June 23, 2014

What is a contract of insurance?

An agreement whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or
contingent event
What are the Functions of insurance?
To distribute the expected losses among the policy
indemnify insured against loss, damage or liability arising from an unknown
or contingent event.
As regard to contract of surety?
An agreement whereby a party called the surety guarantees the performance
by another called the principal or obligor of an obligation or undertaking in
favor of a third party called the oblige.
It shall be deemed to be an insurance contract if made by a surety who or
which, as such, is doing an insurance business
What is meant by doing an insurance business?
Making or proposing to make as insurer, any insurance contract;
Making or proposing to make as surety, any contract of suretyship as a
vocation, not as a mere incident to any other legitimate business of a surety;
Doing any insurance business, including reinsurance business;
Doing or proposing to do any business in substance equivalent to any of the
foregoing.
What
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)

are the characteristics of an insurance contract?

Consensual it is perfected by the meeting of the minds of the parties
Aleatory depends upon some contingent event
Contract of adhesion or fine print rule terms does not necessarily mean
that there is mutual agreement because the terms have already been
provided by the insurer (do not result from the mutual consent of the parties)
Conditional it is subject to a condition, the principal one of which is the
happening of the event insured against
Personal insurance cannot be delegated. Each party having in view the
character, credit and conduct of the other.
Compensatory
Risk distributing device by paying a pre-determined amount
Contract of indemnity except in life and accident insurance, an insurance
contract is a contract of indemnity whereby the insurer promises to make
good only the loss of the insured.
Unilateral imposes the legal duties only on the insurer who promises to
indemnify in case of loss
Executed on the part of the insured by paying the premiums; while Executory
on the part of the insurer (until the payment of the loss)
Voluntary the parties may incorporate such terms and conditions as they
may deem convenient.

What is Uberrima Fides?

The contract of insurance is one of perfect good faith not for the insured
alone, but equally so for the insurer. It requires the parties to the contract to
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disclose conditions affecting the risk of which he is aware, or material fact,

which the applicant knows, and those, which he ought to know.
What is the 2-fold purpose/function?
a) distribute/spread the expected losses among planholders upon the
happening of an event.
b) indemnify the insured from the happening of the loss/damage.
Construction/interpretation of theinsurance contract?
if clear should be interpreted according to ordinary meaning.
if ambiguous strictly against the insurer, liberally in favor of the insured
What
a)
b)
c)
d)
e)

are the elements/requisite of insurance contract?

Insurable interest must exist
Risk of loss
Assumption of risk taken by the insurer
Payment of a premium
Scheme of distribution of losses

What may be insured? (definition Sec.10)

Future contingent resulting in loss or damage (example: possible future fire)
Past unknown event resulting in loss or damage (example: fact of past sinking
of a vessel unknown to the parties)
Contingent liability (Example: reinsurance)
What

may not be insured?

any person considered as an enemy of the state.
any contract of lottery (Sec. 4)
Mere contingent or expectant interest in anything (Sec. 16)

June 24, 2014

What is an insurable interest?
A person is deemed to have insurable interest in the subject matter insured
where he has a relation or in connection with or concern in it that he will
derive pecuniary benefit or advantage from its preservation and will suffer
pecuniary loss or damage from its destruction, termination or injury by the
happening of the event insured against.
Who are the parties to an insurance contract?
a) Insurer The person who undertakes to indemnify another
b) Insured The person with capacity to contract and having an insurable
interest in the life or property of the insured; and
c) Beneficiary Person designated to receive proceeds of policy when risk
attaches.
Who can be an insurer? What is required to be an insurer?
A foreign or domestic insurance company may transact business in the
Philippines but must first obtain a certificate of authority for that purpose
from the Insurance Commissioner who has the discretion to refuse to issue
such certificate if it will best promote the interests of the people of this
country (Sec. 187)
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 Every person, partnership, association or corporation duly authorized to

transact business as provided in this code.
Include all individuals, partnerships, associations or corporations including
government-owned or controlled corporations and entities engaged as
principals in the insurance business excepting mutual benefit association.
When is there insurable interest in life?
Sec. 10. Every person has an insurable interest in the life and health:
a) Of himself, of his spouse and of his children;
b) Of any person on whom he depends wholly or in part for education
and support, or in whom he has pecuniary interest;
c) Of any person under 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.
When is there insurable interest in property?
Sec. 14. An insurable interest in property may consist in:
a. An existing interest;
b. An inchoate interest founded on an existing interest; or
c. An expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Examples
- Existing interest (legal or equitable title on the property)
- Inchoate interest (interest which has not yet ripened, such as interest of
stockholder in the property of the corporation which he owns stocks)
- Expectancy couple with existing interest (a farmer insuring future crops or a
workman insuring the building which he was contracted to repair.
Can a creditor and a debtor mortgage the property at the same time?
Yes. Both the mortgagor and mortgagee have a separate and distinct
insurable interest in the mortgaged property and that they may take separate
policies with the same or different insurance company. Thus, both can insure
the property at the same time or with concurrence.
What are the extent of insurable interest of mortgagor and mortgagee?
Mortgagor may insure the mortgaged property to its full value
Mortgagee can only insure it to the extent of the debt secured
Exception: in marine Insurance
Problem:
Vilma obtained a loan of 500,000 from Linda, and as a security she mortgaged her
house worth 750,000. Nora insured her house against fire with ABC insurance for
750,000 with the policy stating: Any other insurer should be declared otherwise all
benefits in the policy will be forfeited. Linda also insured the house against fire with
XYZ insurance company for 500,000. Both Vilma and Linda did not advise their
respective insurance companies of the existence of the other insurance. When both
were enforced, the house was burned.
a.) Can both Vilma and Linda insure the property at the same time for how
much?
b.) Vilma refused to pay 500,000 when the house is already burned, what will
happen?
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Ans:
a) Vilma can insure because it is her own property and she has an insurable
Interest over the house in the amount of 750,000 which is the full extent of
the value of the property. While Linda, her insurable Interest only to the
extent of the debt of Nora in the amount of 500,000 which is the full value of
the credit.
b) XYZ takes the place of Linda. Subrogated to the interest of Linda. Linda will
not collect from Vilma.
Note:
If mortgagee insures the property mortgaged and pays the premium in case of loss,
mortgagor will pay the insurance company debit.
If mortgagor insures the property and pays the premium and assigns the insurance
to mortgagee, the debt is considered paid.
If mortgagor insures the property and pays the premium but did not assign the
insurance to the mortgagee, the mortgagor still has a debt to pay the mortgagee.
What is a beneficiary?
A person whether natural or juridical for whose benefit the policy is issued
and is the recipient of the proceeds of the insurance.
Who can be designated as a beneficiary in a life insurance?
Any person can be a beneficiary not otherwise disqualified.
Who are those persons who are disqualified to be beneficiaries?
a) Those made between persons who were guilty of adultery or concubinage
(conviction not being a condition precedent);
b) Those made between persons found guilty of the same criminal offense, in
consideration thereof;
c) Those made to a public officer or his wife, descendants or ascendants by
reason of his office
Rules in designation of beneficiary
LIFE
a) A person who insures his own life can designate any person as his
beneficiary whether or not the beneficiary has insurable interest in the
life of the insured.
b) If a person who insures the life of another person and name himself as
beneficiary must have an insurable interest in such life (Sec. 10)
c) If the policy is taken by a 3rd party, not the insured, on the life of the
insured the 3rd party designates himself as the beneficiary, is it
necessary that the 3rd party must have an insurable interest on the life
insured. (life and health of the insured) 3 rd person must have an
insurable interest at the time of the taking of the policy.
PROPERTY
The beneficiary of the property insurance must have an insurable interest in
such property which must exist only at time the policy takes effect but also
when the loss occurs.
NOTE:
General Rule: The designation of beneficiary is revocable
Exception: When the insured did not expressly reserved his right to revoke the
designation of the beneficiary, such designation is irrevocable and he cannot
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change the beneficiary without the consent of the latter. (A signature of the
beneficiary must be obtain) Case of Hilario Gercio v. Sunlife Insurance
If beneficiary is revocable, can the owner exercise all rights and privileges
of the policy?
YES. The insured can exercise all the rights and privileges of the policy.
How about if irrevocable beneficiary, can he exercise /change any right in
the policy. What are the effects?
NO. The effect would be that the insured CANNOT:
a. Assign the policy;
b. Take the Cash Surrender Value of the policy;
c. Allow his creditors to attach or execute on the policy;
d. Add new beneficiary; or
e. Change the irrevocable designation to revocable, even though the change is
just and reasonable.
Distinguish insurable interest in life from property.
Life

Property

when should it exist

At the time the insurance

takes effect

as to beneficiary

no need to have insurable

interest on his life.
unlimited

as to limit of the
amount

At the time the insurance takes

effect and at the time of loss
although it need not exist in the
meantime
must have insurable interest
over the property insured
only to the extent of the amount
insured

Is it possible Compulsory Heir has an insurable Interest on the property of

the testator during the lifetime of said testator
No, compulsory heir has no existing interest over the property of the testator while
he is still alive.
What is a general Creditor?
loans money without any collateral
Does a general creditor have an insurable Interest over the property of his
debtor?
NO, he is not the owner. As to the debt, he has an insurable interest but not to the
property.
Debtor, insurable Interest over the property of the creditor ? How about
the health of the creditor?
None to both of them. When creditor dies, debt is extinguished.
Distinguish Standard or Union Mortgage Clause from Open or Loss Payable
Clause?
Standard or Union Mortgage Clause

Open or Loss Payable Clause

Subsequent act of the mortgagor cannot

affect the right of the assignee

Acts of the mortgagor affect the

mortgagee. Reason: mortgagor does not
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Mortgagee perform the acts of

mortgagor
Clause included wherein the insurance
interest of the mortgagee shall not be
invalidated by any act of the mortgagor
or owner of the property at the time
Protects mortgagees interest from
invalidation due to mortgagors acts.

cease to be a party to the contract (sec.

& 9)
Mortgage that can be paid-off to
maturity without penalty
Mortgagee is the beneficiary for
insurance taken by the mortgagor
Acts of mortgagor invalidates the
insurance

What is a standard/ union mortgage Clause

Standard or union mortgage clause incorporation in an insurance Policy, leads to
the creation of a separate contract between the insurer and the mortgagee
empowers the mortgagee to collect payment from the insurer even if the policy is
void or voidable with regard to the mortgagor.
Open/loss payable mortgage clause?
There is only one contract and the act of the mortgagor,
It refers to an insurance Policy is a provision that authorize payment of proceeds to
the mortgagee.
Loss/payable clause designates the person as a beneficiary of the proceeds or
assigns to the person a claim against the insurer but the clause does not treat the
person as an additional insured.
Acts of the mortgagor affects the mortgagee.
PROBLEM:
Pedro, a most valued employee of zenith manufacturing Corporation for the past 20
years. He was insured by his employer with itself as the beneficiary. Zenith has a
house in Xavier Estates and they let Pedro use the house. The house was also
insured by Zenith as the beneficiary. Both of policies were up to Dec. 31, 2011. Now
on June 15, 2011, Pedro retired from the company. As part of his retirement
package, the title of Xavier Estates was transferred to his name. On July 9, 2011,
the house was burned resulting to Pedros death.
a. Who could recover the insurance taken from the life of Pedro?
b. Who can recover on the insurance taken from the house at Xavier Estates?
Ans:
a) NO ONE can recover
b) Zenith corporation can recover the policy of Pedros life because insurable
interest of life may not exist at the time of death and being the beneficiary
thereof.
July 16, 2014
Change of interest
General rule: (Sec. 20)
Change of interest in any part of the thing insured unaccompanied by a change in
the interest in the insurance, suspends the insurance to an equivalent extent, until
the interest in the thing and the interest in the insurance is vested in the same
person.
Exception: (sec.20 -24)
1. in case of life, health and accident insurance (Sec. 20)
2. When a change in interest results after the occurrence of an injury which
results in a loss (Sec. 21)
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3. Change in interest in one or more several distinct things separately insured

by one policy (Sec. 22)
4. Change in the interest by will or succession on the death of the insured (Sec.
23)
5. Transfer of interest by one of several partners, joint owners in common jointly
insured to the others (sec.24)
6. The policy is so framed that it will not inure to the benefit of whom so ever
during the continuance of the become the owner of the thing (sec. 27)
7. It is an express condition against the alienation of policy in case of alienation
of insurance contract is suspended but avoided (art. 1306 of Civil Code)
Example:
Change of interest after the occurrence of an injury
X insured his house then the house burn. After the house was burn X assigned the
policy to Y. Can Y collect?
NO. At the time the insurance was taken and at the time of the loss X has insurable
interest not Y despite the assignment of POLICY AFTER THE OCCURRENCE OF LOSS.
Change of interest by one or more several distinct things
X insured his two cars Toyota and Honda worth 200,000 and paid the premium of
6,000 thereon. He sold Toyota when the policy was still effect without the consent of
the insurer. Later Honda suffered a total loss due to accident. Can he collect from
the insurer?
Ans:
a) NO. Since the two cars are NOT separately valued in the policy and the
premium was meant to cover both vehicles. In this case, the sale of one thing
affects the insurance of the others.
Change of interest by will or succession
Pedro insured his house worth 1 million. While the policy is still in effect Pedro died,
can Pablo his only son collect on insurance even before the transfer of the policy in
his name?
YES. Change of interest by will or succession on the death of the insured does not
avoid the insurance and his interest in the insurance passes to the person taking his
interest in the thing insured.
Transfer of interest by one of several partners
Pedro, Juan and Pablo are partners of Z store. They insured the store against fire
insurance for 300,000. While the policy is still in effect Pablo sold his interest to
Pedro. The store was burn, can Juan and Pedro collect the insurance?
Ans:
YES. Pablo who sold his interest to a partner (Pedro) thus a transfer of interest by
one of several partners, joint owners in common, who are jointly insured to the
others does not avoid the insurance even though it has been agreed that the
insurance shall cease upon the alienation of thing insured.
Devices used of ascertaining the risk of loss
1. Concealment
2. Representation
3. Warranties
4. Conditions
5. Exceptions
What is concealment?
A neglect to communicate that which a party knows and ought to communicate.
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When is there concealment?

Requisites: There is concealment (sec.38)
a. when the party knows the fact and neglects to disclose it to the other party
b. the fact that he conceals is material to the risk
c. such part is duty bound to disclose such fact to the other
d. such party makes no warranty the of the fact that he conceals
e. the other party has not the means of ascertaining the fact that he conceals
Is the fact of fraud necessary to rescind an insurance contract on the
ground of concealment?
NO. Concealment whether intentional or unintentional entitles the injured party to
rescind the contract. (Sec. 27)
When is fraud affect insurance contract?
Intentional or fraudulent concealment applies only to matters tending to prove
falsity of warranty. (Sec. 29)
July 21, 2014
Test of materiality? When is a fact material it needs to be disclosed?
A fact is material facts if it affects/influence the insurer s decision to :
a. enter into the contract
b. estimate the risk
c. fix the premium
When is the obligation to disclose the material fact be made so as not to
avoid the contract on the ground of concealment?
Before effectivity of the contract
Is the insured obligated to communicate the fact acquired after the
effectivity of the policy?
NO more
Will it cancel the insurance if he will not communicate? Will there be
concealment?
NO. Insured is not obligated to disclose and there is no concealment.
If there was already an application but before the effectivity of the policy,
is there a need for the insured to communicate the material fact acquired
after the application has been made?
- If the material fact has been acquired after the effectivity of the policy he is NOT
oblige to communicate the same, thus there could be no concealment to negate the
contract.
General rule: If acquired after the application has been made but before the
effectivity of the insurance, the insured is bound to make disclosure
EXCEPTION: when the effectivity is made to retroact to the date of application.
(sec.31-35)
What are the instances when there is no concealment even if the facts
were not communicated (3 instances)?
a. When the insurer is expected to know the material fact
b. When the insurer is deemed to waive its disclosure
c. When the insurer issued the policy without further inquiry with re to the
perfectly answered Insurance application
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In what instance is an opinion considered a material fact that needs to be

communicated? In what kind of insurance? When is it material?
In life insurance, it is NOT material
In marine insurance, opinion is material
What is the effect or consequence of concealment? Exemption?
General Rule: concealment vitiates the contract and has the right of rescission.
Exemption: when the insurer waives and with regard to incontestability clause
where AFTER a life insurance policy is made payable on the death of the insured
and shall have been in force during the lifetime of the insured for a period of atleast
2years from the date of its issue or of its reinstatement, the insurer cannot prove
that the POLICY IS VOID AB INITIO or rescindable by reason of fraudulent
concealment or misrepresentation of the insured or his agent.
- Marine insurance regarding concealment: element that the other party has
not the means of ascertaining the fact concealed.
What is an Incontestability Clause?
- Requisite:
1. The policy is a life insurance policy
2. It is payable on the death of the insured
3. It has been in force during the lifetime of the insured for a period of
2years from the date of its issue or of its last reinstatement.
The period of 2yrs can be shortened but it cannot be extended.
When must an insurer exercise right of rescission?
NON-LIFE
- Must be exercised prior to the commencement of an action on the contract
LIFE
- The defense is available only during the first two years of a life insurance
policy or upon the first 2yrs after reinstatement
Is the fact of fraud necessary to rescind the insurance contract on the
ground of concealment?
NO. sec. 27. A concealment whether intentional or unintentional, entitles the injured
party to rescind the contract of insurance.
Sec.29: An intentional and fraudulent omission, on the part of insured, to
communicate information of matters proving or tending to prove the falsity of a
warranty, entitles the insurer to rescind.
When is it Affirmative? When is it Promissory?
Affirmative affirmation of fact when the contract begins
Promissory promise to be performed after the policy was issued.
What is the effect/consequence of representation? When can the party rescind?
(Sec. 45)
What are the exceptions that the misrepresentation entitles the insurer to rescind at
the time the representation becomes false? (When insurer accepts payment of
premium, and when incontestability clause applies in case of life insurance.)
Can the insurer still rescind based on misrepresentation after an action has been
commenced?
(Sec 48 prior to the commencement of an action)

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Distinguish Warranties from Representation

2 Kinds of Condition to an insurance contract: Condition Precedent and Condition
Subsequent.
July 22, 2014
What is representation?
A factual statements made by the insured at the time of, or prior to, the issuance of
the policy to give information to the insurer and induce him to enter into an
insurance contract.
What
1.
2.
3.

are the kinds of Representation?

Oral or written ( sec. 36)
Made before or at the time of the issuance of the insurance policy (Sec. 37)
Affirmative(sec. 39) and Promissory(Sec. 42)

What is misrepresentation?
There is misrepresentation when:
a. The insured stated the fact something which is untrue
b. Such fact was stated with the knowledge that it is untrue and with intent to
deceive or which he state positively as true knowing it to be true and which
has a tendency to mislead
c. Such fact is material to the risk.
Distinguish Concealment from Misrepresentation
In concealment the insured is silent when he is ought to speak while in
misrepresentation the insured stated the fact which is not true.
What is the effect of misrepresentation?
Misrepresentation or false statement intentionally made by the insured entitles the
insurer to rescind the contract from the time the representation becomes false.
Except in life insurance when the policy had been in force or
Devices used in ascertaining the risk of loss:
1) Concealment,
2) Representation
3) Warranty
4) Conditions
5) Exception
What is a Warranty?
A statement or promise by the insured set forth in the policy or by reference
incorporated therein, the untruth or non-fulfillment of which in any respect, and
without reference to whether insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy VOIDABLE by the insurer.
What are the kinds of Warranties?
Express, Implied, Affirmative, Promissory,
What is the effect of a breach of warranty?
GENERAL RULE: in case of breach of warranty entitles to insurer to RESCIND the
contract
EXCEPTION:
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1.
2.
3.
Other

Loss occurs before the time of performance of the warranty

Performance become unlawful at the place of contract
Performance becomes impossible
warranties includes .

What
a.
b.
c.
d.

are the defenses NOT barred by Incontestability Clause:

The person taking the insurance lacked insurable interest as required by law
The case of the death of the insured is an excepted risk
Premiums have not been paid
The conditions of the policy relating to military or naval services have been
violated
e. The fraud is particularly of vicious type
f. Beneficiary failed to furnish proof of death or to comply with any conditions
imposed
g. Action was not brought within the time specified.

What is a policy in insurance? (Sec. 49)

A written instrument in which a contract of insurance is set forth.
What are the basic contents of a policy? (Sec. 51)
It must specify:
a. The parties
b. The amount of insurance except in open policy
c. rate of premium
d. property or life insured
e. insurable interest in property insurance, if the insured is not the absolute
owner
f. risk insured against
g. duration of insurance
Is policy necessary for the perfection of contract?
- In insurance contract, the insured is the one applying while the insurer accepts the
offer by approving the application. But the mere submission does not perfect the
contract but it is the approval of the policy and the corresponding payment of
premium that perfected the contract.
- If the insured sent the application and pays the premium to the insurer can
recover the when the insured died after the approval of the contract. However,
cannot recover when the insured had perished before the application was
approved.
Is the presentation of insurance policy necessary to recover from the
insurance?
General Rule: Presentation of policy is not necessary to recover from the insurance
(Asian Terminal Inc. v. Malayan Insurance GR. # 171406, April 4, 2011)
EXCEPTION:
1. If issue raised arose from the very existence of an Insurance Contract
(Malayan Insurance Inc. v. Regis Brokerage, Inc. GR. # 172156, Nov. 23,
2007)
2. In order to determine extent of coverage
(Wallem Phil. Shipping Inc. v. Prudential Guarantee & Assurance Inc. GR #
152158, Feb. 7, 2003)
3. In Marine Insurance, when loss or damaged cargo pass through several
stages with different parties and it could not be determined when the
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damage to the cargo occurred such that the insurer should be made liable for
it
(Home Insurance Corporation v. CA, GR # 109293, Aug. 18, 1993)
What is a cover note?
Is a memorandum issued before the approval of the application.
What is the effect if insurer issued a cover note?
Rules on cover note:
a. A cover note is issued upon the approval of the policy.
b. It shall be binding from the date of issuance
c. It can be cancelled by either party upon notice within 7 days before its expiration
d. The policy must be issued within 60days
e. The 60-day period may be extended by the insurance commissioner
What is a Rider? What is a Clause?
A rider is a printed stipulation usually attached to the policy because they
constitute additional stipulations between the parties
A clause is an agreement between the insurer and the insured on a certain matter
relating to the liability of the insurer in case of loss.
Who signs the insurance policy? (The insurer or his authorized agent)
Is the insured required to sign in all kinds of policies? (No. Countersigns only in
Riders,
Warranties, Clauses, and Endorsements, except when made or applied for by the
insured or owner for himself.)
Is a policy necessary for the perfection of the insurance contract? What is required
for the perfection of the insurance contract? (Approval of application and payment
of premiums prefects the contract of insurance.)
What are the kinds of Policy? Explain each.
Open
Valued
Running
What are the grounds for the cancellation of the policy by the insurer?
(Sec. 64)
What are the requisites to be complied with by the insurer for the
cancellation of the contract?
(Notice requirement to the insured.)

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