Nego & Insurance

7/28/2019 Nego & Insurance

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Who are the parties to an insurance contracts?(a)Insurer the person who undertakes to indemnify another by a contract of insurance;(b)Insured the person to be indemnified. (Note: Anyone except a public enemy may be insured)

(c)Beneficiary the person who receives benefit or advantage, or the one who is entitled to the benefit

of a contract, that is, the one to whom the insurance is payable or is entitled to the proceeds of the policy onthe occurrence of the event designated.

-Public enemy defined: Public enemy is a nation at war with the Philippines and also every citizen or

subject nation. Such term does not include robbers, thieves or riotous mobs.

-Who may insure a mortgage property: Both the Mortgagor and the Mortgagee may take out separatepolices with the same of different companies. The mortgagor to the extent of the value of his property, the

mortgagee to the extent of his credit.

Who may be beneficiary:

Any person may be designated as beneficiary in a life insurance contract even though he is a strangerand has no insurable interest in the insured, except those who are forbidden by law to receive donations from

the insured

3. CHARACTERISTICS / NATURE OF INSURANCE CONTRACTS

a) It is an ALEATORY CONTRACT- by an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do

something in consideration of what the other shall give or do upon the happening of an event which is

uncertain, or which is to occur at an indeterminate time. (Sec 2010, Civil Code). Insurance is aleatory in the

sense that the liability of the insurer depends upon the happening of a contingent event. It is not a wageringcontract.

b) It is a CONTRACT OF INDEMNITY for NON-LIFE INSURANCE; it is an INVESTMENT in LIFE

INSURANCE

- Non-life insurance is a contract of indemnity, because the party insured is entitled to compensation for

such loss as has been occasioned by the perils insured against. The right to recover is commensurate with the

loss sustained. (RULE: RECOVERY = LOSS)- Life insurance is not a contract of indemnity, but a contract to pay a certain sum of money in the event

of death, for life cannot be the subject of valuation or the loss adjustable on any principle of indemnity.

- Life insurance is an investment because it is secured by the insurer as a measure of economic securityfor him during his lifetime and for his beneficiary upon his death EXCEPT one secured by the creditor on the

life of the debtor the reason being, the amount of insurable interest is already susceptible of pecuniary

estimation, which value ordinarily equivalent to the amount of the debt.

c) It is a PERSONAL CONTRACT

- An insurer contracts with reference to the character of the insured and vice versa. As a consequence,

the assignment or conveyance of the property insured does not transfer the insurance and instead the policy is

suspended.

d) It is an EXECUTORY AND CONDITIONAL on the part of the INSURER and it is EXECUTED on the

part of the INSURED.

-Insurance contract is executory after payment of premiums, that is, executed on the part of the insured

upon payment of premium and wholly executory on the part of the insurer.- Insurance is conditional in the sense that the insurer is not obligated to pay unless the loss arises from

the specified perils.

e) It is an ONEROUS CONTRACT

- There is valuable consideration (premium)

f) It is a BILATERAL CONTRACT

- Both parties, the insured and the insurer, are bound to do

something.

g) It is a FORMAL CONTRACT

- Insurance contract is formal and real (not consensual) in nature because a policy is required to be

issued, and the premium must be paid.

h) It is one of ABSOLUTE/PERFECT GOOD FAITH


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- It is required that the parties, the insurer and the insured, but more so with the insurer since its

dominant bargaining position imposes a stricter liability or responsibility, to deal with each other in absolutegood faith.

i) It is a CONTRACT OF ADHESION

- Insurance policies are contracts of adherence, that is, agreements prepared by one party and imposed

upon parties dealing with it which may not be changed, the latters participation in the agreement being

reduced to the alternative to take it or leave it.

Implied Warranties

Warranty defined:

- A warranty is a statement in the policy, part of the contract, a condition on which, the contractdepends and is conclusively presumed material. It is the essence of warranty that its breach bars recovery even

though the breach has nothing to do with the loss. (Secs 67 76)

Implied Warranties in Marine Insurance(a) That the ship is seaworthy at the inception of the insurance (Sec 113, ICP);

(b) That the ship will not deviate from agreed voyage unless deviation is proper (Secs. 123, 124,125,

ICP);

(c) That the ship will not engage in illegal venture;(d) warranty of possession of documents of neutrality: that the ship will carry the requisite documents of

nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted;

(e) presence of insurable interest.Note: The foregoing warranties are implied as they exist by the mere fact that a contract of marine

insurance is entered into.

Seaworthiness as the main warranty in marine insurance:

Definition:

- A ship is seaworthy, when reasonably fit to perform the service, and to encounter the ordinary perils ofthe voyage, contemplated by the parties to the policy. (Sec 114, ICP)

- Seaworthiness of a vessel is a relative term, depending on the nature of the ship, the voyage, and the

service in which she is at the time engaged.- Thus, a vessel seaworthy for one purpose may be unseaworthy for another purpose.

Requirement of seaworthiness, when satisfied?

General Rule: The requirement of seaworthiness is satisfied when the vessel is seaworthy at the

commencement of the risk.Exceptions: (a) When the insurance is for a specific period, in which case, the vessel must be

seaworthy at the commencement of every voyage she may undertake during such period;

(b) When the insurance is upon the cargo required to be transshipped at an indeterminate port, inwhich case each vessel upon which the cargo is shipped, or transshipped, must be seaworthy at the

commencement of each particular voyage; (Sec 115, ICP) and

(c) Where different portions of the voyage contemplated by the policy differ in respect to things requisiteto make the ship seaworthy at the commencement of each portion with reference to that portion. (Sec 117, ICP)

To what does the warranty of seaworthiness extend to?

- The warranty if seaworthiness extends not only to the condition of the structure of the ship, but it

requires that: (a) it be properly laden or loaded with cargo; (b) is provided with a competent master, sufficient

number of officers and seamen; (c) it must have the requisite equipment and appurtenances. (Sec 116, ICP)

Unseaworthiness during the voyage:

- Seaworthiness of a vessel, as a general rule, is necessary only at the commencement of the risk.- Accordingly, if a vessel is seaworthy at the inception of the voyage, subsequent unseaworthiness does

not avoid the policy. Provided there is no unreasonable delay in repairing the defect. Otherwise, the insurer isexonerated on the ship or the shipowners interest from any liability arising from therefrom. (Sec 118, ICP)

- Unreasonable delay in repairing the defect causing the unseaworthiness arising after the

commencement of the risk will discharge the insurer from liability only when the damage or loss was caused bythe unseaworthiness of the vessel. (Sec 118, ICP)

- However, where the damage was not caused by the particular defect that made the ship unseaworthy,

the insurer is still liable.


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Abandonment- Abandonment 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 (Sec 138, ICP).

Requisites of valid abandonment:

1) There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec138, ICP);

2) There must be a constructive total loss (Sec 139, ICP);

3) The abandonment must neither be partial nor conditional (Sec 140, ICP);4) It must be made within a reasonable time after receipt of reliable information of the loss. (Sec 141,

ICP);

5) It must be factual (Sec 142, ICP);

6) It must be made by giving notice thereof to the insurer which may be done orally or in writing (Sec143, ICP);

7) The notice of abandonment must be explicit and must specify the particular cause of the

abandonment (Sec144, ICP).

Effects of Abandonment:

1) It is equivalent to a transfer of his interest to the insurer, with all the chances of recovery andindemnity (Sec. 146, ICP). Note though, if the insurer pays for a loss as if it were an actual loss, he is entitled to

whatever may remain of the thing insured, or its proceed or salvage as if there has been a formal abandonment.

(Here the insurer opted to pay for a total actual loss, notwithstanding the absence of actual abandonment)

2) Acts done in good faith by those who were agents of the insured in respect to the thing insuredsubsequent to the loss, are at the risk of the insurer and for his benefit (Sec 148). The agents of the insured

becomes the agents of the insurer.

Note: The fact that abandonment is not made or is omitted does not prejudice the insured as he maynevertheless recover his actual loss (Sec 155.)

Effectivity of abandonment

1) Upon acceptance of the Insurer.- Acceptance may either be 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

acceptance (Sec 150).- Once accepted, abandonment is conclusive between the parties, that is, the loss is admitted together

with the sufficiency of abandonment. (Sec 151)

- Once accepted and made, abandonment is irrevocable, unless the ground upon which it was made

proves to be unfounded (Sec 152), that is, where the information upon which abandonment has been madeproves incorrect, or the thing insured was so far restored when the abandonment was made that there was in

fact no total loss.(Sec 142)

2) On an accepted abandonment involving a ship, freightage earned previous to the lo belongs to theinsurer of the freightage, that subsequently earned belongs to the insurer of the ship.(Sec 153)

3) If abandonment is not accepted despite validity, the insurer is liable upon an actual total loss,

deducting from the amount any proceeds of the thing insured may have come to the hands of the insured (Sec154). This is due to the fact that under Sec 149, which provides, that if notice is properly given, it does not

prejudice the insured, if the insurer refuses to accept the abandonment.

Liability for averages

B. FIRE INSURANCE

Fire defined:

In insurance, it is defied as the active principle of burning , characterized by heat and light combustion.

Coverage

Insurance against fire includes loss or damage due to lightning, windstorm, tornado, earthquake or other

allied risks when such risks are covered by extensions to the insurance policy or under separate policies (Sec167).

Requisites to allow recovery

(a) The fire must be the proximate cause of the damage or the loss; AND

(b) The fire must be hostile as opposed to friendly fire.

Hostile fire vs. friendly fire:


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Hostile fire is a fire that: (a) burns at a place where it is intended to burn; (b) starts as a friendly fire

but becomes hostile if it should escape from the place where it is intended to burn and becomes uncontrollable;(c) is a friendly fire which becomes hostile by not escaping from its proper place but because of the unsuitable

material used to light it and it becomes inherently dangerous and uncontrollable.

Friendly fire on the other hand, is one that burns in place where it is intended to burn and employed forthe ordinary purpose of lighting, heating or manufacturing.

Alteration defined:

It is a change in the use or condition of a thing insured from that which is limited by the policy, madewithout the consent of the insurer, by means within the control of the insured, and increasing the risk, which

entitles the insurer to rescind the contract of insurance (Sec 168).

Effect of Alteration:

An alteration in the use or condition of the thing insured will entitle the insurer to rescind the contract

of insurance provided the following requisites are present, to wit:

(a) The use or condition of the thing insured is specifically limited or stipulated in the policy. (note: Acontract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy,

which does not violate its provision, even though it increases the risk and is the cause of the loss (Sec 170));

(b) There is an alteration in the said use or condition;

(c) The alteration was made without the consent of the insurer;(d) The alteration was made by means within the control of the insured (note: If the alteration be by

accident or means beyond the control of the insured, this requisite is not met); and

(e) The alteration increased the risk of loss. But any alteration in the use or condition of the thinginsured from that to which is limited by the policy, which does not increase the risk, does not affect the contract

(Sec 169).

Basis for rescission:

Payment of the premium is based on the risk as assessed at the time of the issuance of the policy when

the risk is increased without a corresponding increase in premium, it is as if no premium is paid.

Measure of Indemnity:

a) In Open Policy it is the expense it would be to the insured to replace the thing lost or

insured in the condition it was at the time of the injury (Sec 171).b) In case of Valued Policy the valuation as agreed upon by the parties is conclusive in the

adjustment of either a partial or total loss in the absence of fraud (Sec 171)

How valuation is made?

1) Whenever insured would like to have the valuation stated in a policy insuring a building or structure

against fire, it may be made by an independent appraiser, who is paid by the insured and the value may then be

fixed between the insurer and the insured.2) Subsequently, the clause is then inserted in the policy that said valuation has thus been fixed;

3) In case of loss, provided there is no change increasing the risk without the consent of the insurer or

fraud on the part of the insured, the insurer will pay the whole amount so insured and stated in the policy ispaid. If it is a partial loss, the whole amount of the partial loss is paid. In case there are two or more policies,

each shall contribute pro-rate to the total or partial loss but the liability of the insurers cannot be more than the

amount stated in the policy.4) Or the parties may stipulate that instead of payment the option to repair, rebuild or replace the

property wholly or partially damaged or destroyed shall be exercised (Sec 172). This is also known as the

option to rebuild clause.

- No policy of fire insurance shall be pledged, hypothecated or transferred to any person, firm orcompany that acts as agent for or otherwise represents the issuing company. Any of such pledge, hypothecation

or transfer hereafter made shall be void and of no effect as it may affect other creditors of the insured.

E. LIFE INSURANCE

Life Insurance defined:

Is insurance on human lives and insurance appertaining thereto or connected therewith. (Sec 179)

When Payable?

An insurance upon life may be made payable on (1) death of the person, or (2) his surviving a specified period,or (3) or otherwise, contingently on the continuance or cessation of life.


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Usual Kind of Life Insurance:

(a) Whole life / Ordinary Life / Straight Life premiums are payable for life and the insurer agrees topay the face value upon the death of the insured.

(b) Limited payment life insured pay premiums for a limited period after which he stops with a

guarantee by the insurer that upon death amount is to be paid death occurs while payment is not complete beneficiary receives face amount.

(c) Term Policy Insurer is liable only upon death of the insured within the agreed term or period, the

value of the policy is paid to him. If h die before the end of the period, it is paid to the beneficiaries.

(d) Advance Insurance a contract which provides for the payment to the insured of a lump sumimmediately, in consideration of his agreement to make certain periodical payments to the insurer for a

specified period, or for the end of that period, the performance of insureds obligation being secured by

mortgage or deed of trust.(e) Endowment protection is for a limited period, if the insured is still alive at the end of the period,

the value of the policy is paid to him. If he dies before the end of the period, it is paid to the beneficiaries.

Annuity defined:

Annuity is a contract to pay the insured, or a named person or persons, sum or sums periodically during a life

or a certain period.

Annuity distinguished from life insurance:

Although annuity is considered life insurance for purposes of the Insurance Code, the following distinctions

between annuity and life insurance could be made:

(a) Annuity is payable during the lifetime of the annuitant, while life insurance I usually payable uponthe death of the insured.

(b) The annuitant pays a single premium, while insured in life insurance pays premiums by installments.

(c) In annuity, the insurer undertakes to pay annuities until the death of the annuitant, while in lifeinsurance, the insurer pays a lump sum upon death of the insured.

Where the insured is a minor:

As far as a minor, who is the insured or a beneficiary in an insurance contract, in the absence or incapacity ofa judicial guardian, the father, in default, the mother, may act in behalf of the minor without need of bond or

court authority, when it involves the exercise of any right under the policy to include but not limited to,

obtaining a policy, loan, surrendering the policy, receiving the proceeds of the policy and giving the minorsconsent to any transaction on the policy, provided, the interest of the minor does not exceed Php 20,000.00.

Risks Covered:

1) Generally, all causes of death are covered, unless:

1.a. Excluded by law, i.e. beneficiary is the principal accomplice or anaccessory in bringing the death of the insured.

1.b. Excluded by policy, i.e. when it does not cover assault, murder or injuries inflicted

intentionally by 3rd persons1.c. Excluded by public policy, i.e when the insured is executed for a crime committed.

2) Suicide, if (a) committed after the policy has been in force for a period of two years from date of

issue or last reinstatement unless policy provides a shorter period (b) but it is nevertheless compensable ifcommitted in the date of insanity regardless of the date of commission (Sec 180-A)

Assignment of Life Insurance:

A life insurance may pass by transfer, will or succession to any person, whether he has insurable interest ornot (Section 181).

- The person to whom the life insurance is transferred may recover upon it whatever the insured might

have recovered.

- While there is no need for the assignee to have insurable interest, it should not be used to circumvent

the law prohibiting insurance without insurable interest. Thus, an assignment contemporaneous with issuancemay invalidate the policy unless made in good faith.

- Notice to the insurer of transfer or bequest is not necessary to preserve the validity of the policy,unless thereby expressly required (Sec 182).

- Where the policy is payable to a beneficiary other than the insured or his estate or personal

representatives, and the right to change the beneficiary is expressly waived, the consent of such beneficiary tothe assignment of the policy must be obtained since the beneficiary, in such case, has a vested right on the

policy that cannot be defeated by an assignment or transfer without his consent.


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-The consent of the beneficiary to an assignment by the insured is not necessary where the insured has

not expressly waived the right to change the beneficiary, for in such case the beneficiary has no vested right asthe insured may still change him.

Measure of Indemnity:

Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity

under a policy of insurance upon life or health is the sum fixed in the policy.

Life Insurance is Valued Policy:

Life insurance contract is a valued policy in the sense that the sum payable to the beneficiary is the amount

specified in the policy.

- This is a consequence of the rule that life insurance is not a contract of indemnity and since the value

of life lost could not be ascertained, the amount of the policy should be paid.- However, when the insurable interest is susceptible of pecuniary measurement, then the amount of the

loss suffered should be the basis of payment, as in the case of insurance procured by a creditor on the life of the

debtor, for then, life insurance of such nature is a contract of indemnity.

5. INSURABLE INTEREST

It is required that the insured in an insurance contract should posses an interest of some kind,

susceptible of pecuniary estimation--- known as insurable interest.Generally, a person has insurable interest in the subject matter insured when:

He has such a relation or connection with, or concern in, such subject matter that he will derive

pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its

destruction, termination or injury by the happening of the event insured against.

Purpose of insurable interest requirement:

1. The existence of insurable interest is necessary because its absence renders the contract VOID.This is based on the principle that insurance is a contract of indemnity;

2. Without such insurable interest, the contract would in effect be a mere wager or gambling which

is VOID.

A. Insurable Interest in Life and Property Insurance

Insurable interest in life insurance

Pertinent provisions of the Insurance Code:

SECTION 10. Every person has an insurable interest in the life & health:

(a) Of himself, of his spouse & of his children;(b) Of any person on whom he depends wholly or in part for education or support, or in

whom he has a pecuniary interest;

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

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

What is the basis of insurable interest in life?

It exist when there is reasonable ground founded on the relation of the parties, either

pecuniary or contractual or by blood or by affinity to expect some benefit from the continuance of

life of the insured.

When must insurable interest in life exist?

Insurable interest in life must exist at the time of the effectivity of the policy and need not

exist at the time of the death of the insured as life insurance is not a contract of indemnity. It ismeant to give financial security to the insured or his beneficiaries (Section 19). However, insurable

interest of a creditor on the life of the debtor must exist only at the time of effectivity but also at the

time of the death of the debtor as in this instance it is a contract of indemnity. His interest iscapable of exact pecuniary measurement.

What is the extent of insurable interest in ones life?

He has unlimited interest in his own life or that of another person regardless of whether or not

the latter has insurable interest. Provided, that if the beneficiary has no insurable interest, there


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is no force or bad faith. But, if he takes out a policy on the life of another and names himself as

beneficiary, he must have an insurable interest in the life of the insured.

NOTE: The insurable interest of every member of petitioners health care program in obtaining the health care

agreement is his own health. Under the agreement, petitioner is bound to indemnify any member who incurshospital, medical or any other expense asising from sickness, injury or other stipulated contingency to the extent

agreed upon under the contract. (Philippine Health Care Providers Inc. V. Commissioner of Internal Revenue,

Jun. 12 2008 G.R. 167330)

WHO MAY BE BENEFICIARIES IN LIFE INSURANCE?

Anyone, except who are prohibited by law to receive donations from the insured. Note art. 739 of theCivil Code, hence the following cannot be designated as beneficiaries;

1. Those made between persons guilty of adultery or concubinage at the time of the designation;

2. Those guilty of the same criminal offense in consideration thereof;3. Those made to a public officer or his wife, descendants/ascendants by reasons of his office;

NOTE:

A prior conviction for adultery/concubinage is not required, it can be proven by proponderance ofevidence in the same action nullifying the designation. Note the cases of Insular Life vs. Ebrado, 80 SCRA 181,

where a common law wife of the insured who is married could not be named as a beneficiary and SSS vs.Davac, 17 SCRA 863, where the insured designated his second wife as a beneficiary was upheld as the latter

was not aware of the first marriage;The disqualification does not extend to the children of the adultery or concubinage in view of the

express recognition of the successional rights of illegitimate children (Art. 287, NCC and Art. 176, Family

Code);

MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE

INSURED?

It is recognized that the insured may name anyone he chooses except those disqualified to

receive donations as a beneficiary in his life insurance, even if he is a stranger and has no insurableinterest in the life of the insured. The designation, however, must be in GOOD FAITH AND

WITHOUT FRAUD OR INTENT TO ENTER INTO A WAGERING CONTRACT.

NOTE:

Pertinent Decisions of the Supreme Court

Beneficiary in life and property insurance (2005 bar exams)

SC Ruling:

Under the law, the beneficiary designated in a life insurance contract cannot be changed without his or her

consent because of the beneficiarys vested interest in the policy. In this regard, it is worth nothing that the

beneficiary designation indorsement which forms part of the policy in the name of Rodolfo Dimayuga statesthat the designation of the beneficiaries is irrevocable and no right or privilege under the policy may be

exercised, or agreement made with the insurance company to any change in or amendment to the policy without

the consent of the said beneficiary. Accordingly, based on the provisions of the contract and the law applicable,it is only with the consent of all the beneficiaries that any change or amendment to the policy concerning the

irrevocability of beneficiaries may be legally and validly effected. [Philippine American Life InsuranceCompany v. Pineda (175 SCRA 416)]

Insurable interest on property

SC RULING:

1. The lessor cannot validly be a beneficiary of the fire insurance policy taken by the spouses Cha. It has

no insurable interest on the merchandize insured because it remains with the spouses.2. The automatic assignment of the policy to the lessor is void for being contrary to law and public policy.

The proceeds of the fire insurance policy rightfully belong to the spouses cha.The insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no insurable interest on

the property insured. (Spouses Nilo Cha v. CA Aug. 18, 1997, 2009).

CAN THE BENEFICIARY BE CHANGED?

The insured shall have the right to change the beneficiary he designated unless he hasexpressly waived the right in the policy (Section 11);


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If he has waived the right, the effect is to make the designation as irrevocable. Note that the

designation of the guilty spouse as irrevocable beneficiary is revocable as the instance of theinnocent spouse in cases of termination of:

(1) a subsequent marriage;

(2) nullification of marriage;(3) annulment of marriage; and

(4) legal separation (Art. 34, (4) Family Code

WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY

IN A LIFE INSURANCE CONTRACT?The beneficiary has a vested right that cannot be taken away without his consent. In fact should the

insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the

insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs.Philamlife, 20 SCRA 434).Note: where the wife and minor children were namedirrevocable beneficiaries, wife dies, the husband seeks to change the beneficiarieswith the consent of the children. The consent is not valid due to minority.(Philamlife vs. Pineda, 170 SCRA 416).

NOTE:

2005 BAR EXAM (NO. IX -1)

Q: What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. (2%)

A: The irrevocable beneficiary has a vested interest in the policy, including its incident such as the policy loan

and cash surrender value. (Grogorio v. Sun Life Assurance Company of Canada, 48 Phil. 53 [1925])

2005 BAR EXAM (NO. IX- 2)

Q: Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a friend, as his

beneficiary. Jacob, however, changed his mind and wants Yob and Jojo, his other friends, to be included as

beneficiaries considering that the proceeds of the policy are sufficient for the three friends.Can Jacob still addYob and Jojo as his beneficiaries? Explain. (2%)

A: The insured cannot add other beneficiaries as this would diminish the interest of Diwata who is the

irrevocably designated beneficiary. The insured can only do so with the consent of Diwata.

WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN

ENDOWMENT POLICY?

His interest is contingent as benefits are to be paid only if the assured dies before the specified

period. If the insured outlives the period, the benefits are paid to the insured;

WHAT IS THE EFFECT OF FAILURE TO DESIGNATE OR BENEFICIARY IS

DISQUALIFIED

The benefits of the policy shall accrue to the estate of the insured;

WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED?

If the designation is irrevocable, the legal representatives of the beneficiary may recover unless it

was stipulated that the benefits are payable only if living.If designation is revocable, and no

change is made, the benefits passes to the estate of the insured. The rule holds also if benefits were

payable only if livingorif survivingand the beneficiary dies before the insured.

*WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE

WHERE HE WILLFULLY KILLS THE INSURED?

If the killing is willful, the interest is forfeited, if he is the principal, an accomplice, or an

accessory. The nearest relative of insured gets the proceeds if not otherwise disqualified (Section

12). If not willful or felonious, the provision does not apply.

B. Insurable interest in property insurancePertinent provisions of the Insurance Code:


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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 theinsured, is an insurable interest.

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 w/ an existing interest in that out of w/c the expectancy arises.

In what does a person have insurable interest in property?

A person has insurable interest in property as 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 (section 13). It may consist of:

(a) An existing interest;

(b) An inchoate interest founded on an existing interest (Defined: Interest in real estate which is

not a present interest but which may ripen into a vested interest if not barred, extinguished, or

divested);

(c ) An expectancy coupled with an existing interest in that out of which the expectancy arises.

Note:1. Expectancy must be founded on an actual right to the thing or a

valid contract for it;2. A carrier or depository of any kind has insurable interest in the thing

held by him such to the extent of his liability but not to exceed thevalue thereof(Sections 13, 14, and 15), such as a warehouseman.

But, a mere contingent or expectant interest in anything, notfounded on contract or actual right to the thing is not insurable asthere is no insurable interest (Section 16);

What is the test or measure of insurable interest in property?

Whether one will derive pecuniary benefit or advantage from its preservation or will sufferpecuniary loss or damage from its destruction. (Section 17)

Must the beneficiary in property insurance have insurable interest on the property insured?

YES, as no contract or policy of insurance on property shall be enforceable. Except for the

benefit of some person having insurable interest in the property insured.

WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST

Must exist at the time the insurance takes effect and when the loss occurs but need not exits in

the meantime (Section 19).

Distinctions

Insurable Interest in Life Insurable Interest in Property

1. Must exist at the time thepolicy is taken.

1. Must exist at the time thepolicy is taken and at the time

loss occurs.

2. Taken on insureds life, hisbeneficiaries need not haveinsurable interest on his life.

2. Beneficiary must have aninsurable interest in propertyinsured.

3. No limit on the amount ofinsurable interest.

3. Insurable interest is limitedto the value of interest inproperty insured.


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In life insurance, the general rule is no limit on the amount of insurable interest. The exception is an

insurance taken by the creditor on the life of his debtor. In which case, the insurable interest is limitedonly to the extent of the debt. (Sec. 10)

In relation to the need for the existence of insurable interest:

GENERAL RULE: The effect of a change of interest in any part of a thing insured unaccompanied by a

corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until

the interest in the thing and the interest in the insurance are vested in the same person. (Sec. 20)

No claim in insurance contract while it is suspended because it can happen that the insurable interestwill be returned.

WHAT CHANGE IS CONTEMPLATED

An absolute transfer of the property not life, a lease/mortgage;

EXCEPTIONS TO THE REQUIREMENTS OF INSURABLE INTEREST:(1) Life, health or accident insurance because they are not contracts of indemnity and insurable

interest is not required at the time of loss;

(2) A change of interest after occurrence of an injury and results in loss does not affect the right ofthe insured to indemnity;

- After a loss, the liability of the insurer is fixed

(3) A change of interest in one or more several distinct things, separately insured by one policy, does

not avoid as to the others (Section 22);

(4) A change of interest in one or more several distinct things, separately insured by one policy, does

not avoid the insurance as to the insured; (Section 23)

(5) A transfer of interest by one or several partners, joint owners, or owners in common, who are

jointly insured to the others, does not avoid insurance even though it has been agreed that theinsurance shall lease upon an allocation of the thing insured;

Note:

- There must be no stipulation against it otherwise it is avoided;

- Transfer to strangers avoid the policy

(6) When notwithstanding a prohibition, the consent of the insurer is obtained;

(7) When the policy is so framed that it will insure to the benefit of whomsoever may become theowner during the continuance of the risk.

C. DOUBLE INSURANCE AND OVER INSURANCE

When does double insurance exist?

Double Insurance exists where the same person is insured by several insurers separately in respect

to the same subject and interest. (Sec. 93)

REQUISITES OF DOUBLE INSURANCE

1. Same person is insured;

2. There are several insurers;

3. Subject insured is the same;

4. Interest insured is the same; and5. Risk of peril insured against is the same;

Take Note:

Double insurance is not prohibited by law. A person may therefore procure two or more insurances

to cover his property. However, the insurer may insert an Other Insurance Clause which will


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prohibit double insurance. The rationale is to prevent the danger that the insured will over insure his

property.

EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE

1. Insured, unless the policy otherwise provide, 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 respectivecontracts.

2. Where the policy under which the insured claims is a valued policy, the insured must give creditas against the valuation for any sum received by him under any policy without regard to the actual

value of the subject matter insured.

3. Where the policy under which the insured claims is an unvalued policy, he must give credit, as

against the full insurable value, for any sum received by him under the policy.

4. Where the insured receives any sum in excess of the valuation in case of a valued policy or the

insurable value in case of an unvalued policy, he must hold such sum in trust for the insurers,according to their right of contribution among them;

5. In relation paragraph (4) Each insurer is bound, as between himself and the other insurers to

contribute ratably to the loss in proportion to the amount for which it is liable under his contract.

ALSO REFERRED TO AS THE PRINCIPLE OF CONTRIBUTION WHICH HAS ALREADYBEEN INCOPORATED IN ALMOST ALL POLICIES that should there be other insurances

covering the same property, the liability of the company would be limited to its ratable proportion of

the loss or damage (Also known as CONTRIBUTION CLAUSE)

TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE

Whether the insured, in case of happening of the risk, can directly benefited by recovering on

both policies? If yes there is double insurance.

IS DOUBLE INSURANCE VALID?

It depends, if there is prohibition in the policy then it is not valid, but if there is no prohibition, itis valid provided it must follow the provisions of the law.

If there is an OTHER INSURANCE CLAUSE one that prevents other insurance on theproperty except without the consent of the company THEN IT WILL PREVENT ENFORCEMENT

OF THE POLICY, the policy will be NULL and VOID. If there is no OTHER INSURANCE

CLAUSE, then double insurance is allowed but the provisions of Section 94 must be followed

because property insurance is a contract of indemnity.

DISTINGUSHING OVER INSURANCE FROM DOUBLE INSURACE

REINSURANCE

DOUBLE

INSURANCE

OVER

INSURANCE

- there must be two

or more insurers;

- one insurer is

sufficient;

- the total amountof the policies

need not exceed

the value of the

insurable interest;

- the value mustalways be in

excess of the

insurable interest;


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occurs when an insurer procures a 3RD person to insure him against loss or liability by reason

of such original insurance. (Section 95)

WHEN IS REINSURANCE COMPULSORY?

1. When a non-life insurer insured in any one risk or hazard an amount exceeding 20% of its networth, the insurer needs reinsurance of the excess over such limit (Section 215 (1))

2. When a foreign insurance company withdraws from the Philippines, it should cause its primary

liabilities under policies insuring residents of the Philippines to be reinsured by another company

authorized to transact an insurance business in the Philippines; WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER OBTAINS

REINSURANCE?

Except in automatic reinsurance treaties (when two or more insurance companies agree in advance thatthey will reinsure a part of any line of insurance taken by the other. Since such contracts are self-executing

and the obligation attaches automatically, the information required to be communicated herein could not

influence the reinsurer in deciding whether or not to accept the reinsurance because it is automatZrepresentations of the original insured;all information or knowledge he possesses whether previously or

subsequently acquired, which are material to the risk (Section 96)

WHAT KIND OF CONTRACT IS REINSURANCE?

It is presumed to be a contract of indemnity against liability, and merely against damage (Section 97).

As a RULE, the reinsurer is not liable to the reinsured for a loss under an original policy if the

reinsured is not liable to the original policyholder.

Note: The subject of the reinsurance contract is the insurers risk not the property insured in the original

policy Thus, it is not necessary that the insurer first pay on the claim on the original policy before claimingfrom the insurer.

WHAT IS THE EXTENT OF LIABILITY OF THE REINSURER?

The liability of the reinsurer is measured by the liability of the reinsured to the original policyholder PROVIDED, it does not exceed the amount of reinsurance.

Example: A insures his house valued at 1 million to X insurance for 1.5 Million. X insurance reinsured withZ insurance for 1.2 million. The house burns. The liability of Z insurance is only up to 1 million, which is

the liability of X Insurance. What if the original insured and insurance company settles for less, the liability

of Z Insurance is still only up to what is paid by X Insurance OTHERWISE, the original insurer profits and

thus violates that the principle that is a contract of indemnity.

WHAT IS THE INTEREST OF THE ORIGINAL INSURED IN THE CONTRACT OF

REINSURANCE?

The original insured has no interest in the contract of reinsurance (section 98). Hence only the

reinsured can claim against the reinsurer.

D. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY

INSURABLE INTEREST OF MORTGAGOR AND MORTGAGEE OVERMORTGAGED PROPERTY

Both the mortgagor and mortgagee each have an insurable interest in the property mortgagedand this interest is separate and distinct from the other, such that each of them may insure the

same property for his own benefit. While the mortgagor, as owner, has an insurable interest

equivalent to the value of the property, the mortgagees interest is only up to the extent of hisdebt.

WHO MAY INSURE A MORTGAGED PROPERTY?

Both the mortgagor and the mortgagee may take out separate policies with the same or different

companies. The mortgagor to the extent of his property, the mortgagee to the extent of his credit;

(section 8)


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WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THEPROPERTY MORTGAGED IN HIS OWN NAME BUT MAY THE LOSSPAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM?

UNLESS THE POLICY PROVIDES OTHERWISE:

a. The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be a

party to the original contract. Hence, if the policy is cancelled, notice must be given to the

mortgagor;

b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance,will have the same effect although the property is in the hands of the mortgagee. Hence, if there is a

violation of the policy by the mortgagor, the mortgagee cannot recover;

c. Any act required to be done by the mortgagor may be performed by the mortgagee with the sameeffect if it has been performed by the mortgagor. Example: If notice of loss is required, the

mortgagee may give it;

d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit

and the balance if any to be paid to the mortgagor, since such is for both their benefits;

e. Upon recovery by the mortgagee, his credit is extinguished;

If on the other hand, (section 9), the insurer assents to the transfer of the insurance from the

mortgagor to the mortgagee, and at the time of his assent, imposes further qualifications on theassignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of the

assignee Note the Union Mortgage Clause creates the relation of insured and insurer between

mortgagee and the insurer independent of the contract of the mortgagor. In such case, any act of themortgagor can no longer affect the rights of the mortgagee the insurance contract is now

independent of that with the mortgagor.

WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE

WITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR?

a. The mortgagee may collect from the insurer upon the occurrence of the loss to the extent of hiscredit;

b. Unless otherwise stated, the mortgagor cannot collect the balance of the proceeds after the

mortgagee is paid;

c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the mortgagee

against the mortgagor and may collect the debt to the extent paid to the mortgagee;

d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is unable to

collect in full from insurer, he can recover from the mortgagor;

e. The mortgagor is not released from the debt because the insurer is subrogated in place of the

mortgagee;

TAKE NOTE:

A person who is interested in the safety and preservation of materials in his possession belonging tothird parties because he stands either to benefit from their continued existence or to be prejudiced by their

destruction, has an insurable interest thereon which is not necessarily limited to the extent of his liability to the

owners thereof. A person having mere right of possession of property may insure it to its full value and in his

own name, even when he is not responsible for its safekeeping. (ANG KA YU vs. PHOENIX ASSURANCECO. LTD 1CAR 2)

A. Concealment

WHAT IS CONCEALMENT?

Concealment is a neglect to communicate that which a party knows and ought to communicate (Section

26)

WHAT IS THE EFFECT OF CONCEALMENT?


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Whether intentional or not, it entitles the injured party to rescind the contract of insurance (Section 27).

Examples:(1) The insured does not disclose sickness but dies of another cause. There is concealment because

it is material to a determination of the assumption of risk by the insurer;

(2) The father of the insured obtained an insurance policy over his daughter, but did not disclosethat she was a mongoloid child, the child dies of influenza, the concealment relieves the insurer of

liability (Grepalife vs. CA 89 SCRA 543)

BASIS OF PROVISIONS ON CONCEALMENT/REPRESENTATIONFundamental characteristic of a contract of insurance that it is one of perfect/utmost good faith;

NOTE:

2001 BAR EXAM (N0.XVI): A applied for a non-medical life insurance. The insured did not inform the

insurer that one week prior to his application for insurance, he was examined and confined at St. Lukes

hospital where he was diagnosed for lung cancer. The insured soon thereafter died in a plane crash. Isthe insurer liable considering that the fact concealed had no bearing with the cause of death of the

insured? Why?

A: No. The concealed fact is material to the approval and issuance of the insurance policy. It iswell settled that the insured need not die of the disease he failed to disclose to the insurer. It is

sufficient that his non-disclosure misled the insurer in forming his estimate of the risks of the proposedinsurance policy or in making inquiries.

WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED?

The party claiming existence of concealment must prove that there was knowledge on the part of the

party charged with concealment.

AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT HAVE

KNOWLEDGE OF THE FACT CONCEALED?

Generally, a party must have knowledge of the fact concealed at the time of the effectivity of thepolicy. Note that even if a party did not know of the existence at the rime of application but before its

effectivity, there is concealment.

Information acquired after effectivity is not concealment and does not constitute ground torescind the policy, as after the policy is issued, information subsequently acquired is no longer material

as it will not affect or influence the party to enter into contract. However, in case of the reinstatement of

a lapsed policy, facts known after effectivity but before reinstatement must be disclosed.

HOW IS THE MATERIALITY OF THE CONCEALMENT OR REPRESENTATION

DETERMINED?

Materiality is 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 disadvantagesof the proposed contract or in making his inquiries (Section 31) .

WHAT IS THE TEST OF MATERIALITY?

The test of materiality is whether knowledge of the true facts could have influence a prudent insurer

in determining whether to accept the risk or in fixing the premiums .

MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED

AND THE CAUSE OF THE LOSS?

Not necessary

Concealment need not be material, be of facts which about or contribute to or are connected of

the insureds loss. It is immaterial that there is no causal relationship between the fact concealed and

the loss sustained. It is sufficient that the non-revelation has misled the insurer in forming its estimate ofdisadvantage of fixing the premium.

Examples: Insured concealed kidney disease and enlarged liver later he died of thrombosis, is the

insurer liable? No, since the fact concealed was material though the insured did not die therefrom

(Henson vs. Philam 50 OG 73428). Insured had concealed that he had kidney disease. He dies in planecrash. The insurer is not liable (Sunlife vs. CA, 245 SCRA 269.

WHAT FACTS MUST BE COMMUNICATED?


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Each party to an insurance contract is bound to communicate to the other all facts that meet the

following requisites:(a) Such fact that must be within his knowledge as concealment requires knowledge of the fact

concealed by the party charged with concealment;

(b) Fact/s must be material to the contract it must be of such nature that had the insurer known ofit, it would not have accepted the risk or demanded a higher premium;

(c) That the other party had no means of ascertaining such fact/s;

(d) That the party with a duty to communicate makes no warranty (Section 28) as the existence of

a warranty make the requirement to disclose superfluous but an intentional fraudulent omission on thepart of the one insured to communicate information on a matter proving or tending to prove falsity of a

warranty entitles the insurer to rescind (Section 29).

WHAT MATTER NEED NOT BE COMMUNICATED?

Except in answer to the inquiries of the other:

(1) Those which the other knows as the insurer cannot say that it has been deceived or misled;

Example: Insured discloses that he has tuberculosis to he agent of the insurer, who in turn omits to state

the same in the application of the insured was deemed knowledge of the insurer (Insular Life AssuranceCo. vs. Feliciano, 74 Phil 468). Insurer had surveyed the location and surrounding area of a building

that it is to be insured against fire, an omission to state that there are neighboring buildings will notavoid policy;

(2) Those which in the exercise of ordinary care, the other ought to know, and of which, the former

has no reason to suppose him to be ignorant. The facts that the other ought to know as per section 32

are:

(3) Those of which the other waives communication. A waiver takes place either, by the terms of the

insurance or by he neglect to make inquiries as to such facts where they are distinctly implied in otherfacts of which information is communicated (section 33).

(4) Those which prove or tend to prove the existence of a risk excluded by a warranty, and whichare not otherwise material.

(5) Those which relate to the risk exempted from the policy, and which are not otherwise material

(section 30).

Note:

SUNLIFE ASSURANCE CO. OF CANADA VS. CA, JUNE 22, 1995(1996, 1997, and 2001 Bar Exams)

Robert Bacani was issued life insurance non-medical policy for P100,000.00 with his mother as

beneficiary. In his application, he concealed his confinement at the Lung Center of the Philippines forcertain illness. He died of a plane crash. The insurance company refused to pay for breach of the

insurance contract.RTC and CA granted the claim of the beneficiary because the concealed facts were

not material or irrelevant to the cause of death.

SC RULING:

The SC reversed the ruling and held that the information which the insured failed to disclose wasmaterial and relevant to the approval and issuance of the policy. The facts concealed would have

affected the insurers action on the application either by charging a higher rate of premium or rejecting

the same. The insured need not die of the disease he concealed. It is sufficient that his non-disclosuremisled the insurer in forming his estimate of the risk involved or in making inquiries. The contract of

insurance can be rescinded by reason of concealment and this has to be exercised within the two yearcontestability period.

B. Misrepresentation/Omissions

WHAT IS REPRESENTATION?

Oral or written statement of a fact or a condition affecting the risk made by the insured to the

insurance company, tending to induce the insurer to take the risk (Section 36)


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WHEN MAY REPRESENTATION BE MADE?

Since it is an inducement to entering a contract it must ordinarily be made at the same time as

or before the insurance of the policy (section 37). Note that it can also be made after the issuance

of the policy when the purpose thereof is to induce the insurer to modify an existing insurancecontract as the provisions also apply to a modification (Same with concealment)

HOW SHOULD REPRESENTATION BE CONSTRUED?

The language of a representation is to be interpreted by the same rules as the language of the

contracts in general (section 38). Hence, it need not be literally true and correct/accurate in every

respect, rather, it is sufficient if it is substantially or materially true. In case of a promissory

representation, it is sufficient if it is substantially complied with.

WHAT ARE THE FORMS AND KINDS OF REPRESENTATION?

Representations may be Oral or Written and can either be:

(a) Affirmative which is an affirmation of a fact existing when the contract begins;

(b) Promissory which is a statement by the insured concerning what is to happen during the term

of the insurance.

IS A REPRESENTATION PART OF THE CONTRACT?

No, it cannot qualify as an express provision in a contract (it is a collateral inducement to the

contract but it may qualify an implied warranty (section 40).

CAN A REPRESENTATION BE WITHDRAWN OR ALTERED?

Yes, as long as the insurance has not yet been effected and the insurer has not yet been induced

to issue the policy. If withdrawn or altered afterwards, the contract can be rescinded as theinsurer has already been led to issue the policy (section 41).

TO WHAT DATE DOES A REPRESENTATION REFER?

It must be presumed to refer to the date on which the contract goes into effect (section 42).

Note: There is no false representation if it is true at the time the contract takes effect although falseat the time it is made.

WHEN IS A REPRESENTATION SAID TO BE FALSE?

When the facts fail to correspond with its assertions or stipulations (Section 44)

MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HE HAS NO

PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS?

When a person has no personal knowledge of facts he may or may not communicate suchinformation to the insurer. If he does communicate, he is not responsible for its truth (section 43).

Hence, there can be no misrepresentation.

WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD

PERSON?

When the information material to the transaction was acquired by an agent of the insured, as

knowledge of the agent is also knowledge of the principal.


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WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT?

If it is false on material point, whether affirmative or promissory the injured party is entitled to

rescind the contract from the time the representation becomes false. However, the right to rescind isconsidered waived by the acceptance of premium payments despite knowledge of the ground to

rescind (section 45).

Examples:(a) Insurer was aware of the lack of the extinguishers required by the policy. But there is no waiver

if the insurer had no knowledge of the ground at the time of the acceptance of the premium;

(b) Unauthorized driver (Strokes vs. Malayan, 127 SCRA 766)

HOW IS MATERIALITY DETERMINED?

The same as concealment (Section 46) probable and reasonable influence of the facts upon the party

to whom the representation is made in forming his estimate of the advantage/disadvantages of the

contract or I making inquiries.

WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED?

The right to rescind must be exercised previous to the commencement of an action on thecontract (section 48). Note the case of Tan Chay Hing vs. West Coast Life Insurance Co., 51 Phil

80, where an insurer interposed the defense in an action to claim the proceeds that the contract is

null and void. Section 48 was held to apply only when there is a contract to rescind.It is also qualified by 2nd paragraph of section 48 which provides that after a policy of life

insurance payable on the death of the insured shall have been in force during the lifetime of the

insured for a period of 2 years from the date of issue or its last reinstatement, the insurer cannotprove that the policy is void ab initio or is subject to rescission by reason of a fraudulent

concealment or misrepresentation of the insured or his agent(known as the incontestabilityclause).

WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITYCLAUSE?

(a) On the part of the insurer an insurer has/should have a reasonable opportunity to investigatethe statements which are made by the applicant an that after a definite period, it should no longer be

permitted to question its validity;

(b) On part of the insured its object is to give the greatest possible assurance that the beneficiarieswould receive payment of the proceeds without question as to validity or the policy.

REQUISITES OF INCONTESTABILITY CLAUSE

The requisites are:

(1) It 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 years from date of

issue/or last reinstatement.

Tan vs. CA, 174 SCRA 403 during the lifetime of the insured means that the policy is no longer in

force if the insured dies.

Facts: Philam issued policy on November 6, 1973. On April 26, 1975 the insured died. Thebeneficiaries claimed but the insurer denied the claim on September 11, 1975 and rescinded the

policy on the ground of misrepresentation and concealment. Held: Insurer has two years from date


18/52

of issue/reinstatement within which to contest the policy whether or not the insured still lives within

the period.

WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE

LAPSE OF 2 YEARS?

(1) non-payment of premiums;

(2) lack of insurable interest;

(3) that the cause of death was excepted or not covered by the terms of the policy;(4) that the fraud was of a particular vicious type such as:

a. policy was taken in furtherance of a scheme to murder the insured;

b. where the insured substituted another for the medical examination;c. where the beneficiary feloniously killed the insured;

(5) violation of a condition in the policy relating to military or naval service in time of war;

(6) the necessary notice or proof of death was not given;(7) action is not brought within time specified in the policy, which in no case should be less than 1

year as per section 63.

WHAT ARE THE EFFECTS OF INCONTESTABILITY?

The insurer can no longer escape liability, tender the policy or be allowed to prove that the policy is

void ab initio or may be rescinded by reason of concealment or misrepresentation by the agent of

the insured or the insured.

DISTINGUISH CONCEALMENT FROM REPRESENTATION

Concealment is the neglect of one party to communicate to the other material facts. The

information he gives in compliance with his duty to reveal information is representation.Representation therefore is the communication required to comply with the prohibition against

concealment.

Concealment is the passive and misrepresentation is the active form of the same bad faith.

CONCEALMENT AND REPRESENTATION COMPARED

1. In concealment the insured withholds information of material facts, while in representation

the insured makes erroneous statements;2. In concealment and misrepresentation both give the insurer the right to rescind the contract of

insurance;

3. The materiality of concealment and representation are determined by the same rules;4. Whether the concealment or representation is intentional or not, the injured party can rescind;

5. Since insurance contracts are of utmost good faith the insurer is also covered by the rule.

DISTINGUISHING IT FROM REPRESENTATIONS

WARRANTY REPRESENTATION

A warranty ispart of thecontract;

A warranty is

expressly setforth in thepolicy orincorporatedtherein byreference;

A warranty

must strictly

Representation ismerely acollateral

inducementthereto;

A

Representationmy be oral orwritten inanotherstatement;


19/52

and literallyperformed;

A warranty ispresumedmaterial;

A breach of

warranty is abreach of thecontract itself

Representation

must besubstantiallytrue;

A representation

must be shownto be so;

(mis)representati

on is a ground torescind thecontract;

1. Prescription of Action

RULES

1. The parties to a contract of insurance may validly agree that an action on the policy shouldbe brought within a limited period of time, provided such period is not less than one (1) year

from the time the cause of action accrues. If the period agreed upon is less than one (1) year

from the time the cause of action accrues, such agreement is VOID.

a. The stipulated prescriptive period shall begin to run from the date of the insurersrejection of the claim filed by the insured or beneficiary and not from the time of the

loss;

b. In case the claim was denied by the insurer but the insured filed a petition forreconsideration, the prescriptive period should be counted from the date of the claim

was denied and not at the first reconsideration. (Sun Life Office, LTD v. CA, March

13, 1991)2. If there is no stipulation or the stipulation was void, the insured may bring the action within

ten (10) years in case the contract is written.

3. In Compulsory Motor Vehicle Insurance, the written notice of claims must be filed within 6months from the date of the accident, otherwise the claim is deemed waived even if the same is

brought within one year from its rejection.

4. The suit for damages, either with the proper court or with the Insurance Commissioner,

should be filed within one year from the date of the denial of the claim by the insurer, otherwise,claimants right of action shall prescribe.

2. Subrogation

WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO GIVINGOF NOTICE OF LOSS?

In property insurance, after the insured has received payment from the insurer of the loss covered bythe policy, the insurance company is SUBROGATED to the rights of the insured against the

wrongdoer or the person who has violated the contract. The right of subrogation accrues upon

payment of the insurance claim.

NOTE: Subrogation takes effect by operation of law and does not require the consent of the wrongdoer (Firemans Fire Insurance vs. Jamilla & Company, 70 SCRA 323).

THERE IS NO SUBROGATION IN:

(a) Life insurance as it is not a contract of indemnity

(b) When proximate cause of the loss is the insured himself(c) When the insurer pays to the insured a loss not covered by the policy;

The insured is no longer to collect from the wrongdoer if the amount that he received from theinsurer has fully compensated for the loss.

SUBROGATION (ART. 2207, NEW CIVIL CODE)

NOTE:

PHILIPPINE AMERICAN GEN. INSURANCE CO. VS. CA & FELMAN SHIPPING LINES,

JUNE 11,1997.


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SC RULING:

It ordered Felman to pay Phialamgen P 755, 250.00 plus interest pursuant to Art. 2207 0f the CivilCode which provides:

Art. 2207. If the plaintiffs 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, the insurancecompany shall be subrogated to the right of the insured against the wrongdoer or the person who

violated the contract.

I. FORMS AND INTERPRETATION

Doubt resolved in favour of negotiability; Purpose

Where the meaning is doubtful, the courts have adopted the policy of resolving in favour of the

negotiability of the instrument.

The purpose obviously is to encourage the free circulation of the negotiable paper because of the

admittedly indispensable function that they perform in commercial business transactions in any given

country and the world at large.

Guiding Principle

The basic GUIDING PRINCIPLE as laid down in Section 10 is that the instrument need not follow thelanguage of the law, but the terms must be sufficient to clearly indicate an intention to conform to the

requirements of the law. Hence, the use of a foreign language or grammatical errors does not destroy

negotiability.

NOTE THOUGH the EXCEPTION FOUND IN SECTION 8 pertaining to an instrument payable to order

where literal compliance with the law is necessary.

Illustrations:

1. The following promissory note is not negotiable because it is neither payable to order or to bearer

RECEIEVD P10,000 payable after World War II.

(Sgd. B)

2. Conformity with all requirements of NIL makes an instrument a bill of exchange, even if acceptance isnot made since the alter is important only in determination of liabilities of parties. (See: Phil. Bank of

Commerce v. Aruego, 102 SCRA 530 (1981)

Form of Negotiable Instruments

An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with

reasonable certainty. (Sec. 1, NIL)

1. It must be in writing

a. Physical Integrity of Whole Instrument the negotiability of an instrument must be determined only from the

face of the document itself and not elsewhere (Des Moines Savings Bank v. Arthur, 163 la. 205, 143 NW 556)


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CALTEX V. CA (1992)

The negotiability or non-negotiability of an instrument is determined from the face of the

instrument itself. The duty of the court in such case is to ascertain, not what the parties may have

secretly intended but what is the meaning of the words they have used.

b. A commercial transaction may be verbal unless the law requires a written document for its validity. Writing is

required for negotiable instruments. Hence, there can be no verbal promissory note nor a bill of exchange. Inshort, the requisites for the validity of a negotiable instrument are: (a) consent, (b) consideration, (c) subject

matter, and form.

c. As a general rule, bills, notes and other instruments of similar nature are not subject to be varied or contradicted

by parol or extrinsic evidence pursuant to the rule that long experience that written evidence is so much more

certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have

expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to

show that the parties intended a different contract from that expressed in the writing signed by them BUT if there

is an allegation of fraud in the execution of promissory note, such as when the note having a face value of

P50,000.00 was alleged to have been signed by the makers at only P5,000.00, where a parol contemporaneous

agreement was the inducing and moving cause of the written contract, it may be shown by parol evidence; but itmust be established by clear and convincing evidence, mere preponderance of evidence not even being adequate

(Inciong v. Court of Appeals, 257 SCRA 578)

"In writing" - includes print; written or typed

and signed by the maker or drawer.

a. Any inscription or even stamping will suffice provided that it is meant to function as the signature of the party

b. Persons who write their names on the face of a note are makers and are liable as such, and their solidary liability

is made certain by the presence of the phrase joint and several. (Republic Planters Bank vs. CA, 216 SCRA

738)

The signature of the maker of a note or the drawer of a bill is usually affixed at the lower right handcorner of the instrument

No person liable on the instrument whose signature does not appear thereon.

One who signs in a trade or assumed name liable to same extent as if he had signed in his own name.

(Sec. 18, NIL)

Signature of party may be made by duly authorized agent; no particular form of appointment necessary. (Sec. 19,

NIL)

Signature, binding so long it is intended or adopted as the signature of the signer or made with his

authority.

2. It must contain an unconditional promise or order to pay a sum certain in money.

A. ORDER OR PROMISE TO PAY

a. PROMISSORY NOTE:i. PROMISE TO PAY: should be express on the face of the instrumentii. Word "promise" is not absolutely necessary. Any expression equivalent to a promise is

sufficient.iii. Mere acknowledgment of a debtinsufficient

b. BILLS OF EXCHANGE:i. Order - command or imperative direction; the instrument, by its nature, demanding a right.ii. Words which are equivalent to an order are sufficient.iii. A mere request or authority to pay does not constitute an order.iv. Although the mere use of polite words like "please" does not of itself deprive the instrument of

its characteristics as an order, its language must clearly indicate a demand upon the drawee to

pay.


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B. UNCONDITIONALa. Thepromise or order to pay, to be unconditional, must be unqualified.b. Sec. 3, NIL: An unqualified order or promise to pay is unconditionalthough coupled with:

An indication of a particular fund out of which reimbursement is to be made, or a particularaccount to be debited with the amount

UNCONDITIONAL: Mere indication of the particular fund out of which reimbursement is to

be made, or an indication of a particular account to be debited with the amount

A statement of the transaction which gives rise to the instrument.

UNCONDITIONAL: Mere recital of the transaction or consideration for which the

instrument was issued

However, the fact that the condition appearing on the instrument has been fulfilled will not

convert it into a negotiable one.

But an order or promise to pay out of a particular fund is not unconditional

CONDITIONAL: when reference to the fund clearly indicates an intention that such fund

alone should be the source of payment

General Rule: The promise or order should not depend on a contingent event. If it is conditional, itis non-negotiable.

Exceptions:

a. Indication of particular fund from which the acceptor disburses himself after payment

b. Statement of the transaction which gives rise to the instrument. (Sec. 3, NIL)

a. An unconditional promise or order to pay is required because the purpose of a negotiable instrument is to take the

place of money. Hence, if the instrument may or may not mature, no one will have faith on negotiable instrument

embodying it. Thus, the promise or order must be ABSOLUTE.

b. Any word equivalent to an order would suffice, and words of courtesy would not be inconsistent with the order;however, a mere request or authorization would not be enough.

c. The promise must be found in the instrument itself, the mere existence of a debt does not amount to a promise.

The use of the word order is deemed equivalent to promise.

d. An acknowledgement of debt becomes a promise to pay by addition of words implying a promise of payment,

such as payable on a given day, payable on demand, paid when called for, I.O.U. (Jimenez v. Bucoy, 103

Phil. 40 [1958])

e. Nature of Condition (Art. 1179, Civil code) a distinction must be made between a condition (a future and

uncertain event which may or may not happen) and a period (one that is certain to happen though the time when it

will happen is not known). An instrument embodying an obligation that is subject to a condition is non-

negotiable; whereas, that with an obligation subject to a period is negotiable.

Illustrations:

1. Pay to A or order P500 if it rains on 28 June 2012

(Sgd.) B

If it rains on 28 June 2012 is a condition, one which may or may not happen. The instrument

is non-negotiable. Under the last sentence of Section 4, if it indeed rains on 28 June 2012 and thecondition is thereby fulfilled, the instrument which was originally conditional and non-negotiable

does no thereby become negotiable by the fulfillment of the condition.2. 10 days after X dies, pay A or order P500.

(Sgd.) BWhen X will die is not certain, but X is sure to die. This is a period. The instrument is negotiable

3. Under Section. 39, a condition in the endorsement would not destroy negotiability of the instrument. Thus:


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Pay A or order P500

(Sgd.) B

[at the back]

Pay to X if it rains on 28 June 2012

(Sgd.) A

B, upon presentment for payment, may pay immediately ignoring whether the condition is fulfilled. Should B

choose to pay immediately and the condition is not fulfilled, then the quasi-contract of solution indebiti arises

(Article 2154, Civil Code).

Under Section 3 (a) an indication of a particular account to be debited with the amount does not make the

promise or order conditional. We have to distinguish between the use of the words fix and indicate. If theinstrument fixes the fund from where payment has to be made, so that payment cannot be made from other funds,

the instrument is not negotiable. But if the instrument merely indicates the fund from where payment is to be

made, so that the obligor will still be liable even if the indicated fund is depleted, then the instrument is to be

made, so that the obligor will still be liable even if the indicated fund is depleted, then the instrument is

negotiable.

NOTE: (a) a check of itself does not operate as an assignment of any part of the funds to the credit of the drawer

with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check. (Section

189) (b) A treasury warrant is not a negotiable instrument because it is to be paid from a particular fund(Abubakar v. Auditor General, 81 Phil. 359 [1948]; Metropolitan Bank v. CA [1991]) (c) Indication of a

particular fund out of which reimbursement is to be made. (d) a statement of the transaction which give rise to the

instrument like Section 3 (b) like:

Pay to A or order P500arising from our rice deal

(Sgd.) BSee: Elizalde & Co. V. Binan Trans. Co. (CA) 58 O.G. 5886 (1960)

Reference in a promissory note to some extrinsic agreement, in order to destroy its negotiability, must be suchas to indicate unmistakably that the paper is to be burdened with conditions of that agreement. When the

reference is a simple recital of the consideration for which the paper was given, or is a mere mention of origin

of the transaction, its negotiability is not affected.

C. A SUM CERTAIN IN MONEY

1. Sec. 2, NIL: The sum payable is a sum certain, even if:

a. With interest;

b. By stated installments;

c. By stated installments with acceleration clause (a provision that upon default in payment of any

installment/interest, the whole shall become due);d. With exchange, whether at a fixed rate or at the current rate; or

e. With costs of collection or attorney's fee, in case payment not made at maturity2. A sum is certain if from the face of the instrument it can be mathematically computed.3. A stipulation to pay a higher rate of interest if the note is not paid or a lower rate if it is paid on or

before maturity does not render the instrument non-negotiable.

D. MUST BE PAYABLE IN MONEY1. Capable of being transformed into money.


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2. NON NEGOTIABLE: an instrument which contains an order or promise to do an act in addition to

the payment of money3. BUT If the order or promise gives the holderan election to require something to be done in lieu of

payment of money, an instrument otherwise negotiable would not be affected thereby. (Sec. 5, NIL)

But if the option is with the maker or person primarily liable, instrument is NOT negotiable.

4. Kind of current money does not affect negotiability. Since the value of the note can by a simple

mathematical computation be expressed in the value of the lawful money of the latter country

(Incitti v Ferrante, 1933, US Jur)

5. Obligations in foreign currency may be discharged in Philippine currency based on the prevailingrate at the time of payment, pursuant to RA 8183 (Asia World Recruitment v NLRC, 1999).

b. The sum certain when what is to be paid is a fixed amount of money or alternatively, if

from the face of the instrument it can be mathematically computed. Under Section 2, the sum is still certain even

when it is (a) with interest stipulated through Usury Law now ineffective. (Liam Law v. Olympic Sawmill co.,

129 SCRA 439 [1984]; CB Circular No. 905, s. 1982 OG 7336). (b) By stated instalments, though the

instalments must not only be stated, but the maturity of each instalment must be fixed or determinable (c) by

stated instalments, with Acceleration Clause (d) With either fixed or current rate of exchange, or payable in

foreign exchange Uniform Currency Law, R.A. 529, repealed by R.A. 8183) (e) With costs of collection or

attorneys fees, in cases where payment is not made at maturity NOTE THOUGH that at maturity, the instrument

is no longer fully negotiable since any transferee acquiring it would not be a holder in due course under Sections

52 and 58.

c. Section 2 illustrates instances where the sum payable is still a sum certain. This must be

correlated with Section 5 which provides that an instrument which contains an order or promise to do any act in

addition to the payment of money is not negotiable. Thus in the following illustration, the instrument is not

negotiable, to wit:

Pay A or order P500 or 5 sacks of rice

(Sgd.) BHowever, under Sec. 5 (d), the instrument is not rendered non-negotiable if it is the holder who is given an

election to require something to be done in lieu of payment of money, thus, in the following illustration, the

instrument if negotiable because the obligation of the maker/acceptor to pay in a sum certain, if the holder so

chooses, is still absolute, to wit:

Pay A or order P500 but the holder may demand delivery of 5 sacks of rice

(Sgd.) B

Illustrations:

As provided for under Section 2, the following are still negotiable instruments, to wit:

1. Pay to A or order P500 with interest at 12% per annum

2. Pay to A or order P500payable in monthly instalments of P1003. Pay to A or order P500 in monthly instalments of P100 and failure to pay one instalment will make the entire

fall due immediately

4.

Pay to A or order and in the event of litigation, I agree to pay court costs and attorneys fees.5.

Pay A or order P500

(Sgd.) B


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The paragraph of Section 2 on foreign exchange is deemed to have been amended to by Rep. Acts 529 and 4100. The

instrument is valid but what is void is the obligation to pay in foreign currency (See: Arrietta v. NARIC, 10 SCRA

79 [1964]).

While the agreement to pay in foreign exchange is declared null and void and of no effect, what the law specifically

prohibits is payment in currency other than legal tender; it does not defeat a creditors claim for payment, but to be

made in lawful Philippine legal tender. (See: Ponce v. Court of Appeals 90 SCRA 533 [1979]).

Where the parties stipulate payment in foreign currency, the rate of exchange is determined not at the time of making

of the instrument but at the time of payment, and not the rate at the time the obligation was incurred. (See Kalalo v.

Luz 34 SCRA 337 [1970])

3. It must be payable on demand, or at a fixed or determinable future time.

TIME OF PAYMENT MUST BE CERTAIN

Purpose: Informing the holder of the instrument of the date when he may enforce paymentthereof.

An instrument may be payable:

1. on demand

a. when expressed to be payable on demand, or at sight, or on presentation; (Sec. 7, NIL)b. when no time for payment expressed, (Sec. 7, NIL)c. Special Rule: where an instrument is issued, accepted or indorsed when overdue, it is, as regards the

person so issuing, accepting, or indorsing it, payable on demand or at a fixed or determinable future

timed. when its expressed to be payable at a fixed period after date or sight, or on or before a fixed or

determinable future time fixed therein,e. Where an instrument is issued, accepted or indorsed when overdue, it is, as regards to the person so

issuing, accepting, or indorsing it, payable on demand.

Illustration:

(a) On demand pay to A or order P500)

(b) At sight pay to A or order P500. (This applies only to a bill of exchange.)(c) On presentation pay to A or order P500. (This applies only to a bill of exchange).

(d) Pay to A or order. (No date expressed.)

(e) 10 days after date (16 April 2012) pay to A or order P500. (Provided, that this instrument is issued,

accepted or endorsed when overdue, as far as the person issuing, accepting o indorsing is concerned, theinstrument is payable on demand.)

Demand instruments: Holder may call for payment any time; maker has an option to pay at any time,

and the refusal of the holder to accept payment will terminate the running of interest, if any, but the

obligation to pay the note remains.

2. at a fixed time

o Only on the stipulated date, and not before, may the holder demand its payment.

o Should he fail to demand payment, the instrument becomes overdue but remains valid and

negotiable. It is merely converted to a demand instrument.

3. at a determinable future time

o Determinable future time, if expressed to be payable (Sec. 4, NIL):

1.)At a fixed period after date of sight;

2.)On or before a fixed or determinable future time specified therein;

3.)On or at a fixed period after the occurrence of a specified event which is certain to happen,though the time of happening be uncertain.

Illustrations:


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a. At a fixed period after date or sight

10 days after date pay to A or order P500

(Sgd.) B 10 days after sight pay to A or order P500

(Sgd.) B

b. On or before a fixed or determinable future time specified therein:On or before 9 July 2014 pay to a or order P500

(Sgd.) B

c. On or at a fixed period after the occurrence of a specified event which is certain to happen, though

the time of happening be uncertain10 days after X die

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