Sec 1. “This Decree shall be known as The Insur-ance Code.”

History & Origin• Insurance is based upon the principle of aiding another from a loss caused

by an unfortunate event; with the purpose of extending aid to their unfortu-nate members from a fund contributed by all.

• First domestic non-life insurance company “Yek Tong Line Fire and Ma-rine Insurance Company.

• First domestic life insurance company “Insular Life Assurance Co. Ltd”• C.A 186 created GSIS which covers gov’t employees• RA 1161 created SSS which covers employees of the private sector.

Laws governing insurance1. Insurance Code

• primarily governs the different types for insurance contracts and those engaged in insurance business in the Phil.

2. Special Laws• Insurance Code• Revised Gov’t Service Insurance Act of 1977• The Social Security Act of 1954

3. Civil Code : Art. 739 & 2012, 2011, 2021-2027 and 22074. Others:

• Code of Commerce • RA 656 “Property Insurance Act” dealing with gov’t property. • RA 4898 providing life, disability and accident insurance coverage to

barangay officials• EO 250 which increases, integrates and rationaizes the insurance bene-

fits of barangay officials & members of the Sangguniang Panlalawigan, Panlungsod and Bayan

• RA 3591 which creates PDIC that insures the deposits of all banks

Rights of subrogation of insurer to rights of insured against wrongdoer• Subrogation - substitution of one person in place of another with reference

to a lawful claim or right, so that he who is substituted succeeds to the

rights of the other in relation to a debt or claim, including its remedies and securities.

• Doctrine of subrogation is a process of legal substitution. The Insurer, after paying the amount covered by the insurance policy, is now stepping into the shoes of the insured and availing himself of the latter’s rights that exist against the wrongdoer at the time of the loss.

• Purpose: 1. To make the person who caused the loss to be legally responsi-ble for it. 2. To prevent the insured from receiving a double recovery from the wrong doer and the insurer

• Right of subrogation under Art. 2207 applies only to property and NOT to life insurance. Why? - The value of human life is unlimited and no recov-ery from a 3rd party can be deemed adequate to compensate the insured’s beneficiary. A pecuniary value of a human life can seldom be determined with accuracy EXCEPT when the insurance is taken by a creditor o the life of a debtor to secure a debt.

• Life insurance contracts are not ordinarily contracts of indemnity.• Art. 2207 “If the plaintiff's property has been insured, and he has re-

ceived indemnity from the insurance company for the injury or loss aris-ing out of the 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. If the 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.”

• Payment of the insurer serves as an EQUITABLE ASSIGNMENT of all the remedies w/c the insured may have against the third party whose negli-gence or wrongful act caused the loss.

• Subrogation receipt is sufficient to establish the existence of a insurer in-sured relationship and the amount paid to settle the insurance.

• Loss or injury must be covered under the insurance policy. In case the in-surer pays the insured for the loss not covered by it, he may not recover from the latter what he has paid as it is treated as “voluntary payment” how-ever the insurer may recover from the third party for damages under Art. 1236 of the CC.

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• The insured can only recover once however if the amount paid by the insur-ance company does not fully cover the loss/injury, the insured is entitled to recover the deficiency from the person responsible of such.

• Insurer can not compel the insured to seek indemnity from a 3rd person or somewhere.

• The insurer can only recover the amount recoverable by the insured from the party responsible for the loss. Also the insurer can not recover the full amount it paid if it is greater than that to which the insured could lawfully lay claim against the person causing the loss.

• Exercise of right of subrogation lies solely under the insurer’s discretion.• Limitation of the right of subrogation:

A. both the insurer and the consignee are bound by the contractual stipu-lations under the bill of lading.

B. Insurer can be surrogated only to the rights as the insured may have against the wrongdoer.

• In a case where the insured release by his own act the wrongdoer or 3rd party responsible for the loss/damage, the insurer loses his right against the wrongdoer because the latter can only be subrogated to the rights of the for-mer. However, the insured is under obligation to return to the insurer the amount paid thereby entitling the the latter to recover the same.

Sec 2. “Whenever used in this Code, the following terms shall have the respective meanings here-inafter set forth or indicated, unless the context otherwise requires:(1) A "contract of insurance" is an agreement whereby one undertakes for a consideration to in-demnify another against loss, damage or liability arising from an unknown or contingent event.A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if made by a surety who or which, as such, is doing an insurance business as here-inafter provided.

(2) The term "doing an insurance business" or "transacting an insurance business", within the meaning of this Code, shall include:(a) making or proposing to make, as insurer, any insurance contract;(b) 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;(c) doing any kind of business, including a reinsur-ance business, specifically recognized as consti-tuting the doing of an insurance business within the meaning of this Code;(d) doing or proposing to do any business in sub-stance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or transac-tions or that no separate or direct consideration is received therefore, shall not be deemed conclu-sive to show that the making thereof does not constitute the doing or transacting of an insur-ance business.”

Legal concept of insurance• Assurance - referring to an event like death w/c must happen• Insurance - a contingent w/c may or may not occur• Insurance covers Assurance

Definition1. Contract of insurance -

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• an agreement by w/c one party(insurer) for a consideration(premium) paid by other party(insured), promises to pay money or its equivalent or to do some act valuable to the latter(or his nominee), upon the happening of a loss, damage, liability, or disability arising from an unknown or contingent event.

• is a promise by one person to pay another, money or any other thing of value upon the happening of a fortuitous event beyond the effective con-trol of either party in w/c the promisee has an interest apart from the contract.

2. Policy - a written insurance

Economic Business

Insurance reduces risk by a transfer and combination of uncertainty in regard to financial loss

plan by w/c large #s of people associate themselves & transfer to the shoulders of all, risks that attach to individuals

*In short, it is plan by w/c the losses of the few are paid out of the contribu-tions of all members of a group.

Determination of the existence of the contract

• The character of insurance is to be determined by the exact nature of the contract actually entered into whatever the form it takes or by whatever name it may be called.

• A contract of suretyship is different from a contract of insurance however the former shall be deemed like the latter when the surety is doing an insur-ance business within the the meaning of the Code

• Elements: • Subject - thing insured

• Fire & Marine insurance, the thing is the property• Life, Health & Accident, the thing is the life or health of the person• Casualty Insurance, it is the insured’s risk of loss or liability

• Consideration - the premium paid; its amount is based on the probability of loss and extent of liability for w/c the insurer nay become liable under the contract.

• Object and purpose - the transfer and distribution of risk of loss, damage or liability arising from an unknown or contingent event through the payment of consideration by the insured to the insurer under a legally binding contract to reimburse the insured for losses suffered on the hap-pening of the stipulated event.

* There must be an 1. offer and acceptance 2. parties have the legal capacity to enter into such contract 3. all requisites of a binding must be present (en-forceable).

Nature & Characteristics of an insurance contract1. Characteristics of a contract of insurance

1. Consensual - perfected by the meeting of the minds of the parties2. Voluntary - not compulsory however they must not contravene any

provision of law and are not opposed to public policy• In particularly liability insurance, may be required by law in certain

instances• Insurance may also arise by operation of law.• Social Insurance - GSIS & SSS

3. Aleatory • depends upon some contingent event.

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• one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event w/c is uncertain, or w/c is to occur at an indeterminate time

4. Unilateral contract - imposing legal duties only on the insurer who promises to indemnify in case of loss

5. Conditional - because it is subject to conditions the principal one of which is the happening of the event insured against.

6. Contract of Indemnity • because the promise of the insurer is to make good only the loss of

the insured. • No person may secure insurance upon property in w/c he has no in-

terest. If the insured has no insurable interest, the contract is void and unenforceable by reason that it is contrary to public policy.

7. Personal Contract • between the insurer and the insured each party having in view the

character, credit and conduct of the other.• Insured cannot assign his rights under a property policy to others

without the consent of the insurer. • With regards to life insurance policies, they are generally transfer-

able or assignable8. Property in legal contemplation

Distinguishing elements of the contract of insurance

Insured

• He possesses an interest of some kind susceptible of pecuniary estimation known as “Insurable Interest”

• He is subject to a risk of loss• The insured makes a eatable contribution called “premium” to a general insur-

ance fund

* Even if all the elements are present, there is still no contract of insurance if the primary purpose of the parties is the rendering of service and not the in-demnification of a party for loss, damages or liability incurred by the latter.

Insurance, a risk-distributing device1. A contract possessing only the first 3 elements shall be a “risk-shifting de-

vice” but not a contract of insurance w/c is fundamentally a “risk distribut-ing device.”

2. The device of insurance serves to distribute or spread the risk of financial or economic loss faced by the insured among as many as possible of those who are subject to the same or similar kind of risk.

Coping with risk1. Various way to cope with risk

1. Limiting the probability of loss2. Limiting the effects of loss• Diversification is a particularly important way of limiting the effects

of loss3. Self-insurance or self-financing• Special funds set aside for loss

4. Ignoring risk• engage in the activity w/o doing anything further with regards to the

risk5. Transferring risk to another• transferring or sharing it to someone else by a contractual arrange-

ment

Valuation of transferring risk1. An individual’s attitude towards risk is influenced by several factor

1. probability of loss2. potential magnitude of the loss3. person’s ability to absorb loss

2. With respect to loss, people are either1. risk preferring - those people would choose to forego the certain loss

in the hope of incurring no loss, despite the equal probability of suf-fering a large loss

2. risk neutral - indifferent to the alternatives3. risk averse - would choose to lose 500Php with certainty instead of

confronting the 50% chance of losing twice as much

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Economic effects of the transfer and distribution of risk1. Moral hazard - Since X’s risk is completely eliminated through transfer to

Y, X might not take measures that prevent the loss from occurring or min-imising the effect of loss once it occurs. (take for granted na yung thing since insured naman)

2. Remedy is to monitor the insured’s behaviour and adjust the premium based on the extent to w/c the insured takes adequate steps to safeguard his property. (not feasible); SOLUTION: insured retains some responsi-bility for the risk through either DEDUCTIBLE or COINSURANCE.

3. Deductible - insured bears any loss up to some stated amount with the in-surer bearing the rest.

4. Coinsurance - insured bears some stated percentage of the loss regardless of its amount, with the insurer bearing the rest.

5. Amount to be paid - the amount of the fee or premium should equal the insured’s expected loss + pro rate share of the insurer’s admin costs.

6. They classified the risks by grouping similar risks together and charging each member of the group the same premium.

7. Adverse selection - any group will have a higher proportion of less desir-able risks since more applications for the insurance will tend to come from those who get a better bargain.

The field of insurance1. Basic classification emphasizes on

1. Voluntary insurance (private)• includes major category of commercial insurance w/c divided into

personal & property types of protection, and traditionally in property insurance, the major groupings of fire-marine and casualty-surety are important.

• Not based upon gov’t compulsion and is sought by the insured to meet a recognised need for protection.

• It is divided into 3 groups1. Commercial insurance - usually what people have in mind when

they refer to insurance business. 2 classifications1. Personal insurance - based on the nature of the perils; whether

they are more directly concerned with losses due to loss of earning power of a person.

2. Property insurance - includes every form that has for its pur-pose the protection against loss arising from the ownership or use of property. 2 general classifications• 1st - the insured in the event of loss growing out of dam-

ages to, or destruction of his own property; Includes fire and marine insurance

• 2nd - pays damages for which the insured is legally liable, the consequence of negligent acts that result in injuries to other persons or damage to their property; casualty and surety insurance.

2. Cooperative insurance • applied to associations usually operating under hospital, medi-

cal, fraternal, employee or trade-union auspices.• organized without regard to the profit motive and represent an

effort to accomplish the ends of social insurance by private en-terprise

• non-profit cooperative objective of the insurance is emphasized3. Voluntary gov’t insurance

• no element of compulsion• designed to benefit the entire community but are used only by

those persons who wish to use the available benefits.• such plans as the insurance of mortgage loans and insurance of

growing crops2. Social insurance (gov’t)• compulsory and is designed to provide a minimum of economic secu-

rity for large groups of persons, particularly those in the lower income groups.

• Primarily concern with the unfavorable losses resulting from the per-ils of accidental injury, sickness, old age, unemployment and the pre-mature death of family earner.

• Limited to that insurance w/x are required by the gov’t and have for their object the provision of a minimum standard of living.

3. Multiple line insurance - denotes not just several kinds of insurance but the combination of at least 2 kinds of insurance, specifically the traditional fire and casualty lines.

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4. All lines insurance - used rather to describe the broadening nature of insurance operations w/x combines at least most of the basic types of insurance including the traditional fire, casualty, life and health lines.

Classifications of contracts of insurance1. Principal and older forms of insurance are Marine, Fire, Life and Acci-

dent.2. 3 main classifications

1. Insurance against loss or impairment of property interests2. Insurance against loss of earning power due to death3. Insurance against contingent liability to make payment to another• insured is protected against his loss with regards to claims for dam-

ages3. Modernized classfication

1. Marine2. Property3. Personal4. Liability

Classification by interest protected1. 2 methods to classify according to the interest

1. 3rd party/1st party distinction• contract between the insurer and the insured is designed to indemnify

the insured for a loss suffered directly by the insured. • Property insurance - 1st party• Liability insurance - 3rd party because the interests protected by the

contract are ultimately those of 3rd parties injured by the insured’s conduct

• ALL insurance are 1st party except liability• Life insurance - 1st party because the loss is suffered by the insured;

it is the insured who loses his life.• Health insurance - 1st party because loss is suffered directly by the in-

sured.• No fault insurance - 1st party because of the substitution for tort lia-

bility

• “No fault” - victims recovers for his loss from his own insurer, w/o regard to the fault of the 3rd party or his own contributory fault

2. All-risk/specified-risk reduction

All risk Specified risk

Distinction • reimburses the in-sured for damages to the subject matter of

the policy from all causes EXCEPT

those specifically ex-cepted in the policy

• all those not ex-cluded are automati-

cally included

• covers damage to the subject matter of the policy only if it results from specifically iden-tified causes listed in

the policy

Language of the policy • Marine insurance & “Jeweler’s block in-

surance”

• homeowner’s insur-ance

Burden of Proof • once the insured es-tablishes that a loss

occurred through some event other

than an inherent de-fect or normal depre-ciation, ORDINARILY placed on the insurer to prove that the loss falls within an explicit exception to cover-

age

• Ordinarily placed on the insured to initially

prove that the loss falls within the pol-icy’s provisions on

coverage

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Other advantages • coverage is presum-ably simpler to under-

stand• duplication of cover-

ages & premiums from separate

• specified risk policies is avoided

• pressures toward ad-verse selection are

minimised• policies are easier

and less expensive for the insurer to ad-

minister• most advantageous -

avoidance of gap in coverage

• HOWEVER NOT AB-SOLUTE, if a loss is certain to occur, such

as wear and tear therefore not being

fortuitous, it is not in-surable

• COVERS ALL KINDS OF LOSS but not

those due to wilful & fraudulent act of the

inusured

Classification under the Code• Classified according to the nature of risk involved

1. Life insurance contracts1. individual life2. group life3. industrial life

2. Non life insurance contracts1. marine2. fire3. casualty

3. Contracts of suretyship or bonding• covers any kind of loss, damage or liability arising from an un-

known or contingent event• possible for an insurance company to insure against any risk what-

ever associated with any lawful activity as long as there is no pro-hibition by a statue or violation of public policy

Contracts written by guaranty or surety companies• Contracts written by guaranty or suretyship companies and those generally

designated as guaranty insurance comprises generally principally of fi-delity, title, bond ans security guaranty.

• Construed against the insurer• GR: bonds of guaranty and surety companies who engage in the business

for profit are essentially insurance contracts and are governed by the rules of construction applicable thereto applies to bonds guaranteeing the carry-ing out or performance of contracts to do a particular act or carry out a par-ticular project.

• A contract of suretyship shall be deemed be an insurance contract if made by surety who or w/c is doing an insurance business w/in the meaning of the code

Construction of insurance contracts2. When there is ambiguity or doubt

• Contracts of insurance are to be construed or interpreted liberally in favour of the insured and strictly against the insurer resolving all ambi-guities against the latter so as to effect its dominant purpose of indem-nity or payment to the insured, especially where a forfeiture in involved.

• It should be interpreted to carry out the purpose for w/c the parties en-tered into the contract w/c is to insure against risks of loss, damage or li-ability n the part of the insured.

• Limitations of liability must be construed in such a way as to preclude the Insurer from non-compliance with its obligations

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• Be Construed strictly against the insurer• A policy of insurance is a contract of “adhesion” - the insurer is under

the duty to make its meaning clear if it desires to limit or restrict the op-eration of the general provisions of its contract by special proviso, ex-ception or exemption.

• “Bargaining contract” - both parties participate in drawing up its terms and conditions or determining its wording

• Any ambiguity be resolved in favor of the beneficiary.• A policy of insurance w/c contains exceptions or conditions tending to

work a forfeiture of the policy shall be interpreted most favourably to-wards those against whom they are intended to operate and most strictly against the insurance company or the party for whose benefit they are in-serted.

• If the restrictive provisions are open to 2 interpretations — most favor-able to the insured is adopted.

• If there is a resolutory condition — mere inaction of the insurer on the insurance application must not work to prejudice the insured.

3. When the terms are clear• The principle of favourably to the insured only applies to cases of doubt

but not when the intention of the policy is clear or the language is suffi-ciently clear to convert the mening of the parties although the contract may be rather onerous.

• If such terms are clear and certain they must be taken in their plain and ordinary sense.

Function of Insurance1. Principal function — risk-bearing2. Subsidiary function

1. Stimulates business enterprises2. Encourages business efficiency and enterprise3. Promotes loss-prevention4. Encourages savings5. Solves social problems

3. Indirect function - there are various indirect functions some of which may be regarded as benefits rather than functions proper1. Investment of funds

2. Use of reserve funds3. Effect on prices4. As a basis of credit

Sec. 3 “Any contingent or unknown event, whether past or future, which may damnify a person hav-ing an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this chapter.The consent of the spouse is not necessary for the validity of an insurance policy taken out by a mar-ried woman on her life or that of her children.All rights, title and interest in the policy of insur-ance taken out by an original owner on the life or health of a minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy.”

Requisites of a contract of insurance1. Subject matter w/c the insured has an insurable interest

• anything that has an appreciable pecuniary value w/c is subject to loss or deterioration or w/c one may be deprived so that his pecuniary in-terest is or may be prejudiced, may properly constitute the subject matter of insurance.

• 3 insurances — Property; Life, health and accident; Casualty2. Event or peril insured against w/c may be any contingent or unknown

event, past or future and a duration for the risk thereof• the contingent or unknown event will 1. damnify or cause loss to a

person having an insurable interest or 2. create a liability against him. • Unknown event may be past or future.• Insurer is liable for a fortuitous event if it is the event or peril insured

against and is the proximate cause of the loss.3. Promise to pay or indemnify in a fixed or ascertainable amount4. Consideration for the promise known as “premium”5. Meeting of the minds of the parties upon all the foregoing essentials

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Insurance by a married woman• May take out an insurance on her life or of her children or that of her hus-

band without the consent of the latter, she having an insurable interest Insurance by a minor• Not void, only voidableOwnership of life insurance policy• Divided between the insured and the beneficiary• Insured being the owner of its various marketing & sales features• Beneficiary is the owner of the promise to pay the proceeds at the death of

the insured subject to the insured’s right of revocation• GR: the nature of the interest of the beneficiary depends on the terms if the

insurance contract, including the existing statutes by w/c the insurer and its policyholders are bound.

• At the death of the original owner of a policy of insurance taken out by him on the life or health of a person, all rights, title and interest in the policy shall automatically vest in the latter unless otherwise provided for in the policy.

Sec 4. “The preceding section does not authorize an insurance for or against the drawing of any lot-tery, or for or against any chance or ticket in a lot-tery drawing a prize.”

• 3 elements of lottery1. consideration2. prizes3. chance

• No lottery where a company, to promote the sale of certain products, re-sorts to a scheme w/c envisions the giving away for free of certain prizes for the purchase of said products, for the participants are not required to pay more than the usual price of the products.

• Only similarity of gambling and insurance — one party promises to pay a given sum to the other upon the occurence of a given future event, the

promise being conditioned upon the payment of, or agreement to pay, a stipulated amount by the other party to the contract.

Sec 5. “All kinds of insurance are subject to the provi-sions of this chapter so far as the provisions can apply”

Sec 6. “Every person, partnership, association, or cor-poration duly authorized to transact insurance busi-ness as elsewhere provided in this code, may be an in-surer”

1. Insurer - the party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured or to pay him a certain sum on the happening of a specified contingency or event.

2. Insured - the person in whose favour the contract is operative and who is indemnified against, or is to receive a certain sum upon the happening of a specified contingency or event. The person whose loss is the occasion for the payment of the insurance proceeds by the insurer.

3. Beneficiary - person designated by the terms of the policy as the one to receive the proceeds of the insurance•

Who may be an insurer1. Individual, partnership or association AS LONG AS IT HOLDS A CER-

TIFICATE OF AUTHORITY FROM THE INSURANCE COMMIS-SIONER.

2. In order to possess such, IT MUST POSSESS THE REQUIRED CAPI-TAL ASSETS.

3. Insurance Corporation - one that is formed or organised to save any per-son or persons or other corporations harmless from loss, damage or liabil-ity arising from any unknown or future or contingent event, or to indem-nify or to compensate any person or persons or other corporations for any such loss, damage, liability or to guarantee the performance of or compli-ance with contractual obligations or the payment of debts of others.

Business of insurance affected with public interest• Insurance companies are instrumentalities w/c gather funds upon the basis

of equality of risk from a greater number of persons, sufficient;y large in

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number to arouse the element of chance to step out and the law of averages to step in as the controlling factor — and hold the numerous amounts so collected as general fund to be paid out to those who shall suffer losses.

Sec 7. “Anyone except a public enemy may be in-sured.”

Capacity of party insured1. Natural Person - in order that a person may be the party insured n a con-

tract of insurance, 2 essential requisites are necessary1. competent to make a contract2. possess an insurable interest in the subject of the insurance3. insured must not be a public enemy

• public enemy - a nation with whom the Phil is at war and it in-cludes every citizen or subject of such nation.

• alien enemy• during wartime, a private corp controlled by enemy aliens are con-

sidered to be public enemy despite organised under the Phil law. The corporation is deemed to have the same citizenship as the con-trolling stockholders in time of war.

2. Juridical Person - corporations or partnership

Effects of war on existing insurance contracts 1. Where parties rendered enemy aliens

• All intercourse between citizens of belligerent powers which is inconsis-tent with a state of war is prohibited.

• If the parties are not rendered enemy aliens by the intervention of war, he policy continues to be enforceable according to its terms and the laws governing insurance and the general rules regarding contracts.• Property insurance - an insurance policy ceases to be valid and en-

forceable as soon as an insured becomes a public enemy.• Life insurance - contract is not merely suspended but is abrogated by

reason of nonpayment of premiums, however the insured is entitled to the cash or reserve value of the policy, which is the excess of the pre-miums paid over the actual risk carried during the years when the pol-icy had been in force.

2. Where loss occurs after end of war• termination of war does not revive the contract. • Insurer is not liable even if the loss is suffered by the insured after the

end of the war.

Sec 8. “Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be per-formed by the mortgagor, may be performed by the mortgagee therein named, with the same ef-fect as if it had been performed by the mort-gagor.”

Insurable interest of mortgagor and mortgagee1. Separable insurable interest

• The mortgager and the mortgagee have each an insurable interest in the property mortgaged and this interest is separate and distinct from the other.

• Insurance taken by one in his own name only and in his favour alone, does not inure to the benefit of the other.

2. Extent of insurable interest of1. Mortgagor• Being the owner, he has an insurable interest therein to the extent of

its value, even though the mortgage debt equals such value.• Loss or destruction will not extinguish his mortgage debt.

2. Mortgagee

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• He has an insurable interest in the mortgaged property to the extent of the debts secured since the property is relied upon as security thereof and in insuring he is not insuring the property itself but his interest or lien thereon.

• His insurable interest is considered prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property.

3. Extent of amount of recovery• The mortgagor cant recover the full amount of his loss.• The mortgagee can’t recover in excess of the credit at the time of the

loss nor the value of the property mortgaged.

Insurance by mortgagee of his own interest. 1. When the mortgagee, independently of the mortgagor, insures his own in-

terest in the mortgaged property, he is entitled to the proceeds of the pol-icy in case of loss before payment of the mortgage.

2. In case of subrogation of insurer to right of mortgage, the mortgagee is not allowed to retain his claim against the mortgagor but it passes by sub-rogation to the insurer to the extent of the insurance money paid.

3. When there is a change of creditor, the payment of the insurance to the mortgagee by reason of the loss does not relieve the mortgagor from his principal obligation but only changes the creditor.

Insurance by mortgagor of his own interest1. Mortgagor may insure his own interest as owner for his benefit that in

case of loss the proceeds do not inure to the benefit of the mortgagee who has no greater right than unsecured creditors in the same.

2. However it is competent for the mortgagor to take out in ursine for the benefit of the mortgagee, where he pays the insurance premiums, making the loss payable to the mortgagee which it is the usual practice.

3. The mortgagee may be made the beneficial payee in several ways:• becomes the assignee of the policy with the consent of the insurer• be the mere pledgee without such consent• a rider making the policy payable to the mortgagee “as his interest may

appear” may be attached

• a “standard mortgage clause” containing a collateral independent con-tract between the mortgagee and the insurer may be attached

• the policy 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

Insurance by mortgagor for benefit of mortgagee, or policy assigned to mortgagee• Effects when the mortgagor effects insurance in his own name making it

payable to the mortgagee or assigned a policy to the mortgagee:1. contract is deemed to be upon the interest of the mortgagor hence he

does not cease to be party to the contract2. Any act of the mortgagor prior to the loss, that will avoid the insur-

ance affects the mortgagee even if the property is in the hands of the mortgagee

3. Any act which is to be performed by the mortgagor may be performed by the mortgagee with the same effect

4. In case of loss, mortgagee is entitle to the proceeds to the extent of his credit

5. Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished

* Rule on subrogation by the insurer to the right of the mortgagee does not apply

Effect of standard and open clause in fire insurance policy1. Standard or Union mortgage clause - the acts of the mortgagor do not af-

fect the mortgagee. (if a fire insurance policy contains it)• Purpose: make a separate and distinct contract of insurance on the inter-

est of the mortgagee.• mortgagee may procure a policy by which the mortgagor is top ay upon

such insurance2. Open or loss-payable mortgage clause - merely 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 mortgage.

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• If a policy is obtained by the mortgagor with a loss-payable clause in favour of the mortgagee as his interest may appear, the mortgagee is only a beneficiary to the insurer and not made party to the contract. Any act of the mortgagor w/c defeats his right will also defeat the right of the mortgagee. This kind of policy covers only such interest as the mort-gagee has at the issuing the policy.

Right of mortgage under mortgagor’s policy• The contract of indemnity under such policy is primarily with the mort-

gagor but the mortgagee is a third party beneficiary• Before loss - mortgagee is a conditional appointee of the mortgagor enti-

tled to receive so much of any sum that may become due under the pol-icy as does not exceed his interest as mortgagee.• Such right becomes absolute upon the occurrence of the loss

• After loss - loss happens when the credit is not due, the mortgagee is en-titled to receive the money to apply to the extinguishment of the debt as fast as it becomes due• loss happens after the credit has matured, the mortgagee may apply

the proceeds to the extent of his credit

Effect of insurance by mortgagee on behalf of mortgagor1. Discharge of debt

• Mortgagee is entitled to receive payment from the insured if the debt is equal to it. If greater than debt, the mortgagee holds the excess as trust for the mortgagor.

2. Right to subrogation• if there is a stipulation that the insurer shall be surrogated to the rights of

the mortgagee — payment of the policy will not discharge the debt even though the mortgagee may have procured the policy by arrangement with the mortgagor.

• if none, rule on subrogation does not apply EXCEPT where the mort-gage insures only his interest.

Sec 9. “If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obliga-

tion on the assignee, making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee.”

Assignment or transfer of insurance policy• The assignee acquires no greater right under the insurance than the assignor

had, subject to insurer’s defences UNLESS he makes a new contract with the insurer.

1. fire policy - being strictly a personal contract, the insurer is natural con-cerned about the moral character of the insured and should not be com-pelled to become an insurer to an assignee to whom he would have de-clined to issue a policy and who could mentally alter the risks assumed by the insurer w/o his consent.

2. marine policy - assignable even w/o the consent of the insurer unless re-quired by the terms of the policy.

• it is believed however that a marine policy just like a fire policy is not assignable w/o the consent of the insurer

3. casualty policy - insurer’s consent is also required since it involves moral hazards therefore such policies are not freely assignable without insurer’s consent.

4. life policy - it may be freely be assigned before or after the loss occurs, to any person whether he has an insurable interest or not. HOWEVER, an assignment of a life policy to a person without an insurable interest will not be upheld.

* A distinction must be made between the assignment or transfer:A. of the policy itself w/c transfers the rights to the contract to another

insuredB. of the proceeds of the policy after a loss has happened, w/c involves a

money claim under, or a right of action on, the policyC. of the subject matter of the insurance, such as a house insured under a

fire policy w/c has the effect of suspending the insurance until the sae person becomes the owner of both the policy and the thing insured

Right of mortgagor to assign insurance policy to mortgagee• Sec only gives effect if the insurer agrees to the transfer of the policy at the

time of his assent, imposes new obligations on the assignee

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Effect of new contract between insurer and mortgagee-assignee• Assignment of a fire policy by the mortgagor to the mortgagee w/ the con-

sent of the insurer does not convert the contract into one of indemnity to the mortgagee.

• Contract remains with the mortgagor as it is his interest alone that is cov-ered.

• Assignment operates merely as an equitable transfer of the policy so as to enable the mortgagee to recover the amount due in case of loss subject to the conditions of the policy.

• BUT where a new & distinct consideration passes between the mortgagee and the insurer a new contract is created therefore acts of the mortgagor can’t affect the right of the mortgagee, the assignee.

“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 or support, or in whom he has a pecuniary interest;

“(c) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and

“(d) Of any person upon whose life any estate or interest vested in him depends.

Insurable interest

• One of the most basic of all requirements

o Pecuniary in nature

o E – life insurance

▪ Benefit need not be pecuniary

Necessity of insurable interest

• Gives a legal right to insure

• Necessary for the validity of an insurance contract, without which, it is a mere wager-ing policy

Requirement a matter of public policy

• As a deterrence to the insured

• As a measure of limit of recovery

General classes of life policies

• Upon one’s life

o Unlimited insurable interest

o Not necessary that the beneficiary designated should have any interest in the life of the insured

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o Unlikely that a person will insure his own life for the benefit of another or for speculation

o Insurance of own life

▪ Evidence of good faith

o Selection of beneficiary of the insured sufficient to guaranty existence of good faith and confidence

o When regarded upon as a wagering policy

▪ At the behest of a third person named as a beneficiary

• Evidences

o Original proposal to take out insurance was that of the beneficiary

o The premiums are paid by the beneficiary

o The beneficiary has no interest, economic, emotional in the continued life of the insured

• Life of another

o There must be insurable interest in that life of another

o Insurance for the benefit of the insured

▪ Pecuniary

▪ Relation by blood, marriage or commercial intercourse

▪ Must have interest to preserve the life of the insured in spite of the insurance rather than destroy it

o Insurance for the benefit of a third party

▪ Both owner and beneficiary must have insurable interest in the life of the cestui que vie

▪Insurable interest in the life of a person upon whom one depends upon for education or support or in whom he has pecuniary interest

• When blood relationship sufficient

o Natural affection in the following cases is sufficient, if not more powerful to protect the life of the insured than any other consideration

▪ Brother – sister

▪ Father – child

• Persons obliged to support each other

o Under art. 195 of the Family Code

▪ Spouses

▪ Legitimate ascendants and descendants

▪ Parents and their legitimate children and the legitimate children of the latter

▪ Parents and their illegitimate children and the legitimate or ille-gitimate children of the latter

▪ Legitimate brothers and sisters, whether of the full or half-blood

▪ Brothers and sisters not legitimately related, whether of the full or half-blood

• Where pecuniary benefit essential

o Lesser degree of kinship

▪ Uncle-aunt

▪ Nephew-neice

▪ By affinity

• Son-in-law

• Brother-in-law

o There must be expectation of pecuniary benefit

o There must be dependence on the insured for support and care

o The expectation need not have legal basis, it is sufficient that it is actual

▪ Assumption of parental relations when a man sends a girl to school

▪ Woman who takes a girl from an orphan asylum and gives her a home

▪ Corporation has insurable interest over the life of an officer whose services the corporation depends for its prosperity

▪ On a business partner on the theory that his death may ad-versely affect the business operations

▪ On the reasonable expectation of substantial future benefits of employees

• President

• Executive officers

• Dept headsInsurable interest of a person in life of another under a legal obligation to former

• Related by contract or commercial relation

o That the right possessed by him will be extinguished or impaired by the death or illness of the other may lawfully procure an insurance on the oth-ers life

• Risk that performance of obligation might be delayed or prevented

o Must show that the death or illness of the insured might delay or prevent its performance

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Insurable interest of a creditor on the life of his debtor

• Extent

o Only to the amount of the debt AND the cost of carrying the insurance on the debtors life

o Amount must not be so disproportionate to the amount of the debts and liens plus cost of the insurance speculative/wagering

• Right of the debtor in insurance taken by creditor

o Creditor not an agent of the debtor

o Contract is purely between the insurer and the creditor

o Does not inure to the benefit of the creditor unless the contrary is ex-pressly stipulated

• Extent of the amount which may be recovered by the insuring creditor

o Amounts which remain unpaid at the time of the death of the debtor

o If whole debt paid none

• Where insurance taken by debtor for the benefit of the creditor

o Full payment by the debt does not invalidate the policy, the proceeds should go to the estate of the debtor

• When debt becomes legally unenforceable

o Does not cut off the insurable interest of the creditor although there is no reasonable expectation of the debtor becoming solvent

o Moral or equitable obligation to pay the debt is not destroyed

o The creditor may not insure the life of his debtor unless the latter has a le-gal obligation to him for payment

Insurable interest in the life of person upon which an estate or interest depends

• One may insure the life of the person where the continuation of the estate or interest vested in him who takes the insurance depends upon the life of the insured

o Ex – A receives as legacy the usufruct of a house. The ownership of which is vested in B. In the legacy, should B first die, both the usufruct and own-ership will pass to C. A has an insurable interest in the life of B

Consent of person whose life is insured

• Not essential

• Provided, it can be proved that

o There is insurable interest at the inception of the policy

Similarity between a life insurance policy and a civil donation

• Donation

o Act of liberality whereby a person disposes gratuitously a thing or right in favor of another who accepts it

o Both founded upon LIBERALITY

o Beneficiary is like a done

▪ Recipient of the profits or proceeds

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

Beneficiary defined

• Person named or designated in a contract of life, health or accident insurance as the one who is to receive the benefits which become payable according to the terms of the contract

• Intended recipients of the proceeds or benefits of the insurance or benefits of the in-surance if the risks occurs

• Those who upon a proper basis of insurable interest, secure insurance for their own benefit upon the lives of others

Kinds

• Insured himself

• Third person who paid a consideration

• Third person through mere bounty of the insured

o No valuable consideration

o Beneficiary may be the estate of the insured or third party

• 2nd and 3rd cases

o The beneficiary is not a party of the contract

o In all three cases

▪ The proceeds become the exclusive property of the beneficiary upon the death of the insured

▪ Therefore, where the insured before dying became insolvent, the proceeds should be paid to the beneficiary and not the as-signee

Limitations on the appointment of beneficiary

• Any person forbidden from receiving any donation (Art. 739. CC)

o Those guilty of adultery or concubinage at the time of donation

o Those made between persons found guilty of the same criminal offense in consideration thereof

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o Those made to a public officer or his wife, descendants and ascendants, by reason of his office

• Beneficiary is like a done Art. 739 of CC should likewise apply

Right of the insured to change beneficiary

• GR: power to change even without the consent of the beneficiary who has no vested right but only an expectancy of receiving the proceeds

• Insured may without the consent of the insured

o Retain the right to receive cash value

o Assign the policy

o Surrender the police

• Effect of death of the insured

o Beneficiaries designation deemed irrevocable

• Where right is waived

o Beneficiary acquires absolute and vested interest to all benefits accruing to the policy from the date of its issuance and delivery, including that of ob-taining a policy loan to the extent stated in the schedules of values at-tached to the policy

o New beneficiary cannot be added

o Insured does not have power to destroy the contract by refusing to pay premiums for the beneficiary can protect his interest by paying the premi-ums

Measurement of vested interest

• In full face value and not in cash surrender value

• Incase of death, beneficiary is paid on full face value

• In case the insured discontinues paring for the premiums, the beneficiary may con-tinue paying it and is entitled to automatic extended term or paid up insurance op-tions and vested right cannot be divisible at any given time

When beneficiary dies before the insured

• View that beneficiaries representative is entitled to insurance proceeds

o When the right to change the beneficiary is expressly waived

▪ The benefits should pass to his representatives and not to the estate of the insured

o View that estate of the insured is entitled to the insurance proceeds

▪ Especially if the designation is subject to the express condition to pay “if surviving”

▪ Most but not all courts hold “beneficiaries executors, administra-tors, or assigns,” sufficient to negative the implied condition that

the death of the beneficiary before maturity of the policy termi-nated all his rights to it

Designation of beneficiary

• Construed broadly in order that the benefit shall be received by those intended by the insured as the object of his bounty

o Children include;

▪ Adopted child

▪ Adult child not forming part of the household

▪ After born children even of a marriage subsequently contracted

▪ X include grandchildren

o Husband, wife, widow

▪ Description personae

• Answers the description but does not have the legal status of wife does not prevent her from taking as beneficiary as when she is designated by name al-though the words “his wife” are added

▪ Not named but designated merely by status

• Legal husband or wife ascertained at time of death

o Note: X extend to those forbidden to receiving a donation i.e. common law spouse, etc.

o Husband and children, wife and children

▪ “Their children”

• Includes children by another wife but prevailing view is children common to both

▪ “Wife and children,” “ Husband and children”

• All children of the insured

• Insurance money divided per capita

o Family

▪ Court will ascertain. If was so regarded, the court may include him though by no way related to the insured

o Heirs or legal heirs

▪ Heirs at law and persons who would take the property in case the insured died intestate

o Estate or legal representatives of the deceased

▪ Strict legal sense

▪ Executors or administrators unless

• It appears that the insured intended to use these ex-pressions in the sense of heirs or next of kin

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o If no beneficiary

▪ Legal heirs in accordance with law

▪ E

• 2 women innocently in good faith

o Each family entitled to one half of the insur-ance benefits

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

Forfeiture of interest of the beneficiary in a life insurance policy

• Other qualified beneficiaries

o Nearest relatives not otherwise disqualified of the insured shall inherit the proceeds in accordance with the rules of intestate succession

o Order (Refer to p.110 of De Leon)

Liability of insurer on death of insured

• Death at the hands of the law

o Ex. Legal execution

o One of the risks in the absence of a valid policy exception

• Death by self destruction

o Insurer not liable in case committed intentionally with whatever motive when in sound mind

▪ No recovery

▪ Death caused by voluntary act

o Insurer liable

▪ Purely accidental even though due to negligence if not excluded from the coverage by words such as “death by his own had,” “self destruction” and the like

• Death by suicide wile insane

o Insurer liable in the absence of express conditions to the contrary

o Insanity is one of the diseases the insurer must have known

• Death caused by beneficiary

o Intentional amounting to a felony

▪ Interest forfeited on the ground of public policy

▪ Nearest relative shall receive the proceeds if not otherwise dis-qualified

o Circumstances not amounting to a felony, beneficiary insane, self-defense, accidental

▪ Rights of the beneficiary under the policy not affected

o Not intentional but amounting to a felony

▪ Beneficiaries interest in the policy not forfeited

o Murder of the insured in all cases

▪ Forfeiture of interest

o Death caused by violation of law

▪ Insurer must establish that the violation of the law was the cause of had a causal connection with the accident resulting in death of the insured to avoid liability

“SEC. 13. Every interest in property, whether real or personal, or any relation thereto, or li -ability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest.

Insurable interest in property

• May be the

o Property itself

o Any relation thereto (interest of a trustee or a commission agent)

o Liability in respect thereof (interest of a carrier or depositary)

• Anyone who derives benefit from its existence or would suffer loss from its destruc-tion

• Occurrence of loss may be uncertain

o Sufficient that the interest might be subject to loss

• Title or right to possession not essential

o Insured has insurable interest if he is so situated with respect to the prop-erty that he will suffer loss as the proximate result of its damage or de-struction

▪ Mortgagor sold interests to vendee and thus parted with all his interests still has an insurable interest in the property because of his personal liability for the debt and his right to be subrogated to the mortgage security.

• Legal expectation of loss or benefit

o Not necessarily the interest in property in the sense of title but the concern in the preservation of the property and such a relation to or connection with it as will necessarily entail a pecuniary loss in case od its injury or de-struction

• Mere factual expectation of loss or benefit

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o Such expectation arising from any legal right or duty in connection with the property does not constitute insurable interest

o Ex

▪ Owner of a gasoline station near a hotel has no sufficient insur-able interest in the hotel simply becase its burning or destruction though it leaves the gasoline station physically unharmed, will lessen his income from guests of the hotel

▪ Also known as factual expectation

• Insufficient in strict indemnity insurance but will suffice in life insurance

“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.

Insurable interest in property in particular cases

• Existing interest

o Legal title

▪ Trustee as in the case of a seller of property not yet delivered, mortgagor of the property mortgaged, lessor of the property leased

o Equitable title

▪ Purchaser of property before delivery

▪ Mortgagee of property mortgaged

▪ Mortgagor after foreclosure but before expiration of the redemp-tion period

• Inchoate interest

o Founded on an existing interest

▪ Stockholder in the property of the corporation of which he is a stockholder which is founded on an existing interest from his ownership of shares in he corporation

▪ Insurable interest is limited to the value of his interest or to his share in the distribution of the corporate assets upon dissolution

▪ A stockholder has neither legal nor equitable tittle to assets of the corporation

▪ A partner has insurable interest in the firm property which will support a separate policy for his benefit

• An expectancy

o Must be coupled with an existing interest in that out of which such ex-pectancy arises

▪ Farmer may insure future crops if they are to be grown on a land owned by him at the time of the issuance of the policy

▪ An owner of a business can insure against a contingency which may cause loss of profits resulting from the cessation or inter-ruption of his business

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

Insurable interest of a carrier or depository

• Loss of the thing may cause liability to the carrier or depository to the extent of the value

• Bailee may insure merely his interest in the chattels to protect himself against loss of the benefits to which he is entitled, or insure himself against the liability which may incur upon the destruction of the chattels

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

Mere contingent or expectant interest not insurable

• A mere hope or expectation of benefit which may be frustrated by the happening of some event uncoupled with any present legal right will not support a contract of in-surance

o A father cannot insure the property of his son or vice versa that he expects to inherit the same

o Life of parents, children, spouses may be insured since they are under mutual obligation to support each other and to save the party entitled to support from being the subject of public charity.

o A general or unsecured creditor cannot insure the specific property of his debtor who is alive even though destruction of such property would render worthless any judgment he may obtains

▪ But an unsecured creditor may insure the property of a de-ceased debtor since all personal liability ceases with the death of the debtor

▪ Proceedings are in rem

▪ Also an unsecured creditor who obtains a judgment in his favor becomes a judgment creditor and has been held to have an in-surable interest in the property as he has a right to levy on such property as may be necessary to satisfy the judgment

▪ An unsecured creditor has an insurable interest in the life of his debtor to the extent of the amount of the debt

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o Property of testator still alive

▪ One named as beneficiary in a will has no insurable interest in a property before the testators death

• Expectation has no legal basis since it will pass no le-gal effect before the death of the testator

• Can be revoked at any time before the death unless the right has been expressly waived

“SEC. 17. The measure of an insurable interest in property is the extent to which the in-sured might be damnified by loss or injury thereof.

Measure of insurable interest in property

• Only on the actual loss and not more

• Mortgagor has insurable interest equal to the value of the mortgaged property and the mortgagee, only to the extent of the credit secured by the mortgage

• Purpose is indemnity

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

Effect of absence of insurable interest

• Principle of indemnity available

o Basis of all contracts

o No insurable interest void premiums ordinarily returned to insured un-less in pari delicto with the insurer

▪ In fire insurance, void if no insurable interest even if the insurer knew and insurable interest was subsequently acquired.

▪ A contract of lease which provides that any fire insurance policy obtained by the lessee over his merchandise inside the leased premises without the consent of the lessor shall automatically assign the proceeds of the policy to the lessor who has no inter-est in the property insured void

• Doctrine of waiver or estoppel not applicable

o X invoked since the public has an interest in the matter independent of consent or concurrence of the parties

o But where the real intention of the insured was to insure his goods for 15K but through error or mistake of the insurer the policy issued for 15K is the building in which the goods were stored which was never owned by the in-sured nor had ay insurable interest, it was held that in case of loss the in -sured can recover

Measure of indemnity

• Marine or fire insurance

o Valued policies

▪ Valuation of the thing insured conclusive between the parties thereto in the adjustment of loss, the insured has some interest at risk and there is no fraud on his part although it might be proved that the actual value of the thing is less

▪ Principle of indemnity cannot be invoked by the insurer who agreed to repair or replace the thing insured with a new one even though the cost of the undertaking may exceed the origi-nal amount of the insurance

• Liability insurance contracts

o Contracts of indemnity against liability not against loss

o Proceeds are paid to the third person to whom the insured is liable

• Life insurance contracts

o Not contracts of indemnity

o Amount fixed payable is not the true value of the thing insured because the life of a person is priceless

o More of an investment that indemnification

o Amount is governed by the amount of premium he contracted to pay

• Personal accident insurance

o Not contracts of indemnity

o Principle of indemnity not applicable

o If insurance on the life of another person

▪ Amount recoverable is the loss sustained by the person who ef-fected the policy

▪ In theory, it becomes a contract of indemnity

▪ Almost impossible to assess extent of injury

▪ A policy with fixed benefits may be effected

• Health insurance

o Not contracts of indemnity

▪ Contracts which provide for specific periodic income to disabled persons

o Contracts of indemnity

▪ Those which cover medical expenses

• Health care agreement

o Agreement with a health maintenance organization is the nature of a non-life insurance which is primarily a contract of indemnity

o Once a member incurs hospital, medical or any other expense arising from sickness or injury or other stipulated contingent, the health care

19

provider must pay for the same to the extent agreed upon under a con-tract

o Payment should be made to the party who pad all the hospital and medi-cal expenses

“SEC. 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; and interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist there-after or when the loss occurs.

Time when insurable interest must exist

• GR: applicable only to insurance on property and not to life insurance except that on the life of the debtor

• In property

o When insurance takes effect and loss occurs

o Insurable interest must exist in 2 distinct times

▪ Date of execution of the contract AND

▪ Date of the occurrence of the risk

• Otherwise void

• Why? Suffered no loss

• In life

o When insurance takes effect

o Must exist at the time the policy is procured or took effect

o Even if it ceased to exist at the time of the insured’s death

o Debtor whose life was insured by the creditor who subsequently pays the debt remains in force provided the former creditor continues to pay the premiums although there is no longer insurable interest

• Liability insurance

o When liability attaches

• Need not exist during intervening period

o To prevent the issue of wagering policies

o Need not exist in the meantime

o In the absence of a special provision to the contrary, the alienation of a property will not defeat a recovery if the insured has subsequently reac-quired the property and possess an insurable interest at the time of the loss

Existence of insurable interest when risk attaches

• It must be noted that notwithstanding the great volume of authority, the existence of insurable interest at the inception of the contract, unless made so by statute, is not

all necessary to its validity. It is sufficient that insurable interest exists at the time the risk attaches.

Insurable interest in life and property distinguished

Life Property

Unlimited Limited to the actual value of the interest

Enough that it exists at the time the pol-icy takes effect

Must exist at the time the policy takes ef-fect and when the loss occurs

Expectation of benefit need not have a legal basis whatever

Expectation must have a basis of a legal right

“SEC. 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured unac-companied by a corresponding change of interest in the insurance, suspends the insur-ance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person.

Effect in general of change of interest

• GR: mere transfer of a thing insured does not transfer the policy but suspends it un-til the same person becomes both the owner of the policy and the thing insured

• E

o Life, health an accident insurance

o Change of interest in the thing insured after the occurrence of an injury which results to a loss

o Change of interest in one or more of several things separately insured by one policy

o Change of interest by will or succession on the death of the insured

o Transfer of interest by one of several partners, joint owner or owners in common who are jointly insures to the others

o When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owners of the interest insured

o When there is express prohibition against alienation In the policy in case of alienation the contract is avoided

Object of rule against alienation

• To provide against changes which might supply a motive to destroy the property or might lessen the interest of the insured in protecting and guarding it

Change of interest covered by law

20

• Means absolute transfer of the property insured such as conveyance of the property by means of absolute deed of sale

• Interest does not pass by mere execution of a pledge or a chattel mortgage

o No alienation within the meaning of insurance law

“SEC. 21. A change of interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the right of the insured to indemnity for the loss.

Change of interest in a thing insured after a loss

• Liability of insurer becomes fixed

• Insured has a right to assign hi claim against the insurer as freely as any other money claim

• Absolute and cannot be delimited by agreement

• Insured has absolute right to transfer the thing insured after the occur-rence of the loss

• Does not affect his right of indemnity for the loss

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

Change of interest where several things separately insured in the policy

• Divisible contract

o Cause or consideration made up of several parts

o Violation of a condition which avoids a policy with respect to one or more thins does not affect the others

• Indivisible

o Cause or consideration for a gross sum or for an entire premium

o Change of interest in one or more of the things will also avoid the insur-ance

• Divisibility

o Determined by the intention by the language employed by the parties

“SEC. 23. A change of interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person taking his inter-est in the thing insured.

Change of interest by death of insured

• Insurance on property passes automatically to the heir, legatee or devisee who ac-quired interest in the thing insured, on the death on the insured

• Rights to succession are transmitted from the moment of the deat of the decedent

“SEC. 24. A transfer of interest by one of several partners, joint owners, or owners in com -mon, 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.

Transfer of interest by one of the several partners, etc., jointly insured

• Will not avoid the insurance

o Each partner is interested in the whole property

o Hazard is not increased because the purchasing partner has acquired a greater interest in the property by a transfer of his co-partners share

o E

▪ When done without the consent of the insurer and before the loss occurs where the policy contains the condition that in case of ANY sale, transfer, or change of title of any property insured by this company, or of any undivided interest therein such insur-ance will be void and cease

o Transfer to strangers

▪ Avoid the policy

“SEC. 25. Every stipulation in a policy of insurance for the payment of loss whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wa-gering, is void.

Stipulations prohibited in an insurance policy

• 2 stipulations declared void

o Stipulation for the payment of loss whether the person insured has or has not any interest in the subject matter of insurance

▪ Mere wager policy

• Pretended insurance where the insured has no inter-est in the thing insured and can sustain no loss by the happening of the misfortunes insured against

• E – Sec 181

o Stipulation that the policy shall be received as proof of insurable interest

▪ Existence of insurable interest does not depend upon the stipu-lations in a contract of insurance

• Defense of absence is available only to the insurer who has a legitimate interest in raising the defense

• May be raised by and for the benefit of the insurer alone

Wagering or gaming policies void

• A mere bet upon a future event

o Void on the ground of public policy

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• Non-existence of loss from occurrence of event

o Wager

▪ No loss but profit from it

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

• In making a contract, the parties have 4 primary concerns1. Correct estimation of the risk w/c enables the insurer to decided

whether he is willing to assume it, and if so, at what rate of premium2. The precise delimitation of the risk w/c determines the extent of the

contingent duty to pay undertaken by the insurer3. Such control of the risk after it is assumed as will enable the insurer to

guard against the increase of the risk because of change in conditions4. Determining whether a loss occurred and if so, the amount of such

loss.

Devices for ascertaining and controlling risk & loss1. The devices of concealment and representative were originally developed

for the purpose of enabling the insurer to secure the same info with re-spect to the risk that was possessed by the applicant for insurance, so that he might be equally capable of forming a just estimate of its quality.

2. Warranties and condition — affirmative; deals with conditions existing at the inception of the contract, and exceptions are used for the purpose of making more definite and certain the general words used to describe the risk the insurer undertook to bear

• General description of risk has 2 parts1. Designation of the specific property interest to be covered.2. Specification of such of the perils to w/c that property interest

would be exposed. 3. Exceptions

• perform a similar function in making more definite the coverage indi-cated by the general description of the risk by excluding certain speci-fied risks that otherwise would have been included under the general language describing the risks assumed.

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• It may be of certain property or of certain peril within the general cover-age.

4. Executory warranties and conditions• undertakings the certain conditions should or should not exist in the fu-

ture, are used to enable the insurer to rescind the contract in case subse-quent events increased the risk to such an extent that he is no longer willing to bear.

• Exceptions are also used for the purpose of controlling risk.5. Conditions precedent

• Insurer must also protect himself against fraudulent claims of loss, this he attempts to do by inserting in the policy various conditions.

• Conditions requiring immediate notice of loss or injury and detailed proofs of loss within a limited period and in many great many policies there is found a condition requiring that any action thereon shall be brought within a limited time.

• It is necessary for the insurer to ascertain not only that fact of loss, but also the amount of any loss that may in fact have occurred.

• Secure such protection, the insurer inserts the various conditions provid-ing for the appointment of appraisers and for arbitration in case no agreement can be reached as to the amount of loss

• Concealment — a neglect to communicate that w/c a party knows and ought to communicate.• It is the intentional withholding by the insured of any fact material to the

risk.• Requisites:

1. A party knows the fact w/c he neglects to communicate or disclose to the other

2. Such party concealing is duty bound to disclose such fact to the other3. Such party concealing makes no warranty of the fact concealed4. The other party has not the means of ascertaining the fact concealed.

• A warranty is made of the fact concealed, the non-disclosure of such fact is not concealment but constitutes a violation of warranty.

Sec. 27. A concealment whether intentional or un-intentional entitles the injured party to rescind a contract of insurance. (As amended by Batasang Pambansa Blg. 874)

Effect of concealment 1. By the insured

• Failure on the part of the insured to disclose conditions affecting the risk, of w/c he is aware, makes the contract VOIDABLE at the insurer’s option.

• Contracts of the utmost good faith. • Rely primarily upon the info supplied by to him by the applicant• Not limited to material facts but extends to those w/c he ought to know

— necessary for the insurer to evaluate the risk — therefore no defense to plead mistake or forgetfulness.

2. By the insurer• Dominant bargaining position carries with it stricter responsibility• Sec 27 entitles the rescind of the contract, implying that it is optional on

his part WON to exercise such right.

Proof of fraud in concealment • Insurer need not prove fraud in order to rescind a contract on the ground of

concealment1. Existence of fraud not required

• legal effect of concealment, whether intentional or unintentional is the same, it entitles the insurer to rescind the contract of insurance, conceal-ment being defined as “negligence to communicate that w/c a party knows and ought to communicate”

2. Reason for the rule • If it were necessary for the insurance company to show actual fraud on

the part of the insured, “it would then be impossible for it to protect itself and its honest policyholders against fraudulent and improper claims. As it wold be impossible to show actual fraud except in the extremest cases.”

3. Basis and criterion for provision

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• It misleads or deceives the insurer into accepting the risk or accepting it at the rate of premium agreed upon.

• Insurer is mixed into a belief that the circumstance withheld does not ex-ist, he is thereby induced to estimate the risk upon a false basis that it does not exist.

Rules as to marine insurance1. In the Phil

• Fraud in not necessary in order that the insured may be guilty of con-cealment — the PRESENCE or ABSENCE of an INTENT TO DE-CEIVE IS IMMATERIAL

Sec. 28. Each party to a contract of insurance must communicated to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no war-ranty, and which the other has not the means of ascertaining.

Effect that must be communicated even in the absence of inquiry• It is the duty of each party to a contract of insurance to communicate in

good faith all facts within his knowledge only when1. Material to the contract2. Other has not the means of ascertaining the said facts3. To w/c the party with the duty to communicate makes no warranty.

• Test it: If the applicant is aware of the existence of some circumstances w/c he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked.

Effect of failure of insure to verify• Argument postulates an obligation of the insurance company before issuing

the policy to verify the statements made by the insured in his application. • Insurance company has the right to rely on the statements of the insured as

to material facts such as his previous sickness and the matter is not one of w/c disclosure is excused by law.

Sec. 29. An intentional and fraudulent omission, on the part of one insured, to communicate infor-mation of matters proving or tending to prove the falsity of a warranty, entitles the insurer to re-scind.

When fraudulent intent necessary• Non-disclosure under Sec 29 must be INTENTIONAL & FRAUDULENT

in order that the contract may be rescinded.• Omission is on the part of the insured and partly entitled to rescind is the

insurer.• In every contract of marine insurance, the warranty is implied that the ship

is seaworthy — the intentional and fraudulent omission on the part of the insured when applying for a policy to communicate info that his ship is in-dustries or in special peril would entitle the insurer to rescind because the concealment refers to matters proving or tending to prove the falsity of the warranty that the ship seaworthy.

Sec. 30. Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other:chanroblesvirtuallawlibrary(a) Those which the other knows;(b) Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant;(c) Those of which the other waives communica-tion;(d) Those which prove or tend to prove the exis-tence of a risk excluded by a warranty, and which are not otherwise material; and(e) Those which relate to a risk excepted from the policy and which are not otherwise material.

Matters made the subject of special inquiries material

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• General proposition, matters made the subject of inquiry must be deemed material, even though otherwise they might not be so regarded

• Insured is required to make full and true disclose to questions asked.• Failure of an apparently complete answer to make full disclosure will avoid

the policy.• Answer incomplete on its face will not defeat the policy in the absence of

good faith.

When there is no duty to make disclosure 1. Matters known to, or right to be known by insurer, or w/c he waives dis-

closure • Insured cannot be penalised for failure to disclose matters already

known to the insurer — insurer cant say there is deception; ought to be known to the insurer or his agent for to hold otherwise would be to charge the insured with the default of the insurer or his agent; or of w/c the insurer waives communication for the insurer is in estopped.

2. Risks excepted from the policy• Insurer cannot complain of the insured’s failure to disclose facts that

concern only risks excepted from the policy, either expressly or war-ranty, from the liability assumed under the policy

• The undisclosed fact must not be material for otherwise THE RULE WILL NOT APPLY.

3. Nature or amount of insured’s interest• Info of the nature or amount of the interest of one insured need not be

communicated UNLESS in answer to an inquiry EXCEPT as prescribed by Sec 51.

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

Determination of materiality

1. Test of materiality• To be material — a fact need not increase the risk or contribute to any

loss or damage suffered.• It is sufficient if the knowledge of it would influence the parties in mak-

ing the contract.• Matter must be determined ultimately by the court.

2. From the standpoint of the INSURER• Fact is material — knowledge of it is probably and reasonable influence

upon the insurer in assessing the risk involved and in making or omitting further inquiries & cause him either to reject the risk or to accept it only at a higher premium rate or on different terms though that fact nay not even reeky contribute to the contingency upon w/c the insurer would be-come liable or in any wise affect the risk

• Sufficient that his non-disclosure misled the insurer in forming his esti-mates of the risks of the proposed insurance policy or in making in-quiries.

• Its disclosure is one of the conditions specified in the fire insurance pol-icy, is not open to doubt.

• Waiver by the insurance company of medical examinations renders more material, the info required of the applicant concerning the previous con-dition of health and disease suffered, for such info necessarily consti-tutes an important factor w/c the insurer takes into consideration in de-ciding whether to issue the policy or not.

• The insurer accepted his application as a standard risk where only the in-sured died of hypertension — insurer may rescind the contract of insur-ance and delay payment on the ground of concealment / misrepresenta-tion.

3. Concealment regarded as intentional • Nature of the facts not conveyed to the insurer may be such that the fail-

ure of the insured to communicate must have been intentional rather than INADVERTENT.

• There is concealment — could not have been unaware that his heart beat would at times rise to high & alarming levels and that he had consulted a doctor 2x in 2 months before applying for non-medical insurance.

• In absence of evidence, concealment thereof is no ground for annulment of the policy.

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4. Where fact concealed not material• Insured cannot be guilty of concealment where the fact concealed is not

material.

Time when info acquired• No info possessed by one party can be material, in the sense of requiring

disclosure UNLESS it is possible that it may influence the other in making of the contract

1. After contract has become effective• No duty resting upon the insured to disclose it, even though the policy is

yet to issue.• Concealment must take place at the time the contract is entered into in

order that the policy may be avoided and not afterwards.• Duty of disclosure ends with the completion and effectivity of the con-

tract.2. Before contract becomes effective

• Contract is to be effective only upon the issuance of the policy, an appli-cant for life insurance, is under a duty to disclose to the insurer, changes in his health occurring or coming to his knowledge between the date of submitting his application after satisfactory medical examination and the date the policy is delivered.

Sec. 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material per-ils contemplated; and all general usages of trade.

Matters each party bound to know• Insured need not communicate public events, such as that a nation is at war

or the laws and political conditions in other countries or the allegiance of particular countries, the SOURCES of his info being equally open to the in-surer who is presumed to know them.

• Insurer is charged with the knowledge of the general trade usages and rules of navigation, kind f seasons and all the risks connected with navigation.

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

Right to info may be waived• Right to info of material facts may be waived, either EXPRESSLY — by

the terms of insurance; or IMPLIEDLY — by neglect to make inquiry as to the facts already communicated.

• If the applicant has answered the questions asked in the application, he is justified in assuming that no further info is desired.

Sec. 34. Information of the nature or amount of the interest of one insured need not be communi-cated unless in answer to an inquiry, except as prescribed by section fifty-one.

Disclosure of nature and extent of interest of insured• It is required that a policy of insurance just specify “The interest of the in-

sured in property insured, if he is not the absolute oner thereof.”• A mortgagee must disclose his particular interest even if no inquiry is made

by the insurer in relation thereto.• Requirement is made so that the insurer may determine the extent if the in-

sured’s insurable interest.• NO need to disclose the inters in the property insured if it is absolute.

Sec. 35. Neither party to a contract of insurance is bound to communicate, even upon inquiry, infor-mation of his own judgment upon the matters in question.

Disclosure of judgment upon the matters in question• Duty to disclose is confined to facts.

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• Hence, no duty to disclose mere opinion, speculation, intention or expecta-tion.

• This is true even if the insured is asked. Sec 36 “ A representation may be oral or written.”

1. Representation - a statement made by the insured at the time of, or prior to, the issuance of the policy, relative to the risk to be insured, as to an ex-isting or past fact or state of facts, or concerning a future happening, to give information to the insurer and otherwise induce him to enter ito the insurance contract.

2. Misrepresentation - a statement w/c1. as a fact of something w/c is untrue2. the insured stated with knowledge that it is untrue & with an intent to

deceive, or w/c he states positively as true w/o knowing it to be true and w/c has a tendency to mislead

3. such face in either case is material to the risk* Misrepresentation by the insured renders the insurance contract voidable at

the option of the insurer, even though innocently made & without wrongful intent.

* Misrepresentation = concealment

Form & nature of representation1. Info given concerning risk

• Duty of the person applying for insurance to give to the insurer all such info concerning the risk as will be of use to the latter in estimating its character and in determining WON to assume it & terms on w/c it will accept in case it wishes to do so.

• Info may be given orally or written in papers not connected w/ the con-tract or in the application or examiner’s report or it may appear in the policy itself.

2. Form basis of contract• Info thus given forms the basis of the contract as made.• Description as relied on by the insurer, proved to be untrue in material

aspect, insurer may deny liability.• Material misrepresentation -> will avoid the contract whether innocent

or fraudulent

3. Intended as collateral inducements• Representation nay be communicated in any manner whatsoever that is

intelligible.• Not part of the contract UNLES EXPRESSLY MADE SO.

Sec. 37 “A representation may be made at the time of, or before, issuance of the policy.”

Time when representation may be made• Very nature of representation requires that it precede the execution of the

contract.• A representation made after the policy is issued could not have influenced

either party to enter into the contract. HOWEVER, a representation may be performed after the issuance of the policy.

Sec. 38 “The language of a representation is to be interpreted by the same rules as the language of contracts in general.”

• The representation is written in the policy, the language in which it is ex-pressed was chosen by the insurer, if in answer to an inquiry, the agent of the insurer usually phrases the answer to a question worded by the insurer.

Sec. 39 “A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation.

Kinds of representation1. Oral or Written2. Made at the time of issuing the policy or before3. Affirmative or Promissory

1. Affirmative representation - any allegation as to the existence or non-existence of a fact when the contract begins

2. Promissory representation - any promise to be fulfilled after the con-tract has come into existence or any statement concerning what is to happen during the existence of the insurance

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• Nature of PR• It used to indicate a parol or oral promise made in connection

with the insurance but not incorporated in the policy.• Non-performance of such a promise cannot be shown by the in-

surer in defence to an action on the policy, but proof that the promise was made w/ fraudulent intent will serve to defeat the insurance.

Effect on policy of expression or opinion or expectation1. Good faith / Bad faith of the insured

• A representation of the insured, although false, will not avoid a policy of insurance if there is NO ACTUAL FRAUD IN INDUCING THE AC-CEPTANCE of the risk or its acceptance at a lower rate of premium.

• Such statement is obviously of the foregoing character since in such case the insurer is not justified in relying upon such a statement BUT IS OB-LIGATED TO MAKE FURTHER INQUIRY.

2. Liability of the insurer• To avoid liability, the insurer must prove both materiality of the in-

sured’s opinion and the latter’s intent to deceive.• If representation is one of fact, all the insurer need to prove is its falsity

and materiality. • Intent to deceive is presumed.

When representation deemed a mere expression or opinion• Oral representation as to future even or condition w/c the insured has no

control will be deemed a mere expression of opinion w/c will avoid a con-tract only when made in bad faith.

Sec. 40 A representation cannot qualify an ex-press provision in a contract of insurance, but it may qualify an implied warranty.”

• It can’t qualify an express provision — because it is not part of the contract BUT ONLY A COLLATERAL INDUCEMENT.

• It may qualify an implied warranty.

Sec. 41 “A representation may be altered or with-drawn before the insurance is effected, but not af-terwards.”

• A representation may be altered or withdrawn before the contract actually takes effect but not afterwards since the insurer has already been led by the representation in assuming the risk contemplated in the contract.

Sec. 42 “A representation must be presumed to refer to the date on which the contract goes into effect.”

• Representation refer only to the tie of making the contract.• Conditions represented as existing must be so during the making of the

contract but not necessarily afterwards• Representation found to be untrue may be withdrawn prior to the comple-

tion of the contract but not afterwards• No false representation — if it is true at the time the contract takes effect

although false at the time it was made & vice versa• False representation — if it is true at the time of the it was made but false

at the time the contract takes effect.

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

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Effect where info obtained from 3rd person• Insured is given the discretion to communicate to the insurer what he

knows of a matter of w/c he has no personal knowledge.• Representation turns out to be false, he is not responsible — Provided he

gives explanation that he does so on the info of others.

Effect where info obtained from agent of insured/insurer1. Agent of the insured - has the duty it’s ordinary course of business to

communicate such info to his principal & it was possible for the agent un-der such in the exercise of due diligence to have made such communica-tion before the making of the contract, the insured will be liable for the truth.• Insured cannot recover on the policy

2. Agent of the insurer - Same principle applies to the insure though in the nature of things, the question does not occur so frequently. • Insurance would be void

Sec. 44 “A representation is to be deemed false when the facts fail to correspond with its asser-tions or stipulations.”

• Representation only need to be SUBSTANTIALLY TURE.• To be avoided, a representation relied upon must be false in a substantial

and material respect.• Representation is substantially true — it is true in every particular material

to the risk, or is so far true that the conduct of the insurer would not have been different if the exact truth had been alleged.

• Representation partly fails but is true or is complied with so far as is seen tail to the risk insured against, the policy remains in force.

• In marine insurance, substantially true is not sufficient. — Insured is re-quired to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assume to disclose.

• Insurer generally relies to a large degree on the statements of the applicant regarding the risk.

Construction of representation as affirmative

• A representation written in the policy even in such form as t admit of its be-ing construed as an executory agreement or promissory representation will rather be construed when possible, as an affirmative representation of a present fact in order to save the policy from avoidance.

Sec. 45 “If a representation is false in a material point, whether affirmative or promissory, the in-jured party is entitled to rescind the contract from the time when the representation becomes false. The right to rescind granted by this Code to the insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission. (As amended by Batasang Pambansa Blg. 874).”

Effect of falsity of representation• To be deemed false — it is sufficient if the representation fails to correspnd

with the facts in a MATERIAL POINT.• Representation of fact are the foundation of the contract; if the foundation

does not exist, the superstructure does not arise.

Effect of collusion or fraud of agent of insurer1. Collusion with insured

• It will vitiate the policy.• Agent ceases to represent his principal & represents himself — insurer is

not estopped form avoiding the policy.2. Principal of agent

• Insurer is liable when its agent writes a false answer into the application w/o knowledge of the insured.

• Insured merely signed the application & let the agent of the insurer filled the blanks — made the agent as insured’s agent

Sec. 46 “The materiality of a representation is de-termined by the same rules as the materiality of a concealment.”

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1. Test of materiality - Materiality of the representation is determined by th e probable and reasonable influence of the facts upon the arty to whom the representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries.

2. Materiality, a judicial question - The matter of misrepresentation must be of the that character w/c the court can say would reasonably affect the in-surers judgment.

Concealment

• Insured withholds info of material facts from the insurer

• Materiality of concealment - determined by the same rules as applied in cases of misrepresentation

• Same effect as a misrepresentation and gives the insurer a right to rescind the contract

• Whether international or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or false representation

• 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

Sec. 47 “The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation.”

• Sec 26 - 48 apply not only to the original formation of the contract but also to a modification the same during the time it is in force.

Sec. 48 “Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised pre-vious to the commencement of an action on the contract.After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two 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 misrepresenta-tion of the insured or his agent.”

When an insurer must exercise his right t rescind 1. In general

• A contract of insurance may be rescinded on the ground of CONCEAL-MENT, FALSE REPRESENTATION or BREACH OF WARRANTY.

• A defense to an action to recover insurance that the policy was obtained through false representation, fraud and deceit is not in the nature of an action to rescind and is therefore not barred by the provision.

• No time limit imposed for interposing this defense.2. In non-life policy

• Insurer may rescind a contract of insurance, such right must be exercise prior to the commencement of an action on the contract.

• Insurer is no longer entitled to rescind a contract of insurance after the insured has filed an action to collect the amount of the insurance.

• Any of the material representations is false, the insurer’s tender of the premiums and notice that the policy is cancelled before commencement of the suit hereon, operates to rescind a contract of insurance.

3. In life policy

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• Defenses mentioned are amiable only during the first 2 years of a life in-surance policy.

Incontestability of life policies1. Incontestable clauses stipulating that the policy shall be incontestable af-

ter a stated period are in general use, and are now required by statues in force in my states

2. Incontestability - after the requisites are shown to exist, the insurer shall be estopped from contesting the policy or setting up any defense, EX-CEPT AS IS ALLOWED ON THE GROUND OF PUBLIC POLICY.

Theory & object of the incontestable clause1. As to the insurer - Insurer should have a reasonable opportunity to investi-

gate the statements w/c the applicant makes in procuring his policy and that after a definite period, the insurer should not be permitted to question the validity of the policy, either by affirmative action or by defines to a suit brought on the life policy by the beneficiary.

2. As to the insured - to give the greatest possible assurance to a policy-holder that his beneficiaries would receive payment w/o question as to the validity of the policy or the existence of the coverage once the period of contestability passes.

• Protect the policyholder or beneficiary from a lawsuit contesting the va-lidity of he policy after a considerable time has passed and evidence of the facts surrounding the purchase may be unavailable.

• It is a sufficient answer to the various tactics employed by insurance companies to avoid liability.

Requisites for incontestability1. Policy is a life insurance policy.2. It is payable on the death of thee insured.3. It has been in force during the lifetime of the insured for at least 2 years

from its date of issue or of its last reinstatement. * Period of 2 years may be shorten but it cannot be extended by stipulation* “During the lifetime” means that the policy is no longer considered in force

after the insured has died.

Effect when policy becomes incontestable

1. Policy of life insurance becomes incontestable, the insure may not refuse to pay the same by claiming that;1. Policy is void ab initio2. It is rescissible by reason of the fraudulent by reason of the fraudulent

concealment of the insured or his agent, no matter how patent or well-founded

3. It is rescissible by reason of the fraudulent misrepresentations of the insured or his agent.

* “Void ab inito” — “voidable”* “Fraud” — “Fraud by inducement” * Period of contestability should be counted from the date of reinstatement

and not from the date of the issuance of the policy. * A policy of insurace may be revived or reinstated pursuant to a provision

contained in the policy or the agreement of the parties.

Defenses not barred by incontestable clause• Incontestability of a policy under he law is not absolute• A beneficiary of any person who has procured a life policy more than 2

years before his death would automatically be entitled to the proceeds upon that person’s death.

• Incontestability only deprives the insurer of those defences w/c arise in connection with the formation & operation of the policy prior to loss.

• Insurer may still contest the policy on any of the ff grounds:1. The person taking the insurance lacked insurable interest as required

by law.2. Cause of the death of the insured is an excepted risk.3. Premiums have not been paid4. Conditions of the policy relating to military or naval service have

been violated5. Fraud is of a particularly vicious type, the policy was taken out in fur-

therance of a scheme to murder the insured, or where the insured sub-stitutes another person for the medical examination or where the ben-eficiary feloniously kiss the insured.

6. Beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened,

7. Action was not brought w/in the time specified.

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Sec. 49. The written instrument in which a con-tract of insurance is set forth, is called a policy of insurance.

Sec. 50. The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insur-ance shall be written on the blank spaces pro-vided therein.Any rider, clause, warranty or endorsement pur-porting 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 endorse-ment is also mentioned and written on the blank spaces provided in the policy.Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued af-ter the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.

Notwithstanding the forgoing, the policy may be in electronic form subject to the pertinent provi-sions of RA # 8792, otherse known as the “Elec-tronic Commerce Act” and to such rules and regu-lations as may be prescribed by the Commis-sioner.

2. Policy of Insurance — written document embodying the terms and stipu-lations of the contract of insurance between the insured and the insurer.

3. Policy / Insurance policy / Policy of Insurance — signed ONLY by the INSURER or his DULY AUTHORIZED AGENT.

• Need not to be signed by the insured EXCEPT where express warranties are contained in a separate instrument forming part of the policy in w/c case the law requires that the instrument must be signed by the insured.

• Standard practice is to have the prospective insured FILLED OUT and SIGN an application prepared by the insurer.

Policy controls terms of insurance contract.1. Measure of insurer’s liability

• It’s terms measures the insurer’s liability and in order to recover, insured must show himself within the terms.

2. Presence of requisites for validity• All requisites necessary for a valid contract must be present — only then

it will constitute a valid & binding contract, superseding all preliminary agreements and negotiations.

3. Compliance of insured with conditions of the policy• Absence of statutory to the contrary, insurance company have the same

rights as individual to limit their liability and to impose whatever condi-tions they deem best upon their obligations not inconsistent with public policy.

• Compliance by the insured with the terms of the policy is a condition precedent to the right of recovery.

Policy, a contract of “adhesion” 1. Term drafted & imposed by insurer

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• A description of the manner by w/c the contract is formed: 1 party hav-ing superior bargaining power imposes its choice of terms on the other party.

• Ordinarily, contracts are freely negotiated by parties with roughly equiv-alent bargaining power.

2. Ambiguity resolved against insurer• Parties do not bargain on equal footing, the weaker party’s participation

is reduced to the alternative — “take it or leave it”• Liberally in favour of the insured and strictly against the party responsi-

ble therefor. • Cardinal principle of law that forfeiture are not favoured and that any

construction w/c would result in the forfeiture of the policy benefits for the person claiming thereunder will be avoided if it is possible to con-strue the policy in a manner w/c would permit recovery by finding a waiver for such a forfeiture.

3. When terms of contract clear• No room for construction and such term cannot be enlarged or dimin-

ished by judicial construction.

Form of contract of insurance• Writing may be informal• Written application informally accepted• Formal — being carefully drawn written policy in customary use.• Everything must be in the blank space provided in the policy.• In case of conflict between the written & printed portions — written shall

prevail.

Perfection of insurance contract1. Acceptance of application

• If an application for insurance by the person seeking insurance has not been either accepted or rejected by the insurer, there is n contract yet as it is merely an offer or proposal.

• Mere signing of an application do not bind the insurer to issue a policy — No evidence to constitute that there was a contract

• Applicant dies before its approval — NO

• Acceptance must be UNCONDITIONAL• Reception & retention of the policy without objection — YES

2. Compliance with conditions precedent• Parties may impose additional conditions precedent to the validity of the

policy as a contract as they see fit. • No valid & binding insurance contract where NO PREMIUM is PAID

UNLESS CREDIT IS GIVEN OR THERE IS A WAIVER OR SOME AGREEMENT.

• In life insurance, a “BINDING SLIP” or “BINDING RECEIPT” does not insure by itself.

3. Cover notes• Maybe issued to bind the Insurance temporarily pending the issuance of

the policy. • Coverage then can begin depending upon their terms.

Offer & acceptance in insurance contract• Applicant usually takes the offer to the insurer through an application for

insurance w/c is usually attached to policy and made a part of the insurance contract.

1. In property & liability insurance• Insured who makes the offer and accepted by the insurer.• Offer s usually accepted by an agent of the insurer.

2. In life and health insurance• Depends if the insured pays the premium at the time he applies for insur-

ance.• Does not pay the premium — it is just an invitation

Importance of delivery of policy• Delivery — the act of putting the insurance policy — the physical docu-

ment — into the possession of the insured. 1. Process of forming a contract

1. Delivery of the policy is important in at least 2 ways1. As evidence of the making of a contract and of its terms

33

2. As communication of the insurer's acceptance of the insured’s of-fer

2. Determination of policy period• Where a policy provides that the coverage terminates 1 year after deliv-

ery, therefore becomes the important fact for determining when the pol-icy period ends.

3. Absence pf delivery• Delivery of a policy is not a prerequisite to a valid contract of insurance.• The contract may be completed prior to delivery of the policy or even

w/o the delivery of the policy depending on the intention of the parties.• Policy may contain a provision that states that the insurance is not effec-

tive until the delivery of the policy.

Modes of delivery of policy1. Actual/ Constructive delivery

• No contract of insurance unless the minds of the parties have meet — Actual mutual transfer of policy is not a prerequisite to its validity UN-LESS the parties have so agreed in clear language.

• Constructive delivery may be sufficient. • Delivery may be made to the insured in person or to his duty constituted

agent or some person for the benefit of the insured.• No further conditions are to be fulfilled — there is constructive delivery

when it is deposited in the mail duly directed to the insured or his agent. 2. Delivery, primarily a matter of intention

• Possession by the insured raises the presumption that the policy was de-livered to the insured, while possession by the insurer is prima facie evi-dence that no delivery was made.

• If the application contains provision that the insurance shall not be effec-tive until the delivery of the policy — that condition is essential to the consummation of the contract.

Delivery to insurer’s agent as delivery to insured

• Applicant dies when the policy has been given to the agent of the insurance company but before its delivery to the applicant — beneficiaries can re-cover? 2 conflicting views

1. Beneficiaries can recover • Actual delivery to him is not essential to give the policy a binding effect• Insured already paid a premium for a period during w/c e did not actu-

ally receive protection.• Insurer can simply consider the contract perfected upon actual delivery

of the policy to the agent — if the insured had not died.2. Beneficiaries cannot recover

• Only by the reason that insurance agent is not his agent.

Effect of delivery of policy1. Where delivery conditional

• non-performance of the condition precedent prevents the contract from taking effect

• A stipulation that the policy shall not become operative unless the appli-cant is in good health at the time of the delivery of the policy is valid, binding and enforceable

2. Where delivery unconditional• Unconditional delivery of an insurance policy corresponding to the

terms of the application ordinarily consummates the contract & the pol-icy as delivered becomes the final contract between the parties.

• Parties so intend, the insurance becomes effective at the same time of the delivery of the policy.

3. Where premium still unpaid after unconditional delivery• Insurer cannot be presumed to have extended credit from the insurer

from the mere fact of unconditional delivery of the insurance policy without the prepayment of premium; & even if such presumption may be inferred, there must be a clear and express acceptance by the noised of the insurer’s offer to extend credit.

• Absence of a clear agreement granting credit extension, policy will lease if the premium is not pad, at the time and in the manner specified in the policy.

Rider in a contract of insurance34

• Rider — a small printed or typed stipulation contained on a slip of paper at-tached to the policy and forming an integral part of the policy.

1. Additional binding stipulation between the parties• Riders are usually attached to the policy because they constitute addi-

tional stipulations therefore if properly attached — it will have the effect as if actually embodied in the policy.

2. Necessity for riders, etc• found in the fact that in the conduct of insurance business, it often be-

comes necessary to add a new provision to a policy, or to modify or waive an existing provision, or to make any desired change in the policy.

3. Rule in case of conflict between a rider, etc & printed stipulations of a policy

• Rider prevails — more deliberate expression of the agreement.• Applies to the interpretation of clauses, warranties or indorsements w/c

are attached to policies to very their terms.

Attached papers on insurance policy• GR: A rider, slip or other paper becomes a part of a contract or policy of in-

surance if properly & sufficiently attached or referred to therein in a man-ner as to leave no doubt as to the intention of the parties in such respect.

• Sec 226: NO rider etc shall be attached to, printed or stamped upon a policy of insurance UNLESS the form of such rider has been approved by the In-surance Commissioner.

• Despite being attached in the insurance policy — it has no binding UN-LESS descriptive title or name of the rider is also mentioned and written on the blank space provided in the policy.

• Lack of description will NOT affect the other provisions of the policy ECEPT where without such rider, contract would be incomplete.

• Clause — an agreement between the insurer and the insured on certain mat-ter relating to the liability of the insurer in case of loss.

• “Three-fourth Clause” — liability of the insurer shall not exceed 3/4 of the loss or damage.

• “Loss payable Clause” — loss if any is payable to a named party or parties as their interest may appear.

• “Change of Ownership Clause” — it will inure to the benefit of whomso-ever, during the continuance of the risk, may become the owner of the in-terest insured, the insurer gives its written consent to the assignment of the thing insured.

• Endorsement — any provision added to an insurance contract altering its scope or application. • It may be in a nature of PERMIT• It varies the terms of an original insurance contract.

• GR: If a rider is physically attached to a policy of insurance contempora-neously with its execution and delivered to the insured so attached, and suf-ficient reference is ade in the policy, that fact that it is w/o the SIGNA-TURE of the insurer or of the insured WILL NOT PREVENT its inclusion and construction as a part of the insurance contract.

• Same goes for no countersignature

Effect of failure of insured to read policy1. Majority Rule — not reading the policy before accept is not negligence

per so nor laches by reason that insurance contract are contracts of “adhe-sion”

2. Minority Rule— Many courts however apply “One who accepts a contrac-tual instrument is conclusively presumed, in the absence of fraud or mu-tual mistake, to know and assent to its contents.

• duty bound to read the content. 3. Exception of the Minority Rule

• Insured could not have discovered the erroneous statement by such read-ing

• induced by fraud• illiterate or unable to read• long, complicated & difficult to understand policies

4. Trend in modern cases• Insured relies not upon the text of the policies but on the general descrip-

tion of the coverage provided by the insurer and its agents door the time he is considering whether to submit an application.

• Absent a special request, an insured will not see the text of the policy until after the application has been submitted and the 1st premium paid.

35

• “duty to read” has less significance in modern case.

Insurer’s duty to explain the policy1. Where terms of policy are clear2. Important caveats

• “reasonable expectations” — operate to impose de facto a duty on the in-surer to explain the policy’s coverage to the insured.• if court holds that an insured’s RE entitle him to coverage despite pol-

icy language to the contrary — insurer has to pay for the loss because the insurer failed to explain the limitations.

• if insurer had provided an explanation, the insureds expectation of different coverage would have been rendered unreasonable.

• Insurers have failed to explain the option to the insured — liable for loss• Agents of the insurer and insurer are held liable for negligence of agents

in performing their professional duties — to explain the coverage.• When the insured disputes a denial of coverage, the duty of good faith

and faire dealing ma impose an obligation on the insurer to alert the in-sured to his rights.• Sarchett case, the arbitration clause was prominently displayed with a

bold-face hearing. Nevertheless the court reasoned that the insurer had reason to know that the insured was unaware of his rights, be-cause he repeatedly protested the denial of coverage w/o requesting review by an impartial panel of physicians.

Sec. 51. A policy of insurance must specify:(a) The parties between whom the contract is made;(b) The amount to be insured except in the cases of open or running policies;(c) The premium, or if the insurance is of a charac-ter where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final pre-mium is to be determined;(d) The property or life insured;

(e) The interest of the insured in property insured, if he is not the absolute owner thereof;(f) The risks insured against; and(g) The period during which the insurance is to continue.

Content of the policy1. Name

• incorrectly spelled is of no importance as long as identity can be suffi-ciently established

• Name of the insured is essential to be effective2. Amount

• life, health and accidental death — fixed sum is payable• “automatic increase clause — depends upon the happening of an event• deductible — amount to be deducted from any loss w/c is shouldered by

the insured making the insurer liable only for the excess of said amount3. Premium

• rate of premiums are developed on the basis of the nature and character of the risk assumed & also o the value of the property or other interest insured.

• Life insurance — average life span at any given age• Fire insurance —structure and construction, occupancy or use, location

and loss-prevention or protection facilities & exposure to risk4. Property or life insured — subject matter of the contract5. Interest of insured in property6. Risks insured against7. Term or duration of insurance

• Life of the policy — period of time during w/c the insurer assumes the risk of loss

• Annual policies - 12months• Short period policies - less period than 12months

Kinds of insurable risks1. Personal — person — time of death or disability, also with life and health

risk

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2. Property — destruction of property 1. Direct losses — fire, lightning, windstorm, flood & other forces of

nature2. Indirect losses — may occur, rents or favourable leases

3. Liability — liability for the injured person (tort)

Risk, peril and hazards distinguished 1. Risk — chance of loss or possibility of the occurrence of a loss, based on

known or unknown factors.2. Peril — contingent or unknown event w/c may cause a loss3. Hazard — condition or factor, tangible or intangible, w/c may create or

increase the chance of loss form a given peril1. Physical — location, structure, occupancy, exposure2. Moral — mental attitudes

Requirements for risk to be insurable 1. Importance2. Calculability — reasonable statistical estimate 3. Definiteness of loss — fairly definite as to cause, time, lace and amount 4. No catastrophic loss — not a large numbers of people are subject to the

same risk at the same time5. Accidental nature — fortuitous & unexpected losses*** Requirement NOT ABSOLUTE

Sec. 52. Cover notes may be issued to bind insur-ance temporarily pending the issuance of the pol-icy. Within sixty days after the issue of the cover note, a policy shall be issued in lieu thereof, in-cluding within its terms the identical insurance bound under the cover note and the premium therefor. chanrobles virtual law libraryCover notes may be extended or renewed beyond such sixty days with the written approval of the Commissioner if he determines that such exten-sion is not contrary to and is not for the purpose of violating any provisions of this Code. The Com-

missioner may promulgate rules and regulations governing such extensions for the purpose of pre-venting such violations and may by such rules and regulations dispense with the requirement of writ-ten approval by him in the case of extension in compliance with such rules and regulations.

1. Preliminary contract of present insurance • Insure insures the subject matter usually by what is known as the “bind-

ing slip” or “binder” or “cover note”, the contract to be effective until the formal policy is issued or the risk rejected

• “Cover Note” — merely a written memo of the most important terms of a preliminary contract of insurance, intended to give temporary protec-tion pending the investigation of the risk by the insurer, or until the issue of a formal policy, provided it is later determined that the applicant was insurable at the time it was given.

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Reinsurance policy Reinsurance treaty

A contract of indemnity one insurer makes with another to protect the first insurer

from a risk it has already assumed.

It is merely an agreement between 2 in-surance companies whereby one agrees to cede & the other to accept reinsurance business pursuant to provisions specified

in the treaty

Issuance of reinsurance policies on stan-dard risk & also on substandard risks un-

der special arrangements

Contracts OF insurance Contracts FOR insurance

• Serves as commercial convenience 2. Preliminary contract of executory insurance

• Insurer makes a contract to insure the subject matter at some subsequent time w/c may be definite or indefinite.

• Right acquired by the insured is merely to demand the delivery of a pol-icy in accordance with the terms agreed upon and the obligation as-sumed by the insure is to deliver such policy.

Issuance and renewal of cover notes1. Cover Notes — short-term insurance policies that may be issued to afford

mediate provisional protection to the insured until the insurer can inspect or evaluate the risk in question and issue the proper policy or until the risk is declined and notice is given.

• not to be treated separately

Rules on cover notes1. It is a contact of insurance2. It must be approved by the Insurance Comm.3. Valid not exceeding 60 days from the date of its issuance WON premium

has been paid — may cancel by either party upon at least 7 days notice to the other party

4. Not cancelled, within 60 days be issued in lieu thereof5. Maybe renewed & extended 6. Insurance companies may impose on cover notes a deposit premium

equivalent to at least 25% of the estimated premium of the intend insur-ance coverage but in no case less than Php 500

Sec. 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy.

• 3rd parties have no right UNLESS there be some contract of trust, express or implied between the insured and the 3rd party.

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

Where insurance made by an agent or trustee• Agent or trustee when making an insurance contract for or on behalf of his

principal should indicate that he is merely acting in a representative capac-ity by singing as such agent or trustee or by other general terms in the pol-icy.

Sec. 55. To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is nec-essary that the terms of the policy should be such as are applicable to the joint or common interest.

• As long as it is not on his own name • It is in the terms of the policy clearly show that the insurance was meant to

cover also the shares of the other partners.

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

Sec. 57. A policy may be so framed that it will in-ure to the benefit of whomsoever, during the con-tinuance of the risk, may become the owner of the interest insured.

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Where description of insured general• It must specify the parties between whom the contract is made.• In order that the insurance may be applied to the interest of the person

claiming the benefit of the policy, he must show that he is the person named or described or that he belongs to the class of person comprehended in the policy.

Sec. 58. The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the pol-icy and the thing insured.

Effect of transfer of thing insured• Since a contract of insurance is a personal contract, it does not attach to or

run with the property insured. • A purchaser of property who does not take the precaution to obtain a trans-

fer of the policy of insurance cannot recover upon such contract, as the transfer of the property has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as of the property in-sured.

Sec. 59. A policy is either open, valued or running.

Sec. 60. An open policy is one in which the value of the thing insured is not agreed upon & the amount of insurance merely represents the in-surer’s maximum liability. The value of such thing insured shall be ascertained at the time of loss.

Sec. 61. A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum.

Sec. 62. A running policy is one which contem-plates successive insurances, and which provides

that the object of the policy may be from time to time defined, especially as to the subjects of in-surance, by additional statements or indorse-ments.

Kinds of policies1. Open or Unvalued policy

• it does not predetermine the value of the insured property but establishes a maximum amount the insurer will pay in case of a total loss of the property insured.

• a certain agree sum is written on the dace of the policy not as the value of the property insured but as the maximum limit of the insurer’s liability in case of destruction by the peril insured against.

• Insured must establish Fair Marker Value of the insured property at the time of the loss. If FMV exceeds the mac — latter will control if below, the former will control

2. Valued Policy• value of the insured property is predetermined and the value is the

amount to be used in case of a total loss.• insured and insurer expressly agree in advance on the value pf the sub-

ject matter of the insurance.• 2 values — 1. Face value of the policy 2. Value of the thing insured

3. Running Policy• intended to provide indemnity for property w/c cannot well be covered

by a valued policy because of its frequent change of location and quan-tity or for property os much nature as not to admit of a gross valuation.

• It denotes insurance w/c contemplates that the risk is shifting, fluctuating or varying and w/c covers a class of property rather than any particular thing.

Advantage of a running policy 1. either underinsured nor overinsured at any time2. Avoids cancellations that would otherwise be necessary to keep insurance

adjusted to value at each location and for w/c cancellations he would be charged the expensive short rate

39

3. Save the trouble of watching his insurance and the danger of being under-insured in spite of his care, through oversight or mistake.

4. Rate is adjusted to 100% insurance, where as valued policies requiring in-surance only to say 80 % of the value, give wither small or no reduction for amounts of insurance above this figure.

Sec. 63. A condition, stipulation, or agreement in any policy of insurance, limiting the time for com-mencing an action thereunder to a period of less than one year from the time when the cause of ac-tion accrues, is void.

Validity of agreement limiting time for commencing action1. GR: A clause in an insurance policy to the effect than an action upon the

policy by the insured must be brought within a certain period is valid and will prevail over the general lawn limitations of actions as prescribed by the CC if not contrary to Sec 63.

• Rights of the parties flow from the IC hence they are not bound by the statute of limitations nor by exemptions thereto.

2. Period limitation • If period is fixed less than 1 year from the time the case of action ac-

crues, the stipulation would be void. • In the case, of a policy of industrial life insurance, the period cannot be

less than 6 years after the cause of action accrues.

Nature of condition limiting period for filing claim• Condition in an insurance policy that claims must be presented within a

certain period after rejection is not merely a procedural requirement.• Condition is an important matter essential to prompt settlement of claims

against insurance companies, as it demands that insurance suits be brought by the insured while the evidence as to the origin and cause of the loss or destruction has not yet disappeared.

• It is in the nature of a condition precedent to the liability of the insurer, res-olutory cause the purpose of w/c is to terminate all liabilities in case the actin is not filed by the insured within the period stipulated.

Where action brought against insurer’s agent

• Bringing of such action against the agent cannot have any legal effect EX-CEPT that of notifying the agent of the claim.

When cause of action accrues• it does not accrue until the insured’s claim is finally rejected by the insurer.• Period for commencing an action under a policy of insurance under Sec 63

is to be computed not form the time when loss actually occurs BUT from the TIME WHEN TEH INSURED HAS A RIGHT TO BRING AN AC-TION AGAINST THE INSURER.

1. Stipulated prescriptive period begins from the happening of the loss2. Stipulated prescriptive period begins from the rejection of claim3. Stipulated prescriptive period begins from the filling of claim

Sec. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the pol-icy, of one or more of the following(a) non-payment of premium;(b) conviction of a crime arising out of acts in-creasing the hazard insured against;(c) discovery of fraud or material misrepresenta-tion;(d) discovery of willful or reckless acts or omis-sions increasing the hazard insured against;(e) physical changes in the property insured which result in the property becoming uninsurable; or(f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code.

Sec. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address

40

shown in the policy, and shall state (a) which of the grounds set forth in section sixty-four is relied upon and (b) that, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based.

1. Cancellation• right to rescind, abandon or cancel a contract of insurance.• Termination either by the insurer or the insured of a policy of insurance

before its expiration.• A contract of insurance is permitted to lapse when the insured fails to

take some action to keep contract in force. • Insured can cancel an insurance contract at his election by surrendering

the policy. — entitles him to the return of the premiums on the custom-ary share-rate basis.

Form and sufficiency of notice of cancellation by the insurer1. Prior notice of cancellation to the insured.2. Notice must be based on the occurrence, after the effective date of the

policy, of one or more of the grounds mentioned3. Must be in writing, mailed or delivered to the named insured at the ad-

dress shown in the policy, or to his authorized broker.4. Must state w/c o the grounds set forth is relied upon• duty of the insurer upon written request of the named insured to furnish the

facts on w/c the cancellation is based.

Prior notice of cancellation to insured• Prevent cancellation of the policy w/o allowing the insured ample oppor-

tunity to negotiate for other insurance in its stead for his own protection1. Notice given to insured himself

• not to & through any unauthorised person of the policy — notice of can-cellation by the insurer, given to the mortgage of the insured but not to the insured with w/c the insurer had direct dealing w/o the prior author-ity of the insured, is not effective notice as to the insured owner.

2. Notice delivered personally or sent by mail

• It may be mailed.• No proof that the notice was actually mailed to and received by the in-

sured, where all that the insurer offers to show that the cancellation was communicated to the insured is its employee’s testimony that the said cancellation was sent “by mail through our mailing section” w/o more

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

Renewal of non-life insurance policy1. As a new contract or extension of old one

• GR: a renewal of insurance by the payment of a new premium and the issuance of a receipt therefor where there is no provision in the policy of for its renewal, is anew contract on the same terms as the old one.

• Renewal is in pursuance of a prison to that effect, it is not a new contract but an extension of the old.

2. Rights of parties• Insurance other than life — named insured is given the right to renew

upon the same terms and conditions the original policy upon payment of the premium due on the effective date of the renewal UNLESS the in-surer at least 45 days in advance of the end of the period mails or deliv-

41

ers to the unused notice of its intention not to renew the policy or to con-dition its renewal upon reduction of its amount or elimination of some coverages.

• GR: An insurance company is bound by the greater coverage in an ear-lier policy where the renewal policy is issued w/o calling to insured’s at-tention a reduction in the policy coverage.

3. Period for giving notice of non-renewal by insurer• A policy written for a term of less than 1 year is considered as if written

for a term of 1 year while a policy written for a longer term or with no fixed expiration date is considered as if written for successive policy pe-riods term of 1 year.

• if term of the policy is 5 years, notice must be given at least 45 days be-fore the anniv date — 45 days not complied with, insurer may not refuse to renew a policy upon payment of the premium due.

• Unless the insurer complies with the requirement of Sec 65 & 66, he has to renew the policy whether he likes it or not.

Sec. 67 “A warranty is either expressed or im-plied.”

1. Warranty• a statement or promise by the insured contained in the policy itself or in-

corporated in or attached to it by property reference, the falsity or non-fulfillment of w/c & regardless of WON the insurer has suffered loss or prejudice as a result of the falsity or nonfulfillment, renders the policy voidable at the election of the insurer.

• The contract of insurance is rendered voidable by the insurer w/o refer-ence to the materially of the statement or promise and to whether the in-surer was prejudiced by such breach.

Kind of warranties1. Express warranty - an agreement contained in the policy r clearly incorpo-

rated therein as part thereof whereby the insured stipulates that certain facts relating to the risk are or shall be true or certain acts relating t the same subjects have been or shall be done

2. Implied warranty - a warranty w/c from the very nature of the contract or fro the general tenor of the words, although no express warranty is men-tioned, is necessarily embodied in the policy as part thereof & which binds the insured as though expressed in the contract.

• In every policy in marine insurance — there is an implied warranty that the ship is seaworthy when the policy attaches. (ONLY IN MARINE INSURANCE)

3. Affirmative warranty - one w/c asserts the existence of a fact or condition at the time it is made.

• It is continuing if it is one that must be satisfied during the entire cover-age period of the insurance.

4. Promissory warranty - one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted.

Warranty presumed affirmative

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• GR: Courts will presume that the warranty is merely affirmative UNLESS the contrary intention appears.

Sec. 68 “A warranty may relate to the past, the present, the future, or to any or all of these.”• Although the provision employs the term “warranty” in general, in case of

PROMISSORY WARRANTY, the same may refer only to FUTURE EVENTS.

Sec. 69 “No particular form of words is necessary to create a warranty.”

Intention of the parties• Warranty does not mean warranty — it depends upon the intention of the

parties in regards thereto.• In case of doubt, a statement will be construed as a representation rather

than a warranty especially if such statement is contained in any instrument other than the policy like an application w/c is collateral merely to the con-tract of insurance.

• Parties must intend a statement to be a warranty and it must be included as a part of the contract.

• gratuitous answer (answer not responsive to any questions ask) — are not warranties even though the policy makes the statement in the application warranties.

Warranties

considered part of the contract

always written on the face of the policy, actually or by reference

strictly compiled with

falsity or nonfulfillment of a warranty operates as a breach of contract

presumed material insurer must show the materiality of a representation in order to defeat an action

* Before a representation will be considered a warranty, it must be EX-PRESSLY included or incorporated by clear reference in the policy and the contract must clearly show that the parties intended that the right of the in-sured would depend on the truth or fulfilment of the warranty.

* Statements are to be considered representation UNLESS it is clear intended them to be warranties

* Where a statement is true, it is ordinarily immaterial whether it is a war-ranty or a representation.

Sec. 70 “Without prejudice to section fifty-one, ev-ery express warranty, made at or before the exe-cution of a policy, must be contained in the policy itself, or in another instrument signed by the in-sured and referred to in the policy as making a part of it.”

Express warranty, where contained1. in a policy, or another instrument

• For a stipulation to be considered a warranty — It must not only be clearly shown that the parties intended it as such but it must also form part of the contract itself or if contained in another instrument be signed by the insured & referred to in the policy as making a part if it.

• Mere reference alone is not sufficient to give this effect.2. Validity of construed in a rider

• a warranty contained in a rider to the policy is null android — rider was not signed by the insured & not referred in the policy as making a part of it.• If “another instrument” construed as excluding a rider — a rider at-

tached to a policy is a part of the contract, it need not be signed by the insured nor referred to in the policy as making a part of it.

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• “Another Instrument” could not mean a mere slip of paper like a rider, but something akin to the policy itself as a written instrument in w/c a contract of insurance is set forth.

Sec. 71 “A statement in a policy of matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty thereof.”

Express warranty regarding person, thing or risk1. Statement must refer to a fact

• Statement in the policy relating to the person or thing insured or the risk must be A FACT to constitute an express warranty.

2. Where statement in the nature of an opinion• A statement in the policy can only be an expression of an opinion is not

a warranty of truthfulness.• Statement if deemed a warranty at all is merely a limited warranty as to

the honest good faith of the insured — a warranty that the statement is his honest opinion or judgment.

Sec. 72 “A statement in a policy which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place.”

Warranty of facts or omissions w/c materially affect the risk• This article refers to a promissory warranty.• Breach of promises or agreements as to future acts will not avoid a policy

UNLESS the promises are material to the risk.• The act or omission is material to the risk if it increases the risk, only sub-

stantial increase of risk works forfeiture of the policy w/ is avoided for in-crease in hazard.

Sec. 73 “When, before the time arrives for the per-formance of a warranty relating to the future, a loss insured against happens, or performance be-

comes unlawful at the place of the contract, or im-possible, the omission to fulfill the warranty does not avoid the policy.”

When breach of warranty does not avoid policy• GR: Violation of a warranty avoids a contract of insurance. This article

provides for 3 exceptions:1. When loss occurs before time for performance2. When performance becomes unlawful3. When performance becomes impossible - failure to comply with a

promissory warranty may be due not only to legal impossibility but also to physical impossibility

Where insurer barred by waiver or estoppel• Breach of warranty operates to discharge the insurer from liability UN-

LESS the insurer is liable because of a waiver of the warranty or a estoppel. • Doctrines of waiver & warranty have been used to modify the harsh opera-

tion of the rules on concealment & warranty.1. The omission to fulfil a warranty or condition will be excused where there

is a waiver on the pat of the insurer.2. Waiver - an intentional relinquishment of a known right

• may be EXPRESS or IMPLIED• Failure on the part of the insurer to assert a forfeiture upon breach of

warranty or condition, after knowledge thereof, amounts to a waiver or estoppel.

• If waiver is to be implied from conduct mainly — conduct must be clearly indicative of a clear intent of the insurer to waive its right un-der the policy.

3. Under estoppel• insurer is precluded because of some action or inaction on its part, form

relying on an otherwise valid defines as against the insured who has been induced to enter into the contract by the insurer’s representation or conduct.

4. Estoppel - conduct of the insurer presents it from avoiding liability5. Waiver - failure of the insurer to assert a defense prevents it from assert-

ing that defines in the event of a claim filed by the insured

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

Right to rescind for violation of a material warranty1. Rescission by the insured

• violation of the terms of a contract of insurance entitles either party to terminate the contractual relations.

• Insured can sue for rescission for breach of contract due t the refusal of the insurer to grant a loan applied for although this was expressly agreed upon in the policy and he can recover the full amount of the premiums paid by him up to the filing of the actions

2. Rescission by the insurer• Insurer is entitled to rescind a contract of insurance for violation of a

warranty only if said warranty is MATERIAL otherwise it will not be avoid the policy.

• It maybe rescind even though the violation was not the direct cause of the loss as long as material.

Sec. 75 “A policy may declare that a violation of specified provisions thereof shall avoid it, other-wise the breach of an immaterial provision does not avoid the policy.”

When violation of immaterial provisions shall avoid policy• Every warranty is conclusively presumed material.• Parties may EXPRESSLY STIPULATE that the violation of a particular

provision in the policy shall avoid it.• To constitute a violation, the other insurance must be upon the same sub-

ject-matter, the same interest therein and the same risk.

Sec. 76 “A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, pre-vents the policy from attaching to the risk.”

Effect of breach of warranty by insured1. Fraud not essential for breach - Falsity is the basis of liability on a war-

ranty; breach is one without fraud.2. Effect if w/o fraud

• No fraud, policy is avoided only from the time of breach & the insured is entitled to• return of premium paid at a pro rata rate from the time of breach if it

occurs after the inception of the contract• all the premiums if it is broken during the inception of the contract —

contract is void ab initial and never becomes binding3. Effect if with fraud

• Policy is avoided ab init & the insured IS NOT entitled to the return of the premium paid.

Conditions in insurance policy1. Condition - an event signifying in its broadest sense either an occurrence

or a non-occurrence that alters the previously existing legal relations of the parties to the contract.

2. Insurers may impose whatever conditions they please upon their obliga-tions, as long as they are not contrary to law, morals, good customs, pub-lic order or public policy.

3. Conditions in an insurance policy are 2 kinds1. Condition precedent - happening of some event or the performance of

some act after the terms of the contract have been agreed upon, before the contract shall be binding on the parties, such as that the policy shall not take effect until delivery and payment of the 1st premium during the good health of the applicant.

2. Condition subsequent - w/c pertains to the contract of insurance after the risk has attached and during the existence thereof, such as the con-dition requiring notice and proof of loss in case of loss upon an insur-ance against fire.

Warranty & condition distinguished • Warranty does not suspend nor defeat the operation of the contract but a

breach affords either remedy expressly provided in the contract of that fur-nished by law

45

• Condition precedent is one without the performance of w/c the contract, al-though in for executed by the parties & delivered, does not spring into life.

• A condition precedent is a limitation to the attachment of the risk — war-ranty does not necessarily have that effect.

Exceptions in insurance policy• Exception are inserted in a contract of insurance for the purpose WITH-

DRAWING FROM THE COVERAGE OF THE POLICY, as delimited by the general language describing the risk assumed, some specific risks w/c the insurer declares himself unwilling to undertake

Effects of breach on legal relations of parties1. on binding force of contract

• Occurrence of a breach or warranty or condition even though such breach be but temporary renders the entire contact defeasible or voidable and even though such breach may not have affected the risk or contrib-uted to the loss in any way

• But occurrence of an excepted peril does not in the least affect the bind-ing force of the contract.

2. liability where there is waiver• Insurer does not become liable for an excepted loss by waiver UNLESS

such waiver amounts to a new contract on valuable consideration• Insurer cannot, by a naked waiver, assume a non-existent duty. Nor is

the defense that the loss is expected barred by the incontestable clause.

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium

46

thereof has been paid, except in the case of a life or an industrial life policy whenever the grace pe-riod provision applies or whenever under the bro-ker and agency agreements with duly licensed in-termediaries a ninety day 90 credit extension is given. No credit extension to a duly licensed inter-mediary should exceed ninety days 90 fro date of issuance of the policy.

Sec 78. Employees of the Republic of the Philip-pines, including its political subdivisions & instru-mentalities, and gov’t-owned or controlled corpo-rations, may pay their insurance premiums and loan obligations through salary deduction: Pro-vided, that the insurer, cashier, paymaster or offi-cial of the entity employing the gov’t employee is authorized, notwithstanding the provisions of any existing law, rules & regulations to the contrary, to make deductions from the salary, wage or in-come of the latter pursuant to the agreement be-tween the insurer & the gov’t employee & to remit such deductions to the insurer concerned, & col-lect such reasonable free for its service.

1. Insurance premium - agreed price for assuming and carrying the risk — it is the consideration paid an insurer for undertaking to indemnify the in-sured against a specified

* Only 1 premium is paid for several things — the insurance contract is entire or indivisible as to the items insured.

2. Assessment - a sum specifically levied by mutual insurance companies or associations, upon a fixed and definite plan, to pay losses & expenses.

3. A policy issued on the assessment plan - one where the payment of the benefit is in any manner or degree dependent upon the collection of an assessment upon persons holding similar policies.

4.

Premium

It is levied and paid to meet anticipated losses

It is not enforceable against the insured

not a debt

0.

Payment of premium ordinarily not a debt1. In fire, casualty and marine insurance — premium payable becomes a

debt as soon as the risk attaches.2. In suretyship — as soon as the contract or bond is perfected and delivered

to the obligor• “The thing insured is exposed to the peril insured against” — assumes that

the contract is perfected w/c takes place when the applicant’s offer is ac-cepted by the insurer.

• Where there was not only a perfected contract but a partially performed one — it is binding.

• Remaining premium shall be demandable.• Nonpayment of the balance of the premium due DOES NOT product the

CANCELLATION of the contract of insurance.• Premiums are the ELIXIR VITAE of the insurance business — strength of

the vinculum juris is not measured by any specific amount of the premium payment.

3. In life insurance becomes a debt only when:• 1st premium — the contract has become binding• subsequent premiums — insurer has continued the insurance after maturity

of the premium, in consideration of the insured’s express or implied prom-ise to pay.

• A life insurance policy involves a contractual obligation wherein the in-sured becomes duty bound to pay the premium agreed upon lest he runs the risk of having his insurance policy lapse if he fails to pay such premiums.

• No duty assumed by the insured to pay any premiums subsequent to the first.

• Contract is executory — ordinary life insurance is purely UNILATERAL.

47

• Insurer cannot compel the insured to pay the premium because the insured is by no means a debtor of the insurer, nor is the insurer the creditor of the insured.

Effect of nonpayment of premium1. First premium • Nonpayment of the first premium prevents the contract from becoming

binding notwithstanding the acceptance of the application nor premium due does not produce cancellation of the contract UNLESS WAIVED.

2. Subsequent premium• Nonpayment of subsequent premium does not affect the validity of the con-

tract UNLESS by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse.

* For individual life, endowment insurance & group life insurance — policy-holder is entitled to a grace period of either 30 days or 1 month within w/c the payment of any premium after the first may be made

* Industrial life insurance — grace period is 4 weeks, & where premiums are payable monthly, either 30 days or 1 month.

* Payment of the insurance premiums & loan obligations of gov’t employees through salary deduction.

Excuses for nonpayment of premiums1. Fortuitous events • Even the act of God will not prevent the forfeiture of the policy when the

premium remains unpaid. • If the insured can neglect payment at maturity & yet suffer no loss forfei-

ture, premiums will not be punctually paid. • Insurer must have some efficient means of enforcing punctuality; hence in-

surance contracts usually provide for the forfeiture of the policy upon de-fault of prompt payment of premiums.

2. Condition, conduct or default of insurer• No excuse whatever will avail to prevent a forfeiture EXCEPT only when

the nonpayment has in some way been induced by the condition, conduct or default of the insurer.

• Nonpayment is excused;

1. Insurer has become insolvent & has suspended business or has re-fused w/o justification a valid tender of premiums.

2. Failure top y was due to the wrongful conduct of the insurer as when the insurer induced the beneficiary under a policy to current it for can-cellation by falsely representing that the insurance was illegal & void, & returning the premiums paid.

3. Insurer has in any wise waive his right to demand payment. • Insurer will not be deemed to have waived his privilege of forfeiture by

mere inaction or silence if the ground be default in the payment of premi-ums, going as it does to the whole consideration inducing the inure to enter into the contract.

• Insured has the privilege of continuing the policy in force by making pre-mium payments, the insurer cannot ordinarily force the insured to make these payments.

Valid of policy where credit extension granted to insured

When policy valid & binding notwithstanding nonpayment of premium1. Exceptions to Sec 77

1. Life or an industrial policy, whenever the grace period provisions ap-plies

2. Whenever under the broker and agency agreements with duly license intermediaries, a 90-day extension is given.

3. An acknowledgement in a policy or contract of insurance of receipt of premium even if there is a stipulation therein that it shall not be bind-ing until the premium is actually paid.

4. An agreement allowing the insured to pay the premium in instalments and partial payment has been made at the time of loss

5. Agreement to grant the insured credit extension for the payment of the premium and loss occurs before the expiration of the credit term

6. Estoppel bars the insurer from invoking Sec 77 to avoid recovery on a policy providing a credit term for the payment of the premiums, as against the insured who relied in good faith on such extensions.

* Credit extension EXCEEDS 90 days from the date of the issuance of the policy, it should be deemed only for 90 days however receipt of the insurer of the premiums even after the expiration of the credit term but before the loss, under the insurance valid & binding.

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* ***ONCE THE POLICY HAS BEEN ISSUED, THE PRESUMPTION LIES THAT THE PREMIUM HAS BEEN DULY PAID & NONPAY-MENT OF THE PREMIUM IS ATTRIBUTABLE TO THE FAULT OR MISREPRESENTATION OF THE INSURER, THE INSURED IS EN-TITLE OT RECOVER IN CASE OF LOSS.

Sec. 79. An acknowledgment in a policy or con-tract of insurance or the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding un-til the premium is actually paid.

Effect of acknowledgement of receipt of premium in policy1. Waiver of condition of prepayment

• When a policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of prepayment, the acknowl-edgement being declared by law to be conclusive evidence of premium payment

2. Recovery of premium if unpaid• Conclusive presumption extends only to the question of the binding ef-

fect of the policy.• Acknowledgement is only a prima facie evidence of the fact of such pay-

ment.• Insure may still dispute its acknowledgement but only for the purpose of

recovering the premium due & unpaid• Sec 79 is an exception to Sec 77

Effect of acceptance of premium• Acceptance of premium within the stipulated period for payment thereof,

including the agreed period of grace, merely assures continued effectivity of the insurance policy in accordance with its terms.

• Acceptance does not stop the insurer from interposing any valid defense under the terms of the insurance policy, where such insurer is not guilty of any inequitable actor representation.

Sec. 80. A person insured is entitled to a return of premium, as follows:

(a)To the whole premium if no part of his interest in the thing insured be exposed to any of the perils insured against;

(b) Where the insurance is made for a definite pe-riod of time and the insured surrenders his policy, to such portion of the premium as corresponds with the unexpired time, at a pro rata rate, unless a short period rate has been agreed upon and ap-pears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously ac-crued; Provided, That no holder of a life insurance policy may avail himself of the privileges of this paragraph without sufficient cause as otherwise provided by law.

Sec. 81. If a peril insured against has existed, and the insurer has been liable for any period, how-ever short, the insured is not entitled to return of premiums, so far as that particular risk is con-cerned.

Sec. 82. A person insured is entitled to return of the premium when the contract is voidable, on ac-count of fraud or misrepresentation of the insurer,

49

or of his agent, or on account of facts, the exis-tence of which the insured was ignorant without his fault; or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy.

A person insured is not entitled to a return of pre-mium if the policy is annulled, rescinded or if a claim is denied by reason of fraud.

Sec. 83. In case of an over-insurance by several in-surers other than life, 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 at risk.

When insured entitled to recover premiums• Insured has the right to recover premiums already paid or a portion thereof

in the ff cases1. No part of the thing insured has been exposed to any of the perils in-

sured against.2. Insurance is for a definite period and the insured surrenders his policy

before the termination thereof.3. Contract is voidable because the existence of facts of w/c the insured

was ignorant without his fault4. Insurer never incurred any liability under the policy because of the

default of the insured other than actual fraud5. Contract is voidable & subsequently annulled because of the fraud or

misrepresentation of the insurer or his agent.6. There is over-insurance7. Rescission is granted due to the insurer’s breach of contract.

• #1, 3, 4 & 5 — the insured is entitled to a return of the entire premium paid.

• Insured cannot recover premiums UNLESS they have actually been paid.

• Payment to insurer’s agent is sufficient.• Documentary stamps tax & other taxes are not covered.• A person insured is not entitled to a return of premium if the policy is an-

nulled, rescind or if a claim is denied by reason of fraud.

When risk has never attached• Since premiums are paid in consideration f the assumption of specified

risks by insurers, if the risk insured against does not or cannot attach or if no part of the interest is subject to any of the specified perils, — the insurer cannot claim or retain the ore mum thus paid, in the absence of any fraud or fault on the part of the insured.

1. Approval of application or acceptance of policy absent• Application not approved — no premium can be recovered• If premium has previously been paid, it must be returned as no risk

whatsoever has ever attached.• If no risk attaches r contract results, there is no meeting of the minds

of the parties on the subject matter of the insurance. 2. Loss occurs before effective date

• Insured pays in advance the annual premium, the insurance take effect on a c retain date and the loss occurs before said date, the insured is entitled to a return of the whole premium.

3. Insured & insurer become public enemies• Premiums paid after the declaration of war between the belligerent

states be returned to the insured. • Insured is not entitled to indemnity for loss occurring after such dec-

laration of war.

Where insured surrenders policy before termination• Sec 80 (b) does not apply to

1. Insurance not for a definite period2. Short period rate has been agreed upon3. Policy is a life insurance policy

• Insurance is for a definite period + insured cancels policy by surrendering (provided it is allowed in the policy) = Insured is entitled to recover the premiums already paid equivalent to the UNEXPIRED term pro rata. — In-

50

surer shall refund UNEARNED PREMIUMS in proportion to the UNEX-PIRED PERIOD.

Where short period rate has been stipulated• An insurance policy may be cancelled even if before its expiration by: (pre-

miums have been paid for a year)• Insurer — it retains only a proportion of the annual premium that the ex-

pired time bears to the entire time • Insured — the pro rata return of premium will not be followed if the pol-

icy stipulates a short period rate w/c insured is entitled to return of the premium in the proportion stipulated.

Right to recover premiums as to life insurance• Recovery of premiums paid is not allowed if the insured surrendered his

policy — life insurance is not a divisible contract.• Insured will be entitled to receive the “cash current value” of his policy af-

ter 3 full annual premiums shall have been paid.

Where risk has attached 1. Whole premium considered as earned

• GR: insurance granted in the entire consideration for the premium re-ceived; if the risk attached by reason of the contract’s becoming binding upon the insurer — whole premium must be considered earn therefore cannot be apportioned in case the risk terminates before the end of the term for w/c the insurance was granted. (cargo ship sailed in the middle withdrew the policy)

2. Where insurance divisible• Premium paid for any particular risk is not earned until that risk has at-

tached.

Where the contract is voidable1. Fraud of the insurer of his agent

• Policy is induced by the fraud or misrepresentation of the insurer or his agent, the insured may reside the contract and demand the return of the premiums paid by him by a timely action.

2. Other grounds

• voidable — on account of facts, the existence of w/c the insured was ignorant w/o his fault; by any default of the insured other than actual fraud, the insurer never incurred liability under the policy.

3. Fraud of the insured• Insured is not entitled to a return of the premium paid if the policy is

annulled by reason of FRAUD or MISREPRESENTATION of the in-sured.

• Sec 82 impliedly prohibits the return of the premium where the policy is annulled by reason if the fraud of the insured.

Where there is over-insurance• In case of over-insurance by double insurance, the insurer is not liable for

the total amount of insurance taken, his liability being limited to the amount of the insurable interest on the property insured. He is not entitled to the excess of the insurance over the insurable interest of the insured

• The premiums to be returned where there is over-insurance by several in-surers shall be proportioned to the amount by w/c the AGGREGATE SUM insured in all the policies exceeds the insurable value of the thing at risk.

• X insures his house w/ insurable value of 1.5M

Insurer Amount of Insurance Premium paidB. Co 1.2M 24,000C. Co 600k 12,000Total 1.8M 36,000

* there was an over-insurance of 300k (1.5M - 1.2M) so the proportion is 300k/1.8M = 1/6 therefore 1/6 of 24k & 1/6 of 12k shall be recovered.

Where insurance is illegal• Insurance is void because it is illegal — Premiums cannot be recovered• If parties are not in pari delicto— the law will allow an innocent insured to

take again his premiums as when he is ignorant that the insurance is illegal.• One where has no insurable interest in the life insured, paid premiums in

the bona fide belief induced by the fraudulent statement of the insurer that such insurance is valid — he amy recover the premiums paid

• It will not be the same if the insured was a conscious party to the wrong.

51

Basis of right to recover premiums• Return of premiums for short interest, over-insurance and double insurance

— basis is 1. Insurer could have been called to pay the whole sum instead — In-

surer could at any time & under any conceivable circumstance, have been call on to pay the whole sum on w/c he has received premium, in such case the whole premium is earned & there shall be no return.

2. Insurer could have been called to pay only part of the whole sum in-sured — Never in any event have thus been called on to pay the whole but only a part of the amount of his subscription, he ought not retain a larger proportion of the premium & must return the residue

Sec 84 An insurer may contract & accept pay-ments, in addition to regular premium, for the purpose of paying future premiums on the policy or to increase the benefits thereof.

Payments in addition to regular premiums• Insured is duty bound to make prompt payment of only the insurance pre-

miums due under the policy.• Insurer may contract with the insured whereby the insured may make and

the insurer accept payments in addition to regular premiums — for the pur-pose of paying future premiums on the policy or to increase the benefit thereof.

Sec. 85. An agreement not to transfer the claim of the insured against the insurer after the loss has happened, is void if made before the loss except as otherwise provided in the case of life insur-ance.

1. Claim - a demand for the satisfaction of a loss suffered within the purview of an insured’s policy• May be made by the party insured, the insurer with right of subroga-

tion, or non-party but with a right against the insured.

Effect of agreement not to transfer claim of insured after a loss1. Before a loss has occurred, an insurance policy is not assignable WITH-

OUT the consent of the insurer2. After a loss, the insured has an absolute right to transfer or assign his

claim against the insurer.3. A stipulation w/c attempts to prohibit such transfer of policy is void by

reason that:1. It hinders agreement from being free transmission of property 2. Transfer involves but money claim or right of action3. Transfer involves no question of moral hazard

• because it cannot increase the insurer’s risk for a loss that has al-ready occurred.

• Sec 173 prohibits the transfer of a policy of fire insurance to any person or company who acts as an agent for or otherwise represents the issuing com-pany and declares such transfer void insofar as it ay affect other creditors of the insured.

Sec. 86. Unless otherwise provided by the policy, an insurer is liable for a loss of which a peril in-sured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not li-

52

able for a loss which the peril insured against was only a remote cause.

1. Loss - an injury, damage or liability sustained by the insured in conse-quence of the happening of one or more of the perils against w/c the in-surer, in consideration of the premium, has undertaken to indemnify the insured. • It includes death, property damage or destruction.• It includes income or profits & legal liability to a third party.• In reinsurance — loss refers to the reinsurer’s share of the loss on

risks ceded either automatically or facultatively.

Liability of insurer for loss1. Extent of loss — depends whether the insured suffers a loss & the extent

of that loss; it may be TOTAL, PARTIAL or CONSTRUCTIVE TOTAL.• It can be satisfied by PAYMENT OF THE LOSS, REINSTATEMENT

or REPLACEMENT.2. Cause of loss — Insurer assume liability only for a loss proximately

caused by he perils insured against although a peril not insured against may have been a remote cause of the loss.

• Insure is still liable even if the proximate cause is not the peril insured against if the IMMEDIATE cause is the peril insured against.

3. Burden of proof where loss has occurred — Insurer has the burden of proof to show that he not liable.

• Proximate cause — a natural & continuous sequence, unbroken by any new independent cause, produces an event and w/o w/c the event would not have occurred. • it is the EFFICIENT CAUSE• the one that SETS OTHERS IN MOTION• LOSS is ATTRIBUTED

1. Hostile Fire — It occurs outside of the usual confines or beings as a friendly fire & because

2. Friendly Fire — So long as a fire burns in a place where it was intended to burn & ought to be, it is to be regarded as merely an agent for the ac-complishment of some purpose & not as a hostile peril

• Fire insurance providers indemnification protection for losses caused by a hostile fire but NOT for damage or loss due to a friendly fire.

Sec. 87. An insurer is liable where the thing in-sured is rescued from a peril insured against that would otherwise have caused a loss, if, in the course of such rescue, the thing is exposed to a peril not insured against, which permanently de-prives the insured of its possession, in whole or in part; or where a loss is caused by efforts to rescue the thing insured from a peril insured against.

Extension of principle of proximate cause1. Insure is liable when:

1. The loss took place while being rescued from the evil insured against.• Insured if permanently deprived of the possession of the thing insured

by a peril not insured against, provided it is shown that said property would have been lost by the peril insured against had there been no attempt to rescue it.

2. The loss is caused by effort to rescue the thing insured from a peril in-sured against

• It is the efforts to rescue the thing that caused the loss• However the insured is bound to exercise a reasonable degree of care

in removing the goods.• The necessity for removal is to be determined not by the result alone

but by the circumstance as they appear to the interest persons at the time of the fire.

Sec. 88. Where a peril is especially excepted in a contract of insurance, a loss, which would not have occurred but for such peril, is thereby ex-

53

cepted although the immediate cause of the loss was a peril which was not excepted.

• Insurer is not liable if the proximate cause of the loss is a peril excepted from the policy although the immediate cause is a peril not excepted. — Ex. Explosion not excepted but caused fire

Sec. 89. An insurer is not liable for a loss caused by the willful act or through the connivance of the insured; but he is not exonerated by the negli-gence of the insured, or of the insurance agents or others.

• Insurer is not liable for a loss caused by the intentional act of the insured or through his connivance.

• Loss is not within the contemplation of a contract of insurance one of the requisites of w/c is that the risk should not be subject in any wise to the control of the parties.

Loss caused by negligence of insured1. Where there is ordinary negligence — will not relieve insurer from liabil-

ity2. Where there is gross negligence — will obviously relieve the insurer from

liability

Sec. 90. In case of loss upon an insurance against fire, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay.Sec. 91. When a preliminary proof of loss is re-quired by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time.

Condition before loss

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• There must be compliance on the part of the insured with the terms of the policy.

• If he has violated or failed to perform the conditions of the contract — in-sured cannot recover UNLESS it has been waived by the insurer

Condition after loss1. Notice & proof of loss

• Conditions after the loss that must be fulfilled before the insured be-comes entitled to the benefit of a fire insurance policy: written notice of loss must be given to the insurer

• Attending physician in case of death2. Nature

• Until a loss occurs, the insurer’s liability under his contract is altogether contingent, but with the happening of the capital fact of loss, his liability arises and becomes properly fixed.

3. Construction• GR: they must be construed with much less strictness than those condi-

tions that operate prior to the loss.

Meaning & purpose of notice of loss1. Notice of loss — more or less formal notice given the insure by the in-

sured or claimant under a policy of the occurrence of the loss insured against.

2. Purpose: Aprrise the insurance company with the occurrence of the loss, so that it may gather info & make proper investigation while the evidence is still fresh & take such action as may be necessary to protect its interest from fraud or imposition — to prevent further loss to the property

Necessity of notice of loss• Insurer cannot be held liable to pay claim UNLESS he receives notice of

that claim.• Not given in a timely manner — insurer is exonerated• Formal notice of loss is not necessary if the insurer already has actual no-

tice.

Time for giving notice of loss

• W/o unnecessary delay• Non-life insurance, other than fire insurance — Commissioner may specify

the period for the submission of the notice of loss.• Given within a stated time after the loss occurs and that failure to give the

notice within such time shall preclude recovery. — It is valid provided the time so fixed is not reasonably short.

Meaning & nature of proof of loss1. Proof of loss - more or less formal evidence given the company by the in-

sured or claimant under a policy of the occurrence of the loss, the particu-lars thereof and the data necessary to enable the company to determine its liability & the amount thereof.

2. However it does not stand in court as evidence or proof.

Form of notice or proof of loss • In case of loss upon an insurance against fire, the law requires a written no-

tice thereof.• The law does not make any requirement as to the form in w/c notice or

proof os loss must be given in case of other non-life insurance.• In absence thereof of any stipulation in the policy, notice or proof may be

Orally or in Writing.

Purpose of proof of loss• Requirement of notice is intended merely to give the insurer information

upon w/c he may act promptly in protecting the property from further loss for w/c he may be liable or to enable him to take any other immediate steps that his interests may require

• Statement of loss is a very formal requirement & intended not only for:• give the insurer information by w/c he may determine the extent of his

liability• But also: Afford him a means of detecting any fraud that may have been

practiced upon upon him• Operate as a check upon extravagant claims

Burden of proof of loss in court action

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• Insured has the burden of proving that he has suffered a loss & in life insur-ance, death of the insured must be proven.

• Once the insured makes a prima facie case in his favor, the burden is shifts to the insurer to controvert the insured’s prima facie case.

Excuses for non-compliance with conditions• Failure on the part of the insured to comply strictly with their terms will be

excused when the circumstances were such as to make strict compliance impossible.

Sec. 92. All defects in a notice of loss, or in prelim-inary proof thereof, which the insured might rem-edy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objec-tion, are waived.

When defects in notice or proof deemed waived• It is duty of the dissatisfied insurer to indicate the defects on the proofs of

loss as given, so that the deficiencies may be supplied.• Retention of the defective proofs constitute a waiter of his objections• There is waiver where the insurer

1. Writes to the insured that he considers the policy null & void as the furnishing of the notice or proof of loss would be vain & useless

2. Recognizes his liability to pay the claim3. Denies all liability under the policy4. Joins in the proceedings for determining the amount of the loss by ar-

bitration, making no objections on account of notice & preliminary proof

5. Makes no objection on any ground other than a formal defect in the preliminary proof.

• Proof are defective is not sufficient to impose on the insured the duty to supply defects not pointed out.

Sec. 93. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any

act of him, or if he omits to take objection promptly and specifically upon that ground.

When delay in presentation of notice or proof deemed waived• Waiver of delay in the presentation of notice of proof of loss may be made

6. By an act of the insurer7. By failure to take objection promptly and specifically upon that

ground• An insurance company is estopped from claiming that notice of the fire was

not given forthwith to the insurer by the insured as required by the terms of the policy when it still accept payment of the premium with full knowledge that the place was damaged by fire.

Sec. 94. If the policy requires, by way of prelimi-nary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the in-surer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified.

Effect of failure to secure certificate or testimony of 3rd person• IF the policy requires, the certificate or testimony of a person other than the

insured, such requirement must be complied with by the insured as part of the contract.

• Insured is only required to exercise due diligence to procure it.• Insured must furnish reasonable evidence to the insurer that the person’s re-

fusal was not induced by any just grinds of disbelief of said person in the truth of the facts necessary to be certified or resifted but because of other grounds.

• It has been held that such requirement in the policy must be literally con-strued on favour of the insured.

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

1. Double insurance — “Co-insurance”2. Requisites

1. Person insured is the same2. 2 or more insurers insuring separately3. Identity of subject matter4. Identity of interest insured5. Identity of risk or peril insured against.

Over-Insurance

Amount of the insurance is beyond the value of the insured’s insurable interest

There may be only one insurer

• There is Over-insurance by double insurance.

Binding effect of stipulation against double insurance• A policy w/c contains no stipulation against additional insurance is not in-

validated by the procuring of such insurance1. Additional insurance obtained by the insured

• It is valid & reasonable, & in the absence of consent, waiver or estop-pel on the part of the insurer, a breach thereof will precent a recovery on the policy.

• In order to constitute a violation, It must be upon the SAME SUB-JECT MATTER, SAME INTEREST THEREIN, SAME RISK.

2. Additional insurance obtained by a third person • Good or bad faith of the insured usually is immaterial.• Insurance obtained by a 3rd person w/o knowledge or consent of the

insured will not affect his rights under the policy in the absence of rat-ification.

Purpose of prohibition against double insurance • Purpose: to prevent over-insurance & thus avert the perpetration of fraud.• The public is interested in preventing the situation in w/c a loss would be

profitable to the insured.

Sec. 96. Where the insured is overinsured by dou-ble insurance:chanroblesvirtuallawlibrary(a) The insured, unless the policy otherwise pro-vides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts;(b) Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum re-ceived by him under any other policy without re-gard to the actual value of the subject matter in-sured;(c) Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum re-ceived by him under any policy;

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(d) 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 poli-cies, he must hold such sum in trust for the insur-ers, according to their right of contribution among themselves;(e) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is li-able under his contract.

Rules for payment of claims where there is over-insurance by double insur-ance• Insured can recover no more than the amount of his insurable interest

whether the insurance is contained in one policy or in several policies.• Principle of Contribution — requires each insurer to contribute rateably to

the loss or damages considering that the several insurance cover the same subject matter & interest against the same peril.

• They apply only where there is over-insurance by double insurance that is thee insurance is contained in several policies the total amount of w/c is in excess of the insurable interest of the insured.

• Part (e) — governs the liability of the insurers among themselves where the total insurance taken exceeds the loss. If the loss is greater than the sum to-tal of all the policies issued, each insurer is liable for the amount of his pol-icy.

Sec. 97. A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance.

2. Contract of Reinsurance — a contract whereby one party, the reinsurer, agrees to indemnify another, the reinsured, either in whole or in part, against loss or liability w/c the latter may sustain or incur under a separate

& original contract of insurance with a 3rd party, the original insured. — “An insurance of an insurance” ; “treaties”

3. Reinsurance of a reinsurance is “Retrocession”

Double Insurance

Insurer remains as the insurer of the original insured

Subject of the insurance is property

Insured is the party in interest in all the contracts Original insured has no interest in the contract of reinsurance w/c is independent

Insured has to give his consent

Value of reinsurance1. From the standpoint of the INSURER

• Reinsuring companies benefit from contracts of reinsurance• “Retention” — every insurance company establishes a limit on the maxi-

mum claim it wishes to pay out of its own resources• Distribution of risks• Greater proportion• Reducing the waste arising out of policies w/c are applied for but not is-

sued.2. From the standpoint of the INSURED

• Practice of reinsurance is also beneficial to the insured1. Gives insurance companies that practice in greater financial sta-

bility and thus make the insured’s individual policy more reliable.2. A large amount of insurance is needed, the insured may obtain it

w/o negotiating w/ numerous companies3. It enables the insured to obtain protection promptly, w/o delay

that would be required to divide and distribute the amount among many companies

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4. All the insurance can be written under identical contract proviso, whereas otherwise there might vary with the different companies among whom the insurance is divided

5. Small companies are encourage to divide large exposures for safety & enabled to accept a wide variety of applicants.

3. From the standpoint of the INSURING PUBLIC• Plainly beneficial to the public inasmuch as they promote both effi-

ciency & stability in the conduct of the reinsurance business.

Sec. 98. Where an insurer obtains reinsurance, ex-cept under automatic reinsurance treaties, he must communicate all the representations of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk.

Duty of reinsured to disclose facts• An underwriter is seeking to insure his risks, his day to disclose all material

facts is no less than the similar duty imposed on a person seeking an origi-nal insurance, the duty in both cases is one of the strictest good faith since the risk insured against in a contract of reinsurance is the probability that the original insurer may be compelled to indemnify for the loss under the policy issued by him.

• A policy may be avoided where the reinsured cancels the fact that a loss has taken place or that the property is over-insured where he has knowl-edge thereof

Automatic & facultative methods of ceding reinsurance

Automatic

Share or participation in risk insured Art 98 does not apply

Advantages to insurer Avoidance of any delay in issuing its policy

Protection to reinsurer • The reinsure is relying on the underwriting judgment of the insurer & is bound to accept a case even though it may not agree with the underwrit

ing decision• Reinsurer is protected by the requirement that the

original insurer retains its full retention limit w/c assures a measure of self-interest.

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• It is only after reinsurance cession is made that the obligation of the insure to pay the reinsurance premium arises.

Sec. 99. A reinsurance is presumed to be a con-tract of indemnity against liability, and not merely against damage.

Nature of contract of reinsurance• Primary insurer’s risk & not the property insured under the original policy

1. Contract, one of indemnity against liability • No means necessary that the insurer shall first have paid a loss accruing,

as a condition precedent to his demanding payment of the reinsurer.• Insolvency of the insurer does not in any wise affect the right of the in-

sure to demand payment in full under the policy of reinsurance. 2. Contract, separate from original insurance policy

• Independent of & separate from the contract of reinsurance.• Practice is for the reinsurer to pay the insurer even before the latter has

indemnified the original insured.3. Contract based on original policy

• Necessarily based upon the original policy and the rights of the parties while fixed by the terms and conditions of the policy of reinsurance are yet greatly affected by the terms and conditions of the original policy upon w/c the reinsurance contract is based

• Reinsurance risk must be the same as that covered by the original insur-ance policy.

4. Insurable interest requirement applicable • Doctrine of insurable interest applies to reinsurance just as it does to any

insurance contract.5. Rule on subrogation applicable

• A reinsurer acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss.

Sec. 100. The original insured has no interest in a contract of reinsurance.

Rights of original insured in contract of reinsurance1. Insured has no concern with the contract of reinsurance & the reinsurer is

not liable to the insured either as surety or otherwise UNLESS the con-tract so provides.

2. No privity of contract between the original reinsured and the reinsurer.3. A contract of reinsurance rarely explicitly permits direct acton by the

original insured against the reinsurer.

Liability of reinsurer to reinsured• GR: Insurer is entitled to avail itself of every defines w/c the reinsured

might urge in an action by the person originally insured.• Reinsurer is not liable to the reinsured for a loss under the original policy if

the latter is not liable to the original insured or for an amount more than the sum actually paid to the thereon.

• “To pay as may be paid thereon” does not preclude the reinsurer from in-sisting upon proper proof that a loss within the terms of the original policy has taken place

• It does not enable the reinsured to recover from his reinsurer to an extent beyond the subscription of the latter under the contract of reinsurance.

Liability of reinsurer to original insured • Original insured may stand in any of 3 relations towards the reinsurer in ac-

cordance with the terms of the particular contract of reinsurance.

1. Contract of reinsurance sole between insurer & reinsurer • Original insured has absolutely no interest in the contract & is a total

stranger to it• UNLESS the reinsurance contract contains a stipulation assigning the

right of the insurer in favour of the insured, the latter, not being a privy to the contract, has no cause of action against the reinsurer but only against the insurer.

2. Contract of reinsurance with stipulation in favor of original insured

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• Reinsure who has promised to pay the losses accruing under the original policy will be liable to a suit by the original insured under the contract of reinsurance.

• Remedy of the insured is both against the insure and the reinsurer.3. Contract of reinsurance amounting to novation of original contract

• The original insurer may also maintain an action directly against the reinsurer in those cases in w/c the circumstances attending the making of the contract of reinsurance amount to a novation of the original contract & hence operate to discharge that contract and the original insurer form all obligations thereunder.

• The original insurer will be released only when the insured agrees with the insurer and reinsure to the novation

• Such an agreement is ordinarily carried into effect by a current of the original policy and issuance of a new one including the same terms and conditions — “reinsurer”

• Such a transaction is not one of technical reinsurance — “reinsurer” is but substituted for the original insurer hence becomes the immediate in-surer of the subject of the original policy.

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