Insurance Midterm Notes

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[INSURANCE]
THE INSURANCE CODE OF THE PHILIPPINES (PD No.
612 as amended by RA No. 10607)

Development of insurance in its present concept:
I829 - Lloyd’s of London appointed Stracham,
Murray & Co. Inc. as its representative
1898- life insurance was introduced with the entry
of Sun Life Assurance of Canada
1936- Social insurance was established
1937- CA No. 186 created the GSIS which covers
government employees
1939- Union Insurance Society of Canton
appointed Russel &Sturgis as its agentin Manila
Yek Tong Lin Fire and Marine Insurance Companyfirst non-life insurance company
Insular Life assurance Co., Ltd- first domestic life
insurance company
1949- a government agency was formed to handle
insurance affairs with the Insular Treasurer
appointed as ex-officio Commissioner
1950- reinsurance was introduced with the
Reinsurance Company of the Orient
1951- the first workmen’s compensation Pool was
organized as the Royal Group Inc.
1954- RA No. 1161 created the SSS which covers
employees of the private sector

SECTION 1
HISTORICAL ORIGIN OF INSURANCE
Mutual insurance as old as society itself
Basis: Insurance is based upon the principle of
aiding another from a loss caused by an
unfortunate event
Benevolent societies organized for the purpose of
extending aid to their unfortunate members from a
fund contributed by all
Origin of present day insurance attributed to merchants of
Italian cities
Extensive maritime commerce of Italian republics
In its early forms, the law of insurance was derived
from the maritime law and as such was part of the
general law merchant and international in its
character
Development of insurance in England
Italian merchants founded trading houses in
London
All questions of insurance were determined in
accordance with the customs of merchants and by
merchant courts
English Insurance Act of 1601
Lord Mansfield= Father of English Commercial Law
Essential principles of the law merchant were
incorporated into the common-law system of
England and the common-law courts thereby
rendered competent to determine all questions
involving insurance
Development of insurance in the United States
Followed the same lines as in England
Has developed in such a way that English practices
and English decisions have little influence on the
insurance of the US

SOURCES OF INSURANCE IN THE PHILIPPINES
Spanish period:
1.
2.

American regime:
1.

Family as the primary political unit; misfortune
borne by the family
As barangays developed, the assistance was
extended accordingly

Martial Law period:
1.

2.

Economic (low per capita income of people)
“Bahala na” philosophy

The Insurance Code (PD No. 612)- took effect on
December 18, 1974 and amended the Insurance
Act
The Insurance Code of 1978 (PD No. 1560)- took
effect on June 11, 1978

RA 10607- amended the Insurance Code (PD 612)
LAWS GOVERNING INSURANCE
1.
2.
3.

Factors that worked against the development of insurance in
the Ph:
1.
2.

Insurance Act (Act No. 2427)- expressly repealed
the Code of Commerce provisions on Insurance

August 30, 1950- the Civil Code of the Philippines took
effect (RA No. 386) which expressly repealed the old Civil
Code provisions on insurance

Development of insurance in the Philippines
Pre-Spanish times

Code of Commerce
Civil Code of 1889

4.

Insurance Code of 1978- primary governing law
Civil Code
Special laws:
3.1. The Insurance code (PD 612)
3.2. The Revised Government Service Insurance
Act of 1977 (PD No. 1146)
3.3. The Social Security Act of 1954 (RA No. 1161)
Others:
4.1. Code of Commerce

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[INSURANCE]
4.2. Property Insurance Law (RA No. 656)- deals
with government property
4.3. RA No. 4898- covers barangay officials
4.4. EO No. 250- increased the insurance benefits
of barangay officials
4.5. RA No. 3591- established the Philippine
Deposit Insurance Corporation
RIGHT OF SUBROGATION OF INSURER TO RIGHTS OF
INSURED AGAINST WRONGDOER
1. Basis of right: equity

5. Loss or injury for risk must be covered by the policy

Subrogation
The substitution of one person in place of
another with reference to a lawful claim or
right so that he who is substituted succeeds to
the rights of the other in relation to a debt or
claim, including its remedies and securities
Doctrine of subrogation in insurance
The insurer, after paying the amount covered
by the insurance policy, steps into the shoes of
the insured, as it were, and availing himself of
the latter’s rights that exist against the
wrongdoer at the time of the loss.
2. Purpose
Principal purpose: To make the person who caused
the loss, legally responsible for it and at the same
time prevent the insured from receiving a double
recovery from the wrongdoer and the insurer
Other purpose: To prevent tortfeasors from being
free from liabilities
How insurer may recover:
1.
2.

Payment of insured to the insured operates as an
equitable assignment to the former of all remedies
which the latter may have against the third party
whose negligence or wrongful act caused the loss
Right of subrogation is not dependent on privity of
contract or upon assignment of claim. It accrues
simply upon payment of the insurance claim by the
insurer
Presentation in evidence of the insurance policy is
not indispensable. The subrogation receipt is
sufficient to establish insurer-insured relationship

Recover directly in a suit against the
wrongdoer (third party)
As real party in interest in a suit brought
by the insured

TN: Right of subrogation is not defeated by
settlement between insured and wrongdoer without
consent of insurer
3. Right of subrogation applicable only to property insurance
Why not applicable to life insurance?
Value of human life to beneficiary is incapable
of pecuniary estimation
Life insurance contracts are not contracts of
indemnity
4. Privity of contract or assignment by insured of claim not
essential

Voluntary payment- where insurer pays the insured
for a loss which is not a risk covered by the policy
Consequences of voluntary payment: The insurer
has no right of subrogation against the third party
liable for the loss
Remedy of insurer: He may recover from the third
party under Article 1236 of the Civil Code
6. Right of insured to recover from both insurer and third
party
Basis: principle of indemnity
The insurer may only recover from the third
party the amount of the loss
When right of subrogation exists: After the indemnity
has been paid by the insurer to the insured
Instance when insured may recover from both the
insurer and the third party –
When the amount of the paid by the insurer
does not fully cover the injury or loss, the
insured may recover the deficiency from the
third party
7. Right of insured to recover from insurer instead of third
party
Right of insured to be indemnified by insurer
cannot be defeated on the ground that the insured
has a right to be indemnified by the third party
Basis: premium paid by the insured to the insurer
8. Right of insurer against third party limited to amount
recoverable from latter by the insured
Reason: As the insurer is subrogated merely to the
rights of the insured, it can necessary recover only
the amount recoverable by the insured from the
party responsible

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Neither can the insurer recover more than the
amount it paid the insured although the latter is
able to recover the deficiency from the wrongdoer
because of under-insurance.

2.

9. Exercise of right of subrogation by insurer discretionary
Insurer has the option to exercise such right

3.

10. Loss of right of subrogation by act of insured or insurer
Limitations of the right:
1.

2.

Both the insurer and the consignee are bound
by the contractual stipulations under the bill of
lading
The insurer can be subrogated only to the
rights as the insured may have against the
wrongdoer

Situation: When the insured defeats the right of
subrogation of insurer by releasing the wrongdoer
Consequence: The insured is under obligation to return
to the insurer the amount paid thereby entitling the
latter to recover the same.
Insurer is the real party in interest with regard to the
portion of the indemnity paid since he is subrogated to
the rights of the insured
Situation: When the insurer pays the insured without
notifying the third party who in good faith settled the
claim
Consequence: the settlement is binding on both insured
and insurer and the latter cannot bring an action
against the third party on his right of subrogation.
11. Effect of assignment by insured of its rights against
third party to insurer

4.

The terms “assurance” and “insurance”
are used interchangeably.
Definition under the Code: A contract of insurance
is an agreement whereby one undertakes for a
consideration to indemnify another against loss,
damage, or liability arising from an unknown
source.
Other definition: A contract of insurance is an
agreement by which one party (insurer) for a
consideration (premium) paid by the other party
(insured), promises to pay money or its equivalent
or to do some act valuable to the latter (or his
nominee), upon the happening of a loss, damage,
liability or disability arising from an unknown or
contingent event.
Insurance contract, in general: A promise to pay
another, money or any other thing of value upon
the happening of a fortuitous event beyond d the
effective control of with party in which the promise
has an interest apart from the contract.

Policy- a written insurance contract
Contract of guaranty
Art. 2047(1)- By guaranty, a person called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
Contract of suretyship
Art. 20147(2)- If a person binds himself solidarily with the
principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such a case the contract
is called suretyship.

1.
2.
3.

Guarantor
Subsidiary liability
Pays if the debtor
cannot pay
Insurer of the
debtor’s solvency

1.
2.
3.

Surety
Primary liability
Pays if debtor does
not
Insurer of the debt

Effects:
1.

2.

The case is not between the insured and the
insurer but between the insured and the third party
because the insurer merely stepped into the shoes
of the insured
The third party cannot set up as defense any defect
in the insurance policy because it is not privy to it

DEFINITION OF INSURANCE FROM OTHER
VIEWPOINTS
1.

2.
CONSTRUCTION OF THE INSURANCE CODE
Means interpretation and is allowed only if its
provisions are not clear
SECTION 2
LEGAL CONCEPT OF INSURANCE
1.

Insurance is a type of contract

3.
4.

Economic- a method which reduces risk by a
transfer and combination (or pooling) of
uncertainty in regard to financial loss.
Business- a plan by which large numbers o people
associate themselves and transfer to the shoulders
of all, risks that attach to individuals.
Mathematical- the application of certain actuarial
(insurance mathematics) principles.
Social- social device whereby the uncertain risks of
individuals may be combined in a group and thus
made more certain, with small periodic
contributions by the individuals providing a fund
out of which those who suffer losses may be
reimbursed.

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DETERMINATION OF THE EXISTENCE OF THE
CONTRACT
1.

2.

3.
4.
5.

Nature of the contract – determines the character
of the insurance; title of the contract is a weak
indicator
Elements of the contract:
a. Subject matter- refers to the thing insured
Examples:
Fire and marine insurance- property
Life, health or accident insurance- life
or health of a person
Casualty insurance- the insured’s risk
of loss or liability
b. Consideration- the premium paid by the
insured
Basis for the amount: the probability of loss
and the extent of liability which the insurer
may become liable under contract
c. Object and purpose- the transfer and
distribution of risk of loss, damages, or liability
arising from an unknown or contingent event ;
a contract of insurance is a risk-bearing
contract
There must be an offer and acceptance for a
contract of insurance
The parties must have the legal capacity to enter
into a contract
To be enforceable, requisites of a binding contract
must be present

NATURE AND CHARACTERISTICS OF AN INSURANCE
CONTRACT
1.

It is consensual- perfected by the meeting of the
minds of the parties

2.

It is voluntary- it is not compulsory and the parties
may incorporate such terms and conditions as they
deem convenient provided they do not contravene
the law and public policy.
Instances when an insurance contract is not
voluntary:
a.

b.
c.

3.

When it is required by law- e.g. for motor
vehicles, for employees or for business
license
When it arises by operation of law- e.g.
War Damage Corporation Act
Social insurance- for members of the GSIS
and SSS

It is aleatory- depends upon some contingent
event
An insurance contract is not a contract of
chance
Each party must take a risk

Aleatory vs. Commutative Contract

Aleatory- one of the parties or both reciprocally bind
themselves to give or to do something in consideration of
what the other shall give or do upon the happening of an
event which is uncertain or which is to occur at an
indeterminate time.
Commutative- represent even exchanges
Q: Why are insurance contracts aleatory?
A: They involve the exchange of widely varying values for it
is of the essence of insurance that no one knows how the
risk insured against will happen. The insurer may be liable
to pay the full amount insured under life policies of which
only very few premiums have been paid.
4.

It is unilateral - it is executed as to the insured
after the payment of the premium and executory
on the part of the insurer in the sense that it is not
executed until payment for a loss; it imposes legal
duties only on the insurer
Payment of the premium as condition
precedent to the inception of the
contract

5.

It is conditional- subject to conditions the principal
one of which is the happening of the event insured
against. Other conditions (e.g.) payment of
premium) must be complied as precedent to the
right of the insured to claim the benefit.

6.

It is a contract of indemnity (except life and
accident insurance where the result is death)- the
promise of the insurer is to make good only the
loss of the insured.
Contemplates a possible gain for the
insured
If the insured has no insurable
interest, the contact is void and
unenforceable.

7.

It is a personal contract
The insured cannot assign before the
happening of the loss, his rights
under a property policy to others
without the consent of the insurer
The obligation of the insurer to pay
does not attach to or run with the
property whether it be real or
personal.

Novation- the total or partial extinction of an obligation
through the creation of a new one which substitutes it.
Requisites of a valid novation:
1.
2.
3.

A previous valid obligation.
Capacity and intention of the parties to modify or
extinguish the obligation.
The modification or extinguishment of the
oblgation;

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4.

The creation of a new valid obligation.

a.

Personalness of insurance contracts –
1.
2.
3.

Personal insurance- applies only to a particular
individual
Liability insurance
Property insurance- the insurance is on the
insured’s interest in the property, not on the
property itself. It is the damage to the
personal interest not the property that is being
reimbursed under a policy of property
insurance

b.

COPING WITH RISK
How people cope with risk:
1.

Life insurance policies are generally assignable or
transferable
2.
Reason: They are in the nature of
property and do not represent a personal
agreement between insured and insurer
8.

It is property in legal contemplation

DISTINGUISHING ELEMENTS OF THE CONTRACT OF
INSURANCE
Parties: Insured and insurer

3.

Elements:
1.

2.
3.
4.

5.

Insurable interest- the insured possesses an
interest of some kind susceptible of pecuniary
estimation
The insured is subject to a risk of loss
The insurer assumes that risk of loss
Such assumption of risk is a part of a general
scheme to distribute actual losses among a large
group or substantial number of persons bearing a
similar risk
Premium- ratable contribution made by the insured
to a general insurance fund in consideration for the
insurer’s promise

TN: All elements must be present otherwise there is no
contract of insurance

Insurance equitably distributes losses (among
those subject to the same kind of risk) out of a
general fund contributed by all
Provides protection against absorbing one’s
losses alone (broad sharing of economic risk)

4.

5.

Limiting the probability of loss
Example: Industries use safety devices around
complex and dangerous machineries in order to
lessen the probability that employees will expose
themselves to injury
Concrete buildings are less likely to catch fire than
wood building
Limiting effects of loss
Examples:
a. Passengers and drivers use seatbelts to
minimize damage resulting from a vehicular
accident
b. Sprinkler system installed to limit the effect of
a fire
c. Diversification- e.g. when investors choose to
own a wide variety of stocks to minimize the
risk that a sharp decline in the value of one
stock may have on their assets
Self-insurance or self-financing
Example: A restaurant owner may choose to set
aside a portion of each year’s profit into a special
reserve fund designated to pay an expected loss
Ignoring risk
Example: A tightrope walker who proceeds to walk
along a rope without any safety devices
Transferring risk to another
Examples:
a.
Seller’s warranty of goods sold
b. Contract of insurance

THE VALUE OF TRANSFERRING RISK
Some factors which influence an individual’s attitude toward
risk:
1.
2.
3.

Probability of loss
Potential magnitude of the loss
Person’s ability to absorb loss

INSURANCE, A RISK-DISTRIBUTING DEVICE
1.

Risk-shifting device- A contract possessing
elements 1, 2 and 3 above

Expected loss- the magnitude of the loss, should it
materialize times the probability that it will occur
INDIVIDUAL’S ATTITUDE TOWARD RISK

Example: Contract of guaranty where an interest of
the creditor i.e. payment of the debt (element 1) is
exposed to impairment by the happening of
contingent events e.g. insolvency (element 2) of
the principal debtor and the risk of the creditor is
assumed by a guarantor (element 3)
2.

Risk-distributing/ risk-sharing/ risk-policy devicee.g. insurance contract

1.

2.
3.

Risk preferring- people who choose to forego the
certain loss in the hope of incurring no loss, despite
the equal probability of suffering a large loss.
Risk neutral- indifferent to the alternatives
Risk averse- people who choose to confront certain
loss than confront an expected loss; usually willing
to pay someone else to assume the risk

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TN: As the potential magnitude of loss increases, most
people become more risk averse

persons, particularly those in the lower income
groups
Concerns itself primarily with the unfavorable
losses resulting from the perils of accidental injury,
sickness, old age, unemployment and premarture
death of the family earner.
Required by the government
Object: provision of a minimum standard of living
Basis of its compulsory nature- the experience that
some persons cannot or will not voluntarily
purchase insurance and the obligation of the
government to protect the general welfare of the
citizens.

ECONOMIC EFFECTS OF THE TRANSFER AND
DISTRIBUTION OF RISK
1.
2.

3.
4.
5.

Benefit to society as a whole
Undesirable side effects: Moral hazard phenomena
-- Reduced incentive to take steps to protect his
property which may increase the probability of loss
Problem regarding measurement of amount of risk
transferred
Theoretically, it is ideal that the insurer monitor the
insured’s behavior but in reality, this is not feasible
Sharing by insured of some responsibility for the
risk (to deal with the moral hazard phenomena)
Deductible- the insured bears any loss up
to some stated amount with the insurer
bearing the rest.
Coinsurance- the insured bears some
stated percentage of the loss regardless of
its amount, with the insurer bearing the
risk

Problem regarding computation of premium to be charged
Amount of premium- should equal the insured’s
expected loss plus pro rata share of the insurer’s
administrative costs
Classification of risks
Q: When feasible?
A: As long as the cost of measuring the
differentiating factor is less than the premium
reduction the insurer can offer members of a
differentiated, better-risk group
Sub-classification of risks
Adverse selection- Within the same group, it is
inevitable that some insured will be better risks
than others, even though all members of the group
pay the same premium because at a certain point,
further subdivision of the group becomes too
expensive relative to the benefits gained.
THE FIELDS OF INSURANCE
Multiple line insurance- the combination of at least two
kinds of insurance.
All lines insurance- used to describe the broadening nature
of insurance operations which combine at least most of the
basic types of insurance.
1.

Social (government) insurance
It is compulsory and designed to provide a
minimum of economic security for large groups of

2.

Voluntary (private) insurance- not based on
government compulsion and is sought by the
insured to meet a recognized need for protection
a.

Commercial insurance
aa. Personal insurance- based on the nature
of the perils i.e. whether they are more
directly concerned with losses due to loss of
earning power of a person
1. life insurance including annuities
2. health insurance
3. accident insurance
bb. Property insurance- included every form
that has for its purpose the protection against
loss arising from the ownership or use of
property
General classifications:
1.

2.

Insurance which indemnifies the
insured in the event of loss,
growing out of damages to, or
destruction of his own property.
Example: Marine insurance
Insurance which pays damages
for which the insured is legally
liable, the consequence of
negligent acts that result in
injuries to other persons or
damage to their property.
Example: casualty insurance;
surety insurance

cc. Cooperative insurance – the term
“cooperative” is applied to associations usually
operating under hospital, medical, fraternal,
employee or trade union auspices organized
without regard to the profit motive and represent
an effort to accomplish social insurance by private
enterprise; non-profit cooperative objective of the
insurance is emphasized.
dd. Voluntary government insurance –
no element of compulsion unlike social
insurance. The various plans offered are

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designed to benefit the entire community
but are used only by those persons who
wish to use available benefits.

2.

Example: insurance of mortgage loans;
insurance of growing crops
CLASSIFICATIONS OF CONTRACTS OF INSURANCE
1.

2.

3.

Insurance against loss or impairment of property
interest which may be either in existence or merely
expected i.e. present rights or profits yet to accrue.
a. Marine insurance
b. Fire insurance
c. Guaranty insurance – for non-performance of
contract which the insured is a party
d. Credit insurance – for protection against
insolvency of debtors
e. Fidelity insurance – protection from defalcation
of employees or agents
f.
Theft insurance
g. Title insurance – protection against defective
title or interest in property
Insurance against loss of earning power (due to
death or some other disability)
Example: life insurance
Insurance against contingent liability to make
payment to another- the insured is protected
against his loss with regard to claims for damages;
designed to reimburse the insured for any liability
he might incur to a third party
Example: reinsurance, workmen’s compensation
insurance; motor vehicle liability insurance

TN: All insurance except liability can be fairly thought of as
first-party insurance
No-fault insurance
The substitution of first party insurance for tort
liability. The victim of tort, instead of looking to the
tortfeasor and his insurer for reimbursement looks
to his own insurer for first-party protection.
First-party insurance is compulsory under the no
fault scheme.
The term no-fault connotes that the victim recovers
for his loss from his own insurer without regard to
the fault of the third-party or his own contributory
fault.
All-risk vs. specified risk
1.

Modernized classification
1.
2.
3.
4.

Marine insurance
Property insurance
Personal insurance
Liability insurance
2.

Other classification
1.
2.

Property insurance
Personal insurance

CLASSIFICATION BY INTEREST PROTECTED

First-party insurance- designed to indemnify the
insured for a loss suffered directly by the insured
Examples:
Property insurance- the damage to
the property is an immediate, direct
diminution of the insured’s assets.
Life insurance- the insured designates
a beneficiary but the loss is directly
suffered by the insured
Health insurance- the insurer pays
the provider of health care but the

All-risk insurance- reimburses the insured for
damage to the subject matter of the policy from all
causes except those specifically excepted in the
policy; those not excluded are automatically
included.
Example: marine insurance which insures
the vessel for physical loss or damage
from any external cause except for certain
explicit exclusions
Jeweler’s block insurance
Specified-risk insurance- covers damage to the
subject matter of the policy only if it results from
specifically identified causes listed in the policy.
Example: Homeowner’s policy

TN:
Language of the policy is helpful but not
necessarily determinative on whether a policy is
all-risk or specified.
The historical development of the policy can be
important in determining whether the policy covers
all risk.

First-party insurance vs. Third-party insurance
1.

loss is still suffered directly by the
insured
Third-party insurance – the interests protected
by the contract are ultimately those of third parties
injured by the insured’s conduct; the insured’s loss
is indirect in the sense that the third party suffers
the direct loss. In the event of payment, the
insured merely serves as a conduit for transmission
of the payment from the insurer to a third party.
Example: liability insurance

Burden of proof:
1.

2.

Specified-risk policy- the burden is ordinarily
placed on the insured to initially prove that the loss
falls within the policy’s provisions on coverage.
All-risk policy- once the insured establishes that a
loss occurred through some event other than an
inherent defect or normal depreciation, the burden

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is ordinarily placed on the insurer to prove that the
loss falls within an explicit exception to coverage.

4.

Security guaranty

Rules in construction:
Advantages of an all-risk policy:
1.

2.
3.
4.
5.

If the causation leading to the loss is difficult to
identify and prove, an all-risk policy can be highly
beneficial to the insured.
The coverage is presumably simpler to understand;
Duplication of coverages and premiums from
separate, specified-risk policies is avoided;
The policies are easier and less expensive for the
insurer to administer.
The avoidance of gaps in coverage.

All-risk insurance not absolute
It is a fundamental prerequisite to any policy’s
coverage that the loss be fortuitous. If the loss is
certain to occur, due to normal wear and tear, the
loss is not fortuitous and therefore not insurable.
Exclusions can take away what the all-risk policy
gives.
All-risk coverage does not alter the basic insurance
law principles that can operate to limit coverage.
An all-risk insurance policy covers all kinds of loss
but not –
o
Those due to willful and fraudulent act of
the insured
o
An undisclosed event that existed prior to
the coverage
o
An event caused by the consummation
during the period of coverage of an
indwelling fault in the goods that had
existed prior to that coverage

1.
2.

Q: When contract of suretyship deemed an insurance
contract?
A: If made by a surety who or which, as such, is doing an
insurance business within the meaning of the Code.
CONSTRUCTION OF INSURANCE CONTRACTS
Provisions of the insurance policy should be examined and
interpreted in consonance with each other.
Where there is ambiguity
1.

2.

3.

4.

CLASSIFICATION UNDER THE CODE
1.

2.

3.

Life insurance contracts
a. Individual life
b. Group life
c. Industrial life
Non-life insurance contracts
a. Marine
b. Fire
c. Casualty
Contracts of suretyship and bonding-apply to
different types of risk with different kinds of
coverage. The policies differ in the persons and
interests they protect.

CONTRACTS WRITTEN BY GUARANTY OR SURETY
COMPANIES
Designated as guaranty insurance – the underwriter
engages in the business for profit
Comprises of –
1.
2.
3.

Fidelity guaranty
Title guaranty
Bond guaranty

Construed strictly against the insurer.
Bonds guaranteeing the carrying out or
performance of contracts to do a particular act or
carry out a particular project are essentially
considered insurance contacts and are governed by
the rules on construction applicable thereto

GR: Contracts of insurance are to be construed or
interpreted liberally in favor of the insured and
strictly against the insurer resolving all ambiguities
against the latter.
An insurance contract should be so interpreted as
to carry out the purposes for which the parties
entered into the contract.
Limitations of liability must be construed in such a
way as to preclude the insurer from noncompliance with its obligation.
A policy of insurance which contains exceptions or
conditions tending to work a forfeiture of the policy
shall be interpreted most favorably toward those
against whom they are intended to operate and
most specifically against the insurer or the party
for whose benefit they are inserted

Contract of adhesion vs. bargaining contract
1.

2.

Contract of adhesion- most of the terms of the
contracts do not result from mutual negotiation
between the parties as they are prescribed by one
party in final printed forms which the other party
may reject or adhere if he chooses but which he
cannot change
Example: insurance contracts
Bargaining contract- both parties participate in the
drawing up of its terms and conditions or
determining its wording.

When evidence aliunde may be admitted in interpreting
contracts of insurance
When there is a significant disparity between the
written agreement and the intention of the parties
Under the Rules of Court, a party may present
evidence to modify explain or add to the terms of

8

[INSURANCE]
the written agreement if he puts in issue in his
pleading its failure to express the true intent and
agreement of the parties thereto.

FUNCTIONS OF INSURANCE
1.
2.

Where terms are clear
The cardinal principle of insurance law of interpreting
insurance contracts favorably to the insured is applicable
only in cases of doubt, not when the intention of the policy
is clear or the language is sufficiently clear to convey the
meaning of the parties.
1.
2.

3.

If the terms are clear and certain, they must be
taken in their plain and ordinary sense.
The terms of an unambiguous insurance policy
cannot be enlarged or diminished by judicial
construction.
Obligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith.

3.

Principal functions: risk-bearing
Subsidiary functions
a. Stimulates business enterprise
b. Encourages business efficiency and enterprise
c. Promotes loss-prevention (through a system of
rating which allows discounts for good features
and impose special conditions where the risk is
unsatisfactory)
d. Encourage savings
e. Solve social problems
Indirect functions
a. Investment of funds
b. Use of reserve funds
c. Effect on prices- the existence of insurance
benefits the consumer public in terms of
reduced prices because the cost of insurance is
less than the cost of risk of insurance.
d. As a basis of credit
WHAT MAY BE INSURED

Where contract is silent with respect to a particular matter
Any doubt that may arise for failure of the contract
to provide with respect to a particular matter
should be resolved against the insurer.
WHAT CONSTITUTES DOING OR TRANSACTING AN
INSURANCE BUSINESS
1.
2.

Name or designation by insurer not controllingInsurance is that which the law defines it to be.
Acts deemed included by the law
Section 2(2) of the Code enumerates the acts
which are deemed included in the term “doing an
insurance business” or “transacting an insurance
business”:
1. Making or proposing to make, as insurer, any
insurance contract;
2. Making or proposing to make, as surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;
3. Doing any kind of business, including a
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;
4. Doing or proposing to do any business in
substance equivalent to any of the foregoing in
a manner designed to evade the provisions of
this Code.

[Section 3] Any contingent or unknown event, whether
past or future, which may –
1.
2.

Requisites for a valid and enforceable contract of
insurance:
1.
2.
3.
4.
5.

2.

The contract is a contract of insurance if the
principal object and purpose is indemnity
The contract is not insurance it is service, risk
transfer and distribution is being merely incidental
and therefore not subject to laws regulating
insurance.

A subject matter in which the insured has an
insurable interest.
Event or peril insured against which may be any
contingent or unknown event, past or future;
A promise to pay or indemnify in a fixed or
ascertainable amount
A consideration for the promise, known as the
premium
A meeting of the minds of the parties upon the
foregoing essentials.

Other requisites:
1.
2.
3.

Parties must be competent to enter into contracts
Must be approved by the Insurance Commission
The contract must not be for a purpose contrary to
law or public policy

Subject matter of contract of insurance
1.

Principal object and purpose test to determine nature of the
contract
1.

Damnify a person having insurable interest, or
Create a liability against him

2.
3.

4.

In general – Anything that has an appreciable
pecuniary value which is subject to loss or
deterioration or of which one may be deprived so
that his pecuniary interest is or may be prejudiced
Property insurance – the subject matter of the
policy is the risk of loss of the property involved
Life, health and accident insurance – The
person insured becomes the subject of the
insurance
Casualty insurance – the subject matter is the
risks involved in its use or the insured’s risk of loss

9

[INSURANCE]
or liability that he may suffer loss or be compelled
to indemnify for the loss suffered by a third person.
Event or peril insured against
3.
The contingency or unknown event (past or future) must be
such that its happening will –
1.
2.

Damnify or cause loss to a person having an
insurable interest or
Create a liability against him

Section 4

Q: When is the insurer liable for a fortuitous event?

Lottery- extends to all schemes for the
distribution of prizes by chance such as policy
playing, gift exhibition, prize concerts, raffles at
fairs, etc. and various forms of gambling.

A: If it is the event or peril insured against and is the
proximate cause of the loss.
Insurance by a married woman
A married woman may take out an insurance on –
1.
2.
3.
4.

Her life or that of her children without the consent
of her husband, or
That of her husband
Her paraphernal or separate property; or
On property given to her by her husband

Insurance by a minor
Contract of insurance entered into by a minor (below 18
years) is not entirely void. It is merely voidable.
Rules:
1.

2.

3.
4.

If the contract is not disaffirmed by the minor, the
insurer cannot escape liability by pleading minority
as a defense.
If the contract is fair and no fraud or undue
influence was practiced by the insurer, the minor
cannot recover the premiums paid if he cannot
return the benefits received.
An insurance company contracting with a minor is
bound by the contract; the minor ordinarily is not.
Where minor is insured or a beneficiary, the judicial
or natural guardian, may exercise in behalf of the
minor any right under the policy,

Ownership of life insurance policy
1.

2.

Ownership divided between insured and
beneficiaries
Insured- owner of the various marketing
and sales feature of the life insurance
policy
Beneficiary- owner of a promise to pay the
proceeds at the death of the insured
subject to the insured’s right of revocation
Interest of insured and beneficiary
Insured- he becomes a party to the
insurance contract when he takes a policy
on his own life. Such contract remains his
at least in part and may be maintained by

suit for the protection of those whose
favor it is made.
Beneficiary – the nature of his interest
depends on the terms of the contract
Transfer of rights to minor insured upon death of
original owner of policy
All the rights, title and interest in the
policy shall automatically vest in the latter
iunless otherwise provided for in the policy

3 essential elements of lottery:
1.

2.
3.

Consideration- there is consideration of price paid if
it appears that the prizes offered by whatever
name they may be called came out of the fund
raised by the sale of chances among the
participants in order to win the prizes
Prizes
chance

Rule: No insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a
lottery drawing a prize.
Reason: Even if the lottery ticket holder were not to win, it
cannot be said that he suffered a loss of the prize. IOW the
failure to win a prize would not damnify or create a liability
against him.
Contract of insurance not a wagering contract

1.
2.
3.
4.
5.

Gambling contract
the parties contemplate gain through mere
chance
the gambler courts fortune
tends to increase the inequality of fortune
Essence: Whatever one person wins from a
wager is lost by the other wagering party
As soon as the party makes a wager, he
creates a risk of loss to himself where no such
risk existed previously.

1.
2.
3.
4.
5.

Similarity in gambling and insurance contracts
One party promises to pay a given sum to the other upon
the occurrence of agiven future event, the promise being
conditioned upon the payment of, or agreement to pay a
stipulated amount by the other party to the contract.
Section 5 – All kinds of insurance are subject to the
provisions of this chapter so far as the provisions can apply

10

The
reas
The
Ten
Wh
of a
Pur
and
pur
eco

[INSURANCE]
PARTIES TO THE CONTRACT
1.

2.

Insurer- the party who assumes or accepts the
risk of loss and undertakes for a consideration to
indemnify the insured or to pay him a certain sum
on the happening of a specified contingency or
event.
Insured- the person in whose favor the contract is
operative and who is indemnified against, or is to
receive a certain sum upon the happening of a
specified contingency or event. He is the person
whose loss is the occasion for the payment of the
insurance proceeds by the insurer.
Not always the person to whom the proceeds
are paid as such may be paid to a beneficiary
or assignee of the policy.

Terms used
1.
2.

3.

Insurer- synonymous with assurer or underwriter
Insured and assured are generally used
interchangeably but insured may refer to –
a. The owner of the property insured; or
b. The person whose life is the subject of the
contract of insurance
Assured refers to the person for whose benefit the
insurance is granted

Example: A wife insures the life of her husband for her own
benefit

Insurer and insurance company include all
individuals, partnerships, associations or
corporations including GOCCs engaged as
principals in the insurance business except
mutual benefit associations.
Business of insurance affected with public interest
Insurance business is subject to regulation and
control by the State by virtue of its police power.
Capacity of party insured
1.

2.

Natural person
a. Must be competent to make a contract
b. Must possess an insurable interest in the
subject of the insurance
c. Must not be a public enemy
Juridical person- may take out insurance on
property owned by it; must not be a public enemy

Q: Who may be insured?
A: Section 7- Anyone except a public enemy may be
insured.
Public enemy- designates a nation with whome the
Philippines is at war and it includes every citizen or subject
of such nation.
Citizenship of corporation during wartime

Insured- the husband (since his life is the subject
of the insurance)
Assured- wife (not the insured even if she is the
owner of the policy
4.
5.

Assured is also used sometimes as synonym of
beneficiary
Beneficiary- the person designated by the terms of
the policy as the one to receive the proceeds of the
insurance

Control test- a corporation is deemed to have the
same citizenship as the controlling stockholders in
time of war.
Effects of war on existing insurance contracts
1.

All intercourse between citizens of belligerent
powers which is inconsistent with a state of war is
prohibited

Who may be an insurer? (Section 6)
1.

2.

Foreign or domestic insurance company or
corporation
Must first obtain a certificate of authority
from the Insurance Commissioner
Individual, partnership or association
Must have capital assets required of an
insurance corporation and invested in the
same manner
For individual insurer- must hold a
certificate of authority from the Insurance
Commissioner
Insurance corporation- one formed or
organized to save any person pr persons
or other corporations harmless from loss,
damage or liability arising from an
unknown or future or contingent event

Where parties rendered enemy aliens

a.

b.

2.

Property insurance- an insurance policy ceases
to be valid and enforceable as soon as an insured
becomes a public enemy.
Life insurance
o
United States Rule- the contract is not
merely suspended but is abrogated by
reason of nonpayment of premiums.
However, the insured is entitled to the
cash or reserve value of the policy if any
which is the excess of the premiums paid
over the actual risk carried during the
years when the policy has been in force.
Where loss occurs after end of war
o
Termination of the war does not revive the
contract. Consequently, the insurer is not

11

[INSURANCE]
liable even if the loss is suffered by the
insured after the end of the war.

obligation but only changes the creditor

Section 8 – Insurable interest of mortgagee and
mortgagor

Effect of insurance
mortgagor

1.

Discharge of debt

Separate insurable interests
Mortagor and mortgagee have each an insurable
interest in the property mortgaged and this interest
is separate and distinct from the other.
Insurance taken by one on his own and in his favor
alone does not inure to the benefit of another.
In case both of them take out separate insurance
policies on the same property, or one policy
covering their respective interests, the same is not
open to the objection that there is double
insurance.

2.

3. Extent of amount of recovery
a. Mortgagor- cannot recover upon the insurance
beyond the full amount of his loss
b. Mortgagee- cannot recover upon the insurance
in excess of the credit at the time of the loss nor
the value of the property mortgaged.
Insurance by mortgagee of his own interest
Loss BEFORE payment of the mortgage debt

on

behalf

of

Right of subrogation
1.

If there is a stipulation
The payment of the policy will not
discharge the debt even though the
mortgagee may have procured the policy
by arrangement with the mortgagor
Debt is not extinguished and insurer
becomes the new creditor of mortgagor

2.

If there is no stipulation
The rule on subrogation does not apply except
where the mortgagee insures only his interest

a. Mortgagor – as owner of the property mortgaged/
insured, he has an insurable interest therein to the
extent of its value even though the mortgage debt
equals such value.

b. Mortgagee – has an insurable interest in the
mortgaged property to the extent of the debt secured
and in insuring, he is not insuring the property itself but
his interest or lien thereon. His insurable interest is
prima facie the value mortgaged and extends only to
the amount of the debt not exceeding the value of the
mortgaged property.

mortgagee

Mortgagee is entitled to receive payment
from the insured but such payment
discharges the debt if equal to it, and if
greater than the debt, the mortgagee
holds the excess as trustee for the
mortgagor

Extent of Insurable Interest

Reason: Loss or destruction of the property
insured will not extinguish his mortgage debt.

by

Insurance by mortgagor
For his own (mortgagor) benefit
In case of loss, the insurance proceeds do not
inure to the benefit of the mortgagee who has no
greater right than unsecured creditors

For th

Mortgagor pays t
payable to the mor

Ways in which the
payee –
1. Mortgagee
of the insu
2. Mortgagee
insurer
3. A rider m
as “his inte
4. A “stand
collateral
mortgagee
5. The polic
mortgagor
contract
benefit, i
equitable l

1.

Mortgagee is entitled to the proceeds of the policy

2.

Subrogation of insurer to the right of mortgagee
Mortgagee is not allowed to retain his claim which passes
Legal effects of insurance by mortgagor for benefit of
by subrogation to the insurer to the extent of the
mortgagee or policy assigned to mortgagee:
insurance money paid
1. The contract is deemed to be upon the interest of
Change of creditor
the mortgagor (he does not cease to be a party
Payment of the insurance to the mortgagee by reason of
thereof)
loss does not relieve the mortgagor from his principal

3.

12

[INSURANCE]
2.

3.

4.
5.

Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance, affects the
mortgagee even if the property is in the hands of
the latter
Any act which under the contract of insurance is to
be performed by the mortgagor may be performed
by the mortgagee
In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit
Upon recovery by the mortgagee to the extent of
his credit, the debt is extinguished
Rule on subrogation by the insurer to the
right of mortgagee does not apply since
the debt is already extinguished

Effect of standard and open clauses in fire insurance
policy

Effect: It substitutes the assignee or transferee in place of
the original insured in respect to –
1.
2.

The right to claim indemnity or payment for a loss
as well as
The obligation to perform the conditions, if any, of
the policy

TN: The assignee, unless he makes a new contract with the
insurer, acquires no greater right under the insurance than
the assignor, subject to insurer’s defenses
Kind of policy

1.

Fire policy

Standard mortgage clause
Definition

Collateral
independent
contract
between the mortgagee and the
insurer; premium is paid by the
mortgagor

Effects

The acts of the mortgagor do not
affect the mortgagee

WON subject to
assignment

Reason

Generally,
not
subject
to
assignment in the
absence
of
a
provision
in
the
contract
or
subsequent consent
of the insurer

It is a strictly
personal contract.
The
insurer
is
naturally
concerned
about
the
moral
character of the
insured and should
not be compelled
to
become
an
insurer
to
an
assignee to whom
he
would
have
declined to issue a
policy and who
could
materially
alter
the
risks
assumed by the
insurer without his
consent.

Mortgagee is a party to the contract
of insurance

2.

Marine
policy

Assignable
even
without the consent
of the insurer unless
required
by
the
terms of the policy

3.

Casualty
policy

Assignable but the
insurer’s consent is
required

Right of mortgagee under mortgagor’s policy
TN: The contract is primarily with the mortgagor but the
mortgagee is made a third party beneficiary
Before loss
Credit is not due
Mortgagee
is
a
conditional
appointee of the mortgagor

The mortgagee is entitled to receive the
money to apply to the extinguishment of
4. Life policy
the debt as fast as it becomes due

Entitled to receive the sum that
may become due under the policy
as does not exceed his interest
Such right becomes absolute upon
the occurrence of the loss

This
type
of
insurance involves
moral hazards at
least as great as
those
of
fire
insurance

The
policy
may
freely be assigned
before or after the
loss occurs, to any
person whether he
has an insurable
interest or not

Assignment or transfer may be –
Section 9 – Assignment or transfer of insurance policy

13

[INSURANCE]
1.
2.

3.

Of the policy itself – transfers the rights of the
contract to another insured
Of the proceeds of the policy – involves a
money claim under or a right of action on the
policy
Of the subject matter of the insurance – has
the effect of suspending the insurance until the
same person becomes the owner of both the policy
and the thing insured.

advantage from its preservation and will suffer pecuniary
loss or damage from its destruction, termination or injury
by the happening of the event insured against.
Interest does not necessarily imply a right to the whole or
part of a thing.
1.
2.

Effect of new contract
mortgagee-assignee
1.

2.

between

insurer

and

Assignment of policy to mortgagee without
consent of insurer
Does not convert the contract into one of
indemnity to the mortgagee
The contract remains with the mortgagor as it
is his interest alone that is covered
The assignment merely operates as an
equitable transfer of the policy to enable the
mortgagee to recover the amount due in case
of loss subject to the conditions of the policy
Acts of the mortgagor affects the mortgageeassignee
Any acts of the mortgagor may be done by the
mortgagee-assignee
Assignment
with
new
and
distinct
consideration which gives rise to a new
contract between insurer and mortgagee
A novation of the original contract takes place
The acts of the mortgagor cannot affect the
rights of the mortgagee, the assignee

GR: Insurable interest is pecuniary in nature
EXC: In life insurance, to have insurable interest in the life
of a person, the expectation of benefit from the continued
life of that person need not necessarily be of pecuniary
nature.
Necessity of insurable interest
1.
2.

3.

4.

In the absence thereof, the person insuring would
in effect be gambling which is prohibited by law.
A policy so issued is a mere wagering policy or
contract and is void for illegality.

Section 10- Every person has an insurable interest in the
life and health:

3.

4.

Of himself, of his spouse and of his children
Of any person on whom he depends wholly or in
part for education or support or in whom he has a
pecuniary interest;
Of any person under a legal obligation to him for
the payment of money, or respecting property or
services, of which death or illness might delay or
prevent the performance; and
Of any person upon whose life any estate or
interest vested in him depends

Insurable interest, in general – that interest which the
law requires the owner of an insurance policy to have in the
person or thing insured.

Insurable interest may be in life and health or in
property.
The existence of insurable interest gives a person
the legal right to insure the subject of the policy.
Validity of the contract
An insurable interest is necessary to the validity of
an insurance contract whatever the subject matter
of the policy
Not required in industrial life insurance

Effect if person insuring does not have insurable
interest in the subject matter of the policy

INSURABLE INTEREST (IN LIFE INSURANCE POLICY)

1.
2.

Property of a thing – the price is generally the
measure
Interest in a thing – every benefit or advantage
arising out of or depending on such thing may be
considered.

Requirement, a matter of public policy
As a deterrence to the insured
The insurable interest requirement is based upon
considerations of public policy which render wager policies
invalid. A wager policy is demoralizing in that –
1.

2.

It allows the insured to have an interest in the
destruction of the subject matter rather than in its
preservation.
It affords a temptation or an inducement to the
insured having nothing to lose and everything to
gain to bring to pass the event upon the happening
of which the insurance becomes payable.

Q: When is a person deemed to have an insurable
interest in the subject matter insured?

As a measure of limit to recovery

A: If he has a relation or connection with or concern in it
that he will derive pecuniary or financial benefit or

Since an insurance contract is a contract to pay indemnity,
the insurable interest of the insured will be the measure of
the upper limit of his provable loss under the contract.

14

[INSURANCE]
Two general classes of life policies
1.

Insurance upon one’s life – insurance taken by
the insured upon his own life for the benefit of:
a. Himself; or
b. His estate; or
c. A third person who may be designated as
beneficiary
TN: Does not usually present an insurable interest
question since the insured clearly has an insurable
interest in his own life

2.

Insurance upon life of another – those policies
taken out be the insured upon the life of another.
He must have an insurable interest in the life of
that person.

A. INSURABLE INTEREST IN ONE’S OWN LIFE
Every person has an unlimited interest in his own life
whether the insurance is for the benefit of himself or
another.

Donation- an act of liberality whereby a person disposes
gratuitously a thing or right in favor of another who accepts
it.
Both life insurance policy and donation are founded
upon the same consideration i.e. liberality.
A beneficiary is like a donee because he will receive
the proceeds or profits of said insurance.
Q: Under the law, who are prohibited from making
donations?
1.

2.
3.
4.
5.

Spouses during the marriage except as to
moderate gifts given on occasion of family
rejoicing.
Common law spouses or persons living together as
husband and wife without a valid marriage.
Persons guilty of adultery or concubinage
Persons found guilty of the same criminal offense
in consideration thereof
Public officer or his wife, descendants and
ascendants by reason of his office

B. INSURABLE INTEREST IN THE LIFE OF ANOTHER
GR: In case of insurance upon one’s life for the benefit of
another, it is not necessary that the beneficiary designated
should have any interest in the life of the insured.

1.

A person cannot procure insurance for his own
benefit on the life of another for whose life he
has no insurable interest.
The insurable interest in the life of another
must be a pecuniary one.
It exists whenever the relation between
assured and insured whether by blood,
marriage or commercial intercourse is such
that the assured has a reasonable expectation
of deriving benefit from the continuation of the
life insured or of suffering detriments or
incurring liability through its termination.

Reason: The presence of insurable interest is really
required only as evidence of the good faith of the
parties. The selection of the beneficiary by the
insured is in ordinary cases sufficient guaranty of
the existence of such good faith and confidence
between them as will sufficiently protect the
insured.
EXC: Where a wagering policy had been taken out by the
insured on his life at the behest of a third person who is
named as beneficiary, proof of insurable interest of such
beneficiary on the life of the insured must be established.
Evidences of a wagering policy:
1.
2.
3.

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

Effect if policy is a wagering contract: The court will
generally void the policy entirely.
IOW, a person has an insurable interest in his own life. But
f the policy is applied for and owned by someone other than
the insured, the applicant-owner must have an insurable
interest in the life of the insured.
Similarity between life insurance policy and civil
donation

Insurance for the benefit of insured (person whose
life is subject matter of the policy)

2.

Insurance for the benefit of a third party
When the owner of a policy insures the life of
another – the cestui que vie – and designates
a third party as beneficiary, both owner and
beneficiary must have an insurable interest in
the life of the cestei que vie.
If insurable interest requirement is satisfied, a
life policy is assignable regardless of whether
the assignee has an insurable interest n the
life of the cestui que vie.

C. INSURABLE INTEREST IN THE LIFE OF A PERSON UPON
WHOM ONE DEPENDS FOR EDUCATION OR SUPPORT OR IN
WHOM HE HAS A PECUNIARY INTEREST
When mere blood relation sufficient
Usually applicable to close relatives or immediate family
members

15

[INSURANCE]
Based from US decisions holding that blood relation is
sufficient to give either an insurable interest in the life of
the other.

1.
2.
3.
4.

ER may insure life of EE and vice versa
Partnership may insure life of his co-partner
Corporation may insure the life of its manager
Surety may insure the life of his principal

Reason: Natural affection is sufficient if not powerful to
protect the life of the insured provided that the policy is
obtained in good faith.

Risk that performance of obligation might be delayed
or prevented

Persons obliged to support each other (Article 195, Family
Code)

It must appear that the death or illness of the
insured person who is under legal obligation, might
delay or prevent its performance

1.
2.
3.
4.
5.

The spouses
Legitimate ascendants and descendants
Parents and their legitimate children and the
legitimate or illegitimate children of the later
Parents and their illegitimate children and the
legitimate or illegitimate children of the later
Legitimate brothers and sisters whether of the full
or half-blood
Except: When the need to support is due to causes
imputable to the claimant’s fault or negligence

When pecuniary benefit essential
In some cases mere blood relations (as in the case
of distant or collateral relatives) or mere relation
by affinity does not constitute insurable interest.
Under our law, there must be an expectation of
pecuniary benefit in the life of the insured to
sustain the insurance i.e. a risk of actual monetary
loss from his death.
The expectation need not have a legal basis. It is
sufficient that it is actual.
Examples:
1.
2.
3.
4.
5.
6.

Insurance taken by a person on the life of his
benefactor
Insurance taken by a benefactress on the life
of a girl she has taken from an orphan asylum
Insurance taken by corporation on the life of
its officer
Insurance taken by a partner on the life of his
co-partner
Insurance taken by an employer over the life
of a valuable employee
Insurance taken by an employee over the life
of his employer

D. INSURABLE INTEREST OF A PERSON IN THE LIFE OF
ANOTHER UNDER A LEGAL OBLIGATION TO THE FORMER
Related by contract or commercial relations
Any person related to another either by contract or
commercial relation that a right possessed by him
will be extinguished or impaired by the death or
illness of the other may lawfully procure insurance
on the other’s life.
Example:

E. INSURABLE INTEREST OF CREDITOR IN LIFE OF HIS
DEBTOR
Extent of interest
Creditor may insure his debtor’s life but only to the
extent of the amount of the debt and the cost of
carrying the insurance on the debtor’s life,
The amount of the policy must not be so
disproportionate to the amount of the debts and
liens thereon plus the cost of the insurance as to
justify the conclusion that the policy is merely a
wagering or speculative one.
Reason: Creditor will not be fully damnified if the
insurance is limited only to the exact amount of the
debt
Right of debtor in insurance taken by creditor
The insurance does not inure to the benefit of the
debtor unless the contrary is expressly stipulated.
Reason: The creditor in procuring the insurance is
not an agent of the debtor. The contract is purely
between the creditor and the insurer.
Extent of the amount that may be recovered by
insuring creditor
Insurance taken by creditor not purely a contract of
life insurance (Note: Life insurance is not a contract
of indemnity)
The principle of indemnity applies as in the case of
property insurance i.e. the creditor could only
recover such amounts as remain unpaid at the
time of the death of the debtor.
If the whole debt has already been paid, then
recovery on the policy is no longer permissible.
Where insurance taken by debtor for the benefit of
creditor
Full payment of the debt does not invalidate the
policy. The proceeds should go to the estate of the
debtor.
Where debt becomes legally unenforceable

16

[INSURANCE]
In American cases, when a valid debt becomes
unenforceable for being barred by prescription or
because of insolvency of the debtor, it does not cut
off the insurable interest of the creditor although
there is no reasonable expectation of the debtor
becoming solvent.
Reason: The moral or equitable obligation of the
debtor to pay is not destroyed by the discharge
which affects only the legal obligation to pay.

c.

Notes:
The proceeds of the life insurance policy become
the exclusive property of the beneficiary upon the
death of the insured.
In a and b of the foregoing, the beneficiary is not a
party to the contract

Caveat: Under our law however, the creditor may
not insure the life of his debtor unless the latter
has a legal obligation to him for payment of money.
Insurable interest in life of person upon which an
estate or interest depends
One may insure the life of a person where the
continuation off the estate or interest vested in him
who takes the insurance depends upon the life
insured.
Example: A legatee may insure the life of another
person where it is made a condition in the will of
the testator that the legacy given to him shall be
passed to another should such person predeceased
the testator.
Consent of person whose life is insured
Under our law, the consent of the person insured is
not essential to the validity of the policy. So long as
the assured has a legal insurable interest at the
inception of the policy, the insurance is valid.
Section 11 – Designation of beneficiary
Beneficiary- the person who is named or designated in a
contract of life, health or accident insurance as the one who
is to receive the benefits which become payable, according
to the terms of the contract, upon the death of the insured.

Limitations in the appointment of beneficiary
Person who takes out a policy of insurance on his own life
payable to another must –
1.
2.

2.

The intended recipients of the proceeds or benefits
of the insurance if the insured risk occurs.
Those who secure insurance for their own benefit
upon the lives of others.

Kinds of beneficiary
Beneficiary in a life insurance policy may be –
1.
2.
3.

The insured himself
His personal representative; or
Someone other than the insured who may be –
a. The insured (assured)- one who himself
procures the contract and pays the premium
and thus an immediate party to the contract.
b. Third person who has paid a consideration

act in good faith; and
Without intent to make the transaction merely a
cover for a forbidden wagering contract

Rule: The insured in a life insurance may designate any
person as beneficiary unless disqualified to be so under the
provisions of the Civil Code.
Q: Who cannot be designated as beneficiary in a life
insurance policy?
A: Persons who are forbidden to receive donations cannot
be designated as beneficiaries of a life insurance policy by
the person who cannot make a donation to them (Art. 739,
NCC) –
1.

2.
3.

Other definitions:
1.

Third person through mere bounty of insured –
one who does not give any consideration but is
designated as recipient of the proceeds of the
policy through mere bounty of the insured.
The beneficiary designated may be the estate
of the insured or a third party,

Persons guilty of adultery or concubinage
It is not required that there be previous
conviction;
may
be
proved
by
preponderance of evidence.
Persons found guilty of the same criminal offense
in consideration thereof
Public officer or his wife, descendants and
ascendants by reason of his office

Notes:
A life insurance policy is the same as a donation as
they are founded on considerations of liberality
insofar as the beneficiary is concerned thus the
proscription in Article 739 should equally operate in
life insurance contracts.
In the absence of any beneficiary named in the life
insurance policy or where the designated
beneficiary is disqualified, the proceeds of the
insurance will go to the estate of the deceased
insured.
Right of insured to change beneficiary

17

[INSURANCE]
GR: WON the policy reserves the right to the insured to
change the beneficiary, he has the power to change the
beneficiary without the consent of the latter who acquires
no vested right but only an expectancy of receiving the
proceeds under the insurance.

3.

Application of loan under the policy and surrender of
the policy
Constitute acts of disposition or alienation of
property rights of the beneficiary and not merely of
management or administration because they
involve the incurring or termination of contractual
obligations.

Consequence: The insured retains the right to –
1.
2.
3.
4.

Receive the cash value of the policy;
Take out loans against the cash value;
Assign the policy; or
Surrender it without the consent
beneficiary.

of

the

Effect of death of insured

Where beneficiary dies before the insured
1.

Insured’s power to extinguish the beneficiary’s
interest ceases at his death and cannot be
exercised by his personal representatives or
assignees. The beneficiary’s designation shall be
deemed irrevocable.

Effects:

2.

3.

4.

5.

The insured has no power to make such change
without the consent of the beneficiary.
The beneficiary acquires an absolute and vested
interest to all benefits accruing to the policy from
the date of its issuance and delivery including that
of obtaining policy loans.
Beneficiary acquires a property right in the policy
which he cannot be divested of without his
consent.
A new beneficiary cannot be added for this would
in effect reduce the designated beneficiary’s vested
rights.
The insured does not retain the power to destroy
the contract by refusing to pay the premiums
because the beneficiary can protect his interest by
paying the premiums himself.
Reason: Fulfillment of an obligation may be made
by a third person even against the will of the
debtor and if he has an interest in its fulfillment,
even against the creditor.

View that beneficiary’s representative is entitled to
insurance proceeds
As a consequence of the vested interest rule,
where the right to change the designated
beneficiary is expressly waived in the policy, that if
the beneficiary dies before the insured, his rights
so vested should pass to his representatives and
on the death of the insured, the policy should
belong, not to the estate of the insured, but to the
representatives of the beneficiary.

Where right to change is (expressly) waived

1.

The vested right under the policy cannot be
divisible at any given time

2.

View that estate of the insured is entitled to the
insurance proceeds
Where the beneficiary predeceases the insured, the
estate of the insured should be entitled to the
proceeds of the insurance especially where the
designation is subject to the express condition to
pay the beneficiary is he survives the insured or “if
surviving.”

Designation of beneficiary
Words used in designating the beneficiaries in a life policy
will not be given their technical meaning but will be
construed broadly.
The beneficiary designated may be –
1.
2.
3.

Measurement of vested interest of beneficiary in
policy

The insured; or
His estate; or
Specifically designated person or persons or a class
or classes of persons

Children – when designated, may include:
Should be measured on its full face value and not
on its cash surrender value for in case of death of
the insured, said beneficiary is paid on the basis of
its face value.
In case the insured should discontinue paying premiums –
1.
2.

The beneficiary may continue paying it;
He is entitled to automatic extended term or paidup insurance options, etc.;

1.
2.
3.
4.

Adopted child;
An adult child not forming part of the household of
the insured; or
After-born
children
even
of
a
marriage
subsequently contracted.
Ordinarily taken to mean descendants of the 1 st
degree
Where the children are named individually, other
children cannot share in the insurance proceeds

18

[INSURANCE]
unless the insured subsequently
designation to include them.

amend

his

while those payable to heirs or next of kin
are not.
If no beneficiary is designated in the life insurance
policy, the proceeds thereof will go to his legal
heirs in accordance with law.

Husband; wife or widow
Wife- when designated by name, is taken to mean
as “description personae” and the fact that one
who otherwise answers the description does not
have the legal status of the wife of the insured
does not prevent her from taking as beneficiary as
when she is designated by name.
If the beneficiary is not named but is designated
merely by status such as “husband,” “wife,” or
“widow” of the insured, the legal husband or wife
as ascertained at the death of the insured is
entitled to the benefits of such insurance.
Husband and children; wife and children
Wife and their children – when designated as
beneficiaries include children by another wife
although the prevailing view states that the
beneficiaries are limited to children common to
both
Wife and children or my wife and children – the
insurance is deemed for the benefit of all the
children of the insured, whether by the named wife
or those of another
Husband and children – he and they do not take
the insurance by inheritance but upon her death,
the insurance money must be divided per capita
among the husband and children. The same rule
applies in a policy payable to wife and children.

Section 12 – Forfeiture of the beneficiary in a life
insurance policy
Q: When may the interest of a beneficiary in a life insurance
be forfeited?
A: When the beneficiary is the principal, accomplice or
accessory willfully bringing about the death of the insured.
Interest of beneficiary – the right of the beneficiary to
receive the proceeds of the policy
Q: In the event of forfeiture, who will be entitled to the
proceeds of the policy?
A: Other qualified beneficiaries of the insured i.e. the
nearest relatives of the insured paid through the latter’s
estate in accordance with the rules on succession
Q: Who are considered the nearest relatives of the insured?
1.
2.
3.
4.
5.
6.

Family
Test: WON the person was so regarded by the
insured as family. If he was so regarded, he will be
allowed to participate although in no way related to
the insured.
Heirs or legal heirs
These terms will not ordinarily be construed as
indicating merely the heirs at law but rather that
class of persons who would take the property of
the insured in case he died intestate such as the
widow as well as the children of the deceased.

Q: In default of the above, who shall inherit the insurance
proceeds?
A: The State
Liability of insurer on death of inaured
1.

Death at the hands of the law
According to Professor Vance, the better view
is that death at the hands of the law – as by
legal execution – is one of the risks assumed
by the insurer under a life insurance policy in
the absence of a valid policy exception.

Estate or legal representatives of the deceased
Are to be construed in their strict technical sense
and the courts will ordinarily assume that they are
used to mean executors or administrators unless it
appears that the insured intended to use these
expressions in the sense of heirs or next of kin.
o
Reason: Policies payable to the insured’s
executors, administrators or assigns are
assets of the deceased insured’s estate

Legitimate children
Father and mother if living
Grandfather and grandmother or ascendants in the
nearest degree if living
Illegitimate children
Surviving spouse
Collateral relatives –
a. Brothers and sisters of the full-blood
b. Brothers and sisters of the half-blood
c. Nephews and nieces

2.

Death by self-destruction i.e. intentional suicide while
of sound mind
Death by suicide is by implication exempted
from the risks assumed by the insurer
especially where the insurance is for the
benefit of another rather than the insured.
However, in view of Section 87, the insurer is
not liable in case the insured commits suicide

19

[INSURANCE]
intentionally with whatever motive, when of
sound mind.
o
Reason: The death is caused by the
voluntary act of the insured.
Death by accident even if due to the insured’s
own carelessness or negligence is not excluded
3.

Death by suicide while insane
In the absence of express conditions to the
contrary, the suicide of an insured while insane
does not discharge the insurer from liability on
his contract.

4.

Death caused by beneficiary

Where it amounts to a felony
The beneficiary cannot receive any benefit under
the contract of insurance.
His interest will be forfeited and the qualified
nearest relative of the insured shall receive the
proceeds.
Where it does not amount to a felony
Examples:
1.
2.
3.

Accidental death or where the insured’s death was
not intentionally caused
As a consequence of self-defense
Where beneficiary is insane
The rights of the beneficiary under the policy are
not affected.
A deliberate killing (murder) of the insured suffices
to work a forfeiture whatever may be the motive –
whether for gain under the insurance policy or any
other motive.

5.

Death caused by violation of law
GR: The fact that the insured died while he was
committing a felony or violating a law would not
warrant the denial of liability.
EXC: Insurer shall not be liable if he establish that
the commission of the felony or the violation of the
law was the cause or had a causal connection with
the accident resulting in death.
INSURABLE INTEREST IN PROPERTY

Section 13
Insurable interest in property – Every interest in
property, whether real or personal or any relation thereto,
or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured, is an
insurable interest.
The interest may be –

1.
2.
3.

In the property itself – e.g. ownership;
Any relation thereto – e.g. trustee or commission
agent
A liability in respect thereof -- e.g. interest of a
carrier or depositary of goods

In general, anyone has an insurable interest in property
who derives a benefit from its existence or would suffer
loss from its destruction.
Occurrence of loss may be uncertain
It is not necessary that the interest is such that the
event insured against would necessarily subject the
insured to loss. It is sufficient that it might do so and
that
pecuniary
injury
would
be
the
natural
consequence.
Title right to possession not essential
Although a person has no title, legal or equitable, in the
property, he has an insurable interest if he is so
situated with respect to the property that he will suffer
loss as the proximate result of its damage or
destruction.
Not the same as the civil concept of res perit domino
where ownership is the basis for consideration of who
bears the risk of loss. Insurable interest on property is
not determined by concept of title but whether the
insured has substantial economic interest thereto.
Examples:
1.

2.

Mortgagor who sold the mortgaged property to a
vendee who assumed payment of the mortgage
debt has an insurable interest in said property
because of his personal liability for the debt and his
right to be subrogated to the mortgage security in
case he should be compelled to make payment.
A vendor retains an insurable interest on the
property sold so long as he has a vendor’s lien
thereon.

Legal expectation of loss or benefit
Insurable interest is a concern in the preservation of the
property and such a relation to or connection with it as will
necessarily entail pecuniary loss in case of its injury or
destruction.
1.

2.

In property insurance – the expectation of benefit
to be derived from the continued existence of
property must have a basis of legal right although
the person insured has no title, legal or equitable
to the property insured
In life insurance – the expectation of pecuniary
benefit in the life of the insured need not have a
legal basis, it is sufficient that it be actual.

Mere factual expectation of loss
Such expectation not arising from any legal right or
duty in connection with the property, does not
constitute an insurable interest.
o
Example: Owner of gasoline station has
no sufficient insurable interest in a hotel
located near even if its burning or

20

[INSURANCE]
destruction lessens his income from guest
of the hotel.
This factual expectation, however, will suffice in life
insurance.

Stockholder has an interest in the
preservation
of
corporate
property
because he sustains a loss in so far as the
value of his stock is depreciated or his
dividends are reduced or cut off in case of
destruction thereof.
Stockholder
has
neither
legal
nor
equitable title to assets of the corporation

o

Section 14 – What insurable interest in property
consists

o

Insurable interest in property may consists of –
1. An existing interest – may be legal or equitable title
TN: More than one insurable interest may exist over the
same property.
Examples:
Persons having insurable interest arising from legal
title

b.
c.
d.

Trustee as in the case of the seller of
property not yet delivered
Mortgagor for property mortgaged
Lessor, lessee or sublessee of property
leased
Assignee of property for the benefit of
creditors

Persons having insurable interest arising from
equitable title
a.

b.
c.
d.
e.
f.

g.
h.

Purchaser of property –
1. before delivery; or
2. before performance of condition of the
sale
Mortgagee of mortgaged property
Mortgagor after foreclosure but before
expiration of period of redemption
Beneficiary under a deed of trust
Creditors under deed of assignment
Judgment debtor whose property is seized
under execution until –
1. expiration of the period of redemption; or
2.
right to have set the sale aside has been
lost
Builders and constructors of buildings pending
payment of construction price
Purchaser of an option to buy real estate to
the extent of the option money

2. An inchoate interest founded on existing interest
Examples:
A stockholder has an inchoate interest in the
property of the corporation which is founded on an
existing interest arising from his ownership of
shares in said corporation.
Extent of insurable interest of stockholder –
a. The value of his interest; or
b.
His share in the distribution of corporate
assets upon dissolution
Notes:

A partner’s insurable interest in firm property

3. An expectancy coupled with an existing interest in
that out of which the expectancy arises
Examples:
1.
2.

a.

1.

2.

3.

Farmer may insure future crops grown in his land
or in the land of another
An owner of business can insure against a
contingency which may cause loss of profits
Any binding contract which will be injuriously
affected by the destruction of any designated
property even though the insured may have
neither interest in the property nor specific lien
upon it –
a. Workman may insure building he may have
contracted to repair
b. Artist may insure the structure for interior
decoration of which he had been employed

Section 15
depositary



Insurable

interest

of

carrier

or

Extent of insurable interest of carrier or depositary: up to
the extent of the value of the property held by him
A person having qualified property in chattels entitling
him to possession and the right of using or dealing with
them has an insurable interest in such chattels.
Example: bailee in commodatum – if he insures his
own property or property held by him in trust, in
the event of loss, the insurance inures
proportionately to the benefit of all the owners of
the property insured.
General Bonded Warehouse Act – a warehouseman
licensed to engage in the business of receiving
commodities for storage is required to insure the same
against fire
Section 16 –
Rule: Mere contingent or expectant interest in property is
not insurable
1.

Property of father/son/spouse
a.
b.
c.

Father cannot insure his son’s property
Son cannot insure property he expects to
inherit from his father
Spouse has no insurable interest in the
property of the other
TN: It has been held that obligation to support
and the right to legitime may form legal basis
for a spouse’s insurable interest.

21

[INSURANCE]
2.

3.

4.

Life of parents/children/spouses – insurable by
express statutory provisions since under the law
the parents and their children and spouses have
the mutual obligation to support each other.
General or unsecured creditor –
a. Cannot insure specific property of debtor who
is alive even though destruction of such
property would render worthless any judgment
he might obtain.
b. May insure property of a deceased debtor
since all personal liability ceases with the
death of the debtor.
c. If he obtains judgment in his favor and
becomes a judgment creditor, he has an
insurable interest in the debtor’s property
because of his right to levy such property
Caveat: He must show that the debtor has no
other property out of which judgment may be
satisfied.
d. Has an insurable interest in the life of hid
debtor to the extent of the amount of the
debt.
Beneficiary in a will
GR:
Has no insurable interest in a property
designated before testator’s death
o
His expectation has no legal basis
since the will does not take effect
before the death of the testator and
can be revoked at any time before the
latter’s death
EXC: If testator has expressly waived the right to
revoke in the policy in which case the beneficiary
has an insurable interest.

Section 17 – Measure of insurable interest in property
Measure: The extent to which the insured might be
damnified by loss or injury (indemnity rule)
Anything that reduces or diminishes the loss
reduces the amount to which the insurer is bound
to pay.
Reason: Insurance is a contract of indemnity. Any contract
that gives to the insured more than indemnity against his
actual loss is a mere wagering contract contrary to public
policy.
Examples:
1.
2.

Mortgagor has an insurable interest equal to value
of the property mortgaged
Mortgagee has an insurable interest up to the
extent of the credit secured by the mortgage

Section 18 – Effect of absence of insurable interest in
property insured
Principle of indemnity applicable
a. An insurance taken out by a person on property in which
he has no insurable interest is void.
Examples:

1.
2.

Fire insurance taken out of property belonging
to another is void although insured will
subsequently acquire insurable interest.
Contract of lease providing for automatic
assignment or transfer to lessor if lessee
obtains fire insurance over his merchandise
inside the leased premises is void.

b. Where the insurance is invalidated on the ground that no
insurable interest exists –
GR: The premium is ordinarily returned to the
insured
EXC: unless insured is in pari delicto with the
insurer
Notes:
1.
2.

If insured is paid an amount equal or less
than his actual loss – valid
If insured is paid an amount greater than
his actual loss – void

Doctrine of waiver or estoppels not applicable
Reason: The public interest in the matter independent of
the consent or concurrence of the parties.
Exception: Even if the insured does not have an insurable
interest in the property insured, he can still recover if the
reason thereof is the mistake or error committed by the
insurer in drawing up the policy,
Measure of indemnity in insurance contracts
1.

Marine or fire insurance – the amount of
insurance is limited to the value of the interest
being protected.
The real purpose of the contract is to
place the insure in the situation in which
he was before the loss.
Amount of indemnity may be determined

a. After the loss; or
b. Previously fixed in the contract
Pursuant to the principle of indemnity, the
amount of insurance is not the exact
measure of indemnity but the maximum
indemnity which the insured might obtain.
a. Valued policies – the valuation of the thing
insured is conclusive between the parties thereto in
the adjustment of loss provided that the insured –
a.
b.

has some interest at risk and
there is no fraud on his part

b. Principle of indemnity cannot be invoked by
insurer who agreed to repair or replace the thing
insured with a new one even though the cost of the
undertaking may exceed the original amount of the
insurance.
2. Liability insurance – considered contracts of indemnity
against liability and not against loss.

22

[INSURANCE]
If the insured suffers no loss because his
liability to the third person cannot be
enforced, the insurer has no obligation to
pay the proceeds.
3. Life insurance – not contracts of indemnity
The amount fixed at death of the insured
is not considered the true value because
the life of a person is priceless but simply
the measure of indemnity which the
insurer has bound himself to pay the
insured.
More
of
an
investment
than
indemnification protection against loss.
4. Personal accident
contracts of indemnity

insurance

contracts



not

Reason: Life and limb are not susceptible to exact
or uniform valuation.
However, if a person effects a personal
accident insurance on the life of another,
the amount recoverable is the loss
sustained by the person who effected the
policy.
5. Health insurance –
a. If it provides for a specific periodic income to
disabled contracts – not contract of indemnity
b. if it covers medical expenses – contract of
indemnity
6. Health care agreements
Agreement with health maintenance
organization (HMO) is in the nature of a
non-life insurance which is primarily a
contract of indemnity this payment should
be made to the party who incurred the
expenses.
Section 19 – Time when insurable interest must exist
1. Insurable interest in property insurance – must exist
when:
a.
b.
c.

The insurance takes effect (the
execution of the contract); and
When the loss occurs, but
Need not exist in the meantime;

date

of

Reason for the rule: Property insurance is
indemnity insurance. If he insured has no more
interest in the property at the time of the injury,
loss, or destruction, he has suffered no loss.
Need not exist in the meantime
The interest of the insured need not exist
in the meantime.
In the absence of a special provision to
the contrary, the alienation of the insured
property will not defeat a recovery if the

insured subsequently reacquired the
property and possesses an insurable
interest at the time of the loss.
Example: D insured his house on May 15, 2014 for
1 year. He sold the house to B on July 10, 2014.
The house burned on September 15, 2014. D
cannot recover because he no longer has an
insurable interest at the time the loss occurred.
However, if on September 11, 2014, D reacquired
the house from B, D may recover because
insurable interest need not exist during the
intervening period from July 10 to Sept. 10, 2014.
Example: In the above example, C is an unsecured
creditor of D and he insured the latter’s house. The
house burned accidentally on September 15, 2014.
C cannot collect the proceeds of the policy because
being an unsecured creditor he has no lien on D’s
house, C has no insurable interest when he insured
the house even if D sold the house to C at the time
of the occurrence of the loss.
Rule also applies only in life insurance
procured by the creditor on the life of his
debtor
Example: D was indebted to C with the
debt payable in 1 year. C insured D’s life
for the amount of the debt to run for 1
year. D died on the 10 th month but the
debt had already been paid at the 9 th
month. C cannot recover on the insurance
as he does not anymore have an insurable
interest at the time of the loss since the
debt was already extinguished.
2. Insurable interest in life insurance– must exist when
the insurance takes effect, but need not exist thereafter, or
when the loss occurs.
Reason for the rule: Life insurance is investment.
Since the event upon which payment is to be made
is certain to happen, it is logical to determine
insurable interest at the time the contract was
entered into.
Example: D insured his own life for the benefit of
C, his creditor for a period of 1 year. On the 10 th
month, D died but the debt was already paid at the
end of the 9th month. The payment of the debt did
not invalidate the policy. The proceeds of the
insurance would be paid to the estate of D.
Example: X Corporation insures the life of Y, its
President with X corp. as beneficiary. Y sold his
stockholdings and severs connection with X which
continued to pay the premiums. Y subsequently
died. X is entitled to the proceeds.
Liability insurance
In
liability
insurance,
questions
of
insurable interest are not particularly
important. It necessarily exists when the
liability of the insured to a third party
attaches.

23

[INSURANCE]
Existence of insurable interest when risk attaches
It seems that the existence of insurable
interest at the inception of the contract,
unless made so by statute, is not at all
necessary for its validity. It is sufficient
that insurable interest exists at the time
the risk attaches.

Refers to absolute transfer of property
insured. The interest in the property does
not pass by mere execution of a pledge or
mortgage.
EXC:
1.
2.

Insurable interest in life and property distinguished

3.

As to extent

As to time
when
insurable
interest must
exist

As to
expectation
of benefit to
be derived

Insurable
interest in life
Unlimited (except
in
insurance
effected by creditor
on
the
life
of
debtor where it is
only up to the
extent of the debt)
Must exist at the
time
the
policy
takes effect and
need not exist at
the time of the loss
(except
in
insurance effected
by creditor on the
life of the debtor)
Need
not
have
legal
basis,
a
reasonable
probability
is
sufficient

Insurable interest
in property
Limited
to
the
actual value of the
interest
on
the
property

4.
5.
6.

7.

Must exist when the
insurance
takes
effect and when the
loss
occurs
but
need not exist in
the meantime

CONCEALMENT
Four primary concerns of parties to an insurance
contract

Must have a basis
of legal right

1.

2.

Section 20 – Effect, in general, of change in interest

3.

GR: The change of interest in the thing insured
unaccompanied by any change in interest in the insurance
until the interest in the thing insured and interest in the
insurance are vested in the same person.

4.

TN: The contract is not rendered void but is
merely suspended.
Example: A insured his house under a fire policy. A
subsequently sold it to B. The house got accidently
burned. B, the purchaser, cannot recover the
proceeds of the policy because he has no contract
with the insurer. A, seller, cannot also recover
because having sold the house, he has no more
insurable interest in the same. It would have been
different had B become the owner of the policy.
Object or rule against alienation
To provide against changes that might
supply a motive to destroy the property,
or might lessen the interest of the insured
in protecting and guarding it.
Change of interest covered by law

In life, health and accident insurance]
A change of interest in the thing insured after
occurrence of an injury which results in loss;
A change in interest in one or more several things,
separately insured by one policy.
A change in interest by will or succession on the
death of the insured
A transfer of interest by now of several partners,
joint owners, or owners in common, who are jointly
insured, to the others.
When a policy is so framed that it will inure to the
benefit of whomsoever during the continuance of
the risk, may become the owner of the interest
insured.
When there is an express prohibition against the
alienation n the policy, in case of alienation, the
contract of insurance is not merely suspended but
is avoided.

Correct estimation of the risk – enables the
insurer to decide whether he is willing to assume it
and if so at what rate of premium.
Precise delimitation of the risk – determines
the extent of the contingent duty to pay
undertaken by the insurer.
Control of the risk – to enable the insurer to
guard against increase of the risk because of
change in conditions.
Determining whether a loss occurred and if
so, the amount of such loss.

Devices for ascertaining and controlling risk of loss
1.

Concealment and representations
Purpose: To enable the insurer to secure the same
information with respect to the risk that was possessed
by the applicant for insurance, so that he might be
equally capable of forming a just estimate of its quality.

2.

Warranties and conditions (in so far as they are
affirmative i.e. dealing with conditions existing at the
inception of the contract)
Purpose: To make more definite and certain
the general words used to describe the risk the
insurer undertook to bear.
General description of the risk –

24

[INSURANCE]
1.
2.

Designation of the specific property
interest to be covered.
Specification of such perils to which
the property interest would be
exposed

3. Exceptions – excludes certain specified risks that
otherwise would have been included under the general
language describing the risk assumed.
Purpose:

Effect: Involves facts the existence of which
shows the risk to be greater than that
intended to be assumed and operates to
create in the insurer the power to extinguish, if
he so desires, the legal relations already
created.
Example of warranty: The insured may be
required to warrant that he had not been the
subject to the peril of a major operation.
Example of condition: That the policy shall be
void should the insured by guilty of
concealment or misrepresentation.
Executory warranties and conditions
Undertakings that certain conditions should or
should not exist in the future to enable the
insurer to rescind the contract in case
subsequent events increased the risk to such
an extent that he is no longer willing to bear.

1.

2.

The exception may be of –
1.
2.

Requisites of concealment –
1.
2.
3.

2.

The insured may warrant that a watchman
will be kept upon the premises during the
currency of the policy.
A condition to the effect that the policy
shall become void if any repairs are made
upon the building or the hazard otherwise
increased without written consent of the
insurer.

Conditions precedent

4.

Rule: A concealment, whether intentional or unintentional
entitles the injured party to rescind the contract of
insurance (Section 27)
Caveat: Concealment only “entitle” the injured party to
rescind the contract implying that it is optional on his
part WON to exercise his right of rescission

Examples:

2.

3.

Condition requiring immediate notice
of loss or injury and detailed proofs of
loss within a limited period.
Condition requiring that any action
thereon shall be brought within a
limited time.
Condition
providing
for
the
appointment of appraisers and for
arbitration in case of disagreement as
to the amount of the loss so that the
insurer may ascertain not only the
fact of the loss but also the amount
thereof.

A party knows the fact which he neglects to
communicate or disclose to the other
Such party concealing is duty bound to disclose
such fact to the other
Such party concealing makes no warranty of the
fact concealed
Caveat: Where a warranty is made of the fact
concealed,
non-disclosure
thereof
is
not
concealment but is a violation of warranty.
The other party has not the means of ascertaining
the fact concealed

Section 27 – Effect of Concealment

Purpose: To enable the insurer to protect
himself against fraudulent claims of loss.

1.

Certain property
Certain peril

CONCEALMENT – the neglect to communicate that which a
party knows and ought to communicate (Sec. 26).

Examples:
1.

To make more definite and certain the general
words used to describe the risk the insurer
undertook to bear.
To control risks
Example: Condition in the contract of insurance
that the insurer assumes no liability for loss during
the period that the insured premises remain vacant
or unoccupied.

1.

2.

Concealment by insured – makes the contract
voidable at the insurer’s option.
Reason:
Insurance
policies
are
traditionally contracts uberrimae fidae i.e.
contracts of utmost god faith. As a rule,
the full circumstances of the subject
matter of the insurance are known to the
insured only and the insurer in deciding
WON to accept the risk, primarily relies
upon the information supplied by the
applicant.
Concealment by the insurer – entitles the injured
party (insured) to rescission.

25

[INSURANCE]
Reason: Insurer’s
position
carries
responsibilities.

dominant bargaining
with
it
stricter

Reason: The subject of insurance is or may be
seen and inspected before the risk is assumed thus
no such necessity for reliance exists.

Proof of fraud in concealment

In the Philippines

Rule: The insurer need not prove fraud in order to rescind
the contract.

The rule is applicable to every kind of insurance.

Reason:
The
duty
of
communication
is
independent of the intention and is violated by the
fact of concealment, even where there is no design
to deceive.
If it is necessary for the insurer to prove actual
fraud, it would be impossible for it to protect itself
against improper and fraudulent claims. The
insurer would be left at the mercy of one who
wished to apply for insurance, as it would be
impossible to show actual fraud except in the
extremest cases.
Basis of provision on concealment: Concealment
misleads or deceives the insurer into accepting the risk, or
accepting it at the rate of premium agreed upon. The
insurer is misled into the belief that the circumstances
withheld does not exist and he is thereby induced to
estimate the risk upon a false basis that does not exist.
Criterion: Was the insurer misled or deceived into entering
a contract obligation or in fixing the premium of insurance
by a withholding of material information or facts within the
assured’s knowledge or presumed knowledge?

Reason: Fraud is not essential in order that the
insured may be guilty of concealment. The
presence of an intent to deceive is immaterial.
Section 28 – Matters that must be communicated
even in the absence of inquiry
Each party to a contract of insurance has a duty to
communicate in good faith all facts within his knowledge
only when –
1.
2.
3.

Test: If the applicant is aware of the existence of some
circumstances which he knows would influence the insurer
acting upon his application, good faith requires him to
disclose that circumstance, though unasked.
Effect of failure of insurer to verify
The effect of material concealment cannot be
avoided by the allegation that the insurer could
have known and discovered the illness or disease
which the insured concealed.

Rules:
1.
2.

There is no concealment where the fact withheld
was not material to the contract.
There is concealment where the fact withheld was
material to the contract –
a. If the insured honestly believed that the fact
withheld was not material, the concealment is
not fraudulent or intentional.
b. If the fact withheld was material to the
contract and the insured knew or believed that
it material, there is fraudulent concealment.

In the United States
1. Rule in Section 27 applies only to marine insurance.
Reason: In marine insurance, the subject of
insurance is generally beyond the reach and is not
open to inspection of the underwriters who is
obliged to rely upon the assured and therefore, has
the right to exact full disclosure of all the facts
known to him.
2. Rule not applicable to fire and other kinds of insurance

They are material to the contract
The other has not the means of ascertaining the
said facts
As to which the party with the duty to
communicate makes no warranty

The insurance company has the right to rely on the
statements of the insured as to material facts.
Section 29 – When fraudulent intent necessary
GR: In concealment, fraudulent intent is not necessary in
order for the injured party to rescind the contract
EXC: Where the concealment relates to the falsity of a
warranty, fraudulent intent must be established in order to
entitle the party to rescission of the contract

i.
ii.

iii.
iv.

Ordinary concealment (Section 27)
Intent to defraud immaterial
Concealment entitles the injured party to
rescind
the
contract,
whether
such
concealment is intentional or unintentional so
long as the facts withheld are material to the
risk assumed by the insurer
The omission may either be on the part of the
insured or the insurer
The party entitled to rescission is the injured
party who may either be the insured or the
insurer

i.
ii.

iii.
iv.

No
Con
ten
Non
frau
resc
The
The

Example:
warranty is
intentional a

26

[INSURANCE]
more the
material
the information
of the
insured to communicate
information
that his shiprequired
is
applicant
concerning
previous
health conditions
in distress during the
application
for insurance
entitles
disease
suffered since
for such
the insurer to and
rescind
the contract
the information
important
concealment refersnecessarily
to mattersconstitutes
proving orantending
to factor which
insurer
takes that
into the
consideration
prove the falsity the
of the
warranty
ship is in deciding
whether to issue the policy or not.
seaworthy.
When concealment regarded as intentional
Section 30
disclosure



When

there is

no

duty

to

A man’s state of mind or subjective belief is not
capable of proof in our judicial process, except
through proof of external acts or failure to act
which inferences as to his subjective belief may be
reasonably drawn.
The nature of the facts conveyed to the insurer
may be such that failure of the insured to
communicated must have been intentional rather
than inadvertent.

make

GR: Neither party to a contract of insurance is bound to
communicate information of matters –
1.
2.

3.
4.

5.

Those which the other knows
Those which, in the exercise of ordinary care,
the other ought to know, and of which the
former has no reason to suppose him
ignorant
Those
of
which
the
other
waives
communication
Those which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material
Those which relate to a risk excepted from the
policy and which are not otherwise material

Where fact concealed not material
The insurer cannot be guilty of concealment
Time when information acquired
1.

EXC: When the foregoing is made the subject of special
inquiries
Matters made the subject of special inquiries
Must be deemed material
Failure of an apparently complete answer to make
full disclosure will avoid the policy. But an answer
incomplete on its face will not defeat the policy in
the absence of bad faith.

2.

Section 31 – Determination of materiality
Test of materiality: A fact is material if knowledge of it
would have a probable and reasonable influence upon the
insurer in assessing the risk involved and in making or
omitting further inquiries and cause him either to –
1.
2.

Reject the risk or
Accept it at a higher premium rate or on different
terms

Section 32 – Matters each party is bound to know
1.

Notes:
The test is in the effect which the knowledge of the
fact would have on the making of the contract. It is
sufficient if the knowledge of it would influence the
parties making the contract.
It is sufficient that non-disclosure misled the
insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries.
In non-medical insurance, the waiver by the
insurance company of medical examination renders

After contract has become effective
The duty of disclosure ends with the
completion and effectivity of the contract
If the contract is already complete and
binding before the inf0ormation in
question is acquired, there can be no duty
resting upon the insured to disclose it,
even though the policy is yet to issue.
IOW, concealment must take place at the
time the contract is entered into in order
that the policy may be avoided and not
afterwards.
Before contract becomes effective
If the contract is to be effective only upon
the issuance of the policy, an applicant is
under duty to disclose to the insurer facts
coming to his knowledge between the
date of submitting the application and
date the policy is delivered.

2.

The insured need not communicate public events,
the sources of such information being equally open
to the insurer who is therefore presumed to know
them.
The insurer is charged with the knowledge of the
general trade usages and rules of navigation, kinds
of seasons and all the risks connected with
navigation.

Section 33 – Right to information may be waived
1.

Express waiver – when the contract by its terms
provide for such waiver

27

[INSURANCE]
2.

Implied waiver – by neglect of insurer to make
further
inquiry
as
to
the
facts
already
communicated
Caveat: There is no waiver where the failure of the
insurer to make further inquiries was due precisely
to the concealment on the part of the insured.

1.
2.

3.

As a fact of something which is untrue;
Which the insured sated with knowledhe that it is
untrue and with an intent to deceive, or which he
states positively as true without knowing it to be
true and which has a tendency to mislead and
Where such fact in either case is material to the
risk

Notes:
Waiver is a type of estoppel
Where upon the face of the application, a question
appears to be not answered at all or to be
imperfectly answered and the insurer issues a
policy without any further inquiry, it waives the
imperfection of the answer and renders the
omission to answer more fully material.
Section 34 – Disclosure of nature and intent of
interest of insured

Effect of misrepresentation by the insured: It renders
the insurance contract voidable at the option of the insurer
even though innocently made and without wrongful intent.
TN: Misrepresentation may be viewed as the active
form of concealment.
TN: Misrepresentation is an affirmative defense.
Form and nature of representation
1.

GR: Information of the nature or amount of the interest of
the insured need not be communicated
EXC:
1.
2.

Unless in answer to an inquiry
In property insurance where the insured is not the
absolute owner of the property in which case he
must specify his interest in the property (Section
51)
There is no need to disclose the interest in
the property insured if it is absolute.

2.

Section 35 – Disclosure of judgment upon matters in
question
The duty to disclose is confined to facts. Hence,
there is no duty to disclose mere opinion,
speculation, intention or expectation. This is true
even if the insured is asked.

3.

Example: The insured need not answer the
question in the policy: “How long do you think you
will live?”
REPRESENTATION
Section 36 – A representation may be oral or written.
Representation – a statement made by the insured at the
time of, or prior to, the issuance of the policy, relative to the
risk to be insured, as to an existing or past fact or state of
facts, or concerning a future happening, to give information
to the insurer and otherwise induce him to enter into the
insurance contract.
TN: Representation may also be made by the
insurer.
Misrepresentation – a statement:

Information concerning risk
It is the duty of the person applying for
insurance to give to the insurer all such
information concerning the risk
May be given orally or in writing in
May appear in papers not connected with
the contract or in the policy itself
Forms the basis of the contract
However communicated, the information
thus given forms the basis of the contract.
It describes, marks our and defines the
risk assumed.
If the description relied upon by the
insurer proves to be materially untrue, he
may deny liability by contending that it
was not the risk that he assumed. Thus
the rule that untruth of the material
representation relied on by the insurer will
avoid the whole contract, irrespective of
intent.
Intended as collateral inducements
Being merely collateral inducements to the
contract,
representation
may
be
communicated in any manner.
They do not form part of the part of the
contract unless expressly made so.

Examples:
1.

2.

3.
4.

An underwriter who has insured a vessel described
as a steamer cannot be required to pay the loss of
a sailing vessel.
Insurer cannot be made liable for a vessel
represented to be safe in port which at the time of
undertaking was already lost at sea.
The insurer of a brick house is not liable for loss of
a frame house.
He who insurers a man of 30 cannot be made liable
for the death of a man who was then 55.

Section 37 – Time when representation may be made

28

[INSURANCE]
A representation may be made –
1.
2.

because the rules of evidence forbid the
admission of parol testimony to add prior
or contemporaneous terms to a written
instrument. But proof that such promise
was made with fraudulent intent will serve
to defeat the insurance.

At the time of; or
Before the issuance of the policy

Representation precedes the execution of the insurance
although it may be performed after the issuance of the
policy.
It must be induce the insurer to issue the policy at a
specified premium thus if made after the policy is
issued, it could not have influenced the parties to enter
into the contract.

2.

An undertaking by the insured inserted in the
policy but not made a warranty.
In this sense, it is an executory term of the
contract and not properly a representation.
Promissory representation therefore is substantially
a condition or a warranty.

Section 38 – Construction of representation
Example: Applicant of fire insurance on a
building makes a promise contained in the
policy that it shall be occupied which
induced the insurer to issue the policy at a
lower rate. Such promise is not a
representation but a term of the contract,
the performance of which may be a
condition to the insurer’s liability.

Representation –
1.
2.
3.

Construed liberally in favor of the insured
Required to be only substantially true
Language thereof is to be interpreted by the same
rules as the language of contracts in general [Arts.
1370-1379, NCC provisions on interpretation of
contracts]

Warranties – must be literally true or the contract will fail.
Examples:
1.
2.

3.

Questions as to the use of liquor – refer to habitual
use and not to occasional use or occasional sprees.
Questions as to having any illness – Must be
existing at the time of the application; does not
include illness which is entirely cured before the
application for the policy.
Questions as to the use of the liquor – refer to
serious ailments and not to minor indispositions.

Section 39 – Kinds of representation
1.
2.
3.

May be oral or written
May be made at the time of issuing the policy or
before
May be affirmative or promissory

Affirmative representation – any allegation as to the
existence or non-existence of a fact where the contract
begin.
Promissory representation –
1.
2.

Any promise to be fulfilled after the contract has
come into existence; or
Any statement concerning what is to happen
during the existence of the insurance

Nature of promissory representations
1.

It is used to indicate a parol or oral promise made
in connection with the insurance but not
incorporated in the policy.
Effect: Non-performance of such promise
is not a defense in an action on the policy

Effect on policy
expectation

of

expression

of

opinion

or

Rule: A representation of the expectation, belief,
opinion or judgment of the insured, although false
[and material], will not avoid the policy of
insurance if there is no actual fraud in inducing the
acceptance of the risk or its acceptance at a lower
rate of premium.
Reason: The insurer is not justified in relying upon
such statement, but is obligated to make further
inquiry.
To avoid liability, the insurer must prove –
1.
2.

The materiality of the insured’s opinion;
The latter’s intent to deceive

If representation if one of fact – the insurer need
to prove its falsity and materiality. The intent to
deceive is presumed.
Examples: The following are mere opinions which
will not avoid the contract even if false or
erroneous –
1.
2.
3.

Statement of insured that his house is of a
certain value
That insured is wholly free from disease
That insured, an applicant for motor
vehicle insurer, is a very good driver
TN: If the applicant does not really know
how to drive and he made such statement
in the application of the policy, it amount
to
fraudulent
misrepresentation
of
material fact.

29

[INSURANCE]
When representation deemed a mere expression of
opinion

at the time the contract took effect, it was already
in Tokyo, there is no misrepresentation.

When it is an oral representation as to a future event or
condition, over which the insured has no control, with
reference to property or the life insured.

2. Conversely, there is false representation if it is true at the
time it was made but false at the time contract takes effect

Example: Insured oral’s promise that the building
will be occupied which later on remained
unoccupied during the existence of the contract.

Example: June 10, 2014 – X applied for life
insurance policy and stated that he never suffered
from pneumonia
June 12, 2014 – X became ill with pneumonia

Section 40 – Effect of representation on express
provision of policy
1.

A representation cannot qualify an expression
provision or an express warranty in a contract of
insurance.

June 30, 2014 – delivery of the policy and payment
of the first premium; X did not disclose his having
been sick of pneumonia

Reason: It is not a part of the contract but only a
collateral inducement to it.

Is there false representation? Yes. At the time the
contract was made [June 10], the representation
made by X that he never suffered from pneumonia
was true. But at the time of delivery of the policy
[June 30], such representation became false, X
having previously suffered from pneumonia.

Example: If the policy provides that the house
insured was a warehouse, any representation made
by the insured prior to the issuance of the policy to
the effect that the house was only used as a
residence is not a defense in an action for recovery
of the amount of insurance.
2.

June 25, 2014 – X recovered from his illness

Representation as to the age of the insured – presumed to
refer to the date of the application and not the date of
effectivity of the contract

A representation may qualify an implied warranty.
Example: If the insured makes a representation
that the vessel insured was deficient for the voyage
because it was not duly manned, such
representation may qualify the implied warranty
that the vessel was seaworthy.

Section 41 – When representation may be altered or
withdrawn
Representation may be altered or withdrawn before the
contract actually takes effect but not afterwards
Reason: Insurer has already been lead into
assuming the risk contemplated in the contract
Section 42 – Time to which representation refers
Representations refer only to the time of making the
contract.
Statements
promissory
of
conditions
to
exist
subsequent to the completion of the contract may be
conditions or warranties but not representation.
Principle:
Representation
is
a
“continuing
representation” until the contract takes effect.
1. There is no false representation if it is true at the time
the contract takes effect although false at the time it was
made.
Example: If the insured represented that his vessel
was in Tokyo when in fact it was in Hongkong, but

Example: Insured stated in his application that his
age is 35. There is no misrepresentation even if
insured is already 36 at the time the contract takes
effect.
Section 43 – effect where information obtained from
third person
The insured is given the discretion to communicate to the
insurer what he knows of a matter of which he has no
personal knowledge. Insured is not responsible for
representations based on information obtained from third
persons provided that he gives explanation that he does so
on the information from others.
Example: Insured does not know the cause of
death of his parents. Upon application for
insurance, he may report information thereof
obtained from friends or relatives. He is not
responsible for the truth of the information
provided that he expressly states that he does not
possession personal knowledge thereof but from
others.
Q: What is subsequent to the issuance of the policy, insured
obtains information material to the risk?
A: He should communicate it to the insurer. Failure to do so,
avoids the policy.
Effect where information obtained from agent

30

[INSURANCE]
1.

Agent of the insured – If it was possible for the
agent in the exercise of due diligence to have made
such communication as to a material risk before
making the contract, the insured will be liable for
the truth.
Example: Captain of ship is bound to
communicate to the ship owner the loss of
the ship before the latter may effect any
insurance on the ship “lost or not lost.”
The insured cannot recover from the
policy effected, if any.

2.

Agent of the insurer – same principle applies
Example: If insurer effects insurance upon
a vessel “lost or not lost” when his agent
knew the vessel has in fact, arrived safely,
the insurance would be void and insured
would be entitled to a return of premium.

Section 44 – When representation deemed false
[misrepresentation]
Rule: A representation is to be deemed false when the facts
fail to correspond with its assertions or stipulations.
Representations are not required to be literally true, they
need only be substantially true. Thus they must be false in a
substantial and material respect to avoid the policy.
Q: When is a representation considered substantially true?
1.
2.

When it is true in every particular material to the
risk; or
In so far that the conduct of the insurer would not
have been different if the exact truth had been
alleged.

Example:
1.

2.

3.

Failure to state a disease from which the applicant
had completely recovered from does not avoid the
policy, the application form of which required the
applicant to detail all illness, disease, operations,
accidents or injuries he experienced since
childhood.
A statement that the applicant is in good health is
held not to mean that he is in perfect health but
that he is not aware of any disease of such serious
nature to impair his health permanently. If he is
temporarily ill because of some passing malady, it
does not render his representation substantially
untrue.
Statement of a sales agent that he does not drive
more than 5,000 km a year when in fact from the
nature of his job, he drives 20,000 km a year, is a
misrepresentation giving the insurer the right to
avoid the policy.

Representations in marine insurance – are required to be
actually true, not merely substantially true.
Reason: The insurer generally relies to a large
degree on the statements of the applicant
regarding the risk.
Construction of representation affirmative
A representation should be construed as much as possible
as an affirmative representation of a present fact even if it
is in such a form as to admit being an executory agreement
or a promissory representation, in order to save the policy.
Example: The insured states that a building is used
for a certain purpose or that no smoking is allowed
in the premises. The truth of the representation at
the time the contract takes effect is sufficient to
validate the insurance even if there is a subsequent
change in the use of the building or in the practice
as to smoking in the premises.
Section 45 – Effect of falsity of representation
Fraud or intent to misrepresent facts is not essential to
entitle the injured party to rescind a contract of
insurance on the ground of false representation.
To be deemed false, it is sufficient if the fails to
correspond with the facts in a material point.
Examples:
1.

2.

A statement made by the applicant that
neither he nor any member of his family had
been sick although he knew that his brother
and sister died of pulmonary tuberculoses and
he himself is spitting blood at the time of the
application is a misrepresentation sufficient to
avoid the insurance.
A representation by the insured that he did not
drink intoxicating liquor when in fact he drank
but very seldom is false but not in a material
point.

Whether the false representation is in the policy itself
or in the application for insurance, if it is on a material
point particular to the risk assumed by the insurer and
relied by him will support a forfeiture of the insured’s
right under the policy.
Effect of collusion or fraud of agent of insurer
Collusion with insured
Collusion
between
insured
and
agent
in
misrepresenting the facts will vitiate the policy
even though the agent is acting within the
apparent scope of his authority.

31

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The agent thereby ceases to represent his
principal, and represents himself; so the insurer is
not stopped from avoiding the policy.
Principal of agent
Where the insured merely signed the application
form and made the agent of the insurer fill the
same for him, by doing so, the insured made the
agent of the insurer his own agent.
But where the insurer required the medical
examiner or the agent to put the questions and fill
out the answers, the writer of the application is not
the agent of the insured. The insurer is liable for
any false answer written by the agent or the
medical examiner in the application.
Section 46 – Materiality of representation
Test: The materiality of a representation is not to
be determined by the event but solely by the
probable and reasonable influence of the facts
upon the insurer in forming his estimates of the
disadvantages of the proposed contract or in
making his inquiries.
Materiality is a judicial question
It is not left to the insurer to determine the
materiality of a representation but to the courts.
Concealment vs. Misrepresentation
Difference: In concealment, the insured withholds
information of material facts from the insurer while in
misrepresentation, the insured makes erroneous statements
of facts with the intent of inducing the insurer to enter into
the insurance contract.
Similarities:
1.

2.

3.
4.

Test of materiality in both is the probable and
reasonable influence of the facts upon the insurer
in forming his estimates of the disadvantages of
the proposed contract or in making his inquiries.
Concealment or misrepresentation on the part of
the insured gives the insurer the right to rescind
the contract
Whether intentional or not, the injured party is
entitled to rescind the contract of insurance.
Since the contract of insurance is one which
requires utmost good faith on both the parties, the
rules on concealment and representation apply
likewise to the insurer

Section 47 – Applicability in modification of contract
The
provisions
governing
concealment and
misrepresentation apply not only to the original

formation of the contract but also a modification of
the same during the time it is in force.
Thus, where the insurer is induced to modify the
insurance policy as to the rate of premium by a
misrepresentation on the part of the insured in a
material point, the insurer is entitled to rescind
such modification.
Section 48 – When the insurer must exercise his right
to rescind
An action to recover on the insurance is different
from an action to rescind the contract.
The defense of concealment or misrepresentation
in an action to recover insurance has no time limit.
Whereas if the ground in an action for rescission is
concealment or misrepresentation, certain rules as
to time limit must be observed.
Rescission in non-life policy
In non-life policies, an action for rescission on the
ground of concealment or misrepresentation must be
exercised prior to the commencement of an action
otherwise it will be barred.
[Based from unsa akong masabtan sa discussion ni
Soleng] – Even if I cannot anymore rescind the contract
on the ground of concealment or misrepresentation
because there is already an action on the contract, I
can still use the concealment or misrepresentation as
my defense in the court action. I am not barred from
using such grounds in for rescission as my defense in
an action to recover on the policy because an action to
rescind is different from an action to recover the
insurance.
Rescission in life policy
The defenses of concealment and misrepresentation are
available only during the first 2 years of a life insurance
policy.
Reason: Incontestibility of life policies
Incontestible clauses – clauses which stipulate that
the policy shall be incontestible after a stated
period. They creat a kind of contractual statute of
limitations on certain defenses that may be raised
by the insurer.
Incontestibility – after the requisites are shown to
exist, the insurer shall be stopped from contesting
the policy or setting up any defense except as is
allowed, on the ground of public policy.
Theory and object of the incontestable clause
1.

As to the insurer – He should have a
reasonable opportunity to investigate the

32

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statement which the applicant makes in
procuring the policy and that after a definite
period, he should not be permitted to question
the validity of the policy, either by affirmative
action [rescission] or by defense to a suit
brought on the life policy of the beneficiary.
2.

As to the insured – To give the greatest
possible assurance to the policyholdrer that his
benefiicaires would receive payment without
question as to the validity of the policy. It is
designed to protect the policyholder and his
beneficiary from a lawsuit contesting the
validity of the policy after considerable time
has passed and evidence of the facts
surrounding the purchase may be unavailable.

Requisites for incontestability –
1.
2.
3.

The policy is a life insurance policy
It is payable on the death of the insured
It has been in force during the lifetime of the
insured for at least 2 years from its date of
issue or of its last reinstatement
“during the lifetime” – the policy is no longer
considered in force after the insured died

2 year period for contesting a life insurance policy –
may be shortened but it cannot be extended by
stipulation
TN: The incontestability of a life insurance need not be
stipulated in the policy. Even if there is no incontestable
clause, if the requisites are present, a life insurance
becomes incontestable.
Effect when life policy becomes incontestable
The insurer may not refuse to pay the same by claiming
that:
1.

2.
3.

The policy is void ab initio [should be taken to
mean “voidable” and the fraud contemplated
should refer to fraud in inducement]
It is rescibble by reason of fraudulent
concealment
It is rescissible by reason of fraudulent
misrepresentation

2.

[Again based sa unsa akong nasabtan sa discussion ni
Soleng, di ko sure ani]
If life insurance, the action for rescission on the ground
of concealment or misrepresentation must be brought
within 2 years during the life of the policy if the
requisites of incontestability are present. The same rule
applies in an action to recover on the life insurance.
Concealment and misrepresentation can be set up as
defenses in such action if brought within the 2 year
period otherwise they are considered barred. However,
if the insured dies within the 2 year period,
incontestability of the policy will not set in.
Concealment and misrepresentation may be set up as
defenses in an action for recovery on the insurance
brought in after two years. However, an action for
rescission on the ground of concealment or
misrepresentation is not allowed because the same
must be brought within the two year period.
Defenses not barred by incontestability clause:
TN: The incontestability of a policy is not absolute. It
only deprives the insurer of those defenses which arise
in connection with the formation and operation of the
policy prior to the loss. The insurer may still contest the
policy by way of defense to a suit brought upon the
policy or by action to rescind the same on the following
grounds:
1.
2.
3.
4.
5.

If reinstated policy – the period of contestability should
be counted from the date of reinstatement and not
from the date of issuance of the policy.
Example: X procured insurance on his life through
fraudulent concealment or misrepresentation
1.

If X dies within 2 years from the issuance of
the policy, the rule on incontestability does not
apply because the law says that the policy
must have been in force during the lifetime of

the insured for a period of 2 years. Hence, his
beneficiary cannot recover on the policy.
Whether or not X is dead or alive, the insurer
cannot exercise the right after 2 years from
the time the policy is issued. The fraud
committed by X is cured by the lapse of the
said 2 year period.

6.

7.

That the person taking the insurance lack
insurable interest
That the cause of death of the insured is an
excepted risk.
That the premiums have not been paid
That the conditions of the policy relating to
military or naval service have been violated
That the fraud is of a particularly vicious type.
Examples:
a. The policy was taken out of a scheme to
murder the insured
b. Where the insured substitutes another
person for the medical examination
c. Where the beneficiary feloniously kills the
insured
That the beneficiary failed to furnish proof of
death or to comply with any condition imposed
by the policy after the loss has happened.
That the action was not brought within the
time specified.

33

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-- NOTHING FOLLOWS --

34

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