Sundiang Notes - Insurance

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REVIEWER IN INSURANCE LAW As lectured by Dean Jose R. Sundiang

MATTERS TO STUDY: For purposes of the bar, study very well the following: 1. Insurable interest (most important) 2. The principle of indemnity, specially in property insurance 3. The principle of subrogation (Art. 2207, NCC) 4. The principle of utmost good faith 5. The principle of insurance as a contract of adhesion

CASE: ENRIQUEZ VS. SUN LIFE ASSURANCE CO. FACTS: An application for life mailed by the insurer. Before insured died.

insurance was mailed. A n acceptance was also the receipt of the acceptance letter, the

HELD: Follow the Theory of Cognition. A contract is perfected upon knowledge of the acceptance. There was no perfected contract since it was not shown that the acceptance of the application ever came to the knowledge of the applicant.

HISTORY: 1. 2. 3.

Insurance Act (2427) PD 612 PD 1460 - merely codified all the insurance laws of date of effectivity - 11 June 1978 4. PD 1814 - amending certain provisions of the Insurance Code 5. BP 874

the

Philippines;

CONTRACT OF INSURANCE A "contract of insurance" is an agreement whereby one undertakes consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. It is an agreement, a contract. Hence, it must have all elements of a contract: consent, object, and cause or consideration.

the

for

a

essential

What are the essential elements of a contract of insurance? There must be a subject matter in which case there must be an insurable interest, especially in property insurance. There must be the risk or the peril insured against. Under the Code, the risk is any contingent and unknown event, whether past or future, which may damnify a person having an insurable interest can be insured against. Insurable interest is a very important concept in insurance. There must be a risk or peril insured against. There must also be the consent of the contracting parties. As a rule, it is a voluntary contract. The only exception is found in Chapter VI, the Compulsory Motor Vehicle Liability Insurance. Those who have cars know this. You cannot register your vehicle unless it is covered by this type of insurance.

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But as a rule, insurance is a voluntary contract. So the parties must give their consent freely; no vice of consent, like force, intimidation, undue influence, mistake, violence, etc. Then, like any other contract, there must be a meeting of the minds. It is a consensual contract; it is perfected by mere consent. There is also an offer and an acceptance between the insurer and the insured. These elements must concur before you have a contract of insurance. Who are the parties? The insured and the insurer. Who is the insurer? He is the party who undertakes to indemnify the insured against loss, damage or liability arising from an unknown or contingent event. The insured on the other hand, is the party to be indemnified upon the occurrence of the loss. Aside from being capacitated to enter into a contract, what other qualifications must the insured posses? The law says under Sec. 7, he must not be a public enemy. The law says anyone except a public enemy can be insured against. What does public enemy mean? To what does it refer? It refers to a country with which the Philippines is at war and the citizens thereof. What is the reason why, under the law, a public enemy cannot be insured against? The reason is obvious. The purpose of war is to cripple the power & exhaust the resources of the enemy. If the Code did not contain the aforementioned prohibition, it could be insured to compensate by way of insurance after having destroyed or crippled the resources of the enemy. May a minor validly enter into a contract of insurance? Under the present Code, the law by way of exception provides that a minor may enter contract of life, health and accident insurance, provided the beneficiary is among those mentioned under the law: the minor's estate, the parents, spouse, children, siblings (Sec. 3[3]).

into

Consider, however, RA 6809, which reduced the minority age to eighteen. So when the law speaks of a minor at least eighteen years of age, considering RA 6809, I believe that said provision of the Insurance Code has correspondingly modified by said piece of legislation.

a

been

In other words, one who is eighteen (18) years of age is no longer a minor under RA 6809. Therefore, a person who is eighteen years of age may enter not only into a contract of life and accident insurance, but even property insurance. Suppose the insured is minor, below eighteen years of age, say seventeen and he enters into a contract of property insurance. The insurance company issues a policy. There is a loss by fire. Can the insurance deny the claim on the ground that the insured is a minor? May the insurer raise as a defense the minority of the insured, and therefore consider the contract void? NO. Recall the law on contracts under the Civil Code. Under the law, a contract entered into by a minor is not void, it is only voidable, therefore valid until annulled (Art. 1390 [1], NCC) Furthermore, we have that law on contracts, that when one of the parties is incapacitated, the capacitated party cannot invoke as a defense the incapacity of the other party. In other words, in the absence misrepresentation on the part of the minor, the insurer will be liable despite the fact that the insured is a minor. We can even apply the principle of estoppel. The insurer is estopped from denying the claim.

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REVIEWER IN INSURANCE LAW

3

As lectured by Dean Jose R. Sundiang

How about a married woman? Can she enter into a contract of insurance without the consent of her husband? YES provided that the insurance is on her life or that of her children (Sec. 3, par. 2, ICP) The law does not mention property insurance. Under the Civil Code under the present Family Code, with respect to the question of whether a wife may engage in any trade, occupation or profession without the consent of the husband, the rule is YES, the wife can do so. All that the wife can do is to object on serious moral grounds and provided that his income is sufficient to support the family in accordance with its social standing.

There are many important The most important ones are:

concepts

referring

to

a

contract

of

and

insurance.

1. it is a personal contract 2. it is a contract of adhesion

CHARACTERISTICS OF A CONTRACT OF INSURANCE 1.

It is an aleatory contract Art. 2010, NCC - by an aleatory contract, 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. Event which may or may not happen - fire Even that will happen although we do not know when - death (in so far as the insurer is concerned, the even is conditiona l, it may or may not happen)

2.

It is a personal contract See Sec. 20 The law presumes that the qualifications of the insured.

3.

It is a contract of the result is death)

indemnity

insurer

(except

considered

life

&

accident

the

personal

insurance

where

In so far as property insurance is concerned. The purpose of the insurance contract is to indemnify. Therefore, the amount to be recovered should never be more than the loss. Otherwise, the contract becomes an instrument for unjust enrichment (solutio indebiti). 4.

It is a contract of adhesion A contract which does not result from the negotiation of the parties. In insurance, there is a policy, normally in printed form. Normally, the applicant of the insured has no participation in the preparation of the contract. He may either accept or reject the contract. -3-

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In transportation law, there is a case involving a plane ticket which the Supreme Court held as a contract of adhesion. Will it bind the passenger although he has not read it? Yes, because while it is a contract of adhesion, it is not a void contract. It follows that he is bound by the provisions thereof. That is also the case of a contract of insurance. The situation is different in a contract of sale where the parties normally would have a say on the terms thereof, the manner of payment, the manner of delivery, who should shoulder the expenses, etc. This does not apply in a contract of insurance. In a contract of insurance, the policy is in written form presented to the applicant. He either adheres (that is why it is called a contract of adhesion) or rejects the contract. Therefore, as a result, being contract of adhesion, the rule is: should there be any doubt, ambiguity or obscurity, in any of the terms and stipulations of the contract, the same shall be interpreted strictly against the insurer and liberally in favor of the insured.

a

There is a similar provision of the Civil Code, under Art. 1377. Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. Applying the aforesaid provision to a contract of insurance, who is that party? The insurer. The party who prepared the contract. Therefore, should there be any doubt, any ambiguity or obscurity, in any of the terms and conditions of the contract, the rule to follow is: the same shall be interpreted strictly against the insurer and liberally in favor of the insured. To illustrate: regarding policy, who is deemed to contract of insurance, the time of the accident of the policy, there can

the so -called authorized driver clause of the be an authorized driver under the policy? In a should there be an accident, and the driver is not an authorized driver within the meaning e no recovery.

at

Under the policy, who is an authorized driver? 1. the insured 2. any person driving upon the insured's order with his permission provided the person driving is authorized to drive the motor vehicle in accordance with the licensing laws, rules, or regulations and is not disqualified from driving the same by order of a court law, or any rule or regulation on that behalf. Simply that means: if the one driving is other than the insured: 1. he must be authorized or permitted by the insured. 2. he must be qualified to drive in accordance with, say, the Land Transportation Code, and other rules and regulations, must not have been disqualified by any court of law, rule or regulation in that behalf. According to the Code, however, the requirement that the person driving, must be duly authorized to drive in accordance with the licensing law, rules and regulations, and is not disqualified from driving the -4-

said

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motor vehicles by any order of a court the person driving is other than the insured.

of

law,

etc.,

applies

only

if

So, in the case of Palermo, and some other cases, at the time of the accident, the one driving his car was the insured himself. He had an expired driver's license. The insurance company denied the claim involving the authorized driver clause. According to the insurance company, the under the policy, the insured as driver was not authorized, hence, the insurer was not liable. The Supreme Court said NO. Because at the time of the accident, the one driving the car was the insured himself. The foregoing requirement does not apply. In the case of Perla Compania de Segurus vs. CA, 208 scra 478, the insured car was parked somewhere in Makati. It was car napped. It was being driven by someone who had an expired license before it was stolen. The insurance company denied the claim invoking the authorized driver clause. The Supreme Court disagreed. In the first place, what should apply is the theft clause, not the authorized driver clause. The fact that the person driving the car before it was stolen did not have a license or had an expired driver's license is of no moment. The clause that should apply is the theft clause. In the case of Villacorta vs. Insurance Commission, 100 SCRA 467, the insured car was involved in an accident and was brought to the repair shop. Necessarily the owner would have to entrust the keys of the car to the owner of the shop or the authorized representative, so the car after the repair had been completed could be road-tested. But some of the employees of the motor shop used the car in a joy-ride around Manila. Unfortunately, it was involved in an accident, again the insurance company denied the claim invoking the authorized driver clause. The Supreme Court disagreed. When the insured entrusted the keys to the owner of the repair shop, there was an implied authority given by the insured either to the owner of the shop or the latter's employees to drive the car. Secondly, in that case, what should apply is not the authorized driver clause but the theft clause of the policy. EXCEPTION TO THE RULE: tourists, however, who have an expired xxx of 90 days is not under the law, an authorized driver unless he secures Philippine Driver's License.

a

REMEMBER You apply the rule that should there be any doubt, ambiguity or obscurity, in any of the terms and stipulations of the contract, same shall be interpreted strictly against the insurer and liberally in favor of the insured, only when there is doubt, ambiguity or obscurity, in any of the terms and stipulations of the contract. But if the terms, conditions, room for interpretation.

and

stipulations

are

clear,

there

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the

is

no

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When the law or contract is clear, no matter how harsh it may be, then the courts will have to enforce the law or contract. Courts are supposed to make contracts for the parties. That is also true with the contract of insurance.

not

Why don't we refer or apply to the provisions of the Civil Code when we talk about the contract of insurance? What laws govern the contract of insurance? Art. 2011, CC: The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws shall be regulated by this Code. Primarily, a contract of insurance is governed by special laws (PD 1460, as amended). In the absence of any applicable provision of the special law, the provisions of the Civil Code, particularly the provisions Obligations and Contracts shall be applied. In the absence of any applicable provisions in both, then decisions and doctrines prevailing in the United States may be applied. Why? Because primarily, our law on insurance is of American origin, patterned the insurance laws of California and New York. REMEMBER, in resolving insurance problems, order they are mentioned: 1. Special Laws 2. Civil Code (Art. 2011) 3. American decisions and doctrines 5.

It is based on the property insurance)

principle

of

apply

subrogation

the

following

(applicable

only

in

on

from

the

to

Art. 2027, CC: If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. Subrogation

is

essentially a process of substitution, where the subrogee, in this case, the insurer, steps into the shoes of the insured. Actions or rights pertaining to the insured will be transferred to the insurer. For example, you have a car insured under a comprehensive policy. It was involved in an accident. It was the fault of the other party. Damage: P30,000.00. What are your remedies? Either you recover from the insurer or from the party at fault. You cannot recover from both. Why not? Because a contract of insurance is a contract of indemnity. It is not to be used as an instrument for profit or gain. Suppose you decide to recover f rom the insurer, but the insurer you only P25,000.00. With respect to that amount, there will be subrogation. It is now the insurer who can recover this amount from the -6-

pays

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party at fault. In the case of Malayan Insurance Company, the court held that subrogation is a normal incident of indemnity insurance. It inures to the insurer without the need of formal assignment or an express stipulation in the policy to that effect. The moment the insurer pays the insured, the insurer becomes a subrogee in equity. May the insured recover from the party at fault? Art. 2207 of the Civil Code says YES, because the law says, "if the amount paid by the insurance company does not fully recover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury." Can the insurer's right of subrogation be destroyed? Yes. The insurer's right of subrogation can be destroyed when the insured releases the other party at fault from liability. Why? Because by releasing the other party, the insured destroys or defeats the insurer's right of subrogation. Hence, the insurer will deny the claim of the insured. In other words, it is the obligation of the insured to preserve at all times that right of recovery which belongs to him, but which will eventually be transferred to the insurer by way of subrogation. That is a condition in the insurance policy. How else can the right of subrogation be destroyed or defeated? the insurer pays the insured even if the cause of the loss was not the risk or peril insured against.

When

What factors must concur before there can be recover in property insurance? 1. the insured must have an insurable interest in the subject matter; 2. that the interest must be properly covered by the policy; 3. there must be a loss; and 4. as a rule, the loss must be proximately caused by the peril insured against.

ILLUSTRATIONS: 1.

2.

A owns a house worth P1M. He has an insurable interest in the house. But B insured the house in his name. Shou ld there be a loss, can B recover? No. Because he has no insurable interest in the house. Can A recover? No. Because while A has an insurable interest in house, such interest was not covered by the policy, as it was B who insured the house.

that

In the same example, A insured the house against fire for one year. During the year, there was no fire, there was no loss. Can there be a refund of the premiums paid? No. there can be no recovery. does the insured get? What is the consideration? The consideration on the part of the insurer is the premium paid by the insured. How about the insured, what is its consideration? The protection, the promise, the undertaking on the part of the insurer to indemnify the insured in case of loss. That is the consideration on the part of the insured.

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What

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So it is not correct to say that should there be no loss within the term of the policy, there is no cause or consideration. There was a consideration. If there is no cause or consideration, even under the law on contracts, the contract is void. Or where the cause consideration is illicit or unlawful, the contract is also void. Art. 1411, CC: When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have action against each other, and both shall be prosecuted. xxx

or

no

INSURABLE INTEREST When is a person said to have an insurable interest in a subject matter? Why does the law require the insured to have an insurable interest? If the insured has no insurable interest contract becomes a wagering contract, on the lose and everything to gain.

in the subject theory that he

matter, the has nothing

to

While it is true that the insurance is a conditional contract based chance, it is not the same as a wagering contract. The law does not authorize it under Sec. 4, 16 and 25. When is the insured deemed to have an insurable interest? A person has an insurable interest in the subject matter if he is so connected, so situated, so circumstanced, so related, that by the preservation of the property shall suffer pecuniary loss, damage or prejudice. How do we determine whether a person has an insurable interest in the life of another person, without considering the enumeration under Sec. 10? is insurable interest when that person has an interest in the preservation of life of another despite the insurance, rather than in its destruction because of the insurance.

on

he

There

In other words, could the beneficiary be more interested in terminating that life so that he could recover from the insurer, or could he be more interested in preserving that life, despite the insurance, then he has insurable interest in that life.

In whose life or health does a person has an insurable interest? Sec. 10. Every person has an insurable interest in the life and health: a) of himself, of his spouse and of his children; b) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; c) of any person under a legal obligation to him for the payment money, or respecting property or services, of which death or illness might delay or prevent the performance; and d) of any person upon whose lif e any estate or interest vested in him depends.

The explanations for (a) and (b) above are self-explanatory. -8-

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For (c) above, this refers to a case where the person in question is under obligation either for payment of money or to render services. The movie companies for instance, have insurable interest in the life/lives and health of the actors and actresses who are under contract with them. Why? Because these actors and actresses are under obligation to render services to said movie companies. Without these actors and actresses, these movie companies are liable to close down. With respect to the obligation for the payment of money, there is the creditor-debtor relationship. A creditor has insurable interest in the life of the debtor, but only to the event of the obligation. For instance, the debtor owes the creditor of P1M in the form of a loan. Can the creditor insure the life of the debtor? Yes. Because the debtor is under obligation to pay money to the creditor. The death of the debtor will either delay or prevent the payment of the loan. But although the creditor can insure the life of the debtor, the insurance is limited to the amount of the loan which is P1M.

QUERY: In the example above, suppose C (creditor) insures the life of D (debtor) for P1M. Before the death of D, the loan had been fully paid by him. Can D recover? No, because he was not a party to the contract (Art. 1311, CC). An insurance procured by the creditor over the life of the debtor for the benefit of the creditor will not inure to the benefit of the debtors. The creditor is not acting as an agent. Can C recover? No, because he no longer had insurable interest on the life of D at the time of D's death. Who can recover? Nobody. Suppose it was D who insured his own life and made C as the beneficiary, but before D's death, the loan had been paid in full, this time who recover? The heirs or legal representative of D.

can

Try to consider the difference between those two different situations. An insurance procured by the creditor on the life of the debtor in the name or for the benefit of the creditor will not inure to the benefit of the debtor. The nature of the life insurance partakes of the nature of a contract of indemnity because, unlike in property insurance, in life insurance, as a rule, there is no limit. That is one of the distinctions between life insurance and property insurance. You can insure your own life for as much as you wish, with as many insurance companies as you like, provided you pay the premiums.

In property insurance, on the other hand, there is a limit. And that is the extent of the insurable interest. Under Sec. 14, for a person to have insurable interest in property, he need not be the owner thereof. Sec. 14. An insurable interest in property may consist in: (a) An existing interest; (b) An inchoate interest founded on an existing interest; or (c) An expectancy, coupled with an existing interest in which the expectancy arises.

that

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out

of

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Aside from an owner of a property, who else can have an insurable interest in such property? A lessee, among others. In ord er to ascertain whether or not a person has an insurable interest in property subject matter, the test to be applied is Sec. 17. Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damn ified by loss or injury thereof.

In the event of loss or injury to the property, will he be damnified? Will he suffer any loss, damage or prejudice? If the answer is YES, then insurable interest.

he

In the sale of property, the vendor, prior to actual delivery, has insurable interest in the property. In sale with a right to repurchase (pacto de retro), within the period of redemption, the vendor a retro has an insurable interest in the property because he still has the right of redemption. Although you should recall how is ownership of the thing sold transfers to the vendee or buyer. That is important for determining for instance, issue of who should bear the loss, beca use of the principle or res domino.

has

an

the perit

In transfer by delivery, tradition, actually or constructively, it is not the perfection of the contract, nor the payment of the price, but the delivery, which will transfer ownership to the buyer. So pending delivery, despite perfection or even payment of the price, as a rule, then vendor is still the owner. The vendee, of course, under Arts. 1163 -1165, CC, can demand delivery. He has a right. So in effect, both the vendor and the vendee have insurable interest in property subject matter. With respect to a stockholder of a corporation, does he have insurable interest in the corporate assets and property? The rule in corporation law is that a corporation has a personality distinct and separate from those of its stockholders. Hence, any property of the corporation is not property of its stockholders. Such property belongs to the corporation as a distinct and separate entity. But a stockholder has an inchoate interest to the extent of his shares or subscription in corporate assets. To that extent, a stockholder has insurable interest in the property of a corporation. Going back to life insurance, do you have an insurable interest in life of your girlfriend? No. Mere relationship is not enough to grant insurable interest in a person party to such relationship. Unless she depends on you for support.

the

What about a corporation, does it have an insurable interest in the life of its janitor? No. Even if the janitor is under obligation to render services to the corporation, death of the janitor cannot bring loss or prejudice to the corporation. But does a corporation have an insurable interest in the life of its president? Yes. Death of the president will mean loss or prejudice to the corporation itself. Do you have an insurable interest in the life of your lecturer? Is he not under obligation to render service to you (deliver lectures)? Or is school which has an insurable interest in the life of the lecturer? No.

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it

the

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Sec. 8. Unless the policy otherwise prov ides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor. These are the possible situations You have a debtor who owes the creditor P2M. There is a principal contract of loan, which is secured by a real estate mortgage of a house and lot, and the house is worth P3M. Who has an insurable interest in the house and how much? Both the mortgagor and the mortgagee have separate and distinct interest in that house. Why the mortgagor? Because he is the owner. Will the fact that it is mortgaged to the creditor secure a loan of P2M not diminish or reduce the insurable interest of the mortgagor in the house? Should not the loan of P2M be deducted from the value of the house which is P3M, making the mortgagor's insurable interest in the house only up to the extent of P1M? No. Despite the mortgage, the mortgagor's interest will be up to the value of the house. Why? Because 1. 2.

Under the law on Credit Transactions, ownership is not transferred to the mortgagee, and Loss of the house will not mean the extinguishment of the loan.

Under the law on Contracts, while contract will extinguish the accessory accessory contract will not extinguish accessory follows the principal. Should the house be lost, extinguishment of the loan.

such

the extinguishment of the principal contract, the extinguishment of the the principal contract. The rule is:

loss

will

The loan will only become an unsecured mortgagor's interest in the house remains.

not

necessarily

obligation.

mean

Therefore,

the

the

How about the creditor, who is not the owner, will he have an insurable interest in the house? Yes, because by the loss or destruction thereof shall prejudice the obligation will become unsecured to the extent of the loan of P2M. Both mortgagor-debtor and mortgagee-creditor have separate and distinct interest in the said property.

SITUATION NO. 1:

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D insures the house for P5M against fire in his own name, for his interest only. Nothing is mentioned about the interest of C. The house was destroyed by fire. Who can recover and how much?

own

Can C recover? No, because he is not a party to the contract of insurance. Can D recover? Yes. How much? Only P3M although he insured it for P5M. Why only P3M? Because insurance is a contract of indemnity. If he were allowed to recover P5M but the property would be making a profit. That would encourage arson.

is

worth

only

P3M,

While C cannot recover directly from the insurance company, he shall, however, hold a lien over the proceeds of the policy under Art. 2127, CC.

SITUATION NO. 2: C insures the house for P2M against fire in his own name, for his interest. Nothing is mentioned about D's interest. The house is completely destroyed by fire. Who can recover? Only C, because D is not a party to the insurance company indemnifies C, the amount extinguish the loan?

contract of P2M,

No. There will be subrogation. The insurer, after recover from D. There will be a change of creditors.

own

of insurance. If the will such payment

indemnifying

C

can

SITUATION NO. 3: What is contemplated under Sec. 8 is where D insures the property in his name, for his interest, but with a stipulation in favor of C. The following are the consequences: 1. 2.

D is still the real party in interest, party to the contract. Any act of D which will otherwise same effect.

he does not cease avoid

the

policy

to be a will

have

the

Suppose the policy contains a stipulation that there should be no storage of flammable materials like gasoline. In violation thereof, D, the insured, stores gasoline. This is an act of the insured, which under the policy, could avoid it. Despite the "loss payable clause" in favor of the creditor, that will avoid the policy. Suppose, the insurance recover and how much?

was

for

P3M

and

there

was

a

total

loss,

C cannot recover from the insurer because at the time of the loss, he no longer had any insurable interest in the property. Suppose, there was no payment, who can recover and how much?

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who

can

D

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C can recover P2M and D, 1M. This time the loan is extinguished. will be no subrogation. This is what we call "loss payable clause."

There

PROBLEM: In life insurance, is it necessary for the insurable interest in the life of the insured?

beneficiary

to

have

an

It depends. Where a person insures his own life, he can, as a rule, designate anybody, even a complete stranger, as the beneficiary. That beneficiary need not have an insurable interest in the life of the insured. He can designate anybody subject only to the exceptions under Art. 739, CC, in relation to Art. 2012, CC. "Art. 739. The following donations shall be void: 1. Those made b/n persons who were guilty of adultery or concubinage at the time of the donation; 2. Those made b/n persons found guilty of the same criminal offense, in consideration thereof; 3. Those made to a public officer or his wife, descendants and ascendants, by reason of his office. In the case referred to in No.1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and donee may be proved by preponderance of evidence in the same action." "Art. 2012. Any person who is forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, a ccording to this article." Simply, one who cannot receive any donation under named beneficiary in the life insurance policy by give any donation. Reason behind of the law.

the

law:

to

prevent

an

indirect

Art. 739, cannot be the person who cannot

violation

or

circumvention

Proceeds of a life insurance policy partakes of the nature of a donation to the beneficiary. Act of liberality. CASE: INSULAR LIFE VS. EBRADO FACTS: A married man insured his life and de signated his mistress as beneficiary. When he died, both the wife and the mistress filed their respective claim with the insurance company. The insurance company went to the court by way of interpleader. ISSUE: Who should recover, the wife or the mistress? HELD: The mistress could not recover because of Art. 739 and Art. 2012. The wife could not recover either because she was not a party to the contract; neither was there a stipulation in her favor. The procee ds would go to the estate of the deceased. - 13 -

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As a rule, when a person insures his own life, he can designate anybody as his beneficiary. However, when a person insures the life of another, he must have an insurable interest in that life. Apply Sec. 10. One cannot just insure the life of anybody and make himself the beneficiary. He must have an insurable interest in that life. In property insurance, however, the insured MUST always have an insurable interest in the subject matter. In the case of a mortgage property, the interest of the mortgagor is up to the extent of the value of the property. The only exception is the bottomry loan. The nature of a bottomry loan is that the payment conditional, subject to the safe arrival of the vessel destination.

of at

the the

loan port

is of

PROBLEMS Q: The father insured his life and made his son the beneficiary. Later, the father discovered that his son was a drug addict. So he wrote to the insurance company asking for a change of beneficiary, from his son to his wife. The father died and the son filed a claim with the insurance company, claiming that he, having been named by his father as the beneficiary in the policy, he acquired a vested right or interest in the proceeds of the insurance policy. Is the contention of the son tenable? A: Under Sec. 11, which reversed the provisions of the old law, the rule now is that the designation is presumed to be revocable. The rule is that the insured can always change the beneficiary named in the policy, unless he expressly waives that right in the policy.

Q:

Can the beneficiary apply the vested interest rule in the policy?

A: If the designation is irrevocable, like for instance, when there is an express waiver by the insured in the policy. The beneficiary, in this case, acquires a vested interest in the policy of which he cannot be deprived without his consent. Otherwise, in the absence of an express waiver by the insured, the beneficiary can be changed anytime.

Q: What is the effect under Sec. 12 where the beneficiary in life insurance policy willfully brings about the death of the insured, either accomplice or accessory? A: The beneficiary automatically forfeits his interest in the insurance policy. This does not mean, however, that the insurer will no longer be liable. The insurer remains liable, the only effect is that the beneficiary's interest is forfeited. Who then will be entitled to the proceeds? The nearest relative of the insured, not otherwise disqualified (so, where the beneficiary brings about the death of the insured not in a willful manner, as for instance, through reckless imprudence under Art. 365, RPC, Sec. 12 does not apply). - 14 -

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15


Q: Is a mere hope or expectancy insurable? Suppose a person buys sweepstakes tickets and insures his chance of winning, so much so that if he does not win the first price, the insurer will indemnify? Or can you insure your chance of passing the bar exams? A: No. A mere hope or expectancy is not insurable. This is a wagering contract. In order that a mere hope may be insurable, it must be coupled with an existing interest in the thing from which the expectancy shall arise under Sec. 14, par. c. or under Sec. 16, which provides that there must be a valid contract. The shattering of expectation, however bright, or the disappointing of hope, however strong, does not constitute such a loss to be indemnified by insurance. It will be in the nature of a wagering contract which the law does not allow - gambling.

Q: The mother was confined in a hospital, scheduled to be operated on following day of a very serious illness. The night before the operation, she called for her only son, and told him that she had prepared a will naming the son as the only heir. Among the property that the son expected to inherit was a house located at Dasmariñas Village. On the same evening, the son together with his family moved into the house which he expected to inherit. At same time he insured the house in his name against fire. The operation took place, and unfortunately, the mother died. Af ter which, the house was completely destroyed by fire, the risk or peril insured against. May the son recover?

the

the

A: No. When he insured the house, he had no insurable interest. His interest was a mere hope or expectancy. You do not inherit from a person who is still alive. Inheritance takes place upon the death of the decedent. Under the law, insurable interest in property must exist both at the time of the effectivity of the policy AND at the time of the loss, although it need not exist in the meantime. Insurable interest in life, on the other hand, need to exist only at the time of the effectivity of the policy, it need not exist thereafter.

Q: Under Sec. 20, where there is a change of interest thing insured unaccompanied by a corresponding change of insurance, what will happen?

in any part of interest in the

the

A: The policy shall be suspended to an equivalent extent until the interest in the thing and the interest in the insurance are vested in the same perso n. Under Sec. 58, the mere transfer of the thing insured will not mean automatic transfer of the policy. It shall be suspended until the same person becomes the owner of both the policy and the thing insured. It will merely be suspended, it will not be avoided, because of the rule that insurable interest in property must exist both at the time of the effectivity of the loss although it need not exist in the meantime.

EXAMPLE:

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16


You own a car, and insured it in your name. At the time of the effectivity of the policy there is no question that you have an insurable interest in the car being the owner. The policy is for a term of one year. Six months thereafter, you sold the car. There is a change of interest in the car, from the original owner to the buyer. But the policy was not transferred to the buyer. Thereafter, the car was lost. Who can recover? Nobody. Neither the original owner nor the buyer. The original owner cannot recover because while he had an insurable interest in the car at the time of the effectivity of the policy, he no longer had insurable interest in the car at the time of the loss. He had sold it. The buyer could not recover either. While he had insurable interest at the time of the loss, he had no insurable interest in the car at the time of effectivity of the policy.

Q: How can insurable interest again in the same person?

in

both

the

insured

and

the

policy

be

vested

A: (1) In the example given, before the occurrence of the loss, the policy was transferred to the buyer. In that case, may the buyer r ecover? Yes, because when the policy was transferred to him, interest in both the policy and in the car were present in the buyer. (2) Where the seller repurchases the car before the occurrence of the loss. In which case, the seller may recover. So, if you sell an insured property and neither you nor the buyer the precaution of having the policy transferred in the name of the buyer, in case of loss, neither you and the buyer can recover. This is because of the rule in property insurance that, insurable interest must exist at the time of the effectivity of the policy and at the time of the occurrence of the loss.

takes

In life insurance, however, all that the law requires is that insurable interest must exist at the time of the effectivity of the policy but it need not exists thereafter.

EXAMPLE: A corporation has insurable interest in the life of its president. So here is a corporation which insures the life of its president. The corporation is the beneficiary. As president of the corporation, he is allowed to use a house belonging to the corporation. After the effectivity of the life insurance policy, the president resigns from the corporation and relinquishes all his interest in the corporation. after which, he insured the house in his own name against fire. After resigning and insuring the house, the corporation agrees to sell the house to its former president. Then the former president dies, and the house burns. Q: Who can recover on the life insurance policy? A: The corporation can, because at the time of the effectivity of the policy, the corporation still has an insurable interst in the life of the president, because he was still president then. Although at the time of the loss (death), the corporation no longer had insurable interest in the life because he had already resigned.

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17


Q: Who can recover on the fire insurance? A: Neither the corporation nor the former president (estate) can recover, because when the president insured the house in his name, he did not yet have an insurable interest in the house for the simple reason that he was not yet its owner. It was after the effectivity of the policy that he was able to buy it.

INSURABLE INTEREST IN LIFE vs. INSURABLE INTEREST IN PROPERTY: » »

Insurable interest in life need exist only at the time of the effectivity of the policy. It need not exist thereafter. Insurable interest in property must exist both at the time of the effectivity of the policy AND at the time of the loss. It need not exist in the meantime.

SUSPENSION OF POLICY GENERAL RULE: Sec. 20. xxx a change of interest in any part of a thing insured unaccompanied by a corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person. EXCEPTIONS: Under the following circumstances, the policy despite a change in any part of the thing insured: 1.

will

not

be

suspended

Sec. 21. A change in interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the right of the insured to indemnity for the loss. In motor vehicle insurance, the owner insured his car in his name. It was involved in an accident. Damage: P20,000.00. After which, he sold the car. May the seller recover? Yes, because at the time of the occurrence of the loss (accident) he was still the owner, hence, he still had an insurable interest in the car. But suppose after the transfer or sale of the car, a second accident happened, however, there was no transfer of the policy to the buyer. With respect to the second accident, who can recover? Nobody, because neither the seller nor the buyer had insurable interest both at the time of the effectivity of the policy and at the time of the loss.

2.

Sec. 22. A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the others. This refers to a divisible contract. You own four houses in a compound: A, B, C, and D. You insured them under one policy, but separately valued. You pay a single premium. Later, you sold house A, but the policy was not transferred to the buyer. Afterwards, house B - 17 -

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18


was burned down. Can the insured recover? Yes, the sale of house A will not affect the insured's right to be indemnified because of the loss or destruction of house B. Although they are covered under the policy and a single premium is paid, the contract is divisible. 3.

Sec. 23. A change on interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person taking his interest in the thing insured. Whoever takes the property of the decedent will automatically become the owner of the policy. Here is a father, who, during his lifetime, insured his house in his name against fire. The policy was in the name of the father. The house was later inherited by the son. So actually, there was a change of interest in the house, from the father to the son. Later, the house was burned. Can the son recover? Yes. Whoever takes the house will automatically be the owner of the policy. What is the reason for this exception? Art. 1311, NCC. Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is liable beyond the value of the property he received from the decedent.

4.

Sec. 24. A transfer of interest by one of several partners, owners, or owners in common, who are jointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured.

not

joint

This refers to a case where the change of interest is made in favor of a partner, joint owner, or co-owner. Let's say A, B, and C are owners in common of a house worth P3M. They insured the house jointly in their names. Later, A sold his undivided share of ⅓ to D, after which the house was completely destroyed by fire. Insofar as the share of A is concerned, there had been a change of interest in favor of D. Since D is a stranger, not a partner, the rule in suspension is applied. When is the exception applied? The exception is applied where A, instead of transferring his share to D, transfers the same to B or C, thereby increasing the participation of either to ⅔. There will be no suspension of the policy because no new party was introduced to the co-ownership. 5.

Sec. 57. 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. This contemplates a situation where there is an agreement or stipulation in the policy that should there be a transfer or change of interest in the property, there should likewise be an automatic transfer or policy. This is a valid stipulation.

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19


Art. 1306, NCC. The contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.

Sec. 25. Every

stipulation in

a

policy

of insurance

for the payment of

loss

whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void. So even if there is a stipulation, that it is void, or that shall be received as evidence of proof of interest. This is also void.

the

policy

As to whether a person has or has no insurable interest in property, cannot be vested by mere agreement or stipulation or the parties. It is contrary to law (Sec. 25) and public policy because it becomes a wagering contract. PROBLEM: Q: B is not the owner of the house. He is neither a lessee nor a mortgagee. He has nothing to do with the house. He tells the insured that despite the fact that he has no insurable interest in the house, he would like to insure the house in his name against fire. He is willing to any amount of premium that may be required from him. And the insurer knowing that B has no insurable interest in the house, agrees to issue a policy to B. they further stipulated that should the house be destroyed by fire, the insurer will indemnify him regardless of whether or not he has insurable interest in the house. Afterwards, the house is completely destroyed by fire. Can B recover? A: No. Their agreement was a wagering contract.

is

contrary

to

law

and

public

policy,

because

pay

it

UTMOST GOOD FAITH (UBERIMEI FIDEI) The contract is the law between the contracting parties, and they enjoined to comply with it in good faith. In a contract of insurance, the law does not require only ordinary good faith but utmost good faith.

are

What is utmost good faith? It means absolute and perfect candor, openness and honesty. It is the absence of any deception or concealment however slight. The parties to a contract of insurance must act in utmost good faith. There should be no concealment. There should be no misrepresentation. What is the reason for utmost good faith? A contract of insurance is an aleatory contract. contract, By an aleatory one or reciprocally bind themselves to give or what the other party shall give or do.

both of the contracting parties to do something in consideration of

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20


Being an aleatory contract, the insurer's liability is conditional. The parties, especially the insurer, relies on the representation and statements made by the other party. In life insurance, the insurer will not just issue a policy. The insured may be asked to give statements or to answer questions. The insured, next to his doctor, is in a better position to know the state of his health. So he should not in any way misrepresent the state of his health.

WHAT ARE THE DEVICES USED BY THE INSURER TO ASCERTAIN, DETERMINE AND CONTROL THE RISKS TO BE ASSUME? 1. 2. 3. 4. 5.

Concealment Representation Warranties Conditions Exceptions

WHAT ARE THE FOUR PRIMARY CONCERNS OF THE INSURER? 1.

The correct estimation of the risk, which enables the insurer to decide whether he is willing to assume it and if so, at what rate of premium. 2. The precise delimitation of the risk which determines the extent of the contingent duty to pay undertaken by the insurer. 3. Such control of the risk after it is assumed as will enable the insurer to guard against the increase of the risk because of change in conditions. 4. Determining whether a loss occurred and if so, the amount of such loss.

HOW MAY AN INSURER BE ABLE TO CONTROL THE RISK THROUGH THE USE OF EXCEPTION? » »

Exempt certain properties Except certain perils or risks

IN PROPERTY INSURANCE, THE FOLLOWING MUST CONCUR BEFORE ONE MAY RECOVER: 1. 2. 3. 4.

Insurable interest; Interest must be properly covered by the policy; There was a loss; and Loss must be proximately caused by the peril insured against.

The principle of utmost good faith applies to both parties. If information is withheld, then it follows that there was no meeting of the minds.

CONCEALMENT Sec. 26. A neglect to communicate communicate is called concealment.

that

which

a

party

knows

and

ought

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to

- 21 -


21


I would call it a "sin of omission," neglect, failure. Where you are dutybound to communicate to the insurer, an information or a fact which is within your knowledge, which is material in the contract, but which you did not communicate, you are guilty of concealment under Sec. 27. The remedy of the insurer is to rescind the contract.

Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. (As amended by Batasang Pambansa Blg.874) What are the grounds for rescission? 1. Concealment 2. Misrepresentation, and 3. Breach of warranty. When we speak of rescission, the party asking for rescission of the contract impliedly admits the existence of a valid and binding contract. Because the purpose of rescission is to terminate, to rescind. You do not terminate or rescind a non-existing contract. Rescission would not be the remedy. So rescission presupposes the existence of a valid ad binding contract. Going back to concealment, does it mean that the parties are also required communicate everything, including "tsismis," especially where the to applicant is a woman? No. What one is required to communicate is that which is within his knowledge. It must be material. One is not under obligation to communicate something immaterial. How is materiality determined? Sec. 31. Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in fo rming his estimate of the disadvantages of the proposed contract, or in making his inquiries. For an information to be material, is it necessary that it be the cause of the loss? No. In determining whether or not an information is material, simply ask: "Had this been concealed to the insurer, had it not been concealed, do you think the insurer would have been influenced (1) in deciding or not whether to issue the policy and (2) in determining the rate of premium?" If the answer is yes, then it is material.

you

For example, here is a person suffering from a terminal disease, confined in a hospital. The doctors told him about it and he had, at most six months to live. Wanting to provide something for the membe rs of his family upon his death, he went to an insurance company and applied for a life insurance policy. The insurance company agreed to issue a non-medical life insurance policy. This means the insurer waives the right to have the applicant physically or medically examined. Where the insurer agrees to issue a non -medical insurance policy, would that constitute a waiver of the right to communication? No. What is waived is only the right to have the applicant examined. And according to the Supreme Court, where the insurer issues a non-medical life insurance policy, with more reason should there be no concealment, no misrepresentation, on the part of the applicant. Why? Because you can assume that the insurer, in agreeing - 21 -

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22


to issue the non-medical life insurance policy, he must have relied entirely, completely, on the statements of the insured. So, a non-medical insurance policy was issued because from his appearance, he did not appear to be suffering from a serious ailment. He did not tell the insurer that he was ill, he concealed that fact. Later, he died in vehicular accident.

a

Can the insurer rescind the contract on the ground of concealment? Yes. The fact of illness was immaterial. Had he told the insurer that he was seriously ill, the insurer would not have agreed to issue the policy. Such fact, if disclosed, would have influenced the insurer in deciding whether or not to issue the policy. Assuming that the insurer would have, just the same, agreed to issue the policy, the rate of premium would have been very high. Of course, there are matters, which need not be communicated. Matters, which, through the ordinary exercise of diligence could have been ascertained by the insurer. This is similar to what we call in civil procedure as "judicial notice," where the law presumes that a certain matter is known to both parties. Like mercantile usages, practice, etc., these need not be communicated. Or, where there is waiver, which may either be express or implied - waiver of the right to communication. There is an express waiver when it is stated in the policy. There is an implied waiver when there is a neglect or failure to inquire from facts which are communicated where they distinctly impaired. (Sec. 33)

so are

ILLUSTRATION: We must distinguish between an answer to a question which is manifestly incomplete, yet accepted by the insurer, and an answer to a question which is apparently complete but in fact incomplete and therefore, untrue. In the latter case, there would be no waiver. EXAMPLES: i.

One of the questions asked of the applicant in an applicant for life insurance is, "Have you ever been to a hospital?" Yes. The insurer did not ask further questions, did not pursue the question. But the applicant had been operated on twenty times. Failure of the insurer to make further inquiries after the answer yes was given is deemed to be a waiver of the right to communication. The answer yes, means that there was something wrong with the health of the applicant. A prudent insurer would have asked further, when? Why? How many times? Etc. Failure to do that on the part of waiver of the right to communication.

ii.

the

insurer

would

constitute

In the same example, the applicant is asked the following questions, (1) Have you ever been confined in a hospital? Yes. (2) How times? Two times. (3) Why? I suffered from minor ailments like flu.

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a

many

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23


It turned out, however, that the applicant had been confined hospital many times, and had gone major operations for some serious ailments.

in

a

Does this constitute a waiver? No, because in the second example, there are answers which are apparently complete but which are in fact incomplete. Therefore, the insurer may still rescind the contract by reason of concealment.

MISREPRESENTATION Like concealment, misrepresentation is a sin of commission. What is purpose of misrepresentation? Why would a party to a contract misrepresentations to the insurer? To induce the insurer to enter into contract. That being the purpose, misrepresentation is made either before or at the time of the effectivity of the issuance of policy.

the make a

Normally, misrepresentations are not made after the issuance of the policy, because they will not serve any purpose anymore. After having convinced the insurer to enter into a contract, to issue the policy, there is no point in making further misrepresentation. These are made before. However, there is an EXCEPTION where a representation is made even after the effectivity of the insurance policy. Sec. 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation.

EXAMPLE: You insured your house. At the time of insuring it, you represented to the insurer that it was being used for industrial purposes. And it was true. Necessarily, between a building used exclusively for residential purposes and one used for commercial or industrial purposes, the latter would command a higher rate or premium, because the risk is greater. Six months after the effectivity of the policy, a change in the nature of the occupancy took place. You went bankrupt so you closed the business. There was a change in the nature of the occupancy from commercia l or industrial to residential. So you returned to the insurer and represented to him that from this day on, the property would be used exclusively for residential purposes and not as previously stated. So here is a representation made after the effectivity of the insurance policy. The purpose of which is to ask for the modification of the policy, in order that the insurer may agree to a reduction of the premium. This is the exception.

PROBLEM:

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24


An applicant for a life insurance is asked the question, "Have you ever suffered from any of the following diseases?" One of them is pneumonia. Answer: No. It was untrue because at that time, he had suffered pneumonia. There was no misrepresentation. However, while the policy was being processed, he did suffer form pneumonia. But because of modern drugs, he got cured before the issuance of the policy. So at that time of the issuance of the policy, he was no longer suffering form pneumonia. But he did suffer from pneumonia between the time of filing of the application and the date of the effectivity of the policy. So he did not tell the insurer anymore that he did suffer from pneumonia. Then he died of cancer. Could the insurer deny the claim that there was either concealment or misrepresentation? Yes.

on

the

ground

RULE: Statement in the case of representation must be goes into effect, although it may not be true when made. On the other hand, even if contract goes into effect, that the contract.

true will

when give

true

when

the

contract

made, but no longer true the insurer the right to

when the rescind

Rescission is the remedy when there is concealment, misrepresentation, and breach of warranty.

What are the limitations contract of insurance?

of

the

right

of

the

insurer

to

rescind

the

(1) Sec. 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. The right to rescind granted by this Code to the insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission. (As amended by Batasang Pambansa Blg. 874). Simply, the second part of the foregoing provisions means: If the insurer accepts premium payments despite knowledge of the ground for rescission, such acceptance will constitute a waiver of the right to rescind. EXAMPLE: The insurer knew that there was misrepresentation. So, he could asked for the rescission of the policy. But instead of asking for the rescission of the policy, he accepted the premium payments from insured. Such acceptance constitutes a waiver of the right to rescind.

have the

What could be the purpose or reason of the insurer in accepting premium payments instead of rescinding the policy, knowing that it could be rescinded? He expected that there would during the term of the policy.

be

no

loss,

there

would

be

no

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claim,

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25


Sec. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. (2) In a non-life policy, such right commencement of an action on the contract.

must

be

exercised

prior

to

the

"Commencement of an action on the contract" - either in court or with the Insurance Commissioner. (3) In a life policy, defenses years of the insurance policy.

are

available

only

during

The period of two years for contesting a life policy may be shortened but it cannot be extended by stipulation.

the

by

first

the

If an insurer believes that the contract may be rescinded, he must do. He must act before the insured files an action against the insurer for recovery of a claim. The second part is what is known as the incontestability clause.

two

insurer

the

WHAT IS THE INCONTESTABILITY CLAUSE? A Clause stipulating that the policy shall be started period ; after the requisites are shown to be estopped from contesting the policy or setting allowed, on the ground of public policy.

incontestable after a exists, the insured shall any defense, except as

REQUISITES OF INCONTESTABILITY CLAUSE? 1. 2.

Life insurance policy payable upon the death of the insured; and Policy must have been in force for a period of at least two during the lifetime of the insured either from date of issue or date of last reinstatement.

years

If the foregoing requisites concur, the insurer can no longer ask for the rescission of the contract on the ground of concealment or misrepresentation. The policy has become incontestable. But even if the policy of life insurance has become incontestable under Sec. 48 (2), the insurer can still raise certain defenses to defeat recovery, like non-payment of the premiums. It does not mean that simply because a policy has become incontestable, the insured need not pay the premiums anymore. Of course not.

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26


Going back to concealment, is it necessary for the insurer to communicate to the insurer the nature and amount of his interest in the property insured? In the case of a house, is the insured required to communicate to the insurer that he is the owner (nature of interest) and that his house is worth (amount of interest)?

P1M

As a rule, NO. If he is the absolute owner, he does not have to inform the insurer of the nature and amount of his interest. If, however, he is not the absolute owner, like in the case of a mortgagee, under Sec. 8, then YES, he has to inform the insurer not only the nature of his interest, the fact that he is a mortgagee, but he must also inform insurer the extent of his interest in the property, say P2M.

the

If the insured is the absolute owner, it is easy to ascertain the extent of his interest, it is the value of the property. If the insured is not the absolute owner, like a interest may be less than the value of the property. amount of the obligation secured by the mortgage.

mortgagee, then his It could only be the

WHAT IS THE EFFECT WHEN THE POLICY BECOMES INCONTESTABLE? The insurer cannot set up the defenses that: a. The policy is void ab intitio; b. It is rescissible by reason of fraudulent concealment of the insured or his agent, no matter how patent or well-founded; c. It is rescissible by reason of fraudulent misrepresentation of the insured or his agent. IS THE INCONTESTABLE CLAUSE ABSOLUTE? No. It only deprives the insurer of those defenses which arise connection with the formation and operation of the policy prior to the loss. The following defenses are still available: 1. 2. 3. 4. 5. 6. 7.

in

That the person taking the insurance lacked insurable interest required by law. 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 science have been violated. That the fraud is of a particular vicious type. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss had happened. That the action was not brought within the time specified.

PURPOSE OF THE LAW: The assure that after the specified period, the policy owner may rely upon the insurance company to carry out the terms of the contract, regardless of irregularities in connection with the application which may later discovered.

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be

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27


WHAT IS A POLICY? It is the written instrument in which a contract of insurance is set forth. (Sec. 49) IS IT THE SAME AS THE INSURANCE CONTRACT ITSELF? No. CAN THERE BE A CONTRACT OF INSURANCE WITHOUT A POLICY? As a rule, YES, because a policy is only an evidence of the contract. HOW IS CONTRACT OF INSURANCE PERFECTED? Being a consensual contract, as distinguished from a real contract, it is perfected by mere consent. Concurrence between an offer and acceptance (in a real contract, delivery is necessary for the perfection of the contract, like the contract of pledge, loan, commodatum). In a contract of insurance, the moment the parties agree or their meet, when there is concurrence between the offer and acceptance, there is a contract of insurance. A meeting of the minds on the object of the contract.

minds

What may be the object? In life insurance, it is the life or health of a person; in property insurance, like fire or marine, it is the property; in liability insurance, it is the possible liability of a person by reason of the use of the property. An example of liability insurance is what we call under Chapter VI as the Compulsory Motor Vehicle Liability Insurance. The insurer under a liability type of insurance is liable only with respect to the civil aspect. Criminal liability cannot be insured because it is something personal. In Criminal Law, every person who is criminally liable is also civilly liable (Art. 100, RPC). For example, one is involved in a vehicular accident and he is at fault. He can be charged under Art. 365 of the RPC. But he can also he held civilly liable for the damage to property that he have caused, or the injury that another person may have sustained by reason of the accident. The insurer will answer only for the civil liability, not for the criminal liability. Sometimes after the issuance of the policy, the parties to the contract may find it necessary to make certain alterations, modifications or changes or erasures. This can be done without canceling the policy, which may prove to be not only expensive but also tenious. How? It can be done through the use of riders, endorsements, warranties, and clauses. For example, going back to Sec. 20, what is the effect of a change interest in any part of the thing insured if there is no corresponding change of interest in the insurance? What will happen? The policy shall be suspended.

of

If the property insured is transferred, but the insurance is not transferred to the buyer, in case of loss, neither the original owner nor the buyer can recover. Because under Sec. 20, the law requires that in property insurance, insurable interest must exist both at the time of the effectivity of the policy and at the time of the loss, although it need not exist in the meantime.

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28


So let's say the owner of a car insures the car in his own name under a comprehensive policy for one year. Three months thereafter, he sold the car without transferring the policy to the buyer. In case of loss of the car, neither the original owner nor the buyer can recover. There can be recovery only if the policy is transferred to the buyer. In property insurance, the transfer of the insurance must be with consent of the insurer, unlike in the case of life insurance under Sec. 181.

the

In life insurance, the policy may be assigned even without the consent of the insurer, unless there is a stipulation to the contrary, In property insurance, the conse nt of the insurer is transfer of the policy. Why? Because it is a personal contract.

necessary

for

Even under Sec. 58, the law says " The mere transfer does not transfer the policy, but suspends it until the the owner of both the policy and the thing insured. "

of a thing same person

the

insured becomes

In the above example, where the owner sells the car, how can the insurance policy be transferred to the buyer (now owner) without canceling the existing policy which is in the name of the original owner or seller? It can be done through the use of an endorsement. The insurer will simply issue an endorsement. In the foregoing example, you cannot affect a transfer of the registration certificate of the car unless the buyer gets a new policy, or gets an endorsement from the insurer, which is to be submitted to the LTO. This is because of the rule that failure to do so will result in the suspension of the policy. Is the counter-signature of the insured necessary where a rider, endorsement, or a clause, or a warranty is issued? The answer is qualified. If the same attached to the insured.

or

an

was issued simultaneously with the policy (normally it is policy), there is no need for the counter-signature of the

But if the same is issued after the issuance of the policy, the answer is qualified again: 1.

If it was the insured who requested for the issuance of the rider, endorsement, or clause or warranty, his counter-signature is not necessary; but 2. If it was issued after the effectivity of the policy and it was not asked for by the insured, his counter -signature is necessary as evidence of his assent to the rider, endorsement, clause warranty.

WHAT IS A RIDER? It is a printed or typed stipulation contained on a slip of paper attached to the policy and forming an integral part of the policy. Riders are usually

- 28 -

or

- 29 -

29


attached to the policy between the parties.

because

they

constitute

additional

stipulations

When there is inconsistency between a rider and the printed stipulation in the policy, the rider prevails as being more deliberate expression of agreement of the contracting parties.

the

WHY IS THERE A NECESSITY FOR RIDERS? It is often becomes necessary to add a new term to the policy or to modify or waive an existing term. Riders save the parties from the trouble of making an entirely new contract. WHAT MUST A POLICY OF INSURANCE CONTAIN? 1. 2. 3. 4. 5. 6. 7. 8.

The name of the parties. Amount of the insurance. Rate of premium. Property or life insured. Interest of the insured on the proper ty if he is not the owner thereof; Risks insured against. Duration of the insurance. Terms of the policy.

May a third person, one who is not a party to the contract sue the insurer directly. The rule is found under Art. 1311, NCC, on the relativity contracts. The exception to the rule is where a contract contains a stipulation in favor of a third person, known as stipulation pour atrui. One who is not a party to a neither can he demand performance contract of insurance.

contract thereof.

shall not be bound by a The same rule applies to

of

contract, a

WHAT IS A COVER NOTE? It is a written memorandum of the most important terms of a preliminary contract intended to give temporary protection pending the investigation of the risk by the insurer or until the issue of a formal policy provided that it is later determined that the applicant was insurable at the time it was given. PURPOSE: to give temporary protection. For how long it will be valid? 60 days May it be extended? How? It may be extended or renewed with the written approval of the Insurance Commissioner if he determines that such extension is not contrary to and is not for the purpose of violating any provision of the Code or the approval of the Insurance Commissioner may be dispensed with upon the certification of the president, vice -president, or general manager of the insurance company concerned that the risk involved, the values of such risks and or the premiums therefore has not yet been determined or established or such extension or renewal is not contrary to and is not for the purpose of violating any provisions of the Insurance Code, or of any

- 29 -

- 30 -

30


rulings, instructions, or circulars of the Insurance Commissioner. (Ins. Memo. Cir. No. 3-75, dated September 29, 1975, effective Oct. 21, 1976) Is it necessary that it be supported by a separate Pacific Timber case. It is only a collateral agreement.

premium?

No.

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

See

proper

As a rule, a third party cannot sue the insurer directly. When can a third person sue the insurer directly? Where the policy provides for indemnity against liability. An insurance against liability is considered a contract with a stipulation in favor of a third party. An example of this type of policy is what we have under Chapter VI, the Compulsory Motor Vehicle Liability Insurance. Under this type of coverage, a third party may sue the insurer directly. The very purpose of the law is to provide immediate financial assistance to victims of vehicular accidents, regardless of the financial capability of the insured (Malayan Insurance; Pan Malayan Insurance). When the insurance policy insures against liability, then a third party may sue the insurer directly. There is no need to wait for the court to convict the insured or render a judgment against the insured. The victim or claimant third party can proceed directly against the insurer. But while a third party may sue the insurer directly under coverage, the liability of the insurer and the insured is NOT solidary.

a

liability

A third party claimant covered by a liability type of policy sues on the insurance policy; judgment is rendered against both the insured and the insurer. Can the plaintiff recover the entire amount adjudged by the court against the insurer without proceeding against the insured? No, said the case of Malayan Insurance and Pan Malayan Insurance. Because the obligations of the insurer and the insured are not solidary. Q: Why are they not solidary? A: Because 1. 2.

The liability of the insurer is based on contract. The contract of insurance, whereas the liability of the insured is based on torts. The liability of the insurer is limited to the face value of the policy. Hence, to hold the insurer as solidary liable with the insured is to admit a possibility where the insurer may be held liable on an amount that is more than the amount of the coverage.

HOW IS LOSS UNDERSTOOD IN INSURANCE? It includes any partial loss, injury or damage which may be the insured, it does not follow the definition of loss in the Civil Code.

suffered

- 30 -

by

- 31 -

31


MAY A CONTRACT OF INSURANCE BE ENTERED INTO BY AN AGENT? Yes. See Sec. 54 - it will inure to the benefit of the principal. REQUISITES before the contract shall be deemed a contract for the principal: 1. 2. 3. 4.

Agent must be duly authorized; Must act within the scope of his authority; Must disclose his principal; and Indicate by appropriate words that he is capacity.

»

Correlate Sec. 20 with Sec. 57 and 58.

acting

in

a

representative

WHAT ARE THE DIFFERENT TYPES OF POLICIES? OPEN POLICY As to how much the insured can recover under an open policy depends upon: 1. 2.

The value of the property after the concurrence of the loss; and The face value of the policy.

In no case can the insurer be held liable for more - but his liability may be less than the face value of the property insured. VALUED POLICY In a valued policy, the parties agree prior to the issuance of the policy on a definite valuation of the property insured. The policy on its expresses the value thereof. So if the parties agree at the time that the policy is insured contract is worth P3M. This amount now represents the value of the property.

face

that

the

RUNNING POLICY A running policy contemplates successive insurance. issued where there is a constant change either in the:

Normally,

this

is

1. Location of the property insured, or 2. Valuation thereof. Like in the case of stocks in trade. You own a department store, and you insured your stocks. Considering the nature of the business - you sell and replenish constantly - there is a constant change thereof. So you cannot fix the amount even just for a day. Can you imagine the inconvenience if every time there is a change in the valuation of the stocks, you cancel the policy and ask for a new one? You probably cancel your policy every thirty minutes. So to avoid the inconvenience, a running policy may be issued. The subject of the insurance may be determined from time to time through the use additional statements or endorsements without canceling your policy.

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of

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32


PRESCRIPTION OF ACTION What is the period of prescription of an action based on a contract insurance? Within what time should an action based on a contract of insurance be brought? In the absence of any stipulation in the policy, you apply the provisions of the Civil Code. This being an action based on a written contract, prescribes in ten years. So, the contract of insurance being therefrom prescribes in ten (10) years, the policy.

a contract, an in the absence

of

it

action arising of a stipulation

in

May the parties agree on a period less than ten years? YES. Under Sec. 63, provided it is not less than one (1) year from the time the cause of action accrues. Sec. 63. A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void. One year Less than one year

- valid - invalid

If there is a stipulation in the contract providing for the period within which an action based on the contract may be brought, the same is valid, provided it is not less than one (1) year from the time the cause of action accrues. It is reckoned or computed not from the date of the accident, but from the time the cause of action accrues. When does the cause of action accrue? From the receipt by the insured of the notice of denial of the claim. So if the insurer does not act on the claim, he neither approves or denies it, the cause of action will never accrue. And the one year period will not begin to run. There was an actual case that we handled. There was a vehicular accident. The insured filed a claim with the insurer. The insurer did not act on the claim for a period of five yea rs. There was no approval nor denial. So the insured filed a case in court against the insurer. The lawyer of the insurance company filed a motion to dismiss on the ground of prescription. He was very confident because in that particular case, there was a stipulation in the policy providing for a period of one year. The stipulation provided that the one year period would run from the time the cause of action accrues. The one-year period in the foregoing exam ple starts to run, not from the date of the accident, but from the time the cause of action accrues. And the cause of action does not accrue if the insurer does not act on the claim. The cause of action accrues only from the receipt by the insured of the denial of his claim by the insurer. From the time of such receipt, the prescription starts to run. If the stipulation states that the insured can bring an action against the insurer within a period of one year from the date of the accident, - 32 -

this

- 33 -

33


amounts to saying that the period of prescription as agreed upon is less than one year. Because under the law, the cause of action accrues from the receipt of the denial of the claim, not from the date of the accident. Hence, under Sec. 63, this stipulation on prescription is void. And since it is void, it is as if there is no stipulation at all. If there is no stipulation, the provision of the Civil prescription should be adopted. Said provision states that an action based on a written contract prescribes in ten years. (Art. 1144, NCC)

Code

on

Under the Compulsory Motor Vehicle Liability Insurance, as amended by BP 384, a notice must be sent to the insurer, within six months from the date of the accident; otherwise, it would constitute a waiver on the part of the claimant. The action must be brought within one-year from the denial of the claim. Let's say you are the claimant victim under this type of coverage. You have to give a notice to the insurer within six months from the date of the accident. If the insurance company does not pay, you have one year from the denial of the claim within which to file your claim either with the regular courts or with the Insurance Commission. Otherwise, the action shall prescribe (correlate Sec. 63 of the Code and BP 384, on prescription of action).

CASE: SUN INSURANCE OFFICE LIMITED VS. COURT OF APPEALS, 195 SCRA 193 FACTS: The policy provides for a period of one year prescription. One year from the time the cause of action accrues. The insured, after the occurrence of the loss, filed a notice of his claim to the insurer. The insurance company denied the claim. Upon denial of the claims, the insured filed a request for reconsideration with the insurer, this too was denied. There was a loss, notice of loss, claim, denial of claim, request for reconsideration, denial of request for reconsideration. When the case was filed, it was already beyond the one year period from the denial of the claim, because it took sometime before the insurer could act on the request for reconsideration. ISSUE: Has the action prescribed? When did the prescriptive period start to run, from the first denial of the claim or from the denial of the request for reconsideration? HELD: Prescription started to run from the first denial of the claim, not from the denial of the request for reconsideration. The action, therefore, has prescribed. Otherwise, the claimant can delay the filing of an action which may be prejudicial to the insurer. Why prejudicial? Because if the filing of the action is delayed, witnesses may no longer be available, documentary evidence may no longer be available.

While it is true that insurance is a contract of adhesion, hence should be interpreted strictly against the insurer and liberally in favor of the insured, this principle is applicable only where there is ambiguity in terms or stipulations thereof. - 33 -

the

- 34 -


34


When the terms or stipulations are clear, there is no room interpretation. The only recourse is to enforce the contract. Courts are not meant to make contracts for the parties.

Q:

for

May a policy of insurance be cancelled after the issuance?

A: YES. But the insurance company cannot just arbitrarily cancel an insurance policy. The insurance company must follow the procedure laid down under law.

the

The law requires the following: (Proceedings for cancellation) 1. 2.

There must be a written notice of cancellation to the insured accordance with Sec. 65; and The notice must state any of the grounds for cancellation mentioned under Sec. 64: i. ii. iii. iv. v. vi.

in

non-payment of premiums; conviction of a crime arising out of acts increasing the hazards insured against; discovery of fraud or material misrepresentation; discovery of willful or reckless acts or omissions increasing the hazards insured against; physical changes in the property insured which result in the property becoming uninsurable; determination by the Insurance Commissioner that the continuation of the policy would violate or would place the insurer in violation of the Code.

PURPOSE OF SEC. 65: to afford the insured continued protection. WHAT IF THERE IS NO NOTICE, THE INSURED WENT TO THE INSURER, THE INSURED WAS WILLING TO PAY THE PREMIUMS, THE INSURER REFUSES TO RENEW. ON THE THIRD DAY, A LOSS OCCURRED, IS THE INSURER LIABLE? Yes. Cancellation must conform with the requirements of the law. WHAT IS THE REMEDY OF THE INSURED IN THIS CASE? Consignation. Go to the Insurance Commissioner based on the old contract.

and

deposit

the

premium

WARRANTY What is a warranty? What is the purpose of warranty? An example in an insurance against fire is that the insured shall not store flammable materials within the premises of the insured property, otherwise the policy shall be avoided. Why does the insurer require the insured to make such a warranty? In order to eliminate potentially increasing hazards, which may either be due to the acts of the insured or to the change in the condition of the property. Definitely, the storage of such material will increase the risk, the hazards, because there are fire hazards.

- 34 -

- 35 -

35


Let's say in anticipation of Christmas and New Year, you store explosives in your house. Your house is insured against fire, and there is a warranty in the policy to the effect that you will not store flammable materials the premises of the insured property.

within

Christmas passed, New Year passed, you consumed all the explosives in your house but nothing happened to your house. Three days after, when there no longer any explosives therein, your house burns. Cause: faulty electrical wiring.

were

Can the insurer deny the claim? Yes. When there is a breach of warranty, there need not be a causal connection between the breach and the cause of the loss. It is of no moment whether the breach was the cause of the loss or not. With or without connection between the breach and the cause of the loss, the insurer can rescind the contract on the ground of breach of warranty. But if there is no warranty to that effect, the insurer will remain liable. PURPOSE: To control the risk assumed by the insurer. WHERE SHOULD AN EXPRESS POLICY BE STATED? WHAT IF IT WAS WRITTEN ON SEPARATE PIECE OF PAPER? It must be contained in the policy or clearly incorporated therein as part thereof.

A

SUPPOSE THAT THERE IS A BREACH OF WARRANTY BUT IT DID NOT CONTRIBUTE TO THE LOSS, IS THE INSURER LIABLE? No. The insurer will be exonerated? WHAT ARE THE DIFFERENT KINDS OF WARRANTY? 1.

2.

3. 4.

EXPRESS WARRANTY - it is an agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured stipulates that certain facts relating to the risk are or shall be true or certain facts relating to the same subjects have been or shall be done. IMPLIED WARRANTY - is a warranty which from the very nature of the contract or from the general tenor of the words, although no express warranty is mentioned, is necessarily embodied in the policy as part thereof and which binds the insured as though expressed in warranty. AFFIRMATIVE WARRANTY - one which asserts the existence of a fact or condition at the time it is made. PROMISSORY WARRANTY - one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted.

WHAT ARE THE INSTANCES WHEN THERE IS BREACH OF WARRANTY BUT THE POLICY IS NOT AVOIDED? 1. 2. 3.

When the loss occurs before the time warranty. When the performance becomes unlawful. When the performance becomes impossible.

for

the

performance

of

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the

- 36 -

36


Sec. 74. The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind. Sec. 75. A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy. Under Sec. 74, breach of material warranty or of a material provision of a policy will entitle the other party to rescind the contract. Q: How about a avoid the policy? A:

violation

of

an

immaterial

provision

of

the

policy?

Will

it

RULE: violation of an immaterial provision will not avoid the policy.

EXCEPTION: when the policy as provided for under Sec. provides or declares that a violation thereof will avoid it.

75

expressly

For example, on co-insurance. The policy provides that other insurance allowed, to be declared when required or on the occurrence of a loss. The stipulation provides further, otherwise, this policy shall be avoided. You have here a provision which actually is not material, but a violation thereof will avoid the policy because the policy expressly declares that violation thereof will avoid it. In the absence of such express stipulation, however, violation thereof will not avoid the policy (Sec. 75).

a

IS FRAUD NECESSARY IN THE BREACH OF WARRANTY? No. See Sec. 76. 1.

Without any fraud, the policy is avoided only from the time of the breach and the insured is entitled to: to return of premium paid at a pro rata rate from the time of i. breach (see Sec. 79[b]) if it occurs after the inception of the contract; or ii. to all the premiums if it is broken during the inception of the contract.

2.

With fraud, the policy is avoided ab initio.

PREMIUM PAYMENTS Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. Sec. 78. receipt of the policy be binding

An acknowledgment in a policy or contract of insurance or the premium is conclusive evidence of its payment, so far as to make binding, notwithstanding any stipulation therein that it shall not until the premium is actually paid.

- 36 -

- 37 -

37


Under Sec. 77, the RULE is on a cash and carry basis. No premium payment, no policy. The law says he can demand for a return of the entire premium if the thing insured was never exposed to the peril insured against. Why? Because there is no assumption of risk. Let's say you insured certain cargoes for transport to Japan. They are to be loaded on a vessel. You buy marine insurance thereon and pay the premium. But for one reason or another, you failed to load the cargo on the designated vessel. The vessel left without your cargo. In this case you can ask for the return of the entire premium because the thing insured (cargoes) was exposed to any navigational peril insured against; there was no assumption of risk on the part of the insurer.

never

REASONS: When the parties enter into a credit agreement, such an agreement is valid because it is not contrary to law, morals, good customs, public order public policy (Art. 1306, NCC).

and

Besides what Sec. 77 prohibits is not the payment of the premium on installment but the stipulation that will make the policy valid and binding despite the non-payment of the premium. It does not prohibit the parties from entering into a credit agreement. So if the parties agree on the payment of the premium on installment, that agreement is valid and binding. On the other hand, under Sec. 78, when there is an acknowledgment of the receipt of the premium by the insurer, such acknowledgment is considered conclusive evidence of the payment of the premium, notwithstanding any stipulation that it shall not be binding until the premium is actually paid. In other words, if the insurer acknowledges in the policy the receipt of the premium although in fact such premium has not been paid, acknowledgement made by the insurer will serves as conclusive evidence of its payment. The insurer will not even be allowed to introduce evidence to contrary because the law says conclusive evidence.

such the

For example, a person insures his house against fire for one year. Premium for that year was paid but nothing happened. With the intention to renew the policy for another year, a renewal certificate was issued to him worded thus: "in consideration of the premium of P3,000.00 having been paid, this policy is renewed for another year subject to the same terms and conditions." It was signed by the insurer and delivered to the insured. But the insured never paid the premium for the second year. This time the house was burned. The insured filed a claim but the insurer denied such claim invoking Sec. 77: No premium payment, No policy. The Court held acknowledgment of the of its payment.

that the receipt of

applicable provision is Sec. 78, the the premium payment is conclusive evidence

Where, however, the question is with respect to the actual payment of the premium, not the validity or the binding effect of the contract, the conclusive presumption does not apply.

- 37 -

- 38 -

38


In the same example, if the insurer admits the liability but demands for payment of the premium, the insured cannot invoke Sec. 78 to evade payment and say that the acknowledgement receipt is conclusive evidence he need not pay the premium, Sec. 78 is no longer applicable because this is now an action which involves the payment of the premium, not the validity or the binding effect of the contract. This is now an action brought by the insurer against the insured for the collection of the premium. In which case, the conclusive presumption will not apply.

RETURN OF PREMIUM What is the basis of the right of the insurer to collect premiums? Or if the premiums have been paid, what is the basis of the right of the insurer to retain the premiums paid? The assumption of risk. If the insurer does not assume any risk, he is not entitled to premiums. If the premiums have been paid, he has no right to retain the same. The premiums must be returned to the insured.

collect

For example, there is 100% certainty that there will be no loss, no damage, hence there is no risk. Why pay the premium? The assumption of the the insurer is the basis of the right to collect premiums.

risk

Q: Is the insurer liable if the cause of the loss or damage is a fortuitous event? A: Yes, peril.

provided

that

the

cause

of

the

loss

or

damage

is

not

an

excepted

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which, could not be foreseen, or which, though foreseen, were inevitable. Is the foregoing provision general rule insurance? Can the insurer escape liability fortuitous event?

applicable to the contract by invoking said provision

of on

No. A contract of insurance falls under exception no. 3 because the very nature of the insurer's obligation requires the assumption of risk. Therefore, even if the cause of the loss or damage was fortuitous event, as long as it is not an excepted peril, the insurer shall be liable. It cannot invoke as a defense, caso fortuito. Necessarily, the insurer in a contract of insurance assumes the risk.

When is the insured entitled to return of premiums? When can he ask for a refund, totally or partially? He can demand for the return of the entire premium if the thing insured was never exposed to the peril insured against. Why? Because there is no assumption of risk. - 38 -

by

- 39 -

39


When can the insured ask for a partial return of premium? Here, we have to indivisible contract.

distinguish

between

a

divisible

contract

and

an

Let's say you insured your car for 12 months. You paid your premiums of P1,200 per month. After six months of effectivity, no loss. You decide to surrender the policy, have it cancelled, probably because you already sold the car. In this case, you can ask for a return of premium for the unexpired period of six months. In the absence of any short-period rate, the basis of the computation is pro rata. Likewise, partial return of premium insurance resulting from double insurance.

is

applicable

to

cases

of

over

In over insurance, the total amount of the coverage exceeds the value of the property. There can be double insurance without over insurance, and over insurance without double insurance.

OVER INSURANCE WITHOUT DOUBLE INSURANCE You P15M.

have

a

building

worth

P10M

and

you

insured

it

with

one

company

for

DOUBLE INSURANCE WITHOUT OVER INSURANCE You have a building worth P10M and you insured it with five companies for P2M each for a total of P10M.

Where, however, there is double insurance resulting in over insurance, the premiums paid corresponding to the excess will be refunded. Insofar as the excess is concerned, there is no assumption of risk on the part of the insurer. In case of total loss, the insured cannot recover more than the value of the property, because insurance is a contract of indemnity, not for profit. It is not intended to enrich the insured. Otherwise, it becomes a wagering contract. What's wrong with a wagering contract? If this is allowed, the insured would be tempted to bring about the loss or destruction of the thing insured. In property insurance, the result is arson. EXAMPLE: You have a building worth P10M and you insured it with five companies for P3M each, for a total of P15M. In case of loss, even a total loss, the insured cannot recover more than P10M, which is the value of the property. The premium corresponding to the excess of P5M must be refunded to the insured, because insofar as such excess is concerned, the insurer never assumed any risk.

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- 40 -

40


MAY PREMIUMS BE PAID IN INSTALLEMNTS? WILL THE PARTIAL PAYMENT OF THE PREMIUMS MAKE THE POLICY VALID AND BINDING? Yes. A stipulation, which provides for the payment of the premium in installments is valid, the same not being contrary to law, morals, good customs, public order or public policy. Sec. 77 merely precludes the parties from stipulating that the policy is valid and even if the premiums are not paid. It does not prohibit the parties from entering into a credit agreement. (Makati Tuscany Condominiums vs. Court of Appeals) There are only two statutory payment of the premiums, namely: 1. 2.

exceptions

to

the

requirement

of

the

pre -

In case of life or industrial life insurance, when a grace period applies; or When an insurer makes a written acknowledgment of the receipt of the premiums, such acknowledgement being declared by law to be conclusive evidence of the premium payment (South Sea Surety vs. Court of Appeals ).

In Spouses Tibay vs. Court of Appeals, the Supreme Court held that a fire insurance policy shall not be valid and binding upon mere partial payment of the premium. Sec. 77 contemplates full payment. Justice Vitug the arguments:

made

a

dissenting

opinion

in

this

case,

the

following

are

1.

The payment of the premiums, subject to the stated exceptions (Sec. 77 regarding life insurance and Sec. 78) is deemed, by the foregoing provision, to be an element essential to establish juridical relation between the insurer and the insured. Observe, however, that the law never requires, nor measures the strength of the vindiculum juris by any specific amount of premium payment. It should be enough that payment on the premium, partly or in full, is made by the insured, which the insurer accepts. In fine, it is either that a juridical tie exists (by such payment) or that it is not existent at all (by such payment). Once the juridical relation comes into being, the full efficacy, not mere pro tanto, of the insurance naturally follows. Verily, not only is there an insurance contract, but also a partially performed contract. In case of loss, recovery on the basis of the full contract value, less the unpaid premium accordingly be had. Conversely, if no loss occurs, the insurer can demand the unpaid balance of the premium. The insured, on the one hand, cannot avoid the obligation of paying the premium while the insurer cann ot treat the contract as valid only for the purpose of collecting premiums and as invalid for the purpose of indemnity.

2.

Non-payment of the balance due cannot result in an automatic cancellation of the insurance contract, otherwise, the effect would be to place exclusively in the hands of one of the contracting parties to decide whether the contract should stand or not in possible disregard of the mutuality of contracts rule. Instead the parties should be able to demand from each other the performance of whatever obligations they had assumed or, if desired, sue timely for the rescission of the contract. In the meanwhile, the contract endures and an occurrence of the risk insured against triggers the insurer's liability. Forthwith, legal compensation under the Civil Code can be applied. The net result - 40 -

- 41 -

41


would be that the insurer's liability to the insured reduced by the balance of the premium, the insurer's therefore having already attached.

would simply liability

be

3.

To say that the provisions in the policy issued by Fortune, "That the insurance shall not be in force until the premium had been fully paid and that it shall be deemed effective, valid and binding upon the company only when the premiums therefore have been actually paid in full and duly acknowledge" override the efficaciousness of the insurance contract despite the payment and acceptance of a part of the premium would be opposed not only to the precepts heretofore adverted to on the correct application of Sec. 77 but also the intent and spirit of Sec. 78.

4.

On the day premium payment is made but the insured, albeit only a portion of it, so long as accepted by the insurer, the insurance coverage becomes effective and binding, notwithstanding any stipulation to the contrary. The insurer is not without any recourse; all that it needs is not to accept if it wants to, any premium payment of less than full.

NOTE: In this case, the insured had made partial payment of the premium payment on insured against took place.

and the

the insurer had accepted a policy weeks before the risk

»

It has also been held that when an insurer authorizes an insurance broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium i n its behalf.

»

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

REASON:It is presumed that the insurer has waived the condition payment. The conclusive presumption applies only to the question binding effect of the policy.

of of

prethe

WHAT IS THE BASIS OF THE INSURER'S RIGHT TO COLLECT PREMIUMS? The assumption of risk. WHEN IS THE INSURED ENTITLED TO A RETURN OF THE PREMIUM? 1. 2. 3. 4. 5. 6. 7.

When no part of the thing insured has been exposed to any peril insured against. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof. Where the contract is voidable because of fraud or misrepresentation on the part of the insured or his agent. When the contract is voidable because of the existence of facts which the insured was ignorant without his fault. When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud. When there is over insurance. When rescission is granted because of the insurer's breach of contract.

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of

- 42 -

42


SEC. 79 DOES NOT APPLY WHEN: 1. 2. 3.

The insurance is not for a definite period. A short period rate has been agreed upon. The policy is a life policy.

IN INSURANCE, WHAT MAY BE TRANSFERRED OR ASSIGNED? 1. 2.

3.

The thing insured - see effects on Sec. 20 The policy itself. » Property insurance, being a personal contract, may not be transferred without the consent of the insurer. » A life insurance, unless otherwise provided in the policy, may always be transferred. The claim itself - see Sec. 83

Even if there is a stipulation in the policy against the transfer of claim, such stipulation is void. The insured may still transfer his claim after the claim has been fixed by agreement. REASON: Just like any other money claim, it can be assigned. unduly restrict the right of an owner to trans fer his property.

It

would

WHEN IS THERE A LOSS? IS A PARTIAL LOSS POSSIBLE? Art. 1189 (2) Since the car was only partially damaged, the situation does not fall under any of the foregoing enumerations. Therefore, there is no loss. The loss payable clause does not apply. In a case, the Supreme Court rejected the foregoing argument. In insurance, "loss" is not to be interpreted in the context of the foregoing Civil provision. When we speak of "loss" in insurance, we refer not only to total losses but also to partial losses. What is the effect of a stipulation in a contract of insurance, prohibits the insured form transferring his claim against the insurer the occurrence of a loss, and the agreement is made before the loss under Sec. 83? Sec. 83. An agreement not to transfer the claim of the insured against the insurer after the loss has happened, is void if made before the except as otherwise provided in the case of life insurance.

Code

which after

loss

Let's say a motor car insurance policy, the car was damaged, and the loss was fixed at P30,000 by agreement of the parties - the insured and the insurer. Before the payment of the loss, the insured A assigned his claim to B. There is an agreement in the policy, which prohibits A from transferring his claim. What should be the effect of such an agreement? It is void. agreement, A can assign his claim to B even without the consent insurer.

Despite of the

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the

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43


REASON: A money claim is property. To prohibit A from transferring assigning his claim would result in undue rest riction of one of the rights of an owner, an attribute of ownership under the Law on Property. disponendi, the right to dispose. The transmission of rights over property.

or Jus

A common cause of misunderstanding between policy holder s and the insurance companies is that when there is a loss the insurance company denies the claim invoking that it is not caused by the peril insured against.

Recall July 16, 1990 killer quake. The question raised by the owners of building which were damaged by the earthquake was whether or not they could recover on their policies. As a rule, in order that the insurer can be held liable, the peril insured against must be the proximate cause of the loss (if the peril insured against is only a remote cause, the insurer is not liable. PROXIMATE CAUSE is an event which sets all other events in motion without any intervening or independent cause without which the injury or loss not have occurred. It need not be the nearest in point of time and place of the loss. For example, you have an insurance against fire. explosion causing fire, then the fire causing the loss. Proximate cause Immediate cause

First,

there

was

would

an

- explosion - fire

Is the insurer liable? Depends on whether or not the explosion excepted or excluded peril under Sec. 86, the insurer shall not be liable.

is

an

Sec. 86. Where a peril is especially excepted in a contract of insurance, loss, which would not have occurred but for such peril, is thereby although the immediate cause of the loss was a peril which was not excepted.

a excepted

You have an insurance against fire. First there was a volcanic eruption causing an earthquake; earthquake causing an explosion; explosion causing fire; fire causing the loss. Proximate cause Immediate cause

- volcanic eruption - fire

Is the insurer liable? Depends on whether the proximate cause is an excepted peril or not. The rule is, the peril insured against must be the proximate cause. It if it only the remote cause of the loss, the insurer shall not be liable. EXAMPLE: You own building A and B and you insured them against fire. Between them is a firewall. Fire started in building A and because of the intense heat, it weakened the firewall, which subsequently fell and destroyed building B. Can you recover on building B?

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44


Yes. The proximate cause is fire, the immediate cause is the falling the wall. Although building B was not damaged by fire, the proximate cause of such damage was fire, the very peril insured against.

of

EXAMPLE: Fire started in building A, the wall did not fall. Several months later, a strong typhoon came because of which the wall fell. Is the insurer liable? No. Fire in this situation is only a remote cause of the loss. Neither is it the proximate cause nor the immediate cause.

In no case the insured covered by a personal accident policy, participated in a boxing competition. He was hit by his opponent, he fell his head hit the floor and died. The insurer denied the claim because according to the insurer the cause of death was not the accident and besides the cause of death not covered by the policy. The Supreme Court said that the cause of the death Accident means something which is unforeseen. It happens or intervention by the human will, unexpected.

was an without

was

accident. any design

There was this executive in a company. He had a gun. He unloaded impress his secretary he pointed a gun to his temple and pulled the trigger. An explosion followed and he fell dead.

it.

To

The insurance company, denied the claim saying the cause of death was not accidental. The insured deliberately pointed the gun to his temple and deliberately pulled the trigger. The Supreme Court said it was accid ental, not intentional. The explosion was unforeseen, unexpected. The cause of death being an accident, the insurer was held liable. In Torts and Damages, the accused can be held liable only if his negligence was the proximate cause of the loss, death or injury. Of course if there was contributory negligence on the part of the plaintiff, the same will mitigate the liability of the accused.

Here is a boy playing with a ball. The ball rolled out into the The boy ran after the ball. Unfortunately, there was a speeding vehicle which hit the boy and the boy died.

street.

What was the proximate cause of death? Was it the manufacturer of the ball without which there would not have been any ball? Was it the store which sold the ball? Was it the father who bought the ball? Was is the boy who playing with the ball? Or was it the negligence of the driver? The Supreme Court held that the cause of the death of the boy negligence of the driver of the car that hit the boy. The negligence of the driver was the proximate cause of the loss.

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was

was

the

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45


Sec. 85. An insurer is liable where the thing insured is rescued from a peril insured against that would otherwise have caused a loss, if, in the course of such rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part; or where a loss is caused by efforts to rescue the thing insured from a peril insured against. Building A and B are adjacent to each other separated only by a wire fence. Under the Law on Property, a distance of 2 meters must be maintained from the boundary line (Easement of light and view). Building A with all the personal effects therein (appliances, furniture, clothes) is insured against fire. Fire started on building B. Residents of building A brought out their belongings in order to say them from the impending fire. But as soon as the belongings are brought out into the street, they are taken away by looters. The personal effects were being rescued from a peril insured against (fire) but in the process they were exposed to a peril not insured against (theft). Fortunately the firemen arrived on time and put the fire under control. No part of the insured building was damaged by fire but the personal belonging that were taken out into the street were stolen. They were being rescued from the peril insured against, but along the way it was exposed to a peril not insured against (theft). Is the insurer liable in so far as the personal effects are concerned? If you would interpret Sec. 85, the answer is NO because the law says "xx that would otherwise have caused a loss xxx." The insured in order to recover would have to prove that he had not removed his things from the house they would have been burnt. But could he prove it when he removed his personal effects therefrom before they would get burned? The insurer would say "kung hindi ninyo inalis yan, hindi sana nasunog" But do we have to wait until the house is on fire? If the policy contains a condition which requires the insured to take the necessary steps to prevent or minimize further losses (normally it does), said condition would be in conflict with Sec. 85 above. There would be a situation where the insured would be placed in a no -win situation. In such a case, the insurer will be liable for damage or loss personal effects which while being rescued from peril insured against (fire) got exposed to a peril not insured against (theft).

of

the

To illustrate this condition. For example, one has a car insured under the Comprehensive Insurance Policy. You were involved in an accident in an uninhabited place. Under the foregoing condition you were not supposed to leave the car there. There is a provision in the policy, that you must see to it that the car is towed to a safe place. That's why the insurance company pays a certain amount as towing fee. Because if you leave the car there and just came back later you will find only the shell of the car because everything else would have been stolen by them. Because of the foregoing conflict some people especially when they fully covered just lock their houses when exposed to fire, instead of trying to rescue their personal effects therein so that they can recover. Otherwise,

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are

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46


their claims might be rejected because ninyo inalis yan, hindi sana nasunog."

the

insurer

might

say

"kung

hindi

Likewise, the insurer is liable if the loss is caused by efforts to save the things from the peril insured against. In the foregoing example, when someone tries to lift the refrigerator in order to save it from fire (peril insured against) but it turns out to be too heavy for him and drops it and the refrigerator gets damaged the insurer shall be liable. Q: Suppose the peril insured against was only the immediate cause under Sec. 86, is the insurer liable? First, there was an explosion then there was fire and the fire caused the loss. Proximate cause Immediate cause

- Explosion - Fire

A: If the proximate cause was the explosion is an exempted peril, the insurer shall not be liable under Sec. 86 otherwise insurer is liable.

Q: Suppose the insurer liable? A:

loss

was

caused

by

the

negligence

of

the

insured.

Is

the

Mere negligence on the part of the insured will not exonerate the insurer.

Some people have the impression that if the cause of the loss was the negligence of the insurer, not be liable. This is not correct.

insurer can prove that then the insurer shall

the

If mere negligence on the part of the insured will exonerate the insurer, the in no case will an insurer be liable under a liability type of coverage under Chapter 6. Under this type of coverage, the insurer is liable only when the insurer is negligent (culpa aquiliana - Art. 365, RPC)

Suppose you are driving recklessly and you got involved in an accident. It was your fault. Can the insurer deny your claim on the ground that been negligent? No. Unless it was a willful connivance of the insured (Sec. 87)

act

In an insurance against fire, you insurer will not be liable under Sec. 87.

on

the

set

part

your

of

house

the

on

insured

fire

you

or

with

(arson).

Or you ask someone else to do it for you and you connive with him. Again the insurer will not be liable. But if the cause of the loss was negligence, such negligence will not exonerate the insurer.

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The

simple

had

the

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47


Friendly Fire/Hostile Fire A fire is friendly when it is found in a place where it is intended to be. Ex. Stove, for domestic or industrial purpose. Should there be any loss or damage occasioned by the smoke coming out of the stove, the insurer will not be liable therefore. The fire becomes hostile when it spreads from where it is intended to burn or to be. In which case, the insurer shall be liable.

CONDITIONS Conditions are the devices used by the parties in controlling risk or loss. It may be classified into conditions precedent and conditions subsequent. Conditions policy.

precedent

Conditions policy.

subsequent

-

must

-

must

be

be

fulfilled

before

the

effectivity

of

the

after

the

effectivity

of

the

fulfilled

EXAMPLE: 1. Giving notice of loss without unreasonable delay (Sec. 88) so that a. the insured can take steps or actions to minimize further and b. to be able to determine the extent of the liability to prevent the filing of fraudulent claims. »

Failure to insurer.

do

so

especially

in

fire

insurance

will

losses;

exonerate

2. Submission of proof of loss that will enable the insurer to determine: a. WON there was really a loss b. WON the property insured was the one involved in the accident c. Amount of damages

In a vehicular accident, proof of loss are: a. Police report; b. Affidavit of witnesses; c. Pictures of the damaged car; d. Estimate of invoice; In case of death: a. Death certificate. In case of injuries: a. Medical certificate; b. Receipts, etc. Such proof would enable the insurer to estimate the extent of the loss so it could determine how much it would be liable.

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the

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48


The law does not require a particular form unless the policy provide for a particular form to be submitted. There are other conditions which the comply with before there can be recovery.

policy

Q: What is the difference between the effects conditions precedent and of conditions subsequent?

may

of

require

the

the

insured

non-performance

to

of

A: Non-performance of conditions subsequent will NOT avoid the policy but will result in the forfeiture of the rights of the insured against the insurer while non-performance of conditions precedent will AVOID the policy.

DOUBLE INSURANCE You have a building worth P10M. You insured it with 5 companies worth P20M. Hence, you have double insurance resulting in over insurance. Q:

Should there be a loss, from whom and how much can the insured recover?

A:

Sec. 94. Where the insured is over insured by double insurance: (a) The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; (b) Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured; (c) Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy; (d) Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable val ue in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; (e) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract.

EXAMPLES: SITUATION (a) This means that the insured can recover from the insurers in any order he wants provided that the insurers liability shall not exceed the value of the policy in the case of a valued policy.

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face

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49


Suppose there are 5 insurers, the insurer can recover the whole P10M from insurer 1 or from insurer 1, P3M, from insurer 2, P2M and from insurer 3, P5M. While it is true that under Sec. 94 (e) the insurers are proportionately liable, this is only true as among them. Insofar as the insured is concerned, he can hold any of the insurers liable up to the amount for which they are severally liable under their respective contracts.

SITUATION (b) and (c) There are 4 insurers and the total loss is P10M. Let's say he recovers from insurer 1, P2M. He has to deduct that from the amount of the total loss. Then recover from insurer 2, P3M and insurer 3, P3M. Again, he has to deduct the amount from the total loss. How much can he recover from insurer 4? Only P2M. Why? Insurance is a contract of indemnity. The insured should not allowed to recover more than the value of the property otherwise it will result in unjust enrichment on the part of the insured and thus becomes a wagering contract.

be

SITUATION (d) Suppose for one reason or another, he was able to recover more than P10M say, P15M. Under the law, the excess of P5M does not belong to him and he shall hold it in trust for the insurer according to their right of contributions among themselves. He becomes a trustee similar to the principle of solutio indebiti. When there is something delivered and there is no right or obligation to demand it, the obligation to return the thing delivered arises.

SITUATION (e) The insurers among themselves are only proportionately liable. So how much is each of them liable? (Amount of policy) Total Insurance taken

x

(Loss)

Ultimately, each insurer will only shoulder a proportionate amount of the loss, although an insurer may be made to pay more than his actual contribution. But eventually those who paid less than what they are supposed to pay will have to reimburse the insurer, which may have paid more than their proportionate contribution.

REINSURANCE This is what we call, in property insurance, limit of single means an insurance company is allowed to retain only 20% of its This is retention capacity. That applies only to a single risk.

risk. This net worth.

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50


Sec. 215. No insurance company other than life, whether foreign or domestic, shall retain any risk on any one subject of insurance in an amount exceeding twenty per centum of its net worth. For purposes of this section, the term "subject of insurance" shall include all properties or risks insured by the same insurer that customarily are considered by non -life company underwriters to be subject to loss or damage from the same occurrence of any hazard insured against. Reinsurance ceded as authorized under the succeeding title shall be deducted in determining the risk retained. As to surety risk, deduction shall also be made of the amount assumed by any other company authorized to transact surety business and the value of any security mortgage, pledged, or held subject to the surety's control and for the surety's protection. This means that the occurrence of the peril insured against might result in a total loss. Insurance companies operate on the basis of the law of the averages. They have a way of limiting their exposure in a given area. For instance in fire insurance, no insurance company will insure all the houses located along the same block. Why? Should fire break out in that area, there is a probability that all the causes will get burned. And it result in what they call xxx

will

So if you apply with an insurance company, the insurer will ask: "How much is my exposure in that area?" If the insurer has reached the maximum exposure, it will no longer issue any policy. In life insurance, the insurer considers policy holders will die at the same time.

the

assumption

that

not

all

Let's say X is the insured. He owns a building worth P100M. He insures it with one insurer Y against fire. 20% of the net worth is its retention capacity. Let's assume that the retention capacity of Y is P20M. While it can insure the property for P100M, Y will have to reinsure the excess of P20M. So the original contracts between X and Y is the contract of insurance. Y will have to reinsure with A say, P10M, with B, P30M, with C, P30M P10M for a total of P80M.

and

These contracts between Y and A, B, C and D are contracts of reinsurance. In the original contract (contract of insurance), the subject matter the contract is the building in the subsequent contract (contract of reinsurance), the subject matter is the liability that Y may suffer by reason of the original contract.

of

So what happens? Let's say there was a total loss. The entire building worth P100M was damaged. Can the insured recover directly from the reinsurer? No. Because the insured is not a party to the contract of insurance.

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D,

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51


From whom can the insured recover the amount of P100M? Only from Y, the insurer. But later on, Y can recover from the reinsurers a total of P80M. The original insurer for P100M can recover from the reinsurers a total of P80M. Net loss, P20M. Without the device of reinsurance, Y will have to should er the entire amount of P100M. This is one way of preventing insurance companies from becoming bankrupt or insolvent. It is to the interest of the insuring public that insurance companies remain solvent. That is a purpose of reinsurance. Insurance is a risk distributing device. Loss of one is shouldered by many. In reinsurance, the rules on concealment and representation, how may this be done? There may be either a reinsurance treaty or a proper payment basis. If there is a reinsurance treaty between Y and A, that in itself contract signed before hand. There is an agreement under that treaty that for every risk assumed by Y, a certain percentage shall be ceded automatically. No need of making an offer. Of course, in the treaty, there is a provision on the type of risk that shall be covered.

is

a

to

So let's say there is a treaty between Y and A and this is one of risks covered by the treaty. And under the treaty, 10% of the risk assumed by Y is automatically ceded to A, then the moment Y assumes this risk, 10% P100M is automatically ceded to A by way of reinsurance.

Y

the Of

The advantage in a treaty is that there is no need to make an offer, there is no need to make an acceptance. The cession is automatic. In that case, the reinsurer under the treaty follows the fortune misfortune of the insurer. The reinsurer relies on the underwriting judgment of the insurer.

or

But if there is no treaty, the transaction is on a case by case basis. Let's say there is a treaty between Y and A, then Y has to make an offer to A just like any other contract. So Y will send a letter to A, and A may or may not accept the offer becaus e there is no treaty arrangement. If A says no, there is no contract of reinsurance.

MARINE INSURANCE Under the present Code, marine insurance is defined in Sec. 99. It consists of two parts. Part one refers to any loss or damage to any of properties enumerated thereunder. Part two, which is an example of liability insurance, refers to marine protection and indemnity insurance.

the

Under the second part, the insurer will be liable for any liability that the insured may incur arising from marine operations. i.e., Marine protection and indemnity insurance. You should be able to distinguish between perils of the sea and perils of the ship. If the cause of the loss is only peril of the ship, the insurer is not liable. Examples of this would be the usual or ordinary movements of the sea like waves, ordinary wear and tear of the vessel or negligent failure of the owner of the master to provide the vessel with the necessary equipment. If the cause of the loss is any of those enumerated above, the insurer shall - 51 -

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52


not be liable. It must be a peril of the sea and not perils of the ship. It must be something which may or may not happen and not something which happen. Just like any other type of property insurance. In marine insurance, the law requires also that the insured must have an insurable interest subject matter.

in

The owner of a vessel under Sec. 100 has an insurable interest the vessel may have been chartered by one who covenants to pay him its value in case of loss.

must

the

although

Let us say you have a vessel worth P100M and somebody charters it as agreed, among others, that should the vessel be lost, he (charterer) would pay the value thereof. (A charterer party is actually a contract of lease whereby the owner leases the whole of the vessel or part thereof, for the agent transportation of tools or passengers or both, for a fixed price). Q:

or the

Up to what extent would be the insurable interest of the owner?

A: Still P100M. But he can recover from the charterer.

recover

from

the

insurer

only

what

he

can

not

If the charterer pays the owner P80M upon the loss of the vessel, then the owner can recover from the insurer only P20M. Why? Because insurance is a contract of indemnity. He cannot be allowed to recover an amount more than the value of the property. Otherwise, it will result in undue enrichment on the part of the insured. Solutio indebiti. How about the charterer, does he have insurable interest in the Yes, under Sec. 106, the charterer has an insurable interest in the vessel to the extent that he shall be imdennified. So, considering that he agreed to pay the value of the vessel loss, then the charterer's interest would be the value of the vessel (100M).

vessel?

upon

LOANS ON BOTTOMRY, RESPONDENTIA What is a loan on bottomry differ from an ordinary loan?

or

respondentia?

How

does

a

bottomry

In the case of bottomry loan, the repayment is conditional. It is subject to the condition that the vessel, which is given as a security, shall arrive safely at the port of destination. So let's say, A is a lender in bottomry loan. The vessel, worth P100M is the collateral for the payment of the loan. The bottomry is P20M. Q:

What is the extent of the insurable interest of the owner?

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loan

its

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53


A: The difference between the value of the vessel and the amount of the loan. In the foregoing example, the insurable interest of the owner would only P80M. Why? Because should the vessel does not have to pay the lender.

be

lost

during

the

voyage,

the

be

borrower

How about the lender, does he have an insurable interest in the Yes, to the extent of the amount of the loan. Why? Because should the vessel be lost he will not be able to recover the loan from the owner.

vessel?

So, both the owner and the lender may insure the vessel. The owner, to the extent of the difference between the value of the vessel and the amount the loan, the lender, the amount of the loan, because that is the extent that he shall be damnified by the loss of the vessel.

of

Loans on bottomry are not subject to the Usury Law. Meaning, the lender on bottomry could charge interest higher than the rates allowed by the Usury Law (when this law was still in effect). One of the most essential requirements of Usury is, the loan must be absolutely payable. That is not true in the case of a bottomry loan, because in the bottomry loan, the repayment is subject to the condition that the vessel shall arrive safely at the port of destination. The same principle applies in the case of respondentia loan. The only difference is, in the case of respondentia loan, the collateral is not the vessel but the goods loaded thereon. But the payment of the loan is also subject to the condition that the cargoes will arrive safely at the port of destination. Otherwise, the borrower need not pay the loan.

Recall that mere hope or expectancy is not insurable (Sec. 14 and 16). If you buy a sweepstakes ticket, you cannot insure the chance of winning. is mere hope or expectancy, In order that hope or expectancy may be insurable, under Sec 14, it must be coupled with an interest in the thing from which the expectancy arise or there must be a valid contract for it. Thus, in the case of expected freightage, an expected profit in insurance, they are insurable although they are in the nature of a mere hope or expectancy.

shall

marine

Let's say A is the owner of certain goods worth P300T, should the arrive safely at the port of destination, he expects to sell them for P350T, or expects to realize a profit of P50T. There is no question that he insure the goods, because he has an insurable interest in the goods. That is an existing interest under Sec. 14. But he also has an insurable interest in the expected profit. He insure the profit separately although this is in the nature of a mere hope or expectancy.

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That

goods can

can

- 54 -


54


Why? Because he has an interest in profits shall be realized. Loss of the profits.

the goods from the sale of which the goods would also mean loss of the

This is also true in connection with expected freightage. In marine insurance, when we speak of freightage. This would include all benefits derivable for the enjoyment of or use of the vessel, or the transportation of goods, or passengers, or both or from the chartering of vessel. Again, this in the nature of a mere hope or expectancy. But under the law, this is insurable because under Sec. 16 it is founded on an interest upon the thing from which the expectancy shall arise. So if you are given a problem, and the problem speaks of an expectancy. The question provides that so and so insures the expectancy. You must analyze the nature of the expectancy. If it is a mere hope or expectancy, it is not insurable. To be insurable, the hope or expectancy must be coupled with an interest in the thing from which the expectancy shall arise. The rules on concealment and representation are also applicable in a contract of marine insurance. In other words, the parties to a contract marine insurance must also act in utmost good faith.

of

As a matter of fact, the application of the rule on concealment and representation in marine insurance is more strict than in other types of insurance. Why? Because of the nature of the property as well as the location thereof. Oftentimes, the subject matter of a marine policy, like there on the high sea, or in a port of, and the insurer vessel examined or inspected. Therefore, the insurer has to entirely, on the representation of the insured.

a vessel is out has not have that rely, almost

Unlike for instance, in fire insurance, normally before the insurer decides to issue a policy, he would have the property examined by his employees. Such procedure may not be possible in the case of marine insurance.

own

Take note, however, of Sec. 110. With respect to the matters mentioned under Sec. 119, would the concealment the reof entitle the insurer to rescind the contract? Normally, you will recall, because of the principle of materiality under Sec. 31, should there be concealment or representation, this is the RULE: what was the concealed or misrepresented need not have been the cause of the loss. There need not be any causal connection between what was concealed or misrepresented and the cause of the loss. A person suffering from a terminal diseases which he concealed from the insurer. He died in a vehicular accident. Under the law, the insurer can rescind the contract due to concealment on the part of the insured. Note that there was not even a causal connection between what was concealed and the cause of death. But such absence of causal connection is of no moment. The fact of concealment on the part of the insured gives the insurer the right to rescind the contract of insurance.

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55


Under Sec. 110, however, in marine insurance, should there concealment of any matters mentioned thereunder, as to whether will be liable or not will depend on the cause of the loss.

be any the insurer

If the cause is something else other than what was concealed the insurer will still be liable. In order that the insurer will be exonerated, should there be concealment of any matters mentioned under Sec. 110, that must be the cause of the loss. Under No. 1, for example, the national character or nationality of thing insured; let us say you have a vessel of Iranian registry. The insured concealed from the insurer the fact that the vessel was of Iranian registry. During the voyage, the vessel encountered a strong typhoon and it was damaged. Can the insurer ask for the rescission of the contract due to concealment?

the

No, because the cause of the loss was not the fact that it was of Iranian registry. The cause of the loss was typhoon. But in the same example, before it could reach its port of destination, it was captured and detained by the Iraqia (because there was war going between Iran and Iraq), can the insurer rescind the contract? Yes, because its capture and detention was due Iranian registry. What was concealed turned out to (capture and detention).

on

to the fact it was of the cause of the loss

The foregoing is an exception to the rule on materiality under Sec. 31

WARRANTIES Warranties in marine insurance may be: (1) expressed, or (2) implied. Implied warranties are those which are deemed to be part of the contract even if the parties did not expressly agree on such warranties. In marine insurance, the following are the implied warranties: 1. 2. 3. 4.

the vessel is sea worthy; the vessel will not make an improper deviation; the vessel will not engage in any illegal venture; if there is an express warranty, as to the nationality or neutrality of the vessel, there is an implied warranty that it will carry the requisite documents to prove its nationality or neutrality (note that this implied warranty appears only if there is an express warranty as to the nationality or neutrality of the vessel).

SEAWORTHINESS This is a relative term. In ascertaining whether a vessel is seaworthy, there are several factors to be considered. To be considered are: (1) the structural condition of the vessel; (2) the nature of the service to be

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56


performed; and (3) the nature of the voyage; and (4) the cargoes to be loaded on the vessel. In general, a vessel is seaworthy if it is fit to perform the service and to encounter the ordinary perils of the sea with respect to the voyage contemplated by the parties. But it does not apply only to the structural condition of the vessel. It must also be properly equipped; it must be provided with sufficient of crew members; and it must be provided with the necessary provisions, etc. A vessel may be seaworthy for navigating rivers but not for the purpose of navigating the high seas.

or

inter -island

numbers

voyages

Let's say a vessel may be seaworthy for navigating between Manila and Cebu. But the vessel may not be seaworthy for navigating between Manila and U.S.

A vessel may be seaworthy for carrying cargoes for a particular service or voyage but not on intentional voyages. So you have the best structurally constructed vessel in the world. have a voyage from Manila and San Francisco, USA. You provide the captain and the members of the crew with only one sandwich and a glass of water each. The vessel is not seaworthy.

You

The law requires that it be properly laden or provided with the necessary equipment. RULE: the vessel must be seaworthy only at the commencement to the voyage. EXCEPTIONS: 1. In case of time policy; 2. In case of insurance on cargoes which by the nature of the voyage, of the nature of the cargoes, or by agreement of the parties, they are to be transit from one vessel to another. Exceptions to (1) 1. Let us say in a policy for one year, during the term of the policy, the vessel undertakes three voyages. Then the law requires that it must be seaworthy at the commencement of each voyage. 2. In an insurance on cargoes, the cargoes are to be shipped from Manila to San Francisco. From Manila, the cargoes are loaded on vessel A. Upon reaching Guam, they are transferred to vessel B and upon reaching Alaska, they are transferred to vessel C. In that case, when vessel A leaves Manila, it must be seaworthy; when vessel B leaves Guam, it must be seaworthy and; when vessel C leaves Alaska, it must be seaworthy. 3. The vessel would have to navigate rivers then it goes out into the China Sea and passes through the Suez Canal. This is a voyage by stages. It must be seaworthy in navigating any of the stages: rivers, China Sea and Suez Canal.

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57


Q: Suppose at the time of the commencement of the voyage it was seaworth y. But upon reaching a certain point, it became unseaworthy. The master believed it could still move by its own power and so it proceeded. Upon reaching another point, there was a loss or damage. Is the insurer liable? A: (Qualified) It depends. If the cause of the loss was not unseworthiness of the vessel, the insurer will still be liable. But if cause of the loss is the unseaworthiness of the vessel, the insurer shall not be liable.

When it becomes unseaworthy, the law requires the delay to have the vessel unnecessary repaired; failing thereafter a loss occurs, the insurer shall not be liable.

the the

master without in which and

INSURANCE OF CARGOES Q: Does cargoes? A:

the

requirement

of

seaworthiness

also

apply

to

an

insurance

of

Yes.

Q: Suppose A is the owner of certain cargoes loaded in a vessel for a voyage from Manila to Japan. Unknown to A, the vessel was unseaworthy. And during the voyage, the cargoes were damaged or lost due to the unseaworthiness of the vessel. Can A in an action brought against the insurer claim that he had no notice or knowledge of the fact that the vessel was unseaworthy? A:

No.

The court held that while it may be true that he was not the owner of the vessel and it is possible that he had not knowledge of the fact the vessel was unseaworthy, it was his obligation as owner of the cargoes to look for a vessel that was seaworthy. Otherwise, the insurer shall not be liable by reason of the unseaworthy of the vessel.

DEVIATION Deviation in marine insurance may either be proper or improper. Where the voyage was described by the points of beginning and ending (ex. Beginning Manila and ending New York), which is the course of the sail? 1. It will depend upon the agreement or stipulation of the parties. 2. If there is no such stipulation, it will depend upon marine usages or practices. 3. In the absence of both, it shall be that way between the specified which to a master of ordinary skill and discretion would mean the most natural, direct and advantageous.

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places

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58


Q: Let's assume that either by agreement of the parties or as fixed by usages or which to a master of ordinary skill and discretion is the most natural, direct and advantageous, where can there be a deviation? A:

1. When there is a departure from the course of the voyage. 2. When there is unnecessary delay in commencing the voyage. 3. When it pursues an entirely different voyage.

A deviation is improper when it is not proper. When is it proper? See Sec. 124.

Q: Let's say during the voyage the master received the information from PAGASA that there was an approaching typhoon along the course of sail pursued by the vessel. Believing in good faith that the information from PAGASA was true, the master deviated. It turned out though that the PAG-ASA was wrong, that there was after all no typhoon coming. Could this be a proper or improper deviation? A: This is a proper deviation, provided the master acted relying on the information, although it turned out to be untrue.

in

good

being

faith

in

We have to distinguish between a proper and improper deviation because under Sec. 126, if the deviation is improper, and a loss or damage occurs subsequently to the improper deviation, the insurer shall not be liable. Under the law, the insurer can always claim when you departed from course of sail in effect, there was no meeting of the minds, and therefore, can rescind the contract.

the

LOSS In maritime insurance, losses may be total or partial. Every loss which is not total is partial. WHEN IS THERE TOTAL LOSS? Total loss may be actual or constructive/technical. Constructive/technical principle of abandonment.

total

loss

is

important

in

relation

to

the

Average may either be particular or general. In transportation law, average includes all expenses incurred for preservation of the vessel or cargo, or both, during the voyage up to the point of destination. That would include losses, damages and expenses. In particular average loss, it does not inure to the common benefit, to the parties, to the marine venture and therefore it is to be borne only by the party whose interest was lost or damaged. In general average loss, the requisites are: 1. 2.

It must be done deliberately by the master or upon his authority; It must inure to the common benefit of all parties; - 58 -

- 59 -

59


3. 4. 5.

There must be no negligence on the part of the party whose interest was sacrificed; It must be successful; There must be a marine peril.

Q: You have a voyage from Manila to Hong belonging to A, B, and C. Who are the parties? A:

Kong.

Loaded

thereon

are

cargoes

The owner of the vessel and the owners of the cargoes (A, B, C).

During the voyage, the vessel encountered a strong typhoon. In order to lighten the load of the vessel, the master decided to jettison the cargo belonging to A and as a result, the vessel and the remaining cargoes arrived safely in Hong Kong. This is a general average situation. The parties whose interests were saved, the owner of the vessel owners of the cargoes (B and C), will contribute to the loss. It is but fair, had it not been lost. If the parties are insured, assessed upon the insured. What is the parties?

the

formula

Interest of party x Total Interest

used

Loss

to

the

insurers

determine

=

will

the

pay

share

the

and

the

contributions

contribution

of

each

of

Contribution

Sec. 136. Where it has been agreed that an insurance upon a particular thing, or class of things, is not liable for the possession, at class of things, even is liable for his thing insured.

shall be free from particular average, a marine insurer any particular average loss not depriving the insured of the port of destination, of the whole of such thing, or though it becomes entirely worthless; but such insurer proportion of all general average loss assessed upon the

Q: Should there be such a clause in a marine policy and a loss occurs during the voyage, would the insurer be liable? A: Qualify. If it is a particular average loss and it is only partial, the insurer shall not be liable. But even if it is only a particular average loss if it is total, then the insurer shall be liable. However, if it is in the nature of a general average loss, despite the presence of the above clause, the insurer will be liable and will have to pay the contribution.

In the example above, where the cargoes of A were jettisoned, and supposing the jettisoned goods were worth P1M, A, the owner may either demand contributions from the parties whose interests were saved (owner of vessel and owner of the other cargoes) or if the goods were insured, he may recover from his insurer. (Note that he cannot recover from both, because of the principle of indemnity).

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- 60 -

60


If the goods were insured, and he decides to recover from the insurer, then there will be subrogation. He can no longer demand contribution from the parties whose interests were saved. The insurer becomes a subrogee who can demand contributions from the parties whose interests were saved.

Q: When will the right of the insured to demand indemnification insurer be lost (or when can he not recover from his insurer)?

from

his

A: 1. If he waives the right to demand contributions from the parties whose interest were saved; and 2. If he allows separation of intere sts.

Like in a motor car insurance, for instance, you were involved in accident, the other party was at fault. Your car was insured under a comprehensive policy. What are your remedies? 1. 2.

an

recover from your insurer, or recover from the party at fault.

If you recover from the insurer, there will recover the deficiency.

your insurer up to the extent of the amount be subrogation (Art. 2207, NCC). But you can

paid by still

Similarly, in marine insurance, if the party whose interest was sacrificed decides to recover from his insurer, it will now be the insurer who has the right to recover from the parties whose interests were saved. The insured should not do any act that will destroy that right, because it will eventually be transferred to the insurer by way of subrogation. So if he waives the right by signing a waiver, for instance, then insurer will deny his claim because the right of subrogation is destroyed. By executing the waiver, you deny your insurer the right as subrogee to go after the party at fault (Read Pan Malayan Insurance).

the

CO-INSURANCE Sec. 157. A marine insurer is liable upon a partial loss, only for proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured.

such

In marine insurance, by express provisions of the law, provided the requisites are present, there is what we call co -insurance whether or not there is a stipulation in the policy. In other types of insurance, like fire, there has to be an express stipulation. The requisites are: 1. 2.

The property is under-insured (insured for an amount less than its value); There is only a partial loss. - 60 -

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61


What is the effect? You cannot recover the whole amount of your loss from your insurer. You will shoulder a portion thereof. You become a co-insurer with your insurer. Let's say a vessel worth P50M is insured for only P25M. With respect the uninsured portion of P25M, you become your own insurer, that's why it is called co-insurance. Let's say there was partial loss P20M. You can recover only ½, which is P10M.

of P20M. P10M. You

to

You cannot recover the entire shoulder the difference of

So while it is not advisable to over-insure your property because insurance contract is a contract of indemnity, neither it is advisable under-insure it because of the principle of co -insurance.

to

REPEAT: In marine insurance with or without a stipulation in the policy, by virtue of Sec. 157, provided that the requisites are there, the principle of co-insurance are there. In other types of insurance, like fire, there must be an express stipulation in the policy (normally, there is in standard form) for the principle of co-insurance to apply. With respect to package, the same principle applies. As a matter of fact with respect to the general average loss, we also have the same principle. EXAMPLE: A is the owner of the goods worth P1M but he insured them for only P.5M. Under Sec. 157, should there be a partial loss, the foregoing formula on co-insurance is applied, B's property worth P1M was saved, insured for only P.5M. Let's say the contribution assessed upon B as one of the parties whose interest was saved was P100T. It's the insurer who will have to pay the contribution. Why? Considering that the goods belonging to B was under insured, under the principle of co-insurance, the amount that will be paid by the insurer will only be ½ of the amount of contribution assessed upon B, as the law says this is the contributing value. In determining the amount of contribution to be paid interest was saved, the basis thereof is the value, not insurance.

by a party whose the amount of

Where the policy value is less than the contributing value, liability of the insurer will only be proportionate under Sec. 157.

then

The same thing applies in the case of goods and package. Let's have goods worth P2M and you expect to make a profit of P300T. You may insure not only the goods but also the expected profits. The loss of the goods means total loss of the profits obviously. If the insurer of the goods.

the

say

goods are lost during the voyage, the owner can recover from the profits the entire amount of P300T, aside from the value

- 61 -

you

the of

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62


Partial loss of the goods will mean partial loss of the profits, obviously. Let's say during the voyage 50% of the goods were lost. So the owner recover only P150T by way of lost profits from the insurer of the profits.

can

ABANDONMENT The following are the requisites of a valid abandonment: 1. 2. 3.

4.

There must be constructive total loss under Sec. 139; It must be neither partial or conditional (must be total and unconditional) There must be a notice or an order to abandon to the insurer (orally or in writing; if oral, it must be confirmed in writing within 7 days); It must be explicit, based on the facts existing at the time the order was made.

In the Philippines, under Sec. 139 we follow the ¾ rule. There constructive total loss, when more then ¾ of the value has been lost to the peril insured against.

is

When there is constructive total loss, the insured has the option abandon (meaning to relinquish his interest in the thing insured in favor of the insurer, so he can recover on the basis of actual total loss).

to

EXAMPLE: The property insured is worth P20M. 80% thereof was lost. Under Sec. 139 there is a constructive total loss. The insured can relinquish the equivalent of 20% or what remains of the thing insured in favor of the insurer, then he can recover on the basis of an actual loss, 100%. He cannot retain what remains then recover because of the principle of indemnity. But the foregoing is not mandatory. It is merely op tional on the part of the insured. If he decides to retain the equivalent of 20% he can recover his actual loss. In either case he will still be getting 100%. If he decides to abandon by surrendering what remains of the thing insured, he can recover only his actual loss, 100% but if he decides not to and retains it, he recovers the equivalent of 80%.

abandon

Basically what is the meaning of abandonment in marine insurance?

Q:

Is acceptance of an order to abandon necessary on the par t of the insurer?

A:

No. Acceptance on the part of the insurer is not necessary.

Q: Suppose effect? A:

the

insurer

refuses

to

accept

a

valid

abandonment,

what

is

the

It will not prejudice the rights of the insured.

Q: Suppose the insurer say, "I just pay 80%." Can this be done?

will

not

accept.

You

can

keep

that.

- 62 -

I

will

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63


A: No. The insured can recover on therefrom whatever comes into his hand.

Q:

the

basis

of

an

actual

loss,

deducting

what are the effects of a valid abandonment?

A: 1. There is a relinquishment of the interest of the insured in the insurer. 2. There is what we call a transfer of agency (the agents of the insured becomes the agents of the insurer).

favor

of

Ownership of the ship being abandoned is transferred to the insurer at the time of the loss. It retroacts to the date of the loss, not upon acceptance.

FIRE INSURANCE Sec. 167. As used in this Code, the term "fire insurance" shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. It would seem that but also losses caused other allied risks.

fire insurance covers not only losses caused by by lightning, earthquake, tornado, windstorm, and

fire

Recall that during the Killer Quake many building collapsed. The property owners asked if they could recover their losses under their fire policies.

In an insurance against fire and the cause of loss is earthquake, can the insured recover? As a rule, for the insured to recover, the peril insured against must be the proximate cause of the loss. If the proximate cause of the loss is not the peril insured against, under Sec. 86, recovery would depend on whether the cause of the loss is excepted or not. Despite this provision on fire insurance, which would seem to include such things as earthquake, windstorm, etc., the law does not mean that those risks are indeed included because the same provision sates "when such risks are covered: (1) by an extension to fire insurance policies; or (2) under separate policies." So the rule is still the same. If the loss is caused by these called allied risks, like tornado, lightning, etc., as to whether the insured will recover depends on whether such perils are: (1) covered by the itself; or (2) under a separate policy.

What are the effects of the alteration in any part of the thing insured?

- 63 -

things policy

- 64 -

64


For instance, a building is insured. The policy expressly provides that it shall be used exclusively for residential purposes. During the terms of the policy, the owner converted it into a commercial or industrial building, thereafter, it was burned. Can the insured recover? There was an alteration from residential to commercial or industrial? If made without the consent of the insurer by means within the the insured, it increases the risk. Necessarily, when the house is from residential to commercial or industrial, there is an There was a violation of the policy provision. Therefore, deny the claim.

control of converted increase in the insurer

risk. can

But if the provision is immaterial in order to avoid the policy, policy must expressly state that a violation thereof shall avoid it. Otherwise, it shall not avoid the policy.

the

Losses by fire may either be: 1. 2.

direct or actual; or indirect or consequential

Normally, under a fire policy, the insurer actual losses. Unless the policy provides otherwise.

is

liable

only

for

direct

Sometimes, indirect or consequential losses are more than the actual direct losses. Examples of consequential losses: loss of use; loss of income; loss of profits.

or

or

In the absence of any specific provision in the policy, the insurer's liability is confined to the direct or actual losses. And fire must be the proximate cause.

Suppose you have a building and you insured it with two or more companies. Should there be a loss, can the insurer invoke a defense that the property was insured with two or more companies, and therefore the insurer cannot be liable? In the absence of a provision in the policy, insurance, the insurer cannot raise such defense.

which

Normally, double insurance is allowed, provided insurers when required or upon the happening of a loss.

notice

prohibits

is

double

given

to

The Supreme Court in may cases held that such clause valid, which requires the insured to give notice of the existence of other insurance/s. Failure on the part of the insured to do so could be a ground fo r the denial claim.

SURETYSHIP/GUARANTY In a contract of guaranty, the guarantor is only secondarily liable to the principal debtor that is why he is entitled to the benefit of exclusion. - 64 -

all

of

the

- 65 -

65


In the case principal debtor.

of

a

surety,

the

liability

is

solidary

with

that

of

the

While a surety undertakes to pay the principal obligation if the debtor does not pay, regardless of whether the latter is solvent or insolvent, a guarantor undertakes to pay only when the principal debtor cannot pay by reason of insolvency. That is why he (guarantor) is entitled to the benefit of exclusion. A surety is an insurer of the debt; while a guarantor is an insurer of the solvency of the debtor. Just like any other accessory contract or obligation, a contract suretyship or of guaranty cannot exist independently. There has to be a valid and binding principal obligation. For instance, in a contract of mortgage or pledge, there has to be a valid and binding principal obligation.

of

You have a first contract, the debtor 'D' and the creditor 'C' Let' say it is a contract of loan. But before the creditor would grant the loan in favor of the debtor, he would have to be protected so he gets someone else, 'S' to act as surety. If 'S' agrees, then there will be a second contract and 'S'. The second is the contract of suretyship.

between 'C'

But before 'S' would enter into such a contract, he would also like to be protected. So there will be a third contract between the debtor 'D' and the surety 'S'. This contract is sometimes called an indemnity agreement. Actually, these are three separate and independent contracts, but they are so interrelated that the moment. Let's say, D fails to pay C, then C will go after S under the contract of suretyship. The law defines a contract of suretyship as an agreement whereby a party called a surety undertakes to perform the obligation of another party called the debtor in favor of another party called the creditor. If S pays C, then S in turn can ask for reimbursement from the principal debtor, D. A contract of suretyship is essentially a credit accommodation. A surety is not supposed to suffer a loss, unlike the insurer. Because if the surety pays the creditor, he can ask for reimbursement from the principal debtor. And the extent of liability of the surety depends on the contract of the surety in relation to the principal contract. Just like a guaranty. And thereafter, the surety can ask for reimbursement of indemnification from the principal debtor. Just like a contract payment of premiums.

of

insurance,

the

surety

is

also

entitled

to

the

LIFE INSURANCE is insurance Sec. 179. Life insurance appertaining thereto or connected therewith.

on

human

lives

and

insurance

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66


Take note of Sec. 180-A, an amendatory section inserted by BP 874. Sec. 180-A. The insurer in a life insurance contract shall be liable in case of suicides only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period: Provided, however, That suicide committed in the state of insanity shall be compensable regardless of date of commission. (As amended by Batasang Pambansa Blg. 874).

the

The rule is simple. If the insured commits suicide, is the insurer liable? The answer depends on whether the insured was sane or insane at the time of the commission of the act (suicide): 1.

If he was sane, the answer (suicide) was committed:

would

further

depend

on

the

time

the

act

a. If he was sane and the act was committed WITHIN a period of two years from the date of the issuance of the policy, or of its last reinstatement, the insurer shall not be liable. » The parties can agree on a period shorter than two years, but they cannot agree on a period longer than two years. b. If the insured was sane and the act (suicide) was committed AFTER a period of two years from the date of issue, or date of last reinstatement, the insurer shall be liable. 2.

If the insured was insane at the time of the commission of the act, then it shall always be compensable regardless of the date of the commission. » So if he was insane, you do not ask the date of commission anymore. Whether it was committed during or after the two-year period is not relevant. The law says that the insurer shall always be liable.

But would a sane person commit suicide? Note that the period above is similar to the incontestability clause.

Sec. 181. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. May the insured in a life insurance policy assign or transfer a policy? As a rule, YES. Is the consent of the insurer necessary for the assignment of the policy? In the absence of an express provision in the policy, the consent of insurer is NOT necessary.

the

Is the consent of the beneficiary necessary for assignment of a life insurance policy? It would depend. Sec. 11 says that if the beneficiary had acquired a vested right because the designation is irrevocable, it cannot be assigned without his consent. However, if the designation is revocable, then the consent of the beneficiary is not necessary.

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67


Suppose that at the time of the death of the insured, he was committing a felony, will such fact be a ground for the insurer to deny the claim? Supreme Court held that the mere fact that at time of death of the insured he was committing a felony, that in itself is not a ground for the denial of the claim. There must be a connection between the cause of death and the commission of the felony.

The

Suppose premiums on a life insurance policy are paid from: 1. 2. 3.

separate property of insane; conjugal assets; partly from separate property and partly from conjugal assets.

To whom shall the proceeds go? Depends on the beneficiary: (a) juridical person; (b) natural person.

Let us say someone while still single insured his life. He paid the premiums out of his own salary. Three years later he got married and he continued to pay the premiums out of his salary, which was not conjugal property. Then he dies. The beneficiary was someone else, not the wife. How would the proceeds of the property be distributed? In case of BPI vs. Posadas, the Supreme Court held that where the premiums were paid from the separate property of the insured, the proceeds shall be considered separate property. If the premiums were paid out of the conjugal assets, the proceeds shall be conjugal. If the premiums were paid partly from separate property and partly form conjugal assets, the proceeds shall be divided proportionately. However, the foregoing rule shall apply only the estate or the legal represe ntative of the insured.

if

the

main

beneficiary

is

If the beneficiary is a natural person, regardless of the source/s of the premiums, the proceeds shall belong to the beneficiary, to the exclusion of all others. The foregoing rule does not apply where the beneficiary is a juridical person.

CLAIMS SETTLEMENT Where there is an action, or in case of litigation, the law requires the Insurance Commissioner, or the Court, as the case may be, to make a finding on whether the insurer unjustifiable withheld the payment of claims. If in the affirmative, then the Commissioner or the Court is required to award damages, attorney's fees, expenses, interest twice the ceiling set by the Monetary Board. Before there can be an award of such damages, like interest, there has to be an express finding by the lower court, or the Commissioner that there was undue denial or withholding of the payment of the claim.

- 67 -

- 68 -

68


The law legal rate?

says

twice

the

ceiling

set

by

the

Monetary

Board.

What

is

the

In Reformina vs. Tomol. The Supreme Court held that 12% applied if transaction is in the form of a loan, forebearance of money, goods, or credit. But if it is an action for damages, it is still 6%.

the

Art. 2209, NCC. If the obligation consists in the payment of a sum of money and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest which is 6% per annum.

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI) As a general rule, insurance is a voluntary contract. But this exception because in the case of motor vehicle insurance, it is compulsory.

is

an

'NO FAULT FEATURE' (See Sec. 378) The purpose of these articles on compulsory insurance is to provide immediate financial assistance to victims of vehicular accidents regardless of the financial capability of the motor vehicle owner or operator. As amended by PD damages to property.

1455,

it

now

covers

only

physical

injuries.

No

more

The law says a passenger is one who is being transported or conveyed in or by another vehicle for transportation for compensation. A third party is one who is not a passenger. The following are not considered third parties: 1. 2. 3. 4.

passenger members of the household of the insured members of the family within the second degree of consanguinity or affinity of a motor vehicle owner or land transportation operator employees of the insured, i.e., driver, in respect to death bodily injured, arising out of and in the course of employment.

or

In the case of Phil. Summit Guaranty, the insured car was registered in the name of the corporation, assigned to its president. One day, while the president was with his son in the car, the car was involved in an accident. The son died. A claim was filed, but the insurer denied the claim, invoking the exclusionary clause. According to the insurer, the son of the president to whom the car was assigned was not a third party. The Supreme Court disagreed. The insured was a corporation, and under the law, a corporation has a personality separate and distinct from that of its officers and stockholders. Hence, the exclusionary rule does not apply in this case.

- 68 -

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69


Besides, this being a contract of adhesion, in case of doubt, the shall be interpreted in favor of the insured and strictly against the insurer.

The most significant under Sec. 378.

feature

of

this

coverage

is

the

'NO

FAULT'

same

Clause

Sec. 378. Any claim for death or injury to any passenger or third party pursuant to the provisions of this chapter shall be paid without the necessity of proving fault or negligence of any kind; Provided, That for purposes of this section: (i) The total indemnity in respect of any person shall not exceed five thousand pesos; (ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: (a) Police report of accident; and (b) Death certificate and evidence sufficient to establish the proper payee; or and evidence of medical or hospital (c) Medical report disbursement in respect of which refund is claimed; (iii) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained.

Considering that this is a compulsory type of insurance coverage, in case of an accident between two vehicles, you can almost be sure that they covered. Against whom may the heirs of the victims choose between the insurers of the two vehicles?

file

their

claim?

Can

The Supreme Court in the case of Perla Compania de Seguros, said No. The law is clear. It says the claim shall be filed against the insurer vehicle where the claimant or the victim was an occupant, where he was riding, mounting or dismounting from.

Let's say P was a passenger of road accident with vehicle B. Is P insurer of vehicle B?

vehicle correct

A. in

are

they

of

the

The vehicle was involved in filing a claim against the

No. The claim must be filed against the insurer of the vehicle was an occupant, mounting or dismounting from at the time of the accident.

Suppose a pedestrian was injured in the accident. Against whom shall the pedestrian file his claim? The law says, against the insurer of the directly offending vehicles.

- 69 -

where

a

he

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70


Sec. 384. Any person having any claim upon the policy issued pursuant to this Chapter shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting forth the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six months from date of accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commissioner or the Courts within one year from denial of the claim, otherwise, the claimant's right of action shall prescribe. (As amended by Presidential Decree 1814 and Batas Pambansa Blg. 874). Notice - within 6 months from date of the accident Action - within 1 year from denial of the claim

JURISDICTION With respect to the compulsory Commissioner has the original and limitations under Sec. 414.

type of exclusive

coverage, the Insurance jurisdiction, subject to

INSURANCE COMMISSIONER Prior to the declaration of Martial Law this was purely an administrative body. It was then known as the Office of the Insurance Commissioner. A presidential powers. So it is functions.

decree now a

issued after Martial Law granted quasi-judicial body. It exercises

it adjudicatory quasi-judicial

In Phil. American Life vs. Ansaldo, it was held that the quasi-judicial power of the Insurance Commissioner is limited by law to claims and complaints involving any loss, damage, or liability for which an insurer may be answerable under any kind of policy or contract of insurance. This power does not cover the relation affecting the insurance company and its agents but is limited to adjudicating claims and complaints filed by the insured against the insurance company.

With respect to the administrative powers, it has the power to issue licenses to insurance companies, the power to investigate insurance companies, the power to examine the books and records of insurance companies. What is the extent of its jurisdiction? It can adjudicate claims arising from any contract of insurance, suretypship, reinsurance, etc., provided the claim does not exceed P100,000.00, exclusive of interest, attorney's fees, and costs (beyond this amount, it has no jurisdiction). Jurisdiction is concurrent with the regular courts. But the moment an action is filed and the Commissioner takes cognizance of the action, although it has concurrent jurisdiction with the regular courts, then it shall acquire jurisdiction to the exclusion of the regular courts in any case involving the same subject matter.

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Sundiang Notes - Insurance

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