Insurance Code
money withdrawn. Is PNB liable for the money
lost on the said transaction?
A: Yes. The payment of the amounts of checks
without previously clearing them with the drawee
bank especially so where the drawee bank is a
foreign bank and the amounts involved were large
is contrary to normal or ordinary banking practice.
Jurisprudence provides that when the bank allowed
the withdrawal of the value of a check prior to its
clearing, before the check shall have been cleared
for deposit, the collecting bank can only ‘assume’ at
its own risk that the check would be cleared and
paid out (PNB v. Spouses Cheah, G.R. No. 170895 &
170892, April 25, 2012, Del Castillo, J.).
EFFECT OF DELAY
1. The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay (Ibid.).
2. The indorser shall be discharged from liability
(PNB vs. Seeto, G.R. No. L-4388, August 13, 1952)
Q: X and Y are disputing over a property. To
settle the dispute, they entered into a
compromise agreement by which they agreed to
have the property in dispute be sold. X bought
the property and delivered a manager’s check to
Y. Y refused to accept the same, hence it was
consigned with the court. Y later accepted the
check and three years after acceptance, he filed
an action alleging that the check payment did
not amount to legal tender and that he never
even encashed the check. Is the contention of Y
tenable?
A: NO. It is true that a check is not a legal tender and
while delivery of a check produces the effect of
payment only when it is encashed, the rule is
otherwise if the debtor (X) was prejudiced by the
creditor’s (Y) unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due
diligence in presenting it for payment. If no such
presentment was made, the drawer cannot be held
liable irrespective of loss or injury sustained by the
payee. Payment will be deemed effected and the
obligation for which the check was given as
conditional payment will be discharged (Pio
Barretto Realty Development Corp. vs. CA, G.R. No.
132362, June 28, 2001).
Q: To ensure payment and as a business
practice, SMC required Puzon to issue postdated
checks equivalent to the value of the products
purchased on credit before the same were
released to him. Said checks were returned to
Puzon when the transactions covered by these
checks were paid or settled in full. Puzon
UNIVERSITY OF SANTO TOMAS
78
2019 GOLDEN NOTES
Mercantile Law
purchased products on credit and issued to SMC,
two (2) BPI checks to cover the said transaction.
During one of his visits to the SMC Paranaque
Sales Office, he allegedly requested to see BPI
Check No. 17657. However, when he got hold of
BPI Check No. 27903 which was attached to a
bond paper together with BPI Check No. 17657,
he allegedly immediately left the office with his
accountant, bringing the checks with them. SMC
sent a letter to Puzon, demanding the return of
the said checks. Puzon ignored the demand
hence SMC filed a complaint against him for
theft. The investigating prosecutor
recommended the dismissal of the case for lack
of evidence. On appeal, the CA agreed with the
prosecutor. Were the prosecutor and the DOJ
correct in finding no probable cause for theft?
A: Yes. If the subject check was given by Puzon to
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title
to or ownership of the check was transferred upon
delivery. However, if the check was not given as
payment, there being no intent to give effect to the
instrument, then ownership of the check was not
transferred to SMC (SMC v. Puzon, G.R. No. 167567,
September 22, 2011).
INSURANCE CODE
Laws governing contracts of insurance in the
Philippines
1. R.A. 10607 (July 23, 2012)
2. New Civil Code
3. Special Laws
CONCEPT OF INSURANCE
Contract of insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event [IC, Sec. 2(a)].
A contract of insurance, to be binding from the date
of application, must have been a completed contract
(Perez vs. CA, GR No. 112329, January 28, 2000).
Thus, it must have all the essential elements of a
valid contract as enumerated in Art. 1318 of the New
Civil Code: (Sm-CoMe)
1. Subject matter in which the insured has an
insurable interest;
2. Consideration, which is the premium paid by the
insured, for the insurer’s promise to indemnify
the former upon the happening of the event or
peril insured against; and
3. Meeting of minds of the parties.
“Doing an insurance business” or “transacting
an insurance business” (ISRA)
The term “doing an insurance business” or
“transacting an insurance business” means:
1. Making or proposing to make, as Insurer, any
insurance contract;
2. Making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;
3. Doing any kind of business, including a
Reinsurance business, specifically recognized
as constituting the doing of an insurance
business.
4. Doing or proposing to do Any business in
substance equivalent to any of the foregoing in
a manner designed to evade the provisions of
the Insurance Code.
In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the
making of the insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall NOT be
deemed conclusive to show that the making
thereof does not constitute the doing or transacting
of an insurance business [IC, Sec. 2 (b)].
Q: The parties’ CBA contains the following
provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume
under a self-insurance basis hospitalization for
the dependents of regular employees”.
Eventually, three members of Mitsubishi Motors
Philippines Salaried Employees Union
(MMPSEU), namely, Ernesto Calida, Hermie Juan
Oabel and Jocelyn Martin, filed claims for
reimbursement of hospitalization expenses of
their dependents. In turn, Mitsubishi Motors
Philippines Corporation (MMPC) paid only a
portion of their hospitalization insurance
claims, not the full amount. However, MMPSEU
insists that MMPC is also liable for the amounts
covered under other insurance policies;
otherwise, MMPC will unjustly profit from the
premiums the employees contribute through
monthly salary deductions. Is MMPSEU’s
contention correct?
A: NO. Since the subject CBA provision is an
insurance contract, the rights and obligations of the
79
parties must be determined in accordance with the
general principles of insurance law. Being in the
nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA
provision obligates MMPC to indemnify the covered
employees’ medical expenses incurred by their
dependents but only up to the extent of the
expenses actually incurred. This is consistent with
the principle of indemnity which proscribes the
insured from recovering greater than the loss
(Mitsubishi Motors Philippines Salaried Employees
Union vs. Mitsubishi Motors Corp, G.R. No. 175773,
June 17, 2013, in Divina 2014).
Insurance as an Uberrimae Fides contract (1993
Bar)
The contract of insurance is one of perfect good
faith (uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so for
the latter, since its dominant bargaining position
carries with it stricter responsibility (Qua Chee Gan
vs. Law Union and Rock Insurance, Co. Ltd., GR No. L-
4611, December 17, 1955). It requires the parties to
the contract to communicate that which a party
knows and ought to communicate, that is, the duty
to disclose in good faith all facts material to the
contract. This doctrine is essential on account of the
fact that the full circumstances of the subject matter
of insurance are, as a rule, known to the insured only
and the insurer, in deciding whether or not to accept
a risk, must rely primarily upon the information
supplied to him by the applicant (Sundiang Sr. &
Aquino, 2014).
Insurance as contracts of adhesion (Fine Print
Rule)
While generally, stipulations in a contract come
about after deliberate drafting by the parties
thereto, there are certain contracts in which almost
all the provisions of which have been drafted only
by one party, usually a corporation. Such contracts
are called contracts of adhesion, because the only
participation of the other party is the signing of his
signature or his 'adhesion' thereto. Insurance
contracts fall into this category (Sweet Lines, Inc. vs.
Teves, GR No. L-37750, May 19, 1978). An illustration
of a contract of adhesion is when the insurer used
“fine print” letters in conditions stated in a contract
of insurance (Ibid).
Rules in the construction or interpretation of
insurance contracts
GR: If the terms of the contract clearly show the
intention of the parties, there shall be no room for
interpretation.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
XPN: If there are ambiguities in the terms of an
insurance contract, they have to be resolved in favor
of the insured and strictly against the insurer
because an insurance contract being a contact of
adhesion, most of its terms is not a product of
mutual negotiation between the parties as they are
prepared by the insurance company in final printed
forms (De Leon, 2014).
Parties to the contract of insurance
1. Insurer – party who assumes or accepts the risk
of loss and undertakes for a consideration to
indemnify the insured on the happening of a
specified contingency or event.
2. Insured – person in whose favor the contract is
operative and is indemnified.
NOTE: The insured is not always the person to
whom the proceeds are paid.
3. Assured/Beneficiary- a person designated by
the terms of the policy to receive the proceeds
of the insurance. He may be the insured or a
third party in the contract for whose benefit the
policy is issued and to whom the loss is payable.
Insurer
Every corporation, partnership, or association duly
authorized by the Insurance Commission to transact
insurance business may be an insurer (IC, as
amended by RA 10607, Sec. 6).
The term “insurer” no longer includes “individuals”
under RA 10607. Hence, an individual natural
person is no longer allowed to be an insurer.
However, it includes the following:
1. Professional reinsurer - any person, partnership,
association or corporation that transacts solely
and exclusively reinsurance business in the
Philippines.
2. Mutual Insurance Companies - The law also
provides for the procedure for mutualization of
domestic stock life insurance companies. A new
provision on RA 10607 is on demutualization or
conversion of mutual insurance companies into
stock corporations (IC, as amended by RA 10607,
Sec. 280).
3. Cooperatives are now expressly included in the
term “insurer” or “insurance company.”
However, the cooperative must: (Su-Ca)
a. Have a sufficient capital and asset required
under the Insurance Code and the pertinent
UNIVERSITY OF SANTO TOMAS
80
2019 GOLDEN NOTES
regulations issued by the Commission (IC,
as amended, Sec. 192).
b. Have a certificate of authority to operate
issued by the Commission which should be
renewed every year (IC, as amended, Sec.
193, Sundiang Sr. & Aquino, 2014).
Q: Philippine Health Care Providers, Inc. is
engaged in operating a prepaid group practice
health care delivery system or a health
maintenance organization (HMO) to take care of
the sick and disabled persons enrolled in the
health care plan. Individuals enrolled in its
health care programs pay an annual
membership fee and are entitled to various
medical services provided by its duly licensed
physicians, specialists and other professional
technical staff participating in the group
practice health delivery system at a hospital or
clinic operated or accredited by it. Is Philippine
Health Care Providers, Inc. a health
maintenance organization or an insurance
company?
A: HMOs are not insurance businesses. One test that
they have applied is whether the assumption of risk
and indemnification of loss (which are elements of
an insurance business) are the principal object and
purpose of the organization or whether they are
merely incidental to its business. If these are the
principal objectives, the business is that of
insurance. But if they are merely incidental and
service is the principal purpose, then the business is
not insurance.
Philippine Health Care Providers appears to provide
insurance-type benefits to its members (with
respect to its curative medical services), but these
are incidental to the principal activity of providing
them medical care. The "insurance-like" aspect of
Philippine Health Care Providers’ business is
miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health
care services rather than insurance services, it
cannot be considered as being in the insurance
business (Philippine Health Care Providers, Inc., v.
CIR, G.R. No. 167330, September 18, 2009).
Persons who may be insured (2000 Bar)
Anyone except a public enemy may be insured (IC,
Sec. 7).
A public enemy is a nation at war with the
Philippines and every citizen or subject of such
nation. It does not include mobs, thieves or robbers
(Bouvier’s Law Dictionary).
Mercantile Law
If majority of the stockholders of the corporation
were subjects who became an enemy corporation
upon the outbreak of the war between two states, it
stands to reason that an insurance policy ceases to
be allowable as soon as an insured becomes a public
enemy. Hence, any contingency which may occur
during or after said war cannot be indemnified
under a policy issued before said war. However,
elementary rules of justice and in the absence of
specific provision in the Insurance Law, require that
the premium paid by the insured for the period
covered by its policy should be returned. The
purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its
enemy's property and repay in insurance the
value of what has been so destroyed. (Filipinas
Compaña de Seguros v. Christern, Huenefeld and Co.,
Inc., G.R. No. L- 2294 May 25, 1951).
Subject matter of a contract of insurance
Anything having an appreciable pecuniary value,
which is subject to loss or deterioration, or of which
one may be deprived so that his pecuniary interest
is or may be prejudiced.
Event or peril insured against
It is any contingent or unknown event, whether past
or future, which may damnify a person having an
insurable interest, or create a liability against him
subject to the provisions of Chapter I of the
Insurance Code (IC, Sec. 3).
Consent of spouse not necessary
The consent of the spouse is not necessary for the
validity of an insurance policy taken out by a
married person on his or her life or that of his or her
children (IC, Sec. 3).
Consent of the person insured is not essential to
the validity of the policy.
So long as it could be proved that the insured has an
insurable interest at the inception of the policy, the
insurance is valid even without such consent (IC,
Sec. 10).
Effect of death of policy’s original owner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health
of the person insured shall automatically vest in the
latter upon the death of the original owner, unless
otherwise provided for in the policy (IC, Sec. 3).
81
NOTE: Prior to the effectivity of the Insurance Code
of 2013, the term used was “minor” instead of “the
person insured.” A minor cannot enter into any
contract of insurance with any insurance company.
Games of chances cannot be insured
An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a
lottery drawing a prize is not authorized (IC, Sec. 4).
Void stipulations in an insurance contract
Stipulations in an insurance contract which
provides:
1. For the payment of loss whether the person
insured has or does not have any insurable
interest in the subject-matter of insurance;
2. That the policy shall be received as proof of
such interest;
3. Every policy executed by way of gaming or
wagering (ICC, Sec. 25).
NOTE: The Insurance Code provides that a policy
may declare that a violation of specified provisions
thereof shall avoid it. Thus, in fire insurance policies,
which contain provisions that if the claim be in any
respect fraudulent or if any false declaration be
made or used in support thereof, all the benefits
under the policy, shall be forfeited, a fraudulent
discrepancy between the actual loss and that
claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the
insurer (United Merchants Corp. vs. Country Bankers
Insurance Corp, G.R. No. 198588, July 11, 2012).
ELEMENTS OF AN INSURANCE CONTRACT
SPEAR:
1. Scheme to distribute losses – Such assumption of
risk is part of a general scheme to distribute
actual losses among a large group or substantial
number of persons bearing a similar risk.
2. Payment of premium – As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
insurance fund.
3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible
of pecuniary estimation, known as “insurable
interest.”
4. Assumption of Risk – The insurer assumes that
risk of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of
loss through the destruction or impairment of
that interest by the happening of designated
peril.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code Mercantile Law
Aside from compulsory motor vehicle liability fault, recklessness or person inflicting the occurrence of the injury or event upon
NOTE: The inherent uncertainty of events is insurance, the Insurance Code contains no negligence of third injury that is which the liability depends. The purpose is
normally described in terms of risk. A contract other provisions applicable to casualty parties (Sundiang Sr. controlling. If the to protect the injured person against the
possessing only the last three elements enumerated insurance. Therefore, such casualty insurance & Aquino, 2014 citing injuries suffered by insolvency of the insured who causes such
above is a risk-shifting device, but NOT a contract are governed by the general provisions Pan Malayan the insured clearly injury and to give him a certain beneficial
of insurance which is a risk-distributing device (De applicable to all types of insurance, and Insurance Corp. V. CA, resulted from the interest in the proceeds of the policy. It is as
Leon, 2006). outside of such statutory provisions, the rights G.R. No. 81026, April 3, intentional act of a if the injured person were especially named
and obligations of the parties must 1990). third person, the in the policy (Shafer vs. RTC Judge, G.R. No.
Moral Hazard Phenomenon be determined by their contract, taking insurer is relieved 78848, November 14, 1988, 1996 Bar).
into consideration its purpose and always from liability as b. Indemnity against actual loss or payment –
Consequently, however, the existence of insurance in accordance with the general principles of stipulated (Sundiang The third persons cannot proceed against
could have the perverse effect of increasing the insurance law Sr. & Aquino, 2014 the insurer, the contract being solely to
probability of loss. This is when the insured, having citing Biagtan v. The reimburse the insured for liability actually
in mind the indemnification for loss or damage 6. Burglary and theft insurance – an insurance Insular Life Assurance discharged by him through payment to
caused by the happening of the event insured against loss of property by the depredations of Co. Ltd, G.R. No. L- third persons, said third person’s recourse
against, would have reduced incentive to take steps burglars and thieves. 25579, March 29, being thus limited to the insured alone.
to protect himself or his property, subject of 7. Health insurance – an indemnity to persons for 1972). (Guingon vs. Del Monte, G.R. No. L-22042,
insurance. (Ibid). expense and loss of time occasioned by disease. August 17, 1967) Prior payment by the
Rules on Third party liability insurance insured is necessary to give rise to the
CASUALTY INSURANCE Health and accident insurance are either covered obligation of the insurer.
under life (Sec. 180) or casualty insurance. (Sec. 1. Insurable interest is based on the interest
It is an insurance covering loss or liability arising 174) of the insured in the safety of the persons, Source of liability of third party liability
from accident or mishap, excluding certain types of and their property, who may maintain an insurance (1996, 2000 Bar)
loss which by law or custom are considered as 8. Other substantially similar kinds of insurance action against him in case of their injury or
falling exclusively within the scope of other types of (Perez, 2006). destruction respectively (De Leon, 2010). The direct liability of the insurer under indemnity
insurance such as fire or marine (IC, Sec. 176). 2. In a TPL insurance contract, the insurer contract against third party liability does not mean
Two divisions of casualty insurance (AH-3rd assumes the obligation by paying the that the insurer can be held solidarily liable with the
Coverage of casualty insurance (P3-EMo-BuHO) Party) injured third party to whom the insured is insured. The insurer’s liability is based on contract;
liable. Prior payment by the insured to the that of the insured is based on tort (Figuracion vda.
1. Personal accident insurance – a form of 1. Accident or health insurance – Insurance injured third person is not necessary in De Maglana, et. al. v. Hon. Francisco Consolacion, G.R.
insurance which undertakes to indemnify the against specified perils which may affect order that the obligation of the insurer may No. 60506, August 6, 1992).
assured against the expense, loss of time, and the person and/or property of the insured. arise. The moment the insured becomes
suffering resulting from accidents causing him (E.g. personal accident, robbery/theft liable to third persons, the insured acquires Q: Lawrence, a boxer, is a holder of an accident
physical injury, usually by payment at a fixed insurance) an interest in the insurance contract which insurance policy. In a boxing match, he died after
rate per week while the consequent disability 2. Third party liability insurance– Insurance may be garnished like any other credit being knocked out by the opponent. Can his
lasts, and sometimes including the payment of a against specified perils which may give rise (Perla Compania de Seguros, Inc. vs. father who is a beneficiary under said insurance
fixed sum to his heirs in case of his death by to liability on the part of the insured of Ramolete, G.R. No. L-60887, November 13, policy successfully claim indemnity from the
accident within the term of the policy. claims for injuries or damage to property of 1991). insurance company?(1990 Bar)
2. Public utility insurance – indemnifies against others (De Leon, 2010). 3. In burglary, robbery and theft insurance,
liability on account of injuries to the person or the opportunity to defraud the insurer A: YES. Clearly, the proximate cause of death was
property of another. It may extend to “Accidental” vs. “Intentional” as used in (moral hazard) is so great that insurer the boxing contest. Death sustained in a boxing
automobiles, elevators, fly wheels, libel, insurance have found it necessary to fill up the contest is an accident (De la Cruz v. Capital Insurance
theaters, and vessels. policies with many restrictions designed to & Surety Co., G.R. No. L-21574, June 30, 1966).
3. Plate glass insurance – an insurance against loss ACCIACCIDENTD INTENTIONAL reduce the hazard. The purpose of the
from accidental breaking of plate-glass exception is to guard against liability Liability of the insurer vs. Liability of the insured
The terms “accident” Intentional as used in
windows, doors, showcases, etc. should theft be committed by one having
and “accidental” have an accident policy
4. Employer's liability and workmen’s insurance – unrestricted access to the property INSURER INSURED
been taken to mean excepting intentional
the risk insured against is the liability of the (Fortune Insurance & Surety Co. vs. CA, G.R. The liability is direct but Liability is direct and
that which happens injuries inflicted by
assured to make compensation or pay damages No. 115278, May 23, 1995). the insurer cannot be can be held liable with
by chance or the insured or any
for an accident, injury, or death, occurring to a 4. The right of the person injured to sue the held solidarily liable all the parties at fault.
fortuitously, without other person, implies
servant or other employee, in the course of his insurer of the party at fault (insured), with the insured and
intention or design, the exercise of the
employment under statutes imposing such depends on whether the contract of other parties at fault.
which is unexpected, reasoning faculties,
liability on employers. insurance is intended to benefit third Liability is based on Liability is based on
unusual or consciousness, and
5. Motor vehicle liability insurance – is a contract persons also or only the insured (Eulogio vs. contract. tort.
unforeseen. The term volition. Where a
of insurance against passenger and third-party Del Monte, GR No. L-22042, August 17, The third-party liability The liability extends to
does not, without provision of the policy
liability for death or bodily injuries and damage 1967). If the contract provides for: is only up to the extent the amount of actual
qualification, exclude excludes intentional
to property arising from, motor vehicle a. Indemnity against third party liability – The of the insurance policy and other damages
events resulting in injury, it is the
accidents. third persons to whom the insured is liable, and that required by (Heirs Poe v. Malayan
damage or loss due to intention of the
can sue directly the insurer upon the law.

UNIVERSITY OF SANTO TOMAS UNIVERSITY OF SANTO TOMAS

82 83 FACULTY OF CIVIL LAW
2019 GOLDEN NOTES
 Insurance Code
Insurance, G.R. No.
156302, April 7, 2009).
Q: While driving his car along EDSA, Cesar
sideswiped Roberto, causing injuries to the
latter, Roberto sued Cesar and the third-party
liability insurer for damages and/or insurance
proceeds. The insurance company moved to
dismiss the complaint, contending that the
liability of Cesar has not yet been determined
with finality. Is the contention of the insurer
correct? (1996 Bar)
A: NO, the contention of the insurer is not correct.
There is no need to wait for the decision of the court
determining Cesar’s liability with finality before the
third-party liability insurer could be sued. The
occurrence of the injury to Roberto immediately
gave rise to the liability of the insurer under its
policy. Where an insurance policy insures directly
against liability, the insurer’s liability accrues
immediately upon the occurrence of the injury or
event upon which the liability depends (Shafer vs.
RTC Judge, supra).
Liability of insurer if the insured was
committing a felony
Liabilities arising out of acts of negligence, which
are also criminal, are also insurable on the ground
that such acts are accidental. Thus, a motor
insurance policy covering the insured’s liability for
accidental injury caused by his negligence, even
though gross and attended by criminal
consequences such as homicide through reckless
imprudence, will not be void as against public
policy. But liability consequences of deliberate
criminal acts are not insurable (Sundiang Sr. &
Aquino, 2014).
“No action” clause
It is a requirement in a policy of liability insurance
which provides that suit and final judgment be first
obtained against the insured, that only thereafter
can the person injured recover on the policy. It
expressly disallows suing the insurer as co-
defendant (Guingon v. Del Monte, supra).
A “no action” clause must yield to the provisions of
the Rules of Court regarding multiplicity of suits
(Shafer v. RTC Judge, supra).
Rules in accident insurance
1. For death or injury to be covered by the policy,
such should not be the natural or probable
result of the insured’s voluntary act, or if
something unforeseen occurs in the doing of the
UNIVERSITY OF SANTO TOMAS
84
2019 GOLDEN NOTES
Mercantile Law
act which produces the injury, which may result PROPERTY b. Public official bond – required of public
SURETYSHIP
to death (Dela Cruz v. Capitol Insurance & Surety INSURANCE officers for the faithful performance of their
Co., supra). It is an accessory The principal contract duties and as a condition of entering upon
2. Suicide and willful exposure to needless peril contract. itself. the duties of their offices.
are in pari matere because they both signify a There are three There are only two
disregard for one’s life. Voluntary exposure to a parties: the surety, parties: insurer and 3. Judicial bonds – required in connection with
known danger is generally held to negate the obligor/debtor, and insured judicial proceedings (Ibid).
accidental character of whatever followed from the obligee/creditor.
the known danger (De Leon, 2010). More of a credit Generally a contract of Rules of payment of premiums in suretyship
3. The insured’s beneficiary has the burden of accommodation with indemnity
proof in demonstrating that the cause of death the surety assuming 1. The premium becomes a debt as soon as the
is due to the covered peril. Once that fact is primary liability contract of suretyship or bond is perfected and
established, the burden shifts to the insurer to Surety is entitled to No right of recovery for delivered to the obligor (IC, Sec. 77);
show any excepted peril that may have been reimbursement from the loss the insurer 2. The contract of suretyship or bonding shall not
stipulated by the parties (Vda. De Gabriel v. CA, the principal and his may sustain except be valid and binding unless and until the
G.R. No. 103883, November 14, 1996). guarantors for the loss when the insurer is premium therefor has been paid;
it may suffer under the entitled to subrogation. 3. Where the obligee has accepted the bond, it
SURETYSHIP contract. shall be valid and enforceable notwithstanding
A bond may be May be cancelled that the premium has not been paid (Philippine
Contract of suretyship cancelled by or with unilaterally either by Pryce Assurance Corp. v. CA, G.R.No. 107062,
the consent of the the insured or by the February 21, 1994);
It is an agreement whereby a party called the obligee or by the insurer on grounds 4. If the contract of suretyship or bond is not
“surety” guarantees the performance by another commissioner or by provided by law. accepted by, or filed with the obligee, the surety
party called the “principal or obligor” of an the court. shall collect only a reasonable amount;
obligation or undertaking in favor of a third party Requires acceptance of Does not need 5. If the non-acceptance of the bond be due to the
called the “obligee”. It is essentially a credit the obligee before it acceptance of any third fault or negligence of the surety, no service fee,
accommodation which includes official becomes valid and party. stamps, or taxes imposed shall be collected by
recognizances, stipulations bonds or undertakings enforceable. the surety; and
issued by any company by virtue and under the A risk-shifting device, A risk-distributing 6. In the case of continuing bond (for a term longer
provisions of Act No. 536, as amended by Act No. the premium paid device, the premium than one year or with no fixed expiration date),
2206 (IC, Sec. 177). being in the nature of a paid being considered a the obligor shall pay the subsequent annual
service fee. ratable contribution to premium as it falls due until the contract is
The extent of surety’s liability is determined by the a common fund. (De canceled (IC, Sec. 179) (De Leon, 2010).
language of the suretyship contract or bond itself. It Leon, 2010)
cannot be extended by implications beyond the By law and by the specific contract involved in this
terms of the contract. Having accepted the bond, the Types of surety bonds (CoFiJud) case, the effectivity of the bond required for the
creditor is bound by the recital in the surety bond obtention of a license to engage in the business of
that the terms and conditions of distributorship 1. Contract bonds – These are connected with receiving rice for storage is determined not alone by
contract be reduced in writing or at the very least construction and supply contracts. It protects the payment of premiums but principally by the
communicated in writing to the surety. Such non- the owner against a possible default by the Administrator of the NFA. A continuing bond, as in
compliance by the creditor impacts not on the contractor or his possible failure to pay this case where, there is no fixed expiration date,
validity or legality of the surety-contract but on the materials, men, laborers and sub-contractors. may be cancelled only by the obligee, which is the
creditor’s right to demand performance (First The position of surety, therefore, is to answer NFA, by the Insurance Commissioner, and by the
Lepanto–Taisho Insurance Corporation vs. Chevron for a failure of the principal to perform in court (Country Bankers Insurance Corporation vs.
Philippines, G.R. No. 177839, January 18, 2012). accordance with the terms and specifications of Lagman, G.R. No. 165487, July 13, 2011, in Divina,
Nature of liability of surety the contract. There may be two bonds: 2014).
a. Performance bond – covers the faithful
The liability of the surety or sureties shall be: performance of the contract; and Q: Fumitechniks Corporation, represented by
b. Payment bond – covers the payment of Ma. Lourdes Apostol, had applied for and was
1. Solidary – Joint and several with the obligor and laborers and material men. issued a surety bond by First Lepanto-Taisho
2. Limited or fixed – Limited to the amount of the Insurance Corporation (First Lepanto-Taisho)
bond (It cannot be extended by implication). 2. Fidelity bonds –They pay an employer for loss for the amount of P15,700,000.00. As stated in
3. Contractual – It is determined strictly by the growing out of a dishonest act of his employee. the attached rider, the bond was in compliance
terms of the contract of suretyship in relation to For the purposes of underwriting, they are with the requirement for the grant of a credit
the principal contract between the obligor and classified as: line with the Chevron Philippines, Inc.
the obligee (IC, Sec. 178). a. Industrial bond – required by private (Chevron) to guarantee payment of the cost of
employers to cover loss through dishonesty fuel products withdrawn within the stipulated
Suretyship vs. Property Insurance of employees; and time in accordance with the terms and
conditions of agreement between Chevron and
UNIVERSITY OF SANTO TOMAS
85 FACULTY OF CIVIL LAW
 Insurance Code
Fumitechniks. When Fumitechniks defaulted on
its obligation, Chevron notified First Lepanto-
Taisho of Fumitechniks’ unpaid purchases. First
Lepanto-Taisho thereafter demanded to
Fumitechniks the submission of a copy of the
agreement secured by the bond, together with
copies of documents such as delivery receipts.
Fumitechniks, however, denied that it executed
such an agreement with Chevron, thus no copy
of such agreement could be submitted. Because
of this, Chevron Philippines, Inc. sued First
Lepanto-Taisho for the payment of unpaid oil
and petroleum purchases made by
Fumitechniks. Is the surety liable to the creditor
in absence of a written contract with the
principal?
A: NO. Section 176 of the Insurance Code is clear
that a surety contract should be read and
interpreted together with the contract entered into
between the creditor and the principal. A surety
contract is merely a collateral one, its basis is the
principal contract or undertaking which it secures.
Necessarily, the stipulations in such principal
agreement must at least be communicated or made
known to the surety. Having accepted the bond,
Chevron as creditor must be held bound by the
recital in the surety bond that the terms and
conditions of its distributorship contract be reduced
in writing or at the very least communicated in
writing to the surety. Such non-compliance by the
Chevron impacts not on the validity or legality of the
surety contract but on the creditor’s right to
demand performance (First Lepanto-Taisho
Insurance v. Chevron Philippines, Inc., G.R. No.
177839, January 18, 2012).
LIFE INSURANCE
It is insurance on human lives and insurance
appertaining thereto or connected therewith (Sec.
181, Insurance Code). It includes every contract or
pledge for the payment of endowments or annuities.
It is made payable on the death of the person, or on
his surviving a specified period, or otherwise
contingently on the continuance or cessation of life
(IC, Sec. 182).
NOTE: Every contract or undertaking for the
payment of annuities including contracts for the
payment of lump sums under a retirement program
where a life insurance company manages or acts as
a trustee for such retirement program shall be
considered a life insurance contract for purposes of
the Insurance Code (IC, Sec. 181).
Every contract or pledge for the payment of
endowments or annuities shall also be considered a
Mercantile Law
life insurance contract under the Insurance Code beneficiary is paid; if he outlives the period, he pointed the gun at her. Startled, she pushed the
(IC, Sec. 182). does not get anything. gun aside and said that it may be loaded. Thus,
4. Industrial life – entitles the insured to pay Tan, to assure her that it was not loaded, pointed
Who may exercise any right under the policy premiums weekly, or where premiums are it at his temple. The next moment, there was an
payable monthly or oftener explosion and Tan slumped to the floor lifeless.
In the absence of a judicial guardian, the father, or in 5. Term insurance – insured pays premium only
the latter’s absence or incapacity, the mother, of any once, and he is insured for a specified period. If Beverly, then claimed the proceeds from Sun
minor, who is an insured or a beneficiary under a he dies within the period, his beneficiaries Insurance, but the latter rejected her claim on
contract of life, health, or accident insurance, may benefit. If he outlives the period, no person the ground that the death of Tan was not
exercise, in behalf of said minor, any right under the benefits from the insurance. accidental. Beverly sued the insurer. Will
policy, without necessity of court authority or the 6. Endowment – insured pays premium for Beverly’s claim prosper? (1993, 1994 Bar)
giving of a bond, where the interest of the minor in specified period. If he outlives the period, the
the particular act involved does not exceed Five face value of the policy is paid to him; if not, his A: Beverly can recover the proceeds of the policy
hundred thousand pesos (P500,000.00) or in beneficiaries receive the benefit. (Sundiang Sr. from the insurer. The death of the insured was not
such reasonable amount as may be determined & Aquino, 2014). due to suicide or willful exposure to needless peril
by the Commissioner. Such right may include, but which are excepted risks. The insured’s act was
shall not be limited to, obtaining a policy loan, Contract of life annuity purely an act of negligence which is covered by the
surrendering the policy, receiving the proceeds of policy and for which the insured got the insurance
the Policy, and giving the minor’s consent to any It is a contract to pay the insured, or a named person for his protection. In fact, he removed the magazine
transaction on the minor’s consent to any or persons, a sum or sums periodically during life or from the gun and when he pointed the gun to his
transaction on the policy. certain period (Perez, 2006). temple he did so because he thought that it was safe
for him to do so. He did so to assure his sister that
In the absence or in case of the incapacity of the Measure of indemnity under a policy of the gun was harmless. There is none in the policy
father or mother, the grandparent, the eldest insurance upon life or health that would relieve the insurer of liability for the
brother or sister at least eighteen (18) years of age, death of the insured since the death was an accident
or any relative who has actual custody of the minor GR: The measure of indemnity under a policy of (Sun Insurance v CA, G.R. Nos. 79937-38, February 13,
insured or beneficiary, shall act as a guardian insurance upon life or health is the sum fixed in the 1989).
without need of a court order or judicial policy.
appointment as such guardian, as long as such Life insurance vs. Fire/Marine insurance
person is not otherwise disqualified or XPN: The interest of a person insured is susceptible
incapacitated. Payment made by the insurer of exact pecuniary measurement (IC, Sec. 186). FIRE/MARINE
LIFE INSURANCE
pursuant to this section shall relieve such insurer of INSURANCE
any liability under the contract (IC, Sec. 182). Liability of the insurer in case of suicide It is a contract of
It is a contract of
investment not contract
Reasons why a Life insurance is also a contract The insurer shall be liable in case of suicide by the indemnity.
of indemnity.
of indemnity insured if: (FISh) Always regarded as May be open or
valued policy. valued.
This is because of the following reasons: 1. The suicide is committed after the policy has May be transferred or The transferee or
been in force for a period of 2 years from the assigned to any person assignee must have an
1. The liability in life insurance is absolutely date of its issue or of its last reinstatement. even if he has no insurable interest in
certain 2. The suicide is committed within a shorter insurable interest. the thing insured.
2. Amount of life insurance generally is without period as provided in the policy. The consent of the Consent, in the
limit 3. The suicide is committed in the state of insanity insurer is not essential absence of waiver by
3. The policy is a valued policy regardless of the date of commission (IC, Sec. to the validity of the the insurer, is
4. There is no direct pecuniary loss required (De 183). assignment of a life essential in the
Leon, 2010). policy unless expressly assignment of the
NOTE: Any stipulation extending the 2-year required. policy.
Kinds of life insurance policies (GO LITE) period is null and void. Insurable interest in the Insurable interest in
life or health of the the property insured
1. Group Life - Essentially a single insurance Q: Sun Insurance Co. issued to Tan a life policy person insured need not must exist not only
contract that provides coverage for many having this provision: “the company shall not be exist after the insurance when the insurance
individuals. Example: In favor of employees; liable in respect of ‘bodily injury’ consequent takes effect or when loss takes effect but also
mortgage redemption insurance. upon the insured person who willfully exposes occurs. when the loss occurs.
2. Ordinary life, general life or old-line policy – himself to needless peril except in an attempt to Insurable interest
Insured pays a premium every year until he save human life". Tan designated his wife, Insurable interest need
must have a legal
dies. Beverly as beneficiary. not have any legal basis.
basis.
3. Limited payment – Insured pays premium for a Contingency that is The contingency
limited period. If he dies within the period, his One evening, Tan, while playing with his hand contemplated is a insured against may
gun, suddenly stood in front of his secretary and certain event, the only or may not occur.

UNIVERSITY OF SANTO TOMAS UNIVERSITY OF SANTO TOMAS

86 87 FACULTY OF CIVIL LAW
2019 GOLDEN NOTES
 Insurance Code Mercantile Law
uncertainty being the responsible for the accident sustained (First The owner or owners of motor vehicles for 2. Secure, before the insurance policy or surety
time when it will take Integrated Bonding Insurance Co., Inc. v. Hernando, transportation of passengers for compensation, bond ceases to be effective, another similar
place. G.R. No. L-51221, July 31, 1991). including school buses (Sec. 386, [e], Ibid). policy or bond to replace that one canceled;
The liability of the 3. Without making any replacement, make a cash
Liability is uncertain NOTE: The insurer’s liability accrues immediately Persons required to maintain a compulsory deposit in sufficient amount with the Insurance
insurer to make
because the upon the occurrence of the injury or event upon motor vehicle liability insurance (CMVLI) policy Commissioner and secure a certification from
payment is certain, the
happening of the peril which the liability depends, and does not depend on to operate motor vehicle/s in public highways the Insurance Commissioner regarding the
only uncertain element
insured against is the recovery of judgment by the injured party deposit made for presentation to and filing with
being when such
uncertain. against the insured (Shafer v. Judge, RTC, supra). 1. Motor vehicle owner (MVO) the Land Transportation Office (CMVLI, supra)
payment must be made.
May be terminated by 2. Land transportation operator (LTO) (Sec. (IC, Sec. 393-394).
May be cancelled by Definitions 387, Ibid).
the insured but cannot
either party and is Limitations with respect to compulsory motor
be cancelled by the
usually for a term of 1. Motor vehicle Scope of coverage required for compulsory vehicle liability insurance over solicitation
insurer and is usually a
one year motor vehicle liability insurance
long-term contract.
The “loss” to the Any vehicle propelled by any power other than 1. No government office or agency having the duty
The reverse is muscular power using the public highways, but 1. For MVOs, the coverage must be comprehensive of implementing the provisions of the Insurance
beneficiary caused by
generally true of the excepting road rollers, trolleys cars, street against third party liability for death or bodily Code on CMVLI shall act as agent in procuring
the death of the insured
loss of property, i.e., it sweepers, sprinklers, lawn mowers, bulldozers, injuries. If the private motor vehicle is being the insurance policy or surety bond required;
can seldom be
is capable of graders, forklifts, amphibian trucks, and cranes if used to transport passengers for compensation, 2. No official or employee of such office or agency
measured accurately in
pecuniary estimation. not used in public highways, vehicles which run the coverage shall include passenger liability. shall similarly act as such agent; and
terms of cash value.
The insured is only on rails or tracks, and tractors, trailers and 2. For LTOs, coverage must be comprehensive 3. The commission of an agent procuring the
The beneficiary is under traction engines of all kinds used exclusively for against both passenger and third-party corresponding insurance policy or surety bond
required to submit
no obligation to prove agricultural purposes (Sec. 3[a] of RA 4136). liabilities for death or bodily injuries (Ins. shall in no case exceed 10% of the amount of
proof of his actual
actual financial loss as a Memo. Cir. No. 3-81). premiums therefore (IC, Sec. 400).
pecuniary loss as a
result of the death of the NOTE: Trailers having any number of wheels, when
condition precedent
insured in order to propelled or intended to be propelled by Substitutes for a compulsory motor vehicle Effects of the cancellation of the policy
to collecting the
collect the insurance. attachment to a motor vehicle shall be classified as liability insurance policy
insurance.
separate motor vehicle with no power rating (Ibid). GR: Upon receipt of the notice of such cancellation,
COMPULSORY MOTOR VEHICLE LIABILITY Instead of a CMVLI policy, MVOs or LTOs may either: the Land Transportation Office shall order the
INSURANCE 2. Passenger immediate confiscation of the plates of the motor
1. Post a surety bond with the Insurance vehicle concerned.
Motor vehicle liability insurance Any fare-paying person being transported and Commissioner who shall be made the obligee or
conveyed in and by a motor vehicle for creditor in the bond in such amount or amounts XPNs: No confiscation will be ordered if said Office
It is a protection coverage that will answer for legal transportation of passengers for compensation, required as limits of indemnity to answer for receives any of the following:
liability for losses and damages for bodily injuries or including persons expressly authorized by law or by the same losses sought to be covered by a
property damage that may be sustained by another the vehicle’s operator or his agents to ride without CMLVI policy; or 1. An evidence or proof of a new and valid CMVLI
arising from the use and operation of a motor fare (IC, Sec. 386, [b]). 2. Make a cash deposit with the Insurance cover which may be either an insurance policy
vehicle by its owner (Compulsory Motor Vehicle Commission in such amount or amounts or guaranty in cash or surety bond;
Liability Insurance, prepared and distributed by the 3. Third-party required as limits of indemnity for the same 2. A signed duplicate of an endorsement or
Insurance Commission). purpose (Sec. 390, Ibid) addendum issued by the insurance company
Any person other than a passenger as defined in this concerned showing revival or continuance of
Note: It is the only compulsory insurance coverage section (Ibid) and shall also exclude a member of the After the cash deposit or surety bond has been the CMVLI cover; or
under the Insurance Code. household, or a member of the family within the proceeded against by the Insurance Commissioner, 3. A certification issued by the Insurance
second degree of consanguinity or affinity, of a such cash deposit shall be replenished or such Commissioner to the effect that a cash deposit
The Insurance Code makes it unlawful for any land motor vehicle owner or land transportation surety bond shall be restored by the MVO or LTO in in the amount required as limit of indemnity
transportation operator or owner of a motor vehicle operator, as likewise defined herein, or his the right amount/s required as limit of liability has been made with him by the MVO or LTO
to operate the same in public highways unless there employee in respect of death, bodily injury, or within 60 days after impairment or expiry, (CMVLI, supra, IC, Sec. 393).
is an insurance or guaranty to indemnify the death damage to property arising out of and in the course otherwise, he shall secure a CMLVI required (Ibid).
or bodily injury of a third party or passenger arising of employment (Sec. 386, [c], Ibid). “Own damage” coverage
from the use thereof (IC, Sec. 387). Registration of Duties of motor vehicle owner or land
any vehicle will not be made or renewed without 4. Owner or Motor vehicle owner (MVO) transportation operator in contemplation of the It simply meant that the insurer had assumed to
complying with the requirement (IC, Sec. 389). cancellation of the policy reimburse the costs for repairing the damage to the
Actual legal owner of a motor vehicle, whose name insured vehicle, as opposed to damage to third party
Purpose of motor vehicle liability insurance such vehicle is duly registered with the Land Contemplating the cancellation of the policy, the vehicle/property. The phrase “own damage” does
Transportation Office (Sec. 386, [d], Ibid). MVO or LTO shall: not mean damage to the insured car caused by the
To give immediate financial assistance to victims of assured itself, instead, of third parties (Pan Malayan
motor vehicle accidents and/or their dependents, 5. Land transportation operator (LTO) 1. Give to the insurance or surety company Insurance Corporation v. Court of Appeals, supra).
especially if they are poor regardless of financial concerned a written notice of his intention to
capability of motor vehicle owners or operators cancel; No fault indemnity clause (1994 Bar)

UNIVERSITY OF SANTO TOMAS UNIVERSITY OF SANTO TOMAS

88 89 FACULTY OF CIVIL LAW
2019 GOLDEN NOTES
 Insurance Code
It is a clause where the insurer is required to pay a
third party injured or killed in an accident without
the necessity of proving fault or negligence on
the part of the insured. There is a stipulated
maximum amount to be recovered.
It is a clause that gives the victim (injured person or
heirs of the deceased) an option to file a claim for
death or injury without the necessity of proving
fault or negligence of any kind to guarantee
compensation or indemnity to injured persons in
motor vehicle accidents.
Rules under the “no fault indemnity clause”
1. The total indemnity in respect of any one
person shall not exceed P15,000 for all motor
vehicles (Ins. Memo. Circ. No. 4-2006).
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to
establish proper payee
c. Medical report and evidence of medical or
hospital disbursement (IC, Sec. 391 [3]).
3. Claim may be made against one motor vehicle
only (Sec. 391 [c], Ibid).
4. In case injury of an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle
in which the occupant is riding, mounting or
dismounting from (Ibid).
5. In any other case (not an occupant), claim shall
lie against the insurer of the directly offending
vehicle (Ibid).
6. 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 (Ibid).
The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the
law, by using the word "shall”, makes it mandatory
that the claim be made against the insurer of the
vehicle in which the occupant is riding, mounting or
dismounting from. That said vehicle might not be
the one that caused the accident is of no moment
since the law itself provides that the party paying
may recover against the owner of the vehicle
responsible for the accident (Perla Compania de
Seguros, Inc. v. Ancheta, G.R. No. L-49599, August 8,
1988).
This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds P15,
000 and there is controversy in respect thereto, the
finding of fault may be availed of by the insurer only
as to the excess. The first P15, 000 shall be paid
without regard to the fault (CMVLI, supra).
UNIVERSITY OF SANTO TOMAS
90
2019 GOLDEN NOTES
Q: X is a passenger of a jeepney for hire being
driven by Y. The jeepney collided with another
passenger jeepney being driven by Z who was
driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
covered by Comprehensive Motor Vehicular
Insurance Coverage. If X wants to claim under
the "no fault indemnity clause", his claim will lie
(2012 Bar)
A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
Insurance Code states that in the case of an occupant
of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding,
mounting or dismounting from.
Authorized driver clause
It indemnifies the insured owner against loss or
damage to the car but limits the use of the insured
vehicle to:
1. The insured himself; or
The insured need not prove that he has a
driver’s license at the time of the accident if he
was the driver (Sundiang Sr. & Aquino, 2014).
2. Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in
accordance with the law, and is not disqualified
(Villacorta v. Insurance Commissioner, G.R. No.
54171, October 28, 1980).
The main purpose of this clause is to require a
person other than the insured, who drives the
car on the insured’s order or with his
permission, to be duly licensed drivers and
have no disqualification to drive a motor
vehicle.
An Irish citizen whose 90-day tourist visa had
expired, cannot recover on his car insurance policy,
not being authorized to drive a motor vehicle
without a Philippine driver’s license (Stokes v.
Malayan Insurance Co., Inc. G.R. No. L-34768,
February 24, 1984).
A driver with an expired Traffic Violation Receipt or
expired Temporary Operator’s permit is not
considered an authorized driver within the meaning
of the insurance policy. The Traffic Violation Receipt
is coterminous with a confiscated license under the
Motor Vehicle Law (Gutierrez v. Capital Insurance &
Surety Co., Inc., G.R. No. L-26287, June 29, 1984).
Theft clause
Mercantile Law
It is that which includes theft as among the risks
insured against. Where a car is unlawfully and
wrongfully taken without the knowledge and
consent of the owner, such taking constitutes “theft”
and it is the theft clause, not the authorized driver
clause which should apply (Perla Compania de
Seguros, Inc. v. CA, supra).
The “Theft Clause” of a comprehensive motor
vehicle insurance policy has been interpreted by the
Court in several cases to cover situations like (1)
when one takes the motor vehicle of another
without the latter’s consent even if the motor
vehicle is later returned, there is theft- there being
intent to gain as the use of the thing unlawfully
taken constitutes gain or (2) when there is taking of
a vehicle by another person without the permission
or authority from the owner thereof (Paramount
Insurance vs. Spouses Remondeulaz, G.R. No. 173773,
November 28, 2012).
Theft
There is theft if the vehicle is taken with intent to
gain without the consent of the insured-owner.
Thus, there is theft even if:
1. The vehicle is returned;
2. The vehicle was stolen by the driver of the
insured (Alpha Insurance and Surety Company v.
Castor, G.R. 198174, September 2, 2013);
3. The vehicle was taken to the owner of a repair
shop for the purpose of repair and in order to
attach accessories (Paramount Insurance v.
Spouses Remondeulaz, G.R. No. 173773,
November 28, 2012) (Sundiang Sr. & Aquino,
2014).
Q: On May 26, 2014, Jess insured with Jack
Insurance (Jack) his 2014 Toyota Corolla sedan
under a comprehensive motor vehicle insurance
policy for one year. On July 1, 2014, Jess’ car was
unlawfully taken. Hence, he immediately
reported the theft to the traffic Management
Command (TMC) of the Philippine National
Police (PNP), which made Jess accomplish a
complaint sheet as part of its procedure. In the
complaint sheet, Jess alleged that a certain Ric
Silat (Silat) took possession of the subject
vehicle to add accessories and improvements
thereon. However, Silat failed to return the
subject vehicle within the agreed three- day
period. As a result, Jess notified Jack of his claim
for reimbursement of the value of the lost
vehicle under the insurance policy. Jack refused
to pay claiming that there is no theft as Jess gave
Silat lawful possession of the car. Is Jack
correct? (2014 Bar)
91
A: NO, Jack Insurance is not correct. Ric Silat was
merely given physical possession of the car. He did
not have juridical possession over the same. It is
also apparent that the taking by Silat of the car of
Jess is without the consent or authority of the latter.
Thus, the act of Silat in depriving Jess of his car, soon
after the transfer of physical possession of the same
to him, constitutes theft under the insurance policy
that is compensable (Paramount Insurance v.
Spouses Remonduelaz, G.R. No. 173773, November 8,
2012).
Q: On February 21, 2013, Barrack entered into a
contract of insurance with Matino Insurance
Company (Matino) involving a motor vehicle.
The policy obligates Matino to pay Barrack the
amount of P600,000 in case of loss or damage to
said vehicle during the period covered, which is
from February 26,2013 to February 26,2014.
On April 16,2013, at about 9:00 am, Barrack
instructed his driver, JJ, to bring the motor
vehicle to a nearby auto shop for tune-up.
However, JJ no longer despite and diligent
efforts to locate the said vehicle, the efforts
proved futile. Resultantly, Barrack promptly
notified Matino of the said loss and demanded
payment of the insurance proceeds of P600,000.
In a letter dated July 5,2013, Matino denied the
claim, reasoning as stated in the contract that
“the company shall not be liable for any
malicious damage caused by the insured, any
member of his family or by a person in the
insured’s service. Is Matino correct in denying
the claim? (2014 Bar)
A: Matino Insurance is not correct in denying the
claim. The loss of the motor vehicle is not excluded
under the insurance policy as the loss was due to
theft, not malicious damage. The “malicious
damage” clause under the policy is not applicable
but rather the “theft” clause. Thus, the provision
under the policy that "the company shall not be
liable for any malicious damage caused by the
insured, any member of his family or by a person in
the insured’s service” is not applicable (Alpha
Insurance and Surety Co. v. Castor, G.R. No. 198174,
September 2,2003).
Q: When a passenger jeepney, insured but with
an authorized driver’s clause and was driven by
a driver who only holds a Traffic Violation
Report (TVR) because his license was
confiscated, met an accident, may the owner of
the jeepney claim from the insurance company?
(2003 Bar)
A: YES. The fact that the driver was merely holding
a TVR does not violate the condition that the driver
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code Mercantile Law
should have a valid and existing driver’s license. him as sole beneficiary, given that he did not distinct things, interest over the life of
Besides, such a condition should be disregarded have a steady source of income and he always separately insured by the insured.
because what is involved is a passenger jeepney, and depended on Bianca both emotionally and one policy, does not (De Leon, 2010; Sundiang Sr. & Aquino, 2014)
what is involved here is not own damage insurance financially. During the term of the insurance, avoid the insurance as
but third party liability where the injured party is a Bianca died of what appeared to be a mysterious to the others (IC, Sec. Existence of insurable interest in life and
third party not privy to the contract of insurance. cause so that which led Carlo to immediately 22). property insurance
requested for an autopsy to be conducted. It was
established that Bianca was transgender all 3. A change on interest, For both life and property insurance, the insurable
INSURABLE INTEREST along – a fact unknown to Carlo. Can Carlo claim by will or succession, interest is required to exist at the time of perfection
the insurance benefit? (2014 Bar) on the death of the of the policy. For property insurance, the insurable
insured, does not avoid interest must also exist at the time of loss, however,
An insurable interest is that interest which a person A: YES, Carlo can claim the insurance benefit. He an insurance; and his in case of life insurance, the insurable interest need
is deemed to have in the subject matter insured, had insurable interest on Bianca’s life under Section interest in the to exist only at the time of perfection and not
where he has a relation or connection with or 10(b) of the Insurance Code as the problem states insurance passes to the thereafter (IC, Sec. 19).
concern in it, such that the person will derive that Carlo “always depended on Bianca both person taking his
pecuniary benefit or advantage from the emotionally and financially.” The insurable interest interest in the thing Change of beneficiary
preservation of the subject matter insured and will upon the life of another under the aforesaid insured (IC, Sec. 23).
suffer pecuniary loss or damage from its provision need not be based on kinship or legal GR: The insured shall have the right to change the
destruction, termination, or injury by the happening obligation to give support. The fact that their 4. A transfer of interest beneficiary he designated in the policy
of the event insured against. marriage may be void is irrelevant. by one of several
partners, joint owners, XPN: If the insured expressly waived this right in
NOTE: The existence of insurable interest is a Insurable interest in life insurance vs. Insurable or owners in common, the said policy.
matter of public policy and is not susceptible to the interest in property insurance (2002 Bar) who are jointly
principle of estoppel. The existence of an insurable insured, to the others, Notwithstanding the foregoing, in the event the
interest gives a person the legal right to insure the LIFE PROPERTY does not avoid an insured does not change the beneficiary during his
subject matter of the policy of insurance (Violeta R. As to extent insurance even though lifetime, the designation shall be deemed
Lalican vs. The Insular Life Assurance Co. Ltd., G.R. No. GR: Every person has Limited to the actual it has been agreed that irrevocable (IC, Sec. 11).
183526, August 25, 2009). an unlimited insurable value of the property the insurance shall
interest in his own life cease upon an NOTE: Under Sec. 64 of the Family Code, the
Mere hope or expectancy is not insurable alienation of the thing innocent spouse is allowed to revoke the
XPN: Where life insured (IC, Sec. 24). designation of the other spouse as irrevocable
A mere contingent or expectant interest in anything, insurance is taken out beneficiary after legal separation.
not founded on an actual right to the thing, nor upon by a creditor on the life 5. Every stipulation in a
any valid contract for it, is not insurable (ICC, Sec. of the debtor, insurable policy of insurance for Effects of Irrevocable Designation of a
16). interest is limited to the payment of loss Beneficiary:
the amount of debt whether the person
When does a person have insurable interest? When must insurable interest exist insured has or has not a. The insured cannot assign the policy if the
GR: Must exist twice, any interest in the designation of the beneficiary is irrevocable.
GR: A person is deemed to have an insurable i.e, both at the time the property insured, or The irrevocable beneficiary has a vested right
interest in the subject matter insured when a person policy takes effect and that the policy shall be (2005 Bar; Sundiang Sr. & Aquino, 2014).
has a relation or connection with or concern in the the time of loss, but received as proof of b. The beneficiary designated in a life insurance
subject matter, such that he will derive pecuniary need not exist in the such interest, and contract cannot be changed without the consent
benefit or advantage from its preservation and will period in between (IC, every policy executed of the beneficiary (Gercio v. Sun Life Assurance
suffer pecuniary loss from its destruction or injury Sec. 19). by way of gaming or of Canada, 48 Phil. 53, 28 September 1925).
by the happening of the event insured against. wagering, is void (IC, c. A new beneficiary cannot be added to the
XPN: IC, Secs. 21-24; Sec. 25). irrevocably designated beneficiary for this
However, in some cases, expectation of benefit from 25, 57. As to the beneficiary’s interest would in effect reduce the latter’s vested rights
Must exist at the time GR: The beneficiary The beneficiary must (Go v. Redfern, 72 Phil. 71, 25 April 1941).
the continued life of that person need not the policy takes effect
necessarily be of pecuniary nature to have an 1. A change in interest need not have have insurable interest d. The irrevocably designated beneficiary may
and need not exist insurable interest over over the thing insured. obtain a policy loan to the extent stated in the
insurable interest in the life of a person (De Leon, in a thing insured, after
thereafter (IC, Sec. 19). the life of the insured if schedule of values attached to the policy (Gercio
2010). the occurrence of an
injury which results in the insured himself NOTE: Insurable v. Sun Life Assurance of Canada, 48 Phl. 53, 28
Q: Carlo and Bianca met in the La Boracay a loss, does not affect secured the policy. interest is an September 1925).
festivities. Immediately, they fell in love with the right of the insured indispensable e. The insured cannot take the cash surrender
each other and got married soon after. They to indemnity for the XPN: However, if the requirement. value assign or even borrow on said policy
have been cohabiting blissfully as husband and loss (IC, Sec. 21). life insurance was without the consent of the beneficiary.
wife, but they did not have any offspring. As the obtained by the
years passed by, Carlo decided to take out 2. A change of interest beneficiary, the latter IN LIFE/ HEALTH
insurance on Bianca’s life for P1 million with in one or more several must have insurable

UNIVERSITY OF SANTO TOMAS UNIVERSITY OF SANTO TOMAS

92 93 FACULTY OF CIVIL LAW
2019 GOLDEN NOTES
 Insurance Code
Two general classes of life policies
1. Insurance upon one’s life – are those taken out
by the insured upon his own life for the benefit:
(HET)
a. Of himself;
b. Of his estate, in case it matures only at his
death;
c. Of third person who may be designated as
beneficiary.
The question of insurable interest is immaterial
where the policy is procured by the person whose
life is insured. A person who insures his own life can
designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
life of the insured subject to the limits under Article
2012 in relation to Article 739 of the New Civil Code
(De Leon, 2010).
Q: X is the common-law wife of Y. Y loves X so
much that he took out a life insurance on his own
life and made her the sole beneficiary. Y did this
to ensure that X will be financially comfortable
when he is gone. Upon the death of Y, who should
be entitled to the proceeds? (2012 Bar)
A: X as sole beneficiary under the life insurance
policy on the life of Y will be entitled to the proceeds
of the life insurance.
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Creencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100,000, in Sotero’s favor
on August 30,1993, after the requisite medical
examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability
to pay the premium on the policy.
4. Sotero did not sign the application for
insurance
5. Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
UNIVERSITY OF SANTO TOMAS
94
2019 GOLDEN NOTES
Sotero validly designate her niece as
beneficiary? (2014 Bar)
A: YES. Sotero may validly designate her niece as
beneficiary. The same is not prohibited under the
Insurance Code or any other laws pertinent to the
problem.
2. Insurance upon life of another – are those taken
out by the insured upon the life of another. Where a
person names himself beneficiary in a policy he
takes on the life of another, he must have insurable
interest in the life of the latter. This class includes
the following: (SELD)
a. His spouse and of his children.
b. Any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest.
c. Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent
the performance.
d. Of any person upon whose life any estate
or interest vested in him depends (IC, Sec.
10).
NOTE: In paragraph (a) of Section 10 of the
Insurance Code, mere relationship is sufficient
while the rest (pars. b, c, and d) requires pecuniary
interest. Thus, the interest of the creditor over the
life of the debtor ceases upon full payment
(Sundiang Sr. & Aquino, 2009).
Persons prohibited from being designated as
beneficiaries (1998 Bar)
Under the Article 739 in relation to Art. 2012 of the
New Civil Code, the following are prohibited
designation of beneficiaries:
1. Those made between persons who were guilty
of adultery or concubinage at the time of
donation.
NOTE: The guilt of the donor and done may be
proved by preponderance of evidence in the
same civil action. Criminal conviction is not
necessary.
2. Those made between persons found guilty of
the same criminal offense, in consideration
thereof.
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
Mercantile Law
The designation of the above-enumerated persons
is void but the policy is binding. The estate will get
the proceeds (Sundiang Sr. & Aquino, 2009).
Art. 2012. Any person who is forbidden from
receiving any donation under Art. 739 cannot be
named beneficiary of a life insurance policy by the
person who cannot make any donation to him,
according to said article.
NOTE: A beneficiary in a life insurance policy is no
different from a donee. Both are recipients of pure
beneficence. So long as marriage remains the
threshold of family laws, reason and morality
dictate that the impediments imposed upon
married couple should likewise be imposed upon
extra-marital relationship. If legitimate relationship
is circumscribed by these legal disabilities, with
more reason should an illicit relationship be
restricted by these disabilities. (Insular Life v.
Ebrado G.R. No. L-44059 October 28, 1977)
Beneficiary willfully brought about the death of
the insured (2008 Bar)
GR: 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 (IC, Sec. 12).
XPNs: (IUD)
1. Insanity of the beneficiary at the time he killed
the insured
2. The insured’s death was unintentionally caused
(e.g., thru accident);
3. The beneficiary acted in self-defense;
Q: Juan de la Cruz was issued Policy No. 8888 of
the Midland Life Insurance Co. on a whole life
plan for P20,000 on August 19, 1989. Juan is
married to Cynthia with whom he has three
legitimate children. He, however, designated
Purita, his common-law wife, as the revocable
beneficiary. Juan referred to Purita in his
application and policy as the legal wife. Three
(3) years later, Juan died. Purita filed her claim
for the proceeds of the policy as the designated
beneficiary therein. The widow, Cynthia, also
filed a claim as the legal wife. To whom should
the proceeds of the insurance policy be
awarded? (1998 Bar)
95
A: The estate is entitled to claim for the proceeds of
the insurance policy. As a general rule, the insured
may designate anyone he wishes to be his/her
beneficiary. However, Art. 2012 of the Civil Code,
which applies suppletorily to the Insurance Code,
provides that any person who is forbidden from
receiving any donation under Art. 739 cannot be
named beneficiary of a life insurance policy by the
person who cannot make any donation to him,
according to said article. Art. 739 specifically bars
the donations as between persons who were guilty
of adultery or concubinage. Since Purita is a
common-law wife of Juan, she falls squarely in to
this category therefore she is disqualified to receive
insurance proceeds and when this happens, the
estate of the deceased is the one entitled to the
proceeds (Insular Life Assurance Company, Ltd. vs.
Capronia Ebrado, supra).
Q: Loreto designated Eva, his common-law wife,
and illegitimate children as beneficiaries in his
life insurance policies. Loreto was killed and
Eva was the prime suspect in his death. The
legitimate wife and children of Loreto asked for
the insurance proceeds contending that
illegitimate family is disqualified from being
beneficiaries and that the insurance benefits
must redound to the benefit of the estate of
Loreto. Will the claim of the legitimate family
prosper?
A: NO. 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.
While the share of Eva must be forfeited, the
designation of the illegitimate children as
beneficiaries remains valid. There is no proscription
in naming illegitimate children as beneficiaries. It is
only in cases where the insured has not designated
beneficiary or when the designated beneficiary is
disqualified by law to receive the proceeds, that the
policy proceeds shall redound to the benefit of the
estate of the insured. Thus, the proceeds of the
policy must be awarded to the illegitimate children,
to the exclusion of the legitimate family (Heirs of
Loreto Maramag vs. Maramag, G.R. No. 181132, June
5, 2009).
IN PROPERTY
Every interest in property, whether real or
personal, or any relation thereto, or liability in
respect thereof, of such nature that contemplated
peril might directly damnify the insured, is
insurable interest (IC, Sec. 13).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
Insurable interest in property may consist of the
following (1991 Bar): (ExInEx)
1. An existing interest – The existing interest in the
property may be legal or equitable title.
Examples of insurable interest arising from
legal title:
a. Trustee, as in the case of the seller of
property not yet delivered;
b. Mortgagor of the property mortgaged; or
c. Lessor of the property leased (De Leon,
supra).
Examples of insurable interest arising from
equitable title:
a. Purchaser of property before delivery or
before he has performed the conditions of
the sale;
b. Mortgagee of property mortgaged; or
c. Mortgagor, after foreclosure but before the
expiration of the redemption period. (De
Leon, 2010).
2. An inchoate interest founded on an existing
interest.
Example: A stockholder has an inchoate interest
in the property of the corporation of which he is
a stockholder, which is founded on an existing
interest arising from his ownership of shares in
the corporation (De Leon, 2014).
3. An expectancy coupled with an existing interest
in that out of which the expectancy arises.
NOTE: Existence of insurable interest is a matter of
public policy. Hence, the principle of estoppel
cannot be invoked (Sundiang Sr. & Aquino, 2014).
Measure of insurable interest in property (2000
Bar)
Under Sec. 17, the measure of insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof. Insurable
interest in property does not necessarily imply a
property interest in, or lien upon, or possession of,
the subject matter of the insurance, and neither title
nor a beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8,
2006).
UNIVERSITY OF SANTO TOMAS
96
2019 GOLDEN NOTES
A common carrier or depository’s extent of
insurable interest in a thing held by him
A carrier or depositary 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, because
the loss of the thing by the carrier or depository may
cause liability against him to the extent of its value
(IC, Sec. 15).
Change of interest in any part of a thing insured
“Change of interest” contemplated by law is an
absolute transfer of the insured’s entire interest in
the property insured to one not previously
interested or insured (Perez, 2006).
GR: A change of interest in any part of a thing
insured unaccompanied by a corresponding change
in interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
same person (IC, Sec. 20; Sec.58).
XPNs: (PLADS-JOF)
1. When there is a prohibition against alienation
or change of interest without the consent of the
insurer in which case the policy is not merely
suspended but avoided (Sundiang & Aquino,
2014., citing Curtis vs. Girard Fire and Marine
Ins., 11 SE 3, 190 Ga. 954).
2. In life, accident, and health insurance. (IC, Sec.
20)
3. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss
does NOT affect the right of the insured to
indemnity for loss (IC, Sec. 21).
NOTE: After the occurrence of the peril insured
against, the insured acquired a vested right over
the proceeds of the policy.
4. A change of interest in one or more distinct
things, separately insured by one policy does
NOT avoid the insurance as to the others (IC,
Sec. 22).
5. A change of interest by will or succession, on
the death of the insured, does NOT avoid an
insurance; and his interest in the insurance
passes to the person taking his interest in the
thing insured (IC, Sec. 23).
6. A transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to the others does NOT avoid an
insurance even though it has been agreed that
the insurance shall cease upon an alienation of
the thing insured (IC, Sec. 24).
7. When the policy is so framed that it will inure to
the benefit of whomsoever, during the
Mercantile Law
continuance of the risk, may become the owner
of the interest insured (IC, Sec. 57).
DOUBLE INSURANCE AND OVER INSURANCE
Double insurance
Double insurance exists where the same person is
insured by several insurers separately, in respect to
the same subject and interest (IC, Sec. 95).
Requisites of double insurance (STRIP)
1. Subject matter is the same
2. Two or more insurers insuring separately
3. Risk or peril insured against is the same
4. Interest insured is the same
5. Person insured is the same
There is no double insurance even though two
policies were both issued over the same subject
matter and both covered the same peril insured
against if the two policies were issued to two
different entities (Malayan Insurance Co. vs.
Philippine First Insurance Co., G.R. No. 184300, July
11, 2012).
Double insurance is not prohibited by law
It is not contrary to law and hence, in case of double
insurance, the insurers may still be made liable up
to the extent of the value of the thing insured but not
to exceed the amount of the policies issued.
A provision in the policy that prohibits double
insurance is valid. However, in the absence of such
prohibition, double insurance is allowed (Perez,
2006).
Nature of the liability of the several insurers in
double insurance (2005 Bar)
In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he
is liable under his contract. This is known as the
“principle of contribution” or “contribution clause”
[IC, Sec. 96(e)].
Over insurance
There is over insurance whenever the insured
obtains a policy in an amount exceeding the value of
his insurable interest (Perez, 2006).
Double Insurance vs. Over Insurance
DOUBLE INSURANCE OVER INSURANCE
97
There may be no over
insurance as when the When the amount of
sum total of the the insurance is
amounts of the policies beyond the value of the
issued does not exceed insured’s insurable
the insurable interest interest.
of the insured.
There may be only one
insurer, with whom the
There are two or more
insured takes
insurers insuring the
insurance beyond the
same subject matter.
value of his insurable
interest.
Rules when the insured in a policy other than
life is over insured by double insurance
1. The insured, unless the policy otherwise
provides, may claim payment from the insurers
in such order as he may select, up to the amount
which the insurers are severally liable under
their respective contracts.
2. Where the policy under which the insured
claims is a valued policy, any sum received by
him under any other policy shall be deducted
from the value of the policy without regard to
the actual value of the subject matter insured.
3. Where the policy under which the insured
claims is an unvalued policy, any sum received
by him under any policy shall be deducted
against the full insurable value, for any sum
received by him under any policy.
4. Where the insured receives any sum in excess
of the valuation in the case of valued policies, or
of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
insurers, according to their right of
contribution among themselves.
5. Each insurer and the other insurers, to
contribute ratably to the loss in proportion to
the amount for which he is liable under his
contract (IC, Sec. 96).
Additional or other insurance clause (2008 Bar)
A clause in the policy that provides that the policy
shall be void if the insured procures additional
insurance without the consent of the insurer
(Pioneer Insurance and Surety Corp vs. Yap, G.R. No.
L-36232, December 19, 1974).
The insurer may insert an “other insurance clause”
to prevent the danger that the insured will over
insure his property and thus avert the possibility of
perpetration of fraud. It is lawful and specifically
allowed under Sec. 75 of the Insurance Code which
provides that “a policy may declare that a violation
or a specified provision thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid it.”
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
Waiver of violation
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a waiver
of annulment of the contract (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
G.R. No. L-33131, December 13, 1930).
Q: Wyeth Philippines, Inc. (Wyeth) procured a
marine policy from Philippines First Insurance
Co., Inc. (PFIC) to secure its interest over its own
products while the same were being
transported or shipped in the Philippines.
Thereafter, Wyeth executed its annual contract
of carriage with Reputable Forwarder Services,
Inc. (Reputable). Under the contract, Reputable
undertook to answer for all risks with respect to
the goods and shall be liable to Wyeth, for the
loss, destruction, or damage of the
goods/products due to any and all causes
whatsoever, including theft, robbery, flood,
storm, earthquakes, lightning, and other force
majeure while the goods/products are in transit
and until actual delivery to the customers,
salesmen, and dealers. The contract also
required Reputable to secure an insurance
policy on Wyeth’s goods. Thus, Reputable signed
a Special Risk Insurance Policy (SR Policy) with
Malayan Insurance Co., Inc., (Malayan) for the
amount of P1,000,000.00. Is there is double
insurance (as prohibited in Section 5 of the SR
policy between Malayan and Reputable) so as to
preclude PFIC from claiming indemnity from
Malayan?
A: NO. The interest of Wyeth over the property
subject matter of both insurance contracts is
different and distinct from that of Reputable’s. The
policy issued by PFIC was in consideration of the
legal and/or equitable interest of Wyeth over its
own goods. On the other hand, what was issued by
Malayan to Reputable was over the latter’s
insurable interest over the safety of the goods,
which may become the basis of the latter’s liability
in case of loss or damage to the property and falls
within the contemplation of Section 15 of the IC.
Therefore, even though the two concerned
insurance policies were issued over the same goods
and cover the same risk, there arises no double
insurance since they were issued to two different
persons/entities having distinct insurable interests.
Necessarily, over insurance by double insurance
cannot likewise exist (Malayan Insurance Co., Inc., v.
Philippine First Insurance Co., Inc. and Reputable
Forwarder Services, Inc., G.R. No. 184300, July 11,
2012).
UNIVERSITY OF SANTO TOMAS
98
2019 GOLDEN NOTES
Absence of notice of existence of other insurance
constitutes fraud
When the insurance policy specifically requires that
notice should be given by the insured of the
existence of other insurance policies upon the same
property, the total absence of such notice nullifies
the policy. Such failure to give notice of the
existence of other insurance on the same property
when required to do so constitutes deception and it
could be inferred that had the insurer known that
there were many other insurance policies on the
same property, it could have hesitated or plainly
desisted from entering into such contract (Perez,
2006).
No policy of insurance shall be cancelled except
upon notice thereof to the insured
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
the sum of P1 Million for 1 year. The policy was
issued with the premium fixed at P60,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 Bar)
A: YES. As a general rule, no policy is binding unless
the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
allowing the insured to pay the premium in
installments and partial payment has been made at
the time of loss. In the case at hand Francis already
paid two installments at the time of the loss and as
such may recover on the policy (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6,
1992). Furthermore, the contention of the insurer
that the failure to pay premium resulted in the
cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
notice thereof to the insured (IC, Sec. 64).
Cancellation of policy of insurance by reason of
over insurance
Sec. 64 of the IC provides that upon discovery of
other insurance coverage that makes the total
insurance in excess of the value of the property
insured, the insurer may cancel such policy of
insurance; provided there is prior notice and such
Mercantile Law
circumstance occurred after the effective date of the
policy.
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY
Instances where more than one insurable
interest may exist in the same property
1. Trust - both trust or and trustee have insurable
interest over the property in trust.
2. Corporation - both the corporation and its
stockholders have insurable interest over the
assets.
3. Partnership - both the firm and partners have
insurable interest over its assets.
4. Assignment - both the assignor and assignee
have insurable interest over the property
assigned.
5. Lease - the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
6. Mortgage - both the mortgagor and mortgagee
have insurable interest over the property
mortgaged.
Insurable interest of mortgagor and mortgagee
in case of a mortgaged property are NOT the
same (1999, 2010 Bar)
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure
to the benefit of the other. The same is not open to
objection that there is double insurance (RCBC vs.
CA, 289 G.R. Nos. 128833-34, 128866, April 20, 1998;
IC, Sec. 8).
Extent of insurable interest of mortgagor and
mortgagee (1999 Bar)
1. Mortgagor – The mortgagor of property, as
owner, has an insurable interest to the
extent of its value even though the
mortgage debt equals such value.
2. Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged
property to the extent of the debt secured;
such interest continues until the mortgage
debt is extinguished (Sundiang Sr. & Aquino,
2014).
NOTE: In case of an insurance taken by the
mortgagee alone and for his benefit, the mortgagee,
after recovery from the insurer, 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 (De Leon, 2010).
99
Q: To secure a loan of P10 million, Mario
mortgaged his building to Armando. In
accordance with the loan arrangements, Mario
had the building insured with First Insurance
Com for P10 million, designating Armando as
the beneficiary. Armando also took an
insurance on the building upon his own interest
with Second Insurance Company for P5 million.
The building was totally destroyed by fire, a
peril insured against under both insurance
policies. It was subsequently determined that
the fire had been intentionally started by Mario
and that in violation of the loan agreement, he
had been storing inflammable materials in the
building.
a. How much, if any, can Armando recover
from either or both insurance companies?
b. What happens to the P10 million debt of
Mario to Armando? Explain. (2010 Bar)
A:
a. Armando can receive P5 million from Second
Insurance Company. As mortgagee, he had an
insurable interest in the building. Armando
cannot collect anything from First Insurance
Co., since the latter is not liable for the loss of
the building. First, it was due to a willful act of
Mario, who committed arson. Second, fire
insurance policies contain a warranty that the
insured will not store hazardous materials
within the insured premises. Mario breached
this warranty when he stored inflammable
materials in the building. These two factors
exonerate First Insurance Co. from liability to
Armando as mortgagee even though it was
Mario who committed them (IC, Sec. 8; Sec. 87).
b. Since Armando would have collected P5 million
from Second Insurance Company, this amount
should be considered as partial payment of the
loan. Armando can only collect the balance of P5
million. Second Insurance Co. can recover from
Mario the amount of P5 million it paid, because
it became subrogated to the rights of Armando.
Standard or union mortgage clause
It is a clause that states that the acts of the
mortgagor do not affect the mortgagee. The purpose
of the clause is to make a separate and distinct
contract of insurance on the interest of the
mortgagee (De Leon, 2010).
Open or loss-payable mortgage clause
It is a clause which provides for the payment of loss,
if any, to the mortgagee as his interest may appear
and under it, the acts of the mortgagor affect the
mortgagee (De Leon, 2010).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
In a policy obtained by the mortgagor with loss
payable clause in favor of the mortgagee 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. This kind of policy covers only such
interest as the mortgagee has at the issuance of the
policy (Sundiang Sr. & Aquino, 2014, Geagonia v. CA,
supra).
The mortgagee may be made a beneficial payee
through any of the following:
1. He may become the assignee of the policy with
the consent of the insurer;
2. He may be the pledgee without such consent of
the insurer;
3. A rider making the policy payable to the
mortgagee “as his interest may appear” may be
attached; or
4. A “standard mortgage clause” containing a
collateral independent contract between the
mortgagee and the insurer may be attached.
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 (Ibid.).
Effects if the insurance is procured by
mortgagor for benefit of mortgagee, or policy
assigned to mortgagee
1. The contract is deemed to be upon the interest
of the mortgagor; hence he does not cease to be
party to the contract.
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands
of the mortgagee.
3. Any act which under the contract of insurance
is to be performed by the mortgagor may be
performed by the mortgagee with the same
effect.
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time
of loss and.
5. The debt is extinguished upon recovery by the
mortgagee to the extent of his credit (Sundiang
Sr. & Aquino, 2014, citing IC, Sec. 8).
NOTE: The rule on subrogation by the insurer to the
right of the mortgagee does not apply in this case.
Assignment of policy to mortgagee is not a
payment
UNIVERSITY OF SANTO TOMAS
100
2019 GOLDEN NOTES
The assignment is merely to afford the mortgagee a
greater security for the settlement of the
mortgagor’s obligation and should not be construed
as payment in just the same way that delivery of
negotiable instruments does not constitute
payment until the proceeds are realized or collected
(Perez, 2006).
Note: The exception of this rule is the “Mortgage
Redemption Insurance”
Effects of “mortgage redemption” insurance
procured by the mortgagor
A “mortgage redemption insurance” is simply a kind
of life insurance procured by the mortgagor, with
the mortgagee as beneficiary, up to the extent of the
mortgage indebtedness. Its rationale is to give
protection to both the mortgagee and the
mortgagor. In case the mortgagor-insured dies, the
proceeds of such insurance will be applied to the
payment of the mortgage debt to the mortgagee,
thereby relieving the heirs of the mortgagor of the
burden of paying the debt (Great Pacific Assur. Corp.
v. CA, et. al., G.R. No. 113899, October 13, 1999).
PERFECTION OF THE
CONTRACT OF INSURANCE
Policy of insurance
It is the written instrument in which the contract of
insurance is set forth (IC, Sec. 49). It is the written
document embodying the terms and stipulations of
the contract of insurance between the insured and
insurer.
The policy is not necessary for the perfection of the
contract (Sundiang Sr. & Aquino, 2014).
Form of an insurance contract
1. The policy shall be in printed form which may
contain blank spaces to be filled in.
2. Any rider, clause, warranty or endorsement
purporting to be part of the contract of
insurance and which is pasted or attached to
said policy is not binding on the insured, unless
the descriptive title or name of the rider, clause,
warranty or endorsement is also mentioned
and written on the blank spaces provided in the
policy.
3. Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued
after the original policy shall be countersigned
by the insured or owner.
Mercantile Law
NOTE: Notwithstanding the foregoing, the policy
may be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to such
rules and regulations as may be prescribed by the
Commissioner (IC, Sec. 50).
Types of policy of insurance (OVaR)
1. Open – one in which the value of the thing
insured is not agreed upon, and the amount of
the insurance merely represents the insurer’s
maximum liability. The value of such thing
insured shall be ascertained at the time of the
loss (IC, Sec. 60).
2. Valued – is one which expresses on its face an
agreement that the thing insured shall be
valued at a specific sum (IC, Sec. 61).
3. Running – one which contemplates successive
insurances, and which provides that the object
of the policy may be from time to time defined,
especially as to the subjects of insurance, by
additional statements or indorsements (IC, Sec.
62).
Basic contents of a policy (P3AIR2)
1. Parties
2. Period during which the insurance is to
continue
3. Property or life insured
4. Amount of insurance, except in open or running
policies
5. Interest of the insured in the property if he is
not the absolute owner
6. Risk insured against
7. Rate of premium (IC, Sec. 51)
Rider
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
restricting its benefits or excluding certain
conditions from the coverage (Black’s Law
Dictionary).
Riders are not binding on the insured unless the
descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy.
It should be countersigned by the insured or owner
unless he was the one who applied for the same (IC,
Sec. 50).
Cover notes
Persons who wish to be insured may get protection
before the perfection of the insurance contract by
securing a cover note. The cover note issued by the
insurer shall be deemed an insurance contract as
101
contemplated under Section 1(1) of the Insurance
Code subject to the following rules:
1. The cover note shall be issued or renewed only
upon prior approval of the Insurance
Commission;
2. The cover note shall be valid and binding for not
more than sixty (60) days from the date of its
issuance;
3. No separate premium (separate from the policy
or main contract) is required for the cover note;
4. The cover note may be canceled by either party
upon prior notice to the other of at least seven
(7) days;
5. The policy should be issued within sixty (60)
days after the issuance of the cover note;
6. The sixty (60)-day period may be extended
upon written approval of the Insurance
Commission; and
7. The written approval of the Insurance
Commission is dispensed with upon the
certification of the president, vice-president or
general manager of the insurer that the risk
involved, the values of such risks and premium
therefor, have not as yet been determined or
established and the extension or renewal is not
contrary to or is not for the purpose of violating
the Insurance Code or any rule
OFFER AND ACCEPTANCE/CONSENSUAL
Perfection of an insurance contract
The contract of insurance is perfected when the
assent or consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. Mere
offer or proposal is not contemplated (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, November 29,
1920).
Cognition Theory
Mere submission of the application without the
corresponding approval of the policy does not result
in the perfection of the contract of insurance.
Insurance contracts through correspondence follow
the “cognition theory” wherein an acceptance made
by letter shall not bind the person making the offer
except from the time it came to his knowledge
(Enriquez v. Sun Life Assurance Co., GR No. L-15774,
Nov. 29, 1920).
Q: On June 1, 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21,
2011, the insurance company accepted the
application and mailed, on the same day, its
acceptance plus the cover note. It reached X's
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
residence on August 11. On August 4, 2011, X
figured in a car accident. He died a day later. May
X's heirs recover on the insurance policy? (2011
Bar)
A: NO, since X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the “cognition theory”. Where the
applicant died before he received notice of the
acceptance of his application for the insurance,
there is no perfected contract (Perez v. Court of
Appeals, G.R. No. 112329, January 28, 2000).
Q: Jason is the proud owner of a newly-built
house worth PS million. As a protection against
any possible loss or damage to his house, Jason
applied for a fire insurance policy thereon with
Shure Insurance Corporation (Shure) on
October 11, 2016 and paid the premium in cash.
It took the company a week to approve Jason's
application. On October 18, 2016, Shure mailed
the approved policy to Jason which the latter
received five (5) days later. However, Jason's
house had been razed by fire which transpired a
day before his receipt of the approved policy.
Jason filed a written claim with Shure under the
insurance policy. Shure prays for the denial of
the claim on the ground that the theory of
cognition applies to contracts of insurance.
Decide Jason's claim with reasons. (2016 Bar)
A: Jason’s claim should be denied. What governs
insurance contract is the cognition theory whereby
the insurance contract is perfected only from the
time the applicant came to know of the acceptance
of the offer by the insurer. In this case, the loss
occurred a day prior to Jason’s knowledge of the
acceptance by Shure of Janson’s application. There
being no perfected insurance contact, Jason is not
entitled to recover from Shure.
Offer in property and liability insurance
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter-
offer. The offer is usually accepted by an insurance
agent on behalf of the insurer (De Leon, 2010).
Offer in life and health insurance
It depends upon whether the insured pays the
premium at the time he applies for insurance.
1. If he does not pay the premium, his application is
considered an invitation to the insurer to make
an offer, which he must then accept before the
contract goes into effect.
UNIVERSITY OF SANTO TOMAS
102
2019 GOLDEN NOTES
2. If he pays the premium with his application, his
application will be considered an offer (De Leon,
2010).
DELAY IN ISSUANCE OF POLICY
Delivery of policy
Delivery is not necessary in the formation of the
contract of insurance since the contract of insurance
is consensual (Sundiang Sr. & Aquino, 2014).
The mere delivery of an insurance policy to
someone does not give rise to the formation of a
contract in the absence of proof that he had agreed
to be insured.
The contract may be completed prior to delivery of
the policy or even without the delivery of the policy
depending upon the intention of the parties. The
policy may contain a provision that states that the
insurance is not effective until the delivery of the
policy. (De Leon, 2010)
Two types of delivery
1. Actual – delivery to the person of the insured.
2. Constructive
a. By mail –If policy was mailed already and
premium was paid and nothing is left to be
done by the insured, the policy is
considered constructively delivered if
insured died before receiving the policy.
b. By agent –If delivered to the agent of the
insurer, whose duty is ministerial, or
delivered to the agent of the insured, the
policy is considered constructively
delivered (De Leon, 2010).
PREMIUM PAYMENT
Premium
It is an agreed price for assuming and carrying the
risk – that is, the consideration paid to an insurer for
undertaking to indemnify the insured against a
specified peril (De Leon, 2010).
The burden is on an insured to keep a policy in force
by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured
from allowing a policy to elapse through a failure to
make premium payments. The continuance of the
insurer's obligation is conditional upon the
payment of premiums, so that no recovery can be
had upon a lapsed policy, the contractual relation
between the parties having ceased (Philippine
Phoenix Surety & Insurance Company vs.Woodworks,
Inc. G.R. No. L-25317 August 6, 1979).
Mercantile Law
Premium vs. Assessment
PREMIUM ASSESSMENT
Levied and paid to
Collected to meet
meet anticipated
actual losses
losses
Assessment when
properly levied is a
Premium is not a debt
debt, unless otherwise
expressly agreed
Acceptance of premium
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace
period, merely assures continued effectivity of the
insurance policy in accordance with its terms (Stoke
v. Malayan Insurance Co., Inc., G.R. No. L-34768,
February 28, 1984).
Payment of the premium to agent of the insurance
company is binding on it (Malayan Insurance v.
Arnaldo G.R. No. L-67835, October 12, 1987 and
Areola v. CA G.R. No. 95641, September 22, 1994).
NOTE: An insurance company which delivers a
policy to an insurance broker, is deemed to have
authorized the latter to receive the payment of the
premium (IC, Sec. 306).
“Cash and carry” rule (2003 Bar)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and
until the premium thereof has been paid. Any
agreement to the contrary is void.
XPN: (ICE GAP)
A policy is valid and binding even when there is non-
payment of premium:
1. When there is an agreement allowing the
insured to pay the premium in installments and
partial payment has been made at the time of
loss (Makati Tuscany Condominium Corp. v. CA,
G.R. No. 95546, Nov. 6, 1992).
2. When there is an agreement to grant the
insured credit extension for the payment of the
premium and loss occurs before the expiration
of the credit term (2007 Bar; NCC, Art. 1306;
UCPB General Insurance v. Masagana Telemart,
G.R. No. 137172, Apr. 4, 2001).
3. When estoppel bars the insurer to invoke non-
recovery on the policy.
4. In case of life or industrial life policy whenever
the grace period provision applies, or whenever
under the broker and agency agreements with
103
duly licensed intermediaries, a ninety (90)-day
credit extension is given. No credit extension to
a duly licensed intermediary should exceed
ninety (90) days from date of issuance of the
policy (IC, Sec. 77).
5. When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding
until the premium is actually paid. This is
without prejudice however to right of insurer to
collect corresponding premium (IC, Sec. 77).
6. When the public interest so requires, as
determined by the Insurance Commissioner
Example: In compulsory motor vehicle
insurance, if the policy was issued without
payment of premium by the vehicle owner, the
insurer will still be held liable. To rule
otherwise would prejudice the 3rd party victim.
1. Payment in installments
Q: American Home Assurance Co. (AHAC) ,
issued in favor of Makati Tuscany
Condominium Corporation insurance policies
for 2 years. The premiums were paid by Tuscany
on installments. The policy was again renewed,
however, Tuscany thereafter refused to pay the
balance of the premium. AHAC filed an action to
recover the unpaid balance. Tuscany contended
that payment by installment of the premiums
due on an insurance policy invalidates the
contract of insurance and no risk attached to the
policy. The policy was never binding and valid,
and no risk attached to the policy. Is the
contention of Tuscany valid?
A: NO. The subject policies are valid even if the
premiums were paid on installments. The records
clearly show that Tuscany and AHAC intended the
subject insurance policies to be binding and
effective notwithstanding the staggered payment of
the premiums. For 3 years, the insurer accepted all
the installment payments. Such acceptance of
payments speaks loudly of the insurer’s intention to
honor the policies it issued to Tuscany.
While the import of Section 77 is that
prepayment of premiums is strictly required as
a condition to the validity of the contract, Section
78 of the Insurance Code in effect allows waiver
by the insurer of the condition prepayment by
making an acknowledgment in the insurance
policy of receipt of premium as conclusive
evidence of payment so far as to make the policy
binding despite the fact that premium is actually
unpaid (Makati Tuscany Condominium Corp. vs. CA
G.R. No. 95546, November 6, 1992).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
Q:The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
the sum of PI Million for 1 year. The policy was
issued with the premium fixed at 160,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 Bar)
A: YES, when insured and insurer have agreed to the
payment of premium by installments and partial
payment has been made at the time of loss, then the
insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
payment had not yet elapsed. The owner may
recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
2. Credit Extension
Under Sec. 77 as amended by RA 10607, a ninety
(90)-day credit extension may be given whenever
credit extension is given under the broker and
agency agreements with duly licensed
intermediaries. The requisites are as follows:
1. The credit extension must be provided for
under the broker and agency agreements; and
2. The credit extension to a duly licensed
intermediary should not exceed ninety (90)
days from date of issuance of the policy
(Sundiang Sr. & Aquino, 2014).
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a long-
standing insurance relationship with each
other; SPMC secures the comprehensive fire
insurance on its plant and facilities from SIC.
The standing business practice between them
has been to allow SPMC a credit period of 90
days from the renewal of the policy within which
to pay the premium.
Soon after the new policy was issued and before
premium payments could be made, a fire gutted
the covered plant and facilities to the ground.
The day after the fire, SPMC issued a manager's
check to SIC for the fire insurance premium, for
which it was issued a receipt; a week later SPMC
issued its notice of loss. SIC responded by
issuing its own manager's check for the amount
UNIVERSITY OF SANTO TOMAS
104
2019 GOLDEN NOTES
of the premiums SPMC had paid, and denied
SPMC's claim on the ground that under the "cash
and carry" principle governing fire insurance,
no coverage existed at the time the fire occurred
because the insurance premium had not been
paid. Is SPMC entitled to recover for the loss
from SIC? (2003, 2013 Bar)
A: YES. St. Peter Manufacturing Company is entitled
to recover for the loss from Stable Insurance
Company. Stable Insurance Company granted a
credit term to pay the premiums. This is not against
the law, because the standing business practice of
allowing St. Peter Manufacturing Company to pay
the premiums after 60 or 90 days, was relied upon
in good faith by SPMC. Stable Insurance Company is
in estoppel (UCPB General Insurance Company, Inc.
v. Masagana Telemart, Inc., G.R. No. 137172, April 4,
2001).
3. Estoppel
Q: Maxilite and Marques entered into a trust
receipt transaction with FEBTC for the shipment
of various high-technology equipment. FEBIBI,
upon the advice of FEBTC, facilitated the
procurement and processing from Makati
Insurance Company of four separate and
independent fire insurance policies over the
merchandise. Maxilite agreed that FEBTC would
debit Maxilite’s account for the premium
payments. However, said premiums were not
paid. A fire gutted Maxilite’s office and
warehouse. As a result, Maxilite suffered losses
amounting to at least P2.1 million, which
Maxilite claimed against the fire insurance
policy with Makati Insurance Company. Makati
Insurance Company denied the fire loss claim on
the ground of non-payment of premium. FEBTC
and FEBIBI disclaimed any responsibility for the
denial of the claim. Will the claim of Maxilite
prosper?
A: YES. The claim of Maxilite will prosper. FEBTC is
estopped from claiming that the insurance premium
has been unpaid. That FEBTC induced Maxilite to
believe that the insurance premium has in fact been
debited from Maxilite’s account is grounded on the
following facts: (1) FEBTC represented and
committed to handle Maxilite’s financing and capital
requirements, including the insurance of the trust
receipted merchandise; (2)the premiums of prior
insurance policies had been paid through automatic
debit arrangement; (3) FEBIBI sent FEBTC, not
Maxilite, to debit Maxilite’s account; (4) there was
no written demand from FEBTC or Makati
Insurance Company for Maxilite to pay the
insurance premium; (5) the subject insurance policy
remained uncancelled despite the alleged non-
Mercantile Law
payment of the premium, making it appear that the
insurance policy remained in force and binding.
Thus, Maxilite can still claim from FEBTC (Jose
Marques and Maxilite Technologies, Inc. vs FEBTC, GR
No. 171379, January 10, 2011).
4. Grace Period
In case of individual life or endowment insurance
and group life insurance, the policyholder is entitled
to a grace period of either 30 days or 1 month within
which the payment of any premium after the first
may be made [IC, Secs. 233 (a) and 234 (a)].
In case of industrial life insurance, the grace period
is 4 weeks, where premiums are payable monthly,
either 30 days or 1 month [IC, Secs. 236 (a)].
5. Acknowledgment of receipt of premium
Acknowledgment of receipt of premium is
conclusive evidence of its payment, in so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
the premium is actually paid (IC, Sec. 79).
When the policy contains such written
acknowledgment, it is presumed that the insurer
has waived the condition of prepayment. It hereby
creates a legal fiction of payment. The presumption
is however, extended only to the question of the
binding effect of the policy.
As far as the payment of the premium itself is
concerned, the acknowledgment is only a prima
facie evidence of the fact of such payment. The
insurer may still dispute its acknowledgment but
only for the purpose of recovering the premium due
and unpaid. Whether payment was indeed made is
a question of fact.
Payment through salary deduction
Employees of the Republic of the Philippines,
including its political subdivisions and
instrumentalities, and government-owned or
controlled corporations, may pay their insurance
premiums and loan obligations through salary
deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
government employee is authorized,
notwithstanding the provisions of any existing law,
rules and regulations to the contrary, to make
deductions from the salary, wage or income of the
latter pursuant to the agreement between the
insurer and the government employee and to remit
such deductions to the insurer concerned, and
105
collect such reasonable fee for its services (IC, Sec.
78).
Payment of premium by post-dated check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said
note or check has been converted into cash. This is
consistent with Article 1249 of the New Civil Code.
Note: Payment by means of a check or note,
accepted by the insurer, bearing a date prior to the
loss, assuming availability of the funds thereof,
would be sufficient even if it remains unencashed at
the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor
(2007 Bar).
NOTE: This is not applicable in case of Post dated
checks, The payment of a promissory note or
postdated check at a stated maturity subsequent to
the loss, is insufficient to put the insurance into
effect (Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250).
Q: If the applicant failed to pay premium and
instead executed a promissory note in favor of
the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in
case of loss?
A: YES, the insurer is liable because there has been
a perfected insurance contract. The insurer
accepted the promise of the applicant to pay the
insurance premium within thirty 30 days from the
effective date of policy. By so doing, it has implicitly
agreed to modify the tenor of the insurance policy
and in effect, waived any provision therein that it
would only pay for the loss or damage in case the
same occurs after the payment of the premium.
Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R.
No. L-22375, July 18, 1975).
Q: On September 25, 2013, Danny Marcial
(Danny) procured an insurance on his life with a
face value of P5 million from RN Insurance
Company (RN), with his wife Tina Marcial (Tina)
as sole beneficiary. On the same day, Danny
issued an undated check to RN for the full
amount of the premium. On October 1, 2013, RN
issued the policy covering Danny’s life
insurance. On October 5, 2013, Danny met a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
tragic accident and died. Tina claimed the
insurance benefit, but RN was quick to deny the
claim because at the time of Danny’s death, the
check was not yet encashed and therefore the
premium remained unpaid.
a. Is RN correct?
b. Will your answer be the same if the check is
dated October 15, 2013? (2014 Bar)
A:
a. NO. RN Insurance is not correct. The facts of the
case show that Danny procured insurance on
his life on September 25, 2013, with his wife
Tina as beneficiary, and on that same day, he
issued an undated check to RN for the full
amount of the premium. Since the undated
check was issued to RN on September 25, 2013,
it will be considered dated as of the same day.
RN Insurance denied the claim of Tina because
at the time of Danny’s death, the check was not
yet encashed, therefore, the premium remained
unpaid. The payment by means of a check or
note, accepted by the insurer, bearing a date
prior to the loss, assuming the availability of the
funds thereof, would be sufficient even if it
remains unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the mercantile
instrument.
b. The answer would not be the same if the check
were dated October 15, 2013. The payment of
a promissory note or postdated check at a
stated maturity subsequent to the loss, is
insufficient to put the insurance into effect
(Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250).
If it were RN Insurance who dated the check
October 15, 2013, then my answer would be the
same as my answer to the first question.
Q: Alfredo took out a policy to insure his
commercial building from fire. The broker for
the insurance company agreed to give a 15-day
credit within which to pay the insurance
premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable
on May 30, 2006. On May 28, 2006, a fire broke
out and destroyed the building owned by
Alfredo. May Alfredo recover on the insurance
policy? (2007 Bar)
A: YES. Alfredo may recover on the policy. It is valid
to stipulate that the insured will be granted credit
term for payment of premium. Payment by means of
a check which was accepted by the insurer, bearing
UNIVERSITY OF SANTO TOMAS
106
2019 GOLDEN NOTES
a date prior to the loss, would be sufficient. The
subsequent effects of encashment retroact to the
date of the check (UCPB General Insurance Co., Inc. v.
Masagana Telamart, Inc., 356 SCRA 307 [2001]).
Non-payment of premiums
Non-payment of the premium will not entitle the
insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding
the acceptance of the application or the issuance of
the policy, unless waived. But nonpayment of the
balance of the premium due does not produce the
cancellation of the contract.
With respect to subsequent premiums, non-payment
does not affect the validity of the contracts unless,
by express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse (De
Leon, 2010).
Non-payment of premiums by reason of the
circumstances or conduct of the insurer
GR: Non-payment of premiums does not merely
suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the
essence of the contract (De Leon, 2010).
XPN: (IWW)
1. The insurer has become insolvent and has
suspended business, or has refused without
justification a valid tender of premiums
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, Oct.
29, 1952).
2. Failure to pay was due to the wrongful conduct
of the insurer.
3. The insurer has waived his right to demand
payment
Fortuitous events will not prevent forfeiture of the
policy when the premium remains unpaid. Hence,
non-payment of premium by reason of a fortuitous
event is not an excuse.
Non-payment of premiums occasioned by war
causes complete abrogation of the insurance. Hence,
war does not excuse non-payment (Constantino vs.
Asia Life Isurance Company 1950).
Mercantile Law
Instances when payment of premium becomes a
debt or obligation
1. In fire, casualty and marine insurance, the
premium payable becomes a debt as soon as the
risk attaches.
2. In life insurance, the premium becomes a debt
only when, in the case of the first premium, the
contract has become binding, and in the case of
subsequent premiums, when the insurer has
continued the insurance after maturity of the
premium, in consideration of the insured’s
express or implied promise to pay (De Leon,
2010).
Payments in addition to regular premium
An insurer may contract and accept payments, in
addition to regular premium, for the purpose of
paying future premiums on the policy or to increase
the benefits thereof (IC, Sec. 84).
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Devices used to prevent the forfeiture of a life
insurance after the payment of the first
premium (C-PAGER)
1. Cash surrender value – The amount the insurer
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it.
(Cyclopedia Law Dictionary, 3rd ed.). Note: the
policyholder is entitled to the CSV in the event of
default in a premium payment after three full
annual premiums shall have been paid.
2. Paid up Insurance – The insured is given a right,
upon default, after the payment of at least three
annual premiums to have the policy continued
in force from the date of default for the whole
period of the insurance without further
payment of premiums. It results to a reduction
of the original amount of insurance, but for the
same period originally stipulated (6 Couch 2d.,
355; 37 C.J.S. 364).
3. Automatic Loan Clause – A stipulation in the
policy providing that upon default in payment
of premium, the same shall be paid from the
loan value of the policy until that value is
consumed. In such a case, the policy is
continued in force as fully and effectively as
though the premiums had been paid by the
insured from funds derived from other sources
(6 Couch 2d., 383).
4. Grace period – After the payment of the first
premium, the insured is entitled to a grace
period of 30 days within which to pay the
succeeding premiums [IC, Sec. 233 (a)].
5. Extended insurance – It is where the insured is
given a right, upon default, after payment of at
107
least three full annual premiums [IC, Sec. 233
(f)] to have the policy continued in force from
the date of default for a time either stated or
equal to the amount as the net value of the
policy taken as a single premium, will purchase
(De Leon, 2010).
6. Reinstatement – Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at any time within 3 years from the
date of default in the payment of premium,
unless the cash surrender value has been paid,
or the extension period expired, upon
production of evidence of insurability
satisfactory to the company and the payment of
all overdue premiums and any indebtedness to
the company upon said policy [IC, Sec. 233 (j)].
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Purpose of the reinstatement provision
The purpose of the provision is to clarify the
requirements for restoring a policy to premium-
paying status after it has been permitted to lapse.
The law requires that the policy owner be
permitted to reinstate the policy, subject to the
violations specified, any time within three (3)
years from the date of default of premium
payment. A longer period, being more favorable to
the insured, may be used.
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the
insurer, which has the right to deny reinstatement
if it were not satisfied as to the insurability of the
insured, and if the latter did not pay all overdue
premiums and other indebtedness to the insurer
(McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-
3581, September 21, 1950).
Q: A life insurance policy lapsed. The insured
applied for reinstatement of the policy and paid
only a part of the overdue premiums.
Subsequently, the insured died. Was the insurer
liable?
A: The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
recovery of the face value of the policy (Andres vs.
Crown Life Ins. Co., 55 O.G. 3483).
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after
it lapsed. Eulogio paid the premiums due on the
first two months. However, he failed to pay
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
subsequent premiums. One month after the
policy lapsed, he filed an application for the
reinstatement of his policy. He deposited the
overdue premiums and signed a reinstatement
policy stating that the payment deposit only
and shall not bind the Company until this
application is finally approved. Hours later,
Eulogio died of electrocution. The insurance
company denied the claim of his beneficiaries
stating that the policy was never approved. Is
the contention of the insurance company valid?
A: YES. The stipulation in a life insurance policy
giving the insured the privilege to reinstate it upon
written application does not give the insured
absolute right to such reinstatement by the mere
filing of an application. The insurer has the right to
deny the reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not
pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured, the Insurance Company cannot be
compelled to entertain an application for
reinstatement of the policy because the conditions
precedent to reinstatement can no longer be
determined and satisfied (Violeta R. Lalican vs. The
Insular Life Assurance Company Limited, supra).
REFUND OF PREMIUMS
Instances when the insured entitled to recover
premiums already paid or a portion thereof
(2000 Bar)
1. Whole (EFIDe)
a. When no part of the thing insured has been
exposed to any of the perils insured against
(IC, Sec. 80).
b. When the contract is voidable because of
the fraud or misrepresentations of the
insurer of his agent (IC, Sec. 82).
c. When the insurance is voidable because of
the existence of facts of which the insured
was ignorant without his fault (IC, Sec. 82).
d. When the insurer never incurred any
liability under the policy because of the
default of the insured other than actual
fraud (IC, Sec. 82).
e. When rescission is granted due to insurer’s
breach of contract (IC, Sec. 74).
NOTE: When the contract is voidable, a person
insured is entitled to a return of the premium
when such contract is subsequently annulled
under the provisions of the New Civil Code.
A person insured is not entitled to a return of
premium if the policy is annulled, rescinded or if a
claim is denied by reason of fraud (IC, Sec. 82).
UNIVERSITY OF SANTO TOMAS
108
2019 GOLDEN NOTES
2. Pro rata:
a. When the insurance is for a definite period
and the insured surrenders his policy
before the termination thereof; except:
i. Policy not made for a definite period
of time;
ii. Short period rate is agreed upon; or
iii. In life insurance policy.
b. When there is over-insurance. The
premiums to be returned shall be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk (IC, Sec. 83).
i. In case of over-insurance by double
insurance, the insurer is not liable for
the total amount of the insurance
taken, his liability being limited to
the property insured. Hence, the
insurer is not entitled to that portion
of the premium corresponding to the
excess of the insurance over the
insurable interest of the insured.
(1990 Bar)
ii. In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by
which the aggregate sum insured in
all the policies exceeds the insurable
value of the thing insured (IC, Sec.
83).
Illustration:
Where there is a total over insurance of
P500,000.00 in an aggregate P2,000,000.00
policy (P1,500,000.00 is only the insurable
value), 25% (proportion of P500k to P2M)
of the premiums paid to the several
insurers should be returned.
When the insured is not entitled to return of
premiums paid (LI2FE)
1. In life insurance policies (IC, Sec. 80 [b])
2. If contract is illegal and the parties are in pari
delicto.
3. If the policy is annulled, rescinded or if a claim
is denied by reason of fraud (IC, Sec. 82)
4. If the peril insured against has existed, and the
insurer has been liable for any period, the peril
being entire and indivisible (IC, Sec. 81)
Q: Teodoro Cortez, applied for a 20-year
endowment policy with Great Pacific Insurance
Corporation (Great Pacific). His application,
with the requisite medical examination, was
Mercantile Law
accepted and approved by the Great Pacific and
in due course, an endowment policy was issued
in his name. Thereafter, Great Pacific advised
Cortez that the policy was not in force. To make
it enforceable and operative, Cortez was asked
to remit the balance to complete his initial
annual premium and to see Dr. Felipe V. Remollo
for another full medical examination at his own
expense. Because of this, Cortez informed that it
that he was cancelling the policy and he
demanded the return of his premium plus
damages. Great Pacific ignored his demand. Is
Cortez entitled to a refund of his premium?
A: YES. Great Pacific should have informed Cortez of
the deadline for paying the first premium before or
at least upon delivery of the policy to him, so he
could have complied with what was needful and
would not have been misled into believing that his
life and his family were protected by the policy,
when actually they were not. And, if the premium
paid by Cortez was unacceptable for being late, it
was the company's duty to return it. Since his policy
was in fact inoperative or ineffectual from the
beginning, the company was never at risk, hence, it
is not entitled to keep the premium (Great Pacific
Life Insurance Corp. v. CA, et al., G.R. No. L-57308,
April 23, 1990).
RESCISSION OF INSURANCE CONTRACTS
Instances wherein a contract of insurance may
be rescinded (1991, 1994, 1996 - 1998 Bar)
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
Instances wherein a contract of insurance may
be canceled by the insurer
(NCDP - Discovery of FraME WOR)
1. Nonpayment of premium
2. Conviction of a crime arising out of acts
increasing the hazard insured against
3. A determination by the Commissioner that the
continuation of the policy would violate or
would place the insurer in violation of the
Insurance Code
4. Physical changes in the property insured which
result in the property becoming uninsurable
5. Discovery of fraud or material
misrepresentation
6. Discovery of other insurance coverage that
makes the total insurance in excess of the value
of the property insured
109
7. Discovery of willful or omissions or reckless
acts increasing the hazard insured against (IC,
Sec. 64)
No policy of insurance other than life shall be
canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
shall be effective unless it is based on the
occurrence, after the effective date of the policy, of
one or more of the abovementioned instances (Sec.
64, Ibid).
Notice of cancellation of the contract
All notices of cancellation shall be in writing, mailed
or delivered to the named insured at the address
shown in the policy, or to his broker provided the
broker is authorized in writing by the policy owner
to receive the notice of cancellation on his behalf,
and shall state:
1. Which of the grounds set forth in Section 64 is
relied upon; and
2. That, upon written request of the named
insured, the insurer will furnish the facts on
which the cancellation is based (IC, Sec. 65).
CONCEALMENT
Concealment
Concealment is a neglect to communicate that which
a party knows and ought to communicate (IC, Sec.
26).
Under Section 27 of the Insurance Code, “a
concealment entitles the injured party to rescind a
contract of insurance.” Moreover, under Section 168
of the Insurance Code, the insurer is entitled to
rescind the insurance contract in case of an
alteration in the use or condition of the thing
insured (Malayan Insurance Company vs. PAP Co.,
G.R. No. 200784, August 7, 2013, in Divina 2014).
Requisites: (NeD-NoW-NomMa)
1. A party knows a fact which he neglects to
communicate or disclose to the other party;
2. Such party concealing is duty bound to disclose
such fact to the other;
3. Such party concealing makes no warranty as to
the fact concealed;
4. The other party has no means of ascertaining
the fact concealed; and
5. The fact must be material.
Test of materiality (2000 Bar)
It is determined not by the event, but solely by the
probable and reasonable influence of the facts upon
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
the party to whom the communication is due, in
forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries (IC,
Sec. 31).
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles
the injured party to rescind (IC, Sec. 27).
Facts not conveyed to the insurer raises
presumption that the failure of the insured to
communicate must have been intentional rather
than inadvertent. Goodfaith is not a defense because
of the Uberrimae Fidei Doctrine.
Concealment in marine insurance
Rules on concealment are stricter in marine
insurance since the insurer would have to depend
almost entirely on the matters communicated by the
insured. Thus, in addition to material facts, each
party must disclose all the information he possesses
which are material or the information of the belief
or expectation of a third person, in reference to a
material fact. But concealment in a marine
insurance in any of the following matters
enumerated under Section 112 Insurance Code does
not vitiate the entire contract, but merely
exonerates the insurer from a loss resulting from
the risk concealed.
Test in ascertaining the existence of
concealment
If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that
circumstance, though unasked.
Matters that need not be disclosed
GR: The parties are not bound to communicate
information of the following matters: (OWKERI)
1. Those which, in the exercise of ordinary care,
the other ought to know and of which, the
former has no reason to suppose him ignorant;
2. Those of which the other waives
communication;
3. Those which the other knows;
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty, and
which are not otherwise material;
5. Those which relate to a risk excepted from the
policy and which are not otherwise material;
and
6. The nature or amount of the interest of one
insured, except if he is not the owner of the
property insured (IC, Sec. 34).
UNIVERSITY OF SANTO TOMAS
110
2019 GOLDEN NOTES
XPN: In answer to inquiries of the other (IC, Sec. 30)
NOTE: Neither party is bound to communicate, even
upon inquiry, information of his own judgment,
because such would add nothing to the appraisal of
the application (IC, Sec. 35).
Matters that must be disclosed even in the
absence of inquiry
1. Those material to the contract
2. Those which the other has no means of
ascertaining
3. Those as to which the party with the duty to
communicate makes no warranty
NOTE: Matters relating to the health of the insured
are material and relevant to the approval of the
issuance of the life insurance policy as these
definitely affect the insurer’s action to the
application. It is well-settled that the insured need
not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
inquiries (Sunlife Assurance Co. of Canada v. CA, G.R.
No. 105135, June 22, 1995).
Information as to the nature of interest need not be
disclosed except in property insurance, if the
insured is not the owner. If somebody is insuring
properties of which he is not the owner, he must
disclose why he has insurable interest that would
entitle him to ensure it, and the extent thereof [IC,
Secs. 34 and 51 (e)].
Q: X insured his life for P20 million. X, plays golf
and regularly exercises everyday, hence is
considered in good health. He did not know,
however, that his frequent headache is really
caused by his being hypertensive. In his
application form for a life insurance for himself,
he did not put a check to the question if he is
suffering from hypertension, believing that
because of his active lifestyle, being
hypertensive is a remote possibility. While
playing golf one day, X collapsed at the fairway
and was declared dead on arrival at the
hospital. His death certificate stated that X
suffered a massive heart attack. (2016, BAR)
(a) Will the beneficiary of X be entitled to the
proceeds of the life insurance under the
circumstances, despite the non-disclosure that
he is hypertensive at the time of application?
(b) If X died in an accident instead of a heart
attack, would the fact of X's failure to disclose
that he is hypertensive be considered as
material information?
Mercantile Law
A:
(a) No, the beneficiary of X is not entitled to the
proceeds of the life insurance. The hypertension of
X is a material fact that should have been disclosed
to the insurer. The concealment of such material
fact entitles the insurer to rescind the insurance
policy.
(b) It is still a material information. It is settled that
the insured cannot recover even though the
material fact not disclosed is not the cause of the
loss.
Evidence of insurability
Evidence of Insurability is a broader phrase than
“Evidence of Good Health” and includes such other
factors as the insured’s occupation, habits, financial
condition, and other risk selection factors.
Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for
a twenty-year endowment policy on the life of
his one-year old daughter Helen Go. Ngo Hing
supplied the essential data and filed the
application to Mondragon, the branch manager.
After sometime, Helen Go died of influenza with
complication of bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in
his effort, he filed the action for the recovery of
the same. Did Ngo Hing conceal the state of
health and physical condition of Helen Go, which
rendered void the binding receipt?
A: YES. Ngo Hing intentionally concealed the state
of health of his daughter Helen Go. He was fully
aware that his child was a typical mongoloid child
upon filling out the application form. It is evident
that he withheld a fact material to the risk to be
assumed by the insurance company had the plan be
approved.
The contract of insurance is one of perfect good
faith, uberrima fides, absolute and perfect candor;
the absence of any concealment or demotion.
Concealment is a neglect to communicate that which
needs to be communicated whether intentional or
unintentional. In case of concealment, the insurer is
entitled to rescind the contract of insurance. In the
case at bar, the respondent is guilty of such
concealment. Ultimately, there was no perfected
contract of insurance since the conditions in the
binding receipt were not complied with by the
applicant (Great Pacific Life Assurance Company v.
CA, G.R. No. L-31845, April 30, 1979).
Q: Benny applied for life insurance for Php 1.5
Million. The insurance company approved his
111
application and issued an insurance policy
effective Nov. 6, 2008. Benny named his children
as his beneficiaries. On April 6, 2010, Benny died
of hepatoma, a liver ailment.
The insurance company denied the children's
claim for the proceeds of the insurance policy on
the ground that Benny failed to disclose in his
application two previous consultations with his
doctors for diabetes and hypertension, and that
he had been diagnosed to be suffering from
hepatoma. The insurance company also
rescinded the policy and refunded the
premiums paid.
Was the insurance company correct? (2013 Bar)
A: YES. The insurance company correctly rescinded
the policy because of concealment. Benny did not
disclose that he was suffering from diabetes,
hypertension, and hepatoma. The concealment is
material, because these are serious ailments. Also,
Benny died less than two years from the date of the
issuance of the policy, hence rescission is still
possible (IC, Sec. 26; Sec. 48).
Right to information of material facts may be
waived
1. Expressly by the terms of the contract
2. Impliedly the failure to make an inquiry as to
such facts, where they are distinctly implied in
other facts from which information is
communicated (IC, Sec. 33).
Rules on concealment
1. If there is concealment under Section 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance.
(1996 Bar)
2. The party claiming the existence of
concealment must prove that there was
knowledge of the fact concealed on the part of
the party charged with concealment.
3. Good faith is not a defense in concealment.
Concealment, whether intentional or
unintentional entitles the injured party to
rescind the contract of insurance (IC, Sec. 27).
4. The matter concealed need not be the cause of
loss (IC, Sec. 31).
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
In order for concealment to produce the effect of
avoiding the policy, it should take place at the
time the contract is entered into
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
Concealment should take place at the time the
contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
Waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous condition of health and diseases suffered,
for such information necessarily constitutes an
important factor which the insurer takes into
consideration in deciding whether to issue the
policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be
a ground to rescind the contract.
NOTE: The rationale for this rule is that if
concealment should take place after the contract is
entered into, the information concealed is no longer
material as it will no longer influence the other
party to enter into such contract.
Q: Joanna applied for a non-medical life
insurance. Joanna did not inform the insurer
that one week prior to her application for
insurance, she was examined and confined at St.
Luke’s Hospital where she was diagnosed for
lung cancer. The insured soon thereafter died in
a plane crash. Is the insurer liable considering
that the fact concealed had no bearing with the
cause of death of the insured? Why? (2001 Bar)
A: NO. The insurer is not liable. The concealed fact
is material to the approval and issuance of the
insurance policy. It is well settled that the insured
need not die of the disease she failed to disclose to
the insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimate of the
risks of the proposed insurance policy or in making
inquiries (Sun Life v. CA, supra).
Instances whereby concealment made by an
agent procuring the insurance binds the
principal
1. Where it was the duty of the agent to acquire
and communicate information of the facts in
question.
2. Where it was possible for the agent, in the
exercise of reasonable diligence to have made
such communication before the making of the
insurance contract.
NOTE: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the
fault of the agent, will avoid the policy, despite the
good faith of the insured.
MISREPRESENTATION/OMISSION
UNIVERSITY OF SANTO TOMAS
112
2019 GOLDEN NOTES
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer to
assume the risk.
Under Sec. 37, representation should be made,
altered or withdrawn at the time of or before the
issuance of the policy. It may be altered or
withdrawn before the insurance is effected, but not
afterwards (IC, Sec. 34).
Characteristics of representation
(COW-DAW-BA)
1. Not a part of the contract but merely a collateral
inducement to it
2. Oral or written
3. Must be presumed to refer to the date the
contract goes into effect
4. Altered or withdrawn before the insurance is
effected but not afterwards
5. Made before or at the time of issuing the policy
and not after (IC, Sec. 42).
Similarities of concealment and representation
1. Both refer to the same subject matter and both
take place before the contract is entered.
2. Concealment or representation prior to loss or
death gives rise to the same remedy; that is
rescission or cancellation.
3. The test of materiality is the same (IC, Secs. 31,
46).
4. The rules of concealment and representation
are the same with life and non-life insurance.
5. Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on
ground of concealment or false representation.
6. Since the contract of insurance is said to be one
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and
representation apply likewise to the insurer.
Kinds of representation
1. Oral or written (Sec. 36, Ibid)
2. Affirmative (Sec. 42, Ibid)
3. Promissory (Sec. 39, Ibid)
Affirmative representation
Any allegation as to the existence or non-existence
of a fact when the contract begins (e.g. the statement
of the insured that the house to be insured is used
only for residential purposes is an affirmative
representation).
Mercantile Law
Promissory representation
Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance.
Representation as to a future undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge (IC, Sec.
39).
An erroneous opinion or belief will not avoid the
insurance policy
The statement of an erroneous opinion, belief or
information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
fraudulent.
To avoid liability, the insurer must prove both
materiality of the insured’s opinion and the latter’s
intention to deceive.
Misrepresentation
It occurs when the facts fail to correspond with
its assertions or stipulations. Misrepresentation
is an affirmative defense. To avoid liability, the
insurer has the duty to establish such a defense by
satisfactory and convincing evidence (IC, Sec. 44; Ng
Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L-
30685, May 30, 1983).
NOTE: In the absence of evidence that the insured
has sufficient medical knowledge to enable him to
distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was
“associated with ulcer of the stomach” should be
considered an expression in good faith. Fraudulent
intent of insured must be established to entitle
insurer to rescind the insurance contract.
Misrepresentation, as a defense of insurer, is an
affirmative defense which must be proved (Ng Gan
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L-
30685, May 30, 1983).
Requisites of misrepresentation (UKMa)
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to
be true and which has a tendency to mislead;
and
3. Such fact in either case is material to the risk.
113
A representation cannot qualify an express
provision in a contract of insurance but it may
qualify an implied warranty (IC, Sec. 40).
Test of materiality
It 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 representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries (IC,
Sec. 46).
Effects of misrepresentation
1. It renders the insurance contract voidable at
the option of the insurer, although the policy is
not thereby rendered void ab initio. The injured
party entitled to rescind from the time when the
representation becomes false.
2. When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is waiver of right of rescission.
Effect of collusion between the insurer’s agent
and the insured
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus,
represents himself; so, the insurer is not estopped
from avoiding the policy.
Concealment vs. Misrepresentation
Concealment Misrepresentation
The insured withholds The insured makes
the information of erroneous statements
material facts from the of facts with the intent
insurer of inducing the insurer
to enter into the
insurance contract
Application of concealment and
misrepresentation in case of loss or death
GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or
death, the insurer can refuse to pay.
XPN: The incontestability clause under paragraph 2
of Section 48.
Incontestability clause (1991, 1994, 1996, 1998
Bar)
After the policy of life insurance made payable on
the death of the insured shall have been in force
during the lifetime of the insured for a period of two
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
(2) years from the date of its issue or its last
reinstatement, the insurer cannot prove that the
policy is void ab initio (construed as voidable) or is
rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent
(Sundiang Sr. & Aquino, 2014, citing IC, Sec. 48;
Florendo v. Philam Plans, G.R. No. 186983, February
22, 2012).
The “Incontestability Clause” under Section 48 of the
Insurance Code regulates both the actions of the
insurers and prospective takers of life insurance. It
gives insurers enough time to inquire whether the
policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it
forewarns scheming individuals that their attempts
at insurance fraud would be timely uncovered –
thus deterring them from venturing into such
nefarious enterprise (Manila Bankers Life Insurance
Corporation vs. Cresencia-Aban, G.R. No. 175666, July
29, 2013).
Note: The period of two years may be shortened but
it cannot be extended by stipulation.
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Creencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100, 000, in Sotero’s favor
on August 30, 1993, after the requisite medical
examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability
to pay the premium on the policy.
4. Sotero did not sign the application for
insurance
5. Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
the incontestability period set in even in cases of
fraud as alleged in this case? (2014, Bar)
A: YES. The incontestability period applies even in
cases of fraud. Section 48 regulates both the actions
of the insurers and prospective takers of the life
UNIVERSITY OF SANTO TOMAS
114
2019 GOLDEN NOTES
insurance. It gives insurers enough time to inquire
whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered. Legitimate policy holders are absolutely
protected from unwarranted denial of their claims
or delay in the collection of insurance proceeds
occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may
no longer be set up after the two-year period
expires.
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments, only to later on deny a claim on the policy
on specious claims of fraudulent concealment or
misrepresentation (Manila Bankers Life Insurance
Corp. v. Aban, G.R. No. 175666, July 29, 2013).
Q: The life insurance policy has been in force for
more than three years, when Sotero, the
insured, died. Thereafter, Aban, as the
beneficiary designated in the policy, filed a
claim for the insurance proceeds. However,
Bankers Life denied the claim and refunded the
premiums paid based on their findings that
Sotero did not personally apply for the policy as
she was illiterate and it was Aban who filed the
insurance application and designated herself as
the beneficiary. Can Bankers Life validly deny
said claim on the ground of fraud, concealment
and/or misrepresentation?
A: NO. Under Sec. 48 of the IC or the Incontestability
Clause, an insurer is precluded from raising the
defenses of false representations or concealment of
material facts insofar as health and previous
diseases are concerned if the insurance has been in
force for at least two years during the insured’s
lifetime. Considering that the insured died after the
two-year period, the Bankers Life is, therefore,
barred from proving that the policy is void ab initio
by reason of the insured’s fraudulent concealment
or misrepresentation or want of insurable interest
on the part of the beneficiary Aban (Manila Bankers
Life Insurance Corp. v. Aban, G.R. No. 175666, July 29,
2013, Del Castillo, J.).
Q. Felipe applied for the reinstatement of his life
insurance policy. Insular Life advised Felipe that
his application for reinstatement may only be
considered if he agreed to certain conditions.
Felipe agreed and paid additional premium on
December 27, 1999 and as a result, the Letter of
Acceptance was given to him which indicated
that the reinstated policy will be effective on
June 22, 1999. On January 7, 2000, Insular Life
issued an Endorsement regarding the policy.
Mercantile Law
On September 22, 2001, Felipe died.
Subsequently, Felipe’s beneficiaries filed with
Insular Life a claim for benefit under the
reinstated policy. This claim was denied.
Instead, Insular Life advised Felipe’s
beneficiaries that it had decided to rescind the
reinstated policy on the grounds of concealment
and misrepresentation by Felipe. However, the
respondents contend that policy cannot be
rescinded as it is already incontestable. Is
Felipe’s reinstated life insurance policy already
incontestable at the time of his death?
A: YES. Under Sec. 48 of the Insurance Code, after a
policy of life insurance made payable on the death
of the insured shall have been in force during the
lifetime of the insured for a period of two years from
the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio
or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or
his agent. The reinstatement of the insured’s policy
is to be reckoned from the date when the application
was processed and approved by the insurer. To
reinstate a policy means to restore the same to
premium-paying status after it has been permitted
to lapse (The Insular Life Assurance Company, Ltd. v.
Khu, G.R. No. 195176, April 18, 2016, Del Castillo, J.).
Defenses that are not barred by incontestability
clause (PIPE-TFC)
The following defenses are not barred by the
incontestability clause:
1. That the person taking the insurance lacked
insurable interest as required by law;
2. That the cause of the death of the insured is an
excepted risk;
3. That the premiums have not been paid (IC, Secs.
77, 233[b], 236[b]);
4. That the conditions of the policy relating to
military or naval service have been violated (IC,
Secs. 233[b], 234[b]);
5. That the fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish proof of
death or to comply with any condition imposed
by the policy after the loss has happened; or
7. That the action was not brought within the time
specified (Sundiang Sr. & Aquino, 2014).
Remedy of the injured party in case of
misrepresentation
If there is misrepresentation, the injured party is
entitled to rescind from the time when the
representation becomes false.
Exercise of the right to rescind the contract
115
In non-life insurance policy, it must be exercised
previous to the commencement of an action on the
contract, -the action referred to is that to collect a
claim on the contract (IC, Sec.48, par.1).
In life insurance policy, the defenses mentioned in
the second paragraph of section 48 of the IC are
available only within the 2-year incontestability
period (De Leon, 2014).
BREACH OF WARRANTIES
Warranties (1993 Bar)
Statements or promises by the insured set forth in
the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in
any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or
non-fulfillment render the policy voidable by the
insurer.
Purpose of warranties
To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
of the insured or to the change of the condition of
the property.
Basis of warranties
The insurer took into consideration the condition of
the property at the time of effectivity of the policy.
Kinds of warranties (APIE)
1. Affirmative warranty – one which relates to
matters which exist at or before the issuance of
the policy.
2. Promissory warranty – one in which the insured
undertakes that something shall be done or
omitted after the policy takes effect and during
its continuance.
3. Express warranty – a statement in a policy, of a
matter relating to the person or thing insured,
or to the risk, as a fact.
4. Implied warranty – an agreement or stipulation
not expressed in the policy but the existence of
which is admitted or presumed from the fact
that the contract of insurance has been
executed.
Warranty vs. Representation
WARRANTY REPRESENTATION
Considered parts of the Collateral inducement
contract. to the contract.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code Mercantile Law
Always written on the fire broke out at the Pace Factory which totally Loss in insurance Instances when the defects in the notice or proof
May be written in a
face of the policy, burned the insured properties. of loss are considered waived (MaJoR-DeW)
totally disconnected
actually or by The injury, damage or liability sustained by the
paper or may be oral.
reference. The policy forbade the removal of the insured insured in consequence of the happening of one or When the insurer:
Must be strictly Only substantial proof properties unless sanctioned by Ilocano. more of the perils against which the insurer, in 1. Writes to the insured that he considers the
complied with. is required. Condition 9 (c) of the policy provides that “the consideration of the premium, has undertaken to policy null and void as the furnishing of notice
Its falsity or non- Its falsity renders the insurance ceases to attach as regards the indemnify the insured. It may be total, partial, or or proof of loss would be useless;
fulfillment operates as policy void on the property affected unless the insured, before the constructive, in case of marine insurance. 2. Recognizes his liability to pay the claim;
a breach of contract. ground of fraud. occurrence of any loss or damage, obtains the 3. Denies all liability under the policy
Insurer must show its sanction of the company signified by Conditions before the insured may recover on 4. Joins in the proceedings for determining the
Presumed material. materiality in order to endorsement upon the policy… (c) if the the policy after the loss amount of the loss by arbitration, making no
defeat an action on the property insured is removed to any building or objections on account of notice and preliminary
policy. place other than in which is herein stated to be 1. The insured or some person entitled to the proof; or
insured.” PAM claims that it has substantially benefit of the insurance, without unnecessary 5. Makes Objection on any ground other than the
Effects of breach of warranty complied with notifying Ilocano through its delay, must give written notice to the insurer formal defect in the preliminary proof.
sister company, the RBC which in fact, referred (IC, Sec. 90).
1. Material PAM to Ilocano for the insurance coverage. Is 2. When required by the policy, insured must Instances when delay in the presentation of
Ilocano liable under the policy? (2014 Bar) present a preliminary proof loss which is the notice or proof of loss deemed waived
GR: Violation of material warranty or of best evidence he has in his power at the time
material provision of a policy will entitle the A: NO. Ilocano Insurance is not liable under the (IC, Sec. 91). If caused by:
other party to rescind the contract. policy. By the clear and express condition in the NOTE: For other non-life insurance, the 1. Any act of the insurer; or
renewal policy, the removal of the insured property Commissioner may specify the period for the 2. By failure to take objection promptly and
XPN: (with regard to “promissory” warranties) to any building or place required the consent of submission of the notice of loss (IC, Sec. 90). specifically upon that ground (IC, Sec. 93).
a. Loss occurs before the time of performance Ilocano. Any transfer effected by PAM, Inc. without
of the warranty; Ilocano’s consent would free the latter from any In some life and accident policies, a provision Proof of loss
b. The performance becomes unlawful at the liability (Malayan Insurance Company, Inc v. PAPCO, included, requiring certificate of the attending
place of the contract; or Ltd., G.R. No. 200784, August 7, 2013). physician of the insured, be furnished as part of the It is the more or less formal evidence given the
c. Performance becomes impossible (IC, Sec. proof of death. (de Leon, de Leon jr., 2017) company by the insured or claimant under a policy
73). Effect of a breach of warranty without fraud of the occurrence of the loss, the particulars thereof
Notice of loss and the data necessary to enable the company to
2. Immaterial The policy is avoided only from the time of breach determine its liability and the amount thereof.
and the insured is entitled: It is the more or less formal notice given to the
GR: It will not avoid the policy. insurer by the insured or claimant under a policy, of Time for payment of claims
1. To the return of the premium paid at a pro rata the occurrence of the loss insured against.
XPN: When the policy expressly provides, or from the time of breach or if it occurs after the LIFE POLICIES NON-LIFE POLICIES
declares that a violation thereof will avoid it. inception of the contract; or Purposes of notice of loss (InDEx) 1. Maturing upon the
2. To all premiums if it is broken during the expiration of the term–
For instance, an “Other Insurance Clause” which inception of the contract. 1. To give insurer Information by which he may the proceeds are
is a condition in the policy requiring the insured determine the extent of his liability immediately payable to
Effect of breach of warranty with fraud: 2. To afford the insurer a means of detecting any The proceeds shall be
to inform the insurer of any other insurance the insured, except if
Fraud that may have been practiced upon him paid within 30 days
coverage of the property. A violation of the proceeds are payable in
1. Policy is avoided ab initio and never 3. To operate as a Check upon extravagant claims after the receipt by the
clause by the insured will not constitute a installments or
became binding. insurer of proof of loss
breach unless there is an additional provision annuities which shall be
2. Insured is not entitled to the return of the Effect of failure to give notice of loss and ascertainment of
stating that the violation thereof will avoid the paid as they become
premium the loss or damage by
policy (IC, Sec. 75). due.
agreement of the
OTHER TYPES OF
FIRE INSURANCE parties or by arbitration
Q: On May 13, 1996 PAM Inc. obtained a P15 Omission INSURANCE 2. Maturing at the death
but not later than 90
million fire insurance policy from Ilocano Failure to give notice of the insured, occurring
The failure to communicate information on matters days from such receipt
Insurance covering its machineries and will not exonerate the prior to the expiration of
proving or tending to prove the falsity of warranty. Failure to give notice of proof of loss, whether
equipment effective for one year or until May 14, insurer, unless there is a the term stipulated – the
In case of omission, the aggrieved party may rescind defeats the right of the or not ascertainment is
1997. The policy expressly stated that the stipulation in the policy proceeds are payable to
the contract of insurance. insured to recover. had or made (IC, Sec.
insured properties were located at “Sanyo requiring the insured to the beneficiaries within
249).
Precision Phils. Building Phase III Lots 4 and 6 do so. 60 days after
Block 15 PEZA, Rosario, Cavite.” Before its presentation of claim
expiration, the policy was renewed on “as is” CLAIMS SETTLEMENT AND SUBROGATION The law does not require any form in which the and filing of proof of
basis for another year or until May 13 1998. The notice of loss must be given. In absence of any death (IC, Sec. 248).
subject properties were later transferred to stipulation in the policy, notice may be given orally
Pace Factory also in PEZA. On October 12, 1997 NOTICE AND PROOF OF LOSS or in writing. (de Leon, de Leon jr., 2017) GUIDELINES ON CLAIMS SETTLEMENT
during the effectivity of the renewed policy, a

UNIVERSITY OF SANTO TOMAS UNIVERSITY OF SANTO TOMAS

116 117 FACULTY OF CIVIL LAW
2019 GOLDEN NOTES
 Insurance Code
Claim Settlement
Claim settlement is the indemnification of that
suffered by the insured.
The claimant may be the:
1. Insured;
2. Reinsured, the insurer who is entitled to
subrogation; or
3. A third party who has a claim against the
insured.
Purpose of the rule
To eliminate unfair claim settlement practices.
Rules in claim settlement
1. No insurance company doing business in the
Philippines shall refuse, without justifiable
cause, to pay or settle claims arising under
coverage provided by its policies, nor shall any
such company engage in unfair claim
settlement practices.
2. Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioner’s complaint experience with
other insurance companies writing similar lines
of insurance shall be admissible in evidence in
an administrative or judicial proceeding
brought under this section [IC, Sec. 247(b)].
Claims settlement in life insurance
1. The proceeds shall be paid immediately upon
the maturity of the policy if there is such a
maturity date.
2. If the policy matures by the death of the insured,
within sixty (60) days after presentation of the
claim and filing of the proof of the death of the
insured (Sundiang Sr. & Aquino, 2014; IC, Section
248).
Claims settlement in property insurance
1. Proceeds shall be paid within thirty (30) days
after proof of loss is received by the insurer and
ascertainment of the loss or damage is made
either by agreement or by arbitration.
2. If no ascertainment is made within sixty (60)
days after receipt of proof of loss, it shall be paid
within ninety (90) days after such receipt
(Sundiang Sr. & Aquino, 2014; IC, Sec. 249).
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Unfair settlement practices (GMAIL)
UNIVERSITY OF SANTO TOMAS
118
2019 GOLDEN NOTES
The following constitutes unfair settlement
practices:
1. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of claims
submitted in which liability has become
reasonably clear.
2. Knowingly misrepresenting to claimant’s
pertinent facts or policy provisions relating to
coverage at issue;
3. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
4. Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
5. Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason substantially
less than the amounts ultimately recovered in
suits brought by them.
Sanction for the insurance companies which
engaged to unfair settlement practices
The sanction for insurance companies engaged in
unfair settlement practices can either be [a]
suspension; or [b] revocation of an insurance
company’s certificate of authority (IC, Sec 247).
Effect of refusal or failure to pay the claim within
the time prescribed
The insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board on the
proceeds of the insurance from the date following
the time prescribed under the Insurance Code, until
the claim is fully satisfied (Prudential Guarantee and
Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R.
No. 151890, June 20, 2006).
NOTE: Refusal or failure to pay the loss or damage
will entitle the assured to collect interest UNLESS
such refusal or failure to pay is based on the ground
that the claim is fraudulent.
Where the mortgagor and the mortgagee were, both
claiming the proceeds of a fire insurance policy and
the creditors of the mortgagor also attached the
proceeds, the insurance company cannot be held
liable for damages for withholding payment since
the delay was not malevolent (RCBC v. CA, supra).
A prima facie evidence of unreasonable delay in
payment of the claim is created by the failure of the
insurer to pay the claim within the time fixed in the
Insurance Code. (Tio Khe Chio v. Court of Appeals,
202 SCRA 119, 1991)
Mercantile Law
PRESCRIPTION OF ACTIONS
Rules on the prescriptive period for filing an
insurance claim
1. The parties to a contract of insurance may
validly agree that an action on the policy should
be brought within a limited period of time,
provided such period is not less than 1 year from
the time the cause of action accrues. If the period
agreed upon is less than 1 year from the time
the cause of action accrues, such agreement is
void (IC, Sec. 63, 1996 Bar).
a. The stipulated prescriptive period shall
begin to run from the date of the insurer’s
rejection of the claim filed by the insured
or beneficiary and not from the time of
loss.
b. In case the claim was denied by the insurer
but the insured filed a petition for
reconsideration, the prescriptive period
should be counted from the date the claim
was denied at the first instance and not
from the denial of the reconsideration. To
rule otherwise would give the insured a
scheme or devise to waste time until any
evidence which may be considered against
him is destroyed (1996 Bar; Sun Life
Office, Ltd. vs. CA, supra).
2. If there is no stipulation or the stipulation is
void, the insured may bring the action within 10
years in case the contract is written.
3. In a comprehensive motor vehicle liability
insurance (CMVLI), the written notice of claim
must be filed within 6 months from the date of
the accident; otherwise, the claim is deemed
waived even if the same is brought within 1
year from its rejection (Vda. De Gabriel vs. CA,
GR No. 103883, Nov 14, 1996).
4. The suit for damages, either with the proper
court or with the Insurance Commissioner,
should be filed within 1 year from the date of
the denial of the claim by the insurer, otherwise,
claimant’s right of action shall prescribe (IC, Sec.
397).
NOTE: Notwithstanding the fact that the case was
filed beyond the one-year prescriptive period
provided for under COGSA, the suit will not be
dismissed if the delay was not due to the claimant’s
fault. The insurer therefore should bear the loss
with interest on account of such delay (New World
International Development Phils. Inc. vs. NYK-
FILJAPAN Shipping Corp., G.R. No. 171468, August 24,
2011, in Divina, 2014).
SUBROGATION
119
Right of Subrogation
A process of legal substitution; the insurer, after
paying the amount covered by the insurance policy,
stepping into the shoes of the insured, as it were,
and availing himself of the latter’s rights that exist
against the wrongdoer at the time of the loss.
Principle of Subrogation
If the plaintiff’s property has been insured, and he
has received indemnity from the insurance
company for the injury or loss arising out of wrong
or breach of contract complained of, the insurance
company shall be subrogated to the rights of the
insured against the wrongdoer or the person who
has violated the contract (NCC, Art. 2207).
The payment by the insurer to the insured operates
as an equitable assignment to the insurer of all the
remedies that the insured may have against the
third party whose negligence or wrongful act
caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity
of contract. It accrues simply upon payment by the
insurance company of the insurance claim (Malayan
Insurance Co., Inc., vs. Alberto, et al., G.R. No. 194320,
February 1, 2012).
NOTE: Incapacity of the insured will not affect the
capacity of the subrogee because capacity is
personal to the holder (Lorenzo Shipping v. Chub and
Sons, Inc., G.R. No. 147724, June 8, 2004).
Q: Under a Marine Risk Note, Malayan Insurance
Co., Inc. insured 60, 000 plastic bags of soda ash
dense which were shipped on a vessel of Asian
Terminals, Inc. (ATI) from China to Manila.
When the bags were unloaded in the
warehouses of the consignee, a total of 2,881
bags were in bad order. Malayan Insurance paid
the value of the lost/damaged cargoes to the
consignee and as subrogee of the consignee,
filed before the RTC a Complaint for damages
When the case reached the Supreme Court, ATI
raised for the first time the issue that Malayan
Insurance is not entitled to the relief granted as
it failed to establish its cause of action since, as
the alleged subrogee, it never presented any
valid, existing, enforceable insurance policy or
any copy thereof in court. Can Malayan
Insurance, as subrogee, recover from ATI even
though it never presented the insurance
contract or policy covering the subject
shipment?
A: YES. Non-presentation of the insurance
contract or policy is not necessarily fatal. As an
exception to the general rule, Court ruled in Delsan
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Insurance Code
Transport Lines, Inc. v. CA that the presentation in
evidence of the marine insurance policy is not
indispensable before the insurer may recover from
the common carrier the insured value of the lost
cargo in the exercise of its subrogatory right. The
right of subrogation accrues simply upon payment
by the insurance company of the insurance claim.
Moreover, since there was no issue regarding the
validity of the insurance contract or policy, or any
provision thereof by reason of ATI’s failure to
dispute the coverage of the insurance contract or
policy, Malayan Insurance had no reason to present
the insurance contract or policy as evidence during
the trial (Asian Terminals, Inc. v. Malayan Insurance
Co., Inc., G.R. No. 171406, April 4, 2011, Del Castillo,
J.).
Q: ELP Insurance, Inc. issued Marine Policy No.
888 in favor of FCL Corp. to insure the shipment
of 132 bundles of electronic copper cathodes
against all risks. Subsequently, the cargoes
were shipped on board the vessel “M/V Menchu”
from Leyte to Pier 1, North Harbor, Manila.
Upon arrival, FCL Corp. engaged the services of
CGM Inc. for the release and withdrawal of the
cargoes from the pier and the subsequent
delivery to its warehouse or plants in
Valenzuela City. The goods were loaded on
board twelve trucks owned by CGM, Inc. driven
by its employed drivers and accompanied by its
employed truck helpers. Of the twelve trucks en
route to Valenzuela City, only eleven reached the
destination. One truck loaded with eleven
bundles of copper cathodes, failed to deliver its
cargo.
Because of this incident, FCL Corp. filed with ELP
Insurance, Inc. a claim for insurance indemnity
in the amount of P1.5 million. After the requisite
investigation and adjustment, ELP Insurance,
Inc. paid FCL Corp. the amount of P1,350,000 as
insurance indemnity.
ELP Insurance, Inc. thereafter filed a complaint
for damages against CGM, Inc. before the RTC,
seeking reimbursement of the amount it had
paid to FCL Corp. for the loss of the subject cargo.
CGM, Inc. denied the claim on the basis that it is
not privy to the contract entered into by and
between FCL Corp. and ELP Insurance, Inc., and
hence, it is not liable thereof. If you are the
judge, how will you decide the case? (2014 Bar)
A: I will decide the case in favor of ELP Insurance.
Even if CGM, Inc. is not privy to the contract between
FCL Corp. and ELP Insurance, it is still liable for the
loss of the cargo. If the plaintiff’s property has been
insured and he has received indemnity from the
UNIVERSITY OF SANTO TOMAS
120
2019 GOLDEN NOTES
insurance company for the injury or loss arising out
of the wrong or breach of the contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrong-doer.
Since ELP Insurance is subrogated to the rights of
FCL Corp. to the extent of the amount it paid, it has
the right to seek reimbursement from CGM, Inc.
(Loadmaster Customs Services Inc. v. Glodel
Brokerage Corporation and R&B Insurance
Corporation, G.R. No. 179446, January 10, 2011).
Purposes of subrogation
1. To make the person who caused the loss legally
responsible for it.
2. To prevent the insured from receiving double
recovery from the wrongdoer and the insurer.
3. To prevent the tortfeasors from being free from
liability and is thus founded on consideration of
public policy.
Rules on subrogation
1. Applicable only to property insurance – the value
of human life is regarded as unlimited and
therefore, no recovery from a third party can be
deemed adequate to compensate the insured’s
beneficiary.
2. The right of insurer against a third party is
limited to the amount recoverable from latter
by the insured.
Rules on indemnity
1. Applies only to property insurance
except when the creditor insures the life
of his debtor.
2. Insurance contracts are not wagering
contracts or gambling contracts.
NOTE: Under the collateral source rule, if an
injured person receives compensation for his
injuries from a source wholly independent of the
tortfeasor, the payment should not be deducted
from the damages which he would otherwise collect
from the tortfeasor. It finds no application to cases
involving no-fault insurances under which the
insured is indemnified for losses by insurance
companies, regardless of who was at fault in the
incident generating the losses. Here, it is clear that
MMPC is a no-fault insurer. Hence, it cannot be
obliged to pay hospitalization expenses of the
dependents of its employees which had already
been paid by separate health insurance providers of
said dependents (Mitsubishi Motors Philippines
Salaried Employees Union vs. Mitsubishi Motors Corp
G.R. No. 175773, June 17, 2013, in Divina, 2014).
Mercantile Law
When amount paid by the insurance company
does not fully cover the injury or loss
The aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury
(NCC, Art. 2207).
Instances where the right of subrogation does
not apply (RRL-No LoCo)
1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or
damage from liability
2. The insurer loses his rights against the
wrongdoer since the insurer can only be
subrogated to only such rights as the insured
may have
3. Where the insurer pays the insured the value of
the loss without notifying the carrier who has
in good faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or
risk not covered by the policy
5. Life insurance
6. For recovery of loss in excess of insurance
coverage
NOTE: Since the insurer can be subrogated to only
such rights as the insured may have, should the
insured, after receiving payment from the insurer,
release the wrongdoer who caused the loss, the
insurer loses his rights against the latter. But in such
a case, the insurer will be entitled to recover from
the insured whatever it has paid to the latter, unless
the release was made with the consent of the
insurer (Manila Mahogany Manufacturing Corp. v.
CA, G.R. No. L-52756, October 12, 1987).
TRANSPORTATION LAW
Laws that govern contracts of transportation
Contracts of transportation, whether by land, sea, or
air, [i] if within the Philippines; or [ii] if the
transportation of goods be from a foreign country to
the Philippines, shall be governed by the following
laws, arranged by order of application:
1. Provisions of the New Civil Code on Common
Carriers;
2. Code of Commerce; and
3. Special laws such as Carriage of Goods by the
Sea (COGSA); Salvage Law; Public Service Act;
Land Transportation and Traffic Code; Tariff
and Customs Code; and Civil Aeronautics Act
(Art. 1735 and 1766, NCC; American President
Lines, Ltd. v. Klepper, G.R. No. L-15671, November
29, 1960).
121
(Ci-Co-Spec)
NOTE: In case of international carriage in air
transportation, (i) the Montreal Convention as
ratified by the Philippines in 2015; (ii) the Warsaw
Convention (iii) Civil Aviation Authority Act, may be
applicable.
If the goods are to be transported from the
Philippines to a foreign country, the law of the latter
country shall govern the transportation contract
(CC, Art. 1753; NDC. v. CA, G.R. No. L-49407, August
19, 1988).
COMMON CARRIER
Requisites for an entity to be classified as a
common carrier (1996, 1997, 2000, 2002 Bar)
(PecofaB-LAW-FP)
1. Must be a Person, corporation, firm or
association;
2. Engaged in the Business of carrying or
transporting passengers or goods or both;
3. The carriage or transport must either be by
Land, water or air;
4. The service is for a Fee; and
5. The service is offered to the Public (Art. 1732,
NCC)
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes/pipelines is a
common carrier. The law does not distinguish as to
the means by which transportation is carried out, as
long as it is by land, water, or air. Neither does the
law require that transportation be through a motor
vehicle (First Phil. Industrial Corp. v. CA, G.R. No.
125948, December 29, 1998).
Q: The Pereñas were engaged in the business of
transporting students from their respective
residences in Parañaque City to Don Bosco in
Pasong Tamo, Makati City and back. They
employed Alfaro as driver of the van. The
Zarates contracted the Pereñas to transport
their son, Aaron, to and from Don Bosco.
However, a train hit the rear end of the van
driven by Alfaro, and the impact threw nine (9)
students in the rear, including Aaron, out of the
van. Aaron landed on the path of the train, which
dragged his body and severed his head,
instantaneously killing him.
The Zarates commenced an action for damages
against Alfaro, the Pereñas, PNR, and Alano. The
Zarates’ claim against the Pereñas was based on
breach of the contract of carriage and based on
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW