sundiang notes - insurance

- 1 - REVIEWER IN INSURANCE LAW

As lectured by Dean Jose R. Sundiang

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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 insurance was mailed. An acceptance was also

mailed by the insurer. Before the receipt of the acceptance letter, the

insured died.

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. Insurance Act (2427)

2. PD 612

3. PD 1460 - merely codified all the insurance laws of the Philippines;

date of effectivity - 11 June 1978

4. PD 1814 - amending certain provisions of the Insurance Code

5. BP 874

CONTRACT OF INSURANCE

A "contract of insurance" is an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage or liability arising

from an unknown or contingent event.

It is an agreement, a contract. Hence, it must have all the essential

elements of a contract: consent, object, and cause or consideration.

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 into a

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]).

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

said provision of the Insurance Code has been

correspondingly modified by said piece of legislation.

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

6809, I believe that

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 of

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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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 and

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 concepts referring to a contract of insurance.

The most important ones are:

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 conditional, it may or may not

happen)

2. It is a personal contract

that the insurer considered

See Sec. 20

The law presumes the personal

qualifications of the insured.

3. It is a contract of indemnity (except life & accident insurance where

the result is death)

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.

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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 a

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.

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 the so-called authorized driver clause of the

policy, who is deemed to be an authorized driver under the policy? In a

contract of insurance, should there be an accident, and the driver at

the time of the accident is not an authorized driver within the meaning

of the policy, there can e no recovery.

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 said

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motor vehicles by any order of a court of law, etc., applies only if

the person driving is other than the insured.

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 a

Philippine Driver's License.

REMEMBER -

You apply the rule that 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, only when there is doubt, ambiguity or obscurity,

in any of the terms and stipulations of the contract.

But if the terms, conditions, and stipulations are clear, there is no

room for interpretation.

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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 not

supposed to make contracts for the parties. That is also true with the

contract of insurance.

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 on

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 from

the insurance laws of California and New York.

REMEMBER, in resolving insurance problems, apply the following in the

order they are mentioned:

1. Special Laws

2. Civil Code (Art. 2011)

3. American decisions and doctrines

5. It is based on the principle of subrogation (applicable only to

property insurance)

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 from the insurer, but the insurer pays

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

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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? When

the insurer pays the insured even if the cause of the loss was not the

risk or peril insured against.

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. A owns a house worth P1M. He has an insurable interest in the house.

But B insured the house in his name. Should 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 that

house, such interest was not covered by the policy, as it was B who

insured the house.

2. 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. What

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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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 or

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 no

action against each other, and both shall be prosecuted. xxx

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 in the subject matter, the

contract becomes a wagering contract, on the theory that he has nothing to

lose and everything to gain.

While it is true that the insurance is a conditional contract based on

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 he

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? There

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.

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 of

money, or respecting property or services, of which death or

illness might delay or prevent the performance; and

d) of any person upon whose life any estate or interest vested in him

depends.

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

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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 can

recover? The heirs or legal representative of D.

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 that out of

which the expectancy arises.

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- 10 - REVIEWER IN INSURANCE LAW 10


Aside from an owner of a property, who else can have an insurable interest

in such property? A lessee, among others. In order 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 damnified 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 he has

insurable interest.

In the sale of property, the vendor, prior to actual delivery, has an

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, the

issue of who should bear the loss, because of the principle or res perit

domino.

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 the

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.

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 it the

school which has an insurable interest in the life of the lecturer? No.

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Sec. 8. Unless the policy otherwise provides, 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. Under the law on Credit Transactions, ownership is not transferred

to the mortgagee, and

2. Loss of the house will not mean the extinguishment of the loan.

Under the law on Contracts, while the extinguishment of the principal

contract will extinguish the accessory contract, the extinguishment of the

accessory contract will not extinguish the principal contract. The rule is:

accessory follows the principal.

Should the house be lost, such loss will not necessarily mean the

extinguishment of the loan.

The loan will only become an unsecured obligation. Therefore, the

mortgagor's interest in the house remains.

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 own

interest only. Nothing is mentioned about the interest of C. The house was

destroyed by fire. Who can recover and how much?

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 is worth only P3M, D

would be making a profit. That would encourage arson.

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 own

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 contract of insurance. If the

insurance company indemnifies C, the amount of P2M, will such payment

extinguish the loan?

No. There will be subrogation. The insurer, after indemnifying C can

recover from D. There will be a change of creditors.

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. D is still the real party in interest, he does not cease to be a

party to the contract.

2. Any act of D which will otherwise avoid the policy will have the

same effect.

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 was for P3M and there was a total loss, who can

recover and how much?

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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C can recover P2M and D, 1M. This time the loan is extinguished. There

will be no subrogation. This is what we call "loss payable clause."

PROBLEM:

In life insurance, is it necessary for the beneficiary to have an

insurable interest in the life of the insured?

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

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."

of adultery or

"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, according to this

article."

Simply, one who cannot receive any donation under Art. 739, cannot be

named beneficiary in the life insurance policy by the person who cannot

give any donation.

Reason behind the law: to prevent an indirect violation or circumvention

of the law.

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 designated 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 proceeds would go to the

estate of the deceased.

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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 of the loan is

conditional, subject to the safe arrival of the vessel at the port of

destination.

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).

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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 the

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 Dasmarias Village. On the same evening, the son together

with his family moved into the house which he expected to inherit. At the

same time he insured the house in his name against fire. The operation took

place, and unfortunately, the mother died. After which, the house was

completely destroyed by fire, the risk or peril insured against. May the son

recover?

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 in any part of the

thing insured unaccompanied by a corresponding change of interest in the

insurance, what will happen?

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 person.

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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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 in both the insured and the policy be vested

again in the same person?

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 recover? 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 takes

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.

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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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 will not be suspended

despite a change in any part of the thing insured:

1. 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.

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

2.

- 17 -



3.

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.

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?

4.

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 not

liable beyond the value of the property he received from the

decedent.

Sec. 24. A transfer of interest by one of several partners, joint

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.

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 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 . There will be no suspension of the policy because no

new party was introduced to the co-ownership.

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.

5.

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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 the policy

shall be received as evidence of proof of interest. This is also void.

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 pay

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 is contrary to law and public policy, because it

was a wagering contract.

UTMOST GOOD FAITH (UBERIMEI FIDEI)

The contract is the law between the contracting parties, and they are

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.

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.

aleatory contract,

reciprocally bind themselves to give or to do something in consideration of

what the other party shall give or do.

By an one or both of the contracting parties

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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. Concealment

2. Representation

3. Warranties

4. Conditions

5. 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. Insurable interest;

2. Interest must be properly covered by the policy;

3. There was a loss; and

4. 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 that which a party knows and ought to

communicate is called concealment.

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I would call it a "sin of omission," neglect, failure. Where you are duty-

bound 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 forming 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, you

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.

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 members 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

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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 a

vehicular accident.

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 so

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 are

distinctly impaired. (Sec. 33)

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.

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 the insurer would constitute a

waiver of the right to communication.

In the same example, the applicant is asked the following questions,

(1) Have you ever been confined in a hospital? Yes. (2) How many

times? Two times. (3) Why? I suffered from minor ailments like flu.

EXAMPLES:

i.

ii.

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It turned out, however, that the applicant had been confined in a

hospital many times, and had gone major operations for some serious

ailments.

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 the

purpose of misrepresentation? Why would a party to a contract make

misrepresentations to the insurer? To induce the insurer to enter into a

contract. That being the purpose, misrepresentation is made either before or

at the time of the effectivity of the issuance of policy.

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 commercial 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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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 on the ground

that there was either concealment or misrepresentation? Yes.

RULE:

Statement in the case of representation must be true when the contract

goes into effect, although it may not be true when made.

On the other hand, even if true when made, but no longer true when the

contract goes into effect, that will give the insurer the right to rescind

the contract.

Rescission is the remedy when there is concealment, misrepresentation, and

breach of warranty.

What are the limitations of the right of the insurer to rescind the

contract of insurance?

(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 have

asked for the rescission of the policy. But instead of asking for the

rescission of the policy, he accepted the premium payments from the

insured. Such acceptance constitutes a waiver of the right to rescind.

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 be no loss, there would be no claim,

during the term of the policy.

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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 must be exercised prior to the

commencement of an action on the contract.

"Commencement of an action on the contract" - either in court or with

the Insurance Commissioner.

(3) In a life policy, defenses are available only during the first two

years of the insurance policy.

The period of two years for contesting a life policy by the insurer

may be shortened but it cannot be extended by stipulation.

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 the

recovery of a claim. The second part is what is known as the incontestability

clause.

WHAT IS THE INCONTESTABILITY CLAUSE?

A Clause stipulating that the policy shall be incontestable after a

started period ; after the requisites are shown to exists, the insured shall

be estopped from contesting the policy or setting any defense, except as

allowed, on the ground of public policy.

REQUISITES OF INCONTESTABILITY CLAUSE?

1. Life insurance policy payable upon the death of the insured; and

2. Policy must have been in force for a period of at least two years

during the lifetime of the insured either from date of issue or date of

last reinstatement.

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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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 P1M

(amount of interest)?

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 the

insurer the extent of his interest in the property, say P2M.

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 mortgagee, then his

interest may be less than the value of the property. It could only be the

amount of the obligation secured by the mortgage.

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 in

connection with the formation and operation of the policy prior to the loss.

The following defenses are still available:

1. That the person taking the insurance lacked insurable interest required

by law.

2. That the cause of death of the insured is an excepted risk.

3. That the premiums have not been paid.

4. That the conditions of the policy relating to military or naval science

have been violated.

5. That the fraud is of a particular vicious type.

6. That the beneficiary failed to furnish proof of death or to comply with

any condition imposed by the policy after the loss had happened.

7. 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 be

discovered.

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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 minds

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.

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 of

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.

the property insured

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.

If is transferred, but the insurance is not

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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 the

consent of the insurer, unlike in the case of life insurance under Sec. 181.

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 consent of the insurer is necessary for the

transfer of the policy. Why? Because it is a personal contract.

Even under Sec. 58, the law says "The mere transfer of a thing insured

does not transfer the policy, but suspends it until the same person becomes

the owner of both the policy and the thing insured."

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, or an

endorsement, or a clause, or a warranty is issued? The answer is qualified.

If the same was issued simultaneously with the policy (normally it is

attached to the policy), there is no need for the counter-signature of the

insured.

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

sundiang notes - insurance

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