hizon notes - insurance.pdf

NOTES ON INSURANCE

Kenneth & King Hizon (2A)

Facultad de Derecho Civil 1 UNIVERSITY OF SANTO TOMAS

UNIVERSITY OF SANTO TOMAS

Faculty of Civil Law A.Y. 2011-2012

Second Semester

LAW ON INSURANCE

THE INSURANCE CODE OF THE PHILIPPINES (Presidential Decree No. 1460, As Amended)

GENERAL PROVISIONS Sec. 1. This Decree shall be known as "The Insurance Code".

HISTORICAL ORIGIN

Insurance is based upon the principle of aiding another from a loss caused by an unfortunate event. Q: Mutual insurance is said to be as old as society itself. Give some ancient civilizations where insurance already existed. A:

1. Egyptians 2. Chinese 3. Hindus 4. Romans

But, it is said to have been established among the Greeks as early as 3

rd century B.C.

Q: Give the origin of the present day insurance. A: The practice of insurance as we know it today is relatively a modern invention. 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. It is thus apparent that the law of insurance was derived from the maritime law, and as such, was part of the general law merchant, and international in its character. From Italy, the practice of insuring commercial ventures against disaster rapidly extended to other maritime States of Europe.

Q: How did insurance develop in England? A: The Italian merchants from the commercial centers in Northern Italy, generally known as the Lombards, founded

trading houses in London in the 12th

century and brought with them the custom of insuring against hazards of trade. Q: Questions of insurance, at the early times, were determined in accordance with what factors? A:

1. Customs of merchants 2. Merchant courts 3. Custom of submitting all contracts involving

mercantile rights to courts of merchants Q: In 1601, what essential event happened in England which made a huge impact in the development of the field of insurance? A: In 1601, the common law courts of England began to take cognizance of insurance cases with the passage of the first English Insurance Act by which a special court was established for the trial of maritime insurance controversies. Q: Give the important contribution of Lord Mansfield in the field of insurance. A: With his appointment in 1756 as Chief Justice of Court of King’s Bench, the essential principles of the law of merchant were incorporated into the common law system of England and the common law courts thereby rendered competent to determine all questions involving insurance. Lord Mansfield is also known as “Father of English Commercial Law.” Q: How did insurance develop in the United States? A: With the exception of ocean marine insurance, the English practices and the English decisions have little influence in the United States. Q: How did insurance develop in the Philippines during the Pre-Spanish times?

NOTES ON INSURANCE

Kenneth & King Hizon (2A)- UST Faculty of Civil Law


A: Prior to the 19th

century, insurance in its modern sense, did not exist 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 misfortune, it was borne by the family. When the barangays developed, the assistance was extended accordingly. Eventually, mutual benefit societies and fraternal associations were organized for the purpose of rendering assistance, in money or in kind, to their members. Q: Why didn’t insurance in the Philippines work in the early years? A: Aside from economic reasons (low per capita income), the fatalistic philosophy behind our oft-quoted expression “bahala na.” Q: How about in the present context, how was insurance introduced in the Philippines? A: It was first introduced sometime in 1829 when Lloyd’s of London appointed Stracham, Murray & Co., Inc. as its representative here. In 1939, the Union Insurance Society of Canton appointed Russel & Sturgis as its agent in Manila. The business transacted then was limited to non-life insurance. Q: When was life insurance introduced in the Philippines? A: It was only in 1898 with the entry of Sun Life Assurance of Canada. Q: What was the first domestic non-life insurance company in the Philippines? A: Yek Tong Lin Fire and Marine Insurance Company which was organized on June 8, 1906. Q: What was the first domestic non-life insurance company in the Philippines? A: Insular Life Assurance Co., Ltd which was organized in 1910. Q: When was reinsurance introduced in the Philippines? A: In 1950, with Reinsurance Company of the Orient which wrote treaties both for life and non-life. In 1949, a government agency was formed to handle insurance affairs. The Insular Treasurer was appointed Commisioner ex officio Q: When was social insurance established?

A: In 1936 with the enactment of C.A. No. 186 which created the Government Service Insurance System (GSIS) which started operations in 1937. In 1954, R.A. No. 1161 was enacted which provides for the organization of Social Security System (GSIS) covering employees of the private sector

SOURCES OF INSURANCE LAW Q: What are the sources of insurance law in the Philippines? A:

1. During the Spanish period, the Code of Commerce and book 4 of the Old Civil Code of 1889

2. Act. No. 2427 (Insurance Act) during the American period

3. R.A. 386, Civil Code of the Philippines 4. Presidential Decree No. 612 which ordained the

Insurance Code of the Philippines 5. Presidential Decree No. 1460 consolidated all

insurance laws into a single code known as the Insurance Code of 1978.

6. Presidential Decree No. 1814 and B.P. Blg. 874 which amended P.D. 1460

Laws governing insurance

Q: What laws govern insurance? A:

1. Insurance Code of 1978 (P.D. 1460)-It took effect on June 11, 1978, the date of its promulgation

2. Civil Code-The provisions dealing with insurance are Articles 739 and 2012 (on void donations), Art. 2011 (on the applicability of the Civil Code), Arts. 2021-2027 (life annuity contracts), Art. 2186 (compulsory motor vehicle liability insurance), and Art. 2207 (insurer’s right of subrogation)

NOTE: Insurance contracts are governed primarily by the Insurance Code but if it does not specifically provide for a particular matter in question, the provisions of the Civil Code on contracts and other special laws shall govern.

3. Special laws a. Insurance Code of 1978

NOTE: Insofar as Civil Code is concerned, the Code of Commerce is considered a special law

b. P.D. 1146 (The Revised Government Insurance Act of 1977)

NOTES ON INSURANCE



c. R.A. 1161 (The Social Security Act of 1954)

4. Others a. R.A. 656 (Property Insurance Law) b. R.A. 4898 (for insurance coverage of barangay

officials) c. E.O. 250 d. R.A. 3591

DOCTRINE OF SUBROGATION

Q: What is the doctrine of subrogation? A: It is basically a process of legal subrogation. The insurer, after paying the amount covered by the insurance policy, stepping into the shoes of the insured, as it were, and availing himself of the latter’s rights that exist against the wrongdoer at the time of the loss. Q: What is the basis of the doctrine? A: It has its roots on equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimately payment of debt by one who justice and good conscience ought to pay. Q: What are the principal purposes of subrogation conditioned on policy? A:

1. To make the person who caused the loss, legally responsible for it

2. To prevent the insured from receiving a double recovery from the wrongdoer and the insurer

3. To prevent tortfeasors from being free from the liabilities

Q: It is said that the right of subrogation under Art. 2207 applies only to property, and not to life insurance. Why? A: The value of human life is regarded as unlimited, and no recovery from a 3

rd party can be deemed adequate to

compensate the insured’s beneficiary. The pecuniary value of human life to the beneficiary of a life insurance policy can seldom be determined with accuracy. NOTE: Life insurance contracts are not ordinary contracts of indemnity Q: Explain: Privity of contract or assignment by insured claim is not essential. A: The right of subrogation is not dependent upon, not does it grow out of, any privity of contract or upon written

assignment of claim. It accrues simply upon payment of the insurance claim by the insurer. Q: Is presentation of evidence of the insurance policy indispensable before the insurer may recover? A: No. The subrogation receipt itself is sufficient to establish not only the relationship of the insurer and the insured, but also the amount to settle the insurance. Q: What if the insurer pays the insured for a loss which is not risk covered by the policy, effecting thereby “voluntary payment,” does the insurer have a right of subrogation? A: No. Under Art. 2207, the cause of loss or injury must be risk covered by the policy to entitle the insurer to subrogation. Nevertheless, the insurer may recover from the 3

rd party responsible for damage to the insured property

under Art. 1236 of the Civil Code. Note: The right of subrogation given to the insurer prevents the insured from obtaining more than the amount he loss. It is a method of implementing the principle of indemnity which is the heart of insurance. The right exists after indemnity has been paid by insurer to the insured who can no longer go after the 3

rd party. He can only recover once.

Q: What if the amount paid by the insurance company does not fully cover the injury or loss? A: It is the aggrieved party or the insured, not the insurer, who is entitled to recover the deficiency from the person responsible for the loss or injury. This is true in case of under-insurance. Q: Explain: The insurer cannot defeat the insured’s claim for indemnity on the ground that the insured has a right to be indemnified by a 3

rd person.

A: Having been paid a premium to make good the insured’s loss, the insurer cannot compel him to seek indemnity elsewhere. Q: Explain: The right of insurer against 3

rd party is limited to

amount recoverable from the latter by the insured. A: As the insurer is subrogated merely to the rights of the insured, it can necessarily recover only the amount recoverable by the insured from the party responsible for the loss. It cannot recover in full the amount it paid to the insured if it is greater than that which the insured could lawfully lay claim against the person causing the loss. Q: Is the exercise of the right of subrogation by the insurer mandatory or discretionary?

NOTES ON INSURANCE



A: Discretionary. Whether or not the insurer should exercise the rights of the insured to which it has been subrogated lies solely within the former’s sound discretion. Q: When is the right of subrogation loss by act of insured or insurer? A: If the insured, after receiving payment from the insurer, release by his own act the wrongdoer or 3

rd party responsible

for loss or damage from liability, the insurer loses his rights against the wrongdoer since the insurer can be subrogated to only such rights as the insured may have. Q: What is the consequence of the same? A: For defeating the insurer’s right of subrogation, the insured is under obligation to return to the insurer the amount paid thereby entitling the latter to recover the same. Also, where the insurer pays the insured the value of the lost goods without notifying the carrier who has in good faith settled the claim for loss of the insured, the settlement is binding on both the insured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation. Q: What is the effect of assignment by insured of its rights against 3

rd party to insurer?

A: The case is not between the insured and the insurer but one between the shipper, and the carrier, because the insurance company merely stepped into the shoes of the shipper. And if the shipper has a direct cause of action against the carrier on account of damage to cargo, such action can be availed of by insurer as a subrogee of the insured and the carrier cannot set up as a defense any defect in the insurance policy because it is not privy to it.

SUPPLETORY APPLICATION OF THE CIVIL CODE

Q: When does the Civil Code apply in insurance? A: Insurance contracts are governed primarily by the Insurance Code but if it does not specifically provide for a particular matter in question, the provisions of the Civil Code on contracts and other special laws shall govern.

Ex:

1. Where the insurance company’s consent to the policy was vitiated by error

2. The contract of life annuity was not perfected where the acceptance of the application by home office of the insurer never came to the knowledge of the applicant who died

3. When the consideration is false or fraudulent 4. Recovery in case of rescission

5. A common-law wife is disqualified from becoming the beneficiary of the insured in view of prohibition under Art 2012

6. Award for moral & exemplary damages in case of unreasonable delay in payment of insurance claims.

INTERPRETATION OF INSURANCE CODE

Q: When should the Insurance Code construed or interpreted? A: Only when its provisions are not clear. When a statute has been adopted from some other state and said statute has previously been construed by the courts of such country, the statute is usually deemed to have been adopted with construction so given. The rules enunciated by best American authorities involving similar provisions of the Philippine law on insurance should be adopted for purposes of having our law on insurance conform to the modern law on insurance as found in the U.S. The courts should follow in fundamental points the construction placed by California courts on California law.

Sec. 2. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: (1) 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. A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter provided. (2) The term "doing an insurance business" or "transacting an insurance business", within the meaning of this Code, shall include: (a) making or proposing to make, as insurer, any insurance contract; (b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;

NOTES ON INSURANCE



(d) 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. In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. (3) As used in this code, the term "Commissioner" means the "Insurance Commissioner". chanrobles virtual law library

LEGAL CONCEPT OF INSURANCE Q: Is “assurance” also used interchangeably with insurance? A: Yes. Many writers use assurance instead of insurance to describe life insurance business.

ASSURANCE INSURANCE

Refers to an event like death, which must happen

Refers to a contingent event which may or may not occur

NOTE: As used in this Code, insurance covers assurance. Q: Why is the definition given by law subject to criticism? A: For instance, it does not include life insurance which is a contract upon condition rather than to indemnify for no recovery can fully repay a beneficiary for loss of life which is beyond pecuniary value. Q: What will be a better definition then? A: A contract of insurance is an agreement by which one party (insurer) for a consideration (premium) paid by the other party (insured), promises to pay money or its equivalent or to do some act valuable to the latter (or his nominee), upon the happening of a loss, damage, liability, or disability arising from an unknown or contingent event, Q: In general, what is an insurance contract? A: It is a promise by one person to pay another, money, or any other thing of value upon the happening of a fortuitous event beyond the effective control of either party which the promise has an interest apart from the contract. Q: Give the definition of insurance from other viewpoints. A:

VIEWPONT DEFINITION

Economic A method which reduces risk by transfer

and combination or pooling of uncertainty in regard to financial loss

Business A plan by which large numbers of people associate themselves and transfer to shoulder of all, risks that attach to individuals. It serves as a basis for credit and a mechanism for savings and investments

Mathematical The application of certain actuarial principles to calculate the chance of loss. The principles of probability are applied to statistical results of past experience represented by a mortality table.

Social A social device whereby the 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 loss may be reimbursed. It is a plan by which the losses of the few are paid out of contributions of all members of a group.

DETERMINATION OF THE EXISTENCE OF THE CONTRACT

Q: How should the character of insurance be determined? A: It is determined by the exact nature of the contract actually entered into whatever form it takes or by whatever name it may be called. Q: Under the Code, when is a contract of suretyship be deemed as an insurance contract? A: If it is made by a surety who or which as such, is doing an insurance business, within the meaning of the Code. But strictly speaking, a contract of suretyship is entirely different from a contract of insurance

Elements in determining the existence of contract of insurance

Q: What are the elements in determining the existence of contract of insurance? A:

1. Subject matter- refers to the thing insured. a. Fire and marine- thing insured is the property b. Life, health, or accident- it is the health of the

person that is the subject matter c. Casualty- the insured’s risk of loss or liability

2. Consideration- the premium paid by the insured. Its

amount is principally based on the probability of loss

NOTES ON INSURANCE



and extent of liability for which the insurer may become liable under the contract.

3. Object and Purpose – the transfer & distribution of risk of loss, damage, or liability arising from an unknown or contingent event through the payment of a consideration by the insured to the insurer under a legally binding contract to reimburse the insured for losses suffered on the happening of the stipulated event.

NATURE AND CHARACTERISTICS OF AN INSURANCE

CONTRACT Q: What are the characteristics of a contract of insurance? A:

1. Consensual – if an insurance has not been either accepted or rejected, there is no contract yet

2. Voluntary – not compulsory and parties may incorporate such terms and conditions as they may deem convenient provided they do not contravene any provision of law and are not opposed to public policy XPNS: motor vehicles, employees NOTE: An insurance may arise by operation of law Ex: War Damage Corporation Act GSIS SSS

3. Aleatory – it depends upon some contingent event. But it is not a contract of chance although the event may never occur. -one of the parties or both reciprocally bind themselves to give or 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.

4. Unilateral- contract imposing legal duties only to the insurer who promises to indemnify in case of loss. It is executed as to the insured after 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. NOTE: The payment of the premium is a condition precedent to the inception of the contract

5. Conditional- it is subject to conditions the principal one of which is the happening of the event insured against. It also includes other conditions such as payment of premium or performance of some other act

6. Contract of indemnity – except for life and accident insurance where the result is death

Note: No person may secure insurance upon property in which he has no interest. If the insured has no insurable interest, the contract is void and unenforceable as being contrary to public policy.

7. Personal – each party having in view the character, credit and conduct of the other. a. As a rule, the insured cannot assign, before the

happening of the loss, his rights under a property policy to others without the consent of the insurer. Also, the obligation of the insurer to pay does not attach to or run with the property whether it be real or personal property.

b. All contracts of insurance share a common trait of “personalness” Ex: i. life, accident, and disability insurance are

plainly personal ii. liability insurance iii. property insurance – the insurance is on the

insured’s interest in the property and not on the property itself. It is damage to the personal interest and not on the property that is being reimbursed

iv. life insurance – generally assignable or transferrable as they are in the nature of property

8. Property in legal contemplation – but unlike property policies, life insurance policies are assignable or transferrable

Distinguishing elements of the contract of insurance

Q: The contract of insurance made by parties usually called insured and insurer, is distinguished by the presence of 5 elements. What are these? A:

1. Insurable interest – interest susceptible of pecuniary estimation

2. The insured is subject to risk of loss through the destruction or impairment of that interest by the happening of designated perils

3. Insurer assumes risk of loss 4. Such assumption of risk is part of a general scheme

to distribute actual losses among large group or substantial no. of persons bearing a similar risk

5. Premium- consideration for insurer’s promise

INSURANCE AS A RISK-DISTRIBUTING DEVICE

Q: What if the contract only possesses 3 elements? A: It is only a risk-shifting device and not a contract of insurance which is a risk-distributing device.

NOTES ON INSURANCE



Ex: Contract of guaranty The device of insurance serves to distribute the risk of economic loss among as many as possible of those who are subject to the same kind of risk. It provides protection against absorbing one’s loss alone. This broad sharing of economic risk is the principle of risk-distribution.

COPING WITH RISK

Q: People cope with risk in various ways. Give some ways. A:

1. Limiting the probability of loss Ex: firewalls, sprinkler systems

2. Limiting the effect of loss Ex: seatbelt Diversification- important way of limiting the effect of loss Ex: investors will own a wide variety of stocks to offset the loss in other stocks

3. Self-insurance- or special funds 4. Ignoring risk

Ex: tightrope walker would purchase special shoes or may install a safety net

5. Transferring risk to another Ex: seller’s warranty of goods sold

THE VALUE OF TRANSFERRING RISK

Q: What factors influence an individual’s attitude toward risk? A:

1. Probability of loss 2. Potential magnitude of loss 3. Person’s ability to absorb the loss

Q: What are the 3 kinds of people with respect to loss? A:

1. Risk preferring- -these people would choose to forego the certain loss in the hope of incurring no loss despite the equal probability of suffering large loss

2. Risk neutral- Indifferent to the alternatives

3. Risk averse -they would choose to lose P500 with certainty instead of confronting the 50% chance of losing twice as much

As the potential magnitude of loss increases, most people become more risk averse. This is true even though the probability of loss declines.

When people are averse to risk of loss, they are usually willing to pay someone else to assume the risk

ECONOMIC EFFECTS OF THE TRANSFER

AND DISTRIBUTION OF RISK If the satisfaction of both parties was improved, the transaction was a desirable one. Society as a whole would be better off if a large number of similar , mutually beneficial transactions would occur. Q: Give some undesirable side effects of the transfer and distribution of risk? A:

1. People may have less incentive to take measures that prevent the loss from occurring or minimizing the effect of loss once it occurs

2. It may have the perverse effect of increasing the probability of loss

Moral hazard – ex: a mechanic knowing that in the event his tools are stolen, the insurer will reimburse his loss in full may be less likely to suffer the inconvenience of putting his tools in a locked area. Q: Why is there a problem regarding measurement of amount of risk transferred? A: Monitoring the behavior of each insured is not feasible.

Deductible insurance and coinsurance Q: What is deductible insurance? A: The insured bears any loss up to some stated amount with the insurer bearing the rest Q: What is coinsurance? A: The insured bears some stated percentage of the loss regardless of its amount, with the insurer bearing the rest. Q: What should be done to compensate for the moral hazard phenomenon? A: The premiums would have to be much higher if all of the insured’s risks were transferred; the insured benefits in the

NOTES ON INSURANCE



long run by paying lower premiums while simultaneously taking some measures that prevent loss or limit its effects. Q: What is the problem regarding computation of premium to be charged? A: Because life is uncertain, calculating each person’s expected loss with absolute precision is impossible. Moreover, if predictions were possible on an individual basis, insurance would not be necessary, since each person would know when loss would occur and then would take all necessary preventive measures, thereby eliminating the value of transferring risk. Q: Explain why is there a need to have classification of risks? A: Because the complete impracticability of individual rating, insurers would group similar risks and charge each number of the group the same premium. Q: What is the phenomenon of adverse selection? A: It is inevitable that within the same group, some insureds will be better risks than others, even though all members of the group pay the same premium.

FIELDS OF INSURANCE Q: What are the different fields of insurance? A:

1. In general a. Social or government b. Voluntary

i. Commercial insurance -personal (life and health) -property (fire-marine, and casualty-surety insurance)

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

d. All lines insurance- it is a term used to describe the broadening nature of insurance operations which combine at least most of the basic types of insurance including traditional fire, casualty, life and health lines.

2. Social (government insurance)

-compulsory and is designed to provide a minimum of economic security for large groups of persons, particularly those in the lower income groups.

-includes:

a. perils of accidental injury b. sickness c. old age d. unemployment e. premature death of family earner

Q: What is the object of social insurance? A: To provide a minimum standard of living Q: Why is it compulsory? A:

a. It is predicated upon some experience that some persons cannot or will not voluntarily purchase insurance, and

b. The obligation of the government to protect the general welfare of its citizens.

3. Voluntary (private) insurance

a. Commercial insurance

-it receives its motivating force from the profit idea i. Personal insurance- it is based on the

nature of the perils; whether they are more directly concerned with losses due to loss of earning power of a person Ex: life insurance, annuities, health and accident insurance

ii. Property insurance- the purpose is the protection against loss arising from the ownership or use of property. 1. Indemnification for the destruction

of his own property Ex: fire and marine insurance

2. Consequence of negligence acts that result in the injuries to other persons or damage to their property Ex: casualty and surety insurance

b. Cooperative insurance

-without regard to profit motive and represent an effort to accomplish the ends of social insurance by private enterprise.

c. Voluntary government insurance -there is no element of compulsion in contrast with social insurance. -the various plans offered are designed to benefit the entire community but are used only by those persons who wish to use the available benefits.

NOTES ON INSURANCE



Ex: insurance of mortgage loans and insurance of growing criops

Principal and older forms of insurance Q: What are the different principal and older forms of insurance? A:

1. Marine 2. Fire 3. Life 4. Accident

Q: What are the different classifications of contracts of insurance? A:

1. Insurance against loss or impairment of property interests- either: a. In existence b. Merely expected

NOTE: This includes:

a. Marine insurance- loss or impairment due to marine perils

b. Fire insurance c. Earthquake d. Explosion e. Guaranty insurance- due to non-performance of

contracts of which the insured is a party f. Credit insurance- insolvency of debtors g. Fidelity insurance – defalcations of employees and

agents h. Theft insurance policies- for theft and burglary i. Title insurance – defective titles or interest in

property

2. Insurance against loss of earning power NOTE: This includes:

a. Life insurance – due to death b. Accidental injury c. Ill-health d. Sickness e. Old age f. Other disability g. Unemployment

3. Insurance against contingent liability to make payment to another

-the inured is protected against his loss with regard to claim for damages.

NOTE: This includes:

a. Reinsurance b. Workmen’s compensation insurance c. Motor vehicle liability insurance

-They are designed to reimburse the insured for any liability he might incur to a 3

rd party

Principal and older forms of insurance

Q: What are the different modern classifications of insurance? A:

1. Marine 2. Property –protection of property interests 3. Personal – protection of personal interests 4. Liability

Q: What are the 2 large classes of insurance contracts? A:

1. Property insurance 2. Personal insurance

CLASSIFICATION BY INTERESTS PROTECTED

Q: What are the 2 methods of categorization according to the interests being protected by the arrangement? A:

1. First-party vs. Third-party insurance First party insurance –the contract between the insurer and the insured is designed to indemnify the insured (or his family members) for a loss suffered directly by the insured. Examples:

a. Property insurance -damage to property is an immediate diminution of the insured’s assets

b. Liability insurance -described as 3

rd party insurance because the

interests protected by the contract are ultimately those of 3

rd parties injured by the insured’s conduct

-the insured’s loss is indirect in the sense that the 3rd

party suffers the direct loss. -designed to protect unknown 3

rd parties

c. All insurance except liability

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-first party insurance

d. Life insurance -designates a beneficiary to receive the proceeds of the policy but it does not mean that the insurance is 3

rd party because the loss is suffered by the insured

and it is the insured who loses his life.

e. Health insurance -the health insurer pays the provider of health care services directly, rather than paying the proceeds to the insured. But the loss, illness and its expenses, is suffered directly by the insured.

Q: What is “No fault insurance”? A: It is the substitution of first party insurance for tort liability. The victim of tort, instead of looking to the tortfeasor and his insurer for reimbursement, looks to his own insurer for first-party protection. First party insurance is compulsory under the typical no fault scheme. The term “no fault” connotes that the victim recovers for his loss from his own insurer, without regard to the fault of the 3

rd party or his own contributory fault.

2. All-risk vs. specified-risk

ALL-RISK SPECIFIED-RISK

Definition

Reimburses the insured for damage to the subject matter of the policy from all causes except those specifically excepted in the policy.

Covers damage to the subject matter of the policy only if it results from specifically identified causes listed in the policy.

Example

Ex: marine insurance is traditionally treated as such

Homeowner’s insurance

Burden of proof

Once the insured establishes that a loss occurred through some event other than an inherent defect or normal depreciation, the burden is ordinarily placed on the insurer to prove that the loss falls within an explicit exception to coverage

The burden of proof is ordinarily placed on the insured to initially prove that the loss falls within the policy’s provision coverage

Jeweler’s block insurance

Q: What is the so-called “jeweler’s block insurance”? A: It provides jewelers with coverage regardless of the cause. It is traditionally treated as all-risk insurance.

Q: Give advantages of all-risk coverage. A:

1. The coverage is presumably simpler to understand 2. Duplication of coverages and premiums from

separate, specified-risk policies is avoided 3. Pressures toward adverse selection are minimized 4. Policies are easier and less expensive for insurer to

administer. 5. Avoidance of gaps in coverage

Q: Explain: All-risk coverage not absolute. A: All-risk event would not include an undisclosed event that existed prior to coverage, or an event caused by the consummation during the period of coverage of an indwelling fault in the goods that had existed prior to that coverage. Also, if the loss is certain to occur, such as loss due to normal wear and tear, the loss is not fortuitous, therefore, not insurable.

Q: What are the different classifications of insurance under

the Code? A: 1. Life insurance contracts

a. Individual life b. Group life c. Industrial life

2. Non-life insurance contracts

a. Marine b. Fire c. Casualty

3. Contracts of suretyship or bonding

Q: Is it possible for an insurance company to insure against any risk whatever associated with any lawful activity? A: Yes, as long as there is no prohibition by a statute or violation of public policy.

CONTRACTS WRITTEN BY GUARANTY OR SURETY COMPANIES

Q: What are the contracts written by guaranty or surety companies and designated as guaranty insurance? A:

1. Fidelity 2. Title

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3. Bond 4. Security guaranty

Q: How are these contracts construed? A: Like other insurance contracts, they are construed strictly against the insurer. Q: The general rule that bonds of guaranty and surety companies who engage in the business for profit are essentially insurance contracts and are governed by rules of construction are applicable thereto, rather than by rules applicable to strict or pure contracts of suretyship applies only when? A: It applies to bonds guaranteeing the carrying out or performance of contracts to do a particular act or carry out a particular project. Q: When is a contract of suretyship deemed to be an insurance contract? A: Only if it is made by a surety who or which is doing an insurance business within the meaning of the Code.

CONSTRUCTION OF INSURANCE CONTRACTS

Provisions of insurance policy shall be examined and interpreted in consonance with each other. Q: In case of doubt, how should contracts of insurance construed? A: As a general rule, contracts of insurance are to be construed or interpreted liberally in favor of the insured and strictly against the insurer resolving all ambiguities against the latter so as to effect its dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved.

Contract of adhesion v. Bargaining contract Q: Is an insurance contract a “contract of adhesion”? A: Yes. It is a contract of adhesion, that is, most terms of the contracts 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. Q: What is a “bargaining contract”? A: In this contract, both parties participate in drawing up its terms and conditions or determining its wording. Any ambiguity

A policy of insurance which contains exceptions or conditions tending to work a forfeiture of the policy shall be interpreted most favorably toward those against whom they are intended to operate and most strictly against the insurance company or the party for whose benefit they are inserted When restrictive provisions are open to 2 interpretations, that which is most favorable to the insured is adopted. Limitations of liability shall be construed in such a way as to preclude the insurer from non-compliance with its obligations. Q: What if the terms are clear? A: The cardinal principle of insurance law of interpreting insurance contracts favorably to the insured is applicable only in case of doubt, not when the intention of the policy is clear or the language is sufficiently clear to convey the meaning of the parties. Court is bound to adhere to the insurance contract as the authentic expression of the intention of the parties. The terms of an unambiguous insurance policy cannot be enlarged or diminished by judicial construction since the court cannot make a new contract for the parties where they themselves have used express and unambiguous words. Q: What if the contract is silent with respect to a particular matter? A: Any doubt that may arise for failure of the contract to provide with respect to a particular matter should be resolved against the insurer.

WHAT CONSTITUTES DOING OR TRANSACTING AN INSURANCE BUSINEES

1. Name or designation by insurer not controlling

a. -insurance, whether fire, marine or any other form is that which the law defines it to be

2. Acts deemed included by law

-the law enumerates the acts which are deemed included in the term “doing an insurance business” or “transferring an insurance business.”

Q: Does the fact that no profit is derived from the making of insurance contracts or that no separate or direct consideration is received therefor or it states that it is not an insurance policy conclusive to show that the making thereof does not constitute transacting of an insurance business? A: No.

NOTES ON INSURANCE



NOTE: A company may be found to be engaged in an insurance business even though it expressly disclaims any intention to sell insurance. The majority of cases have adopted the view that a contract for the payment of burial or funeral expenses at the death of the holder is a contract of life insurance subject to insurance laws. An agreement to service or repair at a flat monthly fee, any burned out and defective parts of fluorescent fixtures has been held not to constitute an insurance contract since any element of guaranty or warranty in the agreement is merely incidental to the servicing business. A tire manufacturing was held to be engaged in the insurance business when it promised to repair or replace the tire if any defects were discovered or accidental losses incurred within a states period.

Principal object and purpose test Q: What is the “principal object and purpose test”? A: Under this, if the principal object is “indemnity”, the contract constitutes 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.

FUNCTIONS OF INSURANCE

NOTE: Insurance is also known as the “first modern industry.”

Principal function Q: What is the principal function of insurance? A: The main function of insurance is risk-bearing. The financial losses of the few are equitably distributed over the many out of a fund contributed by all. What it does is to spread the losses over a large no. of persons.

Subsidiary function Q: What are the subsidiary functions of insurance? A:

1. Stimulates business enterprises -insurance helps maintain the present-day large scale commercial and industrial organizations.

2. Encourages business efficiency and enterprise

-the natural result of the elimination of risk is an increase in business efficiency. -it also increases the willingness to invest new capital in business enterprise

3. Promotes loss-prevention -insurers encourage loss-prevention through a system of rating which allows discounts for good features and impose special conditions where the risk is unsatisfactory.

4. Encourage savings -by protecting the individual against unforeseen events, insurance provides a climate in which savings are encouraged.

5. Solves social problems

Ex: GSIS, SSS

Indirect functions Q: What are the indirect functions of insurance? A:

1. Investment of funds -the funds of the insurers are invested so that they not only earn interest to be added to the funds but they also make available huge resources for underwriting industrial, agricultural, cultural, and other projects.

2. Use of reserve funds -the reserve funds are not static, but are used productively. If the reserve funds were not used, the income they earn would have to be obtained through higher premiums.

3. Effect on prices -the cost of insurance is less than the cost of risk without insurance.

4. As a basis of credit -in case of mortgage upon real estate, no mortgagee is willing to lend money unless he knows that the value of the property is protected from destruction by fire

NOTES ON INSURANCE



Chapter 1

THE CONTRACT OF INSURANCE

Title 1 WHAT MAY BE INSURED

Sec. 3. Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this chapter. The consent of the husband is not necessary for the validity of an insurance policy taken out by a married woman on her life or that of her children. Any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for life, health and accident insurance, with any insurance company duly authorized to do business in the Philippines, provided the insurance is taken on his own life and the beneficiary appointed is the minor's estate or the minor's father, mother, husband, wife, child, brother or sister. The married woman or the minor herein allowed to take out an insurance policy may exercise all the rights and privileges of an owner under a policy. All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy.

REQUISITES OF A CONTRACT OF INSURANCE

Q: What are the requisites of a contract of insurance? A:

1. Subject matter in which the insured has insurable interest

2. Event or peril insured against which may be any future, contingent or unknown event, past or future, and a duration for the risk thereof

3. Promise to pay or indemnify in a fixed or ascertainable amount

4. A consideration for the promise known as the premium

5. A meeting of minds of the parties upon all foregoing essentials.

NOTE: The parties must also be competent to enter into the contract Q: What is the subject matter of insurance?

A: In general, anything having appreciable pecuniary value which is subject to loss or deterioration or of which one may be deprived so that his pecuniary interest is prejudiced, may properly constitute the subject matter of insurance

Both property and persons may be the subjects of insurance. But the term subject matter is ordinarily used in reference to the insurance of property. NOTE:

a. In property insurance it is the risk of loss of such property that is primarily involved

b. In health, life, and accident insurance, the matter is generally viewed as one in reference to the insured as party to the contract

c. In casualty insurance, the subject matter is the risk involved in its use, or the insured’s risk of loss, or liability that he may suffer

EVENT OR PERIL INSURED AGAINST

Under sec. 3, the contingency or unknown event must be such that its happening will: a. Damnify or cause loss to a person having an insurable

interest b. Create a liability against him

NOTE: The unknown event may be past or future Q: In contract of insurance, when is the insurer liable for the fortuitous event? A:

1. If it is the event or peril insured against and 2. It is the proximate cause of the loss.

INSURANCE BY A MARRIED WOMAN

Q: May a married woman take out an insurance on her life or that of her children without the consent of her husband? A: Yes. She may also take out insurance on her paraphernal or separate property, or on property given to her by her husband.

INSURANCE BY A MINOR

Q: A minor may enter into a valid contract of insurance (health, life, and accident) provided that certain requisites are present. What are these? A:

NOTES ON INSURANCE



1. He is 18 years of age or over 2. The contract is for life, health or accident insurance 3. The insurance is taken on his life 4. The beneficiary or the person to receive the

proceeds of the insurance upon the happening of the event insured againts is any of the enumerated by law

Q: What if the minor entered into by a minor is a contract of insurance other than life, health or accident insurance such as fire, or maritime insurance, what is the effect? A: A contract of insurance other than life, health or accident insurance such as fire, or maritime insurance, entered into by a minor is not entirely void. It is merely voidable, that is, valid until annulled in a proper action in court by the minor or his legal representative. Q: In case of voidable insurance contract, what if the minor did not disaffirmed the contract? A: The insurer cannot escape liability by pleading minority as a defense because persons who are capable cannot allege incapacity of those with whom they contracted. A minor cannot recover the premiums he paid if he cannot return the benefits received. The result is that an insurance company contarcting with a minor is bound by the contract; the minor ordinarily is not.

OWNERSHIP OF LIFE INSURANCE POLICY

Q: The ownership of a modern life insurance policy is devided between whom? A: It is divided between the insured and the beneficiary. The insured is the owner of the various marketing and sales features such as loan and cash surrender values. One who takes a policy of insurance on his own life becomes a party to the contract, even though the benefits of the insurance are to accrue to someone else known as the beneficiary. Q: To what depends the nature of interest of the beneficiary? A: It depends on the terns of the insurance contract including the existing statutes. Upon the death of the original owner of the policy of insurance taken out by him on the life or health of a minor, all rights and titile and interest in the policy shall be automatically vest in the minor unless otherwise provided for in the policy.

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

CONCEPT OF LOTTERY

Q: What is lottery? A: It 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.

Essential elements Q: What are the different essential elements of lottery? A:

1. Consideration 2. Prizes 3. Chance

Q: What if the prizes did not come out of the fund or contributions by the participants? A: In such case, there is no consideration. Consequently, there is no lottery. Q: Can the sweepstake holder insure himself against the failure of his ticket to win a prize? A: No, because even if he were not to win, it cannot be said that he suffered a loss of the prize. The failure to win a prize would not indemnify or create a liability against him.

CONTRACT OF INSURANCE NOT A WAGERING CONTRACT

While a contract of insurance is based on contingency, it is not a contract of chance and is not used for profit. Q: Distinguish between insurance contrcact and gambling contract.

INSURANCE CONTRACT GAMBLING CONTRACT

Parties seek to distribute possible loss by reason of mischance

Parties contemplate gain through mere chance

Insured seeks to avoid misfortune

Gambler courts fortune

Tends to equalize fortune The contract tends ro incerase the inequality of fortune

What one insured gains is not at the expense of another

The essence is whatever one person wins from a wager is

NOTES ON INSURANCE



insured. lost by other waggering party

The purchase of insurance does not create a new and therefore no existing risk of less to the purchaser

As soon as a party makes a wager, he creates a risk of loss to himself, where no such risk existed before

Q: What are the similarities between the 2? A: 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 of, or agreement to pay, a stipulated amount by other party to contract. In either case, one party may receive more than he paid or agreed to pay.

Sec. 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply.

Chapter 1 also applies to:

a. Marine insurance b. Fire insurance c. Casualty insurance d. Suretyship e. Life insurance f. Any other kind of insurance

TITLE II PARTIES TO THE CONTRACT

Sec. 6. Every person, partnership, association, or corporation duly authorized to transact insurance business as elsewhere provided in this code, may be an insurer.

PARTIES TO A CONTRACT OF INSURANCE

Q: Who are the 2 parties in a contract of insurance? A:

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

2. Insured- the “second party” to the contract or the

person in whose favor the contract is operative and who is indemnified against, or is to receive a certain sum upon the happening of a specified contingency or event; synonymous with assured.

Insured v. Assured

Q: Strictly speaking, give the difference between “assured” and “insured”? A:

INSURED ASSURED

Refers to the owner of the property insured or the person whose life is the subject of the contract of insurance

Refers to the person for whose benefit the insurance is granted

A synonym for beneficiary

Q: Can the business of insurance be carried on by individuals? A: Yes. It can be carried on by individuals just as much as by corporations and associations. It has been stated also that the State itself may go into insurance business. Q: Is the insured always the person to whom the proceeds are paid? A: No. This person may be the beneficiary designated in the policy. It is also possible that insured may assign the proceeds of the insurance to someone else. Q: Describe the relation between the insurer and the insured? A: It is that of a contingent debtor and creditor, subject to the conditions of the policy and not that of trustee and cestui que trust. Q: If the wife insures the life of her husband for her own benefit, who is the assured and the insured respectively? A: The wife is the assured and the husband is the insured. Q: Who is the beneficiary? A: He is the person designated by the terms of the policy as the one to receive the proceeds of the insurance. He is the 3

rd

party in a contract of life insurance for whose benefit the policy is issued and to whom the loss is payable.

WHO MAY BE AN INSURER

Q: Who may be an insurer? A:

NOTES ON INSURANCE



1. Foreign or domestic insurance company or corporation

2. Individual, partnership, or association Q: What is the requirement before an individual, partnership, corporation or company may transact insurance business in the Philippines? A: 1. They must fist obtain a certificate of authority for that

purpose from the Insurance Commissioner who may refuse to issue such certificate of authority if in his judgment such refusal will best promote the interests of the people of this country.

2. They must be “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.”

Insurance corporation

Q: What is an “insurance corporation”? A: Corporations formed or organized to save any person or persons or other corporations harmless from loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or other corporations for any such loss, damage, or liability, or to guarantee the performance of or compliance with contractual obligations or the payment of debt of others (Sec. 185). The last part of the definition refers to suretyship. For the purpose of this Code, the terms “insurer” and “insurance company” shall include all individuals, partnerships, associations, or corporations, including government-owned or controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the terms shall also include professional reinsurers defined in section two hundred eighty (Sec. 184).

BUSINESS OF INSURANCE AFFECTED WITH PUBLIC INTEREST

Q: What is the effect of having the business of insurance affected with public interest? A: It is subject to regulation and control by the state by virtue of the exercise of its police power or in the interest of public convenience and the general good of the people. Q: A law was passed requiring companies to file schedule of rates and prohibiting discriminatory rates. Is the law valid?

A: Yes. The business of insurance affects public welfare as to invoke and require governmental regulation.

Sec. 7. Anyone except a public enemy may be insured.

CAPACITY OF PARTY INSURED

Q: Who may be insured? A:

1. Natural person a. He must be competent to make a contract b. He must possess an insurable interest in the

subject of the insurance c. He must not be a public enemy

2. Juridical person

Ex: partnership XPN: public enemy

NOTE: Sec. 3 specifically authorizes minors, 18 years or more to take out insurance payable to limited class of beneficiaries. Q: Who is a “public enemy” A: It designates a nation with whom the Philippines is at war and it includes every citizen or subject of such nation. It may also mean alien enemy. Q: Are mobs, however numerous, they may be, or robbers or thieves considered also as public enemy? A: Yes. Q: Discuss the doctrine under Filipinas Cia de Seguros v. Christern Huenefeld. A: During wartime, a private corporation is deemed an enemy corporation although organized under Philippine laws if they are controlled by enemy aliens. This is the so-called “control test.”

Control test Q: What is the so-called “control test”? A: Under this test, a corporation is deemed to have the same citizenship as the controlling stockholders in time of war.

EFFECT OF WAR ON EXISTING INSURANCE CONTRACTS

Q: What is the effect of war on existing insurance contracts where the parties are rendered as enemy aliens?

NOTES ON INSURANCE



A: By the law of nations, all intercourse between citizens of belligerent powers which is inconsistent with a state of war is prohibited. Note that the purpose of war is to cripple the power and exhaust the resources of the enemy. It is inconsistent that the subjects of one country should lend their assistance to protect by insurance. Q: What if the parties are not rendered enemy aliens? A: If the parties are not rendered enemy aliens by the intervention of the war, the policy continues to be enforceable according to its terms and the laws governing insurance and the general rules regarding contracts. Q: What is the rule with respect to property insurance? A: An insurance policy ceases to be valid and enforceable as soon as an insured becomes public enemy. Q: What is the rule with respect to life insurance? A: United States Rule declares that the contract is not merely suspended but is abrogated by reason of nonpayment of premiums, since the time of the payment is peculiarly of the essence of the contract. However, the insured is entitled to cash or reserve value of the policy which is the excess of premiums paid over the actual risk carried during the years when policy had been in force. Q: What is the effect where loss occurs after end of war? A: The termination of the war does not revive the contract. Consequently, the insurer is not liable even if the loss is suffered by the insured after the end of the war.

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

INSURABLE INTEREST OF MORTGAGEE

AND MORTGAGOR

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

Q: What if the insurance is taken by one in his own name only and in his own favor alone? A: It does not inure to the benefit of the other. Q: What is the extent of insurable interest of mortgagor? A: The mortgagor of property, as owner, has an insurable interest therein to the extent of its value, even though the mortgage debt equals such value. Q: What is the reason for this? A: The loss or destruction of the property insured will not extinguish his mortgage debt. Q: What is the extent of the insurable interest of mortgagee? A: The mortgagee or his assignee as such has an insurable interest in the mortgaged property to the extent of the debt secured, since the property is relied upon as security thereof, and in insuring, he is not insuring the property itself but his interest or lien thereon. His interest is prima facie the value mortgaged and extends only to the amount of debt, not exceeding the value of the mortgaged property. Such interest continues until the mortgage debt is extinguished. Q: What is the extent of amount of recovery? A: The mortgagor cannot recover upon the insurance beyond the full amount of his loss and the mortgagee, in excess of the credit at the time of the loss nor the value of the property mortgaged.

INSURANCE BY MORTGAGEE OF HIS OWN INTEREST

Q: What is the right of mortgagee in case of loss? A: Where the mortgagee, independently of the mortgagor, insures in his own interest in the mortgaged property, he is entitled to the proceeds of the policy in case of loss before the payment of the mortgage.

NOTES ON INSURANCE



Q: What is the effect of subrogation of insurer to the right of mortgagee? A: The mortgagee is not allowed to retain his claim against the mortgagor but it passes by subrogation to the insurer to the extent of the insurance money paid. Q: What is the effect of change of creditor? A: The payment of the insurance to the mortgagee by reason of the loss does not relieve the mortgagor from his principal obligation but only changes the creditor.

INSURANCE BY MORTGAGOR OF HIS OWN INTEREST

Mortgagor may insure his own interest as owner for his own benefit. In case of loss the insurance proceeds do not inure to the benefit of the mortgagee.

Q: What are the ways where the mortgagee may be made the beneficial payee? A:

1. He may become the assignee of the policy with the consent of the insurer

2. He may be the mere pledgee without such consent 3. A rider, making the policy payable to the mortgagee

“as his interest may appear” may be attached 4. A “standard mortgage clause” containing a collateral

independent contract between the mortgagee and the insurer may be attached.

5. The policy, though, by its terms payable absolutely to the mortgagor; may have been procured by a mortgagor under a contract duty to insure for the mortgagee’s benefit, in which case the mortgagee acquires an equitable lien upon the proceeds.

INSURANCE BY MORTGAGOR FOR BENEFIT OF MORTGAGEE,

OR POLICY ASSIGNED TO THE MORTGAGEE

Q: What are the legal effects where the mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance. A:

1. The contract is deemed to be upon the interest of the mortgagor; hence, he does not cease to be a party to the contract

2. Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance affects the mortgagee even if the property is in the hands of the mortgagee

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

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

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

The rule on subrogation by the insurer to the right of the mortgagee does not apply in this case.

EFFECT OF STANDARD AND OPEN

CLAUSES IN FIRE INSURANCE POLICY Q: What is the effect if a fire insurance policy contains a “standard or union mortgage clause”? A: The acts of the mortgagor do not affect the mortgagee. Q: What is the purpose of the clause? A: To make a separate and distinct contract of insurance on the interest of the mortgagee. Q: What is an “open or loss-payable mortgage clause”? A: It merely provides for the payment of loss, if any, to the mortgagee as his interest may appear and under it, the acts of the mortgagor affect the mortgagee. Q: What if the policy is obtained by the mortgagor with a loss-payable clause in favor of the mortgagee as his interest may appear? A: The mortgagee is only a beneficiary under the contract and recognized as such by the insurer but not made a party to the contract itself. Any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. Q: What if the insurance contains a mortgage clause which reads: “Loss, if any, shall be payable to mortgagee as its interest may appear subject to the terms of this policy? A: It was held that this is clearly a simple loss payable clause, not a standard mortgage clause.

RIGHT OF MORTGAGEE UNDER MORTGAGOR’S POLICY

The contract of policy is primarily with the mortgagor, but the mortgagee is a 3

rd party beneficiary.

Q: What is his right before the loss?

NOTES ON INSURANCE



A: 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. Q: What is his right upon the occurrence of the loss? A: Such right becomes absolute. Q: What is his right after the loss? A:

1. If the loss happens when the credit is not due, the mortgagee is entitled to receive the money to apply to the extinguishment of the debt

2. If the loss happens after the credit has matured, the mortgage may apply the proceeds to the extent of his credit.

EFFECT OF INSURANCE BY THE MORTGAGEE ON BEHALF OF

THE MORTGAGOR

Q: What is the effect of insurance by the mortgagee on behalf of the mortgagor? A: 1. Discharge of debt -upon the destruction of the property,

the mortgagee is entitled to receive payment from the insured but such payment discharges the debt if 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 such 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.

Sec. 9. If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligation on the assignee, making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee.

ASSIGNMENT OR TRANSFER OF INSURANCE POLICY

Q: What is the effect of an assignment or transfer of the insurance policy? A: The effect is to substitute the assignee or transferee in place of the original insured in respect to the right to claim indemnity or payment for a loss as well as the obligation to perform the conditions, if any, of the policy.

The assignee, unless he makes a new contract with the insurer, acquires no greater right under the insurance than the assignor had, subject to the insurer’s defenses. Q: What will happen in case of assignment or transfer of a fire insurance policy? A: A fire insurance policy before it becomes a fixed liability is not subject to assignment, being strictly a personal contract, in the absence of provision in the contract or subsequent consent of the insurer. Q: Why? A: The insurer is naturally concerned about the moral character of the insured and should not be compelled to become an insurer to an assignee to whom he would have declined to issue policy and who would materially alter the risks assumed by the insurer without his consent. Q: What will happen in case of assignment or transfer of a marine insurance policy? A: It is assignable even without the consent of the insurer unless required by the terms of the policy. However, it is believed that just like a fire insurance, it is not assignable without the consent of the insurer. Q: What will happen in case of assignment or transfer of a casualty insurance policy? A: Insurer’s consent is also required. This type of insurance involves moral hazards at least as great as those of fire insurance. Q: What will happen in case of assignment or transfer of a life insurance policy? A: The policy may freely be assigned before or after the loss occurs, to any person whether he has an insurable interest or not. However, an assignment of a life insurance without an insurable interest, which the insured makes in bad faith and under such circumstances as where there was a preconceived agreement that the policy was to be assigned for the purpose of accomplishing an illegal purpose will not be upheld.

RIGHT OF MORTGAGOR TO ASSIGN INSURANCE POLICY TO

MORTGAGEE

The right of mortgagor to assign or transfer an insurance policy is recognized under Sec. 8.

NOTES ON INSURANCE



EFFECT OF NEW CONTRACT BETWEEN INSURER AND

MORTGAGEE-ASSIGNEE

The assignment of a fire insurance policy by the mortgagor to the mortgagee with the consent of the insurer does not convert the contract into one of indemnity to the mortgagee. The contract remains with the mortgagor as it is his interest alone that is covered. The assignment operates merely as an equitable transfer of the policy so as to enable the mortgagee to recover the amount due in case of loss subject to the conditions of the policy. However, where a new and distinct consideration passes between from the mortgagee to the insurer, a new contract is created between them. A novation of the original contract takes place. Hence, the act of the mortgagor cannot affect the right of the mortgagee, the assignee.

TITLE 3 INSURABLE INTEREST

Sec. 10. Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of his children; (b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and (d) Of any person upon whose life any estate or interest vested in him depends. Q: What is insurable interest? A: It is one of the most basic of all requirements in insurance. It is the interest which the law requires the owner of an insurance policy to have in the person or thing insured. Pecuniary in nature- where the insured has a relation or connection with or concern with the subject matter that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination or injury. Q: Does the law require a right to the whole thing? A: No, it may be a part of it. Q: State the difference between the price and the interest in a thing.

A: The price is the measure while the latter refers to every benefit or advantage arising out of or depending on such thing. EXC: With regard to life insurances, to have an insurable interest in the life of a person, the expectation of the benefit from the continued life of that person need not necessarily be of a pecuniary nature.

NECESSITY OF INSURABLE INTEREST

The existence of insurable interest is a primary concern in determining the liability of an insurer under the policy of the insurance. Q: What is the effect of the presence or absence of such interest? A: Its existence gives a person the legal right to insure the subject of the policy. In the absence of which, the person insuring would be gambling which is prohibited by law. Thus, it is necessary to the validity of an insurance and a policy issued to a person without interest in the subject matter is a mere wager and is void for illegality. Q: State the reasons why the law makes such requirement that the person insuring must have insurable interest over the subject? A:

1. As deterrence to the insured and which renders wager policies invalid. A wager policy is contrary to public interest and is demoralizing in that:

a. It allows the insured to have an interest in the

destruction of the subject matter rather than its preservation.

b. It affords inducement or temptation to bring to pass the event so that the insurance becomes payable.

2. As a measure of limit of recovery The insurable interest accordingly is the measure of proper limit of his provable loss under the contract. The insurance should not be a means of making a net profit from the happening of the event insured against.

LIFE INSURANCE Q: What are the 2 classes of life policies? A:

NOTES ON INSURANCE



1. Insurance upon one’s life- those taken out by the insured upon his life for the benefit of himself, or his estate, in case it matures only at his death, or for the benefit of a third person who may be designated as beneficiary.

Q: Does it need an insurable interest? A: No, an application therefor does not usually present

an insurable interest question. 2. Insurance upon life of another- taken out be the insured

upon the life of another. In this case, such person must have an insurable interest in the life of that person.

INSURABLE INTEREST IN ONE’S LIFE

The question of insurable interest is immaterial where the policy is procured by the person whose life is insured.

1. Insurance taken out by the insured in his life for the

benefit of another- where insurable interest is really required only as evidence of the good faith of the parties. The mere fact that a man on his own motion insures his life for the benefit either of himself or of another is sufficient evidence of good faith to validate the contract.

2. When the insurance regarded a wager policy- this is the exemption to the abovementioned rule.

Q: What are the requirements for a wagering policy? A:

1. That the original proposal to take out insurance was that of the beneficiary;

2. That premiums are paid by the beneficiary; and 3. That the beneficiary has no interest, economic or

emotional in the continued life of the insured.

A person has an insurable interest in his own life. Yet if the policy is applied for and owned by someone other than the insured, the applicant-owner must have an insurable interest in the life of the insured.

Q: What are the similarities between a life insurance and a civil donation?

Donation Life insurance

An act of liberality whereby a person disposes gratuitously a thing or right in favor of another who accepts it.

Consideration: Liberality

A beneficiary is like a donee,

because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance.

Family Code

Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage. (133a) A life insurance policy taken by a spouse on his life in favor of the other takes effect after the death of the insured.

INSURABLE INTEREST IN LIFE OF ANOTHER

1. Insurance for benefit of the insured- the policy of the law requires that the assured shall have an interest to preserve the life insured in spite of the insurance, rather than destroy it because of the insurance.

2. Insurance for the benefit of a third party- when the owner of the policy insures the life of another and designates third party as beneficiary, both of them must have an insurable interest in the life of the cestui que vie.

The insurable interest must be pecuniary or founded upon the close relationship between the parties. Thus, the mere fact the 2 persons are engaged to be married does not give one an insurable interest in the life of another.

INSURABLE INTEREST IN LIFE OF A PERSON ON WHOM HE

DEPENDS WHOLLY OR IN PART FOR EDUCATION OR SUPPORT, OR IN WHOM HE HAS A PECUNIARY INTEREST

1. When mere blood relationship sufficient- in U.S. cases,

pecuniary benefit is not the only test, blood relationship is also considered. Accordingly, natural affection is considered sufficient and more powerful to protect the life of the insured than any other consideration. The policy should be obtained in good faith.

The following have an insurable interest in each other’s life since they are obliged to support each other (Art. 195 of Family Code): Art. 195. Subject to the provisions of the succeeding articles, the following are obliged to support each other to the whole extent set forth in the preceding article: (1) The spouses;

NOTES ON INSURANCE



(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 (291a) Art. 196. Brothers and sisters not legitimately related, whether of the full or half-blood, are likewise bound to support each other to the full extent set forth in Article 194, except only when the need for support of the brother or sister, being of age, is due to a cause imputable to the claimant's fault or negligence. (291a) 2. When pecuniary benefit essential- Yet, in other cases,

mere blood relationship does not create an insurable interest in the life of another. Under the law, there must be an expectation of pecuniary benefit in the life of the insured to sustain the insurance. Nonetheless, the expectation need not have a legal basis whatever; it is sufficient that it be actual.

A man who sends a girl to school and pays her expenses is sufficient to give her an insurable interest in his life. A corporation has an interest in the life of an officer on whose service the corporation depends for its prosperity and whose death will be the cause of a substantial pecuniary loss to it . In case of employees, insurable interest is dependent upon the value of the employee to the business.

INSURABLE INTEREST OF A PERSON IN LIFE OF ANOTHER UNDER A LEGAL OBLIGATION TO HIM

1. Related by contract or commercial relation- that a right

possessed by him will be extinguished or impaired by the death or illness of the other may lawfully procure insurance on the other’s life. e.g. Employer to the Employee and vice versa; a partner to his co-partner; a surety to his principal.

2. Risk that performance of obligation might be delayed or prevented-it must appear that the death or illness of the insured person who is under a legal obligation might delay or prevent its performance. e.g. a partner has no insurable interest against another if both have no capital invested and neither is indebted to the other.

INSURABLE INTEREST OF CREDITOR IN THE LIFE OF HIS DEBTOR

Extent of interest- for the purpose of protecting his debt but only to the extent of the amount of the debt and the cost of carrying the insurance on the debtor’s life. Yet it should not be so disproportionate to the amount of debts and liens thereon plus the cost of the insurance that the policy is merely a wagering or speculative one.

Right of debtor in insurance taken by the creditor- the contact is between the insurer and the insuring creditor inasmuch as by law, the creditor is given an insurable interest on the life of the debtor. It does not inure to the benefit of the debtor unless the contrary is stipulated.

Extent of the amount that may be recovered by the insuring creditor- principle of indemnity applies in this kind of insurance as in the case of property insurance. Creditor can only recover such amounts as remain unpaid at the time of the death of the debtor.

Q: What is the effect if the whole amount has been discharged?

A: In such case, recovery on the policy is no longer permissible.

Where insurance taken by debtor for the benefit of creditor- where a debtor in good faith insures his life for the benefit of the creditor, full payment of the debt does not invalidate the policy; in such case the proceeds shall go to the estate of the debtor.

Where debt becomes legally unenforceable- like if it is already barred by the stature of limitations or of the debtor’s discharge in insolvency—does not cut off the insurable interest of the creditor although there is no reasonable expectation of the debtor becoming solvent so as to be able to pay his debt.

BASIS: the moral and equitable obligation of the debtor to pay his debt is not destroyed by the discharge which only affects the legal obligation to pay.

Yet on our law, it is clear that a creditor may not insure the life of the debtor unless the latter has a legal obligation to him for the payment of money.

INSURABLE INTEREST IN LIFE OF A PERSON UPON WHICH AN

ESTATE OR INTEREST DEPENDS

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

NOTES ON INSURANCE



Q: Is the consent of the person whose life is insured essential to the validity of the insurance taken by another? A: There are 2 conflicting schools of thought regarding this:

1. All contract without the consent of the insured are contrary to public policy and therefore, void. Accordingly, the danger to the public of circumstances like hastening the death of the insured by criminal means is obviated when the insured has given his consent to the contract. His very consent is strong evidence of the good faith of the person procuring the insurance.

2. According to sec. 10 however, the consent of the person insured is not essential so long as it could be proved that the assured has a legal interest at the inception of the policy.

Sec. 11. The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy.

BENEFICIARY

Q: Who is a beneficiary? A: He is the person who is named or designated in a contract of life, health, or accident insurance as the one who is to receive the benefits which become payable upon the death of the insured. -refers to those persons who though not parties to the contract are mentioned in it as the intended recipients of the proceeds or benefits of the insurance if the insured risk occurs. -those who secure insurance for their own benefit upon the lives of others. Q: What are the kinds of beneficiary? A:

1. Insured himself- he may himself be the person who procures the contract and pay the premiums necessary to maintain it; an immediate party to the contract. He is the assured.

2. Personal representatives; and 3. Someone other than the insured:

a. Third person who paid a consideration- third person

named as beneficiary may have paid a valuable consideration for his selection as such; insured may have taken the policy for the benefit of a creditor or to secure some other obligation.

b. Third person through mere bounty of insured- beneficiary may be one who gives no consideration whatsoever but is designated as recipient of the proceeds of the policy through mere bounty of the insured.

In these cases, the proceeds of the life insurance policy become the exclusive property of the beneficiary upon the death of the insured. Q: What if the insured before dying became insolvent, who should be entitled to the proceeds? A: It should be paid to the beneficiary and not to the assignee in insolvency. Q: What are the limitations in the appointment of the beneficiary? A: G.R: A person may take out a policy of insurance on his own life and make it payable to whomsoever he pleases whether the beneficiary lacks insurable interest or not. However, he should act in good faith and without intent to make the transaction merely a wagering contract. EXC: Article 2012 of the NCC in relation to Art. 739. 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. (n) Art. 739. The following donations shall be void: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to a public officer or his wife, descedants and ascendants, by reason of his office. In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and donee may be proved by preponderance of evidence in the same action. (n) Q: For the prohibition to apply, is it required that there be previous conviction for adultery or concubinage? A: No. Q: To whom shall the proceeds of the policy accrue in the absence of any beneficiary named in the life insurance policy or where the designated beneficiary is disqualified?

NOTES ON INSURANCE



A: It shall go to the estate of the deceased insured. Q: State the rule regarding the right of the insured to change the beneficiary in life insurance. A: Whether or not the policy reserves to the insured the right to change the beneficiary, he has the power to so change the beneficiary without the consent of the latter who acquires no vested right but only an expectancy of receiving the proceeds under the insurance.

Effect of death Q: What is the effect of the death of the insured? A: The right or the insured’s power to extinguish the beneficiary’s interest must be exercised while the former is alive. Thus, it ceases at his death and cannot be exercised by his personal representatives or assignees. Q: What is the effect if the right to change is waived? A: In such case, the insured has no power to make such change without the consent of the beneficiary. In such case:

The beneficiary acquires an absolute and vested interests from the date of its issuance and delivery. Thus, he has a property right on the policy which could not be deprived without his consent. Neither can a new beneficiary be added for this would in effect reduce the latter’s vested rights.

Q: Can the insured destroy the contact by refusing to pay the premiums? A: No, the beneficiary can always pay them to protect his interest. Accordingly, the fulfillment of the obligation may be made by a third person even against the will of the debtor and if he has an interest in the fulfillment of the obligation, even if against the will of the creditor. Q: How do we measure the insurable interest of the beneficiary in a policy? A: It should be measured on its full value and not on its cash surrender value.

BENEFICIARY PREDECEASED THE INSURED

Q: What will happen in case the beneficiary dies before the insured? A:

1. View that beneficiary’s representative is entitled to insurance proceeds- where the right to change the designated beneficiary is expressly waived, that if the beneficiary dies before the insured, his rights so vested should pass to his representatives. Thus, upon the death of the insured, the proceeds of the policy should belong to the representatives of the beneficiary.

2. View that the estate of the insured is entitled to insurance proceeds- especially where the designation is subject to the express condition to pay the beneficiary if he survives the insured or “if surviving.”

Words used in designating the beneficiaries of a life policy will not be given their technical significance but will be construed broadly in order that the benefit of the insurance shall be received by those intended by the insured ads the object of his bounty. The following may be designated as beneficiaries:

1. Insured or his estate; 2. Specifically designated person or persons; and 3. Class or classes of persons

a. Children- include an adopted child; or an adult child not

forming part of the household of the insured; or after-born children of a marriage subsequently contracted. It means a descendant of the first degree and is never intended to include grandchildren.

If the children were named individually, other children cannot share in the proceeds unless the insured amend his designation to include them.

b. Husband, wife or widow- the word “wife” is regarded as

a descrtiptio personae. Thus, the fact that one who otherwise answers the description does not have the legal status of the wife of the insured does not prevent her from taking as beneficiary as when she is designated by name although the words “his wife” are added.

But if the beneficiary is not named but is designated merely by status, the legal husband etc. as ascertained at the death of the injured is entitled to the benefits of such insurance. c. Husband and children; wife and children-if the

designation is made to the insured’s “wife and children” or “my wife and children”, the insurance is deemed for the benefit of all the children of the insured whether by the named wife or those of another.

d. Family- the court in this case will ascertain whether that person was so regarded by the insured. If he was so regarded, he will be allowed to participate although in no way related to the insured.

NOTES ON INSURANCE



e. Heirs or legal heirs- these terms will not be construed as indicating merely the heirs at law but rather that class of persons who would take the property of the insured in case he died intestate.

f. Estate or legal representatives of the deceased- to be

construed in their strict technical sense and the courts will ordinarily assume that they are used to mean executors or administrators, unless it appears that the insured intended to use these expressions in the sense of heirs or next of kin.

If no beneficiary is designated, the proceeds will go to his legal heirs in accordance with law. Sec. 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.

INTEREST

Q: What does interest mean? A: It is the right of the beneficiary to receive the proceeds of the life insurance policy. It does not mean insurable interest since the beneficiary need not have an insurable interest in the life of the insured. Q: Who are the nearest relatives of the insured? A:

1. The legitimate children; 2. The father and mother, if living; 3. Grandfather and grandmother, or ascendants

nearest in degree, if living; 4. The illegitimate children; 5. The surviving spouse; and 6. Collateral relatives, to wit:

a. Brothers and sisters of the full blood; b. Brothers and sisters of the half-blood; and c. Nephews and nieces

7. In default of the above, the State Q: What is the liability of the insurer on death of insured? A: 1. Death at the hands of the law- according to Prof. Vance

in his treatise on insurance, the death of the insured at the hands of the law—as by legal execution-is one of the risks assumed by the insurer in the absence of a valid policy exception.

2. Death by self-destruction- death by suicide is not by implication exempted from the risks assumed by the insurer especially where the insurance is for the benefit of another rather than the insured.

BUT: Sec. 87. 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: What is the reason behind such rule? A: In such circumstance, the death is still caused by the voluntary act of the insured, he knowing and intending that his death shall be the result of his act. But death which is purely accidental even if due to his own carelessness or negligence is not excluded from the coverage by the words “self-destruction” or “death by his own hands” and the like. 3. Death by suicide while insane- in the absence of express

conditions to the contrary, the suicide of an insured while insane does not discharge the insurer from his liability on his contract. It must have known to that the insured was subject and the unwitting act of self-destruction is as much the consequence of that disease.

4. Death caused by beneficiary- where the beneficiary intentionally brings about the death of the insured under such circumstances as to amount to a felony, he cannot receive any benefit under the contract of insurance. Thus, his interest shall be forfeited and the nearest relative of the insured shall receive the proceeds of the said insurance if not otherwise disqualified.

EXC: When such killing was accidental or in self-defense or where the beneficiary was insane, the rights of the beneficiary under the policy are not affected. The same is true where the insured’s death was not intentionally caused.

Thus, it is well-settled that a deliberate killing of the insured by the beneficiary suffices to work a forfeiture.

5. Death caused by violation of law- the mere fact that the

insured dies while he was committing a felony or violating a law would not warrant denial of liability. To avoid liability, the insurer must establish that the commission of the felony or the violation of law was the cause or had a causal connection with the accident resulting in the death of the insured.

An act or omission punishable by a special law is not a felony but more of the general term-crime, offense, transgression or infraction of law. Thus, the act of driving a motorcycle

NOTES ON INSURANCE



without the license to do so (although a violation of the Land Transportation and Traffic Code) would not constitute a felony. It must be shown that the violation of law was the cause or had causal connection with the accident.

Sec. 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 Q: What is an insurable interest in property? A: It may be in the property itself (ownership) or any relation thereto (interest of a trustee), or liability in respect thereto (interest of a carrier). Q: Who has an insurable interest in property? A: Anyone who derives benefit from its existence or would suffer loss from its destruction. The occurrence of the loss may be uncertain and it is not necessary that the interest is such that the event insured against would necessarily subject the insured to loss. Q: In an insurance of property, is title or right to possession not essential? A: No, title in the property as well as possession or right to possession is not essential. It is enough that he will suffer loss as the proximate result of its damage or destruction. Mortgagor who sold the mortgaged premises to a vendee has an insurable interest in the property because of his personal liability for the debt and his right to be subrogated to the mortgage security in case he should be compelled to make payment. Insurable interest is more of a concern in the conservation of the property and such a relation to or connection with it as will necessarily entail a pecuniary loss in case of its injury or destruction. Nonetheless, the expectation of benefit must have a basis of legal right although the person insured has no title. Q: Is a mere factual expectation of loss sufficient? A: No, such expectation not arising from any legal right or duty in connection with the property does not constitute an insurable interest. Yet, this type of interest of “factual expectation,” though is insufficient in strict indemnity insurance, will suffice in life insurance.

Sec. 14. An insurable interest in property may consist in:

a. An existing interest; b. An inchoate interest founded on an existing

interest; or c. An expectancy, coupled with an existing interest in

that out of which the expectancy arises. Q: Does the interest in a property need to be an existing one? A: No, it may consist merely of an inchoate interest or expectancy. An existing interest- legal title or equitable title Q: Give examples of persons who have insurable interest arising from legal title. A:

1. Trustee-in case of seller of property not yet delivered;

2. Mortgagor- in case of a property mortgaged; 3. Lessee and sub lessee; and 4. Assignee of property for the benefit of creditors

A representative (an executor, administrator, trustee, or receiver) who holds legal title in such capacity has sufficient insurable interest for the purpose of taking out insurance on the property under his control but nay proceeds from such insurance are to be held for the benefit of those whose benefit the representative is acting. Q: Give examples of persons who have insurable interest arising from equitable title. A:

1. Purchaser of property before delivery; 2. Mortgagee; 3. Mortgagor after foreclosure but before expiration;

of the period within which redemption is allowed; 4. Beneficiary under a deed of trust; 5. Creditors under a deed of assignment; 6. A judgment debtor whose property has been seized

under execution until the right to redeem or the right to have the sale set aside has been lost;

7. Builders and constructors of buildings pending the payment of the construction price;

8. Purchaser of an option to buy real estate Q: Is an inchoate right considered as sufficient? Cite examples.

NOTES ON INSURANCE



A: Yes but it must be founded on an existing interest. A stockholder in the property of the corporation of which he is a stockholder—his insurable interest is limited to the extent of the value of his interest or to his share in the distribution of the corporate assets upon dissolution. Note that a stockholder has neither legal nor equitable title to assets of the corporation.A partner with respect to property of the firm

Q: What about an expectancy, will that qualify as an insurable interest? Give examples. A: Yes, but it must be coupled with an existing interest in that out of which such expectancy arises. A farmer may insure future crops if the same are to be grown on land owned by him at the time of the issuance of the policy or are to be raised by him in the land of another, provided that it will belong to him when produced. A business owner with respect to a contingency which may cause loss of profits A workingman has an insurable interest in any building he may have contracted to repair or an artist might insure the structure for the interior decoration of which he had been employed.

Sec. 15. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof. The basis of this provision is that the loss of the thing may cause liability to the carrier or depositary to the extent of its value. This includes bailees to protect him against the loss of the benefits to which he is entitiled Under the General Bonded Warehouse Act—a warehouse man license to engage in the business of receiving commodities for storage is required to insure the same against fire. Sec. 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable. A mere hope or expectation of benefit uncoupled with ay present legal right will not support a contract of insurance. A father cannot insure his son’s property nor can a son insure the property that he expects to inherit from his father as his interest is merely an expectancy.

Parents and children and spouses can insure the life of each other Q: Can a general or unsecured creditor insure specific property of his debtor who is alive? A: No, 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 liabilities 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. A judgment creditor has an insurable interest in the debtor’s property as he has been held to have insurable interest in the debtor’s property as he has a right to levy on such property as may be necessary to satisfy the judgment. Yet, he has to show that the debtor has no other property out of which the judgment may be satisfied. An unsecured creditor has an insurable interest in the life of his debtor to the extent of the amount of the debt. Also, a person named as beneficiary in a will has no insurable interest in a property designated before the testator’s death. Accordingly, the will can be revoked anytime before the death of the testator unless he has expressly waived this right in the policy. Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. A contract of insurance is one of indemnity. Thus, any contract that gives to the insured more than indemnity against his actual loss that may be suffered is in the nature of a wagering policy contrary to public policy and void. Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. BASIS: Principle of Indemnity. Thus, an insurance taken out by a person on property in which he has no insurable interest is void. Q: Cite an example where the rule will not apply. A: In case the real intention was to insured the goods for P 15,000.00 but instead it was the building in which the goods were stored (and which was not owned by the insured or had any insurable interest thereto). In such case, the insured can recover in case of loss of the goods.

NOTES ON INSURANCE



Q: What will happen to the proceeds of the insurance in such case where the insurance is void? A: The premium will be returned to the insured unless he is in pari delicto with the insurer. In a life insurance taken by a person on his own life, the beneficiary need not have an insurable interest in the life insured.

Doctrine of waiver or estoppel Q: Does the Doctrine of waiver or estoppel apply in the aforesaid situation? A: No, since the public has an interest in the matter independent of the consent or concurrence of the parties.

CONTRACTS OF MARINE OR FIRE INSURANCE The amount of indemnity may be determined after the loss or is previously fixed in the contract. The insured cannot recover in excess of his actual loss. In valued policies however, the valuation of the thing insured is conclusive between the parties thereto in the adjustment of loss. The principle of indemnity will not also apply in case the insurer agreed to repair or replace the thing insured with a new one even though the cost of the undertaking may exceed the original amount of the insurance.

LIABILITY INSURANCE CONTRACTS

Contracts of indemnity against liability and not against loss. Accordingly, the insurer’s promise is to pay the proceeds of the policy in behalf of the insured to a third person to whom the insured is liable. Hence, if the insured suffers no loss because the liability to third persons cannot be enforced, the insurer has no obligation to pay the proceeds.

LIFE INSURANCE CONTRACTS Not contracts of indemnity. The amount fixed payable is not considered as the true value of the thing insures because the life of a person is priceless. It is simply a measure of indemnity which the insurer has bound himself to pay the insured. The amount for which a person is insured is governed by the amount of premium that he contracted to pay.

PERSONAL ACCIDENT INSURANCE CONTRACTS

NOTE: Not contracts of indemnity. Life and limb are not susceptible to exact or uniform valuation. Yet if a person effects an personal accident insurance on the life of another person, the amount recoverable is the loss sustained by the person who effected the policy. In theory, such contract becomes a contract of indemnity but it is often impossible exactly to assess the injury suffered.

HEALTH INSURANCE CONTRACTS NOTE: Not contracts of indemnity. But those covered by medical expenses are contracts of indemnity.

HEALTH CARE AGREEMENT

An agreement with a health maintenance organization (HMO) is in the nature of non-life insurance which is primarily a contract of indemnity. Payment must be made to the party who incurred the expenses. Sec. 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but 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. BASIS: To prevent the issue of wagering policies. Q: When should insurable interest in property exist? A:

1. On the date of the execution of the contract 2. On the date of the occurrence of the risk secured

against Q: What is the effect if the above rule is not met? A: The policy is void. Hence, if a fire occurs after the sale or alienation of the property, the former owner cannot recover on the policy. Q: What about in life insurance, when is the insurable interest requirement satisfied? A: If the same exists at the time the policy is procured, even if it has ceased to exist at the time of the insured’s death.

NOTES ON INSURANCE



In liability insurance, questions of insurable interest are not particularly important. It necessarily exists when the liability of the insured to a third party attaches.

Insurable interest in life and property Q: Distinguish between insurable interest in life and property. A:

Life Insurance Property Insurance

As to extent of insurable interest

Unlimited Limited to the actual value of the interest thereon

As to time when insurable interest must exist

At the time the policy takes effect and need not exist at the time of the loss

It is necessary that the insurable interest mist exist when the insurance takes effect and when the loss occurs, but need not to exist in the meantime

As to expectation of benefit to be derived

It need not have any legal basis whatever. A reasonable probability is sufficient without more -no legal right to support if there is reasonable ground for believing that the support will be continued.

There must be legal basis however remote to constitute an insurable interest. -an heir cannot insure the property he expects to inherit. -stockholder may insure the property of the corporation although he has no legal interest whatsoever in such property.

Sec. 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured 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. The transfer of interest of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both policy and the thing insured. BASIS: Sec. 19 of the Insurance Code The contract in this case is not rendered void but is merely suspended by a change of interest. Q: State the purpose of the rule against alienation.

A: It is 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. Q: What do you mean by transfer of interest? A: It means absolute transfer of the property insured such as the conveyance of the property by means of an absolute deed of sale. Thus, interest in the property does not pass by mere execution of a pledge or mortgage. G.R.: Change of interest suspends the insurance EXC: 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, or owners in common, who are jointly insured, to the others;

6. When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured;

7. Where there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but is avoided.

Sec. 21. A change in 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. The liability of the insurer becomes fixed after the loss happened. Insured has a right to assign his claim against the insurer and the absolute right to transfer the thing insured after the occurrence of the loss.

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

Divisible contract and indivisible contract Q: What is the distinction between a divisible contract and indivisible contract? A:

NOTES ON INSURANCE



Divisible Contract Indivisible Contract

As to the effect

The cause of consideration is made up of several parts. -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

The cause or consideration is entire or single -if the things are insured under one policy for a gross sum and for an entire premium, the contract is indivisible; change of interest in one or more of the things will also avoid the insurance as to the others

Whether the contract is entire or severable is a question of intention to be determined by the language employed by the parties. Sec. 23. A change on 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 insurance on property passes automatically on the death of the insured to the heir, legatee or devisee who acquired interest in the thing insured. The right to succession is transmitted from the moment of the death of the decedent.

Sec. 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. Q: What is the effect of transfer of interest in the insured property by a partner, joint owner, etc. to others who are jointly insured? A: It will not avoid the insurance. The rule is the same even if there is a stipulation that the insurance shall cease upon alienation of the thing insured. Q: What is the reason for such rule? A: That is so because, 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 by such transfer. Q: Give the exemption to such rule.

A: If the transfer occurs without the consent of the insurer and before the loss occurs. Q: What is the effect if the transfer is to a stranger? A: Such will avoid the policy. It ends the contract of insurance to as to him (the partner), but does not affect the insurance as to the others. Sec. 25. Every stipulation in a policy of insurance for the payment of loss whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void. Q: What are the stipulations which are declared void under this section? A:

1. Stipulation for the payment of loss whether the person insured has or has no interest in the subject matter of the insurance;

2. Stipulation that the policy shall be received as proof of insurable interest- the insurer can always show lack of insurable interest after the issuance of the policy insurance.

Wager policy

Q: What is a wager policy? A: It is a pretended insurance where the insured has not interest in the thing insured and can sustain no loss by the happening of the misfortunes insured against. Q: Who has the right to raise the defense of the absence of an insurable interest? A: It is available only to the insurer being the only party to the insurance contract who has a legitimate in interest in raising such defense. The insurable interest requirement intends to deter the insured from the temptation to bring about by unnatural means the results of the contingent event.

NOTES ON INSURANCE



TITLE 4

CONCEALMENT

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

FOUR PRIMARY CONCERNS OF PARTIES TO AN INSURANCE CONTRACT

Q: What are the 4 primary concerns of the parties to an insurance contract? A:

1. The correct estimation of the risk which enables the insurer to decide whether he is willing to assume it, and if so, at what rate of premium?

2. The precise delimitation of the risk which determines the extent of the contingent duty to pay undertaken by the insurer.

3. Such control of the risk after it assumed as will enable the insurer to guard against the increase of the risk because of the change in conditions

4. Determining whether a loss occurred and if so, the amount of such loss.

Q: What are the devices for ascertaining and controlling risk and loss? A:

1. Concealment 2. Representations 3. Warranties 4. Conditions 5. Exceptions

Q: What is the original purpose for the development of concealment and representations? A: For the purpose of enabling the insurer to secure the same information with respect to the risk that was possessed by the applicant for insurance, so that he might be equally capable of forming a just estimate of its quality. Q: Why are warranties and conditions considered as “alternative”? A: They deal with conditions existing at the inception of the contract

Exceptions Q: What is the purpose of exceptions?

A: To make more definite and certain the general words used to describe the risk the insurer undertook to bear. Exceptions make more definite the coverage indicated by the general description of the risk by excluding certain specified risks that otherwise would have been included under the general language describing the risks assumed. Exceptions are also used for the purpose of controlling risks. Ex: In a fire insurance policy, burning caused by lightning may be excepted from the risks assumed Q: What are the 2 parts of the general description of risk? A:

1. The designation of the specific property interest to be covered

2. The specification of such of the perils to which the property interest would be exposed.

Warranties and conditions involve facts the existence of which shows the risk to be greater than that intended to be assumed and operates to create in the insurer the power to extinguish, if he so desires, the legal relations already created.

Executory warranties and conditions Q: What are executory warranties and conditions? A: These are undertakings that certain conditions should or should not exist in the future. Q: What is the purpose of the same? A: To enable the insurer to rescind the contract in case subsequent events increased the risk to such an extent that he is no longer willing to bear.

conditions precedent Q: What is the purpose of conditions precedent? A: The insurer must also protect himself against fraudulent claims of loss through these conditions precedent. Ex: Conditions requiring immediate notice of loss or inquiry and detailed proofs of loss within a limited period. Q: It is necessary for the insurer to ascertain not only the fact of loss, but also the amount of any loss that may in fact have occurred. How does an insurer do this?

NOTES ON INSURANCE



A: The insurer inserts the various conditions providing for the appointment of appraisers, and for arbitration in case no agreement can be reached as to amount of loss.

Concealment Q: What is “concealment”? A: As defined under Sec. 26, it is the neglect to communicate that which a party knows and ought to communicate. Q: What are the different requisites for concealment? A:

1. A party knows the fact which he neglects to communicate or disclose to the other

2. Such party concealing is duty bound to disclose such fact to each other

3. Such party concealing makes no warranty of the fact concealed

4. The other party has no means of ascertaining the fact concealed.

Q: What if a warranty is made of the fact concealed? A: The non-disclosure of such fact is not concealment but constitutes a violation of warranty. Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. (As amended by Batasang Pambansa Blg. 874)

Q: What is the effect of concealment by the insured? A: As a rule, failure on the party of the insured to disclose conditions affecting the risk, of which he was aware, makes the contract voidable at the insurer’s option. RATIO: The insurance policies are contracts uberrimae fidae, that is, contracts of the utmost good faith. It is no defense to plead mistake or forgetfulness. Q: What is the effect of concealment by the insurer? A: The contractual duty of disclosure imposed by utmost good faith is not required of the insured alone, but is imposed with equal stringency upon the insurer; in fact, it is more upon the latter, since his dominant bargaining position carries with it stricter responsibility. Q: How is the “duty of utmost good faith” breached? A: By concealment or misrepresentation

PROOF OF FRAUD IN CONCEALMENT

Under Sec. 27, the insurer need not prove fraud in order to rescind a contract on the ground of concealment (Saturnino v. Phil. American Life Insurance Co). The duty of communication is independent of the intention and is violated by the fact of concealment, even when there is no design to deceive. Q: Is the effect of concealment different when it is intentional and when it is unintentional? A: No. The legal effect of concealment, whether intentional or unintentional, is the same, that is, it entitles the insurer to rescind the contract of insurance, concealment being defined as neglect to communicate that which a party knows and ought to communicate. Q: What is the reason for the above rule? A: If it were necessary for the insurance company to show actual fraud on the party of the insured, then it is plain that it would be impossible for it to protect itself and its honest policy holders against fraudulent and improper claims. It would be wholly at the mercy of anyone who wished to apply for insurance, as it would be impossible to show actual fraud except in the external cases. There would be no incentive to an applicant to tell the truth. Q: What is the basis of the rule vitiating the contract in cases of concealment? A: The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into accepting the risk, or accepting it at the rate premium agreed upon.

RULES AS TO MARITIME INSURANCE

Q: In U.S., the rule in Sec. 27 applies only to ocean marine insurance.

A: What is the reason for this? A: In marine insurance, the subject of the insurance is generally beyond reach, and not open to inspection of the underwriters, often distant ports or upon high seas and the underwriter from the very necessities of his undertaking is obliged to rely upon the assured and has the right to exact a full disclosure of all the facts known to him which may in anyway affect the risk to be assumed. NOTE: In fire and other kinds of insurance, the subject is seen and inspected before the risk is assumed and its construction,

NOTES ON INSURANCE



situation and ordinary hazards as well appreciated by the underwriter as by the other and, therefore, no such necessity for reliance exists. Q: In the Philippines, the rule that fraud is not essential in order that the insured may be guilty of concealment, is applicable to every kind of insurance. Why? A: Under the California Insurance Code, from which Sec. 27 was taken considers the presence or absence of an intent to deceive is immaterial. Sec. 28. Each party to a contract of insurance must communicated to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.

MATTERS THAT MUST BE COMMINICATED EVEN IN THE ABSENCE OF INQUIRY

Q: What are the requisites to compel each party to communicate in good faith all facts within his knowledge? A:

1. They are material to the contract 2. The other has no means of ascertaining the said

facts 3. As to which the party with duty to communicate

makes no warranty An applicant for life insurance suffering from or who had been treated or hospitalized for some ailment like pneumonia, diabetes or syphilis, or incipient pulmonary tuberculosis, or peptic ulcer, or cerebral congestion and Bells Palsy, among others must disclose such facts even if not inquired into where such facts are material to the risk assumed. Q: What is the test? A: If the applicant is aware of the existence o some circumstances which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstances, though unasked. Q: What is the effect of failure of insurer to verify? A: The effect of material concealment cannot avoided by the allegation that insurer could have known and discovered the illness or disease which the insured had concealed.

Sec. 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

Q: What kind of concealment this section refers to? A: It relates to falsity of a warranty.

ORDINARY CONCEALMENT

FALSITY OF A WARRANTY

Under Section 27 Under Sec. 29, Secs. 67-76

Intention is not important

Non-disclosure must be intentional and fraudulent in order that the contract may be rescinded

The omission is on the part of the insured and the party entitled to rescind is the insurer

Q: In every contract of marine insurance, the warranty is implied that the ship is seaworthy. What is the effect of this? A: The intentional and 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 concealment refers to matter proving or tending to prove the falsity of the warranty that the ship is seaworthy. Sec. 30. Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other: (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 MATERIAL

As a general proposition, matters made the subject of inquiry must be deemed material.

NOTES ON INSURANCE



The insured is required to make full and true disclosure to the questions asked. Q: What is the effect of failure to make full disclosure? A: It will avoid the insurance policy. Q: What is the effect of an incomplete answer on its face? A: It will not defeat the policy in the absence of bad faith.

WHEN IS THERE NO DUTY TO MAKE DISCLOSURE The circumstances of the parties to an insurance contract or the conditions under which it is executed may be such as to render it unnecessary for the insured to disclose to the insurer facts that would otherwise be material. Q: What are the circumstances which would excuse non-disclosure? A:

1. Matters known to, or right to be known by insurer, or of which he waives disclosure

2. Risks excepted from the policy (either expressly or by warranty)

3. Nature or amount of the insured’s interest

The nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry except as prescribed by Sec. 51.

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

DETERMINATION OF MATERIALITY

Q: What is the test for materiality? A: The test is in the effect which the knowledge of the fact in question would have on the making of the contract. Q: To be material, should the fact increase the risk or contribute to any loss or damage suffered? A: No. it is sufficient if the knowledge of it would influence the parties in making the contract. This is of course, determined by the court. The insured cannot be guilty of concealment where the fact concealed is not material.

Q: From the standpoint of the insurer, when is a fact material? A: 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 either to reject the risk or accept it only at a higher premium rate or on different terms though the fact may not even remotely contribute to the contingency upon which the insurer would become liable, or in any wise, affect the risk. In non-medical insurance, which does away with the usual medical examination before the policy is issued, the waiver by the insurance company of medical examination renders more material, the information required of the applicant concerning the previous condition of health and disease suffered, for such information necessarily constitutes an important factor which insurer takes into consideration in deciding whether to issue the policy or not (Saturnino v. Phil American Insurance Co,; Sunlife Assur. Co of Canada v. CA)

Q: When is concealment regarded as intentional? A: A man’s state of mind or subjective belief is not capable of proof in our judicial process, except through proof of external acts or failure to act from which inferences as to his subjective belief may be reasonably drawn. Cases under this:

1. Saturnino v. Phil American Insurance Co 2. Great Pacific Life Assurance Co. v. CA 3. Canilang v. CA

Q: What is the doctrine under the case Insular Life Assn. Co. v. Pineda? A: In the absence of evidence of the insurability of a person afflicted with chronic cough, concealment thereof is no ground for annulment of the policy.

TIME WHEN INFORMATION ACQUIRED

Q: When should the concealment take place? A: Concealment must take place at the time the contract is entered into in order that the policy may be avoided and not afterwards. The duty of disclosure ends with the completion and effectivity of the contract. NOTE: The rule is different in reinsurance Q: What is the duty of the insured when the contract is to be effective only upon the issuance of the policy?

NOTES ON INSURANCE



A: An applicant for life insurance policy is under a duty to disclose to the insurer, changes in his health occurring or coming to his knowledge between the date of submitting his application after satisfactory medical examination and the date the policy is delivered. Sec. 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade.

MATTERS EACH PARTY IS BOUND TO KNOW

Q: Under Sec. 3, is the insured under the obligation to communicate public events, such as that a nation is at war or the laws and political conditions in other countries? A: No. The sources of the information, being equally open to the insurer who is presumed to know them. Q: What is the rule as to general trade usages and rules of navigation? A: The insurer is charged with knowledge of the general trade usages and rules of navigation, kinds of seasons, and all the risks connected with navigation. Sec. 33. The right to information of material facts may be waived, either by the terms of the 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

Q: May the right to information be waived? A: Yes, either expressly, that is, by the terms of insurance, or impliedly, by neglect to make inquiry as to facts already communicated. If the applicant has answered the questions asked in the application, he is justified in assuming that no further information is desired. Q: What is the doctrine under the case Ng Zee v. Asian Crusader Life Assurance Corp.? A: In the absence of evidence that the insured had sufficient medical knowledge as to enable him to distinguish between “peptic ulcer” and a “tumor,” his statement, that the tumor was “associated with peptic ulcer of stomach” should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Where upon the face of the application, a question appears to be not answered at all or to be imperfectly answered and

the insurer issues a policy without any further inquiry, it waives the imperfection of the answer and renders the omission to answer more fully immaterial. Sec. 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 fifty-one.

DISCLOSURE OF NATURE AND EXTENT OF

INTEREST INSURED Under Sec. 51 (e), it is required that a policy insurance must specify “the interest of the insured in the property insured, if he is not the absolute owner thereof. Ex: Mortgagee must disclose his particular interest even if no inquiry is made so that the insurer may determine the extent of the insured’s insurable interest.

Q: If the interest in the property is absolute, is there a need to disclose the interest in the property insured? A: No. Sec. 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 matters in question

The duty of disclosure is confined to facts. There is no duty to disclose mere opinion, speculation, intention, or expectation. This is true even if the insured is asked.

Title 5 REPRESENTATION

Sec. 36. A representation may be oral or written. Q: What is representation? A: It is a statement made by the insured at the time of, or prior to, the issuance of the policy, as to an existing or past 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 contract. Q: Who makes a representation? A: It may also be made by the insurer but as the insured seldom desires to avoid the contract, the cases most of the time involve to representations made by the insured.

NOTES ON INSURANCE



Misrepresentation

Q: What is misrepresentation? A: It is a statement

a. As a fact of something which is untrue b. Which the insured stated with knowledge that it is

untrue and with an intent to deceive, or which he states positively as true knowing it to be true and which has tendency to mislead, and

c. Where such fact in either case is material to the risk Q: What is the effect of misrepresentation by the insured? A: It renders the insurance contract voidable at the option of the insurer, even though innocently made and without wrongful intent. NOTE: Misrepresentation is the active form of concealment

FORM AND NATURE OF CONCEALMENT

It is the duty of the person applying for insurance to give to the insurer all such information concerning the risk as will be of use to the latter in:

a. estimating its character and b. in determining whether or not to assume it

Q: How should the information be given? A: It may be given orally, or written in papers not connected with the contract, such as circulars and prospectuses, or in the application or examiner’s report, or it may appear in the policy itself. Representations are made to influence the insurer to accept the risk. They are merely collateral inducements. They are not part of the contract unless expressly made so.

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

Q: When should the representation be made? A: The very nature of representation requires that it precede the execution of the contract. A representation made after the policy is issued could not have influenced either party to enter into the contract. However, a representation may be performed after the issuance of the policy.

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

CONSTRUCTION OF REPRESENTATIONS

Q: How should representations be construed? A: They must be construed liberally in favor of the insured, and are required to be only substantially true. Q: How about warranties? A: By contrast, must be literally true, or the contract will fail.

If the representation is written in the policy, the language in which it is expressed was chosen by the insurer; if answer to an inquiry, the agent of the insurer usually phrases the answer to the question worded by the insurer.

Q: How are questions as to use of liquors be construed? A: In questions as to use of liquor- they will be construed as referring to the habitual use and not to occasional use or even occasional sprees. Q: How about questions as to having any illness? A: If the insured had stated that he had never had “any illness, local disease or injury in any organ,” it was held that this representation was substantially true despite the fact that the insured had been charged from the army because of inflammation of the eyes, which had been entirely cured before the application for the policy. Q: What about questions as to illness or disease? A: They will refer to serious ailments and not to minor indispositions.

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

Kinds of representation Q: What are the kinds of representation? A:

1. Oral or 2. Written; 3. Made at the time of issuing the policy or 4. Before 5. Affirmative 6. Promissory

NOTES ON INSURANCE



Affirmative representation

Q: What is affirmative representation? A: Any allegation as to the existence or non-existence of a fact when the contract begins. Ex: statement that the house is used only for residential purposes

Promissory representation

Q: What is promissory representation? A: Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the contract. Q: How is the term “promissory representations” used? A: It is used in 2 senses:

a. It is used to indicate a parol or oral promise made in connection with the insurance, but not incorporated in the policy. The non-performance of such promise cannot be shown by the insurer in defense to an action on the policy, but proof that the promise was made with fraudulent intent will serve to defeat the insurance.

b. An undertaking by the insured inserted in the policy but not specifically made a warranty is also called a “promissory representation.” It is merely an executory term of the contract, and not properly a representation

A promissory representation is, therefore, substantially a condition or a warranty.

EFFECT ON THE POLICY OF EXPRESSIONS OF OPINION OR EXPECTATION

A representation of the expectation, intention, belief, or opinion or judgment of the insured, although false, will not avoid the policy of insurance if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium. Q: What is the reason behind the said rule? A: This is the rule since the insurer is not justified in relying upon such a statement, but is obligated to make further inquiry. Q: What should the insurer do to escape liability?

A: The insurer must prove both materiality of the insured’s opinion and the latter’s intent to deceive. Q: What is the rule in case of representation of fact? A: The insurer must prove its falsity and materiality. Q: When is representation deemed a mere expression of opinion? A: Only if made in bad faith. Sec. 40. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty. Q: What is the effect of representation on express provisions of policy? A: A representation cannot qualify an express provision or an express warranty in contract of insurance. This is so because a representation is not part of the contract but only a collateral inducement to it. A representation, however, may qualify an implied warranty.

Sec. 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards.

Q: When may representation be altered or withdrawn? A: A representation, not being a part of the contract of insurance, may be altered or withdrawn before the contract usually takes effect but not afterwards since the insurer has already been led by the representation in assuming the risk contemplated in the contract.

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

TIME TO WHICH REPRESENTATION REFERS

Representation refer only to the time of making the contract. Statements promissory of conditions to exist subsequent to the contemplation of the contract may be conditions or warranties. Representations found to be untrue may be withdrawn prior to the copletion of the contract but not afterwards. There is a false representation if it is true at the time it was made but false at the time the contract takes effect.

Sec. 43. When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he

NOTES ON INSURANCE



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. Q: What is the effect where information obtained from 3

rd

persons? A: The insured is given the discretion to communicate to the insurer what he knows of a matter of which he has no personal knowledge. If the representation turns out to be false, he is not responsible therefor, provided he gives explanation that he does so on the information of others.

Where a party orders insurance, and afterwards receives information material to the risk, or has knowledge of a loss, be ought to communicate it to his agent as soon as, with due and reasonable diligence, it can be communicated for the purpose of countermanding the order or laying the circumstances before the insurer.

Q: What is the effect of information obtained from agent of insured? A: If the information proceeds from an agent of the insured, whose duty it is in the ordinary course of business such information to his principal, and it was possible for the agent under such circumstances in the exercise of due diligence to have made such communication before the making of the contract, the insured will be liable for the truth. Q: What is the effect of information obtained from the agent of the insurer? A: The same applies to the insurer though in the nature of things, the question does not occur so frequently. Sec. 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations. Representations are not required to be literally true; they need only be substantially true In order that policy be avoided, a representation relied upon must be false in a substantial and material respect.

. Q: When is representation deemed true? A: When it is true in every particular material to the risk, or is so far true that the conduct of the insurer would not have different if the exact truth had been alleged. Where a party fails but is true or is complied with so far as is essential to the risk insured against, the policy remains in force.

Q: What is the rule re: marine insurance? A: Substantial truth of a representation is not sufficient. The insured is required to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose. Examples:

1. Confinement in childbirth is not a “personal ailment” 2. Failure of the insured to include an illness

occasioned by a fall from tree from which he had completely recovered was held not to avoid the policy

3. A statement that the applicant is in good health is held not to mean that he is in perfect health, but that he is not aware of any disease of such serious nature as to impair his health permenantly

CONSTRUCTION OF REPRESENTATION AS AFFIRMATIVE

A representation written in the policy even in such form as to admit of its being construed as an executor agreement or promissory representation will rather be construed as an affirmative representation of a present fact in order to save the policy from avoidance. Sec. 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. The right to rescind granted by this Code to the insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission. (As amended by Batasang Pambansa Blg. 874).

EFFECT OF FALSITY OF REPRESENTATION

Q: What is the effect of representation? A: Fraud or intent to misrepresent facts is not essential to entitle the injured party to rescind a contract of insurance on the ground of false representation (B.P 874) Q: What is the rule in order for a representation to be false? A: It is sufficient if the representation fails to correspond with the facts in a material point. In other words, the minds of the parties never meet. It is not misrepresentation for the insured to state that he did not drink beer or other intoxicants if he drank but very seldom.

NOTES ON INSURANCE



EFFECT OF COLLUSION OR FRAUD OF

AGENT OF INSURER

Q: What is the effect of collusion or fraud of agent of the insurer? A: 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. Where there is collusion, the agent ceases to represent his principal, and represents himself; thus, the insurer is not estopped from avoiding the policy Where the insured merely signed the application form and made the agent of the insurer fill the same for him, it was held that by doing so, the insured made the agent of the insurer his own agent. The insurer is liable when its agent writes false answer into the application without the knowledge of the insured Sec. 46. The materiality of a representation is determined by the same rules as the materiality of a concealment.

MATERIALITY OF REPRESENTATION

Q: What is the test of materiality? A: It is 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. Q: Who determines the materiality of the representation? A: It is a judicial question. It is the Court which will determine.

CONCEALMENT AND MISREPRESENTATION COMPARED

CONCEALMENT MISREPRESENTATION

The insured withholds information of material facts from the insurer

The insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract

The materiality of concealment is determined by the same rules in cases of misrepresentation

Concealment on the part of the insured has the same effect as a misrepresentation and gives the insurer a right to rescind the contract

Whether intentional or not, the injured party is entitled to

rescind a contract of insurance on ground of concealment of false misrepresentation

The rules on concealment and misrepresentation apply likewise to the insurer

Sec. 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation. The provisions of Sec. 26 to 35 governing concealment and Sections 36 to 48 governing representations apply not only to the original formation of the contract but also to a modification of the same during the time it is in force. If the insurer is induced to modify the insurance policy as to the rate of premium by a representation on the part of the insured in a material point, the insurer is entitled to rescind such modification.

Sec. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised 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 years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent.

WHEN AN INSURER MUST EXERCISE HIS RIGHT TO RESCIND

Q: When must an insurer exercise his right to rescind the contract? A:

1. In general, a contract of insurance may be rescinded on the ground of: a. Concealment b. False representation c. Breach of warranty

NOTE: A defense to an action to recover insurance that the policy was obtained through false misrepresentations, fraud, or deceit is not barred by the provision. There is no time limit imposed for interposing this defense.

2. In non-life policy, in order that the rescind a contract of insurance, such right must be exercised prior to the commencement of an action on the contract. In other words, the insurer is no longer entitled to rescind after the insured has filed an action to collect the amount of the insurance.

NOTES ON INSURANCE



NOTE: However, where any of the material representations is false, the insurer’s tender of the premiums and notice that the policy is cancelled before the commencement of the suit thereon, operates to rescind a contract of insurance.

3. In life policy, the defenses mentioned are available

only during the first 2 years of a life insurance policy.

INCONTESTABILITY OF LIFE POLICIES

Q: What is incontestability? A: It means that after the requisites are shown to exist, the insurer shall be estopped from contesting the policy or setting up any defense, except as is allowed, on the ground of public policy.

Incontestable clauses create a kind of contractual statute of limitations on certain defenses that may be raised by the insurer.

THEORY AND OBJECT OF INCONTESTABLE CLAUSE

A. As to the insurer

The theory is that an insurer should have a reasonable opportunity to investigate the statements which the applicants make and that after a definite period, the insurer should not be permitted to question the validity of the policy either by affirmative or by defense to a suit brought on the life policy by the beneficiary.

B. As to the insured

The object of the clause is to give the greatest possible assurance to a policyholder that his beneficiaries would receive payment without question as to the validity of the policy or the existence of the coverage once the period of contestability passes. It is designed to protect the policyholder or beneficiary from a lawsuit contesting the validity of the policy after a considerable time has passed and evidence of the facts surrounding the purchase may be unavailable.

Requisites for incontestability Q: What are the requisites for incontestability? A:

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 2 years from its date of issue or of its last reinstatement.

Q: May the 2 year period of contesting a life insurance policy by the insurer be shortened? A: Yes. Q: May it be extended by stipulation? A: No. The phrase “during the lifetime” simply means that the policy is no longer considered in force after the insured has died. Q: What is the effect when the policy becomes incontestable? A: The insurer may not refuse to pay the same by claiming that:

1. The policy is void ab initio 2. It is rescissible by reason of the fraudulent

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

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

Since the law speaks of a policy in force for 2 years, the expression “void ab initio” should be understood in the sense of “voidable” and the fraud contemplated should refer to fraud in inducement.

Q: What will be the period in case of reinstated policy? A: The period of contestability should be counted from the date of reinstatement, and not from the date of issuance of the policy. A policy of insurance, after it has lapsed or become forfeited, as for non-payment of premiums or breach of a warranty or condition, may be revived by or reinstated pursuant to a provision contained in the policy or the agreement of the parties.

DEFENSES NOT BARRED BY INCONTESTABLE CLAUSE

The incontestable clause is not absolute. Incontestability only deprives the insurer of those defenses which arise in connection with the formation and operation of the policy prior to loss.

Q: What are the defenses which are not barred by the incontestability clause?

NOTES ON INSURANCE



A:

1. That the person taking the insurance lacked insurable interest as required by law

2. That the cause of death of the insured is an expected risk

3. That the premiums have not been paid 4. That the conditions of the policy relating to military

or naval service have been violated 5. That the fraud is of a particularly vicious type, as

where the policy was taken out in furtherance of a scheme to murder the insured, or where the insured substitutes another person for the medical examination, or where the beneficiary feloniously kills the insured.

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

7. That the action was not brought within the time specified.

Title 6 THE POLICY

Sec. 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance. Sec. 50. The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of 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. Group insurance and group annuity policies, however, may be typewritten and need not be in printed form. Q: What is policy of insurance?

A: It is the written document embodying the terms and stipulations of the contract of insurance between the insured and the insurer. Q: Who signs the policy? A: It is signed only by the insurer or his duly authorized agent. It need not be signed by the insured except where express warranties are contained in a separate instrument forming part of the policy in which case the law requires that the instrument must be signed by the insured.

The standard practice is to have the prospective insured full out and sign an application prepared by the insurer.

POLICY CONTROLS TERMS OF INSURANCE

The insurance policy constitutes the measure of the insurer’s liability, and in order to recover, the insured must show himself within the terms. To create an enforceable agreement all the requisites necessary in order that there will be a valid contract of insurance must be present. The insurance companies have the same rights as individuals to limit their liabilities and to impose whatever conditions they deem best upon their obligations not inconsistent with public policy. The compliance of the insured with the terms of the policy is a condition precedent to the right of recovery.

POLICY AS A “CONTRACT OF ADHESION”

Q: What is a contract of adhesion? A: It is essentially a description of the manner byb which the contract is formed: one party having superior bargaining power imposes its choice of terms on the other party. The insured sees the contract in its final form and has had no voice in the selection or arrangement of the words employed therein. Although the insured can choose from variety of available coverages, he cannot negotiate the substance of the contract the insurer. Q: How is ambiguity in the insurance policy construed? A: Since the parties do not bargain on equal footing, the weaker party’s participation is reduced to the alternative “to take it or leave it.” Where the language used in an insurance contract or application is such to create ambiguity, the same should be resolved liberally in favor of the insured and strictly

NOTES ON INSURANCE



against the party responsible therefor (the insurance company which prepared the contract) Q: What is the rationale behind this? A: To afford the greatest protection to the insured. Also, forfeitures are not favored and any construction which would result in the forfeiture of the policy benefits for the person claiming thereunder will be avoided if it is possible to construe the policy in a manner which would permit recovery. Q: What is the exception to the general rule? A: The courts will only rule out blind adherance to terms where facts and circumstances will show that they are basically one-sided. The “fine print” or “contracts of adhesion” rule does not apply where the petitioner is an acute businessman of experience who is presumed to have assented to the assailed provisions of the policy with full knowledge and, therefore, cannot claim he did not know its terms.

If the terms of the contract are clear and unambiguous, there is no room for construction and such terms cannot be enlarged or diminished by judicial construction.

POLICY DIFFERENT FROM CONTRACT ITSELF

Policy of insurance

Formal written instrument evidencing the contract of insurance entered into between the insured and the

insurer

The law between the parties

Insurance contracts are required in standard forms

No policy of insurance shall be issued or delivered within the Philippines unless in the form previously

approved by the Insurance Commissioner

Every contract of insurance in the Philippines must be evidenced by a policy and that policy must be in the

form previously approved by the Insurance Commissioner

FORM OF CONTRACT OF INSURANCE

Modern-day insurance contracts are evidenced by writing. Q: Should the written insurance contracts be in formal form? A: This wiritng may be informal, as a binding slip, or a written application informally accepted; or it may be formal, being the carefully written policy in customary use.

Under the Insurance Code, the policy must be in printed form. Group insurance and group annuity policies may be typewritten. Q: In case of conflict between the printed and written portions of a policy, which should prevail? A: The written portion prevails.

PERFECTION OF INSURANCE CONTRACTS

A contract of insurance, like other contracts, must be assented to by the parties either in person or by their agents. Q: How is assent or consent manifested ? A: By the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. Q: What if the application for insurance has not been either accepted or rejected? A: There is no contract yet as it is merely an offer or proposal. Q: Does the mere signing of an application for life insurance and the payment of the first premium bind the insurer to issue a policy? A: No, where there is no evidence of any contract between the parties that such acts should constitute a contract of insurance. Q: What is the rule in order for the contract to be binding from the date of the application? A: It should be one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. Also, the contract is not perfected where the applicant for life insurance dies before its approval or it does not appear that the acceptance of the application ever came to the knowledge of the applicant. Q: What is the rule on the acceprtace of an insurance policy? A: It must be unconditional, but it need not be by formal act. Reception and retention of the policy without objection beyond a reaonable time may be deemed to be an acceptance. Q: May the parties impose additional conditions precedent to the validity of the policy? A: Yes. However, the usual conditions found in the application for insurance are that the contract shall not

NOTES ON INSURANCE



become binding until the policy is delivered and the first premium paid. This condition is valid. Q: Can there ne a valid and binding insurance contract where no premium is paid? A: GR: No. XPN: Unless there is credit given or there is a waiver or some agreement obviating the necessity for prepayment of the premium.

But where the premium has been previously paid, the contract is perfected upon approval of the application although the policy has not yet been issued, unless there is a stipulation to the contrary. It may happen that the insurance applied for has never been in force where the applicant dies after the disapproval or the insurance application notwithstanding that the initial premium has been paid and a binding deposit receipt issued.

Cover notes

Q: What are cover notes? A: They may be issued to bind the Insurance temporarily pending the issuance of the policy. Coverage then can begin depending upon their terms.

OFFER AND ACCEPTANCE IN INSURANCE CONTRACT Q: Who makes the offer and who accepts the offer? A: Generally, the applicant usually makes the offer to the insurer through an application for insurance which is usually attached to policy and made a part of the insurance contract. Q: How about in property and liability insurance? A: It is the insured who technically makes an offer to the insurer, who accepts the offer, rejects it, or makes a counter-offer. The offer is usually accepted by an insurance agent on behalf of insurer. Q: How about in life and health insurance? A: The situation depends upon whether the insured pays the premium at the time he applies for insurance.

a. If he does not pay the premium, his application is considered an invitation to the insurer to make an offer, which he must accept before the contract goes into effect.

b. If he pays the premium with his application, his application will be considered an offer.

Q: Does insurance agent have the authority to bind immediately the insurers they represent? A: No. Instead, they customarily issue a binding receipt that makes the coverage effective on:

1. The date of the application 2. The date of the medical examinatio, if the insurer

determines later that the applicant was insurable on that date

The binding receipt is a conditional acceptance by the insurer.

c. Where the application for insurance constitutes an offer by the insured, a policy issued strictly in accordance with the offer is an acceptance of the offer that perfects the contract. If the policy issued does not conform to the insured’s application, it is an offer to the insured which he may accept or reject.

IMPORTANCE OF DELIVERY OF POLICY

Q: What is delivery? A: It is the act of putting the insurance policy, the physical document, into possession of the insured. Q: Why is delivery of the policy important? A:

1. As evidence of the making of a contract and of its terms

2. As communication of the insurer’s acceptance of the insured’s offer.

3. Delivery may affect the term of the coverage Example: where a policy provides that the coverage terminates 1 year after delivery, it becomes the important fact for determining when the policy period ends Q: What if there was no delivery? A: The delivery of a policy is not a prerequisite to a valid contract of insurance. The contract may be completed prior to delivery of the policy or even without the delivery of the policy depending on the intention of the parties. The widespread use of binding receipts has made delivery less important than it used to be.

NOTES ON INSURANCE



But delivery still has significance as the decisive act that ordinarily marks the end of the insurer’s oportunity to decline coverage.

MODES OF DELIVERY OF POLICY

Q: What are the different modes of delivery of policy? A: Actual or constructive delivery

ACTUAL CONSTRUCTIVE

The delivery may be made to the insured in person or to his duly constituted agent

When it is deposited in the mail duly directed to the insured or his agent

Whether or not the policy was delivered after its issuance depends, not upon its manual possession by the insured but rather upon the intention of the parties which may be shown by their acts or words. Q: What is the effect of possession by the insured of the policy? A: It raises the presumption that the policy was delivered to the insured, whilen possession by the insurer is prima facie evidence that no delivery was made. If the application contains a provision that the insurance shall not be effective until the delivery of the policy, delivery is essential to the consummation of the contract.

DELIVERY TO INSURER’S AGENT AS DELIVERY TO INSURED

Q: Is delivery to the agent of the insurance company delivery to the insured? A: There are conflicting views as to the answer.

1. Beneficiary cannot recover RATIO: The insurance agent is not his agent

2. Beneficiary can recover RATIO: The contract is to be deemed complete when the policy has been delivered to the insurance agent. The insured having complied with every condition required of him, actual delivery to him is not essential to give policy binding effect. A contrary rule would be financially unfair to the beneficiary where the amount of the premium is computed from the date of the application.

EFFECT OF DELIVERY OF POLICY

Q: What is the effect of delivery of policy where the delivery is conditional? A: Where there is conditional delivery of an insurance policy, non-performance of the condition precedent prevents the contract from taking effect. Ex: stipulation that the policy shall not become operative unless the applicant is in good health at the time of delivery of the policy is valid. Q: What if the delivery is unconditional? A: It ordinarily consummates the contract, and the policy as delivered becomes the final contract between the parties. Where the parties so intend, the insurance becomes effective at the same time of the delivery of the policy. Q: How about when the premium is still unpaid after unconditional delivery? A: The insurer cannot be presumed to have extended credit from the mere fact of unconditional delivery of the insurance policy without the pre-payment of the premium; and even if such presumption may be inferred, there must be a clear and express acceptance by the insured of the insurer’s offer to extend credit. In the absence of any clear agreement granting credit extension, the policy will lapse if the premium is not paid, at the time and in the manner specified in the policy.

RIDER IN THE CONTRACT OF INSURANCE

Q: What is a rider? A: It is a small or typed stipulation contained on a slip of paper attached to the policy and forming an integral part of the policy. They are usually attached to the policy because they constitute additional stipulations between the parties. Any rider properly attached to a policy is a part of the contract to the same extent and with like effect as if actually embodied in the policy. Q: What is the necessity for riders? A: In the conduct of insurance business, it often becomes necessary to add new provision to a policy, or to modify or waive an existiong provision, or to make any desired change in the policy. This saves the trouble and expense of making an entirely new contract.

NOTES ON INSURANCE



Q: What is the rule in case of conflict between the rider and printed stipulations of a policy? A: The rider prevails, as being more deliberate expression of the agreement of the contracting paties.

ATTACHED PAPERS ON INSURANCE POLICY

Q: What is the binding effect of rider, slip or other paper? A: They become part of a contract or policy of insurance if properly and sufficiently attached or referred to therein in a manner as to leave no doubt as to the intention of the parties in such respect. Sec. 226 states that no rider, etc. shall be attached to, printed or stamped upon a policy of insurance unless the form of such rider has been approved by the Insurance Commissioner Q: What is the effect of lack of description? A: 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 is also mentioned and written on blank spaces provided in the policy. The lack of description will not affect the other provisions of the policy except where without such rider, the contract will be incomplete.

Warranties Q: What are warranties? A: They are inserted or attached to a policy to eliminate specific potential increases of hazard during the policy of the term owing to:

a. Actions of the insured b. Condition of the property

Clause

Q: What is a clause? A: It is an agreement between the insurer and the insured on certain matter relating to the liability of the insurer in case of loss. Q: What is a “Three-fourths Clause”? A: Under the same, the liability of the insurer shall not exceed ¾ of the loss of or damage to the insured. Q: What is the “Loss payable Clause”?

A: It states that the loss, if any, is payable to a named party or parties as their interest may appear. Q: What is the “Change of ownership Clause”? A: It provides that it will inure to the benefit of whomsoever, during the continuance of the riskm may become the owner of the interest insured, the insurer gives a written consent to the assignment of the thing insured.

Endorsement Q: What is an endorsement? A: Any provision added to an insurance contract altering its scope or application. Ex: those extending the perils covered In the nature of a permit such as one authorizing the removal of the insured property and providing for coverage in another location Q: What is the effect of lack of signature? A: As a general rule, where the rider is physically attached to a policy of insurance contemporaneously with its execution and delivered to the insured so attached, and sufficient reference 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 a part of the insurance contract. A countersignature of the insured or owner is required to any rider, etc. not applied for by him if ussued after delivery of the policy, which countersignature shall be taken as his agreement to the contents of the matter so attached.

EFFECT OF FAILURE OF INSURED TO READ POLICY

Q: What is the effect of failute of the insured to read the policy? A:

1. Majority rule- such acceptance is not negligence per se and in proceedings to reform insurance contracts, most courts hold that the insured’s acceptance and retention of the policy unread is not such laches as will defeat his right to reformation

RATIO: Insurance contracts are contracts of adhesion

2. Minority rule- the one who accepts a contractual instrument is conclusively presumed, in the absence of fraud or mutual mistake, to know and assent to its contents.

NOTES ON INSURANCE



Q: What are the exceptions to the “minority rule”? A: 1. It ia obvious that the insurer cannot complain of the

failure of the insured to read his policy where the insured could not have discovered the erroneous statement by such reading.

2. He is induced by the fraud of the agent of the insurer not to read his policy

3. The insured is illiterate or unable to read English 4. Where the contratcts are long, complicated and difficult

to understand even if read

The so-called “duty to read” has less significance in modern cases

INSURER’S DUTY TO EXPLAIN THE POLICY

Q: What is the duty of the insurer in explaining the policy in case the terms of policy are clear? A: The insurer has no affirmative duty to explain rthe policy or its exclusions to the insured. Q: What are the exceptions to this rule? A: 1. Doctrine of reasonable expectations- imposes a de facto

duty on the insurer to explain the policy’s coverage to the insured. If a court holds that an insured’s reasonable expectations entitle him to coverage despite policy language to the contrary, the court in effect said that the insurer must pay for the loss because the insurer failed to explain the limitations on coverage to the insured. In other words, if the insurer had provided an explanation of the coverage, the insured’s expectations of different coverage would have been rendered unreasonable.

2. Options available to the insured- in motor vehicle insurance where legislations have made certain kinds of coverage optional, usually uninsured or underinsured motorist insurance, courts have imposed a duty of the insurer to explain the options to the insured, otherwise, they will be held liable for loss.

3. 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.

4. Contractual rights of insured after denial of coverage – when the insured discputes a denial of coverage, the duty of good faith and fair dealing may impose an obligation on the insurer to alert the insured to his rights.

GROUP INSURANCE

Q: What is group insurance? A: It is the coverage of a number of individuals by means of a single or blanket policy, thereby effecting economies which frequently enable the insurer to sell its services at lower premium rates than are ordinarily obtainable for same type of insurance protection on life policies sold to individuals Q: What is the form and nature of contract? A: It is essentially a single insurance contract that provides coverage for many individuals. In its original and most common form, it provides life or health insurance coverage for employees of one employer. Q: Is it an indemnity insurance for the benefit of the employer? A: No, but an insurance upon the life of the employee for his personal benefit and the protection of those depending upon him and is in addition to and distinct from workmen’s compensation insurance. Q: Who are affected by this insurance? A:

1. Insurer 2. Employer 3. Insured 4. Beneficiary

Q: When is a group insurance plan considered as contributory? A: If each member pays all or some part of the premiums Q: When is it non-contributory? A: If the representative pays all of the premiums. Q: What are the advantages of group insurance? A: The amounts of premiums paid by the employer are tax deductible, within limits, while the premiums paid by the employee are not considered taxable income to the employee.

Most policies require an employee to pay a portion of the premium which the employer deducts from wages or salaries while the remainder is paid by the employer.

NOTES ON INSURANCE



The employer acts as a functionary in the collection and payment of premiums and in performing related duties such as the disbursement of insurance payments to the employees.

Q: What are the constituent parts of the contract? A:

1. Group or master policy 2. Policyholder and certificates of participation

It consists of the parent or master policy, the individual certificate being no part of such contract but only an instrument reciting the employee’s right to protection under the terms of group policy. For purposes of construction, howver, both the master and the certificate are to be considered together as parts of the same contract. Q: Does the employer act as agent of insurer? A: Yes. The Court held that the employer is the agent of the insurer in performing the duties of administering group insurance policies. Q: Explain: “The employees are real parties in interest.” A: Although the employer may be the titular or named insured, the insurance is actually related to the life and health of the employee. Indeed, the employee is in the position of a real party to the master policym and even in a non-contributoty plan, the payment by the employer of the entire premium is a part of the total compensation paid for services of employee. The labor of the employees is the true source of benefits.

Sec. 51. A policy of insurance must specify: (a) The parties between whom the contract is made; (b) The amount to be insured except in the cases of open or running policies; (c) The premium, or if the insurance is of a 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.

CONTENTS OF THE POLICY

Q: What are the contents of the policy? What is the consequence of their inclusion in the policy? A:

1. Name of the parties 2. Amount of insurance 3. Premium 4. Property or life insured 5. Interest of insured in property 6. Risks insured against 7. Term or duration of insurance

Their inclusion is essential to enable the parties to determine easily the nature and effect of the contract entered by them thereby avoiding lawsuits.

NAME OF THE PARTIES

The mere fact the name of the insured was incorrectly spelled is of no importance whatever, provided that the identity of the party can be sufficiently established. It is also not important that the name should appear therein, as he may be described in other ways than by name:

-“for the owner” of specified property - for the benefit of “whom it may concern”

AMOUNT OF INSURANCE

Necessary to easily and exactly determine the amount of indemnity to be paid the insured in case of loss or damage especially if it is only partial and not total. It is the basis of calculating the premium. Yet, in cases of open running policies, it need not be specified. The amount of insurance is the maximum limit on the insurer’s liability for loss or damage suffered by the insured as in fire and casualty insurance. Such amount however is not necessarily the value of the property insured nor the extent of liability of the insurer in the event of loss. In life and health insurance and accidental death and injury insurance a fixed sum is payable—one not measured by the proved amount of the insured’s loss. Where the policy of life insurance contains an “automatic increase clause” by which the increase of the insurance coverage shall depend upon the happening of an event, the

NOTES ON INSURANCE



amount insured necessarily includes the additional sum covered by the said clause because it is already determinable at the time the transaction was entered into and formed part of the policy. Q: What is a deductible? A: It is the amount to be deducted from any loss, which is shouldered by the insured making the insurer liable only for the excess of said amount.

PREMIUM

It represents the consideration of the contract; it is what the insured pays the insurer to assume the risk of or the value loss. The rates of premium are based on the nature and character of the property or other interest insured.

Q: What is net premium? A: It is the portion of the premium that is chargeable directly to the risk assumed by the insurer. Q: What is gross premium? A: It is the total amount charged to the insured, which necessarily includes the net premium plus charges for administrative expenses and profits.

LIFE INSURANCE

Premiums are based on the average life span at any given age, predicted from statistical figures known as mortality tables. Thus, the life insurance policy of a father would require the payment of higher premiums than his son’s.

FIRE INSURANCE

Factors that affect the rate of a building are its structure or construction, occupancy or use, location, and loss-prevention or protection facilities (like fire-fighting equipments and water supply) and the exposure or proximity to other risks.

PROPERTY OR LIFE INSURED

They constitute the subject matter of the contract. The insurer will not be liable for the property lost or damaged which is not the one insured.

INTEREST OF INSURED IN PROPERTY

Important in fire insurance policies to determine the actual damage suffered by the insured in case of loss of the property covered by the policy if he is not the absolute owner thereof.

RISKS INSURED AGAINST

All foreseeable losses or risks may be insured against except those the insurance of which would be repugnant to public policy or positively prohibited, or those which are occasioned by the insured’s own fraud or misconduct.

TERM OR DURATION OF INSURANCE

It refers to the period during which the insurance is to continue. The duration may be expressed in terms of dates, from one specified time to another, like in marine insurance or in terms of distance or voyage. The period during which the insurer assumes the risk of loss is known as the life of the policy. Policies issued for a term of 12 months are known as annual policies while those for a less period are known as short period policies.

INSURABLE RISKS

Q: What are the kinds of insurable risks? A:

1. Personal risks 2. Property risks 3. Liability risks

Personal risks

They are risks involving the person. It is chiefly concerned with the time of death or disability as well as the risk of incapacity through accidental injury, illness or old age.

Property risks

They are those involving loss or damage to property which arises from the destruction of property. The possible loss of a cargo or ship at sea is considered a risk to those engaged in the maritime operations. Q: What are direct losses?

NOTES ON INSURANCE



A: Those losses by fire, lightning, windstorm, flood and other forces of nature. They offer a constant threat of loss to real estate. Q: What are indirect losses? A: They include loss of profits, rents or favorable leases.

Liability risks

They are those involving liability for the injury to the person or property of others. It is sometimes called as third party risks. They are so-called when the insurance is used to shift the burden of responsibility, the insurer and insured person have agreed that a third party (the injured person) will be paid for injuries which the insured is legally liable. It includes both bodily injury and property damage risks.

RISKS

Q: What are the Risks? A: It is the chance of loss or the possibility of the occurrence of a loss, based on known and unknown factors. Q: When is a risk considered as negative and positive? A: It is positive in the sense that it is a beneficial one; it is negative when the same is undesirable. If a loss is certain to happen or not to happen, no risk is involved.

PERIL

Q: What is peril? A: It is the contingent or unknown event which may cause a loss. It is the contingency that one insures against. Its existence creates the risk, and its occurrence results in loss. Examples of perils are fires, flood, theft, automobile accidents, illness, death, and hundreds of other causes of uncertainty.

HAZARD

Q: What is Hazard?

A: It is a condition or factor, tangible or intangible, which may create or increase the chance of loss from a given peril. Accordingly, the sum total of hazards constitute the perils which cause the risk. Q: What are the 2 major classifications of hazards? A:

1. Physical hazards-relates to location, structure, occupancy, exposure, and the like.

2. Moral hazards-factors that have their inception in metal attitudes. They include those created by dishonesty, insanity, carelessness, indifference and other causes psychological in nature. This includes the study of the character of the person under consideration in the light of his reputation.

However, risks may be used when what is in mind is peril or degree of hazard while a risk may refer to the subject-matter of the insurance.

Requirements for risks to be insurable Q: What are the requirements for risks to be insurable? A:

1. Importance- the loss to be insured against must be important enough to warrant the existence of an insurance contract.

2. Calculability- the risk must permit a reasonable statistical estimate of the chance of loss and possible variations from the estimate. Otherwise, it is impossible to determine the amount of premiums that would be required.

3. Definiteness of loss- the loss should be fairly definite as to cause, time, place, and amount.

4. No catastrophic loss- when large numbers of people are subject to the same kind of losses, it is an obvious deviation from the principle that the losses of the few are borne by the contributions of the many who does not suffer loss.

5. Accidental nature- insurance is intended to cover fortuitous or unexpected losses. Intentional loss caused by the insured is uninsurable because they cannot be reasonably predicted and that the same is against public policy.

Yet, insurability is best described as a relative matter. Sec. 52. Cover notes may be issued to bind insurance temporarily pending the issuance of the policy. Within sixty days after the issue of the cover note, a policy shall be issued in lieu thereof, including within its terms the identical

NOTES ON INSURANCE



insurance bound under the cover note and the premium therefor. Cover notes may be extended or renewed beyond such sixty 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. Q: What are the 2 kinds of preliminary contracts of insurance? A:

1. Preliminary contracts of present insurance; and 2. Preliminary contracts of executory insurance.

PRELIMINARY CONTRACTS OF PRESENT INSURANCE

This is where the insurer insures the subject matter usually by what is known as binding slip or binder or cover note. Accordingly, the contract is to be effective until the formal policy is issued or the risk is rejected. The binder is a temporary contract of insurance and is usually issued after the applicant pays the first premium.

Cover Note Q: What is a cover note? A: It is merely a written note memorandum of the most important terns of a preliminary contract of insurance. It is intended to give temporary protection pending the investigation of the risk by the insurer or until the issue of a formal policy. It serves the needs of commercial convenience and yet more definite and reliable than oral agreement. It may be used to afford immediate provisional protection to the insured until the insurer can inspect or evaluate the risk in question and issue the proper policy. Being temporary, it is sufficient that it shows an agreement to pay whatever rate may be fixed. The fact that no separate premium was paid on the cover note before the loss insured against occurred does not militate against its binding effect as an insurance contract.

PRELIMINARY CONTRACTS OF EXECUTORY INSURANCE

The insurer makes a contract to insure the subject matter at some subsequent time which may be definite or indefinite. Accordingly, the right acquired by the insured is merely to demand the delivery of a policy in accordance with the terms agreed upon and the obligation assumed by the insurer is to deliver such policy.

RULES ON COVER NOTES Q: What are the rules on cover notes? A:

1. Insurance companies doing business in the Philippines may issue cover notes to bind insurance temporarily.

2. It shall be deemed to be a contract of insurance according to Sec.1 (1).

3. No cover note shall be issued or renewed unless in the form previously approved by the Insurance Commission.

4. It shall be valid and binding for a period not exceeding 60 days from the date of its issuance. Yet, it may be cancelled by either party upon at least 7 days notice to the other party.

5. If it is cancelled, a policy of insurance shall, within 60 days after the issuance of such cover note, be issued in lieu thereof.

6. It can be extended or renewed beyond the aforementioned period of 60 days within the written approval of the Commission, provided that such written approval may be dispensed with upon the certification of the president, v-president, or general manager of the insurance company concerned that the risks involved, the values of the risk, the premiums have not as yet been determined or established.

7. Insurance companies may impose on cover note a deposit premium equivalent to at least 25% of the estimated premium but in no case less than P500.00.

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

A contract of insurance is a personal contract between the insured and the insurer. 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.

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An insurance taken by one in his own right and his own interest does not in any way inure to the benefit of the other. As against the insurer, a third person has also no right to the proceeds thereof. A policy insurance is a distinct and independent contract between the insured and the insurer. Sec. 54. When an insurance contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by other general words in the policy. An insurance may be taken by a person personally or through his agent or trustee. Thus, the agent or trustee when making an insurance contract for or on behalf of the principal should indicate that he is merely acting in a representative capacity by signing as such agent or trustee. Sec. 55. To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest. Insurable interest in the property of a partnership exists both the partnership and the partners. A partner has an insurable interest in the firm property which will support a policy taken out thereon for his own benefit. But for the co-partners to recover, the terms of the policy must clearly show that the insurance was meant to cover also the shares of the other partners. Sec. 56. When the description of the insured in a policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy. Sec. 57. A policy may be so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured. The policy must specify the parties between whom the contract is made. In any case, in order that the insurance may be applied to the interest of the person claiming the benefit of the policy, he must shown that he is the person named or described or that he belongs to the class of persons comprehended in the policy. Sec. 58. The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured.

Since a contract of insurance is a personal contract, it does not attach to or run with the property insured. The transfer of property has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as of the property insured. Sec. 59. A policy is either open, valued or running. Sec. 60. An open policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss. Sec. 61. A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum. Sec. 62. A running policy is one which 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.

KINDS OF POLICIES

Q: What is an open or unvalued policy? A: It is one in which a certain agreed sum written on the face of the policy not as the value of the property insured but as the maximum limit of the insurer’s liability. Accordingly, the insured must establish the fair market value (FMV) of the property at the time of the loss. If the FMV exceeds the maximum, the latter will control whereas if below, the former will control.

The insurer only pays the actual value of the property as determined at the time of loss. The amount recoverable is determined by the amount of the loss but not exceeding the face amount of the policy.

Valued policy

Q: What is valued policy? A: It is one which the parties expressly agree on the value of the subject matter of the insurance. There are 2 values: the face value of the policy and the value of the thing insured. In the absence of fraud or mistake, the agreed valued of the things insured will be paid in case of total loss of the property, unless the insurance is for a lower amount.

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Open policy Q: What is an open policy? A: It is where the value of the property insured is not agreed upon although the parties may agree on the maximum amount of recovery or limit the liability of the insurer.

Running policy Q: What is a running policy? A: It is intended to provide indemnity for property which cannot well be covered by a valued policy because its frequent change of location and quantity or for property of such a nature as not to admit of a gross valuation. In this case the risk is shifting, fluctuating or varying and which covers a class of property rather than any particular thing. These policies are usually known as floating, running or blanket. They are in reality, open policies. Q: What are the advantages of a running policy? A: 1. He is neither under nor over-insured at anytime, the

premium being based on monthly values reported; 2. He avoids cancellations that would otherwise be

necessary to keep insurance adjusted to value at each location, and for which cancellations he would be charged the expensive short rate;

3. He is saved the trouble of watching his insurance and danger of being underinsured in spite of his care through oversight or mistake; and

4. The rate is adjusted to 100% insurance. Sec. 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. G.R.: A clause in an insurance policy to the effect that an action upon the policy by the insured must be brought within a certain period after rejection is valid. Accordingly, the rights of the parties flow from the insurance contract; thus, they are not bound by the statute of limitations nor by exemptions thereto. It is essential to prompt settlement of claims against the insurance companies as it demands that insurance suits be brought while the evidence as to the origin and cause of loss or destruction has not yet disappeared.

EXC: If the period fixed is less than 1 year from the time the cause of action accrues. In case of industrial life insurance, the period cannot be less than 6 years after the cause of action accrues. The bringing of action against the agent of insurer cannot have any legal effect except that of notifying the agent of the claim. Beyond such notification, the filing of the action can serve no other purpose.

ACCRUAL OF CAUSE OF ACTION

Q: When does a cause of action accrues? A: The right of the insured to the payment of his loss accrues from the happening of the loss. Yet, it does not accrue until the insured’s claim is finally rejected by the insurer. Accordingly, before such final rejection, there is no real necessity for bringing the suit. Cause of action does not accrue until the party obligated refuses to comply with its duty to the insured to pay the amount of the insurance. The New Insurance Code empowers the Insurance Commissioner to adjudicate disputes relating to an insurance company’s liability to an insured under a policy issued by the former to the latter. Thus, a complaint or claim filed with the Commission is now considered as an action or suit the filing of which would have the effect of tolling or suspending the running of the prescriptive period. Sec. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the 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. Sec. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, and shall state (a) which of the grounds set forth in section sixty-

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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 OF CONTRACT OF INSURANCE

Q: What is cancellation? A: It is the term used with regard to insurance regarding the right to rescind, abandon, or cancel a contract of insurance. It is the termination by either the insurer or the insured of a policy of the insurance before its expiration. Accordingly, a contract of insurance is permitted to lapse when the insured fails to take some action to keep the contract in force. The insured can cancel the contract at his election by surrendering the policy. Such surrender however entitles him to the return of the premiums on the customary short-rate basis. Q: What are the conditions for the cancellation by the insurer? A:

1. There must be prior notice of cancellation to the insured;

2. The notice must be based on the occurrence after the effective date of the policy, of one or more of the grounds mentioned;

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 of the grounds set forth is relied upon.

The premium referred to in Sec. 64 must be a premium subsequent to the first because it speaks of non-payment after the effective date of the policy (See Sec. 77). Q: What is the purpose of the prior notice of cancellation to the insured? A: It is to prevent the cancellation of the policy without allowing the insured ample opportunity to negotiate for other insurance in its stead for his own protection. The notice must be personal to the insured and not to or through any unauthorized person by the policy. The notice need not be delivered personally to the insured. It may be mailed. Sec. 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. G.R.: A renewal of insurance by the payment of a new premium and the issuance of a receipt therefor where there is no proviso nom the policy for its renewal, is a new contract on the same terms as the old one. EXC: Where the renewal is in pursuance of a provision to that effect, it is not a new contract but an extension of the old one. In case of insurance other than life, the named insured is given the right to renew upon the same terms and conditions the original policy upon payment of the premium due on the effective date of the renewal unless the 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 the reduction of its amount or elimination of some coverage. If the term of the policy is 5 years, the notice must be given at least 45 days before the anniversary date of any given policy year. If the 45 days rule is not complied with, the insurer may not refuse to renew a policy upon payment of the premium due.

Title 8 PREMIUM

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. Q: What is premium? A: It is the agreed price for assuming and carrying the risk—that is, the consideration paid an insurer for undertaking to indemnify the insured against a specified peril. NOTE: Where only one premium is paid for several things not separately valued or separately insured, making for only one

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cause or consideration, the insurance contract is entire or indivisible, not severable or divisible, as to the items insured. It is immaterial that they are shipped or transported separately.

Assessment Q: What is assessment? A: It is a sum specifically levied by mutual insurance companies or associations, upon a fixed and definite plan, to pay losses and expenses. A policy issued on the assessment plan has been defined as one where the payment of the benefit is in any manner or degree dependent upon collection of an assessment upon persons holding similar policies. Q: Distinguish premium from assessment. A: In theory, all payments or premiums and assessments are but contributions from all members of the insuring organization to make good the losses of individual members.

PREMIUM ASSESSMENT

Levied and paid to meet anticipated losses

Collected to meet actual losses

The payment of premium, after the first, is not enforceable against the insured

Assessments unless otherwise agreed, are legally enforceable once levied.

Not a debt Unless otherwise agreed, is a debt

Payment of premium ordinarily not a debt or obligation

In fire, casualty, and marine insurance-the premium payable becomes a debt as soon as the risk attaches, an in suretyship¸ as soon as the contract or bond is perfected and delivered to the obligor. Q: What does the phrase “the thing insured is exposed to the peril insured against” assume? A: It assumes that the contract is perfected which takes place when the applicant’s offer is accepted by the insurer. Q: What is the effect if as between the insurer and the insured, there was not only a perfected contract of insurance but a partially performed one? A: The non-payment of the balance of the premium due does not produce the cancellation of the contract of insurance in the sense that it can no longer be enforced. A contrary rule would place exclusively in the hands of the insured the right to decide whether the contract should stand or not.

NATURE OF PARTIAL DEPOSIT

Q: What is the nature of partial deposit? A: The payment of the partial premium by the assured in this particular instance should not be considered as payment required by the law and by the parties. Rather it must be taken in the concept of a deposit to be held in trust by the insurer until such time that the full amount has been tendered and duly receipted for. Q: Explain: Premium is the elixir vitae of insurance business. A: It cannot be disputed that premium is the elixir vitae of the insurance business because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the public, hence, the imperative need for its prompt payment and full satisfaction. Upon this bedrock, the insurance firms are enabled to offer the assurance of security to the public at favorable rates. Q: What is the effect if the partial payment is accepted by the insurer? A: An insurance is an aleatory contract which is at once effective upon its perfection although the occurrence of a condition or event may later dictate the demandability of certain obligations thereunder. Founded on the principle of autonomy of contracts, the parties are generally not prevented from imposing conditions that alone could trigger the contract’s obligatory force. These conditions however, must not be contrary to law, morals, good customs, public order and public policy. In life insurance- the premium becomes a debt only when in the case of the first premium, the contract has become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after maturity of the premium, in consideration of the insured’s express or implied promise to pay. a. A life insurance policy involves a contractual obligation

wherein the insured becomes duty bound to pay premium agreed upon lest he runs the risk of having his insurance policy lapse if he fails to pay such premiums. The fact that the insurance policy contains an automatic premium payment clause cannot divest such policy of its contractual nature for the result of such failure would only be for him to pay the premium plus the corresponding interest depending upon the condition of the policy.

b. There is usually no duty assumed by the insured to pay any premiums subsequent to the first. Insofar as the contract is executory, the ordinary life insurance is purely

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unilateral. The insurer therefore cannot compel the insured to pay the premium because the insure is by no means a debtor of the insurer, nor the insurer the creditor of the insured.

EFFECT OF NON-PAYMENT OF PREMIUM

Q: What is the effect of non-payment of premium? A:

1. First premium- non-payment of the first premium unless waived prevents the contract from becoming binding notwithstanding the acceptance of the application nor the issuance of the policy.

But non-payment of the balance of the premium does not produce the cancellation of the contract.

2. Subsequent premiums- does not affect the validity of the

contract unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse. In case of individual life or endowment insurance and group life insurance, the policyholder is entitled to a grace period of either 30 days or 1 month within which payment of any premium after the first may be made. In case of industrial insurance, the grace period is 4 weeks, and where premiums are payable monthly, either 30 days or 1 month.

EXCUSES FOR NON-PAYMENT OF PREMIUM

Q: What are the excuses for non-payment of premiums? A: 1. Fortuitous events- even the act of god, rendering the

payment of the premium by the insured wholly impossible will not prevent the forfeiture of the policy when the premium remains unpaid. The insurer must have some efficient means for enforcing punctuality.

NOTE: The insurance contracts are not affected by the fact that the non-payment is due to war or that the insured has not been negligent.

2. Condition, conduct, or default of insurer- non-payment

is excused if: a. Where the insurer has become insolvent and

has suspended business, or has refused without justification a valid tender of premiums.

b. Where the failure to pay was due to the wrongful conduct of insurer as when he induced the beneficiary to surrender it for cancellation by falsely representing that the insurance was illegal and void, and returning the premiums made

c. Where the insurer has in any wise waived his right to demand payment.

VALIDITY OF POLICY WHERE CREDIT EXTENSION GRANTED

TO INSURED

It is submitted that a credit extension agreement is valid.

Q: What are the exceptions to Sec. 77? A:

1. In the case of a life or an industrial policy whenever grace period provision applies

2. When there is an acknowledgement in a policy of contract of insurance of receipt of premium even if there is a stipulation therein that it shall not be binding until the premium is actually paid.

3. When there is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of the loss.

4. When there is an agreement to grant the insured credit extension for the payment of the premium and loss occurs before the expiration of the credit term; and

5. When estoppel bars the insurer from invoking section 77 to avoid recovery on the policy providing a credit term for the payment of the premiums, as against the insured who relied in good faith on such extension.

NOTE: Once the premium has been issued, the presumption lies that premium has been duly paid, and where the non-payment of the premium is attributable to the fault or misrepresentation of the insurer, the insured is entitled to recover in case of loss.

Sec. 78. 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 ACCEPTANCE OF THE PREMIUM

Q: What is the effect of acceptance of the premium? A: Acceptance of premium within stipulated period for payment thereof, including agreed period of grace, merely assures continued effectivity of the insurance policy in accordance with its terms. Such acceptance does not stop the insurer from in interposing any valid defense under the terms of the insurance policy where such insurer is not guilty of any inequitable act or representation. There is nothing inconsistent between acceptance of the premium due under an insurance policy and the enforcement of these terms.

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Sec. 79. 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. Sec. 80. 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. Sec. 81. A person insured is entitled to return of the premium when the contract is voidable, on account of fraud or misrepresentation of the insurer, or of his agent, or on account of facts, the existence of which the insured was ignorant without his fault; or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy. Sec. 82. In case of an over-insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk.

RECOVERY OF THE PREMIUMS Q: When is the insured entitled to recover premiums? A: The insured has the right to recover premiums already paid or a portion thereof in the following cases:

1. When no part of the thing insured has been exposed to any of the perils insured against

2. When the insurance is for definite period and the insured surrenders his policy before the termination thereof

3. When the contract is voidable because of the fraud or misrepresentations of the insurer or his agent

4. When the contract is voidable because of the existence of facts of which the insured was ignorant without his fault

5. When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud

6. When there is over-insurance 7. When the rescission is granted due to insurer’s

breach of contract. In the cases 1,3,4 and 5, the insured is entitled to return of the entire premium paid. Of course, the insured cannot recover premiums unless they have actually deemed paid. Fees like documentary stamps tax and other taxes are not covered, thus they cannot be returned.

EFFECT WHEN RISK NEVER ATTACHED Q: What if the risk has never attached? A: Since the premiums are paid in consideration of the assumption of specified risks by insurers, and since no premium is due unless the risk attaches, if the risk insured against does not or cannot attach, or if no part of the interest is subject to any of the specified perils, the insurer cannot claim or retain the premium thus paid, in the absence of any fraud or fault on the part of the insured. Q: What is the effect is the approval of the application or acceptance of policy is absent? A: Where the application for the policy was not approved, no premium can be recovered, and with respect to a policy requiring acceptance to be effective, the insured cannot be held liable for accruing premiums if the policy is not accepted. If no risk attaches or contract results, there is no meeting of minds of the parties on the subject matter of the insurance. Q: What if the loss occurs before effective date? A: Where the insured pays in advance the annual premium on a certain property insured by him, the insurance to take effect on a certain date and the loss occurs before said date, the insured is entitled to a return of the whole premium

EFFECT OF BEING PUBLIC ENEMIES Q: What if the insured and insurer became public enemies? A: Where the parties of insurance have become public enemies because of the existence of a state of war, justice requires that premiums paid after the declaration of war between the belligerent states be returned to the insured. War abrogates the insurance contracts between belligerent states, and therefore, the insured is not entitled notwithstanding the payment of the premiums, to indemnify for loss occurring after such declaration of war. Q: Enumerate the cases where Sec. 79 (b) will not apply. A: Sec. 79 (b) does not apply:

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a. Where the insurance is for a definite period b. Where a short period rate has been agreed upon c. Where the policy is a life insurance policy

INSURED SURRENDERS THE POLICY BEFORE TERMINATION

Q: What if the insured suurenders the policy before termination? A: If the insurance is for a definite period of time and the insured cancels his policy by surrendering his policy, provided this is allowed under the policy, the insured is entitled to recover the premiums already paid equivalent to the unexpired period, retaining only the earned portion corresponding to the portion expired. But there shall be a deducted from the whole premiums any claim for loss or damage under the policy which has previously accrued.

SHORT PERIOD RATE

Q: What if a short period rate has been stipulated? A: If a policy on which premiums have been paid for a year is cancelled by insurer before the expiration of the year, it retains only a proportion of the annual premium that the expired time bears to the entire time. If a policy is cancelled by the insured, the pro rata return of premium will not be followed if the policy stipulates a short period rate, in which case, the insured is entitled to return of the premium in proportion stipulated. A short period rate clause appears in most fire policies. Q: Explain the right to recover premiums as to life insurance. A: Recovery of premiums paid is not allowed in life insurance if the insured surrenders his policy. Q: What is the reason for this? A: Life insurance is not a divisible contract. It is not an insurance for a single year, with privilege of renewal from year to year by paying the annual premium but that is an entire contract of insurance for life subject to discontinuance and forfeiture for non-payment of any of the stipulated premiums. The value of the assurance for one year of a man’s life when he is young, strong, and healthy is manifestly not the same when he is old and decrepit. In life insurance however, the insured will be entitled to receive the “cash surrender value” of his policy “after three full annual premiums shall have been paid.”

WHERE THE RISK HAS ATTACHED

1. Whole premium considered as earned -the general rule is that the insurance granted is he entire consideration for the premium received; hence, if the risk has attached by reason of the contract’s becoming binding upon the insurer, the whole premium must be considered as earned and, therefore, cannot be apportioned in case the risk terminates before the end of the term for which the insurance was granted.

NOTE: In the absence of any agreement to the contrary, 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 the principal risk is concerned.

2. Where insurance divisible

-if the contract of insurance is divisible, consisting of several distinct risks for which different amount of premiums have been paid, the premium paid for any particular risk is not earned until that risk has attached.

VOIDABLE INSURANCE CONTRACTS

Q: What are the instances where the contract of insurance is voidable? A:

1. Fraud of insurer and his agent 2. On account of facts, the existence of which the

insured was ignorant without his fault; 3. By any default of the insured other than actual

fraud, the insurer never incurred liability under the policy

4. Fraud of the insured Q: Is the insured entitled to return of the premium if the policy is annulled by reason of his fraud or misrepresentation? A: The insured is not entitled. Sec. 81 impliedly prohibits the return of premium where the policy is annulled by reason of the fraud of the insured.

OVER-INSURANCE

Q: Where is there over-insurance? A: In case of over-insurance by double insurance, the insurer is not liable for the total amount of insurance taken, his liability being limited to the amount of the insurable interest on the property insured. He is not entitled to that portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured.

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NOTE: The premiums to be returned where there is over-insurance by several insurers shall be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. Q: What if the insurance is illegal? A: When the insurance is void because it is illegal, the general rule is that the premiums cannot be recovered. Q: What is the exception to this general rule? A: 1. If in fact, the parties are not in pari delicto, the law will

allow an innocent insured to take again his premiums as when the insured was ignorant of the facts which rendered the insurance illegal.

2. Where one having no insurable interest in the life insured, paid premiums in the bona fide belief induced by fraudulent statement of the insurer, that such insurance was valid, he may recover the premiums paid despite the fact that the contract was illegal.

Q: What are the bases of right to recover premiums with regard the return of premium for short interest, over insurance, and double insurance? A: 1. Insurer could have been called to pay the whole sum

insured -In such case, the whole premium is earned and there shall be no return

2. Insurer could have been called to pay only part of the whole sum insured -He ought not retain a larger portion than ½ or ¼ of the premium (for example) of the premium and must return the residue.

Title 9 LOSS

Sec. 83. 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 OF INSURANCE

Q: What is claim of insurance?

A: It may be defined as a demand for the satisfaction of a loss suffered within the purview of an insured’s policy. It may be made by the party insured, the insurer with right of subrogation, or non-party but with a right against the insured. Q: What is the effect of agreement not to transfer claim of insured after a loss? A: Before a loss has occurred, an insurance policy, except a life insurance policy is not assignable without the consent of he insurer on the theory that the policy is a personal contract between the insured and insurer. After the 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. Q: What if there is an agreement which hinders free transmission of property? A: Such stipulation is void as against public policy. Q: What if the transfer involves money claim or right of action? A: After the loss has been suffered, the policy or right thereunder may be assigned without the consent of or notice to the insurer for in such case, it is not the personal contract which is being assgned, but a money claim under or a right of action on the policy. Q: What if the transfer involves no question of moral hazard? A: Such assignment of the right to collect from the insurer involves no question of moral hazard because it cannot increase the insurer’s risk for a loss that has already occurred. Once a loss has occurred, the duty of the insurer to pay the insurance proceeds is fixed and the transfer does no harm to its duty. Sec. 173, however, prohibits that transfer of policy of fire insurance to any person or company who acts as an agent for or otherwise represents the issuing company and declares such transfer void insofar as it may affect other creditors of the insured. Sec. 84. 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 which the peril insured against was only a remote cause.

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Q: What is loss? A: It may be defined as the injury, damage, or liability sustained by the insured in consequence of the happening of one or more of the perils against which the insurer, in consideration of the premium, has undertaken to indemnify the insured.

SCOPE OF LOSS

Q: What is the scope of loss? A: It embraces:

a. Bodily injury b. Death c. Property damage d. Destruction e. Loss of income f. Loss of profits g. Legal liability to a 3

rd party

Q: In reinsurance, what is loss? A: It refers to reinsurer’s share of the loss on risks ceded either automatically or facultatively. Q: What is the extent of liability of the insurer for loss? A: How much the insurer will pay depends upon whether the insured suffers a loss and the extent of that loss. Q: What is the extent of the loss? A:

1. Total 2. Partial 3. Constructive total

Q: How can the loss be satisfied? A:

1. Payment of the loss 2. Reinstatement (repair or restoration) of the property

damaged 3. Replacement with another similar property

Q: What is the rule with respect to the “cause of the loss”? A: The insurer assumes liability only for a loss proximately caused by the perils insured against although a peril not insured against may have been a remote cause of the loss. But the insurer is still liable even if the proximate cause is not the peril insured against if the immediate cause is the peril insured against.

Q: Who has the burden of proof in case of loss? A: The insurer has the burden of proof to show that he is not liable. Q: What is the quantum of evidence required? A: Preponderance of evidence

PROXIMATE CAUSE, EFFICIENT CAUSE AND IMMEDIATE CAUSE

Q: What is proximate cause? A: It is that which in a natural and continuous sequence, unbroken by any new independent cause, produces an event and without which the event would not have occurred. Q: What is efficient cause? A: It is one that sets others in motion. Q: Is proximate the same as immediate cause? A: No. EXAMPLES:

If the fire causes explosion which results in a loss, fire is the proximate cause

If the house is insured against fire and it is damaged by the failing of a wall of a neighboring bldg. which is on fire, the fire is the proximate cause although no part of the insured house is actually on fire.

An accidental injury resulting in hemia which forced the insured, as a last result, to submit to a surgical operation which turns out unsuccessful, the accident is the proximate cause and not the surgical operation.

Hostile v. Friendly fire

Q: Distinguish “hostile” from “friendly” fire. A:

FRIENDLY FIRE HOSTILE FIRE

So long as a fire burns in a place where it was intended to burn, and ought to be, it is to be regarded as merely an agency for the accomplishment of some purpose and not as a hostile perile.

When it occurs outside of the usual confines or begins as a friendly fire and becomes hostile by escaping from the place where it ought to be to some place where it ought not to be.

Examples: 1. A fire burning in a

Example: 1. Where the flames

NOTES ON INSURANCE



furnace, stove or lamp is a friendly fire, and it is not to be considered to be within the terms of the policy

2. Damage caused by smoke issuing from a lamp that is turned too high

escaped through a crack in a stove releasing sprinkle head above, the insurer was held liable for the issuing loss

2. Even though the fire may remain entirely within its proper place, it may become hostile if it, by accident, becomes so excessive as to beyond control.

3. A fire caused by a lighted cigarette on a rug

Q: What is the reason for the rule on friendly fire? A: The policy shall not be construed to protect the insured from injury consequent upon his negligent use or mismanagement of fire, so long as it is confined to the place where it ought to be.

Sec. 85. 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: What are the 2 occasions under Sec. 85 where the insurer is liable? A: 1. Where the loss took place while being rescued from the

peril insured against

The insurer is liable where the insured is permanently deprived of the possession, in whole or in part, of the thing insured by peril not insured against provided it is shown that said property would have been no attempt to rescue it. Example: Loss of goods by theft during the removal of goods to save them from loss by fire is covered by the policy against fire except when the policy contains a stipulation exempting insurer from liability for such loss.

2. Where the loss is cause by efforts to rescue the thing

insured from a peril insured against.

In this case, it is the efforts to rescue the thing that caused the loss.

Examples:

a. damages to goods by being trampled on or thrown about in the efforts to put out the fire

b. damage to goods by water during attempt to save it from fire itself

The insured is bound to exercise a reasonable degree of care in removing the goods Q: What is the test of the necessity of removal? A: It is to be determined not by the result alone but by the circumstances as they appear to the interested persons at the time of the fire.

Sec. 86. Where a peril is especially excepted in a contract of insurance, a loss, which would not have occurred but for such peril, is thereby excepted although the immediate cause of the loss was a peril which was not excepted. Q: What is the effect if the proximate cause is an excepted peril? A: The insurer is not liable if the proximate cause of the loss is a peril excepted from the policy although the immediate cause is a peril not excepted. Example: In a fire insurance policy which excludes loss through explosion, if an explosion occurs first and causes a fire which results in a loss, the insurer is not liable. Q: Who has the burden of proving that the loss is caused by risks excepted? A: The insurance company. Sec. 87. 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: Is the insurer liable for a loss caused by the intentional act of the insured or through his connivance? A: No. Such loss is not within the contemplation of a contract of insurance one of the requisites of which is that the risk should not be subject in any wise to the control of the parties. Q: Is the insurer liable for the negligence of the insured? A:

NOTES ON INSURANCE



1. Where there is ordinary negligence

The carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer, as a general rule. The doctrine of contributory negligence does not in any way apply to rights under a contract of insurance. Mere negligence or carelessness on the part of the insured or his servants, although directly causing or contributing to the loss, usually is one of the risks covered by the insurance and does not relieve the company from liability.

2. Where there is gross negligence

Gross negligence or recklessness on the part of the insured, the consequences of which must have been palpably obvious to him at the time, will relieve the insurer from liability. Examples:

a. Where the insured in his own house, sees the burning coals in the fireplace, does not brush them up

b. Or when he makes no attempt to put it out. c. There was no efforts taken to save personal property in

the building although there is ample time.

Title 10 NOTICE OF LOSS

Sec. 88. In case of loss upon an insurance against fire, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay.

Sec. 89. 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.

Q: What is the rule regarding the conditions before the loss? A: There must be compliance on the part of the insured with the terms of the policy. Q: What if he has violated or failed to perform the conditions of the contract, and such violation or want of performance has not been waived by the insurer? A: The insured cannot recover. The non-compliance with the contract bars his right of recovery.

Example: where the policy provides that it shall be void if the insured shall procure any other insurance on the property without the consent of the insurer, the violation of the condition renders ipso facto the policy void. Q: What is the rule regarding the conditions after loss? A: Secs. 88 and 89 provides for the conditions concerning matters after the loss which must be fulfilled before the insured becomes entitled to the benefit of the policy. Example: In some life and accident policies, a provision is included requiring that a certificate of attending physician of the insured be furnished as part of the proof of death. Q: What is the nature of these conditions? A: While in the form of conditions precedent, they are in nature conditons subsequent to breach of which affects a right that has already accrued. Q: How shall these conditions be construed? A: All these conditions in the policy-making reqiuirements of the insured after the loss are intended merely for evidential purposes and do not properly form any part of the conditions of liability. Thus, it is the general rules of construction which states that they shall be construed with much less strictness than those conditions that operate prior to the loss that shall apply. Q: What is notice of loss? A: It is the more or less formal notice given the to the insurer by the insured or claimant under a policy of the occurrence of the loss insured againts. Q: What is the purpose of the notice? A: To apprise the insurance company with the occurrence of the loss, so that it may gather information and make the proper investigation while the evidence is still fresh, and take such action as be necessary to protect its interest from fraud or imposition; in the case of property insurance, to prevent further loss to the property. Q: Is notice necessary? A: It is obvious that the insurer cannot be held liable to pay a claim unless he receives notice of that claim. Under the law, if notice of loss is not given to the insurer by the person insured or by the person entitled to the benefit of the insurance without unnecessary delay, or in a timely

NOTES ON INSURANCE



manner, the insurer is exonerated or discharged from liability. NOTE: It is immaterial that if the notice is not given, the company would not be prejudiced, and if given, the company would not be benefited. Formal notice of the loss is not necessary if the insurer already has actual notice, but there is authority to the contrary. Q: What is the propert time for givig notice of loss? A: The notice must be given “without unnecessary delay.” A notice of loss must be given immediately or forthwith requires the giving of notice within a reasonable time. Q: What constitutes a reasonable time for giving notice? A: It depends on the circumstances of the particular case although the courts construe the requirement of immediate notice liberally in favor of the insured. NOTE: The insurance contract may provide that the notice of the loss shall be given within a stated time after the loss occurs and that failure to give the notice within such time shall preclude recovery. Such provision is valid provided the time so fixed is not unreasonably short.

PROOF OF LOSS

Q: What is proof of loss? A: It is more or less the formal evidence given the company by the insured or claimant under a policy of the occurrence of its loss, the particulars thereof, and the data necessary to enable the company to determine its liability and the amount thereof. Q: What should be the form of notice or proof of loss? A: The law does not make any requirement as to the form in which notice or proof of loss must be given. In the absence of any stipulation, notice or proof may be given orally or in writing. However, it is advisable to give the notice of proof in writing for the protection of the insured or his beneficiary. The notice of loss may be in the form of an informal or provisional claim containing a minimum information as distinguished from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment.

a. Oral

b. In writing c. Informal or provisional d. Formal claim

Q: What is the purpose of the proof of loss? A: The notice of loss is distinct from the proof of loss. The requirement of notice is intended merely to give the insurer information upon which he may act promptly in protecting the property from further loss for which he may be liable or to enable him to take any other immediate steps that his interests may require. The statement of loss is a very much formal requirement, and intended not only:

a. To give the insurer information by which he may determine the extent of his liability

b. To afford him a means of detecting any fraud that may have been practiced upon him

c. To operate as a check upon extravagant claims

ADJUSTERS

Q. Who are adjusters? A: The insurer or the insured may avail of the services of adjusters in effecting the settlement of an insurance claim. Q: Who has the burden of proof of loss in court action? A: If the insured has the burden of proving that he has suffered a loss and in life insurance, death of the insured must be proven. In an action on a fire insurance, it devolves upon the plaintiff to prove the amount of his loss by a preponderance of evidence. The cost price is competent evidence to show the value of articles destroyed by fire. Q: Are inventory of goods constitute evidence of loss? A: No, they are mere claim for loss NOTE: Testimony or evidence must be given to sustain correctness of the claim. Q: What may be the excuse/s for non-compliance with the conditions? A: Failure on the part of the insured to comply strictly with the terms will be excused when the circumstances were such as to make strict compliance impossible. Examples:

NOTES ON INSURANCE



1. failure to give notice and proof of loss will be excused

when it is due to the death or incapacity of the insured 2. beneficiary had no knowledge of the existence of the

policy of the insured who died before the fire.

Sec. 90. 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. Q: When is the defect in notice or proof deemed waived? A: It is the duty of the dissatisfied insurer to indicate the defects in the proof of loss given, so that deficiencies may be supplied. His retention of the defective proofs constitutes waiver of his objections. Thus, there is waiver where the insurer:

1. writes the insured that he considers the policy null and void as the furnishing of the notice or proof of loss would be vain and useless

2. recognize his liability to pay the claim 3. denies all liability under the policy 4. joins in the proceedings for determining the amount

of the loss by arbitration, making no objections on account of notice and preliminary proof

5. makes objections on any ground other than formal defect in the preliminary proof

6. general statement that proofs are defective Sec. 91. 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.

DELAY IN THE PRESENTATION OF NOTICE OF PROOF

Q: When is delay in the presentation of notice or proof deemed waived? A: Waiver of delay in the presentation of notice or proof of loss may be made:

a. by an act of the insurer b. by failure to take objection promptly and specifically

upon that ground An insurance company, by accepting payment of premium with full knowledge that the premises had been injured or destroyed by fire, is stopped from claiming that the notice of the fire was not given forthwith to the insurer by the insured as required by the terms of the policy.

If the insured has attempted to comply with the stipulations of the policy and the company makes objections which necessitate amended or supplemental proofs, the insured will be allowed a reasonable time after he is appraised thereof within which to remedy the defects regardless of the time prescribed by the policy for furnishing proofs. Sec. 92. 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. Q: What is the effect of failure to secure certificate or testimony of 3

rd person?

A: If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person (like notary public) other than the insured, such requirement must be complied with by the insured as part of the contract. However, the insured is only required to exercise due diligence to procure it. Such requirement in the policy must be liberally construed in favor of the insured.

Title 11 DOUBLE INSURANCE

Sec. 93. A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. Q: What is double insurance? A: In double insurance, the same person is insured by several insurers separately in respect to the same subject and interest. NOTE: The terms “additional insurance,” “other insurance,” and “double insurance” are used interchangeably although there is technical difference in their meanings. Q: What are the requisites for double insurance? A:

1. The person insured is the same 2. Two or more insurers insuring separately 3. The subject matter is the same 4. The interest insured is also the same

NOTES ON INSURANCE



5. The risk or peril insured against is likewise the same.

DOUBLE INSURANCE v. OVER INSURANCE Q: Distinguish double insurance from over-insurance. A:

DOUBLE INSURANCE OVER INSURANCE

The same person is insured by several insurers separately in respect to the same subject and interest

Where the amount of the insurance is beyond the value of the insured’s insurable interest

There are always several insurers

There may be only 1 insurer involved

Used instead of “co-insurance”

Double insurance and over-insurance may exist at the same time or neither may exist at all.

BINDING EFFECT OF STIPULATION AGAINST DOUBLE INSURANCE

A policy which contains no stipulation against additional insurance, is not invalidated by the procuring of such insurance. Policies of fire insurance contain a stipulation or condition that they be avoided if additional insurance is procured on the property without the insurer’s consent.

“ADDITIONAL or OTHER INSURANCE CLAUSE”

Q: What is the purpose of the “additional” or “other insurance clause”? A: It is intended to prevent an increase in the moral hazard. It is valid and reasonable, and in the absence of consent, waiver or estoppel on the part of the insurer, a breach thereof will prevent a recovery on the policy. Q: What is the requirement in order to constitute a violation? A: The other insurance must be upon:

1. the same subject matter, 2. the same interest therein, and 3. the same risk

Q: What if the additional insurance was obtained by a 3

rd

person? A: The good faith or bad faith of the insured usually is immaterial. However, insurance obtained by a 3

rd person

without knowledge or consent of the insured will not affect his rights under the policy in the absence of ratification. Q: What is the purpose for the prohibition against double insurance? A: To prevent over-insurance and thus, avert the perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a loss would be profitable to the insured.

Sec. 94. Where the insured is overinsured 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, the insured must give credit as against the valuation for any sum received by him under any other 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 he must give credit, as 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 IN CASE OF OVER INSURANCE BY DOUBLE INSURANCE

Q: What are the rules for payment of claims where there is over-insurance by double insurance? A: 1. As the contract of insurance is a contract of indemnity,

the insured can recover no more than the amount of his insurable interest whether the insurance is contained in one policy or several policies

2. Principle of Contribution- requires each insurer to contribute ratably to the loss or damage considering that the several insurances cover the same subject matter and interest against the same peril.

3. If the loss is greater than the sum total of all the policies issued, each insurer is liable for the amount of his policy.

NOTES ON INSURANCE



Title 12 REINSURANCE

Sec. 95. 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. Q: What is a contract of reinsurance? A: It is a contract whereby one party, the reinsurer, agrees to indemnify another, the reinsured (original insurer), either in whole or in part, against loss or liability which the latter may sustain or incur under a separate or original contract of insurance with a 3

rd party, the original insured. It is

sometimes referred to as treaties. Reinsurance is required by law in certain cases. Q: How do you call the reinsurance of a reinsurance? A: Retrocession

REINSURANCE v. DOUBLE INSURANCE

Q: Distinguish “reinsurance” from “double insurance.” A:

DOUBLE INSURANCE REINSURANCE

The insurer remains as the insurer of the original insured

The insurer becomes the insured, insofar as the reinsurer is concerned

The subject of the insurance is property

It is the original insurer’s risk

An insurance of the same interest

An insurance of a different interest

The insured is the party in interest in all contracts

The original insured has no interest in the contract of reinsurance which is independent of the original contract of insurance.

The insured has to give his consent

The consent of the original insured is not necessary since he is sometimes hardly even aware of the reinsurance transaction.

Value of the reinsurance

A: 1. From the standpoint of the insurer- reinsuring companies

benefit from contracts of reinsurance. Q: What is retention?

A: Every insurance company, in accordance with its financial strength, establishes limit on the maximum claim it wishes to pay out if its own resources. This limit is called retention. At same time, a company wants its salesman to be able to take an application for any amount the applicant is willing to seek. When such applications are for a sum over the company’s retention, it handles the excess by means of reinsurance. Q: What is the purpose of reinsurance? A: Through the use of reinsurance, then, an insurer is able to issue policies for amounts in the excess of its retention limit or beyond the capacity of its financial resources in cases of loss, rather than inconvenience a client by referring him to other insurance companies. This is in the best interest of the insuring public, the insurer, and the reinsurer. The knowledge of the industry regarding classification of impaired risks is increased in the most economical manner. Reinsuring companies serve as focal point forund the collection of such risks where statistically significant volumes of consistently underwritten substandard business are accumulated and subjected to extensive analyses by an experienced staff. 2. From the standpoint of he insured- the practice of

reinsurance is also beneficial to the insured in the following reasons:

a. It gives insurance companies that practice in greater financial stability and thus makes insured’s individual policy more reliable

b. If a large amount of insurance is needed, the insured may obtain it without negotiating with numerous companies

c. It enables the insured to obtain protection promptly, without the delay that would be required to divide and distribute the amount among many companies

d. All the insurance can be written under identical contract provisions, whereas otherwise these might vary with the different companies among whom the insurance is divided

e. Small companies are encouraged to divide large exposures for safety and enabled to accept a wide variety of applicants.

3. From the standpoint of the public – contracts or

“treaties” of reinsurance are plainly beneficial to the public inasmuch as they promote both efficiency and stability in the conduct of the reinsurance business.

Sec. 96. 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

NOTES ON INSURANCE



previously or subsequently acquired, which are material to the risk.

DUTY OF REINSURED TO DISCLOSE FACTS

Where an underwriter is seeking to insure his risks, his duty to disclose all material facts is no less than the similar duty imposed on a person seeking an original insurance; the duty in both cases is one of the strictest good faith since the risk insured against in a contract of reinsurance is the probability that the original insurer may be compelled to pay for the loss under the policy issued by him. Thus, a policy may be avoided where the reinsured conceals the fact that a loss has taken place or that the property is over-insured where he has knowledge thereof.

AUTOMATIC AND FACULTATIVE METHODS OF

CEDING REINSURANCE

Q: How may reinsurance be placed in effect? A:

1. Automatically 2. facultatively

Q: Distinguish automatic from facultative reinsurance. A:

AUTOMATIC REINSURANCE

FACULTATIVE REINSURANCE

Under this, the ceding company (reinsured) is bound to cede (give off by way of reinsurance) and the reinsurer is obligated to accept a fixed share of the risk which has to be reinsured under the contract

Covers the liability on individual risk, there is no obligation either to cede or to accept participation in the risk insured, each party having a free choice. But once the shared is accepted, the obligation is absolute and the liability assumed thereunder can be discharged by one and only way—payment of he share of the losses. There is no altrenative or substitute prestation.

Q: What is the advantage of the automatic method to the insurer? A: There is avoidance of any delay in issuing its policy. Q: How about in facultative method?

A: It receives the reinsurer’s underwriting opinion before the policy is issued.

PROTECTION TO REINSURER

By agreeing to accept business automatically, the reinsurer is relying on the underwriting judgment of the insurer and is bound to accept a case even though it may not agree with the underwriting decision. The reinsurer is protected by the requirement that the original insurer retains its full retention limit, which assures a measure of self-interest. In practice, when any question of proper underwriting classification exists, the insurer usually does not use its automatic facility but instead secures the reinsurer’s underwriting opinion by submitting the case facultatively.

REINSURANCE TREATY v. REINSURANCE POLICY

Q: Distinguish reinsurance treaty from reinsurance policy. A:

REINSURANCE TREATY REINSURANCE POLICY

Merely an agreement beween two insurance companies whereby one agrees to cede and the other to accept reinsurance business pursant to provisions specified in the treaty.

A contract of indemnity one insurer makes with another to protect the first insurer from a risk it has already assuned.

Contracts for insurance Contracts of insurance

The lumping of the different agreements under a contract has resulted in the term known to the insurance world as “treaties.”

Sec. 97. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage. Q: What is the nature of the contract of reinsurance? A: The subject of the contract of reinsurance is the primary insurer’s risk and not the property under the original policy. Its nature are: 1. Contract is one of indemnity against liability 2. Contract that is separate from original insurance policy 3. Contract based on original policy 4. Insurable interest requirement is also applicable. 5. Rule on subrogation applicable

NOTES ON INSURANCE



Sec. 98. The original insured has no interest in a contract of reinsurance. Q: What are the rights of original insured in a contract of reinsurance? A: 1. The insured, unless the contract so provides, has no

concern with the contract of reinsurance, and the reinsurer is not liable the insured either as surety or otherwise.

2. There is no privity of contract between the original reinsured and the reinsurer. A contract of reinsurance rarely explicitly permits direct action by the original insured against the reinsurer.

Q: What is the liability of the reinsurer to the reinsured? A: As a general rule, the reinsurer is entitled to avail itself of every defense which the reinsured might urge in an action by the person originally insured. Thus, the reinsurer is not liable to the reinsured for a loss under an original policy if the latter is not liable to the original insured or for an amount more than the sum actually paid to the insured. Q: What is the liability of the reinsurer to original insured? A: The original insured may stand in any of 3 relations towards the reinsurer in accordance with the terms of the particular contract of reinsurance. 1. Contract of reinsurance solely between insurer and

reinsurer 2. Contract of reinsurance with stipulation in favor of

original insured 3. Contract of reinsurance amounting to novation of

original contract

Chapter II CLASSES OF INSURANCE

Title I MARINE INSURANCE

Sub-Title 1- A DEFINITION

Sec. 99. Marine Insurance includes: (1) Insurance against loss of or damage to:

(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, evidences 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;

(b) 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);

(c) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise;

(d) Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, 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.

(2) "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

Q: What is transportation insurance? A: It is concerned with the perils of property in (or incidental to) transit as opposed to property perils at a generally fixed location. It does not include normal motor vehicle insurance which is treated separately by law.

NOTES ON INSURANCE



It is usually known as marine insurance. Q: What are the 2 major divisions of transportation insurance? A:

1. Ocean Marine Insurance—it has to do with the insurance of sea perils.

The old law defines ocean marine insurance as an insurance against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time.

2. Inland marine insurance- covers primarily the land

or over the land transportation perils of property shipped by railroads, motor trucks, airplanes, and other inland waterway transportation and other waterborne perils outside of those risks that fall definitely within the ocean marine category.

This insurance may be in the form of property insurance, indemnifying the insured for loss or damage to property or in the form of liability insurance protecting the insured against liability for loss or damage to property or for personal injury, illness or death of another person.

SCOPE OF OCEAN MARINE INSURANCE (OMI) Q: What is the scope of OMI? A: It provides protecting for:

1. Ships or hulls; 2. Goods or cargoes; 3. Earnings such as freight, passage, money,

commission, or profits; and 4. Liability (known as protection and indemnity

insurance). Q: What are the risks or losses covered in ocean marine insurance? A: All risks and losses may be insured against, except such as are repugnant to public policy or positively prohibited. Q: What is the effect if a general marine insurance policy does not state the risks assured? A: The same is valid and covers the usual marine risks; and in marine policy, the general enumeration of “all other perils” etc. extends only to marine damage of like kind to those enumerated.

To sustain a recovery on a marine policy, the loss must have been occasioned by a risk or peril insured against. A contract of insurance on freight is that the perils insured against shall not prevent the ship from earning full freight for the insured in that voyage; such contract does not undertake that the goods shall be delivered in a sound or merchantable state or that the vessel shall be safe from the dangers of the sea. An insurance on time by no means contains an engagement that any particular voyage undertaken by the insured within the prescribed period shall be performed before the expiration of the policy but only that the shop shall be capable of performing the voyage undertaken notwithstanding any loss or injury which may occur to her during the time for which she is insured. In marine policies, the insurer may except liability from certain causes. In marine insurance, the goods are presumed to be shipped under deck—below the weather deck of the vessel.

Q: What is the effect if the goods are shipped on deck? A: They are not covered by the policy unless special notice of the stowage is given to the underwriter and he accepts the enhanced risk. Accordingly, the deck of a vessel is not designed to carry goods. Its function is to make the holds watertight and to protect the cargo laden in the holds. Goods carried on a deck are subject to weather damage, sea damage, and the hazard of being washed overboard. Yet, certain goods, dangerous in themselves are, by custom and sometimes by law, required to be shipped on deck so that they will not endanger the other cargo and can, if necessity arise, be quickly thrown overboard.

PERILS OF THE SEA

Q: What does the standard “perils of the sea” include? A: It includes only those casualties due to the unusual violence or extraordinary action to wind and wave, or to other extraordinary causes connected with navigation. It embraces all kinds of marine insurance casualty:

a. Shipwreck b. Foundering c. Stranding d. Collision, and e. Every specie of damage done to the ship or goods at

sea by violent action of the wind and waves; or

NOTES ON INSURANCE



f. Losses occasioned by the jettisoning of cargo; g. Barratry

Q: What is barratry? A: It is any willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owners, and to the prejudice of the owner’s interest. It must be willful and intentional act.

Q: What are the perils not covered by such insurance? A: It does not cover losses resulting from ordinary wear and tear or other damage usually incident to the voyage. “Perils of the sea” is a relative term.

Perils of the sea from perils of the ship

Q: Distinguish perils of the sea from perils of the ship? A:

Perils of the sea Perils of the ship

Include only such losses as are or extraordinary nature or arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence as distinguished from the ordinary wear and tear of the voyage

A loss which results from: a. the natural and

inevitable action of the sea;

b. From the ordinary wear and tear of the ship; and

c. From the negligent failure of the ship’s owner to provide the vessel with the proper equipment to convey the cargo under ordinary conditions.

NOTE: Insurer does not undertake to insure against the perils of the ship

Perils of the sea must be the proximate cause of the loss.

ALL RISK MARINE INSURANCE POLICY

Q: What is an all risk marine insurance policy? A: It insures against all causes of conceivable loss or damage except as otherwise excluded in the policy or due to fraud or intentional misconduct on the part of the insured.

It evolved to grant greater protection than that afforded by the “perils clause.” It covers all losses during the voyage whether arising from a marine peril or not.

Q: Who has the burden of proof to establish damage or loss that has occurred is excluded from the coverage? A: It is the duty to the insurance company to establish that said loss or damage falls within the exceptions provided for by law; otherwise, it is liable therefor. The insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril. Yet, in this case, the burden is not on the insured to prove the precise cause of loss or damage for which it seeks compensation. The insured has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage.

NEED FOR INLAND TRANSPORTATION INSURANCE

The development of the land forms of transportation—railroads, motor trucks, and airplanes. As business and commerce grew, many activities seemed to be served best by extension of land marine insurance to cover property while awaiting shipment, while being prepared for shipment, while being processed, and while in storage after shipment.

FLEXIBILITY OF INLAND MARINE RATES

AND COVERAGES

As the demand for inland marine insurance coverages developed into a veritable boom, fire and casualty insurances were attracted to the business. The original coverage under inland marine insurance gave protection to the policyholder in case of loss or damage resulting from the “perils of transportation.” The scope was broadened until all risks policies were reached, an almost unlimited insurance that appears in very many of the inland marine forms. Today, there is no more distinction between ocean marine and inland marine insurance. Accordingly, the definition is less important today because multi-line law now permit a

NOTES ON INSURANCE



single insurer to write all types of property and liability insurance. Q: What are the classes of inland marine insurance? A:

1. Property insurance in goods in transit by railroad, express, mail, motor truck, aircraft and partly by water;

2. Property insurance on goods of certain specified types, wherever they may be, against any peril, even though not in the course of transportation;

3. Property insurance on fixed property such as bridges, tunnels, and the like;

4. Property insurance on a few of the means of transportation such as small boats, railroad cars and the like; and

5. Liability insurance to protect transportation carriers, warehousemen, processors and other bailees from the consequences of legal responsibility for property of customers while in their custody. CLASSES OF INLAND MARINE INSURANCE

To be eligible for inland marine contract, the risk must involve an element of transportation. Either the property is actually in transit held by persons (bailees) who are not its owners, or at a fixed location but an important instrument of transportation, or is a movable type of goods which is often at different locations.

Q: What are the 4 divisions or classes of inland marine insurance? A: 1. Property in transit- protection for property frequently

exposed to loss while it is in transportation from one location to another;

2. Bailee liability- protection to persons who have temporary custody of the goods or personal property of others, such as carriers, laundrymen, warehousemen, and garage keepers;

3. Fixed transportation property—bridges, tunnels, and other instrumentalities of transportation and communication although they are fixed properties. Accordingly they are essential part of the transportation system; and

4. Floater-an inland marine insurance provides insurance to follow the insured property wherever it may located, subject to the territorial limits of the contract. Floater policies may be issued for such items as jewelry, furs, works of art, contractor’s equipment etc.

Sub-Title 1-B

INSURABLE INTEREST Sec. 100. 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. NOTE: Marine insurance is invalid unless supported by an insurable interest in the thing insured. There can be no valid insurance unless there is something to insure.

INSURABLE INTEREST OF OWNER OF A SHIP

Q: What is the extent of the insurable interest of owner of a ship? A: The insurable interest is the extent of its value even if he has mortgaged the same or has chartered it to a third person who agrees to pay him its value in case of loss. In the latter case, the insurer is liable only for that part of the loss which the insured cannot recover from the charterer.

In case of a vessel

The insurable interest is commonly possessed by the owner, and also if money has been barrowed, by one who holds mortgage on the vessel.

In case of cargo

The insurable interest is with the shipper or the consignee depending upon the terms of sale.

COMMON TERMS OF SALE

Q: Enumerate and define the different common terms of sale?

A:

1. F.O.B (Free on board):

a. F.O.B factory—the buyer assumes responsibility when

the goods leave the factory; and b. F.O.B point of destination—the buyer does not assume

responsibility until the goods are received from the carrier.

2. C.I.F (Cost, Insurance, and Freight)- the seller assumes complete responsibility for securing all necessary insurance; and

NOTES ON INSURANCE



3. C&F (Cost, and freight)—the buyer procures his own insurance.

In case of a vendee/ consignee of goods in transit

Q: What is the basis of interest of the vendee or consignee? A: His interest over the goods is based on the perfected contract of sale between him and the shipper of the goods which operates to vest in him an equitable title even before delivery or before he performed the conditions of the sale. Such equitable title vests in the vendee an existing interest over the goods sufficient to be the subject of insurance. Sec. 101. 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

Q: What is a loan on bottomry? A: It is one which is payable only if the vessel, given as a security for the loan, completes in safety the contemplated voyage. The lender in bottomry is entitled to receive a high rate of interest to compensate him for the risk of losing his loan. Where the vessel is bottomed, the owner has an insurable interest only in the excess of its value over the amount of the bottomry loan. The insurable interest of the lender on bottomry in the vessel given as security is to the extent of the loan. Sec. 102. 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.

FREIGHTAGE

Q: What is freightage? A: It is also known as freight. It is the benefit which is to accrue to the owner of the vessel from its use in the voyage contemplated or the benefit derived from the employment of the ship. Q: What are the sources of freightage? A:

1. The chartering of the ship 2. Its employment for the carriage of his own goods

3. Its employment for the carriage of the goods of others.

Sec. 103. 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.

INSURABLE INTEREST IN EXPECTED OR ANTICIPATED FREIGHTAGE

The shipowner includes:

a. Legal owner b. Charterer who expects to earn in the transportation

of goods of others Q: What is included in “freight money assured to the shipowner”? A:

1. Freight, in its ordinary acception, to be earned and payable upon the completion of the voyage

2. The hire of the vessel, payable by the charterer 3. The benefit accruing to the owner from the use of

his vessel in the way of profits upon carriage of his own goods.

The owner of ship has an insurable interest in expected freightage which he may not earn in case of the intervention of peril insured against or other peril incident to the voyage. This rule is the same although the freight has been paid in advance. Where the agreement is payable in any event, whether the vessel is lost or is not lost, the shipowner has no insurable interest in such freight. The shipper who has prepaid the freightage under such condition, has an insurable interest on the same.

INSURABLE INTEREST IN PASSAGE OF MONEY

Passage money is customarily payable in advance. It cannot be recovered if the vessel is lost before the completion of the passage. Passenger can insure his advances of passage money but the shipowner may not insure it unless it is payable upon the completion of the voyage.

Sec. 104. 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

NOTES ON INSURANCE



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.

INSURABLE INTEREST IN EXPECTED FREIGHTAGE IN A CHARTER PARTY

Q: When does this insurable interest exist? A: To give an insurable interest in expected freightage, the insured must have an inchoate right to freight, that is, he must be in such position with regard to freight that nothing could prevent him from ultimately having a perfect right to it but the intervention of the perils insured against. a. Where freight is the price to be paid for hire of the ship

under charter party, the shipowner has an inchoate right to freight as soon as there is an inception of performance by the ship under the charter party.

b. Where the inchoate right to freight accrues as soon as the goods are actually put on board and where part of the goods has been loaded and the balance is ready, there is an insurable interest in the whole freight.

c. Where the shipowner has made a binding contract for freight and the ship is in the readiness to receive the goods, he has an insurable interest.

Q: What are the interests where there are no insurable interest in the freight? A:

1. Where there is no contract and no part of the goods expected to be carried are on board, there is no insurable interest in freight although there are goods ready for shipment or the master is provided with funds for the purpose of purchasing a cargo

2. Where the vessel is a mere seeking ship or a vessel looking for the cargo to be transported, the owner has no insurable interest in freight to be earned on goods not loaded.

Sec. 105. One who has an interest in the thing from which profits are expected to proceed has an insurable interest in the profits.

INSURABLE INTEREST IN EXPECTED PROFITS One having a reasonable expectation of profits from a marine adventure may take out an insurance to protect such profits. The interest in the goods or adventure out of which the profits are expected to be realized should be a legal interest although such interest may be contingent like a commission to an agent or consignee.

Thus the owner of the cargo to be carried on a trading voyage has an insurable interest not only on the value of the cargo but also on the expected profit from the sale of the cargo which is liable to be affected by the perils of the sea. The insured has sufficient interest if it is based on a valuable consideration paid. Sec. 106. 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

The insurable interest of a charterer of a ship is up to the extent that he is liable to be damnified by its loss. One who charters a vessel, with a stipulation to pay its value in case of loss, has an insurable interest to the extent of its value The charterer has also an insurable interest in the profits he expects to earn by carrying in the goods in excess of the amount he agreed to pay for the charter of the vessel. Q: What is a charter party? A: It is a contract by which an entire ship or some principal part thereof is lent by the owner to another person for a specified time or use. Q: What are the types of charter parties? 1. Charter party or demise charter –a lease of an

unfurnished house. It is the charterer who shall provide a crew and victuals and supplies and fuel for her during the term of the charter. the charterer becomes, in effect, the owner of the voyage or service stipulated, subject to the liability for damages caused by negligence.

2. Contract of affreightment- the owner of the vessel leases part or all of its space to haul goods for others. The owner of the vessel retains the possession, command and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for payment of the charter hire or freight.

Q: What are the 2 types of contracts of affreigment? A:

1. Voyage charter or trip charter 2. Time charter

NOTES ON INSURANCE



Sub-Title 1-C

CONCEALMENT

Sec. 107. In marine insurance each party is bound to communicate, in addition to what is required by section twenty-eight, all the information which he possesses, material to the risk, except such as is mentioned in Section thirty, and to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose. Q: What is concealment in maritime insurance? A: It 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 order has no actual or presumptive knowledge. The rule applies to both the assured and the underwriter and the rests upon the doctrine of good faith as well as the prevention of fraud. RULES AS TO MISREPRESENTATIONS AND CONCEALMENTS

STRICTER IN MARINE INSURANCE

Q: What is the reason for the stricter rules? A: This is due to the difference in the character of the property and the greater facility of the insurer possesses in obtaining information as to its conditions and surrounding circumstances in cases of insurance on buildings, etc. than the vessels, which are often insured when absent or afloat.

To constitute concealment, it is sufficient that the insured is in possession of the material fact concealed although he may not be aware of it.

Sec. 108. In marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material.

OPINIONS OR EXPECTATIONS OF THIRD PERSONS

In marine insurance, the rule is quite strict because the insured is bound to communicate to the insurer not only facts but also:

a. Beliefs or opinions of third persons b. Expectations of 3

rd persons

The only requirement is that the information be in reference to a material fact

Sec. 109. 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.

PRESUMPTIVE KNOWLEDGE BY THE INSURED OF PRIOR LOSS

Q: When is this rule applicable? A: The rebuttable presumption of knowledge of a prior loss on the part of the insured applies if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication. Q: What is the reason for the presumption? A: The reason is the quickness in the transmission of news by means of modern communications. Because of the rapidly advanced means of transportation, the presumption that the loss of a vessel due to disaster of the seas was duly communicated to the insured becomes stronger. Q: When is the rule not applicable? A: When having no cause to expect information the insured omits to call at the post office where a letter was received in the morning of the day the insurance was affected, containing the material information, he is not guilty of negligence which will vitiate the policy. Sec. 110. 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;

WHEN CONCEALMENT VITIATES THE ENTIRE CONTRACT

Q: In what occasion concealment will not vitiate entire contract? A: Concealment of any of the matters indicated from paragraphs a to e of Sec. 110 does not avoid the policy ab initio. If the vessel was lost due to any of the causes mentioned which was concealed, the insurer is not liable; but if the vessel is lost due to the perils of the sea, like a storm, the insurer is not exonerated from liability. Q: Is the national character of the vessel material?

NOTES ON INSURANCE



A: Generally, no. But facts lying within the knowledge of the insured which will expose the property to belligerent risks of seizure and condemnation for violation of the trade or navigation laws of another country must be disclosed.

Sub-Title 1-D REPRESENTATION

Sec. 111. 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. Applicability of rules on representation to marine insurance

The general rules governing representations with respect to insurance policies generally have been held to apply to marine insurance policies. 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. Q: What is the effect of false representation by insured? A:

1. Intentional- avoids the policy 2. Not intentional- the insurer may rescind the contract

from the time the representation becomes false 3. Materiality of representations-

a. Age b. Equipment c. Particular condition or d. rating of the vessel e. repaired in a certain place f. she has arrived at her port of destination g. was at a certain place at a certain time h. other underwriters had insured her at a certain

rate

Statements of the nature and amount of the cargo, where she was not overloaded or where the underwriter did not rely thereon, have been held to be immaterial.

Sec. 112. The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance. Q: Differentiate representations of expectation from promissory representations.

A:

REPRESENTATIONS OF EXPECTATIONS

PROMISSORY EXPECTATIONS

Statements of future facts or events which are in their nature contingent and which the insurer is bound to know that the insured could not have intended to as known facts but as intentions and expectations merely

Unless made with fraudulent intent, their failure to fulfillment is not a ground for rescission

Q: What is the falsity of the representation as to expectation? A: Unless made with fraudulent intent, their failure to fulfillment is not a ground for rescission. Q: In what statements this rule apply? A:

1. statements of the time a vessel will sail or is expected to sail

2. nature of the cargo to be shipped 3. amount of profits expected 4. destination of the vessel 5. that the insured has no doubt that he can get

insurance effected for a certain premium

Sub-Title 1-E IMPLIED WARRANTIES

Sec. 113. In every marine insurance upon a ship or freight, or freightage, or upon any thing which is the subject of marine insurance, a warranty is implied that the ship is seaworthy. Q: What is warranty in marine insurance? A: It refers to a stipulation, either expressed or implied, forming part of the policy as to some fact, condition, or circumstances relating to the risk. Q: What are implied warranties in marine insurance? A: The insurer will not be liable for any loss under this policy in case the vessel:

a. is unseaworthy at the inception of the insurance b. deviates from the agreed voyage

NOTES ON INSURANCE



c. engages in an illegal venture d. the ship will carry the requisite documents of

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

Q: What will the admission of seaworthiness by the insurer may mean? A: 1. that the warranty of seaworthiness is to be taken as

fulfilled 2. that the risk of unseaworthiness is assumed by the

insurer.

Q: What if the unseaworthiness is unknown to the owner of the cargo insured? A: The implied warranty of seaworthiness attaches to whoever is insuring the cargo, whether he be the shipowner or not. The fact that the unseaworthiness of the ship was unknown to insured is immaterial in ordinary marine insurance and may not be used by him as a defense in order to recover on the marine insurance policy. NOTE: The shipper may have no control over the vessel but he has full control in the choice of the common carrier that will transport his goods. The shipper may have no control over the vessel but he has full control in the choice of the common carrier that he will transport his goods. A charterer of a vessel has no obligation before transporting its cargo to ensure that the vessel it chartered complied with all the legal requirements. The duty rests upon the common carrier simply for being engaged in public services. Because of the implied warranty of seaworthiness, shippers of goods are not expected when transacting with common carriers, to inquire into the vessels’ unseaworthiness, genuineness of licenses, and compliance with all maritime laws. Q: What if the vessel is found unseaworthy? A: A shipowner is also presumed to be negligent since it is tasked with the maintenance of its vessel. Though its duty can be delegated, the shipowner must exercise close supervision over its men. Q: Give an exception to the limited liability doctrine which limits the liability to it pro rata share in the insurance proceeds?

A: When the damage is due to the fault of the shipowner and the captain. In such case, the shipowner, unless it overcomes the presumption of negligence, is liable to the total value of the damage or loss.

Sec. 114. A ship is seaworthy when reasonably fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy.

SEAWORTHINESS OF VESSEL

Q: What constitutes seaworthiness? A: It is a relative term depending on the nature of the ship, the voyage, and the service in which she is at the time engaged. Generally for a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a sufficient number of competent officers and crew. Q: What if there is failure of a common carrier to maintain in seaworthy condition the vessel? A: It is a clear breach of its duty prescribed in Art. 1755 of Civil Code. Q: What should be the nature of the ship to comply with seaworthiness? A: The vessel must be in a fit state as to repair, equipment, crew, and in all other respects to perform the voyage insured and to encounter ordinary perils or navigation. She must also be in a suitable condition to carry the cargo put on board or intended to be put on board. NOTE: It is not necessary that the cargo itself shall be seaworthy. Q: What should be the nature of the voyage? A: What is reasonable fitness to encounter the perils expected to arise in the course of the voyage vary, naturally with the character of the particular voyage. Q: What is the rule as to the nature of service? A: The requirement is that she shall be reasonably capable of safely carrying the cargo to its port of destination. Q: What are the criteria as to seaworthiness of a vessel? A:

1. Physical and mechanical condition 2. The extent of its fuel and provisions supply 3. The quality of its officers and crew 4. Adaptability for the service in which they are

employed

NOTES ON INSURANCE



Sec. 115. An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the of commencement of the risk, except in the following cases: (a) When the insurance is made for a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the commencement of every voyage it undertakes during that time; (b) When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of the trade, is to be transhipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the commencement of each particular voyage.

COMMENCEMENT OF THE RISK

Q: When is the commencement of the risk? A: The general rule is that the warranty of seaworthiness is complied with if the ship 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. Q: What are the exceptions to the rule? A:

1. In the case of 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 case of voyage policy, contemplating a voyage in different stages, the ship must be seaworthy at the commencement of each portion.

NOTE: The unexplained sinking of the vessel creates the presumption of unseaworthiness. The shipowner cannot escape liability by presenting in evidence a certificate that tends to show that at the time of dry-docking and inspection.

Time policy vs. Voyage policy Q: What is a time policy? A: Provides coverage for a fixed period of time, at the expiration of which the insurance will lapse. Q: What is a voyage policy?

A: It covers the subject matter for the voyage named in the policy until the specified voyage ends, regardless of the time it takes to complete the voyage. Q: Distinguish time from voyage policy? A:

TIME POLICY VOYAGE POLICY

Gives protection for a stipulated period and therefore avoids the annoyance of constant attention to the termination of voyages and the renewal of policies. On hulls (vessels), they are common type. By means of time policy, the insured avoids the necessity of continually describing separate voyages many of which are over similar routes.

Particularly adapted to tramp steamers and sailing vessels, inasmuch as those do not move over fixed routes and their travel may be more easily described by separate voyage policies. Because cargoes are subject to sea risk for short periods, the voyage policy is frequently used.

Sec. 116. 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. Q: What is the scope of seaworthiness of vessel? A: Seaworthiness requires that: 1. Vessel must have the equipment and appliances

appropriate to voyage in which it is engaged and the cargo it carries

2. It must have sufficient fuel, stores, and provisions to last for the entire voyage

3. It must have sufficient number of competent officers and men

4. 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 vessel or cargo.

NOTE: The carrying of the cargo on deck raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship.

Sec. 117. 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

NOTES ON INSURANCE



of seaworthiness is complied with if, at the commencement of each portion, the ship is seaworthy with reference to that portion.

SEAWORTHINESS DURING VOYAGE IN STAGES

Q: What is the rule regarding voyage in stages? A: Where the policy contemplates a voyage in different stages during which the subject matter insured will be exposed to different degrees or kinds of perils, or the ship will require different degrees or kinds of perils, or the ship will require different kinds of equipment, she must be seaworthy at the commencement of each stage, but it is sufficient if at the commencement of each stage, she is seaworthy for the purpose of that stage. The stages must be separate and distinct in order to have a different degree of seaworthiness for particular parts.

Sec. 118. 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.

EFFECT OF UNSEAWORTHINESS DURING THE VOYAGE

Q: What if the ship becomes unseaworthy during the voyage? A: The general rule is that there is no implied warranty that the vessel will remain in a seaworthy condition throughout the life of the policy. When the vessel becomes unseaworthy during the voyage, it is the duty of the master, as the shipowner’s representative, to exercise due diligence to make it seaworthy again, and if loss should occur because of his negligence in repairing the defect, the insurer is relieved of liability but the contract of insurance is not affected as to any other risk or loss covered by the policy and not caused or increased by such particular defect. Sec. 119. A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of the insurance upon the cargo.

SEAWORTHINESS OF THE CARGO

Q: What is the rule as to the seaworthiness as to cargo? A: The seaworthiness of a vessel is also to be determined with regard to the nature of the cargo which she undertakes to transport, the requirement being that she shall be

reasonably capable of safely conveying the cargo to its port of destination. A ship which is seaworthy for the purpose of insurance upon the ship may yet be unseaworthy for the purpose of insurance upon the cargo. Sec. 120. 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. Q: How is a warranty of national character be known? A: It is gathered from the language of the policy describing the vessel as the “Philippine,” “American,” “British,” “Spanish” etc. A warranty of nationality does not mean that the vessel was built in such country but that the property belongs to a subject thereof. It refers to the beneficial ownership rather than to legal title.

WARRANTY OF NEUTRALITY Q: What is the import of warranty of neutrality? A: It imports that the property insured is neutral in fact, and shall be so in appearance and conduct, that the property shall belong to neutrals, and no act of insured or his agent shall be done which can legally compromise its neutrality. NOTE: The warranty extends to insured’s interest in all the property intended to be covered by the policy, but not to the interest of a 3

rd person not covered by the policy.

Q: Explain the implied warranty to carry requisite documents. A: The warranty of nationality also requires that the vessel be conducted and documented as of such nation, and a breach of warranty in either particular will avoid the policy. The warranty of nationality requires that the insured property shall be accompanied by documentary evidence of its neutral character and not by any other papers which compromise such character.

Sub-Title 1-F THE VOYAGE AND DEVIATION

Sec. 121. When the voyage contemplated by a marine insurance policy is described by the places of beginning and ending, the voyage insured in one which conforms to the

NOTES ON INSURANCE



course of sailing fixed by mercantile usage between those places. Sec. 122. If the course of sailing is not fixed by mercantile usage, the voyage insured by a marine insurance policy is that way between the places specified, which to a master of ordinary skill and discretion, would mean the most natural, direct and advantageous.

Sec. 123. Deviation is a departure from the course of the voyage insured, mentioned in the last two sections, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage.

DEVIATION IN MARINE INSURANCE

Q: What is deviation? A: Any excused departure from the regular course or route of the insured voyage or any other act which substantially alters the risk constitutes deviation. Q: What are the cases of deviation in marine insurance? A: 1. Departure from the course of sailing fixed by mercantile

usage between the places of beginning and ending specified in the policy

2. Departure from the most neutral, direct, and advantageous route between the places specified if the course of sailing is not fixed by mercantile usage

3. Unreasonable delay in pursuing the voyage 4. The commencement of an entirely different voyage

Sec. 124. A deviation is proper: (a) When caused by circumstances over which neither the master nor the owner of the ship has any control; (b) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against; (c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or (d) When made in good faith, for the purpose of saving human life or relieving another vessel in distress.

Sec. 125. Every deviation not specified in the last section is improper. Q: What are the kinds of deviation? A:

1. Proper 2. Improper

Q: Illustrate some specific acts of proper deviation?

A: 1. When the ship is compelled to head for another port

by stress of weather 2. Where a departure from the course is made to take

on a pilot when necessary to the safety of the adventure

3. Proceed to a place where the ship will meet a convoy if the policy warrants that the ship will not proceed from one port to another without convoy

4. To escape capture 5. Where the master seeks another port of discharge

when the water of the river is too shallow for his vessel to enter.

A deviation for the purpose of saving life does not constitute a breach of warranty. Sec. 126. An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation. Q: What is the effect of improper deviation? A: The insurer becomes immediately absolved from further liability under the policy for losses occurring subsequent the deviation.

Sub-Title 1-G LOSS

Sec. 127. A loss may be either total or partial. Sec. 128. Every loss which is not total is partial. Sec. 129. A total loss may be either actual or constructive. Q: What are the kinds of losses? A:

1. Total 2. Partial

Total loss

Q: What are the 2 kinds of total loss? A:

1. Actual or absolute 2. Constructive or technical

Q: What is the effect of total loss?

NOTES ON INSURANCE



A: The underwriter is liable for the whole of the amount insured. Sec. 130. An actual total loss is cause by: (a) A total destruction of the thing insured; (b) The irretrievable loss of the thing by sinking, or by being broken up; (c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or (d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured.

Actual loss Q: What is actual loss? A: It 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. Q: Is complete physical destruction necessary to constitute actual total loss? A: No.

LIMITED LIABILITY OR HYPOTHECARY RULE

Q: What is the limited liability rule? A: These are embodied in: 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 equipments and the freight it may have earned during the voyage. Art. 590-The co-owners of a vessel shall be civilly liable in the proportion of their interests in the common fund, for the results of the acts of the 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 the shipowners in the cases prescribed in this section, shall be understood as limited to the value of the vessel with all its appurtenances and freightage earned during the voyage. These articles precisely intend to limit the liability of the shipowner or agent to the value of the vessel, its

appurtenances and freightage earned in the voyage, provided that the owner or agent abandons the vessel. In case the vessel is totally lost and there is no vessel to abandon, abandonment is not required. Because of such total loss, the liability of the shipowner or agent for damages is extinguished.

Limited liability rule Q: What is the exception to this “limited liability rule”? A: A shipowner or shipagent may be held liable for damages when the sinking of the vessel is attributable to the actual fault or negligence of the shipowner or its failure to ensure seaworthiness of the vessel. Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon, under Section one hundred thirty-nine.

CONSTRUCTIVE LOSS

Q: What is constructive loss? A: It is also known as technical total loss in which the loss although not actually total, is of such a character that the insured is entitled, if he thinks fit, to treat as total by abandonment. Q: What is the importance of distinction between actual and constructive total loss? A: In case of actual total loss, no abandonment is necessary, but if the loss is merely constructively total, an abandonment becomes necessary in order to recover as for a total loss. Sec. 132. 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 Q: When is there a presumption of actual total loss? A: Where a vessel is not heard of at all within reasonable time after sailing, or for a reasonable time after she was last seen, she will be presumed to have been lost from peril insured against Q: How will the presumption be laid down? A: It is enough to prove that the vessel was not heard of at her port of departure after she sailed without calling witnesses from her port of destination.

NOTES ON INSURANCE



Sec. 133. 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. Q: What is the liability of the insurer in case of reshipment? A: If the original ship is disabled, and the master, acting with a wise discretion, as the agent of the merchant and the shipowners, forwards cargo in another ship, such necessary and justifiable change of ship will not discharge the underwriter on the goods from liability for any loss which may take place on goods subsequently to such reshipment. Q: What is the exception to this rule? A: Where resort must be had to distant places to procure a vessel, and there are serious impediments in the way of putting cargo on board. The insurer may require an additional premium if the hazard be increased by extension of liability.

Sec. 134. 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.

ADDITIONAL LIABILITY OF INSURER OF GOODS

The insurer is liable for the expenses necessary to complete the transportation of cargo reshipped in addition to any loss or damage which may take place on the goods, due to the perils insured against.

Sec. 135. 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

CONSTRUCTIVE LOSS ACTUAL TOTAL LOSS

An abandonment by the insured is necessary in order to recover for total loss in the absence of any provision to the contrary in

The right of the insured to claim the whole insurance is absolute. He need not give notice of abandonment nor formally abandon to the

the policy insurer anything that may remain of the insured property.

Sec. 136. 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

Q: What is average? A: It is any extra-ordinary or accidental expenses incurred during the voyage for the preservation of the vessel, cargo, 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 unloaded. Q: What are the kinds of average? A:

1. Gross or general average –must be borne equally by all of the interests concerned in the venture

2. Simple or particular- damages to the vessel which have not inured to the common benefit and profit of all persons interested in the vessel and the cargo. It is suffered by and borne alone by the owner of the cargo or of the vessel, as the case may be.

PRINCIPLE OF GENERAL AVERAGE CONTRIBUTION

It is decided by the master of a vessel acting for all the interests concerned, to sacrifice any part of a venture exposed to a common and imminent peril in order to save the rest, the interests so saved are compelled to contribute ratably or proportionately to the owner of interest sacrificed, so that the cost of the sacrifice shall fall equally upon all. Q: What are the requisites to the right to claim general average contribution? A:

1. There must be a common danger to the vessel or cargo

2. Part of the vessel or cargo was sacrificed deliberately 3. The sacrifice must be for the common safety or for

the benefit of all 4. It must be made by the master or upon his authority

NOTES ON INSURANCE



5. It must not be caused by any fault of the party asking the contribution

6. It must be necessary Q: What is the liability fo the insurer for general average? A: He is liable for his proportion of all general average loss assessed upon the thing inusred. Article 859 of the Code of Commerce provides that: “The insurers of the vessel of the freightage, and of the cargo shall be obliged to pay for the indemnification of the gross average, insofar as is required of each one of these objects respectively.” Q: What is the formula for computing the liability of the insurer? A: FORMULA: Amount of insurance x General Average = Proportion of GAL Total amount or value Loss (GAL) for which insurer is liable involved Q: What is the liability of insurer for particular average? A: Policies of marine insurance frequently contain stipulations with respect to certain class of goods which are perishable or peculiarly subject to damage under which the insurer will not be liable for loss, partial or total, arising from perils of the sea. The purpose of such is to protect the insurer.

Sec. 137. 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.

Scope of insurance against actual total loss

Where the insurance is against absolute total loss or actual total loss, the insurer will not be liable for constructive or technical total loss. If the insured is deprived of the possession of the entire thing insured at the port of destination, the insurer is liable because the permanent non-arrival thereof is really an actual total loss.

Sub-Title 1-H

ABANDONMENT Sec. 138. 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. Q: What is abandonment? A: The act of the insured in notifying the insurer that owing to damage done to the subject of the insurance, he elects to take the amount of the insurance in the place of the subject thereof, the remnant of which he ceded to insurer. Q: What are the requisites for valid abandonment? A:

1. There must be an actual relinquishment by the person insured of his interest in the thing insured

2. There must be a constructive total loss 3. The abandonment be neither partial nor conditional 4. It must be made within a reasonable time after

receipt of reliable information of the loss 5. It must be factual 6. It must be made by giving notice thereof to the

insurer which may be done orally or in writing 7. The notice of abandonment must be explicit and

must specify the particular cause of the abandonment.

NOTE: Abandonment is not applicable to cases where the injury or average was occasioned by the shipowner’s own fault. When the loss is only technically total, the insured cannot claim the whole insurance without showing due regard to the interest which the underwriter may take in the abandoned property. Sec. 139. 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 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; (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

NOTES ON INSURANCE



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 sub-paragraph. But freightage cannot in any case be abandoned unless the ship is also abandoned.

Rules in constructive total loss Q: What are the rules in constructive total loss? A:

1. English rule- when the subject matter of the insurance, while still existent in specie, is so damaged as not to be worth, when repaired, the cost of repairs

2. American rule- when it is so damaged that the cost of repairs would exceed ½ of the value of the thing as required. It is also known as the fifty percent rule.

3. In the Philippines, the insured may not abandon the thing insured unless the loss or damage is more than ¾ of its value.

Q: What is the rule in abandonment where insurance is divisible and where it is indivisible? A: Any part of the thing insured separately valued by the policy may be separately abandoned as it is deemed separately insured. Whether the contract is entire or severable is a question of intention to be determined by the language employed by the parties. Q: What should be the criterion as to the extent of loss? A: It must be in reference to the general market value immediately before the disaster. This is the proper rule even though the policy is valued. The value of the policy is the proper criterion in the event that there is an express stipulation. In determining the extent of the loss, the expenses incurred or to be incurred by the insured recovering the thing insured are taken into account.

ABANDONMENT

Sec. 140. An abandonment must be neither partial nor conditional. Sec. 141. 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 the insured has received notice of loss, he must elect within a reasonable time whether he will abandon to the insurer, and if he elects to abandon, he must give notice thereof. What is reasonable time is a question depending on the facts and circumstances in each case.

Sec. 142. 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.

ABANDONMENT MUST BE FACTUAL

The right of the insured to abandon and recover for a total loss depends upon the state of facts at the time of the offer to abandon and not upon the state disclosed by the information received, or upon the state of loss at a prior or subsequent time. If the abandonment when made is good, the rights of the parties are definitely fixed, and do not become changed by any subsequent events. Insured cannot abandon when the thing insured is safe, or when he knew at the time of his offer to abandon that the vessel has been repaired and is successfully pursuing her voyage. Q: Give instances justifying abandonment. A:

1. Total loss under a marine insurance policy 2. Capture 3. Seizure 4. Detention of the ship or cargo 5. Restraint by blockade or embargo 6. With no fault of the owner, the funds for repair

cannot be raised 7. Voyage is absolutely lost 8. Under urgent necessity, the master of a vessel at an

immediate port, makes a sale of the insured property.

Q: Should the information be direct or positive? A: No. The protest of the master, a newspaper report, the report of a pilot, or a letter from an official or an agent, is sufficient.

NOTES ON INSURANCE



Sec. 143. 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 days from such oral notice. Q: What should be the form of notice of abandonment? A:

1. The notice may be made orally or in writing unless the policy requires it to be in writing

2. If the notice is done orally, the insured must submit to the insurer within 7 days from such oral notice, a written notice of the abandonment.

Q: By whom and to whom shall notice be made? A:

1. The abandonment need not necessarily be made by the insured but may be made by an authorized agent, and an agent having an authority to insure has prima facie an authority to abandon

2. The abandonment may be made to an agent of the underwriter and abandonment to a broker who is agent for parties is sufficient.

Sec. 144. A notice of abandonment must be explicit, and must specify the particular cause of the abandonment, but need state only enough to show that there is probable cause therefor, and need not be accompanied with proof of interest or of loss.

Notice of loss must be explicit

Q: Should the notice of loss be explicit? A: Yes, there must be an intention to abandon, apparent from the communication to the insurer and a relinquishment of all rights to the insurer. The grounds for abandonment must be stated with such particularity as to enable the underwriter to determine whether or not he is bound to accept the offer. Sec. 145. An abandonment can be sustained only upon the cause specified in the notice thereof. If the insured assigns an insufficient cause or causes which do not in fact exist, the proof of other causes will not be admitted in suing for a total loss.

Sec. 146. An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity.

Q: What is the effect of valid abandonment? A: It transfers to the insurer the interests in the subject matter covered by the policy subject to the rights and interests, if any, of third persons. This insurer acquires thereby the entire interest insured, together will all its incidents, including rights of action which the insured, together will all its incidents including the rights of action which the insured has against third persons for the inquiry. Sec. 147. 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 insurer is entitled to whatever may remain of the thing insured, or its proceeds or salvage.

Sec. 148. 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.

TRANSFER OF AGENCY TO INSURER

From the moment of valid abandonment, the master of the vessel and agents of the insured become the agents of the insurer and the latter becomes responsible for all the expenses and liabilities in respect thereof. Insurers are liable for the wages of seaman earned subsequent to the loss, but take free from any lien or liability for wages earned prior thereto.

Sec. 149. 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. Acceptance is in no case necessary if the abandonment is properly made. The insured’s right to abandon, in policy of marine insurance, is absolutely when justified by the circumstances.

Sec. 150. 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 of abandonment Q: What is the form of acceptance of abandonment? A:

NOTES ON INSURANCE



1. An insurer’s acceptance of an offered abandonment need not to be express

2. It may be implied by conduct 3. Mere silence after notice would not operate as an

acceptance Sec. 151. The acceptance of an abandonment, whether express or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment. Sec. 152. An abandonment once made and accepted is irrevocable, unless the ground upon which it was made proves to be unfounded. Q: What is the effect of acceptance of abandonment? A:

1. He becomes at once liable for the whole amount of the insurance, and also becomes entitled to all rights which insured possessed in the thing insured

2. Acceptance fixed the rights of the parties. It is conclusive upon them

3. Acceptance stops the insurer to rely on insufficiency in the form, time, right of abandonment

Sec. 153. 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.

RIGHT OF INSURER TO FREIGHTAGE

Freightage earned subsequent to the loss belongs to the insurer of said freightage.

Sec. 154. If an insurer refuses to accept a valid abandonment, he is liable as upon actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured. Q: What is the effect of refusal to accept a valid abandonment of insurer’s liability? A:

1. The insurer is liable as upon actual loss less any proceeds the insured may have received on account of damaged property as when the insured succeeds in selling the property as damaged.

2. If the abandonment was improper, the insured may recover the extent of damage proved.

Sec. 155. If a person insured omits to abandon, he may nevertheless recover his actual loss.

Q: What is the effect of insured’s failure to make abandonment?

A: He may nevertheless recover his actual loss.

Sub-Title 1-I MEASURE OF INDEMNITY

Sec. 156. A valuation in a policy of marine insurance in 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. Q: What is the effect of valuation? A: To fix in advance the value of the property and thus avoid the necessity of proving its actual value in case of loss. Q: To be conclusive, the valuation must be? A:

a. The insured has some interest at risk b. There is no fraud on his part

Sec. 157. 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. Q: When is the insured considered as co-insurer in marine insurance? A: If the value of his interest exceeds the amount of insurance. q Sec. 158. 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.

LOSS OF PROFITS SEPARATELY INSURED

If the profits to be realized are separately insured from the vessel or cargo, the insured is entitled to recover, in case of loss, such portion of the profits as the value of the property lost bears the value of the whole property. Sec. 159. In case of a valued policy of marine insurance on freightage or cargo, if a part only of the subject is exposed

NOTES ON INSURANCE



to the risk, the evaluation applies only in proportion to such part. Q: What if only a part of the cargo or freightage insured is exposed to risk? A: The valuation will be reduced proportionately. The insurer is bound to return such portion of the premium ad corresponds with the portion of the cargo which had been exposed to the risk.

Sec. 160. When profits are valued and insured by a contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which they are expected to arise, and the valuation fixes their amount.

Sec. 161. 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 for estimating loss under an open policy of marine insurance

Q: What are the rules for estimating loss under an open policy of marine insurance? A: The real value of the thing insured must be proved by the insured in each case.

1. The value of the vessel is to be taken as of the commencement of the risk and not its value at the time she was built.

2. The value of the cargo is its actual cost to the insured when laden on board, or where the cost cannot be established, its market value at the time and place of shipment.

3. The value of the freightage is the gross freightage and not the net freightage. Primage is excluded in the gross freightage.

4. The cost of the insurance is always added in calculating the value of the ship, cargo, or freightage or other subject matter in an open policy.

Sec. 162. 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. NOTE: This provision applies if the cargo is insured against partial loss and it suffers damage as a result of which the market value at the port of destination is reduced. FORMULA: Market price in sound state Less: market price in damaged state =reduction in value (depriciation) Reduction value x amount of insurance = amount of Market price in recovery sound state Sec. 163. 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. Sec. 164. 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. Sec. 165. 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 the contribution, nor when the insured, having the right and opportunity to enforce the contribution from others, has neglected or waived the exercise of that right. Q: What are the rights of the insured in case of general average?

NOTES ON INSURANCE



A: The general rule is that the insurer is liable for any general average loss where it is payable or has been paid by the insured in consequence of the peril insured against. Q: In what instances there can be no recovery for general average? A:

1. After the separation of the interests liable to contribution or after the cargo liable for contribution has been removed from the vessel

2. When the insured has neglected or waived his right to contribution.

LIMIT AS TO LIABILITY OF INSURER; FORMULA:

Amount of insurance x proportion of general = limit of liability value of thing insurance of insurer insured Sec. 166. 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 of the remaining cost of repairs after such deduction, except that anchors must be paid in full. LIABILITY OF INSURER IN CASE OF PARTIAL LOSS OF SHIP OR

ITS EQUIPMENT

There is deducted from the cost of repairs one-third new for old” on the theory that the new materials render the vessel much more valuable that it was before the loss.

Title 2 FIRE INSURANCE

Sec. 167. 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. Q: What is fire insurance? A: It is a contract of indemnity by which the insurer for a stipulated premium, agrees to indemnify the insured against loss of, damage to, a property caused by hostile fire.

Allied lines

Q: What are allied lines? A: It protects against loss by lightning, windstorm, etc. but not only when such risks are covered by extension to fire insurance policies or under separate policies subject to the payment of additional premiums. There should be distinction between fire insurance alone and fire-and-extended coverage. Q: What is the nature of fire insurance? A: It is a contract of indemnity. Q: What is the concept of fire under the Code? A: Spontaneous combustion is usually a rapid oxidation. Fire is oxidation which is so rapid to produce either a flame or a glow. Under our jurisdiction, fire may not be considered a natural disaster or calamity since it almost always arises from some act of man, or by human means. It cannot be an act of God unless caused by some lightning or natural disaster or casualty not attributable to human agency. Q: What are the risks and losses covered? A: The scope, and coverage of insurance policy and the intention of the parties, as indicated by their contract controls.

LOSS OF PROFITS INSURANCE or BUSINESS INTERRUPTION INSURANCE

Q: What is loss of profits insurance or business interruption insurance? A: The attachment of a consequential loss from the standard fire insurance extends the coverage to such consequential losses.

KINDS OF INDIRECT LOSSES

Q: What are the kinds of indirect of losses? A:

1. Physical damage caused to other property which is not usually covered by the basis insurance policy.

2. Loss of earnings 3. Extra expense or additional expenditure or charges

incurred by insured following damage or destruction of buildings or contents by an insured peril.

NOTES ON INSURANCE



OCEAN MARINE v. FIRE POLICIES

Q: Distinguish marine and fire insurance policies? A:

OCEAN MARINE FIRE POLICIES

A policy of insurance on vessel engaged in navigation although it insures the vessel against fire risks only

Where the hazard is fire alone and the subject is an unfurnished vessel, never afloat for a voyage

Q: Why is distinction important? A:

1. In marine insurance, the rules on constructive total loss and abandonment apply but not in fire insurance

2. In case of partial loss of a thing insured for less than its actual value, the insured in a marine insurance policy is a co-insurer of the uninsured portion, while the insured may only become co-insurer in a fire insurance if expressly agreed upon by the parties.

Sec. 168. 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. Sec. 169. 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. chanrobles virtual law library Q: What are the requisites for an alteration in thing insured to entitle the insurer to rescind the contract? A:

1. The use or condition of the thing is specifically limited or stipulated in the policy

2. Such use or condition as limited by the policy is altered

3. The alteration is made without the consent of the insurer

4. The alteration is made by means within the control of the insured

5. The alteration increases the risk. The 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.

INCREASE OF RISK OR HAZARD IN GENERAL

There is an implied promise or undertaking on the part of the insured that he will not change the premises or character of the business carried there so as to increase the risk of loss by fire. An increase of hazard takes place whenever the insured property is put to some new use, and the new use increases the chance of loss. The increase should be substantial in character Q: Give alterations which will avoid the policy. A:

1. Where the risk of loss is increased 2. Where the increase no longer exist at the time of

loss Q: What are the alterations which will not avoid the policy? A:

1. Where the risk of loss is not increased 2. Where questioned articles required by insured’s

business 3. Where insured property would be useless if

questioned acts were prohibited. Q: What are the effects where the insured has no control or knowledge of alteration? A:

1. The insurer’s liability is not affected 2. Insured’s knowledge is presumed in case of act of

the insured’s tenant

Sec. 170. 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. Sec. 171. If there is no valuation in the policy, the measure of indemnity in an insurance against fire is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in the condition in which at the time of the injury; but if there is a valuation in a policy of fire insurance, the effect shall be the same as in a policy of marine insurance.

NOTES ON INSURANCE



If the policy does not contain any prohibition limiting the use or condition of the thing insured, an alteration in said use or condition does not constitute a violation of the policy

Sec. 172. 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 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. Q: What is the measure of the indemnity under an open policy? A: The insured is entitled only to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss by a preponderance of evidence. The liability of the insurer shall in no event exceed what it would cost the insured to repair, or replace the thing insured In case of personal property having a market value which can readily be determined, such market value may be applied in determining the actual loss sustained.

VALUATION IN FIRE INSURANCE POLICY

Q: What is the effect of valuation in a fire insurance policy? A:

1. Valuation is conclusive as to parties 2. In case of total loss, the insured can recover the

whole amount and in case of partial loss, the full amount of the partial loss.

3. If the thing is insured under 2 or more policies, each policy shall contribute pro rata to the payment of such whole or partial loss.

Q: Is the insured presumed to be a co-insurer under fire policies in the absence of stipulation? A: No.

CO-INSURANCE CLAUSE IN FIRE INSURANCE Q: What is a co-insurance clause in fire insurance policies? A: It is a clause requiring the insured to maintain insurance to an amount equal to the value or specified percentage of value of the insured property under penalty of becoming co-insurer to the extent of such deficiency. Q: What is the reason for this clause? A: To prevent the property owners from taking out such small amount of insurance and thereby reducing the premium payment and thereby increasing the rates of premium for all.

“OPTION TO REBUILD” CLAUSE Q: What is an option to rebuild clause? A: A stipulation concerning the repairing, rebuilding, or replacing of buildings or structures wholly or partially damaged or destroyed. The 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. Sec. 173. 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. NOTE: After the loss, the insured may pledge, hypothecate, or transfer a fire insurance policy or rights thereunder even without the consent of, or notice, to insurer.

Title 3 CASUALTY INSURANCE

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer's liability insurance, motor vehicle liability insurance, plate glassinsurance, burglary and theft insurance, personal accident and health insurance as

NOTES ON INSURANCE



written by non-life insurance companies, and other substantially similar kinds of insurance. Q: What is a casualty insurance? A: It includes all the forms of insurance against loss or liability arising from accident or mishap excluding certain types of loss or liability which are not within the scope of other types of insurance such as:

a. Marine b. Fire c. Suretyship d. Life

Q: What are the risks or losses covered? A:

1. Accident- Violent mishap proceeding from an unknown or unexpected cause

2. Burglary, robbery or theft not includes because of the opportunity to defraud the insurer (moral hazard)

Q: What are the 2 general divisions of casualty insurance? A:

1. Insurance against specified perils which may affect the person or property of the insured such as personal accident, robbery, theft, damage to or loss of motor vehicle, insolvency of debtors, defalcation of employees

2. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to others for damage to their property such as workmen’s compensation, motor vehicle liability, professional liability, products liability

LIABILITY INSURANCE

Q: What is liability insurance? A: A contract of indemnity for the benefit of the insured and those in privity with him, or those to whom the law upon the grounds of public policy extends the indemnity against liability. Q: What is the liability insurable in case of quasi-delict or non-fulfillment of contract? A: It is only civil injury and not a felony or crime which is a public injury.

Q: What is the liability insurable in case of criminal negligence? A: It is criminal but also insurable on the ground that they are incidental. But liability consequences of deliberate criminal acts are not insurable. Q: What is the insurable interest in liability insurance? A: The insurable interest is to be found in the interest the insured has in the safety of persons who may maintain, or in the freedom from damage of property which may become the basis of suits against him in case of injury or destruction. Q: When is liability insurance in policy payable? A: The insurer assumes the obligation of paying the injured third person from the moment that the insured becomes liable to third persons. Q: May the injured person sue the insurer of party at fault? A: It depends on whether the contract insurance is intended to benefit third persons also or only the insured. Q: Explain the tests. A: 1. Indemnity against third party liability- the third persons

can sue directly the insurer upon the occurrence of the injury or event upon which the liability depends. It becomes operative as soon as the liability of the person indemnified arises irrespective of whether or not he has suffered actual loss.

2. Indemnity against actual loss or payment- third persons cannot proceed against insurer, the contract being solely to reimburse the insured for liability actually discharged by him through payment to third persons. Prior payment by insured is necessary in order that obligation of insurer may arise.

Q: What is the basis of the insurer’s liability? A:

1. Contract of insurance 2. Sum limited in the contract

Q: What is accident insurance? A: It reimburses the insured in an accident Q: What is health insurance? A: It reimburses the insured for pecuniary loss arising out of disease-related illness.

NOTES ON INSURANCE



NOTE: Accident and health insurances are frequently combined. Q: Who has the burden of proof? A: In accident insurance, the insured’s beneficiary has the burden of proof Q: What is accident or accidental as used in accident policy? A: It is an event that takes place without one’s foresight or expectation or an event which proceeds from an unknown cause or unusual effect of unknown cause and not expected. It may include causes attributable to fault or negligence. Q: What is the rule as to death or injury resulting from accidental or accidental means? A: General rule is that death or injury does not result from accidental means within the terms of an accident policy if it is the natural result of the insured’s voluntary act, unaccompanied by anything unforeseen except the death or injury. Q: What is the rule as to suicide and willful exposure to needless peril? A: It will ordinarily negate the accidental character of whatever followed from the known danger. Suicide is the positive act of ending one’s life The willful exposure on the other hand indicates reckless risking of it that is almost suicide in intent. Q: What do you mean by intentional? A: It implies the exercise of the reasoning faculties, consciousness, and volition.

No action clause Q: What is the effect of no action clause in policy of liability insurance? A: It cannot prevail over the Rules of Court aimed at avoiding multiplicity of suits.

Title 4

SURETYSHIP Sec. 175. A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206. Q: What is suretyship? A: It is an agreement whereby one undertakes to answer for the debt, default, or miscarriage of another. Q: What are the undertakings within the scope of suretyship? A:

1. Official recognizes 2. Stipulations, bonds, undertakings by any company by

virtue of Act. 536 Sec. 176. The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (As amended by Presidential Decree No. 1455). Q: What is the nature of the liability of surety? A: It is solidary. It is limited to the amount of the bond. It is contractual which means it is determined in relation to the principal contract. Q: Distinguish between suretyship and property insurance. A:

SURETYSHIP PROPERTY INSURANCE

Accessory contract Principal contract in itself

There are 3 parties: a. Surety b. Principal debtor c. Creditor

2 parties: a. Insurer b. insured

It is more of credit accommodation

Contract of indemnity

Surety is entitled to reimbursement from principal and his guarantors for loss it may suffer under the contract

No right of recovery except when the insurer is entitled to subrogation

NOTES ON INSURANCE



A bond can only be cancelled with the consent of olbligee or by Court of competent jurisdiction

May be cancelled unilaterally

Requires acceptance of oblige before it becomes valid

Does not need the acceptance of any third party

Risk-shifting device Risk distributing device

Q: Distinguish suretyship and guaranty A:

GUARANTY SURETYSHIP

Collateral undertaking Surety is an original promissory

Surety is an original promissory

Surety‐primarily liable

Guarantor binds himself to pay if the principal cannot pay

Surety undertakes to pay if principal does not pay

Insurer of solvency of debtor Insurer of the debt

Guarantor can avail of the benefit of excussion and division in case creditor proceeds against him

Surety cannot avail of the benefit of excussion and division

Secondarily or subsidiarily liable

Primarily liable

Is not bound to take notice of the non-performance of his principal

Ordinarily led to know every default of his principal

Often discharged by the mere indulgence of the creditor of the principal, and is usually not liable unless notified of the default of the principal

Will not be discharged either by mere indulgence of the creditor of the principal or by want of notice of the default of the principal, no matter how much he may be injured thereby

Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety: Provided, That if the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect only reasonable amount, not exceeding fifty per centum of the premium due thereon as service fee plus the cost of stamps or other taxes imposed for the issuance of the contract or bond: Provided, however, That if the non-acceptance of the bond be due to the fault or negligence of the surety, no such service fee, stamps or taxes shall be collected.

In the case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of competent jurisdiction, as the case may be. chanrobles virtual law library Q: What are the rules on payment of premiums? A:

1. the premium becomes a debt as soon as the contract of suretyship or bond is perfected and delivered to obliogor

2. the contract of suretyship or bonding shall be valid and binding unless and until the premium has been paid

3. where the obligee has accepted the bond, it shall be valid and enforceable notwithstanding that the premium has not been paid

4. if the contract of suretyship or bond is not accepted by or filed with obligee, the surety shall collect only reasonable amount

5. if the non-acceptance of the bond de due to the fault of negligence of surety, no service fee, stamps, or taxes imposed shall be collected by surety

6. In the case of continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract is cancelled.

TYPES OF SURETY BONDS

Q: What are the types of surety bonds? A:

1. Contract bonds- connected with construction and supply contracts a. Performance bonds b. Payment bonds- payment of laborers and

material men 2. Fidelity bonds

a. Industrial bond-required by private employers to cover loss through dishonesty of employees

b. Public official bond 3. Judicial bond

a. Injunction bonds b. Attachment bonds c. Replevin bonds d. Bail bonds e. Appeal bonds

Sec. 178. Pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship.

NOTES ON INSURANCE



Pertinent provision from NCC

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a)

Title 5 LIFE INSURANCE

Sec. 179. Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith. Sec. 180. An insurance upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life. Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purpose of this Code. In the absence of a judicial guardian, the father, or in the latter's absence or incapacity, the mother, or any minor, who is an insured or a beneficiary under a contract of life, health or accident insurance, may exercise, in behalf of said minor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest of the minor in the particular act involved does not exceed twenty thousand pesos. Such right may include, but shall not be limited to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the policy, and giving the minor's consent to any transaction on the policy. Q: What is life insurance? A: It is an insurance payable on death of a person or on his surviving a specified period, or otherwise, contingently on the continuance or cessation of title. It is also a mutual agreement by which a party agrees to pay a given sum of money on the happening of a particular event contingent on the duration of human life, in consideration of the payment of a smaller sum immediately, or in periodical payments by other party.

Q: Who are the parties involved in a policy of life insurance? A:

1. Owner of the policy- one who has the power to name or change the beneficiary or to assign the policy

2. The person whose life is the subject of the policy, also known as the cestui que vie

3. The beneficiary to whom the proceeds are paid Q: What is the nature of life insurance? A:

1. It is not one of indemnity. 2. Liability is absolutely certain 3. Amount of insurance generally without limit 4. Life policy is a valued policy 5. Direct pecuniary loss not required.

LIFE INSURANCE v. FIRE AND MARINE INSURANCE

Q: Distinguish life insurance from fire and marine insurance. A:

LIFE INSURANCE FIRE AND MARINE INSURANCE

Not a contract of indemnity but a contract of investment

Contracts of indemnity

Always regarded as a valued policy

May be: a. Open b. Valued

May be transferred or assigned to any person even if he has no insurable interest

The transferee or assignee must have the insurable interest in the thing insured

The consent of the insurer is not essential to the validity of the assignment of a life policy unless expressly required

Such consent in the absence of waiver by the insurer is essential in the assignment of a fire or marine insurance policy

Insurable interest in the life or health of the person insured need not exist after the insurance takes effect or when the loss occurs

The insurable interest in the property insured must exist not only when the insurance takes effect but also when the loss occurs

Insurable interest need not have any legal basis

Insurable interest must have legal basis

The contingency that is contemplated is certain event, the only uncertainty being the time when it will take place

The contingency insured against may or may not occur

The liability of the insurer to make payment is certain

Liability is uncertain because the happening of the peril is uncertain

Although may be terminated by insured, cannot be cancelled by the insurer,

May be cancelled by either party and is usually for a term of 1 year

NOTES ON INSURANCE



thus, usually a long-term contract

The loss to the beneficiary caused by the death of the insured can seldom be measured accurately

The loss can be measured accurately

The beneficiary is under no obligation to prove actual financial loss as a result of death of the insured in order to collect the insurance

The insured is required to submit proof of his actual pecuniary loss as a condition precedent to collecting in insurance

Q: May a of insurance policy be attached and sold at public auction? A: No (Rule 39. Sec. 12). All moneys, benefits, privileges, or annuities accruing or in any manner growing out of any life insurance are exempt from execution regardless of the amount of the annual premiums paid. Q: In what instances can the exemption be applied to accident insurance? A: When accident insurance regarded as life insurance- the risk insured is the death of the insured by accident, then such accident insurance may also be regarded as life insurance. Q: Who has the burden of proof? A: In accident insurance, the insured’s beneficiary has the burden of proving that the cause of death is due to the covered peril. Once that fact is established, the burden of proof then shifts to the insurer to show any excepted peril that may have been stipulated by the parties.

KINDS OF LIFE INSURANCE POLICIES

Q: What are the kinds of life insurance policies? A: 1. ordinary life policy- the insured is required to pay a

certain fixed premium annually or at more frequent intervals throughout his entire life and the beneficiary is entitled to receive payment under the policy only after the death of the insured. Also known as whole life or regular life or straight life or cash-value insurance

2. limited payment life policy- premiums are payable only during a limited period of years, usually 10, 15 or 20. It is also payable only at the death of the insured. It is also known as limted premium insurance policy.

3. Term insurance policy- provides coverage only if the insured dies during a limited period. Also known as temporary insurance.

4. Endowment policy- the insurer binds himself to pay a fixed sum to the insured if he survives for a specified

period or if he dies within such period, to some other person indicated.

SCOPE OF LIFE INSURANCE

Q: What is the scope of life insurance? A: The loss of earning power by persons results from:

1. Death 2. Injury 3. Illness 4. Old age 5. Loss of employment

KINDS OF DEATH

Q: What are the kinds of death from the economic standpoint? A:

1. Actual death- “casket death” 2. Living death- permanent disability 3. Retirement death- living beyond the period of

earning capacity represents this classification of death.

ALEATORY CONTRACT OF LIFE ANNUITY

Q: What is an aleatory contract of life annuity? A: The debtor binds himself to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income.

Annuity Q: What is an annuity? A: Also called as the upside-down application of the life insurance principle. It is based on the notion that the purpose of the annuity is the scientific liquidation of an estate. Q: Distinguish annuity contracts from ordinary life policies. A:

ANNUITY CONTRACTS ORDINARY LIFE POLICIES

Insures against economic problems resulting from a long life rather than early death

NOTES ON INSURANCE



“transiency” “longevity”

The lump sum is paid to the insurer immediately and the annuitant receives the annuity payments as longs as he lives

Insured pays to the insurer an annuity and his beneficiary receives at the insured’s death the lump sum payment

More of an investment Indemnity

Provides protection from a substantial risk

Civil code provisions govern these contracts

Sec. 180-A. The insurer in a life insurance contract shall be liable in case of suicides only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period: Provided, however, That suicide committed in the state of insanity shall be compensable regardless of the date of commission. (As amended by Batasang Pambansa Blg. 874).

RULES ON SUICIDE

Q: What are the instances where the insurer is liable in case of suicide? A: 1. The suicide is committed after the policy has been in

force for a period of 2 years from date of its issue or of its last reinstatement

2. The suicide is committed after a shorter period provided in the policy although within the 2 year period

3. The suicide is committed in the state of insanity regardless of the date of commission, unless suicide is an excepted risk

Q: When is he not liable? A: 1. The suicide is not by reason of insanity and is committed

within 2 year period 2. The suicide is by reason of insanity but is not among the

risks assumed by the insurer regardless of the date of commission

3. The insurer can show that policy was obtained with the intention to commit suicide even in the absence of any suicide exclusion in the policy.

Sec. 181. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. Q: What if the assignment is used as a cloak to hide an illegal scheme?

A: The courts will not permit the process of assignment to be used as cloak to hide an illegal inetent to make contracts on human life. Sec. 182. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly required.

NOTICE TO INSURER OF TRANSFER

If the policy does not expressly require the insured to give notice of an assignment or transfer of the policy to the insurer, such notice is not essential to the validity of the assignment.

Sec. 183. 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.

MEASURE OF INDEMNITY UNDER LIFE POLICY

The extent of the amount of indemnity payable on death of the insured under a policy of insurance upon life or health is the amount fixed in the policy. There can be no exact pecuniary measurement of a person’s interest in his life or the life of another. The exception is when the person insures the life of another, as where a creditor insures the life of his debtor.

END

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