CHAPTER ONE GENERAL CONCEPTS Modera insurance contracts originated Som che practice of rebants im the fourteenth century. Nevertheless, # as ren acknowledged that different strains of security arrangements have, slready been used for centuries and they are akin to insurance contracts in embrvoni¢ forms. Justice Laurel com-mented on the growth of insuraney business thie wise, “The phenomenl growth ofinaura.ce rors almost nothing ‘shundred years agoto its present gigantic proporson ot ofthe oustanding marvels of present-lay business ife. The demand ‘or economic security, the growing need for socal stability, and tie clamor for provaction agamst the hazards of crue-crppling calamities and sudden economic shocks, have mede insurance one of she felt necessities of modern life, Easurance is no longer s rich man's monopoly. Upon it ae heaped the aseured hopes fF many families of modest means. It is woven, ast were, into the very warp and woof of national economy. 1 touehas the holiest and most sacred ies in the fe of man-love of parents, love of ves and love of eildren.” [DEFINITION] The statutory definition of the GLTnsurance appears in the first paragraph of Section 2 of the Insurance Code that states:" yeoment ‘The naular Lite Ansurance Co, Ltd. v. Soran D. Feliciano, eo GR. No. $7990, September «8, 1941, 75 Pil, 202 ‘Section 4. insurance Code, Republi Act (RA) No. 10807 as amended by RA No, 1060" dated August {5, 2018, hereinaRer refered te aeRISE ~pent tin i ~ ibaa CansioeRATION: = premio a ESSENTIALS OF INSURANCE LAW (Republic Act No. 10807 with Notes ot Pre-Neod Act a. Insurance may also be defined as a contract whereby gne party called the insurer undertakes for @ consideration to ay another party , OF his baneficiars. upon dhe iappening of the peril msured against, whoreby the party insure Fetaeiony iow ae bee ee jecessarily by the terminology used. The test to determine if oF the prom uot by what is called a, For instance, a contract may be considered an insurance pi EER es ese es ee. ep | (CHAPTER ONE s (GENERAL CONCEPTS partake of the nature of a sontract of insurance, Although risk is a primary element of an insurance contract, it is not necessarily {ue that risk alone is suffient to establish it. Almost anyone who undertakes a contractual obigation always bears acertain degree of fntancial sk. Consequently, there is a need to distinguish prepaid servico contract ike those of petitioner) fromm purance contracts, Indeed, an entity undertakes sCGusiness ia) whet it offers to provide health serves: dhe risk that TomighcTaf te oara reasonable return on its investment. But itis not the risk of the type peculiar only to insurance ccmpanies. c. It should be notedin this connection chat a Health Plan is not one of the Pre-Need Plans expressly recognized under the Pre- ‘Need Code and its Implementing Rules and Regulations, Under the Implementing Rules and Regulations, a pre-need company may be authorized to issue plans if itis any or all of the following types of plans: \1: educational plan, ‘2) pension plan, and ‘2) life or memorial plan. contract even if it is referred to as a health plan. In Philamoare-supRAnty 1 $1.02, SURETYSHIP. For regulatory purposes. a contract Health Syatems Court of pei the Supreme Court raled that hy Ai 8 sluall be deemed to be an insurance contract within the fontrart inrvd wat ae ee aon it the meaning of the Insurance Code when made by @ surety who or need plan. in the said ease, the insurable interest of respondent's ‘which, as such, ie doing an insurance business. hhusband in obtaining the health care agreement was his own health, SOLLDA@U- w/ ‘Re! hi ric, is doing an ina Once the member incurs hospital, medical or any other arising from sickness, injury or other stipulated contingent, che health care provider must pay for the same to the extent agreed upon under the contract. b. The Supreme Court reached different conclusion in Philippine Health Care Provider, Inc... CIR* where it concluded that the elements of insurance contract are absent. The Court ruled that there was no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance ‘at a pre-agreed price under the agreements. Indemnity of the ‘member was not the focal point of the agreement but the extension of medical services to the member at an affordable cost; it did not ‘ional Auto Service Corporation y. Stat, Tests Cv: App..35 8.W- 28200, “White Gud Maribe Services, Ine Pronas Insurance Suncee Corporation, ¢ ab, GR. Nu 164514, aly 28, 2008 GR. No. 195678, March 18, 2002, See also Bh [Noeoa! and Danilo Olivares, GR. No. 19873" ebm “GR. No. 167980, Soptamber 16 2 yense PRINCIPAL a, _ The contract of suretyship under the New Civil Code is simply defined as an agreement whereby one binds himself solidarily with the principal debtor.*->0r my 1noullnice FUlnEs. $1.08. PRE-NEED PLANS. Insurance contracts should like- wise be distinguished from pre-need plans that are now under the regulatory powers of the-Insurance Commission (.C.) under the Pre-Need Code (RA No. 9829)-Pre-need plans are contracts, agreements, deeds or plans far the h ic providefor futur ‘onsiderations or @ivery 6 ther benetpn or agroed maturity ute as seSRTe! There, in exchange for ch or !notallment amounts with or without interest or insurance covertge and includes ‘ifé, pension, i ang ether plas, instruments, contracts or deeds as may be by LC.» Tho Seition Ap), RA No. 9899. Sesion 10, IR ofthe Pre Need Code, "Section 2, LC. See $2 of eis Caaptar Section 2041, Naw Chal Cade "Sec sf), BA No. 9628| | | | ‘ ESSENTIALS OF INSURANCE LAW (Wepublic Act No, 10607 with Notes on PreNead Act) basic laws and rules on Pre-Need Plans are discussed in Chapter 18 of this work. $1.04. VARIABLE CONTRACTS. The Insurance Code likewise governs “variable contracts.” “Variable contract” means any policy or contract on either a group er on an individual basis issued by an insurance coinpany providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investments or of a designated separate account in which amounts received in connection with, such contracts shall have been placed and accounted for separately and apart from other investments and accounts. This contract may also provide benefits or values incidental thereto payable in fixed or variable amounts, or both. PROBLEMS: 1. ET, deceased husband of respondent JT, applied for a hhonlth care coverage with petitioner Philamcare Health Systems, Inc. The application was approved for a period of one year from March 1, 1888 to March 1, 1989, Accordingly, he was issued Health Care Agreement No, POIO194. Under the agreement, respondent's husband ‘was entitled to avail of hospitalization benefite, whether ordinary or emergency, listed therein. He was also ‘entitled to avail of “out patient benefits” such as snouial physical examinations, provontive health care and other out-patient services. aay#he agrcoment an insurance noes? ” At Yos. The health care agrosment was in the natire of son- Life insurance, which is primarily a contract of indemnity. 2 ie, the inarable erst of roopondent’s husband in health care agreement was on his own health. Once the member incurs hoepital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upen under the contract. (Philamcare Health Systems, Inc. v. Court of Appeals and Julite Trinos, GR. No. 125678, March 18, 2002. But sce ‘contrary view in Phil, Health Care Providers, Ine. 0. CLR, September 18, 2009 below) ‘Bee Ghapser 18, nage 422 of this book "Seetion 288, LC. as amine cnaprer NE, GENERAL CONCEPIS ‘Under the agrooment with tho PHCP, Ine, the member pays the PHCP a predetermined consideration in exchange {or the hospital, medical and professional services rendered by the petitioner's physician or affliated physician to him. In case of availment by a member of the benefits under the agreement, PHCP does not ruimburse or indemnify ‘the member as the latter does not pay any thin party Insteac, it is the petitioner who pays the participating physicians-and othor hoalth eare providers for the services rendered at pre-agreed rates. The member doss not make sny such payment. According to the agreement, a member can take advantage of the bulk of the benefits snyrime. eat. laboratory sarvices, x-ray, routine annual physical examination and consultationé, vaccine administration as well as fumily planning counseling, oven in che absence of any peril, los or damage on his or her part. In ease of omorgency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor pert ofthe list of services available. The assumption of the ‘expense by petitioner is not confined to the happening of « contingency but includes ineidenta even in the absenoe of illness or injury. Can the contract between the member and the PHCP be considered an insurance contract? ‘The contract is not an ineurance eontraet. Not a the necessary elements of a contract of insurance are present in petitioner’ agroemente. To begin with, there is no lass, damage or liability on the part of the member that showld bo indemnified by PHCP. In other words, there is nothing in the egroomont that give rigo to 2 monetary lability on the part of the member to any third party-provider of medical services which might in tum necessitate indemnification from petitioner. The terme “indemnify” or “indemnity” presuppose, that a lshility or claim hae already been incurred. There is no inderanity preciaely because the member merely gvails of medical services to be paid or already paid in advance at a pre-agreed price under the agreomonts. Indemnity of the member was not the focal point of tho agreement but the extanaion of nedical services to the member at an affardable cost, it ‘did not partake of the nature ofa contract of insurance, While PHCP undertakes a business risk whon it offers to provide health services: the rik that it might fail ‘2 came reasonable return on its investment. Buti is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, isthe risk° ESSENTIALS OF INSURANCE LAW (Republic Act No: 10607 wish Notes on Pre‘Need Ac) hat the cost of insurance claims might be higher chan the romiums paid. The amount of premium is calculated om ‘he basis of sxsumptions made relative o the insured. However, assuming that the PHOP's commitment 19 provide medical services to ite members ean be construed asan acceptance ofthe risk that it will shell out more tha the prepaid feos, it sull will not qualify as an insurance contract because pettioner’s objective is to provide medical services at reduced cost. not wo discrbute nak like ‘sn insurer. Philippine Health GR. No, 167880, September 1. $2, DOING AN INSURANCE BUSINESS, The -erm “doing ‘an ieurence business” or “transacting an insurance business, ‘within the meaning of the Insurance Code, shall include: (1), Making or proposing to mks, as insur, any insurance contract; ~ a (2) Making or proposing to make, as surety, any contact of surtyhip asa vocation and sobas torey incidental fo anyother lgitmate business aekety cy or proposing to do any business in suet yany ofthe foregoing in amanner ignod 8 provisions of this Code,.« * Ly not adding 1 evade Re pmuinmsy te Sasiannse Code, 4. Profit not material. in the application of the provisions of the Insurance Code, the fact tha is derived from the ‘mab of rney contrac, agetgil OF fransactina or that Baca my ner teeter ee ne CuaaiauaDoCleinaD eSletion> Cia — nb classification of special contracts. It cop idect tf a rut a contract where some of the rights of jes of the ¥5.02, HOW INSURANCE DEALS WITH RISK. From the “id (Mtutineh “TE Singeal Upon hate sven? TTF Si eT ‘Thevanse that what the insured will pay In pet ‘viewpoint of most insured individuals, they are transferring their ‘isk of loss to the insurance company. As stated earlier, they trade resent loss by way of premium payments with future recompense fr geaterion, a. Risk Distributing Device. However, in reality, insur. ‘ance is risk distributing device because the risk of loss is not acti ally transferred to the insurer but a number of people constituting the clients of the insurer eontribute to a common fund by paying Premiums. In theory, the insurer will get the amount to be paid to ‘each insured in case of loss from this pool or common fund. That is why itis one of the features of insurance that the assumption of risk of the insurer ie patt off general scheme to distribute actual locses { peteents- bearing : amang 2 lange group of ing a similar risk, Adam Smith 1 maenge, Tee, Princpler of neurone, Sré iy 38, erelaar sefeced ‘oa ad”| - ‘Ibi. p. sy “Adam Sih, The Woe lan BAst lane Baon, 2008, p48, are’ Tan ‘Pay in petos is not equal to what ‘he vill receive in case of lose. Spe money values eichusiesl i Gigt equivatestt. In another sense, however, the contract “Adam Smith, The Wealth of Nations, Bansam Classi Bition, 2008, p. 961, “Robert i Mehr and Sandra. Gosteveon, Life dnewrance:Thary and Practic, “4h Bi p. 31, hrenafiar rafered ion Mr ed Outro” “tia R. Vance, Handbook ofthe Ta of Inguraner, 24 Fa. (2690), . 8, Dever elerrad ta au Vane,”6 ‘ESSENTIALS OP INSURANCE LAW (Repabit Act No. 10607 with Notes on Pre-New Act) ©. @ersonal?The contract is personal because thn cont is entered into with due consideration to the goes ea cee etapa is, the tasarer may have aecopied the risk because of $e insurability ofthe insured. Each party enters into the smtract in view of the charactor, credit and conduct-of the other Bven Droperty insurance contrat in personal in nature. In realty. tie @ person rather than the property that is protected. Hence, the character, eredit and conduct of the meeting of minds with respect to the, a ae Ts ‘Art, 1319. Consent is manifested by the meet of the offer and the acceptance upon the thing Cause WHICI er Ue ote ‘Acceptance made by oleae ioe G2 bind the ofterer time f came to rownuy.Yo cack rucha coe posted We Bion entered Info inthe place wets te ofer ». (1262a) “SMobr and Cammack, pp. 10-14 David L. Bickalbauge, Genera! Insurance, 1974 Rd, yp. 7577, hereinafter refered ee “Bickslaupt” "eas distinguished from real consacts which are pecfeted by delivery and Ihimsal contracts which mguire corate frmaliee "tke $ pubbe iatrument to be perfected18 ESSENTIALS OF INSURANCE LAW (Bepublic det No, 10607 with Netes on Pre Nowa Act) 2. gllon TREAD Partialasy, consistent with the Cognition Theory tha is being applied under the New Civil Code, an insuranee contract is perfected the go learns of the accoptance of hi oF By tie other party eam b. iagured makes the OMG in insurance contract, the insured makes the ofr hr suk he application ‘o the snsurer Gris authorized agent. The insurer acepts the ofer by approving ‘Toe spplition-and We contract ix perieeet noon receipt oF notice Dy The Insured of such approval 2) In this connection, it is well to note that the asuai’ procedure for the perfection of an insuranee contract ‘insured makes the offer by filing an application form) mav be departed from. “It tay be that the insurer offers a contrect which is accepted by the insured with or without writing or the agent o ee ot rma om the application for insurances made may have authority SF ateept the offer without reference, and this acceptance may Se written ororal."® c. Gnaccepted applic In a case decided by the Supreme Court, the Insurance contract was considered binding ‘Upon proof that the insurance application was duly received by the jnsurer. The Court ruled that insurer assumed tho risk of lose Without approving the application However, it is believed that the ng in the said case(GanngD be considered an excestion to the Tule on perfection of insurance cannot impose a in the absence ofa ‘contract, Closer examination of the facts shows that What was involved was Creditor Group Life Insurance Poliey. Under the policy, the cl Gardens who pu ee burial lots from it on installment basig ‘be insured. by lamlife. The amount of insurance coverage ‘upon the existing balance of the purchased burial lots. ‘wibis should be distinguished tram the Manifestation Theory caatemplated [under Article 64 ofthe Code of Commerce unde: which the contrac ir perfocses Sees {he Simo tho acsoptance of te offer is manifested. or exam, the sno of Se Development Bank of the Phils. v. Court of Appeals, 0-R. No. 109987, March 2%. 1994; Rafael Enrigues v. Son Life Assurance Co of Canada, GR No’ iasot, ‘November 28, 102, ‘Vance, 275, ‘sBsernal Gardens Momoral Park Corportion . Philippine American ‘ie Tnsurmnoe Comporation, GR No. 166246, Apne, 2008 CHAPTER ONE 8 (GENERAL CONCEPTS: 0 policy was tobe fective for a period of one year, renewable on ‘jny aus The pey provides that. "Toe insurance af ary elighie Tot Purchonar shal be effective oo te dae he contact oan with the Assured. However, there shal! be no insurance if the application of the Lot Purchaser is not approved by the Company,” The Supreme Court applied the rule that there must be strict interpretation of the provision of the insuranc® policy against the insurer in ara ‘dt the conclusion that the Insurance shall be deemed effective the ‘moment the lot buyer contracts a loan with Biernal Gardens, Ix Eber Words there war asad © peor egreement Tegan the effectivity of the contract of insurance. The Supreme Court observed: ber hand the seemingly concing provisions amt be bem teas tat tym 0 pony porhase SF omen fat Burt sae Contract covering belt purchase is created and the same i Sfocve, al, td binding unt terminated by Palas br SSeapproving the tarorancesppestion. The scr enn of ‘Graiter Group Lie Policy Nor P1900 onthe Eftactive Date of Senet ie im the nature ofa reslutry condition which would Teed tosh corn ofthe inearune contrac, Moreover, the tor inaction of th inset on th ot work so prejie Sho Sure (2). The detision in Eternal Gardens Memorial Park v Philippine American Life Insurance Corporation® may aleo be “Tiel Geen Menara! Pak Corporation v,Pipise Amer Ue toon I het oe ar re ‘Spe Crt tac anu cen rae ee joes eae anes ae ee Thewis ening tour ar sat sme a ‘See Lux Pind, eal. v. Hon. Court of Appeals, e al, GR. No. 108862. September 27, 1908. Se alao $8] of Chapter 19 of tis werk.Ea ESSENTIALS OF INSURANGE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) petitioner should have been considered an@gepiJof the insurer by virtue of the master agroement or R or m7 ier words, the petitioner can be deemed the agent of the insurer for purposes of making the offer of insurance and its acceptance happens at the same time as the acceptance of he offer to sell the lot is made. {2) In Bternal Gardens Memorial Park». Philippine American Life Insupgnce Corporation,® the petitioner ean be deemed to be thet of insurer who offers an insurance soutract-at the same tinie as 1t offers to sell fis Tots yer 7 the Buyer i also deemed io have a ‘insurance thereby perfecting the same, {B) The situation in Bternal Gardens. Memorial Pari v. Philippine Americal Life Ineurance Corporation is sizilar ‘o the practice of business entities in tying up with insurance companies in the sale of their goods. For example, some business entities sell goods like luggage or offer tour package; if'a person will buy the goods or avail af the service, the buyer ‘will be entitled to automatic insurance coverage, In some cases, ‘insurance companies sell greeting cards like Christmas cards which entitle the buyer to insurance coverage. It is believed that in those cases, the sellers are constituted as che agents of the insurance cotmpaties. These agents ale the after ot anoffer to enter into an ce contre arm of as es ee ‘Ba observed by Prot Vance "ae delay By the Tara aig Unreasonable, in acting upon the application raises no implication of acceptance nor does it estop the insurer to deny tlie existence of the contract.’ is an le clement of the contract, there can be ne contract ie parties as to the object and consideration. Courts cannot make c ave s- Tele rie tat aceptance of an offer ean be implied. However iad ascptammt an oer can te Ses =e Fie nase CHAPTER ONE. a (GBNERAL CONCEPTS established Galp)if there are other circumstances that will indicate haction or delay. In other case, estoppel Shae To othe drewsstances that ed tbo applicant to baler pt Sha Hl ap Teaan roved (other mere than inaction or delay) (4) Homovor, oven ther ini parfeciad SORE ce insurer ray be subject to tor ability ander Articles 19 and 21 ofthe New ‘GAT Codr for abuee THRE acting in a manner that is contrary to morals and good customs based on the peculiar circumstances of each case, PROBLEMS: . “PY fled an application with an insurance company for 2 * oye endowing in te snout of 850,000.09 on the life of bis one-year old daughter, supplying all tho coventel data tn the appicaten fora but mithout tiudoing thas his daughter was a Mongood chil Upon ‘Pe payment of te ancl premio, « nding depos cesar ued 1 y fer age er ® sing hy te company. The Isurante compar theaprboel fhn taurane tplcaion satig fat ts Sian alin for mae act vale for minors blow seven Yours ld and odtsedsnsther pan. Te insurance agent Eitntantorm Pf te daspproval nor of he alteraatve lan odered and instead, strongly rcommended hat ES" cempaay mieonsider and. approve the lnsuranee spinon. Ania were dang Pvt nto au proces ef te fsranoe bat the compa Pefused om ‘he grounds ‘that, there was conceslment of ‘Satria fact inthe insorance aplication and that thas rejected the aplication,“ contunded on the other band, {Eas the binding depot roenptconmticatd «temporary coniract of ie insurance, How would you Tescve this laeue? ‘A: The denial by the insurance ‘Tuere is no ‘ngurance cont learns: aval of “aaurance contract can be parfocred if the approval came after the death ofthe insured, The binding epost receipt is merely conditonal and dows not inmine ‘ekaghe "he ning Sepost ecep io boiated ‘Gee apptoval or rejection of application by the inwuranceA [ESSENTIALS OF INSURANCE LAW ‘epuie Act No, 10807 with Notes on Pre-Need Act) company. (Great Pacific Life Ass. Co. v. Court of Appeaie, GR. No, L-$1845, April 30, 19791 Mr A filed an application for a fre insurance policy cover his house. He signed the application on January 25, 2007 and dolivered it to his insurance broker. Mr B. on Jacuary 18, 2007 together with che required premium Mr. B submitted the application to the ofice uf XYZ Insurance Corporation on January 20, 3007 and the application was processed and approved on Tannery 28 2007, On January 26. 007, XYZ sent 2 notice to Mrs Ay ruil, Me. A received shw notice on January 18.2007. Inte ‘meantime, op January 26. 2007, che hoase of Mr. A was totally destroyed by fire, Can Mz. A recover ‘rom “O12” ‘No. Mr, A cannot recover fom XYZ. There is no pertoeved ‘surance contract betmeen A and XYZ at the time of the Joss, An insurance cortract is perfected only from the ‘ime the insured had notice ofthe asceptanice of his oer The application of Mr. A constitates the offer <> ante into an insurance contract." While the offer hud aireacy ‘een accepted on January 25, 2007 or belore the ions she Insured learned bout the accoptanc. of the offer aniy aftor the lose or on Janvary 38, 2007 Anopplication for a ifeinsurance policy with JH insurance Company was made by Mr. DHD and listed therein for {inclasion ge meured lives are Mr, DED, his wife AD amd hs children KD and BD. The application discloses that “8D heart is impaired.” Mr. DHD was informed hy the soliciting agent that he could not assure him thet the company would include KD as an insured fatnily member, JH Fasurance Company approved the application but with the notation “Delete KD as insured” Thereafter. life insurance policy was sent to DHD insuring the lives of all the persons named in the application but attached thereto are the application and a document entitled “Amendment to Application” which required the: of the insured and provides that KD be deleted from the List of the proposed insured and that no coverage should be provided to her. Not being able to cantact the instred who was not at home when he ealled, the saliciting agent lef. the policy and attached documents with AD. Tha amendment had not heen signed by the ineured when KD ied, The insurance company denied the claim for RD'e death. Is the denial proper? ‘Yes, the denial ofthe claim was proper because there was 0 perfected contract of irsurance. The spol CHAPTER ONE GENERAL CONCEPTS: insured was the nature of an offar that must be accepted the insurance company. The insurance company Ieacap he ofr ao litead staged the amonmont to the contract af insurance which daletos the poy of one ‘of the liver included in the application. The amendment constitutad a counteroffer which must be accepted by sbe ‘asured-applicant In this case, the counterofer was not taeepted because the signature was not obtained. John ‘Hencook Mutual Life Ineuranee Company. Donald H. Dietin, ef ai. 1994. 24.911, Apri, 2964 99. Tnmuranse may bes 16D includes the insurame coverage prov-des by tho, Social Security 2 mpulsory, ature and are designed to provide « minimum of economic sesurity ‘Prlarg ee re ante lowe meome dese? icularly m the lower income cla fey are designed to protect the large group of persons against the perils of accidental injury, sickness, old age, unemployment and the premature death of the family wage earner.” ene sepee ee Da cd Sl pe clear ct i (2) Casualty Insurance, (3) Fire Insurance, (4) Life Insurance, (5) Compulsory Third Party Liability Insurance, and\6}Microinsurance. oe os a riod when iti ip fore, or 2) ecirng line ge pal Gare, Life Insurance may be classi ‘into: wi ‘The life of a person is insured on rary basi i ered. Bikeaut m6. Sikelnewpeu ‘ESSENTIALS OF INSURANCE LAW ‘Repablic Act Ne. 0807 with Notes on Pre-Nend Act ‘A person is insured during ® In tis type of mouranee, te ‘insured is paid a ceriain amount or the face valu of the gol ifthe nau suntv soot pened a ee Fithe preeds the muured dent ae +) Cidustrial CJE>~ It is that form of life insurance under which’ the premiums are payable either monthly or oftener. ifthe face dmount of insurance provided i AA PONCE ‘otimore than Eve fines that of the current statutory lou aay wa te Cie a PS ‘Tedustral poly a pried spor te paley ae pot descriptive matter 4. GFoporty TaswEaGE Toe tasurance Cade recognizes insurance pobtiee that a wholly or pany considered seers iasurance These include: Hreimsuraer Se Tres marine insurance, ands) gaia Tse 2 "NG 16607 ‘GoW includes a provision on Micreinsurance:* Section 187 of the Insurance Code provide that Mortssureace ia fn produce cts he | ppc nets othe poornbere eae taste shee “(a) The amount of contributions, premiums, fees OF charges, computed on a dally basis, does not exceed, Seven and a half percent (7.5%) of the current daily ‘minimum wage rate for nonagricultural workers in Metro Manila; and (b). The maximum sum of guaranteed benefits is ‘not more than one thousand (1,000) times of the curront daily minimum wage rate for nonagricultural workers in Metro Manila.” se. (DEMNETY] One of the fundamental srinciptess ié What is knowh as the principle ofindemnity “his means thatthe insured should @plallect more than the actual ‘TSectiog 56.1.0. au amended by RA No, 10807 ‘*Secsions 187 & 188, .C. as amended by BA No, 1060 CHAPTER ONE co (GENERAL CONCEPTS ccash value of the loss, The principle ig meant to prevent the insured mm profiting from insurance and to reduce moral hazard” a ‘Accepted exceptions to the principle of demnity include: (1)"Lif bythe mourer can notes aaa a ad ‘and (2) Vali icies.under which z otaLloss,* . ; Pociags Sar animes a, mere TEER ae eat inure iri interest is indispensable, (2) The value of che interest dest oF ce esate Te cape re aed ted above). (37 Co-Insuran; rine surance, ane Subrogation in property msurance"" BLANKET POLICY ~ a prgte poy Ou insured paper tee ved neve Ren and tea pnpety at hme dreatir the ate Bod of papery ok an ine rcatine ar Hy or mr eid pnp ox An ny mane Lenn adja po Bia p82.‘CHAPTER TWO THE PARTIES The insis.; and the insured are the parties to an insurance contract. The jnsurer is the party who promises t0 pay in ease loss results because the peril insured aysinst occurred. The insured is the owner of the policy whose property or life is insu. d or who took ‘out the insurance over the life of persons in whom he has insurable interest. There is ¢ third person involved in an insuraneé contract known as the béfieficiary. The beneficiary is the person in whose favor the insurance was taken by the insured and who will receive ‘the priceeds of the insurance in case of lose. However, in strict legal sense, the beneficiary is not a party to the contract unless he is the insured himself. The importance of studying the parties involved in insurance contracts was explained in this wis “Tasurance ideas and practices’ define central privileges ‘and responsibilities within a society. Ja that sense, our insurance ‘arrangements form’a materia) constitution, one that operates through routine, mundane transaetions that nevertheless define the contours of individual and social responsibility. For ‘that reason, studying who is eligible Wo raceive what insurance bbenefita, and who pays for them, is as good a guide to the social ‘compact as any combination of Supreme Court opinions.” §1._ INSURED. Under the Insurance Code, the insured is the person who applied for and to whom an insurance policy is issued to cover his life, property or the life of or property of other person/s in ‘whose life or property he has insurable interest or liability to other persons. The insured is the one who enters into e contract with the insurer. $1.01. ASSURED AND OWNER. In life insurance, ifa person insures the life of another, the person whose life is insured is called the “insured” while the person who took out an insurance on the “Tom Baker, On the Genealogy of Morel Haxard, 75 Texes Law Review 297 (1996) ae < cHapren Two 22 "THR PARTIES former's life is called the “agstirefl® There are those who refer to the person who obtained the poliey as the “ownerand the person whose life was insured as the “insured.” $1.02. CAPACITY. Under the New Civil Code, @ contract 4s poidable if one of the parties is ieapacitated.* Accordingly, an insurance contract is voidable if the insured is aainor, an irieane person or is otherwise incapacitated to enter into an insurance contraet.* However, a capacitated person can validly enter into an insurance cohtract insuring the life of an incapacitated person like a minor. 4 Married Women. Married women can enter into insur- ance contracts without the consent of their husbands. Section 3 of the Insurance Code provides that “the ponsent of the husband is not necessary for the validity of an insurance policy taken out by # married woman on her life or that of her children,” However, this provision had already beon superseded by the Executive Onder No. 209 otherwise known as the Family Code of the Philippines’ and Ropublic Act No. 7192. Republic Act No, 7192 expressly provides that married women can enter into insurance contracts without the consent of their husbands, Women's eapacity to act is not impaired by marriage beeause the mandate of the law is on equality. These statutory provisions are consistent with Section 14 of the Article 11 of the 1987 Constitution which provides for “equality before the law ‘of women and men.” b, Minors. Minors cannot enter into insurance contracts The rule under the New Civil Code is that a contract entered into between a minor and eapacitated person is considered plidable. Hence, an insurance contract entered into between the miiarand an insuranee campany is woidable (1) It should be noted in this eonnection that Section 3 of the Insuranice Code provides that “any minor of the age of eighteen years or more, may, notwithstanding such minor- ity, contract fer life, health and accident insurance, with any insurance company duly authorized to do business in the Phik ippines, provided the imsurance is taken ott his own life and the beneficiary appointed is the minor's estate or the ihioy’s “Article 1290, New Civil Code. ‘Article 36, Now Clil Code. ‘Hloreinafterreerred to as the ‘Pumily Cote” ‘See Art, 78, Pemlly Code, cul ny fenoy ESSENTIALS OF INSURANCE LAW father, mother, husband, wife, child, brother or sister.” How- ever, this provision ig Likewise deemed superseded by the Fam- ily Code which fixed the age of majority at eighteen (18) years. At eighteen (18), « person is capacitated to act for all purposes. ‘Hence, @ person who is eighteen (18) can enter into an insur ance contract without any limitation exgept the limitations im- posed on other persons who are of legal ate (2) The life of a minor can be insured, This is subject to the provisions of the last paragraph of Section 8 which pro- vides: Allrights, title and interest in the policy of insurance taken out by an original owner on the life or health of @ minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy. For example, the parents can insure the life of their minor child. If the parents, who are the original owners of the policy, will die, all the rights, title and interest in the policy shall be automatically vested in the minor. $1.03, PUBLIC ENEMY. Section 7 of the Insuruxice Code Provides that “anyone except a public enemy may be insured.” A Public enemy is a State (and the citizens thereof) which is at war with the Philippines, a. Effect of War. If there is no war yet at the time of the taking of the policy but war ensues between the Philippines and the country of the insured, the insurance policy is deemed abrogated. The Supreme Court has adopted the so called “United States Rule” which declares that the contract is not merely suspended, but is ‘abrogated by reason of nonpayment of premiums, since the time of ‘the payments is peculiarly of the essence of the contract.’ (@) The Supreme Court rejected the New York rule ‘which holds that war between states in which the parties reside suspends the contract of life insurance and that, upon tender of all premiums due by the insured or his representative after the “TAR. 294, Family Code as amended by R.A No. 6808. ‘James MeGuire v. Manufacturers Life Insurenoe Company, GR. No. 1-388, September 21, 1950; Laper de Constantino Asia Life Ineurance Company, end Per” ‘ta Asia Life Insurance Company. G.R. Nos 1-1609 and 1-1670, August 3, 1960. CHAPTER TWO 26 ‘THE PARTIES ‘war was terminated, the éontract is revived and becomes fully operatives b. In another case, the Supreme Court ruled that based on Section 7 of the Insurance Code, it stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy? The High Court cited these authorities: “Effet of war, generally. — All interoourse between citizens of belligerent powers which in inconistont with a state of war is prohibited by the law of nations. Such probibition includes all negotiations, commerce or trading with the enemy, all acts which will increase, or tend to increase, its income oF retoutes; all acts of voluntary submission tai; or receiving its preston; also al acts concerning the tranamiasion of money or fends; and all contracts velating thereto aro thoresy {farther prohibits insurance upon trade with or by the enamiy- upon the ie or lives of aliens engaged in service with the enemy: this forthe reason that the mibjects of one country casnot be Permitted to lend their assistance to protect by insurance the commerce or property of belligerent, alien subjects, or to do lnything detrimental too their countyy’s Interest. The purpose of war is to geippe the power and pdhaust the resonrees of the enemy, and itis inconsistent tht one country should estroy its enemy's propery and jepay in insurance the value of what hus been so destroyed, or that it should in uch manner increase the resources of the enemy, oF render it of, and the commencement of war determine, for like reasone all trading inoreourse with the enemy, which prior thereto may have been lawful Al! individuals threfore, who compose the belligerent powers, exist as to each other, in estate of utter exclusion, and ‘are public enemies * Inthecaseofn odinary fire ptiy, Which grantsinsurance only from year, or for some other specified term iti pain that sven the parties become slien enemies, che pntractual tie is broken and the contractual rights of the parties, so far as not vested, Ios." $2, INSURER. Section 6 of the Insurance Cade provides that every pefson, partnership, gsséciation, or cetporation duly authorized to transact insurance business may be an insurer. bi. "Pilinas Compania de Seguros v. Christrs, Huenenfel, & Co, G.R. No. Le ‘2094, May 26, 1951, ‘bid, citing 6 Couch, Cye. of Ins. Law, p, 6282-6958, "Tbid citing Vance, the Taw on Tnmnranee, See. 44.132, —- i26 ESSENTIALS OF INSURANCE LAW §2.01. DEFINITION. “Insure” or “insurance company” shall include all individuals, partnerships, aséociations, or corporations, including government-owned or controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations.* a. Professional Reinsurer. The terms “insurer” or “insur- ance company” likewise inilude professional reinsurers.» Section 280 defines the term “professional reineurer” as any person, part- nership, association or corporation that transacte solely and exclu- sively reinsurance business in the Philippines. b, Domestic and Foreign Company. An insurer may be & domestfe company or a forefgn company. “Domestic company” shall include companies formed, organized or existing wr(der the laws of the Philippines. “Foreign company” when used without limitation shall ineluge companies formed, organized, or existing under any laws othg# than those of the Philippines. ¢ Insurance Corporations. The law likewise defines “igsurance corporations” as corporations formed or organized to ive any person or persons or other corporations harmless from Joss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or other corporations for any such loss, damage, or liability, or to guarantee the performance of or compliance with contractual obligations or the payment of debt of others. 4. Mutual Benefit Association. Although excluded from the term “insurer” under Section 184 of the Insurance Code, likewise within the regulatory powers of the Insurance Commission are “mutual benefit associations.” They must first secure a license from ‘the Insurance Commission before they can transact business. (1) Situal benefit: associations include ‘any society, association or corporation, without capital stock, formed or organized not for profit but mainly for the pafpose of paying sick benefits to members, or of furnishing fivanciel support to members while out of employment, or of paving to relatives of deceased members of fixed or any sum of money, irrespective of ‘Section Tea, LC. ba. Seeton 188, LC. "Beeson 281, LC ‘CHAPTER TWO 2 ‘THE PARTIES whether such aim or purpose is carried out by means of fixed dues or assessments collected regularly from the members, or of providing, by the issuance of certificates of insurance, payment of ites members of accident or life insurance benefits out of euch fixed and regular dues or assessments, but in no case shail include any society, association, or corporation with such mutual benefit features and which shall be carried out purely from voluntary contributions collected not regularly and or no fixed amount from whomsoever may contribute.”* e. Mutual Insurance Companies. Mutual Insurance Companies are recognized under the Insurance Code. Sec. 262 provides that any domestic stock life insurance company doing ‘business in the Philippines may gdnvert itself into an incorporated mutual life insurer. To that end it may provide and carry out ‘a plan for the acquisition of the outstanding shares of its capital stock for the benefit ofits policyholders, or any class or classes ofits policyholders, by complying with the requirements of Chapter 1, ‘Title 17 of the Insurance Code.* Q) Procedure for Mutualization. The plan for mu- tualization shall include appropriate proceedings for amend- ing the insurers ariles of nepeportion to gfe effect tothe acquisition, by said insurer, £6r the benefit of its policyholders or any class or classes thereof, of the outstanding shares of its capital stock and the conversion of the insurer from a stock corporation into a non-stock corporation for the benefit of its members. The members of such non-stock corporation shall be the policyholders from time to time of the class or classes for whose benefit the stock of the insurer was acquired, and the policyhalders of such other class or classes as may be specified in such corporation's articles of incorporation as hey may be ‘amended from time to tim (2) The terms “policyholder” or “policyholders” for pur poses of mutuslization under Chapter III, Title 17 shall be deemed to mean the pefGon or persons insured under an indi- vidual policy of life insurance, or of isalth and gecident insur- ance, or of any combination of life, health and accident insur- “ance. They shal also include the person or persons to whom ‘WBeetion 890, 1.6. Sections 289 to 272, 1.0. ‘Section 263, 1.28 ESSENTIALS OF INSURANCE LAW any annuity or pure endowment is presently or prospectively payable by the terms of an individual annuity or pure endow= ment contract, exegpt where the policy or contract declares some other person fo be the owner or holder thereof, in which ‘case such other person shall be deemed policyholder. ‘The terms “policyholder” and “policyholders” include the employer to whom, or a president, secratary or other executive officer of sxiy corporation or association to which a master group policy has been issued, but exelude the holders of certificates or poli- cies issued under or in connection with a master group policy. Beneficiaries under unmatured contracis shall not as such be {deemed to be policyholders. (3) Demutualization. In some countries, the trend is towards “demutualization.” More and more prctual insurance companies are converting to stick corporations. One of the primary reasons for this development is the need of companies for mere funds. tis easier to raise funds ifthe corporate Vehicle is a stock corporation. Another reason for demutualization is to enable the insurance company to afversify its activities and to facilitate payment of certain types of non-cash compensation to its directors and officers.* $2.02. CERTIFICATE OF AUTHORITY. Section 187 of the Insurance Cade provides that, yx insurance company shall transact any insurance business in: the Philippines until after it shall have obtained a certjfiggte of authority for that Purpose from the (Insurance) Commissioner upon application therefor and payment by the company concerned of the fees.” A certificate of authority is Toquired because contracts of insurance involve publi¢ interest and regulation thereof by the State is necessary.” a, Similorly, Setffon 186 provides that no person, partner- ship, or association of persons shall transact any insurance business in the Philippines excgnt as agent of a person or corporation autho. rized to do the busingss of insurance in the Philippines, unless: (1) possessed of the capital and assets required of an insurance corpora- aa, "Burton T. Bear, J David L. Bickelhaupt, Robert M, Crowe, and Barbara S. Poole, Pundamientals of Insurance for Psnancial Pausiag, 3nd Bastion, 2002, PT, "Beam, et al” ‘White Gold Marine Services, Ine-v-Hioneer Insurance and Surety Corporation, etal, GIR. No. 154514, July 25, 2008 CRAPTER TWO 29 ‘THE PARTIES tion doing the same kind of business in the Philippines and invested in the same manner; (2) nor unless the Cerfimissioner shall have granted to him or them a certificate to the effect that he or they have complied with a the provisions of law which an insurance eorpora- ‘tion doing business in the Philippines is required to observe. §2.03. GROUNDS FOR DISAPPROVAL OF APPLICA- “TION. Section-187 provides for some of the grounds for rejection of the application for certificate of authority by the Insurance Commis- sioner: 4. Ifsuch refusal will best promote the interest ofthe people of this country; b. If there is evidence that the applicant. company is not qualified by the laws of the Philippines to transact business therein; c. If the grant of such authority appears to be unjustified in the Tight of: (1) economic requirements, (2) the direction, administration, integrity and responsibility of the organizers and administrators, (3) the financial organization and the amount of capital, and (4) reasonable assurance of the safety of the interests of the policyholders and the public. $2.04. PROHIBITED ACTS. An insurer is prohibited from doing, among other acts, the following:* a, To transact in the Philippinos the business oflife and non: life insurance concurrently unless specifically authorized to do s0>* aa b. To have equity in an adjustment company (neither shall an adjustment company have an equity in an insurance company); To negotiate any contract of insurance other than is plainly expressed in the policy or other written contract issued to or to be issued as evidence thereof Sedan 167, Le. Tid; Note that the terms “fe” and “non-life” insurance ehall be deemed to {include health, accident and disabity insurance Sesto 361, LC,20 [ESSENTIALS OF INSURANCE LAW a. Todirectly or indirectiy, by giving or sharing « commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of such insured, either as an inducement to the making of such insurance or after such insurance has been effected, any the premium which is specified in the policy, Oramiy special favor or advantage in the dividends or other benefits to acerté thereon: ©. To give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not opécified in auch policy or contract of insurance, £ To make any discrimination against any Filipigo in the senso that he is given less advantageous rates, dividends or other poliey conditions or privileges than are accorded to other nationals because of his race;” & Tolssue or circulate or cause or permit tobe issued or cir- culated any literature, illustration, circular or statement of any sort misrepresenting the terms of any policy issued by any insurance company of the benefits or advantages promised thereby, or any misleading estimate of the divi dends or share of surplus to be received thereon: h, To use any name or title of any policy or clase of policies misrepresenting the true nature thereof" and — i, To make any misleading representation or incomplete comparison of policies to any person insured in such company for the purpose of indueing or tending to induce such person to lapse, forfeit, or surrender his said PROBLEM: 1. Sometime in January 1975, Ms, NL was able to convince Mr. ET to take out a life insurance policy with MBL In surance Corporation. As a result of a medical examina ‘Hon conducted on ET showing that he was a diabetic, he "a, sia, "Tod. Section 962, LC. "To Ti. (CHAPTER TWO a ‘THE PARTIES insurance company fixed the annual insurance premium ‘at P93,180.00 fora life insurance poliey with a face value ‘of Pi,000,000.00. In arder to persuade BT to Lake oat the policy at the computed premium, NL offered to return to hhim the amount corresponding to her commission out of ‘he first premium payment, which is equivalent to FITY pereent (50%) thereof. Upon such inducement, ET agreed ‘9 take she policy thus, on April 30, 1976, he issued two cheeks in favor of the MBL for P46,590.00 each or a to- tal of P93,180.00. Both checks were postdated May 30, 1975 60 as to enable NL to make arrangements for the return t ET of ene cheek corresponding to the amount of her commission. On June 4, 1975, NL received the sum ff P51,269.00 as her commission out of the first annual premium paid by ET. Yet, NL failed to comply with her commitment to pay ET P46,590.00. Soon after, ET's attor- ney sent a demand letter dated July 7, 1975. Can Mr-ET recover from MBL? ‘A: No, EP cannot recover from MBL. Under Section 361 of ‘the Insurance Code insurance companies, brokers and agents are prohibited to induce another to take out an insurance policy with the promise to return part of the premium out of the commissions of the agent or broker. ‘The law disallows practices involving rebates or preferen- ‘tial treatment with respect to the cost ofthe poliy or the benefits allowed for the premium. Accordingly, to enforce contracts or agreements directly prohibited under the law ‘would be against the very public policy which the law was Aesigned and intended to-uphold. (Nora Lumibao v. Hon. Intermediate Appellate Court and Bugenio Trinidad, GR. NoL-64677, September 13, 1990) §3, BENEFICIARY. The beneficiary may be a third porson. Unless he is the :nsured himself, the beneficiary is not one of the contracting parties. However, a third party beneficiary named in the policy has the right to file an action against the insurer in case of loss. ‘No other party ean recover the proceeds other than the beneficiary. Section 53 provides: Sec. 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. a. When a beneficiary is designated. In life insurance, if there is a pamod beneficiary and the designation is not invalid, it2 [ESSENTIALS OP INSURANCE LAW is the designated beneficiary who is entitled to receive the proceeds and not the heirs of the insured. If another person is named the beneficiary, the proceeds of an insurance policy belong exclusively to the jary and ni whose life was in- ‘sured. In other words, the proceeds are the separate and individual property of the beneficiary, and not of the heirs of the person whoso life was insured.* At any rate, the heir may also be the beneficiary ‘and the proceeds of the life-insurance poliey payable to said heir belongs to him exclusively and does not form part of the deceased's estate= b. When there is no beneficiary. It is only when there is mo designated beneficiary or when the designation is void, that the'laws of succession are applicable In other words, if there is no designated beneficiary, the proceeds shall form part of the estate of the deceased insured» ©. Effect of use of conjugal funds. If the funds of the conjugal partnership of gains are used to pay for the premium, the proceeds of the policy constitute community property if the policy was made payable to the deceasod's estate. One-half of said proceeds belongs to the estate and the other half to the surviving spouse () Incase decided when the New Civil Code provisions on the property regime of the spouses was still in forve, the ‘Supreme Court adopted the following comments of Manresa in his Commentaries on the Civil Code: "ion Pica, ef a. v. Government Servie Insurance System, GR No. L-25808, ‘May 29, 1970; Del Val Dal Val, 29 Pil, 836, S40; Sergio Alabst etal +. Torbie De Alabat, No. L-22169, December 29, 1067, The Bank of Philippine Islands v.Juan Pooudae, Sx, G.R. No, 94589, October 22, 1951, ting 1 Corpus Juris 665-556), ° ‘Social Security System v. Candelaria D. Davae, etal, G.R. No.L-21642, July 80, 196. ‘Re: Claims for the Benufits ofthe Late Mario x. Charllongc, A.M No 190 October 18, 1877 The Bank of Philippine Islends . Juan Posadas, Sr, supra citing Mastin: Mo- ran, L1 Tex. Civ. A, 600, Jn re Stan's Estate, Myr, Prob, (Cal) 6 (where the Supreme Court of California found that the premiums mere Paid using the salary of the de: ‘eagsd, which salary was considered community property); In re Webtis Estate, Myr ‘Prob (Cab, 95 (where the Supreme Court of Califia found thatthe decedent paid tho fe: third of the amount of the premiums on hislifeneurance policy out his ear ing before the marriage and the remainder from his earnings receved afer the mar age end where the court held that one-third ofthe policy balonged to hi aeparete ‘estate, and the remainder to the community property, Vol. 8, page 589 cited in The Bank of Philippine Islands v. Juan Posada, J, ia, us pe, mascione, acter ry, orp, ‘CHAPTER TWO 38 "THE PARTIES “The amount of the policy represents the premium to be paid, and the right to it arises the moment the contract is perfected, for at that moment the power of disposing of it may be exercised, and if death occurs payment may be demanded. tis therefore something acquired for a valuable consideration Guring the marriage, though the period of its fuldllment, depend upon the death of one of the spouses, which terminates ‘the partnership. So considered, the question may be said to be decided by Articlos 1996 and 1401: ifthe premiums are paid with the exclusive property of husband or wife, the policy, belonge to the owner; if with conjugal property, or if the money cannot be proved as coming from one ar the other of the spouses, the poliey is community property.” (2) However, if there is a designated beneficiary, the beneficiary is entitled to the proceeds of the policy. The source of the premium is immaterial. a. Vested Interest of beneficiary. The vested interest or right of the beneficiaries in a life insurance policy should he ‘measured on its full face value and not on its cash surrender value, for in case of death of the insured, said benoficiaries are paid on the basis of its face value and in case the insured should discontinue paying premiums, the beneficiaries may continue paying it and are entitled to automatic extended term or paid-up insurance options and that said vested right under the policy cannot be divisible at any given time” PROBLEM: 1. Enrique Mora, owner of an Oldsmobile sedan model 1956, bearing plate ne. QC 8088, mortgaged the same to the HLS. Reyes, Inc, with the condition that the former would insure the automobile, with the latter as beneficiary, The automobile was thereafter insured on June 23, 1959 with the State Bonding & Insurance Co. Ine,, and motor car Insurance policy A-O615 was issued to Enrique Mora, the pertinent provisions of which read: “l. The Company (referring to. the State Bonding & Insurance Co., Inc) will, sub ject to the Limits of Liability, indemnify the *Daifin Nevo, al v. The Philippine Americas Life Insurance Company, GR. No. L-22796, June 26, 1967, 20 SCRA 48aESSENTIALS OF INSURANCE LAW Insured against loss of or damages to the Mo- tor Vehicie and its accessories and spare parts whilst thereon: (a) by accidental collision or ‘overturning or eollision or overturning conse- quenily upon mechanical breakdown or conse- quent upon wear and tear. 2. Atiteown option the Company niay ‘pay in cash the amount of the loss or damage ‘or may repair, reinstate, or replace the Motor Vehicle or any part thereof or ite accessories or apare parts. The liability of the Company shall not exceed to value of the parts whichever is the less. The Insured s estimate of value stated in the schedule will the maximum amount pay able by the Company in respect of any claim for oes or damage. 4. The Insured may authorize the re- pair of the Motor Vehicle necessitated by dam: ‘age for which the Company may he liable under this Policy provided that: — (a) The estimated cost of suck repair dove not exceed the Autho- rized Repair Limit, (2) A detailed estimate of the cost is forwarded to the Company without delay, subject to the condition that Loss, if ‘any, is payable to H.S. Reyes, Inc’, by virtue of the fact that said Oideraobile sedan was mort- gaged in favor ofthe said H.S. Reyes, Ine. and that under a clause in said insurance policy, ‘any loss was made payable to the B.S, Reyes, Inc. as Mortgages; ax ax ae During the effectivity of an insurance contract, the ear met an accident, Enrique More, without the imowledge and consent of the H.S. Reyes, Inc, authorized ‘the Bonifacio Bros. Inc. to furnish the labor and materials, CHAPTER TWO ‘THE PARTIES: , What are the rights of ALPHA against Beta Insurance Company ox the fire insurance? A: (@)_ ALPHA can recover from Mutual Life Insurance Company in the lift insurance poliey, ALPHA had insur able interest of ALPHA in the life of tae person insured, ‘Mr. P, a the time the insurance took effect. Mr. P was an ‘employee of ALPHA at the time the insurance poliey was ~_sGreat Pecfc Tile Assarenes Corp x. Court of Appeals, No.1 ber ie Areal 899, Oat (CHAPTER THREE BL INSURABLE INTEREST taken. The fact that he was ro longer an employee at the time of his death will not defeat the claim because in life insurance, insurable interest need not exist thereafter or ‘when the lose occurred (See. 19, LC.) (b) ALPHA cannot recover irom Beta Insurance Compa- ny. In property insurance, insurable interest in the prop- erty insured must exist not ocly when the insurance takes effect but also when the loss cecurs. In the given problem, the fire that destroyed the insured house took place after ALPHA had cold the house to Mz. P. Hence, the ingurable interest of ALPHA in the property insured no longer ex- inted when the loss occurred (See. 28, .C.). 2. -On duly 14, 2005, X, took an insurance policy on the life of his friend, Y. In the insurance application, X misrep- resented that Y was in perfect health although he Jew all the time that Y was afficied with AIDS. On October’ 18, 2007, Y died in a motor accident. Shortly thereafter, X filed his insurance claim, Should the insurer pay? Rea. ‘A: No. The insurer need not pay the claim of X. The insurer does not have any legal obligation to make such payment because X does not have insurable interest over the life of Y. The friendship of X alone is not the insurable interest contemplated in the life insurance, Insurable interest in the life of others (other than one's spouses or children} is merely to the extent of the pecuniary interest in that life ‘which interest is not shown in the facts presented, $8. INSURABLE INTEREST IN PROPERTY INSUR- ANCE, ‘The basic rule in property insurance is provided for in Sec- tion 18 of the Insurance Code which provides that. “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 ‘ngured.” Related provisions are Sections 18, 14, 16 and 17 of the Insurance Code which provides Sec. 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. Sec. 14, An insurable interest in property may consist in: (a) Anexisting interest;a ESSENTIALS OF INSURANCE LAW (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. ‘Sec. 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 insurabl ‘Sec. 17, The measure of an insurable interest in Property is the extent to which the insured might be damnified by loss or injury thereof. $8.01. TEST. Based on Section 13 of the Insurance Code, the presence of insurable interest in property can be determined by asking if the insured has 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 said insured, Any title to, or interest in property, legal or equitable, will support a contract of property insurance. Even where the insured has vo title, the contract will be upheld if his interest in or his, relation to, the property is such that he will, or may bé benefited by its continued existence or suffer a direct pecuniary loss from its destruction or injury.’ b, The. test in determining insurable interest in property is whether one will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from ite destruction, termination, injury by the happening of the event insured against $8.02, KINDS OF INSURABLE INTEREST. Insurable interest in property may be an (1) existing interest, (2) inchoate interest founded on an existing interest, ar (3) expectancy, coupled ‘with an existing interest out of which the expectancy arises. a. Existing Interest. Existing interest includes the interest of an owner. However, title or ownership is not essential. Thuis, the “Harvardian Collages of Sen Fernando, Pampanga, Ine. v. Country Bankers In ‘surance Corporation, CA GR CV No, 69771, January 6.1986, 1CARA) ‘Hoarvardian Colleges of San Fernando, Pampanga, lne +. Countey Bankers In- surance Corporation, Zid, citing Harrison v, Fortiege, 161 US 7, (CHAPTER THREE 88 INSURABLE INTEREST following persons have insurable interest over the property even if they are not the owners thereof, (J) lesooe, (2) depositary, (3) ‘usufructuary, end (4) borrower in eommodaturn. b, Consistently, « possessor who is holding the property without consideration with the consent of the owner has inenrahle interest in the property that he is occupying. Ono has insurable interest if he is so situated with respect to the property that he will suffer loss as the proximate result ofits damage or destruction. ¢. _Imsale of goods, an unpaid seller retains insurable interest over the goods even if ownership had already been transferred to the vendee upon delivery. An unpaid seller has a vendor's lien and therefore he, will be damnified by the loss of the goods even after delivery." 4. On the other hand, the vende or buyer has insurable interest over the goods even while the goods are still in transit. In one ease, the Supreme Court ruled that the consignee of the goods in transit under an invoice containing the terms under “C & F Manila,” has insurable interest in said goods. As vendee/consignee of the goods, he has such existing interest therein as may be the subject of e valid insurance ¢ontract, His interest over the goods is based on the perfected contract of sale. The perfected contract of sale ‘between him and the seller/shipper of the goods operates to vest in hhim an equitable title even before delivery or before he performed the conditions of the sale. The contract of shipment, whether under “FOB.” “CLF or °C & Fis immaterial in the determination of whether the vendee has insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance. e. _Insureble interest in property exists in any of the flowing ‘cases because the person is s0 situated that he will suffer because of the loss due to a peril insured against:* ryan Gtege Sn Fernando, Pspange, In v Gnutry Bases Ta erases Copan a Sioa Cagnya, Tn. Tnrarance Company of Norte Americ, GR. No aay, June & 200, Can be suns PAE Yapton No e006, Meh 22 780 piine Mohan: Insurance Co., Inc. v. Court of Appeals, No, 85141, Novem- ber 28198 7 ‘iervarian Calege of San Fernand, Pampanga, Is. v Omniny Bases Innurans Capers,& ‘ESSENTIALS OF INSURANCE LAW 2) When the insured possesses a legal title to the Property insured, whether vested ar contingent, defeasible or undefeasible; (2) | Whet he has equitable title of whatever character and in whatever manner acquired; (8) | When he possesses a quslified property or possesso1 Tight in the subject of the insurance; had .g (When he has mere possession or right of possession; anc (5) "When he has neither possession of the property nor any other legal interest in it but stends in such zelation with Fespect to it that he may suffer from its destruction, loss of a legal right dependent upen its continued existence, fF qimthoate Interest. Inchoate interest must be founded 00 an existing interest, For example, an shareholder has inchoate oq expectancy. Expectancy must likeviise be coupled with an exsting interest. For instance, the interest of an heir over the Rraperties of his successor who is still alive is a mere expectancy ‘that is not coupled with an existing interest. Hence, the he doce pot heve insurable interest over the properties of his successor-in. interest. 808-DISTINCTIONS BETWEEN INSURABLE INTER- EST IN PROPERTY INSURANCE AND LIFE INSURANCE, INSURABLE INTEREST IN | INSURABLE INTEREST IN PROPERTY LIFE 1. As to extent: Limited up to | 1. Unlimited except if scoured the valued of the property. by the creditor = 2 Time when it must exist: | 2 At the time of the perioclon At the time of perfection of | "of the insurance contract the contract and at the time of the loss, CHAPTER THREE bad [INSURABLE INTEREST 3. Need for legal basis: Ex- | 3. Expectation of benefit must pectation of benefit need not | have legal basis. have legal basis. 4. Beneficiary’s Interest: |4._Insurable interest is not nec- essary ifthe insured took out the poliey on his own life and designated another, Beneficiary must have in- surable interest Beneficiary must have insur blo interest if ana took aut ‘an insurance on the life. of another PROBLEMS: and on the |. Apieee of machinery was shipped to Mr. Pablo and 2% Sabin af CAP, Manila Me. Pablo insured said machinery with te Taga Mercanaie Insurane Cot, CTAMIC) for oss or damage during the voyage. The vessel tank en route fo Manila Mr. Pablo then fle a claim with TAMIC ‘whic was denied for the reason that prior ta delivery, Mr. Pablohed ao insurable interest. Decide the case. A: TAMIC invalidly denied the claim, Mr. Pablo already had ‘ap inmurable interest on the piece of the machinery he bough: even before delivery. As a purchaser, he already hhad equitable interest on the propery delivery. Filipina Merchants Insurance Co. v. CA, 179 SCRA 638) 2. Aomoatmue val at 20,0000 hich bebe inared ne he Fogo. eae lune ia 2 Shams atone 0 ond ocr arent ere, heres eto morgage to te rebut at isp tsroncs plete ata: For A ek theo e ans upon tant, Binatone Pres nds Se eon asl Se haw ee The u ie gh de imine, won oe wei thc higher be’ erent ofan or, Hitless gun’ re P2600.0 with \ other insurance company. In order to redeem the house, A Secrwed 10000 in dann nr eine SE hc fenrence plyof P10 900.A0 WC Rowe Be RSA seg 8 i Satin ef 10800000 SE LeEe gee ctaly only rnd Whe a sore fn beer be56 ESSENTIALS OF INSURANCE LAW A: Only B can recover undér the policy. As the mortgagor ‘and highest bidder inthe foreclosure sale, B has igeurable interest on As house. However, his interest is limited to 'P50,000.00, the value of A’s house. An insuraneé contract, is a contract of indemnity, hence; B cannot recover more that the value of the house, A cannot recover. Although A has insurable interest over ‘the house, he lost his interest over the insurance polley when he assigned it to C. A bad ne more interwel in hig insurance policy atthe time of the lose. (Ccannot recover because he has no insurable interest over A’shouse, Ae an unsecured creditor, Chas no interest over ‘the house. Besides, the assignment to him of 4's insurance policy was not approved by the insurer, 3. A owns a house worth P500,000.00, He insured it against fire for P260,000.00 for the period from January 1, 1977 to ‘January 1, 1978. At the instance of B who is ¢ judgment «reditor ofA, the said house was levied upon hy the sheriff and sold at public auction on March 15,1977, It was ad- Judicated to B for P150,000 at the auction sale, B insured {be house against fire for P150,000,00 for the period from, ‘March 16, 1977 to March 16, 1978. The house was acciden- ‘ally burned on April 1, 1977. May A recover under his policy? Give reasons, ‘A: A can recover under his poliey. 4 had insueable interest (over the house at the time the poliey was taken and at the time of the loss, A did not lose his inaurable interest when ‘the house was sold at public auction. A, as judgment debt or, had twelve (12) months time after the sale to redsem the property. 4's insurable interest in the house semaained during such redemption period, Hence, A had insurable interest atthe time of las, ‘The defendant, Mariano R. Barretto, constructed « house for the other dofondant, Placida A. Jose, on land deseribed ‘8 No. 72, plot. Estate of Nagtahan, district of Sempaloc, city of Manila, for the agroed price of PS,000. Subsequeny thereto and on November 12, 1912, Placida A. Jove sold the house to the plaintiff, Antonina Lampano, for the sam. of P6,000. On March 22, 1913, the house was destroyed by. fire, At the time of the fire Antonine Lampano still owed Placida A. Jose the sum of P2,000, evidenced by a promis- sory note, and Placida A. Jose stil owed Matiano RBar, retto on the cost af the construction the sum of P2,000. After the completion af the house and sometime before It (CHAPTER THREE INSURABLE INTEREST sap ec ae secon ene es St amekauncnens inate ania Menara pean iaerrismen see eo a ss rin ins etn See building, furnishing all the materials and supplies, and insured it after it had been completed. Having insurable, See policy was in the name of Barretto alone. It was, therefore, ‘8 personal contract between him and the company and not ‘@ contract which ran with the property. According to this smn ere cae caer ranean zt irere matic neces saitraninnwable inter athe tne ofthe king ofthe shetty aranisimer nnd yoni persons have different interests in the same property, the ieenaaearantegm ae Seta asremetet eine soars oem peace a emer ae rd See aa Somes teria pep eee nas ae ing decision of the supreme court of Spain of December 30, iseae.rmst AE une fade te ed we aes ete a oa ares ea ae des Sea ieee ore suis iner caine te aecenay re creel a Reraiaias uichtctc mere Seat cea ean mavrienres meme oes Sree neato ‘with respect to the textiles because he allegedly does notcy ESSENTIALS OF INSURANCE LAW have insurable interest thereon. Ie the position of X Insur- ‘ance Corporation tenable? A: No, the position of X Insurance Corporation is not tenable. ‘AKY kas insurable interest over the textiles. The deetrac- tien of the textiles meant pecuniary loss to AKY beeause ‘he was deprived of the compensation he would certainly be entitled to for dyeing the same not to mention their Pecuniary liability for dhe labor and other expenses, They ate also liable to the owners of the textiles for their lose Whenover there is a real interest to protect and a pervon. isso situated with respect to the subject of insurance that its destruction would or might reasonably be expeeted £0 impair the valie‘of that interest, an insurance on such interest would not be a wager within the statute, whether the interest was an ownership in or a right to the posses. sion of the property or simply an advantage of a pecuni ary character having a legal basis. (Ang Ka Yu, et al. v Phoenix Assurance Co., Ltd. et al, CA GR. No. 27881 R, September 28, 1961, 1 CAR 704, 709) $8.04, INSURABLE INTEREST OF BAILEE, In a contract. of carriage, the carrier may be dammnified by the loss of the goods because he may be obligated to pay the shipper any damage to the property. Similarly, a depositary is obligated to take care of the thing deposited and he can be made liable if the thing deposited is damaged. Thus, both the carrier und the depositary have insurable interest over the property subject to the provisions of Section 15 of the Insurance Code which provides: Sec. 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. a. "Included in insurance policies taken by depositaries are the so-called bailee policies that are involved in transportation of oods, ~ ~ $8.05, INSURABLE INTEREST OF THE MORTGAGOR AND MORTGAGEE. Both the mortgagor and the mortgagee have insurable interest over the mortgaged property. The morigagor is the owner of the-mortgaged property, hence, he has an existing interest that may be the subject of an insurance. Section 8 governs situations when the mortgagor takes an insurance on the basis of his own insurable interest: CHAPTER THREE ® INSURABLE INTEREST Sec. 8 Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to @ 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 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 hamed, with the same effect as if it had been performed by the mortgagor. a a8 te @ mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be covered by ane poliey, or each may take out a separate policy covering his interest, either at the same or at Separate times. The mortgagor's insurable interest covers the fall Yalue of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property, The morigagee's insurable intorest is to the extent of the debt, since the property is relied upon ax security thereof, and in ineuring he is not lasuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount af the debt, not exceeding the value ofthe mortgaged property. Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee." b. The usual practice and contractual stipulation is for mortgagor to take’ out insurance for the benefit of the mortgagee, ‘The mortgagee may be made the beneficial payee in several ways including the following: (2) He may become the assignee of the policy with the consent ofthe insurer; or (2) A mere pledgee without such consent, or the original policy may contain « mortgage clause; or “Aramaade Geegonia v. Court of Appeals and Country Banker Insiraice Corpor ration, No, 114427, Februsry €, 1996; Ral Commercial Banking Corporation, of ¥. Court of Appeals, ea, Ne. 128893, april 20,1998 “bid.6 ESSENTIALS OP INSURANCE LAW (3) _A rider making the policy payable to the mortgagee “as his interest may appear” may be attached; or @ , A‘standard mortgage clause," containing acellateral independent contract between the mortgages and insurer, may be attached; or (5) The policy, though by its terms payable absolutely ‘to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee’s benefit, in which case the mortgagee acquires an equitable lien upon the proceeds; or (6) The policy may provide for a loss payable clause in favor of the morigagee, ©, _ Inthe policy obtained by the mortgagor with “loss payable ‘lause” in favor of the mortgageo as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself.» Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. This kind of policy covers only such interest as the mortgagee has at the iseuance of the policy." ‘The typical “loss payable clause” is also known as the “open mortgage clause” dA “loss payable clause” should be distinguished from a “union morigage clause” where there is a transfer of an insurance from the mortgagor to the mortgagee with the assent of insurer. ‘The apphicable statute 19 Section 9 of the Insurance Code which provides: Sec. 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 obligation on the assignee, making anew contract with him, the act of the mortgagor cannot affect the rights of said assignee. fe. _ The different variations of “loss payable clauses” were explained by Prof. Vance in this wise: ‘WGreat Pasfc Life Assurance Corp. v, Court of Apps and Mederds V. Leute. io, No, 118899, October 13, 998 “Ibi (CHAPTER THREE a INSURABLE INTEREST “In the first class are those that merely designate the ‘mortgagee as payee, to the extent of his interest, of such sum ‘as may become payable under the provisions and conditions of ‘he policy. Under such clause, the mortgagee is made merely a beneficiary under the contract, recognized as auch by the insurer, but not made a party to the contract itself. Any default on the part of the mortgagor, which by the terms of the policy ofeat his rights, wil also dofeat all rights of the mortgagee ‘under the contract, even though the latter may not have been in uny fault In the socond clase are those clauses, known in their more ‘usual forms, as “standard” or “union” mortgage clauses, which create collateral independent contracts between the insurer and mortgagee, and provide that the rights of the mortgagee shall not be defeated by the acts or defaults of the mortgagor. Under clauses of this class, we have the general rule that the mortgagee’s rights remain unaffected by any default or breach of condition by the mortgagor to which the mortgagee is not a party." §3.06. INSURABLE INTEREST OF MORTGAGEE. The rule is that a mortgagee may, independently of the mortgagor, in- sure the mortgaged property in his own name snd for his own inter- est. In such case, the mortgagee is entitled to the insurance proceeds 3n case of loss, but he is not ellowed to retain his claim against the mortgagor. The claim is passed by subrogation to the insurer to the extent of the money paid. Or stated in another way, the mortgagee may insure his interest in the property independently of the mort- gagor and in that event, upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit, of the mortgagor, and the amount due under the mortgage debt re- ‘mains unchanged. The mortgagee, however. is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the’ insurer, to the extent of the insurance money paid. fa, It is true that there are authorities which hold that if a mortgagee procures insurance on his separate interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceods applied in "wp 64.656. Cherie Pulleev. Bastrie Csi, No.1-7667, Novembor 28, 1055, citing Vance, pp. 64, 72-778,e ESSENTIALS OF INSURANCE LAW reduction of the mortgage debt, and that, furthermore, the mortgagee “has still a right to recover his whole debt of the mortgagor.” But these authorities merely represent the minority view. The general rule and the weight of authority is, that the insurer is thereupon. ‘subrogated to the rights of the mortgagee under the mortgage. In this respect, the insurer is akin to a surety.” b. ‘Thus, in oue case, an insurance contract was taken out by the mortgagee upon his own interost and it was stipulated that the proceeds would be paid to him only. The Supreme Court held that ‘the mortgagee, in case of loss, may only recover upon the poliey to the extent of his credit at the time of the loss. It was declared that the mortgagor had no right of action against the mortgagee on the policy.» On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement by which the mortgagor is to pay the premiums upon such insurance d. The mortgagee may likewise procure an insurance poliey for his own benefit and malke himself the beneficiary. The mortgagee vwill not be required to account for the proceeds or to share the same to the mortgagor. The contract between the mortgagee as insured and the mortgagor is an independent contract * e. _ Ithas been noted, however, that although the morigagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and obtains policy on the assurance that it insures him, the policy is in fact in. the form used to insure a mortgagor with loss payable clause.” bd, citing 19 R.C.L p. 405; Joves on Mortgage’, Vol T, pp, 671-072: King v. State Mut F. Ing Co, 7 Cush. 1; SufolcF- Ine. Co. v Boyden Allen, 123; See also Looms v. Engle Life & Health Ins. Co. 6 Gray. 998; Washington Mills Emery Mig. Co. v. Weymouth dB, Mut. F-lns Co, 135 Mase, 506; Foster v. Equitable Mut F ns, Co, 2 Gray 216; See case note, 8 Lawyers Report Annotated, new series, p78, San Miguel Brewery x. Law Union and Rock Incurance Co,Ltd, Ne-1- 14300, SJexuary 19, 1926, 40 Phil 674. Pua. "Antonina Lampanov. Plaside A Jose, etal, No, L-9401, March 90, 1915, citing Shadgsts Philie and Crow Cn 881. RA 481 ‘Armando Geagonia ¥. Cour of Appeals and Country Benkcers Insurence Cor poration supe CHAPTER THREE, INSURABLE INTEREST PROBLEMS: a On December 18, (2006), plaintiff obtained from defendant loan in the sum af P12,000 subject to the following” conditions: (a) that plaintiff shall pay to defendant fan interest in the amount of P250 a month; (b) that defendant shall deduct from the loan certain cbligations of plaintiff w third persons amounting to £4,590, plus ‘the sum of P250 as interest for the first month; and () ‘that after making the above deductions, defendant shall oliver to plaintiff only the balance of the loan of P12,000. Pursuant to their agreement, plaintiff paid to defendant ‘98 interest on the loan a total of P2,250.00 corresponding ‘to nine months from December 18, [2006], on the basis of P250.00 a month; which is more than the maximum, interest authorized by law. To secure the payment of the aforesaid loan, defendant required plaintiff to sign a document known as “Conditional Sale of tal Building,” purporting to convey to defendant, with right to repurchase, 2 bwostory building of strong matenals belonging to plaintiff: This document did not express the ‘ue intention ofthe parties which was merely to place said property as security for the payment ofthe loan, After the ‘execution of the aferesaid document, defendant insured the building against fire with the Associated Insurance & Surety Co, Ine. for the sum of P15,000, the insurance policy having been iscued in the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant collected from the insurance company fan indemnity of P13,107.00, Plainti? demanded from defendant that she he crodited with the necessary amount to pay her obligation out of the insurance proceeds but defendant refused to do so, When a case was filed with the trial cours, the “Conditional Sale of Residential Building” was declared an equitable mortgage and the obligati of the plaintiff was considered fully compensated by the {insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107 ropresenting the difference of ‘the Joan of P12,000 and the cum of P13,107 collected by seid defendant from the insurance company. Did the court correctly rule that there was compensation? No. The court erred in declaring that the proceede ofthe in- surance taken out by the defendant an the property mort- ‘gaged inured to the benofit of the plaintiff and in order- ing eaid defendant to deliver to the plaintiff the difference ‘between her indebtedness and the amount of insurance ‘oceived by the defendant, for the correct sclution should[ESSENTIALS OF INSURANCE LAW bie that the proceeds of the insurance should be delivered to the defendant but that her claim against the plaints? should he considered aseigned to the insurance company who is deemed subrogated to the rights af the defendant ‘ the extent of the money paid as indemnity. Hence, the Froceeds of the insurance amounting to P13,107.00 was roperly collected by defendant who is not required to ac- ‘unt for ito the plaintiff. The collection of said insurance roceeds shall not be deemed to have compensated the cbligation of the plaintiff to the defendant, but bars the lntter from claiming its payment from the former. (Cherie Falileo v. Beatriz Cosio, No. L-7667, Noveraber 28, 1955) L borrows P50, 000.00 fram M payable 260 days after date at 12% per annum. To secure the loan, L mortgages his house and lot in favor of M. To protect himself from certain contingencies, M insures the house for the full ‘amount ofthe loan with Rock Insurance Co. A fire breaks fout and burns the house and M collects from the insurance ‘company the full value of the insurance. Upon maturity of Jen, the insurance company demands payment from L, ‘Tae latter refuses on the ground that the loan had been extinguished by the insurance payment which M received from the insurance company. He further contends that it isbad enough to lose a house but it is worse if one has to pay off « paid obligation to somebody who has not extend- ‘8 any loar to him. Besides, he states, thet the insurance ‘peyment should inure to his benefit because he own the ‘house. Pass upon the merit of L's eantention, ‘The contentions of L are untenable. The obligation to pay the loan was not extinguished when M rooeived the pro- conds of the insurance company. The insurable interest oF ‘Mas mortgagee is separate and distinct from the interest ofL. Thus, recovery under an insurance policy separately taken by the mortgagee, M, will not affect the obligation of fs ‘L's argument that he has not entered into any loan or eon- ‘tract of whatever nature with the insurance company will ‘not excuse him from liability. Upon payment of the insur- er, the latter is subrogated to the righte of the mortgagee, ‘The right of subrogation is imposed by law. Itie not depen- ext upon nor does it grow out of any privity of contract, or upon the insurer an assignee in equity. L's consent to said subrogation is not necessary. (Art. 2207 NCC; Fireman's Fund Insurence Co. v. Jamilia & Co., 70 SCRA 223) CHAPTER THREE 6 INSURABLE INTEREST $4. WHEN MUST INSURABLE INTEREST EXIST. The time during which insurable inte-est must exist is different if the insurance is property insurance ard if the insurance is life or health insurance. The governing rule is exprossed in Section 19 of the Insurance Code: ‘Sec. 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 ist when the insurance takes effect, but need not exist thereafter ‘or when the loss occurs. $4.01. PROPERTY INSURANCE. In property insurance, insurable interest in the subject property must exist when the in: surance takes effect and when tha loss occurs. It need not exists continuously from the time the insurance takes effect until the time of the loss; the law provides that it noed not exist in the meantime In other words, the insured can recover even if he lost his insurable interest after the perfection of the insurance contract so long as he recovers the same before the loss occurs, For example, Mr. A is the owner of a car which he insured with X Company. After the isst- ance of the policy, Mr. A sold and delivered the ear to Mr. B. Later, Mr. A re-acquired the car from Mr. B. It was after the re-acquisition that the ear was destroyed. In this case, Mr. A can recover even if there is a period between the time of the taking of the insurance and the time of the loss that Mr. A had no insurable interest over ‘the car. The insurance is deemed suspended during the intervening period in accordance with Seetion 20 of the Insurance Code which provides: ‘Sec. 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of intorest in any part of 2 thing insured unaccompanied by a corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person, a. Thus, in the given example, the insurance is suspended when Mr. B became the owner and possessor of the ear. The insurance is automatically reinstated when Mr. A re-aequires the property.6 ESSENTIALS OF INSURANCE LAW ‘Sec. 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. >. ‘Transfer or change of interest in the property with the consent of the insurer wall not suspend the poliey. In fact, the policy itself may be written in such a way that consent is given in advance by the insurer and the policy will inure to the benefit of anyone to whom the property is transferred. Section 57 of the Insurance Code provides Sec. 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. The change of interest will not suspend the insurance in the cases contemplated in Sections 21 to 24 and Section 58 of the Insurance Cade which provide: Sec. 21. A change in interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the right of the insured to.indemnity for the loss. ‘Sec. 22. A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the others. ‘Sec. 23. A change on interest, by will or succession, on the death of the insured, does not avoid an insuranc ‘and his interest in the insurance passes to the person taking his interest in the thing insured. Sec, 24. A transfor of interest by one of several Fartners, joint owners, or owners in commen, who are jointly insured, tothe others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured. $4.02, LIFE INSURANCE. In life insurance, all that is required is that the insured has insurable interest over the property at the time the insurance takes effect. This rule is rooted in the fact that lifo ineurance ie not 2 contract of indemnity. For example, spouse can insure the life of the other spouse. The spouse who CHAPTER THREE 6 INSURABLE INTEREST took out the insurance can still recover if at the time of the death of the spouse whoce life wes insured, their marriage was already annulled. G PROBLEMS: 1. The agent in Davao of the insured “A” was employed to ship “A's” copra to Manila and to communicate the ship- ment to the buyer ‘A” in Manila. The same agent wrote ‘he owner of the copra announcing the sailing of the ship, Dut failed to state that the ship had run a ground, whieh fact he already knew before announcing the ssiling. “A” the buyer of the copra, in all good faith, took # marine insurance on the copra. The copra was badly damaged and ‘was a total loss. Com the insured recover on the policy? ‘A: No, the insured cannot recover on the policy. The subject ‘matter of the Marine Insurance was already lost at the ‘inne of the perfection of the insurance contract. IL is basic ‘hat an interest in the property insored must exist when the iisurance takes effect and when the loss occurs. 2. Ina civil suit, the court ordered Bonjie to pay Nat P500, 000,00. To execute the judgmont, the sheriff levied upon Benjie's registered property (a parcel of land and the building thereon), und sold the same at « public auction ‘to Nat, the highest bidder. The latter, on March 18, 1992, registered with the register of deeds the certificate of sale issued to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured with Garapal Insurance for PI Mil- lion the same building that was sald at publi Nat. Benjie failed to redeem the property by 1993. On March 19, 1999, a fire razed the building to the ground. Garape! insurance refused to make good its obligation te Benjie under the insurance contract. Is Garapal Insurance legally justified in refusing payment ta Benjie? A: Yes, Garapal Insurance is legally justified in refusing pay- ‘ment of the insurance proceeds to Benjie, The hasic rule in {insurance is that theinsured must have ineurable interest in the property insured not only at the time of the perfec- ‘ion of the contract but also at the time of the loss In this case, Benjie no longer had insurable sntorest on the prop- ceriy at the timie of the lose because Benge was ne longer the owner of the property insured as he failed to redeem the property within the redemption period of one (1) year,8 BSSENTIALS OF INSURANCE LAW 8 On February 8, 1987, while Jose Palacio was in the hospi- tal preparatory to a heart surgery, he called his only som, Boy Palacio, and showed the latter # will naming his vo as sole heir to al the father’s estate including the family ‘mansion in Forbes Park. The following day, Boy Palacio ‘took out a fire insurance policy on the Forbes Park man- sion. One week Inter, the father died. After his father’s death, Boy Palacio moved his wife and children to the family mansion which he inherited. On March 30, 1987, fire oecarred razing the mansion to the ground. Boy Pal «io then proceeded to collect on the fire insurance he took farler onthe house. Sbold the insurance company pay? As No, the insurance company can legally refuse to pay. The rule in property insurance is that insurable interest must exist both at the time f the risk insured against occurs, In the present case, Boy did not have insurable interest on the house at the time he-took the insurance, The fact ‘that Boy Palacio was the expected scle heir of his father's ‘estate does not give the prospective heir any existing in- terest prior to the decedent, §5. INSURABLE INTEREST OF BENEFICIARY IN )PERTY INSURANCE. The beneficiary must have insurable terest in the property that is the object of the insurance. The contract will be considered a wagering contract if the beneficiary ‘rill be allowed to recover even iThe has ho insurable interest on the subject property. \ $5.01, INSURABLE INTEREST OF BENEFICIARY IN LIFE INSURANCE. If the insured takes out an insurance on his own Life, he can designate anybody whether or not the beneficiary has insurable interest over his (insured) life. However, ifthe insured takes out an insurance on the life of another designating himself or herself as beneficiary, insurable interest on the part ofthe insured is necessary. Insurable interest on the part ofthe beneficiary is likewise necessary if one takes out an insurance on the life of another and designates a third person as the beneficiary. PROBLEM: 1. Blanco took out a PJ Million life insurance policy nem- ing his friend and creditor, Montenegro as his beneficiary ‘When Blanco died, his outstanding loan to Montenegro ‘was only P50, 000.00 Blanco’s executor contended that (CHAPTER THREE co INSURABLE INTEREST only P50,000.00 out of the insurance proceeds should be paid to Montenegro and the balance of P950,000.00 should ‘be paid to Bianco's entate Is the execator’s contention cor- rect? Reason out your answer. ‘A: No, the contention of the executor is not correct. A per~ ‘son ean insure his own life end he does, he can designate ‘any person as beneficiary even ifthe same person does not have insurable interest in his life. In other words, the ben- eficiary in a life insurance policy in the life of the insured ‘need not have insurable interest if he was designated by ‘the insured himself. The beneficiary wio is so designated is therefore entitled to the entire proceeds of the insur- §6. ASSIGNEE IN LIFE INSURANCE. A life insurance policy can be transferred even without the consent of the insurer. By express provision of Section 181 of the Insurance Code, it is not necessary that the transferee has insurable interest. a. Since a policy of insurance upon life or health may pass by ‘transfer, will or succession to any person whether he has insurance interest or not, the transferee may recover whatever the insured ‘may have recovered under the policy. $6.01. ASSIGNEE IN PROPERTY INSURANCE. With ‘respect to property insurance, it is necessary that the transferee has insurable interest over the thing insured. This is consistent with Section 18 of the Insurance Code which provides that “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.” The requirement of insurable interest can likewise be inferred from Section 68 provides that 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. a. Accordingly, # clause in an agreement, providing for an automatic assignment of the policy is void, if the assignee does not have any insurable interest over the insured property. For example, a provision in a contract of lease that provides that any fire insurance policy obtained by the lessee over the merchandize inside the leased TGeat Palle Life Assurance Corp. v. Court of Appeals and Medards V. Leu- ‘eo, upre.0 ESSENTIALS OP INSURANCE LAW premises is deemed assigned or transferred to the lestor is void for being contrary to law and public policy.» b, . If the transfer of the property insurance policy is made after the loss, insurable interest on the part of the beneficiary is no longer necessary. In fact, the policy cannot prohibit the transfer of tthe policy after the loss has cecurred, The Insurance Code provides: Sec. 83. An agreement not to transfer the claim of the insured against the insurer after the loss has happened, is void if made before the loss except as otherwise provided in the case of life insurance, PROBLEM: 1. ‘Nrowns a condominium unit prosently insured with Holy Insurance Company for Pl Million. "N" Inter sells the eon- dominium unit to "0." Somehow, “O° fails to obtain the transfer ofthe insurance policy to his name fram "N." Sub- sequently, afro of unknown origin destroys completely the condominium unit, Who may collect the insurance? A: Nobody can collect the insurance proceeds. While N had ingurable interest at the time the insurance policy was taken, he no longer had insurable interest at time of the loss. On the other hand, *O” is not a party wo the insurance contract and there was no valid assignment of the policy 00" le Che, et al v. Court of Appeals, etal, No, 124520, August 18, CHAPTER FOUR PREMIUM Insurance is a risk-spreading device. The insurer pools the premiums paid by all its lien. In theory, the pool of premiums answers for the losses of each insured. Indeed, it is no exaggeration to say that premium is the elizir vitae of insurance business. $1. PREMIUM REQUIRED FOR POLICY TO BE BINDING. At the heart of the statutory rules on premium is Seetion 77 of the Insurance Code which provides: ‘Sec. 77. An insurer is entitled to payment of the Premium as soon as the thing insured Is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. a. When payment accrues. The lew states that the insurer fs entitled to payment of the premium as soon as the thing insured the peril insured against. It should be noted however act of insuratice is generally unilateral. This means that the insurer does not have o reciprocal obligation to pay the premium although the same payment will give rise to the unilateral obligation of the insurer. Usually, the insured cannot’be sued for non-payment of the premium, the only effect of non-payment being that the policy will not go into force. After the insurance comes into force after their payment of premium, it is only the insurer that makes a logally enforceable promise (@) Payment may be made to the insurer himself or its agent. Section 306 of the Insurance Code provides “any "Tibay v. Court of Appests, No, 119655, May 24, 1096, 257 SCRA 126. nn ESSENTIALS OF INSURANCE LAW insurance compsny which delivers to an insurance agent or insurance broker a poliey or contract of insurance shall be deemed to have authorized such agent.or broker to receive ‘an premiiin which is due on such policy Suit the time of ifs issuance or delivery or which, becomes due therein.” Payment to an agent having authority to rooet esse cles pment equivalent to payment to the ich payment is complet when the eae ih the ageuts hands and is «discharge of the indebtedness owing to the principal: (2 Industrial Life Poliey.? In the case of industrial ite policy, Section 229 of the Insurance Code provides that the same “shall not Japse for x i of premium if such non-payment was due'to the failure of the company to send its representative ot agent-to thé insured at the residence of the insured or at some other place indicated by him for the purpose of collecting: such premium.” This rule shalt not apply however when the premium on the poliey remains unpaid for a period af three months or twelve weeks after the grace period hhas expired.s i $1.01. EFFECT OF NON-PAYMENT, The abligation of the insurer will not become valid and binding ifthe rst premium has not been paid. Ifthe subsequent premiums have not been paid, the policies issued will be deemed to have lapsed. I the insurer has no lability under the lapsed. and inexistent policies, the insurer has no right to demand, mich less ‘sue the insured for the unpaid premiums. To give the insurer the right to sue the insured would be the height of injustice and unfair dealing. With the lapsing of the policies through the nonpayment of premiums by the insured there is no more insurance eontract to ‘Malayan Foureice Co, Ine. v. Gregoria Cruz Arnaldo fal, No. 67835, Octo- ber 12,1987; Santos B Arco, eal. v. Cour of Appeals, eta, No, 95641, September 22,1984. ‘Under Section 229 of the Insurance Code, an indusirial life policy shall not lapse for non-payment af premiam IPsuch non-payment was due tthe flare of toe campany to wend its representative or agent to the insured at the residencn of the Insured oF at some other place indicated by him for the purpose ef collecting sac premium: Provided, That the provisions of thie paragraph shal not apply when the premium on the plicy remains unpaid for = paried of thrvo month or twelve weeks ser the grace period has expired, “and par, Stetion 229, LC. (CHAPTER FOUR 8 PREMIUM speak tthe nonpayment fhe proms dou at merely suspend but puts sn end to an insurance contract sinte the payment is peculiarly of the essence of the contract." $1.02. WHEN BINDING EVEN IF PREMIUM IS UNPAID. ‘Based on the ruling in UCPB General Insurance Co. Inc. v. Masogana Telamart,_Inc.,* there are five (5) exceptions to the rule that the poly iwc aid end Mining unas gps have Seo Fiat cata oe ean (2) When the grace period applies in ease of life and industrial life policy; (2) When thereis an acknowledjément in the policy or receipt that the premium has been paid; (3) When there is an agreement that the premium shall be payable on installment; (4) "When there is a credit extension; and (8) When the equitable doctrine of estoppel applies, 8, Grace Period. A grace period is the period aftex the date the promium is due during which the premium can be paid with no interest charged und the policy remaining in force.’ This exception presupposes that the insurance policy had already been in force for 4 certain period. It cannot apply when the insurance policy is first taken. The applicable provisions are Sections 227, 226 and 230, the pertinent provisions of which states Sec. 227. Inthe case of individual life orendowment Insurance, the policy shall contain in substance the following conditions: (3) A provision that the policyholder is entifed to a grace period either of thirty days or of one month within which the payment of any premium after the frst may be made; subject at the option of the insurer to an interest charge not in excess of six per centum per Arturo P. Valennela et ul v. The Tua. Goust of Aspe, et cl Wo. 88122, ‘October 19, 1990, “GR. No, 197172. April 4, 2001. Note that the Supreme Court rovers a ar Aer Decision inthe same caso which sustained the immurere position “Harvey W. Rubin, Dictionary ofTnsurance Terms, 4th Bé,, p 207 hereinafter ‘refered tose “Rubin”u ESSENTIALS OF INSURANCE LAW annum for the number of days af grace elapsing before ‘the payment of the premium, during which period of grace the policy shall continue in full force, But in case grace tefore the averdue premium is paid, the amount of such premium with interest may de deducted from the amount payable under the policy in settlement; xxx Sec. 228. No policy of group life insurance shall be issued and delivered in the Philippines unless it contains in substance the following provisions, or provisions which in the opinion of the Commissioner are more favorabie to the persons insured, or at least as favorable to the persons insured and more favorable to the policy-holders: (a) A provision that the policyholder is entitled to 2 grace period of either thirty days or of one month for the payment of any premium due after the first, during which grace period the death benefit coverage shall continue in force, unless the p given the insurer written notice of discontinuance in ‘advance of the date of discontinuance and in accordance with the terms of the policy. The policy may provide that tho policyholder shall be lable for the payment of a pro rata promium for the time the policy is in force during ‘such grace period; Sec. 230. in the case of industrial life insurance, the policy shall contain in substance the following provisions: (a) A provision that the insured is entitled to a grace period of four weeks within which the payment of any premium after the first may be made, except that where premiums are payable monthly, the period of grace shall be either one month or thirty days; and that during tthe period of grace, the policy shall continue in full force, but if during such grace period:the policy becomes a claim, than any overdue and unpaid promiums may be deducted from any amount payable under the policy in settlement; CHAPTEE FOUR % ‘PREMIUM 20x b. Acknowledgement. The second exception is provided for in Section 78 of the Insurance Code which states: Sec. 78, An acknowledgment in a policy or contract of insurance or the receipt of premium is conclusive ‘gyidence of te-payment, so far as to maké the polity inding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid: Even if, in fact, the insured has not yet paid the premium, the insurer's obligation ‘will already be in force if there is agreement. ‘However, this doesnot mean that the insured is excused from paying the premium that is due. The insurer can still demand-payment of the premium, e._ Installment, In Makati Tuscany Condominiium Corpora- tion v. The Court of Appeals, et al,* the Supreme Court allowed the insured to pay the premiums on installment basis and adopted the following ratiocination of the Court of Appeals in making such ral- “While the impart of Section 77 is that prepayment of premiums is strictly required asa condition to the validity of the contract We are not prepared to rule that the request to make instalment payments duly approved by the insurer, ‘would provent the entire contrect of insurance from going into effect despite rayment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by ‘making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the poliey binding despite the fact chat premium is actually ‘unpaid. Section77 merely precludes the parties from stipulating that the policy :s valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, 1nd such an agreement is not contrary to morals, good customs, public order or public policy. (De Leon, the Insurance Code, ap. 176). 80 is an understanding to allow insured to pay premiums in installments not so proscribed. At the very least, both parties should be deemad in estoppel to question the arrangement they have voluntarily accopted, "Ne. 95546, November 6, 1992,