• Section 2.

Whenever used in this Code, the following terms shall have the respective
meanings hereinafter set forth or indicated, unless the context otherwise requires:

"(a) 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.

"A contract of suretyship shall be deemed to be an insurance contract, within the meaning
of this Code, only if made by a surety who or which, as such, is doing an insurance business
as hereinafter provided.

"(b) The term doing an insurance business or transacting an insurance business, within the
meaning of this Code, shall include:

"(1) Making or proposing to make, as insurer, any insurance contract;

"(2) Making or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;

"(3) Doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;

"(4) Doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code.

"In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business.

"(c) As used in this Code, the term Commissioner means the Insurance Commissioner

o Definition of the law is subject to criticism because it does not include life insurance
which is a contract upon condition rather than to indemnify for no recovery can fully
repay for loss of life which is beyond pecuniary value
o Better definition is that a contract of insurance is an agreement by which insurer for a
consideration paid by the insured, promises to pay money or its equivalent to the latter
upon the happening of a loss, damage, or liability happening from an unknown or
contingent event
o To pay another for the happening of a fortuitous event beyond the effective control of
either party
o A written insurance contract is called a policy
o Insurance is to be determined by the nature of the contract regardless of its form
• A suretyship shall be deemed an insurance if made by a surety who is doing
insurance as a business
o Elements of the contract
• Subject matter, the thing being insured
• Consideration, the premium paid by the insured
 • Object and purpose, transfer and distribution of the risks of loss
o Characteristics of the contract
• Consensual, because it is perfected by the meeting of minds
• Voluntary, because it is not mandatory
▪ however some laws might require insurance as a requirement to giving
licenses
▪ It may also arise by operation of law like in GSIS and SSS
• Aleatory, because it depends on some contingent event
▪ To do upon the happening of an event which is uncertain OR is to occur at
an indeterminate time
• Executed as to insured, Executory upon the insurer
▪ Because insured already paid while insurer will only execute upon payment
for a loss
• Conditional, because it is subject to the happening of the event and the payment
of premiums
• A contract to indemnify, because the promise is to make good the loss of the
insured
▪ Which is why you cannot insure a party you have no insurable interest in
▪ Lack of interest make the insurance void
▪ Does not apply to life insurance
• Personal contract, because it does not attach to run with the property in that the
buyer cannot be his successor unless by express stipulation the parties decide to
make it run
▪ Personal insured interest on the property and not the property itself so it is
still personal
▪ Applies only to a particular individual and does not transfer except life
insurance which is assignable and do not represent a personal agreement
o Elements of a contract of insurance
• Insurable interest
• Insured is subject to a risk of loss through the impairment of that interest
• Insurer assumes the risk of loss
• Assumption of risk is part of a scheme to distribute actual losses among a large
group of persons bearing a similar risk
• Contribution of premium
o If only the first 3 are present then it is merely a risk shifting device and not a contract of
insurance which is a risk distributing device
• They spread the risk of loss faced by the insured among as many people who are
subject to the same risk through a premium where each member contributes to a
small degree toward compensation for the losses of any member
o Insurance does is NOT to prevent losses but to spread the loss over a large number of
people
o Coping with risk
• Limiting the probability of loss, like fire wall mechanisms
• Limiting the effect of loss
• Self-insurance
• Ignoring the risk
• Transferring the risk to another
o Value of transferring risks
 • Risk preferring, would forego a certain loss in the hope of not incurring a loss by
chance (50 percent chance to lose 1000)
• Risk neutral, indifferent to alternatives
• Risk averse, would choose the certain smaller loss
▪ People become more risk averse as the potential magnitude of loss
increases even if probability declines
▪ The more wealth a person has the less risk averse he is
o Economic effects of the transfer and distribution of risk
• Benefits society as a whole, since both parties benefit from the transaction
• Undesirable side effects, insured might not take steps to protect his property no
that risk of loss is not his to bear
• Problem of measurement of amount of risk transferred, so can't determine
proper premium amount because of moral hazard
• Sharing by insured of some responsibility for the risk, to bear any loss up to some
stated amount to bear with a moral hazard
• Problem regarding computation of premium, calculating expected loss is difficult
• Classification of risks, by charging people different premium rates depending on
group
• Subclassification of risks, adverse selection where although different risks still in
same group to balance each other out
o Fields of insurance
• Social Insurance, is compulsory and designed to provide a minimum of economic
security for large groups of persons
• Voluntary Insurance, not compulsory and is sought by the insured
▪ Commercial insurance, where the motivation is profit
• Personal insurance, concerned with losses due to earning power of a
person
• Property insurance, protection against loss arising from ownership or
use of property
• First kind indemnifies owner's loss of property
• Second kind, pays damages for which insured is legally liable
▪ Cooperative insurance, to accomplish the ends of social insurance by a
private enterprise
▪ Voluntary government insurance, not compulsory but still for the benefit of
the community
o Classification of contracts of insurance
• General old classes
▪ Marine, fire, life, accident
• Main new classes
▪ Insurance against loss or impairment of property interests
▪ Insurance against loss of earning power
▪ Insurance against contingent liability to make payment to another
o Classification by interests protected
• Property insurance, 1st party insurance because proceeds are paid to insured
• Liability insurance, 3rd party because interest are those of a different party's, no
fault insurance
• All insurance except liability is a first party insurance
• Life insurance is not 3rd party because the loss is suffered by the insured
 ▪ Unless third party rights as beneficiaries are chosen, it goes to the estate
o Insurance can also be categorized as all risk or specified risk (as to the causes of loss)
• In a specified risks burden of proof is on insured to prove that it falls within the
coverage
• All risk insurance is not absolute because it does not cover loss due to willful or
fraudulent acts
o Construction of insurance contracts
• To be interpreted in consonance with other stipulations in the contract
• Construed liberally in favor of insured because it is a contract of adhesion
o What constitutes as doing an insurance business
• Designation by insurer is not controlling
• Company FOUND to be engaged in insurance business
• Must not be incidental to a business if excludes losses from external or accidental
losses
• Principal object and purpose test
▪ If object is indemnity then it is insurance, if it is service and risk transfer is
incidental then it is not
o Functions of insurance
• Main function is risk bearing
• Subsidiary functions are to stimulate business enterprise, encourage business
efficiency, promotes loss prevention, encourages savings, and solves social
problems
• Indirect functions are the investment of funds, use of reverse funds, affects
prices, and is a basis of credit

• "Section 3. Any contingent or unknown event, whether past or future, which may damnify a
person having an insurable interest, or create a liability against him, may be insured
against, subject to the provisions of this chapter.

"The consent of the spouse is not necessary for the validity of an insurance policy taken out
by a married person on his or her life or that of his or her children.

"All rights, title and interest in the policy of insurance taken out by an original owner on the
life or health of the person insured shall automatically vest in the latter upon the death of
the original owner, unless otherwise provided for in the policy.

o Requisites of a contract of insurance

• Subject matter with an insurable interest
▪ Anything with a pecuniary value which is subject to loss or deterioration
▪ May be persons or property
• Peril insured against that is contingent or unknown regardless of whether past or
future and a duration of the risks thereof
▪ Event happening will cause loss to a person having insurable interest
▪ OR create liability against him
▪ An unknown past event is only valid for marine insurance, fire for example
must be a future event
• A promise to indemnify
• A consideration known as the premium
 • A meeting of the minds upon the foregoing essentials
o A married woman may take out insurance for her life or that of her children without
consent of the husband
• Same goes with her paraphernal or separate property
o Insurance by minor is merely voidable
• Persons who are capable cannot allege the incapacity of those whom they have
contracted with
• Guardian may exercise in behalf of the minor
o Upon death of original owner of a policy of insurance on the life of a person, all rights
shall automatically go to the latter unless otherwise provided for in the policy

• "Section 4. The preceding section does not authorize an insurance for or against the
drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize
o Extends to all schemes of distribution of prizes by chance
• Consideration
• Prize
• Chance
• One cannot insure himself against his failure of his ticket to win a prize
o Is not a wagering or gambling contract
• Though it is not through chance its purpose is still not for actual loss
• Insurance to distribute loss through mischance NOT gain through chance
• Insured seeks to avoid misfortune NOT court fortune
• Insurance equalizes fortune NOT increase the inequality
• What insure gains isn't at the expense of another NOT loss by the wagering party
• Creating insurance does not create a new risk of loss NOT like wagering where by
entering there is already a risk
o Similarity between insurance and gambling is that there is a promise to pay a given sum
on the occurrence of a future condition and the payment or promise to pay a stipulated
amount

• "Section 5. All kinds of insurance are subject to the provisions of this chapter so far as the
provisions can apply
o Matters not expressly provided for in the insurance code and special laws on insurance
are governed by the civil code

"TITLE 2
"PARTIES TO THE CONTRACT

"Section 6. Every corporation, partnership, or association, duly authorized to transact

insurance business as elsewhere provided in this Code, may be an insurer
o The business of insurance may now only be carried out by corporations, partnerships or
associations
o Inured is not always whom the proceeds are paid
o The relation between the 2 is one of a contingent debtor and creditor
o Terms used
• The insurance company can also be called an underwriter
• Assured is a synonym for the beneficiary
 o An insurance corporation is one formed to save any person or corporation harmless
from loss, damage, or liability from any unknown or future or contingent event
o Business of insurance is one affected by public interest and is thus subject to the
regulation and control by the state by virtue of police power

"Section 7. Anyone except a public enemy may be insured

o Capacity of part insured
• Natural, competent to make a contract and must possess an insurable interest
• Juridical, may take out insurance on property owned by it
o Public enemy designates a nation whom the Philippines is at war with
• Mobs and thieves are not public enemies
• Control test to check if corporations are a public enemy
o Effect of war on existing insurance
• Property insurance policy ceases to be valid as soon as insured becomes a public
enemy
• Life insurance is abrogated by reason of non-payment and not merely suspended
• Loss after war does not matter since the contract is not revived

"Section 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
o Insurable interest of Mortgagee and mortgagor
• The interest of both are distinct from each other, insurance taken for his benefit
does not inure to the other
• Mortgagor of property as owner has an insurable interest to the extent of its
value even if the mortgage debt equals the value, this is because loss of the
property insured will not extinguish the mortgage debt
• Mortgagee has insurable interest to the extent of the debt secured since the
property is relied upon as security thereof; it is his interest being insured and not
the property
• Mortgagor cannot recover beyond loss, and mortgagee not beyond the credit at
the time of loss
o Insurance by mortgagee of his own interest
• Entitled to the proceeds before payment of mortgage
• Insurer subrogates MORTGAGOR
• Mortgagor now has to pay the insurer
o Insurance by mortgagor of his own interest
• It is competent to take out insurance for the benefit of mortgagee so loss is
payable to mortgagee
• The legal effect of this are as follows
▪ Contract is for the interest of the mortgagor so he does not cease being a
party
 ▪ Act of mortgagor prior to loss which would avoid insurance affects
mortgagee
▪ Acts to be performed by mortgagor may be performed by mortgagee
▪ In case of loss, mortgagee gets proceeds to the extent of credit
▪ Upon recovery debt is extinguished
o A union mortgage clause makes it so the acts of mortgagor do not affect mortgagee
o A loss payable mortgage clause makes it so loss is payable to mortgagee and that the
acts of mortgagor affect mortgagee
o Right of mortgagor under mortgagee's policy
• Before loss, is a conditional appointee
• After loss, entitled to receive money to the extinguishment of the debt as fast as
it becomes due

"Section 9. If an insurer assents to the transfer of an insurance from a mortgagor to a

mortgagee, and, at the time of his assent, imposes further obligations on the assignee,
making a new contract with him, the acts of the mortgagor cannot affect the rights of said
assignee
o Transfer from mortgagor to mortgagee only if insurer gives consent
o Effect of transfer is to substitute the assignee in place of the original insured in respect
to the right to claim
o Assignee acquires no greater right unless he makes a new contract with the insurer
o Fire policy is strictly personal
o Marine policy is assignable even without the consent of insurer
o Casualty policy requires consent, along with those subject to moral hazards
o Life insurance may be freely assigned before or after loss occurs

"TITLE 3
"INSURABLE INTEREST

"Section 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

o A person is deemed to have an insurable interest in the subject matter insured where he
has a relation or concern that he will drive pecuniary or financial benefit from its
preservation, and damage from its destruction
• Interest does not imply a right to the hole or part of that thing
• Every benefit or advantage arising out of or depending on such thing is
considered comprehended EXCEPT life insurance where benefit need not
necessarily be of pecuniary measure
o Necessity of insurable interest
• Gives a person the legal right to insure the object of the policy, in the absence of
such interest the effect would be gambling (Which is illegal) because it would be
a mere bet on a future event
• Is necessary for the validity of an insurance contract, if a loss occurs without this
requirement insurer has the right to deny liability even if it's agent waives the
requirement
▪ Insurable interest does not apply to industrial life insurance
o Wager policies without interest is contrary to public policy because there is an interest
for the destruction of a subject matter rather than its preservation
o General classes of life policies
• Insurance upon one's life, taken upon his own life for the benefit of his own
estate or beneficiary
▪ no question of insurable interest
▪ Insurable interest is really only required as evidence of the good faith of the
parties
▪ Exception is when the court finds that a wagering policy has been taken out
by insured at the behest of a 3rd person as beneficiary
▪ Is evident when the beneficiary pays the premiums, has no emotional or
economic interest, and that the proposal take the insurance was from the
beneficiary
▪ Upon finding it is a wagering policy the court will render it VOID
• Insurance upon the life of another, must have insurable interest on the life of that
person because you benefit from the policy
▪ Insurable interest on the life of another must be a pecuniary one
▪ Requirement is to show interest in preserving the life insured in spite of the
insurance rather than destroy it
o Similarity between life insurance and donation
• Both are founded upon liberality when it is in his life for the benefit of another
• If it is for the life of another but for the benefit of a 3rd party, both must have
insurable interest in that life but if insurable interest of owner is satisfied a life
policy is assignable regardless of whether assignee has insurable interest in the
life
o Insurable interest upon whom one depends for education, support, or whom he has a
pecuniary interest in
• Mere blood relationship if sufficiently close enough gives insurable interest in the
life of another but it must be obtained in good faith and not for purposes of
speculation
▪ Spouses
▪ Legitimate ascendants and descendants
▪ Parents and their legit children and the legitimate or illegitimate children of
the latter
▪ Parents and their illegitimate children and the legit or illegitimate children
of the latter
▪ Legitimate brothers or sisters, full or half-blood (if not legitimately related
still bound to support if the need of the sibling of age EXCEPT if it is due to
causes imputable to the negligence or fault of claimant)
• Love and friendship by itself is not enough, clear showing of insurable interest
 ▪ Like expecting education from them
▪ Expect being cared for by them like in the future degenerative years
▪ Or a partner whose death will dissolve the firm
▪ Or one on an irreplaceable employee
o Insurable interest of a person in a life of another under a legal obligation to the former
• That a right possessed by him will be impaired by the loss of his life
• Also applies to a risk that the performance might be delayed or prevented
• A partner has no insurable interest in the life of the other if both have no capital
invested and neither is indebted to the other
o Insurable interest of creditor in life of his debtor
• Only to the extent to the amount of the debt
• The creditor is not acting as the agent of the debtor for the debtor's benefit and
does not inure to latter's benefit
• If whole debt has been paid then recovery is not permissible
• Different if debtor gets it for creditor because full payment does not invalidate
the policy but the proceeds go to debtor
• Even when a once valid debt becomes legally unenforceable, the insurable
interest still does not end because a moral obligations still exists
▪ Under our law, creditor may not insure the life of his debtor unless the
latter has a LEGAL obligation to pay
o Insurable interest in life of person upon which an estate or interest depends
• Where the continuation of the estate or interest vested upon him depends on the
insured
o On principle all contracts without consent of insured are contrary to public policy and
thus void
• Under our law consent is not essential to the validity of the policy so long as it can
be proved that the assured has a legal insurable interest at the inception of the
policy

"Section 11. The insured shall have the right to change the beneficiary he designated in the
policy, unless he has expressly waived this right in said policy. Notwithstanding the
foregoing, in the event the insured does not change the beneficiary during his lifetime, the
designation shall be deemed irrevocable.

o Beneficiary refers to the person who is named or designated in a contract of life, health,
or accident insurance as the one to receive the benefits which become payable
according to the terms of the contract
o Kinds of beneficiary
• Insured himself
• 3rd person who paid a consideration, for a creditor, not party to the contract
• 3rd person through mere bounty of insured, designated, not party to the contract
o Limitations in the appointment of a beneficiary
• Article 2012 of the civil code
▪ Any person forbidden from receiving any donation under 739 cannot be
made beneficiary in life insurance (Guilty of adultery by preponderance of
evidence, guilty of the same criminal offense in consideration thereof, to a
public officer, descendants, ascendants by reason of office, common law
spsouse)
 • Regardless of no insurable interest so long as it is in good faith without intent to
make t a cover for a forbidden wagering contract
o Right of insured to change beneficiary in life insurance
• General rule, WON policy reserves to the insured the right to change, he has the
power to change the beneficiary without the consent of the old beneficiary who
receive no vested right
• Power to extinguish beneficiary's interest extinguishes at death of insured
• If insured waives the right to change beneficiaries then he has no power to make
such change without consent of the beneficiary
▪ Beneficiary gains a vested right from date policy is issued and delivered
▪ Insured can't even add a new beneficiary
▪ Cannot destroy the contract by not paying premium because the
beneficiary can pay instead
o Vested right or interest of the beneficiary should be measured on its full face value and
not it cash surrender value (minor limit)
o Where beneficiaries die before insured
• Beneficiary's representative is entitled to insurance proceeds, but this does harm
to intent of insured who only wants to support the beneficiary
• Estate of insured entitled to insurance proceeds especially if there is an express
stipulation in the contract to that effect, but even that is countered when
executors, administrators, or assigns are included as persons who can be
designated
o Designation of beneficiary (liberally construed for the benefit of whom the insured
intended)
• Descendants of the first degree, if with specific name then only him
• Husband, wife, or widow; "wife" on its own is a personal description with no need
of legal statue but if designated by status "the wife of insured" then the legal
spouse is entitled
• Wife AND children, includes children not common to both
• Family, court has to determine if person was so regarded by insured
• Heir or legal heirs, class of persons who would take the property in case he died
intestate
• Estate or legal representatives of deceased, construed in the strict technical
sense to mean executors and administrators unless it appears insured intended it
for heirs
• If no beneficiary then it will go to his legal heirs, to split between 2 innocent
women who married him

"Section 12. The interest of a beneficiary in a life insurance policy shall be forfeited when
the beneficiary is the principal, accomplice, or accessory in willfully bringing about the
death of the insured. In such a case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the
proceeds shall be paid in accordance with the policy contract. If the policy contract is silent,
the proceeds shall be paid to the estate of the insured

o In case forfeited then it goes to the nearest qualified relative of the insured
• Legitimate children
 • Father and mother
• Grandparents or ascendants nearest in degree if living
• Illegitimate children
• Surviving spouse
• Collateral relatives
• The state
o Liability of insurer upon death of insured
• Death by legal execution, considered one of the risks assumed by insurer in a life
insurance policy
• Death by self-destruction, insurer is not exempted especially if it is for the benefit
of another rather than insured,
▪ But section 89 says otherwise, so long as it is not by negligence but a pure
voluntary act while in sound mind
• Death by suicide while insane, in the absence of express conditions the insurer is
still liable
• Death caused by beneficiary, general rule is it is forfeited unless it does not
amount to a felony like when it is in self-defense, accidental, or beneficiary was
insane
▪ Insurer can stipulate that it can be lost even if killed lawfully
▪ Even if killed through felony but not for gain, general rule will apply
• Death cause by violation of law, to avoid liability insurer must prove the causal
connection between the cause of death and the crime committed
▪ Violation of special law not considered a felony here

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

o Anyone has an insurable interest in property who derives benefit from its existence or
would suffer from its loss
• It is enough that the event insured against has pecuniary injury as the natural
consequence
• Title or right to possession is not essential
• Expectation of loss without any legal right is not an insurable interest (Burning
hotel)

"Section 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

o Existing interest, may be legal or equitable title

 • Representatives holding legal title can get the proceeds but only in benefit of
whom they are representing
• More than one insurable interest may exist in the property
o Inchoate interest, limited to the value of his share in the distribution
o Expectancy, with and existing interest (future crops owned by him)

"Section 15. A carrier or depository of any kind has an insurable interest in a thing held by
him as such, to the extent of his liability but not to exceed the value thereof

o This is allowed because a the loss of the thing may cause liability towards the depository

"Section 16. A mere contingent or expectant interest in anything, not founded on an actual
right to the thing, nor upon any valid contract for it, is not insurable

o A mere hope or expectation of benefit which may be frustrated will not support a
contract of insurance
• Son cannot insure his father's property that he expects to inherit
• Parents, children, and spouses can insure the life of each other because of a
mutual obligation to support each other (article 195 family code)
• Unsecured creditor cannot insure specific property of his debtor
▪ May do so when the debtor is dead because the personal obligation shifts
to the estate
▪ Judgment creditors have an insurable interest but to collect they must
show that the debtor has no other property out of which judgment may be
satisfied
• A beneficiary in a will has no insurable interest while the testator is still alive
unless testator expressly waives his right to revoke the will

"Section 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss or injury thereof

o Insurance contracts are one of indemnity, insurance more than the value of the
property is a wagering policy and thus void
o Anything that reduces the loss lessens the liability of the insurer

"Section 18. No contract or policy of insurance on property shall be enforceable except for
the benefit of some person having an insurable interest in the property insured

o This applies even if insured subsequently acquires insurable interest

• The premium is then returned unless they are in pari delicto, doctrine of
indemnity will still apply in this case
• In life insurance it is not necessary for the beneficiary to have an insurable
interest in the life insured
o Doctrine of waiver or estoppel cannot be invoked because the public has an interest in
the matter independent of the concurrence of the parties
 •Mistake of insurer of insuring the building not owned instead of goods, insured
can still recover from the goods
o Measure of indemnity in insurance contracts
• Contracts of marine or fire insurance
▪ In valued policies the valuation of the thing is conclusive (can be proved
that the value is less or that there is fraud)
▪ Principle of indemnity cannot be invoked if they agree to replace or repair
but the cost is higher
• Liability insurance contracts
▪ If insured suffers no loss because liability cannot be enforced then there is
no obligation to pay
• Life insurance
▪ Are not contracts of indemnity because the life of a person is priceless but
merely a measure of the amount insurer has bound himself to pay, it is
more of an investment
• Personal accident insurance contracts
▪ Life and limb are not susceptible to exact uniform valuation
▪ Is a contract of indemnity if it is on the life and limb of another purpose
though a policy of fixed benefits is usually issued
• Health insurance contracts
▪ Those that provide specific periodic income to the disable is not an
indemnity but those that cover medical expenses are
• Health care agreement
▪ A contract of indemnity because it is a nonlife insurance

"Section 19. An interest in property insured must exist when the insurance takes effect, and
when the loss occurs, but need not exist in the meantime; and interest in the life or health
of a person insured must exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs

o Time when insurable interest must exist

• For property it must exist at two distinct times, date of the execution of the
contract and date of the occurrence of the risk insured against otherwise it is
void.
• Insurable interest requirement is satisfied when the interest exists at the time the
policy is procured even if it ceases at the time of the insured's death. This is
because it is an investment, even if it is by a creditor but only for the rest of the
contract year
• Questions of insurable interest are not important in liability insurance
• It need not exist in the meantime for property
o Notwithstanding the great volume of authority to the contrary, the existence of an
insurable interest at the inception of the contract is not necessary for its validity unless
made so by statute
o Insurable interest in life and property distinguished
• As to extent, life is unlimited while property is limited to the value
• As to time when insurable interest must exist, in life it is enough that it exists only
at the time the policy takes effect
 • As to expectation of benefit, in life it need not have legal basis a reasonable
probability is sufficient and it need not be pecuniary (for family only), For
property a legal basis even if remote is needed

"Section 20. Except in the cases specified in the next four sections, and in the cases of life,
accident, and health insurance, a change of interest in any part of a thing insured
unaccompanied by a corresponding change of 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

o Mere transfer of a thing inured does not transfer the policy but suspends it until the
same person becomes the owner
• The goal here is to prevent a motive of destroying the property when the interest
has lessened
• Interest does not pass by mere execution of pledge or mortgage
o The exceptions to the above general rule are
• Sec. 20 In life health and insurance
• Sec. 21 change of interest in the thing after the occurrence of an injury resulting
in loss
▪ The contract must be divisible where the avoiding of one does not affect
the others
▪ Whether it is divisible is a question of intention, not separately valued and
only one premium is evidence of indivisibility
• Sec. 22 change of interest in one or more several things insured separately
insured
• Sec. 23 change of interest by succession on death of insured
▪ His interest in the insurance passes on to the person taking his interest in
the thing insured
• Sec. 24 Transfer of interest by one of several partners who are jointly inured to
the others
▪ Transfer does not affect the risk because no new party is brought into the
contractual relationship with the insurer
▪ If there is a stipulation that a sale or transfer of the undivided interest voids
insurance and it is sold to a copartner without permission then the policy is
avoided
• Sec. 57 When policy is framed that it will inure to the benefit of whomever during
the continuance of the risk may become the owner of the interest insured
• Art. 1306 CC When there is express prohibition of alienation in the policy, the
contract is not suspended but avoided

"Section 21. A change of 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

"Section 22. A change of interest in one or more of several distinct things, separately
insured by one policy, does not avoid the insurance as to the others
"Section 23. A change of 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

"Section 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

"Section 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

o Two stipulation are declared void in this section

• That there is payment of loss even if there is no insurable interest, because this is
a wager policy
• That this policy shall be received as proof of insurable interest, insurable interest
cannot depend on the contract of insurance
o Absence of insurable interest may be raised by and for the benefit of the insurer alone

"TITLE 4
"CONCEALMENT

"Section 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment

o Four primary concerns of the parties to an insurance contract

• Estimation of the risk so insurer can decide whether he is willing to assume and at
what premium
• Precise delimitation of the risk, extent of the contingent duty to pay
• Control of the risk after it is assumed as will enable insurer to guard against the
increase of risk
• Determining whether a loss occurred and the amount of such loss
o Devices for ascertaining and controlling risk and loss
• Devices of concealment and representations
▪ To enable insurer to secure information with respect to the risk possessed
by the applicant
• Warranties and conditions
▪ To make more certain the general words used to describe the risk the
insurer undertook to bear
▪ For conditions existing at the inception of the contract
▪ Allows insurer to extinguish if facts that increase risk are present
▪ General description of the risk has two parts
• Designation of the specific property interest to be covered
 • Specification of the perils the property interest would be exposed (no
major operation)
• Exceptions
▪ Excludes certain specified risks that otherwise would have been included in
the contract
▪ Fire due to lightning for example can be excluded
• Executory warranties and conditions
▪ That certain conditions should or should not exist in the future otherwise
the contract is rescinded
• Conditions precedent
▪ To protect against fraudulent claims of loss
▪ Conditions like providing appointment of appraisers or conditions for
arbitration
o Requisites of concealment
• Party knows the fact he neglects to communicate
• Party concealing is duty bound to discloses such fact
• Party concealing makes no warranty of the fact concealed
• Other party has no means of ascertaining the fact concealed

"Section 27. A concealment whether intentional or unintentional entitles the injured party
to rescind a contract of insurance

o Effect of concealment
• By the insured, makes the contract voidable at the insurer's option. It is no
mistake to plead mistake or forgetfulness
• By the insurer, entitles insured party to rescind a contract. Also an Ubirrimae
Fidae contract
o Concealment is defined as negligence to communicate that which a party know and
ought to communicate
o Proof of fraud IN concealment
• Existence of fraud not required, duty of communication is independent of the
intention and is violated by mere fact of concealment
• Reason for the rule, it would be impossible for it to protect itself and its honest
policy holders against fraudulent claims
• Basis and criterion for provision, basis is that it mislead or deceives the insurer
into accepting the risk or the premium rate by relying upon belief that insured
will disclose material facts
▪ Was the insurer misled into entering the contract?
▪ Was the withheld material fact within the assured's knowledge or
presumed knowledge
▪ Whether insured thought it was a material fact
o Rules as to marine insurance
• In the US, the rule on concealment only applies to marine insurance because the
subject of insurance is generally beyond the reach and not open to the inspection
of the underwriters, often in distant ports or in the high seas while other kinds of
insurance may be seen and inspected before the risk is assumed
• In the Philippines, The rule on concealment applies to every kind of insurance
"Section 28. Each party to a contract of insurance must communicate to the other, in good
faith, all facts within his knowledge which are material to the contract and as to which he
makes no warranty, and which the other has not the means of ascertaining

o This section makes it the duty of each party to a contract of insurance to communicate
in good faith all facts within his knowledge ONLY when:
• They are material to the contract (Section 31, 34, 35)
• The other has no means of ascertaining the said facts (Section 30, 32, 33)
• As to the party with the duty to communicate makes no warranty (Section 67-66)
o The test is whether the applicant is aware of the existence of some circumstances which
he knows would influence the insurer in acting upon his application
o The effect of material concealment cannot be avoided by the allegation that the insurer
could have known and discovered the illness which insured had concealed, there is no
obligation for the insurer to verify the statements made by insured

"Section 29. An intentional and fraudulent omission, on the part of one insured, to
communicate information of matters proving or tending to prove the falsity of a warranty,
entitles the insurer to rescind

o When fraudulent intent is necessary

• This concealment refers to falsity of a warrant which requires it to be intentional
and fraudulent to be rescinded
• The omission here is on the part of insured which entitles insurer to rescind
• When a warranty says a ship is sea worth and the insured says yes, it is entitled to
rescind only when non-disclosure of facts tending to prove falsity is intentional

"Section 30. Neither party to a contract of insurance is bound to communicate information

of the matters following, except in answer to the inquiries of the other:

"(a) Those which the other knows;

"(b) Those which, in the exercise of ordinary care, the other ought to know, and of which
the former has no reason to suppose him ignorant;

"(c) Those of which the other waives communication;

"(d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and
which are not otherwise material; and

"(e) Those which relate to a risk excepted from the policy and which are not otherwise
material

o Matters made the subject of inquiry must be deemed material even though otherwise
they might not be so regarded
 •The failure of an apparently complete answer to make full disclosure will avoid
the policy
• An answer incomplete on its face will not defeat the policy in the absence of bad
faith
• Issue of a policy without further inquiry is a waiver of the omission to state the
amount (since 2 questions only 1 answered)
o When there is no duty to make disclosure
• Matters known to, or right to be known by insurer of which he waives disclosure
▪ Cannot be penalized for not disclosing something insurer already knows
▪ Or if the insurer waives communication because there is estoppel
• Risks excepted from the policy
▪ Facts on risks excepted by a warranty (whether express or implied) cannot
be complained of
▪ Meaning the undisclosed fact is not material
• Nature and amount of insured's interest
▪ Unless in answer to an inquiry except as prescribed by section 51

"Section 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

o Determination of materiality
• The test is the effect of the fact on the making of the contract. It need not
increase the risk or contribute to the loss suffered, it is enough if it would
influence the parties in making the contract (a fire threat letter then accidental
fire)
• Material if it would have a probable and reasonable influence upon the insurer in
assessing the risk involved
▪ Concealed fact of diabetes and syphilis even if death in not connected
• Concealment regarded as intentional when the nature of facts imply such
• Inured cannot be guilt of concealment when the fact is not material (ECG but
negative anyway so still won't affect)
o Time when information acquired
• If contract is already complete and binding before information in question is
acquired, there is no duty to disclose it even if the policy is yet to issue
• Concealment must take place at the time the contract is entered into for the
policy to be avoided (Except for reinsurance 98)
• If contract is to be effective only upon issuance of policy there is a duty to
disclose changes in his health to his knowledge from the date of application and
the date the policy is delivered

"Section 32. Each party to a contract of insurance is bound to know all the general causes
which are open to his inquiry, equally with that of the other, and which may affect the
political or material perils contemplated; and all general usages of trade
 o Insurer need not communicate public events such as the political condition or that there
is war
o Insurer is charged with the knowledge of the general trade usages and rules of
navigation, and all the risks of navigation (Marine?)

"Section 33. The right to information of material facts may be waived, either by the terms
of insurance or by neglect to make inquiry as to such facts, where they are distinctly
implied in other facts of which information is communicated

o Right to information to material facts may be waived either expressly by the terms of
insurance or impliedly by neglect to make inquiry as to the facts already communicated
o If the applicant has answered the questions in the application he is justified in assuming
no further information is desired
o To answer that he was confined before to the hospital bu there was no inquiry as to why
is considered a waiver to that information
o But there is no waiver where the failure of the insured to make further inquiries was
precisely because of the concealment
o Waived especially if insurer had means to ascertain the truth of the matter alleged in
the application
o In the absence of medical knowledge as to enable him to distinguish what disease, this
should be construed as good faith with no insurance avoidance

"Section 34. Information of the nature or amount of the interest of one insured need not be
communicated unless in answer to an inquiry, except as prescribed by Section 51

o Section 51 holds that a policy of insurance must specify the interest of the insured in
property insured if he is not the absolute owner thereof, but if absolute then no need
to disclose
o Mortgagee must therefore disclose his interest

"Section 35. Neither party to a contract of insurance is bound to communicate, even upon
inquiry, information of his own judgment upon the matters in question

o Duty to disclose is confined to facts, there is no duty to disclose mere opinion,

speculation, intention, or execution
o "How long do you think you will live?" is a question that one need not answer

"TITLE 5
"REPRESENTATION

"Section 36. A representation may be oral or written

 o Representation is a statement made by the insured at the time of, or prior to, the
issuance of the policy relative to the risk being insured, as to a exiting or past fact or
concerning a future happening, to give information to the insurer and otherwise induce
him to enter into the insurance contract
o It can also be made by insurer though unlikely since insured seldomly want to avoid the
contract
o Misrepresentation in in insurance is a statement
• As a fact of something which is untrue
• Insured stated with knowledge that it is untrue with intent to deceive OR which
he states to be positively true without knowing it to be true and has a tendency
to mislead
• Where such fact is material to the risk
o Misrepresentation by insured renders the insurance contract voidable at insurer's
option EVEN though innocently made without wrongful intent
o Misrepresentation may be viewed as an active form of concealment
o Form and nature of representation
• Duty of the person applying for insurance to give to the insurer all such
information concerning the risk as will be of use to insurer in determining
whether to assume it
• However communicated, info given forms basis of the contract (To assume the
risk described to me)
• Representations are made to influence the insurer to accept the risk, are
collateral inducements to the contract
o Cases
• Insurer not liable for sailing vessel described as a steam one
• Insurer not liable for a frame house described as a brick one
• Insurer is liable for a white house described as a green one

"Section 37. A representation may be made at the time of, or before, issuance of the policy

o The very nature of representation requires that it precede the execution of the contract
o Insurer must be induced by the misrepresentation of the applicant to issue the policy at
a specified premium, a representation after the policy could not have influenced either
party
o However, representation may be PERFORMED after the issuance of the policy

"Section 38. The language of a representation is to be interpreted by the same rules as the
language of contracts in general

o Representations are to be construed liberally in favor of insured and are required to

only be substantially true
o Warranties by contrast must be literally true or the contract will fail

"Section 39. A representation as to the future is to be deemed a promise, unless it appears

that it was merely a statement of belief or expectation
 o A representation may be
• Oral or written
• At the time of the issuing of the policy or before
• Affirmative or promissory
o Affirmative, is any allegation of the existence or non-existence of a fact when the
contract begins
o Promissory, any promise to be fulfilled after the contract has come into existence
• An oral promise made in connection with insurance but not incorporated in the
policy
• Non-performance of such promise cannot be shown by insurer as defense to an
action on the policy but proof that such promise was made with fraudulent intent
will serve to defeat insurance
• An undertaking by the insured inserted in the policy but not specifically made a
warranty is also called a promissory representation, however it is merely an
executory term pf the contract and not properly a representation
o Effect on policy of expressions of opinion or expectation
• Good/bad faith of the insured
▪ Representation of the insured although false, will not avoid a policy if there
is no actual fraud in inducing the acceptance of the risk or its acceptance at
a lower premium
▪ This is also the rule even in regard to statements material to the risk since
insurer is not justified in relying upon such a statement but is obligated to
make further inquiry
• Liability of the insurer
▪ Good faith of the insured furnishes the criterion of truth for they can be
false only when the belief as stated is not honestly entertained
▪ To prove liability insurer must prove materiality and intent to deceive by
insured
• An oral representation as to a future event over which the insured has no control
will be deemed a mere expression of opinion which will avoid a contract only
when made in bad faith

"Section 40. A representation cannot qualify an express provision in a contract of insurance,

but it may qualify an implied warranty

o A representation cannot qualify an express provision or an express warranty because a

representation is not part of the contract but only a collateral inducement to it
o A representation can qualify an implied warranty

"Section 41. A representation may be altered or withdrawn before the insurance is

effected, but not afterwards

o A representation, not being part of the contract of insurance, may be altered or

withdrawn before the contract actually takes effect but not afterwards since the insurer
has already been led by the representation in assuming the risk
"Section 42. A representation must be presumed to refer to the date on which the contract
goes into effect

o Representations refer only to the time of making the contract

• Statements promissory of conditions to exist subsequent to the completion of the
contract may be condition or warranties
o There is no false representation if it is true at the time the contract takes effect although
false at the time it was made
• It is false if it is untrue at the time the contract takes effect even though it was
true at the time it was made
• Otherwise the policy may be avoided

"Section 43. When a person insured has no personal knowledge of a fact, he may
nevertheless repeat information which he has upon the subject, and which he believes to
be true, with the explanation that he does so on the information of others; or he may
submit the information, in its whole extent, to the insurer; and in neither case is he
responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to
give the information

o Effect where information obtained from 3rd persons

• Insured is given discretion to communicate to the insurer what he knows of a
matter of which he has no personal knowledge
• If the representation turns out to be false, he is not responsible, provided he
gives explanation that he does so on the information of others
o Effect where information is obtained from an agent
• Agent of insured, If its duty is to communicate such information to his principal
and it is possible for the agent to have made the communication before making
the contract, insured is liable for the truth
• Agent of the insurer, the same principle applies (insurer's agent knows the ship is
safe in insurance of being lost)

"Section 44. A representation is to be deemed false when the facts fail to correspond with
its assertions or stipulations

o Unlike warranties, representation are not required to be literally true, they need only be
substantially true
o For a policy to be avoided the representation must be false in the substantial and
material aspect
• Substantial representation if the conduct of the insurer would not have been
different if the exact truth had been alleged
o In marine insurance, substantial truth of a representation is not sufficient because the
insurer relies on a large degree on the statements of the applicant regarding the risk
o A representation written in the policy will be construed, when possible, as an
affirmative representation of a present fact in order to save the policy from avoidance
 (Building use now at time of policy effect is enough to validate insurance even if
purpose changed in the future)

"Section 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

o Fraud or intent to misrepresent facts is not essential to entitle the injured party to
rescind a contract of insurance on the ground of false representation
• To be deemed false it is sufficient that the representation fails to correspond to
the facts in a material point because the minds of the parties would have never
met
o Effect of collusion or fraud of agent of insurer
• Collusion with insured, will vitiate the policy even though the agent is acting
within the apparent scope of his authority, when there is collusion the agent
ceases to represent his principal
• Principal of agent, Where insured merely signed the application form and made
the agent of insurer fill the same for him, the insured made the gent of the
insurer his own agent
▪ Insurer is liable when its agent writes a false answer into the application
without the knowledge of insured

"Section 46. The materiality of a representation is determined by the same rules as the
materiality of a concealment

o Test of materiality of the representation I t be determined mot by the event, but solely
by the probable and reasonable influence of the facts upon the party upon whom the
representation is made, in forming his estimates of the disadvantage of the proposed
contract
o Materiality is a judicial question that is not left to the insurance company to say so
• No misrepresentation of a mere trifling matter in an applicant's health , if
honestly mistaken, will render the statement false as to avoid the policy
o Concealment v. Misrepresentation
• Concealment withholds information of material facts while misrepresentation
insured makes erroneous statements of facts with the intent of inducing the
insurer to enter into the insurance contract
• Materiality of a concealment is determined by the same rules as applied in cases
of misrepresentation
• A concealment on the part of the insured has the same effect as a
misrepresentation and gives insurer the right to rescind the contract
• Whether intentional or not, injured party is entitled to rescind for both
• Rules on concealment and misrepresentation apply to insurer also

"Section 47. The provisions of this chapter apply as well to a modification of a contract of
insurance as to its original formation
 o 26 - 35 regarding to concealment and section 36 - 48 governing representations apply
not only to the original formation of the contract but also to the modification of the
same during the time it is in force
• Misrepresentation to modify the premium or the policy for example

"Section 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 (2) 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 rescindable by reason of the fraudulent concealment or misrepresentation of the insured
or his agent

o When an insurer must exercise his right to rescind

• In general
▪ Is founded on concealment, false representation, or breach of warranty
▪ It presupposes the existence of a contract, hence a DEFENSE to an action to
recover insurance that the policy was obtained through false
representation, fraud, and deceit is not in the nature of an action to rescind
and is therefore not barred by the provision; there is no time limit for
interposing this defense (they are not trying to rescind)
• In non-life policy
▪ Must be exercised prior to the commencement of an action on the contract
▪ Meaning insurer cannot rescind after insured has filed an action to collect
insurance
▪ Must give the premiums and notice of the cancelled policy to rescind a
contract of insurance
• In life policy
▪ Qualifies the first paragraph so that after 2 year period OR when the
insured dies WITHIN the period, the insurer must make good the policy
even though it was obtained by reason of fraudulent concealment or
misrepresentation
• Must be in force during the lifetime and be payable upon death
o Incontestability of life policies
• Incontestable clauses stipulating that a policy shall be incontestable after a
certain period are required by statute in many states
• Prevents a situation where the insurer knowingly continues to accept annual
premiums payments only to later deny a claim on the ground of fraud
• As to insurer, that an insurer should have reasonable opportunity to investigate
the statement which the applicant makes in procuring his policy and that after a
period should be forbidden to question its validity (either by affirmative action or
by defense to a suit)
• As to insured, to protect the policy holder or beneficiary from a lawsuit
contesting validity
 o Requisites for incontestability
• The policy is a life insurance policy
• Payable on the death of insured
• Has been in force during the lifetime of the insured for at least 2 years from its
date of issue or last reinstatement
▪ Can be shortened by stipulation but not extended
o When the policy becomes incontestable, insurer may not refuse to pay by claiming
• The policy is void ab initio (voidable since it contemplates being active for 2
years)
• Rescissible by reason of fraudulent concealment
• Rescissible by fraudulent misrepresentation (Fraud in inducement)
o Count from the date of last reinstatement
o Approval of application was merely a mechanical act which should be granted upon
compliance with the conditions
o Defenses not barred by incontestable clause
• Incontestability only deprives the insurer of those defenses which arise in
connection with the formation and operation of the policy prior to loss
• Lacked insurable interest
• Cause of death is an excepted risk
• Premiums have not been paid
• Conditions of the policy relating to military and naval policies violated
• Policy taken in furtherance of a scheme to murder insured
• Failed to comply with conditions imposed by the policy after the loss has
happened
• Action not brought within the time specified

"TITLE 6
"THE POLICY

"Section 49. The written instrument in which a contract of insurance is set forth, is called a
policy of insurance

o Discussion is joined with section 50

"Section 50. The policy shall be in printed form which may contain blank spaces; and any
word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to
complete the contract of insurance shall be written on the blank spaces provided therein

"Any rider, clause, warranty or endorsement purporting to be part of the contract of

insurance and which is pasted or attached to said policy is not binding on the insured,
unless the descriptive title or name of the rider, clause, warranty or endorsement is also
mentioned and written on the blank spaces provided in the policy.

"Unless applied for by the insured or owner, any rider, clause, warranty or endorsement
issued after the original policy shall be countersigned by the insured or owner, which
countersignature shall be taken as his agreement to the contents of such rider, clause,
warranty or endorsement.

"Notwithstanding the foregoing, the policy may be in electronic form subject to the
pertinent provisions of Republic Act No. 8792, otherwise known as the ‘Electronic
Commerce Act’ and to such rules and regulations as may be prescribed by the
Commissioner

o Policy is the written document embodying the terms and stipulations of the contract of
insurance
• Signed only by insurer or his duly authorized agent, need not be signed by insured
except when express warranties contained in a separate instrument forming part
of the policy in which case the law requires the instrument to be signed
o Policy controls terms of insurance contract
• Measure of insurer's liability, because essentially it is a contract
• Presence of requisites for validity, in the absence of fraud or mistake, a policy
upon acceptance constitutes a valid and binding contract that supersedes all
preliminary agreements
• Compliance of insured with conditions of policy
o Policy is a contract of adhesion
• Is a description of the manner by which the contract is formed, where one party
with superior bargaining power imposes its choice of terms on the other party
• Ambiguity is resolved against insurer, also applies to surety agreements
• When terms are clear there is no room for construction
• Does not apply if petitioner is an acute businessman
o Policy different from contract itself
• Policy is the formal written instrument
• Every contract of insurance must be evidenced by a policy and that policy must
be in the form previously approved by the insurance commissioner
• Policy must be in printed form and any symbols needed to complete the contract
shall be written on the blank spaces provided in the policy
o Perfection of an insurance contract
• If an application has not yet been accepted or rejected then there is no contract
yet as it is merely an offer or proposal
▪ Mere signing and payment of the first premium do not bind insurer to issue
the policy where there is no evidence of any contract between the parties
▪ No contract is perfected here applicant dies before it is approval or it does
not appear that acceptance ever came to the knowledge of the applicant
▪ Acceptance must be unconditional but it need not be formal
▪ Reception and retention of the policy for a reasonable time is deemed
acceptance
▪ Application may be so drafted that insurance became effective on its
signing by the prospective insured
▪ Contract to be binding from the date of application must be a completed
contract where it leaves nothing to be completed or determined before it
shall take effect
• Compliance with conditions precedent, may impose additional conditions before
validity as parties see fit
 ▪ Usually it is that contract is not binding until the policy is delivered and the
first premium paid
▪ No valid insurance where no premium is paid unless credit is given or there
is a waiver
▪ Insurance never in force where applicant dies after disapproval
▪ Cover notes may be issued to bind the insurance temporarily, pending
issuance of the policy
o Offer and acceptance in insurance contracts
• In property and liability insurance
▪ It is insured who makes an offer to insurer
• In life and health insurance
▪ If insured does not pay premium, application is considered an invitation to
insurer to make an offer
▪ If he pays the premium with his application, then it will be considered an
offer
▪ Where it constitutes an offer by insured, a policy issued strictly in
accordance with that offer is an acceptance that perfects the contract
▪ If it does not conform then it is an offer to insured
o Importance of delivery of policy
• Delivery is the act of putting the insurance policy into the possession of insured
• Delivery is important because it is evidence of the making of a contract AND as
communication of the insurer's acceptance
• Delivery may affect the term of the coverage (policy effective for 1 year after
delivery)
• Delivery is not a prerequisite for a valid contract of insurance (unless parties
agree so), but still important because it marks the end of the insurer's
opportunity to decline coverage
o Modes of delivery of policy
• Actual or constructive delivery, manual transfer of the policy, constructive
delivery when it is deposited in the mail duly directed to insured
• Delivery is primarily a matter of intention, delivery does not depend on its
manual possession but rather the intention of the parties which may be shown by
their acts or words
• Presumption of delivery, possession by insurer is prima facie evidence that no
delivery was made while possession of it by insured is prima facie evidence that it
was delivered
• Delivery can be agreed upon as necessary to consummate the contract
o Delivery to insurer's agent as delivery to insured
• Is delivery to the agent of the insurance company delivery before it is given to
insured? (there is conflict)
• Beneficiary cannot recover, for the simple reason that the insurance agent is not
his agent
• Beneficiary can recover, the insured having complied with every condition
required of him, actual delivery is not essential, it would also be unfair for
premiums to be computed from the date of application
o Effect of delivery
• Where it is conditional, non-performance of the condition precedent prevent the
contract from taking effect
 • Where delivery is unconditional, delivery consummates the contract
• Where premium is still unpaid after unconditional delivery, insurer cannot be
presumed to have extended credit from the mere fact of unconditional delivery
without the payment of premium, even if it was an extension of credit there must
be clear and express acceptance of the insured of the extension of credit
o Rider in a contract of insurance
• Rider is a small printed stipulation contained on a slip of paper attached to the
policy and forming an integral part of the policy
• Additional binding stipulations between the parties
• Necessity of riders is found in the fact that in the conduct of insurance business it
often becomes necessary to add a new provision or modify the policy
• In case of conflict between a rider and printed stipulations of a policy, the rider
prevails as being the more deliberate expression of the agreement
o Any rider purporting to be part of the contract and which is attached to the policy is not
binding on insured unless the descriptive title or name of the rider is also mentioned
and written on the blank space provided in the policy
• The lack of description will not affect the other provisions of the policy except
where without such rider the contract would be incomplete
• The fact that is without signature will not prevent its inclusion and construction
as part of the insurance contract
o Effect of failure of insured to read policy
• Majority rule, such acceptance is not negligence per se and will not defeat his
right to reformation, this is because insurance contracts are on of adhesion
• Minority rule, that one who accepts a contractual instrument is conclusively
presumed to know and assent to its contents
▪ Exceptions to this minority rule, when insured could not have discovered
the erroneous statement by such reading
▪ When he is induced by fraud to not read his policy
▪ If insured is illiterate or cannot understand English
▪ Where contracts are long, complicated, and difficult to understand even
when read
• Duty to read has less significance in modern cases
o Insurer's duty to explain the policy
• Where terms of policy are clear, the insurer has not affirmative duty to explain
EXCEPT
▪ Doctrine of reasonable expectations, to deter insured's expectation of
different coverage
▪ Duty to explain options to insured
▪ Agents of insurer must explain to insured the kinds of coverage available to
them to help them choose
▪ When insured disputes denial of coverage it is the duty of good faith and
dealing may impose an obligation on insurer to alert insured to his rights

"Section 51. A policy of insurance must specify:

"(a) The parties between whom the contract is made;

"(b) The amount to be insured except in the cases of open or running policies;

"(c) The premium, or if the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis and rates upon
which the final premium is to be determined;

"(d) The property or life insured;

"(e) The interest of the insured in property insured, if he is not the absolute owner thereof;

"(f) The risks insured against; and

"(g) The period during which the insurance is to continue

o Contents of the policy

• Names of the parties, mere fact it was incorrectly spelled is of no importance
provided that the identity can be sufficiently established (even if just description)
• Amount of insurance, the sum insured is the basis for calculating the premium
but it need not be specified in cases of open or running policies
▪ Such amount is not necessarily the value of the property but the maximum
limit
▪ Workmen's compensation insurance, amount is not specified in the policy
but by the law imposing liability
▪ Automatic increase clause
▪ Deductible, where insurer is only liable for the excess
• Premium, essential because it is the consideration for the contract
▪ In life insurance premium is based on the average life span at any given age
predicted from mortality tables
• Property or life insured, constitutes the subject matter of the contract
• Interest of insured in the property, especially important in fire insurance policies
to determine the actual damage or loss
• Risks insured against, all foreseeable losses may be insured against except those
which would be repugnant to public policy
• Term or duration of insurance, the period of time the insurer assumes the risk is
known as the life policy
▪ 12 months are annual policies while those of less are short period policies
o Kinds of insurable risks
• Personal risks, concerned with the time of death or disability
▪ often divided into life and health risks
• Property risks, arises from destruction of property
▪ Direct loss through calamity
▪ Indirect loss through loss of profits for example
• Liability risks, third party risks
▪ Includes both bodily and property damage risks
o Risk, peril, and hazards distinguished
• Risk is the chance of loss, if a loss is certain to happen then no risk is involved
• Peril is the contingent or unknown event which may cause a loss
 • Hazard is the condition or factor which may create or increase the chance of loss
from a given peril
▪ Physical hazard, relates to location, structure, occupancy, etc.
▪ Moral hazard, inceptions in mental attitudes
o Requirement for risks to be insurable
• Importance, because to cover every small loss would increase greatly the cost of
protection
• Calculability, must permit a reasonable statistical estimate of the chance of loss, if
it cannot be calculated then the premiums cannot be determined
• Definiteness of loss
• No catastrophic loss, when a large number of people are subject to the same kind
of losses at the same time, it contradicts the principle that the loss of the few are
borne by the contributions of the many
▪ Usual to exclude political and war risks
• Accidental nature, because intentional losses by insured cannot be reasonably
predicted and that it is against public policy
o Requirements for an insurable risk are not absolute

"Section 52. Cover notes may be issued to bind insurance temporarily pending the issuance
of the policy. Within sixty (60) days after issue of a cover note, a policy shall be issued in
lieu thereof, including within its terms the identical insurance bound under the cover note
and the premium therefor.

"Cover notes may be extended or renewed beyond such sixty (60) days with the written
approval of the Commissioner if he determines that such extension is not contrary to and is
not for the purpose of violating any provisions of this Code. The Commissioner may
promulgate rules and regulations governing such extensions for the purpose of preventing
such violations and may by such rules and regulations dispense with the requirement of
written approval by him in the case of extension in compliance with such rules and
regulations

o Preliminary contracts of insurance

• Preliminary contracts of present insurance
▪ Insurer insures the subject matter by a cover note or a binding slip, the
contract to be effective until the formal policy is issued or the risk rejected
▪ Cover note is merely a brief written memorandum if the most important
terms of a preliminary contract of insurance, intended to give temporary
protection pending investigation of risk
▪ In life insurance a binding slip does not insure by itself because no liability
can attach until insurer approves the risk
• Preliminary contract of executory contract of insurance
▪ Makes a contract to insure the subject matter at some subsequent time
which may be definite or indefinite
▪ The right acquired is merely to demand for delivery of the policy
o Issuance and renewal of cover notes
 • Being temporary in nature it is sufficient that it shows by necessary implication an
agreement to pay whatever rate may be fixed
• Fact that no separate premium was made for the cover note does not militate
against its binding effect
• If a cover note is to be treated as a separate policy instead of integrating it into a
regular one, then its purpose would be meaningless for it is actually a contract
o Rule on cover notes
• Issued to bind temporarily
• Is deemed a contract of insurance under section 1(1)
• No cover not shall be issued or renewed unless in the form previously approved
by the insurance commission
• Should not exceed 60 days but can be cancelled upon at least seven days of
notice
• Can be extended beyond 60 days with the written approval of the insurance
commission, approval can be dispensed with by certification of the president of
the insurance company that the risks involved have as yet to be determined or
established and that such extension or renewal I not contrary to the insurance
code
• May impose on cover notes a deposit premium equivalent to at least 25 percent
of the estimated premium but in no case less than 500 pesos

"Section 53. 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

o Persons entitled to recover on policy

• As against insured
▪ 3rd persons have no right unless there be some contract of trust between
them
• As against the insurer
▪ A 3rd person, in the absence of any provision in the policy, has also no right
to the proceeds thereof
▪ Hence cannot be given to creditors without endorsement of some kind of
trust
▪ Liability insurance is a pour atrui contract so it is payable to 3rd persons or
their heirs

"Section 54. When an insurance contract is executed with an agent or trustee as the
insured, the fact that his principal or beneficiary is the real party in interest may be
indicated by describing the insured as agent or trustee, or by other general words in the
policy

o Insurance may be taken by a person personally, or through his agent but the insurance
is the be applied exclusively to the interest of the person in whose name and benefit it
is made
o Agent mut indicate that he is merely acting in behalf by signing as such agent or trustee
"Section 55. To render an insurance effected by one partner or part-owner, applicable to
the interest of his co-partners or other part-owners, it is necessary that the terms of the
policy should be such as are applicable to the joint or common interest

o Insurable interest in the property of a partnership exists in both the partnership and the
partners
o A part who insures partnership property in his own name limits the contract to his own
individual share unless the terms clearly show that it was meant to cover the shares of
the other also

"Section 56. When the description of the insured in a policy is so general that it may
comprehend any person or any class of persons, only he who can show that it was intended
to include him, can claim the benefit of the policy

o Included in the section 57 discussion

"Section 57. A policy may be 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

o Policy of insurance must specify the parties between whom the contract is made
o In order that the insurance may be applied to the interest of the person claiming the
benefit, he must show that he is the person named or described or he belong to that
class

"Section 58. 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

o Since a contract of insurance is a personal contract, it does not attach to or run with the
property insured
o Transfer of property without transfer insurance has the effect of sus pending the
insurance until the purchaser becomes the owner
o Exception to this are sections 20-24 and 57

"Section 59. A policy is either open, valued or running

"Section 60. An open policy is one in which the value of the thing insured is not agreed
upon, and the amount of the insurance merely represents the insurer’s maximum liability.
The value of such thing insured shall be ascertained at the time of the loss

"Section 61. A valued policy is one which expresses on its face an agreement that the thing
insured shall be valued at a specific sum
"Section 62. A running policy is one which contemplates successive insurances, and which
provides that the object of the policy may be from time to time defined, especially as to the
subjects of insurance, by additional statements or indorsements

o Kinds of policies
• Open or unvalued policy
▪ Does not predetermine the value of the insured property but establishes
the maximum amount that insurer will pay
▪Insurer only pays the actual cash value of the property as determined at the
time of loss
• A valued policy
▪ Value is to be used in case of total loss
▪ In the absence of fraud or mistake, it is the agreed face value that is paid
• A running policy
▪ Intended to provide indemnity for property which cannot be valued
because of its frequent change of location, quantity, etc.
▪ Insurance may be carried on a constantly changing stock of goods or grain
o Advantages of a running policy
• Neither under or over insured
• Avoid cancellations that would be necessary to keep insurance adjusted to value
at each location
• Saved the trouble of watching his insurance for fear of being under inured

"Section 63. A condition, stipulation, or agreement in any policy of insurance, limiting the
time for commencing an action thereunder to a period of less than one (1) year from the
time when the cause of action accrues, is void

o A clause to an insurance policy to the effect that an action must be brought within a
certain period is valid and ill prevail over the general law
• But if the period is less than 1 year from the time the action accrues then the
stipulation is void
• Industrial life insurance cannot be less than 6 years
o Is not merely procedural which can be overlooked
o Accrues from the happening of the loss
• However cause of action does not accrue until insured's claim is finally rejected
by the insurer because before such final rejection there is no real necessity for
bringing the suit
o Stipulated prescriptive period begins from the happening of the loss
• Where the policy provided that no suit or action shall be sustainable unless
insured fully complied with all the terms of the policy is repugnant because it
reduces it to less than 1 year
• As the stipulation is upon a written contract, the time limit is 10 years
o Stipulated prescriptive period begins from rejection of claim allows the above
o An action filed with the office of the insurance commissioner has the effect of
suspending the prescriptive period
o Stipulated prescriptive period begins from the filing of the claim
• Accrues until the party obligated refuses to comply with its duty
 o Contractual limitations will be strictly construed against insurer

"Section 64. No policy of insurance other than life shall be cancelled by the insurer except
upon prior notice thereof to the insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective date of the policy, of one or more of
the following:

"(a) Nonpayment of premium;

"(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 insured which result in the property becoming
uninsurable;

"(f) Discovery of other insurance coverage that makes the total insurance in excess of the
value of the property insured; or

"(g) A determination by the Commissioner that the continuation of the policy would violate
or would place the insurer in violation of this Code

"Section 65. All notices of cancellation mentioned in the preceding section shall be in
writing, mailed or delivered to the named insured at the address shown in the policy, or to
his broker provided the broker is authorized in writing by the policy owner to receive the
notice of cancellation on his behalf, and shall state:

"(a) Which of the grounds set forth in Section 64 is relied upon; and

"(b) That, upon written request of the named insured, the insurer will furnish the facts on
which the cancellation is based

o Cancellation is regarded as the right to rescind a contract of insurance

o Right of insurer to cancel policy of insurance OTHER than life is covered by sections 64
and 65
• Insured can cancel an insurance at his election by surrendering the policy but
does not entitle return of premiums on the customary short rate basis
o Form and sufficiency of notice of cancellation by the insurer
• Prior notice of cancellation to insured, to prevent cancellation without allowing
insured ample opportunity to negotiate other insurance for its stead
▪ Notice should be personal to insured
▪ It need not be delivered personally but through mail
• Notice based on occurrence after the effective date of the policy of one or more
grounds in sec 64
• Must be in writing, mailed or delivered to insured or his authorized broker
 • Must state which of the ground set forth is relied upon
o It is the duty of insurer upon written request of insured to furnish the facts on which the
cancellation is based
o Premium in sec 64 is not the first because it speaks of a period after the effective date of
the policy which section 77 requires a premium to be valid

"Section 66. In case of insurance other than life, unless the insurer at least forty-five (45)
days in advance of the end of the policy period mails or delivers to the named insured at
the address shown in the policy notice of its intention not to renew the policy or to
condition its renewal upon reduction of limits or elimination of coverages, the named
insured shall be entitled to renew the policy upon payment of the premium due on the
effective date of the renewal. Any policy written for a term of less than one (1) year shall be
considered as if written for a term of one (1) year. Any policy written for a term longer than
one (1) year or any policy with no fixed expiration date shall be considered as if written for
successive policy periods or terms of one (1) year

o Renewal of non-life insurance policy

• As a new contract or extension of an old one, renewal by payment of a new
premium and the issuance of a receipt, when there is no provision for its renewal,
is a new contract on the same terms
▪ But if in pursuance of a provision to that effect, it is not new but an
extension of the old one
• In insurance other than life, named insured is given the right to renew upon the
same terms and conditions the original policy upon payment of the premium due
on the effective date of the renewal
▪ Unless insurer at least 45 days in advance delivers to insured notice of its
intention not to renew or to condition the renewal
• A policy written for a tern of less than one year is considered as if written for a
term of one year while a policy written for longer with no fixed expiration date is
considered as if written for successive policy periods of one year

"TITLE 7
"WARRANTIES

"Section 67. A warranty is either expressed or implied

o Warranty is a statement or promise by the insured contained in the policy where falsity
or non-fulfillment renders the policy voidable at the election of insurer
o Kinds of warranties
• Express, agreement contained in the policy or clearly incorporated therein
• Implied, warranty from the very nature of the contract or from the general tenor
of the words (only in marine insurance)
• Affirmative warranty, Asserts the existence of a fact or condition at the time it is
made, continuing if it is one that must be satisfied during entire coverage period
• Promissory warranty, one where insured stipulates that certain facts or
conditions pertaining to the risk shall exist or that certain thing shall be omitted
 o Warranty presumed as merely affirmative (no promise that it structure will continue to
be used as such)

"Section 68. A warranty may relate to the past, the present, the future, or to any or all of
these

o Promissory warranties only refer to the future

"Section 69. No particular form of words is necessary to create a warranty

o Word warranty does not necessarily constitute a warranty, what governs is the intention
of the parties
• In case of doubt, a statement will be construed as a representation
• Answers not responsive to any question asked are not warranties even though
the policy makes the statements a warranty
o Warranties v. representations
• Warranties are part of the contract while representations are collateral
inducements
• Warranties are always written in the policy while representations MAY only be
written
• Warranties must be strictly complied with while representation only require
substantial truth
• Falsity or non-fulfillment of a warranty is a breach of contract while falsity in a
representation render the policy voidable or Rescissible
• Warranties are presumed material, while insurer mut show materiality of a
representation
• Before a representation will be considered a warranty it must expressly be
included in the policy and the contract must clearly show that the parties
intended the rights of insured to depend in the fulfillment or truth of the
warranty
▪ Where a statement is true, it is immaterial whether it is a warranty or
representation
o Warranties are strictly construed against insurer

"Section 70. Without prejudice to Section 51, every express warranty, made at or before
the execution of a policy, must be contained in the policy itself, or in another instrument
signed by the insured and referred to in the policy as making a part of it

o Express warranty where contained

• In a policy itself or in another instrument signed by insured and referred to in the
policy, mere reference alone is not sufficient

"Section 71. A statement in a policy, of a matter relating to the person or thing insured, or
to the risk, as fact, is an express warranty thereof
 o A statement in the policy relating to the person or thing insured, or to the risk, must be
fact and not as an opinion to constitute an express warranty thereof
o If an opinion, it is merely a warranty as to the honesty and good faith of the insured
(that statement is honest)

"Section 72. A statement in a policy, which imparts that it is intended to do or not to do a

thing which materially affects the risk, is a warranty that such act or omission shall take
place

o Refers to a promissory warranty whose breach will not avoid policy unless the promise
are material to the risk
o Only substantial increase of risk works forfeiture of the policy

"Section 73. When, before the time arrives for the performance of a warranty relating to
the future, a loss insured against happens, or performance becomes unlawful at the place
of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy

o General rule is that a violation of warranty avoids the contract EXCEPT

• When loss occurs before time for performance, install fire extinguishers within 5
days
• When performance becomes unlawful
• When performance becomes impossible
o Breach of warranty operates to discharge the insurer from liability unless insurer is
liable because of a waiver or estoppel
• Waiver may be express or implied (failure to assert after knowledge)
• Estoppel is different from waiver, in estoppel the conduct of insurer prevents
avoiding of the policy while in a waiver there is a failure to assert a defense
prevents it from asserting a defense later

"Section 74. The violation of a material warranty, or other material provision of a policy, on
the part of either party thereto, entitles the other to rescind

o Violation of terms entitles either party to terminate the contractual relations

o The right of insurer to rescind exists even though the violation was not the direct cause
of the loss

"Section 75. A policy may declare that a violation of specified provisions thereof shall avoid
it, otherwise the breach of an immaterial provision does not avoid the policy

o Parties may expressly stipulate that the violation of a particular provision, although
immaterial, shall avoid the policy
o Same subject matter, same interest, same risk for a double insurance
"Section 76. A breach of warranty without fraud merely exonerates an insurer from the
time that it occurs, or where it is broken in its inception, prevents the policy from attaching
to the risk

o Fraud not essential to entitle insurer to rescind

• If without fraud, policy is avoided only from the time of breach
▪ If it occurs during inception of contract then return all premiums because it
never became binding
• If with fraud, policy is void ab initio and not entitled to the premiums paid
o A condition is an event signifying an occurrence or non-occurrence that alters the
previously existing legal relations of the parties
• Condition precedent, the happening of some event before the contract becomes
binding (delivery)
• Condition subsequent, not to the attachment of risk and inception but for during
the existence thereof (notice and proof of loss)
o Warranties v. Conditions
• Effect, Warranty does not suspend or defeat the operation of the contract but
affords the remedy provided in the contract or law, while conditions are a
limitation to the attachment of risk
o Promissory warranties are usually regarded as conditions subsequent
o Exception are inserted in a contract of insurance for the purpose of withdrawing from
the coverage part of its scope
o Occurrence of a breach of a warranty or condition even though temporary renders the
entire contract voidable even if it did not affect risk or contribute to the loss, while in
an exception the policy remains untouched
o Breach of warranty or condition may be waived without consideration but an insurer
does not become liable for an excepted loss by waiver unless such waiver amounts to a
new contract on valuable consideration
• Insurer cannot by naked waiver assume a non-existent duty