sundiang notes - insurance
TRANSCRIPT
-
- 1 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
1
MATTERS TO STUDY:
For purposes of the bar, study very well the following:
1. Insurable interest (most important)
2. The principle of indemnity, specially in property insurance
3. The principle of subrogation (Art. 2207, NCC)
4. The principle of utmost good faith
5. The principle of insurance as a contract of adhesion
CASE: ENRIQUEZ VS. SUN LIFE ASSURANCE CO.
FACTS: An application for life insurance was mailed. An acceptance was also
mailed by the insurer. Before the receipt of the acceptance letter, the
insured died.
HELD: Follow the Theory of Cognition. A contract is perfected upon knowledge
of the acceptance. There was no perfected contract since it was not shown
that the acceptance of the application ever came to the knowledge of the
applicant.
HISTORY:
1. Insurance Act (2427)
2. PD 612
3. PD 1460 - merely codified all the insurance laws of the Philippines;
date of effectivity - 11 June 1978
4. PD 1814 - amending certain provisions of the Insurance Code
5. BP 874
CONTRACT OF INSURANCE
A "contract of insurance" is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event.
It is an agreement, a contract. Hence, it must have all the essential
elements of a contract: consent, object, and cause or consideration.
What are the essential elements of a contract of insurance? There must be
a subject matter in which case there must be an insurable interest,
especially in property insurance. There must be the risk or the peril insured
against. Under the Code, the risk is any contingent and unknown event,
whether past or future, which may damnify a person having an insurable
interest can be insured against.
Insurable interest is a very important concept in insurance. There must be
a risk or peril insured against. There must also be the consent of the
contracting parties. As a rule, it is a voluntary contract. The only
exception is found in Chapter VI, the Compulsory Motor Vehicle Liability
Insurance. Those who have cars know this. You cannot register your vehicle
unless it is covered by this type of insurance.
- 1 -
-
- 2 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
2
But as a rule, insurance is a voluntary contract. So the parties must give
their consent freely; no vice of consent, like force, intimidation, undue
influence, mistake, violence, etc. Then, like any other contract, there must
be a meeting of the minds. It is a consensual contract; it is perfected by
mere consent. There is also an offer and an acceptance between the insurer
and the insured. These elements must concur before you have a contract of
insurance.
Who are the parties? The insured and the insurer. Who is the insurer? He
is the party who undertakes to indemnify the insured against loss, damage or
liability arising from an unknown or contingent event. The insured on the
other hand, is the party to be indemnified upon the occurrence of the loss.
Aside from being capacitated to enter into a contract, what other
qualifications must the insured posses? The law says under Sec. 7, he must
not be a public enemy. The law says anyone except a public enemy can be
insured against.
What does public enemy mean? To what does it refer? It refers to a country
with which the Philippines is at war and the citizens thereof. What is the
reason why, under the law, a public enemy cannot be insured against? The
reason is obvious. The purpose of war is to cripple the power & exhaust the
resources of the enemy. If the Code did not contain the aforementioned
prohibition, it could be insured to compensate by way of insurance after
having destroyed or crippled the resources of the enemy.
May a minor validly enter into a contract of insurance? Under the present
Code, the law by way of exception provides that a minor may enter into a
contract of life, health and accident insurance, provided the beneficiary is
among those mentioned under the law: the minor's estate, the parents, spouse,
children, siblings (Sec. 3[3]).
Consider, however, RA 6809, which reduced the minority age to eighteen. So
when the law speaks of a minor at least eighteen years of age, considering RA
said provision of the Insurance Code has been
correspondingly modified by said piece of legislation.
In other words, one who is eighteen (18) years of age is no longer a minor
under RA 6809. Therefore, a person who is eighteen years of age may enter not
only into a contract of life and accident insurance, but even property
6809, I believe that
insurance.
Suppose the insured is minor, below eighteen years of age, say seventeen
and he enters into a contract of property insurance. The insurance company
issues a policy. There is a loss by fire. Can the insurance deny the claim on
the ground that the insured is a minor? May the insurer raise as a defense
the minority of the insured, and therefore consider the contract void? NO.
Recall the law on contracts under the Civil Code. Under the law, a contract
entered into by a minor is not void, it is only voidable, therefore valid
until annulled (Art. 1390 [1], NCC)
Furthermore, we have that law on contracts, that when one of the parties
is incapacitated, the capacitated party cannot invoke as a defense the
incapacity of the other party. In other words, in the absence of
misrepresentation on the part of the minor, the insurer will be liable
despite the fact that the insured is a minor. We can even apply the principle
of estoppel. The insurer is estopped from denying the claim.
- 2 -
-
- 3 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
3
How about a married woman? Can she enter into a contract of insurance
without the consent of her husband? YES provided that the insurance is on her
life or that of her children (Sec. 3, par. 2, ICP)
The law does not mention property insurance. Under the Civil Code and
under the present Family Code, with respect to the question of whether a wife
may engage in any trade, occupation or profession without the consent of the
husband, the rule is YES, the wife can do so. All that the wife can do is to
object on serious moral grounds and provided that his income is sufficient to
support the family in accordance with its social standing.
There are many important concepts referring to a contract of insurance.
The most important ones are:
1. it is a personal contract
2. it is a contract of adhesion
CHARACTERISTICS OF A CONTRACT OF INSURANCE
1. It is an aleatory contract
Art. 2010, NCC - by an aleatory contract, one of the parties or both
reciprocally bind themselves to give or to do something in
consideration of what the other shall give or do upon the happening of
an event which is uncertain or which is to occur at an indeterminate
time.
Event which may or may not happen - fire
Even that will happen although we do not know when - death (in so far
as the insurer is concerned, the even is conditional, it may or may not
happen)
2. It is a personal contract
that the insurer considered
See Sec. 20
The law presumes the personal
qualifications of the insured.
3. It is a contract of indemnity (except life & accident insurance where
the result is death)
In so far as property insurance is concerned. The purpose of the
insurance contract is to indemnify. Therefore, the amount to be
recovered should never be more than the loss. Otherwise, the contract
becomes an instrument for unjust enrichment (solutio indebiti).
4. It is a contract of adhesion
A contract which does not result from the negotiation of the parties.
In insurance, there is a policy, normally in printed form. Normally,
the applicant of the insured has no participation in the preparation of
the contract. He may either accept or reject the contract.
- 3 -
-
- 4 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
4
In transportation law, there is a case involving a plane ticket which
the Supreme Court held as a contract of adhesion. Will it bind the
passenger although he has not read it? Yes, because while it is a
contract of adhesion, it is not a void contract. It follows that he is
bound by the provisions thereof. That is also the case of a contract of
insurance.
The situation is different in a contract of sale where the parties
normally would have a say on the terms thereof, the manner of payment,
the manner of delivery, who should shoulder the expenses, etc. This
does not apply in a contract of insurance.
In a contract of insurance, the policy is in written form presented to
the applicant. He either adheres (that is why it is called a contract
of adhesion) or rejects the contract. Therefore, as a result, being a
contract of adhesion, the rule is: should there be any doubt, ambiguity
or obscurity, in any of the terms and stipulations of the contract, the
same shall be interpreted strictly against the insurer and liberally in
favor of the insured.
There is a similar provision of the Civil Code, under Art. 1377.
Art. 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
Applying the aforesaid provision to a contract of insurance, who is
that party? The insurer. The party who prepared the contract. Therefore,
should there be any doubt, any ambiguity or obscurity, in any of the
terms and conditions of the contract, the rule to follow is: the same
shall be interpreted strictly against the insurer and liberally in
favor of the insured.
To illustrate: regarding the so-called authorized driver clause of the
policy, who is deemed to be an authorized driver under the policy? In a
contract of insurance, should there be an accident, and the driver at
the time of the accident is not an authorized driver within the meaning
of the policy, there can e no recovery.
Under the policy, who is an authorized driver?
1. the insured
2. any person driving upon the insured's order with his permission
provided the person driving is authorized to drive the motor vehicle
in accordance with the licensing laws, rules, or regulations and is
not disqualified from driving the same by order of a court law, or
any rule or regulation on that behalf.
Simply that means: if the one driving is other than the insured:
1. he must be authorized or permitted by the insured.
2. he must be qualified to drive in accordance with, say, the Land
Transportation Code, and other rules and regulations, must not have
been disqualified by any court of law, rule or regulation in that
behalf.
According to the Code, however, the requirement that the person driving,
must be duly authorized to drive in accordance with the licensing law,
rules and regulations, and is not disqualified from driving the said
- 4 -
-
- 5 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
5
motor vehicles by any order of a court of law, etc., applies only if
the person driving is other than the insured.
So, in the case of Palermo, and some other cases, at the time of the
accident, the one driving his car was the insured himself. He had an
expired driver's license. The insurance company denied the claim
involving the authorized driver clause. According to the insurance
company, the under the policy, the insured as driver was not authorized,
hence, the insurer was not liable.
The Supreme Court said NO. Because at the time of the accident, the one
driving the car was the insured himself. The foregoing requirement does
not apply.
In the case of Perla Compania de Segurus vs. CA, 208 scra 478, the
insured car was parked somewhere in Makati. It was car napped. It was
being driven by someone who had an expired license before it was stolen.
The insurance company denied the claim invoking the authorized driver
clause.
The Supreme Court disagreed. In the first place, what should apply is
the theft clause, not the authorized driver clause. The fact that the
person driving the car before it was stolen did not have a license or
had an expired driver's license is of no moment. The clause that should
apply is the theft clause.
In the case of Villacorta vs. Insurance Commission, 100 SCRA 467, the
insured car was involved in an accident and was brought to the repair
shop. Necessarily the owner would have to entrust the keys of the car
to the owner of the shop or the authorized representative, so the car
after the repair had been completed could be road-tested. But some of
the employees of the motor shop used the car in a joy-ride around
Manila. Unfortunately, it was involved in an accident, again the
insurance company denied the claim invoking the authorized driver
clause.
The Supreme Court disagreed. When the insured entrusted the keys to the
owner of the repair shop, there was an implied authority given by the
insured either to the owner of the shop or the latter's employees to
drive the car. Secondly, in that case, what should apply is not the
authorized driver clause but the theft clause of the policy.
EXCEPTION TO THE RULE: tourists, however, who have an expired xxx of 90
days is not under the law, an authorized driver unless he secures a
Philippine Driver's License.
REMEMBER -
You apply the rule that should there be any doubt, ambiguity or
obscurity, in any of the terms and stipulations of the contract, the
same shall be interpreted strictly against the insurer and liberally in
favor of the insured, only when there is doubt, ambiguity or obscurity,
in any of the terms and stipulations of the contract.
But if the terms, conditions, and stipulations are clear, there is no
room for interpretation.
- 5 -
-
- 6 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
6
When the law or contract is clear, no matter how harsh it may be, then
the courts will have to enforce the law or contract. Courts are not
supposed to make contracts for the parties. That is also true with the
contract of insurance.
Why don't we refer or apply to the provisions of the Civil Code when we
talk about the contract of insurance? What laws govern the contract of
insurance?
Art. 2011, CC: The contract of insurance is governed by special
laws. Matters not expressly provided for in such special laws shall
be regulated by this Code.
Primarily, a contract of insurance is governed by special laws (PD 1460,
as amended). In the absence of any applicable provision of the special
law, the provisions of the Civil Code, particularly the provisions on
Obligations and Contracts shall be applied.
In the absence of any applicable provisions in both, then decisions and
doctrines prevailing in the United States may be applied. Why? Because
primarily, our law on insurance is of American origin, patterned from
the insurance laws of California and New York.
REMEMBER, in resolving insurance problems, apply the following in the
order they are mentioned:
1. Special Laws
2. Civil Code (Art. 2011)
3. American decisions and doctrines
5. It is based on the principle of subrogation (applicable only to
property insurance)
Art. 2027, CC: If the plaintiff's property has been insured, and he
has received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss
or injury.
Subrogation is essentially a process of substitution, where the
subrogee, in this case, the insurer, steps into the shoes of the
insured. Actions or rights pertaining to the insured will be
transferred to the insurer.
For example, you have a car insured under a comprehensive policy. It
was involved in an accident. It was the fault of the other party.
Damage: P30,000.00. What are your remedies? Either you recover from the
insurer or from the party at fault. You cannot recover from both. Why
not? Because a contract of insurance is a contract of indemnity. It is
not to be used as an instrument for profit or gain.
Suppose you decide to recover from the insurer, but the insurer pays
you only P25,000.00. With respect to that amount, there will be
subrogation. It is now the insurer who can recover this amount from the
- 6 -
-
- 7 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
7
party at fault. In the case of Malayan Insurance Company, the court
held that subrogation is a normal incident of indemnity insurance. It
inures to the insurer without the need of formal assignment or an
express stipulation in the policy to that effect. The moment the
insurer pays the insured, the insurer becomes a subrogee in equity.
May the insured recover from the party at fault? Art. 2207 of the Civil
Code says YES, because the law says, "if the amount paid by the
insurance company does not fully recover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury."
Can the insurer's right of subrogation be destroyed? Yes. The insurer's
right of subrogation can be destroyed when the insured releases the
other party at fault from liability. Why? Because by releasing the
other party, the insured destroys or defeats the insurer's right of
subrogation. Hence, the insurer will deny the claim of the insured.
In other words, it is the obligation of the insured to preserve at all
times that right of recovery which belongs to him, but which will
eventually be transferred to the insurer by way of subrogation. That is
a condition in the insurance policy.
How else can the right of subrogation be destroyed or defeated? When
the insurer pays the insured even if the cause of the loss was not the
risk or peril insured against.
What factors must concur before there can be recover in property
insurance?
1. the insured must have an insurable interest in the subject matter;
2. that the interest must be properly covered by the policy;
3. there must be a loss; and
4. as a rule, the loss must be proximately caused by the peril insured
against.
ILLUSTRATIONS:
1. A owns a house worth P1M. He has an insurable interest in the house.
But B insured the house in his name. Should there be a loss, can B
recover? No. Because he has no insurable interest in the house. Can
A recover? No. Because while A has an insurable interest in that
house, such interest was not covered by the policy, as it was B who
insured the house.
2. In the same example, A insured the house against fire for one year.
During the year, there was no fire, there was no loss. Can there be
a refund of the premiums paid? No. there can be no recovery. What
does the insured get? What is the consideration?
The consideration on the part of the insurer is the premium paid by
the insured. How about the insured, what is its consideration? The
protection, the promise, the undertaking on the part of the insurer
to indemnify the insured in case of loss. That is the consideration
on the part of the insured.
- 7 -
-
- 8 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
8
So it is not correct to say that should there be no loss within the
term of the policy, there is no cause or consideration. There was a
consideration. If there is no cause or consideration, even under
the law on contracts, the contract is void. Or where the cause or
consideration is illicit or unlawful, the contract is also void.
Art. 1411, CC: When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. xxx
INSURABLE INTEREST
When is a person said to have an insurable interest in a subject matter?
Why does the law require the insured to have an insurable interest?
If the insured has no insurable interest in the subject matter, the
contract becomes a wagering contract, on the theory that he has nothing to
lose and everything to gain.
While it is true that the insurance is a conditional contract based on
chance, it is not the same as a wagering contract. The law does not authorize
it under Sec. 4, 16 and 25.
When is the insured deemed to have an insurable interest? A person has an
insurable interest in the subject matter if he is so connected, so situated,
so circumstanced, so related, that by the preservation of the property he
shall suffer pecuniary loss, damage or prejudice.
How do we determine whether a person has an insurable interest in the life
of another person, without considering the enumeration under Sec. 10? There
is insurable interest when that person has an interest in the preservation of
life of another despite the insurance, rather than in its destruction because
of the insurance.
In other words, could the beneficiary be more interested in terminating
that life so that he could recover from the insurer, or could he be more
interested in preserving that life, despite the insurance, then he has
insurable interest in that life.
In whose life or health does a person has an 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.
The explanations for (a) and (b) above are self-explanatory.
- 8 -
-
- 9 - REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
9
For (c) above, this refers to a case where the person in question is under
obligation either for payment of money or to render services. The movie
companies for instance, have insurable interest in the life/lives and health
of the actors and actresses who are under contract with them. Why? Because
these actors and actresses are under obligation to render services to said
movie companies. Without these actors and actresses, these movie companies
are liable to close down.
With respect to the obligation for the payment of money, there is the
creditor-debtor relationship. A creditor has insurable interest in the life
of the debtor, but only to the event of the obligation. For instance, the
debtor owes the creditor of P1M in the form of a loan. Can the creditor
insure the life of the debtor? Yes. Because the debtor is under obligation to
pay money to the creditor. The death of the debtor will either delay or
prevent the payment of the loan. But although the creditor can insure the
life of the debtor, the insurance is limited to the amount of the loan which
is P1M.
QUERY:
In the example above, suppose C (creditor) insures the life of D (debtor)
for P1M. Before the death of D, the loan had been fully paid by him. Can D
recover? No, because he was not a party to the contract (Art. 1311, CC). An
insurance procured by the creditor over the life of the debtor for the
benefit of the creditor will not inure to the benefit of the debtors. The
creditor is not acting as an agent. Can C recover? No, because he no longer
had insurable interest on the life of D at the time of D's death. Who can
recover? Nobody.
Suppose it was D who insured his own life and made C as the beneficiary,
but before D's death, the loan had been paid in full, this time who can
recover? The heirs or legal representative of D.
Try to consider the difference between those two different situations. An
insurance procured by the creditor on the life of the debtor in the name or
for the benefit of the creditor will not inure to the benefit of the debtor.
The nature of the life insurance partakes of the nature of a contract of
indemnity because, unlike in property insurance, in life insurance, as a rule,
there is no limit. That is one of the distinctions between life insurance and
property insurance. You can insure your own life for as much as you wish,
with as many insurance companies as you like, provided you pay the premiums.
In property insurance, on the other hand, there is a limit. And that is the
extent of the insurable interest. Under Sec. 14, for a person to have
insurable interest in property, he need not be the owner thereof.
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.
- 9 -
-
- 10 - REVIEWER IN INSURANCE LAW 10
As lectured by Dean Jose R. Sundiang
Aside from an owner of a property, who else can have an insurable interest
in such property? A lessee, among others. In order to ascertain whether or
not a person has an insurable interest in property subject matter, the test
to be applied is Sec. 17.
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.
In the event of loss or injury to the property, will he be damnified? Will
he suffer any loss, damage or prejudice? If the answer is YES, then he has
insurable interest.
In the sale of property, the vendor, prior to actual delivery, has an
insurable interest in the property. In sale with a right to repurchase (pacto
de retro), within the period of redemption, the vendor a retro has an
insurable interest in the property because he still has the right of
redemption.
Although you should recall how is ownership of the thing sold transfers to
the vendee or buyer. That is important for determining for instance, the
issue of who should bear the loss, because of the principle or res perit
domino.
In transfer by delivery, tradition, actually or constructively, it is not
the perfection of the contract, nor the payment of the price, but the
delivery, which will transfer ownership to the buyer. So pending delivery,
despite perfection or even payment of the price, as a rule, then vendor is
still the owner. The vendee, of course, under Arts. 1163-1165, CC, can demand
delivery. He has a right. So in effect, both the vendor and the vendee have
insurable interest in property subject matter.
With respect to a stockholder of a corporation, does he have insurable
interest in the corporate assets and property? The rule in corporation law is
that a corporation has a personality distinct and separate from those of its
stockholders. Hence, any property of the corporation is not property of its
stockholders. Such property belongs to the corporation as a distinct and
separate entity. But a stockholder has an inchoate interest to the extent of
his shares or subscription in corporate assets. To that extent, a stockholder
has insurable interest in the property of a corporation.
Going back to life insurance, do you have an insurable interest in the
life of your girlfriend? No. Mere relationship is not enough to grant
insurable interest in a person party to such relationship. Unless she depends
on you for support.
What about a corporation, does it have an insurable interest in the life
of its janitor? No. Even if the janitor is under obligation to render
services to the corporation, death of the janitor cannot bring loss or
prejudice to the corporation. But does a corporation have an insurable
interest in the life of its president? Yes. Death of the president will mean
loss or prejudice to the corporation itself.
Do you have an insurable interest in the life of your lecturer? Is he not
under obligation to render service to you (deliver lectures)? Or is it the
school which has an insurable interest in the life of the lecturer? No.
- 10 -
-
- 11 - REVIEWER IN INSURANCE LAW 11
As lectured by Dean Jose R. Sundiang
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.
These are the possible situations -
You have a debtor who owes the creditor P2M. There is a principal contract
of loan, which is secured by a real estate mortgage of a house and lot, and
the house is worth P3M.
Who has an insurable interest in the house and how much? Both the
mortgagor and the mortgagee have separate and distinct interest in that house.
Why the mortgagor? Because he is the owner.
Will the fact that it is mortgaged to the creditor secure a loan of P2M
not diminish or reduce the insurable interest of the mortgagor in the house?
Should not the loan of P2M be deducted from the value of the house which is
P3M, making the mortgagor's insurable interest in the house only up to the
extent of P1M?
No. Despite the mortgage, the mortgagor's interest will be up to the value
of the house. Why? Because -
1. Under the law on Credit Transactions, ownership is not transferred
to the mortgagee, and
2. Loss of the house will not mean the extinguishment of the loan.
Under the law on Contracts, while the extinguishment of the principal
contract will extinguish the accessory contract, the extinguishment of the
accessory contract will not extinguish the principal contract. The rule is:
accessory follows the principal.
Should the house be lost, such loss will not necessarily mean the
extinguishment of the loan.
The loan will only become an unsecured obligation. Therefore, the
mortgagor's interest in the house remains.
How about the creditor, who is not the owner, will he have an insurable
interest in the house? Yes, because by the loss or destruction thereof shall
prejudice the obligation will become unsecured to the extent of the loan of
P2M. Both mortgagor-debtor and mortgagee-creditor have separate and distinct
interest in the said property.
SITUATION NO. 1:
- 11 -
-
- 12 - REVIEWER IN INSURANCE LAW 12
As lectured by Dean Jose R. Sundiang
D insures the house for P5M against fire in his own name, for his own
interest only. Nothing is mentioned about the interest of C. The house was
destroyed by fire. Who can recover and how much?
Can C recover? No, because he is not a party to the contract of insurance.
Can D recover? Yes. How much? Only P3M although he insured it for P5M. Why
only P3M? Because insurance is a contract of indemnity.
If he were allowed to recover P5M but the property is worth only P3M, D
would be making a profit. That would encourage arson.
While C cannot recover directly from the insurance company, he shall,
however, hold a lien over the proceeds of the policy under Art. 2127, CC.
SITUATION NO. 2:
C insures the house for P2M against fire in his own name, for his own
interest. Nothing is mentioned about D's interest. The house is completely
destroyed by fire. Who can recover?
Only C, because D is not a party to the contract of insurance. If the
insurance company indemnifies C, the amount of P2M, will such payment
extinguish the loan?
No. There will be subrogation. The insurer, after indemnifying C can
recover from D. There will be a change of creditors.
SITUATION NO. 3:
What is contemplated under Sec. 8 is where D insures the property in his
name, for his interest, but with a stipulation in favor of C.
The following are the consequences:
1. D is still the real party in interest, he does not cease to be a
party to the contract.
2. Any act of D which will otherwise avoid the policy will have the
same effect.
Suppose the policy contains a stipulation that there should be no storage
of flammable materials like gasoline. In violation thereof, D, the insured,
stores gasoline. This is an act of the insured, which under the policy,
could avoid it. Despite the "loss payable clause" in favor of the creditor,
that will avoid the policy.
Suppose, the insurance was for P3M and there was a total loss, who can
recover and how much?
C cannot recover from the insurer because at the time of the loss, he no
longer had any insurable interest in the property.
Suppose, there was no payment, who can recover and how much?
- 12 -
-
- 13 - REVIEWER IN INSURANCE LAW 13
As lectured by Dean Jose R. Sundiang
C can recover P2M and D, 1M. This time the loan is extinguished. There
will be no subrogation. This is what we call "loss payable clause."
PROBLEM:
In life insurance, is it necessary for the beneficiary to have an
insurable interest in the life of the insured?
It depends. Where a person insures his own life, he can, as a rule,
designate anybody, even a complete stranger, as the beneficiary. That
beneficiary need not have an insurable interest in the life of the insured.
He can designate anybody subject only to the exceptions under Art. 739, CC,
in relation to Art. 2012, CC.
"Art. 739. The following donations shall be void:
1. Those made b/n persons who were guilty
concubinage at the time of the donation;
2. Those made b/n persons found guilty of the same criminal
offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants 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."
of adultery or
"Art. 2012. Any person who is forbidden from receiving any donation
under Art. 739 cannot be named beneficiary of a life insurance policy
by the person who cannot make any donation to him, according to this
article."
Simply, one who cannot receive any donation under Art. 739, cannot be
named beneficiary in the life insurance policy by the person who cannot
give any donation.
Reason behind the law: to prevent an indirect violation or circumvention
of the law.
Proceeds of a life insurance policy partakes of the nature of a donation
to the beneficiary. Act of liberality.
CASE: INSULAR LIFE VS. EBRADO
FACTS: A married man insured his life and designated his mistress as
beneficiary. When he died, both the wife and the mistress filed their
respective claim with the insurance company.
The insurance company went to the court by way of interpleader.
ISSUE: Who should recover, the wife or the mistress?
HELD: The mistress could not recover because of Art. 739 and Art. 2012. The
wife could not recover either because she was not a party to the contract;
neither was there a stipulation in her favor. The proceeds would go to the
estate of the deceased.
- 13 -
-
- 14 - REVIEWER IN INSURANCE LAW 14
As lectured by Dean Jose R. Sundiang
As a rule, when a person insures his own life, he can designate anybody as
his beneficiary. However, when a person insures the life of another, he must
have an insurable interest in that life. Apply Sec. 10. One cannot just
insure the life of anybody and make himself the beneficiary. He must have an
insurable interest in that life.
In property insurance, however, the insured MUST always have an insurable
interest in the subject matter.
In the case of a mortgage property, the interest of the mortgagor is up to
the extent of the value of the property. The only exception is the bottomry
loan.
The nature of a bottomry loan is that the payment of the loan is
conditional, subject to the safe arrival of the vessel at the port of
destination.
PROBLEMS -
Q: The father insured his life and made his son the beneficiary. Later, the
father discovered that his son was a drug addict. So he wrote to the
insurance company asking for a change of beneficiary, from his son to his
wife. The father died and the son filed a claim with the insurance company,
claiming that he, having been named by his father as the beneficiary in the
policy, he acquired a vested right or interest in the proceeds of the
insurance policy. Is the contention of the son tenable?
A: Under Sec. 11, which reversed the provisions of the old law, the rule now
is that the designation is presumed to be revocable. The rule is that the
insured can always change the beneficiary named in the policy, unless he
expressly waives that right in the policy.
Q: Can the beneficiary apply the vested interest rule in the policy?
A: If the designation is irrevocable, like for instance, when there is an
express waiver by the insured in the policy. The beneficiary, in this case,
acquires a vested interest in the policy of which he cannot be deprived
without his consent. Otherwise, in the absence of an express waiver by the
insured, the beneficiary can be changed anytime.
Q: What is the effect under Sec. 12 where the beneficiary in life insurance
policy willfully brings about the death of the insured, either accomplice or
accessory?
A: The beneficiary automatically forfeits his interest in the insurance
policy. This does not mean, however, that the insurer will no longer be
liable. The insurer remains liable, the only effect is that the beneficiary's
interest is forfeited. Who then will be entitled to the proceeds? The nearest
relative of the insured, not otherwise disqualified (so, where the
beneficiary brings about the death of the insured not in a willful manner, as
for instance, through reckless imprudence under Art. 365, RPC, Sec. 12 does
not apply).
- 14 -
-
- 15 - REVIEWER IN INSURANCE LAW 15
As lectured by Dean Jose R. Sundiang
Q: Is a mere hope or expectancy insurable? Suppose a person buys sweepstakes
tickets and insures his chance of winning, so much so that if he does not win
the first price, the insurer will indemnify? Or can you insure your chance of
passing the bar exams?
A: No. A mere hope or expectancy is not insurable. This is a wagering
contract. In order that a mere hope may be insurable, it must be coupled with
an existing interest in the thing from which the expectancy shall arise under
Sec. 14, par. c. or under Sec. 16, which provides that there must be a valid
contract.
The shattering of expectation, however bright, or the disappointing of
hope, however strong, does not constitute such a loss to be indemnified by
insurance. It will be in the nature of a wagering contract which the law does
not allow - gambling.
Q: The mother was confined in a hospital, scheduled to be operated on the
following day of a very serious illness. The night before the operation, she
called for her only son, and told him that she had prepared a will naming the
son as the only heir. Among the property that the son expected to inherit was
a house located at Dasmarias Village. On the same evening, the son together
with his family moved into the house which he expected to inherit. At the
same time he insured the house in his name against fire. The operation took
place, and unfortunately, the mother died. After which, the house was
completely destroyed by fire, the risk or peril insured against. May the son
recover?
A: No. When he insured the house, he had no insurable interest. His interest
was a mere hope or expectancy. You do not inherit from a person who is still
alive. Inheritance takes place upon the death of the decedent. Under the law,
insurable interest in property must exist both at the time of the effectivity
of the policy AND at the time of the loss, although it need not exist in the
meantime.
Insurable interest in life, on the other hand, need to exist only at the
time of the effectivity of the policy, it need not exist thereafter.
Q: Under Sec. 20, where there is a change of interest in any part of the
thing insured unaccompanied by a corresponding change of interest in the
insurance, what will happen?
A: The policy shall be suspended to an equivalent extent until the interest
in the thing and the interest in the insurance are vested in the same person.
Under Sec. 58, the mere transfer of the thing insured will not mean automatic
transfer of the policy. It shall be suspended until the same person becomes
the owner of both the policy and the thing insured. It will merely be
suspended, it will not be avoided, because of the rule that insurable
interest in property must exist both at the time of the effectivity of the
loss although it need not exist in the meantime.
EXAMPLE:
- 15 -
-
- 16 - REVIEWER IN INSURANCE LAW 16
As lectured by Dean Jose R. Sundiang
You own a car, and insured it in your name. At the time of the effectivity
of the policy there is no question that you have an insurable interest in
the car being the owner. The policy is for a term of one year. Six months
thereafter, you sold the car. There is a change of interest in the car,
from the original owner to the buyer. But the policy was not transferred
to the buyer. Thereafter, the car was lost. Who can recover? Nobody.
Neither the original owner nor the buyer. The original owner cannot
recover because while he had an insurable interest in the car at the time
of the effectivity of the policy, he no longer had insurable interest in
the car at the time of the loss. He had sold it. The buyer could not
recover either. While he had insurable interest at the time of the loss,
he had no insurable interest in the car at the time of effectivity of the
policy.
Q: How can insurable interest in both the insured and the policy be vested
again in the same person?
A: (1) In the example given, before the occurrence of the loss, the policy
was transferred to the buyer. In that case, may the buyer recover? Yes,
because when the policy was transferred to him, interest in both the policy
and in the car were present in the buyer.
(2) Where the seller repurchases the car before the occurrence of the loss.
In which case, the seller may recover.
So, if you sell an insured property and neither you nor the buyer takes
the precaution of having the policy transferred in the name of the buyer, in
case of loss, neither you and the buyer can recover. This is because of the
rule in property insurance that, insurable interest must exist at the time of
the effectivity of the policy and at the time of the occurrence of the loss.
In life insurance, however, all that the law requires is that insurable
interest must exist at the time of the effectivity of the policy but it need
not exists thereafter.
EXAMPLE:
A corporation has insurable interest in the life of its president. So here
is a corporation which insures the life of its president. The corporation
is the beneficiary. As president of the corporation, he is allowed to use
a house belonging to the corporation. After the effectivity of the life
insurance policy, the president resigns from the corporation and
relinquishes all his interest in the corporation. after which, he insured
the house in his own name against fire. After resigning and insuring the
house, the corporation agrees to sell the house to its former president.
Then the former president dies, and the house burns.
Q: Who can recover on the life insurance policy?
A: The corporation can, because at the time of the effectivity of the
policy, the corporation still has an insurable interst in the life of
the president, because he was still president then. Although at the
time of the loss (death), the corporation no longer had insurable
interest in the life because he had already resigned.
- 16 -
-
- 17 - REVIEWER IN INSURANCE LAW 17
As lectured by Dean Jose R. Sundiang
Q: Who can recover on the fire insurance?
A: Neither the corporation nor the former president (estate) can
recover, because when the president insured the house in his name, he
did not yet have an insurable interest in the house for the simple
reason that he was not yet its owner. It was after the effectivity of
the policy that he was able to buy it.
INSURABLE INTEREST IN LIFE vs. INSURABLE INTEREST IN PROPERTY:
Insurable interest in life need exist only at the time of the
effectivity of the policy. It need not exist thereafter.
Insurable interest in property must exist both at the time of the
effectivity of the policy AND at the time of the loss. It need not
exist in the meantime.
SUSPENSION OF POLICY
GENERAL RULE:
Sec. 20. xxx 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.
EXCEPTIONS:
Under the following circumstances, the policy will not be suspended
despite a change in any part of the thing insured:
1. 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.
In motor vehicle insurance, the owner insured his car in his name.
It was involved in an accident. Damage: P20,000.00. After which, he
sold the car. May the seller recover? Yes, because at the time of
the occurrence of the loss (accident) he was still the owner, hence,
he still had an insurable interest in the car. But suppose after the
transfer or sale of the car, a second accident happened, however,
there was no transfer of the policy to the buyer. With respect to
the second accident, who can recover? Nobody, because neither the
seller nor the buyer had insurable interest both at the time of the
effectivity of the policy and at the time 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.
This refers to a divisible contract. You own four houses in a
compound: A, B, C, and D. You insured them under one policy, but
separately valued. You pay a single premium. Later, you sold house A,
but the policy was not transferred to the buyer. Afterwards, house B
2.
- 17 -
-
- 18 - REVIEWER IN INSURANCE LAW 18
As lectured by Dean Jose R. Sundiang
3.
was burned down. Can the insured recover? Yes, the sale of house A
will not affect the insured's right to be indemnified because of the
loss or destruction of house B. Although they are covered under the
policy and a single premium is paid, the contract is divisible.
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.
Whoever takes the property of the decedent will automatically become
the owner of the policy. Here is a father, who, during his lifetime,
insured his house in his name against fire. The policy was in the
name of the father. The house was later inherited by the son. So
actually, there was a change of interest in the house, from the
father to the son. Later, the house was burned. Can the son recover?
Yes. Whoever takes the house will automatically be the owner of the
policy.
What is the reason for this exception?
4.
Art. 1311, NCC. Contracts take effect only between the parties,
their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from 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.
This refers to a case where the change of interest is made in favor
of a partner, joint owner, or co-owner. Let's say A, B, and C are
owners in common of a house worth P3M. They insured the house
jointly in their names. Later, A sold his undivided share of to D,
after which the house was completely destroyed by fire. Insofar as
the share of A is concerned, there had been a change of interest in
favor of D. Since D is a stranger, not a partner, the rule in
suspension is applied. When is the exception applied? The exception
is applied where A, instead of transferring his share to D,
transfers the same to B or C, thereby increasing the participation
of either to . There will be no suspension of the policy because no
new party was introduced to the co-ownership.
Sec. 57. 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.
This contemplates a situation where there is an agreement or
stipulation in the policy that should there be a transfer or change
of interest in the property, there should likewise be an automatic
transfer or policy. This is a valid stipulation.
5.
- 18 -
-
- 19 - REVIEWER IN INSURANCE LAW 19
As lectured by Dean Jose R. Sundiang
Art. 1306, NCC. The contracting parties may establish such
stipulations, clauses, terms, and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
Sec. 25. Every stipulation in a policy of insurance for the payment of loss
whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering, is void.
So even if there is a stipulation, that it is void, or that the policy
shall be received as evidence of proof of interest. This is also void.
As to whether a person has or has no insurable interest in property,
cannot be vested by mere agreement or stipulation or the parties. It is
contrary to law (Sec. 25) and public policy because it becomes a wagering
contract.
PROBLEM:
Q: B is not the owner of the house. He is neither a lessee nor a
mortgagee. He has nothing to do with the house. He tells the insured that
despite the fact that he has no insurable interest in the house, he would
like to insure the house in his name against fire. He is willing to pay
any amount of premium that may be required from him. And the insurer
knowing that B has no insurable interest in the house, agrees to issue a
policy to B. they further stipulated that should the house be destroyed by
fire, the insurer will indemnify him regardless of whether or not he has
insurable interest in the house. Afterwards, the house is completely
destroyed by fire. Can B recover?
A: No. Their agreement is contrary to law and public policy, because it
was a wagering contract.
UTMOST GOOD FAITH (UBERIMEI FIDEI)
The contract is the law between the contracting parties, and they are
enjoined to comply with it in good faith. In a contract of insurance, the law
does not require only ordinary good faith but utmost good faith.
What is utmost good faith? It means absolute and perfect candor, openness
and honesty. It is the absence of any deception or concealment however slight.
The parties to a contract of insurance must act in utmost good faith.
There should be no concealment. There should be no misrepresentation. What is
the reason for utmost good faith? A contract of insurance is an aleatory
contract.
aleatory contract,
reciprocally bind themselves to give or to do something in consideration of
what the other party shall give or do.
By an one or both of the contracting parties
- 19 -
-
- 20 - REVIEWER IN INSURANCE LAW 20
As lectured by Dean Jose R. Sundiang
Being an aleatory contract, the insurer's liability is conditional. The
parties, especially the insurer, relies on the representation and statements
made by the other party. In life insurance, the insurer will not just issue a
policy. The insured may be asked to give statements or to answer questions.
The insured, next to his doctor, is in a better position to know the state of
his health. So he should not in any way misrepresent the state of his health.
WHAT ARE THE DEVICES USED BY THE INSURER TO ASCERTAIN, DETERMINE AND CONTROL
THE RISKS TO BE ASSUME?
1. Concealment
2. Representation
3. Warranties
4. Conditions
5. Exceptions
WHAT ARE THE FOUR PRIMARY CONCERNS OF THE INSURER?
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 is assumed as will enable the
insurer to guard against the increase of the risk because of change in
conditions.
4. Determining whether a loss occurred and if so, the amount of such loss.
HOW MAY AN INSURER BE ABLE TO CONTROL THE RISK THROUGH THE USE OF EXCEPTION?
Exempt certain properties
Except certain perils or risks
IN PROPERTY INSURANCE, THE FOLLOWING MUST CONCUR BEFORE ONE MAY RECOVER:
1. Insurable interest;
2. Interest must be properly covered by the policy;
3. There was a loss; and
4. Loss must be proximately caused by the peril insured against.
The principle of utmost good faith applies to both parties. If information
is withheld, then it follows that there was no meeting of the minds.
CONCEALMENT
Sec. 26. A neglect to communicate that which a party knows and ought to
communicate is called concealment.
- 20 -
-
- 21 - REVIEWER IN INSURANCE LAW 21
As lectured by Dean Jose R. Sundiang
I would call it a "sin of omission," neglect, failure. Where you are duty-
bound to communicate to the insurer, an information or a fact which is within
your knowledge, which is material in the contract, but which you did not
communicate, you are guilty of concealment under Sec. 27. The remedy of the
insurer is to rescind the contract.
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)
What are the grounds for rescission?
1. Concealment
2. Misrepresentation, and
3. Breach of warranty.
When we speak of rescission, the party asking for rescission of the
contract impliedly admits the existence of a valid and binding contract.
Because the purpose of rescission is to terminate, to rescind. You do not
terminate or rescind a non-existing contract. Rescission would not be the
remedy. So rescission presupposes the existence of a valid ad binding
contract.
Going back to concealment, does it mean that the parties are also required
communicate everything, including "tsismis," especially where the to
applicant is a woman? No. What one is required to communicate is that which
is within his knowledge. It must be material. One is not under obligation to
communicate something immaterial.
How is materiality determined?
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.
For an information to be material, is it necessary that it be the cause of
the loss? No. In determining whether or not an information is material, you
simply ask: "Had this been concealed to the insurer, had it not been
concealed, do you think the insurer would have been influenced (1) in
deciding or not whether to issue the policy and (2) in determining the rate
of premium?" If the answer is yes, then it is material.
For example, here is a person suffering from a terminal disease, confined
in a hospital. The doctors told him about it and he had, at most six months
to live. Wanting to provide something for the members of his family upon his
death, he went to an insurance company and applied for a life insurance
policy. The insurance company agreed to issue a non-medical life insurance
policy. This means the insurer waives the right to have the applicant
physically or medically examined.
Where the insurer agrees to issue a non-medical insurance policy, would
that constitute a waiver of the right to communication? No. What is waived is
only the right to have the applicant examined. And according to the Supreme
Court, where the insurer issues a non-medical life insurance policy, with
more reason should there be no concealment, no misrepresentation, on the part
of the applicant. Why? Because you can assume that the insurer, in agreeing
- 21 -
-
- 22 - REVIEWER IN INSURANCE LAW 22
As lectured by Dean Jose R. Sundiang
to issue the non-medical life insurance policy, he must have relied entirely,
completely, on the statements of the insured.
So, a non-medical insurance policy was issued because from his appearance,
he did not appear to be suffering from a serious ailment. He did not tell the
insurer that he was ill, he concealed that fact. Later, he died in a
vehicular accident.
Can the insurer rescind the contract on the ground of concealment? Yes.
The fact of illness was immaterial. Had he told the insurer that he was
seriously ill, the insurer would not have agreed to issue the policy. Such
fact, if disclosed, would have influenced the insurer in deciding whether or
not to issue the policy.
Assuming that the insurer would have, just the same, agreed to issue the
policy, the rate of premium would have been very high.
Of course, there are matters, which need not be communicated. Matters,
which, through the ordinary exercise of diligence could have been ascertained
by the insurer. This is similar to what we call in civil procedure as
"judicial notice," where the law presumes that a certain matter is known to
both parties. Like mercantile usages, practice, etc., these need not be
communicated.
Or, where there is waiver, which may either be express or implied - waiver
of the right to communication. There is an express waiver when it is so
stated in the policy. There is an implied waiver when there is a neglect or
failure to inquire from facts which are communicated where they are
distinctly impaired. (Sec. 33)
ILLUSTRATION:
We must distinguish between an answer to a question which is manifestly
incomplete, yet accepted by the insurer, and an answer to a question which is
apparently complete but in fact incomplete and therefore, untrue. In the
latter case, there would be no waiver.
One of the questions asked of the applicant in an applicant for life
insurance is, "Have you ever been to a hospital?" Yes. The insurer
did not ask further questions, did not pursue the question. But the
applicant had been operated on twenty times.
Failure of the insurer to make further inquiries after the answer
yes was given is deemed to be a waiver of the right to communication.
The answer yes, means that there was something wrong with the health
of the applicant. A prudent insurer would have asked further, when?
Why? How many times? Etc.
Failure to do that on the part of the insurer would constitute a
waiver of the right to communication.
In the same example, the applicant is asked the following questions,
(1) Have you ever been confined in a hospital? Yes. (2) How many
times? Two times. (3) Why? I suffered from minor ailments like flu.
EXAMPLES:
i.
ii.
- 22 -
-
- 23 - REVIEWER IN INSURANCE LAW 23
As lectured by Dean Jose R. Sundiang
It turned out, however, that the applicant had been confined in a
hospital many times, and had gone major operations for some serious
ailments.
Does this constitute a waiver? No, because in the second example,
there are answers which are apparently complete but which are in
fact incomplete. Therefore, the insurer may still rescind the
contract by reason of concealment.
MISREPRESENTATION
Like concealment, misrepresentation is a sin of commission. What is the
purpose of misrepresentation? Why would a party to a contract make
misrepresentations to the insurer? To induce the insurer to enter into a
contract. That being the purpose, misrepresentation is made either before or
at the time of the effectivity of the issuance of policy.
Normally, misrepresentations are not made after the issuance of the policy,
because they will not serve any purpose anymore.
After having convinced the insurer to enter into a contract, to issue the
policy, there is no point in making further misrepresentation. These are made
before.
However, there is an EXCEPTION where a representation is made even after
the effectivity of the insurance policy.
Sec. 47. The provisions of this chapter apply as well to a modification of
a contract of insurance as to its original formation.
EXAMPLE:
You insured your house. At the time of insuring it, you represented to the
insurer that it was being used for industrial purposes. And it was true.
Necessarily, between a building used exclusively for residential purposes
and one used for commercial or industrial purposes, the latter would
command a higher rate or premium, because the risk is greater.
Six months after the effectivity of the policy, a change in the nature of
the occupancy took place. You went bankrupt so you closed the business.
There was a change in the nature of the occupancy from commercial or
industrial to residential. So you returned to the insurer and represented
to him that from this day on, the property would be used exclusively for
residential purposes and not as previously stated.
So here is a representation made after the effectivity of the insurance
policy. The purpose of which is to ask for the modification of the policy, in
order that the insurer may agree to a reduction of the premium. This is the
exception.
PROBLEM:
- 23 -
-
- 24 - REVIEWER IN INSURANCE LAW 24
As lectured by Dean Jose R. Sundiang
An applicant for a life insurance is asked the question, "Have you ever
suffered from any of the following diseases?" One of them is pneumonia.
Answer: No. It was untrue because at that time, he had suffered pneumonia.
There was no misrepresentation. However, while the policy was being
processed, he did suffer form pneumonia. But because of modern drugs, he
got cured before the issuance of the policy. So at that time of the
issuance of the policy, he was no longer suffering form pneumonia. But he
did suffer from pneumonia between the time of filing of the application
and the date of the effectivity of the policy. So he did not tell the
insurer anymore that he did suffer from pneumonia.
Then he died of cancer. Could the insurer deny the claim on the ground
that there was either concealment or misrepresentation? Yes.
RULE:
Statement in the case of representation must be true when the contract
goes into effect, although it may not be true when made.
On the other hand, even if true when made, but no longer true when the
contract goes into effect, that will give the insurer the right to rescind
the contract.
Rescission is the remedy when there is concealment, misrepresentation, and
breach of warranty.
What are the limitations of the right of the insurer to rescind the
contract of insurance?
(1) 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).
Simply, the second part of the foregoing provisions means: If the insurer
accepts premium payments despite knowledge of the ground for rescission, such
acceptance will constitute a waiver of the right to rescind.
EXAMPLE:
The insurer knew that there was misrepresentation. So, he could have
asked for the rescission of the policy. But instead of asking for the
rescission of the policy, he accepted the premium payments from the
insured. Such acceptance constitutes a waiver of the right to rescind.
What could be the purpose or reason of the insurer in accepting
premium payments instead of rescinding the policy, knowing that it
could be rescinded?
He expected that there would be no loss, there would be no claim,
during the term of the policy.
- 24 -
-
- 25 - REVIEWER IN INSURANCE LAW 25
As lectured by Dean Jose R. Sundiang
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.
(2) In a non-life policy, such right must be exercised prior to the
commencement of an action on the contract.
"Commencement of an action on the contract" - either in court or with
the Insurance Commissioner.
(3) In a life policy, defenses are available only during the first two
years of the insurance policy.
The period of two years for contesting a life policy by the insurer
may be shortened but it cannot be extended by stipulation.
If an insurer believes that the contract may be rescinded, he must do. He
must act before the insured files an action against the insurer for the
recovery of a claim. The second part is what is known as the incontestability
clause.
WHAT IS THE INCONTESTABILITY CLAUSE?
A Clause stipulating that the policy shall be incontestable after a
started period ; after the requisites are shown to exists, the insured shall
be estopped from contesting the policy or setting any defense, except as
allowed, on the ground of public policy.
REQUISITES OF INCONTESTABILITY CLAUSE?
1. Life insurance policy payable upon the death of the insured; and
2. Policy must have been in force for a period of at least two years
during the lifetime of the insured either from date of issue or date of
last reinstatement.
If the foregoing requisites concur, the insurer can no longer ask for the
rescission of the contract on the ground of concealment or misrepresentation.
The policy has become incontestable.
But even if the policy of life insurance has become incontestable under
Sec. 48 (2), the insurer can still raise certain defenses to defeat recovery,
like non-payment of the premiums. It does not mean that simply because a
policy has become incontestable, the insured need not pay the premiums
anymore. Of course not.
- 25 -
-
- 26 - REVIEWER IN INSURANCE LAW 26
As lectured by Dean Jose R. Sundiang
Going back to concealment, is it necessary for the insurer to communicate
to the insurer the nature and amount of his interest in the property insured?
In the case of a house, is the insured required to communicate to the insurer
that he is the owner (nature of interest) and that his house is worth P1M
(amount of interest)?
As a rule, NO. If he is the absolute owner, he does not have to inform the
insurer of the nature and amount of his interest.
If, however, he is not the absolute owner, like in the case of a mortgagee,
under Sec. 8, then YES, he has to inform the insurer not only the nature of
his interest, the fact that he is a mortgagee, but he must also inform the
insurer the extent of his interest in the property, say P2M.
If the insured is the absolute owner, it is easy to ascertain the extent
of his interest, it is the value of the property.
If the insured is not the absolute owner, like a mortgagee, then his
interest may be less than the value of the property. It could only be the
amount of the obligation secured by the mortgage.
WHAT IS THE EFFECT WHEN THE POLICY BECOMES INCONTESTABLE?
The insurer cannot set up the defenses that:
a. The policy is void ab intitio;
b. It is rescissible by reason of fraudulent concealment of the
insured or his agent, no matter how patent or well-founded;
c. It is rescissible by reason of fraudulent misrepresentation of
the insured or his agent.
IS THE INCONTESTABLE CLAUSE ABSOLUTE?
No. It only deprives the insurer of those defenses which arise in
connection with the formation and operation of the policy prior to the loss.
The following defenses are still available:
1. That the person taking the insurance lacked insurable interest required
by law.
2. That the cause of death of the insured is an excepted risk.
3. That the premiums have not been paid.
4. That the conditions of the policy relating to military or naval science
have been violated.
5. That the fraud is of a particular vicious type.
6. That the beneficiary failed to furnish proof of death or to comply with
any condition imposed by the policy after the loss had happened.
7. That the action was not brought within the time specified.
PURPOSE OF THE LAW:
The assure that after the specified period, the policy owner may rely
upon the insurance company to carry out the terms of the contract, regardless
of irregularities in connection with the application which may later be
discovered.
- 26 -
-
- 27 - REVIEWER IN INSURANCE LAW 27
As lectured by Dean Jose R. Sundiang
WHAT IS A POLICY?
It is the written instrument in which a contract of insurance is set forth.
(Sec. 49)
IS IT THE SAME AS THE INSURANCE CONTRACT ITSELF?
No.
CAN THERE BE A CONTRACT OF INSURANCE WITHOUT A POLICY?
As a rule, YES, because a policy is only an evidence of the contract.
HOW IS CONTRACT OF INSURANCE PERFECTED?
Being a consensual contract, as distinguished from a real contract, it is
perfected by mere consent. Concurrence between an offer and acceptance (in a
real contract, delivery is necessary for the perfection of the contract, like
the contract of pledge, loan, commodatum).
In a contract of insurance, the moment the parties agree or their minds
meet, when there is concurrence between the offer and acceptance, there is a
contract of insurance. A meeting of the minds on the object of the contract.
What may be the object? In life insurance, it is the life or health of a
person; in property insurance, like fire or marine, it is the property; in
liability insurance, it is the possible liability of a person by reason of
the use of the property. An example of liability insurance is what we call
under Chapter VI as the Compulsory Motor Vehicle Liability Insurance. The
insurer under a liability type of insurance is liable only with respect to
the civil aspect. Criminal liability cannot be insured because it is
something personal.
In Criminal Law, every person who is criminally liable is also civilly
liable (Art. 100, RPC). For example, one is involved in a vehicular accident
and he is at fault. He can be charged under Art. 365 of the RPC. But he can
also he held civilly liable for the damage to property that he have caused,
or the injury that another person may have sustained by reason of the
accident. The insurer will answer only for the civil liability, not for the
criminal liability.
Sometimes after the issuance of the policy, the parties to the contract
may find it necessary to make certain alterations, modifications or changes
or erasures. This can be done without canceling the policy, which may prove
to be not only expensive but also tenious. How? It can be done through the
use of riders, endorsements, warranties, and clauses.
For example, going back to Sec. 20, what is the effect of a change of
interest in any part of the thing insured if there is no corresponding change
of interest in the insurance? What will happen? The policy shall be suspended.
the property insured
transferred to the buyer, in case of loss, neither the original owner nor the
buyer can recover. Because under Sec. 20, the law requires that in property
insurance, insurable interest must exist both at the time of the effectivity
of the policy and at the time of the loss, although it need not exist in the
meantime.
If is transferred, but the insurance is not
- 27 -
-
- 28 - REVIEWER IN INSURANCE LAW 28
As lectured by Dean Jose R. Sundiang
So let's say the owner of a car insures the car in his own name under a
comprehensive policy for one year. Three months thereafter, he sold the car
without transferring the policy to the buyer. In case of loss of the car,
neither the original owner nor the buyer can recover. There can be recovery
only if the policy is transferred to the buyer.
In property insurance, the transfer of the insurance must be with the
consent of the insurer, unlike in the case of life insurance under Sec. 181.
In life insurance, the policy may be assigned even without the consent of
the insurer, unless there is a stipulation to the contrary,
In property insurance, the consent of the insurer is necessary for the
transfer of the policy. Why? Because it is a personal contract.
Even under Sec. 58, the law says "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."
In the above example, where the owner sells the car, how can the insurance
policy be transferred to the buyer (now owner) without canceling the existing
policy which is in the name of the original owner or seller? It can be done
through the use of an endorsement. The insurer will simply issue an
endorsement.
In the foregoing example, you cannot affect a transfer of the registration
certificate of the car unless the buyer gets a new policy, or gets an
endorsement from the insurer, which is to be submitted to the LTO. This is
because of the rule that failure to do so will result in the suspension of
the policy.
Is the counter-signature of the insured necessary where a rider, or an
endorsement, or a clause, or a warranty is issued? The answer is qualified.
If the same was issued simultaneously with the policy (normally it is
attached to the policy), there is no need for the counter-signature of the
insured.
But if the same is issued after the issuance of the policy, the answer is
qualified again:
1. If it was the insured who requested for the issuance of the rider,
endorsement, or clause or warranty, his counter-signature is not
necessary; but
2. If it was issued after the effectivity of the policy and it was
not asked for by the insured, his counter-signature is necessary
as evidence of his assent to the