INSURANCE a.

New york law – Chapter V (Security fund)

Contract of Insurance b. California law – all other chapters
2. Jurisprudence
GENERAL CONSIDERATIONS 3. Insurance Commission circulars
4. New Civil Code – suppletory application
To pass LOL
25% - Recitation Characteristics
35% - Midterm exam 1. Aleatory
40% - Final exam 2. Consensual
3. Voluntary
Insurance 4. Personal
Securing against the risk 5. Conditional (suspensive)
6. Unilateral – cannot modify contract alone
Kinds of insurance 7. Contract of indemnity except life insurance
1. Life
a. Traditional Factors considered in insurable interest
b. Variable 1. Timing – existence
2. Relationship – dependence
2. Non-life/general 3. Benefit – entitlement
a. Motor 4. Pecuniary in nature – proceeds
b. Fire
c. Marine When can you insure?
d. AOG General rule: Any contingent or unknown event happening in
e. Liability E&S, D&O the future
f. Travel Exception: Past AND unknown to the parties
g. Personal accident
Merger and acquisition problem
Life vs. Non-life Can you share the services between life and non-life
Life Non-life insurance companies?
Insurable Must exist at time Must exist at time of No, in cases of underwriting and marketing. These are
interest of agreement agreement and time regulated activities which cannot be shared. Approval by IC is
of loss immaterial as these services are covered by existing
regulations. Also, life and non-life has different licenses.
Benefit No indemnification There is
indemnification The business of insurance contains underwriting (writing and
limited to amount of selling) and marketing (making, proposing, etc.).
loss
Insurance contracts against liability usually used by
professionals, agents, BODs and officers of corporation
1. Errors and omissions (E&O) – for agents giving advice
Insurance vs. Reinsurance vs. Suretyship 2. Directors and officers (D&O) – for defense and
Insurance Reinsurance Suretyship settlement costs
Parties 2 2 3
Contract 1 1 2
created
Premium Payment Payment Acceptance
of suretyship

Insurance is a contract
Evidence of contract is the policy
Payment of premium is performance of the contract

Basis: Intent. In case of doubt, whatever is favorable to the

insured.

Sources of interpretation/governing law

1. Insurance Code
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TITLE 1 - WHAT MAY BE INSURED Contract of insurance is not a wagering contract;
differences
Sec. 3
REQUISITES Gambling contract Contract of insurance
Parties contemplate a gain Parties seek to distribute
1. Subject matter in which insured has insurable through mere chance possible loss by reason of
interest; mischance
Gambler courts fortune Insured seeks to avoid
In general, must have appreciable pecuniary value, subject to misfortune
loss or deterioration. Ex. Property, life, health, casualty, etc.
Tends to increase the Equalizes fortune
2. Event or peril insured against which may be any ineaquality of fortune
contingent or unknown event, past or future, and
duration for risk thereof; Essence is whatever one What one insured gains is not
person wins from a wager at the expense of another
The happening will: (1) damnify or cause loss to a person is lost by the other insured
having an isnurable interest; or (2) create a liability against wagering party
him. The unknown event may be past or future.
Creates a risk of loss Does not create
3. A promise to pay or indemnify in a fixed or
determinable amount; One party promises to pay a given sum to the other upon
occurrence of a given future event
Ownership of life insurance divided between insured and
beneficiaries. Insured as the owner of its variopus marketing
and sales features and the beneficiary as the owner of a Sec. 5
promise to pay the proceeds. APPLICABILITY OF PROVISIONS
All kinds of isnurance contract are subject to the provisions of
4. A consideration for the promise, known as the this chapter so far as provisions can apply.
“premium”;

5. A meeting of minds.

Insurance by married woman

On her life or children, even without the husband’s consent.

Insurance by a minor
Not entirely void. Merely voidable, valid until annulled.
Persons who are capable cannot allege the incapacity of those
with whom they contracted.

Note: Policy must be approved by the Insurance

Conmmissioner.

Sec. 4
CONCEPT OF LOTTERY
All schemes for the distirbution of prizes by chance, such as
playing, gift exhibition, prize concerts, rafflles, etc.

Essential elements
1. Consideration;
2. Prizes; and
3. Chance

If prizes do not come out of the fund raised by the sale of

chance, no consideration has been paid and thus, there is no
lottery.

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TITLE 2 - PARTIES TO THE CONTRACT
Parties to a contract of insurance
1. Insurer – who assumes or accept the risk of loss and
indertakes for a consideration to indemnify upon
happening of a contingent event.
2. Insured – person in whose favor the contract is
operative. Not always the person to whom the
proceeds are paid.
Note: Insurer is synonymous with “assurer” or “underwriter.”
Assured is the beneficiary.
Sec. 6
WHO MAY BE AN INSURER
1. Corporation, domestic or foreign;
2. Individual;
3. Partnership; or
4. Association.
All must first obtain a certificate of authority from the
Insurance Commissioner: that it possesses the capital sset
required of an insurance corporation doing trhe same kind of
business in PH and invested in the same manner.
Business of insurance affected with public interest
Thus, subject to regulation and control by the state by virtue
of the exercise of police power or in the interest of public
convenience and the general good of the people.
Sec. 7
WHO MAY BE INSURED
Any one except a public enemy
Capacity of the insured
1. Natural person
 Must be compentent to make a contract;
 Possesse insurable interest;
 Not a public enemy
2. Juridical person
Meaning of public enemy
Designates a nation with whom the PH is at war and includes
every citizen or subject of such nation.
Under the control test, a private corporation is deemed an
enemy although organized under PH law if they are controlled
by enemy aliens.
Effect of war on existing insurance contract
All intercourse are prohibited. Inconsistent that subjects of
one country should lend their assistance to protect by
insurance, the commerce of property of belligerent alien
subjects or to do anything detrimental to their country’s
interests.
1. With respect to property insurance – ceases to be
valid and enforceable as soon as an sinured becomes
a public enemy
2. With respect to life insurance – not merely
suspendedn, but is abrogated. Insured is entitled to
the cash or reserve value of the policy (excess of
premiums paid over the actual risk carried when the
policy had been in force)
Where loss occurs after end of war
Since effect of war does not suspend, bnut abrogates,
termination of war does not revive the contract.
Sec. 9
INSURABLE INTEREST OF MORTGAGEE AND
MORTGAGOR
Insurable interest of mortagor
As owner, extends to the value of property. Loss or
destruction of property will not extinguish his mortgage debt.
Insurable interest of mortgagee
To the extent of the debt secured not exceeding th evlaue of
the property, not isnuring the property itself but his interes or
lien thereon.
Limits on recovery
Mortgagor cannot recover beyond full amount of loss and the
mortgagee, in excess of the credit at the time of the loss nor
the value of the property mortgaged.
Insurance of mortgagee in case of loss
Entitled to the proceeds of the policy in case of loss before
payment of mortgage.
Effect: Subrogation of insurer to the right of mortgagee, to
the extent of the insurance money paid. Mortgagor not
relieved from obligation.
Insurance by mortgagor of his own interest
1. For his own benefit
Proceeds do not inure to the benefit of the mortgagee who
has not greater right than unsecured creditors in the same.
2. For the benefit of the mortgagee
Mortgagor pays the premium, making loss payable to the
mortgagee. The mortgagee may be made the beneficial
payee in several ways:
a. He may become the assignee with consent of the
insurer;
b. Mere pledge without consent;
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 c. Standard mortgage clause;
d. Through the policy. As to marine policy
Assignable even wihtout the consent of the insurer, unless
Insurance by mortgagor for benefit of mortgagee, or policy policy provides to the contrary.
assigned to mortgagee; effect
 The contract is deemed to be upon the interest of the As to casualty policy
mortgagor, latter does not cease to be a party. Thus, Insurer’s consent is also required, involves moral hazards.
if before loss, debt is paid, mortgagor is entitled to
recover the value of property upon loss. As to life policy
 Any act of mortgagor prior to loss, which would Policy may freely be assigned before or after the loss occurs,
otherwise avoid the insurance affects the to any person whether he has an insurable interest or not.
mortgagee, even if property is in the hands of the
mortgagee. Distinctions as to transfer or assignment of:
 Mortgagee may perform acts of mortgagor, with a. Policy itself – transfers the right to the contract to
same effect. another insured;
 In case of loss, mortgagee to the extent of his credit, b. Proceeds of the policy – involves a money claim
debt is extinguished. under or right of action;
 Rule on subrogation does not apply. c. Subject matter of the insurance – such as house
insured which has the effect of suspending the
Right of mortgagee under the mortgagor’s policy insurance untilt the same person becomes the owner
1. Before loss – conditional appointee of the mortgagor of both policy and thing insured.
entitled to receive so much sum that may become
due under the policy as does not exceed his interest
in the mortgage.
2. After loss – entitled to receive the money to apply to
the extinguishment of the debt as fast as it becomes
due. On the other hand, if loss happens after the
credit has matured, the mortgagee may apply the
proceeds to the extent of his credit.

Insurance by mortgagee on behalf of the mortgagor; effect

 Discharge of debt – upon destruction of property, the
mortgagee is entitled to receive payment from the
insured but such payment discharges the debt if
equal, and if greater, the mortgagee holds the excess
as trustee for the mortgagor.
 If loss occurred after debt is paid – mortgagee cannot
recover because he had no insurable interest.
Mortgagor cannot also recover because he is not the
insured.
 Right of subrogation – if there is stipulation that the
insurer shall be subrogate to the rights of the
mortgagee, payment will not discharge the debt.

Sec. 9
ASSIGNMENT OR TRANSFER OF INSURANCE POLICY
Substitute the assignee or transferee in place of the original
isnured in respect to the right to claim indemnity or payment.

The assignee, unless he makes a new contract with insurer,

acquires no greater right under the insurance than the
assignor had, subject to insurer’s defenses.

As to fire policy
Before it becomes fixed liability, it is not subject to
assignment, being strictly a personal contract. The insurer is
naturally concerned about the moral character of the insured.
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TITLE 3 - INSURABLE INTEREST
Insurable interest in general
Interest which the law requires the owner of an insurance
policy to have in the person or thing insured.
Pecuniary in nature
Person will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening of the
event insured against.
In sum, person benefits from its existence and prejudiced from
its destruction.
Necessity of insurable interest
 Legal right to insure – absence of interest, in effect
would be gambling.
 Validity of the contract – mere wagering policy or
contract and is void for illegality.
Requirement is a matter of public policy
Public policy render wager policies invalid. It allows the
insured to have an interest in the destruction of the subject
matter rather than in its preservation. Nothing to lose, and
everything to gain.
Sec. 10
INSURABLE INTEREST IN LIFE AND HEALTH
Classes of life policies
1. Insurance upon one’s life
Does not present an insurable interest question. Every person
has unlimited insurable interest in his own life, whether the
insurance is for his benefit or another.
When insurance on one’s life regarded as wagering
a. Original proposal to take out insurance was that of
the beneficiary;
b. Premiums are paid by the beneficiary;
c. That beneficiary has not interest, economic or
emotional, in the continued life of the insured.
Civil donation and life insurance is founded upon the same
consideration: liberality out of the premiums paid by insured.
Beneficiary is like a donee.
2. Insurance upon life of another
Insurance for benefit of insured
A person cannot lawfully procure insurance for his own benefit
on the life of another in whose life he has no insurable interest.
Policy of law requires that assured shall have an interest to
preserve the life insured in spite of the insurance, rather than
destroy it because of the insurance.
Insurance for benefit of a third party
Both owner and beenficiary must have insurable interest. It
must be one of those mentioned in Sec. 10:
a. His spouse or children
b. Insurable interest in life of person whom one
depends for edcuation or support or in whom he
has a pecuniary interest
Generally, blood or material relationships fit he concept of
insurable interest. Under Art. 195 of FC, the following are
obliged to support each other:
i. Spouses;
ii. Legitimate ascendants and descendants;
iii. Parents and their LC and LC or IC of the latter;
iv. Parents and their IC and the LC or IC of the latter;
v. Legitimate B/S, whether full or half blood.
In other cases, mere blood relationship (lesser degree in
kinship) does not create an insurable interest in the life of
another. Affinity does not constitute an insurable interest.
Dependent but no blood relationship
If the party who takes out an insurance is dependent on the
insured for support and care, it is strong evidence of insurable
interes even in the absence of close blood relationship. Hence,
“love and affection,” “gratitude,” or “friendship,” by itself is
not sufficient. Expectation needs to be ACTUAL.
c. Insurable interest of a person in life of another
under a legal obligation to former
Related by contract or commercial relation
That a right possessed by him will be extinguished or impaired
by the death or illness of the other may lawfully procure
insurance on the other’s life. Ex. Employer may insure the life
of the employee.
Risk that performance of obligation might be delayed or
prevented
It must appear that death or illness of the insured person who
is under a legal oblifation, might delay or prevent its
performance.
d. Insurable interest of creditor in life of his debtor
Extent of interest
Amount of the debt and cost of carrying the insurance.
Extent of recovery
Principle of indemnity applies. Insuring creditor could only
recover such amount as remain unpaid at the time of eath. If
whole death has been paid, no recovery is permissible.
Right of debtor in insurance taken by creditor
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A creditor who insures does not act as agent of the debtor.
Contract is purely between the insurer and the insuring
creditor.
Where insurance taken by the debtor for the benefit of
creditor
Where a debtor in good faith insured the life for the benefit of
the creditor, full payment of the debt does not invalidate the
policy, in such case, the proceeds should go to the estate of
the debtor.
e. Insurable interest in life of person upon which an
estate or interest depends
One may insure the life of a person where the continuation of
the estate or interest vested in him who takes the insurance
depends upon the life insured.
Consent of person whose life is insured
NOT essential to the validity of the policy. So long as it could
be proved that the assured has a legal interest at the inception
of the policy.
Sec. 11
BENEFICIARY; CHANGES
Beneficiary
Named or designated in a contract of life, health, or accident
insurance as the one who is to received the benefits; intended
recepients of the proceeds or benefits.
Kinds of beneficiaries
a. Insured himself – also called as the assured.
b. Third person who paid a consideration – named
may have paid a valuable consideration for his
selection.
c. Third person through mere bounty of insured – no
consideration at all.
Limitations in the appointment of a beneficiary
Insured himself
Any beneficiary whomever he pleases EXCEPT those
prohibited under Art. 739 to make donations between:
a. Persons who were guilty of adultery and concubinage
at the time of donation;
b. Persons found guilty of the same criminal offense, in
consideration thereof;
c. Made to a public officer or his wife, descendants and
ascendants, by reason of his office.
Right of insured to change beneficiary in life insurance
General rule: Whether or not the policy reserves to the
insured the right to change the beneficiary, he has the power
to change the beneficiary without consent of the latter who
acquires no vested right but only an expectancy of receiveing
the proceeds under the insurance.
Exception: Waiver. Thus, beneficiary acquires an absolute
and vested interest to all benefits accruing to the policy from
date of issuance and delivery.
Vested interest of beneficiaty in policy
Full face value and not on its cash surrender value.
Where beneficiary dies before insured
The estate of the insured should be entitled to the proceeds of
the insurance especially where the designation is subject to
express condition to pay the beneficiary if he survives the
insured or “if surviving.”
Designation of beneficiary
Construed broadly in order that the benefit of the insurance
shall be received by those intended by the insured as the
object of his bounty.
Designated may be the insured or his estate, a specific
person/s or a class/es of persons. Such as:
a. Children – broad enough to include adopted, adult
not forming part of household or after-born children.
First degree only, never intended to include
grandchildren.
b. Husband, wife or widow – must be the legal one.
c. Husband and children; wife and children – all
children, need not be both (?)
d. Family
e. Heirs or legal heirs – not only heirs at law but rather
that class of persons who would take the property of
the insured in case he died intestate.
f. Estate or legal representatives of deceased –
executors and administrators.
Sec. 12
FORFEITURE OF INTEREST OF BENEFICIARY
Interest is the right of beneficiary to receive the proceeds of
the life insurance policy.
When forfeited
Beneficiary is the principal, accomplice or accessory willfully
bringing about the death of the insured.
Who inherits?
In case of forfeiture, the nearest relatives, not otherwise
disqualified, shall inherit the proceeds. Nearest relatives of the
insured are:
a. LC;
b. LP, if living;
c. Grandfather/mother or LA, if living;
d. IC;
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 e. SS;
f. Collateral relatives, such as B/S full or half-blood and
nephews and nieces.
g. State.
Sec. 13
INSURABLE INTEREST IN PROPERTY
In general
The interest may be in the proeprty itself (ex. ownership), or
any relation thereto (ex. interest of a trustee or a commission
agent), or liability in respect thereof (ex. Interest of a carrier or
depository of goods).
Title or right to possession is not necessary
What is essential is that he will suffer loss as the proximate
result of its damage or destruction (ex. mortgagee).
Sec. 14
INSURABLE INTEREST IN PROPERTY IN PARTICULAR
CASES
a. An exisitng interest;
 Legal title, such as trustee, mortgagor, lessor,
assignee; or
 Equitable title such as purchaser of property
before delivery, mortgagor after foreclosure but
before expiration of redemption period, etc.
b. An inchoate interest founded on an existing
interest; or
 A stockholder has an inchoate interest in the
property of the corporation;
 Partner has insurable interest in the firm
property.
c. An expectancy, coupled with an existing interest in
that out of which the expectancy arises.
 Farmer may insure future crops;
 Owner of business can isnure agaisnt
contingency which may cause loss of profits
resulting from the cessation or interruption of his
business.
Sec. 15
INSURABLE INTEREST OF CARRIER OR DEPOSITORY
Loss of the thing may cause liability to the carrier or
depository to the extent of its value.
Limitations
Only to the extent of his liability but not to exceed the value
thereof.
Sec. 16
MERE CONTINGENT OR EXPECTANT INTEREST NOT
INSURABLE
A mere hope or expectation of benefit which may be
frustrated by the happening of some event uncoupled with
any present legal right will not support a contract of insurance.
Examples:
 Property expected to be inherited.
 Property of debtor – unsecured creditor cannot
insure specific proeprty of debtor who is alive. If
debtor is dead, unsecured creditor may insure the
property since all personal liability ceases with the
death of the debtor.
Sec. 17
MEASURE OF INSURABLE INTEREST IN PROPERTY
Extent to which the insured might be damnified by loss or
injury thereof.
Any contract of property insurance that gives to the insured
more than indemnity against his actual loss that may be
suffered by the happening of the event insured agaisnt is in
the nature of a wagering policy contrary to public policy is
void. Thus, the limits on interest of mortgagor and
mortgagee.
Sec. 18
EFFECT OF ABSENCE OF INSURABLE INTEREST IN
PROPERTY INSURED
Principle of indemnity is applicable. Such is the basis of all
contracts of property insurance. Contract is void where there
is no insurable interest.
Doctrine of waiver or estoppel is N/A
Cannot be invoked since the public has an interest int he
matter independent of the consent or concurrence of the
parties.
Measure of indemnity in insurance contracts
1. Marine or fire insurance – contract of indemnity
against loss. The amount of indemnity may be
determined after the loss (Sec. 60) or is previously
fixed in the contract (Sec. 61).
2. Liability insurance – contract of indemnity agaisnt
liability. No liability, no obligation to pay proceeds.
3. Life insurance – NOT a contract of indemnity.
Amount fixed payable at death, but such is not the tru
value of the thing insured because life is priceless.
4. Personal accident insurance – NOT contract of
indemnity. Life and limb are not susceptible to exact
or uniform valuation.
5. Health insurance – medical expenses.
6. Health care agreement – non-life, thus, contract of
indemnity. Medical expenses.
Sec. 19
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TIME WHEN INSURABLE INTEREST MUST EXIST g. When there is express prohibition against alienation
in the policy, in case of alienation, the contract of
Property Life insurance ins not merely suspended but is avoided.
When insurance takes effect Yes Yes
In the meantime or thereafter No No OBJECT OF RULE AGAINST ALIENATION
When loss occurs Yes No To provide against changes which might supply a motive to
destroy the property, or might lessen the interest of the
Ratio for the rule insured in protecting and guarding it.
For property, it is a contract of indemnity. If the insured has
no more interest in the proeprty at tim eof loss, he has CHANGE OF INTEREST COVERED BY LAW
suffered no loss. See Secs. 20-24 for absolute transfers.

However, existence of insurable interesr at the inception of Sec. 21

the contract, unless made so by statute, is not at all necessary CHANGE OF INTEREST IN A THING INSURED AFTER LOSS
to its valdiity. It is sufficient that insurable interest exists at the The insured has absolute right to transfer the thing insured
time the risk attaches. after the occurence of the loss. Such change of interest does
not affect his right to indemnity for the loss.
Insurable interest in life and property distinguished
Sec. 22
Property Life CHANGE OF INTEREST WHERE SEVERAL THIGNS
Extent of Limited to actual Unlimited SEPARATELY INSURED BY ONE POLICY
insurable value of interest Contract is divisible and vioaltion of a condition which avoid a
interest thereon policy with respect to one or more does not affect others.

As to time Must exist at time Only at time When things are insured under one policy for a gross sum and
when I-I insurance take insurance takes for an entire premium – indivisible.
must exist effect and when effect
loss occurs Note: Divisibility of contract is a question of intention.

As to Legal right Need not have legal Sec. 23

expectation basis CHANGE OF INTEREST BY DEATH OF INSURED
of benefit to Art. 777 of NCC applies. Rights to succession are transmitted
be derived from the moment of death of the decedent.

Sec. 20 Sec. 24
TRANSFER OF INTEREST BY ONE OF THE SEVERAL
EFFECT OF CHANGE OF INTEREST, IN GENERAL
PARTNERS, JOINT OWNERS OR OWNERS IN COMMIN,
The mere transfer of a thing insured does not transfer the
WHO ARE JOINTLY INSURED, TO THE OTHERS
policy but suspends it until the same person becomse the
owner of both the policy and the thing insured. Will not avoid the insurance. Same rule even if there is a
stipulation that the isnurance shall cease upon an alienation of
the thing insured.
EXCEPTIONS
a. In life, health and accident insurance (Sec. 20);
Ratio: The transfer does not affect the risk because no new
b. Change of interest after occurence of injury which
party is brought into contractual relationship with the insurer.
results in a loss (Sec. 21);
c. Change of interest in one or more of several things,
spearately insured by one policy (Sec. 22); Effect when transfer is to strangers
Policy is avoided. The contract of insurance as to the
d. Transfer of interest by will or succession on death of
transferor is avoided but not the contract as to the others.
insured (Sec. 23);
e. Transfer of intrest by one of several partners, joint
owners, or owners in common, who are jointly Sec. 25
STIPULATIONS PROHIBITED IN AN INSURANCE POLICY
insured, to the others (Sec. 24);
f. When policy is so framed that it will inure to the
benefit of whomever, during the continuance of the Void stipulations
a. Stipulation for the payment of loss whether the
risk, may become the owner of the interest insured
person insured has or has not any interest in the
(Sec. 57); and
subject matter of the insurance – mere wager polciy.

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 b. Stipulation that the policy shall be received as proof
of insurable interest – whether or not insurable
interest exists foes not depend upon the contract of
insurance or the stipulations therein.

In short, wagering or gaming policies are void.

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TITLE 4 – CONCEALMENT
CONCEALMENT DEFINED
Neglect to communicate that which a party knows and ought
to communicate; intentional withholding of material facts.
Requisites
1. Party knows the fact and neglects to communicate
2. Bound to disclose
3. Makes no warranty of the facts concealed
4. Other party has no means of ascertaining the fact
concerned
Sec. 27
EFFECT OF CONCEALMENT
Intentional or unintentional – injured party has right to
rescind.
By the insured
Voidable because insurance contract is of utmost good faith.
Full matters are known to the insured only. Insurer must rely
primarily upon information supplied to him.
By the insurer
Dominant bargaining position.
Proof of fraud need not be proved
Impossible to show actual fraud. Misleads the insurer into
accepting the risk.
Rules on Marine Insurance
 US rule: Sec. 27 applies only to marine because
generally beyond the reach of inspection.
 PH rule: Applicable to all kinds of insurance.
Sec. 28
MATTERS TO BE COMMUNICATED
1. Material to contract;
2. Other has no means of ascertaining the facts;
3. Party with duty to communicate makes no warranty
Test
Fact would influence the insurer in acting upon the application
Note: Insurer has right to rely on the statements of the
insured. Thus, failure of insurer to verify has no effect.
Sec. 29
FALSITY OF A WARRANTY
Must be intentional/fraudulent. May be rescinded. If omission
on the part of the insured, insurer has right to rescind.
Sec. 30
NO DUTY OF DISCLOSURE OF THE FF UNLESS MADE
SUBJECT OF SPECIAL INQUIRIES
1. Other party knows – no deception
2. Ought to be known to the insurer – default of insurer
himself
3. Waiver of communication – estopped
4. Not material, excluded by a warranty
5. Risk excepted from policy, need not be material,
either:
a. By exclusion in warranty
b. Express stipulation
Sec. 31
MATERIALITY
Need not increase the risk. Solely will probably and reasonably
influence the party in forming his estimates or making his
inquiries – effect on the making of the contract.
Ex. Non disclosure of pneumonia. Died in a plane crash – policy
is avoided because pneumonia is material.
Ex. Non material – underwent ECG where results are normal,
but did not disclose that he underwent a test. Here, it would
not have affected insurer’s decision.
Note: When made subject of special inquiry – it is automatic
material even if they might not be so regarded.
Time when information acquired
Concealment must take place at time contract is entered in
order to avoid the policy. No duty to disclose after perfection
of the contract.
Sec. 32
MATTERS EACH PARTY IS BOUND TO KNOW
Matter of public events. General causes such as war and
political conditions, as well as trade and usages and rules of
navigation.
Sec. 33
RIGHT TO INFORMATION MAY BE WAIVED
1. Expressly – by terms of the insurance
2. Impliedly – neglect to make an inquiry when insurer
had means to ascertain the matter. Ex. Insured
admitted confinement but insurer did not question
the cause.
Sec. 34
DISCLOSURE OF NATURE AND EXTENT OF INTEREST
INSURED
Required if not the absolute owner (ex. Mortgagee even if no
inquiry).
Ratio: so that insurer may know extent of insurable interest.
Sec. 35
DISCLOSURE OF OWN JUDGMENT
Not required. Disclosure duty is confined to facts only. Not
mere opinion and speculation. Even if insured is asked. Ex.
“How long do you think you will live?”
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11
TITLE 5 – REPRESENTATION Nature of promissory representations
1. Oral sense
REPRESENTATION DEFINED
Statement made by the insured at the time, or prior to the Not incorporated in the policy. Non-performance will not be a
issuance of the policy, relative to the risk, past or future. defense. Proof that promise was made fraudulently so as to
defeat the insurance.
Misrepresentation
Statement that is: 2. Written
1. Untrue;
2. Knowledge that it is untrue (with intent to deceive); Inserted in the policy but not made a warranty. Merely an
and executory term of the contract, not properly a representation.
3. Such fact is material
Promissory representation = substantially a
Voidable. Active form of concealment. condition/warranty

Sec. 36 EFFECT ON POLICY OF EXPRESSIONS OF OPINION OR

FORM, ORAL OR WRITTEN EXPECTATION
However communicated, the information forms the basis of Although false, will not avoid the policy if there is no actual
the contract as made. fraud, although material to the risk.

Collateral inducements – made to influence the insurer to Ex. “I am a very good driver.” Not avoided unless do not know
accept the risk. how to drive.

Sec. 37 Sec. 40
TIME WHEN REPRESENTATION BE MADE REPRESENTATION AS EXPRESS PROVISION IN THE
Precedes execution of the contract. POLICY
General rule: Representation is not part of a contract, merely
If made after, it could not have influenced either party to enter a collateral inducement.
into a contract.
Exception: Implied warranty.
Sec. 38
CONSTRUCTION OF REPRESENTATION Sec. 41
Apply rules on construction of general contracts. Ex. Use of REPRESENTATION ALTERED OR WITHDRAWN
liquor refers to habitual use. Illness or disease refers to serious Before insurance is effected, but not afterwards.
ailments not minor indispositions.
Sec. 42
Construed in favor of insured and required only to be PRESUMED TO REFER TO DATE WHICH THE CONTRACT
substantially true, unlike warranties which must be literally GOES IN EFFECT
true.
No false representation
Sec. 39 True at making of contract although false when
REPRESENTATION AS TO THE FUTURE representation was made.
Deemed to be a promise, unless appears to be belief or
expression. False representation
True when representation was made but false at making of
Kinds of representation contract.
Form – oral or written
Time – at the execution, before Rule: A representation is a continuing representation until the
Nature – affirmative, promissory contract takes effect.

Affirmative representation Sec. 43

Non-existence of a fact when a contract begins. Ex. That
house is used only for residential purposes.
Promissory representation
Promise to be fulfilled after the contract is executed.
EFFECT OF INFORMATION OBTAINED FROM THIRD
PERSON
Insured has discretion to communicate to insurer what he
knows of a matter which he has no personal knowledge. If
turned to be false, not responsible if he gives explanation that
he does so on the information of others.

12

When information obtained from agent of:
1. Insured – liable for truth of agent, in the exercise of
due diligence, would have communicated prior to
making of the contract.
2. Insurer – liable.
Sec. 44 – read book
FALSE REPRESENTATION
Facts fail to correspond with its assertions or stipulations.
Representation need not be literally true
Need only to be substantially true – conduct of insurer would
not have been different if the exact truth had been alleged.
Construction of representation as affirmative
Present fact. In order to save the policy from avoidance.
Sec. 45
FALSITY OF REPRESENTATION
Material point. Fraud or intent to misrepresent facts is not
essential to entitle the injured party to rescind. Sufficient if
representation fails to corresponde with the facts in a material
point.
Incontestability clause
Policy stipulation that policy shall be incontestable after a
certain period.
Ratio: to give insurer reasonable opportunity to investigate
facts, after which, cannot anymore be permitted to question
validity.
Requisites of incontestability
1. Life insurance;
2. Payable upon death of insured;
3. In force during the lifetime of insured for at least 2
years from date of issue/last reinstatement.
Period may be shortened BUT NOT extended. The phrase
“during lifetime” simply means that the policy is no longer
considered in force after the insured has dies. The key phrase
is “for a period of 2 years.”
Effect when incontestable
Insurer cvannot refuse to pay on grounds of:
a. Void ab initio;
b. Rescissible by misrepresentation or fraudulent
concealment.

Effect of collusion or fraud of agent of insurer
Collusion with insured – will vitiate the policy even though
agent is acting within authority. When there is collusion, the
agent thereby ceases to represent his principal; so the insurer
is NOT estopped from avoiding the policy.
Sec. 46
MATERIALITY OF REPRESENTATION
Same as concealment. Probable and reasonable influence of
the facts upon the party to whom representation is made.
Concealment vs. Representation
Concealment is withholding the information of material facts;
while representation is making erroneous statement of facts.
Defenses not barred by incontestability clause
a. Lack of insurable interest;
b. Excepted risk;
c. Premiums not paid;
d. Action not brought within specified time;
e. Conditions of policy relating to militry or naval
services violated.
Incontestability only deprives the insurer of those defenses
which arise in connection with formation and operation of
policy prior to loss.

Same as to:
a. Materiality;
b. Effect, that is to rescind;
c. Whether intentional or not;
d. Utmost good faith

Sec. 47
Sections 26-48 applies not only to original formation but also
to a modification of the same.

Sec. 48
WHEN INSURER MUST EXERCISE THE RIGHT TO RESCIND
An action to rescind presupposes the existence of contract.
1. Non-life – prior to commnencement of an action on
the contract.
2. Life – available only during the first 2 years.

13
TITLE 6 – THE POLICY
Sec. 49
POLICY DEFINED
Written document embodying the terms and stipulations of
the contract of insurance between the insured and the insurer.
Signature of parties
Required only for insurer or agent. Not required for insured
unless there are express qarranties contained ina separate
instrument (Sec. 70).
Policy, a contract of adhesion
Take it or leave it. Mostly drafted by industry experts.
Ambiguity resolved against the insurer since the parties do not
bargain on equal footing. The greatest protection to the
insured is given.
Policy is different from the contract itself
Policy is evidence of contract. Form must be previously
approved by the Insurance Commissioner.
Form of contract of insurance
Under the Code, must be in printed form. In case of conflict
between printed and written, written portions prevail.
Perfection of insurance contract
Meeting of the offer and acceptance upon the thing and the
cause which are to constitute a contract.
Acceptance of application
 Mere signing of application and payment of first
premium do not bind the insurer;
 Applicant dies before approval;
 Acceptance must unconditional
 Reception and retention of the policy without
objection beyond a reasonable time may be deemed
to be an acceptance.
Conditions precedent
Parties may impose additional conditions.
Offer and acceptance in insurance contract
Applicant usually makes the offer through an application
which is usually attached to the policy and made part of the
insurance contract.
Importance of delivery of policy
Delivery is the act of putting the insurance policy into the
possession of the insured (physical). Purpose:
a. Evidence;
b. Communication of insurer’s acceptance;
c. In some cases, delivery may affect the term of the
coverage.
However, delivery is NOT a prerequisite to a valid contract of
insurance.
Modes of delivery of policy
Actual or constructive. Delivery is primarily a matter of
intention (policy provides that insurance is not effective until
after delivery to the insured).
Delivery to insurer’s agent as delivery to insured
Contrary views:
 Beneficiary cannot recover – insurance agent is not
the insured’s agent
 Beneficiary can recover – insured having complied
with every condition, actual delivery to him is not
essential to give policy a binding effect; unfair for
beneficairy.
Effect of delivery of policy
Where delivery conditional, non-performance prevents
contract from taking effect.
Where delivery unconditional, ordinarily consummates the
contract, where the party so intends.
Where premium still unpaid after unconditional delivery,
insurer cannot be presumed to have extended credit from the
mere fact of unconditional delivery without the pre-payment
of premium.
Rider in an insurance contract
Small printed or typed stipulation contained on a slip of paper
attached to the policy and forming integral part fo the policy.
 Additional stipulations, part of contract.
 Saves expenses of making a new contract.
 In case of conlflict, rider prevails, as being a more
deliberate expression of the agreement.
Attached papers on insurance policy
A rider, slip or other paper becomes part of the contract/policy
if properly and suffciently attached or referred as to leave no
doubt as to intention of the parties.
In addition, a form of a rider must be approved by Insurance
Commissioner (Sec. 50). Also, the descriptive title or name of
the rider, etc must also be mentioned and written on the blank
spaces provided in the policy. Warranties, clauses or
endorsement.
Effect of lack of signature in attached papers
General rule: When physically attached and sufficient
reference is made, lack of signature will not prevent its
inclusion in the contract.
Exceptions: countersignature of insured is required when not
applied for by hin if issued after the delivery.
14
Effect of failure of insured to read policy
Majority rule: The fact that it is customary for insured to
accept policies without reading is judicially recognized. Not
negligence per se. Basis: adhesion, not of bargaining.
“Duty to read” has less significance in modern cases.
Insurer’s duty to explain the policy
Where terms of policy are clear, insurer has no affirmative
duty to explain the policyor its exclusion to the insured.
Sec. 51
CONTENTS OF THE POLICY
1. Name of the parties – incorrectly spelled is not
important as long as identity is sufficiently
established.
2. Amount of insurance – to determine amount of
indemnity. Basis of calculating the premium. Need
not in open or running policies. Maximum amount on
insurer’s liability.
3. Premium – consideration of the contract.
4. Property or life insured – subject matter of the
contract. Proper term is “thing insured.”
5. Interest of insured in property
6. Risk insured against – creates the liability.
7. Term or duration of insurance – life of the policy. 12
months = annual policies; less than = short period
policies.
Kinds of insurable risks
1. Personal risks – involving the person. Death or
disability.
2. Property risks – loss or damage to property.
a. Direct losses – fire, lightning, windstorm,
flood, etc.
b. Indirect losses – loss of profits, rents,
favorable leases, etc.
3. Liability risks – liability for the injury to the person or
property of others.
Risk, peril, hazard distinguished
1. Risk – chance of loss
2. Peril – contingent or unknown event
3. Hazard – condition or factor which may create or
increase the chance of loss
a. Physical hazards
b. Moral hazards – dishonesty, carelessness,
insanity, etc.
Requirements for risks to be insurable
1. Importance – enough to warrant the existence of an
insurance contract
2. Calculability – reasonable statistical estimate of the
chance of loss
3. Definiteness of loss
4. No catastrophic loss – usual to exclude political and
war risks were large number of people are subject to
the same kind of loss; shouldered by the State.
5. Accidental nature – cover fortuitous or unexpected
losses.
Note: Requirements not absolute
Sec. 52
PRELIMINARY CONTRACTS OF INSURANCE
Two kinds
1. Preliminary contract of present insurance
Insured through binding slip, binder or cover note, the
contract to be effective until the formal policy is issued or the
risk rejected.
Binder/cover note - temporary contract of insurance; written
memorandum of important terms of preliminary contract,
intended to give temporary protection pending the
investigation of the risk of the insurer.
In life insurance, binding slip or binding receipt does not insure
by itself.
2. Prelimianry executory contract of insurance
Insurer makes a subsequent contract to insure the subject
mkatter at some subsequent time, definite or indefinite. Right
acquire by the insured is merely to demand the delivery of
policy. Not binding unless delivered.
Issuance and renewal of cover notes
Provisional protection until the insurer can inspect or evaluate
the risk in question and issue the proper policy.
Fact that no premium was paid does not militate its binding
effect. Cover notes do not contain particulars that would serve
as basis for the computation of the premiums.
Rules on cover notes
 Deemed to be contract of insurance
 Approved by IC
 Valid and binding for a period not exceeding 60 days
from date of issuance, whether or not premium has
been paid
 May be cancelled by either upon at least 7 days notice
 When not cancelled, within 60 days, policy shall be
issued
 May be extended or renewed with written approval
of IC
 May impose a deposit premium equivalent to at least
25% of the estimated premium, but not less than 500.
Sec. 53
PERSONS ENTITLED TO RECOVER ON POLICY
15
The insurance proceeds shall be applied exclusively to the
proper interest of the person in whose name or for whose
benefit it is made unless otherwise specified in the policy.
As against the insured, third persons have no right to proceeds
of the policy unless there be some contract of trust.
As against the insurer, third person, in absence of any
provision in the policy, has no right to proceeds thereof.
Valid: contracts pour autrui.
Sec. 54
WHERE INSURANCE MADE BY AN AGENT OR TRUSTEE
Agent or trustee when making insurance contract for or on
behalf of the principal should indicate that he is merely acting
in a representative capacity by signing as such agent/trustee,
or other general terms in the policy.
Sec. 55
WHERE INSURANCE EFFECTED BY PARTNER OR PART
OWNER
A partner who insures partnership property in his own name
limits the contract to his individual shares unless the terms of
the policy clearly show that the insurance was meant to cover
also the shares of the other partners.
Sec. 56, 57
WHERE DESCRIPTION OF INSURED GENERAL
Claimant must show that he is the person named or described
or that he belongs to the class of persons comprehended in
the policy.
Sec. 58
EFFECT OF TRANSFER OF THING INSURED
Mere transfer of property does not transfer the policy because
insurance contracts are personal. It merely suspends the
policy until the same person becomes the owner of both policy
and thing insured.
Sec. 59, 60, 61, 62
KINDS OF POLICIES
1. Open or unvalued – value of the thing insured not
agreed upon and amount of insurance merely
represents the insurer’s maximum liability.
2. Valued – agreement that the thing insured shall be
valued at a specified sum. Value of the thing insured
will be paid. Liability under life insurance is measured
by face value of the policy.
3. Running – contemplates successive insurances,
provides that object may be from time to time
defined by additional statements or indorsements.
Due to frequent change in location and quantity, risk
in shifting, fluctuating or varying.
Advantages of running policy
Neither underinsured or overinsured at any time. The rate is
adjusted to 100% insurance.
Sec. 63
VALIDITY OF AGREEMENT LIMITING TIME FOR
COMMENCING ACTION
Limited to less than 1 year = void.
Nature of condition limiting period
Essential to prompt settlement of claims, while evidence as to
origin and cause of loss or destruction has not yet
disappeared.
Where action brought against insurer’s agent
When cause of action accrues
When claim is finally rejected by the insurer. Not from the time
of loss.
Thus, stipulated prescriptive period begins from rejection of
claim.
Sec. 64
CANCELLATION
Right to rescind, abandon, or cancel a contract of insurance.
Causes of cancellation, applicable to NON-LIFE
a. Non-payment of premium – premium subsequent to
the first, because it speaks of non payment after the
effective date of the policy.
b. Conviction of a crime arising out of acts increasing
the hazard insured against
c. Discovery of fraud or material misrepresentation
d. Discovery of willful or reckless acts or omissions
increasing the hazard insured against
e. Physical changes in the property which renders it
uninsurable
f. Discovery of other insurance coverage that makes
the total insurance in excess of the value of property
insured
g. A determination by IC
Sec. 65
FORM AND SUFFICIENCY OF NOTICE OF CANCELLATION
BY THE INSURER
1. Prior notice of cancellation
2. Based on occurrence after the effective date of the
policy
3. Writing, mailed or delivered to the named insured at
address shown in the policy or authorized broker
4. State the grounds
Sec. 66
RENEWAL OF NON-LIFE INSURANCE POLICY
General rule: A renewal by payment of a new premium and
issuance of receipt therefor where there is no provision in the
16
policy for its renewal, is a new contract on the same terms as
the old one.

Exception: Where the renewal is in pursuance of a provision,

not a new contract but an extension of the old one.

Intention not to renew by insurer

Must send notice to insured of intention not to renew within
45 days in advance before end of period.

Period of giving notice of non-renewal by insurer

Upon payment of premium due on the effective date of the
renewal. Any policy written for a term less than 1 year shall be
considered written for a term of one year. If longer than 1 year,
considered as successive policy each with a term of one year.

If period not complied with

Insurer may not refuse to renew the policy upon payment of
the premium due.

17
TITLE 7 – WARRANTIES
WARRANTIES DEFINED
Statement or promise by the insured contained in the policy
or incorporated or attached to it by proper reference.
Sec. 70
EXPRESS WARRANTY, WHERE CONTAINED
Must form part of the instrument. If on another instrument,
must have (1) reference; and (2) signed by the insurer.

Effect of falsity Sec. 71

Falsity or non-fulfillment of which makes the contract
voidable.
Kinds of warranties
1. Affirmative – asserts the existence of a fact or
condition at time made. Continuing when must be
satisfied during the entire coverage period of
insurance.
2. Promissory – condition subsequent
3. Express – contained in agreement
4. Implied – nature of the contract. Ex. Marine
insurance = sea worthiness.
Presumption
Warranty is presumed affirmative unless the contrary is
proved.
Ex. “Will you keep a book of accounts in a safe?” Yes. =
promissory.
Sec. 68
WARRANTY MAY BE A PAST, PRESENT OR FUTURE
When future, it is promissory.
EXPRESS WARRANTY REGARDING PERSON, THING OR
RISK
Statement must refer to a fact, not expression of an opinion.
Sec. 72
PROMISSORY WARRANTIES
Breach of promises as to future acts will not avoid a policy
unless promises are MATERIAL to the risk, that which
increases the risk.
Sec. 73
WHEN BREACH DOES NOT AVOID THE POLICY
General rule: Violation of a warranty avoids the insurance.
Exceptions:
a. Occurs before time of performance
b. Becomes unlawful
c. Becomes impossible
Where insurer barred by waiver or estoppel
Waiver is the intentional relinquishment of a known right.
Express or implied. Thus, failure to assert such means waiver.
Estoppel is an action or inaction; waiver is a type of estoppel.

Sec. 69 Sec. 74
NO PARTICULAR FORM OF WORDS IS NECESSARY RIGHT TO RESCIND
Intention of parties governs. In case of doubt, representation For material warranties only. As long as material even though
only unless included in the contract. violation was not the direct cause of the loss.

Gratuitous answers written in the application (ex. Sec. 75

Unresponsive answer) are NOT warranties even though the WHEN VIOLATION OF IMMATERIAL PROVISION AVOIDS
policy makes the statements in the application warranties. THE POLICY
General rule: immaterial breach will not avoid the policy.
Warranties vs. Representation Exception: when stipulated.

Warranties Representation Sec. 76

Part of the contract.
Always written on the face
Must be strictly complied
Presumed material
Falsity or non-fulfillment =
breach
Not part, merely a collateral EFFECT OF BREACH OF WARRANTY BY THE INSURED
inducement
Fraud is not essential for breach
May be in a totally It is falsity that is the basis of liability on a warranty.
disconnected paper or oral
Effect if without fraud
Substantial truth required Policy is avoided only at time of breach. Insured is entitled to:
a. Return of premium paid at a pro rata rate at time of
Insurer must show breach, if it occurs after inception of contract.
materiality b. All the premiums if it is broken during inception (void
ab initio).
Falsity = voidable
Effect if with fraud

18
Policy is void ab initio. Not entitled to return of the premiums
paid.

Conditions in an insurance policy

1. Condition precedent – condition before the contract
becomes binding.
2. Condition subsequent – contract after the risk has
attached and during existence thereof.

Warranties vs. Conditions precedent

Warranties does not suspend or defeat the contract but
breach has remedies; conditions predecent, without
performance, no contract. There is a limitation to the
attachment of the risk.

19
 As a rule under Sec. 77, the premium must be paid in cash as a
TITLE 8 - PREMIUM condition precedent for a non-life insurance policy to be valid
and binding, and an agreement to grant the insured credit
Sec. 77, 78 extension of the premium due is void.
PREMIUM DEFINED
Agreed price for asuming and carrying the risk – that is, the When policy is valid and binding notwithstanding non-
considertion paid an insurer for undertaking to indemnify the payment of premium
insured against a specified peril. Exceptions to Sec. 77:
a. For life or industrial policy, whenever grace period
ASSESSMENT DEFINED provision applies;
Sum specifically levied by mutual insurance companies or b. Under broker/agency agreements with duly licensed
associations, upon a fixed and definite plan, to pay losses and intermediaries, a 90-day extension is given;
expenses. c. When there is an acknowledgment in a policy or
contract of insurance of receipt of premium even if
Premium vs. Assessment there is a stipulation therein that it shall not be
binding until the premium is actually paid;
Premium Assessment d. When there is an agreement allowing the isnured to
Levied and paid to meet Collected to meet actual pay the premium in installments and partial payment
anticipated losses losses has been made at the time of loss;
e. When there is agreement to grant the insured credit
Payment, after the first, is Unless otherwise agreed, extension for the payment of the premium, and loss
not enforceable against the legally enforceable once occurs before the expiration of the credit term.
insured levied f. When estoppel bars the insurer from invoking Sec. 77
to avoid recovery on a policy providing a credit term
Not a debt Properly levied, unless for the payment of the premiums, as against the
otherwise expressly agreed, insured who relied in good faith on such extension.
is a debt
If credit extension exceeds 90 days, it shall be deemed only for
90 days.
Payment of premium ordinarily not a debt or obligation
In fire, casualty and marine insurance, the premium payable Sec. 79
becomes a debt as soon as the risk attaches. EFFECT OF ACKNOWLEDGMENT OF RECEIPT OF
PREMIUM IN POLICY
When no premium is paid, insurer cannot demand payment Conclusive evidence of payment, so far as to make the policy
since the continuance of the insurer’s obligation is conditioned binding, notwithstanding any stipulation therein that it shall
upon the payment of the premium. not be binding until the premium is actually paid.

In life insurance, premium becomes a debt only when in the
case of the first premium, the contract becomes binding, and
in case of subsequent premiums, when the insurer continued
the insurance after maturity of the premium, in cosnideration
of the insured’s express or implied promies to pay.
Effect of non-payment of premium
a. First premium – unless waived, prevents the contract
from becoming binding notwithstanding
acceptance.
b. Subsequent premiums – does not affect the validity
of the contract unless, by express stipulation, it is
provided that the policy shall in that event be
suspended or shall lapse.
Excuses for non-payment of premiums
 Fortuitous events
 Conditions, conduct or default of insurer
Validity of policy where credit extension granted to insured
Waiver of condition of prepayment
Even if it is actually unpaid. The law establishes a legal fiction
of payment.
Recovery of premium if unpaid
Presumption extends only to the question of the binding
effect of the policy. Insurer may still dispute its
acknowledgement but only for the purpose of recovering the
premium due and unpaid.
Effect of acceptance of premium
Merely assures the continued affectivity of the insurance
policy in accordance with its terms. Such acceptance does not
stop the insurer from interposing any valid defense under the
terms of the insurance policy, where such insurer is not guilty
of any inequitble act or representation.
Sec. 80, 81, 82, 83
WHEN INSURER ENTITLED TO RECOVER PREMIUMS

20
 1. When no part of the thing insured has been exposed
to any of the perils insured against;
2. When the insurance is for a definite period and the
insured surrenders his policy before the termination;
3. When contract is voidable and subsequently annulled
because of fraud and misrepresentations of the
insurer or his agent;
4. When the contract is voidable because of existence of
facts which the insured was ignorant without his
fault;
5. When the insrer never incurred any liability under the
policy because of the default of the insured other
than actual fraud;
6. When there is over-insurance;
7. When rescission is granted due to the insurer’s
breach of contract;
For No. 1, 3, 4 and 5, the insured is entitled to are turn of the
entire premium paid.
A person insured is not entitled to a return of premium if the
policy is annulled, rescinded, or if a claim is denied by reason
of fraud.
When risk has never attached
No premium is due unless the risk attaches in the ff:
 Approval of applicaion or acceptance of policy
absent;
 Loss occurs before effective date;
 Insured and insurer become public enemies.
1. Fraud of the insurer or his agent – insured may, by
timely action, rescind the contract and demand the
return of the premiums paid by him.
2. Other grounds – insured is entitled to return, as long
as without fault.
3. Fraud of the insured – not entitled to a return of the
premium.
When there is over-insurance
Caused by double insurance. The insurer is not liable for the
total amount of insurance taken, his liability being limited to
the amount of I-I on the property isnured. Hence, he is not
entitled to that portion of the premium corresponding to the
excess of the isnurance over the I-I of the insured.
Premiums to be returned shall be proportioned to the amount
by which the aggregate sum insured in all the policies exceeds
the insurable value.
When insurance is illegal
Void. General rules, premiums cannot be recovered. If not in
pari delicto, innocent insured may recover premium paid.
Sec. 84
PAYMENTS IN ADDITION TO REGULAR PREMIUMS
For the purpose of paying future premiums on the policy or to
increase the benefits thereof. The insured is duty bound to
make prompt payment of only the insurance premiums due
under the policy.

Where insured surrenders policy before termination

If the isnurance is for a definite period, the insured is entitled
to recover the premiums already paid equivalent tot he
unexpired term at a pro rata rate.

Where short period rate has been stipulated

The pro rata return of premium will not be followed. The
insured is entitled to the return of the premium in the
proportion stipulated. Usually, a short period rate clause
appears in most fire policies.

Right to recover premiums as to life insurance

Not allowed if the insured surrenders the policy. Ratio: Not a
divisible contract, not an insurance for a single year.

When risk has attached

If risk has attached by reason of the contract’s becoming
binding upon the insurer, the whole premium must be
considered as earned and, therefore, cannot be apportioned
in case the risk terminates before the end of the term for
which the insurance was granted.

Where insurance is divisible, the premium paid for any

particular risk is not earned until that risk has attached.

When the contract is voidable

21
TITLE 9 – LOSS
Hostile and friendly fires
CLAIM DEFINED
A demand for the satisfaction of a loss suffered within the Hostile Friendly
purview of an insured’s policy. Indemnified. Not indemnified.
Occurs outside the usual Fire burns in a place where it
Sec. 85 confines or begins as a was intended to burn, and
EFFECT OF AGREEMENT NOT TO TRANSFER CLAIM OF friendly fire and becomes ought to be = merely an
INSURED AFTER LOSS hostile by escaping from the agency for the
Void. Against public policy. place where it ought to be accomplishment of some
(excessive beyond control. purpose (ex. stove, lamp,
Before loss, insurance policy is not assignable without the Ex. lighted cigarette on a etc.)
consent of the insurer on the theory that policy is personal. rug).
Principle: Policy should not
After loss, absolute right to transfer or assign claim. Not be construed to protect
personal contract is assigned, but only money claim. No from injury consequent
question of moral hazard – it cannot increase the insurer’s risk upon negligent use or
for a loss that already occured. management of fire.

Sec. 86 Sec. 87
CAUSES OF LOSS EXTENSION OF PRINCIPLE OF PROXIMATE CAUSE

Loss defined Two cases

Injury, damage or liability sustained by the insurer in
consequence of happening of one or more perils against which
th einsurer, in consideration of premium, has undertaken to
indemnify the insured.
Scope of loss
Bodily injury, property damage or loss of income or profits.
Loss may be total, partial or constructive total.
Causes
Insurer assumes liability for a loss proximately caused by the
perils insured against although a peril not insured against may
have been a remote cause of the loss.
But insurer is liable if the proximate cause is not the peril
insured against IF the immediate cause is the peril insured
against.
1. Where the loss took place while being rescued
from the peril insured against
Loss that would deprive insured possession, in whole or in
part, of the thing insured by a peril NOT insured against.
Provided: property would have been lost by the peril isnured
against had there been no attempt to rescue it.
2. Where the loss is caused by efforts to rescue the
thing insured from a peril insured against
It is the efforts to rescue the thing that caused the loss. Insured
is bound to exercise a reasonable degree of care in removing
the goods.
Ex. Damages to goods by being trampled on or thrown in th
efforts to put out the fire.

In sum, peril insured against must either be PROXIMATE or Note: Loss must take place in the course of such rescue or
IMMEDIATE, but not REMOTE? caused by efforts to rescue from a peril insured against.

Burden of proof Sec. 88

Insurer to show why he is not liable.
Proximate cause
Proximate cause is that cause which, in natural and continuous
sequence, unbroken by any efficient intervening cause,
produces injury, and without which the event would not have
occured.
Proximate cause is not immediate cause.
WHERE PROXIMATE CAUSE IS AN EXCEPTED PERIL
Not liable although the immediate cause is a peril NOT
excepted. Burden of proof is on the insurer.
Sec. 89
LOSS BY WILLFUL ACT OR THROUGH CONNIVANCE OF
INSURED
Not liable. Risk should not be subject in any wise to the control
of the parties.

Test: If the event did not happen, could the injury have LOSS CAUSED BY NEGLIGENCE OF INSURED
resulted? If no, then the event is the proximate cause.

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General rule: Carelessness and negligence of the insured or
his agents constitute no defense on the part of insurer.
Contributory negligence does not in any way apply.

Gross negligence: Relieves insurer from liability.

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TITLE 10 – NOTICE OF LOSS
Sec. 90, 91
CONDITIONS AFTER LOSS
1. Notice of loss (Sec. 90); AND
2. Proof of loss, when required by the policy (Sec. 91).
Proof of loss
Need not that necessary in the court of justice but only best
evidence which the insured has in his power at that time.
The terms of the contract constitute the measure of the
insurer’s liability, and noncompliance therewith by the insured
bars his right of recovery.
Requirements under the policy
Construed for evidential purposes. Construed with much less
strictness than those conditions that operate prior to loss.
Meaning and purpose
More or less formal notice of occurence of the loss insured
against; to apprise insurer of loss so that it may gather
investigayion while evidence is still fresh
Necessity
Insurer cannot be held liable to pay a claim unless he receives
notice of that claim. Formal notice not necessary when insurer
already has actual notice.
Time for giving notice of loss
Within a reasonable time, given without unnecessary delay.
Depends on the circumstances – as soon as circumstances
permitted insured, in the exercise of reasonable diligence, to
communicate.
Stipulation may provide as long as NOT UNREASONABLY
SHORT.
Meaning and nature of proof of loss
More or less formal evidence of occurence of loss. Need not be
of such persuasiveness as is required in judicial proceedings.
Form
No required form. Orally or in writing.
Purpose of proof of loss
1. Give information of extent of insurer’s liability;
2. Afford insurer of detecting any fraud; and
3. Operate as a check upon extravagant claims.
Burden of proof of loss in court action
Insured. Once the insured makes a prima facie case in his favor,
burden of evidence shifts to the insurer to controvert the
insured’s prima facie case.
Excuses from non-compliance
Excused when the circumstances were such as to make strict
compliance impossible. Ex. beneficiary had no knowledge of
the existence of the policy.
Sec. 92
WHEN DEFECTS IN NOTICE OR PROOF DEEMED WAIVED
Insurer has the powr to require information satisfactory to
him. His retention of the defective proofs constitutesa waiver
of his objections.
Example of waiver:
 Recognizes liability
 Denies all liability under the policy
 Joins int he proceeding for determining the amount
of loss, making no objections on the preliminary
proof;
 No objection on formal defect in preliminary proof.
General statement that proofs are defective is not sufficient to
impose on the insured the duty to supply defects not pointed
out.
Sec. 93
WHEN DELAY IN PRESENTATION OF NOTICE OR PROOF
DEEMED WAIVED
1. By the act of insurer;
2. Failure to take objection promptly and specifically
upon that ground.
Ex. Instead of invoking delay, isnurer tooks steps to determine
cause and extent of loss.
Sec. 94
EFFECT OF FAILURE TO SECURE CERTIFICATE OR
TESTIMONY OF THIRD PERSON
Insured is only required to exercise due diligence to procure it.
In event of refusal, only required is reasonable evidence that
person’s refusal was not induced by any just grounds or
disbelief of said person in the truth of the facts necessary to be
certified or testified but, because of other grounds.
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TITLE 11 – DOUBLE INSURANCE b. Valued policy – a recovery from one is deducted from
value of the policy regardless of his actual loss. Can
Sec. 95 recover only the difference from the others.
DOUBLE INSURANCE DEFINED c. Unvalued policy – may recover from insurers in such
Same person is insured by several insurers separately in order he may select up to the amount of actual loss.
respect to the same subject and interest. d. Where sum received by insured exceeds total
insurance taken – excess is held in trust by insured for
In double insurance, there is co-insurance by two or more the insurers. He cannot recover more than the full
insurers, hence, it is also known as co-insurance. indemnity.
e. Contribute ratably to the loss.
Requisites
1. Person insured is the same;
2. 2 or more insurers insuring separately;
3. Identity of subject matter;
4. Identity of interest insured;
5. Identity of risk or peril insured against.

Double insurance vs. Over insurance

Double insurance Overinsurance

There may be no over-
insurance as when total of
policies does not exceed the
insurable interest
Always several insurers
Amount of insurance is
beyond the value of the
insured’s insurable interest
There may be only one
insurer involved

Thus, both may co-exist.

Binding effect of stipulation against double insurance

Known as “other insurance” clause. Valid and reasonable to
prevent increase in moral hazard. Absence of consent, waiver
or estoppel on the part of insurer, a breach will prevent a
recovery.

Purpose of prohibition
Prevent over insurance and avert the perpetration of fraud.
The public and insurer is interested in preventing the situation
in which a loss would be profitable to the insured.

Sec. 96
RULES OF PAYMENT OF CLAIMS WHERE THERE IS OVER-
INSURANCE BY DOUBLE INSURANCE
As a contract of indemnity, the insured cannot recover no
more than the amount of his insurable interest.

Principle of contribution
Requires each insurer to contribute ratably to the loss or
damage considering that several insurances cover the same
subject matter and interest against the same peril.

a. Insured, unless policy provides, may claim to anyone

in such order as he may select, up to amount of each
insurer’s liability.

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TITLE 12 – REINSURANCE
Reinsurance treaty vs. Reinsurance policy
Sec. 97 Treaty - agreement between 2 insurance companies whereby
REINSURANCE DEFINED one agrees to cede and the other to accept reinsurance
One by which an insurer procures a third person to insure him business pursuant to provisions specified in treaty – resulting
against loss or libaility by reason of such original insurance. to automatic method of reinsurance.

Also called “treaties.”
Reinsurance vs. Double insurance
Reinsurance
Insurer becomes the
insured, in so far as
reinsurance is concerned
Subject is original insurer’s
risk
Double insurance
Insurer remains as insurer of
original insured
Subject is property
Policy – contract of indemnity one insurer makes with another
to protect the first insurer from a risk it has already assumed.
Treaties are contracts of reinsurance; policies or cessions are
contracts of insurance.
Sec. 99
NATURE OF CONTRACT OF REINSURANCE
Contract of indemnity against liability, not merely against
damage. Primary subject is insurer’s risk and not the property
insured.

Different interest Same interest Thus, it is not necessary that the insurer/reinsured shall first
have paid a loss accruing from the original insurance.
Original insured has no Insured is the party in
interest in the contract of interest in all the contracts Contract separate from original insurance policy, but based on
reinsurance, which is the original policy. Same requirement for insurable interest
independent of the original applies (scope cannot be beyond of the coverage of original
insurance). Rule on subrogation applicable.
Consent of original insured Insured has to give his
is not necessary consent Sec. 100
RIGHTS OF ORIGINAL INSURED IN THE REINSURANCE
CONTRACT
Value of reinsurance None. Not privy.
From standpoint of insurer
Limit on the maximum claim it wishes to pay out (retention). Liability of reinsurer to reinsured
When such applications are for a sum over the company’s General rule: Reinsurer is entitled to avail itself of every
retention, it handles the excess by means of reinsurance. defense which the reinsured might urge in an action by the
person originally insured.
From the standpoint of insured
Makes the insured’s individual policy more reliable. Liability of reinsurer to original insured
a. If the reinsurance contract contains a stipulation
From standpoint of insuring public assigning the right of the insurer in favor of the
Stability and efficiency of reinsurance business. insured;
b. Contract of reinsurance with stipulation in favor of
Sec. 98 original insured;
DUTY OF THE REINSURED TO DISCLOSE FACTS OF c. Contract of reinsurance amounting to novation of
ORIGINAL INSURED original contract.
All representations of the original insured and also all
knowledge the re-insured possesses, whether previously or
subsequently acquired, which are material to the risk.

Automatic vs. Facultative method of ceding reinsurance

Automatic – reinsured is bound to cede and reinsurer is
obligated to accept a fixed share of the risk which has to be
reinsured under the contract.

Facultative – no obligation either to cede or to accept

aprticipation in the risk insured, each party having a free
choice.

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