Spectra Notes - Insurance Compilation

Insurance

Based on the outlined discussion of Atty. Eduardo V. Soleng, Jr. Updated as of: AY: 2014 - 2015

Societas Spectra Legis

Societas Spectra Legis Insurance

TABLE OF CONTENTS INTRODUCTION ............................................................................................................................................................. 7 Definitions ................................................................................................................................................................................................................................... 7

GENERAL PROVISIONS ................................................................................................................................................... 8 SECTION 1. .................................................................................................................................................................................................................................. 8 SECTION 2. ................................................................................................................................................................................................................................ 13 VIRGINIA CALANOC vs PHILIPPINE AMERICAN LIFE INSURANCE CO .................................................................................................................................................................14 EMILIA T. BIAGTAN vs THE INSULAR LIFE ASSURANCE COMPANY ....................................................................................................................................................................15 FIGURACION VDA. DE MAGLANA vs CONSOLACION ..........................................................................................................................................................................................17 ANDREW PALERMO vs PYRAMID INSURANCE CO ..............................................................................................................................................................................................19 ZENITH INSURANCE vs CA .....................................................................................................................................................................................................................................19 VILLACORTA vs INSURANCE COMMISSION .........................................................................................................................................................................................................20 SUN INSURANCE OFFICE vs CA; NERISSA LIM .....................................................................................................................................................................................................22 PERLA COMPANIA DE SEGUROS vs. CA, HERMINIO LIM and EVELYN LIM ........................................................................................................................................................23

SECTION 3. ................................................................................................................................................................................................................................ 27 ENRIQUEZ vs SUN LIFE INSURANCE .....................................................................................................................................................................................................................28

SECTION 4. ................................................................................................................................................................................................................................ 29 SECTION. 5. ............................................................................................................................................................................................................................... 30 SECTION 6. ................................................................................................................................................................................................................................ 30 SECTION 7. ................................................................................................................................................................................................................................ 31 SECTION 8. ................................................................................................................................................................................................................................ 32 GEAGONIA vs CA and COUNTRY BANKERS INSURANCE CORPORATION ...........................................................................................................................................................32 FORTUNE INSURANCE vs CA .................................................................................................................................................................................................................................33 EDILLON vs MANILA BANKERS LIFE ......................................................................................................................................................................................................................34 PERLA COMPANIA DE SEGUROS vs CA, MILAGROS CAYAS ................................................................................................................................................................................34 AISPORNA vs CA ....................................................................................................................................................................................................................................................35 COUNTRY BANKERS INSURANCE vs LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE..........................................................................................................35 AMERICAN HOME ASSURANCE COMPANY vs TANTUCO ENTERPRISES, INC ....................................................................................................................................................36

PERFECTION OF CONTRACTS CASES: ...................................................................................................................................................................................... 37 GREAT PACIFIC LIFE ASSURANCE vs CA................................................................................................................................................................................................................37 DBP vs CA ...............................................................................................................................................................................................................................................................37 PEREZ vs CA ............................................................................................................................................................................................................................................................38

SUBROGATION CASES .............................................................................................................................................................................................................. 39 MALAYAN INSURANCE vs CA ................................................................................................................................................................................................................................39 MANILA MAHOGANY MANUFACTURING CORPORATION vs. CA AND ZENITH INSURANCE CORPORATION ..................................................................................................40 PAN MALAYAN INSURANCE vs CA ........................................................................................................................................................................................................................40 CEBU SHIPPING AND ENGINEERING WORKS, INC. VS. WILLIAM LINES INC. AND PRUDENTIAL GUARANTEE AND ASSURANCE COMPANY, INC. ......................................41

SECTION. 9. ............................................................................................................................................................................................................................... 43 SECTION. 10. ............................................................................................................................................................................................................................. 44 SECTION 11. .............................................................................................................................................................................................................................. 47 SECTION 12. .............................................................................................................................................................................................................................. 49 SECTION 13. .............................................................................................................................................................................................................................. 50 SECTION 14. .............................................................................................................................................................................................................................. 51 SECTION 15. .............................................................................................................................................................................................................................. 52 SECTION 16. .............................................................................................................................................................................................................................. 52 SECTION 17. .............................................................................................................................................................................................................................. 53

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 2

Societas Spectra Legis Insurance SECTION 18. .............................................................................................................................................................................................................................. 53 SECTION 19. .............................................................................................................................................................................................................................. 54 SECTION 20. .............................................................................................................................................................................................................................. 55 SECTION 21. .............................................................................................................................................................................................................................. 56 SECTION 22. .............................................................................................................................................................................................................................. 56 SECTION 23. .............................................................................................................................................................................................................................. 57 SECTION 24. .............................................................................................................................................................................................................................. 57 SECTION 25. .............................................................................................................................................................................................................................. 57

CONCEALMENT.............................................................................................................................................................58 SECTION 26. .............................................................................................................................................................................................................................. 58 SECTION 27. .............................................................................................................................................................................................................................. 58 SECTION 28. .............................................................................................................................................................................................................................. 59 SECTION 29. .............................................................................................................................................................................................................................. 60 SECTION 30. .............................................................................................................................................................................................................................. 60 SECTION 31. .............................................................................................................................................................................................................................. 61 SECTION 32. .............................................................................................................................................................................................................................. 62 SECTION 33. .............................................................................................................................................................................................................................. 62 SECTION 34. .............................................................................................................................................................................................................................. 62 SECTION 35. .............................................................................................................................................................................................................................. 62

REPRESENTATION .........................................................................................................................................................63 SECTION 36. .............................................................................................................................................................................................................................. 63 SECTION 37. .............................................................................................................................................................................................................................. 63 SECTION 38. .............................................................................................................................................................................................................................. 63 SECTION 39. .............................................................................................................................................................................................................................. 64 SECTION 40. .............................................................................................................................................................................................................................. 65 SECTION 41. .............................................................................................................................................................................................................................. 65 SECTION 42. .............................................................................................................................................................................................................................. 65 SECTION 43. .............................................................................................................................................................................................................................. 66 SECTION 44. .............................................................................................................................................................................................................................. 66 SECTION 45. .............................................................................................................................................................................................................................. 67 SECTION 46. .............................................................................................................................................................................................................................. 67 SECTION 48. .............................................................................................................................................................................................................................. 68 SECTION 49. .............................................................................................................................................................................................................................. 69 SECTION 50. .............................................................................................................................................................................................................................. 72 SECTION 51. .............................................................................................................................................................................................................................. 74 SECTION 52. .............................................................................................................................................................................................................................. 75 SECTION 53. .............................................................................................................................................................................................................................. 76 SECTION 54. .............................................................................................................................................................................................................................. 77 SECTION 55. .............................................................................................................................................................................................................................. 77 SECTION 56. .............................................................................................................................................................................................................................. 77 SECTION 58. .............................................................................................................................................................................................................................. 77 SECTION 59. .............................................................................................................................................................................................................................. 77 SECTION 60. .............................................................................................................................................................................................................................. 77 SECTION 61. .............................................................................................................................................................................................................................. 78 SECTION 62. .............................................................................................................................................................................................................................. 78

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 3

Societas Spectra Legis Insurance SECTION 63. .............................................................................................................................................................................................................................. 79 SECTION 64. .............................................................................................................................................................................................................................. 79 SECTION 65. .............................................................................................................................................................................................................................. 79 SECTION 66. .............................................................................................................................................................................................................................. 80 SECTION 67. .............................................................................................................................................................................................................................. 81 SECTION 68. .............................................................................................................................................................................................................................. 82 SECTION 69. .............................................................................................................................................................................................................................. 82 SECTION 70. .............................................................................................................................................................................................................................. 82 SECTION 71. .............................................................................................................................................................................................................................. 83 SECTION 72. .............................................................................................................................................................................................................................. 83 SECTION 73. .............................................................................................................................................................................................................................. 83 SECTION 74. .............................................................................................................................................................................................................................. 84 SECTION 75. .............................................................................................................................................................................................................................. 84 SECTION 76. .............................................................................................................................................................................................................................. 84 Makati Tuscany Condominium Corp. v. Court of Appeals, 215 SCRA 462 ........................................................................................................................................................87 UCPB vs. MASAGANA ............................................................................................................................................................................................................................................88 Tibay vs CA – Fortune insurance ..........................................................................................................................................................................................................................88 South Sea Surety vs CA .........................................................................................................................................................................................................................................89

SECTION 79. .............................................................................................................................................................................................................................. 89 SECTION 80. .............................................................................................................................................................................................................................. 90 SECTION 84. .............................................................................................................................................................................................................................. 92 SECTION 85. .............................................................................................................................................................................................................................. 92 SECTION 86. .............................................................................................................................................................................................................................. 92 SECTION 87. .............................................................................................................................................................................................................................. 94 SECTION 89. .............................................................................................................................................................................................................................. 94 SECTION 89. .............................................................................................................................................................................................................................. 94 SECTION 92. .............................................................................................................................................................................................................................. 96 SECTION 93. .............................................................................................................................................................................................................................. 96 SECTION 94. .............................................................................................................................................................................................................................. 96 SECTION 95. .............................................................................................................................................................................................................................. 96 SECTION 96. .............................................................................................................................................................................................................................. 97 SECTION 98. .............................................................................................................................................................................................................................. 98 SECTION 99. .............................................................................................................................................................................................................................. 99 SECTION 100. ............................................................................................................................................................................................................................ 99

DEFINITION...................................................................................................................................................................99 INSURABLE INTEREST..................................................................................................................................................102 SECTION 102. .......................................................................................................................................................................................................................... 102 SECTION 103. .......................................................................................................................................................................................................................... 102 SECTION 104. .......................................................................................................................................................................................................................... 103 SECTION 105. .......................................................................................................................................................................................................................... 103 SECTION 106. .......................................................................................................................................................................................................................... 103 SECTION 107. .......................................................................................................................................................................................................................... 103 SECTION 108. .......................................................................................................................................................................................................................... 104 SECTION 111. .......................................................................................................................................................................................................................... 105 SECTION 112. .......................................................................................................................................................................................................................... 105

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 4

Societas Spectra Legis Insurance SECTION 113. .......................................................................................................................................................................................................................... 105 SECTION 114. .......................................................................................................................................................................................................................... 106 SECTION 118. .......................................................................................................................................................................................................................... 107 SECTION 119. .......................................................................................................................................................................................................................... 107 SECTION 120. .......................................................................................................................................................................................................................... 107 SECTION 122. .......................................................................................................................................................................................................................... 108 SECTION 127. .......................................................................................................................................................................................................................... 108

LOSS ...........................................................................................................................................................................109 SECTION 129. .......................................................................................................................................................................................................................... 109 SECTION 130. .......................................................................................................................................................................................................................... 109 SECTION 131. .......................................................................................................................................................................................................................... 109 SECTION 133. .......................................................................................................................................................................................................................... 109 SECTION 134. .......................................................................................................................................................................................................................... 110 SECTION 135. .......................................................................................................................................................................................................................... 110 SECTION 136. .......................................................................................................................................................................................................................... 110 SECTION 137. .......................................................................................................................................................................................................................... 110 SECTION 138. .......................................................................................................................................................................................................................... 110 SECTION 139. .......................................................................................................................................................................................................................... 111

ABANDONMENT .........................................................................................................................................................112 SECTION 140. .......................................................................................................................................................................................................................... 112 SECTION 141. .......................................................................................................................................................................................................................... 112 SECTION 142. .......................................................................................................................................................................................................................... 113 SECTION 143. .......................................................................................................................................................................................................................... 113 SECTION 144. .......................................................................................................................................................................................................................... 113 SECTION 145. .......................................................................................................................................................................................................................... 113 SECTION 145. .......................................................................................................................................................................................................................... 114 SECTION 147. .......................................................................................................................................................................................................................... 114 SECTION 148. .......................................................................................................................................................................................................................... 114 SECTION 149. .......................................................................................................................................................................................................................... 114 SECTION 150. .......................................................................................................................................................................................................................... 114 SECTION 153. .......................................................................................................................................................................................................................... 114 SECTION 154. .......................................................................................................................................................................................................................... 115 SECTION 155. .......................................................................................................................................................................................................................... 115 SECTION 156. .......................................................................................................................................................................................................................... 115 SECTION 157. .......................................................................................................................................................................................................................... 115

MEASURE OF INDEMNITY ...........................................................................................................................................115 SECTION 158. .......................................................................................................................................................................................................................... 115 SECTION 159. .......................................................................................................................................................................................................................... 115 SECTION 160. .......................................................................................................................................................................................................................... 116 SECTION 161. .......................................................................................................................................................................................................................... 116 SECTION 163. .......................................................................................................................................................................................................................... 116 SECTION 164. .......................................................................................................................................................................................................................... 117 SECTION 165. .......................................................................................................................................................................................................................... 117 SECTION 166. .......................................................................................................................................................................................................................... 117 SECTION 167. .......................................................................................................................................................................................................................... 117

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 5

Societas Spectra Legis Insurance SECTION 168. .......................................................................................................................................................................................................................... 117 SECTION 169. .......................................................................................................................................................................................................................... 118 SECTION 170. .......................................................................................................................................................................................................................... 119 SECTION 171. .......................................................................................................................................................................................................................... 119 SECTION 172. .......................................................................................................................................................................................................................... 119 SECTION 174. .......................................................................................................................................................................................................................... 120 SECTION 175. .......................................................................................................................................................................................................................... 120

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 6

Societas Spectra Legis Insurance

INTRODUCTION DEFINITIONS Variable contracts - a policy that provides a guaranteed minimum death benefit with the potential for increased benefits, without the necessity of paying additional premium. Law of large numbers – a theorem used by insurance companies to determine the chance of an event occurring. Authorized Driver Clause – an insurance clause which provides that if the person driving is other than the insured, he must have been duly authorized by the insured, to drive the vehicle to make the insurance company liable for the driver's negligence Mortgage Redemption Insurance - is a form of life insurance which pays for the mortgage of the insured in case of untimely death. Wager Policy - A pretended insurance where the insured has no interest in the thing insured and can sustain no loss by the happening of the misfortunes insured against. Cover notes – short term insurance policies that may be issued to afford immediate provisional protection to the insured until the policy is issued or rejected. No-fault insurance - any type of insurance contract under which insured are indemnified for losses by their own insurance company, regardless of fault in the incident generating losses. Alien enemy - an alien who is designated as an enemy during wartime due to permanent or temporary allegiance to a hostile power Factual Expectation - expectation not arising from any legal right or duty in connection with the property, and which do not constitute an insurable interest. Doctrine of Reasonable Expectation - a principle that relies on the reasonable expectations of the insured as a guide for insurance contract interpretation. Preliminary contract of present insurance – the insurer insures the subject matter usually by cover note, the contract to be effective until the formal policy is issued or the risk rejected. Assured - the person designated to receive the proceeds of the insurance. Risk – is the chance of loss. Peril – is the contingent event which may cause a loss. Hazard – the condition or situation that creates or increases chance of loss in an insured risk from a given peril. Loss – refers to the happening of the event insured. First meeting of the semester: Maybe we can now start with the preliminaries class… [insert here the sound of crickets chirping]

SOCIETAS SPECTRA LEGIS AND FRIENDS University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 7

Societas Spectra Legis Insurance

GENERAL PROVISIONS SECTION 1. This Decree shall be known as “The Insurance Code of the Philippines” Origin of the modern insurance Its origin is to be found in the mutual agreement among merchants of the Italian cities in the early middle ages engaged in common shipping ventures for distributing among the mutual contractors, the loss falling upon any one by reason of the perils of navigation. These Italian merchants founded trade houses in London in the 12th century and brought the custom of insuring against hazards of trade. The development of the several kinds of insurance has followed the same lines in the US as in England. The insurance industry of the US has grown to such extent that the English practices and decisions have little influence on insurance in the US. Development of insurance in the Philippines During the pre-Spanish times, when the political unit was then the family, if a member of the family died or suffered any other misfortune, it was borne by the family. Even now, this practice of furnishing some form of assistance to bereaved members of the family of someone who dies still exists. Eventually, mutual benefit societies and fraternal associations were organized for the purpose of rendering assistance in money or kind, to their members. Insurance, in its present concept was first introduced in the Philippines in 1892 when Lloyd’s of London appointed their representative here. In 1898, life insurance was introduced in this country with the entry of Sun Life Assurance of Canada. In 1906, the first domestic non-life insurance company, the Yek Tong Lin Fire and Marine Insurance Company, was organized, while the first domestic life insurance company, the Insular Life Assurance Co., Ltd., was organized in 1910. Concept of social insurance Social insurance is any government-sponsored program wherein the benefits, eligibility requirements and other aspects of the program are defined by statute. It is funded by taxes or premiums paid by (or on behalf of) participants (although additional sources of funding may be provided as well) and the program serves a defined population, and participation is either compulsory or the program is subsidized heavily enough that most eligible individuals choose to participate. Examples of social insurance Government Service Insurance System (GSIS) and Social Security Insurance (SSS) Sources of insurance law in the Philippines 1) The Code of Commerce and the old Civil Code of 1889;. 2) Act No. 2427 (Insurance Act), which expressly repealed the provisions of the Code of Commerce. 3) R.A. No. 386 (NCC), which expressly repealed those provisions of the old Civil Code on insurance. 4) P.D. No. 612 (The Insurance Code), which repealed Act No. 2427, as amended. 5) P.D. No. 1460 (The Insurance Code of 1978), which reenacted P.D. No 612, as amended. It has been amended by P.D. No. 1814 and No. 1981 and Batas Pambansa Blg. 874. 6) R.A. No 10607. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 8

Societas Spectra Legis Insurance Laws governing insurance 1) The Insurance Code of 1978 (PD NO 612, as amended by Presidential Decree Nos. 1141, 1280, 1455, 1460, 1814 and 1981, and Batas Pambansa Blg. 874, and R.A. No. 10607) 2) Civil Code (Article 739 and 2012, on void donations; Article 2011, on the applicability of the Civil Code; Articles 2021-2027, with respect to life annuity contracts; Article 2186, on compulsory motor vehicle liability insurance; Article 2207, on the insurer’s right of subrogation) Insurance contracts are governed primarily by the Insurance Code but if it does specifically provide for a particular matter in question, the provision of the Civil Code on contracts and other special laws shall govern. ARTICLE 2207.If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of 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. 3) Special laws a) P.D. No. 612 (The Insurance Code) b) P.D. No. 1146, as amended (The Revised Government Insurance Act of 1977), with respect to insurance of government employees. c) R.A. No. 1161, as amended (The Social Security Act of 1954) 4) Others – a) R.A. No. 656, as amended (Property Insurance Law, dealing with government property) b) R.A. No. 4898, as amended, providing life, disability and accident insurance coverage to barangay officials. c) Exec. Order No. 250, which increased, integrated and rationalized the insurance benefits of barangay officials under R.A. No. 4898 and members of the LGU councils. d) R.A. No. 3591, as amended, which established the Philippines Deposit Insurance Corporation which insures the deposits of all banks which are entitled to the benefits of insurance under the Act. Concept of subrogation Subrogation is the 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. Purpose of subrogation (1) To make the person who caused the loss, legally responsible for it and (2) prevent the insured from receiving a double recovery from the wrongdoer and the insurer. SIR: The concept of subrogation is very important in your insurance law. Must there be a lawsuit in order to have a subrogation? No. Subrogation accrues simply upon payment of the insurance claim by the insurer.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 9

Societas Spectra Legis Insurance Concept of subgrogation in terms of insurance law Subrogation refers to the process an insurance company uses to seek reimbursement from the responsible party for a claim it has already paid. Your insurance company may pay your claim, and then seek reimbursement from the other party. SIR: At the time when the insurer paid the insured the proceeds of the insurance, he steps into the shoes of the insured. He can now the recover whatever the damage caused from the wrongdoer or tortfeasor. A insured his life in the amount of P10 million, making B, his wife as his beneficiary. There was a time that B quarreled with A. B murdered A. B went to the insurance company and asks for the proceeds of the insurance, to which the latter obliged. The prosecution file a case of murder against B. B was convicted and sent to jail. Upon learning that B was convicted for murder with finality, the insurer went to B and told B, “I have to get the P10 million from you because I am now subrogated when I paid the amount of the proceeds”. Is the insurer correct? No. The value of human life is regarded as unlimited and therefore, no recovery from a third party can be deemed adequate to compensate the insured’s beneficiary. Why is subrogation limited only to property insurance? The pecuniary value of a human life to the beneficiary of a life insurance policy can seldom be determined with accuracy, except where the insurance is taken by a creditor on the life of a debtor to secure a debt. SIR: The creditor has an insurable interest over the life of his debtor. But not to any extent. The creditor can only insure the life of the debtor up to the amount of his debt. Such that if the debt is only P5 million, the creditor cannot get as proceeds the entire amount of P10 million. Even if the creditor insured the life of his debtor in the amount of P10 million, later on if the insurer learns that the credit is only P5 million, then only P5 million will be released to the creditor because his insurable interest is only up to P5 million. Supposing A insured his BMW car in the amount of P3 million. While he was driving, it was hit by B, who was driving negligently. A went to the insurer and asks for the proceeds of the insurance. He was able to prove that the damage to his car amounted to P2 million so he was able to receive the proceeds of the insurance up to P2 million. Since the insurer once took up Insurance Law in the USC-College of Law (later on na one-timebig-time ni Torregosa), he knew of the concept of subrogation so he went directly to B. But B said, “I will not pay you because there was no assignment. In fact, you cannot produce any single document which shows that there was payment or the rights of A was assigned to you. Is that correct? No because the right of subrogation is not dependent upon any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer. The presentation in evidence of the insurance policy is not indispensable before the insurer may recover. The subrogation receipt, by itself, is sufficient to establish not only the relationship of the insurer and the insured, but also the amount paid to settle the insurance. (Privity of contract or assignment by insured of claim not essential.) What if there is no receipt? Then the wrongdoer should not pay.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 10

Societas Spectra Legis Insurance SIR: If you are the wrongdoer class, even if that is the concept of subrogation, you should, at the very least, ask for some documents before releasing the amount. Otherwise, if he has no documents to prove that payment was made, why will you be compelled to pay. Let him file a case against you. Supposing in the same example, the damage caused by negligence of a person is an excluded risk. Despite the presence of such excluded risk in the insurance, still the insurer paid A. After that, the insurer went to B and ask for reimbursement. Will that prosper? No because the cause of the loss or injury must be a risk covered by the policy to entitle the insurer to subrogation and since the insurer paid the insured for a loss which is not a risk covered by the policy, the insurer has no right of subrogation against the third party liable for the loss. (Loss or injury for risk must be covered by the policy.) Is there no instance where the insurer can go after B? Yes there is. The insurer may recover from the third party responsible for the damage to the insured property under Article 1236(2) of the Civil Code. Article 1236(2) Whoever[insurer] pays for another[insured] may demand from the debtor[wrongdoer] what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. What if that time B knew that the insurer will pay but before the insurer could deliver the amount of the proceeds of the insurance to A, B told the insurer, ”Do not to pay A because its outside the coverage of the insurance. It’s an issue between me and A”? Article 1236 still applies even if payment was made by the insurer against the will of the debtor. Can A recover from both the insurer and B? A may recover from either the insurer or B but he may only recover once. The right of subrogation given to the insurer prevents the insured from obtaining more than the amount of his loss. (Right of insured to recover from both insurer and third party.) In our example, the amount of the insurance taken by A from the insurer is P3 million, supposing the BMW owned by A is damaged to the tune of P4 million. Can he recover the entire amount from the insurer? No because their contract of insurance only covered an amount up to P3 million. Where can A recover the deficiency? A can recover the deficiency from B under Article 1236. Can you compel the insurer to exercise the right of subrogation? No because such right lies solely within the insurer’s discretion. (Exercise of right of subrogation by insurer discretionary)

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 11

Societas Spectra Legis Insurance Limitations to the right of subrogation (a) both the insurer and the consignee are bound by the contractual stipulations under the bill or lading. (b) the insurer can be subrogated only to the rights as the insured may have against the wrongdoer. A, insure his car for P1 million against all risk. The car was hit by B and the car was damaged to the tune of P1 million. So A went to the insurer and the insurer paid the insured. After receiving payment from the insurer, A released B from any liability for the loss or damage to his car. What is the effect of the part of the action of A on the rights of the insurer? The insurer loses his rights against the wrongdoer since the insurer can be subrogated to only such rights as the insured may have. For defeating the insurer’s right of subrogation, A is under obligation to return to the insurer the amount paid thereby entitling A to recover the same. (Loss of right of subrogation by act of insured or insurer.) A, a merchant shipped his goods amounting to P1 million using the motor vessel owned by B. A, the insured, also insured them. Unfortunately, the vessel was devoured by a kraken. B, in good faith, settled his obligations with A. The insurer, without informing B, also settled the amount with A. May the insurer go after B? SIR: No because there is not subrogation in this case. A contract of insurance is a contract of indemnity. At the time when the insurer paid the A, there was no longer damage on the part of A, the insured. Whatever damaged A incurred was already paid by the carrier. There is no subrogation here. (Effect of assignment by insured of its rights against third party to insurer.) Applicability of the Civil Code in your insurance contract It is applied subsidiarily as insurance contracts are governed primarily by the Insurance Code. Provisions in the Civil Code which can apply in contracts of insurance 1) Contract is voidable when consent is vitiated. (Articles 1330, 1331). 2) When a contract is perfected. (Article 1319[2]) 3) Contract is void where the consideration is false or fraudulent. (Article 1353) 4) Obligation of mutual restitution in case of rescission. (Article 1385) 5) Prohibition on a common-law wife from becoming the beneficiary of the insured. (Article 2012 in relation to Article 739) 6) The award of moral and exemplary damages in case of unreasonably delay in the payment of insurance claims. What is meant by the construction of Insurance Code? It means the interpretation of the insurance law. When do you construe the provisions of the Insurance Code? Only in case of ambuigity.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 12

Societas Spectra Legis Insurance SECTION 2. Contract of insurance A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. Concept of an unknown event An event which may or may not happen.

Contract of suretyship SIR: It is an agreement whereby a party called the surety guarantees the performance of another, called the principal or obligor, of an obligation or undertaking in favor of a third person, called the obligee. When contract of suretyship is deemed an insurance contract A contract of suretyship shall be deemed to be an insurance contract, only if made by a surety who or which, as such, is doing an insurance business under the Insurance Code. What do you mean by doing an insurance business or transacting an insurance business? 1) Making or proposing to make, as insurer, any insurance contract; 2) Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; 3) Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; 4) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. What is the concept of assurance and how do you differentiate it from assurance? Assurance is used to describe the life insurance business, referring to an event like death, which must happen while insurance refers to a contingent event which may or may not happen. As used in the Insurance Code, the term insurance covers assurance. Elements of a contract 1) Subject matter – refers to the thing insured. 2) Consideration – premium paid by the insured 3) Object and purpose – transfer and distribution of risk or loss. Definition of insurance from the viewpoint of: Economic –it is a method which reduces risk by a transfer and combination (pooling) of uncertainty in regards to a financial loss. Business – it is a plan by which large numbers of people associate themselves and transfers to the shoulder of all, risks that attach to individuals. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 13

Societas Spectra Legis Insurance Mathematical – it is the application of certain actuarial (insurance mathematics) application. Social – it is a social device whereby uncertain risks of individuals may be combined in a group and thus made more certain, with small periodic contributions by the individuals providing a fund out of which those who suffer losses may be reimbursed. Nature and characteristics of an insurance contract 1) It is consensual because it is perfected by the meeting of the minds of the parties. 2) It is voluntary in the sense that it is not compulsory and the parties may incorporate such terms and conditions as they may deem convenient which will be binding. 3) It is aleatory in the sense that it depends upon some contingent event. 4) It is executed as to the insured after the payment of the premium, and executory on the part of the insurer in the sense that it is not executed until payment for a loss. 5) It is conditional because it is subject to the conditions the principal one of which is the happening of the event insured against. 6) It is a contract of indemnity because the promise of the insurer is to make good only the loss of the insured. 7) It is a personal contract between the insurer and the insured. 8)As a contract, it is a property in legal contemplation. They are in the nature of property and do not represent a personal agreement between the insurer and the insured. Does the concept of contract of indemnity apply to life insurance? No because the pecuniary value of a human life to the beneficiary of a life insurance policy can seldom be determined with accuracy. Insurance, a risk-distributing device The device of insurance equitably distributes losses out of a general fund contributed by all. It serves to spread the risk of financial or economic loss faced by the insured among as many possible of those who are subject to the same kind of risk. By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group. Contract of adhesion A contract in which most of the terms do not result from mutual negotiation between the parties as they are prescribed by the insurer in final printed forms which the insured may reject or to which he may “adhere” if he chooses but which he cannot change. In case of doubt in an insurance policy, who should be in favored, the insurer or the insured? The insured because it is not really his fault. It should be construed against the party who caused such ambiguity, the insurer. VIRGINIA CALANOC vs PHILIPPINE AMERICAN LIFE INSURANCE CO FACTS: Melencio Basilio was a watchman of the Manila Auto Supply. He secured a life insurance policy from the Philippine American Life Insurance Company in the amount of P2,000 to which was attached a supplementary contract covering death by accident. On January 25, 1951, he died of a gunshot wound on the occasion of a robbery committed in the house of Atty. Ojeda. Virginia Calanoc, the widow, was paid the sum of P2,000, face University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 14

Societas Spectra Legis Insurance value of the policy, but when she demanded the payment of the additional sum of P2,000 representing the value of the supplemental policy, the company refused alleging, as main defense, that the deceased died because he was murdered by a person who took part in the commission of the robbery and while making an arrest as an officer of the law which contingencies were expressly excluded in the contract and have the effect of exempting the company from liability. ISSUE: Whether Basilio’s death was accidental or caused by one of the risks excluded by the supplementary contract which exempts the company from liability. HELD: Accidental. There is no proof that the death of Basilio is the result of assault or murder for the record is barren of any circumstance showing how the fatal shot was fired. Nor can it be said that the killing was intentional for there is the possibility that the malefactor had fired the shot merely to scare away the people around for his own protection and not necessarily to kill or hit the victim. The victim could have been either the policeman or Atty. Ojeda for it cannot be pretended that the malefactor aimed at the deceased precisely because he wanted to take his life. Basilio cannot be considered as making an arrest as an officer of the law, as contended, simply because he went with the traffic policeman, for certainly he did not go there for that purpose nor was he asked to do so by the policeman. While as a general rule the parties may limit the coverage of the policy to certain particular accidents and risks or causes of loss, and may expressly except other risks or causes of loss therefrom, it is to be desired that the terms and phraseology of the exception clause be clearly expressed so as to be within the easy grasp and understanding of the insured. For if the terms are doubtful or obscure the same must of necessity be interpreted or resolved against the one who has caused the obscurity so as to effect the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is involved. EMILIA T. BIAGTAN vs THE INSULAR LIFE ASSURANCE COMPANY FACTS: Juan S. Biagtan was insured with defendant InsularLife Assurance Company for the sum of P5,000.00 and, under a supplementary contract denominated "Accidental Death Benefit Clause, for an additional sum of P5,000.00 if "the death of the Insured resulted directly from bodily injury effected solely through external and violent means sustained in an accident ... and independently of all other causes. The clause, however, expressly provided that it would not apply where death resulted from an injury "intentionally inflicted by another party. On the night of May 20, 1964 a band of robbers entered the house of the insured Juan S. Biagtan. That in committing the robbery, the robbers, on reaching the staircase landing on the second floor, rushed towards the door of the second floor room, where they suddenly met a person near the door of oneof the rooms who turned out to be the insured Juan S. Biagtan who received thrusts from their sharp-pointed instruments, causing wounds on the body of said Juan S. Biagtan resulting in his death. Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid the basic amount of P5,000.00 but refused to pay the additional sum of P5,000.00 under the accidental death benefit clause, on the ground that the insured's death resulted from injuries intentionally inflicted by third parties and therefore was not covered. ISSUE: Whether the wounds received by the insured at the hands of the robbers — nine in all, five of them mortal and four non-mortal — were inflicted intentionally. HELD: Yes. It cannot be denied that the act itself of inflicting the injuries was intentional. Where a gang of robbers enter a house and coming face to face with the owner, even if unexpectedly, stab him repeatedly, it is contrary to all reason and logic to say that his injuries are not intentionally inflicted, regardless of whether they prove fatal or not. Nine wounds inflicted with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned. Thus, it has been held that "intentional" as used in an accident policy excepting intentional injuries inflicted by the insured or any other person, etc., implies the exercise of the University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 15

Societas Spectra Legis Insurance reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. What is the difference between this case and the case of Calanoc? In the case of Calanoc, the malefactor had fired the shot merely to scare away the people around for his own protection and not necessarily to kill or hit the victim whereas in this case, nine wounds inflicted with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned.

The contract of insurance is considered as uberrimae fidei, a contract in utmost good faith This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal (questionnaire). Otherwise, if you will die, the problem will lie to the beneficiaries because the insurer might not release the amount of the insurance as you did not with your insurer in good faith. The same goes with the insurer, he is also required to deal with you in good faith. Such that whatever is provided for in the policy, it can be made binding to the insurer. Elements of a contract of insurance 1) The insured possesses an interest of some kind susceptible of pecuniary estimation known as “insurable interest”. 2) The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils. 3) The insurer assumes that risk of loss. 4) Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing a similar risk. 5) As consideration for the insurer’s promise, the insured make a ratable contribution called “premium”, to a general insurance fund. Concept of insurable interest Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured. Risk shifting-device vs Risk-distributing device: In a risk-shifting device, the contract possesses only the first three (3) elements of a contract of insurance whereas a risk-distributing device equitably distributes losses out of a general fund contributed by all. Example of a risk-shifting device A contract of guaranty, where the creditor is exposed to impairment by the happening of contingent events such as the insolvency of the principal debtor and the risk of the creditor is merely assumed by the guarantor. Example of a risk-distributing device A contract of insurance.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 16

Societas Spectra Legis Insurance Concept of risk A situation where the probability of a loss is known but when a mode of occurrence or the actual value of the occurrence is not. Ways people cope with risk By: 1) limiting the probability of loss. 2) limiting the effects of loss. 3) self-insurance. 4) ignoring the risk. 4) transferring the risk to another. Ways you can limit the risk or probability of loss 1) Installing guards or safety devices in a cutting machine. 2) Using concrete materials instead of wood in constructing buildings. 3) Installing loss prevention devices such as firewalls, sprinkler systems. Way you can limit the effects of loss 1) By using seat belts while riding in automobiles. 2) Installing sprinkler systems inside the building. How self-insurance work An owner chooses to bear the risk himself thru special funds set aside to cover the loss. Disadvantages of self-insurance 1) It’s expensive. 2) The funds set aside may not be sufficient to cover the loss. 3) You do not know when the loss may occur. 4) Loss may occur before the owner is fully prepared for it. Ignoring risk You engage in the activity without doing anything further with regard to the risk. (self-explanatory) Transferring risk to another By entering into a contract of insurance. Distinction between a risk preferring, risk neutral and risk averse individual: Risk preferring people would choose to forego the certain loss in the hope incurring no loss despite the equal probability of suffering a large loss. Risk neutral people are indifferent to the alternatives. Risk averse people would choose to lose P500 with certainty instead of confronting the 50% change of losing twice as much. FIGURACION VDA. DE MAGLANA vs CONSOLACION

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 17

Societas Spectra Legis Insurance FACTS: Lope Maglana was on his way to his work station, driving a motorcycle, he met an accident that resulted in his death. He died on the spot. The PUJ jeep that bumped the deceased was driven by Pepito Into, operated and owned by defendant Destrajo. The heirs of Lope Maglana, Sr., here petitioners, filed an action for damages and attorney's fees against operator Patricio Destrajo and AFISCO. An information for homicide thru reckless imprudence was also filed against Pepito Into. The lower court rendered a decision finding that Destrajo had not exercised sufficient diligence as the operator of the jeepney. Destrajo was ordered to pay the plaintiffs the sum of P12,000.00 and P5,000.00 as moral damages, which amount shall be deducted in the event judgment in the criminal case against Into shall have been enforced. AFISCO is also ordered to reimburse defendant Destrajo whatever amounts the latter shall have paid only up to the extent of its insurance coverage. Petitioners filed a motion for the reconsideration of the second paragraph of the dispositive portion of the decision contending that AFISCO should not merely be held secondarily liable because the Insurance Code provides that the insurer's liability is "direct and primary and/or jointly and severally with the operator of the vehicle, although only up to the extent of the insurance coverage." Petitioners argued their position that AFISCO is directly and solidarily liable with Destrajo up to the extent of its insurance coverage. ISSUE: Whether AFISCO is directly and/or solidarily liable with Destrajo. HELD: The provision in the insurance contract between AFISCO and Destrajo leads to no other conclusion but that AFISCO can be held directly liable by petitioners. AFISCO will pay all sums of money to discharge the liability of the insured in cases of death or injury to third parties. Where an insurance policy insures directly against liability, the insurer's liability accrues immediately upon the occurrence of the injury or event upon which the liability depends, and does not depend on the recovery of judgment by the injured party against the insured. Since petitioners had received from AFISCO the sum of P5,000.00 under the no-fault clause, AFISCO's liability is now limited to P15,000.00. However, we cannot agree that AFISCO is likewise solidarily liable with Destrajo. While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, THE DIRECT LIABILITY OF THE INSURER UNDER INDEMNITY CONTRACTS AGAINST THIRD PARTY LIABILITY DOES NOT MEAN THAT THE INSURER CAN BE HELD SOLIDARILY LIABLE WITH THE INSURED AND/OR THE OTHER PARTIES FOUND AT FAULT. THE LIABILITY OF THE INSURER IS BASED ON CONTRACT; THAT OF THE INSURED IS BASED ON TORT. Thus, petitioner therein, which, under the insurance contract is liable only up to P20,000.00, cannot be made solidarily liable with the insured for the entire obligation of P29,013.00 otherwise there would result "an evident breach of the concept of solidary obligation." The liability of AFISCO based on the insurance contract is direct, but not solidary with that of Destrajo which is based on Article 2180 of the Civil Code. 12 As such, petitioners have the option either to claim the P15,000 from AFISCO and the balance from Destrajo or enforce the entire judgment from Destrajo subject to reimbursement from AFISCO to the extent of the insurance coverage. Purpose of a Third Party Liability (TPL) insurance To protect injured persons against the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy. Concept of a solidary obligation In solidary obligations, the creditor may enforce the entire obligation against one of the solidary debtors, in an insurance contract, the insurer undertakes for a consideration to indemnify the insured against loss, damage or liability arising from an unknown or contingent event.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 18

Societas Spectra Legis Insurance ANDREW PALERMO vs PYRAMID INSURANCE CO FACTS: After having purchased a brand car, Andrew Palermo insured the same with Pyramid Insurance against any loss or damage for P20,000.00 and against third party liability for P10,000.00. Palermo paid Pyramid Insurance P361.34 premium for one year, for which defendant issued Private Car Comprehensive Policy. The automobile was, however, mortgaged by Palermo with the vendor, Ng Sam Bok Motors Co., to secure the payment of the balance of the purchase price. While driving the automobile in question, Palermo met a violent accident. The La Carlota City fire engine crashed head on, and as a consequence, the plaintiff sustained physical injuries, his father, Cesar Palermo, who was with him in the car at the time was likewise seriously injured and died shortly thereafter, and the car in question was totally wrecked. The insurance policy grants an option unto the defendant, in case of accident either to indemnify the plaintiff for loss or damage to the car in cash or to replace the damaged car. Pyramid Insurance, however, refused to take either of the above-mentioned alternatives for the reason as alleged, that the insured himself had violated the terms of the policy when he drove the car in question with an expired driver's license. The court ordered the defendant to pay the plaintiff the sum of P20,000.00, value of the insurance of the motor vehicle. Pyramid Insurance alleges that the court erred in interpreting the provision of the policy regarding AUTHORIZED DRIVER: “Any of the following:(a)The Insured; (b)Any person driving on the Insured's order or with his permission. Provided that the person driving is permitted in accordance with the licensing or other laws or regulations to drive the Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of law or by reason of any enactment or regulation in that behalf.” ISSUE: Whether or not Palermo is an authorized driver" under the insurance policy considering that his driver's license had expired at the time of the accident. HELD: Duh. The driver of the insured motor vehicle at the time of the accident was the insured himself, hence an "authorized driver" under the policy. While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway without a license or with an expired license, an infraction of the Motor Vehicle Law on the part of the insured, is not a bar to recovery under the insurance contract. It however renders him subject to the penal sanctions of the Motor Vehicle Law. The requirement that the driver be "permitted in accordance with the licensing or other laws or regulations to drive the Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of Law or by reason of any enactment or regulation in that behalf," applies only when the driver "is driving on the insured's order or with his permission." It does not apply when the person driving is the insured himself. Concept of 'authorized driver' clause A clause which provides that a person other than the insured owner, who drives the car on the insured's order, such as his regular driver, or with his permission, such as a friend or member of the family or the employees of a car service or repair shop, must be duly licensed drivers and have no disqualification to drive a motor vehicle. ZENITH INSURANCE vs CA FACTS: Lawrence Fernandez insured his car for "own damage" with Zenith Insurance. The car figured in an accident and suffered actual damages in the amount of P3,640.00. After allegedly being given a run around by Zenith for two (2) months, Fernandez filed a complaint for sum of money and damages resulting from the refusal of Zenith to pay the amount claimed. Aside from actual damages and interests, Fernandez also prayed for more damages in the amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees of P3,000.00 and litigation expenses of P3,000.00. A decision was rendered by the trial court in favor of private respondent Fernandez. The Court of Appeals rendered its decision affirming in toto the decision of the trial court. Zenith Insurance appeals the case and contends that while the complaint of Fernandez prayed for P10,000.00 moral University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 19

Societas Spectra Legis Insurance damages, the lower court awarded twice the amount, or P20,000.00 without factual or legal basis; while Fernandez prayed for P5,000.00 exemplary damages, the trial court awarded P20,000.00; and while Fernandez prayed for P3,000.00 attorney's fees, the trial court awarded P5,000.00. ISSUE: Whether or not the award of moral damages, exemplary damages and attorney's fees is proper. HELD: No. Under the Insurance Code, in case of unreasonable delay in the payment of the proceeds of an insurance policy, the damages that may be awarded are: 1) attorney's fees; 2) other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary Board of the amount of the claim due the injured; and 4) the amount of the claim. That in awarding moral damages in case of breach of contract, there must be a showing that the breach was wanton and deliberately injurious or the one responsible acted fraudulently or in bad faith. The act of Zenith Insurance in delaying payment for two months cannot be considered as so wanton or malevolent to justify an award of P20,000.00 as moral damages, taking into consideration also the fact that the actual damage on the car was only P3,460. In the pre-trial of the case, it was shown that there was no total disclaimer by Fernandez. The reason for Zenith Insurance’s failure to indemnify Fernandez within the two-month period was that the parties could not come to an agreement as regards the amount of the actual damage on the car. The amount of P10,000.00 prayed for by private respondent as moral damages is equitable. Exemplary damages will not be awarded as the insurance company had not acted in wanton, oppressive or malevolent manner. The awards due to private respondent Fernandez are as follows: 1)P3,640.00 as actual claim plus interest of twice the ceiling prescribed by the Monetary Board computed from the time of submission of proof of loss; 2)P10,000.00 as moral damages; 3)P5,000.00 as attorney's fees; 4)P3,000.00 as litigation expenses and 5)Costs Effect if there is an unreasonable delay in releasing the proceeds of the insurance policy under the Insurance Code The damages that may be awarded are: 1) attorney's fees; 2) other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary Board of the amount of the claim due the injured; and 4) the amount of the claim.

Why was the amount the moral damages and other damages reduced by the Supreme Court? Because there was no showing that the breach was wanton and deliberately injurious or that Zenith Insurance acted fraudulently or in bad faith. The reason for Zenith Insurance’s failure to indemnify Fernandez within the two-month period was that the parties could not come to an agreement as regards the amount of the actual damage on the car. VILLACORTA vs INSURANCE COMMISSION FACTS: Petitioner Jewel Villacorta vehicle was brought to the Sunday Machine Works, Inc., for general check-up and repairs. While it was in the custody of the shop, the car was allegedly taken by six persons and driven out. While travelling, the car figured in an accident. The driver, Benito Mabasa, and one of the passengers died and the other four sustained physical injuries. The car, as well, suffered extensive damage. Villacorta, thereafter, filed a claim for total loss with Empire Insurance but claim was denied. Hence, Villacorta was compelled to institute an action. Empire Insurance contended that the accident did not fall within the provisions of the policy University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 20

Societas Spectra Legis Insurance either for the Own Damage or Theft coverage, invoking the policy provision on "Authorized Driver" clause. The Insurance Commission decided in favor of Empire Insurance holding under "Authorized Driver" clause, if the person driving is other than the insured, he must have been duly authorized by the insured, to drive the vehicle to make the Insurance company liable for the driver's negligence. With the declarations of Villacorta and her husband that they did not Mabasa nor consented to the use of the car, the Commission hold that Mabasa, is not an authorized driver of the Villacorta, thus, a violation of the 'Authorized Driver' clause of the policy. Commission likewise upheld Empire Insurance’s assertion that the car was not stolen and therefore not covered by the Theft clause, ruling that the fact that the car was taken by one of the residents of the Sunday Machine Works, and the withholding of the same, for a joy ride should not be construed to mean 'taking' under the Revised Penal Code. If at all there was a 'taking', the same was merely temporary in nature. A temporary taking is held not a taking insured against. ISSUE: (1) Whether or not Mabana is an “authorized driver” under the policy; (2) Whether or not Empire Insurance is liable under the theft clause of the policy. HELD: (1) Yes. A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his car key to the shop owner and employees who are presumed to have the insured's permission to drive the car for legitimate purposes of checking or road-testing the car. The mere happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized purpose in violation of the trust reposed in the shop by the insured car owner does not mean that the "authorized driver" clause has been violated such as to bar recovery, provided that such employee is duly qualified to drive under a valid driver's license. The situation is no different from the regular or family driver, who instead of carrying out the owner's order to fetch the children from school takes out his girlfriend instead for a joy ride and instead wrecks his girlfriend, este the car. (2) Yes. When a person, either with the object of going to a certain place, or learning how to drive, or enjoying a free ride, takes possession of a vehicle belonging to another, without the consent of its owner, he is guilty of theft because by taking possession of the personal property belonging to another and using it, his intent to gain is evident since he derives therefrom utility, satisfaction, enjoyment and pleasure. It is equally evident that the taking proved to be quite permanent rather than temporary, for the car was totally smashed in the fatal accident and was never returned in serviceable and useful condition to Villacorta. What is the basis of the lower court in saying that the driver was not authorize? Villacorta and her husband’s admission that they did not know the person who drove her vehicle at the time of the accident, much less consented to the use of the same. What about the fact that the driver was not authorize by the owner? [answer on the above case] Why did the Supreme Court set aside the application of the authorized driver clause and instead used the theft clause? Because there was no violation of the 'Authorized Driver' clause of the policy. The SC considered Mabana as an authorized driver under the policy; That the mere happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized purpose in violation of the trust reposed in the shop by the insured car owner does not mean that the "authorized driver" clause has been violated such as to bar recovery, provided that such employee is duly qualified to drive under a valid driver's license. On the other hand, there was an unlawful taking of the car, hence the theft clause was applied.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 21

Societas Spectra Legis Insurance SUN INSURANCE OFFICE vs CA; NERISSA LIM FACTS: Nerissa Lim's husband, Felix Lim, Jr., was issued a personal accident policy. Two months later, he was dead with a bullet wound in his head. Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with his handgun, from which he had previously removed the magazine. As she watched the television, he stood in front of her and pointed the gun at her. She pushed it aside and said it might be loaded. He assured her it was not and then pointed it to his temple. The next moment there was an explosion and Lim slumped to the floor. He was dead before he fell. As beneficiary, Nerissa Lim sought payment on the policy but her claim was rejected. Sun Insurance agreed that there was no suicide. It argued, however, that there was no accident either. It further argued that there is no accident when a deliberate act is performed unless some additional, unexpected, independent and unforeseen happening occurs which produces or brings about their injury or death. That Felix Li, Jr. willfully exposed himself to needless peril and thus removed himself from the coverage of the insurance policy. ISSUE: Whether or not Felix Lim willfully exposed himself to needless peril, thereby removing himself from the coverage of the insurance policy. HELD: No. Lim did not willfully expose himself to needless peril when he pointed the gun to his temple because the fact is that he thought it was not unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless. Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from recovering from the insurance policy he obtained precisely against accident. There is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by negligence. There are only four exceptions expressly made in the contract to relieve the insurer from liability, and none of these exceptions is applicable in the case at bar. It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured. Isn't it a fact that when he place the gun he willfully exposed himself to a needless peril? Lim did not know that the gun he put to his head was loaded. As the secretary testified, Lim had removed the magazine from the gun and believed it was no longer dangerous. He expressly assured her that the gun was not loaded. Economic effects of the transfer and distribution of risk 1) Benefit to the society as a whole - since an insured person completely eliminates his risk by transferring it to the insurer for a price. The insurer, on the other hand, by dealing in risk on a large scale, could earn a profit. Society as a whole would be better off if a large number of similar, mutually beneficial transaction would occur. 2) Undesirable side effect – If an insured’s risk is completely eliminiated through transfer to the insurer, the former might have less incentive to take measures that prevent the loss from occurring or minimize the effect of loss once it occurs. (Phenomenon of moral hazard) Phenomenon of moral hazard Such a case is encountered when, being covered by the insurance contract, the insured reduce the caution they would have applied had they not been insured, thus making the insured event more likely and its reimbursement higher.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 22

Societas Spectra Legis Insurance Ways to solve the phenomenon of moral hazard By: 1) involving insured agents in sharing the risk, 2) tying the premium to the history of the person to be insured, 3) reducing the premium if the insured implements special precautions to reduce the probability of the risk occurring. Deductible insurance The insured bears any loss up to some stated amount with the insurer bearing the rest. Coinsurance The insured bears some stated percentage of the loss regardless of its amount, with the insurer bearing the rest. Phenomenon of adverse selection It describes a situation wherein an individual's demand for insurance (the propensity to buy insurance and the quantity purchased) is positively correlated with the individual's risk of loss (higher risks buy more insurance), and the insurer is unable to allow for this correlation in the price of insurance. From the insurer's viewpoint, the higher mortality of the group which selects to buy insurance is adverse. The insurer raises the price of insurance accordingly, and, as a consequence, low-risk individuals may be less likely to buy insurance (or may buy smaller amounts) than they would buy at a lower price reflective of their lower risk. The reduction in insurance purchases by low-risk individuals is also adverse from the insurer's viewpoint, and perhaps also from a public policy viewpoint. In such cases, the premium would result too high for low-risk individuals and too cheap for those expected as the riskiest, thus generating an accumulation of bad risks and the consequent default of the insurance company. PERLA COMPANIA DE SEGUROS vs. CA, HERMINIO LIM and EVELYN LIM FACTS: Herminio and Evelyn Lim purchased a Ford Hatchback 1981 model car and insured with Perla Compania de Seguros, Inc. (PERLA) for comprehensive coverage including theft. On November 9, 1982, said vehicle was carnapped. Evelyn Lim, who was driving said car before it was carnapped, immediately called up the AntiCarnapping Unit of the Philippine Constabulary to report said incident and thereafter, went to the nearest police substation to make a police report regarding said incident. Lim then filed a claim for loss with the Perla Insurance but said claim was denied on the ground that Evelyn Lim, who was using the vehicle before it was carnapped, was in possession of an expired driver's license at the time of the loss of said vehicle which is in violation of the authorized driver clause of the insurance policy. ISSUE: Whether or not Evelyn Lim violated the insurance contract because the authorized driver clause. HELD: No. The comprehensive motor car insurance policy issued by Perla Insurance undertook to indemnify the private respondents against loss or damages to the car (a) by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft; and (c) by malicious act. Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's consent or knowledge, such taking constitutes theft, and, therefore, it is the "THEFT" clause, and not the "AUTHORIZED DRIVER" clause, that should apply. There is no causal connection between the possession of a valid driver's license and the loss of a vehicle. To rule otherwise would render car insurance practically a sham since an insurance company can easily University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 23

Societas Spectra Legis Insurance escape liability by citing restrictions which are not applicable or germane to the claim, thereby reducing indemnity to a shadow. Fields of insurance 1) Voluntary insurance - it is sought by the insured to meet a recognized need for protection and is not based upon government compulsion. 2) multiple-line insurance - a combination of at least two (2) kinds of insurance, specifically the traditional fire and casualty lines. 3) all lines insurance - describes the broadening nature of insurance operations which combine at least most of the basic types of insurance including the traditional fire, casualty, life and health lines. 4) social insurance - it is compulsory and is designed to provide a minimum of economic security for large groups of persons, particularly thosein the lower income groups. Can the government compel the individual to get a social insurance? Yes because the government has the obligation to protect the general welfare of its citizens. Three groups of voluntary insurance 1) Commercial insurance – This is what persons usually have in mind when they refer to the insurance business. Two major classification of commercial insurance: a) Personal insurance – based on the nature of the perils and is more directly concerned with losses due to loss of earning power of a person. b) Property insurance – Insures against loss arising from the ownership or use of property. There are 2 general classifications of property insurance: i. The first indemnifies the insured in the event of loss growing out of damages of his own property. ii. The second pays damages for which the insured is legally liable. 2) Cooperative insurance – Usually involves associations usually operating under medical, fraternal employees auspices organized without regard to the profit and represent an effort to accomplish the ends of social insurance by private enterpises. 3) Voluntary government insurance – Involves no element of compulsion. Three main classifications of insurance 1) Insurance against loss or impairment of property interests which may either be in existence of merely expected. a. Guaranty insurance - insures the non-performance of the contract. b. Credit insurance - insures the insolvency of the debtor. c. Fidelity insurance - insures against defalcations of employees and agents. d. Theft insurance - insures the property against theft. e. Title insurance - insures against defective title or interest in property. 2) Insurance against loss of earning power (life insurance) due to death, accidental injury, ill-health, sickness, old age or other disability, or even unemployment. 3) Insurance against contingent liability to make payment to another, i.e., the insured is reimburse for any liability he might incur to a third party.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 24

Societas Spectra Legis Insurance Four types of insurance under the modernized classification 1) marine 2) property 3) personal 4) liability Classifications of insurance by interests protected 1) First-party versus third-party insurance – In first-party insurance, the contract between the insurer and the insured is designed to indemnify the insured for a loss suffered directly by the insured (Ex: property insurance). In third-party insurance, the insurer indemnifies a third party injured by the insured’s conduct. 2) All-risk versus specified-risk – An all-risk insurance reimburses the insured for damages to the subject matter of the policy from all causes except those specifically excepted in the policy. In other words, all those not excluded are automatically included. An specified-risk insurance which covers damage to the subject matter of the policy if it results from specifically identified causes listed in the policy. Type of loss is suffered by the insured in a third-party insurance The insured suffers an indirect loss, in the sense that the third party suffers the direct loss. Is a life insurance considered a first-party insurance or third-party insurance? It is a first-party insurance because the loss is suffered by the insured; it is the insured who loses his life. Is a health insurance a first-party insurance or third-party insurance? It is a first-party insurance because the loss – the illness and expenses – is suffered directly by the insured. No-fault insurance It is essentially the substitution of first-party insurance for tort liability. The victim of a tort, instead of looking for the tortfeasor and his insurer for reimbursement, looks to his own insurer for the first-party protection. The term “no-fault” connotes that the victim recovers for his loss from his own insurer, without regard to the fault of the third party or his own contributory fault. Can his insurer ask reimbursement from the tortfeasor? Yes under the concept of subrogation. What if there is a contributory negligence? The amount the insured can claim from the tortfeasor is equitably reduced. Under the concept of subrogation, the insurer can only claim such amount that the insured could have received from the tortfeasor. Burden of proof in an all-risk policy Both the insured and the insurer. Once the insured establishes that a loss occurred through some event other than an inherent defect or normal depreciation, the burden is placed in the insurer to prove that the loss falls within an explicit exception to the coverage. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 25

Societas Spectra Legis Insurance Burden of proof in a specified-risk policy The burden is placed on the insured to initially prove that the loss falls within the policy’s provision on coverage. Advantages of an all-risk coverage 1) The burden is placed in the insurer to prove that the loss falls within an explicit exception to the coverage. 2) The all-risk policy diminishes the burden placed on the insured and thus makes pro-insured outcomes more likely. 3) The coverage is presumably simpler to understand. 4) Duplication of coverages and premiums from separate, specified-risk is avoided. 5) Pressures toward adverse selection are minimized. 6) Policies are easier to and less expensive for the insurer to administer. 7) Avoidance of gaps in coverage. X is a merchant who owns a warehouse which stores several stocks worth P50 million. He insured his warehouse in an all-risk policy. Before the all-risk insurance was issued in his favor, the stocks inside his warehouse were already rotting. Upon discovering, he paid the all-risk policy of the insurance. If you are the insurer will you release the proceeds of the insurance? No, because an all-risk coverage is not absolute. The all-risk event would not include undisclosed event that existed prior to coverage or an event cause by the consummation during the period of coverage of an indwelling fault in the goods that had existed prior to that coverage. Furthermore, an all-risk policy does not cover losses due to willful and fraudulent act of the insured. X insured his house against all risk for P50 million. One day he purchase flammable materials place it inside his house. After a few days the house was gutted by fire. He went to the insurer and ask the insurer to release the proceeds. He was able to prove that the house was indeed was gutted by fire. Should the insurer release the proceeds? No because an all-risk coverage does not include loss which is certain to occur. An all-risk coverage does not alter the basic insurance law principles that can operate to limit the coverage such as the causation rule. Classifications of insurance under the Insurance Code Insurance contracts are classified according to the nature of the risk involves as follows: 1) Life insurance contracts which may be: a) individual life b) group life c) industrial life 2) Non-life insurance contracts which may be: a) marine b) fire c) casualty 3) Contracts of suretyship or bonding. Treatment of contracts of suretyship Under the Insurance Code, a contract of suretyship shall be deemed to be an insurance contract only if made by a surety who or which, is doing an insurance business within the meaning of the Code. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 26

Societas Spectra Legis Insurance The principle object and purpose test Under this test, if the principle object and purpose is indemnity, the contract constitute insurance, but if it is “service” risk transfer and distribution being merely incidental, then the arrangement is not insurance and therefore not subject to laws regulating insurance. (This test is used in evaluating whether an agreement that includes an indemnification or other risk shifting constitutes insurance. The fact that an agreement contains an element of risk shifting will not cause the agreement to be deemed a contract of insurance so long as the principal object and purpose of the agreement is something other than shifting risk.) Functions of insurance 1) Principal function – risk bearing. The financial losses of the few are equitably distributed over the many out of a fund contributed by all. 2) Subsidiary functions: a) Stimulates business enterprises – It enables industrialists and other to use their capital in the development of their business by paying a fixed contribution by way of premium and obtain financial security against the insured risk, instead of freezing capital to guard against various contingencies. b) Encourages business efficiency and enterprise – By reducing risk, insurance also increases the willingness to invest new capital in business enterprise. c) Promotes loss-prevention – Insurance encourage loss-prevention through a system of rating which allows discounts for good features and impose special conditions where the risk is unsatisfactory. d) Encourage savings – By protecting the individual against unforeseen events, insurance provides a climate in which savings are encouraged. e) Solves social problems – The effect of the concurrent operation of both social insurance and free enterprise insurance is that compensation is available to victims of loss or injuries, while the financial difficulties arising from old age, disability, or death are mitigated. 3) Indirect functions – a) Investment of funds – By reason of their principal function, insurers accumulate large funds which are invested so that not only do they earn interest to be added to the funds but they also make available huge resources for projects that contribute to national development. b) Use of reserve funds – Because of the investment policy of insurers, their funds are not static, but are used productively. c) Effect on prices – The existence of insurance benefits the consumer public in terms of reduced prices because the cost of insurance is less than the cost of risk without insurance. d)As a basis of credit – Because of insurance, a mortgagee is willing to lend money because he knows the value of the property is protected, or a dealer now sell goods to a retailer on credit because he has some assurance that the goods and the business of the retailer are protected from sudden disaster by fire. SECTION 3. Requisites of contract of insurance 1) A subject matter in which the insured has an insurable interest. 2) Peril insured against which may be any future contingent or unknown event, past or future., and a duration for the risk thereof. 3) A promise to indemnify in a fixed amount. 4) A consideration for the promise, known as premium. 5) A meeting of the minds of the parties upon all the foregoing essentials. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 27

Societas Spectra Legis Insurance ENRIQUEZ vs SUN LIFE INSURANCE FACTS: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance Company of Canada through its office in Manila for a life annuity. The application was immediately forwarded to the head office of the company at Montreal, Canada. On November 26, 1917, the head office gave notice of acceptance by cable to Manila. On December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office of the company stating that Herrer desired to withdraw his application. The following day the local office replied to Mr. Torres, stating that the policy had been issued, and called attention to the notification of November 26, 1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on December 20, 1917. An action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. ISSUE: Whether or not Herrer received notice of acceptance of his application. HELD: No. Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer that his application had been accepted, was never actually mailed and thus was never received by the applicant. The law applicable to the case is found to be the second paragraph of article 1262 of the Civil Code providing that an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge. A letter will not be presumed to have been received by the addressee unless it is shown that it was deposited in the post-office, properly addressed and stamped. We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved satisfactorily that the acceptance of the application ever came to the knowledge of the applicant. Event or peril that can be insured against Any contingent or unknown event, past or future, whose happening will (1) damnify or cause loss to a person having an insurable interest or (2) create a liability against him. (For example: Death of a person, fire against your property) Can the husband insure himself without the consent of his wife? Yes because the provides that the consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on his/her life or that of his/her children. Subject matter in a life insurance The life of the insured. Subject matter in a casualty insurance The risks involved in the use of the property, or the insured’s risk of loss or liability, that he may suffer loss or be compelled to indemnify of the loss suffered by a third person. Can a minor enter into a contract of insurance? Yes, although the contract is voidable, i.e., valid until annulled.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 28

Societas Spectra Legis Insurance Effect if an insurance company issues an insurance policy on a seven year old kid The insurance company is bound by the contract. In such case, can the insurer deny liability by reason of minority of the insured? No because persons who are capable of entering into contracts cannot allege the incapacity of those with whom they contracted. Ownership of life insurance policy Ownership is divided between insured and beneficiaries. A insured the life of B, making himself the beneficiary. However, A died ahead of B. What happens to the policy? All rights, title and interest in the policy of insurance taken out by A on the life or health of B shall automatically vest in the B upon the death of the A, unless otherwise provided for in the policy. [Sec 3(3)] SECTION 4. Concept of lottery The term lottery extends to all schemes for the distribution of prizes by chance, such as policy playing, gift exhibition, prize concerts, raffles at fairs, etc., and various forms of gambling. Elements of lottery 1) consideration 2) prize 3) chance In order for it to be considered a lottery or a game of chance, should there be a direct connection between the element of consideration and the element of prize? Yes. It is considered a lottery if the prizes offered came out of the fund raised by the sale of chances among the participants in order to win the prizes. Supposing X purchased a lotto ticket because the prize is already P500 million. X wants to insure his winning so he went to an insurance company. Is that allowed? No, because the law expressly prohibits an insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize. (SECTION 4) Distinctions between an insurance and a wagering contract 1) In a gambling contract, the parties contemplate gain through mere chance while in a contract of insurance, the parties seek to distribute possible loss by reason of mischance. 2) The gambler courts fortune, while the insured seeks to avoid misfortune. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 29

Societas Spectra Legis Insurance 3) The contract of gambling tends to increase the inequality of fortune, while the contract of insurance tends to equalize the fortune. 4) In gambling, whatever one person wins from a wager is lost by the other wagering party. In a contract of insurance, what one insured gains is not at the expense of another insured. 5) As soon as a party makes a wager, he creates a risk of loss to himself where no such risk existed previously. On the other hand, the purchase of insurance does not create a new risk of loss to the purchaser. Similarity between insurance and gambling In both cases, one party promises to pay a given sum to the other upon the occurrence of a given future event, the promise being conditioned upon the payment, or agreement to pay, a stipulated amount by the other party to the contract. SECTION. 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply SECTION 6. Parties to a contact insurance 1) The insurer who assumes the risk of loss for a consideration to indemnify insured on the happening of a specified contingency or event. 2) The insured who is to receive a certain sum upon the happening of a specified contingency. Does the insured always receive the proceeds of the insurance? No. The recipient may be the beneficiary designated in the policy. It is also possible that the insured may assign the proceeds to someone else. Is the beneficiary a party to the insurance contract? No. He is a third party in a contract of life insurance. Difference between insurer and assurer Insurer is synonymous with the term assurer. Difference between insured and assured The term insured refers to the owner of the property insured while assured is the person whose benefit the insurance is granted. Difference between the assured and beneficiary Assured is synonymous with beneficiary, the person designated to receive the proceeds of the insurance.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 30

Societas Spectra Legis Insurance Who may be an insurer 1) Foreign or domestic insurance company or corporation – it must first obtain a certificate of authority from the Insurance Commssioner before they may transact insurance business in the Philippines. 2) Individual, partnership or association – must hold a certificate of authority from the Insurance Commissioner and possessed of the capital assets required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner. SECTION 7. Capacity of a party insured 1) Natural person – Two essential requisites: a) He must be competent to make contract. The following cannot give consent to a contract: i. unemancipated minors ii. insane or demented persons iii. deaf-mutes who do not know how to write iv. persons who are suffering from civil interdiction v. incompetents who are under guardianship b) He must possess an insurable interest in the subject of the insurance. 2) Juridical person – may takeout insurance on property owned by it. Meaning of a public enemy A nation with whom the Philippines is at war and includes every citizen of such nation. The term may be taken to mean alien enemy. Mob, robbers, or thieves are never considered public enemies for purposes of the Insurance Code. Enemy corporation A private corporation is deemed an enemy corporation although organized under Philippine laws if they are controlled by enemy aliens. Control test Test whereby a corporation is deemed to have the same citizenship as the controlling stockholders in time of war. Effect of war on existing insurance contracts 1) With respect to property insurance – An insurance policy ceases to be valid as soon as an insured becomes a public enemy. 2) With respect to life insurance – The contract is not merely suspended but is abrogated by reason of nonpayment of premiums, since the time of the payments is peculiarly of the essence of the contract. However, the insured is entitled to the cash value of the policy, which is the excess of the premiums paid over the actual risk carried during the years when the policy had been enforced.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 31

Societas Spectra Legis Insurance Contract of insurance between citizens of belligerent states are abrogated The purpose of war is to cripple the power and exhaust the resources of the enemy. It would be inconsistent that the subjects of one country should do anything detrimental to their country’s interest by lending their assistance to protect by insurance, the commerce or property of belligerent alien subjects. SECTION 8. Insurable interest of mortgagee and mortgagor 1) Separate insurable interest – They each have a separate and distinct insurable interest in the property mortgaged. 2) Extent of insurable interest of mortgagor – has an insurable interest to the extent of its value. Loss or destruction of the property insured will not extinguish his mortgage debt. 3) Extent of insurable interest of mortgagee – has an insurable interest in the mortgaged property to the extent of the debt secured (or to the extent of his credit). He is not insuring the property itself but his interest or lien on the property. Such interest continues until the mortgage debt is extinguished. 4) Extent of amount of recovery – the mortgagor cannot recover upon the insurance beyond the full amount of his loss and the mortgagee cannot recover in excess of the credit at the time of the loss nor the value of the property mortgaged. GEAGONIA vs CA and COUNTRY BANKERS INSURANCE CORPORATION FACTS: Armando Geagonia is the owner of Norman’s Mart and obtained from Country Bankers a fire insurance policy which covered Stock-in-trade consisting of RTW dry goods. The policy contained a provision where the insured must give notice to the insurer of any insurance or insurances already affected or which may be subsequently be effected covering any of the property or properties consisting of stocks in trade, goods in process and/or inventories already insured by such policy otherwise it shall be deemed forfeited, provided that such condition does not apply when the total insurance or insurances in force at the time of the loss is not more than 200k. Subsequently, a fire broke out and destroyed Geagonia’s stocks-in-trade. Country bankers denied the claim because it was found that at the time of the loss, the stocks were likewise covered by two other fire insurances for 100k each by PFIC. It had a mortgage clause which stated that loss, if any, shall be payable to Cebu Tesing Textiles. ISSUE: Whether or not there was double insurance to justify denial of the claim HELD: NO (Country Bankers is liable. The condition in the policy is commonly known as the additional or “other insurance” clause and has been upheld as valid and as a warranty that no other insurance exists. Its violation would thus avoid the policy. However, in order to constitute a violation, the other insurance must be upon the same subject matter, the same insurable interest, and the same risk. As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be one policy, or each may take out a separate policy covering his interest, either at the same or separate times. The mortgagor’s insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property. The mortgagee’s insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. A double insurance exists where the same person is insured by several insurers separately in respect of the same subject and cover the same interest. Since the two policies of the PFIC do not cover the same interest as that covered by the policy in issue, no double insurance exists. The non-disclosure is not fatal. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 32

Societas Spectra Legis Insurance What is the reason why the insurer denied the claim? That there was a violation of the “other insurance” clause. What is this clause? SIR: When you take an insurance policy, particularly property insurance, there is this usual clause in the policy wherein you have to obtain a written approval from the insurer of your act in taking insurance policy. This is called the “other insurance” clause. If you have other insurances, you have to divulge it to your insurer. Otherwise, if at the time of loss, the insurer will discover that there are other insurances covering the same property, on the same interest, and the same risk, then your claim will be denied. Purpose of “other insurance” clause It prevents over insurance and therefore, fraud will be averted. FORTUNE INSURANCE vs CA FACTS: On June 29, 1987, Producer’s Bank of the Philippines’ armored vehicle was robbed, in transit, of seven hundred twenty-five thousand pesos (Php 725,000.00) that it was transferring from its branch in Pasay to its main branch in Makati. To mitigate their loss, they claim the amount from their insurer, namely Fortune Insurance and Surety Co. Fortune Insurance, however, assails that the general exemption clause in the Casualty Insurance coverage had a general exemption clause, to wit: "GENERAL EXCEPTIONS The company shall not be liable under this policy in respect of xxx xxx xxx (b)any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee, partner, director, trustee or authorized representative of the Insured whether acting alone or in conjunction with others. ..." And, since the driver (Magalong) and security guard (Atiga) of the armored vehicle were charged with three others as liable for the robbery, Fortune denies Producer’s Bank of its insurance claim. According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one branch to another, they effectively and necessarily became its authorized representatives in the care and custody of the money. Assuming that they could not be considered authorized representatives, they were, nevertheless, employees of Producers. Fortune insists that PRC Management System and Unicorn Security Services are but "labor-only" contractors under the Labor Code, and a finding that a contractor is a "labor-only" contractor is equivalent to a finding that there is an employer-employee relationship between the owner of the project and the employee of the "labor-only" contractor. ISSUE: Whether or not recovery is precluded under the general exemption clause. HELD: Yes, recovery is precluded under the general exemption clause. Even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC Management Systems and Unicorn Security Services were truly independent contractors, we are satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay City branch to its head office in Makati, its "authorized representatives" who served as such with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the money to its head office, with Alampay to be responsible for its custody in transit; Magalong to drive the armored vehicle which would carry the money; and Atiga to University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 33

Societas Spectra Legis Insurance provide the needed security for the money, the vehicle, and his two other companions. In short, for these particular tasks, the three acted as agents of Producers. A "representative" is defined as one who represents or stands in the place of another; one who represents others or another in a special capacity, as an agent, and is interchangeable with "agent." EDILLON vs MANILA BANKERS LIFE FACTS: In April 1969, Carmen Lapuz filled out an application form for insurance under Manila Banker Life Assurance Corporation. She stated that her date of birth was July 11, 1904. Upon payment of the Php 20.00 premium, she was issued the insurance policy in April 1969. In May 1969, Carmen Lapuz died in a vehicular accident. Regina Edillon, who was named a beneficiary in the insurance policy sought to collect the insurance claim but Manila Banker denied the claim. Apparently, it is a rule of the insurance company that they were not to issue insurance policies to “persons who are under the age of sixteen (16) years of age or over the age of sixty (60) years …” Note, that Lapuz was already 65 years old when she was applying for the insurance policy. ISSUE: Whether or not Edillon is entitled to the insurance claim as a beneficiary. HELD: Yes. The age of the insured Carmen 0. Lapuz was not concealed to the insurance company. Her application for insurance coverage which was on a printed form furnished by private respondent and which contained very few items of information clearly indicated her age at the time of filing the same to be almost 65 years of age. There was sufficient time for the private respondent ro process the application and to notice that the applicant was over 60 years of age and thereby cancel the policy on that ground if it was minded to do so. If the private respondent failed to act, it is either because it was willing to waive such disqualification; or, through the negligence or incompetence of its employees for which it has only itself to blame, it simply overlooked such fact. Under the circumstances, the insurance corporation is already deemed in estoppel. Its inaction to revoke the policy despite a departure from the exclusionary condition contained in the said policy constituted a waiver of such condition. PERLA COMPANIA DE SEGUROS vs CA, MILAGROS CAYAS FACTS: Milagros Cayas was the registered owner of a Mazda bus. Said passenger vehicle was insured with Perla Compania de Seguros. On December 17, 1978, the bus figured in an accident injuring several of its passengers. Perea sued Milagros Cayas for damages; while three others agreed to a settlement of P4,000.00 each with Milagros Cayas. After trial, the court rendered a decision in favor of Perea, Cayas ordered to compensate the latter with damages. Cayas filed a complaint with the CFI, seeking reimbursement from PCSI for the amounts she paid to ALL victims, alleging that the latter refused to make such reimbursement notwithstanding the fact that her claim was within its contractual liability under the insurance policy. The decision of the CA affirmed in toto the decision of the RTC of Cavite, the dispositive portion of which states: IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering Perla Compania to pay plaintiff Cayas the sum of P50,000.00 under its maximum liability as provided for in the insurance policy; In this petition for review on certiorari, Perla Compania seeks to limit its liability only to the payment made by Cayas to Perea and only up to the amount of P12,000.00. It altogether denies liability for the payments made by Cayas to the other 3 injured passengers totaling P12,000.00. ISSUE: How much should Perla Compania pay? HELD: The insurance policy clearly and categorically placed Perla Compania’s liability for all damages arising out of death or bodily injury sustained by one person as a result of any one accident at P12,000.00. The insurance policy also provides: University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 34

Societas Spectra Legis Insurance 5. No admission, offer, promise or payment shall be made by or on behalf of the insured without the written consent of the Company … It being specifically required that Perla Compania’s written consent be first secured before any payment in settlement of any claim could be made, Cayas is precluded from seeking reimbursement of the payments made to the other 3 victims in view of her failure to comply with the condition contained in the insurance policy. Also, the insurance policy involved explicitly limits petitioner’s liability to P12,000.00 per person and to P50,000.00 per accident. Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case. Thus, it was error on the part of the trial and appellate courts to have disregarded the stipulations of the parties and to have substituted their own interpretation of the insurance policy. Although Cayas was able to prove a total loss of only P44,000.00, petitioner was made liable for the amount of P50,000.00, the maximum liability per accident stipulated in the policy. This is patent error. An insurance indemnity, being merely an assistance or restitution insofar as can be fairly ascertained, cannot be availed of by any accident victim or claimant as an instrument of enrichment by reason of an accident. AISPORNA vs CA FACTS: Mapalad Aisporna, wife of a duly licensed insurance agent, was charged for violation of the first paragraph of SECTION 189 of the Insurance Act having acted as agent in the solicitation for insurance in favor of Eugenio Isidro for and in behalf of Perla Compania de Seguros, Inc. without having first secured a certificate of authority to act as such agent from the office of the Insurance Commission. The evidence disclosed at the trial was that petitioner merely left a note on top of her husband's desk informing the latter of Isidro's intention to renew his policy. The trial court found appellant guilty as charged. On appeal, the Court of Appeals construing the first paragraph of SECTION 189 independent from the two succeeding paragraphs, affirmed the judgment of conviction and held that the receipt of compensation for the issuance of an insurance policy is not an essential element for a violation of the first paragraph of SECTION 189 of the Insurance Act. ISSUE: Whether or not a person can be convicted of having violated the first paragraph of SECTION 189 of the Insurance Act without reference to the second paragraph of the same SECTION. HELD: No. The first paragraph of SECTION 189 prohibits a person from acting as agent, subagent or broker in the solicitation or procurement of applications for insurance without first procuring a certificate of authority so to act from the Insurance Commissioner, while its second paragraph defines who is an insurance agent within the intent of this SECTION and, finally, the third paragraph thereof prescribes the penalty to be imposed for its violation. Considering that the definition of an insurance agent as found in the second paragraph is also applicable to the agent mentioned in the first paragraph, to receive compensation by the agent is an essential element for a violation of the first paragraph of SECTION 189; The appellate court has established ultimately that Mapala did not receive any compensation for the issuance of the insurance policy of Eugenio Isidro. COUNTRY BANKERS INSURANCE vs LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE FACTS: For the loss it sustained fire as a result of the fire, Lianga Bay Cooperative filed an insurance claim with Country Bankers Insurance. The latter, however, denied the claim on the ground that based on the submitted documents, the building of Lianga Bay was set on fire by two NPA rebels who wanted to obtain provisions. This was an excepted risk under the policy contract.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 35

Societas Spectra Legis Insurance ISSUE: HELD: Where a risk is excepted by the terms of a policy which insures against other perils or hazards, loss from such a risk constitutes a defense which the insurer may urge, since it has not assumed that risk, and from this it follows that an insurer seeking to defeat a claim because of an exception or limitation in the policy has the burden of proving that the loss comes within the purview of the exception or limitation set up. If a proof is made of a loss apparently within a contract of insurance, the burden is upon the insurer to prove that the loss arose from a cause of loss which is expected or for which it is not liable, or from a cause which limits its liability. Stated elsewise, since the petitioner in this case is defending on the ground of non-coverage and relying upon an exemption or exception clause in the fire insurance policy, it has the burden of proving the facts upon which such excepted risk is based, by a preponderance of evidence. But petitioner failed to do so. AMERICAN HOME ASSURANCE COMPANY vs TANTUCO ENTERPRISES, INC FACTS: Tantuco Enterpries insured against fire its two oil mills with American Home Assurance. The first oil mill was covered by Fire Insurance Policy No. 306-7432324-3 for the period March 1, 1991 to 1992 while the second oil mill, which commonly referred to as the new oil mill was covered by Policy No. 306-7432321-9 also for the same term. Unfortunately, on September 30, 1991, the new oil mill was destroyed by fire. Respondent claimed for the insurance proceeds from the petitioner but it was rejected by the latter for the reason that the burned oil mill was not covered by any insurance policy. According to petitioner, the oil mill gutted by the fire was not the one described by the specific boundaries in the contested policy. In further attempt to avoid liability, petitioner claimed that respondent forfeited the renewal policy for its failure to pay the full amount of the premium and breached the Fire Extinguishing Appliances Warranty. Hence, respondent filed a complaint for specific performance and damages with the Regional Trial Court of Lucena City. After trial, the court rendered judgment in favor of respondent. On appeal, the Court of Appeals upheld the decision of the RTC. ISSUE: Whether or not Tantuco Enterprises can claim the proceeds of its policy from the American Home Assurance. HELD: Yes. In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be. Notwithstanding, therefore, the misdescription in the policy in this case, it is beyond dispute, that what the parties manifestly intended to insure was the new oil mill. If the parties really intended to protect the first oil mill, then there is no need to specify it as new. Indeed, it would be absurd to assume that Tantuco Enterprises would protect its first oil mill for different amounts and leave uncovered its second one. The first oil mill is already covered under the policy issued by the petitioner. It is unthinkable for Tantuco Enterprises to obtain the other policy from the very same company. American Home Assurance ought to know that a second agreement over that same realty results in its overinsurance. On the supposed Tantuco Enterprises' insufficient premium payment, the Court found that the said issue was never raised at the pre-trial proceedings. Nor did American Home Assurance present during the trial any witness to testify that Tantuco Enterprises indeed failed to pay the full amount of the premium. As to the alleged breach of the warranty, the Court found that Tantuco Enterprises was able to comply with the warranty.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 36

Societas Spectra Legis Insurance PERFECTION OF CONTRACTS CASES: GREAT PACIFIC LIFE ASSURANCE vs CA FACTS: Ngo Hing, a duly authorized agent of Pacific Life, applied for a 20-year endowment policy on the life of his one-year old daughter, a mongoloid. He did not divulge each physical defect of his daughter. He paid the premium and was issued a binding deposit receipt. However, despite the branch manager's favorable recommendation, the Company disapproved the application, because a 20-year endowment plan is not available for minors. Instead, it offered the Juvenile Triple Action Plan. The manager wrote back and again strongly recommended the approval of the application. At this point, the child died of influenza with complication of broncho-pneumonia. ISSUE: whether the binding deposit receipt constituted a temporary contract of the life insurance in question. HELD: Where the binding deposit receipt is intended to be merely a provisional or temporary insurance contract, and that the receipt merely acknowledged, on behalf of the insurance company, that the latter's branch office had received from the applicant the insurance premium and had accepted the application subject for processing by the insurance company, such binding deposit receipt does not become in force until the application is approved. A binding deposit receipt which is merely conditional does not insure outright. Thus, where an agreement is made between the applicant and the agent, no liability will attack until the principal approves the risk and a receipt is given by the agent. The acceptance is merely conditional, and is subordinated to the act of the company in approving or rejecting the application.

DBP vs CA FACTS: Juan B. Dans, together with his family applied for a loan of P500,000 with DBP. As principal mortgagor, Dans, then 76 years of age was advised by DBP to obtain a mortgage redemption insurance (MRI) with DBP MRI pool. A loan in the reduced amount was approved and released by DBP. From the proceeds of the loan, DBP deducted the payment for the MRI premium. The MRI premium of Dans, less the DBP service fee of 10%, was credited by DBP to the savings account of DBP MRI-Pool. Accordingly, the DBP MRI Pool was advised of the credit. Dans died of cardiac arrest. DBP MRI Pool notified DBP that Dans was not eligible for MRI coverage, being over the acceptance age limit of 60 years at the time of application. DBP apprised Candida Dans of the disapproval of her late husband’s MRI application. DBP offered to refund the premium which the deceased had paid, but Candida Dans refused to accept the same demanding payment of the face value of the MRI or an amount equivalent of the loan. She, likewise, refused to accept an ex gratia settlement which DBP later offered. Hence, the case at bar. ISSUE: Whether or not the DBP MRI application was perfected. HELD: No. Under the provisions of the MRI, the coverage shall take effect: (1) when the application shall be approved by the insurance pool; and (2) when the full premium is paid during the continued good health of the applicant. These two conditions, being joined conjunctively, must concur. Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The pool, however, did not approve the application of Dans. There is also no showing that it accepted the sum of P1,476.00, which DBP credited to its account with full knowledge that it was payment for Dan's premium. There was, as a result, no perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable on a contract that does not exist. The liability of DBP is another matter.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 37

Societas Spectra Legis Insurance Mortgage redemption insurance Mortgage Redemption Insurance (MRI) is a form of life insurance which pays for the mortgage of the insured in case of untimely death. In the Philippines, this is a requirement of banks when applying for a housing loan. However, if you already have an existing life insurance policy, you can assign that policy as your MRI so in case of death, the mortgage gets paid off from your life insurance proceeds. PEREZ vs CA FACTS: Primitivo B. Perez had been insured with BF Lifeman Insurance Corporation since 1980 for P20,000.00. He was convinced to increase the coverage to P50,000.00 and avail of its promotional discount. However, delay took place in processing the application form. Perez died in an accident. At the time of his death, the applications for the increased coverage were still in the provincial office. Without knowing that Perez had died, BF Lifeman approved the application form and issued the corresponding policy a few days after his death. His widow, Virginia Perez, claimed the benefits under the insurance policies of the deceased. She was paid under the first insurance policy but was refused of the claim under the increased coverage. The insurance company maintained that the insurance had not been perfected at the time of death of the insured. BF Lifeman filed a complaint for rescission of contract. Meanwhile Virginia filed a counterclaim for collection of the amount under the increased policy. The trial court ruled in favor of Virginia. The Court of Appeals, however, reversed the decision saying that the insurance contract for the increased indemnity could not have been perfected since at the time the policy was issued, Primitivo was already dead. The instant petition was filed on the ground that there was a consummated contract because the condition of the policy was potestative, being dependent upon the will of the insurance company only and was therefore null and void. ISSUE: Whether or not Virginia Perez is entitled to the proceeds of the insurance policy under the increased indemnity. HELD: No. A contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement. When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination, his application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected. It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for additional insurance coverage were still with the branch office of respondent corporation in Gumaca and it was only two days later, or on November 27, 1987, when Lalog personally delivered the application papers to the head office in Manila. Consequently, there was absolutely no way the acceptance of the application could have been communicated to the applicant for the latter to accept inasmuch as the applicant at the time was already dead.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 38

Societas Spectra Legis Insurance SUBROGATION CASES MALAYAN INSURANCE vs CA FACTS: Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car Comprehensive Policy covering a Willys jeep. The insurance coverage was for "own damage" not to exceed P600.00 and "thirdparty liability" in the amount of P20,000.00. The insured jeep, while being driven by one Juan P. Campollo, an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to causing damage to the insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep. As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and PANTRANCO. After trial, judgment was rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc. "The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00. On appeal, CA, ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. ISSUE: (1) Whether or not Malayan Insurance is solidarily liable with Sio Choy and San Leon Rice Mill; (2) whether Malayan Insurance is entitled to be reimbursed by San Leon Rice Mill for whatever amount the former has been adjudged to pay Vallejos on its insurance policy. HELD: (1) No. Only respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos. Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort. In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two respondents by reason of the indemnity contract against third party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary obligation and insurance contracts. (2) Yes. Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose negligence or wrongful act caused the loss. When the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, (italics supplied) or upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity. It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of not exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each. The rule holds true as to an insurer subrogated to the right of a solidary debtor.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 39

Societas Spectra Legis Insurance MANILA MAHOGANY MANUFACTURING CORPORATION vs. CA AND ZENITH INSURANCE CORPORATION FACTS: Manila Mahogany insured its Mercedes Benz with Zenith Insurance Company. One day, the vehicle was bumped and damaged by a truck owned by San Miguel Corp (SMC). Zenith paid P5K to petitioner in amicable settlement. Petitioner’s general manager executed a Release Claim, subrogating respondent company to all its right to action against SMC. Later respondent wrote Insurance Adjusters Inc. to demand reimbursement from SMC. Insurance Adjusters refused saying that SMC had already paid petitioner P4,500 for the damages to petitioner’s vehicle, as evidenced by a cash voucher and Release of Claim executed by the GM of petitioner discharging SMC from “all actions, claims, demands the rights of action that now exist or hereafter develop arising out of or as a consequence of the accident. Respondent demanded the P4.5K amount from petitioner. Petitioner refused. Suit filed for recovery. City Court ordered petitioner to pay respondent. CFI affirmed. CA affirmed with modification that petitioner was to pay respondent the total amount of 5K it had received from respondent. Petitioner’s argument: Since the total damages were valued at P9,486.43 and only 5K was received by petitioner from respondent, petitioner argues that it was entitled to go after SMC to claim the additional which was eventually paid to it. Respondent’s argument: No qualification to its right of subrogation. ISSUE: Whether or not Manila Mahogany should pay Zenith Insurance despite the subrogation in the Release of Claim was conditioned on recovery of the total amount of damages petitioner has sustained. HELD: Yes. Although petitioner's right to file a deficiency claim against San Miguel Corporation is with legal basis, without prejudice to the insurer's right of subrogation, nevertheless when Manila Mahogany executed another release claim discharging San Miguel Corporation from all actions, claims, demands and rights of action that now exist or hereafter arising out of or as a consequence of the accident" after the insurer had paid the proceeds of the policy – the compromise agreement of P5,000.00 being based on the insurance policy – the insurer is entitled to recover from the insured the amount of insurance money paid. Since petitioner by its own acts released San Miguel Corporation, thereby defeating private respondent's right of subrogation, the right of action of petitioner against the insurer was also nullified. Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier paid to petitioner. The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500 as originally asked for, but P5,000, the amount respondent company paid petitioner as insurance, is also in accord with law and jurisprudence. Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer. PAN MALAYAN INSURANCE vs CA FACTS: Pan Malayan filed a complaint for damages with the RTC of Makati against private respondents Erlinda Fabie and her driver. Pan Malayan insured a Mitsubishi Colt Lancer car registered in the name of Canlubang. Dut to the carelessness, recklessness and imprudence of the unknown driver of a pick-up, the insured car was hit and suffered damages in the amount of P42,052.00. Pan Malayan defrayed the cost of repair of the insured car, and therefore was subrogated to the rights of Canlubang against the driver of the pick-up and his employer, Erlinda Fabie. Despite repeated demands, defendants failed and refused to pay the claim of Pan Malay. Defendants/Private Respondents alleged that Pan Malay had no cause of action against them because payment under the “own damage” clause of the insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on the assumption that there was no wrongdoer or no third party at fault. RTC dismissed the case for no cause of action and denied its motion for reconsideration. The CA affirmed the trial courts decision. Hence, this petition. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 40

Societas Spectra Legis Insurance ISSUE: Whether or not payment under the “own damage” under the insurance policy precludes insurer from the right of subrogation. HELD: No. When PANMALAY utilized the phrase "own damage" – a phrase which, incidentally, is not found in the insurance policy – to define the basis for its settlement of CANLUBANG's claim under the policy, it simply meant that it had assumed to reimburse the costs for repairing the damage to the insured vehicle. It is in this sense that the so-called "own damage" coverage is differentiated from Third Party Liability" coverage which refer to "Property Damage" coverage (liabilities arising from damage caused by the insured vehicle to the properties of third parties). Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured vehicle due to negligent or careless acts of third parties is not listed under the general and specific exceptions to the coverage of insured risks which are enumerated in detail in the insurance policy itself. For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of action against private respondents. The insurer who may have no rights of subrogation due to "voluntary" payment may nevertheless recover from the third party responsible for the damage to the insured property under Article 1236 of the Civil Code. CEBU SHIPPING AND ENGINEERING WORKS, INC. VS. WILLIAM LINES INC. AND PRUDENTIAL GUARANTEE AND ASSURANCE COMPANY, INC. FACTS: William Lines, Inc. brought its vessel M/V Manila City to the Cebu Shipyard in Lapulapu City for annual dry-docking and repair. Subject vessel was insured with Prudential Guarantee for P45,000,000.00 for hull and machinery. The Hull Policy included an “Additional Perils” clause covering loss of or damage to the vessel through the negligence of, amonf others, ship repairmen. CSEW was also insured by Prudential Guarantee for third party liability under s Shiprepairs Legal Liability Insurance Policy for P10,000,000.00 only. After subject vessel was transferred to the docking quay, it caught fire and sank, resulting to its eventual total loss. William Lines, Inc. filed a complaint for damages against CSEW, alleging that the fire which broke out in M/V Manila City was caused by CSEW’s negligence and lack of care. An amended complaint, impleading Prudential Guarantee as co-plaintiff, was filed after the latter had paid William Lines, Inc. the value of the hull and machinery insurance of M/V Manila City. RTC ruled that the cause of the fire was through the negligence of CSEW. CA affirmed the appealed decision. Hence this petition. ISSUE: Whether or not Prudential has the right of subrogation against its own insured and whether or not the parties intended for them to be a co-assured in the insurance policy. RULING: The petition is unmeritorious. Upon proof of payment by Prudential Guarantee to William Lines, the former was subrogated to the right of the latter to indemnification from CSEW. Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William Lines, paid the latter the total amount covered by its insurance policy, it was subrogated to the right of the latter to recover the insured loss from CSEW, the liable party. A stipulation in the work order that requires William Lines to maintain insurance on the vessel during the period of dry-docking or repair, works to the benefit of CSEW. However, the fact that CSEW benefits from the said stipulation does not automatically make it as a co-assured of William Lines. The hull and machinery insurance procured by William Lines, Inc. from Prudential named only "William Lines, Inc." as the assured. Thus, when the insurance policy involved named only William Lines, Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is unfounded.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 41

Societas Spectra Legis Insurance Legal effects of an insurance by mortgagee of his own interest and the loss is payable to the mortgagee 1) Mortgagee is entitled to the proceeds of the policy in case of loss before the payment of the mortgage. 2) The claim passes by subrogation to the insurer to the extent of the insurance money paid and the mortgagee is not allowed to retain his claim against the mortgagor. 3) 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. C has a credit of P8 million against D which is secured by D’s house. C, mortgagee, insured the house of D, mortgagor, up to P8 million. Supposing D already paid C P4 million, how much will C be entitled to recover from the insurer? P4 million, the remaining debt of D.

May C, after receiving the P4 million from the insurer, still go after D and collect the remaining P4 million debt? No because his insurable interest was already satisfied with the payment of the P4 million by the insurer. Supposing the insurer paid the D the amount of P8 million, is he subrogated to the rights of the mortgagee and go after the mortgagor? Yes. When the insurance is procured by the mortgagee for his own benefit and the insurer pays the proceeds to the mortgagee, the insurer is subrogated to the latter’s right and he may go after the mortgagor. Supposing it was the mortgagor who procured and paid for the insurance contract, making the loss payable to the mortgagee, Legal effects of an insurance by mortgagor for the benefit of the mortgagee 1) The contract is deemed to be upon the interest of the mortgagor; hence, he does not cease to be party to the contract. 2) Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance affects the mortgagee even if the property is in the hands of the mortgagee. 3) Any act under the contract which is to be performed by the mortgagor may be performed by the mortgagee with the same effect. 4) In case of loss, the mortgagee is entitled to the extent of his credit. 5) Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished. 6) The rule on subrogation by the insurer to the right of the mortgagee does not apply in this case. Standard or union mortgage clause Clause which makes a separate and distinct contract of insurance on the interest of the mortgagee. Under this clause, the acts of the mortgagor do not affect the mortgagee.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 42

Societas Spectra Legis Insurance Open or loss-payable clause Clause that may be included in a policy obtained by the mortgagor in favor of the mortgagee where the latter is only a beneficiary and not a party to the contract itself. Under this clause, any acts of the mortgagor which defeats his right wil also defeat the right of the mortgagee. Effect of standard and open clauses in fire insurance policy clause. Rights of the mortgagee under the mortgagor’s policy 1) Before loss – the mortgagee is a conditional appointee of the mortgagor entitled to receive so much of any sum that may become due under the policy as does not exceed his interest as mortgagee. 2) Loss happens when credit is not yet due - the mortgagee is entitled to receive money to apply to the extinguishment of the debt as fast as it becomes due 3) Loss happens after credit has matured – the mortgagee may apply the proceeds to the extent of his credit. [interest] Effect of insurance by mortgagee on behalf of mortgagor 1) Discharge of debt – The same rules obtain when the mortgagee procures the policy as a contracting party by which the mortgagor is to pay the premiums upon such insurance. Upon the destruction of the property, the mortgagee is entitled to receive payment from the insured but such payment discharges the debt it equal to it, and if greater than the debt, the mortgagee holds the excess as trustee for the mortgagor. 2) Right to subrogation – If there is a stipulation that the insurer shall be subrogated to the rights of the mortgagee, the payment of the policy will not discharge the debt even though the mortgagee may have procured the policy by arrangement with the mortgagor. SECTION. 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 obligations on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of said assignee. Does the act of the mortgagor affect the rights of the assignee? Yes, unless the insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligations on the assignee, making a new contract with him. Legal effect of assignment or transfer of insurance policy To substitute the assignee or transferee in place of the original insured in respect to the: (1) right to claim indemnity for a loss; (2) obligation to perform the conditions, if any, of the policy. Assignment or transfer of insurance policy 1) As to fire policy – not assignable (you might assign it to an arsonist) without the consent of the insurer; 2) As to marine policy – not assignable (you might assign it to jack sparrow) without the consent of the insurer. 3) As to casualty policy - not assignable (you might assign it to lupin) as it involves obvious moral hazards, unless the insurer consents;

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 43

Societas Spectra Legis Insurance 4) As to life policy – may freely be assigned before or after the loss occurs, to any person whether he has an insurable interest or not; except when it is assigned to a person without an insurable interest and under circumstances where the insured makes such an assignment in bad faith. Moral hazard The lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance. Kinds of assignment or transfer 1) of the policy itself- transfers the rights to the contract to another insured. 2) of the proceeds of the policy after loss has happened – involves a money claim under the policy. 3) of the subject matter of the insurance – such as a house insured under a fire policy which has the effect of suspending the insurance until the same person becomes the owner of both the policy and the thing insured. Legal basis of the mortgagor to assign the insurance policy to the mortgagee SECTION 8 of the Code. SECTION. 10. Every person has an insurable interest in the life and health: (a) [1]Of himself, [2] of his spouse and [3]of his children; (b) [4]Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) [5]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) [6]Of any person upon whose life any estate or interest vested in him depends. Insurable interest That interest which the law requires the owner of an insurance policy to have in the person or thing insured. Insurable interest in life insurance To have an insurable interest in the life of a person, the expectation of benefit from the continued life of that person need not necessarily be of a pecuniary nature. Test in insurable interest in general A person is deemed to have an insurable interest in the subject matter where he has a relation with it in that he will derive pecuniary benefit from its preservation and will suffer pecuniary loss from its destruction, by the happening of the event insured against. Necessity of insurable interest In the absence of such interest, the person insuring in effect would be gambling which is prohibited by law. A policy issued to a person without interest in the subject matter insured is a mere wagering policy and is void for illegality.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 44

Societas Spectra Legis Insurance Requirement, a matter of public policy A wager policy is obviously contrary to public interest in that: 1) It allows the insured to have an interest in the destruction of the subject matter rather that its preservation. 2) It affords a temptation or inducement to the insured, having nothing to lose and everything to gain, to bring pass the event upon the happening of which the insurance becomes payable. Two general classes of life policies 1) Insurance upon one’s life – Those taken out by the insured upon his own life for the benefit of himself, or of his estate, or of a third person who may be designated as beneficiary. 2) Insurance upon the life of another – Policies taken out by the insured upon the life of another. Insurable interest in one own’s life Every person has an unlimited insurable interest in the his own life whether the insurance is for the benefit of himself or another; and it is not necessary that the beneficiary designated in the policy should have any interest in the life of the insured. Instances of a wagering policy 1) that the original proposal to take out insurance was that of the beneficiary. 2) that premiums are paid by the beneficiary. 3) that the beneficiary has no interest, economic or emotional in the continued life of the insured. SIR: These are just indicia; There’s really not hard and fast rule in determining whether the life insurance is a wagering policy. Similarity between a life insurance policy and a civil donation A donation is an act of liberality whereby a person disposes gratuitously a thing or right in favor of another who accepts it. Both are founded upon the same consideration: liberality. Insurable interest in life of another A person cannot lawfully procure an insurance for his own benefit on the life of another in whose life he has no insurable interest. The policy of the law requires that the insured shall have an interest to preserve the life insured in spite of the insurance rather than destroy it because of the insurance. Insurance for benefit of a third party When the owner of a policy insures the life of another(cestui que vie) and designates a third party as a beneficiary, both the owner and the beneficiary must have an insurable interst in the life of the cestui que vie. X insures the life of Y and makes Z as the beneficiary. Should X have an insurable interest in the life of Y? Both X and Z should have an insurable interest in the life of Y.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 45

Societas Spectra Legis Insurance Persons obliged to support each other Generally, blood or material relationships fit the concept of insurable interest. The following have an insurable interest in each other’s life since under the Family Code, they are obliged to support each other: (1) The spouses; (2) Legitimate ascendants and descendants; (3) Parents and their legitimate children and the legitimate and illegitimate children of the latter; (4) Parents and their illegitimate children and the legitimate and illegitimate children of the latter; and (5) Legitimate brothers and sisters, whether of full or half-blood. Insuring your collateral relatives Mere blood relationship such as uncle or aunt, and nephew and niece and cousins (lesser degree of kinship), does not create an insurable interest in the life of another. Also, mere relationship by affinity (in-laws; stepchildren) ordinarily does not constitute an insurable interest. Insuring your girlfriend/mamasan You may for as long as you can prove that you have an insurable interest in her because you wholly depend on your paramour for education or support. Insuring your paramour No because any person forbidden from receiving any donation cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him. Should there be a previous conviction for adultery of concubinage? No it is not required. An action for declaration of nullity may be brought by the spouse of the donor or done and the guilt of the donor and done may be proved by preponderance of evidence.

Supposing in the same scenario, you were able to procure an insurance policy and later on you died. To whom should the proceeds of the insurance policy go? To the estate of the insured. X agreed to have sex with Y, a married man, because of Y’s promise to make her a beneficiary. Is that a valid transaction? No because an insurance made between persons found guilty of the same criminal offense, in consideration thereof is void. SIR: If the reason why you made this person as your beneficiary was because of the commission of the offense of adultery or concubinage, then the insurance policy is void even if it is the consideration only.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 46

Societas Spectra Legis Insurance Corporation insuring the life of its officer Generally, a corporation has an insurable interest in the life of an officer on whose services the corporation depends for its prosperity and whose death will be the cause of a substantial pecuniary loss to it. Partnership insuring the life of one of its partner A person may take out a policy on the life of his business partner on the theory that the latter’s death may adversely affect the business operations which can, in turn, cause financial losses. Insuring the life of the President of the Republic or the Dean of the College of Law Under our law, there must be an expectation of benefit in the life of the insured to sustain the insurance, i.e., a risk of actual and substantial monetary loss from his death. Hence, love, affection, gratitude or friendship by itself is not sufficient. Insuring the life of an employer For as long as the employee derives pecuniary benefit from the continued existence of his employer and suffer pecuniary loss from his death, he may insure the life of the latter. Insuring the life of a janitor/clerk/house helper In the case of employees, insurable interest is dependent upon the value of the employee to the business. One who could be easily replaced would hardly be one in whom the employer could reasonably claim an insurable interest. Insurable interest of creditor in the life of his debtor Only to the extent of the amount of the debt. The debtor got an insurance to be paid to the creditor. Meanwhile, he was able to pay his creditor. Later on, the debtor died and became a zombie. Is the insurer liable to pay the proceeds to the creditor? No, the debt was already extinguished upon payment by the debtor. The proceeds should instead go to the estate of the debtor. Consent of person whose life insured Not essential to the validity of the policy so long as it could be proved that the assured has a legal insurable interest at the inception of the policy. SECTION 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 foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 47

Societas Spectra Legis Insurance Beneficiary The person names in the contract of life, health, or accidental insurance as the one who is to receive the benefits. Kinds of beneficiary 1) The insured himself – the person who procures the contract and pays the premium necessary to maintain it.  Where the creditor insures the life of the debtor o The creditor is the insured and the beneficiary o The life of the debtor is the subject of the life insurance policy 2) Third person who paid a consideration – The insured may have taken the policy for the benefit of the creditor or to secure some other obligation.  Where the debtor procures an insurance for the benefit of his creditor. 3) Third person through mere bounty of insured – The beneficiary may be one who gives no consideration but is designated as recipient of the proceeds of the policy.  Third party liability insurance procured by car owners. In the 2nd and 3rd cases, (generally) the beneficiary is not a party to the contract of insurance. Limitations in the appointment of beneficiary 1) ART 739. The following donations shall be void: i. Those made between persons who were guilty of adultery or concubinage at the time of the donation; ii. Those made between persons found guilty of the same criminal offense, in consideration thereof; iii. Those made to a public officer or his wife, descendants and ascendants, by reason of his office. 2) ART 2012. Any person who is forbidden from receiving any donation under article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article. Right of the insured in life insurance where beneficiary is a third person General rule: 1) right to change the 2) retains the right receive the cash value of the policy 3) take out loans against the cash value 4) to assign the policy 5) to surrender the policy Rationale: beneficiary acquires no vested right but only an expectancy of receiving the proceeds under the insurance. Exception: when the insured expressly waives such right under the policy. X made Y as his beneficiary. When X died, the heirs of X would like to assign the proceeds of the insurance to Z. Can the heirs do that? No because the insured’s power to assigned the beneficiary’s interest ceases at his death and cannot be exercised by his heirs, representatives or assignees. (Effect of death of insured)

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 48

Societas Spectra Legis Insurance Where right to change is waived Then the insured has no power to make such change without the consent of the beneficiary. What if X refuses to continue paying the premiums. What is the remedy of Y? Y may opt pay the premium because the fulfillment of an obligation may be made by a third person even against the will of the debtor and if has has an interest in the fulfillment of the obligation, even against the will of the creditor. (Art 1236) Measurement of vested interest of beneficiary in policy Measured on its full face value and not on its cash surrender value for in case of death of the insured, said beneficiary is paid on the basis of its face value. Effect where beneficiary dies before insured 1) view that beneficiary’s representative/heir is entitled to insurance proceeds – where the right to change the designated beneficiary is expressly waived in the policy, his vested right should pass to his representatives. 2) view that estate of the insured is entitled to the insurance policy – the insured could not have intended to make a provision for the heirs of the deceased beneficiary, who may be persons without an interest in his life. This is true also where the designation is subject to the express condition to pay the beneficiary if the survives the insured or “if surviving”. *better view+ X designates his insurer as his beneficiary. Is that allowed? Yes you can designate anyone as your beneficiary except as otherwise prohibited by the law. Designation of beneficiary 1) Children – means a descendant of the first degree and is never intended to include grandchildren. “the beneficiaries are my children” includes children by another wife. 2) Wife – the word “wife” in the description of the beneficiary of life insurance is generally regarded as merely descriptive and does not necessarily need to have the legal status of a wife. “my wife and children” is deemed for benefit of al children of the insured, whether by the named wife or those of another. If no beneficiary is designated, the proceeds will go to his legal heirs in accordance with law. SECTION 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. Nearest relatives of the insured In the order of enumeration, they are the following: (a) The legitimate children; (b) The father and mother, if living; University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 49

Societas Spectra Legis Insurance (c) (d) (e) (f)

(g)

The grandfather and grandmother, or ascendant nearest in degree, if living The illegitimate children; The surviving spouse; and The collateral relatives, to wit: 1) Brothers and sisters of the full blood 2) Brothers and sisters of the half-blood; and 3) Nephews and nieces. In default of the above, the State shall be entitled to receive the insurance proceeds.

Liability of insurer on death of insured 1) Death in the hands of the law – Many courts hold that the insurer is not liable for the death of the insured at the handsof the law. 2) Death by self-destruction. – the insurer is not liable in case the insured commits suicide intentionally, with whatever motive, when in sound mind. To hold otherwise is to say that the occurrence of the event, upon the happening of which the insurer undertook to pay, was intended to be left to insured’s option. That view is against the very essence of the contract. 3) Death by suicide while insane. –The suicide of an insured while insane does not discharge the insurer from his liability on his contract. Such insanity is one of the diseases to which the insurer must have known that the insured was subject. 4) Death caused by the beneficiary – where the beneficiary, as principal, accomplice or accessory intentionally brings about the death of the insured under such circumstances as to amount to felony, he cannot recover any benefit under the contract of insurance. His interest shall be forfeited and the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. However, when the killing was accidental, unintentional or in self-defense or where the beneficiary was insane, the rights of the beneficiary under the policy are not affected. 5) Death caused by violation of law – Does not warrant denial of liability. To avoid liability, the insurer must further establish that the commission of the felony or the violation of the law was the cause or had a causal connection with the accident resulting in the death of the insured. SECTION 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest. Insurable interest in property 1) In general –anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction. 2) Title or right to possession not essential – Although a person has no title, legal or equitable, in the property, and neither possession nor right to possession, yet he has an insurable interest if he is so situated with respect to the property that he will suffer loss as the proximate result of its damage or destruction.  where a mortgagor had sold the mortgaged premises to a vendee who assumed the payment of the mortgage debt, and had thus parted with all his interest in the property, the mortgagor yet had an insurable interest in the property because of his personal liability for the debt and his right to be subrogated to the mortgage security in case he should be compelled to make payment. 3) Legal expectation of loss or benefit. – the expectation of benefit to be derived from the continued existence of property must have a basis of legal right although the person insured has no title, either legal or equitable, to the property insured.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 50

Societas Spectra Legis Insurance Factual expectation Such expectation not arising from any legal right or duty in connection with the property, does not constitute an insurable interest. Thus, an owner of a gasoline filling station near a hotel has no sufficient insurable interest in the hotel simply because its burning or destruction, though it leaves the filling station physically unharmed, will lessen his income from guests of the hotel. This type of interest though usually insufficient in strict indemnity insurance, will suffice in life insurance. SECTION 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. Existing interest The existing interest in a property may be a legal title or equitable title.  Persons who have insurable interest arising from legal title: trustee, mortgagor, lessor, lessee, sublessee Equitable interest A real right, but not a legal right, in a property. You do not own the property but you have the right to possess, use, to the fruits of the property. Examples are the lessees of a building, tenant of a land.  Persons who have insurable interest arising from equitable title: Purchaser of property before delivery; mortgagor after foreclosure but before the expiration of the redemption period; judgment debtor whose property has been seized under execution until the right to redeem. Inchoate interest Generally property interests, that are likely to vest but have not yet actually done so. The inchoate interest usually is dependent on an event occurring that triggers the interest, such as a relative's death triggering an inheritance. You have an insurable interest over an inchoate interest for as long as it is founded on an existing interest.  A stockholder has an inchoate interest in the property of a corporation of which he is stockholder, which is founded on an existing interest arising from his ownership of shares in the corporation. His insurable interest is limited to the extent of the value of his interest in the distribution of the corporate assets upon dissolution. An expectancy Must be coupled with an existing interest in that out of which such expectancy arises.  A farmer may insure future crops if they are to be grown on land owned by him, or although the crops are to be raised by him on the land of another provided the crops will belong to him when produced.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 51

Societas Spectra Legis Insurance

SECTION 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 carrier or depository The loss of the thing may cause liability to the carrier or depositary to the extent of its value. SECTION 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 A mere 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 insurance 1) Property of father/son/spouse – A father cannot insured his son’s property nor can the son insure the property that he expects to inherit from his father as his interest is merely an expectancy of inheriting. 2) Property of debtor – Nor can a general or unsecured creditor insure specific property of his debtor who is alive, even though destruction of such property would render worthless any judgment he might obtain.  But an unsecured creditor may insure the property of a deceased debtor since all personal liability ceases with the death of the debtor. The proceedings to subject the estate to the payment of the debt of the deceased debtor are in rem.  An unsecured creditor who obtains a judgment in his favor becomes a judgment creditor and has an insurable interest in the debtor’s property has he has a right to levy on such property.  An unsecured creditor has an insurable interest in the life of the debtor to the extent of the amount of the debt. 3) Property of testator still alive – One named as beneficiary in a will has no insurable interest in a property designated before the testator’s death. His expectation has no legal basis since the will has no legal effect before the death of the testator. The will can be revoked at any time before the death of the testator unless he has expressly waived this right in the policy in which case the beneficiary will have insurable interest. X purchased a house under a contract to sell. The contract provides that no transfer shall be made until and unless the buyer pays the entire amount. X was able to sell 80% of the contract price. Can X insure the property? Yes, because every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest. In property insurance, although a person has no title, legal or equitable to such property, he may still insure said property for as long as he is situated with respect to the property that he will suffer loss as the proximate result of its damage or destruction.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 52

Societas Spectra Legis Insurance

SECTION 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. Measure of insurable interest in property To the extent to which the insured might be damnified by loss or injury thereof. Otherwise, the insurance contract would be in a nature of a wagering policy. The purpose of property insurance is to indemnify a person against his ACTUAL loss and not to wager on the happening of the event.  A person who insures his property valued at P100,000 for P120,000 and suffers a total loss, is only limited to recover his actual loss P100,000, the value of his house and not the whole amount of P120,000 which represents the maximum limit of recovery of the insurer. SECTION 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. Can a property insurance be taken for the benefit of any other person, even if that person has no insurable interest? No because 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 in the property insured 1) Principle of indemnity applicable – An insurance taken out of a person on property in which he has no insurable interest is void.  Where the insurance is invalidated on the ground that no insurable interest exists, the premium is ordinarily returned to the insured unless he is in pari delicto with the insurer. Measure of indemnity in insurance contracts 1) Contracts of marine or fire insurance – The amount of insurance fixed in the policy is not the exact measure of indemnity to which the insured is entitled, but the maximum indemnity which he might obtain. The insured cannot recover in excess of his actual loss.  In valued policies – the valuation of the thing insured is conclusive between the parties in the adjustment of loss. 2) Liability insurance contracts – They are considered contracts of indemnity against liability and not against loss. The insured’s promise is to pay the proceeds of the policy on behalf on the insured to a third person to whom the insured is liable. If the insured suffers no loss because his liability to the third person, for some reason, cannot be enforced the insurer has no obligation to pay the proceeds. 3) Life insurance contracts – They are not contracts of indemnity. It is simply the measure of indemnity which the insurer has bound himself to pay the insured. Life insurance is more of an investment than indemnification protection against loss.  Except when the creditor insures the life of his debtor.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 53

Societas Spectra Legis Insurance 4) Personal accident insurance contracts – They are not contracts of indemnity. Life and limb are not susceptible to exact or uniform valuation. 5) Health insurance – those that cover medical expenses are contracts of indemnity. SECTION 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 thereafter or when the loss occurs. You are the owner of the said property, you lease the property to X, and then you took an insurance and you assign the proceeds, if ever the building will be gutted by fire, to the lessee because the lessee also has insurable interest, is that allowed? No because an interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime. The person having insurable interest, should that person be the same as the insured and the beneficiary? Yes And can the insured designate a beneficiary in property and life insurance? In property insurance the beneficiary must have an insurable interest at the time of the loss whereas in life insurance the beneficiary may or may not have an insurable interest when the loss occurs. X planned to purchase a house, before buying the same house he insured the same and thereafter was able to purchase the house. The house was totally destroyed, can he claim the proceeds? No because X didn’t have an interest in property insured when the insurance took effect. If he cannot get the proceeds, what about the premium that he paid? It will be returned to him X owns stocks, and the stocks were inside the building. The contract with the insurer was to insure the stocks against any harm, danger or peril. Unfortunately the contract says it’s the building that was insured and not the stocks. X tried to claim the insurer said no, I cannot release the proceeds because according to the contract it was the building that was insured and not the stocks. Can X claim? He can claim because of the error committed. X insured life of his wife, thereafter he had a quarrel, to spite his wife, they annulled. Can the wife if husband dies claim the proceeds even if annulled? Yes because insurable interest in life insurance need only exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 54

Societas Spectra Legis Insurance X insured life of debtor for P 1million, the debtor paid him 1million pesos. Thereafter, the debtor died. Can X claim proceeds of insurance? Yes because in life insurance the insurable interest requirement is satisfied if the interest exists at the time the policy took effect even if it ceased to exist at the time of the insured’s death. X Partnership insured life of one of the partners, thereafter one of the partners resigned. Thereafter died, can partnership claim proceeds? Yes because he had a insurable interest at the time the insurance took effect. X unsecured creditor, insured life of his debtor, thereafter debtor died. Can he claim? Yes Distinction Between Insurable Interest In Life And Property 1) As to extend of insurable interest – Insurable interest in life is unlimited whereas in property it is limited to the actual value of the interest. 2) As to time when insurable interest must exist – In life insurance it is enough that it exists at the time the policy took effect whereas in property insurance that insurable interest must exist when the insurance takes effect and when the loss occurs but need not exist in the meantime. 3) As to expectation of benefit to be derived – In life insurance, the expectation of benefit to be derived need not have a legal basis whereas in property insurance, the expectation of benefit has have a legal basis. SECTION 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 unaccompanied by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person. Effect of change of interest The mere transfer of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured. 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 It must be an absolute transfer of the property insured such as the conveyance of the property by means of an absolute deed of sale.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 55

Societas Spectra Legis Insurance Exceptions to the general rule 1) In life, health and accident insurance 2) A change of interest in the thing insured after the occurrence of an injury which results in a loss. 3) A change of interest in one or more of several things, separately insured by one policy 4) A change of interest by will or succession on the death of the insured 5) A transfer of interest by one of several partners, joint owners who are jointly insured, to the others 6) When a policy is so framed that it will inured to the benefit of whomsoever. 7) When there is an express prohibition against alienation, the contract is avoided. SECTION 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 loss After a loss has happened, the liability of the insurer becomes fixed. The insured has a right to assign his claim against the insurer. This right is absolute and cannot be delimited by agreement. The insured also has the right to transfer the thing insured after the occurrence of the loss. Such change of interest does not affect his right to indemnity for the loss. SECTION 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 by one policy 1) Effect dependent on divisibility of contract – If the things are separately insured in one policy the contract is divisible and the violation of a condition which avoids the policy with respect to one or more of the things does not affect the others. On the other hand, if the things are insured under one policy for a gross sum and for an entire premium, the contract is indivisible so that a change of interest in one or more of the things will also avoid the insurance as to the others. X insured his house for P200,000 and his vehicle insured for P300,000 under a divisible insurance. X sold his vehicle to Y. The house thereafter was gutted by fire. Can X claim the proceeds? Yes, the sale of the car will not affect the insurance of the car. The car was lost after X sold it to Y. Can X still claim the proceeds? No because at the time of the loss X no longer has insurable interest over the car. How about Y, can she claim the proceeds? No because at the time the insurance policy took effect, she did not have an insurable interest over the car, unless there was also a transfer of the policy at the time X sold the car to Y.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 56

Societas Spectra Legis Insurance SECTION 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 interest in the thing insured. The rights to succession are transmitted from the moment of the death of the decedent. X insured his house. X died and became an extra in the walking dead. Thereafter the house was gutted by fire. May the heir claim the proceeds? Yes because the change of interest in the house by the death of X does not affect the insurance because it is likewise transferred to his heirs who may collect on the policy should the house be burned later on even before he could transfer the insurance policy under his name. SECTION 24. A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured. Each partner is interested in the whole property and the hazard is not increased because the purchasing partner has acquired a greater interest in the property. No new party is brought into contractual relationship with the insurer. Effect where transfer to strangers It will avoid the policy. A sale by a partner of his insurable interest to a stranger ends the contract of insurance as to him but does not affect the insurance as to the others. SECTION 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 wagering, is void. Stipulations that are prohibited in an insurance policy 1) Stipulation of the payment of loss whether the person insured has or has not interest in the subject matter of the insurance – is a mere wager policy and is void. 2) Stipulation that the policy shall be received as proof of insurable interest – it is void because whether or not insurable interest exists does not depend upon the contract of insurance.  The defense of absence of insurable interest is available only to the insurer being the only party to the insurance contract who has a legitimate interest in raising the defense. It may be raised by and for the benefit of the insurer alone. Wager policy A pretended insurance where the insured has no interest in the thing insured and can sustain no loss by the happening of the misfortunes insured against.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 57

Societas Spectra Legis Insurance Wagering policy or gaming policies void 1) A mere bet upon the future – such policies have a tendency to create a desire for the event and furnish strong temptation to the party interested to bring about if possible the event insured against. 2) Non-existence of loss from occurrence of event – Wagers suffer no loss from the occurrence. On the contrary, they actually profit from it. The insurable interest requirement intends to deter the insured from the temptation to bring about by unnatural means the results of the contingent event.

CONCEALMENT SECTION 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment. Different devices for ascertaining and controlling risk and loss 1) Concealment 2) Representations 3) Warranties 4) Conditions 5) Exceptions Requisites for concealment 1) A party knows the fact which he neglects to communicate to the other. 2) Such party concealing is duty bound to disclose such fact to the other. 3) Such party concealing makes no warranty of the fact concealed 4) The other party has no means of ascertaining the fact concealed. Where a warranty made of the concealed, the non-disclosure of such fact is not concealment but constitutes a violation of warranty. SECTION 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. Effect of concealment 1) By the insured – makes the contract voidable at the insurer’s option. It is not limited to material facts which the applicant knows, but extends to those which he ought to know, they being necessary for the insurer to evaluate the risk, either to charge a higher premium or to refuse to issue a policy. 2) By the insurer – imposed with equal stringency upon the insurer since his dominant bargaining position carries with it stricter responsibility. Give an example where the insurer is guilty of concealment whereby the insured is entitled to rescind the contract The insured wanted to insure himself for P500,000. The insurer assessed him of certain premiums. It turned out such insurer has no asset and cannot pay the amount. This entitles the insurer to rescind the contract and recover the premium he paid to the insurer. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 58

Societas Spectra Legis Insurance Proof of fraud in concealment The insurer need not prove fraud because it would be impossible for an insurer to show actual fraud except. The duty of communication is violated by the fact of concealment, even when there is no design to deceive. Test for concealment Whether the insurer was misled or deceived into entering a contract obligation by a withholding of material facts within the assured’s knowledge or presumed knowledge. X was not aware of his illness. X, in his application, he wrote that he was fully fit. The insurer did not bother to verify the data supplied by X. However, in reality, X suffers from a medical condition. His application was eventually approved. Is there concealment? No because there was no knowledge on the part of X that he is suffering from a certain illness. In concealment, it’s the failure to communicate a material fact which such party knows and ought to communicate. SECTION 28. Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining. Matters that must be communicated even in the absence of an inquiry All facts : 1) which are material to the contract. 2) the other party has no means of ascertaining 2) which the other party with the duty to communicate makes no warranty. Test used If the applicant is aware of the existence of some circumstances which 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 insurer to verify The effect of material concealment cannot be avoided by the allegation that the insurer could have known and discovered the illness or disease which the insured had concealed. The insurance company has the right to rely on the statements of the insured as to material facts such as his previous sickness, for he knows the facts, and the matter is not one of which disclosure is excused by the law. X insured his building and he said that it is a sari-sari when it truth and in fact it was a warehouse for LPG. The insurer did not verify. Can it be rescinded? Yes because X knows for a fact that his warehouse is not a sari-sari store. Thus, he is liable for concealment.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 59

Societas Spectra Legis Insurance SECTION 29. An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entitles the insurer to rescind. When fraudulent intent necessary in concealment When the concealment relates to the falsity of a warranty. The non-disclosure under SECTION 29 must be intentional and fraudulent in order that the contract may be rescinded. Give an example In every marine insurance, there is implied warranty that the ship is seaworthy. The fraudulent omission on the part of the insured when applying for a policy to communicate information that his ship is in distress 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 is seaworthy. SIR: You enter into a fire insurance contract. You make a warranty in the contract that during the coverage of the policy you will only use the building as your residential house. If you violate that policy, the insurer can rescind the contract. In this case, you also concealed a material information because you knew for a fact that when the policy took effect the house was also used for business. Had you told the insurer that you also use the house for business, they would have charge you for a higher premium because the house will be subject to more risks. In this case, there is a material concealment because he did not divulge to the insurer that the house is not exclusively used for residential purposes. Worse, you made a warranty that such house will be used only residential purposes. The facts he concealed has a connection with his warranty. Therefore, the insurer may rescind the contract either because of the concealment or fraudulent concealment. SECTION 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: (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 communication; (d) Those which prove or tend to prove the existence 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 As a general rule, matters made the subject of inquiry must be deemed material, even though otherwise they might not be so regarded. When there is no need to make a disclosure See SECTION 30 above.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 60

Societas Spectra Legis Insurance SECTION 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 Test of materiality Whether the knowledge of the fact would influence the parties in making the contract. Example: X insured his house against fire but he did not disclose the fact that he received 2 letter threatening to set his house on fire if he did not pay P1 billion to the sender. X’s house was destroyed by an accidental fire. The insurer can deny liability for the loss. From the standpoint of the insurer A fact is material if the knowledge of it would have a probable and reasonable influence upon the insurer in assessing the risk involved and in making or omitting further inquiries, and cause him to either reject the risk or to accept it only at a higher premium rate or on different terms. Effect if insurer does not require medical examination The waiver of the insurance company of medical examination renders more material the information required of the applicant concerning the previous condition of health and disease suffered . When concealment regarded as intentional When the nature of the facts not conveyed to the insurer may be such that the failure of the insured to communicate must been intentional rather than inadvertent.  The withholding of the applicant of the fact that his daughter is suffering from down syndrome. Such fact which is material to the contract could never be disguised in supplying essential data for the insurance application form. Where fact concealed not material When such fact would not have affected the decision of the insurer. Time when information acquired 1) After contract has become effective – Concealment must take place at the time the contract is entered into in order that the policy will be avoided and not afterwards. The duty of disclosure ends with the completion and effectivity of the contract. 2) Before contract becomes effective – In life insurance, the applicant is under a duty to disclose to the insurer changes in his health coming to his knowledge between the date of submitting his application and the date the policy is delivered.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 61

Societas Spectra Legis Insurance SECTION 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 perils contemplated; and all general usages of trade. Matters each party bound to know The insured need not communicate public events such as that a nation is at wars or the laws and political conditions in other countries. Likewise, the insurer is charged with the knowledge of the general trade usages and rules of navigation, kinds of seasons and all the risks connected with navigation. SECTION 33. The right to information of material facts may be waived, either by the terms of insurance 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 information may be waived Either expressly, by the terms of insurance, or implied, by the neglect to make inquiry as the facts already communicated.  In an answer to a question, the insured communicated to the insurer that he had once stayed in a hospital. The insurer did not inquire as to the cause of the confinement. In this case, there is an implied waiver on the part of the insurer.  But there is no waiver where the failure of the insurer to make further inquiries was due precisely to concealment on the part of the insured. SECTION 34. Information 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 SECTION 51. Disclosure of nature and extent of the interest of the insured Under SECTION 51, it is required that a policy of insurance must specify the interest of the insured if he not the absolute owner of the property in order that the insurer may determine the extent of the insured’s insurable interest.  There is no need to disclose the interest in the property if the insured the owner thereof. SECTION 35. Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. Disclosure of judgment upon the matters in question The duty to disclose is confined to facts. Hence, there is not duty to disclose mere opinion, speculation, intention or expectation.  Suppose the insurer asks the insured, “How long do you think you will live?” The insured need not answer the question.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 62

Societas Spectra Legis Insurance

REPRESENTATION SECTION 36. A representation may be oral or written. 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 a past or existing fact or state of facts, or concerning a future happening, to give information to the insurer and otherwise induce him to enter into the insurance. Misrepresentation A statement 1) as a fact of something which is untrue, 2) which the insured stated with knowledge that it is untrue and with an intent to deceive, or which he states positively as true without knowing it to be true and which has a tendency to mislead, and 3) where such fact in either case is material to the risk. Such misrepresentation by the insured renders the insurance contract voidable at the option of the insurer, even though innocently made and without wrongful intent. When representation becomes a misrepresentation When factually untrue and the insured knew at the time when he made such representations that it is untrue and he has intent to deceive. Intended as collateral inducements Representations are made to influence the insurer to accept the risk. They are not a part of the contract unless expressly made so. SECTION 37. A representation may be made at the time of, or before, issuance of the policy. Time when representation may be made It precedes the execution of the contract. The insurer must be induced by the misrepresentation of the applicant for the insurance to issue the policy at a specified premium. SECTION 38. The language of a representation is to be interpreted by the same rules as the language of contracts in general. Construction or representations Representations are construed liberally in favor of the insured and are required to be only substantially true. Warranties by contrast must be literally true or the contract will fail. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 63

Societas Spectra Legis Insurance 

In a question are you afflicted with a disease, the insured stated no even if he suffered a 1 day fever. Is there a misrepresentation? No because there is no material representation.

SECTION 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 representation A representation may be: 1) oral or written 2) made at the time of issuing the policy or before 3) affirmative or promissory Affirmative representation Any allegation as to the existence or non-existence of a fact when the contract begins. Promissory representation Any promise to be fulfilled after the contract has come into existence. Nature of promissory representations 1) It is used to indicate an oral promise made in connection with the insurance but not incorporated in the policy. 2) An undertaking by the insured, inserted in the policy, but not specifically made a warranty. Effect on policy of expression of opinion or expectation 1) Good faith/bad faith of the insured – a representation of the expectation, intention, belief or opinion of the insured although false, will not avoid a policy if there is no actual fraud in inducing the acceptance of the risk or its acceptance at a lower premium. 2) Liability of the insurer – To avoid liability, the insurer must prove both the materiality of the insured’s opinion and the latter’s intent to deceive. If the representation is one of fact, all the insurer need to prove is its falsity and materiality. The intent to deceive is presumed.  In response, to a question an applicant for a motor vehicle insurance replied: “I am a good driver”. The statement is not fraudulent as it is merely made an expression of opinion. But if in fact the applicant does not know how to drive, he is guilty of fraudulent misrepresentation of material fact. When representation deemed a mere expression of opinion An oral representation as to a future event over which the insured has no control with reference to property or life insured, will be deemed a mere expression of opinion.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 64

Societas Spectra Legis Insurance SECTION 40. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty. Effect of representation on express provisions of policy A representation cannot qualify an express provision or an express warranty in a contract of insurance. This is because a representation is not part of the contract but only a collateral inducement to it. However, a representation may qualify an implied warranty. The policy says that the vessel is a passenger vessel. During the execution the insured represents that the vessel is used as a cargo vessel. Thereafter, the vessel sank while traversing the high seas. Can the insurance company deny? No because such representation cannot qualify an express provision written in the insurance policy. X claims during the execution of the contract that his vessel is a fire hazard. Take note that in marine insurance, there is an implied warranty that the vessel is seaworthy. Thereafter, the vessel caught fire in the middle of the voyage and sank. Can the insurer deny the proceeds? No because such representation has already qualified the implied warranty that the vessel is seaworthy. SECTION 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards. When representation may be altered or withdrawn 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. SECTION 42. A representation must be presumed to refer to the date on which the contract goes into effect. Time to which representation refers Only to the time of making the contract. There is no false representation, if it is true at the time the contract takes effect although false at the time it was made and vice versa, there is false representation if it is true at the time it was made but false at the time the contract takes effect. X applied for an insurance policy. He claimed that he is not afflicted with any disease. The day after he suffered a heart-attack. On the next day, the policy was delivered to him. Still he did not inform the insurer. Is he guilty of misrepresentation? Yes.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 65

Societas Spectra Legis Insurance SECTION 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 responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information. Effect where information obtained from third persons If the representation turns out to be false, he is not responsible provide he gives explanation that he does so on the information of others. The insured is not responsible for the truth of the information.  If Superman has no personal knowledge of the cause of the death of his parents because they died when he was still infant, he may report such information obtained from Lex Luthor and Batman, expressly stating that he does not possess knowledge personally but though others. Effect where information obtained from agent of insured/insurer 1) Agent of the insured - the insured will be liable for the truth if the agent has the duty to communicate such information to the principal and it was possible for the agent under such circumstances in the exercise of due diligence to have made such communication before making the contract. 2) Agent of the insurer – same principle applies. SECTION 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations. When representation deemed false When the representation relied upon is false in substantial and material respect. When representation considered substantially true A representation is substantially true when it is true in every material particular to the risk, or is so far that the conduct of the insurer would not have been different if the exact truth had been alleged.  In marine insurance, substantial truth of a representation is not sufficient. The insured is required to state the exact and whole truth because the 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 when such form as to admit of its being 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.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 66

Societas Spectra Legis Insurance SECTION 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. Effect of falsity of representation Entitles the injured party to rescind a contract of insurance on the ground of false representation. To be deemed false, it is sufficient if the representation fails to correspond with the facts in a material point. Representations of fact are the foundation of the contract. Effect of collusion of fraud of agent of insurer 1) Collusion with insured – collusion between the agent and the insured in misrepresenting the facts will vitiate the policy even though the agent is acting within the apparent scope of his authority. The agent thereby ceases to represent his principal, and represents himself, so the insurer is not estopped from avoiding the policy. 2) Principal agent – likewise, where the insured merely signed the application form and made the agent of the insurer fill the same for him, the insured made the agent of the insurer his own agent, thereby vitiating the policy. SECTION 46. The materiality of a representation is determined by the same rules as the materiality of a concealment. Test of materiality The materiality of the representation is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries. Materiality, a judicial question It is not left to the insurance company to determine the materiality of the representation. The matter represented must of that character which the court can say would affect the insurer’s judgment.

Concealment and misrepresentation compared 1) As to the facts, in concealment the insured withholds the information of material facts from the insurer whereas in misrepresentation, the insured makes the erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract. 2) As to the determination of the materiality, both are governed by the same rules. 3) As to the effect, concealment and misrepresentation on the part of the insured gives the insurer a right to rescind the contract. 4) Whether intentional or not, the injured party is entitled to rescind a contract of insurance on the ground of concealment or false representation.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 67

Societas Spectra Legis Insurance SECTION 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 previous 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 (2) 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 rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent. When an insurance must exercise his right to rescind 1) In general - In a property insurance, you have to plead to the court of your intention to rescind the insurance contract before the insured files an action to collect the proceeds of such insurance. Once the insured has filed an action to collect the amount, you are no longer allowed to rescind such contract. However, in that same action file by the filed by the insured, you may raise it as a matter of defense that the insured has violated the rules on concealment, representation or warranty, etc. 2) In life policy – The defenses are available only during the first two (2) years of a life insurance policy. Incontestability of life policies The policy shall be incontestable after a stated period. Incontestability means that after the two years from the date of its issue, the insurer shall be estopped from contesting the policy or setting up any defense, except as is allowed, on the ground of public policy. Theory and object of the incontestable clause 1) As to the insurer – an insurer should have a reasonable opportunity to investigate the statements which 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 defense to a suit brought on the life policy by the beneficiary. 2) As to the insured – the clause gives the greatest possible assurance to a policyholder that his beneficiary would receive payment without question as to the validity of the policy once the period of contestability passes. Requisites for incontestability 1) the policy is a life insurance policy 2) it is payable on the death of the insured 3) it has been in force during the lifetime of the insured for at least two (2) years from its date of issue or of its last reinstatement. The period of 2 years may be shortened but it cannot be extended by stipulation. The phrase “during the lifetime” simply means that the policy is no longer considered in force after the insured has died. Defenses not barred by incontestable clause 1) that the person taking the insurance lacked insurance interest as required by law. 2) the cause of the death of the insured is an excepted risk. 3) the premiums have not been paid. 4) the conditions of the policy relating to military or naval service have been violated University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 68

Societas Spectra Legis Insurance 5) the fraud is of a particularly vicious type, as where the policy was taken out in furtherance of a scheme to murder the insured. 6) the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened. 7) the action was not brought within the time specified. SECTION 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance.  It must be in the form previously approved by the Commissioner. It can be in electronic form, subject to the Electronic Commerce Act. Q: Supposing you applied for an insurance. The insurance company send you a policy through email, and the insurer also appended to such email, his electronic signature, saying, “This is a copy of the policy”. Is that allowed? A: Yes. For as long as, it is subject to the pertinent provisions of the Electronic Commerce Act, which provides for, how to authenticate an electronic document or evidence. One of the manner in authenticating is an electronic signature on the part of the person sending it.

 It is signed only by the insurer or his duly authorized representative. It need not be signed by the insured, EXCEPT where express warranties are contained in a separate instrument forming part of the policy.  Policy is a measure of insurer’s liability, it’s terms constitute the measure of the insurer’s liability, and in order to recover, insured must show himself within the terms.  Policy is a contract of adhesion. o Contract of Adhesion – is a description of the manner by which the contract is formed. Where one party having superior bargaining power, imposes its choice of terms on the other party. o According to Prof. Williston, “Insurance contracts are drafted with the aid of skillful and highly paid legal talent, from which no deviation desired by an applicant will be permitted. The underwriter is magnificently qualified to understand and protect its own selfish interests, while the applicant is short lamb driven to accept whatever the contract may be offered on a take-it or leave-it basis. o Here, although the insured can choose from a variety of coverages, he cannot negotiate the substance with the insurer. o A contract of insurance which is a contract of adhesion is perfectly valid contract. However if the language used in an insurance contract is to create ambiguity, the same should be resolved liberally in favor of the insured and strictly against the party responsible. o It is a cardinal principle of law that forfeitures are not favored, and that any construction which would result in forfeiture of the benefits of the policy will be avoided, if it is possible to construe the policy in a manner which would permit recovery. o However when the terms are clear and unambiguous and there is no room for construction, such terms cannot be enlarged or diminished by judicial construction.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 69

Societas Spectra Legis Insurance  Policy of insurance is different from the contract of insurance. The policy is the formal written instrument evidencing the contract of insurance, entered into by the insured and the insurer. The contract of insurance, is the law between them.  Under SECTION 226, no policy shall be issued or delivered in the Philippines, UNLESS in the form previously approved by the Commissioner. It must be evidenced by a POLICY and it MUST BE IN THE FORM PREVIOUSLY APPROVED BY THE COMMISSIONER..  It must be in a printed form, any word, phrase, clause, or word necessary to complete the contract of insurance shall be written on the blank spaces provided in the policy.  In case of conflict between the written and printed portions of the policy, the written portion prevails. o Q: X applied for an insurance contract and paid the premium thereof, after lapse of 1 year, still no acceptance was made. Thereafter X died, can the beneficiaries still claim the proceeds of the insurance? A: No. If an application for insurance has not been either accepted or rejected by the insurer, there is no contract yet as it is merely an offer or proposal. The contract is not perfected where the applicant dies before its approval or it does not appear that the acceptance of the application ever came to the knowledge of the applicant.  A contract of insurance must be assented to by the parties, either in person or by their agents. Consent is manifested by meeting of the minds and acceptance of the thing and cause which constitute the contract. o The mere signing of an application for life insurance and payment of premium, do not bind the insurer to issue a policy, where there is no evidence of contract between them. o The application may be so drafted that the insurance became effective on its signing by the prospective insured and the parties are bound by its terms for which application is made, until it is terminated by the rejection. (Cover Note) o The contract to be binding from the date of application, must be a completed contract one that leaves nothing to be done before it shall take effect. o Parties may impose additional conditions precedent to the validity of the policy. Usual conditions is that the CONTRACT IS NOT BINDING until, POLICY IS DELIVERED AND PREMIUM IS PAID.  Cover note, is one that is issued to bind the Insurance temporarily pending the issuance of the policy.  Who makes the offer and who accepts the offer? o In property and liability insurance, it is the insured who technically makes an offer to the insurer, who accepts the offer, rejects it or makes a counter-offer. It is usually accepted by an insurance agent on behalf of the insurer. o In life and health insurance, it depends:  If the insured does not pay the premium, his application is considered an invitation to the insurer to make an offer.  If the insured pays the premium, his application will be considered as an offer.  Life and health insurance agents, do not have authority to bind immediately the insurers they represent. Instead, they customarily issue a binding receipt. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 70

Societas Spectra Legis Insurance  Binding receipt, issued to make the coverage effective on the 1.) date of the application or 2.) the date of medical examination. It is a conditional acceptance by the insurer. o Q: Supposing you applied for a life insurance policy, in addition you paid the premiums, that is considered as offer. Thereafter the insurer issues in your favor an insurance policy, is that considered as an acceptance of your offer? A: Yes that is considered acceptance of the offer, if there are no issues at all with respect to the terms and conditions of your application and the terms and conditions in the insurance policy. However if there is a variance in the application and the issued policy, it is not considered as acceptance even if a policy is issued in your favor.  Delivery, is the act of putting the insurance policy (physical document) into the possession of the insured.  It is important in 2 ways: o As evidence of making the contract and its terms o As communication of the insurer’s acceptance of the insurer’s offer. Another thing: o Determination of the policy period. E.g. Policy provides that coverage terminates 1 year after delivery.  Delivery is also significant, as it is the decisive act that ordinarily marks the end of the insurer’s opportunity to decline the coverage.  The delivery of the policy is not a prerequisite to a valid contract of insurance. The contract may be completed prior to delivery of the policy or without delivery of the policy, depending on the INTENTION OF THE PARTIES. Atty S: In contract of insurance it is necessary that there is meeting of the minds between the insured and the insurer. I offer, “Mr. Insurer here is the premium, etc..” The insurer will have to accept that, in order for there to be a valid contract of insurance. But it does not end there, that acceptance must be communicated to the insured. In that case of ENRIQUEZ (Sun Life), that’s the means of communication of acceptance – the delivery of the policy itself. Such that prior to the delivery, he did not know that there was already an acceptance, because he transferred his residence. Considering that there is no meeting of minds, no valid contract of insurance. It would have been different if, the insurer after making an application, would tell you, “Yes your application is now approved Mr. Offeror, signed insurer, lovingly yours. In that case there is already a valid contract of insurance. Such that even if the insurer is yet to deliver, the contract is already perfected. In effect, delivery, it’s not really material in order for you to have a valid contract of insurance. It becomes material, if that delivery is the means of communicating the acceptance on the part of the insurer.  Modes of delivery: o Actual Delivery o Constructive Delivery  Q: X applied for an insurance and paid for the premium. It was approved by insurer and the policy was transmitted to the insurance agent. Before it is delivered to the insured, the latter died. Can the beneficiary claim for the proceeds?

A: There are two views: University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 71

Societas Spectra Legis Insurance o o

1st View, That the beneficiaries cannot recover, because the insurance agent is not the insured’ 2nd view. That the beneficiaries can recover, because the insured having complied every condition required of him, actual delivery to him is not essential t give the policy a binding effect. Moreover, it would be financially unfair to the beneficiary where the amount of premium is computed from the date of application, in effect insured paid premium for a period during which he did not receive any protection.

o

Atty S: Whether or not there is already meeting of minds. If there is, such that the insurer already knew that the contract of insurance is already approved even if its in the hands of the agent, HE CAN RECOVER. Under present jurisprudence, acceptance on the part of the insurer has to be communicated to the insured. E.g. the insurer transmits the policy to the agent, then the insurer contacted the insured telling him that, “Mr. Insured, I have accepted.”

 Where delivery is conditional, the non-performance of the condition precedent, prevents the contract from taking effect.  If the delivery is unconditional, the delivery consummates the contract and the policy delivered becomes the final contract between the parties. o Where premium is still unpaid after unconditional delivery, the insurer cannot be presumed to have extended credit from the mere fact of unconditional delivery of the insurance without prepayment of the premium. SECTION 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 insurance shall be written on the blank spaces provided therein. “Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and written on the blank spaces provided in the policy. “Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement. “Notwithstanding the foregoing, the policy may be in electronic form subject to the pertinent provisions of Republic Act No. 8792, otherwise known as the ‘Electronic Commerce Act’ and to such rules and regulations as may be prescribed by the Commissioner”  Rider, is a small printed or typed stipulation contained in a slip of paper attached and forming an integral part of the policy. It constitutes additional stipulations between the parties. It is necessary in the conduct of insurance business to add, modify, waive or make a desired change in the policy, saving the trouble and expense of making an entirely new contract.  In case of conflict between rider, etc. and printed stipulations of a policy, the Rider prevails, as being a more deliberate expression of the contracting parties. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 72

Societas Spectra Legis Insurance  A rider, slip or other paper becomes part of a contract or policy of insurance if properly and sufficiently attached or referred therein as to leave no doubt as to the intentin of the parties.  Effect of Lack of description, any rider, clause, warranty, or endoresement (RCWE), purporting to be a 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 (RCWE) is mentioned and written on the blank spaces provided in the policy.  Effect of Lack of signature, if the RCWE which is physically attached contemporaneously with the execution of the policy, and delivered to the insured and sufficient referrence is made in the policy, the fact that it is WITHOUT the signature of the insurer or of the insured will NOT prevent its inclusion and construction as part of the insurance contract. SAME RULE APPLIES: Where RCWE, although issued AFTER the original policy, was applied for the insured or owner. EXC: Countersignature of the insured is required to any RCWE, which is not applied for by him.  Warranty, are inserted or attached to a policy to eliminate specific potential increases of hazard during the policy term, owing to 1.) actions of the insured or 2.) conditions of the property.  Clause, agreement between the insurer and the insured on certain matter relating to the liability of the insurer. E.g. “liability of the insurer will not exceed ¾ of the loss”  Endorsement, any provision added to an existing insurance contract altering its scope or application. E.g. “Permit authorizing removal of the insured property and providing coverage for another location.”

Effect of Failure of the insured to read the policy  Majority Rule, acceptance is not negligence per se, that the insured’s acceptance and retention of the policy is not laches as will defeat his right to reformation. The basis being that insurance contracts are contracts of adhesion and not of bargaining, that insured purchases the contract prepared solely by the insurer.  Minority Rule, that the insured has the duty to read his policy and is bound by his contract as written whether he reads it or not. EXCEPTIONS TO THE MINORITY RULE: o It is obvious that insurer cannot complain of the failure of the insured to read, where insured could not have discovered the erroneous statements b such reading. o Insured is induced by fraud of the agent of the insurer not to read his policy. o The insured is illiterate or unable to read. o In settings where the contracts are long, complicated, and difficult to understand, that even if read, it may not be reasonable to expect people to take time to read, before manifesting intent to be bound by them.  Better View: MINORITY RULE, the law is already in the insured’s favor, in giving liberal construction to him and strictly construing it against the party who caused the ambiguity. Likewise, the contract is the law between the contracting parties. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 73

Societas Spectra Legis Insurance Insurer’s duty to explain his policy GR: Where terms of policy are clear and unambiguous, the insurer has no affirmative duty to explain the policy or its exclusions to the insured. EXC: It is subject to important caveats: o o

o

o

Reasonable expectations of insured – or so called “doctrine of reasonable expectations”, operates to impose a de facto duty to the insurer to explain the policy’s coverage to the insured. Options available to insured – esp. in motor vehicle insurance, where law made certain kinds of coverage optional, courts have imposed a duty on the insurer to explain the options to the insured. Information expected by insured from insurer’s agent – agents owe their customers a duty to exercise the skill and care that a reasonable agent would exercise in the circumstances. E.g. explaining to the customer kinds of coverage and helping the insured to choose the appropriate coverage. Contractual rights of insured after denial of coverage – when insured disputes

Atty. S: As to whether terms of the policy are clear or unambiguous, these are Factual Issues that is left to be determined with the best discretion of the trial court. SECTION 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 character where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final premium 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.”  Names of the parties is essential in all contracts. The fact the name of the insured was incorrectly misspelled is of no importance, provided that the identity of the party can be sufficiently established.  Amount of the insurance is necessary to determine the amount of indemnity to be paid to the insured, in case of loss or damage, especially if it is only partial. To provide a maximum limit of insurer’s liability for loss or damage suffered by the insured. o Automatic increase, increase of insurance coverage shall depend upon the happening of an event. o Deductible, is the stated amount to be deducted from any loss, which is shouldered by the insured making the insurer liable for the excess.  Premium is essential considering that it represents the consideration of the contract. The rates are developed on the basis of the nature and character of the risk assumed. o Life insurance, based on average lifespan of a person o Fire insurance, e.g. structure, construction, loss-prevention or protection facilities.  Property or life insured is essential as it constitutes the subject matter of the contract.  Interest of insured in property, is essential to determine the actual damage suffered by the insured in case of loss of the property covered by the policy. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 74

Societas Spectra Legis Insurance  Risk insured against is essential such that, the insurer is liable to indemnify the insured if it is the risk insured against.  Term or duration of insurance, is essential, such that the insurer would not be liable UNLESS it occurred during the duration of the insurance. o Life of the policy, period of time which insurer assumes the risk o Annual policies, policies issued for a term of 12 months o Short period policies, those issued for a lesser period. KINDS OF INSURABLE RISK 1. Personal Risk – those involving the person. It is chiefly concerned with the time of death or disability. 2. Property Risk – those involving loss or damage to property. a. Direct loss – e.g. caused by fire, flood, or other forces of nature b. Indirect loss – e.g. loss of profits, rents or favorable leases 3. Liability Risk – those involving liability for injury to the person or property of others. Sometime’s called “third party risk”.  Risk, the chance of loss, or the possibility of the occurrence of a loss.  Peril, the contingent or unknown event which may cause a loss.  Hazard, condition or factor, tangible or intangible, which may create or increase the chance of loss from any given peril. o Physical hazards, terms include everything relating to location, structure, occupancy, exposure, etc. o Moral hazards, those factors that have their inception in mental attitudes. REQUIREMENT OF RISK TO BE INSURABLE – not all risks are insurable 1. Importance, must be important enough to warrant existence of a contract. 2. Calculability, risk must permit reasonable statistical estimate. 3. Accidental Nature 4. No Catastrophic loss, large numbers of people must not be subject to the same kind of losses at the same time. 5. Definiteness, losses should be fairly definite as to cause, time, place and amount, otherwise, estimates of possible loss are difficult. o The above requirements are NOT ABSOLUTE, SECTION 52. Cover notes may be issued to bind insurance temporarily pending the issuance of the policy. Within sixty (60) days after issue of a cover note, a policy shall be issued in lieu thereof, including within its terms the identical insurance bound under the cover note and the premium therefor. “Cover notes may be extended or renewed beyond such sixty (60) days with the written approval of the Commissioner if he determines that such extension is not contrary to and is not for the purpose of violating any provisions of this Code. The Commissioner may promulgate rules and regulations governing such extensions for the purpose of preventing such violations and may by such rules and regulations dispense with the requirement of written approval by him in the case of extension in compliance with such rules and regulations.” University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 75

Societas Spectra Legis Insurance  Cover notes, also called “binder”, are short term insurance policies that may be issued to afford immediate provisional protection to the insured until the insurer can inspect or evaluate the risk in question and issue the proper policy. o Preliminary contract of present insurance, insurer insures the subject matter usually by binder or cover note, the contract to be effective until the formal policy is issued or the risk rejected. o Preliminary executory contract of insurance, insurer makes a contract to insure the subject matter at some subsequent time which may be definite or indefinite. Under such executory contract, the right acquired by insured, is merely to demand delivery of a policy in accordance with the terms agreed upon, and obligation of the insurer is to deliver such policy.

 Cover note is temporary in nature. The fact that no separate premium was paid on the cover note, does not militate against its binding effect.  Rules on Cover Notes o Insurance companies doing business in the Philippines may issue cover notes, to bind insurance temporarily, pending issuance of the policy o Cover note shall be deemed to be a contract of insurance o No cover note shall be issued UNLESS in the form previously approved by the Commissioner o If cover note is not cancelled, policy of insurance shall be issued within 60 days after issuance of such cover note. o GR: It can be extended or renewed beyond the period of 60 days, with written approval of the Insurance Commission. EXC: written approval may be dispensed with, upon certification of the president, vicepresident, or general manager of insurance company, that the risk involved, value of risk or premiums, have not yet been determined, and such extension is not contrary and for the purpose of violating provisions of the code. o Insurance companies may impose on cover notes a deposit premium equivalent to at least 25% of the estimated premium, but in no case less than 500.00. SECTION 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.  As against the insured, third persons have no right either in a court of equity or in a court of law to the proceeds of the policy, UNLESS there be some contract of trust, express or implied, between the insured and third persons.  As against the insurer, a third person, in the absence of any provision in the policy, has no right to proceeds thereof.  Contract pour atrui, contract between two parties, when there is a clear and express provision giving a benefit to a third person.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 76

Societas Spectra Legis Insurance SECTION 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 insured as agent or trustee, or by other general words in the policy.”  Insurance may be taken by a person personally or through his agent or trustee. Agent should indicate that he is merely acting in a representative capacity by signing as agent or by other general terms in the policy. SECTION 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 necessary that the terms of the policy should be such as are applicable to the joint or common interest.”  Insurable interest in property of a partnership exists in both partnership and partners.  A partner has an insurable interest in the firm property, which will support a policy taken for his own benefit.  If a partner insures partnership property in his own name, this limits the contract to his individual share UNLESS the terms of the policy clearly show that the insurance was meant to cover also the shares of other partners. He can insure the entire property of the partnership, if the terms are applicable to the joint or common interest. SECTION 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.”  The policy of insurance must specify the parties between whom the contract is made.  If the description of the thing insured is so general, it does not avoid the policy. Provided that the person claiming to be the insured could be clearly identified.  He must prove that 1.) he is the person named or described or 2.) he belongs to the class of persons comprehended in the policy. e.g. “For the owner” SECTION 58. The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured.”  A contract of insurance is a Personal Contract, it does not attach or run with the property insured.  A purchaser of property who does not take the precaution to obtain a transfer of the policy of insurance cannot, in case of loss, recover upon such contract, as the transfer has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as the property insured. SECTION 59. A policy is either open, valued or running. SECTION 60. An open policy is one in which the value of the thing insured is not agreed upon, and the amount of the insurance merely represents the insurer’s maximum liability. The value of such thing insured shall be ascertained at the time of the loss. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 77

Societas Spectra Legis Insurance SECTION 61. A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum. SECTION 62. A running policy is one which contemplates successive insurances, and which provides that the object of the policy may be from time to time defined, especially as to the subjects of insurance, by additional statements or indorsements.  Open or unvalued policy does not predetermine the value of the insured property but establishes a maximum amount the insured will pay in case of total loss. Insured must establishes the fair market value (FMV) at the time of loss. If FMV is higher, the maximum will control. If FMV is lower, the FMV will control.  Valued policy, the value of the insured property is predetermined and the value is the amount to be used in case of total loss. Take note: there are two values: o Face value of the policy o Value of the thing insured *The liability of insurer under a life policy is measured by the face value of the policy.  Running policy, this is intended t provide indemnity for property which cannot be well covered under valued policy, because of frequent change of location and quantity, or that is of such nature as not to admit gross valuation. E.g. “stock of goods” Q: X insured his house in an open policy, face value is 1,000,000. The actual loss is 500,000. Thereafter the house was gutted by fire, how much can X claim from the insurer? A: The insured can recover the actual loss of 500,000. Atty. S: Take note class, that under an open policy, the valuation of the property may only be made after the occurrence of the loss. The insurer through its adjusters or appraisers will survey the area, and determine the value of the property of the loss. Q: Suppose the value of the property in a valued policy is at 10,000,000. But you insured it for 5,000,000. The house is gutted by fire, how much can the insured claim from the insurer? A: It depends on the “amount of the insurance or the policy you get with the insurer”. The amount which the insured can recover is only 5,000,000. Atty S: If the value of the house is 10,000,000, you insured it for 15,000,000. If the house is gutted by fire, insurer is only liable up to 10,000,000. Transcriber submits that the insured cannot recover, more than the value of the property. In running policy, say for example Henry Sy, owner of the SM department store, day in-day out the stocks will be depleted each day, you cannot expect him to go to the insurer daily. What he will do is he will get a Running policy. So for the entire Mall of Asia, “I am insuring it for 50 billion pesos”, it will COVER everything. So if a portion of MOA is gutted by fire, the insured can only claim the amount of the loss. The 50 billion, is the maximum of loss that the insured can recover.  Blanket policy, is one covering by a single amount of insurance, the same kind of property at different locations or different kinds of property at a single location. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 78

Societas Spectra Legis Insurance SECTION 63. A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void.  GR: A clause in the insurance policy to the effect that an action upon the policy must be brought within a certain period is valid and will prevail over the general law on limitations.  EXC: If the period is less than one year from the time the cause of action accrues, the stipulation is void. However, in case of industrial life insurance, the period cannot be less than six years after the cause of action accrues. (Sec 231 (d))  The requirement that a claim must be presented within a certain period is not merely a procedural requirement, it is in the nature of a condition precedent to the liability of the insurer.  Bringing action against the agent of the insurer cannot have any legal effect except notifying agent of such claim. o Time cause of action accrues – the cause of action in an insurance contract does not accrue until the insured’s claim is finally rejected by the insurer. o Cause of action (R O V D), there is right of the plaintiff, an obligation on the part of the defendant not to violate such right, an act or omission violating such right, and damage.  A policy stipulating that prescriptive period begins from the happening of a loss is void. Because necessarily, the loss occurs before the rejection of the insurer’s claim (accrual of cause of action)  Stipulation is based upon a written contract, the time limit is 10 years from the time the cause of action accrues. (In the absence of stipulation) SECTION 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 policy, of one or more of the following: (a) non-payment of premium; (b) conviction of a crime arising out of acts increasing the hazard insured against; (c) discovery of fraud or material misrepresentation; (d) discovery of willful or reckless acts or omissions 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. SECTION 65. All notices of cancellation mentioned in the preceding SECTION shall be in writing, mailed or delivered to the named insured at the address 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.  Cancellation, is the termination by either the insured or insurer before its expiration.  Insured can cancel the insurance contract at his election by surrendering such policy.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 79

Societas Spectra Legis Insurance Form and sufficiency of notice of cancellation by insurer 1. Prior notice of cancellation to the insured 2. The notice must be based on one or more grounds mentioned in SECTION 64. 3. It must be in writing, mailed or delivered, to the named insured at the address shown in the policy 4. It must state which grounds set forth is relied upon.  It is the duty of the insurer, upon written request of the named insured, to furnish the facts on which the cancellation is based.  The purpose of a prior notice, is to prevent the cancellation of the policy, without allowing the insured ample opportunity to negotiate for other insurance for its own protection. SECTION 66. In case of insurance other than life, unless 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 policy or to condition its renewal upon reduction of limits or elimination of coverages, the named insured 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 written 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.  A renewal of insurance by payment of a new premium and issuance of a receipt, where there is no provision in the policy for its renewal, is a new contract on the same terms as the old one. “Depends primarily on the intention of the parties”  In case of insurance other than life, the insured is given the right to renew the contract with the same terms and conditions on the original policy, upon payment of the premium on the effective date of renewal, o UNLESS, the insurer at least 45 days in advance of the end of the period, mails or delivers to the insured, notice of its intention not to renew the policy or to condition its renewal upon reduction of its amount or elimination of some coverages.  A policy written for a term of less than 1 year is considered for a term of (1) one year. While policy written longer or with no fixed expiration date, is considered written for successive policy period or term of 1 year. Q: Suppose a fire insurance was issued for 30 days, when should the insurer inform the insured of its intention not to renew? A: Ambot… Q: Suppose the insurance is for 5 years, and the insurer does not want to extend, what should he do? A: The insurer has to inform the insured at least 45 days in advance before the end of each successive policy period on each year.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 80

Societas Spectra Legis Insurance Title 7

WARRANTIES SECTION 67. A warranty is either expressed or implied. Warranty – Statement or promise by the insured, contained, incorporated, or attached by proper reference to the policy, the falsity or nonfulfillment of which, regardless of whether the insurer has suffered loss or prejudice as a result, renders the policy voidable at the election of the insurer. Kinds of Warranties:  Express warranties, an agreement contained in the policy or clearly incorporated, which stipulates that certain facts relating to the risk are or shall be true, or certain acts relating to the same subjects have been or shall be done.  Implied warranties, is a warranty, which from the very nature of the contract or from the general tenor of words, although no express warranty is mentioned is necessarily embodied in the policy as part thereof which binds the insured as expressed in the contract. Ex: That a vessel is seaworthy  Affirmative warranty, is one which asserts the existence of a fact or condition at the time it is made. The warranty is continuing if it is one that must be satisfied during the entire coverage period. Ex: That building is free of materials causing fire at the time of issuance.  Promissory warranty (executory), is one where the insured stipulates that certain facts or conditions pertaining to risk shall exist or that certain things with reference, shall be done or omitted. Ex: there shall be installation of fire protection devices. o

Warranties are presumed affirmative.

Atty S: When you say warranty, there is this specific warranty provided for in the policy and that warranty turns out to be a false warranty, where you did not fulfill such warranty. It is not merely considered as a violation, but a breach of such insurance contract. Ex: you had an agreement with your insurer that the building insured will be inhabited(someone will take care of it) for the life of the policy and because of that the premium was lowered. Then again during the life of a contract, the building became uninhabited, at the time the insurer has the right to ask for cancellation because it is considered as voidable.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 81

Societas Spectra Legis Insurance SECTION 68. A warranty may relate to the past, the present, the future, or to any or all of these.

Stipulation that insured never suffered any ailment

warranty that relates to the past

Stipulation that the a building is occupied as a dwelling

warranty that relates to the present

Stipulation, that the insured would employ a watchman or install fire extinguishers

warranty that relates to the future

SECTION 69. No particular form of words is necessary to create a warranty.

 Word “warranty” in an insurance contract does not necessarily constitute warranty. Whether the statement made by the insured is a warranty, depends upon the intention of the parties.  In case of doubt, it would be construed as a representation rather than a warranty. The parties must intend a statement to be a warranty, and it must be included as part of the contract.  Difference between Representations and Warranties o

Representations are merely considered as collateral inducements, while Warranties are considered as parts of the contract.

o

Representations may be written in a totally disconnected paper or may be oral. Warranties are always written on the face of the policy.

o

Falsity of a Representation renders the policy voidable on the ground of fraud. Non fulfillment of a Warranty operates as a breach of contract.

o

Representations require only substantial truth, Warranties must be strictly complied with

o

Warranties are presumed material, while insurer must show materiality of a Representation in order to defeat action on the policy

 Before a representation will be considered a warranty, it must be expressly included or incorporated by clear reference in the policy. SECTION 70. Without prejudice to SECTION fifty-one, every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it.

 GR: In order that a stipulation may be considered a warranty, it must not only be clearly shown that parties intended as such, but it must o

also form part of the contract itself, or

o

if contained in another instrument, must be signed by the insured and referred to in the policy as making a part of it.

 EX: Warranty contained in a rider, which is attached to a policy is part of the contract. It need not be signed by the insured nor referred to in the policy as making part of it.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 82

Societas Spectra Legis Insurance SECTION 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. Q: Policy says that X is 35 years old. In truth and in fact, X is 45 years old. Is that an express warranty? A: It is an express warranty. Statement in the policy relating to a person or thing insured is a fact. Q: Policy says, that I believe I am a good driver? A: Not an express warranty, as the statement merely refers to be an opinion or belief. SECTION 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. Q: In a insurance policy, the insured and insurer agreed that insured will insure his other building within 2 months from the effectivit y of the original policy. If he did not insure such building then the fire broke out then gutted out the building insured in the original policy, can he claim the proceeds of the policy? A:Yes the insured can still claim, it is not a warranty. This is a promissory warranty, the breach of promises or agreements as to future acts will not avoid a policy, UNLESS promises are “material to the risk”.

 Material to the risk, the act or omission is material to the risk if it increases the risk. Under the law, only substantial increase of risks works forfeiture of the policy which is avoided for increase in hazard. SECTION 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy.

Other instances where breach of warranty does not avoid policy: 1. Loss occurs before time for performance Ex: Insured warrants that after 5 days after execution contract, he will install fire extinguishers. On the second day fire broke out. 2. Performance becomes unlawful Ex: Policy expressly contains warranty that the insured house which is at the time rented, shall cease to be rented and shall be used as a private dwelling for the family of the insured. A law was later passed, prohibiting the ejectment of tenants of a period of less than 1 year. 3. Performance becomes impossible. (May be Physical or Legal Impossibility) Physical, insured warrants to change the party wall to concrete. However there was no cement available for private use without the fault of the insured, and subsequently loss happens. Insurer barred by waiver or estoppel  Waiver, an intentional relinquishment of a known right. Ex: Failure on the part of the insurer to assert a forfeiture upon a breach of warranty or condition, upon knowledge thereof, amounts to a waiver.  Estoppel, the insurer is precluded, because of some action or inaction on its part. Relying on an otherwise valid defense as against the insured who has been induced to enter into the contract by the insurer’s representation or conduct. Ground of estoppel is that it would be against Equity and Good Conscience.  Estoppel vs. Waiver: o

Estoppel in the conduct of the insurer prevents it from avoiding liability. While in Waiver, the failure of the insurer to assert as a defense prevents it from asserting that defense in the event of a claim filed by the insured.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 83

Societas Spectra Legis Insurance  Examples in the book: o

Other insurance clause violated, insurer knowing that insured has violated a clause prohibiting making of other insurance on the same property without giving notice to the insurer, preferred to continue the policy by demanding and collecting premium.

o

Premium not paid, an extension of time for payment of premium amounts to a waiver of insurer’s right to require payment of premium on due date.

o

Warranty clause violated, insurer was aware even before policy was issued that in premises insured, the number of fire hydrants was less than that demanded. Nevertheless it issued a policy and accepted premiums. Insurer is barred by waiver or estoppel.

o

Insured vehicle is not a common carrier, insurer knew all along that insured owned a private vehicle and not a common carrier when it issued a common carrier’s accident insurance. NOT ONCE BUT TWICE, without any objection on its part, the insured on the other hand is a man of scant(barely sufficient) education.

SECTION 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. SECTION 75. A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy.

 Parties may expressly stipulate that the violation of a particular provision (although immaterial) in the policy shall avoid it. Ex: Insurance policy expressly states that if the insurer does not procure a fire insurance for his other building (meaning not the building he insured), violation of such stipulation although immaterial, will avoid insurance policy. SECTION 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, prevents the policy from attaching to the risk.

Fraud not essential for breach  In order that insurer may be entitled to rescind a contract of insurance on the ground of breach of warranty, fraud is not essential. Effect if without Fraud  If there is no fraud, the policy is avoided only from the time of breach, and insurer is entitled to o the return of premium paid at pro rata from the time of breach. o All premiums if its broken during the inception of the contract. (VOID AB INITIO) Effect if with Fraud  Where there is fraud the policy is void ab initio, and the insured is not entitled to the return of premium paid.  Condition, is an event in which either an occurrence or non-occurrence thereof, alters the previously existing legal relations of the parties to the contract. o Parties may impose whatever conditions, as long as they are not contrary to law, morals, good customs, public order or public policy.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 84

Societas Spectra Legis Insurance Difference between Conditions and Warranties:  As to effect: o Warranty does not suspend or defeat the operation of the contract, but breach affords a remedy expressly provided in the contract or by law. While a condition precedent is one without performance of which, the contract, does not spring into life.  Condition is a limitation to the attachment of risk, while Warranty does not necessarily have such effect.  As to nature: o If the insured warrants that if representations made by him in his application for insurance are not true, the policy shall be null and void, such statements are not conditions precedent but rather of the nature of a defeasance. Promissory warranties are usually regarded as conditions subsequently to be performed after the policy has become a valid contract, non-performance will work a defeasance.  Exceptions, are inserted in a contract of insurance for the purpose of withdrawing from the coverage of the policy, as delimited by the general language describing risk assumed, some specific risks which insurer declares himself unwilling to undertake. Ex: Insurer issues policy covering a store and its contents against loss by fire may CUT DOWN the meaning of contents, by excepting money and securities, or RESTRICT the peril of fire, by excepting fire caused by lightning. Exceptions distinguished from warranties and conditions Policy contains warranted statement that insured building is occupied Policy declares that “this entire policy shall be void if the insured building becomes vacant or unoccupied for more than 30 days” Atty: This usually comes from the insurer. Policy provides that insurer will not be liable for loss, while the insured building is vacant or unoccupied for

WARRANTY CONDITION

EXCEPTION

Effects of breach on legal relations of parties Binding force of contract  The occurrence of a breach of warranty or condition, even though such breach be temporary. Renders the entire contract defeasible or voidable, even though breach may not have affected the risk or contributes to the loss.  But occurrence of an excepted peril (vacancy of the house) does not in the least effect affect the binding force of the contract. o If a loss happens during such vacancy, it falls outside the coverage of the policy and the insurer is not liable. o But if no loss occurs (house is reoccuppied) the contract relations continue to be unchanged.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 85

Societas Spectra Legis Insurance On liability where there is waiver  Breach of warranty or condition may be waived without consideration. But insurer does not become liable for an excepted loss by waiver UNLESS such waiver amounts to a new contract on valuable consideration. Q: X got a fire policy for a period of 5 years, the policy says that fire caused by lightning is an excepted peril. On it’s third year, the building gutted by fire due to lightning. X tried to claim the proceeds, however the insurer said it is an excepted peril. X then went back to the insurer, saying that he cannot use his defense of excepted peril, because the policy became incontestable already. A: The insurer may not be compelled to pay the proceeds, because it is an excepted peril –netty. "TITLE 8

PREMIUM "SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies, or whenever under the broker and agency agreements with duly licensed intermediaries, a ninety (90)-day credit extension is given. No credit extension to a duly licensed intermediary should exceed ninety (90) days from date of issuance of the policy. "SECTION 78. Employees of the Republic of the Philippines, including its political subdivisions and instrumentalities, and government-owned or -controlled corporations, may pay their insurance premiums and loan obligations through salary deduction: Provided, That the treasurer, cashier, paymaster or official of the entity employing the government employee is authorized, notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make deductions from the salary, wage or income of the latter pursuant to the agreement between the insurer and the government employee and to remit such deductions to the insurer concerned, and collect such reasonable fee for its services.

 Premium – the agreed price for assuming or carrying risk. Consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.  Assesment, a sum specifically levied by mutual insurance companies or associations, upon a fixed or definite plan, to pay losses and expenses.  Premium vs Assessments o Premiums are levied and paid to meet anticipated losses. These are not enforceable against the insured. Premium is not a debt.  EXC: In fire, casualty and marine insurance – premium becomes a debt as soon as the risk attaches  In life insurance – the premium becomes a debt only when, in case of the first premium, the contract has become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after maturity of the premiums University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 86

Societas Spectra Legis Insurance o

While Assessments are collected to meet actual loses. Unless otherwise agreed, these are legally enforceable once levied. Assessment, if properly levied, is a debt.

Q: May the government employee pay the insurance premium through salary deduction, what are the requirements? A: Yes. Provided that the treasurer, cashier, paymaster or official of the entity employing the government employee is authorized, to make deductions from the salary, wage or income of the Gov’t employee pursuant to the agreement between the insurer and the government employee, and to remit such deductions to the insurer concerned and collect such reasonable fee for such services. Q: X insured his building with Y for fire for 1 year with premium of 20,000.00. May Y demand for payment of the 20,000 premium? There was no first or prior payment of premium. Atty S: Insurance company cannot claim for payment of the premium. Because there is no valid contract between the insured and the insurer. Unless there was already payment of the first premium, although partial, as insured only paid 10,000.Insured cannot enforce it, because premium is not a debt. Makati Tuscany Condominium Corp. v. Court of Appeals, 215 SCRA 462 Facts: The insurer issued a insurance policy for the properties of Makati Tuscany, this insured policy was renewed 3 times and premiums were paid in installments. On its 3rd year, Makati failed to pay the subsequent premiums and they contended that they are no longer required to pay for the subsequent premiums alleging that the insurance policy never took effect and is not binding, because full payment of the premiums must be paid in order for the insurance policy to take effect. Ruling: Sec 77 of the Insurance code precludes the party from stipulating that the policy is valid even if the premiums are not paid, but does not prohibit an agreement granting credit extension, such an agreement is not contrary to law, morals, good customs or public policy. SC also said that the risk already attached upon payment of the first installment or premium. Q: There is a fire insurance policy for a period of 5 years. On its 3 rd year the building was gutted by fire. The insured asked for the proceeds. The insurer denied saying that it is an excepted peril. The insured says no, because it is already covered by “incontestable clause”. A: No. The incontestable clause is only proper in life insurance, and not in non-life insurance. Effect of nonpayment of premium The ability of the insurer to meet its contingent obligations to the public depends upon prompt payment of all premiums due to it.  In case of First premium, the non-payment of the first premium UNLESS waived, prevents the contract from becoming binding notwithstanding the acceptance of the application nor issuance of the policy.  In case of Subsequent premiums, the non-payment of subsequent premiums does not affect the validity of the contracts UNLESS by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse. Atty S: If the insurer already received the first premium, and after demanding from the insured, the insured will no longer want to pay. He has the option to go to court either to 1.)demand payment 2.) ask for rescission. But from the very start if at the start, the premiums on the policy were not paid by the insured, he did not pay not even a single cent. In this case, if the insured building is gutted by fire, the insurer is not at all liable, not a single cent of the proceeds shall be given to the insured.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 87

Societas Spectra Legis Insurance  In Fortuitous events – Even the act of God rendering the payment of the premium wholly impossible , it will not prevent the forfeiture of the policy when the premiums will be paid. The insurer must have some efficient means of enforcing punctuality. o The rule is not affected by the fact that the nonpayment is due to war or the insured has not been negligent. Atty S: It would be case to case basis, if you know for a fact that there is a typhoon coming and your duty to pay falls on that date which the typhoon is expected to come, of course, prudence would dictate that you have to pay in advance. If in another case you were hit by a magnitude 9 earthquake, of course it would necessarily excuse you from paying. UCPB vs. MASAGANA Facts: UCPB insured Masagana’s properties. Two months before expiration of the policy, UCPB gave written notice to Masagana for non renewal of the policies. Then the property insured was razed by fire. A month after Masagana gave a check for payment of the premium and the following day filed a complaint to clam the proceeds of the policy. Ruling: 1991 – The SC ruled that the insurance policies had expired. Because an insurance policy other than life is not valid and binding until actual payment of the premium, any agreement to the contrary is void. The parties may not agree expressly or impliedly on the extension of the credit time to pay the premium and consider the policy binding before actual payment. 1992- The SC ruled that SECTION 77 merely precludes that the policy is valid even if premiums are not paid. But it does not expressly prohibit an agreement granting credit extension. Likewise this case mentions about the exceptions to SECTION 77, that the policy is valid and binding notwithstanding non-payment of the premium. They are: 1.) Granting credit extension and 2.) estoppel. Tibay vs CA – Fortune insurance Facts: Sps. Tibay insured their property with Fortune insurance. The premium was for 2900, but only 600 were paid by the insured. The building insured was razed by fire. Two days later Violeta Tibay paid for the balance of the premium and on the same day filed a claim against Fortune insurance. Is the policy valid and binding upon partial payment of premium? Ruling: No, SC ruled that premium must be paid in full in order for the policy to be valid and binding. This case is different from Makati Tuscany, because in the Makati, there was a practice that payment shall be in installments. Neither is there any stipulation granting any credit extension. Likewise, payment of premiums is the elixir vitae of insurance business because the insurer must maintain a legal reserve fund to meet its contingent liabilities.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 88

Societas Spectra Legis Insurance South Sea Surety vs CA Facts: Insured obtained a marine insurance cargo policy for its logs loaded on the vessel. Insured gave check payment to Victorino Chua. A day after, the vessel sank. South Sea cancelled the insurance policy alleging non-payment of premiums. Is Victorino Chua an agent of the insurer and therefore payment was accepted. Ruling: Yes. Victorino Chua is an agent of the insurer. Under the code, an insurance company which delivers to an agent or broker a policy or contract of insurance shall be deemed to have an authorized agent or broker to receive payment on its behalf of premiums which is due. Malayan Insurance Co. (MICO) vs Arnaldo DMD!! Dili ko kaapas sa storya ni Jamica :c Exceptions to SECTION 77 1. In case of a life or industrial policy where grace period provision applies 2. Under the broker and agency agreements, where a 90-day extension is given 3. There is an acknowledgement in the policy of receipt of the premium, even if there is a stipulation that it shall not be binding until the premium is actually paid. 4. There is an agreement allowing insured to pay in installments and partial payment is made at the time of loss 5. There is an agreement to grant the insured a credit extension for the payment of the premium 6. Estoppel - receipt of the insurer of the premium even after the expiration of the credit term but before the loss. SECTION 79. An acknowledgment in a policy or contract 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 until the premium is actually paid. Effect of acknowledgement of receipt of premium in policy:  Waiver of condition of prepayment – The insurer has waived the condition of prepayment, the acknowledgement being declared by law as conclusive evidence of premium payment.  Recovery of premium if unpaid – The conclusive presumption extends only to the question of binding effect of the policy. It is only a prima facie evidence of the fact of such payment and insurer may still dispute its acknowledgement, only for the purpose of recovering the premium due and unpaid. Effect of acceptance of premium  Acceptance of the premium merely assures continued effectivity of the insurance policy with its terms.  Acceptance does not stop the insurer from interposing any valid defense under the terms of the insurance policy.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 89

Societas Spectra Legis Insurance SECTION 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 period 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 appears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued: 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. "SECTION 81. If a peril insured against has existed, and the insurer has been liable for any period, however short, the insured is not entitled to return of premiums, so far as that particular risk is concerned. "SECTION 82. A person insured is entitled to a return of the premium when the contract is voidable, and subsequently annulled under the provisions of the Civil Code; or on account of the fraud or misrepresentation of the insurer, or of his agent, or on account of facts, or the existence of which the insured was ignorant of 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 premium if the policy is annulled, rescinded or if a claim is denied by reason of fraud. "SECTION 83. In case of an over insurance by several insurers 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. Insured entitled to recover premiums 1. No part of the thing insured has been exposed to any peril insured against Ex: a. In a policy which requires acceptance to be effective, the insured cannot be held liable for accruing premiums if the policy is not accepted. He can recover premium(Risk does not attach) b. Insured pays premiums in advance for an insurance to take effect on a later date (15 days from receipt). On the 5th day the insured building was gutted by fire, the insured can ask return of the premium. NB: He cannot also claim the proceeds 2. Insurance is for a definite period and insured surrenders his policy before termination - Insured can recover premiums paid at pro rata rate Ex: a. X insures his house for 2 years and pays premium of 24,000. After 6 months, he surrenders the policy. He shall be entitled to collect ¼ or 6,000. Conditions for SECTION 80b to apply: i. Must be a definite period ii. Not a life insurance GR: Not a divisible contract, insured cannot recover. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 90

Societas Spectra Legis Insurance EXC: Insured is entitled to receive the cash surrender value of his policy, after 3 full annual premiums have been paid. iii. Not a short period rate (a table or proportion is stipulated)

3. Contract is voidable and is subsequently annulled because of fraud or misrepresentation of the insurer or his agent. Ex: a. Insured is induced upon representation of the insurer’s agent that policy is issued to him within one month. He can refuse and recover premiums paid if not issued within said period.

4. When contract is voidable, because of existence of facts which insured was ignorant without his fault. Ex: a. Insured pays premiums on his vessel not knowing it has already been lost. 5. When insurer never incurred any liability under the policy because of the default of the insured other than actual fraud. Ex: a. Insurer pays in advance premiums. The vessel is still under repair, however due to reasons other than actual fraud, the repair of vessel is not completed when voyage is about to start. The insured can recover the premiums paid. 6. There is over-insurance - Amount of insurance is beyond the value of the insured’s insurable interest. Ex: a. X insures his house w/c has an insurable value of 1.5 million. Insures it with A for 1 M and B for 2 M. He pays premiums of 100,000 each for A and B. There is over insurance of 500,000. He can recover ____________________. (Syntax Error) #%@ Please refer to your classmates 7. Rescission is granted due to the insurer’s breach of contract.

Where insurance is illegal  GR: When the insurance is void, because it is illegal, the premiums can be recovered. If parties are not in pari delicto, the law will allow the innocent insured to take again his premiums as when insured was ignorant of the facts which rendered the insurance illegal.  EXC: When the parties are in pari delicto (Both parties are equally guilty) Basis of right to recover premiums (Over-insurance, double insurance, Short interest)  Insurer could have been called to pay the whole sum insured. o If insurer could AT ANY TIME and under conceivable circumstances, have been called to pay the whole sum on which he has received the premium, in such case the whole premium is earned and there shall be no return. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 91

Societas Spectra Legis Insurance  Insurer could have been called to pay only the part of the whole sum insured. o If he is not called on to pay the whole, but only a part of his subscription (half or a fourth) he ought not to retain a larger proportion than one half or one fourth of the premium. SECTION 84. An insurer may contract and accept payments, in addition to regular premium, for the purpose of paying future premiums on the policy or to increase the benefits thereof

"TITLE 9

LOSS SECTION 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 insurance.

 Claim – a demand for satisfaction of a loss suffered within the purview of an insured’s policy. It may be: (Who may make such claim?) o Party insured o Insurer with right of subrogation o Non-party but with a right against the insured Ex: 3rd party who suffered a loss by reason the negligent acts of the insured. Effect of agreement not to transfer claim of insured AFTER a loss.  If BEFORE a loss has occurred, an insurance policy, except a life insurance policy, is NOT ASSIGNABLE, without the consent of the insurer.  If AFTER a loss has occurred, the insured has an absolute right to transfer or assign his claim against the insurer. A stipulation which attempts to prohibit such transfer is void. Rationale: o Hinders free transmission of property o Transfer involves money claim or right of action o Transfer involves no “Moral Hazard”, it cannot increase the insurer’s risk of loss that has already occurred. Moral Hazard, risk that insured may be induced for the destruction of the thing that is insured than to its preservation.

SECTION 86. Unless otherwise provided by the policy, an insurer is liable for a loss of which a peril insured 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 liable for a loss of which the peril insured against was only a remote cause.

 Loss – injury, damage or liabilty sustained by the insured in consequence of the happening of one or more perils.  Loss with reference to reinsurance – the reinsurer’s share of the loss on risk ceded. Liability of insurer for loss  Extent of loss of the insurer depends upon whether the insured suffers a loss and the extent upon such loss. (Contract of insurance is a contract of indemnity) University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 92

Societas Spectra Legis Insurance  Loss is satisfied by: o Payment o Reinstatement or repair or restoration o Replacement with another similar property  The INSURED has the burden of proof where loss has occurred. The INSURER has the burden of proof that loss occurred under an excepted peril. o Contract of insurance is a contract of indemnity, therefore it proscribes the insured from profiting from the loss which constitutes unjust enrichment.  Proximate cause – natural and continuous sequence that which produces an event and without which the event would not have occurred. It is also called efficient cause, but not immediate cause, the proximate cause may give rise to a immediate cause. Immediate cause is the peril insured against.  Remote cause – a cause which is far remote from the injury caused, because of a supervening event.

Q: X insured his building against fire, in the policy, fire caused by lightning is an excepted peril. Another building is struck by lightning and it was razed by fire. This affected his building close to it. Can he ask for the proceeds? A: No. The proximate cause of the fire is the lightning which struck the building. The fire which gutted his building is the immediate cause. Under the Code, the insurer is not liable if the proximate cause which is a excepted peril from the policy caused the immediate cause which is not an excepted peril. Q: Suppose his building was destroyed because the building close to it, when struck by lightning crumbled and the debris scattered all over his building causing the damage. A: Still No.  Friendly Fire – Fire is in a place where it is intended to burn and ought to be. o Fire burning in a furnace, stove or lamp damage caused by such fires  Hostile Fire – When fire occurs outside the usual confines or begins as a friendly fire and becomes hostile, by escaping from the place where it ought to be some where it ought to be. o Flames escaped through a crack in a stove releasing a sprinkle head above. o Even if fire remain in its proper place, when it is by accident becomes so excessive and is now beyond control.  Fire insurance provides indemnification for losses caused by a hostile fire, but not for damage or loss due to a friendly fire. o We have to determine whether Fire is friendly or hostile. If Friendly, insured cannot claim for the proceeds. Hostile, insured can claim. Q: Suppose you have important documents which were insured against fire, you went to the province, and you left those documents. There was a fiesta and people was roasting pig near the house, which eventually caused the fire, can you claim for the proceeds? A: No.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 93

Societas Spectra Legis Insurance SECTION 87. An insurer is liable where the thing insured 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 deprives 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

Q: X insured his paintings against fire. One night she heard “Sunog”, considering that her most precious possessions are her paintings, she removed it and put it outside her house, and when she got back, the paintings were lost. Can he claim for the proceeds? A: Yes. If the loss of the thing insured is by theft, during the removal of the goods to save them from loss by fire, is covered by a policy against fire. UNLESS there is a stipulation exempting the insurer from liability.  LOSS TOOK PLACE WHILE BEING RESCUED FROM THE PERIL INSURED AGAINST. (Example stated above)  LOSS IS CAUSED BY EFFORTS TO RESCUE THE THING INSURED FROM A PERIL INSURED AGAINST. SECTION 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 negligence of the insured, or of the insurance agents or others

Q: X insured his entire building against fire, but he connived with his friend Y. Can he recover from the proceeds? If there is a Co-insured, can he recover from the proceeds? A: X cannot recover. But the Co insured can recover, because he was innocent and not guilty of the wrong doing. The intentional destruction by one of the co-insured should not be interpreted to deny recovery by other coinsured. Atty S: Class Take note…  If the peril insured against is the proximate cause of loss, the insurer is liable.  If the peril insured against is the immediate cause of loss, IT DEPENDS. o o

The insurer is liable only if the proximate cause is NOT AN EXCEPTED PERIL. Stated otherwise, if the PERIL IS AN EXCEPTED PERIL, insurer is liable.

Q: X insured his entire building against fire, but he connived with Y to set in on fire? Can he recover? A: No. SECTION 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 negligence of the insured, or of the insurance agents or others.

 Loss caused by negligence of the insured o Where there is only ordinary negligence – it does not constitute a defense on the part of the insured. Ex: Insured lighted some straw under the barn to smoke out bees, but the fire rapidly spread and destroyed the property. o

Where there is gross negligence – Have the effect of relieving the insurer from liability. Ex: Insured sees a small fire start and make no attempt to put it out.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 94

Societas Spectra Legis Insurance TITLE 10

NOTICE OF LOSS "SECTION 90. In case of loss upon an insurance against fire, an insurer is exonerated, if written notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay. For other non-life insurance, the Commissioner may specify the period for the submission of the notice of loss. "SECTION 91. When a preliminary proof of loss is required 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. CONDITIONS AFTER LOSS:  Written notice of loss must be given to the insurer.  A Preliminary proof of loss must also be given (If required by the policy) *These are in the nature of a condition subsequent to the breach, which affects rights which already accrued.  Notice of loss – is more or less a FORMAL NOTICE given to the insurer by the insured or claimant under a policy, of the occurrence of the loss insured against. PURPOSE: To apprise the insurance company with the occurrence of the loss, so it may gather information and make proper investigation, and to protect its interest against fraud. NECESSITY OF LOSS:  Under the law, if notice of loss is not given to the insurer by the insured without unnecessary delay or in a timely manner. o Unreasonable delay – depends on the circumstances of a particular case. o For non-life insurance, other than fire, Commissioner may specify the period for the submission of the notice of loss. o Parties may stipulate period within which notice of loss must be given.  Formal notice of loss is not necessary, if insurer already has actual notice. PROOF OF LOSS  Poof of loss – more or less a formal evidence given by to the insurer by the insured or claimant under the policy, of the occurrence of the loss. To enable the company to determine its liability and the amount thereof. o Purpose:  Give insurer extent of his liability  Afford him means of detecting any fraud  To operate as a check, upon extravagant claims. BURDEN OF PROOF  The insured has the burden of proof that he has suffered a loss.  Once the insured makes a prima facie case in his favor, the burden of evidence shifts to the insurer to controvert the insured’s prima facie case, and show it falls under an exception or limitations in the policy.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 95

Societas Spectra Legis Insurance SECTION 92. All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived. SECTION 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.

WAIVER OF DELAY OF PRESENTATION OF NOTICE OR PROOF OF LOSS: 1. By an act of the insurer 2. By Failure to take objection promptly and specifically upon that ground SECTION 94. If the policy requires, by way of preliminary 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 insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified.

"TITLE 11

DOUBLE INSURANCE SECTION 95. A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest.

Requisites: 1. The person insured is the same 2. Two or more insurers insuring separately 3. Identity of subject matter 4. Identity of interest insured 5. Identity of risk or peril insured against  Double insurance is synonymous with other insurance.  Distinction between double insurance and over-insurance: o Over-insurance exist when the amount of the insurance is beyond the value of the insured’s insurable interest. In double insurance, there may be no over-insurance. o In Over-insurance, there may be one insurer. In double insurance, there are always several insurers.

 A policy which contains no stipulation against additional insurance, is not invalidated by procuring such insurance. Stated otherwise, if there is a stipulation prohibiting such, policy may be invalidated. o Purpose of prohibiting double insurance: To avoid perpetration of fraud.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 96

Societas Spectra Legis Insurance SECTION 96. Where the insured in a policy other than life is over insured by double insurance:

"(a) The insured, unless the policy otherwise provides, 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, any sum received by him under any other policy shall be deducted from the value of the policy without regard to the actual value of the subject matter insured; "(c) Where the policy under which the insured claims is an unvalued policy, any sum received by him under any policy shall be deducted against the full insurable value, for any sum received by him under any policy; "(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 policies, he must hold such sum in trust for the insurers, 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 liable under his contract.

Rules for payment of claims where there is over-insurance by double insurance  The liability of the insurers in case of over-insurance by double insurance is joint and several.  Joint and several liability – Ex: X insured his building valued at 1,000,000. He insured it with A for 1M, for B with 2M and C with 3M. In case of loss, he can recover from either A, B or C for 1M. - Supposing X already got 1M from A, he can no longer recover from B or C. - Supposing he got 1 peso from A, he can claim 999,999 from B or C. B or C cannot raise as a defense that “you should have recovered the whole amount from A, because the obligation is joint and several.  The insured can recover no more than the amount of his insurable interest whether the insurance is contained in one policy or several policies.  Contribution clause – a stipulation which provides that, the insurance company shall not be liable to pay or contribute more its ratable portion of the loss or damage. -SKIPPED COMPUTATION- 

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 97

Societas Spectra Legis Insurance TITLE 12

REINSURANCE "SECTION 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.

 Retrocession, the reinsurer insures the risk covered in an insurance.  Primary/Direct/Ceding Insurer – The insurance company originally writing the insurance.  Reinsurance vs. Double Insurance: Reinsurance Double Insurance Insurer becomes the insured The subject is the insurer’s risk The original insured has no interest in the contract of reinsurance Insurance of different interest

Insurer remains to be the insured The subject of the insurance is the property The insured is the party in interest in all the insurance contracts Insurance of the same interest

 Retention – the limit on the maximum claim an insurance company wishes to pay out of its own resources.  Net Retention – The portion of the risk retained by the primary insurer.

SECTION 98. Where an insurer obtains reinsurance, except 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.  GR: The original insurer has the duty to communicate all the representations of the original insured and all the knowledge and information he possess, whether previously or subsequently acquired, which are material to the risk.  EXC: Automatic reinsurance treaties o It is an agreement between the reinsurer and the reinsured, where the reinsured is bound to cede and the reinsurer is obligated to accept, a fix share of the risk which has to be insured under the contract.  Facultative Insurance – There is no obligation either to cede or to accept participation in the risk insured, each party having a free choice. o Automatic Reinsurance Treaties are more advantageous at the point of view of the reinsured. While Facultative Insurance is more advantageous on the part of the reinsurer.  Reinsurance Treaty, an agreement between 2 insurance companies, whereby one agrees to cede and the other to accept insurance. It is a contract for insurance as opposed to reinsurance policies which are contracts of insurance.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 98

Societas Spectra Legis Insurance SECTION 99. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage.  It is not necessary that the insurer shall have first paid a loss accruing as a condition precedent to his demanding payment to the reinsurer.  Liability insurance – one which is concerned with loss, damage or liability caused to third persons, by reason of the negligence of the insured.  Right of Subrogation is applicable in reinsurance. The reinsurer on payment of a loss, acquires the same rights by subrogation as are acquired in similar cases where original insurer pays the loss.  In an action on a contract of insurance, the reinsurer is entitled to avail of every defense which the reinsured might urge in an action by the person originally insured. SECTION 100. The original insured has no interest in a contract of reinsurance.  GR: There is no privity of contract between the original insured and the reinsurer. The insured has no concern with the reinsurance, and the reinsurer is not liable to the insured. EXC: o The contract of reinsurance contains a stipulation assigning the right of the insurer in favor of the insured. o Contract of reinsurance with stipulation in o Contract of reinsurance amounts to novation of the original contract.

"CHAPTER II

CLASSES OF INSURANCE "TITLE I

MARINE INSURANCE "SUB-TITLE 1-A

DEFINITION "SECTION 101. Marine Insurance includes: (a) Insurance against loss of or damage to: (1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transhipment, or reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks; (2) Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles); (3) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and (4) Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 99

Societas Spectra Legis Insurance docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways. (b) Marine protection and indemnity insurance, meaning insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person.  Transportation insurance – concerned with the perils of property in transit, as opposed to perils at a general fixed location.

Divisions of Marine Insurance 1. Ocean Marine Insurance – Insurance against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property. 2. Inland Marine Insurance – covers primarily the land or over the land transportation perils of property, rivers, lakes and other waterborne perils outside those falling within the ocean marine category. Scope of Marine Insurance (L.E.G.S.) 1. Liability incurred by the owner or any party interested in or responsible 2. Earnings 3. Goods or cargoes 4. Ships or hulls Atty S: In the Bar Exams, you are asked what is the coverage of Marine Insurance. You should one or two or three classes of Marine Insurance.  Marine insurance may be in the form of: o Property Insurance, indemnifying the insured for loss or damage to property. o Liability Insurance, protecting the insured against loss or damage to property personal injury or death of another person.  Marine risk note – Not an insurance policy. Merely an acknowledgement or declaration of the insurer confirming the specific shipment covered by a marine open policy. Presumption that goods are shipped under deck  GR: If goods are shipped on deck, they are not covered by the policy EXC: There is a specified notice of the stowage and he accepts the enhanced risk. o

Rationale: Presumption is that the deck of a vessel is not designed to carry goods.

Perils of the sea  Perils of the sea/perils of navigation – those casualties due to the unusual violence or extraordinary action of wind and wave, or other extraordinary causes connected with navigation.  Perils of the sea, include only such losses which are extraordinary in nature, which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from ordinary wear and tear of the voyage and from injuries suffered by the vessel as consequence of not being seaworthy (perils of the ship). University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 100

Societas Spectra Legis Insurance  Perils of the Ship – loss which results from a) the natural and inevitable action of the sea, b) the ordinary wear and tear of the ship, or c) the negligent failure of the ship’s owner to provide proper equipment to convey cargo under ordinary conditions. o

Jettison/Jettisoning – intentional casting overboard, of any part of a venture exposed to a peril, in the hope of saving the rest of the venture. “covered under perils of the sea”

o

Barratry – any willful misconduct on the part of the master or crew, in pursuance of an unlawful or fraudulent purpose, without consent of the owner and to the prejudice of the owner’s interest. “still covered under perils of the sea” TEMPEST – not a peril of the sea.

Perils of the sea must be the proximate cause of the loss  The insurer is liable only for such losses or damages proximately caused by the perils insured against. Ex: o A vessel insured which was caught by a storm was shipwrecked and it reached a barbaric island, and the barbaric people caused fire on the ship. However the policy provides that fire is an excepted peril. Ans: The proximate cause of loss is the act of piracy. However, the insurer is still liable even it was an excepted peril. Because, it was not able to deliver itself out of the original peril of shipwreck. All risk marine insurance  All risk marine insurance, insures against all causes of loss or damage, except as otherwise excluded in the policy or due to fraud or intentional misconduct of the insured.  Perils of the ship is included in the all risk policy. Since it covers all losses during the voyage whether marine peril or not. Classes of Inland Marine Insurance  To be eligible for inland marine insurance, the risk must involve an element of transportation. 1. Property in transit 2. Bailee liability – persons who have temporary custody of goods. (carriers, laundrymen, warehousemen, etc) 3. Fixed Transportation property - eligible for insurance because they are essential part of the marine transportation system. 4. Floater – the property is insured wherever it may be located.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 101

Societas Spectra Legis Insurance SUB-TITLE 1-B

INSURABLE INTEREST SECTION 102. The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss: Provided, That in this case the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer Insurable interest of insured in marine insurance  GR: Marine insurance is invalid, unless there is an insurable interest in the thing insured. o There can be no valid insurance unless there is something to insure.  EXC: In an insurance taken upon a ship or cargo “lost or not lost”, the insurer expressly agrees that he will be bound in any event, even though the vessel was already lost. o There can be a valid insurance even though there is nothing to insure when contract was made. Insurable interest of owner of the ship  The owner of the ship has an insurable interest on the vessel to the extent of its value. Ex: X is the owner of the ship valued at 10,000,000. He charters it to Y who agrees to pay its value in case of loss. He insures the vessel. In case he recovers only from Y to the amount of 4,000,000. He can recover 6,000,000 from the insurer. Insurable interest and sale contracts a. In case of the vessel- insurable interest Is possesed by the owner, mortgagor or lessee. b. In case of Cargo – the insurable interest is in the shipper or consignee. i. FOB factory – the buyer has the obligation to insure from the time the goods leave the factory. ii. FOB point of destination – the buyer does not assume responsibility until goods are received from the carrier. (Seller has the obligation to insure) iii. CIF (Cost – Insurance – Freight)– The seller assumes complete responsibility. iv. C & F (Cost and Freight) – The buyer procures his own insurance. c. In case of a buyer/consignee of goods – the buyer can insure cargo. Because there is already a perfected contract of sale, even without delivery, it vests in the vendee an equitable title or an existing interest over the goods sufficient to be the subject of insurance. SECTION 103. The insurable interest of the owner of the ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry  Loan on Bottomry – is one which is payable only if the vessel, given as security for the loan, completes in safety, the contemplated voyage.  Respondentia loan - one which is payable only if the cargo, given as security for the loan, completes in safety, the contemplated voyage. o Ex: X is the owner of a vessel valued at 2,000,000. He borrows from Y by way of loan on bottomry for 800,000. X can insure the vessel for 1,200,000. On the otherhand, Y can also insure the same for 800,000.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 102

Societas Spectra Legis Insurance SECTION 104. Freightage, in the sense of a policy of marine insurance, signifies all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others. SECTION 105. The owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage.  Freight – the benefit which is to accrue to the owner of the vessel, from its use in the contemplated or the benefits derived from the employment of the ship. a. Chartering the ship b. Carriage of his own goods c. Carriage of the goods of others  Passage money – It is customarily payable in advance. Here only the passenger can insure his advances. However the ship owner cannot insure, unless it is payable only upon completion of the voyage.  Expected freight is insurable, while passage money is not insurable because it is paid in advance. o However if freight is payable in any event or the freight is already paid, the ship owner has no insurable interest in such freight, because it is no longer expected. o

To give the insurer an insurable interest in the expected freightage, he must have an inchoate right to the freight, that nothing could prevent him from ultimately having a right to it, but the intervention of perils insured against.

SECTION 106. The interest mentioned in the last SECTION exists, in case of a charter party, when the ship has broken ground on the chartered voyage. If a price is to be paid for the carriage of goods it exists when they are actually on board, or there is some contract for putting them on board, and both ship and goods are ready for the specified voyage.  Seeking ship – a vessel looking for cargo to be transported, the ship owner has no insurable interest in the freight to be earned on goods not loaded.

SECTION 107. One who has an interest in the thing from which profits are expected to proceed has an insurable interest in the profits.  One having a reasonable expectation of profits from a marine adventure, may take out insurance to protect such profits. EX: Owner of a cargo to be carried on a trading voyage, has an insurable interest in the cargo and from the expected profit from the sale of the cargo.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 103

Societas Spectra Legis Insurance SECTION 108. The charterer of a ship has an insurable interest in it, to the extent that he is liable to be damnified by its loss.  Charter party – a contract by which an entire ship or a principal part thereof, is lent by the owner to another person, for a specified time or use. a. Bareboat / Demise charter – The ship owner turns over full possession and control of his vessel to the charterer. The charterer becomes, the owner for the voyage or the service stipulated, and subject to liability for damages caused by negligence. The ship master or the crew become agents of the charterer. In this case the charterer/owner pro hac vice, is held liable for expenses of the voyage, including wages of seamen. b. Contract of Affreightment – the owner of the vessel, leases part or all of its space to haul goods for others. The Shipowner retains possession, command and navigation of the ship. The charterer is free from liability of to third persons in respect to the ship. a. Voyage Charter – contract of carriage of goods from one ports of loading to one or more ports of unloading. b. Time Charter – contract for use of the vessel for a specified period of time or for the duration of one or more specified voyages. Owner pro hac vice  In a demise or bareboat charter, the charterer is treated as owner pro hac vice - owner for the time being or for that particular instance. Concealment in Marine Insurance  Concealment in marine insurance is the failure to disclose any material fact or circumstance which in fact or law is within or which ought to be within the knowledge of one party and of which the other has no actual or presumptive knowledge.  Rules as to misrepresentations and concealments are more strict  This is due to the difference in the character of the property, and the greater facility the insurer possesses in obtaining information as to its conditions and surrounding circumstances in cases of insurance on buildings than on vessel. Possession of a material fact  Under SECTION 107, to constitute concealment, it is sufficient that the insured is in possession of a material fact concealed although he may not be aware of it. Example: Thus, if an agent failed to notify his principal of the loss of a cargo and the latter, after the loss but ignorant thereof, secured insurance “lost or not” on the venture, such insurance will be void on the group of concealment. Opinions or expectations of third persons  Insurance in general - a party to a contract of insurance need not communicate information of his own judgment to the insurer much less what he learns from a third person.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 104

Societas Spectra Legis Insurance  In marine insurance - however the rule is quite strict because the insured in bound to communicate to the insurer not only facts but also: 1) beliefs or opinions of third persons, or 2) expectations of third persons.  The only requirement is that the information be in reference to a material fact. Thus, there is concealment where the insured at the time of application for insurance did not disclose the opinion of marine experts who inspected the vessel insured that the ship was unseaworthy. 

SECTION 111. A person insured by a contract of marine insurance is presumed to have knowledge, at the time of insuring, of a prior loss, if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication.  Reason for the the presumptionis the quickness in the transmission of news by means of modern communication.  When not applicable. The insured is not bound, to use all accessible means of information at the very last instant of time to ascertain the condition of the property insured. Effect of concealment SECTION 112. A concealment in a marine insurance, in respect to any of the following matters, does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: (a) The national character of the insured; (b) The liability of the thing insured to capture and detention; (c) The liability to seizure from breach of foreign laws of trade; (d) The want of necessary documents; and (e) The use of false and simulated papers. As a rule, the concealment of a material fact entitles the injured party to rescind the entire contract of insurance. However, concealment of matters indicated from paragraphs (a) to (e) does not avoid the policy ab initio. If the vessel be lost due to any of the causes mentioned which was conceal, the insurer is not liable; but if the vessel be lost due to other perils of the sea, like storm, the insurer is not exonerated.

Representation in marine insurance SECTION 113. If a representation by a person insured by a contract of marine insurance, is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 105

Societas Spectra Legis Insurance SECTION 114. The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance.  A substantial misrepresentation of any material fact or circumstance relating to marine insurance avoids the policy.  The general rule that a representation is material where it would influence the judgment of a prudent insurer in fixing the premium or in determining whether he would take the risk, is applicable to marine insurance. Effects of false representation  Intentional - any misrepresentation of a material fact made with fraudulent intent avoids the policy  Not intentional - if not intentional or fraudulent but the the fact misrepresented is material to the risk, the insurer may also rescind the contract from the time the representation becomes false. Warranty-In marine insurance, a warranty has been defined as a stipulation, express or implied, forming part of the policy as to some fact, condition, or circumstance relating to the risk. Implied warranty - In every insurance upon marine venture whether of vessel, cargo, or freight, there are conditions upon the underwriter’s liability for the risks assumed. The insurer will not be liable for any loss under the policy in case the vessel: 1. is unseaworthy at inception of insurance 2. deviates from agreed voyage 3. engages in illegal venture 4. does not carry requisite documents of nationality  Seaworthiness is a relative term depending upon the nature of the ship, voyage, service and goods, denoting in general a ship’s fitness to perform the service and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy, When seaworthiness complied with. (General Rule) At Commencement of risk The warranty of seaworthiness is complied with if theship be seaworthy at the time of the commencement of the risk. Prior or subsequent unseaworthiness is not a breach of the warranty nor is it material that the vessel arrives in safety at the end of her voyage. Exceptions: 1. In the case of a time policy, the ship must be seaworthy at the commencement of every voyage she may undertake 2. In the case of cargo policy, each vessel upon which the cargo is shipped or transshipped, must be seaworthy at the commencement of each particular voyage 3. In the case of a voyage policy contemplating a voyage in different stages, the ship must be seaworthy at the commencement of each portion University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 106

Societas Spectra Legis Insurance  Transhipment when a cargo is unloaded from another ship and then loaded to another ship Applicability(of warranty of seaworthiness) to a cargo owner It becomes the obligation of a cargo owner to look for a reliable common carrier, which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has control in the choice of the common carrier that will transport his goods (Roque v. IAC, 139 SCRA 596) Scope of seaworthiness SECTION 118. A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be properly laden, and provided with a competent master, a sufficient number of competent officers and seamen, and the requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage.  Seaworthiness requires that the vessel must have equipment and appliances appropriate to the voyage in which it is engaged and the cargo it carries; it must have sufficient fuel, stores and provisions to last the entire voyage; sufficient number of competent officers and men; And if the insurance is on cargo, the same must be properly loaded, stowed, dunnaged and secured so as not to imperil the navigation of the vessel or to cause injury to the vessel or cargo. Seaworthiness during voyage in stages SECTION 119. Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefor, a warranty of seaworthiness is complied with if, at the commencement of each portion, the ship is seaworthy with reference to that portion. Where the policy contemplates a voyage in different stages during the the subject matter insured will be exposed to different degrees or kinds of perils, or the ship will required different kinds of equipment, she must be seaworthy at the commencement of each stage, but it is sufficient that she be seaworthy for the purpose of that stage. What if it becomes seaworthy during the voyage?

SECTION 120. When the ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner’s interest from liability from any loss arising therefrom.  It is the duty of the master as the agent of the shipowner, to exercise due diligence to make it seaworthy again.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 107

Societas Spectra Legis Insurance Express warranty as to nationality of neutrality SECTION 122. Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon.  A warranty of national character - A warranty of nationality does not mean that the vessel was built in such country, but that the property belongs to a subject thereof.  A warranty of neutrality imports that the property insured is neutral in fact. Implied warranty to carry requisite documents That warranty of nationality requires that the vessel be conducted and documented as of such nation The warranty of neutrality requires that the insured property shall be accompanied by documentary evidence of its neutral character.  Deviation-A departure from the course of the voyage insured, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage Instances: o Departure of vessel from thecourse of the sailing fixed bymercantile usage o Departure of vessel from the most natural, direct and advantageous route if not fixed by mercantile usage o Unreasonable delay in pursuing voyage o Commencement of an entirely different voyage Kinds of Deviation Proper: 1. When caused by circumstances outside the control of the ship captain or ship owner; 2. When necessary to comply with a warranty or to avoid a peril; 3. When made in good faith to avoid a peril; 4. When made in good faith to save human life or to relieve another vessel in distress (SECTION 126) The insurer is not exonerated from liability for loss happening after proper deviation. The effect is as is there was no deviation. SECTION 127. Every deviation not specified in the last SECTION is improper.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 108

Societas Spectra Legis Insurance SUB-TITLE 1-G

LOSS SECTION 129. A loss may be either total or partial. SECTION 130. Every loss which is not total is partial. SECTION 131. A total loss may be either actual or constructive.  Actual total loss – exists when the subject matter of the insurance is wholly destroyed or lost, or when it is so damaged as no longer to exist in its original character.  Complete physical destruction is not essential to constitute actual total loss Limited Liability Rule Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons, which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her equipment and the freight it may have earned during the voyage.

Art. 590. The co-owners of the vessel shall be civilly liable in the proportion of their interest in the common fund for the results of the acts of the ship captain referred to in Article 587. Each co-owner may exempt himself from this liability by the abandonment, before a notary of the part of the vessel belonging to him.

Art. 837. The civil liability incurred by shipowners in the case prescribed in this SECTION, shall be understood as limited to the value of the vessel with all its appurtenances and freightage served during the voyage.

SECTION 133. A constructive total loss is one which gives to a person insured a right to abandon, under SECTION 141. - Constructive total loss (technical total loss) – is one which the loss, although not actually total, is of such character that the insured is entitled, if he thinks fit, to treat as total by abandonment. Importance:  In case of actual total loss, abandonment is not necessary  If the loss is merely constructively total, an abandonment is necessary to recover for a total loss.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 109

Societas Spectra Legis Insurance SECTION 134. An actual loss may be presumed from the continued absence of a ship without being heard of. The length of time which is sufficient to raise this presumption depends on the circumstances of the case. Presumption of actual total loss  Where vessel is not heard of at all within a reasonable time after sailing or after it was last seen, it will be presumed to have been lost from a peril insured against. SECTION 135. When a ship is prevented, at an intermediate port, from completing the voyage, by the perils insured against, the liability of a marine insurer on the cargo continues after they are thus reshipped. Nothing in this SECTION shall prevent an insurer from requiring an additional premium if the hazard be increased by this extension of liability. Liability of insurer in case of reshipment  If the ship is disabled, and the master acting with wise discretion as the agent of the merchant forwards the cargo to another ship, such will not discharge the insurer of the goods from liability for any loss on the goods subsequent to such reshipment. SECTION 136. In addition to the liability mentioned in the last SECTION, a marine insurer is bound for damages, expenses of discharging, storage, reshipment, extra freightage, and all other expenses incurred in saving cargo reshipped pursuant to the last SECTION, up to the amount insured. Nothing in this or in the preceding SECTION shall render a marine insurer liable for any amount in excess of the insured value or, if there be none, of the insurable value. SECTION 137. Upon an actual total loss, a person insured is entitled to payment without notice of abandonment. Right of insured to payment upon actual total loss  In constructive total loss, an abandonment by the insured is necessary in order to recover for a total loss.  In actual total loss, the right of the insured to the whole insurance is absolute, no need to give notice of abandonment or formally abandon the remains of the insured property. SECTION 138. Where it has been agreed that an insurance upon a particular thing, or class of things, shall be free from particular average, a marine insurer is not liable for any particular average loss not depriving the insured of the possession, at the port of destination, of the whole of such thing, or class of things, even though it becomes entirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured.  Average – any extraordinary or accidental expense incurred during the voyage for the preservation of the cargo, vessel or both and all damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo is unloaded. Kinds of average: 1. Gross or general average – damages and expenses which are deliberately caused by the master or upon his authority, in order to save the vessel from a known risk. 2. Simple or particular average – all damages and expenses caused to the vessel or her cargo which have not inured to the common benefit and profit of all persons interested in the vessel and her cargo. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 110

Societas Spectra Legis Insurance DIFFERENCE: General average, interest saved are compelled to contribute ratably or proportionately based on the value of the said interest to the owner of interest sacrificed. Requisites: 1. 2. 3. 4. 5. 6. 7.

There must be a common danger to the vessel or the cargo The part of the vessel or cargo was sacrificed deliberately The sacrifice must be for the common safety or for the benefit of all It must be made by the master or upon his authority It must not be caused by any fault of the party asking the contribution It must be succesful It must be necessary

 Jettison – the intentional act of casting overboard any part of a venture exposed to a peril in the hope of saving the rest of the venture. Ex: On board a tiny boat with a capacity of 4 persons, is borbie, joan, bop2x and TJ. Due to the strong waves and the boat being overloaded, the boat is slowly being filled with seawater. So TJ should be jettisoned to save the other 3 lives. Ing-ana ra na concept. #bored Liability of insurer for general average Amount of insurance Total amount or value

General Average Loss (GAL)

Proportion of GAL for w/c insurer is liable

Caveat: walay computation sa exam. If interested see page 377. SECTION 139. An insurance confined in terms to an actual loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the entire thing insured

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 111

Societas Spectra Legis Insurance SUB-TITLE 1-H

ABANDONMENT SECTION 140. Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured.  Abandonment – also defined as, act of the insured notifying the insurer that owing to damage done to the subject of insurance, he elects to take the amount of the insurance in the place of the subject thereof, the remnant of which he concedes to the insurer.

Requisites of valid abandonment 1. 2. 3. 4. 5. 6. 7.

There must be actual relinquishment There must be a constructive total loss The abandonment must be neither partial nor conditional (absolute) It must be made within a reasonable time after receipt of reliable information It must be factual It must be made by giving notice of thereof, to the insurer which may be orally or in writing Notice must be explicit and shall specify the particular cause of abandonment

Necessity for abandonment  There is no obligation upon the insured to abandon, it is a matter of his own election. If he does not abandon, he recover his actual total loss.  However when the vessel is totally lost, abandonment is not required, as there is no vessel to abandon. SECTION 141. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: (a) If more than three-fourths (¾) thereof in value is actually lost, or would have to be expended to recover it from the peril; (b) If it is injured to such an extent as to reduce its value more than three-fourths (¾); (c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than three-fourths (¾) the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or (d) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like expense or risk mentioned in the preceding subparagraph. But freightage cannot in any case be abandoned unless the ship is also abandoned.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 112

Societas Spectra Legis Insurance RULE

When can there be abandonment?

English Rule

Subject matter, while still existent in specie, is so damaged as not to be worth.

American Rule

When it is so damaged that the cost of repairs would exceed ½ of its value “fifty percent rule” dili 50 Cent rule “nagjoke si sir hahaha”

Philippine Rule

When the loss or damage is more than ¾ of the value

 If insurance is severable or divisible and separately insured, it can also be separately abandoned.  GR: the extent of the injury to the vessel is to be considered with reference to its general market value immediately preceding the disaster, even if the policy is valued, EXC: if the valuation is expressly provided. SECTION 142. An abandonment must be neither partial nor conditional. SECTION 143. An abandonment must be made within a reasonable time after receipt of reliable information of the loss, but where the information is of a doubtful character, the insured is entitled to a reasonable time to make inquiry.  When insured has received notice of a loss, he must elect within a reasonable time whether he will abandon to the insurer, and if he elects to abandon must give notice. Reasonable time* depends on the circumstances of the case.  If the character of the loss is not made clearly to appear (information is doubtful in character), insured is entitled to a sufficient interval to ascertain its real nature. SECTION 144. Where the information upon which an abandonment has been made proves incorrect, or the thing insured was so far restored when the abandonment was made that there was then in fact no total loss, the abandonment becomes ineffectual. Information need not be direct or positive  It is sufficient that information is of such facts and circumstance as to render it highly probable that a constructive total loss has occurred and facts sufficient to constitute a total loss exists. SECTION 145. Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing: Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within seven (7) days from such oral notice.  The notice may be made orally, unless the policy requires it to be in writing. If done orally, insured must submit to the insurer within 7 days, a written notice of abandonment. MADE BY WHOM

MADE TO WHOM

Insured or his authorized agent

Insurer or to a Broker who is an authorized agent for both parties

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 113

Societas Spectra Legis Insurance

SECTION 145. Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing: Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within seven (7) days from such oral notice. Notice of abandonment must specify the particular cause – It is sufficient that notice shows the probable cause for the abandonment. It is not required to be accompanied with proof or interest of loss. SECTION 147. An abandonment can be sustained only upon the cause specified in the notice thereof. SECTION 148. An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity. Effect of Abandonment -

Insurer becomes entitled to all the rights which the insured possessed in the thing insured. The effect of abandonment retroacts to the time of loss

SECTION 149. If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment. The acceptance by the insured of payment is deemed an offer of abandonment on his part, in case the insurer pays for a loss as if it were an actual total loss. SECTION 150. Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer, and for his benefit. SECTION 151. Where notice of abandonment is properly given, the rights of the insured are not prejudiced by the fact that the insurer refuses to accept the abandonment SECTION 152. The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed as an acceptance.  Acceptance is not necessary if the abandonment is properly made. The insured’s right to abandon is absolute. It may be: o Express Acceptance o Implied Acceptance, the act of the insurer in consequence of an abandonment which can be justified under a right derived by abandonment. SECTION 153. The acceptance of an abandonment, whether express or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 114

Societas Spectra Legis Insurance SECTION 154. An abandonment once made and accepted is irrevocable, unless the ground upon which it was made proves to be unfounded. Effects of Acceptance of a valid abandonment ACCEPT

Insurer becomes liable for the whole amount of the insurance, and becomes entitled to all rights which insured possessed in the thing insured.

REJECT/

Insurer is liable for actual total loss, less any proceeds the insured may REFUSES have received on account of the damage property if he succeeds in selling the property. Art. 156 Atty S: Supposing class the vessel is partially damaged, and the damage caused is ¾ of the value . But if after it was examined, it was determined that the damage was only for 50% of its value. It was abandoned and there was already acceptance. In this case, the insurer may REVOKE THE ABANDONMENT. SECTION 155. On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insurer of said freightage; but freightage subsequently earned belongs to the insurer of the ship. SECTION 156. If an insurer refuses to accept a valid abandonment, he is liable as upon an actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured. SECTION 157. If a person insured omits to abandon, he may nevertheless recover his actual loss.  He cannot be compelled to abandon even if abandonment is proper.

MEASURE OF INDEMNITY SECTION 158. A valuation in a policy of marine insurance is conclusive between the parties thereto in the adjustment of either a partial or total loss, if the insured has some interest at risk, and there is no fraud on his part; except that when a thing has been hypothecated by bottomry or respondentia, before its insurance, and without the knowledge of the person actually procuring the insurance, he may show the real value. But a valuation fraudulent in fact, entitles the insurer to rescind the contract.  A policy of insurance may be VALUED or OPEN o Valued – the value of the property is fixed in advance. o Open – the value of the property is determined at the time of loss.  If there is fraud in the valuation of the policy, the insurer may be entitled to rescind the contract. SECTION 159. A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. X owns a vessel valued at 1,000,000 he insured it for 600,000. Damaged up to 400,000. Up to how much is the liability of the insurer? Solution: [Partial Loss/Value of the Thing insured] x Amount of Insurance [400,000/1,000,000]x600,000 = 240,000 University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 115

Societas Spectra Legis Insurance Rationale! Why can’t the insured collect the whole 400,000? Under Marine insurance, there is this concept of co-insurance, where the insured is obliged to look for an insurer for the whole amount of the value. Otherwise, he will be considered as a co-insurer as to the difference. Therefore the insured is liable up to 40% of the damage, while insurer is liable to the other 60%. Take Note: The Co-insurer clause will only apply if there is partial loss, and not in case where it is totally lost. SECTION 160. Where profits are separately insured in a contract of marine insurance, the insured is entitled to recover, in case of loss, a proportion of such profits equivalent to the proportion which the value of the property lost bears to the value of the whole. X insures his expected profits in the amount of 500,000. The cargo is 1,000,000. However the cargo upon examination, the portion of it was lost, and the value of it was only 500,000. How much is liability of the insurer? Solution: [500,000/1,000,000]x500,000 = 250,000 SECTION 161. In case of a valued policy of marine insurance on freightage or cargo, if a part only of the subject is exposed to risk, the valuation applies only in proportion to such part. Effect where only a part of cargo insured is exposed to risk  The insured cannot claim the entire value of the insurance. He cannot claim for that portion which is not exposed to risk.  The insurer is also liable to return a portion of the premium paid by the insured which cannot be insured, because of the thing insured is not subjected to a risk of loss (element of insurance) SECTION 163. In estimating a loss under an open policy of marine insurance the following rules are to be observed: (a) The value of a ship is its value at the beginning of the risk, including all articles or charges which add to its permanent value or which are necessary to prepare it for the voyage insured; (b) The value of the cargo is its actual cost to the insured, when laden on board, or where the cost cannot be ascertained, its market value at the time and place of lading, adding the charges incurred in purchasing and placing it on board, but without reference to any loss incurred in raising money for its purchase, or to any drawback on its exportation, or to the fluctuation of the market at the port of destination, or to expenses incurred on the way or on arrival; (c) The value of freightage is the gross freightage, exclusive of primage, without reference to the cost of earning it; and (d) The cost of insurance is in each case to be added to the value thus estimated. Rules in estimating losses under an open policy of marine insurance  In determining the value of the vessel, the value is to be taken as of the commencement of the risk and not its value at the time it was built.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 116

Societas Spectra Legis Insurance  In determining the value of the cargo, the value of the cargo is its actual cost to the insured or if that cannot be ascertained, the market value at the time and place of shipment. Primage – small compensation paid by shipper to the master of the vessel for his care and trouble bestowed on the shipper’s goods and which the master is entitled. Demurrage – compensation provided for in the contract of affreightment for the detention of the vessel beyond the time agreed on for loading or unloading or for sailing.

SECTION 164. If cargo insured against partial loss arrives at the port of destination in a damaged condition, the loss of the insured is deemed to be the same proportion of the value which the market price at that port, of the thing so damaged, bears to the market price it would have brought if sound. X owns fresh fruits valued at 1,000,000, he insured it for 500,000. He loaded it to a particular vessel. In the port of destination it was discovered that the fruits were damaged, and the Market Value is only 500,000. How much if any can recover? =(Reduction in value / Market price in Sound State) x Amount of Insurance =(500,000 / 1,000,000) x 500,000 =250,000 Port of Refuge expenses – expenses incurred in repairing damages suffered by the vessel because of perils insured against, as well as those incurred for saving the vessel from perils (raising or launching or towing the vessel or navigating it to port of safety).

SECTION 165. A marine insurer is liable for all the expenses attendant upon a loss which forces the ship into port to be repaired; and where it is stipulated in the policy that the insured shall labor for the recovery of the property, the insurer is liable for the expense incurred thereby, such expense, in either case, being in addition to a total loss, if that afterwards occurs. SECTION 166. A marine insurer is liable for a loss falling upon the insured, through a contribution in respect to the thing insured, required to be made by him towards a general average loss called for by a peril insured against: Provided, That the liability of the insurer shall be limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. SECTION 167. When a person insured by a contract of marine insurance has a demand against others for contribution, he may claim the whole loss from the insurer, subrogating him to his own right to contribution. But no such claim can be made upon the insurer after the separation of the interests liable to contribution, nor when the insured, having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of that right. SECTION 168. In the case of a partial loss of ship or its equipment, the old materials are to be applied towards payment for the new. Unless otherwise stipulated in the policy, a marine insurer is liable for only two-thirds (2/3) of the remaining cost of repairs after such deduction, except that anchors must be paid in full.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 117

Societas Spectra Legis Insurance The vessel owned by A incurred a partial loss, particularly in its equipment, the cost of repair is 1,000,000. A the owner of the vessel would like to claim the amount of said repair to the insurer. How much can he recover from the insurer? Atty S: If there is a partial loss, you can recover everything. So if you own a vessel the value is 1 million and insured it for 1 million. You suffered losses for 400,000. You will get 400,000. However in this case, worth 1,000,000. That vessel suffered partial loss amounting 400,000, and because the cost of repair is 400,000. When you go to the insurer, instead of paying you the full 400,000, the Insurer will only pay you 2/3 of the 400,000. Rationale is, it makes the vessel more valuable than before the loss. TITLE 2

FIRE INSURANCE SECTION 169. As used in this Code, the term fire insurance shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. Fire Insurance Defined  Fire insurance is a contract of indemnity by which the insurer, for a stipulated premium, agrees to indemnify the insured against loss, damage to, a property caused by “hostile fire”.  Fire is oxidation which is so rapid as to produce either a flame or glow, which is caused by combustion. Fire and extended coverage  Fire insurance includes not only insurance against loss by fire, but also insurance in the so-called “Allied lines”, where some risk are covered by extension to fire insurance policies. In our Jurisprudence, fire may not be considered natural calamity or disaster since it almost arises from some act of man. It cannot be an act of God, UNLESS caused by lightning or a natural disaster. Difference between Ocean Marine and Fire Policies Ocean Marine Policies A policy of insurance on a vessel engaged in navigation

Fire insurance Policies The hazard is fire alone and the subject is an unfinished vessel, never afloat for voyage.

Importance of the distinction Ocean Marine Policies

Fire insurance Policies

Rules in constructive total loss and abandonment applies.

Constructive total loss and abandonment does not apply.

Concept of co-insurance applies

Concept of co-insurance does not apply

Kinds of Indirect losses 1. Physical damage caused to other property 2. Loss of Earnings to interruption of business by damage to insured’s property. 3. Extra expense or additional expenditure. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 118

Societas Spectra Legis Insurance

SECTION 170. An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance. SECTION 171. An alteration in the use or condition of a thing insured from that to which it is limited by the policy, which does not increase the risk, does not affect a contract of fire insurance. When alteration in thing insured entitles insured to rescind Requisites:

1. 2. 3. 4. 5.

The use or condition of the thing is specifically limited or segregated Such use or condition as limited by the policy is altered. Alteration is made without the consent of the insurer The alteration is made by means within the control of the insured The alteration increases the risk

Increase of Risk or Hazard There is an insurance contract, there is no provision against increase of risk in the said policy. You are the owner of the house, you bring Gasoline or kerosene and store it inside the house, did it increase the risk? Yes. An increase of hazard takes place whenever the insured property is put to some use, and the new use increases the chance of loss. SECTION 172. A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of the loss. Q: Supposing an article which increases the risk, is brought inside the building, what is the effect? Atty S: If an article which increases the risk is brought inside the building, you have to determine first whether SECTION 77 applies. If it is stipulated that you are not supposed to bring these materials, even if it will not increase the risk, it has to be followed. Suppose you are not supposed to bring in marshmallows it is stipulated in the policy itself, whether or not it will increase the risk, the insurer may deny payment. Supposing you are not prohibited in the policy, you apply SECTION 171, is that if it will increase the risk, the insurer will not be considered liable. However there are exceptions. These are:  

If it is necessary to the business ex: To store a limited amount of gasoline If it will render the property useless without such alteration.

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 119

Societas Spectra Legis Insurance Measure of Indemnity under an Open Fire policy  The insured is only entitled to recover the amount of loss sustained, and the burden is upon him to establish amount by mere preponderance of evidence. o Liability of insurer will not exceed what it would cost the insured to repair or replace the thing insured with the like kind and quality, with proper deduction for depreciation considering the age and condition before loss.  Market value which may be readily determined can be applied to determine amount of loss sustained. Measure of Indemnity under a Valued Policy  The valuation is conclusive between the parties, unless there was fraud. Liability cannot exceed the amount of insurance or actual loss suffered. X owns a building worth 1 million and insured it for 1million, the policy is an open policy. At the time of loss, the value of the house is worth 3 million. Supposing only 2/3 of the house is destroyed, how much can he recover? X can only recover 1 million See topic under Open and Valued policy SECTION 174. Whenever the insured desires to have a valuation named in his policy, insuring any building or structure against fire, he may require such building or structure to be examined by an independent appraiser and the value of the insured’s interest therein may then be fixed as between the insurer and the insured. The cost of such examination shall be paid for by the insured. A clause shall be inserted in such policy stating substantially that the value of the insured’s interest in such building or structure has been thus fixed. In the absence of any change increasing the risk without the consent of the insurer or of fraud on the part of the insured, then in case of a total loss under such policy, the whole amount so insured upon the insured’s interest in such building or structure, as stated in the policy upon which the insurers have received a premium, shall be paid, and in case of a partial loss the full amount of the partial loss shall be so paid, and in case there are two (2) or more policies covering the insured’s interest therein, each policy shall contribute pro rata to the payment of such whole or partial loss. But in no case shall the insurer be required to pay more than the amount thus stated in such policy. This SECTION shall not prevent the parties from stipulating in such policies concerning the repairing, rebuilding or replacing of buildings or structures wholly or partially damaged or destroyed.  Co-insurance clause – a clause requiring the insured to maintain an insurance to an amount equal to the value or specified percentage of value of the insured property under penalty of becoming a co-insurer to the extent of the deficiency.  Option to rebuild clause – Insurer is given the option to reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage. SECTION 175. No policy of fire insurance shall be pledged, hypothecated, or transferred to any person, firm or company who acts as agent for or otherwise represents the issuing company, and any such pledge, hypothecation, or transfer hereafter made shall be void and of no effect insofar as it may affect other creditors of the insured. GR: After the loss has occurred, the insured may pledge or transfer a fire insurance policy or rights thereunder. Consent of or notice to, the insurer is not required. EXC: Insured cannot transfer a policy of fire insurance to any person or company who acts as agent of the insurer. (It might defraud creditors of the insured) EFFECT: VOID University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 120

Societas Spectra Legis Insurance

- UNFORTUNATELY THE NOTES END HERE – PLEASE READ THE BOOK OF DE LEON FOR THE REST OF THE COVERAGE

SOCIETAS SPECTRA LEGIS AND FRIENDS

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

Page 121