Laws Governing Insurance

1. Primarily, the Amended Insurance Code (RA 10607);

2. Suppletorily, the Revised Corporation Code; and,
3. the New Civil Code.

Why is the Revised Corporation Code suppletory? Because insurance

businesses must register as a legitimate corporate entity before the
Securities and Exchange Commission (SEC) with the endorsement
from the Insurance Commission. The SEC exercises regulatory
powers over the insurance company.

Why is the Civil Code suppletory? Because a contract of insurance is a

contract. These are the relevant provisions from the Civil Code that
apply to insurance:

· Art. 1319 (Elements and Perfection of Contract)

(1) Object;
(2) Consideration;
(3) Consent of parties (offer and acceptance).

Under the theory of cognition, the acceptance is

considered to effectively bind the offeror only from
the time it came to his knowledge. If the offeror dies
before he learns of the acceptance of the offeree, the
insurance contract is not perfected.

· Art. 739 and 2012 (Void Donations)

(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,
descendants and ascendants, by reason of his office.

Is insurance a donation to a beneficiary? Yes. When a

beneficiary is appointed in a life insurance, it is considered
as a donation (mortis causa, in effect) to the beneficiary.
 When a husband insures himself and appoints his wife as
beneficiary, does that not violate the Civil Code on void donations?
It does not violate. The provision against donation between
spouses is only during marriage. In this scenario, the
beneficiary can only benefit upon the death of the spouse.

Can the husband change its beneficiary to the mistress? No, to

prevent moral hazard and support for wrongdoing. The
husband has no insurable interest over the mistress.

· Art. 2011 (Applicability of the Civil Code)

· Art. 2207 (Insurer’s Right of Subrogation)
o 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.

What does this mean? For example, a car owner insured his
car. A truck driver hit and damaged this car. After the
insurance company indemnifies the car owner for the
damage, it is the insurance company—not the car owner—
who will file an appropriate action for damages against the
trick driver.

· Art. 2186 (Compulsory Motor Vehicle Liability Insurance)

· Arts. 2021-2027 (Life Annuity Contracts)

General Concept of Insurance

CONTRACT OF INSURANCE, DEFINED.

SEC. 2(A), AIC: 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
[xxx]

· Agreement whereby one party, called the insurer, promises to

pay money or its equivalent to the insured in consideration for
the insured paying a premium arising from a loss, damage, or
liability by reason of an unknown or contingent event.

Pure risk Speculative risk

Beyond human control and can Taken on voluntarily and can result
only result in a pecuniary loss if it in either a profit or loss.
occurs.
Examples: Breakup, loss in
Examples: Disability, accidents,
gambling, drawing of chance or
death, fire, shipwreck, etc.
lottery (SEC. 4, AIC).
What risks can be insured?
The business of insurance is imbued with public interest and involves a
matter of public policy.
· It is subject to regulation by the State, with respect not only to
the relations between the insurer and the insured, but also to the
internal affairs of insurance companies.
· The Insurance Commission is vested with both regulatory and
adjudicatory authority over insurance matters.

Why is this so? Insurance claims entail potential moral hazards and vulnerability
to abuse. Furthermore, these companies need to be regulated to protect its
clients, guarantee its liquidity, and secure its capacity to pay upon the happening
of the risk. Hence the need for the special law.

CONTRACT OF INSURANCE v. CONTRACT OF SURETY

Contract of Insurance Contract of Suretyship

A contract of insurance is an agreement A contract of suretyship shall be deemed

whereby one undertakes for a consideration to to be an insurance contract, within the
indemnify another against loss, damage or meaning of this Code, only if made by a
 liability arising from an unknown or surety who or which, as such , is doing
contingent event. an insurance business as hereinafter
provided.

CHARACTERISTICS OF INSURANCE

1. Consensual – Perfected at the moment the insured learns of the

acceptance of the insurer, or vice versa, without need of delivery or
other formality.
2. Voluntary
3. Aleatory – Depends on the occurrence of a contingent event.
4. Executory (Upon payment of premium) and conditional (Upon the
happening of the risk).
5. Contract of indemnity
· Principle of Indemnity: The insurer is only liable to
indemnify up to the value of the actual loss that was experienced
by the insured.
6. Personal – Before approving the insurance contract, the insurer will
consider the personal circumstances of the applicant. Thus, it is generally
non-transferable except with the consent of the insurer.
7. Risk Distributing Device – Law of large numbers
· The risk of loss is not actually transferred to the
insurer but to a number of people constituting the clients of
the insurer. These clients contribute to a common fund, the
insurance fund, by paying premiums. If the risk happens to
any one of them, they can indemnify him or her.
· Law of Large Numbers: The more entities availing of
the insurance, the lesser the risk assumed by the insurer.
More funds will be available to indemnify clients.
8. Contract of adhesion – Terms are prepared solely by the insurer, and the
assurer can only accept or reject, but not modify.
· Thus, any ambiguity in the contract is construed strictly
against the insurer
i. and in favor of the policyholder.
9. Uberrimae fidae – Relies in the good faith of both parties.
· All the necessary information must be given to the
insurer so that the insurance company may fix the
appropriate amount of premium; a material
 misrepresentation and concealment may invalidate an
insurance contract.
· The rule on caveat emptor (“let the buyer beware”)
does not apply to insurance contracts.

ELEMENTS OF INSURANCE

SEC. 3, AIC: 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 [xxx]
1. The insured must have insurable interest (in the life or property
insured).
• If the loss of the subject matter can only result in pecuniary loss.
2. The insured is subject to risk of loss.
3. The insurer assumes the risk.
4. The assumption of risk is part of a general scheme to distribute the loss
among large group of persons bearing similar risks.
5. The insured pays a premium.

PARTIES TO A CONTRACT OF INSURANCE

1. INSURED: The party to be indemnified upon the occurrence of the loss.

[1] Must have capacity to contract;
• May be a natural or juridical person.
[2] Possess an insurable interest in the subject of the insurance;
[3] Must not be a public enemy (SEC. 7, AIC).

2. INSURER: The person or company in an insurance contract that undertakes an

insurance risk to pay compensation.
o Every corporation, partnership, or association [not individuals]
duly authorized to transact insurance business as elsewhere provided in this
Code, may be an insurer (SEC. 6, AIC).

INSURABLE INTEREST

Why must the insured establish insurable interest? Because every policy executed by
way of gaming or wagering, is void (SEC. 25, AIC); to reduce moral hazard,
 dishonesty, or character defects in the individual which may increase the chance
of the loss.

INSURABLE INTEREST: An insured has insurable interest in the subject matter if he

or she is so connected, so situated, so circumstanced, or so related, that by the
preservation of the same he shall derive pecuniary benefit, and by its destruction he
shall suffer pecuniary loss, damage, or prejudice.
• Because of this character of loss, the insured will have to be indemnified.

The existence of an insurable interest gives a person the legal right to insure the subject
matter of the policy of insurance. It is a fundamental postulate of all insurance that it
must not be a mere bet upon a future event.

Public policy requires an insurable interest to prevent wagering under the guise of
insurance, and to reduce to a safe level the temptation to destroy the insured property.
Lack of insurable interest is a defense created for the benefit of society, not for the
benefit of any insurance company.

XPN: However, in life insurance, to have an insurable interest in a person's life, the
expectation of benefit from the continued life of that person need not necessarily be
pecuniary.

LIFE INSURANCE (Sec. 10, AIC) PROPERTY INSURANCE (Sec. 14, AIC)
 Every interest in property, whether
Every person has an insurable interest
real or personal, or any relation
in the life and health:
thereto, or liability in respect
thereof, of such nature that a
(a) Of himself, of his spouse
contemplated peril might directly
and of his children;
damnify the insured, is an insurable
interest, which may consist in:
(b) Of any person on whom he
depends wholly or in part for (a) An existing interest;
education or support, or in whom he
has a pecuniary interest;
(b) An inchoate interest
founded on an existing
(c) Of any person under a legal
interest; or,
obligation to him for the payment of
money, or respecting property or (c) An expectancy, coupled with
services, of which death or illness an existing interest in that out of
might delay or prevent the which the expectancy arises.
performance; and,

(d) Of any person upon whose life

any estate or interest vested in him
depends.

Must exist at the time of the Must exist at the time of both
perfection of the insurance contract, [1] the perfection and [2] the loss
but need not exist at the time of the (SEC. 19, AIC).
loss (SEC. 19, AIC).
Unlimited except in life insurance
effected by creditor on life of debtor. Limited to actual value of interest in
· There is no limit at how property insured.
· As a contract of indemnity.
much an insured insures the
life; only depending on how
much premium he is willing
or can pay.

The expectation of benefit to be

An expectation of benefit to be
derived from the continued existence
derived from the continued
of life need not have any legal basis
 whatsoever; a reasonable probability
existence of the property insured
is sufficient without more.
must have a legal basis.
· Because death is a certain
risk.
The beneficiary need not have an
insurable interest over the life of the The beneficiary must have
insured if the insured himself secured
insurable interest over the thing
the policy. However, if the life
insurance was obtained by the insured.
beneficiary, the latter must have
insurable interest over the life of the
insured.

Life Insurance

GENERAL RULE: Must exist ONLY at the time of the perfection of the insurance
contract.

Exception: If insurance is over the life 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. Why? At the time of the death
of the debtor or mortgagor, the debt or obligation should still be existing.

Example, what if you insured the life of your spouse when you were married, but
you eventually separated, can you still claim the insurance proceeds when your
former spouse dies? YES. In life insurance, insurable interest is only required
to exist at the time of the perfection of the insurance contract.

Can a life insurance be taken over the life of a juridical person? No, the death
contemplated here only means natural death because juridical death is not a pure
risk.

(a) Of himself, of his spouse and of his children;

Is consent of the person whose life is being insured necessary? No. Once
insurable interest is established, the consent of the person whose
life is to be insured is not necessary (SEC. 3, AIC).

Can you get insurance over the life of your boyfriend or girlfriend? No,
because you are not legally tied.
 Can you designate your boyfriend or girlfriend as the beneficiary? Yes, if
the insured is the policyholder, he or she may elect any beneficiary
even without insurable interest over the latter. Insurable interest is
not required over the beneficiary.

Can you get insurance over the life of illegitimate children? Yes, there is
nothing in the law that qualifies children with their marital status.

(b) Of any person on whom he depends wholly or in part for

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

Why is there no insurable interest over parents or siblings? The focus on

the law is on the immediate family upon marriage. However, you
can still insure parents and siblings under the other classifications
of persons whom a person has insurable interest.
o Illustration: You can insure the life of your brother if he is
the one providing, fully or partly, for your education and
daily support. Even family friends.

(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;

· More on business dealings where there is reasonable

expectation of benefit and where the death of a person can lead
to a financial expense.
o Illustrations:
§ Where the company insures the life of an officer of
a company or of another employee;
§ Where a creditor insures the life of a debtor.
§ When a mortgagee insures the life of the mortgagor
(mortgage redemption insurance).

On the other hand, can an employee insure the life of the employer? Yes,
on the basis that he has a pecuniary interest over the employer.
 To what extent can a creditor get a life insurance policy over the life of a
debtor? Up to the amount of the debt of the debtor, that legal
obligation is the creditor’s insurable interest.

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

Property Insurance
Must exist ONLY at the time of both [1] the perfection of the insurance contract, and
[2] the happening of the loss.

(a) An existing interest;

· The party has either a legal or equitable right, not necessarily
ownership, over the property; includes lessee, possessor,
depositary, usufructuary, borrower in commodatum, or even
unpaid seller of thing still in transit.
· “Will the person gain pecuniary benefit if the property is
preserved, or suffer pecuniary loss if the property is
destroyed?”

(b) An inchoate interest founded on an existing interest;

· The interest only becomes a real power of dominion upon the

happening of an event.

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

· There is a certain future interest based on an existing interest.

CONCEALMENT

SEC. 26, AIC: A neglect to communicate that which a party knows and ought
to communicate, is called a concealment.
· May be committed by both the insured and insurer.
· May be passive concealment (failure to disclose) or active concealment
(misrepresentation or supplying misleading information).
 · Illustration: Failure to disclose in the application form previous
diseases, allergies, or medical operations in order to have lower
premiums.

REQUISITES:
1. A party knows a fact which he neglects to communicate or disclose to
the other;
2. Such party concealing is duty bound to disclose such fact to the other;
· Applicants are duty-bound because the data gathered in the application
form and interview with the insurance agent are deemed material
information for the insurer to come up with its premium estimation.
3. Such party concealing makes no warranty as to the fact concealed;
4. The other party has not the means of ascertaining the fact concealed;
· The certification in the bottom of the form where the applicant affirms
that all information gathered is true and correct is given due emphasis
and honored by the insurer, for ease of business
5. Material

EFFECTS:
SEC. 27, AIC: A concealment whether intentional or unintentional entitles the injured
party to rescind a contract of insurance.

What if the party was only negligent and in good faith? Concealment
entitles rescission whether intentional or unintentional. Good faith
is not a defense in concealment. But there must at least be
convincing proof.

What if the insured conceals information about sickness but dies due to
accident, can the insurer still rescind the contract? YES. Concealment
entitled the injured party to rescind, even if the death or loss is
due to a cause unrelated to the concealed matter.

What is the effect of rescission? Everything will be returned. The

insurer will return the premiums of the insured and the latter
cannot receive the benefits of the insurance.

What if the discovery of the concealment happens after the death of the
insured? The insurer can no longer invoke the concealment to evade
 payment—this would be under the Incontestability Clause, and
places upon the insurer the duty to investigate earlier while the
insured was still alive.

REPRESENTATION

REPRESENTATION: Factual statements made by the insured at the time of, or

prior to, the issuance of the policy to give information to the insurer and induce
him to enter into the insurance contract.

REQUISITES:

1. The insured stated a fact which is untrue;

2. Such fact was stated with knowledge that it is untrue and with intent to
deceive (FRAUD) or which he states positively as true without knowing it to
be true and which has a tendency to mislead (NEGLIGENCE);
3. Such a fact in either case is material to the risk.

Concealment Representation
Involves an omission or non- disclosure Involves a positive assertion or affirmation
(passive concealment). (active concealment).

Fraud need not be proven as both intentional

Fraud must be proven in material
and unintentional concealment are grounds
misrepresentation; no presumption of
for rescission; presumed material.
materiality.

Concealment cannot refer to future acts. Can pertain to the future because it is
promissory.
EFFECT: In both cases of concealment and misrepresentation, the test of materiality and
the effect of right to rescission apply.

PREMIUMS AND POLICIES

PREMIUM: Consideration paid to an insurer for undertaking to indemnify the insured

against a specified peril.
· The insurer is entitled to the payment of the premium as soon as
the thing insured is exposed to the peril insured against.
 What is the basis of the insurer to collect premiums? Assumption of risk.

Effect of Non-Payment of Premium

What is the effect if the first premium has not been paid?
The policy will lapse, but there can be a grace period of usually
30 days from the date the premium becomes due in order to pay
it.

GENERAL RULE: No policy issued by an insurance company is valid and

binding until actual payment of premium. Any agreement to the contrary
is void (SEC. 77, AIC).

EXCEPTIONS:
[1] In case of life or industrial life insurance, when the grace periods
applies (SEC. 77);
[2] When the insurer makes a written acknowledgment of the receipt
premium (SEC. 78);
[3] If the parties have agreed to the payment of the premium in
installments and partial payment has been made at the time of the loss;
[4] Where a credit term has been agreed upon; and,
[5] Where the parties are barred by estoppel;
What is the effect of an acknowledgment of receipt of a premium?
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 (SEC. 79, AIC).

POLICIES: The written instrument in which a contract of insurance is set forth

(SEC. 49, AIC).

Must the policy be notarized? No, because like employment contracts, it is

imbued with public interest and its contents must be in accordance with
the provisions of the Insurance Code. Notarized or not, a provision
contrary to the Insurance Code is void.

Kinds of Property Insurance Policies

 1. Open Policy: Value of thing insured is not agreed upon but left to be
ascertained in case of loss (SEC. 60, AIC).
o The indemnity must only be up to the value of the
loss and cannot be more, otherwise moral hazard
(Principle of Indemnity).

2. Valued Policy: Definite valuation of the property insured is

agreed by both parties and written on the face of policy (SEC. 61,
IAC).

3. Running Policy: Contemplates successive insurances and which

provides that the object of the policy may from time to time be defined
(SEC. 62, IAC).
o More applicable in merchandise, like in groceries
or warehouses, as you don’t insure them one by
one, and their values may change over time

WARRANTIES

WARRANTIES: Statement or promise by the insured set forth in the policy or by

reference incorporated therein, the untruth or non-fulfillment of which in any respect,
and without reference to whether insurer was in fact prejudiced by such untruth or
non- fulfilment, renders the policy voidable by the insurer.

- If concealment or misrepresentation is material, effect is rescission of the

contract; if untruth or non-fulfilment, avoidance or nullification of the contract
by the insurer.

KINDS

1. EXPRESS – An agreement expressed in a policy whereby the insured stipulates

that certain facts relating to the risk are or shall be true, or certain acts relating to
the same subject have been or shall be done.
· Illustration: The insurer will ask, “What will be the use of the
property?” The insured warrants, “This will be used for
residential purposes, not commercial.”

2. IMPLIED – It is deemed included in the contract although not necessarily

mentioned.
 · Illustration: In marine insurance, seaworthiness of the vessel.
Otherwise, the insurance is useless. In life insurance, the subject
must be alive.

Warranty Representation

Part of the contract. Mere collateral inducement.

· Agreement by the · Purpose is to induce the
parties as to what to do other party to enter into
or fulfill. the contract.
Written on the policy, actually or
May be written in the policy or may
by reference.
be oral.
Presumed material. Must be proved to be material.
Requires only substantial
Must be strictly complied with.
truth and compliance.

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, or
whenever under the broker and agency agreements with duly licensed intermediaries,
a ninety (90)-day credit extension is given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from date of issuance of the policy. “

DEFINITION OF PREMIUM: An agreed price or consideration for assuming and

carrying the risk – that is, the consideration paid to an insurer for undertaking to
indemnify the insured against a specified peril.

Insurance is a contract whereby one undertakes for a consideration to indemnify

another against loss,damage or liability arising from an unknown or contingent event.
Just like any other contract, it requires a cause or consideration. The consideration is the
premium, which must be paid at the time and in the way and manner specified in the
policy. If not so paid, the policy will lapse and be forfeited by its own terms. The law,
however, limits the parties’ autonomy as to when payment of premium may be made
for the contract to take effect. The general rule in insurance laws is that unless the
premium is paid, the insurance policy is not valid and binding

Assessment – a sum specifically levied by mutual insurance companies or associations,

upon a fixed and definite plan, to pay losses and expenses.

Premium v. Assessment

Premium Assessment

levied and paid to meet anticipated losses collected to meet actual losses

Generally not a debt If properly levied, it is a debt.

GR: Premium is not a debt.

XPN: When premium becomes a debt

Fire, casualty, and marine insurance – as soon as the risk attaches
Suretyship – as soon as the contract or bond is perfected and delivered to the obligor

In life insurance, can there be recovery of premium?

In life insurance, the first premium is when the contract is binding. But for subsequent
premiums, the insurer has continued the insurance after the maturity of the premium.

Case in point: Gaisano v. Development Insurance and Surety Corp., G.R. No. 190702,
February 27, 2017

Two kinds of presumptions

Conclusive presumption – no other evidence can be permitted to question or overturn
it.
Disputable or rebuttable presumption – contrary proof is allowed to be presented.

“Sec. 78: The conclusive effect of the statement of acknowledging the premium relates
only to the binding effect of the contract. It has nothing to do with the right of the
insurer to recover if and when it is true that the premium is unpaid. As far as the
question is concerned, it is only prima facie evidence. It is valid and binding and
indisputable. But as to the actual receipt, it can be disputed and recovered.”

Cash and Carry Rule

What is the Cash and Carry Rule?
Under the Cash and Carry Rule, the general rule in insurance laws is that unless
the premium is paid the insurance policy is not valid and binding.
Stated otherwise, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium thereof has been paid.

Effect if the premium is not paid

GR: Insurance policy is not valid and binding.

XPNs: When is the insured entitled to recover the premium?
1. When no part of the interest in the thing insured has been exposed to any of
the perils insured against (Sec. 80a).
2. Insurance is for a definite period and the insured surrenders his policy before
termination (Sec. 80b).
3. Contract is voidable and subsequently annulled because of fraud or
misrepresentation of the insurer or agent (Sec. 82).
4. Contract is voidable because of the existence of facts of which insured was
ignorant without his fault (Sec. 82).
5. Insurer never incurred any liability under the policy because of the default of
the insured other than actual fraud (Sec. 82).
6. There is over-insurance
7. When rescission is granted due to the insurer’s breach of contract
In 1, 3, 4 and 5 – the insured is entitled to a return of the ENTIRE premium paid
• They have to be actually paid
• Payment to insurer’s agent is sufficient

The assumption of risk is one of the essential elements in the insurance contract – if
there is no risk – premium may be recovered.

For government employees, they can opt to pay their insurance premium through
salary deduction by authorizing the treasurer or cashier to deduct, remit, and charge
service fees.

If there is an acknowledgment or statement in the insurance policy that the premium

has already been paid, then that is conclusive evidence as to the validity and binding
effect of the contract itself.

BUT it does not mean it is prima facie evidence as far as the recovery of the premium is
not paid. If in truth the premium is not paid, the insurer can still collect but the insurer
cannot allege that the insurance contract does not exist. It is not a defense.

Can you recover if the policy is voidable?

Yes.
Grounds for voidability
A voidable contract is a formal agreement between two parties that may be rendered
unenforceable for any number of legal reasons, which may include:
(a) Failure by one or both parties to disclose a material fact.
(b) (b) A mistake, misrepresentation, or fraud.
(c) Undue influence or duress.
(d) One party's legal incapacity to enter a contract (e.g., a minor).
(e) One or more terms that are unconscionable.
(f) A breach of contract.

If the contract is illegal – The doctrine of in pari delicto matters. If both parties are at
fault, no one can recover. The court will not afford protection to those who do not come
to court with clean hands.
If there is only one guilty party, then the innocent party can recover.

Conditions to a right of recovery

1. There should be compliance with the terms of the contract
2. Before you can recover, you should serve a notice of loss
3. Provide proof of loss.

Can you recover the premium if the insured and the insurer become public enemies?
Yes. After the declaration of war. War abrogates the insurance contract. It will cancel.
Return to each other what you have received by virtue of the contract.

What if the loss occurs before the effectivity of the policy, can there be a recovery of
premium?
No. In that case, the insurer is never liable. The premium is supposed to answer for the
contingent liability. Here, the loss had already happened, therefore, the premium
cannot be recovered.

When the risk attaches:

• If risk is entire + contract is indivisible: insured is not entitled to return of premium if
insurer is exposed to the peril however short.
• If the contract is divisible (involves several distinct risks) – the premium for the risk
which does not attach can be claimed.

When the risk never attached

1. Application for a policy was not approved, no premium can be recovered
2. Loss occurs before the effective date
3. Insured and insurer become public enemies because of state of war
• War abrogates insurance contracts between citizens of belligerent states
Can you recover the proceeds if the cancellation of the policy happens after the contract
was perfected? No.

Where the insurance is made for a definite period of time and the insured surrenders his policy
before the expiration of that period
Section 80(b) does NOT apply:
1. When the insurance is not for a definite period
2. A short period has been agreed upon
3. The policy is for life insurance policy

In Life Insurance
• It is an indivisible contract so the insured cannot recover.
• HOWEVER, he is entitled to receive the “cash surrender value” AFTER 3 full annual
premiums have been paid.

When contract is voidable

Where the contract is voidable on account of fraud or misrepresentation of the insurer or his
agent
If the insured is in fraud – he is NOT entitled to return of the premium. Nobody can
profit from his own wrong.
If the insurer is in fraud – entitled to premium.

When the contract is voidable on account of facts, the existence of which the insured
was ignorant of without his fault

When by any default of the insured other than actual fraud, the insurer never incurred
any liability under the policy
Example: insured a vessel but it was destroyed before the actual voyage

Other grounds in Sec 82 – there can be recovery of premium

SECTION 82. A person insured is entitled to a return of the premium when the
contract is voidable, and subsequently annulled under the provisions of the Civil
Code; or on account of the fraud or misrepresentation of the insurer, or of his agent,
or on account of facts, or the existence of which the insured was ignorant of without
his fault, or when by any default of the insured other than actual fraud, the insurer
never incurred any liability under the policy.
A person insured is not entitled to a return of premium if the policy is
annulled, rescinded or if a claim is denied by reason of fraud.

When there is over-insurance

In case of an over-insurance by several insurers
(a) Insurer is not entitled to the portion of the premium corresponding to the excess
of the insurance over the insurable interest of the insured.
(b) Return is only for the proportion which exceeds the insurable interest.
 (c) Proportioned to the amount by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing at risk.

Can there be recovery if the insured surrenders the policy before the termination?
It is the same as cancelation of policy.
If INSURER cancels the contract, then he is only allowed to retain the portion to
which he earned before the time expired.
If the INSURED cancels the contract, then he can only recover pro rata or
proportionally in respect to the unexpired time.
UNLESS there is a short-period rate – there is a scale.
Ex: if the contingent event happened in the first year, 20% or 25% depending on
the stipulation will be retained.

LOSS

What is loss? It is the injury or damage or liability sustained by the insured as a result
of the happening of the peril insured against in the policy.

Loss in Property Insurance It is the pecuniary detriment consisting of the total cash
value of the property in case of total loss or the reduction of its value in case of partial
loss.
Loss in Life and Health Insurance Loss occurs in Life Insurance when the person
insured dies. In Health Insurance, loss occurs in case of injury to or disability of the
insured.

Insurance claim
A demand for the satisfaction of a loss suffered within the purview of an insured’s
policy. It may be made by:
(1) The party insured
(2) The insurer with the right of subrogation
(3) A non-party but with a right against the insured
Is an insurance policy assignable?
 If the loss already occurred – Right to claim may be transferred. Liability of the
insurer has been fixed.
If the loss has not yet occurred – Claim cannot be transferred because an
insurance contract is a personal contract between the insured and the insurer.

When is the Insurer liable for loss?

The Insurer is liable under any of the following circumstances:
(a). When there is loss and the proximate cause of which is the peril insured
against;
(b). When there is loss and the immediate cause of which is the peril insured
against except where proximate cause is an excepted peril;
(c.) When there is loss through the negligence of insured except where there was
gross negligence which amounts to a willful act;
(d). When there is loss caused by efforts to rescue the thing from a peril insured
against; and
(e). If during the course of rescue from a peril insured against, there is loss due to
a peril not insured against.

The Insurer is not liable if:

(a) Loss is caused by the insured’s willful act or gross negligence;
(b) Loss is due to the connivance of the insured;
(c) Where the excepted peril is the proximate cause of the loss; and
(d) The peril insured against is the remote cause of the loss

SECTION 85. An agreement not to transfer the claim of the insured against the
insurer after the loss has happened, is void if made before the loss except as otherwise
provided in the case of life insurance.

GR: A prohibition against the transfer of the claim after the loss is against public policy
– therefore VOID
(a) The rights of the parties are already fixed after the loss.
(b) Agreement hinders free transmission of property.
(c) Transfer involves money claim; it is not the personal contract being assigned but
the money claim under or right of action on the policy.
(d) It involves no moral hazard – does not increase the insurer’s risk; transfer does
not do harm to its duty.

XPN: Sec 173. Which prohibits the transfer of a fire insurance policy to any person who
acts as an agent of the issuing company and declares such transfer void insofar as it
affects the creditors of the insured.

How do you satisfy loss?

1. Payment
2. Reinstatement
3. Replacement

SECTION 86. Unless otherwise provided by the policy, an insurer is liable for a loss
of which a peril insured against was the proximate cause, although a peril not
contemplated by the contract may have been a remote cause of the loss; but he is not
liable for a loss of which the peril insured against was only a remote cause.

Proximate Cause - That which, in a natural and continuous sequence, unbroken by any
new independent cause, produces an event without which the event would not have
occurred (Efficient Cause)

Immediate Cause - The direct cause of loss. It is the result of the proximate cause. If the
proximate cause did not happen, the immediate cause wouldn’t have happened as well.

Remote Cause - It contributed to the damage but it is not the main cause of the damage.
It is a cause which is far remote from the injury caused, because of a supervening event.

Test to determine whether it is the proximate cause

If the event did not happen, could the injury have resulted? If no, then it is the
proximate cause.

Who has the burden of proof to prove loss?

The insured .
Once the loss has been proved, who has the burden to prove denial of the liability?
The insurer.

What is the quantum of proof required to prove the fact of loss?

Mere preponderance of evidence.

SECTION 88. Where a peril is especially excepted in a contract of insurance, a loss,

which would not have occurred but for such peril, is thereby excepted although the
immediate cause of the loss was a peril which was not excepted.

• The insurer is NOT liable if the proximate cause is an excepted peril even if the
immediate peril is a peril not excepted
• If the proximate cause is an expected peril, even if the immediate cause is a peril
insured against, the happening of the
loss is not compensable.
GR: if the peril insured against is the immediate cause, compensable.
XPN: if the proximate cause is an excepted peril (hence, not compensable)
If the peril insured against is the proximate cause, it is compensable.
If the peril insured against is the immediate cause, it is compensable.
If the peril insured against is the remote cause, it is not compensable.

Illustrations:
1. An explosion (excepted peril) happens causing fire which results in loss.
Proximate Cause – Explosion (thing which sets another thing in motion) BUT it is an
EXCEPTED RISK.
Here, the Insurer cannot claim for insurance proceeds.
Immediate Cause - Fire
Remote Cause – lightning (does not matter for the purposes of recovering insurance)

2. A hostile fire first occurred and it caused an explosion which resulted in loss.
Proximate Cause – Fire
Immediate Cause – Explosion
Here, the Insurer can claim for the loss because the explosion is the immediate cause. “is
thereby excepted although the immediate cause of the loss was a peril which was not
excepted”

SECTION 89. An insurer is not liable for a loss caused by the willful act or through
the connivance of the insured; but he is not exonerated by the negligence of the
insured, or of the insurance agents or others

It must be caused by a willful act

What is the effect of the negligence of the insured?
GR: Negligence of the insured or his agents – the insurer is LIABLE.
Purpose of insurance is to guard against negligence, even the insured’s own negligence.
PROVIDED that it is only ordinary negligence

XPN: If the negligence is so gross – the insurer is NOT liable

GROSS NEGLIGENCE would mean bad faith and bad faith would mean FRAUD.
Insurer is relieved from liability.
The doctrine of contributory negligence does not in any way apply to rights under a
contract of insurance.

CASE IN POINT: Chartis Phils. Insurance, Inc. v. Cyber City Teleservices, Ltd., G.R. No.
234299, March 3, 2021
 NOTICE OF LOSS AND PROOF OF LOSS

SECTION 90. In case of loss upon an insurance against fire, an insurer is exonerated,
if written notice thereof be not given to him by an insured, or some person entitled to
the benefit of the insurance, without unnecessary delay. For other non-life insurance,
the Commissioner may specify the period for the submission of the notice of loss

SECTION 91. When a preliminary proof of loss is required by a policy, the insured is
not bound to give such proof as would be necessary in a court of justice; but it is
sufficient for him to give the best evidence which he has in his power at the time

Notice of loss – formal notice given to the insurer by the insured or the claimant under
a policy of the occurrence of the loss insured against; necessary for the insurer to be
liable to pay the claim.

Conditions to the right of recovery before insurance proceeds can be claimed

1. Compliance to the insurance contract. (Sec. 94)
2. Provide a notice of loss
3. Provide a proof of loss.
Purpose of Notice of Loss
1. To enable the insurer to gather information and make the proper investigation while
evidence is still fresh and take
such action as may be necessary to protect his interest from fraud or imposition.
2. To prevent further loss

Form of Notice of Loss

- It should be in writing
- Formal notice of loss is not necessary if the insurer has actual knowledge
- It is immaterial that if the notice was not given, the company would not be prejudiced;
and if given, the company would not benefit.

Time for giving notice of loss

• “Without unnecessary delay” – within a reasonable time
• It is a question of fact. Depends on the circumstances of the case
• Construed liberally in favor of the insured
• Non-life insurance other than fire – the Commissioner may specify the period for the
submission of the notice of loss
• Parties may stipulate the period but must not be unreasonably short

Proof of Loss
More or less formal evidence given the company by the insured or claimant under a
policy of the occurrence of the loss, the particulars and the data necessary to enable the
company to determine its liability and amount
• Best evidence which he has in his power at the time is sufficient
- Need not be of such persuasiveness of that required in judicial proceedings
• In loss upon an insurance against fire – written notice needed

But GR: NO FORM REQUIRED

- Orally
- In writing
Though more advisable if in writing for the protection of the insured or his beneficiary

Notice of loss may be in the form of:

- Informal/Provisional claim
Containing minimum information
- Formal claim
Contains the full details of the loss, computations of the amounts claimed, and
supporting evidence together with request or demand for payment.

Purpose of Proof of Loss

1. To give information upon which he may act promptly in protecting the property from
further loss for which he may be liable or enable him to take any other steps that his
interests may require.

2. To protect the insurer from extravagant claims.

• Notice of loss is different from proof of loss.

• Statement of loss is a more formal requirement.
- Give the insurer information by which he may determine the extent of his liability
- Afford him a means of detecting any fraud that may have been practiced upon him
- Operate as a check upon extravagant claims
• May avail the services of ADJUSTERS in effecting the settlement of an insurance claim

Burden of Proof of Loss in Court Action

1. INSURED has the burden of proving that he suffered loss.
a. In life insurance – death of insured must be proven
2. Once insured makes a prima facie case in his favor, burden SHIFTS to the INSURER
to controvert insured’s prima
facie case
a. Insurer who seeks to defeat a claim because of an exception or limitation in the policy
has the burden of
establishing that the loss comes within the purview of the exception or limitation

SECTION 92. All defects in a notice of loss, or in preliminary proof thereof, which the
insured might remedy, and which the insurer omits to specify to him, without
unnecessary delay, as grounds of objection, are waived.
What if in order to claim for proceeds, it is required to have a certificate or testimony or
a third person?

SECTION 94. If the policy requires, by way of preliminary proof of loss, the certificate
or testimony of a person other than the insured, it is sufficient for the insured to use
reasonable diligence to procure it, and in case of the refusal of such person to give it,
then to furnish reasonable evidence to the insurer that such refusal was not induced
by any just grounds of disbelief in the facts necessary to be certified or testified

Here, it is sufficient for the insured to use reasonable diligence to procure the
certification or testimony. It can be excused that the insured cannot provide so long as it
is not induced by any just grounds of disbelief in the facts necessary to be certified or
testified. The third person may not be willing to substantiate the statement to prove loss
Notice of Loss and Proof of Loss are mandatory requirements The requirement of the
notice of loss and obligation to le a proof of loss are conditions with which the insured
MUST comply before there is any liability on the part of the insurer.

When must Notice of Loss be given?

The notice of loss must be given without unnecessary delay or within a reasonable time.
A requirement of the policy that notice of loss be given immediately or forthwith
requires the giving of notice within a reasonable time.

Form of Notice or Proof of Loss In case of loss upon re insurance, the law requires
written notice. 234 For other kinds of insurance, absent any stipulation in the policy,
notice or proof may be given orally or in writing.

Waiver of Defects in and Presentation of Notice of Loss

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. 235 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.

It is the duty of the insurer to indicate the defects on the proofs of loss given, so that the
deficiencies may be supplied by the insured. When the insurer recognizes his inability to pay the
claim, there is waiver by the insurer of any defect in the proof of loss.

DOUBLE INSURANCE; OVERINSURANCE

DOUBLE INSURANCE (Sec. 95)

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

When is there a Double Insurance? A double insurance exists where the same person
is insured by several insurers separately in respect to the same subject and interest.

Requisites of double insurance:

(1) The person insured is the same;
(2) Two or more insurers insuring separately;
(3) There is identity of subject matter;
(4) There is identity of interest insured; and
(5) There is identity of risk or peril insured against.

CASE IN POINT: Malayan Insurance Co., Inc. v Philippines First Inc.

Double insurance distinguished from over-insurance
Double Insurance Over-Insurance

As to amount there may be no the amount of the

over-insurance as insurance is beyond
when the sum total the value of the
of the amounts of insured's insurable
the policies issued interest.
does not exceed the
insurable interest of
the insured.

As to no. of insurers involved there are always there may be only

several insurers one insurer
involved

may exist at the same time or neither may exist at

all.

“Over-insurance" by "Double insurance.”

when the sums insured exceed the insurable interest.

Binding effect of stipulation against double insurance

Policy contains no stipulation against additional insurance

- is not invalidated by the procuring of such insurance.

Policy contains a stipulation or condition

- commonly known as additional or "other insurance" clause
- It is valid and reasonable

(1) Additional insurance obtained by the insured

- a breach thereof will prevent a recovery on the policy.

(2) Additional insurance obtained by a third person

- without the knowledge or consent of the insured will not affect his rights under the
policy in the absence of ratification.

Purpose of prohibition against double insurance.

- intended to prevent an increase in the moral hazard.
- prevent over-insurance and thus avert the perpetration of fraud.
- prevent the situation in which a loss would be profitable to the insured.
in r/t to the requisites of double insurance

CASE IN POINT: Multi-Ware Manufacturing v. Cibeles Insurance

OVER-INSURANCE (Sec. 96)

- insurance is contained in several policies the total amount of which is in excess of the
insurable interest of the insured.

Principle of Contribution/Contribution Clause

- enunciated in Sec. 96.
- which 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.
- a stipulation that the insurance company shall not be liable to pay or contribute more
than its ratable proportion of the loss or damage.

When is there an Over Insurance?

Over insurance exists when the amount of the insurance is beyond the value of the
Insured`s insurable interest.

Is over insurance allowed? No. Discovery of other insurance coverage that makes the
total insurance in excess of the value of the property insured is a ground for cancellation
of the policy

Effects of Double Insurance and Over Insurance

1. The Insured 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;

2. Where the policy under which the Insured claims is a valued policy, any sum
received by him under any other policy shall be deducted from the value of the policy
without regard to the actual value of the subject matter insured;

3. Where the policy under which the Insured claims is an unvalued policy, any sum
received by him under any policy shall be deducted against the full insurable value, for
any sum received by him under any policy;

4. 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;

5. 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.
 SEC. 96. Where the insured in a policy other than life is over-insured by double
insurance:
(f) 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;
(g) Where the policy under which the insured claims is a valued policy, any sum
received by him under any other policy shall be deducted from the value of the
policy without regard to the actual value of the subject matter insured;
(h) Where the policy under which the insured claims is an unvalued policy, any
sum received by him under any policy shall be deducted against the full insurable
value, for any sum received by him under any policy;
(i) 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;
(j) Each insurer is bound, as between himself and the other insurers, to contribute
ratably to the loss in proportion to the amount for which he is liable under his
contract.

Rules for payment of claims where there is Over-insurance by Double insurance:

1. Order to claim payment
As the contract of insurance is a contract of indemnity (Sec.18.), the insured can recover
no more than the amount of his insurable interest whether the insurance is contained in
one policy or in several policies.
The exception allowed by law (i.e., "unless the policy otherwise provides") applies where
the policy contains what is generally referred to as the contribution clause which stipulates that
the insurance company shall not be liable to pay or contribute more than its ratable proportion of
the loss or damage.

2. Where insured claims under a valued policy (par. b)

If an insured has been fully indemnified for his loss by one insurer, he cannot file
subsequent claims against the others.

3. Where insured claims under an unvalued policy (par.c)

4. Liability of each insurer to contribute ratably to the loss (par. e)
5. Where sum received by insured exceeds total insurance taken (par. d)
 REINSURANCE

(Sec. 97-100)
-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 and original contract of insurance with a
third party, the original insured.

- It has been referred to simply as "an insurance of an insurance" i.e., insurance business
is transferred from one insurance company to another.

- essentially a form of insurance for insurance companies.

In reinsurance, the insurer becomes an insured (Reinsured) in relation to reinsurer.

-Also, in reinsurance, the original insured has no interest in the reinsurance contract.
Neither is the consent of the original insured necessary for reinsurance. In essence,
Different perils are insured against in separate policies.
-Condition Where an Insurer obtains reinsurance, except under automatic reinsurance
treaties, he must communicate all the representations of the original Insured, and also
all the knowledge and information he possesses, whether previously or subsequently
acquired, which are material to the risk.

SEC. 97. A contract of reinsurance is one by which an insurer procures a third person
to insure him against loss or liability by reason of such original insurance.

In order that there may be a contract of reinsurance, it is necessary that there is

an original contract of insurance; thus, insurable interest of reinsurance may not be for a
greater amount than the original insurance, although it may be easily for a less amount.

Reinsurance distinguished from double insurance

REINSURANCE DOUBLE INSURANCE

the insurer becomes the insured, insofar the insurer remains as the insurer of the
as the reinsurer is concerned; original insured

subject of the insurance it is the original the subject of the insurance is property
insurer's risk (Sec. 99)

an insurance of a different interest; an insurance of the same interest

the original insured has no interest in the the insured. is the party in interest in all
contract of reinsurance which is the contracts
independent of the original contract of
insurance (Sec. 100)

the consent of the original insured (who is the insured has to give his consent
hardly even aware of the reinsurance
transaction) is not necessary.

Value of reinsurance.
(1) From the standpoint of the insurer

(a) Every insurance company, in accordance with its financial strength,

establishes a limit (called “retention”) on the maximum claim it wishes to pay out of its
own resources. When amount applied by insured are for a sum over the company's
retention limit, it handles the excess by means of reinsurance.
 (b) Reinsuring companies serve as focal point for the collection of impaired risks
where statistically significant volumes of consistently underwritten substandard
business are accumulated and subjected to extensive analyses and research by
experienced staff.

(c) reinsurer benefits through the acquisition of business which is expected to

prove profitable in the long run.

(2) From the standpoint of the insured

(a) It gives insurance companies that practice in greater financial stability and
thus makes the 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; and

(e) Small companies are encouraged to divide large exposures for safety and
enabled to accept a wide variety of applicants

SEC. 98. Where an insurer obtains reinsurance, except under reinsurance treaties, he
must communicate all the representations of the original insured, and also all the
knowledge and information he possesses, whether previously or subsequently
acquired, which are material to the risk.
Duty of reinsured to disclose facts
The duty of the insurer to disclose all material facts is the same as those imposed on
insured in an original insurance Thus, a policy may be avoided where the reinsured
conceals the fact that a loss has taken place or that the property is overinsured where he
has knowledge thereof.

Automatic and facultative methods of ceding reinsurance

Automatic reinsurance treaty

- An agreement between an insurer and a reinsurer under which the insurer is obligated
to cede and the reinsurer is obligated to accept as reinsurance the amounts written by
the insurer in excess of its retention limits, within prescribed limits outlined in the
agreement. The reinsurer's liability commences simultaneously with the insurer.
Facultative reinsurance treaty
- An indemnity reinsurance agreement under which there is no obligation on the part of
the insurer to cede or the reinsurer to accept individual risks. The reinsurer retains the
"faculty" to accept or reject each risk offered by the insurer. The reinsurer's liability
commences after definite approval or acceptance of the risk.

SEC. 99. A reinsurance is presumed to be a contract of indemnity against liability, and

not merely against damage.

Nature of contract of reinsurance

The subject of the contract of reinsurance is the primary insurer's risk and not the
property insured under the original policy.

(1) Contract, one of indemnity against liability Thus, it is necessary that the insurer shall
first have paid a loss accruing, as a condition precedent to his demanding payment of
the reinsurer. Note: The insolvency of the insurer (precluded from fulfilling the
obligation to the insured under the original policy), does not affect the right of the
insurer to demand payment in full under the policy of reinsurance even if the original
insured should decide not to enforce his claim against the insurer.

(2) Contract, separate from original insurance policy The practice is for the reinsurer to
pay the insurer even before the latter has indemnified the original insured.

(3) Contract based on original policy The rights of the parties while fixed by the terms
and conditions of the policy of reinsurance are greatly affected by the terms and
conditions of the original policy upon which the reinsurance contract is based. The
reinsured risk must be the same as that covered by the original insurance policy.

(4) Insurable interest requirement applicable This doctrine applies to reinsurance just as
it does to any insurance contract. Therefore, the primary insurer is not entitled to
contract for reinsurance exceeding the limits of the policy ceded to the reinsurer.
Similarly, the reinsurer cannot provide coverage for risks beyond the scope of the
coverage provided by the primary insurer.

(5) Rule on subrogation applicable Reinsurer, on payment of a loss, acquires the same
rights by subrogation as are acquired in similar cases where the original insurer pays a
loss.

SEC. 100. The original insured has no interest in a contract of reinsurance.

Reinsurance is a contract between the reinsured and the reinsurer by which the
latter agrees to protect the former from risks already assumed.
Rights of original insured in contract of reinsurance:
(1) The insured, unless the contract so provides, has no concern with the contract of
reinsurance, and the reinsurer is not liable to the insured either as surety or otherwise.

(2) 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.

Liability of reinsurer to reinsured

(1) Contract of reinsurance solely between insurer and reinsurer - the original insured
has absolutely no interest in the contract and is a total stranger to it. Thus, he has no
cause of action against the reinsurer, but only against the insurer.
(2) Contract of reinsurance with stipulation in favor of original insured. - the reinsurer
who has promised to pay the losses accruing under the original policy will be liable to a
suit by the original insured under the contract of reinsurance. The remedy of the
insured is both against the insurer and the reinsurer.
(3) Contract of reinsurance amounting to novation of original contract

Thus, the original insured may maintain an action directly against the reinsurer
discharging the contract and the original insurer from all obligations.

- Release of obligation occurs only when the insured agrees with the insurer and
reinsurer to the novation.