE A deviation for the purpose of saving life does not constitute
a breach of warranty.
Q: What is deviation?
Sec. 126. An insurer is not liable for any loss happening to
A: Any excused departure from the regular course or route of the thing insured subsequent to an improper deviation.
the insured voyage or any other act which substantially alters
the risk constitutes deviation. Q: What is the effect of improper deviation?

Q: What are the cases of deviation in marine insurance? A: The insurer becomes immediately absolved from further
liability under the policy for losses occurring subsequent the
A: deviation.
1. Departure from the course of sailing fixed by mercantile
usage between the places of beginning and ending
specified in the policy
2. Departure from the most neutral, direct, and Sub-Title 1-G
advantageous route between the places specified if the LOSS
course of sailing is not fixed by mercantile usage
3. Unreasonable delay in pursuing the voyage Sec. 127. A loss may be either total or partial.
4. The commencement of an entirely different voyage
Sec. 128. Every loss which is not total is partial.
Sec. 124. A deviation is proper:
Sec. 129. A total loss may be either actual or constructive.
(a) When caused by circumstances over which neither the
master nor the owner of the ship has any control; Q: What are the kinds of losses?
(b) When necessary to comply with a warranty, or to avoid a
peril, whether or not the peril is insured against; A:
(c) When made in good faith, and upon reasonable grounds
of belief in its necessity to avoid a peril; or 1. Total
(d) When made in good faith, for the purpose of saving 2. Partial
human life or relieving another vessel in distress.
Total loss
Sec. 125. Every deviation not specified in the last section is
improper. Q: What are the 2 kinds of total loss?

Q: What are the kinds of deviation? A:

A: 1. Actual or absolute
1. Proper 2. Constructive or technical
2. Improper
Q: What is the effect of total loss?
Q: Illustrate some specific acts of proper deviation?

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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: The underwriter is liable for the whole of the amount appurtenances and freightage earned in the voyage, provided
insured. that the owner or agent abandons the vessel.

Sec. 130. An actual total loss is cause by: In case the vessel is totally lost and there is no vessel to
abandon, abandonment is not required. Because of such total
(a) A total destruction of the thing insured; loss, the liability of the shipowner or agent for damages is
(b) The irretrievable loss of the thing by sinking, or by being extinguished.
broken up;
(c) Any damage to the thing which renders it valueless to Limited liability rule
the owner for the purpose for which he held it; or
(d) Any other event which effectively deprives the owner of Q:  What  is  the  exception  to  this  “limited  liability  rule”?
the possession, at the port of destination, of the thing
insured. A: A shipowner or shipagent may be held liable for damages
when the sinking of the vessel is attributable to the actual
Actual loss fault or negligence of the shipowner or its failure to ensure
seaworthiness of the vessel.
Q: What is actual loss?
Sec. 131. A constructive total loss is one which gives to a
A: It exists when the subject matter of the insurance is wholly person insured a right to abandon, under Section one
destroyed or lost or when it is so damaged as no longer to hundred thirty-nine.
exist in its original character.
CONSTRUCTIVE LOSS
Q: Is complete physical destruction necessary to constitute
actual total loss? Q: What is constructive loss?

A: No. A: It is also known as technical total loss in which the loss

although not actually total, is of such a character that the
LIMITED LIABILITY OR HYPOTHECARY RULE insured is entitled, if he thinks fit, to treat as total by
abandonment.
Q: What is the limited liability rule?
Q: What is the importance of distinction between actual and
A: These are embodied in: constructive total loss?

Art. 587-The ship agent shall also be civilly liable for the A: In case of actual total loss, no abandonment is necessary,
indemnities in favor of third persons which may arise from but if the loss is merely constructively total, an abandonment
the conduct of the captain in the care of the goods which he becomes necessary in order to recover as for a total loss.
loaded on the vessel; but he may exempt himself therefrom
by abandoning the vessel with all her equipments and the Sec. 132. An actual loss may be presumed from the
freight it may have earned during the voyage. continued absence of a ship without being heard of. The
length of time which is sufficient to raise this presumption
Art. 590-The co-owners of a vessel shall be civilly liable in depends on the circumstances of the case.
the proportion of their interests in the common fund, for
the results of the acts of the captain, referred to in Article Presumption of actual total loss
587.
Q: When is there a presumption of actual total loss?
Each co-owner may exempt himself from this liability by the
abandonment, before a notary, of the part of the vessel A: Where a vessel is not heard of at all within reasonable time
belonging to him. after sailing, or for a reasonable time after she was last seen,
she will be presumed to have been lost from peril insured
Art. 837. The civil liability incurred by the shipowners in the against
cases prescribed in this section, shall be understood as
limited to the value of the vessel with all its appurtenances Q: How will the presumption be laid down?
and freightage earned during the voyage.
A: It is enough to prove that the vessel was not heard of at
These articles precisely intend to limit the liability of the her port of departure after she sailed without calling
shipowner or agent to the value of the vessel, its witnesses from her port of destination.

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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
the policy insurer anything that may
Sec. 133. When a ship is prevented, at an intermediate port, remain of the insured
from completing the voyage, by the perils insured against, property.
the liability of a marine insurer on the cargo continues after
they are thus reshipped. Sec. 136. Where it has been agreed that an insurance upon a
particular thing, or class of things, shall be free from
Nothing in this section shall prevent an insurer from particular average, a marine insurer is not liable for any
requiring an additional premium if the hazard be increased particular average loss not depriving the insured of the
by this extension of liability. possession, at the port of destination, of the whole of such
thing, or class of things, even though it becomes entirely
Q: What is the liability of the insurer in case of reshipment? worthless; but such insurer is liable for his proportion of all
general average loss assessed upon the thing insured.
A: If the original ship is disabled, and the master, acting with
a wise discretion, as the agent of the merchant and the AVERAGE
shipowners, forwards cargo in another ship, such necessary
and justifiable change of ship will not discharge the Q: What is average?
underwriter on the goods from liability for any loss which
may take place on goods subsequently to such reshipment. A: It is any extra-ordinary or accidental expenses incurred
during the voyage for the preservation of the vessel, cargo, or
Q: What is the exception to this rule? both and all damages to the vessel and cargo from the time it
is loaded and the voyage commenced until it ends and the
A: Where resort must be had to distant places to procure a cargo unloaded.
vessel, and there are serious impediments in the way of
putting cargo on board. Q: What are the kinds of average?

The insurer may require an additional premium if the hazard A:

be increased by extension of liability.
1. Gross or general average –must be borne equally by
Sec. 134. In addition to the liability mentioned in the last all of the interests concerned in the venture
section, a marine insurer is bound for damages, expenses of 2. Simple or particular- damages to the vessel which
discharging, storage, reshipment, extra freightage, and all have not inured to the common benefit and profit of
other expenses incurred in saving cargo reshipped pursuant all persons interested in the vessel and the cargo. It
to the last section, up to the amount insured. is suffered by and borne alone by the owner of the
Nothing in this or in the preceding section shall render a cargo or of the vessel, as the case may be.
marine insurer liable for any amount in excess of the
insured value or, if there be none, of the insurable value. PRINCIPLE OF GENERAL AVERAGE CONTRIBUTION

ADDITIONAL LIABILITY OF INSURER OF GOODS It is decided by the master of a vessel acting for all the
interests concerned, to sacrifice any part of a venture
The insurer is liable for the expenses necessary to complete exposed to a common and imminent peril in order to save the
the transportation of cargo reshipped in addition to any loss rest, the interests so saved are compelled to contribute
or damage which may take place on the goods, due to the ratably or proportionately to the owner of interest sacrificed,
perils insured against. so that the cost of the sacrifice shall fall equally upon all.

Sec. 135. Upon an actual total loss, a person insured is Q: What are the requisites to the right to claim general
entitled to payment without notice of abandonment. average contribution?

RIGHT OF INSURED TO PAYMENT A:

UPON ACTUAL TOTAL LOSS
1. There must be a common danger to the vessel or
CONSTRUCTIVE LOSS ACTUAL TOTAL LOSS cargo
An abandonment by the The right of the insured to 2. Part of the vessel or cargo was sacrificed deliberately
insured is necessary in claim the whole insurance is 3. The sacrifice must be for the common safety or for
order to recover for total absolute. He need not give the benefit of all
loss in the absence of any notice of abandonment nor 4. It must be made by the master or upon his authority
provision to the contrary in formally abandon to the

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
5. It must not be caused by any fault of the party asking
the contribution Sub-Title 1-H
6. It must be necessary ABANDONMENT

Q: What is the liability fo the insurer for general average? Sec. 138. Abandonment, in marine insurance, is the act of
the insured by which, after a constructive total loss, he
A: He is liable for his proportion of all general average loss declares the relinquishment to the insurer of his interest in
assessed upon the thing inusred. Article 859 of the Code of the thing insured.
Commerce provides   that:   “The   insurers   of   the   vessel   of   the  
freightage, and of the cargo shall be obliged to pay for the Q: What is abandonment?
indemnification of the gross average, insofar as is required of
each  one  of  these  objects  respectively.” A: The act of the insured in notifying the insurer that owing to
damage done to the subject of the insurance, he elects to
Q: What is the formula for computing the liability of the take the amount of the insurance in the place of the subject
insurer? thereof, the remnant of which he ceded to insurer.

A: Q: What are the requisites for valid abandonment?

FORMULA: A:

Amount of insurance x General Average = Proportion of 1. There must be an actual relinquishment by the
GAL person insured of his interest in the thing insured
Total amount or value Loss (GAL) for which insurer is 2. There must be a constructive total loss
liable 3. The abandonment be neither partial nor conditional
involved 4. It must be made within a reasonable time after
receipt of reliable information of the loss
Q: What is the liability of insurer for particular average? 5. It must be factual
6. It must be made by giving notice thereof to the
A: Policies of marine insurance frequently contain stipulations insurer which may be done orally or in writing
with respect to certain class of goods which are perishable or 7. The notice of abandonment must be explicit and
peculiarly subject to damage under which the insurer will not must specify the particular cause of the
be liable for loss, partial or total, arising from perils of the abandonment.
sea. The purpose of such is to protect the insurer.
NOTE: Abandonment is not applicable to cases where the
Sec. 137. An insurance confined in terms to an actual loss injury   or   average   was   occasioned   by   the   shipowner’s   own  
does not cover a constructive total loss, but covers any loss, fault.
which necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing When the loss is only technically total, the insured cannot
insured. claim the whole insurance without showing due regard to the
interest which the underwriter may take in the abandoned
Scope of insurance against actual total loss property.

Where the insurance is against absolute total loss or actual Sec. 139. A person insured by a contract of marine insurance
total loss, the insurer will not be liable for constructive or may abandon the thing insured, or any particular portion
technical total loss. thereof separately valued by the policy, or otherwise
separately insured, and recover for a total loss thereof,
If the insured is deprived of the possession of the entire thing when the cause of the loss is a peril insured against:
insured at the port of destination, the insurer is liable
because the permanent non-arrival thereof is really an actual (a) If more than three-fourths thereof in value is actually
total loss. lost, or would have to be expended to recover it from the
peril;
(b) If it is injured to such an extent as to reduce its value
more than three-fourths;
(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 three-fourths

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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
the value of the thing abandoned or a risk which a prudent loss, but where the information is of a doubtful character,
man would not take under the circumstances; or the insured is entitled to a reasonable time to make inquiry.
(d) If the thing insured, being cargo or freightage, and the
voyage cannot be performed, nor another ship procured by When the insured has received notice of loss, he must elect
the master, within a reasonable time and with reasonable within a reasonable time whether he will abandon to the
diligence, to forward the cargo, without incurring the like insurer, and if he elects to abandon, he must give notice
expense or risk mentioned in the preceding sub-paragraph. thereof.
But freightage cannot in any case be abandoned unless the
ship is also abandoned. What is reasonable time is a question depending on the facts
and circumstances in each case.
Rules in constructive total loss
Sec. 142. Where the information upon which an
Q: What are the rules in constructive total loss? abandonment has been made proves incorrect, or the thing
insured was so far restored when the abandonment was
A: made that there was then in fact no total loss, the
abandonment becomes ineffectual.
1. English rule- when the subject matter of the
insurance, while still existent in specie, is so ABANDONMENT MUST BE FACTUAL
damaged as not to be worth, when repaired, the
cost of repairs The right of the insured to abandon and recover for a total
2. American rule- when it is so damaged that the cost loss depends upon the state of facts at the time of the offer
of repairs would exceed ½ of the value of the thing to abandon and not upon the state disclosed by the
as required. It is also known as the fifty percent rule. information received, or upon the state of loss at a prior or
3. In the Philippines, the insured may not abandon the subsequent time.
thing insured unless the loss or damage is more than
¾ of its value. If the abandonment when made is good, the rights of the
parties are definitely fixed, and do not become changed by
Q: What is the rule in abandonment where insurance is any subsequent events.
divisible and where it is indivisible?
Insured cannot abandon when the thing insured is safe, or
A: Any part of the thing insured separately valued by the when he knew at the time of his offer to abandon that the
policy may be separately abandoned as it is deemed vessel has been repaired and is successfully pursuing her
separately insured. Whether the contract is entire or voyage.
severable is a question of intention to be determined by the
language employed by the parties. Q: Give instances justifying abandonment.

Q: What should be the criterion as to the extent of loss? A:

A: It must be in reference to the general market value 1. Total loss under a marine insurance policy
immediately before the disaster. This is the proper rule even 2. Capture
though the policy is valued. The value of the policy is the 3. Seizure
proper criterion in the event that there is an express 4. Detention of the ship or cargo
stipulation. 5. Restraint by blockade or embargo
6. With no fault of the owner, the funds for repair
In determining the extent of the loss, the expenses incurred cannot be raised
or to be incurred by the insured recovering the thing insured 7. Voyage is absolutely lost
are taken into account. 8. Under urgent necessity, the master of a vessel at an
immediate port, makes a sale of the insured
ABANDONMENT property.

Sec. 140. An abandonment must be neither partial nor Q: Should the information be direct or positive?
conditional.
A: No. The protest of the master, a newspaper report, the
Sec. 141. An abandonment must be made within a report of a pilot, or a letter from an official or an agent, is
reasonable time after receipt of reliable information of the sufficient.

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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Sec. 143. Abandonment is made by giving notice thereof to
the insurer, which may be done orally, or in writing; Q: What is the effect of valid abandonment?
Provided, That if the notice be done orally, a written notice
of such abandonment shall be submitted within seven days A: It transfers to the insurer the interests in the subject
from such oral notice. matter covered by the policy subject to the rights and
interests, if any, of third persons. This insurer acquires
Q: What should be the form of notice of abandonment? thereby the entire interest insured, together will all its
incidents, including rights of action which the insured,
A: together will all its incidents including the rights of action
which the insured has against third persons for the inquiry.
1. The notice may be made orally or in writing unless
the policy requires it to be in writing Sec. 147. If a marine insurer pays for a loss as if it were an
2. If the notice is done orally, the insured must submit actual total loss, he is entitled to whatever may remain of
to the insurer within 7 days from such oral notice, a the thing insured, or its proceeds or salvage, as if there had
written notice of the abandonment. been a formal abandonment.

Q: By whom and to whom shall notice be made? The insurer is entitled to whatever may remain of the thing
insured, or its proceeds or salvage.
A:
Sec. 148. Upon an abandonment, acts done in good faith by
1. The abandonment need not necessarily be made by those who were agents of the insured in respect to the thing
the insured but may be made by an authorized insured, subsequent to the loss, are at the risk of the insurer
agent, and an agent having an authority to insure and for his benefit.
has prima facie an authority to abandon
2. The abandonment may be made to an agent of the TRANSFER OF AGENCY TO INSURER
underwriter and abandonment to a broker who is
agent for parties is sufficient. From the moment of valid abandonment, the master of the
vessel and agents of the insured become the agents of the
Sec. 144. A notice of abandonment must be explicit, and insurer and the latter becomes responsible for all the
must specify the particular cause of the abandonment, but expenses and liabilities in respect thereof.
need state only enough to show that there is probable cause
therefor, and need not be accompanied with proof of Insurers are liable for the wages of seaman earned
interest or of loss. subsequent to the loss, but take free from any lien or liability
for wages earned prior thereto.
Notice of loss must be explicit
Sec. 149. Where notice of abandonment is properly given,
Q: Should the notice of loss be explicit? the rights of the insured are not prejudiced by the fact that
the insurer refuses to accept the abandonment.
A: Yes, there must be an intention to abandon, apparent from
the communication to the insurer and a relinquishment of all Acceptance is in no case necessary if the abandonment is
rights to the insurer. properly made.

The grounds for abandonment must be stated with such The  insured’s  right  to  abandon,  in  policy  of  marine insurance,
particularity as to enable the underwriter to determine is absolutely when justified by the circumstances.
whether or not he is bound to accept the offer.
Sec. 150. The acceptance of an abandonment may be either
Sec. 145. An abandonment can be sustained only upon the express or implied from the conduct of the insurer. The
cause specified in the notice thereof. mere silence of the insurer for an unreasonable length of
time after notice shall be construed as an acceptance.
If the insured assigns an insufficient cause or causes which
do not in fact exist, the proof of other causes will not be Acceptance of abandonment
admitted in suing for a total loss.
Q: What is the form of acceptance of abandonment?
Sec. 146. An abandonment is equivalent to a transfer by the
insured of his interest to the insurer, with all the chances of A:
recovery and indemnity.

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NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
1. An  insurer’s  acceptance  of  an  offered  abandonment  
need not to be express A: He may nevertheless recover his actual loss.
2. It may be implied by conduct
3. Mere silence after notice would not operate as an
acceptance
Sub-Title 1-I
Sec. 151. The acceptance of an abandonment, whether MEASURE OF INDEMNITY
express or implied, is conclusive upon the parties, and
admits the loss and the sufficiency of the abandonment. Sec. 156. A valuation in a policy of marine insurance in
conclusive between the parties thereto in the adjustment of
Sec. 152. An abandonment once made and accepted is either a partial or total loss, if the insured has some interest
irrevocable, unless the ground upon which it was made at risk, and there is no fraud on his part; except that when a
proves to be unfounded. thing has been hypothecated by bottomry or respondentia,
before its insurance, and without the knowledge of the
Q: What is the effect of acceptance of abandonment? person actually procuring the insurance, he may show the
real value. But a valuation fraudulent in fact, entitles the
A: insurer to rescind the contract.
1. He becomes at once liable for the whole amount of
the insurance, and also becomes entitled to all rights Q: What is the effect of valuation?
which insured possessed in the thing insured
2. Acceptance fixed the rights of the parties. It is A: To fix in advance the value of the property and thus avoid
conclusive upon them the necessity of proving its actual value in case of loss.
3. Acceptance stops the insurer to rely on insufficiency
in the form, time, right of abandonment Q: To be conclusive, the valuation must be?

Sec. 153. On an accepted abandonment of a ship, freightage A:

earned previous to the loss belongs to the insurer of said
freightage; but freightage subsequently earned belongs to a. The insured has some interest at risk
the insurer of the ship. b. There is no fraud on his part

RIGHT OF INSURER TO FREIGHTAGE Sec. 157. A marine insurer is liable upon a partial loss, only
for such proportion of the amount insured by him as the loss
Freightage earned subsequent to the loss belongs to the bears to the value of the whole interest of the insured in the
insurer of said freightage. property insured.

Sec. 154. If an insurer refuses to accept a valid Q: When is the insured considered as co-insurer in marine
abandonment, he is liable as upon actual total loss, insurance?
deducting from the amount any proceeds of the thing
insured which may have come to the hands of the insured. A: If the value of his interest exceeds the amount of
insurance. q
Q: What is the effect of refusal to accept a valid
abandonment  of  insurer’s  liability? Sec. 158. Where profits are separately insured in a contract
of marine insurance, the insured is entitled to recover, in
A: case of loss, a proportion of such profits equivalent to the
1. The insurer is liable as upon actual loss less any proportion which the value of the property lost bears to the
proceeds the insured may have received on account value of the whole.
of damaged property as when the insured succeeds
in selling the property as damaged. LOSS OF PROFITS SEPARATELY INSURED
2. If the abandonment was improper, the insured may
recover the extent of damage proved. If the profits to be realized are separately insured from the
vessel or cargo, the insured is entitled to recover, in case of
Sec. 155. If a person insured omits to abandon, he may loss, such portion of the profits as the value of the property
nevertheless recover his actual loss. lost bears the value of the whole property.

Q:   What   is   the   effect   of   insured’s   failure   to   make   Sec. 159. In case of a valued policy of marine insurance on
abandonment? freightage or cargo, if a part only of the subject is exposed
Facultad de Derecho Civil 84
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
to the risk, the evaluation applies only in proportion to such 4. The cost of the insurance is always added in
part. calculating the value of the ship, cargo, or freightage
or other subject matter in an open policy.
Q: What if only a part of the cargo or freightage insured is
exposed to risk? Sec. 162. If cargo insured against partial loss arrives at the
port of destination in a damaged condition, the loss of the
A: The valuation will be reduced proportionately. The insurer insured is deemed to be the same proportion of the value
is bound to return such portion of the premium ad which the market price at that port, of the thing so
corresponds with the portion of the cargo which had been damaged, bears to the market price it would have brought if
exposed to the risk. sound.

Sec. 160. When profits are valued and insured by a contract NOTE: This provision applies if the cargo is insured against
of marine insurance, a loss of them is conclusively presumed partial loss and it suffers damage as a result of which the
from a loss of the property out of which they are expected market value at the port of destination is reduced.
to arise, and the valuation fixes their amount.
FORMULA:
Sec. 161. In estimating a loss under an open policy of marine
insurance the following rules are to be observed: Market price in sound state
Less: market price in damaged state
(a) The value of a ship is its value at the beginning of the =reduction in value (depriciation)
risk, including all articles or charges which add to its
permanent value or which are necessary to prepare it for Reduction value x amount of insurance = amount of
the voyage insured; Market price in recovery
(b) The value of the cargo is its actual cost to the insured, sound state
when laden on board, or where the cost cannot be
ascertained, its market value at the time and place of lading, Sec. 163. A marine insurer is liable for all the expenses
adding the charges incurred in purchasing and placing it on attendant upon a loss which forces the ship into port to be
board, but without reference to any loss incurred in raising repaired; and where it is stipulated in the policy that the
money for its purchase, or to any drawback on its insured shall labor for the recovery of the property, the
exportation, or to the fluctuation of the market at the port insurer is liable for the expense incurred thereby, such
of destination, or to expenses incurred on the way or on expense, in either case, being in addition to a total loss, if
arrival; that afterwards occurs.
(c) The value of freightage is the gross freightage, exclusive
of primage, without reference to the cost of earning it; and Sec. 164. A marine insurer is liable for a loss falling upon the
(d) The cost of insurance is in each case to be added to the insured, through a contribution in respect to the thing
value thus estimated. insured, required to be made by him towards a general
average loss called for by a peril insured against; provided,
Rules for estimating loss under an open policy of marine that the liability of the insurer shall be limited to the
insurance proportion of contribution attaching to his policy value
where this is less than the contributing value of the thing
Q: What are the rules for estimating loss under an open insured.
policy of marine insurance?
Sec. 165. When a person insured by a contract of marine
A: The real value of the thing insured must be proved by the insurance has a demand against others for contribution, he
insured in each case. may claim the whole loss from the insurer, subrogating him
to his own right to contribution. But no such claim can be
1. The value of the vessel is to be taken as of the made upon the insurer after the separation of the interests
commencement of the risk and not its value at the liable to the contribution, nor when the insured, having the
time she was built. right and opportunity to enforce the contribution from
2. The value of the cargo is its actual cost to the others, has neglected or waived the exercise of that right.
insured when laden on board, or where the cost
cannot be established, its market value at the time Q: What are the rights of the insured in case of general
and place of shipment. average?
3. The value of the freightage is the gross freightage
and not the net freightage. Primage is excluded in
the gross freightage.

Facultad de Derecho Civil 85

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A: The general rule is that the insurer is liable for any general Q: What are allied lines?
average loss where it is payable or has been paid by the
insured in consequence of the peril insured against. A: It protects against loss by lightning, windstorm, etc. but
not only when such risks are covered by extension to fire
Q: In what instances there can be no recovery for general insurance policies or under separate policies subject to the
average? payment of additional premiums.

A: There should be distinction between fire insurance alone and

fire-and-extended coverage.
1. After the separation of the interests liable to
contribution or after the cargo liable for contribution Q: What is the nature of fire insurance?
has been removed from the vessel
2. When the insured has neglected or waived his right A: It is a contract of indemnity.
to contribution.
Q: What is the concept of fire under the Code?
LIMIT AS TO LIABILITY OF INSURER; FORMULA:
A: Spontaneous combustion is usually a rapid oxidation. Fire
Amount of is oxidation which is so rapid to produce either a flame or a
insurance x proportion of general = limit of liability glow.
value of thing insurance of insurer
insured Under our jurisdiction, fire may not be considered a natural
disaster or calamity since it almost always arises from some
Sec. 166. In the case of a partial loss of ship or its act of man, or by human means. It cannot be an act of God
equipment, the old materials are to be applied towards unless caused by some lightning or natural disaster or
payment for the new. Unless otherwise stipulated in the casualty not attributable to human agency.
policy, a marine insurer is liable for only two-thirds of the
remaining cost of repairs after such deduction, except that Q: What are the risks and losses covered?
anchors must be paid in full.
A: The scope, and coverage of insurance policy and the
LIABILITY OF INSURER IN CASE OF PARTIAL LOSS OF SHIP OR intention of the parties, as indicated by their contract
ITS EQUIPMENT controls.

There is deducted from the cost of repairs LOSS OF PROFITS INSURANCE or BUSINESS INTERRUPTION
one-third  new  for  old”  on  the  theory  that  the  new  materials   INSURANCE
render the vessel much more valuable that it was before the
loss. Q: What is loss of profits insurance or business interruption
insurance?

A: The attachment of a consequential loss from the standard

Title 2 fire insurance extends the coverage to such consequential
FIRE INSURANCE losses.

Sec. 167. As used in this Code, the term "fire insurance" KINDS OF INDIRECT LOSSES
shall include insurance against loss by fire, lightning,
windstorm, tornado or earthquake and other allied risks, Q: What are the kinds of indirect of losses?
when such risks are covered by extension to fire insurance
policies or under separate policies. A:

Q: What is fire insurance? 1. Physical damage caused to other property which is

not usually covered by the basis insurance policy.
A: It is a contract of indemnity by which the insurer for a 2. Loss of earnings
stipulated premium, agrees to indemnify the insured against 3. Extra expense or additional expenditure or charges
loss of, damage to, a property caused by hostile fire. incurred by insured following damage or destruction
of buildings or contents by an insured peril.
Allied lines

Facultad de Derecho Civil 86

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

OCEAN MARINE v. FIRE POLICIES INCREASE OF RISK OR HAZARD IN GENERAL

Q: Distinguish marine and fire insurance policies? There is an implied promise or undertaking on the part of the
insured that he will not change the premises or character of
A: the business carried there so as to increase the risk of loss by
fire.
OCEAN MARINE FIRE POLICIES
A policy of insurance on Where the hazard is fire An increase of hazard takes place whenever the insured
vessel engaged in navigation alone and the subject is an property is put to some new use, and the new use increases
although it insures the vessel unfurnished vessel, never the chance of loss.
against fire risks only afloat for a voyage
The increase should be substantial in character
Q: Why is distinction important?
Q: Give alterations which will avoid the policy.
A:
A:
1. In marine insurance, the rules on constructive total
loss and abandonment apply but not in fire 1. Where the risk of loss is increased
insurance 2. Where the increase no longer exist at the time of
2. In case of partial loss of a thing insured for less than loss
its actual value, the insured in a marine insurance
policy is a co-insurer of the uninsured portion, while Q: What are the alterations which will not avoid the policy?
the insured may only become co-insurer in a fire
insurance if expressly agreed upon by the parties. A:

Sec. 168. An alteration in the use or condition of a thing 1. Where the risk of loss is not increased
insured from that to which it is limited by the policy made 2. Where   questioned   articles   required   by   insured’s  
without the consent of the insurer, by means within the business
control of the insured, and increasing the risks, entitles an 3. Where insured property would be useless if
insurer to rescind a contract of fire insurance. questioned acts were prohibited.

Sec. 169. An alteration in the use or condition of a thing Q: What are the effects where the insured has no control or
insured from that to which it is limited by the policy, which knowledge of alteration?
does not increase the risk, does not affect a contract of fire
insurance. chanrobles virtual law library A:

Q: What are the requisites for an alteration in thing insured 1. The  insurer’s  liability  is  not  affected
to entitle the insurer to rescind the contract? 2. Insured’s   knowledge   is   presumed   in   case   of   act   of  
the  insured’s  tenant
A:
Sec. 170. A contract of fire insurance is not affected by any
1. The use or condition of the thing is specifically act of the insured subsequent to the execution of the policy,
limited or stipulated in the policy which does not violate its provisions, even though it
2. Such use or condition as limited by the policy is increases the risk and is the cause of the loss.
altered
3. The alteration is made without the consent of the Sec. 171. If there is no valuation in the policy, the measure
insurer of indemnity in an insurance against fire is the expense it
4. The alteration is made by means within the control would be to the insured at the time of the commencement
of the insured of the fire to replace the thing lost or injured in the
5. The alteration increases the risk. condition in which at the time of the injury; but if there is a
valuation in a policy of fire insurance, the effect shall be the
The contract of fire insurance is not affected by any act of the same as in a policy of marine insurance.
insured subsequent to the execution of the policy which does
not violate its provisions even though it increases the risk and
is the cause of the loss.
Facultad de Derecho Civil 87
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
If the policy does not contain any prohibition limiting the use Q: Is the insured presumed to be a co-insurer under fire
or condition of the thing insured, an alteration in said use or policies in the absence of stipulation?
condition does not constitute a violation of the policy
A: No.
Sec. 172. Whenever the insured desires to have a valuation
named in his policy, insuring any building or structure CO-INSURANCE CLAUSE IN FIRE INSURANCE
against fire, he may require such building or structure to be
examined by an independent appraiser and the value of the Q: What is a co-insurance clause in fire insurance policies?
insured's interest therein may then be fixed as between the
insurer and the insured. The cost of such examination shall A: It is a clause requiring the insured to maintain insurance to
be paid for by the insured. A clause shall be inserted in such an amount equal to the value or specified percentage of
policy stating substantially that the value of the insured's value of the insured property under penalty of becoming co-
interest in such building or structure has been thus fixed. In insurer to the extent of such deficiency.
the absence of any change increasing the risk without the
consent of the insurer or of fraud on the part of the insured, Q: What is the reason for this clause?
then in case of a total loss under such policy, the whole
amount so insured upon the insured's interest in such A: To prevent the property owners from taking out such small
building or structure, as stated in the policy upon which the amount of insurance and thereby reducing the premium
insurers have received a premium, shall be paid, and in case payment and thereby increasing the rates of premium for all.
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 “OPTION  TO  REBUILD”  CLAUSE
insured's interest therein, each policy shall contribute pro
rata to the payment of such whole or partial loss. But in no Q: What is an option to rebuild clause?
case shall the insurer be required to pay more than the
amount thus stated in such policy. This section shall not A: A stipulation concerning the repairing, rebuilding, or
prevent the parties from stipulating in such policies replacing of buildings or structures wholly or partially
concerning the repairing, rebuilding or replacing of buildings damaged or destroyed. The insurer is given the option to
or structures wholly or partially damaged or destroyed. reinstate or replace the property damaged or destroyed or
any part thereof, instead of paying the amount of the loss or
Q: What is the measure of the indemnity under an open damage.
policy?
Sec. 173. No policy of fire insurance shall be pledged,
A: The insured is entitled only to recover the amount of hypothecated, or transferred to any person, firm or
actual loss sustained and the burden is upon him to establish company who acts as agent for or otherwise represents the
the amount of such loss by a preponderance of evidence. issuing company, and any such pledge, hypothecation, or
transfer hereafter made shall be void and of no effect
The liability of the insurer shall in no event exceed what it insofar as it may affect other creditors of the insured.
would cost the insured to repair, or replace the thing insured
NOTE: After the loss, the insured may pledge, hypothecate,
In case of personal property having a market value which can or transfer a fire insurance policy or rights thereunder even
readily be determined, such market value may be applied in without the consent of, or notice, to insurer.
determining the actual loss sustained.

VALUATION IN FIRE INSURANCE POLICY

Title 3
Q: What is the effect of valuation in a fire insurance policy? CASUALTY INSURANCE

A: Sec. 174. Casualty insurance is insurance covering loss or

1. Valuation is conclusive as to parties liability arising from accident or mishap, excluding certain
2. In case of total loss, the insured can recover the types of loss which by law or custom are considered as
whole amount and in case of partial loss, the full falling exclusively within the scope of other types of
amount of the partial loss. insurance such as fire or marine. It includes, but is not
3. If the thing is insured under 2 or more policies, each limited to, employer's liability insurance, motor vehicle
policy shall contribute pro rata to the payment of liability insurance, plate glassinsurance, burglary and theft
such whole or partial loss. insurance, personal accident and health insurance as

Facultad de Derecho Civil 88

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
written by non-life insurance companies, and other Q: What is the liability insurable in case of criminal
substantially similar kinds of insurance. negligence?

Q: What is a casualty insurance? A: It is criminal but also insurable on the ground that they are
incidental. But liability consequences of deliberate criminal
A: It includes all the forms of insurance against loss or liability acts are not insurable.
arising from accident or mishap excluding certain types of
loss or liability which are not within the scope of other types Q: What is the insurable interest in liability insurance?
of insurance such as:
A: The insurable interest is to be found in the interest the
a. Marine insured has in the safety of persons who may maintain, or in
b. Fire the freedom from damage of property which may become
c. Suretyship the basis of suits against him in case of injury or destruction.
d. Life
Q: When is liability insurance in policy payable?
Q: What are the risks or losses covered?
A: The insurer assumes the obligation of paying the injured
A: third person from the moment that the insured becomes
liable to third persons.
1. Accident- Violent mishap proceeding from an
unknown or unexpected cause Q: May the injured person sue the insurer of party at fault?
2. Burglary, robbery or theft not includes because of
the opportunity to defraud the insurer (moral A: It depends on whether the contract insurance is intended
hazard) to benefit third persons also or only the insured.

Q: What are the 2 general divisions of casualty insurance? Q: Explain the tests.

A: A:

1. Insurance against specified perils which may affect 1. Indemnity against third party liability- the third persons
the person or property of the insured such as can sue directly the insurer upon the occurrence of the
personal accident, robbery, theft, damage to or loss injury or event upon which the liability depends. It
of motor vehicle, insolvency of debtors, defalcation becomes operative as soon as the liability of the person
of employees indemnified arises irrespective of whether or not he has
2. Insurance against specified perils which may give rise suffered actual loss.
to liability on the part of the insured for claims for 2. Indemnity against actual loss or payment- third persons
injuries to others for damage to their property such cannot proceed against insurer, the contract being solely
as  workmen’s  compensation,  motor  vehicle  liability,   to reimburse the insured for liability actually discharged
professional liability, products liability by him through payment to third persons. Prior payment
by insured is necessary in order that obligation of insurer
LIABILITY INSURANCE may arise.

Q: What is liability insurance? Q:  What  is  the  basis  of  the  insurer’s  liability?

A: A contract of indemnity for the benefit of the insured and A:

those in privity with him, or those to whom the law upon the 1. Contract of insurance
grounds of public policy extends the indemnity against 2. Sum limited in the contract
liability.
Q: What is accident insurance?
Q: What is the liability insurable in case of quasi-delict or
non-fulfillment of contract? A: It reimburses the insured in an accident

A: It is only civil injury and not a felony or crime which is a Q: What is health insurance?
public injury.
A: It reimburses the insured for pecuniary loss arising out of
disease-related illness.

Facultad de Derecho Civil 89

UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law

NOTE: Accident and health insurances are frequently Title 4

combined. SURETYSHIP

Q: Who has the burden of proof? Sec. 175. A contract of suretyship is an agreement whereby
a party called the surety guarantees the performance by
A: In   accident   insurance,   the   insured’s   beneficiary   has   the   another party called the principal or obligor of an obligation
burden of proof or undertaking in favor of a third party called the obligee. It
includes official recognizances, stipulations, bonds or
Q: What is accident or accidental as used in accident policy? undertakings issued by any company by virtue of and under
the provisions of Act No. 536, as amended by Act No. 2206.
A: It   is   an   event   that   takes   place   without   one’s   foresight   or  
expectation or an event which proceeds from an unknown Q: What is suretyship?
cause or unusual effect of unknown cause and not expected.
A: It is an agreement whereby one undertakes to answer for
It may include causes attributable to fault or negligence. the debt, default, or miscarriage of another.

Q: What is the rule as to death or injury resulting from Q: What are the undertakings within the scope of
accidental or accidental means? suretyship?

A: General rule is that death or injury does not result from A:

accidental means within the terms of an accident policy if it is
the   natural   result   of   the   insured’s   voluntary   act,   1. Official recognizes
unaccompanied by anything unforeseen except the death or 2. Stipulations, bonds, undertakings by any company by
injury. virtue of Act. 536

Q: What is the rule as to suicide and willful exposure to Sec. 176. The liability of the surety or sureties shall be joint
needless peril? and several with the obligor and shall be limited to the
amount of the bond. It is determined strictly by the terms of
A: It will ordinarily negate the accidental character of the contract of suretyship in relation to the principal
whatever followed from the known danger. contract between the obligor and the obligee. (As amended
by Presidential Decree No. 1455).
Suicide  is  the  positive  act  of  ending  one’s  life
Q: What is the nature of the liability of surety?
The willful exposure on the other hand indicates reckless
risking of it that is almost suicide in intent. A: It is solidary. It is limited to the amount of the bond. It is
contractual which means it is determined in relation to the
Q: What do you mean by intentional? principal contract.

A: It implies the exercise of the reasoning faculties, Q: Distinguish between suretyship and property insurance.
consciousness, and volition.
A:
No action clause
SURETYSHIP PROPERTY INSURANCE
Q: What is the effect of no action clause in policy of liability Accessory contract Principal contract in itself
insurance? There are 3 parties: 2 parties:
a. Surety a. Insurer
A: It cannot prevail over the Rules of Court aimed at avoiding b. Principal debtor b. insured
multiplicity of suits. c. Creditor
It is more of credit Contract of indemnity
accommodation
Surety is entitled to No right of recovery except
reimbursement from when the insurer is entitled
principal and his guarantors to subrogation
for loss it may suffer under
the contract
Facultad de Derecho Civil 90
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
A bond can only be cancelled May be cancelled unilaterally
with the consent of olbligee In the case of a continuing bond, the obligor shall pay the
or by Court of competent subsequent annual premium as it falls due until the contract
jurisdiction of suretyship is cancelled by the obligee or by the
Requires acceptance of Does not need the Commissioner or by a court of competent jurisdiction, as the
oblige before it becomes acceptance of any third party case may be. chanrobles virtual law library
valid
Risk-shifting device Risk distributing device Q: What are the rules on payment of premiums?

Q: Distinguish suretyship and guaranty A:

A: 1. the premium becomes a debt as soon as the

contract of suretyship or bond is perfected and
GUARANTY SURETYSHIP delivered to obliogor
Collateral undertaking Surety is an original 2. the contract of suretyship or bonding shall be valid
promissory and binding unless and until the premium has been
Surety is an original Surety-­‐primarily  liable   paid
promissory 3. where the obligee has accepted the bond, it shall be
Guarantor binds himself to Surety undertakes to pay if valid and enforceable notwithstanding that the
pay if the principal cannot principal does not pay premium has not been paid
pay 4. if the contract of suretyship or bond is not accepted
Insurer of solvency of debtor Insurer of the debt by or filed with obligee, the surety shall collect only
reasonable amount
Guarantor can avail of the Surety cannot avail of the
benefit of excussion and benefit of excussion and 5. if the non-acceptance of the bond de due to the
division in case creditor division fault of negligence of surety, no service fee, stamps,
or taxes imposed shall be collected by surety
proceeds against him
6. In the case of continuing bond, the obligor shall pay
Secondarily or subsidiarily Primarily liable
the subsequent annual premium as it falls due until
liable
the contract is cancelled.
Is not bound to take notice of Ordinarily led to know every
the non-performance of his default of his principal
TYPES OF SURETY BONDS
principal
Often discharged by the Will not be discharged either
Q: What are the types of surety bonds?
mere indulgence of the by mere indulgence of the
creditor of the principal, and creditor of the principal or by
A:
is usually not liable unless want of notice of the default
1. Contract bonds- connected with construction and
notified of the default of the of the principal, no matter
supply contracts
principal how much he may be injured
a. Performance bonds
thereby
b. Payment bonds- payment of laborers and
material men
Sec. 177. The surety is entitled to payment of the premium
2. Fidelity bonds
as soon as the contract of suretyship or bond is perfected
a. Industrial bond-required by private employers
and delivered to the obligor. No contract of suretyship or
to cover loss through dishonesty of employees
bonding shall be valid and binding unless and until the
b. Public official bond
premium therefor has been paid, except where the obligee
3. Judicial bond
has accepted the bond, in which case the bond becomes
a. Injunction bonds
valid and enforceable irrespective of whether or not the
b. Attachment bonds
premium has been paid by the obligor to the surety:
c. Replevin bonds
Provided, That if the contract of suretyship or bond is not
d. Bail bonds
accepted by, or filed with the obligee, the surety shall
e. Appeal bonds
collect only reasonable amount, not exceeding fifty per
centum of the premium due thereon as service fee plus the
Sec. 178. Pertinent provisions of the Civil Code of the
cost of stamps or other taxes imposed for the issuance of
Philippines shall be applied in a suppletory character
the contract or bond: Provided, however, That if the non-
whenever necessary in interpreting the provisions of a
acceptance of the bond be due to the fault or negligence of
contract of suretyship.
the surety, no such service fee, stamps or taxes shall be
collected.
Facultad de Derecho Civil 91
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
Pertinent provision from NCC 1. Owner of the policy- one who has the power to
name or change the beneficiary or to assign the
Art. 2047. By guaranty a person, called the guarantor, binds policy
himself to the creditor to fulfill the obligation of the 2. The person whose life is the subject of the policy,
principal debtor in case the latter should fail to do so. also known as the cestui que vie
If a person binds himself solidarily with the principal debtor, 3. The beneficiary to whom the proceeds are paid
the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a Q: What is the nature of life insurance?
suretyship. (1822a)
A:

1. It is not one of indemnity.

Title 5 2. Liability is absolutely certain
LIFE INSURANCE 3. Amount of insurance generally without limit
4. Life policy is a valued policy
Sec. 179. Life insurance is insurance on human lives and 5. Direct pecuniary loss not required.
insurance appertaining thereto or connected therewith.
LIFE INSURANCE v. FIRE AND MARINE INSURANCE
Sec. 180. An insurance upon life may be made payable on
the death of the person, or on his surviving a specified Q: Distinguish life insurance from fire and marine insurance.
period, or otherwise contingently on the continuance or
cessation of life. A:

Every contract or pledge for the payment of endowments or LIFE INSURANCE FIRE AND MARINE
annuities shall be considered a life insurance contract for INSURANCE
purpose of this Code. Not a contract of indemnity Contracts of indemnity
but a contract of investment
In the absence of a judicial guardian, the father, or in the Always regarded as a valued May be:
latter's absence or incapacity, the mother, or any minor, policy a. Open
who is an insured or a beneficiary under a contract of life, b. Valued
health or accident insurance, may exercise, in behalf of said May be transferred or The transferee or assignee
minor, any right under the policy, without necessity of court assigned to any person even must have the insurable
authority or the giving of a bond, where the interest of the if he has no insurable interest interest in the thing insured
minor in the particular act involved does not exceed twenty The consent of the insurer is Such consent in the absence
thousand pesos. Such right may include, but shall not be not essential to the validity of waiver by the insurer is
limited to, obtaining a policy loan, surrendering the policy, of the assignment of a life essential in the assignment
receiving the proceeds of the policy, and giving the minor's policy unless expressly of a fire or marine insurance
consent to any transaction on the policy. required policy
Insurable interest in the life The insurable interest in the
Q: What is life insurance? or health of the person property insured must exist
insured need not exist after not only when the insurance
A: It is an insurance payable on death of a person or on his the insurance takes effect or takes effect but also when
surviving a specified period, or otherwise, contingently on the when the loss occurs the loss occurs
continuance or cessation of title. Insurable interest need not Insurable interest must have
have any legal basis legal basis
It is also a mutual agreement by which a party agrees to pay a The contingency that is The contingency insured
given sum of money on the happening of a particular event contemplated is certain against may or may not occur
contingent on the duration of human life, in consideration of event, the only uncertainty
the payment of a smaller sum immediately, or in periodical being the time when it will
payments by other party. take place
The liability of the insurer to Liability is uncertain because
Q: Who are the parties involved in a policy of life insurance? make payment is certain the happening of the peril is
uncertain
A: Although may be terminated May be cancelled by either
by insured, cannot be party and is usually for a
cancelled by the insurer, term of 1 year
Facultad de Derecho Civil 92
UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
thus, usually a long-term period or if he dies within such period, to some other
contract person indicated.
The loss to the beneficiary The loss can be measured
caused by the death of the accurately SCOPE OF LIFE INSURANCE
insured can seldom be
measured accurately Q: What is the scope of life insurance?
The beneficiary is under no The insured is required to
obligation to prove actual submit proof of his actual A: The loss of earning power by persons results from:
financial loss as a result of pecuniary loss as a condition
death of the insured in order precedent to collecting in 1. Death
to collect the insurance insurance 2. Injury
3. Illness
Q: May a of insurance policy be attached and sold at public 4. Old age
auction? 5. Loss of employment

A: No (Rule 39. Sec. 12). All moneys, benefits, privileges, or KINDS OF DEATH
annuities accruing or in any manner growing out of any life
insurance are exempt from execution regardless of the Q: What are the kinds of death from the economic
amount of the annual premiums paid. standpoint?

Q: In what instances can the exemption be applied to A:

accident insurance?
1. Actual death- “casket  death”
A: When accident insurance regarded as life insurance- the 2. Living death- permanent disability
risk insured is the death of the insured by accident, then such 3. Retirement death- living beyond the period of
accident insurance may also be regarded as life insurance. earning capacity represents this classification of
death.
Q: Who has the burden of proof?
ALEATORY CONTRACT OF LIFE ANNUITY
A: In   accident   insurance,   the   insured’s   beneficiary   has   the  
burden of proving that the cause of death is due to the Q: What is an aleatory contract of life annuity?
covered peril. Once that fact is established, the burden of
proof then shifts to the insurer to show any excepted peril A: The debtor binds himself to pay an annual pension or
that may have been stipulated by the parties. income during the life of one or more determinate persons in
consideration of a capital consisting of money or other
KINDS OF LIFE INSURANCE POLICIES property, whose ownership is transferred to him at once with
the burden of the income.
Q: What are the kinds of life insurance policies?
Annuity
A:
Q: What is an annuity?
1. ordinary life policy- the insured is required to pay a
certain fixed premium annually or at more frequent A: Also called as the upside-down application of the life
intervals throughout his entire life and the beneficiary is insurance principle. It is based on the notion that the
entitled to receive payment under the policy only after purpose of the annuity is the scientific liquidation of an
the death of the insured. Also known as whole life or estate.
regular life or straight life or cash-value insurance
2. limited payment life policy- premiums are payable only Q: Distinguish annuity contracts from ordinary life policies.
during a limited period of years, usually 10, 15 or 20. It is
also payable only at the death of the insured. It is also A:
known as limted premium insurance policy.
3. Term insurance policy- provides coverage only if the ANNUITY CONTRACTS ORDINARY LIFE POLICIES
insured dies during a limited period. Also known as Insures against economic
temporary insurance. problems resulting from a
4. Endowment policy- the insurer binds himself to pay a long life rather than early
fixed sum to the insured if he survives for a specified death

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UNIVERSITY OF SANTO TOMAS
NOTES ON INSURANCE
Kenneth & King Hizon (2A)- UST Faculty of Civil Law
“transiency” “longevity” A: The courts will not permit the process of assignment to be
The lump sum is paid to the Insured pays to the insurer used as cloak to hide an illegal inetent to make contracts on
insurer immediately and the an annuity and his human life.
annuitant receives the beneficiary receives at the
annuity payments as longs as insured’s   death   the   lump   Sec. 182. Notice to an insurer of a transfer or bequest
he lives sum payment thereof is not necessary to preserve the validity of a policy
More of an investment Indemnity of insurance upon life or health, unless thereby expressly
Provides protection from a substantial risk required.
Civil code provisions govern these contracts
NOTICE TO INSURER OF TRANSFER
Sec. 180-A. The insurer in a life insurance contract shall be
liable in case of suicides only when it is committed after the If the policy does not expressly require the insured to give
policy has been in force for a period of two years from the notice of an assignment or transfer of the policy to the
date of its issue or of its last reinstatement, unless the policy insurer, such notice is not essential to the validity of the
provides a shorter period: Provided, however, That suicide assignment.
committed in the state of insanity shall be compensable
regardless of the date of commission. (As amended by Sec. 183. Unless the interest of a person insured is
Batasang Pambansa Blg. 874). susceptible of exact pecuniary measurement, the measure
of indemnity under a policy of insurance upon life or health
RULES ON SUICIDE is the sum fixed in the policy.

Q: What are the instances where the insurer is liable in case MEASURE OF INDEMNITY UNDER LIFE POLICY
of suicide?
The extent of the amount of indemnity payable on death of
A: the insured under a policy of insurance upon life or health is
the amount fixed in the policy.
1. The suicide is committed after the policy has been in
force for a period of 2 years from date of its issue or of its There  can  be  no  exact  pecuniary  measurement  of  a  person’s  
last reinstatement interest in his life or the life of another.
2. The suicide is committed after a shorter period provided
in the policy although within the 2 year period The exception is when the person insures the life of another,
3. The suicide is committed in the state of insanity as where a creditor insures the life of his debtor.
regardless of the date of commission, unless suicide is an
excepted risk

Q: When is he not liable?

END
A:

1. The suicide is not by reason of insanity and is committed

within 2 year period
2. The suicide is by reason of insanity but is not among the
risks assumed by the insurer regardless of the date of
commission
3. The insurer can show that policy was obtained with the
intention to commit suicide even in the absence of any
suicide exclusion in the policy.

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.

Q: What if the assignment is used as a cloak to hide an

illegal scheme?

Facultad de Derecho Civil 94

UNIVERSITY OF SANTO TOMAS