2020 BAR REVIEW COMMERCIAL LAW

Handout No. 6
INSURANCE LAW

Distinguishing characteristics of insurance

An insurance contract exists where the following elements concur:

1) The insured has an insurable interest;

2) The insured is subject to a risk of loss by the happening of the designated peril;
3) The insurer assumes the risk;
4) Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and
5) In consideration of the insurer’s promise, the insured pays a premium. Philamcare Health
Systems, Inc. vs. Court of Appeals, 379 SCRA 356, G.R. No. 125678, 18 March 2002

Risk Distributing Device

An insurance contract serves to distribute the risk of economic loss among those who are subject
to the same risk.

Microinsurance

Microinsurance is an insurance intended to cover low-income households or individuals that

would allow them to recover indemnity for illness, injury, or death.

Compulsory insurance coverage for agency-hired workers

It is an insurance mechanism made available by the law to provide insurance protection for our
overseas Filipino workers (OFW).

Variable Contract

Variable contract refers to any policy or contract on either a group or on an individual basis issued
by an insurance company 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

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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. It shall not be deemed to be a security or securities as defined in The
Securities Act, as amended, or in the Investment Company Act, as amended, nor subject to
regulations under said Acts. Sec. 238[b], Insurance Code

The seemingly conflicting provisions must be harmonized to mean that upon a party’s purchase
of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser
is created and the same is effective, valid, and binding until terminated by Philamlife by
disapproving the insurance application. The second sentence of Creditor Group Life Policy No.
P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would
lead to the cessation of the insurance contract.

Moreover, the mere inaction of the insurer on the insurance application must not work to
prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The
termination of the insurance contract by the insurer must be explicit and unambiguous. Eternal
Gardens Memorial Park Corporation vs. Philippine American Life Insurance Company, 551 SCRA
1, G.R. No. 166245, 9 April 2008

Contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used.

If such terms are clear and unambiguous, they must be taken and understood in their plain,
ordinary, and popular sense. H.H. Hollero Construction, Inc. vs. Government Service Insurance
System, 736 SCRA 303, G.R. No. 152334 September 24, 2014

Basis of insurable interest in life and health insurance

Every person has an insurable interest in the life and health: (1) of himself, of his spouse and of
his children; (2) of any person on whom he depends wholly or in part for education or support,
or in whom he has a pecuniary interest; (3) of any person under a legal obligation to him for the
payment of money, respecting property or service, of which death or illness might delay or
prevent the performance; and (4) of any person upon whose life any estate or interest vested in
him depends. Sec. 10, Insurance Code

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Test of Materiality of Information

Materiality is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in forming his estimate
of the disadvantages of the proposed contract, or in making his inquiries. Sec. 31, Insurance Code

Rescission due to concealment

Citing Section 27 of the Insurance Code, however, Insular Life asserts that in cases of rescission
due to concealment, i.e., when a party "neglect[s] to communicate that which [he or she] knows
and ought to communicate," proof of fraudulent intent is not necessary. Section 27 reads: A
concealment whether intentional or unintentional entitles the injured party to rescind a contract
of insurance.

The statutory text is unequivocal. Insular Life correctly notes that proof of fraudulent intent is
unnecessary for the rescission of an insurance contract on account of concealment. This is neither
because intent to defraud is intrinsically irrelevant in concealment, nor because concealment has
nothing to do with fraud. To the contrary, it is because in insurance contracts, concealing material
facts is inherently fraudulent: "if a material fact is actually known to the [insured], its
concealment must of itself necessarily be a fraud." When one knows a material fact and conceals
it, "it is difficult to see how the inference of a fraudulent intent or intentional concealment can
be avoided." Thus, a concealment, regardless of actual intent to defraud, "is equivalent to a false
representation." The Insular Assurance Co., Ltd. vs. The Heirs of Jose H. Alvarez, G.R. No.
207526, October 03, 2018

Section 26 defines concealment as "[a] neglect to communicate that which a party knows and
ought to communicate." However, Alvarez did not withhold information on or neglect to state
his age. He made an actual declaration and assertion about it.

What this case involves, instead, is an allegedly false representation. Section 44 of the Insurance
Code states, "A representation is to be deemed false when the facts fail to correspond with its
assertions or stipulations." If indeed Alvarez misdeclared his age such that his assertion fails to
correspond with his factual age, he made a false representation, not a concealment. The Insular
Assurance Co., Ltd. vs. The Heirs of Jose H. Alvarez, G.R. No. 207526, October 03, 2018

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Not being similarly qualified as rescission under Section 27, rescission under Section 45 remains
subject to the basic precept of fraud having to be proven by clear and convincing evidence. In
this respect, Ng Gan Zee's and similar cases' pronouncements on the need for proof of
fraudulent intent in cases of misrepresentation are logically sound, albeit the specific reference
to Argente as ultimate authority is misplaced.

The absence of the requirement of intention definitely increases the onus on the insured.
Between the insured and the insurer, it is true that the latter may have more resources to
evaluate risks. Insurance companies are imbued with public trust in the sense that they have the
obligation to ensure that they will be able to provide succor to those that enter into contracts
with them by being both frugal and, at the same time, diligent in their assessment of the risk
which they take with every insurance contract. However, even with their tremendous resources,
a material fact concealed by the insured cannot simply be considered by the insurance company.
The insurance company may have huge resources, but the law does not require it to be
omniscient.

On the other hand, when the insured makes a representation, it is incumbent on them to assure
themselves that a representation on a material fact is not false; and if it is false, that it is not a
fraudulent misrepresentation of a material fact. This returns the burden to insurance companies,
which, in general, have more resources than the insured to check the veracity of the insured's
beliefs as to a statement of fact. Consciousness in defraudation is imperative and it is for the
insurer to show this. The Insular Assurance Co., Ltd. vs. The Heirs of Jose H. Alvarez, G.R. No.
207526, October 03, 2018

The RTC correctly held that the CDH’s medical records that might have established the insured’s
purported misrepresentation/s or concealment/s was inadmissible for being hearsay, given the
fact that Manulife failed to present the physician or any responsible official of the CDH who
could confirm or attest to the due execution and authenticity of the alleged medical records.

Manulife had utterly failed to prove by convincing evidence that it had been beguiled, inveigled,
or cajoled into selling the insurance to the insured who purportedly with malice and deceit
passed himself off as thoroughly sound and healthy, and thus a fit and proper applicant for life
insurance. Manulife’s sole witness gave no evidence at all relative to the particulars of the
purported concealment or misrepresentation allegedly perpetrated by the insured. In fact,
Victoriano merely perfunctorily identified the documentary exhibits adduced by Manulife; she
never testified in regard to the circumstances attending the execution of these documentary
exhibits much less in regard to its contents. Of course, the mere mechanical act of identifying
these documentary exhibits, without the testimonies of the actual participating parties thereto,

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adds up to nothing. These documentary exhibits did not automatically validate or explain
themselves.

“The fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer.” For failure of Manulife to prove intent to defraud on the part
of the insured, it cannot validly sue for rescission of insurance contracts. Manulife Philippines,
Inc. vs. Ybañez, 810 SCRA 516, G.R. No. 204736 November 28, 2016

Rescission of life insurance due to fraud

After the two-year period lapses, or when the insured dies within the period, the insurer must
make good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation. Manila Bankers Life Insurance Corporation vs. Aban, 702 SCRA 417, G.R. No.
175666, July 29, 2013

The insurer has two years from its issuance to investigate and verify whether the policy was
obtained by fraud, concealment, or misrepresentation. Upon the death of the insured within the
two-year period from the issuance of the policy, the insurer loses its right to rescind the policy.
Sun Life of Canada (Philippines), Inc. v. Ma. Daisy’s Sibya, G.R. No. 211212, June 8, 2016.

In mathematical terms, the amount of retained risk is computed by deducting ceded/reinsured

risk from insurable risk. If the resulting amount is below twenty percent (20%) of the insurer’s
net worth, then the retention limit is not breached.

Section 215 of the old Insurance Code, the law in force at the time Plaridel issued the attachment
bond, limits the amount of risk that insurance companies can retain to a maximum of 20% of its
net worth. However, in computing the retention limit, risks that have been ceded to authorized
reinsurers are ipso jure deducted. Communication and Information Systems Corporation vs.
Mark Sensing Australia Pty. Ltd., 815 SCRA 449, G.R. No. 192159 January 25, 2017

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A contract of reinsurance is one by which an insurer (the “direct insurer” or “cedant”) procures
a third person (the “reinsurer”) to insure him against loss or liability by reason of such original
insurance.

The reinsurer’s contractual relationship is with the direct insurer, not the original insured, and
the latter has no interest in and is generally not privy to the contract of reinsurance. Put simply,
reinsurance is the “insurance of an insurance.” Communication and Information Systems
Corporation vs. Mark Sensing Australia Pty. Ltd., 815 SCRA 449, G.R. No. 192159 January 25,
2017

The general rule in insurance laws is that unless the premium is paid, the insurance policy is not
valid and binding.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. Just like any other
contract, it requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy. If not so paid, the policy will
lapse and be forfeited by its own terms. The law, however, limits the parties’ autonomy as to
when payment of premium may be made for the contract to take effect. The general rule in
insurance laws is that unless the premium is paid, the insurance policy is not valid and binding.
Gaisano vs. Development Insurance and Surety Corporation, 818 SCRA 603, G.R. No. 190702
February 27, 2017

The notice of the availability of the check, by itself, does not produce the effect of payment of
the premium.

Here, there is no dispute that the check was delivered to and was accepted by respondent’s
agent, Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made
at the time of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-
Pacific was informed that the check was ready for pickup on September 27, 1996, the notice of
the availability of the check, by itself, does not produce the effect of payment of the premium.
Trans-Pacific could not be considered in delay in accepting the check because when it informed
petitioner that it will only be able to pick up the check the next day, petitioner did not protest to
this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there was no payment
of premium yet to make the insurance policy effective. There are, of course, exceptions to the
rule that no insurance contract takes effect unless premium is paid. Gaisano vs. Development
Insurance and Surety Corporation, 818 SCRA 603, G.R. No. 190702 February 27, 2017

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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.

We cannot sustain petitioner’s claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite nonpayment of the premiums. Even if there is a
waiver of prepayment of premiums, that in itself does not become an exception to Section 77,
unless the insured clearly gave a credit term or extension. This is the clear import of the fourth
exception in the UCPB General Insurance Co., Inc. v. Masagana Telemart, Inc., 356 SCRA 307
(2001). To rule otherwise would render nugatory the requirement in Section 77. Gaisano vs.
Development Insurance and Surety Corporation, 818 SCRA 603, G.R. No. 190702 February 27,
2017

Defenses not barred by incontestability

The following defenses may still be interposed by the insurer notwithstanding incontestable
status of the policy:

1) The person taking the insurance lacked insurable interest as required by law.
2) The cause of the death of the insured is an excepted risk.
3) The premiums have not been paid.
4) The conditions of the policy relating to military or naval service have been violated.
5) The fraud is of a particularly vicious type.
6) The beneficiary failed to furnish proof of death or to comply with any condition imposed
by the policy after the loss has happened.
7) The action was not brought within the time specified

The Jumbo Risk Provision clearly indicates that failure to pay in full any of the scheduled
installments on or before the due date shall render the insurance policy void and ineffective as
of 4 p.m. of such date.

Parc Association's failure to pay on the first due date (November 30, 2003), resulted in a void and
ineffective policy as of 4 p.m. of November 30, 2003. Hence, there is no credit extension to
consider as the Jumbo Risk Provision itself expressly cuts off the inception of the insurance policy
in case of default. Philam Insurance Co., Inc. vs. Parc Chateau Condominium Unit Owners
Association, Inc., G.R. No. 201116, March 04, 2019

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The right of subrogation is however, not absolute. “There are a few recognized exceptions to
this rule. For instance, if the assured by his own act releases the wrongdoer or third party liable
for the loss or damage, from liability, the insurer’s right of subrogation is defeated.

x x x Similarly, where the insurer pays the assured the value of the lost goods without notifying
the carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on
both the assured and the insurer, and the latter cannot bring an action against the carrier on his
right of subrogation. x x x And where the insurer pays the assured for a loss which is not a risk
covered by the policy, thereby effecting ‘voluntary payment,’ the former has no right of
subrogation against the third party liable for the loss x x x.” Loadstar Shipping Company,
Incorporated vs. Malayan Insurance Company, Incorporated, 742 SCRA 627, G.R. No. 185565
November 26, 2014

Should the insurer pay the insured and it turns out that indemnification is not due, or if due, the
amount paid is excessive, the insurer takes the risk of not being able to seek recompense from
the alleged wrongdoer.

This is because the supposed subrogor did not possess the right to be indemnified and therefore,
no right to collect is passed on to the subrogee. Loadstar Shipping Company, Incorporated vs.
Malayan Insurance Company, Incorporated, 742 SCRA 627, G.R. No. 185565 November 26, 2014

As the Court discussed in the Decision dated November 26, 2014, Malayan was not able to prove
the pecuniary loss suffered by PASAR for which the latter was indemnified. This is in line with the
principle that a subrogee steps into the shoes of the insured and can recover only if the insured
likewise could have recovered. Loadstar Shipping Company, Incorporated vs. Malayan
Insurance Company, Incorporated, 825 SCRA 14, G.R. No. 185565 April 26, 2017

In Lalican v. The Insular Life Assurance Company, Limited (613 Phil. 518; 597 SCRA 159), it was
held that the reinstatement of the insured’s policy is to be reckoned from the date when the
application was processed and approved by the insurer.

There, we stressed that: To reinstate a policy means to restore the same to premium-paying
status after it has been permitted to lapse. xxx

In the instant case, Eulogio’s death rendered impossible full compliance with the conditions for
reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his
Application for Reinstatement and deposit the amount for payment of his overdue premiums

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and interests thereon with Malaluan; but Policy No. 9011992 could only be considered reinstated
after the Application for Reinstatement had been processed and approved by Insular Life during
Eulogio’s lifetime and good health.

Thus, it is settled that the reinstatement of an insurance policy should be reckoned from the date
when the same was approved by the insurer. The Insular Life Assurance Company, Ltd. vs. Khu,
789 SCRA 544, G.R. No. 195176 April 18, 2016

In the Endorsement, the obscurity is patent. In the first sentence of the Endorsement, it is not
entirely clear whether the phrase “effective June 22, 1999” refers to the subject of the sentence,
namely “the reinstatement of this policy,” or to the subsequent phrase “changes are made on
the policy.”

Given the obscurity of the language, the construction favorable to the insured will be adopted by
the courts. Accordingly, the subject policy is deemed reinstated as of June 22, 1999. Thus, the
period of contestability has lapsed. The Insular Life Assurance Company, Ltd. vs. Khu, 789 SCRA
544, G.R. No. 195176 April 18, 2016

Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the
industry purposefully used to its advantage. More often than not, insurance contracts are
contracts of adhesion containing technical terms and conditions of the industry, confusing if at
all understandable to laypersons, that are imposed on those who wish to avail of insurance.

As such, insurance contracts are imbued with public interest that must be considered whenever
the rights and obligations of the insurer and the insured are to be delineated. Hence, in order to
protect the interest of insurance applicants, insurance companies must be obligated to act with
haste upon insurance applications, to either deny or approve the same, or otherwise be bound
to honor the application as a valid, binding, and effective insurance contract. The Insular Life
Assurance Company, Ltd. vs. Khu, 789 SCRA 544, G.R. No. 195176 April 18, 2016

Co-insurance

Co-insurance is type of insurance in which the insured pays a share of the payment made against
a claim.

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No-Fault Indemnity Claim

The no-fault indemnity clause of the Compulsory Motor Vehicle Liability Insurance allows the
victim of a vehicular incident to recover indemnity from the insurer of the relevant insurer
without the necessity of showing fault.

Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim,
shall lie against the insurer of the vehicle in which the occupant is riding, mounting or
dismounting from. In any other case, claim shall lie against the insurer of the directly offending
vehicle. In all cases, the right of the party paying the claim to recover against the owner of the
vehicle responsible for the accident shall be maintained. Sec. 391, Insurance Code

Case law illumines that the prescriptive period for the insured’s action for indemnity should be
reckoned from the “final rejection” of the claim.

Section 10 of the General Conditions of the subject CAR Policies commonly read: 10. If a claim is
in any respect fraudulent, or if any false declaration is made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any
benefit under this Policy, or if a claim is made and rejected and no action or suit is commenced
within twelve months after such rejection or, in case of arbitration taking place as provided
herein, within twelve months after the Arbitrator or Arbitrators or Umpire have made their
award, all benefit under this Policy shall be forfeited. H.H. Hollero Construction, Inc. vs.
Government Service Insurance System, 736 SCRA 303, G.R. No. 152334 September 24, 2014

Forfeiture of interest of beneficiary

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

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Cover Note

A cover note is merely a written memorandum of the most important terms of the preliminary
contract of insurance, intended to give temporary protection pending the investigation of the
risk by the insurer, or until the issuance of a formal policy, provided that it is later determined
that the applicant was insurable at the time it was given.

Double Insurance

A double insurance exists where the same person is insured by several insurers separately in
respect of the same subject and interest. Sec. 95, Insurance Code

Requisites of Double Insurance

The requisites in order for double insurance to arise are as follows: (1) The person insured is the
same; (2) Two or more insurers insuring separately; (3) There is identity of subject matter; (4)
There is identity of interest insured; and (5) There is identity of the risk or peril insured against.
Malayan Insurance Co., Inc. vs. Philippines First Insurance Co., Inc., 676 SCRA 268, G.R. No.
184300, 11 July 2012

Option to rebuild

Parties to a fire insurance contract can stipulate concerning the repair, rebuilding or replacement
of buildings or structures wholly or partially damaged or destroyed. Sec. 174, Insurance Code

Liability of insurer in case of suicide

The insurer in a life insurance contract shall be liable in case of suicide only when it is committed
after the policy has been in force for a period of two (2) years from the date of its issue or of its
last reinstatement, unless the policy provides a shorter period: Provided, however, That suicide
committed in the state of insanity shall be compensable regardless of the date of commission.
Sec. 183, Insurance Code

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